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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-11303
SYNBIOTICS CORPORATION
(Exact name of registrant as specified in its charter)
California 95-3737816
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11011 Via Frontera
San Diego, California 92127
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (858) 451-3771
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
As of May 15, 2000, 9,372,662 shares of Common Stock were outstanding.
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SYNBIOTICS CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
Part I Condensed Consolidated Statement of Operations and Comprehensive Loss -
Three months ended March 31, 2000 and 1999 1
Condensed Consolidated Balance Sheet -
March 31, 2000 and December 31, 1999 2
Condensed Consolidated Statement of Cash Flows -
Three months ended March 31, 2000 and 1999 3
Notes to Condensed Consolidated Financial Statements 4
Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Quantitative and Qualitative Disclosures About Market Risk 15
Part II Other Information 16
</TABLE>
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
Synbiotics Corporation
Condensed Consolidated Statement of Operations and Comprehensive Loss (unaudited)
- ---------------------------------------------------------------------------------
Three Months Ended March 31,
----------------------------------------
2000 1999
------------------ -------------------
<S> <C> <C>
Revenues:
Net sales $ 9,158,000 $ 9,390,000
Internet revenues 2,000
License fees 61,000 61,000
Royalties 2,000 3,000
------------------ -------------------
9,223,000 9,454,000
------------------ -------------------
Operating expenses:
Cost of sales 4,933,000 4,080,000
Research and development 547,000 560,000
Selling and marketing 2,541,000 2,018,000
General and administrative 1,726,000 1,414,000
------------------ -------------------
9,747,000 8,072,000
------------------ -------------------
(Loss) income from operations (524,000) 1,382,000
Other income (expense):
Interest, net (332,000) (327,000)
------------------ -------------------
(Loss) income before income taxes (856,000) 1,055,000
(Benefit from) provision for income taxes (22,000) 465,000
------------------ -------------------
(Loss) income before extraordinary item (834,000) 590,000
Early extinguishment of debt, net of tax 116,000
------------------ -------------------
Net (loss) income (834,000) 706,000
Cumulative translation adjustment (108,000) (904,000)
------------------ -------------------
Comprehensive loss $ (942,000) $ (198,000)
================== ===================
Basic (loss) income per share:
(Loss) income from continuing operations $ (0.09) $ 0.06
Early extinghuishment of debt, net of tax 0.01
------------------ -------------------
Net (loss) income $ (0.09) $ 0.07
================== ===================
Diluted (loss) income per share:
(Loss) income from continuing operations $ (0.09) $ 0.06
Early extinghuishment of debt, net of tax 0.01
------------------ -------------------
Net (loss) income $ (0.09) $ 0.07
================== ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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Item 1. Financial Statements (continued)
Synbiotics Corporation
Condensed Consolidated Balance Sheet
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------- -------------
(unaudited) (audited)
<S> <C> <C>
Assets
Current assets:
Cash and equivalents $ 2,726,000 $ 2,260,000
Securities available for sale 1,516,000 3,443,000
Accounts receivable 5,570,000 4,517,000
Inventories 5,226,000 5,178,000
Deferred tax assets 508,000 505,000
Other current assets 1,734,000 1,570,000
------------- -------------
Total current assets 17,280,000 17,473,000
Property and equipment, net 1,839,000 1,744,000
Goodwill 14,835,000 12,137,000
Deferred tax assets 8,092,000 8,055,000
Deferred debt issuance costs 398,000 447,000
Other assets 3,766,000 4,191,000
------------- -------------
$ 46,210,000 $ 44,047,000
============= =============
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable and accrued expenses $ 5,814,000 $ 5,921,000
Current portion of long-term debt 1,000,000 1,000,000
Deferred revenue 242,000 242,000
------------- -------------
Total current liabilities 7,056,000 7,163,000
------------- -------------
Long-term debt 8,568,000 5,914,000
Deferred revenue 909,000 969,000
Other liabilities 1,573,000 1,546,000
------------- -------------
11,050,000 8,429,000
------------- -------------
Mandatorily redeemable common stock 2,444,000 2,412,000
------------- -------------
Non-mandatorily redeemable common stock and other shareholders' equity:
Common stock, no par value, 24,800,000 share authorized,
9,366,000 and 8,576,000 shares issued and outstanding at
March 31, 2000 and December 31, 1999 40,015,000 39,424,000
Common stock warrants 1,003,000 1,003,000
Accumulated other comprehensive loss (1,024,000) (916,000)
Accumulated deficit (14,334,000) (13,468,000)
------------- -------------
Total non-mandatorily redeemable common stock and other shareholders' equity 25,660,000 26,043,000
------------- -------------
$ 46,210,000 $ 44,047,000
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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Item 1. Financial Statements (continued)
Synbiotics Corporation
Condensed Consolidated Statement of Cash Flows (unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------
2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (834,000) $ 706,000
Adjustments to reconcil net (loss) income to net cash (used for) provided by
operating activities:
Depreciation and amortization 602,000 608,000
Early extinguishment of debt (200,000)
Changes in assets and liabilities:
Account receivable (1,053,000) (1,253,000)
Inventories (48,000) (490,000)
Deferred taxes (40,000) 355,000
Other assets 57,000 577,000
Accounts payable and accrued expenses 374,000 1,637,000
Income taxes payable 113,000
Deferred revenue (60,000) 1,393,000
Other liabilities 27,000 29,000
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Net cash (used for) provided by operating activities (975,000) 3,475,000
------------- -------------
Cash flows from investing activities:
Acquisition of property and equipment (238,000) (343,000)
Proceeds from sale of securities available for sale 1,927,000 241,000
------------- -------------
Net cash provided by (used for) investing activities 1,689,000 (102,000)
------------- -------------
Cash flows from financing activities:
Payments of long-term debt (250,000) (1,050,000)
Proceeds from issuance of common stock, net 110,000 138,000
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Net cash used for financing activities (140,000) (912,000)
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Net increase in cash and equivalents 574,000 2,461,000
Effect of exchange rates on cash (108,000) (904,000)
Cash and equivalents - beginning of period 2,260,000 4,357,000
------------- -------------
Cash and equivalents - end of period $ 2,726,000 $ 5,914,000
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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Item 1. Financial Statements (continued)
SYNBIOTICS CORPORATION
Notes to Condensed Consolidated Financial Statements (unaudited)
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Note 1 - Interim Financial Statements:
The accompanying condensed consolidated balance sheet as of March 31, 2000 and
the condensed consolidated statements of operations and comprehensive loss and
of cash flows for the three months ended March 31, 2000 and 1999 have been
prepared by Synbiotics Corporation (the "Company") and have not been audited.
The condensed consolidated financial statements of the Company include the
accounts of its wholly-owned subsidiaries Synbiotics Europe SAS and W3COMMERCE.
All significant intercompany transactions and accounts have been eliminated in
consolidation. These financial statements, in the opinion of management, include
all adjustments (consisting only of normal recurring accruals) necessary for a
fair presentation of the financial position, results of operations and cash
flows for all periods presented. The financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB filed for the year ended December 31,
1999. Interim operating results are not necessarily indicative of operating
results for the full year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2 - Acquisition:
On January 12, 2000, the Company acquired W3COMMERCE LLC, a privately-held
Internet systems and services provider based in San Diego, CA. The consideration
paid was $2,913,000, which consisted of $100,000 in cash and a 5 year,
$2,813,000 note, which bears interest at 6.21% and is convertible into 1,000,000
shares of the Company's common stock beginning January 12, 2002. Upon
conversion, any accrued interest will be forgiven. The former shareholders of
W3COMMERCE may receive up to an additional 800,000 shares of the Company's
common stock if certain per share stock price targets for the Company's common
stock are reached prior to January 12, 2003.
The transaction was accounted for as a purchase. Goodwill arising from the
transaction totalled $3,064,000 which is being amortized over an estimated
useful life of 10 years utilizing the straight-line method. The convertible debt
portion of the of the purchase price and liabilities assumed totalling
$2,893,000 is considered a non-cash financing activity for purposes of the
statement of cash flows.
The Company's statement of operations includes the results of operations of
W3COMMERCE for the period January 1, 2000 to March 31, 2000. The following are
pro forma results of operations as if the W3COMMERCE transaction had been
consummated on January 1, 1999:
Three Months
Ended
March 31, 1999
--------------
(unaudited)
Revenues:
As Reported $ 9,454,000
==============
Pro forma $ 9,456,000
==============
Net income:
As reported $ 706,000
==============
Pro forma $ 429,000
==============
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Item 1. Financial Statements (continued)
SYNBIOTICS CORPORATION
Notes to Condensed Consolidated Financial Statements (unaudited)
- -----------------------------------------------------------------------------
Three Months
Ended
March 31, 1999
------------------
(unaudited)
Basic net income per share:
As reported $ 0.07
==================
Pro forma $ 0.04
==================
Diluted net income per share:
As reported $ 0.07
==================
Pro forma $ 0.04
==================
Note 3 - Inventories:
Inventories consist of the following:
March 31, December 31,
2000 1999
-------------- ---------------
(unaudited) (audited)
Inventories:
Raw materials $ 3,013,000 $ 2,320,000
Work in process 122,000 589,000
Finished goods 2,091,000 2,269,000
-------------- ---------------
$ 5,226,000 $ 5,178,000
============== ===============
Note 4 - (Loss) Income per Share:
The following is a reconciliation of net (loss) income and share amounts used in
the computations of (loss) income per share:
<TABLE>
<CAPTION>
Three Months Ended March 31,
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2000 1999
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<S> <C> <C>
Basic and diluted net (loss) income used:
(Loss) income from continuing operations $ (834,000) $ 590,000
Less accretion of mandatorily redeemable common stock (32,000) (31,000)
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(Loss) income from continuing operations used in computing
basic (loss) income from continuing operations per share (866,000) 559,000
Early extinguishment of debt, net of tax 116,000
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Net (loss) income used in computing basic and diluted net (loss)
income per share $ (866,000) $ 675,000
============= =============
</TABLE>
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Item 1. Financial Statements (continued)
<TABLE>
<CAPTION>
SYNBIOTICS CORPORATION
Notes to Condensed Consolidated Financial Statements (unaudited)
- ---------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31,
-------------------------------------
2000 1999
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<S> <C> <C>
Shares used:
Weighted average common shares outstanding used in computing basic
(loss) income per share 9,281,000 8,920,000
Weighted average options and warrants to purchase common stock as
determined by the treasury method 349,000
---------------- ---------------
Shares used in computing diluted (loss) income per share 9,281,000 9,269,000
================ ===============
</TABLE>
Weighted average options and warrants to purchase common stock as determined by
the application of the treasury method and weighted average shares of common
stock issuable upon assumed conversion of debt totalling 1,337,000 shares have
been excluded from the shares used in computing diluted net (loss) income per
share for the three months ended March 31, 2000 as their effect is anti-
dilutive. In addition, warrants to purchase 265,000 and 284,000 shares of
common stock at $4.54 per share have been excluded from the shares used in
computing diluted net (loss) income per share for the three months ended March
31, 2000 and 1999, respectively, as their exercise price is higher than the
weighted average market price for those periods, and in addition their effect is
anti-dilutive for the three months ended March 31, 2000 and 1999.
Note 5 - Segment Information and Significant Customers:
The Company has determined that it has only one reportable segment based on the
fact that all of its products are animal health products. Although the Company
sells diagnostic, vaccine and instrument products, it does not base its business
decision making on a product category basis.
The following are revenues for the Company's diagnostic, vaccine and instrument
products:
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------------
2000 1999
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(unaudited) (unaudited)
<S> <C> <C>
Diagnostics $ 6,536,000 $ 7,390,000
Vaccines 2,039,000 1,758,000
Instruments 579,000 242,000
Other revenues 69,000 64,000
---------------- ----------------
$ 9,223,000 $ 9,454,000
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</TABLE>
The following are revenues and long-lived assets information by geographic area:
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------
2000 1999
---------------- -----------------
(unaudited) (unaudited)
<S> <C> <C>
Revenues:
United States $ 6,498,000 $ 6,396,000
France 1,292,000 1,404,000
Other foreign countries 1,433,000 1,654,000
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$ 9,223,000 $ 9,454,000
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</TABLE>
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Item 1. Financial Statements (continued)
<TABLE>
<CAPTION>
SYNBIOTICS CORPORATION
Notes to Condensed Consolidated Financial Statements (unaudited)
- ---------------------------------------------------------------------------------------------------------------------
March 31, December 31,
2000 1999
------------------ ------------------
(unaudited) (audited)
<S> <C> <C>
Long-lived assets:
United States $ 14,831,000 $ 12,079,000
France 5,988,000 6,440,000
Other foreign countries 19,000
------------------ ------------------
$ 20,838,000 $ 18,519,000
================== ==================
</TABLE>
The Company had sales to one customer totalling $1,053,000 during the three
months ended March 31, 2000. During the three months ended March 31, 1999,
sales to one customer totalled $1,806,000.
NOTE 6 - SUBSEQUENT EVENTS:
On April 21, 2000, the Company acquired the poultry diagnostic product line from
Kirkegaard & Perry Laboratories, Inc. The consideration paid was $3,500,000
in cash upon closing, with an additional $1,000,000 due upon the earlier of the
transfer of manufacturing or one year from the date of closing. In addition,
the Company will be required to pay up to $1,500,000, three years from the date
of closing, based upon its sales of the acquired products, which will be
recorded as additional purchase price as the related sales are recognized.
In April 2000, the Company refinanced its outstanding Banque Paribas debt with
Imperial Bank ("Imperial"). The new debt agreement includes a $6,000,000 term
loan, which is due in April 2005, bears interest at the rate of prime plus
0.50%, is payable in monthly installments, beginning in May 2000, of $100,000 of
principal plus accrued interest and is secured by substantially all of the
Company's assets.
In addition, the debt agreement includes a $4,000,000 revolving line of credit
which bears interest at the rate of prime plus 0.50%, with interest only
payments to be made monthly beginning in May 2000. Any outstanding principal is
due in April 2002. The Company is required to pay a quarterly commitment fee
equal to 0.50% per annum on the average unused portion of the line of credit
facility.
Imperial requires the Company to maintain certain financial ratios and levels of
tangible net worth and also restricts the Company's ability to pay dividends and
make loans, capital expenditures or investments without Imperial's consent.
The Company will record an approximately $1,000,000 extraordinary loss on early
extinguishment of debt in the second quarter of 2000, which represents the
remaining unamortized debt issuance costs and debt discount on the Banque
Paribas debt.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this Quarterly
Report on Form 10-Q contains both historical financial information and forward-
looking statements. We do not provide forecasts of future financial performance.
The historical financial information may not be indicative of future financial
performance. In fact, future financial performance may be materially different
than the historical financial information presented herein. Moreover, the
forward-looking statements about future business or future results of operations
are subject to significant uncertainties and risks, which could cause actual
future results to differ materially from what is suggested by the forward-
looking information. The following risk factors should be considered in
evaluating our forward-looking statements and assessing our future financial
condition, results of operations and cash flows:
The market in which we operate is intensely competitive, even with regard to our
key canine heartworm diagnostic products, and many of our competitors are larger
and more established
The market for animal health care products is extremely competitive. Companies
in the animal health care market compete to develop new products, to market and
manufacture products efficiently, to implement effective research strategies,
and to obtain regulatory approval. Our current competitors include significantly
larger companies such as Pfizer Animal Health, Merial S.A.S. (the successor to
Rhone-Merieux), Schering-Plough and IDEXX Laboratories. These companies are
substantially larger and have greater financial, manufacturing, marketing, and
research resources than we do. Our current competitors also have extensive
expertise in conducting pre-clinical and clinical testing of new products and in
obtaining the necessary regulatory approvals to market products. In addition,
IDEXX Laboratories prohibits its distributors from selling competitors'
products, including ours. Further, additional competition could come from new
entrants to the animal health care market. We cannot assure you that we will be
able to compete successfully in the future or that competition will not harm our
business.
Our canine heartworm products constitute 39% of our sales. In addition to our
historic competition with IDEXX Laboratories, the sales leader in this product
category, our sales were substantially affected in 1999 by a new heartworm
product from Heska Corporation. We have filed a lawsuit against Heska, claiming
that its heartworm product infringes our patent. Also, Abbott Laboratories
entered the canine heartworm diagnostic market in March 2000, and our market
share and average selling prices may decline, perhaps significantly.
We have a history of losses and an accumulated deficit
We did not achieve profitability for the years ended December 31, 1998 and 1999,
and we have had a history of losses. We have incurred a consolidated accumulated
deficit of $14,334,000 at March 31, 2000. We may not achieve profitability again
and if we are profitable in the future there can be no assurance that
profitability can be sustained. The additional expenses which we anticipate we
will incur while building W3COMMERCE's business may prevent us from being
profitable, even if our traditional animal health business were to be
profitable.
We depend on third party manufacturers
We contract for the manufacture of some of our products, including our vaccines,
our Witness(R) and VetRED(R) diagnostic kits, and our SCA 2000(TM) blood
coagulation timing instrument. We also expect that some of our anticipated new
products will be manufactured by third parties. In addition, some of the
products manufactured for us by third parties, including Witness(R) and
VetRED(R) are licensed to us by their manufacturers. There are a number of risks
associated with our dependence on third-party manufacturers including:
. reduced control over delivery schedules;
. quality assurance;
. manufacturing yields and costs;
. the potential lack of adequate capacity during periods of excess
demand;
. limited warranties on products supplied to us; and
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. increases in prices and the potential misappropriation of our
intellectual property.
If our third party manufacturers fail to supply us with an adequate number of
finished products, our business would be significantly harmed. We have no long-
term contracts or arrangements with any of our vendors that guarantee product
availability, the continuation of particular payment terms or the extension of
credit limits.
In addition, sales of our feline leukemia virus ("FeLV") vaccine to Merial
S.A.S. and other distributors for resale in Europe will be at risk unless our
manufacturer, Bio-Trends International, Inc. ("Bio-Trends"), obtains European
Union regulatory approvals for its manufacturing facilities. Loss of these sales
would have a material adverse effect on our profitability and our cash flows.
If we encounter delays or difficulties in our relationships with our
manufacturers, the resulting problems could have a material adverse effect on
us. For example, all of our vaccine products (other than our FeLV vaccine
products) were manufactured using bulk antigen fluids that were supplied by a
third party. The supply agreement expired and we were unable to locate a
replacement supplier for these bulk antigen fluids. We decided to discontinue
the sales of the affected products once our remaining supplies were exhausted,
which occurred during the third quarter of 1999. Sales of the affected products
totaled $1,645,000, $2,073,000 and $1,596,000 during 1999, 1998 and 1997,
respectively.
We rely on third party distributors for a substantial portion of our sales, but
we are experiencing difficulties with the distribution channel
Because we have historically depended upon distributors for such a large portion
of our sales (although we did not have any customers representing 10% or more of
our net sales during 1999, sales to two distributors totaled 33% of our net
sales during 1998), our ability to establish and maintain an adequate
independent sales and marketing capability in any or all of our targeted markets
may be impaired. Our failure to independently sell and market our products could
materially harm our business. Further, distributor agreements render our sales
exposed to the efforts of third parties who are not employees of Synbiotics and
over whom we have no control. Their failure to generate significant sales of our
products could materially harm our business. Reduction by these distributors of
the quantity of our products which they distribute would materially harm our
business. In addition, IDEXX Laboratories' prohibition against its distributors
carrying competitors' products, including ours, has and could continue to make
some distributors unavailable to us. We adopted a similar policy in the second
quarter of 1999, which caused some of our distributors to abandon our product
line. Although we have rescinded this policy, and some of our former
distributors are again selling our products, we do not expect our sales to
distributors to reach their previous levels.We are also exposed to the risk that
any sales by us directly to veterinarians could alienate our current
distributors.
Our direct selling efforts may not succeed
We are increasing our efforts to sell our products directly to veterinarians,
including by telesales and over the Internet. We are inexperienced in large-
scale direct selling efforts and may not be able to successfully execute this
strategy. Also, veterinarians have traditionally relied on distributors, and the
number of veterinarians willing to purchase directly from manufacturers may be
smaller than we believe.
Our profitable vaccine sales in Europe may decline soon
Merial distributes in Europe our FeLV vaccine, which we obtain from Bio-Trends.
Our gross profit in 1999 and 1998 on these sales of FeLV vaccine to Merial in
Europe was $570,000 and $520,000, respectively. Merial has exercised a
contractual right which will enable it, in 2002, to introduce its own FeLV
vaccine product in Europe. If Merial does so, our sales to Merial in Europe
would probably decline sharply.
There is no assurance that acquired businesses can be successfully combined
There can be no assurance that the anticipated benefits of the April 2000
acquisition of the poultry product line from Kirkegaard & Perry Laboratories,
Inc., the January 2000 acquisition of W3COMMERCE, or any other future
acquisitions (collectively, the "Acquired Business") will be realized.
Acquisitions of businesses involve numerous risks, including difficulties in the
assimilation of the operations, technologies and products of the Acquired
Business, introduction of different distribution channels, potentially dilutive
issuances of equity and/or increases in leverage and risk resulting from
issuances of debt securities, the need to establish internally operating
functions which had been previously provided pre-acquisition by a corporate
parent, accounting charges, operating companies in different geographic
locations with different cultures, the potential loss of key employees of the
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<PAGE>
Acquired Business, the diversion of management's attention from other business
concerns and the risks of entering markets in which we have no or limited direct
prior experience. In addition, there can be no assurance that the acquisitions
will not have a material adverse effect upon our business, results of
operations, financial condition or cash flows, particularly in the quarters
immediately following the consummation of the acquisition, due to operational
disruptions, unexpected expenses and accounting charges which may be associated
with the integration of the Acquired Business and us, as well as operating and
development expenses inherent in the Acquired Business itself as opposed to
integration of the Acquired Business.
Our acquisition of W3COMMERCE may not prove profitable
There can be no assurance that our January 2000 acquisition of W3COMMERCE will
result in profits to us or that we will be able to recover the money we invest
in W3COMMERCE's operations. The efforts of W3COMMERCE to integrate our business
with the retailing of products over the Internet may not be successful, and this
may harm our business. Our acquisition of W3COMMERCE subjects us to risks
associated with the acquisition of any business, as well as the following risks
specifically associated with doing business over the Internet:
. W3COMMERCE's business model has not been demonstrated as profitable;
. W3COMMERCE's business model could be replicated by other companies if
it is perceived as being successful;
. larger, more established competitors may enter the online markets in
which we intend to operate;
. the Internet may not continue to grow as a focal point of business
transactions;
. the Internet may become subject to additional government regulation
that may harm our business;
. retail sale of products on the Internet has not been widely
demonstrated as profitable; and
. we do not have experience in marketing products other than animal
health products, yet W3COMMERCE's business plan calls for expansion
into other markets.
We depend on key executives and personnel
Our future success will depend, to a significant extent, on the ability of our
management to operate effectively, both individually and as a group. Competition
for qualified personnel in the animal health care products industry is intense,
and even more intense in the Internet marketing business, and we may not be
successful in attracting and retaining such personnel. There are only a limited
number of persons with the requisite skills to serve in those positions and it
may become increasingly difficult to hire such persons.
The loss of the services of any of our key personnel or the inability to attract
or retain qualified personnel could harm our business.
We rely on new and recent products
In our animal health business we rely to a significant extent on new and
recently developed products, and expect that we will need to continue to
introduce new products to be successful in the future. There can be no assurance
that we will obtain and maintain market acceptance of our products. There can be
no assurance that future products will meet applicable regulatory standards, be
capable of being produced in commercial quantities at acceptable cost or be
successfully commercialized.
