-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RRr0Qu3iKTxobcxzIduBR4w6RJdZ7mNoqiv3YQuzES0gTXB+HZ6NdRdHJLLS6vHM lRbdxFeGwOPxJZ3PNwNnLA== /in/edgar/work/0000898430-00-003494/0000898430-00-003494.txt : 20001116 0000898430-00-003494.hdr.sgml : 20001116 ACCESSION NUMBER: 0000898430-00-003494 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYNBIOTICS CORP CENTRAL INDEX KEY: 0000719483 STANDARD INDUSTRIAL CLASSIFICATION: [2835 ] IRS NUMBER: 953737816 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-11303 FILM NUMBER: 769228 BUSINESS ADDRESS: STREET 1: 11011 VIA FRONTERA CITY: SAN DIEGO STATE: CA ZIP: 92127 BUSINESS PHONE: 6194513771 10-Q 1 0001.txt FORM 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 September 30, 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 92127 San Diego, California (Zip Code) (Address of principal executive offices)
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 October 31, 2000, 9,373,355 shares of Common Stock were outstanding. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SYNBIOTICS CORPORATION INDEX
Page ---- Part I Condensed Consolidated Statement of Operations and Comprehensive 1 Loss--Three and nine months ended September 30, 2000 and 1999... Condensed Consolidated Balance Sheet--September 30, 2000 and 2 December 31, 1999.............................................. Condensed Consolidated Statement of Cash Flows--Nine months 3 ended September 30, 2000 and 1999.............................. Notes to Condensed Consolidated Financial Statements............ 4 Management's Discussion and Analysis of Financial Condition and 9 Results of Operations.......................................... Quantitative and Qualitative Disclosures About Market Risk...... 17 Part II Legal Proceedings............................................... 19 Changes in Securities........................................... 19 Defaults Upon Senior Securities................................. 19 Submission of Matters to a Vote of Security Holders............. 19 Other Information............................................... 19 Exhibits and Reports on Form 8-K................................ 20
PART I--FINANCIAL INFORMATION ITEM 1. Financial Statements SYNBIOTICS CORPORATION CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS (unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ------------------------ 2000 1999 2000 1999 ----------- ----------- ----------- ----------- Revenues: Net sales................ $ 7,451,000 $ 6,016,000 $25,356,000 $23,800,000 Internet revenues........ 86,000 134,000 License fees............. 61,000 61,000 182,000 187,000 Royalties................ 3,000 2,000 6,000 8,000 ----------- ----------- ----------- ----------- 7,601,000 6,079,000 25,678,000 23,995,000 ----------- ----------- ----------- ----------- Operating expenses: Cost of sales............ 3,781,000 3,933,000 12,439,000 11,479,000 Research and development............. 534,000 508,000 1,618,000 1,644,000 Selling and marketing.... 2,637,000 1,742,000 7,950,000 5,542,000 General and administrative.......... 1,442,000 1,531,000 5,133,000 4,346,000 ----------- ----------- ----------- ----------- 8,394,000 7,714,000 27,140,000 23,011,000 ----------- ----------- ----------- ----------- (Loss) income from operations................ (793,000) (1,635,000) (1,462,000) 984,000 Other income (expense): Interest, net............ (308,000) (314,000) (913,000) (926,000) ----------- ----------- ----------- ----------- (Loss) income before income taxes..................... (1,101,000) (1,949,000) (2,375,000) 58,000 (Benefit from) provision for income taxes.......... (293,000) (650,000) 58,000 292,000 ----------- ----------- ----------- ----------- Loss before extraordinary item...................... (808,000) (1,299,000) (2,433,000) (234,000) Early extinguishment of debt, net of tax.......... (583,000) 116,000 ----------- ----------- ----------- ----------- Net loss................... (808,000) (1,299,000) (3,016,000) (118,000) Translation adjustment..... (756,000) 323,000 (550,000) (931,000) ----------- ----------- ----------- ----------- Comprehensive loss......... $(1,564,000) $ (976,000) $(3,566,000) $(1,049,000) =========== =========== =========== =========== Basic loss per share: Loss from continuing operations.............. $ (0.09) $ (0.15) $ (0.27) $ (0.04) Early extinguishment of debt, net of tax........ (0.06) 0.01 ----------- ----------- ----------- ----------- Net loss................. $ (0.09) $ (0.15) $ (0.33) $ (0.03) =========== =========== =========== =========== Diluted loss per share: Loss from continuing operations.............. $ (0.09) $ (0.15) $ (0.27) $ (0.04) Early extinguishment of debt, net of tax........ (0.06) 0.01 ----------- ----------- ----------- ----------- Net loss................. $ (0.09) $ (0.15) $ (0.33) $ (0.03) =========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements. 1 SYNBIOTICS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET
September December 31, 30, 2000 1999 ------------ ------------ (unaudited) (audited) ASSETS ------ Current assets: Cash and equivalents............................. $ 1,715,000 $ 2,260,000 Securities available for sale.................... 617,000 3,443,000 Accounts receivable.............................. 3,845,000 4,517,000 Inventories...................................... 6,766,000 5,178,000 Deferred tax assets.............................. 454,000 505,000 Other current assets............................. 1,151,000 1,570,000 ------------ ------------ Total current assets........................... 14,548,000 17,473,000 Property and equipment, net........................ 2,839,000 1,744,000 Goodwill........................................... 17,988,000 12,137,000 Deferred tax assets................................ 8,417,000 8,055,000 Deferred debt issuance costs....................... 39,000 447,000 Other assets....................................... 3,647,000 4,191,000 ------------ ------------ $ 47,478,000 $ 44,047,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY: ------------------------------------- Current liabilities: Accounts payable and accrued expenses............ $ 6,320,000 $ 5,921,000 Current portion of long-term debt................ 1,200,000 1,000,000 Deferred revenue................................. 263,000 242,000 Other current liabilities........................ 1,000,000 ------------ ------------ Total current liabilities...................... 8,783,000 7,163,000 ------------ ------------ Long-term debt..................................... 10,743,000 5,914,000 Deferred revenue................................... 787,000 969,000 Other liabilities.................................. 1,635,000 1,546,000 ------------ ------------ 13,165,000 8,429,000 ------------ ------------ Mandatorily redeemable common stock................ 2,510,000 2,412,000 ------------ ------------ Non-mandatorily redeemable common stock and other shareholders' equity: Common stock, no par value, 24,800,000 share authorized, 9,373,000 and 8,576,000 shares issued and outstanding at September 30, 2000 and December 31, 1999............................... 40,065,000 39,424,000 Common stock warrants............................ 1,003,000 1,003,000 Accumulated other comprehensive loss............. (1,466,000) (916,000) Accumulated deficit.............................. (16,582,000) (13,468,000) ------------ ------------ Total non-mandatorily redeemable common stock and other shareholders' equity................ 23,020,000 26,043,000 ------------ ------------ $ 47,478,000 $ 44,047,000 ============ ============
See accompanying notes to condensed consolidated financial statements. 2 SYNBIOTICS CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)
Nine Months Ended September 30, ------------------------ 2000 1999 ----------- ----------- Cash flows from operating activities: Net loss............................................ $(3,016,000) $ (118,000) Adjustments to reconcile net loss to net cash (used for) provided by operating activities: Depreciation and amortization..................... 2,083,000 1,880,000 Early extinguishment of debt...................... 937,000 (200,000) Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable............................. 672,000 193,000 Inventories..................................... (1,588,000) (382,000) Deferred taxes.................................. (311,000) 302,000 Other assets.................................... (302,000) 317,000 Accounts payable and accrued expenses........... 904,000 299,000 Deferred revenue................................ (161,000) 1,271,000 Other liabilities............................... 89,000 89,000 ----------- ----------- Net cash (used for) provided by operating activities................................... (693,000) 3,651,000 ----------- ----------- Cash flows from investing activities: Acquisition of property and equipment............. (460,000) (625,000) Proceeds from sale of (investment in) securities available for sale............................... 2,826,000 (1,147,000) Acquisition of KPL poultry product line........... (3,554,000) ----------- ----------- Net cash used for investing activities........ (1,188,000) (1,772,000) ----------- ----------- Cash flows from financing activities: Proceeds from issuance of long-term debt.......... 10,000,000 Payments of long-term debt........................ (8,250,000) (1,550,000) Proceeds from issuance of common stock, net....... 136,000 389,000 ----------- ----------- Net cash provided by (used for) financing activities................................... 1,886,000 (1,161,000) ----------- ----------- Net increase in cash and equivalents................ 5,000 718,000 Effect of exchange rates on cash.................... (550,000) (931,000) Cash and equivalents--beginning of period........... 2,260,000 4,357,000 ----------- ----------- Cash and equivalents--end of period................. $ 1,715,000 $ 4,144,000 =========== ===========
See accompanying notes to condensed consolidated financial statements. 3 SYNBIOTICS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1--Interim Financial Statements: The accompanying condensed consolidated balance sheet as of September 30, 2000 and the condensed consolidated statements of operations and comprehensive loss and of cash flows for the three and nine months ended September 30, 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 inc. 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--New Accounting Pronouncements: In September 2000, the Emerging Issues Task Force (the "EITF") reached a final consensus on Issue 00-10, "Accounting for Shipping and Handling Fees and Costs" ("EITF 00-10"). EITF 00-10 requires companies to record as revenue amounts charged to customers for shipping and handling. The Company had previously been recording these amounts net against freight expense included in cost of sales. The Company was required to adopt EITF 00-10 during the three months ended September 30, 2000, and there was no effect on results of operations as the amounts charged to customers for shipping and handling were reclassified from cost of sales to net sales. Accordingly, the Company has reclassified these amounts from cost of sales to net sales for all periods presented. Note 3--Acquisitions: On January 12, 2000, the Company acquired W3COMMERCE LLC, now W3COMMERCE inc., a privately-held e-commerce and Internet solutions company 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 payable, 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 members 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 purchase price and liabilities assumed totalling $2,893,000 is considered a non-cash financing activity for purposes of the statement of cash flows. On April 21, 2000, the Company acquired the poultry diagnostic product line from Kirkegaard & Perry Laboratories, Inc. ("KPL"). The consideration paid was $3,500,000 in cash upon closing, and 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, during the 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. 4 SYNBIOTICS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued The transaction was accounted for as a purchase. Goodwill arising from the transaction totalled $4,640,000 which is being amortized over an estimated useful life of 10 years utilizing the straight-line method. The $1,000,000 manufacturing transfer liability portion of the purchase price is considered a non-cash investing 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 September 30, 2000 and the results of operations of the KPL poultry product line for the period April 21, 2000 to September 30, 2000. The following are pro forma results of operations as if the W3COMMERCE and KPL transactions had been consummated on January 1, 1999:
Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ------------------------ 2000 1999 2000 1999 ----------- ----------- ----------- ----------- (unaudited) (unaudited) (unaudited) (unaudited) Revenues: As Reported............. $7,601,000 $ 6,079,000 $25,678,000 $23,995,000 ========== =========== =========== =========== Pro forma............... $7,601,000 $ 6,889,000 $26,487,000 $26,126,000 ========== =========== =========== =========== Loss before extraordinary Item: As reported............. $ (808,000) $(1,299,000) $(2,433,000) $ (234,000) ========== =========== =========== =========== Pro forma............... $ (808,000) $(1,250,000) $(2,152,000) $ (110,000) ========== =========== =========== =========== Net (loss) income: As reported............. $ (808,000) $(1,299,000) $(3,016,000) $ (118,000) ========== =========== =========== =========== Pro forma............... $ (808,000) $(1,250,000) $(2,735,000) $ 6,000 ========== =========== =========== =========== Basic net loss per share: As reported............. $ (0.09) $ (0.15) $ (0.33) $ (0.03) ========== =========== =========== =========== Pro forma............... $ (0.09) $ (0.14) $ (0.30) $ (0.01) ========== =========== =========== =========== Diluted net loss per share: As reported............. $ (0.09) $ (0.15) $ (0.33) $ (0.03) ========== =========== =========== =========== Pro forma............... $ (0.09 $ (0.14) $ (0.30) $ (0.01) ========== =========== =========== ===========
Note 4--Inventories: Inventories consist of the following:
September 30, December 31, 2000 1999 ------------- ------------ (unaudited) (audited) Inventories: Raw materials................................... $2,584,000 $2,320,000 Work in process................................. 391,000 589,000 Finished goods.................................. 3,791,000 2,269,000 ---------- ---------- $6,766,000 $5,178,000 ========== ==========
5 SYNBIOTICS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued Note 5--Long-Term Debt: In April 2000, the Company refinanced its outstanding Banque Paribas debt with Imperial Bank ("Imperial"). The new Imperial debt agreement included 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 the Company's assets. The line of credit, of which the Company had drawn the entire $4,000,000 as of September 30, 2000, 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 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. As of June 30, 2000 and September 30, 2000, the Company was not in compliance with certain Imperial Bank financial covenants, and has obtained waivers from the bank. In exchange for the waivers, the Company has: 1) paid the bank waiver fees totalling $70,000 and 2) made a one time principal payment on its term loan of $500,000. In addition, in November 2000 the Company amended the Imperial agreement to: 1) convert $1,500,000 from the line of credit to the term loan; 2) reduce the line of credit to a maximum of $2,500,000, subject to a borrowing base calculation; 3) change the due date of the term debt to March 31, 2002; 4) revise the calculation of certain financial ratios and the required levels of tangible net worth and 5) increase the interest rate on both the term debt and the line of credit to prime plus 1.50% to 2.50% (dependent upon the Company's ratio of senior funded debt to earnings before interest, taxes, depreciation and amortization). In addition to amending the Imperial agreement, the Company also agreed to issue to Imperial warrants to purchase 250,000 unregistered shares of the Company's common stock at $2.00 per share. The Company recorded an extraordinary loss on early extinguishment of debt of $583,000, net of income tax benefit of $354,000, in the second quarter of 2000, which represents the remaining unamortized debt issuance costs and debt discount on the Banque Paribas debt. 6 SYNBIOTICS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued Note 6--Loss per Share: The following is a reconciliation of net loss and share amounts used in the computations of loss per share:
Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ----------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ---------- (unaudited) (unaudited) (unaudited) (unaudited) Basic and diluted net loss used: Loss from continuing operations................ $ (808,000) $(1,299,000) $(2,433,000) $ (234,000) Less accretion of mandatorily redeemable common stock.............. (33,000) (32,000) (99,000) (94,000) ---------- ----------- ----------- ---------- Loss from continuing operations used in computing basic loss from continuing operations per share..................... (841,000) (1,331,000) (2,532,000) (328,000) Early extinguishment of debt, net of tax.......... (583,000) 116,000 ---------- ----------- ----------- ---------- Net loss used in computing basic and diluted net loss per share................... $ (841,000) $(1,331,000) $(3,115,000) $ (212,000) ========== =========== =========== ========== Shares used: Weighted average common shares outstanding used in computing basic loss per share..................... 9,373,000 9,179,000 9,327,000 9,049,000 Weighted average options and warrants to purchase common stock as determined by the treasury method.... ---------- ----------- ----------- ---------- Shares used in computing diluted loss per share.............. 9,373,000 9,179,000 9,327,000 9,049,000 ========== =========== =========== ==========
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 1,242,000, 260,000, 1,275,000 and 330,000 shares have been excluded from the shares used in computing diluted net loss per share for the three months ended September 30, 2000 and 1999 and the nine months ended September 30, 2000 and 1999, respectively, as their effect is anti-dilutive. In addition, warrants to purchase 284,000 shares of common stock at $4.54 per share, which expired in March 2000, have been excluded from the shares used in computing diluted net loss per share for the three and nine months ended September 30, 1999 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 and nine months ended September 30, 1999. Note 7--Segment Information and Significant Customers: The Company has determined that it has only one reportable segment based on the fact that all of its net sales are from its animal health products, and its Internet revenues are insignificant at this time. Although the Company sells diagnostic, vaccine and instrument products, it does not base its business decision making on a product category basis. 7 SYNBIOTICS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued The following are revenues for the Company's diagnostic, vaccine and instrument products:
Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ------------------------ 2000 1999 2000 1999 ----------- ---------- ----------- ----------- (unaudited) (unaudited) (unaudited) (unaudited) Diagnostics............... $5,524,000 $3,920,000 $18,722,000 $18,116,000 Vaccines.................. 1,257,000 1,654,000 4,760,000 4,759,000 Instruments............... 670,000 442,000 1,874,000 925,000 Other revenues............ 150,000 63,000 322,000 195,000 ---------- ---------- ----------- ----------- $7,601,000 $6,079,000 $25,678,000 $23,995,000 ========== ========== =========== =========== The following are revenues and long-lived assets information by geographic area: Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ------------------------ 2000 1999 2000 1999 ----------- ---------- ----------- ----------- (unaudited) (unaudited) (unaudited) (unaudited) ----------- ---------- ----------- ----------- Revenues: United States........... $5,209,000 $4,114,000 $18,848,000 $16,784,000 France.................. 1,229,000 1,065,000 3,354,000 3,266,000 Other foreign countries.............. 1,163,000 900,000 3,476,000 3,945,000 ---------- ---------- ----------- ----------- $7,601,000 $6,079,000 $25,678,000 $23,995,000 ========== ========== =========== ===========
September December 30, 2000 31, 1999 ----------- ----------- (unaudited) (audited) Long-lived assets: United States..................................... $19,076,000 $12,079,000 France............................................ 5,418,000 6,440,000 Other foreign countries........................... 19,000 ----------- ----------- $24,513,000 $18,519,000 =========== ===========
During the three months ended September 30, 2000, sales to one customer totalled $822,000. The Company had sales to one customer totalling $689,000 during the three months ended September 30, 1999. There were no sales to any one customer that totalled 10% or more of total revenues during the nine months ended September 30, 2000 and 1999. 8 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: We may sell our primary business We have announced that we have engaged investment bankers to consider means of enhancing shareholder value, including the possible sale of our animal health business. There can be no assurance that our animal health business can be sold for a favorable price, and we have not decided what we would do with the proceeds of any sale. Also, the uncertainties caused by this process may undermine our relationships with our customers, employees and suppliers. 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) and IDEXX Laboratories. These companies are substantially larger and have greater financial, manufacturing, marketing, and research resources than we do. 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 31% 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 and 2000 by a new heartworm product from Heska Corporation. We have filed a lawsuit against Heska, claiming that its heartworm product infringes our patent 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 $16,582,000 at September 30, 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 rely on third party distributors for a substantial portion of our sales, but we recently have experienced 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 9 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 made, 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. We have rescinded this policy, and all but one of our former distributors are again selling our products. We are also exposed to the risk that any sales by us directly to veterinarians could alienate our current distributors. Our direct selling strategy has been scaled back We are inexperienced in large-scale direct selling. Also, veterinarians have traditionally relied on distributors, and the number of veterinarians willing to purchase directly from manufacturers may be smaller than we believe. In fact, at the end of the third quarter of 2000, we refocused our sales and marketing efforts towards traditional animal health distribution and, as a result, we significantly reduce the headcount of our telesales force. Our profitable vaccine sales in Europe may decline soon Merial distributes in Europe our FeLV vaccine, which we obtain from Intervet. 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 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. 10 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 may need additional capital in the future 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. The 621,000 shares of our common stock which we issued to Merial in conjunction with the 1997 acquisition of Synbiotics Europe are subject to a put provision. The put option gives Merial the right, beginning on July 9, 2001, to sell all or any portion of its shares to us at a price of $5 per share, for a total of $3,105,000. Although the put option is subordinated to our Imperial Bank debt, if Merial were to exercise its put option, we would be unable to pay for the shares. 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. 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, or we may need to delay, reduce, or eliminate one or more of our operational activities or research and development programs. Any of these events would impair our competitive position and harm our business. 11 We are not in compliance with our bank loan covenants In April 2000, we refinanced our outstanding Banque Paribas debt with Imperial Bank ("Imperial"). As of June 30, 2000 and September 30, 2000, we were not in compliance with some of the financial covenants in our agreement with Imperial, and we have obtained waivers from the bank. We cannot assure you that we will be in compliance with the covenants in the future. Failure to be in compliance with the covenants places us in technical default of the debt agreement, and Imperial could theoretically demand repayment of the loans. We do not have the funds to repay the loans on short notice. 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 products, our poultry diagnostic products 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 . 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, Intervet, Inc. (formerly Bio-Trends International, Inc.) ("Intervet"), obtains European Union regulatory approvals for its manufacturing facilities which make this product. 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 and $2,073,000 during 1999 and 1998, respectively. 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. 12 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. 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. Our European operations 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. 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, trade secrets, and confidentiality 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 United States. 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. Our patent infringement litigation against Heska's use of heartworm diagnostic technology is also expensive. 13 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 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 FeLV vaccine to Merial S.A.S. or other distributors for resale in Europe will be at risk unless Intervet, our supplier, obtains European Union regulatory approvals for its manufacturing facilities which make this product. 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 third quarter of 2000 increased by $1,435,000 or 24% over the third quarter of 1999. The increase reflects an increase in our diagnostic product sales of $1,604,000 and an increase in our instrument product sales of $228,000, offset by a decrease in our sales of vaccine products of $397,000. The 14 increase in our sales of diagnostic products is primarily due to sales of the KPL poultry diagnostic products which we acquired in April 2000, and increased sales to distributors due to the fact that all but one of our former distributors are again selling our products. The weakening of the French franc against the U.S. dollar negatively impacted our reported diagnostic sales in Europe. Our decreased vaccine sales reflects the absence of sales of vaccines to private label partners which we discontinued during the third quarter of 1999 because we were unable to obtain supply of a crucial manufacturing material. Our instrument and reagent product sales increased due to sales in the U.S. and in Europe (as these instruments have obtained the European CE mark) and increased sales of reagents resulting from increased placements of instruments. Our net sales for the nine months ended September 30, 2000 increased $1,556,000 or 7% over the nine months ended September 30, 1999. The increase reflects an increase in our diagnostic product sales of $606,000 and an increase in our instrument product sales of $949,000, while sales of our vaccine products were flat. The increase in our sales of diagnostic products is primarily due to sales of the KPL poultry diagnostic products which we acquired in April 2000, offset by the effect of expensive promotional programs in the United States during the first quarter of 2000 which attempted to respond to increased competition in the canine heartworm diagnostic market. 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 half 2000 increased by 6% over the first half of 1999, yet our sales in dollars for these products decreased by 17%. In Europe, sales of our large animal diagnostic products decreased 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 reported European diagnostic sales. Our instrument product sales increased due to sales in the U.S. and in Europe (as these instruments have obtained the European CE mark) increased sales of reagents resulting from increased placements of instruments, and a full nine month's worth of sales of our SCA 2000TM 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. Our cost of sales as a percentage of our net sales was 51% during the third quarter of 2000 compared to 65% during the third quarter of 1999 (i.e., our gross margin increased to 49% from 35%). The higher gross margin is a direct result of three factors: i) the increase in our sales; ii) the poultry diagnostic products have relatively high margins and iii) a decrease in our sales of lower margin vaccines. Our gross margins are restrained by the fact that a significant portion of our manufacturing costs are fixed costs. Among our major products, our DiroCHEK(R) canine heartworm diagnostic products and the ProChem(R) analyzer are manufactured at our facilities, whereas our WITNESS(R), VetRED(R), all poultry diagnostic, all vaccines and the SCA 2000(TM) products 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. Our cost of sales as a percentage of our net sales was 49% during the nine months ended September 30, 2000 compared to 48% during the nine months ended September 30, 1999 (i.e. our gross margins decreased to 51% from 52%). The lower gross margins are a result of the effect of the promotional programs in the first quarter of 2000 discussed above. We are currently in the process of transferring the manufacturing of our poultry diagnostic products to our manufacturing facilities in San Diego, and we expect the transfer to be completed within the next twelve months. We believe that our gross margins on these products will improve as we will have more products to absorb our fixed manufacturing costs. 15 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 until July 1998 Merial 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 broadened Merial's U.S. distribution rights (which were an area of ongoing discussions) and eliminated the royalty. In addition, we will work with Merial to try to have Intervet 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 Intervet-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 increased $26,000 or 5% during the third quarter of 2000 as compared to the third quarter of 1999, and decreased $26,000 or 2% during the nine months ended September 30, 2000 as compared to the nine months ended September 30, 1999. Our research and development expenses as a percentage of our net sales were 7% and 8% during the third quarter of 2000 and 1999, respectively, and were 6% and 7% during the nine months ended September 30, 2000 and 1999, respectively. Our selling and marketing expenses during the third quarter of 2000 increased by $895,000 or 51% over the third quarter of 1999, and increased $2,408,000 or 43% during the nine months ended September 30, 2000 as compared to the nine months ended September 30, 1999. The increases are due primarily to the acquisition of W3COMMERCE, promotional programs and an increase in our direct-to-veterinarian telemarketing group. Our selling and marketing expenses as a percentage of our net sales were 35% and 29% during the third quarter of 2000 and 1999, respectively, and were 31% and 23% during the nine months ended September 30, 2000 and 1999, respectively. At the end of the third quarter of 2000, we refocused our sales and marketing efforts towards traditional animal health distribution and, as a result, we significantly reduce the headcount of our telesales force. Our general and administrative expenses during the third quarter of 2000 decreased by $89,000 or 6% from the third quarter of 1999, and increased $787,000 or 18% during the nine months ended September 30, 2000 as compared to the nine months ended September 30, 1999. The decrease for the quarter is due primarily to the non-recurrence of exit compensation to a former employee and a decrease in consulting services, offset by an increase in goodwill amortization related to our KPL acquisition. The increase for the nine month period is due primarily to legal expenses related to our patent litigation with Heska, increased goodwill amortization related to our KPL acquisition, increased use tax resulting from a state use tax audit, and foreign currency losses related to our intercompany receivable from Synbiotics Europe. Our general and administrative expenses as a percentage of our net sales were 19% and 25% during the third quarter of 2000 and 1999, respectively, and were 20% and 18% during the nine months ended September 30, 2000 and 1999, respectively. Financial Condition We believe that our present capital resources, which included working capital of $5,765,000 at September 30, 2000, are sufficient to meet our current working capital needs and service our debt through September 30, 2001. As of September 30, 2000, we had outstanding principal balances on our Imperial Bank debt of $9,000,000, and outstanding principal balances on our convertible debt issued in conjunction with the acquisition of W3COMMERCE of $2,813,000. As of June 30, 2000 and September 30, 2000, we were not in compliance with certain Imperial Bank financial covenants, and we have obtained waivers from the bank. In exchange for the waivers, we have: 1) paid the bank waiver fees totalling $70,000 and 2) made a one time principal payment on our term loan of $500,000. In addition, in November 2000 we amended the Imperial agreement to: 1) convert $1,500,000 from 16 the line of credit to the term loan; 2) reduce the line of credit to a maximum of $2,500,000, subject to a borrowing base calculation; 3) change the due date of the term debt to March 31, 2002; 4) revise the calculation of certain financial ratios and the required levels of tangible net worth and 5) increase the interest rate on both the term debt and the line of credit to prime plus 1.50% to 2.50% (dependent upon our ratio of senior funded debt to earnings before interest, taxes, depreciation and amortization). In addition to amending the Imperial agreement, we also agreed to issue to Imperial warrants to purchase 250,000 unregistered shares of the Company's common stock at $2.00 per share. The 621,000 shares of our common stock which we issued to Merial S.A.S. in conjunction with the 1997 acquisition of Synbiotics Europe are subject to a put provision. The put option gives Merial S.A.S. the right, beginning on July 9, 2001, to sell all or any portion of its shares to us at a price of $5 per share, for a total of $3,105,000. Although the put option is subordinated to the Imperial bank debt, if Merial were to exercise its put option, we would be unable to pay for the shares. 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. Our European operations 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 and our newly acquired poultry diagnostic products and success in our Internet marketing business will also reduce our seasonality. Success in our Internet marketing business would also reduce our seasonality. On June 19, 2000 we announced that we had retained investment bankers to advise us in exploring strategic alternatives for enhancing the value of Synbiotics to our shareholders. Included in these strategic alternatives is the possible sale of our animal health business. If we were to sell the animal health business, the financial condition and results of operations would be materially affected, as substantially all of our assets, liabilities, revenues and expenses are attributable to the animal health business. Subsequent to any possible sale of the animal health business, our assets would consist primarily of the sales proceeds and the operations of W3COMMERCE, and our future results of operations would be contingent upon the efforts of W3COMMERCE. 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 the potential for changes in interest rates and foreign currency exchange rates. Interest Rate Risk The fair value of our investments available for sale at September 30, 2000 was $617,000, 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 September 30, 2000 was $11,813,000, of which $2,813,000 has a fixed interest rate of 6.21%, and the remaining $9,000,000 has a variable interest rate based on the prime rate. 17 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 Synbiotics Europe as it transacts business in Euros, its local currency. However, this risk is limited to our intercompany receivable from Synbiotics Europe and the conversion of its financial statements into the U.S. dollar for consolidation. There is no foreign currency exchange rate risk related to Synbiotics Europe'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. 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 Synbiotics Europe's financial statements, including its intercompany payable, into the U.S. dollar for consolidation. 18 PART II--OTHER INFORMATION Item 1. Legal Proceedings Synbiotics Corporation vs. Heska Corporation--United States District Court for the Southern District of California No material changes. SE Technologies, Inc. vs. Synbiotics Corporation--San Diego Superior Court On July 13, 2000, SE Technologies, Inc. ("SE") file a lawsuit against us alleging a breach of contract related to consulting services performed by SE in conjunction with the 1999 implementation of our enterprise resource planning system. We paid $430,000 for the implementation, of which $266,000 was for the base implementation (which we believe was to be capped at $266,000) and $164,000 for certain modifications to the software. SE has billed us an additional $188,000 which we have not paid. We have repeatedly requested details of the services performed for the amount billed, and we have not received a response which justifies the additional billed amount. We plan to vigorously defend ourselves against the allegations. In the event we were to lose the lawsuit, we believe our direct liability would be the $188,000 plus legal expenses. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. 19 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 2.8 Asset Purchase Agreement by and between the Registrant and Kirkegaard & Perry Laboratories, Inc., dated April 18, 2000. The following schedules have been omitted from this filing: 1) Exhibit A: a)Exhibit B--Specifications for the manufacture or each of the products acquired. b) Exhibit C--Plan of transition of manufacturing of the products acquired from Kirkegaard & Perry Laboratories, Inc. to the registrant. c) Exhibit D--Transfer prices of the products manufactured by Kirkegaard & Perry Laboratories, Inc for the registrant during the manufacturing transition phase. 2) Exhibit L: a)Attachment 2.15(a)--Kirkegaard & Perry Laboratories, Inc customer list. b)Attachment 2.15(b)--Kirkegaard & Perry Laboratories, Inc supplier list. The omitted schedules will be provided supplementally to the Commission upon the Commission's request 10.1 Lease of Premises located at 11011 Via Frontera, San Diego, California, dated November 20, 1996. 10.1.1 First Amendment to Lease of Premises located at 11011 Via Frontera, San Diego, California. 10.74 Secured Promissory Note from the Registrant to Kirkegaard & Perry Laboratories, Inc., dated April 18, 2000. 10.74.1 Security Agreement by and between the Registrant and Kirkegaard & Perry Laboratories, Inc., dated April 18, 2000. 10.74.2 Intercreditor Agreement by and among the Registrant, Imperial Bank and Kirkegaard & Perry Laboratories, Inc., dated April 18, 2000. 27 Financial Data Schedule (for electronic filing purposes only).
