Exhibit 10.20


 


[***] – Certain information in this exhibit have
been omitted and filed separately with the Securities and Exchange Commission. Confidential
treatment has been requested with respect to the omitted portions.


 


 






 






 


 


THIRD
AMENDED AND RESTATED 

CREDIT AND SECURITY AGREEMENT


 


BY
AND BETWEEN


 


HESKA
CORPORATION,

DIAMOND ANIMAL HEALTH, INC.,


 


 


AND


 


 


WELLS
FARGO BANK, NATIONAL ASSOCIATION

as successor in interest to Wells Fargo Business Credit, Inc.


 


Dated as of December 30, 2005


 


 






 






 

















 


THIRD
AMENDED AND RESTATED 

CREDIT AND SECURITY AGREEMENT


 


Dated as of December 30, 2005


 


HESKA CORPORATION, a Delaware corporation (“Heska”) and DIAMOND ANIMAL
HEALTH, INC., an Iowa corporation (“Diamond”) (each of Heska and Diamond may be
referred to herein individually as a “Borrower” and collectively as the “Borrowers”)
and WELLS FARGO BANK, NATIONAL ASSOCIATION, acting through its Wells Fargo
Business Credit operating division (the “Lender”), as successor in interest to
Wells Fargo Business Credit, Inc., hereby agree as follows:


 


RECITALS


 


The Borrowers and Center Laboratories, Inc., a
Delaware corporation (“Center”), and the Lender entered into a Second Amended
and Restated Credit and Security Agreement dated as of June 14, 2000 (the “Former
Credit Agreement”).


 


Shortly after the Former Credit Agreement was
executed, Center was sold to an unrelated entity and is no longer a Borrower
under the Former Credit Agreement or under this Agreement.


 


The Borrowers have requested that the Former Credit
Agreement be amended and restated in its entirety as set forth herein.


 


NOW THEREFORE, in consideration of the premises and
the mutual promises herein contained, the parties hereto agree that the Former
Credit Agreement be amended and restated to read in its entirety as follows:


 


ARTICLE I



Definitions


 


Section 1.1             Definitions. For all purposes of this Agreement,
except as otherwise expressly provided or unless the context otherwise
requires:


 


(a)           the terms defined in this Article have
the meanings assigned to them in this Article, and include the plural as well
as the singular; and


 


(b)           all accounting terms not otherwise
defined herein have the meanings assigned to them in accordance with GAAP.


 


“Accounts” means all of the Borrowers’ accounts, as
such term is defined in the UCC, including each and every right of the
Borrowers to the payment of money, whether such right to payment now exists or
hereafter arises, whether such right to payment arises 


 

















 


out of a sale, lease or other disposition of goods or
other property, out of a rendering of services, out of a loan, out of the
overpayment of taxes or other liabilities, or otherwise arises under any
contract or agreement, whether such right to payment is created, generated or
earned by the Borrowers or by some other person who subsequently transfers such
person’s interest to the Borrowers, whether such right to payment is or is not
already earned by performance, and howsoever such right to payment may be
evidenced, together with all other rights and interests (including all Liens)
which the Borrowers may at any time have by law or agreement against any
account debtor or other obligor obligated to make any such payment or against
any property of such account debtor or other obligor; all including but not
limited to all present and future accounts, contract rights, loans and
obligations receivable, chattel papers, bonds, notes and other debt
instruments, tax refunds and rights to payment in the nature of general
intangibles.


 


“Additional Capital” means any of the following received
by a Borrower on or after June 30, 2005: 
(a) net cash proceeds from issuance of Heska common stock,
including common stock issued under an employee stock purchase plan or as a
result of the exercise of options or warrants, (b) net cash proceeds from
issuance of Heska preferred stock, (c) net cash proceeds from a Borrower’s
issuance of debt instruments subject to a subordination agreement acceptable to
Wells Fargo in its sole discretion, and (d) net cash proceeds from the
licensing or sale of [***].


 


“Advance” means a Revolving Advance, an Equipment
Advance, or a Term Loan B Advance.


 


“Affiliate” or “Affiliates”, for any Borrower, means
any Person controlled by, controlling or under common control with such
Borrower, including (without limitation) any Subsidiary of such Borrower. For
purposes of this definition, “control,” when used with respect to any specified
Person, means the power to direct the management and policies of such Person,
directly or indirectly, whether through the ownership of voting securities, by
contract or otherwise.


 


“Aggregate Borrowing Base” means at any time the
lesser of (a) the Maximum Line or (b) the sum of each Borrower’s
Borrowing Base.


 


“Aggregate L/C Amount” means at any time the sum of
each Borrower’s L/C Amount.


 


“Agreement” means this Third Amended and Restated
Credit and Security Agreement, as amended, supplemented or restated from time
to time.


 


“Availability” for a Borrower means the difference of (i) such
Borrower’s Borrowing Base and (ii) the sum of (A) the outstanding
principal balance of such Borrower’s Revolving Note and (B) such Borrower’s
L/C Amount.


 


“Banking Day” means a day other than a Saturday,
Sunday or other day on which banks are generally not open for business in
Denver, Colorado and Minneapolis, Minnesota.


 


3

















 


“Book Net Worth” of a Borrower means the aggregate of
the common and preferred stockholders’ equity in such Borrower, determined in
accordance with GAAP, but excluding (a) the non-cash impact of expensing
options, restricted stock or other stock-based compensation under APB 25, SFAS
123, SFAS 123R and/or SFAS 148, and (b) the non-cash impact of income or
expense relating to deferred tax assets and liabilities caused by the use of
net loss carry-forwards, in each case after December 31, 2004.


 


“Borrower” means Heska or Diamond, and “Borrowers”
means Heska and Diamond.


 


“Borrowing Base” for a Borrower means, at any time the
lesser of:


 


(a)           the Maximum Line; or


 


(b)           subject to change from time to time in
the Lender’s sole discretion:


 


(i)            85% of Eligible Accounts of such
Borrower, plus


 


(ii)           During the
Foreign Accounts Eligibility Period, the lesser of (A) 85% of Eligible
Foreign Accounts or (B) the FREP Sublimit, plus


 


(iii)          the lesser of (A) the sum of (1) Eligible
Inventory of such Borrower consisting of raw materials multiplied by the Raw
Materials Advance Rate plus (2) 55% of Eligible Inventory of such Borrower
consisting of finished goods, or (B) the difference of (1) $4,500,000
less (2) the aggregate amount of Advances made to all Borrowers other than
such Borrower in reliance on Eligible Inventory.


 


“Capital” of a Borrower means the sum of Book Net
Worth plus Subordinated Debt of such Borrower plus the lesser of (a) the
amount of Debt that was formerly Subordinated Debt payable to
Agri-Laboratories, Ltd. but that has been forgiven and is booked as a long-term
liability, such as deferred revenue, or (b) $500,000.


 


“Capital Expenditures” for any Borrower for a period
means the sum of (a) any expenditure of money for the purchase or
construction of assets, or for improvements or additions thereto during such
period, which are capitalized on such Borrower’s balance sheet, whether
financed or unfinanced, but excluding expenditures to purchase Rental Inventory,
plus (b) all expenditures of money to purchase [***] in excess of
$1,500,000 during the fiscal year in which such period occurs.


 


“Cash” means instantly available cash and cash
equivalents (including, without limitation, investments permitted by Section 7.4(a)(i) and
the investments identified at item (i) on Schedule 7.4).


 


“Collateral” means all of the Borrowers’ Accounts,
chattel paper, deposit accounts, documents, Equipment, General Intangibles,
goods, instruments, Inventory, Investment Property, letter-of-credit rights,
letter of credit, all sums on deposit in any Collateral Account, and any items
in any Lockbox; together with (i) all substitutions and 


 


4

















 


replacements for and products of any of the foregoing;
(ii) in the case of all goods, all accessions; (iii) all accessories,
attachments, parts equipment and repairs now or hereafter attached or affixed
to or used in connection with any goods; (iv) all warehouse receipts,
bills of lading and other documents of title now or hereafter covering such
goods; (v) all collateral subject to the Lien of any Security Document; (vi) any
money, or other assets of any Borrower that now or hereafter come into the
possession, custody, or control of the Lender; (vii) all sums on deposit
in the Special Account; and (viii) proceeds of any and all of the
foregoing.


 


“Collateral Account” for Diamond means (a) the
Collateral Account, as defined in the Collateral Account Agreement and (b) the
Deposit Account listed on Exhibit A of Diamond’s Deposit Account Control
Agreement, and for Heska means (a) the “Lender Account” as defined in the
Heska’s Lockbox Agreement and (b) the Deposit Account listed on Exhibit A
of Heska’s Deposit Account Control Agreement.


 


“Collateral Account Agreement” means the Collateral
Account Agreement dated as of October 16, 1997, by and among Diamond, the
Lender, as successor in interest to Norwest Bank Iowa, NA, and the Lender.


 


“Commitment” means the Lender’s commitment to make
Advances to or for the Borrowers’ account pursuant to Article II.


 


“Credit Facility” means the credit facility being made
available to the Borrowers by the Lender pursuant to Article II.


 


“Debt” of any Person means all items of indebtedness
or liability which in accordance with GAAP would be included in determining
total liabilities as shown on the liabilities side of a balance sheet of that
Person as at the date as of which Debt is to be determined. For purposes of
determining a Person’s aggregate Debt at any time, “Debt” shall also include
the aggregate payments required to be made by such Person at any time under any
lease that is considered a capitalized lease under GAAP.


 


“Default” means an event that, with giving of notice
or passage of time or both, would constitute an Event of Default.


 


“Default Period” means any period of time beginning on
the day on which a Default or Event of Default has occurred and ending on the
date the Lender notifies the Borrowers in writing that such Default or Event of
Default has been cured or waived.


 


“Default Rate” means, (i) with respect to the
Revolving Advances, an annual rate equal to three percent (3.0%) over the
Revolving Floating Rate, which rate shall change when and as the Revolving
Floating Rate changes, and (ii) with respect to the Term Advances, an
annual rate equal to three percent (3.0%) over the Term Floating Rate, which
rate shall change when and as the Term Floating Rate changes.


 


“Deposit Account Control Agreement” for a Borrower
means the Deposit Account Control Agreement dated as of February 21, 2005,
by and among such


 


5

















 


Borrower, the Lender, as successor in interest to
Wells Fargo Business Credit, Inc., and the Lender.


 


“Diamond Equipment Note” means the Equipment Note
(Diamond) dated as of July 26, 2005, payable to the order of the Lender in
the original principal amount of $2,000,000, and any note or notes issued in
substitution therefor, as the same may hereafter be amended, supplemented
or restated from time to time.


 


“Diamond Revolving Note” means the Second Amended and
Restated Revolving Note (Diamond Animal Health) dated as of March 26,
2004, payable to the order of the Lender in the original principal amount of
$12,000,000, as the same may hereafter be amended, supplemented or
restated from time to time.


 


“Director” means, with respect to any Borrower, a
director if such Borrower is a corporation, a governor, manager, or managing
member if such Borrower is a limited liability company, or a partner if such
Borrower is a partnership.


 


“Discretionary Reduction” means any of the following
that is unilaterally adopted by the Lender through the exercise of its sole
discretion: (a) a reduction (in accordance with subsection (b) of
the definition of Borrowing Base) in any advance rate under any Borrower’s
Borrowing Base; (b) disqualification (in accordance with subsection (xiv)
of the definition of Eligible Accounts) of any Account that would otherwise
have been an Eligible Account; or (c) disqualification (in accordance with
subsection (x) of the definition of Eligible Inventory) of any Inventory
that would otherwise have been Eligible Inventory.


 


“Discretionary Reduction Date” means any date on which
the Aggregate Borrowing Base is at least $3,000,000 less than it would have
been had no Discretionary Reductions been adopted.


 


“ERISA” means the Employee Retirement Income Security
Act of 1974, as amended.


 


“Eligible Accounts” for a Borrower means all unpaid
Accounts of such Borrower, net of any credits, except the following shall not
in any event be deemed Eligible Accounts:


 


(i)            That portion of Accounts with terms of 60
days or less that are over 60 days past due, and all other Accounts over 90
days past the invoice date; provided, however, that certain
Accounts which are billed pursuant to dated term invoices with payment terms of
not greater than 180 days from the invoice date (“Dated Term Accounts”) which (A) do
not remain unpaid more than 180 days from such Dated Term Account’s invoice
date, (B) are not more than 30 days past due, and (C) are approved by
the Lender in its sole discretion, shall, despite the terms of this subsection (i),
be deemed Eligible Accounts;


 


(ii)           That portion of Accounts that is disputed
or subject to a claim of offset or a contra account (up to the amount of such
dispute), including that


 


6

















 


portion of
Accounts due from customers who have made prepayments, up to the amount of the
prepayment;


 


(iii)          That portion of Accounts not yet earned
by the final delivery of goods or rendition of services, as applicable, by such
Borrower to the customer;


 


(iv)          Accounts owed by any unit of government,
whether foreign or domestic (provided, however, that there shall be included in
Eligible Accounts that portion of Accounts owed by such units of government for
which such Borrower has provided evidence satisfactory to the Lender that (A) the
Lender has a first priority perfected security interest and (B) such
Accounts may be enforced by the Lender directly against such unit of government
under all applicable laws);


 


(v)           Accounts owed by an account debtor
located outside the United States and Canada which are not (A) backed by a
bank letter of credit naming the Lender as beneficiary or assigned to the
Lender, in the Lender’s possession or control, and with respect to which a
control agreement concerning the letter-of-credit rights is in effect, and
acceptable to the Lender in all respects, in its sole discretion, or (B) covered
by a foreign receivables insurance policy acceptable to the Lender in its sole
discretion;


 


(vi)          Accounts owed by an account debtor that
such Borrower has learned or has determined to be insolvent, is the subject of
bankruptcy proceedings or has gone out of business;


 


(vii)         Accounts owed by an Owner, Subsidiary,
Affiliate, officer or employee of any Borrower;


 


(viii)        Accounts not subject to a duly perfected
security interest in the Lender’s favor or which are subject to any lien,
security interest or claim in favor of any Person, other than Permitted Liens;


 


(ix)           That portion of Accounts that has been
restructured, extended, amended or modified;


 


(x)            That portion of Accounts that constitutes
advertising, finance charges, service charges or sales or excise taxes;


 


(xi)           Accounts owed by an account debtor,
regardless of whether otherwise eligible, if 10% or more of the total amount
due under Accounts from such debtor is ineligible under clauses (i), (ii) or
(ix) above;


 


(xii)          That portion of the aggregate Accounts of
a single customer owed to all Borrowers in the aggregate that exceeds 15% of
all Accounts of all Borrowers in the aggregate; provided, however, that for the
customers listed below, such limit shall instead be the greater of the
foregoing or the amount set forth opposite such customer in the following table:


 


7

















 




	
  Customer

  	
   

  	
  Concentration Limit

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  [***]

  	
   

  	
  25

  	
  %

  
	
   

  	
   

  	
   

  	
   

  
	
  [***]

  	
   

  	
  20

  	
  %

  






 


(xiii)         That portion of Accounts that arises from
research contracts;


 


(xiv)        Accounts, or portions thereof, otherwise
deemed ineligible by the Lender in its sole discretion.


 


“Eligible Equipment” of a Borrower means Equipment
owned by such Borrower and designated by the Lender as eligible from time to
time in its sole discretion but excluding any Equipment having any of the
following characteristics:


 


(i)            Equipment
that is subject to any Lien other than in favor of the Lender;


 


(ii)           Equipment
that has not been delivered to the Premises;


 


(iii)          Equipment
in which the Lender does not hold a first priority security interest;


 


(iv)          Equipment
that is obsolete or not currently saleable;


 


(v)           Equipment
that is not covered by standard “all risk” insurance for an amount equal to its
forced liquidation value;


 


(vi)          Equipment
that requires proprietary software in order to operate in the manner in which
it is intended when such software is not freely assignable to the Lender or any
potential purchaser of such Equipment;


 


(vii)         Equipment
consisting of computer hardware, software, tooling, or molds;


 


(viii)        Equipment
consisting of Rental Inventory; and


 


(ix)           Equipment
otherwise deemed unacceptable to Lender in its sole discretion.


 


“Eligible Foreign Accounts” for a Borrower means all Accounts due and
owing by an account debtor located outside the United States to such Borrower;
but excluding any Accounts having any of the following characteristics:


 


8

















 


(i)            That
portion of Accounts (other than dated Accounts) unpaid 120 days or more after
the invoice date, (B) that portion of dated Accounts unpaid more than 90
days after the stated due date, and (C) that portion of Accounts that do
not provide for payment in full within 120 days after the shipment date;


 


(ii)           That portion of Accounts related to goods or
services with respect to which such Borrower has received notice of a claim or
dispute, which are subject to a claim of offset or a contra account, or which
reflect a reasonable reserve for warranty claims or returns;


 


(iii)          That portion of Accounts not yet earned by
the final delivery of goods or rendition of services, as applicable, by such
Borrowers to the customer;


 


(iv)          That portion of Accounts for which an invoice
has not been sent to the applicable account debtor;


 


(v)           Accounts
owed by any unit of government;


 


(vi)          Accounts owed by an account debtor that is
insolvent, the subject of bankruptcy proceedings or has gone out of business;


 


(vii)         Accounts owed by an Owner, Subsidiary,
Affiliate, Officer or employee of any Borrower;


 


(viii)        Accounts
not subject to a duly perfected security interest in the Lender’s favor or
which are subject to any Lien in favor of any Person other than the Lender,
other than Permitted Liens;


 


(ix)           That portion of Accounts that has been
restructured, extended, amended or modified;


 


(x)            That portion of Accounts that constitutes advertising,
finance charges, service charges or sales or excise taxes;


 


(xi)           That portion of Accounts owed by any one
account debtor that would permit Revolving Advances supported by such account
debtor’s Accounts to exceed $300,000 at any one time;


 


(xii)          Accounts denominated in any currency other
than United States dollars, Canadian dollars, Swiss francs, Japanese yen,
United Kingdom pounds sterling or European Union euros;


 


(xiii)         Accounts with respect to which the Borrower
has not instructed the Account debtor to pay the Account to the Collateral
Account;


 


(xiv)        Accounts owed by debtors located in countries
not acceptable to the Lender in its sole discretion;


 


9

















 


(xv)         Accounts
owed by an account debtor, regardless of whether otherwise eligible, if 10% or
more of the total amount due under Accounts from such debtor is ineligible
under clauses (i), (ii) or (ix) above;


 


(xvi)        Accounts otherwise deemed unacceptable to the
Lender in its sole discretion.