There can be no assurance that new products can be manufactured at a cost or in
quantities necessary to make them commercially viable. If we are unable to
produce internally, or to contract for, a sufficient supply of our new products
on acceptable terms, or if we should encounter delays or difficulties in our
relationships with manufacturers, the introduction of new products would be
delayed, which could have a material adverse effect on our business.
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We may need additional capital in the future
We currently anticipate that our existing cash balances and short term
investments and cash flow expected to be generated from future operations will
be sufficient to meet our liquidity needs for at least the next twelve months.
However, we may need to raise additional funds if our estimates of revenues,
working capital and/or capital expenditure requirements change or prove
inaccurate or in order for us to respond to unforeseen technological or
marketing hurdles or to take advantage of unanticipated opportunities.
Further, our future capital requirements will depend on many factors beyond our
control or ability to accurately estimate, including the expenses of building
W3COMMERCE's Internet business, continued scientific progress in our product and
development programs, the cost of manufacturing scale-up, the costs involved in
preparing, filing, prosecuting, maintaining and enforcing patent claims, the
cost involved in patent infringement litigation, competing technological and
market developments, and the cost of establishing effective sales and marketing
arrangements. In addition, we expect to review potential acquisitions that would
complement our existing product offerings or enhance our technical capabilities.
While we have no current agreements with respect to any such acquisition, any
future transaction of this nature could require potentially significant amounts
of capital. Such funds may not be available at the time or times needed, or
available on terms acceptable to us. If adequate funds are not available, or are
not available on acceptable terms, we may not be able to take advantage of
market opportunities, to develop new products, or to otherwise respond to
competitive pressures. This inability could materially harm our business.
In April 2000, we refinanced our outstanding Banque Paribas debt with Imperial
Bank ("Imperial"). The new Imperial debt agreement includes a $6,000,000 term
loan and a $4,000,000 revolving line of credit.
The term loan is due in April 2005, bears interest at the rate of prime plus
0.50%, is payable beginning in May 2000 in monthly installments of $100,000 of
principal plus accrued interest and is secured by substantially all our assets.
The line of credit bears interest at the rate of prime plus 0.50%, with interest
only payments to be made monthly beginning in May 2000. Any outstanding
principal under the line of credit is due in April 2002. The Company is required
to pay a quarterly commitment fee equal to 0.50% per annum on the average unused
portion of the line of credit facility.
Imperial requires us to maintain certain financial ratios and levels of tangible
net worth and also restricts our ability to pay dividends and make loans,
capital expenditures or investments without Imperial's consent.
We will record an approximately $1,000,000 extraordinary loss on early
extinguishment of debt in the second quarter of 2000, which represents the
remaining unamortized debt issuance costs and debt discount on the Banque
Paribas debt.
If adequate funds are not available to us, or if they are not available on terms
reasonably favorable to us, we may need to delay, reduce, or eliminate one or
more of our research and development programs. Any of these events would impair
our competitive position and harm our business.
Our canine heartworm business is seasonal
Our operations are seasonal due to the timing of sales of our canine heartworm
diagnostic products. Our sales and profits tend to be concentrated in the first
half of the year as our distributors prepare for the heartworm season by
purchasing diagnostic products for resale to veterinarians. The operations of
SBIO-E have reduced our seasonality as sales of their large animal diagnostic
products tend to occur evenly throughout the year. We believe that increased
sales of our instrument products, our newly acquired poultry diagnostic products
and our Internet business will also reduce our seasonality.
-11-
<PAGE>
Our failure to adequately establish or protect our proprietary rights may
adversely affect us
We rely on a combination of patent, copyright, and trademark laws, and on trade
secrets and confidentiality provisions and other contractual provisions to
protect our proprietary rights. These measures afford only limited protection.
We currently have 11 issued U.S. patents and several pending patent
applications. Our means of protecting our proprietary rights in the U.S. or
abroad may not be adequate and competitors may independently develop similar
technologies. Our future success will depend in part on our ability to protect
our proprietary rights and the technologies used in our principal products.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our products or to obtain and use trade secrets or
other information that we regard as proprietary. In addition, the laws of some
foreign countries do not protect our proprietary rights as fully as do the laws
of the U.S. Issued patents may not preserve our proprietary position. Even if
they do, competitors or others may develop technologies similar to or superior
to our own. If we do not enforce and protect our intellectual property, our
business will be harmed.
From time to time, third parties, including our competitors, have asserted
patent, copyright, and other intellectual property rights to technologies that
are important to us. We expect that we will increasingly be subject to
infringement claims as the number of products and competitors in the animal
health care market increases.
The results of any litigated matter are inherently uncertain. In the event of
an adverse result in any litigation with third parties that could arise in the
future, we could be required to:
. pay substantial damages, including treble damages if we are held to
have willfully infringed;
. cease the manufacture, use and sale of infringing products;
. expend significant resources to develop non-infringing technology; or
. obtain licenses to the infringing technology.
Licenses may not be available from any third party that asserts intellectual
property claims against us on commercially reasonable terms, or at all.
Also, litigation is costly regardless of its outcome and can require significant
management attention. For example, in 1997, Barnes-Jewish Hospital (the
"Hospital") filed an action against us claiming that our canine heartworm
diagnostic products infringe their patent. We settled this lawsuit, but there
can be no assurance that we would be able to resolve similar incidents in the
future.
Also, because our patents and patent applications cover novel diagnostic
approaches,
. the patent coverage which we receive could be significantly narrower
than the patent coverage we seek in our patent applications; and
. our patent positions involve complex legal and factual issues which
can be hard for patent examiners or lawyers asserting patent coverage
to successfully resolve.
Because of this, our patent position could be vulnerable and our business could
be materially harmed.
The U.S. patent application system also exposes us to risks. In the United
States, the first party to make a discovery is granted the right to patent it
and patent applications are maintained in secrecy until the underlying patents
issue. For these reasons, we can never know if we are the first to discover
particular technologies. Therefore, we can never be certain that our
technologies will be patented and we could become involved in lengthy,
expensive, and distracting disputes concerning whether we were the first to make
the disputed discovery. Any of these events would materially harm our business.
Our business is regulated by the United States and various foreign governments
Our business is subject to substantial regulation by the United States
government, most notably the United States Department of Agriculture, and the
French government. In addition, our operations may be subject to future
legislation and/or rules issued by
-12-
<PAGE>
domestic or foreign governmental agencies with regulatory authority relating to
our business. There can be no assurance that we will continue to be in
compliance with any of these regulations.
For marketing outside the United States, we, and our suppliers, are subject to
foreign regulatory requirements, which vary widely from country to country.
There can be no assurance that we, and our suppliers, will meet and sustain
compliance with any such requirements. In particular, our sales of feline FeLV
vaccine to Merial S.A.S. or other distributors for resale in Europe will be at
risk unless Bio-Trends, our supplier, obtains European Union regulatory
approvals for its manufacturing facilities.
Our liability insurance may prove inadequate
Our products carry an inherent risk of product liability claims and associated
adverse publicity. While we have maintained product liability insurance for
such claims to date, we cannot be certain that this type of insurance will
continue to be available to us or, if it is available, that it can be obtained
on acceptable terms. Also, our current coverage limits may not be adequate.
Any claim against us which results in our having to pay damages in excess of our
coverage limits will materially harm our business. Even if such a claim is
covered by our existing insurance, the resulting increase in insurance premiums
or other charges would increase our expenses and harm our business.
We use hazardous materials
Our business requires that we store and use hazardous materials and chemicals,
including radioactive compounds. Although we believe that our procedures for
storing, handling, and disposing of these materials comply with the standards
prescribed by local, state, and federal regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated.
If any of these materials were mishandled, or if an accident with them occurred,
the consequences could be extremely damaging and we could be held liable for
them. Our liability for such an event would materially harm our business and
could exceed all of our available resources for satisfying it.
Results of Operations
Our net sales for the first quarter of 2000 decreased by $236,000 or 2% from the
first quarter of 1999. The decrease reflects a decrease in our sales of
diagnostic products of $854,000, an increase in our vaccine product sales of
$281,000 and an increase in our instrument product sales of $337,000. The
decrease in our sales of diagnostic products is primarily due to a promotional
program in the United States. While our sales in units have increased, these
sales were at reduced average selling prices. Our U.S. heartworm sales in units
during the first quarter of 2000 increased by 10% over the first quarter of
1999, yet our sales in dollars for these products decreased by 9%. In Europe,
sales of our large animal diagnostic products decreased 14% due to increased
competition, and a change in the timing of mandated disease eradication testing
required by certain European governmental authorities. Tests that used to be
required annually are now only required to be performed every other year. The
weakening of the French Franc against the U.S. dollar also negatively impacted
our European diagnostic sales. Our increased vaccine sales reflected an increase
of 139% in sales of bulk FeLV vaccine (related to the timing of shipments as
requested by our OEM customer), offset by a 77% decrease in sales of vaccines to
private label partners. Our instrument product sales increased primarily due to
sales of our SCA 2000 blood coagulation timing instrument, which we introduced
during the second quarter of 1999.
All of our vaccine products (exclusive of our FeLV vaccine products) were
manufactured using bulk antigen fluids that were supplied by a third party. The
supply agreement expired and we were unable to locate a replacement supplier for
these bulk antigen fluids. We decided to discontinue the sales of the affected
products once our remaining supplies were exhausted, which occurred during the
third quarter of 1999. Sales of the affected products totaled $1,645,000 and
$2,073,000 during 1999 and 1998, respectively.
Although veterinary products manufacturers, including us, have traditionally
relied on distributors, we have been increasing our direct sales of products to
veterinarians via telesales and the Internet as part of a focused strategy. In
addition, we stopped selling to several distributors and to Vedco, Inc., a
distributor co-op, in the second quarter of 1999.
Our cost of sales as a percentage of our net sales was 54% during the first
quarter of 2000 compared to 43% during the first quarter of 1999 (i.e., our
gross margin decreased to 46% from 57%). The lower gross margin is a direct
result of three factors: i) the overall decrease in our sales, ii) the increased
sales of no margin bulk FeLV vaccine to Merial, which are at cost, and iii) the
fact that a significant portion of our manufacturing costs are fixed costs. Our
gross margin, exclusive of the no margin bulk FeLV vaccine sales, would have
been 52% and 59% for the first quarter of 2000 and 1999, respectively. Among
our major products, our DiroCHEK(R)
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<PAGE>
canine heartworm diagnostic products and the ProChem(R) analyzer are
manufactured at our facilities, whereas our WITNESS(R), VetRED(R), all vaccines
and the SCA 2000(TM) are manufactured by third parties. In addition to affecting
our gross margins, outsourcing of manufacturing renders us relatively more
dependent on the third-party manufacturers.
In March 1999, we amended (effective July 1, 1998) our FeLV vaccine supply
agreement with Merial Limited ("Merial"). Since 1992, we have supplied FeLV
vaccine to Merial in the United States. This has included shipments to Merial at
our cost, while Merial has paid a royalty to us on their sales of Merial-labeled
FeLV vaccine. In exchange for $1,500,000 in cash ($1,453,000 of which we are
recognizing ratably over the remaining term of the supply agreement, and the
remainder of which was applied to royalties receivable from Merial), the revised
supply agreement broaden Merial's U.S. distribution rights (which were an area
of ongoing discussions) and eliminate the royalty. In addition, we will work
with Merial to try to have Bio-Trends supply FeLV vaccine directly to Merial for
U.S. distribution. Our FeLV vaccine sales to Merial totalled $2,431,000 and
$2,029,000 during 1999 and 1998, respectively. In the meantime, we will continue
to resell Bio-Trends-supplied FeLV vaccine to Merial at cost for the U.S. Sales
of our own VacSyn FeLV vaccine product, our sales to Merial S.A.S. in France,
which are at a profit rather than at cost, and the collaborative research
relationship between Merial Limited and us were not affected by this amendment.
Our research and development expenses did not change significantly during the
first quarter of 2000 as compared to the first quarter of 1999. Our research
and development expenses as a percentage of our net sales were 6% during the
first quarters of 2000 and 1999. We expect our research and development
expenses to increase during the remainder of 2000 due to further development of
our instrument product line and our newly acquired poultry diagnostic product
line.
Our selling and marketing expenses during the first quarter of 2000 increased by
$523,000 or 26% over the first quarter of 1999. The increase is due primarily
to the acquisition of W3COMMERCE and increase in our direct-to-veterinarian
telemarketing group. Our selling and marketing expenses as a percentage of our
net sales were 28% and 21% during the first quarter of 2000 and 1999,
respectively. We will continue to increase our investment in sales and
marketing to expand our field sales force and our telemarketing and Internet
sales efforts.
Our general and administrative expenses during the first quarter of 2000
increased by $312,000 or 22% over the first quarter of 1999. The increase is
due primarily to legal expenses related to our patent litigation with Heska,
increased use tax, resulting from a state use tax audit, and foreign currency
losses related to our intercompany receivable from SBIO-E. Our general and
administrative expenses as a percentage of our net sales were 19% and 15% during
the first quarter of 2000 and 1999, respectively.
Our combined effective tax rate was 3% during the first quarter of 2000 as
compared to 44% during the first quarter of 1999. The decrease in our effective
rate is due primarily to the net operating loss in the first quarter of 2000,
offset by a change in our deferred tax assets and state income tax expense
resulting from certain states' taxes being calculated on our net worth rather
than our net income.
Financial Condition
We believe that our present capital resources, which included working capital of
$10,224,000 at March 31, 2000, are sufficient to meet our current working
capital needs and service our debt for at least the next twelve months. As of
March 31, 2000, we had outstanding principal balances on our Banque Paribas debt
of $7,250,000, and outstanding principal balances on our convertible debt issued
in conjunction with the acquisition of W3COMMERCE of $2,813,000.
In April 2000, we refinanced our outstanding Banque Paribas debt with Imperial
Bank ("Imperial"). The new Imperial debt agreement includes a $6,000,000 term
loan and a $4,000,000 revolving line of credit.
The term loan is due in April 2005, bears interest at the rate of prime plus
0.50%, is payable beginning in May 2000 in monthly installments of $100,000 of
principal plus accrued interest and is secured by substantially all our assets.
The line of credit bears interest at the rate of prime plus 0.50%, with interest
only payments to be made monthly beginning in May 2000. Any outstanding
principal under the line of credit is due in April 2002. We are required to pay
a quarterly commitment fee equal to 0.50% per annum on the average unused
portion of the line of credit facility.
Imperial requires us to maintain certain financial ratios and levels of tangible
net worth and also restricts our ability to pay dividends and make loans,
capital expenditures or investments without Imperial's consent.
-14-
<PAGE>
We will record an approximately $1,000,000 extraordinary loss on early
extinguishment of debt in the second quarter of 2000, which represents the
remaining unamortized debt issuance costs and debt discount on the Banque
Paribas debt.
Our operations are seasonal due to the timing of sales of our canine heartworm
diagnostic products. Our sales and profits tend to be concentrated in the first
half of the year, as our distributors prepare for the heartworm season by
purchasing diagnostic products for resale to veterinarians. The operations of
SBIO-E have reduced our seasonality as sales of their large animal diagnostic
products tend to occur evenly throughout the year. We believe that Increased
sales of our instruments and supplies, our newly acquired poultry diagnostic
products and success in our Internet marketing business will also reduce our
seasonality.
Impact of the Year 2000 Issue
We did not incur any disruption of our operations related to the year 2000
issue, nor are we aware of any disruption in the operations of our major
suppliers and customers due to the year 2000 issue.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Our market risk consists primarily of changes interest rates and foreign
currency exchange rates.
Interest Rate Risk
The fair value of our investments available for sale at March 31, 2000 was
$1,516,000, all of which consists of fixed interest rate securities. The
objectives of our investment policy are the safety and preservation of invested
funds, and liquidity of investments that is sufficient to meet cash flow
requirements. Our policy is to place our cash, cash equivalents, and investments
available for sale with high credit quality financial institutions, commercial
companies, and government agencies in order to limit the amount of credit
exposure.
The fair value of our long-term debt at March 31, 2000 was $10,063,000, of which
$2,813,000 has a fixed interest rate of 6.21%, and the remaining $7,250,000 has
a variable interest rate based on the prime rate.
A 5% change in interest rates would have no material impact on our financial
condition, results of operations or cash flows as it relates to our securities
available for sale. However, a 5% change in interest rates would have a
material impact on our financial condition, results of operations and cash flows
as it relates to our variable rate long-term debt.
Foreign Currency Exchange Rate Risk
Our foreign currency exchange rate risk relates to the operations of SBIO-E as
it transacts business in Euros, its local currency. However, this risk is
limited to our intercompany receivable from SBIO-E and the conversion of its
financial statements into the U.S. dollar for consolidation. There is no foreign
currency exchange rate risk related to SBIO-E's transactions outside of the
European Union as those transactions are denominated in Euros. Similarly, all of
the foreign transactions of our U.S. operations are denominated in U.S. dollars.
-15-
<PAGE>
We do not hedge our cash flows on intercompany transactions. As a result, the
effects of a 5% change in exchange rates, would have a material impact on our
financial condition, results of operations and cash flows, but only to the
extent that it relates to the conversion of SBIO-E's financial statements,
including its intercompany payable, into the U.S. dollar for consolidation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
No material changes.
Item 2. Changes in Securities
On January 12, 2000, in conjunction with our acquisition of W3COMMERCE LLC, we
issued convertible promissory notes convertible into an aggregate of 1,000,000
shares of our common stock. This was a Section 4(2) private offering, involving
no underwriters.
On January 28, 2000 we issued 134,503 shares of Common Stock to designees of
Barnes-Jewish Hospital as required by our 1998 settlement agreement of patent
infringement litigation which the Hospital brought against us. This was a
Section 4(2) private offering, involving no underwriters and no new
consideration to us.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
During the first quarter of 2000 we began a solicitation of written consent to
approve an amendment of our articles of incorporation to change our name. This
solicitation was not completed by the end of the first quarter.
Item 5. Other Information
On April 21, 2000, we acquired the poultry diagnostic product line from
Kirkegaard & Perry Laboratories, Inc. The consideration paid was $3,500,000 in
cash upon closing, with an additional $1,000,000 due upon the earlier of the
transfer of manufacturing or one year from the date of closing. In addition, we
will be required to pay up to $1,500,000, three years from the date of closing,
based upon our sales of the acquired products, which will be recorded as
additional purchase price as the related sales are recognized.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
2.8 Exchange Agreement between the Registrant and the Individual
Members of W3COMMERCE LLC, dated January 12, 2000.
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<PAGE>
10.70 Non-Competition Agreement between the Registrant and Colin
Lucas-Mudd, dated January 12, 2000.
10.71/+/ Employment Agreement between W3COMMERCE LLC and Colin Lucas-
Mudd, dated January 12, 2000.
10.72 Convertible Promissory Note from the Registrant to Colin
Lucas-Mudd, dated January 12, 2000.
10.73 Convertible Promissory Note from the Registrant to Rigdon
Currie, dated January 12, 2000.
27 Financial Data Schedule (for electronic filing purposes
only).
____________________________
+ Management contract.
(b) Reports on Form 8-K
-------------------
On February 4, 2000, we filed a Form 8-K announcing our January 12,
2000 acquisition of W3COMMERCE LLC.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SYNBIOTICS CORPORATION
Date: May 22, 2000 /s/ Michael K. Green
--------------------------------------------------
Michael K. Green
Senior Vice President and Chief Financial Officer
(signing both as a duly authorized officer and as
principal financial officer)
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<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
EXHIBITS
TO
FORM 10-Q
UNDER
SECURITIES EXCHANGE ACT OF 1934
SYNBIOTICS CORPORATION
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit
- ----------- -------
2.8 Exchange Agreement between the Registrant and the Individual
Members of W3COMMERCE LLC, dated January 12, 2000.
10.70 Non-Competition Agreement between the Registrant and Colin Lucas-
Mudd, dated January 12, 2000.
10.71/+/ Employment Agreement between W3COMMERCE LLC and Colin Lucas-Mudd,
dated January 12, 2000.
10.72 Convertible Promissory Note from the Registrant to Colin Lucas-
Mudd, dated January 12, 2000.
10.73 Convertible Promissory Note from the Registrant to Rigdon Currie,
dated January 12, 2000.
27 Financial Data Schedule (for electronic filing purposes only).
_________________________
+ Management contract.
<PAGE>
Exhibit 2.8
-----------
EXCHANGE AGREEMENT
This Exchange Agreement (the "Agreement") is entered into as of this
12th day of January, 2000, (the "Effective Date") between Synbiotics
Corporation, a California corporation ("Synbiotics"), and the individual members
(the "Members") of W3 Commerce LLC, a Delaware limited liability company
("W3C"), listed in the signature page hereto.
R E C I T A L S
---------------
Whereas, the Board of Directors of Synbiotics and the Members and
Managers of W3C believe it is in the best interests of their respective
companies to consummate the exchange transactions provided for herein in which
the Members of W3C, subject to the terms and conditions set forth herein, will
exchange their percentage member interests in W3C (the "W3C Units") solely for
convertible promissory notes of Synbiotics in the form attached hereto as
Exhibit A (the "Synbiotics Notes") and, if and when certain contingencies are
- ---------
satisfied, shares of common stock ("Synbiotics Common Stock") of Synbiotics (the
"Contingent Shares"); and
Whereas, each of the Members hereby agrees to exchange his or her W3C
Units for Synbiotics Notes and the expectancy of Contingent Shares (the
"Exchange") on the terms and conditions set forth herein;
Whereas, the parties desire to make certain representations,
warranties and agreements in connection with the transactions provided for
herein.
Now, Therefore, in consideration of the representations, warranties
and agreements set forth herein, and for other good and valuable consideration,
the parties agree as follows:
ARTICLE I
THE EXCHANGE
------------
1.1 The Exchange. At the closing of the Exchange (the
------------
"Closing") and subject to the terms and conditions of this Agreement, the
outstanding W3C Units shall be exchanged by the Members for Synbiotics Notes and
the expectancy of Contingent Shares pursuant to the terms of this Agreement.
1.2 Closing. The Closing shall take place at 4:00 p.m. on
-------
January 12, 2000, or one or more subsequent dates as the parties hereto shall
agree (the "Closing Date"). The Closing shall take place at the offices of
Brobeck, Phleger & Harrison LLP, 550 West "C" Street, Suite 1200, San Diego,
California, or such other place as the parties shall agree.
1.3 Notes. At the Closing, Synbiotics shall execute and
-----
deliver to each Member a Synbiotics Note with an original principal amount equal
to $2,812,500 times the
<PAGE>
Member's Quotient. The "Quotient" of a Member shall be the quotient of (a) the
percentage number of W3C Units exchanged by such Member under this Agreement,
divided by (b) the percentage number of all W3C Units exchanged by all the
Members under this Agreement. Upon the Exchange, such Member shall have no
further rights in respect of any W3C Units other than the right to receive
Synbiotics Notes and the expectancy of Contingent Shares as provided herein.