(b) Reports on Form 8-K None. 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Synbiotics Corporation Date: November 14, 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) 21 EX-2.8 2 0002.txt ASSET PURCHASE AGREEMENT Exhibit 2.8 ----------- ASSET PURCHASE AGREEMENT BY AND BETWEEN SYNBIOTICS CORPORATION AND KIRKEGAARD & PERRY LABORATORIES, INC. DATED AS OF APRIL 18, 2000 TABLE OF CONTENTS
Page ASSET PURCHASE AGREEMENT........................................................ 1 - ------------------------ ARTICLE 1 PURCHASE AND SALE OF ASSETS........................................... 1 - --------- 1.1 Purchase and Sale................................................ 1 --- ----------------- 1.2 Assumed Liabilities; Retained Liabilities........................ 1 --- ----------------------------------------- 1.3 Ancillary Documents.............................................. 2 --- ------------------- 1.4 Purchase Price................................................... 2 --- -------------- ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF SELLER.............................. 3 - --------- 2.1 Corporate Organization........................................... 3 --- ---------------------- 2.2 Authorization.................................................... 3 --- ------------- 2.3 Title; Condition of Purchased Assets............................. 3 --- ------------------------------------ 2.4 No Violation..................................................... 3 --- ------------ 2.5 Governmental Authorities......................................... 4 --- ------------------------ 2.6 Liabilities...................................................... 4 --- ----------- 2.7 Purchased Assets; Purchase Orders................................ 4 --- --------------------------------- 2.8 Litigation....................................................... 4 --- ---------- 2.9 Contracts........................................................ 5 --- --------- 2.10 Compliance with Law.............................................. 5 ---- ------------------- 2.11 Licenses, Permits and Authorizations............................. 5 ---- ------------------------------------ 2.12 Intangible Property Rights....................................... 5 ---- -------------------------- 2.13 Tax Matters...................................................... 6 ---- ----------- 2.14 Environmental and Safety Matters................................. 6 ---- -------------------------------- 2.15 Customers and Suppliers.......................................... 6 ---- -------------------------------------------------------- 2.16 Disclosure; No Misstatements..................................... 7 ---- ---------------------------- 2.17 Survival of Representations and Warranties....................... 7 ---- ------------------------------------------ ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF BUYER............................... 7 - --------- 3.1 Organization; Authority.......................................... 7 --- ----------------------- 3.2 Authorization.................................................... 7 --- ------------- 3.3 No Conflict with Other Instruments or Agreements................. 7 --- ------------------------------------------------ 3.4 Governmental Authorities......................................... 7 --- ------------------------ 3.5 Consents......................................................... 8 --- -------- 3.6 Litigation....................................................... 8 --- ---------- 3.7 Capitalization, Financing and Qualifications of Buyer............ 8 --- ----------------------------------------------------- 3.8 Licenses, Permits and Authorizations............................. 8 --- ------------------------------------ 3.9 Brokers.......................................................... 8 --- ------- 3.10 Disclosure; No Misstatements..................................... 8 ---- ---------------------------- 3.11 Survival of Representations and Warranties....................... 8 ---- ------------------------------------------ ARTICLE 4 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER...................... 9 - --------- 4.1 Performance...................................................... 9 --- ----------- 4.2 Related Documents................................................ 9 --- ----------------- 4.3 Governmental Approvals........................................... 9 --- ---------------------- 4.4 Articles of Transfer............................................. 9 --- -------------------- 4.5 Lender's Consent................................................. 9 --- ---------------- 4.6 Third Party Consents............................................. 9 --- -------------------- 4.7 Shareholder Approval............................................. 9 --- -------------------- i
TABLE OF CONTENTS
Page 4.8 Seller's Certificate....................................................... 9 --- -------------------- 4.9 No Financing Condition..................................................... 10 --- ---------------------- ARTICLE 5 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLER............................... 10 - --------- 5.1 Performance................................................................ 10 --- ----------- 5.2 Cash Payment............................................................... 10 --- ------------ 5.3 Related Documents.......................................................... 10 --- ----------------- 5.4 Governmental Approvals..................................................... 10 --- ---------------------- 5.5 Third Party Consents....................................................... 10 --- -------------------- 5.6 Buyer's Certificate........................................................ 10 --- ------------------- 5.7 Lender's Consent........................................................... 10 --- ---------------- 5.8 Shareholder Approval....................................................... 10 --- -------------------- 5.9 Articles of Transfer....................................................... 11 --- -------------------- ARTICLE 6 BULK SALES...................................................................... 11 - --------- ARTICLE 7 INDEMNIFICATION................................................................. 11 - --------- 7.1 Grant of Indemnity......................................................... 11 --- ------------------ 7.2 Representation, Cooperation and Settlement................................. 12 --- ------------------------------------------ 7.3 Survival of Representations and Warranties................................. 13 --- ------------------------------------------ 7.4 Limitations on Liability................................................... 13 --- ------------------------ ARTICLE 8 CLOSING......................................................................... 14 - --------- 8.1 Closing.................................................................... 14 --- ------- 8.2 Deliveries By Seller....................................................... 14 --- -------------------- 8.3 Deliveries by Buyer........................................................ 14 --- ------------------- 8.4 Trademark Assignments and Filings.......................................... 14 --- --------------------------------- ARTICLE 9 TERMINATION..................................................................... 15 - --------- 9.1 Termination................................................................ 15 --- ----------- 9.2 Effect of Termination...................................................... 15 --- --------------------- ARTICLE 10 TRANSACTIONS SUBSEQUENT TO THE CLOSING DATE.................................... 15 - ---------- 10.1 Further Assurances......................................................... 15 ---- ------------------ 10.2 Sales and Use Taxes........................................................ 15 ---- ------------------- 10.3 Employees.................................................................. 15 ---- --------- 10.4 Manufacturing Agreement.................................................... 16 ---- ----------------------- ARTICLE 11 MISCELLANEOUS PROVISIONS....................................................... 16 - ---------- 11.1 Investigations and Survival................................................ 16 ---- --------------------------- 11.2 Successors and Assigns..................................................... 16 ---- ---------------------- 11.3 Governing Law; Jurisdiction and Venue; Severability........................ 16 ---- -------------------------------------------------- 11.4 Entire Agreement; Modification and Waiver.................................. 17 ---- ---------------------------------------- 11.5 Notices.................................................................... 17 ---- ------- 11.6 Payment of Fees and Expenses............................................... 18 ---- ---------------------------- 11.7 No Other Representations................................................... 18 ---- ------------------------ 11.8 Captions................................................................... 18 ---- -------- 11.9 Publicity.................................................................. 18 ---- --------- 11.10 Confidentiality............................................................ 18 ----- --------------- 11.11 Counterparts............................................................... 18 ----- ------------
ii TABLE OF CONTENTS LIST OF EXHIBITS ---------------- EXHIBIT A Manufacturing Agreement EXHIBIT B-1 Purchased Assets EXHIBIT B-2 Assumed Liabilities EXHIBIT B-3 Retained Liabilities EXHIBIT C Secured Promissory Note EXHIBIT D Security Agreement EXHIBIT E License and Technical Assistance Agreement EXHIBIT F Assumption Agreement EXHIBIT G General Conveyance, Bill of Sale and Assignment EXHIBIT H Non-Competition Agreement EXHIBIT I Royalty Agreement EXHIBIT J Intellectual Property Assignment EXHIBIT K Articles of Transfer EXHIBIT L Sellers' Disclosure Schedule EXHIBIT M Buyer's Disclosure Schedule iii ASSET PURCHASE AGREEMENT ------------------------ This ASSET PURCHASE AGREEMENT ("Agreement") is entered into as of April 18, 2000 (the "Execution Date"), by and between SYNBIOTICS CORPORATION, a California corporation ("Buyer") and KIRKEGAARD & PERRY LABORATORIES, INC. a Maryland corporation ("Seller"), with reference to the following facts: WHEREAS, Seller is in the business of, among other things, manufacturing and selling various poultry diagnostic products and is engaged in the research, development and promotion of poultry diagnostic products (the "Poultry Diagnostic Business"). WHEREAS, Buyer desires to purchase and assume from Seller and Seller desires to sell, convey and assign to Buyer, on the terms and subject to the conditions of this Agreement, all of the assets and certain of the liabilities of Seller related to the Poultry Diagnostic Business (the "Sale Transaction"). WHEREAS, following the closing of the Sale Transaction, Buyer desires to engage Seller to continue to manufacture the Products, as defined in the Transitional Manufacturing and Supply Agreement in the form attached hereto as Exhibit A (the "Manufacturing Agreement"), for the term specified in the Manufacturing Agreement and desires that Seller cooperate with Buyer in the assumption by Buyer of responsibility for the manufacturing of the Products during such period pursuant to the Manufacturing Agreement. NOW, THEREFORE, in consideration of the foregoing premises and the representations, warranties, covenants and agreements contained below, the parties agree as follows: ARTICLE 1 --------- PURCHASE AND SALE OF ASSETS 1.1 Purchase and Sale. On the Closing Date (as defined in Article 8 ----------------- below), Seller agrees to sell, assign and otherwise transfer to Buyer and Buyer agrees to purchase, accept and acquire from Seller, all of Seller's right, title and interest in and to the assets (the "Purchased Assets"). The "Purchased Assets" shall consist of the personal properties, assets, goodwill and rights of Seller, set forth on Exhibit B-1 as Purchased Assets, that are owned by, or licensed to, the Seller as of the Closing and used, held for use or intended to be used primarily in the operation or conduct of the Poultry Diagnostic Business. 1.2 Assumed Liabilities; Retained Liabilities. On the Closing Date, Buyer ----------------------------------------- shall assume the debts, liabilities, assessments, losses, damages, costs, expenses or other obligations (including all debts, liabilities, assessments, losses, damages, costs, expenses or other obligations owing to trade creditors) related to the Purchased Assets set forth on Exhibit B-2 (the "Assumed Liabilities") and Seller shall retain those liabilities set forth on Exhibit B-3 as Retained Liabilities (the "Retained Liabilities"). Following the Closing, (i) all Assumed Liabilities shall be obligations and liabilities solely of, and shall solely be legally and financially borne by, Buyer, (ii) Buyer shall be responsible for compliance with permits and licenses affecting the 1 Purchased Assets (whether or not Seller is the permit holder under such permits and licenses), and (iii) all risk of casualty loss occurring after the Closing relating to the Purchased Assets shall be borne by Buyer. All Retained Liabilities shall continue to be obligations and liabilities solely of, and shall solely be legally and financially borne by, Seller. In furtherance (and not in limitation) of the foregoing, Buyer is not and shall not be treated or viewed as, a successor of Seller as a matter of law. 1.3 Ancillary Documents. In connection with the sale and purchase of the ------------------- Purchased Assets, each of Seller and Buyer shall execute and deliver to the other each of the following agreements to which it is a party at the Closing: (i) the Manufacturing Agreement substantially in the form attached as Exhibit A; --------- (ii) the Secured Promissory Note substantially in the form attached hereto as Exhibit C (the "Secured Note"); (iii) the Security Agreement substantially in - --------- the form attached hereto as Exhibit D (the "Security Agreement"); (iv) the --------- License and Technical Assistance Agreement substantially in the form attached hereto as Exhibit E ("License Agreement"); (v) the Assumption Agreement --------- substantially in the form attached hereto as Exhibit F ("Assumption Agreement"); --------- (vi) the General Conveyance, Bill of Sale and Assignment substantially in the form attached hereto as Exhibit G ("General Conveyance"); (vii) the Non- --------- Competition Agreement substantially in the form attached hereto as Exhibit H --------- ("Non-Competition Agreement"); (vii) the Royalty Agreement substantially in the form attached hereto as Exhibit I (the "Royalty Agreement"); (viii) the --------- Intellectual Property Assignment substantially in the form attached hereto as Exhibit J; and (ix) the Articles of Transfer substantially in the form attached - --------- hereto as Exhibit K. The documents and instruments that Seller and Buyer are --------- required to deliver to each other at the Closing pursuant to clauses (iv) through (ix) of this Section 1.2 shall be referred to herein collectively as the "Conveyance Documents." The Conveyance Documents, together with the Manufacturing Agreement, the Secured Note and the Security Agreement, are referred to herein collectively as the "Related Documents." 1.4 Purchase Price. In consideration for the sale, transfer, assignment -------------- and acceptance of the Purchased Assets pursuant to this Agreement, Buyer (in addition to assuming the Assumed Liabilities) shall pay to Seller the sum of Six Million Dollars ($6,000,000) (the "Purchase Price"), payable as follows: (a) $75,000 previously paid by Buyer to Seller as a good faith deposit in connection with this Agreement; (b) $3,425,000 at the Closing (the "Closing Cash Payment") by certified or cashier's check or by wire transfer in immediately available funds; (c) $1,000,000, as evidenced by the Secured Note, in the original principal amount of $1,000,000, payable in accordance with its terms and Section 10.4 below, which payment obligations of Buyer are secured by certain of the Purchased Assets pursuant to the Security Agreement; and (d) a royalty of ten percent (10%) (but not to exceed $1,500,000) upon the sale by Buyer of Products payable in accordance with the Royalty Agreement. 2 ARTICLE 2 --------- REPRESENTATIONS AND WARRANTIES OF SELLER For purposes of Articles 2 and 3, "Knowledge," "Known" or similar terms mean actual knowledge and knowledge which would reasonably be expected under the circumstances from individual officers and directors in comparable businesses) of the officers and directors of Seller or Buyer, as the case may be, and any employees of Seller or Buyer, as the case may be, who have knowledge of or responsibility for the subject matter of the applicable representation and warranty. Except as set forth in the Seller's Disclosure Schedule attached hereto as Exhibit L (the "Seller's Disclosure Schedule") referencing the specific section of this Article 2 the Seller hereby represents and warrants to Buyer as follows: 2.1 Corporate Organization. Seller is a corporation duly organized, ---------------------- validly existing and in good standing under the laws of the State of Maryland and has all requisite corporate power and authority to enter into this Agreement and each of the Related Documents to which it is a party and perform its obligations hereunder and thereunder. 2.2 Authorization. The execution, delivery and performance by Seller of ------------- this Agreement, and each of the Related Documents to which it is a party, and the consummation by Seller of the transactions contemplated herein and therein, have been duly authorized and approved by all necessary corporate proceedings of Seller, subject to shareholder approval. This Agreement and each of the Related Documents to which it is a party have been duly executed and delivered by Seller, and assuming their due authorization, execution and delivery by Buyer, each constitutes a legal, valid and binding agreement of Seller, subject to shareholder approval and compliance with applicable bulk sales laws, enforceable against Seller in accordance with its terms, except as may be limited by bankruptcy, insolvency or other laws of general application relating to the enforcement of creditors' rights. 2.3 Title; Condition of Purchased Assets. Except as set forth in Section ------------------------------------ 2.3 of the Seller's Disclosure Schedule, Seller has good and marketable title or the right to use and transfer all of the Purchased Assets, free and clear of all mortgages, liens (tax or otherwise), pledges, charges, leases, encumbrances, claims or restrictions of any kind or character (collectively, the "Encumbrances"), except for (i) liens for taxes not yet due and payable, and (ii) liens arising solely by operation of law (collectively, "Permitted Encumbrances"). All of the tangible properties and assets included in the Purchase Assets have been maintained and repaired for their continued operation and are in good operating condition, reasonable wear and tear excepted, and usable in the ordinary course of business. 2.4 No Violation. The execution, delivery and performance by Seller of ------------ this Agreement and each of the Related Documents to which it is a party, subject to shareholder approval and compliance with applicable bulk sales laws, will not (with notice and/or the lapse of time) result in a material breach or violation of, or constitute a material default under, Seller's Articles of Incorporation, Bylaws or any material agreement to which Seller is a party or by which Seller is bound, and will not, to the best of Seller's Knowledge, be in violation of any statute, judgment, order, rule or regulation in effect at the Closing Date of any court or federal, state or other 3 regulatory authority or governmental body having jurisdiction over Seller or the Purchased Assets, except for such violations as would not have a material adverse effect on Buyer after the Closing. To Seller's Knowledge, Seller is not a party to, subject to or bound by any agreement or judgment, order, writ, injunction or decree of any court or federal, state or other regulatory or governmental body that prevents or materially impairs the consummation of the transactions contemplated by this Agreement or the Related Documents or the rights of the Buyer hereunder and thereunder. 2.5 Governmental Authorities. Except as set forth in Section 2.5 of the ------------------------ Seller's Disclosure Schedule, Seller is not required to submit any notice, report or other filing to any governmental or regulatory authority, nor is any consent, approval or authorization of any governmental or regulatory authority required to be obtained in connection with the consummation of the transactions contemplated hereby or in the Related Documents. 2.6 Liabilities. Except as set forth in Section 2.6 of the Seller's ----------- Disclosure Schedule, the Purchased Assets are not subject to any material liabilities or obligations of whatever nature, whether absolute, accrued or contingent. Except as set forth in Section 2.6 of the Seller's Disclosure Schedule, Seller and its officers, employees or agents have not employed any broker, finder or consultant or incurred any liability for any brokerage fees, commissions, consultant's fees or finders' fees in connection with the transactions contemplated hereby or the Related Documents. 2.7 Purchased Assets; Purchase Orders. To Seller's Knowledge and except as --------------------------------- set forth on Schedule 2.7 of the Seller's Disclosure Schedule, the Purchased Assets include all material intellectual property, equipment, inventory and all other property which Seller uses to conduct the Poultry Diagnostic Business and in which Seller has any right, title or interest with respect to the Poultry Diagnostic Business. Except as set forth on Schedule 2.7 of the Seller's Disclosure Schedule, the Purchased Assets include all the assets reasonably necessary to operate the Poultry Diagnostic Business in all material respects in the same manner as the Poultry Diagnostic Business was operated by Seller prior to the Closing (except for management and financial resources and access to technology available to Seller whose business encompasses more than the Poultry Diagnostic Business). All customer orders relating to orders received by the Seller prior to April 18, 2000 and outstanding on the date hereof (if any) are listed in Section 2.7 of the Seller's Disclosure Schedule, and have arisen only from bona fide transactions in the ordinary course of Seller's business, are, to Seller's Knowledge, valid contracts. Except as set forth in Section 2.7 of the Seller's Disclosure Schedule, all inventory and equipment, used in the Poultry Diagnostic Business and included in the Purchased Assets of the Execution Date are Seller's property and have been acquired or arisen in the ordinary course of business, have not been pledged as collateral, are not held by Seller on consignment from others and are being conveyed to Buyer pursuant to the General Conveyance. 2.8 Litigation. To Seller's Knowledge and except as set forth in Section ---------- 2.8 of the Seller's Disclosure Schedule, there are no claims, actions, litigation, suits, proceedings or investigations pending or threatened, against or affecting any of the Purchased Assets, the business and activities conducted by the Poultry Diagnostic Business or the consummation of the transactions contemplated hereby or the Related Documents, at law or in equity or before or by any governmental or regulatory authority, agency or instrumentality or before any arbitrator of 4 any kind, and to the Seller's Knowledge, there is no valid basis, based on Seller's commercially reasonable judgement, for any such claim, action, litigation, suit, proceeding or investigation. Section 2.8 of the Seller's Disclosure Schedule contains a list and brief description of all claims, actions, litigation, suits, proceedings or investigations relating to the Purchased Assets or the Poultry Diagnostic Business which have resulted in a judgment, settlement, compromise, release, payment or award of any nature. Since January 1, 1999, no governmental or regulatory authority, agency or instrumentality has notified Seller in writing of a claim challenging the legal right of Seller to sell any products of the Poultry Diagnostic Business or relating to the Purchased Assets. 2.9 Contracts. Seller has made available to Buyer copies of each --------- agreement, instrument, commitment, contract or other obligation of any type to which Seller is a party or is bound reasonably relating to the Purchased Assets or the Assumed Liabilities (collectively, the "Relevant Contracts"). Set forth in Section 2.9 of the Seller's Disclosure Schedule is an accurate listing of the Relevant Contracts which provide for annual payments to or from the Seller in excess of $25,000. To Seller's Knowledge and except as set forth in Section 2.9 of the Seller's Disclosure Schedule, (i) all Relevant Contracts are in full force and effect and are valid, binding and enforceable in all material respects against the parties thereto in accordance with their respective terms; (ii) Seller has complied in all material respects with the provisions of such Relevant Contracts; (iii) no such party is in default in any material respects under any of the terms thereof; and (iv) no event has occurred that (with the passage of time and/or the giving of notice) would constitute a default by any party under any provision thereof. Except as set forth in Section 2.9 of the Seller's Disclosure Schedule, no consent, approval or authorization of any third party on the part of Seller is required in connection with the consummation of the transactions contemplated hereunder. 2.10 Compliance with Law. Seller has conducted the operation of the ------------------- Poultry Diagnostic Business in compliance in all material respects with all applicable foreign, federal, state or local laws, statutes, rules, regulations, ordinances, codes, orders, licenses, franchises, permits, authorizations and concessions (collectively, "Regulations"), except where the failure to comply with such Regulations would not have a material adverse effect on Buyer after the Closing. 2.11 Licenses, Permits and Authorizations. Section 2.11 of the Seller's ------------------------------------ Disclosure Schedule contains a list of all approvals, authorizations, consents, licenses, franchises, orders and other permits of, and filings with, any governmental authority, whether foreign, federal, state or local (collectively, the "Permits"), which, to Seller's Knowledge, are required by Seller for the ownership, handling, use , sale or possession of the Purchased Assets, the noncompliance with which would have a material adverse effect on Buyer or the Purchased Assets. 2.12 Intangible Property Rights. Schedule 2.12 of the Seller's Disclosure -------------------------- Schedule lists all of the inventions, trade secrets, licenses, trademarks, and applications therefor that Seller uses to conduct the Poultry Diagnostic Business (such assets and rights herein called "Rights"). Except as set forth in Section 2.12 of the Seller's Disclosure Schedule, such Rights are not being infringed or violated by any other person or entity. All Purchased Assets that consist of Rights, are, and upon the consummation of the transactions contemplated by this Agreement and the Related Documents will be, vested in Buyer, pursuant to the terms of this Agreement and the 5 License Agreement, free of any Encumbrances, except for those provided in license agreements previously provided to the Buyer and for such Encumbrances that would not have a material adverse effect on Buyer after the Closing. Except as set forth in Section 2.12 of the Seller's Disclosure Schedule, Seller has not granted any license or right to the Rights to any third party. To the Seller's Knowledge, the Purchased Assets that consist of Rights employed by Seller in connection with the Poultry Diagnostic Business do not infringe upon: other than patents, any Rights, proprietary rights or intellectual property of any other person, firm, corporation or other entity. The documents reflecting the Purchased Assets that consist of Rights are current and accurate and sufficient in detail and content to identify the Rights and permit the full and proper use by Buyer, and have been provided to Buyer. Each of Seller's employees who, either alone or in concert with others, developed, invented, discovered, derived, programmed or designed any of the Assets that consist of Rights, or who has Knowledge of or access to information relating to it, has been put on notice that such Rights are proprietary to Seller and are not to be divulged or misused and has executed a form of proprietary information and inventions agreement provided to and approved by Buyer. To the Knowledge of Seller, the Assets that consist of Rights are presently valid and protectable, and not part of the public knowledge or literature, nor have they been used, divulged, or appropriated for the benefit of any past or present employees or of Seller. 2.13 Tax Matters. All taxes, including, without limitation, income, ----------- property, sales, use, franchise, added value, imposed by the United States or by any foreign country or by any state, municipality, subdivision or instrumentality of the United States or of any foreign country, or by any other taxing authority, which are due or payable by Seller with respect to the Purchased Assets, and all interest and penalties thereon, whether disputed or not, have been or will be paid in full; all tax returns required to be filed with respect to the Purchased Assets have been or will be accurately prepared and duly and timely filed or will be so filed after the Closing Date if due thereafter; and all deposits required by law to be made by Seller have been or will be duly made. Nothing in this Section 2.13 shall be construed as limiting Seller's right to dispute taxes levied upon it. 2.14 Environmental and Safety Matters. Seller's operation of the Poultry -------------------------------- Diagnostic Business has been in compliance in all material respects with, and Seller has complied in all material respects with and is not in violation of any, applicable United States federal, state and local laws, ordinances, regulations and orders relating to environmental matters (collectively, "Environmental Laws"), including, but not limited to, matters related to air pollution, water pollution, on-site or off-site hazardous substance handling, discharge, disposal or recovery, toxic or hazardous substances or materials, asbestos, PCBs, employee safety, and transportation or shipping safety, and, no written notice of violation of any such statutes, laws, ordinances, regulations and orders with respect thereto have been received by Seller, nor, to the Knowledge of Seller, is any such notice threatened. Seller has obtained all material environmental permits, temporary and otherwise, required for the lawful operation of the Poultry Diagnostic Business, and all such permits are in full force and effect and Seller has not received written notice that any such permits will be revoked, lapsed or otherwise subject to modification, nor to the Knowledge of Seller is any such notice of violation, lapse or modification threatened. 2.15 Customers and Suppliers. Section 2.15 of the Seller's Disclosure ----------------------- Schedule sets forth a list of all customers and suppliers of Seller as of the Closing Date with respect to the 6 Poultry Diagnostic Business from which the Seller has received or to which the Seller has paid more than $5,000 within the past 12 months. 2.16 Disclosure; No Misstatements. Neither this Agreement nor the Related ---------------------------- Documents, nor any other document, certificate or written statement referenced in this Agreement or the Related Documents prepared or furnished by Seller to Buyer contains any untrue statement of material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading as of the date hereof or thereof. Seller has disclosed to Buyer all Known facts which are reasonably likely to have a material adverse effect on the Purchased Assets. 2.17 Survival of Representations and Warranties. Seller's warranties and ------------------------------------------ representations herein shall survive the Closing for the period specified in Section 7.3(a) below. ARTICLE 3 --------- REPRESENTATIONS AND WARRANTIES OF BUYER Except as set forth in the Buyer's Disclosure Schedule attached hereto as Exhibit M (the "Buyer's Disclosure Schedule"), Buyer hereby represents and warrants to the Seller as follows: 3.1 Organization; Authority. Buyer is a corporation duly organized, ----------------------- validly existing and in good standing under the laws of the State of California, and has all requisite power and authority to enter into this Agreement and each of the Related Documents to which it is a party and perform its obligations hereunder and thereunder. 3.2 Authorization. The execution, delivery and performance by Buyer of ------------- this Agreement and each of the Related Documents to which it is a party and the consummation of the transactions contemplated herein and therein, have been duly and validly authorized by all necessary corporate action of Buyer. This Agreement and each of the Related Documents to which it is a party have been duly executed and delivered and constitute the legal, valid and binding obligations of Buyer, each enforceable in accordance with their respective terms, except as limited by bankruptcy, insolvency, or other laws of general application relating to the enforcement of creditor's rights. 3.3 No Conflict with Other Instruments or Agreements. The execution, ------------------------------------------------ delivery and performance by Buyer of this Agreement and each of the Related Documents to which it is a party will not result in a material breach or violation of, or constitute a material default under, Buyer's Articles of Incorporation, Bylaws or any agreement to which Buyer is a party or by which Buyer is bound or to which any of Buyer's property is subject, including but not limited to the Credit Agreement, entered into on April 12, 2000, between Buyer and Imperial Bank, and the Commercial Security Agreement, dated April 12, 2000, between Buyer and Imperial Bank, and, to the best of Buyer's Knowledge, will not be in violation of any statute, judgment, order, rule or regulation in effect at the date hereof of any court or federal, state or other regulatory authority or governmental body having jurisdiction over Buyer. 3.4 Governmental Authorities. Except as set forth in Section 3.4 of ------------------------ Buyer's Disclosure Schedule, Buyer is not required to obtain any consent, approval or authorization of any 7 governmental or regulatory authority in connection with the consummation of the transactions contemplated hereby or in the Related Documents. 3.5 Consents. Except as set forth in Section 3.5 of the Buyer's Disclosure -------- Schedule, no consent, approval or authorization of any third party on the part of Buyer is required in connection with the consummation of the transactions contemplated hereunder. 3.6 Litigation. Except as set forth in Section 3.6 of the Buyer's ----------- Disclosure Schedule, there are no claims, actions, litigation, suits, proceedings or investigations pending or, to Buyer's Knowledge, threatened against or affecting the consummation of the transactions contemplated hereby or by the Related Documents, at law or in equity or before or by any governmental or regulatory authority, agency or instrumentality, or before any arbitrator of any kind. 3.7 Capitalization, Financing and Qualifications of Buyer. Since January ----------------------------------------------------- 1, 1997, Buyer has filed with the Securities and Exchange Commission in compliance with applicable laws and regulations the annual and quarterly reports on Section 3.7 of the Buyer's Disclosure Schedule attached hereto including the Report on Form 10-K for the twelve months ended December 31, 1999. Buyer has and believes it will continue to have the financial resources, capabilities and qualifications to perform this Agreement and each of the Related Documents to which it is a party, including without limitation, assumption of the responsibility for the manufacturing of the Products (as defined in the Manufacturing Agreement) in accordance with Section 10.4 below and payment of the Assumed Liabilities. 3.8 Licenses, Permits and Authorizations. Section 3.8 of the Buyer's ------------------------------------ Disclosure Schedule contains a list of all Permits which, to Buyer's Knowledge, are required by Buyer for the acquisition of the Purchased Assets and the consummation of the Sale Transaction by Buyer, the noncompliance with which would have a material adverse effect on Buyer or the Purchased Assets. 3.9 Brokers. Except as set forth in Section 3.9 of Buyer's Disclosure ------- Schedule, Buyer and its officers, employees or agents have not employed any broker or finder or incurred any liability for any brokerage fees, commissions or finder's fees in connection with the transactions contemplated hereby or the Related Documents. 3.10 Disclosure; No Misstatements. Neither this Agreement nor the Related ---------------------------- Documents, nor any other document, certificate or written statement referenced in this Agreement or the Related Documents or prepared or furnished by Buyer to Seller contains any untrue statement of material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading as of the date hereof or thereof. 3.11 Survival of Representations and Warranties. Buyer's warranties and ------------------------------------------ representations herein shall survive the Closing for the period specified in Section 7.3(b) below. 8 ARTICLE 4 --------- CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER Each and every obligation of Buyer under this Agreement to be performed on or before the Closing Date shall be subject to the satisfaction or waiver on or before the Closing Date, of the following conditions precedent, except to the extent that Buyer shall have waived such satisfaction in writing: 4.1 Performance. Seller shall have performed and complied with all ----------- agreements, covenants and conditions required by this Agreement to be performed and complied with by Seller on or before the Closing Date. 4.2 Related Documents. Seller shall have executed and delivered to Buyer ----------------- all of the Related Documents required by their terms to be executed by Seller, substantially in the forms attached hereto. 4.3 Governmental Approvals. As of the Closing, all authorizations, ---------------------- approvals or permits of or filings with any governmental authority that are required by law in order to effect the transfer of the Purchased Assets, the assumption of the Assumed Liabilities and the other transactions contemplated by this Agreement or the Related Documents shall have been duly obtained or made and shall be effective as of the Closing or as soon thereafter as is reasonably practicable. 4.4 Articles of Transfer. Seller shall have filed Articles of Transfer -------------------- relating to the Purchased Assets substantially in the form attached hereto as Exhibit K (the "Articles") with the Maryland State Department of Assessments and Taxation (the "MSDAT") and the MSDAT shall have accepted the Articles for record. 4.5 Lender's Consent. Seller shall have obtained the consent of Bank of ---------------- America, N.A., Seller's principal lender, to the execution, delivery and performance of this Agreement and the Related Documents and the consummation of the Sale Transaction (the "Lender's Consent"). 4.6 Third Party Consents. Seller shall have obtained all consents, -------------------- assignments, approvals, waivers and authorization of third persons (other than the Lender's Consent) as may be necessary in the reasonable view of Buyer for Seller to consummate the transactions contemplated by this Agreement and the Related Documents. 4.7 Shareholder Approval. The Sale Transaction and the execution, delivery -------------------- and performance of this Agreement and the Related Documents shall have been approved by Seller's shareholders in accordance with the Maryland General Corporation Law. 4.8 Seller's Certificate. Buyer shall have received a certificate of the -------------------- President or the Secretary of the Seller dated as of the Closing Date and certifying to the fulfillment of the foregoing conditions and the absence of any material adverse change since February 29, 2000 in the Poultry Diagnostic Business, in form and substance acceptable to Buyer and its counsel ("Seller's Certificate"). 9 4.9 No Financing Condition. Buyer acknowledges and agrees that the ---------------------- availability of financing shall not be a condition to Buyer's obligations under this Agreement. ARTICLE 5 --------- CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLER Each and every obligation of Seller under this Agreement to be performed on or before the Closing Date shall be subject to the satisfaction or waiver, on or before the Closing Date, of each of the following conditions precedent, except to the extent that the Seller shall have waived in writing such satisfaction. 5.1 Performance. Buyer shall have performed and complied with all ----------- agreements, covenants and conditions required by this Agreement to be performed and complied with by Buyer on or before the Closing Date. 5.2 Cash Payment. Buyer shall at the Closing pay to Seller the Closing ------------ Cash Payment. 5.3 Related Documents. Buyer shall have executed and delivered to Seller ----------------- all of the Related Documents required by their terms to be executed by Buyer, substantially in the forms attached hereto. 5.4 Governmental Approvals. As of the Closing, all authorizations, ---------------------- approvals or permits of or filings with any governmental authority that are required by law in order to effect the transfer of the Purchased Assets, assumption of the Assumed Liabilities and the other transactions contemplated by this Agreement of the Related Documents shall have been duly obtained or made and shall be effective as of the Closing or as soon thereafter as is reasonably practicable. 5.5 Third Party Consents. Buyer shall have obtained all consents, -------------------- assignments, approvals, waivers and authorizations of third persons as may be necessary in the reasonable view of Seller for Buyer to consummate the transactions contemplated by this Agreement and the Related Documents. 5.6 Buyer's Certificate. Seller shall have received a certificate of the ------------------- President, the Chief Financial Officer, or the Secretary of the Buyer dated as of the Closing Date and certifying to the fulfillment of the foregoing conditions and the absence of any material adverse change in its condition (financial or otherwise), properties or business operations since the Buyer's Report on Form 10-K for the twelve months ended December 31, 1999, as amended and restated on or about April 13, 2000, in form and substance acceptable to Seller and its counsel ("Buyer's Certificate"). 5.7 Lender's Consent. Seller shall have obtained the Lender's Consent. ---------------- 5.8 Shareholder Approval. The Sale Transaction and the execution, delivery -------------------- and performance of this Agreement and the Related Documents shall have been approved by Seller's shareholders in accordance with the Maryland General Corporation Law. 10 5.9 Articles of Transfer. The MSDAT shall have accepted the Articles for -------------------- record. ARTICLE 6 --------- BULK SALES Each of the parties hereby waives compliance by the other party (to the extent compliance is required) with the bulk sales law of the State of Maryland as set forth in Article 6 of the Maryland Uniform Commercial Code, as amended (the "Maryland Bulk Sales Laws"), subject to Seller's indemnification of Buyer set forth in Section 7.1(c) below. ARTICLE 7 --------- INDEMNIFICATION 7.1 Grant of Indemnity. ------------------ (a) Indemnification by Seller. As an inducement for Buyer to ------------------------- enter into this Agreement and the Related Documents, and acknowledging that Buyer is relying on the indemnification provided in this Section 7 in entering into this Agreement and the Related Documents, Seller agrees to indemnify, defend and hold harmless Buyer and its employees, officers, directors, representatives and agents (collectively, "Buyer Affiliates"), from and against any actual claims, losses, liability, obligations, lawsuits, judgments, settlements, governmental investigations, damages, costs or expenses of whatever nature, including, without limitation, interest, penalties, reasonable attorneys' fees, costs of investigation and all amounts paid in defense or settlement of the foregoing, (collectively "Claims and Losses"), suffered or incurred by Buyer or Buyer Affiliates as a result of or in connection with any of the following: (i) any Retained Liabilities; (ii) any liabilities of the Seller that are not Assumed Liabilities; or (iii) a breach of any obligation, representation, warranty, covenant or agreement of Seller in this Agreement or any Related Document, or because any representation or warranty by Seller contained in this Agreement or any Related Document shall be materially false (collectively, "Buyer's Damages"). (b) Seller's Indemnification Relating to Bulk Sales Laws. In ---------------------------------------------------- addition to Seller's indemnification obligations set forth in Section 7.1(a) above, Seller agrees to indemnify Buyer and Buyer's Affiliates for any Claims or Losses arising out of any claim asserted against Buyer or a Buyer's Affiliate by a creditor of Seller which arises out of any failure by the parties to comply with the Maryland Bulk Sales Laws with respect to the transactions contemplated by this Agreement and any action brought or levy made as a result thereof (a "Transaction Challenge"). Buyer shall promptly advise Seller of any Transaction Challenge of which Buyer becomes aware. (c) Indemnification by Buyer. As an inducement for Seller to ------------------------ enter into this Agreement and the Related Documents, and acknowledging that Seller is relying on the indemnification provided in this Section 7 in entering into this Agreement and the Related Documents, Buyer agrees to indemnify, defend and hold harmless Seller, and its employees, 11 officers, directors, representatives and agents (collectively, "Seller Affiliates"), from and against any Claims and Losses suffered or incurred by Seller or Seller's Affiliates as a result of or in connection with any of the following: (i) any Assumed Liabilities; (ii) any liabilities of Buyer that are not Retained Liabilities; or (iii) a breach of any obligation, representation, warranty, covenant or agreement of Buyer in this Agreement or any Related Document, or because any representation or warranty by Buyer contained in this Agreement or any Related Document shall be materially false (collectively, "Seller's Damages"). 7.2 Representation, Cooperation and Settlement. ------------------------------------------ (a) Each party agrees to give prompt notice to the other of any claim against the other which might give rise to a claim based on the indemnity contained in Sections 7.1(a), 7.1(b) and 7.1(c), stating the nature and basis of the claim and the amount thereof. (b) In the event any claim, action, suit or proceeding is brought against a party (the "Indemnified Party") with respect to which the other party (the "Indemnifying Party") may have liability under the indemnity contained in Sections 7.1(a), 7.1(b) or 7.1(c) hereof, the Indemnified Party shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting from such claim, provided that the Indemnified Party shall not be required to permit the Indemnifying Party to assume the defense of any third party claim which if not first paid, discharged, or otherwise complied with would result in a material interruption or cessation of the conduct of the Indemnified Party's business or any material part thereof or materially impair the value of the Purchased Assets. Failure by the Indemnifying Party to notify the Indemnified Party of its election to defend any such claim or action by a third party within thirty (30) days after notice thereof shall have been given by the Indemnified Party, shall be deemed a waiver of any such election. If the Indemnifying Party assumes the defense of such claim or litigation resulting therefrom, the obligations of the Indemnifying Party hereunder as to such claim shall include taking all steps reasonably necessary in the defense or settlement of such claim or litigation resulting therefrom, including the retention of competent counsel satisfactory to the Indemnified Party, and holding the Indemnified Party harmless from and against any and all damage resulting from, arising out of, or incurred with respect to any settlement approved by the Indemnifying Party or any judgment in connection with such claim or litigation resulting therefrom. The Indemnifying Party shall not, in the defense of such claim or litigation, consent to the entry of any judgment (other than a judgment of dismissal on the merits without costs) except with the written consent of the Indemnified Party nor enter into any settlement (except with the written consent of the Indemnified Party) which does not include as an unconditional term thereof the giving by the claimant or the plaintiff to the Indemnified Party a release from all liability in respect to such claim or litigation in form and substance acceptable to the Indemnified Party. (c) If the Indemnifying Party shall not assume the defense of any such claim by a third party or litigation resulting therefrom, the Indemnified Party may defend against such claim or litigation. If the Indemnified Party assumes the defense of such claim or litigation resulting therefrom, the obligations of the Indemnified Party hereunder as to such claim shall include taking all steps reasonably necessary in the defense or settlement of such claim or litigation resulting therefrom, including the retention of competent counsel satisfactory to the Indemnifying Party. The Indemnified Party shall not, in the defense of such claim or litigation, 12 consent to the entry of any judgment (other than a judgment of dismissal on the merits without costs) except with the written consent of the Indemnifying Party nor enter into any settlement (except with the written consent of the Indemnifying Party) which does not include as an unconditional term thereof the giving by the claimant or the plaintiff to the Indemnified Party a release from all liability in respect to such claim or litigation in form and substance acceptable to the Indemnifying Party. The Indemnifying Party shall, in accordance with the provisions hereof, promptly reimburse the Indemnified Party for the amount of any settlement reasonably entered into by the Indemnified Party and for all damage incurred by the Indemnified Party in connection with the defense against or settlement of such claim or litigation. 7.3 Survival of Representations and Warranties. ------------------------------------------ (a) The representations and warranties of Seller contained in Article 2 above and the covenants of Seller contained in Article 7 of this Agreement, shall survive the Closing hereunder and shall continue in full force and effect for a period of two (2) years after the Closing. A claim shall be deemed made under this Section 7.3(a) and shall not be deemed to be invalid by the terms of this Section 7.3(a) if Buyer sends written notice of such claim to Seller prior to the expiration date of the survival period. (b) The representations and warranties of Buyer contained in Article 3 above (excluding the representations and warranties contained in Section 3.7 above which shall survive for a period of three (3) years following the Closing) and the covenants of Buyer contained in Article 7 (excluding the indemnification obligations referenced in subsection (i) of Section 7.1(c) and as they relate to a breach of Section 3.7 of this Agreement, which shall survive for a period of three years following the Closing) shall survive the Closing hereunder and shall continue in full force and effect for a period of two (2) years after the Closing. A claim shall be deemed made under this Section 7.3(b) and shall not be deemed to be invalid by the terms of this Section 7.3(b) if Seller sends written notice of such claim to Buyer prior to the expiration of the expiration date of the survival period. 7.4 Limitations on Liability. ------------------------ (a) The aggregate of Seller's liability to Buyer under this Agreement shall be $6,000,000. (b) Except where a party's damages are found to be caused by the other party's actual fraud, neither party shall be liable to the other for any special, indirect, punitive, consequential, exemplary or similar damages in any dispute between the parties relating, directly or indirectly, to this Agreement or the transactions contemplated hereby. 13 ARTICLE 8 --------- CLOSING 8.1 Closing. Unless this Agreement shall have been terminated pursuant to ------- Section 9, and subject to the satisfaction or waiver of the conditions set forth in Articles 4 and 5, the closing (the "Closing") shall be consummated at the offices of Hogan & Hartson L.L.P., 555 13th Street, N.W., Washington, D.C., at 10:00 a.m. (Eastern Standard Time) on April 19, 2000 or as soon as reasonably practicable after the satisfaction of or waiver of the conditions set forth in Articles 4 and 5. The date of such Closing is herein referred to as the "Closing Date." At the Closing, the parties to this Agreement will exchange funds, documents, agreements, certificates and other instruments and documents so as to cause the terms and conditions of this Agreement to be satisfied. All documents and instruments delivered at Closing pursuant to this Article 8 shall be dated and shall be effective for all purposes as of the Closing Date. 8.2 Deliveries By Seller. At the Closing, Seller shall deliver to Buyer: -------------------- (a) executed copies of each of the Related Documents required by their terms to be executed by Seller; (b) the Seller's Certificate as required pursuant to Section 4.8; (c) a certified copy of the Articles, as filed with and certified by the MSDAT on the Closing Date; and (d) copies of all approvals and consents required to be obtained by Seller on or prior to Closing pursuant to Sections 4.3, 4.5 and 4.6, including but not limited to the Lender's Consent. 8.3 Deliveries by Buyer. At the Closing Buyer shall pay the Closing Cash ------------------- Payment to Seller, and shall deliver to Seller: (a) executed copies of each of the Related Documents required by their terms to be executed by Buyer; (b) the Buyer's Certificate as required pursuant to Section 5.6; and (c) copies of all approvals and consents required to be obtained by Buyer on or prior to Closing pursuant to Sections 5.4 and 5.5. 8.4 Trademark Assignments and Filings. Seller shall provide reasonable --------------------------------- assistance to Buyer in affecting the transfer of trademarks and trade names, including the execution of required trademark assignments, certificates or documents and the filing thereof. 14 ARTICLE 9 --------- TERMINATION 9.1 Termination. Notwithstanding anything contained in this Agreement to ----------- the contrary, this Agreement may be terminated at any time prior to the Closing: (a) by mutual written consent of Seller and Buyer; (b) by Buyer, if any condition to the obligations of the Buyer under this Agreement to be complied with or performed by Seller at or before the Closing shall not have been complied with or performed at the time required for such compliance or performance, and such noncompliance or nonperformance shall not have been waived by Buyer or cured by Seller within 10 days of such noncompliance or nonperformance; or (c) by Seller, if any condition to the obligations of the Seller under this Agreement to be complied with or performed by the Buyer at or before the Closing shall not have been complied with or performed at the time required for such compliance or performance, and such noncompliance or nonperformance shall not have been waived by Seller or cured by the Buyer within 10 days of such noncompliance or nonperformance. 