-----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, KOwUiBrQvaHtf1Y4PcAoXANmtJi8kXrE024N4mxsaH3DULLI/cJWq8h6sKRJHvDW hhZ8PiVgkm4fkikokoJslA== 0000950134-97-003167.txt : 19970425 0000950134-97-003167.hdr.sgml : 19970425 ACCESSION NUMBER: 0000950134-97-003167 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 40 FILED AS OF DATE: 19970424 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HESKA CORP CENTRAL INDEX KEY: 0001038133 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 770192527 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-25767 FILM NUMBER: 97586525 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 S-1 1 HESKA FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 24, 1997 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- HESKA CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 2836 77-0192527 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification incorporation or organization) Classification Code Number) No.)
1825 SHARP POINT DRIVE FORT COLLINS, COLORADO 80525 (970) 493-7272 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) FRED M. SCHWARZER PRESIDENT AND CHIEF EXECUTIVE OFFICER HESKA CORPORATION 1825 SHARP POINT DRIVE FORT COLLINS, COLORADO 80525 (970) 493-7272 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: KAREN A. DEMPSEY, ESQ. MICHAEL J. SULLIVAN, ESQ. SALLY A. BRAMMELL, ESQ. REX R. O'NEAL, ESQ. DANIEL L. CULLUM, ESQ. LISA S. DUMAW, ESQ. PILLSBURY MADISON & SUTRO LLP COOLEY GODWARD LLP P.O. BOX 7880 5 PALO ALTO SQUARE, 4TH FLOOR SAN FRANCISCO, CALIFORNIA 94120 3000 EL CAMINO REAL PALO ALTO, CALIFORNIA 94306-2155
--------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - ------------ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - ------------ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE
=================================================================================================== PROPOSED MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF AGGREGATE REGISTRATION SECURITIES TO BE REGISTERED OFFERING PRICE(1) FEE - --------------------------------------------------------------------------------------------------- Common Stock, $.001 par value............................... $80,500,000 $24,394 ===================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED APRIL 24, 1997 Shares [HESKA CORPORATION LOGO] Common Stock ------------------ Of the shares of Common Stock (the "Shares") offered hereby, shares are being offered by Heska Corporation ("Heska" or the "Company") and shares are being offered by a stockholder of the Company (the "Selling Stockholder"). See "Principal and Selling Stockholders." The Company will not receive any proceeds from the sale of Shares by the Selling Stockholder. Prior to this offering, there has been no public market for the Shares. It is currently anticipated that the initial public offering price per share of the Common Stock will be between $ and $ per share. For a discussion of the factors to be considered in determining the initial public offering price, see "Underwriting." Application has been made to have the Common Stock approved for listing on the Nasdaq Stock Market's National Market under the symbol "HSKA." FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" ON PAGE 6 HEREIN. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDER -------------- ---------------- ---------------- -------------- Per Share..................... $ $ $ $ Total(2)...................... $ $ $ $
(1) Before deducting expenses payable by the Company estimated at $650,000. (2) The Company has granted the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase a maximum of additional shares to cover over-allotments of Shares. If the option is exercised in full, the total Price to Public will be $ , Underwriting Discounts and Commissions will be $ and Proceeds to Company will be $ . The Shares are offered by the several Underwriters when, as and if delivered to and accepted by the Underwriters and subject to their right to reject orders in whole or in part. It is expected that the Shares will be ready for delivery on or about , 1997, against payment in immediately available funds. CREDIT SUISSE FIRST BOSTON MERRILL LYNCH & CO. Prospectus dated , 1997 3 [INSIDE FRONT COVER OF PROSPECTUS] [ARTWORK] DESCRIPTION FOR EDGAR OF ART ON INSIDE FRONT COVER Photographs of: companion animals with veterinarian, child with dog, horse, a Heska laboratory, Diamond's facility, Heska's trivalent vaccine and a kit of Heska's veterinary diagnostic laboratory sample collection supplies. Caption reads: Heska -- The Science of Caring for Companion Animals 4 [INSIDE FRONT COVER OF PROSPECTUS] [ARTWORK] HESKA, the HESKA logo, DIAMOND, the DIAMOND logo, Bloxham and the Bloxham logo are trademarks of the Company. This Prospectus also includes trade names and trademarks of companies other than Heska. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 5 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and the consolidated financial statements and related notes appearing elsewhere in this Prospectus. THE COMPANY Heska discovers, develops, manufactures and markets companion animal health products, primarily for dogs, cats and horses. The Company's strategy is to become the companion animal health care company of choice for veterinarians by enabling them to comprehensively manage diseases using a broad line of diagnostic, vaccine and therapeutic products and services. Heska has six products currently on the market and over 25 products in research and development. The Company also offers diagnostic laboratory services to veterinarians and operates a full scale USDA and FDA licensed facility which manufactures products for Heska and other animal health companies. Heska has corporate partnerships with Novartis AG, Bayer AG and Eisai Co., Ltd. and plans to expand its products and services through complementary acquisitions, licenses and collaborations. Heska believes that it has the largest and most sophisticated scientific effort in the world devoted to applying biotechnology to the large and growing companion animal health market. According to industry estimates, the worldwide market for companion animal health products and diagnostic services exceeds $2.5 billion. In the United States the market for companion animal health products is the fastest growing segment of the animal health industry and has expanded in response to the introduction of novel products. There are approximately 67 million cats, 57 million dogs and seven million horses in the United States, and approximately 100 million cats, dogs and horses in Western Europe, Japan, Canada, Australia and New Zealand. There are over 35,000 veterinarians in the United States whose practices are devoted principally to companion animal medicine. Heska is focused on providing products and services for the comprehensive management of a broad range of companion animal diseases, such as allergy, heartworm infection and flea-associated conditions. The Company believes that several of its products under development may serve to expand the companion animal health market and advance the practice of veterinary medicine. Heska recently introduced a canine allergy diagnostic product that it believes is a substantial advance in the state of the art in allergy diagnosis. The Company recently introduced a new feline heartworm diagnostic test that is substantially more sensitive than the other commercially available tests. Heska has a novel therapeutic product in the final stages of FDA registration for canine periodontal disease, which is estimated to affect 80 percent of all dogs by three years of age. Heska expects to receive FDA clearance for this product in 1997. The Company is also working on vaccines to be administered annually to prevent heartworm infection in dogs and cats, as well as vaccines to help control fleas on dogs and cats. In addition, Heska is developing a vaccine to prevent the onset of flea bite allergy in dogs, which afflicts a significant percentage of all dogs in flea endemic areas. Currently there are no effective immunologically based preventatives or treatments for this condition. Heska operates veterinary diagnostic laboratories in Colorado and the United Kingdom that provide a range of diagnostic and pathology services to veterinarians, including in vitro allergy testing and the Company's new feline heartworm diagnostic. The Company believes that these laboratories provide a valuable marketing point of contact with veterinarians. The Company is also developing easy to use, point-of-care diagnostic products for the veterinarian's office. Heska scientists have developed a large body of knowledge about the physiology of parasites, such as fleas and heartworms, and the basic immunology of dogs and cats that the Company believes is unmatched in the industry. Heska believes this body of knowledge is essential to creating innovative diagnostics, vaccines and therapeutics. The Company's employees hold more than 20 veterinary doctoral degrees and over 45 Ph.D.s. Most of these employees have been affiliated with prestigious academic research institutions or leading biotechnology or animal health companies. In April 1996, the Company acquired Diamond Animal Health, Inc., a USDA and FDA licensed biological and pharmaceutical manufacturing facility. Diamond has been a licensed manufacturer of veterinary vaccines since the 1950s and operates a 166,000 square foot manufacturing facility. In addition to manufacturing Heska's 3 6 products, Diamond operates as a contract manufacturer of biological and pharmaceutical products for other major animal health companies. Heska has entered into agreements with three major pharmaceutical companies, Novartis AG, Bayer AG and Eisai Co., Ltd., which provide funding for certain of its research and development programs. In April 1996, Novartis made a $36.0 million equity investment in the Company. These partners have rights to market certain resulting Heska products. Heska believes that the size and experience of these partners will enable the Company to penetrate markets more quickly and extensively. To broaden its portfolio of products and technologies, the Company is aggressively pursuing licenses to promising technologies from leading biotechnology companies and research institutions. The Company also intends to build its business through the acquisition of complementary products and businesses. For example, in March 1996 the Company purchased a canine allergy product line and in February 1997 acquired Bloxham Laboratories Limited, one of the largest veterinary diagnostic laboratories in the United Kingdom. The Company believes that significant acquisition opportunities exist in the companion animal health market and plans to actively pursue such opportunities. Heska Corporation was incorporated in California in 1988 and reincorporated in Delaware in 1997. The Company is located at 1825 Sharp Point Drive, Fort Collins, Colorado 80525 and its telephone number is (970) 493-7272. Heska and its subsidiaries currently employ more than 400 persons. As used in this Prospectus, "Heska" and the "Company" refer to Heska Corporation and its consolidated subsidiaries, unless the context requires otherwise. ------------------ Except as set forth in the consolidated financial statements and notes thereto or otherwise as specified herein, all information in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option, (ii) reflects the conversion of all of the Company's outstanding shares of Preferred Stock into shares of Common Stock upon the closing of this offering, and (iii) reflects the Company's reincorporation in Delaware to occur prior to the closing of this offering and associated changes in the Company's charter documents. See "Underwriting," "Description of Capital Stock" and Notes 2 and 10 of Notes to Consolidated Financial Statements. This Prospectus contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. The Company's actual results and the timing of certain events could differ materially from those discussed or projected by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the sections entitled "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," as well as those discussed elsewhere in this Prospectus. 4 7 THE OFFERING Common Stock offered by the Company.......... shares Common Stock offered by the Selling shares Stockholder................................ Common Stock to be outstanding after the shares(1) offering................................... Use of Proceeds.............................. For research and development, expansion of sales and marketing activities, expansion and development of manufacturing operations, potential acquisitions, working capital and general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol....... HSKA
SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ----------------------------------------------- ----------------- 1992 1993 1994 1995 1996(2) 1996 1997 ------- ------- ------ ------- -------- ------- ------- (UNAUDITED) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues: Products and services, net...... $ -- $ -- $ -- $ -- $ 8,013 $ 39 $ 2,626 Research and development........ 283 1,817 3,858 2,230 1,946 117 438 ------- ------- ------ ------- -------- ------- ------- Total revenues.......... 283 1,817 3,858 2,230 9,959 156 3,064 ------- ------- ------ ------- -------- ------- ------- Costs and operating expenses: Cost of sales................... -- -- -- -- 6,648 20 2,148 Research and development........ 1,188 2,427 3,685 6,031 14,038 2,626 4,519 Selling and marketing........... -- -- -- -- 2,493 -- 1,573 General and administrative...... 490 540 904 864 4,540 375 2,418 Amortization of intangible assets....................... -- -- -- -- 1,101 -- 407 ------- ------- ------ ------- -------- ------- ------- Total costs and operating expenses.... 1,678 2,967 4,589 6,895 28,820 3,021 11,065 ------- ------- ------ ------- -------- ------- ------- Loss from operations.............. (1,395) (1,150) (731) (4,665) (18,861) (2,865) (8,001) Other income (expense)............ (58) (37) (153) 99 886 55 120 ------- ------- ------ ------- -------- ------- ------- Net loss.......................... $(1,453) $(1,187) $ (884) $(4,566) $(17,975) $(2,810) $(7,881) ======= ======= ====== ======= ======== ======= ======= Pro forma net loss per share(3)... $ (1.71) $ (0.67) Number of shares used in computing pro forma net loss per share(3)........................ 10,511 11,733
MARCH 31, 1997 -------------------------- ACTUAL AS ADJUSTED(4) -------- -------------- CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and marketable securities............ $ 15,903 Working capital............................................. 14,992 Total assets................................................ 38,597 Long-term obligations....................................... 5,702 Accumulated deficit......................................... (38,157) Total stockholders' equity.................................. 25,168
- --------------- (1) Based on shares outstanding at March 31, 1997. Does not include 2,490,198 shares issuable upon exercise of stock options outstanding and outstanding warrants to purchase 31,392 shares of Common Stock. See "Capitalization," "Management -- Stock Option Plan," "Description of Capital Stock -- Warrants" and Note 10 of Notes to Consolidated Financial Statements. (2) Includes revenues and related expenses attributable to the Company's wholly-owned subsidiary, Diamond Animal Health, Inc., which was acquired in April 1996. (3) See Note 2 of Notes to Consolidated Financial Statements for information concerning the computation of pro forma net loss per share. (4) Adjusted to reflect the sale by the Company of shares of Common Stock offered hereby at an assumed public offering price of $ per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization." 5 8 The discussion in this Prospectus contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. The Company's actual results and the timing of certain events could differ materially from those discussed or projected by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the sections entitled "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," as well as those discussed elsewhere in this Prospectus. RISK FACTORS In evaluating the Company's business, prospective investors should consider carefully the following risk factors in addition to the other information presented in this Prospectus. DEPENDENCE ON DEVELOPMENT AND INTRODUCTION OF NEW PRODUCTS Most of the Company's products are still under development and there can be no assurance such products will be successfully developed or commercialized on a timely basis, or at all. The Company believes that its revenue growth and profitability, if any, will substantially depend upon its ability to complete development of and successfully introduce its new products. The Company will be required to undertake time-consuming and costly development activities and seek regulatory approval for these new products. There can be no assurance that the Company will not experience difficulties that could delay or prevent successfully developing, obtaining regulatory approvals to market or introducing these new products, that regulatory clearance or approval of any new products will be granted by the United States Department of Agriculture ("USDA"), the United States Food and Drug Administration ("FDA"), the Environmental Protection Agency ("EPA") or foreign regulatory authorities on a timely basis, or at all, or that the new products will be successfully commercialized. The Company's strategy is to develop a broad range of products addressing different disease indications. The Company has limited resources to devote to the development of all its products and consequently a delay in the development of one product or the use of resources for product development efforts that prove unsuccessful may delay or jeopardize the development of its other products. Further, to a certain extent, the Company is dependent on collaborative partners to successfully and timely perform research and development activities on behalf of the Company. In order to successfully commercialize any new products, the Company will be required to establish and maintain a reliable, cost-efficient source of manufacturing for such products. If the Company is unable, for technological or other reasons, to complete the development, introduction or scale up of manufacturing of any new product or if any new product is not approved for marketing or does not achieve a significant level of market acceptance, the Company could be materially and adversely affected. Following the introduction of a product, adverse side effects may be discovered that make the product no longer commercially viable. Publicity regarding such adverse effects could affect sales of the Company's other products for an indeterminate time period. The Company is dependent on the acceptance of its products by both veterinarians and pet owners. The failure of the Company to engender confidence in its products and services could affect the Company's ability to attain sustained market acceptance of its products. See "Business -- Manufacturing," "-- Government Regulation" and "-- Collaborative Agreements." LOSS HISTORY AND ACCUMULATED DEFICIT; UNCERTAINTY OF FUTURE PROFITABILITY; QUARTERLY FLUCTUATIONS Heska has incurred net losses since its inception. At March 31, 1997, the Company's accumulated deficit was $38.2 million. The Company anticipates that it will continue to incur additional operating losses for the next several years. Such losses have resulted principally from expenses incurred in the Company's research and development programs and, to a lesser extent, from general and administrative and sales and marketing expenses. There can be no assurance that the Company will attain profitability or, if achieved, will remain profitable on a quarterly or annual basis in the future. The Company believes that future operating results will be subject to quarterly fluctuations due to a variety of factors, including whether and when new products are successfully developed and introduced by the Company or its competitors, market acceptance of current or new products, regulatory delays, product recalls, competition and pricing pressures from competitive products, manufacturing delays, shipment problems, product seasonality, and changes in the mix of products sold. Because the Company is continuing to increase its operating expenses for personnel and new product development and marketing, the Company's operating results will be adversely affected if its sales do not correspondingly increase or if its 6 9 product development efforts are unsuccessful or subject to delays. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." LIMITED SALES AND MARKETING EXPERIENCE; DEPENDENCE ON OTHERS In 1996 Heska began to build a sales force and commenced initial sales of its products. To be successful, Heska will have to develop and train its direct sales force or rely on marketing partners or other arrangements with third parties for the marketing, distribution and sale of its products. The Company is currently marketing its products to veterinarians through a direct sales force and certain third parties. There can be no assurance that the Company will be able to successfully establish and maintain marketing, distribution or sales capabilities or make arrangements with third parties to perform those activities on terms satisfactory to the Company. See "Business -- Sales, Marketing and Customer Service." In addition, the Company has granted marketing rights to certain products under development to third parties, including Novartis AG ("Novartis"), Bayer AG ("Bayer") and Eisai Co., Ltd. ("Eisai"). Novartis has the right to manufacture and market throughout the world (except in countries where Eisai has such rights) under Novartis trade names any flea control vaccine or feline heartworm vaccine developed by the Company on or before December 31, 2005. The Company retained the right to co-exclusively manufacture and market these products throughout the world under its own trade names. Accordingly, if both elect to market these products, the Company and Novartis will be direct competitors, with each party sharing revenues on the other's sales. Heska also granted Novartis a right of first refusal pursuant to which, prior to granting rights to any third party for any products or technology developed or acquired by the Company for either companion animal or food animal applications, Heska must first offer Novartis such rights. Bayer has exclusive marketing rights to the Company's canine heartworm vaccine and its recombinant feline toxoplasmosis vaccine (except in countries where Eisai has such rights). Eisai has exclusive rights in Japan and most countries in East Asia to market the Company's feline and canine heartworm vaccines, feline and canine flea control vaccines and feline toxoplasmosis vaccine. The Company's agreements with its marketing partners contain no minimum purchase requirements in order for such parties to maintain their exclusive or co-exclusive marketing rights. On the other hand, certain of the Company's license and manufacturing agreements contain minimum purchase or sale obligations by the Company in order for the Company to maintain its rights under such agreements. There can be no assurance that Novartis, Bayer or Eisai or any other collaborative party will devote sufficient resources to marketing the Company's products. Furthermore, there is nothing to prevent Novartis, Bayer or Eisai or any other collaborative party from pursuing alternative technologies or products that may compete with the Company's products. See "Business -- Collaborative Agreements." HIGHLY COMPETITIVE INDUSTRY The market in which the Company competes is intensely competitive. Heska's competitors include companion animal health companies and major pharmaceutical companies that have animal health divisions. Companies with a significant presence in the animal health market, such as American Home Products, Bayer, Merck & Co., Inc., Novartis, Pfizer Inc and IDEXX Laboratories, Inc., have developed or are developing products that do or would compete with the Company's products. Novartis and Bayer are marketing partners of the Company, and their agreements with the Company do not restrict their ability to develop and market competing products. These competitors have substantially greater financial, technical, research and other resources and larger, more established marketing, sales, distribution and service organizations than the Company. Moreover, such competitors may offer broader product lines and have greater name recognition than the Company. Additionally, the market for companion animal health care products is highly fragmented, with discount stores and specialty pet stores accounting for a substantial percentage of such sales. As Heska intends to distribute its products only through veterinarians, a substantial segment of the potential market may not be reached, and the Company may not be able to offer its products at prices which are competitive with those of companies that distribute their products through retail channels. There can be no assurance that the Company's competitors will not develop or market technologies or products that are more effective or commercially attractive than the Company's current or future products or that would render the Company's technologies and products obsolete. Moreover, there can be no assurance that the Company will have the financial resources, technical expertise or marketing, distribution or support capabilities to compete successfully. See "Business -- Competition." 7 10 UNCERTAINTY OF PATENT AND PROPRIETARY TECHNOLOGY PROTECTION; LICENSE OF TECHNOLOGY OF THIRD PARTIES The Company's ability to compete effectively will depend in part on its ability to develop and maintain proprietary aspects of its technology and either to operate without infringing the proprietary rights of others or to obtain rights to such technology. Heska has United States and foreign issued patents and is currently prosecuting patent applications in the United States and with certain foreign patent offices. There can be no assurance that any of the Company's pending patent applications will result in the issuance of any patents or that, if issued, any such patents will offer protection against competitors with similar technology. There can be no assurance that any patents issued to the Company will not be challenged, invalidated or circumvented in the future or that the rights created thereunder will provide a competitive advantage. The biotechnology and pharmaceutical industries have been characterized by extensive litigation regarding patents and other intellectual property rights. There can be no assurance that the Company will not in the future become subject to patent infringement claims and litigation in the United States or other countries or interference proceedings conducted in the United States Patent and Trademark Office ("USPTO") to determine the priority of inventions. The defense and prosecution of intellectual property suits, USPTO interference proceedings, and related legal and administrative proceedings are both costly and time consuming. Litigation may be necessary to enforce any patents issued to the Company or its collaborative partners, to protect trade secrets or know-how owned by the Company or its collaborative partners, or to determine the enforceability, scope and validity of the proprietary rights of others. Any litigation or interference proceeding will result in substantial expense to the Company and significant diversion of effort by the Company's technical and management personnel. An adverse determination in litigation or interference proceedings to which the Company may become a party could subject the Company to significant liabilities to third parties. Further, either as the result of such litigation or proceedings or otherwise, the Company may be required to seek licenses from third parties which may not be available on commercially reasonable terms, if at all. The Company's products may incorporate technologies that are the subject of patents issued to, and patent applications filed by, others. As is typical in its industry, from time to time the Company and its collaborators have received and may in the future receive notices claiming infringement from third parties as well as invitations to take licenses under third party patents. It is the Company's policy when it receives such notices to conduct investigations of the claims asserted. With respect to notices the Company has received to date, the Company believes, after due investigation, that it has meritorious defenses to the infringement claims asserted. Any legal action against the Company or its collaborators may require the Company or its collaborators to obtain a license in order to market or manufacture affected products or services. However, there can be no assurance that the Company or its collaborators will be able to obtain licenses for technology patented by others on commercially reasonable terms, that they will be able to develop alternative approaches if unable to obtain licenses, or that the current and future licenses will be adequate for the operation of their businesses. The failure to obtain necessary licenses or to identify and implement alternative approaches could prevent the Company and its collaborators from commercializing certain of their products under development and could have a material adverse effect on the Company's business, financial condition or results of operations. The Company also relies upon trade secrets, technical know-how and continuing invention to develop and maintain its competitive position. There can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company's trade secrets or disclose such technology, that the Company can meaningfully protect its rights to its trade secrets, or that the Company will be capable of protecting its rights to its trade secrets. See "Business -- Intellectual Property." LIMITED MANUFACTURING EXPERIENCE AND CAPACITY; RELIANCE ON CONTRACT MANUFACTURERS To be successful, the Company must manufacture, or contract for the manufacture of, its current and future products in compliance with regulatory requirements, in sufficient quantities and on a timely basis, while maintaining product quality and acceptable manufacturing costs. In order to provide for manufacturing of biological products, the Company acquired Diamond in April 1996. Significant work will be required for the 8 11 scaling up of each potential product prior to commercialization, and there can be no assurance that such work can be completed successfully or on a timely basis. In addition to Diamond, the Company intends to rely on contract manufacturers for certain of its products. The Company currently has supply agreements with Atrix Laboratories ("Atrix") for its canine periodontal disease therapeutic, with Quidel Corporation ("Quidel") for certain manufacturing services relating to its point-of-care canine and feline heartworm diagnostic tests, and with Iatric Corporation for allergy test kits and allergy immunotherapy treatment sets. These agreements all require the manufacturing partner to supply the Company's requirements, within certain parameters. Certain of these partners do not have substantial manufacturing experience on a commercial scale. There can be no assurance that these partners will be able to manufacture products to regulatory standards, the Company's specifications or in a cost-effective and timely manner. If any supplier were to be delayed in scaling up commercial manufacturing, were to be unable to produce a sufficient quantity of products to meet market demand, or were to request renegotiation of contract prices, the Company's business would be materially and adversely affected. While the Company typically retains the right to manufacture products itself or contract with an alternative supplier in the event of the manufacturer's breach, any transfer of production would necessarily involve significant delays in production and additional expense to the Company to scale up production at a new facility and to apply for regulatory licensure for the production of products at that new facility. In addition, there can be no assurance that the Company will be able to locate suitable manufacturing partners for its products under development or alternative suppliers if present arrangements are not satisfactory. See "Business -- Manufacturing." GOVERNMENT REGULATION; NO ASSURANCE OF OBTAINING REGULATORY APPROVALS The development, manufacture and marketing of most of the Company's products are subject to regulation by various governmental authorities, consisting principally of the USDA and the FDA in the United States and various regulatory agencies outside the United States. Delays in obtaining, or failure to obtain any necessary regulatory approvals would have a material adverse effect on the Company's future product sales and operations. Any acquisitions of new products and technologies may subject the Company to additional government regulation. The Company's manufacturing facilities and those of any contract manufacturers the Company may use are subject to the requirements of and subject to periodic regulatory inspections by the FDA, USDA and other federal, state and foreign regulatory agencies. There can be no assurance that the Company or its contractors will satisfy such regulatory requirements, and any failure to do so would have a material adverse effect on the Company's business, financial condition or results of operations. There can be no assurance that the Company will not incur significant costs to comply with laws and regulations in the future or that laws and regulations will not have a material adverse effect upon the Company's business, financial condition or results of operation. See "Business -- Government Regulation." FUTURE CAPITAL REQUIREMENTS; UNCERTAINTY OF ADDITIONAL FUNDING While the Company believes that its available cash, together with the proceeds of this offering, will be sufficient to satisfy its funding needs for current operations for at least the next 12 months, assuming no significant uses of cash in acquisition activities, the Company has incurred negative cash flow from operations since inception and does not expect to generate positive cash flow to fund its operations for the next several years. Thus, the Company may need to raise additional capital to fund its research and development programs, to scale up manufacturing activities and to expand its sales and marketing force. The Company's future liquidity and capital funding requirements will depend on numerous factors, including the extent to which the Company's products under development are successfully developed and gain market acceptance, the timing of regulatory actions regarding the Company's potential products, the costs and timing of expansion of sales, marketing and manufacturing activities, procurement, enforcement and defense of patents important to the Company's business, results of product trials and competition. There can be no assurance that such additional capital will be available on terms acceptable to the Company, if at all. Furthermore, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may include restrictive covenants. If adequate funds are not 9 12 available, the Company may be required to curtail its operations significantly or to obtain funds through entering into collaborative agreements or other arrangements on unfavorable terms. The failure by the Company to raise capital on acceptable terms when needed could have a material adverse effect on the Company's business, financial condition or results of operations. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." DEPENDENCE ON KEY PERSONNEL The Company is highly dependent on the efforts of its senior management and scientific team, including its Chief Executive Officer and Chief Scientific Officer. The loss of the services of any member of its senior management or scientific staff may significantly delay or prevent the achievement of product development and other business objectives. Because of the specialized scientific nature of the Company's business, the Company is highly dependent on its ability to attract and retain qualified scientific and technical personnel. There is intense competition among major pharmaceutical and chemical companies, specialized biotechnology firms and universities and other research institutions for qualified personnel in the areas of the Company's activities. Loss of the services of, or failure to recruit, key scientific and technical personnel could adversely affect the Company's business, financial condition or results of operations. See "Business -- Employees" and "Management -- Directors, Executive Officers and Key Employees." MANAGEMENT OF GROWTH; IDENTIFICATION AND INTEGRATION OF ACQUISITIONS The Company anticipates additional growth in the number of its employees, the scope of its operating and financial systems and the geographic area of its operations as new products are developed and commercialized. This growth will result in an increase in responsibilities for both existing and new management personnel. The Company's ability to manage growth effectively will require it to continue to implement and improve its operational, financial and management information systems and to train, motivate and manage its employees. There can be no assurance that the Company will be able to manage its expansion, and a failure to do so could have a material adverse effect on the Company's business, financial condition or results of operations. In 1996, Heska consummated the acquisitions of Diamond and the canine allergy business of Bioproducts DVM, Inc. In February 1997, Heska acquired Bloxham Laboratories Limited, a veterinary diagnostic laboratory in the United Kingdom. Moreover, the Company anticipates using a portion of the proceeds from this offering to make additional acquisitions. See "Use of Proceeds." Identifying and pursuing acquisition opportunities, integrating acquired products and businesses and managing growth requires a significant amount of management time and skill. There can be no assurance that the Company will be effective in identifying and effecting attractive acquisitions, integrating acquisitions or managing future growth. The failure to do so may have a material adverse effect on the Company's business, financial condition or results of operations. POTENTIAL PRODUCT LIABILITY; LIMITED INSURANCE COVERAGE The testing, manufacturing and marketing of the Company's current products as well as those currently under development entail an inherent risk of product liability claims and associated adverse publicity. To date, the Company has not experienced any material product liability claims, but any such claims arising in the future could have a material adverse effect on the Company's business, financial condition or results of operations. Potential product liability claims may exceed the amount of the Company's insurance coverage or may be excluded from coverage under the terms of the policy. There can be no assurance that the Company's existing insurance can be renewed at a cost and level of coverage comparable to that presently in effect, if at all. In the event that the Company is held liable for a claim against which it is not indemnified or for damages exceeding the limits of its insurance coverage or which results in significant adverse publicity against the Company, such claim could have a material adverse effect on the Company's business, financial condition or results of operations. HAZARDOUS MATERIALS The Company's products and development programs involve the controlled use of hazardous and biohazardous materials, including chemicals, infectious disease agents and various radioactive compounds. 10 13 Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by applicable local, state and federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any damages or fines that result and any such liability could exceed the resources of the Company. The Company may incur substantial costs to comply with environmental regulations as the Company expands its manufacturing capacity. LACK OF PRIOR PUBLIC MARKET AND DETERMINATION OF OFFERING PRICE Prior to this offering, there has been no public market for the Common Stock and there can be no assurance that an active public market for the Common Stock will develop or be sustained after this offering. The initial public offering price will be determined through negotiations among the Company, the Selling Stockholder and the Underwriters and may bear no relationship to the price at which the Common Stock will trade upon completion of the offering. See "Underwriting." POSSIBLE VOLATILITY OF STOCK PRICE The securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. The market prices of the common stock of many publicly-held biotechnology companies have in the past been, and can in the future be, especially volatile. Announcements of technological innovations or new products by the Company or its competitors, release of reports by securities analysts, developments or disputes concerning patents or proprietary rights, regulatory developments, changes in regulatory policies, economic and other external factors, as well as quarterly fluctuations in the Company's financial results, may have a significant impact on the market price of the Common Stock. POTENTIAL ADVERSE MARKET IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE Sales of a substantial number of shares of Common Stock in the public market following this offering could have an adverse effect on the price of the Common Stock. The shares offered hereby will be eligible for sale in the public market immediately following this offering. Upon the commencement of this offering, approximately 278,000 shares will be eligible for immediate resale in the public market. Beginning 90 days after the date of this Prospectus, approximately 377,000 additional shares will be eligible for sale in the public market pursuant to Rule 144 and Rule 701 under the Securities Act of 1933, as amended (the "Securities Act"). Additionally, approximately 12,000,000 shares of Common Stock, including 1,177,555 shares issuable upon the exercise of certain options, will be eligible for sale in the public market 180 days after the date of this Prospectus, upon expiration of lockup agreements, in reliance on Rule 144 or Rule 701 under the Securities Act. The Company intends to register a total of approximately shares of Common Stock reserved for issuance under its 1997 Employee Stock Purchase Plan and 1997 Stock Incentive Plan as soon as practicable following the date of this Prospectus. Certain existing stockholders have rights to require the Company to register their shares for future sale. See "Description of Capital Stock -- Registration Rights" and "Shares Eligible for Future Sale." BROAD DISCRETION OF MANAGEMENT TO ALLOCATE OFFERING PROCEEDS The Company anticipates that the proceeds of this offering will be used to fund research and development efforts, to expand sales and marketing capabilities, to expand and develop manufacturing operations and capabilities, to fund strategic acquisitions of businesses, technologies or products and to finance working capital and general corporate requirements. The amounts expended for each such purpose and the timing of such expenditures may vary depending upon numerous factors. The Company will have broad discretion in determining the amount and timing of expenditures and in allocating the new proceeds of this offering. Such discretion will be particularly broad with respect to that portion of the proceeds available for use for working capital and general corporate purposes. See "Use of Proceeds." 11 14 CONTROL BY DIRECTORS, EXECUTIVE OFFICERS, PRINCIPAL STOCKHOLDERS AND AFFILIATED ENTITIES The Company's directors, executive officers, principal stockholders and entities affiliated with them will, in the aggregate, beneficially own approximately % of the Company's outstanding Common Stock following the completion of this offering. The Company's three major stockholders, who together will own % after the offering, have entered into a voting agreement dated as of April 12, 1996 (the "Voting Agreement") whereby each agreed to collectively vote its shares in such manner so as to ensure that each major stockholder was represented by one member on the Company's Board of Directors. The Voting Agreement terminates on December 31, 2005 unless prior to such date any of the investors ceases to beneficially hold 2,000,000 shares of the voting stock of the Company, at which time the Voting Agreement would terminate. The major stockholders, if acting together, could substantially control all matters requiring approval by the stockholders of the Company, including the election of directors and the approval of mergers or other business combination transactions. See "Principal and Selling Stockholders" and "Description of Capital Stock -- Voting Agreement." EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS AND DELAWARE LAW Certain provisions of the Company's Restated Certificate of Incorporation and Bylaws may have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of the Company. Such provisions could limit the price that certain investors may be willing to pay in the future for shares of the Company's Common Stock. Certain of these provisions allow the Company to issue Preferred Stock without any vote or further action by the stockholders, provide for a classified board of directors and eliminate the right of stockholders to call special meetings of stockholders. These provisions may make it more difficult for stockholders to take certain corporate actions and could have the effect of delaying or preventing a change in control of the Company. In addition, certain provisions of Delaware law applicable to the Company could also delay or make more difficult a merger, tender offer, or proxy contest involving the Company. See "Management" and "Description of Capital Stock." DILUTION; ABSENCE OF DIVIDENDS The initial public offering price is substantially higher than the net tangible book value per share of Common Stock. Investors purchasing shares of Common Stock in the offering will, therefore, incur immediate and substantial dilution. At an initial public offering price of $ per share, the immediate dilution to purchasers of shares of Common Stock in the offering is $ per share of Common Stock, or %. Additional dilution is likely to occur upon the exercise of options and warrants granted by the Company. See "Dilution." 12 15 USE OF PROCEEDS The proceeds to the Company from the sale of the shares of Common Stock being offered by the Company are estimated to be $ ($ if the Underwriters' over-allotment option is exercised in full), assuming an initial public offering price of $ per share and after deducting estimated underwriting discounts and commissions and offering expenses. The Company currently anticipates that it will use the net proceeds of this offering to continue to fund the Company's research and development efforts, to expand sales and marketing capabilities and to expand and develop manufacturing operations and capabilities. The Company also expects to use a portion of the net proceeds to acquire businesses, technologies or products complementary to the Company's business, although no specific commitments have been made and no transactions are currently being negotiated which would have a material effect on the Company's operating results. The Company anticipates using the remaining net proceeds for working capital and general corporate purposes. The cost, timing and amount of funds required by the Company cannot be precisely determined at this time and will be based upon numerous factors, including the Company's progress in research and development; the timing and costs of obtaining regulatory approvals; the costs involved in preparing, filing, prosecuting and enforcing patent claims; competing technological and market developments; changes in the Company's existing research and collaborative relationships; evaluation of the commercial viability of potential products; and the progress of commercialization activities and arrangements. The Company has broad discretion in determining how the net proceeds of this offering will be applied. Pending such uses, the Company intends to invest the net proceeds in short-term, interest-bearing obligations. The Company will not receive any proceeds from the sale of the shares of Common Stock by the Selling Stockholder. See "Principal and Selling Stockholders." DIVIDEND POLICY The Company has never declared or paid dividends on its capital stock and does not anticipate paying any dividends in the foreseeable future. The Company currently intends to retain its earnings, if any, for the development of its business. 13 16 CAPITALIZATION The following table sets forth the capitalization of the Company as of March 31, 1997, after giving effect to the conversion of all shares of Preferred Stock into Common Stock upon the closing of this offering, and as adjusted to give effect to the sale of the shares of Common Stock being offered by the Company at an assumed initial public offering price of $ per share and the application of the estimated net proceeds therefrom as set forth under "Use of Proceeds."
MARCH 31, 1997 ----------------------- ACTUAL AS ADJUSTED -------- ----------- (IN THOUSANDS) Long-term obligations, less current portion(1).............. $ 5,702 $ 5,702 Stockholders' equity: Preferred Stock, $.001 par value; 25,000,000 shares authorized; 10,513,999 outstanding (actual); none outstanding (as adjusted).............................. 63,236 -- Common Stock, $.001 par value; 40,000,000 shares authorized; 1,114,904 issued and outstanding (actual); [ ] issued and outstanding (as adjusted)(2).. 239 Additional paid-in capital................................ Cumulative translation adjustment......................... 1 1 Stock subscription receivable............................. (151) (151) Accumulated deficit....................................... (38,157) (38,157) -------- -------- Total stockholders' equity........................ $ 25,168 $ ======== ======== Total capitalization.............................. $ 30,870 $ ======== ========
- --------------- (1) See Notes 5 and 6 of Notes to Consolidated Financial Statements. (2) Does not include (i) 3,817,166 shares of Common Stock reserved for issuance under the Company's stock option plans, under which there were options outstanding as of March 31, 1997 to purchase an aggregate of 2,490,198 shares of Common Stock, and (ii) 31,392 shares of Common Stock issuable upon exercise of warrants outstanding as of March 31, 1997. See "Management -- Stock Option Plan," "Description of Capital Stock -- Warrants" and Note 10 of Notes to Consolidated Financial Statements. 14 17 DILUTION The net tangible book value of the Company as of March 31, 1997 was $21.0 million, or $1.80 per share. Pre-offering pro forma net tangible book value per share represents the amount of total tangible assets less total liabilities of the Company, divided by the number of shares of Common Stock outstanding (which includes the conversion of all outstanding Preferred Stock at the closing of the offering). After giving effect to the sale of the shares of Common Stock offered by the Company hereby (at an assumed initial public offering price of $ per share and after deduction of estimated underwriting discounts and commissions and offering expenses), the post-offering pro forma net tangible book value of the Company at March 31, 1997 would have been $ , or $ per share. This represents an immediate increase in such net tangible book value of $ per share to existing stockholders and an immediate dilution of $ per share to new investors purchasing shares in this offering. The following table illustrates this per share dilution: Assumed initial public offering price....................... $ ------ Net tangible book value per share before offering......... $ ---------- Increase per share attributable to new investors.......... ---------- Pro forma net tangible book value per share after offering.................................................. ------ Dilution per share to new investors......................... $ ======
The following table summarizes, on a pro forma basis as of March 31, 1997, the differences between existing stockholders and new investors with respect to the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company, and the average consideration paid per share (based upon an assumed initial public offering price of $ per share and before deduction of estimated underwriting discounts and commissions and offering expenses payable by the Company):
SHARES PURCHASED(1) TOTAL CONSIDERATION AVERAGE -------------------- --------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- ------------- Existing stockholders.......... 11,629,000 % $55,755,000 % $4.79 New investors.................. ---------- ----- ----------- ----- Total................ 100.0% $ 100.0% ========== ===== =========== =====
- --------------- (1) Sales by the Selling Stockholder in this offering will reduce the number of shares held by existing stockholders to , or approximately % (approximately %, if the Underwriters' over-allotment option is exercised in full), of the total number of shares of Common Stock outstanding, and will increase the number of shares held by new investors to , or approximately % (or approximately %, if the Underwriters' over-allotment option is exercised in full), of the total number of shares of Common Stock outstanding after this offering. The foregoing table assumes no exercise of the Underwriters' over-allotment option or of any outstanding stock options or warrants. As of March 31, 1997, there were outstanding options to purchase an aggregate of 2,490,198 shares of Common Stock at exercise prices ranging from $0.10 to $3.00 per share and warrants to purchase 31,392 shares of Common Stock exercisable at a weighted average exercise price of $3.10 per share. To the extent these options or warrants are exercised, there will be further dilution to new investors. See "Management -- Stock Option Plan," "Description of Capital Stock -- Warrants" and Note 10 of the Notes to Consolidated Financial Statements. 15 18 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data with respect to the Company's balance sheet data at December 31, 1995 and 1996 and, with respect to the Company's consolidated statement of operations data, for each of the three years in the period ended December 31, 1996 have been derived from the Company's consolidated financial statements, which have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report included elsewhere herein. The consolidated balance sheet data as of December 31, 1992, 1993 and 1994 and the consolidated statement of operations data for the years ended December 31, 1992 and 1993 have been derived from audited consolidated financial statements not included herein. The selected consolidated financial data at March 31, 1997 and for each of the three month periods ended March 31, 1996 and 1997 have been derived from unaudited consolidated financial statements prepared on the same basis as the audited consolidated financial statements and containing, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the consolidated financial position at such dates and the operating results and cash flows for such periods. The results of operations for the three months ended March 31, 1997 are not necessarily indicative of results to be expected for any future period. The selected financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes included elsewhere in this Prospectus.
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------------------------------------- ----------------- 1992 1993 1994 1995 1996(1) 1996 1997 ------- ------- ------ ------- -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues: Products and services, net............. $-- .... $ -- $ -- $ -- $ 8,013 $ 39 $ 2,626 Research and development............... 283 1,817 3,858 2,230 1,946 117 438 ------- ------- ------ ------- -------- ------- ------- Total revenues.................. 283 1,817 3,858 2,230 9,959 156 3,064 ------- ------- ------ ------- -------- ------- ------- Costs and operating expenses: Cost of sales.......................... -- -- -- -- 6,648 20 2,148 Research and development............... 1,188 2,427 3,685 6,031 14,038 2,626 4,519 Selling and marketing.................. -- -- -- -- 2,493 -- 1,573 General and administrative............. 490.... 540 904 864 4,540 375 2,418 Amortization of intangible assets...... -- -- -- -- 1,101 -- 407 ------- ------- ------ ------- -------- ------- ------- Total costs and operating expenses...................... 1,678 2,967 4,589 6,895 28,820 3,021 11,065 ------- ------- ------ ------- -------- ------- ------- Loss from operations..................... (1,395) (1,150) (731) (4,665) (18,861) (2,865) (8,001) Other income (expense)................... (58) (37) (153) 99 886 55 120 ------- ------- ------ ------- -------- ------- ------- Net loss................................. $(1,453) $(1,187) $ (884) $(4,566) $(17,975) $(2,810) $(7,881) ======= ======= ====== ======= ======== ======= ======= Pro forma net loss per share(2).......... $ (1.71) $ (0.67) Number of shares used in computing pro forma net loss per share(2)............ 10,511 11,733
DECEMBER 31, ------------------------------------------------- MARCH 31, 1992 1993 1994 1995 1996 1997 ------- ------- ------- -------- -------- --------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and marketable securities............................ $ 149 $ 695 $ 539 $ 6,827 $ 23,700 $ 15,903 Working capital (deficit)............... (331) (241) 300 6,522 23,955 14,992 Total assets............................ 338 1,031 2,670 8,508 42,169 38,597 Long-term obligations................... 19 132 181 302 4,528 5,702 Accumulated deficit..................... (5,664) (6,851) (7,735) (12,301) (30,276) (38,157) Total stockholders' equity (deficit).... (203) (86) 1,180 7,249 32,383 25,168
- --------------- (1) Includes revenues and related expenses attributable to Diamond, which was acquired in April 1996. (2) See Note 2 of Notes to Consolidated Financial Statements for information concerning the computation of pro forma net loss per share. 16 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Prospectus contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. The Company's actual results and the timing of certain events could differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below, as well as those discussed elsewhere in this Prospectus. OVERVIEW Heska discovers, develops, manufactures and markets companion animal health products, primarily for dogs, cats and horses. From the Company's inception in 1988 until early 1996, the Company's operating activities related primarily to research and development activities, entering into collaborative agreements, raising capital and recruiting personnel. Prior to 1996, the Company had not received any revenues from the sale of products, and it has incurred net losses since inception. As of March 31, 1997, the Company's accumulated deficit was $38.2 million. During 1996, Heska grew from being primarily a research and development concern to a fully-integrated research, development, manufacturing and marketing company. The Company accomplished this through the acquisitions of Diamond Animal Health, Inc. ("Diamond"), a licensed pharmaceutical and biological manufacturing facility in Des Moines, Iowa, and the canine allergy business of Bioproducts DVM, Inc. (the "Bioproducts Business"), hiring key employees and support staff, establishing marketing and sales operations to support the Bioproducts Business and other Heska products introduced in 1996, and the design and implementation of more sophisticated operating and information systems. The Company also expanded the scope and level of scientific and business development activities, increasing the opportunities for new products. In the first quarter of 1997, the Company launched additional products and expanded internationally through the acquisition of Bloxham Laboratories Limited ("Bloxham"), a veterinary diagnostic laboratory in Teignmouth, England. Each of the acquisitions of Diamond, the Bioproducts Business and Bloxham 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. The Company anticipates that it will continue to incur additional operating losses for the next several years as it introduces new products and continues its research and development activities for products under development. There can be no assurance that the Company will attain profitability or, if achieved, will remain profitable on a quarterly or annual basis in the future. See "Risk Factors -- Loss History and Accumulated Deficit; Uncertainty of Future Profitability; Quarterly Fluctuations." RESULTS OF OPERATIONS Three Months Ended March 31, 1997 and 1996 Product and service revenues were $2.6 million for the three months ended March 31, 1997 as compared to $39,000 for the corresponding period in 1996. Revenues for the first quarter of 1997 consisted primarily of revenues from Diamond, and to a lesser extent of revenues from Heska products introduced in late 1996 or early 1997, whereas revenues for 1996 included only minor revenues from the Bioproducts Business which was acquired in March 1996. Revenues for the first quarter of 1997 also reflect diagnostic laboratory services revenues for Bloxham subsequent to its acquisition in February 1997. Revenues from sponsored research and development increased to $438,000 in the three months ended March 31, 1997 from $117,000 in the corresponding period in 1996. Fluctuations in revenues from sponsored research and development are generally the result of changes in the number of funded research projects as well as the timing and performance of contract milestones. The Company expects that revenues from sponsored research and development will decline in future periods, reflecting the expiration of current funding commitments and the Company's decision to fund its future research activities primarily from internal sources. Cost of goods sold was $2.1 million for the three months ended March 31, 1997 as compared to $20,000 for the comparable period in 1996, due primarily to manufacturing activities at Diamond which were not included in 17 20 the 1996 period. The gross margin for the three months ended March 31, 1997 was $478,000. The Company expects that its gross margins will improve as sales volumes increase and manufacturing capacity at Diamond is more fully utilized. Research and development expenses increased to $4.5 million for the three months ended March 31, 1997 from $2.6 million in the comparable period of 1996, due to a substantial increase in the level and scope of research and development activities following a $36.0 million equity investment by Novartis in April 1996. Research and development expenses include expenses both for development of products to be marketed by the Company and development under sponsored research and development agreements, and consist primarily of salaries and benefits for scientific, development and regulatory personnel, intellectual property costs, license fees, contract research, supplies and materials, depreciation and rental of lab equipment and facility costs. The Company expects that research and development expenses will continue to increase through 1997, although the rate of increase is expected to be lower than that experienced between the first quarter of 1996 and the first quarter of 1997. Selling and marketing expenses were $1.6 million for the three months ended March 31, 1997 and consist primarily of salaries and benefits for sales and marketing personnel, commissions, market research, product promotion, consulting fees, and trade show costs. The Company added senior sales management and 22 field sales persons in the first quarter of 1997 to support planned product introductions. The Company expects that these costs will continue to increase through 1997 as the Company continues to add personnel and launch new products. General and administrative expenses increased to $2.4 million for the three months ended March 31, 1997 from $375,000 for the comparable period in 1996 as a result of significant growth in the Company's accounting and finance, human resources, legal, administrative, information systems and facilities. The Company expects that its general and administrative expenses will increase in future periods. Amortization of intangible assets totaled $407,000 for the three months ended March 31, 1997 as a result of these acquisitions. Net intangible assets at March 31, 1997 totaled $4.2 million as a result of the Diamond, Bioproducts Business and Bloxham acquisitions. Interest income increased to $296,000 for the three months ended March 31, 1997 compared to $71,000 for the three months ended March 31, 1996 due to increased cash balances following the $36.0 million in equity financing received after the end of the first quarter of 1996. Interest expense increased to $170,000 for the three months ended March 31, 1997 compared to $16,000 for the comparable period in 1996 due to the assumption of debt in connection with the acquisition of Diamond in April 1996 and increases in debt financing for laboratory and manufacturing equipment acquired during 1996. The Company reported a net loss of $7.9 million for the three months ended March 31, 1997 as compared to a net loss of $2.8 million for the three months ended March 31, 1996. The Company expects to incur additional operating losses for the next several years. Years Ended December 31, 1996, 1995 and 1994 Product and service revenues were $8.0 million in 1996, consisting primarily of revenues from Diamond subsequent to its acquisition and to a lesser extent from sales of allergy diagnostic services and treatment products by Heska subsequent to the acquisition of the Bioproducts Business. The Company had no such revenues prior to 1996. Revenues from sponsored research and development decreased to $1.9 million in 1996 from $2.2 million in 1995 and $3.9 million in 1994. 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. See Note 8 of Notes to Consolidated Financial Statements for more detailed information about the amounts received under sponsored research and development agreements in each of these periods. 18 21 Cost of goods sold totaled $6.6 million in 1996 and reflects primarily manufacturing activities at Diamond and to a lesser extent product costs associated with Heska's product sales. The Company did not incur cost of goods sold in 1995 or 1994. The gross margin for 1996 was $1.4 million. Research and development expenses increased to $14.0 million in 1996 from $6.0 million in 1995 and $3.7 million in 1994. The increases in 1996 and 1995 are due primarily to substantial increases in the level and scope of research and development activities for products to be marketed by the Company following the equity financings in those years and increases in intellectual property costs. A substantial portion of the expense in 1994 was incurred under sponsored research and development agreements. Selling and marketing expenses totaled $2.5 million in 1996, reflecting the Company's establishment of a sales and marketing organization to support Heska's launch and sale of products in 1996. Sales and marketing expenses consisted primarily of salaries and benefits for sales and marketing personnel, market research, product promotion, consulting and trade show costs. The Company did not incur selling and marketing expenses in 1995 or 1994. General and administrative expenses increased to $4.5 million in 1996 from $864,000 in 1995 and $904,000 in 1994. The increase in 1996 resulted from the significant growth of accounting and finance, human resources, legal, administrative, information systems and facilities operations to support the Company's increased business and financing activities. These expenses declined slightly in 1995 from 1994 due largely to a severance payment made in 1994 to a former executive. Amortization of intangible assets totaled $1.1 million for 1996 and resulted from the 1996 acquisitions of Diamond and the Bioproducts Business. Net intangible assets at December 31, 1996 totaled $3.5 million as a result of the Diamond and Bioproducts Business acquisitions. Interest income increased to $1.4 million for 1996 from $172,000 in 1995 and $26,000 in 1994, as a result of increased cash available for investment from the proceeds of equity investments in 1996 and 1995. Interest expense increased to $325,000 in 1996 from $63,000 in 1995 and $168,000 in 1994, due to the assumption of debt in connection with the Diamond acquisition and an increase in debt financing for laboratory and manufacturing equipment. The higher interest expense in 1994 compared to 1995 reflects interest due on loans to a stockholder. The Company reported a net loss in 1996 of $18.0 million as compared to a 1995 net loss of $4.6 million and a 1994 net loss of $884,000. The significant increase in losses over the period reflects the increases in research and development in 1996 and 1995 and in sales and marketing activities in 1996. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations since inception primarily with the net proceeds received from private placements of equity securities and from revenues from sponsored research and development. As of March 31, 1997, the Company had received aggregate proceeds of $55.8 million from equity transactions, including $36.0 million received in April 1996 in connection with an equity investment by Novartis and $10.0 million received in 1995 from equity investments by Volendam Investeringen N.V. The Company has also received funds totaling $11.4 million through March 31, 1997 under collaborative agreements, of which $11.0 million has been recognized as revenue from sponsored research and development. In addition, the Company has received proceeds from equipment financing totaling $4.7 million through March 31, 1997 and assumed $4.3 million in short and long-term debt in connection with the 1996 acquisition of Diamond. Capital lease obligations and term debt owed by the Company totaled $7.8 million as of March 31, 1997, with installments payable through 2001. The Company anticipates that it will continue to use capital equipment leasing facilities to fund equipment acquisitions and, if possible, leasehold improvements. The Company expects to finance accounts receivable and inventory at Diamond through an asset based borrowing facility, although no agreement has been entered into. The Company will also seek similar borrowing facilities to fund increases in Heska's accounts receivable and inventory if acceptable terms can be negotiated. 19 22 Net cash used for operating activities was $1.3 million, $3.7 million and $14.1 million for 1994, 1995 and 1996, respectively, and $6.9 million for the three months ended March 31, 1997. Cash was used for operations primarily to fund research and development activities along with the establishment of sales and marketing operations and administrative infrastructure. Expenditures for property and equipment totaled $424,000, $348,000 and $5.2 million for 1994, 1995 and 1996, respectively, and $2.2 million for the three months ended March 31, 1997. As the Company continues to expand it will require additional expenditures to improve its leased manufacturing and research facilities. The Company currently expects to spend approximately $7.0 million over the next several years to improve Diamond's facility. In addition, Diamond is negotiating to provide manufacturing services to new customers that would require the construction of specialized facilities and the purchase of specialized equipment. Diamond will, to the extent possible, ask such customers to bear or share these costs. The Company has financed its acquisition activities primarily through the issuance of Preferred Stock and in connection therewith issued Preferred Stock valued at $648,000 in the first three months of 1997 to acquire Bloxham and $7.1 million in 1996 to acquire Diamond. Cash used for acquisition activities, including funds deposited in a restricted cash account, totaled $418,000 for the three months ended March 31, 1997 relating to Bloxham, and $478,000 in 1996 relating to the Bioproducts Business. At March 31, 1997, the Company's principal source of liquidity was $15.9 million in cash, cash equivalents and short-term investments. While the Company believes that these sources of cash, together with the proceeds of this offering, will be sufficient to satisfy its funding needs for current operations for at least the next 12 months, assuming no significant uses of cash in acquisition activities, the Company has incurred negative cash flow from operations since inception and does not expect to generate positive cash flow to fund its operations for the next several years. Thus, the Company may need to raise additional capital to fund its research and development programs, to scale up manufacturing activities and to expand its sales and marketing force. The Company's future liquidity and capital funding requirements will depend on numerous factors, including the extent to which the Company's products under development are successfully developed and gain market acceptance, the timing of regulatory actions regarding the Company's potential products, the costs and the timing of expansion of sales, marketing and manufacturing activities, the procurement and enforcement of patents important to the Company's business, and the results of product trials and competition. There can be no assurance that such additional capital will be available on terms acceptable to the Company, if at all. Furthermore, any additional equity financing may be dilutive to stockholders and debt financing, if available, may include restrictive covenants. If adequate funds are not available, the Company may be required to curtail its operations significantly or to obtain funds through entering into collaborative agreements or other arrangements on unfavorable terms. The failure by the Company to raise capital on acceptable terms when needed could have a material adverse effect on the Company's business, financial condition or results of operations. NET OPERATING LOSS CARRYFORWARDS As of December 31, 1996, the Company had a net operating loss ("NOL") carryforward of approximately $26.9 million and approximately $731,000 of research and development ("R&D") tax credits available to offset future federal income taxes. The NOL and tax credit carryforwards, which are subject to alternative minimum tax limitations and to examination by the tax authorities, expire from 2003 to 2010. The Company's acquisition of Diamond resulted in a "change of ownership" under the provisions of Section 382 of the Internal Revenue Code of 1986, as amended, and the Company believes that this offering may constitute an additional "change of ownership" under those rules. As such, the Company will be limited in the amount of NOLs incurred prior to the merger or to this offering it may utilize to offset future taxable income. This limitation will total approximately $4.3 million per year for periods subsequent to the Diamond acquisition. Similar limitations also apply to utilization of R&D tax credits to offset taxes payable. 20 23 RECENT ACCOUNTING PRONOUNCEMENTS The Company does not expect the adoption of any standards recently issued by the Financial Accounting Standards Board to have a material impact on the Company's financial position or results of operations. 21 24 BUSINESS OVERVIEW Heska discovers, develops, manufactures and markets companion animal health products, primarily for dogs, cats and horses. The Company's strategy is to become the companion animal health care company of choice for veterinarians by enabling them to comprehensively manage diseases using a broad line of diagnostic, vaccine and therapeutic products and services. Heska has six products currently on the market and over 25 products in research and development. The Company also offers diagnostic laboratory services to veterinarians and operates a full scale USDA and FDA licensed facility which manufactures products for Heska and other animal health companies. Heska has corporate partnerships with Novartis, Bayer and Eisai and plans to expand its products and services through complementary acquisitions, licenses and collaborations. Heska believes that it has the largest and most sophisticated scientific effort in the world devoted to applying biotechnology to the large and growing companion animal health market. BACKGROUND Companion animals improve the quality of human life by providing companionship, affection and acceptance. In addition, numerous studies indicate that relationships with companion animals have demonstrable therapeutic benefits for blood pressure, anxiety and loneliness, especially for elderly or depressed people. There are approximately 67 million cats, 57 million dogs and seven million horses in the United States, representing approximately one cat, dog or horse for every two people. There are also approximately 100 million cats, dogs and horses in Western Europe, Japan, Canada, Australia and New Zealand. The Company believes that due to better nutrition and care, the average life expectancy of dogs and cats in the United States has been increasing. As with humans, as companion animals age, their medical needs increase. According to industry estimates the worldwide market for companion animal health products and diagnostic services exceeds $2.5 billion. In the United States, the market for companion animal health products is the fastest growing segment of the animal health industry and has expanded in response to the introduction of novel products. There are over 35,000 veterinarians in the United States whose practices are devoted principally to companion animal medicine. The practice of veterinary medicine in the United States is significantly different from the practice of human medicine and greatly affects the market for companion animal health products. In addition to providing services and prescribing drugs, veterinarians act as the pharmacists of companion animal medicine by reselling the vaccines and other products which they use or prescribe in their practice. Veterinarians also sell other non-prescription products for use at home. Another distinction from human medicine is that the vast majority of companion animal veterinarians practice as "general practice" veterinarians without significant specialization. Access to veterinarians specializing in diseases common to companion animals can be difficult and expensive. For example, of the approximately 35,000 companion animal veterinarians in the United States, fewer than 100 are board certified veterinary dermatologists. The development of biotechnology products for the companion animal health market has lagged behind development of products for the larger human health market. To date, it appears that there have only been modest, isolated efforts to use biotechnology to develop products specifically for companion animal health applications. For example, at this time, the Company believes that there are only two recombinant vaccines on the market for companion animal health and only a handful of diagnostic products that use recombinant proteins, two of which are the Company's feline heartworm and flea bite allergy diagnostic products. Heska believes that it is the first company to undertake a concerted effort to use biotechnology to develop a broad range of products for companion animal health. 22 25 HESKA'S STRATEGY Heska's goal is to become a leader in companion animal health. The Company's strategy to achieve this goal includes the following elements: - Promote strong relationships with veterinarians. Heska plans to become the companion animal health care company of choice for veterinarians, who are the primary distribution channel for companion animal diagnostics, vaccines and therapeutics. Heska intends to accomplish this goal by providing novel products that advance companion animal medicine, by selling its products exclusively to veterinarians and by supporting the general practitioner through high quality diagnostic services and through access to a staff of medical specialists. The Company believes that support of veterinarians is critical to enhancing Heska brand loyalty. - Develop a broad line of innovative products for comprehensive case management. Heska's strategy is to offer and develop a broad line of products and services for comprehensive management of companion animal diseases, such as allergy, heartworm infection and flea-associated conditions. For several companion animal diseases, Heska is developing products and services for each step of veterinary care, from diagnosis to treatment and prevention. The Company currently has six products on the market and over 25 products in research and development, and it also provides veterinary diagnostic laboratory services. The Company expects that its business will not be substantially dependent on one product or technology. - Commercialize products from its large, sophisticated research effort. Heska scientists have developed a large body of knowledge, from the organism to the molecular genetic level, about the physiology of parasites, such as fleas and heartworms, and the basic immunology of dogs and cats. The Company believes that this body of knowledge is unmatched in the industry. The Company's strategy is to use this knowledge and the skills of its researchers to create innovative, proprietary products. Heska's current employees hold more than 20 D.V.M.s and over 45 Ph.D.s. Most of these employees have been affiliated with prestigious academic research institutions and/or leading biotechnology or animal health companies. - Leverage resources through strong strategic relationships. Heska has entered into agreements with three major pharmaceutical companies, Novartis, Bayer and Eisai, which provided funding for certain of its research and development programs. These partners have rights to market certain resulting Heska products. Heska believes that the size and experience of these partners will enable the Company to penetrate markets more quickly and extensively. Additionally, to broaden its portfolio of products and technologies, the Company is aggressively pursuing licenses to promising technologies from leading biotechnology companies and research institutions. - Pursue complementary acquisitions. The Company intends to build its business in part through the acquisition of complementary technologies, products and businesses. In 1996, the Company acquired its present canine allergy product line and a licensed manufacturing facility, and in 1997 it purchased one of the largest veterinary diagnostic laboratories in the United Kingdom. The Company believes that significant acquisition opportunities exist in the companion animal health industry and plans to actively pursue such opportunities. 23 26 PRODUCTS AND PROGRAMS The Company is developing a broad line of diagnostic, vaccine and therapeutic products targeting a broad range of companion animal diseases. The following table summarizes Heska's currently available products and its products in various stages of research and development:
- ---------------------------------------------------------------------------------------------- MARKETING PRODUCT STAGE OF DEVELOPMENT(1) RIGHTS(2) - ---------------------------------------------------------------------------------------------- ALLERGY & DERMATOLOGY Canine Allergy Diagnostic Currently available; second Heska generation expected in 1997 Feline Allergy Diagnostic Expected in 1997 Heska Canine Allergy Currently available Heska Immunotherapeutic Feline Allergy Regulatory discussions underway Heska Immunotherapeutic Ancillary Dermatology Products Expected in 1997 Heska - ---------------------------------------------------------------------------------------------- FLEA BITE ALLERGY Canine Flea Bite Allergy Diagnostic Veterinary Diagnostic Currently available Heska Laboratory Point-of-Care Diagnostic Research Heska Feline Flea Bite Allergy Diagnostic Veterinary Diagnostic Expected in 1997 Heska Laboratory Point-of-Care Diagnostic Research Heska Flea Bite Allergy Research Heska Immunotherapeutic Canine Flea Bite Allergy Research Heska Vaccine Feline Flea Bite Allergy Research Heska Vaccine - ---------------------------------------------------------------------------------------------- FLEA CONTROL Flea Control Vaccines Canine Flea Control Vaccine Research Heska/Novartis/ Eisai Feline Flea Control Vaccine Research Heska/Novartis/ Eisai Environmental Flea Control Research Heska Pharmaceutical Flea Control Research Heska/Novartis - ----------------------------------------------------------------------------------------------
(1) See "-- Government Regulation" for a description of the marketing and approval process for the Company's products. (2) See "-- Collaborative Agreements" for a description of the marketing rights for these products. 24 27
- ---------------------------------------------------------------------------------------------- MARKETING PRODUCT STAGE OF DEVELOPMENT(1) RIGHTS(2) - ---------------------------------------------------------------------------------------------- HEARTWORM INFECTION Feline Heartworm Diagnostic Veterinary Diagnostic Currently available Heska Laboratory Point-of-Care Diagnostic Expected in 1997 Heska Canine Heartworm Diagnostic Veterinary Diagnostic Currently available Heska Laboratory Point-of-Care Diagnostic Expected in 1997/1998 Heska Heartworm Vaccines Canine Heartworm Vaccine Research Bayer/Eisai Feline Heartworm Vaccine Research Heska/Novartis/ Eisai - ---------------------------------------------------------------------------------------------- DENTISTRY Canine Periodontal Disease Expected in 1997 Heska Therapeutic Canine Dental Hygiene Kits Expected in 1997 Heska - ---------------------------------------------------------------------------------------------- OTHER INFECTIOUS DISEASES Feline Trivalent Viral Vaccine Currently available; second Heska generation in research Feline Immunodeficiency Virus Research Heska Vaccine Feline Leukemia Virus Vaccine Research Heska Bartonellosis (Cat Scratch Product approval trials ongoing Heska Fever) Vaccine Feline Toxoplasmosis Vaccine Research Bayer/Eisai Feline Plague Vaccine Research Heska Canine Leishmaniosis Diagnostic Expected in Italy in 1997 Heska Canine Leishmaniosis Vaccine Research Heska Canine Viral Vaccines Research Heska Equine Influenza Vaccine Product approval trials ongoing Heska - ---------------------------------------------------------------------------------------------- ONCOLOGY Research Heska - ----------------------------------------------------------------------------------------------
(1) See "-- Government Regulation" for a description of the marketing and approval process for the Company's products. (2) See "-- Collaborative Agreements" for a description of the marketing rights for these products. 25 28 ALLERGY AND DERMATOLOGY Overview. Allergy is common in companion animals and affects approximately 10% to 15% of dogs. Clinical symptoms of allergy are variable, but are often manifested as persistent and serious skin disease in dogs and cats. Clinical management of allergic disease is problematic as there are a large number of allergens that may give rise to these conditions. Although skin testing is often regarded as the most accurate diagnostic procedure, such tests are painful, subjective and inconvenient for animals and accordingly are used much less often than in vitro testing. The Company believes that many of the currently available in vitro diagnostic tests are of questionable accuracy. The effectiveness of the immunotherapy that is prescribed to treat allergic disease is inherently limited by inaccuracies in the diagnostic process. The Company's principal strategy with respect to allergy is to improve the quality of immunotherapy by improving the quality of diagnosis. Heska has developed more accurate in vitro technology to detect IgE, the antibody most involved in allergic reactions. This technology permits the design of tests that more specifically identify the animal's allergic responses to particular allergens. As part of its plan to support the veterinarian, the Company has adopted a complete disease management approach to allergy. As part of its allergy program, the Company offers allergy testing services, immunotherapy products, palliative products and case management services. Diagnostics. Heska currently markets in vitro canine allergy diagnostic tests for a wide range of allergens. The allergy testing is conducted in Heska's veterinary diagnostic laboratories using an enzyme-linked immunoassay ("ELISA") to screen the serum of dogs against a panel of known allergens. The test format currently includes 48 different allergens, consisting primarily of various pollens, grasses, molds and insects. The binding of IgE antibodies to a cellular receptor is an essential prerequisite to allergic reaction. Heska has produced a molecular clone of the cellular receptor for the IgE antibody. The Company has used this molecularly cloned receptor in a unique diagnostic assay to detect the presence and quantity of allergen-specific IgE in an animal's blood. The Company believes that this test, which is the first of its kind, will enable the more accurate diagnosis of allergy necessary for improved immunotherapy. Heska introduced a diagnostic laboratory version of this test for the diagnosis of canine flea bite allergy in January 1997. The Company is working on an adaptation of this test for all canine allergy testing, which is expected to be available through Heska's veterinary diagnostic laboratories in 1997. The Company also intends to introduce a similar diagnostic product for feline allergy testing in 1997. The Company expects to follow development of the feline allergy diagnostic product with the development of a similar equine allergy diagnostic product. Immunotherapeutics. Veterinarians who use Heska's diagnostic laboratories for in vitro allergy testing services often purchase immunotherapy treatment sets for those dogs with positive test results. A large percentage of those canine allergy tests performed by the Company are positive, and veterinarians order Heska's immunotherapy treatment sets for a majority of these dogs. These prescription treatment sets are formulated specifically for each allergic animal and contain only the allergens to which the animal has demonstrated significant levels of IgE antibodies. The prescription formulations are administered in a series of injections, with doses increasing over several months, to alter the allergic status of the animal. Immunotherapy is generally continued for an extended time. The Company also plans to offer immunotherapy treatment sets for cats upon receipt of regulatory clearance. Ancillary Dermatology Products and Services. Heska expects to introduce in 1997 a line of supportive care products such as allergy shampoos and rinses to be dispensed by veterinarians for use at home, along with client information brochures explaining allergy and its treatment. The Company has as a full-time employee a board-certified veterinary dermatologist whose primary job is to provide free case management consultations to any Heska customer. There are fewer than 100 board certified veterinary dermatologists in the United States, and the Company believes that free, on-demand dermatology consultations are of tremendous assistance to the veterinarian. 26 29 FLEA BITE ALLERGY Overview. Flea bite allergy is the most common skin disease afflicting dogs and cats throughout the world. It is estimated that flea related problems account for more than 50% of skin conditions observed by veterinarians in flea endemic areas. Treatments currently available for flea bite allergy are limited. For example, steroids may provide temporary symptomatic relief, and control of fleas on the animal and in its environment is also helpful. However, prolonged use of steroids may have harmful side effects, and sustained complete control of flea populations is extremely difficult. The Company has developed technology for the accurate diagnosis of flea bite allergy and is researching products to prevent the development of flea bite allergy in susceptible animals and to provide efficacious immunotherapy for animals that have already developed an allergy to flea bites. Heska scientists have found that flea salivary proteins are principally responsible for the allergic reactions to flea bites. The Company has developed proprietary methods for collecting pure saliva from feeding fleas. From this pure saliva, flea salivary allergens were discovered and characterized by Heska biochemists, and the Company's molecular biologists have cloned many of the genes that encode these unique allergens. Certain of these recombinant molecules have been shown to give rise to reactions in flea bite allergic dogs and cats. Diagnostics. At present, diagnosis of flea bite allergy is generally based on the clinical impression of the veterinarian and a positive response to effective flea control. Intradermal skin testing, performed by injecting small amounts of an extract of whole fleas into the skin, is used by some veterinary dermatologists. A characteristic reaction in the skin, occurring within a few minutes following injection of the extract, is suggestive of allergy to fleas. However, testing with an extract of whole fleas is of limited value in diagnosing flea bite allergy, as such extracts contain only minute amounts of flea saliva in addition to other allergens known not to be involved in flea bite allergy that may cause the observed reaction. Using its proprietary flea salivary allergens and its novel receptor-based assay for detection of IgE antibodies in the serum of allergic animals, the Company has developed a reliable in vitro ELISA-based test for flea bite allergy in dogs. Heska introduced this product in January 1997 in its Colorado veterinary diagnostic laboratory. The Company expects to introduce a similar test for cats in 1997. The Company is also developing point-of-care diagnostic products for both dogs and cats to assist the veterinarian in making a prompt flea bite allergy diagnosis in the veterinary clinic. Immunotherapeutics. The Company is using its extensive knowledge of flea biology, its proprietary flea salivary allergens and its broad understanding of canine and feline immunology to develop novel flea bite allergy immunotherapeutics. Such treatments are intended to reduce or eliminate the symptoms of allergy in dogs and cats that are already allergic to flea bites. Experimental immunotherapy trials are scheduled to begin in 1997. Vaccines. Heska is also developing vaccines to prevent flea bite allergy from occurring in cats and dogs that are not yet allergic to flea bites. Experimental vaccine studies were initiated in October 1996, and additional studies are scheduled to commence in 1997. FLEA CONTROL Overview. The common flea which infests dogs and cats, Ctenocephalides felis, is prevalent worldwide wherever warm ambient temperatures and adequate humidity exist. This highly successful parasite produces uncomfortable allergic responses, transmits other diseases, causes anemia and is a nuisance to pets and their owners. As a result, flea control products for dogs and cats represent a worldwide market of approximately $1 billion. A number of proprietary and non-proprietary products are currently marketed for flea control. Two of the proprietary products introduced in the last few years have been particularly successful. The systemic flea control products recently introduced by Novartis and Bayer, "Program" and "Advantage," each sold $100 million or more in the United States in the year of their introduction. No single product, however, is considered to be completely safe and effective in flea control at all life-cycle stages. In addition, certain topical control chemicals, such as those included in sprays and collars, can be toxic and present safety concerns for animals and humans. The use of certain flea control chemicals may also, over time, result in fleas that are resistant to those products. 27 30 Vaccines. Heska's goal is to develop vaccines that will produce an immune response in the dog or cat that will kill fleas and reduce their reproduction. For a number of reasons, including the complexity of parasites and their adaptations for life in or on host animals, the development of vaccines against parasites is generally more difficult than the development of vaccines against viral or bacterial infections. Heska has devoted substantial resources to basic research in flea physiology in its efforts to design products that will safely and effectively control fleas. A team of Heska scientists, with expertise in flea biology, biochemistry, molecular biology and immunology, is using the results of this research to undertake the development of vaccines for the control of fleas. To facilitate this work, Heska has created a substantial flea insectary producing more than 25 million fleas every year. The Company has the capacity to microscopically dissect 10,000 fleas per week. Genomic libraries and numerous tissue-specific cDNA libraries have been created to discover the relevant product targets. Heska researchers also study the molecular physiology of fleas, focusing on molecular targets from virtually every flea life-stage. As candidate molecules are purified and molecularly cloned, protein and nucleic acid sequence data provide the basis for composition of matter patent applications. Experimental studies with the first vaccine candidates were initiated in 1996, but commercial vaccines are not anticipated for the next several years. Environmental Control. As an example of Heska's ability to capitalize on its understanding of flea biology, the Company has also entered into a collaboration with a third party to develop a safe, biologically-based flea control product which can be applied around the home or kennel to control fleas. Pharmaceutical Control. The Company's research of flea molecular physiology has led to the identification of molecular targets for small molecule pharmaceuticals. Heska has created and is developing additional in vitro tests amenable to high throughput chemical screening. These in vitro tests and additional in vivo screens are expected to facilitate rapid analysis of early stage product candidates and subsequent product development. The Company expects that it will seek collaborative arrangements to further develop these pharmaceutical products. HEARTWORM INFECTION Overview. Heartworm infections of dogs and cats are caused by the parasite Dirofilaria immitis. This parasite is transmitted in larval form to dogs and cats through the bite of an infected mosquito. Larvae develop into adult worms which live in the pulmonary arteries and heart of the host, where they can cause serious cardiovascular, pulmonary, liver and kidney disease. The adult worms produce offspring called microfilariae, which are ingested by blood-feeding mosquitoes. In the mosquito, the worms develop into the infective larval stage and in a subsequent mosquito bite are transmitted to the dog or cat. Heartworm infection is common throughout the world, particularly in warm and humid climates. Dogs are particularly susceptible to heartworm infection and treatment is difficult, expensive and requires the use of toxic compounds with serious adverse effects for the animal. Chemoprophylactic products to prevent heartworm infections in dogs are generally available and widely prescribed, but require monthly or daily administration during the heartworm transmission season. As a result, compliance and convenience issues arise. The worldwide market for canine heartworm diagnostic and chemoprophylactic products is estimated to be more than $250 million per year. Heartworm infections of cats represent a growing area of concern for veterinary practitioners. Although cats are somewhat less susceptible to heartworm infection than are dogs, infected cats may experience serious disease, even death, from only a single adult worm. Diagnosis of these infections is very difficult, as there are generally too few adult worms present to allow for reliable heartworm antigen detection in the blood, as is done for dogs. A chemoprophylactic product to prevent heartworm infections of cats, similar to the products available for dogs, was introduced by Merck & Co., Inc. in January 1997. Because the manufacturer's label of this chemoprophylactic product recommends that cats be tested for active infection prior to administration of their product, Heska believes the availability of the feline preventative treatment will increase demand for its feline diagnostic products. Diagnostics. Heska's heartworm vaccine research effort has resulted in the characterization of many unique heartworm antigens, certain of which will be useful for the development of improved diagnostic tests. In January 1997, Heska introduced a new test in a diagnostic laboratory format for feline heartworm infections of cats which allows veterinarians for the first time to definitively establish the prevalence of heartworm exposure in 28 31 cats. This test is highly specific and identifies antibodies in cat serum that react with a recombinant heartworm antigen. Regulatory clearance is expected in 1997 for a rapid point-of-care test for feline heartworm infection using this same technology in the clinic. The Company expects to launch this point-of-care feline heartworm diagnostic product in Italy later this year. Heska has also developed a diagnostic test for heartworm infection in dogs. This test uses monoclonal antibodies reactive with heartworm antigens to detect the presence of these antigens in the blood of the infected dog. The test is presently offered through Heska's veterinary diagnostic laboratory. A point-of-care format is being developed and, assuming regulatory clearance, is expected to be available in late 1997 or early 1998. Vaccines. In order to avoid the need for repeated administration of chemoprophylactic drugs and the resulting compliance and convenience problems, Heska's goal is to develop vaccines for annual administration that would prevent cardiopulmonary infection in dogs and cats caused by heartworms. The Company has identified many candidate vaccine antigens and the genes encoding them have been cloned. Heska is using these proprietary molecules in vaccination studies of dogs and cats, including trials which involve delivering vaccine candidates using nucleic acids and viral vectors. Each vaccination trial requires approximately one year to complete. Accordingly, commercialization of vaccines for heartworm infections of dogs and cats is not anticipated for several years. DENTISTRY Overview. Dentistry for dogs and cats is one of the fastest growing markets in companion animal health. Within dentistry, the major problems are general dental hygiene and periodontal disease. It is estimated that 80% or more of all dogs exhibit symptoms of periodontal disease by three years of age, which often manifests as bad breath. Left untreated, periodontal disease can cause loss of teeth and systemic bacterial infection. The most prevalent treatment is the cleaning and scaling of the animal's teeth, which requires that the animal be anesthetized. Although periodic cleaning and scaling is recommended for all dogs, this procedure alone does not adequately address the underlying infection in dogs with periodontal disease and systemic antibiotics are widely prescribed but are generally unable to achieve the sustained concentration in the tooth pocket necessary to obtain the desired therapeutic effect. Heska's complete disease management approach to these medical issues is to offer a proprietary periodontal disease therapeutic, a group of dental hygiene products and case management services from a board-certified veterinary dental specialist. Canine Periodontal Disease Therapeutic. The Company has the exclusive, worldwide rights to market Atrix Laboratories Inc.'s proprietary human periodontal disease product developed to treat companion animal periodontal disease. The Atrix technology uses a biodegradable polymer containing the antibiotic doxycycline. The polymer is injected into the tooth pocket in a liquid form where it forms a semi-solid implant that releases the antibiotic gradually over time. Efficacy of this treatment to clear existing infections has been established for both dogs and humans. Heska's goal is to have this product administered by veterinarians on a regular basis for dogs with periodontal disease concurrently with the regular cleaning and scaling of the animal's teeth. Regulatory approval for marketing of the periodontal disease therapeutic for dogs is expected in 1997. Atrix will manufacture the product for distribution by Heska. Canine Dental Hygiene Kits. Regular dental hygiene has been proven to be of value in the prevention of periodontal disease in companion animals. As part of its comprehensive disease management approach, Heska intends to market canine dental care kits for both routine dental hygiene and for dental hygiene following the use of its proprietary periodontal disease therapeutic. The kits will consist of a toothbrush, toothpaste and rinse and will be manufactured for the Company by third parties. The Company expects to commence its marketing of these dental hygiene kits concurrently with the launch of its periodontal therapeutic. OTHER INFECTIOUS DISEASES Feline Trivalent Viral Vaccine. Heska currently markets a three-way modified live vaccine for the three most common viral diseases of cats, namely calicivirus, rhinotracheitis virus and panleukopenia virus. This vaccine is administered without needle injection by dropping the liquid preparation into the eyes and nostrils of cats. While there is one competitive non-injectable two-way (no panleukopenia protection) vaccine, all other competitive 29 32 products are injectable formulations. The use of injectable vaccines in cats has become controversial due to the frequency of side effects associated with injection of certain vaccines. The most serious of these side effects are injection site sarcomas, tumors which are nearly always fatal. The Company's trivalent vaccine avoids injection site side effects and is believed by the Company to be very efficacious. The Company is also researching a second generation vaccine using recombinant technology. Feline Immunodeficiency Virus Vaccine. Feline Immunodeficiency Virus ("FIV") produces a viral disease characterized by immunodeficiency which ultimately results in the death of the cat. Treatment options are quite limited, and at this time there are no vaccines available to prevent the disease, although several of the animal health companies with a feline vaccine line are believed to be attempting to develop one. Heska is developing a recombinant FIV vaccine, and the first experimental trials of Heska vaccine candidates are expected to be initiated in 1997. Feline Leukemia Virus Vaccine. Feline Leukemia Virus ("FeLV") is a viral disease of cats that is characterized by immunodeficiency and ultimately results in death. As with FIV, treatment options are quite limited. However, there are several vaccines presently offered for the prevention of FeLV. There is some controversy as to the relative efficacy of these vaccines. Heska is developing a recombinant vaccine for FeLV, and the first experimental trials of the Heska vaccine candidates are expected to be initiated in 1997. Bartonellosis (Cat Scratch Fever) Vaccine. Cat Scratch Fever, caused by the bacterium Bartonella henselae, is transmitted from cats to humans by a cat's scratch and perhaps by other means. The human disease is characterized by malaise, fever and swollen lymph nodes, sometimes lasting several weeks and sometimes requiring hospitalization. The Company believes that there are over 22,000 cases of Cat Scratch Fever in humans annually, of which 2,000 require hospitalization. Immunocompromised humans may develop very severe disease following infection, and this organism is a cause of a significant number of opportunistic infections in HIV-positive individuals. Therefore, doctors treating at-risk human populations may recommend that cats be eliminated from the household. The Company is working with scientists at the United States Centers for Disease Control and Prevention ("CDC") in Atlanta to develop a vaccine for cats. The vaccine will prevent cats from harboring the bacteria in their blood and thus limit transmission of the bacteria from cats to humans. Certain vaccine formulations prepared at Heska have successfully protected cats from infection and studies are underway to optimize these vaccine formulations. The Company is also working with the CDC to develop a second generation vaccine. Feline Toxoplasmosis Vaccine. Toxoplasma gondii is a protozoan parasite that infects cats and other mammals including humans, pigs and sheep. This disease is transmitted to humans through the oocysts (eggs) of the parasite, which are passed exclusively in the feces of infected cats. In addition, consumption of undercooked lamb and pork is a common means of transmission to humans. Toxoplasma infections are generally not a serious concern for cats, as healthy cats generally tolerate the infection without disease. However, infections of other animals, including humans, may have serious consequences. This is particularly true for immunocompromised individuals, such as HIV-infected persons, and for unborn fetuses. Such infections may be life threatening in the former case, and lead to birth defects or miscarriage in the latter. Because of the risk of transmission of this disease from cat feces, doctors sometimes advise immunocompromised patients and women who are or may become pregnant to avoid or give away their cats. For this reason, Heska believes that an appropriate vaccine may encourage such individuals to keep their family pets and is developing a recombinant vaccine to protect cats from shedding Toxoplasma oocysts. The Company believes that such a vaccine, if widely used, could help to reduce the transmission of disease to humans and other animals. The Company has identified and cloned the genes encoding over 80 vaccine candidate antigens from internally developed gene libraries. Testing of these antigens for vaccine efficacy is expected to begin in 1997. Feline Plague Vaccine. The disease commonly known as the "Bubonic Plague" or "Black Death" reached epidemic proportions in medieval Europe. While no longer epidemic, this disease, caused by the bacterium Yersinia pestis, still exists and may be transmitted to humans from cats. The plague-causing bacterium is endemic in many areas of the western United States where infections are transmitted among rodents by flea bites. Cats may be exposed to the bacterium either through direct contact or through bites of fleas from infected rodents. Moreover, veterinarians and cat owners are at risk of infection by contact with diseased cats. Each year in the 30 33 western United States several cases of feline plague are reported, and occasionally, practicing veterinarians are infected. According to the CDC, from 1980 to 1994, there were 229 reported cases of human plague in the United States, resulting in 33 fatalities. Heska scientists are developing a feline vaccine for plague. Studies in mice have demonstrated significant immune responses for this vaccine formulation and efficacy studies in cats are planned for 1997. Canine Leishmaniosis Diagnostic and Vaccine. Canine visceral leishmaniosis is a serious disease of dogs and humans caused by the parasite Leishmania. These protozoan parasites are transmitted to humans and dogs through the bite of sandflies. The disease causes profound suffering and, if left untreated, infected dogs often die. While this disease is generally not a problem in the United States, it is widespread in Mediterranean and Middle Eastern countries and in South America. Dogs serve as the primary reservoir of the parasites for transmission to other dogs and to humans. Diagnosis of canine visceral Leishmania infections is currently based on clinical symptoms, the finding of parasitized cells in lymph node aspirates and the use of a laboratory-based microscopy assay to detect antibodies in the serum of dogs reactive with Leishmania antigens. At present there are no vaccines that will prevent Leishmania infection of dogs. The Company believes that significant markets exist for both a convenient and reliable diagnostic and an effective vaccine. These products would improve quality of life of dogs living in endemic areas and may reduce the risk of disease transmission to humans. Using a proprietary molecule developed by Corixa Corporation, the Company has developed a sensitive diagnostic laboratory immunoassay for diagnosis of canine Leishmania infection and is developing a point-of-care device for rapid diagnosis. Both the laboratory test and the point-of-care test are expected to be introduced for sale in Italy in 1997, with introduction in other European countries to follow. These tests provide improved accuracy and are much faster and easier to perform than the currently available laboratory test. The Company expects that laboratory testing of vaccine candidates will commence in 1997. Vaccine trials will be conducted in Italy under conditions of natural exposure in an area where transmission of Leishmania is endemic. Because little is yet known of the natural progression of disease in Leishmania-infected dogs, it is anticipated that this research effort, and subsequent vaccine trials, will not be completed for several years. Canine Viral Vaccines. Heska scientists are researching a next generation line of vaccines which are intended to protect dogs from their most common viral diseases. This vaccine line will focus on four principal canine viral diseases: parvovirus, distemper virus, parainfluenza virus and adenovirus. The Company intends to develop a vaccine to protect dogs from all four viruses and another vaccine aimed at parvovirus alone. The Company does not expect these next generation vaccines to be commercially available for several years. Equine Influenza Vaccine. Equine influenza is a common viral disease of horses and is similar to human influenza. Horses have diminished performance and quality of life for an extended period following infection. Currently available vaccines for equine influenza are of limited efficacy and the duration of immunity for existing vaccines is measured in weeks or months. Heska is developing a unique vaccine for equine influenza and believes its vaccine candidates will have improved efficacy and duration of immunity. The vaccine is currently being tested in horses for safety and efficacy. ONCOLOGY With improving medical care, dogs and cats are living longer lives and, accordingly, developing more age-associated diseases such as cancer. In fact, cancer is the leading cause of disease-associated death in dogs and cats. However, most treatments are less than optimal and employ "off label" therapeutic products developed for use in humans. The Company believes that it is critical that a cancer therapeutic product not substantially decrease the quality of life of the treated dog or cat. Accordingly, Heska is pursuing a number of product opportunities focusing primarily on quality of life during the course of cancer therapy. Numerous approaches are being taken, including pursuing licensing opportunities arising from human oncology research and collaborating with outside scientists on unique immunization techniques for companion animal cancers. The Company does not expect to have commercial products in this area for several years. 31 34 VETERINARY DIAGNOSTIC LABORATORY SERVICES Heska believes that there is a substantial market need for high quality veterinary diagnostic laboratory services combined with high quality case management advice. This is due in part to the fact that most veterinarians practice as general practitioners, rather than specialists. In order to support veterinarians in their practices, Heska intends that its veterinary diagnostic laboratory will address these diagnostic situations as well as provide highly technical, state-of-the-art case analyses. In 1996, Heska established a veterinary diagnostic laboratory at its Fort Collins facility. The diagnostic laboratory currently offers the Company's allergy diagnostics, canine and feline heartworm diagnostics and flea bite allergy assays, in addition to other diagnostic and pathology services. The Fort Collins veterinary diagnostic laboratory is currently staffed by three diplomates of the American College of Veterinary Pathologists, several medical technologists experienced in animal disease, and several additional technical staff. As in all other areas of its business, Heska intends to continue to provide its customers the highest level of customer support possible. Heska intends to continue to use the diagnostic laboratory both as a stand-alone service center and as an adjunct to its product development efforts. Many of the assays which the Company will develop in a point-of-care format will initially be validated and made available in the diagnostic laboratory and will remain available in that format after the introduction of the analogous point-of-care test. The Company believes that veterinarians will appreciate being able to have confirmatory testing performed in the laboratory as a back-up to point-of-care testing, as well as the ability in some circumstances to conduct quantitative testing. The Company believes that these diagnostic services also provide opportunities for interaction between its medical and technical consulting staff and its veterinarian customers. In addition to the United States veterinary diagnostic laboratory, the Company recently acquired Bloxham Laboratories Limited, one of the largest veterinary diagnostic laboratories in the United Kingdom. Bloxham Laboratories provides a full range of diagnostic and pathology services, including the proprietary diagnostic laboratory tests marketed by the Company. NON-COMPANION ANIMAL HEALTH PRODUCTS Food Animal Products. Diamond is completing the research, development and testing of a new line of bovine vaccines. Diamond has entered into a strategic collaboration with a major pharmaceutical company pursuant to which the partner is providing funding for certain of this bovine vaccine research and development work in exchange for non-exclusive rights to use the antigens that Diamond develops. Heska has also developed a unique diagnostic to detect Trichinella spiralis, a parasite that is transmitted to humans and other animals in undercooked meat. Infected pork is implicated in most outbreaks of human trichinosis. Heska has identified what it believes to be the most important antigen for the diagnosis of Trichinella infection in pigs and other hosts. This carbohydrate antigen has been synthesized, can be produced in large quantities, and has been shown to be a superior reagent for the serological diagnosis of Trichinella infections of swine. The Company is presently in negotiations to provide this antigen for distribution as a diagnostic product to the swine product subsidiary of an international pharmaceutical company. Potential Human Health Applications. Heska's extensive research in the molecular and cellular biology of parasites has yielded potential human applications. Various biotechnology companies are pursuing pharmaceutical compounds derived from various microscopic organisms, higher invertebrates such as snails and even amphibians. The Company's research with parasites has similarly yielded molecules that may also have interesting human pharmaceutical applications. In addition, the Company's novel work with the cellular receptor for IgE has been directed toward improving the diagnosis of allergy in companion animals. The Company intends to further evaluate this technology for the diagnosis of human allergic disease. It also appears that certain allergic-type diseases may be caused by an autoimmune reaction to this same cellular receptor for IgE. The Company is evaluating whether the detection of these auto-antibodies can be used in diagnostic testing for these diseases. After it has completed its initial proof-of-concept work as to these technologies, Heska intends to explore corporate partnerships with appropriate human health care companies for the further development of the human applications. With this 32 35 approach, Heska hopes to maximize the benefit of the technologies discovered and developed at Heska, including extending them into the human health care market where feasible without distracting the Company from its companion animal health focus. PRODUCT CREATION Heska is committed to creating innovative products to address significant unmet health needs of companion animals. The Company creates products both through internal research and development and through external collaborations. Internal research is managed by multidisciplinary product-associated project teams consisting of veterinarians, biologists, molecular and cellular biologists, biochemists and immunologists. Heska believes that it has the largest and most sophisticated scientific effort in the world devoted exclusively to applying biotechnology to the creation of companion animal products. Heska's employees hold more than 20 D.V.M.s and over 45 Ph.D.s; seven employees hold both D.V.M. and Ph.D. degrees. The creation of unique and scientifically advanced vaccine and therapeutic products often requires an investment in basic research. For example, fundamental knowledge about the immunology of dogs and cats is not well developed, and the Company has invested significant resources on basic research to understand immune responses in dogs and cats. Similarly, the Company has invested significant resources to develop novel viral vector and nucleic acid vaccines. The Company believes the information provided by these research groups is essential to an informed and predictable program aimed at creating state of the art safe and effective vaccines and immunotherapeutics. Through this commitment, Heska has developed new knowledge of T-cell biology, cytokines, immune responses to adjuvants and the use of viral vector and nucleic acid vaccines in companion animals. For a number of reasons, including the complexity of parasitic organisms and their adaptations for life in or on host animals, the development of vaccines against parasites is generally more difficult than the development of vaccines against viruses or bacteria. The Company has committed substantial resources to develop a body of knowledge at a molecular genetic level about the physiology of parasites such as fleas and heartworms and the diseases they cause that it believes is unmatched in the industry. The Company has created a flea production laboratory that produces tens of millions of fleas each year for internal research. Similarly, in order to maximize the likelihood of developing a successful heartworm vaccine, the Company has created a mosquito insectary where tens of thousands of infective heartworm larvae are produced every week. To support its product research programs, the Company has also developed core technical support areas which perform commonly-used techniques to a consistent high standard. These in-house core support areas include a hybridoma laboratory, a protein and nucleic acid sequencing facility, a recombinant protein purification laboratory, a diagnostics creation laboratory and a process development laboratory. Heska is also committed to identifying external product opportunities and creating business and technical collaborations that could lead to the creation of other products. The Company is currently funding research at multiple academic or governmental institutions. In addition, the Company is also involved in joint research or product development efforts with a number of companies. See "-- Collaborative Agreements." The Company believes that its active participation in scientific networks and its reputation for investing in research enhances its ability to acquire external product opportunities. SALES, MARKETING AND CUSTOMER SERVICE The Company presently markets its products in the United States directly to veterinarians through the use of its field sales force, inside customer service/tele-sales force and veterinary distributors acting as contract sales agents. The Company presently has over 20 field sales representatives and field sales supervisors and eight customer service/tele-sales representatives and supervisors. The twelve veterinary distributors with whom the Company has entered into sales agency relationships employ more than 300 field and customer service/tele-sales representatives. Internationally, the Company will market its products to veterinarians through distributors, sales agents, strategic collaborators, or directly. The choice of distribution channels will depend on factors such as the size of 33 36 the market in the country, the ease of accessing that market using a direct sales force and the economic efficiency of alternative distribution methods. There are over 35,000 veterinarians in the United States whose practices are devoted principally to companion animal medicine. Those veterinarians practice in approximately 25,000 clinics in the United States. The Company plans to market its products to these clinics primarily through the use of its field and telephone sales force, sales agents, trade shows and print advertising. The Company has sold products and services to over 3,000 such clinics within the last 12 months. In addition to creating novel products that improve companion animal health, Heska is committed to supporting the veterinarian through a complete case management strategy. The average companion animal veterinarian practices general medicine. Although there are an increasing number of veterinary specialists available, the economics of companion animal practice discourage extensive use of these specialists. The Company's strategy is to help the general practice veterinarian practice more sophisticated medicine in several ways. First, the Company currently provides certain specialized diagnostic services not available in a point-of-care format or in third party laboratories. The Company intends to increase the range of these services, both at its Colorado facility and through the establishment or acquisition of additional diagnostic laboratories. In addition, the Company has established a medical and technical consulting group on site at the Colorado facility consisting of six employee veterinarians with specialized expertise in such areas as dermatology, internal medicine, pathology, dentistry and feline practice. These personnel are available to all veterinarian customers for interpretation of test results and qualified and timely advice for continuing management of any given case. The Company believes that these services enhance the practicing veterinarians' ability to provide the best possible medical care. Although most veterinary diagnostic, vaccine and therapeutic products are ordinarily sold only by veterinarians where a doctor-patient relationship exists, these products are sometimes sold directly to the public by catalogue and retail outlets that employ veterinarians. In order to support veterinary clinics and to foster loyalty to Heska products, the Company intends to sell its products exclusively to veterinarians for use where a doctor-patient relationship exists. Heska scientists present examples of the scientific advances that are being made in the Company's laboratories at important veterinary and other scientific meetings and are encouraged to publish their research in peer reviewed journals. The Company believes that these presentations and publications have helped establish the Company as a scientific leader in companion animal health. MANUFACTURING The Company expects that its products will be manufactured both by Diamond and/or by contract manufacturers. Diamond's facility consists of a 166,000 square foot USDA and FDA licensed biological and pharmaceutical manufacturing facility in Des Moines, Iowa. The Company expects that it will manufacture most or all of its biological products at this facility, as well as most or all of its recombinant proteins and other proprietary reagents for its diagnostic products. The Company will manufacture its point-of-care diagnostic products for feline and canine heartworm infection with Quidel and Diamond. The Company's periodontal disease therapeutic will be manufactured by Atrix Laboratories, the company that is developing this product for human use. The Company's non-proprietary products, such as the canine dental hygiene kits and the dermatology line, will be manufactured to its specifications by third parties. As the Company enters into additional strategic collaborations, it is possible that some of these strategic partners may manufacture products for sale by the Company. The Company's reliance upon third party manufacturers poses a significant risk. See "Risk Factors -- Limited Manufacturing Experience and Capacity; Reliance on Contract Manufacturers." In addition to manufacturing products for the Company, Diamond manufactures veterinary biologicals and pharmaceuticals on a contract basis for other major companies in the animal health industry. Diamond is one of the few contract biological manufacturers in this market. Bayer, which is a leader in the bovine vaccine area, currently has most of its bovine products for the United States market manufactured by Diamond. In 1996, Bayer accounted for a majority of the Company's revenues on a consolidated basis. Bayer is contractually obligated to make minimum annual purchases of bovine vaccine products annually through June 1999. In addition to viral 34 37 vaccines, Diamond also manufactures vaccines against bacterial infections, such as leptospirosis. Diamond currently has the capacity to manufacture more than 50,000,000 doses of vaccines each year. Diamond's customers purchase products in both bulk and finished format and usually contract with Diamond to perform all phases of manufacturing, including growth of the active bacterial and viral agents, sterile filling, lyophilization and packaging. In addition, Diamond ordinarily will support its customers through research services, regulatory compliance services, validation support and distribution services. Capacity at this facility is not fully utilized, and Diamond is in negotiations with several other companies, including a manufacturer of human vaccines, for the provision of manufacturing services. COLLABORATIVE AGREEMENTS NOVARTIS In April 1996, the Company and Novartis entered into several agreements in connection with a $36.0 million equity investment by Novartis in the Company (see "Certain Transactions"). Novartis received, under the marketing agreements, certain rights to manufacture and market any flea control vaccine or feline heartworm control vaccine developed by the Company as to which USDA prelicensing serials are completed on or before December 31, 2005. The Company and Novartis have co-exclusive rights to market these products under their own trade names throughout the world (other than in countries in which Eisai has such rights) and, if both parties elect to market, the parties will share revenues on their sales. The marketing agreements remain in force through 2010 or longer, if Novartis is still actively marketing such products. In addition, the parties entered into a screening and development agreement under which the parties may undertake joint research and development activities in certain fields. If the parties fail to agree to perform joint research activities, then Novartis has the right to use certain materials of the Company on an exclusive basis to develop food animal pharmaceutical products or on a co-exclusive basis with the Company to develop pharmaceutical products for parasite control in companion animals or food animal vaccines. Novartis would pay royalties on any such products developed by it. Currently, there are no current joint research projects being undertaken, although several are in the proposal stage. The Company and Novartis also entered into a right of first refusal agreement under which the Company, prior to granting licenses to any third party to any products or technology developed or acquired by the Company for either companion animal or food animal applications, must first offer Novartis such rights. If the parties are unable to come to an agreement within 150 days of the Company's first notice, Heska may thereafter license such rights to third parties on terms not materially more favorable than the terms last offered by the Company to Novartis. The screening and development agreement and right of first refusal agreement each terminate in 2005. BAYER In June 1994, the Company entered into research agreements (the "Research Agreements") with Bayer providing for funding of research (the "Research Program") by Bayer on a recombinant feline toxoplasmosis vaccine and a canine heartworm vaccine (the "Vaccines"). Bayer has the option to obtain an exclusive, royalty-bearing license to sell the Vaccines in all countries except in those in which Eisai has rights. If Bayer exercises this option, the parties will negotiate license and distribution agreements. The Company has the first option to manufacture any products sold pursuant to any such distribution agreement. The Research Agreements will terminate upon completion of the Research Program. Bayer may terminate the Research Agreements prior to completion, but would not have any rights to market the Vaccines (unless it terminated due to Heska's breach), although it would have non-exclusive access to technology developed in the Research Program for use other than in Vaccines. In the event Bayer elects to terminate the Research Agreements (other than due to Heska's breach), the Company would recover the right to market the Vaccines, subject to certain royalties to Bayer intended to repay certain amounts Bayer paid under the Research Agreements. EISAI In January 1993, the Company entered into an agreement with Eisai, a leading Japanese pharmaceutical company, pursuant to which the Company granted Eisai the exclusive right to market the Company's feline and canine heartworm vaccines, flea control vaccine and feline toxoplasmosis vaccine in Japan and most other countries in East Asia. In exchange, the Company received an up-front license fee and research funding for the 35 38 development of these products. Heska will have the right to manufacture any such products pursuant to a supply agreement to be negotiated between the parties. The agreement will terminate in January 2008, unless extended or earlier terminated by either party for material breach of the agreement or by Eisai pursuant to certain early termination rights. QUIDEL The Company has entered into a development agreement with Quidel under which the parties are jointly developing its feline and canine heartworm point-of-care diagnostic tests using Quidel's rapid in-clinic test technology. The Company has paid development fees to Quidel. The parties also have negotiated a supply agreement under which Quidel will perform manufacturing services with respect to these tests for the Company. INTELLECTUAL PROPERTY Heska believes that patents, trademarks, copyrights and other proprietary rights are important to its business. Heska also relies upon trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain its competitive position. Heska actively seeks patent protection both in the United States and abroad. As of April 24, 1997, Heska had seven issued United States patents and 56 pending United States patent applications, including four with allowed claims. Heska's issued United States patents primarily relate to the Company's proprietary heartworm, flea control, trichinosis diagnostic and vaccine delivery technologies. The Company's pending United States patent applications primarily relate to proprietary heartworm, flea control, flea allergy dermatitis, trichinosis diagnostic, plague, vaccine delivery, and IgE receptor-based allergy diagnosis technologies. Certain of the issued patents and patent applications relating to heartworm and trichinosis are assigned or co-assigned to Colorado State University Research Foundation ("CSURF"). Heska has an exclusive license to CSURF's rights in these issued patents and patent applications. Applications corresponding to most of the United States applications have been or will be filed in other countries. As of April 24, 1997, Heska had three issued foreign patents and 59 pending foreign filings, including nine pending Patent Cooperation Treaty ("PCT") filings. The Company also has obtained exclusive and non-exclusive licenses for numerous other patents held by academic institutions and human biotechnology companies. The proprietary technology of Diamond is primarily protected through trade secret protection of, for example, its manufacturing processes. In general, the intellectual property of Diamond's customers belongs to such customers. As patent applications in the United States are maintained in secrecy until patents issue and as publication of discoveries in the scientific or patent literature often lags behind the actual discoveries, the Company cannot be certain that it was the first to make the inventions covered by each of its pending patent applications or that it was the first to file patent applications for such inventions. Furthermore, the patent positions of biotechnology and pharmaceutical companies are highly uncertain and involve complex legal and factual questions, and, therefore, the breadth of claims allowed in biotechnology and pharmaceutical patents or their enforceability cannot be predicted. There can be no assurance that patents will issue from any of the Company's patent applications or, should patents issue, that the Company will be provided with adequate protection against potentially competitive products. Furthermore, there can be no assurance that should patents issue, they will be of commercial value to the Company, or that the USPTO or private parties, including competitors, will not successfully challenge the Company's patents or circumvent the Company's patent position. In the absence of adequate patent protection, the Company's business may be adversely affected by competitors who develop comparable technology or products. Pursuant to the terms of the Uruguay Round Agreements Act, patents issuing from applications filed on or after June 8, 1995 have a term of 20 years from the date of such filing, irrespective of the period of time it may take for such patent to ultimately issue. This method of patent term calculation can result in a shorter period of patent protection afforded to the Company's products compared to the prior method of term calculation (17 years from the date of issue) as patent applications in the biopharmaceutical sector often take considerable time to issue. Under the Drug Price Competition and Patent Term Restoration Act of 1984 and the Generic Animal Drug and Patent Term Restoration Act, a patent which claims a product, use or method of manufacture covering drugs 36 39 and certain other products may be extended for up to five years to compensate the patent holder for a portion of the time required for FDA review of the product. There can be no assurance that the Company will be able to take advantage of the patent term extension provisions of this law. The Company also relies on trade secrets and continuing technological innovation which it seeks to protect with reasonable business procedures for maintaining trade secrets, including confidentiality agreements with its collaborators, employees and consultants. There can be no assurance that these agreements will not be breached, that the Company will have adequate remedies for any breach or that the Company's trade secrets and proprietary know-how will not otherwise become known or be independently discovered by competitors. Under certain of the Company's research and development agreements, inventions discovered in certain cases become jointly owned by the Company and the corporate sponsor or partner and in other cases become the property of the Company or the corporate sponsor or partner. Disputes may arise with respect to ownership of any such inventions. The commercial success of the Company also depends in part on the Company and its collaborators neither infringing patents or proprietary rights of third parties nor breaching any licenses that may relate to the Company's technologies and products. The Company is aware of several third party patents and patent applications that may relate to the practice of the Company's technologies. There can be no assurance that the Company or its collaborators do not or will not infringe any patents or proprietary rights of third parties. Furthermore, to the extent that Heska or its consultants or research collaborators use intellectual property owned by others in work performed for the Company, disputes may arise as to the rights in such intellectual property or in related or resulting know-how and inventions. Any legal action against the Company or its collaborative partners claiming damages and seeking to enjoin commercial activities relating to the Company's products and processes affected by third party rights, in addition to subjecting the Company to potential liability for damages, may require the Company or its collaborative partner to obtain a license in order to continue to manufacture or market the affected products and processes or to stop the manufacture and marketing of the affected products and processes. There can be no assurance that the Company or its collaborative partners would prevail in any such action or that any license (including licenses proposed by third parties) required under any such patent would be made available on commercially acceptable terms, if at all. There are a significant number of United States and foreign patents and patent applications in the practice of the Company's areas of interest and the Company believes that there may be significant litigation in the industry regarding patent and other intellectual property rights. If the Company becomes involved in such litigation, it could consume a substantial portion of the Company's managerial and financial resources, which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors -- Uncertainty of Patent and Proprietary Technology Protection; License of Technology of Third Parties." GOVERNMENT REGULATION Most of the products being developed by Heska will require licensing by a governmental agency before marketing. In the United States, governmental oversight of animal health products is primarily split between two agencies the United States Department of Agriculture ("USDA") and the Food and Drug Administration ("FDA"). Vaccines and point-of-care diagnostics for animals are considered veterinary biologics and are regulated by the Center for Veterinary Biologics ("CVB") of the USDA under the auspices of the Virus-Serum-Toxin Act. Alternatively, animal drugs, which generally include all synthetic compounds, are approved and monitored by the Center for Veterinary Medicine ("CVM") of the FDA under the auspices of the Federal Food, Drug and Cosmetic Act. A third agency, the Environmental Protection Agency ("EPA"), has jurisdiction over certain products applied topically to animals or to premises to control external parasites. Most of the regulated products presently under development by Heska will be regulated by the USDA. The purpose of the Virus-Serum-Toxin Act is to ensure that veterinary biologics sold in the United States are safe and efficacious. Pre-market testing is performed by the manufacturer and the CVB prior to approval of the product for sale as well as on each new lot. Although the procedures for licensing products by the USDA are formalized, the acceptable standards of performance for any product are agreed upon between the manufacturer and the CVB. For novel products that are unlike others already licensed, the agreement on expected performance standards is typically reached through a dialogue between the CVB and the manufacturer. The formal demonstration of acceptable efficacy of the product is done in carefully controlled laboratory trials. This is normally a much quicker process than demonstration of efficacy in clinical trials using client-owned animals. 37 40 The drug development process for human therapeutics is much more involved than that for animal drugs. The company sponsor of a human drug must obtain FDA marketing approval in a multi-phase process which generally is lengthy, expensive and subject to unanticipated delays. First, extensive preclinical studies in animal models to assess safety and efficacy as well as laboratory toxicology and pharmacokinetic studies of the drug must be conducted. The company must then submit to the FDA an application for an Investigational New Drug which must become effective before human clinical trials can commence. Human clinical trials are then conducted in three sequential phases. Phase I, which is safety testing, generally involves a small group of patients or healthy volunteers and typically takes approximately one year to complete. Phase II, in which the drug is tested for efficacy, optimal dosage and safety risks, is conducted in a larger, but still limited, patient population and typically takes 18 to 36 months to complete. If the drug proves efficacious in Phase II trials, expanded Phase III trials are conducted to evaluate the overall risks and benefits of the drug in relation available therapies for the disease. This phase typically takes two and one-half to five years to complete. Only after these clinical trials are complete may the company submit a New Drug Application ("NDA") to the FDA for marketing approval of the drug; and the NDA review process takes more than two years on average to complete. The entire process from research to market introduction may take as long as 20 years and cost tens to hundreds of millions of dollars. By contrast, recent industry data indicate that it takes about 11 years and $5 million to develop a new drug for animals, from commencement of research to market introduction. Of this time, approximately three years is spent in the clinical trial and review process. This time requirement for animal drugs is significantly shorter than the analogous time requirement for human drugs in part because clinical trials may be conducted immediately in the animal for which the drug is intended. In addition, the time and cost for companion animal drugs may be significantly less than for food producing animals, as food safety residue levels are not at issue. Also, for animal drugs, unlike human drugs, advantages over existing therapies do not have to be demonstrated. In addition, with the enactment of the Animal Drug Availability Act ("ADA") in October 1996, substantial reductions in the time and cost to license some new animal drugs by the FDA are anticipated. The ADA was designed to streamline the animal drug approval process in order to provide more registered drugs for animal use. The ADA creates a binding pre-submission conference at which the CVM and a company agree on the types of data the FDA will require. The ADA also removes the requirement that field investigations be done in every instance and allows the CVM to accept different types of proof of a drug's safety and efficacy. For example, as permitted by the ADA, the FDA has agreed that data collected by Atrix in human preclinical trials using dogs with naturally occurring periodontal disease constituted adequate evidence of product efficacy for purposes of regulatory clearance for Heska's canine periodontal disease therapeutic. This is expected to reduce, by two years, the approval process time for the Heska periodontal disease therapeutic by eliminating the need to conduct clinical trials in client-owned dogs. Heska currently expects that this product will be licensed for use in dogs before the equivalent product is licensed by the FDA for use in humans, although the human clinical trials were initiated significantly before Heska's efforts. Recent industry data indicates that it takes approximately four years and $4 million to license a conventional vaccine for animals from basic research through licensing. In contrast to vaccines, point-of-care diagnostics can typically be licensed by the USDA in about a year with considerably less cost. However, vaccines or diagnostics that use innovative materials such as those resulting from recombinant DNA technology usually require additional time to license. A number of animal health products are not regulated. For example, assays for use in a veterinary diagnostic laboratory do not have to be licensed by either the USDA or the FDA. Additionally, grooming and supportive care products such as those being developed for the dermatology and dental health care product lines are exempt from regulation as long as they do not bear a therapeutic claim that represents the product as a drug. Recently, regulations governing the export of drugs and biologics have also been relaxed by the passage of the Export Reform Enhancement Act of 1996. Under this act, drugs and biologics produced in the United States do not have to be licensed for sale in the United States before export if they are approved for sale in the importing country. Accordingly, Heska is moving quickly to introduce diagnostic products in certain countries, such as Italy and Australia, where the products would address significant market opportunities or needs. 38 41 The European Union ("EU") is centralizing the regulatory process for companion animal drugs and biologics for member states. In addition, both the USDA and the FDA are working with the EU and Japan via the Veterinary International Cooperation on Harmonization initiative to harmonize the regulatory requirements for companion animal health products. Thus, in the future, it is hoped that a single set of requirements will be in place to streamline the licensing of veterinary products in the major companion animal markets. COMPETITION The market in which the Company competes is intensely competitive. Heska's competitors include companion animal health companies and major pharmaceutical companies that have animal health divisions. Companies with a significant presence in the animal health market, such as American Home Products, Bayer, Merck & Co., Inc., Novartis, Pfizer Inc and IDEXX Laboratories, Inc., have developed or are developing products that do or would compete with the Company's products. Novartis and Bayer are marketing partners of the Company and their agreements with the Company do not restrict their ability to develop and market competing products. These competitors have substantially greater financial, technical, research and other resources and larger, more established marketing, sales, distribution and service organizations than the Company. Moreover, such competitors may offer broader product lines and have greater name recognition than the Company. Additionally, the market for companion animal health care products is highly fragmented, with discount stores and specialty pet stores accounting for a substantial percentage of such sales. As Heska intends to distribute its products only through veterinarians, a substantial segment of the potential market may not be reached and the Company may not be able to offer its products at prices which are competitive with those of companies that distribute their products through retail channels. There can be no assurance that the Company's competitors will not develop or market technologies or products that are more effective or commercially attractive than the Company's current or future products or that would render the Company's technologies and products obsolete. Moreover, there can be no assurance that the Company will have the financial resources, technical expertise or marketing, distribution or support capabilities to compete successfully. EMPLOYEES As of April 1, 1997, Heska and its subsidiaries employed 402 full-time persons, of whom 108 are in manufacturing and quality control, 137 are in research, development and regulatory, 65 are in finance and administration, 54 are in sales and marketing, 38 are in the diagnostic laboratories. Of this total, Diamond employed a total of 144 persons and Bloxham employed a total of 38 persons. Heska's employees hold more than 20 D.V.M.s and over 45 Ph.D.s. There can be no assurance that the Company will continue to be able to attract and retain qualified technical and management personnel. See "Risk Factors -- Dependence on Key Personnel." None of the Company's employees is covered by a collective bargaining agreement and the Company believes its employee relations are good. FACILITIES The Company leases an aggregate of approximately 75,000 square feet of administrative and laboratory space in six buildings located mostly in one business park in Fort Collins, Colorado under leases expiring from 1999 through 2004, with options to extend through 2010 for the larger facilities. The Company believes that its present facilities are adequate for its current and planned activities and that suitable additional or replacement facilities in the Fort Collins area are readily available on commercially reasonable terms. Diamond's principal manufacturing facility in Des Moines, Iowa, consisting of 166,000 square feet of buildings on 34 acres of land, is leased from Bayer under a lease expiring 1998, with options to extend through 2009. Diamond also owns a 160-acre farm used principally for research purposes located in Carlisle, Iowa. Management believes that any new construction required for Diamond's activities can be accommodated at its present site. The Company's European subsidiary leases its facilities. LEGAL PROCEEDINGS The Company is not a party to any material legal proceedings. 39 42 MANAGEMENT DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES The directors, executive officers and key employees of the Company are as follows:
NAME AGE POSITION ---- --- -------- DIRECTORS AND EXECUTIVE OFFICERS Fred M. Schwarzer............... 45 President, Chief Executive Officer and Director Robert B. Grieve, Ph.D.......... 45 Chief Scientific Officer and Vice Chairman Giuseppe Miozzari, Ph.D......... 50 Managing Director, Heska Europe R. Lee Seward, D.V.M............ 51 Executive Vice President John A. Shadduck, D.V.M., 57 Executive Vice President, Operations Ph.D.......................... William G. Skolout.............. 46 Chief Financial Officer Louis G. Van Daele.............. 53 President, Diamond Animal Health, Inc. A. Barr Dolan(1)(2)............. 47 Chairman of the Board Lyle A. Hohnke, Ph.D.(1)........ 54 Director Denis H. Pomroy(2).............. 47 Director Lynnor B. Stevenson, Ph.D.(1)... 54 Director Guy Tebbit, Ph.D.(2)............ 47 Director KEY EMPLOYEES David L. Hines, Ph.D............ 50 Vice President, Product Development and Regulatory Affairs Elizabeth Hodgkins, D.V.M....... 47 Vice President, Marketing Paul Hudnut, J.D................ 38 Vice President, Business Development Deborah E. Robbins, J.D......... 40 Vice President, General Counsel and Secretary Keith E. Rushlow, Ph.D.......... 43 Vice President, Science and Technology Dan T. Stinchcomb, Ph.D......... 43 Vice President, Biochemistry and Molecular Biology Carol Talkington Verser, 44 Vice President, Intellectual Property Ph.D.......................... Donald L. Wassom, Ph.D.......... 48 Vice President, Allergy and Immunology Glade Weiser, D.V.M............. 48 Vice President, Diagnostics Kenneth Williams................ 50 Vice President, Sales
- --------------- (1) Member of Compensation Committee of the Board of Directors. (2) Member of Audit Committee of the Board of Directors. Fred M. Schwarzer is President, Chief Executive Officer and a director of the Company. Mr. Schwarzer served as the Executive Vice President responsible for the Company's strategic planning and corporate partnerships from June 1994 until he was elected to serve as President and Chief Executive Officer of the Company effective November 1994. He has been a member of the Company's Board of Directors since June 1994. From June through October 1994, Mr. Schwarzer was an employee of Charter Venture Capital and continues to hold a small limited partnership interest in Charter Ventures II, L.P. Mr. Schwarzer was the founder and a partner in the Mountain View, California law firm of General Counsel Associates from 1988 to June 1994 and, prior to founding General Counsel Associates, was a partner in the San Francisco law firm of Pillsbury Madison & Sutro LLP. He holds a J.D. degree from the University of California, Berkeley and a B.A. degree from the University of Michigan. Robert B. Grieve, Ph.D. is Chief Scientific Officer and Vice Chairman of the Company and is a founder of the Company. Dr. Grieve was named to his current position in December 1994. He has been a member of the Company's Board of Directors since 1990. Dr. Grieve was a Professor of Parasitology at Colorado State University from 1987 until joining the Company in January 1994 as Vice President, Research and Development. In addition to his duties with the Company, Dr. Grieve serves as President of the American Society of Parasitologists. In the past, he has served in a formal editorial capacity for the Journal of Immunology, the 40 43 Journal of Parasitology and the American Journal of Veterinary Research. His professional awards and honors include the 1991 Ralston Purina Small Animal Research Award and the 1990 Henry Baldwin Ward medal for outstanding research in Parasitology, awarded by the American Society of Parasitologists. He holds a Ph.D. degree from the University of Florida and M.S. and B.S. degrees from the University of Wyoming. Giuseppe Miozzari, Ph.D. joined the Company as Managing Director, Heska Europe in March 1997. From 1980 to March 1997, Dr. Miozzari served in senior research positions with Novartis, most recently as the Head of Research of the Animal Health Sector and prior to that, from 1980 to 1983, as Head of the Molecular Biology Research Unit in the Pharmaceuticals Division. Dr. Miozzari also served as Novartis' designate on the Board of Directors of the Company from April 1996 to March 1997. Dr. Miozzari holds Ph.D. and Dipl. Sc. Nat. degrees from the Federal Institute of Technology (ETH) in Zurich, Switzerland. R. Lee Seward, D.V.M. is Executive Vice President of the Company. He joined the Company in October 1994. Before joining the Company, Dr. Seward held successive positions with Merck & Co., Inc. from May 1981 until September 1994. His most recent position with Merck was Executive Director, Animal Science Research, a position in which he headed worldwide animal health product development. Dr. Seward was in private veterinary practice from March 1980 until he joined Merck & Co., Inc. He holds D.V.M. and B.S. degrees from Colorado State University. John A. Shadduck, D.V.M., Ph.D. is Executive Vice President, Operations of the Company. He was named to this position in January 1997. Dr. Shadduck also served as a director of the Company from January 1990 to January 1997. Before joining the Company, he held the position of Dean, College of Veterinary Medicine, Texas A&M University from July 1988 until January 1997. He holds D.V.M. and M.Sc. and Ph.D degrees from The Ohio State University. William G. Skolout was appointed Chief Financial Officer of the Company in March 1997. Before joining Heska, Mr. Skolout was Chief Financial Officer of Cardinal Technologies, Inc. from March 1996 to February 1997 and was Chief Financial Officer and Vice President of Cray Computer Corporation from September 1992 to December 1995. He holds an M.B.A., Finance degree from the University of Massachusetts, Amherst and a B.S., Business Finance degree from University of Colorado, Boulder. Louis G. Van Daele has served as President of Diamond since February 1994. From February 1989 until January 1994, he served as Director of Quality Control and Quality Assurance at Diamond. He holds an M.B.A. degree from Wayne State University and a B.S. degree from Michigan State University. A. Barr Dolan has been a director of the Company since March 1988. Mr. Dolan has been the President of Charter Venture Capital, a venture capital management firm, since 1982, a general partner of Charter Ventures since 1982 and a general partner of Charter Ventures II, L.P. since 1994. Mr. Dolan is also a director of several private companies. He holds M.S. and B.A. degrees from Cornell University, an M.A. degree from Harvard University and an M.B.A. from Stanford University. Lyle A. Hohnke, Ph.D. has been a director of the Company since April 1996. Dr. Hohnke is a general partner of Javelin Capital Fund, L.P., a venture capital firm, a position he has held since 1994. Dr. Hohnke was a co-founder of Diamond and served as Chairman and CEO from 1994 until its acquisition by the Company in April 1996. From January 1991 to October 1993 he was a general partner of Heart Land Seed Capital Fund. Dr. Hohnke is also a director of Zynaxis, Inc. and several private companies. He holds Ph.D. and M.A. degrees from the University of Oregon, an M.B.A. from the Hartford Graduate Institute and a B.A. degree from Western Michigan University. Denis H. Pomroy has been a director of the Company since March 1995. He is the president of Volendam Capital Advisors, Palo Alto, California, a venture capital management company, which advises on and manages investments for member companies of the Volendam investment group, including Volendam Investeringen N.V. Prior to joining Volendam Capital Advisors, Mr. Pomroy served as chief financial officer from 1989 through 1996 of Madge Networks N.V., a computer networking company. Mr. Pomroy serves as a director of several other private companies, mainly in the emerging growth technology area. He holds a bachelors degree from The University of Birmingham, England and is a fellow of The Chartered Institute of Management Accountants, England. 41 44 Lynnor B. Stevenson, Ph.D. was a founder of Heska and has been a director of the Company since March 1988 and served as President of the Company from March 1988 to March 1992. Dr. Stevenson is currently the President and Chief Executive Officer of Cascade Oncogenics, Inc. From July 1992 to April 1997, she was Director, Technology Transfer at the University of Oregon. She holds a Ph.D. degree in biochemistry from Monash University, Australia and B.Sc. and M.Ed. degrees from the University of Melbourne, Australia. Guy Tebbit, Ph.D. has been a director of the Company since March 1997 when he became Novartis' designate on the Board of Directors of the Company. Since January 1997, Dr. Tebbit has served as Vice President, Research and Development, Regulatory Affairs and Professional Services at Novartis. From January 1995 to January 1997, he held the position of Director, Manufacturing and Regulatory Affairs at Novartis and from January 1992 to January 1995 he served as Senior Product Development Manager at Novartis. Dr. Tebbit holds a Ph.D. from Oregon State University and a B.S. degree from Northern Illinois University. David L. Hines, Ph.D. has served as Vice President, Product Development and Regulatory Affairs since February 1997. Prior to joining the Company, Dr. Hines was the manager of Virus Vaccine Research and Development for Solvay Animal Health, Inc., where he was employed from February 1989 to December 1995. He holds Ph.D. and B.Sc. degrees from The Ohio State University. Elizabeth Hodgkins, D.V.M. has served as Vice President, Marketing of the Company since October 1996. From June 1985 until August 1993, Dr. Hodgkins held a variety of positions in customer relations and marketing with Hill's Pet Nutrition Inc. Prior to 1985, Dr. Hodgkins was an Instructor in Residence in Veterinary Microbiology at the University of California at Davis and an Oncological Specialist and Associate Clinician at Silverado Veterinary Hospital in Napa, CA. She holds D.V.M. and B.S. degrees from the University of California, Davis and a J.D. degree from the University of Kansas. Paul Hudnut, J.D. has served as Vice President of Business Development of the Company since June 1996. Prior to joining the Company, Mr. Hudnut was a General Manager at US WEST Media Group. He held positions in management and business development at subsidiaries of US WEST Inc. from February 1988 until joining the Company. Prior to joining US WEST Inc., Mr. Hudnut was associated with the Denver, Colorado law firm of Davis, Graham & Stubbs. He holds a J.D. degree from the University of Virginia and a B.A. degree from The Colorado College. Deborah E. Robbins, J.D. is Vice President, General Counsel and Secretary of the Company. She has served in that position since April 1996. From February 1990 until joining the Company, Ms. Robbins was a partner with the Mountain View, California law firm of General Counsel Associates, and prior to that time was an associate and partner in the Palo Alto, California law firm of Wilson, Sonsini, Goodrich & Rosati. She holds a J.D. degree from the University of Chicago and a B.A. degree from Wellesley College. Keith E. Rushlow, Ph.D. has served as Vice President of Science and Technology of the Company since December 1995. From April 1993 until December 1993, he was Senior Director, Molecular Biology. From December 1993 to December 1994, he was Director of Research. From December 1994 to December 1995, he was Vice President, Research. From September 1990 until joining the Company, Dr. Rushlow was a Research Associate Professor at the University of Pittsburgh School of Medicine and Associate Faculty at the Pittsburgh Cancer Institute. Dr. Rushlow has also held various scientific and research management positions with the National Cancer Institute, Battelle Memorial Institute and Syngene/TechAmerica. He holds a Ph.D. degree from the University of Colorado and a B.S. degree from the University of Michigan. Dan T. Stinchcomb, Ph.D. has served as Vice President of Biochemistry and Molecular Biology for the Company since May 1996. Prior to joining the Company, from July 1993 until May 1996 Dr. Stinchcomb was employed at Ribozyme Pharmaceuticals, Inc., most recently as Director of Biology Research. From 1988 until April 1993, Dr. Stinchcomb held various positions with Synergen, Inc. Prior to joining Synergen, Dr. Stinchcomb was an Associate Professor in Cellular and Developmental Biology at Harvard University. He holds a Ph.D. degree from Stanford University and a B.A. degree from Harvard University. Carol Talkington Verser, Ph.D. has served as Vice President of Intellectual Property of the Company since June 1996. From July 1995 until June 1996, Dr. Verser was the Director of Intellectual Property for the Company. She was a patent agent for the law firm of Sheridan, Ross & McIntosh in Denver, Colorado from 1991 until 1995 42 45 and from 1990 through 1992 was a writer and contributing editor for Bioworld Today. From 1986 until 1989, she was a director at BioGrowth Inc. She holds a Ph.D. degree from Harvard University and a B.S. degree from the University of Southern California. Donald L. Wassom, Ph.D. has served as Vice President of Allergy and Immunology of the Company since January 1996. From May 1992 until January 1996, Dr. Wassom was Professor of Parasitology at Colorado State University. Dr. Wassom has also held faculty positions at the University of Wisconsin and Cornell University. He holds Ph.D. and B.S. degrees from the University of Utah. Glade Weiser, D.V.M. has served as Vice President of Diagnostics of the Company since April 1996. From October 1989 until January 1996, Dr. Weiser was Professor and Chairperson for the Department of Pathology in the College of Veterinary Medicine and Biomedical Sciences at Colorado State University. He was a member of the faculty at the College of Veterinary Medicine of The Ohio State University from July 1975 until December 1982. Dr. Weiser is a Diplomate of the American College of Veterinary Pathologists. He holds D.V.M. and B.S. degrees from the University of California, Davis. Kenneth Williams has served as Vice President of Sales of the Company since February 1997. From 1988 until joining the Company, he was Director of Field Sales for Ciba-Geigy Animal Health. He holds a B.S. degree from Virginia Polytechnic Institute. Mr. Schwarzer and Ms. Robbins are husband and wife. There are no other family relationships among any of the directors or executive officers of the Company. BOARD COMPOSITION AND COMMITTEES Effective upon the closing of this offering, the Company's Board of Directors will be divided into three classes, with one class of directors elected each year at the annual meeting of stockholders for a three-year term of office. All directors of one class hold their positions until the annual meeting of stockholders at which their respective successors are elected and qualified. Mr. Schwarzer and Dr. Tebbit serve in the class whose term expires in 1998; Dr. Grieve and Mr. Dolan serve in the class whose term expires in 1999; and Mr. Pomroy, Dr. Stevenson and Dr. Hohnke serve in the class whose term expires in 2000. Officers are elected at the first board of directors meeting following the stockholders' meeting at which the directors are elected and serve at the discretion of the Board of Directors. Mr. Dolan was appointed to the Company's Board of Directors in connection with initial and subsequent equity investments in the Company by Charter Ventures and Charter Ventures II, L.P. (collectively, "Charter"). Dr. Tebbit was appointed to the Board of Directors in connection with an equity investment in the Company by Novartis. Mr. Pomroy was appointed to the Board of Directors of the Company in connection with an investment in the Company by Volendam Investeringen N.V. ("Volendam"). Volendam, Charter and Novartis are parties to a voting agreement with the Company pursuant to which each entity is entitled to elect one director to the Company's Board of Directors for as long as each entity owns a specified amount of the Company's voting stock. See "Description of Capital Stock -- Voting Agreement." Dr. Hohnke was appointed to the Board of Directors of the Company in connection with the Company's April 1996 acquisition of Diamond. The Board of Directors has established an Audit Committee and a Compensation Committee. The Audit Committee, which consists of Messrs. Dolan and Pomroy and Dr. Tebbit, reviews the results and scope of the annual audit and the services provided by the Company's independent accountants. The Compensation Committee, which consists of Mr. Dolan, Dr. Hohnke and Dr. Stevenson, makes recommendations to the Board of Directors with respect to general and specific compensation policies and practices of the Company and administers its 1997 Stock Incentive Plan and 1997 Employee Stock Purchase Plan. Mr. Schwarzer also attends meetings of the Compensation Committee, other than discussions relating to his own compensation, but does not vote on any matters. 43 46 COMPENSATION OF OUTSIDE DIRECTORS Directors do not receive any fees for service on the Board of Directors, but are reimbursed for their expenses for each meeting attended. Directors are eligible to participate in the Company's 1997 Stock Incentive Plan described below. As of the date of this Prospectus, one outside director purchased an aggregate of 25,000 shares of Common Stock at a price of $1.20 per share pursuant to an award made under a prior stock plan. In March 1997, each outside director was granted an option to purchase 2,000 shares of Common Stock at an exercise price of $3.00 per share under the 1997 Stock Incentive Plan. Dr. Tebbit has declined this option in accordance with Novartis policies. Mr. Dolan assigned his option in equal portions to Charter Ventures and Charter Ventures II, L.P. as required by their partnership agreements. The Company expects that there will be no further discretionary grants of options to outside directors after the date of this offering, although outside directors will be entitled to certain automatic grants under the 1997 Stock Incentive Plan. See "-- Stock Option Plan." EXECUTIVE COMPENSATION The following table summarizes all compensation paid to the Company's Chief Executive Officer and to each of the Company's other most highly compensated executive officers whose total annual salary and bonus exceeded $100,000, for services rendered in all capacities to the Company during the fiscal year ended December 31, 1996. SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION AWARDS ANNUAL ------------ COMPENSATION OTHER SECURITIES NAME AND FISCAL --------------------- ANNUAL UNDERLYING PRINCIPAL POSITION YEAR SALARY($)(1) BONUS COMPENSATION OPTIONS(#) ------------------ ------ ------------ ----- --------------- ------------ Fred M. Schwarzer................... 1996 $200,000 -- -- 150,000 President and Chief Executive Officer Robert B. Grieve.................... 1996 190,000 -- -- 150,000 Chief Scientific Officer and Vice Chairman R. Lee Seward....................... 1996 180,000 -- -- -- Executive Vice President Louis G. Van Daele.................. 1996.. 115,098(2) -- -- 14,685 President, Diamond
- --------------- (1) Salary includes amounts, if any, deferred pursuant to 401(k) arrangements. (2) Mr. Van Daele's employment with the Company commenced in April 1996 following the Company's acquisition of Diamond. 44 47 The following tables set forth certain information as of December 31, 1996 and for the fiscal year then ended with respect to stock options granted to and exercised by the individuals named in the Summary Compensation Table above who received option grants in 1996. OPTION GRANTS IN FISCAL YEAR 1996
POTENTIAL REALIZABLE VALUE AT ASSUMED NUMBER OF PERCENTAGE OF ANNUAL RATES OF STOCK SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(4) OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ---------------------- NAME GRANTED(1) FISCAL YEAR ($/SHARE)(2) DATE(3) 5%($) 10%($) ---- ---------- --------------- ------------ ---------- --------- --------- Fred M. Schwarzer...... 150,000 18.87% $1.20 6/21/06 $113,201 $286,874 Robert B. Grieve....... 150,000 18.87 1.20 6/21/06 113,201 286,874 Louis G. Van Daele..... 13,975 1.75 1.20 5/21/06 10,430 26,365 710(5) .09 1.20 4/19/06 536 1,358
- --------------- (1) The right to exercise these stock options vests ratably on a monthly basis over a four year period. Under the terms of the Company's stock plans, the committee designated by the Board of Directors to administer such plans retains the discretion, subject to certain limitations, to modify, extend or renew outstanding options and to reprice outstanding options. Options may be repriced by canceling outstanding options and reissuing new options with an exercise price equal to the fair market value on the date of reissue, which may be lower than the original exercise price of such canceled options. (2) The exercise price is equal to 100% of the fair market value on the date of grant. (3) The options have a term of 10 years, subject to earlier termination in certain events related to termination of employment. (4) The 5% and 10% assumed rates of appreciation are suggested by the rules of the Securities and Exchange Commission and do not represent the Company's estimate or projection of the future Common Stock price. There can be no assurance that any of the values reflected in the table will be achieved. (5) These incentive stock options were fully vested as of the date of grant. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL 1996 YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT DECEMBER 31, 1996(#) DECEMBER 31, 1996($)(2) SHARES ACQUIRED VALUE --------------------------- --------------------------- NAME ON EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- --------------- -------------- ----------- ------------- ----------- ------------- Fred M. Schwarzer......... -- -- 76,979 196,021 $ 51,984 $55,066 Robert B. Grieve.......... -- -- 180,416 179,584 156,270 41,230 R. Lee Seward............. 30,000 $25,500 -- 50,000 -- 42,500 Louis G. Van Daele........ -- -- 3,039 11,646 -- --
- --------------- (1) These values were calculated on the basis of the fair market value of the underlying securities at the exercise date minus the applicable per share exercise price. (2) There was no public trading market for the Common Stock as of December 31, 1996. These values were calculated on the basis of the fair market value of the Common Stock at December 31, 1996 ($1.20), as determined by the Company's Board of Directors, minus the applicable per share exercise price. 45 48 EMPLOYMENT AGREEMENTS The Company has entered into employment agreements with each of Fred M. Schwarzer, its Chief Executive Officer, Robert B. Grieve Ph.D., its Chief Scientific Officer and Vice Chairman, and R. Lee Seward D.V.M., an Executive Vice President. These agreements provide for severance payments if the employment of the individual is terminated without cause, including terminations in connection with a change in control of the Company. In the case of Mr. Schwarzer and Dr. Grieve, the payments would be one year's salary plus an additional one year of vesting under any stock arrangements if the termination takes place at any time on or before December 31, 1999, or six months' salary and an additional six months' vesting under any stock arrangements if the termination takes place after that date. In the case of Dr. Seward, the severance payment would be one year's salary if the termination takes place at any time on or before October 17, 1997 and six months' salary if the termination takes place after that date. Additionally, Louis G. Van Daele, President of Diamond, has an employment agreement with Diamond, pursuant to which Mr. Van Daele is entitled to severance payments equal to one year of salary payable in twelve monthly installments if he is terminated without cause prior to April 2000. STOCK OPTION PLAN In March 1997, the Company's Board of Directors adopted the Company's 1997 Stock Incentive Plan (the "Stock Plan"). The Stock Plan replaces the Company's 1988 Stock Plan and its 1994 Key Executive Plan (the "Prior Plans"). The Prior Plans were terminated effective upon the adoption of the Stock Plan. No further grants will be made under the Prior Plans, although they will continue to govern all outstanding awards made thereunder. All future awards will be made under the Stock Plan. The number of shares of Common Stock that are reserved for issuance under the Stock Plan pursuant to the direct award or sale of shares or the exercise of options is equal to 1,350,000 shares plus the number of shares remaining available under the Prior Plans on the date of their termination. If any options granted under the Stock Plan or under the Prior Plans are forfeited or terminate for any other reason without having been exercised in full, then the unpurchased shares subject to those options will become available for additional grants under the Stock Plan. If shares granted or purchased under the Stock Plan are forfeited, then those shares will also become available for additional grants under the Stock Plan. The number of shares reserved for issuance under the Stock Plan will be increased automatically on January 1 of each year by a number equal to the lesser of (a) 1,500,000 shares or (b) 5% of the shares of Common Stock outstanding on the immediately preceding December 31. Under the Stock Plan, all employees (including officers) and directors of the Company or any subsidiary and any independent contractor or advisor who performs services for the Company or a subsidiary are eligible to purchase shares of Common Stock and to receive awards of shares or grants of nonstatutory options. Employees are also eligible to receive grants of incentive stock options ("ISOs") intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). The Stock Plan is administered by the Compensation Committee of the Board of Directors, which selects the persons to whom shares will be sold or awarded or options will be granted, determines the number of shares to be made subject to each sale, award or grant, and prescribes the other terms and conditions of each sale, award or grant, including the type of consideration to be paid to the Company upon sale or exercise and the vesting schedule. The exercise price under any nonstatutory options generally must be at least 85% of the fair market value of the Common Stock on the date of grant. The exercise price under ISOs cannot be lower than 100% of the fair market value of the Common Stock on the date of grant and, in the case of ISOs granted to holders of more than 10% of the voting power of the Company, not less than 110% of such fair market value. The term of an ISO cannot exceed 10 years, and the term of an ISO granted to a holder of more than 10% of the voting power of the Company cannot exceed five years. Beginning after this offering, each new non-employee director who is elected to the Company's Board of Directors will automatically be granted as of the date of election an option to purchase 10,000 shares of Common Stock at an exercise price equal to the fair market value of the Common Stock on the date of grant. The shares subject to these options will vest in four equal installments at annual intervals over the four-year period commencing on the date of grant. In addition, each non-employee director who will continue to serve following any annual meeting of stockholders will automatically be granted an option as of the date of such meeting to 46 49 purchase 2,000 shares of Common Stock at an exercise price equal to the fair market value of the Common Stock on the date of grant. The shares subject to these options will vest on the first anniversary of grant. No director will receive the 10,000-share grant and a 2,000-share grant in the same year. EMPLOYEE STOCK PURCHASE PLAN In April 1997, the Board of Directors of the Company adopted the 1997 Employee Stock Purchase Plan (the "ESPP") to provide employees of the Company with an opportunity to purchase Common Stock through payroll deductions. The ESPP will be submitted to the stockholders of the Company for approval. Under the ESPP, 250,000 shares of Common Stock have been reserved for issuance. The ESPP is expected to become effective at the time of this Offering. All full-time regular employees who are employed by the Company or Diamond on the date of this Prospectus, will be eligible to participate in the ESPP. Eligible employees may participate in the ESPP by authorizing payroll deductions of a specified percentage of their total cash compensation. Amounts withheld are applied at the end of every six-month accumulation period to purchase shares of Common Stock. The value of the Common Stock (determined as of the beginning of the offering period) that may be purchased by any participant in a calendar year is limited to $25,000. Participants may withdraw their contributions at any time before stock is purchased. The purchase price is equal to 85% of the lower of (a) the market price of Common Stock immediately before the beginning of the applicable offering period or (b) the market price of Common Stock at the time of the purchase. In general, each offering period is 24 months long, but a new offering period begins every six months. Thus, up to four overlapping offering periods may be in effect at the same time. An offering period continues to apply to a participant for the full 24 months, unless the market price of Common Stock is lower when a subsequent offering period begins. In that event, the subsequent offering period automatically becomes the applicable period for purposes of determining the purchase price. The first accumulation and offering periods are expected to commence on the date of this Prospectus and will end on December 31, 1997 and , 1999, respectively. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS The Company has adopted provisions in its Restated Certificate of Incorporation that limit the liability of its directors for monetary damages for breach of their fiduciary duty as directors, except for liability that cannot be eliminated under the Delaware General Corporation Law ("Delaware Law"). Delaware Law provides that directors of a company will not be personally liable for monetary damages for breach of their fiduciary duty as directors, except for liability (i) for any breach of their duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for unlawful payment of dividends or unlawful stock repurchases or redemptions, as provided Section 174 of the Delaware Law, or (iv) for any transaction from which the director derived an improper personal benefit. Any amendment or repeal of these provisions requires the approval of the holders of shares representing at least 66 2/3% of the shares of the Company entitled to vote in the election of directors, voting as one class. The Company's Restated Certificate of Incorporation and Bylaws also provide that the Company may indemnify its directors and officers to the fullest extent permitted by Delaware Law. The Company has entered into separate indemnification agreements with its directors and executive officers that could require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or executive officers and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. The Company believes that the limitation of liability provision in its Restated Certificate of Incorporation and the indemnification agreements will facilitate the Company's ability to continue to attract and retain qualified individuals to serve as directors and officers of the Company. 47 50 CERTAIN TRANSACTIONS The Company has historically sold its Preferred Stock in private placements to venture capital firms. Since January 1994, the Company has sold an aggregate of 3,928,085 shares of Series E Preferred Stock in a series of private financings for $3.25 per share and 3,000,000 shares of Series F Preferred Stock for $12.00 per share (all shares of Preferred Stock will convert into Common Stock upon the closing of this offering). The purchasers of the Preferred Stock include the following directors, holders of more than 5% of the Company's securities, and entities associated with the Company's directors:
SHARES OF PREFERRED STOCK PURCHASED -------------------------- SERIES E SERIES F ----------- ----------- Entities associated with Charter Ventures................... 851,162 -- Volendam Investeringen, N.V. ............................... 3,076,923 -- Denis H. Pomroy(1).......................................... 3,076,923 -- A. Barr Dolan(2)............................................ 851,162 -- Novartis.................................................... -- 3,000,000 Guy Tebbit Ph.D.(3)......................................... 3,000,000
- --------------- (1) Represents shares held by Volendam Investeringen N.V. with respect to which Mr. Pomroy disclaims beneficial ownership except to the extent of his proportionate share therein. Mr. Pomroy, a director of the Company, is the president of Volendam Capital Advisors, which advises and manages investments for Volendam Investeringen, N.V. and may be deemed to be a beneficial owner of the shares held by Volendam Investeringen N.V. because of shared voting power with respect to such shares. (2) Represents shares held by Charter Ventures and Charter Ventures II, L.P. with respect to which Mr. Dolan disclaims beneficial ownership except to the extent of his proportionate share therein. Mr. Dolan, a director of the Company, is a general partner of each of Charter Ventures and Charter Ventures II, L.P. and may be deemed to be a beneficial owner of the shares held by such entities because of shared voting power with respect to such shares. (3) Represents shares held by Novartis, by whom Dr. Tebbit is employed. Dr. Tebbit does not share voting or investment power with respect to such shares and disclaims beneficial ownership thereof. The purchasers of the above shares of Preferred Stock are entitled to registration rights. See "Description of Capital Stock -- Preferred Stock." In connection with its purchase of Series F Preferred Stock, Novartis was granted marketing rights to certain of the Company's products under development. In addition, the Company entered into a Screening and Development Agreement and Right of First Refusal Agreement with Novartis. See "Business -- Collaborative Agreements" for a description of these agreements. Novartis did not make any separate payments for these rights. See "Management -- Employment Agreements" for a description of employment agreements between the Company and certain executive officers. For information concerning indemnification of directors and officers, see "Management -- Limitation of Liability and Indemnification Matters." In March 1995, the Company converted $638,567 of indebtedness to entities associated with Charter Ventures, a principal stockholder of the Company, to shares of Series E Preferred Stock at $3.25 per share. In December 1994, the Company converted $2,127,708 of indebtedness to Charter Ventures to shares of Series E Preferred Stock at $4.00 per share. In connection with the sale of Series E Preferred Stock in March 1995 at $3.25 per share, the Company effected a 1.23 to one split of the Series E Preferred Stock to bring the effective purchase price of the shares purchased at $4.00 to $3.25. A total of 122,753 shares was issued to Charter Ventures as a result of this stock split. Mr. Schwarzer purchased an aggregate of 177,000 shares of Common Stock from the Company in February 1995 at a purchase price of $.35 per share, paid by a full recourse promissory note in the initial principal amount of $61,950. The note bears interest at 7 1/2% per annum, compounded annually, and is due in full in February 2001. Mr. Schwarzer is a special limited partner of Charter Ventures II, L.P. 48 51 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of April 16, 1997 and as adjusted to reflect the sale by the Company and the Selling Stockholder of the shares offered hereby (assuming no exercise of the Underwriters' over-allotment option), by: (i) each person who is known by the Company to own beneficially more than 5% of the Company's Common Stock, (ii) each of the Company's directors, (iii) each of the Company's officers named under "Management -- Summary Compensation Table," and (iv) all directors and executive officers of the Company as a group.