 


“Eligible Inventory” for a Borrower means all
Inventory of such Borrower, at the lower of cost or market value as determined
in accordance with GAAP; provided, however, that the following shall not in any
event be deemed Eligible Inventory:


 


(i)            Inventory that is: 
in-transit; located at any warehouse, job site or other premises not
approved by the Lender in writing; located outside of the states, or
localities, as applicable, in which the Lender has filed financing statements
to perfect a first priority security interest in such Inventory; covered by any
negotiable or non-negotiable warehouse receipt, bill of lading or other
document of title; on consignment from or to any Person or subject to any
bailment unless such consignee or bailee has executed an agreement with the
Lender;


 


(ii)           Supplies, packaging or parts Inventory;


 


(iii)          Work-in-process Inventory;


 


(iv)          Inventory that is damaged, obsolete, or not currently
saleable in the normal course of such Borrower’s operations;


 


(v)           Inventory that such Borrower has returned, has
attempted to return, is in the process of returning or intends to return to the
vendor thereof;


 


(vi)          Inventory that is perishable or live; provided,
however, that Inventory with an expiration date shall be deemed Eligible
Inventory, up to 90 days before the expiration date of such Inventory;


 


(vii)         Inventory that is subject to a security interest in
favor of any Person other than the Lender, except for Permitted Liens;


 


(vii)         Inventory manufactured by any Borrower pursuant to a
license that (A) prohibits the Lender from exercising its rights against
such Inventory or (B) restricts such Borrower’s ability to grant the
Lender the right to sell such Inventory, in either case unless the applicable
licensor has agreed in writing to permit the Lender to exercise its rights and
remedies against such Inventory;


 


10

















 


(viii)        Sample Inventory;


 


(ix)           all
Rental Inventory that has been delivered to, or is in transit to, a customer,
and all Rental Inventory that is not substantially the same in functionality
and quality as other Inventory carried for sale by such Borrower; and


 


(x)            Inventory otherwise deemed ineligible by the Lender in
its sole discretion.


 


“Environmental Laws” has the meaning specified in Section 5.12.


 


“Equipment” of a Borrower means all of such Borrower’s
equipment, as such term is defined in the UCC, whether now owned or hereafter
acquired, including but not limited to all present and future machinery,
vehicles, furniture, fixtures, manufacturing equipment, shop equipment, office
and recordkeeping equipment, parts, tools, supplies, and including specifically
(without limitation) the goods described in any equipment schedule or list
herewith or hereafter furnished to the Lender by any Borrower.


 


“Equipment Advance” has the meaning given in Section 2.3.


 


“Equipment Note” means the Heska Equipment Note or the
Diamond Equipment Note.


 


“Event of Default” has the meaning specified in Section 8.1.


 


“Existing Revolving Advances” has the meaning
specified in Section 2.1.


 


“Excess Collateral Base” for a Borrower means the
difference of (i) such Borrower’s Borrowing Base calculated without taking
into account the limitation imposed by the Maximum Line, and (ii) the sum
of (A) the outstanding principal balance of such Borrower’s Revolving Note
and (B) such Borrower’s L/C Amount.


 


“Factory Mortgage” means the Combination Mortgage,
Assignment of Rents and Fixture Financing Statement, executed by Diamond for
the benefit of the Lender, dated as of September 8, 1998, concerning the
Factory Mortgaged Property, as amended.


 


“Factory Mortgaged Property” means Mortgaged Property
as defined in the Factory Mortgage.


 


“Farm Mortgage” means the Combination Mortgage,
Assignment of Rents and Fixture Financing Statement, executed by Diamond for
the benefit of the Lender, dated as of September 8, 1998, concerning the
Farm Mortgaged Property, as amended.


 


“Farm Mortgaged Property” means Mortgaged Property as
defined in the Farm Mortgage.


 


“Foreign Accounts Eligibility Period” means the period
beginning on the first day of any month in which a Borrower requests in writing
that Eligible Foreign Accounts be


 


11

















 


included in the Borrowing Base and ending on the last
day of any month in which a Borrower requests in writing that Eligible Foreign
Accounts no longer be included in the Borrowing Base; provided, however, that
the Foreign Accounts Eligibility Period shall automatically terminate on the
earlier of the Termination Date or on the first date on which (i) the
Borrowers have failed to make any payment of the fee provided for in Section 2.9(e),
or (ii) the foreign receivables eligibility program in which the Lender
participates becomes unavailable to the Lender, or (iii) any Borrower’s foreign
Accounts cease for any reason to be eligible for coverage under such foreign
receivables eligibility program.


 


“Former Credit Agreement” has the meaning given in the
Recitals.


 


“FREP Sublimit” means an amount from zero to $500,000,
as adjusted from time to time in increments of $100,000 in the Borrowers’
discretion.


 


“GAAP” means generally accepted accounting principles,
applied on a basis consistent with the accounting practices applied in the
financial statements described in Section 5.5.


 


“General Intangibles” of a Borrower means all of such
Borrower’s general intangibles, as such term is defined in the UCC, whether now
owned or hereafter acquired, including (without limitation) all present and
future patents, patent applications, copyrights, trademarks, trade names, trade
secrets, customer or supplier lists and contracts, manuals, operating
instructions, permits, franchises, the right to use the Borrower’s name, and
the goodwill of the Borrower’s business.


 


“Guarantors” shall mean Diamond and any other Person
who executes a guaranty of all or any part of the Obligations for the
benefit of the Lender.


 


“Hazardous Substance” has the meaning given in Section 5.12.


 


“Heska Equipment Note” means the Equipment Note
(Heska) dated as of July 26, 2005, payable to the order of the Lender in
the original principal amount of $500,000, as the same may hereafter be
amended, supplemented or restated from time to time.


 


“Heska Revolving Note” means the Second Amended and
Restated Revolving Note (Heska) dated as of March 26, 2004, payable to the
order of the Lender in the original principal amount of $12,000,000, as the
same may hereafter be amended, supplemented or restated from time to time.


 


“Intellectual Property License” means a license owned
by any Borrower, which license allows such Borrower the use of any patent,
trademark, trade name, or copyrighted material owned by a Person that is not a
Borrower.


 


“Inventory” of a Borrower means all of such Borrower’s
inventory, as such term is defined in the UCC, whether now owned or hereafter
acquired, whether consisting of whole goods, spare parts or components,
supplies or materials, whether acquired, held or


 


12

















 


furnished for sale, for lease or under service
contracts or for manufacture or processing, and wherever located, and
including, without limitation, all Rental Inventory.


 


“Investment Property” of a Borrower means all of such
Borrower’s investment property, as such term is defined in the UCC, whether now
owned or hereafter acquired, including but not limited to all securities,
security entitlements, securities accounts, commodity contracts, commodity
accounts, stocks, bonds, mutual fund shares, money market shares and U.S.
Government securities.


 


“L/C Amount” for a Borrower means the sum of (i) the
Aggregate Face Amount of any issued and outstanding Letters of Credit for which
such Borrower is the account party and (ii) the unpaid amount of the
Obligation of Reimbursement with respect to such Letters of Credit.


 


“L/C Application” means an application and agreement
for Letters of Credit in a form acceptable to the Lender.


 


“Letter of Credit” has the meaning given it in Section 2.18.


 


“Lien” means any security interest, mortgage, deed of
trust, pledge, lien, charge, encumbrance, title retention agreement or
analogous instrument or device, including the interest of each lessor under any
capitalized lease and the interest of any bondsman under any payment or
performance bond, in, of or on any assets or properties of a Person, whether
now owned or hereafter acquired and whether arising by agreement or operation
of law.


 


“Liquidity” means the sum of Cash (excluding Cash
located in accounts outside the United States or owned by an entity not
incorporated in the United States) plus Excess Collateral Base less Past Due
Payables.


 


“Loan Documents” means this Agreement, the Notes and
the Security Documents.


 


“Lockbox” for any Borrower has the meaning given in
such Borrower’s Lockbox Agreement.


 


“Lockbox Agreement” for Diamond means the Agreement as
to Lockbox Service by and among Diamond, the Lender, as successor in interest
to Norwest Bank Iowa, NA, and the Lender, as successor in interest to Wells
Fargo Business Credit, Inc., dated as of October 16, 1997, and for
Heska means the Lockbox and Collection Account Agreement among Heska, Regulus
West LLC (“Regulus”), the Lender, as successor in interest to Wells Fargo
Business Credit, Inc., and the Lender, dated as of June 14, 2000.


 


“Maturity Date” means June 30, 2009.


 


“Maximum Line” means $12,000,000, unless said amount
is reduced pursuant to Section 2.12, in which event it means the amount to
which said amount is reduced.


 


“Minimum Interest Charge” has the meaning given in Section 2.8(d).


 


13

















 


“Net Income” for a Borrower means, for any period,
after-tax net income from continuing operations (that is, not including
extraordinary items, or gains or losses from unusual items or discontinued
operations), in each case for such Borrower for such period, as determined in
accordance with GAAP, but excluding (a) the non-cash impact of expensing
options, restricted stock or other stock-based compensation under APB 25, SFAS
123, SFAS 123R and/or SFAS 148, and (b) the non-cash impact of income or
expense relating to deferred tax assets and liabilities caused by the use of
net loss carry-forwards.


 


“Non-Core IP” means intellectual property (including,
without limitation, any patent, trademark, trade name, or copyrighted material)
of any Borrower that is unrelated to the Borrowers’ veterinary product sales
and [***] would not have a material adverse effect on any Borrower.


 


“Note” means a Revolving Note, an Equipment Note, or
the Term Loan B Note, and “Notes” means the Revolving Notes, the Equipment
Notes, and the Term Loan B Note.


 


“Obligation of Reimbursement” has the meaning given in
Section 2.19.


 


“Obligations” means each and every debt, liability and
obligation of every type and description which any Borrower may now or at
any time hereafter owe to the Lender, related to the indebtedness arising under
this Agreement, the Notes or any other agreement between any such Borrower and
the Lender, entered into in connection with the Credit Facility, including
without limitation the Obligation of Reimbursement.


 


“Owner” means with respect to a Borrower, each Person
having legal or beneficial title to an ownership interest in such Borrower or a
right to acquire such an interest.


 


“Past Due Payables” means accounts payable (other than
accounts payable to Affiliates) that are 60 days or more past due.


 


“Permitted Lien” has the meaning given in Section 7.1.


 


“Person” means any individual, corporation,
partnership, joint venture, limited liability company, association, joint-stock
company, trust, unincorporated organization or government or any agency or
political subdivision thereof.


 


“Plan” means an employee benefit plan or other plan
maintained for any Borrower’s employees and covered by Title IV of ERISA.


 


“Premises” means all premises where any Borrower
conducts its business and has any rights of possession, including (without
limitation) the premises legally described in Exhibit A attached hereto.


 


“Prepayment Factor” means three percent (3%) at all
times unless one of the following conditions applies:  (a) if Heska achieves, on a consolidated
basis, Net Income greater than $0 for its fiscal year ending December 31,
2006, “Prepayment Factor” shall


 


14

















 


mean two percent (2%) from July 1, 2006 through
and including June 30, 2007; and (b) if Heska achieves, on a
consolidated basis, Net Income greater than $0 for its fiscal year ending December 31,
2007, “Prepayment Factor” shall mean two percent (2%) from July 1, 2007
through and including June 30, 2008; and (c) if Heska achieves, on a
consolidated basis, Net Income greater than $0 for its fiscal year ending December 31,
2008, “Prepayment Factor” shall mean one percent (1%) from July 1, 2008
through and including June 30, 2009.


 


“Prime Rate” means the rate publicly announced from
time to time by Wells Fargo Bank, N.A. as its “prime rate” or, if such bank
ceases to announce a rate so designated, any similar successor rate designated
by the Lender.


 


“Raw Materials Advance Rate” means 35%.


 


“Receivables” of a Borrower means each and every right
of such Borrower to the payment of money, whether such right to payment now
exists or hereafter arises, whether such right to payment arises out of a sale,
lease or other disposition of goods or other property, out of a rendering of services,
out of a loan, out of the overpayment of taxes or other liabilities, or
otherwise arises under any contract or agreement, whether such right to payment
is created, generated or earned by such Borrower or by some other person who
subsequently transfers such person’s interest to such Borrower, whether such
right to payment is or is not already earned by performance, and howsoever such
right to payment may be evidenced, together with all other rights and
interests (including all liens and security interests) which such Borrower may at
any time have by law or agreement against any account debtor or other obligor
obligated to make any such payment or against any property of such account
debtor or other obligor; all including but not limited to all present and
future accounts, contract rights, loans and obligations receivable, chattel
papers, bonds, notes and other debt instruments, tax refunds and rights to
payment in the nature of general intangibles.


 


“Rental Inventory” of a Borrower means diagnostic and
monitoring instruments purchased by such Borrower for the purpose of
demonstrating, loaning, leasing or renting to customers, whether accounted for
as equipment or as inventory.


 


“Reportable Event” shall have the meaning assigned to
that term in Title IV of ERISA.


 


“Revolving Advance” has the meaning given in Section 2.2.


 


“Revolving Floating Rate” means an annual rate equal
to the sum of the Prime Rate plus the Spread, which annual rate shall change
when and as the Prime Rate changes.


 


“Revolving Note” means the
Heska Revolving Note or the Diamond Revolving Note.


 


“Security Documents” means this Agreement, each
Collateral Account Agreement, each Lockbox Agreement, each Deposit Account
Control Agreement,the


 


15

















 


Factory Mortgage, the Farm Mortgage, and any other
document delivered to the Lender from time to time to secure the Obligations,
as the same may hereafter be amended, supplemented or restated from time
to time.


 


“Security Interest” has the meaning given in Section 3.1.


 


“Special Account” means a specified cash collateral
account maintained by a financial institution acceptable to the Lender in
connection with Letters of Credit, as contemplated by Sections 2.20 and 3.8.


 


“Spread” has the meaning given in Section 2.7.


 


“Subordinated Debt” of a Borrower means all Debt of
such Borrower that is subject to a Subordination Agreement.


 


“Subordination Agreement” means any subordination
agreement accepted by the Lender from time to time.


 


“Subsidiary” means any Person of which more than 50%
of the outstanding ownership interests having general voting power under
ordinary circumstances to elect a majority of the directors or the equivalent
of such Person, regardless of whether or not at the time ownership interests of
any other class or classes shall have or might have voting power by reason
of the happening of any contingency, is at the time directly or indirectly
owned by a Borrower, by a Borrower and one or more other Subsidiaries, or by
one or more other Subsidiaries.


 


“Tangible Net Worth” of a Borrower means the
difference between (i) the tangible assets of such Borrower, which, in
accordance with GAAP are tangible assets, after deducting adequate reserves in
each case where, in accordance with GAAP, a reserve is proper and (ii) all
Debt of such Borrower; provided, however, that notwithstanding the foregoing in
no event shall there be included as such tangible assets patents, trademarks,
trade names, copyrights, licenses, goodwill, receivables from Affiliates,
directors, officers or employees, prepaid expenses, deposits, deferred charges
or treasury stock or any securities or Debt of such Borrower or any other
securities unless the same are readily marketable in the United States of
America or entitled to be used as a credit against federal income tax
liabilities, and any other assets designated from time to time by the Lender,
in its reasonable discretion.


 


“Tax Expense” for a Borrower as of any date means
state and federal income taxes recorded by such Borrower for the year-to-date period ending on such date.


 


“Term Advances” means the Equipment Advance and the
Term Loan B Advances.


 


“Term Floating Rate” means an annual rate equal to the
sum of the Prime Rate plus the Spread, which annual rate shall change when and
as the Prime Rate changes.


 


“Term Loan B Advance” has the meaning specified in Section 2.5.


 


16

















 


“Term Loan B Note” means the Term Loan B Note of the
Borrowers, dated as of June 14, 2000 and payable to the order of the
Lender in the original principal amount of $2,062,500, and any note or notes
issued in substitution therefor, as the same may hereafter be amended,
supplemented or restated from time to time.


 


“Termination Date” means the earliest of (i) the
Maturity Date, (ii) the date the Borrowers terminate the Credit Facility,
or (iii) the date the Lender demands payment of the Obligations after an
Event of Default pursuant to Section 8.2


 


“UCC” means the Uniform Commercial Code as in
effect from time to time in the state designated in Section 9.15 as the
state whose laws shall govern this Agreement, or in any other state whose laws
are held to govern this Agreement or any portion hereof.


 


“Wells Fargo Bank” means Wells Fargo Bank West,
National Association.


 


Section 1.2             Other Definitional Terms; Rules of
Interpretation.
The words ‘hereof’, ‘herein’ and ‘hereunder’ and words of similar import when
used in the Agreement shall refer to this Agreement as a whole and not to any
particular provision of this Agreement. All accounting terms not otherwise
defined herein have the meanings assigned to them in accordance with GAAP. All
terms defined in the UCC and not otherwise defined herein have the meanings
assigned to them in the UCC. References to Articles, Sections, subsections,
Exhibits, Schedules and the like, are to Articles, Sections and subsections of,
or Exhibits or Schedules attached to, this Agreement unless otherwise expressly
provided. The words ‘include’, ‘includes’ and ‘including’ shall be deemed to be
followed by the phrase ‘without limitation’. Unless the context in which used
herein otherwise clearly requires, ‘or’ has the inclusive meaning represented
by the phrase ‘and/or’. Defined terms include in the singular number the plural
and in the plural number the singular. Reference to any agreement (including
the Loan Documents), document or instrument means such agreement, document or
instrument as amended or modified and in effect from time to time in accordance
with the terms thereof (and, if applicable, in otherwise explicitly provided,
and reference to any promissory note includes any promissory note which is an
extension or renewal thereof or a substitute or replacement therefore.
Reference to any law, rule, regulation, order, decree, requirement, policy,
guideline, directive or interpretation means as amended, modified, codified,
replaced or reenacted, in whole or in part, and in effect on the determination
date, including rules and regulations promulgated thereunder.


 


17

















 


ARTICLE II



Amount and Terms of the Credit Facility


 


Section 2.1             Existing Revolving Advances. The Lender has made various revolving
advances to the Borrowers (the “Existing Revolving Advances”) in accordance
with the Former Credit Agreement. As of December 28, 2005, the outstanding
principal balance of the Existing Revolving Advances to Heska was $8,545,126.50
and the outstanding principal balance of the Existing Revolving Advances to
Diamond was $541,186.19. Upon execution and delivery of this Agreement, the
Existing Revolving Advances shall be deemed to be Revolving Advances pursuant
to Section 2.2.


 


Section 2.2             Revolving Advances. The Lender agrees, on the terms and
subject to the conditions herein set forth, to make advances (the “Revolving
Advances”) to any Borrower from time to time until the Termination Date, on the
terms and subject to the conditions herein set forth. The Lender shall have no
obligation to make a Revolving Advance to a Borrower if, after giving effect to
such requested Revolving Advance, (a) the sum of the outstanding and
unpaid Revolving Advances to such Borrower exceed such Borrower’s Borrowing
Base, or (b) the sum of the outstanding and unpaid Revolving Advances
would exceed the Aggregate Borrowing Base. Each Borrower’s obligation to pay
the Revolving Advances shall be evidenced by such Borrower’s Revolving Note and
shall be secured by the Collateral as provided in Article III and the
Mortgaged Property as defined in each of the Factory Mortgage and the Farm
Mortgage. Within the limits set forth in this Section 2.2, each Borrower may borrow,
prepay pursuant to Section 2.12 and reborrow. Each Borrower agrees to
comply with the following procedures in requesting Revolving Advances under
this Section 2.2:


 


(a)           Such Borrower shall make each request for
a Revolving Advance to the Lender before 11:00 a.m. (Denver time) of the
day of the requested Revolving Advance. Requests may be made in writing or
by telephone, specifying the date of the requested Revolving Advance and the amount
thereof. Each request shall be by (i) any officer of such Borrower; or (ii) any
person designated as such Borrower’s agent by any officer of such Borrower in a
writing delivered to the Lender; or (iii) any person whom the Lender
reasonably believes to be an officer of such Borrower or such a designated
agent.


 


(b)           Upon fulfillment of the applicable
conditions set forth in Article IV, the Lender shall disburse the proceeds
of the requested Revolving Advance by crediting the same to such Borrower’s demand
deposit account maintained with Wells Fargo Bank unless the Lender and such
Borrower shall agree in writing to another manner of disbursement. Upon the
Lender’s request, such Borrower shall promptly confirm each telephonic request
for an Advance by executing and delivering an appropriate confirmation
certificate to the Lender. Each Borrower shall repay all such Advances even if
the Lender does not receive such confirmation and even if the person requesting
such Advance was not in fact authorized to do so. Any request for an Advance by
a Borrower, whether written or telephonic, shall be deemed to be a
representation by such Borrower that the conditions set forth in Section 4.2
have been satisfied as of the time of the request.