1.4 Contingent Shares. Assuming the Closing occurs, Synbiotics
-----------------
shall deliver to each Member, if and within 30 days after the First Contingency
is satisfied, a number of shares of unregistered Synbiotics Common Stock
(Contingent Shares) equal to 400,000 times the Member's Quotient. Assuming the
Closing occurs, Synbiotics shall deliver to each Member, if and within 30 days
after the Second Contingency is satisfied, a number of shares of unregistered
Synbiotics Common Stock (Contingent Shares) equal to 400,000 times the Member's
Quotient. The "First Contingency" is that before January 12, 2003 the mean
average of the closing sale prices of Synbiotics Common Stock on the Nasdaq
National Market for any period of 90 consecutive calendar days equals or exceeds
$12.50 or that before January 12, 2003 Synbiotics has been acquired for cash
consideration of at least $12.50 per share of Synbiotics Common Stock. The
"Second Contingency" is that before January 12, 2003 the mean average of the
closing sale prices of Synbiotics Common Stock on the Nasdaq National Market for
any period of 90 consecutive calendar days equals or exceeds $25.00 or that
before January 12, 2003 Synbiotics has been acquired for cash consideration of
at least $25.00 per share of Synbiotics Common Stock. If before January 12, 2003
Synbiotics is acquired for cash at an amount less than either of the prices
associated with the First Contingency or Second Contingency, a proportionate
number of Contingent Shares shall be delivered to each Member. Such proportion
shall be determined by dividing the price paid for each share of Synbiotics
stock in such acquisition by each of $12.50 and $25.00, respectively, and then
multiplying the result of each such calculation by 400,000. The resulting
numbers, when added together, shall represent the total number of Contingent
Shares to be delivered by Synbiotics to each Member. In no event, however, shall
the number of shares to be delivered to each Member exceed 800,000 shares. If
before January 12, 2003 Synbiotics is acquired for stock, the fair market value
of the number of shares issued in the acquisition for one share of Synbiotics
Common Stock shall continue to be "tracked," as if it were the closing sale
price of one share of Synbiotics Common Stock, until January 12, 2003 for the
purpose of determining whether the First Contingency and/or the Second
Contingency is satisfied.
Pursuant to Article 7.3 of this Agreement, the effect of this Article
----------- -------
1.4 shall be binding upon and shall inure to the benefit of the parties hereto
- ---
and their respective successors and assigns, with all obligations of this
Article 1.4 being assumed by such successors and assigns. This explicit
- -----------
reference to the binding nature of this Article 1.4 shall in no way limit the
-----------
effect of Article 7.3 on the other provisions of this Agreement.
-----------
1.5 Contribution of Assets. Before the Closing, the Members
----------------------
shall contribute to W3C all rights, assets and property of any person currently
or previously used in the business now being conducted, and presently proposed
to be conducted, by or in the name of W3C (the "Business") or necessary for W3C
to operate and conduct the Business ("Contributed Assets"), by instruments of
transfer satisfactory to Synbiotics. All Contributed Assets shall be transferred
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<PAGE>
to W3C in fee simple free and clear of all adverse claims, restrictions,
security interests, liens and encumbrances.
1.6 Private Placement.
-----------------
(a) The issuance of Synbiotics Notes, the issuance of
shares of Synbiotics Common Stock upon conversion of the Synbiotics Notes, and
the issuance of Contingent Shares (if any) are intended to be exempt from the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to the private placement exemption provided by
Section 4(2) of the Securities Act, and of applicable state securities laws.
Each Member hereby agrees to take all actions and execute all documents
reasonably requested by Synbiotics to qualify the issuance of such securities
for such exemptions.
(b) Any evidence of ownership of the Synbiotics Notes, the
shares of Synbiotics Common Stock issuable upon conversion thereof, and the
Contingent Shares (if any) (collectively, the "Securities") shall bear the
following legend:
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED ABSENT AN EFFECTIVE
REGISTRATION THEREOF UNDER SUCH ACT OR COMPLIANCE WITH RULE 144
PROMULGATED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED
SATISFACTORY EVIDENCE THAT SUCH REGISTRATION IS NOT REQUIRED."
The Securities shall not be transferable in the absence of an effective
registration statement under the Securities Act or an exemption therefrom.
Synbiotics shall be entitled to give stop transfer instructions to its transfer
agent with respect to the Securities in order to enforce the foregoing
restrictions.
1.7 Closing Deliveries.
------------------
(a) At the Closing, Synbiotics shall deliver to each Member
the Synbiotics Notes issuable in exchange for such Member's W3C Units and each
Member shall deliver to Synbiotics a Limited Liability Company Interest
Certificate, accompanied by a duly executed transfer instrument.
(b) At the Closing, Members Colin Lucas-Mudd, Edward
Brunel-Cohen and Regan Carey shall each execute and deliver to Synbiotics non-
competition agreements in substantially the form attached hereto as Exhibit B
(the "Non-Competition Agreements"). Also at the Closing, Colin Lucas-Mudd and
Regan Carey shall execute and deliver to Synbiotics employment agreements
substantially in the form attached hereto as Exhibit C (the "Mudd and Carey
Employment Agreements"). Within thirty (30) days of the Closing, Edward Brunel-
Cohen shall enter into an employment agreement (the "Cohen Employment
Agreement") in the United Kingdom having terms that are substantially equivalent
to those contained in the Mudd and Carey Employment Agreements, subject to such
changes or additions
-3-
<PAGE>
required to conform the Cohen Employment Agreement to local laws and practices.
Also at the Closing, W3C shall deliver to Synbiotics Proprietary Information and
Inventions Agreements, pursuant to Section 3.23 hereof, executed by each
employee and consultant of W3C.
1.8 Stock Splits, etc. All figures in this Article I are based
-----------------
on there being no change in the W3C Units or the Synbiotics Common Stock by way
of stock split, stock dividend, reverse stock split, or other increase or
decrease (without consideration) in the number of outstanding securities. In the
event of any such changes, the numbers in this Article I shall be appropriately
adjusted to prevent the enlargement or diminution of benefits to anyone.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SYNBIOTICS
--------------------------------------------
Synbiotics hereby represents and warrants to each Member that, except
as set forth on a Synbiotics Disclosure Letter (the "Disclosure Letter")
previously delivered by Synbiotics to Colin Lucas-Mudd as the representative of
the Members (the "Representative"):
2.1 Organization and Authority of Synbiotics. Synbiotics is a
----------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of California and has all necessary corporate power and authority
to enter into this Agreement, to carry out its obligations hereunder and
thereunder and to consummate the transactions contemplated hereby and thereby.
The execution and delivery of this Agreement by Synbiotics, the performance by
Synbiotics of its obligations hereunder and thereunder and the consummation by
Synbiotics of the transactions contemplated hereby and thereby have been duly
authorized by all requisite action on the part of Synbiotics. This Agreement has
been duly executed and delivered by Synbiotics, and (assuming due authorization,
execution and delivery by each Member) this Agreement constitutes a legal, valid
and binding obligation of Synbiotics, enforceable against Synbiotics in
accordance with its terms.
2.2 Capital Structure. The authorized capital stock of
-----------------
Synbiotics consists of 24,800,000 shares of Common Stock, of which there are
9,197,132 shares issued and outstanding as of the date hereof and 25,000,000
shares of preferred stock, of which there are no shares issued and outstanding
as of the date hereof. There are no other outstanding shares of capital stock or
voting securities and no outstanding commitments to issue any shares of capital
stock or voting securities, except as disclosed in Synbiotics' SEC reports and
subsequent stock option grants in the ordinary course of business. When and if
issued, the Securities will be duly authorized, validly issued, fully paid and
non-assessable and free of any liens or encumbrances created by, or resulting
from the actions of, Synbiotics, and will not be subject to preemptive rights or
rights of first refusal created by statute, the Articles of Incorporation or
Bylaws of Synbiotics or any agreement to which Synbiotics is a party or by which
it is bound.
2.3 Authorization. All and any corporate action on the part of
-------------
Synbiotics, its officers, directors and shareholders necessary for the
authorization, execution, delivery and performance by Synbiotics of all its
obligations under this Agreement and for the authorization, issuance, sale and
delivery of the Securities has been taken, and this Agreement, once executed
-4-
<PAGE>
by Synbiotics and the Members, will constitute a legally binding and valid
obligation of Synbiotics enforceable in accordance with its terms, such
enforceability being subject only to laws of general application relating to
bankruptcy, insolvency and the relief of debtors and rules of law governing
specific performance, injunctive relief or other equitable remedies. Except for
rights, if any, which have been duly waived, the issuance and sale of the
Securities will not give rise to any preemptive rights or rights of first
refusal on behalf of any person in existence on the date hereof.
2.4 Validity of Shares. The Securities, when issued, sold and
------------------
delivered in accordance with the terms and for the consideration expressed in
this Agreement, shall be duly and validly issued (including, without limitation,
compliance with applicable federal and state securities laws), fully paid and
nonassessable.
2.5 No Conflict. The execution and delivery of this Agreement
-----------
do not, and the consummation of the transactions contemplated hereby will not,
conflict with, or result in any violation of, or default (with or without notice
or lapse in time, or both) under, or give rise to a right of termination,
cancellation or acceleration of any obligation or to a loss of a material
benefit under, any provision of the Articles of Incorporation or Bylaws of
Synbiotics. The execution and delivery of this Agreement do not, and the
consummation of the transactions contemplated hereby will not, conflict with, or
result in any violation of, or default (with or without notice or lapse in time,
or both) under, or give rise to a right of termination, cancellation or
acceleration of any obligation or to a loss of a material benefit under, any
provision of any mortgage, indenture, lease or other agreement or instrument,
permit, concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Synbiotics, its properties or
assets, the effect of which could have a material adverse effect on Synbiotics
or materially impair or restrict its power to perform its obligations as
contemplated hereby.
2.6 Accuracy of Reports. Synbiotics' annual report on Form
-------------------
10-KSB for the year ended December 31, 1998 filed with the SEC, Synbiotics'
amended quarterly report on Form 10-QSB/A for the quarter ended September 30,
1999 filed with the SEC (the "Quarterly Report"), and all reports required to be
filed by Synbiotics thereafter to the date of this Agreement under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") (together, the
"SEC Reports"), have been duly filed, were complete and correct in all material
respects as of the dates at which the information was furnished, and contained
(as of such dates) no untrue statement of a material fact nor omitted to state a
material fact necessary in order to make the statements made therein, in light
of the circumstances in which they were made, not misleading.
2.7 Changes. Except as otherwise disclosed herein or in the SEC
-------
Reports, between September 30, 1999 and the date of this Agreement there has not
been:
(a) any change in the assets, liabilities, financial
condition, prospects or operations of Synbiotics from that reflected in the
Quarterly Report, except changes in the ordinary course of business which have
not been, either in any individual case or in the aggregate, materially adverse;
-5-
<PAGE>
(b) any material change in the contingent obligations of
Synbiotics, whether by way of guaranty, endorsement, indemnity, warranty or
otherwise;
(c) any damage, destruction or loss, whether or not
covered by insurance, materially and adversely affecting the properties or
business of Synbiotics;
(d) any declaration or payment of any dividend or other
distribution of the assets of Synbiotics;
(e) any labor organization activity; or
(f) to the best of Synbiotics' knowledge, any other event
or condition of any character which has materially and adversely affected
Synbiotics' assets, liabilities, financial condition, prospects or operations.
2.8 Government Consent, etc. No consent, approval or
-----------------------
authorization of or designation, declaration or filing with any governmental
authority on the part of Synbiotics is required in connection with the valid
execution and delivery of this Agreement, or the offer, sale or issuance of the
Securities, or the consummation of any other transaction contemplated hereby,
except the filing of a Registration Statement and related activities pursuant to
Article V hereof.
2.9 Full Disclosure. The representations and warranties of
---------------
Synbiotics contained in this Agreement, when read together with the Synbiotics
Disclosure Letter and the SEC Reports, do not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements contained herein, in light of the circumstances under which they were
made, not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE MEMBERS
---------------------------------------------
Each Member hereby jointly and severally represents and warrants to
Synbiotics that, except as set forth on a Members Disclosure Letter previously
delivered by the Representative, on behalf of the Members, to Synbiotics, , and
except as set forth on the Schedule of Exceptions attached hereto as Exhibit D
---------
("Schedule of Exceptions"):
3.1 Investment Risk. Each Member is aware that the Securities
---------------
have not been and upon issuance will not be registered under the Securities Act
or any applicable state securities laws, and agrees that the Securities will not
be offered or sold in the absence of registration under the Securities Act and
any applicable state securities laws or an exemption from the registration
requirements of the Securities Act and any applicable state securities laws.
Such Member will not transfer the Securities in violation of the provisions of
any applicable federal or state securities laws. In this connection, such Member
represents that he or she is familiar with Rule 144 promulgated pursuant to the
Securities Act ("Rule 144"), as presently in effect, and understands the resale
limitations imposed thereby and by the Securities Act. Such Member understands
that the offering and exchange of the Securities are intended to be exempt from
registration under the Securities Act, by virtue of Section 4(2) of the
Securities Act, based,
-6-
<PAGE>
in part, upon the representations, warranties and agreements contained in this
Agreement and further understands that Synbiotics is relying on such
representations, warranties and agreements in connection therewith. Such Member
is acquiring the Synbiotics Notes and would obtain the other Securities for his
or her own account and for investment, and not with a view to the distribution
thereof or with any present intention of distributing or selling any of the
Securities except in compliance with the Securities Act. Such Member represents
that by reason of his or her business and financial experience, and the business
and financial experience of those persons, if any, retained by him or her to
advise him or her with respect to his or her investment in the Securities, such
Member together with such advisors has knowledge, sophistication and experience
in business and financial matters so as to be capable of evaluating the merits
and risk of the prospective investment. Such Member's financial condition and
investments are such that he or she is in a financial position to hold the
Securities for an indefinite period of time and to bear the economic risk of,
and withstand a complete loss of, his or her investment in the Securities.
3.2 Organization; Good Standing; Qualification. W3C is a
------------------------------------------
limited liability company duly organized, validly existing, and in good standing
under the laws of the State of Delaware. W3C's Company Agreement (the "Company
Agreement") is as dated July 16, 1998. W3C has all requisite power and authority
to own and operate its properties and assets and to carry on its business as now
conducted and as proposed to be conducted. W3C is duly qualified to transact
business and is in good standing in each jurisdiction in which the failure so to
qualify would have a material adverse effect on its business, properties,
prospects or financial condition.
3.3 Authorization. This Agreement and any other agreement to
-------------
which any Member is to be a party and the execution and delivery of which is
contemplated hereby (the "Ancillary Agreements") constitute valid and legally
binding obligations of the Members, enforceable in accordance with their
respective terms except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, and other laws of general application affecting
enforcement of creditors' rights generally, and (ii) as limited by laws relating
to the availability of specific performance, injunctive relief, or other
equitable remedies.
3.4 Governmental Consents. No consent, approval, qualification,
---------------------
order or authorization of, or filing with, any local, state, or federal
governmental authority is required on the part of W3C or the Members in
connection with the Members' valid execution, delivery, or performance of this
Agreement or any Ancillary Agreement.
3.5 Capitalization. The authorized equity securities of W3C
--------------
consist of percentage ownership interests, all one hundred percent (100%) of
which are issued and outstanding. The outstanding W3C Units are owned by the
persons and in the percentages following (in each case of record, beneficially,
in fee simple and free of any legends, restrictions, adverse claims, liens and
encumbrances):
Colin Lucas-Mudd 63.0%
---------------------- ------------
Donna Lucas-Mudd 15.0%
---------------------- ------------
Edward Brunel-Cohen 12.0%
---------------------- ------------
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<PAGE>
Regan Francis Carey 3.0%
---------------------- ------------
Rigdon Currie 2.0%
---------------------- ------------
Mark Brunel-Cohen 1.5%
---------------------- ------------
Tim Mudd 1.0%
---------------------- ------------
Steven Usrey 1.0%
---------------------- ------------
Drew Keene 1.0%
---------------------- ------------
Kimberley Lind 0.5%
---------------------- ------------
The outstanding W3C Units have been issued pursuant to valid exemptions from the
registration or qualification provisions of the Securities Act and any relevant
state securities laws. There are not outstanding any options, warrants, rights
(including conversion or preemptive rights and rights of first refusal) or
agreements for the purchase or acquisition from W3C or from any Member of any
W3C member interests or securities exercisable or exchangeable for or
convertible into any W3C member interests.
3.6 Subsidiaries. Except as set forth in the Schedule of
------------
Exceptions, W3C does not own or control, directly or indirectly, any interest in
any other corporation, association, or other business entity. W3C is not a
participant in any joint venture, partnership, or similar arrangement.
3.7 Contracts and Other Commitments. Except as set forth on
-------------------------------
the Schedule of Exceptions, W3C does not have any contract, agreement, lease,
commitment or proposed transaction, written or oral, absolute or contingent,
other than (i) contracts for the purchase of supplies and services that were
entered into in the ordinary course of business and that do not involve more
than $5,000, and do not extend for more than one (1) year beyond the date
hereof, and (ii) contracts terminable at will by W3C on no more than thirty (30)
days' notice without cost or liability to W3C and that do not involve any
employment or consulting arrangement and are not material to the conduct of
W3C's business. For the purpose of this paragraph, employment and consulting
contracts, and license agreements and any other agreements relating to the
acquisition or disposition of W3C's technology, shall not be considered to be
contracts entered into in the ordinary course of business. Each contract,
agreement or other arrangement disclosed in the Members Disclosure Letter or in
the Schedule of Exceptions is in full force and effect and constitutes a legal,
valid and binding agreement, enforceable in accordance with its terms. W3C has
performed all of its required material obligations under, and is not materially
in violation or breach of or default under, any such contract, agreement or
arrangement. The other parties to any such contract, agreement or arrangement
are not in violation or breach of or default under any such contract, agreement
or arrangement.
3.8 Related-Party Transactions. Except as set forth in the
--------------------------
Schedule of Exceptions, no employee, Member (shareholder), manager, officer, or
director of W3C or member of his or her immediate family thereof is indebted to
W3C, nor is W3C indebted (or committed to make loans or extend or guarantee
credit) to any of them. None of such persons
-8-
<PAGE>
has any direct or indirect ownership interest in any firm or corporation with
which W3C is affiliated or with which W3C has a business relationship, or any
firm or corporation that competes with W3C, except that employees, officers or
directors of W3C and members of their immediate families may own stock in
publicly traded companies that may compete with W3C. No manager, officer or
director or any member of their immediate families is, directly or indirectly,
interested in any material contract with W3C. Additionally, none of such persons
(i) has engaged in any business dealings with W3C, (ii) owns directly or
indirectly, in whole or in part, any material tangible or intangible property
that W3C uses or (iii) has made any payment or commitment to pay any commission,
fee or other amount to, or purchase or obtain or otherwise contract to purchase
or obtain any goods or services from, any person of which any Member, manager,
officer, or director of W3C is a partner or stockholder (except for stock
holdings in publicly traded companies).
3.9 Certain Business Practices. No employee, Member
--------------------------
(shareholder), manager, officer, or director of W3C (in their capacities as
such) has (i) used any funds for unlawful contributions, gifts, entertainment or
other unlawful expenses relating to political activity, (ii) made any unlawful
payment to foreign or domestic government officials or employees or to foreign
or domestic political parties or campaigns or violated any provision of the
Foreign Corrupt Practices Act of 1977, as amended, (iii) consummated any
transaction, made any payment, entered into any agreement or arrangement or
taken any other action in violation of Section 1128B(b) of the Social Security
Act, as amended, or (iv) made any other unlawful payment.
3.10 Permits. W3C has all franchises, permits, licenses, and
-------
any similar authority necessary for the conduct of the Business. W3C is not in
default in any material respect under any of such franchises, permits, licenses
or other similar authority.
3.11 Compliance with Law and Other Instruments. Neither any of
-----------------------------------------
the Members nor W3C is in violation or default in any material respect of any
provision of W3C's Company Agreement or in any material respect of any provision
of any agreement, instrument or contract to which W3C or any Member is a party
or by which W3C or any Member is bound or of any federal or state judgment,
order, writ, decree, statute, rule or regulation applicable to W3C or any
Member. The execution, delivery and performance by the Members of this Agreement
and any Ancillary Agreement, and the consummation of the transactions
contemplated hereby and thereby will not (assuming the absence of any consent
that has not actually been obtained) result in any such violation or be in
material conflict with or constitute, with or without the passage of time or
giving of notice, either a material default under any such provision or an event
that results in the creation of any material lien, charge or encumbrance upon
any assets of W3C or the suspension, revocation, impairment, forfeiture, or
nonrenewal of any material public or private license, permit, authorization, or
approval applicable to W3C, its business or operations, or any of its assets or
properties.
3.12 Litigation. There is no action, suit, proceeding or
----------
investigation pending or currently threatened against W3C or any Member that
questions the validity of this Agreement or any Ancillary Agreement or the right
of the Members to enter into such agreements, or to consummate the transactions
contemplated hereby or thereby, or that might result, either individually or in
the aggregate, in any material adverse change in the assets, business
properties,
-9-
<PAGE>
prospects or financial condition of W3C, or in any material change in the
current equity ownership of W3C; and there is no basis for any such action. The
foregoing includes, without limitation, any action, suit, proceeding, or
investigation pending or currently threatened involving the prior employment of
any of W3C's employees, their use in connection with W3C's business of any
information or techniques allegedly proprietary to any of their former
employers, their obligations under any agreements with prior employers, or
negotiations by W3C with potential backers of, or investors in, W3C or its
proposed business. Neither any of the Members nor W3C is a party to or named in
any order, writ, injunction, judgment or decree of any court or government
agency or instrumentality. There is no action, suit or proceeding by or against
W3C currently pending or that W3C currently intends to initiate.
3.13 Business Plan. The Business Plan dated October 15, 1999,
-------------
previously delivered to Synbiotics (the "Business Plan") was prepared in good
faith by W3C and does not, to the best of the Members' knowledge after
reasonable investigation, contain any untrue statement of a material fact nor
does it omit to state a material fact necessary to make the statements therein
not misleading, except that with respect to projections and expressions of
opinion or predictions contained in the Business Plan, the Members represent
that such projections and expressions of opinion and predictions were made in
good faith and that W3C believes there is a reasonable basis therefor.
3.14 Title to Property and Assets; Leases. W3C is in possession
------------------------------------
of and has good and marketable title to, or has valid leasehold interests in or
valid rights under written agreements to use, all tangible real or personal
property, equipment, plants, buildings, structures, facilities and all other
rights, assets and properties used in or reasonably necessary for the conduct of
the Business, including all the Contributed Assets and tangible personal
property reflected on the Financial Statements and any tangible personal
property acquired since that date other than property disposed of since such
date in the ordinary course of business. Except (a) for liens for current taxes
not yet delinquent, (b) for liens imposed by law and incurred in the ordinary
course of business for obligations not past due to carriers, warehousemen,
laborers, materialmen and the like, or (c) for liens in respect of pledges or
deposits under workers' compensation laws or similar legislation, or W3C owns
its property and assets free and clear of all mortgages, liens, claims and
encumbrances. Each real property lease is a legal, valid and binding agreement
of W3C subsisting in full force and effect enforceable in accordance with its
terms, and there is no, and W3C has not received notice of any, default (or any
condition or event which, after notice or lapse of time or both, would
constitute a default) thereunder. With respect to any property and assets it
leases, W3C is in compliance with such leases and, to the best of its knowledge,
holds a valid leasehold interest free of any liens, claims or encumbrances,
subject to clauses (a)-(c) above.
3.15 Liabilities. W3C has no liability or obligation, absolute
-----------
or contingent, except (i) obligations and liabilities incurred in the ordinary
course of business that are not material, individually or in the aggregate, and
(ii) obligations under contracts made in the ordinary course of business that
would not be required to be reflected in financial statements prepared in
accordance with generally accepted accounting principles. W3C has no
indebtedness for borrowed money that W3C has directly or indirectly created,
incurred, assumed, or guaranteed, or with respect to which W3C has otherwise
become directly or indirectly liable.