9.2 Effect of Termination. In the event of the termination of this --------------------- Agreement pursuant to this Article 9, this Agreement shall forthwith become void and there shall be no liability on the part of any party hereto or any of its directors, officers, stockholders or affiliates except nothing herein shall relieve any party from liability for any breach by such party. ARTICLE 10 ---------- TRANSACTIONS SUBSEQUENT TO THE CLOSING DATE 10.1 Further Assurances. From time to time after the Closing Date, the ------------------ parties shall execute, deliver and acknowledge all such further instruments of transfer and conveyance and shall perform all such other acts as any other party may reasonably request to more effectively transfer the Purchased Assets and to otherwise carry out the transactions contemplated by this Agreement and the Related Documents. 10.2 Sales and Use Taxes. Any sales, use or other transfer tax which is ------------------- payable as the result of the transactions contemplated by this Agreement shall be paid by Buyer in full compliance with applicable law. Buyer will provide Seller with an appropriate resale certificate relating to the purchase of Seller's inventory. 10.3 Employees. From and after the Closing, Buyer shall be permitted, but --------- is not required, to contact and meet with such employees of Seller whose duties directly relate to the Poultry Diagnostic Business as Buyer selects and to offer employment to such persons as Buyer selects on terms to be determined by Buyer (each, a "New Employee"). The parties agree that the employment relationship between such New Employees and Buyer shall be a new employment relationship and that Seller shall not be responsible for any compensation or benefits to any New Employees attributable to the period of their employment by Buyer. 15 10.4 Manufacturing Agreement. Seller and Buyer agree to perform the ----------------------- covenants and agreements set forth in Article 3 of the Manufacturing Agreement in order to enable Buyer to assume the manufacturing of the Products in accordance with such Manufacturing Agreement. Seller and Buyer further agree, as contemplated by the terms of the Secured Note that (a) if Seller complies with its obligations under Article 3 of such Manufacturing Agreement, even though the transfer of the manufacturing to Buyer has not occurred within twelve months from the Closing Date, Buyer is obligated to pay $800,000 (such amount is included in, and not in addition to, the amounts set forth in Section 1.4(c) hereof to be paid by Buyer) to Seller on the twelve-month anniversary of the Closing Date or if such transfer of the manufacturing is completed prior to such anniversary of the Closing Date, upon the date such transfer of the manufacturing is completed, and (b) is obligated to pay the remaining $200,000 (such amount is included in, and not in addition to, the amounts set forth in Section 1.4(c) hereof to be paid by Buyer) to the Seller when the transfer of the manufacturing is completed, but in no event later than the fifteen-month anniversary of the Closing Date. In no event shall Buyer have any right to offset against amounts owed to Seller under the Secured Note any other amounts that Buyer claims are owed to Buyer by Seller under this Agreement or any of the Related Documents. ARTICLE 11 ---------- MISCELLANEOUS PROVISIONS 11.1 Investigations and Survival. The respective representations, --------------------------- warranties, covenants and agreements of Seller and Buyer herein and in the Related Documents, or in any certificates or other documents delivered prior to or at the Closing, shall not be deemed modified, waived or otherwise affected by any investigation made by any party or its representatives hereto nor shall the same be affected by the Closing. 11.2 Successors and Assigns. This Agreement may not be assigned by a party ---------------------- without the prior written consent of the parties hereto which consent shall not be unreasonably withheld or delayed; provided, however, this Agreement may be assigned and the obligations hereunder delegated by the Buyer to a purchaser or acquiror of all or substantially all of the business, stock or assets of Buyer in whatever form of corporate transaction or to any other corporation or entity that, directly or indirectly, through one or more intermediaries, controls, is controlled by or under common control with Buyer without the consent of the Seller; provided, however, that any such assignment shall not relieve Buyer of its obligations hereunder or under any of the Related Documents. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors, assigns, heirs, legatees, executors and administrators of the parties. Nothing expressed or implied in this Agreement is intended to confer on any person other than Buyer, Seller and their respective successors and permitted assigns any rights or obligations under this Agreement. 11.3 Governing Law; Jurisdiction and Venue; Severability. This Agreement --------------------------------------------------- shall be governed by and construed in accordance with the laws of the State of Maryland, without regard to principles of conflicts of law. If any term, covenant or condition of this Agreement is held to be to any extent invalid, void, or otherwise unenforceable by any court or arbitrator, the remainder of this Agreement shall not be affected thereby and each term, covenant and condition of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 16 11.4 Entire Agreement; Modification and Waiver. This Agreement, together ----------------------------------------- with the agreements and documents referred to herein, constitute the entire agreement between the parties hereto with respect to the subject matter hereof and supersede all prior and contemporaneous agreements and understandings. All Exhibits and Schedules attached hereto are incorporated herein by this reference. This Agreement may be modified, amended or supplemented only by a written instrument duly executed by all parties hereto. No covenant, term or condition or the breach thereof shall be deemed waived, unless it is waived in writing and signed by the party against whom the waiver is claimed. Any waiver of breach of any covenant, term or condition shall not be deemed to be a waiver of any preceding or succeeding breach of the same or any other covenant, term or condition. The failure of any party to insist upon strict performance of any covenant, term or condition hereunder shall not constitute a waiver of such party's right to demand strict compliance therewith in the future. Time is of the essence for purposes of each and every provision of this agreement. 11.5 Notices. All payments, notices, requests, demands and other ------- communications required or permitted hereunder shall be in writing and shall be delivered personally (which shall include delivery by courier or overnight delivery service) or sent by certified or registered mail postage prepaid, certified or return receipt requested, or sent by telecopier or similar facsimile transmission, to the parties at their respective address set forth below or at such other address as shall be given in writing by a party to the other party. Items delivered personally or by telecopier or facsimile shall be deemed delivered on the date of actual delivery; items sent by certified or regular mail shall be deemed delivered three (3) days after mailing. If to Seller: Kirkegaard & Perry Laboratories, Inc. 2 Cessna Court Gaithersburg, Maryland 20879-4174 Attention: Albert Perry, President Telephone No.: 301-948-7755 Facsimile No.: 301-948-9442 With a copy (which shall not constitute notice) to Hogan & Hartson LLP 555 Thirteenth Street, N.W. Washington, D.C. 20004 Attention: Robert J. Waldman Telephone No.: 202-637-5670 Facsimile No.: 202-637-5910 If to Buyer: Synbiotics Corporation 11011 Via Frontera San Diego, California 92121 Attention: Chief Financial Officer Telephone No.: (858) 451-3771 Facsimile No.: (858) 451-5719 17 With a copy (which shall not constitute notice) to: Brobeck, Phleger & Harrison LLP 12390 El Camino Real San Diego, California 92130 Attention: Hayden Trubitt, Esq. Telephone No.: 858-720-2500 Facsimile No.: 858-720-2555 11.6 Payment of Fees and Expenses.responsible for, and shall pay, all of ---------------------------- its own legal, accounting and other transactional fees and expenses incurred in the negotiation and preparation of this Agreement and the Related Documents and the transactions contemplated herein and therein. 11.7 No Other Representations. Except to the extent expressly set forth in ------------------------ this Agreement or the Exhibits or Schedules attached hereto (as incorporated herein), neither party makes any representations or warranties to the other and disclaims all liability and responsibility for any representation, warranty, statement or information orally or in writing to the other party, including any opinion, information or advice which may have been provided by one party to the other party. 11.8 Captions. The Article and Section headings used in this Agreement are -------- for convenience or reference only and are not to be considered in construing or interpreting any term or provision of this Agreement. 11.9 Publicity. Except as required by applicable law, neither Seller nor --------- Buyer shall make any public announcement or otherwise communicate with any third party, including without limitation news media, customers and government authorities, in respect of this Agreement or the transactions contemplated herein without prior notification to and approval by Seller (in the case of a proposed communication by Buyer) or Buyer (in the case of a proposed communication by Seller), and Seller and Buyer shall cooperate as to the timing and contents of any such announcement or communication. 11.10 Confidentiality. The Confidentiality and Non-Disclosure Agreement --------------- dated as of December 17, 1998 between Buyer and Seller remains in full force and effect and each of the parties agrees to perform its obligations thereunder. Each of the parties agrees that it will not disclose the existence of this Agreement except to their respective financial, legal and other advisors, on a "need-to-know" basis, and persons or entities with whom consents, approvals or clearances would be required to consummate the transactions contemplated by this Agreement and the Related Documents. 11.11 Counterparts. This Agreement may be executed in multiple copies, each ------------ of which shall be deemed an original and all of which shall constitute a single agreement binding on all parties. [Remainder of This Page Intentionally Left Blank] 18 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. "BUYER" "SELLER" SYNBIOTICS CORPORATION, KIRKEGAARD & PERRY a California corporation LABORATORIES, INC. a Maryland corporation By: /s/ Michael Green By: /s/ Albert Perry ----------------- ---------------- Title: Vice President - Finance Title: President COUNTERPART SIGNATURE PAGE TO ASSET PURCHASE AGREEMENT 19 EXHIBIT A --------- TRANSITIONAL MANUFACTURING AND SUPPLY AGREEMENT This TRANSITIONAL MANUFACTURING AND SUPPLY AGREEMENT (this "Agreement"), is dated as of April 18, 2000 (the "Effective Date"), by and between Synbiotics Corporation, a California corporation ("Synbiotics"), having its principal office at 11011 Via Frontera, San Diego, CA 92127 and Kirkegaard & Perry Laboratories, Inc., a Maryland corporation ("KPL"), having its principal office at 2 Cessna Court, Gaithersburg, Maryland 20879. Recitals -------- WHEREAS, Synbiotics and KPL have entered into an Asset Purchase Agreement, dated as of April 18, 2000 (the "Purchase Agreement"), pursuant to which Synbiotics has agreed to acquire certain assets comprising KPL's Poultry Diagnostics Business (as defined in the Purchase Agreement) and to assume certain liabilities and obligations of KPL related to KPL's Poultry Diagnostics Business; WHEREAS, KPL will continue to manufacture and will supply Synbiotics with certain products related to the Poultry Diagnostics Business requested by Synbiotics for a period of time after the closing of the transactions under the Purchase Agreement, upon the terms and conditions hereinafter set forth; and WHEREAS, KPL and Synbiotics will implement a transition plan to enable Synbiotics to manage an orderly transition to Synbiotics' operation of the Poultry Diagnostics Business, including its assumption of the manufacture of the Products (as defined below) at facilities owned or leased by Synbiotics, upon the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the premises and mutual covenants and agreements herein, the parties hereto agree as follows: ARTICLE 1: PRODUCTS -------------------- 1.1 Current Products. Pursuant to the terms of this Agreement, KPL ----------------- shall manufacture and sell to Synbiotics, and Synbiotics shall purchase from KPL, commercial poultry diagnostics products currently being manufactured by KPL as identified on Exhibit A attached hereto (the "Products"). Synbiotics shall --------- purchase all its requirements of the Products from KPL until the manufacturing of such Products has been successfully transferred from KPL to Synbiotics, and KPL will use commercially reasonable efforts to supply such requirements, based upon a six-month rolling forecast of Synbiotics' requirements. Synbiotics will provide the initial six-month rolling forecast in writing to KPL no later than thirty (30) days after the Effective Date, and shall update such six-month rolling forecast in writing to KPL every three months thereafter. The estimate for the first three months of each such six-month rolling forecast shall be binding on Synbiotics. 1.2 New or Additional Products. If Synbiotics requests that KPL --------------------------- manufacture and supply new or additional commercial poultry diagnostic products that are not identified on Exhibit A attached hereto, the parties agree in --- --------- good faith to negotiate mutually acceptable terms for the manufacture and supply of such new or additional products, and, if such terms are mutually agreed upon, to execute and deliver an appropriate amendment to this Agreement or a separate agreement for such purpose. The parties acknowledge and agree that KPL shall have no obligation to apply for and obtain any licenses or approvals from the United States Department of Agriculture ("USDA") or other agencies or departments of the United States Government or of any other state, local or foreign government (collectively, "Governmental Authority") in connection with such new or additional products; provided, however, that in the event the parties enter into an amendment to this Agreement or a separate agreement for the manufacture and supply of such new or additional products, KPL will provide commercially reasonable assistance to Synbiotics in applying for such licenses or approvals. ARTICLE 2: PREPARATION OF PRODUCTS ----------------------------------- 2.1 Specifications. KPL shall manufacture and package the Products -------------- pursuant to the specifications outlined in the current USDA Outline of Production, as described or referred to in Exhibit B attached hereto. KPL shall --------- use commercially reasonable efforts to manufacture and supply the Products hereunder in accordance with such specifications. 2.2 Trademark. During the term of this Agreement, Synbiotics grants KPL --------- a non-transferable, non-exclusive, royalty-free license (without right to sublicense) to use trademarks of Synbiotics solely to manufacture and/or supply the Products exclusively to Synbiotics pursuant to this Agreement. 2.3 Quality Control. KPL shall be responsible for performing quality --------------- control and/or quality assurance with respect to the Products manufactured by KPL in accordance with its current procedures. 2.4 Labeling. KPL shall label the Products with the current label or one -------- to be provided by Synbiotics. Synbiotics shall abide by the rules and regulations of the USDA with respect to the labelling of the Products. During the term of this Agreement and for one year after this Agreement is terminated in accordance with its terms, Synbiotics shall indemnify, defend and hold harmless KPL from and against any Losses (as defined in Section 2.9 below) arising from or in connection with any failure of Synbiotics to provide proper warnings and instructions on its literature and labels which will be in compliance with all state, federal and local laws. Synbiotics shall bear all costs of printing its labels, which shall not be modified, removed or replaced without the express consent of Synbiotics. Synbiotics shall bear all costs of other marketing materials and associated expenses. 2.5 Inspection Rights. Synbiotics shall have the right, upon reasonable ----------------- written notice to KPL and at mutually convenient times, to enter upon KPL's facilities in order to A-2 physically inspect and test any of the Products prior to shipment by KPL. In addition, Synbiotics shall also have the right, upon reasonable notice to KPL, to have one or more designated employees of Synbiotics present as an observer in KPL's facilities during the manufacture of any of the Products. 2.6 Warranty. KPL warrants that the Products shall be free of defects in -------- material and workmanship at the time of shipment of the Products. The sole remedy of Synbiotics for breach of the above warranty shall be the return of the defective Product at Synbiotics' sole expense. If such Product is found defective, KPL, at KPL's sole option, shall repair or replace such Product. Notwithstanding the foregoing, no warranty, express or implied, shall extend to any Product that has been subjected to misuse, neglect, accident, or improper storage or installation or that has been repaired, modified or altered by any person or entity other than KPL. No course of dealing or usages of trade or course of performance may be used to supplement or explain the terms of this warranty or the obligations and rights of the parties hereto. If the warranty herein be altered, enlarged or changed by any distributor, dealer or other person whatsoever then Synbiotics assumes the responsibility for the additional altered terms. Nothing contained in this Section 2.6 shall in any way limit the scope of KPL's indemnification obligation, as set forth in Section 2.9 hereof. 2.7 Disclaimers. THE EXPRESS WARRANTY SET FORTH IN SECTION 2.6 OF THIS ----------- AGREEMENT IS IN LIEU OF, AND SYNBIOTICS HEREBY EXPRESSLY WAIVES, ALL OTHER GUARANTEES AND WARRANTIES OF ANY KIND, WHETHER EXPRESS, IMPLIED OR STATUTORY, INCLUDING, WITHOUT LIMITATION, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, AND ALL SUCH OTHER WARRANTIES ARE HEREBY DISCLAIMED AND EXCLUDED BY KPL. IN NO EVENT SHALL KPL BE LIABLE FOR ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES IN CONNECTION WITH OR ARISING OUT OF THE SALE OR USE OF ANY PRODUCT, WHETHER BASED ON BREACH OF WARRANTY OR ON CONTRACT, STRICT LIABILITY, NEGLIGENCE OR OTHERWISE, WHETHER OR NOT KPL SHALL HAVE BEEN ADVISED AS TO THE POSSIBILITY OR REASON FOR ANY SUCH POTENTIAL LOSS OR DAMAGE. THE SOLE AND EXCLUSIVE REMEDY FOR BREACH OF KPL'S WARRANTY OF THE PRODUCTS SHALL BE AS STATED IN SECTION 2.6 HEREOF. IN ALL OTHER CASES KPL'S SOLE AND EXCLUSIVE LIABILITY WITH RESPECT TO ANY MATTER ARISING FROM OR CONNECTED WITH THE SALE OR USE OF ANY PRODUCTS, OR KPL'S PERFORMANCE UNDER THIS AGREEMENT, WHETHER BASED ON BREACH OF WARRANTY OR ON CONTRACT, STRICT LIABILITY, NEGLIGENCE OR OTHERWISE, SHALL NOT EXCEED THE ORIGINAL COST TO SYNBIOTICS OF THE PRODUCTS SOLD OR PROVIDED TO SYNBIOTICS, NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY. NOTHING CONTAINED IN THIS SECTION SHALL IN ANYWAY LIMIT THE SCOPE OF KPL'S INDEMNIFICATION OBLIGATION, AS SET FORTH IN SECTION 2.9 HEREOF. 2.8 License of Equipment. During the term of this Agreement, Synbiotics -------------------- grants KPL a license to use the Dynex Plate Making/Casting Machine, Serial Number 1023 (the "Equipment"). During the term of this Agreement, KPL shall, at its own expense, (a) keep the Equipment in a suitable environment as specified by the Equipment's manufacturer, and in good A-3 condition and working order, ordinary wear and tear excepted; (b) maintain insurance with an insurer having a "Best Policyholders" rating of B+ or better covering loss of or damage to the Equipment with a $1,000 deductible per occurrence; and (c) shall maintain commercial general liability insurance, in the amount of at least $1,000,000, or more for each occurrence, with an insured having a "Best Policyholders" rating of B+ or better. Each policy required by this Section 2.8 shall name Synbiotics as an additional insured and shall contain a clause requiring the insured to provide thirty (30) days' prior written notice of the cancellation or any material alteration to the terms of such policy. KPL shall furnish to Synbiotics, upon request, reasonable evidence that all insurance required by this Section 2.8 is in effect. During the term of this Agreement, KPL shall not make any material alteration or modification to the Equipment without Synbiotics' prior written consent, which consent shall not be unreasonably withheld. Upon the termination or expiration of this Agreement, KPL shall deliver the Equipment to Synbiotics, at Synbiotics' sole cost and expense, in accordance with written instructions provided to KPL by Synbiotics. 2.9 Indemnity. During the term of this Agreement and for two years --------- after this Agreement is terminated in accordance with its terms, Synbiotics shall defend, indemnify and hold harmless KPL from and against any and all liabilities, damages, losses, obligations, costs and expenses, including attorney's fees (collectively, a "Loss") that KPL may incur in connection with a claim for damage to or loss of tangible personal property, breach of warranty, or for bodily injury, sustained by any customer or user or other person or entity (collectively, "Damage") if or where the Damage is caused by or arises in connection with (a) improper use of Products, (b) improper disposal of Products, (c) unauthorized modification of Products, (d) Synbiotics' fault or negligence, (e) any warranties, representations or agreements (other than those based on KPL's warranty or some other term of this Agreement) made by Synbiotics or its agents in connection with sales of Products; (f) a breach by KPL of the warranty in Section 2.6 hereof, or (g) KPL's failure to ship or otherwise provide Products in a timely manner. During the term of this Agreement and for two years after this Agreement is terminated in accordance with its terms, KPL shall defend, indemnify and hold harmless Synbiotics from and against any and all Losses that Synbiotics may incur in connection with a claim for Damage if such a Damage is directly caused by the operation of the Equipment by KPL or (b) third party claims arising from the failure of KPL to produce or package a Product in accordance with the applicable outline guide for the production of such Product; provided, however that nothing set forth in this Section 2.9 shall be construed as imposing any liability on KPL, whether pursuant to this Section 2.9 or otherwise, for any Damage caused by the sale, distribution, use or misuse of a Product. 2.10 Notice of Claims. In the event that KPL shall receive a claim or ---------------- notice of a claim alleging Damage that is subject, in whole or in part, to Synbiotics' obligation to defend, indemnify and hold harmless as set forth in Section 2.8, KPL shall give Synbiotics written notice within 10 business days after receipt of the claim or notice of the claim. KPL shall cooperate with Synbiotics in every reasonable manner in the defense of such claim. ARTICLE 3: TRANSITION PLAN --------------------------- KPL and Synbiotics shall each use commercially reasonable efforts, and shall cooperate with each other, to implement the transition plan set forth at Exhibit C attached - --------- A-4 hereto, which is intended to effect an orderly transfer of the manufacturing of the Products to Synbiotics within twelve months after the closing of the transactions under the Purchase Agreement. ARTICLE 4: PRICES AND PAYMENT TERMS ------------------------------------ Synbiotics shall pay KPL for the Products in accordance with the pricing schedule set forth in Exhibit D attached hereto. All amounts required --------- to be paid hereunder shall be paid in U.S. Dollars by check or wire transfer within thirty (30) days after the invoice date. Such prices do not include any applicable sales, use, value-added, excise, withholding and/or other taxes (except income taxes imposed on KPL), custom duties, fees, freight, insurance, handling, shipping and delivery charges, all of which shall be the responsibility of and shall be paid by Synbiotics. All title and risk of loss or damage to or delay of the Products shall pass to Synbiotics upon their delivery to the common carrier or other agent or other person designated by Synbiotics at or near KPL's manufacturing or warehousing facility in Gaithersburg, MD. Shipping arrangements from such facility shall be at Synbiotics' instructions and expense. ARTICLE 5: TERM ---------------- This Agreement shall terminate on the earlier of (i) 120 days after written notice from Synbiotics to KPL to the effect that Synbiotics has decided to assume responsibility for manufacturing of the Products or (ii) one year after the closing of the transactions under the Purchase Agreement. This Agreement may be renewed for successive ninety-day terms with the mutual written consent of the parties. The parties understand and agree that for each Product being manufactured by KPL under this Agreement, upon the completion of the transfer of manufacturing for such Product, KPL shall have no further obligations to manufacture such Product. ARTICLE 6: PURCHASE OF INVENTORY --------------------------------- 6.1 Inventory. Except as set forth in Section 6.1 with respect to --------- raw materials, upon termination of this Agreement, Synbiotics will purchase any or all of the principal components and packaging, supplies, and Products in KPL's possession that are related exclusively to the Products (the "Inventory"). Synbiotics shall pay KPL an amount equal to KPL's costs for any such Inventory. Notwithstanding the foregoing, Synbiotics shall not be required to purchase any inventory that is damaged, obsolete or unmarketable due to a prohibition on marketing such inventory by the USDA. 6.2 Raw Materials. After the Closing (as defined in the Purchase ------------- Agreement), Synbiotics shall sell to KPL the raw materials included within the Purchased Assets being sold to Synbiotics pursuant to the Purchase Agreement for a purchase price $352,780.27. The parties acknowledge and agree that notwithstanding such sale, KPL shall be entitled to use such raw materials to produce the Products pursuant to this Agreement. KPL shall credit the amount of $352,780.27 to Synbiotics ratably over 12 months from the Closing with the balance of such amount credited to KPL upon the termination of this Agreement. Upon the termination A-5 or expiration of this Agreement, Synbiotics shall purchase all remaining inventories of such raw materials at KPL's cost. ARTICLE 7: FORCE MAJEURE ------------------------- If the performance of this Agreement or of any obligation hereunder is prevented, restricted or interfered with by reason of any cause beyond the reasonable control of the affected party, the party so affected upon prompt notice to the other party shall be excused from such performance to the extent of such prevention, restriction or interference; provided, however, that the -------- ------- party so affected shall use commercially reasonable efforts to avoid or remove such causes of non-performance and shall continue performance hereunder with the utmost dispatch whenever such causes are removed. ARTICLE 8: RELATIONSHIP AND OTHER MATTERS ------------------------------------------ 8.1 Relationship. During the term of this Agreement, the only ------------ relationship between the parties shall be as independent contractors. Except as expressly set forth herein, neither party is authorized to, or shall undertake to bind the other party in any way by any warranty, agreement, contract, representation or order, whether in the name of Synbiotics or KPL or otherwise, nor shall either party refer to or use the other's name alone or in any combination with any other words or names, in any manner or connection whatsoever, including in any publication, article, or any form of advertising or publicity, except with the consent of the other party and except where required by any Governmental Authority and then only to the extent so required. 8.2 No Restriction. This Agreement does not restrict KPL's right -------------- during or after the term of this Agreement to distribute or sell components that may be used in the Products, including but not limited to, antibodies, substrates, buffers and solutions to any customers or distributors of KPL for research or re-manufacture as contemplated under the Non-Competition Agreement of even date herewith between Seller and Buyer. ARTICLE 9: ASSIGNMENT AND DELEGATION ------------------------------------- Neither of the parties shall be entitled to transfer or assign or delegate, partially or entirely, any of its rights or obligations under this Agreement to another without the prior written consent of the other party; provided that either party may assign this Agreement without such consent in connection with a merger or consolidation with an unrelated third party or transfer to an unrelated third party of all or substantially all of such party's assets. No assignment requiring consent hereunder shall be effective until the assignee agrees in writing with the other party to be bound by and to perform all of the obligations of its assignor under this Agreement, nor shall the assignor be released from its obligations hereunder, by virtue of such assignment or otherwise, unless the non-assigning party expressly consents in writing to such release. A-6 ARTICLE 10: MISCELLANEOUS -------------------------- 10.1 Notices. All notices and other communications hereunder shall be ------- in writing and shall be deemed to have been duly given when delivered personally, or transmitted by telecopier, receipt acknowledged, or in the case of documented overnight delivery service or registered or certified mail, return receipt requested, postage prepaid, on the date shown on the receipt therefore, to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): If to KPL: Kirkegaard & Perry Laboratories, Inc. 2 Cessna Court Gaitersburg, MD 20879 Attention: Albert Perry, President Fax: (301) 948-9442 with a copy (which shall not constitute notice) to: Hogan & Hartson LLP 555 Thirteenth Street, N.W. Washington, D.C. 20004 Attention: Robert J. Waldman Telephone No.: 202-637-5670 Facsimile No.: 202-637-5910 If to Synbiotics: Synbiotics Corporation 11011 Via Frontera San Diego, CA 92127 Attention: Fax: (619) 451-5719 with a copy (which shall not constitute notice) to: Brobeck, Phleger & Harrison LLP 12390 El Camino Real San Diego, California 92130 Attention: Hayden Trubitt, Esq. Fax: (858) 720-2555 10.2 Severability. The invalidity or unenforceability of any provision ------------ of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, each of which shall remain in full force and effect. A-7 10.3 Entire Agreement. This Agreement (with its Exhibits), together ---------------- with the Purchase Agreement with its Exhibits, contains, and is intended as, a complete statement of all of the terms and the arrangements between the parties hereto with respect to the matters provided for herein, and supersedes any and all previous oral or written agreements and understandings between the parties hereto with respect to those matters. No provision of this Agreement shall create any rights or benefits in favor of any person or entity other than KPL and Synbiotics. 10.4 Governing Law. This Agreement shall be governed by and construed ------------- in accordance with the laws of the State of Maryland, without giving effect to principles of conflicts of law. This Agreement shall be interpreted as having been drafted jointly by both parties hereto and shall not be more strictly construed against either party. 10.5 Good Faith and Dealing Clauses. In entering into this Agreement, ------------------------------ the parties hereto recognize that it is impracticable to make provision for every contingency which may arise during the term of this Agreement and the parties declare it to be their intention to exercise good faith and fair dealing under this Agreement. If during the term of this Agreement a situation arises that is beyond the reasonable control of either party and that is not covered by any other provisions under this Agreement and if such situation results in a material disadvantage to one party and a corresponding material advantage to the other party, then at the request of either party the parties shall promptly consult with a view towards reaching a mutually acceptable agreement dealing with such situation. 10.6 Amendments, Waivers, etc. This Agreement may be amended, ------------------------ supplemented or modified, and any provision hereof may be waived, only pursuant to written instrument making specific reference to this Agreement signed by each of the parties hereto. 10.7 Waiver. The failure or delay of either party to exercise or ------ enforce any right hereunder, including termination for breach or default, shall not be deemed to be a waiver of the right for that or any other subsequent breach or default or for the persistence in a breach or default of a continuing nature. 10.8 Counterparts. This Agreement may be executed and delivered in one ------------ or more counterparts, each of which shall be deemed an original hereof, and all of which together shall constitute one and the same instrument. 10.9 Language; Headings. The official language of this Agreement is ------------------ the English language and all notices and other written materials pertaining to this Agreement shall be maintained and delivered in the English language. Any translation of this Agreement shall be at Synbiotics' expense and solely for its information or use, and such translation shall not govern the rights of the parties under this Agreement. The headings set forth in this Agreement are solely for convenience of reference and shall not constitute a part of this Agreement or affect its meaning, construction or effect. All references to Sections or Exhibits are references to the Sections and Exhibits to this Agreement. A-8 IN WITNESS WHEREOF the parties hereto have caused this Agreement to be executed and delivered by their respective duly authorized representatives, as of the day and year first above written. KIRKEGAARD & PERRY LABORATORIES, INC. By: /s/ Albert Perry ---------------- Name: Albert Perry Title: President SYNBIOTICS CORPORATION By: /s/ Michael Green ----------------- Name: Michael Green Title: Vice President - Finance A-9 EXHIBIT A Products -------- Catalog Number Poultry Elisa Kit Tests Per Kit - -------------- --------------------------------- ------------- 54-90-01 Infectious Bursal disease Plus (IBD+) 450 54-81-01 Infectious bursal Disease (IBD) 900 54-82-01 Infectious Bronchitis Virus (IBV) 900 54-83-01 Newcastle Disease Virus (NDV) 900 54-84-01 Avian Reovirus (REO) 900 54-87-05 MG/MS Combination 900* *Kit contains 450 tests for each agent 54-86-01 Avian Encephalomyelitis Virus (AE) 900 54-93-01 Infectious laryngotracheitis (LT) 900 54-95-01 Avian Leukosis virus (ALV), antigent detection 900 54-77-01 Pasteurella multocida (PM) 900 54-87-06 AE-IBV-IBD-NDV-REO Combination 900* *Kit contains 450 tests for each agent 54-85-01 Mycoplasma gallisepticum (MG) 900 54-96-01 Mycoplasma synoviae (MS) 900 54-78-01 Avian Influenza Virus (AIV) 900 54-80-01 Chicken Anemia Virus (CAV) 450 54-88-01 Avian Leukosis Virus, subgroup J (ALV-J) 450 54-99-01 Hemorrhagic Enteritis Virus (HEV) 900 54-72-01 Bordetella avium (BA) 900 54-89-01 Pasteurella nultocida (PM) 900 54-92-01 New Castle Disease Virus (NDV) 900 54-94-01 Mycoplasma gallisepticum (MG) 900 54-97-01 Mycoplasma synoviae (MS) 900 54-98-01 Mycoplasma meleagridis (MM) 900 454-9199 Broad Spectrum Salmonella 40 454-9194 Group-D Salmonella 40 454-9293 Campylobactor Species 40 454-9590 E-Coli 0157 40 A-10 EXHIBIT B-1 Purchased Assets The Purchased Assets include all right, title, and interest of Seller in and to the personal properties, assets, goodwill and rights of Seller set forth on this Exhibit B-1 that are owned by, or licensed to, the Seller as of the Closing and used, held for use or intended to be used primarily in the operation or conduct of the Poultry Diagnostic Business, including the following (but excluding the types of assets described in paragraph (a) of Schedule 2.7 of the Seller's Disclosure Schedule and Seller's Tetramethyl benzidene precipitating substrate, goat anti- E. coli IgG, goat anti-Salmonella IgG, goat anti-Camplybacter IgG, and their enzyme conjugates): (a) Dynex Plate Making/Casting machine, Serial Number 1023; (b) copies of all books, customer lists and records, inspection records, distributor lists and records, research records relating to poultry and turkey products and other business records pertaining to the Poultry Diagnostic Business and the Purchased Assets; (c) to the extent assignable, all Relevant Contracts, and all rights of Seller, whether now existing or hereafter arising, thereunder, including the benefit of all deposits given by Seller pursuant thereto, relating to the Poultry Diagnostic Business set forth in Schedule 1 to this Exhibit B-1; ------------ (d) all supplies, raw-materials, works in process, finished goods and materials used or consumed in the Poultry Diagnostic Business existing on the Closing Date; (e) all rights, title and interests in and to all products relating to the Poultry Diagnostic Business currently in development as of the Closing; (f) all rights to the trademark "PROFLOK", and the goodwill of the Poultry Diagnostic Business symbolized by such trademark name, including all United States Federal and state and all foreign registrations, extensions, renewals, applications for registrations of such or rights to register the same worldwide, used in connection with the Poultry Diagnostic Business, and set forth on Schedule 2 all licenses or consents to use with respect thereto, and any and all rights of enforcement with respect to the foregoing, including all rights worldwide to sue for the infringement or unauthorized use thereof (whether past, present or future) and the recovery of damages or royalties related thereto (collectively, the "Trademarks"); (g) all technical information used in the Poultry Diagnostic Business (including, for example, invention disclosures, trade secrets and know-how, assemblies and detail drawings, design manufacturing and assembling techniques and methods, design information, parts list, databases, computer software and documentation, source code listings, mask works, technical data, user, operation and maintenance manuals, servicing and installation instructions relating to manufacturing processes and apperati, design and production processes, test and inspection techniques and procedures, material handling techniques, inspection methods and standards used in the Poultry Diagnostic Business) and set forth in the Outlines of Production attached as Exhibit B of the Manufacturing Agreement, and all trade secret rights arising under the common law, state or federal law or the laws of any foreign country, and the unencumbered right to exercise all such rights in all media and by any manner and means now known or hereafter devised, and any and all rights to register, patent or secure protection of such, and all rights of action and claims for damages and benefits arising from past, present and future infringements of such trade secret rights together with the right to sue for and in the name of Buyer and to collect the same for Buyer's use, all throughout the world for the legal duration thereof, including, without limitation, those set forth in Section 2.12 of the Seller's Disclosure Schedule (collectively, the "Trade Secrets"); (h) all right, title and interest in and to the ProFILE software licensed to Seller pursuant to the Consulting Services Agreement, dated between Seller and Innov Corporation (the "Software" and together with the Trade Marks and Trade Secrets, the "Transferred Intellectual Property"); and (i) all of Seller's marketing literature relating to the Poultry Diagnostic Business in Seller's possession on the Closing Date. B-1-2 Schedule 1 ---------- (a) Distributor Agreements (i) Written Distributor Agreements Distributor Expiration Agricultural Development January 1998 Avenida & Associates Inc. August 31, 1994 BTI March 15, 1992 Chem-East January 2001 Egytech August 1, 2003 FELCO N/A Golbid Co. Ltd. January 1998 (EMBARGO) Hester Pharmaceuticals August 31, 2000 Intertech (formerly Biovida) December 31, 1998 La Ensenada N/A LSI January 1998 Maya Laboratuar, Ltd. January 27, 1999 Merial (formerly ISBI) December 31, 1998 Modern Agropharmaceuticals January 1, 2001 Est Nippon Biological June 30, 1999 Seravian, S. L. March 31, 2000 Tseng Hsiang Life Sciences N/A Ward Medic Limited August 31, 1994 Veterquimica N/A N/A (ii) Any written Distributor arrangements entered into by Seller, on the one hand, and: AgroBio Tek Laboratorios; Bio Diagnostics SND. BHD.; Bio-Mediq DPC; Carval De Colombia; Fort Dodge Animal Health; Korman Biotech (terminated); Productos Quimicos Magiar SA; PT Satwa Jawa Jaya; or Rhenium Ltd., on the other hand, if, and only if, Seller provides Buyer with a copy of any such written Distributor arrangement to Buyer on or before May 18, 2000. B-1-3 Notwithstanding the foregoing, Seller is not assigning and Buyer is not assuming any oral contracts by and between Seller, on the one hand, and any of the parties listed in the prior sentence. (b) License Agreements
- ------------------------------------------------------------------------------------------------------------ Licensor Subject Matter of License - ------------------------------------------------------------------------------------------------------------ Univ. of Maryland IBDV e/Del Recombinant C12 - ------------------------------------------------------------------------------------------------------------ Univ. of Maryland CAV - Monoclone, R25 Cell Line, R63 and mab 8 - ------------------------------------------------------------------------------------------------------------ Univ. of Maryland R63 and mab 8 - ------------------------------------------------------------------------------------------------------------ Univ. of Maryland Influenza Group A Specific Monoclonal Antibodies: LS-98-070 - ------------------------------------------------------------------------------------------------------------ USDA Avian Leukosis Virus Subgroup J Envelope Gene - ------------------------------------------------------------------------------------------------------------ Veterinary Infectious Disease Organization Hybridoma Cell Line (15 G 4) - ------------------------------------------------------------------------------------------------------------
(c) Software - Innov Agreement. B-1-4 Schedule 2 ---------- Trademarks Country Registration No. Effective Date Expiration Date - ------- ---------------- -------------- --------------- United States No. 1,561,761 10/24/1989 10/24/2009 France No. 1,148,880 3/16/1989 3/16/2009 Benelux No. 462,552 3/11/1999 4/18/2009 United Kingdom No 1,368,834 12/12/1995 12/12/2005 Portugal No. 255,395 10/20/1992 10/20/2002 Spain No. 1,315,229 6/5/1991 6/5/2011 B-1-5 EXHIBIT B-2 Assumed Liabilities The Assumed Liabilities shall include any and all debts, liabilities, assessments, losses, damages, costs, expenses or other obligations (including all debts, liabilities, assessments, losses, damages, costs, expenses or other obligations owing to trade creditors) related to the Purchased Assets, arising on or after the Closing Date, including but not limited to (a) customer claims for Products sold after the Closing (b) the remaining license fees due under the Innov Agreement. EXHIBIT B-3 ----------- Retained Liabilities The Retained Liabilities shall include: (a) all liabilities of Seller that would be reflected on a balance sheet prepared as of the Closing prepaid in accordance with generally accepted accounting principles, except as included in the Assumed Liabilities; (b) al1 contingent liabilities of Seller existing on the Closing Date other than Assumed Liabilities, which shall include customer claims for products of the Poultry Diagnostic Business sold by Seller prior to the Closing; (c) all damages and liabilities with respect to employees, former employees or retirees of Seller arising on or prior to the Closing Date; (d) all liabilities of Seller existing on the Closing Date other than Assumed Liabilities; and (e) any liabilities arising out of a breach of a written distribution agreement between Seller, on the one hand and any of the following, on the other hand, (i) BioMedig DPC, (ii) Carval De Colombia, (iii) Fort Dodge Animal Health, (iv) Korman Biotech, (v) Productos Quimicos Magiar SA, (vi) PT Satwa Jawa Jaya, (vii) Rheniurn Ltd., (vii) Bio Diagnostics SND.BHD, and (ix) AgroBio Tek Laboratories, to the extent any such written agreement exists on the date hereof and such breach arises out of actions or inactions occurring on or prior to the earlier of (a) the date any such written agreement is delivered to Buyer or (b) May 18, 2000. EXHIBIT C --------- SECURED PROMISSORY NOTE $1,000,000 As of April 18, 2000 Washington, D.C. FOR VALUE RECEIVED, SYNBIOTICS CORPORATION, a Delaware corporation (the "Maker"), promises to pay to the order of KIRKEGAARD & PERRY LABORATORIES, INC., a Maryland corporation (the "Holder"), at, or at such other place as the Holder may from time to time designate, the aggregate principal amount of $1,000,000. Said principal shall be due and payable as follows: Amount Due Payment Due Date ---------- ---------------- $800,000 Upon the earlier of (i) the completion of the transfer of the manufacturing of the Products as defined in the Transitional Manufacturing and Supply Agreement of even date herewith, by and between Holder and Maker (the "Manufacturing Agreement") from Holder to Maker in accordance with the terms of the Manufacturing Agreement or (ii) April 18, 2001. $200,000 Upon the earlier of (i) the completion of the transfer of the manufacturing of the Products as defined in the Manufacturing Agreement from Holder to Maker in accordance with the terms of the Manufacturing Agreement or (ii) July 18, 2001. All payments hereunder shall be made in lawful money of the United States of America. The unpaid principal amount of this Note may be prepaid in whole or in part at any time or times without premium or penalty. Each prepayment shall be applied first to the payment of all accrued but unpaid interest and other amounts accrued hereunder, if any, on the date of any such prepayment, and the balance of any such prepayment shall be applied to installments of principal payable hereunder in the order of maturity. This Note evidences the obligation of the Maker to the Holder pursuant to Section 1.4 of the Asset Purchase Agreement, dated as of April 18, 2000, ----------- between Maker and Holder (the "Agreement"), and is secured by a Security Agreement of even date herewith, between Maker and Holder (the "Security Agreement"), encumbering certain assets of Maker. The Holder is entitled to the benefits of the Security Agreement, and reference is made to the Security Agreement for a description of the collateral and the rights and remedies of the Holder thereunder. Neither the reference to the Agreement nor any provision thereof shall affect or impair the absolute and unconditional obligation of the Maker to pay the principal amount hereof when due. The occurrence of any of the following shall constitute an event of default ("Event of Default") hereunder: (i) failure to pay, when due, the principal or any other sum payable hereunder, and continuance of such failure for five (5) business days after the date on which such principal, or other sum is due (whether upon maturity hereof, upon any installment payment day, upon acceleration, or otherwise); (ii) an event of default by Maker under the Security Agreement; (iii) an event of default by Maker under the Manufacturing Agreement; or (iv) an event of default by Maker under the Royalty Agreement. Upon the occurrence of any Event of Default hereunder, the entire principal amount hereof, and all accrued and unpaid interest thereon, shall be accelerated, and shall be immediately due and payable, at the option of the Holder, without demand or notice with respect to an Event of Default specified in clause (i) of this Agreement, and in addition thereto, and not in substitution therefor, the Holder shall be entitled to exercise any one or more of the rights and remedies provided by applicable law. Failure to exercise said option or to pursue such other remedies shall not constitute a waiver of such option or such other remedies or of the right to exercise any of the same in the event of any subsequent Event of Default hereunder. In the event that the principal amount hereof, or any other sum due hereunder, is not paid when due and payable, the whole of the unpaid principal amount evidenced hereby and all unpaid sums due hereunder shall, from the date when such payment was due and payable until the date of payment in full thereof, bear interest at the interest rate announced by The Wall Street Journal as the "prime" lending rate charged by major financial institutions (the "Prime Rate") plus two percent (2%), which rate shall commence, without notice, immediately upon the date when said payment was due and payable. Should The Wall Street Journal cease publishing the Prime Rate, an alternate index of similar nature will be selected by the Maker and the Holder. The Maker promises to pay all reasonable costs and expenses (including without limitation reasonable attorneys' fees and disbursements) incurred in connection with the collection hereof, and to perform each and every obligation to be performed by the Maker under this Note. Any payment on this Note coming due on a Saturday, a Sunday, or a day which is a legal holiday in the place at which a payment is to be made hereunder shall be made on the next succeeding day which is a business day in such place, and any such extension of the time of payment shall be included in the computation of interest hereunder. Each Obligor (which term shall include the Maker and all makers, sureties, guarantors, endorsers, and other persons assuming obligations pursuant to this Note) under this Note hereby waives presentment, protest, demand, notice of dishonor, and all other notices, and all defenses and pleas on the grounds of any extension or extensions of the time of payments or the due dates of this Note, in whole or in part, before or after maturity, with or without notice. No renewal or extension of this Note, no release or surrender of any collateral given as security for this Note, no release of any Obligor, and no delay in enforcement of this Note or in exercising any right or C-2 power hereunder, shall affect the liability of any Obligor. The pleading of any statute of limitations as a defense to any demand against Obligor is expressly waived. No single or partial exercise by the Holder of any right hereunder shall preclude any other or further exercise thereof or the exercise of any other rights. No delay or omission on the part of the Holder in exercising any right hereunder shall operate as a waiver of such right or of any other right under this Note. This Note and all agreements between the Maker and the Holder relating hereto are hereby expressly limited so that in no contingency or event whatsoever, whether by reason of acceleration or otherwise, shall the amount paid or agreed to be paid to the Holder for the use, forbearance or detention of money hereunder exceed the maximum amount permissible under applicable law. If from any circumstance whatsoever fulfillment of any provision hereof, at the time performance of such provision shall be due, shall involve transcending the limit of validity prescribed by law, then, ipso facto, the obligation to be ---------- fulfilled shall be reduced to the limit of such validity, and if from any such circumstance the Holder shall ever receive interest, or anything which might be deemed interest under applicable law, which would exceed the highest lawful rate, such amount which would be excessive interest shall be applied to the reduction of the principal amount owing on account of this Note and not to the payment of interest, or if such excessive interest exceeds the unpaid balance of principal of this Note, such excess shall be refunded to the Maker. All sums paid or agreed to be paid to the Holder for the use, forbearance or detention of the indebtedness of the Maker to the Holder shall, to the extent permitted by applicable law, be deemed to be amortized, prorated, allocated and spread throughout the full term of such indebtedness until payment in full so that the actual rate of interest on account of such indebtedness is uniform throughout the term thereof. The terms and provisions of this paragraph shall control and supersede every other provision of this Note and all other agreements between the Maker and the Holder. Whenever used herein, the words "Maker" and "Holder" and "Obligor" shall be deemed to include their respective successors and assigns. This Note shall be governed by and construed under and in accordance with the laws of the State of Maryland (but not including the choice of law rules thereof). IN WITNESS WHEREOF, the undersigned has caused this Note to be duly executed and delivered in its name and on its behalf on its behalf as of the day and year first hereinabove set forth. SYNBIOTICS CORPORATION ATTEST: /s/ Paul Rosinack By: /s/ Kenneth M. Cohen - ----------------- -------------------- Name: Kenneth M. Cohen Title: President and CEO C-3 EXHIBIT D --------- SECURITY AGREEMENT THIS SECURITY AGREEMENT, dated as of April 18, 2000 (this "Agreement"), is made by and between SYNBIOTICS CORPORATION, a California corporation ("Synbiotics"), and KIRKEGAARD & PERRY LABORATORIES, INC., a Maryland corporation ("Secured Party"). WHEREAS, pursuant to an Asset Purchase Agreement of even date herewith, by and between Synbiotics and the Secured Party (the "Purchase Agreement"), Synbiotics has agreed to purchase the Purchased Assets (as defined in the Purchase Agreement) from the Secured Party for a Purchase Price (as defined in the Purchase Agreement), which Purchase Price includes a payment by Borrower to the Secured Party in the aggregate amount of $1,000,000 pursuant to the Note (as defined below); WHEREAS, as a condition to the closing under the Purchase Agreement, Synbiotics has agreed to secure the payment and performance of its obligations to the Secured Party pursuant to this Agreement and the Secured Promissory Note, dated of even date herewith, made by the Buyer and payable to the Secured Party in the original principal amount of $1,000,000 (the "Note"); NOW THEREFORE, in consideration of the foregoing, the covenants and agreements herein contained, and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto do hereby agree as follows: ARTICLE I DEFINITIONS Section 1.1 Defined Terms. Unless otherwise defined herein, the ------------- capitalized terms used in this Agreement shall have the meanings assigned to such terms as stated below: (a) "Affiliate" shall mean, as to any person, any other person that, directly or indirectly, controls, is controlled by or is under common control with such person or is a director or officer of such person. For purposes of this definition, the term "control" (including the terms "controlling", "controlled by" and "under common control with") of a person means the possession, direct or indirect, of the power to vote 5% or more of the voting stock of such person or to direct or cause the direction of the management and policies