ASSET PURCHASE AGREEMENT

 

 

                                  Exhibit 10.27

 

                            ASSET PURCHASE AGREEMENT

 

      This ASSET PURCHASE AGREEMENT is entered into as of May 13th, 2004, by and

among PhotoAccess Technologies, Corp., a Delaware corporation ("Seller") and

PhotoWorks, Inc., a Washington corporation ("PhotoWorks") and PhotoWorks Digital

Imaging, Inc. , a Washington corporation and a wholly-owned subsidiary of

PhotoWorks ("Buyer").

 

                                    RECITALS

 

      A. Seller is engaged in the business of providing services that enable the

delivery of film-quality digital prints and photo merchandise through on-line

points of sale (the "Services").

 

      B. Buyer desires to purchase and Seller desires to sell substantially all

of the assets of Seller used or held in connection with the Services.

 

      NOW THEREFORE, the parties agree as follows:

 

                                    AGREEMENT

 

1. Sale and Purchase of Assets.

 

      1.1 Transfer of Assets. Subject to the terms and conditions of this

Agreement, at the closing referred to in Section 3 (the "Closing"), Seller shall

sell, assign, grant and transfer to Buyer, and Buyer shall purchase and accept

from Seller, all of Seller's right, title and interest in and to substantially

all of the assets of Seller, including the following assets (the "Assets"):

 

            (a) The PhotoAccess.com Website and Fulfillment Platform. All

rights, title and interest in and to the Seller's website and fulfillment

platform, including without limitation, all (i) equipment owned by Seller and

used in connection with the Services and listed on Schedule 1.1(a)(i) (the

"Hardware"), (ii) all software owned or licensed by Seller and used in

connection with the Services and listed on Schedule 1.1(a)(ii), including all

improvements, corrections, modifications, updates and enhancements thereto (the

"Software"), and (iii) all documentation used in the development and updating of

the Software, including without limitation, design or development specifications

or reports, and related correspondence and memoranda, and all end-user

instruction manuals that usually accompany the Software instructing end-users in

the use of the Software, whether in printed or electronic form (collectively,

the "Documentation");

 

             (b) Seller Intellectual Property. All rights, title and interest in

and to intangible property of Seller used in the Services (whether owned, used,

registered in the name of, or licensed by Seller or in which Seller otherwise

has an interest), including, without limitation, all research, development,

computer source and object code, trade secrets, copyrights, patents, patent

applications, trademarks, trade names, trade dress, service marks and Internet

domain and other names (either registered, common law or registration applied

for), inventions, know-how and other proprietary rights, including, without

 

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limitation, those listed on Schedule 1.1(b) (together with the Hardware,

Software and Documentation, the "Seller Technology");

 

            (c) Contracts. All rights in and to the agreements and contracts to

which Seller is a party or beneficiary related to the Services and used or

intended to be used in Seller's business as conducted as of the Closing Date,

including without limitation, the agreements listed on Schedule 1.1(c) (the

"Third-Party Technology Contracts");

 

            (d) Fixed Assets and Tangible Personal Property. The fixed assets

and tangible personal property of Seller, including photo finishing equipment,

listed on Schedule 1.1(d) (the "Personal Property");

 

            (e) Customer Lists. All customer lists of Seller (the "Customer

Lists") and all files, records and documents (including credit information and

stored digital images) relating to customers of Seller prior to Closing that are

stored on the Hardware.

 

            (f) In Process Orders. All orders that are entered or have not been

fulfilled as of the close of business on April 30, 2004 shall be the property of

Buyer and Buyer shall be entitled to all revenues therefrom. The fulfillment of

such orders shall be Buyer's sole responsibility.

 

            (g) Accounts Receivable. All accounts receivable of Seller as of the

date of Closing.

 

      1.2 Assumption of Obligations. In connection with the purchase and sale of

the Assets hereunder, Buyer shall assume in writing at the Closing only those

obligations of Seller as set forth on Schedule 1.2 ("Assumed Obligations"). No

other Seller liabilities or obligations of any nature, whether known or unknown,

fixed or contingent ("Excluded Obligations"), shall be assumed by Buyer in

connection with the purchase and sale of the Assets. All Excluded Obligations

shall remain the sole responsibility of Seller. Seller agrees to apply its

existing cash and any cash received between the date hereof and the Closing Date

to the reduction of its accounts payable and outstanding tax obligations.