PERCENTAGE OF SHARES BENEFICIALLY OWNED(1) SHARES BENEFICIALLY ------------------- OWNED PRIOR NUMBER OF PRIOR TO AFTER TO OFFERING(1) SHARES OFFERED OFFERING OFFERING ------------------- -------------- -------- -------- Entities associated with Charter Ventures(2)........................... 3,646,924 -- 31.3% 525 University Avenue Suite 1500 Palo Alto, CA 94301 Novartis Produkte AG............................ 3,000,000 -- 25.7 Klybeckstrasse A4A 4002 Basel Switzerland Volendam Investeringen, N.V..................... 3,076,923 [] 26.4 14 John B. Gorsiraweg P.O. Box 3889 Curacao, Netherlands Antilles A. Barr Dolan(3)................................ 3,646,924 -- 31.3 Robert B. Grieve, Ph.D.(4)(9)................... 315,356 -- 2.7 Lyle A. Hohnke, Ph.D.(9)........................ 93,925 -- * Denis H. Pomroy(5)(9)........................... 3,103,923 -- 26.6 Fred M. Schwarzer(6)(9)......................... 292,208 -- 2.5 Lynnor B. Stevenson, Ph.D.(9)................... 227,000 -- 1.9 Guy Tebbit, Ph.D.(7)............................ 3,000,000 -- 25.7 R. Lee Seward, D.V.M.(8)(9)..................... 161,250 -- 1.4 Louis G. Van Daele(9)........................... 111,024 -- 1.0 All directors and executive officers as a group (12 persons)(9)(10)........................... 10,965,362 -- 91.2
- --------------- * Less than 1%. (1) To the Company's knowledge, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, subject to community property laws where applicable and the information contained in the footnotes to this table. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting and investment power with respect to securities. Shares of Common Stock issuable upon exercise of stock options exercisable within 60 days of April 30, 1997 are deemed outstanding and to be beneficially owned by the person holding such option for purposes of computing such person's percentage ownership, but are not deemed outstanding for the purpose of computing the percentage ownership of any other person. 49 52 (2) Includes 3,385,510 shares and options to purchase 1,000 shares of Common Stock held by Charter Ventures and 259,414 shares and options to purchase 1,000 shares of Common Stock held by Charter Ventures II, L.P. (3) Represents shares and options held by Charter Ventures and Charter Ventures II, L.P., with respect to which Mr. Dolan disclaims beneficial ownership except to the extent of his proportionate share therein. Mr. Dolan, a director of the Company, is a general partner of each of Charter Ventures and Charter Ventures II, L.P., and may be deemed a beneficial owner of the shares held by such entities because of shared voting power with respect to such shares. (4) Includes options to purchase 14,731 shares of Common Stock held by Dr. Grieve's wife, with respect to which Dr. Grieve disclaims beneficial ownership. (5) Includes 3,076,923 shares held by Volendam Investeringen, N.V., with respect to which Mr. Pomroy disclaims beneficial ownership except to the extent of his proportionate interest therein, and 20,840 shares of Common Stock subject to repurchase by the Company. (6) Includes 4,125 shares of Common Stock and options to purchase 1,750 shares of Common Stock held by Mr. Schwarzer's wife, with respect to which Mr. Schwarzer disclaims beneficial ownership, and 92,772 shares of Common Stock subject to repurchase by the Company. (7) Represents shares held by Novartis, with respect to which Dr. Tebbit disclaims beneficial ownership. (8) Includes 40,000 shares of Common Stock subject to repurchase by the Company. (9) Includes an aggregate of 367,155 shares of Common Stock issuable upon exercise of stock options currently exercisable within 60 days of April 30, 1997 as follows: Dr. Grieve, 210,625; Dr. Hohnke, 7,534; Mr. Pomroy, 2,000; Mr. Schwarzer, 109,333; Dr. Stevenson, 2,000; Dr. Seward, 11,250; Mr. Van Daele, 4,786; and Dr. Shadduck, 19,627. (10) Includes shares held by entities referenced in footnotes 2, 5 and 7 which are affiliated with certain directors. 50 53 DESCRIPTION OF CAPITAL STOCK Upon the closing of this offering, the authorized capital stock of the Company will consist of 40,000,000 shares of Common Stock, $.001 par value, and 25,000,000 shares of Preferred Stock, $.001 par value. COMMON STOCK As of April 16, 1997 there were 11,654,319 shares of Common Stock outstanding held by approximately 75 stockholders of record. Such figures assume the conversion of each outstanding share of Preferred Stock upon the closing of this offering into one share of Common Stock. The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders, including the election of directors, and do not have cumulative voting rights. Accordingly, the holders of a majority of the shares of Common Stock entitled to vote in any election of directors can elect all of the directors standing for election, if they so choose (subject to the Voting Agreement described below). Subject to preferences that may be applicable to any then outstanding Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors out of funds legally available therefor. See "Dividend Policy." Upon a liquidation, dissolution or winding up of the Company, the holders of Common Stock will be entitled to share ratably in the net assets legally available for distribution to stockholders after the payment of all debts and other liabilities of the Company, subject to the prior rights of any Preferred Stock then outstanding. Holders of Common Stock have no preemptive or conversion rights or other subscription rights and there are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of Common Stock are, and the Common Stock to be outstanding upon completion of this offering will be, fully paid and nonassessable. PREFERRED STOCK Upon the closing of this offering, all outstanding shares of Preferred Stock will be converted into Common Stock. See Note 10 of Notes to Consolidated Financial Statements for a description of the currently outstanding Preferred Stock. Following the conversion, the Company's Certificate of Incorporation will be restated to delete all references to the prior series of Preferred Stock and 25,000,000 shares of undesignated Preferred Stock will be authorized. The Board of Directors has the authority, without further action by the stockholders, to issue from time to time the Preferred Stock in one or more series and to fix the number of shares, designations, preferences, powers, and relative, participating, optional or other special rights and the qualifications or restrictions thereof. The preferences, powers, rights and restrictions of different series of Preferred Stock may differ with respect to dividend rates, amounts payable on liquidation, voting rights, conversion rights, redemption provisions, sinking fund provisions, and purchase funds and other matters. The issuance of Preferred Stock could decrease the amount of earnings and assets available for distribution to holders of Common Stock or affect adversely the rights and powers, including voting rights, of the holders of Common Stock and may have the effect of delaying, deferring or preventing a change in control of the Company. The Company has no present plans to issue any shares of Preferred Stock. WARRANTS In connection with certain equipment financing transactions, the Company issued to the equipment lessor warrants (collectively, the "Warrants") to purchase 6,400 shares of Series C Preferred Stock with an exercise price of $2.50 and warrants to purchase 24,992 shares of Series D Preferred Stock with an exercise price of $3.25. All of such Warrants remain outstanding as of April 16, 1997. Upon the closing of this offering, such Warrants will become exercisable for Common Stock at the rate of one share of Common Stock for each share of Preferred Stock underlying such Warrants. REGISTRATION RIGHTS After this offering, the holders of shares of Common Stock issued upon conversion of the Company's Preferred Stock (including shares issuable upon exercise of Warrants (collectively, the "Registrable Shares")), or their permitted transferees, are entitled to certain rights with respect to the registration of such shares under the 51 54 Securities Act. If the Company proposes to register any of its securities under the Securities Act for its own account or the account of any of its stockholders other than the holders of the Registrable Shares, holders of such Registrable Shares are entitled, subject to certain limitations and conditions, to notice of such registration and are, subject to certain conditions and limitations, entitled to include Registrable Shares therein, provided, among other conditions, that the underwriters of any such offering have the right to limit the number of shares included in such registration. In addition, commencing 180 days after the effective date of the Registration Statement of which this Prospectus is a part, the Company may be required to prepare and file a registration statement under the Securities Act at its expense if requested to do so by the holders of at least 35% of the Registrable Shares, provided the reasonably expected aggregate offering price will equal or exceed $5,000,000 including underwriting discounts and commissions. The Company is required to use its best efforts to effect such registration, subject to certain conditions and limitations. The Company is not obligated to effect more than two of such stockholder-initiated registrations. Further, holders of Registrable Shares may require the Company to file additional registration statements on Form S-3, subject to certain conditions and limitations. VOTING AGREEMENT In connection with certain investments in the Company by each of Novartis, Volendam and Charter (collectively, the "Investors"), the Investors entered into a Voting Agreement dated as of April 12, 1996 (the "Voting Agreement"), whereby each Investor agreed to vote or act with respect to all shares of the Company's voting securities now owned or subsequently acquired by such Investor such that one designee of each of Novartis, Volendam and Charter shall be elected to the Board of Directors of the Company. The Investors further agreed to vote their shares in such manner to elect as the remaining directors of the Company individuals unaffiliated with any of the Investors but who are reasonably acceptable to all of the Investors. By executing the Voting Agreement, the Company agreed to use its best efforts to cause the nominee of each of Novartis, Volendam and Charter to be elected to the Company's Board of Directors. The Voting Agreement terminates on December 31, 2005 unless prior to such date any of the Investors ceases to beneficially hold 2,000,000 shares (as adjusted for stock splits, recapitalizations and similar events) of the voting stock of the Company. DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS The Company is subject to the provisions of Section 203 of the Delaware Law, an anti-takeover law. In general, the statute prohibits a publicly held Delaware corporation from engaging in a business combination with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A "business combination" includes a merger, asset sale or other transaction resulting in financial benefit to the stockholder. An "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years prior, did own) 15% or more of the corporation's voting stock. Upon the closing of this offering, the Company's Restated Certificate of Incorporation will provide for a classified board of directors and will eliminate the right of stockholders to call special meetings of stockholders. The provisions described above, together with the ability of the Board of Directors to issue Preferred Stock as described under "--Preferred Stock," may have the effect of deterring a hostile takeover or delaying a change in control or management of the Company. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is American Securities Transfer and Trust, Inc. 52 55 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering there has been no public market for the Common Stock of the Company and no predictions can be made regarding the effect, if any, that market sales of shares or the availability of shares for sale will have on the market price prevailing from time to time. As described below, only a limited number of shares will be available for sale shortly after this offering due to certain contractual and legal restrictions on resale. Nevertheless, sales of substantial amounts of Common Stock of the Company in the public market after the restrictions lapse could adversely affect the prevailing market price. Upon completion of this offering, the Company will have outstanding shares of Common Stock assuming: (i) no exercise of the Underwriter's over-allotment option; and (ii) no exercise of outstanding options and warrants. The shares of Common Stock being sold hereby will be freely tradable (other than by an "affiliate" of the Company as such term is defined in the Securities Act) without restriction or registration under the Securities Act. All remaining shares were issued and sold by the Company in private transactions ("Restricted Shares") and are eligible for public sale if registered under the Securities Act or sold in accordance with Rule 144 or Rule 701 thereunder. The Company's directors, executive officers and certain stockholders, who collectively hold an aggregate of approximately 11,000,000 shares of Common Stock, have agreed pursuant to certain agreements that they will not sell any Common Stock owned by them without the prior written consent of Credit Suisse First Boston Corporation for a period of 180 days from the effective date of the Registration Statement of which this Prospectus is a part (the "Lockup Period"). Approximately 278,000 Restricted Shares will be eligible for immediate sale in the public market pursuant to Rule 144(k) under the Securities Act as of the date of this Prospectus. Beginning 90 days after the date of this Prospectus, approximately 377,000 additional Restricted Shares will be eligible for sale in the public market pursuant to Rule 144 and Rule 701 under the Securities Act. Following the expiration of the Lockup Period, approximately 12,000,000 shares of Common Stock, including 1,177,555 shares issuable upon the exercise of certain options, will be available for sale in the public market subject to compliance with Rule 144 or Rule 701. See "Underwriting." In general, under Rule 144 as currently in effect, beginning 90 days after the date of this Prospectus, an affiliate of the Company, or a holder of Restricted Shares who owns beneficially shares that were not acquired from the Company or an affiliate of the Company within the prior year, would be entitled to sell within any three-month period a number of shares that does not exceed the greater of 1% of the then outstanding shares of Common Stock (approximately shares immediately after this offering, assuming no exercise of the Underwriters' over-allotment option) or the average weekly trading volume of the Common Stock during the four calendar weeks preceding the date on which notice of the sale is filed with the Securities and Exchange Commission (the "Commission"). Sales under Rule 144 are subject to certain requirements relating to manner of sale, notice and availability of current public information about the Company. However, a person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of the Company at any time during the 90 days immediately preceding the sale and who owns beneficially Restricted Shares is entitled to sell such shares under Rule 144(k) without regard to the limitations described above; provided that at least two years have elapsed since the later of the date the shares were acquired from the Company or from an affiliate of the Company. The foregoing is a summary of Rule 144 and is not intended to be a complete description. Subject to certain limitations on the aggregate offering price of a transaction and other conditions, Rule 701 may be relied upon with respect to the resale of securities originally purchased from the Company by its employees, directors, officers, consultants or advisers prior to the closing of this offering pursuant to written compensatory benefit plans or written contracts relating to the compensation of such persons. In addition, the Commission has indicated that Rule 701 will apply to stock options granted by the Company before this offering, along with the shares acquired upon exercise of such options. Securities issued in reliance on Rule 701 are deemed to be Restricted Shares and, beginning 90 days after the date of this Prospectus (unless subject to the contractual restrictions described above), may be sold by persons other than affiliates subject only to the manner of sale provisions of Rule 144 and by affiliates under Rule 144 without compliance with its one-year minimum holding period requirements. The Company intends to file a registration statement under the Securities Act covering approximately shares of Common Stock reserved for issuance under the Stock Plan and ESPP. Such registration statement is expected to be filed soon after the date of this Prospectus and will automatically become effective 53 56 upon filing. Accordingly, shares registered under such registration statement will be available for sale in the open market, unless such shares are subject to vesting restrictions with the Company or the contractual restrictions described above. In addition, after this offering, the holders of approximately shares of Common Stock will be entitled to certain rights to cause the Company to register the sale of such shares under the Securities Act. Registration of such shares under the Securities Act would result in such shares becoming freely tradable without restriction under the Securities Act (except for shares purchased by affiliates of the Company) immediately upon the effectiveness of such registration. See "Description of Capital Stock -- Registration Rights." 54 57 UNDERWRITING Under the terms and subject to the conditions contained in an Underwriting Agreement dated , 1997 (the "Underwriting Agreement"), the Underwriters named below (the "Underwriters"), for whom Credit Suisse First Boston Corporation and Merrill Lynch, Pierce, Fenner & Smith Incorporated are acting as representatives (the "Representatives"), have severally but not jointly agreed to purchase from the Company and the Selling Stockholder the following respective numbers of shares of Common Stock:
NUMBER OF UNDERWRITER SHARES ----------- --------- Credit Suisse First Boston Corporation...................... Merrill Lynch, Pierce, Fenner & Smith Incorporated.................................... ------- Total............................................. =======
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters will be obligated to purchase all of the shares of Common Stock offered hereby (other than those shares covered by the over-allotment option described below), if any are purchased. The Underwriting Agreement provides that, in the event of a default by an Underwriter, in certain circumstances the purchase commitments of the non-defaulting Underwriters may be increased or the Underwriting Agreement may be terminated. The Company has granted to the Underwriters an option, expiring on the close of business on the 30th day after the date of this Prospectus, to purchase up to additional shares from the Company at the initial public offering price less the underwriting discounts and commissions, all as set forth on the cover page of this Prospectus. Such option may be exercised only to cover over-allotments in the sale of the shares of Common Stock. To the extent such option is exercised, each Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of the additional shares of Common Stock as it was obligated to purchase pursuant to the Underwriting Agreement. The Company and the Selling Stockholder have been advised by the Representatives that the Underwriters propose to offer the shares offered hereby to the public initially at the public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession of $ per share, and the Underwriters and such dealers may allow a discount of $ per share on sales to certain other dealers. After the initial public offering, the public offering price and concession and discount to dealers may be changed by the Representatives. Prior to this Offering, there has been no public market for the Common Stock. The initial price to the public for the shares of Common Stock will be determined by negotiation among the Company, the Selling Stockholder and the Representatives and will be based on, among other things, the Company's financial and operating history and condition, its prospects and the prospects for its industry in general, the management of the Company and the market prices for the securities of companies in businesses similar to that of the Company. The Representatives have informed the Company and the Selling Stockholder that they do not expect discretionary sales by the Underwriters to exceed 5% of the Shares being offered hereby. The Company, its officers and directors and certain other stockholders of the Company, including the Selling Stockholder, have agreed that they will not offer, sell, contract to sell, announce their intention to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Commission a registration statement under the Securities Act relating to any additional shares of Common Stock or securities convertible into or exchangeable 55 58 or exercisable for any shares of Common Stock without the prior written consent of Credit Suisse First Boston Corporation for a period of 180 days from the date of this Prospectus, except (i) sales of Common Stock offered in this offering or (ii) issuances of Common Stock by the Company pursuant to the exercise of employee stock options outstanding on the date of this Prospectus or (iii) issuances in specified acquisitions. The Company and the Selling Stockholder have agreed to indemnify the Underwriters against certain liabilities, including civil liabilities under the Securities Act, or contribute to payments which the Underwriters may be required to make in respect thereof. Application has been made to have the Common Stock approved for listing on the Nasdaq Stock Market's National Market under the symbol "HSKA." The Representatives, on behalf of the Underwriters, may engage in overallotment, stabilizing transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Over-allotment involves syndicate sales in excess of the offering size, which creates a syndicate short position. Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. Syndicate covering transactions involve purchases of the Common Stock in the open market after the distribution has been completed in order to cover syndicate short positions. Penalty bids permit the Representatives to reclaim a selling concession from a syndicate member when the Common Stock originally sold by such syndicate member is purchased in a syndicate covering transaction to cover syndicate short positions. Such stabilizing transactions, syndicate covering transactions and penalty bids may cause the price of the Common Stock to be higher than it would otherwise be in the absence of such transactions. These transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. NOTICE TO CANADIAN RESIDENTS RESALE RESTRICTIONS The distribution of the Common Stock in Canada will be made only on a private placement basis exempt from the requirement that the Company and the Selling Stockholder prepare and file a prospectus with the securities regulatory authorities in each province where trades of the Common Stock are effected. Accordingly, any resale of the Common Stock in Canada must be made in accordance with applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made in accordance with available statutory exemptions or pursuant to a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the Common Stock. REPRESENTATIONS OF PURCHASERS Each purchaser of the Common Stock in Canada who receives a purchase confirmation will be deemed to represent to the Company, the Selling Stockholder and the dealer from whom such purchase confirmation is received that (i) such purchaser is entitled under applicable provincial securities laws to purchase such Common Stock without the benefit of a prospectus qualified under such securities laws, (ii) where required by law, that such purchaser is purchasing as principal and not as agent, and (iii) such purchaser has reviewed the text above under "Resale Restrictions." RIGHTS OF ACTION (ONTARIO PURCHASERS) The securities being offered are those of a foreign issuer and Ontario purchasers will not receive the contractual right of action prescribed by section 32 of the Regulation under the Securities Act (Ontario). As a result, Ontario purchasers must rely on other remedies that may be available, including common law rights of action for damages or rescission or rights of action under the civil liability provisions of the U.S. federal securities laws. 56 59 ENFORCEMENT OF LEGAL RIGHTS All of the issuer's directors and officers as well as the experts named herein and the Selling Stockholder may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon the issuer or such persons. All or a substantial portion of the assets of the issuer and such persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against the issuer or such persons in Canada or to enforce a judgment obtained in Canadian courts against such issuer or persons outside of Canada. NOTICE TO BRITISH COLUMBIA RESIDENTS A purchaser of the Common Stock to whom the Securities Act (British Columbia) applies is advised that such purchaser is required to file with the British Columbia Securities Commission a report within ten days of the sale of any Common Stock acquired by such purchaser pursuant to this offering. Such report must be in the form attached to British Columbia Securities Commission Blanket Order BOR #95/17, a copy of which may be obtained from the Company. Only one such report must be filed in respect of the Common Stock acquired on the same date and under the same prospectus exemption. TAXATION AND ELIGIBILITY FOR INVESTMENT Canadian purchasers of the Common Stock should consult their own legal and tax advisors with respect to the tax consequences of an investment in the Common Stock in their particular circumstances and with respect to the eligibility of the Common Stock for investment by the purchaser under relevant Canadian Legislation. LEGAL MATTERS Certain legal matters with respect to the validity of the Common Stock offered hereby will be passed upon for the Company by Pillsbury Madison & Sutro LLP, San Francisco, California and for the Underwriters by Cooley Godward LLP, Palo Alto, California and Boulder, Colorado. EXPERTS The consolidated financial statements of Heska Corporation included in this Prospectus and elsewhere in the registration statement have been audited by Arthur Andersen LLP, independent public accountants as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. The statements of income and cash flows of Diamond Animal Health, Inc. for the year ended March 31, 1996 included in this Prospectus and elsewhere in the Registration Statement have been audited by McGladrey & Pullen, LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. The statements of income and cash flows of Diamond Animal Health, Inc. for the year ended March 31, 1995 included in this Prospectus and elsewhere in the Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. 57 60 ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement under the Securities Act with respect to the Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the Common Stock offered hereby, reference is hereby made to such Registration Statement, exhibits and schedules. Statements contained in this Prospectus regarding the contents of any contract or other document are not necessarily complete; with respect to each such contract or document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. A copy of the Registration Statement, including the exhibits and schedules thereto, may be inspected without charge at the principal office of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of such material may be obtained from such office upon payment of the fees prescribed by the Commission. In addition, the Commission maintains a World Wide Web site on the Internet at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. 58 61 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- HESKA CORPORATION Report of Independent Public Accountants.................. F-2 Consolidated Balance Sheets as of December 31, 1995 and 1996 and March 31, 1997 (unaudited) and on a pro forma basis as of March 31, 1997 (unaudited)................. F-3 Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996 and for the three months ended March 31, 1996 and 1997 (unaudited)....... F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1994, 1995 and 1996 and the three months ended March 31, 1997 (unaudited).......... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and for the three months ended March 31, 1996 and 1997 (unaudited)....... F-6 Notes to Consolidated Financial Statements................ F-7 DIAMOND ANIMAL HEALTH, INC. Report of Independent Accountants (McGladrey & Pullen LLP)................................................... F-24 Report of Independent Auditors (Ernst & Young LLP)........ F-25 Statements of Income for the years ended March 31, 1995 and 1996............................................... F-26 Statements of Cash Flows for the years ended March 31, 1995 and 1996.......................................... F-27 Notes to Financial Statements............................. F-28 PRO FORMA CONSOLIDATED CONDENSED FINANCIAL INFORMATION...... F-31
F-1 62 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Heska Corporation: We have audited the accompanying consolidated balance sheets of Heska Corporation (a California corporation) and subsidiary as of December 31, 1995 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for the three years ended December 31, 1994, 1995 and 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Heska Corporation and subsidiary as of December 31, 1995 and 1996, and the results of their operations and their cash flows for the three years ended December 31, 1994, 1995 and 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Denver, Colorado, February 28, 1997 F-2 63 HESKA CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands) ASSETS
PRO DECEMBER 31, FORMA ------------------- MARCH 31, MARCH 31, 1995 1996 1997 1997 -------- -------- --------- --------- (UNAUDITED) Current assets: Cash and cash equivalents......................... $ 6,827 $ 6,609 $ 4,476 $ 4,476 Marketable securities............................. -- 17,091 11,427 11,427 Accounts receivable, net.......................... -- 749 1,047 1,047 Inventories, net.................................. -- 4,430 5,287 5,287 Other current assets.............................. 152 334 482 482 Contract receivable............................... 500 -- -- -- -------- -------- -------- -------- Total current assets...................... 7,479 29,213 22,719 22,719 Property and equipment, net......................... 1,029 8,209 10,548 10,548 Intangible assets, net.............................. -- 3,480 4,158 4,158 Restricted marketable securities and other assets... -- 1,267 1,172 1,172 -------- -------- -------- -------- Total assets.............................. $ 8,508 $ 42,169 $ 38,597 $ 38,597 ======== ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.................................. $ 537 $ 1,634 $ 2,446 $ 2,446 Accrued liabilities............................... 169 940 1,182 1,182 Deferred revenue.................................. 20 1,413 1,842 1,842 Current portion of capital lease obligations...... 231 464 549 549 Current portion of long-term debt................. -- 807 1,708 1,708 -------- -------- -------- -------- Total current liabilities................. 957 5,258 7,727 7,727 Capital lease obligations, less current portion..... 302 1,459 1,648 1,648 Long-term debt, less current portion................ -- 2,942 3,912 3,912 Accrued pension liability........................... -- 127 142 142 -------- -------- -------- -------- Total liabilities......................... 1,259 9,786 13,429 13,429 -------- -------- -------- -------- Commitments and contingencies Stockholders' equity: Convertible preferred stock, 10,000,000, 25,000,000, 25,000,000 and 25,000,000 shares authorized; 6,618,085, 10,459,999, 10,513,999 and no shares issued and outstanding, with an aggregate liquidation preference of $19,516, $62,588, $63,236 and none, respectively........ 19,516 62,588 63,236 -- Common stock, no par value, 20,000,000 shares authorized; 919,363, 1,021,645, 1,114,904 and 11,628,903 shares issued and outstanding, respectively................................... 144 189 239 63,475 Cumulative translation adjustment................. -- -- 1 1 Stock subscription receivable from officers....... (110) (118) (151) (151) Accumulated deficit............................... (12,301) (30,276) (38,157) (38,157) -------- -------- -------- -------- Total stockholders' equity................ 7,249 32,383 25,168 25,168 -------- -------- -------- -------- Total liabilities and stockholders' equity.................................. $ 8,508 $ 42,169 $ 38,597 $ 38,597 ======== ======== ======== ========
See accompanying notes to consolidated financial statements. F-3 64 HESKA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ----------------------------- ------------------ 1994 1995 1996 1996 1997 ------ ------- -------- ------- ------- (UNAUDITED) Revenues: Products and services, net.............. $ -- $ -- $ 8,013 $ 39 $ 2,626 Research and development................ 3,858 2,230 1,946 117 438 ------ ------- -------- ------- ------- 3,858 2,230 9,959 156 3,064 Costs and operating expenses: Cost of sales........................... -- -- 6,648 20 2,148 Research and development................ 3,685 6,031 14,038 2,626 4,519 Selling and marketing................... -- -- 2,493 -- 1,573 General and administrative.............. 904 864 4,540 375 2,418 Amortization of intangible assets....... -- -- 1,101 -- 407 ------ ------- -------- ------- ------- 4,589 6,895 28,820 3,021 11,065 ------ ------- -------- ------- ------- Loss from operations...................... (731) (4,665) (18,861) (2,865) (8,001) Other income (expense): Interest income......................... 26 172 1,356 71 296 Interest expense........................ (168) (63) (325) (16) (170) Other, net.............................. (11) (10) (145) -- (6) ------ ------- -------- ------- ------- Net loss.................................. $ (884) $(4,566) $(17,975) $(2,810) $(7,881) ====== ======= ======== ======= ======= Pro forma net loss per share (unaudited)............................. $ (1.71) $ (0.67) ======== ======= Shares used to compute pro forma net loss per share (unaudited)................... 10,511 11,733 ======== =======
See accompanying notes to consolidated financial statements. F-4 65 HESKA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands, except per share data)
PREFERRED STOCK COMMON STOCK STOCK CUMULATIVE TOTAL ---------------- --------------- SUBSCRIPTION TRANSLATION ACCUMULATED STOCKHOLDERS' SHARES AMOUNT SHARES AMOUNT RECEIVABLE ADJUSTMENT DEFICIT EQUITY ------ ------- ------ ------ ------------ ----------- ----------- ------------- Balances, December 31, 1993....... 2,690 $ 6,750 496 $ 15 $ -- $ -- $ (6,851) $ (86) Exercise of options to purchase Common Stock for cash at $0.15-$0.35 per share......... -- -- 113 19 -- -- -- 19 Issuance of Series E Preferred Stock for cancellation of indebtedness, valued at $3.25 per share..................... 655 2,128 -- -- -- -- -- 2,128 Issuance of Common Stock for services, valued at $0.35 per share......................... -- -- 4 1 -- -- -- 1 Compensation expense related to options....................... -- -- -- 2 -- -- -- 2 Net loss........................ -- -- -- -- -- -- (884) (884) ------ ------- ----- ---- ----- ---- -------- -------- Balances, December 31, 1994....... 3,345 8,878 613 37 -- -- (7,735) 1,180 Exercise of options to purchase Common Stock for cash at $0.25-$0.35 per share......... -- -- 9 3 -- -- -- 3 Issuance of Series E Preferred Stock for cancellation of indebtedness, valued at $3.25 per share..................... 196 638 -- -- -- -- -- 638 Issuance of Series E Preferred Stock at $3.25 per share...... 3,077 10,000 -- -- -- -- -- 10,000 Issuance of Common Stock at $0.35 per share for stock subscription receivable from officers...................... -- -- 297 104 (104) -- -- -- Interest on stock subscription receivable from officers...... -- -- -- -- (6) -- -- (6) Net loss........................ -- -- -- -- -- -- (4,566) (4,566) ------ ------- ----- ---- ----- ---- -------- -------- Balances, December 31, 1995....... 6,618 19,516 919 144 (110) -- (12,301) 7,249 Issuance of Series E Preferred Stock in exchange for the common stock of Diamond Animal Health, Inc., valued at $8.40 per share..................... 842 7,072 -- -- -- -- -- 7,072 Grant of options to purchase Common Stock.................. -- -- -- 8 -- -- -- 8 Exercise of options to purchase Common Stock for cash at $0.25-$0.35 per share......... -- -- 103 37 -- -- -- 37 Issuance of Series F Preferred Stock at $12.00 per share..... 3,000 36,000 -- -- -- -- 36,000 Interest on stock subscription receivable from officers...... -- -- -- -- (8) -- -- (8) Net loss........................ -- -- -- -- -- -- (17,975) (17,975) ------ ------- ----- ---- ----- ---- -------- -------- Balances, December 31, 1996....... 10,460 62,588 1,022 189 (118) -- (30,276) 32,383 Unaudited: Issuance of Series E Preferred Stock in exchange for the capital stock of Bloxham Laboratories Limited, valued at $12.00 per share........... 54 648 -- -- -- -- -- 648 Exercise of options to purchase Common Stock for cash at $0.15-$1.20 per share......... -- -- 68 20 -- -- -- 20 Issuance of Common Stock at $1.20 per share for stock subscription receivable from a director...................... -- -- 25 30 (30) -- -- -- Interest on stock subscription receivable from officers and a director...................... -- -- -- -- (3) -- -- (3) Foreign currency translation adjustments................... -- -- -- -- -- 1 -- 1 Net loss........................ -- -- -- -- -- -- (7,881) (7,881) ------ ------- ----- ---- ----- ---- -------- -------- Balances, March 31, 1997 (unaudited)..................... 10,514 $63,236 1,115 $239 $(151) $ 1 $(38,157) $ 25,168 ====== ======= ===== ==== ===== ==== ======== ========
See accompanying notes to consolidated financial statements. F-5 66 HESKA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ---------------------------- ------------------- 1994 1995 1996 1996 1997 ------- ------- -------- -------- -------- (UNAUDITED) CASH FLOWS USED IN OPERATING ACTIVITIES: Net loss................................... $ (884) $(4,566) $(17,975) $(2,810) $(7,881) Adjustments to reconcile net loss to cash used in operating activities: Depreciation and amortization........... 148 253 1,072 123 430 Amortization of intangible assets....... -- -- 1,101 -- 407 Amortization of debt discount........... -- -- 121 -- 21 Issuance of common stock for services... 1 -- -- -- -- Compensation expense related to options............................... 2 -- -- -- -- Loss on disposition of assets........... 13 16 60 -- 48 Interest receivable on stock subscription.......................... -- -- (8) (2) (3) Increase in accrued pension liability... -- -- 62 -- 15 Changes in operating assets and liabilities:.......................... Accounts receivable, net.............. -- -- (508) (75) (10) Inventories, net...................... -- -- (408) -- (751) Prepaids and other assets............. (20) (83) (66) (116) (203) Contract receivable................... (1,500) 1,000 500 -- -- Accounts payable...................... 454 41 744 (101) 519 Accrued liabilities................... 144 -- 265 238 57 Deferred revenue...................... 325 (386) 987 (20) 429 ------- ------- -------- ------- ------- Net cash used in operating activities....................... (1,317) (3,725) (14,053) (2,763) (6,922) ------- ------- -------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions of businesses, net of cash acquired................................ -- -- (478) (500) (180) Cash deposited in restricted cash account related to Bloxham acquisition.......... -- -- -- -- (238) Purchase of marketable securities.......... -- -- (31,243) -- -- Purchase of restricted marketable securities.............................. -- -- (1,219) -- -- Proceeds from sale of marketable securities.............................. -- -- 14,152 -- 6,140 Purchases of property and equipment........ (424) (348) (5,232) (630) (2,229) ------- ------- -------- ------- ------- Net cash provided by (used in) investing activities............. (424) (348) (24,020) (1,130) 3,493 ------- ------- -------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock..... 19 3 37 1 20 Proceeds from borrowings................... 1,644 527 3,318 -- 1,614 Repayments of debt and capital lease obligations............................. (78) (169) (1,500) (55) (345) Proceeds from issuance of preferred stock................................... -- 10,000 36,000 -- -- ------- ------- -------- ------- ------- Net cash provided by (used in) financing activities............. 1,585 10,361 37,855 (54) 1,289 ------- ------- -------- ------- ------- EFFECT OF EXCHANGE RATE CHANGES ON CASH...... -- -- -- -- 7 ------- ------- -------- ------- ------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................ (156) 6,288 (218) (3,947) (2,133) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR....................................... 695 539 6,827 6,827 6,609 ------- ------- -------- ------- ------- CASH AND CASH EQUIVALENTS, END OF YEAR....... $ 539 $ 6,827 $ 6,609 $ 2,880 $ 4,476 ======= ======= ======== ======= =======
See accompanying notes to consolidated financial statements. F-6 67 HESKA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND BUSINESS Heska Corporation (the "Company") discovers, develops, manufactures and markets companion animal health products and services. The Company also manufactures and sells animal health products and services in the United States, Canada and Europe through Diamond Animal Health, Inc. ("Diamond") and Bloxham Laboratories Limited ("Bloxham"), its wholly-owned subsidiaries (see Note 3). The Company continues to incur substantial operating losses due principally to its research and development and sales and marketing activities. Cumulative operating losses from inception of the Company in 1988 through December 31, 1996 and March 31, 1997 have totaled $30,276,000 and $38,157,000 (unaudited), respectively. During 1996, the Company progressed from being primarily a research and development company to a fully-integrated research, development, manufacturing and marketing company. The Company's products are subject to long development and regulatory approval cycles and there can be no assurance that the Company will successfully develop, manufacture or market these products. In the first quarter of 1997, the Company began to launch products which had been developed internally. Prior to that time, the Company had not received any revenues from the sale of internally developed products. The Company's ability to achieve profitable operations will depend primarily upon its ability to commercialize products that are currently under development. There can be no assurance that the Company will successfully develop, manufacture, or market these products. During the period required to develop its products, the Company intends to finance operations with additional equity and debt financing. There can be no assurance that such financing will be available when required or will be obtained under favorable terms. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries since the dates of their respective acquisitions. All material intercompany transactions and balances have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents are stated at cost, which approximates market, and include short-term highly liquid investments with original maturities of less than three months. Cash equivalents consist of United States government obligations. Marketable Securities and Restricted Investments The Company has adopted Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. Pursuant to this Statement, the Company has classified its marketable securities as "available-for-sale" and, accordingly, carries such securities at aggregate fair value. Unrealized gains or losses, if material, are included as a separate component of stockholders' equity. At December 31, 1996 and March 31, 1997, these securities had an aggregate amortized cost of $18,310,000 and $12,170,000 (unaudited), respectively, which approximated fair market value, a maximum maturity of F-7 68 HESKA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) approximately nine and six months, respectively, and consisted entirely of U.S. government obligations. This included $1,219,000 and $743,000 (unaudited) of restricted investments held as collateral for capital leases (see Note 4) and $17,091,000 and $11,427,000 (unaudited) of short-term marketable securities, respectively. 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. Inventories, net of provisions, consist of the following (in thousands):
DECEMBER 31, -------------- MARCH 31, 1995 1996 1997 ---- ------ ----------- (UNAUDITED) Raw materials............................................ $-- $ 885 $ 868 Work in process.......................................... -- 3,103 4,121 Finished goods........................................... -- 442 298 --- ------ ------ $-- $4,430 $5,287 === ====== ======
Property, Equipment and Intangible Assets Property and equipment are recorded at cost and depreciated on a straight-line basis over the estimated useful lives of the related assets. Amortization of assets acquired under capital leases is included with depreciation expense on owned assets. Leasehold improvements are amortized over the applicable lease period or their estimated useful lives, whichever is shorter. Maintenance and repairs are charged to expense when incurred, and major renewals and improvements are capitalized. Intangible assets consist of various assets arising from business combinations and are amortized using the straight-line method over the period of expected benefit. In accordance with Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, the Company periodically reviews the appropriateness of the remaining life of its property, equipment and intangible assets considering whether any events have occurred or conditions have developed which may indicate that the remaining life requires adjustment. After reviewing the appropriateness of the remaining life and the pattern of usage of these assets, the Company then assesses their overall recoverability by determining if the net book value can be recovered through undiscounted future operating cash flows. Absent any unfavorable findings, the Company continues to amortize and depreciate its property, equipment and intangible assets based on the existing estimated life. F-8 69 HESKA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Property and equipment consist of the following (in thousands):
DECEMBER 31, ESTIMATED ---------------- MARCH 31, USEFUL LIFE 1995 1996 1997 ------------- ------ ------- ----------- (UNAUDITED) Land...................................... N/A $ -- $ 233 $ 233 Buildings................................. 10 years -- 453 453 Machinery and equipment................... 3 to 15 years 1,382 7,924 10,562 Leasehold improvements.................... 3 to 5 years 222 1,103 1,234 ------ ------- ------- 1,604 9,713 12,482 Less accumulated depreciation and amortization........... (575) (1,504) (1,934) ------ ------- ------- $1,029 $ 8,209 $10,548 ====== ======= =======
Intangible assets consist of the following (in thousands):
DECEMBER 31, ESTIMATED ---------------- MARCH 31, USEFUL LIFE 1995 1996 1997 ------------- ------ ------- ----------- (UNAUDITED) Take-or-pay contract...................... 37 Months $ -- $ 3,873 $ 3,873 Other intangible assets................... 2 to 7 years -- 707 1,792 ------ ------- ------- -- 4,580 5,665 Less accumulated amortization............................ -- (1,100) (1,507) ------ ------- ------- $ -- $ 3,480 $ 4,158 ====== ======= =======
The take-or-pay contract resulted from the acquisition of Diamond in April 1996 (see Note 3). The remaining intangible assets resulted from the acquisitions of Bloxham in February 1997 (see Note 3) and the canine allergy business from Bioproducts DVM, Inc. in March 1996 (see Note 3). Revenue Recognition Revenues from products and services are recognized at the time goods are shipped or services are provided to the customer, with an appropriate provision for returns and allowances. The Company recognizes revenue from sponsored research and development as research activities are performed or as development milestones are completed under the terms of the research and development agreements. Costs incurred in connection with the performance of sponsored research and development are expensed as incurred. The Company defers revenue recognition related to payments received during the current year for research activities to be performed in the following year. Cost of Sales Royalties payable in connection with certain research and development agreements (see Note 8) are reflected in cost of sales as incurred. Unaudited Pro Forma Net Loss Per Share The Company's historical capital structure is not indicative of its prospective structure due to the automatic conversion of all shares of convertible preferred stock into common stock concurrent with the closing of the Company's anticipated initial public offering ("IPO"). Accordingly, historical net loss per common share is not considered meaningful as it would differ materially from the pro forma net loss per common share and common stock equivalent shares given the contemplated changes in the capital structure of the Company. F-9 70 HESKA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Pro forma net loss per common share is computed using the weighted average number of common shares outstanding during the period. Common equivalent shares from stock options and warrants are excluded from the computation as their effect is anti-dilutive, except as required by the SEC. Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83, common stock and common stock equivalent shares issued by the Company during the 12 months immediately preceding the filing of the IPO, plus shares which became issuable during the same period as a result of the granting of options to purchase common stock, have been included in the calculation of weighted average number of shares of common stock as if they were outstanding for all periods presented (using the treasury stock method). Accordingly, only those common stock and common stock equivalent shares issued during the 12 months immediately preceding the filing of the IPO have been included in the computation of pro forma net loss per common share. In addition, the Company has assumed the conversion of convertible preferred stock issued into common stock for all periods presented. Unaudited Pro Forma Information Upon closing of the Company's IPO, all of the outstanding shares of Series A, B, C, D, E and F Preferred Stock will be automatically converted into shares of Common Stock on a share for share basis. The unaudited pro forma consolidated balance sheet as of March 31, 1997 reflects the conversion of 10,513,999 shares of Preferred Stock into 10,513,999 shares of Common Stock. Foreign Currency Translation The functional currency of Bloxham is the Pound Sterling ("L"). Assets and liabilities of the Company's foreign subsidiary 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 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. Interim Financial Statements The financial statements as of March 31, 1997 and for the three months ended March 31, 1996 and 1997 are unaudited and include all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the results for such interim periods. The results of operations for the three months ended March 31, 1997 are not necessarily indicative of the results to be expected for the entire year. Reclassifications Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation. 3. BUSINESS MERGERS AND ACQUISITIONS The following acquisitions have been accounted for under the purchase method of accounting and, accordingly, the operating results of these acquisitions are included in the Company's consolidated results of operations from the date of acquisition. Diamond Animal Health, Inc. ("Diamond") -- In April 1996, the Company acquired Diamond in a merger transaction valued at $7,080,000. The merger was consummated by exchanging 1,593,432 shares of Diamond common stock for 841,914 shares of the Company's Series E Preferred Stock and options to purchase F-10 71 HESKA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 68,553 shares of the Company's Common Stock, granted to Diamond employees at an exercise price of $1.20 per share. As a result of the merger, Diamond became a wholly-owned subsidiary of the Company. The total purchase price of the acquisition was allocated as follows (in thousands):
Cash........................................................ $ 22 Other current assets........................................ 4,623 Property and equipment...................................... 3,101 Take-or-pay contract........................................ 3,873 License rights.............................................. 1,250 ------- 12,869 Less liabilities assumed: Current liabilities....................................... (2,726) Long-term liabilities..................................... (3,063) ------- (5,789) ------- Value of shares issued and options granted.................. $ 7,080 =======
Under the take-or-pay contract, Bayer Corporation (see Note 11) is obligated to make minimum annual purchases from Diamond through June 1999. License rights reflect the value of certain rights granted to a Diamond customer in return for a reduction of $1,250,000 in payments on a note payable to the customer (see Note 5). These license rights were classified as intangible assets held for sale at the time of the Diamond merger, and no gain or loss was recognized as a result of this transaction. Bioproducts DVM, Inc. ("Bioproducts") -- In March 1996, the Company acquired the canine allergy testing and immunotherapy businesses of Bioproducts (the "Bioproducts Business") in exchange for $500,000 in cash and a $250,000 promissory note. The promissory note is noninterest bearing and is due in four equal annual installments of $62,500 on each anniversary date of the acquisition closing date (see Note 5). In connection with this acquisition, the Company recorded an intangible asset in the amount of $707,000, primarily related to customer lists and covenants not to compete. Pro Forma Results of Operations The following unaudited pro forma summary presents the consolidated results of operations as if the Bioproducts Business and Diamond acquisitions had been consummated as of January 1, 1995, based on unaudited financial statements provided by the respective sellers (in thousands):
YEARS ENDED DECEMBER 31, ------------------- 1995 1996 ------- -------- (UNAUDITED) Revenues.................................................... $12,027 $ 12,928 Net loss.................................................... $(7,354) $(18,589) Pro forma net loss per share................................ $ (1.73) Shares used to compute pro forma net loss per share......... 10,762
The pro forma results give effect to certain adjustments, including amortization of intangibles, reduced interest costs associated with conversion of debt, and additional depreciation and amortization expenses due to increased book basis of the property and equipment. The pro forma results have been prepared for comparative F-11 72 HESKA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) purposes only and are not necessarily indicative of the results that would have been attained had the acquisitions occurred at the beginning of 1995 or of the results which may occur in the future. Bloxham Laboratories Limited ("Bloxham") -- In February 1997, the Company acquired the capital stock of Bloxham, a clinical reference laboratory located in the United Kingdom, in a transaction valued at approximately $1,150,000. The acquisition was consummated by exchanging 54,000 shares of the Company's Series E Preferred Stock, a note payable for L200,000 and $180,000 in cash. The Company also agreed to grant to Bloxham employees options to purchase the Company's common stock on a basis consistent with stock options granted to employees of other Heska subsidiaries. Under the terms of the acquisition agreement, the Company deposited approximately $238,000 in a restricted cash account as collateral for the note payable. In connection with this acquisition, the Company recorded an intangible asset in the amount of $1,085,000. 4. CAPITAL LEASE OBLIGATIONS The Company has entered into certain capital lease agreements for laboratory equipment, office equipment, machinery and equipment, and computer equipment and software. For the years ended December 31, 1995 and 1996 and the three months ended March 31, 1997, the Company had capitalized machinery and equipment under capital leases of $741,000, $2,004,000 and $2,259,000 (unaudited), respectively. The capitalized cost of the equipment under capital leases is included in the accompanying balance sheets under the respective asset classes. Under the terms of the Company's lease agreements, the Company is required to make monthly payments of principal and interest through the year 2001, at interest rates ranging from 9.25% to 11.85% per annum. The equipment under the capital leases serves as security for the leases. The Company has a capital lease with its commercial bank which requires the Company to pledge cash or investments as additional collateral for the lease. The lease agreement, which has a borrowing limit of $2,000,000, calls for a collateral balance equal to 75% of the outstanding lease balance, dropping to 50% and 25% when the Company's annual revenues reach $18,000,000 and $28,000,000, respectively. In March 1997, the bank reduced the collateral requirement to 50% (unaudited). As of December 31, 1996 and March 31, 1997, the Company was in compliance with all covenants of the master lease and had pledged U.S. Treasury Bonds of $1,219,000 and $743,000 (unaudited) as additional collateral under the lease, respectively. The future annual minimum required payments under capital lease obligations as of December 31, 1996 were as follows (in thousands):
DECEMBER 31, ------------ 1997........................................................ $ 1,304 1998........................................................ 1,143 1999........................................................ 1,086 2000........................................................ 1,184 2001........................................................ 713 ------- Total minimum lease payments.............................. 5,430 Less amount representing interest......................... (3,507) ------- Present value of net minimum lease payments............... 1,923 Less current portion...................................... (464) ------- Total long-term capital lease obligations......... $ 1,459 =======
F-12 73 HESKA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. LONG-TERM DEBT AND NOTES PAYABLE Long term debt consists of the following (in thousands):
DECEMBER 31, --------------- MARCH 31, 1995 1996 1997 ----- ------ ----------- (UNAUDITED) Diamond obligations 9.5% real estate mortgage to Hartford-Carlisle Bank due in monthly installments of $3 and a final payment of the unpaid principal balance and accrued interest of $59 in October 2004....................................... $ -- $ 214 $ 211 Term note to Iowa Business Growth guaranteed by the Small Business Administration (SBA), due in monthly installments of approximately $3 through July 2004, including interest at prime plus 0.7%.............. -- 169 165 Promissory note to the Iowa Department of Economic Development (IDED), due in annual installments of $15 through June 2004, with the remaining $125 forgivable in March 1999 based upon levels of employment at Diamond, with a stated interest rate of 3.0% and a 9.5% imputed interest rate, net of an unamortized discount of $39 and $38 (unaudited), respectively....................................... -- 189 189 Promissory note to the City of Des Moines, due in monthly installments of $2 through May 2004, with a stated interest rate of 3.0% and a 9.5% imputed interest rate, net of an unamortized discount of $26 and $25 (unaudited), respectively....................................... -- 128 126 10.0% promissory notes, due in monthly interest payments until June 1997, then quarterly installments totaling $50 from June 1997 to March 1999, with the unpaid balance due March 1999....... -- 498 498 Unsecured promissory note to customer, due in monthly installments of $25 through June 1999, with no stated interest rate and a 9.5% imputed interest rate, net of an unamortized discount of $82 and $67 (unaudited), respectively (monthly installments change to 1/36th of the principal balance and stated interest becomes prime plus 2.0% if Diamond's sales increase to $12,000 in any annual period)............................................ -- 655 597 Heska obligations Promissory note to Bioproducts (see Note 3) due in annual installments of $62 through March 2000, with no stated interest rate and a 9.5% imputed interest rate, net of an unamortized discount of $43 and $38 (unaudited), respectively.......................... -- 207 149
F-13 74 HESKA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, --------------- MARCH 31, 1995 1996 1997 ----- ------ ----------- (UNAUDITED) Promissory note to former Bloxham shareholders (see Note 3) due in semi-annual interest payments through February 2007, redeemable on demand in whole or in part at any time after February 18, 1998 in increments of L1 together with accrued interest, with stated interest rate of 4.5%, denominated in pounds sterling..................... -- -- 327 Bloxham obligation Real estate mortgage due in monthly principal payments of L1 and quarterly interest payments through June 2006, with stated interest rate of a bank's base rate (6.0% at March 31, 1997) plus 2.75%, denominated in Pounds Sterling..................... -- -- 132 Diamond and Heska obligations Equipment financing due in monthly installments of $49 through June 2000, and final payments totaling $342 due May through July 2000, with stated interest rates of 18.1%, secured by certain equipment, furniture and fixtures............................. -- 1,689 1,616 Equipment financing due in monthly installments of $48 through March 2000, with stated interest rate of 14.0%, secured by certain equipment and fixtures... -- -- 1,610 ----- ------ ------- -- 3,749 5,620 Less installments due within one year................... -- (807) (1,708) ----- ------ ------- $ -- $2,942 $ 3,912 ===== ====== =======
The Diamond SBA, IDED, City of Des Moines and 10.0% promissory notes are secured by a first security interest in substantially all of the assets of Diamond except assets acquired through capital leases, and are included as cross-collateralized obligations by the respective lenders. These notes, along with the unsecured note to the customer, were assumed as a result of the Diamond acquisition. Maturities of long-term debt and notes payable as of December 31, 1996 were as follows (in thousands):
YEAR ENDING DECEMBER 31, - ------------ 1997......................................................... $ 808 1998......................................................... 988 1999......................................................... 849 2000......................................................... 679 2001......................................................... 79 Thereafter................................................... 346 ------ $3,749 ======
Notes Payable to a Stockholder The Company had demand notes payable to a holder of Preferred Stock in the amount of $129,000 at December 31, 1994. The notes were unsecured and bore interest at 10% per annum. A representative of the stockholder is a director of the Company. In December 1994, the Company converted $2,128,000 of notes payable and accrued interest owing to this stockholder to 654,680 shares of Series E Preferred Stock. In F-14 75 HESKA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) March 1995, the Company converted $639,000 of demand notes payable and accrued interest owing to this stockholder to 196,482 shares of Series E Preferred Stock. 6. ACCRUED PENSION LIABILITY Diamond has an inactive noncontributory defined benefit pension plan covering a limited number of current and former Diamond employees. Effective October 1992, Diamond froze the plan, restricting new participants and benefits for future service. The plan provides monthly benefits on years of service which are subject to certain reductions if the employee retires before reaching age 65. Diamond's funding policy is to make the minimum annual contribution that is required by applicable regulations. Net pension cost for Diamond's defined benefit pension plan consisted of the following (in thousands):
DECEMBER 31, 1996 ----------------- Interest cost on projected benefit obligation............... $ 55 Actual return on plan assets................................ 14 Net amortization and deferral............................... (70) ----- Net periodic pension cost......................... $ (1) =====
The following table sets forth the plan's funded status and amounts recognized in the accompanying balance sheets (in thousands):
DECEMBER 31, 1996 ----------------- Actuarial present value of benefit obligations: Vested benefit obligation................................... $1,089 Accumulated benefit obligation.............................. 1,089 ------- Projected benefit obligation................................ 1,089 Plan assets, consisting primarily of bonds and commercial mortgage notes............................................ 962 ------- Projected benefit obligation in excess of plan assets....... $ (127) =======
Assumptions used by Diamond in the determination of the pension plan information consisted of the following:
DECEMBER 31, 1996 ----------------- Discount rate............................................... 7.00% Expected long-term rate of return on plan assets............ 7.75%
7. INCOME TAXES The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. As of December 31, 1996 the Company had approximately $26,900,000 of net operating loss ("NOL") carryforwards for income tax purposes and approximately $731,000 of research and development tax credits available to offset future federal income taxes, subject to limitations for alternative minimum tax. The NOL and credit carryforwards are subject to examination by the tax authorities and expire in various years from 2003 through 2010. The Tax Reform Act of 1986 contains provisions that may limit the NOL and credit carryforwards available for use in any given year upon the occurrence of certain events, including significant changes in ownership interest. A change in ownership of a company of greater than 50% within a three-year period results in an annual limitation on a company's ability to utilize its NOL carryforwards from tax periods prior to the ownership change. The acquisition of Diamond F-15 76 HESKA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) resulted in such a change of ownership and the Company estimates that the resulting NOL carryforward limitation will be approximately $4,300,000 per year for periods subsequent to April 1996. The Company does not believe that this limitation will have a material impact on the utilization of its NOL carryforwards. The acquisition of Diamond was completed on a tax free basis. Accordingly, the difference between the basis of the assets for financial reporting purposes exceeds the basis of the assets for income tax purposes. The Company has recorded a deferred tax liability related to this basis difference. As the Company had previously recorded a valuation allowance against its deferred tax assets, the Company reduced its valuation allowance in an amount equal to the deferred tax liability at the date of the acquisition. The Company's NOLs represent a previously unrecognized tax benefit. Recognition of these benefits requires future taxable income, the attainment of which is uncertain, and therefore, a valuation allowance has been established for the entire tax benefit and no benefit for income taxes has been recognized in the accompanying consolidated statements of operations. Deferred tax assets and liabilities consist of the following (in thousands):
DECEMBER 31, ------------------- 1995 1996 ------- -------- Deferred tax assets: Research and development credits.......................... $ 414 $ 731 Inventory valuation and reserves.......................... -- 71 Deferred revenue.......................................... -- 90 Pension liability......................................... -- 49 Accrued compensation...................................... 39 122 Amortization of intangible assets......................... -- 86 Other..................................................... 7 11 Net operating loss carryforwards.......................... 4,491 10,317 ------- -------- 4,951 11,477 Less valuation allowance.................................. (4,951) (10,818) ------- -------- -- 659 Deferred tax liability: Property and equipment.................................... -- (659) ------- -------- -- (659) ------- -------- Net deferred taxes................................ $ -- $ -- ======= ========
8. RESEARCH AND DEVELOPMENT AGREEMENTS In June 1994, the Company entered into agreements with Bayer AG ("Bayer"), a pharmaceutical company, pursuant to which Bayer is funding and assisting in the development of certain technologies. In return, the Company granted Bayer the option to license the technologies to manufacture certain products for sale, as well as the right to distribute for all parts of the world, except Japan and East Asia. To the extent the Company is determined to have manufacturing responsibility under the agreement, Bayer will be required to purchase its requirements of such products from the Company. In exchange for the above, Bayer agreed to provide research funding to the Company, of which $1,500,000 was received in 1995 and $500,000 in June 1996. The Company expects to receive periodic research payments until June 1999 as the related expenses are incurred and specified milestones are reached. In connection with this contract, the Company recognized research revenue of $569,000, $1,456,000 and $1,300,000 for the years ended F-16 77 HESKA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) December 31, 1994, 1995 and 1996, respectively, and none (unaudited) for the three months ended March 31, 1996 and 1997. Additionally, the Company will receive royalties based on a percentage of any net sales of products developed under the agreements not manufactured by the Company. Bayer may terminate the agreement for convenience at any anniversary, beginning in June 1996, with 90 days notice, in which case the product rights revert to the Company. The Company would be required to pay Bayer a royalty on net sales exceeding a specified threshold. The total amount of this royalty would not exceed the amount of research funding provided by Bayer. In January 1993, the Company entered into an agreement with Eisai Co., Ltd. ("Eisai") pursuant to which Eisai obtained the exclusive right to market certain products in Japan and East Asia. Under the terms of the agreement, the Company is to receive periodic payments for support of research, one half of which is only to be received upon completion of certain milestones. The Company recognized $600,000 and $337,000 as research and development revenue for the years ended December 31, 1994 and 1995, respectively, related to this agreement. No revenue was recognized for the year ended December 31, 1996, or the three months ended March 31, 1997 (unaudited). Although the agreement does not expire until 2008, Eisai may terminate its research support for any licensed product with 90 days written notice. Three of the specified projects covered by the agreement have been mutually abandoned. In February 1993, the Company entered into an agreement with another pharmaceutical company pursuant to which the Company granted the pharmaceutical company an exclusive license for the sale and use of certain technology. The Company received $187,000 in the year ended December 31, 1994, related to this agreement, which was terminated in December 1994. In October 1996, the Company and Diamond entered into three related agreements with a pharmaceutical company concerning the research, development, licensing, manufacturing and marketing of certain products. Under the research and development agreement, Diamond granted a non-exclusive, royalty-free, paid-up right and license to develop, manufacture and market certain of its bovine products. In return, the pharmaceutical company agreed to fund certain research costs associated with the development of these products, subject to the achievement of certain milestones. In connection with this research funding, the Company recognized research and development revenue of $210,000 during the fourth quarter of 1996 and $320,000 (unaudited) for the three months ended March 31, 1997. As additional consideration, the Company received an exclusive, royalty-free, worldwide license for certain feline biological vaccines. The Company also has a three-year agreement with the pharmaceutical company for the manufacture of these feline vaccines. The Company estimates its future cash flows from its existing research and development contracts, subject to scheduled completion of specified milestones, are as follows (in thousands):
YEAR ENDING DECEMBER 31, - ------------ 1997.................................................................. $1,505 1998.................................................................. 1,360 1999.................................................................. 750 2000.................................................................. 600 ------ $4,215 ======
9. COMMITMENTS AND CONTINGENCIES The Company holds certain rights to market and manufacture products using technology developed under certain research and development agreements with various entities. In connection with such agreements, the F-17 78 HESKA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company has agreed to pay the entities royalties on net product sales. No royalties have become payable to date under these agreements. In connection with the acquisition of the Bioproducts Business (see Note 3), the Company entered into a four year product supply agreement in March 1996 with a company affiliated with Bioproducts (the "Seller"). The Company is obligated to purchase a minimum of $168,000 in products and services from the Seller on a quarterly basis. If purchases are less than $168,000 in any quarter the Company may make an advance payment to be credited against future purchases, or pay 65% of the shortfall. In 1996 the Company incurred shortfalls under this agreement totaling approximately $72,000, which are expected to be applied against 1997 purchases. The agreement also contains provisions whereby the Company may make payments to terminate the contract after March 1997. In connection with an equity investment by Novartis AG ("Novartis") in April 1996 (see Note 10), the Company granted Novartis the rights, co-exclusive with the Company's rights, to market two products under development by the Company, the flea control vaccine and feline heartworm vaccine. The Company and Novartis have a revenue sharing arrangement for net sales of these products through the year 2005. In addition to the marketing agreements described above, the Company entered into a pharmaceutical screening cooperation agreement with Novartis, pursuant to which the two parties may enter into joint development arrangements to develop pharmaceutical and vaccine products. In addition, to the extent that the Company decides to grant a license to any third party to any products or technology for companion or food animal applications, Novartis must be offered first right to negotiate to acquire such license. The Company contracts with various parties that conduct research and development on the Company's behalf. In return, the Company generally receives the right to commercialize any products resulting from these contracts. The contracts are generally for one year periods and may be extended or terminated at the end of the contract period upon mutual agreement. In the event the Company licenses any technology developed under these contracts, the Company will generally be obligated to pay royalties at specified percentages of future sales of products utilizing the licensed technology. The Company has entered into operating leases for its office and research facilities and certain equipment with future minimum payments as of December 31, 1996 as follows (in thousands):
YEAR ENDING DECEMBER 31, - ------------ 1997.................................................................. $ 622 1998.................................................................. 621 1999.................................................................. 440 2000.................................................................. 370 2001.................................................................. 303 Thereafter............................................................ 837 ------ $3,193 ======
The Company had rent expense of $145,000, $208,000 and $564,000 in 1994, 1995 and 1996, respectively. F-18 79 HESKA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. CAPITAL STOCK Preferred Stock Preferred Stock consists of the following:
DECEMBER 31, ------------------ MARCH 31, 1995 1996 1997 ------- ------- ----------- (UNAUDITED) (IN THOUSANDS) Series A, no par value, 300,000 shares authorized and outstanding, entitled to a preference in liquidation of $300,000......................................... $ 300 $ 300 $ 300 Series B, no par value, 250,000 shares authorized and outstanding, entitled to a preference in liquidation of $500,000......................................... 500 500 500 Series C, no par value, 1,346,400 shares authorized; 1,340,000 issued and outstanding, entitled to a preference in liquidation of $3,350................. 3,350 3,350 3,350 Series D, no par value, 824,992 shares authorized; 800,000 issued and outstanding, entitled to a preference in liquidation of $2,600,000............. 2,600 2,600 2,600 Series E, no par value, 4,100,000 and 5,100,000 and 5,100,000 shares authorized, respectively; 3,928,085, 4,769,999 and 4,823,999 shares issued and outstanding, respectively, entitled to a preference in liquidation of $12,766,000, $19,838,000 and $20,486,000, respectively........................... 12,766 19,838 20,486 Series F, no par value, no shares, 3,000,000 and 3,000,000 authorized and outstanding, respectively, entitled to a preference in liquidation of $36,000,000....................... -- 36,000 36,000 ------- ------- ------- $19,516 $62,588 $63,236 ======= ======= =======
In 1996, the Company increased the total authorized number of shares of Preferred Stock to 25,000,000. Preferred Stock may be issued in one or more series with rights and dividend preferences determined by the board of directors. Each share of Preferred Stock entitles the holder to one vote and to receive dividends when and if declared by the board of directors. No distributions may be paid to the holders of Common Stock unless the holders of preferred stock have received stated minimum preferential dividends and participate in such distributions to holders of Common Stock. All accrued dividends on the Preferred Stock must be paid prior to such distributions. No dividends have been paid or declared as of March 31, 1997. In April 1996, the Company issued 3,000,000 shares of its Series F Preferred Stock to Novartis at $12.00 per share. In connection with this equity investment, the Company and the Investor signed certain joint marketing, screening and right of first refusal agreements. See Note 9. In the event of liquidation, the holders of Series A, B, C, D, E and F Preferred Stock are entitled to receive, prior to any distribution to the holders of Common Stock, the liquidation preference of the respective series of Preferred Stock indicated above, plus all declared and unpaid dividends. After these distributions have been made, the remaining assets of the Company, if any, will be distributed to the holders of Common Stock in an amount equal to $1.20 per share. After the above distributions have been made, the remaining assets of the Company, if any, will be shared by the holders of Preferred and Common Stock in the same proportion as the number of shares of Common Stock and Preferred Stock then held by each stockholder. In the event of a F-19 80 HESKA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) consolidation, merger, sale, conveyance or other disposition of all or substantially all of the Company's property or business, the holders of Preferred Stock are to receive the amount they would have received in liquidation. Each share of Preferred Stock is convertible, at the option of the holder, on a share for share basis into Common Stock, subject to certain anti-dilutive provisions. Conversion into Common Stock is automatic in the event of a qualifying IPO. Stockholders owning at least 35% of the outstanding Preferred Stock (including Common Stock issued upon conversion of Preferred Stock) may require the Company to register their shares with the Securities and Exchange Commission under certain circumstances. Registration expenses are to be paid by the Company. Common Stock The Company has granted stock purchase rights to acquire 322,000 shares of Common Stock to key executives pursuant to the 1994 Key Executive Stock Plan. The executives exercised these rights by executing promissory notes payable to the Company. The notes mature in six years, bear interest at 7.5% and are secured by a pledge of the shares of Common Stock purchased. Under the terms of the Key Executive Stock Plan, if the purchaser's relationship with the Company ceases for any reason within 48 months of the date of grant the Company may, within 90 days following termination, repurchase at the original exercise price all of the stock which has not vested. The stock vests ratably over the 48 month period. The following table summarizes information about the stock purchase rights exercised during the years ended, and the amounts outstanding and vested, at December 31, 1995 and 1996:
NUMBER DECEMBER 31, 1995 DECEMBER 31, 1996 OF EXERCISE ------------------ ------------------- SHARES PRICE EXERCISED VESTED EXERCISED VESTED ------- -------- --------- ------ --------- ------- Stock purchase rights granted during 1994..................... 297,000 $0.35 297,000 95,066 -- 169,310 Stock purchase rights granted during 1996..................... 25,000 $1.20 -- -- -- 1,040
In January 1997, the stock purchase rights granted in 1996 were exercised by the grantee through a promissory note which is due January 2003. Stock Option Plans The Company has a stock option plan (the "1988 Stock Plan") which authorizes the grant of stock options and stock purchase rights to employees, officers, directors and consultants of the Company to purchase shares of Common Stock. In 1996, the board of directors increased the total number of shares of Common Stock reserved for issuance under the 1988 Stock Plan to 2,683,060. The stock options granted by the board of directors may be either incentive stock options ("ISO") or nonstatutory stock options ("NSO") and expire as determined by the board of directors. The exercise price for options may be no less than 100% of fair market value for ISOs or 85% of fair market value for NSOs. Options granted will expire no later than the tenth anniversary subsequent to the date of grant or 90 days following termination of employment, except in cases of death or disability, in which case the options will remain exercisable for up to twelve months. Under the terms of the 1988 Stock Plan, in the event the Company is sold or merged, options granted will either be assumed by the surviving corporation or vest immediately. During 1994, the Company approved a Key Executive Stock Plan which authorizes the grant of options and stock purchase rights to key executives, including directors, of the Company to purchase up to 500,000 shares of Common Stock. The board of directors may grant stock purchase rights or stock options, which may be either ISOs or NSOs and expire as determined by the board of directors. The exercise price may be no less than 100% F-20 81 HESKA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of fair market value for ISOs or 85% of fair market value for NSOs or purchase rights. Options granted will expire no later than the tenth anniversary subsequent to the date of grant or 90 days following termination of employment, except in cases of death or disability, in which case the options will remain exercisable for up to twelve months. Under the terms of the Key Executive Stock Plan, in the event the Company is sold or merged, options granted will either be assumed by the surviving corporation or vest immediately. In March 1997, the Company's board of directors adopted the Company's 1997 Stock Incentive Plan (the "Stock Plan"). The Stock Plan replaces the Company's 1988 Stock Plan and its 1994 Key Executive Plan (the "Prior Plans"). The Prior Plans were terminated effective upon the adoption of the Stock Plan. No further grants will be made under the Prior Plans, although the terms of the Prior Plans will continue to govern all outstanding awards made thereunder. All future awards will be made under the Stock Plan. The number of shares of Common Stock that are reserved for issuance under the Stock Plan pursuant to the direct award or sale of shares or the exercise of options is equal to 1,350,000 shares plus the number of shares remaining available under the Prior Plans on the date of their termination. The number of shares reserved for issuance under the Stock Plan will be increased automatically on January 1 of each year by a number equal to the lesser of (a) 1,500,000 shares or (b) 5% of the shares of Common Stock outstanding on the immediately preceding December 31. Statement Of Financial Accounting Standards No. 123 ("SFAS 123") SFAS 123, Accounting for Stock-Based Compensation, defines a fair value based method of accounting for employee stock options or similar equity instruments. However, SFAS 123 allows the continued measurement of compensation cost for such plans using the intrinsic value based method prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), provided that pro forma disclosures are made of net income or loss, assuming the fair value based method of SFAS 123 had been applied. The Company has elected to account for its stock-based compensation plans under APB 25; accordingly, for purposes of the pro forma disclosures presented below, the Company has computed the fair values of all options granted during 1995 and 1996, using the Black-Scholes pricing model and the following weighted average assumptions:
1995 1996 ---------- ---------- Risk-free interest rate.............................. 5.93% 6.12% Expected lives....................................... 3.30 years 3.11 years Expected volatility.................................. 80% 80% Expected dividend yield.............................. 0% 0%
To estimate expected lives of options for this valuation, it was assumed options will be exercised at varying schedules after becoming fully vested dependent upon the income level of the option holder. For measurement purposes, options have been segregated into three income groups, and estimated exercise behavior of option recipients varies from zero to one year from the date of vesting, dependent on income group (less highly compensated employees are expected to have shorter holding periods). All options are initially assumed to vest. Cumulative compensation cost recognized in pro forma net income or loss with respect to options that are forfeited prior to vesting is adjusted as a reduction of pro forma compensation expense in the period of forfeiture. Because the Company's Common Stock is not yet publicly traded, the expected market volatility was estimated using the estimated average volatility of four publicly held companies which the Company believes to be similar with respect to the markets in which they compete. Actual volatility of the Company's stock may vary. Fair value computations are highly sensitive to the volatility factor assumed; the greater the volatility, the higher the computed fair value of the options granted. The total fair value of options granted was computed to be approximately $120,000 and $454,000 for the years ended December 31, 1995 and 1996, respectively. The amounts are amortized ratably over the vesting periods of the options. Pro forma stock-based compensation, net of the effect of forfeitures, was $38,000 and $176,000 for 1995 and 1996, respectively. F-21 82 HESKA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) If the Company had accounted for its stock-based compensation plans in accordance with SFAS 123, the Company's net loss would have been reported as follows (in thousands except per share amounts):
YEARS ENDED DECEMBER 31, ------------------- 1995 1996 ------- -------- Net loss: As reported............................................... $(4,566) $(17,975) ======= ======== Pro forma (unaudited)..................................... $(4,604) $(18,151) ======= ======== Pro forma net loss per share: As reported (unaudited)................................... $ (1.71) ======== Pro forma (unaudited)..................................... $ (1.73) ========
A summary of the Company's plans is as follows:
YEARS ENDED DECEMBER 31, ------------------------------------------- THREE MONTHS ENDED 1995 1996 MARCH 31, 1997 -------------------- -------------------- -------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE --------- -------- --------- -------- --------- -------- (UNAUDITED) Outstanding at beginning of period......................... 688,361 $0.2503 1,279,592 $0.2973 1,898,992 $0.6250 Granted........................ 612,850 $0.3500 794,624 $1.1031 682,335 $1.8587 Cancelled...................... (12,496) $0.3117 (72,942) $0.4634 (22,793) $1.1274 Exercised...................... (9,123) $0.2778 (102,282) $0.3559 (68,336) $0.2831 --------- --------- --------- Outstanding at end of period..... 1,279,592 $0.2973 1,898,992 $0.6250 2,490,198 $0.9679 ========= ========= ========= Exercisable at end of period..... 533,814 $0.2433 850,662 $0.4049 890,594 $0.4514 ========= ======= ========= ========= =======
The weighted average exercise prices approximated weighted average estimated fair values of options granted during the years ended December 31, 1995 and 1996, and the three months ended March 31, 1997. The following table summarizes information about stock options outstanding and exercisable at December 31, 1996:
OPTIONS OUTSTANDING ----------------------------------------- WEIGHTED OPTIONS EXERCISABLE NUMBER OF AVERAGE ------------------------- OPTIONS REMAINING WEIGHTED NUMBER WEIGHTED OUTSTANDING AT CONTRACTUAL AVERAGE EXERCISABLE AT AVERAGE DECEMBER 31, LIFE IN EXERCISE DECEMBER 31, EXERCISE RANGE OF EXERCISE PRICES 1996 YEARS PRICE 1996 PRICE ------------------------ -------------- ------------- -------- -------------- -------- $0.1000-$0.2500................ 448,692 5.69 $0.2104 433,574 $0.2090 $0.3500-$0.3500................ 762,323 8.39 $0.3500 290,222 $0.3500 $1.2000-$1.2000................ 687,977 9.49 $1.2000 126,866 $1.2000 --------- ------- $0.1000-$1.2000................ 1,898,992 8.11 $0.5877 850,662 $0.4049 ========= ==== ======= ======= =======
As of March 31, 1997, the Company had options to purchase 2,490,198 (unaudited) shares of Common Stock outstanding with exercise prices ranging from $0.10 -- $3.00 per share. F-22 83 HESKA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Stock Warrants The Company has issued warrants to purchase 6,400 shares of Series C Preferred Stock at an exercise price of $2.50 per share and 6,225 shares, 267 shares and 18,500 shares of Series D Preferred Stock at an exercise price of $3.25 per share in connection with the leases discussed in Note 4. These warrants expire on November 7, 1998, June 7, 2002, December 30, 2002 and October 20, 2003, respectively. No warrants have been exercised as of December 31, 1996. 11. MAJOR CUSTOMERS The Company had sales of greater than 10% of total revenue to only one customer during the year ended December 31, 1996. This customer, which represented 64% of total revenues, purchases bovine vaccines from Diamond under the terms of a take-or-pay contract which expires in June 1999. 12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
YEARS ENDED DECEMBER 31, MARCH 31, ------------------------ ------------ 1994 1995 1996 1996 1997 ------ ---- ------ ---- ---- (UNAUDITED) (IN THOUSANDS) Cash paid for interest............................. $ 21 $ 55 $ 331 $157 $146 Noncash investing and financing activities: Purchase of intangible assets through the issuance of debt.............................. -- -- 207 207 320 Issuance of Preferred Stock and options to purchase Common Stock in exchange for the common stock of Diamond, net of cash received...................................... -- -- 7,058 -- -- Reduction in future payments on debt to customer in exchange for the granting of certain rights........................................ -- -- 1,250 -- -- Issuance of Preferred Stock in exchange for cancellation of indebtedness, including accrued interest.............................. 2,385 639 -- -- -- Purchase of assets under direct capital lease financing..................................... 155 416 -- -- 255 Issuance of Preferred Stock in exchange for the capital stock of Bloxham, net of cash received...................................... -- -- -- -- 648
F-23 84 INDEPENDENT AUDITOR'S REPORT The Board of Directors Diamond Animal Health, Inc. Des Moines, Iowa We have audited the accompanying statements of income and cash flows of Diamond Animal Health, Inc. for the year ended March 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Diamond Animal Health, Inc. for the year ended March 31, 1996 in conformity with generally accepted accounting principles. MCGLADREY & PULLEN, LLP Des Moines, Iowa May 14, 1996 F-24 85 REPORT OF INDEPENDENT AUDITORS The Board of Directors Diamond Animal Health, Inc. We have audited the accompanying statements of income and cash flows of Diamond Animal Health, Inc. for the year ended March 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Diamond Animal Health, Inc. for the year ended March 31, 1995 in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Des Moines, Iowa May 30, 1995 F-25 86 DIAMOND ANIMAL HEALTH, INC. STATEMENTS OF INCOME YEARS ENDED MARCH 31, 1995 AND 1996 (in thousands)
1995 1996 ------- ------- Net sales (Note 6).......................................... $10,944 $ 8,124 Cost of goods sold.......................................... 7,713 6,467 ------- ------- Gross profit.............................................. 3,231 1,657 Selling, general and administrative expenses (Note 5)....... 2,531 2,829 ------- ------- Operating income (loss)................................... 700 (1,172) ------- ------- Financial income (expense): Interest income........................................... 40 12 Interest (expense)........................................ (355) (426) ------- ------- (315) (414) ------- ------- Income (loss) before income tax expense (benefit)......... 385 (1,586) Income tax expense (benefit) (Note 4)....................... 80 (130) ------- ------- Net income (loss)................................. $ 305 $(1,456) ======= =======
See Notes to Financial Statements. F-26 87 DIAMOND ANIMAL HEALTH, INC. STATEMENTS OF CASH FLOWS YEARS ENDED MARCH 31, 1995 AND 1996 (in thousands)
1995 1996 --------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)......................................... $ 305 $ (1,456) Adjustments to reconcile net income (loss) to net cash (used in) operating activities: Depreciation........................................... 105 159 Amortization........................................... 25 23 Noncash pension expense................................ -- 7 Noncash interest expense............................... 202 195 Change in operating assets and liabilities: (Increase) in trade receivables...................... (370) (37) (Increase) in income tax refund claim receivable..... -- (160) (Increase) in inventories............................ (64) (667) (Increase) decrease in prepaid expenses.............. 14 (70) (Increase) decrease in other assets.................. (19) 16 Increase in accounts payable......................... 32 421 Increase (decrease) in accrued expenses.............. (34) 152 Increase in customer deposits........................ -- 623 (Decrease) in deferred revenue....................... (373) -- --------- ----------- Net cash (used in) operating activities........... (177) (794) --------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment........................ (428) (218) Payments of organization costs............................ (37) -- --------- ----------- Net cash (used in) investing activities........... (465) (218) --------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from debt........................................ 645 1,505 Principal payments on debt, including capital lease obligations............................................ (503) (482) --------- ----------- Net cash provided by financing activities......... 142 1,023 --------- ----------- Net increase (decrease) in cash................... (500) 11 CASH Beginning................................................. 583 83 --------- ----------- Ending.................................................... $ 83 $ 94 ========= =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash payments for: Interest............................................... $ 146 $ 221 Income taxes........................................... 159 5 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Accretion (valuation) of redeemable common stock purchase warrants (Note 3)...................................... $ 116 $ (116) Capital lease obligations incurred for the purchase of equipment.............................................. -- 136 347,028 shares of common stock issued in exchange for redeemable common stock purchase warrants, net of $100 cash secured (Note 3).................................. -- 135 (Decrease) in minimum pension liability as stockholder's equity................................................. -- (24)
See Notes to Financial Statements. F-27 88 DIAMOND ANIMAL HEALTH, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Nature of business: Diamond Animal Health, Inc. (the "Company") manufactures and sells animal health products to the agricultural and veterinary markets in the United States, Canada and Europe. Significant accounting policies: Cost of goods sold: Inventories are stated at the lower of cost, determined by using the first-in, first-out (FIFO) method, or market. Depreciation: Depreciation is provided on the straight-line method over the estimated useful lives of the assets, including 10 to 15 years for buildings and 5 to 10 years for machinery and equipment. It is the Company's policy to include amortization of assets acquired under capital leases with depreciation expense on owned assets. Amortization: Costs incurred in connection with the organization of the Company are amortized on the straight-line basis over five years. Deferred taxes: Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Stock options and awards: Employee stock options and awards are accounted for in accordance with Accounting Principles Board Opinion No. 25 using the intrinsic value method. Under that method, the excess of the fair value of the underlying stock over the exercise price is determined at the measurement date and recognized as compensation expense over the related service period. Research and development: Expenditures for research and development are charged to expense as incurred. Expense for the years ended March 31, 1995 and 1996 was approximately $772,000 and $1,455,000, respectively. Estimates and assumptions: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 2. RENT EXPENSE The Company leases its primary production and office facility under a noncancelable operating lease expiring on December 31, 1998. The lease contains a five-year renewal option exercisable at the option of the Company. In addition, the Company leases certain office equipment and autos under operating leases expiring from February 1997 to May 2000. Total rent expense was approximately $178,000 and $182,000 for the years ended March 31, 1995 and 1996, respectively. NOTE 3. REDEEMABLE COMMON STOCK PURCHASE WARRANTS In connection with the initial capitalization of the Company, warrants were issued to subordinated lenders to purchase a total of 337,028 shares of common stock at an exercise price of $.005 per share. Total proceeds received from the lenders were allocated to long-term debt and warrants based on fair value, resulting in an initial carrying value of the warrants of $133,000. The carrying value of the warrants was being accreted to the estimated redemption price on a pro-rata basis over the period until the initial redemption date, with a corresponding charge (credit) to retained earnings of $116,000 and $(116,000) for the years ended March 31, F-28 89 DIAMOND ANIMAL HEALTH, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 1995 and 1996, respectively. All warrants were exercised during the year ended March 31, 1996. Under a similar agreement, warrants to purchase 20,000 shares of common stock were issued in March 1996, with 10,000 warrants exercised at $.01 per share and the remaining 10,000 exercised subsequent to year-end at $.01 per share. NOTE 4. INCOME TAXES Components of income tax expense (benefit) for the years ended March 31, 1995 and 1996 were as follows:
1995 1996 --------- --------- Current expense (benefit)............... $ 196,000 $(130,000) Research and development tax credits.... (116,000) -- --------- --------- $ 80,000 $(130,000) ========= =========
The income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income (loss) from continuing operations for the years ended March 31, 1995 and 1996 due to the following:
1995 1996 -------- --------- Computed "expected" (benefit) expense... $131,000 $(544,000) Increase (decrease) in valuation allowance............................. (51,000) 414,000 -------- --------- $ 80,000 $(130,000) ======== =========
At March 31, 1996, the Company had research and development tax credit carryforwards of approximately $370,000 which expire in 2000 through 2003. The Company also had net operating loss carryforwards of $567,000 which expire in the year 2010. NOTE 5. EMPLOYEE BENEFIT PLANS The Company has a noncontributory defined benefit pension plan covering all employees who have met the eligibility requirements. The plan provides monthly benefits on years of service which are subject to certain reductions if the employee retires before reaching age 65. Substantially all employees were eligible for the plan prior to the plan being frozen. The Company's funding policy is to make the minimum annual contribution that is required by applicable regulations. Effective October 1992, the Company froze the plan restricting new participants and benefits for future service. Net pension cost for the Company's defined benefit pension plan consisted of the following components for the year ended March 31, 1996. Pension cost for 1995 was not material and the components for that period have not been determined.
1996 -------- Interest cost on projected benefit obligation............... $ 72,000 Actual return on plan assets................................ (171,000) Net amortization and deferral............................... 106,000 -------- $ 7,000 ========
Assumptions used by the Company in the determination of the pension plan information consisted of the following as of March 31, 1996: Discount rate............................................... 7.00% Expected long-term rate of return on plan assets............ 7.75%
F-29 90 DIAMOND ANIMAL HEALTH, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The Company has a 401(k) plan covering substantially all full-time employees. Under the terms of the plan, participants may contribute up to 15% of their salary to the plan. The Company matches certain employee contributions, depending on length of service with the Company. Expense related to this plan was approximately $93,000 and $82,000 for the years ended March 31, 1995 and 1996, respectively. The Company also has a defined contribution plan covering substantially all full-time employees. The Company contributed 4% and 3% of all eligible employee earnings for the years ended March 31, 1995 and 1996, respectively. Expense related to this plan was approximately $130,000 and $108,000 for the years ended March 31, 1995 and 1996, respectively. The Company has an employee stock option plan providing for the issuance of up to 337,028 shares of the Company's common stock. The plan provides for options to be issued to key employees at an exercise price of not less than fair market value with a term of ten years and a month to exercise from date of grant. At March 31, 1996 the Company had options outstanding for a total of 129,737 shares at an exercise price of $3.18 per share, all of which were fully vested and exercisable and expire in the years ending March 31, 2005 and 2006. NOTE 6. MAJOR CUSTOMER Approximately 88% and 71% of the Company's revenues were derived from the Company's major customer representing sales of approximately $9,578,000 and $5,766,000 for the years ended March 31, 1995 and 1996, respectively. The Company has a Manufacturing and Supply Agreement with the customer which obligates the customer to purchase a minimum quantity of defined products from the Company annually on a calendar year basis starting January 1, 1996. The agreement is effective through June 1999, renewable annually thereafter. NOTE 7. INTEREST EXPENSE The Company had long-term debt, bank and other notes payable totaling $3,995,000 and $5,347,000 at March 31, 1995 and 1996, respectively, at interest rates ranging primarily from 8% to 10%. F-30 91 PRO FORMA CONSOLIDATED CONDENSED FINANCIAL INFORMATION The following unaudited pro forma consolidated condensed statement of operations for the year ended December 31, 1996 gives effect to the acquisition of Diamond in April 1996 and the canine allergy business from Bioproducts DVM, Inc. in March 1996 as if each had occurred on January 1, 1996. The pro forma adjustments are based upon currently available information and upon certain assumptions that management believes are reasonable under current circumstances. The unaudited pro forma consolidated statement of operations and notes thereto do not purport to represent what the Company's consolidated results of operations would actually have been if such transactions had in fact occurred on such date. The unaudited pro forma consolidated statement of operations and accompanying notes should be read in conjunction with the audited consolidated financial statements and notes thereto and other financial information pertaining to the Company included elsewhere in the prospectus.
YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ---------------------------------------------------------- HISTORICAL RESULTS UNAUDITED HESKA ------------------------------- PRO HISTORICAL BIOPRODUCTS DIAMOND PRO FORMA FORMA RESULTS (UNAUDITED)(1) (UNAUDITED)(1) ADJUSTMENTS RESULTS ---------- -------------- -------------- ----------- --------- Revenues......................... $ 9,959 $ 149 $ 2,820 $ -- $ 12,928 Costs and operating expenses..... (26,648) (115) (3,086) -- (29,849) Depreciation and amortization.... (1,072) -- (64) (97)(2) (1,233) Amortization of intangible assets......................... (1,100) -- -- (114)(3) (1,214) -------- ----- ------- ----- -------- Loss from operations............. (18,861) 34 (330) (211) (19,368) Interest and other expense....... 886 -- (137) 30(4) 779 -------- ----- ------- ----- -------- Net loss......................... $(17,975) $ 34 $ (467) $(181) $(18,589) ======== ===== ======= ===== ======== Unaudited pro forma net loss per share(5)....................... $ (1.71) (1.73) Weighted average common shares outstanding(5)................. 10,511 10,762
- --------------- (1) Represents the sales and costs of sales of products sold related to the period from January through March and April, respectively, of the Bioproducts Business and Diamond. The results of both operations were included in the Company's historical operations from their respective acquisition dates. (2) Represents additional depreciation and amortization of the tangible assets acquired. (3) Represents additional depreciation and amortization of certain intangible assets acquired from the respective entities. For purposes of this pro forma statement of operations, the Company has recorded amortization of the intangible asset related to the Bayer take or pay contract over the period from January 1996 through June 1999. The Company's historical statement of operations includes amortization of such asset over the period from April 1996 through June 1999. (4) Represents a reduction in interest expense relative to certain notes payable which were converted into equity immediately prior to the acquisition of Diamond in April 1996. (5) Assumes conversion of Preferred Stock into Common Stock of the Company. See Note 2 of the Notes to Consolidated Financial Statements. F-31 92 DESCRIPTION OF ART ON INSIDE BACK COVER Photographs of dogs, cats and horses and drawings of the logos of Heska's subsidiaries, Bloxham Laboratories, Ltd. and Diamond Animal Health, Inc. Caption reads -- Heska -- The Science of Caring for Companion Animals 93 ------------------------------------------------------ NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE. ------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary..................... 3 Risk Factors........................... 6 Use of Proceeds........................ 13 Dividend Policy........................ 13 Capitalization......................... 14 Dilution............................... 15 Selected Consolidated Financial Data... 16 Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 17 Business............................... 22 Management............................. 40 Certain Transactions................... 48 Principal and Selling Stockholders..... 49 Description of Capital Stock........... 51 Shares Eligible for Future Sale........ 53 Underwriting........................... 55 Notice to Canadian Residents........... 56 Legal Matters.......................... 57 Experts................................ 57 Additional Information................. 58 Index to Consolidated Financial Statements........................... F-1
------------------ UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ====================================================== [HESKA CORPORATION LOGO] Shares Common Stock PROSPECTUS CREDIT SUISSE FIRST BOSTON MERRILL LYNCH & CO. ------------------------------------------------------ 94 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the various expenses expected to be incurred by the Registrant in connection with the sale and distribution of the securities being registered hereby, other than underwriting discounts and commissions. All amounts are estimated except the Securities and Exchange Commission registration fee and the National Association of Securities Dealers, Inc. filing fee. SEC registration fee........................................ $ 24,394 National Association of Securities Dealers, Inc. filing fee....................................................... 8,550 Blue Sky fees and expenses.................................. 7,500 Accounting fees and expenses................................ 100,000 Legal fees and expenses..................................... 300,000 The Nasdaq Stock Market listing fee......................... 35,000 Printing and engraving expenses............................. 140,000 Registrar and Transfer Agent's fees......................... 10,000 Miscellaneous fees and expenses............................. 24,556 -------- Total............................................. $650,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law provides for the indemnification of officers, directors, and other corporate agents in terms sufficiently broad to indemnify such persons under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act. Article VIII of the Registrant's Restated Certificate of Incorporation (Exhibit 3.1 hereto) authorizes the Board of Directors of the Registrant to indemnify the Registrant's directors, officers, employees and other agents to the fullest extent permitted by the Delaware General Corporation Law. The Registrant has also entered into agreements with its directors and officers that will require the Registrant, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers to the fullest extent not prohibited by law. The Underwriting Agreement (Exhibit 1.1) provides for indemnification by the Underwriters of the Registrant, its directors and officers, and by the Registrant of the Underwriters, for certain liabilities, including liabilities arising under the Act, and affords certain rights of contribution with respect thereto. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES (a) On various dates between January 1994 and March 1997, the Registrant issued an aggregate of 293,232 shares of its Common Stock to 32 employees pursuant to the exercise of options granted under its stock option plans. The exercise prices per share ranged from $.35 to $1.20, for an aggregate consideration of $77,584. The Registrant relied on the exemption provided by Rule 701 under the Act. (b) In February 1995 and January 1997, the Registrant issued an aggregate of 322,000 shares of its Common Stock to two senior executives and a director of the Company pursuant to restricted stock purchase agreements under a stock option plan. The purchase prices ranged from $0.35 to $1.20 per share for an aggregate consideration of $133,950. The Registrant relied on the exemption provided by Section 4(2) and Rule 701 under the Act. (c) In 1994 and 1995, the Registrant issued an aggregate of 3,928,085 shares of Series E Preferred Stock to a total of three accredited investors at an effective price per share of $3.25, for an aggregate cash consideration of $12,766,276. In April 1996, the Company issued 3,000,000 shares of its Series F Preferred Stock to a single accredited investor at a purchase price of $12.00 per share for an aggregate cash consideration of $36,000,000. The Registrant relied on the exemptions provided by Sections 4(2) and 4(6) of the Act. II-1 95 (d) On various dates between March 1994 and February 1995, the Registrant issued an aggregate of 3,525 shares of Common Stock to two consultants of the Registrant in consideration of consulting services. The Registrant relied upon the exemptions provided by Section 4(2) and Rule 701 of the Act. (e) In April 1996, the Registrant issued an aggregate of 841,914 shares of Series E Preferred Stock to the eight shareholders of Diamond Animal Health, Inc. in exchange for all of the outstanding shares of Diamond. The Registrant relied upon the exemption provided by Section 4(2) of the Act. (f) In February 1997, the Registrant issued an aggregate of 54,000 shares of Series E Preferred Stock to the three shareholders of Bloxham Laboratories Limited in exchange for all of the outstanding shares of Bloxham. The Registrant relied upon the exemption provided by Section 4(2) of the Act. The recipients of the above-described securities represented their intention to acquire the securities for investment only and not with a view to distribution thereof. Appropriate legends were affixed to the stock certificates issued in such transactions. All recipients had adequate access, through employment or other relationships, to information about the Registrant. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A) EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 1.1* Form of Underwriting Agreement 3.1(a) Restated Articles of Incorporation of Heska Corporation, a California corporation, as filed with the Secretary of State of California on April 4, 1996. 3.1(b) Form of Restated Certificate of Incorporation of Heska Merger Corporation, a Delaware corporation (to be filed prior to the effective date of the Registration Statement). 3.1(c)* Form of Restated Certificate of Incorporation of Heska Corporation, a Delaware corporation (to be filed after the closing of the offering). 3.2(a) Bylaws of Heska Corporation, a California corporation, as amended. 3.2(b) Bylaws of Heska Merger Corporation, a Delaware corporation, as amended. 3.2(c)* Bylaws of Heska Corporation, a Delaware corporation, as amended (to be adopted after the closing of the offering). 4.1* Specimen Common Stock Certificate. 4.2 First Amended Investors' Rights Agreement by and among Registrant and certain stockholders of Registrant dated as of April 12, 1996. 4.3 Form of warrant to purchase Series C Preferred Stock. 4.4 Form of warrant to purchase Series D Preferred Stock. 5.1* Opinion of Pillsbury Madison & Sutro LLP. 9.1 Voting Agreement by and among Registrant and certain stockholders of Registrant, dated as of April 12, 1996. 10.1+ Collaborative Agreement between Registrant and Eisai Co., Ltd. dated January 25, 1993. 10.2+ Canine Heartworm Cooperation Agreement between Registrant and Bayer AG dated as of June 10, 1994. 10.3+ Feline Toxoplasmosis Cooperation Agreement between Registrant and Bayer AG dated as of June 10, 1994. 10.4+ Product Supply and License Agreement between Registrant and Atrix Laboratories, Inc. dated May 1, 1995, as amended June 23, 1995. 10.5+ Screening and Development Agreement between Ciba-Geigy Limited and Registrant, dated as of April 12, 1996. 10.6 Right of First Refusal Agreement between Ciba-Geigy Limited and Registrant, dated as of April 12, 1996.
II-2 96
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 10.7+ Marketing Agreement between Registrant and Ciba-Geigy Limited dated as of April 12, 1996. 10.8+ Marketing Agreement between Registrant and Ciba-Geigy Corporation dated as of April 12, 1996. 10.9+ Manufacturing and Supply Agreement between and among Diamond Animal Health, Inc., Agrion Corporation, Diamond Scientific Co. and Miles Inc. dated December 31, 1993 and Amendment and Extension thereto dated September 1, 1995. 10.10 Employment Agreement between Registrant and Robert B. Grieve dated January 1, 1994, as amended March 4, 1997. 10.11 Employment Agreement between Registrant and Fred M. Schwarzer dated November 1, 1994, as amended March 4, 1997. 10.12 Employment Agreement between Registrant and R. Lee Seward dated October 17, 1994. 10.13 Employment Agreement between Registrant and Louis G. Van Daele dated April 14, 1996. 10.14 Restricted Stock Purchase Agreement dated February 28, 1995 by and between Registrant and Fred M. Schwarzer. 10.15 Restricted Stock Purchase Agreement dated February 28, 1995 by and between Registrant and R. Lee Seward. 10.16 Restricted Stock Purchase Agreement dated January 11, 1997 by and between Registrant and Denis H. Pomroy. 10.17 Form of Indemnification Agreement to be entered into between Registrant and its directors and certain officers. 10.18 1997 Incentive Stock Plan of Registrant. 10.19 Forms of Option Agreement. 10.20 1997 Employee Stock Purchase Plan of Registrant. 10.21 Lease Agreement dated March 8, 1994 between Sharp Point Properties, LLC and Registrant. 10.22 Lease Agreement dated as of June 27, 1996 between GB Ventures and Registrant. 10.23 Lease Agreement dated as of July 11, 1996 between GB Ventures and Registrant. 10.24 Lease Agreement dated as of December 31, 1993 between Miles, Inc. and Diamond Animal Health, Inc., as amended September 1, 1995. 11.1 Statement of computation of earnings per share. 21.1 Subsidiaries of the Company. 23.1 Consent of Arthur Andersen LLP. 23.2 Consent of McGladrey & Pullen, LLP. 23.3 Consent of Ernst & Young LLP. 23.4 Consent of Pillsbury Madison & Sutro LLP (included in its opinion filed as Exhibit 5.1 to this Registration Statement). 24.1 Power of Attorney (see page II-5). 27. Financial Data Schedule.
- --------------- * To be filed by amendment. + Confidential treatment has been requested with respect to certain portions of these agreements. II-3 97 (B) FINANCIAL STATEMENT SCHEDULES None. Schedules have been omitted because they are not applicable or not required or because the information is included elsewhere in the Financial Statements or the notes thereto. ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act, may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) It will provide to the underwriters at the closing(s) specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. II-4 98 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Fort Collins, State of Colorado, on the 24th day of April, 1997. HESKA CORPORATION By /s/ FRED M. SCHWARZER ----------------------------------- Fred M. Schwarzer President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Fred M. Schwarzer, Robert B. Grieve, William G. Skolout and Deborah E. Robbins, and each of them, his or her true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments, including post-effective amendments, to this Registration Statement, and any registration statement relating to the offering covered by this Registration Statement and filed pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and agents or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
NAME TITLE DATE ---- ----- ---- /s/ FRED M. SCHWARZER President and Chief Executive Officer - ------------------------------------------------ (Principal Executive Officer) and Fred M. Schwarzer Director April 24, 1997 /s/ WILLIAM G. SKOLOUT Chief Financial Officer (Principal - ------------------------------------------------ Financial and Accounting Officer) William G. Skolout April 24, 1997 /s/ A. BARR DOLAN Chairman of the Board - ------------------------------------------------ A. Barr Dolan April 24, 1997 /s/ ROBERT B. GRIEVE, PH.D. Chief Scientific Officer and Vice - ------------------------------------------------ Chairman Robert B. Grieve, Ph.D. April 24, 1997 /s/ LYLE A. HOHNKE, PH.D. Director - ------------------------------------------------ Lyle A. Hohnke, Ph.D. April 24, 1997 /s/ DENIS H. POMROY Director - ------------------------------------------------ Denis H. Pomroy April 24, 1997 /s/ LYNNOR B. STEVENSON, PH.D. Director - ------------------------------------------------ Lynnor B. Stevenson, Ph.D. April 24, 1997 /s/ GUY TEBBIT, PH.D. Director - ------------------------------------------------ Guy Tebbit, Ph.D. April 24, 1997
II-5 99 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 1.1* Form of Underwriting Agreement 3.1(a) Restated Articles of Incorporation of Heska Corporation, a California corporation, as filed with the Secretary of State of California on April 4, 1996. 3.1(b) Form of Restated Certificate of Incorporation of Heska Merger Corporation, a Delaware corporation (to be filed prior to the effective date of the Registration Statement). 3.1(c)* Form of Restated Certificate of Incorporation of Heska Merger Corporation, a Delaware corporation (to be filed after the closing of the offering). 3.2(a) Bylaws of Heska Corporation, a California corporation, as amended. 3.2(b) Bylaws of Heska Merger Corporation, a Delaware corporation, as amended. 3.2(c)* Bylaws of Heska Merger Corporation, a Delaware corporation, as amended (to be adopted after the closing of the offering). 4.1* Specimen Common Stock Certificate. 4.2 First Amended Investors' Rights Agreement by and among Registrant and certain stockholders of Registrant dated as of April 12, 1996. 4.3 Form of warrant to purchase Series C Preferred Stock. 4.4 Form of warrant to purchase Series D Preferred Stock. 5.1* Opinion of Pillsbury Madison & Sutro LLP. 9.1 Voting Agreement by and among Registrant and certain stockholders of Registrant, dated as of April 12, 1996. 10.1+ Collaborative Agreement between Registrant and Eisai (Japan) dated January 25, 1993. 10.2+ Canine Heartworm Cooperation Agreement between Registrant and Bayer AG dated as of June 10, 1994. 10.3+ Feline Toxoplasmosis Cooperation Agreement between Registrant and Bayer AG dated as of June 10, 1994. 10.4+ Product Supply and License Agreement between Registrant and Atrix Laboratories, Inc. dated May 1, 1995, as amended June 23, 1995. 10.5+ Screening and Development Agreement between Ciba-Geigy Limited and Registrant, dated as of April 12, 1996. 10.6 Right of First Refusal Agreement between Ciba-Geigy Limited and Registrant, dated as of April 12, 1996. 10.7+ Marketing Agreement between Registrant and Ciba-Geigy Limited dated as of April 12, 1996. 10.8+ Marketing Agreement between Registrant and Ciba-Geigy Corporation dated as of April 12, 1996. 10.9+ Manufacturing and Supply Agreement between and among Diamond Animal Health, Inc., Agrion Corporation, Diamond Scientific Co. and Miles Inc. dated December 31, 1993 and Amendment and Extension thereto dated September 1, 1995. 10.10 Employment Agreement between Registrant and Robert B. Grieve dated January 1, 1994, as amended March 4, 1997. 10.11 Employment Agreement between Registrant and Fred M. Schwarzer dated November 1, 1994, as amended March 4, 1997. 10.12 Employment Agreement between Registrant and R. Lee Seward dated October 17, 1994. 10.13 Employment Agreement between Registrant and Louis G. Van Daele dated April 14, 1996. 10.14 Restricted Stock Purchase Agreement dated February 28, 1995 by and between Registrant and Fred M. Schwarzer.
100
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 10.15 Restricted Stock Purchase Agreement dated February 28, 1995 by and between Registrant and R. Lee Seward. 10.16 Restricted Stock Purchase Agreement dated January 11, 1997 by and between Registrant and Denis H. Pomroy. 10.17 Form of Indemnity Agreement to be entered into between Registrant and its directors and certain officers. 10.18 1997 Incentive Stock Plan of Registrant. 10.19 Forms of Option Agreement. 10.20 1997 Employee Stock Purchase Plan of Registrant. 10.21 Lease Agreement dated March 8, 1994 between Sharp Point Properties, LLC and Registrant. 10.22 Lease Agreement dated as of June 27, 1996 between GB Ventures and Registrant. 10.23 Lease Agreement dated as of July 11, 1996 between GB Ventures and Registrant. 10.24 Lease Agreement dated as of December 31, 1993 between Miles, Inc. and Diamond Animal Health, Inc., as amended September 1, 1995. 11.1 Statement of computation of earnings per share. 21.1 Subsidiaries of the Company. 23.1 Consent of Arthur Andersen LLP. 23.2 Consent of McGladrey & Pullen, LLP. 23.3 Consent of Ernst & Young LLP. 23.4 Consent of Pillsbury Madison & Sutro LLP (included in its opinion filed as Exhibit 5.1 to this Registration Statement). 24.1 Power of Attorney (see page II-5). 27. Financial Data Schedule.