of such person, whether through the ownership of voting stock, by contract or otherwise. (b) "Collateral" shall mean those assets of the Synbiotics in which the Secured Party shall have a perfected security interest, as described in Section 2.1 herein. - ----------- (c) "Event of Default" shall have the meaning specified in Section 4.1 ----------- hereof. (d) "Lien" shall mean and include any lien, mortgage, security interest, pledge, charge, equity, encumbrance or right of any kind whatsoever. (e) "Repayment Amount" shall mean the unpaid principal amount of the Note and all other amounts due thereunder. ARTICLE 2 SECURITY INTEREST Section 2.1 Security. As security for the prompt and full payment of the -------- Note and the performance by Synbiotics of all other obligations to the Secured Party under the Note and this Agreement, whether now in existence or hereafter created and whether primary, secondary, direct, contingent or otherwise, Synbiotics hereby pledges, assigns and grants to the Secured Party a valid, binding, enforceable, perfected, exclusive continuing first priority security interest in all of Synbiotics' right, title and interest in and to the property of Synbiotics listed on Exhibit A. --------- All of the property and interests in property described in Exhibit A --------- and all other property and interests in personal property which shall, from time to time, secure the Secured Obligations are herein collectively referred to as the "Collateral". Section 2.2 Rights of Secured Party. Synbiotics agrees that with respect ----------------------- to the Collateral, the Secured Party shall have all of the rights and remedies of a secured party under any applicable laws. ARTICLE 3 MONITORING OF COLLATERAL Section 3.1 Inspection of Records. The Secured Party shall have the --------------------- right, upon reasonable prior notice to Synbiotics, to call at Synbiotics' places of business during regular business hours, before or after an Event of Default, and without hindrance or delay, to audit, inspect, verify, check and make extracts or photocopies from the records of Synbiotics relating to the Collateral and other data relating to the Collateral. Section 3.2 Notice of Events Affecting Collateral. Synbiotics, -------------------------------------- immediately upon learning thereof, shall report to the Secured Party all matters materially affecting the value, enforceability or collectibility of any of the Collateral. ARTICLE 4 EVENTS OF DEFAULT; TERMINATION Section 4.1 Events of Default. If any of the following events shall occur ----------------- (each an "Event of Default"), the Secured Party shall be entitled to exercise its rights and remedies under Article 5 of this Agreement: (a) The occurrence of any Event of Default under the Note; D-2 (b) The occurrence of any event of default by Synbiotics under the Transitional Manufacturing and Supply Agreement of even date herewith, by and between Synbiotics and Secured Party ("Manufacturing Agreement"); (c) Synbiotics shall fail to make any payments when due as provided for in the Royalty Agreement of even date herewith, between Synbiotics and Secured Party ("Royalty Agreement"), unless otherwise suspended by the term of such agreement; (d) Synbiotics shall breach or fail to perform any of the obligations set forth in this Agreement which breach or failure is not cured within 15 calendar days after notice thereof from the Secured Party to Synbiotics; (e) Any Lien created on the property encumbered hereby shall cease to be a valid and enforceable perfected first priority security interest in favor of the Secured Party, or Synbiotics shall so assert in writing or any of the Collateral shall be or become subject to any non-statutory Lien that has priority over the Liens granted to the Secured Party hereunder; or (f) Any event or condition shall occur and be continuing for more than 15 calendar days which causes, or which permits any lender to Synbiotics, to declare, any material indebtedness of Synbiotics for money borrowed to become due and payable prior to its scheduled maturity date. Section 4.2 Termination of Agreement. This Agreement shall be terminated ------------------------ and Synbiotics shall be released from liability hereunder upon the full and final payment to the Secured Party of all amounts owed to the Secured Party (including, but not limited to, the Repayment Amount) and the performance of all other obligations secured hereby. ARTICLE 5 RIGHTS AND REMEDIES UPON AN EVENT OF DEFAULT Section 5.1 Secured Party's Specific Rights and Remedies. In addition to -------------------------------------------- all other rights and remedies provided by law or under the Note, the Secured Party, upon the occurrence of any Event of Default, may: (a) Foreclose or enforce all or any security interests, liens, assignments, or pledges created by this Agreement or in the Note; (b) File suit against Synbiotics; (c) Seek specific performance or injunctive relief to enforce performance of the undertakings, duties and agreements provided herein, whether or not a remedy at law exists or is adequate; and (d) Exercise any rights of a secured creditor under the Uniform Commercial Code, as adopted and amended in Maryland, including the right to take possession of the Collateral without the use of judicial process or hearing of any kind. Section 5.2 Remedies Cumulative. The rights and remedies provided in this ------------------- Agreement and the Note, or otherwise under applicable laws shall be cumulative and the exercise of any particular right or remedy shall not preclude the exercise of any other rights or remedies in addition to, or as an alternative of, such right or remedy. Section 5.3 Obligations Are Unconditional. The payment and performance of ----------------------------- the obligations hereunder or secured hereby shall be the absolute and unconditional duty and obligation of Synbiotics, and, except as otherwise provided for in the Royalty Agreement or the Manufacturing Agreement, shall be independent of any defense or any rights of set-off, recoupment or counterclaim which Synbiotics might otherwise have against the Secured Party, and, except as otherwise provided for in the Royalty Agreement or the Manufacturing Agreement, Synbiotics shall pay absolutely all payments required hereunder, free of any deductions and without abatement, diminution or set-off. Until such time as the obligations hereunder or secured hereby have been fully paid and performed, Synbiotics (a) shall not suspend or discontinue any payments provided for in the Note and except as otherwise provided for in the Royalty Agreement or the Manufacturing Agreement, (b) shall perform and observe all of Synbiotics' obligations contained herein, and (c) shall not terminate or attempt to terminate this Agreement for any cause. ARTICLE 6 MISCELLANEOUS Section 6.1 Exercise of Rights. No failure or delay on the part of the ------------------ Secured Party to exercise any right, power or privilege under this Agreement and no course of dealing between Synbiotics and the Secured Party shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under this Agreement preclude any other or further exercise thereof or the exercise of any other right, power or privilege. To the extent permitted by law, the rights and remedies herein expressly provided are cumulative and not exclusive of any rights or remedies which the Secured Party would otherwise have pursuant to law or equity. No notice to or demand on any party in any case shall entitle such party to any other or further notice or demand in similar or other circumstances, or constitute a waiver of the right of the other party to any other or further action in any circumstances without notice or demand. In the event that the consent of the Secured Party is required under the terms hereof, it is understood and agreed that except as otherwise provided expressly herein, the determination whether to grant or withhold such consent shall be made solely by the Secured Party in its absolute discretion. Section 6.2 Amendment and Waiver. This Agreement may not be amended, -------------------- waived, supplemented, restated, or otherwise modified without the prior consent of Synbiotics and the Secured Party. Section 6.3 Indemnification. --------------- (a) Synbiotics agrees to pay, and to hold the Secured Party harmless from all liability for, any stamp taxes imposed by future changes in law (including interest, penalties and fees) which may be payable in connection with this Agreement or any modification of any of the foregoing. D-4 (b) Synbiotics shall (i) indemnify and hold harmless the Secured Party and its directors, officers, employees and Affiliates from and against all losses, claims, damages, expenses or liabilities to which the Secured Party or such director, officer, employee or Affiliate may become subject insofar as such losses, claims, damages, expenses or liabilities (or actions, suits or proceedings including any inquiry or investigation or claims in respect thereof) are caused by or result from any errors or omissions of Borrower under this Agreement and (ii) reimburse the Secured Party and its directors, officers, employees or Affiliates, upon their demand, for any reasonable legal or other expenses incurred in connection with investigating, preparing to defend or defending any such loss, claim, damage, liability, action or claim; provided, -------- however, that Synbiotics shall not be required to indemnify the Secured Party - ------- for any claims, damages, losses, liabilities, costs or expenses to the extent, but only to the extent, caused by the willful misconduct or gross negligence of such person or entity. If any action is brought against the Secured Party or any other person indemnified or intended to be indemnified pursuant to this Section 6.3(b), Synbiotics shall, if requested by the Secured Party or any such - -------------- indemnified person, resist and defend such action, suit or proceeding or cause the same to be resisted and defended by counsel reasonably satisfactory to the person or persons indemnified or intended to be indemnified. Each indemnified person shall, unless the Secured Party or other indemnified person has made the request described in the preceding sentence and such request has been complied with, have the right to employ its own counsel (or staff counsel) to investigate and control the defense of any other matter covered by such indemnity and the reasonable fees and expenses of such counsel shall be at the expense of Synbiotics. (c) All obligations provided for in Sections 6.3(a) and (b) ----------------------- herein shall survive any termination of this Agreement. Section 6.4 Successors and Assigns. This Agreement shall bind, and the ---------------------- benefits hereof shall inure to, Synbiotics and the Secured Party and their respective successors and assigns; provided that neither may transfer or assign -------- any or all of its rights and obligations hereunder without the prior written consent of the other party. Section 6.5 Notices, Requests, Demands. Except where telephonic -------------------------- instruction or notices are expressly authorized herein to be given, all notices, demands, instructions, requests, consents and other communications required or permitted to be given to or made upon any party hereto shall be given in accordance with Section 11.5 of the Purchase Agreement. ------------ Section 6.6 Counterparts: Description Headings. ----------------------------------- (a) This Agreement may be executed in any number of counterparts, and by the different parties hereto on the same or separate counterparts, each of which shall be deemed to be an original instrument but all of which together shall constitute one and the same agreement. (b) The descriptive headings of the various sections of this Agreement are inserted for convenience of reference only and shall not be deemed to affect the meaning or construction of any of the provisions hereof. D-5 Section 6.7 Governing Law. This Agreement and the rights and obligations ------------- of the parties under this Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of Maryland without reference to its conflict of laws provisions. Section 6.8 Jurisdiction, Waiver of Jury and Bond. Each of Synbiotics and ------------------------------------- the Secured Party hereby irrevocably waives trial by jury in any action or proceeding of any kind or nature in any court in which an action may be commenced arising out of this Agreement or the Note or any of the transactions contemplated herein and therein or any assignment thereof. Each of the Secured Party and Borrower hereby agrees that the United States District Court for the District of Maryland or, at the option of the Secured Party, any court in which the Secured Party shall initiate legal or equitable proceedings and which has subject matter jurisdiction over the matter in controversy, shall have jurisdiction to hear and determine any claims or disputes between Synbiotics and the Secured Party, pertaining directly or indirectly to this Agreement, the Note or any of the transactions contemplated herein and therein. Synbiotics expressly submits and consents in advance to such jurisdiction in any action or proceeding commenced in such courts, hereby waiving personal service of the summons and complaint, or other process or papers issued therein, and agrees that service of such summons and complaint, or other process or papers may be made by mail or messenger directed to it at the address set forth in Section ------- 11.5 of the Purchase Agreement and that service so made shall be deemed to be - ---- completed upon the earlier of actual receipt of five (5) days after the same shall have been posted to Synbiotics' address. The Secured Party and Synbiotics acknowledge that the time and expense required for trial by jury exceed the time and expense required for a bench trial and hereby waive, to the extent permitted by law, trial by jury, and waive any bond or surety or security upon such bond which might, but for this waiver, be required of the Secured Party. Nothing contained in this Section 6.8 shall affect the right of the Secured Party to ----------- serve legal process in any other manner permitted by law or affect the right of the Secured Party to bring any action or proceeding against Synbiotics or its property in the courts of any other jurisdiction to the extent necessary to enforce its liens against property located in such jurisdictions. Synbiotics waives any right it may have to claim or recover in any litigation referred to above any special, exemplary, punitive or consequential damages or any damages other than, or in addition to, actual damages. Section 6.9 Severability. In the event any provision of this Agreement ------------ shall be held invalid or unenforceable by any court of competent jurisdiction, the parties hereto agree that such holding shall not invalidate or render unenforceable any other provision hereof or thereof. The parties hereto further agree that the holding by any court of competent jurisdiction that any remedy pursued by the Secured Party hereunder is unavailable or unenforceable shall not affect in any way the ability of the Secure Party to pursue any other remedy available to it. Section 6.10 Entire Agreement. This Agreement completely sets forth the ---------------- agreements between the parties and fully supersedes all prior agreements, both written and oral, relating to all matters set forth herein. [SIGNATURE PAGE FOLLOWS] D-6 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be duly executed and delivered in its name and on its behalf as of the date first above written. SECURED PARTY: KIRKEGAARD & PERRY LABORATORIES, INC. By: /s/ Albert Perry ---------------- Name: Albert Perry Title: President SYNBIOTICS: SYNBIOTICS CORPORATION By: /s/ Michael Green ----------------- Name: Michael Green Title: Vice President - Finance D-7 EXHIBIT A The Collateral includes all of Debtor's right, title, and interest in and to the personal properties, assets, goodwill and rights of Debtor set forth on this Exhibit A that have been sold, assigned, or otherwise transferred to the --------- Debtor by the Secured Party pursuant to the Asset Purchase Agreement, dated as of April 18, 2000, between Debtor and Secured Party (the "Purchase Agreement") and are owned by, or licensed to, the Debtor as of the date hereof including: (a) Dynex Plate Making/Casting machine, Serial Number 1023, together with all parts, alterations, attachments, additions, accessions, improvements, substitutions, replacements and accessions thereto; (b) copies of all books, customer lists and records, inspection records, distributor lists and records, research records relating to poultry and turkey products and other business records pertaining to Debtor's poultry diagnostic business and the Purchased Assets (as defined in the Purchase Agreement); (c) to the extent assignable, all contracts, and all rights of the Debtor, whether now existing or hereafter arising, thereunder, including the benefit of all deposits given by the Debtor pursuant thereto, relating to the Debtor's poultry diagnostic business, set forth in Schedule 1 to this Exhibit A; --------- (d) all of the Debtor's supplies, raw-materials, works in process, finished goods and materials used or consumed in the Debtor's poultry diagnostic business existing on the date hereof and all returned reclaimed or repossess goods, replacements and substitutions thereof; (e) all rights, title and interests in and to all products relating to the Debtor's poultry diagnostic business currently in development as of the date hereof; (f) all rights to the trademark "PROFLOK", and the goodwill of the Debtor's poultry diagnostic business symbolized by such trademark name, including all United States Federal and state and all foreign registrations, extensions, renewals, applications for registrations of such or rights to register the same worldwide, used in connection with Debtor's poultry diagnostic business, set forth on Schedule 2, all licenses or consents to use with respect thereto, and any and all rights of enforcement with respect to the foregoing, including all rights worldwide to sue for the infringement or unauthorized use thereof (whether past, present or future) and the recovery of damages or royalties related thereto; (g) all technical information used in the Debtor's poultry diagnostic business (including, for example, invention disclosures, trade secrets and know- how, assemblies and detail drawings, design manufacturing and assembling techniques and methods, design information, parts list, databases, computer software and documentation, source code listings, mask works, technical data, user, operation and maintenance manuals, servicing and installation instructions relating to manufacturing processes and apperati, design and production processes, test and inspection techniques and procedures, material handling techniques, inspection methods D-8 and standards used in the Debtor's poultry diagnostic business) and set forth in the Outlines of Production contained in Exhibit B to the Transitional Manufacturing and Supply Agreement of even date herewith, between Debtor and Secured Party, and all trade secret rights arising under the common law, state or federal law or the laws of any foreign country, and the unencumbered right to exercise all such rights in all media and by any manner and means now known or hereafter devised, and any and all rights to register, patent or secure protection of such, and all rights of action and claims for damages and benefits arising from past, present and future infringements of such trade secret rights together with the right to sue for and in the name of the Debtor and to collect the same for the Debtor's use; (h) all right, title and interest in and to the ProFILE software licensed to the Debtor pursuant to the Consulting Services Agreement, dated July 19, 1997 between Secured Party and Innov Corporation, as assigned to Debtor (the "Innov Agreement"); (i) all marketing literature relating to Debtor's poultry diagnostic business in Debtor's possession on the date hereof; (j) all accessions to, substitutions for and all replacements, products and proceeds of the foregoing including, without limitation, proceeds of insurance policies insuring the Collateral. D-9 Schedule 1 ---------- (1) Distributor Agreements (a) Written distributor agreements between the Debtor and each of the following: (i) Agricultural Development; (ii) AgroBio Tek Laboratorios; (iii) Avenida & Associates Inc.; (iv) Bio Diagnostics SND. BHD.; (v) BTI; (vi) Chem-East; (vii) Egytech; (viii) FELCO; (ix) Golbid Co. Ltd.; (x) Hester Pharmaceuticals; (xi) Intertech (formerly Biovida); (xii) La Ensenada; (xiii) LSI; (xiv) Maya Laboratuar, Ltd.; (xv) Merial (formerly ISBI); (xvi) Modern Agropharmaceuticals Est.; (xvii) Nippon Biological; (xviii) Seravian, S. L.; (xix) Tseng Hsiang Life Sciences; (xx) Ward Medic Limited; and (xxi) Veterquimica; (b) Written distributor arrangements (if any) between the Debtor and each of the following: (i) Bio-Mediq DPC; (ii) Carval De Colombia; (iii) Fort Dodge Animal Health; (iv) Korman Biotech (terminated); (v) Productos Quimicos Magiar SA; (vi) PT Satwa Jawa Jaya; and (vii) Rhenium Ltd. D-10 (2) License Agreements between the Debtor and each of the following:
- ------------------------------------------------------------------------------------------------------------------- Licensor Subject Matter of License - ------------------------------------------------------------------------------------------------------------------- Univ. of Maryland IBDV e/Del Recombinant C12 - ------------------------------------------------------------------------------------------------------------------- Univ. of Maryland CAV - Monoclone, R25 Cell Line, R63 and mab 8 - ------------------------------------------------------------------------------------------------------------------- Univ. of Maryland R63 and mab 8 - ------------------------------------------------------------------------------------------------------------------- Univ. of Maryland Influenza Group A Specific Monoclonal Antibodies: LS-98-070 - ------------------------------------------------------------------------------------------------------------------- USDA Avian Leukosis Virus Subgroup J Envelope Gene - ------------------------------------------------------------------------------------------------------------------- Veterinary Infectious Disease Organization Hybridoma Cell Line (15 G 4) - -------------------------------------------------------------------------------------------------------------------
(3) Innov Agreement. D-11 Schedule 2 ---------- Trademarks
Country Registration No. Effective Date Expiration Date ------- ---------------- United States No. 1,561,761 10/24/1989 10/24/2009 France No. 1,148,880 3/16/1989 3/16/2009 Benelux No. 462,552 3/11/1999 4/18/2009 United Kingdom No. 1,368,834 12/12/1995 12/12/2005 Portugal No. 255,395 10/20/1992 10/20/2002 Spain No. 1,315,229 6/5/1991 6/5/2011
D-12 EXHIBIT E --------- LICENSE AND TECHNICAL ASSISTANCE AGREEMENT This LICENSE AND TECHNICAL ASSISTANCE AGREEMENT, (this "Agreement") is made and entered into as of the 18th day of April, 2000 (the "Effective Date"), between SYNBIOTICS CORPORATION, a California corporation ("Licensee") and KIRKEGAARD & PERRY LABORATORIES, INC., a Maryland corporation ("Licensor"). WHEREAS, the parties have entered into that certain Asset Purchase Agreement of even date herewith (the "Purchase Agreement"), pursuant to which Licensee will purchase certain assets of Licensor relating to the development, promotion and sale of poultry diagnostics products; WHEREAS, Licensor has designed and developed certain ABTS substrate (1 component) ("Substrate") technologies and Conjugate (as defined below) technologies for use in the "Poultry Diagnostic Field," as defined below; and WHEREAS, Licensee desires to avail itself of these Substrate and Conjugate technologies, and Licensor desires to license such technologies to Licensee; NOW THEREFORE, in consideration of the mutual promises contained herein and the mutual benefits to be derived therefrom, Licensor and Licensee agree as follows: ARTICLE 1 Definitions ----------- The following words and phrases will have the meanings set forth below: 1.1 Agreement. This Agreement and the following Schedules attached --------- hereto: Schedule 1 Trade Secrets ---------- Schedule 2 Licensee Products ---------- 1.2 Conjugate. Collectively, Licensor's HRP Goat IaG conjugate and --------- HRP Goat Anti-Turkey conjugate. 1.3 Licensee Product(s). Each of Licensee's products manufactured for ------------------- use in the Poultry Diagnostics Field listed on Schedule 2, whether or not Licensee hereafter makes any changes or modifications. 1.4 Licensee Improvements. Any new technology used or developed by --------------------- Licensee that consists of improvements to the Substrate and Conjugate technologies after the Effective Date. 1.5 Manufacturing Agreement. That certain Transitional Manufacturing ----------------------- and Supply Agreement between Licensor and Licensee of even date herewith. 1.6 New Inventions. Any technology, trade secrets, products or -------------- services directly related to the Substrate or the Conjugates intended to be used in the Poultry Diagnostics Field developed by Licensor after the Effective Date. 1.7 Poultry Diagnostics Field. The conduct of business pertaining to ------------------------- research, development, manufacturing, sales and other activities directly relating to the development, promotion and sale of Poultry Diagnostic Products. Notwithstanding the foregoing, the term "Poultry Diagnostic Field" shall not include general poultry research not directly related to the development of poultry diagnostic products. 1.8 Poultry Diagnostic Products. Collectively, ELISA kits, Western --------------------------- blot kits, kit components (exclusive of goat anti-chicken IgC conjugates, goat anti-turkey conjugates and substrates such as ABTS 1 component reagent) including virus, purified virus, viral proteins mycoplasma or mycoplasma proteins, monoclonal antibodies targeted against avian pathogenic reagents, and computer software that are specifically designed for the assay of infectious agents, the monitoring of antibody titer in response to immunization or the evaluation of the state of poultry health. 1.9 Trade Secrets. All of Licensor's existing technical expertise, ------------- and all proprietary information, data or confidential know-how pertaining to the design, manufacture, and use of the Substrate and the Conjugates which were developed or acquired by Licensor and are owned by Licensor and which have been applied to or used by Licensor in the Poultry Diagnostics Field, as set forth on Schedule 1. 1.10 Veterinary Diagnostic Field. The conduct of business pertaining --------------------------- to research, development, manufacturing, sales and other activities directly relating to the development, promotion and sale of veterinary diagnostic products. Notwithstanding the foregoing, the term "Veterinary Diagnostic Field shall not include general veterinary research not directly related to the development of veterinary diagnostic products. E-2 ARTICLE 2 License ------- Licensor hereby grants to Licensee an exclusive (even as to Licensor), worldwide, perpetual, sublicensable, fully paid up, royalty-free right and license under the Trade Secrets (i) to make, have made, manufacture, use or sell any Poultry Diagnostic Products, including without limitation, the Licensee Products and components of the Licensee Products, in the Poultry Diagnostics Field; and (ii) to provide or deliver any services to customers, in the Poultry Diagnostics Field. Notwithstanding anything to the contrary in this Article 2, Licensor shall be permitted to distribute those products contained in Licensor's 1999 research product catalog (the "Research Products") to third party users for use in fields other than the Poultry Diagnostic Field; provided, however, Seller agrees not to knowingly sell any Substrate or Conjugate to any third party for the purpose of manufacturing or producing products designed primarily for use in the Poultry Diagnostic Field. Furthermore, nothing contained in this Article 2 shall be construed as prohibiting Licensor from using the Trade Secrets as contemplated in the Manufacturing Agreement. ARTICLE 3 Term ---- 3.1 Term. This Agreement commences as of the Effective Date and will ---- remain in effect indefinitely unless and until terminated by mutual agreement of the parties or in accordance with Section 10.3. 3.2 No Termination. Except as otherwise expressly provided in -------------- Sections 3.1 and 10.3, this Agreement will not be subject to termination during its term. ARTICLE 4 Delivery and Technical Assistance --------------------------------- 4.1 Delivery. -------- (a) Delivery Upon Closing. Licensor has furnished or made available to --------------------- Licensee copies of such documents, information and other materials in possession of Licensor, including without limitation, materials relating to the Trade Secrets, as Licensor believes are reasonably necessary for Licensee to understand, implement and use the Trade Secrets and to be able to manufacture Licensee Products. (b) Future Deliveries. Upon Licensee's reasonable written request from ----------------- time to time and without charge (other than photocopy expense), Licensor will furnish to Licensee copies of such additional documents, information and other materials, in possession of Licensor, which have not previously been provided to Licensee, including without limitation all materials relating to the Trade Secrets, as are reasonably necessary for Licensee to understand, implement and use the Trade Secrets and Licensee Products and to be able to manufacture Licensee Products. E-3 4.2 Technical Assistance. Notwithstanding anything to the contrary in -------------------- Article 2.2, upon Licensee's reasonable request from time to time, Licensor shall, at Licensee's expense and subject to mutual agreement in good faith between the parties as to scheduling, scope of work and the projected cost of Licensor's services, provide technical assistance to Licensee in connection with the Trade Secrets, and in connection with the manufacture, use, delivery or sale of Licensee Products. At Licensee's request, such technical assistance shall include, without limitation: (a) Advice and assistance by qualified engineers and other personnel who have knowledge of the Trade Secrets, or experience in the manufacture and use of Licensee Products; and (b) Such other technical services and technical information that Licensee may reasonably request in connection with this Agreement. 4.3 Compensation. For any services rendered upon Licensee's request ------------ pursuant to Section 4.2, Licensee will pay Licensor's normal rates customarily charged to third parties consisting of Licensor's actual labor costs (including, without limitation, direct costs by labor category, overhead, burden and general and administrative expenses) plus a reasonable profit, and will reimburse Licensor for all reasonable expenses incurred in connection with the performance of such services (including but not limited to travel, lodging and meal expenses). ARTICLE 5 Protection of Trade Secrets --------------------------- 5.1 Use and Non-Disclosure. Licensee and Licensor will not use or ---------------------- permit the use of any Trade Secrets for any purpose not authorized by this Agreement, except in connection with and subject to the terms of the Manufacturing Agreement. Subject to the provisions of Section 5.2 and 5.3, Licensee and Licensor will hold in confidence, and will not disclose or communicate to any third person, any Trade Secrets. Licensee and Licensor will take or cause to be taken all reasonably necessary precautions to prevent the disclosure or communications of such Trade Secrets to third persons. 5.2 Exceptions. Licensee or Licensor may each disclose Trade Secrets ---------- to its employees or to any person or entity in connection with bona fide business or financing transactions to the extent that each such disclosure is reasonably necessary for the purpose of manufacturing, selling, delivering, providing, installing, repairing or servicing any product (including, without limitation Licensee Products) or providing any services or procuring goods and services required in connection therewith or discussing or conducting such business or financing transaction; provided that: (a) Licensee or Licensor clearly marks any document or other material containing any Trade Secrets so disclosed to indicate that such documents or materials contain the Trade Secrets, (b) Licensee or Licensor requires each entity to whom such documents or materials are disclosed to sign a written agreement limiting use thereof to the purpose stated in such agreement, prohibiting the reproduction thereof and the disclosure thereof to any other person and requiring the prompt return thereof when no longer needed or such agreement is terminated, and (c) any reproduction, note or summary of such documents or E-4 materials immediately upon the making thereof will become the property of Licensor. The foregoing restrictions on the use and disclosure of the Trade Secrets shall not apply with respect to any Trade Secret (i) that is in or (through no improper action or inaction by the disclosing party or any agent or employee) enters the public domain, or (ii) that was rightfully in its possession or known by Licensee prior to receipt from Licensor, or (iii) in the case of Licensee only, that was rightfully disclosed to Licensee by another person without restriction, or (iv) five (5) years after the Effective Date. 5.3 Accessions. Each modification, improvement and revision of any of ---------- the Trade Secrets (except for direct reproductions thereof) that is made by or for Licensee will become the property of Licensee. ARTICLE 6 Improvements; First Right of Offer ---------------------------------- 6.1 First Right of Offer for New Inventions. Licensee will have a --------------------------------------- right of first offer to license New Inventions in the Poultry Diagnostics Field. Licensor shall not license or sell any New Inventions to any third party, except in the fields of use exclusively reserved to Licensor, without first offering such New Inventions to Licensee. Upon receipt of written notification from Licensor as to the details of the New Invention and the specific terms of an offer by Licensor to sell or license such New Inventions to Licensee, Licensee shall have thirty (30) days to accept the offer. In the event that Licensee accepts the offer, the terms of the license or sale shall be those contained in the offer, and no other terms shall apply. If Licensee does not accept the offer, then for a period of twelve (12) months thereafter, Licensor may license such New Inventions to a third party, but shall not do so on terms that are more favorable to the third party than the terms last offered by Licensor to Licensee. 6.2 First Right of Offer for License in Veterinary Diagnostic Field. --------------------------------------------------------------- Licensee will have a right of first offer to obtain a license to manufacture products and to perform services using the Substrate and Conjugate technologies in the Veterinary Diagnostic Field. Licensor shall not license or sell the Substrate and Conjugate technologies in the Veterinary Diagnostic Field to any third party, without first offering such opportunity to Licensee. Upon receipt of written notification from Licensor as to the details of the proposed license or sale of the Substrate and Conjugate technologies in the Veterinary Diagnostic Field and the specific terms of an offer by Licensor to sell or license such technologies to Licensee, Licensee shall have thirty (30) days to exercise its rights under this Section 6.2. In the event that Licensee exercises its rights under this Section 6.2, the terms of the license or sale shall be those contained in the offer submitted to Licensor, and no other terms shall apply; provided, however, that should Licensee choose to exercise its rights under this Section 6.2 and license the Substrate and Conjugate technologies, Licensee shall receive an exclusive, perpetual, royalty-free license in exchange for a one-time license fee of twenty-five thousand dollars ($25,000). If Licensee does not exercise its rights under this Section 6.2, then for a period of twelve (12) months thereafter, Licensor may license or sell the Substrate and Conjugate technologies to a third party, but shall not do so on terms that are more favorable to the third party than the terms last offered by Licensor to Licensee. E-5 6.3 Licensee Improvement(s). Licensee shall promptly disclose to ----------------------- Licensor in writing all Licensee Improvements. 6.4 Expiration of Right of First Offer and Obligation to Disclose ------------------------------------------------------------- Licensee Improvements. Notwithstanding anything to the contrary in this - --------------------- Agreement, the rights of first offer in Sections 6.1 and 6.2 shall expire five (5) years after the Effective Date, and any Licensee Improvements developed or created at any time after five (5) years after the Effective Date shall not be included as part of the licenses granted hereunder. ARTICLE 7 Cooperation in Obtaining Government Approval -------------------------------------------- Licensor and Licensee promptly will seek all necessary governmental approvals and licenses that may be required in connection herewith and will cooperate with each other in every reasonable way to obtain such approval. Nothing in this Agreement will be deemed to require either party to agree to any revision or modification of this Agreement that may be required to obtain any governmental approval. ARTICLE 8 Default; Remedy; Termination ---------------------------- 8.1 Default. A "default" shall exist under this Agreement if either ------- party fails to perform any written obligation to be performed by it hereunder within thirty (30) days after written notice from the other party that time for such performance has passed or, if no such time is prescribed, within thirty (30) days after written notice from the other party. 8.2 Remedy. If a party is in default hereunder, the party not in ------ default may pursue any remedy available to it at law or in equity if the noticed default is not cured within the notice period. Termination of this Agreement is not a remedy for default; this Agreement may be terminated only pursuant to Sections 3.1 or 8.3. 8.3 Termination by Licensor. Licensor may terminate this Agreement ----------------------- only in the event that (i) Licensee has not made each payment when due under the Purchase Agreement and the documents relating thereto, (ii) Licensor has provided written notice to the Licensee of such failure to pay, (iii) Licensor has not received payment within ten (10) days after the receipt by Licensee of the written notice described in (ii) above of the amount then due under the Purchase Agreement and (iv) Licensor delivers to Licensee a written termination notice following such ten (10) day period and before such payment is received by Licensor. 8.4 Performance After Termination. Upon termination of this Agreement ----------------------------- pursuant to Section 8.3, (a) all right, title and interest to the Licensee Products, the Licensed Services and any other rights or licenses granted during the term of this Agreement shall revert back to Licensor; (b) Licensee will promptly (1) discontinue the use of, and will destroy or return to Licensor or its designee, all documents and all copies thereof relating to Licensor's proprietary and confidential information regardless of the form or medium in which such information is stored, including but not limited to, Trade Secrets and all notes, summaries and other documents E-6 or materials containing information relating to such information, and (2) refrain from any manufacture, delivery or sale involving in any manner whatsoever, directly or indirectly, use or utilization of any license or any other right granted under this Agreement. ARTICLE 9 Miscellaneous ------------- 9.1 Notices. All notices and communications required or permitted to ------- be given under this Agreement shall be sufficient only if written in English and personally delivered, delivered by a major commercial rapid delivery courier service with tracking capabilities or mailed by certified or registered mail, return receipt requested, with postage or delivery charges prepaid and addressed to a party at its address set forth below (unless by such notice a different person or address will have been designated by notice pursuant to this Section). If not received sooner, notice by mail will be deemed received five (5) days after deposit in the U.S. mails. Licensor: Kirkegaard & Perry Laboratories 2 Cessna Court Gaithersburg, Maryland 20879-4174 Attn: Albert Perry, President E-7 with a copy to (which shall not constitute notice) to: Hogan & Hartson LLP 555 Thirteenth Street, N.W. Washington, D.C. 20004-1109 Attn: Robert J. Waldman, Esq. Licensee: Synbiotics Corporation 11011 Via Frontera San Diego, California 92121 Attn: Chief Financial Officer with a copy (which shall not constitute notice) to: Brobeck, Phleger & Harrison LLP 12390 El Camino Real San Diego, California 92130 Attn: Hayden J. Trubitt, Esq. 9.2 Assignments. Neither party shall assign or transfer any of its ----------- respective rights or delegate any of its duties under this Agreement without the prior written consent of the other party, except for assignment or transfer to a subsidiary or affiliate of the Licensor or in connection with the sale or transfer of all of the assets. 9.3 Headings. The headings and titles to the Articles and Sections of -------- this Agreement are inserted for convenience only and will not be deemed a part hereof or affect the construction or interpretation of any provision hereof. 9.4 Remedies. Unless otherwise expressly provided herein, the rights -------- and remedies hereunder are in addition to, and not in limitation of, other rights and remedies under this Agreement, and exercise of one right or remedy will not be deemed a waiver of any other right or remedy. 9.5 Modification - Waiver. No cancellation, modification, amendment, --------------------- deletion, addition or other change in this Agreement or any provision hereof, or waiver of any right or remedy herein provided, will be effective for any purpose unless specifically set forth in a writing signed by the party to be bound thereby. No waiver of any right or remedy in respect of any occurrence or event on one occasion will be deemed a waiver of such right or remedy in respect of such occurrence or event on any other occasion. E-8 9.6 Entire Agreement. This Agreement supersedes all other ---------------- agreements, oral or written, heretofore made with respect to the subject hereof and the transactions contemplated hereby and, with the Schedules hereto and in conjunction with the Purchase Agreement and the Related Documents (as defined in the Purchase Agreement), contains the entire agreement of the parties. 9.7 Controlling Law. All questions concerning the validity and --------------- operation of this Agreement and performance of the obligations imposed upon the parties hereunder will be governed by the substantive laws of the State of Maryland, without regard to its conflicts of laws principles. 9.8 Successors and Assigns. The provisions of this Agreement will be ---------------------- binding upon and inure to the benefit of Licensor and Licensee and their respective successors and authorized assigns. This provision will not be deemed to expand or otherwise affect the limitations on assignment and delegation set forth in Section 9.2. 9.9 Product Marking. Licensee Products manufactured, delivered or --------------- sold by Licensee will be marked by Licensee in conformance with the patent and copyright laws of the countries of manufacture, use and sale. 9.10 Publicity. Except as the other party gives its prior written --------- consent, neither Licensor nor Licensee will use the name of the other party in any publicity, product announcement, brochure, advertising, product labeling, promotion or otherwise for any purpose. 9.11 Counterparts. This Agreement has been executed in several ------------ counterparts, each of which will be deemed to be an original copy hereof. 9.12 Attorney's Fees. In the event of any dispute or litigation --------------- relating to this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees and court costs from the other party(ies). E-9 IN WITNESS WHEREOF, each of the parties has caused this Agreement to be duly executed and delivered in its name and on its behalf as of the Effective Date. LICENSOR: LICENSEE: KIRKEGAARD & PERRY SYNBIOTICS CORPORATION, LABORATORIES, INC. a California corporation a Maryland corporation By: /s/ Albert Perry By: /s/ Michael Green ---------------- ----------------- Title: President Title: Vice President - Finance E-10 SCHEDULE 1 ---------- Trade Secrets The Trade Secrets for the Substrate and Conjugates are set forth in Licensor's manufacturing protocols and procedures. E-11 SCHEDULE 2 ---------- Licensee Products
Catalog Number Poultry Elisa Kit Tests Per Kit - -------------- ------------------------------------------------ ------------- 54-90-01 Infectious Bursal disease Plus (IBD+) 450 54-81-01 Infectious bursal Disease (IBD) 900 54-82-01 Infectious Bronchitis Virus (IBV) 900 54-83-01 Newcastle Disease Virus (NDV) 900 54-84-01 Avian Reovirus (REO) 900 54-87-05 MG/MS Combination 900* *Kit contains 450 tests for each agent 54-86-01 Avian Encephalomyelitis Virus (AE) 900 54-93-01 Infectious laryngotracheitis (LT) 900 54-95-01 Avian Leukosis virus (ALV), antigent detection 900 54-77-01 Pasteurella multocida (PM) 900 54-87-06 AE-IBV-IBD-NDV-REO Combination 900* *Kit contains 450 tests for each agent 54-85-01 Mycoplasma gallisepticum (MG) 900 54-96-01 Mycoplasma synoviae (MS) 900 54-78-01 Avian Influenza Virus (AIV) 900 54-80-01 Chicken Anemia Virus (CAV) 450 54-88-01 Avian Leukosis Virus, subgroup J (ALV-J) 450 54-99-01 Hemorrhagic Enteritis Virus (HEV) 900 54-72-01 Bordetella avium (BA) 900 54-89-01 Pasteurella nultocida (PM) 900 54-92-01 New Castle Disease Virus (NDV) 900 54-94-01 Mycoplasma gallisepticum (MG) 900 54-97-01 Mycoplasma synoviae (MS) 900 54-98-01 Mycoplasma meleagridis (MM) 900 86-12-10 Profile Software Ver. 3.0, 3.5" 86-12-11 Profile Software Ver. 3.0, 5.25" 454-9199 Broad Spectrum Salmonella 40 454-9194 Group-D Salmonella 40 454-9293 Campylobactor Species 40 454-9590 E-Coli 0157 40
E-12 EXHIBIT F --------- ASSUMPTION AGREEMENT This Assumption Agreement (the "Agreement") is made and entered into as of this 18th day of April, 2000 by Kirkegaard & Perry Laboratories, Inc., a Maryland corporation ("Seller"), and Synbiotics Corporation, a California corporation ("Buyer"). WHEREAS, pursuant to an Asset Purchase Agreement of even date herewith, by and between Seller and Buyer (the "Asset Purchase Agreement"), Seller has agreed to sell and Buyer has agreed to purchase the Purchased Assets and to assume the Assumed Liabilities; and WHEREAS, pursuant to Section 8.3(a) of the Asset Purchase Agreement, -------------- Buyer is required to execute and deliver this Agreement at the Closing; NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Defined Terms. Terms not otherwise defined herein shall have the ------------- meanings set forth in the Asset Purchase Agreement. 2. Assumption. Upon the terms and subject to the conditions set ---------- forth herein and in the Asset Purchase Agreement, Buyer hereby assumes and agrees to pay, honor, discharge and perform, as the case may be, in a timely manner and in accordance with their respective terms, the Assumed Liabilities. 3. Retained Liabilities. Notwithstanding the assumption by Buyer of -------------------- the Assumed Liabilities, Buyer is not assuming and shall not be liable to Seller or any other person for obligations or liabilities of Seller other than the Assumed Liabilities. The Assumed Liabilities shall not include the Retained Liabilities. 4. Further Assurances. Each party hereto agrees to execute, deliver ------------------ and file such additional instruments and to take such other actions as any other party may reasonably request in order to effectuate the purposes of this Agreement. 5. Successors and Assigns. The terms and provisions of this ---------------------- Agreement and the respective rights and obligations of the parties hereunder shall be binding upon their respective successors and assigns. The terms and provisions of this Agreement may be enforced only by the parties hereto and their respective successors and assigns. 6. Governing Law. This Agreement shall be governed by, and construed ------------- and enforced in accordance with, the laws of the State of Maryland, without regard to the principles thereof relating to conflicts or choice of laws. [SIGNATURE PAGE FOLLOWS] F-2 IN WITNESS WHEREOF, each of the parties has caused this Agreement to be duly executed and delivered in its name and on its behalf as of the date first set forth above. SELLER: KIRKEGAARD & PERRY LABORATORIES, INC. By: /s/ Albert Perry ---------------- Name: Albert Perry Title: President BUYER: SYNBIOTICS CORPORATION By: /s/ Michael Green ----------------- Name: Michael Green Title: Vice President - Finance F-3 EXHIBIT G --------- GENERAL CONVEYANCE. BILL OF SALE AND ASSIGNMENT KIRKEGAARD & PERRY LABORATORIES, a Maryland corporation (the "Seller"), hereby grants, conveys and assigns as of April 18, 2000 (the "Effective Date"), unto SYNBIOTICS CORPORATION, a California corporation ("Buyer"), pursuant to that certain Asset Purchase Agreement between the Seller and Buyer dated as of April 18, 2000 (the "Purchase Agreement"), all of the Seller's right, title and interest in and to all the assets and personal properties (whether tangible or intangible and whether owned or leased by Seller), of every kind, character and description and wherever situated which are identified as Purchased Assets in Exhibit B-l to the Purchase Agreement (the assets and properties identified in (i) and (ii) above are collectively referred to as the "Assets"). TO HAVE AND TO HOLD the Assets unto Buyer, its successors and assigns forever, subject to the terms and conditions of that certain Transitional Manufacturing and Supply Agreement of even date herewith between Buyer and Seller. The Seller and its successors hereby agree to take all actions reasonably necessary to obtain any necessary consents for the transfer of the Assets to Buyer and, upon the receipt of such consents, to provide to the Buyer the benefits of title to such Assets. All the Assets shall automatically be deemed to have been assigned to Buyer as of the Closing Date (as defined in the Purchase Agreement). Effective as of the Closing Date, Buyer shall be entitled to the full economic benefit of ownership of the Assets and shall not be liable for any loss, damage or charge arising out of acts or omissions of the Seller occurring prior to the Closing Date with respect to the Assets or the conduct of Seller's business, except with respect to such losses, damages or charges that are Assumed Liabilities (as defined in the Purchase Agreement), which Buyer shall assume in accordance with the terms and conditions of the Purchase Agreement. THE SELLER FOR ITSELF AND ITS SUCCESSORS, AGREES THAT they or such successors will hereafter cause the execution and delivery of any further assignments, instruments of transfer, bills of sale, powers of attorney or conveyances and perform other acts, as may be reasonably necessary or desirable to fully vest in Buyer title to and enjoyment of the Assets assigned or intended to so be pursuant to this Agreement. IN WITNESS WHEREOF, the Seller has caused this General Conveyance, Bill of Sale and Assignment to be duly executed and delivered in its name and on its behalf as of the date first written above. SELLER: KIRKEGAARD & PERRY LABORATORIES, INC., a Maryland corporation By: /s/ Albert Perry ---------------- Title: President [SIGNATURE PAGE TO GENERAL CONVEYANCE, BILL OF SALE AND ASSIGNMENT] G-2 EXHIBIT H --------- NON-COMPETITION AGREEMENT ------------------------- THIS NON-COMPETITION AGREEMENT (this "Agreement") is entered into as of April 18, 2000 (the "Effective Date"), by and among SYNBIOTICS CORPORATION, a California corporation ("Buyer"), and KIRKEGAARD & PERRY LABORATORIES, INC., a Maryland corporation ("Seller") with reference to the following facts: A. WHEREAS, pursuant to that certain Asset Purchase Agreement of even date herewith, by and between Buyer and Seller (the "Purchase Agreement"), Buyer is purchasing and assuming from Seller and Seller is selling, conveying and assigning to Buyer, on the terms and subject to the conditions of the Purchase Agreement, certain of the assets and certain of the liabilities of Seller related to its poultry diagnostic business. B. Buyer intends to maintain and operate a business based, in substantial part, on the Assets. C. The execution of this Agreement by the Seller is a material inducement for Buyer's execution of the Purchase Agreement. D. The parties hereto desire to provide for the protection of the value of the Purchased Assets (as defined in the Purchase Agreement) being acquired by Buyer pursuant to the Purchase Agreement, and to provide protection to the business and confidential information of Buyer. NOW, THEREFORE, in consideration of the foregoing premises and the mutual terms, covenants and conditions contained in the Purchase Agreement and this Agreement, the parties hereby agree as follows: 1. Non-Competition. During the term of this Agreement, without the prior --------------- written consent of Buyer, Seller shall not directly or indirectly, (a) use any trade secrets used in the production of Products (as defined in the Transitional Manufacturing and Supply Agreement of even date herewith, by and between Buyer and Seller (the "Manufacturing Agreement")), or (b) engage in any business involving the sale of products designed primarily for poultry diagnostics anywhere in the world, except in connection with performance of its obligations under the Manufacturing Agreement , the License and Technical Assistance Agreement of even date herewith by and between Buyer and Seller (the "License Agreement"), and the Royalty Agreement of even date herewith, between Seller and Buyer (the "Royalty Agreement"). Nothing contained in this Section 1 or any other provision in this Agreement shall be construed as prohibiting or otherwise restricting Seller's right and ability to sell any of the products listed in its 1999 research product catalog ("Research Products") to third parties for uses in fields other than research, development, manufacturing, sales and other activities directly relating to the development, promotion and sale of poultry diagnostic products (the "Poultry Diagnostic Field"), provided, however that Seller agrees not to knowingly sell any Substrate or Conjugate (as such terms are defined in the License Agreement) to any third party for the purpose of manufacturing or producing products designed primarily for use in the Poultry Diagnostic Field. 2. Term and Termination. This Agreement shall extend for a period of --------------------- three (3) years after the date hereof. This Agreement shall terminate and Seller shall be released from all of its obligations hereunder in the event Buyer defaults under any of the following: (i) the Secured Promissory Note of even date herewith, made by Buyer and payable to Seller in the original principal amount of $1,000,000 (the "Note"), (ii) the Security Agreement of even date herewith, by and between Seller and Buyer (the "Security Agreement") or (iii) the Royalty Agreement; provided, however, that Seller provides Buyer notice of such default and such default is not cured within the applicable cure periods set forth in the Note, the Security Agreement or the Royalty Agreement, as the case may be, unless such cure period is extended or waived by mutual agreement of the parties. 