 

      1.3 Excluded Assets. Notwithstanding the foregoing, the properties and

assets of Seller set forth on Schedule 1.3 shall be retained by Seller and are

expressly excluded from the purchase and sale contemplated by this Agreement

(collectively, the "Excluded Assets"). Notwithstanding anything to the contrary

contained elsewhere in this Agreement, the Assets shall not include any of the

Excluded Assets.

 

2. Purchase Price; Payment Terms.

 

      2.1 Purchase Price. The consideration (the "Purchase Price") for the

Assets shall consist of the following: (a) One Million Two Hundred Thousand

(1,200,000) shares of the common stock (the "Shares") of PhotoWorks (the "Shares

Payment"); and (b) assumption of the Assumed Obligations by the Buyer.

 

      2.2 Payment. The Purchase Price shall be made as follows:

 

            (a) 800,000 of the Shares shall be paid to Seller at Closing by

PhotoWorks' issuance of one or more stock certificates in the name of Seller

and/or to such stockholders of Seller as directed by Seller.

 

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            (b) 400,000 of the Shares shall be retained by PhotoWorks (the

"Holdback Shares") as security for Seller's indemnification obligation under

Section 8.4 hereof. Holdback Shares as to which Buyer has not made a claim

within eleven (11) months of the Closing Date (the "Holdback Period") shall be

delivered to Seller and/or such stockholders of Seller as directed by Seller

promptly at the end of the Holdback Period. The Shares included in the Holdback

Shares may not be assigned by Seller or its shareholders (other than by Seller

to its shareholders) prior to the end of the Holdback Period.

 

      2.3 Restricted Shares. Seller acknowledges that the Shares have not been

registered under the Securities Act of 1933, as amended (the "1933 Act") and

will be restricted securities as defined in Rule 144 promulgated by the

Securities and Exchange Commission under the 1933 Act. PhotoWorks has no

obligation to register the Shares for resale under the 1933 Act. The stock

certificates evidencing all the Shares shall carry a restrictive legend stating:

 

                  THIS SECURITY IS NOT BEING REGISTERED UNDER THE SECURITIES ACT

      OF 1933, AS AMENDED (THE "SECURITIES ACT") OR APPLICABLE STATE SECURITIES

      LAWS. THE HOLDER HEREOF, BY PURCHASING THIS SECURITY, AGREES FOR THE

      BENEFIT OF THE ISSUER THAT THIS SECURITY MAY BE RESOLD, PLEDGED OR

      OTHERWISE TRANSFERRED, ONLY (1) TO THE COMPANY, (2) IN ACCORDANCE WITH

      RULE 144 OR A SIMILAR RULE AS THEN IN EFFECT UNDER THE SECURITIES ACT AND

      APPLICABLE STATE SECURITIES LAWS OR (3) PURSUANT TO AN EXEMPTION FROM

      REGISTRATION UNDER THE SECURITIES ACT

 

      2.4 Tax Consequences. It is intended that this transaction shall qualify

as a reorganization pursuant to Section 368(a)(1)(C) of the Internal Revenue

Code of 1986, as amended (the "Code"), and that this Agreement shall constitute

a plan of reorganization within the meaning of Section 361 of the Code.

 

3. Closing.

 

      3.1 Time and Place of Closing. The Closing of the sale and purchase of the

Assets shall take place at 10:00 a.m., Pacific Standard time, as soon as

reasonably practicable after the satisfaction or waiver of the conditions to

Closing set forth herein, but in no event more than 30 days after such

satisfaction or waiver (the "Closing Date") at the offices of Heller Ehrman

White & McAuliffe, LLP, in Seattle, Washington or such other time and date as

the parties may mutually agree upon in writing.