- --------------- * To be filed by amendment. + Confidential treatment has been requested with respect to certain portions of these agreements. EX-3.1.A 2 RESTATED ARTICLES/INCORP OF HESKA CORP. 1 EXHIBIT 3.1(a) [SECRETARY OF STATE - CALIFORNIA STAMP] RESTATED ARTICLES OF INCORPORATION OF HESKA CORPORATION Fred M. Schwarzer hereby certifies that: 1. He is the President and Secretary of Heska Corporation, a California corporation. 2. The Articles of Incorporation of this corporation are amended and restated to read in full as follows: "One: The name of this corporation is Heska Corporation. Two: 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 California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. Three: 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 40,000,000 shares of Common Stock and 25,000,000 shares of 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. Four: The designation of and the number of shares constituting the initial five series of, and the rights, preferences, privileges and restrictions relating to, the Preferred Stock are as follows: 2 1. Designation of Series. There is hereby provided a series of Preferred Stock designated Series A Preferred Stock (the "Series A Preferred Stock"), a series of Preferred Stock designated Series B Preferred Stock (the "Series B Preferred Stock"), a series of Preferred Stock designated Series C Preferred Stock (the "Series C Preferred Stock"), a series of Preferred Stock designated Series D Preferred Stock (the "Series D Preferred Stock"), a series of Preferred Stock designated Series E Preferred Stock (the "Series E Preferred Stock") and a series of Preferred Stock designated Series F Preferred Stock (the "Series F Preferred Stock"). 2. Number of Shares. The number of shares constituting the Series A Preferred Stock is fixed at three hundred thousand (300,000) shares. The number of shares constituting the Series B Preferred Stock is fixed at two hundred fifty thousand (250,000) shares. The number of shares constituting the Series C Preferred Stock is fixed at one million three hundred forty six thousand four hundred (1,346,400) shares. The number of shares constituting the Series D Preferred Stock is fixed at eight hundred twenty-four thousand nine hundred ninety-two (824,992) shares. The number of shares constituting the Series E Preferred Stock is fixed at five million one hundred thousand (5,100,000) shares. The number of shares constituting the Series F Preferred Stock is fixed at three million (3,000,000) shares. 3. Dividend Provisions. The holders of the Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available therefor, dividends at an annual rate of $.08 per share of Series A Preferred Stock (the "Series A Dividend Rate"), $.16 per share of Series B Preferred Stock (the "Series B Dividend Rate"), $.20 per share of Series C Preferred Stock (the "Series C Dividend Rate"), $.26 per share of Series D Preferred Stock (the "Series D Dividend Rate"), $.26 per share of Series E Preferred Stock (the "Series E Dividend Rate"), $.96 per share of Series F Preferred Stock (the "Series F Dividend Rate") payable in preference and priority to any payment of any dividend on Common Stock of the Corporation. Such dividends shall not be cumulative and no right to such dividends shall accrue to holders of Preferred Stock unless declared by the Board of Directors. Each share of Preferred Stock shall rank on a parity with every other share of Preferred Stock, irrespective of series, with regard to dividends, and no dividends shall be declared or paid or set apart for payment on the shares of any series of Preferred Stock unless at the same time a dividend for the same percentage of the respective dividend rates shall also be declared or paid or set apart for payment, as the case may be, on the shares of Preferred Stock of each other series then outstanding. -2- 3 No dividends or other distributions shall be made with respect to the Common Stock in any fiscal year (other than dividends payable in Common Stock on shares of Common Stock) until a dividend in the amount of at least the respective Dividend Rates per share of each of the Series A, Series B, Series C, Series D, Series E and Series F Preferred has been declared and paid or set apart during that fiscal year. The holders of Preferred Stock shall participate with holders of Common Stock in the payment of dividends and other distributions in excess of the dividends to be first paid on Preferred Stock ratably on an as-if-converted to Common Stock basis. For purposes of this Section 3, unless the context otherwise requires, distribution shall mean the transfer of cash or property without consideration, whether by way of dividend or otherwise, payable other than in Common Stock, or the purchase or redemption of shares of this corporation (other than repurchases of Common Stock held by employees or consultants of this corporation upon termination of their employment or services pursuant to agreements providing for such repurchase) for cash or property, including any such transfer, purchase or redemption by a subsidiary of this corporation. Each holder of shares of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock shall be deemed to have consented, for purposes of sections 502, 503 and 506 of the General Corporation Law of the State of California, to distributions made by this corporation in connection with the repurchase of shares of Common Stock issued to or held by employees or consultants upon termination of their employment or services pursuant to agreements providing for such repurchase. 4. Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of this corporation, whether voluntary or involuntary, holders of shares of each series of Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of this corporation to the holders of the Common Stock by reason of their ownership thereof, an amount per share as may be fixed for such series (the "Preferential Amount"). The Preferential Amount shall be: (i) for each share of Series A Preferred Stock, $1.00 plus all declared and unpaid dividends to the date of liquidation, distribution or winding up ("Liquidation Date"); (ii) for each share of Series B Preferred Stock, $2.00 plus all declared and unpaid dividends to the Liquidation Date; (iii) for each share of Series C Preferred Stock, $2.50 plus all declared and unpaid dividends to the Liquidation Date; (iv) for each share of Series D Preferred Stock, $3.25 plus all declared and unpaid dividends to the Liquidation Date; (v) for each share of Series E Preferred Stock, $3.25 plus all declared and unpaid dividends to the -3- 4 Liquidation Date; and (vi) for each share of Series F Preferred Stock, $12.00 plus all declared and unpaid dividends to the Liquidation Date. (b) (i) If upon the occurrence of such event the assets thus distributed among the holders of the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock shall be insufficient to permit the payment to such holders of the full Preferential Amount, then the entire assets of this corporation legally available for distribution shall be distributed among the holders of the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock in proportion to the respective Preferential Amounts fixed for each then outstanding series of Preferred Stock. (ii) If assets remain in this corporation after the distributions provided for in subparagraph (a) have been fully made, the holders of Common Stock shall be entitled to receive, prior and in preference to any further distribution of any other of the surplus funds or assets of the corporation to holders of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock by reason of their ownership thereof, an amount equal to $1.20 per share (subject to adjustment for stock dividends, stock splits, stock combinations or the like). (iii) After the distributions have been made as required by subparagraphs (a) and (b)(ii) of this Section, if assets remain in this corporation, the holders of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock and Common Stock will share in all such remaining assets in the same proportion as the number of shares of Common Stock and Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock (or, if greater, that number of shares of Common Stock as would be outstanding assuming conversion of the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock into Common Stock as provided in Section 5 hereof) then held by each of them bears to the total number of shares of Common Stock and Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock (or, if greater, the total number of shares of Common Stock as would be outstanding assuming conversion of the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock into Common Stock) of the corporation then issued and outstanding. (c) (i) A consolidation or merger of this corporation with or into any other corporation or corporations, in which consolidation or merger the shareholders of the Corporation receive distributions in cash or securities of another corporation or corporations as a result of such consolidation or merger (unless the shareholders of the Corporation will hold at least fifty percent (50%) of the voting equity securities of the surviving corporation and in substantially -4- 5 the same pro rata portions as each held of the voting equity securities of the Corporation immediately prior to the consolidation or merger) or a sale, conveyance or other disposition of all or substantially all of this corporation's property or business, shall be deemed to be a liquidation, dissolution or winding up within the meaning of this Section 4. (ii) In any of such events, if the consideration received by this corporation is other than cash or indebtedness, its value will be deemed to be its fair market value. In the case of publicly traded securities, fair market value shall mean the closing market price for such securities on the date such consolidation, merger or sale is consummated. If the consideration is in a form other than publicly traded securities, its value shall be determined by the Board of Directors of this corporation. 5. Conversion. Holders of outstanding shares of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock shall have conversion rights as follows (the "Conversion Rights"). As used herein, the "Original Issue Date" shall be for the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock, respectively, the date the first share of such respective series was issued by this corporation. (a) Right To Convert. (i) Subject to subparagraph (c) of this Section 5, each share of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share at the office of this corporation or any transfer agent for the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock, as the case may be, into such number of fully paid and nonassessable shares of Common Stock equal to the ratio (the "Conversion Ratio") determined by dividing the Initial Conversion Price for each respective series by the then effective Conversion Price. As used herein, the term "Initial Conversion Price" shall be: $1.00 per share for the Series A Preferred Stock; $2.00 per share for the Series B Preferred Stock; $2.50 per share for the Series C Preferred Stock; $3.25 per share for the Series D Preferred Stock; $3.25 per share for the Series E Preferred Stock; and $12.00 per share for the Series F Preferred Stock. As used herein, the term "Conversion Price" shall mean, for any share of Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock at any time, the Initial Conversion Price for such share as adjusted from time to time pursuant to the provisions of this Section 5. (iii) Each share of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock shall automatically be converted into such -5- 6 number of fully paid and nonassessable shares of Common Stock at the then effective Conversion Ratio for the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock, respectively, immediately upon the closing of the issuance of shares following the effectiveness of a registration statement (other than a registration statement with respect to any securities offered pursuant to any employee purchase, savings, option, bonus, appreciation, profit sharing, thrift, incentive or similar plan of the corporation) under the Securities Act of 1933, as amended, covering a firm commitment, underwritten public offering of any of this corporation's Common Stock at an aggregate price to the public exceeding $10,000,000 in cash, provided that the price per share at which the Common Stock is offered is at least $8.00. (b) Mechanics of Conversion. Before any holder of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock shall be entitled to convert the same into shares of Common Stock, such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of this corporation or of any transfer agent for the Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, as the case may be, and shall give written notice by mail, postage prepaid, to this corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. This corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, as the case may be, or to the nominee or nominees thereof, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, as the case may be, to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of shares of Common Stock on such date. (c) Conversion Price Adjustments of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock. The Conversion Price of the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock shall be subject to adjustment from time to time as follows: (i) (A) If this corporation shall issue any Additional Stock (as defined in subsection (ii) of this subsection (c) of this Section 5) without consideration or for a consideration per share less than the Conversion Price for the Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, as -6- 7 the case may be, in effect immediately prior to the issuance of such Additional Stock, the Conversion Price for the Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, as the case may be, in effect immediately prior to each such issuance shall forthwith (except as otherwise provided in this clause (i)) be reduced, as of the opening of business on the date of such issue or sale, to a new Conversion Price which: (1) in the case of Series A Preferred Stock, shall be a price equal to the quotient obtained by dividing the total computed under clause (X) below by the total computed under clause (Y) below as follows: (X) an amount equal to the sum of (i) the aggregate purchase price of all shares of Series A Preferred Stock sold to date, plus (ii) the aggregate consideration, if any, received by this corporation for all Additional Stock issued since the Original Issue Date of the Series A Preferred Stock; (Y) an amount equal to the sum of (i) the aggregate purchase price of all shares of the Series A Preferred Stock, divided by the Initial Conversion Price for the Series A Preferred Stock on the Original Issue Date thereof (or such higher or lower Initial Conversion Price as results from the application of subparagraphs (c)(iii) and (iv) of this Section 5), plus (ii) the number of shares of Additional Stock issued since such Original Issue Date (increased or decreased to the extent that the number of such shares of Additional Stock shall have been increased or decreased as the result of the application of subparagraphs (c)(iii) and (iv) of this Section 5); (2) in the case of the Series B Preferred Stock, shall be a price equal to the quotient obtained by dividing the total computed under clause (X) below by the total computed under clause (Y) below as follows: (X) an amount equal to the sum of -7- 8 (i) the aggregate purchase price of all shares of Series B Preferred Stock sold to date, plus (ii) the aggregate consideration, if any, received by this corporation for all Additional Stock issued since the Original Issue Date of the Series B Preferred Stock; (Y) an amount equal to the sum of (i) the aggregate purchase price of all shares of the Series B Preferred Stock, divided by the Initial Conversion Price for the Series B Preferred Stock on the Original Issue Date thereof (or such higher or lower Initial Conversion Price as results from the application of subparagraphs (c)(iii) and (iv) of this Section 5), plus (ii) the number of shares of Additional Stock issued since such Original Issue Date (increased or decreased to the extent that the number of such shares of Additional Stock shall have been increased or decreased as the result of the application of subparagraphs (c)(iii) and (iv) of this Section 5); (3) in the case of Series C Preferred Stock, shall be a price equal to the quotient obtained by dividing the total computed under clause (X) below by the total computed under clause (Y) below as follows: (X) an amount equal to the sum of (i) the aggregate purchase price of all shares of Series C Preferred Stock sold to date, plus (ii) the aggregate consideration, if any, received by this corporation for all Additional Stock issued since the Original Issue Date of the Series C Preferred Stock; (Y) an amount equal to the sum of (i) the aggregate purchase price of all shares of the Series C Preferred Stock, divided by the Initial Conversion Price for the Series C Preferred Stock on the Original Issue Date thereof (or such higher or lower Initial Conversion Price as results from the application of subparagraphs (c)(iii) and (iv) of this Section 5), plus -8- 9 (ii) the number of shares of Additional Stock issued since such Original Issue Date (increased or decreased to the extent that the number of such shares of Additional Stock shall have been increased or decreased as the result of the application of subparagraphs (c)(iii) and (iv) of this Section 5); (4) in the case of Series D Preferred Stock, shall be a price equal to the quotient obtained by dividing the total computed under clause (X) below by the total computed under clause (Y) below as follows: (X) an amount equal to the sum of (i) the aggregate purchase price of all shares of Series D Preferred Stock sold to date, plus (ii) the aggregate consideration, if any, received by this corporation for all Additional Stock issued since the Original Issue Date of the Series D Preferred Stock; (Y) an amount equal to the sum of (i) the aggregate purchase price of all shares of the Series D Preferred Stock, divided by the Initial Conversion Price for the Series D Preferred Stock on the Original Issue Date thereof (or such higher or lower Initial Conversion Price as results from the application of subparagraphs (c)(iii) and (iv) of this Section 5), plus (ii) the number of shares of Additional Stock issued since such Original Issue Date (increased or decreased to the extent that the number of such shares of Additional Stock shall have been increased or decreased as the result of the application of subparagraphs (c)(iii) and (iv) of this Section 5); (5) in the case of Series E Preferred Stock, shall be a price equal to the quotient obtained by dividing the total computed under clause (X) below by the total computed under clause (Y) below as follows: -9- 10 (X) an amount equal to the sum of (i) the aggregate purchase price of all shares of Series E Preferred Stock sold to date, plus (ii) the aggregate consideration, if any, received by this corporation for all Additional Stock issued since the Original Issue Date of the Series E Preferred Stock; (Y) an amount equal to the sum of (i) the aggregate purchase price of all shares of the Series E Preferred Stock, divided by the Initial Conversion Price for the Series E Preferred Stock on the Original Issue Date thereof (or such higher or lower Initial Conversion Price as results from the application of subparagraphs (c)(iii) and (iv) of this Section 5), plus (ii) the number of shares of Additional Stock issued since such Original Issue Date (increased or decreased to the extent that the number of such shares of Additional Stock shall have been increased or decreased as the result of the application of subparagraphs (c)(iii) and (iv) of this Section 5); and (6) in the case of Series F Preferred Stock, shall be a price equal to the quotient obtained by dividing the total computed under clause (X) below by the total computed under clause (Y) below as follows: (X) an amount equal to the sum of (i) the aggregate purchase price of all shares of Series F Preferred Stock sold to date, plus (ii) the aggregate consideration, if any, received by this corporation for all Additional Stock issued since the Original Issue Date of the Series F Preferred Stock; (Y) an amount equal to the sum of (i) the aggregate purchase price of all shares of the Series F Preferred Stock, divided by the Initial Conversion Price for the Series F Preferred Stock on the Original Issue Date thereof (or such -10- 11 higher or lower Initial Conversion Price as results from the application of subparagraphs (c)(iii) and (iv) of this Section 5), plus (ii) the number of shares of Additional Stock issued since such Original Issue Date (increased or decreased to the extent that the number of such shares of Additional Stock shall have been increased or decreased as the result of the application of subparagraphs (c)(iii) and (iv) of this Section 5). (B) No adjustment of the Conversion Price for the Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, as the case may be, shall be made in an amount less than one cent per share, and (except to the limited extent provided for in subparagraphs (c)(i)(E)(y), (c)(i)(E)(z) and (c)(iv) of this Section 5) no adjustment of such Conversion Price shall have the effect of increasing the Conversion Price above the Conversion Price in effect immediately prior to such adjustment. (C) In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by this corporation for any underwriting or otherwise in connection with the issuance and sale thereof. (D) In the case of the issuance of the Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined by the Board of Directors irrespective of any accounting treatment. (E) In the case of the issuance of options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities (which are not excluded in the definition of Additional Stock): (w) the aggregate maximum number of shares of Common Stock deliverable upon exercise of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in subparagraphs (c)(i)(C) and (c)(i)(D) of this Section 5), if any, received by this corporation upon the issuance of such options or rights plus the minimum purchase price provided in such options or rights for the Common Stock covered thereby; -11- 12 (x) the aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by the corporation for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the additional consideration, if any, to be received by the corporation upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in subparagraphs (c)(i)(C) and (c)(i)(D) of this Section 5); (y) on any change in the number of shares of Common Stock deliverable upon exercise of such options or rights or conversion of or exchange for such convertible or exchangeable securities, (excluding a change resulting from any antidilution provisions thereof), the Conversion Price as then in effect shall forthwith be readjusted to such Conversion Price as would have obtained had the adjustment made upon the issuance of such options, rights or securities not converted prior to such change or options or rights related to such securities not converted prior to such change been made upon the basis of such change, but no further adjustment shall be made for the actual issuance of Common Stock upon the exercise of any such options or rights or the conversion or exchange of such securities; (z) on the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Conversion Price shall forthwith be readjusted to such Conversion Price as would have obtained had the adjustment made upon the issuance of such options, rights or securities or options or rights related to such securities been made upon the basis of the issuance of only the number of shares of Common Stock actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities. (ii) "Additional Stock" shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to subparagraph (c)(i)(E) of this Section 5) by this corporation after the Original Issue Date of the Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, as the case may be, other than: -12- 13 (A) Common Stock issued pursuant to a transaction described in Section 5(c)(iii) hereof; (B) an additional 122,753 shares of Series E Preferred Stock issued pursuant to a stock split effected by the Amended and Restated Articles of Incorporation filed March 29, 1995; (C) Common Stock first issued after March 31, 1996, or options outstanding on or first issued after March 31, 1996, to officers, directors, employees or consultants of this corporation, whether directly or pursuant to the exercise of options, on terms which shall have been approved by the Company's Board of Directors, up to an aggregate of 2,674,073 shares; (D) Series C Preferred Stock issuable upon exercise of an outstanding warrant to purchase 6,400 shares of Series C Preferred Stock and Series D Preferred Stock issuable upon exercise of outstanding warrants to purchase an aggregate of 24,992 shares of Series D Preferred Stock; (E) Shares of Series E Preferred Stock and shares of Common Stock issuable upon exercise of options to purchase Common Stock issued to shareholders and holders of options of Diamond Animal Health, Inc., up to an aggregate of 1,020,000 shares; (F) With respect to the Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, Common Stock issued or issuable upon conversion of the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock, respectively; and (G) any shares of capital stock issued as a dividend or distribution on Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock; (H) any shares of Common Stock issued, issuable or, pursuant to Section 5(c)(i)(E), deemed to be issued, if the holders of a majority of the outstanding Preferred Stock, voting together on an as-converted basis, agree in writing that such shares shall not constitute Additional Stock; or (I) by way of dividend or distribution on shares of Common Stock excluded from the definition of Additional Stock by the foregoing clauses (A) through (H) or this clause (I). -13- 14 (iii) If the number of shares of Common Stock outstanding at any time after the Original Issue Date of the Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, as the case may be, is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then, following the record date fixed for the determination of holders of Common Stock entitled to receive such stock dividend, subdivision or split-up, the Conversion Price for the Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, as the case may be, shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each such share of Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, as the case may be, shall be increased in proportion to such increase of outstanding shares of Common Stock. (iv) If the number of shares of Common Stock outstanding at any time after the Original Issue Date of the Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, as the case may be, is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price for the Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, as the case may be, shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each such share of Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, as the case may be, shall be decreased in proportion to such decrease in outstanding shares of Common Stock. (d) Other Distributions. In the event this corporation shall at any time after the Original Issue Date of the Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, as the case may be, declare a distribution payable in securities of other persons, evidences of indebtedness issued by this corporation or other persons, assets or options or rights not referred to in Section 5(c)(iii) hereof, then, in each such case, the holders of the Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, as the case may be, shall be entitled to the distributions provided for in Section 3 hereof, and no adjustment to the Conversion Price provided for in this Section 5 shall be applicable. (e) No Impairment. This corporation will not, by amendment of its Articles of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by this corporation, but will at all times in good faith assist in the carrying out of all the provisions of this -14- 15 Section 5 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock against impairment. (f) No Fractional Shares and Certificate as to Adjustments. (i) No fractional shares shall be issuable upon conversion, and the number of shares of Common Stock to be issued shall be rounded to the nearest whole share. (ii) Upon the occurrence of each adjustment or readjustment of the Conversion Price pursuant to this Section 5, this corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and cause independent public accountants selected by this corporation to verify such computation and prepare and furnish to each holder of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock affected thereby a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. This corporation shall, upon the written request at any time of any holder of Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth such adjustment or readjustment, the Conversion Price at the time in effect, and the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of his shares. (g) Notices of Record Date. In the event of any taking by this corporation of a record of the holders of any class or series of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, this corporation shall mail to each holder of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock, at least 20 days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. (h) Reservation of Common Stock Issuable Upon Conversion. This corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock, such number of its shares of Common -15- 16 Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock, this corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. (i) Notices. Any notice required by the provisions of this Section 5 to be given to the holders of shares of Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at his address appearing on the books of this corporation. 6. Voting Rights. (a) Except as otherwise required by law or by Sections 6(b) or 7 hereof, the holders of Preferred Stock and the holders of Common Stock shall be entitled to notice of any shareholders' meeting and to vote together as a class upon any matter submitted to shareholders for a vote. In any matter submitted to shareholders for a vote, each share of Common Stock issued and outstanding shall have one vote and each holder of shares of Preferred Stock shall be entitled to the number of votes equal to the number of shares of Common Stock into which such holder's Preferred Stock is convertible, as adjusted from time to time pursuant to Section 5 hereof, at the record date for determination of the shareholders entitled to vote on such matters, or, if no such record date is established, at the date such vote is taken or any written consent of shareholders is solicited. (b) So long as not fewer than 2,000,000 shares of Series A, Series B, Series C and Series D Preferred Stock (as adjusted for stock dividends, stock splits, stock combinations or the like) are outstanding, if, in any election for directors of the corporation, the holders of the Series A, Series B, Series C and Series D Preferred Stock shall together not have sufficient votes, voting together, to elect a director through exercise of cumulative voting, then the holders of the Series A, Series B, Series C and Series D Preferred Stock, voting as a separate class, shall be entitled to elect one director of the corporation. (c) So long as not fewer than 2,000,000 shares of Series E Preferred Stock (as adjusted for stock dividends, stock splits, stock combinations or the like) are outstanding, if, in any election for directors of the corporation, the holders of the Series E Preferred Stock shall together not have -16- 17 sufficient votes to elect a director through exercise of cumulative voting, then the holders of the Series E Preferred Stock, voting as a separate class, shall be entitled to elect one director of the corporation. (d) So long as not fewer than 2,000,000 shares of Series F Preferred Stock (as adjusted for stock dividends, stock splits, stock combinations or the like) are outstanding, if, in any election for directors of the corporation, the holders of the Series F Preferred Stock shall together not have sufficient votes to elect a director through exercise of cumulative voting, then the holders of the Series F Preferred Stock, voting as a separate class, shall be entitled to elect one director of the corporation. 7. Protective Provisions. This corporation shall not, without first obtaining the approval (by vote or written consent, as provided by law) of (a) the holders of at least a majority of the Series A, Series B, Series C and Series D Preferred Stock voting together as a separate class, (b) the holders of at least a majority of the outstanding Series E Preferred Stock voting as a separate class, and (c) the holders of at least a majority of the outstanding Series F Preferred Stock voting as a separate class: (i) sell, convey or otherwise dispose of all or substantially all of its property or business; (ii) merge into or consolidate with any other corporation (other than a wholly owned subsidiary corporation); (iii) amend or repeal any provision of, or add any provision to, these Articles of Incorporation if such action would alter or change the rights, preferences and privileges of the Preferred Stock in a material and adverse manner; (iv) increase the authorized number of shares of Preferred Stock or any series of Preferred Stock; or (v) create any new class or series of stock having a preference over the Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock with respect to voting, dividends or upon liquidation. 8. Status of Converted or Redeemed Stock. In case any shares of Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock shall be converted pursuant to Section 5 hereof, the shares so converted shall resume the status of authorized but unissued shares of Preferred Stock. -17- 18 Five: 1. Limitation of Directors' Liability. The liability of the directors of this Corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. 2. Indemnification of Corporate Agents. This Corporation is authorized to indemnify the directors and officers of this Corporation to the fullest extent permissible under California law. 3. Repeal or Modification. Any repeal or modification of this Article Five or any provision hereof shall not adversely affect any right of indemnification or limitation of liability of any agent of this Corporation relating to acts or omissions occurring prior to such repeal or modification." * * * * * 3. The foregoing amendment and restatement of this corporation's Articles of Incorporation has been duly approved by the Board of Directors. 4. The foregoing amended and restated articles of incorporation have been duly approved by the required vote of shareholders in accordance with sections 902 and 903 of the California Corporations Code. The total number of outstanding shares entitled to vote on this amendment is 925,684 shares of Common Stock, 300,000 shares of Series A Preferred Stock, 250,000 shares of Series B Preferred Stock, 1,340,000 shares of Series C Preferred Stock, 800,000 shares of Series D Preferred Stock and 3,928,085 shares of Series E Preferred Stock. The percentage vote required was more than fifty percent (50%) of the Common Stock and the Preferred Stock, voting together, more than fifty percent (50%) of the Preferred Stock, voting separately as a class, more than fifty percent (50%) of the Common Stock, voting separately as a class and more than fifty percent (50%) of the Series E Preferred Stock, voting separately as a class. The number of shares voting in favor of the amendment equaled or exceeded the vote required. -18- 19 The undersigned further declares under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of his own knowledge. Date: April 4, 1996 -------------------- /s/ FRED M. SCHWARZER --------------------------------- Fred M. Schwarzer President and Secretary -19- EX-3.1.B 3 FORM OF RESTATED CERT. OF INCORP OF HESKA MERGER 1 EXHIBIT 3.1(b) RESTATED CERTIFICATE OF INCORPORATION OF HESKA MERGER CORPORATION HESKA MERGER 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 Merger 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. THIRD: The 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 MERGER CORPORATION. ARTICLE II The registered office of the corporation within the State of Delaware is located at 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. ARTICLE III The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of Delaware. ARTICLE IV A. Authorized Stock. This corporation is authorized to issue two classes of shares, to be designated Common Stock and Preferred Stock, respectively. This corporation is authorized to issue forty million (40,000,000) 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. The -1- 2 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. B. 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, 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 liquidation, dissolution or winding up of this corporation, whether voluntary or involuntary, holders of the corporation's Common Stock and Preferred Stock shall receive distributions according to the priorities set forth in Section C hereof. C. Preferred Stock. The designation of and the number of shares constituting the initial five series of, and the rights, preferences, privileges and restrictions relating to, the Preferred Stock are as follows: 1. Designation of Series. There is hereby provided a series of Preferred Stock designated Series A Preferred Stock, $.001 par value per share (the "Series A Preferred Stock"), a series of Preferred Stock designated Series B Preferred Stock, $.001 par value per share (the "Series B Preferred Stock"), a series of Preferred Stock designated Series C Preferred Stock, $.001 par value per share (the "Series C Preferred Stock"), a series of Preferred Stock designated Series D Preferred Stock, $.001 par value per share (the "Series D Preferred Stock"), a series of -2- 3 Preferred Stock designated Series E Preferred Stock, $.001 par value per share (the "Series E Preferred Stock") and a series of Preferred Stock designated Series F Preferred Stock, $.001 par value per share (the "Series F Preferred Stock"). 2. Number of Shares. The number of shares constituting the Series A Preferred Stock is fixed at three hundred thousand (300,000) shares. The number of shares constituting the Series B Preferred Stock is fixed at two hundred fifty thousand (250,000) shares. The number of shares constituting the Series C Preferred Stock is fixed at one million three hundred forty-six thousand four hundred (1,346,400) shares. The number of shares constituting the Series D Preferred Stock is fixed at eight hundred twenty-four thousand nine hundred ninety-two (824,992) shares. The number of shares constituting the Series E Preferred Stock is fixed at five million one hundred thousand (5,100,000) shares. The number of shares constituting the Series F Preferred Stock is fixed at three million (3,000,000) shares. 3. Dividend Provisions. The holders of the Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available therefor, dividends at an annual rate of $.08 per share of Series A Preferred Stock (the "Series A Dividend Rate"), $.16 per share of Series B Preferred Stock (the "Series B Dividend Rate"), $.20 per share of Series C Preferred Stock (the "Series C Dividend Rate"), $.26 per share of Series D Preferred Stock (the "Series D Dividend Rate"), $.26 per share of Series E Preferred Stock (the "Series E Dividend Rate"), $.96 per share of Series F Preferred Stock (the "Series F Dividend Rate") payable in preference and priority to any payment of any dividend on Common Stock of the corporation. Such dividends shall not be cumulative and no right to such dividends shall accrue to holders of Preferred Stock unless declared by the Board of Directors. Each share of Preferred Stock shall rank on a parity with every other share of Preferred Stock, irrespective of series, with regard to dividends, and no dividends shall be declared or paid or set apart for payment on the shares of any series of Preferred Stock unless at the same time a dividend for the same percentage of the respective dividend rates shall also be declared or paid or set apart for payment, as the case may be, on the shares of Preferred Stock of each other series then outstanding. No dividends or other distributions shall be made with respect to the Common Stock in any fiscal year (other than dividends payable in Common Stock on shares of Common Stock) until a dividend in the amount of at least the respective Dividend Rates per share of each of the Series A, Series B, Series C, Series D, Series E and Series F Preferred has been declared and paid or set apart during that fiscal year. The holders of Preferred Stock shall participate with holders of Common Stock in the payment of dividends and other distributions in excess of the dividends to be first paid on Preferred Stock ratably on an as-if-converted to Common Stock basis. -3- 4 For purposes of this Section 3, unless the context otherwise requires, distribution shall mean the transfer of cash or property without consideration, whether by way of dividend or otherwise, payable other than in Common Stock, or the purchase or redemption of shares of this corporation (other than repurchases of Common Stock held by employees or consultants of this corporation upon termination of their employment or services pursuant to agreements providing for such repurchase) for cash or property, including any such transfer, purchase or redemption by a subsidiary of this corporation. 4. Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of this corporation, whether voluntary or involuntary, holders of shares of each series of Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of this corporation to the holders of the Common Stock by reason of their ownership thereof, an amount per share as may be fixed for such series (the "Preferential Amount"). The Preferential Amount shall be: (i) for each share of Series A Preferred Stock, $1.00 plus all declared and unpaid dividends to the date of liquidation, distribution or winding up ("Liquidation Date"); (ii) for each share of Series B Preferred Stock, $2.00 plus all declared and unpaid dividends to the Liquidation Date; (iii) for each share of Series C Preferred Stock, $2.50 plus all declared and unpaid dividends to the Liquidation Date; (iv) for each share of Series D Preferred Stock, $3.25 plus all declared and unpaid dividends to the Liquidation Date; (v) for each share of Series E Preferred Stock, $3.25 plus all declared and unpaid dividends to the Liquidation Date; and (vi) for each share of Series F Preferred Stock, $12.00 plus all declared and unpaid dividends to the Liquidation Date. (b)(i) If upon the occurrence of such event the assets thus distributed among the holders of the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock shall be insufficient to permit the payment to such holders of the full Preferential Amount, then the entire assets of this corporation legally available for distribution shall be distributed among the holders of the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock in proportion to the respective Preferential Amounts fixed for each then outstanding series of Preferred Stock. (ii) If assets remain in this corporation after the distributions provided for in subparagraph (a) have been fully made, the holders of Common Stock shall be entitled to receive, prior and in preference to any further distribution of any other of the surplus funds or assets of the corporation to holders of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock by reason of their ownership thereof, an amount equal to $1.20 per share (subject to adjustment for stock dividends, stock splits, stock combinations or the like). (iii) After the distributions have been made as required by subparagraphs (a) and (b)(ii) of this Section, if assets remain in this corporation, the holders of Series A, Series B, Series C, Series D, Series E and Series F -4- 5 Preferred Stock and Common Stock will share in all such remaining assets in the same proportion as the number of shares of Common Stock and Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock (or, if greater, that number of shares of Common Stock as would be outstanding assuming conversion of the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock into Common Stock as provided in Section 5 hereof) then held by each of them bears to the total number of shares of Common Stock and Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock (or, if greater, the total number of shares of Common Stock as would be outstanding assuming conversion of the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock into Common Stock) of the corporation then issued and outstanding. (c)(i) A consolidation or merger of this corporation with or into any other corporation or corporations, in which consolidation or merger the stockholders of the corporation receive distributions in cash or securities of another corporation or corporations as a result of such consolidation or merger (unless the stockholders of the corporation will hold at least fifty percent (50%) of the voting equity securities of the surviving corporation and in substantially the same pro rata portions as each held of the voting equity securities of the corporation immediately prior to the consolidation or merger) or a sale, conveyance or other disposition of all or substantially all of this corporation's property or business, shall be deemed to be a liquidation, dissolution or winding up within the meaning of this Section 4. (ii) In any of such events, if the consideration received by this corporation is other than cash or indebtedness, its value will be deemed to be its fair market value. In the case of publicly traded securities, fair market value shall mean the closing market price for such securities on the date such consolidation, merger or sale is consummated. If the consideration is in a form other than publicly traded securities, its value shall be determined by the Board of Directors of this corporation. 5. Conversion. Holders of outstanding shares of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock shall have conversion rights as follows (the "Conversion Rights"). As used herein, the "Original Issue Date" shall be for the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock, respectively, the date the first share of such respective series was issued by this corporation. (a) Right To Convert. (i) Subject to subparagraph (c) of this Section 5, each share of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share at the office of this corporation or any transfer agent for -5- 6 the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock, as the case may be, into such number of fully paid and nonassessable shares of Common Stock equal to the ratio (the "Conversion Price") determined by dividing the Initial Conversion Price for each respective series by the then effective Conversion Price. As used herein, the term "Initial Conversion Price" shall be: $1.00 per share for the Series A Preferred Stock; $2.00 per share for the Series B Preferred Stock; $2.50 per share for the Series C Preferred Stock; $3.25 per share for the Series D Preferred Stock; $3.25 per share for the Series E Preferred Stock; and $12.00 per share for the Series F Preferred Stock. As used herein, the term "Conversion Price" shall mean, for any share of Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock at any time, the Initial Conversion Price for such share as adjusted from time to time pursuant to the provisions of this Section 5. (ii) Each share of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock shall automatically be converted into such number of fully paid and nonassessable shares of Common Stock at the then effective Conversion Price for the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock, respectively, immediately upon the closing of the issuance of shares following the effectiveness of a registration statement (other than a registration statement with respect to any securities offered pursuant to any employee purchase, savings, option, bonus, appreciation, profit sharing, thrift, incentive or similar plan of the corporation) under the Securities Act of 1933, as amended, covering a firm commitment, underwritten public offering of any of this corporation's Common Stock at an aggregate price to the public exceeding $10,000,000 in cash, provided that the price per share at which the Common Stock is offered is at least $8.00. (b) Mechanics of Conversion. Before any holder of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock shall be entitled to convert the same into shares of Common Stock, such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of this corporation or of any transfer agent for the Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, as the case may be, and shall give written notice by mail, postage prepaid, to this corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. This corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, as the case may be, or to the nominee or nominees thereof, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, as the case may be, to be converted, and the person or persons entitled to receive the shares of -6- 7 Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of shares of Common Stock on such date. (c) Conversion Price Adjustments of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock. The Conversion Price of the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock shall be subject to adjustment from time to time as follows: (i)(A) If this corporation shall issue any Additional Stock (as defined in subsection (ii) of this subsection (c) of this Section 5) without consideration or for a consideration per share less than the Conversion Price for the Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, as the case may be, in effect immediately prior to the issuance of such Additional Stock, the Conversion Price for the Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, as the case may be, in effect immediately prior to each such issuance shall forthwith (except as otherwise provided in this clause (i)) be reduced, as of the opening of business on the date of such issue or sale, to a new Conversion Price which: (1) in the case of Series A Preferred Stock, shall be a price equal to the quotient obtained by dividing the total computed under clause (X) below by the total computed under clause (Y) below as follows: (X) an amount equal to the sum of (i) the aggregate purchase price of all shares of Series A Preferred Stock sold to date, plus (ii) the aggregate consideration, if any, received by this corporation for all Additional Stock issued since the Original Issue Date of the Series A Preferred Stock; (Y) an amount equal to the sum of (i) the aggregate purchase price of all shares of the Series A Preferred Stock, divided by the Initial Conversion Price for the Series A Preferred Stock on the Original Issue Date thereof (or such higher or lower Initial Conversion Price as results from the application of subparagraphs (c)(iii) and (iv) of this Section 5), plus (ii) the number of shares of Additional Stock issued since such Original Issue Date (increased or decreased to the extent that the number of such shares of Additional Stock shall have been increased or decreased as the result of the -7- 8 application of subparagraphs (c)(iii) and (iv) of this Section 5); (2) in the case of the Series B Preferred Stock, shall be a price equal to the quotient obtained by dividing the total computed under clause (X) below by the total computed under clause (Y) below as follows: (X) an amount equal to the sum of (i) the aggregate purchase price of all shares of Series B Preferred Stock sold to date, plus (ii) the aggregate consideration, if any, received by this corporation for all Additional Stock issued since the Original Issue Date of the Series B Preferred Stock; (Y) an amount equal to the sum of (i) the aggregate purchase price of all shares of the Series B Preferred Stock, divided by the Initial Conversion Price for the Series B Preferred Stock on the Original Issue Date thereof (or such higher or lower Initial Conversion Price as results from the application of subparagraphs (c)(iii) and (iv) of this Section 5), plus (ii) the number of shares of Additional Stock issued since such Original Issue Date (increased or decreased to the extent that the number of such shares of Additional Stock shall have been increased or decreased as the result of the application of subparagraphs (c)(iii) and (iv) of this Section 5); (3) in the case of Series C Preferred Stock, shall be a price equal to the quotient obtained by dividing the total computed under clause (X) below by the total computed under clause (Y) below as follows: (X) an amount equal to the sum of (i) the aggregate purchase price of all shares of Series C Preferred Stock sold to date, plus (ii) the aggregate consideration, if any, received by this corporation for all Additional Stock issued since the Original Issue Date of the Series C Preferred Stock; -8- 9 (Y) an amount equal to the sum of (i) the aggregate purchase price of all shares of the Series C Preferred Stock, divided by the Initial Conversion Price for the Series C Preferred Stock on the Original Issue Date thereof (or such higher or lower Initial Conversion Price as results from the application of subparagraphs (c)(iii) and (iv) of this Section 5), plus (ii) the number of shares of Additional Stock issued since such Original Issue Date (increased or decreased to the extent that the number of such shares of Additional Stock shall have been increased or decreased as the result of the application of subparagraphs (c)(iii) and (iv) of this Section 5); (4) in the case of Series D Preferred Stock, shall be a price equal to the quotient obtained by dividing the total computed under clause (X) below by the total computed under clause (Y) below as follows: (X) an amount equal to the sum of (i) the aggregate purchase price of all shares of Series D Preferred Stock sold to date, plus (ii) the aggregate consideration, if any, received by this corporation for all Additional Stock issued since the Original Issue Date of the Series D Preferred Stock; (Y) an amount equal to the sum of (i) the aggregate purchase price of all shares of the Series D Preferred Stock, divided by the Initial Conversion Price for the Series D Preferred Stock on the Original Issue Date thereof (or such higher or lower Initial Conversion Price as results from the application of subparagraphs (c)(iii) and (iv) of this Section 5), plus (ii) the number of shares of Additional Stock issued since such Original Issue Date (increased or decreased to the extent that the number of such shares of Additional Stock shall have been increased or decreased as the result of the application of subparagraphs (c)(iii) and (iv) of this Section 5); -9- 10 (5) in the case of Series E Preferred Stock, shall be a price equal to the quotient obtained by dividing the total computed under clause (X) below by the total computed under clause (Y) below as follows: (X) an amount equal to the sum of (i) the aggregate purchase price of all shares of Series E Preferred Stock sold to date, plus (ii) the aggregate consideration, if any, received by this corporation for all Additional Stock issued since the Original Issue Date of the Series E Preferred Stock; (Y) an amount equal to the sum of (i) the aggregate purchase price of all shares of the Series E Preferred Stock, divided by the Initial Conversion Price for the Series E Preferred Stock on the Original Issue Date thereof (or such higher or lower Initial Conversion Price as results from the application of subparagraphs (c)(iii) and (iv) of this Section 5), plus (ii) the number of shares of Additional Stock issued since such Original Issue Date (increased or decreased to the extent that the number of such shares of Additional Stock shall have been increased or decreased as the result of the application of subparagraphs (c)(iii) and (iv) of this Section 5); and (6) in the case of Series F Preferred Stock, shall be a price equal to the quotient obtained by dividing the total computed under clause (X) below by the total computed under clause (Y) below as follows: (X) an amount equal to the sum of (i) the aggregate purchase price of all shares of Series F Preferred Stock sold to date, plus (ii) the aggregate consideration, if any, received by this corporation for all Additional Stock issued since the Original Issue Date of the Series F Preferred Stock; -10- 11 (Y) an amount equal to the sum of (i) the aggregate purchase price of all shares of the Series F Preferred Stock, divided by the Initial Conversion Price for the Series F Preferred Stock on the Original Issue Date thereof (or such higher or lower Initial Conversion Price as results from the application of subparagraphs (c)(iii) and (iv) of this Section 5), plus (ii) the number of shares of Additional Stock issued since such Original Issue Date (increased or decreased to the extent that the number of such shares of Additional Stock shall have been increased or decreased as the result of the application of subparagraphs (c)(iii) and (iv) of this Section 5). (B) No adjustment of the Conversion Price for the Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, as the case may be, shall be made in an amount less than one cent per share, and (except to the limited extent provided for in subparagraphs (c)(i)(E)(y), (c)(i)(E)(z) and (c)(iv) of this Section 5) no adjustment of such Conversion Price shall have the effect of increasing the Conversion Price above the Conversion Price in effect immediately prior to such adjustment. (C) In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by this corporation for any underwriting or otherwise in connection with the issuance and sale thereof. (D) In the case of the issuance of the Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined by the Board of Directors irrespective of any accounting treatment. (E) In the case of the issuance of options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities (which are not excluded in the definition of Additional Stock): (w) the aggregate maximum number of shares of Common Stock deliverable upon exercise of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a -11- 12 consideration equal to the consideration (determined in the manner provided in subparagraphs (c)(i)(C) and (c)(i)(D) of this Section 5), if any, received by this corporation upon the issuance of such options or rights plus the minimum purchase price provided in such options or rights for the Common Stock covered thereby; (x) the aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by the corporation for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the additional consideration, if any, to be received by the corporation upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in subparagraphs (c)(i)(C) and (c)(i)(D) of this Section 5); (y) on any change in the number of shares of Common Stock deliverable upon exercise of such options or rights or conversion of or exchange for such convertible or exchangeable securities (excluding a change resulting from any antidilution provisions thereof), the Conversion Price as then in effect shall forthwith be readjusted to such Conversion Price as would have obtained had the adjustment made upon the issuance of such options, rights or securities not converted prior to such change or options or rights related to such securities not converted prior to such change been made upon the basis of such change, but no further adjustment shall be made for the actual issuance of Common Stock upon the exercise of any such options or rights or the conversion or exchange of such securities; (z) on the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Conversion Price shall forthwith be readjusted to such Conversion Price as would have obtained had the adjustment made upon the issuance of such options, rights or securities or options or rights related to such securities been made upon the basis of the issuance of only the number of shares of Common Stock actually issued upon the exercise of such options or rights, -12- 13 upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities. (ii) "Additional Stock" shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to subparagraph (c)(i)(E) of this Section 5) by this corporation after the Original Issue Date of the Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, as the case may be, other than: (A) Common Stock issued pursuant to a transaction described in Section 5 (c)(iii) hereof; (B) An additional 122,753 shares of Series E Preferred Stock issued pursuant to a stock split effected on March 29, 1995; (C) Common Stock first issued after March 31, 1996, or options outstanding on or first issued after March 31, 1996, to officers, directors, employees or consultants of this corporation, whether directly or pursuant to the exercise of options, on terms which shall have been approved by the Company's Board of Directors; (D) Series C Preferred Stock issuable upon exercise of an outstanding warrant to purchase 6,400 shares of Series C Preferred Stock and Series D Preferred Stock issuable upon exercise of outstanding warrants to purchase an aggregate of 24,992 shares of Series D Preferred Stock; (E) Shares of Series E Preferred Stock and shares of Common Stock issuable upon exercise of options to purchase Common Stock issued to stockholders and holders of options of Diamond Animal Health, Inc., up to an aggregate of 1,020,000 shares; (F) With respect to the Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, Common Stock issued or issuable upon conversion of the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock, respectively; and (G) Any shares of capital stock issued as a dividend or distribution on Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock; (H) Any shares of Common Stock issued, issuable or, pursuant to Section 5 (c)(i)(E), deemed to be issued, if the holders of a majority of the outstanding Preferred Stock, voting together on an as-converted basis, agree in writing that such shares shall not constitute Additional Stock; or -13- 14 (I) By way of dividend or distribution on shares of Common Stock excluded from the definition of Additional Stock by the foregoing clauses (A) through (H) or this clause (I). (J) Shares of Series E Preferred Stock and shares of Common Stock issuable upon the conversion of such Series E Preferred Stock issued in connection with the acquisition of Bloxham Laboratories Limited, up to an aggregate of 54,000 shares. (iii) If the number of shares of Common Stock outstanding at any time after the Original Issue Date of the Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, as the case may be, is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then, following the record date fixed for the determination of holders of Common Stock entitled to receive such stock dividend, subdivision or split-up, the Conversion Price for the Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, as the case may be, shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each such share of Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, as the case may be, shall be increased in proportion to such increase of outstanding shares of Common Stock. (iv) If the number of shares of Common Stock outstanding at any time after the Original Issue Date of the Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, as the case may be, is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price for the Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, as the case may be, shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each such share of Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, as the case may be, shall be decreased in proportion to such decrease in outstanding shares of Common Stock. (d) Other Distributions. In the event this corporation shall at any time after the Original Issue Date of the Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, as the case may be, declare a distribution payable in securities of other persons, evidences of indebtedness issued by this corporation or other persons, assets or options or rights not referred to in Section 5 (c)(iii) hereof, then, in each such case, the holders of the Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, as the case may be, shall be entitled to the distributions provided for in Section 3 hereof, and no adjustment to the Conversion Price provided for in this Section 5 shall be applicable. (e) No Impairment. This corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, -14- 15 dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by this corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 5 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock against impairment. (f) No Fractional Shares and Certificate as to Adjustments. (i) No fractional shares shall be issuable upon conversion, and the number of shares of Common Stock to be issued shall be rounded to the nearest whole share. (ii) Upon the occurrence of each adjustment or readjustment of the Conversion Price pursuant to this Section 5, this corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and cause independent public accountants selected by this corporation to verify such computation and prepare and furnish to each holder of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock affected thereby a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. This corporation shall, upon the written request at any time of any holder of Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (A) such adjustment or readjustment, (B) the Conversion Price at the time in effect, and (C) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of his shares. (g) Notices of Record Date. In the event of any taking by this corporation of a record of the holders of any class or series of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, this corporation shall mail to each holder of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock, at least 20 days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. (h) Reservation of Common Stock issuable Upon Conversion. This corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series A, Series B, Series C, Series D, -15- 16 Series E and Series F Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock, this corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. (i) Notices. Any notice required by the provisions of this Section 5 to be given to the holders of shares of Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at his address appearing on the books of this corporation. 6. Voting Rights. (a) Except as otherwise required by law or by Sections 6(b) or 7 hereof, the holders of Preferred Stock and the holders of Common Stock shall be entitled to notice of any stockholders' meeting and to vote together as a class upon any matter submitted to stockholders for a vote. In any matter submitted to stockholders for a vote, each share of Common Stock issued and outstanding shall have one vote and each holder of shares of Preferred Stock shall be entitled to the number of votes equal to the number of shares of Common Stock into which such holder's Preferred Stock is convertible, as adjusted from time to time pursuant to Section 5 hereof, at the record date for determination of the stockholders entitled to vote on such matters, or, if no such record date is established, at the date such vote is taken or any written consent of stockholders is solicited. (b) So long as not fewer than 2,000,000 shares of Series A, Series B, Series C and Series D Preferred Stock (as adjusted for stock dividends, stock splits, stock combinations or the like, but excluding, for purposes of this calculation, any shares of Common Stock issued upon conversion of the outstanding Series A, Series B, Series C and Series D Preferred Stock) are outstanding, the holders of the Series A, Series B, Series C and Series D Preferred Stock, voting as a separate class, shall be entitled to elect one director of the corporation. (c) So long as not fewer than 2,000,000 shares of Series E Preferred Stock (as adjusted for stock dividends, stock splits, stock combinations or the like, but excluding, for purposes of this calculation, any shares of Common Stock issued upon conversion of the outstanding Series E Preferred Stock) are outstanding, the holders of the Series E Preferred Stock, voting as a separate class, shall be entitled to elect one director of the corporation. (d) So long as not fewer than 2,000,000 shares of Series F Preferred Stock (as adjusted for stock dividends, stock splits, stock combinations or the like, but excluding, for purposes of this calculation, any shares of Common Stock issued upon conversion of the outstanding Series F -16- 17 Preferred Stock) are outstanding, the holders of the Series F Preferred Stock, voting as a separate class, shall be entitled to elect one director of the corporation. 7. Protective Provisions. This corporation shall not, without first obtaining the approval (by vote or written consent, as provided by law) of (a) the holders of at least a majority of the Series A, Series B, Series C and Series D Preferred Stock voting together as a separate class, (b) the holders of at least a majority of the outstanding Series E Preferred Stock voting as a separate class, and (c) the holders of at least a majority of the outstanding Series F Preferred Stock voting as a separate class: (i) sell, convey or otherwise dispose of all or substantially all of its property or business; (ii) merge into or consolidate with any other corporation (other than a wholly owned subsidiary corporation); (iii) amend or repeal any provision of, or add any provision to, this Certificate of Incorporation if such action would alter or change the rights, preferences and privileges of the Preferred Stock in a material and adverse manner; (iv) increase the authorized number of shares of Preferred Stock or any series of Preferred Stock; or (v) create any new class or series of stock having a preference over the Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock with respect to voting, dividends or upon liquidation. 8. Status of Converted or Redeemed Stock. In case any shares of Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock shall be converted pursuant to Section 5 hereof, the shares so converted shall resume the status of authorized but unissued shares of Preferred Stock. ARTICLE V The corporation is to have perpetual existence. -17- 18 ARTICLE VI In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware: A. Amendment. The board of directors of the corporation is expressly authorized, without the assent or vote of the stockholders, to make, alter, amend, change, add to or repeal the Bylaws of the corporation. B. Elections. Elections of directors need not be by written ballot unless the Bylaws of the corporation shall so provide. C. Corporate Records. 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. ARTICLE VII 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. -18- 19 ARTICLE VIII 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. 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, 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 VIII 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. E. Vote Required to Amend or Repeal. The amendment or repeal of this Article VIII shall require the approval of the holders of shares representing at least sixty six and two-thirds percent (66-2/3%) of the shares of the corporation entitled to vote in the election of directors, voting as one class. ARTICLE IX The corporation reserves the right to amend or repeal any provision contained in this 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. * * * * * -19- 20 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 sole stockholder of the corporation in accordance with Sections 245 and 242 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 Merger Corporation has caused this certificate to be signed by its President and Chief Executive Officer and Secretary this __th day of April, 1997. ------------------------------ Fred M.Schwarzer President and Chief Executive Officer ------------------------------ Deborah E. Robbins Secretary -20- EX-3.2.A 4 BYLAWS OF HESKA CORPORATION 1 EXHIBIT 3.2(a) CERTIFICATE OF ACTION BY BOARD OF DIRECTORS OF HESKA CORPORATION FIXING THE NUMBER OF MEMBERS ON THE BOARD The following resolution was duly adopted by the Board of Directors of Heska Corporation at a special meeting held on March 15, 1997 in Fort Collins, Colorado: RESOLVED, that the number of directors of the Corporation shall be fixed at seven (7) until changed as provided in Section 2 of the Article III of the By-Laws of the Corporation. 2 CERTIFICATE OF AMENDMENT OF BYLAWS OF HESKA CORPORATION The following resolutions were duly adopted by the Board of Directors of Heska Corporation by written consent effective November 12, 1996: RESOLVED, that Article IV, Section 3 of the Bylaws of the Corporation is hereby amended by deleting said Article IV, Section 3 in its entirety and substituting the following therefor: "Section 3. Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board or president or, if both the chairman of the board and the president are absent or are unable or refuse to act, by any vice president or by any two directors. Special meetings of the board of directors shall be held upon four (4) days' notice by mail or forty-eight (48) hours notice delivered personally or by telephone (including a voice messaging system or other system or technology designed to record and communicate messages), telegraph, facsimile, electronic mail or other electronic means. Notices are deemed given or sent (i) at the time a written notice by mail is deposited in the United States mails, postage prepaid, (ii) the time any other written notice, including facsimile, telegram or electronic mail message, is personally delivered to the director or is delivered to a common carrier for transmission or actually transmitted by the person giving the notice by electronic means, to the director, (iii) the time any oral notice is communicated, in person or by telephone, including a voice messaging system or other system or technology designed to record and communicate messages, or wireless, to the director, including the director's designated voice mailbox or address on such a system, or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the place of the meeting if the meeting is to be held at the principal executive office of the corporation, and need not specify the purpose of the meeting." 3 CERTIFICATE OF BOARD OF DIRECTORS OF HESKA CORPORATION FIXING THE NUMBER OF MEMBERS ON THE BOARD The following resolution was duly adopted by the Board of Directors of Heska Corporation by written consent effective as of April 5, 1996: RESOLVED, that conditioned upon and effective upon the closing the acquisition of all of the outstanding capital stock of Diamond Animal Health, Inc. by the Corporation or its subsidiaries (the "Diamond Closing"), the authorized number of directors of the Corporation shall be fixed at eight (8) until changed as provided in Section 2a of Article III of the By-Laws of the Corporation. 4 CERTIFICATE OF AMENDMENT OF BYLAWS OF HESKA CORPORATION The following resolutions were duly adopted by the shareholders of Heska Corporation by written consent effective as of April 3, 1996: RESOLVED, that Article III, Section 2a of the Bylaws of the Corporation is hereby amended to read as follows: "Section 2a. The authorized number of directors shall be not less than five (5) nor more than nine (9). The exact authorized number of directors shall be fixed from time to time, within the limits specified in this Section 2a or in the articles of incorporation, by resolution of the board of directors, or by a by-law or amendment thereof duly adopted by the vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute at least a majority of the required quorum), or by the written consent of the holders of a majority of the outstanding shares entitled to vote." ; and be it further RESOLVED, that the authorized number of directors of the Corporation shall be fixed at seven (7) until changed as provided in Section 2 of Article III of the By-Laws. 5 CERTIFICATE OF AMENDMENT OF BYLAWS OF PARAVAX, INC. The following resolution was duly adopted by the Board of Directors of Paravax, Inc. at a meeting held on June 20, 1994: RESOLVED that subject to the approval of the shareholders of the Company, that Section 2 of Article III of the By-Laws of the Corporation is hereby amended to read in its entirety as set forth on Exhibit A hereto and the Secretary of the Corporation is hereby directed to insert a copy of the By-Laws as so amended in the minute book of the Corporation; and be it further RESOLVED that the authorized number of directors of the Corporation shall be fixed at six (6) until changed as provided in Section 2 of Article III of the By-Laws; and be it further 6 EXHIBIT A Section 2a. The authorized number of directors shall be not less than four (4) nor more than seven (7). The exact authorized number of directors shall be fixed from time to time, with in the limits specified in this Section 2a or in the articles of incorporation, by resolution of the board of directors, or by a by-law or amendment thereof duly adopted by the vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute at least a majority of the required quorum), or by the written consent of the holders of a majority of the outstanding shares entitled to vote. 7 CERTIFICATE OF AMENDMENT OF BYLAWS OF PARAVAX INC. The following was approved by the Shareholders of Paravax, Inc. at an annual meeting held on July 20, 1992: Pursuant to Article III, Section 2a, of the By-laws of the Corporation, the Board of Directors of the Corporation hereby provides for a variable number of authorized directors of the Company between four and seven, initially to be fixed at five and thereafter to be fixed within such limits from time to time by the Board of Directors. 8 CERTIFICATE OF AMENDMENT OF BYLAWS OF PARAVAX, INC. The following resolution was duly adopted by the Board of Directors of Paravax, Inc. at a meeting held on April 13, 1992: RESOLVED that in accordance with Section 2a of Article III of the By-Laws of the Corporation, the number of authorized directors of the Corporation shall be increased to and fixed at five until further action of the Board of Directors or shareholders of the Corporation; and be it further 9 CERTIFICATE OF AMENDMENT OF BYLAWS OF PARAVAX, INC. The following resolution was duly adopted by Unanimous Written Consent by the Board of Directors of Paravax, Inc. on November 30, 1989: "RESOLVED that, Section 2b of Article III of the By-Laws of the Corporation, shall be amended and restated in its entirety (the "Amendment") to read as follows: "Section 2b. Subject to the foregoing provisions for changing the authorized number of directors, the authorized number of directors of the corporation shall be (4)"; 10 BY-LAWS OF PARAVAX, INC. 11 B Y - L A W S of PARAVAX, INC. ARTICLE I Principal Office Section 1. The principal executive office for the transaction of the business of the corporation is hereby fixed and located at 525 University Avenue, Suite 1500, Palo Alto, California. The board of directors may change such principal executive office from one location to another. Section 2. The board of directors may at any time establish other business offices within or without the State of California. ARTICLE II Meetings of Shareholders Section 1. All meetings of the shareholders shall be held at any place within or without the State of California which may be designated either by the board of directors or by the written consent of all shareholders entitled to vote thereat and not present at the meeting given either before or after the meeting and filed with the secretary of the corporation. In the absence of any such designation, shareholders' meetings shall be held at the principal executive office of the corporation. Section 2. The annual meeting of the shareholders of the corporation shall be held on such date and at such time as shall be determined by the board of directors, not more than fifteen (15) months after the date of the preceding annual meeting or, in the case of the first annual meeting, not more than fifteen (15) months after the organization of the corporation. At such meeting, directors shall be elected and any other proper business may be transacted which is within the powers of the shareholders. Written notice of each annual meeting shall be given to each shareholder entitled to vote either personally or by first-class mail or other means of written communications (which includes, without limitation and wherever used in these by-laws, telegraphic and facsimile communication), charges prepaid, addressed to each shareholder at the address appearing on the books of the corporation, or given by the shareholder to the corporation for the purpose of notice. If any notice or report addressed to the shareholder at the address of such shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice or report to the shareholder at such address, all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available for the shareholder upon written demand of the shareholder at the principal executive office of the corporation for a period of one year from the date of the giving of the notice or report to all other shareholders. If no address of a shareholder appears on the books of the corporation or is given by the shareholder to the corporation, notice is duly given to him if sent by mail or other means of written communication addressed to the place where the principal executive office of the corporation is located or if published at least once in a newspaper of general circulation in the county in which said principal executive office is located. 12 All such notices shall be given to each shareholder entitled thereto not less than ten (10) days nor more than sixty (60) days before each annual meeting. Any such notice shall be deemed to have been given at the time when 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. An affidavit of mailing of any such notice in accordance with the foregoing provisions, executed by the secretary, assistant secretary or transfer agent of the corporation shall be prima facie evidence of the giving of the notice. Such notices shall state: (a) The place, date and hour of the meeting; (b) Those matters which the board, at the time of the mailing of the notice, intends to present for action by the shareholders; (c) If directors are to be elected, the names of nominees intended at the time of the notice to be presented by management. for election; (d) The general nature of a proposal, if any, to take action with respect to the approval of (i) a contract or other transaction with an interested director, (ii) an amendment of the articles of incorporation, (iii) a reorganization of the corporation as defined in Section 181 of the California General Corporation Law (the "General Corporation Law"), (iv) a voluntary dissolution of the corporation, or (v) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, if any; and (e) Such other matters, if any, as may be expressly required by statute. Section 3. Special meetings of the shareholders for the purpose of taking any action permitted to be taken by the shareholders under the General Corporation Law and the articles of incorporation of this corporation, may be called by the chairman of the board or the president, or by any vice president, or by the board of directors, or by the holders of shares entitled to cast not less than ten percent (10%) of the votes at the meeting. Upon request in writing that a special meeting of shareholders be called for any proper purpose, directed to the chairman of the board, president or secretary by any person (other than the board of directors) entitled to call a special meeting of shareholders, the officer forthwith shall cause notice to be given to the shareholders entitled to vote that a meeting will be held at a time requested by the person or persons calling the meeting, not less than thirty-five (35) nor more than sixty (60) days after receipt of the request. Except in special cases where other express provision is made by statute, notice of such special meetings shall be given in the same manner and contain the same statements as required for annual meetings of shareholders; provided that notice of any special meeting shall also specify the general nature of the business to be transacted, and no other business may be transacted at such meeting. Section 4. The presence in person or by proxy of the holders of a majority of the shares entitled to vote at any meeting shall constitute a quorum for the transaction of business. The shareholders present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave 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. Section 5. Any shareholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of a majority of the shares, the holders 13 of which are either present in person or represented by proxy thereat, but in the absence of a quorum no other business may be transacted at such meeting, except as provided in Section 4 above. When any meeting of shareholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at a meeting at which the adjournment is taken, except that notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at an adjourned meeting in accordance with Section 2 of this Article II if a new record date for the adjourned meeting is fixed by the board of directors, or if the adjournment is for more than forty-five (45) days from the date set for the original meeting. At any adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. Section 6. Unless a record date for.voting purposes be fixed as provided in Section 1 of Article VI of these by-laws then, subject to the provisions of Sections 702 and 704 of the General Corporation Law, only persons in whose names shares entitled to vote stand on the stock records of the corporation at the close of business on the business day next preceding the day on which notice of the meeting is given or if such notice is waived, at the close of business on the business day next preceding the day on which the meeting of shareholders is held (except that the record date for shareholders entitled to give consent to corporate action without a meeting shall be determined in accordance with Section 8 of this Article II) shall be entitled to receive notice of and to vote at such meeting, and such day shall be the record date for such meeting. Any shareholder entitled to vote on any matter may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal (other than elections of directors), but if the shareholder fails to specify the number of shares such shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares such shareholder is entitled to vote. Such vote may be by voice or by ballot; provided, however, that all elections for directors must be by ballot upon demand made by a shareholder at any election and before the voting begins. The affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively shall constitute at least a majority of the required quorum) shall be the act of the shareholders except as may otherwise be provided by (i) Section 4 of this Article II, (ii) the cumulative voting provisions for the election of directors as stated in this section below, and (iii) the General Corporation Law or the articles of incorporation of this corporation. Subject to the requirements of the next sentence, every shareholder entitled to vote at any election for directors may cumulate his votes and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which his shares are normally entitled, or distribute his votes on the same principle among as many candidates as he shall think fit. No shareholder shall be entitled to cumulate votes for a candidate or candidates unless the names of such candidate or candidates have been placed in nomination prior to the voting and the shareholder has given notice at the meeting prior to the voting of the shareholder's intention to cumulate his votes. If any one shareholder has given such notice, all shareholders may cumulate their votes for candidates in nomination. The candidates receiving the highest number of affirmative votes of shares entitled to be voted for them, up to the number of directors to be elected, shall be elected. Section 7. The transactions of any meeting of shareholders, either annual or special, however called and noticed, and wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote, not present in person or by proxy, signs a written waiver of notice or a consent to a holding of the meeting, or an approval of the minutes thereof. The waiver of notice, consent or approval need not specify either the business to be transacted or the purpose of any regular or special meeting of shareholders, except that if action is taken or proposed to be taken for approval of any of those 14 matters specified in subparagraph (d) of the third paragraph of Section 2 of this Article II, the waiver of notice, consent or approval shall state the general nature of such proposal. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance of a person at a meeting shall also constitute a waiver of notice of and presence at such meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened, and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters required to be included in the notice but not so included, if such objection is expressly made at the meeting. Section 8. Directors may be elected without a meeting by a consent in writing, setting forth the action so taken, signed by all of the persons who would be entitled to vote for the election of directors; in addition a director may be elected at any time to fill a vacancy (other than a vacancy created by removal) not filled by the directors by the written consent of persons holding a majority of the outstanding shares entitled to vote for the election of directors. Notice of such election shall be given to nonconsenting shareholders if required by this Section 8. Any other action which, under any provision of the General Corporation Law, may be taken at a meeting of the shareholders, may be taken without a meeting, and without notice except as hereinafter set forth, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares 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. All such consents shall be filed with the secretary of the corporation and shall be maintained in the corporate records. Unless the consents of all shareholders entitled to vote have been solicited in writing: (a) Notice of any proposed shareholder approval of (i) a contract or other transaction with an interested director; (ii) indemnification of an agent of the corporation as authorized by Section 9 of Article IV of these by-laws; (iii) a reorganization of the corporation as defined in Section 181 of the General Corporation Law; or (iv) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, if any, without a meeting by less than unanimous written consent, shall be given at least ten (10) days before the consummation of the action authorized by such approval; and (b) Prompt notice shall be given of the taking of any other corporate action approved by shareholders without a meeting by less than unanimous written consent, to those shareholders entitled to vote who have not consented in writing. Such notices shall be given in the manner provided in Section 2 of Article II of these by-laws. Unless, as provided in Section 1 of Article VI of these by-laws, the board of directors has fixed a record date for the determination of shareholders entitled to notice of and to give such written consent, the record date for such determination shall be (a) the day on which the first written consent is given, when no prior action by the board of directors has been taken, or (b) the close of business on the day the board of directors adopts the resolution relating to such action. 15 Any shareholder giving a written consent, or the shareholder's proxyholders, or a transferee of the shares or a personal representative of the shareholder or their respective proxyholders, may revoke the consent by a writing received by the corporation prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the secretary of the corporation, but may not do so thereafter. Such revocation is effective upon its receipt by the secretary of the corporation. Section 9. Every person entitled to vote shares or execute consents shall have the right to do so either in person or by one or more agents authorized by a written proxy executed by such person or his duly authorized agent and delivered to the secretary of the corporation. A proxy shall be deemed executed if the shareholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the shareholder or the shareholder's attorney in fact. Any proxy duly executed which does not state that it is irrevocable shall continue in full force and effect until (a) a writing stating that the proxy is revoked is delivered to the secretary of the corporation, (b) a proxy bearing a later date is executed by the person who executed the prior proxy and is presented to the meeting, (c) as to any meeting, by attendance at such meeting and voting in person by the person executing the proxy or (d) written notice of the death or incapacity of the maker of such proxy is received by the corporation before the vote pursuant thereto is counted; provided that no such proxy shall be valid after the expiration of eleven (11) months from the date of its execution, unless otherwise provided in the proxy. The revocability of a proxy which states on its face that it is irrevocable shall be governed by the provisions of Sections 705(e) and (f) of the General Corporation Law. Section 10. In advance of any meeting of shareholders, the board of directors may appoint any persons other than nominees for office as inspectors of election to act at such meeting and any adjournment thereof. If inspectors of election be not so appointed, the chairman of any such meeting may, and on the request of any shareholder or his proxy shall, make such appointment at the meeting. The number of inspectors shall be either one or three. If appointed at a meeting on the request of one or more shareholders or proxies, the majority of shares represented in person or by proxy shall determine whether one or three inspectors are to be appointed. In case any person appointed as inspector fails to appear or fails or refuses to act, the vacancy may, and on the request of any shareholder or a shareholder's proxy shall, be filled by appointment by the board of directors in advance of the meeting, or at the meeting by the chairman of the meeting. The duties of such inspectors shall be as prescribed by Section 707 of the General Corporation Law and shall include: determining the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the authenticity, validity and effect of proxies; receiving votes, ballots or consents; hearing and determining all challenges and questions in any way arising in connection with the right to vote; counting and tabulating all votes or consents; determining when the polls shall close; determining the result; and such acts as may be proper to conduct the election or vote with fairness to all shareholders. In the determination of the validity and effect of proxies the dates contained on the forms of proxy shall presumptively determine the order of execution of the proxies, regardless of the postmark dates on the envelopes in which they are mailed. The inspectors of election shall perform their duties impartially, in good faith, to the best of their ability and as expeditiously as is practical. If there are three inspectors of election, the decision, act or certificate of a majority is effective in all respects as the decision, act or certificate of all. Any report or certificate made by the inspectors of election is prima facie evidence of the facts stated therein. 16 ARTICLE III Board of Directors Section 1. Subject to the provisions of the General Corporation Law and any limitations in the articles of incorporation and these by-laws as to action to be authorized or approved by the shareholders, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. Without prejudice to such general powers, but subject to the same limitations, it is hereby expressly declared that the board of directors shall have the following powers: First: To conduct, manage and control the affairs and business of the corporation and to make such rules and regulations therefor, not inconsistent with law or with the articles of incorporation or with the by-laws, as they may deem best; Second: To elect and remove at pleasure the officers, agents and employees of the corporation, prescribe their duties and fix their compensation; Third: To authorize the issue of shares of stock of the corporation from time to time upon such terms as may be lawful, in consideration of money paid, labor done, services actually rendered to the corporation or for its benefit or in its formation or reorganization, debts or securities canceled, and tangible or intangible property actually received, but neither promissory notes of the purchaser (unless adequately secured by collateral other than the shares acquired or unless permitted by Section 408 of the General Corporation Law) nor future services shall constitute payment or part payment for the shares of the corporation; Fourth: To borrow money and incur indebtedness for the purposes of the corporation and to cause to be executed and delivered therefor, in the corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecations or other evidences of debt and securities therefor; Fifth: To alter, repeal or amend, from time to time, and at any time, these by-laws and any and all amendments of the same, and from time to time, and at any time, to make and adopt such new and additional by-laws as may be necessary and proper, subject to the power of the shareholders to adopt, amend or repeal such by-laws, or to revoke the delegation of authority of the directors, as provided by law or by Article VIII of these by-laws; and Sixth: By resolution adopted by a majority of the authorized number of directors, to designate an executive and other committees, each consisting of two or more directors, to serve at the pleasure of the board, and to prescribe the manner in which proceedings of such committee shall be conducted. The 17 appointment of members or alternate members (who may replace any absent member at any meeting of the committee) of a committee requires the vote of a majority of the authorized number of directors. Any such committee, to the extent provided in a resolution of the board, shall have all of the authority of the board, except with respect to: (i) The approval of any action for which the General Corporation Law or the articles of incorporation also require shareholder approval; (ii) The filling of vacancies on the board or in any committee; (iii) The fixing of compensation of the directors for serving on the board or on any committee; (iv) The adoption, amendment or repeal of by-laws; (v) The amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable; (vi) Any distribution to the shareholders, except at a rate or in a periodic amount or within a price range determined by the board; and (vii) The appointment of other committees of the board or the members thereof. Section 2a. The authorized number of directors shall not be less than three (3) nor more than five (5). The exact authorized number of directors shall be fixed from time to time, within the limits specified in this Section 2a or in the articles of incorporation, by resolution of the board of directors, or by a by-law or amendment thereof duly adopted by the vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute at least a majority of the required quorum), or by the written consent of the holders, of a majority of the outstanding shares entitled to vote. Section 2b. Subject to the foregoing provisions for changing the authorized number of directors, the authorized number of directors of this corporation shall initially be three (3). Section 3. The directors shall be elected at each annual of shareholders, but if any such annual meeting is not held or the directors are not elected thereat, the directors may be elected at any special meeting of shareholders held for that purpose. Each director, including a 18 director elected to fill a vacancy, shall hold office until his successor is elected, except as otherwise provided by statute. Section 4. A vacancy in the board of directors shall be deemed to exist in case of the death, resignation or removal of any director, if the authorized number of directors be increased, or if the shareholders fail, at any annual or special meeting of shareholders at which any director or directors are elected, to elect the full authorized number of directors to be voted for at that meeting. The board of directors may declare vacant the office of a director who has been declared of unsound mind by an order of court or has been convicted of a felony. Vacancies in the board of directors, except for a vacancy created by the removal of a director, may be filled by a majority of the directors then in office, whether or not less than a quorum, or by a sole remaining director, and each director so elected shall hold office until his successor is elected at an annual or a special meeting of the shareholders. A vacancy in the board of directors created by the removal of a director may only be filled by the vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute at least a majority of the required quorum), or by the written consent of the holders of all of the outstanding shares. The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors. Any such election by written consent other than to fill a vacancy created by removal shall require the consent of holders of a majority of the outstanding shares entitled to vote. Any director may resign effective upon giving written notice to the chairman of the board, the president, the secretary or the board of directors of the corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the board of directors accepts the resignation of a director tendered to take effect at a future time, the board or the shareholders shall have power to elect a successor to take office when the resignation is to become effective. No reduction of the authorized number of the directors shall have the effect of removing any director prior to the expiration of his term of office. 19 ARTICLE IV Meetings of Directors Section 1. Regular meetings of the board of directors shall be held at any place within or without the State of California that has been designated from time to time by the board of directors. In the absence of such designation, regular meetings shall be held at the principal executive office of the corporation, except as provided in Section 2. Special meetings of the board of directors may be held at any place within or without the State of California which has been designated in the notice of the meeting, or, if not designated in the notice or if there is no notice, at the principal executive office of the corporation. Section 2. Immediately following each annual meeting of the shareholders there shall be a regular meeting of the board of directors of the corporation at the place of said annual meeting or at such other place as shall have been designated by the board of directors for the purpose of organization, election of officers and the transaction of other business. Other regular meetings of the board of directors shall be held without call on such date and time as may be fixed by the board of directors; provided, however, that should any such day fall on a legal holiday, then said meeting shall be held at the same time on the next business day thereafter ensuing which is not a legal holiday. Notice of regular meetings of the directors is hereby dispensed with and no notice whatever of any such meeting need be given, provided that notice of any change in the time or place of regular meetings shall be given to all of the directors in the same manner as notice for special meetings of the board of directors. Section 3. Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board or president or, if both the chairman of the board and the president are absent or are unable or refuse to act, by any vice president or by any two directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director, or sent by first-class mail or telegram or facsimile transmission, charges prepaid, addressed to him at his address as it appears upon the records of the corporation or, if it is not so shown on the records and is not readily ascertainable, at the place at which the meetings of the directors are regularly held. In case such notice is mailed, it shall be deposited in the United States mail at least four (4) days prior to the time of the holding of the meeting. In case such notice is telegraphed or sent by facsimile transmission, it shall be delivered to a common carrier for transmission to the director or actually transmitted by the person giving the notice by electronic means to the director at least forty-eight (48) hours prior to the time of the holding of the meeting. In case such notice is delivered personally or by telephone as above provided, it shall be so delivered at least twenty-four (24) hours prior to the time of the holding of the meeting. Any notice given personally or by telephone may be communicated to either the director or to a person at the office of the director whom the person giving the notice has reason to believe will promptly communicate it to the director. Such deposit in the mail, delivery to a common carrier, transmission by electronic means or delivery, personally or by telephone, as above provided, shall be due, legal and personal notice to such directors. The notice need not specify the place of the meeting if the meeting is to be held at the principal executive office of the corporation, and need not specify the purpose of the meeting. Section 4. Presence of a majority of the authorized number of directors at a meeting of the board of directors constitutes a quorum for the transaction of business, except as hereinafter provided. Members of the board may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the board of directors, subject to the provisions of Sections 310, 311 and 317 of the General 20 Corporation Law. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, provided that any action taken is approved by at least a majority of the required quorum for such meeting. A majority of the directors present, whether or not a quorum is present, may adjourn any meeting to another time and place. If the meeting is adjourned for more than twenty-four (24) hours, notice of any adjournment to another time or place (other than adjournments until the time fixed for the next regular meeting of the board of directors, as to which no notice is required) shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of the adjournment. Section 5. 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. Section 6. Any action required or permitted to be taken by the board of directors, may be taken without a meeting if all members of the board shall individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the board. Such action by written consent shall have the same force and effect as a unanimous vote of such directors. Section 7. The provisions of this Article IV shall also apply, with necessary changes in points of detail, to committees of the board of directors, if any, and to actions by such committees (except for the first sentence of Section 2 of Article IV, which shall not apply, and except that special meetings of a committee may also be called at any time by any two members of the committee), unless otherwise provided by these by-laws or by the resolution of the board of directors designating such committees. For such purpose, references to "the board" or "the board of directors" shall be deemed to refer to each such committee and references to "directors" and "members of the board" shall be deemed to refer to members of the committee. Section 8. Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement for expenses, as may be fixed or determined by resolution of the board. Section 9. The corporation shall, to the maximum extent permitted by the General Corporation Law, indemnify each of its agents against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding arising by reason of the fact that any such person is or was an agent of the corporation. For purposes of this Section, an "agent" of the corporation includes any person who is or was a director, officer, employee or other agent of the corporation, or who is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or who was a director, officer, employee or agent of a corporation which was a predecessor of the corporation or of another enterprise at the request of such predecessor corporation. 21 ARTICLE V Officers Section 1. The officers of the corporation shall be a chairman of the board or a president, or both, a secretary, and a treasurer, who shall also be the chief financial officer of the corporation. The corporation may also have, at the discretion of the board of directors, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and such other officers as may be designated from time to time by the board of directors. Any number of offices may be held by the same person. The officers shall be elected by the board of directors and shall hold office at the pleasure of such board. Chairman of the Board Section 2. The chairman of the board, if there is such an officer, shall, if present, preside at all meetings of the board of directors and exercise and perform such other powers and duties as may be from time to time assigned to him by the board of directors or prescribed by the by-laws. If there is no president, the chairman of the board shall, in addition, be the general manager and chief executive officer of the corporation and shall have the powers and duties prescribed in Section 3 of Article V of these by-laws. President Section 3. Subject to such powers and duties, if any, as may be prescribed by these by-laws or the board of directors for the chairman of the board, if there is such an officer, the president shall be the general manager and chief executive officer of the corporation and shall, subject to the control of the board of directors, have general supervision, direction and control of the business and officers of the corporation. He shall preside at all meetings of the shareholders and, in the absence of the chairman of the board, or if there is no chairman, at all meetings of the board of directors. He shall have all of the powers and shall perform all of the duties which are ordinarily inherent in the office of the president, and he shall have such further powers and shall perform such further duties as may be prescribed for him by the board of directors. Vice Presidents Section 4. In the absence or disability or refusal to act of the president, the vice presidents in order of their rank as fixed by the board of directors, or, if not ranked, the vice president designated by the president or the board of directors, shall perform all of the duties of the president and when so acting shall have all the powers of and be subject to all the restrictions upon the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them, respectively, by the board of directors or the by-laws. 22 Secretary Section 5. The secretary shall keep or cause to be kept at the principal executive office of the corporation or such other place as the board of directors may order, a book of minutes of all proceedings of the shareholders, the board of directors and committees of the board, with the time and place of holding, whether regular or special, and if special how authorized, the notice thereof given, the names of those present at directors' and committee meetings, and the number of shares present or represented at shareholders' meetings. The secretary shall keep or cause to be kept at the principal executive office or at the office of the corporation's transfer agent a record of shareholders or a duplicate record of shareholders showing the names of the shareholders and their addresses, the number of shares 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. The secretary or an assistant secretary, or, if they are absent or unable or refuse to act, any other officer of the corporation, shall give or cause to be given notice of all the meetings of the shareholders, the board of directors and committees of the board required by the by-laws or by law to be given, and he shall keep the seal of the corporation, if any, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by the by-laws. Section 6. It shall be the duty of the assistant secretaries to assist the secretary in the performance of his duties and generally to perform such other duties as may be delegated to them by the board of directors. Treasurer Section 7. The treasurer shall be the chief financial officer of the corporation and shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of account of the corporation. He shall receive and deposit all moneys and other valuables belonging to the corporation in the name and to the credit of the corporation and shall disburse the same only in such manner as the board of directors or the appropriate officers of the corporation may from time to time determine, shall render to the president and the board of directors, whenever they request it, an account of all his transactions as treasurer and of the financial condition of the corporation, and shall perform such further duties as the board of directors may require. Section 8. It shall be the duty of the assistant treasurers to assist the treasurer in the performance of his duties and generally to perform such other duties as may be delegated to them by the board of directors. ARTICLE VI Miscellaneous Record Date Section 1. The board of directors may fix a time in the future as a record date for the determination of the shareholders entitled to notice of and to vote at any meeting of shareholders or entitled to give consent to corporate action in writing without a meeting, to receive any report, to receive any dividend or distribution, or any allotment of rights, or to exercise rights in respect of any change, conversion, or exchange of shares. The record date so fixed shall be not more than sixty (60) days nor less than ten (10) days prior to the date of any 23 meeting, nor more than sixty (60) days prior to any other event for the purposes of which it is fixed. When a record date is so fixed, only shareholders of record at the close of business on that date are entitled to notice of and to vote at any such meeting, to give consent without a meeting, to receive any report, to receive a dividend, distribution, or allotment of rights, or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided by statute or in the articles of incorporation or by-laws. If the board of directors does not so fix a record date: (a) The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders 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. (b) The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, when no prior action by the board has been taken, shall be the day on which the first written consent is given. (c) The record date for determining shareholders for any other purpose shall be at the close of business on the day on which the board adopts the resolution relating thereto, or the sixtieth (60th) day prior to the date of such other action, whichever is later. Inspection of Corporate Records Section 2. The accounting books and records, the record of shareholders, and minutes of proceedings of the shareholders and the board and committees of the board of this corporation and any subsidiary of this corporation shall be open to inspection upon the written demand on the corporation of any shareholder or holder of a voting trust certificate at any reasonable time during usual business hours, for a purpose reasonably related to such holder's interests as a shareholder or as the holder of such voting trust certificate. Such inspection by a shareholder or holder of a voting trust certificate may be made in person or by agent or attorney, and the right of inspection includes the right to copy and make extracts. A shareholder or shareholders holding at least five percent (5%) in the aggregate of the outstanding voting shares of the corporation or who hold at least one percent (1%) of such voting shares and have filed a Schedule 14B with the United States Securities and Exchange Commission relating to the election of directors of the corporation shall have (in person, or by agent or attorney) the right to inspect and copy the record of shareholders' names and addresses and shareholdings during usual business hours upon five (5) business days' prior written demand upon the corporation and to obtain from the transfer agent for the corporation, upon, written demand and upon the tender of its usual charges, a list of the shareholders' names and addresses, who are entitled to vote for the election of directors, and their shareholdings, as of the most recent record date for which it has been compiled or as of a date specified by the shareholder subsequent to the date of demand. The list shall be made available on or before the later of five 24 (5) business days after the demand is received or the date specified therein as the date as of which the list is to be compiled. Every director shall have the absolute right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the corporation and its subsidiary corporations. Such inspection by a director may be made in person or by agent or attorney and the right of inspection includes the right to copy and make extracts. Certificates for Shares Section 3. Every holder of shares in the corporation shall be entitled to have a certificate signed in the name of the corporation by the chairman or vice chairman of the board or the president or a vice president and by the treasurer or an assistant treasurer or the secretary or any assistant secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be 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 such person were an officer, transfer agent or registrar at the date of issue. If the shares of the corporation are classified or if any class of shares has two or more series, there shall appear on the certificate one of the following: (a) A statement of the rights, preferences, privileges and restrictions granted to or imposed upon each class or series of shares authorized to be issued and upon the holders thereof. (b) A summary of such rights, preferences, privileges and restrictions with reference to the provisions of the articles and any certificates of determination establishing the same. (c) A statement setting forth the office or agency of the corporation from which shareholders may obtain, upon request and without charge, a copy of the statement referred to in subdivision (a). There shall also appear on the certificate (unless summarized under subparagraphs (a) or (b) above) the statements required by all of the following clauses to the extent applicable: (a) The fact that the shares are subject to restrictions upon transfer. (b) If the shares are assessable or are not fully paid, a statement that they are assessable or the statements required by subdivision (d) of Section 409 of the General Corporation Law if they are not fully paid. 25 (c) The fact that the shares are subject to a voting agreement under subdivision (a) of Section 706 or an irrevocable proxy under subdivision (e) of Section 705 of the General Corporation Law or restrictions upon voting rights contractually imposed by the corporation. (d) The fact that the shares are redeemable. (e) The fact that the shares are convertible and the period for conversion. Any such statement or reference thereto required by subparagraphs (a) or (b) above shall appear conspicuously on the face of the certificate. Any such certificate shall also contain such legend or other statement as may be required by the California Corporate Securities Law of 1968, the Federal securities laws, and any agreement between the corporation and the issuee thereof. Certificates for shares may be issued prior to full payment under such restrictions and for such purposes as the board of directors or the by-laws may provide; provided, however, that any such certificate so issued prior to full payment shall state on the face thereof the amount remaining unpaid and the terms of payment, thereof. No new certificate for shares shall be issued in lieu of an old certificate unless the latter is surrendered and cancelled at the same time; provided, however, that a new certificate will be issued without the surrender and cancellation of the old certificate if (a) the old certificate is lost, apparently destroyed or wrongfully taken; (b) the request for the issuance of the new certificate is made within a reasonable time after the owner of the old certificate has notice of its loss, destruction or theft; (c) the request for the issuance of a new certificate is made prior to the receipt of notice by the corporation that the old certificate has been acquired by a bona fide purchaser; (d) the owner of the old, certificate files a sufficient indemnity bond with or provides other adequate security to the corporation; and (e) the owner satisfies any other reasonable requirements imposed by the corporation. In the event of the issuance of a new certificate, the rights and liabilities of the corporation, and of the, holders of the old and new certificates, shall be governed by the provisions of Sections 8104 and 8405 of the California Commercial Code. Representation of Shares of Other Corporations Section 4. 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 other 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. Inspection of By-laws Section 5. The corporation shall keep in its principal executive office in California, or if its principal executive office is not in California, then at its principal business office in California (or otherwise provide upon written request of any shareholder), the original or a copy of the by-laws as amended to date, certified by the secretary, which shall be open to inspection by the shareholders at all reasonable times during office hours. 26 Construction and Definitions Section 6. Unless the context otherwise requires, the general provisions, rules of construction and definitions contained in the General Corporation Law shall govern the construction of these by-laws. Without limiting the generality of the foregoing, the masculine gender includes the feminine and neuter, the singular number includes the plural and the plural number includes the singular, and the term "person" includes a corporation as well as a natural person. ARTICLE VII Corporate Loans and Guarantees Section 1. The provisions contained in this Article VII set forth the terms and conditions by which the corporation may make a loan or guaranty to the officers and directors of the corporation except as otherwise permitted or limited by the General Corporation Law or any other applicable law. Section 2. The corporation shall not make any loan of money or property to, or guarantee the obligation of, any director or officer of the corporation, unless the transaction or an employee benefit plan authorizing such loans or guaranties, after disclosure of the right under such a plan to include officers or directors, is approved by (a) the shareholders, with the shares owned by the director or officer, or by the directors or officers then eligible to participate in such plan, not being entitled to vote thereon, or (b) the unanimous vote of the shareholders. Section 3. The corporation shall not make any loan of money or property to, or guarantee the obligation of, any person upon the security of shares of the corporation or of its parent, unless the loan or guaranty is (a) otherwise adequately secured, (b) made pursuant to an employee benefit plan permitted, by Section 408 of the General Corporation Law, (c) approved by the shareholders with the shares owned by the borrower not entitled to vote, or (d) approved by unanimous vote of the shareholders. Section 4. Notwithstanding anything to the contrary contained in Section 2 of this Article VII, the corporation may advance money to a director or officer of the corporation for any expenses reasonably anticipated to be incurred in the performance of the duties of such director or officer, provided that in the absence of such advance, such director or officer would be entitled to be reimbursed for such expenses by such corporation, its parent or any subsidiary. Section 5. The provisions of Section 2 of this Article VII do not apply to the payment of premiums in whole or in part by the corporation on a life insurance policy on the life of a director or officer of the corporation so long as repayment to the corporation of the amount paid by it is secured by the proceeds of the policy and its cash surrender value. 27 ARTICLE VIII Amendments Section 1. New by-laws may be adopted or these by-laws may be amended or repealed by the affirmative vote or written consent of a majority of the outstanding shares entitled to vote, except as otherwise provided by law or by the articles of incorporation or these by-laws. Section 2. Subject to the right of shareholders as provided in Section 1 of this Article to adopt, amend or repeal by-laws, and except as otherwise provided by law or by the articles of incorporation, by-laws (other than a by-law or amendment thereof changing the authorized number of directors), may be adopted, amended or repealed by the board of directors. ARTICLE IX Annual and Other Reports Section 1. (a) So long as the corporation shall have fewer than one hundred shareholders of record (determined as provided in Section 605 of the General Corporation Law), the requirement of Section 1501(a) of said law that an annual report be sent to the shareholders is expressly waived. (b) Notwithstanding subdivision (a) of this Section, the corporation shall, upon the written request of any shareholder made more than one hundred twenty (120) days after the close of a fiscal year, deliver or mail to the person making the request, within thirty (30) days thereafter, the financial statements required by Section 1501(a) of the General Corporation Law. Section 2. A shareholder or shareholders holding at least five percent (5%) of the outstanding shares of any class of the corporation may make a written request to the corporation for an income statement of the corporation for the three-month, six-month or nine-month period of the current fiscal year ended more than thirty (30) days prior to the date of the request and a balance sheet of the corporation as of the end of such period and, in addition, if no annual report for the last fiscal year has been sent to shareholders, the statements referred to in Section 1501(a) of the General Corporation Law for the last fiscal year. The corporation shall deliver or mail the statements to the person making the request within thirty (30) days thereafter. A copy of any such statements shall be kept on file in the principal executive office of the corporation for twelve (12) months and they shall be exhibited at all reasonable times to any shareholder demanding an examination of them or a copy shall be mailed to such shareholder. The quarterly income statements and balance sheets referred to in this Section shall be accompanied by the report thereon, if any, of any independent accountants engaged by the corporation or the certificate of an authorized officer of the corporation that such financial statements were prepared without audit from the books and records of the corporation. EX-3.2.B 5 BYLAWS OF HESKA MERGER CORPORATION 1 EXHIBIT 3.2(b) B Y L A W S OF HESKA MERGER CORPORATION (A DELAWARE CORPORATION) 2 TABLE OF CONTENTS
Page ---- ARTICLE 1: Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Principal Office. . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Additional Offices. . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE 2: Meeting of Stockholders . . . . . . . . . . . . . . . . . . . . 1 2.1 Place of Meeting. . . . . . . . . . . . . . . . . . . . . . . 1 2.2 Annual Meeting. . . . . . . . . . . . . . . . . . . . . . . . 1 2.3 Special Meetings. . . . . . . . . . . . . . . . . . . . . . . 1 2.4 Action Without a Meeting. . . . . . . . . . . . . . . . . . . 1 2.5 Notice of Meetings. . . . . . . . . . . . . . . . . . . . . . 2 2.6 Business Matter of a Special Meeting. . . . . . . . . . . . . 2 2.7 List of Stockholders. . . . . . . . . . . . . . . . . . . . . 2 2.8 Organization and Conduct of Business. . . . . . . . . . . . . 3 2.9 Quorum and Adjournments. . . . . . . . . . . . . . . . . . . . 3 2.10 Voting Rights. . . . . . . . . . . . . . . . . . . . . . . . 3 2.11 Majority Vote. . . . . . . . . . . . . . . . . . . . . . . . 3 2.12 Record Date for Stockholder Notice and Voting. . . . . . . . 3 2.13 Proxies. . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.14 Inspectors of Election. . . . . . . . . . . . . . . . . . . . 4 ARTICLE 3: Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3.1 Number; Qualifications. . . . . . . . . . . . . . . . . . . . 5 3.2 Resignation and Vacancies. . . . . . . . . . . . . . . . . . . 5 3.3 Removal of Directors. . . . . . . . . . . . . . . . . . . . . 5 3.4 Powers. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3.5 Place of Meetings. . . . . . . . . . . . . . . . . . . . . . . 5 3.6 Annual Meetings. . . . . . . . . . . . . . . . . . . . . . . . 5 3.7 Regular Meetings. . . . . . . . . . . . . . . . . . . . . . . 5 3.8 Special Meetings. . . . . . . . . . . . . . . . . . . . . . . 6 3.9 Quorum and Adjournments. . . . . . . . . . . . . . . . . . . . 6 3.10 Action Without Meeting. . . . . . . . . . . . . . . . . . . . 6 3.11 Telephone Meetings. . . . . . . . . . . . . . . . . . . . . . 6 3.12 Waiver of Notice. . . . . . . . . . . . . . . . . . . . . . . 6 3.13 Fees and Compensation of Directors. . . . . . . . . . . . . . 6 3.14 Rights of Inspection. . . . . . . . . . . . . . . . . . . . . 7 ARTICLE 4: Committees of Directors . . . . . . . . . . . . . . . . . . . . 7 4.1 Selection. . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4.2 Power. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4.3 Committee Minutes. . . . . . . . . . . . . . . . . . . . . . . 7
-i- 3 ARTICLE 5: Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 5.1 Officers Designated. . . . . . . . . . . . . . . . . . . . . . 8 5.2 Appointment of Officers. . . . . . . . . . . . . . . . . . . . 8 5.3 Subordinate Officers. . . . . . . . . . . . . . . . . . . . . 8 5.4 Removal and Resignation of Officers. . . . . . . . . . . . . . 8 5.5 Vacancies in Offices. . . . . . . . . . . . . . . . . . . . . 8 5.6 Compensation. . . . . . . . . . . . . . . . . . . . . . . . . 8 5.7 The Chairman of the Board. . . . . . . . . . . . . . . . . . . 8 5.8 The President. . . . . . . . . . . . . . . . . . . . . . . . . 9 5.9 The Vice President. . . . . . . . . . . . . . . . . . . . . . 9 5.10 The Secretary. . . . . . . . . . . . . . . . . . . . . . . . 9 5.11 The Assistant Secretary. . . . . . . . . . . . . . . . . . . 9 5.12 The Chief Financial Officer. . . . . . . . . . . . . . . . . 10 ARTICLE 6: Stock Certificates . . . . . . . . . . . . . . . . . . . . . . 10 6.1 Certificates for Shares. . . . . . . . . . . . . . . . . . . . 10 6.2 Signatures on Certificates. . . . . . . . . . . . . . . . . . 10 6.3 Transfer of Stock. . . . . . . . . . . . . . . . . . . . . . . 10 6.4 Registered Stockholders. . . . . . . . . . . . . . . . . . . . 10 6.5 Lost, Stolen or Destroyed Certificates. . . . . . . . . . . . 11 ARTICLE 7: General Provisions . . . . . . . . . . . . . . . . . . . . . . 11 7.1 Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . 11 7.2 Dividend Reserve. . . . . . . . . . . . . . . . . . . . . . . 11 7.3 Checks. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 7.4 Corporate Seal. . . . . . . . . . . . . . . . . . . . . . . . 11 7.5 Execution of Corporate Contracts and Instruments. . . . . . . 11 ARTICLE 8: Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . 12
-ii- 4 B Y L A W S OF HESKA MERGER CORPORATION (A DELAWARE CORPORATION) ARTICLE 1 Offices 1.1 Principal Office. The initial registered office of the Corporation shall be 1209 Orange Street, Wilmington, DE, 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 a Board and transact such other business as may properly be brought before the meetings. 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 Certificate of Incorporation, at the request of the Chairman, the Board of Directors, the President or by the holders of shares entitled to cast not less than 10% of the votes at such meeting. Such request shall state the purpose or purposes of the proposed 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 -1- 5 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 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 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 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- 6 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 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 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 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 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 -3- 7 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 sch 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 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 -4- 8 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; Qualifications. The Board shall consist of not less than five (5) members nor more than nine (9) members, the exact number thereof to be determined from time to time by resolution of the Board. At each annual meeting of the stockholders, directors shall be elected for that class of directors whose terms are then expiring, except as provided in Section 3.2, and each director so elected shall hold office until his or her successor is elected and qualified or until his or her earlier resignation or removal. Directors need not be stockholders. 3.2 Resignation and Vacancies. A vacancy or vacancies in the Board shall be deemed to exist in the case of the death, resignation or removal of any director, or if the authorized number of directors be increased. Vacancies may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, unless otherwise provided in the Certificate of Incorporation. The stockholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors. If the Board accepts the resignation of a director tendered to take effect at a future time, the Board shall have power to elect a successor to take office when the resignation is to become effective. If there are no directors in office, then an election of directors may be held in the manner provided by statute. 3.3 Removal of Directors. Unless otherwise restricted by statute, the Certificate of Incorporation or these Bylaws, any director or the entire Board may be removed, with or without cause, by the holders of at least a majority of the shares entitled to vote at an election of directors. 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 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. -5- 9 3.8 Special Meetings. Special meetings of the Board may be called by the Chairman of the Board, the President, a Vice President or 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 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. 3.10 Action Without Meeting. Unless otherwise restricted by the 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 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 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. -6- 10 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 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 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 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. -7- 11 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 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, 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 -8- 12 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, the 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 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. -9- 13 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, or the President or a Vice President and by the Chief Financial Officer, or 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. 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 -10- 14 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 Laws of Delaware or the provisions of the 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 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 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 -11- 15 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. ARTICLE 8 Amendments These Bylaws may be altered, amended or repealed, or new Bylaws may be adopted, by the Board of Directors, or by the affirmative vote of the holders of a majority of the outstanding shares entitled to vote on such matters. -12- EX-4.2 6 FIRST AMEND INVESTORS' RIGHTS AGREEMENT 1 EXHIBIT 4.2 FIRST AMENDED INVESTORS' RIGHTS AGREEMENT This First Amended Investors' Rights Agreement is made and entered into as of April 12, 1996 by and among HESKA CORPORATION (the "Company") (formerly Paravax, lnc.), the holders of capital stock or warrants to purchase capital stock of the Company identified on Schedule A and Schedule B attached hereto (the "Investors") and CIBA-GEIGY LIMITED (the "Purchaser"). The Investors and the Purchaser are sometimes collectively referred to as the "Shareholders". RECITALS: A. The Company will issue and sell to the Purchaser an aggregate of 3,000,000 shares of Series F Preferred Stock pursuant to a Series F Preferred Stock Purchase Agreement of even date herewith (the "Series F Agreement"). B. The Purchaser has required that certain registration rights be granted to them with respect to the securities of the Company to be acquired. C. The Investors hold shares of Series A, Series B, Series C, Series D and Series E Preferred Stock of the Company, or warrants to purchase Series C and Series D Preferred Stock of the Company entitled to certain registration rights and rights regarding receipt of information pursuant to the terms of an Investors' Rights Agreement dated as of March 31, 1995 (the "Original Agreement"). The Investors hereby agree that all such rights under the Original Agreement are hereby amended and superseded by the rights provided under this Agreement. AGREEMENT NOW, THEREFORE, in consideration of the foregoing and of the mutual promises and covenants contained herein, the parties agree as follows: 1. Integration and Transaction with Diamond. 1.1 Integration. Effective upon the execution of this Agreement by the Investors holding a majority of the Registrable Securities, as such term was defined in the Original Agreement, and the closing of the sale and issuance of Series F Preferred Stock pursuant to the Series F Agreement, and subject only to the conditions set forth therein, all rights and covenants contained in the Original Agreement shall be amended and replaced in their entirety by the rights and covenants in this Agreement. The rights and covenants of this Agreement set forth the sole and entire agreement among the Company, the 2 Investors and the Purchasers on the subject matter hereof and supersede any prior agreements. 1.2 Transaction With Diamond. The parties agree that shareholders of Diamond Animal Health, Inc. ("Diamond") who become holders of Series E Preferred Stock of the Company pursuant to a planned acquisition of the shares of Diamond may become parties to this Agreement by executing a counterpart signature page, and all such shareholders shall be Shareholders and their shares of Series E Preferred Stock shall be Registrable Securities for all purposes of this Agreement. 2. Restrictions on Transfer Registration Rights. 2.1 Definitions. As used herein: (a) The terms "register", "registered" and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act of 1 933, as amended (the "Securities Act"), and the declaration or ordering of the effectiveness of such registration statement. (b) For the purposes hereof, the term "Registrable Securities" means shares of (i) any and all Common Stock of the Company issued or issuable upon conversion of shares of the Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock of the Company, which have not been previously resold to the public in a registered public offering, including shares of Common Stock issuable upon conversion of Series C and Series D Preferred Stock issuable upon exercise of warrants as listed in Schedule A hereto (the "Warrants") issued to Dominion Ventures, Inc., (ii) stock issued with respect to or in any exchange for or in replacement of stock included in subparagraph (i) above which have not been previously resold to the public in a registered public offering, and (iii) stock issued in respect of the stock referred to in (i) and (ii) above as a result of a stock split, stock dividend or the like, which have not been previously resold to the public in a registered public offering. (c) The terms "Holder" or "Holders" mean any person or persons to whom Registrable Securities were originally issued and who execute this Agreement or qualifying transferees under Section 5 hereof who hold Registrable Securities. (d) The term "Initiating Holders" means any Holder or Holders of in the aggregate at least 35% of the Registrable Securities which have not been previously resold to the public in a registered public offering. -2- 3 2.2 Requested Registration. (a) Request for Registration. In case the Company shall receive from the Initiating Holders a written request that the Company effect any registration with respect to Registrable Securities the reasonably expected aggregate offering price of which equals or exceeds $5,000,000 including underwriting discounts and commissions, the Company will: (i) within ten (10) days after its receipt thereof give written notice of the proposed registration to all other Holders; and (ii)as soon as practicable, use its best efforts to effect such registration (including, without limitation, preparation of a registration statement and prospectus complying as to form with the requirements of the Securities Act, the execution of an undertaking to file post-effective amendments, appropriate qualifications under the applicable blue sky or other state securities laws and appropriate compliance with exemptive regulations issued under the Securities Act and any other governmental requirements or regulations) as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holder's or Holders' Registrable Securities as is specified in such request, together with all or such portion of the Registrable Securities of any Holder or Holders joining in such request as are specified in a written request given within 20 days after receipt of such written notice from the Company; provided, that the Company shall not be obligated to take any action to effect such registration pursuant to this Section 2.2: (A) Prior to the earlier of (1) June 30, 1 998, or (2) one hundred and eighty (180) days following the effective date of the Company's first registered offering to the general public of its securities for its own account; or (B) In any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act; or (C) After the Company has effected two such registrations pursuant to this subsection 2.2(a) and such registrations have been declared or ordered effective. -3- 4 Subject to the foregoing clauses (A) through (C), the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practical, but in any event within ninety (90) days after receipt of the request or requests of the Initiating Holders; provided, however, that if the Company shall furnish to such Holders a certificate signed by the President or Chief Executive Officer of the Company stating that in the good faith judgment of the Board of Directors it would be seriously detrimental to the Company for such registration statement to be filed at the date filing would be required and it is therefore essential to defer the filing of such registration statement, the Company shall be entitled to delay the filing of such registration statement not more than once in any twelve month period for an additional period of up to ninety (90) days. (b) Underwriting. If the Initiating Holders intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to Section 2.2 and the Company shall include such information in the written notice referred to in subsection 2.2(a)(i). The right of any Holder to registration pursuant to Section 2.2 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder) to the extent provided herein. The Company shall (together with all Holders proposing to distribute their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by a majority in interest of the Initiating Holders, provided, however, that the managing underwriter shall be approved by the Company, which approval shall not be unreasonably withheld. Notwithstanding any other provision of this Section 2.2, if the underwriter advises the Initiating Holders in writing that marketing factors require a limitation of the number of shares to be underwritten, the lnitiating Holders shall so advise all Holders of Registrable Securities who have elected to participate in such offering, and the number of shares of Registrable Securities that may be included in the registration and underwriting shall be allocated among all such Holders thereof in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by such Holders. If any Holder of Registrable Securities disapproves of the terms of the underwriting, he may elect to withdraw therefrom by written notice to the Company, the underwriter and the Initiating Holders. Any Registrable Securities which are excluded from the underwriting by reason of the underwriter's marketing limitation or withdrawn from such underwriting shall be withdrawn from such registration. If the underwriter has not limited the number of Registrable Securities to be underwritten, the Company, -4- 5 employees of the Company and other holders of the Company's Common Stock may include securities for its (or their) own account in such registration if the underwriter so agrees and if the number of Registrable Securities which would otherwise have been included in such registration and underwriting will not thereby be limited by the underwriter. 2.3 Company Registration. (a) Right to Include. If at any time or from time to time, the Company proposes to register any of its securities, for its own account or the account of any of its shareholders other than the Holders, (other than a registration relating solely to employee stock option or purchase plans, or a registration relating solely to an SEC Rule 145 transaction, or a registration on any other form, other than Form 5-1, S-2 or S-3, or any successor to such form which does not include substantially the same information as would be required to be included in a registration statement covering the sale of Registrable Securities) the Company will: (i) promptly give to each Holder written notice thereof; and (ii)include in such registration (and any related qualification under blue sky laws or other compliance with applicable laws), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made within 20 days after receipt of such written notice from the Company, by any Holder or Holders to be included in any such registration, except as set forth in subsection 2.3(b) below. (b) Underwriting. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to subsection 2.3(a)(i). In such event the right of any Holder to registration pursuant to Section 2.3 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the other holders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company. Notwithstanding any other provision of this Section 2.3, if the underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the underwriter may limit the number of Registrable Securities to be included in the registration and underwriting (i) completely, in the case of the Company's initial public offering, or (ii) to not less than 15% of the shares to be included in any other registration. In the event of a cutback by the underwriters of the number of Registrable Securities to be included in the registration and underwriting, the Company shall advise all Holders of Registrable Securities which would otherwise be registered and underwritten pursuant hereto, and the number of shares of Registrable Securities that may be included in the registration and underwriting shall be allocated among all of such Holders in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by such Holders. If any Holder disapproves of the terms of any such underwriting, he may elect to withdraw therefrom by written notice to the Company and the underwriter. Any Registrable Securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. The Company may not include, pursuant to contractual incidental registration rights or otherwise, shares of Common Stock held by employees or consultants of the Company or others in a registration statement pursuant to Section 2.3 if, and to the extent that, the amount of Registrable -5- 6 Securities held by other than employees or consultants that is otherwise includable in such registration statement would thereby be diminished. 2.4 Form S-3. After its initial public offering, the Company shall use its best efforts to qualify for registration on Form S-3 or any comparable or successor form. After the Company has qualified for the use of Form S-3, the Holders of the Registrable Securities shall have the right to request an unlimited number of registrations on Form S-3 (such requests shall be in writing and shall state the number of shares of Registrable Securities to be disposed of and the intended method of disposition of Shares by such Holders), subject only to the following: (a) The Company shall not be required to effect a registration pursuant to this Section 2.4 within 120 days of the effective date of any registration referred to in Sections 2.2 or 2.3 above. (b) The Company shall not be required to effect a registration pursuant to this Section 2.4 unless the Holder or Holders requesting registration propose to dispose of shares of Registrable Securities having an aggregate disposition price (before deduction of underwriting discounts and expenses of sale) of at least $750,000. -6- 7 (c) The Company shall not be required to effect more than two registrations pursuant to this Section 2.4 in any consecutive 1 2 month period. The Company shall promptly give written notice to all Holders of Registrable Securities of the receipt of a request for registration pursuant to this Section 2.4 and shall provide a reasonable opportunity for other Holders to participate in the registration, provided that if the registration is for an underwritten offering, the terms of subsection 2.2(b) shall apply to all participants in such offering. Subject to the foregoing, the Company will use its best efforts to effect promptly the registration of all shares of Registrable Securities on Form S-3 to the extent requested by the Holder or Holders thereof for purposes of disposition; provided, however, that if the Company shall furnish to such Holders a certificate signed by the President or Chief Executive Officer of the Company stating that in the good faith judgement of the Board of Directors it would be seriously detrimental to the Company for such registration statement to be filed at the date filing would be required and it is therefore essential to defer the filing of such registration statement, the Company shall be entitled to delay the filing of such registration statement for an additional period of up to ninety (90) days. Any registration pursuant to this Section 2.4 shall not be counted as a registration pursuant to Section 2.2. 2.5 Expenses of Registration. All expenses incurred in connection with any registration, qualification or compliance pursuant to this Section 2, including without limitation, all registration, filing and qualification fees, printing expenses, fees and disbursements of counsel for the Company and one counsel for the selling Holders and expenses of any special audits incidental to or required by such registration, shall be borne by the Company except as follows: (a) The Company shall not be required to pay for expenses of any registration proceeding begun pursuant to Section 2.2 or 2.4, the request for which has been subsequently withdrawn by the Initiating Holders or Holders requesting registration, in which such case, such expenses shall be borne by the Holders requesting such withdrawal; provided, however, that in lieu of paying such expenses a majority in interest of the Initiating Holders may elect to forfeit their right to request one registration pursuant to Section 2.2; provided further, however, that if at the time of such withdrawal the Holders have learned of a material adverse change in the business, condition or prospects of the Company from that known to the Holders at the time of their request and have withdrawn the request with reasonable promptness following disclosure by the Company of such change, then the Holders shall not be -7- 8 required to pay any such expenses and shall retain their rights to such registration pursuant to Section 2.2. (b) With respect to any registration proceeding pursuant to Section 2.4, the Company shall only be required to pay for expenses of (i) two registrations requested by Charter Ventures and Charter Ventures II, L.P., (ii) two registrations requested by Volendam lnvesteringen N.V., and (iii) two registrations requested by the Purchaser, provided in each case that such registrations have been declared or ordered effective. (c) The Company shall not be required to pay fees of legal counsel of a Holder except for a single counsel acting on behalf of all selling Holders. (d) The Company shall not be required to pay underwriters' fees, discounts or commissions relating to the Registrable Securities. 2.6 Registration Procedures. In the case of each registration, qualification or compliance effected by the Company pursuant to this Agreement, the Company will keep each Holder participating therein advised in writing as to the initiation of each registration, qualification and compliance and as to the completion thereof. At its expense the Company will: (a) Keep such registration, qualification or compliance pursuant to Sections 2.2, 2.3 or 2.4 effective for a period of 120 days or until the Holder or Holders have completed the distribution described in the registration statement relating thereto, whichever first occurs; (b) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of the Registrable Securities owned by them; (c) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act or the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; -8- 9 (d) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such United States jurisdictions as shall be reasonably requested by the Holders; provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions, unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act; (e) Cause all such Registrable Securities registered under this Section 2 to be listed on each securities exchange on which similar securities issued by the Company are then listed; (f) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering, and each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement; (g) Provide a transfer agent and registrar for all Registrable Securities registered hereunder and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration; and (h) Furnish, at the request of any Holder requesting registration of Registrable Securities pursuant to this Section 2, on the date that such Registrable Securities are delivered to the underwriters for sale in connection with such registration, if such securities are being sold through underwriters or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities, and (ii) a letter dated such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities. -9- 10 2.7 Indemnification. (a) The Company will indemnify and hold harmless each Holder of Registrable Securities, each of its officers, directors and partners, and each person controlling such Holder, with respect to which such registration, qualification or compliance has been effected pursuant to this Agreement, and each underwriter, if any, and each person who controls any underwriter of the Registrable Securities held by or issuable to such Holder, against all claims, losses, expenses, damages and liabilities (or actions in respect thereto) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any preliminary or final prospectus, offering circular or other document (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation or alleged violation by the Company relating to action or inaction required of the Company in connection with the requirements of the Securities Act or the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any rule or regulation promulgated under the Securities Act or any state securities law applicable to the Company and will reimburse each such Holder, each of its officers, directors and partners, and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, for any reasonable legal and any other expenses incurred in connection with investigating, defending or settling any such claim, loss, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such claim, loss, damage or liability arises out of or is based on any untrue statement or omission based upon written information furnished to the Company in an instrument duly executed by such Holder or underwriter specifically for use therein, and provided further that the agreement of the Company to indemnify any under writer and any person who controls such underwriter contained herein with respect to any such preliminary prospectus shall not inure to the benefit of any underwriter, from whom the person asserting any such claim, loss, damage, liability or action purchased the stock which is the subject thereof, if at or prior to the written confirmation of the sale of such stock, a copy of the prospectus (or the prospectus as amended or supplemented) was not sent or delivered to such person, excluding the documents incorporated therein by reference, and the untrue statement or omission of a material fact contained in such preliminary prospectus was corrected in the prospectus (or the prospectus as amended or supplemented). -10- 11 (b) Each Holder will, if Registrable Securities held by or issuable to such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify and hold harmless the Company, each of its directors and officers, each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company within the meaning of the Securities Act, and each other such Holder, each of its officers, directors and partners and each person controlling such Holder, against all claims, losses, expenses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any preliminary or final prospectus, offering circular or other document (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company, such Holders, such directors, officers, partners, persons or underwriters for any reasonable legal or any other expenses incurred in connection with investigating, defending or settling any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company in an instrument duly executed by such Holder specifically for use therein, and provided further that the agreement of the Holder to indemnify any underwriter and any person who controls such underwriter (or to indemnify the Company and each person who controls the Company if the Company is selling directly and not through an underwriter) contained herein with respect to any such preliminary prospectus shall not inure to the benefit of any underwriter, from whom the person asserting any such claim, loss, damage, liability or action purchased the stock which is the subject thereof (or the Company if such stock was purchased directly from the Company), if at or prior to the written confirmation of the sale of such stock, a copy of the prospectus (or the prospectus as amended or supplemented) was not sent or delivered to such person, excluding the documents incorporated therein by reference, and the untrue statement or omission of a material fact contained in such preliminary prospectus was corrected in the prospectus (or the prospectus as amended or supplemented). Notwithstanding the foregoing, in no event shall the indemnification provided by any Holder hereunder exceed the net proceeds received by such Holder for the sale of such Holder's securities pursuant to such registration. -11- 12 (c) Each party entitled to indemnification under this Section 2.7 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "lndemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought. The Indemnified Party shall promptly permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not be unreasonably be withheld). The Indemnified Party may participate in such defense and hire counsel at such party's own expense; provided, however, that the Indemnified Party shall have the right to retain its own counsel with the fees and expenses to be paid by the Indemnifying Party if the Indemnifying Party refuses to assume the defense thereof or if representation of such Indemnified Party by the counsel retained by the Indemnifying Party would be inappropriate due to actual or potential differing interests between such Indemnified Party and any other party represented by such counsel in such proceeding. The failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations hereunder, except to the extent that such failure is materially prejudicial to an Indemnifying Party's ability to defend such action. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of the Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. No Indemnified Party shall be entitled to indemnification hereunder if such Indemnified Party consents to entry of any judgment or enters into any settlement without the consent of the Indemnifying Party. Any Indemnified Party shall cooperate with the Indemnifying Party in the defense of any claim or litigation brought against such Indemnified Party. 2.8 Lock-Up Provision. Upon receipt of a written request by the Company or by its underwriters, the Holders shall not sell, sell short, grant an option to buy, or otherwise dispose of shares of the Company's Common Stock or other securities (except for any such shares included in the registration) for a period of one hundred and eighty (180) days following the effective date of the initial registration of the Company's securities; provided, however, that such Holder shall have no obligation to enter into the agreement described in this Section 2.8 unless all executive officers and directors enter into similar agreements. The Company may impose stop-transfer instructions with respect to the shares (or securities) subject to the foregoing restriction until the end of said 180-day period. -12- 13 2.9 Information by Holder. The Holder or Holders of Registrable Securities included in any registration shall promptly furnish to the Company such information regarding such Holder or Holders and the distribution proposed by such Holder or Holders as the Company may reasonably request in writing and as shall be required in connection with any registration, qualification or compliance referred to herein. 2.10 Rule 144 Reporting. With a view to making available to Holders of Registrable Securities the benefits of certain rules and regulations of the Securities and Exchange Commission (the "SEC") which may permit the sale of the Registrable Securities to the public without registration, at all times after the effective date of the first registration filed by the Company for an offering of its securities to the general public the Company agrees to: (a) Make and keep public information available, as those terms are understood and defined in SEC Rule 144 under the Securities Act; (b) File with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and (c) So long as a Holder owns any Registrable Securities, to furnish to such Holder forthwith upon such Holder's request a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 (at any time after 90 days after the effective date of the first registration statement filed by the Company for an offering of its securities to the public), and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed by the Company as such Holder may reasonably request in availing itself of any rule or regulation of the SEC allowing such Holder to sell any such securities without registration. 2.11 Limitations on Subsequent Registration Rights. From and after the date of this Agreement, the Company shall not, without the prior written consent of the Holders of a majority of the outstanding Registrable Securities, enter into any agreement with any holder or prospective holder of any securities of the Company which would allow such holder or prospective holder (a) to include such securities in any registration filed under Section 2.2, 2.3 or 2.4 hereof, unless under the terms of such agreement, such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of its securities will not reduce the amount of the -13- 14 Registrable Securities of the Holders which is included or (b) to make a demand registration which could result in such registration statement being declared effective prior to the earlier of either of the dates set forth in subsection 2.2(a)(ii)(A) or within 120 days of the effective date of any registration effected pursuant to Section 2.2 hereof. 2.12 Termination. The rights of a Holder under this Agreement (other than rights under Section 2.7) shall terminate on the earlier to occur of (a) the date on which a Holder can sell all of its Registrable Securities without registration pursuant to Rule 144 within a three (3) month period, unless at the time the Holder's Registrable Securities represent more than one percent (1 %) of the outstanding capital stock of the Company, or (b) the eighth anniversary of the closing of the Company's first registered public offering of its securities. 3. Covenants of the Company. 3.1 Financial Information. So long as a Shareholder continues to hold at least 200,000 shares of Preferred Stock (including shares of Common Stock issued upon conversion of Preferred Stock) (collectively, the "Securities") with respect to subsections (a) and (b) below, and 500,000 shares of the Securities with respect to subsections (c) and (d) below, the Company will furnish the following information to the Shareholder: (a) Annual Financials. As soon as practicable after the end of each fiscal year, and in any event within 90 days thereafter, the Company will provide the Shareholder with consolidated balance sheets of the Company and its subsidiaries, if any, as at the end of such fiscal year, and consolidated income statements and consolidated statements of cash flows of the Company and its subsidiaries, if any, for such year, prepared in accordance with generally accepted accounting principles, all in reasonable detail, certified by independent public auditors of recognized national standing selected by the Company. (b) Quarterly Financials. As soon as practicable after the end of each fiscal quarter (except the fourth fiscal quarter), and in any event within 45 days thereafter, the Company will provide the Shareholders with consolidated balance sheets of the Company and its subsidiaries, if any, as at the end of such fiscal quarter, and consolidated income statements of the Company and its subsidiaries, if any, for such quarter, prepared in accordance with generally accepted accounting principles (except for required footnotes and for minor year-end adjustments), all in reasonable detail, certified by the chief financial officer of the Company. -14- 15 (c) Monthly Financials. As soon as practicable after the end of each month (except the last month of the fiscal year), and in any event within 20 days thereafter, the Company will provide the Shareholders with consolidated balance sheets and income statements of the Company and its subsidiaries, if any, as of the end of such month, prepared in accordance with generally accepted accounting principles (except for required footnotes and for minor year end adjustments). (d) Budget. As soon as practicable after its adoption or approval by the Company's Board of Directors, but not later than the commencement of such fiscal year, the Company will provide the Shareholders with a consolidated annual plan for each fiscal year which shall include monthly capital and operating expense budgets, cash flow statements, projected balance sheets and profit and loss projections for each such month and for the end of the year, itemized in such detail as the Board of Directors may reasonably determine. (e) Termination of Covenant. The Company's obligation to deliver the information required under subsections (c) and (d) above shall terminate upon the date on which the Company is required to file a report with the SEC pursuant to Section 13(a) or 1 5(d) of the Exchange Act by reason of (i) the Company's having registered any of its securities pursuant to Section 12 of the Exchange Act or (ii) a registration statement filed by the Company under the Securities Act having become effective. 3.2 Confidentiality of Information. All information obtained by a Shareholder pursuant to Section 3.1 shall be deemed proprietary and confidential to the Company and will not be disclosed by a Shareholder to any person or entity without the prior written consent of the Company; provided, however, that such consent shall not be unreasonably withheld. This restriction shall not apply to information which becomes known to the public without fault of the recipient or which is disclosed pursuant to a governmental regulation or order, provided that prior to disclosure the disclosing party notifies the Company of such proposed disclosure in order to permit the Company to seek confidential treatment of such information. 4. Right to Maintain. 4.1 "New Securities". For purposes of this Section 4, the term "New Securities" shall mean shares of Common Stock, Preferred Stock or any other class of capital stock of the Company, whether or not now authorized, securities of any type that are convertible into shares of such capital stock, and -15- 16 options, warrants or rights to acquire shares of such capital stock. Notwithstanding the foregoing, the term "New Securities" will not include (a) securities issuable upon conversion of the Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock; (b) up to an additional 1,020,000 shares of Series E Preferred Stock and Common Stock (or related options) in the aggregate issuable to the shareholders or optionholders of Diamond; (c) securities issuable upon exercise of the Warrants; (d) securities offered to the public in a bona fide underwritten public offering pursuant to a registration statement filed under the Securities Act; (e) securities issued pursuant to the acquisition of another corporation by the Company by merger, purchase of substantially all of the assets, or other reorganization whereby the Company owns not less than fifty-one percent (51%) of the voting power of such corporation; (f) up to an aggregate of 2,674,073 shares of Common Stock first issued after the date of this Agreement or related options outstanding on or first issued after the date of this Agreement to officers, directors, employees or consultants of the Company, pursuant to any stock grant, stock option plan or stock purchase plan or other stock incentive agreement or arrangement approved by the vote or written consent of not less than sixty-six and two-thirds percent (66 2/3%) of the directors then in office; (g) securities issued in connection with equipment lease or working capital debt financings, so long as the number of securities so issued does not exceed one percent (1 %) of the then outstanding capital stock of the Company; (h) securities issued upon exercise or conversion of options, warrants and other convertible securities outstanding on the date hereof; and (i) shares of Common Stock or Preferred Stock issued in connection with any stock split, stock dividend or recapitalization by the Company. 4.2 Grant of Rights. Subject to the terms specified in this Section 4, so long as a Shareholder holds not less than 500,000 shares of Securities, the Company hereby grants to the Shareholders the right of first refusal to purchase a portion of any issue of New Securities which the Company hereafter may from time to time propose to issue and sell as shall maintain the Shareholders' pro rata percentage ownership of the Company's capital stock. The "pro rata" percentage ownership of a Shareholder is calculated by dividing (i) the number of shares of Common Stock held by the Shareholder plus the total number of shares of Common Stock issuable upon the conversion of all Preferred Stock then held by the Shareholder by (ii) the total number of shares of Common Stock then outstanding, including shares issuable upon conversion of any Preferred Stock. -16- 17 4.3 Procedure. (a) In the event the Company proposes to undertake an issuance of New Securities, it shall give the Shareholders written notice of its intention, describing the type of New Securities, the price and material terms upon which the Company proposes to issue the same. A Shareholder shall have 20 calendar days from the date of receipt of any such notice to agree to purchase up to its pro rata share of such New Securities for the price and upon the terms specified in the Company's notice by giving written notice to the Company to such effect and stating therein the quantity of New Securities to be purchased. (b) If less than all of the New Securities are subscribed for after the expiration of the 20 calendar day period referred to in Section 4.3(a), the Company shall have 90 days thereafter to sell or enter into an agreement to sell any New Securities not purchased by Shareholders exercising their rights at a price and upon terms no more favorable to the purchaser than the terms specified in the Company's notice to the Shareholders, after which 90 day period the Company shall not thereafter sell such New Securities without first offering a portion to the Shareholders in accordance with this Section 4. 4.4 Termination of Rights. The rights granted under this Section 4 shall expire upon the closing of a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act covering the offer and sale of Common Stock for the account of the Company to the public at an aggregate offering price of not less than $10,000,000 and at a public offering price per share (prior to underwriter commissions and expenses) that is not less than $8.00 (as adjusted for stock splits, stock combinations and the like). 5. Assignment of Rights. The rights granted pursuant to this Agreement may be assigned by a Shareholder or its transferee upon sale or transfer (other than a sale to the public) of at least 200,000 shares of Preferred Stock (including shares of Common Stock issued upon conversion thereof) (as adjusted for stock dividends, stock splits, recapitalizations and the like) held by a Shareholder, provided that certain rights under Sections 3 and 4 will continue to require ownership of a greater number of shares. The rights under Sections 3 and 4 may not be assigned to a transferee which the Company reasonably believes is a competitor or intends to become a competitor of the Company. The Company shall be given prompt notice of such transfer and any such transferee shall agree to become subject to the obligations of the Shareholders under this -17- 18 Agreement. Notwithstanding the foregoing, Ciba-Geigy Limited may assign all of its rights and obligations hereunder in connection with the merger of Ciba-Geigy Limited and Sandoz Limited, and the formation of a new entity, Novartis. 6. Miscellaneous. 6.1 Amendment or Waiver. Any term of this Agreement may be amended and the observance of any such term may be waived (either generally or in a particular instance and either retroactively or prospectively) with the written consent of the Company and Shareholders holding at least a majority of the outstanding Registrable Securities. Any amendment or waiver effected in accordance with this paragraph shall be binding upon all of the parties hereto and their successors and assigns, even if such Shareholder did not consent in writing to such amendment or waiver. 6.2 Governing Law. This Agreement shall be governed in all respects by the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within California. 6.3 Entire Agreement. This Agreement constitutes the full and entire understanding and agreement between the parties with respect to the subject hereof and it supersedes, merges, and renders void any and all prior understandings and/or agreements, written or oral, with respect to such subject matter. 6.4 Notices. All notices and other communications required or permitted hereunder shall be in writing and shall be personally delivered, mailed by certified or registered mail, postage prepaid, or delivered by overnight delivery or express courier, addressed to the Holders at their addresses shown on the records of the Company or, to the Company, at its principal executive office, or at such other address as the Company or any Holder shall hereafter furnish in writing. All notices that are mailed shall be deemed delivered five (5) days after deposit in the United States mail. 6.5 Severability. In case any provision of this Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 6.6 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one and the same instrument. -18- 19 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first above written. HESKA CORPORATION By: /s/ FRED M. SCHWARZER -------------------------------------- Fred M. Schwarzer Title: President ----------------------------------- INVESTORS AND PURCHASER: CIBA-GEIGY LIMITED By: /s/ H.B. GURTLER /s/ DR. P. KORNICKER --------------------------------------- H.B. Gurtler President Animal Dr. P. Kornicker Title: Health Division Division Counsel ----------------------------------- -19- 20 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first above written. HESKA CORPORATION By: ---------------------------------- Title: ------------------------------- INVESTORS AND PURCHASER: CHARTER VENTURES By: /s/ A. BARR DOLEN ---------------------------------- Title: General Position ------------------------------- -19- 21 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first above written. HESKA CORPORATION By: ---------------------------------- Title: ------------------------------- INVESTORS AND PURCHASER: CHARTER VENTURES II, L.P. By: /s/ A. BARR DOLEN ---------------------------------- Title: General Partner ------------------------------- -19- 22 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first above written. HESKA CORPORATION By: ---------------------------------- Title: ------------------------------- INVESTORS AND PURCHASER: VOLENDAM INVESTERINGEN N.V. /s/ ANNEKE SOEDHOE /s/ GERMAIN SPROEK By: MeesPierson Trust (Curacao) N.V. ---------------------------------- Title: Managing Director ------------------------------- -19- 23 SCHEDULE A List of Warrants Series C Preferred Stock Warrants:
Date of No. Shares Subject -------- ------------------ Name Grant Expiration Date Exercise Price to Warrant ---- ----- --------------- -------------- ---------- Dominion Ventures 11/22/89 11/22/1998 $2.50 6,400 ----- Total: 6,400
Series D Preferred Stock Warrants:
Date of Subject to -------- ----------- Name Grant Expiration Date Exercise Price Warrant ---- ----- --------------- -------------- ------- Dominion Ventures 06/07/93 06/07/2002 $3.25 6,225 Dominion Ventures 12/30/93 12/30/2002 $3.25 267 Dominion Ventures 11/20/94 11/20/2003 $3.25 18,500 ------- Total: 24,992 Total of all warrants: 31,392 =======
-20- 24 SCHEDULE B LIST OF INVESTORS
Number of Name Series Shares ---- ------ ------ Charter Ventures A 300,000 B 250,000 C 1,340,000 D 800,000 E 695,510 Charter Ventures II, L.P. E 155,652 Volendam Investerigen N.V. E 3,076,923