3. Remedies. Seller acknowledges and agrees that its compliance with the --------- covenants contained in Section 1 hereof are reasonable and necessary to protect the goodwill and value of the Purchased Assets. Seller further acknowledges and agrees that a breach of the covenants in Section 1 hereof will result in immediate, irreparable and continuing damage to Buyer for which there will be no adequate remedy at law; and agrees that in the event of any such breach or violation or any threatened or intended breach or violation of the aforesaid covenants, the Buyer and its respective successors and assigns may be entitled to temporary, preliminary and permanent injunctive relief and/or restraining orders enjoining and restraining such breach or violation or such threatened or intended breach or violation and/or other equitable relief (without needing to post any bond or other security) in addition to such other and further relief as may be proper. Seller hereby represents (i) that it has thoroughly reviewed the terms of this Agreement, including the geographic areas and time periods stated herein, (ii) that its experience and/or abilities are such that observance of this Agreement will not cause undue hardship or unreasonably interfere with its ability to conduct its business and (iii) that it has reviewed the limitations imposed by this Agreement with independent counsel. 4. Severability. In the event any portion of this Agreement shall for any ------------ reason be held to be illegal or unenforceable to any extent, such portion shall be deemed to read in such a way so as to render it legal and enforceable to the maximum extent possible in every respect, so as to effectuate the parties' expressed intent to the maximum extent possible, and the remaining portions of this Agreement shall remain in full force and effect. Without limitation, the parties agree and intend that the covenants and agreements contained in this Agreement shall be deemed to be a series of separate covenants and agreements, one for each and every political subdivision of the covered area. If, in any judicial proceeding, a court shall refuse to enforce in such action the separate covenants and agreements deemed included herein then, at the option of Buyer, wholly unenforceable covenants and agreements shall be deemed eliminated from the provisions hereof for the purpose of such proceeding to the extent necessary to permit the remaining separate covenants and agreements to be enforced in such proceeding. This Agreement is separate and severable from the Purchase Agreement and the various agreements executed pursuant thereto. The Purchase Agreement and the various agreements executed pursuant thereto shall remain in full force and effect notwithstanding any holding that this Agreement is illegal or unenforceable to any extent. H-2 5. Notices. All payments, notices, requests, demands and other -------- communications required or permitted hereunder shall be in writing and shall be delivered personally (which shall include delivery by courier or overnight delivery service) or sent by certified or registered mail, postage prepaid, certified or return receipt requested or sent by telecopier or other similar facsimile transmission to the parties at their respective address set forth below or at such other address as shall be given in writing by a party to the other parties. Items delivered personally or by telecopier or facsimile shall be deemed delivered on the date of actual delivery; items sent by certified or registered mail shall be deemed delivered three (3) days after mailing. Seller: Kirkegaard & Perry Laboratories 2 Cessna Court Gaithersburg, Maryland 20879-4174 Attn: Albert Perry, President Facsimile: (301) 948-9442 with a copy (which shall constitute notice) to: Hogan & Hartson, LLP 555 13th Street, N.W. Washington, DC 2004 Attn: Robert J. Waldman, Esq. Facsimile: (202) 637-5910 Buyer: Synbiotics Corporation 11011 Via Frontera San Diego, California 92121 Attn: Chief Financial Officer Facsimile: (858) 451-5719 with a copy to (which shall not constitute notice) to: Brobeck, Phleger & Harrison LLP 12390 El Camino Real San Diego, California 92130 Attn: Hayden J. Trubitt, Esq. Facsimile: (858) 720-2555 6. Amendments and Waivers. This Agreement may be modified, amended or ----------------------- supplemented only by a written instrument duly executed by all parties hereto. No covenant, term or condition or the breach thereof shall be deemed waived, unless it is waived in writing and signed by the party against whom the waiver is claimed. Any waiver of breach of any covenant, term or condition shall not be deemed to be a waiver of any preceding or succeeding breach of the same or any other covenant, term or condition. The failure of any party to insist upon strict performance of any covenant, term or condition hereunder shall not constitute a waiver of such party's right to demand strict compliance therewith in the future. 7. Successors and Assigns. This Agreement may not be assigned by a party ---------------------- without the prior written consent of the other party; provided, however, the Buyer may assign its rights H-3 and delegate its obligations under this Agreement to a purchaser of all or substantially all of the business, stock or assets of the Buyer in whatever form or to any of Buyer's Affiliates without the consent of the Seller; provided, that such assignee agrees to assume and perform all of Borrower's obligations hereunder. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. 8. Governing Law; Jurisdiction and Venue. This Agreement shall be -------------------------------------- governed by and construed in accordance with the laws of the State of Maryland, without regard to principles of conflicts of law. 9. Attorneys' Fees. In the event that any legal action becomes necessary ---------------- to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled, in addition to its court costs, to such reasonable attorneys' fees and expenses and expert witness fees as may be fixed by a court of competent jurisdiction. 10. Counterparts. This Agreement may be executed in multiple copies, each ------------- of which shall be deemed an original and all of which together shall constitute a single agreement binding on all parties. 11. Entire Agreement. This Agreement (together with documents and ----------------- agreements entered into herewith) constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior and contemporaneous agreements and understandings. Each party to this Agreement acknowledges that no promises or agreements have been made by any party, or any one acting on behalf of any party, that are not embodied in this Agreement with respect to the subject matter hereof. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] H-4 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be duly executed and delivered in its name and on its behalf as of the date first written above. BUYER: SELLER: SYNBIOTICS CORPORATION, KIRKEGAARD & PERRY LABORATORIES, a California corporation INC., a Maryland corporation By: /s/ Michael Green By: /s/ Albert Perry ----------------- ---------------- Title: Vice President - Finance Title: President EXHIBIT I --------- Royalty Agreement This Agreement is made as of the 18th day of April, 2000 (the "Effective Date"), between Kirkegaard & Perry Laboratories, Inc., a Maryland corporation ("Seller"), and Synbiotics Corporation, a California corporation ("Buyer"). WHEREAS, Seller owns all rights, title and interest in certain assets used in the production of poultry diagnostic products. WHEREAS, pursuant to an Asset Purchase Agreement of even date herewith, between Seller and Buyer (the "Purchase Agreement"), Seller is transferring its right, title and interest in and to the Purchased Assets (as defined in the Purchase Agreement) to Buyer; WHEREAS, as part of the consideration for the purchase of the Purchased Assets, the parties agree that Buyer shall pay Seller a royalty on all sales of the Poultry Diagnostic Products (as defined below) by the Buyer and its agents, distributors and dealers, for a period of 4 years from the Closing (as defined in the Purchase Agreement); WHEREAS, the parties desire to set forth the terms regarding the royalty relationship, NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. DEFINITIONS 1.1 "Poultry Diagnostic Products" means collectively, those poultry diagnostic kits (a) manufactured and distributed by Buyer from and after the Closing and (b) manufactured by Seller by and on behalf of Buyer pursuant to the Transitional Manufacturing and H-5 Supply Agreement of even date herewith, by and between Seller and Buyer from and after the Closing, and distributed by Buyer and its agents, distributors and dealers. The term Poultry Diagnostic Products shall include, but not be limited to, the types of kits set forth on Schedule 1 attached hereto. 1.2 "Clients" means the end users or prospective end users of any of the Poultry Diagnostic Products. 1.3 "Territory" means worldwide. 1.4 "Contract Year" means the period commencing on the Effective Date of this Agreement and continuing for a period of twelve months and each succeeding twelve-month period hereafter during the term of this Agreement. 1.5 "Net Revenues" means the total revenues derived from the sale of Poultry Diagnostic Products in the Territory during the Term by Buyer or Buyer's Representatives during the applicable calculation period, less allowances and returns (excluding allowances or discounts to affiliates of Buyer). 1.6 "Buyer's Representatives" means an individual or entity who acts as an agent, distributor or dealer for and on behalf of Buyer with respect to the sale or distribution of Poultry Diagnostic Products. 2. OWNERSHIP 2.1 Buyer shall own all right, title and interest in and to the Poultry Diagnostic Products. 3. PAYMENT OF ROYALTIES 3.1 Within thirty (30) days after the end of each calendar quarter during a Contract Year, Buyer shall pay Seller a Quarterly Royalty Payment. For purposes of this Agreement, the term Quarterly Royalty Payment shall be an amount equal to ten percent (10%) of the Net Revenues recognized by Buyer during the applicable calendar quarter. 3.2 In no event shall the aggregate Quarterly Royalty Payments exceed the sum of $1,500,000. 4. BUYER'S MARKETING RESPONSIBILITIES AND OTHER DUTIES 4.1 Buyer shall use its best efforts to sell, promote and support the sale of Poultry Diagnostic Products throughout the Territory. H-6 4.2 Buyer shall maintain books and records sufficient to demonstrate its compliance with this Agreement, including, without limitation, complete accounting records relating to the sale and distribution of the Poultry Diagnostic Product by Buyer. 5. INDEMNITY Buyer shall indemnify and hold Seller harmless from any and all damages, liabilities or costs asserted against or incurred by Seller arising out of the sale, distribution or use of the Poultry Diagnostic Products, including but not limited to any claims asserted against Seller by end-users of the Poultry Diagnostic Products and or Buyer's agents, distributors and dealers. 6. TERM AND TERMINATION 6.1 The term of this Agreement (the "Term") shall commence on the Effective Date and shall continue for a period of four (4) years thereafter. 6.2 Upon the expiration or termination of this Agreement, Seller shall be entitled to receive and Buyer shall pay within thirty (30) days the applicable Quarterly Royalty Payment with respect to any Net Revenues received by Buyer (a) during the calendar quarter in which expiration or termination occurred but prior to such expiration or termination, and (b) after such date of expiration or termination or with respect to any offers to purchase Poultry Diagnostic Products actually received by Buyer on or before the date of expiration or termination of this Agreement. 7. GROSS AND SUBSTANTIAL NON-PERFORMANCE, SUSPENSION OF PAYMENTS During the first twelve months this Agreement is in effect, in the event (a) of gross and substantial non-performance by Seller of its material obligations under the Manufacturing Agreement, which non-performance is not attributable directly or indirectly to the acts or inactions of Buyer, and (b) Buyer has pursued its rights and remedies under the Manufacturing Agreement and has not been reasonably compensated for the damages caused by such non-performance, then Buyer shall notify Seller of its intention to suspend payments under this Agreement as provided for in this Section 7 and the basis therefor. Upon receipt of such notice, Seller shall have 45 days to cure such non-performance. In the event Seller is not able to cure such non-performance within such period, then Buyer shall have the right to suspend payments under this Agreement with respect to Products for which manufacturing has not been transferred to Synbiotics pursuant to this Agreement until Buyer has received reasonable compensation for such non- performance after taking into account the remedies exercised by Buyer under the Manufacturing Agreement. 8. LIMITATION OF LIABILITY IN NO EVENT SHALL EITHER PARTY HERETO BE ENTITLED TO SPECIAL, INDIRECT, PUNITIVE, CONSEQUENTIAL, EXEMPLARY OR SIMILAR DAMAGES, INCLUDING (UNLESS BUYER HAS THE RIGHT TO SUSPEND H-7 PAYMENTS HEREUNDER IN ACCORDANCE WITH SECTION 7) LOST PROFITS, FOR BREACH OF THIS AGREEMENT; PROVIDED, HOWEVER, THE LIMITATIONS SET FORTH IN THIS -------- ------- SECTION 8 SHALL NOT APPLY IN THE EVENT A PARTY'S DAMAGES ARE FOUND TO BE CAUSED BY THE OTHER PARTY'S ACTUAL FRAUD. NOTHING SET FORTH IN THIS SECTION 8 SHALL BE CONSTRUED AS LIMITING SELLER'S RIGHT TO RECOVER QUARTERLY ROYALTY PAYMENTS FROM BUYER IN THE EVENT OF A BREACH OF THIS AGREEMENT OR OTHERWISE. H-8 9. MISCELLANEOUS 9.1 Buyer agrees that, at Seller's discretion, both during the life of this Agreement and for a period of two years from the expiration or termination hereof Seller or an accounting firm selected by Seller may examine Buyer's books and records solely for the purpose of verifying compliance with this Agreement. Seller shall hold and shall cause any accounting firm selected by Seller to hold the information so received by it in confidence. In the event that the books and records show that Seller was underpaid under this agreement, Buyer shall immediately pay the overdue amount to Seller and shall pay all the costs of the accounting examination. 9.2 Neither this Agreement nor any of Buyer's rights or duties hereunder shall be assigned or otherwise transferred by Buyer without Seller's prior written consent. 9.3 Buyer and Seller agree that each is an independent contractor and neither is an agent, partner or joint venturer of the other, unless otherwise specified. No debts or obligations shall be incurred by either party in the other party's name or on its behalf, and neither party shall be responsible or liable for the debts and obligations of the other party. 9.4 Any waiver by either party of any of its rights hereunder shall be deemed applicable only to the specific event or matter then at hand and shall not be deemed a waiver or abandonment of any other rights hereunder; and this Agreement shall continue in full force and effect as though such previous waiver had not occurred. 9.5 If any provisions of this Agreement is found to be illegal, invalid or unenforceable, such finding will not affect the legality, validity or enforceability of the other provisions of this Agreement, which will remain in effect. 9.6 Neither of the parties to this Agreement shall be liable for any default or delay by an event or circumstances beyond the reasonable control of such party. The party affected shall use every reasonable effort to eliminate or correct the cause preventing performance hereunder as soon as possible. The provisions of this Section 9.6 shall not apply to any obligations under this Agreement of either party to pay the other party any amounts owing hereunder. 9.7 This Agreement hereto constitutes the entire agreement between the parties with regard to the subject matter of this Agreement and supersedes all previous communications, whether oral or written, between the parties with respect to such subject matter. Neither the course of conduct between the parties nor trade usage shall modify or alter this Agreement. If either party issues a purchase order or other writing addressing the subject matter of this Agreement, such purchase order or writing shall be for such party's internal purposes only, and the terms and conditions contained therein shall have no force or effect. 9.8 This Agreement is governed by the laws of the State of Maryland, without regard to the conflict rules thereof, and each party submits to the exclusive jurisdiction of that State. 9.9 Any notice required or permitted under this Agreement shall be given in accordance with Section 11.5 of the Purchase Agreement. H-9 IN WITNESS WHEREOF, each of the parties has caused this Agreement to e duly executed and delivered in its name and on its behalf as of the date first set forth above. SELLER: KIRKEGAARD & PERRY LABORATORIES, INC. By: /s/ Albert Perry ---------------- Name: Albert Perry Title: President BUYER: SYNBIOTICS CORPORATION By: /s/ Michael Green ----------------- Name: Michael Green Title: Vice President - Finance H-10 SCHEDULE 1 ---------- Poultry Diagnostic Kits Catalog Number Poultry Elisa Kit Tests Per Kit - -------------- ----------------- ------------- 54-90-01 Infectious Bursal disease Plus (IBD+) 450 54-81-01 Infectious bursal Disease (IBD) 900 54-82-01 Infectious Bronchitis Virus (IBV) 900 54-83-01 Newcastle Disease Virus (NDV) 900 54-84-01 Avian Reovirus (REO) 900 54-87-05 MG/MS Combination 900* *Kit contains 450 tests for each agent 54-86-01 Avian Encephalomyelitis Virus (AE) 900 54-93-01 Infectious laryngotracheitis (LT) 900 54-95-01 Avian Leukosis virus (ALV), antigent detection 900 54-77-01 Pasteurella multocida (PM) 900 54-87-06 AE-IBV-IBD-NDV-REO Combination 900* *Kit contains 450 tests for each agent 54-85-01 Mycoplasma gallisepticum (MG) 900 54-96-01 Mycoplasma synoviae (MS) 900 54-78-01 Avian Influenza Virus (AIV) 900 54-80-01 Chicken Anemia Virus (CAV) 450 54-88-01 Avian Leukosis Virus, subgroup J (ALV-J) 450 54-99-01 Hemorrhagic Enteritis Virus (HEV) 900 54-72-01 Bordetella avium (BA) 900 54-89-01 Pasteurella nultocida (PM) 900 54-92-01 New Castle Disease Virus (NDV) 900 54-94-01 Mycoplasma gallisepticum (MG) 900 54-97-01 Mycoplasma synoviae (MS) 900 54-98-01 Mycoplasma meleagridis (MM) 900 86-12-10 Profile Software Ver. 3.0, 3.5" 86-12-11 Profile Software Ver. 3.0, 5.25" 454-9199 Broad Spectrum Salmonella 40 454-9194 Group-D Salmonella 40 454-9293 Campylobactor Species 40 454-9590 E-Coli 0157 40 I-11 EXHIBIT J --------- INTELLECTUAL PROPERTY ASSIGNMENT This Intellectual Property Assignment is entered into this 18th day of April 2000 by and among KIRKEGAARD & PERRY LABORATORY, INC., a Maryland corporation ("Assignor"), and SYNBIOTICS CORPORATION, a California corporation ("Assignee"). WHEREAS, Assignee and Assignor are parties to that certain Asset Purchase Agreement dated April 18, 2000 (the "Purchase Agreement") (initially capitalized terms used herein and not otherwise defined herein shall have the meanings given to such terms in the Purchase Agreement); and WHEREAS, the execution and delivery of this Intellectual Property Assignment is a condition precedent to Assignee's obligations under the Purchase Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Assignor assigns to Assignee, and Assignee hereby accepts such assignment of, Assignor's entire right, title and interest in and to all of the Transferred Intellectual Property (as such intellectual property is defined and described in paragraph (h) of Exhibit B-1 to the Purchase Agreement, including, without limitation, all rights to damages and payments for past, present or future infringements or misappropriations thereof in all countries and the goodwill of the Poultry Diagnostic Business and operations of the Assignor associated with the Transferred Intellectual Property. 2. The rights, title and interest assigned under Section 1 above shall be --------- for Assignee's own use and enjoyment, and for the use and enjoyment of Assignee's successors, assigns or other legal representatives, as fully and entirely as the same would have been held and enjoyed by Assignor if this assignment and sale had not been made. 3. Assignor authorizes and requests the Commissioner of Patents and Trademarks of the United States, and an official of any country or countries foreign to the United States, whose duty it is to register patents, trademarks or copyrights, to record Assignee as the assignee and owner of the Transferred Intellectual Property, to the extent such recordation is required by law for the effective transfer thereof. 4. Concurrently with the execution of this Intellectual Property Assignment, Assignor shall deliver the original papers, applications, and other official documents relating to all patents and trademarks, and other Transferred Intellectual Property, assigned under Section 1 above (to the extent such --------- transfer is permitted under applicable law). 5. Assignor hereby covenants and agrees that it shall cease and refrain from all use of all rights, title, and interests assigned under Section 1 above --------- in all countries of the world as of the date hereof, except as permitted or contemplated under the Transitional Manufacturing and Supply Agreement of even date herewith, by and between Assignor and Assignee (the "Manufacturing Agreement") and the License and Technical Assistance Agreement of even date herewith, between Assignor and Assignee (the "License Agreement"). 6. With respect to the Transferred Intellectual Property, Assignor will, from and after the Closing Date (i) use the same level of its effort to keep such Transferred Intellectual Property confidential as it uses to protect its own confidential information (except that Assignor may not make any disclosure of the Transferred Intellectual Property to any acquiror or investor who directly competes or indicates an intent to compete with Assignee in the production and distribution of poultry diagnostic products (a "Competitor"), or to any Competitor which the Assignor is proposing to acquire, invest in or otherwise partner with, including continuing to protect the confidential nature of such Transferred Intellectual Property as if the sale provided for in the Purchase Agreement had not occurred), (ii) not disclose the Transferred Intellectual Property to any third party, except as permitted or required under applicable law or as permitted or contemplated under the Manufacturing Agreement or License Agreement, and (iii) not use the Transferred Intellectual Property, except as permitted or contemplated under the Manufacturing Agreement or the License Agreement. From time to time after the date hereof, Assignor will execute and deliver, or cause its affiliates to execute and deliver, to Assignee such instruments of sale, transfer, conveyance, assignment and delivery, and such consents, assurances, powers of attorney and other instruments as may be reasonably requested by Assignee or its counsel in order to vest in Assignee all right, title and interest of Assignor in and to the Purchased Assets and otherwise in order to carry out the purpose and intent of this Intellectual Property Assignment. 7. This Intellectual Property Assignment, together with the Purchase Agreement and all documents executed in connection with the Purchase Agreement, constitutes the entire agreement and understanding between and among the parties hereto with respect to the matters set forth herein, and supersedes and replaces any prior agreements and understandings, whether oral or written, between and among them with respect to such matters. Notwithstanding any other provisions of this Intellectual Property Assignment to the contrary, nothing contained in this Intellectual Property Assignment shall in any way supersede, modify, replace, amend, change, rescind, waive, exceed, expand, enlarge or in any way affect the provisions, including warranties, covenants, agreements, conditions, representations, or in general any of the rights and remedies, and any of the obligations and indemnifications of Assignor or Assignee set forth in the Purchase Agreement nor shall this Intellectual Property Assignment expand or enlarge any remedies under the Purchase Agreement including without limitation any limits on indemnification specified therein. This Intellectual Property Assignment is intended only to effect the transfer of certain property transferred pursuant to the Purchase Agreement and shall be governed entirely in accordance with the terms and conditions of the Purchase Agreement. 10. This Intellectual Property Assignment shall in all respects be construed in accordance with and governed by the laws of the State of Maryland without giving effect to its conflicts-of-laws principles. 11. This Intellectual Property Assignment may be executed by the parties herein in separate counterparts and by facsimile, each of which when so executed and delivered shall be an original, but all such counterparts and facsimile shall together shall constitute one and the same instrument. [SIGNATURE PAGE TO FOLLOW] J-2 IN WITNESS WHEREOF, each of the parties has caused this Agreement to be duly executed and delivered in its name and on its behalf as of the date first set forth above. SYNBIOTICS CORPORATION, KIRKEGAARD & PERRY LABORATORIES, INC., a California corporation a Delaware corporation By: /s/ Michael Green By: /s/ Albert Perry ----------------- ---------------- Name: Michael Green Name: Albert Perry Title: Vice President - Finance Title: President [SIGNATURE PAGE TO THE INTELLECTUAL PROPERTY ASSIGNMENT] J-3 ACKNOWLEDGMENT ) DISTRICT OF COLUMBIA ) ss. ) On April 19, 2000, before me, Carolyn Silva-Quagliato, Notary Public, personally appeared Michael Green and Albert Perry, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they respectively executed the same in their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the persons, or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. [SEAL] /s/ Carolyn Silva-Quagliato --------------------------- Notary Public in and for the aforesaid County and State J-4 EXHIBIT K --------- ARTICLES OF TRANSFER FIRST: Kirkegaard & Perry Laboratories, Inc., a corporation organized and existing under the laws of the State of Maryland ("Transferor"), agrees to the sale of substantially all of its property and assets (sometimes referred to herein as the "Sale Transaction"), as set forth in the Purchase Agreement (as defined below). The terms and conditions thereof and the mode of carrying the same into effect are as set forth in the Asset Purchase Agreement, dated as of April 18, 2000, between the Transferee (as defined below) and the Transferor (the "Purchase Agreement"), and as set forth in these Articles of Transfer (the "Articles"). SECOND: The name of the transferee of such property and assets is Synbiotics Corporation, a California corporation (the "Transferee"), and the post office address of the principal place of business of such Transferee is 11011 Via Frontera, San Diego, California 92121. THIRD: The parties to these Articles are the Transferor and the Transferee, a corporation organized on the 25th day of March, 1982 under the General Corporation Law of the State of California. FOURTH: The nature and amount of the consideration to be paid, by or on behalf of the Transferee, for the assets of the Transferor to be sold to Transferee in the Sale Transaction are as follows: Transferee will (a) pay Transferor an aggregate of up to $6,000,000 for certain assets of Transferor, such payment consisting of (i) a $3,500,000 cash payment, (ii) additional cash payments in the future equal to, in the aggregate, $1,000,000, subject to certain terms, including the eventual transfer by Transferor to Transferee of certain manufacturing operations of Transferor relating to products in the poultry diagnostic business, and (iii) certain royalty payments over a specified period of years based on worldwide sales of products in the poultry diagnostic business, which payments are not to exceed, in the aggregate, $1,500,000, and (b) assume certain liabilities of Transferor, all as set forth in the Purchase Agreement. FIFTH: The principal office of the Transferor is located in the County of Montgomery, State of Maryland. The Transferor owns no interest in land in the State of Maryland. SIXTH: The location of the principal office of the Transferee is 11011 Via Frontera, San Diego, California 92121, and the name and post office address of a resident agent of the Transferee in Maryland, service of process upon whom shall bind the Transferee in any action, suit or proceeding pending at the time of the filing of these Articles or thereafter instituted or filed against it under the provisions of Title 3 of the Corporations and Associations Article of the Annotated Code is Maryland is The Corporation Trust Incorporated, 300 Lombard Street, Baltimore, Maryland 21202. SEVENTH: The Sale Transaction was (a) duly advised by the Board of Directors of the Transferor adopting a resolution on March 20, 2000, declaring that said sale of all or substantially all of the property and assets of the Transferor herein proposed was advisable substantially upon the terms and conditions set forth in the Purchase Agreement and these Articles and directing that the Sale Transaction be submitted for action by the stockholders of the Transferor and (b) duly approved by the stockholders of Transferor by the unanimous written consent of stockholders entitled to vote thereon. EIGHTH: The Sale Transaction to be effected by these Articles was duly advised, authorized and approved by the Transferee in the manner and by the vote required by the laws of the State of California, the state of organization of the Transferee, and by the charter of the Transferee. K-2 IN WITNESS WHEREOF, Kirkegaard & Perry Laboratories, Inc. and Synbiotics Corporation, the parties hereto, have caused these Articles to be signed in their respective corporate names and on their behalf by their respective presidents (or vice-presidents) and witnessed by their respective duly authorized officers all as of the 18th day of April, 2000. Witnessed: KIRKEGAARD & PERRY LABORATORIES, INC. /s/ William Hearl By: /s/ Albert Perry - ----------------- ---------------- Name: William Hearl Name: Albert Perry Title: Executive Vice President Title: President Witnessed: SYNBIOTICS CORPORATION /s/ Paul A. Rosinack By: /s/ Kenneth M. Cohen - -------------------- -------------------- Name: Paul A. Rosinack Name: Kenneth M. Cohen Title: President, Animal Health Title: President and Chief Executive Officer K-3 THE UNDERSIGNED, President of Kirkegaard & Perry Laboratories, Inc., who executed on behalf of said corporation the foregoing Articles of Transfer of which this certificate is made a part, hereby acknowledges, in the name and on behalf of said corporation, the foregoing Articles of Transfer to be the corporate act of said corporation and further certifies that, to the best of his knowledge, information and belief, the matters and facts set forth herein with respect to the approval thereof are true in all material respects, under the penalties of perjury. /s/ Albert Perry ---------------- Name: Albert Perry Title: President THE UNDERSIGNED, President and Chief Executive Officer of Synbiotics Corporation, who executed on behalf of said corporation the foregoing Articles of Transfer, of which this certificate is made a part, hereby acknowledges, in the name and on behalf of said corporation, the foregoing Articles of Transfer to be the corporate act of said corporation and further certifies that, to the best of his knowledge, information and belief, the matters and facts set forth therein with respect to the approval thereof are true in all material respects, under the penalties of perjury. /s/ Kenneth M. Cohen -------------------- Name: Kenneth M. Cohen Title: President and Chief Executive Officer K-4 EXHIBIT L --------- SELLER'S DISCLOSURE SCHEDULE FOR THE ASSET PURCHASE AGREEMENT BY AND BETWEEN SYNBIOTICS CORPORATION AND KIRKEGAARD & PERRY LABORATORIES, INC. DATED AS OF APRIL 18, 2000 Please refer to the Asset Purchase Agreement, dated as of April 18, 2000 (the "Agreement"), by and between Synbiotics Corporation, a California corporation ("Buyer), and Kirkegaard & Perry Laboratories, Inc., a Maryland corporation ("Seller"). These Schedules, which together comprise Seller's Disclosure Schedule under the Agreement, are being delivered with, and form part of, the Agreement. The Schedules are qualified in their entirety by reference to the specific provisions of the Agreement and are not intended to constitute, and shall not be construed as constituting, representations or warranties of Seller, except as and to the extent provided in the Agreement. In some respects, the Schedules may also provide information not strictly called for by the Agreement where it was thought that such additional information might be helpful. No implication should be drawn that any information provided in the Schedules is necessarily material or otherwise required to be disclosed or that the inclusion of such information establishes or implies a standard of materiality, a standard for what is or is not in the ordinary course of business or any other standard set forth in the Agreement. The following also pertains to the Schedules as they relate to the Agreement: At Buyer's request, various representatives of Seller have delivered, and may in the future deliver, to Buyer (outside of the Agreement and the Schedules) certain forecasts and estimates, including forecasts and estimates of revenues and costs and assessments of certain contingencies and reserves. Buyer has also received, and may in the future receive, during the conduct of its due diligence and business investigations, information with respect to Seller for the purpose of assisting Buyer in forming its own conclusions regarding the business and the financial condition of Seller. However, Seller makes no representation or warranty outside the Agreement and the Schedules with respect to such disclosures or information. Capitalized terms used in the Schedules shall, unless the context indicates otherwise, have the same meanings as in the Agreement. Seller has used its best efforts to cross reference sections of the Schedules and a reference in any Section or subsection of the Schedules to another Section or subsection shall be deemed to incorporate the matters so referenced. Headings have been inserted for convenience of reference only and shall not have the effect of amending or changing the content or meaning of the information disclosed in the Schedules. L-2 Section 2.3 - Title; Condition of Purchased Assets (a) Seller may not transfer or assign its rights to the United States Department of Agriculture ("USDA") licenses listed on the attached Attachment 2.3(a) (the "USDA Licenses"). Seller will provide the USDA with notice of its intent to manufacture the Products for and on behalf of Buyer pursuant to the Manufacturing Agreement utilizing such licenses. Buyer will have to obtain such licenses in its own name in order to directly manufacture the Products. (b) Pursuant to the applicable provisions of the License Agreements listed on the attached Attachment 2.3(b), Seller must obtain the consent of the licensors prior to assigning or transferring its right, title and interest in and to such license agreements to Buyer. Seller is in the process of obtaining such consents. (c) Pursuant to Section 5A and other applicable provisions of the Loan Agreement, dated April 3, 1998, between Bank of America, N.A. ("Bank") and Seller, as modified and extended (the "Loan Agreement"), Seller may not, without the Bank's prior written consent, sell, lease, assign or transfer any assets except in the normal cause of its business. Seller has obtained the Bank's consent to the transaction contemplated by the Agreement. (d) Pursuant to a Security Agreement, dated April 3, 1998, by and between Bank and Seller (the "Security Agreement"), Seller granted Bank a security interest in certain assets of Seller, including the Purchase Assets, to secure Seller's obligations under the Loan Agreement. (e) Many of Seller's distributor agreements may not be assigned by Seller without the prior written consent of the other party to such agreement, including the distributor agreements set forth on Attachment 2.3(c). Seller is in the process of obtaining such consents, but no assurance can be given that Seller will obtain all such consents prior to the Closing. L-3 [INTENTIONALLY LEFT BLANK] L-4 Attachment 2.3(a) ----------------- USDA Licenses -------------
KPL Product Effective Date Company License Code - -------------------------------- -------------------------------------------------------------- ---------------- ---------------- United States Department of Establishment - Non-Transferable 12/6//1990 Agriculture United States Department of Avian Encephalomyelitis Antibody Test Kit - code 5006 54-86-01 10/26/1992 Agriculture United States Department of Avian Influenze Virus Antibody Test Kit - Code 5004 54-78-01 7/1/1996 Agriculture United States Department of Avian Leukosis Virus Antigen Test Kit - Code 5007 54-88-01 4/13/1992 Agriculture United States Department of Bordetella Avium Antibody Test Kit - Code 5015 54-72-01 7/18/1994 Agriculture United States Department of Hemorrhagic Enteritis Antibody Test Kit - Code 57E1 54-99-01 5/12/1993 Agriculture United States Department of Infectious Bursal Disease Antibody Test Kit - Code 5040 54-81-01 9/11/1987 Agriculture United States Department of Infectious Bursal Disease Antibody Test Kit - Code 5040.01 54-90-01 3/23/1989 Agriculture United States Department of Infectious Bronchitis Virus Antibody Test Kit - Code 5030 54-82-01 2/3/1998 Agriculture United States Department of Fowl Laryngotracheitis Antibody Test Kit - Code 5601 54-93-01 10/31/1990 Agriculture United States Department of Mycoplasma Gallisepticum Antibody Test Kit - Code 5070 54-85-01 7/115/1991 Agriculture United States Department of Mycoplasma Gallisepticum Antibody Test Kit - Code 5070.01 54-94-01 7/5/1991 Agriculture United States Department of Mycoplasma Meleagrisis Antibody Test Kit - Code 51720 54-98-01 7/5/1991 Agriculture
L-5 United States Department of Mycoplasma Synoviae Antibody Test Kit - Code 5173 54-97-01 9/6/1991 Agriculture United States Department of Mycoplasma Synoviae Antibody Test Kit - Code 5173.01 54-96-01 7/3/1991 Agriculture United States Department of NewCastle Disease Antibody Test Kit - Code 5080 54-83-01 12/24/1987 Agriculture United States Department of NewCastle Disease Antibody Test Kit - Code 5080.01 54-92-01 5/16/1991 Agriculture United States Department of Pasteuralla Multocida Antibody Test Kit - Code 5130 54-77-01 1/4/1994 Agriculture United States Department of Pasteuralla Multocida Antibody Test Kit - Code 5130.01 54-89-01 10/24/1994 Agriculture United States Department of Avian Reovirus Antibody Test Kit - Code 5008 54-84-01 12/24/1987 Agriculture United States Department of Mycoplasma Gallisepticum-Synoviae Antibody Test Kit - Code 5074 54-87-05 1/22/1996 Agriculture United States Department of Avian Encephalcmyelitis-Bronchitis-Bursal Disease-NewCastle Disease- 54-87-06 3/11/1996 Agriculture Reovirus Antibody Test Kit Code - 5106
L-6 Attachment 2.3(b) License Agreements Requiring Consent to Assign Pursuant to the applicable clauses of the License Agreements between Seller and each of the USDA, University of Maryland and the Veterinary Infectious Disease Organization ("VIDO"), Seller must obtain the consent of the other party to such License Agreements prior to assigning them. L-7 Attachment 2.3(c) Distributor Agreements Requiring Consent to Assign Pursuant to the applicable clauses of the distributor agreements between Seller and each of the distributors listed below, Seller must obtain the consent of the other party to such distribution agreements prior to assigning them. (i) Modern Agropharmaceuticals and Trading Establishment (Lebanon, Syria, Jordan). (ii) Maya Laboratuar, Ltd. (Turkey). (iii) Chem-East (Hungary). (iv) Egytech (Egypt) (v) All-Russia Research Institute of Animal Health, ARRIAH (Russia and other former Soviet Union countries). L-8 Section 2.4 - No Violation See Section 2.3 for a description of the Loan Agreement and the Security Agreement. See Section 2.3(a) for a description of the consents required under the License Agreements. See Section 2.3(b) for a description of the consents required under Seller's distributor agreements. L-9 Section 2.5 - Governmental Authorities See Section 2.3 of the Seller's Disclosure Schedule with respect to the USDA Licenses and the notices to be provided by Seller to the USDA. L-10 Section 2.6 -Liabilities (a) Pursuant to a letter agreement dated December 15, 1999, Seller agreed to pay The Sage Group a success fee upon the sale of the Poultry Diagnostic Business. (b) Pursuant to a License Agreement, dated January 2000, between Seller and the University of Saskatchewan as represented by the Veterinary Infectious Disease Organization ("Vido") (the "Vido Agreement"), Seller owes Vido royalties totaling $9,000 on Product 54-99-01. (c) Pursuant to a Consulting Services Agreement dated July 19, 1997, between Innov Corporation ("Innov") and Seller (the "Innov Agreement"), Innov will provide support for the ProFILE software acquired from Innov by Seller. The Innov Agreement has a remaining term of 21 months. The balance of the fee owed by Seller to Innov under the Innov Agreement is $37,854.17. Upon payment of the balance of this fee, Innov will release the source code for the ProFILE software to Buyer. L-11 Section 2.7 - Purchased Assets; Purchase Orders. (a) The Purchased Assets do not include any office furniture or equipment or any of the following types of laboratory equipment: laboratory benches, general laboratory equipment, pumps, tanks, general laboratory glassware, centrifuges and rotors, single and multi-channel pipettes, computers, ELISA plate readers, refrigerators and freezers, ultra-freezer, cold room, tissue culture hoods, incubators, plate storage cabinets, liquid fill dispensers, liquid concentrators or solution formulation tanks/mixers. Buyer will need to obtain a fully equipped laboratory containing the types of equipment noted above in order to operate the Poultry Diagnostic Business in all material respects in the same manner as the Poultry Diagnostic Business was operated by Seller prior to the Closing. (b) Certain of the Purchased Assets have been pledged by Seller to the Bank pursuant to the Security Agreement. L-12 Section 2.8 - Litigation None L-13 Section 2.9 - Contracts (a) Attached hereto as Attached 2.9(a) is a list of Seller's distributor agreements and arrangements which are in effect as of the date hereof (b) Item (2) of Attachment 2.9(a) sets forth a list of the distributors whose written distribution agreements with Seller have expired but who continue to distribute Seller's poultry diagnostic products on behalf of Seller. (c) Item (3) of Attachment 2.9(a) sets forth a list of the distributors with whom Seller has oral arrangements providing for the distribution of Seller's poultry diagnostic products by such distributors. (d) See Section 2.12 for a description of the License Agreements. (e) See Section 2.3(b) for a description of the License Agreements for which Seller must obtain the applicable licensor's consent in order to assign such License Agreements to Buyer. (f) Attached hereto as Attachment 2.9(b) is a list of the Relevant Contracts that provide for annual payments to or from Seller in excess of $25,000. (g) See Section 2.9 for a description of the Innov Agreement. (h) Seller has engaged AgroBio Tek Laboratories as its sales agent to represent Seller in Central America, Latin America and South America. L-14 Attachment 2.9(a) Distributor Summary 1. Set forth below is a summary of the parties with whom Seller has written agreements that are currently in effect providing for the distribution of poultry diagnostic products: Distributor Document Type Expiration Chem-East Agreement January 2001 Egytech Agreement August 1, 2003 Hester Pharmaceuticals Agreement August 31, 2000 Modern Agropharmaceuticals Est. Agreement January 1, 2001 Seravian, S. L. Agreement March 31, 2000 2 Set forth below is a list of the parties with whom Seller has previously entered into written agreements which have expired. Notwithstanding the expiration of such agreements, Seller continues to distributes products through such distributors. Distributor Document Type Expiration Agricultural Development Agreement January 1998 Avenida & Associates Inc. Letter of Intent August 31, 1994 BTI Agreement March 15, 1992 Bio Diagnostics SND. BHD. Letter N/A FELCO Statement N/A Golbid Co. Ltd Agreement January 1998 (EMBARGO) Intertech (formerly Biovida) December 31, 1998 La Ensenada Letter of Intent N/A LSI Agreement January 1998 Maya Laboratuar, Ltd. Agreement January 27, 1999 Merial (formerly ISBI) Agreement December 31, 1998 Nippon Biological Agreement June 30, 1999 Tseng Hsiang Life Sciences Statement N/A WardMedic Limited Agreement August 31, 1994 Veterquimica Letter N/A L-15 3.Set forth below is a list of the parties with whom Seller has oral arrangements providing for the distribution of poultry diagnostic products: Bio-Mediq DPC Carval De Colombia Fort Dodge Animal Health Korman Biotech (terminated) Productos Quimicos Magiar SA PT Satwa Jawa Jaya Rhenium Ltd. L-16 Attachment 2.9(b) Innov Agreement L-17 Section 2.10 - Compliance with Law None L-18 Section 2.11- Licenses, Permits and Authorizations (a) Attached hereto as Attachment 2.11(a) is a summary of Seller's export permits. (b) See Section 2.3(a) for a description and listing of the USDA Licenses (c) See Section 2.12(a) for a description of Seller's registered trademarks. (d) See Section 2.3 for a description of the Loan Agreement. L-19 Attachment 2.11(a) Export Permits (a) Government of Canada Permit to Import Veterinary Biologics Permit No. D10/K3 Government of Canada Permit to Import Veterinary Biologics Permit No. P6.10/K3 Government of Canada Permit to Import Veterinary Biologics Permit No. C10/K3 Government of Canada Permit to Import Veterinary Biologics Permit No. C5.11/K3 Government of Canada Permit to Import Veterinary Biologics Permit No. A-1999-02186-4 Government of Canada Permit to Import Veterinary Biologics Permit No. C27/K3 (b) Japan requires importers of poultry diagnostic products to obtain permits to import samples of such products into Japan. Seller's Japanese distributor has obtained such a permit. Other countries impose similar requirements. Such permits are typically acquired by Seller's distributors. (c) Prior to distributing Mycoplasma diagnostic kits in certain states, Seller must obtain the approval of the applicable state authorities. As of April 18, 2000, Seller has obtained approval from the applicable state officials in all fifty states to distribute such kits, with the exception of the States of Idaho and North Dakota and the Commonwealth of Massachusetts. Certain states have authorized Seller to distribute these diagnostic kits to specific laboratories in such states and/or have limited the types of diagnostic kits that may be distributed in such states. A list of these states and the restrictions imposed are set forth below. (1) Alabama - C.S. Roberts Diagnostic Lab, Auburn, AL (2) Florida: Florida Dept. of Agriculture and Consumer Services, Animal Disease Diagnostic Lab, Kissimmee, FL. (3) Hawaii: USDA approved diagnostic labs only (4) Indiana: Turkey - all state and commercial labs; Chicken - NPIP approved labs and Purdue Animal Disease Diagnostic Lab, West Lafayette, IN. (5) Iowa: Turkey - All state and commercial labs, Chicken - NVSL, Ames, IA; Veterinary Diagnostic Lab, Iowa State University, L-20 Ames, IA; Drs. Koehnk and Feldman, Jewell, IA; Hy-Vac Lab Egg Co., Gowrie, IA; Hy-Line International. Dallar Center, IA. (6) Kentucky: Chicken Only - USDA/APHIS/VS, Frankfort, Livestock Disease Diagnostic Ctr., U. of Kentucky, Lexington, KY; Murray State University, Breathitt Veterinary Center, Hopkinsville, KY (7) Maine: Chicken Only (8) Minnesota: Solvay - Salsbury Labs, Mendota Heights, MN; Willmar Poultry Co., Willmar, MN; U. of Minn., St. Paul, MN; State Poultry Testing Lab, Willmar, MN; Brinton Labs, Willmar, MN; Dr. M.C. Kumar, Atwater Lab, Atwater, MN. (9) Montana: Dr. William Quinn, Montana Dept. of Livestock Diagnostic Lab, Bozeman, MT. (10) Nevada: Animal Disease Lab, Nevada Dept. of Agriculture, Reno, NV. (11) New York: New York State Diagnostic Lab, Cornell University, Ithaca, NY; C.P. (USA) Inc., NY, NY. (12) North Carolina: Cuddy Farms, Marshville, NC; Carroll's of Warsaw, Warsaw, NC; Goldsboro Milling, Goldsboro, NC; Talley Farms, Stanfield, NC; Louis Rich Company, Wingate, NC; Dr. David Ley, NC State University, College of Veterinary Medicine, Raleigh, NC; Tarheel Hatchery, Raeford, NC; Prestage Farms, Clinton, NC. (13) Ohio: Chicken Only (14) Oregon: Department of Agriculture and Animal Health (all diagnostic products must be registered with the Oregon Department of Agriculture and a $65 fee paid for each product (one time) prior to sale). (15) Rhode Island: Department of Health, Providence, RI. (16) South Dakota: South Dakota Veterinary Diagnostic Lab, Brookings, SD. (17) Utah: Turkey Only (18) Vermont: Vermont Dept. of Agriculture, Food and Markets Lab, Waterbury, VT. (19) Wyoming: Wyoming State Veterinary Lab, Laramie, WY. L-21 Section 2.12 - Intangible Property Rights (a) Attached hereto are Attachment 2.12(a) is a summary of the Seller's trademarks relating to or used in the Poultry Diagnostic Business (b) Attached hereto as Attachment 2.12(b) is a summary of the license agreements (the "License Agreements") to which Seller is a party pursuant to which Seller licenses intellectual property used in the Poultry Diagnostic Business. (c) Seller maintains laboratory notebooks and files that contain the product specifications and procedures for manufacturing the Seller's poultry diagnostic products. These notebooks and files are maintained at Seller's principal offices. (d) See Section 2.6 for a description of the Innov Agreement and the ProFILE software. L-22 Attachment 2.12(a) Trademarks Country Registration No. Effective Date Expiration Date United States No. 1,561,761 10/24/1989 10/24/2009 France No. 1,148,880 3/16/1989 3/16/2009 Benelux No. 462,552 3/11/1999 4/18/2009 United Kingdom No 1,368,834 12/12/1995 12/12/2005 Portugal No. 255,395 10/20/1992 10/20/2002 Spain No. 1,315,229 6/5/1991 6/5/2011 L-23 Attachment 2.12(b) License Agreements Licensor Subject Matter of License - -------------------------------------------------------------------------------- Univ. of Maryland IABDV e/Del Recombinant C12 Univ. of Maryland CAV - Monoclone, R25 Cell Line R63 and mab 8 Univ. of Maryland R63 and mab 8 Univ. of Maryland Influenza Group A Specific Monoclonal Antibodies: LS-98-070 USDA Avian Leukosis Virus Subgroup J Envelope Gene VIDO Hybridoma Cell Line (15 G 4) L-24 Section 2.13 - Tax Matters None. L-25 Section 2.14 - Environmental and Safety Matters None. L-26 Section 2.15 - Customers and Suppliers (a) Attached hereto as Attachment 2.15(a) is Seller's customer list as of March 31, 2000. (b) Attached whereto as Attachment 2.15(b) is a list of Seller's suppliers as of March 31, 2000. L-27 EXHIBIT M --------- BUYER'S DISCLOSURE SCHEDULE FOR THE ASSET PURCHASE AGREEMENT BY AND BETWEEN SYNBIOTICS CORPORATION AND KIRKEGAARD & PERRY LABORATORIES, INC. DATED AS OF APRIL 18, 2000 Section 3.4 - Governmental Authority None M-2 Section 3.5 - Consents None M-3 Section 3.6 - Litigation 1. Synbiotics v. Heska, U.S. District Court, Southern District M-4 Section 3.7 - Securities and Exchange Commission Reports 1. Annual Report - Form 10-KSB filed on April 13, 2000 2. Amended Quarterly Report - Form 10-QSB filed on April 13, 2000 3. Amended Quarterly Report - Form 10-QSB filed on April 13, 2000 4. Amended Quarterly Report - Form 10-QSB filed on April 13, 2000 5. Amended Quarterly Report - Form 10-QSB filed on April 13, 2000 6. Quarterly Report - Form 10-QSB filed on November 15, 1999 7. Quarterly Report - Form 10-QSB filed on August 16, 1999 8. Quarterly Report - Form 10-QSB filed on May 14, 1999 9. Annual Report - Form 10-KSB filed on March 30, 1999 10. Quarterly Report - Form 10-QSB filed on November 16, 1998 11. Quarterly Report - Form 10-QSB filed on August 14, 1998 12. Quarterly Report - Form 10-QSB filed on May 15, 1998 13. Annual Report - Form 10-KSB filed on April 14, 1998 14. Quarterly Report - Form 10-QSB filed on November 14, 1997 15. Quarterly Report - Form 10-QSB filed on August 14, 1997 16. Quarterly Report - Form 10-QSB filed on May 14, 1997 17. Annual Report - Form 10-KSB filed on March 31, 1997 M-5 EX-10.1 3 0003.txt LEASE Exhibit 10.1 ------------ STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE--MODIFIED NET AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION 1. Basic Provisions ("Basic Provisions") 1.1 Parties: This Lease ("Lease"), dated for reference purposes only, November 20, 1996, is made by and between Bernardo View Ltd. ("Lessor") and Synbiotics Corporation, a California Corporation (Lessee"), (collectively the "Parties," or individually a "Party"). 1.2(a) Premises: That certain portion of the Building, including all improvements therein or to be provided by Lessor under the terms of the Lease, commonly known by the street address of 11011 Via Frontera, located in the City of San Diego, County of San Diego, State of California, with zip code 92127, as outlined on Exhibit ___ attached hereto ("Premises). The "Building" is that certain building containing the Premises and generally described as (describe briefly the nature of the Building): A multi-tenant concrete tilt-up R&D/Industrial Building consisting of approximately 15,447 square feet in an "as is" condition. See Exhibit A. In addition to Lessee's rights to use and occupy the Premises and hereinafter specified, Lessee shall have non-exclusive rights to the Common Areas (as defined in Paragraph 2.7 below) as hereinafter specified, but shall not have any rights to the roof, exterior walls or utility raceways of the Building or to any other buildings in the Industrial Center. The Premises, the Building, the Common Areas, the land upon which they are located, along with all other buildings and improvements thereon, are herein collectively referred to as the "Industrial Center." (Also see Paragraph 2.) 1.2(b) Parking: N/A unreserved vehicle parking spaces ("Unreserved Parking Spaces"); and N/A reserved vehicle parking spaces ("Reserved Parking Spaces"). (Also see Paragraph 2.6) See Paragraph 49 for Parking Provisions. 1.3 Term: Five (5) years and 0 months ("Original Term") commencing January 1, 1997 ("Commencement Date") and ending December 31, 2002 ("Expiration Date"). (Also see paragraph 3.) 1.4 Early Possession: N/A ("Early Possession Date"). (Also see Paragraphs 3.2 and 3.3.) 1.5 Base Rent: $10,349.49 per month ("Base Rent"), payable on the 1st day of each month commencing January 1. 1997 (Also see Paragraph 4.) [ ] If this box is checked, this lease provides for the Base Rent to be adjusted per Addendum __ , attached hereto. 1.6(a) Base Rent Paid Upon Execution: $ N/A as Base Rent for the period N/A. 1.6(b) Lessee's Share of Common Area Operating Expenses: Twenty & 56/100 percent (20.56%) ("Lessee's Share") as determined by [ ] prorata square footage of the Premises as compared to the total square footage of the Building or [ ] other criteria as described in Addendum __. 1.7 Secutity Deposit $11,000.00 ("Security Deposit"). (Also see Paragraph 5.) 1.8 Permitted Use: Office, laboratory and light manufacturing of the type conducted by Synbiotics Corporation. ("Permitted Use".) (Also see Paragraph 6.) 1.9 Insuring party. Lessor is the "Insuring Party." (Also see Paragraph 8.) 1.10(a) Real Estate Brokers. The following real estate broker(s) (collectively, the "Brokers:) and brokerage relationships exist in this transaction and are consented to by the Parties (check applicable boxes): [ ] _______________represents Lessor exclusively ("Lessor's Broker"); [ ] _______________represents Lessee exclusively {"Lessee's Broker"); or [x] The Sanders Company represents both Lessor and Lessee ("Dual Agency). (Also see Paragraph 1.5.) 1 1.10(b) Payment to Brokers. Upon the execution of this Lease by both Parties, Lessor shall pay to said Broker(s) jointly, or in such separate shares as they may mutually designate in writing, a fee as set forth in a separate shares as they may mutually designate in writing, a fee as set for in a separate written agreement between Lessor and said Broker(s) or in the event there is no separate written agreement between Lessor and said Broker(s), the sum of $33,317.35 or brokerage services rendered by said Broker(s) in connection with this transaction. 