-10-
<PAGE>
3.16 Books and Records. The minute books and other LLC records of W3C as
-----------------
made available to Synbiotics contain a true and complete record, in all material
respects, of all actions taken at all meetings and by all written consents in
lieu of meetings of the Members, the board of directors (managers) and
committees of the board of directors (managers) of W3C. The stock transfer
ledgers and other similar records of W3C accurately reflect all issuances and
record transfers of the equity interests of W3C. The other financial and
business books and records of W3C are true, correct and complete.
3.17 Financial Statements. The Members have previously delivered to
--------------------
Synbiotics the balance sheet of W3C as of December 15, 1999 and the statement of
income for the eleven and one-half (11 1/2)-month period then ended (the
"Financial Statements"). Such Financial Statements (i) are true, correct and
complete, (ii) are in accordance with the books and records of W3C, (iii) have
been prepared in conformity with GAAP, and (iv) fairly present the financial
condition and results of operations of W3C as of the date thereof and for the
period covered thereby; provided that the Financial Statements are subject to
normal year-end adjustments and lack footnotes and certain other presentations.
3.18 Absence of Changes. Since the end of the period covered by the
------------------
Financial Statements, there has not been any event or condition of any type that
has (individually or in the aggregate) materially and adversely affected (or
could reasonably be expected to materially and adversely affect) the business,
properties, prospects or financial condition of W3C.
3.19 Absence of Certain Developments. Since December 15, 1999, W3C has
-------------------------------
not;
(a) issued any securities or any right, option or warrants with
respect thereto;
(b) borrowed any amount, obtained any letters of credit or
incurred or become subject to any Liabilities except accounts payable or
liabilities in excess of $25,000 in the aggregate;
(c) discharged or satisfied any lien or encumbrance or paid any
obligation or liability, other than current liabilities paid in the ordinary
course of business;
(d) mortgaged or pledged any of its rights, assets or
properties, or subjected them to any lien, charge or any other encumbrance;
(e) sold, leased, subleased, assigned or transferred any of its
rights, assets or properties, except in the ordinary course of business, or
cancelled any debts or claims;
(f) made any changes in any employee compensation, severance or
termination agreement, commitment or offer of employment to any individuals;
(g) entered into any material transaction, or modified any
existing transaction;
-11-
<PAGE>
(h) suffered any damage, destruction or casualty loss, whether
or not covered by insurance ;
(i) made any capital expenditures, additions or improvements or
commitments for the same, except those made in the ordinary course of business
which in the aggregate do not exceed $25,000;
(j) entered into any transaction or operated the Business, not
in the ordinary course of business;
(k) made any change in its accounting methods or practices or
ceased making accruals for taxes, obsolete inventory, vacation and other
customary accruals;
(l) ceased from reserving cash to pay taxes, principal and
interest on borrowed funds, and other customary expenses and payments;
(m) caused to be made any reevaluation of any of its rights,
assets or properties;
(n) caused to be entered into any amendment or termination of
any lease, customer or supplier contract or other material contract or agreement
to which it is a party;
(o) made any material change in any of its business policies,
including, without limitation, advertising, distributing, marketing, pricing,
purchasing, personnel, sales, returns, budget or product acquisition or sale
policies;
(p) terminated or failed to renew, or received any written
threat (that was not subsequently withdrawn) to terminate or fail to renew, any
contract or other agreement that is or was material to the Business or its
financial condition;
(q) permitted to occur or be made any other event or condition
of any character which has had a material adverse effect on it;
(r) waived any rights material to its financial or business
condition;
(s) made any illegal payment or rebates;
(t) made or changed any material tax election;
(u) paid or declared any dividends or distributions;
(v) repurchased or redeemed any securities; or
(w) entered into any agreement to do any of the foregoing.
3.20 Patents, Copyrights, and Trademarks. W3C owns or possesses
-----------------------------------
sufficient legal rights to all patents, trademarks, servicemarks, trade names,
copyrights, trade secrets, licenses, domain names, information, proprietary
rights and processes necessary or desirable in order to conduct the Business
without any conflict with or infringement of the rights of others.
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<PAGE>
All of these are listed on the Members Disclosure Letter. There are no
outstanding options, licenses, or agreements of any kind relating to the
foregoing, nor is W3C bound by or a party to any options, licenses or agreements
of any kind with respect to the patents, trademarks, service marks, trade names,
copyrights, trade secrets, licenses, domain names, information, proprietary
rights and processes of any other person or entity. W3C has not received any
communications alleging that W3C has violated or, by conducting its business as
proposed, would violate any of the patents, trademarks, service marks, trade
names, copyrights, trade secrets or other proprietary rights of any other person
or entity. None of W3C's consultants or employees is obligated under any
contract (including licenses, covenants or commitments of any nature) or other
agreement, or subject to any judgment, decree or order of any court or
administrative agency, that would interfere with the use of such consultant's or
employee's best efforts to promote the interests of W3C or that would conflict
with W3C's business as proposed to be conducted. Neither the execution nor
delivery of this Agreement, nor the carrying on of W3C's business by the
employees of W3C, nor the conduct of W3C's business as proposed, will conflict
with or result in a breach of the terms, conditions or provisions of, or
constitute a default under, any contract, covenant or instrument under which any
of such consultants or employees is now obligated. W3C does not need to use any
inventions of any of its employees (or persons it currently intends to hire)
made prior to their employment by W3C. To the extent that any work, invention,
or material has been developed or created by a third party for W3C, W3C has a
written agreement with such third party with respect thereto and W3C thereby has
obtained ownership of, and is the exclusive owner of, all intellectual property
in such work, material or invention by operation of law or by valid assignment
or by agreement, as the case may be.
3.21 Marketing Rights. W3C has not granted rights to license, market, or
----------------
sell its products and services to any other person and is not bound by any
agreement that affects W3C's exclusive right to develop, distribute, license,
market, or sell its products and services.
3.22 Employees; Employee Compensation. There is no strike, or labor
--------------------------------
dispute or union organization activities pending or threatened between W3C and
its employees. None of W3C's employees belongs to any union or collective
bargaining unit. W3C has complied in all material respects with all applicable
state and federal equal employment opportunity and other laws related to
employment. No employee of W3C is or will be in violation of any judgment,
decree or order, or any term of any employment contract, noncompetition
agreement, nondisclosure agreement or other contract or agreement relating to
the relationship of any such employee with W3C or any other party because of the
nature of the business conducted or to be conducted by W3C or to the utilization
by the employee of his best efforts with respect to such business. No W3C
employee or consultant has employed or proposes to employ any trade secret or
any information or documentation proprietary to any former employer or has
violated any confidential relationship which such person may have had with any
third party, in connection with the Business, and W3C has no reason to believe
there will be any such employment or violation. W3C is not party to or bound by
any currently effective employment contract, deferred compensation agreement,
bonus plan, incentive plan, profit sharing plan, retirement agreement, or other
employee compensation agreement or benefit plan (including any ERISA plan). No
officer or key employee, or any group of key employees, intends to terminate
their employment with W3C, nor does W3C have a present intention to terminate
the employment of any of the foregoing. Subject to general principles related to
wrongful termination of employees, the employment of each officer and employee
of W3C is terminable at the will of W3C.
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3.23 Proprietary Information and Inventions Agreements. Each employee
-------------------------------------------------
consultant of W3C has executed a Proprietary Information and Inventions
Agreement substantially in the form that has been delivered to Synbiotics.
3.24 Tax Returns, Payments. W3C has filed all tax returns and reports as
---------------------
required by law. These returns and reports are true and correct in all material
respects. W3C has paid all taxes and other assessments due, except those
contested by it in good faith. W3C has made adequate provisions on its books of
account for all taxes, assessments and governmental charges with respect to its
business, properties and operations for such period. W3C has withheld or
collected from each payment made to each of its employees, the amount of all
taxes (including, but not limited to, federal income taxes, Federal Insurance
Contribution Act taxes and Federal Unemployment Tax Act taxes) required to be
withheld or collected therefrom, and has paid the same to the proper tax
receiving officers or authorized depositaries.
3.25 Insurance. W3C and/or its Members has or have in full force and
---------
effect fire and casualty insurance policies, with extended coverage, sufficient
in amount (subject to reasonable deductibles) to allow it to replace any of its
properties that might be damaged or destroyed. W3C and/or its Members has or
have in full force and effect comprehensive general liability insurance and
products liability insurance in amounts customary for companies similarly
situated.
3.26 Environmental and Safety Laws. W3C is not in violation of any
-----------------------------
applicable statute, law, or regulation relating to the environment or
occupational health and safety, and no material expenditures are or will be
required in order to comply with any such existing statute, law, or regulation.
3.27 Contributed Assets. The Members have contributed to W3C, in
------------------
compliance with Section 1.5, all assets, properties and rights which should be
Contributed Assets.
3.28 Bank Accounts. The Members Disclosure Letter contains a complete and
-------------
accurate list of each deposit account or asset maintained by or on behalf of W3C
with any bank, brokerage house or other financial institution, specifying with
respect to each the name and address of the institution, the name under which
the account is maintained, the account number, and the name and title or
capacity of each person authorized to have access thereto.
3.29 Disclosure. The Members have provided Synbiotics with all the
----------
information reasonably available to them that Synbiotics has requested for
deciding whether to purchase the W3C Units and all information which the Members
believe is reasonably necessary to enable Synbiotics to make such decision.
Neither this Agreement nor any other written or oral statements made or
delivered in connection herewith contains any untrue statement of a material
fact or omits to state a material fact necessary to make the statements herein
or therein not misleading.
-14-
<PAGE>
ARTICLE IV
POST-CLOSING COVENANTS
----------------------
4.1 Registration of Shares.
----------------------
(a) Synbiotics shall, within 45 days after the earlier of
satisfaction of the First Contingency or conversion of Synbiotics Notes with an
aggregate principal balance of at least $1,000,000, prepare and file with the
SEC a registration statement on Form S-3 under the Securities Act covering the
resale of the Synbiotics Common Stock within the Securities (the "Shares") by
the Members (the "Registration Statement"), and corresponding applications for
registration under the blue sky laws of any states for which the Members
reasonably request in writing to Synbiotics that Synbiotics obtain such blue-sky
registration (it being understood that in the vast majority of states no such
registration is legally required, due to Synbiotics' Nasdaq National Market
listing or other reasons). Synbiotics shall use its reasonable diligent efforts
to obtain effectiveness of the Registration Statement and such blue sky
registrations as soon thereafter as practicable, and in any event within 90 days
after the initial filing of the Registration Statement with the SEC, and shall
use its best efforts to keep the Registration Statement and such blue sky
registrations effective after that. Notwithstanding the foregoing, Synbiotics
will only be required to maintain the effectiveness of the Registration
Statement and such blue sky registrations until the earlier of (a) such time as
all of the Shares have been disposed of by the Members, or (b) such date on
which each of the Members may legally dispose of all of the Shares held by him
in one transaction in the open market pursuant to Rule 144(k) under the
Securities Act. Synbiotics shall also cause the Shares, when and if issued, to
be listed on the Nasdaq National Market and on any stock exchange on which the
Synbiotics Common Stock may from time to time be listed. Synbiotics shall pay
all fees and expenses incurred by Synbiotics in connection with preparing,
filing, prosecuting and updating the Registration Statement, such blue sky
applications and registrations, and such listing, including all registration and
filing fees, listing fees, printing expenses, and fees and disbursements of
Synbiotics' counsel and accountants.
(b) The Members shall cooperate fully with Synbiotics in the
preparation of such Registration Statement and blue sky applications and shall
provide to Synbiotics all information and materials (including updated
information and materials) regarding themselves and their respective proposed
methods of disposition of the Shares and take all actions reasonably requested
by Synbiotics to permit Synbiotics to comply with applicable requirements of the
SEC, to comply with applicable requirements of the relevant blue sky laws, and
to obtain the desired acceleration of the effective date of such Registration
Statement.
(c) Subject to Section 4.1(d) hereof, Synbiotics shall promptly
prepare and file with the SEC and any relevant blue sky authorities such
amendments and supplements to the Registration Statement and the prospectus used
in connection therewith as may be necessary to keep such Registration Statement
effective and to comply with (and enable the Members to comply with) the
provisions of the Securities Act and Rule 415 thereunder with respect to the
disposition of all the Shares.
-15-
<PAGE>
(d) During the effectiveness of the Registration Statement,
Synbiotics shall promptly notify the Members of the happening of any event or
other circumstance as the result of which, in Synbiotics' judgment, (i) the
prospectus included in the Registration Statement, as then in effect, would
include an untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading in light of the circumstances then existing, or (ii) the offer or
resale of the Shares would otherwise have a material and adverse effect on any
proposed or pending acquisition, merger, business combination or other material
transaction involving Synbiotics; and, upon receipt of such notice and until the
earlier of (i) the date Synbiotics makes available to the Members a supplemented
or amended prospectus meeting the requirements of the Securities Act and
relevant blue sky laws, or (ii) the date Synbiotics notifies the Members that
the Members may resume offers and sales using the prior prospectus, the Members
shall not offer or sell any Shares pursuant to the Registration Statement (and
shall return all copies of such prior prospectus to Synbiotics if requested to
do so by it). Notwithstanding Section 4.1(c), Synbiotics may continue such
"blackout" period or periods for such period of time as Synbiotics considers
reasonably necessary and in its best interest due to circumstances then
existing, or simply due to the fact that amendments/supplements of a
Registration Statement/ prospectus cannot be prepared instantly; but in no event
---
may Synbiotics impose "blackouts" on the Members for any period of 30 or more
consecutive business days or totaling more than 100 days in any 12 month period.
(e) Synbiotics shall not be required to apply for or obtain blue
sky registration in any state if in connection therewith or as a condition
thereto it must (i) qualify to do business in such state where it would not
otherwise be required to qualify, (ii) subject itself to general taxation in
such state, (iii) file a general consent to service of process in such state, or
(iv) make any change in its Articles of Incorporation or Bylaws, which
Synbiotics' Board of Directors determines to be contrary to the best interests
of Synbiotics and its shareholders.
4.2 Indemnification.
---------------
(a) Synbiotics will indemnify the Members against all claims,
losses, expenses, damages and liabilities (or actions in respect thereto)
arising out of or based on (A) any untrue statements (or alleged untrue
statement) of a material fact contained in any prospectus contained in any
registration statement covering the Shares for resale, or based on any omission
(or alleged omission) to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, or (B) any
misrepresentation or breach of any representation or warranty given or made by
Synbiotics in this Agreement, and will reimburse the Members for any reasonable
legal and any other expenses incurred in connection with investigating,
defending or settling any such claim, loss, damage, liability or action,
provided that Synbiotics will not be liable in any such case to the extent that
any such claim, loss, damage or liability is caused by any untrue statement or
omission based upon written information furnished to Synbiotics by the Members
specifically for use therein.
(b) The Members will indemnify Synbiotics, each of its directors
and officers, and each person who controls Synbiotics within the meaning of the
Securities Act, against all claims, losses, expenses, damages and liabilities
(or actions in respect thereof) arising out of or based on (A) any untrue
statement (or alleged untrue statement) of a material fact
-16-
<PAGE>
contained in any such prospectus, or any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, or (B) any sale of Shares which violates (or
allegedly violates) the Securities Act because of violation of the prospectus
delivery requirement or because more or less than the information in such
prospectus is given (or alleged to be given) in connection with the sale, or (C)
any misrepresentation or breach of any representation or warranty given or made
by the Members in this Agreement, and will reimburse Synbiotics, and such
directors, officers, or controlling persons, for any reasonable legal or any
other expenses incurred in connection with investigating, defending or settling
any such claim, loss, damage, liability or action, but in the case of subsection
(b)(A) to the extent, and only to the extent, that such untrue statement (or
alleged untrue statement) or omission (or alleged omission) is made in such
prospectus in reliance upon and in conformity with written information furnished
to Synbiotics by the Members specifically for use therein.
(c) Each party entitled to indemnification under this Section
4.2 (the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such indemnified party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld), and the Indemnified Party may participate in such defense at the
Indemnified Party's expense, and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations hereunder, unless such failure resulted in
actual detriment to the Indemnifying Party. The Indemnified Party shall provide
all cooperation reasonably requested for the defense of the claim or litigation.
No Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability in respect to such claim or litigation. An
Indemnified Party shall not decline any settlement complying with the foregoing
if it requires nothing of the Indemnified Party other than the payment of money
(which is in fact paid by the Indemnifying Party) and does not include an
admission of liability.
(d) In order to provide for just and equitable contribution to
joint liability under the Securities Act in any case in which any person or
entity entitled to indemnification under Section 4.2 makes a claim for
indemnification pursuant to this Section 4.2 but it is judicially determined (by
entry of a final judgment or decree by a court of competent jurisdiction and the
expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case notwithstanding the fact
that this Section 4.2 provides for indemnification in such case; then, and in
such case, the party that would otherwise be required to indemnify under Section
4.2 will contribute to the aggregate losses, claims, damages or liabilities to
which the other parties may be subject (after contribution from others) in such
proportion as is appropriate to reflect the relative fault of the parties in
connection with the losses suffered, as well as any other relevant equitable
considerations.
-17-
<PAGE>
4.3 Deliverables Upon Effectiveness. When and if the SEC declares the
-------------------------------
Registration Statement effective, Synbiotics shall promptly deliver to the
Members:
(a) A certificate signed by the President of Synbiotics that the
Registration Statement is effective and, to his knowledge, no stop order with
respect to the Registration Statement has been issued and no proceedings
therefor have been instituted.
(b) Such number of copies of the Registration Statement and
(from time to time) of each amendment and supplement thereto, such number of
copies of the prospectus (including (from time to time) any supplemental or
amended prospectus) included in such Registration Statement, and such other
related documents as the Members may reasonably request in writing in order to
facilitate the disposition of the Shares by the Members.
4.4 Current Public Information. As long as the Members own any Shares
--------------------------
and Synbiotics remains a public company, Synbiotics shall use its best efforts
to properly file all SEC Reports, or otherwise make available "adequate current
public information" about itself, within the meaning of Rule 144(c) under the
Securities Act, to potentially make available to the Members the benefits of
certain rules and regulations of the SEC which may permit the sale of the Shares
without registration.
4.5 Taking of Necessary Action; Further Action If, at any time after the
------------------------------------------
Closing, any further action is necessary or desirable to carry out the purposes
of this Agreement, the managers, officers and directors of W3C and Synbiotics
are fully authorized in the name of their respective companies or otherwise to
take, and they and the Members will take, all such lawful and necessary action
to do so, so long as such action is not inconsistent with this Agreement.
4.6 Board Seat. Upon the Closing, Synbiotics' Board of Directors shall
----------
elect Colin Lucas-Mudd to the Synbiotics Board of Directors to serve until the
next annual meeting of shareholders.
4.7 Confidential Information and Non-Disclosure.
-------------------------------------------
(a) Definition of Confidential Information. Each of the Members
--------------------------------------
hereby acknowledges that the assets of the Business, which give value to the W3C
Units, include the confidential and proprietary information of and regarding the
Business in existence prior to Effective Date (collectively, "Confidential
Information"), which Confidential Information shall include, without limitation,
all of the following materials and information (whether or not reduced to
writing and whether or not patentable or protected by copyright): (i) any and
all trade secrets concerning the business and affairs of W3C and/or the
Business, product specifications, data, know-how, formulae, compositions,
processes, designs, sketches, photographs, graphs, drawings, samples, inventions
and ideas, past, current and planned research and development, current and
planned manufacturing and distribution methods and processes, customer lists,
current and anticipated customer requirements, price lists, market studies,
business plans, computer software and programs (including object code and source
code), computer software and database technologies, systems, structures and
architectures (and related processes, formulae, compositions, improvements,
derivatives, devices, know-how, inventions, discoveries, concepts,
-18-
<PAGE>
ideas, designs, methods and information) and any other information, however
documented, of W3C or of any other person which has entrusted its confidential
and proprietary information to W3C that is a trade secret within the meaning of
any and all applicable state and federal trade secret laws; (ii) any and all
information concerning the business and affairs of W3C or of any other person
which has entrusted its confidential and proprietary information to W3C (which
includes historical financial statements, financial projections and budgets,
historical and projected sales, capital spending budgets and plans, the names
and backgrounds of key personnel and personnel training and techniques and
materials), however documented; and (iii) any and all notes, analysis,
reflections, derivatives, compilations, studies, summaries, and other material
prepared by or for W3C containing or based, in whole or in part, on any
information included in the foregoing. The parties hereto agree that the failure
of any Confidential Information to be marked or otherwise labeled as
confidential or proprietary information shall not affect its status as
Confidential Information. Notwithstanding the foregoing, Confidential
Information shall not include (1) any information which is generally known to
the public or to companies in businesses similar to the Business, (2) any
information which later, through no act of any Member, becomes generally known
or (3) to the limited extent of compliance with such requirements, any
information required to be disclosed by a Member pursuant to a subpoena or court
order, or pursuant to a requirement of a governmental agency or law of the
United States of America or a state thereof, provided that (a) the Member will
provide Synbiotics with prior written notice of such disclosure in order that
Synbiotics may attempt to obtain a limitation of the required disclosure, a
protective order or the assurance of confidential treatment and (b) the Member
will cooperate with Synbiotics in attempting to obtain such limitation, order or
assurance.
(b) Non-Use and Non-Disclosure. Commencing on the date hereof
--------------------------
and at all times thereafter, each of the Members shall hold in the strictest
confidence (except as previously approved by Synbiotics in writing), and shall
not, directly or indirectly, disclose, divulge, reveal, report, publish,
transfer or otherwise communicate, or use for its benefit or the benefit of any
other person, partnership, firm, corporation or other entity, or use to the
detriment of Synbiotics or W3C, or misuse in any way, any Confidential
Information. Each of the Members acknowledges that he will in no way infringe
upon any W3C copyrights, trademarks or servicemarks and will in no way use,
copy, appropriate or redistribute any part of the Confidential Information,
whether obtained directly or indirectly from Synbiotics or W3C or not, without a
specific written license agreement with Synbiotics. It is agreed that any
derivative, modification or elaboration of any Confidential Information by any
third party remains, so far as each of the Members is concerned, Confidential
Information for purposes of this Agreement. Synbiotics and each of the Members
each hereby stipulates that, as between them, all Confidential Information
acquired by Synbiotics via its purchase of the W3C Units constitutes important,
material and confidential and/or proprietary information of Synbiotics and the
Business, constitutes unique and valuable information, and affects the
successful conduct of the Business and Synbiotics' goodwill, and that
Synbiotics/W3C shall be entitled to recover its damages, in addition to any
injunctive remedy that may be available, for any breach of this Section 4.7.
-----------
(c) Trade Secrets. All trade secrets of Synbiotics (including
-------------
W3C) and the Business will be entitled to all of the protection and benefits
under all applicable federal and state trade secrets law. If any information
that Synbiotics deems to be a trade secret is found by a court of competent
jurisdiction not to be a trade secret, such information will, nevertheless,
-19-
<PAGE>
be considered Confidential Information for purposes of this Agreement unless it
is excluded by the last sentence of Section 4.7(a).