 


18

















 


Section 2.3             Equipment Advances. On July 28, 2005, the Lender made
an Equipment Advance to Heska in the amount of $500,000 and an Equipment
Advance to Diamond in the amount of $2,000,000, each in accordance with the
Former Credit Agreement. As of December 28, 2005, the outstanding
principal balance of the Equipment Advance to Heska was $500,000, and the
outstanding principal balance of the Equipment Advance to Diamond was
$2,000,000. Each Borrower’s obligation to pay the Equipment Advances shall be
evidenced by such Borrower’s Equipment Note and shall be secured by the
Collateral as provided in Article III and the Mortgaged Property as
defined in each of the Factory Mortgage and the Farm Mortgage.


 


Section 2.4             Payment of Equipment Note. The outstanding principal balance of
each Equipment Note shall be due and payable as follows:


 


(a)           On February 1, 2006, and the first
day of each month thereafter, Diamond shall pay monthly installments of
$37,037.04


 


(b)           On February 1, 2006, and the first
day of each month thereafter, Heska shall pay monthly installments of
$9,259.26; and


 


(c)           On the Maturity Date, the entire unpaid
principal balance of each Equipment Note, and all unpaid interest accrued
thereon, shall in any event be due and payable.


 


Section 2.5             Term Loan B Advances. The Lender has previously made advances
to Diamond in the amount of $2,250,000 (the “Term Loan B Advances”). As of December 28,
2005, the outstanding principal balance of the Term Loan B Advances was
$904,738.00. The Borrowers’ obligation to pay the Term Loan B Advances shall be
evidenced by the Term Loan B Note and shall be secured by the Collateral as
provided in Article III and the Mortgaged Property as defined in each of
the Factory Mortgage and the Farm Mortgage.


 


Section 2.6             Payment of Term Loan B Note. The outstanding principal balance of
the Term Loan B Note shall be due and payable as follows:


 


(a)           On June 1, 2000 and the first day of
each month thereafter, in monthly installments of $17,658; and


 


(b)           On the Maturity Date, the entire unpaid
principal balance of the Term Loan B Note, and all unpaid interest accrued
thereon, shall in any event be due and payable.


 


Section 2.7             Spread. The spread (the “Spread”) means the percentage set
forth in the table below opposite the applicable prior-fiscal-year Net Income
of the Borrowers, which percentage shall change annually effective as of the
first day of the month following the month in which the Borrowers delivers to
the Lender their audited financial statements for the prior fiscal year;
provided, however, that so long as no Default Period then exists, if Heska
raises Additional Capital of not less than [***], the “Spread” shall be
decreased by 0.75% below the otherwise-applicable rate, effective as of the
first day of the month following the month in which such Additional Capital is
raised; and provided further that if Heska does not raise at least [***] of
Additional Capital on or before January 1, 2006, the “Spread” shall be
increased


 


19

















 


by 0.25% above the
otherwise-applicable rate, effective as of January 1, 2006; and provided
further that if Heska does not raise at least [***] of Additional Capital on or
before July 1, 2006, the “Spread” shall be increased by 0.75% (including,
and not in addition to, the 0.25% increase described in the proviso above)
above the otherwise-applicable rate, effective as of July 1, 2006; and
provided further that in no case shall any decrease in the Spread occur during
the Default Period:


 


	
  Prior
  Fiscal Year Net Income

  	
   

  	
  Spread

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Less than $0

  	
   

  	
  2.75

  	
  %

  
	
   

  	
   

  	
   

  	
   

  
	
  Greater than or equal
  to $0

  but less than $2,500,000

  	
   

  	
  1.75

  	
  %

  
	
   

  	
   

  	
   

  	
   

  
	
  Greater than or equal
  to $2,500,000

  	
   

  	
  0.75

  	
  %

  



 


Section 2.8             Interest; Minimum Interest Charge;
Default Interest; Participations; Usury. Interest accruing on the Notes shall be due and
payable in arrears on the first day of each month.


 


(a)           Revolving Note. Except as set forth in Sections 2.8(e),
2.8(f) and 2.8(g), the outstanding principal balance of the Revolving Note
shall bear interest at the Revolving Floating Rate.


 


(b)           Equipment Note. Except as set forth in Sections 2.8(e),
2.8(f) and 2.8(g), the outstanding principal balance of the Equipment Note
shall bear interest at the Term Floating Rate.


 


(c)           Term Loan B Note. Except as set forth in Sections 2.8(e),
2.8(f) and 2.8(g), the outstanding principal balance of the Term Loan B
Note shall bear interest at the Term Floating Rate.


 


(d)           Minimum Interest Charge. Notwithstanding Sections 2.8(a), 2.8(b), 2.8(c) and
2.8(e), the Borrowers shall pay to the Lender interest of not less than
$100,000 per calendar year (the “Minimum Interest Charge”) during the term of
this Agreement, and the Borrowers shall pay any deficiency between the Minimum
Interest Charge and the amount of interest otherwise calculated under
Sections 2.8(a), 2.8(b), or 2.8(c) on the date and in the manner
provided in Section 2.10; provided, however, that if the period for which
the Minimum Interest Charge is being calculated is shorter than one year, such
amount shall be prorated on a per diem basis for such shorter period.


 


(e)           Default Interest Rate. At any time during any Default Period, in the Lender’s
sole discretion and without waiving any of its other rights and remedies, the
principal of the Advances outstanding from time to time shall bear interest at
the Default Rate, effective for any periods designated by the Lender from time
to time during that Default Period.


 


20

















 


(f)            Participations. If any Person shall acquire a participation in the
Advances under this Agreement, the Borrowers shall be obligated to the Lender
to pay the full amount of all interest calculated under this Section 2.8,
along with all other fees, charges and other amounts due under this Agreement, regardless
if such Person elects to accept interest with respect to its participation at a
lower rate than the Revolving Floating Rate or the Term Floating Rate, or
otherwise elects to accept less than its prorata share of such fees, charges
and other amounts due under this Agreement.


 


(g)           Usury. In any event no rate change shall be put into effect
which would result in a rate greater than the highest rate permitted by law.


 


Section 2.9             Fees.


 


(a)           Unused Line Fee. For the purposes of this Section 2.9(a), “Unused
Amount” means the Maximum Line reduced by (i) outstanding Revolving
Advances and (ii) the L/C Amount. The Borrowers agree to pay to the Lender
an unused line fee at the rate of one-quarter of one percent (0.25%) per annum
on the average daily Unused Amount from the date of this Agreement to and
including the Termination Date, due and payable monthly in arrears on the first
day of the month and on the Termination Date.


 


(b)           Audit Fees. The Borrowers hereby agree to pay the Lender, on
demand, audit fees in connection with any audits or inspections conducted by
the Lender of any Collateral or any Borrower’s operations or business at the
rates established from time to time by the Lender as its audit fees (which fees
are currently $100 per hour per auditor), together with all actual
out-of-pocket costs and expenses incurred in conducting any such audit or
inspection, such audits shall be conducted, at the least, on a quarterly basis.


 


(c)           Letter of Credit Fees. Each Borrower agrees to pay the Lender a
fee with respect to each Letter of Credit issued for such Borrower’s account,
if any, accruing on a daily basis and computed at the annual rate of two and
one-half percent (2.5%) of the aggregate amount that may then be drawn on
all outstanding Letters of Credit issued for such Borrower’s account, assuming
compliance with all conditions for drawing thereunder (the “Aggregate Face
Amount”), from and including the date of issuance of such Letter of Credit
until such date as such Letter of Credit shall terminate by its terms or be
returned to the Lender, due and payable monthly in arrears on the first day of
each month and on the Termination Date; provided, however that during Default
Periods, in the Lender’s sole discretion and without waiving any of its other
rights and remedies, such fee shall increase to five and one-half percent
(5.5%) of the Aggregate Face Amount. The foregoing fee shall be in addition to
any and all fees, commissions and charges imposed by Lender with respect to or
in connection with such Letter of Credit.


 


(d)           Letter of Credit Administrative Fees. Each Borrower shall pay all
administrative fees charged by the Lender in connection with the honoring of
drafts under any Letter of Credit issued for such Borrower’s account,
amendments thereto, transfers thereof and all other activity with respect to
the Letters of Credit at the then-current rates published by the Lender for
such services rendered on behalf of customers of the Lender generally.


 


21

















 


(e)           Foreign Receivables
Eligibility Program Fee.
The Borrowers agree
to pay to the Lender during the Foreign Accounts Eligibility Period, a monthly
fee in an amount equal to one-twelfth of two-and-one-half percent (2.50%) of
the FREP Sublimit, due and payable monthly in advance on the first day of the
month.


 


(f)            Amendment Fee. The Borrowers shall pay the Lender as of the date hereof a fully
earned, non-refundable fee in the amount of $10,000 in consideration of the
Lender’s execution and delivery of this Agreement.


 


Section 2.10           Computation of Interest and Fees; When
Interest Due and Payable. Interest accruing on the outstanding principal balance of the
Advances and fees hereunder outstanding from time to time shall be computed on
the basis of actual number of days elapsed in a year of 360 days. Interest
shall be payable in arrears on the first day of each month and on the
Termination Date.


 


Section 2.11           Capital Adequacy. If any Related Lender determines at any
time that its Return has been reduced as a result of any Rule Change, such
Related Lender may require any Borrower to pay it the amount necessary to
restore its Return to what it would have been had there been no Rule Change.
For purposes of this Section 2.11:


 


(a)           “Capital Adequacy Rule” means any law, rule,
regulation, guideline, directive, requirement or request regarding capital
adequacy, or the interpretation or administration thereof by any governmental
or regulatory authority, central bank or comparable agency, whether or not
having the force of law, that applies to any Related Lender. Such rules include
rules requiring financial institutions to maintain total capital in
amounts based upon percentages of outstanding loans, binding loan commitments
and letters of credit.


 


(b)           “L/C Rule” means any law, rule,
regulation, guideline, directive, requirement or request regarding letters of
credit, or the interpretation or administration thereof by any governmental or
regulatory authority, central bank or comparable agency, whether or not having
the force of law, that applies to any Related Lender. Such rules include rules imposing
taxes, duties or other similar charges, or mandating reserves, special deposits
or similar requirements against assets of, deposits with or for the account of,
or credit extended by any Related Lender, on letters of credit.


 


(c)           “Related Lender” includes (but is not
limited to) the Lender, any parent corporation of the Lender and any assignee
of any interest of the Lender hereunder and any participant in the loans made
hereunder.


 


(d)           “Return” for any period, means the return
as determined by a Related Lender on the Advances and Letters of Credit based
upon its total capital requirements and a reasonable attribution formula that
takes account of the Capital Adequacy Rules and the L/C Rules then in
effect, costs of issuing or maintaining any Letter of Credit and amounts
received or receivable under this Agreement or the Notes with respect to any
Advance or Letter of Credit. Return may be calculated for each calendar
quarter and for


 


22

















 


the shorter period
between the end of a calendar quarter and the date of termination of whole of
this Agreement.


 


(e)           “Rule Change” means any change in
any Capital Adequacy Rule or L/C Rule occurring after the date of
this Agreement, but the term does not include any changes in applicable
requirements that at the Closing Date are scheduled to take place under the
existing capital Adequacy Rules or L/C Rules or any increases in the
capital that any Related Lender is required to maintain to the extent that the
increases are required due to a regulatory authority’s assessment of the
financial condition of such Related Lender.


 


The Lender will promptly notify the Borrowers of any event of which it
has knowledge, occurring after the date hereof, which will entitle the Lender
to compensation pursuant to this Section 2.11. Certificates of any Related
Lender sent to any Borrower from time to time claiming compensation under this Section 2.11,
stating the reason therefor and setting forth in reasonable detail the
calculation of the additional amount or amounts to be paid to the Related
Lender hereunder to restore its Return shall be conclusive absent manifest
error. In determining such amounts, the Related Lender may use any
reasonable averaging and attribution methods.


 


Section 2.12           Voluntary Prepayment; Reduction of the
Maximum Line; Termination of the Credit Facility by the Borrowers. Except as otherwise provided herein,
each Borrower may prepay the Revolving Advances made to it in whole at any
time or from time to time in part. Diamond may prepay the Equipment
Advances (other than in accordance with Section 2.4) or prepay the Term
Loan B Advances (other than in accordance with Section 2.6), or the
Borrowers may terminate the Credit Facility or reduce the Maximum Line at
any time if it (i) gives the Lender at least 30 days’ prior written notice
and (ii) pays the Lender the prepayment, termination or line reduction
fees in accordance with Section 2.13. Any prepayment of the Equipment
Advances (other than in accordance with Section 2.4), any prepayment of
the Term Loan B Advances (other than in accordance with Section 2.6), or
reduction in the Maximum Line must be in an amount not less than $250,000 or an
integral multiple thereof. If the Borrowers reduce the Maximum Line to zero,
all Obligations shall be immediately due and payable. Any partial prepayments
of the Equipment Note (other than in accordance with Section 2.4), and any
partial prepayments of the Term Loan B Note (other than in accordance with Section 2.6),
shall be applied to principal payments due and owing in inverse order of their
maturities. Upon termination of the Credit Facility and payment and performance
of all Obligations, the Lender shall release or terminate the Security Interest
and the Security Documents to which the Borrowers are entitled by law.


 


Section 2.13           Termination, Line Reduction and
Prepayment Fees; Waiver of Termination, Prepayment and Line Reduction Fees.


 


(a)           Termination and Line
Reduction Fees.
If the Credit Facility is terminated for any reason as of a date other than the
Maturity Date, or the Borrowers reduce the Maximum Line, the Borrowers shall
pay the Lender a fee in an amount equal to the Prepayment Factor multiplied by
the Maximum Line (or the reduction, as the case may be).


 


23

















 


(b)           Prepayment Fees. If the Equipment Note is prepaid for any
reason except in accordance with Section 2.4, the Borrowers shall pay to
the Lender a fee in an amount equal to the Prepayment Factor multiplied by the
amount prepaid. If the Term Loan B Note is prepaid for any reason except in
accordance with Section 2.6, the Borrowers shall pay to the Lender a fee
in an amount equal to one percent (1%) of the amount prepaid.


 


(c)           Waiver of Termination and
Line Reduction Fees. The
Borrowers will not be required to pay the termination or line reduction fees
otherwise due under this Section 2.13 if such termination or line
reduction is made (i) because of refinancing of the Borrowers by another
division of the Lender, (ii) within 60 days after any demand for payment
upon any Borrower in accordance with Section 2.11, or (iii) within 60
days after any Discretionary Reduction Date.


 


Section 2.14           Mandatory Prepayment. Without notice or demand, if the
outstanding principal balance of the Revolving Advances made to a Borrower
shall at any time exceed such Borrower’s Borrowing Base, such Borrower shall
immediately (or, to the extent such condition is a result of a Discretionary Reduction,
within 5 Business Days) prepay the Revolving Advances to the extent necessary
to eliminate such excess. Any payment received by the Lender under Section 2.12
may be applied to the Obligations, in such order and in such amounts as
the Lender, in its discretion, may from time to time determine; provided
that any prepayment under Section 2.12 which a Borrower designates as a
payment of the Revolving Advances, shall be applied to such Borrower’s
Revolving Advances; provided, further, that any prepayment under Section 2.12
which a Borrower designates as a partial prepayment of the Equipment Note or
the Term Loan B Note, shall be applied to principal installments of the
Equipment Note or the Term Loan B Note respectively, in inverse order of
maturity.


 


Section 2.15           Payment. All payments to the Lender shall be made in
immediately available funds and shall be applied to the Obligations upon
receipt by the Lender. The Lender may hold all payments not constituting
immediately available funds for three (3) days before applying them to the
Obligations. Notwithstanding anything in Section 2.2, each Borrower hereby
authorizes the Lender, in its discretion at any time or from time to time
without such Borrower’s request and even if the conditions set forth in Section 4.2
would not be satisfied, to make a Revolving Advance in an amount equal to the
portion of the Obligations from time to time due and payable.


 


Section 2.16           Payment on Non-Banking Days. Whenever any payment to be made
hereunder shall be stated to be due on a day which is not a Banking Day, such
payment may be made on the next succeeding Banking Day, and such extension
of time shall in such case be included in the computation of interest on the
Advances or the fees hereunder, as the case may be.


 


Section 2.17           Liability Records. The Lender may maintain from time
to time, at its discretion, liability records as to the Obligations. All
entries made on any such record shall be presumed correct until a Borrower
establishes the contrary. Upon the Lender’s demand, each Borrower will admit
and certify in writing the exact principal balance of the Obligations that such
Borrower then asserts to be outstanding. Any billing statement or accounting
rendered by


 


24

















 


the Lender shall be
conclusive and fully binding on the Borrowers unless the Borrowers give the
Lender specific written notice of exception within 30 days after receipt.


 


Section 2.18           Issuance of Letters of Credit.


 


(a)           Upon any Borrower’s Request the Lender
shall issue, from time to time until the Termination Date, one or more
documentary or standby letters of credit (each, a “Letter of Credit”) for such
Borrower’s account, provided that:


 


(i)            The Lender shall have no obligation to
issue any Letter of Credit for the benefit of a Borrower if (A) a Default
Period exists, or (B) the face amount of the Letter of Credit to be issued
would exceed the lesser of:


 


(1)           $1,000,000 less the Aggregate L/C Amount,
or


 


(2)           such Borrower’s Availability.


 


Each Letter of Credit, if any, shall be issued
pursuant to a separate L/C Application entered by the applicable Borrower and
the Lender, completed in a manner satisfactory to the Lender. The terms and
conditions set forth in each such L/C Application shall supplement the terms and
conditions hereof, but if the terms of any such L/C Application and the terms
of this Agreement are inconsistent, the terms hereof shall control.


 


(b)           No Letter of Credit shall be issued with
an expiry date later than the Maturity Date.


 


(c)           Any request for the issuance of a Letter
of Credit under this Section 2.18 shall be deemed to be a representation
by the requesting Borrower that the statements set forth in Section 4.2
hereof are correct as of the time of the request.


 


Section 2.19           Payment of Amounts Drawn Under Letters of
Credit. Each
Borrower agrees to pay to the Lender any and all amounts required to be paid
under the applicable L/C Application, when and as required to be paid thereby,
and the amounts designated below, when and as designated:


 


(a)           Each Borrower hereby agrees to pay the
Lender on the day a draft is honored under any Letter of Credit a sum equal to
all amounts drawn under such Letter of Credit plus any and all reasonable
charges and expenses that the Lender may pay or incur relative to such
draw, plus interest on all such amounts, charges and expenses as set forth
below (all such amounts are hereinafter referred to as the “Obligation of
Reimbursement”).


 


(b)           Each Borrower hereby agrees to pay the
Lender on demand interest on all amounts, charges and expenses payable by such
Borrower to the Lender under this Section 2.19, accrued from the date any
such draft, charge or expense is paid by the Lender until payment in full by
such Borrower at the Revolving Floating Rate.