1.11 Guarantor. The obligations of the Lessee under this Lease are to be guaranteed by __________ ("Guarantor"). (Also see Paragraph 37.) 1.12 Addenda and Exhibits. Attached hereto is an Addendum or Addenda consisting of Paragraphs 49 through 56, and Exhibit A, all of which constitute a part of this Lease. 2. Premises, Parking and Common Areas. 2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term at the rental, and upon all of the terms, covenants and conditions set forth in the Lease. Unless otherwise provided herein, any statement of square footage set forth in the Lease, or that may have been used in calculating rental and/or Common Area Operating Expenses, is an approximation which Lessor and Lessee agree in reasonable and the rental and Lessee's Share (as defined in Paragraph 1.6(b) based thereon is not subject to revision whether or not the actual square footage is more or less. 2.2 Condition. Lessor shall deliver the Premises to Lessee clean and free of debris on the Commencement Date and warrants to Lessee that the existing plumbing, electrical systems, like sprinkler systems, lighting, air conditioning and heating systems and loading doors, if any. in the Premises, other than those constructed by Lessee, shall be in good operating condition on the Commencement Date. If a non-compliance with said warranty exists as of the Commencement Date, Lessor shall, except as otherwise provided in the Lease, promptly alter receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with the warranty within thirty (30) days after the Commencement Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.3 Compliance with Covenants, Restrictions and Building Code. Lessor warrants that any Improvements (other than those constructed by Lessee or at Lessee's direction) on or in the Premises which have been constructed or installed by Lessor or with Lessors consent or at Lessor's direction shall comply with all applicable covenants or restrictions of record and applicable building codes, regulations and ordinances in effect on the Commencement Date. Lessor further warrants to Lessee that Lessor has no knowledge of any claim having been made by any governmental agency that a violation or violations of applicable building codes, regulations, or ordinances exist with regard to the Premises as of the commencement Date. Said warranties shall not apply to any Alterations or Utility Installations (defined in Paragraph 7.3(a)) made or to be made by lessee. If the premises do not comply with said warranties, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee given within six (6) months following the Commencement Date and setting forth with specificity the nature and extent of such non-compliance, take such action, at lessor's expense, as may be reasonable or appropriate to rectify the non-compliance. Lessor makes no warranty that the Permitted Use in Paragraph 1.8 is permitted for the Premises under Applicable Laws (as defined in Paragraph 2.4). 2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it has been advised by the Broker(s) to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical and fire sprinkler systems, security, environmental aspects, seismic and earthquake requirements, and compliance with the Americans with Disabilities Act and applicable zoning, municipal, county, state and federal laws, ordinances and regulations and any covenants or restrictions of record (collectively, "Applicable Laws") and the present and future suitability of the Premises for Lessee's intended use; (b) that Lessee has made such investigation as it deems necessary with reference to such matter, is satisfied with reference thereto and Assumes all responsibility therefore as the same relate to Lessee's occupancy of the Premises and/or the terms of the Lease; and (C) that neither Lessor, nor any of lessor's agents, as had any oral or written representations or warranties with respect to said matters other that as set forth in the Lease. 2.5 Lessee as Prior Owner/Occupant. The warranties made by Lessor in the Paragraph 2 shall be of no force or effect if immediately prior to the date set forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such event, Lessee shall, at Lessee's sole cost and expense correct any non compliance of the Premises with said warranties. 2 2.6 Vehicle Parking. Lessee shall be entitled to use the number of Unreserved Parking Spaces and Reserved Parking Spaces specified in Paragraph 1.2(b) on those portions of the Common Areas designated from time to time by Lessor for parking. Lessee shall not use more parking spaces than said number. Said parking spaces shall be used for parking by vehicles no larger than full- size passenger automobiles or pick-up trucks, herein called "Permitted Size Vehicles." Vehicles other than Permitted Size Vehicles shall be parked and loaded or unloaded as directed by Lessor in the Rules and Regulations (as defined in paragraph 40) issued by Lessor. (Also see Paragraph 2.9.) (a) Lessee shall not permit or allow any vehicles that belong to or are controlled by Lessee or Lessee's employees, suppliers, shippers, customers, contractors or invitees to be loaded, unloaded, or parked in areas other that those designated by lessor for such activities. (b) If Lessee permits or allows any of the prohibited activities described in the Paragraph 2.6, then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. (c) Lessor shall at the Commencement Date of this lease, provide the parking facilities required by Applicable Law. 2.7 Common Areas - Definition. The term "Common Areas" is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Industrial Center and Interior utility raceways within the Premises that are provided and designated by the lessor from time to time for the general non-exclusive use of Lessor, Lessee and other lessees of the Industrial Center and their respective employers, suppliers, shippers, customers, contractors and invitees, including parking areas, loading and unloading areas, trash areas roadways, sidewalks, walkways, parkways, driveways and landscaped areas. 2.8 Common Areas - Lessee's Rights. Lessor hereby grants to Lessee, for the benefit of Lessee and its employees, suppliers, shippers, contractors, customers and invitees, during the term of this lease, the non-exclusive right to use, in common with others entitled to such use, the Common Areas as they exist from time to time, subject to any rights, powers, and privileges reserved by lessor under the terms hereof or under the terms of any rules and regulations or restrictions governing the use of the Industrial Center. Under no circumstances shall the right herein granted to use the Common Areas be deemed to include the right to store any property, temporally or permanently, in the Common Areas. Any such storage shall be permitted only by the prior written consent of Lessor or Lessor's designated agent, which consent may be revoked at any time. In the event that any unauthorized storage shall occur then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove the property and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.9 Common Areas - Rules and Regulations. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to establish, modify, amend and enforce reasonable Rules and Regulations with respect thereto in accordance with Paragraph 40. Lessee agrees to abide by and conform to all such Rules and Regulations, and to cause its employees, supplier, shippers, customers, contractors and invitees to so abide and conform. Lessor shall not be responsible to Lessee for the non-compliance with said rules and regulations by other lessees of the Industrial Center. 2.10 Common Area - Changes, Lessor shall have the right, in Lessor's sole discretion, from time to time: (a) To make changes to the Common Areas, including, without limitation, changes in the location, size, shape and number of driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas, walkways and utility raceways; (b) To Close temporarily any of thy Common Areas for maintenance purposes so long as reasonable access to the Premises remains available; (c) To designate other land outside the boundaries of the Industrial Center to be a part of the Common Areas; (d) To add additional buildings and improvements to the Common Areas; 3 (e) To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Industrial Center, or any portion thereof; and (f) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Industrial Center as lessor may, in the exercise of sound business judgment, deem to be appropriate, 3. Term 3.1 Term. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 3.2 Early Possession. If an Early Possession Date is specified in Paragraph 1.4, and if Lessee totally or partially occupies the Premises after the Early Possession Date but prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early occupancy. All other terms of this Lease, however, (including but limited to the obligations to pay Lessee's Share of Common Area Operating Expenses and to carry the Insurance required by Paragraph 8) shall be in effect during such period. Any such early possession shall not affect nor advance the Expiration Date of the Original Term. 3.3 Delay in Possession. If for any reason, Lessor cannot deliver possession of the Premises to Lessee by the Early Possession Date, if one is specified in Paragraph 1.4, or if no Early Possession Date is specified, by the commencement Date, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this lease, or the obligations of Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not, except as otherwise provided herein, be obligated to pay rent or perform any other obligation of Lessee under the terms of this lease until Lessor delivers possession of the Premises to Lessee. If possession of the Premises is not delivered to Lessee within sixty (60) days after the Commencement Date, Lessee may, at its option, by notice in writing to Lessor within ten (10) days after the end of said sixty (60) day period, cancel this lease. In which event the parties shall be discharged from all obligations hereunder; provided further, however, that if such written notice of Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease hereunder shall terminate and be of no further force or effect. Except as may be otherwise provided, and regardless of when the Original Term actually commences, if possession is not tendered to Lessee when required by this Lease and Lessee does not terminate this Lease, as aforesaid, the period free of the obligation to pay Base Rent, if any, that Lessee would have otherwise enjoyed under the terms hereof, but minus any days of delay caused by the acts, changes or omissions of Lessee. 4. Rent 4.1 Base Rent. Lessee shall pay Base Rent and other rent or charges, as the same may be adjusted from time to time, to Lessor in lawful money of the United States, without offset or deduction, on or before the day on which it is due under the terms of this Lese. Base Rent and all other rent and charges for any period during the term hereof which is for less than one full month shall be prorated based upon the actual number of days of the month involved. Payment of Base Rent and other charges shall be made to Lessor at its address stated herein or to such other persons or at such other addresses as Lessor may from time to time designate in writing to Lessee. 4.2 Common Area Operating Expenses. Lessee shall pay to Lessor during the term hereof, in addition to the Base Rent, Lessee's Share (as specified in Paragraph 1.6(b) of all Common Area Operating Expenses, as hereinafter defined, during each calendar year of the term of this Lease, in accordance with the following provisions: (a) "Common Area Operating Expenses" are defined, for purposes of the Lease, as all costs incurred by Lessor relating to the ownership and operation of the Industrial Center, Including, but not limited to the following: (i) The Operation, repair and maintenance, in neat clean good order and condition, of the following: (aa) The Common Areas, including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways, landscaped areas, striping, bumpers, Irrigation systems, Common Area lighting facilities, fences and gates, elevators and roof. (bb) Exterior signs and any tenant directories. (cc) Fire detection and sprinkler systems. 4 (ii) The cost of water, gas, electricity and telephone to service the Common Areas. (iii) Trash disposal, property management and security services and the costs of any environmental inspections. (iv) Reserves set aside for maintenance and repair of Common Areas. (v) Real Property Taxes (as defined in Paragraph 10.2) to be paid by lessor for the Building and Common Areas under Paragraph 10 hereof. (vi) The cost of the premiums for the Insurance policies maintained by Lessor under Paragraph 8 hereof. (vii) Any deductible portion of an insured loss concerning the Building or the Common Areas. (viii) Any other services to be provided by Lessor that are stated elsewhere in the Lease to be a Common Operating Expense. (b) Any Common Area Operating Expenses and Real Property Taxes that are specifically attributable entirely to the Building or to any other building in the Industrial Center or to the operation, repair and maintenance thereof, shall be allocated entirely to the Building or to such other building. However, any Common Area Operating Expenses and Real Property Taxes that are not specifically attributable to the Building or to any other building or to the operation, repair and maintenance thereof, shall be equitable allocated by Lessor to all buildings in the Industrial Center. (c) The inclusion of the improvements, facilities and services set forth in Subparagraph 4.2(a) shall not be deemed to impose an obligation upon Lessor to either have said improvements or facilities or to provide those services unless the Industrial Center already has the same, Lessor already provides the services, or Lessor has agreed elsewhere in this lease to provide the same or some of them. (d) Lessee's Share of Common Area Operating Expenses shall be payable by Lessee within ten (10 days after a reasonably detailed statement of actual expenses in presented to Lessee by Lessor. At Lessor's option, however, an amount may be estimated by Lessor from time to time of Lessee's Share of actual expenses is presented to Lessee by Lessor. At lessor's option, however, an amount may be estimated by Lessor from time to time of Lessee's Share of annual Common Area Operating Expenses and the same shall be payable monthly or quarterly, as Lessor shall designate, during each 12-month period of the Lease term, on the same day as the Base Rent is due hereunder. Lessor shall deliver to Lessee within sixty (60) days after the expiration of each calendar year a reasonably detailed statement showing Lessee's Share of the actual Common Area Operating Expenses incurred during the preceding year. If lessee's payments under this Paragraph 4.2(d) during said preceding year exceed Lessee's Share as indicated on said statement, Lessor shall be credited the amount of such overpayment against Lessee's Share of Common Area Operating Expenses next becoming due. If Lessee's payments under this Paragraph 4.2() during said preceding year were less than Lessee's Share as indicated on said statement, Lessee shall pay to Lessor the amount of the deficiency within ten (10) days after delivery by Lessor to Lessee of said statement. 5. Security Deposit. Lessee shall deposit with the lessor upon Lessee's execution hereof the Security Deposit with Lessor upon Lessee's execution hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful performance of Lessee's obligations under this Lease. If Lessee fails to pay Base Rent or charges due hereunder, or otherwise Defaults under this Lease (as defined in Paragraph 13.1) , Lessor may use apply or retain all or any portion of said Security Deposit for the Payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, cost, expenses, loss or damage (including attorney's fees) which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request therefore deposit monies with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. Any time the base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit to the full amount required by this Lease. Any time the Base Rent increases during the term of this Lease, Lessee shall at all times bear the same proportion to the then current Base Rent as the Initial Security Deposit bears to the Initial Base Rent set forth in Paragraph 1.5. Lessor shall not be required to keep all or any part of the Security Deposit separate from its general accounts. Lessor shall, at the expiration or earlier termination of the term hereof and after Lessee has vacated the Premises, return to Lessee (or at Lessor's option, to the last assignee, if any; of Lessee's interest herein), that portion of the Security Deposit not used or applied by Lessor. Unless 5 otherwise expressly agreed in writing by Lessor, no part of the Security Deposit shall be considered to be held in trust, to bear interest or other increment for its use, or to be prepayment for any monies to paid by Lessee under this Lease. 6. Use 6.1 Permitted Use. (a) Lessee shall use and occupy the Premises only for the Permitted Use set forth in Paragraph 1.8, or any other legal use which is reasonably comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to the Premises or neighboring premises or properties. (b) Lessor hereby agrees to not unreasonably withhold or delay its consent to any written request by Lessee, Lessee's assignees or subtenants and by prospective assignees and subtenants of Lessee, its assignees and subtenants, for a modification of said Permitted Use, so long as the same will not impact the structural integrity of the improvements on the Premises or in the building or the mechanical or electrical systems therein, does not conflict with uses by other lessees, is not significantly more burdensome to the Premises or the Building and the improvements thereon, and is otherwise permissible pursuant to this Paragraph 6. If Lessor elects to withhold such consent, Lessor shall within five (5) business days after such request give a written notification of same, which notice shall include an explanation of Lessor's reasonable objections to the change in use. 6.2 Hazardous Substances (a) Reportable Uses Require Consent. The term "Hazardous Substance" as used in the Lease shall mean any product, substance, chemical material or waste whose presence, nature, quantity and/or intensity of existence, use, manufacture, disposal, transportation, spill, release or effect, either by itself or in combination with other materials expected to be on the Premises, is either; (i) potentially injurious to the public health, safety or welfare, the environment, or the Premises; (ii) regulated or monitored by an governmental authority; or (iii) a basis for potential liability of Lessor to any governmental agency or third party under any applicable status or common law theory. Hazardous Substance shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products or by-products thereof. Lessee shall not engage in any activity in or about the premises which constitutes a Reportable Use (a hereinafter defined) of Hazardous Substances without the express prior written consent of Lessor and compliance in a timely manner (at Lessee's sole cost and expense) with all Applicable Requirements (as defined in Paragraph 6.3) "Reportable Use" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and (iii) the presence in, on or about the Premises of a Hazardous Substance with respect to which any Applicable Laws require that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior consent, but upon notice to Lessor and in compliance with all Applicable Requirements, use any ordinary and customary materials reasonably required to be used by Lessee in the normal course of the Permitted Use, so long as such use is no a reportable Use and does not expose the Premises or neighboring properties to any meaningful risk of contamination or damage or expose Lessor to any liability thereof. In addition, Lessor may (but without any obligation to do so) condition its consent to any Reportable Use of any Hazardous Substance by Lessee upon Lessee's giving Lessor such additional assurance as Lessor, in its reasonable discretion, deems necessary to protect itself, the public, the Premises and the environment against damage, contamination or injury and/or liability therefor, including but not limited to the installation (and, at Lessor's option, removal on or before Lease expiration or earlier termination) of reasonably necessary protective modification to the Premises (such as concrete encasements) and/or the deposit of an additional Security Deposit under Paragraph 5 hereof. (b) Duty to inform Lessor. If lessee knows or has reasonable cause to believe that a Hazardous Substance has come to be located in, on, under or about the Premises or the Building, other than as previously consented to by Lessor, Lessee shall immediately give Lessor written notice thereof, together with a copy of any statement, report, notice, registration, application, permit, business plan, license, claim, action, or proceeding given to, or received from, any governmental authority or private party concerning the presence, spill, release, discharge of, or exposure to, such Hazardous Substance including but not limited to all such documents as may be involved in any Reportable Use involving the Premises. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on under or about the Premises (including, without limitation, through the plumbing or sanitary sewer system). 6 (c) Indemnification. Lessee shall indemnify, protect, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, and the Premises, harmless from and against any and all damages, liabilities, judgments, costs, claims, liens, expenses, penalties, loss of permits and attorney's and consultants' fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee or by anyone under Lessee's control. Lessee's obligation under this Paragraph 6.2(c) shall include, but not be limited to the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation (including consultants' and attorneys' fees and testing), removal, remediation, restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances, unless specifically so agreed by Lessor in writing at the time of such agreement. 6.3 Lessee's Compliance with Requirements. Lessee shall at Lessee's sole cost and expense, fully diligently and in a timely manner, comply with all "Applicable Requirements," which term is used in this Lease to mean all laws, rules, regulations, ordinances, directives, covenants, easements and restrictions of record, permits, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendation of Lessee's engineers and/or consultants, relating in any manner to the Premises (including but not limited to matters pertaining to (i) industrial hygiene, (ii) environmental conditions on, in, under or about the Premises, including soil and groundwater conditions, and (iii), the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill or release of any Hazardous Substance, now in effect or which may hereafter come into effect. Lessee shall, within five (5) days after receipt of Lessor's written request, provide Lessor with copies of all documents and information, including but not limited to permits, registrations, manifests, applications, reports and certificates, evidencing Lessee's compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved of any threatened or actual claim, notice citation, warning, complaint or report pertaining to or involving failure by Lessee or the Premises to comply with any Applicable Requirements. 6.4 Inspection: Compliance with Law Lessor, Lessor's agents, employees, contractors and designated representatives, and the holders of any mortgages, deeds of trust or ground leases on the Premises ("Lenders") shall have the right to enter the Premises at any time in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by lessee with this Lease and all Applicable Requirements (as defined in Paragraph 6.3), and Lessor shall be entitled to employ experts and/or consultants in connection therewith to advise Lessor with respect to Lessee's installation, operation, use, monitoring, maintenance, or removal of any Hazardous Substance on or from the Premises. The costs and expenses of any such inspections shall be paid by the party requesting same, unless a Default or Breach of this Lease by Lessee or a violation of Applicable Requirements or a contamination, caused or materially contributed to by Lessee, is found to exist or to be imminent , or unless the inspection is requested or ordered by a governmental authority as the result of any such existing or imminent violation or contamination. In such case, Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may be, for the costs and expenses of such inspections. 7. Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations 7.1 Lessee's Obligations (a) Subject to the provisions of Paragraphs 2.2 (condition), 2.3 (Compliance with covenants, Restrictions and Building Code) 7.2 (Lessor's Obligations), 8 (Damage or Destruction), and 14 (Condemnation, Lessee shall, at Lessee shall at Lessee's sole cost and expense and at all times, keep the Premises and every part thereof in good order, condition and repair (whether or not such portion of the Premises requiring repair, or the means of repairing the same, are reasonable or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises), including without limiting the generality of the foregoing, all equipment or facilities specifically serving the Premises, such as plumbing, heating, air conditioning, ventilating, electrical, lighting facilities, boilers, fired or unfired pressure vessels, fire hose connections if within the Premises, fixtures, interior walls, interior surfaces of exterior walls, ceilings, floors, windows, doors, plate glass, and skylights, but excluding any items which are the responsibility of Lessor pursuant to Paragraph 7.2 below. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices. Lessee's obligation shall include restorations, replacements or renewals when necessary to keep the Premises and all improvement thereon or a part thereof in good order, condition and state of repair. 7 (b) Lessee shall, at Lessee's sole cost and expense procure and maintain a contract with copies to Lessor, in customary form and substance for and with a contractor specializing and experienced in the inspection, maintenance and service of the heating, air conditioning and ventilation system for the Premises. However, Lessor reserves the right upon notice to Lessee, to procure and maintain the contract for the hearing, air conditioning and ventilating systems, and if Lessor elects, Lessee shall reimburse Lessor, upon demand for the cost thereof. (c) If Lessee fails to perform Lessee's obligations under this Paragraph 7.1, Lessor may enter upon the which case no notice shall be required, perform such obligations on Lessee's behalf, and put the Premises in good order, condition and repair, in accordance with Paragraph 13.2 below. 7.2 Lessor's Obligations. Subject to the provisions of Paragraphs 2.2 (Condition) 2.3 (Compliance with Covenants, Restrictions and Building Code). 4.2 (Common Area Operating Expenses), 6 (use), 7.1 (lessee's Obligations), 9 (Damage or Destruction), Lessor, subject to reimbursement pursuant to Paragraph 4.2, shall keep in good order, condition and repair the foundations, exterior wall, structural condition of interior bearing walls; exterior roof, fire sprinkler and/or standpipe and hose (if located in the Common Areas) or other automatic fire extinguishing system including fire alarm and/or smoke detection systems and equipment, fir hydrants, parking lots, walkways, parkways, driveways, landscaping, fences, signs and utility systems serving the Common Areas and all parts thereof, as well as providing the services for which there is a Common Area Operating Expense pursuant to Paragraph 4.2. Lessor shall not be obligated to paint the exterior or interior surfaces of exterior walls nor shall lessor be obligated to maintain, repair or replace windows, doors or plate glass of the Premises. Lessee expressly waves the benefit of any statue now or hereafter in effect which would otherwise afford Lessee the right to make repairs at Lessor's expense or to terminate this Lease because of Lessor's failure to keep the Building, Industrial Center or Common Areas in good order, condition and repair. 7.3 Utility Installations, Trade Fixtures, Alterations. (a) Definitions; Consent Required. The term "Utility Installations" is used in this Lease to refer to all air lines, power panels, electrical distribution, security, fire protection systems, communications systems, lighting fixtures, heating, ventilating and air conditioning equipment. plumbing and fencing in, on or about the Premises. The term "Trade Fixtures" shall mean Lessee's machinery and equipment which can be removed without doing material damage to the Premises. The term "Alterations" shall mean any modification of the improvements on the Premises which are provided by Lessor under the teems of this Lease other than Utility installations or Trade Fixtures "Lessee-Owned Alterations and/or Utility installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make nor cause to be made any Alterations or Utility installations in, on, under or about the Premises without Lessor's prior written consent. Lessee may, however, make non- structural Utility installations to the interior of the Premises (excluding the roof) without Lessor's consent but upon notice to Lessor, so long as they are not visible from the outside of the Premises, do not involve puncturing, relocating or removing the roof or any existing walls, or changing or interfering with the fire sprinkler or fire detection systems and the cumulative cost thereof during the term of this Lease as extended does not exceed $2,500.00. (b) Consent. Any Alterations or Utility installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed plans. All consents given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent shall be deemed conditioned up (l) Lessee's acquiring permits required by governmental authorities; (II) the furnishing of copies of such permits together with a copy of the plains and specifications for the Alteration or Utility installation, to Lessor prior to commencement of the work thereon, and (III) the compliance by Lessee with all conditions of said permits in a prompt and expeditious manner. Any Alterations or Utility installations by Lessee during the term of this Lease shall be done in a good and workmanship manner, with good and sufficient materials, and be in compliance with all Applicable Requirements, Lessee shall promptly upon completion thereof furnish Lessor with as-built plans and specifications therefor, Lessor may (but without obligation to the do so) condition its consent (to any requested Alteration that costs$2,500.00 or more upon Lessee's providing Lessor with a lien and completion bond in an amount equal to one and one half times the estimated cost of such Alteration or Utility installation. (c) Lien Protection. Lessee shall pay when due all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on, or about the Premises, and Lessor shall have the right to post notices of non-responsibility in or on the Premises as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense, defend and protect itself, Lessor and the Premises against the same and 8 shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one and one-half times the amount of such contested lien claim or demand, indemnifying Lessor against liability for the same, as required by law for the holding of the Premises free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's attorneys' fees and costs in participating in such action if Lessor shall decide it is to its best interest to do so. 7.4 Ownership, Removal, Surrender and Restoration. (a) Ownership, Subject to Lessor's right to require their removal and to cause Lessee to become the owner thereof as hereinafter provided in this Paragraph 7.4, all Alterations and Utility installations made to the Premises by Lessee shall be the property of and owned by Lessee, but considered a part of the Premises. Lessor may, at any time and at its option, elect in writing to Lessee to be the owner of all or any specified part of the Lessee-Owned Alterations and Utility installations. Unless otherwise instructed per Subparagraph 7.4(b) hereof, all Lessee-Owned Alterations and Utility installations shall at the expiration or earlier termination of this Lease, become the property of Lessor and remain upon the Premises and be surrendered with the Premises by Lessee. (b) Removal, Unless otherwise agreed in writing. Lessor may require that any or all Lessee-Owned Alterations or Utility installations be removed by the expiration or earlier termination of this Lease, notwithstanding that their installation may have been consented to by Lessor. Lessor may require the removal at any time of all or any part of any Alteration or Utility installation made without the required consent of Lessor. (c) Surrender/Restoration. Lessee shall surrender the Premises by the end of the last day of the Lease term or any earlier termination date, clean and free of debris and in good operating condition and state of repair, ordinary wear and tear excepted. Ordinary wear and tear shall not include any damage of detonation that would have been prevented by good maintenance practice or by Lessee performing all of its obligations under this Lease. Except as otherwise agreed or specified herein, the Premises, as surrendered, shall include the Alterations and Utility installations. The obligation of Lessee shall include the repair of any damage occasioned by the installation, maintenance for removal of Lessee's Trade Fixtures, furnishings, equipment and Lessee-Owned Alterations and Utility installations, as well as the removal of any storage tank installed by or for Lessee, and the removal replacement or remediation of any soil, material or ground water contaminated by Lessee, all as may then be required by Applicable Requirements and/or good practice. Lessee's Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee subject to its obligation to repair and restore the Premises per this Lease. 8. Insurance: Indemnity. 8.1 Payment of Premiums. The cost of the premiums for the Insurance policies maintained by Lessor under this Paragraph 8 shall be a Common Area Operating Expense pursuant to Paragraph 4.2 thereof. Premiums for policy periods commencing prior to, or extending beyond, the term of this Lease shall be prorated to coincide with the corresponding Commencement Date or Expiration Date. 8.2 Liability Insurance (a) Carried by Lessee. Lessee shall obtain and keep in force during the term of this Lease a Commercial General Liability policy of insurance providing Lessee, Lessor and any Lender(s) whose names have been provided to Lessee in writing (as additional insureds) against claims for bodily injury, personal injury and property damage based upon, involving or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000. per occurrence with an "Additional Insured-Managers or Lessor of Premises" endorsement and contain the "Amendment of the Pollution Exclusion" endorsement for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance required by this Lease or as carried by Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. 9 (b) Carried by Lessor. Lessor shall also maintain liability insurance described in Paragraph 8.2(a) above in addition to and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein. 8.3 Property Insurance-Building, Improvements and Rental Value. (a) Building and Improvements. Lessor shall obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and to any Lender(s), insuring against loss or damage to the Premises. Such insurance shall be for full replacement cost, as the same shall exist from time to time, or the amount required by any Lender(s), but in no event more than the commercially reasonable and available insurable value thereof if, by reason of the unique nature or age of the improvements involved, such latter amount is less than full replacement cost. Lessee-Owned Alterations and Utility installations, Trade Fixtures and Lessee's personal property shall be insured by Lessee pursuant to Paragraph 8.4. If the coverage is available and commercially appropriate, Lessor's policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for any additional costs resulting from debris removal and reasonable amounts of coverage for the enforcement of any ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Building required to be demolished or removed by reason on the enforcement of any building, zoning, safety or land use laws as the result of a covered loss, but not including plate glass insurance. Said policy or policies shall also contain an agreed valuation provision in lieu of ant co-insurance clause waver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. (b) Rental Value. Lessor shall also obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and any Lender(s), insuring the loss of the full rental and other charges payable by all Lessees of the Building to Lessor for one year (including all Real Property Taxes, insurance costs, all Common Area Operating Expenses and any scheduled rental increases). Said insurance may provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of rental revenues from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any co-insurance clause, and the amount of coverage shall be adjusted annually to reflect the projected rental income. Real Property Taxes, insurance premium costs and other expense, if any, otherwise payable for the next 12-,month period Common Area Operating Expenses shall include any deductible amount in the event of such loss. (c) Adjacent Premises. Lessee shall pay for any increase in the premiums for the property insurance of the Building and for the Common Areas or other buildings in the Industrial Center if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. (d) Lessee's Improvements. Since Lessor is the Insuring Party, Lessor shall not be required to insure Lessee-Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease. 8.4 Lessee's Property Insurance. Subject to the requirements of Paragraph 815, Lessee at its cost shall either by separate policy or, at Lessor's option by endorsement to a policy already carried, maintain insurance coverage on all of Lessee" personal property, Trade Fixtures and Lessee-Owned Alterations and Utility Installations in, on, or about the Premises similar in coverage to that carried by Lessor as the insuring Party under Paragraph 8.3(a). Such insurance shall be full replacement cost coverage with a deductible not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property and the restoration of Trade Fixtures and Lessee-Owned Alterations and Utility Installations. Upon request from Lessor, Lessee shall provide Lessor with written evidence that such insurance is in force. 8.5 Insurance Policies. Insurance required hereunder shall be in companies duly licensed to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B+, V, or such other rating as may be required by a Lender, as set forth in the most current issue of "Best's Insurance Guide". Lessee shall not do or permit to be done anything which shall invalidate the insurance policies referred to in this Paragraph 8. Lessee shall cause to be delivered to Lessor, within seven (7) days after the earlier of the Early Possession Date or the Commencement Date, certified copies of, or certificates evidencing the existence and amounts of, the insurance required under 10 Paragraph 8.2(a) and 8.4. No such policy shall be cancelable or subject to modification except after thirty (30) days' prior written notice to Lessor. Lessee shall at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals of "insurance binders" evidencing renewal thereof, or Lessor ma order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. 8.6 Waver of Subrogation. Without affecting any other rights or remedies. Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages (whether in contract or in tort ) against the other, for loss or damage to their property arising out of incident to the perils required to be insured against under Paragraph 8. The effect of such releases and waivers of the right to recover damages shall not be limited by the amount of insurance carried or required, or by any deductible applicable thereto, Lessor and Lessee agree to have their respective insurance companies issuing property damage insurance waive any right to subrogation that companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby. 8.7 Indemnity. Except Lessor's negligence and/or breach of express warranties, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents. Lessor's master ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, costs and judgments, penalties, loss of permits, attorneys' and consultants' fees, expenses and/or liabilities arising out of, involving, or in connection with, the occupancy of the Premises by Lessee, the conduct of Lessee's business, any act omission or neglect of Lessee, its agents, contractors, employees or invitees, and out of any Default of Breach by Lessee in the performance in a timely manner of any obligation on Lessee's part to be performed under this Lease. The foregoing shall include, but not be limited to the defense or pursuit of any claim or any action or proceeding involved therein, and whether or not (in the case of claims made against the Lessor) litigated and/or reduced to judgment. In case any action or proceeding be brought against Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonable satisfactory to Lessor and Lessor shall cooper4ate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. 8.8 Exemption of Lessor from Liability. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, air conditioning for lighting fixtures, or from any other cause, whether said injury or damage results from conditions arising upon Premises, or upon other portions of the building of which the Premises are a part, from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is accessible or not. Lessor shall not be liable for any damages arising from any act or neglect of any other lessee of Lessor nor from the failure by Lessor to enforce the provisions of any other lease in the Industrial Center. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom. 9. Damage or Destruction. 9.1 Definitions. (a) "Premises Partial Damage" shall mean damage or destruction to the Premises, other than Lessee-Owned Alterations and Utility installations, the repair cost of which damage or destruction is less than fifty percent (50%) of the then Replacement Cost (as defined in Paragraph 9.1(d) of the Premises (excluding Lessee-Owned Alterations and utility Installations and Trade Fixtures immediately prior to such damage or destruction. (b) "Premises Total Destruction" shall mean damage or destruction to the Premises, other than Lessee-Owned Alterations and Utility Installations, the repair cost of which damage or destruction is fifty percent (50%) or more of the then Replacement Cost of the Premises (excluding Lessee-Owned Alterations and Utility installations and Trade Fixtures) immediately prior to such damage or destruction. In addition, damage or destruction to the Building, other than Lessee-Owned Alterations and Utility Installations and Trade Fixtures of any lessees of the Building, the cost of which damage or destruction is fifty percent (50%) or more of the then Replacement Cost (excluding Lessee-Owned Alterations and Utility Installations and Trade Fixtures of any lessees of the Building) of the Building shall, at the option of Lessor, be deemed to be Premises Total Destruction. 11 (c) "Insured Loss" shall mean damage or destruction to the Premises, other than Lessee-Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a) irrespective of any deductible amounts or coverage limits involved. (d) "Replacement Cost" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of applicable building codes, ordinances or laws, and without deductions for depreciation. (e) "Hazardous Substance Condition" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 8.2(a), in on or under the Premises. 9.2 Premises Partial Damage - Insured Loss. If premises Partial Damage that is an insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee-Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect. In the event, however, that there is a shortage of insurance proceeds and such shortage is due to the fact that, by reason of the unique nature of the improvements in the Premises, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the fund to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request thereof. If Lessor receives said funds or adequate assurance thereof within said ten (10) day period, Lessor shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within said period, Lessor may nevertheless elect by written notice to Lessee within ten (10)days thereafter to make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within ten (10 day period, and if Lessor does not so elect to restore and repair, then this Lease shall terminate sixty (60) days following the occurrence of the damage or destruction. Unless otherwise agreed, Lessee shall in no event have any right to reimbursement from Lessor for any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party. 9.3 Partial Damage - Uninsured Loss. If Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessees expense and this Lease shall continue in full force and effect), Lessor may at Lessor's option, either (l) repair such damage as son as reasonable possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage of Lessor's desire to terminate this Lease as of the date sixty (60) days following the date of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage totally at Lessee's expense and without reimbursement from Lessor. Lessee shall provide Lessor with the required funds or satisfactory assurance thereof within thirty (30) days following such commitment from Lessee. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available, if Lessee does not give such notice and provide the funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. 9.4 Total Destruction. Notwithstanding any other provision hereof, if Premises Total Destruction occurs (including any destruction required by any authorized public authority), this Lease shall terminate sixty (60) days following the date of such Premises Total Destruction, whether or not the damage or destruction is an Insured Loss or was caused by a negligent or willful act of Lessee. In the even, however, that the damage or destruction was caused by Lessee, Lessor shall have the right to recover Lessor's damage from Lessee except as released and waived in paragraph 9.7. 9.5 Damage Near End of Term. If at any time during the last six (6) months of the term of this Lease there is damage for which the cost to repair exceeds one month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor's option, terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within thirty (30) days after the date of occurrence of such damage. Provided, however, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by (a) exercising such option, and (b) providing Lessor with any shortage in Insurance proceeds (or adequate assurance 12 thereof) needed to make the repairs on or before the earlier of (i) the date which is ten (10) days after Lessee's receipt of Lessor's written notice purporting to terminate this Lese, or (ii) the day prior to the date upon which such option expires. If Lessee duly exercised such option during such period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in Insurance proceeds. Lessor shall, at Lessor's expense repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during such period, then this Lease shall terminate as of the date set forth in the first sentence of this Paragraph 9.5. 9.6 Abatement of Rent; Lessee's Remedies. (a) In the event of (i) Premises Partial Damage or (ii) Hazardous Substance Condition for which Lessee is not legally responsible, the Base Rent, Common Area Operating Expenses and other charges, if any, payable by Lessee hereunder for the period during which such damage or condition, its repair, remediation or restoration continues, shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired, but not in excess of proceeds from aforesaid, all other obligations of Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim against Lessor for any damage suffered by reason of any such damage, destruction, repair, remediation or restoration. (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this Paragraph 9 and shall not commence, in a substantial and meaningful way, the repair or restoration of the Premises within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice of lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice to Lessor and such Lenders and such repair or restoration is not commenced within thirty (30) days after receipt of such notice, this Lease shall terminate as of the date specified in said notice. If Lessor or a Lender commences the repair or restoration of the Premises within thirty (30) days after the receipt of such notice, this Lease shall continue in full force and effect. "Commence" as used in the Paragraph 9.6 shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever occurs first. 9.7 Hazardous Substance Conditions. If a Hazardous Substance Condition occurs, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by Applicable Requirements and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 6.2 (c) and Paragraph 1.3, Lessor may at Lessor's option either (l) investigate and remediate such Hazardous Substance Condition, if required as soon as reasonably possible at Lessor's expense. In which even this Lease shall continue in full force and effect, or (ii) if the estimated cost to investigate and remediate such condition exceeds twelve (12) times the then monthly Base Rent or $100,000. whichever is greater, give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition of Lessor's desire to terminate this Lease as of the date sixty (60 days following the date of such notice. In the event Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the excess costs of (a) investigation sand remediation of such Hazardous Substance Condition to the extend required by Applicable Requirements, over (b) an amount equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with the funds required of Lessee or satisfactory assurance thereof within thirty (30 days following the commitment by Lessee. In such event this Lease shall continue in full force and effect, and Lessor shall provide the required funds or assurance thereof within the time period specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. 9.8 Termination - Advance Payments. Upon termination of this Lease pursuant to this Paragraph 9, Lessor shall return to Lessee any advance payment made by Lessee to Lessor and so much of Lessee's Security Deposit as has not been, or it is not then required to be , used by Lessor under the terms of this Lease. 9.9 Waver Statutes. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises and the building with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent it is inconsistent herewith. 10. Real Property Taxes. 10.1 Payment of Taxes. Lessor shall pay the Real Property Taxes, as defined in Paragraph 10.2, applicable to the Industrial Center, and except as otherwise provided in Paragraph 10.3, any such amounts shall be included in the calculation of Common Area Operating Expenses in accordance with the provisions of Paragraph 4.2. 13 10.2 Real Property Tax Definition. As used herein, the term "Real Property Taxes" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other that inheritance, personal income or estate taxes) imposed upon the Industrial Center by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage, or other improvement district thereof, levied against any legal or equitable interest of Lessor in the Industrial Center or any portion thereof, Lessor's right to rent or other income therefrom, and/or Lessor's business of leasing the Premises. The term "Real Property Taxes" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring, or changes in Applicable Law taking effect, during the term of this Lease, including but not limited to a change in the ownership of the Industrial Center or in the improvements thereon, the execution of this Lease, or any modification, amendment or transfer thereof, and whether or not contemplated by the Parties, in calculating Real Property Taxes for any calendar year; the Real Property Taxes for any real estate tax year shall be included in the calculation of Real Property Taxes for such calendar year based upon the number of days which such calendar year and tax year have in common. 10.3 Additional Improvements. Common Area Operating Expenses shall not include Real Property Taxes specified in the tax assessor's records and work sheets as being caused by additional improvements placed upon the Industrial Center by other lessees or by Lessor for the exclusive enjoyment of such other lessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however, pay to Lessor at the tome Common Area Operating Expenses are payable under Paragraph 4.2, the entirety of any increase in Real Property Taxes if assess solely by reason of Alterations, Trade Fixtures, or Utility Installations placed upon the Premises by Lessee or at Lessee's request. 10.4 Joint Assessment, if the Building is not separately assessed, Real Property Taxes allocated to the Building shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.5 Lessee's Property Taxes. Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee-Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lese contained in the Premises or stored within the Industrial Center. When Possible, Lessee shall cause its Lessee-Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee's property within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property. 11. Utilities. Lessee shall pay directly for all utilities and services supplied to the Premises, including but not limited to electricity, telephone, security, gas and cleaning of the Premises, together with any taxes thereon. If any such utilities or services are not separately metered to the Premises or separately billed to the Premises, Lessee shall pay to the Lessor a reasonable proportion to be determined by Lessor of all such charges jointly metered or billed with other premises in the Building, in the manner and within the time periods set forth in Paragraph 4.2(d) 12. Assignment and Subletting. 