--------------
4.8 Ownership. Each of the Members hereby acknowledges and agrees that
---------
all right, title and interest in and to any Confidential Information shall be
the exclusive property of Synbiotics and/or W3C. Without limiting the foregoing,
each of the Members shall assign to Synbiotics any and all right, title or
interest which he may have in all Confidential Information made, developed or
conceived of in whole or in part by him or any employee or consultant of W3C who
conceived in whole or in part such Confidential Information. Each of the Members
further agrees to execute and deliver any and all instruments, and to do all
other things reasonably requested by Synbiotics in order to vest more fully in
Synbiotics and/or W3C all ownership rights in such Confidential Information. All
equipment, notebooks, documents, memoranda, reports, files, samples, books,
correspondence, lists, other written and graphic records, and the like, in any
way relating to any Confidential Information or the Business, which W3C or its
employees, Members or consultants prepared, used, constructed, observed,
processed, or controlled (collectively, "Materials") shall be Synbiotics'/W3C's
exclusive property, and each of the Members hereby agrees to deliver all
Materials, together with any and all copies thereof, promptly to Synbiotics at
Synbiotics' request.
ARTICLE V
---------
CONDITIONS OF THE MEMBERS' OBLIGATIONS AT CLOSING.
-------------------------------------------------
The obligations of the Members under Section 1 of this Agreement are
subject to the fulfillment at or before the Closing of each of the following
conditions, any of which may be waived in writing by the Representative on
behalf of the Members:
5.1 Bringdown. Synbiotics' representations and warranties in Article II
---------
shall be true in all material respects, as if made on and as of the date of the
Closing. Synbiotics shall have performed or fulfilled in all material respects
all agreements, obligations and conditions contained herein required to be
performed or fulfilled by Synbiotics before such Closing.
5.2 Blue Sky Compliance. Synbiotics shall be exempt from or have
-------------------
complied with the registration/qualification requirements of and be effective
under all blue sky laws applicable to the offer and sale of the Securities to
the Members.
5.3 No Order Pending. There shall not then be in effect any order
----------------
enjoining or restraining the transactions contemplated by this Agreement.
5.4 Compliance Certificate. Synbiotics shall have delivered to the
----------------------
Representative a certificate dated as of the date of the Closing signed by the
Chief Executive Officer or President of Synbiotics certifying that, to his
knowledge, the conditions set forth in Sections 5.1, 5.2, and 5.3 have been
satisfied.
-20-
<PAGE>
ARTICLE VI
CONDITIONS OF SYNBIOTICS' OBLIGATIONS AT CLOSING
------------------------------------------------
The obligations of Synbiotics under Section 1 of this Agreement are
subject to the fulfillment at or before the Closing of each of the following
conditions, any of which may be waived in writing by Synbiotics:
6.1 Bringdown. The Members' representations and warranties in Article
---------
III shall be true in all material respects, as if made on and as of the date of
the Closing. The Members and W3C shall have performed or fulfilled in all
material respects all agreements, obligations and conditions contained herein
required to be performed or fulfilled by the Members and/or W3C before such
Closing.
6.2 No Order Pending. There shall not then be in effect any order
----------------
enjoining or restraining the transactions contemplated by this Agreement.
6.3 Legal Opinion. Synbiotics shall have received an opinion of counsel
-------------
to the Members to the effect that the Members own, and the W3C Units being
exchanged by the Members constitute, all of the member interests in W3C.
6.4 Instruments of Transfer. Synbiotics shall have received the Limited
-----------------------
Liability Company Interest Certificates representing all of the W3C Units and
duly executed transfer instruments.
6.5 Non-Competition and Employment Agreements. Synbiotics shall have
-----------------------------------------
received executed originals of the Non-Competition Agreements, the Proprietary
Information and Inventions Agreements, the Mudd and Carey Employment Agreements
and be reassured that the Cohen Employment Agreement will be executed and
delivered within thirty (30) days.
6.6 Compliance Certificate. The Representative shall have delivered to
----------------------
Synbiotics a certificate dated as of the date of the Closing signed by the
Representative certifying that, to his knowledge, the conditions set forth in
Sections 6.1 and 6.2 have been satisfied.
ARTICLE VII
GENERAL PROVISIONS
------------------
7.1 Representations, Warranties and Agreements. Each party agrees that,
------------------------------------------
except for the representations and warranties contained in this Agreement or as
otherwise set forth in the Disclosure Letter, no party hereto has made any other
representations and warranties, and each party hereby disclaims any other
representations and warranties made by itself or any of its officers, directors,
employees, agents, financial and legal advisors or other representatives, with
respect to execution and delivery of this Agreement or the transactions
contemplated herein, notwithstanding the delivery or disclosure to any other
party or any party's representatives of any documentation or other information
with respect to any one or more of the foregoing. The warranties,
representations and covenants of Synbiotics and the Members contained in or
made
-21-
<PAGE>
pursuant to this Agreement shall survive the execution and delivery of this
Agreement and the consummation of the transactions contemplated herein.
Synbiotics' investigation does not adversely affect Synbiotics' right to rely on
the Members' representations and warranties.
7.2 Governing Law. This agreement shall be governed by, and construed
-------------
and enforced in accordance with, the laws of the State of California.
7.3 Assignment; Binding Effect; Benefit. This Agreement shall be binding
-----------------------------------
upon and shall inure to the benefit of the parties hereto and their respective
successors and assigns. Notwithstanding anything contained in this Agreement to
the contrary, nothing in this Agreement, expressed or implied, is intended to
confer on any person other than the parties hereto or their respective
successors and assigns any rights or remedies under or by reason of this
Agreement.
7.4 Entire Agreement; Amendment; Waiver. This Agreement constitutes the
-----------------------------------
entire agreement among the parties with respect to the subject matter hereof and
supersedes all prior agreements and understandings among the parties with
respect thereto. No amendment to or modification or waiver of any provision of
this Agreement shall be binding upon any party hereto unless made in writing and
signed by Synbiotics and a majority in interest of the Members. Any amendment or
waiver effected in accordance with this Section 7.4 shall be binding upon each
Member, each future holder of any Securities, and Synbiotics.
7.5 Counterparts. This Agreement may be executed in one or more
------------
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.
7.6 Headings. The headings of the Sections and Articles of this
--------
Agreement are for convenience and shall not determine the interpretation of this
Agreement.
7.7 Notices. Any notice required or permitted hereunder shall be given
-------
in writing and shall be conclusively deemed effectively given upon personal
delivery, or, if made by registered or certified United States mail, postage
prepaid, four business days after mailing, or if made by overnight carrier, one
business day after sending, in all instances addressed (i) if to Synbiotics, as
set forth below Synbiotics' name on the signature page of this Agreement, and
(ii) if to the Members, to the Representative, as representative of the Members,
as set forth below Colin Lucas-Mudd's name on the signature page to this
Agreement, or at such other address as Synbiotics or the Members may designate
by ten days' advance written notice to the Representative or Synbiotics,
respectively.
7.8 Fees and Expenses. Synbiotics and the Members will each bear their
-----------------
own fees and expenses in connection with the transactions contemplated by this
Agreement.
7.9 Finder's Fees. Each party represents that it neither is nor will be
-------------
obligated for any finders' fee or commission in connection with this
transaction.
The Members jointly and severally agree to indemnify and to hold harmless
Synbiotics from any liability for any commission or compensation in the nature
of a finders' fee
-22-
<PAGE>
(and the costs and expenses of defending against such liability or asserted
liability) for which W3C or any of the Members is responsible.
Synbiotics agrees to indemnify and hold harmless the Members from any
liability for any commission or compensation in the nature of a finders' fee
(and the costs and expenses of defending against such liability or asserted
liability) for which Synbiotics is responsible.
7.10 Publicity. The Members shall make no public announcement of
---------
this Agreement or of the transactions contemplated hereby. Synbiotics shall
control the timing and content of any public announcements.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Exchange Agreement
as of the date first written above.
SYNBIOTICS CORPORATION,
a California corporation
By: /s/ Kenneth M. Cohen
--------------------
President and CEO
By: /s/ Michael K. Green
--------------------
Secretary
Address: 11011 Via Frontera
San Diego, CA 92127
MEMBERS OF W3 COMMERCE LLC
Signature: /s/ Colin Lucas -Mudd
---------------------
Print Name: Colin Lucas-Mudd
Address: 610 Hymettus Avenue
Encinitas, CA 92024
Signature: /s/ Donna Lucas-Mudd
--------------------
Print Name: Donna Lucas-Mudd
Signature: /s/ Edward Brunel-Cohen
-----------------------
Print Name: Edward Brunel-Cohen
Signature: /s/ Regan Francis Carey
-----------------------
Print Name: Regan Francis Carey
Signature: /s/ Mark Brunel-Cohen
---------------------
Print Name: Mark Brunel-Cohen
[SIGNATURE PAGE TO EXCHANGE AGREEMENT BETWEEN SYNBIOTICS
CORPORATION AND W3 COMMERCE, LLC]
<PAGE>
Signature: /s/ Rigdon Currie
-----------------
Print Name: Rigdon Currie
Signature: /s/ Tim Mudd
------------
Print Name: Tim Mudd
Signature: /s/ Steven Usrey
----------------
Print Name: Steven Usrey
Signature: /s/ Drew Keene
--------------
Print Name: Drew Keene
Signature: /s/ Kimberley Lind
------------------
Print Name: Kimberley Lind
[SIGNATURE PAGE TO EXCHANGE AGREEMENT BETWEEN SYNBIOTICS
CORPORATION AND W3 COMMERCE, LLC]
<PAGE>
EXHIBIT A
CONVERTIBLE PROMISSORY NOTE
A-1
<PAGE>
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED
STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED,
ASSIGNED, PLEDGED, OR HYPOTHECATED ABSENT AN EFFECTIVE REGISTRATION THEREOF
UNDER SUCH ACT OR COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT, OR UNLESS
THE COMPANY HAS RECEIVED SATISFACTORY EVIDENCE THAT SUCH REGISTRATION IS NOT
REQUIRED.
CONVERTIBLE PROMISSORY NOTE
---------------------------
$ January 12, 2000
San Diego, California
Synbiotics Corporation, a California corporation ("Maker"), for value
received, hereby promises to pay to ______________ ("Payee"), in lawful money of
the United States, at 11011 Via Frontera, San Diego, California 92127, the
principal sum of _________________ ($_____________), together with simple
interest on the unpaid principal at the rate of 6.21 percent (6.21%) per annum,
interest to accrue on the basis of a 365 day year for the number of days
actually elapsed. All principal together with all accrued interest shall be due
and payable in one lump sum on January 12, 2006.
At any time after the earlier of (a) immediately before an acquisition
of Maker, or (b) January 12, 2002, but not previously, Payee may, at his option,
convert some or all of the principal balance of this Note into shares of the
Common Stock of the Maker, at the rate of $2.8125 per share (as subsequently
adjusted for any stock splits, stock dividends and reverse stock splits).
Accrued interest associated with converted principal shall not be reflected in
the conversion quotient, and shall be deemed forgiven. To convert, Payee must
deliver this Note to Maker together with a written notice of conversion. In the
event of any partial conversion, Maker shall deliver to Payee a new Note, of
like tenor, for the remaining principal amount.
Reference is made to that certain Employment Agreement ("Employment
Agreement") between W3 Commerce LLC and Maker, to which Payee is a third party
beneficiary, executed and delivered in connection with that certain Exchange
Agreement, dated as of January 12, 2000 (the "Exchange Agreement") between
Maker, Payee and others. If, pursuant to the terms of the Employment Agreement,
Payee ceases to be an employee of Maker prior to January 12, 2001, for any
reason other than termination by Maker without Cause (as such term is defined in
the Employment Agreement) (such separation from employment is herein referred to
as "Employment Separation"), the rate at which the principal balance of this
Note may be converted into shares of Common Stock of Maker shall be determined
as follows: if Employment Separation occurs prior to April 12, 2000, the
principal balance of this Note shall be convertible into shares of the Common
Stock of Maker, when such conversion is allowed under the terms of this Note, at
the rate of $4.69 per share (as subsequently adjusted for any stock splits,
stock dividends and reverse stock splits). If Employment Separation occurs after
April 12, 2000, but prior to July 12, 2000, the principal balance of this Note
shall be convertible into shares of the Common Stock of Maker, when such
conversion is allowed under the terms of this Note, at the rate of $4.02 per
share (as subsequently adjusted for any stock splits, stock dividends and
reverse stock splits). If Employment Separation occurs after July 12, 2000, but
prior to October 12, 2000, the principal balance of this Note shall be
convertible into shares of the Common Stock of Maker, when such conversion is
allowed under the terms of this Note, at
A-2
<PAGE>
the rate of $3.52 per share (as subsequently adjusted for any stock splits,
stock dividends and reverse stock splits). If Employment Separation occurs after
October 12, 2000 but prior to January 12, 2001, the principal balance of this
Note shall be convertible into shares of the Common Stock of Maker, when such
conversion is allowed under the terms of this Note, at the rate of $3.125 per
share (as subsequently adjusted for any stock splits, stock dividends and
reverse stock splits).
If Payee ceases at any time to be an employee of Maker due to
termination without Cause, Payee shall be entitled to the full value of this
Note, without regard to any of the calculations set forth in the immediately
preceding paragraph.
If Maker is acquired (except in a reincorporation), this Note shall no
longer be convertible.
This Note may be prepaid, in whole or in part, without premium or
penalty, at any time, after December 30, 2003, on 20 business days' prior
written notice to Payee.
Upon payment in full of all principal and interest payable hereunder,
this Note shall be surrendered to Maker for cancellation.
Maker waives presentment, demand for performance, notice of
nonperformance, protest, notice of protest, and notice of dishonor. No delay on
the part of Payee in exercising any right hereunder shall operate as a waiver of
such right under this Note. This Note is being delivered in and shall be
construed in accordance with the laws of the State of California.
If Maker defaults and the indebtedness represented by this Note or any
part thereof is collected through legal action or other judicial proceedings,
Maker agrees to pay, in addition to the principal and interest payable hereon,
reasonable attorneys' fees and costs incurred by Payee.
This Note, and any Common Stock issued upon conversion hereof, are
subject to an Exchange Agreement dated January 12, 2000 among Maker, Payee, and
the other members of W3 Commerce LLC. Neither this Note, nor any right or
interest in it, may be sold, assigned or transferred.
Subordination Provisions
------------------------
(a) Except for the issuance of shares of Common Stock of Maker upon
conversion in accordance with the terms of this Note, it is agreed that, in the
event of any insolvency, bankruptcy, receivership, assignment for the benefit of
creditors, reorganization, or arrangement with creditors of Maker, whether or
not pursuant to bankruptcy laws, or any dissolution, liquidation, or other
marshalling of the assets and liabilities of Maker, all Senior Debt (defined as
indebtedness to any bank or institutional lender) shall be paid in full before
any payment or distribution of any character, whether in cash, securities (other
than those issued in accordance with the conversion provisions above), or other
property, which would otherwise, but for the subordination provisions applicable
to the obligations under this Note, be payable or distributable for or on
account of any obligations under this Note shall first be paid or distributed
directly to the holders of the Senior Debt, until all Senior Debt shall have
been paid in full.
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<PAGE>
(b) Except for the issuance of shares of Common Stock of Maker upon
conversion in accordance with the terms of this Note, it is agreed that, if any
Senior Debt is accelerated, all such accelerated Senior Debt shall be paid in
full before any payment or distribution of any character, whether in cash,
securities, or other property, shall be made for or on account of any
obligations under this Note. In any such event, any payment or distribution of
any character, whether in cash, securities (other than those issued in
accordance with the conversion provisions above), or other property, which would
otherwise, but for the subordination provisions applicable to the obligations
under this Note, be payable or distributable for or on account of any
obligations under this Note shall first be paid or distributed directly to the
holders of the Senior Debt, until all such accelerated Senior Debt shall have
been paid in full.
(c) Upon the occurrence of any event of default by Maker with respect
to any Senior Debt under circumstances when the subordination provisions
described in the preceding paragraphs are not applicable and the delivery by the
holder of Senior Debt of written notice of such default to Maker, then, unless
and until the holder of Senior Debt shall have notified Maker that such default
shall have been cured or waived or shall have ceased to exist, no payment or
distribution of any character, whether in cash, securities (other than those
issued in accordance with the conversion provisions above), or other property,
shall be made for or on account of any obligations under this Note.
(d) If Maker makes any payment on account of any obligations under
this Note in contravention of the subordination provisions described in this
"Subordination Provisions" section, such payment shall be held by the Payee of
the obligations under this Note for the benefit of, and shall be paid forthwith
over and delivered to, Maker for application to the payment of all Senior Debt
remaining unpaid to the extent necessary to pay all Senior Debt in full in
accordance with the terms of such Senior Debt.
(e) Payee, by acceptance of this Note, is deemed to accept, agree to,
and be bound by this "Subordination Provisions" section.
SYNBIOTICS CORPORATION
______________________________________
By: Kenneth M. Cohen
Title: President
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<PAGE>
EXHIBIT B
NON-COMPETITION AGREEMENT
<PAGE>
NON-COMPETITION AGREEMENT
This NON-COMPETITION AGREEMENT (this "Agreement") is made as of January 12,
2000 by and between Synbiotics Corporation, a California corporation
("Synbiotics"), and _____________________ ("Member").
RECITALS
--------
WHEREAS, Synbiotics, Member and the other members of W3 Commerce LLC, a
Delaware limited liability company ("W3C") have entered into that certain
Exchange Agreement, dated as of January 12, 2000 (the "Exchange Agreement")
pursuant to which Synbiotics is acquiring all the member interests in W3C from
the Members (capitalized terms used herein and not otherwise defined herein
shall have the meanings given such terms in the Exchange Agreement);
WHEREAS, the going concern value of the W3C Units being sold by the Members
to Synbiotics would be diminished substantially if Member were to compete with
Synbiotics in the Business;
WHEREAS, W3C currently conducts the Business in every nation, state and
county in the world;
WHEREAS, the Exchange Agreement requires that Member enter into this
Agreement as a condition to the obligation of Synbiotics to acquire the W3C
Units and to consummate the transactions contemplated by the Exchange Agreement.
NOW, THEREFORE, in consideration of the mutual covenants set forth in this
Agreement, and in connection with the Closing under the Exchange Agreement and
the acquisition of the W3C Units in connection therewith, the parties hereto
agree as follows:
1. Non-Competition. As an inducement for Synbiotics to enter into
---------------
the Exchange Agreement and to pay the purchase price, and in consideration of
Member's exposure to confidential information of the Business, Member hereby
covenants as follows:
a. In General. The term of this Agreement (the "Term") shall
----------
continue for the longer of: (i) three (3) years from the Effective Date (as such
term is defined in the Exchange Agreement) or (ii) two (2) years after Member
ceases to be in the employ of Synbiotics pursuant to the terms of a certain
Employment Agreement between Maker and Synbiotics executed and delivered in
connection herewith. During the Term, Member shall not, directly or indirectly,
own, manage, engage in, operate or conduct, prepare to or plan to conduct or
assist any person or entity to conduct any business, or have any interest in any
business, person, firm, corporation or other entity (as a principal, owner,
agent, employee, shareholder, officer, director, joint venturer, partner,
security holder (except for the ownership of publicly-traded securities
constituting not more than five percent (5%) of the outstanding securities of
the issuer thereof), creditor (except for trade credit extended in the ordinary
course of business), consultant or in any other capacity that engages, directly
or indirectly, in any business which is the same as, similar to or competitive
with the Business anywhere in the world. The covenants
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<PAGE>
set forth in this Section 1 shall be construed as a series of separate covenants
---------
covering their subject matter in each of the separate nations, states and
counties where Synbiotics (for the purpose of this Agreement, the term
"Synbiotics," as used here and hereafter in this Agreement, shall include both
Synbiotics and its present and future affiliates, including W3C) conducts the
Business, and except for geographic coverage, each such separate covenant shall
be deemed identical in terms to the covenants set forth in this Section 1. To
----------
the extent that any such covenant shall be judicially unenforceable in any one
or more of such nations, states and counties, such covenant shall not be
affected with respect to each of the other nations, states and counties. Each
covenant with respect to such nation, state and county shall be construed as
severable and independent.
b. No Diversion of Others. During the Term, Member shall not,
----------------------
either for himself or for any other person, firm, corporation or other entity,
directly or indirectly, or by action in concert with others:
(i) induce or influence, or seek to induce or influence,
any person who is engaged by Synbiotics (as an agent, employee, consultant, or
in any other capacity) or any successor thereto with the purpose of engaging
such person for himself or for a business competitive with Synbiotics or the
Business; or
(ii) divert or take away or attempt to divert or take away,
or solicit or attempt to solicit, any existing or potential customer or supplier
of Synbiotics (whether or not such customer or supplier is actually a customer
or supplier of Synbiotics as of the Effective Date, including without limitation
any customer or supplier solicited by Member or which became known by Member
prior to the Effective Date) with the purpose of obtaining such person as a
customer or supplier for a business competitive with Synbiotics or the Business
or persuading such person to reduce, or to not increase, the level of business
it does with Synbiotics.
c. Organizing Competitive Business. Without limiting any of
-------------------------------
the other provisions contained in this Section 1, during the Term, Member shall
---------
not plan to compete, prepare to compete or discuss Synbiotics' business or the
Business with any third party planning or preparing to compete with the
Business, or conspire with agents, employees, consultants, other representatives
of Synbiotics or any other third party for the purpose of organizing any
business activity competitive with Synbiotics or the Business.
2. Reasonableness of Restrictions. MEMBER HAS CAREFULLY READ AND
------------------------------
CONSIDERED THE PROVISIONS OF SECTION 1 HEREOF AND, HAVING DONE SO, HEREBY AGREES
THAT THE RESTRICTIONS SET FORTH IN SUCH SECTIONS ARE FAIR AND REASONABLE AND ARE
REASONABLY REQUIRED FOR THE PROTECTION OF THE INTERESTS OF SYNBIOTICS AND THE
BUSINESS.
3. Injunctive Relief.
-----------------
a. In General. Member acknowledges and agrees that Synbiotics
----------
shall suffer irreparable harm in the event that Member breaches any of his
obligations under Section 1 hereof, and that monetary damages shall be
---------
inadequate to compensate Synbiotics for
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<PAGE>
any such breach. Member agrees that in the event of any breach or threatened
breach by Member of any of the provisions of Section 1 hereof, Synbiotics shall
---------
be entitled to a temporary restraining order, preliminary injunction and
permanent injunction in order to prevent or restrain any such breach or
threatened breach by Member, or by any or all of Member's agents,
representatives or other persons directly or indirectly acting for, on behalf of
or with Member. Member hereby waives any requirement that Synbiotics submit
proof of the economic value of any trade secret or post a bond or other
security.
b. No Limitation of Remedies. Notwithstanding the provisions
-------------------------
set forth in Section 3(a), above, or any other provision contained in this
------------
Agreement, the parties hereby agree that no remedy conferred by any of the
specific provisions of this Agreement, including, without limitation, this
Section 3, is intended to be exclusive of any other remedy, and each and every
- ---------
remedy shall be cumulative and shall be in addition to every other remedy given
hereunder or now or hereafter existing at law or in equity or by statute or
otherwise.
4. Miscellaneous.
a. Notices. All notices, requests and other communications
-------
hereunder must be in writing and will be deemed to have been duly given only if
delivered personally or by facsimile transmission with answer back confirmation
or mailed (first class, postage prepaid) or by overnight courier to the parties
at the following addresses or facsimile numbers:
If to Member, to:
If to Synbiotics, to:
Synbiotics Corporation
11011 Via Frontera
San Diego, CA 92127
Facsimile No.: (858) 451-5719
Attention: Chief Executive Officer and President
with copies to:
Brobeck, Phleger & Harrison LLP
550 West "C" Street
Suite 1300
San Diego, CA 92101
Facsimile No.: (619) 234-3848
Attention: Hayden Trubitt, Esq.