 


25

















 


If a Borrower fails to pay to the Lender promptly the
amount of its Obligation of Reimbursement in accordance with the terms hereof
and the L/C Application pursuant to which such Letter of Credit was issued, the
Lender is hereby irrevocably authorized and directed, in its sole discretion,
to make a Revolving Advance in an amount sufficient to discharge the Obligation
of Reimbursement, including all interest accrued thereon but unpaid at the time
of such Revolving Advance, and such Revolving Advance shall be evidenced by the
Revolving Note and shall bear interest as provided in Section 2.8 hereof.


 


Section 2.20                                Special Account. If this Credit Facility is terminated
for any reason whatsoever, while any Letter of Credit is outstanding for any
Borrower’s account, such Borrower shall thereupon pay the Lender in immediately
available funds for deposit in the Special Account an amount equal to the
maximum aggregate amount available to be drawn under all Letters of Credit then
outstanding for such Borrower’s account, assuming compliance with all
conditions for drawing thereunder. The Special Account shall be maintained for
the Lender by any financial institution acceptable to the Lender. Any interest
earned on amounts deposited in the Special Account shall be credited to the
Special Account. Amounts on deposit in the Special Account may be applied
by the Lender at any time or from time to time to such Borrower’s Obligation of
Reimbursement or any other Obligations, in the Lender’s sole discretion, and
shall not be subject to withdrawal by any Borrower so long as the Lender
maintains a security interest therein. The Lender agrees to transfer any
balance in the Special Account to such Borrower at such time as the Lender is
required to release its security interest in the Special Account under
applicable law.


 


Section 2.21                                Obligations Absolute. The obligations of each Borrower
arising under Section 2.18 shall be absolute, unconditional and
irrevocable, and shall be paid strictly in accordance with the terms of this
Agreement, under all circumstances whatsoever, including (without limitation)
the following circumstances:


 


(a)                                  any lack of validity or enforceability of
any Letter of Credit or any other agreement or instrument relating to any
Letter of Credit (collectively the “Related Documents”);


 


(b)                                 any amendment or waiver of or any consent
to departure from all or any of the Related Documents;


 


(c)                                  the existence of any claim, setoff,
defense or other right which any Borrower may have at any time, against
any beneficiary or any transferee of any Letter of Credit (or any persons or
entities for whom any such beneficiary or any such transferee may be
acting), or other person or entity, whether in connection with this Agreement,
the transactions contemplated herein or in the Related Documents or any
unrelated transactions;


 


(d)                                 any statement or any other document
presented under any Letter of Credit proving to be forged, fraudulent, invalid
or insufficient in any respect or any statement therein being untrue or
inaccurate in any respect whatsoever;


 


26

















 


(e)                                  payment by or on behalf of the Lender
under any Letter of Credit against presentation of a draft or certificate which
does not strictly comply with the terms of such Letter of Credit; or


 


(f)                                    any other circumstance or happening
whatsoever, whether or not similar to any of the foregoing.


 


ARTICLE III


 


Security Interest; Occupancy;
Setoff


 


Section 3.1                                      Grant of Security Interest. Each Borrower hereby pledges, assigns
and grants to the Lender a security interest (collectively referred to as the “Security
Interest”) in the Collateral, as security for the payment and performance of
the Obligations. Upon request by the Lender, each Borrower will grant the
Lender a security interest in all commercial tort claims it may have
against any Person.


 


Section 3.2                                      Notification of Account Debtors and Other
Obligors. The
Lender may during any Default Period notify any account debtor or other
person obligated to pay the amount due that such right to payment has been
assigned or transferred to the Lender for security and shall be paid directly
to the Lender. Each Borrower will join in giving such notice if the Lender so
requests. At any time after any Borrower or the Lender gives such notice to an account
debtor or other obligor, the Lender may, but need not, in the Lender’s name or
in any Borrower’s name, (a) demand, sue for, collect or receive any money
or property at any time payable or receivable on account of, or securing, any
such right to payment, or grant any extension to, make any compromise or
settlement with or otherwise agree to waive, modify, amend or change the
obligations (including collateral obligations) of any such account debtor or
other obligor; and (b) as each Borrower’s agent and attorney-in-fact,
notify the United States Postal Service to change the address for delivery of
such Borrower’s mail to any address designated by the Lender, otherwise
intercept such Borrower’s mail, and receive, open and dispose of such Borrower’s
mail, applying all Collateral as permitted under this Agreement and holding all
other mail for such Borrower’s account or forwarding such mail to such Borrower’s
last known address.


 


Section 3.3                                      Assignment of Insurance. As additional security for the payment
and performance of the Obligations, each Borrower hereby assigns to the Lender
any and all monies (including, without limitation, proceeds of insurance and
refunds of unearned premiums) due or to become due under, and all other rights
of such Borrower with respect to, any and all policies of insurance now or at
any time hereafter covering the Collateral, to the extent such rights may be
assigned in accordance with such policies, or any evidence thereof or any
business records or valuable papers pertaining thereto, and such Borrower
hereby directs the issuer of any such policy to pay all such monies directly to
the Lender. At any time, after and during the continuance of an Event of
Default, the Lender may (but need not), in the Lender’s name or in any
Borrower’s name, execute and deliver proof of claim, receive all such monies,
endorse checks and other instruments representing payment of such monies, and
adjust, litigate, compromise or release any claim against the issuer of any
such policy.


 


27

















 


Section 3.4                                      Occupancy


 


(a)                                  Each Borrower hereby irrevocably grants
to the Lender the right to take exclusive possession of the Premises at any
time during a Default Period.


 


(b)                                 The Lender may use the Premises only
to hold, process, manufacture, sell, use, store, liquidate, realize upon or
otherwise dispose of goods that are Collateral and for other purposes that the
Lender may in good faith deem to be related or incidental purposes.


 


(c)                                  The Lender’s right to hold the Premises
shall cease and terminate upon the earlier of (i) payment in full and
discharge of all Obligations and termination of the Commitment, and (ii) final
sale or disposition of all goods constituting Collateral and delivery of all
such goods to purchasers.


 


(d)                                 The Lender shall not be obligated to pay
or account for any rent or other compensation for the possession, occupancy or
use of any of the Premises; provided, however, that if the Lender does pay or
account for any rent or other compensation for the possession, occupancy or use
of any of the Premises, the Borrowers shall reimburse the Lender promptly for
the full amount thereof. In addition, the Borrowers will pay, or reimburse the
Lender for, all taxes, fees, duties, imposts, charges and expenses at any time
incurred by or imposed upon the Lender by reason of the execution, delivery,
existence, recordation, performance or enforcement of this Agreement or the
provisions of this Section 3.4.


 


Section 3.5                                      License. Each Borrower hereby grants to the Lender a
non-exclusive, worldwide and royalty-free license to use or otherwise exploit
all trademarks, franchises, trade names, copyrights and patents of such
Borrower for the purpose of selling, leasing or otherwise disposing of any or
all Collateral during any Default Period. Notwithstanding the foregoing, such
grant shall not constitute an assignment of any Intellectual Property License
to the extent granting such a license is prohibited by or would constitute a
default under any such Intellectual Property License (but only to the extent
such prohibition is enforceable under applicable law).


 


Section 3.6                                      Financing Statement. The Borrowers authorize the Lender to
file from time to time where permitted by law, such financing statements
against collateral described as ‘all personal property’ or describing specific
items of collateral including commercial tort claims as the Lender deems
necessary or useful to perfect the Security Interest. A carbon, photographic or
other reproduction of this Agreement or of any financing statements signed by
the Borrower is sufficient as a financing statement and may be filed as a
financing statement in any state to perfect the security interests granted
hereby. For this purpose, the following information is set forth:


 


28

















 


Name and address of Debtors:


 


Heska Corporation

3760 Rocky Mountain Avenue

Loveland, Colorado 80538

Organizational Identification No. 2733906


 


Diamond Animal Health, Inc.

2538 43rd Street SE

Des Moines, Iowa 50317

Organizational Identification No. 170088


 


Name and address of Secured Party:


 


Wells Fargo Bank, National Association

MAC C7300-210

1740 Broadway

Denver, Colorado 80274


 


Section 3.7                                      Setoff. Each Borrower agrees that the Lender may at any
time or from time to time during any Default Period, at its sole discretion and
without demand and without notice to anyone, setoff any liability owed to such
Borrower by the Lender, whether or not due, against any Obligation, whether or
not due. In addition, whether or not a Default Period exists, each other Person
holding a participating interest in any Obligations shall have the right to
appropriate or setoff any deposit or other liability then owed by such Person
to such Borrower, whether or not due, and apply the same to the payment of said
participating interest, as fully as if such Person had lent directly to such
Borrower the amount of such participating interest.


 


Section 3.8                                      Security Interest in Special Account. Each Borrower hereby pledges, and
grants to the Lender a security interest in, all funds held in the Special
Account from time to time and all proceeds thereof, as security for the payment
of all Obligations.


 


ARTICLE IV


 


Conditions of Lending


 


Section 4.1                                      Conditions Precedent to Effectiveness. This Agreement shall be effective upon
the Lender’s receipt of all of the following, each properly executed by the
appropriate party and in form and substance satisfactory to the Lender:


 


(a)                                  This Agreement.


 


(b)                                 A
certificate of each Borrower’s Chief Financial Officer certifying that no
action of any Borrower’s directors is necessary to authorize execution of this
Agreement.


 


(c)                                  Such other documents as the Lender in its
sole discretion may require.


 


29

















 


Section 4.2                                      Conditions Precedent to All Advances and
Letters of Credit.
The Lender’s obligation to make each Advance or to issue each Letter of Credit
shall be subject to the further conditions precedent that:


 


(a)                                  the representations and warranties
contained in Article V hereof are correct on and as of such date of such
Advance as though made on and as of such date, except to the extent that such
representations and warranties relate solely to an earlier date; and


 


(b)                                 no event has occurred and is continuing,
or would result from such Advance or the issuance of such Letter of Credit, as
the case may be, which constitutes a Default or an Event of Default.


 


ARTICLE V


 


Representations and Warranties


 


Each Borrower represents and warrants to the Lender as
follows:


 


Section 5.1                                      Corporate Existence and Power; Name;
Chief Executive Office; Inventory and Equipment Locations; Tax Identification
Number. Diamond
is a corporation, duly organized, validly existing and in good standing under
the laws of the State of Iowa, Heska is a corporation, duly organized, validly
existing and in good standing under the laws of the State of Delaware. Each
Borrower is duly licensed or qualified to transact business in all
jurisdictions where the character of the property owned or leased or the nature
of the business transacted by it makes such licensing or qualification
necessary. No dissolution or termination of any Borrower has occurred, and no
notice of dissolution or articles of termination have been filed with respect
to any Borrower. Each Borrower has all requisite corporate power and authority,
to conduct its business, to own its properties and to execute and deliver, and
to perform all of its obligations under the Loan Documents. Since 1994,
each Borrower has done business solely under the names set forth in Schedule 5.1
hereto. Each Borrower’s chief executive office and principal place of business
is located at the address set forth under the name of such Borrower in Schedule 5.1
hereto, and all of such Borrower’s records relating to its business or the
Collateral are kept at that location. All Inventory and Equipment is located at
that location or at one of the other locations set forth in Schedule 5.1
hereto. Each Borrower’s tax identification number is correctly set forth in Section 3.6
hereto.


 


Section 5.2                                      Authorization of Borrowing; No Conflict
as to Law or Agreements. The execution, delivery and performance by each Borrower of the Loan
Documents and the borrowings from time to time hereunder have been duly
authorized by all necessary corporate action and do not and will not (i) require
any consent or approval of such Borrower’s Owners; (ii) require any
authorization, consent or approval by, or registration, declaration or filing
with, or notice to, any governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, or any third party, except such
authorization, consent, approval, registration, declaration, filing or notice
as has been obtained, accomplished or given prior to the date hereof; (iii) violate
any provision of any law, rule or regulation (including, without
limitation, Regulation X of the Board of Governors of the Federal Reserve
System) or of


 


30

















 


any order, writ,
injunction or decree presently in effect having applicability to such Borrower
or of such Borrower’s articles of incorporation and bylaws; (iv) result in
a breach of or constitute a default under any indenture or loan or credit
agreement or any other material agreement, lease or instrument to which such
Borrower is a party or by which it or its properties may be bound or
affected; or (v) result in, or require, the creation or imposition of any
mortgage, deed of trust, pledge, lien, security interest or other charge or
encumbrance of any nature (other than the Security Interest) upon or with
respect to any of the properties now owned or hereafter acquired by such
Borrower.


 


Section 5.3                                      Legal Agreements.


 


(a)                                  Immediately prior to execution of this
Agreement, the Former Credit Agreement constituted the legal, valid and binding
obligations of each Borrower, enforceable against each Borrower in accordance
with its terms, subject to general principles of equity and the effects of
bankruptcy and insolvency laws applicable to creditors generally. No Borrower has
any claim, defense or offset to enforcement of the Former Credit Agreement.


 


(b)                                 This Agreement constitutes and, upon due
execution by each Borrower, the other Loan Documents will constitute the legal,
valid and binding obligations of each Borrower, enforceable against such
Borrower in accordance with their respective terms, subject to general
principles of equity and the effects of bankruptcy and insolvency laws
applicable to creditors generally.


 


Section 5.4                                      Subsidiaries. No Borrower has any Subsidiaries except
as set forth in Schedule 5.4.


 


Section 5.5                                      Financial Condition; No Adverse Change. Heska has heretofore furnished to the
Lender its consolidated and consolidating financial statements and those
statements fairly present the Borrowers’ financial condition on the dates
thereof and the results of its operations and cash flows for the periods then
ended and were prepared in accordance with generally accepted accounting
principles (except for the absence of footnotes and subject to normal year-end
adjustments with respect to unaudited financial statements). Since the date of
the most recent financial statements, to the date hereof, there has been no
material adverse change in any Borrower’s business, properties or condition
(financial or otherwise).


 


Section 5.6                                      Litigation. Except as set forth in Schedule 5.6 hereto,
there are no actions, suits or proceedings pending or, to any Borrower’s
knowledge, threatened against or affecting any Borrower or the properties of
any Borrower before any court or governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, which, if determined
adversely to such Borrower, would have a material adverse effect on the
financial condition, properties or operations of such Borrower.


 


Section 5.7                                      Regulation U. No Borrower is engaged in the business
of extending credit for the purpose of purchasing or carrying margin stock
(within the meaning of Regulation U of the Board of Governors of the Federal
Reserve System), and no part of the proceeds of any


 


31

















 


Advance will be used to
purchase or carry any margin stock or to extend credit to others for the
purpose of purchasing or carrying any margin stock.


 


Section 5.8                                      Taxes. Each Borrower and its Affiliates have paid or caused
to be paid to the proper authorities when due all federal, state and local
taxes required to be withheld by each of them (other than (a) any such tax
whose amount, applicability or validity is being contested in good faith by appropriate
proceedings and for which proper reserves have been made, or (b) any such
taxes in an aggregate amount among all Borrowers less than $25,000 at any given
time). Each Borrower and its Affiliates have filed all federal, state and local
tax returns which to the knowledge of the officers of such Borrower or any
Affiliate, as the case may be, are required to be filed, and each Borrower
and its Affiliates have paid or caused to be paid to the respective taxing
authorities all taxes as shown on said returns or on any assessment received by
any of them to the extent such taxes have become due (other than (a) any
such tax whose amount, applicability or validity is being contested in good
faith by appropriate proceedings and for which proper reserves have been made,
or (b) any such taxes in an aggregate amount among all Borrowers less than
$25,000 at any given time).


 


Section 5.9                                      Titles and Liens. Each Borrower has good and absolute
title to all Collateral described in the collateral reports provided to the Lender
and all other Collateral, properties and assets (other than assets identified
as being subject to capital leases) reflected in the latest financial
statements referred to in Section 5.5 and all proceeds thereof, free and
clear of all mortgages, security interests, liens, adverse claims and
encumbrances, except for Permitted Liens. No financing statement naming any
Borrower as debtor is on file in any office except to perfect only Permitted
Liens.


 


Section 5.10                                Plans. Except as disclosed to the Lender in writing prior
to the date hereof, no Borrower nor any Affiliates of any Borrower maintains or
has maintained any Plan. To the best of its knowledge, no Borrower nor any
Affiliate of any Borrower has received any notice or has any knowledge to the
effect that it is not in full compliance with any of the requirements of ERISA,
except as set forth on Schedule 5.10. No Reportable Event or other fact or
circumstance which may have an adverse effect on the Plan’s tax qualified
status exists in connection with any Plan. No Borrower nor any Affiliate of any
Borrower has:


 


(a)                                  Any accumulated funding deficiency within
the meaning of ERISA; or


 


(b)                                 Any liability or knows of any fact or
circumstances which could result in any liability to the Pension Benefit
Guaranty Corporation, the Internal Revenue Service, the Department of Labor or
any participant in connection with any Plan (other than accrued benefits which
or which may become payable to participants or beneficiaries of any such
Plan).


 


Section 5.11                                Default. Each Borrower is in compliance with all provisions
of all agreements, instruments, decrees and orders to which it is a party or by
which it or its property is bound or affected, the breach or default of which
could have a material adverse effect on any Borrower’s financial condition,
properties or operations.


 


32

















 


Section 5.12                                Environmental Matters.


 


(a)                                  Definitions. As used in this Agreement, the
following terms shall have the following meanings:


 


(i)                                     “Environmental Law” means any federal,
state, local or other governmental statute, regulation, law or ordinance
dealing with the protection of human health and the environment.


 


(ii)                                  “Hazardous Substances” means pollutants,
contaminants, hazardous substances, hazardous wastes, petroleum and fractions
thereof, and all other chemicals, wastes, substances and materials listed in,
regulated by or identified in any Environmental Law.


 


(b)                                 To each Borrower’s best knowledge, except
as previously disclosed to Lender, there are not present in, on or under the
Premises any Hazardous Substances in such form or quantity as to create
any liability or obligation for any Borrower or for the Lender under common law
of any jurisdiction or under any Environmental Law, and no Hazardous Substances
have ever been stored, buried, spilled, leaked, discharged, emitted or released
in, on or under the Premises in such a way as to create any such liability.


 


(c)                                  Except as set forth in Schedule 5.12,
to each Borrower’s best knowledge, no Borrower has disposed of Hazardous
Substances in such a manner as to create any liability under any Environmental
Law.


 


(d)                                 Except as previously disclosed to Lender,
there are not and there never have been any requests, claims, notices,
investigations, demands, administrative proceedings, hearings or litigation,
relating in any way to the Premises or any Borrower, alleging liability under,
violation of, or noncompliance with any Environmental Law or any license,
permit or other authorization issued pursuant thereto, which could create
liability to any Borrower in excess of $25,000. To each Borrower’s best
knowledge, no such matter is threatened or impending.


 


(e)                                  To each Borrower’s best knowledge, except
as previously disclosed to Lender, each Borrower’s businesses are and have in
the past always been conducted in accordance with all Environmental Laws and
all licenses, permits and other authorizations required pursuant to any
Environmental Law and necessary for the lawful and efficient operation of such
businesses are in the Borrowers’ possession and are in full force and effect.
Except as set forth in Schedule 5.12, to each Borrower’s best knowledge,
there is no threat that any permit required under any Environmental Law will be
withdrawn, terminated, limited or materially changed.


 


(f)                                    To each Borrower’s best knowledge, except
as previously disclosed to Lender, the Premises are not and never have been
listed on the National Priorities List, the Comprehensive Environmental
Response, Compensation and Liability Information System or any similar federal,
state or local list, schedule, log, inventory or database.