-21- EX-4.3 7 FORM OF WARRANT TO PURCHASE SERIES C PREF STOCK 1 EXHIBIT 4.3 NEITHER THIS WARRANT NOR THE SHARES OF PREFERRED STOCK ISSUABLE UPON EXERCISE NOR SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF SAID SHARES OF PREFERRED STOCK HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. NO SALE, TRANSFER OR OTHER DISPOSITION OF THIS WARRANT OR SAID SHARES MAY BE EFFECTED WITHOUT (i) AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO, (ii) AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED OR (iii) RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION TO THE EFFECT THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED. Shares Issuable Upon Exercise: WARRANT TO PURCHASE SHARES OF SERIES C PREFERRED STOCK Expires ___________________ THIS CERTIFIES THAT, for value received, Dominion Ventures, Inc., is entitled to subscribe for and purchase the number of shares (as adjusted pursuant to provisions hereof, the "Shares") of the fully paid and nonassessable Series C Preferred Stock of Paravax, Inc., a California corporation (the "Company"), that have an aggregate purchase price (based on the Series C Preferred Stock issue price) of ___________; provided however, that if an Equity Financing (as defined in Section 1.1 hereof) has not occurred on or prior to _________________, or in the event the Company does not issue Series C Preferred Stock prior to such date, Dominion Ventures, Inc. shall be entitled to purchase ________ shares (as adjusted pursuant to provisions herein, also referred to herein as the "Shares") of the fully paid and nonassessable Series B Preferred Stock of the Company based on the original Series B Preferred Stock issue price of _______ per share. The purchase price of each share of Series B Preferred Stock or Series C Preferred Stock, as applicable, shall be the amount set forth in Section 1.1 herein as such amount may be adjusted from time to time (the "Warrant Price"), subject to the provisions and upon the terms and conditions hereinafter set forth. The terms of the Series C Preferred Stock shall be substantially the same as those of the Series B Preferred Stock with such changes as shall be approved by the holder hereof, which approval shall not be unreasonably withheld. As used herein, the term "Preferred Stock" shall mean the Company's Series C Preferred Stock, as applicable, and any stock into or for which such Series C Preferred Stock, as applicable, may hereafter be converted or exchanged pursuant to the Articles of Incorporation of the Company as from time to time amended as provided by law and in such Articles, and the term "Grant Date" shall mean ___________________. 1. Warrant Price and Term. 1.1 Warrant Price. The Warrant Price hereunder shall be equal to the effective price per share received by the Company in the first equity financing with net proceeds to the Company of at least $1,500,000 which closes after the date hereof (an "Equity Financing"). In the event an Equity Financing does not occur on or before _________________, the Warrant Price shall be _______. 1.2 Term. The purchase right represented by this Warrant is exercisable, in whole or in part, at any time and from time to time from and after the Grant Date and prior to the earlier of the ninth annual anniversary date of the Grant Date or the fourth annual anniversary of the consummation of the Company's initial public offering of its Common Stock, the aggregate gross proceeds from which exceed $5,000,000. 2 2. Method of Exercise; Net Issue Exercise. 2.1 Method of Exercise; Payment; Issuance of New Warrant. The purchase right represented by this Warrant may be exercised by the holder hereof, in whole or in part and from time to time, by either, at the election of the holder hereof, (a) the surrender of this Warrant (with the notice of exercise form attached hereto as Exhibit A duly executed) at the principal office of the Company and by the payment to the Company, by check, of an amount equal to the then applicable Warrant Price per share multiplied by the number of Shares then being purchased or (b) if in connection with a registered public offering of the Company's securities, the surrender of this Warrant (with the notice of exercise form attached hereto as Exhibit A-1 duly executed) at the principal office of the Company together with notice of arrangements reasonably satisfactory to the Company for payment to the Company either by check or from the proceeds of the sale of shares to be sold by the holder in such public offering of an amount equal to the then applicable Warrant Price per share multiplied by the number of Shares then being purchased. The person or persons in whose name(s) any certificate(s) representing shares of Preferred Stock shall be issuable upon exercise of this Warrant shall be deemed to have become the holder(s) of record of, and shall be treated for all purposes as the record holder(s) of, the shares represented thereby (and such shares shall be deemed to have been issued) immediately prior to the close of business on the date or dates upon which this Warrant is exercised. In the event of any exercise of the rights represented by this Warrant, certificates for the shares of stock so purchased shall be delivered to the holder hereof as soon as possible and in any event within thirty days of receipt of such notice and, unless this Warrant has been fully exercised or expired, a new Warrant representing the portion of the Shares, if any, with respect to which this Warrant shall not then have been exercised shall also be issued to the holder hereof as soon as possible and in any event within such thirty-day period. 2.2 Net Issue Exercise. (a) In lieu of exercising this Warrant, holder may elect to receive shares equal to the value of this Warrant (or the portion thereof being canceled) by surrender of this Warrant at the principal office of the Company together with notice of such election in which event the Company shall issue to the holder hereof a number of shares of the Company's Preferred Stock computed using the following formula: X = Y (A - B) --------- A Where: X - The number of shares of Preferred Stock to be issued to holder. Y - the number of shares of Preferred Stock purchasable under this Warrant. A - the fair market value of one share of the Company's Preferred Stock. B - Warrant price (as adjusted to the date of such calculations). (b) For purposes of this Section, fair market value of the Company's Preferred Stock shall mean the average of the closing bid and asked prices of the Company's Preferred Stock quoted in the Over-The-Counter. Market Summary or the closing price quoted on any exchange on which the Preferred Stock is listed, whichever is applicable, as published in the Western Edition of The Wall Street Journal for the ten trading days prior to the date of determination of fair market value. If the Preferred Stock is not traded Over-The-Counter or on an exchange, the fair market value shall be the price per share which the Company could obtain from a willing buyer for shares sold by the Company from authorized but unissued shares, as such price shall be determined in good faith by the Company's Board of Directors and shall be 3 acceptable to the holder hereof, which acceptance shall not be unreasonably withheld. 3. Stock Fully Paid; Reservation of Shares. All Shares that may be issued upon the exercise of the rights represented by this Warrant and Common Stock issuable upon conversion of the Preferred Stock will, upon issuance, be fully paid and nonassessable, and free from all taxes, liens and charges with respect to the issue thereof. During the period within which the rights represented by the Warrant may be exercised, the Company will at all times have authorized and reserved for the purpose of issuance upon exercise of the purchase rights evidenced by this Warrant, a sufficient number of shares of its Preferred Stock (and Common Stock issuable upon conversion thereof) to provide for the exercise of the right represented by this Warrant. 4 4. Adjustment of Warrant Price and Number of Shares. The number and kind of securities purchasable upon the exercise of the Warrant and the Warrant Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows: (a) Reclassification or Merger. In case of any reclassification, change or conversion of securities of the class issuable upon exercise of this Warrant (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), or in case of any merger of the Company with or into another corporation (other than a merger with another corporation in which the Company is a continuing corporation and which does not result in any reclassification or change of outstanding securities issuable upon exercise of this Warrant), or in case of any sale of all or substantially all of the assets of the Company, the Company, or such successor or purchasing corporation, as the case may be, shall execute a new Warrant (in form and substance satisfactory to the holder of this Warrant) providing that the holder of this Warrant shall have the right to exercise such new Warrant and upon such exercise to receive, in lieu of each share of Preferred Stock theretofore issuable upon exercise of this Warrant, the kind and amount of shares of stock, other securities, money and property receivable upon such reclassification, change or merger by a holder of one share of Preferred Stock. Such new Warrant shall provide for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Paragraph 4. The provisions of this subparagraph (a) shall similarly apply to successive reclassifications, changes, mergers and transfers. (b) Subdivisions or Combination of Shares. If the Company at any time while this Warrant remains outstanding and unexpired shall subdivide or combine its Preferred Stock, the Warrant Price and the number of Shares issuable upon exercise hereof shall be proportionately adjusted. (c) Stock Dividends. If the Company at any time while this Warrant is outstanding and unexpired shall pay a dividend payable in shares of Preferred Stock (except any distribution specifically provided for in the foregoing subparagraphs (a) and (b)), then the Warrant Price shall be adjusted, from and after the date of determination of shareholders entitled to receive such dividend or distribution, to that price determined by multiplying the Warrant Price in effect immediately prior to such date of determination by a fraction (a) the numerator of which shall be the total number of shares of Preferred Stock outstanding immediately prior to such dividend or distribution, and (b) the denominator of which shall be the total number of shares of Preferred Stock outstanding immediately after such dividend or distribution and the number of Shares subject to this Warrant shall be proportionately adjusted. (d) No Impairment. The Company will not, by amendment of its Articles of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Paragraph 4 and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against impairment. (e) Notices of Record Date. In the event of any taking by the Company of a record of its shareholders for the purpose of determining shareholders who are entitled to receive payment of any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any share of any class or any other securities or property, or to receive any other right, or for the purpose of determining shareholders who are entitled to vote in connection with any proposed merger or consolidation of the Company with or into any other corporation, or any proposed sale, lease or conveyance of all or substantially all of the assets of the Company, or any proposed liquidation, dissolution or winding up of the Company, the Company shall mail to the holder of the Warrant, at least twenty (20) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. 5 (f) Dilutive Issuances. If and whenever the Company should issue shares of its Common Stock at a price per share less than the Warrant Price in effect immediately prior to such issuance (other than Common Stock issuable or issued to Officers, Directors, Employees or Consultants of the Company, either directly or upon the exercise of options or terms approved by the Company's Board of Directors), then the warrant price shall be adjusted by dividing (1) the sum of (A) the total number of shares of Common Stock outstanding immediately prior to such issuance multiplied by the then effective Warrant Price and (B) the value of the consideration received by the Company upon such issuance as determined by the Board of Directors by (2) the total number of shares of Common Stock outstanding immediately after such issuance. The holder of the Warrant shall thereafter be entitled to purchase at the Warrant price resulting from such adjustment, the number of shares of Common Stock (calculated to the nearest whole share) obtained by multiplying the Warrant Price in effect immediately prior to such adjustment by the number of shares of Common Stock issuable upon the exercise hereof immediately prior to such adjustment and dividing the product thereof by the Warrant Price resulting from such adjustment. For the purposes of this paragraph (d) the issuance of securities convertible into or exercisable for the Common Stock shall be deemed the issuance of the number of shares of Common Stock into which such securities are convertible or for which such securities are exercisable, and the consideration received for such securities shall be deemed to include the minimum aggregate amount payable upon conversion or exercise of such securities. In the event the right to convert or exercise such securities expires unexercised, the Warrant Price of shares issuable upon the exercise hereof shall be readjusted accordingly. 6 5. Notice of Adjustments. Whenever the Warrant Price shall be adjusted pursuant to the provisions hereof, the Company shall within thirty (30) days of such adjustment deliver a certificate signed by its chief financial officer to the registered holder(s) hereof setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the Warrant Price after giving effect to such adjustment. 6. Fractional Shares. No fractional shares of Preferred Stock will be issued in connection with any exercise hereunder, but in lieu of such fractional shares the Company shall make a cash payment therefor upon the basis of the Warrant Price then in effect. 7. Compliance with Securities Act; Disposition of Warrant or Shares of Preferred Stock. (a) Compliance with Securities Act. The holder of this Warrant, by acceptance hereof, agrees that this Warrant, the shares of Preferred Stock to be issued upon exercise hereof and the Common Stock to be issued upon conversion of such Preferred Stock are being acquired for investment and that such holder will not offer, sell or otherwise dispose of this Warrant or any shares of Preferred Stock to be issued upon exercise hereof (or Common Stock issued upon conversion of the Preferred Stock) except as permitted in the legend below so as to not result in a violation of the Securities Act of 1933, as amended (the "Act"). This Warrant, all shares of Preferred Stock issued upon exercise of this Warrant and all shares of Common Stocks issuable upon conversion of said Preferred Stock (unless registered under the Act) shall be stamped or imprinted with a legend in substantially the following form: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT (i) AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO, (ii) AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED OR (iii) RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION TO THE EFFECT THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED. (b) Disposition of Warrant and Shares. With respect to any offer, sale or other disposition of this Warrant or any shares of Preferred Stock acquired pursuant to the exercise of this Warrant (or Common Stock issued upon conversion of such Preferred Stock) prior to registration of such shares, the holder hereof and each subsequent holder of the Warrant agrees to give written notice to the Company prior thereto, describing briefly the manner thereof, together with a written opinion of such holder's counsel, if reasonably requested by the Company, to the effect that such offer, sale or other disposition may be effected without registration or qualification (under the Act as then in effect or any federal or state law then in effect) of this Warrant or such shares of Preferred Stock or Common Stock and indicating whether or not under the Act certificates for this Warrant or such shares of Preferred Stock or Common Stock to be sold or otherwise disposed of require 7 any restrictive legend as to applicable restrictions on transferability in order to insure compliance with the Act. Each certificate representing this Warrant or the shares of Preferred Stock or Common Stock thus transferred (except a transfer pursuant to Rule 144) shall bear a legend as to the applicable restrictions on transferability in order to insure compliance with the Act, unless in the aforesaid opinion of counsel for the holder, such legend is not required in order to insure compliance with the Act. Nothing herein shall restrict the transfer of this Warrant or any portion hereof by the initial holder hereof to any partnership affiliated with the initial holder, or to any partner of any such partnership provided such transfer may be made in compliance with applicable federal and state securities laws. The Company may issue stop transfer instructions to its transfer agent in connection with the foregoing restrictions. 8. Rights as Shareholders; Information. 8.1 Shareholder Rights. No holder of the Warrant, as such, shall be entitled to vote or receive dividends or be deemed the holder of Preferred Stock or any other securities of the Company which may at any time be issuable on the exercise thereof for any purpose, nor shall anything contained herein be construed to confer upon the holder of this Warrant, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to receive notice of meetings, or to receive dividends or subscription rights or otherwise until this Warrant shall have been exercised and the Shares purchasable upon the exercise hereof shall have become deliverable, as provided herein. 8.2 Financial Statements and Information. The Company shall deliver to the registered holder hereof (i) within 120 days after the end of the fiscal year of the Company, a consolidated statement of income for such fiscal year, a consolidated balance sheet of the Company as of the end of such year and a consolidated statement of the sources and application of funds for such year, which year-end financial reports shall be in reasonable detail and certified by independent public accountants of nationally recognized standing selected by the Company, and (ii) within 45 days after the end of each fiscal quarter other than the last fiscal quarter, unaudited consolidated statements of income and sources and application of funds for such quarter and a consolidated balance sheet as of the end of such quarter. In addition, the Company shall deliver to the registered holder hereof any other information or data provided to the shareholders of the Company. 9. Registration Rights. The Company hereby covenants and agrees as follows: (a) The holder hereof shall be given the same registration rights as holders of the Company's Series C Preferred Stock, which shall be substantially of the form of the registration rights of the holders of the Company's Series B Preferred Stock attached hereto as Exhibit B. If the registration rights of the Series C Preferred Stock are not effective by January 31, 1990, the holder hereof shall be granted the registration rights granted to holders of Series B Preferred Stock. The holder hereof shall be deemed holder of the Registrable Securities as defined in the Exhibit B. 10. Additional Rights 10.1 Secondary Sales. The Company agrees to assist the holder of this Warrant in obtaining liquidity if opportunities to make secondary sales of the Company's securities become available. To this end, the Company will promptly provide the holder of this Warrant with notice of any offer to acquire from the Company's security holders more than five percent (5%) of the total voting power of the Company and will cooperate with the holder in arranging the sale of this Warrant to the person or persons making such offer. 8 10.2 Mergers. Unless the Company provides the holder of this Warrant with at least 7 days' notice' of the terms and conditions of the proposed transaction, the Company will not (i) sell, lease, exchange, convey or otherwise dispose of all or substantially all of its property or business, or (ii) merge into or consolidate with any other corporation (other than a wholly-owned subsidiary of the Company), or effect any transaction (including a merger or other reorganization) or series of related transactions, in which more than 50% of the voting power of the Company is disposed of. The Company will cooperate with the holder in arranging the sale of this Warrant in connection with any such transaction. 11. Representations and Warranties. This Warrant is issued and delivered on the basis of the following: (a) This Warrant has been duly authorized and executed by the Company and when delivered will be the valid and binding obligation of the Company enforceable in accordance with its terms; (b) The Shares will be duly authorized and reserved for issuance by the Company and, when issued in accordance with the terms hereof, will be validly issued, fully paid and nonassessable; (c) The rights, preferences, privileges and restrictions granted to or imposed upon the shares of Preferred Stock and the holders thereof will be set forth in the Company's Articles of Incorporation, as amended, a true and complete copy of which will be delivered to the original Warrantholder; (d) The shares of Common Stock issuable upon conversion of the Shares will be duly authorized and reserved and, when issued in accordance with the terms of the Company's Articles of Incorporation, as amended, will be validly issued, fully paid and nonassessable; and (e) The execution and delivery of this Warrant are not, and the issuance of the Shares upon exercise of this Warrant in accordance with the terms hereof will not be, inconsistent with the Company's Articles of Incorporation or by-laws, do not and will not contravene any law, governmental rule or regulation, judgment or order applicable to the Company, and do not and will not contravene any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument of which the Company is a party or by which it is bound or require the consent or approval of, the giving of notice to, the registration with or the taking of any action in respect of or by, any Federal, state or local government authority or agency or other person. 12. Modification and Waiver. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. 13. Notices. Any notice, request or other document required or permitted to be given or delivered to the holder hereof or the Company shall be delivered, or shall be sent by certified or registered mail, postage prepaid, to each such holder at its address as shown on the books of the Company or to the Company at the address indicated therefore on the signature page of this Warrant. 14. Binding Effect on Successors. This Warrant shall be binding upon any corporation succeeding the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets, and all of the obligations of the Company relating to the Preferred Stock issuable upon the exercise of this Warrant shall survive the exercise and termination of this Warrant and all of the covenants and agreements of the Company shall inure to the benefit of the successors and assigns of the holder hereof. The Company will, at the time of the exercise of this Warrant, in whole or in part, upon request of the holder hereof but at the Company's expense, acknowledge in writing its continuing obligation to the holder hereof in respect of any rights (including, without limitation, any right to registration of the shares of Registrable 9 Securities) to which the holder hereof shall continue to be entitled after such exercise in accordance with this Warrant; provided, that the failure of the holder hereof to make any such request shall not affect the continuing obligation of the Company to the holder hereof in respect of such rights. 15. Lost Warrants or Stock Certificates. The Company covenants to the holder hereof that upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of this Warrant or any stock certificate and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of such Warrant or stock certificate, the Company will make and deliver a new Warrant or stock certificate, or like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant or stock certificate. 16. Descriptive Headings. The descriptive headings of the several paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. 17. Governing Law. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of California. By: Title: Address: Date: 10 EXHIBIT A Notice of Exercise To: 1. The undersigned hereby elects to purchase shares of Series Preferred Stock of Corporation pursuant to the terms of the attached Warrant, and tenders herewith payment of the price of such shares in full. 2. Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name or names as are specified below: (Name) (Address) 3. The undersigned represents that the aforesaid shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares. -------------------------------- (Signature) - -------------------------------- (Date) 11 EXHIBIT A-1 Notice of Exercise To: 1. Contingent upon and effective immediately prior to the closing (the "Closing") of the Company's public offering contemplated by the Registration Statement of Form S-_____, filed ____________________, 19_____, the undersigned hereby elects to purchase ___________ shares of Series _____ Preferred Stock of the Company (or such lesser number of shares as may be sold on behalf of the undersigned at the Closing) pursuant to the terms of the attached Warrant. 2. Please deliver to the custodian for the selling shareholders a stock certificate representing such ___________ shares. 3. The undersigned has instructed the custodian for the selling shareholders to deliver to the Company $________________ or, if less, the net proceeds due the undersigned from the sale of shares in the aforesaid public offering. If such net proceeds are less than the purchase price for such shares, the undersigned agrees to deliver the difference to the Company prior to the Closing. ----------------------------- (Signature) - --------------------------- (Date) EX-4.4 8 FORM OF WARRANT TO PURCHASE SERIES D PREF STOCK 1 EXHIBIT 4.4 NEITHER THIS WARRANT NOR THE SHARES OF PREFERRED STOCK ISSUABLE UPON EXERCISE NOR SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF SAID SHARES OF PREFERRED STOCK HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. NO SALE, TRANSFER OR OTHER DISPOSITION OF THIS WARRANT OR SAID SHARES MAY BE EFFECTED WITHOUT (i) AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO, (ii) AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED OR (iii) RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION TO THE EFFECT THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED. Shares Issuable Upon Exercise: WARRANT TO PURCHASE SHARES OF SERIES D PREFERRED STOCK Expires _______________ THIS CERTIFIES THAT, for value received _________, is entitled to subscribe for and purchase ________ shares (as adjusted pursuant to provisions hereof, the "Shares") of the fully paid and nonassessable Series D Preferred Stock of Paravax, Inc., a California corporation (the "Company"), at a price per share of $_____ (such price and such other price as shall result, from time to time, from adjustments specified herein is herein referred to as the "Warrant Price"), subject to the provisions and upon the terms and conditions hereinafter set forth. As used herein, the term "Preferred Stock" shall mean the Company's presently authorized Series D Preferred Stock, or any stock into or for which such Series D Preferred Stock may hereafter be converted or exchanged pursuant to the Articles of Incorporation of the Company as from time to time amended as provided by law and in such Articles, and the term "Grant Date" shall mean _________. 2 1. Term. The purchase right represented by this Warrant is exercisable, in whole or in part, at any time and from time to time from and after the Grant Date and prior to the earlier of the ninth annual anniversary date of the Grant Date or the fourth annual anniversary of the consummation of the Company's initial public offering of its Common Stock, the aggregate gross proceeds from which exceed $5,000,000. 2. Method of Exercise; Net Issue Exercise. 2.1 Method of Exercise; Payment; Issuance of New Warrant. The purchase right represented by this Warrant may be exercised by the holder hereof, in whole or in part and from time to time, by either, at the election of the holder hereof, (a) the surrender of this Warrant (with the notice of exercise form attached hereto as Exhibit A duly executed) at the principal office of the Company and by the payment to the Company, by check, of an amount equal to the then applicable Warrant Price per share multiplied by the number of Shares then being purchased or (b) if in connection with a registered public offering of the Company's securities, the surrender of this Warrant (with the notice of exercise form attached hereto as Exhibit A-l duly executed) at the principal office of the Company together with notice of arrangements reasonably satisfactory to the Company for payment to the Company either by check or from the proceeds of the sale of shares to be sold by the holder in such public offering of an amount equal to the then applicable Warrant Price per share multiplied by the number of Shares then being purchased. The person or persons in whose name(s) any certificate(s) representing shares of Preferred Stock shall be issuable upon exercise of this Warrant shall be deemed to have become the holder(s) of record of, and shall be treated for all purposes as the record holder(s) of, the shares represented thereby (and such shares shall be deemed to have been issued) immediately prior to the close of business on the date or dates upon which this Warrant is exercised. In the event of any exercise of the rights represented by this Warrant, certificates for the shares of stock so purchased shall be delivered to the holder hereof as soon as possible and in any event within thirty days of receipt of such notice and, unless this Warrant has been fully exercised or expired, a new Warrant representing the portion of the Shares, if any, with respect to which this Warrant shall not then have been exercised shall also be issued to the holder hereof as soon as possible and in any event within such thirty-day period. 2.2 Net Issue Exercise. (a) In lieu of exercising this Warrant, holder 3 may elect to receive shares equal to the value of this Warrant (or the portion thereof being canceled) by surrender of this Warrant at the principal office of the Company together with notice of such election in which event the Company shall issue to the holder hereof a number of shares of the Company's Preferred Stock computed using the following formula: X = Y (A - B) --------- A Where X - The number of shares of Preferred Stock to be issued to holder. Y - the number of shares of Preferred Stock purchasable under this Warrant. A - the fair market value of one share of the Company's Preferred Stock. B - Warrant price (as adjusted to the date of such calculations). (b) For purposes of this Section, fair market value of the Company's Preferred Stock shall mean the average of the closing bid and asked prices of the Company's Preferred Stock quoted in the Over-The-Counter Market Summary or the closing price quoted on any exchange on which the Preferred Stock is listed, whichever is applicable, as published in the Western Edition of The Wall Street Journal for the ten trading days prior to the date of determination of fair market value. If the Preferred Stock is not traded Over-The-Counter or on an exchange, the fair market value shall be the price per share which the Company could obtain from a willing buyer for shares sold by the Company from authorized but unissued shares, as such price shall be determined in good faith by the Company's Board of Directors and shall be acceptable to the holder hereof, which acceptance shall not be unreasonably withheld. 3. Stock Fully Paid; Reservation of Shares. All Shares that may be issued upon the exercise of the rights represented by this Warrant and Common Stock issuable upon conversion of the Preferred Stock will, upon issuance, be fully paid and nonassessable, and free from all taxes, liens and charges with respect to the issue thereof. During the period within which the rights represented by the Warrant may be exercised, the Company will at all times have authorized and reserved for the purpose of issuance upon exercise of the purchase rights evidenced by this Warrant, a sufficient number of shares of its Preferred Stock (and Common Stock issuable upon conversion thereof) to provide for the exercise of the right represented by this Warrant. 4 4. Adjustment of Warrant Price and Number of Shares. The number and kind of securities purchasable upon the exercise of the Warrant and the Warrant Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows: (a) Reclassification or Merger. In case of any reclassification, change or conversion of securities of the class issuable upon exercise of this Warrant (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), or in case of any merger of the Company with or into another corporation (other than a merger with another corporation in which the Company is a continuing corporation and which does not result in any reclassification or change of outstanding securities issuable upon exercise of this Warrant), or in case of any sale of all or substantially all of the assets of the Company, the Company, or such successor or purchasing corporation, as the case may be, shall execute a new Warrant (in form and substance satisfactory to the holder of this Warrant) providing that the holder of this Warrant shall have the right to exercise such new Warrant and upon such exercise to receive, in lieu of each share of Preferred Stock theretofore issuable upon exercise of this Warrant, the kind and amount of shares of stock, other securities, money and property receivable upon such reclassification, change or merger by a holder of one share of Preferred Stock. Such new Warrant shall provide for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Paragraph 4. The provisions of this subparagraph (a) shall similarly apply to successive reclassifications, changes, mergers and transfers. (b) Subdivisions or Combination of Shares. If the Company at any time while this Warrant remains outstanding and unexpired shall subdivide or combine its Preferred Stock, the Warrant Price and the number of Shares issuable upon exercise hereof shall be proportionately adjusted. (c) Stock Dividends. If the Company at any time while this Warrant is outstanding and unexpired shall pay a dividend payable in shares of Preferred Stock (except any distribution specifically provided for in the foregoing subparagraphs (a) and (b)), then the Warrant Price shall be adjusted, from and after the date of determination of shareholders entitled to receive such dividend or distribution, to that price determined by multiplying the Warrant Price in effect immediately prior to such date of determination by a fraction (a) the numerator of which shall be the total number of shares of Preferred Stock outstanding immediately prior to such dividend or distribution, and (b) the denominator of which shall be the total number of shares of Preferred Stock outstanding immediately after such dividend or distribution and the number of Shares subject to this Warrant shall be proportionately adjusted. (d) No Impairment. The Company will not, by amendment of its Articles of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary 5 action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Paragraph 4 and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against impairment. (e) Notices of Record Date. In the event of any taking by the Company of a record of its shareholders for the purpose of determining shareholders who are entitled to receive payment of any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any share of any class or any other securities or property, or to receive any other right, or for the purpose of determining shareholders who are entitled to vote in connection with any proposed merger or consolidation of the Company with or into any other corporation, or any proposed sale, lease or conveyance of all or substantially all of the assets of the Company, or any proposed liquidation, dissolution or winding up of the Company, the Company shall mail to the holder of the Warrant, at least twenty (20) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. (f) Dilutive Issuances. See Exhibit C attached hereto and made a part hereof. [Remainder of this page intentionally left blank] 6 5. Notice of Adjustments. Whenever the Warrant Price shall be adjusted pursuant to the provisions hereof, the Company shall within thirty (30) days of such adjustment deliver a certificate signed by its chief financial officer to the registered holder(s) hereof setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the Warrant Price after giving effect to such adjustment. 6. Fractional Shares. No fractional shares of Preferred Stock will be issued in connection with any exercise hereunder, but in lieu of such fractional shares the Company shall make a cash payment therefor upon the basis of the Warrant Price then in effect. 7. Compliance with Securities Act; Disposition of Warrant or Shares of Preferred Stock. (a) Compliance with Securities Act. The holder of this Warrant, by acceptance hereof, agrees that this Warrant, the shares of Preferred Stock to be issued upon exercise hereof and the Common Stock to be issued upon conversion of such Preferred Stock are being acquired for investment and that such holder will not offer, sell or otherwise dispose of this Warrant or any shares of Preferred Stock to be issued upon exercise hereof (or Common Stock issued upon conversion of the Preferred Stock) except as permitted in the legend below so as to not result in a violation of the Securities Act of 1933, as amended (the "Act"). This Warrant, all shares of Preferred Stock issued upon exercise of this Warrant and all shares of Common Stocks issuable upon conversion of said Preferred Stock (unless registered under the Act) shall be stamped or imprinted with a legend in substantially the following form: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT (i) AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO, (ii) AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED OR (iii) RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION TO THE EFFECT THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED. (b) Disposition of Warrant and Shares. With respect to any offer, sale or other disposition of this Warrant or any shares of Preferred Stock acquired pursuant to the exercise of this Warrant (or Common Stock issued upon conversion of such Preferred Stock) prior to registration of such shares, the holder hereof and each subsequent holder of the Warrant agrees to give written notice to the Company prior thereto, describing briefly the manner thereof, together with a written opinion of such holder's counsel, if reasonably requested by the Company, to the effect that such offer, sale or other disposition may be effected without registration or qualification (under the Act as then in effect or any federal or state law then in effect) of this Warrant or such shares of Preferred Stock or Common Stock and indicating whether or not under the Act certificates for this Warrant or such shares of Preferred Stock or Common Stock to be sold or otherwise disposed of require 7 any restrictive legend as to applicable restrictions on transferability in order to insure compliance with the Act. Each certificate representing this Warrant or the shares of Preferred Stock or Common Stock thus transferred (except a transfer pursuant to Rule 144) shall bear a legend as to the applicable restrictions on transferability in order to insure compliance with the Act, unless in the aforesaid opinion of counsel for the holder, such legend is not required in order to insure compliance with the Act. Nothing herein shall restrict the transfer of this Warrant or any portion hereof by the initial holder hereof to any partnership affiliated with the initial holder, or to any partner of any such partnership provided such transfer may be made in compliance with applicable federal and state securities laws. The Company may issue stop transfer instructions to its transfer agent in connection with the foregoing restrictions. 8. Rights as Shareholders; Information. 8.1 Shareholder Rights. No holder of the Warrant, as such, shall be entitled to vote or receive dividends or be deemed the holder of Preferred Stock or any other securities of the Company which may at any time be issuable on the exercise thereof for any purpose, nor shall anything contained herein be construed to confer upon the holder of this Warrant, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to receive notice of meetings, or to receive dividends or subscription rights or otherwise until this Warrant shall have been exercised and the Shares purchasable upon the exercise hereof shall have become deliverable, as provided herein. 8.2 Financial Statements and Information. The Company shall deliver to the registered holder hereof (i) within 120 days after the end of the fiscal year of the Company, a consolidated statement of income for such fiscal year, a consolidated balance sheet of the Company as of the end of such year and a consolidated statement of the sources and application of funds for such year, which year-end financial reports shall be in reasonable detail and certified by independent public accountants of nationally recognized standing selected by the Company, and (ii) within 45 days after the end of each fiscal quarter other than the last fiscal quarter, unaudited consolidated statements of income and sources and application of funds for such quarter and a consolidated balance sheet as of the end of such quarter. In addition, the Company shall deliver to the registered holder hereof any other information or data provided to the shareholders of the Company. 9. Registration Rights. The Company hereby covenants and agrees that the holder hereof (or any registered transferee thereof pursuant to section 7 hereof), shall be entitled to participate in the registration rights with respect to the Preferred Stock or Common Stock issuable upon conversion thereof purchasable by the holder hereof pursuant to the Warrant, in the same manner and to the same extent as a "Holder" pursuant to Section 6 of the Company's Series D Preferred Stock Purchase Agreement, dated as of 8 [ ], a true and correct copy of which is attached hereto as Exhibit B (the "Registration Rights"). The holder hereof shall be deemed a "Holder" and the shares of Preferred Stock issuable upon exercise of this Warrant and Common Stock upon conversion thereof shall be deemed "Registrable Securities" as those terms are defined in the Registration Rights. Anything to the contrary notwithstanding, the registration rights of the holder of this Warrant under this Section 9., may be transferred to any affiliate of the holder hereof. 10. Additional Rights. 10.1 Secondary Sales. The Company agrees to assist the holder of this Warrant in obtaining liquidity if opportunities to make secondary sales of the Company's securities become available. To this end, the Company will promptly provide the holder of this Warrant with notice of any offer to acquire from the Company's security holders more than five percent (5%) of the total voting power of the Company and will cooperate with the holder in arranging the sale of this Warrant to the person or persons making such offer. 10.2 Mergers. Unless the Company provides the holder of this Warrant with at least 7 days' notice of the terms and conditions of the proposed transaction, the Company will not (i) sell, lease, exchange, convey or otherwise dispose of all or substantially all of its property or business, or (ii) merge into or consolidate with any other corporation (other than a wholly-owned subsidiary of the Company), or effect any transaction (including a merger or other reorganization) or series of related transactions, in which more than 50% of the voting power of the Company is disposed of. The Company will cooperate with the holder in arranging the sale of this Warrant in connection with any such transaction. 11. Representations and Warranties. This Warrant is issued and delivered on the basis of the following: (a) This Warrant has been duly authorized and executed by the Company and when delivered will be the valid and binding obligation of the Company enforceable in accordance with its terms; (b) The Shares will be duly authorized and reserved for issuance by the Company and, when issued in accordance with the terms hereof, will be validly issued, fully paid and nonassessable; (c) The rights, preferences, privileges and restrictions granted to or imposed upon the shares of Preferred Stock and the holders thereof will be set forth in the Company's Articles of Incorporation, as amended, a true and complete copy of which will be delivered to the original Warrantholder; (d) The shares of Common Stock issuable upon conversion of the Shares will be duly authorized and reserved and, when issued in accordance with the terms of the Company's Articles of Incorporation, as amended, will be validly issued, fully paid and nonassessable; and 9 (e) The execution and delivery of this Warrant are not, and the issuance of the Shares upon exercise of this Warrant in accordance with the terms hereof will not be, inconsistent with the Company's Articles of Incorporation or by-laws, do not and will not contravene any law, governmental rule or regulation, judgment or order applicable to the Company, and do not and will not contravene any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument of which the Company is a party or by which it is bound or require the consent or approval of, the giving of notice to, the registration with or the taking of any action in respect of or by, any Federal, state or local government authority or agency or other person. 12. Modification and Waiver. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. 13. Notices. Any notice, request or other document required or permitted to be given or delivered to the holder hereof or the Company shall be delivered, or shall be sent by certified or registered mail, postage prepaid, to each such holder at its address as shown on the books of the Company or to the Company at the address indicated therefore on the signature page of this Warrant. 14. Binding Effect on Successors. This Warrant shall be binding upon any corporation succeeding the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets, and all of the obligations of the Company relating to the Preferred Stock issuable upon the exercise of this Warrant shall survive the exercise and termination of this Warrant and all of the covenants and agreements of the Company shall inure to the benefit of the successors and assigns of the holder hereof. The Company will, at the time of the exercise of this Warrant, in whole or in part, upon request of the holder hereof but at the Company's expense, acknowledge in writing its continuing obligation to the holder hereof in respect of any rights (including, without limitation, any right to registration of the shares of Registrable Securities) to which the holder hereof shall continue to be entitled after such exercise in accordance with this Warrant; provided, that the failure of the holder hereof to make any such request shall not affect the continuing obligation of the Company to the holder hereof in respect of such rights. 15. Lost Warrants or Stock Certificates. The Company covenants to the holder hereof that upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of this Warrant or any stock certificate and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation 10 of such Warrant or stock certificate, the Company will make and deliver a new Warrant or stock certificate, or like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant or stock certificate. 16. Descriptive Headings. The descriptive headings of the several paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. 17. Governing Law. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of California. By: Title: Address: 1825 Sharp Point Drive Fort Collins, CO 80525 Date: 11 EXHIBIT A Notice of Exercise To: 1. The undersigned hereby elects to purchase shares of Series Preferred Stock of Corporation pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full. 2. Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name or name as are specified below: (Name) (Address) 3. The undersigned represents that the aforesaid shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares. (Signature) (Date) 12 EXHIBIT A-l Notice of Exercise To: 1. Contingent upon and effective immediately prior to the closing (the "Closing") of the Company's public offering contemplated by the Registration Statement of Form S-_____, filed _____________________, 19_____, the undersigned hereby elects to purchase ___________ shares of Series _____ Preferred Stock of the Company (or such lesser number of shares as may be sold on behalf of the undersigned at the Closing) pursuant to the terms of the attached Warrant. 2. Please deliver to the custodian for the selling shareholders a stock certificate representing such __________ shares. 3. The undersigned has instructed the custodian for the selling shareholders to deliver to the Company $________________ or, if less, the net proceeds due the undersigned from the sale of shares in the aforesaid public offering. If such net proceeds are less than the purchase price for such shares, the undersigned agrees to deliver the difference to the Company prior to the Closing. (Signature) (Date) 13 EXHIBIT C Dilutive Issuances Adjustment of Warrant Price and Number of Shares. The number and kind of securities purchasable upon the exercise of the Warrant and the Warrant Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows: (a) Adjustment of Warrant Price upon Issuance of Additional Stock. The Warrant Price shall be subject to adjustment from time to time as follows: (i) (A) Upon each issuance by the Company of any Additional Stock (as defined below), after the Grant Date, without consideration or for a consideration per share less than the Warrant Price in effect immediately prior to the issuance of such Additional Stock, the Warrant Price in effect immediately prior to each such issuance shall forthwith (except as otherwise provided in this Section 4 (a)) be adjusted to a price determined by multiplying the Warrant Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance (including the number of Shares of Common Stock issuable upon conversion of all outstanding shares of preferred stock of the Company) plus the number of shares of Common Stock which could be purchased were the then Warrant Price used instead (calculated by dividing the total consideration (before deduction of costs) to be received by the Company in such issuance by the then Warrant Price) and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance (including the number of Shares of Common Stock issuable upon conversion of all outstanding shares of preferred stock of the Company) plus the number of shares of such Additional Stock issued in such issuance. (B) No adjustment of the Warrant Price shall be made in an amount less than one cent per share, provided that any adjustments which are not required to be made by reason of this sentence shall be carried forward and shall be either taken into account in any subsequent adjustment made prior to 3 years from the date of the event giving rise to the adjustment being carried forward, or shall be made at the end of 3 years from the date of the event giving rise to the adjustment being carried forward. Except to the limited extent provided for in subsections 4 (a) (i) E (3) and E (4), no adjustment of the Warrant Price pursuant to this subsection 4 (a) (i) shall have the effect of increasing the Warrant Price above the Warrant Price in effect immediately prior to such adjustment. (C) In the case of issuance by the Company of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by the Company for any underwriting or otherwise in connection with the issuance and sale thereof. (D) In the case of issuance by the Company of Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value as determined by the Board of Directors of the Company irrespective of any accounting treatment. (E) In the case of the issuance (whether before, on or after the Grant Date) of options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities, the following provisions shall apply for all purposes of this subsection 4 (a) (i); 1. The aggregate maximum number of shares of Common Stock deliverable upon exercise (to the extent then exercisable) of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in subsections 4 (a) (i) (C) and (a) (i) (D)), if any, received by the Company upon issuance of such options or rights plus the minimum exercise price provided in 14 such options or rights (without taking into account potential antidilution adjustments) for the Common Stock covered thereby. 2. The aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange for (to the extent then convertible or exchangeable) convertible or exchangeable securities or upon exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by the Company for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the minimum additional consideration, if any, to be received by the Company (without taking into account potential antidilution adjustments) upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in subsections 4 (a) (i) (C) and 4 (a) (i) (D)). 3. In the event of any change in the number of shares of Common Stock deliverable or in the consideration payable to the Company upon exercise of such options or rights or upon conversion of or in exchange for such convertible or exchangeable securities, including but not limited to, a change resulting from antidilution provisions thereof, the Warrant Price, to the extent in any way affected by or computed using such options, rights or securities, shall be adjusted based upon the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights or the conversion or exchange of such securities. 4. Upon the expiration of any such options or rights, the termination of any such options or rights to convert or exchange, or the expiration of any options or rights related to such convertible or exchangeable securities, the Warrant Price, to the extent in any way affected by or computed using such options, rights or securities or options or rights related to such securities, shall 15 be recomputed to reflect the issuance of only the number of shares of Common Stock (and convertible or exchangeable securities which remain in effect) actually issued upon the exercise of such options or rights(1) upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities. 5. The number of shares of Common Stock deemed issued and the consideration deemed paid therefor pursuant to subsections 4 (a) (i) (E) (1) and (2) shall be appropriately adjusted to reflect any change, termination or expiration of the type described in either subsection 4 (a) (i) (E) (3) or (4). (ii) "Additional Stock" shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to subsection 4 (a) (i) (E)) by this Company after the Grant Date other than (A) Common Stock issued pursuant to a transaction described in subsection 4 (a) (iii) hereof, or (B) shares of Common Stock issuable or issued to officers, employees, consultants, directors of the Company or, in connection with commercial relationships, to vendors or customers. (iii) Notwithstanding any provisions to this Section 4 (a) to the contrary, no adjustment to the Warrant Price shall be made to this Section 4 (a) upon issuance by the company of Additional Stock to the extent a corresponding adjustment is made to the Conversion Price of the Preferred Stock pursuant to the Company's Articles of Incorporation. (iii) Upon each adjustment of the Warrant Price pursuant to this Section 4 (a), the number of Shares issuable upon exercise hereof shall be adjusted such that the aggregate purchase price for all of such Shares, as adjusted, equals $60,125.00. EX-9.1 9 VOTING AGREEMENT DATED 4-12-96 1 EXHIBIT 9.1 VOTING AGREEMENT This Agreement is made as of the 12th day of April, 1996 by and among HESKA CORPORATION, a California corporation (the "Company"), CIBA-GEIGY LIMITED, a Swiss corporation ("Ciba- Geigy"), VOLENDAM INVESTERINGEN N.V., a Netherlands Antilles corporation ("Volendam"), CHARTER VENTURES, a California limited partnership ("Charter I"), and CHARTER VENTURES II, L.P., a California limited partnership ("Charter II", and collectively with Ciba-Geigy, Volendam and Charter I, the "Shareholders"). WHEREAS, in order to induce Ciba-Geigy and the Company to enter into that certain Series F Preferred Stock Purchase Agreement dated as of the date hereof (the "Series F Agreement"), and to induce Charter I, Charter II and Volendam to consent to the transactions contemplated by the Series F Agreement, the parties hereto have indicated their willingness to enter into this Agreement upon the terms and conditions set forth below; and WHEREAS, the parties hereto enter this Agreement for the additional purpose of confirming the arrangements for election of directors of the Company; IT IS HEREBY AGREED AS FOLLOWS: 1. Agreement to Vote. During the term of this Agreement, and notwithstanding the provisions of Article Four, Sections 6(b), 6(c) and 6(d) of the Amended and Restated Articles of Incorporation of the Company (the "Restated Articles"), the Shareholders shall vote or act with respect to all shares of the Company's voting securities now or hereafter owned by them, whether beneficially or otherwise (the "Shares"), so as to elect the directors of the Company as follows: (a) One designee of Charter I and Charter II (the "Charter Designee") who shall be reasonably acceptable to Volendam and Ciba-Geigy. The Charter Designee shall initially be A. Barr Dolan. Any vacancy occurring because of the death, resignation, or removal of the Charter Designee shall be filled according to this paragraph 1(a). (b) One designee of Volendam (the "Volendam Designee"), who shall be reasonably acceptable to Charter I, Charter II and Ciba-Geigy. The Volendam Designee shall initially be Denis Pomroy. Any vacancy occurring because of the death, resignation, or removal of the Volendam Designee shall be filled according to this paragraph 1(b). (c) One designee of Ciba-Geigy (the "Ciba-Geigy Designee"), who shall be reasonably acceptable to Charter I, Charter II and Volendam. The Ciba-Geigy Designee shall initially be Dr. Giuseppe Miozzari. Any 2 vacancy occurring because of the death, resignation, or removal of the Ciba-Geigy Designee shall be filled according to this paragraph 1(c). (d) With respect to the remaining directors not elected pursuant to Sections 1(a), (b) and (c), the Shareholders shall vote their Shares to elect directors who are not affiliated in any material respect with any of the Shareholders but are reasonably acceptable to all of the Shareholders (the "Remaining Designees"). The Shareholders shall vote their Shares to fill any vacancy occurring because of the death, resignation, or removal of a Remaining Designee according to this paragraph 1(d). 2. Successors in Interest of the Shareholders. The provisions of this Agreement shall be binding upon the successors in interest of the Shareholders to any of the Shareholders' Shares, excluding any purchasers of Shares in the public market. 3. Covenants of the Company. The Company agrees to take all actions required to ensure that the rights given to the Shareholders hereunder are effective and that the Shareholders enjoy the benefits thereof. Such actions include, without limitation, the use of the Company's best efforts to cause the nomination of the designees of the Shareholders, as provided herein, for election as directors of the Company. The Company will not, by any voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all of the provisions of this Agreement and in the taking of all such actions as may be necessary or appropriate in order to protect the rights of the Shareholders hereunder against impairment. 4. Termination. This Agreement shall terminate upon the earlier of (a) such time as any of the Shareholders or their successors in interest bound hereby (with the holdings of Charter I and Charter II aggregated) does not hold an aggregate of 2,000,000 shares of voting securities of the Company, as adjusted for stock splits, recapitalizations and the like, or (b) December 31, 2005. 5. Amendments and Waivers. Any term hereof may be amended and the observance of any term hereof may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Company and each of the Shareholders. 6. Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be held to be prohibited -2- 3 by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 7. Governing Law. This Agreement shall be governed by and construed under the laws of the State of California, without regard to the conflict of laws provisions thereof. 8. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 9. Successors and Assigns. Except as otherwise expressly provided in this Agreement, the provisions hereof shall inure to the benefit of, and be binding upon, the successors and assigns of the parties hereto. Notwithstanding any other provision of this Agreement, Ciba-Geigy may assign all of its rights and obligations hereunder in connection with the merger of Ciba-Geigy and Sandoz Limited, and the formation of a new entity, Novartis. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. HESKA CORPORATION By: /s/ FRED M. SCHWARZER ----------------------- Title: President -------------------- Address: 1825 Sharp Point Drive Fort Collins, CO 80525 Attention: Chief Executive Officer -3- 4 SHAREHOLDERS: CIBA-GEIGY LIMITED, a Swiss corporation By: /s/ H.B. GURTLER DR. P. KORNICKER ------------------------------------- H.B. GURTLER President Animal Dr. P. Kornicker Title: Health Division Division Counsel ---------------------------------- Address: Klybecksts A4A ---------------------------------------- 4002 Basel ---------------------------------------- Attention: Dr. R. Muttenzer ---------------------------------------- CHARTER VENTURES, a California limited partnership By: /s/ A. BARR DOLAN ------------------------------------- Title: General Partner ---------------------------------- Address: 525 University Avenue Suite 1500 Palo Alto, CA 94301 Attention: A. Barr Dolan CHARTER VENTURES II, L.P. By: /s/ A. BARR DOLAN ------------------------------------- Title: GENERAL PARTNER ---------------------------------- Address: 525 University Avenue Suite 1500 Palo Alto, CA 94301 Attention: A. Barr Dolan -4- 5 VOLENDAM INVESTERINGEN N.V. /s/ ANNEKE SOEDHOE By: Mees Pierson Trust (Curacao) N.V. ------------------------------------- Title: Managing Director ---------------------------------- Address: c/o Mees Pierson Trust (Curacao) 14 John B. Gorsiraweg P.O. Box 3889 Curacao, Netherlands Antilles Attention: Germaine Sprock -5- EX-10.1 10 *CONFIDENTIAL TREATMENT* COLL AGREEMENT EISAI 1 [CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTIONS OF THIS DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE COMMISSION] EXHIBIT 10.1 EISAI/PARAVAX COLLABORATIVE AGREEMENT JANUARY 1993 2 AGREEMENT This Agreement is made and entered into on this 25 day of January 1993 by and between Paravax, Inc., a corporation duly organized and existing under the laws of the Sate of California, U.S.A., having its principal place of business at 2301 Research Blvd. Suite 110, Fort Collins, Colorado 80526, U.S.A ("Paravax") and Eisai Co., Ltd., a corporation duly organized and existing under the laws of Japan, having its principal place of business at 4-6-10, Koishikawa, Bunkyo- ku, Tokyo, 112-88 Japan ("Eisai"). WITNESSETH: WHEREAS, Paravax is in the business of the research and development of certain potential vaccines for animal use and has the full right to develop, manufacture, use and sell the potential vaccines described in Exhibits A and C attached hereto (the "Products"); WHEREAS, Eisai is willing to provide certain funding to assist Paravax in the research and development of the Products; and; WHEREAS, in exchange for Eisai's provision of funding, Paravax is willing to grant to Eisai the exclusive right to distribute, sell and market the Products in Japan and Southeast Asia including the People's Republic of China which are more fully described in Exhibit B attached hereto (the "Territory"). NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, Paravax and Eisai hereby agree as follows: 1 3 ARTICLE 1. GRANT OF RIGHTS Paravax hereby grants to Eisai the exclusive rights to distribute, sell and market the Products in the Territory during the term of this Agreement. Eisai shall have the right to distribute, sell and market the Products through its subsidiary corporations or through corporations over which it has common control with another corporation. Eisai shall also have the right to appoint a third party as a distributor in connection with the distribution, sale and marketing of the Products in the Territory. ARTICLE 2. CONSIDERATION As consideration for the rights granted by Paravax to Eisai hereunder, Eisai shall pay a license fee of [ ] to Paravax within 30 days from the date of execution of this Agreement. ARTICLE 3. RESEARCH SUPPORT PAYMENT Eisai shall provide annual funds to support research and development to Paravax in two equal payments per year (the "Research Support Payments") for each of the Products. The first of the Research Support Payments for each of the Products shall be equal to one-half (1/2) of the annual amount indicated in Exhibit D attached hereto and shall be made within thirty (30) days from the date of this Agreement. The second of the Research Support Payments for each of the Products shall also be equal to one-half (1/2) of the annual amount 2 4 indicated in Exhibit D attached hereto and shall be paid when the milestones, as set forth on Exhibit E attached hereto, have been met with respect to that specific Product. The first of the Research Support Payments for each of the Products to be made in the second and third years of this Agreement shall be equal to one- half (1/2) of the annual amount indicated in Exhibit D attached hereto and shall be paid within thirty (30) days from the first day of such year. The second of the Research Support Payments for each of the Products to be made in the second and third years of this Agreement shall also be equal to one-half (1/2) of the annual amount indicated in Exhibit D attached hereto and shall be paid when the respective milestone for such payment, as set forth on Exhibit E attached hereto, has been met with respect to that specific Product. ARTICLE 4. TERMINATION OF RESEARCH SUPPORT PAYMENTS Eisai shall have the option to discontinue the Research Support Payments for any and/or all the Product(s) by giving ninety (90) days prior written notice to Paravax. In the event that Eisai decides to discontinue Research Support Payments for such Product(s), Eisai shall lose all rights granted by Paravax to Eisai hereunder with respect to the distribution, sale and marketing of such product(s) in the Territory. ARTICLE 5. RESEARCH AND DEVELOPMENT In the event that Paravax decides to discontinue research and development with respect to any Product as to which Eisai is willing to continue Research Support Payments or has paid Research Support Payments: 3 5 i) Eisai shall have the right to discontinue Research Support Payments immediately; ii) Paravax shall provide Eisai with all data, reports, materials and any other technical information that are in the possession of Paravax at the time of such discontinuation; iii) Eisai shall have the right to use all data, reports, materials and any other technical information provided by Paravax hereunder in order to continue research and development of such Product on its own and shall also have the exclusive rights (with the right to sublicense) to manufacture, distribute, sell and market any resulting Product in the Territory, provided, however, that Eisai shall pay a reasonable royalty to Paravax with respect to its sales of such resulting Product in the Territory, the amount of which royalty shall take into consideration the value of the technical information and materials provided by Paravax and whether any patents owned by Paravax are used in the manufacture, distribution, sale or marketing of the Product; iv) Eisai shall give Paravax the right of first refusal to obtain an exclusive right to distribute, sell and market such resulting Product anywhere outside of the Territory, except for European countries where Paravax shall be granted the non-exclusive right to distribute, sell and market such resulting Product. The terms of such exclusive right and non-exclusive right shall take into consideration the value of the technical information and materials provided by Paravax and whether any patents owned by Paravax are used in the manufacture, distribution, sale of marketing of the Product: v) When Paravax is interested in obtaining the exclusive right and/or the non-exclusive right set forth in the preceding paragraph, Paravax and Eisai shall in good faith discuss and determine the terms and conditions of a distribution agreement to be executed by the parties hereto, separately from this 4 6 Agreement. Paravax shall pay a reasonable purchase price to Eisai with respect to Paravax's purchase of such resulting Product from Eisai, in accordance with the provisions of the distribution agreement. In the event that it is not commercially feasible for Paravax to distribute, sell and market any Products outside the Territory at the price charged to Paravax by Eisai for such Products, or that Eisai materially breaches its obligation pursuant to the terms and conditions of the distribution agreement to supply Paravax's requirements for Products for distribution and sale outside the Territory, Eisai shall grant to Paravax the rights (with the rights to sublicense) to manufacture, distribute, sell and market such Products outside the Territory, provided, however, that Paravax shall pay a reasonable royalty to Eisai with respect to Paravax's sale of such Products outside the Territory. ARTICLE 6. SUPPLY OF PRODUCTS Paravax shall manufacture and provide Eisai with all Products to be sold by Eisai pursuant to this Agreement, other than those developed by Eisai pursuant to Article 5 hereof. The price charged to Eisai by Paravax for such Products shall be reasonably agreed to by Paravax and Eisai and shall provide for a reasonable profit to Paravax as part of such price. A Supply Agreement for Products will be made and executed by the parties hereto, separately from this Agreement. The Supply Agreement will provide for reasonable forecasts, lead times and minimum order quantities and will require Paravax to use its best efforts to fill all such orders by Eisai, but will allow for reasonable and understandable delays. 5 7 ARTICLE 7. GRANT OF MANUFACTURING RIGHTS Notwithstanding the provisions of Article 6 above, in the event that it is not commercially feasible for Eisai to distribute, sell and market any Product in the Territory at the price charged to Eisai by Paravax for such Product, or that Paravax materially breaches its obligations pursuant to terms of the Supply Agreement to supply Eisai's requirements for Products for distribution and sale in the Territory, Paravax shall grant to Eisai the exclusive rights (with the right to sublicense) to manufacture the Product for distribution, sale and marketing in the Territory to the extent permitted by Article 1 of this Agreement. ARTICLE 8. DEVELOPMENT PLAN Paravax shall, as a condition precedent hereto, prior to execution of this Agreement, deliver a development plan for the Products to Eisai. This development plan shall set forth Paravax's anticipated development program for each of the Products, together with significant anticipated milestones and corresponding projection dates for the completion of such milestones. ARTICLE 9. PATENT AND REPORTS, ETC. 9.1 Paravax shall represent and warrant to Eisai that Paravax has full right and authority to fulfill its obligations pursuant to this Agreement, and Paravax shall immediately disclose to Eisai any pending patent applications and registered patents for the Products in the Territory and shall cooperate with Eisai with respect to the filing of additional patent applications for the Products in the Territory. 6 8 9.2 Promptly after registration and issuance of the patents for the Products in the Territory, Paravax and Eisai, shall register, at Eisai's sole discretion, any and all exclusive licenses for the patent (in Japan, such exclusive license for the patent shall be registered as "senyo-jisshi-ken" as provided for in Articles 77 and 98 of the Japanese Patent Law and corresponding provisions in other countries and jurisdictions in the Territory) granted to Eisai hereunder under the patent law in the Territory. Upon Eisai's request, Paravax shall provide Eisai with necessary documents and/or information in cooperation with the registration of such exclusive license for the patent. 9.3 In the event that additional patents are filed as a result of scientific collaboration between Paravax and Eisai, such patents shall be jointly owned by both Paravax and Eisai and all necessary filings shall be made to reflect such joint ownership with the applicable patent authorities. Paravax and Eisai shall enter into a separate written agreement reflecting the nature and scope of any such scientific collaboration prior to its commencements. Any and all expenses necessary for obtaining and maintaining such patents jointly owned by both Paravax and Eisai shall be equally borne by Paravax and Eisai anywhere. 9.4 Paravax shall cooperate with Eisai to allow Eisai to conduct reasonable testing of the antigen materials to be used for the Products. 9.5 Paravax shall provide quarterly written reports to Eisai on its research efforts with respect to the Products during the time that Eisai is providing Research Support Payments with respect to such Products. Paravax shall also provide written reports to Eisai on its research efforts with respect to the Products during the term of this Agreement at any time upon written request from Eisai. 7 9 9.6 Eisai's scientific personnel shall be freely allowed to visit Paravax's facilities in order to evaluate the research efforts by Paravax pursuant to this Agreement. ARTICLE 10. TRADEMARK Eisai shall distribute, sell and market the Products in the Territory using its own trademarks and trade names. Eisai shall be responsible for obtaining and maintaining all regulatory approval necessary for the lawful distribution, sale and marketing of the Products in the Territory. ARTICLE 11. TERM The term of this Agreement shall be fifteen (15) years from the date of execution of this Agreement, unless this Agreement is terminated sooner in accordance with the provisions set forth herein, provided, however, that this period may be extended by mutual agreement between both parties. ARTICLE 12. TERMINATION 12.1 If this Agreement has not otherwise been extended or terminated, not later than twelve months prior to end of the fifteen (15) year term provided for in Article 11 hereof, Eisai and Paravax shall meet and attempt in good faith to negotiate an extension of this Agreement upon terms which are commercially reasonable as of such date. 8 10 12.2 Either party may terminate this Agreement upon written notice to the other party if the other party has materially failed to perform or comply with any of its material obligations set forth herein and if such failure has continued for more than sixty (60) days after the receipt of written notice requesting performance of compliance thereof. Although either party may terminate this Agreement in the event that the other party fails to perform or comply with any of its obligations set forth herein, neither party shall be responsible to the other party for any lost profits, replacement costs or similar damages as a result of such failure to perform or comply with any of its obligations set forth herein, provided, however, that in the event that the other party has materially failed to perform or comply with any of its material obligations set forth herein, the other party in default shall be responsible to the non-defaulting party for any expenses, costs, lost profits, replacement costs and damages (including reasonable attorney's fees) incurred by the non- defaulting party as a result of such failure. 12.3 Eisai may terminate this Agreement upon written notice to Paravax (i) if Dr. Robert B. Grieve has retired or resigned from Paravax or has stopped his involvement in the research and development of the Products, such that, in Eisai's judgment, it will be difficult to continue the research and development of the Products, or (ii) if a key researcher has retired or resigned from Paravax or has stopped his/her involvement in the research and development of the Products, such that, in Eisai's judgment, it will be difficult to continue the research and development of the Products. 9 11 12.4 Either party may terminate this Agreement upon sending a written notice to the other party when (i) the other party has transferred its business or material assets to a third party, (ii) the rights and obligations under this Agreement, in whole or in part, have been assigned by the other party to any third party without the prior written consent of the party or (iii) the other party is deemed to have financial difficulties which would necessitate, among others, the appointment of a receiver, the postponement of loan payments, application for bankruptcy, insolvency or similar proceedings. 12.5 In the event that either party is acquired by a third party, including but not limited to, by merger, consolidation, sale of assets, or by such issuance or transfer of a sufficient number of shares of its capital stock that the shareholders of such party immediately prior to the transaction hold less than fifty percent (50%) of the number of share outstanding immediately after such transaction, the other party may, at its sole option, either (i) terminate this Agreement upon thirty (30) days written notice to such party, or (ii) continue the performance of this Agreement thereafter, provided that the acquiring party assign all rights and obligations of this Agreement to the acquiring party and the terms and conditions thereof shall be reviewed by the other party to determine if they would be acceptable to the other party. 12.6 In the event that this Agreement is terminated by Eisai pursuant to Section 12.2, 12.3(i), and 12.4 hereof as a result of a breach of this Agreement by Paravax, Paravax shall immediately provide Eisai with all data, reports, materials and any other technical information that are in the possession of Paravax at the time of the termination of this Agreement with respect to the 10 12 manufacture of the Products, and without paying any compensation to Paravax, Eisai shall have the right to use all such data, reports, materials, patents (if any) and any other technical information provided by Paravax hereunder in order to continue research and development of the Products on its own and shall have the perpetual rights (with the rights to sublicense) to manufacture such Products for distribution, sale and marketing in the Territory to the extent permitted by Article I of its Agreement, provided, however, that, in case of termination of this Agreement by Eisai pursuant to Section 12.3(i), Paravax also has a right to use the data, reports, materials, patents (if any) and any other technical information provided by Paravax to Eisai hereunder. It is expressly agreed that a termination of this Agreement pursuant to the provisions of Sections 12.3, 12.4 (excluding Sections 12.4 (ii) and (iii)) or 12.5 hereof shall not be deemed to be a termination as a result of a material breach of this Agreement. ARTICLE 13. INTELLECTUAL PROPERTY 13.1 Paravax will defend, at its own expense, any claim, suit or proceeding brought against Eisai to the extent it is based upon a claim that any Product sold to Eisai pursuant to this Agreement infringes upon any patent, copyright or trade secret of any third party in the Territory. Eisai agrees that it shall promptly notify Paravax in writing of any such claim or action and give Paravax full information and assistance in connection therewith. Paravax shall have the right to control the defense of any such claim or action and the right to settle or compromise any such claim or action, provided, however, that Paravax shall not make any settlement or compromise which would prevent Eisai from manufacturing, distributing, selling, and marketing the Product(s) under this Agreement. If Eisai complies with the provisions hereof, Paravax will pay all damages, costs and expenses finally awarded to third parties against Eisai in such action. If such Product does infringe, or in Paravax's opinion 11 13 might be held to infringe, as set forth above, Paravax may, at its option, replace or modify such Product so as to avoid infringement, or procure the right for Eisai to continue the distribution, sale and marketing of such Product in the Territory. If neither of such alternatives is commercially reasonable, Eisai may terminate this Agreement upon written notice to Paravax. 13.2 Paravax will have no liability for any claim of infringement arising as a result of Eisai's use of the products in combination with any items not supplied by Paravax, or any modification of the products by Eisai or third parties. 13.3 The foregoing states the entire liability of Paravax to Eisai or any purchaser of Products concerning infringement of intellectual property rights, including but not limited to, patent, copyright and trade secret rights. ARTICLE 14. CONFIDENTIALITY During the term of this Agreement and for a period of two (2) years after the expiration of the term of this Agreement or for a period of five (5) years after early termination of this Agreement for any cause whatsoever, neither party shall disclose any information acquired during the performance of this Agreement related to plans, drawings, specifications, business goals, customers, personnel, products, manufacturing processes, work procedures or servicing to any third party. The confidentiality provision set forth above shall not be applicable in the following circumstances: a. when the information concerned becomes public knowledge or publicly available without infringing the terms of this Agreement; 12 14 b. when the party which received the information concerned had already been, in possession of such information without any obligation to keep it confidential, on the date of such receipt; c. when either party received the information concerned from a third party or developed such information independent from the information received from the other party; d. when the other party has given its consent in writing for the information concerned to be revealed; e. when it is inevitable for the information concerned to be revealed through distribution of the Products or through documents related to the Products; f. when the information concerned is revealed in accordance with a legal order from government authorities; In this case, however, the party receiving the information shall in good faith use the information or documents received only for the objectives of the order concerned; or g. when the information concerned is required by law or when it is required in connection with government investigations, procedures or regulations. 13 15 ARTICLE 15. LIABILITY 15.1 Paravax agrees to indemnify Eisai against any damages awarded to any third party against Eisai and/or its distributor for any effect of defective Product or any adverse side effects resulting to such third party as a result of the use of the Products in the manner specified by Paravax or for any failure of warning to the extent that the warnings specified by Paravax have been provided. 15.2 Eisai agrees to indemnify Paravax against any damages awarded to any third party against Paravax arising out of any fault or misconduct of Eisai or its distribution of the products, including any failure to provide the warnings specified by Paravax. ARTICLE 16. WITHHOLDING TAX Any tax required to be withheld by the Japanese government or other authorities on the amounts payable by Eisai to Paravax under this Agreement shall be deductible from the payment due to Paravax, provided that Eisai shall furnish Paravax with a copy of the official tax receipt for such withholding tax. ARTICLE 17. ARBITRATION All disputes, controversies, or differences which may arise between the parties, out of or in relation to or in connection with this Agreement or a breach thereof, unless amicably resolved by mutual agreement, shall be finally settled by arbitration pursuant to the Japan-American Trade Arbitration Agreement of September 16, 1952, by which each party hereto is bound. If the arbitration is demanded by Paravax, it shall be held in Tokyo, Japan, and if the arbitration is demanded by Eisai, it shall be held in Denver, Colorado, U.S.A. 14 16 ARTICLE 18. NOTICES All notices, consents, approvals, and other communications hereunder shall be in writing and shall be deemed to have been given when received if delivered by hand, international courier service, certified or registered air mail, postage prepaid, return receipt requested, telex, of telecopy. ARTICLE 19. MISCELLANEOUS PROVISIONS 19.1 This Agreement cancels and replaces all prior oral or written agreements pertaining to the subject matter of this Agreement between Paravax and Eisai. 19.2 Either party shall not, without the prior written consent of the other party (such consent shall not be withheld unreasonably), transfer this Agreement in whole or in part to a third party or subsidiary, affiliated company, parent company or to any other related company. 19.3 This Agreement shall not be altered or modified unless documents specifying the alteration or modification are signed by both parties, and it shall be binding and valid for any person succeeding to or taking over from either party. 19.4 Nothing herein shall create any association, partnership, joint venture, or the relation of principal and agent between the parties hereto. They are, with respect to each other, independent contractors. Neither party shall have any authority to bind the other or the other's representatives in any way. Neither party shall hold itself out contrary to the terms of this paragraph nor become liable by any contrary act or omission of the other party. This Agreement is not for the benefit of any third party. 15 17 19.5 A waiver by either party of any term or condition of this Agreement in any instance shall not be deemed or construed as a waiver of such term or condition for the future, or of any subsequent breach thereof. All remedies, rights, undertakings, obligations and agreements contained in this Agreement shall be cumulative and none of them shall be in limitation of any other remedy, right, undertaking, obligation or agreement of either party. IN WITNESS WHEREOF, this Agreement is executed in two (2) originals by the duly authorized representatives of the parties hereto, each original being legally binding when signatures have been affixed thereto, as of the date first written above. Paravax, Inc. a Eisai Co., Ltd., a California corporation Japanese corporation by /s/ DANIEL F. CAIN by /s/ ICHIRO TANAKA ---------------------------------- ---------------------------------- 16 18 EXHIBIT A SCOPE OF THE PRODUCTS 1. Canine Heartworm Vaccine 2. Feline Heartworm Vaccine 3. Feline Flea Vaccine 4. Canine Flea Vaccine 5. Feline Toxoplasmosis Vaccine 6. Swine/Ovine Toxoplasmosis Vaccine 7. Canine Tick Vaccine 8. Canine Borreliosis (Lyme) Vaccine 17 19 EXHIBIT B LIST OF THE TERRITORY 1. Japan 2. People's Republic of China including Hong Kong 3. Taiwan 4. Thailand 5. Singapore 6. Malaysia 7. Philippines 8. Indonesia 9. Korea 10. Other countries to be agreed by both parties 18 20 EISAI/PARAVAX COLLABORATIVE AGREEMENT EXHIBIT C JANUARY 1993 21 Exhibit C TABLE OF CONTENTS CANINE HEARTWORM 1 - 5 FELINE HEARTWORM 6 - 10 CANINE FLEA 11 - 15 FELINE FLEA VACCINE 16 - 19 FELINE TOXOPLASMOSIS 20 - 24 SWINE/OVINE TOXOPLASMOSIS 25 - 30 CANINE TICK 31 - 34 CANINE BORRELIOSIS (LYME) 35 - 38
22 Exhibit C CANINE HEARTWORM VACCINE PROJECT INTRODUCTION Dirofilaria immitis, a filarial nematode, is a significant pathogen of dogs and cats. There is little evidence for naturally occurring protective immunity in any filarial infection arising from a natural host-parasite relationship. However, we have created a highly significant immune response in dogs which received chemically abbreviated Dirofilaria immitis larval infections. We also used sera from the immune animals to demonstrate that antibody was effective in passively transferring larval killing and stunting. Therefore, those same sera were used to selectively identify native larval antigens not detected by sera from nonimmune, infected cohorts. Antigens that are detected only by immune dog sera have been characterized by Western blot analysis of larval extracts and excretory-secretory products, and immunoprecipitation of metabolically labeled proteins and larval surface antigens. CURRENT STATUS To molecularly clone the genes encoding protective antigens, four cDNA expression libraries have been prepared in a lambda bacteriophage vector using Poly A selected RNA from adult male or female worms, 48 hour third stage (L3) larvae and 6 day fourth stage (L4) larvae. Screening of the D.immitis 48 hour L3 cDNA library has resulted in identification of two clones (p39 and p17.5) which have been targeted as potential vaccine candidates. We have shown that these clones encode larval specific proteins of 39 kD and 17.5 kD, respectively, that are only recognized by immune dog sera. The p39 beta-galactosidase fusion peptide has been expressed in E. coil and shown to react specifically with immune dog sera by Western blot analysis. Both genes are being subcloned into bacterial plasmid vectors designed for large scale production of affinty purified recombinant protein for use in immunization trials. These genes are also being subcloned into species-specific viral constructs for use as live, attenuated viral vaccines in dogs. RESEARCH PLAN 1. Isolating recombinant clones. The library screening strategy is designed to detect genes encoding protective antigens. Therefore, larval-specific proteins selectively identified by immune dog sera on Western blots are being targeted for molecular cloning by immunoscreening the larval libraries with the immune dog sera. Initially, four of these putative immunogens will be cloned, expressed and tested for efficacy. Following isolation and purification of a positive clone, the D. immitis recombinant phage will be converted to plasmid clones by in vivo excision in the presence of helper phage. The resulting pBluescript clones will be transformed into an appropriate E. coil host for generation of recombinant plasmid DNA. 1 23 Exhibit C To verify that the recombinant clones encode the protein of interest, fusion protein expressed by the purified recombinant phage will be bound to a nitrocellulose filter and used to affinity-purify clone-specific antibodies from the original immune dog sera. The monospecific antibodies will then be eluted and used in Western blot analysis to identify the molecular weight of the native D. immitis larval antigen encoded by the recombinant. COMPLETION CRITERIA: Isolation and purification of four independent recombinant clones encoding larval specific antigens recognized by immune sera. Completion of the western blot analyses to determine the molecular weight of the native D. immitis antigen encoded by each clone. [ ] 3. Identification of protective recombinant antigens in a mouse model. Protective immunity to the larval stages of D. immitis will be demonstrated by active and passive immunization of mice. A. Active immunization of mice. Mice will be immunized with affinity purified recombinant fusion protein and challenged by implantation of diffusion chambers containing infective larvae. The parameters for protection will include larval survival and larval length compared to nonimmune controls. B. Passive immunization of mice. Mice will receive sera from dogs immunized with the affinity purified 2 24 Exhibit C recombinant fusion proteins or sera from dogs vaccinated with recombinant virus. Challenge and evaluation for protection will be as described above. COMPLETION CRITERIA: Demonstration of significant stunting of larvae or reduction in larval survival. 4. Identification of protective recombinant antigens in dogs. A. Immunization with D. immitis recombinant fusion protein expressed in E. coil: Dogs will be immunized with affinity-purified recombinant protein in adjuvant. Antibody titers will be monitored by enzyme linked immunosorbent assay (ELISA) and specificity of the response will be verified by Western blot analysis. Following verification of an antibody response to the fusion protein, dogs will be challenged with infective third stage larvae. Protection will be assessed by the enumeration of adult worms at necropsy, 7 months after challenge. B. Live, attenuated viral vaccine. D. immitis viral constructs will be administered subcutaneously. Antibody titers will be monitored as described above. Following verification of an antibody response to the recombinant protein, dogs will be challenged and protection evaluated as previously described. COMPLETION CRITERIA: 70% protection in immunized dogs. 5. Maximize protective immunity. The immunization regime and antigen(s) stimulating the highest level of protection will be used for optimization of the vaccination protocol. These studies may include administration of a pool of antigens, dose titrations of inoculum and alternate formulations in adjuvant(s). COMPLETION CRITERIA: A minimum of 95% efficacy. 6. Large-scale production of immunogens. Depending on the most successful immunization regime, vaccine production will involve either large scale production of recombinant fusion protein in E. coil or species-specific recombinant viral constructs produced in tissue culture. COMPLETION CRITERIA: Production of product in a USDA licensed facility for USDA pre-licensing serials. 7. Submission to USDA. Submission of application for United States veterinary biological product license. 3 25 Exhibit C PATENTS AND PATENT SUBMISSIONS OF RELEVANCE TO LICENSING IN JAPAN AND SOUTHEAST ASIA [ ] [ ] [ ] Per agreement with Colorado State University Research Foundation, Paravax has acquired exclusive worldwide rights to technology arising out of a Research Agreement dated June 1, 1988, relating to heartworm vaccine, for a period of 15 years or expiration of the patent. 4 26 Exhibit C FELINE HEARTWORM VACCINE PROJECT INTRODUCTION Feline heartworm infections are an increasingly recognized problem. The clinical signs and pathology induced in cats by heartworm infection are generally thought to be more severe than in dogs, death sometimes occurring with as few as one or two worms. There is currently no approved chemo- or immuno-prophylactic for cats, so the introduction of any preventative product, even if less than 100% effective, would be widely accepted. The purpose is to develop a vaccine to prevent mature heartworm infections in cats. Since cats are poorly adapted hosts for Dirofilaria immitis, development of an efficacious vaccine would be more readily achieved than that for the canine host. It is also believed that antigens not necessarily effective in the dog would be effective as vaccines in the cat. Proof of concept has been shown by Paravax, Inc. Two studies using homogenized fourth stage larvae with adjuvant given by intramuscular injection resulted in complete protection levels as high as 100% when compared to controls. In one experiment a decrease in worm numbers in immunized cats that were not completely protected was also observed. By contrast, the use of killed homogenized parasites has no protective effect in the definitive canine host. CURRENT STATUS Further evaluation of the relative ease of protecting cats with homogenized native antigen pools is underway. A 48 cat study using whole adult male worm homogenate with or without adjuvant is in progress. This is an antigen preparation shown to have no effect in protecting dogs from heartworm infections. Preliminary results are expected in the first quarter of 1993 and the final results in the second quarter of 1993. Paravax, Inc. has one of the best facilities and supply of reagents for the study of D. immitis in the world. [ ] Dogs with patent infections are maintained for continuous larval production. Treatment and challenge studies are routinely performed on dogs and cats, and in a mouse model system. A variety of larval specific monoclonal antibodies, infected dog sera, occult infected dog sera, sera from dogs immune to infection with heartworm and sera from a variety of cat heartworm studies are available. Four cDNA expression libraries have been prepared using Poly A selected RNA from 48 hour third stage larvae, 6 day fourth stage larvae, adult male worms and adult female worms. 6 27 Exhibit C Two molecules (p39 and p17.5) have been cloned from the 48 hour third stage larval cDNA library. These molecules are uniquely recognized by sera derived from dogs immune to infection with heartworm, but not sera from infected non-immune dogs. These molecules are currently being subcloned for expression for the purpose of immunizing cats. Both will also be used in a live feline-specific virus vector system in cats. RESEARCH PLAN 1. Evaluation of adult worm homogenate. This study is to further validate that cats can be protected against heartworm infection by means unsuccessful in dogs. Cats have been immunized twice with adult male worm homogenate and challenged with forty infective stage larvae either 3 months or 6 months post second immunization. The studies will be terminated 170 days post challenge. COMPLETION CRITERIA: Termination of the study and evaluation of the protective effect, if any, of adult male worm antigen. 2. Expression of recombinant proteins. Two potentially protective proteins (p39 and p17.5) have been cloned from the 48 hour third stage larval cDNA library. These will be subcloned into a vector system designed for large scale production of protein that can be purified. COMPLETION CRITERIA: Purification of the recombinant protein for initial immunization trials. [ ] 4. Evaluation of efficacy of recombinant protein immunogens. Cats will be immunized twice with purified recombinant protein suspended in adjuvant, and sero-conversion verified by enzyme linked immunosorbent assay (ELISA). Following verification of sero-conversion, standard challenge and evaluation of protection will be performed. COMPLETION CRITERIA: Termination of the study and evaluation of the protective effect. 7 28 Exhibit C [ ] 6. Maximization of protective immunity. The immunization regime and antigen(s) stimulating the highest level of protection will be used for optimization of the vaccination protocol. These studies may include administration of a pool of antigens, dose titrations, alternate route of inoculation and utilization of alternate adjuvants. At this stage, other cloned D. immitis proteins identified in the canine heartworm vaccine project may also be evaluated to augment immunity. COMPLETION CRITERIA: Achievement of complete protection in at least 80% of immunized cats. [ ] 8. Submission to USDA. Submission of application for United States veterinary biological product license. 8 29 Exhibit C PATENTS AND PATENT SUBMISSIONS OF RELEVANCE TO LICENSING IN JAPAN AND SOUTHEAST ASIA Colorado State University and Paravax, Inc. Attorney: Kate Murashige Morrison and Forester, Palo Alto, CA [ ] Per agreement with Colorado State University Research Foundation, Paravax has acquired exclusive worldwide rights to technology arising out of a Research Agreement dated June 1, 1988, relating to heartworm vaccine technology, for a period of 15 years or expiration of the patent. Please note that the preceding patent application which is specific to the feline heartworm vaccine is in addition to the two patents listed previously for the canine heartworm vaccine technology. Those patents will also apply to the feline heartworm vaccine technology. 9 30 Exhibit C CANINE FLEA VACCINE PROJECT INTRODUCTION Fleas are a leading health problem in companion animals worldwide. Flea allergy dermatitis is the most common skin disorder of dogs and cats. Flea problems comprise as much as 80% of all visits to veterinarians during summer months in the United States; flea problems of similar magnitude exist throughout the world. There are chemical compounds on the market for dogs that, when ingested, will absorb into the bloodstream and kill fleas that are feeding on the dog. However, these products have toxic side effects and veterinarians prefer not to prescribe them. A safe vaccine against fleas would be welcomed by veterinarians, and would replace existing systemic products. The purpose of the flea vaccine project is to develop a vaccine product that elicits antibodies that will kill fleas when they feed on dogs or cats. In addition to killing fleas, the vaccine will also reduce the number of eggs infesting the environment. The rationale for the flea vaccine is that cattle can be protected from tick infestation when vaccinated with "hidden antigens" derived from the gut of the tick. The flea, like the tick, is a blood feeding arthropod. Fleas feeding on vaccinated animals will take up antibodies to the hidden antigens. The function of the antigen will be disrupted, leading to death of the flea. Paravax has demonstrated proof of concept for this vaccine. Trials with a prototype vaccine have demonstrated a significant flea killing ability when administered to dogs. In addition, female fleas that initially survived had a significantly reduced capacity to produce eggs. CURRENT STATUS Paravax has established a flea colony utilizing a novel artificial feeding system. This system has a production capacity of 60,000 fleas per week. Vaccine preparations are made from the fleas produced in this system. A flea bioassay has also been developed utilizing the artificial feeding system. The bioassay can be used to evaluate the potency of antiserum generated in animals and then artificially fed to fleas. Paravax scientists have demonstrated that antigens derived from the gut of fed fleas induce greater immunity to fleas than those derived from unfed fleas. Antiserum to both fed and unfed flea gut antigens has been generated in dogs and rabbits, and is available for a subtractive approach to antigen discovery. 11 31 Exhibit C RESEARCH PLAN 1. Identification of relevant native antigens. Antigens that are specifically recognized by antibodies from protected dogs will be identified by Western blotting and radioimmunoprecipitation. Of these antigens, those that are exclusive to the fed gut will be targeted for gene cloning. COMPLETION CRITERIA: Identification of up to four native antigens that are exclusively recognized by antibodies from protected animals. 2. Generation of a flea gut cDNA library. A cDNA expression library will be generated using poly A selected RNA derived from the gut of blood fed fleas. A cDNA library will also be generated from mRNA isolated from the gut of unfed fleas to facilitate a subtractive approach to the identification of relevant antigens exclusive to the fed gut. COMPLETION CRITERIA: Production of a representative fed flea gut and unfed flea gut cDNA library. 3. Clone genes of relevant antigens. Immunization studies have indicated a protective effect in animals inoculated with fed flea gut supernatants, therefore to target protective antigens, the fed gut library will be differentially screened with antisera from immune animals. Positive clones will subsequently be screened with non immune sera to eliminate nonrelevant clones. This same differential approach can be implemented by hybridization analysis of the fed flea gut library with cDNA probes prepared from fed and unfed flea gut mRNA. This would identify clones not detected by immunoscreening due to incorrect reading frames. To further enrich for fed flea gut specific genes, a third subtracted cDNA library will be constructed from the original cDNA libraries by standard protocols and then immunoscreened as described. This library will contain cDNA clones corresponding to mRNAs present in fed flea gut and not present in unfed flea gut. COMPLETION CRITERIA: Identification of up to four antigens that are exclusively recognized by antibodies from protected animals. 4. Gene expression. Clones isolated from the fed flea gut cDNA expression library will be expressed in E. coil and the resulting fusion proteins characterized by Western blot analysis with immune sera. To verify that the recombinant clones encode the protein of interest, fusion protein expressed by the purified recombinant phage is bound to a nitrocellulose filter and used to affinity-purify clone- specific Antibodies from the 12 32 Exhibit C original immune sera. The monospecific antibodies are then eluted and used in Western blot analysis to identify the molecular weight of the native flea gut antigen encoded by the recombinant. The clones will be subcloned into a vector system optimized for large scale production of fusion protein that can be purified by affinity chromotography. COMPLETION CRITERIA: Identification of the molecular weight of up to four relevant flea gut native antigens encoded by the recombinant clone. Affinity purification of the recombinant fusion peptides for initial immunization trials. 5. Identification of protective recombinant antigens. Recombinant proteins will be produced in flask cultures of E. coil. The proteins will be purified from culture supernatants by affinity chromatography. Dogs will be vaccinated and challenged using a standard protocol. Briefly, animals will be vaccinated with antigen plus adjuvant in 2 doses, 2 weeks apart. Two weeks after the second vaccine dose, each animal will be challenged with 50 fleas contained in a flea cage. The number of viable and dead fleas, plus the number of eggs produced will be counted 7 days later. Animals receiving adjuvant alone will be used as controls. The antigen that stimulates the highest level of protective immunity will be selected for final optimization. COMPLETION CRITERIA: Identification of one antigen that elicits a statistically significant level of immunity in dogs. 6. Maximization of protective immunity. The vaccine will be optimized for the highest level of efficacy. Paravax has access to a panel of adjuvants and immunopotentators with potential for use in companion animals. These will be screened in combination with the selected antigen for maximum efficacy in vaccination experiments as described above. Vaccine dose and regimen of administration will also be optimized for maximum efficacy. COMPLETION CRITERIA: Achievement of 65% protection or greater following vaccination of dogs with recombinant antigen. 7. Production scale-up. Production scale-up and optimization will be performed in fermenters using standard procedures. COMPLETION CRITERIA: Production of product in a USDA licensed facility for USDA pre-licensing serials. 8. Submission to USDA. Submission of application for United States veterinary biological product license. 13 33 Exhibit C PATENTS AND PATENT SUBMISSIONS OF RELEVANCE TO LICENSING IN JAPAN AND SOUTHEAST ASIA [ ] 14 34 Exhibit C FELINE FLEA VACCINE PROJECT INTRODUCTION Please see introductory section for canine flea vaccine. It should be noted that cats cannot tolerate the systemic products that are marketed for flea control on dogs. A vaccine against fleas on cats would therefore be the first systemic product to control fleas on cats. Paravax has demonstrated proof of concept for this vaccine. Trials with a prototype vaccine have demonstrated a significant flea killing ability when administered to cats. In addition, female fleas that initially survived the vaccine effect had a significantly reduced capacity to lay eggs. CURRENT STATUS Paravax has established a flea colony utilizing a novel artificial feeding system. This system has a production capacity of 60,000 fleas per week. Vaccine preparations are made from the fleas produced in this system. A flea bioassay has also been developed utilizing the artificial feeding system. The bioassay can be used to evaluate the potency of antibody to flea antigens. Flea vaccine trials in cats are performed using a caged flea challenge system developed at Paravax. Cages containing fleas are attached to the cats in such a way that the fleas can readily feed. This system is superior to the standard free roaming flea challenge in that all fleas can be accounted for. Also, all eggs produced can be collected and accurately counted. We are currently adapting this system for use on dogs. Antibody to fed flea gut antigens has been generated in cats and rabbits, and the antigen discovery part of this project is now underway. RESEARCH PLAN It should be noted that considerable methodological similarity exists between this project and the canine flea vaccine project. However, it is anticipated that each host species may recognize unique molecules and that vaccine delivery will be necessarily unique to each host species. 1. Identification of relevant native antigens. Antigens that are specifically recognized by antibodies from protected animals will be identified by Western blotting and immunoprecipitation. Of these antigens, those that are exclusive to the fed gut will be targeted for gene cloning. 16 35 Exhibit C COMPLETION CRITERIA: Identification of up to four antigens that are exclusively recognized by antibodies from protected animals. 2. Generation of a flea gut cDNA library. A cDNA expression library will be generated using poly A selected RNA derived from the gut of blood fed fleas. A cDNA library will also be generated from mRNA isolated from the gut of unfed fleas to facilitate a subtractive approach to the identification of relevant antigens exclusive to the fed gut. COMPLETION CRITERIA: Production of a representative fed flea gut and unfed flea gut cDNA library. 3. Clone genes of relevant antigens. Immunization studies have indicated a protective effect in animals inoculated with fed flea gut supernatants, therefore to target protective antigens, the fed gut library will be differentially screened with antisera from immune animals. Positive clones will subsequently be screened with non immune sera to eliminate nonrelevant clones. This same differential approach can be implemented by hybridization analysis of the fed flea gut library with cDNA probes prepared from fed and unfed flea gut mRNA. This would identify clones not detected by immunoscreening due to incorrect reading frames. To further enrich for fed flea gut specific genes, a third subtracted cDNA library will be constructed from the original cDNA libraries by standard protocols and then immunoscreened as described. This library will contain cDNA clones corresponding to mRNAs present in fed flea gut and not present in unfed flea gut. COMPLETION CRITERIA: Identification of up to four antigens that are exclusively recognized by antibodies from protected animals. 4. Gene expression. Clones isolated from the fed flea gut cDNA expression library will be expressed in E. coli and the resulting fusion proteins characterized by Western blot analysis with immune sera. To verify that the recombinant clones encode the protein of interest, fusion protein expressed by the purified recombinant phage is bound to a nitrocellulose filter and used to affinity-purify clone- specific antibodies from the original immune sera. The monospecific antibodies are then eluted and used in Western blot analysis to identify the molecular weight of the native flea gut antigen encoded by the recombinant. The clones will be subcloned into a vector system optimized for large scale production of fusion protein that can be purified by affinity chromotography. 17 36 Exhibit C COMPLETION CRITERIA: Identification of the molecular weight of up to four relevant flea gut native antigens encoded by the recombinant clone. Affinity purification of the recombinant fusion peptides for initial immunization trials. 5. Identification of protective recombinant antigens. Recombinant proteins will be produced in flask cultures of E. coli. The proteins will be purified from culture supernatants by affinity chromatography. Cats will be vaccinated and challenged using a standard protocol. Briefly, animals will be vaccinated with antigen plus adjuvant in 2 doses, 2 weeks apart. Two weeks after the second vaccine dose, each animal will be challenged with 50 fleas contained in a flea cage. The number of viable and dead fleas, plus the number of eggs produced will be counted 7 days later. Animals receiving adjuvant alone will be used as controls. The antigen that stimulates the highest level of protective immunity will be selected for final optimization. COMPLETION CRITERIA: Identification of one antigen that elicits a statistically significant level of immunity in cats. 6. Maximization of protective immunity. The vaccine will be optimized for the highest level of efficacy. Paravax has access to a panel of adjuvants and immunopotentators with potential for use in companion animals. These, in addition to conventional adjuvants, will be screened in combination with the selected antigen for maximum efficacy in vaccination experiments as described above. Vaccine dose and regimen of administration will also be optimized for maximum efficacy. COMPLETION CRITERIA: Achievement of 65% protection or greater following vaccination of cats with recombinant antigen. 7. Production scale-up. Production scale-up and optimization will be performed in fermenters using standard procedures. COMPLETION CRITERIA: Production of product in a USDA licensed facility for USDA pre-licensing serials. 8. Submission to USDA. Submission of application for United States veterinary biological product license. 18 37 Exhibit C FELINE TOXOPLASMOSIS VACCINE PROJECT-1 INTRODUCTION Toxoplasmosis is a zoonotic infection with severe consequences, especially in fetal infections and immuno-compromised individuals. The two sources of human infection are the ingestion of undercooked infected meat and oocysts shed after the primary infection of cats. The elimination of oocyst production by house cats and cats frequently found on farms would eliminate a major source of human infection. [ ] 20 38 Exhibit C RESEARCH PLAN [ ] 21 39 Exhibit C [ ] 22 40 Exhibit C 7. Production scale-up. Optimization of large scale production of recombinant proteins will be done by standard procedures using commercial fermentation and preparative purification equipment. Purified proteins will be formulated with the chosen adjuvant by a procedure appropriate for the chosen protein/adjuvant combination. COMPLETION CRITERIA: Production of product in a USDA licensed facility for USDA pre-licensing serials. 8. Submission to USDA. Submission of application for United States veterinary biological product license. PATENTS AND PATENT SUBMISSIONS OF RELEVANCE TO LICENSING IN JAPAN AND SOUTHEAST ASIA [ ] 23 41 SWINE/OVINE TOXOPLASMOSIS VACCINE PROJECT Pages 25-30 intentionally omitted. Project described is no longer being pursued. 42 CANINE TICK VACCINE PROJECT Pages 31-34 intentionally omitted. Project described is no longer being pursued. 43 CANINE BORRELIOSIS (LYME) VACCINE PROJECT Pages 35-38 intentionally omitted. Project described is no longer being pursued. 44 EISAI/PARAVAX COLLABORATIVE AGREEMENT EXHIBIT D JANUARY 1993 45 EXHIBIT D PARAVAX, INC. PROPOSED EISAI FINANCIAL ARRANGEMENT (US DOLLARS)
=========================================================================================== LICENSE FEE PROJECT UPFRONT RESEARCH SUPPORT - ------------------------------------------------------------------------------------------- Total Total Year 1 Year 2 Year 3 Research All - -------------------------[ Canine Heartworm - ------------------------- Feline Heartworm - ------------------------- TOTAL HEARTWORM - ------------------------- Feline Flea Vaccine - ------------------------- Canine Flea Vaccine - ------------------------- TOTAL FLEA - ------------------------- Feline Toxoplasma - ------------------------- Swine/Ovine Toxoplasma - ------------------------- TOTAL TOXOPLASMA - ------------------------- Canine Tick - ------------------------- Canine Lyme - ------------------------- TOTAL TICK/LYME - ------------------------- Total ========================= ]
46 EISAI/PARAVAX COLLABORATIVE AGREEMENT EXHIBIT E JANUARY 1993 47 EXHIBIT E EISAI/PARAVAX MILESTONE AND PAYMENT SCHEDULE CANINE HEARTWORM
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48 Canine Heartworm EXHIBIT E Milestone and Payment Schedule Page 2
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49 EISAI/PARAVAX MILESTONE AND PAYMENT SCHEDULE EXHIBIT E CANINE FLEA VACCINE
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50 EISAI/PARAVAX MILESTONE AND PAYMENT SCHEDULE EXHIBIT E FELINE HEARTWORM VACCINE
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51 EISAI/PARAVAX MILESTONE AND PAYMENT SCHEDULE EXHIBIT E FELINE FLEA VACCINE
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52 EISAI/PARAVAX MILESTONE AND PAYMENT SCHEDULE EXHIBIT E FELINE TOXOPLASMOSIS VACCINE
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53 EISAI/PARAVAX MILESTONE AND PAYMENT SCHEDULE EXHIBIT E SWINE/OVINE TOXOPLASMOSIS VACCINE
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54 Swine/Ovine Toxoplasmosis Vaccine Milestone and Payment Schedule EXHIBIT E Page 2
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55 EISAI/PARAVAX MILESTONE AND PAYMENT SCHEDULE EXHIBIT E CANINE TICK VACCINE
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56 EISAI/PARAVAX EXHIBIT E MILESTONE AND PAYMENT SCHEDULE CANINE BORRELIOSIS (LYME) VACCINE
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EX-10.2 11 *CONFIDENTIAL TREATMENT* CANINE HEARTWORM COOP AGR 1 [CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTIONS OF THIS DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE COMMISSION] EXHIBIT 10.2 CANINE HEARTWORM COOPERATION AGREEMENT THIS AGREEMENT, is entered into as of June 10, 1994 between Paravax, Inc., 2301 Research Boulevard, Suite 110, Fort Collins, Colorado ("Paravax") and Bayer AG, D-51368 Leverkusen, Federal Republic of Germany ("Bayer"). Whereas Paravax is engaged in the research and development of a vaccine for the prevention of canine heartworm (Dirofilaria immitis) infection; Whereas Bayer is interested in providing Paravax with certain funds to support such research and development and to fund a portion of the research and development expenses which Paravax has incurred prior to the date of this Agreement; and Whereas in exchange for providing such research and development funding, Paravax is willing to grant Bayer options to obtain certain rights with respect to such canine heartworm vaccine; Now therefore: The parties hereto agree as follows: ARTICLE 1. OVERVIEW 1.1. Overview. This Canine Heartworm Cooperation Agreement (this "Agreement" or this "Cooperation Agreement") is intended to set forth the parameters pursuant to which Bayer and Paravax intend to develop, manufacture and market a vaccine for the prevention of canine heartworm (Dirofilaria immitis) infection. During the initial phases of the Cooperation Agreement, the primary goal shall be the development and preliminary testing of a vaccine for the prevention of canine heartworm infection. As set forth in ARTICLE 3. RESEARCH AND DEVELOPMENT, Paravax will undertake the primary responsibility for attempting to develop and preliminarily testing such a vaccine, and Bayer shall offer Paravax such technical and scientific assistance in this endeavor as Bayer deems desirable and appropriate. Bayer will also provide funding to allow Paravax to perform such research and development and preliminary testing activities. The primary goal of the next stage of the Cooperation Agreement will be to conduct the clinical testing necessary to determine and optimize the safety and efficacy of the vaccine and to obtain the regulatory approvals required to allow its manufacture and marketing. As set forth in ARTICLE 4. CLINICAL TRIALS, Bayer shall determine the scope and nature of such clinical testing, and Bayer and Paravax shall jointly determine how to allocate responsibility for conducting such clinical testing and obtaining such regulatory approvals. Bayer shall provide the funding necessary to allow Paravax to conduct its portion of these responsibilities. As set forth in ARTICLE -1- 2 5. OPTION AND LICENSE, Bayer shall have the option at any time to obtain a license to the technology which Paravax develops pursuant to this Agreement, for certain uses and subject to certain conditions and the payment of certain royalties. As set forth in ARTICLE 6. MANUFACTURE OF CANINE HEARTWORM VACCINE, to the extent that upon the completion of Phase II of the Research Program Paravax has in place a manufacturing facility that is approved by the appropriate regulatory authorities, Paravax shall be entitled to manufacture the Canine Heartworm Vaccine, and to the extent that Paravax does not have such a facility in place, or chooses not to so manufacture the Canine Heartworm Vaccine, Bayer shall manufacture, or have manufactured, the Canine Heartworm Vaccine for sale in the Territory and shall manufacture Canine Heartworm Vaccine for Paravax as required for sale outside the Territory. As set forth in ARTICLE 7. DISTRIBUTION RIGHTS, upon completion of the development and testing of a safe and efficacious Canine Heartworm Vaccine, Bayer shall have the right to enter into a Distribution agreement which shall allow Bayer to distribute the vaccine throughout the world, with certain exceptions. ARTICLE 2. DEFINITIONS For purposes of this Agreement, the terms set forth below shall be deemed to have the meanings indicated: 2.1. Distribution Agreement shall mean he Canine Heartworm Vaccine Distribution Agreement referred to in Section 7. hereof. 2.2. Manufacturing Agreement shall mean the Canine Heartworm Vaccine Manufacturing Agreement referred to in Section 6.2 hereof. 2.3. Paravax Technology shall mean all intellectual property of Paravax as of date of this Agreement and any intellectual property of Paravax developed during the term of this Agreement, to the extent related to the research, development, manufacture or sale of a recombinant live vector vaccine for the prevention of canine heartworm infection, including but not limited to all patents and patent applications with respect to such intellectual property. 2.4 Net Sales shall mean gross receipts from independent, unrelated partes in a bona fide arm's length transactions, less the following deductions: (a) trade and/or quantity discounts actually allowed and taken in such amounts as are customary in the trade; (b) commission paid or allowed to independent brokers and agents; (c) sales and other excise taxes and duties paid, to the extent separately stated on an invoice; and (d) amounts paid to cover transportation costs, to the extent separately stated on any invoice. 2.5 Research Program shall mean the research program for the development of a vaccine -2- 3 for the prevention of canine heartworm infection as set forth on Exhibit A hereto, as amended by the parties pursuant to the terms of this Agreement. 2.6. Territory shall mean the entire world, with the exception of Japan and Southeast Asia (which shall be deemed to include Korea, Thailand, Singapore, Taiwan, China, Hong Kong, Malaysia Indonesia, and the Philippines). 2.7 Canine Heartworm Vaccine shall mean a recombinant live vector vaccine for the prevention of canine heartworm (Dirofilaria immitis) infection developed during the term of this Agreement pursuant to the Research Program. ARTICLE 3. RESEARCH AND DEVELOPMENT 3.1. Phases of the Research Program. The Canine Heartworm Research Program is divided into four Phases, as described on Exhibit A hereto, which will be referred to in this Agreement as Phases I through IV. Phases I and II of the Research Program are primarily concerned with the initial research and development and preliminary testing of the Canine Heartworm Vaccine. Phases III and IV of the Research Program are primarily concerned with the conduct of the clinical testing necessary to determine and optimize the safety and efficacy of the vaccine and to obtain the regulatory approvals required to allow manufacture and marketing, and their performance is addressed in Article 4 of this Agreement. 3.2. Paravax Responsibility, Phases I and II. Paravax shall have primary responsibility for performing Phases I and II of the Research Program. Bayer shall offer Paravax such technical, scientific and other assistance and cooperation for this undertaking as Bayer deems appropriate. Paravax shall use diligent efforts to conduct Phases I and II of the Research Program, with such modifications, additions and deletions as Bayer and Paravax shall reasonably agree upon. Paravax will provide Bayer with reports on a quarterly basis with respect to it progress as to the Research Program. At Semi-annual intervals, these reports will contain significant detail, and Paravax will host semi-annual meetings, as requested by Bayer, to update Bayer personnel as to its progress and plans with respect to the Research Program. Paravax will use diligent efforts to promptly replace any significant personnel who depart from Paravax while working on the Research Program with appropriate personnel who meet reasonable criteria agreed to with Bayer. 3.3. Research and Development Funding. Upon the execution of this Agreement, Bayer shall pay to Paravax a lump sum payment of US$[ ]. In addition, eight months, sixteen months and twenty-four months after the date of this Agreement Bayer shall pay to Paravax further lump sum payments of US$[ ] each. The total of such lump sum payments, US$[ ], shall be deemed to be funding for a portion of the research and development expenditures which Paravax has undertaken prior to the -3- 4 CONFIDENTIAL TREATMENT REQUESTED date of this Agreement. Bayer shall also make an initial advance research and development milestone payment of US[ ] to Paravax upon the execution of this Agreement. Bayer shall make further research and development funding payments to Paravax as set forth on Exhibit A hereto upon completion of the milestones through the end of Phase II of the Research Program indicated on Exhibit A hereto. The specific dollar amounts set forth herein and on Exhibit A hereto are intended to be net of any withholding required upon transfer of funds to Paravax. 3.4. Unexpected Expenses. To the extent that the expense of completing the Research Program greatly exceeds that contemplated by Paravax at the time this Agreement was entered into, whether due to a change in regulatory requirements or other change in circumstance, Paravax and Bayer shall negotiate in good faith to reach agreement upon a reasonable level of additional research and development funding to be provided by Bayer in order to allow Paravax to complete the Research Program; provided, however, that Bayer shall continue to be entitled to terminate this Agreement pursuant to the provisions of Section 11.2 hereof. The parties agree that Paravax shall not be entitled to any additional research and development funding simply by reason of the fact that the research and development takes longer than Paravax originally contemplated due to delays that are customary for research and development such as the Research Program. 3.5. Bayer Technology. It is contemplated by the parties that Bayer may from time to time, in its discretion, offer Paravax access to certain Bayer proprietary technology which would assist in the development and/or manufacture of the Canine Heartworm Vaccine. In the event that Bayer is willing to offer access to such technology to Paravax, the parties will negotiate in good faith to reach agreement upon reasonable terms and conditions upon which Paravax may make use of such technology for the development and/or manufacture of the Canine Heartworm Vaccine. 3.6. Additional Antigens. Bayer and/or Paravax may from time to time wish to consider adding additional non-heartworm antigens to the Canine Heartworm Vaccine being developed pursuant to this Agreement. In such event, the parties shall cooperatively discuss the costs and benefits of adding such additional antigens and shall negotiate in good faith to reach agreement concerning the wisdom of adding such additional antigens, how to perform the necessary research and development and how this Agreement shall be appropriately amended. 3.7. Full Cooperation. Bayer and Paravax agree to cooperate fully during the term of this Agreement to attempt in good faith to accomplish and enhance the performance of the Research Program, including, among other things, keeping each other fully informed of any possible ancillary technology which would improve the Canine Heartworm Vaccine, such as live vaccine vector technology, which one or the other has, or might be able to obtain, access to, to the extent they are entitled to do so. -4- 5 ARTICLE 4. CLINICAL TRIALS 4.1. Phase III and IV of the Research Program. Phase III and IV of the Research Program are primarily concerned with optimizing the safety, efficacy and manufacturing of the Canine Heartworm Vaccine and obtaining the regulatory approvals required to allow its manufacturing and marketing. It is agreed that, as Bayer has greater regulatory experience than Paravax and as Bayer will have responsibility for marketing the Canine Heartworm Vaccine, Bayer will be responsible for designing the regulatory program, including clinical trial protocols, to obtain the required regulatory approvals. Bayer shall complete such design of the regulatory program prior to the completion of Phase II of the Research Program, so that no delay exists between the completion of Phase II of the Research Program and the commencement of Phase III of the Research Program. Once such a regulatory program has been designed, Paravax and Bayer shall jointly determine how to allocate responsibility for conducting Phases III and IV of the Research Program in order to complete such Phases in the most efficient and expeditious manner. To the extent that Paravax is to undertake responsibility for conducting portions of Phases III and IV of the Research Program, Bayer shall provide Paravax in a timely manner with an amount of funding which is sufficient to allow Paravax to reasonably conduct and complete such portions of the Research Program, including amounts necessary to conduct the clinical trials and obtain the regulatory approvals contemplated. Paravax agrees that it shall use diligent efforts to conduct all formal clinical trials in a manner which is satisfactory for regulatory approval, as directed by Bayer. ARTICLE 5. OPTION AND LICENSE 5.1. Interim License. During the term of this Agreement, Bayer shall have a license to use all Paravax Technology, including all results obtained during the Research Program, and all biological materials created during the Research Program, for purposes of assisting and evaluating the conduct of the Research Program, including designing and conducting the regulatory program referred to in Article 4 hereof, and preparing for and conducting preliminary manufacturing of the Canine Heartworm Vaccine and for all other purposes which are consistent with the provisions of this Cooperation Agreement. 5.2 Option. For a period 180 days after a termination of this Agreement, Bayer shall have an option to acquire a license to use all Paravax Technology to the extent set forth below. The rights to be granted pursuant to such license shall differ depending upon the circumstances under which such option is exercised, as set forth below. 5.3. Exercise upon Completion. In the event that this Agreement terminates upon completion of the Research Program, as set forth in section 11.1 hereof, Bayer shall obtain an exclusive license to use the Paravax Technology to manufacture Canine -5- 6 Heartworm Vaccine for sale in the Territory. Such license shall terminate upon a termination of the Distribution Agreement at the election of Bayer or by reason of a material breach by Bayer. During the term of such license, Paravax shall not grant any other party a license to use the Paravax Technology for the manufacture of any recombinant vaccine for the prevention of canine heartworm infection for sale in the Territory and Paravax will not use the Paravax Technology for the manufacture of any recombinant vaccine for the prevention of canine heartworm infection for sale in the Territory except for sale through Bayer pursuant to the Distribution Agreement. Bayer shall also be entitled to obtain various nonexclusive licenses to use the Paravax Technology for purposes other than a vaccine for the prevention of canine heartworm infection, to the extent Paravax is contractually permitted to grant such licenses. In the event that Bayer elects to obtain such a license, Paravax and Bayer shall negotiate in good faith a reasonable royalty rate and other reasonable terms and conditions for such license. 5.4. Exercise upon Premature Termination caused. by Paravax. In the event that Bayer exercises its option to obtain a license to the Paravax Technology upon the termination of this Agreement pursuant to Section 11.3 hereof as a result of a breach by Paravax, or upon the termination of this Agreement by Bayer at its election pursuant to Section 11.4 hereof as a result of an acquisition of Paravax, Bayer shall obtain an exclusive license to use all of the Paravax Technology to manufacture and sell vaccines for the prevention of canine heartworm infection in the Territory. In such event, Paravax will not use the Paravax Technology to manufacture and/or sell any recombinant vaccine for the prevention of canine heartworm infection in the Territory and will not grant any other party a license to use the Paravax Technology to manufacture and/or sell any recombinant vaccine for the prevention of canine heartworm infection in the Territory; provided, however, that Paravax shall be entitled to use the Paravax Technology in the Territory to manufacture, or have manufactured, a vaccine for the prevention of canine heartworm for sale outside of the Territory. Bayer shall also be entitled to obtain various nonexclusive licenses to use the Paravax Technology for purposes other than a vaccine for the prevention of canine heartworm infection, to the extent Paravax is contractually permitted to grant such licenses. In the event that Bayer elects to obtain such a license, Paravax and Bayer shall negotiate in good faith a reasonable royalty rate and other reasonable terms and conditions for such a license. 5.5. Exercise upon Premature Termination caused by Bayer. In the event that Bayer terminates this Agreement at its election pursuant to Section 11.2 hereof, Bayer shall be entitled to obtain various nonexclusive licenses to use the Paravax Technology for other than a vaccine for the prevention of canine heartworm infection, to the extent Paravax is Contractually permitted to grant such licenses. In the event that Bayer elects to obtain such a license, Paravax and Bayer shall negotiate in good faith a reasonable royalty rate and other reasonable terms and conditions for such license. -6- 7 5.6 Royalty Rates. The license granted to Bayer pursuant to Section 5.1 hereof shall be royalty free. A license with respect to Canine Heartworm Vaccine granted to Bayer pursuant to Section 5.3 hereof shall provide for the payment of royalties to Paravax of [ ]% of Net Sales of Canine Heartworm Vaccine, other than Canine Heartworm Vaccine which is sold by Paravax to Bayer pursuant to the Distribution Agreement. A license with respect to a vaccine for the prevention of canine heartworm infection granted to Bayer pursuant to Section 5.4 hereof shall provide for the payment of royalties to Paravax of [ ]% of Net Sales of any such canine heartworm vaccine. Bayer's obligation to pay any such royalties shall terminate upon the later of (i) the expiration of all of the licensed patents, or (ii) ten years from the first commercial sale of a licensed product by or on behalf of Bayer. In the event that any royalty and/or license fee is required to be paid to any third party with respect to the use, manufacture of sale of Canine Heartworm Vaccine, other than any amounts which Paravax is contractually obligated to pay as of the date of this Agreement, such expense shall be borne equally by Paravax and Bayer. Paravax and Bayer shall jointly decide to undertake any contractual commitment to pay any such license fee or royalty with respect to the manufacture or sale of Canine Heartworm Vaccine. Paravax shall be solely responsible to bear the cost of any license fee or royalty which Paravax is contractually obligated to pay as of the date of this Agreement. 5.7. License Agreements. At any time, upon the request of Bayer, Bayer and Paravax shall negotiate in good faith the form of the license agreement for any license to be granted to Bayer pursuant to this Article 5. Such license agreement shall contain the substantive terms described in this Article 5, together with such other reasonable and customary terms as the parties shall agree upon. Such license agreement shall be subject to appropriate decreases in royalties upon the expiration of patents. Such license agreement shall also provide for Paravax to provide Bayer with reasonable assistance and documentation in order to facilitate Bayer's permitted use of the Paravax Technology. ARTICLE 6. MANUFACTURE OF CANINE HEARTWORM VACCINE 6.1. Manufacturing Source. To the extent that upon the completion of Phase II of the Research Program Paravax owns, or leases pursuant to a long term lease, a manufacturing facility which has been approved by the United States Department of Agriculture or, if applicable, the United States Food and Drug Administration which allows Paravax to produce Canine Heartworm Vaccine for which regulatory approval or clearance for sale can be obtained in a specific country in the Territory, the parties shall proceed as though Paravax shall manufacture the Canine Heartworm Vaccine for distribution in that country by Bayer pursuant to the Distribution Agreement. To the extent that upon the completion of Phase II of the Research Program Paravax does not have such an approved manufacturing facility which allows it to produce Canine Heartworm Vaccine for which regulatory approval or clearance for sale can be -7- 8 obtained in a specific country, the parties shall proceed as though Bayer shall manufacture the Canine Heartworm Vaccine for distribution in that country by Bayer pursuant to the Distribution Agreement. Paravax may elect to forego or cease manufacture of Canine Heartworm Vaccine at any time, provided that Paravax gives Bayer adequate notice to allow Bayer, or a third party, to prepare for the manufacturing requirements of producing the Canine Heartworm Vaccine for, as applicable, Phases III ans IV of the Research Program and/or manufacture for commercial sale. After the commencement of Phase III of the Research Program, Paravax shall have no right to regain from Bayer the right to manufacture the Canine Heartworm Vaccine; however, Bayer agrees that is shall favorably consider any such request made by Paravax. In the event that Paravax elects to forego or cease manufacture of the Canine Heartworm Vaccine, Bayer shall be entitled to manufacture all of Bayer's requirements for Canine Heartworm Vaccine pursuant to the license described in Section 5.3 above. 6.2 Manufacturing Agreement. In the event that Paravax does not manufacture any Canine Heartworm Vaccine, as described in Section 6.1 hereof, Bayer and Paravax shall enter into a Manufacturing Agreement pursuant to which Bayer shall manufacture, or have manufactured, the Canine Heartworm Vaccine for Paravax for sale outside of the Territory and sell such Canine Heartworm Vaccine to Paravax at a reasonable price to be agreed upon by Paravax and Bayer. Such Manufacturing Agreement shall include such other reasonable and customary terms as the parties shall agree upon, consistent with the terms of this Cooperation Agreement. ARTICLE 7. DISTRIBUTION RIGHTS 7.1. Distribution Agreement. Upon Bayer's decision to file for regulatory approvals for a Canine Heartworm Vaccine, Bayer and Paravax shall enter into a Canine Heartworm Vaccine Distribution Agreement. Such Distribution Agreement shall include the substantive terms described in Articles 7,8,9 and 10 of this Cooperation Agreement, together with such other reasonable and customary terms as the parties shall agree upon, consistent with the terms of this Cooperation Agreement. The terms of such Distribution Agreement shall be perpetual, subject to termination by Bayer at its election or termination by Bayer or Paravax as a result of a breach by the other party. 7.2. Grant of Rights. During the term of the Distribution Agreement, Bayer and its affiliated companies shall have the exclusive right to distribute Canine Heartworm Vaccine in the Territory. Bayer and its affiliated companies shall be entitled to distribute the Canine Heartworm Vaccine both directly and through distributors. Bayer shall use diligent efforts during the term of the Distribution Agreement to promote, market, distribute and sell Canine Heartworm Vaccine in the countries in the Territory listed on Exhibit B hereto. Bayer shall have no obligation to promote, market, distribute or sell Canine Heartworm Vaccine in any portion of the Territory -8- 9 in which it is not commercially reasonable to do so. 7.3. Competing Products. Other than Canine Heartworm Vaccine, and any other vaccine licensed from and/or developed by Paravax, Bayer shall not directly, or through any subsidiary or affiliated corporation, sell in the Territory any vaccine for the prevention of canine heartworm infection during the term of the Distribution Agreement. Bayer also agrees that neither it nor any subsidiary or affiliated corporation shall directly or indirectly solicit sales of Canine Heartworm Vaccine for use in any animal other than domestic canines. 7.4. Additional Territories. In the event that a Paravax relationship for the distribution of Canine Heartworm Vaccine with an existing partner terminates as to any portion of the world not included in the Territory, Paravax agrees that, before entering into a relationship with any new partner for the distribution of the Canine Heartworm Vaccine in such portion of the world, it will first offer Bayer the option to obtain distribution rights for the Canine Heartworm Vaccine in that portion of the world upon reasonable terms and conditions and will negotiate in good faith with Bayer with respect to such reasonable terms and conditions if Bayer is interested in obtaining such rights. ARTICLE 8. PURCHASE OF CANINE HEARTWORM VACCINE 8.1. Purchase Obligation. To the extent that Paravax is entitled to be the manufacturing source for Canine Heartworm Vaccine in some or all of the Territory, pursuant to the provisions of Section 6.1 hereof, the Distribution Agreement shall provide that Bayer will purchase from Paravax all quantities of Canine Heartworm Vaccine to be sold by it or on behalf of it pursuant to the Distribution Agreement in such portions of the Territory. Bayer's obligation to purchase Canine Heartworm Vaccine from Paravax shall terminate in the event that Paravax consistently fails to provide in a timely manner the Canine Heartworm Vaccine which Bayer orders pursuant to the terms of the Distribution Agreement or in the event that Paravax elects to cease or forego manufacture of the Canine Heartworm Vaccine pursuant to Section 6.1 hereof. To the extent that Paravax manufacturers Canine Heartworm Vaccine, the terms set forth in this Article 8 shall be incorporated in the Distribution Agreement for purposes of Bayer's purchases of such Canine Heartworm Vaccine. 8.2. Transfer Price. The per dose price at which Bayer shall purchase Canine Heartworm Vaccine from Paravax pursuant to the Distribution Agreement shall be equal to the sum of (i) [ ], (ii) [ ], and (iii) [ ]. To the extent that Paravax and Bayer are unable to agree upon the price at which [ ] would manufacture the Canine Heartworm Vaccine, Paravax -9- 10 and Bayer shall agree upon [ ] for the manufacture of the Canine Heartworm Vaccine in those quantities which Bayer reasonably expects to purchase Canine Heartworm Vaccine in the upcoming year. Upon [ ] for purposes of the calculation of the transfer price payable to Paravax. In addition, Paravax and Bayer will discuss increases to this price in good faith on a yearly basis in order to compensate Paravax for increases in the costs of raw materials, labor and other manufacturing expenses. 8.3. Shipment. All prices and shipments shall be F.C.A. Paravax's Fort Collins, Colorado location, and risk of loss or damage shall pass to Bayer on delivery to a common carrier. Bayer shall pay, or reimburse Paravax for, the amount of any sales, use, excise or similar taxes and all expenses of clearing customs and duties associated with importing or exporting the Canine Heartworm Vaccine purchased from Paravax for sale by or on behalf of Bayer within the Territory. 8.4. Packaging. Bayer shall supply the art work and language for all labels, packaging, product inserts and related items. Bayer shall bear any expense, including discarded materials, resulting from any change in such packaging, labeling, inserts or art work requested by Bayer. Bayer shall market the Canine Heartworm Vaccine using Bayer's tradenames, trademarks, logos and trade dress; however, to the extent the Canine Heartworm Vaccine is manufactured by Paravax, Bayer's name as distributor and Paravax's name as manufacturer shall receive equal prominence in the descriptive materials. 8.5. Forecasts and Purchase Orders. In order to assist Paravax in planning its production schedule for the Canine Heartworm Vaccine, Bayer shall, no later than last day of each calendar quarter, provide Paravax with a good faith forecast of the Canine Heartworm Vaccine that Bayer expects to purchase during each of the following four calendar quarters. The amounts so forecast for the immediately following two quarters shall be deemed to be a noncancellable order for delivery during such quarter; provided, however, that Bayer shall not be obligated to purchase more than 75 % of the amount so forecast for the second such quarter. Any additional amounts to be purchased by Bayer shall be purchased by written purchase order submitted to Paravax. Paravax shall not be obligated to accept any purchase order which provides for delivery in less than 90 days from the date of its receipt. Paravax shall be entitled to establish economically reasonable minimum quantities for individual deliveries in light of production expenses. 8.6. Payment. Payment for Canine Heartworm Vaccine shall be due in full thirty (30) days -10- 11 from the date of receipt of invoice, which shall be on or after the date of shipment. Accounts outstanding more than thirty (30) days will be subject to a monthly charge at the rate of one and one half percent (1.5 %) per month, or the maximum permitted by law, whichever is less. 8.7. Warranty. Paravax will warrant that the Canine Heartworm Vaccine supplied by Paravax will be free from defects in manufacturing and workmanship, and will conform to agreed upon standards and specifications, during the shelf life indicated by Paravax for such Canine Heartworm Vaccine (the "Warranty Period"), provided that the Canine Heartworm Vaccine is maintained under the storage conditions defined by Paravax. Any Canine Heartworm Vaccine which is found to be defective during the Warranty Period may be returned for replacement. Bayer agrees to report to Paravax any suspected product defect or customer complaint. Paravax shall have the right to decide to recall any or all of the Canine Heartworm Vaccine, and Bayer agrees to comply with any recall procedures for such Canine Heartworm Vaccine decided on by Paravax. There shall be no remedies for defective Canine Heartworm Vaccine other than those expressly set forth herein, and Paravax will make no other warranties of any kind, express or implied, with respect to Canine Heartworm Vaccine. Paravax will, however, bear any producer liability to third parties with respect to any Canine Heartworm Vaccine manufactured by Paravax, to the extent imposed by applicable law. ARTICLE 9. PATENT INDEMNIFICATION 9.1. Infringement Defense. Paravax and Bayer will jointly defend any claim, suit or proceeding brought against Bayer and/or Paravax to the extent it is based upon a claim that the Canine Heartworm Vaccine sold by Bayer or on behalf of Bayer pursuant to the Distribution Agreement infringes upon any patent or trade secret rights of any third party. Bayer and Paravax agree that they shall promptly notify the other in writing of any such claim or action and give the other full information and assistance in connection therewith. Paravax and Bayer shall jointly control the defense of any such claim or action and the settlement or compromise of any such claim or action. Paravax and Bayer will jointly pay all damages, costs and expenses paid in settlement or finally awarded to third parties against Bayer and/or Paravax for such claim or in such action. If the Canine Heartworm Vaccine is, or in Paravax's or Bayer's opinion might be, held to infringe as set forth above, Paravax and Bayer shall jointly determine whether to replace or modify such Canine Heartworm Vaccine so as to avoid infringement, or procure the right for Bayer and Paravax to continue the manufacture, use and resale of such Product. Paravax and Bayer shall also jointly determine how the expense of any replacement, modification or procurement of rights shall be borne by Paravax and Bayer. If neither of such alternatives is commercially reasonable, any infringing Canine Heartworm Vaccine held by Bayer and purchased from Paravax shall be returned to Paravax and Paravax's sole liability, in addition to -11- 12 its obligation to pay damages, costs and expenses as set forth above, shall be to refund the amounts paid for such returned Canine Heartworm Vaccine by Bayer, and Paravax shall have no further obligation to supply Canine Heartworm Vaccine to Bayer pursuant to the Distribution Agreement. 9.2. Limitation. Paravax will have no liability for any claim of infringement arising as a result of Bayer's use of the Canine Heartworm Vaccine in combination with any items not supplied by Paravax, any modification of the Canine Heartworm Vaccine by Bayer or third parties, or, in the event that Bayer manufactures the Canine Heartworm Vaccine, any manufacturing process used by Bayer. THE FOREGOING STATES THE ENTIRE LIABILITY OF PARAVAX TO BAYER OR ANY PURCHASER OR USER OF CANINE HEARTWORM VACCINE CONCERNING INFRINGEMENT OF INTELLECTUAL PROPERTY RIGHTS, INCLUDING BUT NOT LIMITED TO, PATENT AND TRADE SECRET RIGHTS. ARTICLE 10. PATENTS 10.1. Ownership of Inventions. As between the parties, all rights to inventions or discoveries invented or discovered jointly by Paravax and Bayer under this Cooperation Agreement shall be jointly owned. Each party shall have the right to use such inventions and discoveries for such purposes as it shall deem appropriate, upon agreement with the other party as to appropriate and reasonable compensation for uses other than those contemplated by this Agreement; provided, however, that to the extent set forth in the Distribution Agreement, Bayer shall have the sole right to distribute Canine Heartworm Vaccine in the Territory. As between the parties, all rights to inventions or discoveries invented or discovered solely by Paravax under this Cooperation Agreement shall belong to Paravax. Bayer shall have no rights with respect to such inventions or discoveries other than the rights to enter into the license agreements and the Distribution Agreement, as set forth herein. As between the parties, all rights to inventions or discoveries invented or discovered solely by Bayer under this Cooperation Agreement shall belong to Bayer. 10.2. Patent Filings. During the term of this Cooperation Agreement and the Distribution Agreement, Paravax shall consult with Bayer as to all patent filings and other patent actions related to the Canine Heartworm Vaccine. Paravax and Bayer shall make such patent filings, and take such other actions with respect to patent filings, as they jointly determine are appropriate, using counsel selected by Paravax and consented to by Bayer, which consent will not be unreasonably withheld. 10.3. Patent Enforcement. During the term of the Distribution Agreement, Bayer shall have the right to bring actions to enforce any patent rights held by Paravax with respect to the Canine Heartworm Vaccine against infringement in the countries in the Territory in which Bayer has the right to distribute the Canine Heartworm Vaccine pursuant to -12- 13 the Distribution Agreement. Paravax shall provide such assistance and cooperation in connection with such enforcement actions as Bayer shall reasonably request. In the event that Bayer elects not to enforce any such patent rights, Paravax may, but is not obligated to, bring actions with respect to such infringement, and Bayer shall provide such assistance and cooperation in connection with such actions as Paravax shall reasonably request. Bayer shall not settle or compromise any such action which it brings to enforce any patent with respect to the Canine Heartworm Vaccine without Paravax's consent, which consent will not be unreasonably withheld. Where such an enforcement action has been brought by Bayer, Bayer shall maintain the litigation at its own expense and shall keep any judgment and award arising from such action. Where such an enforcement action has been brought by Paravax, Paravax shall maintain the litigation at its own expense and shall keep any judgments and awards arising from such action. ARTICLE 11. TERM AND TERMINATION 11.1. Term. The term of this Agreement shall commence on the date first set forth above and shall end on the earlier of the date upon which this Agreement is terminated pursuant to the provisions of this Article 11 or upon the completion of the Research Program. 11.2. Bayer Termination. Bayer shall have the right to terminate this Agreement upon any anniversary of the date hereof, beginning with the second such anniversary (but not before payment of the twenty-four month lump sum payment due pursuant to Section 3.3 hereof), upon written notice given not less than 90 days prior to such anniversary. In the event that Bayer elects to so terminate this Agreement, Paravax shall repay all amounts paid by Bayer pursuant to this Agreement at a rate of [ ] of any vaccine for the prevention of canine heartworm infection developed by Paravax based on the work conducted pursuant to the Research Program during the term of this Agreement. Paravax's obligation to make such payments to Bayer shall not commence until after the completion of the second full calendar year in which such a vaccine has been marketed in the Territory, and such payments shall only be made with respect to Net Sales of such vaccine which take place after the completion of such second full calendar year. 11.3. Termination for Breach. Either party shall have the right to terminate this Agreement upon written notice if (a) the other party is in breach of any material provision of this Agreement and such breach has not been remedied within 30 days after written notice of such breach has been given; or -13- 14 (b) the other party enters into liquidation, whether compulsory or voluntary, or has a receiver appointed as to all or any part of its assets, or takes or suffers any similar action in consequence of debt. 11.4. Paravax Acquisition. Bayer shall have the right to terminate this Agreement upon written notice to Paravax given within ninety (90) days of any acquisition of Paravax by a third party, whether by merger or sale or other transfer of a substantial majority of the assets of Paravax. In the event that Bayer elects to so terminate this Agreement, Bayer shall, upon the request of Paravax, provide reasonable assistance to aid Paravax in satisfying its contractual obligations with respect to the supply of vaccines for the prevention of canine heartworm infection for sale outside of the Territory. 11.5. Paravax Termination. Paravax shall not have the right to unilaterally terminate this Agreement; provided, however, that in the event that Paravax determines that it is unlikely that the Research Program can be successfully completed, Paravax and Bayer shall negotiate an appropriate termination of this Agreement. ARTICLE 12. CONFIDENTIALITY 12.1. Confidential Information. It is agreed that during the term of this Agreement Paravax and Bayer may each disclose certain Confidential Information to the other for purposes of furthering or evaluating progress under this Agreement. The term "Confidential Information" for these purposes shall include all technical, business, financial, or marketing information which one party (the "Disclosing Party") discloses to the other party (the "Receiving Party"), except any portion of such information which: a. is now or later made known to the public through no default by the Receiving Party of its obligations under this Agreement; b. the Receiving Party can show was in its possession prior to disclosure by the Disclosing Party; c. is rightfully received by the Receiving Party from a third party without any accompanying secrecy obligation; or d. is independently developed by the Receiving Party by persons who neither had access to Confidential Information of the Disclosing Party nor received direction from persons who had access to Confidential Information of the Disclosing Party. 12.2. Confidentiality Obligation. A Receiving Party agrees to hold in confidence and not -14- 15 disclose to any third parties any of the Confidential Information of the Disclosing Party without the prior consent of the Disclosing Party; provided, however, that to the extent required in order to obtain regulatory approval, a Receiving Party may disclose such Confidential Information to the appropriate regulatory authorities. A Receiving Party agrees to limit any disclosure of the Confidential Information only to those of its employees and outside professional advisors who have a need to know and who are bound by confidentiality obligations, and to advise such persons of the Receiving Party's obligations under this Agreement. A Receiving Party further agrees to use Confidential Information received from the other party only for purposes of furthering or evaluating progress under this Agreement. Any tangible materials that contain any Confidential Information shall be returned to the Disclosing Party promptly upon request, and any portions of any memoranda, reports or documents created by the Receiving Party which contain any Confidential Information shall be destroyed upon the request of the Disclosing Party; provided, however, that the Receiving Party may keep a single copy of all such tangible materials for purposes of demonstrating compliance with the provisions of this Agreement. 12.3. Confidentiality of Agreement. In addition, neither party will disclose to any third party, other than with the prior written consent of the other party, the terms and conditions of this Agreement, except as may be required by applicable law, regulation or court order. The provisions of this Article 12 shall survive any termination of this Agreement for a period of ten (10) years. ARTICLE 13. MISCELLANEOUS 13.1. Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the assigns of Paravax and Bayer; however, neither Paravax nor Bayer shall be entitled to assign its rights and obligations under this Agreement without the express written consent of the other. Notwithstanding the immediately preceding, such consent shall not be required for an assignment of the rights and obligations of Paravax or Bayer to a wholly owned subsidiary or which takes place as part of an acquisition of Paravax, whether by merger or sale or other transfer of substantially all of the assets of Paravax; provided, however, that nothing in this Section 13.1 shall be deemed to limit the rights of Bayer pursuant to the provisions of Section 11.4 hereof. 13.2. Relationship of Parties. Nothing in this Agreement shall constitute or be deemed to constitute a partnership between the parties. The relationship between Bayer and Paravax shall be strictly that of sponsor and researcher. Bayer, its officers, agents and employees, shall under no circumstances be considered the agents, employees or representatives of Paravax, and Paravax, its officers, agents and employees, shall under no circumstances be considered the agents, employees or representatives of Bayer. Bayer shall not have the right to enter into any contracts or binding commitments in the name of or on behalf of Paravax in any respect whatsoever, and -15- 16 Paravax shall not have the right to enter into any contracts or binding commitments in the name of or on behalf of Bayer in any respect whatsoever. 13.3. Notices. Notices required hereunder shall be deemed properly given upon hand delivery (including professional courier such as Federal Express) to the addresses set forth below, or to such other address as a party shall have given notice of in accordance herewith. Paravax: Paravax, Inc. 2301 Research Boulevard, Suite 110 Fort Collins, CO 80526 Attn: President Bayer: Bayer AG Geschaftsbereich Veterinar VT-F/Leitung D-51368 Leverkusen Germany Attn: Prof. Dr. H. Thomas 13.4. Force Majeure. Neither party shall be liable for any failure to perform any of its obligations hereunder (other than the payment of money) which results from act of God, the elements, fire, flood, component shortages, force majeure, riot, insurrection, industrial dispute, accident, war, embargoes, legal restrictions or any other cause beyond the control of such party. 13.5. Governing Law. This Agreement will be governed by and construed in accordance with the laws of the State of Kansas, without regard to its provisions concerning the applicability of the laws of other jurisdictions. 13.6. Arbitration. Should any dispute, controversy or difference of opinion arise between the parties hereto out of or in relation to or in connection with this Agreement, or the breach thereof, the parties shall first endeavor to reach an amicable resolution thereof. Should the parties fail to reach such an amicable resolution, any such dispute, controversy or difference of opinion shall be resolved by arbitration in accordance with the arbitration rules of the International Chamber of Commerce, then in force, by one or more arbitrators appointed in accordance with such rules. Any such arbitration shall be held in Kansas City, Missouri if requested by Bayer, and in Leverkusen, Germany if requested by Paravax, and all proceedings shall be held in the English language. Any award rendered shall be final and binding upon the parties. Judgement upon the award may be entered in any court having jurisdiction, or application may be made to such court for judicial acceptance of the award and/or an order of enforcement as the case may be. -16- 17 13.7. Severability. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 13.8. Entire Agreement. This Agreement sets forth the entire agreement and understanding between the parties as to the subject matter hereof and may only be amended by a writing signed by both parties. 13.9. Titles and Headings. The titles or headings, articles, sections or paragraphs set forth in this Agreement have been inserted merely to facilitate reference and shall have no bearing upon the interpretation of any of the provisions of this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on their behalf as of the date first set forth above. PARAVAX, INC. By /s/ DAVID F. CAIN --------------------- Title President ------------------ BAYER AG By /s/ H. THOMAS --------------------- Title Head of Research ------------------ BG Animal Health -17- 18 CANINE HEARTWORM VACCINE RESEARCH & DEVELOPMENT PLAN: EXHIBIT A [ ] 1 19 [ ] 2 20 [ ] 3 21 EXHIBIT B TO CANINE HEARTWORM COOPERATION AGREEMENT UNITED STATES OF AMERICA CANINE HEARTWORM VACCINE TIMETABLE - ------------------------------------------------------------------------------- Year 1 Year 2 Year 3 - ------------------------------------------------------------------------------- PHASE 1 - ------------------------------------------------------------------------------- TASK - ------------------------------------------------------------------------------- [ ] 22 CANINE HEARTWORM VACCINE PHASE I/II MILESTONES AND PAYMENTS
- ---------------------------------------------------------------------------------------------------------- Milestones Mos. PAYMENT BY ($000 OMITTED) - ---------------------------------------------------------------------------------------------------------- Performance(1) Milestones(2) - ---------------------------------------------------------------------------------------------------------- UPFRONT 0 0 600 - ---------------------------------------------------------------------------------------------------------- [ ]