All such notices, requests and other communications will (i) if delivered
personally or by overnight courier to the address as provided in this Section
-------
4(a), be deemed given upon delivery,
- ----
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<PAGE>
(ii) if delivered by facsimile transmission to the facsimile number as provided
in this Section 4(a), be deemed given upon sending, and (iii) if delivered by
------------
mail in the manner described above to the address as provided in this Section
-------
4(a), be deemed given two business days after mailing (in each case regardless
- ----
of whether such notice, request or other communication is received by any other
person to whom a copy of such notice, request or other communication is to be
delivered pursuant to this Section). Any party from time to time may change its
address, facsimile number or other information for the purpose of notices to
that party by giving notice specifying such change to the other parties hereto.
b. Entire Agreement. This Agreement, the Exchange Agreement (and
----------------
all related exhibits and schedules) and all other documents delivered in
connection here with supersede all prior discussions and agreements among the
parties with respect to the subject matter hereof and thereof and contains the
sole and entire agreement among the parties hereto with respect thereto;
provided, however, that any provisions of any prior agreement pertaining to
nondisclosure/nonuse are not superseded and remain in effect.
c. Waiver. Any term or condition of this Agreement may be waived
------
at any time by the party that is entitled to the benefit thereof, but no such
waiver shall be effective unless set forth in a written instrument duly executed
by or on behalf of the party waiving such term or condition. No waiver by any
party hereto of any term or condition of this Agreement, in any one or more
instances, shall be deemed to be or construed as a waiver of the same or any
other term or condition of this Agreement on any future occasion. All remedies,
either under this Agreement or by law or otherwise afforded, will be cumulative
and not alternative.
d. Amendment. This Agreement may be amended, supplemented or
---------
modified only by a written instrument duly executed by or on behalf of each
party hereto.
e. Third Parties. The terms and provisions of this Agreement
-------------
are intended solely for the benefit of Member, Synbiotics and Synbiotics'
successors or assigns, and it is not the intention of the parties to confer
third-party beneficiary rights upon any other person.
f. Headings. The headings used in this Agreement have been
--------
inserted for convenience of reference only and do not define or limit the
provisions hereof.
g. Severability. All provisions contained herein are severable and
------------
in the event that any of them shall be held to be to any extent invalid or
otherwise unenforceable by any court of competent jurisdiction, such provision
shall be excised from this Agreement; provided, however, that if the reason for
such invalidity or unenforceability is that the affected provision calls for an
excessive amount of time or money or area or an excessive breadth or scope of
coverage or otherwise requires an excessive degree of any thing or imposes any
excessively onerous restriction or requirement, the affected provision shall not
be excised but instead shall be construed as if it were written so as to call
only for the amount of money, time, area, breadth, scope and/or other thing,
restriction or requirement (but nonetheless for the maximum possible amount of
money, time, area, breadth, scope and/or other thing, restriction or
requirement) which would render such provision valid and enforceable, all so as
to effectuate to the greatest possible extent the parties' expressed intent; and
in every case the remainder of this
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<PAGE>
Agreement shall not be affected thereby and shall remain valid and enforceable,
as if such excised or affected provision were not contained herein.
h. Governing Law, Consent to Jurisdiction and Forum Selection. This
----------------------------------------------------------
Agreement shall be governed by and construed in accordance with the laws of the
State of California applicable to contracts executed and performed in such
State, without giving effect to conflicts of laws principles. The parties hereto
agree that all actions or proceedings arising in connection with this Agreement
shall be initiated and tried exclusively in the State and Federal courts located
in the County of San Diego, State of California. The aforementioned choice of
venue is intended by the parties to be mandatory and not permissive in nature,
thereby precluding the possibility of litigation between the parties with
respect to or arising out of this Agreement in any jurisdiction other than that
specified in this Section 4(h). Each party hereby waives any right it may have
------------
to assert the doctrine of forum non conveniens or similar doctrine or to object
to venue with respect to any proceeding brought in accordance with this
paragraph, and stipulates that the State and Federal courts located in the
County of San Diego, State of California shall have in personam jurisdiction and
venue over each of them for the purposes of litigating any dispute, controversy
or proceeding arising out of or related to this Agreement. Each party hereby
authorizes and accepts service of process sufficient for personal jurisdiction
in any action against it as contemplated by this Section 4(h) by registered or
------------
certified mail, return receipt requested, postage prepaid, to its address for
the giving of notices as set forth in this Agreement, or in the manner set forth
in Section 4(a) of this Agreement for the giving of notice. Any final judgment
------------
rendered against a party in any action or proceeding shall be conclusive as to
the subject of such final judgment and may be enforced in other jurisdictions in
any manner provided by law
i. Construction. No provision of this Agreement shall be construed
------------
in favor of or against any party on the ground that such party or its counsel
drafted the provision. This Agreement shall at all times be construed so as to
carry out the purposes stated herein.
j. Counterparts. This Agreement may be executed in counterparts
------------
and by facsimile, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
B-5
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has duly executed this
Agreement as of the date first above written.
SYNBIOTICS CORPORATION,
a California corporation
By: _____________________________________________
Kenneth M. Cohen, President and Chief Executive Officer
_____________________________________
________________, an individual
<PAGE>
EXHIBIT C
FORM OF EMPLOYMENT AGREEMENT
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT is made by and between W3 Commerce LLC, a Delaware
limited liability company ("EMPLOYER"), and __________________ ("EMPLOYEE") as
of January 12, 2000.
R E C I T A L S:
- - - - - - - -
WHEREAS, EMPLOYER and EMPLOYEE wish to set forth in this Agreement the
terms and conditions under which EMPLOYEE is to be employed by EMPLOYER.
NOW, THEREFORE, EMPLOYER and EMPLOYEE, in consideration of the mutual
promises set forth herein, agree as follows:
ARTICLE 1
---------
TERM OF AGREEMENT
-----------------
1.1 Term. The term of this Agreement shall commence on the date first
----
written above and shall continue until terminated pursuant to Article 6.
ARTICLE 2
---------
EMPLOYMENT DUTIES
-----------------
2.1 Title/Responsibilities. EMPLOYEE shall serve as an employee of
----------------------
EMPLOYER and hold the position of ___________________________________________ of
EMPLOYER, having the powers and responsibilities consistent with such position
and reporting to EMPLOYER's ________________________, all subject to ultimate
direction and management of EMPLOYER's Board of Directors. EMPLOYEE shall also
perform all duties which from time to time are assigned to EMPLOYEE by
EMPLOYER's _______________________ and/or Board of Directors, and shall provide
the _______________________ and/or Board with
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<PAGE>
periodic reports upon request. EMPLOYEE's job location shall be at the San
Diego, California location of EMPLOYER.
2.2 Full Time Attention. EMPLOYEE shall perform his duties hereunder in a
-------------------
diligent and professional manner and devote substantially all of his business
time and attention, best efforts, energy and skills to EMPLOYER during the time
he is employed hereunder as __________________ ________________ of EMPLOYER.
During the term of this Agreement EMPLOYEE shall not without the express consent
of EMPLOYER's Board of Directors serve or act as a shareholder (except passive
holdings of less than 1% of the stock), employee, agent, consultant, officer,
director, partner, representative or owner of any other business entity, nor (if
it would require more than an insubstantial amount of business time or
attention) of any non-profit entity.
2.3 Compliance with Rules. EMPLOYEE shall comply with all applicable
---------------------
governmental laws, rules and regulations and with all of EMPLOYER's policies,
rules and/or regulations applicable to all employees of EMPLOYER.
ARTICLE 3
---------
COMPENSATION
------------
3.1 Base Salary. EMPLOYER shall pay semi-monthly to EMPLOYEE a salary
-----------
of $________ per annum until such time or times as it may discretionarily be
raised (but not lowered) upon annual performance/salary review by EMPLOYER's
Chief Executive Officer (upon recommendation of its Compensation Committee).
3.2 Bonus. In addition to the salary provided in Section 3.1, EMPLOYEE
-----
shall participate in any executive incentive bonus plan which EMPLOYER may in
its discretion establish for 2000 and future years.
C-2
<PAGE>
ARTICLE 4
---------
OTHER BENEFITS
--------------
4.1 Fringe Benefits. EMPLOYEE shall be entitled during the term of his
---------------
employment under this Agreement to all other fringe benefits made available from
time to time by EMPLOYER to its executives generally and/or its employees
generally, including without limitation participation in EMPLOYER's 401(k) plan
and group health insurance plan.
4.2 Expenses. EMPLOYER shall reimburse EMPLOYEE, not less often than
--------
monthly, for reasonable out-of-pocket business expenses incurred by EMPLOYEE in
the course of his duties, upon submission by EMPLOYEE of appropriate expense
account reports and substantiating receipts.
4.3 Vacation. EMPLOYEE shall be entitled to three weeks paid vacation per
--------
full year of service, in accordance with and subject to EMPLOYER's vacation
accrual plan and policies. EMPLOYEE acknowledges the "cap" on vacation accruals
set forth in such plan and policies.
ARTICLE 5
---------
FORMER EMPLOYMENT
-----------------
5.1 No Conflict. EMPLOYEE represents and warrants that the execution
-----------
and delivery by him of this Agreement, his employment by EMPLOYER and his
performance of duties under this Agreement will not conflict with and will not
be constrained by any prior employment or consulting agreement or relationship,
or any other contractual obligation.
5.2 No Use of Prior Confidential Information. EMPLOYEE will not
----------------------------------------
intentionally disclose to EMPLOYER or use on its behalf any confidential
information belonging to any of his former employers, but during his employment
by EMPLOYER he will use in the performance of
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<PAGE>
his duties all information (but only such information) which is generally known
and used by persons with training and experience comparable to his own or is
common knowledge in the industry or otherwise legally in the public domain.
ARTICLE 6
---------
TERMINATION
-----------
6.1 Term. This Agreement (including EMPLOYEE'S employment) shall
----
continue until terminated by either EMPLOYER or EMPLOYEE. Such termination
(including termination of EMPLOYEE's employment) shall be effected by written
notification and may be effected at any time, with or without Cause, for any
reason or no reason.
6.2 Severance. If this Agreement and/or EMPLOYEE's employment is
---------
terminated as a result of Cause, EMPLOYEE shall be entitled to no severance pay.
If this Agreement and/or EMPLOYEE's employment is terminated other than for
Cause, EMPLOYEE shall be entitled to severance pay as follows: six months'
salary at EMPLOYEE's then base salary rate.
Furthermore, if EMPLOYEE is terminated (other than for Cause) in
connection with an acquisition of EMPLOYER, EMPLOYEE shall be entitled to
additional severance pay of six months' salary at EMPLOYEE's then base salary
rate (as well as the severance pay described in the previous paragraph).
"Cause" shall be defined to mean:
(a) Death;
(b) Voluntary resignation (other than because of a material breach by
EMPLOYER of its obligations under this Agreement);
(c) EMPLOYEE's repudiation of this Agreement;
(d) permanent disability (defined as EMPLOYEE's inability to perform,
with or without reasonable accommodation, the essential functions of his
position for any 50 business
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<PAGE>
days - exclusive of vacation days taken - within any continuous period of 200
days by reason of physical or mental illness or incapacity);
(e) EMPLOYEE being formally charged with the commission of a felony,
or being convicted of a misdemeanor involving moral turpitude;
(f) EMPLOYEE's demonstrable fraud or dishonesty;
(g) EMPLOYEE's use of alcohol, drugs or any illegal substance in such
a manner as to interfere with the performance of his duties under this
Agreement;
(h) EMPLOYEE's intentional, reckless or grossly negligent action
materially detrimental to the best interest of the EMPLOYER, including any
misappropriation or unauthorized use of EMPLOYER's property or improper use or
disclosure of confidential information (but excluding any good faith exercise of
business judgment);
(i) EMPLOYEE's intentional failure to perform material duties under
this Agreement if such failure has continued for 15 days after EMPLOYEE has been
notified in writing by EMPLOYER of the nature of EMPLOYEE's failure to perform;
(j) EMPLOYEE's chronic absence from work for reasons other than
illness or permitted vacation; or
(k) EMPLOYEE's violation of policies in EMPLOYER's official Employee
Handbook, as it may be amended from time to time.
Termination for Cause shall be without prejudice to any other right or
remedy to which EMPLOYER may be entitled at law, in equity, or under this
Agreement.
ARTICLE 7
---------
ARBITRATION
-----------
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<PAGE>
7.1 Final and Binding Arbitration. Any controversy, claim or dispute
-----------------------------
between (a) a party to this Agreement, on the one hand, and (b) the other party
to this Agreement and/or such second party's parents, subsidiaries or affiliates
and/or any of their directors, officers, employees, agents, successors, assigns,
heirs, executors, administrators, or legal representatives, on the other hand,
arising out of, in connection with, or in relation to (t) the interpretation,
validity, performance or breach of this Agreement, (u) EMPLOYEE's equity
ownership, (w) any termination of such employment, (x) any actions during or
with respect to EMPLOYEE's work for EMPLOYER, (y) any claims for breach of
contract, tort, or breach of the covenant of good faith and fair dealing, or (z)
any claims of discrimination or other claims under any federal, state or local
law or regulation now in existence or hereinafter enacted and as amended from
time to time concerning in any way the subject of EMPLOYEE's employment with
EMPLOYER or its termination, shall, at the request of either party, be resolved
to the exclusion of a court of law by binding arbitration in San Diego,
California, in accordance with Exhibit A hereto. Each of EMPLOYEE and EMPLOYER
understands and agrees that the arbitration shall be instead of any civil
litigation and that the arbitrator's decision shall be final and binding to the
fullest extent permitted by law and enforceable by any court having jurisdiction
thereof. The only claims not covered by this Section 7.1 are claims for
benefits under the workers' compensation laws, claims for unemployment insurance
benefits, and matters within the jurisdiction of the California Labor
Commissioner, which will be resolved pursuant to those laws.
ARTICLE 8
---------
GENERAL PROVISIONS
------------------
8.1 Governing Law. This Agreement and the rights of the parties
-------------
thereunder shall be governed by and interpreted under California law.
C-6
<PAGE>
8.2 Assignment. EMPLOYEE may not delegate, assign, pledge or encumber his
----------
rights or obligations under this Agreement or any part thereof.
8.3 Notice. Any notice required or permitted to be given under this
------
Agreement shall be sufficient if it is in writing and is sent by registered or
certified mail, postage prepaid, or personally delivered, to the following
addresses, or to such other addresses as either party shall specify by giving
notice under this section:
TO EMPLOYER: _______________________
610 Hymettus Avenue
Encinitas, CA 92024
Copy to: Hayden J. Trubitt
Brobeck, Phleger & Harrison LLP
550 West C Street, Suite 1300
San Diego, CA 92101
TO EMPLOYEE: _____________________
_____________________
_____________________
8.4 Amendment. This Agreement may be waived, amended or supplemented only
---------
by an express writing signed by Synbiotics Corporation, a California corporation
("Synbiotics"), a third party beneficiary to this Agreement. To be valid, such a
writing must be signed by a person specially authorized by Synbiotics' Board of
Directors to sign such particular document.
8.5 Waiver. No waiver of any provision of this Agreement shall be binding
------
unless and until set forth expressly in writing and signed by the waiving party.
To be valid, EMPLOYER's signature must be by a person specially authorized by
EMPLOYER's Board of Directors to sign such particular document. The waiver by
either party of a breach of any provision of this Agreement shall not operate or
be construed as a waiver of any preceding or succeeding breach of the same or
any other term or provision, or a waiver of any contemporaneous breach of any
other term or provision, or a continuing waiver of the same or
C-7
<PAGE>
any other term or provision. No failure or delay by a party in exercising any
right, power, or privilege hereunder or other conduct by a party shall operate
as a waiver thereof, in the particular case or in any past or future case, and
no single or partial exercise thereof shall preclude the full exercise or
further exercise of any right, power, or privilege. No action taken pursuant to
this Agreement shall be deemed to constitute a waiver by the party taking such
action of compliance with any representations, warranties, covenants or
agreements contained herein.
8.6 Severability. All provisions contained herein are severable and in the
------------
event that any of them shall be held to be to any extent invalid or otherwise
unenforceable by any court of competent jurisdiction, such provision shall be
construed as if it were written so as to effectuate to the greatest possible
extent the parties' expressed intent; and in every case the remainder of this
Agreement shall not be affected thereby and shall remain valid and enforceable,
as if such affected provision were not contained herein.
8.7 Headings. Article and section headings are inserted herein for
--------
convenience of reference only and in no way are to be construed to define, limit
or affect the construction or interpretation of the terms of this Agreement.
8.8 Drafting Party. The provisions of this Agreement have been prepared,
--------------
examined, negotiated and revised by each party hereto, and no implication shall
be drawn and no provision shall be construed against either party by virtue of
the purported identity of the drafter of this Agreement, or any portion thereof.
8.9 No Outside Representations. No representation, warranty, condition,
--------------------------
promise, understanding or agreement of any kind with respect to the subject
matter hereof has been made by either party, nor shall any such be relied upon
by either party, except those contained herein.
C-8
<PAGE>
There were no inducements to enter into this Agreement, except for what is
expressly set forth in this Agreement.
8.10 Entire Agreement. This Agreement, together with EMPLOYER's standard
----------------
Proprietary Information and Inventions Agreement, constitutes the entire
agreement between the parties pertaining to the subject matter hereof and
completely supersedes all prior or contemporaneous agreements, understandings,
arrangements, commitments, negotiations and discussions of the parties, whether
oral or written (all of which shall have no substantive significance or
evidentiary effect). Each party acknowledges, represents and warrants that he
or it has not relied on any representation, agreement, understanding,
arrangement or commitment which has not been expressly set forth in this
Agreement. Each party acknowledges, represents and warrants that this Agreement
is fully integrated and not in need of parol evidence in order to reflect the
intentions of the parties. The parties specifically intend that the literal
words of this Agreement shall, alone, conclusively determine all questions
concerning the parties' intent.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
C-9
<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this
Employment Agreement in San Diego, California as of the date first written
above.
W3 COMMERCE LLC
By:________________________________
Colin Lucas-Mudd, President
___________________________________
[EMPLOYEE]
We guarantee the obligations of W3 Commerce LLC under the foregoing Agreement.
SYNBIOTICS CORPORATION
__________________________
Kenneth M. Cohen, President and CEO
Attachment: Exhibit A (Arbitration Procedures)
[SIGNATURE PAGE TO EMPLOYMENT AGREEMENT]
<PAGE>
EXHIBIT A
---------
ARBITRATION PROCEDURES
----------------------
1. Agreement to Arbitrate
In the event that there is any dispute relating to, regarding or
arising in connection with EMPLOYEE's employment with EMPLOYER which cannot be
resolved through direct discussion or mediation, regardless of the kind or type
of dispute (excluding claims for workers' compensation, unemployment insurance
or any matters within the jurisdiction of the California Labor Commissioner),
all such disputes shall be submitted exclusively to final and binding
arbitration pursuant to the provisions of the Federal Arbitration Act or, if
inapplicable, the Uniform Arbitration Act (California Code of Civil Procedure
(S) 1280 et seq.), upon request submitted in writing to the President within one
year from the date the dispute first arose, or within one year of the date of
termination of employment, whichever occurs first. This procedure shall be the
exclusive method for resolving all claims relating to the termination of
EMPLOYEE's employment, including but not limited to any alleged violations of
federal, state and/or local statutes; all claims based upon any purported breach
of duty arising in contract or tort, including but not limited to breach of
contract, breach of the covenant of good faith and fair dealing, or violation of
public policy; and any other alleged violation of an employee's statutory,
contractual or common law rights.
Any failure to request arbitration in accordance with the foregoing
provisions shall constitute a waiver of all rights to raise or present any
claims in any form, in any forum, arising out of any dispute that was subject to
arbitration.
2. Selection of Arbitrator
All disputes subject to arbitration will be resolved by a single
arbitrator selected from a list provided by the California Mediation and
Conciliation Service from its Employment Arbitration Panel. The parties shall
select the arbitrator by alternately striking names from the list, and the last
name remaining on the list shall be the arbitrator selected to resolve the
dispute. The arbitrator must be selected within thirty (30) days of receipt of
the written request for arbitration. The arbitration hearing shall be held in
San Diego, California, at a neutral location selected by the parties or, in the
event the parties are unable to agree, at a location designated by the
arbitrator.
3. Authority of Arbitrator
The arbitrator shall only be authorized to exercise the powers
specifically enumerated by this procedure and to decide the dispute in
accordance with governing principles of law and equity. The arbitrator shall
have no authority to modify the powers granted by the terms of this procedure or
to modify the terms of the employee handbook, except as required by law. The
arbitrator shall have the authority to rule on motions by the parties, to issue
protective orders upon motion of any party or third party, and to determine only
the disputes submitted by the parties based upon the grounds presented. Any
dispute or argument not presented by the parties is outside the scope of the
arbitrator's jurisdiction and any award invoking such disputes
<PAGE>
or arguments is subject to a motion to vacate; provided, however, the arbitrator
shall have exclusive authority to resolve any dispute relating to the validity,
interpretation and enforcement of these arbitration procedures.
4. Discovery
The arbitrator shall have the power, in addition to determining the
merits of the dispute submitted, to permit discovery regarding the subject
matter of arbitration and to enforce the rights, remedies, procedures, duties,
liabilities and obligations of discovery by the imposition of the same terms,
conditions, consequences, liabilities, sanctions and penalties as may be imposed
in like circumstances by a Superior Court under the California Code of Civil
Procedure. All discovery must be completed thirty (30) days prior to the date
set for the arbitration hearing.
5. Hearing Procedure
The issue(s) submitted to the arbitrator must be set forth in the
request for arbitration. The arbitrator shall have no authority to frame the
statement of the issue(s). Unless otherwise agreed by the parties, the
arbitration hearing shall be governed by the formal rules of evidence contained
in the California Evidence Code. The parties shall mutually agree on the number
of days required for hearing. The hearing shall be recorded and transcribed
verbatim by a certified shorthand reporter. Each party shall bear its own costs
with respect to a copy of the transcript of the hearing; however, the parties
shall each be responsible for one-half the cost of the court reporter's fee and
the arbitrator's copy of the hearing transcript.
6. Post-Hearing Procedure
Each party shall have the right to present closing argument at the
conclusion of all sworn testimony and, in addition to or in lieu of closing
argument, either party shall have the right to submit post-hearing briefs. The
due date and procedure for exchanging post-hearing briefs shall be mutually
agreed upon by the parties or as directed by the arbitrator.
7. Opinion and Award
The arbitrator shall issue a written opinion and award within sixty
(60) days of closing arguments or the receipt of post-hearing briefs, whichever
is later. The arbitration award and opinion shall be signed and dated by the
arbitrator and shall decide all issues submitted and set forth the legal
principles supporting each aspect of the opinion and award. The arbitrator
shall only be permitted to award those remedies in law or equity which are
requested by the parties and which are supported by the credible, relevant
evidence. The arbitrator shall have no authority to award punitive or exemplary
damages under any circumstances or for any reason.
8. Fees and Costs
Each party shall be responsible for its own attorney's fees, except as
provided by law, and for all costs associated with discovery unless otherwise
ordered by the arbitrator. Each party shall also be responsible for one-half of
the arbitrator's fee and one-half of any costs associated with the facilities
for the arbitration hearing.