 


(g)                                 Except as set forth in Schedule 5.12,
each Borrower has delivered to Lender all environmental assessments, audits,
reports, permits, licenses and other


 


33

















 


documents
describing or relating in any way to the Premises or such Borrower’s businesses
to the extent in such Borrower’s possession or control.


 


Section 5.13                                Submissions to Lender. All financial and other information
provided to the Lender by or on behalf of each Borrower in connection with such
Borrower’s request for the credit facilities contemplated hereby were true and
correct in all material respects as of the date given and, as to projections,
valuations or proforma financial statements, presented, at the time given, a
good faith opinion as to such projections, valuations and proforma condition
and results. It is recognized by the Lender that projections and forecasts
provided by or on behalf of the Borrowers, although reflecting the Borrowers’
good faith projections or forecasts based on methods and data which the
Borrowers believe to be reasonable and accurate, are not to be viewed as facts
and that actual results during the periods covered by any such projections and
forecasts may (and are likely to) differ from the projected or forecasted
results. Notwithstanding the foregoing, it is recognized by the Borrowers that
the Lender will rely on, among other things, the Borrowers’ projections in
setting financial covenants set forth in Articles VI and VII hereof, and
nothing in this Section 5.13 shall be construed as a waiver of the Lender’s
right to rely on such covenants or to exercise its remedies in case of a breach
of such covenants.


 


Section 5.14                                Financing Statements. Each Borrower has provided to the
Lender signed financing statements sufficient when filed to perfect the
Security Interest and the other security interests created by the Security
Documents. When such financing statements are filed in the offices noted
therein, the Lender will have a valid and perfected security interest in all
Collateral and all other collateral described in the Security Documents which
is capable of being perfected by filing financing statements. None of the
Collateral or other collateral covered by the Security Documents is or will
become a fixture on real estate, unless a sufficient fixture filing is in
effect with respect thereto.


 


Section 5.15                                Rights to Payment. To the best of each Borrower’s
knowledge, except as disclosed to Lender, each right to payment and each
instrument, document, chattel paper and other agreement constituting or
evidencing Collateral or other collateral covered by the Security Documents is
(or, in the case of all future Collateral or such other collateral, will be
when arising or issued) the valid, genuine and legally enforceable obligation,
subject to no defense, setoff or counterclaim, of the account debtor or other
obligor named therein or in such Borrower’s records pertaining thereto as being
obligated to pay such obligation.


 


Section 5.16                                Financial Solvency. Both before and after giving effect to
all of the transactions contemplated in the Loan Documents, no Borrower, and no
Affiliate of any Borrower:


 


(a)                                  was or will be insolvent, as that term is
used and defined in Section 101(32) of the United States Bankruptcy Code
and Section 2 of the Uniform Fraudulent Transfer Act;


 


(b)                                 has unreasonably small capital or is
engaged or about to engage in a business or a transaction for which any
remaining assets of such Borrower or such Affiliate are unreasonably small;


 


34

















 


(c)                                  by executing, delivering or performing
its obligations under the Loan Documents or other documents to which it is a
party or by taking any action with respect thereto, intends to, nor believes
that it will, incur debts beyond its ability to pay them as they mature;


 


(d)                                 by executing, delivering or performing
its obligations under the Loan Documents or other documents to which it is a party
or by taking any action with respect thereto, intends to hinder, delay or
defraud either its present or future creditors; and


 


(e)                                  at this time contemplates filing a
petition in bankruptcy or for an arrangement or reorganization or similar
proceeding under any law of any jurisdiction, or, to the best knowledge of any
Borrower, is the subject of any actual, pending or threatened bankruptcy,
insolvency or similar proceedings under any law of any jurisdiction.


 


ARTICLE VI


 


Borrower’s Affirmative Covenants


 


So long as the Obligations shall remain unpaid, or the Credit Facility
shall remain outstanding, each Borrower will comply with the following
requirements, unless the Lender shall otherwise consent in writing:


 


Section 6.1                                      Reporting Requirements. Heska will deliver, or cause to be
delivered, to the Lender each of the following, which shall be in form and
detail acceptable to the Lender:


 


(a)                                  as soon as available, and in any event
within 90 days after the end of each fiscal year of Heska, Heska’s audited financial
statements with the unqualified opinion of independent certified public
accountants selected by Heska and acceptable to the Lender, which annual
financial statements shall include Heska’s balance sheet as at the end of such
fiscal year and the related statements of Heska’s income, retained earnings and
cash flows for the fiscal year then ended, prepared on a consolidating and
consolidated basis to include any Affiliates, all in reasonable detail and
prepared in accordance with GAAP, together with (i) copies of all
management letters prepared by such accountants and (ii) a certificate of
Heska’s chief financial officer stating that to the best of his knowledge such
financial statements have been prepared in accordance with GAAP and whether or
not such officer has knowledge of the occurrence of any Default or Event of
Default hereunder and, if so, stating in reasonable detail the facts with
respect thereto;


 


(b)                                 within 5 business days of filing with the
United States Securities and Exchange Commission, a copy of each of Heska’s
annual or quarterly reports on forms 10K or 10Q;


 


(c)                                  as soon as available and in any event
within 20 days after the end of each month (or, in the case of months that
coincide with the end of the Borrowers’ fiscal quarter, within 30 days after
the end of such month), an unaudited/internal balance sheet and statement of
income and retained earnings of Heska as at the end of and for such month and
for the year to date period then ended, prepared on a consolidated and
consolidating basis in accordance with GAAP, subject to year-end audit
adjustments; and


 


35

















 


accompanied by a
certificate of Heska’s chief financial officer or principal accounting officer,
substantially in the form of Exhibit B hereto, stating (i) that
to the best of his knowledge such financial
statements have been prepared in accordance with GAAP and fairly represent each
Borrower’s financial condition and the results of its operations, subject to
year-end audit adjustments, (ii) whether or not such officer has knowledge
of the occurrence of any Default or Event of Default hereunder not theretofore
reported and remedied and, if so, stating in reasonable detail the facts with
respect thereto, and (iii) all relevant facts in reasonable detail to
evidence, and the computations as to, whether or not each Borrower is in
compliance with the requirements set forth in Sections 6.12, 6.13, 6.14, 6.15,
and 7.10;


 


(d)                                 weekly, or more frequently if the Lender
so requires, sales journals,  collection
reports, and credit memos of each Borrower;


 


(e)                                  Monthly within 20 days after the end of
each month, agings of each Borrower’s accounts receivable and its accounts
payable, an inventory certification report, and a calculation of each Borrower’s
Accounts, Eligible Accounts, Inventory and Eligible Inventory as at the end of
such month or shorter time period;


 


(f)                                    at least 30 days before the beginning of
each fiscal year of Heska, the projected balance sheets and income statements
for each month of such year, each in reasonable detail, representing each
Borrower’s good faith projections and certified by such Borrower’s chief
financial officer as being the most accurate projections available and
identical to the projections used by such Borrower for internal planning
purposes, together with such supporting schedules and information as the Lender
may in its discretion require;


 


(g)                                 immediately after the commencement
thereof, notice in writing of all litigation and of all proceedings before any
governmental or regulatory agency affecting any Borrower of the type described
in Section 5.12 or which seek a monetary recovery against any Borrower in
excess of $50,000;


 


(h)                                 as promptly as practicable (but in any
event not later than five business days) after an officer of any Borrower
obtains knowledge of the occurrence of any breach, default or event of default
under any Security Document or any event which constitutes a Default or Event
of Default hereunder, notice of such occurrence, together with a detailed
statement by a responsible officer of such Borrower of the steps being taken by
such Borrower to cure the effect of such breach, default or event;


 


(i)                                     as soon as possible and in any event
within 30 days after any Borrower knows or has reason to know that any
Reportable Event with respect to any Plan has occurred, the statement of such
Borrower’s chief financial officer setting forth details as to such Reportable
Event and the action which such Borrower proposes to take with respect thereto,
together with a copy of the notice of such Reportable Event to the Pension
Benefit Guaranty Corporation;


 


36

















 


(j)                                     as soon as possible, and in any event
within 10 days after any Borrower fails to make any quarterly contribution
required with respect to any Plan under Section 412(m) of the Internal
Revenue Code of 1986, as amended, the statement of such Borrower’s chief
financial officer setting forth details as to such failure and the action which
such Borrower proposes to take with respect thereto, together with a copy of
any notice of such failure required to be provided to the Pension Benefit
Guaranty Corporation;


 


(k)                                  promptly upon knowledge thereof, notice
of any loss of or material damage to any Collateral or other collateral covered
by the Security Documents or of any substantial adverse change in the
Collateral or such other collateral or the prospect of payment thereof, in each
case involving a loss, damage or change of $50,000 of more;


 


(l)                                     promptly upon their distribution, copies
of all financial statements, reports and proxy statements which any Borrower
shall have sent to its stockholders;


 


(m)                               promptly after the sending or filing
thereof, copies of all regular and periodic reports which any Borrower shall
file with the Securities and Exchange Commission or any national securities
exchange;


 


(n)                                 promptly upon filing, copies of the state
and federal tax returns and all schedules thereto of each Borrower;


 


(o)                                 promptly upon knowledge thereof, notice
of any Borrower’s violation of any law, rule or regulation, the
non-compliance with which could materially and adversely affect any Borrower’s
business or its financial condition; and


 


(p)                                 from time to time, with reasonable
promptness, any and all receivables schedules, collection reports, deposit
records, equipment schedules, copies of invoices to account debtors, shipment
documents and delivery receipts for goods sold, and such other material,
reports, records or information as the Lender may request.


 


(q)                                 Promptly upon knowledge thereof, each
Borrower will deliver to the Lender notice of any commercial tort claims it may bring
against any person, including the name and address of each defendant, a summary
of the facts, an estimate of such Borrower’s damages, copies of any complaint
or demand letter submitted by such Borrower, and such other information as the
Lender may request.


 


Section 6.2                                      Books and Records; Inspection and
Examination. Each
Borrower will keep accurate books of record and account for itself pertaining to
the Collateral and pertaining to such Borrower’s business and financial
condition and such other matters as the Lender may from time to time
request in which true and complete entries will be made in accordance with GAAP
and, upon the Lender’s request, will permit any officer, employee, attorney or
accountant for the Lender to audit, review, make extracts from or copy any and
all corporate and financial books and records of such Borrower at all times
during ordinary business hours, to send and discuss with account debtors and
other obligors requests for verification of amounts owed to such Borrower, and
to discuss such Borrower’s affairs with any of its Directors, officers,
employees or agents. Each Borrower will permit the Lender, or its employees,
accountants, attorneys or agents,


 


37

















 


to examine and inspect
any Collateral, other collateral covered by the Security Documents or any other
property of such Borrower at any time during ordinary business hours. The
Borrowers hereby irrevocably authorize all accountants and third parties to
disclose and deliver to the Lender, at the Borrowers’ expense, all financial
information, books and records, work papers, management reports and other
information in their possession regarding the Borrowers.


 


Section 6.3                                      Account Verification. The Lender may at any time and
from time to time send or require any Borrower to send requests for
verification of accounts or notices of assignment to account debtors and other
obligors. The Lender may also at any time and from time to time telephone
account debtors and other obligors to verify accounts.


 


Section 6.4                                      Compliance with Laws.


 


(a)                                  Each Borrower will (i) comply with
the requirements of applicable laws and regulations, the non-compliance with
which would materially and adversely affect its business or its financial
condition and (ii) use and keep the Collateral, and require that others
use and keep the Collateral, only for lawful purposes, without violation of any
federal, state or local law, statute or ordinance.


 


(b)                                 Without limiting the foregoing
undertakings, each Borrower specifically agrees that it will comply in all
material respects with all applicable Environmental Laws and obtain and comply
with all permits, licenses and similar approvals required by any Environmental
Laws, and will not generate, use, transport, treat, store or dispose of any
Hazardous Substances in such a manner as to create any material liability or
obligation under the common law of any jurisdiction or any Environmental Law.


 


Section 6.5                                      Payment of Taxes and Other Claims;
Payment of Past-Due Accounts. Each Borrower will pay or discharge, when due, (a) all
taxes, assessments and governmental charges levied or imposed upon it or upon
its income or profits, upon any properties belonging to it (including, without
limitation, the Collateral) or upon or against the creation, perfection or
continuance of the Security Interest, prior to the date on which penalties
attach thereto, (b) all federal, state and local taxes required to be
withheld by it, and (c) all lawful claims for labor, materials and
supplies which, if unpaid, might by law become a lien or charge upon any
properties of such Borrower; provided, that no Borrower shall be required to
pay any such tax, assessment, charge or claim whose amount, applicability or
validity is being contested in good faith by appropriate proceedings and for
which proper reserves have been made. No Borrower shall have any Past Due
Payables.


 


Section 6.6                                      Maintenance of Properties.


 


(a)                                  Each Borrower will keep and maintain the
Collateral, the other collateral covered by the Security Documents and all of
its other properties necessary or useful in its business in good condition,
repair and working order (normal wear and tear excepted) and will from time to
time replace or repair any worn, defective or broken parts; provided, however,
that nothing in this Section 6.6 shall prevent any Borrower from
discontinuing the operation and maintenance of any of its properties if such


 


38

















 


discontinuance is,
in such Borrower’s judgment, desirable in the conduct of such Borrower’s
business and not disadvantageous in any material respect to the Lender.


 


(b)                                 Each Borrower will defend the Collateral
against all claims or demands of all persons (other than the Lender) claiming
the Collateral or any interest therein.


 


(c)                                  Each Borrower will keep all Collateral
and other collateral covered by the Security Documents free and clear of all
security interests, liens and encumbrances except Permitted Liens.


 


Section 6.7                                      Insurance. Each Borrower will obtain and at all times maintain
insurance with insurers believed by such Borrower to be responsible and
reputable, in such amounts and against such risks as may from time to time
be reasonably required by the Lender, but in all events in such amounts and
against such risks as is usually carried by companies engaged in similar
business and owning similar properties in the same general areas in which such
Borrower operates. Without limiting the generality of the foregoing, each
Borrower will at all times keep all tangible Collateral insured against risks
of fire (including so-called extended coverage), theft, collision (for
Collateral consisting of motor vehicles) and such other risks and in such
amounts as the Lender may reasonably request, with any loss payable to the
Lender to the extent of its interest, and all policies of such insurance shall
contain a lender’s loss payable endorsement for the Lender’s benefit acceptable
to the Lender. All policies of liability insurance required hereunder shall
name the Lender as an additional insured.


 


Section 6.8                                      Preservation of Existence. Each Borrower will preserve and
maintain its existence and all of its rights, privileges and franchises
necessary or desirable in the normal conduct of its business and shall conduct
its business in an orderly, efficient and regular manner.


 


Section 6.9                                      Delivery of Instruments, etc. Upon request by the Lender, each
Borrower will promptly deliver to the Lender in pledge all instruments,
documents and chattel papers constituting Collateral, duly endorsed or assigned
by such Borrower.


 


Section 6.10                                Collateral Accounts.


 


(a)                                  If, notwithstanding the instructions to
debtors to make payments to the Lockbox, any Borrower receives any payments on
Receivables, such Borrower shall deposit such payments into such Borrower’s
Collateral Account. Until so deposited, such Borrower shall hold all such
payments in trust for and as the property of the Lender and shall not commingle
such payments with any of its other funds or property; provided, however, that
the foregoing shall not be construed to allow the Lender to withhold any such
payments after full payment and discharge of all Obligations.


 


(b)                                 Amounts deposited in any Collateral
Account shall not bear interest and shall not be subject to withdrawal by any
Borrower, except after full payment and discharge of all Obligations; provided,
however, that if the Borrowers’ only outstanding Obligations are principal owing
under the Equipment Note and the Term Loan B Note, and if no such principal
amount is due, the Lender agrees to remit such amounts to such Borrower’s
demand deposit account maintained with Wells Fargo Bank.


 


39

















 


(c)                                  All deposits in any Collateral Account
shall constitute proceeds of Collateral and shall not constitute payment of the
Obligations. The Lender shall from time to time within one Banking Day, apply
deposited funds in each Collateral Account to the payment of the Obligations,
in any order or manner of application satisfactory to the Lender, by
transferring such funds to the Lender’s general account.


 


(d)                                 All items deposited in any Collateral
Account shall be subject to final payment. If any such item is returned
uncollected, the applicable Borrower will immediately pay the Lender, or, for
items deposited in a Collateral Account, the bank maintaining such account, the
amount of that item, or such bank at its discretion may charge any
uncollected item to any commercial account or other account belonging to the
Borrower to whom the item was payable.


 


Section 6.11                                Performance by the Lender. If any Borrower at any time fails to
perform or observe any of the foregoing covenants contained in this Article VI
or elsewhere herein, and if such failure shall continue for a period of ten
calendar days after the Lender gives such Borrower written notice thereof (or
in the case of the agreements contained in Sections 6.5, 6.7 and 6.10,
immediately upon the occurrence of such failure, without notice or lapse of
time), the Lender may, but need not, perform or observe such covenant on
behalf and in the name, place and stead of such Borrower (or, at the Lender’s
option, in the Lender’s name) and may, but need not, take any and all other
actions which the Lender may reasonably deem necessary to cure or correct
such failure (including, without limitation, the payment of taxes, the
satisfaction of security interests, liens or encumbrances, the performance of
obligations owed to account debtors or other obligors, the procurement and
maintenance of insurance, the execution of assignments, security agreements and
financing statements, and the endorsement of instruments); and such Borrower
shall thereupon pay to the Lender on demand the amount of all monies expended
and all costs and expenses (including reasonable attorneys’ fees and legal
expenses) incurred by the Lender in connection with or as a result of the
performance or observance of such agreements or the taking of such action by
the Lender, together with interest thereon from the date expended or incurred
at the Revolving Floating Rate. To facilitate the Lender’s performance or
observance of such covenants of the Borrowers, each Borrower hereby irrevocably
appoints the Lender, or the Lender’s delegate, acting alone, as such Borrower’s
attorney in fact (which appointment is coupled with an interest) with the right
(but not the duty) from time to time to create, prepare, complete, execute,
deliver, endorse or file in the name and on behalf of such Borrower any and all
instruments, documents, assignments, security agreements, financing statements,
applications for insurance and other agreements and writings required to be
obtained, executed, delivered or endorsed by such Borrower under this Section 6.11.


 


Section 6.12                                Minimum Capital. Heska will maintain, on a consolidated
basis, as of each date listed below, its Capital at an amount not less than the
amount set forth opposite such date (amounts in parentheses denote negative numbers):


 


40

















 


[***] – Certain information on this page have
been omitted and filed separately with the Securities and Exchange Commission. Confidential
treatment has been requested with respect to the omitted portions.


 




	
  Date

  	
   

  	
  Minimum Capital

  
	
  November 30, 2005

  	
   

  	
  [***]

  
	
  December 31, 2005

  	
   

  	
  [***]

  
	
  January 1, 2006

  	
   

  	
  [***]

  
	
  February 28, 2006

  	
   

  	
  [***]

  
	
  March 31, 2006

  	
   

  	
  [***]

  
	
  April 30, 2006

  	
   

  	
  [***]

  
	
  May 31, 2006

  	
   

  	
  [***]

  
	
  June 30, 2006

  	
   

  	
  [***]

  
	
  July 31, 2006

  	
   

  	
  [***]

  
	
  August 31, 2006

  	
   

  	
  [***]

  
	
  September 30, 2006

  	
   

  	
  [***]

  
	
  October 31, 2006

  	
   

  	
  [***]

  
	
  November 30, 2006

  	
   

  	
  [***]

  
	
  December 31, 2006

  	
   

  	
  [***]

  
	
  January 31, 2007
  and the last day

  of each month thereafter

  	
   

  	
  [***]

  






 


Amounts corresponding to dates after December 31, 2005 shall be
adjusted upward or downward, respectively, on a dollar-for-dollar basis, by the
amount the Borrowers’ aggregate actual Capital on December 31, 2005 per
the Borrowers’ audited financial statements exceeds or falls short of [***].