 

      3.2 Items to be Delivered at the Closing.

 

            (a) Items to be Delivered by Seller. At the Closing, Seller shall

deliver or cause to be delivered to Buyer:

 

                  (i) an executed Bill of Sale substantially in the form

attached hereto as Exhibit 3.2(a)(i);

 

                  (ii) an executed Trademark Assignment substantially in the

form attached hereto as Exhibit 3.2(a)(ii);

 

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                  (iii) an executed Copyright Assignment substantially in the

form attached hereto as Exhibit 3.2(a)(iii);

 

                  (iv) an Assignment of Domain Names substantially in the form

attached here to as Exhibit 3.2(a)(iv);

 

                  (v) a master copy of each computer software program included

in the Software (in both object and source code format), which shall be in a

form suitable for copying;

 

                  (vi) a copy of all Documentation, in both printed and

electronic form;

 

                  (vii) a copy of the resolutions of (A) the Board of Directors

of Seller and (B) the shareholders of Seller, in each case authorizing Seller's

execution and delivery of this Agreement and the consummation of the

transactions contemplated hereby, and a certificate of Seller's secretary or

assistant secretary that each of such resolutions were duly adopted and are in

full force and effect as of the Closing;

 

                  (viii) The Customer Lists and all related customer records and

files and the business and financial records relating to the Assets set forth in

Section 1.1(e) hereof;

 

                  (ix) Copies of executed option agreements and offer letters by

and between Buyer, PhotoWorks and certain of Seller's employees ("Certain

Identified Employees");

 

                  (x) A letter from the Washington Department of Revenue with

respect to the tax status of Seller; and

 

                  (xi) Such other documents and instruments as shall be

reasonably requested to effect the transactions contemplated hereby.

 

            (b) Items to be Delivered by Buyer. At the Closing, Buyer shall

deliver or cause to be delivered to Seller:

 

                  (i) a copy of the resolutions of the Board of Directors of

Buyer authorizing Buyer's execution and delivery of this Agreement and the

consummation of the transactions contemplated hereby; and

 

                  (ii) the Purchase Price in accordance with the provisions of

Section 2.2 hereof.

 

            (c) Items to be Delivered by Seller and Buyer. At the Closing, Buyer

and Seller shall both execute an Assignment and Assumption Agreement

substantially in the form attached hereto as Exhibit 3.2(c).

 

4. Representations and Warranties of Seller. Seller represents and warrants to

   Buyer as follows:

 

      4.1 Organization, Standing and Authority of Seller. Seller is a

corporation duly organized, validly existing and in good standing under the laws

of the state of Delaware. Seller has all requisite corporate power and authority

to enter into this Agreement and to consummate the transactions contemplated

hereby. The execution and delivery of this Agreement and the consummation of the

 

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transactions contemplated hereby have been duly authorized by all necessary

corporate action on the part of Seller. Subject to the approval of the

stockholders of Seller, this Agreement constitutes the valid and binding

obligation of Seller, enforceable against Seller in accordance with its terms,

except to the extent that enforceability may be limited by applicable

bankruptcy, reorganization, insolvency, moratorium or other laws affecting the

enforcement of creditors' rights generally and by general principles of equity.

 

      4.2 Required Filings and Consent. None of the execution and delivery by

Seller of this Agreement or the consummation of the transactions contemplated

hereby will require any consent, approval, order or authorization of, or

registration, declaration or filing with, any third party except for such

consents, authorizations, filings, approvals and registrations which are listed

on Schedule 4.2 or which in the aggregate, if not obtained or made, would not be

expected to have a material adverse effect on the Services or Assets (a

"Material Adverse Effect").

 

      4.3 No Conflicts or Violations. The execution and delivery by Seller of

this Agreement and the consummation of the transactions contemplated hereby will

not (i) conflict with, or result in a breach of the Articles of Incorporation or

Bylaws of Seller, (ii) violate any statute, law, rule or regulation, or any

order, writ, injunction or decree of any court or governmental authority, or

(iii) violate or conflict with or constitute a default under any agreement,

instrument or writing of any nature to which Seller is a party or by which

Seller or the Assets may be bound.

 

      4.4 Title to Assets.

 

            (a) Except as set forth on Schedule 4.4(a), Seller owns all right,

title and interest in and to, or otherwise possesses legally enforceable rights,

or is licensed to use, all of the Assets, free and clear of any liens and

encumbrances. Seller's right, title and interest in the Seller Technology is

valid and in full force and effect, and consummation of the transactions

contemplated hereby will not alter or impair any of the Seller Technology to be

acquired by Buyer.