1 Payment upon completion of the time (month) listed if performance level is acceptable. 2 Payment upon successful achievement of milestone, independent of time. 3 Payment upon fulfilling criteria of Milestone 6. 23 Exhibit B to Canine Heartworm Cooperation Agreement United States of America EX-10.3 12 *CONFIDENTIAL TREATMENT* FELINE TOXOPLASMOSIS COOP 1 [CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTIONS OF THIS DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE COMMISSION] EXHIBIT 10.3 FELINE TOXOPLASMOSIS COOPERATION AGREEMENT THIS AGREEMENT, is entered into as of June 10, 1994 between Paravax, Inc. , 2301 Research Boulevard, Suite 110, Fort Collins, Colorado ("Paravax") and Bayer AG, D-51368 Leverkusen, Federal Republic of Germany ("Bayer"). Whereas Paravax is engaged in the research and development of a vaccine for the prevention of feline toxoplasmosis (Toxoplasma gondii); Whereas Bayer is interested in providing Paravax with certain funds to support such research and development and to fund a portion of the research and development expenses which Paravax has incurred prior to the date of this Agreement; and Whereas in exchange for providing such research and development funding, Paravax is willing to grant to Bayer options to obtain certain rights with respect to such feline toxoplasmosis vaccine; N o w t h e r e f o r e: The parties hereto agree as follows: ARTICLE 1. OVERVIEW 1.1. Overview. This Feline Toxoplasmosis Cooperation Agreement (this "Agreement" or this "Cooperation Agreement") is intended to set forth the parameters pursuant to which Bayer and Paravax intend to develop, manufacture and market a vaccine for the prevention of feline toxoplasmosis (Toxoplasma gondii). During the initial phases of the Cooperation Agreement, the primary goal shall be the development and preliminary testing of a vaccine for the prevention of feline toxoplasmosis. As set forth in ARTICLE 3. RESEARCH AND DEVELOPMENT, Paravax will undertake the primary responsibility for attempting to develop and preliminarily testing such a vaccine, and Bayer shall offer Paravax such technical and scientific assistance in this endeavor as Bayer deems desirable and appropriate. Bayer will also provide funding to allow Paravax to perform such research and development and preliminary testing activities. The primary goal of the next stage of the Cooperation Agreement will be to conduct the clinical testing necessary to determine and optimize the safety and efficacy of the vaccine and to obtain the regulatory approvals required to allow its manufacture and marketing. As set forth in ARTICLE 4. CLINICAL TRIALS, Bayer shall determine the scope and nature of such clinical testing, and Bayer and Paravax shall jointly determine how to allocate responsibility for conducting such clinical testing and obtaining such regulatory approvals. Bayer shall provide the funding necessary to allow Paravax to conduct its portion of these responsibilities. As set forth in ARTICLE 5. OPTION AND LICENSE, Bayer shall have the option at any time to obtain a license to the technology which Paravax develops pursuant to this Agreement, for certain uses and subject to certain conditions and the payment of certain royalties. As set forth in ARTICLE 6. 2 MANUFACTURE OF TOXOPLASMOSIS VACCINE, to the extent that upon the completion of Phase II of the Research Program Paravax has in place a manufacturing facility that is approved by the appropriate regulatory authorities, Paravax shall be entitled to manufacture the Toxoplasmosis Vaccine, and to the extent that Paravax does not have such a facility in place, or chooses not to so manufacture the Toxoplasmosis Vaccine, Bayer shall manufacture, or have manufactured, the Toxoplasmosis Vaccine for sale in the Territory and shall manufacture Toxoplasmosis Vaccine for Paravax as required for sale outside the Territory. As set forth in ARTICLE 7. DISTRIBUTION RIGHTS, upon completion of the development and testing of a safe and efficacious Toxoplasmosis Vaccine, Bayer shall have the right to enter into a Distribution Agreement which shall allow Bayer to distribute the vaccine throughout the world, with certain exceptions. ARTICLE 2. DEFINITIONS For purposes of this Agreement, the terms set forth below shall be deemed to have the meanings indicated: 2.1. Distribution Agreement shall mean the Toxoplasmosis Vaccine Distribution Agreement referred to in Section 7.1 hereof. 2.2. Manufacturing Agreement shall mean the Toxoplasmosis Vaccine Manufacturing Agreement referred to in Section 6.2 hereof. 2.3. Paravax Technology shall mean all intellectual property of Paravax as of date of this Agreement and any intellectual property of Paravax developed during the term of this Agreement, to the extent related to the research, development, manufacture or sale of a recombinant live vector vaccine for the prevention of feline toxoplasmosis, including but not limited to all patents and patent applications with respect to such intellectual property. 2.4. Net Sales shall mean gross receipts from independent, unrelated parties in bona fide arm's length transactions, less the following deductions: (a) trade and/or quantity discounts actually allowed and taken in such amounts as are customary in the trade; (b) commissions paid or allowed to independent brokers and agents; (c) sales and other excise taxes and duties paid, to the extent separately stated on an invoice; and (d) amounts paid to cover transportation costs, to the extent separately stated on an invoice. 2.5 Research Program shall mean the research program for the development of a vaccine for the prevention of feline toxoplasmosis as set forth on Exhibit A hereto, as amended by the parties pursuant to the terms of this Agreement. -2- 3 2.6. Territory shall mean the entire world, with the exception of Japan and Southeast Asia (which shall be deemed to include Korea, Thailand, Singapore, Taiwan, China, Hong Kong, Malaysia, Indonesia, and the Philippines). 2.7. Toxoplasmosis Vaccine shall mean a recombinant live vector vaccine for the prevention of feline toxoplasmosis (Toxoplasma gondii) developed during the term of this Agreement pursuant to the Research Program. ARTICLE 3. RESEARCH AND DEVELOPMENT 3.1. Phases of the Research Program. The Toxoplasmosis Research Program is divided into four Phases, as described on Exhibit A hereto, which will be referred to in this Agreement as Phases I through IV. Phases I and II of the Research Program are primarily concerned with the initial research and development and preliminary testing of the Toxoplasmosis Vaccine. Phases III and IV of the Research Program are primarily concerned with the conduct of the clinical testing necessary to determine and optimize the safety and efficacy of the vaccine and to obtain the regulatory approvals required to allow its manufacture and marketing, and their performance is addressed in Article 4 of this Agreement. 3.2. Paravax Responsibility. Phases I and II. Paravax shall have primary responsibility for performing Phases I and II of the Research Program. Bayer shall offer Paravax such technical, scientific and other assistance and cooperation for this undertaking as Bayer deems appropriate. Paravax shall use diligent efforts to conduct Phases I and II of the Research Program, with such modifications, additions and deletions as Bayer and Paravax shall reasonably agree upon. Paravax will provide Bayer with reports on a quarterly basis with respect to its progress as to the Research Program. At semiannual intervals, these reports will contain significant detail, and Paravax will host semi-annual meetings, as requested by Bayer, to update Bayer personnel as to its progress and plans with respect to the Research Program. Paravax will use diligent efforts to promptly replace any significant personnel who depart from Paravax while working on the Research Program with appropriate personnel who meet reasonable criteria agreed to with Bayer. 3.3. Research and Development Funding. Upon the execution of this Agreement, Bayer shall pay to Paravax a lump sum payment of US$[ ]. In addition, eight months, sixteen months and twenty-four months after the date of this Agreement Bayer shall pay to Paravax further lump sum payments of US$[ ] each. The total of such lump sum payments, US$[ ], shall be deemed to be funding for a portion of the research and development expenditures which Paravax has undertaken prior to the date of this Agreement. Bayer shall also make an initial advance research and development milestone payment of US$[ ] to Paravax upon the execution of this Agreement. Bayer shall make further research and development funding payments to -3- 4 Paravax as set forth on Exhibit A hereto upon completion of the milestones through the end of Phase II of the Research Program indicated on Exhibit A hereto. The specific dollar amounts set forth herein and on Exhibit A hereto are intended to be net of any withholding required upon transfer of funds to Paravax. 3.4. Unexpected Expenses. To the extent that the expense of completing the Research Program greatly exceeds that contemplated by Paravax at the time this Agreement was entered into, whether due to a change in regulatory requirements or other change in circumstance, Paravax and Bayer shall negotiate in good faith to reach agreement upon a reasonable level of additional research and development funding to be provided by Bayer in order to allow Paravax to complete the Research Program; provided, however, that Bayer shall continue to be entitled to terminate this Agreement pursuant to the provisions of Section 11.2 hereof. The parties agree that Paravax shall not be entitled to any additional research and development funding simply by reason of the fact that the research and development takes longer than Paravax originally contemplated due to delays that are customary for research and development such as the Research Program. 3.5. Bayer Technology. It is contemplated by the parties that Bayer may from time to time, in its discretion, offer Paravax access to certain Bayer proprietary technology which would assist in the development and/or manufacture of the Toxoplasmosis Vaccine. In the event that Bayer is willing to offer access to such technology to Paravax, the parties will negotiate in good faith to reach agreement upon reasonable terms and conditions upon which Paravax may make use of such technology for the development and/or manufacture of the Toxoplasmosis Vaccine. 3.6. Additional Antigens. Bayer and/or Paravax may from time to time wish to consider adding additional non-toxoplasmosis antigens to the Toxoplasmosis Vaccine being developed pursuant to this Agreement. In such event, the parties shall cooperatively discuss the costs and benefits of adding such additional antigens and shall negotiate in good faith to reach agreement concerning the wisdom of adding such additional antigens, how to perform the necessary research and development and how this Agreement shall be appropriately amended. 3.7. Full Cooperation. Bayer and Paravax agree to cooperate fully during the term of this Agreement to attempt in good faith to accomplish and enhance the performance of the Research Program, including, among other things, keeping each other fully informed of any possible ancillary technology which would improve the Toxoplasmosis Vaccine, such as live vaccine vector technology, which one or the other has, or might be able to obtain, access to, to the extent they are entitled to do so. -4- 5 ARTICLE 4. CLINICAL TRIALS 4.1. Phase III and IV of the Research Program. Phase III and IV of the Research Program are primarily concerned with optimizing the safety, efficacy and manufacturing of the Toxoplasmosis Vaccine and obtaining the regulatory approvals required to allow its manufacture and marketing. It is agreed that, as Bayer has greater regulatory experience than Paravax and as Bayer will have responsibility for marketing the Toxoplasmosis Vaccine, Bayer will be responsible for designing the regulatory program, including clinical trial protocols, to obtain the required regulatory approvals. Bayer shall complete such design of the regulatory program prior to the completion of Phase II of the Research Program, so that no delay exists between the completion of Phase II of the Research Program and the commencement of Phase Ill of the Research Program. Once such a regulatory program has been designed, Paravax and Bayer shall jointly determine how to allocate responsibility for conducting Phases III and IV of the Research Program in order to complete such Phases in the most efficient and expeditious manner. To the extent that Paravax is to undertake responsibility for conducting portions of Phases III and IV of the Research Program, Bayer shall provide Paravax in a timely manner with an amount of funding which is sufficient to allow Paravax to reasonably conduct and complete such portions of the Research Program, including amounts necessary to conduct the clinical trials and obtain the regulatory approvals contemplated. Paravax agrees that it shall use diligent efforts to conduct all formal clinical trials in a manner which is satisfactory for regulatory approval, as directed by Bayer. ARTICLE 5. OPTION AND LICENSE 5.1. Interim License. During the term of this Agreement, Bayer shall have a license to use all Paravax Technology, including all results obtained during the Research Program, and all biological materials created during the Research Program, for purposes of assisting and evaluating the conduct of the Research Program, including designing and conducting the regulatory program referred to in Article 4 hereof, and preparing for and conducting preliminary manufacturing of the Toxoplasmosis Vaccine and for all other purposes which are consistent with the provisions of this Cooperation Agreement. 5.2. Option. For a period of 180 days after a termination of this Agreement, Bayer shall have an option to acquire a license to use all Paravax Technology to the extent set forth below. The rights to be granted pursuant to such license shall differ depending upon the circumstances under which such option is exercised, as set forth below. 5.3. Exercise upon Completion. In the event that this Agreement terminates upon completion of the Research Program, as set forth in Section 11.1 hereof, Bayer shall obtain an exclusive license to use the Paravax Technology to manufacture -5- 6 Toxoplasmosis Vaccine for sale in the Territory. Such license shall terminate upon a termination of the Distribution Agreement at the election of Bayer or by reason of a material breach by Bayer. During the term of such license, Paravax shall not grant any other party a license to use the Paravax Technology for the manufacture of any recombinant vaccine for the prevention of feline toxoplasmosis for sale in the territory, and Paravax will not use the Paravax Technology for the manufacture of any recombinant vaccine for the prevention of feline toxoplasmosis for sale in the Territory, except for sale through Bayer pursuant to the Distribution Agreement. Bayer shall also be entitled to obtain various nonexclusive licenses to use the Paravax Technology for purposes other than a vaccine for the prevention of feline toxoplasmosis, to the extent Paravax is contractually permitted to grant such licenses. In the event that Bayer elects to obtain such a license, Paravax and Bayer shall negotiate in good faith a reasonable royalty rate and other reasonable terms and conditions for such license. 5.4. Exercise upon Premature Termination caused by Paravax. In the event that Bayer exercises its option to obtain a license to the Paravax Technology upon the termination of this Agreement pursuant to Section 11.3 hereof as a result of a breach by Paravax, or upon the termination of this Agreement by Bayer at its election pursuant to Section 11.4 hereof as a result of an acquisition of Paravax, Bayer shall obtain an exclusive license to use all of the Paravax Technology to manufacture and sell vaccines for the prevention of feline toxoplasmosis in the Territory. In such event, Paravax will not use the Paravax Technology to manufacture and/or sell any recombinant vaccine for the prevention of feline toxoplasmosis in the Territory and will not grant any other party a license to use the Paravax Technology to manufacture and/or sell any recombinant vaccine for the prevention of feline toxoplasmosis in the Territory; provided, however, that Paravax shall be entitled to use the Paravax Technology in the Territory to manufacture, or have manufactured, a vaccine for the prevention of feline toxoplasmosis for sale outside of the Territory. Bayer shall also be entitled to obtain various nonexclusive licenses to use the Paravax Technology for purposes other than a vaccine for the prevention of feline toxoplasmosis, to the extent Paravax is contractually permitted to grant such licenses. In the event that Bayer elects to obtain such a license, Paravax and Bayer shall negotiate in good faith a reasonable royalty rate and other reasonable terms and conditions for such license. 5.5. Exercise upon Premature Termination caused by Baver. In the event that Bayer terminates this Agreement at its election pursuant to Section 11.2 hereof, Bayer shall be entitled to obtain various nonexclusive licenses to use the Paravax Technology for other than a vaccine for the prevention of feline toxoplasmosis, to the extent Paravax is contractually permitted to grant such licenses. In the event that Bayer elects to obtain such a license, Paravax and Bayer shall negotiate in good faith a reasonable royalty rate and other reasonable terms and conditions for such license. -6- 7 5.6. Royalty Rates. The license granted to Bayer pursuant to Section 5.1 hereof shall be royalty free. A license with respect to Toxoplasmosis Vaccine granted to Bayer pursuant to Section 5.3 hereof shall provide for the payment of royalties to Paravax of [ ]% of Net Sales of Toxoplasmosis Vaccine, other than Toxoplasmosis Vaccine which is sold by Paravax to Bayer pursuant to the Distribution Agreement. A license with respect to a vaccine for the prevention of feline toxoplasmosis granted to Bayer pursuant to Section 5.4 hereof shall provide for the payment of royalties to Paravax of [ ]% of Net Sales of any such feline toxoplasmosis vaccine. Bayer's obligation to pay any such royalties shall terminate upon the later of (i) the expiration of all of the licensed patents, or (ii) ten years from the first commercial sale of a licensed product by or on behalf of Bayer. In the event that any royalty and/or license fee is required to be paid to any third party with respect to the use, manufacture or sale of Toxoplasmosis Vaccine, other than any amounts which Paravax is contractually obligated to pay as of the date of this Agreement, such expense shall be borne equally by Paravax and Bayer. Paravax and Bayer shall jointly decide to undertake any contractual commitment to pay any such license fee or royalty with respect to the manufacture or sale of Toxoplasmosis Vaccine. Paravax shall be solely responsible to bear the cost of any license fee or royalty which Paravax is contractually obligated to pay as of the date of this Agreement. 5.7. License Agreements. At any time, upon the request of Bayer, Bayer and Paravax shall negotiate in good faith the form of the license agreement for any license to be granted to Bayer pursuant to this Article 5. Such license agreement shall contain the substantive terms described in this Article 5, together with such other reasonable and customary terms as the parties shall agree upon. Such license agreement shall be subject to appropriate decreases in royalties upon the expiration of patents. Such license agreement shall also provide for Paravax to provide Bayer with reasonable assistance and documentation in order to facilitate Bayer's permitted use of the Paravax Technology. ARTICLE 6. MANUFACTURE OF TOXOPLASMOSIS VACCINE 6.1. Manufacturing Source. To the extent that upon the completion of Phase II of the Research Program Paravax owns, or leases pursuant to a long term lease, a manufacturing facility which has been approved by the United States Department of Agriculture or, if applicable, the United States Food and Drug Administration which allows Paravax to produce Toxoplasmosis Vaccine for which regulatory approval or clearance for sale can be obtained in a specific country in the Territory, the parties shall proceed as though Paravax shall manufacture the Toxoplasmosis Vaccine for distribution in that country by Bayer pursuant to the Distribution Agreement. To the extent that upon the completion of Phase II of the Research Program Paravax does not have such an approved manufacturing facility which allows it to produce Toxoplasmosis Vaccine for which regulatory approval or clearance for sale can be -7- 8 obtained in a specific country, the parties shall proceed as though Bayer shall manufacture the Toxoplasmosis Vaccine for distribution in that country by Bayer pursuant to the Distribution Agreement. Paravax may elect to forego or cease manufacture of Toxoplasmosis Vaccine at any time, provided that Paravax gives Bayer adequate notice to allow Bayer, or a third party, to prepare for the manufacturing requirements of producing the Toxoplasmosis Vaccine for, as applicable, Phases III and IV of the Research Program and/or manufacture for commercial sale. After the commencement of Phase III of the Research Program, Paravax shall have no right to regain from Bayer the right to manufacture the Toxoplasmosis Vaccine; however, Bayer agrees that it shall favorably consider any such request made by Paravax. In the event that Paravax elects to forego or cease manufacture of the Toxoplasmosis Vaccine, Bayer shall be entitled to manufacture all of Bayer's requirements for Toxoplasmosis Vaccine pursuant to the license described in Section 5.3 above. 6.2. Manufacturing Agreement. In the event that Paravax does not manufacture any Toxoplasmosis Vaccine, as described in Section 6.1 hereof, Bayer and Paravax shall enter into a Manufacturing Agreement pursuant to which Bayer shall manufacture, or have manufactured, the Toxoplasmosis Vaccine for Paravax for sale outside of the Territory and sell such Toxoplasmosis Vaccine to Paravax at a reasonable price to be agreed upon by Paravax and Bayer. Such Manufacturing Agreement shall include such other reasonable and customary terms as the parties shall agree upon, consistent with the terms of this Cooperation Agreement. ARTICLE 7. DISTRIBUTION RIGHTS 7.1. Distribution Agreement. Upon Bayer's decision to file for regulatory approvals for a Toxoplasmosis Vaccine, Bayer and Paravax shall enter into a Toxoplasmosis Vaccine Distribution Agreement. Such Distribution Agreement shall include the substantive terms described in Articles 7, 8, 9 and 10 of this Cooperation Agreement, together with such other reasonable and customary terms as the parties shall agree upon, consistent with the terms of this Cooperation Agreement. The term of such Distribution Agreement shall be perpetual, subject to termination by Bayer at its election or termination by Bayer or Paravax as a result of a breach by the other party. 7.2. Grant of Rights. During the term of the Distribution Agreement, Bayer and its affiliated companies shall have the exclusive right to distribute Toxoplasmosis Vaccine in the Territory. Bayer and its affiliated companies shall be entitled to distribute the Toxoplasmosis Vaccine both directly and through distributors. Bayer shall use diligent efforts during the term of the Distribution Agreement to promote, market, distribute and sell Toxoplasmosis Vaccine in the countries in the Territory listed on Exhibit B hereto. Bayer shall have no obligation to promote, market, distribute or ell Toxoplasmosis Vaccine in any portion of the Territory in which it is not -8- 9 commercially reasonable to do so. 7.3. Competing Products. Other than Toxoplasmosis Vaccine, and any other vaccine licensed from and/or developed by Paravax, Bayer shall not directly, or through any subsidiary or affiliated corporation, sell in the Territory any vaccine for the prevention of feline toxoplasmosis during the term of the Distribution Agreement. Bayer also agrees that neither it nor any subsidiary or affiliated corporation shall directly or indirectly solicit sales of Toxoplasmosis Vaccine for use in any animal other than domestic felines. 7.4. Additional Territories. In the event that a Paravax relationship for the distribution of Toxoplasmosis Vaccine with an existing partner terminates as to any portion of the world not included in the Territory, Paravax agrees that, before entering into a relationship with any new partner for the distribution of the Toxoplasmosis Vaccine in such portion of the world, it will first offer Bayer the option to obtain distribution rights for the Toxoplasmosis Vaccine in that portion of the world upon reasonable terms and conditions and will negotiate in good faith with Bayer with respect to such reasonable terms and conditions if Bayer is interested in obtaining such rights. ARTICLE 8. PURCHASE OF TOXOPLASMOSIS VACCINE 8.1. Purchase Obligation. To the extent that Paravax is entitled to be the manufacturing source for Toxoplasmosis Vaccine in some or all of the Territory, pursuant to the provisions of Section 6.1 hereof, the Distribution Agreement shall provide that Bayer will purchase from Paravax all quantities of Toxoplasmosis Vaccine to be sold by it or on behalf of it pursuant to the Distribution Agreement in such portions of the Territory. Bayer's obligation to purchase Toxoplasmosis Vaccine from Paravax shall terminate in the event that Paravax consistently fails to provide in a timely manner the Toxoplasmosis Vaccine which Bayer orders pursuant to the terms of the Distribution Agreement or in the event that Paravax elects to cease or forego manufacture of the Toxoplasmosis Vaccine pursuant to Section 6.1 hereof. To the extent that Paravax manufactures Toxoplasmosis Vaccine, the terms set forth in this Article 8 shall be incorporated in the Distribution Agreement for purposes of Bayer's purchases of such Toxoplasmosis Vaccine. 8.2. Transfer Price. The per dose price at which Bayer shall purchase Toxoplasmosis Vaccine from Paravax pursuant to the Distribution Agreement shall be equal to the sum of (i) [ ], (ii) [ ], and (iii) [ ]. To the extent that Paravax and Bayer are unable to agree upon the price at which [ ] would manufacture the Toxoplasmosis Vaccine, Paravax and Bayer shall agree upon [ ] -9- 10 [ ] for the manufacture of the Toxoplasmosis Vaccine in those quantities which Bayer reasonably expects to purchase Toxoplasmosis Vaccine in the upcoming year. Upon [ ] for purposes of the calculation of the transfer price payable to Paravax. In addition, Paravax and Bayer will discuss increases to this price in good faith on a yearly basis in order to compensate Paravax for increases in the costs of raw materials, labor and other manufacturing expenses. 8.3. Shipment. All prices and shipments shall be F.C.A. Paravax's Fort Collins, Colorado location, and risk of loss or damage shall pass to Bayer on delivery to a common carrier. Bayer shall pay, or reimburse Paravax for, the amount of any sales, use, excise or similar taxes and all expenses of clearing customs and duties associated with importing or exporting the Toxoplasmosis Vaccine purchased from Paravax for sale by or on behalf of Bayer within the Territory. 8.4. Packaging. Bayer shall supply the art work and language for all labels, packaging, product inserts and related items. Bayer shall bear any expense, including discarded materials, resulting from any change in such packaging, labeling, inserts or art work requested by Bayer. Bayer shall market the Toxoplasmosis Vaccine using Bayer's tradenames, trademarks, logos and trade dress; however, to the extent the Toxoplasmosis Vaccine is manufactured by Paravax, Bayer's name as distributor and Paravax's name as manufacturer shall receive equal prominence in the descriptive materials. 8.5. Forecasts and Purchase Orders. In order to assist Paravax in planning its production schedule for the Toxoplasmosis Vaccine, Bayer shall, no later than last day of each calendar quarter, provide Paravax with a good faith forecast of the Toxoplasmosis Vaccine that Bayer expects to purchase during each of the following four calendar quarters. The amounts so forecast for the immediately following two quarters shall be deemed to be a noncancellable order for delivery during such quarter; provided, however, that Bayer shall not be obligated to purchase more than 75 % of the amount so forecast for the second such quarter. Any additional amounts to be purchased by Bayer shall be purchased by written purchase order submitted to Paravax. Paravax shall not be obligated to accept any purchase order which provides for delivery in less than 90 days from the date of its receipt. Paravax shall be entitled to establish economically reasonable minimum quantities for individual deliveries in light of production expenses. 8.6 Payment. Payment for Toxoplasmosis Vaccine shall be due in full thirty (30) days from the date of receipt of invoice, which shall be on or after the date of shipment. -10- 11 Accounts outstanding more than thirty (30) days will be subject to a monthly charge at the rate of one and one half percent (1.5 %) per month, or the maximum permitted by law, whichever is less. 8.7. Warranty. Paravax will warrant that the Toxoplasmosis Vaccine supplied by Paravax will be free from defects in manufacturing and workmanship, and will conform to agreed upon standards and specifications, during the shelf life indicated by Paravax for such Toxoplasmosis Vaccine (the "Warranty Period"), provided that the Toxoplasmosis Vaccine is maintained under the storage conditions defined by Paravax. Any Toxoplasmosis Vaccine which is found to be defective during the Warranty Period may be returned for replacement. Bayer agrees to report to Paravax any suspected product defect or customer complaint. Paravax shall have the right to decide to recall any or all of the Toxoplasmosis Vaccine, and Bayer agrees to comply with any recall procedures for such Toxoplasmosis Vaccine decided on by Paravax. There shall be no remedies for defective Toxoplasmosis Vaccine other than those expressly set forth herein, and Paravax will make no other warranties of any kind, express or implied, with respect to Toxoplasmosis Vaccine. Paravax will, however, bear any producer liability to third parties with respect to any Toxoplasmosis Vaccine manufactured by Paravax, to the extent imposed by applicable law. ARTICLE 9. PATENT INDEMNIFICATION 9.1. Infringement Defense. Paravax and Bayer will jointly defend any claim, suit or proceeding brought against Bayer and/or Paravax to the extent it is based upon a claim that the Toxoplasmosis Vaccine sold by Bayer or on behalf of Bayer pursuant to the Distribution Agreement infringes upon any patent or trade secret rights of any third party. Bayer and Paravax agree that they shall promptly notify the other in writing of any such claim or action and give the other full information and assistance in connection therewith. Paravax and Bayer shall jointly control the defense of any such claim or action and the settlement or compromise of any such claim or action. Paravax and Bayer will jointly pay all damages, costs and expenses paid in settlement or finally awarded to third parties against Bayer and/or Paravax for such claim or in such action. If the Toxoplasmosis Vaccine is, or in Paravax' s or Bayer's opinion might be, held to infringe as set forth above, Paravax and Bayer shall jointly determine whether to replace or modify such Toxoplasmosis Vaccine so as to avoid infringement, or procure the right for Bayer and Paravax to continue the manufacture, use and resale of such Product. Paravax and Bayer shall also jointly determine how the expense of any replacement, modification or procurement of rights shall be borne by Paravax and Bayer. If neither of such alternatives is commercially reasonable, any infringing Toxoplasmosis Vaccine held by Bayer and purchased from Paravax shall be returned to Paravax and Paravax's sole liability, in addition to its obligation to pay damages, costs and expenses as set forth above, shall be to refund the amounts paid for such returned Toxoplasmosis Vaccine by Bayer, and Paravax shall have no further -11- 12 obligation to supply Toxoplasmosis Vaccine to Bayer pursuant to the Distribution Agreement. 9.2. Limitation. Paravax will have no liability for any claim of infringement arising as a result of Bayer's use of the Toxoplasmosis Vaccine in combination with any items not supplied by Paravax, any modification of the Toxoplasmosis Vaccine by Bayer or third parties, or, in the event that Bayer manufactures the Toxoplasmosis Vaccine, any manufacturing process used by Bayer. THE FOREGOING STATES THE ENTIRE LIABILITY OF PARAVAX TO BAYER OR ANY PURCHASER OR USER OF TOXOPLASMOSIS VACCINE CONCERNING INFRINGEMENT OF INTELLECTUAL PROPERTY RIGHTS, INCLUDING BUT NOT LIMITED TO, PATENT AND TRADE SECRET RIGHTS. ARTICLE 10. PATENTS 10.1. Ownership of Inventions. As between the parties, all rights to inventions or discoveries invented or discovered jointly by Paravax and Bayer under this Cooperation Agreement shall be jointly owned. Each party shall have the right to use such inventions and discoveries for such purposes as it shall deem appropriate, upon agreement with the other party as to appropriate and reasonable compensation for uses other than those contemplated by this Agreement; provided, however, that to the extent set forth in the Distribution Agreement, Bayer shall have the sole right to distribute Toxoplasmosis Vaccine in the Territory. As between the parties, all rights to inventions or discoveries invented or discovered solely by Paravax under this Cooperation Agreement shall belong to Paravax. Bayer shall have no rights with respect to such inventions or discoveries other than the rights to enter into the license agreements and the Distribution Agreement, as set forth herein. As between the parties, all rights to inventions or discoveries invented or discovered solely by Bayer under this Cooperation Agreement shall belong to Bayer. 10.2. Patent Filings. During the term of this Cooperation Agreement and the Distribution Agreement, Paravax shall consult with Bayer as to all patent filings and other patent actions related to the Toxoplasmosis Vaccine. Paravax and Bayer shall make such patent filings, and take such other actions with respect to patent filings, as they jointly determine are appropriate, using counsel selected by Paravax and consented to by Bayer, which consent will not be unreasonably withheld. 10.3. Patent Enforcement. During the term of the Distribution Agreement, Bayer shall have the right to bring actions to enforce any patent rights held by Paravax with respect to the Toxoplasmosis Vaccine against infringement in the countries in the Territory in which Bayer has the right to distribute the Toxoplasmosis Vaccine pursuant to the Distribution Agreement. Paravax shall provide such assistance and cooperation in connection with such enforcement actions as Bayer shall reasonably request. In the -12- 13 event that Bayer elects not to enforce any such patent rights, Paravax may, but is not obligated to, bring actions with respect to such infringement, and Bayer shall provide such assistance and cooperation in connection with such actions as Paravax shall reasonably request. Bayer shall not settle or compromise any such action which it brings to enforce any patent with respect to the Toxoplasmosis Vaccine without Paravax's consent, which consent will not be unreasonably withheld. Where such an enforcement action has been brought by Bayer, Bayer shall maintain the litigation at its own expense and shall keep any judgment and award arising from such action. Where such an enforcement action has been brought by Paravax, Paravax shall maintain the litigation at its own expense and shall keep any judgments and awards arising from such action. ARTICLE 11. TERM AND TERMINATION 11.1. Term. The term of this Agreement shall commence on the date first set forth above and shall end on the earlier of the date upon which this Agreement is terminated pursuant to the provisions of this Article 11 or upon the completion of the Research Program. 11.2. Bayer Termination. Bayer shall have the right to terminate this Agreement upon any anniversary of the date hereof, beginning with the second such anniversary (but not before payment of the twenty-four month lump sum payment due pursuant to Section 3.3 hereof), upon written notice given not less than 90 days prior to such anniversary. In the event that Bayer elects to so terminate this Agreement, Paravax shall repay all amounts paid by Bayer pursuant to this Agreement at a rate of [ ], of any vaccine for the prevention of feline toxoplasmosis developed by Paravax based on the work conducted pursuant to the Research Program during the term of this Agreement. Paravax's obligation to make such payments to Bayer shall not commence until after the completion of the second full calendar year in which such a vaccine has been marketed in the Territory, and such payments shall only be made with respect to Net Sales of such vaccine which take place after the completion of such second full calendar year. 11.3. Termination for Breach. Either party shall have the right to terminate this Agreement upon written notice if (a) the other party is in breach of any material provision of this Agreement and such breach has not been remedied within 30 days after written notice of such breach has been given; or (b) the other party enters into liquidation, whether compulsory or voluntary, or has a receiver appointed as to all or any part of its assets, or takes or suffers -13- 14 any similar action in consequence of debt. 11.4. Paravax Acquisition. Bayer shall have the right to terminate this Agreement upon written notice to Paravax given within ninety (90) days of any acquisition of Paravax by a third party, whether by merger or sale or other transfer of a substantial majority of the assets of Paravax. In the event that Bayer elects to so terminate this Agreement, Bayer shall, upon the request of Paravax, provide reasonable assistance to aid Paravax in satisfying its contractual obligations with respect to the supply of vaccines for the prevention of feline toxoplasmosis for sale outside of the Territory. 11.5. Paravax Termination. Paravax shall not have the right to unilaterally terminate this Agreement; provided, however, that in the event that Paravax determines that it is unlikely that the Research Program can be successfully completed, Paravax and Bayer shall negotiate an appropriate termination of this Agreement. ARTICLE 12. CONFIDENTIALITY 12.1. Confidential Information. It is agreed that during the term of this Agreement Paravax and Bayer may each disclose certain Confidential Information to the other for purposes of furthering or evaluating progress under this Agreement. The term "Confidential Information" for these purposes shall include all technical, business, financial, or marketing information which one party (the "Disclosing Party") discloses to the other party (the "Receiving Party"), except any portion of such information which: a. is now or later made known to the public through no default by the Receiving Party of its obligations under this Agreement; b. the Receiving Party can show was in its possession prior to disclosure by the Disclosing Party; c. is rightfully received by the Receiving Party from a third party without any accompanying secrecy obligation; or d. is independently developed by the Receiving Party by persons who neither had access to Confidential Information of the Disclosing Party nor received direction from persons who had access to Confidential Information of the Disclosing Party. 12.2. Confidentiality Obligation. A Receiving Party agrees to hold in confidence and not disclose to any third parties any of the Confidential Information of the Disclosing Party without the prior consent of the Disclosing Party; provided, however, that to the extent required in order to obtain regulatory approval, a Receiving Party may -14- 15 disclose such Confidential Information to the appropriate regulatory authorities. A Receiving Party agrees to limit any disclosure of the Confidential Information only to those of its employees and outside professional advisors who have a need to know and who are bound by confidentiality obligations, and to advise such persons of the Receiving Party's obligations under this Agreement. A Receiving Party further agrees to use Confidential Information received from the other party only for purposes of furthering or evaluating progress under this Agreement. Any tangible materials that contain any Confidential Information shall be returned to the Disclosing Party promptly upon request, and any portions of any memoranda, reports or documents created by the Receiving Party which contain any Confidential Information shall be destroyed upon the request of the Disclosing Party; provided, however, that the Receiving Party may keep a single copy of all such tangible materials for purposes of demonstrating compliance with the provisions of this Agreement. 12.3. Confidentiality of Agreement. In addition, neither party will disclose to any third party, other than with the prior written consent of the other party, the terms and conditions of this Agreement, except as may be required by applicable law, regulation or court order. The provisions of this Article 12 shall survive any termination of this Agreement for a period of ten (10) years. ARTICLE 13. MISCELLANEOUS 13.1. Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the assigns of Paravax and Bayer; however, neither Paravax nor Bayer shall be entitled to assign its rights and obligations under this Agreement without the express written consent of the other. Notwithstanding the immediately preceding, such consent shall not be required for an assignment of the rights and obligations of Paravax or Bayer to a wholly owned subsidiary or which takes place as part of an acquisition of Paravax, whether by merger or sale or other transfer of substantially all of the assets of Paravax; provided, however, that nothing in this Section 13.1 shall be deemed to limit the rights of Bayer pursuant to the provisions of Section 11.4 hereof. 13.2. Relationship of Parties. Nothing in this Agreement shall constitute or be deemed to constitute a partnership between the parties. The relationship between Bayer and Paravax shall be strictly that of sponsor and researcher. Bayer, its officers, agents and employees, shall under no circumstances be considered the agents, employees or representatives of Paravax, and Paravax, its officers, agents and employees, shall under no circumstances be considered the agents, employees or representatives of Bayer. Bayer shall not have the right to enter into any contracts or binding commitments in the name of or on behalf of Paravax in any respect whatsoever, and Paravax shall not have the right to enter into any contracts or binding commitments in the name of or on behalf of Bayer in any respect whatsoever. -15- 16 13.3. Notices. Notices required hereunder shall be deemed properly given upon hand delivery (including professional courier such as Federal Express) to the addresses set forth below, or to such other address as a party shall have given notice of in accordance herewith. Paravax: Paravax, Inc. 2301 Research Boulevard, Suite 110 Fort Collins, CO 80526 Attn: President Bayer: Bayer AG Geschaftsbereich Veterinar VT-F/Leitung D-51368 Leverkusen Germany Attn: Prof. Dr. H. Thomas 13.4. Force Majeure. Neither party shall be liable for any failure to perform any of its obligations hereunder (other than the payment of money) which results from act of God, the elements, fire, flood, component shortages, force majeure, riot, insurrection, industrial dispute, accident, war, embargoes, legal restrictions or any other cause beyond the control of such party. 13.5. Governing Law. This Agreement will be governed by and construed in accordance with the laws of the State of Kansas, without regard to its provisions concerning the applicability of the laws of other jurisdictions. 13.6. Arbitration. Should any dispute, controversy or difference of opinion arise between the parties hereto out of or in relation to or in connection with this Agreement, or the breach thereof, the parties shall first endeavor to reach an amicable resolution thereof. Should the parties fail to reach such an amicable resolution, any such dispute, controversy or difference of opinion shall be resolved by arbitration in accordance with the arbitration rules of the International Chamber of Commerce, then in force, by one or more arbitrators appointed in accordance with such rules. Any such arbitration shall be held in Kansas City, Missouri if requested by Bayer, and in Leverkusen, Germany if requested by Paravax, and all proceedings shall be held in the English language. Any award rendered shall be final and binding upon the parties. Judgement upon the award may be entered in any court having jurisdiction, or application may be made to such court for judicial acceptance of the award and/or an order of enforcement as the case may be. -16- 17 13.7. Severability. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 13.8. Entire Agreement. This Agreement sets forth the entire agreement and understanding between the parties as to the subject matter hereof and may only be amended by a writing signed by both parties. 13.9. Titles and Headings. The titles or headings, articles, sections or paragraphs set forth in this Agreement have been inserted merely to facilitate reference and shall have no bearing upon the interpretation of any of the provisions of this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on their behalf as of the date first set forth above. PARAVAX, INC. By /s/ DAVID F. CAIN -------------------------- Title: President ---------------------- BAYER AG By /s/ H. THOMAS ----------------------- Title: Head of Research ----------------------- BG Animal Health -17- 18 FELINE TOXOPLASMOSIS VACCINE RESEARCH & DEVELOPMENT PLAN : EXHIBIT A [ ] 1 19 [ ] 2 20 [ ] 3 21 Feline Recombinant Toxoplasmosis Vaccine Timetable
- ------------------------------------------------------------------------------------------------------------------ PHASE 1 Year 1 Year 2 Year 3 Year 4 ================================================================================================================== TASK ================================================================================================================== [ ]
22 FELINE RECOMBINANT TOXOPLASMOSIS VACCINE PHASE I/II MILESTONES AND PAYMENTS
=================================================================================================================== MILESTONES MOS. PAYMENT BY ($000 OMITTED) - ------------------------------------------------------------------------------------------------------------------- Performance(1) Milestones(2) =================================================================================================================== =================================================================================================================== [ ]
(1) Payment upon completion of the time (month) listed if performance level is acceptable. (2) Payment upon successful achievement of milestone, independent of time. (3) Payment upon fulfilling criteria of Milestone 5. (4) As identified above in this exhibit. 23 Exhibit B to Feline Toxoplasmosis Cooperation Agreement United States of America Federal Republic of Germany United Kingdom France EX-10.4 13 *CONFIDENTIAL TREATMENT* PRODUCT SUPPLY/LICENSE AG 1 [CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTIONS OF THIS DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE COMMISSION] EXHIBIT 10.4 AMENDMENT NO. 1 TO PRODUCT SUPPLY AND LICENSE AGREEMENT This Amendment is effective as of the date given below and modifies the Product Supply and License Agreement (the Agreement) of May 1, 1995 by and between Paravax, Inc. a corporation of the state of California with offices at 1825 Sharp Point Road, Fort Collins Colorado 80525 (PARAVAX ) and Atrix Laboratories, Inc., a corporation of the state of Delaware, with offices at 2579 Midpoint Drive, Fort Collins, CO 80525 (ATRIX). PARAVAX and ATRIX state that Section 2.4 Minimums of the Agreement now reads in certain part: The minimum purchase shall be determined by the number of Units actually delivered by SELLER and paid for by BUYER and the twelve month period (herinafter Anniversary Period) shall run from anniversary to anniversary of the first sale date. PARAVAX and ATRIX agree that pursuant to section 13.1 of the Agreement, this certain part of Section 2.4 shall be amended to read: The minimum annual purchase shall be determined by the number of Units paid for by BUYER but shall be subject to reduction for that year only by the number of units ordered by BUYER and accepted by SELLER but not delivered by SELLER as requested by BUYER, and the twelve month period (herinafter Anniversary Period) shall run from anniversary to anniversary of the first sale date. - -------------------------------------------------------------------------------- AMENDMENT NO. 1 -1- 2 IN WITNESS WHEREOF, the parties have caused this agreement to be signed by the duly authorized officers as of the date hereinbelow written. PARAVAX, INC. ATRIX LABORATORIES, INC. BY: /S/ FRED M. SCHWARZER BY: /s/ CHARLES P. COX ---------------------- -------------------------- Title: President Title: VP Product Development ------------------- ------------------------ Dated: June 23, 1993 Dated: 9 June 1995 ------------------- ------------------------ - ------------------------------------------------------------------------------- AMENDMENT NO. 1 -2- 3 PRODUCT SUPPLY AND LICENSE AGREEMENT This Agreement is entered into as of April 28, 1995 by and between Atrix Laboratories, Inc., a Delaware corporation having a place of business at 2579 Midpoint Drive, Fort Collins, Colorado 80525 ("SELLER") and Paravax, Inc. a California corporation having a place of business at 1825 Sharp Point Drive, Fort Collins, Colorado 80525 ("BUYER"). RECITALS A. SELLER has developed a proprietary, patented method for delivering antibiotics in an injected, slow release medium for the treatment of periodontal disease in humans. B. BUYER is in the business of developing and marketing therapeutic and diagnostic products for the animal health market, and desires to obtain an exclusive license from SELLER to purchase the periodontal product from SELLER and to use and sell the product in the animal health market for periodontal applications. C. In order to penetrate the animal health market, SELLER desires to sell products to BUYER, pursuant to the terms of this Agreement. NOW, THEREFORE, in consideration of the mutual promises in this Agreement, the parties agree as follows: 1. DEFINITIONS 1.1 "Affiliate" shall mean any company, corporation, or business in which BUYER owns or controls at least fifty percent (50%) ownership interest or which owns or controls such an interest in BUYER. 1.2 "Clinical Units" means Product for BUYER's use in the initial clinical trials. Clinical Units may not be repackaged in new dosage sizes and a "Clinical Unit" will consist of 0.5 mL in a 1.25 mL syringe. 1.3 "Effective Date" shall mean the date on which this Agreement has been signed by authorized representatives of both parties. This date shall be inserted in the opening paragraph of this Agreement. 1.4 "Improvement" shall mean any improvement to the Licensed Technology developed by or for SELLER during the term of this Agreement and which has potential application to the Product for the Licensed Field so long as the Unit, as modified by the improvement, falls within the scope of the claims of the patents listed in Exhibit A. 4 1.5 "Licensed Field" shall mean the treatment of periodontal disease in non-human companion animals. 1.6 "Licensed Product" means a Product manufactured by or for BUYER under Section 8 below which at the time of manufacture, use or sale is covered in the country of such manufacture, use or sale, by any pending or issued valid claim for the Patent Rights and optionally is based upon Licensed Technology. For the purposes of this Agreement, an "issued valid claim" shall mean a claim of an unexpired patent which shall not have been withdrawn, canceled, or disclaimed, nor held invalid by a court of competent jurisdiction in any unappealed or unappealable decision in the country where the Licensed Product is made, used or sold by BUYER or its Affiliates. 1.7 "Licensed Technology" means the SELLER's know-how relating to the formulation and manufacture of the Product. 1.8 "Manufacturing Documentation" means all manufacturing documentation, including bill of materials, designs, drawings, lists of tooling, quality assurance protocols and other test materials, reasonably necessary to enable BUYER to manufacture the Product and consisting of the items listed on Exhibit C. 1.9 "Net Sales" shall mean the actual gross receipts from sales of Licensed Products less the following deductions actually paid or allowed by BUYER: quantity and cash discounts normal and customary in the trade; sales, use, and other similar taxes; amounts repaid or credited by reason of rejection or return, and transportation or delivery charges. Free samples, marketing costs however denominated, and promotion costs and fees shall not be included within the deductions used to calculate Net Sales from the gross receipts. In the event an invoice price is determined in a foreign currency, Net Sales shall be the equivalent in U.S. Dollars in accordance with the official foreign currency rate of exchange on the date payment of the invoice is received. 1.10 "Patent Rights" shall mean rights and claims in and to the inventions described in, and rights covered by, issued United States patents and patent applications listed in Exhibit B attached to this Agreement and made a part hereof, including all continuations, continuations-in- part, divisions and renewals thereof, and foreign counterparts thereof, which will automatically be deemed incorporated in and added to this Agreement and shall periodically be added to Exhibit A. If SELLER shall file or obtain any patent applications or patents with respect to Improvements which BUYER chooses to incorporate into any Products under section 2.3, then such applications and patents shall be automatically deemed incorporated in and added to this Agreement to the same extent as provided herein for the items originally included on Exhibit A. 2 5 1.11 "Product" means units of the SELLER's ATRIGEL'" drug delivery system product made of [ ] with doxycycline antibiotic to be sold to BUYER by SELLER hereunder, packaged in the dosage quantity specified by BUYER as provided in Section 3 below and otherwise conforming to the technical specifications attached as Exhibit B, and includes any Improvements, which BUYER chooses under Section 2.3 to incorporate into the Product. The term "Product" shall include Clinical Units, unless the context specifically requires otherwise. 1.12 "Unit(s)" means a separate sealed, moisture resistant package containing one 1.25 mL syringe containing 1 mL of [ ], one 1.25 mL syringe containing the required dose of doxycycline (as indicated on Exhibit B) and one cannula. 2. GRANT OF LICENSE 2.1 Grant of Rights to Licensed Technology. SELLER hereby grants to BUYER an exclusive, worldwide right during the term of this Agreement under the Licensed Technology to purchase Products from SELLER and to use and sell Products in the Licensed Field. BUYER shall have no right to sublicense the rights granted hereunder, provided that BUYER may enter into agreements (which may be called licenses) to sell Products through customary distribution channels, including corporate partners and private label arrangements. Except for the contingent rights granted under Section 8 below, no right is granted to manufacture or have manufactured Products using the Licensed Technology. No right is granted under this Agreement to use any of SELLER's trademarks. 2.2 License Fee. For the license granted under Section 2.1 above, BUYER will pay to SELLER a one-time non-refundable license fee in the amount of [ ] within two (2) business days of the Effective Date. Upon payment in full of this license fee, the license granted under Section 2.1 above shall be fully paid. 2.3 Right to Improvements. SELLER shall disclose to BUYER any Improvements. Such disclosure shall be made as promptly as possible and in any event no later than the date SELLER first incorporates such Improvement into its own products, or first conducts clinical trials with respect to such Improvement. BUYER shall have the right, but not the obligation, to elect to have such Improvement made part of the Products that it purchases hereunder. Upon BUYER's election, such Improvement shall be included as part of the Product and the Licensed Technology and shall be subject to all of the same rights and obligations under this Agreement. To the extent that Improvements are elected by BUYER for incorporation into Products, Buyer agrees to reimburse SELLER for all work of any nature which is needed to make such 3 6 incorporation and obtain governmental regulatory approval for such incorporation, such work including but not limited to developmental work, formulation work, pilot manufacturing studies, clinical studies, regulatory documentation, good manufacturing practices qualification, validation and the like. 2.4 Minimums. BUYER agrees that it will purchase from SELLER the following annual minimum quantities of Product during the life of this Agreement: (1) from the date of execution of this Agreement to the second anniversary of the first sale date of a Licensed Product, BUYER shall [ ] (2) From the second anniversary of the first sale date of a Licensed Product until the expiration of this Agreement under section 12.1 or its termination under sections 12.2 and 12.3, BUYER shall purchase a minimum of [ ] Units per twelve month period from SELLER. The minimum purchase shall be determined by the number of Units actually delivered by SELLER and paid for by BUYER and the twelve month period (hereinafter Anniversary Period) shall run from anniversary to anniversary of the first sale date. The actual number of Units paid for by Buyer in any one Anniversary Period shall be credited against the Anniversary Period purchase minimum. No excess of actual Units over [ ] purchased by BUYER in any one anniversary Period shall be credited against any purchase minimum of succeeding Anniversary Periods. In the event that BUYER fails to purchase the minimum number of Units in any one Anniversary Period: (a) this Agreement will immediately convert to a non-exclusive license in all respects; (b) the contingent manufacturing license under Article 8 shall be cancelled; and (c) SELLER shall have the immediate right to sell Units to third parties and shall have the right to co-own, use, cite and rely upon all of BUYER's governmental regulatory documentation concerning approval of Units in connection with sales by SELLER but SELLER shall have no right to convey any rights to such regulatory documentation to any third party. 3. FORMULATION AND GOVERNMENT APPROVALS 3.1 Dosage and Formulation. SELLER and BUYER acknowledge that the Product as currently formulated by SELLER (0.5 mL material in a 1.25 mL syringe) may not be optimal for applications in the Licensed Field. Accordingly, SELLER agrees to take all actions necessary to reformulate the Products, and any Improvements that BUYER elects to use, such that a Unit of Product is defined as provided in section 1.12. SELLER will package ten of such Units per box. SELLER agrees that it will begin the manufacture of the Units of Product within such time as to provide Units of the Product to BUYER by December 31, 1995. BUYER agrees to pay SELLER a fixed total of $[ ] on the 4 7 schedule indicated below to compensate SELLER for its costs in (a) reformulating the Products in this dosage, except that incorporation of Improvements under section 2.3 and additional toxicology studies requested by the FDA or other regulatory authorities shall not be included within the fixed total of this section 3.1, (b) revising its manufacturing processes and ordering appropriate tooling, and (c) performing all stability testing and other testing necessary for submission to the FDA for approval. This fee will be paid [ ] within two (2) business days of execution of this Agreement, [ ] on December 31, 1995 and $[ ] on July 31, 1996. If this Agreement is terminated prior to July 31, 1996 for any reason, BUYER will pay a portion of any unpaid amount of this fee pro rated through the date of termination that will at least be sufficient to cover SELLER's costs, labor and supplies or will pay an amount up to any unpaid portion of the $[ ] that is sufficient to cover all of SELLER's costs, labor, supplies as shown by SELLER's written documentation, whichever is greater. 3.2 Government Approvals. BUYER shall be solely responsible for obtaining at its own expense all government approvals required for sale of Products in the Licensed Field any jurisdiction. BUYER shall be solely responsible for conducting any clinical trials needed for such approvals. 3.3 Manufacturing and Other Documentation. SELLER shall cooperate in good faith to give BUYER any information in SELLER's possession that would be useful to BUYER in such clinical trials or government filings. In particular, SELLER will at its own expense prepare a package of documentation regarding SELLER's compliance with FDA Good Manufacturing Practices that relates to the Products being sold to BUYER and that complies with FDA regulations. The package will consist at least of the documentation specified on Exhibit C. SELLER will update this package promptly to reflect any changes in the Product's manufacturing process or any changes in FDA requirements. SELLER agrees to provide this package to BUYER as reasonably requested by BUYER. 3.4 No Modification of Products. Except for modifications mandated by any governmental regulatory authority, SELLER agrees that it will not modify the Products in any manner, including changes in materials, dosage size or manufacturing processes, and especially including any changes that would require notification to any filing or a new filing with any governmental agencies, without first obtaining the consent of the BUYER, which consent shall not be unreasonably withheld. If BUYER refuses to give such consent, then irrespective of BUYER's basis for the refusal, SELLER shall have the option either to make the modification and equally share with BUYER the governmental agency filing cost for the modification up to a total for SELLER of ten thousand dollars 5 8 ($10,000.00), or to give BUYER the right to manufacture with all obligations as provided under Article 8.7. 4. TERMS OF PURCHASE 4.1 Terms. All purchases of Products or Units by BUYER shall be made according to the terms of this Agreement. 4.2 Price and Payment. SELLER shall sell Products to BUYER at the prices indicated on Exhibit D. All prices are exclusive of taxes, duties, shipping and similar charges and fees, which will be paid by BUYER. BUYER shall pay all invoices in full within thirty (30) days of the invoice date or the shipping date, whichever is later. 4.3 Purchase Orders. All purchases of Products shall be by written purchase order from BUYER submitted no more than once a month to SELLER. BUYER's purchase order shall conform with the forecast made by BUYER under section 4.4. Any purchase orders submitted by BUYER shall be subject to acceptance as to quantities and delivery dates by an authorized representative of SELLER at SELLER's principal offices. Any order not rejected within three (3) business days shall be deemed accepted. Once so accepted, SELLER shall use its reasonable efforts to meet the delivery dates and quantities set forth on such purchase order. 4.4 Forecasts. (a) No later than the tenth day of each month after the Effective Date, BUYER will provide SELLER with a twelve month rolling forecast (each, a "Product Forecast") which will state: (a) the number of each type of Product which BUYER forecasts it will order in each month, and (b) the month in which BUYER forecasts it will request delivery. SELLER's lead time for Products is eight (8) weeks, and the forecasted delivery date for each order will conform to such lead time requirements. BUYER will be bound by each of its then current Product Forecasts, but only as follows: (i) All forecasts within the first two months of the then current Product Forecast are firm and may not be decreased in any subsequent Product Forecast, although with respect to the second month BUYER may increase the number of any particular Product to be delivered in that second month by up to twenty-five percent (25%). (ii) For the third through the seventh months of the Product Forecast, BUYER may increase or decrease by no more than 33% of the average of all previous months' orders the number of any particular type of Products it would order. For the eighth through the twelfth months of the Product Forecast, BUYER 6 9 may freely increase or decrease the number of any particular type of Products it would order. (b) Any changes in forecast greater than those allowed by Section 4.4(a) (i) and (ii) require the written consent of SELLER and shall not be cause for SELLER failure under section 8.1 irrespective of whether or not SELLER accepts such changes or delivers such greater numbers of Units. Any decrease in the number of units to be purchased, including any failure to deliver a purchase order for the number of units which BUYER is obligated to purchase under this Section 4.4(a) (i), shall be treated as a cancellation under Section 4.5 below. 4.5 Cancellation and Rescheduling (a) BUYER may cancel items to be delivered under a purchase order, provided that BUYER will be required to pay SELLER an amount equal to [ ] of the purchase price for cancellations effected within thirty (30) days of SELLER's scheduled delivery and [ ] of the purchase price for any cancellation effected more than thirty (30) days but less than sixty (60) days from SELLER's scheduled delivery. 4.6 Tax Resale Certificate. BUYER represents that it holds and agrees to provide to SELLER a valid resale exemption certificate issued by each tax jurisdiction in which such certificate is required as a condition of the avoidance of sales or use taxes with respect to the sale of Products under this Agreement. 5. OWNERSHIP; PROPRIETARY RIGHTS NOTICES; INTELLECTUAL PROPERTY INDEMNIFICATION 5.1 Ownership of Intellectual Property. BUYER acknowledges that SELLER is and shall remain the sole owner of all intellectual property rights in the Products and Licensed Technology, and this Agreement only grants BUYER a limited right to use and distribute Products and Licensed Technology as described in this Agreement. 5.2 Proprietary Rights Notice. BUYER agrees that it shall not remove or deface any proprietary rights notices affixed to any Products or their packaging. 5.3 Intellectual Property Indemnification. SELLER shall defend and indemnify BUYER against any claim that any Licensed Products furnished and used as provided under Article 2 of this Agreement or manufactured by BUYER as provided under Article 8 of this Agreement infringes a patent owned by a third party, and shall pay any costs and damages incurred by BUYER in such action, including reasonable attorneys' fees, up to one-half of the 7 10 amounts paid to SELLER by BUYER for purchase of Licensed Product and for royalties on Net Sales of Licensed Product if applicable. The amounts paid to SELLER which are used to calculate this indemnity shall not include fees under section 3.1 or fees or reimbursements for work done by SELLER for BUYER or on BUYER's behalf. This obligation is contingent upon (i) BUYER notifying SELLER promptly in writing of such claim, (ii) BUYER giving SELLER sole control of the defense and all related settlement negotiations, (iii) BUYER providing SELLER with all assistance and information necessary for the defense, (iv) SELLER reaching a final adjudication without recourse to appeal or reaching a final settlement between SELLER and the third party patent holder and (v) if applicable, BUYER manufacturing the Licensed Product according to the manufacturing specifications and selling a Licensed Product formulated according to the Product Specifications provided to BUYER by SELLER respectively under sections 8.2 and Exhibit B, or BUYER manufacturing the Licensed Product according to changed manufacturing specifications and selling a Licensed Product formulated according to changed Licensed Product specifications, provided that the changes do not at least in part cause the original non-infringing manufacturing specification or Licensed Product to become infringing of the third party patent. If any Licensed Product is held to infringe by a court of competent jurisdiction and the adjudication is final and without recourse, or SELLER believes it may infringe, SELLER shall at its sole option either (A) modify such Purchased Product to be non- infringing, or (B) obtain a license for BUYER to continue using the Product. SELLER shall have no obligation hereunder for the modification of the Licensed Products, the manufacturing specifications or combination, operation or use of the Licensed Products with materials not furnished by SELLER if such infringement would have been avoided without such modification or combination. 5.4 Further Indemnifications. BUYER shall defend and indemnify SELLER against any claim associated with Licensed Product and arising out of assertion of strict liability or product liability based upon but not limited to failure to warn, failure to instruct or other BUYER activity required in connection with the Product or by a regulatory authority, or based upon adulteration of Products sold by BUYER. SELLER shall defend and indemnify BUYER against any claim associated with Licensed Product that SELLER has manufactured and which claim is based upon a manufacturing defect or contamination for which SELLER is responsible. 5.5 Entire Liability. THE FOREGOING STATES THE ENTIRE LIABILITY OF THE PARTIES TO EACH OTHER OR ANY PURCHASER OF PRODUCTS CONCERNING INFRINGEMENT OF INTELLECTUAL PROPERTY RIGHTS, INCLUDING BUT NOT LIMITED TO, PATENT, COPYRIGHT AND TRADE SECRET RIGHTS. 8 11 6. LIMITATION OF LIABILITY IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY OR ANY THIRD PARTY FOR COSTS OF PROCUREMENT OF SUBSTITUTE PRODUCTS OR SERVICES, LOST PROFITS, LOSS OF GOODWILL, OR ANY SPECIAL, INDIRECT, CONSEQUENTIAL OR INCIDENTAL DAMAGES, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY, ARISING IN ANY WAY OUT OF THE LICENSE OR SALE OF, OR AGREEMENT TO LICENSE OR SELL, PRODUCTS OR SERVICES TO BUYER. THIS LIMITATION SHALL APPLY EVEN IF A PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, AND NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY. 7. LIMITED WARRANTY 7.1 Limited Warranty from SELLER to BUYER. (a) SELLER warrants to BUYER that the Products (i) will conform to their applicable specifications, (ii) will be manufactured in accordance with all applicable governmental statutes and regulations, and (iii) for a period of one (1) year from the date of shipment from SELLER will be free from defects in materials and workmanship. Upon failure of any unit of Product to comply with the above warranties, SELLER will promptly replace such unit with a unit that does comply or, if unable to replace it, promptly refund in cash to BUYER the amount paid by BUYER for such unit. (b) Warranties for Products will not apply to defects resulting from improper or inadequate handling or storage of Products by BUYER. (c) THE FOREGOING WARRANTIES ARE IN LIEU OF ALL OTHER WARRANTIES EITHER EXPRESS OR IMPLIED INCLUDING WITHOUT LIMITATION IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 8. CONTINGENT MANUFACTURING RIGHTS 8.1 Grant of Contingent Manufacturing License. This contingent right to manufacture shall expire upon the second anniversary of the date of first sale of the Licensed Product. During that period and following the specified time periods associated with the following SELLER failures, BUYER shall give SELLER a twenty (20) day notice of SELLER's failure, and SELLER shall have sixty (60) days in which to substantially cure such failure, those Seller failures being: (a) SELLER is unwilling over any consecutive six (6) week period to accept BUYER purchase orders complying with this Agreement; (b) SELLER is unwilling over any consecutive 6 week period to commit to delivery within thirty (30) days of purchase order delivery dates requested in compliance with this Agreement; (c) SELLER is unable over any 9 12 consecutive 6 week period to make delivery of Licensed Products as required by any accepted purchase orders within thirty (30) days of the delivery dates accepted by SELLER, or (d) is unable to supply Products that meet all of the warranties specified in Section 7.1 above as determined by an independent, private testing agency selected by SELLER, the costs of which shall be borne by SELLER in the event of warranty failure and borne by BUYER in the event of warranty compliance. If SELLER does not substantially cure such SELLER failure within the designated cure period, then at SELLER's sole option, SELLER may designate a third party to manufacture the Product for delivery to BUYER under the terms and conditions of this agreement, or may designate that BUYER shall have the right to manufacture or have manufactured the Licensed Products, subject to the terms of this Section 8. In the event that SELLER selects BUYER to manufacture, BUYER shall also have the right (but not the obligation) to cancel without penalty any outstanding purchase orders and to discontinue purchasing Products from SELLER. SELLER shall exercise this right of selection by delivering written notice to BUYER within twenty (20) days after the expiration of the cure period without a substantial cure by SELLER. 8.2 Transfer of Manufacturing Documentation. Within three (3) business days after receipt of SELLER's written notice selecting BUYER to manufacture, SELLER and BUYER shall meet to discuss in good faith an orderly transfer of all Manufacturing Documentation. SELLER shall use its best efforts to deliver a complete set of such Manufacturing Documentation to BUYER within ten (10) business days after such meeting, and shall cooperate in good faith with all other reasonable requests from BUYER for assistance relating to the start up of SELLER's manufacturing of Products. 8.3 Scope of License. Effective upon SELLER's notice under Section 8.1, the license granted under Section 2.1 shall be amended to include the right to manufacture or have manufactured the Licensed Products. 8.4 Royalties and Minimum. Upon the selection of BUYER to manufacture and BUYER's assumption of such manufacture under section 8.1, BUYER will pay to SELLER a royalty of [ ] ([ ]) of Net Sales of Products manufactured and sold by BUYER. Upon BUYER's assumption of such manufacture, BUYER shall be required to pay a minimum twelve month royalty to SELLER as prescribed in section 8.5. The amount of this minimum royalty shall be equal to [ ]% times [ ] Units times the sale price charged by BUYER for the Units. The minimum twelve month royalty (hereinafter Manufacturing Anniversary Period) shall be due for each twelve month period beginning on the second anniversary of the date of assumption of manufacture of Licensed Product by BUYER. The royalties for Products actually sold by 10 13 BUYER in any one Manufacturing Anniversary Period shall be credited against the Manufacturing Anniversary Period minimum royalty. No excess actual royalty over the minimum paid by BUYER in any one Manufacturing Anniversary Period shall be credited against a minimum royalty due in any succeeding Manufacturing Anniversary Period. In the event that BUYER fails to pay the minimum royalty in any one Manufacturing Anniversary Period: (a) this agreement will immediately convert to a non-exclusive license in all respects; (b) SELLER shall have the immediate right to manufacture, use, and sell Units and license third parties to manufacture, use, and sell Units; and (c) SELLER shall have the right to co-own, use, cite and rely upon all of BUYER's governmental regulatory documentation concerning approval of Units in connection with sales by SELLER but SELLER shall have no right to convey any rights to such regulatory documentation to any third party. 8.5 Payment of Royalties and Reports. Within thirty (30) days after the end of the first calendar quarter in which BUYER has any Net Sales, and within thirty (30) days after the end of each following calendar quarter, BUYER shall make a written report to SELLER setting forth the total Net Sales during such calendar quarter. At the time each such report is made, BUYER shall pay to SELLER the royalties payable hereunder with respect to such period, if any. All payments made hereunder shall be in United States dollars. 8.6 Audit Rights. BUYER shall keep full, true and accurate records regarding Net Sales in sufficient detail to permit the calculation of royalties payable to SELLER. These records shall be available upon written request to SELLER no more frequently than three times per calendar year for inspection at a reasonable time during regular business hours by an independent certified public accountant to whom BUYER has no reasonable objection for the purpose of verifying royalty statements and payments made by BUYER under this Agreement. This accountant shall not disclose to SELLER any information other than the quantities and payments required to be reported hereunder. In the event that an inspection by such accountant discloses an underpayment in excess of five percent (5%), BUYER shall pay the cost of such inspection otherwise, SELLER shall pay for such inspection. 8.7 Non-contingent Right to Manufacture. At any time following the second anniversary of the date of first sale of the Licensed Product, BUYER shall have a right, without cause, to assume the manufacture of the Licensed Product and SELLER shall have a right, without cause, to require the BUYER to assume such manufacture. Irrespective of the party exercising this right, upon assumption of manufacture by BUYER, BUYER may manufacture Licensed Product for itself and for its distribution partners or have the Licensed Product manufactured by a third party for the 11 14 benefit of BUYER and BUYER's distribution partners. This right may be exercised by the exercising party giving the non-exercising party a one hundred eighty (180) day notice of intent to exercise the right to manufacture. If either party exercises this right under section 8.7, the terms of sections 8.2, 8.4, 8.5 and 8.6 shall apply, the terms of section 8.3 shall apply except that obligation for the Manufacturing Anniversary Period minimum royalty shall begin immediately upon the exercise of the right to manufacture under this section 8.7 and the terms of section 2.4, Article 4 and the indemnities and warranties relating to BUYER's purchase of Licensed Product from SELLER shall be canceled. All other Articles and terms of this Agreement shall remain in force. 9. PATENT FILINGS AND MAINTENANCE SELLER shall be responsible for prosecuting and maintaining the patent applications and patents included in the Patent Rights, including any new applications filed with respect to any Improvements, at its own expense. If SELLER should unreasonably refuse to prosecute or pay the maintenance fees with respect to any of the U.S. patents or patent applications included in the Patent Rights, BUYER shall be entitled to do so and to deduct from future payments due to SELLER hereunder, whether for Product purchases or royalties, fifty percent (50%) of all patent prosecution and maintenance fees and expenses so paid by BUYER. 10. INFRINGEMENT LITIGATION 10.1 Right to Bring Suit. During the term of this Agreement, BUYER shall promptly notify SELLER in the event BUYER learns of any instance reasonably believed to constitute infringement of the Patent Rights in the Licensed Field. SELLER have the first right to bring actions to protect and enforce its rights in the Patent Rights in the Licensed Field against third party infringers, and BUYER shall provide such assistance and cooperation in connection with such actions as SELLER shall reasonably request and at SELLER's cost and expense. In the event that SELLER elects not to enforce its rights in the Patent Rights in the Licensed Field against an infringer, BUYER may, but is not obligated to, bring actions with respect to such infringement of the Patent Rights in the Licensed Field, and SELLER shall provide such assistance and cooperation in connection with such actions as BUYER shall reasonably request. 10.2 Expenses and Proceeds of Litigation. Where an action has been brought by SELLER, SELLER shall maintain the litigation at its own expense and shall keep any judgments and awards arising from such action. Where an action has been brought by BUYER, BUYER shall maintain the litigation at its own expense and shall be entitled to keep any judgments and awards arising from such action. 12 15 11. CONFIDENTIALITY Each party agrees, both during the term of this Agreement and for a period of five years thereafter, to hold all information given to it by the other party that is identified as confidential (the "Confidential Information"), in confidence, and not to make the Confidential Information available in any form to any third party or to use the Confidential Information for any purpose other than the purposes described in this Agreement. Each party agrees to take all reasonable steps to ensure that Confidential Information is not disclosed or distributed by its employees or agents in violation of this Agreement, including limiting disclosure to employees or other persons who have a need to know and who have signed appropriate confidentiality agreements. This restriction on disclosure shall not apply to the extent that any Confidential Information (a) is or becomes a part of the public domain through no act or omission of the receiving party; (b) was in the receiving party's lawful possession prior to the disclosure and had not been obtained by the receiving party from the disclosing party; or (c) is lawfully disclosed to the receiving party by a third party without restriction on disclosure. 12. TERM AND TERMINATION 12.1 Term. This Agreement and the rights granted hereunder shall become effective on the Effective Date and shall continue in effect for twenty (20) years thereafter, unless terminated earlier as provided in this Agreement; provided, however, that if upon expiration of this Agreement BUYER shall be entitled to the additional licenses granted under Section 8 above, this Agreement shall continue in effect until the last to expire of any patents included in the Patent Rights. 12.2 Termination for Breach. This Agreement may be terminated by either party immediately if the other party commits any material breach of this Agreement which has not been remedied within sixty (60) days of written notice thereof. 12.3 Termination for Convenience. BUYER may terminate this Agreement at any time upon sixty (60) days written notice to SELLER. 12.4 Effect of Termination Upon expiration or termination of this Agreement for any reason, (a) All rights and licenses granted to BUYER under this Agreement shall immediately terminate; and (b) BUYER shall either return all copies of the Licensed Technology to SELLER or deliver a signed verification 13 16 within thirty (30) days of termination that all copies of the Licensed Technology have been destroyed. Termination shall not effect BUYER's obligations under any accepted purchase orders outstanding at the date of termination; provided that, upon a termination by BUYER for SELLER's default, BUYER may cancel any outstanding orders without penalty. 14 17 13. GENERAL PROVISIONS 13.1 Entire Agreement. All previous agreements and arrangements (if any) made by the parties and relating to the subject matter hereof are hereby superseded and this Agreement, including its exhibits, embodies the entire understanding of the parties, there being no promises, terms, conditions or obligations, oral or written, express or implied, other than those contained herein. This Agreement may only be amended by a written document signed by authorized representatives of both parties. 13.2 Notice. Any notice required to be given hereunder shall be in writing and may be given by facsimile transmission to the facsimile number for such party set forth below or personal delivery (including by professional courier) at, or mailing (by first class receipted prepaid mail) to, the address of the party contained in this Agreement, or such other facsimile number or address as such party may have notified the other of pursuant to this Section. In the case of facsimile transmission or personal delivery, such notice shall be deemed to have been given upon the date of such transmission or delivery. In the case of mailing, such notice shall be deemed to have been given seven days after such mailing. 13.3 Choice of Law and Venue. This Agreement shall be governed by and construed in accordance with the laws of the United States and the State of Colorado, without regard to its provisions concerning the applicability of the laws of other jurisdictions. Any suit hereunder shall be brought in the federal or state courts in the districts which include Fort Collins, Colorado and the parties hereby agree and submit to the personal jurisdiction and venue thereof. 13.4 Relationship of the Parties Nothing in this Agreement shall constitute or be deemed to constitute a joint venture or partnership between the parties. The relationship between SELLER and BUYER shall be that of seller and buyer and of independent contractors. 13.5 Transfer and Assignment. BUYER may not assign or sublicense any of its rights or obligations hereunder to any person, including any Affiliate, without the prior written consent of SELLER, provided, however, that BUYER may assign this Agreement without SELLER's consent in connection with the sale, by merger of otherwise, of substantially all of BUYER's business relating to the Products. Subject to the foregoing, this Agreement shall accrue to the benefit of and be binding upon the successors and assigns of the parties. 15 18 13.6 Force Majeure. Neither party shall be liable for any failure to perform any of its obligations hereunder (other than the payment of money) which results from act of God, the elements, fire, flood, component shortages, force majeure, riot, insurrection, industrial dispute, accident, war, embargoes, legal restrictions or any other cause beyond the reasonable control of the party, provided, however, that if such inability extends for more than ninety (90) days, the other party shall have the right to terminate this Agreement immediately upon written notice. 13.7 Severability. If any provision in this Agreement is found or held to be invalid or unenforceable, then the meaning of said provision shall be construed, to the extent feasible, so as to render the provision enforceable, and if no feasible interpretation would save such provision, it shall be severed from the remainder of this Agreement which shall remain in full force and effect unless the severed provision is essential and material to the rights or benefits received by either Party. In such event, the parties shall use their best efforts to negotiate, in good faith, a substitute, valid and enforceable provision or agreement which most nearly effects their intent in entering into this Agreement. 13.8 No Waiver. No waiver of any term or condition of this Agreement shall be valid or binding on a party unless the same has been mutually assented to in writing by both parties. The failure of a party to enforce at any time any of the provisions 0 this Agreement, or the failure to require at any time performance by the other party of any of the provisions of this Agreement, shall in no way be construed to be a present or future waiver of such provisions, nor in any way affect the ability of a party to enforce each and every such provision thereafter. 13.9 Disputes. The parties agree to enter into a corporate mediation agreement according to the current Center for Public Resources Model Procedure for Mediation of Business Disputes, Center for Public Resources, 366 Madison Avenue, New York, New York. If a dispute between the parties arises, the aggrieved party shall give a thirty (30) day notice of the dispute to the other party. Following the 30 day notice period, the parties with their counsel shall meet twice to attempt to resolve the dispute. The meeting sites shall alternate between the parties headquarters and shall be held during a thirty (30) day period following the notice period. If the parties fail to resolve the dispute then they shall select a mediator having at least iS years experience in the field of pharmaceutical licensing, or if they are unable to select such a mediator, then the parties shall request the American Arbitration Association at 1660 Lincoln St. Denver Colorado to select such a mediator. The mediator shall conduct a mediation of the dispute according to the then current CPR Model Procedure for Mediation of Business Disputes. The outcome of the mediation shall be non-binding upon the parties 16 19 but the parties agree to conduct the mediation first before resorting to any other legal approach for solution of the dispute. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written by their duly authorized representatives. ATRIX LABORATORIES, INC. PARAVAX, INC. By /s/JOHN E. URHEIM By /s/FRED M. SCHWARZER ------------------------- ---------------------------- Name John E. Urheim Name Fred M. Schwarzer ----------------------- ------------------------- Title Vice Chairman & CEO Title President ---------------------- ------------------------- Facsimile (970) 482-9735 Facsimile (970) 493-7333 ----------------- -------------------- 17 20 EXHIBIT A Patents and Patent Application [ ] 21 [ ] 22 EXHIBIT B Product Description & Characteristics [ ] Packaging of Multiple "Units" It is anticipated that 10 Individual Units will be packaged in a chip-board carton that will bear appropriate identification, lot number, expiry date, etc. as required by applicable law(s). Shelf Life of "Units" It is anticipated that packaged Units will have a marketable shelf life of at least one year. 23 EXHIBIT C Manufacturing Information for FDA Review [ ] 24 [ ] 25 [ ] 26 [ ] 27 EXHIBIT D Prices [ ] 28 [ ] EX-10.5 14 *CONFIDENTIAL TREATMENT* SCREENING/DEVELOP AGREE 1 [CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTIONS OF THIS DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE COMMISSION] EXHIBIT 10.5 SCREENING AND DEVELOPMENT AGREEMENT THIS AGREEMENT, made and entered into as of the 12th day of April, 1996 by and between HESKA CORPORATION, 1825 Sharp Point Drive, Fort Collins, C0 80525, USA (hereinafter referred to as "Heska") and CIBA-GEIGY LIMITED, 4002 Basle, Switzerland (hereinafter referred to as "Ciba"). --------------------- WHEREAS, Heska as a consequence of its efforts on the discovery and development of unique biological products for the diagnosis, prevention and treatment of parasitic, viral and bacterial infections in dogs, cats and horses owns and continuously develops molecular targets and tools; and WHEREAS, Ciba is interested for possible commercialization worldwide to use Heska's existing and future molecular targets and tools to screen for pharmaceutical candidates for companion and food animals and for food animal vaccine applications; and WHEREAS, it is in the interest of both parties to make use of Heska's tools and targets and Ciba's screening and development capacity in view of an exclusive commercialization of pharmaceuticals by Ciba in the field of food animals and a co-exclusive commercialization in the field of parasite control in companion animals and for food animal vaccines. NOW THEREFORE, the parties agree as follows: ARTICLE I - DEFINITIONS 1.1 "Companion Animals" means dogs, cats and horses. 1.2 "Food Animals" means cattle, sheep, pigs, poultry and fish. 1.3 "Tools and Targets" means any tangible materials and patentable information relating to such biological materials discovered and developed by Heska prior to December 31, 2005, including, but not limited to, genes, proteins, antibodies, cells and cell lines, vectors, and methods for the manufacture or use of the foregoing. Tools and Targets shall not, however, include (a) any substantially developed food animal vaccines acquired by Heska from third parties as part of its business development activities (e.g., Diamond bovine vaccines); (b) any materials or technology licensed to Heska by third parties under agreements which don't allow Heska to grant a sub-license to Ciba; (c) any materials or technology acquired by Heska as part of its business development activities to the extent such materials or technology are subject to agreements that existed 2 -2- prior to the acquisition by Heska; or (d) any food animal vaccine products developed by Heska after Ciba has elected not to participate in such development pursuant to the Right of First Refusal Agreement of even date herewith. 1.4 "Field" means drug based (or pharmaceutical) parasite control in Companion Animals and any commercial application in Food Animals including vaccines. 1.5 "Products" means marketable products for use in the Field developed or obtained by screening using Tools and Targets. 1.6 "Net Sales Value" means gross invoice value of sales made by Ciba or a Subsidiary of Ciba to third parties of Products less credits for returned goods, discounts and/or rebates and sales taxes as audited by Ciba's independent auditors. 1.7 "Subsidiary" means any company or entity at least fifty percent (50%) of whose voting stock is owned or directly or indirectly controlled. 1.8 "Territory" means all countries of the world. 1.9 "Co-exclusive" means exclusive for Ciba save the right retained by Heska to be exercised on its own or by a Subsidiary of Heska provided, however, that with regard to screening activities entering into a collaboration with a third party is not excluded. ARTICLE 2 - DISCLOSURE OF TOOLS AND TARGETS AND GRANT OF RIGHTS TO CIBA 2.1 A science committee with equal representation of both parties shall discuss status and potential applications of Tools and Targets and review joint R+D activities, if any, at six-monthly intervals. The discussions shall be as open as possible from both sides in order to maximally exploit synergies and complementarities. Ciba representatives shall be permitted to examine relevant Heska laboratory notebooks and primary data upon request. The science committee shall be provided with a comprehensive update on intellectual property matters with respect to the Field. 2.2 The parties shall discuss possibilities of joint research and/or development activities using Tools and Targets in the Field. Joint research projects shall be agreed on and managed by the science committee which will determine scope and objectives, establish milestones and decide on funding. Joint development projects shall be proposed by the science committee and decided on by the appropriate management bodies of both parties based on agreements to be negotiated on a case by case basis. 3 -3- 2.3 If and to the extent the parties are not able to agree upon within a reasonable time frame on joint programs, Ciba shall have a) the exclusive right to use Tools and Targets to develop drug based (pharmaceutical) Products for Food Animals and b) shall have the co-exclusive right to use Tools and Targets to develop Products in the areas of drug based (pharmaceutical) parasite control in Companion Animals and vaccines for Food Animals. ARTICLE 3 - DEVELOPMENT PROGRAM AND PATENTS 3.1 Unless agreed otherwise between the parties in connection with a joint screening and development effort Ciba shall at its cost conduct such a program necessary in Ciba's opinion to develop a candidate based on a Tool and/or Target towards a commercial Product. 3.2 If Heska has not applied for a patent protecting Tools and Targets and/or Products Heska will upon Ciba's notification that it will begin with the Development Program file respective patent applications in the countries specified by Ciba. If Heska does not wish to file a patent in the said countries Ciba will be granted the right to do so under reasonable terms and conditions to be agreed upon. 3.3 Should a patentable invention result from Ciba's screening and development work hereunder, Ciba shall apply for patents as it deems appropriate. 3.4 Should a patentable invention result from joint research and/or development activities or as a direct result of discussions between scientists of both parties, the science committee shall decide on filing, ownership and funding of respective patent applications. 3.5 Neither party shall during the term of this Agreement let lapse any patent relating to Tools and Targets and/or Products without first offering to the other party the opportunity to acquire such patent. ARTICLE 4 - COMMERCIALIZATIONLROYALTIES 4.1 Heska will, upon Ciba's request, grant to Ciba all licenses to Heska technology necessary for Ciba to commercialize any Products developed under this Agreement. Such licenses shall be exclusive with regard to Food Animals (except vaccines) and shall be co-exclusive in the areas of parasite control in Companion Animals and Food Animal vaccines. Such licenses shall be granted for the Territory and shall extend for for the lifetime of such Products. Ciba will, upon Heska's request, grant to Heska all licenses to Ciba technology necessary for Heska to commercialize any Products developed in a joint research and development effort; the parties shall agree upon the respective 4 -4- license fee (on Net Sales Value basis) in good faith. 4.2 In consideration for the rights granted under this Agreement Ciba shall pay royalties of [ ] percent of Net Sales Value reached in Food Animals and [ ] percent of Net Sales Value reached in the areas of parasite control in Companion Animals. The royalty shall be paid by Ciba for countries with patent protection for Molecular Tools and/or Target and/or Products until expiration of the respective patent owned by Heska or Ciba. For countries without patent protection the consideration shall by paid for a period of ten (10) years from the date of the first commercial sale of the Products in the Territory. 4.3 The parties will submit reports within 60 days of the end of each calendar quarter showing Net Sales during such quarter and the payment that will be due to the other party pursuant to paragraphs 4.1 and 4.2 with respect to such quarter. All such payments pursuant to paragraphs 4.1 and 4.2 shall become due and payable once a year on February 15 for the preceding calendar year. 4.4 The party (or, if applicable, both parties) owing royalties to the other shall keep reasonable records containing the information for the compensation of Net Sales figures. The party (or, if applicable, both parties) entitled to royalties, at its own expense, shall have the right to nominate an independent auditor, satisfactory and acceptable to the other party, who shall have access, during normal business hours, to such of the other party's records necessary to determine the accuracy of quarterly Net Sales reports. ARTICLE 5 - SECRECY Both parties undertake to treat all technical and commercial information which they receive from the other party hereunder as strictly secret, except for the purposes of this Agreement. This secrecy obligation shall remain in force until December 31, 2010 but does not apply to information which: a) was known and can be proven by documentary evidence to be known to the receiving party prior to disclosure by the other party; or b) is or becomes through no fault of the receiving party public knowledge or literature; or c) is obtained by the receiving party from a third party as a matter of right. ARTICLE 6 - TERM AND TERMINATION 6.1 This Agreement shall become effective upon its execution by both parties and shall remain in force until December 31, 2005 and thereafter during the lifetime of any Product in development or being sold by Ciba at the time of termination. 6.2 If either party fails to perform or fulfil any substantial obligation hereunder and if such party fails to remedy any such failure within sixty (60) days after written notice specifying particulars thereof from the other party, then the latter party 5 -5- shall have the right to terminate this Agreement by giving written notice of termination at any time within thirty (30) days after said sixty (60) days period. ARTICLE 7 - ASSIGNMENT I NOVARTIS TRANSACTION This Agreement and all rights and obligations hereunder are personal to the parties hereto and may not be assigned without the express prior written consent of the other; provided, however, that Ciba may assign all of its rights and obligations hereunder, without the prior consent of Heska, in connection with the merger of Ciba-Geigy Limited and Sandoz Limited, and the formation of a new entity, Novartis. ARTICLE 8 - GOVERNING LAW AND ARBITRATION 8.1 This Agreement shall be governed by and interpreted in accordance with the laws of Switzerland. 8.2 All disputes arising in connection with the present Agreement shall be finally settled under the Rules of Conciliation and Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules. The arbitration will be held in Zurich. Basle, Fort Collins, CIBA-GEIGY LIMITED HESKA CORPORATION /s/ H.B. GURTLER /s/ DR. P. KORNICKER /s/ FRED M. SCHWARZER H.B. GURTLER Division Counsel President and C.E.O. President Animal Health Division EX-10.6 15 RIGHT OF FIRST REFUSAL AGREEMENT - CIBA/REGISTRANT 1 EXHIBIT 10.6 RIGHT OF FIRST REFUSAL AGREEMENT THIS AGREEMENT is made and entered into as of the 12th day of April 1996, by and between HESKA CORPORATION, 1825 Sharp Point Drive, Fort Collins, Colorado 80525, USA (hereinafter referred to as "Heska") and CIBA-GEIGY LIMITED, 4002 Basle, Switzerland (hereinafter referred to as "Ciba"). WHEREAS, simultaneously with the execution of this Agreement, (i) Ciba is purchasing an aggregate of 3,000,000 shares of the Series F Preferred Stock of Heska, (ii) Ciba and Heska are entering into Marketing Agreements pursuant to which Ciba will obtain certain rights to market certain of Heska's products, and (iii) Ciba and Heska are entering into a Screening and Development Agreement pursuant to which Ciba will have certain rights to use molecular targets and tools discovered by Heska for screening purposes and to develop certain products resulting from such screening. WHEREAS, in addition to the foregoing agreements, Heska has agreed to grant Ciba a right of first refusal on certain corporate partnerships as described more fully below. NOW THEREFORE, the parties agree as follows: ARTICLE 1 - RIGHTS GRANTED 1.1 Subject to the other provisions of this Agreement and to the obligations of Heska pursuant to its current agreements with Bayer AG and Eisai Corp., Ltd., prior to licensing to any third party any products or technology developed or acquired by Heska for companion animal or food animal applications, Heska shall first offer such rights to Ciba. Ciba shall indicate within 30 days of such offer whether it is interested in discussing a possible agreement with Heska concerning such products or technology. If Ciba indicates it is not interested, Heska may thereafter license such products or technology to one or more third parties on terms acceptable to Heska. If Ciba indicates it is interested, Ciba and Heska shall discuss the possible opportunity and attempt to reach a mutually satisfactory agreement. If Ciba and Heska are unable to reach such an agreement within a 1 20 day period following Ciba's indication of interest, Heska may thereafter license such products or technology to one or more third parties, provided that the terms concluded with such third parties, considered as a whole, are not materially more favorable to such third parties than the terms last offered by Heska to Ciba. 1.2 Notwithstanding Section 1.1, Heska shall not be restricted from entering into agreements with Third Party Distributors to distribute products under Heska's trademark or trade name without compliance with Section 1.1. "Third Party Distributors" shall mean entities engaged primarily in the 2 business of distributing finished products without performing substantial development or manufacturing thereon. 1.3 Ciba has previously indicated to Heska that it is not interested in the bovine vaccine products and technology under development at Diamond Animal Health, Inc., and accordingly Heska may license any such products or technology (in their present state or as they may be further developed) without compliance with Section 1.1. 1.4 To the extent that the rights of Bayer AG under its current agreements with Heska with respect to the canine heartworm vaccine are terminated for any reason, and provided that USDA prelicensing serials with respect to such vaccine are completed on or before December 31, 2005, then to the extent of such termination such product shall be added as a "Product" under Section 1.1 of each of the Marketing Agreements dated the date hereof between Heska and Ciba (collectively, the "Marketing Agreements") concerning distribution of flea control vaccine and feline heartworm control vaccines both within the U.S. and outside the U.S. ARTICLE 2 - TERM 2.1 Heska's obligations under Article 1 (other than Section 1.4) shall terminate as to licenses granted by Heska after December 31, 2005. 2.2 Heska's obligations under Section 1.4 shall terminate as to each Marketing Agreement upon termination of such Marketing Agreement. ARTICLE 3 - MISCELLANEOUS 3.1 All notices and other communications required or permitted hereunder shall be in writing and shall be personally delivered, mailed by certified or registered mail, postage prepaid, or delivered by overnight delivery or express courier, addressed to the parties at their addresses shown below, or at such other address as a party shall hereafter furnish to the other in writing. All notices that are mailed shall be deemed delivered five (5) days after deposit in the United States mail. 3.2 This Agreement and all rights and obligations hereunder are personal to the parties hereto and may not be assigned without the express prior written consent of the other; provided, however, that Ciba may assign all of its rights and obligations hereunder, without the prior consent of Heska, in connection with the merger of Ciba-Geigy Limited and Sandoz Limited, and the formation of a new entity, Novartis. -2- 3 3.3 This Agreement shall be governed by and construed under the laws of the State of California, without regard to the conflict of laws provisions thereof. 3.4 This Agreement may be executed in two counterparts, each of which shall be deemed an original, but both of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. HESKA CORPORATION By: /s/ FRED M. SCHWARZER ----------------------------------- Title: President -------------------------------- Address: 1825 Sharp Point Drive Fort Collins, CO 80525 Attention: President ClBA-GElGY, LIMITED, a Swiss corporation By: /s/ H.B. GURTLER ----------------------------------- Title: President Animal Health Division -------------------------------- By: /s/ DR. P. KORNICKER ----------------------------------- Title: Division Counsel -------------------------------- Address: 4002 Basle, Switzerland -3- EX-10.7 16 *CONFIDENTIAL TREATMENT* MARKET AGREE - CIBA 1 [CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTIONS OF THIS DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE COMMISSION] EXHIBIT 10.7 MARKETING AGREEMENT - -------------------------------------------------------------------------------- THIS AGREEMENT, made and entered into as of the 12th day of April, 1996 by and between HESKA CORPORATION, 1825 Sharp Point Drive, Fort Collins, C0 80525, USA (hereinafter referred to as "Heska") and CIBA-GEIGY LIMITED, 4002 Basle, Switzerland (hereinafter referred to as "Ciba"). --------------------- WHEREAS, Heska's efforts are primarily focused on developing unique animal health products for dogs, cats and horses and inter alia is implementing research projects aiming for flea control and feline heartworm control vaccines; and WHEREAS, Ciba has established a marketing presence and sales organization and is selling with great success flea control and heartworm control products for companion animals; and WHEREAS, Ciba is interested in the distribution of Heska future flea control and feline heartworm vaccines and Heska wishes to benefit from Ciba's marketing expertise, organization and product launch expenditure. NOW THEREFORE, the parties agree as follows: ARTICLE I - DEFINITIONS 1.1 "Product" means any flea control vaccine and feline heartworm control vaccine developed by Heska as to which USDA prelicensing serials are completed on or before December 31, 2005. 1.2 "Territory" means all countries of the world except the United States of America. 1.3 "Net Sales" means gross invoice price charged by a party or its Subsidiaries to unaffiliated third parties for sales of Products less sales commissions paid to agents, credits for returned goods, discounts and/or rebates and sales taxes. 1.4 "Subsidiary" means any company or entity at least fifty percent (50%) of whose voting stock is owned or directly or indirectly controlled. 1.5 "Co-exclusive" means exclusive for Ciba save the right retained by Heska to be exercised on its own or by a Subsidiary of Heska. 2 -2- ARTICLE 2 - RIGHTS GRANTED 2.1 Subject to rights granted by Heska to the Japanese company Eisai, Heska hereby grants to Ciba co-exclusive rights to make, use and sell all Products in the Territory. These rights include the right to sublicense to Ciba's Subsidiaries. 2.2 Ciba and Heska shall each have the right to market Products under their respective labels and tradenames and shall be free to determine sales prices. Each party may distribute Products in the Territory using third party distributors provided that the Products are marketed under that party's label and tradename. ARTICLE 3 - MANUFACTURING 3.1 In the event Ciba wishes to have Heska manufacture Products, Heska shall do so under terms and conditions to be agreed upon pursuant to paragraph 3.2 hereof. 3.2 Ciba shall pay to Heska [ ] ARTICLE 4 - CONSIDERATION 4.1 Ciba shall pay to Heska [ ] percent ([ ]%) of Ciba's Net Sales in the Territory. 4.2 Heska shall pay to Ciba [ ] ([ ]%) of Heska's Net Sales in the Territory. 4.3 The parties will submit reports within 60 days of the end of each calendar quarter showing Net Sales during such quarter and the payment that will be due to the other party pursuant to paragraphs 4.1 and 4.2 with respect to such quarter. All such payments pursuant to paragraphs 4.1 and 4.2 shall become due and payable once a year on February IS for the preceding calendar year. 4.4 Both parties shall keep reasonable records containing the information for the compensation of Net Sales figures. Each party, at its own expense, shall have the right to nominate an independent auditor, satisfactory and acceptable to the other party, who shall have access, during normal business hours, to such of the other party's records necessary to determine the accuracy of quarterly Net Sales reports. ARTICLE 5 - PRODUCT DEVELOPMENT AND REGISTRATION 5.1 Heska shall bear and pay all research and development expenses of Products and all development and registration expenses with respect to such countries in the Territory in which Heska chooses to register Products. 3 -3- 5.2 As to countries where Heska does not have the capacity to, or does not choose to, register Products, Ciba may elect to do so, in which case it may deduct its out-of-pocket direct expenses of such registration from any future payments due pursuant to paragraph 4.1 hereof. ARTICLE 6 - SELECTION OF DISTRIBUTION PARTNER With regard to such countries of the Territory in which neither Ciba nor Heska intends to market Products directly or through their respective Subsidiaries the parties shall jointly agree upon the distribution strategy/partner for the Products to be sold in such country. ARTICLE 7 - TERM AND TERMINATION 7.1 This Agreement shall become effective upon its execution by both parties and shall remain in force until the later of December 31, 2010 or for as long as Ciba is selling Products in the Territory. If, after selling a Product in the Territory, Ciba should permanently cease sales of that Product in any country in the Territory without intending to market or sell the Product in the future (an "Abandoned Product"), then the obligations of the parties under this Agreement with respect to the Abandoned Product in that country shall terminate; provided however, that if Ciba sells or intends to market or sell another Product in that country which would constitute an alternative flea control vaccine or feline heartworm control vaccine Product, then the obligations of the parties under this Agreement with respect to the Abandoned Product shall remain in full force and effect. 7.2 If either party fails to perform or fulfil any substantial obligation hereunder and if such party fails to remedy any such failure within sixty (60) days after written notice specifying particulars thereof from the other party, then the latter party shall have the right to terminate this Agreement by giving written notice of termination at any time within thirty (30) days after said sixty (60) days period. ARTICLE 8 - ASSIGNMENT I NOVARTIS TRANSACTION This Agreement and all rights and obligations hereunder are personal to the parties hereto and may not be assigned without the express prior written consent of the other; provided, however, that Ciba may assign all of its rights and obligations hereunder, without the prior consent of Heska, in connection with the merger of Ciba-Geigy Limited and Sandoz Limited, and the formation of a new entity, Novartis. ARTICLE 9 - GOVERNING LAW AND ARBITRATION 9.1 This Agreement shall be governed by and interpreted in accordance with the laws of Switzerland. 4 -4- 9.2 All disputes arising in connection with the present Agreement shall be finally settled under the Rules of Conciliation and Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules. The arbitration will be held in Zurich. Basle, Fort Collins, CIBA-GEIGY LIMITED HESKA CORPORATION By:/s/ H.B. GURTLER By: /s/ FRED M. SCHWARZER ------------------------------ ------------------------- H.B. GURTLER Fred M. Schwarzer President Animal Health Division President and C.E.O. By: /s/ DR. P. KORNICKER ------------------------------ Dr. P. Kornicker Division Counsel EX-10.8 17 *CONFIDENTIAL TREATMENT* MARKET AGREE REGIST/CIBA 1 [CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTIONS OF THIS DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE COMMISSION] EXHIBIT 10.8 MARKETING AGREEMENT THIS AGREEMENT, made and entered into as the 12th day of April, 1996 by and between Heska Corporation (hereinafter referred to as "Heska") and Ciba-Geigy Corporation (hereinafter referred to as "Ciba"). ------------------- WHEREAS, Heska's efforts are primarily focused on developing unique animal health products for dogs, cats and horses and inter alia is implementing research projects aiming for flea control and feline heartworm control vaccines; and WHEREAS, Ciba has established a marketing presence and sales organization and is selling with great success flea control and heartworm control products for companion animals; and WHEREAS, Ciba is interested in the distribution of Heska future flea control and feline heartworm vaccines and Heska wishes to benefit from Ciba's marketing expertise, organization and product launch expenditure. NOW, THEREFORE, the parties agree as follows: Article 1 - Definitions 1.1 "Product" means any flea control vaccine or feline heartworm control vaccine developed by Heska as to which USDA prelicensing serials are completed on or before December 31, 2005. 1.2 "Territory" means the United States of America. 1.3 "Net Sales" means the gross invoice amount billed by a party for the sale of Products to non-affiliated third parties, less sales commissions paid to agents, credits for returned goods, discounts and/or rebates and sales taxes. 1.4 "Subsidiary" means any company or entity at least fifty percent (50%) of whose voting stock is owned or directly or indirectly controlled by a party. 1.5 "Co-exclusive" means exclusive for Ciba save the right retained by Heska to be exercised on its own or by a Subsidiary of Heska. Article 2 - Rights Granted 2.1 Heska hereby grants to Ciba the co-exclusive right and license to make, have made, use and sell all Products in the Territory. Neither Heska nor its Subsidiaries shall authorize or enable a third party to make, have made, use or sell any flea control vaccine or feline heartworm control vaccine developed by Heska in the Territory except as a supplier exclusively to Heska. 2 2.2 Ciba and Heska shall each have the right to market Products under their respective labels and trade names and shall be free to determine the prices and other terms and conditions of sale of the Products; provided that Ciba and Heska shall sell Products directly to veterinarians and to veterinary clinics and not through third party distributors who purchase Products for their own account. ARTICLE 3 -- MANUFACTURING 3.1 Within its discretion, Ciba may manufacture Products or may have Heska or a third party manufacture Products for Ciba. 3.2 In the event Ciba wishes to have Heska manufacture Products, Heska shall do so under terms and conditions to be agreed upon by the parties; among other things, Ciba shall agree to pay to Heska [ ] ARTICLE 4 -- CONSIDERATION 4.1 Ciba shall pay to Heska [ ] percent ([ ]%) of Ciba's Net Sales. 4.2 Heska shall pay to Ciba [ ] ([ ]%) of Heska's Net Sales. 4.3 The parties will submit reports within 60 days of the end of each calendar quarter showing Net Sales during such quarter and the payment that will be due to the other party pursuant to Paragraphs 4.1 and 4.2 with respect to such quarter. All such payments pursuant to Paragraphs 4.1 and 4.2 shall become due and payable once a year on February 15 for sales during the preceding calendar year. 4.4 Both parties shall keep reasonable records containing the information for the computation of Net Sales figures. Each party, at its own expense, shall have the right to nominate an independent auditor, satisfactory and acceptable to the other party, who shall have access, during normal business hours, to such of the other party's records necessary to determine the accuracy of yearly Net Sales reports. ARTICLE 5 -- PRODUCT DEVELOPMENT AND REGISTRATION 5.1 Heska shall bear and pay all research and development expenses of Products and all development and regulatory expenses if Heska chooses to register Products in the Territory. 5.2 If Heska does not have the capacity to, or does not choose to, register Products in the Territory, Ciba may elect to do so, in which case Ciba may deduct its out-of-pocket direct expenses of such registration from any future payments due pursuant to Paragraph 4.1 hereof. -2- 3 ARTICLE 6 -- SELECTION OF DISTRIBUTION PARTNER If neither Ciba nor Heska intends to market Products directly to veterinarians and to veterinary clinics or to veterinarians and to veterinary clinics through their respective Subsidiaries in the Territory the parties shall jointly agree upon the distribution strategy/partner for the Products to be sold in the Territory. ARTICLE 7 -- TERM AND TERMINATION 7.1 This Agreement shall become effective upon its execution by both parties and shall remain in force until the later of December 31, 2010 or for as long as Ciba is selling Products in the Territory. If, after selling a Product in the Territory, Ciba should permanently cease sales of that Product in the Territory without intending to market or sell the Product in the future (an "Abandoned Product"), then the obligations of the parties under this Agreement with respect to the Abandoned Product in the Territory shall terminate; provided, however, that if Ciba sells or intends to market or sell another Product in the Territory which would constitute an alternative flea control vaccine or feline heartworm control vaccine Product, then the obligations of the parties under this Agreement with respect to the Abandoned Product shall remain in full force and effect. 7.2 If either party fails to perform or fulfill any substantial obligation hereunder and if such party fails to remedy any such failure within sixty (60) days after written notice specifying particulars thereof from the other party, then the latter party shall have the right to terminate this Agreement by giving written notice of termination at any time within (30) days after said sixty (60) days period. ARTICLE 8 -- MISCELLANEOUS 8.1 All notices required or permitted hereunder shall be given in writing and sent by facsimile transmission, or mailed postage prepaid by first class certified or registered mail, or sent by a nationally recognized express courier service, or hand delivered at the following addresses: Animal Health Division Ciba-Geigy Corporation Post Office Box 18300 Greensboro, NC 27419 Attention: President With a copy to: Legal Department Heska Corporation 1825 Sharp Point Drive Fort Collins, CO 80525 Attention: Chief Executive Officer -3- 4 Any notice, if mailed properly addressed, postage prepaid, shall be deemed made three (3) days after the date of mailing as indicated on the certified or registered mail receipt, or on the next business day if sent by express courier service or on the date of delivery or transmission if hand delivered or sent by facsimile transmission. 8.2 This Agreement and all rights and obligations hereunder are personal to the parties hereto and may not be assigned without the express prior written consent of the other; provided, however, that Ciba may assign all of its rights and obligations hereunder, without the prior consent of Heska, in connection with the merger of Ciba-Geigy Limited and Sandoz Limited, and the formation of a new entity, Novartis. 8.3 This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York as though made and to be fully performed in said State. 8.4 If any one or more of the provisions of this Agreement shall be held to be invalid, illegal or unenforceable, the validity, legality or enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby. In the event any provision shall be held invalid, illegal or unenforceable the parties shall use best efforts to substitute a valid, legal and enforceable provisions which, insofar as possible, implements the purposes hereof. 8.5 This Agreement constitutes the entire understanding between the parties relating to the subject matter thereof, and no amendment or modification to this Agreement shall be valid or binding upon the parties unless made in writing and signed by the representatives of such parties. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives as of the day and year indicated above. Ciba-Geigy Corporation Heska Corporation By: /s/ T. P. McGOWAN By: /s/ FRED M. SCHWARZER --------------------------------- -------------------------- President, Animal Health Division Title: President Title: President and Chief Executive Officer -4- EX-10.9 18 *CONFIDENTIAL TREATMENT* MANUFACT/SUPPLY AGREE 1 [CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTIONS OF THIS DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE COMMISSION] EXHIBIT 10.9 December 31, 1993 MANUFACTURING AND SUPPLY AGREEMENT This Manufacturing and Supply Agreement ("Agreement") is made and entered into as of December 31, 1993 between and among Diamond Animal Health, Inc. ("DAH"), Agrion Corporation ("Agrion"), Diamond Scientific Co. ("Diamond Scientific") and Miles Inc. ("Miles"). WITNESSETH: WHEREAS, on the date hereof Miles and DAH have entered into a Stock Purchase Agreement (the "Stock Purchase Agreement") pursuant to which Miles has sold to DAH one hundred percent (100%) of the issued and outstanding stock of Agrion; WHEREAS, Diamond Scientific is a wholly-owned subsidiary of Agrion and is a manufacturer of biological and pharmaceutical animal health care products and operates a manufacturing facility with licenses from the USDA; WHEREAS, pursuant to the Stock Purchase Agreement, DAH, Diamond Scientific and Miles have agreed to enter into this Agreement, whereby Diamond Scientific will manufacture and supply to Miles certain biological veterinary products, including those identified on Exhibit A hereto. NOW, THEREFORE, the parties hereby agree as follows: I. DEFINITIONS. 1.1 General. All capitalized terms used in this Agreement and not otherwise defined herein shall have the meanings assigned to them in the Stock Purchase Agreement. In addition, the following terms shall have the meanings set forth below: 1.2 "Affiliate" shall mean, with respect to any party, an entity controlling, controlled by or under common control with, such party. The concept of "control," as used in this definition means the power, whether by stock ownership or otherwise, to direct at least fifty-one percent (51%) of the voting power of the relevant entity. 1.3 "Plant" shall mean the Diamond Scientific animal health care manufacturing facility located in Des Moines, Iowa, and the research facility located in Carlisle, Iowa. 1.4 "Products" shall mean those biological veterinary products identified on Exhibit A hereto, and for which there is an USDA/APHIS approved Outline of Production in place on December 31, 1993 (but also including BRSV VAC F3LP, Horizon X, Compass 4 and Compass 9). 1.5 "New Products" shall mean biological veterinary products that (i) are manufactured pursuant to specifications agreed upon by Miles and Diamond Scientific, (ii) require a new or revised Outline of Production or license from the USDA (except for BRSV VAC F3LP, Horizon X, Compass 4 and Compass 9, which are considered to be Products), and (iii) are manufactured for Miles at the request of Miles and incorporate research to which Miles has contributed after the date of this Agreement. 1.6 "Specifications" shall mean, as the context may require, either one or both of the following, which have been mutually agreed upon by the parties: (i) certified appropriate quantitative and qualitative particulars for all raw materials including active and non-active 2 excipients that are used to prepare all components represented in and by final Products or New Products or Purchase Commitment Products, and (ii) a filed and approved USDA Outline of Production describing in detail the manufacturing process applicable for each Product or New Product or Purchase Commitment Product, and the testing and release criteria applicable to each Product or New Product or Purchase Commitment Product. 1.7 "Net Sales" shall mean the gross sales price invoiced or charged purchasers, less any of the following: (a) sales or excise taxes paid directly or indirectly by Diamond Scientific; (b) any shipping costs separately itemized by Diamond Scientific; and (c) normal and customary trade discounts, returns and allowances. 1.8 "Outline of Production" means an APHIS approved document which delineates (i) all of the manufacturing steps which have been evaluated and confirmed (via testing) for a product and (ii) defines all release testing criteria required and/or developed by the firm to release satisfactory product to the market, approval of which is required prior to issuance of a USDA product license. 1.9 "Purchase Commitment Products" shall mean Products and those biological veterinary products whose transfer prices apply against Miles' minimum annual purchase commitment as provided in Section 5.2. II. MANUFACTURE AND SALE OF PRODUCTS. 2.1 Purchase and Sale. For each calendar year during the term of this Agreement commencing with calendar year 1994 and subject to the provisions hereof, Miles agrees to place orders with Diamond Scientific for Products for shipment within such calendar year, at an annual aggregate cost of not less than [ ] (such amount to be calculated in accordance with Article IV hereof and subject to reduction as described therein); it being understood that in the event Miles shall fail to place orders for shipment of Products within any calendar year aggregating at least [ ] (or an amount reduced pursuant to Section 4.2), then Miles nevertheless shall be obligated to make payment to Diamond Scientific as described in Section 5.1 hereof. In the event this Agreement is not renewed at the expiration of its initial term, then Diamond Scientific and Miles agree that the provisions of this section 2.1 shall be deemed to apply to the first half of calendar year 1996, but the amount of [ ] shall be substituted for each reference to [ ]. Diamond Scientific agrees to manufacture and supply Products as provided herein. Diamond Scientific shall have no obligation to manufacture and supply any New Product or any Purchase Commitment Product (other than Products) to Miles unless the sale and purchase thereof is mutually agreed upon by the parties. Moreover, Diamond Scientific shall not be obligated to manufacture and supply Products in any given calendar year having an aggregate transfer price of greater than [ ] unless otherwise agreed by Diamond Scientific. The parties acknowledge that purchase orders relating to shipments of Products during the first five (5) months of the calendar year 1994 have previously been delivered by Miles and accepted by Diamond Scientific. 2.2 Production Arrangement. During the term of this Agreement, Diamond Scientific shall finish all labor, equipment, facilities, raw materials (except as may otherwise be agreed between the parties in connection with any split manufacturing arrangements) and packaging materials necessary to manufacture the Products, New Products, or Purchase Commitment Products (collectively, "Contract Products") in accordance with the Specifications. Diamond Scientific shall also analyze for quality control, store and package the Contract Products in accordance with USDA/APHIS regulations and shall ship the -2- 3 Contract Products in accordance with instructions from Miles. Miles shall furnish the necessary specifications for labeling to Diamond Scientific, which labeling shall be affixed by Diamond Scientific as provided in Article XI hereof. 2.3 Orders. Each purchase order hereunder delivered from forecasts specified in Sections 3.1 and 3.2 from Miles for the Products shall specify the desired quantities and the delivery dates therefor and shall be submitted to Diamond Scientific at least five (5) months prior to the requested delivery date unless Diamond Scientific agrees to accept the order on shorter notice. Each purchase order shall be binding upon Miles upon written acknowledgment by Diamond Scientific. A purchase order may be amended or modified following written acknowledgment only with the written consent of Diamond Scientific. Revisions to specified filling, labeling or packaging configurations may be made by Miles not later than two (2) months prior to the specified delivery date unless otherwise agreed by Diamond Scientific. Miles will endeavor to order Products and New Products in standard batch sizes as shown on Exhibit B. If specified order amounts for Products and New Products would result in a batch which is thirty percent (30%) below the relevant standard batch size, Miles will be notified and at Miles' option (i) the parties will mutually agree to an increased transfer price for the ordered Products and New Products; (ii) Miles will agree to take the entire standard batch size of the ordered Products and New Products, or (iii) Miles may submit a revised purchase order for a quantity of Products and New Products within the permitted parameters. 2.4 Non-exclusive Purchase Obligation. It is hereby understood and agreed that Miles shall have no obligation to purchase Products or New Products solely from Diamond Scientific, but instead shall be free to place orders for Products or New Products with other suppliers in Miles' sole discretion. 2.5 Non-Competition Agreement. It is hereby understood and agreed that DAH, Agrion and Diamond Scientific, or any Affiliate thereof, will not, directly or indirectly, during the period beginning on the date of this Agreement and ending on December 31, 1995 use, manufacture, supply, market or sell to customers other than Miles, or Affiliates of Miles, any biological veterinary product containing any one or more of the antigens used in the manufacture of the Products or New Products. Notwithstanding the foregoing, Diamond Scientific may (i) manufacture or use the Products or New Products for research purposes and (ii) manufacture any new biological product described in the next sentence prior to January 1, 1996 to be held for inventory, provided such new products may be marketed and sold only after January 1, 1996 subject to the provisions of the next sentence. On or after January 1, 1996, DAH, Agrion or Diamond Scientific, or any Affiliate thereof, may use, manufacture, supply, market or sell to customers other than Miles, or Affiliates of Miles, the Bovine Products (as defined in the Bovine Technology Agreement described in Section 2.6) and any new biological product whose application is for the prevention of bovine disease and which contains one or more of the antigens used in the manufacture of the Bovine Products, provided that during the period commencing on January 1, 1996 and ending on December 31, 1998, Diamond Scientific agrees to pay to Miles a fee of [ ] of Net Sales of Bovine Products or such new biological products sold anywhere in the Western Hemisphere or Europe, which fee shall be payable quarterly by the 15th day following quarter end. Diamond Scientific shall prepare and submit with each quarterly payment a report supporting the calculation of the fee, which shall be subject to audit in accordance with Section 10.2. 2.6. Technology Agreements. In accordance with a certain Non- Bovine Technology Agreement between Miles and DAH of even date herewith (collectively, the "Technology Agreements"), Miles has licensed designated technology to Diamond Scientific solely for the purpose of allowing Diamond Scientific to manufacture Non-Bovine Products -3- 4 designated therein under this Agreement. In accordance with a certain Non-Bovine Technology Agreement and Bovine Technology Agreement, both between Miles and DAH of even date herewith, Diamond Scientific has agreed during the periods therein described to assist Miles, or firms designated by Miles, to obtain a sublicense from the USDA of Diamond Scientific's USDA licenses to permit Miles, its Affiliates, or third-party suppliers to manufacture designated Products or New Products on Miles' behalf. In accordance with the Bovine Technology Agreement, Miles has deeded and conveyed designated technology relating to Bovine Products to DAH, and Diamond Scientific has agreed to grant a perpetual, transferable, non-exclusive license in designated technology to Miles to manufacture Bovine Products designated therein. Diamond Scientific agrees that upon termination of this Agreement it will take steps requested by Miles in order to terminate Diamond Scientific's USDA license rights to manufacture the Non-Bovine Products designated in the Non-Bovine Technology Agreement. The provisions of the Technology Agreements described in this Section 2.6 shall apply with full force and effect to the subject matter hereof that are governed thereby and they are incorporated by reference herein. In the event of any conflict between the Technology Agreements and this Agreement, the provisions of the Technology Agreements shall control. 2.7 Warranties. Diamond Scientific warrants to Miles that (i) Contract Products shall be manufactured in accordance with the applicable Specifications, and (ii) all raw materials supplied by Diamond Scientific shall comply with USDA/APHIS standards and all applicable Specifications and shall be free of any defect, and fit for the use or purpose for which they are supplied. Diamond Scientific makes no warranty that the Products are (or that any Contract Product will be) merchantable or fit for any particular purpose. Diamond Scientific makes no representations and extends no warranties of any kind with respect to use, sale, or other disposition by Miles or its vendees or other transferees of any Contract Products. The warranties in this Section 2.7 are expressly made in lieu of any and all other warranties, provided this sentence shall not be construed to limit any identification obligation of Diamond Scientific under Section 9.1(a). It is further agreed that the specifications for products or any new products that Diamond Scientific may manufacture or sell to customers other than Miles or Affiliates of Miles may differ from the Specifications for the same Products or Contract Products sold to Miles or Affiliates of Miles. 2.8 EU Compliance. Diamond Scientific may prior to January 1, 1996, for the sole purpose of European Unity compliance, initiate procedures that would enable a third party to manufacture Bovine Products on behalf of Diamond Scientific on or after January 1, 1996, subject to the provisions of Section 2.5. 2.9 Contract Manufacture. Miles acknowledges that Diamond Scientific may at any time manufacture animal health care products having any application for other manufacturers, suppliers or vendees using the third party's licenses and/or technology. III. FORECASTS. 3.1 First Year Forecast. Within fifteen (15) days after the date hereof, Miles shall submit to Diamond Scientific a written forecast of the quantities and types of Products that Miles anticipates it will order from Diamond Scientific hereunder during each of the first twelve (12) months of this Agreement. 3.2 Rolling Monthly Forecast. Commencing with the month of February, 1994, and each month thereafter, Miles will submit to Diamond Scientific within fifteen (15) business days after the first day of each month written estimates of the quantities of the Products -4- 5 that Miles anticipates it will order from Diamond Scientific during each of the succeeding twelve (12) months. 3.3 Non-binding Estimates. The forecasts provided by Miles to Diamond Scientific hereunder shall not be deemed binding commitments on the part of Miles to order Products or New Products in the quantities specified therein, but are solely for the purpose of enabling Diamond Scientific to more effectively schedule the use of its facilities. 3.4 Status Reports. Diamond Scientific shall furnish a monthly order status report to Miles not later than the 15th calendar day of each month. IV. CALCULATION OF MILES' PURCHASE COMMITMENT. 4.1 Products Pricing. Transfer prices for each Product set forth on Exhibit A hereto shall be in effect for Products having specified delivery dates prior to April 1, 1995. Transfer pricing to be in effect for the Products to be delivered during the period commencing April 1, 1995 and ending on June 30, 1996 and during subsequent twelve (12) month periods commencing July 1, 1996 and each July 1 thereafter shall be negotiated by the parties in good faith, taking into account such factors as, but not limited to, cost changes, volume changes and plant utilization. In the event revised transfer prices are not agreed upon, then the transfer price previously agreed upon shall remain in effect until the parties reach agreement thereon. 4.2 Savings Resulting from Process Improvements. Process improvements that result in New Products as defined herein and that are attributable in whole or in part to research that has been paid for by Miles shall entitle Miles to a corresponding reduction in the transfer price of such products mutually agreed to between Miles and Diamond Scientific negotiated by the parties in good faith. The aggregate reduction to which Miles is entitled hereunder in a calendar year shall apply toward satisfaction of Miles' [ ] minimum annual purchase commitment for such calendar year. The portion of any such reduction to which Miles is entitled in an calendar month shall be set off against the monthly payments due from Miles to Diamond Scientific pursuant to Section 5.1 hereof. 4.3 Delay Fee. In the event of a failure by Diamond Scientific to deliver (i) at least seventy percent (70%) during the calendar year 1994 or (ii) at least eighty percent (80%) during each subsequent calendar year, of the value of Purchase Commitment Products (calculated on the basis of the transfer prices times the quantity ordered) ordered by Miles within thirty (30) days following the specified delivery date ("Minimum Delivery Amount"), Miles shall be entitled, on the 31st day, to an amount from Diamond Scientific equal to ten percent (10%) of the difference between the Minimum Delivery Amount and the value of the Purchase Commitment Products actually delivered. Such amount shall be set off against the next monthly payment due from Miles to Diamond Scientific pursuant to Section 5.1 hereof. The delay fee described in this Section 4.3 shall not be applicable during any month in which Miles has suspended payments pursuant to Section 4.4. 4.4 Suspension of Monthly Payments. In the event of a failure by Diamond Scientific to deliver Purchase Commitment Products on their specified delivery date or dates having a value (calculated on the basis of the transfer prices times the quantities ordered) equal to or greater than [ ], then Miles shall be entitled to suspend further monthly payments otherwise due under Section 5.1 until such time that the value of the Purchase Commitment Products that have not been delivered by their specified delivery dates shall have been reduced to an amount of less than [ ] at which time, all suspended -5- 6 monthly payments shall be paid to Diamond Scientific. DAH agrees to ship oldest orders first unless otherwise directed by Miles. 4.5 Termination of Monthly Payments. In the event a Material Default (as defined below) shall have occurred under the Lease of even date between Miles and DAH, Miles shall be entitled to terminate further monthly payments otherwise due under Section 5.1. From and after the date of such termination, payment terms for Contract Products shall be net twenty (20) days. Miles shall be entitled to a reimbursement from Diamond Scientific of the amount by which the monthly payments theretofore made by Miles during the preceding twelve (12) months exceeds the aggregate transfer price of Purchase Commitment Products theretofore delivered by Diamond Scientific during such twelve (12) month period. The reimbursement amount shall be payable by Diamond Scientific in equal monthly payments over a twelve (12) month period following the date of such termination. As used in this section, the term "Material Default" means that (i) an "Event of Default" (as defined in the Lease) on the part of DAH shall have occurred and be continuing, and (ii) the damages caused to Miles by reason of such Event of Default shall equal or exceed $100,000. V. PAYMENT TERMS. 5.1 Monthly Payments. Payment to Diamond Scientific for Products and any other agreed upon Purchase Commitment Products scheduled for delivery during the term of this Agreement shall be made by Miles in equal monthly installments, on the first business day of each month during the term hereof in advance, commencing on January 3, 1994. The amount of each monthly installment shall be [ ] subject, however, to reduction by set-off pursuant to Sections 4.2 and 4.3 hereof. If during any calendar year Diamond Scientific shall have delivered to Miles a total of [ ] worth of Purchase Commitment Products based on the transfer prices therefor), then any additional Purchase Commitment Products having an aggregate transfer price up to [ ] and a specified delivery date during such calendar year shall have a purchase price equal to their unit transfer prices less a fifteen percent discount and the payment terms for such additional Purchase Commitment Products shall be net twenty (20) days. The amount of $[ ] described above shall be increased by the amount Miles shall be entitled to credit against its minimum annual purchase commitment pursuant to Section 4.2. Products scheduled for delivery after the expiration of this Agreement shall be net twenty (20) days. 5.2 New Product Payments. The purchase by Miles from Diamond Scientific of any biological veterinary products that contain one or more antigens used in the manufacture of the Products (regardless whether such products fit within the definition of "New Products") shall apply against the [ ] minimum purchase commitment described in Section 5.1, and the transfer prices thereof shall be negotiated by the parties in good faith. The purchase by Miles from Diamond Scientific of any biological veterinary products that do not contain any of the antigens used in the manufacture of the Products (regardless whether such products fit within the definition of "New Products") shall not apply against the [ ] minimum purchase commitment described in Section 5.1 during the first twelve (12) months that they are specified for delivery (but any such products that are specified for delivery thereafter shall apply against the minimum purchase commitment). The purchase price of biological veterinary products that do not contain any of the antigens used in the manufacture of the Products will be negotiated in good faith by the parties and the payment terms for such biological veterinary products shall be net twenty (20) days. -6- 7 VI. DELIVERY AND TITLE. 6.1 Delivery. Diamond Scientific shall ship Contract Products at Miles' expense in accordance with Miles' instructions. Miles shall make direct payment to the common carrier for shipping costs. For purposes of this Agreement, delivery of any Contract Products by Diamond Scientific shall be deemed to have taken place, and (except as provided in Section 6.2 hereof) title to such Contract Products shall pass to Miles, upon delivery by Diamond Scientific F.O.B. Des Moines to the common carrier selected by Miles for delivery to a designated Miles warehouse or warehouses. Diamond Scientific will endeavor to ship Contract Products having the longest possible dating. Unless approved by Miles prior to shipment, Diamond Scientific agrees that Products will have a dating at time of shipment of not less than the minimum shown on Exhibit C; provided that in the event retesting is required for a Product, the minimum dating otherwise required shall be reduced by a period of sixty (60) days. With respect to Contract Products that are available for delivery on the date specified in the order and not picked up by the common carrier within thirty (30) days following the date specified on the purchase order, Diamond scientific shall charge a warehousing fee of one percent (1%) per month of the aggregate prices of the relevant Contract Products. 6.2 Title in the Event of Split Manufacturing. (a) In the event that Miles orders Contract Products from Diamond Scientific that will be manufactured using raw materials supplied by Miles, title to all such raw materials shall at all times remain in Miles. However, Diamond Scientific shall assume all liability for any casualty loss from destruction while such raw materials are in its custody. Miles will provide proper documentation (i.e. copy of USDA/APHIS Form 2008) to Diamond Scientific for all materials owned by Miles and transferred to Diamond Scientific for further manufacturing to assure their quality and acceptability to Diamond Scientific quality assurance. Miles warrants to Diamond Scientific that all raw materials supplied by Miles shall comply with USDA/APHIS standards and all applicable Specifications and shall be free of any defect, and fit for the use or purpose for which they are supplied; b) In the event Miles orders products in process from Diamond Scientific for finishing by Miles, title to all such products in process shall transfer to Miles upon delivery. Diamond Scientific will provide proper documentation (i.e. copy of USDA/APHIS Form 2008) to Miles for all materials owned by Diamond Scientific and transferred to Miles for further manufacturing to assure their quality and acceptability to Miles quality assurance. Diamond Scientific warrants to Miles that all products in process supplied by Diamond Scientific shall comply with USDA/APHIS standards and all applicable Specifications and shall be free of any defect, and fit for the use or purpose for which they are supplied. VII. TERM AND TERMINATION. 7.1 Term. The term of this Agreement, unless it is earlier terminated pursuant to Section 7.2 hereof, shall be thirty (30) months, and shall automatically renew on July 1, 1996, for an eighteen (18) month term and automatically thereafter on an annual basis unless either Miles or Diamond Scientific gives the other eighteen (18) months prior written notice that it does not wish to renew this Agreement. 7.2 Termination. Without prejudice to any rights or remedies otherwise available to the parties hereto, each of Miles and Diamond Scientific shall have the right to terminate this -7- 8 Agreement prior to expiration of its term by giving the other party written notice thereof only in the event: (a) the other party fails to perform or violates any provision of this Agreement in any material respect other than a failure of Diamond Scientific to make delivery of any Contract Products hereunder, and such failure or violation continues unremedied for a period of thirty (30) days after the date the non-defaulting party gives notice to the defaulting party of such failure or violation hereunder; (b) Diamond Scientific shall fail to deliver Purchase Commitment Products to Miles so as to entitle Miles to suspend monthly payments pursuant to Section 4.4 and such failure shall continue unremedied for an additional period of ninety (90) days from the date Miles was permitted to suspend its monthly payments; provided that Diamond Scientific shall have had at least one hundred fifty (150) days following the specified delivery date in which to cure any late delivery caused by product failure; (c) the other party (or, in the case of Diamond Scientific, either DAH, Agrion or Diamond Scientific) is declared insolvent or bankrupt by a court of competent jurisdiction, or a voluntary petition in bankruptcy is filed against such party in any court of competent jurisdiction and is not terminated within 90 days, or a receiver is appointed for such party or such party makes an assignment for the benefit of creditors; or (d) DAH shall be in default under the Promissory Note referred to in Section 5.05 of the Stock Purchase Agreement relating to the purchase of the Inventory (as defined therein), such default shall not be cured or waived within the period of grace, if any, applicable thereto and Miles shall have given notice of acceleration thereof to Diamond Scientific. 7.3 Conduct in the Event of Termination. Upon termination of this Agreement for any reason (whether due to breach or otherwise), Diamond Scientific shall furnish to Miles a complete inventory of all stock on hand of the raw materials, if any, provided by Miles, the work in progress for the manufacture of the Contract Products, and the Contract Products manufactured for Miles hereunder. Without limitation to the remedies otherwise available to the parties, unless otherwise agreed to between the parties, the parties shall act as follows as soon as practicable: (a) If this Agreement is terminated due to breach by Diamond Scientific, Miles shall be entitled to reimbursement from Diamond Scientific the amount by which the monthly payments theretofore made by Miles during the preceding twelve (12) months exceeds the aggregate transfer price of Purchase Commitment Products theretofore delivered by Diamond Scientific during such twelve (12) month period; (b) Products and New Products manufactured on or prior to the date of termination pursuant to orders from Miles shall be delivered by Diamond Scientific to Miles as promptly as practicable, and Miles shall pay Diamond Scientific therefor within ten (10) days of delivery; provided, however, that except if this Agreement is terminated due to breach by Miles, the amount otherwise payable to Diamond Scientific shall be set off against the amount owed by Diamond Scientific pursuant to (a) above; and (c) All raw materials and labeling furnished by Miles shall be returned to Miles at Miles' expense (or if this Agreement is terminated due to breach by Diamond Scientific, at its expense) not less than ten (10) business days after the date of termination. -8- 9 7.4 The expiration or termination of this Agreement shall not operate to release any party from any liability incurred prior to or upon termination hereof. VIII. CONFIDENTIALITY. 8.1 Protection of Information. DAH, Diamond Scientific, Agrion and Miles shall treat as confidential all information provided hereunder (including without limitation information related to Specifications, forecasts, production yields and pricing) in accordance with the confidentiality provisions of the Technology Agreements and they shall take such precautions with respect to such information as they normally take with regard to their own proprietary information to prevent disclosure to third parties, and such disclosure shall be made only as provided in the Technology Agreements. 8.2 Use of Information. All information and materials (including materials made from Miles- provided materials and materials made in accordance with Miles information) required to be kept confidential pursuant to the Technology Agreements shall be used by DAH, Diamond Scientific and Agrion only pursuant to and in accordance with this Agreement and the Technology Agreements. All information and materials (including materials made in accordance with Diamond Scientific information) required to be kept confidential pursuant to the Technology Agreements shall be used by Miles only pursuant to and in accordance with this Agreement and the Technology Agreements. IX. INDEMNIFICATION, INSURANCE AND REGULATORY MATTERS. 9.1 Indemnification. (a) DAH, Agrion and Diamond Scientific each hereby agrees to defend, indemnify and hold Miles, its Affiliates and their respective officers, directors, agents and employees harmless from and against, and DAH, Agrion and Diamond Scientific each agrees that Miles will not defend, indemnify or hold DAH, Agrion and Diamond Scientific harmless from or against any loss, claim, action, damage, expense or liability (including defense costs and attorneys fees and the costs of any recall) arising out of or related to (i) DAH's, Agrion's or Diamond Scientific's failure to manufacture Contract Products in accordance with the Specifications, (ii) the negligence or reckless or willful misconduct of DAH, Agrion, Diamond Scientific or their respective officers, directors, agents or employees; (iii) any breach or default by Diamond Scientific of this Agreement; (iv) any liability arising out of any defect in raw materials supplied by Diamond Scientific or if they are not fit for the particular use or purpose for which they were supplied; (v) any liability arising out of the removal or disposal of hazardous waste generated in connection with the manufacture of the Contract Products following the date of this Agreement, other than merthiolate; (vi) any alleged patent infringement in respect to raw materials Diamond Scientific supplies; (vii) any liability, whether for bodily injury, property damages, consequential damages or otherwise, arising out of the defective manufacturing of Contract Products by Diamond Scientific; or (viii) any liability arising from the contamination of a Contract Product (excluding field contamination). Notwithstanding the foregoing, in the event a Contract Product fails by reason of stability within its approved dating, the sole liability of Diamond Scientific shall be to reimburse Miles the transfer price of such failed product that remains in the distribution channels. (b) Miles hereby agrees to defend, indemnify and hold DAH, Agrion and Diamond Scientific, its Affiliates and their respective officers, directors, agents and employees harmless from and against the loss, claim, action, damage, expense liability (including defense costs and attorney fees and the costs of any recall, arising out of or related to (i) -9- 10 the sale to or use by any person or entity of any of the Contract Products manufactured by Diamond Scientific in compliance with the Specifications (except as described in (a)(viii) above, (ii) any alleged patent or trademark infringement in respect to Products or New Products or raw materials Miles supplies, (iii) any breach or default by Miles of this Agreement, or (iv) arising out of or related to the negligence or reckless or willful misconduct of Miles or its officers, directors, agents or employees. Miles agrees that Diamond Scientific will not defend, indemnify and hold Miles harmless from losses, judgments, claims, actions, damages, expenses, defense costs or attorney's fees arising out of or relating to the sale or use by any person or entity of any of the Contract Products manufactured by Diamond Scientific pursuant to the Specifications, which arise out of, concern or relate to: 1) any design defect or other defect in the Specifications; 2) any liability arising out of any express warranty by or for Miles, its officers, directors, agents, employees or its distributors of Contract Products unauthorized by Diamond Scientific in writing; 3) any liability arising out of any failure by Miles to warn product distributors, purchasers, consumers or users of any hazards or dangerous conditions which related to, concern or result from the Contract Products; 4) any liability arising out of professional services performed by Miles, its officers, directors, agents, employees or its distributors, unless such liability results from the defective manufacturing of the Contract Products by Diamond Scientific; 5) any liability for bodily injury or property damage arising out of labeling, relabeling, repackaging or use as a container, part or ingredient in any other thing or substance by or for Miles, its officers, directors, agents, employees, or its distributors of said Contract Products, unless such labeling, relabeling, repackaging or use has been expressly authorized in writing by Diamond Scientific; 6) any liability arising out of any implied warranty of merchantability or fitness for a particular use or purpose that Miles, its officers, directors, agents, employees or its distributors may extend to third party purchasers of the Contract Products; 7) any bodily injury or damage arising out of any acts of Miles, its officers, directors, agents, employees, or its distributors of the Contract Product which changes the condition of the Contract Product or, if any of the following are customarily performed by the officers, directors, agents, employees or vendors or distributors of Miles, any failure to inspect, adjust or service the Contract Products, whether liability therefor is based on negligence or breach of warranty; 8) any liability arising out of any defect in raw materials supplied by Miles or if they are not fit for the particular use or purpose for which they were supplied; 9) any liability arising out of removal or disposal of merthiolate. 9.2 Indemnification Procedure. Each party of this Agreement shall give immediate written notice to the other of any and all actions, claims, suits or proceedings brought against the party giving such notice which relate to or concern possible payments or obligations under Section 9.1 hereof. In the event that a party asserts a claim for indemnification pursuant to Section 9.1 hereof, it shall give prompt written notice to the other party. Upon prompt written acknowledgment by a party that it is obligated to -10- 11 indemnify the party or parties hereunder, it shall have the right at its own expense to defend any action, suit or proceeding brought against the other party. The indemnified party also shall have the right to participate in such proceeding and to employ its own counsel in any such case at its expense and, whether or not the indemnified party elects to so participate, the other party shall keep it fully informed of any such action, suit or proceeding at all stages thereof. 9.3 Insurance. Diamond Scientific shall maintain during the term of this Agreement at its cost and at the request of Miles for a period of five (5) years thereafter, comprehensive liability insurance and product liability insurance coverage reasonably acceptable to Miles. Diamond Scientific agrees that such insurance shall not be canceled or materially altered without the express written consent of Miles. Diamond Scientific shall provide certificates of insurance evidencing such coverage to Miles within ten (10) days from the date hereof and on each anniversary of the insurance policy during the term hereof. 9.4 Regulatory Matters. Diamond Scientific shall be responsible for manufacture, processing, packaging and holding of the Contract Products in compliance with USDA/APHIS standards. Miles shall be responsible for compliance with USDA/APHIS standards of an raw materials supplied by Miles, Specifications relating to the Contract Products manufactured for Miles pursuant to this Agreement, and labeling components. Diamond Scientific shall be responsible for compliance with USDA/APHIS standards of any raw materials supplied by Diamond Scientific. Each party shall provide reasonable assistance to the others, at no charge, if necessary to respond to USDA audits, inspections, inquiries or requests concerning the Contract Products. (a) Diamond Scientific shall not make any modifications to the Specifications, manufacturing processes, suppliers, test methods, sampling procedures or SOPs for the Contract Products manufactured for Miles pursuant to this Agreement, without obtaining from Miles, prior written consent and Diamond Scientific shall notify Miles in the event any such modifications are mandated by the USDA; (b) With respect to licenses owned by Miles as designated in the Technology Agreements, Miles shall have the right at all times to review, and to make changes that it reasonably deems necessary to, all regulatory filings and other communications between Diamond Scientific and the USDA that could affect the Contract Products, and Miles shall be able to review, prior to their submission, and to make changes that it reasonably deems necessary to, any regulatory filings relating to the Contract Products and shall have the right to stop any regulatory submissions if Miles reasonably deems it advisable to do so for any reason; (c) Diamond Scientific shall advise Miles in advance of any planned changes to any regulatory filings or documents, and shall notify Miles within one (1) Business Day of any adverse finding by the USDA that could affect the Contract Products, and Miles shall have the right to make, prevent or modify any such changes if it reasonably deems advisable to do so; (d) Diamond Scientific shall allow representatives of Miles to inspect the Plant and shall notify Miles immediately of any impending USDA inspection; (e) Diamond Scientific shall inform Miles of its plans to come into compliance with any USDA requirements and continue to keep Miles informed of its progress until compliance has been attained; -11- 12 (f) Miles shall have the right at any time to purchase samples of Contract Product components at Diamond Scientific's cost; (g) Diamond Scientific shall notify Miles immediately in the event of any of the following: (1) any procedural deviation or test failure noted in the manufacture of the Contract Products; (2) Diamond Scientific obtains any information that suggests the Contract Products or any of the raw materials supplied by Diamond Scientific may not be safe, efficacious or otherwise not in compliance with applicable laws and regulation or (3) the failure of the Contract Products or any raw materials supplied by Diamond Scientific to meet any of the applicable Specifications. Unless otherwise obligated by law, Diamond Scientific shall consult with Miles before taking action in connection with any of the above events. Diamond Scientific shall further agree, at its sole expense, to identify and correct any Contract Product deficiencies that are related to Diamond Scientific's performance under this Agreement; (h) Miles shall notify Diamond Scientific immediately in the event of any of the following: (1) Miles obtains any information that suggests any of the raw materials supplied by Miles may not be safe, efficacious or otherwise not in compliance with applicable laws and regulations; or (2) Miles obtains any information regarding the failure of the Contract Products to meet any of the applicable Specifications. Unless otherwise obligated by law, Miles shall consult with Diamond Scientific before taking action in connection with any of the above events; (i) Miles agrees to provide a quarterly report to Diamond Scientific that delineates any complaints or failures in the field relating to Contract Products. X. RECORDS AND AUDITS. 10.1 Records. During the term of this Agreement and for seven (7) years thereafter, Diamond Scientific shall maintain records of orders received, raw materials furnished, Contract Products manufactured, work in progress, Contract Products analyses and quality control tests. Such records shall be kept at the Plant or such other location as may be designated by Diamond Scientific in writing. Diamond Scientific shall not destroy any records relating to Contract Products liability, regulatory compliance or quality assurance without giving Miles notice and an opportunity to take possession of or copy such records as Miles may designate. 10.2 Access: Audits. Diamond Scientific shall allow Miles representatives, upon reasonable notice and at reasonable intervals, to enter the Plant for the purpose of taking inventories of raw materials (if any) supplied by Miles. Diamond Scientific shall further allow Miles representatives, upon reasonable notice and at such intervals as may be reasonably necessary at Miles' expense, to examine, audit and copy the records mentioned in Section 10.1 during business hours for product liability, regulatory and quality control purposes, together with all records relating to fees payable pursuant to Section 2.5. XI. TRADEMARKS AND LABELING. 11.1 Miles' Trademarks. Diamond Scientific shall affix labeling to the Contract Products as specified by Miles, which labeling shall bear one or more Miles trademarks. Nothing contained herein shall give Diamond Scientific, Agrion, DAH or any of their Affiliates any right to use any Miles trademark except on Contract Products for Miles or its Affiliates, and neither Diamond Scientific, Agrion, DAH nor their respective Affiliates shall obtain any right, title or interest in any Miles trademark by virtue of this Agreement or Diamond Scientific's performance of services hereunder. -12- 13 11.2 Label. The Contract Products labeling shall in addition contain the notation "Manufactured by Diamond Scientific License 213, distributed by Miles Inc.," or such similar notation as may be required by Miles and in accordance with applicable state and federal law. Diamond Scientific will work with its approved vendors to develop all artwork, plates and label copy and will forward the billings on to Miles. Miles will be responsible or all costs involved in label changes, updates, and any other Miles requested changes. Miles will reimburse Diamond Scientific for all obsolete label stock in inventory that will not be used up by existing purchase orders, subject to the reimbursement amount being negotiated in good faith between Miles and Diamond Scientific. XII. COVENANTS. 12.1 Compliance. Subject to the provisions of the Lease of even date between Miles and DAH, Diamond Scientific shall comply with any applicable law, regulation or ordinance applicable to the Plant or the Contract Products, including but not limited to, federal and state occupational safety and health laws and federal, state and local waste disposal laws, provided, however, that Miles shall be responsible for the removal and disposal of any merthiolate at Miles' cost and expense. Miles shall comply or cause its agents or independent contractors to comply with any applicable law, regulation or ordinance applicable to laws governing the transportation of merthiolate. 12.2 Permits. Diamond Scientific shall maintain in effect all required governmental permits, licenses, orders, applications and approvals regarding the Contract Products and the use of the Plant to produce such Contract Products, and Diamond Scientific shall produce Contract Products in the Plant in accordance with all such permits, licenses, orders, applications and approvals. XIII. NOTICES. 13.1 Correspondence. Unless otherwise provided herein, any notice, report or other correspondence (except orders, estimates and invoices) (hereinafter collectively referred to as "Correspondence") required or permitted to be given hereunder shall be mailed by certified mail, postage prepaid, or delivered by and to the party to whom such Correspondence is required or permitted to be given hereunder. If mailed, any such Correspondence shall be deemed to have been given when received, as evidenced by certified receipt. If delivered by hand, any such Correspondence shall be deemed to have been given when received by the party to whom such Correspondence is given, as evidenced by written and dated receipt of the receiving party. 13.2 Addressee. All Correspondence to Miles shall be addressed as follows: Miles Inc. Agriculture Division Animal Health Products Box 390 Shawnee Mission, Kansas 66201-0390 Attention: Gary Zimmerman With a copy to: Gayle E. Parkhill, Esq. Jones, Day, Reavis & Pogue 1900 Huntington Center Columbus, Ohio 43215 -13- 14 All Correspondence to DAH or Diamond Scientific shall be addressed as follows: Diamond Animal Health, Inc. 2538 S.E. 43rd Street Des Moines, Iowa 50317 Attention: Louis G. Van Daele With a copy to: Steven E. Zumbach 2000 Financial Center Des Moines, Iowa 50309 Either party may change the address to which any Correspondence to it is to be addressed by notification to the other party as provided herein. XIV. MISCELLANEOUS. 14.1 Relationship of Parties. It is not the intent of the parties hereto to form any partnership or joint venture. Diamond Scientific shall, in relation to its obligations hereunder, act as an independent contractor. 14.2 Assignment and Delegation. Miles may at its sole discretion and without the approval of Diamond Scientific: (a) Assign or transfer its interest or any part thereof under this Agreement to a third party; or (b) Designate and cause a third party to perform all or part of its obligations hereunder, or to have the benefit of all or part of its rights hereunder. 14.3 Devolution. This Agreement shall not be assignable or transferable by any of DAH, Agrion or Diamond Scientific, other than by merger into one another, except with the prior consent in writing of Miles. Any assignment or transfer in violation of the provisions of this Agreement shall be void and of no effect and shall constitute a material breach hereof. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective allowable successors and assigns. 14.4 Governing Law. This Agreement shall be governed by and interpreted in accordance with the substantive laws of the State of Iowa. 14.5 Force Majeure. No party hereto shall be liable to any other in damages for, nor shall this Agreement be terminable by reason of, any delay or default in such party's performance hereunder if such delay or default is caused by conditions beyond such party's reasonable control including, but not limited to, acts of God, regulation or law or other action of any government or any agency thereof, war, insurrection, civil commotion, destruction of Production facilities or materials by earthquake, fire, flood or storm, labor disturbances, epidemic, or failure of public utilities or common carriers; provided, however: (a) upon the occurrence of an event of force majeure that prevents Diamond Scientific in any material respect from supplying Contract Products to Miles in accordance with the terms hereof, Miles may suspend its monthly payment obligations commencing on -14- 15 the earlier of (i) the date Diamond Scientific's business interruption insurance coverage becomes effective or (ii) thirty (30) days after the occurrence of the event of force majeure, and continuing until such time as Diamond Scientific is no longer prevented from supplying products to Miles, and during such time period Miles shall not be authorized to submit further purchase orders hereunder; and (b) the occurrence of an event of force majeure that prevents Miles from performing its obligations under this Agreement or its sale or distribution of Contract Products shall not suspend or relieve Miles from its monthly payment obligations under this Agreement following the earlier of the dates referred to in (a)(i) and (a)(ii) above. 14.6 Captions. The captions in this Agreement are solely for convenience of reference and shall not be used for purposes of interpreting or construing the provisions hereof. 14.7 Severability. Should any part or provision of this Agreement be held unenforceable or in conflict with the applicable laws or regulations of any jurisdiction, the invalid or unenforceable part or provision shall be replaced with a provision which accomplishes, to the extent possible, the original business purpose of such part or provision in a valid and enforceable manner, and the remainder of this Agreement shall remain binding upon the parties hereto. 14.8 Waiver. No failure on the part of any party hereto to exercise, and no delay in exercising, any right, privilege or power hereunder shall operate as a waiver or relinquishment thereof; nor shall any single or partial exercise by any party hereto of any right, privilege or power hereunder preclude any other or further exercise thereof, or the exercise of any other right, privilege or power. 14.9 Entire Agreement. This Agreement, the Exhibits hereto and the Technology Agreements referred to herein, shall constitute the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and shall supersede any prior agreements, negotiations, understandings, representations, statements and writings relating thereto. This Agreement shall not be amended or modified unless such amendment or modification is made in writing and executed by a duly authorized officer or agent of each party hereto. 14.10 Cooperative Conduct of Parties. The parties hereby acknowledge that their intent is to promote a mutually beneficial commercial relationship during the term of this Agreement. In the event the performance of any provision of this Agreement should become impracticable or otherwise impose an undue hardship on a party, upon request of a party, the parties agree to meet to discuss the circumstances which gave rise to such impracticability or hardship, and potential solutions. Each party acknowledges that the impracticability or hardship of performing a provision of this Agreement shall not excuse performance thereof. 14.11 Change in Management. During the term of this Agreement, Diamond Scientific agrees that except with the prior written consent of Miles, it shall not permit both Louis Van Daele and Connie Phillips to cease to be materially involved in the day to day operations of Diamond Scientific or its successors. -15- 16 IN WITNESS WHEREOF, the parties have caused this Agreement to be entered into by their duly authorized representatives, to be effective as of the date first above written. DIAMOND ANIMAL HEALTH, INC. By /s/ LOUIS G. VAN DAELE ------------------------------ Louis G. Van Daele, President AGRION CORPORATION By /s/ LOUIS G. VAN DAELE ------------------------------ Louis G. Van Daele, President DIAMOND SCIENTIFIC CO. By /s/ LOUIS G. VAN DAELE ------------------------------ Louis G. Van Daele, President MILES INC. By /s/ HERMANN R. WERNER ------------------------------ Hermann R. Werner, Executive Vice President -16- 17 EXHIBIT A DIAMOND ANIMAL HEALTH CONTRACT PRICING FOR MILES ANIMAL HEALTH
1994 1994 PRODUCT FORECAST CONTRACT CONTRACT DESCRIPTION QUANTITY PRICE REVENUE - ----------- -------- ----- ------- [ BRSV VAC lODS BRSV VAC 50DS BRSV VAC 3 10 DS BRSV VAC 3 50 DS BRSV VAC 4 5DS BRSV VAC 4 10DS BRSV VAC 4 50DS BRSV VAC 9 5DS BRSV VAC 9 10 DS BRSV VAC 9 50 DS TOTAL BRSV HORIZON I+VAC 3 10DS HORIZON l+VAC 3 50DS HORIZON IV 5DS HORIZON IV 10DS HORIZON IV 50DS HORIZON VII 10DS HORIZON VII 25DS HORIZON IX 5DS HORIZON IX 10DS HORIZON IX 25DS TOTAL HORIZON ECOLI GUARD 10DS ECOLI GUARD 50DS NEO VAC 725 DS CONCORD V 10DS CONCORD V 50DS TGE VAC 10D TGE/ECOLI VAC 4C 10DS TGE NEO VAC 7 10DS TOTAL SWINE ]
Page 1 of 3 18 EXHIBIT A DIAMOND ANIMAL HEALTH CONTRACT FILING FOR MILES ANIMAL HEALTH
1994 1994 PRODUCT FORECAST CONTRACT CONTRACT DESCRIPTION QUANTITY PRICE REVENUE - ----------- -------- ----- ------- [ LEXTRON VAC 10DS LEXTRON VAC 50DS LEXTRON VAC 3 10DS LEXTRON VAC 3 50DS LEXTRON VAC 4 10DS LEXTRON VAC 4 50DS LEXTRON VAC 9 10DS LEXTRON VAC 9 50DS LEXTRON CONQUEST 1+3 10DS LEXTRON CONQUEST 1+3 50DS LEXTRON CONQUEST IV 10DS LEXTRON CONQUEST IV 50DS LEXTRON CONQUEST IX 10DS LEXTRON CONQUEST IX 25DS LEXTRON IBR/POMONA 50DS TOTAL LEXTRON ECOLI GUARD 10DS CANADA CONCORD V 10DS CANADA TGE/ECOLI 10DS CANADA TGE NEO VAC 7 10DS CANADA TOTAL SWINE (CANADA) BRSV VAC 10DS CANADA BRSV VAC 50DS CANADA BRSV VAC 3 10DS CANADA BRSV VAC 3 50DS CANADA HORIZON IV 10DS CANADA HORIZON IV 50DS CANADA HORIZON IX 10DS CANADA HORIZON IX 25DS CANADA TOTAL BOVINE (CANADA) SUBTOTAL ] **ADDITIONAL PRODUCTS: BRSV VAC F3LP, RESPACINE BVD, HORIZON X, COMPASS 4, COMPASS 9 AND COVENANT BULK INCLUDING INTERNATIONAL (LABELED AND UNLABELED) $ [ ] ---------- TOTAL ALL PRODUCTS $[ ]
BOVINE PRODUCTS ARE THOSE PRODUCTS DESIGNATED IN SECTIONS 1, 2, 4 AND 6 OF THIS EXHIBIT A. **OUTLINES OF PRODUCTION ARE IN PROCESS. Page 2 of 3 19 EXHIBIT A DIAMOND ANIMAL HEALTH CONTRACT PRICING FOR BAYER VT EXPORT
LABELED CONTRACT PRICE - ------- -------------- LEPTO5 20 ML [ HORIZON IV 20 ML HORIZON IV 100 ML HORIZON IX 30 ML HORIZON IX 75 ML UNLABELED - --------- ECOLI 4C 20 ML TGE VAC 20 ML HORIZON II 20 ML NEO VAC 7 30 ML BRSV VAC 100 ML BRSV VAC 20 ML BRSC VAC 2 20 ML DILUENT 20 ML ]
Page 3 of 3 20 EXHIBIT B STANDARD BATCH SIZES
Product Batch Size ------- ---------- Bovine - ------ BRSV Vac 10ds 7,600 BRSV Vac 50ds 3,520 BRSV Vac 2 5ds 3,600 BRSV Vac 2 10ds 6,900 BRSV Vac 2 25ds 3,600 BRSV Vac 2 50ds 3,600 BRSV Vac 3 l0ds 7,200 BRSV Vac 3 50ds 3,600 BRSV Vac 3 Feedlot l0ds 7,600 BRSV Vac 3 Feedlot 50ds 3,600 BRSV Vac 4 5ds 5,000 BRSV Vac 4 l0ds 7,300 BRSV Vac 4 50ds 3,600 Compass 4 l0ds 10,000 Compass 4 25ds 5,000 Compass 4 50ds 5,000 Compass 9 l0ds 10,000 Compass 9 50ds 6,000 Horizon I l0ds 10,000 Horizon I 50ds 5,600 Horizon II 5ds 3,500 Horizon II l0ds 10,000 Horizon II 50ds 5,600 Horizon VII 5ds 5,000 Horizon VII l0ds 10,000 Horizon VII 25ds 5,000 Horizon VIII 5ds 5,000 Horizon VIII l0ds 10,000 Horizon VIII 25ds 5,000 IBR 50ds 3,600 Lepto 5 5ds 4,800 Lepto 5 l0ds 10,000 Lepto 5 50ds 5,700 Lepto Pomona 50ds 5,700 Respacine BVD 50ds 3,600 Swine - ----- Concord l0ds 5,000 Concord 50ds 5,000 Ecoli Guard l0ds 10,000 Ecoli Guard 50ds 2,900 NeoVac 7 l0ds 10,000 Neovac 7 25ds 6,000 TGE Vac l0ds 7,600
21 EXHIBIT C Expiration Date Guideline: * Products released for sale with 24 months dating will be shipped to Miles with a minimum of 18 months dating remaining. * Products released for sale with 18 months dating will be shipped to Miles with a minimum of 14 months dating remaining. * Products released for sale with 12 months dating will be shipped to Miles with a minimum of 9 months dating remaining. * In all cases noted above, there will be a 60 day grace period allowed for products that require a retest prior to release and shipment. 22 MANUFACTURING AND SUPPLY AGREEMENT AMENDMENT AND EXTENSION This Manufacturing and Supply Agreement Amendment and Extension (the "Agreement") is made and entered into as of September 1, 1995 by and among DIAMOND ANIMAL HEALTH, INC. ("Diamond"), an Iowa corporation and BAYER CORPORATION ("Bayer") (formerly known as Miles, Inc.), an Indiana corporation. WITNESSETH WHEREAS, Diamond, Agrion Corporation ("Agrion"), Diamond Scientific Co. ("Diamond Scientific"), and Bayer (then known as Miles Inc.) entered into a Manufacturing and Supply Agreement (the "Agreement") dated as of December 31, 1993 in connection with a certain Stock Purchase Agreement dated as of December 31, 1993 by and between Bayer and Diamond, whereby Bayer sold to Diamond one hundred percent (100%) of the issued and outstanding stock of Agrion; and WHEREAS, Agrion and Diamond Scientific were merged into and with Diamond which is the surviving corporation; and WHEREAS, the parties have agreed to extend the term of the Agreement to June 30, 1999 and to amend the Agreement on the terms and conditions of this Amendment. NOW, THEREFORE, in consideration of the premises and covenants contained herein, the parties agree to amend the Agreement as follows: 1. ANNUAL PURCHASE COMMITMENT. BAYER's minimum annual aggregate purchase commitment of [ ] is hereby reduced effective January 1, 1996 to [ ] 23 [ ]. All references in Sections 2.1, 4.2 and 5.2 and elsewhere in the Agreement to such [ ] purchase commitment shall be deemed changed effective January 1, 1996 to [ ]. 2. PURCHASE AND SALE In addition to the amendment described in Paragraph 1 above, Section 2.1 of the Agreement is further amended as follows: a) The second sentence of Section 2.1 is deleted in its entirety and the following is substituted in its place: In the event this Agreement is not renewed at the expiration of the initial term or any extended term hereof, then Diamond and Bayer agree that the provisions of this Section 2.1 shall be deemed to apply to any partial year in such initial or extended term, provided that Bayer's annual aggregate pur chase commitment described above shall be prorated for any such partial year. b) The fifth sentence of Section 2.1 is hereby deleted in its entirety. 2 24 3. NON-COMPETITION AGREEMENT. Section 2.5 of the Agreement is hereby deleted in its entirety and the following is substituted in its place: It is hereby understood and agreed that Diamond, or any Affiliate thereof, will not, directly or indirectly, during the period beginning on the date of this Agreement and ending on December 31, 1996 use, manufacture, supply, market or sell to customers other than Bayer, or Affiliates of Bayer, any biological veterinary product containing any one or more of the antigens used in the manufacture of the Products or New Products. Notwithstanding the foregoing, Diamond may (i) manufacture or use the Products or New Products for research purposes and (ii) manufacture any new biological product whose application is for the prevention of bovine disease and which contains one or more of the antigens used in the manufacture of the Bovine Products (as defined in the Bovine Technology Agreement de scribed in Section 2.6), prior to January 1, 1997 to be held for inventory, provided such new products may be marketed and sold only after January 1, 1997. 3 25 Notwithstanding the foregoing, on or after July 1, 1996, Diamond, or any Affiliate thereof, may supply, market or sell to Lextron any bovine Product, provided that during the period commencing on July 1, 1996 and ending on December 31, 1996, Diamond agrees to pay to Bayer a fee of [ ] percent ([ ]%) of Net Sales of bovine Products sold or supplied to Lextron, except for sales of MLV-IBR Lepto-P on which no fee will be due. Fees due to Bayer shall be payable quarterly by the 15th day following the quarter end. Diamond shall prepare and submit with each quarterly payment a report supporting the calculation of the fee, which shall be subject to audit in accordance with Section 10.2. 4. EU COMPLIANCE . Section 2.8 of the Agreement is amended by changing the date of January 1, 1996 to January 1, 1997 in both instances where it appears. 5. PRODUCT PRICING . a) Exhibit A to the Agreement is hereby deleted in its entirety and Exhibit A which is attached to this Amendment is substituted in its place. 4 26 b) Section 4.1 of the Agreement is deleted in its entirety and in its place is substituted the following: Effective as of September 1, 1995, transfer prices for each Product set forth in Exhibit A hereto shall be in effect for Products having specified delivery dates prior to September 1, 1996. Transfer prices to be in effect for the Products to be delivered during subsequent twelve (12) month periods commencing September 1, 1996 and each September 1 thereafter shall be negotiated by the parties in good faith, taking into account such factors as, but not limited to, cost changes, volume changes and plant utilization. In the event revised transfer prices are not agreed upon, then the transfer price previously agreed upon shall remain in effect until the parties reach agreement thereon. 6. MONTHLY PAYMENTS. Section 5.1 of the Agreement is deleted in its entirety and the following is substituted in its place: Payment to Diamond for Products and any other agreed upon Purchase Commitment Products scheduled for delivery during the term of this 5 27 Agreement shall be made by Bayer in equal monthly installments on the first business day of each month during the term hereof in advance, commencing on January 3, 1994. The amount of each monthly installment shall be [ ] subject, however, to reduction by set-off pursuant to Sections 4.2 and 4.3 hereof. Com mencing January 1, 1996, the amount of each monthly installment shall be reduced to [ ] subject, however, to reduction by set-off pursuant to Sections 4.2 and 4.3 hereof. Products scheduled for delivery after the expiration of this Agreement shall be net twenty (20) days. 7. NEW PRODUCT PAYMENTS . In addition to the amendment to Section 5.2 set forth in Paragraph I above, Section 5.2 of the Agreement is further amended as follows: a) The reference to Section 5.1 in the first and second sentences of Section 5.2 is hereby changed to "Section 2.1". b) The following sentence is added immediately after the first sentence of Section 5.2: 6 28 The purchase by Bayer of non-BRSV containing Bovine Products shall apply against the annual minimum purchase commitment described in Section 2.1. 8. TERM AND TERMINATION . a) Section 7.1 of the Agreement is deleted in its entirety and in its place is substituted the following: The term of this Agreement, unless it is earlier terminated pursuant to Section 7.2 hereof, shall be for a period of five (5) years and six (6) months, through and including June 30, 1999, and shall automatically renew thereafter on an annual basis unless either Bayer or Diamond gives the other eighteen (18) months prior written notice that it does not wish to renew this Agreement. b) Section 7.2 of the Agreement is amended by adding "; or" at the end of subsection (d) and by adding the following at the end of section 7.2: (e) Diamond shall be in default under the Promissory Note dated on or about the date hereof in the original principal amount of Four Hundred Thousand dollars ($400,000) payable to Bayer, such default shall not be cured or waived 7 29 within the period of grace, if any, applicable thereto and Bayer shall have given notice of acceleration thereof to Diamond. 10. NAME CHANGE . All references in the Agreement to Miles shall hereafter be deemed references to Bayer and all references in the Agreement to Diamond, Agrion or Diamond Scientific shall hereafter be deemed references to Diamond. 11. DEFINED TERMS . All capitalized terms not otherwise defined in this Amendment shall have the same meaning given to them in the Agreement. All references to the Technology Agreements and the Lease dated as of December 31, 1993 shall be deemed to mean those documents as amended from time to time. 12. BINDING EFFECT . This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and (in the case of Diamond permitted) assigns. 13. CONFLICT OF TERMS . Except as specifically set forth herein, the terms of the Agreement are unchanged and in full force and effect. In the event of any conflict between the terms of this Amendment and the terms of the Agreement, the letter agreement dated August 18, 1995 between the parties or the letter 8 30 agreement dated September 7, 1995 between the parties, the terms of this Amendment shall govern. IN WITNESS WHEREOF, the parties have caused this Amendment to be entered into by their duly authorized representatives, to be effective as of the date first above written. BAYER CORPORATION DIAMOND ANIMAL HEALTH, INC. AGRICULTURE DIVISION BY:/s/ GARY R. ZIMMERMAN BY:/s/ LOUIS VAN DAELE -------------------------- -------------------------- NAME: Gary R. Zimmerman NAME: Louis Van Daele ------------------------ ------------------------ Vice President New TITLE: Business Development TITLE: President ----------------------- ----------------------- 9 31 EXHIBIT A - FOR MANUFACTURING AND SUPPLY AGREEMENT DIAMOND AH CONTRACT PRICING FOR BAYER AH EFFECTIVE SEPTEMBER 1, 1995
MAH DAH CODE CODE DESCRIPTION COST 0093 57305 ASPEN CONQUEST 1+VAC 3, 10DS [ 0094 57304 ASPEN CONQUEST 1+VAC 3, 50DS 0087 57311 ASPEN IBP-RS VAC, 10DS 0088 57310 ASPEN IBP-RS VAC, 50DS 0089 57309 ASPEN IBP-RS-L5 VAC, 10DS 0090 57308 ASPEN IBP-RS-L5 VAC, 50DS 0085 57312 ASPEN IP-RS VAC, 10DS 0086 57313 ASPEN IP-RS VAC, 50DS 0083 57315 ASPEN RS VAC, 10DS 0084 57314 ASPEN RS VAC, 50DS 1300 57153 BRSV VAC, 10DS 0072 57316 BRSV VAC, 10DS, EXPT-UNLBL 1305 57154 BRSV VAC, 50DS 0071 57320 BRSV VAC, 50DS, EXPT-UNLBL 0073 57269 BRSV VAC 2, 10DS, EXPT-UNLBL 0104 57317 BRSV VAC 2, 50DS, EXPT-UNLBL 1310 57166 BRSV VAC 3, 10DS 1315 57167 BRSV VAC 3, 50DS 1319 57075 BRSV VAC 4, 5DS 1320 57145 BRSV VAC 4, 10DS 0075 57319 BRSV VAC 4, 10DS, EXPT-UNLBL 1325 57146 BRSV VAC 4, 50DS 0077 57318 BRSV VAC, 50DS, EXPT-UNLBL 1326 57076 BRSV VAC 9, 5DS 1329 57078 BRSV VAC 9, 50DS 1327 57077 BRSV VAC 9, 10DS ] MAH DAH CODE CODE DESCRIPTION COST 0139 57254 BRSV VAC F3LP, 10DS [ 0140 57255 BRSV VAC F3LP, 50DS 0103 57221 DILUENT, 100ML, EXPT-UNLBL 0102 57219 DILUENT, 20ML, EXPT-UNLBL 0058 57220 HORIZON 1, 10DS, EXPT-UNLBL 1360 57212 HORIZON 1VAC 3, 10DS 1365 57213 HORIZON 1 VAC 3, 50DS 0059 57170 HORIZON 2, 10DS, EXPT-UNLBL 1341 57144 HORIZON 4, 5DS 1340 57180 HORIZON 4, 10DS 0179 57260 HORIZON 4, 10DS, MEXICO 1345 57181 HORIZON 4, 50DS 0181 57261 HORIZON 4, 50DS, MEXICO 1351 57211 HORIZON 9, 5DS 1350 57176 HORIZON 9, 10DS 0182 57262 HORIZON 9, 10DS, MEXICO 1352 57177 HORIZON 10, 5DS 0183 57263 HORIZON 9, 25DS, MEXICO 0114 57238 HORIZON 10, 5DS 0115 57217 HORIZON 10, 10DS 0261 57354 HORIZON 10, 10DS, MEXICO 0116 57237 HORIZON 10, 25DS 0262 57355 HORIZON 10, 25DS, MEXICO 0052 47143 LEPTO 5, 20ML, EXPT-UNLBL 0155 47150 LEPTO 5, 20ML, MEXICO ]