 


In addition to the foregoing, if Heska makes [***] during the fiscal
year ending December 31, 2006, as contemplated by Section 7.4(a)(ix),
to the extent [***] is expensed in accordance with GAAP, the Minimum Capital
amounts listed above occurring [***] shall be adjusted downward on a dollar-for-dollar
basis by the amount of such expense, not to exceed $1,000,000.


 


Section 6.13                                Minimum Net Income. Heska will achieve, on a consolidated
basis, during each period described below, Net Income in an amount not less
than the amount set forth opposite such period (amounts in parentheses denote
negative numbers):


 


41

















 


[***] – Certain information on this page have
been omitted and filed separately with the Securities and Exchange Commission. Confidential
treatment has been requested with respect to the omitted portions.


 




	
  Period

  	
   

  	
  Minimum Net Income

  
	
  Twelve months ending December 31,
  2005

  	
   

  	
  [***]

  
	
  Three months ending March 31,
  2006

  	
   

  	
  [***]

  
	
  Six months ending June 30,
  2006

  	
   

  	
  [***]

  
	
  Nine months ending September 30,
  2006

  	
   

  	
  [***]

  
	
  Twelve months ending December 31,
  2006

  	
   

  	
  [***]

  






 


In addition to the foregoing, if Heska makes [***] during the fiscal
year ending December 31, 2006, as contemplated by Section 7.4(a)(ix),
to the extent [***] is expensed in accordance with GAAP, the Minimum Capital
amounts listed above occurring [***] shall be adjusted downward on a
dollar-for-dollar basis by the amount of such expense, not to exceed
$1,000,000.


 


Section 6.14                                Minimum Liquidity. Heska will maintain, on a consolidated
basis, as of the last day of each month, its Liquidity at an amount not less
than $1,500,000.


 


Section 6.15                                Minimum Individual Book Net Worth. Each Borrower shall at all times
maintain its Book Net Worth, calculated without regard to any Subsidiary or
other Affiliate, as shown on the “Total stockholders’ equity” line for each
Borrower in Exhibit C, at an amount greater than zero.


 


Section 6.16                                New Covenants. On or before November 30, 2006,
the Borrowers and the Lender shall agree on new covenant levels for Sections
6.12, 6.13, 6.14, 7.4(a)(v) and 7.10 for periods after such date. The new
covenant levels will be based on (i) the Borrowers’ projections for such
periods and (ii) the year to date financial results of Heska, on a
consolidated basis, and such new covenant levels shall be no less stringent
than the present levels. An Event of Default shall occur if the new covenants
are not agreed to by the above date.


 


ARTICLE VII


 


Negative Covenants


 


So long as the Obligations shall remain unpaid, or the Credit Facility shall
remain outstanding, each Borrower agrees that, without the Lender’s prior
written consent:


 


Section 7.1                                      Liens. Such Borrower will not create, incur or suffer to
exist any mortgage, deed of trust, pledge, lien, security interest, adverse
claim, assignment or transfer (collectively, “Liens”) upon or of any of its
assets, now owned or hereafter acquired, to secure any indebtedness; excluding,
however, from the operation of the foregoing, the following
(collectively, “Permitted Liens”):


 


42

















 


(a)                                  in the case of any of such Borrower’s
property which is not Collateral or other collateral described in the Security
Documents, mortgages, deeds of trust, covenants, restrictions, rights,
easements and minor irregularities in title which do not materially interfere
with such Borrower’s business or operations as presently conducted;


 


(b)                                 Liens in existence on the date hereof and
listed in Schedule 7.1 hereto;


 


(c)                                  the Security Interest and Liens and
security interests created by the Security Documents;


 


(d)                                 purchase money Liens given,
simultaneously with or within one hundred twenty (120) days after the
acquisition or construction of real property or tangible personal property
(including vendor’s rights under purchase contracts under an agreement whereby
title is retained for the purpose of securing the purchase price thereof and
lessors’ liens under capitalized lease obligations) or any Lien given to a
financial institution financing the acquisition or construction of the real
property or tangible personal property, on real property or tangible personal
property hereafter acquired or constructed and not heretofore owned by any
Borrower; provided, however, that in each such case such Lien (i) does not
exceed the amount paid for such acquisition or construction, and (ii) is
limited to such acquired or constructed real or tangible personal property;


 


(e)                                  carriers’, mechanics’, materialmen’s,
suppliers’, and other like Liens and charges arising in the ordinary course of
business securing obligations that are not incurred in connection with the
obtaining of any advance or credit and which are not overdue, or are being
contested in good faith by appropriate proceedings;


 


(f)                                    Liens arising in connection with worker’s
compensation, unemployment insurance and progress payments under government
contracts and liens securing the performance of bids, tenders, leases,
contracts (other than for the repayment of borrowed money), statutory
obligations, surety customs and appeal bonds and other obligations of like
nature, incurred, in each case, in the ordinary course of business;


 


(g)                                 judgment liens in existence in an amount
not more than $100,000;


 


(h)                                 zoning restrictions, easements, licenses,
encumbrances, reservations, provisions, covenants, conditions, waivers,
restrictions on the use of property or minor irregularities of title (and with
respect to leasehold interests, mortgages, obligations, liens and other
encumbrances incurred, created, assumed or permitted to exist and arising by, through
or under a landlord or owner of the leased property, with or without consent of
the lessee) as normally exist with respect to similar properties which do not
in the aggregate materially impair the use thereof in the operation of any
Borrower’s business;


 


(i)                                     any preexisting Lien (whether or not
assumed) on any real property or tangible personal property hereafter acquired
by any Borrower; provided, however, that in each such case such Lien is limited
to such acquired real or tangible personal property; provided, further,
that proceeds from a Term Advance are not used to acquire such real
property or tangible personal property;


 


43

















 


(j)                                     extensions, renewals and replacements of
the Liens referred to in clause (b), (d) or (i) above; provided,
any such extension, renewal or replacement liens shall be limited to the
property or assets covered by the Lien extended, renewed or replaced;


 


(k)                                  leases, subleases, licenses and
sublicenses to third parties of patents, patent
applications, trademarks and copyrights, in each case in the ordinary course of
its business as currently conducted;


 


(l)                                     Liens of brokers under brokerage
agreements entered into in the ordinary course of business as presently
conducted;


 


(m)                               Diamond’s grant of a security interest in
the Farm Mortgaged Property to secure existing indebtedness payable to Agri
Laboratories, Ltd. or to secure new indebtedness for borrowed money described
in Section 7.2(g), in each case on terms acceptable to the Lender in its
reasonable discretion; and


 


(n)                                 Diamond’s grant of a security interest in
the Factory Mortgaged Property to secure new indebtedness for borrowed money
described in Section 7.2(h).


 


Section 7.2                                      Indebtedness. Such Borrower will not incur, create,
assume or permit to exist any indebtedness or liability on account of deposits
or advances or any indebtedness for borrowed money or letters of credit issued
on such Borrower’s behalf, or any other indebtedness or liability evidenced by
notes, bonds, debentures or similar obligations, except:


 


(a)                                  indebtedness arising hereunder;


 


(b)                                 indebtedness of such Borrower in
existence on the date hereof and listed in Schedule 7.2 hereto;


 


(c)                                  indebtedness of such Borrower (i) relating
to liens of such Borrower permitted in accordance with Section 7.1, (ii) arising
out of guaranties of such Borrower permitted under Section 7.3, (iii) arising
for such Borrower as a result of an investment in or loan to such Borrower by
another Borrower in accordance with Section 7.4, or (iv) in the case
of Heska, at all times on or before January 31, 2006, indebtedness to
Heska Holding AG in an amount not to exceed $1,500,000, and thereafter, zero.


 


(d)                                 unsecured trade debt incurred, and cash
advances received from customers, in each case in the ordinary course of
business;


 


(e)                                  indebtedness of any Person existing at
the time such Person is merged with or into such Borrower, to the extent the
Lender consents to such merger in accordance with Section 7.7, and
provided that such Debt is not incurred in connection with or in contemplation
of such merger;


 


(f)                                    extensions, renewals and replacements of
the debt referred to in clause (b) or (c) above; provided that
any such extension, renewal or replacement shall be in an


 


44

















 


amount not greater
than, and on terms no less favorable to such Borrower (other than interest rate
increases) than, the amount extended, renewed or replaced;


 


(g)                                 Diamond’s incurrence of indebtedness of
not less than [***] nor more than [***] secured by the Farm Mortgaged Property,
in each case on terms acceptable to the Lender in its reasonable discretion,
but in no event on terms less favorable to the Borrowers than the terms of the
Term Loan B Note; and upon receipt of proceeds of such indebtedness, the Lender
will release its security interest in the Farm Mortgaged Property;


 


(h)                                 Diamond’s incurrence of indebtedness not
less than [***] nor more than [***] secured by the Factory Mortgaged Property
in connection with a refinancing of the Term Loan B Note, provided that (a) the
proceeds of such indebtedness are sufficient to repay, and in fact are used to
repay, the Term Loan B Note in its entirety, with the balance of such proceeds
(if any) being deposited in Diamond’s Collateral Account for repayment of
Revolving Advances, and (b) the terms of such indebtedness are acceptable
to the Lender in its reasonable discretion, but in no event on terms less
favorable to the Borrowers than the terms of the Term Loan B Note. In the case
of such a refinancing, the Lender agrees that it will release its security
interest in the Factory Mortgaged Property upon receipt of the proceeds of such
permitted refinancing;


 


(i)                                     other Debt in an amount not to exceed
$100,000; and


 


(j)                                     capital leases to the extent the entry
into such leases does not cause a Default or Event of Default hereunder.


 


Section 7.3                                      Guaranties. Such Borrower will not assume, guarantee, endorse or
otherwise become directly or contingently liable in connection with any
obligations of any other Person, except:


 


(a)                                  the endorsement of negotiable instruments
by such Borrower for deposit or collection or similar transactions in the
ordinary course of business;


 


(b)                                 guaranties, endorsements and other direct
or contingent liabilities in connection with the obligations of other Persons,
in existence on the date hereof and listed in Schedule 7.2 hereto; and


 


(c)                                  guaranties of the obligations of one
Borrower given by another Borrower.


 


Section 7.4                                      Investments and Subsidiaries.


 


(a)                                  Such Borrower will not purchase or hold
beneficially any stock or other securities or evidences of indebtedness of,
make or permit to exist any loans or advances to, or make any investment or
acquire any interest whatsoever in, any other Person, including specifically but
without limitation any partnership or joint venture, except:


 


(i)                                     investments in direct obligations of the
United States of America or any agency or instrumentality thereof whose
obligations constitute full faith


 


45

















 


and credit
obligations of the United States of America having a maturity of one year or
less, commercial paper issued by U.S. corporations rated “A-1” or “A-2” by
Standard & Poors Corporation or “P-1” or “P-2” by Moody’s Investors
Service or certificates of deposit or bankers’ acceptances having a maturity of
one year or less issued by members of the Federal Reserve System having
deposits in excess of $100,000,000 (which certificates of deposit or bankers’
acceptances are fully insured by the Federal Deposit Insurance Corporation);


 


(ii)                                  advances or loans to such Borrower’s
officers and employees not exceeding at any one time an aggregate of $200,000;


 


(iii)                               advances in the form of progress
payments, prepaid rent not exceeding two months or security deposits;


 


(iv)                              unless a Default Period exists or would
exist immediately after or as a result of any such loan, advance or capital
contribution, loans, advances or capital contributions by Heska to any
Subsidiary that is also a Borrower;


 


(v)                                 unless a Default Period exists or would
exist immediately after or as a result of any such advance or contribution,
advances or contributions during the fiscal year ending December 31, 2006,
by Heska to any Subsidiary that is not a Borrower; provided, however, that (A) both
before and after such advance or contribution Heska’s Tangible Net Worth must
equal or exceed $100,000 and (B) all contributions and advances made in
reliance on this subsection (v) shall not exceed $700,000 in the
aggregate during the fiscal year ending December 31, 2006;


 


(vi)                              investments, including investments in
Subsidiaries, existing on the date hereof and listed in Schedule 7.4;


 


(vii)                           investments in the following items
arising in the ordinary course of business: (A) prepaid expenses and negotiable
instruments held for collection; (B) Accounts (and Investments obtained in
exchange or settlement of Accounts for which such Borrower has determined that
collection is not likely); and (C) lease, utility and worker’s
compensation, performance and other similar deposits;


 


(viii)                        unless a Default Period exists or would
exist immediately after or as a result of any such loan or advance, loans or
advances by any Subsidiary that is also a Borrower to Heska; provided, however,
that both before and after such loan or advance both Heska’s Tangible Net Worth
and such Subsidiary’s Tangible Net Worth must equal or exceed $100,000; and


 


(ix)                                unless (A) a Default Period exists
or would exist immediately after or as a result of any such purchase or
investment, or (B) Heska, on a consolidated basis, achieves Net Income of
less than ($500,000) during the fiscal year ending December 31, 2005, a
purchase of intellectual property rights concerning immunodiagnostic technology
or an investment in an equity position in a company in the immunodiagnostic
industry, not to exceed $1,000,000, which


 


46

















 


purchase or
investment shall occur during the fiscal year ending December 31, 2006.


 


(b)                                 Such Borrower will not create or permit
to exist any Subsidiary; provided, however, that so long as no Default Period
exists, upon written request by such Borrower, the Lender shall not withhold
its consent to the creation of (i) any domestic subsidiary provided such
Borrower causes such subsidiary to deliver to the Lender a guaranty, a security
agreement, and UCC financing statements and other documents requested by the
Lender to create a first priority security interest on behalf of the Lender, or
to perfect such security interest, in all assets of such subsidiary, or (ii) any
foreign subsidiary.


 


Section 7.5                                      Dividends. Such Borrower will not declare or pay any dividends
(other than dividends payable solely in stock of such Borrower) on any class of
its stock or make any payment on account of the purchase, redemption or other
retirement of any shares of such stock or make any distribution in respect
thereof, either directly or indirectly; provided, however, that so long as no
Default Period then exists or would occur immediately following or as a result
of such action, (A) any Borrower that is a Subsidiary of Heska may pay
dividends to Heska so long as such Subsidiary’s Tangible Net Worth both before
and after such dividend equals or exceeds $100,000; and (B) Heska may repurchase
capital stock of Heska held by any employee provided Heska is required to do so
pursuant to any employee equity subscription agreement, stock ownership plan or
stock option agreement in effect from time to time; and provided further that
the aggregate price paid for all such repurchased, redeemed, acquired or
retired capital shall not exceed $100,000 during any fiscal year.
Notwithstanding the foregoing, the exercise of stock options for the purchase
of Heska’s capital stock shall not, by means of any deemed repurchase of shares
as a result of a cashless exercise or otherwise, cause a breach of this Section 7.5.


 


Section 7.6                                      Sale or Transfer of Assets; Suspension of
Business Operations.
Such Borrower will not sell, lease, assign, transfer or otherwise dispose of (i) the
stock of any Subsidiary, (ii) all or a substantial part of its
assets, or (iii) any Collateral or any interest therein (whether in one
transaction or in a series of transactions) to any other Person other than
(A) sale of Inventory in the ordinary course of business; (B) licenses
and sublicenses to third parties of patents, patent applications, trademarks
and copyrights, in each case in the ordinary course of its business as
currently conducted; (C) the sale of used equipment, provided that the
aggregate amount of any such sales of equipment shall not exceed $100,000
during any year, unless the proceeds of such sales are delivered to the Lender
for application against the Obligations; (D) sales or other dispositions
of Investments permitted by Section 7.4; (E) sales of defaulted
receivables to a collection agency in the ordinary course of business; and (F) other
sales of assets with book value of not more than $100,000 during any fiscal
year, for fair and reasonable consideration, to the extent such sale could not
reasonably be expected to have a material adverse effect. Such Borrower will
not in any manner transfer any property without prior or present receipt of
full and adequate consideration.


 


Section 7.7                                      Consolidation and Merger; Asset
Acquisitions.
Such Borrower will not consolidate with or merge into any Person, or permit any
other Person to merge into it, or acquire (in a transaction analogous in
purpose or effect to a consolidation or merger) all or substantially all the
assets of any other Person; provided, however, that the Lender will not
unreasonably withhold its consent to any merger or acquisition.


 


47

















 


Section 7.8                                      Restrictions on Nature of Business. Such Borrower will not engage in any
line of business materially different from that presently engaged in by such
Borrower and/or lines of business reasonably related or supplementing thereto
and will not purchase, lease or otherwise acquire assets not related to its
business.


 


Section 7.9                                      Accounting. Such Borrower will not adopt any material change in
accounting principles other than as required by GAAP, the SEC, or NASDAQ. Such
Borrower will not adopt, permit or consent to any change in its fiscal year.


 


Section 7.10                                Capital Expenditures. The Borrowers, together with any
Affiliates, will not incur or contract to incur, in the aggregate, Capital
Expenditures in the aggregate during the fiscal year-to-date period ending on
any date described below in excess of the amount set forth opposite such
period:


 




	
  Date

  	
   

  	
  Maximum Capital

  Expenditures

  	
   

  
	
  November 30, 2005

  	
   

  	
   

  	
  [***]

  	
   

  
	
  December 31, 2005

  	
   

  	
   

  	
  [***]

  	
   

  
	
  January 1, 2006

  	
   

  	
   

  	
  [***]

  	
   

  
	
  February 28, 2006

  	
   

  	
   

  	
  [***]

  	
   

  
	
  March 31, 2006

  	
   

  	
   

  	
  [***]

  	
   

  
	
  April 30, 2006

  	
   

  	
   

  	
  [***]

  	
   

  
	
  May 31, 2006

  	
   

  	
   

  	
  [***]

  	
   

  
	
  June 30, 2006

  	
   

  	
   

  	
  [***]

  	
   

  
	
  July 31, 2006

  	
   

  	
   

  	
  [***]

  	
   

  
	
  August 31, 2006

  	
   

  	
   

  	
  [***]

  	
   

  
	
  September 30, 2006

  	
   

  	
   

  	
  [***]

  	
   

  
	
  October 31, 2006

  	
   

  	
   

  	
  [***]

  	
   

  
	
  November 30, 2006

  	
   

  	
   

  	
  [***]

  	
   

  
	
  December 31, 2006

  	
   

  	
   

  	
  [***]

  	
   

  






 


Section 7.11                                Discounts, etc. Such Borrower will not, following and
during the continuance of an Event of Default, if requested by the Lender,
grant any discount, credit or allowance to any customer of such Borrower or
accept any return of goods sold, or modify, amend, subordinate, cancel or
terminate the obligation of any account debtor or other obligor of such
Borrower.


 


Section 7.12                                Defined Benefit Pension Plans. Such Borrower will not adopt, create,
assume or become a party to any defined benefit pension plan, unless disclosed
to the Lender pursuant to Section 5.10.


 


Section 7.13                                Other Defaults. Such Borrower will not permit any
breach, default or event of default to occur under any note, loan agreement,
indenture, lease, mortgage, contract for deed, security agreement or other
contractual obligation binding upon such Borrower if the effect of such breach,
default or event of default is to permit the lender thereof to accelerate the
payment of $100,000 or more; provided, however, that such
Borrower shall not be in breach hereunder so long as such breach, default or
event of default is being contested in good faith by


 


48

















 


appropriate proceedings,
for which proper reserves have been made, and the Lender has been given written
notice of such content.