9. Severability
<PAGE>
In the event that any provision of this procedure is determined by the
arbitrator or by a court of competent jurisdiction to be illegal, invalid, or
unenforceable to any extent, such term or provision shall be enforced to the
extent permissible under law and all remaining terms and provisions hereof shall
continue in full force and effect.
<PAGE>
EXHIBIT D
SCHEDULE OF EXCEPTIONS
Section 3.6
-----------
W3C has a wholly owned subsidiary, W3 Commerce Limited, located in the
United Kingdom.
Section 3.7
-----------
W3C has negotiated for a license to use certain software in the
operation of its business. The cost of such license will not exceed $10,000.
Section 3.8
-----------
W3C is indebted to Colin Lucas-Mudd in the amount of $64,355. The
parties acknowledge that this liability will be assumed by Synbiotics.
<PAGE>
Exhibit 10.70
-------------
NON-COMPETITION AGREEMENT
This NON-COMPETITION AGREEMENT (this "Agreement") is made as of January 12,
2000 by and between Synbiotics Corporation, a California corporation
("Synbiotics"), and Colin Lucas-Mudd ("Member").
RECITALS
--------
WHEREAS, Synbiotics, Member and the other members of W3 Commerce LLC, a
Delaware limited liability company ("W3C") have entered into that certain
Exchange Agreement, dated as of January 12, 2000 (the "Exchange Agreement")
pursuant to which Synbiotics is acquiring all the member interests in W3C from
the Members (capitalized terms used herein and not otherwise defined herein
shall have the meanings given such terms in the Exchange Agreement);
WHEREAS, the going concern value of the W3C Units being sold by the Members
to Synbiotics would be diminished substantially if Member were to compete with
Synbiotics in the Business;
WHEREAS, W3C currently conducts the Business in every nation, state and
county in the world;
WHEREAS, the Exchange Agreement requires that Member enter into this
Agreement as a condition to the obligation of Synbiotics to acquire the W3C
Units and to consummate the transactions contemplated by the Exchange Agreement.
NOW, THEREFORE, in consideration of the mutual covenants set forth in this
Agreement, and in connection with the Closing under the Exchange Agreement and
the acquisition of the W3C Units in connection therewith, the parties hereto
agree as follows:
1. Non-Competition. As an inducement for Synbiotics to enter into
---------------
the Exchange Agreement and to pay the purchase price, and in consideration of
Member's exposure to confidential information of the Business, Member hereby
covenants as follows:
a. In General. The term of this Agreement (the "Term") shall
----------
continue for the longer of: (i) three (3) years from the Effective Date (as such
term is defined in the Exchange Agreement) or (ii) two (2) years after Member
ceases to be in the employ of Synbiotics pursuant to the terms of a certain
Employment Agreement between Maker and Synbiotics executed and delivered in
connection herewith. During the Term, Member shall not, directly or indirectly,
own, manage, engage in, operate or conduct, prepare to or plan to conduct or
assist any person or entity to conduct any business, or have any interest in any
business, person, firm, corporation or other entity (as a principal, owner,
agent, employee, shareholder, officer, director, joint venturer, partner,
security holder (except for the ownership of publicly-traded securities
constituting not more than five percent (5%) of the outstanding securities of
the
B-1
<PAGE>
issuer thereof), creditor (except for trade credit extended in the ordinary
course of business), consultant or in any other capacity that engages, directly
or indirectly, in any business which is the same as, similar to or competitive
with the Business anywhere in the world. The covenants set forth in this
Section 1 shall be construed as a series of separate covenants covering their
- ----------
subject matter in each of the separate nations, states and counties where
Synbiotics (for the purpose of this Agreement, the term "Synbiotics," as used
here and hereafter in this Agreement, shall include both Synbiotics and its
present and future affiliates, including W3C) conducts the Business, and except
for geographic coverage, each such separate covenant shall be deemed identical
in terms to the covenants set forth in this Section 1. To the extent that any
----------
such covenant shall be judicially unenforceable in any one or more of such
nations, states and counties, such covenant shall not be affected with respect
to each of the other nations, states and counties. Each covenant with respect
to such nation, state and county shall be construed as severable and
independent.
b. No Diversion of Others. During the Term, Member shall not, either
----------------------
for himself or for any other person, firm, corporation or other entity, directly
or indirectly, or by action in concert with others:
(i) induce or influence, or seek to induce or influence, any
person who is engaged by Synbiotics (as an agent, employee, consultant, or in
any other capacity) or any successor thereto with the purpose of engaging such
person for himself or for a business competitive with Synbiotics or the
Business; or
(ii) divert or take away or attempt to divert or take away, or
solicit or attempt to solicit, any existing or potential customer or supplier of
Synbiotics (whether or not such customer or supplier is actually a customer or
supplier of Synbiotics as of the Effective Date, including without limitation
any customer or supplier solicited by Member or which became known by Member
prior to the Effective Date) with the purpose of obtaining such person as a
customer or supplier for a business competitive with Synbiotics or the Business
or persuading such person to reduce, or to not increase, the level of business
it does with Synbiotics.
c. Organizing Competitive Business. Without limiting any of the
-------------------------------
other provisions contained in this Section 1, during the Term, Member shall not
---------
plan to compete, prepare to compete or discuss Synbiotics' business or the
Business with any third party planning or preparing to compete with the
Business, or conspire with agents, employees, consultants, other representatives
of Synbiotics or any other third party for the purpose of organizing any
business activity competitive with Synbiotics or the Business.
2. Reasonableness of Restrictions. MEMBER HAS CAREFULLY READ AND
------------------------------
CONSIDERED THE PROVISIONS OF SECTION 1 HEREOF AND, HAVING DONE SO, HEREBY AGREES
THAT THE RESTRICTIONS SET FORTH IN SUCH SECTIONS ARE FAIR AND REASONABLE AND ARE
REASONABLY REQUIRED FOR THE PROTECTION OF THE INTERESTS OF SYNBIOTICS AND THE
BUSINESS.
3. Injunctive Relief.
-----------------
B-2
<PAGE>
a. In General. Member acknowledges and agrees that Synbiotics shall
----------
suffer irreparable harm in the event that Member breaches any of his obligations
under Section 1 hereof, and that monetary damages shall be inadequate to
---------
compensate Synbiotics for any such breach. Member agrees that in the event of
any breach or threatened breach by Member of any of the provisions of Section 1
---------
hereof, Synbiotics shall be entitled to a temporary restraining order,
preliminary injunction and permanent injunction in order to prevent or restrain
any such breach or threatened breach by Member, or by any or all of Member's
agents, representatives or other persons directly or indirectly acting for, on
behalf of or with Member. Member hereby waives any requirement that Synbiotics
submit proof of the economic value of any trade secret or post a bond or other
security.
b. No Limitation of Remedies. Notwithstanding the provisions set
-------------------------
forth in Section 3(a), above, or any other provision contained in this
------------
Agreement, the parties hereby agree that no remedy conferred by any of the
specific provisions of this Agreement, including, without limitation, this
Section 3, is intended to be exclusive of any other remedy, and each and every
- ---------
remedy shall be cumulative and shall be in addition to every other remedy given
hereunder or now or hereafter existing at law or in equity or by statute or
otherwise.
4. Miscellaneous.
a. Notices. All notices, requests and other communications hereunder
-------
must be in writing and will be deemed to have been duly given only if delivered
personally or by facsimile transmission with answer back confirmation or mailed
(first class, postage prepaid) or by overnight courier to the parties at the
following addresses or facsimile numbers:
If to Member, to:
Colin Lucas-Mudd
If to Synbiotics, to:
Synbiotics Corporation
11011 Via Frontera
San Diego, CA 92127
Facsimile No.: (858) 451-5719
Attention: Chief Executive Officer and President
with copies to:
Brobeck, Phleger & Harrison LLP
550 West "C" Street
Suite 1300
San Diego, CA 92101
Facsimile No.: (619) 234-384
Attention: Hayden Trubitt, Esq.
B-3
<PAGE>
All such notices, requests and other communications will (i) if delivered
personally or by overnight courier to the address as provided in this Section
-------
4(a), be deemed given upon delivery, (ii) if delivered by facsimile transmission
- ----
to the facsimile number as provided in this Section 4(a), be deemed given upon
------------
sending, and (iii) if delivered by mail in the manner described above to the
address as provided in this Section 4(a), be deemed given two business days
------------
after mailing (in each case regardless of whether such notice, request or other
communication is received by any other person to whom a copy of such notice,
request or other communication is to be delivered pursuant to this Section).
Any party from time to time may change its address, facsimile number or other
information for the purpose of notices to that party by giving notice specifying
such change to the other parties hereto.
b. Entire Agreement. This Agreement, the Exchange Agreement (and all
----------------
related exhibits and schedules) and all other documents delivered in connection
herewith supersede all prior discussions and agreements among the parties with
respect to the subject matter hereof and thereof and contains the sole and
entire agreement among the parties hereto with respect thereto; provided,
however, that any provisions of any prior agreement pertaining to
nondisclosure/nonuse are not superseded and remain in effect.
c. Waiver. Any term or condition of this Agreement may be waived at
------
any time by the party that is entitled to the benefit thereof, but no such
waiver shall be effective unless set forth in a written instrument duly executed
by or on behalf of the party waiving such term or condition. No waiver by any
party hereto of any term or condition of this Agreement, in any one or more
instances, shall be deemed to be or construed as a waiver of the same or any
other term or condition of this Agreement on any future occasion. All remedies,
either under this Agreement or by law or otherwise afforded, will be cumulative
and not alternative.
d. Amendment. This Agreement may be amended, supplemented or
---------
modified only by a written instrument duly executed by or on behalf of each
party hereto.
e. Third Parties. The terms and provisions of this Agreement are
-------------
intended solely for the benefit of Member, Synbiotics and Synbiotics' successors
or assigns, and it is not the intention of the parties to confer third-party
beneficiary rights upon any other person.
f. Headings. The headings used in this Agreement have been inserted
--------
for convenience of reference only and do not define or limit the provisions
hereof.
g. Severability. All provisions contained herein are severable and
------------
in the event that any of them shall be held to be to any extent invalid or
otherwise unenforceable by any court of competent jurisdiction, such provision
shall be excised from this Agreement; provided, however, that if the reason for
such invalidity or unenforceability is that the affected provision calls for an
excessive amount of time or money or area or an excessive breadth or scope of
coverage or otherwise requires an excessive degree of any thing or imposes any
excessively onerous restriction or requirement, the affected provision shall not
be excised but instead shall be construed as if it were written so as to call
only for the amount of money, time, area, breadth, scope and/or other thing,
restriction or requirement (but nonetheless for the maximum possible amount of
money, time, area, breadth, scope and/or other thing, restriction or
B-4
<PAGE>
requirement) which would render such provision valid and enforceable, all so as
to effectuate to the greatest possible extent the parties' expressed intent; and
in every case the remainder of this Agreement shall not be affected thereby and
shall remain valid and enforceable, as if such excised or affected provision
were not contained herein.
h. Governing Law, Consent to Jurisdiction and Forum Selection. This
----------------------------------------------------------
Agreement shall be governed by and construed in accordance with the laws of the
State of California applicable to contracts executed and performed in such
State, without giving effect to conflicts of laws principles. The parties
hereto agree that all actions or proceedings arising in connection with this
Agreement shall be initiated and tried exclusively in the State and Federal
courts located in the County of San Diego, State of California. The
aforementioned choice of venue is intended by the parties to be mandatory and
not permissive in nature, thereby precluding the possibility of litigation
between the parties with respect to or arising out of this Agreement in any
jurisdiction other than that specified in this Section 4(h). Each party hereby
------------
waives any right it may have to assert the doctrine of forum non conveniens or
similar doctrine or to object to venue with respect to any proceeding brought in
accordance with this paragraph, and stipulates that the State and Federal courts
located in the County of San Diego, State of California shall have in personam
jurisdiction and venue over each of them for the purposes of litigating any
dispute, controversy or proceeding arising out of or related to this Agreement.
Each party hereby authorizes and accepts service of process sufficient for
personal jurisdiction in any action against it as contemplated by this Section
-------
4(h) by registered or certified mail, return receipt requested, postage prepaid,
- ----
to its address for the giving of notices as set forth in this Agreement, or in
the manner set forth in Section 4(a) of this Agreement for the giving of notice.
------------
Any final judgment rendered against a party in any action or proceeding shall be
conclusive as to the subject of such final judgment and may be enforced in other
jurisdictions in any manner provided by law
i. Construction. No provision of this Agreement shall be construed
------------
in favor of or against any party on the ground that such party or its counsel
drafted the provision. This Agreement shall at all times be construed so as to
carry out the purposes stated herein.
j. Counterparts. This Agreement may be executed in counterparts and
------------
by facsimile, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
B-5
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has duly executed this
Agreement as of the date first above written.
SYNBIOTICS CORPORATION,
a California corporation
By: /s/ Kenneth M. Cohen
--------------------
Kenneth M. Cohen, President and Chief Executive Officer
/s/ Colin Lucas-Mudd
--------------------
Colin Lucas, an individual
B-0
<PAGE>
Exhibit 10.71
-------------
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT is made by and between W3 Commerce LLC, a Delaware
limited liability company ("EMPLOYER"), and Colin Lucas-Mudd ("EMPLOYEE") as of
January 12, 2000.
R E C I T A L S:
----------------
WHEREAS, EMPLOYER and EMPLOYEE wish to set forth in this Agreement the
terms and conditions under which EMPLOYEE is to be employed by EMPLOYER.
NOW, THEREFORE, EMPLOYER and EMPLOYEE, in consideration of the mutual
promises set forth herein, agree as follows:
ARTICLE 1
---------
TERM OF AGREEMENT
-----------------
1.1 Term. The term of this Agreement shall commence on the date first
----
written above and shall continue until terminated pursuant to Article 6.
ARTICLE 2
---------
EMPLOYMENT DUTIES
-----------------
2.1 Title/Responsibilities. EMPLOYEE shall serve as an employee of
----------------------
EMPLOYER and hold the position of President of EMPLOYER, having the powers and
responsibilities consistent with such position and reporting to EMPLOYER's Chief
Executive Officer, all subject to ultimate direction and management of
EMPLOYER's Board of Directors. EMPLOYEE shall also perform all duties which
from time to time are assigned to EMPLOYEE by EMPLOYER's Chief Executive Officer
and/or Board of Directors, and shall provide the
1
<PAGE>
Chief Executive Officer and/or Board with periodic reports upon request.
EMPLOYEE's job location shall be at the San Diego, California location of
EMPLOYER.
2.2 Full Time Attention. EMPLOYEE shall perform his duties hereunder in a
-------------------
diligent and professional manner and devote substantially all of his business
time and attention, best efforts, energy and skills to EMPLOYER during the time
he is employed hereunder as President of EMPLOYER. During the term of this
Agreement EMPLOYEE shall not without the express consent of EMPLOYER's Board of
Directors serve or act as a shareholder (except passive holdings of less than 1%
of the stock), employee, agent, consultant, officer, director, partner,
representative or owner of any other business entity, nor (if it would require
more than an insubstantial amount of business time or attention) of any non-
profit entity.
2.3 Compliance with Rules. EMPLOYEE shall comply with all applicable
---------------------
governmental laws, rules and regulations and with all of EMPLOYER's policies,
rules and/or regulations applicable to all employees of EMPLOYER.
ARTICLE 3
---------
COMPENSATION
------------
3.1 Base Salary. EMPLOYER shall pay semi-monthly to EMPLOYEE a salary
-----------
of $120,000 per annum until such time or times as it may discretionarily be
raised (but not lowered) upon annual performance/salary review by EMPLOYER's
Chief Executive Officer (upon recommendation of its Compensation Committee).
3.2 Bonus. In addition to the salary provided in Section 3.1, EMPLOYEE
-----
shall participate in any executive incentive bonus plan which EMPLOYER may in
its discretion establish for 2000 and future years.
2
<PAGE>
ARTICLE 4
---------
OTHER BENEFITS
--------------
4.1 Fringe Benefits. EMPLOYEE shall be entitled during the term of his
---------------
employment under this Agreement to all other fringe benefits made available from
time to time by EMPLOYER to its executives generally and/or its employees
generally, including without limitation participation in EMPLOYER's 401(k) plan
and group health insurance plan.
4.2 Expenses. EMPLOYER shall reimburse EMPLOYEE, not less often than
--------
monthly, for reasonable out-of-pocket business expenses incurred by EMPLOYEE in
the course of his duties, upon submission by EMPLOYEE of appropriate expense
account reports and substantiating receipts.
4.3 Vacation. EMPLOYEE shall be entitled to three weeks paid vacation per
--------
full year of service, in accordance with and subject to EMPLOYER's vacation
accrual plan and policies. EMPLOYEE acknowledges the "cap" on vacation accruals
set forth in such plan and policies.
ARTICLE 5
---------
FORMER EMPLOYMENT
-----------------
5.1 No Conflict. EMPLOYEE represents and warrants that the execution
-----------
and delivery by him of this Agreement, his employment by EMPLOYER and his
performance of duties under this Agreement will not conflict with and will not
be constrained by any prior employment or consulting agreement or relationship,
or any other contractual obligation.
5.2 No Use of Prior Confidential Information. EMPLOYEE will not
----------------------------------------
intentionally disclose to EMPLOYER or use on its behalf any confidential
information belonging to any of his former employers, but during his employment
by EMPLOYER he will use in the performance of
3
<PAGE>
his duties all information (but only such information) which is generally known
and used by persons with training and experience comparable to his own or is
common knowledge in the industry or otherwise legally in the public domain.
ARTICLE 6
---------
TERMINATION
-----------
6.1 Term. This Agreement (including EMPLOYEE'S employment) shall
----
continue until terminated by either EMPLOYER or EMPLOYEE. Such termination
(including termination of EMPLOYEE's employment) shall be effected by written
notification and may be effected at any time, with or without Cause, for any
reason or no reason.
6.2 Severance. If this Agreement and/or EMPLOYEE's employment is
---------
terminated as a result of Cause, EMPLOYEE shall be entitled to no severance pay.
If this Agreement and/or EMPLOYEE's employment is terminated other than for
Cause, EMPLOYEE shall be entitled to severance pay as follows: six months'
salary at EMPLOYEE's then base salary rate.
Furthermore, if EMPLOYEE is terminated (other than for Cause) in
connection with an acquisition of EMPLOYER, EMPLOYEE shall be entitled to
additional severance pay of six months' salary at EMPLOYEE's then base salary
rate (as well as the severance pay described in the previous paragraph).
"Cause" shall be defined to mean:
(a) Death;
(b) Voluntary resignation (other than because of a material breach by
EMPLOYER of its obligations under this Agreement);
(c) EMPLOYEE's repudiation of this Agreement;
(d) permanent disability (defined as EMPLOYEE's inability to perform,
with or without reasonable accommodation, the essential functions of his
position for any 50 business
4
<PAGE>
days - exclusive of vacation days taken - within any continuous period of 200
days by reason of physical or mental illness or incapacity);
(e) EMPLOYEE being formally charged with the commission of a felony,
or being convicted of a misdemeanor involving moral turpitude;
(f) EMPLOYEE's demonstrable fraud or dishonesty;
(g) EMPLOYEE's use of alcohol, drugs or any illegal substance in such
a manner as to interfere with the performance of his duties under this
Agreement;
(h) EMPLOYEE's intentional, reckless or grossly negligent action
materially detrimental to the best interest of the EMPLOYER, including any
misappropriation or unauthorized use of EMPLOYER's property or improper use or
disclosure of confidential information (but excluding any good faith exercise of
business judgment);
(i) EMPLOYEE's intentional failure to perform material duties under
this Agreement if such failure has continued for 15 days after EMPLOYEE has been
notified in writing by EMPLOYER of the nature of EMPLOYEE's failure to perform;
(j) EMPLOYEE's chronic absence from work for reasons other than
illness or permitted vacation; or
(k) EMPLOYEE's violation of policies in EMPLOYER's official Employee
Handbook, as it may be amended from time to time.
Termination for Cause shall be without prejudice to any other right or
remedy to which EMPLOYER may be entitled at law, in equity, or under this
Agreement.
ARTICLE 7
---------
ARBITRATION
-----------
5
<PAGE>
7.1 Final and Binding Arbitration. Any controversy, claim or dispute
-----------------------------
between (a) a party to this Agreement, on the one hand, and (b) the other party
to this Agreement and/or such second party's parents, subsidiaries or affiliates
and/or any of their directors, officers, employees, agents, successors, assigns,
heirs, executors, administrators, or legal representatives, on the other hand,
arising out of, in connection with, or in relation to (t) the interpretation,
validity, performance or breach of this Agreement, (u) EMPLOYEE's equity
ownership, (w) any termination of such employment, (x) any actions during or
with respect to EMPLOYEE's work for EMPLOYER, (y) any claims for breach of
contract, tort, or breach of the covenant of good faith and fair dealing, or (z)
any claims of discrimination or other claims under any federal, state or local
law or regulation now in existence or hereinafter enacted and as amended from
time to time concerning in any way the subject of EMPLOYEE's employment with
EMPLOYER or its termination, shall, at the request of either party, be resolved
to the exclusion of a court of law by binding arbitration in San Diego,
California, in accordance with Exhibit A hereto. Each of EMPLOYEE and EMPLOYER
understands and agrees that the arbitration shall be instead of any civil
litigation and that the arbitrator's decision shall be final and binding to the
fullest extent permitted by law and enforceable by any court having jurisdiction
thereof. The only claims not covered by this Section 7.1 are claims for
benefits under the workers' compensation laws, claims for unemployment insurance
benefits, and matters within the jurisdiction of the California Labor
Commissioner, which will be resolved pursuant to those laws.
ARTICLE 8
---------
GENERAL PROVISIONS
------------------
8.1 Governing Law. This Agreement and the rights of the parties thereunder
-------------
shall be governed by and interpreted under California law.
6
<PAGE>
8.2 Assignment. EMPLOYEE may not delegate, assign, pledge or encumber his
----------
rights or obligations under this Agreement or any part thereof.
8.3 Notice. Any notice required or permitted to be given under this
------
Agreement shall be sufficient if it is in writing and is sent by registered or
certified mail, postage prepaid, or personally delivered, to the following
addresses, or to such other addresses as either party shall specify by giving
notice under this section:
TO EMPLOYER: _______________________
610 Hymettus Avenue
Encinitas, CA 92024
Copy to: Hayden J. Trubitt
Brobeck, Phleger & Harrison LLP
550 West C Street, Suite 1300
San Diego, CA 92101
TO EMPLOYEE: _______________________
_______________________
_______________________
8.4 Amendment. This Agreement may be waived, amended or supplemented only
---------
by an express writing signed by Synbiotics Corporation, a California corporation
("Synbiotics"), a third party beneficiary to this Agreement. To be valid, such a
writing must be signed by a person specially authorized by Synbiotics' Board of
Directors to sign such particular document.
8.5 Waiver. No waiver of any provision of this Agreement shall be binding
------
unless and until set forth expressly in writing and signed by the waiving party.
To be valid, EMPLOYER's signature must be by a person specially authorized by
EMPLOYER's Board of Directors to sign such particular document. The waiver by
either party of a breach of any provision of this Agreement shall not operate or
be construed as a waiver of any preceding or succeeding breach of the same or
any other term or provision, or a waiver of any contemporaneous breach of any
other term or provision, or a continuing waiver of the same or
7
<PAGE>
any other term or provision. No failure or delay by a party in exercising any
right, power, or privilege hereunder or other conduct by a party shall operate
as a waiver thereof, in the particular case or in any past or future case, and
no single or partial exercise thereof shall preclude the full exercise or
further exercise of any right, power, or privilege. No action taken pursuant to
this Agreement shall be deemed to constitute a waiver by the party taking such
action of compliance with any representations, warranties, covenants or
agreements contained herein.