EX-10.10 19 EMPLOYMENT AGREEMENT - GRIEVE DATED 01-01-94 1 EXHIBIT 10.10 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into by and between PARAVAX, INC., a California corporation with its principal office at 2301 Research Boulevard, Suite 110, Fort Collins, Colorado ("Company") and ROBERT B. GRIEVE ("Employee"), effective as of January 1, 1994. W I T N E S S E T H: Whereas Company desires to employ Employee to act as its Vice Chairman of the Board of Directors and Vice President, Research and Development in an at-will capacity; and Whereas Employee wishes to act as Company's Vice Chairman of the Board of Directors and 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 Vice Chairman of the Board of Directors and Vice President, Research and Development, and Employee hereby accepts such employment. 2. Duties and Responsibilities. Employee shall serve as Vice Chairman of the Board of Directors and Vice President, Research and Development of Company, with such duties and responsibilities as may be assigned to him from time to time by the Board of Directors of Company, and with such on-going daily duties and responsibilities as are typically entailed in the position of Vice Chairman of the Board of Directors and Vice President, Research and Development. 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, compensation at the rate of $120,000 per year, payable in accordance with the usual and customary payroll practices of Company. 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, upon presentation of appropriate written receipts and reports and subject to the customary practices 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. 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. (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) Severance Pay. (i) Upon involuntary termination of his employment, Employee will be entitled to severance pay as provided below unless he is terminated for "cause," as defined below. If Company terminates Employee for "cause," 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) Definition of "Cause". The parties agree that for the purposes of this 2 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 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; (B) Company shall discontinue its business (for the purpose of this provision, a merger, acquisition or sale of Company in which Company's business is carried on by the surviving entity shall not be deemed to be a discontinuance of the business of Company); (C) Employee shall commit any material breach of his obligations under this Agreement; (D) Employee shall commit any material breach of any material fiduciary duty to Company; (E) 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 to be detrimental to Company's image or interests; (F) Employee shall commit repeated insubordination or refusal to comply with any reasonable request of the Board of Directors of Company relating to the scope or performance of Employee's duties; (G) 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 (H) Employee shall conduct himself in a manner, which in the good faith and reasonable determination of the Board of Directors demonstrated Employee's gross unfitness to serve. (iii) In the event that severance pay is due to Employee as a result of the involuntary termination of his employment without "cause" within three years of the date of this Agreement, Employee will be paid one (1) years' salary in twelve equal monthly installments, with the first such installment due 15 days after the date of such termination and with the following eleven installments due monthly thereafter. (iv) In the event that severance pay is due to Employee as a result of the involuntary termination of his employment without "cause" three or more years after the date of this Agreement, Employee will be paid six (6) months' salary in six equal monthly installments, with the first such installment due 15 days after the date of such termination and with the following five installments due monthly thereafter. 7. Proprietary Information. Employee agrees that he will promptly execute Company's standard employee proprietary information and assignment of inventions agreement. For three (3) years following his termination as an employee, Employee agrees not to undertake any employment or activity wherein the loyal and complete fulfillment of the duties of such employment or activity would necessarily call upon Employee to reveal, to make judgments on or otherwise to use, any proprietary business information or trade secrets of Company's business to which Employee had access by reason of Company's business. 8. Attorneys' Fees. If any legal action arises under this Agreement or by reason of any asserted breach of it, the prevailing party shall be entitled to recover all costs and -2- 3 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 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. 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, and 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 a party shall have given notice of hereunder. IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year hereinabove written. PARAVAX, INC. By /s/ A. BARR DOLAN --------------------------- Its Chairman -------------------------- /s/ ROBERT B. GRIEVE ----------------------------- Robert B. Grieve -3- 4 HESKA CORPORATION AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT WITH ROBERT B GRIEVE THIS AMENDMENT AGREEMENT is entered into effective as of March 4, 1997 by and between Heska Corporation, formerly Paravax, Inc. (the "Company"), and Robert B. Grieve ("Employee"). The Company and Employee are collectively referred to herein as the "Parties." WHEREAS, effective as of January 1, 1994, the Company and Employee entered into an Employment Agreement (the "Employment Agreement"); and WHEREAS, the Parties desire to amend the Employment Agreement for the purpose of (a) extending the period during which terminations may give rise to one-year's severance pay, and (b) amending the scope of severance pay to include vesting under equity stock arrangements; NOW THEREFORE, in consideration of the foregoing, the Parties agree as follows: 1. Amendment to Section 6(b)(iii). Section 6(b)(iii) is hereby amended by deleting said paragraph in its entirety and substituting the following therefor: (iii) In the event that severance pay is due to Employee as a result of the involuntary termination of his employment without "cause" on or before December 31, 1999, Employee will receive (i) one year's salary in twelve equal monthly installments, with the first such installment due 15 days after the date of such termination and with the following eleven installments due monthly thereafter, and (ii) an additional twelve months of vesting (calculated from the effective termination date, and not from the end of the severance pay period) under all stock option agreements, stock purchase agreements or other stock rights granted to Employee. 2. Amendment to Section 6(b)(iv). Section 6(b)(iv) is hereby amended by deleting said paragraph in its entirety and substituting the following therefor: (iv) In the event that the severance pay is due to Employee as a result of the involuntary termination of his employment without "cause" after December 31, 1999, Employee will receive (i) six months' salary in six equal monthly installments, with the first such installment due 15 days after the date of such termination and with the following six installments due monthly thereafter, and (ii) an additional six months of vesting (calculated from the effective termination date, and not from the end of the severance pay period) 5 under all stock option agreements, stock purchase agreements or other stock rights granted to Employee. 3. Addition of Section 10. Section 10 is hereby added to read as follows: 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 writing signed by both parties. 4. No Other Changes. Except for the changes expressly made by this Amendment Agreement, the Employment Agreement remains in full force and effect without change. IN WITNESS WHEREOF, the Parties, for good and valuable consideration the sufficiency of which is hereby acknowledged, have executed this Amendment Agreement as of the date first written above. the "Corporation" "Employee" Heska Corporation Robert B. Grieve By: /s/ FRED M. SCHWARZER /s/ ROBERT B. GRIEVE ------------------------------ ----------------------------- -2- EX-10.11 20 EMPLOYMENT AGREEMENT - SCHWARZER DATED 11-1-94 1 EXHIBIT 10.11 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into by and between PARAVAX, INC., a California corporation with its principal office at 2301 Research Boulevard, Suite 110, Fort Collins, Colorado ("Company") and FRED M. SCHWARZER ("Employee"), effective as of November 1, 1994. W I T N E S S E T H: Whereas Company desires to employ Employee to act as its President and Chief Executive Officer, in an at-will capacity; and Whereas Employee wishes to act as Company's President and Chief Executive Officer 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 President and Chief Executive Officer, and Employee hereby accepts such employment. 2. Duties and Responsibilities. Employee shall serve as President and Chief Executive Officer of Company, with such duties and responsibilities as may be assigned to him from time to time by the Board of Directors of Company, and with such on-going daily duties and responsibilities as are typically entailed in the position of President and Chief Executive Officer. Employee shall devote substantially all of his time and energies to such duties; provided, however, that Employee may devote a modest amount of time and energy, including travel, on behalf of Charter Venture Capital and its affiliates. 3. Compensation. Company shall pay Employee, as compensation for services rendered under this Agreement, compensation at the rate of $200,000 per year, payable in accordance with the usual and customary payroll practices of Company. 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 of Company. In addition, the Company will reimburse Employee all of his reasonable expenses related to moving his household to the Fort Collins area, including reasonable travel expenses, moving expenses and temporary living expenses. Such reimbursement will be made upon presentation of appropriate written receipts. The Company will not reimburse Employee for any brokerage commissions or other expenses relating to the sale of property in California or the purchase of a home in Colorado. 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. 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. (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) Severance Pay. (i) Upon involuntary termination of his employment, Employee will be entitled to severance pay as provided below unless he is terminated for "cause," as defined below. If Company terminates Employee for "cause," 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 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; (B) Company shall discontinue its business (for the purpose of this provision, a merger, acquisition or sale of Company in which Company's business is carried on by the surviving entity shall not be deemed to be a discontinuance of the business of Company); (C) Employee shall commit any material breach of his obligations under this Agreement; (D) Employee shall commit any material breach of any material fiduciary duty to Company; (E) 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 to be detrimental to Company's image or interests; (F) Employee shall commit repeated insubordination or refusal to comply with any reasonable request of the Board of Directors of Company relating to the scope or performance of Employee's duties; (G) 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 -2- 3 (H) Employee shall conduct himself in a manner, which in the good faith and reasonable determination of the Board of Directors demonstrated Employee's gross unfitness to serve. (iii) In the event that severance pay is due to Employee as a result of the involuntary termination of his employment without "cause" within three years of the date of this Agreement, Employee will be paid one (1) years' salary in twelve equal monthly installments, with the first such installment due 15 days after the date of such termination and with the following eleven installments due monthly thereafter. (iv) In the event that severance pay is due to Employee as a result of the involuntary termination of his employment without "cause" three or more years after the date of this Agreement, Employee will be paid six (6) months' salary in six equal monthly installments, with the first such installment due 15 days after the date of such termination and with the following five installments due monthly thereafter. 7. Proprietary Information. Employee agrees that he will promptly execute Company's standard employee proprietary information and assignment of inventions agreement. For three (3) years following his termination as an employee, Employee agrees not to undertake any employment or activity wherein the loyal and complete fulfillment of the duties of such employment or activity would necessarily call upon Employee to reveal, to make judgments on or otherwise to use, any proprietary business information or trade secrets of Company's business to which Employee had access by reason of Company's business. 8. Attorneys' Fees. If any legal action arises under this Agreement or by reason of any asserted breach of it, 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 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. 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, and 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 a party 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 writing signed by both parties. -3- 4 IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year hereinabove written. PARAVAX, INC. By /s/ A. BARR DOLAN ------------------------------------ A. Barr Dolan, Chairman /s/ FRED M. SCHWARZER ---------------------------------------- Fred M. Schwarzer -4- 5 HESKA CORPORATION AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT WITH FRED M. SCHWARZER THIS AMENDMENT AGREEMENT is entered into effective as of March 4, 1997 by and between Heska Corporation, formerly Paravax, Inc. (the "Company"), and Fred M. Schwarzer ("Employee"). The Company and Employee are collectively referred to herein as the "Parties." WHEREAS, effective as of November 1, 1994, the Company and Employee entered into an Employment Agreement (the "Employment Agreement"); and WHEREAS, the Parties desire to amend the Employment Agreement for the purpose of (a) extending the period during which terminations may give rise to one-year's severance pay, and (b) amending the scope of severance pay to include vesting under equity stock arrangements; NOW THEREFORE, in consideration of the foregoing, the Parties agree as follows: 1. Amendment to Section 6(b)(iii). Section 6(b)(iii) is hereby amended by deleting said paragraph in its entirety and substituting the following therefor: (iii) In the event that severance pay is due to Employee as a result of the involuntary termination of his employment without "cause" on or before December 31, 1999, Employee will receive (i) one year's salary in twelve equal monthly installments, with the first such installment due 15 days after the date of such termination and with the following eleven installments due monthly thereafter, and (ii) an additional twelve months of vesting (calculated from the effective termination date, and not from the end of the severance pay period) under all stock option agreements, stock purchase agreements or other stock rights granted to Employee. 2. Amendment to Section 6(b)(iv). Section 6(b)(iv) is hereby amended by deleting said paragraph in its entirety and substituting the following therefor: (iv) In the event that the severance pay is due to Employee as a result of the involuntary termination of his employment without "cause" after December 31, 1999, Employee will receive (i) six months' salary in six equal monthly installments, with the first such installment due 15 days after the date of such termination and with the following six installments due monthly thereafter, and (ii) an additional six months of vesting (calculated from the effective termination date, and not from the end of the severance pay period) 6 under all stock option agreements, stock purchase agreements or other stock rights granted to Employee. 3. No Other Changes. Except for the changes expressly made by this Amendment Agreement, the Employment Agreement remains in full force and effect without change. IN WITNESS WHEREOF, the Parties, for good and valuable consideration the sufficiency of which is hereby acknowledged, have executed this Amendment Agreement as of the date first written above. the "Corporation" "Employee" Heska Corporation Fred M. Schwarzer By: /s/ ROBERT B. GRIEVE /s/ FRED M. SCHWARZER ------------------------------ ----------------------------- -2- EX-10.12 21 EMPLOYMENT AGREEMENT - SEWARD DATED 10-17-94 1 EXHIBIT 10.12 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into by and between PARAVAX, INC., a California corporation with its principal office at 2301 Research Boulevard, Suite 110, Fort Collins, Colorado ("Company") and R. LEE SEWARD ("Employee"), effective as of October 17, 1994. W I T N E S S E T H: Whereas Company desires to employ Employee to act as its Vice President, in an at-will capacity; and Whereas Employee wishes to act as Company's Vice President 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, and Employee hereby accepts such employment. 2. Duties and Responsibilities. Employee shall serve as Vice President of Company, with such duties and responsibilities as may be assigned to him from time to time by the Board of Directors of Company, and with such on-going daily duties and responsibilities as are typically entailed in the position of Vice President. Employee shall devote 100% of his time and energies to such duties. 3. Compensation. Company shall pay Employee, as compensation for services rendered under this Agreement, compensation at the rate of $160,000 per year, payable in accordance with the usual and customary payroll practices of Company. 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 of Company. In addition, the Company will reimburse Employee all of his reasonable expenses related to moving his household to the Fort Collins area, including reasonable travel expenses, moving expenses and temporary living expenses. Such reimbursement will be made upon presentation of appropriate written receipts. The Company will not reimburse Employee for any brokerage commissions or other expenses relating to the sale of property in New Jersey or the purchase of a home in Colorado. Employee may, upon request, ask for a loan from the Company in order to make a down payment on the purchase of a home in Colorado. 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. 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. (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. 2 (b) Severance Pay. (i) Upon involuntary termination of his employment, Employee will be entitled to severance pay as provided below unless he is terminated for "cause," as defined below. If Company terminates Employee for "cause," 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 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; (B) Company shall discontinue its business (for the purpose of this provision, a merger, acquisition or sale of Company in which Company's business is carried on by the surviving entity shall not be deemed to be a discontinuance of the business of Company); (C) Employee shall commit any material breach of his obligations under this Agreement; (D) Employee shall commit any material breach of any material fiduciary duty to Company; (E) 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 to be detrimental to Company's image or interests; (F) Employee shall commit repeated insubordination or refusal to comply with any reasonable request of the Board of Directors of Company relating to the scope or performance of Employee's duties; (G) 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 (H) Employee shall conduct himself in a manner, which in the good faith and reasonable determination of the Board of Directors demonstrated Employee's gross unfitness to serve. (iii) In the event that severance pay is due to Employee as a result of the involuntary termination of his employment without "cause" within three years of the date of this Agreement, Employee will be paid one (1) years' salary in twelve equal monthly installments, with the first such installment due 15 days after the date of such termination and with the following eleven installments due monthly thereafter. (iv) In the event that severance pay is due to Employee as a result of the involuntary termination of his employment without "cause" three or more years after the date of this Agreement, Employee will be paid six (6) months' salary in six equal monthly installments, with the first such installment due 15 days after the date of such termination and with the following five installments due monthly thereafter. 7. Proprietary Information. Employee agrees that he will promptly execute Company's standard employee proprietary information and assignment of inventions agreement. For three (3) years following his termination as an employee, Employee agrees not -2- 3 to undertake any employment or activity wherein the loyal and complete fulfillment of the duties of such employment or activity would necessarily call upon Employee to reveal, to make judgments on or otherwise to use, any proprietary business information or trade secrets of Company's business to which Employee had access by reason of Company's business. 8. Attorneys' Fees. If any legal action arises under this Agreement or by reason of any asserted breach of it, 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 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. 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, and 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 a party 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 writing signed by both parties. IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year hereinabove written. PARAVAX, INC. By /s/ FRED M. SCHWARZER ------------------------------------- Its ------------------------------------ /s/ R. LEE SEWARD --------------------------------------- R. Lee Seward -3- EX-10.13 22 EMPLOYMENT AGREEMENT - VAN DAELE DATED 04-14-96 1 EXHIBIT 10.13 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into by and between DIAMOND ANIMAL HEALTH, INC., an Iowa corporation with its principal office at 2538 S.E. 43rd Street, Des Moines, Iowa ("Company") and LOUIS VAN DAELE ("Employee"), effective as of April 19, 1996. W I T N E S S E T H: Whereas Company desires to employ Employee to act as its President in an at-will capacity; and Whereas Employee wishes to act as Company's President 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 President and Employee hereby accepts such employment. 2. Duties and Responsibilities. Employee shall serve as President of Company, with such duties and responsibilities as may be assigned to him from time to time by the Board of Directors of Company, and with such on-going daily duties and responsibilities as are typically entailed in the position of President. Employee shall devote substantially all of his time and energies to such duties. 3. Compensation. Company shall pay Employee, as compensation for services rendered under this Agreement, compensation at the rate of $130,000 per year, payable in accordance with the usual and customary payroll practices of Company. 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 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. 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. (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. 2 (b) Severance Pay. (i) Upon involuntary termination of his employment within four (4) years of the date of this Agreement, Employee will be entitled to severance pay as provided below unless he is terminated for "cause," as defined below. If Company terminates Employee for "cause," 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 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; (B) Company shall discontinue its business (for the purpose of this provision, a merger, acquisition or sale of Company in which Company's business is carried on by the surviving entity shall not be deemed to be a discontinuance of the business of Company); (C) Employee shall commit any material breach of his obligations under this Agreement; (D) Employee shall commit any material breach of any material fiduciary duty to Company; (E) 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 to be detrimental to Company's image or interests; (F) Employee shall commit repeated insubordination or refusal to comply with any reasonable request of the Board of Directors of Company relating to the scope or performance of Employee's duties; (G) 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 (H) Employee shall conduct himself in a manner, which in the good faith and reasonable determination of the Board of Directors demonstrated Employee's gross unfitness to serve. (iii) In the event that severance pay is due to Employee as a result of the involuntary termination of his employment without "cause" within four (4) years of the date of this Agreement, Employee will be paid one (1) year's salary in twelve equal monthly installments, with the first such installment due 15 days after the date of such termination and with the following eleven installments due monthly thereafter. -2- 3 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. For four (4) years following his termination as an employee, Employee agrees not to undertake any employment or activity wherein the loyal and complete fulfillment of the duties of such employment or activity would necessarily call upon Employee to reveal, to make judgments on or otherwise to use, any proprietary business information or trade secrets of Company's business to which Employee had access by reason of Company's business. 8. Attorneys' Fees. If any legal action arises under this Agreement or by reason of any asserted breach of it, 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 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. 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, and 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 a party shall have given notice of hereunder. 10. Miscellaneous. This Agreement shall be governed by the laws of the State of Iowa 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 writing signed by both parties. IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year hereinabove written. DIAMOND ANIMAL HEALTH, INC. By /s/ FRED M. SCHWARZER ---------------------------------- Title Chairman ------------------------------- /s/ LOUIS VAN DAELE ------------------------------------ Louis Van Daele -3- EX-10.14 23 OFFER LETTER REGISTRANT/SHADDUCK DATED 11-1-96 1 EXHIBIT 10.14 [HESKA LETTERHEAD] November 1, 1996 VIA FEDERAL EXPRESS Dr. John A. Shadduck 1005 Carmel Place College Station, TX 77845 Dear Dr. Shadduck: On behalf of Heska Corporation, a California corporation ("Heska" or the "Company"), I am pleased to offer you the position of Executive Vice President, Operations with the Company. All of us at Heska hope that you will accept this position and begin with the Company not later than February 15, 1997. Should you accept this position, the terms of your employment with Heska would be as follows: 1. You will be paid an annual cash salary of $180,000 payable on a monthly basis at the end of each month. 2. Subject to the approval of the Board of Directors of the Company, you will be granted an incentive stock option to purchase 100,000 shares of Common Stock of Heska at a price equal to the current fair value of the Common Stock on the date of grant (the fair value is currently estimated to be $1.20 per share), pursuant to the Company's standard form of Incentive Stock Option Agreement (the "Option Agreement"). The Option Agreement will provide that you will become entitled to exercise this option as to one-eighth of the shares (12,500 shares) upon your completion of six months of employment with the Company and as to 1/48th of the shares (2,083 shares) upon the completion of each additional month of your employment with the Company, until you are entitled to exercise the option as to the entire 100,000 shares at the end of forty-eight months of employment with the Company. Your right to exercise any portion of this option shall terminate 90 days after the termination of your employment with Heska for any reason, including termination without cause. As you know, the Company will be issuing additional shares of Preferred Stock and/or Common Stock to obtain additional financing or in connection with other corporate transactions and the Company will be issuing additional shares of Common Stock and options to purchase Common Stock to new and existing employees of the Company, both of which will of course reduce the percentage of the outstanding shares of the Company which your option represents. 2 The Company makes no additional promises to you concerning the issuance of options or shares other than those which are expressly stated here, and there is no obligation on the part of the Company to issue any additional options or shares to you during the course of your employment, even though the percentage ownership in the Company which is represented by your options and shares decreases. 3. You will be entitled to participate in all of Heska's employee benefits programs, such as health insurance, in the form that they exist from time to time during your employment. 4. Should you choose to relocate to the Fort Collins area during the course of your employment, Heska will reimburse you for the reasonable cost of moving your personal effects. In addition, Heska will reimburse you for the cost of temporary housing. Some of this reimbursement however, will be treated as taxable income to you. Heska will not reimburse you for brokerage commissions and other expenses related to the sale of your home or the purchase of a home in Fort Collins. 5. You will also be required to execute the Company's standard form of confidential information and assignment of inventions agreement upon the commencement of your employment. 6. You understand that your employment with Heska may be terminated by the Company at any time, with or without cause; however the Company will offer you its standard executive employment agreement, which provides, among other things, that you will receive one years' severance pay in the event that your employment with the Company is terminated without cause within the first three years. We greatly look forward to your joining us at Heska, and we believe that you will be a critical part of the Company's ultimate success. We also believe that you will find Heska to be an aggressive, bold and opportunistic company that will take advantage of, and in fact demand, all of the skills, abilities and energy you have to offer. In short, we believe you will find Heska to be a challenging and rewarding opportunity. 3 To enable us to be prepared for your first day, please indicate below how you would like your e-mail address setup. Your e-mail dress typically is the first six letters of your last name and the first initial of your first name. If you agree to join Heska on the terms described above, please indicate your agreement by signing the enclosed copy and returning it to Ms. Diane McCoy, Director of Human Resources. Very truly yours, /s/ FRED M. SCHWARZER Fred M. Schwarzer Chief Executive Officer Since 15 Feb 97 is a Saturday, I would like to make my First day at work 17 Feb 97 (Monday). Accepted and agreed: /s/ JOHN A. SHADDUCK 6 NOV 96 ---------------------------------- Dr. John A. Shadduck Date SHADDUJ ---------------------------------- e-mail address EX-10.15 24 RESTRICTED STOCK PURCHASE - SCHWARZER 02-28-95 1 EXHIBIT 10.15 RESTRICTED STOCK PURCHASE AGREEMENT THIS AGREEMENT is made as of the 28th day of February, 1995, by and between Paravax, Inc., a California corporation (the "Company"), and Fred M. Schwarzer (the "Purchaser"). In consideration of the mutual covenants and representations herein set forth, the Company and Purchaser agree as follows: 1. Purchase and Sale of Stock. 1.1 Purchase of Stock. Subject to the terms and conditions of this Agreement, the Company hereby agrees to sell to Purchaser and Purchaser agrees to purchase from the Company at the Closing an aggregate of 177,000 shares of the Company's Common Stock (the "Stock") at a price of $0.35 per share, for an aggregate purchase price of $61,950.00. The shares of Stock shall be purchased by delivery of Purchaser's full recourse promissory note in substantially the form of Exhibit A attached hereto (the "Note"). This purchase is being made upon exercise of a stock purchase right granted under the Company's 1994 Key Executive Stock Plan on November 1, 1994. 1.2 Security for Note. As security for the payment of the Note and any renewal or modification thereof, Purchaser hereby pledges and grants to the Company a security interest in all of the Stock pursuant to a Security Agreement in substantially the form attached hereto as Exhibit B (the "Security Agreement"). As part of this pledge, Purchaser will sign and deliver to the Secretary of the Company ("Escrow Agent") a Stock Assignment duly endorsed (with date and number of shares blank) in the form attached hereto as Exhibit C (the "Assignment"), together with the certificate or certificates evidencing the Stock; the Assignment and the certificate or certificates evidencing the Stock are to be held in escrow by the Escrow Agent pursuant to an Escrow Agreement in substantially the form attached hereto as Exhibit D (the "Escrow Agreement") for use if, as and when required pursuant to the Security Agreement. 2. Closing. The purchase and sale of the Stock shall occur at a Closing to be held on the date hereof (the "Closing Date"). The Closing will take place at the principal office of the Company or at such other place as shall be designated by the Company. At the Closing, Purchaser shall deliver to the Company the Note and the Company will issue the Stock registered in the name of Purchaser. In addition, the Purchaser shall sign and deliver the Security Agreement, the Assignment and the Escrow Agreement. 2 3. Purchase Option. 3.1 Grant of Purchase Option. Beginning on the Closing Date, the Stock shall be subject to the right and option of the Company to repurchase the Stock (the "Purchase Option") as set forth in this Section 3. In the event Purchaser's employment by or consulting relationship with the Company (including a parent or subsidiary of the Company) shall cease for any reason, or no reason, with or without cause, including death, disability or involuntary termination ("Termination"), the Company shall have the right, as provided in Section 3.2 hereof, to purchase from Purchaser or his personal representative, as the case may be, at the purchase price of $0.35 per share (the "Option Price"), all of the Stock that has not been released from the Purchase Option in accordance with the following schedule: (a) Beginning as of June 1, 1994, 116,500 shares of Stock will begin vesting over a four year period as follows: 2,427 (116,500/48) of the shares of Stock will be released from the Purchase Option on the first of each month beginning after June 1994 and 2,384 shares of the Stock will be released from the Purchase Option on the first day of the 48th month. (b) Beginning as of November 1, 1994, 60,500 shares of Stock will begin vesting over a four year period as follows: 1,260 (60,500/48) of the shares of Stock will be released from the Purchase Option on the first of each month beginning after November 1994 and 1,280 shares of the Stock will be released from the Purchase Option on the first day of the 48th month. 3.2 Exercise of Purchase Option. Within ninety (90) days following Termination, the Company shall notify Purchaser by written notice delivered or mailed as provided in Section 8.3 as to whether it wishes to purchase the Stock pursuant to exercise of the Purchase Option. If the Company (or its assignees) elects to purchase the Stock hereunder, it shall specify a date (which shall not be later than thirty (30) days from the date of the above described notice) and a place for the closing of the transaction. At such closing, the Company (or its assignees) shall tender payment for the Stock and the certificates representing the Stock so purchased shall be cancelled. Purchaser hereby authorizes and directs the Secretary or Transfer Agent of the Company to transfer the Stock as to which the Purchase Option has been exercised from Purchaser to the Company (or its assignees). The Option Price may be payable, at the option of the Company, in cancellation of all or a portion of any outstanding indebtedness of Purchaser to the Company, or by check, or both. -2- 3 3.3 No Limit on Rights. Nothing in this Agreement shall affect in any manner whatsoever the right or power of the Company, or a parent or subsidiary of the Company, to terminate Purchaser's employment or consulting relationship, for any reason, with or without cause. 3.4 Escrow of Stock. Purchaser agrees at the Closing hereunder, to deliver to and deposit with the Escrow Agent named in the Escrow Agreement of even date and delivered herewith, the certificate or certificates evidencing the Stock and the duly executed Assignments. Such documents are to be held by the Escrow Agent until delivered pursuant to the terms of such Escrow Agreement. Shares of the Stock which are subject to the Purchase Option shall not be transferable by the Purchaser. 3.5 Acceleration on Merger. A dissolution of the Company or a merger or consolidation of the Company in which the Company is not the surviving corporation or in which the shares held by the shareholders of the Company prior to the merger do not represent more than 50% of the outstanding voting securities of the surviving corporation shall cause the Purchase Option to terminate effective immediately prior to the closing of such dissolution, merger or consolidation. 4. Stock Splits, etc. If, from time to time during the term of the Purchase Option as provided in Section 3 hereof, there is any stock dividend, stock split or other change in the character or amount of any of the outstanding securities of the Company or if there is any consolidation, merger or sale of all, or substantially all, of the assets of the Company, then in such event, and subject to Section 3.5, any and all new, substituted or additional securities to which Purchaser is entitled by reason of his ownership of Stock shall be immediately subject to the Purchase Option and be included in the term "Stock" for all purposes of this Agreement with the same force and effect as the shares of Stock presently subject to this Agreement. 5. Legends. All certificates representing any shares of Stock of the Company subject to the provisions of this Agreement shall have endorsed thereon substantially the following legends: (a) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS UPON AND OBLIGATIONS WITH RESPECT TO TRANSFER AND RIGHTS OF REPURCHASE AS SET FORTH IN AN AGREEMENT BETWEEN THE COMPANY AND THE ORIGINAL REGISTERED HOLDER, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY." -3- 4 (b) "THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED." (c) Any legend required under applicable state securities laws. 6. Investment Intent; Covenant. In purchasing the Stock, Purchaser represents to the Company as follows: (a) Purchaser has had an opportunity to discuss the business prospects and business plan of the Company with the officers and directors of the Company. Purchaser has a preexisting personal or business relationship with the Company or one of its officers, directors or controlling persons and/or by reason of his business or financial experience he has the capacity to protect his own interests in connection with the transactions contemplated by this Agreement. Purchaser further acknowledges that the Stock is highly speculative and involves a high degree of risk, and represents and warrants that he is able, without impairing his financial condition, to hold the Stock for an indefinite period of time and suffer a complete loss of his investment therein. (b) Purchaser is acquiring the Stock for investment and not with a view to or for sale in connection with any distribution of said Stock or with any present intention of distributing or selling said Stock and he does not presently have reason to anticipate any change in circumstances or any particular occasion or event which would cause him to sell said Stock. Purchaser understands that the Stock has not been registered under the Securities Act of 1933, as amended, (the "Act") and may not be sold or otherwise disposed of except pursuant to an effective Registration Statement filed under the Act or pursuant to an exemption from the registration requirements of such Act. Purchaser acknowledges that the Company is under no obligation to register the Stock under the Act on his behalf. Purchaser represents and warrants that he understands that the Stock constitutes restricted securities within the meaning of Rule 144 promulgated under the Act; that the exemption from registration under Rule 144 will not be available in any event for at least two years from the date of purchase and payment for the Stock, and even then will not be available unless the terms and conditions of Rule 144 are complied with and will be subject to the limitations on amount set forth therein. -4- 5 (c) Without limiting the representations and warranties set forth above, Purchaser agrees he will not make any transfer of all or any part of the Stock unless (i) there is a Registration Statement under the Act in effect with respect to such transfer and such transfer is made in accordance therewith, or (ii) Purchaser has furnished the Company an opinion of counsel satisfactory to the Company and its counsel to the effect that such transfer will not require registration under the Act. Purchaser agrees that, prior to the closing of the Company's initial public offering registered under the Act, he will not transfer any of such securities in a public offering without the Company's prior consent, even if he is otherwise permitted to transfer them pursuant to Rule 144(k) under the Act. 7. Lock-up Agreement. In the event the Company sells any of its securities in an underwritten initial public offering pursuant to a registration filed pursuant to the Act, Purchaser agrees (but only if each officer and director of the Company also agrees), upon request from the Company or the managing underwriter of such initial or other public offering, not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of, any of the Stock, without the prior written consent of the Company or such underwriter, as the case may be, for such period of time (not to exceed one hundred eighty (180) days) from the effective date of such registration as the Company or the underwriter may specify. Purchaser further agrees that the Company may place stop-transfer notations with the transfer agent of the Stock to enforce this provision. 8. Miscellaneous. 8.1 Further Assurances. The parties agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of this Agreement. 8.2 Entire Agreement. This Agreement, including any exhibits, is the entire agreement of the parties with respect to the subject matter hereof and supersedes all prior oral and written understandings of the parties. 8.3 Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to Purchaser at his address shown on the Company's employment records and to the Company at the address of its principal corporate offices (attention: President) or at such other address as such party may designate by ten (10) days' advance written notice to the other party hereto. -5- 6 8.4 Assignment of Rights; Binding Upon Successors. The Company may assign its rights and delegate its duties under Section 3 hereof. This Agreement shall inure to the benefit of the successors and assigns of the Company and, subject to the restrictions on transfer herein set forth, be binding upon Purchaser, his heirs, executors, administrators, successors and assigns. 8.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California as applied to contracts between California residents to be wholly performed within the State of California. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. PARAVAX, INC. a California corporation By: /s/ ROBERT B. GRIEVE --------------------------------- Title: Vice Chairman ------------------------------ PURCHASER /s/ FRED M. SCHWARZER ------------------------------------ Address 1845 Wallenberg Drive ---------------------------- Fort Collins CO 80526 ---------------------------- ---------------------------- -6- 7 SECURITY AGREEMENT THIS SECURITY AGREEMENT is made as of the 28th day of February, 1995 between Paravax, Inc., a California corporation ("Pledgee" or the "Company"), and Fred M. Schwarzer ("Pledgor"). Recitals Pledgor purchased an aggregate of 177,000 shares of Pledgee's Common Stock (the "Stock") under a Restricted Stock Purchase Agreement dated February 28, 1995 (the "Purchase Agreement"), between Pledgor and Pledgee. As payment for the Stock, Pledgor delivered a promissory note (the "Note") in the total principal amount of $61,950.00. The Note and the obligations hereunder are as set forth in Exhibit A to the Purchase Agreement. NOW THEREFORE, it is agreed as follows: 1. Creation and Description of Security Interest. In order to secure Pledgor's obligation to pay the Note in full, Pledgor, pursuant to the Commercial Code of the State of California, hereby pledges all of the Stock, including those shares purchased with cash (herein sometimes referred to as the "Collateral") represented by certificate number _______. The pledged Stock (together with an executed blank stock assignment for use in transferring all or a portion of the Stock to Pledgee if, as and when required pursuant to this Security Agreement) shall be delivered to the Secretary of Pledgee, or such other person designated by the Company ("Escrow Agent") to be held pursuant to an Escrow Agreement in the form of Exhibit D to the Purchase Agreement (the "Escrow Agreement") as security for the repayment of the Note, and any extensions or renewals thereof. 2. Pledgor's Representations and Covenants. To induce Pledgee to enter into this Security Agreement, Pledgor represents and covenants to Pledgee, its successors and assigns, as follows: (a) Payment of Indebtedness. Pledgor will pay the principal sum of the Note secured hereby, together with interest thereon, at the time and in the manner provided in the Note. (b) Encumbrances. The Stock is not subject to any encumbrances, defenses and liens other than the security interest granted hereunder, and 8 Pledgor will not further encumber the Stock in any manner without the prior written consent of Pledgee. (c) Margin Regulations. In the event that Pledgee's Common Stock becomes margin-listed by the Federal Reserve Board subsequent to the execution of this Security Agreement, and Pledgee is classified as a "lender" within the meaning of the regulations under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G"), Pledgor agrees to cooperate with Pledgee in making any amendment to the Note or providing any additional collateral as may be necessary to comply with such regulations. 3. Voting Rights. During the term of this pledge and so long as all payments of principal and interest are made as they become due under the terms of the Note, Pledgor shall have the right to vote all of the Stock pledged hereunder. 4. Stock Adjustments. In the event that during the term of the pledge any stock dividend, reclassification, readjustment or other changes declared or made in the capital structure of Pledgee, all new, substituted and additional shares or other securities issued by reason of any such change shall be delivered to and held by the Pledgee and Escrow Agent under the terms of this Security Agreement and the Escrow Agreement in the same manner as the Stock originally pledged hereunder. In the event of substitution of such securities, Pledgor and Pledgee shall cooperate and execute such documents as are reasonable so as to provide for the substitution of such Collateral and, upon such substitution, references to "Stock" in this Security Agreement shall include the substituted shares of capital stock of Pledgor as a result thereof. 5. Warrants and Rights. In the event that, during the term of this pledge, subscription warrants or other rights or options shall be issued in connection with the pledged Stock, such rights, warrants and options shall be the property of Pledgor and, if exercised by Pledgor, all new stock or other securities so acquired by Pledgor as it relates to the pledged Stock then held by Escrow Agent shall be immediately delivered to Escrow Agent, to be held under the terms of this Security Agreement in the same manner as the Stock pledged. 6. Default. Pledgor shall be deemed to be in default of the Note and of this Security Agreement in the event: (a) Payment of principal or interest on the Note shall be delinquent for a period of ten (10) days or more; or -2- 9 (b) Pledgor fails to perform any of the covenants set forth in the Purchase Agreement or contained in this Security Agreement for a period of ten (10) days after written notice thereof from Pledgee. In the case of an event of default, as set forth above, Pledgee shall have the right to accelerate payment of the Note upon notice to Pledgor, and Pledgee shall thereafter be entitled to pursue its remedies under the California Commercial Code. 7. Withdrawal or Substitution of Collateral. Until the Note has been paid in full, Pledgor shall not sell, withdraw, pledge, substitute or otherwise dispose of all or any part of the Collateral without the prior written consent of Pledgee. 8. Term. The within pledge of Stock shall continue until the payment of all indebtedness secured hereby, at which time the remaining pledged Stock shall be promptly delivered to Pledgor, subject to the terms of any other agreement between Pledgor and Pledgee. 9. Insolvency. Pledgor agrees that if a bankruptcy or insolvency proceeding is instituted by or against him, or if a receiver is appointed for the property of Pledgor, or if Pledgor makes an assignment for the benefit of creditors, the entire amount unpaid on the Note shall become immediately due and payable, and Pledgee may proceed as provided in the case of default. 10. Escrow Agent Liability. The liability of the Escrow Agent shall be limited as provided in the Escrow Agreement. 11. Miscellaneous. (a) Invalidity of Particular Provisions. Pledgor and Pledgee agree that the enforceability or invalidity of any provision or provisions of this Security Agreement shall not render any other provision or provisions herein contained unenforceable or invalid. (b) Successors or Assigns. Pledgor and Pledgee agree that all of the terms of this Security Agreement shall be binding on their respective successors and assigns, and that the term "Pledgor" and the term "Pledgee" as used herein shall be deemed to include, for all purposes, the respective designees, successors, assigns, heirs, executors and administrators. (c) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California as applied to -3- 10 contracts between California residents to be wholly performed within the State of California. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. "PLEDGEE" Paravax, Inc. a California corporation By: /s/ ROBERT B. GRIEVE -------------------------------------- Title: Vice Chairman ----------------------------------- "PLEDGOR" /s/ FRED M. SCHWARZER ----------------------------------------- Address: 1845 Wallenberg Drive ----------------------------------------- Fort Collins CO 80526 ----------------------------------------- -4- 11 FULL RECOURSE PROMISSORY NOTE $61,950.00 Fort Collins, Colorado February 28, 1995 For value received, the undersigned (the "Maker") promises to pay to Paravax, Inc., a California corporation (the "Company"), or order, at its principal office, the principal sum of Sixty-One Thousand Nine Hundred Fifty Dollars ($61,950.00) with interest thereon at the rate of seven and one-half percent (7 1/2%) per annum, compounded annually, on the unpaid balance of the principal sum. Said principal and interest shall be due as follows: This Note and all accrued interest shall be due and payable on February 28, 2001. Notwithstanding the foregoing, this Note shall be immediately due and payable upon the sale of any of the shares of Common Stock purchased with this Note, to the extent of the proceeds of such sale. All payments are to be made in lawful money of the United States of America. The privilege is reserved to prepay any portion of the Note at any time. Should suit be commenced to collect this Note or any portion thereof, such sum as the Court may deem reasonable shall be added hereto as attorneys' fees. The Maker waives presentment for payment, protest, notice of protest, and notice of non-payment of this Note. This Note is secured by a pledge of certain shares of the Company's Common Stock pursuant to a Security Agreement between the Company and the Maker of even date herewith, and is subject to all the provisions thereof. This Note is also subject to the terms of a Restricted Stock Purchase Agreement between the Company and the Maker of even date herewith. The holder of this Note shall have full recourse against the Maker, and shall not be required to proceed against the collateral security pledged to secure this Note in the event of default. /s/ FRED M. SCHWARZER ------------------------------------ Fred M. Schwarzer 12 ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED, I, _____________________, hereby sell, assign and transfer unto _______________________ ______________________________________________________(_________________) shares of the Common Stock of Paravax, Inc., standing in my name on the books of said corporation represented by Certificate No. _______ herewith and do hereby irrevocably constitute and appoint ________________________________________________________________________________ ______ ________________________ to transfer said stock on the books of the within-named corporation with full power of substitution in the premises. Dated: _______________, 19____. Signature: /s/ FRED M. SCHWARZER ------------------------------------- This Assignment Separate from Certificate was executed in conjunction with the terms of a Restricted Stock Purchase Agreement between the above assignor and Paravax, Inc., dated February 28, 1995. INSTRUCTION: PLEASE DO NOT FILL IN ANY BLANKS OTHER THAN THE SIGNATURE LINE. 13 JOINT ESCROW INSTRUCTIONS February 28, 1995 Secretary Paravax, Inc. 1825 Sharp Point Drive Fort Collins, CO 80525 Dear Sir: As Escrow Agent for both Paravax, Inc., a California corporation (the "Company"), and the undersigned purchaser of stock of the Company (the "Purchaser"), you are hereby authorized and directed to hold the documents delivered to you pursuant to the terms of that certain Restricted Stock Purchase Agreement, dated as of February 28, 1995 ("Agreement"), to which a copy of these Joint Escrow Instructions is attached as Exhibit D, in accordance with the following instructions: 1. Pledge of Stock. Purchaser has pledged an aggregate of 177,000 shares of the Company's Common Stock (the "Stock") to the Company pursuant to a Security Agreement in the form of Exhibit B to the Agreement between Purchaser and the Company of even date herewith (the "Security Agreement") as security for the performance of Purchaser's obligations to the Company under a note (the "Note") delivered to the Company in connection with the purchase of the Stock. This pledge shall continue until the Note has been paid in full. 2. Delivery Upon Default. If an Event of Default shall occur under the Security Agreement or the Note, you shall, within ten (10) days of receipt of a written request of an authorized officer of the Company given to you and Purchaser, deliver the certificate evidencing the Stock and the stock assignments to the Company to enable the Company to exercise its rights as a secured party under the Commercial Code of the State of California. 3. Exercise of Purchase Option. In the event the Company and/or any assignee of the Company (referred to collectively for convenience herein as the "Company") exercises the Purchase Option set forth in the Agreement, the Company shall give to Purchaser and you a written notice specifying the number of shares of stock to be purchased, the purchase price, and the time for a closing hereunder at the principal office of the Company. Purchaser and the Company hereby irrevocably authorize and direct you to close the transaction contemplated by such notice in accordance with the terms of said notice. 14 At the closing, you are directed (a) to date the stock assignments necessary for the transfer in question, (b) to fill in the number of shares being transferred, and (c) to deliver same, together with the certificate evidencing the shares of stock to be transferred, to the Company against the simultaneous delivery to you of the purchase price (by check or by cancellation of any debt owed by Purchaser to the Company) for the number of shares of stock being purchased pursuant to the exercise of the Purchase Option. 4. Deposit of Certificates. Purchaser irrevocably authorizes the Company to deposit with you any certificates evidencing the Stock to be held by you hereunder and any additions and substitutions to said shares as defined in the Agreement and the Security Agreement. Purchaser does hereby irrevocably constitute and appoint you as his attorney-in-fact and agent for the term of this escrow to execute with respect to such securities all documents necessary or appropriate to make such securities negotiable and to complete any transaction herein contemplated, including but not limited to the filing with the Department of Corporations of the State of California of an Application for Consent to Transfer Securities Subject to Legend or Escrow Condition Pursuant to Section 25151 of the California Corporate Securities Law of 1968, if required. Subject to the provisions of this Section 4, Purchaser shall exercise all rights and privileges of a shareholder of the Company while the Stock is held by you. 5. Term. This escrow shall commence upon the date hereof and shall terminate six (6) years and one month from the date hereof or earlier if the Company shall give you notice that the Note has been paid in full and the Shares are no longer subject to the Purchase Option. If at the time of termination of this escrow you should have in your possession any documents, securities, or other property belonging to Purchaser, you shall deliver all of same to Purchaser and shall be discharged of all further obligations hereunder. 6. Provisions Applicable to Escrow Agent. With respect to your performance of your obligations, the following terms shall apply: (a) Your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto. (b) You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties. You shall not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith and in the -2- 15 exercise of your own good judgment, and any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith. (c) You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law, and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree, you shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction. (d) You shall not be liable in any respect on account of the identity, authorities or rights of the parties executing or delivering or purporting to execute or deliver the Agreement or any documents or papers deposited or called for hereunder. (e) You shall be entitled to employ such legal counsel and other experts as you may deem necessary properly to advise you in connection with your obligations hereunder, may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor. (f) Your responsibilities and rights as Escrow Agent hereunder shall pass to any successor Secretary and/or Assistant Secretary of the Company. (g) If you reasonably require other or further instruments in connection with these Joint Escrow Instructions or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments. (h) It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the securities held by you hereunder, you are authorized and directed to retain in your possession without liability to anyone all or any part of said securities until such disputes shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of a court of competent jurisdiction, but you shall be under no duty whatsoever to institute or defend any such proceedings. (i) By signing these Joint Escrow Instructions, you become a party hereto only for the purpose of said Joint Escrow Instructions; you do not become a party to the Agreement or the Security Agreement. -3- 16 7. Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to Purchaser at his address shown on the Company's employment records and to you and the Company at the address of its principal corporate offices (attention: Secretary and attention: President, respectively) or at such other address as such party may designate by ten (10) days prior written notice to the other parties hereto. 8. Successors and Assigns. This instrument shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and permitted assigns. Very truly yours, PARAVAX, INC. By: /s/ ROBERT B. GRIEVE ------------------------------------- Title: Vice Chairman ---------------------------------- PURCHASER: /s/ FRED M. SCHWARZER ---------------------------------------- ESCROW AGENT: /s/ A. BARR DOLAN ---------------------------------------- -4- EX-10.16 25 RESTRICTED STOCK PURCHASE - SEWARD 02-28-95 1 EXHIBIT 10.16 RESTRICTED STOCK PURCHASE AGREEMENT THIS AGREEMENT is made as of the 28th day of February, 1995, by and between Paravax, Inc., a California corporation (the "Company"), and R. Lee Seward (the "Purchaser"). In consideration of the mutual covenants and representations herein set forth, the Company and Purchaser agree as follows: 1. Purchase and Sale of Stock. 1.1 Purchase of Stock. Subject to the terms and conditions of this Agreement, the Company hereby agrees to sell to Purchaser and Purchaser agrees to purchase from the Company at the Closing an aggregate of 120,000 shares of the Company's Common Stock (the "Stock") at a price of $0.35 per share, for an aggregate purchase price of $42,000.00. The shares of Stock shall be purchased by delivery of Purchaser's full recourse promissory note in substantially the form of Exhibit A attached hereto (the "Note"). This purchase is being made upon exercise of a stock purchase right granted under the Company's 1994 Key Executive Stock Plan on November 1, 1994. 1.2 Security for Note. As security for the payment of the Note and any renewal or modification thereof, Purchaser hereby pledges and grants to the Company a security interest in all of the Stock pursuant to a Security Agreement in substantially the form attached hereto as Exhibit B (the "Security Agreement"). As part of this pledge, Purchaser will sign and deliver to the Secretary of the Company ("Escrow Agent") a Stock Assignment duly endorsed (with date and number of shares blank) in the form attached hereto as Exhibit C (the "Assignment"), together with the certificate or certificates evidencing the Stock; the Assignment and the certificate or certificates evidencing the Stock are to be held in escrow by the Escrow Agent pursuant to an Escrow Agreement in substantially the form attached hereto as Exhibit D (the "Escrow Agreement") for use if, as and when required pursuant to the Security Agreement. 2. Closing. The purchase and sale of the Stock shall occur at a Closing to be held on the date hereof (the "Closing Date"). The Closing will take place at the principal office of the Company or at such other place as shall be designated by the Company. At the Closing, Purchaser shall deliver to the Company the Note and the Company will issue the Stock registered in the name of Purchaser. In addition, the Purchaser shall sign and deliver the Security Agreement, the Assignment and the Escrow Agreement. 2 3. Purchase Option. 3.1 Grant of Purchase Option. Beginning on the Closing Date, the Stock shall be subject to the right and option of the Company to repurchase the Stock (the "Purchase Option") as set forth in this Section 3. In the event Purchaser's employment by or consulting relationship with the Company (including a parent or subsidiary of the Company) shall cease for any reason, or no reason, with or without cause, including death, disability or involuntary termination ("Termination"), the Company shall have the right, as provided in Section 3.2 hereof, to purchase from Purchaser or his personal representative, as the case may be, at the purchase price of $0.35 per share (the "Option Price"), all of the Stock that has not been released from the Purchase Option in accordance with the following schedule: Beginning as of October 17, 94, the 120,000 shares of Stock will begin vesting over a four year period as follows: 15,000 of the shares of Stock will be released from the Purchase Option on April 17, 1995, and 2,500 shares of the Stock will be released from the Purchase Option on the 17th day of each month thereafter. 3.2 Exercise of Purchase Option. Within ninety (90) days following Termination, the Company shall notify Purchaser by written notice delivered or mailed as provided in Section 8.3 as to whether it wishes to purchase the Stock pursuant to exercise of the Purchase Option. If the Company (or its assignees) elects to purchase the Stock hereunder, it shall specify a date (which shall not be later than thirty (30) days from the date of the above described notice) and a place for the closing of the transaction. At such closing, the Company (or its assignees) shall tender payment for the Stock and the certificates representing the Stock so purchased shall be cancelled. Purchaser hereby authorizes and directs the Secretary or Transfer Agent of the Company to transfer the Stock as to which the Purchase Option has been exercised from Purchaser to the Company (or its assignees). The Option Price may be payable, at the option of the Company, in cancellation of all or a portion of any outstanding indebtedness of Purchaser to the Company, or by check, or both. 3.3 No Limit on Rights. Nothing in this Agreement shall affect in any manner whatsoever the right or power of the Company, or a parent or subsidiary of the Company, to terminate Purchaser's employment or consulting relationship, for any reason, with or without cause. 3.4 Escrow of Stock. Purchaser agrees at the Closing hereunder, to deliver to and deposit with the Escrow Agent named in the Escrow Agreement of -2- 3 even date and delivered herewith, the certificate or certificates evidencing the Stock and the duly executed Assignments. Such documents are to be held by the Escrow Agent until delivered pursuant to the terms of such Escrow Agreement. Shares of the Stock which are subject to the Purchase Option shall not be transferable by the Purchaser. 3.5 Acceleration on Merger. A dissolution of the Company or a merger or consolidation of the Company in which the Company is not the surviving corporation or in which the shares held by the shareholders of the Company prior to the merger do not represent more than 50% of the outstanding voting securities of the surviving corporation shall cause the Purchase Option to terminate effective immediately prior to the closing of such dissolution, merger or consolidation. 4. Stock Splits, etc. If, from time to time during the term of the Purchase Option as provided in Section 3 hereof, there is any stock dividend, stock split or other change in the character or amount of any of the outstanding securities of the Company or if there is any consolidation, merger or sale of all, or substantially all, of the assets of the Company, then in such event, and subject to Section 3.5, any and all new, substituted or additional securities to which Purchaser is entitled by reason of his ownership of Stock shall be immediately subject to the Purchase Option and be included in the term "Stock" for all purposes of this Agreement with the same force and effect as the shares of Stock presently subject to this Agreement. 5. Legends. All certificates representing any shares of Stock of the Company subject to the provisions of this Agreement shall have endorsed thereon substantially the following legends: (a) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS UPON AND OBLIGATIONS WITH RESPECT TO TRANSFER AND RIGHTS OF REPURCHASE AS SET FORTH IN AN AGREEMENT BETWEEN THE COMPANY AND THE ORIGINAL REGISTERED HOLDER, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY." (b) "THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED." -3- 4 (c) Any legend required under applicable state securities laws. 6. Investment Intent; Covenant. In purchasing the Stock, Purchaser represents to the Company as follows: (a) Purchaser has had an opportunity to discuss the business prospects and business plan of the Company with the officers and directors of the Company. Purchaser has a preexisting personal or business relationship with the Company or one of its officers, directors or controlling persons and/or by reason of his business or financial experience he has the capacity to protect his own interests in connection with the transactions contemplated by this Agreement. Purchaser further acknowledges that the Stock is highly speculative and involves a high degree of risk, and represents and warrants that he is able, without impairing his financial condition, to hold the Stock for an indefinite period of time and suffer a complete loss of his investment therein. (b) Purchaser is acquiring the Stock for investment and not with a view to or for sale in connection with any distribution of said Stock or with any present intention of distributing or selling said Stock and he does not presently have reason to anticipate any change in circumstances or any particular occasion or event which would cause him to sell said Stock. Purchaser understands that the Stock has not been registered under the Securities Act of 1933, as amended, (the "Act") and may not be sold or otherwise disposed of except pursuant to an effective Registration Statement filed under the Act or pursuant to an exemption from the registration requirements of such Act. Purchaser acknowledges that the Company is under no obligation to register the Stock under the Act on his behalf. Purchaser represents and warrants that he understands that the Stock constitutes restricted securities within the meaning of Rule 144 promulgated under the Act; that the exemption from registration under Rule 144 will not be available in any event for at least two years from the date of purchase and payment for the Stock, and even then will not be available unless the terms and conditions of Rule 144 are complied with and will be subject to the limitations on amount set forth therein. (c) Without limiting the representations and warranties set forth above, Purchaser agrees he will not make any transfer of all or any part of the Stock unless (i) there is a Registration Statement under the Act in effect with respect to such transfer and such transfer is made in accordance therewith, or (ii) Purchaser has furnished the Company an opinion of counsel satisfactory to the Company and its counsel to the effect that such transfer will not require registration under the Act. Purchaser agrees that, prior to the closing of the Company's initial public offering registered under the Act, he will not transfer any of such -4- 5 securities in a public offering without the Company's prior consent, even if he is otherwise permitted to transfer them pursuant to Rule 144(k) under the Act. 7. Lock-up Agreement. In the event the Company sells any of its securities in an underwritten initial public offering pursuant to a registration filed pursuant to the Act, Purchaser agrees (but only if each officer and director of the Company also agrees), upon request from the Company or the managing underwriter of such initial or other public offering, not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of, any of the Stock, without the prior written consent of the Company or such underwriter, as the case may be, for such period of time (not to exceed one hundred eighty (180) days) from the effective date of such registration as the Company or the underwriter may specify. Purchaser further agrees that the Company may place stop-transfer notations with the transfer agent of the Stock to enforce this provision. 8. Miscellaneous. 8.1 Further Assurances. The parties agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of this Agreement. 8.2 Entire Agreement. This Agreement, including any exhibits, is the entire agreement of the parties with respect to the subject matter hereof and supersedes all prior oral and written understandings of the parties. 8.3 Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to Purchaser at his address shown on the Company's employment records and to the Company at the address of its principal corporate offices (attention: President) or at such other address as such party may designate by ten (10) days' advance written notice to the other party hereto. 8.4 Assignment of Rights; Binding Upon Successors. The Company may assign its rights and delegate its duties under Section 3 hereof. This Agreement shall inure to the benefit of the successors and assigns of the Company and, subject to the restrictions on transfer herein set forth, be binding upon Purchaser, his heirs, executors, administrators, successors and assigns. -5- 6 8.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California as applied to contracts between California residents to be wholly performed within the State of California. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. PARAVAX, INC. a California corporation By: /s/ FRED M. SCHWARZER ------------------------------------ Title: President -------------------------------- PURCHASER /s/ R. LEE SEWARD --------------------------------------- Address P.O. Box 272119 -------------------------------- Fort Collins CO 80527 -------------------------------- -------------------------------- -6- 7 FULL RECOURSE PROMISSORY NOTE $42,000.00 Fort Collins, Colorado February 28, 1995 For value received, the undersigned (the "Maker") promises to pay to Paravax, Inc., a California corporation (the "Company"), or order, at its principal office, the principal sum of Forty-Two Thousand Dollars ($42,000.00) with interest thereon at the rate of seven and one-half percent (7 1/2%) per annum, compounded annually, on the unpaid balance of the principal sum. Said principal and interest shall be due as follows: This Note and all accrued interest shall be due and payable on February 28, 2001. Notwithstanding the foregoing, this Note shall be immediately due and payable upon the sale of any of the shares of Common Stock purchased with this Note, to the extent of the proceeds of such sale. All payments are to be made in lawful money of the United States of America. The privilege is reserved to prepay any portion of the Note at any time. Should suit be commenced to collect this Note or any portion thereof, such sum as the Court may deem reasonable shall be added hereto as attorneys' fees. The Maker waives presentment for payment, protest, notice of protest, and notice of non-payment of this Note. This Note is secured by a pledge of certain shares of the Company's Common Stock pursuant to a Security Agreement between the Company and the Maker of even date herewith, and is subject to all the provisions thereof. This Note is also subject to the terms of a Restricted Stock Purchase Agreement between the Company and the Maker of even date herewith. The holder of this Note shall have full recourse against the Maker, and shall not be required to proceed against the collateral security pledged to secure this Note in the event of default. /s/ R. LEE SEWARD ----------------------------- R. Lee Seward 8 SECURITY AGREEMENT THIS SECURITY AGREEMENT is made as of the 28th day of February, 1995 between Paravax, Inc., a California corporation ("Pledgee" or the "Company"), and R. Lee Seward ("Pledgor"). Recitals Pledgor purchased an aggregate of 120,000 shares of Pledgee's Common Stock (the "Stock") under a Restricted Stock Purchase Agreement dated February 28, 1995 (the "Purchase Agreement"), between Pledgor and Pledgee. As payment for the Stock, Pledgor delivered a promissory note (the "Note") in the total principal amount of $42,000.00. The Note and the obligations hereunder are as set forth in Exhibit A to the Purchase Agreement. NOW THEREFORE, it is agreed as follows: 1. Creation and Description of Security Interest. In order to secure Pledgor's obligation to pay the Note in full, Pledgor, pursuant to the Commercial Code of the State of California, hereby pledges all of the Stock, including those shares purchased with cash (herein sometimes referred to as the "Collateral") represented by certificate number _______. The pledged Stock (together with an executed blank stock assignment for use in transferring all or a portion of the Stock to Pledgee if, as and when required pursuant to this Security Agreement) shall be delivered to the Secretary of Pledgee, or such other person designated by the Company ("Escrow Agent") to be held pursuant to an Escrow Agreement in the form of Exhibit D to the Purchase Agreement (the "Escrow Agreement") as security for the repayment of the Note, and any extensions or renewals thereof. 2. Pledgor's Representations and Covenants. To induce Pledgee to enter into this Security Agreement, Pledgor represents and covenants to Pledgee, its successors and assigns, as follows: (a) Payment of Indebtedness. Pledgor will pay the principal sum of the Note secured hereby, together with interest thereon, at the time and in the manner provided in the Note. (b) Encumbrances. The Stock is not subject to any encumbrances, defenses and liens other than the security interest granted hereunder, and 9 Pledgor will not further encumber the Stock in any manner without the prior written consent of Pledgee. (c) Margin Regulations. In the event that Pledgee's Common Stock becomes margin-listed by the Federal Reserve Board subsequent to the execution of this Security Agreement, and Pledgee is classified as a "lender" within the meaning of the regulations under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G"), Pledgor agrees to cooperate with Pledgee in making any amendment to the Note or providing any additional collateral as may be necessary to comply with such regulations. 3. Voting Rights. During the term of this pledge and so long as all payments of principal and interest are made as they become due under the terms of the Note, Pledgor shall have the right to vote all of the Stock pledged hereunder. 4. Stock Adjustments. In the event that during the term of the pledge any stock dividend, reclassification, readjustment or other changes declared or made in the capital structure of Pledgee, all new, substituted and additional shares or other securities issued by reason of any such change shall be delivered to and held by the Pledgee and Escrow Agent under the terms of this Security Agreement and the Escrow Agreement in the same manner as the Stock originally pledged hereunder. In the event of substitution of such securities, Pledgor and Pledgee shall cooperate and execute such documents as are reasonable so as to provide for the substitution of such Collateral and, upon such substitution, references to "Stock" in this Security Agreement shall include the substituted shares of capital stock of Pledgor as a result thereof. 5. Warrants and Rights. In the event that, during the term of this pledge, subscription warrants or other rights or options shall be issued in connection with the pledged Stock, such rights, warrants and options shall be the property of Pledgor and, if exercised by Pledgor, all new stock or other securities so acquired by Pledgor as it relates to the pledged Stock then held by Escrow Agent shall be immediately delivered to Escrow Agent, to be held under the terms of this Security Agreement in the same manner as the Stock pledged. 6. Default. Pledgor shall be deemed to be in default of the Note and of this Security Agreement in the event: (a) Payment of principal or interest on the Note shall be delinquent for a period of ten (10) days or more; or -2- 10 (b) Pledgor fails to perform any of the covenants set forth in the Purchase Agreement or contained in this Security Agreement for a period of ten (10) days after written notice thereof from Pledgee. In the case of an event of default, as set forth above, Pledgee shall have the right to accelerate payment of the Note upon notice to Pledgor, and Pledgee shall thereafter be entitled to pursue its remedies under the California Commercial Code. 7. Withdrawal or Substitution of Collateral. Until the Note has been paid in full, Pledgor shall not sell, withdraw, pledge, substitute or otherwise dispose of all or any part of the Collateral without the prior written consent of Pledgee. 8. Term. The within pledge of Stock shall continue until the payment of all indebtedness secured hereby, at which time the remaining pledged Stock shall be promptly delivered to Pledgor, subject to the terms of any other agreement between Pledgor and Pledgee. 9. Insolvency. Pledgor agrees that if a bankruptcy or insolvency proceeding is instituted by or against him, or if a receiver is appointed for the property of Pledgor, or if Pledgor makes an assignment for the benefit of creditors, the entire amount unpaid on the Note shall become immediately due and payable, and Pledgee may proceed as provided in the case of default. 10. Escrow Agent Liability. The liability of the Escrow Agent shall be limited as provided in the Escrow Agreement. 11. Miscellaneous. (a) Invalidity of Particular Provisions. Pledgor and Pledgee agree that the enforceability or invalidity of any provision or provisions of this Security Agreement shall not render any other provision or provisions herein contained unenforceable or invalid. (b) Successors or Assigns. Pledgor and Pledgee agree that all of the terms of this Security Agreement shall be binding on their respective successors and assigns, and that the term "Pledgor" and the term "Pledgee" as used herein shall be deemed to include, for all purposes, the respective designees, successors, assigns, heirs, executors and administrators. (c) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California as applied to -3- 11 contracts between California residents to be wholly performed within the State of California. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. "PLEDGEE" Paravax, Inc. a California corporation By: /s/ FRED M. SCHWARZER ------------------------------------------- Title: President ---------------------------------------- "PLEDGOR" /s/ R. LEE SEWARD ---------------------------------------------- Address: P.O. Box 272119 ---------------------------------------------- Fort Collins CO 80527 ---------------------------------------------- -4- 12 ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED, I, _____________________, hereby sell, assign and transfer unto _________________________________________(_________________) shares of the Common Stock of Paravax, Inc., standing in my name on the books of said corporation represented by Certificate No. _______ herewith and do hereby irrevocably constitute and appoint ___________________________________ ________________________ to transfer said stock on the books of the within-named corporation with full power of substitution in the premises. Dated: _______________, 19____. Signature: /s/ R. LEE SEWARD ------------------------------------- This Assignment Separate from Certificate was executed in conjunction with the terms of a Restricted Stock Purchase Agreement between the above assignor and Paravax, Inc., dated February 28, 1995. INSTRUCTION: PLEASE DO NOT FILL IN ANY BLANKS OTHER THAN THE SIGNATURE LINE. 13 JOINT ESCROW INSTRUCTIONS February 28, 1995 Secretary Paravax, Inc. 1825 Sharp Point Drive Fort Collins, CO 80525 Dear Sir: As Escrow Agent for both Paravax, Inc., a California corporation (the "Company"), and the undersigned purchaser of stock of the Company (the "Purchaser"), you are hereby authorized and directed to hold the documents delivered to you pursuant to the terms of that certain Restricted Stock Purchase Agreement, dated as of February 28, 1995 ("Agreement"), to which a copy of these Joint Escrow Instructions is attached as Exhibit D, in accordance with the following instructions: 1. Pledge of Stock. Purchaser has pledged an aggregate of 120,000 shares of the Company's Common Stock (the "Stock") to the Company pursuant to a Security Agreement in the form of Exhibit B to the Agreement between Purchaser and the Company of even date herewith (the "Security Agreement") as security for the performance of Purchaser's obligations to the Company under a note (the "Note") delivered to the Company in connection with the purchase of the Stock. This pledge shall continue until the Note has been paid in full. 2. Delivery Upon Default. If an Event of Default shall occur under the Security Agreement or the Note, you shall, within ten (10) days of receipt of a written request of an authorized officer of the Company given to you and Purchaser, deliver the certificate evidencing the Stock and the stock assignments to the Company to enable the Company to exercise its rights as a secured party under the Commercial Code of the State of California. 3. Exercise of Purchase Option. In the event the Company and/or any assignee of the Company (referred to collectively for convenience herein as the "Company") exercises the Purchase Option set forth in the Agreement, the Company shall give to Purchaser and you a written notice specifying the number of shares of stock to be purchased, the purchase price, and the time for a closing hereunder at the principal office of the Company. Purchaser and the Company hereby irrevocably authorize and direct you to close the transaction contemplated by such notice in accordance with the terms of said notice. 14 At the closing, you are directed (a) to date the stock assignments necessary for the transfer in question, (b) to fill in the number of shares being transferred, and (c) to deliver same, together with the certificate evidencing the shares of stock to be transferred, to the Company against the simultaneous delivery to you of the purchase price (by check or by cancellation of any debt owed by Purchaser to the Company) for the number of shares of stock being purchased pursuant to the exercise of the Purchase Option. 4. Deposit of Certificates. Purchaser irrevocably authorizes the Company to deposit with you any certificates evidencing the Stock to be held by you hereunder and any additions and substitutions to said shares as defined in the Agreement and the Security Agreement. Purchaser does hereby irrevocably constitute and appoint you as his attorney-in-fact and agent for the term of this escrow to execute with respect to such securities all documents necessary or appropriate to make such securities negotiable and to complete any transaction herein contemplated, including but not limited to the filing with the Department of Corporations of the State of California of an Application for Consent to Transfer Securities Subject to Legend or Escrow Condition Pursuant to Section 25151 of the California Corporate Securities Law of 1968, if required. Subject to the provisions of this Section 4, Purchaser shall exercise all rights and privileges of a shareholder of the Company while the Stock is held by you. 5. Term. This escrow shall commence upon the date hereof and shall terminate six (6) years and one month from the date hereof or earlier if the Company shall give you notice that the Note has been paid in full and the Shares are no longer subject to the Purchase Option. If at the time of termination of this escrow you should have in your possession any documents, securities, or other property belonging to Purchaser, you shall deliver all of same to Purchaser and shall be discharged of all further obligations hereunder. 6. Provisions Applicable to Escrow Agent. With respect to your performance of your obligations, the following terms shall apply: (a) Your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto. (b) You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties. You shall not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith and in the -2- 15 exercise of your own good judgment, and any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith. (c) You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law, and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree, you shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction. (d) You shall not be liable in any respect on account of the identity, authorities or rights of the parties executing or delivering or purporting to execute or deliver the Agreement or any documents or papers deposited or called for hereunder. (e) You shall be entitled to employ such legal counsel and other experts as you may deem necessary properly to advise you in connection with your obligations hereunder, may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor. (f) Your responsibilities and rights as Escrow Agent hereunder shall pass to any successor Secretary and/or Assistant Secretary of the Company. (g) If you reasonably require other or further instruments in connection with these Joint Escrow Instructions or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments. (h) It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the securities held by you hereunder, you are authorized and directed to retain in your possession without liability to anyone all or any part of said securities until such disputes shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of a court of competent jurisdiction, but you shall be under no duty whatsoever to institute or defend any such proceedings. (i) By signing these Joint Escrow Instructions, you become a party hereto only for the purpose of said Joint Escrow Instructions; you do not become a party to the Agreement or the Security Agreement. -3- 16 7. Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to Purchaser at his address shown on the Company's employment records and to you and the Company at the address of its principal corporate offices (attention: Secretary and attention: President, respectively) or at such other address as such party may designate by ten (10) days prior written notice to the other parties hereto. 8. Successors and Assigns. This instrument shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and permitted assigns. Very truly yours, PARAVAX, INC. By: /s/ FRED M. SCHWARZER ------------------------------- Title: President ---------------------------- PURCHASER: /s/ R. LEE SEWARD ---------------------------------- ESCROW AGENT: /s/ A. BARR DOLAN ---------------------------------- -4- EX-10.17 26 RESTRICTED STOCK PURCHASE - POMROY 01-11-97 1 EXHIBIT 10.17 HESKA CORPORATION RESTRICTED STOCK PURCHASE AGREEMENT THIS AGREEMENT is made as of the 11th day of January, 1997, by and between Heska Corporation, a California corporation (the "Company"), and Denis Pomroy (the "Purchaser"). In consideration of the mutual covenants and representations herein set forth, the Company and Purchaser agree as follows: 1. PURCHASE AND SALE OF STOCK. 1.1 PURCHASE OF STOCK. Subject to the terms and conditions of this Agreement, the Company hereby agrees to sell to Purchaser and Purchaser agrees to purchase from the Company at the Closing an aggregate of 25,000 shares of the Company's Common Stock (the "Stock") at a price of $1.20 per share, for an aggregate purchase price of $30,000.00. The shares of Stock shall be purchased by delivery of Purchaser's full recourse promissory note in substantially the form of Exhibit A attached hereto (the "Note"). This purchase is being made upon exercise of a stock purchase right granted under the Company's 1994 Key Executive Stock Plan effective as of October 21, 1996. 1.2 SECURITY FOR NOTE. As security for the payment of the Note and any renewal or modification thereof, Purchaser hereby pledges and grants to the Company a security interest in all of the Stock pursuant to a Security Agreement in substantially the form attached hereto as Exhibit B (the "Security Agreement"). As part of this pledge, Purchaser will sign and deliver to the Secretary of the Company ("Escrow Agent") a Stock Assignment duly endorsed (with date and number of shares blank) in the form attached hereto as Exhibit C (the "Assignment"), together with the certificate or certificates evidencing the Stock; the Assignment and the certificate or certificates evidencing the Stock are to be held in escrow by the Escrow Agent pursuant to an Escrow Agreement in substantially the form attached hereto as Exhibit D (the "Escrow Agreement") for use if, as and when required pursuant to the Security Agreement. 2. CLOSING. The purchase and sale of the Stock shall occur at a Closing to be held on the date hereof (the "Closing Date"). The Closing will take place at the principal office of the Company or at such other place as shall be designated by the Company. At the Closing, Purchaser shall deliver to the Company the Note and the Company will issue the Stock registered in the name of Purchaser. In addition, the Purchaser shall sign and deliver the Security Agreement, the Assignment and the Escrow Agreement. 3. PURCHASE OPTION. 3.1 GRANT OF PURCHASE OPTION. Beginning on the Closing Date, the Stock shall be subject to the right and option of the Company to repurchase the Stock (the "Purchase Option") as set forth in this Section 3. In the event service as a member of the Board of Directors 2 of the Company shall cease for any reason, or no reason, with or without cause, including death, disability or involuntary termination ("Termination"), the Company shall have the right, as provided in Section 3.2 hereof, to purchase from Purchaser or his personal representative, as the case may be, at the purchase price of $1.20 per share (the "Option Price"), all of the Stock that has not been released from the Purchase Option in accordance with the following schedule: (a) Beginning as of October 21, 1996, 24,440 shares of Stock will begin vesting over a four year period as follows: 520 (24,440/47) of the shares of Stock will be released from the Purchase Option on the 21st day of each month beginning after October 1996 and 560 shares of the Stock will be released from the Purchase Option on the 21st day of the 48th month. 3.2 EXERCISE OF PURCHASE OPTION. Within ninety (90) days following Termination, the Company shall notify Purchaser by written notice delivered or mailed as provided in Section 8.3 as to whether it wishes to purchase the Stock pursuant to exercise of the Purchase Option. If the Company (or its assignees) elects to purchase the Stock hereunder, it shall specify a date (which shall not be later than thirty (30) days from the date of the above described notice) and a place for the closing of the transaction. At such closing, the Company (or its assignees) shall tender payment for the Stock and the certificates representing the Stock so purchased shall be canceled. Purchaser hereby authorizes and directs the Secretary or Transfer Agent of the Company to transfer the Stock as to which the Purchase Option has been exercised from Purchaser to the Company (or its assignees). The Option Price may be payable, at the option of the Company, in cancellation of all or a portion of any outstanding indebtedness of Purchaser to the Company, or by check, or both. 3.3 NO LIMIT ON RIGHTS. Nothing in this Agreement shall affect in any manner whatsoever the right or power of the Company, or a parent or subsidiary of the Company, to terminate Purchaser's employment or consulting relationship, for any reason, with or without cause. 3.4 ESCROW OF STOCK. Purchaser agrees at the Closing hereunder, to deliver to and deposit with the Escrow Agent named in the Escrow Agreement of even date and delivered herewith, the certificate or certificates evidencing the Stock and the duly executed Assignments. Such documents are to be held by the Escrow Agent until delivered pursuant to the terms of such Escrow Agreement. Shares of the Stock which are subject to the Purchase Option shall not be transferable by the Purchaser. 3.5 ACCELERATION ON MERGER. A dissolution of the Company or a merger or consolidation of the Company in which the Company is not the surviving corporation or in which the shares held by the shareholders of the Company prior to the merger do not represent more than 50% of the outstanding voting securities of the surviving corporation shall cause the Purchase Option to terminate effective immediately prior to the closing of such dissolution, merger or consolidation. -2- 3 4. STOCK SPLITS, ETC. If, from time to time during the term of the Purchase Option as provided in Section 3 hereof, there is any stock dividend, stock split or other change in the character or amount of any of the outstanding securities of the Company or if there is any consolidation, merger or sale of all, or substantially all, of the assets of the Company, then in such event, and subject to Section 3.5, any and all new, substituted or additional securities to which Purchaser is entitled by reason of his ownership of Stock shall be immediately subject to the Purchase Option and be included in the term "Stock" for all purposes of this Agreement with the same force and effect as the shares of Stock presently subject to this Agreement. 5. LEGENDS. All certificates representing any shares of Stock of the Company subject to the provisions of this Agreement shall have endorsed thereon substantially the following legends: (a) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS UPON AND OBLIGATIONS WITH RESPECT TO TRANSFER AND RIGHTS OF REPURCHASE AS SET FORTH IN AN AGREEMENT BETWEEN THE COMPANY AND THE ORIGINAL REGISTERED HOLDER, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY." (b) "THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED." (c) Any legend required under applicable state or other local securities laws. 6. INVESTMENT INTENT; COVENANT. In purchasing the Stock, Purchaser represents to the Company as follows: (a) Purchaser has had an opportunity to discuss the business prospects and business plan of the Company with the officers and directors of the Company. Purchaser has a preexisting personal or business relationship with the Company or one of its officers, directors or controlling persons and/or by reason of his business or financial experience he has the capacity to protect his own interests in connection with the transactions contemplated by this Agreement. Purchaser further acknowledges that the Stock is highly speculative and involves a high degree of risk, and represents and warrants that he is able, without impairing his financial condition, to hold the Stock for an indefinite period of time and suffer a complete loss of his investment therein. (b) Purchaser is acquiring the Stock for investment and not with a view to or for sale in connection with any distribution of said Stock or with any present intention -3- 4 of distributing or selling said Stock and he does not presently have reason to anticipate any change in circumstances or any particular occasion or event which would cause him to sell said Stock. Purchaser understands that the Stock has not been registered under the Securities Act of 1933, as amended, (the "Act") and may not be sold or otherwise disposed of except pursuant to an effective Registration Statement filed under the Act or pursuant to an exemption from the registration requirements of such Act. Purchaser acknowledges that the Company is under no obligation to register the Stock under the Act on his behalf. Purchaser represents and warrants that he understands that the Stock constitutes restricted securities within the meaning of Rule 144 promulgated under the Act; that the exemption from registration under Rule 144 will not be available in any event for at least two years from the date of purchase and payment for the Stock, and even then will not be available unless the terms and conditions of Rule 144 are complied with and will be subject to the limitations on amount set forth therein. (c) Without limiting the representations and warranties set forth above, Purchaser agrees he will not make any transfer of all or any part of the Stock unless (i) there is a Registration Statement under the Act in effect with respect to such transfer and such transfer is made in accordance therewith, or (ii) Purchaser has furnished the Company an opinion of counsel satisfactory to the Company and its counsel to the effect that such transfer will not require registration under the Act. Purchaser agrees that, prior to the closing of the Company's initial public offering registered under the Act, he will not transfer any of such securities in a public offering without the Company's prior consent, even if he is otherwise permitted to transfer them pursuant to Rule 144(k) under the Act. 7. LOCK-UP AGREEMENT. In the event the Company sells any of its securities in an underwritten initial public offering pursuant to a registration filed pursuant to the Act, Purchaser agrees (but only if each officer and director of the Company also agrees), upon request from the Company or the managing underwriter of such initial or other public offering, not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of, any of the Stock, without the prior written consent of the Company or such underwriter, as the case may be, for such period of time (not to exceed one hundred eighty (180) days) from the effective date of such registration as the Company or the underwriter may specify. Purchaser further agrees that the Company may place stop-transfer notations with the transfer agent of the Stock to enforce this provision. 8. MISCELLANEOUS. 8.1 FURTHER ASSURANCES. The parties agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of this Agreement. 8.2 ENTIRE AGREEMENT. This Agreement, including any exhibits, is the entire agreement of the parties with respect to the subject matter hereof and supersedes all prior oral and written understandings of the parties. -4- 5 8.3 NOTICES. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given by telefax or courier, addressed to Purchaser at his number or address, as the case may be, shown on the Company's records and to the Company at its main telefax number or the address of its principal corporate offices, as the case may be, (attention: President) or at such other number or address as such party may designate by ten (10) days' advance written notice to the other party hereto. 8.4 ASSIGNMENT OF RIGHTS; BINDING UPON SUCCESSORS. The Company may assign its rights and delegate its duties under Section 3 hereof. This Agreement shall inure to the benefit of the successors and assigns of the Company and, subject to the restrictions on transfer herein set forth, be binding upon Purchaser, his heirs, executors, administrators, successors and assigns. 8.5 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Colorado as applied to contracts between Colorado residents to be wholly performed within the State of Colorado. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. HESKA CORPORATION PURCHASER a California corporation /s/ DENIS POMROY By: /s/ DEBORAH E. ROBBINS - ------------------------------------- ---------------------------- Title: V.P. and General Counsel ---------------------------- Address: /s/ c/o Volendam Capital Advisors --------------------------------- Suite 222, 430 Cooper St. --------------------------------- Palo Alto, CA 904301 --------------------------------- -5- 6 FULL RECOURSE PROMISSORY NOTE $30,000.00 Fort Collins, Colorado January 11, 1997 For value received, the undersigned (the "Maker") promises to pay to Heska Corporation, a California corporation (the "Company"), or order, at its principal office, the principal sum of Thirty Thousand Dollars ($30,000.00) with interest thereon at the rate of seven and one-half percent (7 1/2%) per annum, compounded annually, on the unpaid balance of the principal sum. Said principal and interest shall be due as follows: This Note and all accrued interest shall be due and payable on January 11, 2003. Notwithstanding the foregoing, this Note shall be immediately due and payable upon the sale of any of the shares of Common Stock purchased with this Note, to the extent of the proceeds of such sale. All payments are to be made in lawful money of the United States of America. The privilege is reserved to prepay any portion of the Note at any time. Should suit be commenced to collect this Note or any portion thereof, such sum as the Court may deem reasonable shall be added hereto as attorneys' fees. The Maker waives presentment for payment, protest, notice of protest, and notice of non-payment of this Note. This Note is secured by a pledge of certain shares of the Company's Common Stock pursuant to a Security Agreement between the Company and the Maker of even date herewith, and is subject to all the provisions thereof. This Note is also subject to the terms of a Restricted Stock Purchase Agreement between the Company and the Maker of even date herewith. The holder of this Note shall have full recourse against the Maker, and shall not be required to proceed against the collateral security pledged to secure this Note in the event of default. /s/ DENIS POMROY ---------------------------------- Denis Pomroy 7 SECURITY AGREEMENT THIS SECURITY AGREEMENT is made as of the 11th day of January, 1997 between Heska Corporation, a California corporation ("Pledgee" or the "Company"), and Denis Pomroy ("Pledgor"). RECITALS Pledgor purchased an aggregate of 25,000 shares of Pledgee's Common Stock (the "Stock") under a Restricted Stock Purchase Agreement dated January 11, 1997 (the "Purchase Agreement"), between Pledgor and Pledgee. As payment for the Stock, Pledgor delivered a promissory note (the "Note") in the total principal amount of $30,000. The Note and the obligations hereunder are as set forth in Exhibit A to the Purchase Agreement. NOW THEREFORE, it is agreed as follows: 1. CREATION AND DESCRIPTION OF SECURITY INTEREST. In order to secure Pledgor's obligation to pay the Note in full, Pledgor, pursuant to the Commercial Code of the State of Colorado, hereby pledges all of the Stock, including those shares purchased with cash (herein sometimes referred to as the "Collateral") represented by certificate number 72. The pledged Stock (together with an executed blank stock assignment for use in transferring all or a portion of the Stock to Pledgee if, as and when required pursuant to this Security Agreement) shall be delivered to the Secretary of Pledgee, or such other person designated by the Company ("Escrow Agent") to be held pursuant to an Escrow Agreement in the form of Exhibit D to the Purchase Agreement (the "Escrow Agreement") as security for the repayment of the Note, and any extensions or renewals thereof. 2. PLEDGOR'S REPRESENTATIONS AND COVENANTS. To induce Pledgee to enter into this Security Agreement, Pledgor represents and covenants to Pledgee, its successors and assigns, as follows: (a) PAYMENT OF INDEBTEDNESS. Pledgor will pay the principal sum of the Note secured hereby, together with interest thereon, at the time and in the manner provided in the Note. (b) ENCUMBRANCES. The Stock is not subject to any encumbrances, defenses and liens other than the security interest granted hereunder, and Pledgor will not further encumber the Stock in any manner without the prior written consent of Pledgee. (c) MARGIN REGULATIONS. In the event that Pledgee's Common Stock becomes margin-listed by the Federal Reserve Board subsequent to the execution of this Security Agreement, and Pledgee is classified as a "lender" within the meaning of the regulations under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G"), Pledgor agrees to 8 cooperate with Pledgee in making any amendment to the Note or providing any additional collateral as may be necessary to comply with such regulations. 3. VOTING RIGHTS. During the term of this pledge and so long as all payments of principal and interest are made as they become due under the terms of the Note, Pledgor shall have the right to vote all of the Stock pledged hereunder. 4. STOCK ADJUSTMENTS. In the event that during the term of the pledge any stock dividend, reclassification, readjustment or other changes declared or made in the capital structure of Pledgee, all new, substituted and additional shares or other securities issued by reason of any such change shall be delivered to and held by the Pledgee and Escrow Agent under the terms of this Security Agreement and the Escrow Agreement in the same manner as the Stock originally pledged hereunder. In the event of substitution of such securities, Pledgor and Pledgee shall cooperate and execute such documents as are reasonable so as to provide for the substitution of such Collateral and, upon such substitution, references to "Stock" in this Security Agreement shall include the substituted shares of capital stock of Pledgor as a result thereof. 5. WARRANTS AND RIGHTS. In the event that, during the term of this pledge, subscription warrants or other rights or options shall be issued in connection with the pledged Stock, such rights, warrants and options shall be the property of Pledgor and, if exercised by Pledgor, all new stock or other securities so acquired by Pledgor as it relates to the pledged Stock then held by Escrow Agent shall be immediately delivered to Escrow Agent, to be held under the terms of this Security Agreement in the same manner as the Stock pledged. 6. DEFAULT. Pledgor shall be deemed to be in default of the Note and of this Security Agreement in the event: (a) Payment of principal or interest on the Note shall be delinquent for a period of ten (10) days or more; or (b) Pledgor fails to perform any of the covenants set forth in the Purchase Agreement or contained in this Security Agreement for a period of ten (10) days after written notice thereof from Pledgee. In the case of an event of default, as set forth above, Pledgee shall have the right to accelerate payment of the Note upon notice to Pledgor, and Pledgee shall thereafter be entitled to pursue its remedies under the Colorado Commercial Code. 7. WITHDRAWAL OR SUBSTITUTION OF COLLATERAL. Until the Note has been paid in full, Pledgor shall not sell, withdraw, pledge, substitute or otherwise dispose of all or any part of the Collateral without the prior written consent of Pledgee. 8. TERM. The within pledge of Stock shall continue until the payment of all indebtedness secured hereby, at which time the remaining pledged Stock shall be promptly delivered to Pledgor, subject to the terms of any other agreement between Pledgor and Pledgee. -2- 9 9. INSOLVENCY. Pledgor agrees that if a bankruptcy or insolvency proceeding is instituted by or against him, or if a receiver is appointed for the property of Pledgor, or if Pledgor makes an assignment for the benefit of creditors, the entire amount unpaid on the Note shall become immediately due and payable, and Pledgee may proceed as provided in the case of default. 10. ESCROW AGENT LIABILITY. The liability of the Escrow Agent shall be limited as provided in the Escrow Agreement. 11. MISCELLANEOUS. (a) INVALIDITY OF PARTICULAR PROVISIONS. Pledgor and Pledgee agree that the enforceability or invalidity of any provision or provisions of this Security Agreement shall not render any other provision or provisions herein contained unenforceable or invalid. (b) SUCCESSORS OR ASSIGNS. Pledgor and Pledgee agree that all of the terms of this Security Agreement shall be binding on their respective successors and assigns, and that the term "Pledgor" and the term "Pledgee" as used herein shall be deemed to include, for all purposes, the respective designees, successors, assigns, heirs, executors and administrators. (c) GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Colorado as applied to contracts between Colorado residents to be wholly performed within the State of Colorado. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. "PLEDGEE" HESKA CORPORATION "PLEDGOR" a California corporation /s/ DENIS POMROY By: /s/ DEBORAH E. ROBBINS - ------------------------------------- ---------------------------- Title: V.P. and General Counsel ---------------------------- Address: /s/ c/o Volendam Capital Advisors --------------------------------- Suite 222, 430 Cooper St. --------------------------------- Palo Alto, CA 94301 --------------------------------- -3- 10 ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED, I, , hereby sell, assign and -------------------- transfer unto ------------------------------------------------------------ ( ) shares of the Common Stock of Heska Corporation, standing in --- my name on the books of said corporation represented by Certificate No. herewith and do hereby irrevocably constitute and appoint to transfer said stock on the books of the within-named corporation with full power of substitution in the premises. Dated: , 19 . --------------- -- Signature: /s/ DENIS POMROY -------------------------------- This Assignment Separate from Certificate was executed in conjunction with the terms of a Restricted Stock Purchase Agreement between the above assignor and Heska Corporation, dated January , 1997. --- INSTRUCTION: PLEASE DO NOT FILL IN ANY BLANKS OTHER THAN THE SIGNATURE LINE. 11 JOINT ESCROW INSTRUCTIONS January 11, 1997 Secretary Heska Corporation 1825 Sharp Point Drive Fort Collins, CO 80525 Dear Sir or Madam: As Escrow Agent for both Heska Corporation, a California corporation (the "Company"), and the undersigned purchaser of stock of the Company (the "Purchaser"), you are hereby authorized and directed to hold the documents delivered to you pursuant to the terms of that certain Restricted Stock Purchase Agreement, dated as of January 11, 1997 ("Agreement"), to which a copy of these Joint Escrow Instructions is attached as Exhibit D, in accordance with the following instructions: 1. PLEDGE OF STOCK. Purchaser has pledged an aggregate of 25,000 shares of the Company's Common Stock (the "Stock") to the Company pursuant to a Security Agreement in the form of Exhibit B to the Agreement between Purchaser and the Company of even date herewith (the "Security Agreement") as security for the performance of Purchaser's obligations to the Company under a note (the "Note") delivered to the Company in connection with the purchase of the Stock. This pledge shall continue until the Note has been paid in full. 2. DELIVERY UPON DEFAULT. If an Event of Default shall occur under the Security Agreement or the Note, you shall, within ten (10) days of receipt of a written request of an authorized officer of the Company given to you and Purchaser, deliver the certificate evidencing the Stock and the stock assignments to the Company to enable the Company to exercise its rights as a secured party under the Commercial Code of the State of Colorado. 3. EXERCISE OF PURCHASE OPTION. In the event the Company and/or any assignee of the Company (referred to collectively for convenience herein as the "Company") exercises the Purchase Option set forth in the Agreement, the Company shall give to Purchaser and you a written notice specifying the number of shares of stock to be purchased, the purchase price, and the time for a closing hereunder at the principal office of the Company. Purchaser and the Company hereby irrevocably authorize and direct you to close the transaction contemplated by such notice in accordance with the terms of said notice. At the closing, you are directed (a) to date the stock assignments necessary for the transfer in question, (b) to fill in the number of shares being transferred, and (c) to deliver same, together with the certificate evidencing the shares of stock to be transferred, to the Company against the simultaneous delivery to you of the purchase price (by check or by cancellation of any debt owed by Purchaser to the Company) for the number of shares of stock being purchased pursuant to the exercise of the Purchase Option. 12 4. DEPOSIT OF CERTIFICATES. Purchaser irrevocably authorizes the Company to deposit with you any certificates evidencing the Stock to be held by you hereunder and any additions and substitutions to said shares as defined in the Agreement and the Security Agreement. Purchaser does hereby irrevocably constitute and appoint you as his attorney-in-fact and agent for the term of this escrow to execute with respect to such securities all documents necessary or appropriate to make such securities negotiable and to complete any transaction herein contemplated Subject to the provisions of this Section 4, Purchaser shall exercise all rights and privileges of a shareholder of the Company while the Stock is held by you. 5. TERM. This escrow shall commence upon the date hereof and shall terminate six (6) years and one month from the date hereof or earlier if the Company shall give you notice that the Note has been paid in full and the Shares are no longer subject to the Purchase Option. If at the time of termination of this escrow you should have in your possession any documents, securities, or other property belonging to Purchaser, you shall deliver all of same to Purchaser and shall be discharged of all further obligations hereunder. 6. PROVISIONS APPLICABLE TO ESCROW AGENT. With respect to your performance of your obligations, the following terms shall apply: (a) Your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto. (b) You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties. You shall not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith and in the exercise of your own good judgment, and any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith. (c) You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law, and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree, you shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction. (d) You shall not be liable in any respect on account of the identity, authorities or rights of the parties executing or delivering or purporting to execute or deliver the Agreement or any documents or papers deposited or called for hereunder. -2- 13 (e) You shall be entitled to employ such legal counsel and other experts as you may deem necessary properly to advise you in connection with your obligations hereunder, may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor. (f) Your responsibilities and rights as Escrow Agent hereunder shall pass to any successor Secretary and/or Assistant Secretary of the Company. (g) If you reasonably require other or further instruments in connection with these Joint Escrow Instructions or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments. (h) It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the securities held by you hereunder, you are authorized and directed to retain in your possession without liability to anyone all or any part of said securities until such disputes shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of a court of competent jurisdiction, but you shall be under no duty whatsoever to institute or defend any such proceedings. (i) By signing these Joint Escrow Instructions, you become a party hereto only for the purpose of said Joint Escrow Instructions; you do not become a party to the Agreement or the Security Agreement. 7. NOTICES. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or by telefax or courier, addressed to Purchaser at his number or address as the case may be, shown on the Company's records and to the Company at its main telefax number or the address of its principal corporate offices, as the case may be, (attention: Secretary and attention: President, respectively) or at such other number or address as such party may designate by ten (10) days prior written notice to the other parties hereto. 8. SUCCESSORS AND ASSIGNS. This instrument shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and permitted assigns. HESKA CORPORATION PURCHASER a California corporation /s/ DENIS POMROY By: /s/ DEBORAH E. ROBBINS - -------------------------------- ---------------------------- Title: VP and General Counsel ------------------------- ESCROW AGENT /s/ DEBORAH E. ROBBINS - ------------------------------------- -3- EX-10.18 27 FORM OF INDEMNITY AGREEMENT 1 EXHIBIT 10.18 INDEMNIFICATION AGREEMENT THIS INDEMNIFICATION AGREEMENT is made and entered into as to this ___th day of _________, 199__ ("Agreement"), by and between Heska Corporation (as successor by name change to Heska Merger Corporation), a Delaware corporation (the "Company"), and ________________________, (the "Indemnitee"), with reference to the following facts: A. The Company desires the benefits of having Indemnitee serve as an officer and/or director secure in the knowledge that any expenses, liability and/or losses incurred by him in his good faith service to the Company will be borne by the Company or its successors and assigns; B. Indemnitee is willing to serve in his position with the Company only on the condition that he be indemnified for such expenses, liability and/or losses; C. The Company and Indemnitee recognize the increasing difficulty in obtaining liability insurance for directors, officers and agents of a corporation at reasonable cost; D. The Company and Indemnitee recognize that there has been an increase in litigation against corporate directors, officers and agents; and E. The Company's Restated Certificate of Incorporation and Bylaws allow the Company to indemnify its directors, officers and agents to the maximum extent not prohibited under Delaware law. NOW, THEREFORE, the parties hereby agree as follows: 1. Definitions. For purposes of this Agreement: 1.1 "Agent" shall mean any person who (a) is or was a director, officer, employee or agent of the Company or a subsidiary of the Company whether serving in such capacity or as a director, officer, employee, agent, fiduciary or other official of another corporation, joint venture, trust or other enterprise at the request of, for the convenience of, or to represent the interests of the Company or a subsidiary of the Company or (b) was a director, officer, employee or agent of Heska Corporation, a California corporation and the predecessor by merger to the Company (the "Predecessor Corporation") whether serving in such capacity or as a director, officer, employee, agent, fiduciary or other official of another corporation, joint venture, trust or other enterprise at the request of, for the convenience of, or to represent the interests of such Predecessor Corporation. 2 1.2 "Change of Control" shall mean the occurrence of any of the following events after the date of this Agreement: (a) A change in the composition of the board of directors of the Company (the "Board"), as a result of which fewer than two-thirds of the incumbent directors are directors who either (a) had been directors of the Company 24 months prior to such change or (b) were elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the directors who had been directors of the Company 24 months prior to such change and who were still in office at the time of the election or nomination; or (b) Any "person" (as such term is used in sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), as amended) through the acquisition or aggregation of securities is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 20 percent or more of the combined voting power of the Company's then outstanding securities ordinarily (and apart from rights accruing under special circumstances) having the right to vote at elections of directors (the "Capital Stock"); provided, however, that any change in ownership of the Company's securities by any person resulting solely from a reduction in the aggregate number of outstanding shares of Capital Stock, and any decrease thereafter in such person's ownership of securities, shall be disregarded until such person increases in any manner, directly or indirectly, such person's beneficial ownership of any securities of the Company; and provided further that, with respect to Charter Ventures and Charter Ventures II, L.P., Volendam Investeringen N.V. and Novartis AG (formerly known as Ciba-Geigy Limited), each of whom, through the acquisition or aggregation of securities, is or was a beneficial owner on the date hereof, directly or indirectly, of securities of the Company representing 20 percent or more of the Company's Capital Stock on the date hereof, a "Change of Control" shall occur when any of such "persons" is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing [25] percent (rather than 20 percent) or more of the combined voting power of the Company's Capital Stock. 1.3 "Disinterested Director" shall mean a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is being sought by Indemnitee. -2- 3 1.4 "Expenses" shall be broadly construed and shall include, without limitation, (a) all direct and indirect costs incurred, paid or accrued, (b) all attorneys' fees, retainers, court costs, transcripts, fees of experts, witness fees, travel expenses, food and lodging expenses while traveling, duplicating costs, printing and binding costs, telephone charges, postage, delivery service, freight or other transportation fees and expenses, (c) all other disbursements and out-of-pocket expenses, (d) amounts paid in settlement, to the extent not prohibited by Delaware Law, and (e) reasonable compensation for time spent by Indemnitee for which he is otherwise not compensated by the Company or any third party, actually and reasonably incurred in connection with or arising out of a Proceeding, including a Proceeding by Indemnitee to establish or enforce a right to indemnification under this Agreement, applicable law or otherwise. 1.5 "Independent Counsel" shall mean a law firm or a member of a law firm that neither is presently nor in the past five years has been retained to represent: (a) the Company, an affiliate of the Company or Indemnitee in any matter material to either party or (b) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term "Independent Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee's right to indemnification under this Agreement. 1.6 "Liabilities" shall mean liabilities of any type whatsoever, including, but not limited to, judgments or fines, ERISA or other excise taxes and penalties, and amounts paid in settlement (including all interest, assessments or other charges paid or payable in connection with any of the foregoing) actually and reasonably incurred by Indemnitee in connection with a Proceeding. 1.7 "Delaware Law" means the Delaware General Corporation Law as amended and in effect from time to time or any successor or other statutes of Delaware having similar import and effect. 1.8 "Proceeding" shall mean any pending, threatened or completed action, hearing, suit or any other proceeding, whether civil, criminal, arbitrative, administrative, investigative or any alternative dispute resolution mechanism, including without limitation any such Proceeding brought by or in the right of the Company. 2. Employment Rights and Duties. Subject to any other obligations imposed on either of the parties by contract or by law, and with the understanding that this Agreement is not intended to confer employment rights on either party which they did not possess on the date of its execution, Indemnitee agrees to serve as a director or officer so long as he is duly appointed or elected and qualified in accordance with the applicable provisions of the Restated Certificate of Incorporation (the "Certificate") and Bylaws (the "Bylaws") of the Company or any subsidiary -3- 4 of the Company and until such time as he resigns or fails to stand for election or until his employment terminates. Indemnitee may from time to time also perform other services at the request, or for the convenience of, or otherwise benefiting the Company. Indemnitee may at any time and for any reason resign or be removed from such position (subject to any other contractual obligation or other obligation imposed by operation of law), in which event the Company shall have no obligation under this Agreement to continue Indemnitee in any such position. 2.1 Directors' and Officers' Insurance. (a) The Company hereby covenants and agrees that, so long as Indemnitee shall continue to serve as a director or officer of the Company and thereafter so long as Indemnitee shall be subject to any possible Proceeding, the Company, subject to Section 2(c), shall maintain directors' and officers' insurance in full force and effect. (b) In all policies of directors' and officers' insurance, Indemnitee shall be named as an insured in such a manner as to provide Indemnitee the same rights and benefits, subject to the same limitations, as are accorded to the Company's directors or officers most favorably insured by such policy. (c) The Company shall have no obligation to maintain directors' and officers' insurance if the Company determines in good faith that such insurance is not reasonably available, the premium costs for such insurance are disproportionate to the amount of coverage provided, or the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit. 3. Indemnification. The Company shall indemnify Indemnitee to the fullest extent not prohibited by Delaware Law and the provisions of the Certificate and Bylaws of the Company in effect on the date hereof and as the Delaware Law, the Certificate and Bylaws may from time to time be amended (but, in the case of any such amendment, only to the extent such amendment permits the Company to provide broader indemnification rights than Delaware Law, the Certificate and Bylaws permitted the Company to provide before such amendment). The right to indemnification conferred in the Bylaws shall be presumed to have been relied upon by Indemnitee in serving or continuing to serve the Company as a director or officer and shall be enforceable as a contract right. Without in any way diminishing the scope of the indemnification provided by the Bylaws and this Section 3, the Company will indemnify Indemnitee if and whenever he is or was a witness, party or is threatened to be made a witness or a party to any Proceeding, by reason of the fact that he is or was an Agent or by reason of anything done or not done, or alleged to have been done or not done, by him in such capacity, against all Expenses and Liabilities actually and reasonably incurred by Indemnitee or on his behalf in connection with the investigation, defense, settlement or appeal of such Proceeding. In addition to, and not as -4- 5 a limitation of, the foregoing, the rights of indemnification of Indemnitee provided under this Agreement shall include those rights set forth in Sections 4, 5 and 6 below. 4. Payment of Expenses. 4.1 All Expenses incurred by or on behalf of Indemnitee shall be advanced by the Company to Indemnitee within 20 days after the receipt by the Company of a written request for such advance which may be made from time to time, whether prior to or after final disposition of a Proceeding (unless there has been a final determination by a court of competent jurisdiction that Indemnitee is not entitled to be indemnified for such Expenses). Indemnitee's entitlement to advancement of Expenses shall include those incurred in connection with any Proceeding by Indemnitee seeking a determination, an adjudication or an award in arbitration pursuant to this Agreement. The requests shall reasonably evidence the Expenses incurred by Indemnitee in connection therewith. Indemnitee hereby undertakes to repay the amounts advanced if it shall ultimately be determined that Indemnitee is not entitled to be indemnified pursuant to the terms of this Agreement. 4.2 Notwithstanding any other provision in this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any Proceeding, Indemnitee shall be indemnified against all Expenses and Liabilities actually and reasonably incurred by Indemnitee in connection therewith. 5. Procedure for Determination of Entitlement to Indemnification. 5.1 Whenever Indemnitee believes that he is entitled to indemnification pursuant to this Agreement, Indemnitee shall submit a written request for indemnification (the "Indemnification Request") to the Company to the attention of the President with a copy to the Secretary. This request shall include documentation or information which is necessary for the determination of entitlement to indemnification and which is reasonably available to Indemnitee. Determination of Indemnitee's entitlement to indemnification shall be made no later than 60 days after receipt of the Indemnification Request. The President or the Secretary shall, promptly upon receipt of Indemnitee's request for indemnification, advise the Board in writing that Indemnitee has made such request for indemnification. 5.2 The Indemnification Request shall set forth Indemnitee's selection of which of the following forums shall determine whether Indemnitee is entitled to indemnification: (1) A majority vote of Directors who are not parties to the action with respect to which indemnification is sought, even though less than a quorum. -5- 6 (2) A written opinion of an Independent Counsel (provided no such Directors in (1) above or if such Directors in (1) above so direct). (3) A majority vote of the stockholders at a meeting at which a quorum is present, with the shares owned by the person to be indemnified not being entitled to vote thereon. (4) The court in which the Proceeding is or was pending upon application by Indemnitee. The Company agrees to bear any and all costs and expenses incurred by Indemnitee or the Company in connection with the determination of Indemnitee's entitlement to indemnification by any of the above forums. 6. Presumptions and Effect of Certain Proceedings. No initial finding by the Board, its counsel, Independent Counsel, arbitrators or the stockholders shall be effective to deprive Indemnitee of the protection of this indemnity, nor shall a court or other forum to which Indemnitee may apply for enforcement of this indemnity give any weight to any such adverse finding in deciding any issue before it. Upon making a request for indemnification, Indemnitee shall be presumed to be entitled to indemnification under this Agreement and the Company shall have the burden of proof to overcome that presumption in reaching any contrary determination. The termination of any Proceeding by judgment, order, settlement, arbitration award or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, (a) adversely affect the rights of Indemnitee to indemnification except as indemnification may be expressly prohibited under this Agreement, (b) create a presumption that Indemnitee did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company or (c) with respect to any criminal action or proceeding, create a presumption that Indemnitee had reasonable cause to believe that his conduct was unlawful. 7. Remedies of Indemnitee in Cases of Determination not to Indemnify or to Advance Expenses. 7.1 In the event that (a) an initial determination is made that Indemnitee is not entitled to indemnification, (b) advances for Expenses are not made when and as required by this Agreement, (c) payment has not been timely made following a determination of entitlement to indemnification pursuant to this Agreement or (d) Indemnitee otherwise seeks enforcement of this Agreement, Indemnitee shall be entitled to a final adjudication in an appropriate court of the State of Delaware of his entitlement to such indemnification or advance. Alternatively, Indemnitee at his option may seek an award in arbitration. If the parties are unable to agree on an arbitrator, the parties shall provide Judicial Arbitration & Mediation Services, Inc. ("JAMS") with a statement of the nature of the dispute and the desired qualifications of the arbitrator. JAMS will then provide a list of three available arbitrators. Each party may strike one of the -6- 7 names on the list, and the remaining person will serve as the arbitrator. If both parties strike the same person, JAMS will select the arbitrator from the other two names. The arbitration award shall be made within 90 days following the demand for arbitration. Except as set forth herein, the provisions of Delaware law shall apply to any such arbitration. The Company shall not oppose Indemnitee's right to seek any such adjudication or arbitration award. In any such proceeding or arbitration Indemnitee shall be presumed to be entitled to indemnification under this Agreement and the Company shall have the burden of proof to overcome that presumption. 7.2 An initial determination, in whole or in part, that Indemnitee is not entitled to indemnification shall create no presumption in any judicial proceeding or arbitration that Indemnitee has not met the applicable standard of conduct for, or is otherwise not entitled to, indemnification. 7.3 If an initial determination is made or deemed to have been made pursuant to the terms of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in the absence of (a) a misrepresentation of a material fact by Indemnitee in the request for indemnification or (b) a specific finding (which has become final) by a court of competent jurisdiction that all or any part of such indemnification is expressly prohibited by law. 7.4 The Company and Indemnitee agree herein that a monetary remedy for breach of this Agreement, at some later date, will be inadequate, impracticable and difficult of proof, and further agree that such breach would cause Indemnitee irreparable harm. Accordingly, the Company and Indemnitee agree that Indemnitee shall be entitled to temporary and permanent injunctive relief to enforce this Agreement without the necessity of proving actual damages or irreparable harm. The Company and Indemnitee further agree that Indemnitee shall be entitled to such injunctive relief, including temporary restraining orders, preliminary injunctions and permanent injunctions, without the necessity of posting bond or other undertaking in connection therewith. Any such requirement of bond or undertaking is hereby waived by the Company, and the Company acknowledges that in the absence of such a waiver, a bond or undertaking may be required by the court. 7.5 The Company shall be precluded from asserting that the procedures and presumptions of this Agreement are not valid, binding and enforceable. The Company shall stipulate in any such court or before any such arbitrator that the Company is bound by all the provisions of this Agreement and is precluded from making any assertion to the contrary. -7- 8 7.6 Expenses incurred by Indemnitee in connection with his request for indemnification under, seeking enforcement of or to recover damages for breach of this Agreement shall be borne and advanced by the Company. 8. Other Rights to Indemnification. Indemnitee's rights of indemnification and advancement of expenses provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may now or in the future be entitled under applicable law, the Certificate, the Bylaws, an employment agreement, vote of stockholders or Disinterested Directors, insurance or other financial arrangements or otherwise. 9. Limitations on Indemnification. No indemnification pursuant to Section 3 shall be paid by the Company nor shall Expenses be advanced pursuant to Section 3: 9.1 Insurance. To the extent that Indemnitee is reimbursed pursuant to such insurance as may exist for Indemnitee's benefit. Notwithstanding the availability of such insurance, Indemnitee also may claim indemnification from the Company pursuant to this Agreement by assigning to the Company any claims under such insurance to the extent Indemnitee is paid by the Company. Indemnitee shall reimburse the Company for any sums he receives as indemnification from other sources to the extent of any amount paid to him for that purpose by the Company; 9.2 Section 16(b). On account and to the extent of any wholly or partially successful claim against Indemnitee for an accounting of profits made from the purchase or sale by Indemnitee of securities of the Company pursuant to the provisions of Section 16(b) or the Securities Exchange Act of 1934, as amended, and amendments thereto or similar provisions of any federal, state or local statutory law; or 9.3 Indemnitee's Proceedings. Except as otherwise provided in this Agreement, in connection with all or any part of a Proceeding which is initiated or maintained by or on behalf of Indemnitee, or any Proceeding by Indemnitee against the Company or its directors, officers, employees or other agents, unless (a) such indemnification is expressly required to be made by Delaware Law, (b) the Proceeding was authorized by a majority of the Disinterested Directors or (c) such indemnification is provided by the Company, in its sole discretion, pursuant to the powers vested in the Company under Delaware Law. 10. Duration and Scope of Agreement; Binding Effect. This Agreement shall continue so long as Indemnitee shall be subject to any possible Proceeding subject to indemnification by reason of the fact that he is or was an Agent and shall be applicable to Proceedings commenced or continued after execution of this Agreement, whether arising from acts or omissions occurring before or after such execution. This Agreement shall be binding upon the Company and its successors and assigns (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company) -8- 9 and shall inure to the benefit of Indemnitee and his spouse, assigns, heirs, devisees, executors, administrators and other legal representatives. 11. Notice by Indemnitee and Defense of Claims. Indemnitee agrees promptly to notify the Company in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any matter which may be subject to indemnification hereunder, whether civil, criminal, arbitrative, administrative or investigative; but the omission so to notify the Company will not relieve it from any liability which it may have to Indemnitee if such omission does not actually prejudice the Company's rights and, if such omission does prejudice the Company's rights, it will relieve the Company from liability only to the extent of such prejudice; nor will such omission relieve the Company from any liability which it may have to Indemnitee otherwise than under this Agreement. With respect to any Proceeding: (a) The Company will be entitled to participate therein at its own expense; (b) Except as otherwise provided below, to the extent that it may wish, the Company jointly with any other indemnifying party similarly notified will be entitled to assume the defense thereof, with counsel reasonably satisfactory to Indemnitee. After notice from the Company to Indemnitee of its election so to assume the defense thereof and the assumption of such defense, the Company will not be liable to Indemnitee under this Agreement for any attorney fees or costs subsequently incurred by Indemnitee in connection with Indemnitee's defense except as otherwise provided below. Indemnitee shall have the right to employ his counsel in such Proceeding but the fees and expenses of such counsel incurred after notice from the Company of its assumption of the defense thereof and the assumption of such defense shall be at the expense of Indemnitee unless (i) the employment of counsel by Indemnitee has been authorized by the Company, (ii) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of the defense of such action or that the Company's counsel may not be adequately representing Indemnitee or (iii) the Company shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of counsel shall be at the expense of the Company; and (c) The Company shall not be liable to indemnify Indemnitee under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent. The Company shall not settle any action or claim in any manner without Indemnitee's written consent. Neither the -9- 10 Company nor Indemnitee will unreasonably withhold its or his consent to any proposed settlement. 11.1 Contribution. In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in this Agreement is held by a court of competent jurisdiction to be unavailable to Indemnitee in whole or part, the Company shall, in such an event, after taking into account, among other things, contributions by other directors and officers of the Company pursuant to indemnification agreements or otherwise, and, in the absence of personal enrichment, acts of intentional fraud or dishonesty or criminal conduct on the part of Indemnitee, contribute to the payment of Indemnitee's losses to the extent that, after other contributions are taken into account, such losses exceed: (i) in the case of a director of the Company or any of its subsidiaries who is not an officer of the Company or any of such subsidiaries, the amount of fees paid to the director for serving as a director during the 12 months preceding the commencement of the Proceeding; or (ii) in the case of a director of the Company or any of its subsidiaries who is also an officer of the Company or any of such subsidiaries, the amount set forth in clause (i) plus 5% of the aggregate cash compensation paid to said director for service in such office(s) during the 12 months preceding the commencement of the Proceeding; or (iii) in the case of an officer of the Corporation or any of its subsidiaries, 5% of the aggregate cash compensation paid to such officer for service in such office(s) during the 12 months preceding the commencement of such Proceeding. 12. Establishment of Trust. Upon a Change of Control of the Company, the Company or its successor or assign shall establish a Trust (the "Trust") for the benefit of the Indemnitee, the trustee (the "Trustee") of which shall be chosen by the Company and which is reasonably acceptable to the Indemnitee. Thereafter, from time to time, upon receipt of a written request from Indemnitee, the Company shall fund the Trust in amounts sufficient to satisfy any and all Liabilities and Expenses reasonably anticipated at the time of such request for which the Company may indemnify Indemnitee hereunder. The amount or amounts to be deposited in the Trust pursuant to the foregoing funding obligation shall be determined by mutual agreement of the Indemnitee and the Company or, if the Company and the Indemnitee are unable to reach such an agreement, by Independent Counsel selected jointly by the Company and the Indemnitee. The terms of the Trust shall provide that except upon the consent of the Indemnitee and the Company, (i) the Trust shall not be revoked or the principal thereof invaded, without the written consent of the Indemnitee, (ii) the Trustee shall advance to the Indemnitee, within 20 days of a request by the Indemnitee, any and all Expenses, the Indemnitee hereby agreeing to reimburse the Trustee of the Trust for all Expenses so advanced if a final determination is made by a court in a final adjudication from which there is no further right of appeal that the Indemnitee is not entitled to be indemnified under this Agreement, (iii) the Trust shall continue to be funded by the Company in accordance with the funding obligations set forth in this Section, (iv) the Trustee shall promptly pay to the Indemnitee any amounts to which the Indemnitee shall be entitled pursuant to this Agreement, and (v) all unexpended funds in the Trust shall revert to the Company upon a final determination by Independent Counsel selected by Indemnitee or a court -10- 11 of competent jurisdiction that Indemnitee has been fully indemnified with respect to the Proceeding giving rise to the funding of the Trust under the terms of this Agreement. 13. Miscellaneous Provisions. 13.1 Severability; Partial Indemnity. If any provision or provisions of this Agreement (or any portion thereof) shall be held by a court of competent jurisdiction to be invalid, illegal or unenforceable for any reason whatever: (a) such provision shall be limited or modified in its application to the minimum extent necessary to avoid the invalidity, illegality or unenforceability of such provision; (b) the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby; and (c) to the fullest extent possible, the provisions of this Agreement shall be construed so as to give effect to the intent manifested by the provision (or portion thereof) held invalid, illegal or unenforceable. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of any Expenses or Liabilities of any type whatsoever incurred by him in the investigation, defense, settlement or appeal of a Proceeding but not entitled to all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for such total amount except as to the portion thereof for which it has been determined pursuant to Section 5 hereof that Indemnitee is not entitled. 13.2 Identical Counterparts. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement. 13.3 Interpretation of Agreement. It is understood that the parties hereto intend this Agreement to be interpreted and enforced so as to provide indemnification to Indemnitee to the fullest extent not now or hereafter prohibited by law. 13.4 Headings. The headings of the Sections and paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof. 13.5 Pronouns. Use of the masculine pronoun shall be deemed to include use of the feminine pronoun where appropriate. 13.6 Modification and Waiver. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties to this Agreement. No waiver of any provision of this Agreement shall be deemed to constitute a waiver of any of the provisions hereof (whether -11- 12 or not similar) nor shall such waiver constitute a continuing waiver. No waiver of any provision of this Agreement shall be effective unless executed in writing. 13.7 Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if (i) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed or (ii) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed: (a) If to Indemnitee, to: [Name of Director/Officer] c/o HESKA CORPORATION 1825 Sharp Point Drive Fort Collins, Colorado 80525 Telephone: (970) 493-7272 Telefax: (____) __________ (b) If to the Company to: HESKA CORPORATION 1825 Sharp Point Drive Fort Collins, Colorado 80525 Attention: President and Chief Executive Officer Telephone: (970) 493-7272 Telefax: (970) 493-7333 with a copy to: HESKA CORPORATION 1825 Sharp Point Drive Fort Collins, Colorado 80525 Attention: Secretary Telephone: (970) 493-7272 Telefax: (970) 493-7333 or to such other address as may have been furnished to Indemnitee by the Company or to the Company by Indemnitee, as the case may be. 13.8 Governing Law. The parties agree that this Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, as applied to contracts between Delaware residents entered into and to be performed entirely within Delaware. -12- 13 13.9 Consent to Jurisdiction. The Company and Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of Delaware for all purposes in connection with any action or proceeding which arises out of or relates to this agreement and agree that any action instituted under this agreement shall be brought only in the state courts of the State of Delaware. 13.10 Entire Agreement. This Agreement represents the entire agreement between the parties hereto, and there are no other agreements, contracts or understanding between the parties hereto with respect to the subject matter of this Agreement, except as specifically referred to herein or as provided in Sections 8 and 2.1 hereof. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written. HESKA CORPORATION By: -------------------------------- Name: Title [Name of Indemnitee] ------------------------------------- -13- EX-10.19 28 1997 INCENTIVE STOCK PLAN OF REGISTRANT 1 EXHIBIT 10.21 HESKA CORPORATION 1997 EMPLOYEE STOCK PURCHASE PLAN (AS ADOPTED EFFECTIVE _______ __, 1997) 2 TABLE OF CONTENTS
Page ---- SECTION 1. PURPOSE OF THE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 2. ADMINISTRATION OF THE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 (a) Committee Composition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 (b) Committee Responsibilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 3. ENROLLMENT AND PARTICIPATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 (a) Offering Periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 (b) Accumulation Periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 (c) Enrollment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 (d) Duration of Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (e) Applicable Offering Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 SECTION 4. EMPLOYEE CONTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (a) Frequency of Payroll Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (b) Amount of Payroll Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (c) Changing Withholding Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 (d) Discontinuing Payroll Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 (e) Limit on Number of Elections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 SECTION 5. WITHDRAWAL FROM THE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 (a) Withdrawal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 (b) Re-Enrollment After Withdrawal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 SECTION 6. CHANGE IN EMPLOYMENT STATUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 (a) Termination of Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 (b) Leave of Absence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 (c) Death . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 SECTION 7. PLAN ACCOUNTS AND PURCHASE OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 (a) Plan Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 (b) Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 (c) Number of Shares Purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (d) Available Shares Insufficient . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (e) Issuance of Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (f) Unused Cash Balances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 SECTION 8. LIMITATIONS ON STOCK OWNERSHIP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (a) Five Percent Limit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (b) $25,000 Limit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
i 3 SECTION 9. RIGHTS NOT TRANSFERABLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 SECTION 10. NO RIGHTS AS AN EMPLOYEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 SECTION 11. NO RIGHTS AS A STOCKHOLDER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 SECTION 12. STOCK OFFERED UNDER THE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 (a) Authorized Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 (b) Anti-Dilution Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 (c) Reorganizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 13. AMENDMENT OR DISCONTINUANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 14. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 15. EXECUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ii 4 HESKA CORPORATION 1997 EMPLOYEE STOCK PURCHASE PLAN SECTION 1. PURPOSE OF THE PLAN. The Plan was adopted by the Board on _______ __, 1997, effective as of the date of the IPO. The purpose of the Plan is to provide Eligible Employees with an opportunity to increase their proprietary interest in the success of the Company by purchasing Stock from the Company on favorable terms and to pay for such purchases through payroll deductions. The Plan is intended to qualify under section 423 of the Code. SECTION 2. ADMINISTRATION OF THE PLAN. (a) COMMITTEE COMPOSITION. The Plan shall be administered by the Committee. The Committee shall consist exclusively of one or more directors of the Company, who shall be appointed by the Board. (b) COMMITTEE RESPONSIBILITIES. The Committee shall interpret the Plan and make all other policy decisions relating to the operation of the Plan. The Committee may adopt such rules, guidelines and forms as it deems appropriate to implement the Plan. The Committee's determinations under the Plan shall be final and binding on all persons. SECTION 3. ENROLLMENT AND PARTICIPATION. (a) OFFERING PERIODS. While the Plan is in effect, two overlapping Offering Periods shall commence in each calendar year. The Offering Periods shall consist of the 24-month periods commencing on each January 1 and July 1, except that the first Offering Period shall commence on the date of the IPO and end on June 30, 1999. (b) ACCUMULATION PERIODS. While the Plan is in effect, two Accumulation Periods shall commence in each calendar year. The Accumulation Periods shall consist of the six-month periods commencing on each January 1 and July 1, except that the first Accumulation Period shall commence on the date of the IPO and end on December 31, 1997. (c) ENROLLMENT. Any individual who, on the day preceding the first day of an Offering Period, qualifies as an Eligible Employee may elect to become a Participant in the Plan for such Offering Period by executing the enrollment form prescribed for this purpose by the Committee. The enrollment form shall be filed with the Company at the prescribed location not later than 10 days prior to the commencement of such Offering Period. (d) DURATION OF PARTICIPATION. Once enrolled in the Plan, a Participant shall continue to participate in the Plan until he or she ceases to be an Eligible Employee, withdraws from the Plan under Section 5(a) or reaches the end of the Accumulation Period in which his or 5 her employee contributions were discontinued under Section 4(b), 4(d) or 8(b). A Participant who discontinued employee contributions under Section 4(d) or withdrew from the Plan under Section 5(a) may again become a Participant, if he or she then is an Eligible Employee, by following the procedure described in Subsection (c) above. A Participant whose employee contributions were discontinued automatically under Section 4(b) or 8(b) shall automatically resume participation at the beginning of the earliest Accumulation Period ending in the next calendar year, if he or she then is an Eligible Employee. (e) APPLICABLE OFFERING PERIOD. For purposes of calculating the Purchase Price under Section 7(b), the applicable Offering Period shall be determined as follows: (i) Once a Participant is enrolled in the Plan for an Offering Period, such Offering Period shall continue to apply to him or her until the earliest of (A) the end of such Offering Period, (B) the end of his or her participation under Subsection (d) above or (C) re-enrollment in a subsequent Offering Period under Paragraph (ii) below. (ii) In the event that the Fair Market Value of Stock on the last trading day before the commencement of the Offering Period in which the Participant is enrolled is higher than on the last trading day before the commencement of any subsequent offering period, the Participant shall automatically be re-enrolled for such subsequent Offering Period. (iii) When a Participant reaches the end of an Offering Period but his or her participation is to continue, then such Participant shall automatically be re-enrolled for the Offering Period that commences immediately after the end of the prior Offering Period. SECTION 4. EMPLOYEE CONTRIBUTIONS. (a) FREQUENCY OF PAYROLL DEDUCTIONS. A Participant may purchase shares of Stock under the Plan solely by means of payroll deductions. Payroll deductions, as designated by the Participant pursuant to Subsection (b) below, shall occur on each payday during participation in the Plan. (b) AMOUNT OF PAYROLL DEDUCTIONS. An Eligible Employee shall designate on the enrollment form the portion of his or her Compensation that he or she elects to have withheld for the purchase of Stock. Such portion shall be a whole percentage of the Eligible Employee's Compensation, but not less than 1% nor more than 10%. Any other provision of the Plan notwithstanding, no Participant shall have more than $21,250 withheld in the aggregate during all Accumulation Periods ending in the same calendar year. If a Participant is precluded by this Subsection (b) from making additional employee contributions, then his or her employee contributions shall automatically be discontinued and shall resume at the beginning of the earliest Accumulation Period ending in the next calendar year (if he or she then is an Eligible Employee). 2 6 (c) CHANGING WITHHOLDING RATE. If a Participant wishes to change the rate of payroll withholding, he or she may do so by filing a new enrollment form with the Company at the prescribed location at any time. The new withholding rate shall be effective as soon as reasonably practicable after such form has been received by the Company. The new withholding rate shall be a whole percentage of the Eligible Employee's Compensation, but not less than 1% nor more than 10%. (d) DISCONTINUING PAYROLL DEDUCTIONS. If a Participant wishes to discontinue employee contributions entirely, he or she may do so by filing a new enrollment form with the Company at the prescribed location at any time. Payroll withholding shall cease as soon as reasonably practicable after such form has been received by the Company. (In addition, employee contributions may be discontinued automatically pursuant to Section 4(b) or 8(b).) A Participant who has discontinued employee contributions may resume such contributions by filing a new enrollment form with the Company at the prescribed location. Payroll withholding shall resume as soon as reasonably practicable after such form has been received by the Company. (e) LIMIT ON NUMBER OF ELECTIONS. No Participant shall make more than two elections under Subsection (c) or (d) above during any Accumulation Period. SECTION 5. WITHDRAWAL FROM THE PLAN. (a) WITHDRAWAL. A Participant may elect to withdraw from the Plan by filing the prescribed form with the Company at the prescribed location at any time before the last day of an Accumulation Period. As soon as reasonably practicable thereafter, payroll deductions shall cease and the entire amount credited to the Participant's Plan Account shall be refunded to him or her in cash, without interest. No partial withdrawals shall be permitted. (b) RE-ENROLLMENT AFTER WITHDRAWAL. A former Participant who has withdrawn from the Plan shall not be a Participant until he or she re-enrolls in the Plan under Section 3(c). Re-enrollment may be effective only at the commencement of an Offering Period. SECTION 6. CHANGE IN EMPLOYMENT STATUS. (a) TERMINATION OF EMPLOYMENT. Termination of employment as an Eligible Employee for any reason, including death, shall be treated as an automatic withdrawal from the Plan under Section 5(a). (A transfer from one Participating Company to another shall not be treated as a termination of employment.) (b) LEAVE OF ABSENCE. For purposes of the Plan, employment shall not be deemed to terminate when the Participant goes on a military leave, a sick leave or another bona fide leave of absence, if the leave was approved by the Company in writing and if continued crediting of service for such purpose is expressly required by the terms of such leave or by applicable law (as determined by the Company). Employment, however, shall be deemed to terminate 90 days after the Participant goes on a leave, unless a contract or statute protects his or her right to return to 3 7 work. Employment shall be deemed to terminate in any event when the approved leave ends, unless the Participant immediately returns to work. (c) DEATH. In the event of the Participant's death, the amount credited to his or her Plan Account shall be paid to a beneficiary designated by him or her for this purpose on the prescribed form or, if none, to the Participant's estate. Such form shall be valid only if it was filed with the Company at the prescribed location before the Participant's death. SECTION 7. PLAN ACCOUNTS AND PURCHASE OF SHARES. (a) PLAN ACCOUNTS. The Company shall maintain a Plan Account on its books in the name of each Participant. Whenever an amount is deducted from the Participant's Compensation under the Plan, such amount shall be credited to the Participant's Plan Account. Amounts credited to Plan Accounts shall not be trust funds and may be commingled with the Company's general assets and applied to general corporate purposes. No interest shall be credited to Plan Accounts. (b) PURCHASE PRICE. The Purchase Price for each share of Stock purchased at the close of an Accumulation Period shall be the lower of: (i) 85% of the Fair Market Value of such share on the last trading day in such Accumulation Period; or (ii) 85% of the Fair Market Value of such share on the last trading day before the commencement of the applicable Offering Period (as determined under Section 3(e)) or, in the case of the first Offering Period under the Plan, 85% of the price at which one share of Stock is offered to the public in the IPO. (c) NUMBER OF SHARES PURCHASED. As of the last day of each Accumulation Period, each Participant shall be deemed to have elected to purchase the number of shares of Stock calculated in accordance with this Subsection (c), unless the Participant has previously elected to withdraw from the Plan in accordance with Section 5(a). The amount then in the Participant's Plan Account shall be divided by the Purchase Price, and the number of shares that results shall be purchased from the Company with the funds in the Participant's Plan Account. The foregoing notwithstanding, no Participant shall purchase more than 5,000 shares of Stock with respect to any Accumulation Period nor more than the amounts of Stock set forth in Sections 8(b) and 12(a). The Committee may determine with respect to all Participants that any fractional share, as calculated under this Subsection (c), shall be rounded down to the next lower whole share. (d) AVAILABLE SHARES INSUFFICIENT. In the event that the aggregate number of shares that all Participants elect to purchase during an Accumulation Period exceeds the maximum number of shares remaining available for issuance under Section 12(a), then the number of shares to which each Participant is entitled shall be determined by multiplying the number of shares available for issuance by a fraction, the numerator of which is the number of shares that such 4 8 Participant has elected to purchase and the denominator of which is the number of shares that all Participants have elected to purchase. (e) ISSUANCE OF STOCK. Certificates representing the shares of Stock purchased by a Participant under the Plan shall be issued to him or her as soon as reasonably practicable after the close of the applicable Accumulation Period, except that the Committee may determine that such shares shall be held for each Participant's benefit by a broker designated by the Committee (unless the Participant has elected that certificates be issued to him or her). Shares may be registered in the name of the Participant or jointly in the name of the Participant and his or her spouse as joint tenants with right of survivorship or as community property. (f) UNUSED CASH BALANCES. An amount remaining in the Participant's Plan Account that represents the Purchase Price for any fractional share shall be carried over in the Participant's Plan Account to the next Accumulation Period. Any amount remaining in the Participant's Plan Account that represents the Purchase Price for whole shares that could not be purchased by reason of Subsection (c) above, Section 8(b) or Section 12(a) shall be refunded to the Participant in cash, without interest. SECTION 8. LIMITATIONS ON STOCK OWNERSHIP. (a) FIVE PERCENT LIMIT. Any other provision of the Plan notwithstanding, no Participant shall be granted a right to purchase Stock under the Plan if such Participant, immediately after his or her election to purchase such Stock, would own stock possessing more than 5% of the total combined voting power or value of all classes of stock of the Company or any parent or Subsidiary of the Company. For purposes of this Subsection (a), the following rules shall apply: (i) Ownership of stock shall be determined after applying the attribution rules of section 424(d) of the Code; (ii) Each Participant shall be deemed to own any stock that he or she has a right or option to purchase under this or any other plan; and (iii) Each Participant shall be deemed to have the right to purchase 5,000 shares of Stock under this Plan with respect to each Accumulation Period. (b) $25,000 LIMIT. Any other provision of the Plan notwithstanding, no Participant shall purchase Stock with a Fair Market Value (determined as of the beginning of the applicable Offering Period) in excess of $25,000 during any calendar year under this Plan and all other employee stock purchase plans of the Company or any parent or Subsidiary of the Company. For purposes of this Subsection (b), employee stock purchase plans not described in section 423 of the Code shall be disregarded. If a Participant is precluded by this Subsection (b) from purchasing additional Stock under the Plan, then his or her employee contributions shall automatically be discontinued and shall resume at the beginning of the earliest Accumulation Period ending in the next calendar year (if he or she then is an Eligible Employee). 5 9 SECTION 9. RIGHTS NOT TRANSFERABLE. The rights of any Participant under the Plan, or any Participant's interest in any Stock or moneys to which he or she may be entitled under the Plan, shall not be transferable by voluntary or involuntary assignment or by operation of law, or in any other manner other than by beneficiary designation or the laws of descent and distribution. If a Participant in any manner attempts to transfer, assign or otherwise encumber his or her rights or interest under the Plan, other than by beneficiary designation or the laws of descent and distribution, then such act shall be treated as an election by the Participant to withdraw from the Plan under Section 5(a). SECTION 10. NO RIGHTS AS AN EMPLOYEE. Nothing in the Plan or in any right granted under the Plan shall confer upon the Participant any right to continue in the employ of a Participating Company for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Participating Companies or of the Participant, which rights are hereby expressly reserved by each, to terminate his or her employment at any time and for any reason, with or without cause. SECTION 11. NO RIGHTS AS A STOCKHOLDER. A Participant shall have no rights as a stockholder with respect to any shares of Stock that he or she may have a right to purchase under the Plan until such shares have been purchased on the last day of the applicable Accumulation Period. SECTION 12. STOCK OFFERED UNDER THE PLAN. (a) AUTHORIZED SHARES. The aggregate number of shares of Stock available for purchase under the Plan shall be 250,000, subject to adjustment pursuant to this Section 12. (b) ANTI-DILUTION ADJUSTMENTS. The aggregate number of shares of Stock offered under the Plan, the 5,000- share limitation described in Section 7(c) and the price of shares that any Participant has elected to purchase shall be adjusted proportionately by the Committee for any increase or decrease in the number of outstanding shares of Stock resulting from a subdivision or consolidation of shares or the payment of a stock dividend, any other increase or decrease in such shares effected without receipt or payment of consideration by the Company, the distribution of the shares of a Subsidiary to the Company's stockholders or a similar event. (c) REORGANIZATIONS. Any other provision of the Plan notwithstanding, immediately prior to the effective time of a Change in Control, the Offering Period and Accumulation Period then in progress shall terminate and shares shall be purchased pursuant to Section 7. In the event of a merger or consolidation to which the Company is a constituent corporation and which does not constitute a Change in Control, the Plan shall continue unless the plan of merger or consolidation provides otherwise. The Plan shall in no event be construed to restrict in any way the Company's right to undertake a dissolution, liquidation, merger, consolidation or other reorganization. 6 10 SECTION 13. AMENDMENT OR DISCONTINUANCE. The Board shall have the right to amend, suspend or terminate the Plan at any time and without notice. Except as provided in Section 12, any increase in the aggregate number of shares of Stock to be issued under the Plan shall be subject to approval by a vote of the stockholders of the Company. In addition, any other amendment of the Plan shall be subject to approval by a vote of the stockholders of the Company to the extent required by an applicable law or regulation. SECTION 14. DEFINITIONS (a) "ACCUMULATION PERIOD" means a six-month period during which contributions may be made toward the purchase of Stock under the Plan, as determined pursuant to Section 3(b). (b) "BOARD" means the Board of Directors of the Company, as constituted from time to time. (c) "CHANGE IN CONTROL" means: (i) The consummation of a merger or consolidation of the Company with or into another entity or any other corporate reorganization, if more than 50% of the combined voting power of the continuing or surviving entity's securities outstanding immediately after such merger, consolidation or other reorganization is owned by persons who were not stockholders of the Company immediately prior to such merger, consolidation or other reorganization; or (ii) The sale, transfer or other disposition of all or substantially all of the Company's assets or the complete liquidation or dissolution of the Company. A transaction shall not constitute a Change in Control if its sole purpose is to change the state of the Company's incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Company's securities immediately before such transaction. (d) "CODE" means the Internal Revenue Code of 1986, as amended. (e) "COMMITTEE" means a committee of the Board, as described in Section 2. (f) "COMPANY" means Heska Corporation, a Delaware corporation. (g) "COMPENSATION" means (i) the total compensation paid in cash to a Participant by a Participating Company, including salaries, wages, bonuses, incentive compensation, commissions and overtime pay, plus (ii) any pre-tax contributions made by the Participant under section 401(k) or 125 of the Code. Compensation shall exclude moving or relocation allowances, car allowances, imputed income attributable to cars or life insurance, fringe benefits, 7 11 contributions to employee benefit plans and similar items. The Committee shall determine whether a particular item is included in Compensation. (e) "ELIGIBLE EMPLOYEE" means any employee of a Participating Company who meets both of the following requirements: (i) His or her customary employment is for more than five months per calendar year and for more than 20 hours per week; and (ii) He or she either (A) has been an employee of a Participating Company for not less than 30 consecutive days or (B) is an employee of a Participating Company on the date of the IPO. The foregoing notwithstanding, an individual shall not be considered an Eligible Employee if his or her participation in the Plan is prohibited by the law of any country which has jurisdiction over him or her or if he or she is subject to a collective bargaining agreement that does not provide for participation in the Plan. (i) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (ii) "FAIR MARKET VALUE" means the market price of Stock, determined by the Committee as follows: (i) If Stock was traded over-the-counter on the date in question but was not traded on The Nasdaq Stock Market or The Nasdaq National Market, then the Fair Market Value shall be equal to the mean between the last reported representative bid and asked prices quoted for such date by the principal automated inter-dealer quotation system on which Stock is quoted or, if the Stock is not quoted on any such system, by the "Pink Sheets" published by the National Quotation Bureau, Inc.; (ii) If Stock was traded over-the-counter on the date in question and was traded on The Nasdaq Stock Market or The Nasdaq National Market, then the Fair Market Value shall be equal to the last-transaction price quoted for such date by The Nasdaq Stock Market or The Nasdaq National Market; (iii) If the Stock was traded on a stock exchange on the date in question, then the Fair Market Value shall be equal to the closing price reported by the applicable composite transactions report for such date; and (iv) If none of the foregoing provisions is applicable, then the Fair Market Value shall be determined by the Committee in good faith on such basis as it deems appropriate. Whenever possible, the determination of Fair Market Value by the Committee shall be based on the prices reported in The Wall Street Journal or as reported directly to the Company by Nasdaq or a comparable exchange. Such determination shall be conclusive and binding on all persons. 8 12 (k) "IPO" means the initial offering of Stock to the public pursuant to a registration statement filed with the Securities and Exchange Commission on Form S-1. (l) "OFFERING PERIOD" means a 24-month period with respect to which the right to purchase Stock may be granted under the Plan, as determined pursuant to Section 3(a). (m) "PARTICIPANT" means an Eligible Employee who elects to participate in the Plan, as provided in Section 3(c). (n) "PARTICIPATING COMPANY" means (i) the Company and (ii) each present or future Subsidiary designated by the Committee as a Participating Company. (o) "PLAN" means this Heska Corporation 1997 Employee Stock Purchase Plan, as it may be amended from time to time. (p) "PLAN ACCOUNT" means the account established for each Participant pursuant to Section 7(a). (q) "PURCHASE PRICE" means the price at which Participants may purchase Stock under the Plan, as determined pursuant to Section 7(b). (r) "STOCK" means the Common Stock of the Company. (s) "SUBSIDIARY" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. SECTION 15. EXECUTION. To record the adoption of the Plan by the Board on ________ __, 1997, the Company has caused its authorized officer to execute the same. HESKA CORPORATION By: ---------------------------- Title: ------------------------- 9 13 HESKA CORPORATION 1997 EMPLOYEE STOCK PURCHASE PLAN BENEFICIARY DESIGNATION Name: ------------------------------------- Social Security Number - - ----- --- ----- If I die, any unused cash in my account under the Heska Corporation 1997 Employee Stock Purchase Plan (the "Plan") is to be paid to those beneficiaries designated below who survive me, subject to the provisions of the Plan. The payment is to be made as follows [check one box only]: [ ] Entirely to the spouse to whom I am currently married. [Please provide names and addresses below.] If my spouse does not survive me, payment is to be made to [check one box only]: [ ] All of my children who survive me in equal shares. [ ] All of the persons named below who survive me in equal shares. [ ] To all of my children who survive me in equal shares. [Please provide names and addresses below.] [ ] Entirely to the first person named below who survives me. [ ] To all of the persons named below who survive me in equal shares. [ ] Other [please use a separate sheet if necessary]: ---------------------------------------------- ---------------------------------------------- ---------------------------------------------- ---------------------------------------------- ---------------------------------------------- ---------------------------------------------- The term "children" means natural or legally adopted children but excludes stepchildren (if not adopted). The term "siblings" means brothers and sisters, whether natural or adoptive, but excludes stepbrothers and stepsisters. 1 14 The names and addresses of my beneficiaries are as follows [please use a separate sheet if necessary]: 1. Name: Relationship: ------------------- ----------- Address: --------------------------------------- Telephone ( ) ---------------- ------------- 2. Name: Relationship: ------------------- ----------- Address: --------------------------------------- Telephone ( ) ---------------- ------------- 3. Name: Relationship: ------------------- ----------- Address: --------------------------------------- Telephone ( ) ---------------- ------------- 4. Name: Relationship: ------------------- ----------- Address: --------------------------------------- Telephone ( ) ---------------- ------------- 5. Name: Relationship: ------------------- ----------- Address: --------------------------------------- Telephone ( ) ---------------- ------------- This beneficiary designation is to take effect on the date when it is received by the person responsible for administering the Plan at Heska Corporation, and it supersedes any prior designations that I may have made under the Plan. , 199 - -------------- -- ---------------------------- (Signature) Please file this form with . --------------------- - -------------------------------------------------------------------------------- Received by: Date of receipt: . 199 ------------------ -- 2 EX-10.20 29 FORMS OF OPTION AGREEMENT 1 EXHIBIT 10.20 HESKA CORPORATION 1997 STOCK INCENTIVE PLAN STOCK OPTION AGREEMENT TAX TREATMENT This option is intended to be an incentive stock option under section 422 of the Internal Revenue Code or a nonstatutory option, as provided in the Notice of Stock Option Grant. VESTING This option becomes exercisable in installments, as shown in the Notice of Stock Option Grant. In addition, this option becomes exercisable in full if one of the following events occurs: o Your service as an employee, consultant or director of the Company or a subsidiary of the Company terminates because of death, total and permanent disability, or retirement at or after age 65, or o The Company is a party to a merger or other reorganization while you are an employee, consultant or director of the Company or a subsidiary of the Company, this option is not continued by the Company and is not assumed by the surviving corporation or its parent, and the surviving corporation or its parent does not substitute its own option for this option, or o The Company is subject to a "Change in Control" (as defined in the Plan) while you are an employee, consultant or director of the Company or a subsidiary of the Company and, within 12 months after the Change in Control, the surviving entity terminates your service without your consent. If the surviving entity demotes you to a lower position, materially reduces your authority or responsibilities, materially reduces your total compensation or announces its intention to relocate your principal place of work by more than 20 miles, then that action will be treated as a termination of your service. In the event of a merger or other reorganization or a Change in Control, the following rules apply: o If this option is designated as an incentive stock option in the Notice of Stock Option Grant, the acceleration of exercisability will not occur without your written consent. o If the Company and the other party to the transaction agreed that the transaction is to be treated as a "pooling of interests" for financial reporting purposes, and if the transaction in fact was so treated, then the acceleration of exercisability will not occur to the extent that the surviving entity's independent 2 public accountants determine in good faith that the acceleration would include the use of "pooling of interests" accounting. No additional shares become exercisable after your service as an employee, consultant or director of the Company or a subsidiary of the Company has terminated for any reason. TERM This option expires in any event at the close of business at Company headquarters on the day before the 10th anniversary of the Date of Grant, as shown in the Notice of Stock Option Grant. (It will expire earlier if your service terminates, as described below.) REGULAR TERMINATION If your service as an employee, consultant or director of the Company or a subsidiary of the Company terminates for any reason except death or total and permanent disability, then this option will expire at the close of business at Company headquarters on the date three months after your termination date. The Company determines when your service terminates for this purpose. DEATH If you die as an employee, consultant or director of the Company or a subsidiary of the Company, then this option will expire at the close of business at Company headquarters on the date 12 months after the date of death. DISABILITY If your service as an employee, consultant or director of the Company or a subsidiary of the Company terminates because of your total and permanent disability, then this option will expire at the close of business at Company headquarters on the date 12 months after your termination date. For all purposes under this Agreement, "total and permanent disability" means that you are unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted, or can be expected to last, for a continuous period of not less than one year. LEAVES OF ABSENCE For purposes of this option, your service does not terminate when you go on a military leave, a sick leave or another bona fide leave of absence, if the leave was approved by the Company in writing and if continued crediting of service is required by the terms of the leave or by applicable law. But your service terminates when the approved leave ends, unless you immediately return to active work. RESTRICTIONS ON The Company will not permit you to exercise this EXERCISE option if the issuance of shares at that time would violate any law or regulation. NOTICE OF EXERCISE When you wish to exercise this option, you must notify the Company by -2- 3 filing the proper "Notice of Exercise" form at the address given on the form. Your notice must specify how many shares you wish to purchase. Your notice must also specify how your shares should be registered (in your name only or in your and your spouse's names as community property or as joint tenants with right of survivorship). The notice will be effective when it is received by the Company. If someone else wants to exercise this option after your death, that person must prove to the Company's satisfaction that he or she is entitled to do so. FORM OF PAYMENT When you submit your notice of exercise, you must include payment of the option exercise price for the shares you are purchasing. Payment may be made in one (or a combination of two or more) of the following forms: o Your personal check, a cashier's check or a money order. o Certificates for shares of Company stock that you own, along with any forms needed to effect a transfer of those shares to the Company. The value of the shares, determined as of the effective date of the option exercise, will be applied to the option exercise price. Instead of surrendering shares of Company stock, you may attest to the ownership of those shares on a form provided by the Company and have the same number of shares subtracted from the option shares issued to you. However, you may not surrender, or attest to the ownership of, shares of Company stock in payment of the exercise price if your action would cause the Company to recognize compensation expense (or additional compensation expense) with respect to this option for financial reporting purposes. o Irrevocable directions to a securities broker approved by the Company to sell all or part of your option shares and to deliver to the Company from the sale proceeds an amount sufficient to pay the option exercise price and any withholding taxes. (The balance of the sale proceeds, if any, will be delivered to you.) The directions must be given by signing a special"Notice of Exercise" form provided by the Company. WITHHOLDING TAXES AND You will not be allowed to exercise this STOCK WITHHOLDING option unless you make arrangements acceptable to the Company to pay any withholding taxes that may be due as a result of the option exercise. These arrangements may include withholding shares of Company stock that otherwise would be issued to you when you exercise this option. The value of these shares, determined as of the effective date of the option exercise, will be applied to the withholding taxes. -3- 4 RESTRICTIONS ON By signing this Agreement, you agree not to sell RESALE any option shares at a time when applicable laws, Company policies or an agreement between the Company and its underwriters prohibit a sale. This restriction will apply as long as you are an employee, consultant or director of the Company or a subsidiary of the Company. TRANSFER OF Prior to your death, only you may exercise this OPTION option. You cannot transfer or assign this option. For instance, you may not sell this option or use it as security for a loan. If you attempt to do any of these things, this option will immediately become invalid. You may, however, dispose of this option in your will or a beneficiary designation. Regardless of any marital property settlement agreement, the Company is not obligated to honor a notice of exercise from your former spouse, nor is the Company obligated to recognize your former spouse's interest in your option in any other way. RETENTION RIGHTS Your option or this Agreement do not give you the right to be retained by the Company or a subsidiary of the Company in any capacity. The Company and its subsidiaries reserve the right to terminate your service at any time, with or without cause. STOCKHOLDER RIGHTS You, or your estate or heirs, have no rights as a stockholder of the Company until you have exercised this option by giving the required notice to the Company and paying the exercise price. No adjustments are made for dividends or other rights if the applicable record date occurs before you exercise this option, except as described in the Plan. ADJUSTMENTS In the event of a stock split, a stock dividend or a similar change in Company stock, the number of shares covered by this option and the exercise price per share may be adjusted pursuant to the Plan. APPLICABLE LAW This Agreement will be interpreted and enforced under the laws of the State of Colorado. THE PLAN AND The text of the Plan is incorporated in this OTHER AGREEMENTS Agreement by reference. This Agreement and the Plan constitute the entire understanding between you and the Company regarding this option. Any prior agreements, commitments or negotiations concerning this option are superseded. This Agreement may be amended only by another written agreement, signed by both parties. BY SIGNING THE COVER SHEET OF THIS AGREEMENT, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN. -4- 5 HESKA CORPORATION 1997 STOCK INCENTIVE PLAN STOCK OPTION AGREEMENT (OUTSIDE DIRECTORS) TAX TREATMENT This option is intended to be an incentive stock option under section 422 of the Internal Revenue Code or a nonstatutory option, as provided in the Notice of Stock Option Grant. VESTING This option becomes exercisable in installments, as shown in the Notice of Stock Option Grant. In addition, this option becomes exercisable in full if one of the following events occurs: o Your service as an employee, consultant or director of the Company or a subsidiary of the Company terminates because of death, total and permanent disability, or retirement at or after age 65, or o The Company is a party to a merger or other reorganization while you are an employee, consultant or director of the Company or a subsidiary of the Company, this option is not continued by the Company and is not assumed by the surviving corporation or its parent, and the surviving corporation or its parent does not substitute its own option for this option, or o The Company is subject to a "Change in Control" (as defined in the Plan) while you are an employee, consultant or director of the Company or a subsidiary of the Company and, within 12 months after the Change in Control, the surviving entity terminates your service without your consent. If the surviving entity demotes you to a lower position, materially reduces your authority or responsibilities, materially reduces your total compensation or announces its intention to relocate your principal place of work by more than 20 miles, then that action will be treated as a termination of your service. In the event of a merger or other reorganization or a Change in Control, the following rules apply: o If this option is designated as an incentive stock option in the Notice of Stock Option Grant, the acceleration of exercisability will not occur without your written consent. o If the Company and the other party to the transaction agreed that the transaction is to be treated as a "pooling of interests" for financial reporting purposes, and if the transaction in fact was so treated, then the acceleration of exercisability will not 6 occur to the extent that that the surviving entity's independent public accountants determine in good faith that the acceleration would preclude the use of "pooling of interests" accounting. No additional shares become exercisable after your service as an employee, consultant or director of the Company or a subsidiary of the Company has terminated for any reason. TERM This option expires in any event at the close of business at Company headquarters on the day before the 10th anniversary of the Date of Grant, as shown in the Notice of Stock Option Grant. (It will expire earlier if your service terminates, as described below.) REGULAR TERMINATION If your service as an employee, consultant or director of the Company or a subsidiary of the Company terminates for any reason except death or total and permanent disability, then this option will expire at the close of business at Company headquarters on the date three months after your termination date. The Company determines when your service terminates for this purpose. DEATH If you die as an employee, consultant or director of the Company or a subsidiary of the Company, then this option will expire at the close of business at Company headquarters on the date 12 months after the date of death. DISABILITY If your service as an employee, consultant or director of the Company or a subsidiary of the Company terminates because of your total and permanent disability, then this option will expire at the close of business at Company headquarters on the date 12 months after your termination date. For all purposes under this Agreement, "total and permanent disability" means that you are unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted, or can be expected to last, for a continuous period of not less than one year. LEAVES OF ABSENCE For purposes of this option, your service does not terminate when you go on a military leave, a sick leave or another bona fide leave of absence, if the leave was approved by the Company in writing and if continued crediting of service is required by the terms of the leave or by applicable law. But your service terminates when the approved leave ends, unless you immediately return to active work. -2- 7 RESTRICTIONS ON The Company will not permit you to exercise this EXERCISE option if the issuance of shares violate any law or regulation. NOTICE OF EXERCISE When you wish to exercise this option, you must notify the Company by filing the proper "Notice of Exercise" form at the address given on the form. Your notice must specify how many shares you wish to purchase. Your notice must also specify how your shares should be registered (in your name only or in your and your spouse's names as community property or as joint tenants with right of survivorship). The notice will be effective when it is received by the Company. If someone else wants to exercise this option after your death,that person must prove to the Company's satisfaction that he or she is entitled to do so. EXERCISE OF UNVESTED Exercise of unvested shares is allowed under the SHRES Plan. If you would like to exercise your option before it is vested, you must complete a Stock Repurchase Agreement. This agreement provides for the repurchase of that portion of the shares which remain unvested at the time of your termination, death or disability. FORM OF PAYMENT When you submit your notice of exercise, you must include payment of the option exercise price for the shares you are purchasing. Payment may be made in one (or a combination of two or more) of the following forms: o Your personal check, a cashier's check or a money order. o Certificates for shares of Company stock that you own, along with any forms needed to effect a transfer of those shares to the Company. The value of the shares, determined as of the effective date of the option exercise, will be applied to the option exercise price. Instead of surrendering shares of Company stock, you may attest to the ownership of those shares on a form provided by the Company and have the same number of shares subtracted from the option shares issued to you. However, you may not surrender, or attest to the ownership of, shares of Company stock in payment of the exercise price if your action would cause the Company to recognize compensation expense (or additional compensation expense) with respect to this option for financial reporting purposes. o Irrevocable directions to a securities broker approved by the Company to sell all or part of your option shares and to deliver to the Company from the sale proceeds an amount sufficient to pay the option exercise price and any withholding taxes. (The balance of the sale proceeds, if any, will be delivered to you.) The directions must be given by signing a special "Notice of Exercise" form provided by the Company. -3- 8 WITHHOLDING You will not be allowed to exercise this option unless TAXES AND STOCK you make arrangements acceptable to the Company to pay WITHHOLDING any withholding taxes that may be due as a result of the option exercise. These arrangements may include withholding shares of Company stock that otherwise would be issued to you when you exercise this option. The value of these shares, determined as of the effective date of the option exercise, will be applied to the withholding taxes. RESTRICTIONS ON By signing this Agreement, you agree not to sell any RESALE option shares at a time when applicable laws, Company policies or an agreement between the Company and its underwriters prohibit a sale. This restriction will apply as long as you are an employee, consultant or director of the Company or a subsidiary of the Company. TRANSFER OF Prior to your death, only you may exercise this OPTION option. You cannot transfer or assign this option. For instance, you may not sell this option or use it as security for a loan. If you attempt to do any of these things, this option will immediately become invalid. You may, however, dispose of this option in your will or a beneficiary designation. Regardless of any marital property settlement agreement, the Company is not obligated to honor a notice of exercise from your former spouse, nor is the Company obligated to recognize your former spouse's interest in your option in any other way. RETENTION RIGHTS Your option or this Agreement do not give you the right to be retained by the Company or a subsidiary of the Company in any capacity. The Company and its subsidiaries reserve the right to terminate your service at any time, with or without cause. STOCKHOLDER You, or your estate or heirs, have no rights as a RIGHTS stockholder of the Company until you have exercised this option by giving the required notice to the Company and paying the exercise price. No adjustments are made for dividends or other rights if the applicable record date occurs before you exercise this option, except as described in the Plan. ADJUSTMENTS In the event of a stock split, a stock dividend or a similar change in Company stock, the number of shares covered by this option and the exercise price per share may be adjusted pursuant to the Plan. -4- 9 APPLICABLE LAW This Agreement will be interpreted and enforced under the laws of the State of Colorado. THE PLAN AND The text of the Plan is incorporated in this Agreement OTHER AGREEMENTS by reference. This Agreement and the Plan constitute the entire understanding between you and the Company regarding this option. Any prior agreements, commitments or negotiations concerning this option are superseded. This Agreement may be amended only by another written agreement, signed by both parties. BY SIGNING THE COVER SHEET OF THIS AGREEMENT, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN. -5- EX-10.21 30 1997 EMPLOYEE STOCK PURCHASE PLAN OF REGISTRANT 1 EXHIBIT 10.21 HESKA CORPORATION 1997 EMPLOYEE STOCK PURCHASE PLAN (AS ADOPTED EFFECTIVE _______ __, 1997) 2 TABLE OF CONTENTS