12.1 Lessor's Consent Required (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or otherwise transfer mortgage or otherwise transfer or encumber (collectively, "assign) or sublet all or any part of Lessee's interest in the Lease or in the Premises without Lessor's prior written consent given under and subject to the terms of Paragraph 3.6. (b) A change in the control of Lessee shall constitute an assignment requiring Lessor's consent. The transfer, on a cumulative basis, of twenty-five percent (25%) or more of the voting control of Lessee shall constitute a change in control for this purpose. (c) The involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee's assets occurs, which results or will result in a reduction of the Net Worth of Lessee, as hereinafter defined, by an amount equal to or greater than twenty-five (25%) of such Net Worth of Lessee as it was represented 14 to Lessor at the time of full execution and delivery of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, at whichever time said Net Worth of lessee was or is greater, shall be considered as assignment of this Lease by Lessee to which Lessor may reasonably withhold its consent. "Net Worth of Lessee" for purposes of this Lease shall be the net worth of Lessee (excluding any Guarantors) established under generally accepted accounting principles consistently applied. (d) An assignment or subletting of Lessee's interest in this Lease without Lessor's specific prior written consent shall, at Lessor's option, be a Default, curable after notice per Paragraph 13.1 or a non-curable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unconsented to assignment or subletting as a non-curable Breach, Lessor shall have the right to either: (i) terminate this Lease, or (ii) upon thirty (30) day's written notice ("Lessor's Notice"), increase the monthly Base Rent for the Premises to the greater of the fair market rental value of the Premises, as reasonably determined by Lessor, or one hundred ten percent (110%) of the Base Rent then in effect. Pending determination of the new fair market rental value, if disputed by Lessee, Lessee shall pay the amount set forth in Lessor's Notice, with any overpayment credited against the next installment(s) of Base Rent coming due, and any underpayment for the period retroactively to the effective date of the adjustment being due and payable immediately upon the determination thereof, Further, in the event of such Breach and rental adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to the fair market value as reasonably determined by Lessor (without the Lese being considered an encumbrance or any deduction for depreciation or obsolescence, and considering the Premises at its highest and best use and in good condition, or one hundred ten percent (110%) of the price previously in effect, (ii) any index-oriented rental or price adjustment formulas contained in this Lese shall be adjusted to require that the base index be determined with reference to the index applicable to the time of such adjustment, and (iii) any fixed rental adjustments scheduled during the remainder of the lease term shall be increased in the ration as the new rental bears to the Base Rent in effect immediately prior to the adjustment specified in Lessor's Notice. (e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or injunctive relief. 12.2 Terms and Conditions Applicable to Assignment and Subletting. (a) Regardless of Lessor's consent, any assignment or subletting shall not (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, nor (iii) alter the primary liability of Lessee for the payment of Base Rent and other sums due Lessor hereunder or for the performance of any other obligations to be preformed by Lessee under this Lease. (b) Lessor may accept any rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of any rent for performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the Default or Breach by Lessee of any of the terms, convenants or conditions of this Lease. (c) The consent of Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or in any subsequent or successive assignment or subletting by the assignee or sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying lessee or anyone else liable under this Lease or the sublease and without obtaining their consent, and such action shall not relieve such persons from liability under this Lease or the sublease. (d) In the event of any Default or Breach of Lessee's obligation under this Lease, Lessor may proceed directly against Lessee, and Guarantors or anyone else responsible for the performance of the Lessee's obligations under this Lease, including any sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor. (e) Each request for consent to an assignment or subletting shall be in writing accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a non-refundable deposit of $1000 or ten percent (10%) of the monthly Base Rent applicable to the portion of the Premises which is the subject of the proposed assignment or sublease, whichever is greater, as reasonable consideration for Lessor's 15 considering and processing the request for consent. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested by Lessor. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as re contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented in writing. (g) The occurrence of a transaction described in Paragraph 12.2(c) shall give Lessor the right (but not the obligation) to require that the Security Deposit be increased by an amount equal to six (6) times the then monthly Base rent, and Lessor may make the actual receipt by Lessor of the Security Deposit increase a condition to Lessor's consent to such transaction. (h) Lessor, as a condition to giving its consent to any assignment or subletting, any require that the amount and adjustment schedule of the rent payable under this Lease be adjusted to what is then the market value and/or adjustment schedule for property similar to the Premises as then constituted, as determined by Lessor. 12.3 Additional Terms and Conditions Applicable to Subletting. The following terms and conditions shall apply to any subletting by Lessee of all or any par of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein. (a) Lessee hereby assigns and transfer to Lessor all of Lessee's interest in all rentals and income arising from any sublease of all or a portion of the Premises heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach (as defined in Paragraph 13.1) shall occur in the performance of Lessee's obligations under this Lease, Lessee may, except as otherwise provided in this Lease, receive, collect and enjoy the rents accruing under such sublease. Lessor shall not by son of the foregoing provision or any other assignment of such sublease to Lessor, nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such Sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exist in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents and other charges due and to become due under the sublease. Sublessee shall rely upon any such statement and request form Lessor and shall pay such rent and other charges to Lessor without any obligation or right to inquire as to whether such Breach exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against such sublessee, or, until the Breach has been curd, against Lessor, for any such rent and other charges so paid by said sublessee to Lessor. (b) In the event of a Breach by Lessee in the performance of its obligations under this Lease, Lessor, at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligation of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any other prior defaults or breaches of such sublessor under such sublease. (c) Any matter or thing requiring the consent of the sublessor under a sublease shall also require the consent of Lessor herein. (d) No sublessee under a sublease approved by Lessor shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. Default; Breach; Remedies. 16 13.1 Default; Breach, Lessor and Lessee agree that if an attorney is consulted by Lessor in connection with a Lessee Default or Breach (as hereinafter defined) $350.00 is a reasonable minimum sum per such occurrence for legal services and costs in the preparation and services and costs in the preparation and service of a notice of Default, and that Lessor may include the cost of such service and costs in said notice as rent due and payable to cure said default. A "Default" by Lessee is defined as a failure by Lessee to observe, comply with or perform any of the terms, covenants, conditions or rules applicable to Lessee under this Lease. A "Breach" by Lessee is defined as the occurrence of any one or more of the following Defaults, and where a grace period for cure after notice is specified herein, the failure by Lessee to cure such Default prior to the expiration of the applicable grace period, and shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3: (a) The vacating of the Premises without the intention to reoccupy same, or the abandonment of the Premises. (b) Except as expressly otherwise provided in this Lease, the failure by Lessee to make any payment of Base Rent, Lessee's Share of Common Area Operating Expenses, or any other monetary payment required to be made by Lessee hereunder as and when due, the failure by lessee to provide Lessor with reasonable evidence of insurance or surety bond required under this Lease, or the failure of Lessee to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3) days following written notice thereof by or on behalf of Lessors to Lessee. (c) Except as expressly otherwise provided in this Lease, the failure by Lessee to provide Lessor with reasonable written evidence (in duly executed original for, if applicable) of (i) compliance with Applicable Requirements per Paragraph 6.3, (ii) the inspection, maintenance and service contracts required under Paragraph 7.1(b), (iii) the rescission an unauthorized assignment or subletting per Paragraph 12.1, (iv) a Tenancy Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination of this Lease per Paragraph 30, (vi) the guaranty of the performance of Lessee's obligations under this Lease if required under Paragraphs 1.11 and 37, (vi) the execution of any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Lessor may reasonable require of Lessee under the terms of this lease, where any such failure continues a period of ten (10) days following written notice by or on behalf of Lessor to Lessee. (d) A Default by Lessee as to the terms, covenants, conditions, or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof that are to be observed, complied with or performed by Lessee, other than those described in Subparagraphs 13.1(a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice thereof by or on behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach of this Lease by Lessee if Lessee commences such cure within said thirty (30) days period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) the making by Lessee of any general arrangement or assignment for the benefit or creditors; (ii) Lessee's becoming a "debtor" as defined in U.S. Code Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receive to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other Judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days; provided, however, in the event that any provision of this Subparagraph 13.1(e) is contrary to any applicable law, such provision shall be of no force or effect and shall not affect the validity of the remaining provisions. (f) The discovery by Lessor that any financial statement of Lessee or of any Guarantor, given to Lessor by Lessee or any Guarantor, was materially false. (g) If the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor's liability, with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a Guarantor's breach of its guaranty obligation on an anticipatory breach basis, and Lessee's failure, within sixty (60) days following written notice by or on behalf of Lessor to Lessee of any such event, to provide Lessor with written alternative assurances of security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the Guarantors that existed at the time of execution of this Lease. 17 13.2 Remedies. If Lessee fails to perform any affirmative duty or obligation of Lessee under this Lease, within ten(10) days after written notice to Lessee (or in case of an emergency, without notice), Lessor may at its option (but without obligation to do so) perform such duty or obligation on Lessee's behalf, including nut not limited to the obtaining of reasonable required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee to Lessor upon invoice therefor, if any check given to Lessor by lessee shall not be honored by the bank upon which it is drawn, Lessor at its own option, may required all future payments to be made under this Lease by Lessee to be made only by cashier's check. In the event of a Breach of this Lease by Lessee (as defined in Paragraph 13.1), with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach, Lessor may: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor, in such event Lessor shall be entitled to recover from Lessee: (i) the worth at the time of the award of the unpaid rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorney's fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco or the Federal Reserve Bank District in which the Premises are located at the time of award plus one percent (1%0. Efforts by Lessor to mitigate damages caused by Lessee's Default or Brach of this Lease shall not waive Lessor's right to recover damages under this Paragraph 13.2. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding the unpaid rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit for such rent and/or damages. If a notice and grace period required under Subparagraph 13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, or to perform or quit, as the case may be, given to Lessee under any statute authorizing the forfeiture of leases for unlawful detainer shall also constitute the applicable notice for grace period purposes required by Subparagraph 13.1(b), (c) or (d). In such case, the applicable grace period under the unlawful detainer statue shall run concurrently after the one such statutory notice, and the failure of Lessee to cure the Default within the greater of the two (2) such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statue. (b) Continue the Lease and Lessee's right to possession in effect (in California under California Civil Code Section 1951.4) after Lessee's Breach and recover the rent as it becomes due, provided Lessee has the right to sublet or assign, subject only to reasonable limitations. Lessor and Lessee agree that the limitations on assignment and subletting in this Lease are reasonable. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver to protect the Lessor's interest under this Lease, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. (d) The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. 13.3 Inducement Recapture in Event of Breach. Any agreement by Lessor for free or abated rent or other charges applicable to the Premises, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "Inducement Provisions" shall be deem conditioned upon Lessee's full and faithful performance of all of the terms covenants and conditions of this Lease to be performed or observed by Lessee during the term hereof as the same may be extended. Upon the occurrence of a Breach (as defined in Paragraph 13.1) of this Lease by Lessee, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be 18 immediately due and payable by Lessee to Lessor, and recoverable by Lessor, as additional rent due under this Lease, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this Paragraph 13.3 shall not be deemed a waiver by Lessor of the provisions of this Paragraph 13.3 unless specifically as stated in writing by Lessor at the time of such acceptance. 13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor y the terms of any ground lease, mortgage or deed of trust covering the Premises. Accordingly, if any installment of rent or other sum due from Lessee shall not be received by Lessor or Lessor's designee within ten (10) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%) of such overdue amount. The partied hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding Paragraph 4.1 or any or any other provision of this Lease to the contrary, Base Rent shall, at Lessors option, become due and payable quarterly in advance. 13.5 Breach by Lessor. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of the Paragraph 13.5, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and by any Lender(s) whose name and address shall have been furnished to Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30 days after such notice are reasonably required for its performance, then Lessor shall not be in breach of this Lease if performance is commenced within such thirty (30) days period and thereafter diligently pursued to completion. 14. Condemnation. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (all of which are herein called "condemnation") this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, (all of which are herein called "condemnation" ), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten (10%) of the floor area of the Premises, or more than twenty-five percent (15%) of this portion of the Common Areas designated for Lessee's parking, is taken by condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall Have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except, that the Base Rent shall be reduced in the same proportion as the rentable floor area of the Premises taken bear to the total rentable floor space of the Premises. No reduction of Base Rent shall occur if the condemnation does not apply to any portion of the Premises. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution of value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any compensations, separately as awarded to Lessee for Lessee's relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of its net severance damages received, over and above Lessee's Share of the legal and other expenses incurred by Lessor in the condemnation matter. repair any damage to the Premises caused by such condemnation authority. Lessee shall be responsible for the payment of any amount in excess of such net severance damages required to complete such repair. 15. Brokers' Fees. 15.1 Procuring Cause. The Broker(s) named in Paragraph 1.10 is/are the procuring cause of this Lease. 15.2 Additional Terms. Unless Lessor and Broker(s) have otherwise agreed in writing, Lessor agrees that: (a) if Lessee exercises any Option (as defined in Paragraph (39.1) granted under this Lease or any Option subsequently granted, or4 (b) is Lessee acquires any rights to the Premises or other premises in which Lessor has an interest, or (c) if Lessee remains in possession of the Premises with the consent of Lessor after the expiration of the term of this Lease after having failed to exercise an Option, or (d) if said Brokers are the procuring cause of any other lease or sale entered into between the Parties pertaining to 19 the clause herein, then as to any of said transactions, Lessor shall pay said Broker(s) a fee in accordance with the schedule of said Broker(s) in effect at the time of the execution of this Lease. 15.3 Assumption of Obligations. Any buyer or transferee of Lessor's interest in this Lease, whether such transfer is by agreement or by operation of law, shall be deemed to have assumed Lessor's obligation under this Paragraph 15. Ease Broker shall be an intended third party beneficiary of the provisions of Paragraph l.l0 and of the Paragraph 15 to the extent of its interest in any commission arising from this Lease and may enforce that right directly against Lessor and its successors. 15.4 Representations and Warranties. Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder other than as named in Paragraph l.l0(a) in connection with the negotiation of this Lease and/or the consummation of the transaction contemplated hereby, and that no broker or other person, fir or entity other than said named Broker(s) is entitled to any commission or finder's fee in connection with said charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Parry, including any costs, expenses, and/or attorney's fees reasonable incurred with respect thereto. 16. Tenancy and Financial Statements. 16.1 Tenancy Statement. Each Party (as Responding Party") shall within ten (10) days after written notice from the other Party (the "Requesting Party") execute, acknowledge and deliver to the Requesting Party a statement in writing in a form similar to the then "Most current" "Tenancy Statement" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonable requested by the Requesting Party. 16.2 Financial Statement. If Lessor desires to finance, refinance, or sell the Premises or the Building or any part thereof, Lessee and all Guarantors shall deliver to any potential lender or purchaser designated by Lessor such financial statements of Lessee and such Guarantors as may be reasonable required by such lender or purchaser, including but no limited to Lessee's financial statements for the pas three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. Lessor's Liability. The term "Lessor" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises. In the event of a transfer of Lessor's title or interest in the Premises or in this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor at the time of such transfer or assignment. Except as provided in Paragraph 15.3, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. 18. Severability. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. Interest on Past -Due Obligations. Any Monetary payment due Lessor hereunder, other than late charges, not received by Lessor within ten (10) days following the date on which it was due, shall bear interest from the date due at the prime rate charged by the largest state. 20. Time of Essence. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 21. Rent Defined. All monetary obligations of Lessee to Lessor under the terms of this Lease are deemed to be rent. 22. No prior or other Agreements; Broker Disclaimer. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the nature, quality, and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. Each Broker shall be an intended third party beneficiary of the provisions of this Paragraph 22. 23. Notices. 20 23.1 Notice Requirements. All notices required or permitted by this Lease shall be in writing and may be delivered in person(by hand or by messenger or courier service) or any be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission during normal business hours, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The address noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notice purposes. Either Party may by written notice to the other specify a different address for notice purposes, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for the purpose of mailing or delivering notices to Lessee. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such address as Lessor may from time to time hereafter designate by written notice to Lessee. 23.2 Date of Notice. Any notice sent by registered or certified mail, return receipt, requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein, and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantees next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the United States Postal Service or courier. If any notice is transmitted by facsimile transmission or similar means, the same shall be deemed served or delivered upon telephone or facsimile confirmation of receipt of the transmission thereof, provided a copy is also delivered via delivery or mail. If notice is received on a Saturday or Sunday or legal holiday, it shall be deemed received on the next business day. 24. Waivers. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or any other term, covenant or condition hereof. Lessor's consent to, or approval of, any such act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, and subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. Regardless of Lessor's knowledge of a Default or Breach at the time of accepting rent, the acceptance of rent by Lessor shall not be a waiver of any Default or Breach by Lessee of any provision hereof. Any payment given Lessor by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. Recording. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The party requesting recordation shall be responsible for payment of any fees or taxes applicable thereto. 26. No Right to Holdover. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or earlier termination of this Lease. In the event that Lessee holds over in violation of this Paragraph 26 then the Base Rent payable from and after the time of the expiration or earlier termination of this Lease shall be increased to two hundred percent (200%) of the Base Rent applicable during the month immediately preceding such expiration or earlier termination. Nothing contained herein shall be construed as a consent b Lessor to any holding over by Lessee. 27. Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. Covenants and Conditions. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. 29. Binding Effect; Choice of Law. This Lease shall be binding upon the Parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. Subordination; Attornment; Non-Disturbance. 30.1 Subordination. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security devise (collectively, "Security Devise"), now or hereafter placed by Lessor upon the real property of which this Premises are a part, to any and all advances made on the security thereof, 21 and to all renewals, modifications, consolidations, replacements and extensions thereof, Lessee agrees that the Lenders holding such Security Device shall have no duty, liability or obligation to perform any of the obligations of Lessor under this Lease, but that in the event of Lessor's default with respect to any such obligation, Lessee will give any Lender whose name and address have been furnished Lessee in writing for such purpose notice of Lessor's default pursuant to Paragraph 13.5. If any Lender shall elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Devise and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 Attornment. Subject to the non-disturbance provisions of Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not;: (i) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership, (iii) be subject to any offsets or defenses which Lessee might have against any prior lessor, or (iii) be bound by prepayment of more than one month's rent. 30.3 Non-Disturbance. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving assurance (a "non-disturbance agreement") from the Lender that Lessee's possession and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. 30.4 Self-Executing. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however , that upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of Premises, Lessee and Lessor shall execute such further writings as may be reasonable required to separately document any such subordination or non-subordination, attornment and/or non-disturbance agreement as is provided for herein. 31. Attorneys; Fees. If any Party or Broker brings an action or proceeding to enforce the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such fees may be awarded in the same suit, whether or not such action or proceeding is pursued to decision or judgment. The term "Prevailing Party" shall include, without limitation, a Party or Broker of its claim or defense. The attorney's fee award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorney's fees reasonably incurred. Lessor shall be entitled to attorney's fees, costs and expenses incurred in preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. Broker(s) shall be intended third party beneficiaries of the Paragraph 31. 32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements' or additions to the Premises or to the Building, as Lessor may reasonable deem necessary. Lessor may at any time place on or about the Premises any ordinary "For Lease" signs. All such activities of Lessor shall be without abatement of rent or liability to Lessee. 33. Auctions. Lessee shall not conduct, no permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. 34. Signs. Lessor shall not place any sign upon the exterior of the Premises or the Building, except that Lessee may, with Lessor's prior written consent; install (but not on the roof) such signs as are reasonable required to advertise Lessee's own business so long as such signs are in a location designated by Lessor and comply with Applicable Requirements and the signage criteria established for the Industrial Center by Lessor. The installation of any sign on the Premises by or for Lessee shall be subject to the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations). Unless otherwise expressly agreed herein, Lessor reserves all rights to the use of the roof of the Building, and the right to install advertising signs on the building, including the roof, which do not unreasonable interfere with the conduct of Lessee's business; Lessor shall be entitled to all revenues from such advertising signs. 35. Termination; Merger. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, Lessor shall, in the event of any such 22 surrender, termination or cancellation, have the option to continue any one or all of any existing subtenancies. Lessors failure within ten (10) days following any such event to make a written election to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 23 36. Consents. (a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonable withheld or delayed. Lessor's actual reasonable costs and expenses (including but no limited to architects', attorneys', engineers' and other consultants' fees) incurred in the consideration of or response to a request by Lessee for any Lessor consent pertaining to this lease or the Premises, including but not limited to consents to an assignment a subletting or the presence or use of a Hazardous Substance, shall be paid by Lessee to Lessor upon receipt of an invoice and supporting documentation therefor. In addition to the deposit described in Paragraph 12.2(a), Lessor may, as a condition to considering any such request by Lessee, require that Lessee deposit with Lessor an amount of money (in addition to the Security Deposit held under Paragraph 5) reasonable calculated by Lessor to represent the cost Lessor will incur in considering and responding to Lessee's request. Any unused portion of said deposit shall be refunded to Lessee without interest. Lessor's consent to any act, assignment of this Lease or subletting of the Premises by Lessee shall not constitute an acknowledgment that no Default or Brach by Lessee of the Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. (b) All conditions to Lessor's consent authorized by this Lease are acknowledged by Lessee as being reasonable. The failure to specify herein any particular condition to Lessor's consent shall not preclude the impositions y Lessor at the time of consent of such further or other conditions as are the reasonable with reference to the particular matter for which consent is being given. 37. Guarantor. 37.1 Form of Guaranty. If there are to be any Guarantors of this Lease per Paragraph 1.11, the form of the guaranty to be executed by each such Guarantor shall be in the form most recently published by the American Industrial Real Estate Association, and each Guarantor shall have the same obligations as Lessee under this lease, including but not limited to the obligation to provide the Tenancy Statement and information required in Paragraph 16. 37.2 Additional Obligations of Guarantor. It shall constitute a Default of the Lessee under this Lease if any such Guarantor fails or refuses, upon reasonable request by Lessor to give: (a) evidences of the due execution of the guaranty called for by this Lease, including the authority of the Guarantor (and of the party signing on Guarantor's behalf) to obligate such Guarantor on said guaranty, and resolution of its board of directors authorizing the making of such Guaranty as may from time to time be requested b Lessor, (c) a Tenancy Statement, or (d) written confirmation that the guaranty is still in effect. 38. Quit Possession. Upon payment by Lessee of the rent for the Premises and the performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. 39. Options. 39.1 Definition. As used in this Lease, the word "Option" has the following meaning: (a) the right to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal to lease the Premises or the right of first offer to lease the Premises or the right of first refusal to lease other property of Lessor or the right of first offer to lease other property of Lessor; (c) the right to purchase the Premises, or the right of first refusal to purchase the Premises, or the right of first offer to purchase the Premises, or the right to purchase other property of Lessor or the right of first refusal to purchase other property of Lessor or the right of first offer to purchase other property of Lessor. 39.2 Options Personal to Original Lessee. Each Option granted to Lessee in this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and cannot be voluntarily or involuntarily assigned or exercised by any person or entity other than said original Lessee while the original Lessee is in full and actual possession of the Premises and without the intention of thereafter assigning or subletting. The Options, if any, herein granted to Lessee are not assignable, either as a part of an assignment of this Lease or separately or apart therefrom, and no Option may be separated from this Lease in any manner, by reservation or otherwise. 39.3 Multiple Options. In the event that Lessee has any multiple Options to extend or renew this Lease, a later option cannot be exercised unless the prior Options to extend or renew this Lease have been validly exercised. 24 39.4 Effect of Default on Options. (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary: (i) during the period commencing with the giving of any notice of Default under Paragraph 13.1 and continuing until the noticed Default is cured, or (ii) during the period of time any monetary obligation due Lessor from Lessee is unpaid (without regard to whether notice thereof is give Lessee), or (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three (3) or more notices of separate Defaults under Paragraph 13.1 during the twelve (12) month period immediately preceding the exercise of the Option, whether or not the Defaults re cured. (b) The period of time within which an Option may b exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a) (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease, (i) Lessee fails to pay to lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to Lessee three (3) or more notices of separate Defaults under Paragraph 13.1 during any twelve (12) month period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease. 40. Rules and Regulations. Lessee agrees that it will abide by, and keep and observe all reasonable rules and regulations ("Rules and Regulations:") which Lessor may make from time to time for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of the Building and the Industrial Center and their invitees. 41. Security Measures. Lessee hereby acknowledges that the rental payable to the Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. 42. Reservations. Lessor reserves the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights of way, utility raceways, dedications., maps and restrictions do not reasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonable requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. 43. Performance Under Protest. If at any time a dispute shall arise as to any amount or sum of money to be paid by one party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. or so much thereof as it was not legally required to pay under the provisions of this Lease. 44. Authority. If either Party hereto is a corporation, trust, or general or limited partnership, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on it behalf. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after request by Lessor, deliver to Lessor evidence satisfactory to Lessor of such authority. 45. Conflict. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 46. Offer. Preparation of this Lease by either Lessor or Lessee or Lessor's agent or Lessee's agent and submission of same to Lessee or Lessor shall not be deemed an offer to lease. This Lease is not intended to be binding until executed and delivered by all Parties hereto. 47. Amendments. This Lease may be modified only in writing, signed by the parties in interest at the time of the modification. The Parties shall amend this Lease from time to time to reflect any adjustments that are made to the Base Rent or other rent payable under this Lease. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to 25 make such reasonable non-monetary modifications to this Lease as may be reasonably required by an institutional insurance company or pension plan Lender in connection with the obtaining of normal financing or refinancing of the property of which the Premises are a part. 48. Multiple Parties. Except as otherwise expressly provided herein, if more than one person or entity is named herein as either Lessor or Lessee, the obligations of such multiple parties shall be the joint and several responsibility of all persons or entities names herein as such Lessor or Lessee. 26 LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO, THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISE IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR YOUR ATTTORNEY'S REVIEW AND APPROVAL. FURTHER , EXPERTS SHOULD BE CONSULTED TO EVALUATE THE CONDITON OF THE PROPERTY FOR THE POSSIBLE PRESENCE OF ASBESTOS, UNDERGROUND STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMEDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKERS OR THEIR CONTRACTORS, AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL, AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS IN A STSTE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED. The parties hereto have executed this Lease at the place and on the dates specified above their respective signatures. Executed at: Executed at: San Diego on: on: 1/3/97 By LESSOR; By LESSEE BERNARDO VIEW LTD SYNBIOTICS CORPORATION A California Corporation By: /s/ William Brehm By: /s/ Michael Green Name Printed: Name Printed: Michael Green Title: Title: Vice President Finance, CFO By: By: Name Printed: Name Printed: Title: Title: Address: 17065 Via del Campo, Suite 200 Address: 11011 Via Frontera San Diego, CA 92127 San Diego, CA 92127 Telephone: Telephone: (619) 451-3771 Facsimile: Facsimile: (619) 451-5719 BROKER BROKER Executed at: Executed at: on: on: By: By Name Printed: Name Printed: Title: Title: Address Address: Telephone: Telephone: Facsimile: Facsimile: Note: These forms are often modified to meet changing requirements of law and need of the industry. Always write or call to make sure you are utilizing the most recent current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 345 So. Figueroa St. M-1, Los Angeles, CA 90071. (213) 687- 8777 27 ADDENDUM TO LEASE DATED NOVEMBER 20, 1996, BY AND BETWEEN BERNARDO VIEW LTD. AND SYNBIOTICE CORPORATION This Addendum is incorporated in and made a part 0f that certain lease to which this Addendum is attached. Defined terms used herein (as indicated by initial capitalization of words) shall have the same meaning as in the Lease unless otherwise indicated. 49. Vehicle Parking: ---------------- 49.1 Lessee shall be entitled to the right to use any and all vehicle parking spaces in the Industrial Center, other than those exclusively reserved for one or more of the tenants of the Industrial Center, on an unreserved, unassigned, nonexclusive, "First-come, first serve" basis. 49.2 All parking spaces in the Industrial Center shall be used only for parking vehicles no larger than full size passenger automobiles or pickup trucks. No overnight parking shall be allowed. 49.3 Lessor shall designate and mark ten parking spots for the sole and exclusive use of Lessee in the Location shown on Exhibit "A" of this Lease. Lessor, however, shall have no obligation with respect to enforcing said exclusive right to park in said spaces. 49.4 All Parking in the Industrial Center throughout the term of this Lease shall be free of cost to Lessee unless governmental codes or regulations are enacted which require that parking fees be charged. 49.5 Throughout the term of this Lease, Lessor agrees to maintain a ratio of approximately 3.3 parking spots per 1,000 square feet of rental space in the Industrial Center. 49.6 All parking shall be subject to nondiscriminatory rules and regulations imposed by Lessor which are not inconsistent with the rights granted in this Lease. 50. Option to Extend Lease: 50.1 Subject to the provisions of paragraph 3.9 of this Lease, Lessor hereby grants to Lessee one (1) option to extend the term of this Lease for a period of five (5) years. Said option shall be conditional upon Lessor's receipt of written notice of Lessee's exercise of said option no later that six (6) months prior to the termination of said initial term of this Lease. Such option to extend is further conditioned upon Lessee's not being in default under the terms of this Lease at the time for giving such notice and at the time for the commencement of the extension term. In the event of the exercise of such option, the term of this lease shall be extended on the same terms and conditions set forth herein except for the rental rate, which shall be determined as set forth in this paragraph 50. In the event of the exercise by Lessee of an option to extend, Lessor shall, on or before three (3) months prior to the end of the then current term notify Lessee of the proposed Base Rent during the next succeeding extension term. Lessor shall establish the initial Base Rent during extension term as the fair market rate for comparable properties in the vicinity of the Premises, all determined in Lessor's sole judgment. If Lessee disagrees with Lessor's determination, Lessee shall so notify Lessor within five (5) days in writing and Lessor and Lessee shall each within five (5) days thereafter appoint an MAI appraiser and the two appraiser so selected shall appoint a third MAI appraiser, which third appraiser shall determine the prevailing fair market rate for comparable space in the vicinity of the Premises. Such fair market rate as determined shall be the initial Base Rent during the extension term. Each party shall bear the cost of its independently appointed appraiser. In no event shall the initial base rent for each extension term be less that the base rent at the end of the preceding term. 50.2 The initial Base Rent for the extension term shall be adjusted during each such extension term on the first day of the thirteenth (13) full calendar year month of the renewal term and every twelve (123) months thereafter to reflect the increase, if any, in the Consumer Price Index of the Bureau of Labor Statistics of the U. S. Department of Laborer Urban Wage Earners and Clerical Workers, San Diego Metropolitan Area (1967 = 100) for "All times" (the "Index"). Commencing on such date of adjustment, and until the following date of adjustment, the monthly Base Rent payable shall equal the initial Base Rent during said extension term multiplied by a fraction, the numerator of which shall be the Index for the month most recently published as of said date of adjustment and the denominator of which shall be the Index or the same calendar month immediately preceding the commencement of the respective extension term. In no event, however, shall such new Base Rent be less than one hundred four percent (104%) of the Base Rent payable immediately preceding such date of rend adjustment nor shall such new Base Rend Exceed one hundred ten percent (110%) of the Base Rent payable immediately preceding such date of adjustment. In the event the method for determining the index shall be discontinued or modified, then any substitute index adopted by the U.S. Department of Labor shall be used using the conversion formula provided, or if no such substitute index is adopted, then the Index most nearly the same as the Consumer Price Index set forth above, as determined in Lessor's sole discretion, shall be used 51. Alterations and Additions. Notwithstanding any of the provisions of Paragraph 7.3 of the Lease, Lessee shall provide to Lessor prior written notification of all proposed alterations, improvements additions or utility installations in, on or about the premises for the Industrial Center. Such notification shall include copies of all permits necessary in order to perform such work as well as reasonable detailed set of plans showing said proposed work and a list of all contractors and subcontractors who are proposed to be hired to said work. Lessor may require that Lessee remove any or all of said alterations, improvements, additions or utility installations at the expiration of the term of this Lease and restore the Premises and the Industrial Center to their prior condition. In the alternative, Lessor may require that such items remain with the Premises upon the expiration of the term of this Lease. 52. Removal of Tenant's Trade Fixtures Subject to the provisions of Paragraphs 7.3C and 7.4D of the Lease, upon the expiration of this Lease, Lessee shall be entitled to take and remove all personal property, laboratory equipment, furnishings, trade fixtures, and other times brought onto the Premises by Lessee, whether installed or not, provided the removal of the same does not materially damage the Premises and Lessee restores any damage done to the Premises as a result of such removal. 53. Signs. Lessee shall, at Lessee's cost and expense, place a sign of reasonable size on the exterior of the building near the location of the Premises and on the common sign board located at the entrance to the Industrial Center, if such a sign board is available for Tenant's use. Said signs shall be subject to all regulatory authorities on the Industrial Center. Under no circumstances shall Lessee place any sign on any portion of the Premises or the Industrial Center. 54. Hazardous Materials. Lessor and Lessee agree as follows with respect to the existence or use of "hazardous Material" (as defined in Section 54.4) on the Property; 54.1 Lessee shall (l) not cause or permit any Hazardous Material to be brought upon, kept, or used in or about the Property by Lessee, its agents, employees, contractors, or invitees, unless such Hazardous Material is necessary or useful to Lessee's business and will be used, kept, and stored in a manner that complies with all laws relating to any such Hazardous Material so brought upon or used or kept in or about the property by Lessee). If Lessee breached the obligations stated in the preceding sentence, or if the presence of Hazardous Material on the Property caused or permitted by Lessee results in the contamination of the Property by Hazardous Material otherwise occurs for which Lessee is legally liable to Lessor for damage resulting therefrom, then Lessee shall indemnify, defend, and hold Lessor harmless from any and all claims, judgments, damages, penalties, fines, costs liabilities, or losses (including, without limitation diminution in value of the Property, damages for the loss or restriction on use of rentable or usable space or of any amenity of the Property, damages arising from any adverse impact on marketing of space in the building, and sums paid in settlement of claims, attorneys' fees, consultant fees, and expert fees), costs incurred in connection with any investigation of site conditions or any cleanup, remedies, removal, or restoration work required by any federal, state or local governmental agency or political subdivision because of Hazardous Material present in the soil or ground water on or under the property, which arise during or after the Lease Term as a result of such contamination. Without limiting the foregoing, if the presence of any Hazardous Material on the Property caused or permitted by Lessee results in any contamination of the Property, Lessee shall promptly take all actions at its sole expense as are necessary to return the Property to the condition existing prior to the introduction of any such Hazardous Material to the Property; provided that Lessor's approval of such actions shall first be obtained, which approval shall not be unreasonably withheld so long as such actions would not potentially have any material adverse long-term or short-term effect on the Property. 54.2 In the event of hazardous material contamination of the leased property or the groundwater thereunder which is not described in Paragraph 54.1 above, Lessor's rent and other financial obligations shall be abate3d in proportion to the degree to which Lessee's use of the premises is impaired. In the event of hazardous material contamination of the leased property or the groundwater thereunder through the negligence or willful misconduct of Lessor, Lessor shall indemnify, defend and hold harmless Lessee from any and all claims, judgments, damages, penalties, fines, costs, liabilities or losses arising therefrom. Lessor shall not be responsible to Lessee for any damages, claims or liabilities arising from the act of any other tenant of the premises with regard to Hazardous Materials or Hazardous Material contamination. 54.3 It shall not be unreasonable for Lessor to withhold its consent to any proposed Transfer pursuant to Section 12 if (i) the proposed Transferee's anticipated use of the Premises involved the generation, storage, use, treatment, or disposal of Hazardous Material; (ii) the proposed Transferee has been required by any prior Lessor, lender, or governmental authority to take remedial action in connection with Hazardous Material contaminating a property if the contamination resulted from such Transferee's actions or use of the property in question; or (iii) the proposed Transferee is subject to an enforcement order issued by any governmental authority in connection with the use, disposal, or storage of a Hazardous Material. 54.4 As used herein, the term "Hazardous Material" means any hazardous or toxic substance, material, or waste which is or becomes regulated by any local governmental authority, the State of California, or the United States Government. The term "Hazardous Material" includes, without limitation, any material or substance which is (i) defined as "hazardous waste" "extremely hazardous waste or restricted hazardous waste" under Section 25115, 25117, or 25222.7, or listed pursuant to Section 25140 of the California Health and Safety Code, Division 20, Chapter 6/5 (Hazardous Waster Control Law), (ii) defined as a "hazardous material", "hazardous substance" or "hazardous waste" under Section 25316 of the California Health and Safety Code, Division 20, Chapter 6.8 (Carpenter-Presley-Tanner Hazardous Substance Account Act), (iii) defined as a "hazardous material", "hazardous substance", or "hazardous waste" under Section 25501 of the California Health and Safety Code, Division 20, Chapter 6.95 (Hazardous Materials Release Response Plans and Inventory), (iv) defined as a "hazardous substance" under Section 25281 of the California Health and Safety Code, Division 20, Chapter 6.7 (Underground Storage of Hazardous Substances), (v) petroleum, (vi) asbestos, (vii) listed under Article 9 or defined as hazardous or extremely hazardous pursuant to Article ii of Title 22 of the California Administrative Code, Division 4, Chapter 20 (viii) designated as a "hazardous substance" pursuant to Section 1004 of the Federal Resource Conservation and Recovery Act, 42 U.S.C. 6901 et seq. (42 substance) pursuant to Section 101 of the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C 9601 et seq. (42 U.S.C. 9601). 55. Base Rent Adjustments. The Annual Base Rent to be paid by Tenant during each year of this Lease shall in no event be less than the amount set forth herein but shall be increased as follows: The level of the United States Bureau of Labor Statistics Consumer Price Index for All Urban Consumers. All items, for Los Angeles-Anaheim-Riverside, California (1982-84=100) (the "Index") at the Commencement Date (the "base level") shall be the base for the adjustment upward of the Annual Base Rent. At each anniversary of the Commencement Date, the Annual Base Rent payable for the year following such anniversary shall be in an amount equal to the Annual Base Rent increased by the same percentage as the percentage change in the base level. In no event, however, shall the resulting increase in the Annual Base Rend payable hereunder be less than four percent (4%) of the Annual Base Rent in effect immediately prior to any such adjustment. In the event the Bureau should discontinue the publication of the Index, or alter the same in some other manner, Lessor in its discretion, will adopt a reasonable comparable, suitable index or procedure which reflects consumer prices. 56. Tenant Improvement Allowance. Lessor shall reimburse Lessee for Tenant Improvements or refurbishment's to Premises up to $55,000. Lessee, upon completion, shall submit to Lessor request for payment. Lessee shall include the lien releases of all contractors involve. Lessee shall, prior to construction, submit to Lessor Lessee's plan for approval. Said approval shall not be unreasonable withheld. Any improvements to the Premises above the cost of $55,000. shall be paid by Lessee. Said improvements to be completed by April 1, 1997. IN WITNESS WHEREOF, the parties have executed this Addendum concurrently with the execution of the Lease to which it is attached. BERNARDO VIEW LTD. By: /s/ William Brehm ----------------- SYNBIOTICS CORPORATION, a California Corporation By: /s/ Michael Green ----------------- EXHIBIT "A" TO LEASE DATED NOVEMBER 20, 1996 BY AND BETWEEN BERNARDO VIEW LTD AND SYNBIOTICS CORPORATION Description to Premises ----------------------- Approximately 15,447 square feet in the building located at 11011 Via Frontera, Rancho Bernardo, San Diego, California, as shown on the site plan attached as Page 2 and the floor plans attached as Page 3 of this Exhibit "A". The legal description of the property underlying the building is as follows: Lot 15 of Bernardo Industrial Park Unit No. 12, in the City of San Diego, County of San Diego, State of California, according to map thereof, No. 762, filed in the office of county Recorder of San Diego County, May 8, 1973. SITE PLAN --------- This page is a graphic depicting the site plan of the property located at 11011 Via Frontera, San Diego, CA 92127. Page 2 of 3 FLOOR PLAN ---------- This page is a graphic depicting the floor plan of the property located at 11011 Via Frontera, San Diego, CA 92127. Page 3 of 3 EX-10.1.1 4 0004.txt FIRST AMENDMENT TO LEASE EXHIBIT 10.1.1 -------------- FIRST AMENDMENT This Amendment is incorporated in and made a part of that certain lease dated November 1, 1996, between Bernardo View Ltd., the Lessor and Synbiotics Corporation, the Lessee. The following represents the Amendment: 1) Tenant Improvement Allowance: ----------------------------- Lessor and Lessee have agreed to increase paragraph 56 of the Lease Addendum to $73,385.05, with all terms and conditions being the same, except completion is now August 31, 1997. Lessor, at Lessor's expense shall be responsible to improve downstairs restroom and main restroom upstairs, if required by building permit, to accommodate and ADA issue. Additionally, Lessor shall accommodate, if required, any parking lot issues related to ADA only Lessee shall be responsible for all other building issues, including but not limited to toxic waste, outside storage, other ADA issues, etc. 2) Premises: --------- Per paragraph 1.2(a) of the Lease, Lessee has agreed to lease entire building of approximately 25,8000 square feet. 3) Term: ----- The Lease term for the entire building shall commence May 15, 1997 and expire May 31, 2002. 4) Base Rent: ---------- The base rent commencing on May 15, 1997 shall be Sixteen Thousand Seven Hundred Seventy Dollars & 00/100 ($16,770.00) per month per paragraph 1.5 of the Lease. 5. Lessee's Share of Common Area: ------------------------------ Per paragraph 1.6(a) of the Lease, Lessee's prorate share shall increase to thirty-seven point one percent (37.10%). 6) Real Estate Brokers: -------------------- Per paragraph 1.10(a), The Sanders Company is the Broker of Record. IN WITNESS WHEREOF, the parties have executed this Amendment. BERNARDO VIEW LTD. By /s/ William Brehm ----------------- SYNBIOTICS CORPORATION, a California Corporation By /s/ Michael Green ----------------- EX-10.74 5 0005.txt SECURED PROMISSORY NOTE Exhibit 10.74 ------------- SECURED PROMISSORY NOTE $1,000,000 As of April 18, 2000 Washington, D.C. FOR VALUE RECEIVED, SYNBIOTICS CORPORATION, a Delaware corporation (the "Maker"), promises to pay to the order of KIRKEGAARD & PERRY LABORATORIES, INC., a Maryland corporation (the "Holder"), at, or at such other place as the Holder may from time to time designate, the aggregate principal amount of $1,000,000. Said principal shall be due and payable as follows:
Amount Due Payment Due Date ---------- ---------------- $800,000 Upon the earlier of (i) the completion of the transfer of the manufacturing of the Products as defined in the Transitional Manufacturing and Supply Agreement of even date herewith, by and between Holder and Maker (the "Manufacturing Agreement") from Holder to Maker in accordance with the terms of the Manufacturing Agreement or (ii) April 18, 2001. $200,000 Upon the earlier of (i) the completion of the transfer of the manufacturing of the Products as defined in the Manufacturing Agreement from Holder to Maker in accordance with the terms of the Manufacturing Agreement or (ii) July 18, 2001.