 

            (b) No claims have been asserted or threatened against Seller (and

Seller has no knowledge of any claims which are likely to be asserted or

threatened against Seller or which have been asserted or threatened against

others relating to the Seller Technology) by any third party challenging

Seller's use, possession, or distribution of any Seller Technology including

without limitation, any Third Party Technology (as defined below) or challenging

the validity or effectiveness of any license or agreement relating thereto

including without limitation, any Third Party Licenses (as defined below) or

alleging a violation of any third party's or entity's privacy, personal or

confidentiality rights. Seller knows of no valid basis for any claim of the type

specified in the immediately preceding sentence which would be reasonably

expected to interfere with the continued exploitation by Seller of any of the

Seller Technology in the manner currently exploited. Except as set forth on

Schedule 4.4(b), none of the Seller Technology nor the Seller's current use or

exploitation of any Seller Technology including any Third Party Technology

included or related thereto infringes or misappropriates any proprietary right

of any third party. All of the Personal Property is in good operating condition,

except for reasonable wear and tear.

 

      4.5 Intellectual Property.

 

            (a) Schedule 4.5(a) attached hereto contains an accurate and

complete list of all (i) licenses and other agreements with third parties (the

"Third Party Licenses") relating to any proprietary rights that Seller is

licensed or otherwise authorized by such third parties to use, market,

 

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distribute or incorporate in the Seller Technology (the "Third Party

Technology"), (ii) licenses and other agreements with third parties relating to

any information, compilations, data lists or databases that Seller is licensed

or otherwise authorized by such third parties to use, market, disseminate,

distribute or incorporate in the Seller Technology and (iii) licenses and

agreements with third parties under which such third party is licensed or

authorized to use, sell, distribute or incorporate any Seller Technology or any

portion thereof. Except as so identified on Schedule 4.5(a), the Assets are all

the assets essential and required to operate Seller's business as conducted as

of the Closing Date.

 

            (b) Except as set forth on Schedule 4.5(b), Seller has not granted

any third party any right to reproduce, distribute, market or exploit any of the

Seller Technology or any adaptations, translations, or derivative works based on

the Seller Technology or any portion thereof. All of the Seller Technology was

written, developed and created solely by employees of Seller without the

assistance of any third party or were created by third parties who assigned

ownership of their rights to Seller by means of valid and enforceable

confidentiality and invention assignment agreements, true and correct copies of

which have been delivered to Buyer. Seller has taken all steps customary and

reasonable in its industry to protect the confidentiality and proprietary nature

of all Seller Technology and other confidential information not otherwise

protected by patents, patent applications or copyright.

 

            (c) No employee, contractor or consultant of Seller is in violation

of any written employment contract, patent disclosure agreement or any other

written contract or agreement relating to the relationship of any such employee,

consultant or contractor with Seller or any other party because of the nature of

the Services conducted by Seller or currently proposed to be conducted by

Seller. Schedule 4.5(c) lists all employees, contractors and consultants who

have participated in any way in the development of any material portion of the

Seller Technology.

 

            (d) Each person presently or previously employed by Seller

(including independent contractors, if any) has executed a confidentiality,

non-disclosure and proprietary inventions assignment agreement pursuant to the

form of agreement previously provided to Seller or its representatives. There is

no unauthorized use, disclosure, infringement or misappropriation of any of the

Seller Technology, or any Third Party Technology to the extent licensed by or

through Seller, by any third party, including any employee, former employee or

independent contractor of Seller. Except as set forth on Schedule 4.5(d), Seller

has not entered into any agreement to indemnify any third party against any

charge of infringement of any Seller Technology.

 

             (e) Schedule 4.5(e) sets forth a complete and accurate list of all

customers that are licensing the Software from Seller as of the Closing Date

under written contracts (the "Partnership Agreements") with Seller. Seller has

previously provided Buyer with true and complete copies of all Partnership

Agreements (including any amendments, addenda or material correspondence related

thereto). Seller is not a party to any source code escrow agreements or other

agreements giving any customer of Seller the right to obtain, gain access to, or

require the disclosure or delivery of the source code to any Software to which

Seller is a party as of the Closing Date.