Page ---- SECTION 1. PURPOSE OF THE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 2. ADMINISTRATION OF THE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 (a) Committee Composition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 (b) Committee Responsibilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 3. ENROLLMENT AND PARTICIPATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 (a) Offering Periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 (b) Accumulation Periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 (c) Enrollment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 (d) Duration of Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (e) Applicable Offering Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 SECTION 4. EMPLOYEE CONTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (a) Frequency of Payroll Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (b) Amount of Payroll Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (c) Changing Withholding Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 (d) Discontinuing Payroll Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 (e) Limit on Number of Elections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 SECTION 5. WITHDRAWAL FROM THE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 (a) Withdrawal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 (b) Re-Enrollment After Withdrawal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 SECTION 6. CHANGE IN EMPLOYMENT STATUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 (a) Termination of Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 (b) Leave of Absence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 (c) Death . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 SECTION 7. PLAN ACCOUNTS AND PURCHASE OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 (a) Plan Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 (b) Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 (c) Number of Shares Purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (d) Available Shares Insufficient . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (e) Issuance of Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (f) Unused Cash Balances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 SECTION 8. LIMITATIONS ON STOCK OWNERSHIP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (a) Five Percent Limit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (b) $25,000 Limit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
i 3 SECTION 9. RIGHTS NOT TRANSFERABLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 SECTION 10. NO RIGHTS AS AN EMPLOYEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 SECTION 11. NO RIGHTS AS A STOCKHOLDER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 SECTION 12. STOCK OFFERED UNDER THE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 (a) Authorized Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 (b) Anti-Dilution Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 (c) Reorganizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 13. AMENDMENT OR DISCONTINUANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 14. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 15. EXECUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ii 4 HESKA CORPORATION 1997 EMPLOYEE STOCK PURCHASE PLAN SECTION 1. PURPOSE OF THE PLAN. The Plan was adopted by the Board on _______ __, 1997, effective as of the date of the IPO. The purpose of the Plan is to provide Eligible Employees with an opportunity to increase their proprietary interest in the success of the Company by purchasing Stock from the Company on favorable terms and to pay for such purchases through payroll deductions. The Plan is intended to qualify under section 423 of the Code. SECTION 2. ADMINISTRATION OF THE PLAN. (a) COMMITTEE COMPOSITION. The Plan shall be administered by the Committee. The Committee shall consist exclusively of one or more directors of the Company, who shall be appointed by the Board. (b) COMMITTEE RESPONSIBILITIES. The Committee shall interpret the Plan and make all other policy decisions relating to the operation of the Plan. The Committee may adopt such rules, guidelines and forms as it deems appropriate to implement the Plan. The Committee's determinations under the Plan shall be final and binding on all persons. SECTION 3. ENROLLMENT AND PARTICIPATION. (a) OFFERING PERIODS. While the Plan is in effect, two overlapping Offering Periods shall commence in each calendar year. The Offering Periods shall consist of the 24-month periods commencing on each January 1 and July 1, except that the first Offering Period shall commence on the date of the IPO and end on June 30, 1999. (b) ACCUMULATION PERIODS. While the Plan is in effect, two Accumulation Periods shall commence in each calendar year. The Accumulation Periods shall consist of the six-month periods commencing on each January 1 and July 1, except that the first Accumulation Period shall commence on the date of the IPO and end on December 31, 1997. (c) ENROLLMENT. Any individual who, on the day preceding the first day of an Offering Period, qualifies as an Eligible Employee may elect to become a Participant in the Plan for such Offering Period by executing the enrollment form prescribed for this purpose by the Committee. The enrollment form shall be filed with the Company at the prescribed location not later than 10 days prior to the commencement of such Offering Period. (d) DURATION OF PARTICIPATION. Once enrolled in the Plan, a Participant shall continue to participate in the Plan until he or she ceases to be an Eligible Employee, withdraws from the Plan under Section 5(a) or reaches the end of the Accumulation Period in which his or 5 her employee contributions were discontinued under Section 4(b), 4(d) or 8(b). A Participant who discontinued employee contributions under Section 4(d) or withdrew from the Plan under Section 5(a) may again become a Participant, if he or she then is an Eligible Employee, by following the procedure described in Subsection (c) above. A Participant whose employee contributions were discontinued automatically under Section 4(b) or 8(b) shall automatically resume participation at the beginning of the earliest Accumulation Period ending in the next calendar year, if he or she then is an Eligible Employee. (e) APPLICABLE OFFERING PERIOD. For purposes of calculating the Purchase Price under Section 7(b), the applicable Offering Period shall be determined as follows: (i) Once a Participant is enrolled in the Plan for an Offering Period, such Offering Period shall continue to apply to him or her until the earliest of (A) the end of such Offering Period, (B) the end of his or her participation under Subsection (d) above or (C) re-enrollment in a subsequent Offering Period under Paragraph (ii) below. (ii) In the event that the Fair Market Value of Stock on the last trading day before the commencement of the Offering Period in which the Participant is enrolled is higher than on the last trading day before the commencement of any subsequent offering period, the Participant shall automatically be re-enrolled for such subsequent Offering Period. (iii) When a Participant reaches the end of an Offering Period but his or her participation is to continue, then such Participant shall automatically be re-enrolled for the Offering Period that commences immediately after the end of the prior Offering Period. SECTION 4. EMPLOYEE CONTRIBUTIONS. (a) FREQUENCY OF PAYROLL DEDUCTIONS. A Participant may purchase shares of Stock under the Plan solely by means of payroll deductions. Payroll deductions, as designated by the Participant pursuant to Subsection (b) below, shall occur on each payday during participation in the Plan. (b) AMOUNT OF PAYROLL DEDUCTIONS. An Eligible Employee shall designate on the enrollment form the portion of his or her Compensation that he or she elects to have withheld for the purchase of Stock. Such portion shall be a whole percentage of the Eligible Employee's Compensation, but not less than 1% nor more than 10%. Any other provision of the Plan notwithstanding, no Participant shall have more than $21,250 withheld in the aggregate during all Accumulation Periods ending in the same calendar year. If a Participant is precluded by this Subsection (b) from making additional employee contributions, then his or her employee contributions shall automatically be discontinued and shall resume at the beginning of the earliest Accumulation Period ending in the next calendar year (if he or she then is an Eligible Employee). 2 6 (c) CHANGING WITHHOLDING RATE. If a Participant wishes to change the rate of payroll withholding, he or she may do so by filing a new enrollment form with the Company at the prescribed location at any time. The new withholding rate shall be effective as soon as reasonably practicable after such form has been received by the Company. The new withholding rate shall be a whole percentage of the Eligible Employee's Compensation, but not less than 1% nor more than 10%. (d) DISCONTINUING PAYROLL DEDUCTIONS. If a Participant wishes to discontinue employee contributions entirely, he or she may do so by filing a new enrollment form with the Company at the prescribed location at any time. Payroll withholding shall cease as soon as reasonably practicable after such form has been received by the Company. (In addition, employee contributions may be discontinued automatically pursuant to Section 4(b) or 8(b).) A Participant who has discontinued employee contributions may resume such contributions by filing a new enrollment form with the Company at the prescribed location. Payroll withholding shall resume as soon as reasonably practicable after such form has been received by the Company. (e) LIMIT ON NUMBER OF ELECTIONS. No Participant shall make more than two elections under Subsection (c) or (d) above during any Accumulation Period. SECTION 5. WITHDRAWAL FROM THE PLAN. (a) WITHDRAWAL. A Participant may elect to withdraw from the Plan by filing the prescribed form with the Company at the prescribed location at any time before the last day of an Accumulation Period. As soon as reasonably practicable thereafter, payroll deductions shall cease and the entire amount credited to the Participant's Plan Account shall be refunded to him or her in cash, without interest. No partial withdrawals shall be permitted. (b) RE-ENROLLMENT AFTER WITHDRAWAL. A former Participant who has withdrawn from the Plan shall not be a Participant until he or she re-enrolls in the Plan under Section 3(c). Re-enrollment may be effective only at the commencement of an Offering Period. SECTION 6. CHANGE IN EMPLOYMENT STATUS. (a) TERMINATION OF EMPLOYMENT. Termination of employment as an Eligible Employee for any reason, including death, shall be treated as an automatic withdrawal from the Plan under Section 5(a). (A transfer from one Participating Company to another shall not be treated as a termination of employment.) (b) LEAVE OF ABSENCE. For purposes of the Plan, employment shall not be deemed to terminate when the Participant goes on a military leave, a sick leave or another bona fide leave of absence, if the leave was approved by the Company in writing and if continued crediting of service for such purpose is expressly required by the terms of such leave or by applicable law (as determined by the Company). Employment, however, shall be deemed to terminate 90 days after the Participant goes on a leave, unless a contract or statute protects his or her right to return to 3 7 work. Employment shall be deemed to terminate in any event when the approved leave ends, unless the Participant immediately returns to work. (c) DEATH. In the event of the Participant's death, the amount credited to his or her Plan Account shall be paid to a beneficiary designated by him or her for this purpose on the prescribed form or, if none, to the Participant's estate. Such form shall be valid only if it was filed with the Company at the prescribed location before the Participant's death. SECTION 7. PLAN ACCOUNTS AND PURCHASE OF SHARES. (a) PLAN ACCOUNTS. The Company shall maintain a Plan Account on its books in the name of each Participant. Whenever an amount is deducted from the Participant's Compensation under the Plan, such amount shall be credited to the Participant's Plan Account. Amounts credited to Plan Accounts shall not be trust funds and may be commingled with the Company's general assets and applied to general corporate purposes. No interest shall be credited to Plan Accounts. (b) PURCHASE PRICE. The Purchase Price for each share of Stock purchased at the close of an Accumulation Period shall be the lower of: (i) 85% of the Fair Market Value of such share on the last trading day in such Accumulation Period; or (ii) 85% of the Fair Market Value of such share on the last trading day before the commencement of the applicable Offering Period (as determined under Section 3(e)) or, in the case of the first Offering Period under the Plan, 85% of the price at which one share of Stock is offered to the public in the IPO. (c) NUMBER OF SHARES PURCHASED. As of the last day of each Accumulation Period, each Participant shall be deemed to have elected to purchase the number of shares of Stock calculated in accordance with this Subsection (c), unless the Participant has previously elected to withdraw from the Plan in accordance with Section 5(a). The amount then in the Participant's Plan Account shall be divided by the Purchase Price, and the number of shares that results shall be purchased from the Company with the funds in the Participant's Plan Account. The foregoing notwithstanding, no Participant shall purchase more than 5,000 shares of Stock with respect to any Accumulation Period nor more than the amounts of Stock set forth in Sections 8(b) and 12(a). The Committee may determine with respect to all Participants that any fractional share, as calculated under this Subsection (c), shall be rounded down to the next lower whole share. (d) AVAILABLE SHARES INSUFFICIENT. In the event that the aggregate number of shares that all Participants elect to purchase during an Accumulation Period exceeds the maximum number of shares remaining available for issuance under Section 12(a), then the number of shares to which each Participant is entitled shall be determined by multiplying the number of shares available for issuance by a fraction, the numerator of which is the number of shares that such 4 8 Participant has elected to purchase and the denominator of which is the number of shares that all Participants have elected to purchase. (e) ISSUANCE OF STOCK. Certificates representing the shares of Stock purchased by a Participant under the Plan shall be issued to him or her as soon as reasonably practicable after the close of the applicable Accumulation Period, except that the Committee may determine that such shares shall be held for each Participant's benefit by a broker designated by the Committee (unless the Participant has elected that certificates be issued to him or her). Shares may be registered in the name of the Participant or jointly in the name of the Participant and his or her spouse as joint tenants with right of survivorship or as community property. (f) UNUSED CASH BALANCES. An amount remaining in the Participant's Plan Account that represents the Purchase Price for any fractional share shall be carried over in the Participant's Plan Account to the next Accumulation Period. Any amount remaining in the Participant's Plan Account that represents the Purchase Price for whole shares that could not be purchased by reason of Subsection (c) above, Section 8(b) or Section 12(a) shall be refunded to the Participant in cash, without interest. SECTION 8. LIMITATIONS ON STOCK OWNERSHIP. (a) FIVE PERCENT LIMIT. Any other provision of the Plan notwithstanding, no Participant shall be granted a right to purchase Stock under the Plan if such Participant, immediately after his or her election to purchase such Stock, would own stock possessing more than 5% of the total combined voting power or value of all classes of stock of the Company or any parent or Subsidiary of the Company. For purposes of this Subsection (a), the following rules shall apply: (i) Ownership of stock shall be determined after applying the attribution rules of section 424(d) of the Code; (ii) Each Participant shall be deemed to own any stock that he or she has a right or option to purchase under this or any other plan; and (iii) Each Participant shall be deemed to have the right to purchase 5,000 shares of Stock under this Plan with respect to each Accumulation Period. (b) $25,000 LIMIT. Any other provision of the Plan notwithstanding, no Participant shall purchase Stock with a Fair Market Value (determined as of the beginning of the applicable Offering Period) in excess of $25,000 during any calendar year under this Plan and all other employee stock purchase plans of the Company or any parent or Subsidiary of the Company. For purposes of this Subsection (b), employee stock purchase plans not described in section 423 of the Code shall be disregarded. If a Participant is precluded by this Subsection (b) from purchasing additional Stock under the Plan, then his or her employee contributions shall automatically be discontinued and shall resume at the beginning of the earliest Accumulation Period ending in the next calendar year (if he or she then is an Eligible Employee). 5 9 SECTION 9. RIGHTS NOT TRANSFERABLE. The rights of any Participant under the Plan, or any Participant's interest in any Stock or moneys to which he or she may be entitled under the Plan, shall not be transferable by voluntary or involuntary assignment or by operation of law, or in any other manner other than by beneficiary designation or the laws of descent and distribution. If a Participant in any manner attempts to transfer, assign or otherwise encumber his or her rights or interest under the Plan, other than by beneficiary designation or the laws of descent and distribution, then such act shall be treated as an election by the Participant to withdraw from the Plan under Section 5(a). SECTION 10. NO RIGHTS AS AN EMPLOYEE. Nothing in the Plan or in any right granted under the Plan shall confer upon the Participant any right to continue in the employ of a Participating Company for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Participating Companies or of the Participant, which rights are hereby expressly reserved by each, to terminate his or her employment at any time and for any reason, with or without cause. SECTION 11. NO RIGHTS AS A STOCKHOLDER. A Participant shall have no rights as a stockholder with respect to any shares of Stock that he or she may have a right to purchase under the Plan until such shares have been purchased on the last day of the applicable Accumulation Period. SECTION 12. STOCK OFFERED UNDER THE PLAN. (a) AUTHORIZED SHARES. The aggregate number of shares of Stock available for purchase under the Plan shall be 250,000, subject to adjustment pursuant to this Section 12. (b) ANTI-DILUTION ADJUSTMENTS. The aggregate number of shares of Stock offered under the Plan, the 5,000- share limitation described in Section 7(c) and the price of shares that any Participant has elected to purchase shall be adjusted proportionately by the Committee for any increase or decrease in the number of outstanding shares of Stock resulting from a subdivision or consolidation of shares or the payment of a stock dividend, any other increase or decrease in such shares effected without receipt or payment of consideration by the Company, the distribution of the shares of a Subsidiary to the Company's stockholders or a similar event. (c) REORGANIZATIONS. Any other provision of the Plan notwithstanding, immediately prior to the effective time of a Change in Control, the Offering Period and Accumulation Period then in progress shall terminate and shares shall be purchased pursuant to Section 7. In the event of a merger or consolidation to which the Company is a constituent corporation and which does not constitute a Change in Control, the Plan shall continue unless the plan of merger or consolidation provides otherwise. The Plan shall in no event be construed to restrict in any way the Company's right to undertake a dissolution, liquidation, merger, consolidation or other reorganization. 6 10 SECTION 13. AMENDMENT OR DISCONTINUANCE. The Board shall have the right to amend, suspend or terminate the Plan at any time and without notice. Except as provided in Section 12, any increase in the aggregate number of shares of Stock to be issued under the Plan shall be subject to approval by a vote of the stockholders of the Company. In addition, any other amendment of the Plan shall be subject to approval by a vote of the stockholders of the Company to the extent required by an applicable law or regulation. SECTION 14. DEFINITIONS (a) "ACCUMULATION PERIOD" means a six-month period during which contributions may be made toward the purchase of Stock under the Plan, as determined pursuant to Section 3(b). (b) "BOARD" means the Board of Directors of the Company, as constituted from time to time. (c) "CHANGE IN CONTROL" means: (i) The consummation of a merger or consolidation of the Company with or into another entity or any other corporate reorganization, if more than 50% of the combined voting power of the continuing or surviving entity's securities outstanding immediately after such merger, consolidation or other reorganization is owned by persons who were not stockholders of the Company immediately prior to such merger, consolidation or other reorganization; or (ii) The sale, transfer or other disposition of all or substantially all of the Company's assets or the complete liquidation or dissolution of the Company. A transaction shall not constitute a Change in Control if its sole purpose is to change the state of the Company's incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Company's securities immediately before such transaction. (d) "CODE" means the Internal Revenue Code of 1986, as amended. (e) "COMMITTEE" means a committee of the Board, as described in Section 2. (f) "COMPANY" means Heska Corporation, a Delaware corporation. (g) "COMPENSATION" means (i) the total compensation paid in cash to a Participant by a Participating Company, including salaries, wages, bonuses, incentive compensation, commissions and overtime pay, plus (ii) any pre-tax contributions made by the Participant under section 401(k) or 125 of the Code. Compensation shall exclude moving or relocation allowances, car allowances, imputed income attributable to cars or life insurance, fringe benefits, 7 11 contributions to employee benefit plans and similar items. The Committee shall determine whether a particular item is included in Compensation. (e) "ELIGIBLE EMPLOYEE" means any employee of a Participating Company who meets both of the following requirements: (i) His or her customary employment is for more than five months per calendar year and for more than 20 hours per week; and (ii) He or she either (A) has been an employee of a Participating Company for not less than 30 consecutive days or (B) is an employee of a Participating Company on the date of the IPO. The foregoing notwithstanding, an individual shall not be considered an Eligible Employee if his or her participation in the Plan is prohibited by the law of any country which has jurisdiction over him or her or if he or she is subject to a collective bargaining agreement that does not provide for participation in the Plan. (i) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (ii) "FAIR MARKET VALUE" means the market price of Stock, determined by the Committee as follows: (i) If Stock was traded over-the-counter on the date in question but was not traded on The Nasdaq Stock Market or The Nasdaq National Market, then the Fair Market Value shall be equal to the mean between the last reported representative bid and asked prices quoted for such date by the principal automated inter-dealer quotation system on which Stock is quoted or, if the Stock is not quoted on any such system, by the "Pink Sheets" published by the National Quotation Bureau, Inc.; (ii) If Stock was traded over-the-counter on the date in question and was traded on The Nasdaq Stock Market or The Nasdaq National Market, then the Fair Market Value shall be equal to the last-transaction price quoted for such date by The Nasdaq Stock Market or The Nasdaq National Market; (iii) If the Stock was traded on a stock exchange on the date in question, then the Fair Market Value shall be equal to the closing price reported by the applicable composite transactions report for such date; and (iv) If none of the foregoing provisions is applicable, then the Fair Market Value shall be determined by the Committee in good faith on such basis as it deems appropriate. Whenever possible, the determination of Fair Market Value by the Committee shall be based on the prices reported in The Wall Street Journal or as reported directly to the Company by Nasdaq or a comparable exchange. Such determination shall be conclusive and binding on all persons. 8 12 (k) "IPO" means the initial offering of Stock to the public pursuant to a registration statement filed with the Securities and Exchange Commission on Form S-1. (l) "OFFERING PERIOD" means a 24-month period with respect to which the right to purchase Stock may be granted under the Plan, as determined pursuant to Section 3(a). (m) "PARTICIPANT" means an Eligible Employee who elects to participate in the Plan, as provided in Section 3(c). (n) "PARTICIPATING COMPANY" means (i) the Company and (ii) each present or future Subsidiary designated by the Committee as a Participating Company. (o) "PLAN" means this Heska Corporation 1997 Employee Stock Purchase Plan, as it may be amended from time to time. (p) "PLAN ACCOUNT" means the account established for each Participant pursuant to Section 7(a). (q) "PURCHASE PRICE" means the price at which Participants may purchase Stock under the Plan, as determined pursuant to Section 7(b). (r) "STOCK" means the Common Stock of the Company. (s) "SUBSIDIARY" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. SECTION 15. EXECUTION. To record the adoption of the Plan by the Board on ________ __, 1997, the Company has caused its authorized officer to execute the same. HESKA CORPORATION By: ---------------------------- Title: ------------------------- 9 13 HESKA CORPORATION 1997 EMPLOYEE STOCK PURCHASE PLAN BENEFICIARY DESIGNATION Name: ------------------------------------- Social Security Number - - ----- --- ----- If I die, any unused cash in my account under the Heska Corporation 1997 Employee Stock Purchase Plan (the "Plan") is to be paid to those beneficiaries designated below who survive me, subject to the provisions of the Plan. The payment is to be made as follows [check one box only]: [ ] Entirely to the spouse to whom I am currently married. [Please provide names and addresses below.] If my spouse does not survive me, payment is to be made to [check one box only]: [ ] All of my children who survive me in equal shares. [ ] All of the persons named below who survive me in equal shares. [ ] To all of my children who survive me in equal shares. [Please provide names and addresses below.] [ ] Entirely to the first person named below who survives me. [ ] To all of the persons named below who survive me in equal shares. [ ] Other [please use a separate sheet if necessary]: ---------------------------------------------- ---------------------------------------------- ---------------------------------------------- ---------------------------------------------- ---------------------------------------------- ---------------------------------------------- The term "children" means natural or legally adopted children but excludes stepchildren (if not adopted). The term "siblings" means brothers and sisters, whether natural or adoptive, but excludes stepbrothers and stepsisters. 1 14 The names and addresses of my beneficiaries are as follows [please use a separate sheet if necessary]: 1. Name: Relationship: ------------------- ----------- Address: --------------------------------------- Telephone ( ) ---------------- ------------- 2. Name: Relationship: ------------------- ----------- Address: --------------------------------------- Telephone ( ) ---------------- ------------- 3. Name: Relationship: ------------------- ----------- Address: --------------------------------------- Telephone ( ) ---------------- ------------- 4. Name: Relationship: ------------------- ----------- Address: --------------------------------------- Telephone ( ) ---------------- ------------- 5. Name: Relationship: ------------------- ----------- Address: --------------------------------------- Telephone ( ) ---------------- ------------- This beneficiary designation is to take effect on the date when it is received by the person responsible for administering the Plan at Heska Corporation, and it supersedes any prior designations that I may have made under the Plan. , 199 - -------------- -- ---------------------------- (Signature) Please file this form with . --------------------- - -------------------------------------------------------------------------------- Received by: Date of receipt: . 199 ------------------ -- 2 EX-10.22 31 LEASE AGREEMENT DATED 03-08-94 1 EXHIBIT 10.22 LEASE AGREEMENT OFFICE AND INDUSTRIAL SPACE This Lease Agreement is made and entered into as of the 8th day of March,1994, by and between Sharp Point Properties, LLC ("Landlord"), whose address is 4875 Pearl East Circle, Suite 300, Boulder, CO 80301, and Paravax, Inc. ("Tenant"), whose address is 1825 Sharp Point Drive, Fort Collins, CO 80525 . In consideration of the covenants, terms, conditions, agreements and payments as herein set forth, the Landlord and Tenant hereby enter into the following Lease: 1. Definitions. Whenever the following words or phrases are used in this Lease, said words or phrases shall have the following meaning: A. "Area" shall mean the parcel of land depicted on Exhibit "A" attached hereto and commonly known and referred to as 1825 Sharp Point Drive, Fort Collins, Colorado. The Area includes the Leased Premises and one or more buildings. The Area may include Common Areas. B. "Building" shall mean a building located in the Area. C. "Common Areas" shall mean all entrances, exits, driveways, curbs, walkways, hallways, parking areas, landscaped areas, restrooms, loading and service areas, and like areas or facilities which are located in the Area and which are designated by the Landlord as areas or facilities available for the nonexclusive use in common by persons designated by the Landlord. D. "Leased Premises" shall mean the premises herein leased to the Tenant by the Landlord. E. "Tenant's Prorata Share" as to the Building in which the Leased Premises are located shall mean an amount (expressed as a percentage) equal to the number of square feet included in the Leased Premises divided by the total number of leasable square feet included in said Building. The Tenant's Prorata Share as to Common Areas shall mean an amount (expressed as a percentage ) equal to the number of square feet included in the Leased Premises divided by the total number of leasable square feet included in all Buildings located in the Area. The Tenant's Prorata Share for Common Areas may change from time to time as the leasable square footage in all Buildings located in the Area is increased or decreased. 2. Leased Premises. The Landlord hereby leases unto the Tenant, and the Tenant hereby leases from the Landlord, the following described premises: Space All in Building 1825 Sharp Point Drive consisting of 19,200 square feet. 3. Base Term. The term of this Lease shall commence at 12:00 noon on September 1, 1994, and, unless sooner terminated as herein provided for, shall end at 12:00 noon on September, 2004 ("Lease Term"). Except as specifically provided to the contrary herein, the Leased Premises shall, upon the termination of this Lease, by virtue of the expiration of the Lease Term or otherwise, be returned to the Landlord by the Tenant in as good or better condition than when entered upon by the Tenant, ordinary wear and tear excepted. For Option Period see Exhibit F. The term of this Lease will move to October 1, 1994 - October 1, 2004 if Landlord so notifies Tenant by March 31, 1994 4. Rent. Tenant shall pay the following rent for the Leased Premises: A. Base Monthly Rent. Tenant shall pay to Landlord, without notice and without setoff, at the address of Landlord as herein set forth, the following Base Monthly Rent ("Base Monthly Rent"), said Base Monthly Rent to be paid in advance on the first day of each month during the term hereof. In the event that this Lease commences on a date other than the first day of a month, the Base Monthly Rent for the first month of the Lease Term shall be prorated for said partial month. Below is a schedule of Base Monthly Rental payments as agreed upon: Page 1 of 21 Pages INITIAL DFC ----------- GPL ----------- 2 During Lease Term
FOR PERIOD TO PERIOD A BASE MONTHLY STARTING ENDING RENT OF September 1, 1994 September 1, 2004 $ 14,320.00
B. Lease Term Adjustment. If, for any reason, other than delays caused by the Tenant, the Leased Premises are not ready for Tenant's occupancy on September 1, 1994, the Tenant's rental obligation and other monetary expenses (i.e. taxes, utilities, etc.) shall be abated in direct proportion to the number of days of delay. It is hereby agreed that the premises shall be deemed ready for occupancy on the day the Landlord receives a T.C.O. or C.O. from the appropriate authority, or on the day the Landlord gives Tenant the keys to the Leased Premises if a building permit has not been applied for and/or is not required by the appropriate authority. C. Cost of Living Adjustment. The Base Monthly Rental specified in paragraph 4A above shall be recalculated for each Lease Year as defined hereinafter following the first Lease Year of this Lease Agreement. The recalculated Base Monthly Rental shall be hereinafter referred to as the "Adjusted Monthly Rental". The Adjusted Monthly Rental for each Lease Year after the first Lease Year shall be the greater of: (i) the amount of the previous year's Adjusted Monthly Rental, (or the Base Monthly Rental if calculating the Adjusted Monthly Rental for the second Lease Year), or (ii) an amount calculated by the rent adjustment formula set forth below. In applying the rent adjustment formula, the following definitions shall apply: (1) "Lease Year" shall mean a period of twelve (12) consecutive full calendar months with the first Lease Year commencing on the date of the commencement of the term of this Lease and each succeeding Lease Year commencing upon the anniversary date of the first Lease Year; however, if this Lease does not commence on the first day of a month, then, the first Lease Year and each succeeding Lease Year shall commence on the first day of the first month following each anniversary date of this Lease; (2) "Bureau" shall mean the Bureau of Labor Statistics of the United States Department of Labor or any successor agency that shall issue the Price Index referred to in this Lease Agreement. (3) "Price Index" shall mean the "Consumer Price Index-All Urban Consumers-All Items (CPI-U) U.S. City Average (1982-84=100)" issued from time to time by the Bureau. In the event the Price Index shall hereafter be converted to a different standard reference base or otherwise revised, the determination of the increase in the Price Index shall be made with the use of such conversion factor, formula or table as may be published by Prentice-Hall, Inc. or failing such publication, by another nationally recognized publisher of similar statistical information. In the event the Price Index shall cease to be published, then, for the purposes of this paragraph 4C there shall be substituted for the Price Index such other index as the Landlord and the Tenant shall agree upon, and if they are unable to agree within sixty (60) days after the Price Index ceases to be published, such matter shall be determined by arbitration in accordance with the Rules of the American Arbitration Association. (4) "Base Price Index" shall mean the Price Index released to the public during the second calendar month preceding the commencement of this Lease Agreement. (5) "Revised Price Index" shall mean the Price Index released to the public during the second calendar month preceding the Lease Year for which the Base Annual Rental is to be adjusted; (6) "Basic Monthly Rental" shall mean the Basic Monthly Rental set forth in subparagraph 4A above. The rent adjustment formula used to calculate the Adjusted Monthly Rental is as follows: Adjusted Monthly = Revised Price Index X Base Monthly Rental Rental ------------------- Base Price Index (7) Notwithstanding anything contained to the contrary in this Paragraph C, Tenant's annual increase shall be no greater than 5%. Page 2 of 21 Pages INITIAL DFC ----------- GPL ----------- 3 The Adjusted Monthly Rental as hereinabove provided shall continue to be payable monthly as required in paragraph 4A above without necessity of any further notice by the Landlord to the Tenant. D. Total Net Lease. The Tenant understands and agrees that this Lease is a total net lease (a "net, net, net lease"), whereby the Tenant has the obligation to reimburse the Landlord for a share of all costs and expenses (taxes, insurance, trash removal, Common Area operation and maintenance and like costs and expenses), incurred by the Landlord as a result of the Landlord's ownership and operation of the Area. Major capital improvements, such as total replacement of the roof or parking lot are not considered to be maintenance items as described in this Paragraph 6D. 5. Security Deposit. Landlord acknowledges receipt from the Tenant of the sum of Fourteen Thousand, Three Hundred Twenty & No/100 Dollars ($ 14,320.00 ) to be retained by Landlord without responsibility for payment of interest thereon, as security for performance of all the terms and conditions of this Lease Agreement to be performed by Tenant, including payment of all rent due under the terms hereof. Deductions may be made by Landlord from the amount so retained for the reasonable cost of repairs to the Leased Premises (ordinary wear and tear excepted), for any rent delinquent under the terms hereof and/or for any sum used in any manner to cure any default of Tenant under the terms of this Lease. In the event deductions are so made, the Tenant shall, upon notice from the Landlord, redeposit with the Landlord such amounts so expended so as to maintain the deposit in the amount as herein provided for, and failure to so redeposit shall be deemed a failure to pay rent under the terms hereof. Nothing herein contained shall limit the liability of Tenant as to any damage to the Leased Premises, and Tenant shall be responsible for the total amount of any damage and/or loss occasioned by actions of Tenant. Landlord may deliver the funds deposited hereunder by Tenant to any purchaser of Landlord's interest in the Leased Premises in the event such interest shall be sold, and thereupon Landlord shall be discharged from any further liability with respect to such deposit. 6. Use of Premises. Tenant shall use the Leased Premises only for Research, Development and Manufacture of Biopharmaceutical Products and for no other purpose whatsoever except with the written consent of Landlord. Tenant shall not allow any accumulation of trash or debris on the Leased Premises or within any portion of the Area. All receiving and delivery of goods and merchandise and all removal of garbage and refuse shall be made only by way of the rear and/or other service door provided therefore. In the event the Leased Premises shall have no such door, then these matters shall be handled in a manner satisfactory to Landlord. No storage of any material outside of the Leased Premises shall be allowed unless first approved by Landlord in writing, and then in only such areas as are designated by Landlord. Tenant shall not commit or suffer any waste on the Leased Premises nor shall Tenant permit any nuisance to be maintained on the Leased Premises or permit any disorderly conduct or other activity having a tendency to annoy or disturb any occupants of any part of the Area and/or any adjoining property. 7. Laws and Regulations. -- Tenant Responsibility. The Tenant shall, at its sole cost and expense, comply with all laws and regulations of any governmental entity, board, commission or agency having jurisdiction over the Leased Premises. Tenant agrees not to install any electrical equipment that overloads any electrical paneling, circuitry or wiring and further agrees to comply with the requirements of the insurance underwriter or any governmental authorities having jurisdiction thereof. 8. Landlord's Rules and Regulations. Landlord reserves the right to adopt and promulgate rules and regulations applicable to the Leased Premises and from time to time amend or supplement said rules or regulations. Notice of such rules and regulations and amendments and supplements thereto shall be given to Tenant, and Tenant agrees to comply with and observe such rules and regulations and amendments and supplements thereto provided that the same apply uniformly to all Tenants of the Landlord in the Area. 9. Parking. If the Landlord provides off street parking for the common use of Tenants, employees and customers of the Area, the Tenant shall park all vehicles of whatever type used by Tenant and/or Tenant's employees only in such areas thereof as are designated by Landlord for this purpose, and Tenant accepts the responsibility of seeing that Tenant's employees park only in the areas so designated. Tenant shall, upon the request of the Landlord, provide to the Landlord license numbers of the Tenant's vehicles and the vehicles of Tenant's employees. 10. Control of Common Areas. -- Exclusive control of the Landlord. All Common Areas shall at all times be subject to the exclusive control and management of Landlord, notwithstanding that Tenant and/or Tenant's employees and/or customers may have a nonexclusive right to the use thereof. Landlord shall have the right from time to time to establish, modify and enforce rules and regulations with respect to the use of said facilities and Common Areas. Page 3 of 21 Pages INITIAL DFC ----------- GPL ----------- 4 11. Taxes. A. Real Property Taxes and Assessments. The Tenant shall pay to the Landlord on the first day of each month, as additional rent, the Tenant's Prorata Share of all real estate taxes and special assessments levied and assessed against the Building in which the Leased Premises are located and the Common Areas. If the first and last years of the Lease Term are not calendar years, the obligations of the Tenant hereunder shall be prorated for the number of days during the calendar year that this Lease is in effect. The monthly payments for such taxes and assessments shall be $ 1,440.00 until the Landlord receives the first tax statement for the referred to properties. Thereafter, the monthly payments shall be based upon 1/12th of the prior year's taxes and assessments. Once each year the Landlord shall determine the actual Tenant's Prorata Share of taxes and assessments for the prior year and if the Tenant has paid less than the Tenant's Prorata Share for the prior year the Tenant shall pay the deficiency to the Landlord with the next payment of Base Monthly Rent, or, if the Tenant has paid in excess of the Tenant's Prorata Share for the prior year the Landlord shall forthwith refund said excess to the Tenant. B. Personal Property Taxes. Tenant shall be responsible for, and shall pay promptly when due, any and all taxes and/or assessments levied and/or assessed against any furniture, fixtures, equipment and items of a similar nature installed and/or located in or about the Leased Premises by Tenant. C. Rent Tax. If a special tax, charge or assessment is imposed or levied upon the rents paid or payable hereunder or upon the right of the Landlord to receive rents hereunder (other than to the extent that such rents are included as a part of the Landlord's income for the purpose of an income tax), the Tenant shall reimburse the Landlord for the amount of such tax within fifteen (15) days after demand therefore is made upon the Tenant by the Landlord. D. Should Landlord protest and win a reduction in the real estate taxes for the Building and Area, Tenant shall be obligated to pay its Prorata Share of the cost of such protest, if the protest is handled by a party other than the Landlord. 12. Insurance. A. Landlord's Insurance. The Landlord shall procure and maintain fire and casualty coverage for full replacement value of building to include, but not be limited to roofs and walls, loss of rents and liability insurance as it, from time to time, deems proper and appropriate in reference to the Building in which the Leased Premises are located and the Common Areas. Such insurance shall not be required to cover any of the Tenant's property and the Tenant shall have no interest in any of the proceeds of such insurance. B. Tenant's Insurance. Tenant shall, at its sole cost and expense, insure on a full replacement cost basis, Tenant's inventory, fixtures, leasehold improvements and betterments located on the Leased Premises against loss resulting from fire or other casualty. Tenant shall procure, pay for and maintain, comprehensive public liability insurance providing coverage from and against any loss or damage occasioned by an accident or casualty on, about or adjacent to the Leased Premises. Said liability policy shall be written on an "occurrence basis" with limits of not less than $1,000,000 combined single limit coverage. Certificates for such insurance shall be delivered to Landlord and shall provide that said insurance shall not be changed, modified, reduced or cancelled without thirty (30) days prior written notice thereof being given to Landlord. C. Tenant's High Pressure Steam Boiler Insurance. If Tenant makes use of any kind of steam or other high pressure boiler or other apparatus which presents a risk of damage to the Leased Premises or to the Building or other improvements of which the Leased Premises are a part or to the life or limb of persons within such premises, Tenant shall secure and maintain appropriate boiler insurance in an amount satisfactory to Landlord. The Landlord shall be named insured in any such policy or policies. Certificates for such insurance shall be delivered to Landlord and shall provide that said insurance shall not be changed, modified, reduced or cancelled without thirty (30) days prior written notice thereof being given to Landlord. D. Tenant's Share of Landlord Insurance. Tenant shall pay the Landlord as additional rent Tenant's Prorata Share of the insurance secured by the Landlord pursuant to "12A" above. Payment shall be made on the first day of each month as additional rent. The monthly payments for such insurance shall be $96.00 until changed by Landlord as a result of an increase or decrease in the cost of such insurance. E. Mutual Subrogation Waiver. Landlord and Tenant hereby grant to each other, on behalf of any insurer providing fire and extended coverage to either of them covering the Leased Premises, Buildings or other improvements thereon or contents thereof, a waiver of any right of subrogation any such insurer of one party may acquire against the other or as against the Landlord or Page 4 of 21 Pages INITIAL DFC ----------- GPL ----------- 5 Tenant by virtue of payments of any loss under such insurance. Such a waiver shall be effective so long as the Landlord and Tenant are empowered to grant such waiver under the terms of their respective insurance policy or policies and such waiver shall stand mutually terminated as of the date either Landlord or Tenant gives notice to the other that the power to grant such waiver has been so terminated. 13. Utilities. Tenant shall be solely responsible for and promptly pay all charges for heat, water, gas, electric, sewer service and any other utility service used or consumed on the Leased Premises. Should Landlord elect to supply all or any of the utility services to be used or consumed on the Leased Premises, Tenant shall, within ten (10) days from presentation of the statement for such utility service, pay to Landlord, as additional rent under the terms hereof, the amount of said statement if it represents utility service furnished to the Leased Premises only or its prorata share of said statement if it includes utility service to an area greater than the Leased Premises. Said proration of utilities shall be reviewed by Landlord and Tenant at the end of the first year of occupancy, at which time Landlord shall determine if the present percentage of said total utilities is equitable in relation to the use of total services by all the Tenants and will be adjusted by Landlord, if necessary. The Tenant shall forthwith upon taking occupancy of the Leased Premises make arrangements with the Public Service Company, U.S. West or other appropriate utility company to pay the utilities used on the Leased Premises and to have the same billed to the Tenant at the address designated by the Tenant. Should there be a time where the Landlord remains responsible for utilities supplied to the Leased Premises, the Landlord shall bill the Tenant therefore and the Tenant shall promptly reimburse the Landlord therefore. In no event shall Landlord be liable for any interruption or failure in the supply of any such utility to the Leased Premises. In the event the utility company supplying water and/or sewer to the Leased Premises determines that an additional service fee, impact fee, and/or assessment, or any other type of payment or penalty is necessary due to Tenant's use and occupancy of the Building, nature of operation and/or consumption of utilities, said expense shall be borne solely by the Tenant. Said expense shall be paid promptly and any repairs requested by the utility company shall be performed by Tenant immediately and without any delay. 14. Maintenance Obligations of Landlord. Except as herein otherwise specifically provided for, and not including capital improvement, Landlord shall keep and maintain the roof and exterior of the Building of which the Leased Premises are a part in good repair and condition. Tenant shall repair and pay for any damage to roof, foundation and external walls caused by Tenant's action, negligence or fault. 15. Maintenance Obligations of the Tenant. Subject only to the maintenance obligations of the Landlord as herein provided for, the Tenant shall, during the entire Lease Term, including all extensions thereof, at the Tenant's sole cost and expense, keep and maintain the Leased Premises in good condition and repair, including specifically the following: A. Electrical Systems. Tenant agrees to maintain in good working order and to make all required repairs and replacements to the electrical systems for the Leased Premises. Tenant upon signing this Lease acknowledges that Tenant has inspected the existing electrical systems and all such systems are in good repair and working order. B. Plumbing Systems. Tenant agrees to maintain in good working order and to make all required repairs or replacements to the plumbing systems for the Leased Premises. Tenant upon signing this Lease acknowledges that Tenant has inspected the existing plumbing systems and all such systems are in good repair and working order. C. Inspections and Service. Upon termination of Lease Agreement, Tenant agrees, before vacating premises, to employ at Tenant's sole cost and expense, a licensed contractor to inspect, service and write a written report on the systems referred to in "A" and "B" of this Paragraph. Landlord shall have the right to order such an inspection if Tenant fails to provide evidence of such inspection, and, to follow the recommendations of such reports and to charge the expense thereof to the Tenant. D. Tenant's Responsibility for Building and Area Repairs. Tenant shall be responsible for any repairs required for any part of the Building or Area of which the Leased Premises are a part if such repairs are necessitated by the actions or inactions of Tenant. E. Cutting Roof. Tenant must obtain in writing the Landlord's approval prior to making any roof penetrations. Failure by Tenant to obtain written permission to penetrate a roof shall relieve Landlord of any roof repair obligations as set forth in Paragraph "14" hereof. Tenant further agrees to repair, at its sole cost and expense, all roof penetrations made by the Tenant and to use, if so requested by Landlord, a licensed contractor selected by the Landlord to make such penetrations and repairs. Page 5 of 21 Pages INITIAL DFC ----------- GPL ----------- 6 F. Glass and Doors. The repair and replacement of all glass and doors on the Leased Premises shall be the responsibility of the Tenant. Any such replacements or repairs shall be promptly completed at the expense of the Tenant. G. Liability for Overload. Tenant shall be responsible for the repair or replacement of any damage to the Leased Premises, the Building or the Area which result from the Tenant's movement of heavy articles therein or thereon. Tenant shall not overload the floors of any part of the Leased Premises. H. Liability for Overuse and Overload of Operating Systems. Tenant shall be responsible for the repair, upgrade, modification, and/or replacement of any operating systems servicing the Leased Premises and/or all or part of the Building which is necessitated by Tenant's change or increase in use of or non-disclosed use of all or a part of the Leased Premises. Operating systems include, but are not limited to, electrical systems; plumbing systems (both water and natural gas); heating, ventilating, and air conditioning systems; telecommunications systems; computer and network systems; lighting systems, fire sprinkler systems; security systems; and building control systems, if any. I. Inspection of Leased Premises-"As Is" Conditions. Tenant has inspected the Leased Premises and accepts the Leased Premises in the condition that they exist as of the date of this Lease, including, but not limited to, all mechanical, plumbing and electrical systems and the conditions of the interior except: Tenant shall have thirty (30) days to inspect the condition of the mechanical, plumbing and electrical systems to ensure that they are in good working order. If said systems are not found to be in good working order as determined by a licensed contractor, Landlord shall be responsible for making any necessary repairs. J. Failure of Tenant to Maintain Premises. Should Tenant neglect to keep and maintain the Leased Premises as required herein, the Landlord shall have the right, but not the obligation, to have the work done and any reasonable costs plus a ten percent (10%) overhead charge therefore shall be charged to Tenant as additional rental and shall become payable by Tenant with the payment of the rental next due. 16. Common Area Maintenance. Tenant shall be responsible for Tenant's Prorata share of the total costs incurred for the operation, maintenance and repair of the Common Areas, including, but not limited to, the costs and expenses incurred for the operation, maintenance and repair of parking areas (including restriping and repaving); removal of snow; utilities for common lighting and signs; normal HVAC maintenance and elevator maintenance (if applicable); trash removal; security to protect and secure the Area; common entrances, exits, and lobbies of the Building; all common utilities, including water to maintain landscaping; replanting in order to maintain a smart appearance of landscape areas; supplies; depreciation on the machinery and equipment used in such operation, maintenance and repair; the cost of personnel to implement such services; the cost of maintaining in good working condition the HVAC system(s) for the Leased premises; the cost of maintaining in good working condition the elevator(s) for the Leased Premises, if applicable; and Ten percent ( 10 %) of all such operational, maintenance and repair costs to cover Landlord's administrative and overhead costs. These costs shall be estimated on an annual basis by the Landlord and shall be adjusted upwards or downwards depending on the actual costs for the preceding twelve months. Tenant shall pay monthly, commencing with the first month of the Lease Term, as additional rent due under the terms hereof, a sum equal to Tenant's Prorata Share of the estimated costs for said twelve (12) month period, divided by 12. The estimated initial monthly costs are $ 1,040.00. Once each year the Landlord shall determine the actual costs of the foregoing expenses for the prior year and if the actual costs are greater than the estimated costs, the Tenant shall pay its Tenant's Prorata Share of the difference between the estimated costs and the actual costs to the Landlord with the next payment of Base Monthly Rent, or, if the actual costs are less than the estimated costs, the Landlord shall forthwith refund the amount of the Tenant's excess payment to the Tenant. 17. Inspection of and Right of Entry to Leased Premises--Regular, Emergency, Reletting. Landlord and/or Landlord's agents and employees, shall have the right to enter the Leased Premises at all times during regular business hours and, at all times during emergencies, to examine the Leased Premises, to make such repairs, alterations, improvements or additions as Landlord deems necessary, and Landlord shall be allowed to take all materials into and upon said Leased Premises that may be required therefore without the same constituting an eviction of Tenant in whole or in part, and the rent reserved shall in no way abate while such repairs, alterations, improvements or additions are being made, by reason of loss or interruption of business of Tenant or otherwise. During the six months prior to the expiration of the term of this Lease or any renewal thereof, Landlord may exhibit the Leased Premises to prospective tenants and/or purchasers and may place upon the Leased Premises the usual notices indicating that the Leased Premises are for lease and/or sale. Page 6 of 21 Pages INITIAL DFC ----------- GPL ----------- 7 18. Alteration-Changes and Additions-Responsibility. Unless the Landlord's approval is first secured in writing, such approval not to be unreasonably withheld, the Tenant shall not install or erect inside partitions, add to existing electric power service, add telephone outlets, add light fixtures, install additional heating and/or air conditioning or make any other changes or alterations to the interior or exterior of the Leased Premises. Any such changes or alterations shall be made at the sole cost and expense of the Tenant. At the end of this Lease, all such fixtures, equipment, additions, changes and/or alterations (except trade fixtures installed by Tenant) shall be and remain the property of Landlord; provided, however, Landlord shall have the option to require Tenant to remove any or all such fixtures, equipment, additions and/or alterations and restore the Leased Premises to the condition existing immediately prior to such change and/or installation, normal wear and tear excepted, all at Tenant's cost and expense. All such work shall be done in a good and workmanlike manner and shall consist of new materials unless agreed to otherwise by Landlord. Any and all repairs, changes and/or modifications thereto shall be the responsibility of, and at the cost of, Tenant. Landlord may require adequate security from Tenant assuring no mechanics' liens on account of work done on the Leased Premises by Tenant and may post the Leased Premises, or take such other action as is then permitted by law, to protect the Landlord and the Leased Premises against mechanics' liens. Landlord may also require adequate security to assure Landlord that the Leased Premises will be restored to their original condition upon termination of this Lease. 19. Sign Approval. Except for signs which are located inside of the Leased Premises and which are not attached to any part of the Leased Premises, the Landlord must approve in writing any sign to be placed in or on the interior or exterior of the Leased Premises, regardless of size or value. Specifically, signs attached to windows of the Leased Premises must be so approved by the Landlord. As a condition to the granting of such approval, Landlord shall have the right to require Tenant to furnish a bond or other security acceptable to Landlord sufficient to insure completion of and payment for any such sign work to be so performed. Tenant shall, during the entire Lease Term, maintain Tenant's signs in good condition and repair at Tenant's sole cost and expense. Tenant shall, remove all signs at the termination of this Lease, at Tenant's sole risk and expense and shall in a workmanlike manner properly repair any damage and close any holes caused by the installation and/or removal of Tenant's signs. Tenant shall give Landlord prior notice of such removal so that a representative of Landlord shall have the opportunity of being present when the signage is removed, or shall pre-approve the manner and materials used to repair damage and close the holes caused by removal. 20. Right of Landlord to Make Changes and Additions. Landlord reserves the right at any time to make alterations or additions to the Building or Area of which the Leased Premises are a part. Landlord also reserves the right to construct other buildings and/or improvements in the Area and to make alterations or additions thereto, all as Landlord shall determine. Easements for light and air are not included in the leasing of the Leased Premises to Tenant. Landlord further reserves the exclusive right to the roof of the Building of which the Leased Premises are a part. Landlord also reserves the right at any time to relocate, vary and adjust the size of any of the improvements or Common Areas located in the Area, provided, however, that all such changes shall be in compliance with the requirements of governmental authorities having jurisdiction over the Area. Nothing in this Lease will require Tenant to indemnify, hold harmless or release Landlord for any claim, loss, expense, cost judgement and/or demand, or fees, arising from the negligence or willful misconduct of Landlord, its agents, employees or contractors, or a breach of the obligations of Landlord hereunder. 21. Damage or Destruction of Leased Premises. In the event the Leased Premises and/or the Building of which the Leased Premises are a part shall be totally destroyed by fire or other casualty or so badly damaged that, in the opinion of Landlord and Tenant, it is not feasible to repair or rebuild same, Landlord shall have the right to terminate this Lease upon written notice to Tenant. If the Leased Premises are partially damaged by fire or other casualty, except if caused by Tenant's negligence, and said Leased Premises are not rendered untenantable thereby, as determined by Landlord and Tenant, an appropriate reduction of the rent shall be allowed for the unoccupied portion of the Leased Premises until repair thereof shall be substantially completed. If the Landlord elects to exercise the right herein vested in it to terminate this Lease as a result of damage to or destruction of the Leased Premises or the Building in which the Leased Premises are located, said election shall be made by giving notice thereof to the Tenant within thirty (30) days after the date of said damage or destruction. 22. Governmental Acquisition of Property. The parties agree that Landlord shall have complete freedom of negotiation and settlement of all matters pertaining to the acquisition of the Leased Premises, the Building, the Area, or any part thereof, by any governmental body or other person or entity via the exercise of the power of eminent domain, it being understood and agreed that any financial settlement made or compensation paid respecting said land or Page 7 of 21 Pages INITIAL DFC ----------- GPL ----------- 8 improvements to be so taken, whether resulting from negotiation and agreement or legal proceedings, shall be the exclusive property of Landlord, there being no sharing whatsoever between Landlord and Tenant of any sum so paid. In the event of any such taking, Landlord shall have the right to terminate this Lease on the date possession is delivered to the condemning person or authority. Such taking of the property shall not be a breach of this Lease by Landlord nor give rise to any claims in Tenant for damages or compensation from Landlord. Nothing herein contained shall be construed as depriving the Tenant of the right to retain as its sole property any compensation paid for any tangible personal property owned by the Tenant which is taken in any such condemnation proceeding. 23. Assignment or Subletting. Tenant may not assign this Lease, or sublet the Leased Premises or any part thereof, without the written consent of Landlord, such consent not to be unreasonably withheld. No such assignment or subletting if approved by the Landlord shall relieve Tenant of any of its obligations hereunder, and, the performance or nonperformance of any of the covenants herein contained by subtenants shall be considered as the performance or the nonperformance by the Tenant. In the event of an acquisition, merger, or reorganization, the assignment of the Lease shall not be unreasonably withheld by Landlord. 24. Warranty of Title. Subject to the provisions of the following three (3) paragraphs hereof, Landlord covenants it has good right to lease the Leased Premises in the manner described herein and that Tenant shall peaceably and quietly have, hold, occupy and enjoy the Leased Premises during the term of the Lease. 25. Access. Landlord shall provide Tenant nonexclusive access to the Leased Premises through and across land and/or other improvements owned by Landlord. Landlord shall have the right, during the term of this Lease, to designate, and to change, such nonexclusive access. 26. Subordination. Tenant agrees that this Lease shall be subordinate to any mortgages, trust deeds or ground leases that may now exist or which may hereafter be placed upon said Leased Premises and to any and all advances to be made thereunder, and to the interest thereon, and all renewals, replacements and extensions thereof. Tenant shall execute and deliver whatever instruments may be required for the above purposes, and failing to do so within ten (10) days after demand in writing, does hereby make, constitute and irrevocably appoint Landlord as its attorney-in-fact and in its name, place and stead so to do. Tenant shall in the event of the sale or assignment of Landlord's interest in the Area or in the Building of which the Leased Premises form a part, or in the event of any proceedings brought for the foreclosure of or in the event of exercise of the power of sale under any mortgage made by Landlord covering the Leased Premises, attorn to the purchaser and recognize such purchaser as Landlord under this Lease. 27. Easements. The Landlord shall have the right to grant any easement on, over, under and above the Area for such purposes as Landlord determines, provided that such easements do not materially interfere with Tenant's occupancy and use of the Leased Premises. 28. Tenant's Hold Harmless and Indemnification Agreement. Tenant shall indemnify and hold Landlord harmless from and against any and all claims, losses, expenses, costs, judgments, and/or demands, including court costs and attorney's fees, suffered or incurred by the Landlord, arising from activities of Tenant on the Leased Premises or in the Building or in the Area and/or on account of any operation or action by Tenant and/or from and against all claims arising from any breach or default on the part of Tenant or any act of negligence of Tenant, it agents, contractors, servants, employees, licensees, or invitees; or any accident, injury or death of any person or damage to any property in or about the Leased Premises, the Building or the Area. 29. Acts or Omission of Others. The Landlord, or its employees or agents, or any of them, shall not be responsible or liable to the Tenant or to the Tenant's guests, invitees, employees, agents or any other person or entity, for any loss or damage that may be caused by the acts or omissions of other tenants, their guests or invitees, occupying any other part of the Area or by persons who are trespassers on or in the Area, or for any loss or damage caused or resulting from the bursting, stoppage, backing up or leaking of water, gas, electricity or sewers or caused in any other manner whatsoever, unless such loss or damage is caused by or results from the negligent acts of the Landlord, its agents or contractors. 30. Interest on Past Due Obligations. Any amount due to Landlord not paid when due shall bear interest at One and One Half (1 1/2%) percent per month from due date until paid. Payment of such interest shall not excuse or cure any default by Tenant under this Lease. 31. Holding Over-Double Last Month's Rent. If Tenant shall remain in possession of the Leased Premises after the termination of this Lease, whether by expiration of the Lease Term or otherwise, without a written agreement as to Page 8 of 21 Pages INITIAL DFC ----------- GPL ----------- 9 such possession, then Tenant shall be deemed a month-to-month Tenant. The rent rate during such holdover tenancy shall be equivalent to double the monthly rent paid for the last full month of tenancy under this Lease, excluding any free rent concessions which may have been made for the last full month of the Lease. No holding over by Tenant shall operate to renew or extend this Lease without the written consent of Landlord to such renewal or extension having been first obtained. Tenant shall indemnify Landlord against loss or liability resulting from the delay by Tenant in surrendering possession of the Leased Premises including, without limitation, any claims made with regard to any succeeding occupancy bounded by such holdover period. 32. Modification or Extensions. No modification or extension of this Lease shall be binding upon the parties hereto unless in writing and unless signed by the parties hereto. 33. Notice Procedure. All notices, demands and requests which may be or are required to be given by either party to the other shall be in writing and such that are to be given to Tenant shall be deemed to have been properly given if served on Tenant or an employee of Tenant or sent to Tenant by United States registered or certified mail, return receipt requested, properly sealed, stamped and addressed to Tenant at 1825 Sharp Point Drive, Fort Collins, CO 80525 or at such other place as Tenant may from time to time designate in a written notice to Landlord; and, such as are to be given to Landlord shall be deemed to have been properly given if personally served on Landlord or if sent to Landlord, United States registered or certified mail, return receipt requested, properly sealed, stamped and addressed to Landlord at 4875 Pearl East Circle #300, Boulder, CO 80301 or at such other place as Landlord may from time to time designate in a written notice to Tenant. Any notice given by mailing shall be effective as of the date of mailing. 34. Memorandum of Lease-Notice to Mortgagee. The Landlord and Tenant agree not to place this Lease of record, but upon the request of either party to execute and acknowledge so the same may be recorded a short form lease indicating the names and respective addresses of the Landlord and Tenant, the Leased Premises, the Lease Term, the dates of the commencement and termination of the Lease Term and options for renewal, if any, but omitting rent and other terms of this Lease. Tenant agrees to an assignment by Landlord of rents and of the Landlord's interest in this Lease to a mortgagee, if the same be made by Landlord. Tenant further agrees if requested to do so by the Landlord that it will give to said mortgagee a copy of any request for performance by Landlord or notice of default by Landlord; and in the event Landlord fails to cure such default, the Tenant will give said mortgagee a sixty (60) day period in which to cure the same. Said period shall begin with the last day on which Landlord could cure such default before Tenant has the right to exercise any remedy by reason of such default. All notices to the mortgagee shall be sent by United States registered or certified mail, postage prepaid, return receipt requested. 35. Controlling Law. The Lease, and all terms hereunder shall be construed consistent with the laws of the State of Colorado. Any dispute resulting in litigation hereunder shall be resolved in court proceedings instituted in Larimer County and in no other jurisdiction. 36. Landlord Not a Partner With the Tenant. Nothing contained in this Lease shall be deemed, held or construed as creating Landlord as a partner, agent, associate of or in joint venture with Tenant in the conduct of Tenant's business, it being expressly understood and agreed that the relationship between the parties hereto is and shall at all times remain that of Landlord and Tenant. 37. Partial Invalidity. If any term, covenant or condition of this Lease or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease or the application of such term, covenant or condition to persons and circumstances other than those to which it has been held invalid or unenforceable, shall not be affected thereby, and each term, covenant and condition of this Lease shall be valid and shall be enforced to the fullest extent permitted by law. 38. Default-Remedies of Landlord. A. If Tenant shall default in the payment of rent or in the keeping of any of the terms, covenants or conditions of this Lease to be kept and/or performed by Tenant; and, has not cured such default within ten (10) days after written notice from Landlord, Landlord may immediately, or at any time thereafter, reenter the Leased Premises, remove all persons and property therefrom, without being liable to indictment, prosecution for damage therefore, or for forcible entry and detainer and repossess and enjoy the Leased Premises, together with all additions thereto or alterations and improvements thereof. Landlord may, at its option, at any time and from time to time thereafter, relet the Leased Premises or any part thereof for the account of Tenant or otherwise, and receive and collect the rents therefore and apply the same first to the payment of such expenses as Landlord may have incurred in recovering possession and for putting the same in good order and condition for rerental, and expense, commissions and charges paid by Landlord in reletting the Leased Premises. Any Page 9 of 21 Pages INITIAL DFC ----------- GPL ----------- 10 such reletting may be for the remainder of the term of this Lease or for a longer or shorter period. In lieu of reletting such Leased Premises, Landlord may occupy the same or cause the same to be occupied by others. Whether or not the Leased Premises or any part thereof be relet, Tenant shall pay the Landlord the rent and all other charges required to be paid by Tenant up to the time of the expiration of this Lease or such recovered possession, as the case may be and thereafter, Tenant, if required by Landlord, shall pay to Landlord until the end of the term of this Lease, the equivalent of the amount of all rent reserved herein and all other charges required to be paid by Tenant, less the net amount received by Landlord for such reletting, if any, unless waived by written notice from Landlord to Tenant. No action by Landlord to obtain possession of the Leased Premises and/or to recover any amount due to Landlord hereunder shall be taken as a waiver of Landlord's right to require full and complete performance by Tenant of all terms hereof, including payment of all amounts due hereunder or as an election on the part of Landlord to terminate this Lease Agreement. If the Leased Premises shall be reoccupied by Landlord, then, from and after the date of repossession, Tenant shall be discharged of any obligations to Landlord under the provisions hereof for the payment of rent. If the Leased Premises are reoccupied by the Landlord pursuant hereto, and regardless of whether the Leased Premises shall be relet or possessed by Landlord, all fixtures, additions, furniture, and the like then on the Leased Premises, excluding any equipment, fixtures, and furniture that Tenant may be leasing from a third party, may be retained by Landlord. In the event Tenant is in default under the terms hereof and, by the sole determination of Landlord, has abandoned the Leased Premises, Landlord shall have the right to remove all the Tenant's property from the Leased Premises and dispose of said property in such a manner as determined best by Landlord, at the sole cost and expense of Tenant and without liability of Landlord for the actions so taken. B. In the event an assignment of Tenant's business or property shall be made for the benefit of creditors, or, if the Tenant's leasehold interest under the terms of this Lease Agreement shall be levied upon by execution or seized by virtue of any writ of any court of law, or, if application be made for the appointment of a receiver for the business or property of Tenant, or, if a petition in bankruptcy shall be filed by or against Tenant, then and in any such case, at Landlord's option, with or without notice, Landlord may terminate this Lease and immediately retake possession of the Leased Premises without the same working any forfeiture of the obligations of Tenant hereunder. C. [Omitted because stricken by parties.] D. In addition to remedy granted to Landlord by the terms hereof, Landlord shall have available any and all rights and remedies available under the statutes of the State of Colorado. No remedy herein or otherwise conferred upon or reserved to Landlord shall be considered exclusive of any other remedy but shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute. Further, all powers and remedies given by this Lease to Landlord may be exercised, from time to time, and as often as occasion may arise or as may be deemed expedient. No delay or omission of Landlord to exercise any right or power arising from any default shall impair any such right or power or shall be considered to be a waiver of any such default or acquiescence thereof. The acceptance of rent by Landlord shall not be deemed to be a waiver of any breach of any of the covenants herein contained or of any of the rights of Landlord to any remedies herein given. E. If Tenant shall, for any reason, vacate the Leased Premises before the current expiration date, landlord shall have the right to accelerate rental payments and any and all future rent payments due during the course of the Lease Term shall become immediately payable in full to the Landlord. 39. Legal Proceedings-Responsibilities. In the event of proceeding at law or in equity by either party hereto, the defaulting party shall pay all costs and expenses, including all reasonable attorney's fees incurred by the non-defaulting party in pursuing such remedy, if such non-defaulting party is awarded substantially the relief requested. 40. Administrative Charges. In the event any check, bank draft or negotiable instrument given for any money payment hereunder shall be dishonored at any time and from time to time, for any reason whatsoever not attributable to Landlord, Landlord shall be entitled, in addition to any other remedy that may be available, (1) to make an administrative charge of $100.00 or three times the face value of the check, bank draft or negotiable instrument, whichever is smaller, and (2) at Landlord's sole option, to require Tenant to make all future rental payments in cash or cashiers check. Page 10 of 21 Pages INITIAL DFC ----------- GPL ----------- 11 41. Hazardous Materials and Environmental Considerations. A. Tenant covenants and agrees that Tenant and its agents, employees, contractors and invitees shall comply with all Hazardous Materials Laws (as hereinafter defined). Without limiting the foregoing, Tenant covenants and agrees that it will not use, generate, store or dispose of, nor permit the use, generation, storage or disposal of Hazardous Materials (as hereinafter defined) on, under or about the Leased Premises, nor will it transport or permit the transportation of Hazardous Materials to or form the Leased Premises, except in full compliance with any applicable Hazardous Materials Laws. Any Hazardous Materials located on the Leased Premises shall be handled in an appropriately controlled environment which shall include the use of such equipment (at Tenant's expense) as is necessary to meet or exceed standards imposed by any Hazardous Materials Laws and in such a way as not to interfere with any other tenant's use of its premises. Upon breach of any covenant contained herein, Tenant shall, at Tenant's sole expense, cure such breach by taking all action prescribed by any applicable Hazardous Materials Laws or by any governmental authority with jurisdiction over such matters. B. Tenant shall inform Landlord at any time of (i) any Hazardous Materials it intends to use, generate, handle, store or dispose of, on or about or transport from, the Leased Premises and (ii) of Tenant's discovery of any event or condition which constitutes a violation of any applicable Hazardous Materials Laws. Tenant shall provide to Landlord copies of all communications to or from any governmental authority or any other party relating to Hazardous Materials affecting the Leased Premises. C. Tenant shall indemnify and hold Landlord harmless from any and all claims, judgments, damages, penalties, fines, costs, liabilities, expenses or losses (including, without limitation, diminution on value of the Leased Premises, damages for loss or restriction on use of all or part of the Leased Premises, sums paid in settlement of claims, investigation of site conditions, or any cleanup, removal or restoration work required by any federal, state or local governmental agency, attorney's fees, consultant fees, and expert fees) which arise as a result of or in connection with any breach of the foregoing covenants or any other violation of any Hazardous Materials laws by Tenant. The indemnification contained herein shall also accrue to the benefit of the employees, agents, officers, directors and/or partners of Landlord. D. Upon termination of this Lease and/or vacation of the Leased Premises, Tenant shall properly remove all Hazardous Materials and shall then provide to Landlord a Phase I environmental audit report, prepared by a professional consultant satisfactory to Landlord and at Tenant's sole expense, certifying that the Leased Premises have not been subjected to environmental harm caused by Tenant's use and occupancy of the Leased Premises. Landlord shall grant to Tenant and its agents or contractors such access to the Leased Premises as is necessary to accomplish such removal and prepare such report. E. "Hazardous Materials" shall mean (a) any chemical, material, substance or pollutant which poses a hazard to the Leased Premises or to persons on or about the Leased Premises or would cause a violation of or is regulated by any Hazardous Materials Laws, and (b) any chemical, material or substance defined as or included in the definitions of "hazardous substances", "hazardous wastes", "extremely hazardous waste", "restricted hazardous waste", "toxic substances", "regulated substance", or words of similar import under any applicable federal, state or local law or under the regulations adopted or publications promulgated pursuant thereto, including, but not limited to, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Sec. 9601, et seq.; the Hazardous Materials Transportation Act, as amended, 49 U.S.C. Sec. 1801, et seq.; the Resource Conservation and Recovery Act as amended, 42 U.S.C. Sec 6901, et seq.; the Solid Waste Disposal Act, 42 U.S.C. Sec. 6991 et seq.; the Federal Water Pollution Control Act, as amended, 33 U.S.C. Sec. 1251, et seq.; and Sections 25-15-101, et seq., 25-16- 101, et seq., 25-7-101, et seq., and 25-8-101, et seq., of the Colorado Revised Statutes. "Hazardous Materials Laws" shall mean any federal state or local laws, ordinances, rules, regulations, or policies (including, but not limited to, those laws specified above) relating to the environment, health and safety or the use, handling, transportation, production, disposal, discharge or storage of Hazardous Materials, or to industrial hygiene or the environmental conditions on, under or about the Leased Premises. Said term shall be deemed to include all such laws as are now in effect or as hereafter amended and all other such laws as may hereafter be enacted or adopted during the term of this Lease. F. All obligations of Tenant hereunder shall survive and continue after the expiration of this Lease or its earlier termination for any reason. G. Tenant further covenants and agrees that it shall not install any storage tank (whether above or below the ground) on the Leased Premises without obtaining the prior written consent of the Landlord, which consent may be conditioned upon further requirements imposed by Landlord with respect to, among other things, compliance by Tenant with any applicable laws, rules, regulations Page 11 of 21 Pages INITIAL DFC ----------- GPL ----------- 12 or ordinances and safety measures or financial responsibility requirements. H. Should any local governmental entity having jurisdiction over the Leased Premises require any type of environmental audit or report prior to or during the occupancy of the Leased Premises by the Tenant, such cost of the audit or report shall be the sole responsibility of the Tenant. I. Notwithstanding anything to the contrary contained in this Paragraph 41, Tenant shall not be responsible for any conditions which existed prior to its tenancy, nor shall it be responsible if conditions which are determined not to be caused by action or inaction of Tenant. 42. Entire Agreement. It is expressly understood and agree by and between the parties hereto that this Lease sets forth all the promises, agreements, conditions, and understandings between Landlord and/or its agents and Tenant relative to the Leased Premises and that there are no promises, agreements, conditions, or understandings either oral or written, between them other than that are herein set forth. 43. [Omitted because stricken by parties.] 44. Estoppel Certificates. Within no more than 5 days after receipt of written request, the Tenant shall furnish to the owner a certificate, duly acknowledged, certifying, to the extent true: A. That this Lease is in full force and effect. B. That the Tenant knows of no default hereunder on the part of the owner, or if it has reason to believe that such a default exists, the nature thereof in reasonable detail. C. The amount of the rent being paid and the last date to which rent has been paid. D. That this Lease has not been modified, or if it has been modified, the terms and dates of such modifications. E. That the term of this Lease has commenced. F. The commencement and expiration dates. G. Whether all work to be performed by the owner has been completed. H. Whether the renewal term option has been exercised if applicable. I. Whether there exist any claims or deductions from, or defenses to, the payment of rent. J. Such other matters as may be reasonably requested by owner. If the Tenant fails to execute and deliver to the owner a completed certificate as required under this section, the Tenant hereby appoints the owner as its Attorney-In-Fact to execute and deliver such certificate for and on behalf of the Tenant. 45. Financial Statements. As requested by the Landlord, Tenant shall provide copies of its most recent financial statements and shall also provide Landlord with up to three (3) prior years of financial statements, if so requested. 46. Lease Exhibits Attached. This Lease includes the following Lease Exhibits which are incorporated herein and made a part of this Lease Agreement: Exhibit "A" - Site Plan Depicting Area Exhibit "B" - Interior Space Plan Exhibit "C" - Landlord and Tenant's Construction Obligations Exhibit "D" - [Omitted because stricken by parties.] Exhibit "E" - Additional Terms and Conditions Exhibit "F" - Option to Renew Exhibit "G" - Landlord's Waiver Page 12 of 21 Pages INITIAL DFC ----------- GPL ----------- 13 47. Miscellaneous. All marginal notations and paragraph headings are for purposes of reference and shall not affect the true meaning and intent of the terms hereof. Throughout this Lease, wherever the words "Landlord" and "Tenant" are used they shall include and imply to the singular, plural, persons both male and female, companies, partnerships and corporations, and in reading said Lease, the necessary grammatical changes required to make the provisions hereof mean and apply as aforesaid shall be made in the same manner as though originally included in said Lease. IN WITNESS WHEREOF, the parties have executed this Lease as of the date hereof. LANDLORD: SHARP POINT PROPERTIES, LLC --------------------------------------------- By: --------------------------------------------------- GERALD P. LEE TENANT: PARAVAX, INC. ----------------------------------------------- By: --------------------------------------------------- DANIEL F. CAIN, C.E.O/PRESIDENT Page 13 of 21 Pages INITIAL DFC ----------- GPL ----------- 14 ENVIRONMENTAL INDEMNITY AGREEMENT THIS INDEMNITY is given as of this 8th day of March , 1994, by Paravax, Inc. ("Indemnitor," whether one or more), to and for the benefit of Paravax, Inc. ("Landlord"). WHEREAS, Sharp Point Properties, LLC is Landlord under a proposed Lease Agreement dated March 8, 1994, ("the Lease") in which Paravax , a California Corporation is the proposed tenant ("Tenant"), regarding the Leased Premises commonly known as 1825 Sharp Point Drive, Fort Collins, CO 80525 ("Leased Premises"); and WHEREAS, Landlord is unwilling to enter into the Lease with Tenant unless the Indemnitor agrees to the indemnities hereinafter provided. NOW, THEREFORE, in consideration of the matters recited above and to induce Landlord to enter into the Lease with Tenant, Indemnitor undertakes and agrees as follows: 1. Indemnitor shall indemnify, defend and hold Landlord harmless from and against any and all suits, actions, legal or administrative proceedings, demands, claims, judgements, damages, penalties, fines, costs, liabilities, expenses or losses which arise during or after the lease term as a result of or in connection with the presence, use, storage, disposal, transportation by Tenant, its agents, employees or contractors or discharge, by or on behalf of Tenant, of any Hazardous Materials (as defined in the Lease) on, in or under or affecting all or any portion of the Leased Premises or any surrounding areas, or the disposition or transportation of any Hazardous Materials therefrom, or any breach by Tenant of the provisions concerning Environmental Considerations as contained in paragraph 41 of the Lease, or the failure of the Tenant to comply with any applicable Hazardous Materials Laws (as defined in the Lease) with regard to the storage, use, handling, including transportation, or disposal of any Hazardous Material by Tenant, its agents, employees or contractors, or otherwise resulting from or arising out of any action or non-action of Tenant or Tenant's operations on the Leased Premises in violations of the terms of this Lease. Without limiting the generality of the foregoing, it is expressly agreed by Indemnitor that such indemnity shall also include the following to the extent attributable to the storage, use, handling or disposal, including transportation, of any Hazardous Material by Tenant, its agents, employees or contractors: diminution in value of the Leased Premises, damages for loss or restriction on use of rental or useable space or any amenity of the Leased Premises, damages arising from any adverse impact on marketing of space or delay in delivering possession to a subsequent tenant or purchaser, restoration of the Leased Premises to a condition not materially different from its original contour, appearance and condition; costs incurred in connection with any investigation of site conditions or any clean-up, remedial, removal or restoration work required by any federal, state or local governmental agency, political subdivision, court order or lender of the Landlord; costs of removal and lawful disposal off site of all Hazardous Materials; all sums paid in settlement of claims, attorneys' fees, consultant fees and expert fees. The foregoing indemnities shall survive termination or expiration of the Lease and shall also accrue to the benefit of the employees, agents, officers, directors and/or partners of Landlord. 2. Indemnitor agrees to pay to Landlord, from time to time,upon demand therefor, an amount equal to any and all expenses therefore incurred by Landlord for which Landlord is entitled to indemnification. Any sums not so paid shall thereafter bear interest at a rate of two percent (2%) per month until paid in full. 3. The rights and remedies of Landlord under this indemnity shall be in addition to any rights or remedies available to Landlord under the terms of the Lease. The obligations of Indemnitor hereunder shall not be affected or impaired by: (i) the assertion by Landlord against Tenant of any rights or remedies reserved to Landlord pursuant to provisions of the Lease; (ii) the commencement of summary or any other proceedings against Tenant; (iii) failure of the Landlord to enforce any of its rights against Tenant pursuant to the Lease or otherwise; (iv) the granting by Landlord of any extensions of time to Tenant; (v) the assignment or transfer of the Lease by Tenant; (vi) with release or discharge of Tenant from its obligations under the Lease in any creditors', receivership, bankruptcy or other proceedings or the commencement or pendency of any such proceedings; or (vii) the impairment, limitation or modification of the liability of Tenant or the estate of Tenant in bankruptcy, or of any remedy for the enforcement of tenant's liability under the Lease, resulting from the operation of any present or future bankruptcy code or other statute, or from the decision of any court. 4. Until all Tenant's obligations under the Lease are fully performed, Indemnitor (i) waives any right of subrogation which it might have against Tenant Page 14 of 21 Pages INITIAL DFC ----------- GPL ----------- 15 by reason of any payments or acts of performance by Indemnitor pursuant to its obligations hereunder; (ii) waives any other right which Indemnitor may have against Tenant by reason of any one or more payments or acts in compliance with its obligations hereunder; and (iii) subordinates any liability or indebtedness of tenant held by Indemnitor to the obligations of Tenant to Landlord under the Lease. 5. All notices for or allowed hereunder shall be deemed given and received with (a) personally delivered, or (b) at the time the same is deposited in the United States mail, postage prepaid, first class mail, or addressed to the applicable party at the address indicated below for such party, or as to each party, at such other address as shall be designated by such party in a written notice to the other party: If to Indemnitor, to: Paravax, Inc. Sharp Point Drive Collins, CO 80525 If to Landlord, to: Sharp Point Properties, LLC Pearl East Circle #300 CO 80301 6. In the event of default in its obligations hereunder, Indemnitor agrees to reimburse Landlord for reasonable attorneys' fees and costs incurred by Landlord in the enforcement of such obligations. 7. This Environmental Indemnity Agreement shall apply to the Lease and any extension or renewal thereof, and any holdover term following the term thereof, or any such extension or renewal. 8. This Environmental Indemnity Agreement shall be governed by and construed in accordance with the laws of the State of Colorado. 9. The covenants and agreements herein contained shall extend to and be binding upon the parties hereto and their respective successors and assigns. IN WITNESS WHEREOF, the parties hereto have executed this Environmental Indemnity Agreement on the day and year first above written. /s/ PARAVAX -- DANIEL F. CAIN ------------------------------------------- "Indemnitor" /s/ GERALD P. LEE ------------------------------------------- "Landlord" Page 15 of 21 Pages INITIAL DFC ----------- GPL ----------- 16 EXHIBIT "A" [MAP] Page 16 of 21 Pages INITIAL DFC ----------- GPL ----------- 17 EXHIBIT "B" INTERIOR SPACE PLAN Page 17 of 21 Pages INITIAL DFC ----------- GPL ----------- 18 EXHIBIT "C" LANDLORD AND TENANT'S CONSTRUCTION OBLIGATIONS Landlord shall, at no additional cost to Tenant, provide improvements to the Premises as shown and described on Exhibit B. Page 18 of 21 Pages INITIAL DFC ----------- GPL ----------- 19 EXHIBIT "E" ADDITIONAL TERMS AND CONDITIONS I. This Lease is contingent upon approval of Paravax, Inc. Board of Directors on March 21, 1994 II. This Lease is contingent upon Landlord signing a lease with Advanced Energy Industries, Inc. on March 16, 1994 for the building located at 1625 Sharp Point Drive. III. Landlord agrees to sign a waiver of lien on equipment currently leased by Tenant from third parties and from time to time on future equipment that Tenant may lease from third parties. The form utilized for this purpose shall be mutually agreed upon by Landlord and Tenant. IV. Landlord agrees that with the exception of two (2) fume hoods and two (2) sections of work bench, Tenant may, at no additional cost, use all laboratory equipment now located at 1625 Sharp Point Drive. It is, however, expressly understood that Tenant shall be responsible for payment for removal, moving, and reinstallation of such equipment. Page 19 of 21 Pages INITIAL DFC ----------- 20 EXHIBIT "F" Option to Extend Tenant shall have the option to extend the Lease Agreement from 12:00 noon on 9/1/2004 to 12:00 noon on 9/1/2009. In the event the Tenant desires to exercise said option, Tenant shall give written notice of such exercise to Landlord not later than 9/1/2003. See below for Option Term Rent. In the event of such exercise, the Lease Agreement, including all amendments, shall be automatically extended for the additional term. Notwithstanding the foregoing, this option shall be void and of no force or effect if the Tenant is in default hereunder either as of the date of the Tenant's exercise of said option or as of the date of the commencement of the option or additional term. Option Term Rent: Tenant shall pay the following rent for the Leased Premises: Landlord and Tenant will attempt to agree upon a Fair Market Rental Value of the Leased Premises satisfactory to both parties within thirty (30) days of Tenant's exercise of its option. If no agreement can be reached by the parties during that period, then the Base Monthly Rental for the Option Term shall be determined by the Fair Market Rental Value of the Leased Premises as determined by comparison to premises of similar size located in or near the City of Boulder, Colorado, having comparable development, use and density capability and such other characteristics as may be deemed relevant by a subject appraiser whose selection is outlined herein. Landlord shall select an independent MAI real estate appraiser with at least ten (10) years experience in appraising commercial real property in the City of Boulder, Colorado (a "Qualified Appraiser"). The Qualified Appraiser selected by the Landlord shall be referred to as the "Landlord's Appraiser". Within thirty (30) days of being selected by the Landlord, the Landlord's Appraiser shall determine the Fair Market Rental Value of the Leased Premises in accordance with the appraisal standards set forth above and shall immediately give the Landlord and the Tenant written notification of his determination. If the Tenant agrees with the Landlord's Appraiser's determination of the Fair Market Rental Value, the new Base Monthly Rental shall become effective beginning with the first month of the Option Term. If the Tenant does not agree with the Landlord's Appraiser's determination of Fair Market Rental Value, the Tenant shall have the right to select its own Qualified Appraiser to determine the Fair Market Rental Value. If the Tenant does elect to appoint a Qualified Appraiser (the "Tenant's Appraiser"), the Tenant shall select the Tenant's Appraiser within thirty (30) business days after receiving the Landlord's Appraiser's determination of the Fair Market Rental Value. The Tenant's Appraiser shall make his own determination of the Fair Market Rental Value in accordance with the provisions set forth above, within 30 business days of being selected by the Tenant and shall immediately give the Landlord and the Tenant written notice of his determination. If the Fair Market Rental Value as determined by the Landlord's Appraiser and the Tenant's Appraiser, respectively, differ by an amount which is equal to or less than 5% of the Fair Market Rental Value determined by the Landlord's Appraiser, then the arithmetic mean of the two Fair Market Rental Values shall constitute the Fair Market Rental Value used to calculate the new Base Monthly Rental which will in effect for the Option Term. If the Fair Market Rental Value determined by the Landlord's Appraiser and the Tenant's Appraiser, respectively, differ by an amount which is greater than 5% then, within ten (10) business days after the Landlord's Appraiser and the Tenant's Appraiser's determination of the Fair Market Rental Value, the Landlord's Appraiser and the Tenant's Appraiser shall agree upon and select a third Qualified Appraiser who shall be independent of and have no prior or existing affiliation or relationship with either the Landlord or the Tenant (the "Independent Appraiser"). Within ten (10) business days of being appointed, the Independent Appraiser shall, after exercising his best professional judgement, choose either the Landlord's Appraiser's or the Tenant's Appraiser's determination of Fair Market Rental Value which the Independent Appraiser believes, in his best professional judgement, best represents the Fair Market Rental Value at that point in time. Upon making such a selection, the Independent Appraiser shall immediately give the Landlord and the Tenant written notice of this selection of the Fair Market Rental Value. The Fair Market Rental Value selected by the Independent Appraiser shall be used to calculate the new Base Monthly Rental which will be in effect during the Extension Option, and such selection by the Independent Appraiser shall be binding and conclusive upon the Landlord and the Tenant. All appraisal fees required hereunder shall be shared equally by the Landlord and the Tenant. Page 20 of 21 Pages INITIAL DFC ----------- GPL ----------- 21 EXHIBIT "G" LANDLORD'S WAIVER Sharp Point Properties, LLC ("Landlord") is the owner of real property commonly known as 1825 Sharp Point Drive, Fort Collins, CO 80525, (the "Premises") and has leased the Premises to Paravax, Inc., ("Tenant"). 1. Landlord acknowledges that it has received notice that Tenant has or will enter into a master lease agreement with Dominion Ventures, Inc., a California Corporation ("Dominion"), whereby Tenant will lease from Dominion certain equipment (the "Equipment"), all or part of which may be located upon for fixed to the Premises. 2. Landlord waives and releases any and all rights it may have against the Equipment for any rent or other sums due or to become due, under any lease for the Premises or otherwise, and all claims and demands of every kind against the Equipment. 3. Landlord agrees that the Equipment will remain personal property and will not become part of the Premises, regardless of the manner in which it may be affixed to real property, and will allow Dominion to enter the Premises any time to remove the Equipment in the exercise of its rights and remedies arising under the aforesaid master lease agreement. 4. This Consent shall be binding upon heirs, administrators, executors, successors and assigns of the Landlord, and shall insure to the benefit of the successors and assigns of Dominion. IN WITNESS WHEREOF, the undersigned has executed and delivered this consent this 8th day of March, 1994. By: -------------------------------------- GERALD P. LEE VICE PRESIDENT & CEO Page 21 of 21 Pages INITIAL DFC ----------- GPL ----------- EX-10.23 32 LEASE AGREEMENT DATED 06-27-96 1 EXHIBIT 10.23 LEASE AGREEMENT OFFICE AND INDUSTRIAL SPACE This Lease Agreement is made and entered into as of the 27th day of June, 1996, by and between GB Ventures ("Landlord"), whose address is 4875 Pearl East Circle, Suite 300, Boulder, CO 80301, and Heska Corporation, a California corporation("Tenant"), whose address is 1825 Sharp Point Drive, Fort Collins, CO 80525 . In consideration of the covenants, terms, conditions, agreements and payments as herein set forth, the Landlord and Tenant hereby enter into the following Lease: 1. Definitions. Whenever the following words or phrases are used in this Lease, said words or phrases shall have the following meaning: A. "Area" shall mean the parcel of land depicted on Exhibit "A" attached hereto and commonly known and referred to as "Three Prospect" 1613 Prospect Parkway, Fort Collins, Colorado. The Area includes the Leased Premises and one or more buildings. The Area may include Common Areas. B. "Building" shall mean a building located in the Area. C. "Common Areas" shall mean all entrances, exits, driveways, curbs, walkways, hallways, parking areas, landscaped areas, restrooms, loading and service areas, and like areas or facilities which are located in the Area and which are designated by the Landlord as areas or facilities available for the nonexclusive use in common by persons designated by the Landlord. D. "Leased Premises" shall mean the premises herein leased to the Tenant by the Landlord. E. "Tenant's Prorata Share" as to the Building in which the Leased Premises are located shall mean an amount (expressed as a percentage) equal to the number of square feet included in the Leased Premises divided by the total number of leasable square feet included in said Building. The Tenant's Prorata Share as to Common Areas shall mean an amount (expressed as a percentage ) equal to the number of square feet included in the Leased Premises divided by the total number of leasable square feet included in all Buildings located in the Area. The Tenant's Prorata Share for Common Areas may change from time to time as the leasable square footage in all Buildings located in the Area is increased or decreased. 2. Leased Premises. The Landlord hereby leases unto the Tenant, and the Tenant hereby leases from the Landlord, the following described premises: Space All in Building 1613 Prospect Parkway consisting of 16,800 square feet. 3. Base Term. The term of this Lease shall commence at 12:00 noon on September 1, 1996, and, unless sooner terminated as herein provided for, shall end at 12:00 noon on October 1, 2004 ("Lease Term"). Except as specifically provided to the contrary herein, the Leased Premises shall, upon the termination of this Lease, by virtue of the expiration of the Lease Term or otherwise, be returned to the Landlord by the Tenant in the same [Omitted because stricken by parties.] condition than when entered upon by the Tenant, ordinary wear and tear, acts of God, casualties, condemnation, Hazardous Materials (other than those stored, used or disposed of by Tenant in or about the Leased Premises in violation of Hazardous Materials Laws) and Alterations with respect to which Landlord has not reserved the right to require removal excepted. For Option Period see Exhibit F. 4. Rent. Tenant shall pay the following rent for the Leased Premises: A. Base Monthly Rent. Tenant shall pay to Landlord, without notice and without setoff, at the address of Landlord as herein set forth, the following Base Monthly Rent ("Base Monthly Rent"), said Base Monthly Rent to be paid in advance on the first day of each month during the term hereof. In the event that this Lease commences on a date other than the first day of a month, the Base Monthly Rent for the first month of the Lease Term shall be prorated for said partial month. Below is a schedule of Base Monthly Rental payments as agreed upon: Page 1 of 25 Pages INITIAL FMS ----------- GPL ----------- 2 During Lease Term
FOR PERIOD TO PERIOD A BASE MONTHLY STARTING ENDING RENT OF September 1, 1996 October 1, 2004 $ 12,600.00
B. Lease Term Adjustment. If, for any reason, other than delays caused by the Tenant, the Leased Premises are not ready for Tenant's occupancy on September 1, 1996, the Tenant's rental obligation and other monetary expenses (i.e. taxes, utilities, etc.) shall be abated in direct proportion to the number of days of delay. It is hereby agreed that the premises shall be deemed ready for occupancy on the date of Substantial Completion of the Tenant Improvements for the Leased Premises. "Substantial Completion" is defined in Exhibit B, attached hereto and incorporated by reference herein. [Omitted because stricken by parties.] C. Cost of Living Adjustment. The Base Monthly Rental specified in paragraph 4A above shall be recalculated for each Lease Year as defined hereinafter following the first Lease Year of this Lease Agreement. The recalculated Base Monthly Rental shall be hereinafter referred to as the "Adjusted Monthly Rental". The Adjusted Monthly Rental for each Lease Year after the first Lease Year shall be the greater of: (i) the amount of the previous year's Adjusted Monthly Rental, (or the Base Monthly Rental if calculating the Adjusted Monthly Rental for the second Lease Year), or (ii) an amount calculated by the rent adjustment formula set forth below. Notwithstanding the foregoing, in no event shall the increase in any Adjusted Monthly Rental for any Lease Year be greater than six percent (6%) or less than three percent (3%). In applying the rent adjustment formula, the following definitions shall apply: (1) "Lease Year" shall mean a period of twelve (12) consecutive full calendar months with the first Lease Year commencing on the date of the commencement of the term of this Lease and each succeeding Lease Year commencing upon the anniversary date of the first Lease Year; however, if this Lease does not commence on the first day of a month, then, the first Lease Year and each succeeding Lease Year shall commence on the first day of the first month following each anniversary date of this Lease; (2) "Bureau" shall mean the Bureau of Labor Statistics of the United States Department of Labor or any successor agency that shall issue the Price Index referred to in this Lease Agreement. (3) "Price Index" shall mean the "Consumer Price Index-All Urban Consumers-All Items (CPI-U) U.S. City Average (1982-84=100)" issued from time to time by the Bureau. In the event the Price Index shall hereafter be converted to a different standard reference base or otherwise revised, the determination of the increase in the Price Index shall be made with the use of such conversion factor, formula or table as may be published by Prentice-Hall, Inc. or failing such publication, by another nationally recognized publisher of similar statistical information. In the event the Price Index shall cease to be published, then, for the purposes of this paragraph 4C there shall be substituted for the Price Index such other index as the Landlord and the Tenant shall agree upon, and if they are unable to agree within sixty (60) days after the Price Index ceases to be published, such matter shall be determined by arbitration in accordance with the Rules of the American Arbitration Association. (4) "Base Price Index" shall mean the Price Index released to the public during the second calendar month preceding the commencement of this Lease Agreement. (5) "Revised Price Index" shall mean the Price Index released to the public during the second calendar month preceding the Lease Year for which the Base Annual Rental is to be adjusted; (6) "Basic Monthly Rental" shall mean the Basic Monthly Rental set forth in subparagraph 4A above. The rent adjustment formula used to calculate the Adjusted Monthly Rental is as follows: Adjusted Monthly = Revised Price Index X Base Monthly Rental Rental ------------------- Base Price Index The Adjusted Monthly Rental as hereinabove provided shall continue to be payable monthly as required in paragraph 4A above without necessity of any further notice by the Landlord to the Tenant. Page 2 of 25 Pages INITIAL FMS ----------- GPL ----------- 3 D. Total Net Lease. The Tenant understands and agrees that this Lease is a total net lease (a "net, net, net lease"), whereby the Tenant has the obligation to reimburse the Landlord for a share of all costs and expenses (taxes, insurance, trash removal, Common Area operation and maintenance and like costs and expenses), incurred by the Landlord as a result of the Landlord's ownership and operation of the Area. Major capital improvements, such as total replacement of the roof or parking lot are not considered to be maintenance items as described in this Paragraph 6D. 5. Security Deposit. Landlord acknowledges receipt from the Tenant of the sum of Twelve Thousand, Six Hundred & No/100 Dollars ($ 12,600.00 ) to be retained by Landlord without responsibility for payment of interest thereon, as security for performance of all the terms and conditions of this Lease Agreement to be performed by Tenant, including payment of all rent due under the terms hereof. Deductions may be made by Landlord from the amount so retained for the reasonable cost of repairs to the Leased Premises (ordinary wear and tear, acts of God, casualties, condemnation, Hazardous Materials (other than those stored, used or disposed of by Tenant in or about the Leased Premises in violation of Hazardous Materials Laws) and Alterations with respect to which Landlord has not reserved the right to require removal excepted), for any rent delinquent under the terms hereof and/or for any sum used in any manner to cure any default of Tenant under the terms of this Lease. In the event deductions are so made, the Tenant shall, within ten (10) days after receipt of notice from the Landlord, redeposit with the Landlord such amounts so expended so as to maintain the deposit in the amount as herein provided for, and failure to so redeposit shall be deemed a failure to pay rent under the terms hereof. Nothing herein contained shall limit the liability of Tenant as to any damage to the Leased Premises, and Tenant shall be responsible for the total amount of any damage and/or loss occasioned by actions of Tenant. Landlord may deliver the funds deposited hereunder by Tenant to any purchaser of Landlord's interest in the Leased Premises in the event such interest shall be sold, and thereupon Landlord shall be discharged from any further liability with respect to such deposit. Landlord shall return the Security Deposit or balance thereof to Tenant within thirty (30) days after Tenant vacates the Leased Premises. 6. Use of Premises. Tenant shall use the Leased Premises only for Research, Development and Manufacture of Biopharmaceutical Products and for no other purpose whatsoever except with the written consent of Landlord. Tenant shall not allow any accumulation of trash or debris on the Leased Premises or within any portion of the Area. All receiving and delivery of goods and merchandise and all removal of garbage and refuse shall be made only by way of the rear and/or other service door provided therefore. In the event the Leased Premises shall have no such door, then these matters shall be handled in a manner reasonably satisfactory to Landlord. No storage of any material outside of the Leased Premises shall be allowed unless first approved by Landlord in writing, and then in only such areas as are designated by Landlord. Tenant shall not commit or suffer any waste on the Leased Premises nor shall Tenant permit any nuisance to be maintained on the Leased Premises or permit any disorderly conduct or other activity that annoys or disturbs any occupants of any part of the Area and/or any adjoining property. 7. Laws and Regulations. -- Tenant Responsibility. The Tenant shall, at its sole cost and expense, comply with all laws and regulations of any governmental entity, board, commission or agency relating to Tenant's particular use of the Leased Premises [Omitted because stricken by parties.] Tenant agrees not to install any electrical equipment that overloads any electrical paneling, circuitry or wiring and further agrees to comply with the requirements of the insurance underwriter or any governmental authorities having jurisdiction thereof. Notwithstanding anything to the contrary contained in this Lease, Tenant shall not be required to construct or pay the cost of complying with any CC&R's, insurance underwriters' requirements or rules, regulations, statutes, ordinances, laws and building codes (including, without limitation, the Americans With Disabilities Act of 1990) (collectively, "Laws") (i) requiring construction of improvements in the Leased Premises which are properly capitalized under generally accepted accounting principles, unless such compliance is necessitated solely because of Tenant's particular use of the Leased Premises; (ii) regarding the presence of Hazardous Materials unless the same were stored or disposed of by Tenant, its agents, employees or contractors on or in the Leased Premises; or (iii) requiring the correction of any condition existing on the Leased Premises as of the Commencement Date. 8. Landlord's Rules and Regulations. Landlord reserves the right to adopt and promulgate rules and regulations applicable to the Leased Premises and from time to time amend or supplement said rules or regulations. Notice of such rules and regulations and amendments and supplements thereto shall be given to Tenant, and Tenant agrees to comply with and observe such rules and regulations and amendments and supplements thereto provided that the same apply uniformly to all Tenants of the Landlord in the Area and do not unreasonably interfere with Tenant's rights under this Lease. 9. Parking. If the Landlord provides off street parking for the common use of Tenants, employees and customers of the Area, the Tenant shall park all Page 3 of 25 Pages INITIAL FMS ----------- GPL ----------- 4 vehicles of whatever type used by Tenant and/or Tenant's employees only in such areas thereof as are designated by Landlord for this purpose, and Tenant accepts the responsibility of seeing that Tenant's employees park only in the areas so designated. Tenant shall, upon the request of the Landlord, provide to the Landlord license numbers of the Tenant's vehicles and the vehicles of Tenant's employees. Notwithstanding anything to the contrary contained in this Lease, without charge, Tenant shall have the exclusive use of one hundred percent (100%) of all parking spaces within the parking area for the building 10. Control of Common Areas. -- Exclusive control of the Landlord. All Common Areas shall at all times be subject to the exclusive control and management of Landlord, notwithstanding that Tenant and/or Tenant's employees and/or customers may have a nonexclusive right to the use thereof. Landlord shall have the right from time to time to establish, modify and enforce rules and regulations with respect to the use of said facilities and Common Areas. 11. Taxes. A. Real Property Taxes and Assessments. The Tenant shall pay to the Landlord on the first day of each month, as additional rent, the Tenant's Prorata Share of all real estate taxes and special assessments levied and assessed against the Building in which the Leased Premises are located and the Common Areas. If the first and last years of the Lease Term are not calendar years, the obligations of the Tenant hereunder shall be prorated for the number of days during the calendar year that this Lease is in effect. The monthly payments for such taxes and assessments shall be $ 1,292.62 until the Landlord receives the first tax statement for the referred to properties. Thereafter, the monthly payments shall be based upon 1/12th of the prior year's taxes and assessments. Once each year the Landlord shall determine the actual Tenant's Prorata Share of taxes and assessments for the prior year and if the Tenant has paid less than the Tenant's Prorata Share for the prior year the Tenant shall pay the deficiency to the Landlord with the next payment of Base Monthly Rent, or, if the Tenant has paid in excess of the Tenant's Prorata Share for the prior year the Landlord shall forthwith refund said excess to the Tenant. Notwithstanding anything to the contrary contained in this Lease, Tenant shall not be required to pay any portion of any tax or assessment expense (i) levied on Landlord's rental income, unless such tax or assessment expense is imposed in lieu of real property taxes; (ii) in excess of the amount which would be payable if such tax or assessment expense were paid in installments over the longest possible term; (iii) imposed on land and improvements other than the Area; or (iv) attributable to Landlord's net income, inheritance, gift, transfer, franchise, estate or state taxes. Tenant may in good faith contest any tax or assessment, provided that Tenant indemnifies Landlord from any loss or liability in connection therewith. B. Personal Property Taxes. Tenant shall be responsible for, and shall pay promptly when due, any and all taxes and/or assessments levied and/or assessed against any furniture, fixtures, equipment and items of a similar nature installed and/or located in or about the Leased Premises by Tenant. C. Rent Tax. If a special tax, charge or assessment is imposed or levied upon the rents paid or payable hereunder or upon the right of the Landlord to receive rents hereunder (other than to the extent that such rents are included as a part of the Landlord's income for the purpose of an income tax), the Tenant shall reimburse the Landlord for the amount of such tax within fifteen (15) days after demand therefore is made upon the Tenant by the Landlord. D. Should Landlord protest and win a reduction in the real estate taxes for the Building and Area, Tenant shall be obligated to pay its Prorata Share of the cost of such protest, if the protest is handled by a party other than the Landlord. Tenant also shall receive from Landlord a credit in the amount of Tenant's Prorata Share of the reduction won by Landlord. 12. Insurance. A. Landlord's Insurance. The Landlord shall procure and maintain fire and casualty coverage for full replacement value of building to include, but not be limited to, the Tenant Improvements constructed pursuant to Exhibit B hereof, roofs and walls, loss of rents and liability insurance as it, from time to time, deems proper and appropriate in reference to the Building in which the Leased Premises are located and the Common Areas. Such insurance shall not be required to cover any of the Tenant's property and the Tenant shall have no interest in any of the proceeds of such insurance. B. Tenant's Insurance. Tenant shall, at its sole cost and expense, insure on a full replacement cost basis, Tenant's inventory, fixtures, leasehold improvements (other than the Tenant Improvements constructed by Landlord pursuant to Exhibit B) and betterments located on the Leased Premises against loss resulting from fire or other casualty. Tenant shall procure, pay for and maintain, comprehensive public liability insurance providing coverage from and against any loss or damage occasioned by an accident or casualty on, about or adjacent to the Leased Premises. Said liability policy shall be written on an "occurrence basis" with limits of not less than $1,000,000 combined single limit Page 4 of 25 Pages INITIAL FMS ----------- GPL ----------- 5 coverage. Certificates for such insurance shall be delivered to Landlord and shall provide that said insurance shall not be changed, modified, reduced or cancelled without thirty (30) days prior written notice thereof being given to Landlord. C. Tenant's High Pressure Steam Boiler Insurance. If Tenant makes use of any kind of steam or other high pressure boiler or other apparatus which presents a risk of damage to the Leased Premises or to the Building or other improvements of which the Leased Premises are a part or to the life or limb of persons within such premises, Tenant shall secure and maintain appropriate boiler insurance in an amount satisfactory to Landlord. The Landlord shall be named insured in any such policy or policies. Certificates for such insurance shall be delivered to Landlord and shall provide that said insurance shall not be changed, modified, reduced or cancelled without thirty (30) days prior written notice thereof being given to Landlord. D. Tenant's Share of Landlord Insurance. Tenant shall pay the Landlord as additional rent Tenant's Prorata Share of the insurance secured by the Landlord pursuant to "12A" above. Payment shall be made on the first day of each month as additional rent. The monthly payments for such insurance shall be $ 58.94 until changed by Landlord as a result of an increase or decrease in the cost of such insurance. E. Mutual Subrogation Waiver. Landlord and Tenant hereby grant to each other, on behalf of any insurer providing personal injury, fire and extended coverage to either of them covering the Leased Premises, Buildings or other improvements thereon or contents thereof, a waiver of any right of subrogation any such insurer of one party may acquire against the other or as against the Landlord or Tenant by virtue of payments of any loss under such insurance. Such a waiver shall be effective so long as the Landlord and Tenant are empowered to grant such waiver under the terms of their respective insurance policy or policies and such waiver shall stand mutually terminated as of the date either Landlord or Tenant gives notice to the other that the power to grant such waiver has been so terminated. 13. Utilities. Tenant shall be solely responsible for and promptly pay all charges for heat, water, gas, electric, sewer service and any other utility service used or consumed on the Leased Premises. Should Landlord elect to supply all or any of the utility services to be used or consumed on the Leased Premises, Tenant shall, within [Omitted because stricken by parties.] twenty (20) days [Omitted because stricken by parties.] after receipt of presentation of the statement for such utility service, pay to Landlord, as additional rent under the terms hereof, the amount of said statement if it represents utility service furnished to the Leased Premises only or its prorata share of said statement if it includes utility service to an area greater than the Leased Premises. Said proration of utilities shall be reviewed by Landlord and Tenant at the end of the first year of occupancy, at which time Landlord shall determine if the present percentage of said total utilities is equitable in relation to the use of total services by all the Tenants and will be adjusted reasonably by Landlord, if necessary. The Tenant shall forthwith upon taking occupancy of the Leased Premises make arrangements with the Public Service Company, U.S. West or other appropriate utility company to pay the utilities used on the Leased Premises and to have the same billed to the Tenant at the address designated by the Tenant. Should there be a time where the Landlord remains responsible for utilities supplied to the Leased Premises, the Landlord shall bill the Tenant therefore and the Tenant shall promptly reimburse the Landlord therefore. In no event shall Landlord be liable for any interruption or failure in the supply of any such utility to the Leased Premises, except to the extent caused by the negligence or willful misconduct of Landlord, its agents, employees, contractors or invitees. Notwithstanding anything to the contrary contained in this Lease, if the Leased Premises should become not reasonably suitable for Tenant's use as a consequence of fire, casualty, exercise of eminent domain, cessation of utilities or other services required to be provided to the Leased Premises by Landlord, interference with access to the Leased Premises, legal restrictions or the presence of any Hazardous Material which does not result from the Tenant's use, storage or disposal of such Hazardous Material in or about the Leased Premises in violation of Hazardous Materials Laws, and in any of the foregoing cases the interference with Tenant's use of the Leased Premises persists for seven (7) consecutive calendar days, then Tenant shall be entitled to an equitable abatement of rent to the extent of the interference with Tenant's use of the Leased Premises occasioned thereby. If the interference persists for more than thirty (30) consecutive calendar days, Tenant shall have the right to terminate this Lease. In the event the utility company supplying water and/or sewer to the Leased Premises determines that an additional service fee, impact fee, and/or assessment, or any other type of payment or penalty is necessary due to Tenant's use and occupancy of the Building, nature of operation and/or consumption of utilities, said expense shall be borne solely by the Tenant. Said expense shall be paid promptly and any repairs requested by the utility company shall be performed by Tenant promptly [Omitted because stricken by parties.] and without any delay. 14. Maintenance Obligations of Landlord. Except as herein otherwise Page 5 of 25 Pages INITIAL FMS ----------- GPL ----------- 6 specifically provided for, and not including capital improvement, Landlord shall keep and maintain the roof, roof membrane, and exterior of the Building of which the Leased Premises are a part in good repair and condition. Tenant shall repair and pay for any damage to roof, foundation and external walls caused by Tenant's action, negligence or fault. 15. Maintenance Obligations of the Tenant. Subject only to the maintenance obligations of the Landlord as herein provided for, the Tenant shall, during the entire Lease Term, including all extensions thereof, at the Tenant's sole cost and expense, keep and maintain the Leased Premises in good condition and repair, including specifically the following: A. Electrical Systems. Tenant agrees to maintain in good working order and to make all required repairs and replacements to the electrical systems for the Leased Premises. Tenant upon signing this Lease acknowledges that Tenant has inspected the existing electrical systems and all such systems are in good repair and working order. B. Plumbing Systems. Tenant agrees to maintain in good working order and to make all required repairs or replacements to the plumbing systems for the Leased Premises. Tenant upon signing this Lease acknowledges that Tenant has inspected the existing plumbing systems and all such systems are in good repair and working order. C. Inspections and Service. Upon termination of Lease Agreement, Tenant agrees, before vacating premises, to employ at Tenant's sole cost and expense, a licensed contractor to inspect, service and write a written report on the systems referred to in "A" and "B" of this Paragraph. Landlord shall have the right to order such an inspection if Tenant fails to provide evidence of such inspection, and, to follow the recommendations of such reports and to charge the expense thereof to the Tenant. D. Tenant's Responsibility for Building and Area Repairs. Tenant shall be responsible for any repairs required for any part of the Building or Area of which the Leased Premises are a part if such repairs are necessitated by the negligence or willful misconduct [Omitted because stricken by parties.] of Tenant. E. Cutting Roof. Tenant must obtain in writing the Landlord's approval prior to making any roof penetrations. Failure by Tenant to obtain written permission to penetrate a roof shall relieve Landlord of any roof repair obligations as set forth in Paragraph "14" hereof. Tenant further agrees to repair, at its sole cost and expense, all roof penetrations made by the Tenant and to use, if so requested by Landlord, a licensed contractor reasonably selected by the Landlord to make such penetrations and repairs. F. Glass and Doors. The repair and replacement of all glass and doors on the Leased Premises shall be the responsibility of the Tenant. Any such replacements or repairs shall be promptly completed at the expense of the Tenant. G. Liability for Overload. Tenant shall be responsible for the repair or replacement of any damage to the Leased Premises, the Building or the Area which result from the Tenant's movement of heavy articles therein or thereon. Tenant shall not overload the floors of any part of the Leased Premises. H. Liability for Overuse and Overload of Operating Systems. Tenant shall be responsible for the repair, upgrade, modification, and/or replacement of any operating systems servicing the Leased Premises and/or all or part of the Building which is necessitated by Tenant's change or increase in use of or non-disclosed use of all or a part of the Leased Premises. Operating systems include, but are not limited to, electrical systems; plumbing systems (both water and natural gas); heating, ventilating, and air conditioning systems; telecommunications systems; computer and network systems; lighting systems, fire sprinkler systems; security systems; and building control systems, if any. I. Repair or Replacement of Capital Items. Notwithstanding anything to the contrary contained in this lease, if any Operating System required to be maintained by Tenant hereunder requires a repair or replacement of a capital nature, as determined in accordance with generally accepted accounting principles, Landlord shall pay for the capital repair or replacement and Tenant shall reimburse to Landlord, as additional rent, the monthly amortized cost of the item based on its useful life to the extent that the useful life falls during the Term hereof, as extended. [Omitted because stricken by parties.] J. Failure of Tenant to Maintain Premises. Should Tenant neglect to keep and maintain the Leased Premises as required herein, the Landlord shall have the right, but not the obligation, to have the work done and any reasonable Page 6 of 25 Pages INITIAL FMS ----------- GPL ----------- 7 costs plus a ten percent (10%) overhead charge therefore shall be charged to Tenant as additional rental and shall become payable by Tenant with the payment of the rental next due. K. Operating Systems. Notwithstanding anything to the contrary contained in this Lease, as of the Commencement Date and at no cost to Tenant, the Operating Systems serving the Leased Premises shall be in good working order and repair. If during the first thirty (30) days of the Term, any Operating System is not in the condition required by the foregoing sentence, Tenant shall notify Landlord of the need for repair and Landlord promptly shall complete the repair at no cost to Tenant. 16. Common Area Maintenance. Tenant shall be responsible for Tenant's Prorata share of the total costs incurred for the operation, maintenance and repair of the Common Areas, including, but not limited to, the costs and expenses incurred for the operation, maintenance and repair of parking areas (including restriping and repaving); removal of snow; utilities for common lighting and signs; normal HVAC maintenance and elevator maintenance (if applicable); trash removal; security to protect and secure the Area; common entrances, exits, and lobbies of the Building; all common utilities, including water to maintain landscaping; replanting in order to maintain a smart appearance of landscape areas; supplies; depreciation on the machinery and equipment used in such operation, maintenance and repair; the cost of personnel to implement such services; the cost of maintaining in good working condition the HVAC system(s) for the Leased premises; the cost of maintaining in good working condition the elevator(s) for the Leased Premises, if applicable; and Ten percent (10%) of all such operational, maintenance and repair costs to cover Landlord's administrative and overhead costs. These costs shall be estimated on an annual basis by the Landlord and shall be adjusted upwards or downwards depending on the actual costs for the preceding twelve months. Tenant shall pay monthly, commencing with the first month of the Lease Term, as additional rent due under the terms hereof, a sum equal to Tenant's Prorata Share of the estimated costs for said twelve (12) month period, divided by 12. The estimated initial monthly costs are $ 866.20. Once each year the Landlord shall determine the actual costs of the foregoing expenses for the prior year and if the actual costs are greater than the estimated costs, the Tenant shall pay its Tenant's Prorata Share of the difference between the estimated costs and the actual costs to the Landlord with the next payment of Base Monthly Rent, or, if the actual costs are less than the estimated costs, the Landlord shall forthwith refund the amount of the Tenant's excess payment to the Tenant. Notwithstanding anything to the contrary contained in this Lease, in no event shall Tenant have any obligation to perform, to pay directly, or to reimburse Landlord for, all or any portion of the following repairs, maintenance, improvements, replacements, premiums, claims, losses, fees, commissions, charges, disbursements, attorneys' fees, costs and expenses (collectively, "Costs"): (i) Costs occasioned by the act, omission or violation of Law by Landlord, any other occupant of the Area, or their respective agents, employees or contractors, or Costs to correct any construction defect or other condition in the Leased Premises or the Building not in compliance with law as of the Commencement Date; (ii) Costs occasioned by fire, acts of God or other casualties, or by the exercise of the power of eminent domain; (iii) Costs which Tenant pays directly to a third person or for which Landlord has a right of reimbursement from others (iv) Costs (A) arising from the disproportionate use of any utility or service supplied by Landlord to any other occupant of the Area; or (B) associated with utilities and services of a type not provided to Tenant; (v) Costs related to Hazardous Materials, excepted to the extent the Cost is caused by the storage, use or disposal of the Hazardous Material in question by Tenant in violation of Hazardous Materials Laws; (vi) Costs incurred in connection with negotiations or disputes with other occupant(s) of the Area; (vii) depreciation, amortization or other expense reserves; (viii) interest, charges and fees incurred on dept, payments on mortgages and rent under ground leases; or (ix) wages, salaries, compensation and labor burden for any employee not stationed in the Area on a full-time basis, or any fee, profit or compensation retained by Landlord or its affiliates for management and administration of the Area in excess of the management fee which would be charged by a professional management service for operation of comparable projects in the vicinity of the Area. In addition, notwithstanding anything to the contrary contained in this Lease, within thirty (30) days after receipt by Tenant of Landlord's statement of Common Area costs for any prior calendar year during the Term, Tenant or its authorized representative shall have the right to inspect the books of Landlord during the business hours of Landlord at Landlord's office in the Area, or, at Landlord's option, such other location as Landlord reasonably may specify, for the purpose of verifying the information contained in the statement. Unless Tenant asserts specific error within thirty (30) days after receipt of the statement, the statement shall be deemed correct as between Landlord and Tenant, except as to individual components subsequently determined to be in error by a future audit. 17. Inspection of and Right of Entry to Leased Premises--Regular, Emergency, Reletting. Landlord and/or Landlord's agents and employees, shall have the right to enter the Leased Premises with reasonable prior notice at all times during regular business hours and, at all times during emergencies, to examine the Leased Premises, to make such repairs, alterations, improvements or Page 7 of 25 Pages INITIAL FMS ----------- GPL ----------- 8 additions as Landlord deems necessary, and Landlord shall be allowed to take all materials into and upon said Leased Premises that may be required therefore without the same constituting an eviction of Tenant in whole or in part, and the rent reserved shall in no way abate while such repairs, alterations, improvements or additions are being made, by reason of loss or interruption of business of Tenant or otherwise. During the six months prior to the expiration of the term of this Lease or any renewal thereof, Landlord may exhibit the Leased Premises to prospective tenants and/or purchasers and may place upon the Leased Premises the usual notices indicating that the Leased Premises are for lease and/or sale. Notwithstanding anything to the contrary contained in this Lease, any entry by Landlord and Landlord's agents shall not impair Tenant's operations more than reasonably necessary, and Tenant shall have the right to have an employee accompany Landlord and/or its agents at all times that Landlord and/or its agents are present on the Leased Premises. 18. Alteration-Changes and Additions-Responsibility. Unless the Landlord's approval is first secured in writing, such approval not to be unreasonably withheld or delayed, the Tenant shall not install or erect inside partitions, add to existing electric power service, add telephone outlets, add light fixtures, install additional heating and/or air conditioning or make any other changes or alterations to the interior or exterior of the Leased Premises. Notwithstanding the foregoing, Tenant may make non-structural alterations to the Leased Premises not in excess of Twenty-Five Thousand Dollars ($25,000) per work of improvement without obtaining Landlord's prior consent. Any such changes or alterations shall be made at the sole cost and expense of the Tenant. At the end of this Lease, all such fixtures, equipment, additions, changes and/or alterations (except trade fixtures installed by Tenant) shall be and remain the property of Landlord; provided, however, Landlord shall have the option, given in writing at the time that Tenant requests Landlord's consent, or, if no consent is required, upon the expiration or earlier termination of this Lease, to require Tenant to remove any or all such fixtures, equipment, additions and/or alterations and restore the Leased Premises to the condition existing immediately prior to such change and/or installation, normal wear and tear, acts of God, casualties, condemnation, Hazardous Materials (other than those stored, used or disposed of by Tenant in or about the Leased premises in violation of Hazardous Materials Laws) and Alterations with respect to which Landlord has not reserved the right to require removal excepted, all at Tenant's cost and expense. All such work shall be done in a good and workmanlike manner and shall consist of new materials unless agreed to otherwise by Landlord. Any and all repairs, changes and/or modifications thereto shall be the responsibility of, and at the cost of, Tenant. Landlord may require adequate security from Tenant assuring no mechanics' liens on account of work done on the Leased Premises by Tenant and may post the Leased Premises, or take such other action as is then permitted by law, to protect the Landlord and the Leased Premises against mechanics' liens. Landlord may also require adequate security to assure Landlord that the Leased Premises will be restored to their original condition upon termination of this Lease. 19. Sign Approval. Except for signs which are located inside of the Leased Premises and which are not attached to any part of the Leased Premises, the Landlord must approve in writing any sign to be placed in or on the interior or exterior of the Leased Premises, regardless of size or value. Landlord's approval shall not be unreasonably withheld or delayed. Specifically, signs attached to windows of the Leased Premises must be so approved by the Landlord. As a condition to the granting of such approval, Landlord shall have the right to require Tenant to furnish a bond or other security acceptable to Landlord sufficient to insure completion of and payment for any such sign work to be so performed. Tenant shall, during the entire Lease Term, maintain Tenant's signs in good condition and repair at Tenant's sole cost and expense. Tenant shall, remove all signs at the termination of this Lease, at Tenant's sole risk and expense and shall in a workmanlike manner properly repair any damage and close any holes caused by the installation and/or removal of Tenant's signs. Tenant shall give Landlord prior notice of such removal so that a representative of Landlord shall have the opportunity of being present when the signage is removed, or shall pre-approve the manner and materials used to repair damage and close the holes caused by removal. 20. Right of Landlord to Make Changes and Additions. Landlord reserves the right at any time to make reasonable alterations or additions to the Building or Area of which the Leased Premises are a part. Landlord also reserves the right to construct other buildings and/or improvements in the Area and to make alterations or additions thereto, all as Landlord shall determine. Easements for light and air are not included in the leasing of the Leased Premises to Tenant. Landlord further reserves the exclusive right to the roof of the Building of which the Leased Premises are a part. Landlord also reserves the right at any time to relocate, vary and adjust the size of any of the improvements or Common Areas located in the Area, provided, however, that all such changes shall be in compliance with the requirements of governmental authorities having jurisdiction over the Area. Landlord shall use reasonable efforts in exercising the foregoing rights to minimize interference with Tenant's possession of and right to use the Leased Premises. Nothing in this Lease will require Tenant to indemnify, hold harmless or release Landlord for, and Landlord shall indemnify, defend with Page 8 of 25 Pages INITIAL FMS ----------- GPL ----------- 9 counsel reasonably acceptable to Tenant, protect and hold harmless Tenant with respect to, any claim, loss, expense, cost judgement and/or demand, or fees, arising from the negligence or willful misconduct of Landlord, its agents, employees or contractors, or a breach of the obligations of Landlord hereunder, or a violation of Law by Landlord. 21. Damage or Destruction of Leased Premises. In the event the Leased Premises and/or the Building of which the Leased Premises are a part shall be totally destroyed by fire or other casualty or so badly damaged that, in the opinion of Landlord and Tenant, it is not feasible to repair or rebuild same, Landlord shall have the right to terminate this Lease upon written notice to Tenant. If the Leased Premises are partially damaged by fire or other casualty, [Omitted because stricken by parties.] and said Leased Premises are not rendered untenantable thereby, as determined by Landlord and Tenant, an appropriate reduction of the rent shall be allowed for the unoccupied portion of the Leased Premises until Landlord's repair thereof shall be substantially completed. If the Landlord elects to exercise the right herein vested in it to terminate this Lease as a result of damage to or destruction of the Leased Premises or the Building in which the Leased Premises are located, said election shall be made by giving notice thereof to the Tenant within thirty (30) days after the date of said damage or destruction. Notwithstanding anything to the contrary contained in this Lease: (i) Landlord shall not have the right to terminate this Lease if damage to or destruction of the Leased Premises results from a casualty ordinarily covered by insurance required to be carried by Landlord under this Lease. (ii) In the event of damage to the Leased Premises which is not required to be covered by insurance, and is not covered by insurance actually carried, Landlord shall not have the right to terminate this Lease (A) if the damage is relatively minor (e.g. repair or restoration would take fewer than sixty (60) days or it would cost less than ten percent (10%) of the replacement cost of the Leased Premises); or (B) if Tenant agrees to pay the cost of repair in excess of ten percent (10%) of the then replacement cost of the Leased Premises. (iii) If the Leased Premises are damaged by any peril and Landlord does not elect to terminate this Lease or its not entitled to terminate this Lease pursuant to its terms, then as soon as reasonably practicable, Landlord shall furnish Tenant with a written option of Landlord's architect or construction consultant as to when the restoration work required of Landlord may be completed. Tenant shall have the option to terminate this Lease in the event any of the following occurs, which option may be exercised by delivery to Landlord of a written notice of election to terminate within thirty (30) days after Tenant receives from Landlord the estimate of the time needed to complete such restoration: (A) the Leased Premises, with reasonable diligence, cannot be fully repaired by Landlord within ninety (90) days after the damage or destruction; or (B) if the Premises are damaged by any peril within twelve (12) months of the last day of Term, and cannot be substantially restored within sixty (60) days after the date of such damage. (iv) If this Lease is not terminated by Landlord or Tenant as provided herein, Landlord shall restore the Leased Premises and all Tenant Improvements installed by Landlord to the condition in which they existed immediately prior to the casualty. 22. Governmental Acquisition of Property. The parties agree that Landlord shall have complete freedom of negotiation and settlement of all matters pertaining to the acquisition of the Leased Premises, the Building, the Area, or any part thereof, by any governmental body or other person or entity via the exercise of the power of eminent domain, it being understood and agreed that any financial settlement made or compensation paid respecting said land or improvements to be so taken, whether resulting from negotiation and agreement or legal proceedings, shall be the exclusive property of Landlord, there being no sharing whatsoever between Landlord and Tenant of any sum so paid. In the event of any such taking, Landlord shall have the right to terminate this Lease on the date possession is delivered to the condemning person or authority. Such taking of the property shall not be a breach of this Lease by Landlord nor give rise to any claims in Tenant for damages or compensation from Landlord. Nothing herein contained shall be construed as depriving the Tenant of the right to retain as its sole property any compensation paid for any tangible personal property owned by the Tenant which is taken in any such condemnation proceeding, or a separate award made by the condemning authority for relocation costs, moving expenses or loss of goodwill.. 23. Assignment or Subletting. Tenant may not assign this Lease, or sublet the Leased Premises or any part thereof, without the written consent of Landlord, such consent not to be unreasonably withheld. No such assignment or subletting if approved by the Landlord shall relieve Tenant of any of its obligations hereunder, and, the performance or nonperformance of any of the covenants herein contained by subtenants shall be considered as the performance or the Page 9 of 25 Pages INITIAL FMS ----------- GPL ----------- 10 nonperformance by the Tenant. In the event of an acquisition, merger, or reorganization, the assignment of the Lease shall not be unreasonably withheld by Landlord. Notwithstanding anything to the contrary contained in this Lease, Tenant, without Landlord's prior written consent, may sublet the Leased Premises or assign this Lease to: (i) a subsidiary, affiliate, franchisee, division or corporation controlling, controlled by or under common control with Tenant; (ii) a successor corporation related to Tenant by merger, consolidation, non-bankruptcy reorganization or government action; or (iii) a purchaser of substantially all of Tenant's assets located at the Leased Premises, with Landlord's right to reasonably approve the assignment. For purposes of this Lease, a sale of Tenant's capital stock either privately or through any public exchange shall not be deemed an assignment, subletting or other transfer of this Lease or the Leased Premises requiring Landlord's consent. 24. Warranty of Title. Subject to the provisions of the following three (3) paragraphs hereof, Landlord covenants it has good right to lease the Leased Premises in the manner described herein and that Tenant shall peaceably and quietly have, hold, occupy and enjoy the Leased Premises during the term of the Lease. 25. Access. Landlord shall provide Tenant nonexclusive access to the Leased Premises through and across land and/or other improvements owned by Landlord. Landlord shall have the right, during the term of this Lease, to designate, and to change, such nonexclusive access, so long as Tenant's access to the Leased Premises is not impaired thereby. 26. Subordination. Tenant agrees that this Lease shall be subordinate to any mortgages, trust deeds or ground leases that may now exist or which may hereafter be placed upon said Leased Premises and to any and all advances to be made thereunder, and to the interest thereon, and all renewals, replacements and extensions thereof. Tenant shall execute and deliver whatever instruments may be required for the above purposes, and failing to do so within ten (10) business days after demand in writing shall be deemed to be a breach of this Lease [Omitted because stricken by parties.]. Tenant shall in the event of the sale or assignment of Landlord's interest in the Area or in the Building of which the Leased Premises form a part, or in the event of any proceedings brought for the foreclosure of or in the event of exercise of the power of sale under any mortgage made by Landlord covering the Leased Premises, attorn to the purchaser and recognize such purchaser as Landlord under this Lease. Notwithstanding anything to the contrary contained in this Lease, Tenant, Landlord shall deliver to Tenant, within thirty (30) days after the date of this Lease, a recognition agreement in standard form from the existing holder of any deed of trust or similar instrument affecting the Leased Premises, whereby such holder agrees to recognize the leasehold interest of Tenant following a foreclosure of any such interest. Further, as a condition to Tenant's obligation to subordinate its leasehold interest to a future ground lease or instrument of security, Landlord shall obtain from any such ground lessors or lenders a written recognition agreement in the holder's standard form, whereby such holder agrees to recognize the leasehold interest of Tenant following a foreclosure of any such interest. 27. Easements. The Landlord shall have the right to grant any easement on, over, under and above the Area for such purposes as Landlord determines, provided that such easements do not materially interfere with Tenant's occupancy and use of the Leased Premises. 28. Tenant's Hold Harmless and Indemnification Agreement. Except to the extent caused by the negligence or willful misconduct of Landlord, its agents, employees, contractors or invitees, Tenant shall indemnify and hold Landlord harmless from and against any and all claims, losses, expenses, costs, judgments, and/or demands, including court costs and reasonable attorney's fees, suffered or incurred by the Landlord, arising from activities of Tenant on the Leased Premises or in the Building or in the Area and/or on account of any operation or action by Tenant and/or from and against all claims arising from any breach or default on the part of Tenant or any act of negligence of Tenant, it agents, contractors, servants, employees, licensees, or invitees; or any accident, injury or death of any person or damage to any property in or about the Leased Premises, the Building or the Area. 29. Acts or Omission of Others. The Landlord, or its employees or agents, or any of them, shall not be responsible or liable to the Tenant or to the Tenant's guests, invitees, employees, agents or any other person or entity, for any loss or damage that may be caused by the acts or omissions of other tenants, their guests or invitees, occupying any other part of the Area or by persons who are trespassers on or in the Area, or for any loss or damage caused or resulting from the bursting, stoppage, backing up or leaking of water, gas, electricity or sewers or caused in any other manner whatsoever, unless such loss or damage is caused by or results from the negligent acts or willful misconduct of the Landlord, its agents, employees or contractors. 30. Interest on Past Due Obligations. Any amount due to Landlord not paid when due shall bear interest at One and One Half (1 1/2%) percent per month from Page 10 of 25 Pages INITIAL FMS ----------- GPL ----------- 11 due date until paid. Payment of such interest shall not excuse or cure any default by Tenant under this Lease. 31. Holding Over- Last Month's Rent. If Tenant shall remain in possession of the Leased Premises after the termination of this Lease, whether by expiration of the Lease Term or otherwise, without a written agreement as to such possession, then Tenant shall be deemed a month-to-month Tenant. The rent rate during such holdover tenancy shall be equivalent to one hundred fifty percent (150%) [Omitted because stricken by parties.] the monthly rent paid for the last full month of tenancy under this Lease, excluding any free rent concessions which may have been made for the last full month of the Lease. No holding over by Tenant shall operate to renew or extend this Lease without the written consent of Landlord to such renewal or extension having been first obtained. Tenant shall indemnify Landlord against loss or liability resulting from the delay by Tenant in surrendering possession of the Leased Premises including, without limitation, any claims made with regard to any succeeding occupancy bounded by such holdover period. 32. Modification or Extensions. No modification or extension of this Lease shall be binding upon the parties hereto unless in writing and unless signed by the parties hereto. 33. Notice Procedure. All notices, demands and requests which may be or are required to be given by either party to the other shall be in writing and such that are to be given to Tenant shall be deemed to have been properly given if served on Tenant or an employee of Tenant or sent by nationally recognized overnight courier service or sent to Tenant by United States registered or certified mail, return receipt requested, properly sealed, stamped and addressed to Tenant at 1825 Sharp Point Drive, Fort Collins, CO 80525 or at such other place as Tenant may from time to time designate in a written notice to Landlord; and, such as are to be given to Landlord shall be deemed to have been properly given if personally served on Landlord or sent by nationally recognized overnight courier service or if sent to Landlord, United States registered or certified mail, return receipt requested, properly sealed, stamped and addressed to Landlord at 4875 Pearl East Circle #300, Boulder, CO 80301 or at such other place as Landlord may from time to time designate in a written notice to Tenant. Any notice given by mailing shall be effective as of the date of mailing. 34. Memorandum of Lease-Notice to Mortgagee. The Landlord and Tenant agree not to place this Lease of record, but upon the request of either party to execute and acknowledge so the same may be recorded a short form lease indicating the names and respective addresses of the Landlord and Tenant, the Leased Premises, the Lease Term, the dates of the commencement and termination of the Lease Term and options for renewal, if any, but omitting rent and other terms of this Lease. Tenant agrees to an assignment by Landlord of rents and of the Landlord's interest in this Lease to a mortgagee, if the same be made by Landlord. Tenant further agrees if requested to do so by the Landlord, so long as Tenant is provided with the address of the mortgagee, that it will give to said mortgagee a copy of any request for performance by Landlord or notice of default by Landlord; and in the event Landlord fails to cure such default, the Tenant will give said mortgagee a thirty (30) [Omitted because stricken by parties.] day period in which to cure the same. Said period shall begin with the last day on which Landlord could cure such default before Tenant has the right to exercise any remedy by reason of such default. All notices to the mortgagee shall be sent by United States registered or certified mail, postage prepaid, return receipt requested. 35. Controlling Law. The Lease, and all terms hereunder shall be construed consistent with the laws of the State of Colorado. Any dispute resulting in litigation hereunder shall be resolved in court proceedings instituted in Larimer County and in no other jurisdiction. 36. Landlord Not a Partner With the Tenant. Nothing contained in this Lease shall be deemed, held or construed as creating Landlord as a partner, agent, associate of or in joint venture with Tenant in the conduct of Tenant's business, it being expressly understood and agreed that the relationship between the parties hereto is and shall at all times remain that of Landlord and Tenant. 37. Partial Invalidity. If any term, covenant or condition of this Lease or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease or the application of such term, covenant or condition to persons and circumstances other than those to which it has been held invalid or unenforceable, shall not be affected thereby, and each term, covenant and condition of this Lease shall be valid and shall be enforced to the fullest extent permitted by law. 38. Default-Remedies of Landlord. A. If Tenant shall fail to pay any sum due hereunder within five (5) days after receipt of written notice from Landlord that such sum is due, Tenant shall be in default under this Lease. If Tenant fails to keep any of the other terms, covenants or conditions of this Lease, and has not cured such breach within thirty (30) days after receipt of written notice from Landlord (or, if the breach cannot be cured within thirty (30) days, Tenant fails to commence the cure Page 11 of 25 Pages INITIAL FMS ----------- GPL ----------- 12 within the thirty (30)- day period or thereafter fails to diligently prosecute the cure to completion), Tenant shall be in default under this Lease. In the event of any such default, [Omitted because stricken by parties.] Landlord may immediately, or at any time thereafter, reenter the Leased Premises, remove all persons and property therefrom in compliance with applicable law, without being liable to indictment, prosecution for damage therefore, or for forcible entry and detainer and repossess and enjoy the Leased Premises, together with all additions thereto or alterations and improvements thereof. Landlord may, at its option, at any time and from time to time thereafter, relet the Leased Premises or any part thereof for the account of Tenant or otherwise, and receive and collect the rents therefore and apply the same first to the payment of such expenses as Landlord may have incurred in recovering possession and for putting the same in good order and condition for rerental, and expense, commissions and charges paid by Landlord in reletting the Leased Premises. Any such reletting may be for the remainder of the term of this Lease or for a longer or shorter period. In lieu of reletting such Leased Premises, Landlord may occupy the same or cause the same to be occupied by others. Whether or not the Leased Premises or any part thereof be relet, Tenant shall pay the Landlord the rent and all other charges required to be paid by Tenant up to the time of the expiration of this Lease or such recovered possession, as the case may be and thereafter, Tenant, if required by Landlord, shall pay to Landlord until the end of the term of this Lease, the equivalent of the amount of all rent reserved herein and all other charges required to be paid by Tenant, less the net amount received by Landlord for such reletting, if any, unless waived by written notice from Landlord to Tenant. No action by Landlord to obtain possession of the Leased Premises and/or to recover any amount due to Landlord hereunder shall be taken as a waiver of Landlord's right to require full and complete performance by Tenant of all terms hereof, including payment of all amounts due hereunder or as an election on the part of Landlord to terminate this Lease Agreement. If the Leased Premises shall be reoccupied by Landlord, then, from and after the date of repossession, Tenant shall be discharged of any obligations to Landlord under the provisions hereof for the payment of rent. If the Leased Premises are reoccupied by the Landlord pursuant hereto, and regardless of whether the Leased Premises shall be relet or possessed by Landlord, all fixtures, additions, furniture, and the like then on the Leased Premises, excluding any equipment, fixtures, and furniture that Tenant may be leasing from a third party, may be retained by Landlord. In the event Tenant is in default under the terms hereof and, by the sole determination of Landlord, has abandoned the Leased Premises, Landlord shall have the right to remove all the Tenant's property from the Leased Premises and dispose of said property in such a manner as determined best by Landlord, at the sole cost and expense of Tenant and without liability of Landlord for the actions so taken, so long as the foregoing actions of Landlord are taken in compliance with applicable Law. B. In the event an assignment of Tenant's business or property shall be made for the benefit of creditors, or, if the Tenant's leasehold interest under the terms of this Lease Agreement shall be levied upon by execution or seized by virtue of any writ of any court of law, or, if application be made for the appointment of a receiver for the business or property of Tenant, or, if a petition in bankruptcy shall be filed by or against Tenant, and the foregoing are not resolved and/or dismissed within sixty (60) days, then and in any such case, at Landlord's option, with or without notice, Landlord may terminate this Lease and immediately retake possession of the Leased Premises without the same working any forfeiture of the obligations of Tenant hereunder. C. [Omitted because stricken by parties.] D. In addition to remedy granted to Landlord by the terms hereof, Landlord shall have available any and all rights and remedies available under the statutes of the State of Colorado. No remedy herein or otherwise conferred upon or reserved to Landlord shall be considered exclusive of any other remedy but shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute. Further, all powers and remedies given by this Lease to Landlord may be exercised, from time to time, and as often as occasion may arise or as may be deemed expedient. No delay or omission of Landlord to exercise any right or power arising from any default shall impair any such right or power or shall be considered to be a waiver of any such default or acquiescence thereof. The acceptance of rent by Landlord shall not be deemed to be a waiver of any breach of any of the covenants herein contained or of any of the rights of Landlord to any remedies herein given. E. If Tenant shall, for any reason, abandon [Omitted because stricken by parties.] the Leased Premises before the current expiration date, and such abandonment is accompanied by Tenant's failure to pay Monthly Base Rent or additional rent hereunder, Page 12 of 25 Pages INITIAL FMS ----------- GPL ----------- 13 landlord shall have the right to accelerate rental payments and any and all future rent payments due during the course of the Lease Term shall become immediately payable in full to the Landlord. 39. Legal Proceedings-Responsibilities. In the event of proceeding at law or in equity by either party hereto, the defaulting party shall pay all costs and expenses, including all reasonable attorney's fees incurred by the non-defaulting party in pursuing such remedy, if such non-defaulting party is awarded substantially the relief requested. 40. Administrative Charges. In the event any check, bank draft or negotiable instrument given for any money payment hereunder shall be dishonored at any time and from time to time, for any reason whatsoever not attributable to Landlord, Landlord shall be entitled, in addition to any other remedy that may be available, (1) to make an administrative charge of $100.00 or three times the face value of the check, bank draft or negotiable instrument, whichever is smaller, and (2) at Landlord's sole option, to require Tenant to make all future rental payments in cash or cashiers check. 41. Hazardous Materials and Environmental Considerations. A. Tenant covenants and agrees that Tenant and its agents, employees, contractors and invitees shall comply with all Hazardous Materials Laws (as hereinafter defined) applicable to Tenant's business. Without limiting the foregoing, Tenant covenants and agrees that it will not use, generate, store or dispose of, nor permit the use, generation, storage or disposal of Hazardous Materials (as hereinafter defined) on, under or about the Leased Premises, nor will it transport or permit the transportation of Hazardous Materials to or form the Leased Premises, except in full compliance with any applicable Hazardous Materials Laws. If required by applicable Hazardous Materials Laws, any Hazardous Materials located on the Leased Premises shall be handled in an appropriately controlled environment which shall include the use of such equipment (at Tenant's expense) as is necessary to meet [Omitted because stricken by parties.] standards imposed by any applicable Hazardous Materials Laws and in such a way as not to interfere with any other tenant's use of its premises. Upon breach of any covenant contained herein, Tenant shall, at Tenant's sole expense, cure such breach by taking all action prescribed by any applicable Hazardous Materials Laws or by any governmental authority with jurisdiction over such matters. B. Tenant shall provide Landlord with a list of Hazardous Materials that Tenant intends to use in the Leased Premises prior to the Commencement Date and shall inform Landlord [Omitted because stricken by parties.] of [Omitted because stricken by parties.] any Hazardous Materials it intends to use, generate, handle, store or dispose of, on or about or transport from, the Leased Premises Tenant also shall notify Landlord of [Omitted because stricken by parties.] Tenant's discovery of any Hazardous Materials which differ from those on the list. [Omitted because stricken by parties.] Tenant shall provide to Landlord copies of all communications to or from any governmental authority or any other party relating to Hazardous Materials affecting the Leased Premises. C. Tenant shall indemnify and hold Landlord harmless from any and all claims, judgments, damages, penalties, fines, costs, liabilities, expenses or losses (including, without limitation, diminution on value of the Leased Premises, damages for loss or restriction on use of all or part of the Leased Premises, sums paid in settlement of claims, investigation of site conditions, or any cleanup, removal or restoration work required by any federal, state or local governmental agency, reasonable attorney's fees, consultant fees, and expert fees) which arise as a result of [Omitted because stricken by parties.] any other violation of any Hazardous Materials laws by Tenant. The indemnification contained herein shall also accrue to the benefit of the employees, agents, officers, directors and/or partners of Landlord. D. Upon termination of this Lease and/or vacation of the Leased Premises, Tenant shall properly remove all Hazardous Materials and shall then provide to Landlord a copy of the closure report filed with the agency with jurisdiction over closure of the Leased Premises. [Omitted because stricken by parties.] Landlord shall grant to Tenant and its agents or contractors such access to the Leased Premises as is necessary to accomplish such removal and prepare such report. E. "Hazardous Materials" shall mean (a) any chemical, material, substance or pollutant which poses a hazard to the Leased Premises or to persons on or about the Leased Premises or which [Omitted because stricken by parties.] is regulated by any Hazardous Materials Laws, and (b) any chemical, material or substance defined as or included in the definitions of "hazardous substances", "hazardous wastes", "extremely hazardous waste", "restricted hazardous waste", "toxic substances", "regulated substance", or words of similar import under any applicable federal, state or local law or under the regulations adopted or publications promulgated pursuant thereto, including, but not limited to, the Page 13 of 25 Pages INITIAL FMS ----------- GPL ----------- 14 Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Sec. 9601, et seq.; the Hazardous Materials Transportation Act, as amended, 49 U.S.C. Sec. 1801, et seq.; the Resource Conservation and Recovery Act as amended, 42 U.S.C. Sec 6901, et seq.; the Solid Waste Disposal Act, 42 U.S.C. Sec. 6991 et seq.; the Federal Water Pollution Control Act, as amended, 33 U.S.C. Sec. 1251, et seq.; and Sections 25-15-101, et seq., 25-16-101, et seq., 25-7-101, et seq., and 25-8-101, et seq., of the Colorado Revised Statutes. "Hazardous Materials Laws" shall mean any federal state or local laws, ordinances, rules, regulations, or policies (including, but not limited to, those laws specified above) relating to the environment, health and safety or the use, handling, transportation, production, disposal, discharge or storage of Hazardous Materials, or to industrial hygiene or the environmental conditions on, under or about the Leased Premises. Said term shall be deemed to include all such laws as are now in effect or as hereafter amended and all other such laws as may hereafter be enacted or adopted during the term of this Lease. F. All obligations of Tenant in this Paragraph 41 [Omitted because stricken by parties.] shall survive and continue after the expiration of this Lease or its earlier termination for any reason. G. Tenant further covenants and agrees that it shall not install any storage tank (whether above or below the ground) on the Leased Premises without obtaining the prior written consent of the Landlord, which consent may be conditioned upon further reasonable requirements imposed by Landlord with respect to, among other things, compliance by Tenant with any applicable laws, rules, regulations or ordinances and safety measures or financial responsibility requirements applicable to the proposed storage tank. H. Should any local governmental entity having jurisdiction over the Leased Premises require [Omitted because stricken by parties.] an environmental audit or report if Tenant's operations [Omitted because stricken by parties.] during the occupancy of the Leased Premises by the Tenant, such cost of the audit or report shall be the sole responsibility of the Tenant. I. Notwithstanding anything to the contrary contained in this Paragraph 41, Tenant shall not be responsible for any conditions which existed prior to its tenancy, nor shall it be responsible if conditions which are determined not to be caused by action or inaction of Tenant. 42. Entire Agreement. It is expressly understood and agree by and between the parties hereto that this Lease sets forth all the promises, agreements, conditions, and understandings between Landlord and/or its agents and Tenant relative to the Leased Premises and that there are no promises, agreements, conditions, or understandings either oral or written, between them other than that are herein set forth. 43. [Omitted because stricken by parties.] 44. Estoppel Certificates. Within no more than ten (10) business days after receipt of written request, the Tenant shall furnish to the owner a certificate, duly acknowledged, certifying, to the extent true: A. That this Lease is in full force and effect. B. That the Tenant knows of no default hereunder on the part of the owner, or if it has reason to believe that such a default exists, the nature thereof in reasonable detail. C. The amount of the rent being paid and the last date to which rent has been paid. D. That this Lease has not been modified, or if it has been modified, the terms and dates of such modifications. E. That the term of this Lease has commenced. F. The commencement and expiration dates. G. Whether all work to be performed by the owner has been completed. H. Whether the renewal term option has been exercised if applicable. I. Whether there exist any claims or deductions from, or defenses to, the payment of rent. J. Such other matters as may be reasonably requested by owner. If the Tenant fails to execute and deliver to the owner a completed certificate as required under this section, Tenant's failure shall be deemed to be a default hereunder. [Omitted because stricken by parties.] 45. Financial Statements. As reasonably requested by the Landlord, and not more than once each calendar year, Tenant shall provide copies of its most recent financial statements and shall also provide Landlord with up to three (3) prior years of financial statements, if so requested. Landlord shall keep all such financial statements confidential. 46. Lease Exhibits Attached. This Lease includes the following Lease Page 14 of 25 Pages INITIAL FMS ----------- GPL ----------- 15 Exhibits which are incorporated herein and made a part of this Lease Agreement: Exhibit "A" - Site Plan Depicting Area Exhibit "B" - Interior Space Plan Exhibit "C" - Landlord and Tenant's Construction Obligations Exhibit "D" - Sign Code Obligations Exhibit "E" - [Omitted because stricken by parties.] Exhibit "F" - Option to Renew Exhibit "G" - Standard Specifications 47. Miscellaneous. All marginal notations and paragraph headings are for purposes of reference and shall not affect the true meaning and intent of the terms hereof. Throughout this Lease, wherever the words "Landlord" and "Tenant" are used they shall include and imply to the singular, plural, persons both male and female, companies, partnerships and corporations, and in reading said Lease, the necessary grammatical changes required to make the provisions hereof mean and apply as aforesaid shall be made in the same manner as though originally included in said Lease. IN WITNESS WHEREOF, the parties have executed this Lease as of the date hereof. LANDLORD: GB VENTURES --------------------------------------------- By: /s/ GERALD P. LEE --------------------------------------------------- GERALD P. LEE TENANT: HESKA CORPORATION, A CALIFORNIA CORPORATION ----------------------------------------------- By: /s/ FRED M. SCHARZER, PRESIDENT --------------------------------------------------- Page 15 of 25 Pages INITIAL FMS ----------- GPL ----------- 16 ENVIRONMENTAL INDEMNITY AGREEMENT THIS INDEMNITY is given as of this 27th day of June, 1996, by Heska Corporation ("[Omitted because stricken by parties.] Tenant," whether one or more), to and for the benefit of GB Ventures ("Landlord"). WHEREAS, GB VENTURES is Landlord under a proposed Lease Agreement dated June 27, 1996, ("the Lease") in which Heska Corporation , a California Corporation is the proposed tenant ("Tenant"), regarding the Leased Premises commonly known as 1825 Sharp Point Drive, Fort Collins, CO 80525 ("Leased Premises"); and WHEREAS, Landlord is unwilling to enter into the Lease with Tenant unless the [Omitted because stricken by parties.] Tenant agrees to the indemnities hereinafter provided. NOW, THEREFORE, in consideration of the matters recited above and to induce Landlord to enter into the Lease with Tenant, Tenant [Omitted because stricken by parties.] undertakes and agrees as follows: 1. Tenant [Omitted because stricken by parties.] shall indemnify, defend and hold Landlord harmless from and against any and all suits, actions, legal or administrative proceedings, demands, claims, judgements, damages, penalties, fines, costs, liabilities, expenses or losses which arise during or after the lease term as a result of or in connection with the presence, use, storage, disposal, transportation by Tenant, its agents, employees or contractors or discharge, by or on behalf of Tenant, of any Hazardous Materials (as defined in the Lease) in violation of Hazardous Materials Laws on, in or under [Omitted because stricken by parties.] all or any portion of the Leased Premises or any surrounding areas, [Omitted because stricken by parties.] or any breach by Tenant of the provisions concerning Environmental Considerations as contained in paragraph 41 of the Lease, or the failure of the Tenant to comply with any applicable Hazardous Materials Laws (as defined in the Lease) with regard to the storage, use, handling, including transportation, or disposal of any Hazardous Material by Tenant, its agents, employees or contractors, or otherwise resulting from or arising out of any action or non-action of Tenant or Tenant's operations on the Leased Premises in violation of the terms of this Lease. Without limiting the generality of the foregoing, it is expressly agreed by [Omitted because stricken by parties.] Tenant that such indemnity shall also include the following to the extent attributable to the storage, use, handling or disposal, including transportation, of any Hazardous Material by Tenant, its agents, employees or contractors: diminution in value of the Leased Premises, damages for loss or restriction on use of rental or useable space or any amenity of the Leased Premises, damages arising from any adverse impact on marketing of space or delay in delivering possession to a subsequent tenant or purchaser, restoration of the Leased Premises to a condition not materially different from its original contour, appearance and condition; costs incurred in connection with any investigation of site conditions or any clean-up, remedial, removal or restoration work required by any federal, state or local governmental agency, political subdivision, court order or lender of the Landlord; costs of removal and lawful disposal off site of all Hazardous Materials; all sums paid in settlement of claims, reasonable attorneys' fees, consultant fees and expert fees. The foregoing indemnities shall survive termination or expiration of the Lease and shall also accrue to the benefit of the employees, agents, officers, directors and/or partners of Landlord for a period of three (3) years. 