All payments hereunder shall be made in lawful money of the United States of America. The unpaid principal amount of this Note may be prepaid in whole or in part at any time or times without premium or penalty. Each prepayment shall be applied first to the payment of all accrued but unpaid interest and other amounts accrued hereunder, if any, on the date of any such prepayment, and the balance of any such prepayment shall be applied to installments of principal payable hereunder in the order of maturity. This Note evidences the obligation of the Maker to the Holder pursuant to Section 1.4 of the Asset Purchase Agreement, dated as of April 18, 2000, ----------- between Maker and Holder (the "Agreement"), and is secured by a Security Agreement of even date herewith, between Maker and Holder (the "Security Agreement"), encumbering certain assets of Maker. The Holder is entitled to the benefits of the Security Agreement, and reference is made to the Security Agreement for a description of the collateral and the rights and remedies of the Holder 1 thereunder. Neither the reference to the Agreement nor any provision thereof shall affect or impair the absolute and unconditional obligation of the Maker to pay the principal amount hereof when due. The occurrence of any of the following shall constitute an event of default ("Event of Default") hereunder: (i) failure to pay, when due, the principal or any other sum payable hereunder, and continuance of such failure for five (5) business days after the date on which such principal, or other sum is due (whether upon maturity hereof, upon any installment payment day, upon acceleration, or otherwise); (ii) an event of default by Maker under the Security Agreement; (iii) an event of default by Maker under the Manufacturing Agreement; or (iv) an event of default by Maker under the Royalty Agreement. Upon the occurrence of any Event of Default hereunder, the entire principal amount hereof, and all accrued and unpaid interest thereon, shall be accelerated, and shall be immediately due and payable, at the option of the Holder, without demand or notice with respect to an Event of Default specified in clause (i) of this Agreement, and in addition thereto, and not in substitution therefor, the Holder shall be entitled to exercise any one or more of the rights and remedies provided by applicable law. Failure to exercise said option or to pursue such other remedies shall not constitute a waiver of such option or such other remedies or of the right to exercise any of the same in the event of any subsequent Event of Default hereunder. In the event that the principal amount hereof, or any other sum due hereunder, is not paid when due and payable, the whole of the unpaid principal amount evidenced hereby and all unpaid sums due hereunder shall, from the date when such payment was due and payable until the date of payment in full thereof, bear interest at the interest rate announced by The Wall Street Journal as the "prime" lending rate charged by major financial institutions (the "Prime Rate") plus two percent (2%), which rate shall commence, without notice, immediately upon the date when said payment was due and payable. Should The Wall Street Journal cease publishing the Prime Rate, an alternate index of similar nature will be selected by the Maker and the Holder. The Maker promises to pay all reasonable costs and expenses (including without limitation reasonable attorneys' fees and disbursements) incurred in connection with the collection hereof, and to perform each and every obligation to be performed by the Maker under this Note. Any payment on this Note coming due on a Saturday, a Sunday, or a day which is a legal holiday in the place at which a payment is to be made hereunder shall be made on the next succeeding day which is a business day in such place, and any such extension of the time of payment shall be included in the computation of interest hereunder. Each Obligor (which term shall include the Maker and all makers, sureties, guarantors, endorsers, and other persons assuming obligations pursuant to this Note) under this Note hereby waives presentment, protest, demand, notice of dishonor, and all other notices, and all defenses and pleas on the grounds of any extension or extensions of the time of payments or the due dates of this Note, in whole or in part, before or after maturity, with or without notice. No renewal or extension of this Note, no release or surrender of any collateral given as security for this Note, no release of any Obligor, and no delay in enforcement of this Note or in 2 exercising any right or power hereunder, shall affect the liability of any Obligor. The pleading of any statute of limitations as a defense to any demand against Obligor is expressly waived. No single or partial exercise by the Holder of any right hereunder shall preclude any other or further exercise thereof or the exercise of any other rights. No delay or omission on the part of the Holder in exercising any right hereunder shall operate as a waiver of such right or of any other right under this Note. This Note and all agreements between the Maker and the Holder relating hereto are hereby expressly limited so that in no contingency or event whatsoever, whether by reason of acceleration or otherwise, shall the amount paid or agreed to be paid to the Holder for the use, forbearance or detention of money hereunder exceed the maximum amount permissible under applicable law. If from any circumstance whatsoever fulfillment of any provision hereof, at the time performance of such provision shall be due, shall involve transcending the limit of validity prescribed by law, then, ipso facto, the obligation to be ---------- fulfilled shall be reduced to the limit of such validity, and if from any such circumstance the Holder shall ever receive interest, or anything which might be deemed interest under applicable law, which would exceed the highest lawful rate, such amount which would be excessive interest shall be applied to the reduction of the principal amount owing on account of this Note and not to the payment of interest, or if such excessive interest exceeds the unpaid balance of principal of this Note, such excess shall be refunded to the Maker. All sums paid or agreed to be paid to the Holder for the use, forbearance or detention of the indebtedness of the Maker to the Holder shall, to the extent permitted by applicable law, be deemed to be amortized, prorated, allocated and spread throughout the full term of such indebtedness until payment in full so that the actual rate of interest on account of such indebtedness is uniform throughout the term thereof. The terms and provisions of this paragraph shall control and supersede every other provision of this Note and all other agreements between the Maker and the Holder. Whenever used herein, the words "Maker" and "Holder" and "Obligor" shall be deemed to include their respective successors and assigns. This Note shall be governed by and construed under and in accordance with the laws of the State of Maryland (but not including the choice of law rules thereof). IN WITNESS WHEREOF, the undersigned has caused this Note to be duly executed and delivered in its name and on its behalf on its behalf as of the day and year first hereinabove set forth. SYNBIOTICS CORPORATION ATTEST: /s/ Paul Rosinack By: /s/ Kenneth M. Cohen - ----------------- -------------------- Name: Kenneth M. Cohen Title: President and CEO 3 EX-10.74.1 6 0006.txt SECURITY AGREEMENT Exhibit 10.74.1 --------------- SECURITY AGREEMENT THIS SECURITY AGREEMENT, dated as of April 18, 2000 (this "Agreement"), is made by and between SYNBIOTICS CORPORATION, a California corporation ("Synbiotics"), and KIRKEGAARD & PERRY LABORATORIES, INC., a Maryland corporation ("Secured Party"). WHEREAS, pursuant to an Asset Purchase Agreement of even date herewith, by and between Synbiotics and the Secured Party (the "Purchase Agreement"), Synbiotics has agreed to purchase the Purchased Assets (as defined in the Purchase Agreement) from the Secured Party for a Purchase Price (as defined in the Purchase Agreement), which Purchase Price includes a payment by Borrower to the Secured Party in the aggregate amount of $1,000,000 pursuant to the Note (as defined below); WHEREAS, as a condition to the closing under the Purchase Agreement, Synbiotics has agreed to secure the payment and performance of its obligations to the Secured Party pursuant to this Agreement and the Secured Promissory Note, dated of even date herewith, made by the Buyer and payable to the Secured Party in the original principal amount of $1,000,000 (the "Note"); NOW THEREFORE, in consideration of the foregoing, the covenants and agreements herein contained, and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto do hereby agree as follows: ARTICLE I DEFINITIONS Section 1.1 Defined Terms. Unless otherwise defined herein, the ------------- capitalized terms used in this Agreement shall have the meanings assigned to such terms as stated below: (a) "Affiliate" shall mean, as to any person, any other person that, directly or indirectly, controls, is controlled by or is under common control with such person or is a director or officer of such person. For purposes of this definition, the term "control" (including the terms "controlling", "controlled by" and "under common control with") of a person means the possession, direct or indirect, of the power to vote 5% or more of the voting stock of such person or to direct or cause the direction of the management and policies of such person, whether through the ownership of voting stock, by contract or otherwise. (b) "Collateral" shall mean those assets of the Synbiotics in which the Secured Party shall have a perfected security interest, as described in Section 2.1 herein. - ----------- (c) "Event of Default" shall have the meaning specified in Section ------- 4.1 hereof. - --- (d) "Lien" shall mean and include any lien, mortgage, security interest, pledge, charge, equity, encumbrance or right of any kind whatsoever. (e) "Repayment Amount" shall mean the unpaid principal amount of the Note and all other amounts due thereunder. ARTICLE 2 SECURITY INTEREST Section 2.1 Security. As security for the prompt and full payment of the -------- Note and the performance by Synbiotics of all other obligations to the Secured Party under the Note and this Agreement, whether now in existence or hereafter created and whether primary, secondary, direct, contingent or otherwise, Synbiotics hereby pledges, assigns and grants to the Secured Party a valid, binding, enforceable, perfected, exclusive continuing first priority security interest in all of Synbiotic's right, title and interest in and to the property of Synbiotics listed on Exhibit A. --------- All of the property and interests in property described in Exhibit A --------- and all other property and interests in personal property which shall, from time to time, secure the Secured Obligations are herein collectively referred to as the "Collateral". Section 2.2 Rights of Secured Party. Synbiotics agrees that with respect ----------------------- to the Collateral, the Secured Party shall have all of the rights and remedies of a secured party under any applicable laws. ARTICLE 3 MONITORING OF COLLATERAL Section 3.1 Inspection of Records. The Secured Party shall have the --------------------- right, upon reasonable prior notice to Synbiotics, to call at Synbiotics's places of business during regular business hours, before or after an Event of Default, and without hindrance or delay, to audit, inspect, verify, check and make extracts or photocopies from the records of Synbiotics relating to the Collateral and other data relating to the Collateral. Section 3.2 Notice of Events Affecting Collateral. Synbiotics, -------------------------------------- immediately upon learning thereof, shall report to the Secured Party all matters materially affecting the value, enforceability or collectibility of any of the Collateral. ARTICLE 4 EVENTS OF DEFAULT; TERMINATION Section 4.1 Events of Default. If any of the following events shall occur ----------------- (each an "Event of Default"), the Secured Party shall be entitled to exercise its rights and remedies under Article 5 of this Agreement: 2 (a) The occurrence of any Event of Default under the Note; (b) The occurrence of any event of default by Synbiotics under the Transitional Manufacturing and Supply Agreement of even date herewith, by and between Synbiotics and Secured Party ("Manufacturing Agreement"); (c) Synbiotics shall fail to make any payments when due as provided for in the Royalty Agreement of even date herewith, between Synbiotics and Secured Party ("Royalty Agreement"), unless otherwise suspended by the term of such agreement; (d) Synbiotics shall breach or fail to perform any of the obligations set forth in this Agreement which breach or failure is not cured within 15 calendar days after notice thereof from the Secured Party to Synbiotics; (e) Any Lien created on the property encumbered hereby shall cease to be a valid and enforceable perfected first priority security interest in favor of the Secured Party, or Synbiotics shall so assert in writing or any of the Collateral shall be or become subject to any non-statutory Lien that has priority over the Liens granted to the Secured Party hereunder; or (f) Any event or condition shall occur and be continuing for more than 15 calendar days which causes, or which permits any lender to Synbiotics, to declare, any material indebtedness of Synbiotics for money borrowed to become due and payable prior to its scheduled maturity date. Section 4.2 Termination of Agreement. This Agreement shall be terminated ------------------------ and Synbiotics shall be released from liability hereunder upon the full and final payment to the Secured Party of all amounts owed to the Secured Party (including, but not limited to, the Repayment Amount) and the performance of all other obligations secured hereby. ARTICLE 5 RIGHTS AND REMEDIES UPON AN EVENT OF DEFAULT Section 5.1 Secured Party's Specific Rights and Remedies. In addition to -------------------------------------------- all other rights and remedies provided by law or under the Note, the Secured Party, upon the occurrence of any Event of Default, may: (a) Foreclose or enforce all or any security interests, liens, assignments, or pledges created by this Agreement or in the Note; (b) File suit against Synbiotics; (c) Seek specific performance or injunctive relief to enforce performance of the undertakings, duties and agreements provided herein, whether or not a remedy at law exists or is adequate; and 3 (d) Exercise any rights of a secured creditor under the Uniform Commercial Code, as adopted and amended in Maryland, including the right to take possession of the Collateral without the use of judicial process or hearing of any kind. Section 5.2 Remedies Cumulative. The rights and remedies provided in this ------------------- Agreement and the Note, or otherwise under applicable laws shall be cumulative and the exercise of any particular right or remedy shall not preclude the exercise of any other rights or remedies in addition to, or as an alternative of, such right or remedy. Section 5.3 Obligations Are Unconditional. The payment and performance of ----------------------------- the obligations hereunder or secured hereby shall be the absolute and unconditional duty and obligation of Synbiotics, and, except as otherwise provided for in the Royalty Agreement or the Manufacturing Agreement, shall be independent of any defense or any rights of set-off, recoupment or counterclaim which Synbiotics might otherwise have against the Secured Party, and, except as otherwise provided for in the Royalty Agreement or the Manufacturing Agreement, Synbiotics shall pay absolutely all payments required hereunder, free of any deductions and without abatement, diminution or set-off. Until such time as the obligations hereunder or secured hereby have been fully paid and performed, Synbiotics (a) shall not suspend or discontinue any payments provided for in the Note and except as otherwise provided for in the Royalty Agreement or the Manufacturing Agreement, (b) shall perform and observe all of Synbiotics's obligations contained herein, and (c) shall not terminate or attempt to terminate this Agreement for any cause. ARTICLE 6 MISCELLANEOUS Section 6.1 Exercise of Rights. No failure or delay on the part of the ------------------ Secured Party to exercise any right, power or privilege under this Agreement and no course of dealing between Synbiotics and the Secured Party shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under this Agreement preclude any other or further exercise thereof or the exercise of any other right, power or privilege. To the extent permitted by law, the rights and remedies herein expressly provided are cumulative and not exclusive of any rights or remedies which the Secured Party would otherwise have pursuant to law or equity. No notice to or demand on any party in any case shall entitle such party to any other or further notice or demand in similar or other circumstances, or constitute a waiver of the right of the other party to any other or further action in any circumstances without notice or demand. In the event that the consent of the Secured Party is required under the terms hereof, it is understood and agreed that except as otherwise provided expressly herein, the determination whether to grant or withhold such consent shall be made solely by the Secured Party in its absolute discretion. Section 6.2 Amendment and Waiver. This Agreement may not be amended, -------------------- waived, supplemented, restated, or otherwise modified without the prior consent of Synbiotics and the Secured Party. 4 Section 6.3 Indemnification. --------------- (a) Synbiotics agrees to pay, and to hold the Secured Party harmless from all liability for, any stamp taxes imposed by future changes in law (including interest, penalties and fees) which may be payable in connection with this Agreement or any modification of any of the foregoing. (b) Synbiotics shall (i) indemnify and hold harmless the Secured Party and its directors, officers, employees and Affiliates from and against all losses, claims, damages, expenses or liabilities to which the Secured Party or such director, officer, employee or Affiliate may become subject insofar as such losses, claims, damages, expenses or liabilities (or actions, suits or proceedings including any inquiry or investigation or claims in respect thereof) are caused by or result from any errors or omissions of Borrower under this Agreement and (ii) reimburse the Secured Party and its directors, officers, employees or Affiliates, upon their demand, for any reasonable legal or other expenses incurred in connection with investigating, preparing to defend or defending any such loss, claim, damage, liability, action or claim; provided, -------- however, that Synbiotics shall not be required to indemnify the Secured Party - ------- for any claims, damages, losses, liabilities, costs or expenses to the extent, but only to the extent, caused by the willful misconduct or gross negligence of such person or entity. If any action is brought against the Secured Party or any other person indemnified or intended to be indemnified pursuant to this Section 6.3(b), Synbiotics shall, if requested by the Secured Party or any such - -------------- indemnified person, resist and defend such action, suit or proceeding or cause the same to be resisted and defended by counsel reasonably satisfactory to the person or persons indemnified or intended to be indemnified. Each indemnified person shall, unless the Secured Party or other indemnified person has made the request described in the preceding sentence and such request has been complied with, have the right to employ its own counsel (or staff counsel) to investigate and control the defense of any other matter covered by such indemnity and the reasonable fees and expenses of such counsel shall be at the expense of Synbiotics. (c) All obligations provided for in Sections 6.3(a) and (b) herein ----------------------- shall survive any termination of this Agreement. Section 6.4 Successors and Assigns. This Agreement shall bind, and the ---------------------- benefits hereof shall inure to, Synbiotics and the Secured Party and their respective successors and assigns; provided that neither may transfer or assign -------- any or all of its rights and obligations hereunder without the prior written consent of the other party. Section 6.5 Notices, Requests, Demands. Except where telephonic -------------------------- instruction or notices are expressly authorized herein to be given, all notices, demands, instructions, requests, consents and other communications required or permitted to be given to or made upon any party hereto shall be given in accordance with Section 11.5 of the Purchase Agreement. ------------ Section 6.6 Counterparts: Description Headings. ----------------------------------- (a) This Agreement may be executed in any number of counterparts, and by the different parties hereto on the same or separate counterparts, each of which shall be deemed 5 to be an original instrument but all of which together shall constitute one and the same agreement. (b) The descriptive headings of the various sections of this Agreement are inserted for convenience of reference only and shall not be deemed to affect the meaning or construction of any of the provisions hereof. Section 6.7 Governing Law. This Agreement and the rights and obligations ------------- of the parties under this Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of Maryland without reference to its conflict of laws provisions. Section 6.8 Jurisdiction, Waiver of Jury and Bond. Each of Synbiotics and ------------------------------------- the Secured Party hereby irrevocably waives trial by jury in any action or proceeding of any kind or nature in any court in which an action may be commenced arising out of this Agreement or the Note or any of the transactions contemplated herein and therein or any assignment thereof. Each of the Secured Party and Borrower hereby agrees that the United States District Court for the District of Maryland or, at the option of the Secured Party, any court in which the Secured Party shall initiate legal or equitable proceedings and which has subject matter jurisdiction over the matter in controversy, shall have jurisdiction to hear and determine any claims or disputes between Synbiotics and the Secured Party, pertaining directly or indirectly to this Agreement, the Note or any of the transactions contemplated herein and therein. Synbiotics expressly submits and consents in advance to such jurisdiction in any action or proceeding commenced in such courts, hereby waiving personal service of the summons and complaint, or other process or papers issued therein, and agrees that service of such summons and complaint, or other process or papers may be made by mail or messenger directed to it at the address set forth in Section 11.5 of the ------------ Purchase Agreement and that service so made shall be deemed to be completed upon the earlier of actual receipt of five (5) days after the same shall have been posted to Synbiotics's address. The Secured Party and Synbiotics acknowledge that the time and expense required for trial by jury exceed the time and expense required for a bench trial and hereby waive, to the extent permitted by law, trial by jury, and waive any bond or surety or security upon such bond which might, but for this waiver, be required of the Secured Party. Nothing contained in this Section 6.8 shall affect the right of the Secured Party to serve legal ----------- process in any other manner permitted by law or affect the right of the Secured Party to bring any action or proceeding against Synbiotics or its property in the courts of any other jurisdiction to the extent necessary to enforce its liens against property located in such jurisdictions. Synbiotics waives any right it may have to claim or recover in any litigation referred to above any special, exemplary, punitive or consequential damages or any damages other than, or in addition to, actual damages. Section 6.9 Severability. In the event any provision of this Agreement ------------ shall be held invalid or unenforceable by any court of competent jurisdiction, the parties hereto agree that such holding shall not invalidate or render unenforceable any other provision hereof or thereof. The parties hereto further agree that the holding by any court of competent jurisdiction that any remedy pursued by the Secured Party hereunder is unavailable or unenforceable shall not affect in any way the ability of the Secure Party to pursue any other remedy available to it. 6 Section 6.10 Entire Agreement. This Agreement completely sets forth the ---------------- agreements between the parties and fully supersedes all prior agreements, both written and oral, relating to all matters set forth herein. [SIGNATURE PAGE FOLLOWS] 7 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be duly executed and delivered in its name and on its behalf as of the date first above written. SECURED PARTY: KIRKEGAARD & PERRY LABORATORIES, INC. By: /s/ Albert Perry ---------------- Name: Albert Perry Title: President SYNBIOTICS: SYNBIOTICS CORPORATION By: /s/ Michael Green ----------------- Name: Michael Green Title: Vice President - Finance 8 EXHIBIT A The Collateral includes all of Debtor's right, title, and interest in and to the personal properties, assets, goodwill and rights of Debtor set forth on this Exhibit A that have been sold, assigned, or otherwise transferred to the --------- Debtor by the Secured Party pursuant to the Asset Purchase Agreement, dated as of April 18, 2000, between Debtor and Secured Party (the "Purchase Agreement") and are owned by, or licensed to, the Debtor as of the date hereof including: (a) Dynex Plate Making/Casting machine, Serial Number 1023, together with all parts, alterations, attachments, additions, accessions, improvements, substitutions, replacements and accessions thereto; (b) copies of all books, customer lists and records, inspection records, distributor lists and records, research records relating to poultry and turkey products and other business records pertaining to Debtor's poultry diagnostic business and the Purchased Assets (as defined in the Purchase Agreement); (c) to the extent assignable, all contracts, and all rights of the Debtor, whether now existing or hereafter arising, thereunder, including the benefit of all deposits given by the Debtor pursuant thereto, relating to the Debtor's poultry diagnostic business, set forth in Schedule 1 to this Exhibit A; --------- (d) all of the Debtor's supplies, raw-materials, works in process, finished goods and materials used or consumed in the Debtor's poultry diagnostic business existing on the date hereof and all returned reclaimed or repossess goods, replacements and substitutions thereof; (e) all rights, title and interests in and to all products relating to the Debtor's poultry diagnostic business currently in development as of the date hereof; (f) all rights to the trademark "PROFLOK", and the goodwill of the Debtor's poultry diagnostic business symbolized by such trademark name, including all United States Federal and state and all foreign registrations, extensions, renewals, applications for registrations of such or rights to register the same worldwide, used in connection with Debtor's poultry diagnostic business, set forth on Schedule 2, all licenses or consents to use with respect thereto, and any and all rights of enforcement with respect to the foregoing, including all rights worldwide to sue for the infringement or unauthorized use thereof (whether past, present or future) and the recovery of damages or royalties related thereto; (g) all technical information used in the Debtor's poultry diagnostic business (including, for example, invention disclosures, trade secrets and know- how, assemblies and detail drawings, design manufacturing and assembling techniques and methods, design information, parts list, databases, computer software and documentation, source code listings, mask works, technical data, user, operation and maintenance manuals, servicing and installation instructions relating to manufacturing processes and apperati, design and production processes, 9 test and inspection techniques and procedures, material handling techniques, inspection methods and standards used in the Debtor's poultry diagnostic business) and set forth in the Outlines of Production contained in Exhibit B to the Transitional Manufacturing and Supply Agreement of even date herewith, between Debtor and Secured Party, and all trade secret rights arising under the common law, state or federal law or the laws of any foreign country, and the unencumbered right to exercise all such rights in all media and by any manner and means now known or hereafter devised, and any and all rights to register, patent or secure protection of such, and all rights of action and claims for damages and benefits arising from past, present and future infringements of such trade secret rights together with the right to sue for and in the name of the Debtor and to collect the same for the Debtor's use; (h) all right, title and interest in and to the ProFILE software licensed to the Debtor pursuant to the Consulting Services Agreement, dated July 19, 1997 between Secured Party and Innov Corporation, as assigned to Debtor (the "Innov Agreement"); (i) all marketing literature relating to Debtor's poultry diagnostic business in Debtor's possession on the date hereof; (j) all accessions to, substitutions for and all replacements, products and proceeds of the foregoing including, without limitation, proceeds of insurance policies insuring the Collateral. 10 Schedule 1 ---------- (1) Distributor Agreements (a) Written distributor agreements between the Debtor and each of the following: (i) Agricultural Development; (ii) AgroBio Tek Laboratorios; (iii) Avenida & Associates Inc.; (iv) Bio Diagnostics SND. BHD.; (v) BTI; (vi) Chem-East; (vii) Egytech; (viii) FELCO; (ix) Golbid Co. Ltd.; (x) Hester Pharmaceuticals; (xi) Intertech (formerly Biovida); (xii) La Ensenada; (xiii) LSI; (xiv) Maya Laboratuar, Ltd.; (xv) Merial (formerly ISBI); (xvi) Modern Agropharmaceuticals Est.; (xvii) Nippon Biological; (xviii) Seravian, S. L.; (xix) Tseng Hsiang Life Sciences; (xx) Ward Medic Limited; and (xxi) Veterquimica; (b) Written distributor arrangements (if any) between the Debtor and each of the following: (i) Bio-Mediq DPC; (ii) Carval De Colombia; (iii) Fort Dodge Animal Health; (iv) Korman Biotech (terminated); (v) Productos Quimicos Magiar SA; (vi) PT Satwa Jawa Jaya; and (vii) Rhenium Ltd. 11 (2) License Agreements between the Debtor and each of the following:
- ------------------------------------------------------------------------------------------------------- Licensor Subject Matter of License - ------------------------------------------------------------------------------------------------------- Univ. of Maryland IBDV e/Del Recombinant C12 - ------------------------------------------------------------------------------------------------------- Univ. of Maryland CAV - Monoclone, R25 Cell Line, R63 and mab 8 - ------------------------------------------------------------------------------------------------------- Univ. of Maryland R63 and mab 8 - ------------------------------------------------------------------------------------------------------- Univ. of Maryland Influenza Group A Specific Monoclonal Antibodies: LS-98-070 - ------------------------------------------------------------------------------------------------------- USDA Avian Leukosis Virus Subgroup J Envelope Gene - ------------------------------------------------------------------------------------------------------- Veterinary Infectious Disease Organization Hybridoma Cell Line (15 G 4) - -------------------------------------------------------------------------------------------------------
(3) Innov Agreement. 12 Schedule 2 ---------- Trademarks Country Registration No. Effective Date Expiration Date ------- ---------------- United States No. 1,561,761 10/24/1989 10/24/2009 France No. 1,148,880 3/16/1989 3/16/2009 Benelux No. 462,552 3/11/1999 4/18/2009 United Kingdom No 1,368,834 12/12/1995 12/12/2005 Portugal No. 255,395 10/20/1992 10/20/2002 Spain No. 1,315,229 6/5/1991 6/5/2011 13 EX-10.74.2 7 0007.txt INTERCREDITOR AGREEMENT Exhibit 10.74.2 --------------- INTERCREDITOR AGREEMENT THIS INTERCREDITOR AGREEMENT is entered into as of April 18, 2000, by and among IMPERIAL BANK, a California banking company (the "Bank"), SYNBIOTICS CORPORATION, a California corporation, ("Synbiotics") and KIRKEGAARD & PERRY LABORATORIES, INC. a Maryland corporation ("KPL"); WHEREAS, Bank has made a loan to Synbiotics in the original principal amount of $10 million pursuant to a Credit Agreement, dated April 12, 2000, between Bank and Synbiotics (the "Credit Agreement"), which loan is secured by certain assets of Synbiotics pursuant to a Commercial Security Agreement, dated April 12, 2000, by and between Bank and Synbiotics (the "Bank Security Agreement"); WHEREAS, Synbiotics is acquiring certain assets of KPL pursuant to an Asset Purchase Agreement of even date herewith for a purchase price of up to $6,000,000, a portion of which purchase price is evidenced by a Secured Promissory Note, in the original purchase price of $1,000,000 made by Synbiotics and payable to the order of KPL (the "KPL Note") and is secured by certain assets sold by KPL to Synbiotics pursuant to a Security Agreement of even date herewith (the "KPL Security Agreement"); WHEREAS, the parties desire to enter into this Agreement to set forth certain rights and obligations with respect to each other. NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. The parties acknowledge and agree that (a) pursuant to the KPL Security Agreement KPL asserts a first priority perfected security interest in all of the assets forth on Schedule 1 to the KPL Security Agreement (the "KPL Secured Assets") and that (b) Bank asserts a second priority perfected security interest in the KPL Secured Assets. 2. The parties acknowledge and agree that Bank asserts a first priority security interest in all of the assets of Synbiotics other than the KPL Secured Assets. 3. KPL acknowledges and agrees that it will not accept any payments under the KPL Note other than the proceeds of the KPL Secured Assets if, and only if, prior to the receipt of any such payment it receives prior written notice ("Notice") of the occurrence of (i) a payment default by Synbiotics under the Credit Agreement for so long as there is an outstanding amount due and payable under the Credit Agreement or (ii) a default other than a payment default by Synbiotics under the Credit Agreement (a "Non-Payment Default") for so long as such Non-Payment Default remains uncured or unwaived, but in no event longer than 180 days from occurrence of such Non-Payment Default. 4. KPL acknowledges and agrees that in the event it receives a payment under the KPL Note other than the proceeds of the KPL Secured Assets after it receives a Notice, it shall promptly remit such payment to Bank for so long as (i) in the event of a payment default by Synbiotics under the Credit Agreement, there is an outstanding amount due and payable under the Credit Agreement or (ii) in the event of a Non-Payment Default, such Non-Payment Default remains uncured or unwaived, but in no event longer than 180 days after the occurrence of such Non-Payment Default. Nothing herein shall be deemed to release, waive, limit, condition or modify any right which KPL may have to the KPL Secured Assets or the proceeds thereof. 5. Each of KPL and Bank agrees to provide written notice to the other of a payment default under the KPL Note or the Bank Note, respectively, within 5 days after the occurrence of such failure to make such payment when due. Furthermore, Bank shall promptly notify KPL if any default that is the subject of a Notice is cured. 6. This Agreement shall be governed by and construed in accordance with the laws of the State of California (excluding the conflict rules thereof). 7. This Agreement may be executed in one or more counterparts which, when taken together, shall constitute one and the same instrument. 2 IN WITNESS WHEREOF, each of the undersigned have caused this Agreement to be duly executed and delivered in its name and on its behalf as of the date first set forth above. IMPERIAL BANK By: /s/ Jamie Harney ---------------- Name: Jamie Harney Title: Vice President SYNBIOTICS CORPORATION By: /s/ Michael Green ----------------- Name: Michael Green Title: Vice President - Finance KIRKEGAARD & PERRY LABORATORIES, INC. By: /s/ Albert Perry ---------------- Name: Albert Perry Title: President 3 EX-27 8 0008.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2000 AND THE RELATED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 INCLUDED ELSEWHERE IN THIS FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 1,715 617 4,236 391 6,766 14,548 4,360 1,521 47,478 8,783 10,743 2,510 0 40,065 (17,045) 47,478 25,356 25,678 12,439 27,140 0 0 913 (2,375) 58 (2,433) 0 (583) 0 (3,016) (0.33) (0.33)
-----END PRIVACY-ENHANCED MESSAGE-----