8.6 Severability. All provisions contained herein are severable and in the
------------
event that any of them shall be held to be to any extent invalid or otherwise
unenforceable by any court of competent jurisdiction, such provision shall be
construed as if it were written so as to effectuate to the greatest possible
extent the parties' expressed intent; and in every case the remainder of this
Agreement shall not be affected thereby and shall remain valid and enforceable,
as if such affected provision were not contained herein.
8.7 Headings. Article and section headings are inserted herein for
--------
convenience of reference only and in no way are to be construed to define, limit
or affect the construction or interpretation of the terms of this Agreement.
8.8 Drafting Party. The provisions of this Agreement have been prepared,
--------------
examined, negotiated and revised by each party hereto, and no implication shall
be drawn and no provision shall be construed against either party by virtue of
the purported identity of the drafter of this Agreement, or any portion thereof.
8.9 No Outside Representations. No representation, warranty, condition,
--------------------------
promise, understanding or agreement of any kind with respect to the subject
matter hereof has been made by either party, nor shall any such be relied upon
by either party, except those contained herein.
8
<PAGE>
There were no inducements to enter into this Agreement, except for what is
expressly set forth in this Agreement.
8.10 Entire Agreement. This Agreement, together with EMPLOYER's standard
----------------
Proprietary Information and Inventions Agreement, constitutes the entire
agreement between the parties pertaining to the subject matter hereof and
completely supersedes all prior or contemporaneous agreements, understandings,
arrangements, commitments, negotiations and discussions of the parties, whether
oral or written (all of which shall have no substantive significance or
evidentiary effect). Each party acknowledges, represents and warrants that he
or it has not relied on any representation, agreement, understanding,
arrangement or commitment which has not been expressly set forth in this
Agreement. Each party acknowledges, represents and warrants that this Agreement
is fully integrated and not in need of parol evidence in order to reflect the
intentions of the parties. The parties specifically intend that the literal
words of this Agreement shall, alone, conclusively determine all questions
concerning the parties' intent.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this
Employment Agreement in San Diego, California as of the date first written
above.
W3 COMMERCE LLC
By: /s/ Edward Brunel-Cohen
-----------------------
Edward Brunel-Cohen
/s/ Colin Lucas-Mudd
--------------------
Colin Lucas-Mudd
We guarantee the obligations of W3 Commerce LLC under the foregoing Agreement.
SYNBIOTICS CORPORATION
/s/ Kenneth M. Cohen
- --------------------
Kenneth M. Cohen, President and CEO
Attachment: Exhibit A (Arbitration Procedures)
[SIGNATURE PAGE TO EMPLOYMENT AGREEMENT]
<PAGE>
EXHIBIT A
---------
ARBITRATION PROCEDURES
----------------------
1. Agreement to Arbitrate
In the event that there is any dispute relating to, regarding or arising
in connection with EMPLOYEE's employment with EMPLOYER which cannot be resolved
through direct discussion or mediation, regardless of the kind or type of
dispute (excluding claims for workers' compensation, unemployment insurance or
any matters within the jurisdiction of the California Labor Commissioner), all
such disputes shall be submitted exclusively to final and binding arbitration
pursuant to the provisions of the Federal Arbitration Act or, if inapplicable,
the Uniform Arbitration Act (California Code of Civil Procedure (S) 1280 et
seq.), upon request submitted in writing to the President within one year from
the date the dispute first arose, or within one year of the date of termination
of employment, whichever occurs first. This procedure shall be the exclusive
method for resolving all claims relating to the termination of EMPLOYEE's
employment, including but not limited to any alleged violations of federal,
state and/or local statutes; all claims based upon any purported breach of duty
arising in contract or tort, including but not limited to breach of contract,
breach of the covenant of good faith and fair dealing, or violation of public
policy; and any other alleged violation of an employee's statutory, contractual
or common law rights.
Any failure to request arbitration in accordance with the foregoing
provisions shall constitute a waiver of all rights to raise or present any
claims in any form, in any forum, arising out of any dispute that was subject to
arbitration.
2. Selection of Arbitrator
All disputes subject to arbitration will be resolved by a single
arbitrator selected from a list provided by the California Mediation and
Conciliation Service from its Employment Arbitration Panel. The parties shall
select the arbitrator by alternately striking names from the list, and the last
name remaining on the list shall be the arbitrator selected to resolve the
dispute. The arbitrator must be selected within thirty (30) days of receipt of
the written request for arbitration. The arbitration hearing shall be held in
San Diego, California, at a neutral location selected by the parties or, in the
event the parties are unable to agree, at a location designated by the
arbitrator.
3. Authority of Arbitrator
The arbitrator shall only be authorized to exercise the powers
specifically enumerated by this procedure and to decide the dispute in
accordance with governing principles of law and equity. The arbitrator shall
have no authority to modify the powers granted by the terms of this procedure or
to modify the terms of the employee handbook, except as required by law. The
arbitrator shall have the authority to rule on motions by the parties, to issue
protective orders upon motion of any party or third party, and to determine only
the disputes submitted by the parties based upon the grounds presented. Any
dispute or argument not presented by the parties is outside the scope of the
arbitrator's jurisdiction and any award invoking such disputes
<PAGE>
or arguments is subject to a motion to vacate; provided, however, the arbitrator
shall have exclusive authority to resolve any dispute relating to the validity,
interpretation and enforcement of these arbitration procedures.
4. Discovery
The arbitrator shall have the power, in addition to determining the
merits of the dispute submitted, to permit discovery regarding the subject
matter of arbitration and to enforce the rights, remedies, procedures, duties,
liabilities and obligations of discovery by the imposition of the same terms,
conditions, consequences, liabilities, sanctions and penalties as may be imposed
in like circumstances by a Superior Court under the California Code of Civil
Procedure. All discovery must be completed thirty (30) days prior to the date
set for the arbitration hearing.
5. Hearing Procedure
The issue(s) submitted to the arbitrator must be set forth in the
request for arbitration. The arbitrator shall have no authority to frame the
statement of the issue(s). Unless otherwise agreed by the parties, the
arbitration hearing shall be governed by the formal rules of evidence contained
in the California Evidence Code. The parties shall mutually agree on the number
of days required for hearing. The hearing shall be recorded and transcribed
verbatim by a certified shorthand reporter. Each party shall bear its own costs
with respect to a copy of the transcript of the hearing; however, the parties
shall each be responsible for one-half the cost of the court reporter's fee and
the arbitrator's copy of the hearing transcript.
6. Post-Hearing Procedure
Each party shall have the right to present closing argument at the
conclusion of all sworn testimony and, in addition to or in lieu of closing
argument, either party shall have the right to submit post-hearing briefs. The
due date and procedure for exchanging post-hearing briefs shall be mutually
agreed upon by the parties or as directed by the arbitrator.
7. Opinion and Award
The arbitrator shall issue a written opinion and award within sixty (60)
days of closing arguments or the receipt of post-hearing briefs, whichever is
later. The arbitration award and opinion shall be signed and dated by the
arbitrator and shall decide all issues submitted and set forth the legal
principles supporting each aspect of the opinion and award. The arbitrator shall
only be permitted to award those remedies in law or equity which are requested
by the parties and which are supported by the credible, relevant evidence. The
arbitrator shall have no authority to award punitive or exemplary damages under
any circumstances or for any reason.
8. Fees and Costs
Each party shall be responsible for its own attorney's fees, except as
provided by law, and for all costs associated with discovery unless otherwise
ordered by the arbitrator. Each party shall also be responsible for one-half of
the arbitrator's fee and one-half of any costs associated with the facilities
for the arbitration hearing.
9. Severability
<PAGE>
In the event that any provision of this procedure is determined by the
arbitrator or by a court of competent jurisdiction to be illegal, invalid, or
unenforceable to any extent, such term or provision shall be enforced to the
extent permissible under law and all remaining terms and provisions hereof shall
continue in full force and effect.
<PAGE>
Exhibit 10.72
-------------
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED
STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED,
ASSIGNED, PLEDGED, OR HYPOTHECATED ABSENT AN EFFECTIVE REGISTRATION THEREOF
UNDER SUCH ACT OR COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT, OR UNLESS
THE COMPANY HAS RECEIVED SATISFACTORY EVIDENCE THAT SUCH REGISTRATION IS NOT
REQUIRED.
CONVERTIBLE PROMISSORY NOTE
---------------------------
$1,771,875.00 January 12, 2000
San Diego, California
Synbiotics Corporation, a California corporation ("Maker"), for value
received, hereby promises to pay to Colin Lucas-Mudd ("Payee"), in lawful money
of the United States, at 11011 Via Frontera, San Diego, California 92127, the
principal sum of One Million Seven Hundred Seventy-One Thousand Eight Hundred
Seventy-Five Dollars and no cents ($1,771,875.00), together with simple interest
on the unpaid principal at the rate of 6.21 percent (6.21%) per annum, interest
to accrue on the basis of a 365 day year for the number of days actually
elapsed. All principal together with all accrued interest shall be due and
payable in one lump sum on January 12, 2006.
At any time after the earlier of (a) immediately before an acquisition
of Maker, or (b) January 12, 2002, but not previously, Payee may, at his option,
convert some or all of the principal balance of this Note into shares of the
Common Stock of the Maker, at the rate of $2.8125 per share (as subsequently
adjusted for any stock splits, stock dividends and reverse stock splits).
Accrued interest associated with converted principal shall not be reflected in
the conversion quotient, and shall be deemed forgiven. To convert, Payee must
deliver this Note to Maker together with a written notice of conversion. In the
event of any partial conversion, Maker shall deliver to Payee a new Note, of
like tenor, for the remaining principal amount.
Reference is made to that certain Employment Agreement ("Employment
Agreement") between W3 Commerce LLC and Maker, to which Payee is a third party
beneficiary, executed and delivered in connection with that certain Exchange
Agreement, dated as of January 12, 2000 (the "Exchange Agreement") between
Maker, Payee and others. If, pursuant to the terms of the Employment Agreement,
Payee ceases to be an employee of Maker prior to January 12, 2001, for any
reason other than termination by Maker without Cause (as such term is defined in
the Employment Agreement) (such separation from employment is herein referred to
as "Employment Separation"), the rate at which the principal balance of this
Note may be converted into shares of Common Stock of Maker shall be determined
as follows: if Employment Separation occurs prior to April 12, 2000, the
principal balance of this Note shall be convertible into shares of the Common
Stock of Maker, when such conversion is allowed under the terms of this Note, at
the rate of $4.69 per share (as subsequently adjusted for any stock splits,
stock
<PAGE>
dividends and reverse stock splits). If Employment Separation occurs after April
12, 2000, but prior to July 12, 2000, the principal balance of this Note shall
be convertible into shares of the Common Stock of Maker, when such conversion is
allowed under the terms of this Note, at the rate of $4.02 per share (as
subsequently adjusted for any stock splits, stock dividends and reverse stock
splits). If Employment Separation occurs after July 12, 2000, but prior to
October 12, 2000, the principal balance of this Note shall be convertible into
shares of the Common Stock of Maker, when such conversion is allowed under the
terms of this Note, at the rate of $3.52 per share (as subsequently adjusted for
any stock splits, stock dividends and reverse stock splits). If Employment
Separation occurs after October 12, 2000 but prior to January 12, 2001, the
principal balance of this Note shall be convertible into shares of the Common
Stock of Maker, when such conversion is allowed under the terms of this Note, at
the rate of $3.125 per share (as subsequently adjusted for any stock splits,
stock dividends and reverse stock splits).
If Payee ceases at any time to be an employee of Maker due to
termination without Cause, Payee shall be entitled to the full value of this
Note, without regard to any of the calculations set forth in the immediately
preceding paragraph.
If Maker is acquired (except in a reincorporation), this Note shall no
longer be convertible.
This Note may be prepaid, in whole or in part, without premium or
penalty, at any time, after December 30, 2003, on 20 business days' prior
written notice to Payee.
Upon payment in full of all principal and interest payable hereunder,
this Note shall be surrendered to Maker for cancellation.
Maker waives presentment, demand for performance, notice of
nonperformance, protest, notice of protest, and notice of dishonor. No delay on
the part of Payee in exercising any right hereunder shall operate as a waiver of
such right under this Note. This Note is being delivered in and shall be
construed in accordance with the laws of the State of California.
If Maker defaults and the indebtedness represented by this Note or any
part thereof is collected through legal action or other judicial proceedings,
Maker agrees to pay, in addition to the principal and interest payable hereon,
reasonable attorneys' fees and costs incurred by Payee.
This Note, and any Common Stock issued upon conversion hereof, are
subject to an Exchange Agreement dated January 12, 2000 among Maker, Payee, and
the other members of W3 Commerce LLC. Neither this Note, nor any right or
interest in it, may be sold, assigned or transferred.
Subordination Provisions
------------------------
(a) Except for the issuance of shares of Common Stock of Maker upon
conversion in accordance with the terms of this Note, it is agreed that, in the
event of any insolvency, bankruptcy, receivership, assignment for the benefit of
creditors, reorganization, or arrangement with creditors of Maker, whether or
not pursuant to bankruptcy laws, or any dissolution, liquidation, or other
marshalling of the assets and liabilities of Maker, all Senior Debt (defined as
indebtedness to any bank or institutional lender) shall be paid in full before
any payment or distribution of any character, whether in cash, securities (other
than those issued in accordance with the conversion provisions above), or other
property, which would otherwise, but
2
<PAGE>
for the subordination provisions applicable to the obligations under this Note,
be payable or distributable for or on account of any obligations under this Note
shall first be paid or distributed directly to the holders of the Senior Debt,
until all Senior Debt shall have been paid in full.
(b) Except for the issuance of shares of Common Stock of Maker upon
conversion in accordance with the terms of this Note, it is agreed that, if any
Senior Debt is accelerated, all such accelerated Senior Debt shall be paid in
full before any payment or distribution of any character, whether in cash,
securities, or other property, shall be made for or on account of any
obligations under this Note. In any such event, any payment or distribution of
any character, whether in cash, securities (other than those issued in
accordance with the conversion provisions above), or other property, which would
otherwise, but for the subordination provisions applicable to the obligations
under this Note, be payable or distributable for or on account of any
obligations under this Note shall first be paid or distributed directly to the
holders of the Senior Debt, until all such accelerated Senior Debt shall have
been paid in full.
(c) Upon the occurrence of any event of default by Maker with respect
to any Senior Debt under circumstances when the subordination provisions
described in the preceding paragraphs are not applicable and the delivery by the
holder of Senior Debt of written notice of such default to Maker, then, unless
and until the holder of Senior Debt shall have notified Maker that such default
shall have been cured or waived or shall have ceased to exist, no payment or
distribution of any character, whether in cash, securities (other than those
issued in accordance with the conversion provisions above), or other property,
shall be made for or on account of any obligations under this Note.
(d) If Maker makes any payment on account of any obligations under
this Note in contravention of the subordination provisions described in this
"Subordination Provisions" section, such payment shall be held by the Payee of
the obligations under this Note for the benefit of, and shall be paid forthwith
over and delivered to, Maker for application to the payment of all Senior Debt
remaining unpaid to the extent necessary to pay all Senior Debt in full in
accordance with the terms of such Senior Debt.
(e) Payee, by acceptance of this Note, is deemed to accept, agree to,
and be bound by this "Subordination Provisions" section.
SYNBIOTICS CORPORATION
/s/ Kenneth M. Cohen
-------------------
By: Kenneth M. Cohen
Title: President
3
<PAGE>
Exhibit 10.73
-------------
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED
STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED,
ASSIGNED, PLEDGED, OR HYPOTHECATED ABSENT AN EFFECTIVE REGISTRATION THEREOF
UNDER SUCH ACT OR COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT, OR UNLESS
THE COMPANY HAS RECEIVED SATISFACTORY EVIDENCE THAT SUCH REGISTRATION IS NOT
REQUIRED.
CONVERTIBLE PROMISSORY NOTE
---------------------------
$56,250.00 January 12, 2000
San Diego, California
Synbiotics Corporation, a California corporation ("Maker"), for value
received, hereby promises to pay to Rigdon Currie ("Payee"), in lawful money of
the United States, at 11011 Via Frontera, San Diego, California 92127, the
principal sum of Fifty-Six Thousand Two Hundred Fifty Dollars and no cents
($56,250.00), together with simple interest on the unpaid principal at the rate
of 6.21 percent (6.21%) per annum, interest to accrue on the basis of a 365 day
year for the number of days actually elapsed. All principal together with all
accrued interest shall be due and payable in one lump sum on January 12, 2006.
At any time after the earlier of (a) immediately before an acquisition
of Maker, or (b) January 12, 2002, but not previously, Payee may, at his option,
convert some or all of the principal balance of this Note into shares of the
Common Stock of the Maker, at the rate of $2.8125 per share (as subsequently
adjusted for any stock splits, stock dividends and reverse stock splits).
Accrued interest associated with converted principal shall not be reflected in
the conversion quotient, and shall be deemed forgiven. To convert, Payee must
deliver this Note to Maker together with a written notice of conversion. In the
event of any partial conversion, Maker shall deliver to Payee a new Note, of
like tenor, for the remaining principal amount.
Reference is made to that certain Employment Agreement ("Employment
Agreement") between W3 Commerce LLC and Maker, to which Payee is a third party
beneficiary, executed and delivered in connection with that certain Exchange
Agreement, dated as of January 12, 2000 (the "Exchange Agreement") between
Maker, Payee and others. If, pursuant to the terms of the Employment Agreement,
Payee ceases to be an employee of Maker prior to January 12, 2001, for any
reason other than termination by Maker without Cause (as such term is defined in
the Employment Agreement) (such separation from employment is herein referred to
as "Employment Separation"), the rate at which the principal balance of this
Note may be converted into shares of Common Stock of Maker shall be determined
as follows: if Employment Separation occurs prior to April 12, 2000, the
principal balance of this Note shall be convertible into shares of the Common
Stock of Maker, when such conversion is allowed under the terms of this Note, at
the rate of $4.69 per share (as subsequently adjusted for any stock splits,
stock dividends and reverse stock splits). If Employment Separation occurs
after April 12, 2000, but prior to July 12, 2000, the principal balance of this
Note shall be convertible into shares of the Common Stock of Maker, when such
conversion is allowed under the terms of this Note, at the rate of $4.02 per
share (as subsequently adjusted for any stock splits, stock dividends and
reverse stock splits). If Employment Separation occurs after July 12, 2000, but
<PAGE>
prior to October 12, 2000, the principal balance of this Note shall be
convertible into shares of the Common Stock of Maker, when such conversion is
allowed under the terms of this Note, at the rate of $3.52 per share (as
subsequently adjusted for any stock splits, stock dividends and reverse stock
splits). If Employment Separation occurs after October 12, 2000 but prior to
January 12, 2001, the principal balance of this Note shall be convertible into
shares of the Common Stock of Maker, when such conversion is allowed under the
terms of this Note, at the rate of $3.125 per share (as subsequently adjusted
for any stock splits, stock dividends and reverse stock splits).
If Payee ceases at any time to be an employee of Maker due to
termination without Cause, Payee shall be entitled to the full value of this
Note, without regard to any of the calculations set forth in the immediately
preceding paragraph.
If Maker is acquired (except in a reincorporation), this Note shall no
longer be convertible.
This Note may be prepaid, in whole or in part, without premium or
penalty, at any time, after December 30, 2003, on 20 business days' prior
written notice to Payee.
Upon payment in full of all principal and interest payable hereunder,
this Note shall be surrendered to Maker for cancellation.
Maker waives presentment, demand for performance, notice of
nonperformance, protest, notice of protest, and notice of dishonor. No delay on
the part of Payee in exercising any right hereunder shall operate as a waiver of
such right under this Note. This Note is being delivered in and shall be
construed in accordance with the laws of the State of California.
If Maker defaults and the indebtedness represented by this Note or any
part thereof is collected through legal action or other judicial proceedings,
Maker agrees to pay, in addition to the principal and interest payable hereon,
reasonable attorneys' fees and costs incurred by Payee.
This Note, and any Common Stock issued upon conversion hereof, are
subject to an Exchange Agreement dated January 12, 2000 among Maker, Payee, and
the other members of W3 Commerce LLC. Neither this Note, nor any right or
interest in it, may be sold, assigned or transferred.
Subordination Provisions
------------------------
(a) Except for the issuance of shares of Common Stock of Maker upon
conversion in accordance with the terms of this Note, it is agreed that, in the
event of any insolvency, bankruptcy, receivership, assignment for the benefit of
creditors, reorganization, or arrangement with creditors of Maker, whether or
not pursuant to bankruptcy laws, or any dissolution, liquidation, or other
marshalling of the assets and liabilities of Maker, all Senior Debt (defined as
indebtedness to any bank or institutional lender) shall be paid in full before
any payment or distribution of any character, whether in cash, securities (other
than those issued in accordance with the conversion provisions above), or other
property, which would otherwise, but for the subordination provisions applicable
to the obligations under this Note, be payable or
2
<PAGE>
distributable for or on account of any obligations under this Note shall first
be paid or distributed directly to the holders of the Senior Debt, until all
Senior Debt shall have been paid in full.
(b) Except for the issuance of shares of Common Stock of Maker upon
conversion in accordance with the terms of this Note, it is agreed that, if any
Senior Debt is accelerated, all such accelerated Senior Debt shall be paid in
full before any payment or distribution of any character, whether in cash,
securities, or other property, shall be made for or on account of any
obligations under this Note. In any such event, any payment or distribution of
any character, whether in cash, securities (other than those issued in
accordance with the conversion provisions above), or other property, which would
otherwise, but for the subordination provisions applicable to the obligations
under this Note, be payable or distributable for or on account of any
obligations under this Note shall first be paid or distributed directly to the
holders of the Senior Debt, until all such accelerated Senior Debt shall have
been paid in full.
(c) Upon the occurrence of any event of default by Maker with respect
to any Senior Debt under circumstances when the subordination provisions
described in the preceding paragraphs are not applicable and the delivery by the
holder of Senior Debt of written notice of such default to Maker, then, unless
and until the holder of Senior Debt shall have notified Maker that such default
shall have been cured or waived or shall have ceased to exist, no payment or
distribution of any character, whether in cash, securities (other than those
issued in accordance with the conversion provisions above), or other property,
shall be made for or on account of any obligations under this Note.
(d) If Maker makes any payment on account of any obligations under
this Note in contravention of the subordination provisions described in this
"Subordination Provisions" section, such payment shall be held by the Payee of
the obligations under this Note for the benefit of, and shall be paid forthwith
over and delivered to, Maker for application to the payment of all Senior Debt
remaining unpaid to the extent necessary to pay all Senior Debt in full in
accordance with the terms of such Senior Debt.
(e) Payee, by acceptance of this Note, is deemed to accept, agree to,
and be bound by this "Subordination Provisions" section.
SYNBIOTICS CORPORATION
/s/ Kenneth M. Cohen
--------------------
By: Kenneth M. Cohen
Title: President
3
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2000 AND THE RELATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND CASH FLOWS FOR THE THREE
MONTHS ENDED MARCH 31, 2000 INCLUDED ELSEWHERE IN THIS FORM 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
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2,444
0
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