2. [Omitted because stricken by parties.] Tenant agrees to pay to Landlord, from time to time, [Omitted because stricken by parties.] within twenty (20) days after receipt of demand therefor, an amount equal to any and all expenses therefore incurred by Landlord for which Landlord is entitled to indemnification. Any sums not so paid shall thereafter bear interest at a rate of two percent (2%) per month until paid in full. 3. The rights and remedies of Landlord under this indemnity shall be in addition to any rights or remedies available to Landlord under the terms of the Lease. The obligations of [Omitted because stricken by parties.] Tenant hereunder shall not be affected or impaired by: (i) the assertion by Landlord against Tenant of any rights or remedies reserved to Landlord pursuant to provisions of the Lease; (ii) the commencement of summary or any other proceedings against Tenant; (iii) failure of the Landlord to enforce any of its rights against Tenant pursuant to the Lease or otherwise; (iv) the granting by Landlord of any extensions of time to Tenant; (v) the assignment or transfer of the Lease by Tenant; (vi) with release or discharge of Tenant from its obligations under the Lease in any creditors', receivership, bankruptcy or other proceedings or the commencement or pendency of any such proceedings; or (vii) the impairment, limitation or modification of the liability of Tenant or the estate of Tenant in bankruptcy, or of any remedy for the enforcement of tenant's liability under the Lease, resulting from the operation of any present or future bankruptcy code or other statute, or from the decision of any court. Page 16 of 25 Pages INITIAL FMS ----------- GPL ----------- 17 4. [Omitted because stricken by parties.] 5. All notices for or allowed hereunder shall be deemed given and received with (a) personally delivered, or (b) at the time the same is deposited in the United States mail, postage prepaid, first class mail, or addressed to the applicable party at the address indicated below for such party, or as to each party, at such other address as shall be designated by such party in a written notice to the other party: If to Tenant [Omitted because stricken by parties.], to: Heska Corporation 1825 Sharp Point Drive Fort Collins, CO 80525 Attn: President If to Landlord, to: GB Ventures 4875 Pearl East Circle #300 Boulder, CO 80301 6. In the event of default in its obligations hereunder, Tenant [Omitted because stricken by parties.] agrees to reimburse Landlord for reasonable attorneys' fees and costs incurred by Landlord in the enforcement of such obligations. 7. This Environmental Indemnity Agreement shall apply to the Lease and any extension or renewal thereof, and any holdover term following the term thereof, or any such extension or renewal. 8. This Environmental Indemnity Agreement shall be governed by and construed in accordance with the laws of the State of Colorado. 9. The covenants and agreements herein contained shall extend to and be binding upon the parties hereto and their respective successors and assigns. IN WITNESS WHEREOF, the parties hereto have executed this Environmental Indemnity Agreement on the day and year first above written. BY: FRED M. SCHWARZER ----------------------------------------- [Omitted because stricken by parties.] " Tenant" HESKA CORPORATION, A CALIFORNIA CORPORATION GERALD P. LEE -------------------------------------------- "Landlord" Page 17 of 25 Pages INITIAL FMS ----------- GPL ----------- 18 EXHIBIT "A" [MAP] Page 18 of 25 Pages INITIAL FMS ----------- GPL ----------- 19 EXHIBIT "B" Landlord shall construct the space as mutually agreed upon by Landlord and Tenant. Notwithstanding anything to the contrary contained in this Exhibit B or the Lease, "Substantial Completion" of the construction contemplated by the foregoing sentence shall be the date by which all of the following have occurred: (i) Landlord has substantially completed the "Tenant Improvements" (as defined below) in accordance with this Exhibit B; (ii) there remains no incomplete or defective item of Tenant Improvements that would adversely affect Tenant's intended use of the Premises; (iii) Landlord has delivered legal possession of the Premises and the Tenant Improvements to Tenant; (iv) Tenant shall have the right to enter the Leased Premises prior to the completion of the Tenant Finish for the purpose of installing telephone and network cabling and leasehold improvements. Such right shall in no way interfere with Landlord's ability to complete the Tenant Improvements as scheduled. Such entry shall be coordinated with Mike Blank of Rincon Development, Inc. who shall be doing the Tenant Finish work. (v) Landlord has obtained all approvals and permits from the appropriate governmental authorities required for the legal occupancy of the Leased Premises and the Tenant Improvements for Tenant's intended use. "Substantial Completion" shall not be meant to include any i) installation of lab furniture, fixtures and equipment; ii) installation of any office furniture, fixtures and equipment required by Tenant. Landlord shall provide an allowance for, and shall construct, the improvements ("Tenant Improvements") described in the plans and specifications attached to this Lease as Exhibit B-1. The allowance for such construction ("Tenant Improvements Allowance") shall not exceed the sum of Three Hundred Two Thousand Four Hundred Dollars ($302,400). Notwithstanding anything to the contrary contained in this Exhibit, the cost of the Tenant Improvements "Tenant Improvements Cost") subject to the Allowance shall not include (and Tenant shall have no responsibility for) the following: (i) Costs attributable to (A) building shell construction; (B) improvements installed outside the demising walls of the Leased Premises unless (1) necessitated by Tenant Improvements made inside the demising walls of the Leased Premises; or (2) requested by Tenant or as shown in the approved working drawings; and (C) Improvements installed "off- site" (such as streets, curbs, gutters, traffic lights, lights for parking and street lighting); (ii) Costs for improvements which are not shown on or described in the approved working drawings unless otherwise approved by Tenant. (iii) Costs incurred to remove Hazardous Materials from the Leased Premises or the surrounding area unless the presence of such materials was caused by Tenant or its agents, contractors, employees or invitees in violation of Hazardous Materials Laws (as defined in the Lease); (iv) Attorneys' fees incurred in connection with negotiation of construction contracts, and attorneys' fees, experts' fees and other costs of legal and arbitration proceedings to resolve construction disputes with third parties; (v) Loan fees, mortgage brokerage fees, interest and other costs of financing construction costs; (vi) Costs incurred as a consequence of delay (unless the delay is caused by Tenant, its agents, contractors, employees or invitees) or construction defects; (vii) Costs recoverable by Landlord upon account of warranties and insurance; (viii) Restoration costs in excess of insurance proceeds as a consequence of casualties unless the casualty is caused by Tenant, its agents, contractors, employees or invitees; and (ix) Penalties and late charges attributable to the failure to pay construction costs in accordance with this Exhibit except to the extent such penalties and late charges arise due to delays caused by Tenant, its agents, contractors, employees or invitees. The Tenant Improvements shall be constructed in accordance with such attached plans and specifications and all applicable Law (as defined in Paragraph 7 of the Lease), in a good and workmanlike manner, free of defects and using new materials and equipment of good quality. Within thirty (30) days after the Commencement Date, Tenant shall have the right to submit a written "punch list" to Landlord, setting forth any defective item of construction, and Landlord shall promptly cause such items to be corrected. Notwithstanding anything to the contrary contained in the Lease, Tenant's acceptance of the Demised Premises or submission of a "punch list" shall not be deemed a waiver of Tenant's right to have defects in the Tenant Improvements or the Premises repaired at no cost to Tenant. Tenant shall give notice to Landlord whenever any such defect becomes reasonably apparent, and Landlord shall repair such defect as soon as practicable. Landlord also hereby assigns to Tenant all warranties with respect to the Premises, including warranties which would reduce Tenant's maintenance obligations under this Lease, and shall cooperate with Tenant to enforce all such warranties. Also notwithstanding anything to the contrary contained in the Lease, at the Commencement Date, the Leased Premises shall conform to all requirements of covenants, conditions, restrictions and encumbrances ("CC&R's"), all underwriters' requirements and Laws (as defined in Paragraph 7 of the Lease) applicable thereto, including, without limitation, all Laws governing Hazardous Materials. Page 19 of 25 Pages INITIAL FMS ----------- GPL ----------- 20 EXHIBIT "C" LANDLORD AND TENANT'S CONSTRUCTION OBLIGATIONS LANDLORD Landlord shall complete the Leased Premises per Exhibit "B" and per the attached set of "Standard Lease Space Specifications" for Office Buildings. TENANT Tenant shall be responsible for the cost of any change order which increases the cost of the work in excess of the Tenant Improvements Allowance shown on Exhibit "B" or which increases the cost of the Landlords Standard Lease Space Specifications. If Tenant should make any changes which increase such cost it shall pay to the Landlord such sum within 15 days of occupancy of the Leased Premises. Landlord shall have the obligation to notify Tenant in writing of any changes which will obligate the Tenant to any such additional costs. Page 20 of 25 Pages INITIAL FMS ----------- GPL ----------- 21 EXHIBIT "D" [PLANS] Page 21 of 25 Pages INITIAL FMS ----------- GPL ----------- 22 EXHIBIT "F" OPTION TO EXTEND Tenant shall have the option to extend the Lease Agreement from 12:00 noon on 10/1/2004 to 12:00 noon on 10/1/2007 ("Option Period One") and a second option from 12:00 noon on 10/1/2007 to 12:00 noon on 10/1/2010 ("Option Period Two"). In the event the Tenant desires to exercise said option, Tenant shall give written notice of such exercise to Landlord not later than 10/1/2003 for Option Period One and 10/1/2006 for Option Period Two. See below for Option(s) Term Rent. In the event of such exercise, the Lease Agreement, including all amendments, shall be automatically extended for the additional term. Notwithstanding the foregoing, this option shall be void and of no force or effect if the Tenant is in default hereunder, beyond applicable cure periods, either as of the date of the Tenant's exercise of said option or as of the date of the commencement of the option or additional term. Option Term Rent: Tenant shall pay the following rent for the Leased Premises: Landlord and Tenant will attempt to agree upon a Fair Market Rental Value of the Leased Premises satisfactory to both parties within thirty (30) days of Tenant's exercise of its option. If no agreement can be reached by the parties during that period, then the Base Monthly Rental for the Option Term shall be determined by the Fair Market Rental Value of the Leased Premises as determined by comparison to premises of similar size located in or near the City of Boulder, Colorado, having comparable development, use and density capability and such other characteristics as may be deemed relevant by a subject appraiser whose selection is outlined herein. Landlord shall select an independent MAI real estate appraiser with at least ten (10) years experience in appraising commercial real property in the City of Boulder, Colorado (a "Qualified Appraiser"). The Qualified Appraiser selected by the Landlord shall be referred to as the "Landlord's Appraiser". Within thirty (30) days of being selected by the Landlord, the Landlord's Appraiser shall determine the Fair Market Rental Value of the Leased Premises in accordance with the appraisal standards set forth above and shall immediately give the Landlord and the Tenant written notification of his determination. If the Tenant agrees with the Landlord's Appraiser's determination of the Fair Market Rental Value, the new Base Monthly Rental shall become effective beginning with the first month of the Option Term. If the Tenant does not agree with the Landlord's Appraiser's determination of Fair Market Rental Value, the Tenant shall have the right to select its own Qualified Appraiser to determine the Fair Market Rental Value. If the Tenant does elect to appoint a Qualified Appraiser (the "Tenant's Appraiser"), the Tenant shall select the Tenant's Appraiser within thirty (30) business days after receiving the Landlord's Appraiser's determination of the Fair Market Rental Value. The Tenant's Appraiser shall make his own determination of the Fair Market Rental Value in accordance with the provisions set forth above, within 30 business days of being selected by the Tenant and shall immediately give the Landlord and the Tenant written notice of his determination. If the Fair Market Rental Value as determined by the Landlord's Appraiser and the Tenant's Appraiser, respectively, differ by an amount which is equal to or less than 5% of the Fair Market Rental Value determined by the Landlord's Appraiser, then the arithmetic mean of the two Fair Market Rental Values shall constitute the Fair Market Rental Value used to calculate the new Base Monthly Rental which will in effect for the Option Term. If the Fair Market Rental Value determined by the Landlord's Appraiser and the Tenant's Appraiser, respectively, differ by an amount which is greater than 5% then, within ten (10) business days after the Landlord's Appraiser and the Tenant's Appraiser's determination of the Fair Market Rental Value, the Landlord's Appraiser and the Tenant's Appraiser shall agree upon and select a third Qualified Appraiser who shall be independent of and have no prior or existing affiliation or relationship with either the Landlord or the Tenant (the "Independent Appraiser"). Within ten (10) business days of being appointed, the Independent Appraiser shall, after exercising his best professional judgement, choose either the Landlord's Appraiser's or the Tenant's Appraiser's determination of Fair Market Rental Value which the Independent Appraiser believes, in his best professional judgement, best represents the Fair Market Rental Value at that point in time. Upon making such a selection, the Independent Appraiser shall immediately give the Landlord and the Tenant written notice of this selection of the Fair Market Rental Value. The Fair Market Rental Value selected by the Independent Appraiser shall be used to calculate the new Base Monthly Rental which will be in effect during the Extension Option, and such selection by the Independent Appraiser shall be binding and conclusive upon the Landlord and the Tenant. All appraisal fees required hereunder shall be shared equally by the Landlord and the Tenant. Page 22 of 25 Pages INITIAL FMS ----------- GPL ----------- 23 EXHIBIT "G" STANDARD LEASE SPACE SPECIFICATIONS The following are standard specifications for the Leased Premises herein defined. GENERAL A. The leased space design/layout will conform to the Architectural drawings. B. All work performed to complete the Leased Premises will be in accordance with all applicable codes and regulations. C. Demising, corridor and partition walls separating offices from warehouse space to be 3-5/8" metal studs at 24" o.c. with 5/8" gypsum wallboard on each side. Partitions to have acoustical sealant at joints and sound attenuation batting between studs from floor to structure above. Partitions to receive typical partition finish. D. 1) Building interior space may be divided into fire containment areas. It is the responsibility of the Tenant to conform to all applicable regulations and fire codes, including, but not limited to, maintaining egress requirements during the term of occupancy. 2) Fire containment walls to be 3-5/8" metal studs at 24" o.c. with 5/8" gypsum wallboard on each side. Walls to extend from floor to underside of structure above. Doors in fire containment walls to be twenty minute fire rated, solid core oak veneer with closer and metal jambs. E. Tenant will be responsible for identifying any equipment or areas requiring additional or special ventilation, lighting or electrical service prior to space planning. OFFICE AREAS A. INTERIOR PARTITIONS. 1. 3-5/8" metal studs at 24" o.c. from floor to underside of ceiling with 5/8" gypsum wallboard on each side. 2. All concrete block walls in office area to be furred and sheathed as interior partitions above unless otherwise noted on Architectural drawings. B. PARTITIONS FINISH All interior partitions, not pre-finished, will receive paint. Paint to be Landlord's standard, two finish coats over one primer coat. Color to be selected by Tenant from among choices pre-selected by Landlord. C. CEILING To be suspended acoustical tile, 2'X4' omni fissured. Tile and metal grid to be white. D. FLOOR COVERING 1. Carpet to be Landlord's standard. Installation to be glue down. Color to be selected by Tenant from among choices pre-selected by Landlord. Base at carpet to be 2-1/2" high solid oak, finish to match doors. 2. Resilient flooring to be Landlord's standard. 12"X12"X1/8". Color to be selected by Tenant from among choices pre-selected by Landlord. Base at resilient flooring to be Roppe 2-1/2" rubber cove. E. INTERIOR DOORS All interior doors to be solid core flush panel oak veneer with 3 coats natural color lacquer finish. Frames to be timely metal. Door sizes to be 3'-0" X 7'-0" X 1-3/4" unless otherwise noted on architectural drawings. F. DOOR HARDWARE To be sargent 6 line Orbital series, 26D brushed chrome or equal. Page 23 of 25 Pages INITIAL FMS ----------- GPL ----------- 24 All entry doors to have keyed cylinder lock sets. All office, conference, and storage room doors to have passage lock set. Restrooms to have privacy lock. All doors to have 1-1/2 pair 4" hinges and 1 Ives concave wall stop $407 1/2, or equal, stainless steel finish. G. LIGHTING To be 2' X 4' 4 lamp, recessed, fluorescent light fixture with acrylic lens. H. ELECTRICAL/PHONE Outlet locations as shown on Architectural drawings. All outlets, outlet covers, switches and switch plate covers to be white. I. COMPUTER/TELEPHONE OUTLETS Outlets to consist of empty junction box with 1/2" conduit stubbed above ceiling. J. TELEPHONE/COMPUTER LINES AND CABLING Wiring and installation to be provided by Tenant. 3/4" plywood phone board to be provided and installed by Landlord for telephone installation. RESTROOMS A. CONSTRUCTION AND FINISHES To be per office area specifications except as follows: 1. Partitions and ceiling to receive 5/8" water resistant gypsum wallboard. 2. Walls to have 2 coats of epoxy paint from floor to 4'-0" above floor. Remaining wall surface and ceiling to have 2 finish coats of semi-gloss acrylic over one primer coat. Color to be white. 3. Ceiling structure to be metal stud joists bearing on partition wall. Ceiling structure to support unit water heater for restroom. Ceiling height to be maximum allowable. 4. Counter tops to have plastic laminate finish with color to be selected by Tenant from among choices pre-selected by Landlord. B. PLUMBING FIXTURES 1. Toilet - Armitage Shanks, white, model #109 or equal. 2. Lavatory - Armitage Shanks model #308, white, 19" shelf rimming china lavatory with Price Pfister #H43-121 faucet or equal. 3. Lavatory - American Standard wall hung Royalyn Vitreous China 3 hole #1024.121 (20" X 18") with Delta handle faucet #2520 or equal. 4. Urinal - Kohler model #402, white with Zorn flush valve or equal. C. ACCESSORIES 1. Mirror - Full HGT and with mirror with metal edge trim as shown on Architectural Drawings. 2. Mirror - Bobrick stainless steel channel frame mirror #B-165-1830 (18" X 30") or equal. 3. Paper Towel Dispenser/Disposal - Bobrick B-369 recessed, stainless steel satin finish or equal. 4. Toilet Tissue Dispenser - Bobrick B-388 recessed, stainless steel satin finish or equal. 5. Utility Hook - Bobrick #B-670 polished stainless steel or equal mounted interior side of toilet and shower stall doors (if applicable) 66" above finished floor. Page 24 of 25 Pages INITIAL FMS ----------- GPL ----------- 25 6. Grab Bars - Bobrick #B-490, stainless steel satin finished or equal. D. LIGHTING One surface mounted 2 tube fluorescent fixture with acrylic lens in drywall light valance over lavatory. Ceiling fixture, if called for in architectural drawings, to be 2 tube fluorescent with acrylic wrap lens. E. ELECTRICAL MECHANICAL/ELECTRICAL A. HEATING AND COOLING The interior premises are heated and cooled by one or more roof-mounted mechanical units. The sizing of the mechanical units are designed to provide one (1) ton of cooling for every three hundred and eighty-three (383) square feet of floor area; provided that the internal load does not exceed three (3) watts per square foot. Individual thermostat control shall be centrally controlled allowing for automatic setback capabilities with external dial-in monitoring provided for the interior premises, with control areas not to exceed two thousand (2,000) square feet in size. Based upon the above, the system shall maintain a minimum temperature of 65 degrees Fahrenheit and a maximum temperature of 75 degrees fahrenheit in the separate rooms within the Leased Premises, so long as the minimum exterior temperature shall not be below zero degrees fahrenheit and the maximum exterior temperature shall not be below zero degrees fahrenheit and the maximum exterior temperature shall not be in excess of 100 degrees fahrenheit. B. ELECTRICAL Standard electrical service provided to the building to the 120/208 volt, three phase, four wire. No additional service to be provided for Tenant equipment unless otherwise noted. One (1) light switch per office is provided. Circuitry design is normally laid out to allocate 6 to 8 duplex outlets per 20 amp circuit. C. ELECTRICAL OUTLETS Restrooms to have one duplex electrical outlet. See Architectural drawings for outlet locations in other areas. D. LIGHTING Finished rooms, other than restrooms and storage areas will be lighted with 2'X4' recessed, 4 lamp, fluorescent fixtures. All fixtures to be provided initially with lamps. Lights and switch locations will be shown on Architectural drawings. SUPPLEMENTAL ITEMS A. COFFEE BAR 1. Base and upper cabinets to be Merrillat brand with style to be chosen by Landlord. 2. Countertop and splash to be plastic laminate finish with color to be selected by Tenant from among choices pre-selected by Landlord. 3. Kitchen sink, Dayton Kingsford #K-11515 single compartment sink with Delta #2171 faucet or equal. B. SHOWER STALL Universal Rundle #6852, 36" unit fiberglass shower stall with glass shower door or equal. When shoer stalls are provided substitute a 30 gallon hot water heater for the standard 6 gallon hot water heater. C. PARTIAL HEIGHT PARTITIONS Partial height partitions to be 3-5/8" metal studs with 5/8" gypsum wallboard on each side of 1X oak cap. Finish to match full height partitions and oak base. See Architectural drawings for detail. Vertical posts will be provided as necessary for stability. Page 25 of 25 Pages INITIAL FMS ----------- GPL ----------- 26 LEASE ADDENDUM This Lease Addendum is made and entered into the 19th day of July, 1996, by and between GB Ventures ("Landlord") and Heska Corporation, a California corporation ("Tenant") as a supplement to the Lease Agreement by and between Landlord and Tenant dated July 11, 1996. PREMISES: An area of approximately 16,800 square feet commonly known as Four Prospect, 1612 Specht Point Drive, Fort Collins, Colorado. BASE TERM: The term of this Lease shall commence on February 1, 1997 and terminate on October 1, 2004. However, it is mutually agreed that if Landlord can provide Tenant an early occupancy of the Premises, Tenant agrees to take possession and begin its rental obligations. Landlord will provide written notice to tenant if the Premises will be deemed ready prior to February 1, 1997. OTHER TERMS AND CONDITIONS: All other terms and conditions of the Lease Agreement dated July 11, 1996 shall remain the same. LANDLORD: TENANT: GB VENTURES HESKA CORPORATION, A CALIFORNIA CORPORATION /s/ WILLIAM REYNOLDS /s/ DEBORAH E. ROBBINS - ------------------------------ ------------------------------- BY: BY: Vice President & General Counsel 7-19-96 JULY 19, 1996 - ------------------------------ ------------------------------- DATE DATE EX-10.24 33 LEASE AGREEMENT DATED 04-11-96 1 EXHIBIT 10.24 LEASE AGREEMENT OFFICE AND INDUSTRIAL SPACE This Lease Agreement is made and entered into as of the 11th day of July, 1996, by and between GB Ventures ("Landlord"), whose address is 4875 Pearl East Circle, Suite 300, Boulder, CO 80301, and Heska Corporation, a California corporation ("Tenant"), whose address is 1825 Sharp Point Drive, Fort Collins, CO 80525 . In consideration of the covenants, terms, conditions, agreements and payments as herein set forth, the Landlord and Tenant hereby enter into the following Lease: 1. Definitions. Whenever the following words or phrases are used in this Lease, said words or phrases shall have the following meaning: A. "Area" shall mean the parcel of land depicted on Exhibit "A" attached hereto and commonly known and referred to as "Four Prospect" 1612 Specht Point Drive, Fort Collins, Colorado. The Area includes the Leased Premises and one or more buildings. The Area may include Common Areas. B. "Building" shall mean a building located in the Area. C. "Common Areas" shall mean all entrances, exits, driveways, curbs, walkways, hallways, parking areas, landscaped areas, restrooms, loading and service areas, and like areas or facilities which are located in the Area and which are designated by the Landlord as areas or facilities available for the nonexclusive use in common by persons designated by the Landlord. D. "Leased Premises" shall mean the premises herein leased to the Tenant by the Landlord. E. "Tenant's Prorata Share" as to the Building in which the Leased Premises are located shall mean an amount (expressed as a percentage) equal to the number of square feet included in the Leased Premises divided by the total number of leasable square feet included in said Building. The Tenant's Prorata Share as to Common Areas shall mean an amount (expressed as a percentage ) equal to the number of square feet included in the Leased Premises divided by the total number of leasable square feet included in all Buildings located in the Area. The Tenant's Prorata Share for Common Areas may change from time to time as the leasable square footage in all Buildings located in the Area is increased or decreased. 2. Leased Premises. The Landlord hereby leases unto the Tenant, and the Tenant hereby leases from the Landlord, the following described premises: Space All in Building 1612 Specht Point Drive consisting of 16,800 square feet. 3. Base Term. The term of this Lease shall commence at 12:00 noon on February 1, 1997, and, unless sooner terminated as herein provided for, shall end at 12:00 noon on October 1, 2004 ("Lease Term"). Except as specifically provided to the contrary herein, the Leased Premises shall, upon the termination of this Lease, by virtue of the expiration of the Lease Term or otherwise, be returned to the Landlord by the Tenant in the same [omitted because stricken by parties] condition than when entered upon by the Tenant, ordinary wear and tear, acts of God, casualties, condemnation, Hazardous Materials (other than those stored, used or disposed of by Tenant in or about the Leased Premises in violation of Hazardous Materials Laws) and Alterations with respect to which Landlord has not reserved the right to require removal excepted. For Option Period see Exhibit F. 4. Rent. Tenant shall pay the following rent for the Leased Premises: A. Base Monthly Rent. Tenant shall pay to Landlord, without notice and without setoff, at the address of Landlord as herein set forth, the following Base Monthly Rent ("Base Monthly Rent"), said Base Monthly Rent to be paid in advance on the first day of each month during the term hereof. In the event that this Lease commences on a date other than the first day of a month, the Base Monthly Rent for the first month of the Lease Term shall be prorated for said partial month. Below is a schedule of Base Monthly Rental payments as agreed upon: Page 1 of 26 Pages INITIAL DER ----------- GPL ----------- 2 During Lease Term
FOR PERIOD TO PERIOD A BASE MONTHLY STARTING ENDING RENT OF February 1, 1997 October 1, 2004 $ 12,600.00
B. Lease Term Adjustment. If, for any reason, other than delays caused by the Tenant, the Leased Premises are not ready for Tenant's occupancy on February 1, 1997, the Tenant's rental obligation and other monetary expenses (i.e. taxes, utilities, etc.) shall be abated in direct proportion to the number of days of delay. It is hereby agreed that the premises shall be deemed ready for occupancy on the date of Substantial Completion of the Tenant Improvements for the Leased Premises. "Substantial Completion" is defined in Exhibit B, attached hereto and incorporated by reference herein. [omitted because stricken by parties] C. Cost of Living Adjustment. The Base Monthly Rental specified in paragraph 4A above shall be recalculated for each Lease Year as defined hereinafter following the first Lease Year of this Lease Agreement. The recalculated Base Monthly Rental shall be hereinafter referred to as the "Adjusted Monthly Rental". The Adjusted Monthly Rental for each Lease Year after the first Lease Year shall be the greater of: (i) the amount of the previous year's Adjusted Monthly Rental, (or the Base Monthly Rental if calculating the Adjusted Monthly Rental for the second Lease Year), or (ii) an amount calculated by the rent adjustment formula set forth below. Notwithstanding the foregoing, in no event shall the increase in any Adjusted Monthly Rental for any Lease Year be greater than six percent (6%) or less than three percent (3%). In applying the rent adjustment formula, the following definitions shall apply: (1) "Lease Year" shall mean a period of twelve (12) consecutive full calendar months with the first Lease Year commencing on the date of the commencement of the term of this Lease and each succeeding Lease Year commencing upon the anniversary date of the first Lease Year; however, if this Lease does not commence on the first day of a month, then, the first Lease Year and each succeeding Lease Year shall commence on the first day of the first month following each anniversary date of this Lease; (2) "Bureau" shall mean the Bureau of Labor Statistics of the United States Department of Labor or any successor agency that shall issue the Price Index referred to in this Lease Agreement. (3) "Price Index" shall mean the "Consumer Price Index-All Urban Consumers-All Items (CPI-U) U.S. City Average (1982-84=100)" issued from time to time by the Bureau. In the event the Price Index shall hereafter be converted to a different standard reference base or otherwise revised, the determination of the increase in the Price Index shall be made with the use of such conversion factor, formula or table as may be published by Prentice-Hall, Inc. or failing such publication, by another nationally recognized publisher of similar statistical information. In the event the Price Index shall cease to be published, then, for the purposes of this paragraph 4C there shall be substituted for the Price Index such other index as the Landlord and the Tenant shall agree upon, and if they are unable to agree within sixty (60) days after the Price Index ceases to be published, such matter shall be determined by arbitration in accordance with the Rules of the American Arbitration Association. (4) "Base Price Index" shall mean the Price Index released to the public during the second calendar month preceding the commencement of this Lease Agreement. (5) "Revised Price Index" shall mean the Price Index released to the public during the second calendar month preceding the Lease Year for which the Base Annual Rental is to be adjusted; (6) "Basic Monthly Rental" shall mean the Basic Monthly Rental set forth in subparagraph 4A above. The rent adjustment formula used to calculate the Adjusted Monthly Rental is as follows: Adjusted Monthly = Revised Price Index X Base Monthly Rental Rental ------------------- Base Price Index The Adjusted Monthly Rental as hereinabove provided shall continue to be payable monthly as required in paragraph 4A above without necessity of any further notice by the Landlord to the Tenant. Page 2 of 26 Pages INITIAL DER ----------- GPL ----------- 3 D. Total Net Lease. The Tenant understands and agrees that this Lease is a total net lease (a "net, net, net lease"), whereby the Tenant has the obligation to reimburse the Landlord for a share of all costs and expenses (taxes, insurance, trash removal, Common Area operation and maintenance and like costs and expenses), incurred by the Landlord as a result of the Landlord's ownership and operation of the Area. Major capital improvements, such as total replacement of the roof or parking lot are not considered to be maintenance items as described in this Paragraph 6D. 5. Security Deposit. Landlord acknowledges receipt from the Tenant of the sum of Twelve Thousand, Six Hundred & No/100 Dollars ($ 12,600.00 ) to be retained by Landlord without responsibility for payment of interest thereon, as security for performance of all the terms and conditions of this Lease Agreement to be performed by Tenant, including payment of all rent due under the terms hereof. Deductions may be made by Landlord from the amount so retained for the reasonable cost of repairs to the Leased Premises (ordinary wear and tear, acts of God, casualties, condemnation, Hazardous Materials (other than those stored, used or disposed of by Tenant in or about the Leased Premises in violation of Hazardous Materials Laws) and Alterations with respect to which Landlord has not reserved the right to require removal excepted), for any rent delinquent under the terms hereof and/or for any sum used in any manner to cure any default of Tenant under the terms of this Lease. In the event deductions are so made, the Tenant shall, within ten (10) days after receipt of notice from the Landlord, redeposit with the Landlord such amounts so expended so as to maintain the deposit in the amount as herein provided for, and failure to so redeposit shall be deemed a failure to pay rent under the terms hereof. Nothing herein contained shall limit the liability of Tenant as to any damage to the Leased Premises, and Tenant shall be responsible for the total amount of any damage and/or loss occasioned by actions of Tenant. Landlord may deliver the funds deposited hereunder by Tenant to any purchaser of Landlord's interest in the Leased Premises in the event such interest shall be sold, and thereupon Landlord shall be discharged from any further liability with respect to such deposit. Landlord shall return the Security Deposit or balance thereof to Tenant within thirty (30) days after Tenant vacates the Leased Premises. 6. Use of Premises. Tenant shall use the Leased Premises only for Research, Development and Manufacture of Biopharmaceutical Products and for no other purpose whatsoever except with the written consent of Landlord. Tenant shall not allow any accumulation of trash or debris on the Leased Premises or within any portion of the Area. All receiving and delivery of goods and merchandise and all removal of garbage and refuse shall be made only by way of the rear and/or other service door provided therefore. In the event the Leased Premises shall have no such door, then these matters shall be handled in a manner reasonably satisfactory to Landlord. No storage of any material outside of the Leased Premises shall be allowed unless first approved by Landlord in writing, and then in only such areas as are designated by Landlord. Tenant shall not commit or suffer any waste on the Leased Premises nor shall Tenant permit any nuisance to be maintained on the Leased Premises or permit any disorderly conduct or other activity that annoys or disturbs any occupants of any part of the Area and/or any adjoining property. 7. Laws and Regulations. -- Tenant Responsibility. The Tenant shall, at its sole cost and expense, comply with all laws and regulations of any governmental entity, board, commission or agency relating to Tenant's particular use of the Leased Premises Tenant agrees not to install any electrical equipment that overloads any electrical paneling, circuitry or wiring and further agrees to comply with the requirements of the insurance underwriter or any governmental authorities having jurisdiction thereof. Notwithstanding anything to the contrary contained in this Lease, Tenant shall not be required to construct or pay the cost of complying with any CC&R's, insurance underwriters' requirements or rules, regulations, statutes, ordinances, laws and building codes (including, without limitation, the Americans With Disabilities Act of 1990) (collectively, "Laws") (i) requiring construction of improvements in the Leased Premises which are properly capitalized under generally accepted accounting principles, unless such compliance is necessitated solely because of Tenant's particular use of the Leased Premises; (ii) regarding the presence of Hazardous Materials unless the same were stored or disposed of by Tenant, its agents, employees or contractors on or in the Leased Premises; or (iii) requiring the correction of any condition existing on the Leased Premises as of the Commencement Date. 8. Landlord's Rules and Regulations. Landlord reserves the right to adopt and promulgate rules and regulations applicable to the Leased Premises and from time to time amend or supplement said rules or regulations. Notice of such rules and regulations and amendments and supplements thereto shall be given to Tenant, and Tenant agrees to comply with and observe such rules and regulations and amendments and supplements thereto provided that the same apply uniformly to all Tenants of the Landlord in the Area and do not unreasonably interfere with Tenant's rights under this Lease. 9. Parking. If the Landlord provides off street parking for the common use of Tenants, employees and customers of the Area, the Tenant shall park all Page 3 of 26 Pages INITIAL DER ----------- GPL ----------- 4 vehicles of whatever type used by Tenant and/or Tenant's employees only in such areas thereof as are designated by Landlord for this purpose, and Tenant accepts the responsibility of seeing that Tenant's employees park only in the areas so designated. Tenant shall, upon the request of the Landlord, provide to the Landlord license numbers of the Tenant's vehicles and the vehicles of Tenant's employees. Notwithstanding anything to the contrary contained in this Lease, without charge, Tenant shall have the exclusive use of one hundred percent (100%) of all parking spaces within the parking area for the building 10. Control of Common Areas. -- Exclusive control of the Landlord. All Common Areas shall at all times be subject to the exclusive control and management of Landlord, notwithstanding that Tenant and/or Tenant's employees and/or customers may have a nonexclusive right to the use thereof. Landlord shall have the right from time to time to establish, modify and enforce rules and regulations with respect to the use of said facilities and Common Areas. 11. Taxes. A. Real Property Taxes and Assessments. The Tenant shall pay to the Landlord on the first day of each month, as additional rent, the Tenant's Prorata Share of all real estate taxes and special assessments levied and assessed against the Building in which the Leased Premises are located and the Common Areas. If the first and last years of the Lease Term are not calendar years, the obligations of the Tenant hereunder shall be prorated for the number of days during the calendar year that this Lease is in effect. The monthly payments for such taxes and assessments shall be $ 1,292.62 until the Landlord receives the first tax statement for the referred to properties. Thereafter, the monthly payments shall be based upon 1/12th of the prior year's taxes and assessments. Once each year the Landlord shall determine the actual Tenant's Prorata Share of taxes and assessments for the prior year and if the Tenant has paid less than the Tenant's Prorata Share for the prior year the Tenant shall pay the deficiency to the Landlord with the next payment of Base Monthly Rent, or, if the Tenant has paid in excess of the Tenant's Prorata Share for the prior year the Landlord shall forthwith refund said excess to the Tenant. Notwithstanding anything to the contrary contained in this Lease, Tenant shall not be required to pay any portion of any tax or assessment expense (i) levied on Landlord's rental income, unless such tax or assessment expense is imposed in lieu of real property taxes; (ii) in excess of the amount which would be payable if such tax or assessment expense were paid in installments over the longest possible term; (iii) imposed on land and improvements other than the Area; or (iv) attributable to Landlord's net income, inheritance, gift, transfer, franchise, estate or state taxes. Tenant may in good faith contest any tax or assessment, provided that Tenant indemnifies Landlord from any loss or liability in connection therewith. B. Personal Property Taxes. Tenant shall be responsible for, and shall pay promptly when due, any and all taxes and/or assessments levied and/or assessed against any furniture, fixtures, equipment and items of a similar nature installed and/or located in or about the Leased Premises by Tenant. C. Rent Tax. If a special tax, charge or assessment is imposed or levied upon the rents paid or payable hereunder or upon the right of the Landlord to receive rents hereunder (other than to the extent that such rents are included as a part of the Landlord's income for the purpose of an income tax), the Tenant shall reimburse the Landlord for the amount of such tax within fifteen (15) days after demand therefore is made upon the Tenant by the Landlord. D. Should Landlord protest and win a reduction in the real estate taxes for the Building and Area, Tenant shall be obligated to pay its Prorata Share of the cost of such protest, if the protest is handled by a party other than the Landlord. Tenant also shall receive from Landlord a credit in the amount of Tenant's Prorata Share of the reduction won by Landlord. 12. Insurance. A. Landlord's Insurance. The Landlord shall procure and maintain fire and casualty coverage for full replacement value of building to include, but not be limited to, the Tenant Improvements constructed pursuant to Exhibit B hereof, roofs and walls, loss of rents and liability insurance as it, from time to time, deems proper and appropriate in reference to the Building in which the Leased Premises are located and the Common Areas. Such insurance shall not be required to cover any of the Tenant's property and the Tenant shall have no interest in any of the proceeds of such insurance. B. Tenant's Insurance. Tenant shall, at its sole cost and expense, insure on a full replacement cost basis, Tenant's inventory, fixtures, leasehold improvements (other than the Tenant Improvements constructed by Landlord pursuant to Exhibit B) and betterments located on the Leased Premises against loss resulting from fire or other casualty. Tenant shall procure, pay for and maintain, comprehensive public liability insurance providing coverage from and against any loss or damage occasioned by an accident or casualty on, about or adjacent to the Leased Premises. Said liability policy shall be written on an "occurrence basis" with limits of not less than $1,000,000 combined single limit Page 4 of 26 Pages INITIAL DER ----------- GPL ----------- 5 coverage. Certificates for such insurance shall be delivered to Landlord and shall provide that said insurance shall not be changed, modified, reduced or cancelled without thirty (30) days prior written notice thereof being given to Landlord. C. Tenant's High Pressure Steam Boiler Insurance. If Tenant makes use of any kind of steam or other high pressure boiler or other apparatus which presents a risk of damage to the Leased Premises or to the Building or other improvements of which the Leased Premises are a part or to the life or limb of persons within such premises, Tenant shall secure and maintain appropriate boiler insurance in an amount satisfactory to Landlord. The Landlord shall be named insured in any such policy or policies. Certificates for such insurance shall be delivered to Landlord and shall provide that said insurance shall not be changed, modified, reduced or cancelled without thirty (30) days prior written notice thereof being given to Landlord. D. Tenant's Share of Landlord Insurance. Tenant shall pay the Landlord as additional rent Tenant's Prorata Share of the insurance secured by the Landlord pursuant to "12A" above. Payment shall be made on the first day of each month as additional rent. The monthly payments for such insurance shall be $58.94 until changed by Landlord as a result of an increase or decrease in the cost of such insurance. E. Mutual Subrogation Waiver. Landlord and Tenant hereby grant to each other, on behalf of any insurer providing personal injury, fire and extended coverage to either of them covering the Leased Premises, Buildings or other improvements thereon or contents thereof, a waiver of any right of subrogation any such insurer of one party may acquire against the other or as against the Landlord or Tenant by virtue of payments of any loss under such insurance. Such a waiver shall be effective so long as the Landlord and Tenant are empowered to grant such waiver under the terms of their respective insurance policy or policies and such waiver shall stand mutually terminated as of the date either Landlord or Tenant gives notice to the other that the power to grant such waiver has been so terminated. 13. Utilities. Tenant shall be solely responsible for and promptly pay all charges for heat, water, gas, electric, sewer service and any other utility service used or consumed on the Leased Premises. Should Landlord elect to supply all or any of the utility services to be used or consumed on the Leased Premises, Tenant shall, within twenty (20) days after receipt of presentation of the statement for such utility service, pay to Landlord, as additional rent under the terms hereof, the amount of said statement if it represents utility service furnished to the Leased Premises only or its prorata share of said statement if it includes utility service to an area greater than the Leased Premises. Said proration of utilities shall be reviewed by Landlord and Tenant at the end of the first year of occupancy, at which time Landlord shall determine if the present percentage of said total utilities is equitable in relation to the use of total services by all the Tenants and will be adjusted reasonably by Landlord, if necessary. The Tenant shall forthwith upon taking occupancy of the Leased Premises make arrangements with the Public Service Company, U.S. West or other appropriate utility company to pay the utilities used on the Leased Premises and to have the same billed to the Tenant at the address designated by the Tenant. Should there be a time where the Landlord remains responsible for utilities supplied to the Leased Premises, the Landlord shall bill the Tenant therefore and the Tenant shall promptly reimburse the Landlord therefore. In no event shall Landlord be liable for any interruption or failure in the supply of any such utility to the Leased Premises, except to the extent caused by the negligence or willful misconduct of Landlord, its agents, employees, contractors or invitees. Notwithstanding anything to the contrary contained in this Lease, if the Leased Premises should become not reasonably suitable for Tenant's use as a consequence of fire, casualty, exercise of eminent domain, cessation of utilities or other services required to be provided to the Leased Premises by Landlord, interference with access to the Leased Premises, legal restrictions or the presence of any Hazardous Material which does not result from the Tenant's use, storage or disposal of such Hazardous Material in or about the Leased Premises in violation of Hazardous Materials Laws, and in any of the foregoing cases the interference with Tenant's use of the Leased Premises persists for seven (7) consecutive calendar days, then Tenant shall be entitled to an equitable abatement of rent to the extent of the interference with Tenant's use of the Leased Premises occasioned thereby. If the interference persists for more than thirty (30) consecutive calendar days, Tenant shall have the right to terminate this Lease. In the event the utility company supplying water and/or sewer to the Leased Premises determines that an additional service fee, impact fee, and/or assessment, or any other type of payment or penalty is necessary due to Tenant's use and occupancy of the Building, nature of operation and/or consumption of utilities, said expense shall be borne solely by the Tenant. Said expense shall be paid promptly and any repairs requested by the utility company shall be performed by Tenant promptly [omitted because stricken by parties] and without any delay. 14. Maintenance Obligations of Landlord. Except as herein otherwise Page 5 of 26 Pages INITIAL DER ----------- GPL ----------- 6 specifically provided for, and not including capital improvement, Landlord shall keep and maintain the roof, roof membrane, and exterior of the Building of which the Leased Premises are a part in good repair and condition. Tenant shall repair and pay for any damage to roof, foundation and external walls caused by Tenant's action, negligence or fault. 15. Maintenance Obligations of the Tenant. Subject only to the maintenance obligations of the Landlord as herein provided for, the Tenant shall, during the entire Lease Term, including all extensions thereof, at the Tenant's sole cost and expense, keep and maintain the Leased Premises in good condition and repair, including specifically the following: A. Electrical Systems. Tenant agrees to maintain in good working order and to make all required repairs and replacements to the electrical systems for the Leased Premises. Tenant upon signing this Lease acknowledges that Tenant has inspected the existing electrical systems and all such systems are in good repair and working order. B. Plumbing Systems. Tenant agrees to maintain in good working order and to make all required repairs or replacements to the plumbing systems for the Leased Premises. Tenant upon signing this Lease acknowledges that Tenant has inspected the existing plumbing systems and all such systems are in good repair and working order. C. Inspections and Service. Upon termination of Lease Agreement, Tenant agrees, before vacating premises, to employ at Tenant's sole cost and expense, a licensed contractor to inspect, service and write a written report on the systems referred to in "A" and "B" of this Paragraph. Landlord shall have the right to order such an inspection if Tenant fails to provide evidence of such inspection, and, to follow the recommendations of such reports and to charge the expense thereof to the Tenant. D. Tenant's Responsibility for Building and Area Repairs. Tenant shall be responsible for any repairs required for any part of the Building or Area of which the Leased Premises are a part if such repairs are necessitated by the negligence or willful misconduct of Tenant. E. Cutting Roof. Tenant must obtain in writing the Landlord's approval prior to making any roof penetrations. Failure by Tenant to obtain written permission to penetrate a roof shall relieve Landlord of any roof repair obligations as set forth in Paragraph "14" hereof. Tenant further agrees to repair, at its sole cost and expense, all roof penetrations made by the Tenant and to use, if so requested by Landlord, a licensed contractor reasonably selected by the Landlord to make such penetrations and repairs. F. Glass and Doors. The repair and replacement of all glass and doors on the Leased Premises shall be the responsibility of the Tenant. Any such replacements or repairs shall be promptly completed at the expense of the Tenant. G. Liability for Overload. Tenant shall be responsible for the repair or replacement of any damage to the Leased Premises, the Building or the Area which result from the Tenant's movement of heavy articles therein or thereon. Tenant shall not overload the floors of any part of the Leased Premises. H. Liability for Overuse and Overload of Operating Systems. Tenant shall be responsible for the repair, upgrade, modification, and/or replacement of any operating systems servicing the Leased Premises and/or all or part of the Building which is necessitated by Tenant's change or increase in use of or non-disclosed use of all or a part of the Leased Premises. Operating systems include, but are not limited to, electrical systems; plumbing systems (both water and natural gas); heating, ventilating, and air conditioning systems; telecommunications systems; computer and network systems; lighting systems, fire sprinkler systems; security systems; and building control systems, if any. I. Repair or Replacement of Capital Items. Notwithstanding anything to the contrary contained in this lease, if any Operating System required to be maintained by Tenant hereunder requires a repair or replacement of a capital nature, as determined in accordance with generally accepted accounting principles, Landlord shall pay for the capital repair or replacement and Tenant shall reimburse to Landlord, as additional rent, the monthly amortized cost of the item based on its useful life to the extent that the useful life falls during the Term hereof, as extended. I. [omitted because stricken by parties] J. Failure of Tenant to Maintain Premises. Should Tenant neglect to keep and maintain the Leased Premises as required herein, the Landlord shall have the right, but not the obligation, to have the work done and any reasonable Page 6 of 26 Pages INITIAL DER ----------- GPL ----------- 7 costs plus a ten percent (10%) overhead charge therefore shall be charged to Tenant as additional rental and shall become payable by Tenant with the payment of the rental next due. K. Operating Systems. Notwithstanding anything to the contrary contained in this Lease, as of the Commencement Date and at no cost to Tenant, the Operating Systems serving the Leased Premises shall be in good working order and repair. If during the first thirty (30) days of the Term, any Operating System is not in the condition required by the foregoing sentence, Tenant shall notify Landlord of the need for repair and Landlord promptly shall complete the repair at no cost to Tenant. 16. Common Area Maintenance. Tenant shall be responsible for Tenant's Prorata share of the total costs incurred for the operation, maintenance and repair of the Common Areas, including, but not limited to, the costs and expenses incurred for the operation, maintenance and repair of parking areas (including restriping and repaving); removal of snow; utilities for common lighting and signs; normal HVAC maintenance and elevator maintenance (if applicable); trash removal; security to protect and secure the Area; common entrances, exits, and lobbies of the Building; all common utilities, including water to maintain landscaping; replanting in order to maintain a smart appearance of landscape areas; supplies; depreciation on the machinery and equipment used in such operation, maintenance and repair; the cost of personnel to implement such services; the cost of maintaining in good working condition the HVAC system(s) for the Leased premises; the cost of maintaining in good working condition the elevator(s) for the Leased Premises, if applicable; and Ten percent ( 10 %) of all such operational, maintenance and repair costs to cover Landlord's administrative and overhead costs. These costs shall be estimated on an annual basis by the Landlord and shall be adjusted upwards or downwards depending on the actual costs for the preceding twelve months. Tenant shall pay monthly, commencing with the first month of the Lease Term, as additional rent due under the terms hereof, a sum equal to Tenant's Prorata Share of the estimated costs for said twelve (12) month period, divided by 12. The estimated initial monthly costs are $ 866.20. Once each year the Landlord shall determine the actual costs of the foregoing expenses for the prior year and if the actual costs are greater than the estimated costs, the Tenant shall pay its Tenant's Prorata Share of the difference between the estimated costs and the actual costs to the Landlord with the next payment of Base Monthly Rent, or, if the actual costs are less than the estimated costs, the Landlord shall forthwith refund the amount of the Tenant's excess payment to the Tenant. Notwithstanding anything to the contrary contained in this Lease, in no event shall Tenant have any obligation to perform, to pay directly, or to reimburse Landlord for, all or any portion of the following repairs, maintenance, improvements, replacements, premiums, claims, losses, fees, commissions, charges, disbursements, attorneys' fees, costs and expenses (collectively, "Costs"): (i) Costs occasioned by the act, omission or violation of Law by Landlord, any other occupant of the Area, or their respective agents, employees or contractors, or Costs to correct any construction defect or other condition in the Leased Premises or the Building not in compliance with law as of the Commencement Date; (ii) Costs occasioned by fire, acts of God or other casualties, or by the exercise of the power of eminent domain; (iii) Costs which Tenant pays directly to a third person or for which Landlord has a right of reimbursement from others (iv) Costs (A) arising from the disproportionate use of any utility or service supplied by Landlord to any other occupant of the Area; or (B) associated with utilities and services of a type not provided to Tenant; (v) Costs related to Hazardous Materials, excepted to the extent the Cost is caused by the storage, use or disposal of the Hazardous Material in question by Tenant in violation of Hazardous Materials Laws; (vi) Costs incurred in connection with negotiations or disputes with other occupant(s) of the Area; (vii) depreciation, amortization or other expense reserves; (viii) interest, charges and fees incurred on dept, payments on mortgages and rent under ground leases; or (ix) wages, salaries, compensation and labor burden for any employee not stationed in the Area on a full-time basis, or any fee, profit or compensation retained by Landlord or its affiliates for management and administration of the Area in excess of the management fee which would be charged by a professional management service for operation of comparable projects in the vicinity of the Area. In addition, notwithstanding anything to the contrary contained in this Lease, within thirty (30) days after receipt by Tenant of Landlord's statement of Common Area costs for any prior calendar year during the Term, Tenant or its authorized representative shall have the right to inspect the books of Landlord during the business hours of Landlord at Landlord's office in the Area, or, at Landlord's option, such other location as Landlord reasonably may specify, for the purpose of verifying the information contained in the statement. Unless Tenant asserts specific error within thirty (30) days after receipt of the statement, the statement shall be deemed correct as between Landlord and Tenant, except as to individual components subsequently determined to be in error by a future audit. 17. Inspection of and Right of Entry to Leased Premises--Regular, Emergency, Reletting. Landlord and/or Landlord's agents and employees, shall have the right to enter the Leased Premises with reasonable prior notice at all times during regular business hours and, at all times during emergencies, to examine the Leased Premises, to make such repairs, alterations, improvements or Page 7 of 26 Pages INITIAL DER ----------- GPL ----------- 8 additions as Landlord deems necessary, and Landlord shall be allowed to take all materials into and upon said Leased Premises that may be required therefore without the same constituting an eviction of Tenant in whole or in part, and the rent reserved shall in no way abate while such repairs, alterations, improvements or additions are being made, by reason of loss or interruption of business of Tenant or otherwise. During the six months prior to the expiration of the term of this Lease or any renewal thereof, Landlord may exhibit the Leased Premises to prospective tenants and/or purchasers and may place upon the Leased Premises the usual notices indicating that the Leased Premises are for lease and/or sale. Notwithstanding anything to the contrary contained in this Lease, any entry by Landlord and Landlord's agents shall not impair Tenant's operations more than reasonably necessary, and Tenant shall have the right to have an employee accompany Landlord and/or its agents at all times that Landlord and/or its agents are present on the Leased Premises. 18. Alteration-Changes and Additions-Responsibility. Unless the Landlord's approval is first secured in writing, such approval not to be unreasonably withheld or delayed, the Tenant shall not install or erect inside partitions, add to existing electric power service, add telephone outlets, add light fixtures, install additional heating and/or air conditioning or make any other changes or alterations to the interior or exterior of the Leased Premises. Notwithstanding the foregoing, Tenant may make non-structural alterations to the Leased Premises not in excess of Twenty-Five Thousand Dollars ($25,000) per work of improvement without obtaining Landlord's prior consent. Any such changes or alterations shall be made at the sole cost and expense of the Tenant. At the end of this Lease, all such fixtures, equipment, additions, changes and/or alterations (except trade fixtures installed by Tenant) shall be and remain the property of Landlord; provided, however, Landlord shall have the option, given in writing at the time that Tenant requests Landlord's consent, or, if no consent is required, upon the expiration or earlier termination of this Lease, to require Tenant to remove any or all such fixtures, equipment, additions and/or alterations and restore the Leased Premises to the condition existing immediately prior to such change and/or installation, normal wear and tear, acts of God, casualties, condemnation, Hazardous Materials (other than those stored, used or disposed of by Tenant in or about the Leased premises in violation of Hazardous Materials Laws) and Alterations with respect to which Landlord has not reserved the right to require removal excepted, all at Tenant's cost and expense. All such work shall be done in a good and workmanlike manner and shall consist of new materials unless agreed to otherwise by Landlord. Any and all repairs, changes and/or modifications thereto shall be the responsibility of, and at the cost of, Tenant. Landlord may require adequate security from Tenant assuring no mechanics' liens on account of work done on the Leased Premises by Tenant and may post the Leased Premises, or take such other action as is then permitted by law, to protect the Landlord and the Leased Premises against mechanics' liens. Landlord may also require adequate security to assure Landlord that the Leased Premises will be restored to their original condition upon termination of this Lease. 19. Sign Approval. Except for signs which are located inside of the Leased Premises and which are not attached to any part of the Leased Premises, the Landlord must approve in writing any sign to be placed in or on the interior or exterior of the Leased Premises, regardless of size or value. Landlord's approval shall not be unreasonably withheld or delayed. Specifically, signs attached to windows of the Leased Premises must be so approved by the Landlord. As a condition to the granting of such approval, Landlord shall have the right to require Tenant to furnish a bond or other security acceptable to Landlord sufficient to insure completion of and payment for any such sign work to be so performed. Tenant shall, during the entire Lease Term, maintain Tenant's signs in good condition and repair at Tenant's sole cost and expense. Tenant shall, remove all signs at the termination of this Lease, at Tenant's sole risk and expense and shall in a workmanlike manner properly repair any damage and close any holes caused by the installation and/or removal of Tenant's signs. Tenant shall give Landlord prior notice of such removal so that a representative of Landlord shall have the opportunity of being present when the signage is removed, or shall pre-approve the manner and materials used to repair damage and close the holes caused by removal. 20. Right of Landlord to Make Changes and Additions. Landlord reserves the right at any time to make reasonable alterations or additions to the Building or Area of which the Leased Premises are a part. Landlord also reserves the right to construct other buildings and/or improvements in the Area and to make alterations or additions thereto, all as Landlord shall determine. Easements for light and air are not included in the leasing of the Leased Premises to Tenant. Landlord further reserves the exclusive right to the roof of the Building of which the Leased Premises are a part. Landlord also reserves the right at any time to relocate, vary and adjust the size of any of the improvements or Common Areas located in the Area, provided, however, that all such changes shall be in compliance with the requirements of governmental authorities having jurisdiction over the Area. Landlord shall use reasonable efforts in exercising the foregoing rights to minimize interference with Tenant's possession of and right to use the Leased Premises. Nothing in this Lease will require Tenant to indemnify, hold harmless or release Landlord for, and Landlord shall indemnify, defend with Page 8 of 26 Pages INITIAL DER ----------- GPL ----------- 9 counsel reasonably acceptable to Tenant, protect and hold harmless Tenant with respect to, any claim, loss, expense, cost judgement and/or demand, or fees, arising from the negligence or willful misconduct of Landlord, its agents, employees or contractors, or a breach of the obligations of Landlord hereunder, or a violation of Law by Landlord. 21. Damage or Destruction of Leased Premises. In the event the Leased Premises and/or the Building of which the Leased Premises are a part shall be totally destroyed by fire or other casualty or so badly damaged that, in the opinion of Landlord and Tenant, it is not feasible to repair or rebuild same, Landlord shall have the right to terminate this Lease upon written notice to Tenant. If the Leased Premises are partially damaged by fire or other casualty, [omitted because stricken by parties] and said Leased Premises are not rendered untenantable thereby, as determined by Landlord and Tenant, an appropriate reduction of the rent shall be allowed for the unoccupied portion of the Leased Premises until Landlord's repair thereof shall be substantially completed. If the Landlord elects to exercise the right herein vested in it to terminate this Lease as a result of damage to or destruction of the Leased Premises or the Building in which the Leased Premises are located, said election shall be made by giving notice thereof to the Tenant within thirty (30) days after the date of said damage or destruction. Notwithstanding anything to the contrary contained in this Lease: (i) Landlord shall not have the right to terminate this Lease if damage to or destruction of the Leased Premises results from a casualty ordinarily covered by insurance required to be carried by Landlord under this Lease. (ii) In the event of damage to the Leased Premises which is not required to be covered by insurance, and is not covered by insurance actually carried, Landlord shall not have the right to terminate this Lease (A) if the damage is relatively minor (e.g. repair or restoration would take fewer than sixty (60) days or it would cost less than ten percent (10%) of the replacement cost of the Leased Premises); or (B) if Tenant agrees to pay the cost of repair in excess of ten percent (10%) of the then replacement cost of the Leased Premises. (iii) If the Leased Premises are damaged by any peril and Landlord does not elect to terminate this Lease or its not entitled to terminate this Lease pursuant to its terms, then as soon as reasonably practicable, Landlord shall furnish Tenant with a written option of Landlord's architect or construction consultant as to when the restoration work required of Landlord may be completed. Tenant shall have the option to terminate this Lease in the event any of the following occurs, which option may be exercised by delivery to Landlord of a written notice of election to terminate within thirty (30) days after Tenant receives from Landlord the estimate of the time needed to complete such restoration: (A) the Leased Premises, with reasonable diligence, cannot be fully repaired by Landlord within ninety (90) days after the damage or destruction; or (B) if the Premises are damaged by any peril within twelve (12) months of the last day of Term, and cannot be substantially restored within sixty (60) days after the date of such damage. (iv) If this Lease is not terminated by Landlord or Tenant as provided herein, Landlord shall restore the Leased Premises and all Tenant Improvements installed by Landlord to the condition in which they existed immediately prior to the casualty. 22. Governmental Acquisition of Property. The parties agree that Landlord shall have complete freedom of negotiation and settlement of all matters pertaining to the acquisition of the Leased Premises, the Building, the Area, or any part thereof, by any governmental body or other person or entity via the exercise of the power of eminent domain, it being understood and agreed that any financial settlement made or compensation paid respecting said land or improvements to be so taken, whether resulting from negotiation and agreement or legal proceedings, shall be the exclusive property of Landlord, there being no sharing whatsoever between Landlord and Tenant of any sum so paid. In the event of any such taking, Landlord shall have the right to terminate this Lease on the date possession is delivered to the condemning person or authority. Such taking of the property shall not be a breach of this Lease by Landlord nor give rise to any claims in Tenant for damages or compensation from Landlord. Nothing herein contained shall be construed as depriving the Tenant of the right to retain as its sole property any compensation paid for any tangible personal property owned by the Tenant which is taken in any such condemnation proceeding, or a separate award made by the condemning authority for relocation costs, moving expenses or loss of goodwill.. 23. Assignment or Subletting. Tenant may not assign this Lease, or sublet the Leased Premises or any part thereof, without the written consent of Landlord, such consent not to be unreasonably withheld. No such assignment or subletting if approved by the Landlord shall relieve Tenant of any of its obligations hereunder, and, the performance or nonperformance of any of the covenants herein contained by subtenants shall be considered as the performance or the Page 9 of 26 Pages INITIAL DER ----------- GPL ----------- 10 nonperformance by the Tenant. In the event of an acquisition, merger, or reorganization, the assignment of the Lease shall not be unreasonably withheld by Landlord. Notwithstanding anything to the contrary contained in this Lease, Tenant, without Landlord's prior written consent, may sublet the Leased Premises or assign this Lease to: (i) a subsidiary, affiliate, franchisee, division or corporation controlling, controlled by or under common control with Tenant; (ii) a successor corporation related to Tenant by merger, consolidation, non-bankruptcy reorganization or government action; or (iii) a purchaser of substantially all of Tenant's assets located at the Leased Premises, with Landlord's right to reasonably approve the assignment. For purposes of this Lease, a sale of Tenant's capital stock either privately or through any public exchange shall not be deemed an assignment, subletting or other transfer of this Lease or the Leased Premises requiring Landlord's consent. 24. Warranty of Title. Subject to the provisions of the following three (3) paragraphs hereof, Landlord covenants it has good right to lease the Leased Premises in the manner described herein and that Tenant shall peaceably and quietly have, hold, occupy and enjoy the Leased Premises during the term of the Lease. 25. Access. Landlord shall provide Tenant nonexclusive access to the Leased Premises through and across land and/or other improvements owned by Landlord. Landlord shall have the right, during the term of this Lease, to designate, and to change, such nonexclusive access, so long as Tenant's access to the Leased Premises is not impaired thereby. 26. Subordination. Tenant agrees that this Lease shall be subordinate to any mortgages, trust deeds or ground leases that may now exist or which may hereafter be placed upon said Leased Premises and to any and all advances to be made thereunder, and to the interest thereon, and all renewals, replacements and extensions thereof. Tenant shall execute and deliver whatever instruments may be required for the above purposes, and failing to do so within ten (10) business days after demand in writing shall be deemed to be a breach of this Lease [omitted because stricken by parties]. Tenant shall in the event of the sale or assignment of Landlord's interest in the Area or in the Building of which the Leased Premises form a part, or in the event of any proceedings brought for the foreclosure of or in the event of exercise of the power of sale under any mortgage made by Landlord covering the Leased Premises, attorn to the purchaser and recognize such purchaser as Landlord under this Lease. Notwithstanding anything to the contrary contained in this Lease, Tenant, Landlord shall deliver to Tenant, within thirty (30) days after the date of this Lease, a recognition agreement in standard form from the existing holder of any deed of trust or similar instrument affecting the Leased Premises, whereby such holder agrees to recognize the leasehold interest of Tenant following a foreclosure of any such interest. Further, as a condition to Tenant's obligation to subordinate its leasehold interest to a future ground lease or instrument of security, Landlord shall obtain from any such ground lessors or lenders a written recognition agreement in the holder's standard form, whereby such holder agrees to recognize the leasehold interest of Tenant following a foreclosure of any such interest. 27. Easements. The Landlord shall have the right to grant any easement on, over, under and above the Area for such purposes as Landlord determines, provided that such easements do not materially interfere with Tenant's occupancy and use of the Leased Premises. 28. Tenant's Hold Harmless and Indemnification Agreement. Except to the extent caused by the negligence or willful misconduct of Landlord, its agents, employees, contractors or invitees, Tenant shall indemnify and hold Landlord harmless from and against any and all claims, losses, expenses, costs, judgments, and/or demands, including court costs and reasonable attorney's fees, suffered or incurred by the Landlord, arising from activities of Tenant on the Leased Premises or in the Building or in the Area and/or on account of any operation or action by Tenant and/or from and against all claims arising from any breach or default on the part of Tenant or any act of negligence of Tenant, it agents, contractors, servants, employees, licensees, or invitees; or any accident, injury or death of any person or damage to any property in or about the Leased Premises, the Building or the Area. 29. Acts or Omission of Others. The Landlord, or its employees or agents, or any of them, shall not be responsible or liable to the Tenant or to the Tenant's guests, invitees, employees, agents or any other person or entity, for any loss or damage that may be caused by the acts or omissions of other tenants, their guests or invitees, occupying any other part of the Area or by persons who are trespassers on or in the Area, or for any loss or damage caused or resulting from the bursting, stoppage, backing up or leaking of water, gas, electricity or sewers or caused in any other manner whatsoever, unless such loss or damage is caused by or results from the negligent acts or willful misconduct of the Landlord, its agents, employees or contractors. 30. Interest on Past Due Obligations. Any amount due to Landlord not paid when due shall bear interest at One and One Half (1 1/2%) percent per month from Page 10 of 26 Pages INITIAL DER ----------- GPL ----------- 11 due date until paid. Payment of such interest shall not excuse or cure any default by Tenant under this Lease. 31. Holding Over- Last Month's Rent. If Tenant shall remain in possession of the Leased Premises after the termination of this Lease, whether by expiration of the Lease Term or otherwise, without a written agreement as to such possession, then Tenant shall be deemed a month-to-month Tenant. The rent rate during such holdover tenancy shall be equivalent to one hundred fifty percent (150%) [omitted because stricken by parties] the monthly rent paid for the last full month of tenancy under this Lease, excluding any free rent concessions which may have been made for the last full month of the Lease. No holding over by Tenant shall operate to renew or extend this Lease without the written consent of Landlord to such renewal or extension having been first obtained. Tenant shall indemnify Landlord against loss or liability resulting from the delay by Tenant in surrendering possession of the Leased Premises including, without limitation, any claims made with regard to any succeeding occupancy bounded by such holdover period. 32. Modification or Extensions. No modification or extension of this Lease shall be binding upon the parties hereto unless in writing and unless signed by the parties hereto. 33. Notice Procedure. All notices, demands and requests which may be or are required to be given by either party to the other shall be in writing and such that are to be given to Tenant shall be deemed to have been properly given if served on Tenant or an employee of Tenant or sent by nationally recognized overnight courier service or sent to Tenant by United States registered or certified mail, return receipt requested, properly sealed, stamped and addressed to Tenant at 1825 Sharp Point Drive, Fort Collins, CO 80525 or at such other place as Tenant may from time to time designate in a written notice to Landlord; and, such as are to be given to Landlord shall be deemed to have been properly given if personally served on Landlord or sent by nationally recognized overnight courier service or if sent to Landlord, United States registered or certified mail, return receipt requested, properly sealed, stamped and addressed to Landlord at 4875 Pearl East Circle #300, Boulder, CO 80301 or at such other place as Landlord may from time to time designate in a written notice to Tenant. Any notice given by mailing shall be effective as of the date of mailing. 34. Memorandum of Lease-Notice to Mortgagee. The Landlord and Tenant agree not to place this Lease of record, but upon the request of either party to execute and acknowledge so the same may be recorded a short form lease indicating the names and respective addresses of the Landlord and Tenant, the Leased Premises, the Lease Term, the dates of the commencement and termination of the Lease Term and options for renewal, if any, but omitting rent and other terms of this Lease. Tenant agrees to an assignment by Landlord of rents and of the Landlord's interest in this Lease to a mortgagee, if the same be made by Landlord. Tenant further agrees if requested to do so by the Landlord, so long as Tenant is provided with the address of the mortgagee, that it will give to said mortgagee a copy of any request for performance by Landlord or notice of default by Landlord; and in the event Landlord fails to cure such default, the Tenant will give said mortgagee a thirty (30) day period in which to cure the same. Said period shall begin with the last day on which Landlord could cure such default before Tenant has the right to exercise any remedy by reason of such default. All notices to the mortgagee shall be sent by United States registered or certified mail, postage prepaid, return receipt requested. 35. Controlling Law. The Lease, and all terms hereunder shall be construed consistent with the laws of the State of Colorado. Any dispute resulting in litigation hereunder shall be resolved in court proceedings instituted in Larimer County and in no other jurisdiction. 36. Landlord Not a Partner With the Tenant. Nothing contained in this Lease shall be deemed, held or construed as creating Landlord as a partner, agent, associate of or in joint venture with Tenant in the conduct of Tenant's business, it being expressly understood and agreed that the relationship between the parties hereto is and shall at all times remain that of Landlord and Tenant. 37. Partial Invalidity. If any term, covenant or condition of this Lease or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease or the application of such term, covenant or condition to persons and circumstances other than those to which it has been held invalid or unenforceable, shall not be affected thereby, and each term, covenant and condition of this Lease shall be valid and shall be enforced to the fullest extent permitted by law. 38. Default-Remedies of Landlord. A. If Tenant shall fail to pay any sum due hereunder within five (5) days after receipt of written notice from Landlord that such sum is due, Tenant shall be in default under this Lease. If Tenant fails to keep any of the other terms, covenants or conditions of this Lease, and has not cured such breach within thirty (30) days after receipt of written notice from Landlord (or, if the breach cannot be cured within thirty (30) days, Tenant fails to commence the cure Page 11 of 26 Pages INITIAL DER ----------- GPL ----------- 12 within the thirty (30) - day period or thereafter fails to diligently prosecute the cure to completion), Tenant shall be in default under this Lease. In the event of any such default, [omitted because stricken by parties] Landlord may immediately, or at any time thereafter, reenter the Leased Premises, remove all persons and property therefrom in compliance with applicable law, without being liable to indictment, prosecution for damage therefore, or for forcible entry and detainer and repossess and enjoy the Leased Premises, together with all additions thereto or alterations and improvements thereof. Landlord may, at its option, at any time and from time to time thereafter, relet the Leased Premises or any part thereof for the account of Tenant or otherwise, and receive and collect the rents therefore and apply the same first to the payment of such expenses as Landlord may have incurred in recovering possession and for putting the same in good order and condition for rerental, and expense, commissions and charges paid by Landlord in reletting the Leased Premises. Any such reletting may be for the remainder of the term of this Lease or for a longer or shorter period. In lieu of reletting such Leased Premises, Landlord may occupy the same or cause the same to be occupied by others. Whether or not the Leased Premises or any part thereof be relet, Tenant shall pay the Landlord the rent and all other charges required to be paid by Tenant up to the time of the expiration of this Lease or such recovered possession, as the case may be and thereafter, Tenant, if required by Landlord, shall pay to Landlord until the end of the term of this Lease, the equivalent of the amount of all rent reserved herein and all other charges required to be paid by Tenant, less the net amount received by Landlord for such reletting, if any, unless waived by written notice from Landlord to Tenant. No action by Landlord to obtain possession of the Leased Premises and/or to recover any amount due to Landlord hereunder shall be taken as a waiver of Landlord's right to require full and complete performance by Tenant of all terms hereof, including payment of all amounts due hereunder or as an election on the part of Landlord to terminate this Lease Agreement. If the Leased Premises shall be reoccupied by Landlord, then, from and after the date of repossession, Tenant shall be discharged of any obligations to Landlord under the provisions hereof for the payment of rent. If the Leased Premises are reoccupied by the Landlord pursuant hereto, and regardless of whether the Leased Premises shall be relet or possessed by Landlord, all fixtures, additions, furniture, and the like then on the Leased Premises, excluding any equipment, fixtures, and furniture that Tenant may be leasing from a third party, may be retained by Landlord. In the event Tenant is in default under the terms hereof and, by the sole determination of Landlord, has abandoned the Leased Premises, Landlord shall have the right to remove all the Tenant's property from the Leased Premises and dispose of said property in such a manner as determined best by Landlord, at the sole cost and expense of Tenant and without liability of Landlord for the actions so taken, so long as the foregoing actions of Landlord are taken in compliance with applicable Law. B. In the event an assignment of Tenant's business or property shall be made for the benefit of creditors, or, if the Tenant's leasehold interest under the terms of this Lease Agreement shall be levied upon by execution or seized by virtue of any writ of any court of law, or, if application be made for the appointment of a receiver for the business or property of Tenant, or, if a petition in bankruptcy shall be filed by or against Tenant, and the foregoing are not resolved and/or dismissed within sixty (60) days, then and in any such case, at Landlord's option, with or without notice, Landlord may terminate this Lease and immediately retake possession of the Leased Premises without the same working any forfeiture of the obligations of Tenant hereunder. C. [omitted because stricken by parties] D. In addition to remedy granted to Landlord by the terms hereof, Landlord shall have available any and all rights and remedies available under the statutes of the State of Colorado. No remedy herein or otherwise conferred upon or reserved to Landlord shall be considered exclusive of any other remedy but shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute. Further, all powers and remedies given by this Lease to Landlord may be exercised, from time to time, and as often as occasion may arise or as may be deemed expedient. No delay or omission of Landlord to exercise any right or power arising from any default shall impair any such right or power or shall be considered to be a waiver of any such default or acquiescence thereof. The acceptance of rent by Landlord shall not be deemed to be a waiver of any breach of any of the covenants herein contained or of any of the rights of Landlord to any remedies herein given. E. If Tenant shall, for any reason, abandon [omitted because stricken by parties] the Leased Premises before the current expiration date, and such abandonment is accompanied by Tenant's failure to pay Monthly Base Rent or additional rent hereunder, Page 12 of 26 Pages INITIAL DER ----------- GPL ----------- 13 landlord shall have the right to accelerate rental payments and any and all future rent payments due during the course of the Lease Term shall become immediately payable in full to the Landlord. 39. Legal Proceedings-Responsibilities. In the event of proceeding at law or in equity by either party hereto, the defaulting party shall pay all costs and expenses, including all reasonable attorney's fees incurred by the non-defaulting party in pursuing such remedy, if such non-defaulting party is awarded substantially the relief requested. 40. Administrative Charges. In the event any check, bank draft or negotiable instrument given for any money payment hereunder shall be dishonored at any time and from time to time, for any reason whatsoever not attributable to Landlord, Landlord shall be entitled, in addition to any other remedy that may be available, (1) to make an administrative charge of $100.00 or three times the face value of the check, bank draft or negotiable instrument, whichever is smaller, and (2) at Landlord's sole option, to require Tenant to make all future rental payments in cash or cashiers check. 41. Hazardous Materials and Environmental Considerations. A. Tenant covenants and agrees that Tenant and its agents, employees, contractors and invitees shall comply with all Hazardous Materials Laws (as hereinafter defined) applicable to Tenant's business. Without limiting the foregoing, Tenant covenants and agrees that it will not use, generate, store or dispose of, nor permit the use, generation, storage or disposal of Hazardous Materials (as hereinafter defined) on, under or about the Leased Premises, nor will it transport or permit the transportation of Hazardous Materials to or form the Leased Premises, except in full compliance with any applicable Hazardous Materials Laws. If required by applicable Hazardous Materials Laws, any Hazardous Materials located on the Leased Premises shall be handled in an appropriately controlled environment which shall include the use of such equipment (at Tenant's expense) as is necessary to meet standards imposed by any applicable Hazardous Materials Laws and in such a way as not to interfere with any other tenant's use of its premises. Upon breach of any covenant contained herein, Tenant shall, at Tenant's sole expense, cure such breach by taking all action prescribed by any applicable Hazardous Materials Laws or by any governmental authority with jurisdiction over such matters. B. Tenant shall provide Landlord with a list of Hazardous Materials that Tenant intends to use in the Leased Premises prior to the Commencement Date and shall inform Landlord [omitted because stricken by parties] of [omitted because stricken by parties] any Hazardous Materials it intends to use, generate, handle, store or dispose of, on or about or transport from, the Leased Premises Tenant also shall notify Landlord of [omitted because stricken by parties] Tenant's discovery of any Hazardous Materials which differ from those on the list. [omitted because stricken by parties] Tenant shall provide to Landlord copies of all communications to or from any governmental authority or any other party relating to Hazardous Materials affecting the Leased Premises. C. Tenant shall indemnify and hold Landlord harmless from any and all claims, judgments, damages, penalties, fines, costs, liabilities, expenses or losses (including, without limitation, diminution on value of the Leased Premises, damages for loss or restriction on use of all or part of the Leased Premises, sums paid in settlement of claims, investigation of site conditions, or any cleanup, removal or restoration work required by any federal, state or local governmental agency, reasonable attorney's fees, consultant fees, and expert fees) which arise as a result of [omitted because stricken by parties] any other violation of any Hazardous Materials laws by Tenant. The indemnification contained herein shall also accrue to the benefit of the employees, agents, officers, directors and/or partners of Landlord. D. Upon termination of this Lease and/or vacation of the Leased Premises, Tenant shall properly remove all Hazardous Materials and shall then provide to Landlord a copy of the closure report filed with the agency with jurisdiction over closure of the Leased Premises. [omitted because stricken by parties] Landlord shall grant to Tenant and its agents or contractors such access to the Leased Premises as is necessary to accomplish such removal and prepare such report. E. "Hazardous Materials" shall mean (a) any chemical, material, substance or pollutant which poses a hazard to the Leased Premises or to persons on or about the Leased Premises or which [omitted because stricken by parties] is regulated by any Hazardous Materials Laws, and (b) any chemical, material or substance defined as or included in the definitions of "hazardous substances", "hazardous wastes", "extremely hazardous waste", "restricted hazardous waste", "toxic substances", "regulated substance", or words of similar import under any applicable federal, state or local law or under the regulations adopted or publications promulgated pursuant thereto, including, but not limited to, the Page 13 of 26 Pages INITIAL DER ----------- GPL ----------- 14 Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Sec. 9601, et seq.; the Hazardous Materials Transportation Act, as amended, 49 U.S.C. Sec. 1801, et seq.; the Resource Conservation and Recovery Act as amended, 42 U.S.C. Sec 6901, et seq.; the Solid Waste Disposal Act, 42 U.S.C. Sec. 6991 et seq.; the Federal Water Pollution Control Act, as amended, 33 U.S.C. Sec. 1251, et seq.; and Sections 25-15-101, et seq., 25-16- 101, et seq., 25-7-101, et seq., and 25-8-101, et seq., of the Colorado Revised Statutes. "Hazardous Materials Laws" shall mean any federal state or local laws, ordinances, rules, regulations, or policies (including, but not limited to, those laws specified above) relating to the environment, health and safety or the use, handling, transportation, production, disposal, discharge or storage of Hazardous Materials, or to industrial hygiene or the environmental conditions on, under or about the Leased Premises. Said term shall be deemed to include all such laws as are now in effect or as hereafter amended and all other such laws as may hereafter be enacted or adopted during the term of this Lease. F. All obligations of Tenant in this Paragraph 4I shall survive and continue after the expiration of this Lease or its earlier termination for any reason. G. Tenant further covenants and agrees that it shall not install any storage tank (whether above or below the ground) on the Leased Premises without obtaining the prior written consent of the Landlord, which consent may be conditioned upon further reasonable requirements imposed by Landlord with respect to, among other things, compliance by Tenant with any applicable laws, rules, regulations or ordinances and safety measures or financial responsibility requirements applicable to the proposed storage tank. H. Should any local governmental entity having jurisdiction over the Leased Premises require an environmental audit or report if Tenant's operations during the occupancy of the Leased Premises by the Tenant, such cost of the audit or report shall be the sole responsibility of the Tenant. I. Notwithstanding anything to the contrary contained in this Paragraph 41, Tenant shall not be responsible for any conditions which existed prior to its tenancy, nor shall it be responsible if conditions which are determined not to be caused by action or inaction of Tenant. 42. Entire Agreement. It is expressly understood and agree by and between the parties hereto that this Lease sets forth all the promises, agreements, conditions, and understandings between Landlord and/or its agents and Tenant relative to the Leased Premises and that there are no promises, agreements, conditions, or understandings either oral or written, between them other than that are herein set forth. 43. [omitted because stricken by parties] 44. Estoppel Certificates. Within no more than ten (10) business days after receipt of written request, the Tenant shall furnish to the owner a certificate, duly acknowledged, certifying, to the extent true: A. That this Lease is in full force and effect. B. That the Tenant knows of no default hereunder on the part of the owner, or if it has reason to believe that such a default exists, the nature thereof in reasonable detail. C. The amount of the rent being paid and the last date to which rent has been paid. D. That this Lease has not been modified, or if it has been modified, the terms and dates of such modifications. E. That the term of this Lease has commenced. F. The commencement and expiration dates. G. Whether all work to be performed by the owner has been completed. H. Whether the renewal term option has been exercised if applicable. I. Whether there exist any claims or deductions from, or defenses to, the payment of rent. J. Such other matters as may be reasonably requested by owner. If the Tenant fails to execute and deliver to the owner a completed certificate as required under this section, Tenant's failure shall be deemed to be a default hereunder. [omitted because stricken by parties] 45. Financial Statements. As reasonably requested by the Landlord, and not more than once each calendar year, Tenant shall provide copies of its most recent financial statements and shall also provide Landlord with up to three (3) prior years of financial statements, if so requested. Landlord shall keep all such financial statements confidential. 46. Lease Exhibits Attached. This Lease includes the following Lease Page 14 of 26 Pages INITIAL DER ----------- GPL ----------- 15 Exhibits which are incorporated herein and made a part of this Lease Agreement: Exhibit "A" - Site Plan Depicting Area Exhibit "B" - Interior Space Plan Exhibit "C" - Landlord and Tenant's Construction Obligations Exhibit "D" - Sign Code Obligations Exhibit "E" - Additional Terms and Conditions Exhibit "F" - Option to Renew Exhibit "G" - Standard Specifications 47. Miscellaneous. All marginal notations and paragraph headings are for purposes of reference and shall not affect the true meaning and intent of the terms hereof. Throughout this Lease, wherever the words "Landlord" and "Tenant" are used they shall include and imply to the singular, plural, persons both male and female, companies, partnerships and corporations, and in reading said Lease, the necessary grammatical changes required to make the provisions hereof mean and apply as aforesaid shall be made in the same manner as though originally included in said Lease. IN WITNESS WHEREOF, the parties have executed this Lease as of the date hereof. LANDLORD: GB VENTURES ----------------------------------------------------------- By: /s/ GERALD P. LEE ----------------------------------------------------------- GERALD P. LEE TENANT: HESKA CORPORATION, A CALIFORNIA CORPORATION ------------------------------------------------------- By: /s/ DEBORAH E. ROLLINS, Vice President & General Counsel ----------------------------------------------------------- Page 15 of 26 Pages INITIAL DER ----------- GPL ----------- 16 ENVIRONMENTAL INDEMNITY AGREEMENT THIS INDEMNITY is given as of this 11th day of July, 1996, by Heska Corporation ([omitted because stricken by parties] " Tenant," whether one or more), to and for the benefit of GB Ventures ("Landlord"). WHEREAS, GB VENTURES is Landlord under a proposed Lease Agreement dated July 11, 1996, ("the Lease") in which Heska Corporation, a California Corporation is the proposed tenant ("Tenant"), regarding the Leased Premises commonly known as 1825 Sharp Point Drive, Fort Collins, CO 80525 ("Leased Premises"); and WHEREAS, Landlord is unwilling to enter into the Lease with Tenant unless the Tenant agrees to the indemnities hereinafter provided. NOW, THEREFORE, in consideration of the matters recited above and to induce Landlord to enter into the Lease with Tenant, Tenant undertakes and agrees as follows: 1. Tenant shall indemnify, defend and hold Landlord harmless from and against any and all suits, actions, legal or administrative proceedings, demands, claims, judgements, damages, penalties, fines, costs, liabilities, expenses or losses which arise during or after the lease term as a result of or in connection with the presence, use, storage, disposal, transportation by Tenant, its agents, employees or contractors or discharge, by or on behalf of Tenant, of any Hazardous Materials (as defined in the Lease) in violation of Hazardous Materials Laws on, in or under [omitted because stricken by parties] all or any portion of the Leased Premises or any surrounding areas, [omitted because stricken by parties] or any breach by Tenant of the provisions concerning Environmental Considerations as contained in paragraph 41 of the Lease, or the failure of the Tenant to comply with any applicable Hazardous Materials Laws (as defined in the Lease) with regard to the storage, use, handling, including transportation, or disposal of any Hazardous Material by Tenant, its agents, employees or contractors, or otherwise resulting from or arising out of any action or non-action of Tenant or Tenant's operations on the Leased Premises in violation of the terms of this Lease. Without limiting the generality of the foregoing, it is expressly agreed by [omitted because stricken by parties] Tenant that such indemnity shall also include the following to the extent attributable to the storage, use, handling or disposal, including transportation, of any Hazardous Material by Tenant, its agents, employees or contractors: diminution in value of the Leased Premises, damages for loss or restriction on use of rental or useable space or any amenity of the Leased Premises, damages arising from any adverse impact on marketing of space or delay in delivering possession to a subsequent tenant or purchaser, restoration of the Leased Premises to a condition not materially different from its original contour, appearance and condition; costs incurred in connection with any investigation of site conditions or any clean-up, remedial, removal or restoration work required by any federal, state or local governmental agency, political subdivision, court order or lender of the Landlord; costs of removal and lawful disposal off site of all Hazardous Materials; all sums paid in settlement of claims, reasonable attorneys' fees, consultant fees and expert fees. The foregoing indemnities shall survive termination or expiration of the Lease and shall also accrue to the benefit of the employees, agents, officers, directors and/or partners of Landlord for a period of three (3) years. 2. [omitted because stricken by parties] Tenant agrees to pay to Landlord, from time to time, within twenty (20) days after receipt of demand therefor, an amount equal to any and all expenses therefore incurred by Landlord for which Landlord is entitled to indemnification. Any sums not so paid shall thereafter bear interest at a rate of two percent (2%) per month until paid in full. 3. The rights and remedies of Landlord under this indemnity shall be in addition to any rights or remedies available to Landlord under the terms of the Lease. The obligations of [omitted because stricken by parties] Tenant hereunder shall not be affected or impaired by: (i) the assertion by Landlord against Tenant of any rights or remedies reserved to Landlord pursuant to provisions of the Lease; (ii) the commencement of summary or any other proceedings against Tenant; (iii) failure of the Landlord to enforce any of its rights against Tenant pursuant to the Lease or otherwise; (iv) the granting by Landlord of any extensions of time to Tenant; (v) the assignment or transfer of the Lease by Tenant; (vi) with release or discharge of Tenant from its obligations under the Lease in any creditors', receivership, bankruptcy or other proceedings or the commencement or pendency of any such proceedings; or (vii) the impairment, limitation or modification of the liability of Tenant or the estate of Tenant in bankruptcy, or of any remedy for the enforcement of tenant's liability under the Lease, resulting from the operation of any present or future bankruptcy code or other statute, or from the decision of any court. Page 16 of 26 Pages INITIAL DER ----------- GPL ----------- 17 4. [omitted because stricken by parties] 5. All notices for or allowed hereunder shall be deemed given and received with (a) personally delivered, or (b) at the time the same is deposited in the United States mail, postage prepaid, first class mail, or addressed to the applicable party at the address indicated below for such party, or as to each party, at such other address as shall be designated by such party in a written notice to the other party: If to Tenant, to: Heska Corporation 1825 Sharp Point Drive Fort Collins, CO 80525 Attn: President If to Landlord, to: GB Ventures 4875 Pearl East Circle #300 Boulder, CO 80301 5. In the event of default in its obligations hereunder, Tenant agrees to reimburse Landlord for reasonable attorneys' fees and costs incurred by Landlord in the enforcement of such obligations. 6. This Environmental Indemnity Agreement shall apply to the Lease and any extension or renewal thereof, and any holdover term following the term thereof, or any such extension or renewal. 7. This Environmental Indemnity Agreement shall be governed by and construed in accordance with the laws of the State of Colorado. 8. The covenants and agreements herein contained shall extend to and be binding upon the parties hereto and their respective successors and assigns. IN WITNESS WHEREOF, the parties hereto have executed this Environmental Indemnity Agreement on the day and year first above written. BY: /s/ DEBORAH E. ROBBINS, Vice President & General Counsel ---------------------------------------------------------- " Tenant" HESKA CORPORATION, A CALIFORNIA CORPORATION /s/ GERALD P. LEE -------------------------------- "Landlord" Page 17 of 26 Pages INITIAL DER ----------- GPL ----------- 18 EXHIBIT "A" [MAP] Page 18 of 26 Pages INITIAL DER ----------- GPL ----------- 19 EXHIBIT "B" INTERIOR SPACE PLAN Landlord shall construct the space as mutually agreed upon by Landlord and Tenant. Notwithstanding anything to the contrary contained in this Exhibit B or the Lease, "Substantial Completion" of the construction contemplated by the foregoing sentence shall be the date by which all of the following have occurred: (i) Landlord has substantially completed the "Tenant Improvements" (as defined below) in accordance with this Exhibit B; (ii) there remains no incomplete or defective item of Tenant Improvements that would adversely affect Tenant's intended use of the Premises; (iii) Landlord has delivered legal possession of the Premises and the Tenant Improvements to Tenant; (iv) Tenant shall have the right to enter the Leased Premises prior to the completion of the Tenant Finish for the purpose of installing telephone and network cabling and leasehold improvements. Such right shall in no way interfere with Landlord's ability to complete the Tenant Improvements as scheduled. Such entry shall be coordinated with Mike Blank of Rincon Development, Inc. who shall be doing the Tenant Finish work. (v) Landlord has obtained all approvals and permits from the appropriate governmental authorities required for the legal occupancy of the Leased Premises and the Tenant Improvements for Tenant's intended use. "Substantial Completion" shall not be meant to include any i) installation of lab furniture, fixtures and equipment; ii) installation of any office furniture, fixtures and equipment required by Tenant. Landlord shall provide an allowance for, and shall construct, the improvements ("Tenant Improvements") described in the plans and specifications attached to this Lease as Exhibit B-1. The allowance for such construction ("Tenant Improvements Allowance") shall not exceed the sum of Three Hundred Two Thousand Four Hundred Dollars ($302,400). Notwithstanding anything to the contrary contained in this Exhibit, the cost of the Tenant Improvements "Tenant Improvements Cost") subject to the Allowance shall not include (and Tenant shall have no responsibility for) the following: (i) Costs attributable to (A) building shell construction; (B) improvements installed outside the demising walls of the Leased Premises unless (1) necessitated by Tenant Improvements made inside the demising walls of the Leased Premises; or (2) requested by Tenant or as shown in the approved working drawings; and (C) Improvements installed "off- site" (such as streets, curbs, gutters, traffic lights, lights for parking and street lighting); (ii) Costs for improvements which are not shown on or described in the approved working drawings unless otherwise approved by Tenant. (iii) Costs incurred to remove Hazardous Materials from the Leased Premises or the surrounding area unless the presence of such materials was caused by Tenant or its agents, contractors, employees or invitees in violation of Hazardous Materials Laws (as defined in the Lease); (iv) Attorneys' fees incurred in connection with negotiation of construction contracts, and attorneys' fees, experts' fees and other costs of legal and arbitration proceedings to resolve construction disputes with third parties; (v) Loan fees, mortgage brokerage fees, interest and other costs of financing construction costs; (vi) Costs incurred as a consequence of delay (unless the delay is caused by Tenant, its agents, contractors, employees or invitees) or construction defects; (vii) Costs recoverable by Landlord upon account of warranties and insurance; (viii) Restoration costs in excess of insurance proceeds as a consequence of casualties unless the casualty is caused by Tenant, its agents, contractors, employees or invitees; and (ix) Penalties and late charges attributable to the failure to pay construction costs in accordance with this Exhibit except to the extent such penalties and late charges arise due to delays caused by Tenant, its agents, contractors, employees or invitees. The Tenant Improvements shall be constructed in accordance with such attached plans and specifications and all applicable Law (as defined in Paragraph 7 of the Lease), in a good and workmanlike manner, free of defects and using new materials and equipment of good quality. Within thirty (30) days after the Commencement Date, Tenant shall have the right to submit a written "punch list" to Landlord, setting forth any defective item of construction, and Landlord shall promptly cause such items to be corrected. Notwithstanding anything to the contrary contained in the Lease, Tenant's acceptance of the Demised Premises or submission of a "punch list" shall not be deemed a waiver of Tenant's right to have defects in the Tenant Improvements or the Premises repaired at no cost to Tenant. Tenant shall give notice to Landlord whenever any such defect becomes reasonably apparent, and Landlord shall repair such defect as soon as practicable. Landlord also hereby assigns to Tenant all warranties with respect to the Premises, including warranties which would reduce Tenant's maintenance obligations under this Lease, and shall cooperate with Tenant to enforce all such warranties. Also notwithstanding anything to the contrary contained in the Lease, at the Commencement Date, the Leased Premises shall conform to all requirements of covenants, conditions, restrictions and encumbrances ("CC&R's"), all underwriters' requirements and Laws (as defined in Paragraph 7 of the Lease) applicable thereto, including, without limitation, all Laws governing Hazardous Materials. Page 19 of 26 Pages INITIAL DER ----------- GPL ----------- 20 EXHIBIT "C" LANDLORD AND TENANT'S CONSTRUCTION OBLIGATIONS LANDLORD Landlord shall complete the Leased Premises per Exhibit "B" and per the attached set of "Standard Lease Space Specifications" for Office Buildings. TENANT Tenant shall be responsible for the cost of any change order which increases the cost of the work in excess of the Tenant Improvements Allowance shown on Exhibit "B" or which increases the cost of the Landlords Standard Lease Space Specifications. If Tenant should make any changes which increase such cost it shall pay to the Landlord such sum within 15 days of occupancy of the Leased Premises. Landlord shall have the obligation to notify Tenant in writing of any changes which will obligate the Tenant to any such additional costs. Page 20 of 26 Pages INITIAL DER ----------- GPL ----------- 21 EXHIBIT "D" [PLANS] Page 21 of 26 Pages INITIAL DER ----------- GPL ----------- 22 EXHIBIT "E" ADDITIONAL TERMS AND CONDITIONS 1. This Lease Agreement is contingent upon Landlord receiving a signed and duly authorized and executed original of same on or before July 12, 1996. If a duly authorized and executed Lease Agreement is not received by Landlord on or before said date, this Lease Agreement shall be null and void and neither party shall be subject to any further obligation or liability hereunder. 2. Tenant shall provide to Landlord all appropriate plans and specifications, mutually approved by Tenant and Landlord, and in form ready to submit to the City of Fort Collins for issuance of building permit, not later than November 1, 1996. Notwithstanding any other term or condition of this Lease Agreement to the contrary, if Tenant does not timely provide such plans and specifications, or if such plans and specifications are not in form ready for submittal to the City, [omitted because stricken by parties] and as a result of Tenant's failure in either instance substantial completion of the improvements on the Leased Premises and/or delivery of possession of the Leased Premises is delayed beyond February 1, 1997, Tenant shall be deemed responsible for such delay, and consequently, Tenant's obligation for payment of base rent under this Lease shall in such event commence on February 1, 1997, without regard to whether the improvements are substantially completed or possession of the Leased Premises has been delivered to Tenant. Notwithstanding the forgoing, Tenant's obligation to commence payment of base rent on February 1, 1997 shall not become effective until substantial completion of the improvements if substantial completion has not occurred by such date due to a force majeure delay or to a delay caused solely by Landlord. Page 22 of 26 Pages INITIAL DER ----------- GPL ----------- 23 EXHIBIT "F" OPTION TO EXTEND Tenant shall have the option to extend the Lease Agreement from 12:00 noon on 10/1/2004 to 12:00 noon on 10/1/2007 ("Option Period One") and a second option from 12:00 noon on 10/1/2007 to 12:00 noon on 10/1/2010 ("Option Period Two"). In the event the Tenant desires to exercise said option, Tenant shall give written notice of such exercise to Landlord not later than 10/1/2003 for Option Period One and 10/1/2006 for Option Period Two. See below for Option(s) Term Rent. In the event of such exercise, the Lease Agreement, including all amendments, shall be automatically extended for the additional term. Notwithstanding the foregoing, this option shall be void and of no force or effect if the Tenant is in default hereunder, beyond applicable cure periods, either as of the date of the Tenant's exercise of said option or as of the date of the commencement of the option or additional term. Option Term Rent: Tenant shall pay the following rent for the Leased Premises: Landlord and Tenant will attempt to agree upon a Fair Market Rental Value of the Leased Premises satisfactory to both parties within thirty (30) days of Tenant's exercise of its option. If no agreement can be reached by the parties during that period, then the Base Monthly Rental for the Option Term shall be determined by the Fair Market Rental Value of the Leased Premises as determined by comparison to premises of similar size located in or near the City of Boulder, Colorado, having comparable development, use and density capability and such other characteristics as may be deemed relevant by a subject appraiser whose selection is outlined herein. Landlord shall select an independent MAI real estate appraiser with at least ten (10) years experience in appraising commercial real property in the City of Boulder, Colorado (a "Qualified Appraiser"). The Qualified Appraiser selected by the Landlord shall be referred to as the "Landlord's Appraiser". Within thirty (30) days of being selected by the Landlord, the Landlord's Appraiser shall determine the Fair Market Rental Value of the Leased Premises in accordance with the appraisal standards set forth above and shall immediately give the Landlord and the Tenant written notification of his determination. If the Tenant agrees with the Landlord's Appraiser's determination of the Fair Market Rental Value, the new Base Monthly Rental shall become effective beginning with the first month of the Option Term. If the Tenant does not agree with the Landlord's Appraiser's determination of Fair Market Rental Value, the Tenant shall have the right to select its own Qualified Appraiser to determine the Fair Market Rental Value. If the Tenant does elect to appoint a Qualified Appraiser (the "Tenant's Appraiser"), the Tenant shall select the Tenant's Appraiser within thirty (30) business days after receiving the Landlord's Appraiser's determination of the Fair Market Rental Value. The Tenant's Appraiser shall make his own determination of the Fair Market Rental Value in accordance with the provisions set forth above, within 30 business days of being selected by the Tenant and shall immediately give the Landlord and the Tenant written notice of his determination. If the Fair Market Rental Value as determined by the Landlord's Appraiser and the Tenant's Appraiser, respectively, differ by an amount which is equal to or less than 5% of the Fair Market Rental Value determined by the Landlord's Appraiser, then the arithmetic mean of the two Fair Market Rental Values shall constitute the Fair Market Rental Value used to calculate the new Base Monthly Rental which will in effect for the Option Term. If the Fair Market Rental Value determined by the Landlord's Appraiser and the Tenant's Appraiser, respectively, differ by an amount which is greater than 5% then, within ten (10) business days after the Landlord's Appraiser and the Tenant's Appraiser's determination of the Fair Market Rental Value, the Landlord's Appraiser and the Tenant's Appraiser shall agree upon and select a third Qualified Appraiser who shall be independent of and have no prior or existing affiliation or relationship with either the Landlord or the Tenant (the "Independent Appraiser"). Within ten (10) business days of being appointed, the Independent Appraiser shall, after exercising his best professional judgement, choose either the Landlord's Appraiser's or the Tenant's Appraiser's determination of Fair Market Rental Value which the Independent Appraiser believes, in his best professional judgement, best represents the Fair Market Rental Value at that point in time. Upon making such a selection, the Independent Appraiser shall immediately give the Landlord and the Tenant written notice of this selection of the Fair Market Rental Value. The Fair Market Rental Value selected by the Independent Appraiser shall be used to calculate the new Base Monthly Rental which will be in effect during the Extension Option, and such selection by the Independent Appraiser shall be binding and conclusive upon the Landlord and the Tenant. All appraisal fees required hereunder shall be shared equally by the Landlord and the Tenant. Page 23 of 26 Pages INITIAL DER ----------- GPL ----------- 24 EXHIBIT "G" STANDARD LEASE SPACE SPECIFICATIONS The following are standard specifications for the Leased Premises herein defined. GENERAL A. The leased space design/layout will conform to the Architectural drawings. B. All work performed to complete the Leased Premises will be in accordance with all applicable codes and regulations. C. Demising, corridor and partition walls separating offices from warehouse space to be 3-5/8" metal studs at 24" o.c. with 5/8" gypsum wallboard on each side. Partitions to have acoustical sealant at joints and sound attenuation batting between studs from floor to structure above. Partitions to receive typical partition finish. D. 1) Building interior space may be divided into fire containment areas. It is the responsibility of the Tenant to conform to all applicable regulations and fire codes, including, but not limited to, maintaining egress requirements during the term of occupancy. 2) Fire containment walls to be 3-5/8" metal studs at 24" o.c. with 5/8" gypsum wallboard on each side. Walls to extend from floor to underside of structure above. Doors in fire containment walls to be twenty minute fire rated, solid core oak veneer with closer and metal jambs. E. Tenant will be responsible for identifying any equipment or areas requiring additional or special ventilation, lighting or electrical service prior to space planning. OFFICE AREAS A. INTERIOR PARTITIONS. 1. 3-5/8" metal studs at 24" o.c. from floor to underside of ceiling with 5/8" gypsum wallboard on each side. 2. All concrete block walls in office area to be furred and sheathed as interior partitions above unless otherwise noted on Architectural drawings. B. PARTITIONS FINISH All interior partitions, not pre-finished, will receive paint. Paint to be Landlord's standard, two finish coats over one primer coat. Color to be selected by Tenant from among choices pre-selected by Landlord. C. CEILING To be suspended acoustical tile, 2'X4' omni fissured. Tile and metal grid to be white. D. FLOOR COVERING 1. Carpet to be Landlord's standard. Installation to be glue down. Color to be selected by Tenant from among choices pre-selected by Landlord. Base at carpet to be 2-1/2" high solid oak, finish to match doors. 2. Resilient flooring to be Landlord's standard. 12"X12"X1/8". Color to be selected by Tenant from among choices pre-selected by Landlord. Base at resilient flooring to be Roppe 2-1/2" rubber cove. E. INTERIOR DOORS All interior doors to be solid core flush panel oak veneer with 3 coats natural color lacquer finish. Frames to be timely metal. Door sizes to be 3'-0" X 7'-0" X 1-3/4" unless otherwise noted on architectural drawings. F. DOOR HARDWARE To be sargent 6 line Orbital series, 26D brushed chrome or equal. Page 24 of 26 Pages INITIAL DER ----------- GPL ----------- 25 All entry doors to have keyed cylinder lock sets. All office, conference, and storage room doors to have passage lock set. Restrooms to have privacy lock. All doors to have 1-1/2 pair 4" hinges and 1 Ives concave wall stop $407 1/2, or equal, stainless steel finish. G. LIGHTING To be 2' X 4' 4 lamp, recessed, fluorescent light fixture with acrylic lens. H. ELECTRICAL/PHONE Outlet locations as shown on Architectural drawings. All outlets, outlet covers, switches and switch plate covers to be white. I. COMPUTER/TELEPHONE OUTLETS Outlets to consist of empty junction box with 1/2" conduit stubbed above ceiling. J. TELEPHONE/COMPUTER LINES AND CABLING Wiring and installation to be provided by Tenant. 3/4" plywood phone board to be provided and installed by Landlord for telephone installation. RESTROOMS A. CONSTRUCTION AND FINISHES To be per office area specifications except as follows: 1. Partitions and ceiling to receive 5/8" water resistant gypsum wallboard. 2. Walls to have 2 coats of epoxy paint from floor to 4'-0" above floor. Remaining wall surface and ceiling to have 2 finish coats of semi-gloss acrylic over one primer coat. Color to be white. 3. Ceiling structure to be metal stud joists bearing on partition wall. Ceiling structure to support unit water heater for restroom. Ceiling height to be maximum allowable. 4. Counter tops to have plastic laminate finish with color to be selected by Tenant from among choices pre-selected by Landlord. B. PLUMBING FIXTURES 1. Toilet - Armitage Shanks, white, model #109 or equal. 2. Lavatory - Armitage Shanks model #308, white, 19" shelf rimming china lavatory with Price Pfister #H43-121 faucet or equal. 3. Lavatory - American Standard wall hung Royalyn Vitreous China 3 hole #1024.121 (20" X 18") with Delta handle faucet #2520 or equal. 4. Urinal - Kohler model #402, white with Zorn flush valve or equal. C. ACCESSORIES 1. Mirror - Full HGT and with mirror with metal edge trim as shown on Architectural Drawings. 2. Mirror - Bobrick stainless steel channel frame mirror #B-165-1830 (18" X 30") or equal. 3. Paper Towel Dispenser/Disposal - Bobrick B-369 recessed, stainless steel satin finish or equal. 4. Toilet Tissue Dispenser - Bobrick B-388 recessed, stainless steel satin finish or equal. 5. Utility Hook - Bobrick #B-670 polished stainless steel or equal mounted interior side of toilet and shower stall doors (if applicable) 66" above finished floor. Page 25 of 26 Pages INITIAL DER ----------- GPL ----------- 26 6. Grab Bars - Bobrick #B-490, stainless steel satin finished or equal. D. LIGHTING One surface mounted 2 tube fluorescent fixture with acrylic lens in drywall light valance over lavatory. Ceiling fixture, if called for in architectural drawings, to be 2 tube fluorescent with acrylic wrap lens. E. ELECTRICAL MECHANICAL/ELECTRICAL A. HEATING AND COOLING The interior premises are heated and cooled by one or more roof-mounted mechanical units. The sizing of the mechanical units are designed to provide one (1) ton of cooling for every three hundred and eighty-three (383) square feet of floor area; provided that the internal load does not exceed three (3) watts per square foot. Individual thermostat control shall be centrally controlled allowing for automatic setback capabilities with external dial-in monitoring provided for the interior premises, with control areas not to exceed two thousand (2,000) square feet in size. Based upon the above, the system shall maintain a minimum temperature of 65 degrees Fahrenheit and a maximum temperature of 75 degrees fahrenheit in the separate rooms within the Leased Premises, so long as the minimum exterior temperature shall not be below zero degrees fahrenheit and the maximum exterior temperature shall not be below zero degrees fahrenheit and the maximum exterior temperature shall not be in excess of 100 degrees fahrenheit. B. ELECTRICAL Standard electrical service provided to the building to the 120/208 volt, three phase, four wire. No additional service to be provided for Tenant equipment unless otherwise noted. One (1) light switch per office is provided. Circuitry design is normally laid out to allocate 6 to 8 duplex outlets per 20 amp circuit. C. ELECTRICAL OUTLETS Restrooms to have one duplex electrical outlet. See Architectural drawings for outlet locations in other areas. D. LIGHTING Finished rooms, other than restrooms and storage areas will be lighted with 2'X4' recessed, 4 lamp, fluorescent fixtures. All fixtures to be provided initially with lamps. Lights and switch locations will be shown on Architectural drawings. SUPPLEMENTAL ITEMS A. COFFEE BAR 1. Base and upper cabinets to be Merrillat brand with style to be chosen by Landlord. 2. Countertop and splash to be plastic laminate finish with color to be selected by Tenant from among choices pre-selected by Landlord. 3. Kitchen sink, Dayton Kingsford #K-11515 single compartment sink with Delta #2171 faucet or equal. B. SHOWER STALL Universal Rundle #6852, 36" unit fiberglass shower stall with glass shower door or equal. When shoer stalls are provided substitute a 30 gallon hot water heater for the standard 6 gallon hot water heater. C. PARTIAL HEIGHT PARTITIONS Partial height partitions to be 3-5/8" metal studs with 5/8" gypsum wallboard on each side of 1X oak cap. Finish to match full height partitions and oak base. See Architectural drawings for detail. Vertical posts will be provided as necessary for stability. Page 26 of 26 Pages INITIAL DER ----------- GPL ----------- EX-10.25 34 LEASE AGREEMENT DATED 12-31-93 1 EXHIBIT 10.25 AMENDMENT TO LEASE This Amendment to Lease is entered into as of September 1, 1995 between Bayer Corporation, an Indiana corporation (formerly known as Miles, Inc.)("Landlord") and Diamond Animal Health, Inc., ("Tenant") an Iowa corporation. WITNESSETH WHEREAS, Landlord and Tenant entered into that certain Lease dated as of December 31, 1993 (the "Lease") for certain property and improvements located in Des Moines, Polk County, Iowa, as more particularly described in the Lease (the "Demised Premises"); and WHEREAS, the initial term of the Lease commenced January 1, 1994 and ends on December 31, 1998; and WHEREAS, Tenant is granted the right to extend the term of the Lease for an additional term of five (5) years and for one (1) additional term of one (1) year, upon the terms and conditions set forth in the Lease; and WHEREAS, Landlord has agreed to grant Tenant an additional option to extend the term of the Lease for a period of five (5) years upon the terms and conditions set forth herein; and WHEREAS, Landlord and Tenant have agreed to amend the Lease to reflect the additional renewal option, among other matters. NOW THEREFORE, in consideration of Ten Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Landlord and Tenant hereby agree to amend the Lease as follows: 2 1. TERM. a) Section 3.3 of the Lease is hereby deleted in its entirety and in its place substituted the following: SECTION 3.4 - CONDITIONAL EXTENDED TERM. Tenant shall have and is hereby granted the right, at its option, to extend the term of this Lease for one (1) additional term of one (1) year, commencing on January 1, 2009 and ending on December 31, 2009, subject to the following conditions: (1) Tenant shall notify Landlord, on or before December 31, 2005, that Tenant intends to construct a new plant for use in connection with Tenant's business; and (2) On or before September 30, 2008, Tenant notifies Landlord that it is not reasonably practicable for Tenant to occupy its new plant on or before December 31, 2008 because of Tenant's inability to obtain timely government regulatory approval of its new plant. The notices described in subsections (a) and (b) hereof shall be given in the manner set forth in Article 21 hereof. Such extension shall be upon the terms and conditions as for the second Extended Term described in Section 3.3, including the Basic Rent as provided in Section 4.2 hereof. b) Article 3 of the Lease is hereby amended by adding the following as new Section 3.3: 2 3 SECTION 3.3 - SECOND EXTENDED TERM. Tenant shall have and is hereby granted the right, at its option, upon the expiration of the Extended Term described in Section 3.2, to extend the term of this Lease for a second additional term of five (5) years commencing January 1, 2004, provided such option is exercised in writing one hundred twenty (120) days prior to the end of the first Extended Term. The notice described in the preceding sentence shall be given in the manner set forth in Article 21 of the Lease. Such extension shall be upon the terms and conditions as for the original term and first Extended Term except that the Basic Rent shall be as provided in Section 4.2 hereof. 2. RENT. Article 4 of the Lease is hereby amended by adding the following to the end of Section 4.2 thereof: During the extended terms of the Lease described in Sections 3.3 and 3.4 above, if any, Tenant shall pay to Landlord, as annual Basic Rent for the Demised Premises, without deduction, setoff, prior notice or demand, the annual sum of Two Hundred Thousand Dollars ($200,000), payable in monthly installments of Sixteen Thousand Six Hundred and Sixty-Seven Dollars ($16,667) each, commencing on January 1, 2004 and ending on December 31, 2008 if Tenant has not exercised the renewal option described in Section 3.4 above, or commencing on January 1, 2004 and ending on December 31, 2009 if Tenant has exercised the Section 3.4 renewal option. 3 4 3. USE. Section 5.3 the Lease is amended by adding the words "or 3.4" after the words "Section 3.2 or 3.3" in the twenty-sixth line of Section 5.3. 4. MAINTENANCE AND REPAIRS Section 9.4 of the Lease is amended by adding the words "or 3.4" after the words "Section 3.2 or 3.3" in the last sentence of Section 9.4. 5. DEFAULT. Section 17.1 of the Lease is amended by adding "; or" at the end of subsection (h) and adding the following to the end of Section 17.1: (i) Tenant shall be in default under the Promissory Note dated as of September 1, 1995 in the original principal amount of Four Hundred Thousand Dollars ($400,000) by Tenant in favor of Landlord, and such default shall not be cured or waived within the period of grace, if any, applicable thereto, and Landlord shall have given notice of acceleration thereto to Tenant. 6. DEFINED TERMS. All capitalized terms not otherwise defined herein shall have the meanings assigned to them in the Lease. References in the Lease to the Manufacturing Agreement shall mean the Manufacturing Agreement as amended and extended from time to time. 4 5 7. SUCCESSORS AND ASSIGNS. The terms, covenants, and conditions of this Amendment shall be binding upon and inure to the benefit of the parties hereto and their heirs, executors, administrators, successors and (in the case of Tenant, permitted) assigns. 8. LEASE OTHERWISE UNCHANGED. Except as specifically set forth herein, the terms of the Lease are unchanged and in full force and effect. In the event of any conflict between the terms of this Amendment and the Lease, the terms of this Amendment shall govern. IN WITNESS WHEREOF, the parties have executed this Amendment to Lease to be effective as of the date first above written. LANDLORD: TENANT: BAYER CORPORATION DIAMOND ANIMAL HEALTH, INC. AGRICULTURE DIVISION BY: /s/ LOUIS VAN DAELE BY: /s/ GARY R. ZIMMERMAN ------------------------------- -------------------------------- TITLE: President TITLE: Vice President New Business Development DATE: 10/4/95 DATE: 10/18/95 5 6 December 31, 1993 LEASE ARTICLE 1. PARTIES This Lease is entered into as of the 31st day of December, 1993 between Miles Inc., an Indiana corporation ("Landlord"), and Diamond Animal Health, Inc., an Iowa corporation ("Tenant"). WITNESSETH ARTICLE 2. DEMISED PREMISES SECTION 2.1 - DESCRIPTION. Landlord hereby leases to Tenant, and Tenant hereby hires and takes from Landlord, that certain premises situated in Des Moines, Iowa, which is more particularly described in Exhibit A attached hereto and made a part hereof, together with all improvements located thereon (collectively, the "Demised Premises"). SECTION 2.2 - CONDITION. Subject to Article 25 hereof, Tenant acknowledges that (a) Tenant has inspected the Demised Premises and accepts the same in its present "as is" condition, and (b) no representations or warranties have been made by Landlord concerning the condition, repair, remodeling, alteration or improvement of the Demised Premises. ARTICLE 3. TERM SECTION 3.1 - INITIAL TERM. The initial term of this Lease shall be for a period of five (5) years, beginning on the 1st day of January, 1994 and ending on the 31st day of December, 1998, unless sooner terminated as hereinafter provided. SECTION 3.2- EXTENDED TERM. Tenant shall have and is hereby granted the right, at its option, to extend the term of this Lease for one (1) additional term of five (5) years, provided such option is exercised in writing one hundred twenty (120) days prior to the end of the initial term hereof. The notice described in the preceding sentence shall be given in the manner set forth in Article 21 hereof. Such extension shall be upon the terms and conditions as for the original term except that the Basic Rent shall be as provided in Section 4.2 hereof. SECTION 3.2 - CONDITIONAL EXTENDED TERM. Tenant shall have and is hereby granted the right, at its option, to extend the term of this Lease for one (1) additional term of one (1) year, commencing on January 1, 2004 and ending December 31, 2004, subject to the following conditions: (a) Tenant shall notify Landlord, on or before December 31, 2000, that Tenant intends to construct a new plant for use in connection with Tenant's business; and (b) On or before September 30, 2003, Tenant notifies Landlord that it is not reasonably practicable for Tenant to occupy its new plant on or before December 31, 2003 because of Tenant's inability to obtain timely government regulatory approval of its new plant. 7 The notices described in subsections (a) and (b) hereof shall be given in the manner set forth in Article 21 hereof. Such extension shall be upon the terms and conditions as for the Extended Term, including the Basic Rent as provided in Section 4.2 hereof. ARTICLE 4. RENT SECTION 4.1 - BASIC RENT. During the term set forth in Section 3.1 hereof, Tenant shall pay to Landlord, as basic annual rent ("Basic Rent") for the Demised Premises, without deduction, set-off, prior notice or demand, the sum of One Hundred Fifty Thousand Dollars ($150,000.00) payable in monthly installments of Twelve Thousand Five Hundred Dollars ($12,500.00) each, commencing on January 1, 1994 and ending on December 31, 1998. During the term of that certain Manufacturing and Supply Agreement of even date herewith (the "Manufacturing Agreement") entered into by and between Landlord, Tenant, Agrion Corporation ("Agrion") and Diamond Scientific Co. ("Diamond Scientific"), respectively, the Basic Rent reserved herein shall be paid by permitting Landlord to set off the amount of the monthly installments of Basic Rent against the monthly payment due from Landlord to Tenant under the Manufacturing Agreement. SECTION 4.2 - BASIC RENT, EXTENDED TERM. During the first extended term, if any, Tenant shall pay to Landlord, as Basic Rent for the Demised Premises, without deduction, setoff, prior notice or demand, the sum of One Hundred Seventy-Five Thousand Dollars ($175,000.00), payable in monthly installments of Fourteen Thousand Five Hundred Fifty-One and 67/100 Dollars ($14,551.67) each, commencing on January 1, 1999 and ending on December 31,2003. SECTION 4.3 - ADDITIONAL RENT. All other payments required to be made by Tenant to Landlord under this Lease shall be deemed to be additional rent hereunder ("Additional Rent"). The Basic Rent and Additional Rent are collectively referred to herein as "Rent." All Rent shall be payable at the address of Landlord set forth in the Section hereof which is entitled "Notices," or at such other place as Landlord may from time to time direct. Any payment of Rent not made when due after applicable cure periods shall bear interest from the due date thereof at a rate (the "Default Rate") equal to four (4) points above the prime rate for Chase Manhattan Bank, New York, New York. In addition, a late penalty of five percent (5%) of any delinquent payment of Rent shall also be charged if any such payment is more than five (5) days overdue. SECTION 4.4- BASIC RENT TO BE NET. Except as otherwise provided in this Lease, it is the intent of Tenant and Landlord that the Basic Rent shall be absolutely net to Landlord so that, during the term of the Lease, Tenant shall pay absolutely all items of cost and expense relating to the operation, use and ownership of the Demised Premises, and any portion thereof, to the extent that they are incurred during, or relate to, the period included with the term of this Lease, including, without limitation, all general and special real and personal property taxes and assessments, insurance premiums, payments under any service contracts, license and permit fees, maintenance, repair and replacement costs, costs of all utilities and the costs of all other services which are used in connection with operation, use or ownership of the Demised Premises, or any portion thereof; provided, however, that in no event shall Tenant be liable for any "Covered Claim" as set forth in Section 25.1(b). -2- 8 ARTICLE 5. USE SECTION 5.1 - AUTHORIZED. The Demised Premises shall be used solely for the purposes of manufacturing biological and pharmaceutical care products and for no other purpose. Tenant may request a consent to change business use of the Demised Premises, which consent shall not be unreasonably withheld (it being understood that consent withheld due to Landlord's reasonable concern about impairment of the USDA status of the Demised Premises shall automatically be deemed to be reasonable for purposes of this Section). SECTION 5.2 - LICENSES. Tenant shall at its expense use its best efforts to obtain and shall at all times maintain, any and all licenses and permits which may be necessary for the use and operation of the Demised Premises, except in connection with the Covered Claims as set forth in Section 25.1(b). SECTION 5.3 - LAWFUL USE. Tenant shall not use the Demised Premises, or permit the same to be used, in whole or in part, for any unlawful purpose and shall comply with all laws, statutes, ordinances, regulations, or rules of any public authority, agency or organization applicable to the Demised Premises or the use thereof, including, but not limited to, those pertaining to zoning, environmental protection, hazardous substance, or OSHA. Except for Covered Claims as set forth in Section 25.1(b), Tenant shall promptly comply with all governmental orders and directives of every nature whatsoever pertaining to the Demised Premises, including, but not limited to, the correction, prevention and abatement of nuisances in, upon, or connected with the Demised Premises, all at Tenant's expense. Except for environmental problems caused by Tenant which are the responsibility of Tenant pursuant to Section 25.1(a), if (i) the costs of compliance in the aggregate as required by this Section for any calendar year exceeds $4,000.00 times the number of months or parts thereof remaining until the termination date of this Lease, and (ii) such compliance requirements are not required due to Tenant's failure to maintain the Demised Premises or any part thereof, then Tenant shall give Landlord written notice of the cost of compliance as otherwise required by this Section. Thereupon, Landlord shall pay the cost of compliance required by this Section (but in no event shall such cost in the aggregate for any calendar year exceed $8,000.00 times the number of months or parts thereof remaining until the termination date of this Lease), in which event the Basic Rent shall be increased by an amount equal to the cost of compliance required by this Section to accomplish such compliance, divided by the useful life of such assets as determined under Section 167 of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder, which amount shall be payable in equal monthly installments in the manner set forth in Article 4 hereof for the number of months or parts thereof remaining until the termination date of the then-effective Term, as and if extended. In the event that Tenant exercises its option to extend this Lease as provided in Section 3.2 or 3.3 hereof, the phrase "number of months or part thereof remaining until the termination date" as used in this Section shall be determined with reference to such extended term. The provisions of this section shall not be applicable to European Unity compliance requirements. The parties must mutually agree before proceeding to satisfy such requirements and if they mutually agree to comply, they shall further agree as to how the cost of compliance shall be shared. -3- 9 The costs of compliance required for the manufacture of goods pursuant to contract manufacturing agreements with purchasers other than Landlord shall be the responsibility of the Tenant. ARTICLE 6. TAXES SECTION 6.1 - PERSONAL PROPERTY, BUSINESS, ETC. Landlord shall present to Tenant all official bills for taxes attributable to fixtures, equipment, inventory and all other personal property owned by Tenant, as well as for all local business taxes, licenses, fees, and other charges or assessments related to, or the result of, Tenant's property or business being located or conducted on the Demised Premises, Tenant shall pay to Landlord the amount of each such bill, or each installment thereof as reflected on such bill, at least fifteen (15) days prior to the date upon which such installment becomes delinquent. SECTION 6.2 - REAL PROPERTY. Landlord shall present to Tenant all official bills for all real estate taxes and assessments imposed, charged or levied upon the Demised Premises during or related to the term of this Lease, and Tenant shall pay to Landlord the amount of each such bill, or each installment thereof as reflected on such bill, at least fifteen (15) days prior to the date upon which such installment becomes delinquent. SECTION 6.3 - ACCRUED TAXES ON COMMENCEMENT OF LEASE. The Tenant agrees to be responsible for all applicable Personal and Real Property Taxes that accrue during the term of this Lease, regardless of when such taxes are payable. ARTICLE 7. INSURANCE SECTION 7.1 - LIABILITY INSURANCE. Tenant shall procure and maintain, throughout the term of this Lease, a policy or policies of insurance at the Tenant's expense, insuring both Landlord and Tenant against all claims, demands, or actions arising out of, or in connection with, Tenant's use or occupancy of the Demised Premises, or from the condition of said Demised Premises. The liability limits of such policy or policies shall be in an amount not less than $1,000,000.00 in respect of injuries to or death of any one person, and in an amount of not less than $2,000,000.00 in respect of any one accident or disaster, and in an amount of not less than $100,000.00 in respect of property damaged or destroyed, all of such liability insurance to be written by insurers of recognized responsibility which are authorized to do business in the State of Iowa. Such policies (or duly executed certificates as to such policies) shall be promptly delivered to Landlord, and renewals thereof, as required, shall be delivered to Landlord, at least ten (10) days prior to the expiration of the respective policy terms. SECTION 7.2 - CASUALTY INSURANCE. Tenant shall procure and maintain, throughout the term of this Lease, at Tenant's expense, casualty insurance insuring the Demised Premises against all loss or damage by fire, vandalism, malicious mischief and all other hazards, risks and perils in respect of which extended coverage and "all risk" insurance is available, in an amount sufficient to prevent Tenant from becoming a co- insurer under the applicable policy or policies and in any event in an amount not less than Five Million Dollars ($5,000,000.00) of the improvements, exclusive of foundations. Such insurance shall include coverage which will enable Tenant to pay the rent due hereunder (which shall not abate) in the event of any such casualty. -4- 10 SECTION 7.3 - POLICIES. The policies required by Sections 7.1 and 7.2 shall be with companies and in a form satisfactory to Landlord and shall name Tenant and Landlord as insureds thereunder. A certificate as to such insurance shall be presented to Landlord upon Tenant's signing of this Lease. Tenant shall have the right to provide such insurance coverage pursuant to blanket policies obtained by Tenant, provided such blanket policies expressly or coverage to the Demised Premises, and to Tenant as required by this Lease. A written obligation on the part of any such insurance company to notify Landlord in writing of any delinquency in premiums at least ten (10) days prior to any cancellation of such policy shall also be presented to Landlord upon Tenant's signing of this Lease. SECTION 7.4- WAIVER OF SUBROGATION. Landlord and Tenant each hereby waive any and all right that they may have to recover damages from the other for any loss incurred by them by reason of any act or omission of the other, but only to the extent that the waiving party is actually compensated therefor by insurance; provided that, this waiver shall be effective only with respect to loss or damage occurring during such time as the waiving party's coverage under the appropriate policy of insurance is not adversely affected by this waiver. If, in order to avoid such adverse effect, an endorsement must be added to any such insurance policy, Landlord and Tenant each shall in good faith endeavor to cause such an endorsement to be added and thereafter maintained through the term of this Lease. ARTICLE 8. UTILITIES SECTION 8.1 - PAYMENT BY TENANT. Tenant, during the term of this Lease shall pay, when due, charges payable with respect to all gas, heat, electricity, telephone, water, sewage, air conditioning, ventilation, power, and fuel which may be furnished to or used in and about the Demised Premises, or in connection therewith. SECTION 8.2 - INTERRUPTION. Landlord shall not be liable to Tenant in damages or otherwise for any interruptions in service of gas, heat, electricity, telephone, water, sewage, air conditioning, ventilation, power, or fuel resulting from any cause whatsoever. ARTICLE 9. MAINTENANCE AND REPAIRS SECTION 9.1 - CONDITION ON COMMENCEMENT. By accepting occupancy, Tenant shall be deemed to have agreed that the Demised Premises are in a clean and sanitary condition and good state of repair, and in a condition suitable for the use authorized under this Lease. SECTION 9.2 - LANDLORD'S REPAIRS. Landlord shall not be obligated to make, or pay for, any repairs, replacements or improvements to the Demised Premises. Landlord shall not be liable for any damage done or occasioned by or from electrical systems, the heating and/or air conditioning systems, and the plumbing and sewer system in, above, upon, or about the Demised Premises, nor for damages occasioned by water, snow, or ice upon or coming through the roof, walls, windows, doors, or otherwise. -5- 11 SECTION 9.3 - TENANT'S REPAIRS. Tenant, at its expense, shall maintain, repair and re p lace the interior, exterior, landscaping, systems, fixtures and all other parts of the Demised Premises so that they are, at all times, in a state of good condition and repair. SECTION 9.4- LIMITATIONS. If structural repairs or repairs to systems such as heating, electrical, air conditioning or plumbing, are necessary to enable Tenant to use the Demised Premises, and (i) the cost of such repairs in aggregate, as required by this Section for any calendar year, exceeds an amount equal to $4,000.00 times the number of months or parts thereof remaining until termination date and (ii) such repairs are not required due to Tenant's failure to maintain the Demised Premises or any part thereof, then Tenant shall give Landlord written notice of the cost of repair as otherwise required by this Section. Thereupon, Landlord shall pay the cost of repair required by this Section (but in no event shall such cost in aggregate for any calendar year exceed $8,000.00 times the number of months or parts thereof remaining until the termination date of this Lease), in which event the Basic Rent shall be increased by an amount equal to the cost of repairs required by this Section divided by the useful life of such assets as determined under Section 167 of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder, which amount shall be payable m equal monthly installments in the manner set forth in Article 4 hereof for the number of months or parts thereof remaining until the termination date of the then-effective Term, as and if extended. In the event that Tenant exercise its option to extend this Lease as provided in Section 3.2 or 3.3 hereof, the phrase "number of months or parts thereof remaining until the termination date" as used in this Section shall be determined with reference to such extended term. SECTION 9.5 - ALTERATIONS. Tenant shall make no material alterations, additions, or improvements to the Demised Premises without the written consent of the Landlord, which consent shall not be unreasonably withheld. Tenant shall not be required to obtain Landlord's consent to make any alterations, additions or improvement to the Demised Premises that are required by regulatory agencies in connection with Tenant's manufacture of biological and pharmaceutical care products, but Tenant shall give Landlord sufficient prior notice of such alterations, additions, or improvements to permit Landlord to make any regulatory notifications as may be required by law. All alterations, additions or improvements made with Landlord's written consent shall comply with all applicable governmental laws, ordinances, regulations, and other requirements. Tenant shall keep the Demised Premises free and clear of any liens or encumbrances arising out of any work performed, material furnished, or obligations incurred by or through Tenant. Any personal property, equipment, inventory, trade fixtures, appliances, and any other property customarily used by and paid for by Tenant in its business operations conducted on the Demised Premises, shall remain the property of Tenant, and may be installed or removed by Tenant at any time during the term of this Lease; provided, however, that Tenant, at the time of such removal, shall repair, at its expense, any damage to the Demised Premises caused by such removal. Upon the expiration or termination of this Lease, Tenant shall remove all of the aforesaid property and shall repair, at its expense, any damage to the Demised Premises occasioned by such removal. Any other improvements of a permanent nature made to the Demised Premises, such as lighting, partitioning, and alterations to the facilities or systems, which at any time form a part of the Demised Premises, shall become a part thereof, and be surrendered therewith by Tenant upon the termination or expiration of this Lease, unless the Landlord shall require Tenant to remove any such improvements and/or alterations by giving Tenant ten (10) days written notice thereof prior to the expiration or termination date of this Lease in which event, Tenant, at its expense, shall promptly -6- 12 remove same and repair any damage, to the Demised Premises occasioned by such removal. The fixtures described hereto in Schedule 9.5 shall be the property of the Tenant. ARTICLE 10. INSPECTION Landlord and its agents and employees shall have the right, at any reasonable time, to enter upon the Demised Premises for the purpose of inspecting, serving or posting notices, showing to a prospective lender, purchaser or tenant, or making any changes or era ons or repairs which the Landlord shall deem necessary for the protection or preservation of the Demised Premises, or for any other lawful purpose. For purposes of the immediately p receding sentence, the term "reasonable time," shall mean during Tenant's regular business hours and with at least twenty-four (24) hours' advance oral notice, except in the case of an emergency, in which event no time or notice restrictions shall apply. At any time after one hundred twenty (120) days prior to the expiration of the term of this Lease, Landlord may place on the Demised Premises any "For Lease" and/or "For Sale" signs which Landlord reasonably deems appropriate. ARTICLE 11. ASSIGNMENT AND SUBLETTING Tenant shall not voluntarily or by operation of law, assign this Lease, or any rights hereunder, nor sublet the Demised Premises, or any part thereof, without the prior written. consent of Landlord which consent shall not be unreasonably withheld; provided, that Tenant may assign this Lease, or any rights hereunder, or sublet the Demised Premises, or any part thereof, to any affiliate of Tenant. Any such assignment or subletting which is made without obtaining the written consent of Landlord, shall be void, and at the option of Landlord, shall terminate this Lease. ARTICLE 12. INDEMNIFICATION SECTION 12.1 - TENANT'S OBLIGATION. Tenant shall hold harmless, indemnify and defend Landlord and its agents and employees against all claims, demands and actions for loss, liability, damage, cost and expense (including attorneys' fees) resulting from injury or death to any person and/or damage to property caused by the act or omission of any person, except Landlord or its agents or employees, while in, upon, or connected in any way with the Demised Premises during the term of this Lease or any occupancy hereunder. Tenant's obligation to indemnify Landlord hereunder is independent of, in addition to and subject to Landlord's obligations as set forth in Article 25 hereof. SECTION 12.2 - LANDLORD'S OBLIGATION. Landlord shall hold harmless, indemnify and defend Tenant and its agents and employees against all claims, demands and actions for loss, liability, damage, cost and expense (including attorneys' fees) resulting from injury or death to any person and/or damage to property caused by the act or omission of Landlord or its agents or employees while in, upon, or connected in any way with the Demised Premises during the term of this Lease or any occupancy hereunder. Landlord's obligation to indemnify Tenant hereunder is independent of, in addition to and subject to Landlord's obligations as set forth in Article 25 hereof. ARTICLE 13. LOSS BY FIRE AND OTHER CASUALTY If the Demised Premises or any part thereof are damaged by fire or other casualty of any type, the Tenant will give prompt written notice thereof to the Landlord. All proceeds payable under any insurance of the Demised Premises should be paid to the Landlord. In -7- 13 the case the building located upon the Premises is materially damaged by fire or any other casualty to the extent that substantial alteration or reconstruction of the building is required and the manufacture of pharmaceuticals or biologicals upon the Demised Premises is materially impaired by such fire or other casualty, the Landlord or Tenant may, at its option, terminate this Lease by notifying the other in writing of such termination within sixty (60) days after the date the Landlord received notice of such damage. If this Lease is not terminated, Landlord will within sixty (60) days after the date the Landlord receives notice of the damage commence repair and restoration of the building to the extent insurance proceeds are available for such. Landlord will restore the Demised Premises within one hundred eighty (180) days thereafter to substantially the same condition in which the Demised Premises were immediately prior to the happening of the casualty to the extent insurance proceeds are available for such. Notwithstanding anything to the contrary contained herein, Landlord is not required to rebuild, repair, or replace any part of the Tenant's furniture or furnishing or fixtures and equipment removal by Tenant under the provisions of this Lease. ARTICLE 14. CONDEMNATION SECTION 14.1 - TOTAL TAKING. If the whole or any Substantial Part of the Demised Premises should be taken for any public or quasi-public use under governmental law, ordinance or regulation, or by right of eminent domain, or by private purchase in lieu thereof, this Lease shall terminate and the Basic Rent shall be abated during the unexpired portion of this Lease, effective when the physical taking of said Demised Premises shall occur. For purposes of this Lease, the term "Substantial Part" means any portion of the Demised Premises which, if taken, would materially impair Tenant's ability to manufacture pharmaceuticals or biologicals upon the Demised Premises. SECTION 14.2 - PARTIAL TAKING. If less than a Substantial Part of the Demised Premises should be taken for any public or quasi-public use under any governmental law, ordinance or regulation, or by right of eminent domain, or by private purchase in lieu thereof, this Lease shall not terminate, but the Basic Rent payable hereunder during the unexpired portion of this Lease shall be reduced to such an extent as may be fair and reasonable under all of the circumstances. SECTION 14.3 - AWARD OR PAYMENT. If any such taking or private purchase in lieu thereof occurs, any award or payment therefor shall be the property of the Lindlord, whether such award or payment shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Tenant shall be entitled to pursue its own claim and receive an award for loss or damage to its trade fixtures and removal of personal property, loss or damage attributable to the interruption of its business and loss or damage resulting from the relocation of its business. ARTICLE 15. HOLDING OVER If Tenant holds over the Demised Premises or any part thereof, after the termination or expiration of this Lease, such holding over shall constitute and be construed as a tenancy from month-to-month only and, except for the term thereof, shall be on the same terms and conditions specified herein so far as applicable; provided, however, that the Basic Rent shall be one hundred fifty percent (150%) the amount of the Basic Rent for the month of this Lease which immediately preceded such termination or expiration. None of the -8- 14 provisions contained in this Section shall be construed as Landlord's permission for Tenant to hold over. ARTICLE 16. QUIET ENJOYMENT Landlord represents and warrants that it has full right and authority to enter into this Lease and that Tenant, upon paying the rental herein set forth and performing all of its other covenants and agreements set forth in this Lease, shall peaceably and quietly have, hold and enjoy the Demised Premises, for the term hereof, without hindrance or molestation from Landlord, subject, however, to the terms and provisions of this Lease and the following matters (collectively, the "Permitted Encumbrances"): (a) all laws and ordinances, including, without limitation, all zoning and building code ordinances and all other as governmental regulations which now or hereafter relate to the Demised Premises; (b) all easements, restrictions and other matters of record as of the date hereof; (c) any easements, restrictions or other matters of record filed after the date hereof, unless such matter is caused or created by Lindlord and has a material adverse impact on the value of or use of the Demised Premises; (d) any matter caused or created by Tenant; and (e) as permitted by Section 25.3. ARTICLE 17. DEFAULT SECTION 17.1 - EVENTS OF DEFAULT. The following events shall be deemed to be events of default (each an "Event of Default") by Tenant under this Lease: (a) Tenant shall fail to pay any payment of any Rent when due, and such failure shall continue for a period of ten (10)days following notice by Landlord to Tenant, (b) Tenant shall become insolvent, or shall make a transfer in fraud of creditors, or shall make an assignment for the benefit of creditors, (c) Tenant shall file, or have filed against it, any petition, answer or consent seeking or allowing to be entered against it, an order for relief (or any similar remedy) under any provision of any bankruptcy or creditors, rights laws, or consent to the institution of any proceedings thereunder, (d) A receiver or trustee shall be appointed for all or substantially all of the assets of Tenant and such appointment shall not have been vacated within forty-five (45) days thereafter, (e) Tenant shall abandon or vacate all of the Demised Premises for thirty (30) or more consecutive days, (f) Tenant shall fail to comply with any term, provision or covenant in this Lease (other than any one of the foregoing which is addressed in this Section 17.1), and shall not cure such default within thirty (30) days after written notice thereof to Tenant; provided, such 30-day period shall be extended if Tenant diligently and continuously pursues the cure of such default, but not longer than an additional thirty (30) days, (g) Diamond Scientific shall have breached the non-competition agreement set forth in Section 2.5 of the Manufacturing Agreement in any material respect and the breach shall not be cured or waived within the period of grace applicable thereto, or (h) Tenant shall be in default under the Promissory Note referred to in Section 5.05 of that certain Stock Purchase Agreement dated as of December 31, 1993 between -9- 15 Landlord, as Seller, and Tenant, as Purchaser (the "Stock Purchase Agreement") relating to the purchase of the Inventory (as defined therein), such default shall not be cured or waived within the period of grace, if any, applicable thereto, and Landlord shall have given notice of acceleration thereof to Diamond Scientific. ARTICLE 18. REMEDIES SECTION 18.1 - SPECIAL REMEDIES. Upon the occurrence of any Event of Default, Landlord (in addition to any other remedy it may have) shall have the option to pursue any one or more of the following remedies without any notice or demand whatsoever: (a) Re-entry. Enter the Demised Premises, or any part thereof, either with or without process of law, and expel Tenant or any other persons who may be thereon, together with all personal property found therein; and Landlord may terminate this Lease, or may, from time to time, without terminating this Lease and as agent of Tenant, relet the Demised Premises, or any part thereof, for such term or terms (which may be for a term less than or extending beyond the term hereof) and at such rental or rentals and upon such other terms and conditions as Landlord in its sole discretion may deem advisable, with the right to repair, renovate, remodel, redecorate, alter and change the Demised Premises, Tenant remaining liable for any deficiency computed as hereinafter set forth. In the case of any such re-entry and/or dispossession, by summary proceedings or otherwise, all Rent shall become immediately due thereupon and be paid up to the time of such reentry or dispossession, together with suchexpenses as Landlord may reasonably incur for attorneys fees, advertising expenses, brokerage fees and/or putting the Demised Premises in good order or preparing the same for re-rental, together with interest thereon at the Default Rate, accruing from the date of any such expenditure by Landlord. (b) Reletting. At the option of the Landlord, rents received by Landlord from such reletting shall be applied first to the payment of any indebtedness from Tenant to Lindlord, other than Basic Rent due hereunder; second, to the payment of any costs and expenses of such reletting and including, but not limited to, attorneys fees, advertising fees and brokerage fees, and to the payment of any repairs, renovations, remodeling, redecoration, alterations and changes in the Demised Premises; third, to the payment of any Rent due and to become due hereunder, and if after so applying said Rents there is any deficiency in the Rent to be paid by Tenant under this Lease, Tenant shall pay any deficiency to Landlord monthly on the dates specified herein and any payment made or suits brought to collect the amount of the deficiency for any month shall not prejudice in any way the right of Landlord to collect the deficiency for any subsequent month. Landlord shall not be liable for failure to relet if Landlord has diligently and continuously attempted to relet the same; and in no event shall Tenant be entitled to receive any excess of net Rents collected over sums payable by Tenant to Landlord hereunder. No such re-entry or taking possession of the Demised Premises shall be construed as an election on Lindlord's part to terminate this Lease unless a written notice of such intention be given to Tenant. Notwithstanding any such reletting without termination on, Landlord may at any time thereafter elect to terminate this Lease. If Landlord at any time terminates this Lease by reason of any Event of Default, then, in addition to any other remedy it may have, Landlord may recover from Tenant the present value of the amount of Rent reserved in this Lease for the balance of the term, over the then fair market rental value of the Demised Premises for the same period, plus all court costs and attorneys fees incurred by Landlord in the collection of the same. -10- 16 SECTION 18.2- LANDLORD'S RIGHT TO PERFORM. If Tenant shall at any time fail or refuse to perform any of its covenants or obligations hereunder, then Lindlord shall have the right, but shall not be obligated, upon three (3) days' prior notice to Tenant, to p erform such covenant or obligation without waiving or releasing Tenant from any liability therefor. All sums paid, advanced or expended by Landlord pursuant to this Section shall be Rent and shall be repaid to Landlord by Tenant on demand, together with interest thereon at a rate equal to the Default Rate. SECTION 18.3 - OTHER PROVISIONS. Pursuit of any of the remedies enumerated in this Lease shall not preclude pursuit of any other remedies herein provided or any other remedies provided by law, nor shall pursuit of any other remedy herein provided constitute a forfeiture or waiver of any Rent due to Landlord hereunder, or any damages accruing to Landlord by reason of violation of any of the terms, provisions and covenants herein contained. No waiver by Landlord of any violation or breach of any terms, provisions and covenants herein contained shall be deemed or construed to constitute a waiver of any other violation or breach of any of the terms, provisions and covenants contained herein. Landlord's acceptance of the payment of rental or other payments hereunder, after the occurrence of an event of default, shall not be construed as a waiver of such default, unless Landlord so notifies Tenant in writing. Forbearance by Landlord to enforce one or more of the remedies herein provided upon an event of default shall not be deemed or construed to constitute a waiver of such default. If, on account of any breach or default by Tenant, and Tenant's obligations under the terms and conditions of this Lease, it shall become necessary or appropriate for Landlord to employ or consult with an attorney concerning or to enforce or defend any of Landlord's rights or remedies hereunder, Tenant agrees to pay any reasonable attorney's fees. The receipt by Landlord of any Rent with knowledge of the breach of any covenant or other provision contained in this Lease shall not be deemed nor construed to constitute a waiver of such breach or as a waiver of any other violation or breach of any of the terms, provisions and covenants contained herein. ARTICLE 19. TAXES AND INSURANCE PREMIUMS Within thirty (30) days after the due date thereof, Landlord shall provide Tenant with evidence of payment of all real estate taxes and assessments, and Tenant shall provide Landlord with evidence of payment of all premiums for the insurance required to be carried by Tenant hereunder. ARTICLE 20. ESTOPPEL CERTIFICATE Upon request by Landlord, Tenant will promptly execute an instrument certifying that this Lease is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect, as modified) and the dates to which the Rent has been paid, and stating whether or not, to the best knowledge of Tenant, Landlord is in default in the performance of any covenant, agreement, term, provision or condition contained in this Lease, and, if so, specifying each such default. Such statement shall address such other issues as Landlord shall reasonably request. It is intended that any such statement delivered pursuant hereto may be relied upon by any prospective purchaser or mortgagee of the Demised Premises, or any portion thereof, and any prospective assignee of such purchaser or mortgagee. ARTICLE 21. NOTICE Any notices or demands required to be given herein or desired to be given by either party to the other shall be in writing and shall be either personally delivered, sent by nationally -11- 17 recognized overnight courier, or mailed through the United States Postal Service by registered or certified mail, postage prepaid, return receipt requested, to the parties at the following addresses: If to Landlord, to: Miles Inc. ATTN: Gary Zimmerman Box 390 Shawnee Mission, Kansas 66201-0390 with a copy to: Clark A. Ridpath Director, Legal Services Miles Inc. 8400 Hawthorn Road P.O. Box 4913 Kansas City, Missouri 64120-0013 If to Tenant, to: Louis Van Daele Diamond Animal Health, Inc. 2538 S.E. 43rd Street Des Moines, Iowa 50317 with a copy to: Steven E. Zumbach, Esq. 2000 Financial Center Des Moines, Iowa 50309 or such other address as any entity named above designates to the others in writing as aforesaid. Any notice given in a manner set forth above shall be deemed effective as follows: (a) if personally delivered, the notice shall be effective on the date delivered, (b) if sent by nationally recognized overnight courier, the notice shall be effective one (1) business day after it is sent, and (c) if mailed through the United States Postal Service by registered or certified mail, postage prepaid, return receipt requested, the notice shall be effective three (3) business days after the date of deposit with the United States Postal Service. ARTICLE 22. WAIVER No covenant, term or condition or breach of this Lease shall be deemed waived, except by written consent of the party against whom the waiver is claimed, and any waiver of the breach of any covenant, term or condition shall not be deemed to be a waiver of any preceding or succeeding breach of the same or any other covenant, term or condition as to the rent payment accepted. -12- 18 ARTICLE 23. MISCELLANEOUS SECTION 23.1 - CAPTIONS. The captions of the sections contained in this Lease are for convenience only and shall not be deemed to be relevant in resolving any question of interpretation or construction of any section of this Lease. SECTION 23.2 - SUCCESSORS AND ASSIGNS. All of the terms, covenants and conditions of this Lease shall be binding upon, and inure to the benefit of, the parties hereto and their heirs, executors, administrators, successors and assigns, except that nothing in this provision shall be deemed to permit any assignment, subletting or use of the Demised Premises, by Tenant, other than as provided for herein. SECTION 23.3 - APPLICABLE LAW. This Lease shall be governed and interpreted solely by the laws of the State of Iowa then in force. Each number, singular or plural, as used in this Lease, shall include all numbers, and each gender shall be deemed to include all genders. SECTION 23.4 - TIME OF THE ESSENCE. Time is of the essence of this Lease and each and every provision hereof. SECTION 23.5 - NO REAL ESTATE BROKERS. Each of the parties hereto represents and warrants to the other than such party has not dealt with any real estate broker, real estate agent or finder in connection with this transaction, and each of the parties hereto agrees to indemnify and save the other harmless from any loss, cost or expense incurred in connection with any claim for any real estate commission or fee which may arise by reason of the actions of such party. ARTICLE 24. RECORDING This Lease shall not be recorded but, in lieu thereof, either Landlord or Tenant may record a memorandum hereof if and as permitted by Iowa law. ARTICLE 25. HAZARDOUS WASTE AND ENVIRONMENTAL ISSUES SECTION 25.1 - TENANT'S AND LANDLORD'S HOLD HARMLESS AND INDEMNITY. (a) Tenant shall hold harmless and indemnify Landlord from any and all claims, agency actions, demands, causes of action, damages, losses, costs, expenses, attorney fees, expert and consultant fees, lawsuits, penalties, fines, charges, response or remediation costs threatened, sought or imposed by parties, entities or governmental agencies, other than Landlord or Tenant, including but not limited to, injury to or death of any person or persons and damage to or destruction of any property (hereafter collectively referred to as "Covered Claims") which arise out of or in any manner are directly or indirectly connected with any environmental contamination or environmental noncompliance. Tenant's hold harmless and indemnification to Landlord shall apply only to Covered Claims caused by the acts, events, omissions, or operations of the Demised Premises by Tenant, its successors, assigns, employees, contractors or subtenants during the term of this lease. -13- 19 (b) Landlord shall hold harmless and indemnify Tenant from Covered Claims which arise out of or in any manner are directly or indirectly connected with any environmental contamination or environmental noncompliance other than the acts, events, omissions, or operations of the Demised Premises by Tenant, its successors, assigns, employees, contractors or subtenants during the term of this Lease. Landlord's hold harmless and indemnification to Tenant shall include, but not be limited to, all Covered Claims which are or were caused by acts, events, omissions or operation that occurred prior to the Lease Term and the migration or transportation (such as by flooding) of hazardous substances from off-site onto the Demised Premises at any time prior to or during the Lease Term. (c) Notwithstanding any other provision contained herein, these hold harmless and indemnification provisions shall continue after termination of the Lease and shall have no limit as to dollar amount. In defending any Covered Claims, the parties do not waive any applicable statute of limitations. (d) The rights, duties and obligations of the hold harmless provisions contained herein are personal to Landlord (or its Affiliates) and Tenant (or its Affiliates) and cannot be sold, given or otherwise transferred to any other person or entity. SECTION 25.2 - THIRD PARTY ASSERTIONS. (a) Tenant releases any and all claims or causes of action which it may have against Landlord for interference with business operations arising from any environmental activity undertaken on the Demised Premises. Tenant and Landlord understand and agree that Tenant reserves all rights, claims or causes of action which Tenant has or might have against any party other than Landlord (including but not limited to Williams Pipeline Company) for interference with business operations or any other claim arising from such environmental activity. In the event Tenant commences or asserts any claim or cause of action regarding interference with business operations arising from any environmental activity undertaken on the Demised Premises, Landlord agrees to reasonably cooperate with Tenant in such assertion of claim or litigation including, but not limited to, allowing access to any necessary documents and employees of Landlord. (b) In the event Landlord commences or asserts any claim or cause of action arising from any environmental concern on the Demised Premises, Tenant agrees to reasonably cooperate with Landlord in such assertion of claim or litigation, including but not limited to, allowing access to any necessary documents and employees of Tenant. SECTION 25.3 - ACCESS AGREEMENT. Tenant agrees to grant all reasonable access to the Demised Premises to allow Landlord (or other party authorized by Landlord) to undertake any and all environmental activity. Landlord shall restore the property to its condition prior to any activity undertaken by Landlord to the extent reasonably practicable. SECTION 25.4 - RENT ABATEMENT. In the event that it becomes necessary for any person or entity to conduct environmental activity which thereby causes a reduction in production by Tenant, the rent shall abate in proportion to the Tenant's reduction in production. -14- 20 SECTION 25.5 - NOTIFICATION. Tenant shall promptly supply Landlord with a copy of any written notice from any federal, state, or local government unit or agency or other person which: (i) contains any allegation of violation of any governmental law, regulation, or ordinance relating to the Demised Premises; or (li) creates a Covered Claim under Section 25.1. SECTION 25.6 - ENVIRONMENTAL PERMITS. Tenant represents and warrants to Landlord that: (i) Tenant has obtained all necessary federal, state and local environmental permits necessary for the conduct any of its business or the use of Demised Premises in the business; (ii) Tenant knows of no threatened civil, criminal or administrative proceedings against it relating to the use of the Demised Premises; (iii) Tenant will engage in no on-site disposal, either above or below ground, of any hazardous wastes, hazardous substances, contaminants, pollutants or solid waste, as defined by local, state or federal law, on the Demised Premises; and (iv) Tenant shall conduct all activities in full compliance with applicable federal, state and local laws and regulations, including those relating to solid and hazardous waste, and Tenant shall not cause, directly or indirectly, any environmental contamination or pollution upon the Demised Premises. Any spill or release of hazardous wastes, hazardous substances, contaminants, pollutants or solid waste, as defined by local, state or federal law, shall be responded to by Tenant as required by law or the Iowa Department of Natural Resources or the United States Environmental Protection Agency (or their successors). Tenant and Landlord agree that compliance with the Iowa Department of Natural Resources or the United States Environmental Protection Agency (or their successors) directives, if any, shall constitute compliance with Tenant's obligations under this provision. Tenant shall promptly notify Landlord of any such release or spill and provide Landlord with any correspondence between Tenant and the Iowa Department of Natural Resources or the United States Environmental Protection Agency, or their successors. -15- 21 IN WITNESS WHEREOF, this Lease has been executed as of the day and year set forth above. MILES INC. By: /s/ HERMANN R. WERNER ------------------------------- Name: Hermann R Werner -------------------------- Title: Executive Vice President ------------------------- LANDLORD DIAMOND ANIMAL HEALTH, Inc. By:/s/ LOUIS G. VAN DAELE ------------------------------- Name: Louis G. Van Daele -------------------------- Title: President ------------------------- TENANT -16- 22 EXHIBIT "A" TO LEASE PLANT PROPERTY 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 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, 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 Northwest 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 Northeast 1/4 of said 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. Subject to existing highway and recorded easements. EX-11.1 35 STATEMENT REGARDING COMPUTATION OF EARNINGS/SHARE 1 EXHIBIT 11.1 HESKA CORPORATION Statement Re: Computation of Pro Forma Net Loss Per Share (In Thousands, Except per Share Amounts)
Three Months Year Ended Ended December 31, March 31, 1996 1997 ------------ ------------ Weighted average common shares outstanding..................... 938 1,070 Assumed conversion of preferred stock from original date of issuance (weighted average effect from the date of issuance pursuant to Staff Accounting Bulletin No. 83 ("SAB 83") ............ 9,370 10,460 Effect of common stock and common stock equivalents issued within one year prior to the filing of initial public offering (SAB 83)(1) ....................... 203 203 -------- -------- Total ................................................ 10,511 11,733 ======== ======== Net loss ...................................................... $(17,975) $ (7,881) ======== ======== Pro forma net loss per share .................................. $ (1.71) $ (0.67) ======== ========
(1) Common Stock and Common Stock Equivalents issued after April 22, 1996, at prices substantially less than the assumed initial public offering price, have been considered outstanding during the entire period using the treasury stock method. EX-21.1 36 SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21.1 SUBSIDIARIES OF COMPANY Diamond Animal Health, Inc., an Iowa corporation Bloxham Laboratories Limited, a public limited company organized under the laws of England EX-23.1 37 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report (and all references to our Firm) included in or made part of this registration statement. Arthur Andersen LLP Denver, Colorado April 23, 1997 EX-23.2 38 CONSENT OF MCGLADREY & PULLEN, LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use in this Registration Statement of our report, dated May 14, 1996 relating to the financial statements of Diamond Animal Health, Inc., and to the reference to our Firm under the caption "Experts" in the Prospectus. McGladrey & Pullen, LLP Des Moines, Iowa April 23, 1997 EX-23.3 39 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.3 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated May 30, 1995, with respect to the statements of income and cash flows of Diamond Animal Health, Inc. for the year ended March 31, 1995 included in the Registration Statement (Form S-1) and related Prospectus of Heska Corporation for the registration of its common stock. ERNST & YOUNG LLP Des Moines, Iowa April 23, 1997 EX-27 40 FINANCIAL DATA SCHEDULE
5 0001038133 HESKA CORPORATION 1,000 3-MOS YEAR DEC-31-1997 DEC-31-1996 JAN-01-1997 JAN-01-1996 MAR-31-1997 DEC-31-1996 4,476 6,609 11,427 17,091 1,047 749 0 0 5,287 4,430 22,719 29,213 12,482 9,713 1,934 1,504 38,597 42,169 7,727 5,258 0 0 0 0 63,236 62,588 239 189 (38,307) (30,394) 38,597 42,169 2,626 8,013 3,064 9,959 2,148 6,648 11,065 28,820 6 145 0 0 170 325 (7,881) 0 0 0 0 (17,975) 0 0 0 0 0 0 (7,881) (17,975) (0.67) (1.71) (0.67) (1.71)
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