 


Section 7.14                                Place of Business; Name. Such Borrower will not transfer its
chief executive office or principal place of business, or move, relocate, close
or sell any business location. Such Borrower will not permit any tangible
Collateral or any records pertaining to the Collateral to be located in any
state or area in which, in the event of such location, a financing statement
covering such Collateral would be required to be, but has not in fact been,
filed in order to perfect the Security Interest. Such Borrower will not change
its name. Upon written request by any Borrower, after delivery by such Borrower
of (a) financing statements, financing statement amendments, and other
documents requested by the Lender for the purpose of perfecting or maintaining
priority or perfection of the Security Interest and the other security
interests evidenced by the Security Documents, and (b) searches and other
proof requested by the Lender to evidence such priority and perfection, the
Lender shall grant its consent to (x) a relocation of business locations or
Collateral within the United States or (y) a change of any Borrower’s name.


 


Section 7.15                                Organizational Documents. Such Borrower will not become an S
Corporation within the meaning of the Internal Revenue Code of 1986, as
amended.


 


Section 7.16                                Financing Statements. No Borrower will amend any financing
statements showing the Lender as Secured Party or Assignee, or any other
financing statements that are filed in favor of the Lender, except as permitted
by law. Any authorization by the Lender to any Person to amend any such
financing statements shall be in writing.


 


ARTICLE VIII


 


Events of Default, Rights and
Remedies


 


Section 8.1                                      Events of Default. “Event of Default”, wherever used
herein, means any one of the following events:


 


(a)                                  default in the payment of the Obligations
(other than the Obligations specified in Section 8.1(b)) when they become
due and payable;


 


(b)                                 default in the payment of any fees,
commissions, costs or expenses required to be paid by any Borrower under this
Agreement or any other Loan Document within 5 Business Days of the date they
become due and payable;


 


(c)                                  default in the performance, or breach, of
the covenants contained in Section 6.4(a) or Section 6.6(a) of
this Agreement if such default remains unremedied 15 Business Days after its
occurrence; or default in the performance, or breach, of any other covenant or
agreement of any Borrower contained in this Agreement or any other Loan
Document;


 


(d)                                 Any Borrower or any Guarantor shall be or
become insolvent, or admit in writing its or his inability to pay its or his
debts as they mature, or make an assignment for the benefit of creditors; or
any Borrower or any Guarantor shall apply for or consent


 


49

















 


to the appointment
of any receiver, trustee, or similar officer for it or him or for all or any
substantial part of its or his property; or such receiver, trustee or
similar officer shall be appointed without the application or consent of such
Borrower or such Guarantor, as the case may be; or any Borrower or any
Guarantor shall institute (by petition, application, answer, consent or
otherwise) any bankruptcy, insolvency, reorganization, arrangement,
readjustment of debt, dissolution, liquidation or similar proceeding relating
to it or him under the laws of any jurisdiction; or any such proceeding shall
be instituted (by petition, application or otherwise) against any Borrower or
any such Guarantor; or any judgment, writ, warrant of attachment or execution
or similar process shall be issued or levied against a substantial part of
the property of any Borrower or any Guarantor;


 


(e)                                  A petition shall be filed by or against
any Borrower or any Guarantor under the United States Bankruptcy Code naming
such Borrower or such Guarantor as debtor;


 


(f)                                    Any representation or warranty made by
any Borrower in this Agreement, by any Guarantor in any guaranty delivered to
the Lender, or by any Borrower (or any of its officers) or any Guarantor in any
agreement, certificate, instrument or financial statement or other statement contemplated
by or made or delivered pursuant to or in connection with this Agreement or any
such guaranty shall prove to have been incorrect in any material respect when
deemed to be effective;


 


(g)                                 The rendering against any Borrower of a
final judgment, decree or order for the payment of money in excess of $100,000
and the continuance of such judgment, decree or order unsatisfied and in effect
for any period of 30 consecutive days without a stay of execution;


 


(h)                                 A default under any bond, debenture, note
or other evidence of indebtedness of any Borrower owed to any Person other than
the Lender, or under any indenture or other instrument under which any such
evidence of indebtedness has been issued or by which it is governed, or under
any lease of any of the Premises, and the expiration of the applicable period
of grace, if any, specified in such evidence of indebtedness, indenture, other
instrument or lease, if the effect of such default is to permit the lender
thereof to accelerate the payment of indebtedness $100,000 or more;


 


(i)                                     Any Reportable Event, which the Lender
determines in good faith might constitute grounds for the termination of any
Plan or for the appointment by the appropriate United States District Court of
a trustee to administer any Plan, shall have occurred and be continuing
30 days after written notice to such effect shall have been given to such
Borrower by the Lender; or a trustee shall have been appointed by an
appropriate United States District Court to administer any Plan; or the Pension
Benefit Guaranty Corporation shall have instituted proceedings to terminate any
Plan or to appoint a trustee to administer any Plan; or any Borrower shall have
filed for a distress termination of any Plan under Title IV of ERISA; or any
Borrower shall have failed to make any quarterly contribution required with
respect to any Plan under Section 412(m) of the Internal Revenue Code of
1986, as amended, which the Lender determines in good faith may by itself,
or in combination with any such failures that the Lender may


 


50

















 


determine are
likely to occur in the future, result in the imposition of a lien on such
Borrower’s assets in favor of the Plan;


 


(j)                                     An event of default shall occur under any
Security Document or under any other security agreement, mortgage, deed of
trust, assignment or other instrument or agreement securing any obligations of
any Borrower hereunder or under any note;


 


(k)                                  Except as permitted by Section 7.6
of this Agreement, any Borrower shall liquidate, dissolve, terminate or suspend
its business operations or otherwise fail to operate its business in the
ordinary course, or sell all or substantially all of its assets, without the
Lender’s prior written consent;


 


(l)                                     Any Borrower shall fail to pay, withhold,
collect or remit any tax or tax deficiency when assessed or due (other than any
tax deficiency which is being contested in good faith and by proper proceedings
and for which it shall have set aside on its books adequate reserves therefor)
or notice of any state or federal tax liens shall be filed or issued (unless
such lien is being contested in good faith and by proper proceedings and for
which it shall have set aside on its books adequate reserves therefor);


 


(m)                               Default in the payment of any amount owed
by any Borrower to the Lender, other than any indebtedness arising hereunder;


 


(n)                                 Any Guarantor shall repudiate, purport to
revoke or fail to perform any such Guarantor’s obligations under such
Guarantor’s guaranty in favor of the Lender, or any Guarantor shall cease to
exist;


 


(o)                                 Any event or circumstance with respect to
any Borrower shall occur such that the Lender shall believe in good faith that
the prospect of payment of all or any part of the Obligations or the
performance by any Borrower under the Loan Documents is impaired or any
material adverse change in the business or financial condition of any Borrower
shall occur; or


 


(p)                                 Any Borrower shall take or participate in
any action which would be prohibited under the provisions of any Subordination
Agreement or make any payment on Subordinated Indebtedness (as defined in any
Subordination Agreement) that any Person was not entitled to receive under the
provisions of such Subordination Agreement.


 


Section 8.2                                      Rights and Remedies. During any Default Period, the Lender may exercise
any or all of the following rights and remedies:


 


(a)                                  the Lender may, by notice to the
Borrowers, declare the Commitment to be terminated, whereupon the same shall
forthwith terminate;


 


(b)                                 the Lender may, by notice to the
Borrowers, declare the Obligations to be forthwith due and payable, whereupon
all Obligations shall become and be forthwith due and payable, without
presentment, notice of dishonor, protest or further notice of any kind, all of
which each Borrower hereby expressly waives;


 


51

















 


(c)                                  the Lender may refuse to fund any
requested Advance made by any Borrower;


 


(d)                                 the Lender may, without notice to any
Borrower and without further action, apply any and all money owing by the
Lender to any Borrower to the payment of the Obligations;


 


(e)                                  the Lender may exercise and enforce
any and all rights and remedies available upon default to a secured party under
the UCC, including, without limitation, the right to take possession of
Collateral, or any evidence thereof, proceeding without judicial process or by
judicial process (without a prior hearing or notice thereof, which each
Borrower hereby expressly waives) and the right to sell, lease or otherwise
dispose of any or all of the Collateral, and, in connection therewith, each
Borrower will on demand assemble the Collateral and make it available to the
Lender at a place to be designated by the Lender which is reasonably convenient
to both parties;


 


(f)                                    the Lender may exercise and enforce
its rights and remedies under the Loan Documents; and


 


(g)                                 the Lender may exercise any other
rights and remedies available to it by law or agreement.


 


Notwithstanding the foregoing, upon the occurrence of an Event of
Default described in subsections (d) or (e) of Section 8.1,
the Obligations shall be immediately due and payable automatically without
presentment, demand, protest or notice of any kind.


 


Section 8.3                                      Certain Notices. If notice to any Borrower of any
intended disposition of Collateral or any other intended action is required by
law in a particular instance, such notice shall be deemed commercially
reasonable if given (in the manner specified in Section 9.5) at least ten
calendar days before the date of intended disposition or other action.


 


ARTICLE IX


 


Miscellaneous


 


Section 9.1                                      Restatement of Former Credit Agreement. This Agreement is executed for the
purpose of amending and restating the Former Credit Agreement.


 


Section 9.2                                      Release. Each Borrower hereby absolutely and unconditionally
releases and forever discharges the Lender, the Participants and any and all
parent corporations, subsidiary corporations, affiliated corporations,
insurers, indemnitors, successors and assigns thereof, together with all of the
present and former directors, officers, agents and employees of any of the foregoing,
from any and all claims, demands or causes of action of any kind, nature or
description relating to the transactions contemplated by this Agreement,
whether arising in law or equity or upon contract or tort or under any state or
federal law or otherwise, which such Borrower has had or has made claim to have
against any such person for or by reason of any act, omission, matter, cause or
thing whatsoever arising from the beginning of time to and including the date
of this Agreement, whether such claims, demands and causes of action are
matured or


 


52

















 


unmatured or known or
unknown. For greater certainty, nothing herein shall constitute a release by
any Borrower of any Person for any such claim, demand or cause of action
arising after the date of this Agreement.


 


Section 9.3                                      No Waiver; Cumulative Remedies. No failure or delay by the Lender in
exercising any right, power or remedy under the Loan Documents shall operate as
a waiver thereof; nor shall any single or partial exercise of any such right,
power or remedy preclude any other or further exercise thereof or the exercise
of any other right, power or remedy under the Loan Documents. The remedies
provided in the Loan Documents are cumulative and not exclusive of any remedies
provided by law.


 


Section 9.4                                      Amendments, Etc. No amendment, modification, termination
or waiver of any provision of any Loan Document or consent to any departure by
any Borrower therefrom or any release of a Security Interest shall be effective
unless the same shall be in writing and signed by the Lender, and then such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given. No notice to or demand on any Borrower in any
case shall entitle such Borrower to any other or further notice or demand in
similar or other circumstances.


 


Section 9.5                                      Addresses for Notices, Etc. Except as otherwise expressly provided
herein, all notices, requests, demands and other communications provided for
under the Loan Documents shall be in writing and shall be (a) personally
delivered, (b) sent by first class United States mail, (c) sent
by overnight courier of national reputation, or (d) transmitted by
telecopy, in each case addressed or telecopied to the party to whom notice is
being given at its address or telecopier number as set forth below:


 


If to the Borrowers:


 


Heska Corporation

3760 Rocky Mountain Avenue

Loveland, Colorado 80538

Telecopier:  970-619-6003

Attention:  Chief Financial Officer


 


Diamond Animal Health, Inc.

c/o Heska Corporation

3760 Rocky Mountain Avenue

Loveland, Colorado 80538

Telecopier:  970-619-6003

Attention:  Chief Financial Officer


 


If to the Lender:


 


Wells Fargo Bank, National Association

MAC C7300-210

1740 Broadway

Denver, Colorado 80274




53

















 


Telecopier: 
303-863-4904

Attention:  Tim Ulrich


 


or, as to each party, at such other address or telecopier number as may hereafter
be designated by such party in a written notice to the other party complying as
to delivery with the terms of this Section. All such notices, requests, demands
and other communications shall be deemed to have been given on (a) the
date received if personally delivered, (b) when deposited in the mail if
delivered by mail, (c) the date sent if sent by overnight courier, or (d) the
date of transmission if delivered by telecopy, except that notices or requests
to the Lender pursuant to any of the provisions of Article II shall not be
effective until received by the Lender.


 


Section 9.6                                      Further Documents. Each Borrower will from time to time
execute and deliver or endorse any and all instruments, documents, conveyances,
assignments, security agreements, financing statements and other agreements and
writings that the Lender may reasonably request in order to secure,
protect, perfect or enforce the Security Interest or the Lender’s rights under
the Loan Documents (but any failure to request or assure that any Borrower
executes, delivers or endorses any such item shall not affect or impair the
validity, sufficiency or enforceability of the Loan Documents and the Security
Interest, regardless of whether any such item was or was not executed,
delivered or endorsed in a similar context or on a prior occasion). All
requests under Section 9-210 of the UCC (i) shall be made in a
writing signed by a person authorized under Section 2.2, (ii) shall
be personally delivered, sent by registered or certified mail, return receipt
requested, or by overnight courier of national reputation (iii) shall be
deemed to be sent when received by the Lender and (iv) shall otherwise
comply with the requirements of Section 9-210. The Borrowers request that
the Lender respond to all such requests which on their face appear to come from
an authorized individual and releases the Lender from any liability for so
responding. The Borrowers shall pay Lender the maximum amount allowed by law
for responding to such requests.


 


Section 9.7                                      Collateral. This Agreement does not contemplate a sale of
accounts, contract rights or chattel paper, and, as provided by law, each
Borrower is entitled to any surplus and shall remain liable for any deficiency.
The Lender’s duty of care with respect to Collateral in its possession (as
imposed by law) shall be deemed fulfilled if it exercises reasonable care in
physically keeping such Collateral, or in the case of Collateral in the custody
or possession of a bailee or other third person, exercises reasonable care in
the selection of the bailee or other third person, and the Lender need not
otherwise preserve, protect, insure or care for any Collateral. The Lender
shall not be obligated to preserve any rights any Borrower may have
against prior parties, to realize on the Collateral at all or in any particular
manner or order or to apply any cash proceeds of the Collateral in any
particular order of application.


 


Section 9.8                                      Costs and Expenses. Each Borrower, jointly and severally,
agrees to pay on demand all costs and expenses, including (without limitation)
reasonable attorneys’ fees, incurred by the
Lender in connection with the Obligations, this Agreement, the Loan Documents,
and any other document or agreement related hereto or thereto, and the
transactions contemplated hereby, including without limitation all such costs,
expenses and fees incurred in connection with the negotiation, preparation,
execution, amendment, administration, performance, collection and enforcement
of the Obligations and all such documents and


 


54

















 


agreements and the
creation, perfection, protection, satisfaction, foreclosure or enforcement of
the Security Interest.


 


Section 9.9                                      Indemnity. In addition to the payment of expenses pursuant to Section 9.8,
each Borrower, jointly and severally, agrees to indemnify, defend and hold
harmless the Lender, and any of its participants, parent corporations,
subsidiary corporations, affiliated corporations, successor corporations, and
all present and future officers, directors, employees, attorneys and agents of
the foregoing (the “Indemnitees”) from and against any of the following
(collectively, “Indemnified Liabilities”):


 


(i)                                     any and all transfer taxes, documentary
taxes, assessments or charges made by any governmental authority by reason of
the execution and delivery of the Loan Documents or the making of the Advances;


 


(ii)                                  any claims, loss or damage to which any
Indemnitee may be subjected if any representation or warranty contained in
Section 5.12 proves to be incorrect in any respect or as a result of any
violation of the covenant contained in Section 6.4(b); and


 


(iii)                               any and all other liabilities, losses,
damages, penalties, judgments, suits, claims, costs and expenses of any kind or
nature whatsoever (including, without limitation, the reasonable fees and
disbursements of counsel) in connection with the foregoing and any other
investigative, administrative or judicial proceedings, whether or not such
Indemnitee shall be designated a party thereto, which may be imposed on,
incurred by or asserted against any such Indemnitee, in any manner related to
or arising out of or in connection with the making of the Advances and the Loan
Documents or the use or intended use of the proceeds of the Advances;


 


provided that no Borrower shall have any such obligation for any Indemnified
Liabilities arising from any act or omission by an Indemnitee which constitutes
gross negligence or willful misconduct. If any investigative, judicial or
administrative proceeding arising from any of the foregoing is brought against
any Indemnitee, upon such Indemnitee’s request, each Borrower, or counsel
designated by any such Borrower and satisfactory to the Indemnitee, will resist
and defend such action, suit or proceeding to the extent and in the manner
directed by the Indemnitee, at such Borrower’s sole costs and expense. Each
Indemnitee will use its best efforts to cooperate in the defense of any such
action, suit or proceeding. If the foregoing undertaking to indemnify, defend
and hold harmless may be held to be unenforceable because it violates any
law or public policy, each Borrower shall nevertheless make the maximum
contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law. Each Borrower’s
obligation under this Section 9.9 shall survive the termination of this
Agreement and the discharge of such Borrower’s other obligations hereunder.


 


Section 9.10                                Participants. The Lender and its participants, if
any, are not partners or joint venturers, and the Lender shall not have any
liability or responsibility for any obligation, act or omission of any of its
participants. All rights and powers specifically conferred upon the Lender may be
transferred or delegated to any of the Lender’s participants, successors or
assigns.


 


55

















 


Section 9.11                                Execution in Counterparts. This Agreement and other Loan Documents
may be executed in any number of counterparts, each of which when so
executed and delivered shall be deemed to be an original and all of which
counterparts, taken together, shall constitute but one and the same instrument.


 


Section 9.12                                Binding Effect; Assignment; Complete
Agreement; Exchanging Information. The Loan Documents shall be binding upon and inure
to the benefit of the Borrowers and the Lender and their respective successors
and assigns, except that no Borrower shall have the right to assign its rights
thereunder or any interest therein without the Lender’s prior written consent.
This Agreement, together with the Loan Documents, comprises the complete and
integrated agreement of the parties on the subject matter hereof and supersedes
all prior agreements, written or oral, on the subject matter hereof. Without
limiting the Lender’s right to share information regarding any Borrower and its
Affiliates with the Lender’s participants (except that the Lender shall not
share any information with a participant that is a competitor, or an affiliate
of a competitor, of any such Borrower, in the area of researching, developing
and manufacturing animal health products), accountants, lawyers and other
advisors, the Lender, WFC Holdings Corporation, and all direct and indirect
subsidiaries of WFC Holdings Corporation, may exchange any and all
information they may have in their possession regarding any Borrower and
its Affiliates, and each Borrower waives any right of confidentiality it may have
with respect to such exchange of such information. To the extent permitted by
law, each Borrower waives and will not assert against any assignee any claims,
defenses or set-offs which such Borrower could assert against the Lender.


 


Section 9.13                                Severability of Provisions. Any provision of this Agreement which
is prohibited or unenforceable shall be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions
hereof.


 


Section 9.14                                Headings. Article and Section headings in this
Agreement are included herein for convenience of reference only and shall not
constitute a part of this Agreement for any other purpose.


 


Section 9.15                                Governing Law; Jurisdiction, Venue; Waiver of Jury
Trial. The Loan
Documents shall be governed by and construed in accordance with the substantive
laws (other than conflict laws) of the State of Colorado. The parties hereto
hereby (i) consent to the personal jurisdiction of the state and federal
courts located in the State of Colorado in connection with any controversy
related to this Agreement; (ii) waive any argument that venue in any such
forum is not convenient, (iii) agree that any litigation initiated by the
Lender or any Borrower in connection with this Agreement or the other Loan
Documents shall be venued in either the District Court for the City and County
of Denver, Colorado, or the United States District Court, District of Colorado;
and (iv) agree that a final judgment in any such suit, action or
proceeding shall be conclusive and may be enforced in other jurisdictions
by suit on the judgment or in any other manner provided by law. THE PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR
PROCEEDING BASED ON OR PERTAINING TO THIS AGREEMENT.


 


Section 9.16                                Retention of Borrowers’ Records. The Lender shall have no obligation to
maintain any electronic records or any documents, schedules, invoices, agings,
or other papers


 


56

















 


delivered to the Lender
by the Borrowers or in connection with the Loan Documents for more than four
months after receipt by the Lender.


 


IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
first above written.


 


 


	
  WELLS FARGO BANK, NATIONAL

  ASSOCIATION 

  	
  HESKA CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
  By

  	
  /s/ Tim Ulrich

  	
   

  	
  By 

  	
  /s/ Jason Napolitano

  
	
   

  	
  Tim Ulrich, Vice President

  	
   

  	
  Jason Napolitano, Chief Financial Officer

  
	
   

  	
   

  
	
   

  	
  DIAMOND ANIMAL HEALTH, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By  

  	
  /s/ Jason Napolitano

  
	
   

  	
   

  	
  Jason Napolitano, Chief Financial Officer

  
					



 


57

















 


	
  Table of Exhibits and Schedules

  
	
   

  	
   

  
	
  Exhibit A

  	
  Premises

  
	
   

  	
   

  
	
  Exhibit B

  	
  Compliance
  Certificate

  
	
   

  	
   

  
	
  Exhibit C

  	
  Consolidating
  Balance Sheets

  
	
   

  	
   

  
	
   

  	
   

  
	
  Schedule 5.1

  	
  Trade Names,
  Chief Executive Office, Principal Place of Business, and Locations of
  Collateral

  
	
   

  	
   

  
	
  Schedule 5.4

  	
  List of
  Subsidiaries

  
	
   

  	
   

  
	
  Schedule 5.6

  	
  Litigation

  
	
   

  	
   

  
	
  Schedule 5.10

  	
  Plans

  
	
   

  	
   

  
	
  Schedule 5.12

  	
  Environmental
  Matters

  
	
   

  	
   

  
	
  Schedule 7.1

  	
  Permitted Liens

  
	
   

  	
   

  
	
  Schedule 7.2

  	
  Permitted
  Indebtedness and Guaranties

  
	
   

  	
   

  
	
  Schedule 7.4

  	
  Investments

  



 

















 


Exhibit A to Third Amended and Restated

Credit and Security Agreement


 


Premises


 


The Premises referred to in the Amended and Restated
Credit and Security Agreement are described as follows:


 


Heska Corporation


3760 Rocky Mountain Avenue


Loveland, Colorado 80538


 


Diamond Animal Health, Inc.


2538 43rd Street SE


Des Moines, Iowa 50317


 


440 170th Avenue


Carlisle, Iowa


 

















 


[***] – Certain information in this exhibit have
been omitted and filed separately with the Securities and Exchange Commission. Confidential
treatment has been requested with respect to the omitted portions.


 


Exhibit B to Third Amended and Restated

Credit and Security Agreement


 


Compliance Certificate


 


	
  To:

  	
   

  	
   

  
	
   

  	
   

  	
  Wells Fargo Business Credit

  
	
   

  	
   

  	
   

  
	
  Date:

  	
   

  	
                    ,
  200   

  
	
   

  	
   

  	
   

  
	
  Subject:

  	
   

  	
  Heska Corporation

  
	
   

  	
   

  	
  Financial Statements

  



 


In accordance with our Third Amended and Restated Credit and Security
Agreement dated as of December 30, 2005 (the “Credit Agreement”), attached
are the financial statements of Heska Corporation (“Heska”) as of and for                 ,
20    (the “Reporting Date”) and the year-to-date period then
ended (the “Current Financials”). All terms used in this certificate have the
meanings given in the Credit Agreement.


 


I certify that, to the best of my knowledge, the Current Financials
have been prepared in accordance with GAAP, subject to year-end audit
adjustments, and fairly present the Borrowers’ financial condition and the
results of its operations as of the date thereof.


 


Events of Default. (Check one):


 


o                                    The
undersigned does not have knowledge of the occurrence of a Default or Event of
Default under the Credit Agreement.


 


o                                    The
undersigned has knowledge of the occurrence of a Default or Event of Default
under the Credit Agreement and attached hereto is a statement of the facts with
respect to thereto.


 


I hereby certify to the Lender as follows:


 


o                                    The
Reporting Date does not mark the end of one of the Borrowers’ fiscal quarters,
hence I am completing all paragraphs below except paragraph 4.


 


o                                    The
Reporting Date marks the end of one of the Borrowers’ fiscal quarters, hence I
am completing all paragraphs below .


 

















 


Financial Covenants. I further
hereby certify as follows:


 


1.                                       Accounts Payable. Pursuant to Section 6.5
of the Credit Agreement, as of the Reporting Date, Past Due Payables on a
consolidated basis was $                  ,
which o satisfies o does not satisfy the requirement that the Borrowers have no
Past Due Payables.


 


2.                                       Spread. Pursuant to Section 2.7
of the Credit Agreement, as of the Reporting Date, Heska’s prior-fiscal-year
Net Income was, on a consolidated basis, $                  ,
which determines a base Spread of       %
pursuant to the table below. Heska o has o has not raised at least [***] in Additional Capital as of
the Reporting Date, leading to an o increase o decrease from the base Spread of       %,
so that the applicable Spread is equal to       %.


 




	
  Prior
  Fiscal Year Net Income

  	
   

  	
  Spread

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Less than $0

  	
   

  	
  2.75

  	
  %

  
	
   

  	
   

  	
   

  	
   

  
	
  Greater than or equal
  to $0

  but less than $2,500,000

  	
   

  	
  1.75

  	
  %

  
	
   

  	
   

  	
   

  	
   

  
	
  Greater than or equal
  to $2,500,000

  	
   

  	
  0.75

  	
  %

  






 


3.                                       Minimum Capital. Pursuant to Section 6.12
of the Credit Agreement, as of the Reporting Date, Heska’s Capital was, on a
consolidated basis, $                 ,
which o satisfies o does not satisfy the requirement that such amount be not
less than $             
on the Reporting Date, as set forth in the table below and adjusted, if
applicable, in accordance with Section 6.12:


 

















 


[***] – Certain information on this page have
been omitted and filed separately with the Securities and Exchange Commission. Confidential
treatment has been requested with respect to the omitted portions.


 




	
  Date

  	
   

  	
  Minimum Capital

  
	
  November 30, 2005

  	
   

  	
  [***]

  
	
  December 31, 2005

  	
   

  	
  [***]

  
	
  January 1, 2006

  	
   

  	
  [***]

  
	
  February 28, 2006

  	
   

  	
  [***]

  
	
  March 31, 2006

  	
   

  	
  [***]

  
	
  April 30, 2006

  	
   

  	
  [***]

  
	
  May 31, 2006

  	
   

  	
  [***]

  
	
  June 30, 2006

  	
   

  	
  [***]

  
	
  July 31, 2006

  	
   

  	
  [***]

  
	
  August 31, 2006

  	
   

  	
  [***]

  
	
  September 30, 2006

  	
   

  	
  [***]

  
	
  October 31, 2006

  	
   

  	
  [***]

  
	
  November 30, 2006

  	
   

  	
  [***]

  
	
  December 31, 2006

  	
   

  	
  [***]

  
	
  January 31, 2007 and the last day

  of each month thereafter

  	
   

  	
  [***]

  






 


4.                                       Minimum Net Income. Pursuant to Section 6.13
of the Credit Agreement, as of the Reporting Date, Heska’s Net Income was, on a
consolidated basis, $                 ,
which o satisfies o does not satisfy the requirement that such amount be no
less than $                 
on the Reporting Date, as set forth in the table below and adjusted, if
applicable, in accordance with Section 6.13:


 




	
  Period

  	
   

  	
  Minimum Net Income

  
	
  Twelve months ending December 31,
  2005

  	
   

  	
  [***]

  
	
  Three months ending March 31,
  2006

  	
   

  	
  [***]

  
	
  Six months ending June 30,
  2006

  	
   

  	
  [***]

  
	
  Nine months ending September 30,
  2006

  	
   

  	
  [***]

  
	
  Twelve months ending December 31,
  2006

  	
   

  	
  [***]

  






 


5.                                       Minimum Liquidity. Pursuant to Section 6.14
of the Credit Agreement, as of the Reporting Date, Heska’s Liquidity was, on a
consolidated basis,


 

















 


$                 ,
which o satisfies o does not satisfy the requirement that such amount be no
less than $1,500,000 on the Reporting Date.


 


6.                                       Minimum Individual Book
Net Worth. Pursuant to Section 6.15 of the Credit Agreement, as
of the Reporting Date, Heska’s Book Net Worth was $                 
and Diamond’s Book Net Worth was $                 ,
which o satisfies o does not satisfy the requirement that such amounts be no
less than zero on the Reporting Date.


 


7.                                       Maximum Contributions. Pursuant to Section 7.4(a)(v) of
the Credit Agreement, as of the Reporting Date, Heska’s fiscal year-to-date
aggregate contributions to non-Borrower Subsidiaries was $                 ,
which o satisfies o does not satisfy the requirement that such amounts be no
more than $700,000 during any fiscal year.


 


8.                                       Capital Expenditures. Pursuant to Section 7.10
of the Credit Agreement, for the fiscal year-to-date period ending on the
Reporting Date, Heska’s Capital Expenditures were, in the aggregate and on a
consolidated basis, $                 
which o satisfies o does not satisfy the requirement that such amount be not
more than $                 
during the period ending on the Reporting Date, as set forth in the table
below:


 

















 




	
  Date

  	
   

  	
  Maximum Capital

  Expenditures

  	
   

  
	
  November 30, 2005

  	
   

  	
   

  	
  [***]

  	
   

  
	
  December 31, 2005

  	
   

  	
   

  	
  [***]

  	
   

  
	
  January 1, 2006

  	
   

  	
   

  	
  [***]

  	
   

  
	
  February 28, 2006

  	
   

  	
   

  	
  [***]

  	
   

  
	
  March 31, 2006

  	
   

  	
   

  	
  [***]

  	
   

  
	
  April 30, 2006

  	
   

  	
   

  	
  [***]

  	
   

  
	
  May 31, 2006

  	
   

  	
   

  	
  [***]

  	
   

  
	
  June 30, 2006

  	
   

  	
   

  	
  [***]

  	
   

  
	
  July 31, 2006

  	
   

  	
   

  	
  [***]

  	
   

  
	
  August 31, 2006

  	
   

  	
   

  	
  [***]

  	
   

  
	
  September 30, 2006

  	
   

  	
   

  	
  [***]

  	
   

  
	
  October 31, 2006

  	
   

  	
   

  	
  [***]

  	
   

  
	
  November 30, 2006

  	
   

  	
   

  	
  [***]

  	
   

  
	
  December 31, 2006

  	
   

  	
   

  	
  [***]

  	
   

  






 


Attached hereto are all relevant facts in reasonable detail to
evidence, and the computations of the financial covenants referred to above.
These computations were made in accordance with GAAP.


 


	
   

  	
  HESKA CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By

  	
   

  
	
   

  	
   

  	
  Its

  	
   

  



 

















 


Exhibit C to Third Amended and Restated

Credit and Security Agreement


 


Consolidating Balance Sheets


 

















 


Schedule 5.1 to Third Amended and

Restated Credit and Security Agreement


 


Trade Names, Chief
Executive Office, Principal Place of Business, 

and Locations of Collateral


 


Trade Names


 


Diamond Animal Health, Inc.


Diamond


Diamond Animal Health


Diamond Scientific, Inc.


Heska


Heska Corp.


Heska Des Moines


 


Chief Executive Office/Principal Place of Business


 


Heska Corporation


3760 Rocky Mountain Avenue


Loveland, Colorado 80538


 


Diamond Animal Health, Inc.


2538 43rd Street SE


Des Moines, Iowa 50317


 


Other Inventory and Equipment Locations


 


440 170th Avenue


Carlisle, Iowa


 

















 


Schedule 5.4 to Third Amended and

Restated Credit and Security Agreement


 


Subsidiaries


 


Heska Corporation Subsidiaries:


Diamond Animal Health, Inc. (Iowa)


Heska Holding AG (Switzerland)


Sensor Devices, Inc. (Wisconsin—inactive)


 


Diamond Animal Health, Inc. Subsidiaries:


None


 


Heska Holding AG Subsidiaries:


Heska AG (Switzerland)


 

















 


Schedule 5.6 to Third Amended and

Restated Credit and Security Agreement


 


Litigation
Matters


 


On September 9,
2005, United Vaccines, Inc. (“United”), a customer of Diamond, filed a lawsuit
in Wisconsin against Diamond and Heska alleging various claims, including
breach of contract and breach of warranty, and demanding compensatory and
punitive damages. On October 20, 2005, Diamond and Heska filed a motion to
dismiss certain claims against Diamond and all claims against Heska, as well as
an answer to United’s claims, affirmative defenses and counterclaims on behalf
of Diamond. While Diamond and Heska intend to pursue the matter vigorously and
believe they are entitled to damages from United and that United is not
entitled to damages from Heska or Diamond, there can be no assurance the
ultimate resolution of this case will reflect Heska’s and Diamond’s current
beliefs.


 

















 


Schedule 5.10 to Third Amended and

Restated Credit and Security Agreement


 


Plans


 


Borrower now maintains or has maintained the following employee pension
benefit plans as defined in ERISA, . 3(2), 29 U.S.C. 1002(2):


 


1.                                       The
Diamond Animal Health, Inc. Pension Plan for Collective Bargaining Unit
Employees.


 


This Defined Benefit Pension Plan is currently frozen. No new
participants may enter the plan nor are any contribution liabilities
accruing. The plan has a funding liability of $235,974 for Termination
purposes, calculated as of May 1, 1998; this liability is a result of the
difference between the GATT rates used to calculate contributions and the PBGC
rates required to be used by a terminating plan. Upon termination, participants
must receive the larger of the accrued benefit calculated using GATT rates and
using PBGC rates. Since the PBGC rates have been consistently lower than the
GATT rates, the Pension Plan has a funding liability on termination. The Plan
can remain frozen until such time as the PBGC rates match the GATT rates or
Diamond chooses to contribute funds to make up the termination funding
liability. The termination funding liability varies from year to year based
upon fluctuations in interest and mortality rates.


 


The Plan does not have a funding liability under the provisions of
Internal Revenue Code . 412, and there are no reportable events.


 


2.                                       The
Diamond Animal Health, Inc. Saving Plan (the “Savings Plan”).


 


The Savings Plan is a profit sharing/401(k) plan. It was merged into
the Heska Corporation 401(k) Plan (the “Heska Plan”) effective January 1,
1998. Diamond Animal Health, Inc. is the wholly owned subsidiary of its
parent, Heska Corporation. Diamond Animal Health, Inc. was acquired by
Heska Corporation in April, 1996. At the time of the acquisition, both Heska
and Diamond sponsored 401(k) plans. In accordance with the provisions of Treas.
Reg. . 1.401(k)-1(d)(3), Heska Corporation determined that it would be in the
best interests of both Heska and Diamond to merge the Savings Plan into the
Heska Plan. Both plans have been submitted to the Internal Revenue Service for
a Determination that:


 


(1)  the Savings Plan was a tax-qualified plan as of the effective
date of the merger; and


 


(2)  the Heska Plan remains a tax-qualified plan on and after the
merger date.


 


3.                                       The
Heska Corporation 401(k) Plan (the “Heska Plan”)


 


The Heska Plan is a defined contribution plan that was established
under the provisions of Section 401(a) of the Internal Revenue Code (“IRC”),
which includes a qualified deferred arrangement as defined in Section 401(k)
of the IRC, for the benefit of eligible employees of


 

















 


Heska Corporation. The Heska Plan is subject to the provisions of ERISA.
Benefits under the plan are not guaranteed by the Pension Benefit Guaranty
Corporation. On July 1, 2003, the Heska Plan changed custodians and record
keepers from Principal Life Insurance Company to Putnam Fiduciary Trust
Company.


 

















 


Schedule 5.12 to Third Amended and

Restated Credit and Security Agreement


 


Environmental Matters


 


Settlement Agreement between Williams Pipe Line Company and Bayer Corporation


 

















 


Schedule 7.1 to Third Amended and

Restated Credit and Security Agreement


 


Permitted Liens


 


	
  Creditor

  	
   

  	
  Collateral

  	
   

  	
  Jurisdiction

  	
   

  	
  Filing Date

  	
   

  	
  Filing No.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  



 


None


 

















 


[***] – Certain information in this exhibit have
been omitted and filed separately with the Securities and Exchange Commission. Confidential
treatment has been requested with respect to the omitted portions.


 


Schedule 7.2 to Third Amended and

Restated Credit and Security Agreement


 


Permitted Indebtedness and Guaranties


 


Indebtedness


 


Diamond Animal Health, Inc.


 


	
  Lender

  	
   

  	
  Final Pmt Due

  	
   

  	
  Type

  	
   

  	
  Amt Due

  	
   

  	
  Assets Secured

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Bankers Leasing

  	
   

  	
  11/2008

  	
   

  	
  Cap Lease

  	
   

  	
  $

  	
  9,615

  	
   

  	
  Copier

  	
   

  
	
  Bankers Leasing

  	
   

  	
  4/2009

  	
   

  	
  Cap Lease

  	
   

  	
  $

  	
  17,914

  	
   

  	
  Copier

  	
   

  
	
  City of Des Moines

  	
   

  	
  6/2006

  	
   

  	
  LTD

  	
   

  	
  $

  	
  40,310

  	
   

  	
  Subordinated

  	
   

  
	
  [***]

  	
   

  	
  5/2006

  	
   

  	
  LTD

  	
   

  	
  $

  	
  500,000

  	
   

  	
  Subordinated

  	
   

  



 


Guaranties


 


	
  Primary Obligor

  	
   

  	
  Amount and Description of

  Obligation Guaranteed

  	
   

  	
  Beneficiary of Guaranty

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  



 


NONE.


 

















 


[***] – Certain information in this exhibit have
been omitted and filed separately with the Securities and Exchange Commission. Confidential
treatment has been requested with respect to the omitted portions.


 


Schedule 7.4 to Third Amended and

Restated Credit and Security Agreement


 


Investments


 


	
  Diamond Animal Health, Inc.

  	
   

  
	
   

  	
   

  
	
  Stancorp Financial Group Inc. (shares received in
  demutualization)(SFG)

  	
  1,008 shares

  	
   

  
	
   

  	
   

  
	
  Investments in Subsidiaries

  	
   

  
	
   

  	
   

  
	
  As of November 30,
  2005 Heska Corporation had the following investments in subsidiaries:

  	
   

  
	
   

  	
   

  
	
  Diamond Animal Health, Inc.

  	
  $

  	
  297,350

  	
   

  	
   

  
	
   

  	
   

  
	
  European Subsidiaries

  	
  $

  	
  6,805,913