 

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      4.6 Compliance With Law. Except as set forth on Schedule 4.6, Seller and

the operation of the Services are in compliance in all material respects with

all applicable laws and regulations material to the operation of the Services.

Seller has complied in all material respects at all times with any and all

applicable laws, rules, regulations, proclamations and orders, except for such

noncompliances as would not in the aggregate reasonably be expected to have a

Material Adverse Effect.

 

      4.7 Litigation. There is no action, suit, proceeding, claim, arbitration

or investigation pending before any agency, court or tribunal, foreign or

domestic, or threatened against Seller or any of the Assets. There is no

judgment, decree or order against Seller. Except as set forth on Schedule 4.7

and to Seller's knowledge, no circumstances exist that could reasonably be

expected to result in a claim against Seller as a result of the operation of the

Services.

 

      4.8 Tax Returns and Payments. Except as set forth on Schedule 4.8, all

material tax returns and reports required by law to be filed by Seller under the

laws of any jurisdiction, domestic or foreign, have been duly and timely filed

and all Taxes (defined below), fees or other governmental charges of any nature

which were required to have been paid have been paid or provided for. Seller has

no knowledge of any tax audit of Seller by any taxing or other authority in

connection with any of its fiscal years. Seller has no knowledge of any such

audit currently pending or threatened, and there are no tax liens on any of the

properties of Seller, nor have any such liens been threatened, other than for

Taxes not yet due and payable. All taxes that Seller is or was required to

withhold, deduct or collect have been duly withheld, deducted and collected, and

to the extent required, have been paid to the proper governmental agency. Taxes

shall include any income, gross receipts, license, payroll, employment, excise,

severance, stamp, occupation, premium, property, environmental, windfall profit,

customs, vehicle, airplane, boat, vessel or other title or registration, capital

stock, franchise, employees' income withholding, foreign or domestic

withholding, social security, unemployment, disability, real property, personal

property, sales, use, transfer, value added, alternative, add-on minimum and

other tax, fee, assessment, levy, tariff, charge or duty of any kind whatsoever

and any interest, penalty, addition or additional amount thereon imposed,

assessed or collected by or under the authority of any governmental agency or

payable under any tax-sharing agreement or any other contracts.

 

      4.9 Brokers. Other than Seller's obligation for the payment of Five

Thousand Eight Hundred Forty Five Dollars ($ 5,845.00) to Kay Yun, neither (i)

Seller or any directors, officer, agent or employee acting on behalf of seller

nor (ii) any Seller stockholder, is obligated for the payment of fees or

expenses of any broker or finder in connection with this Agreement or any

transaction contemplated hereby.

 

      4.10 Third Party Technology Contracts. Except as set forth on Schedule

4.10, neither Seller nor any other party to the Third-Party Technology Contracts

is in default in performance of or not in compliance with any material

provisions of such Third Party Technology Contracts. Seller has no knowledge of

any intent by any other party not to perform its obligations under any such

contracts. Except as forth on Schedule 4.10, Seller has the right to assign all

Third-Party Technology Contracts to Buyer pursuant to this Agreement and neither

the assignment of such contracts nor the consummation of the transactions

contemplated by this Agreement permits or would lead any party to such contract,

to terminate or alter such contract.

 

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      4.11 Customer Lists. There are no contractual restrictions that limit

Buyer's ability to use the Customer Lists for any lawful purpose consistent with

the Seller's current use thereof in accordance with Seller's privacy policy.

 

      4.12 Accuracy of Documents and Information. The copies of all instruments,

agreements, other documents and written information set forth as, or referenced

in, the schedules or exhibits to this Agreement or specifically required to be

furnished pursuant to this Agreement to Buyer by Seller are complete and correct

in all material respects.

 

      4.13 No Discrimination. There is and has not been any claim in writing

against Seller or its officers or employees, or to Seller's knowledge,

threatened against Seller or its officers or employees (in their capacities as

such), based on actual or alleged race, age, sex, disability or other harassment

or discrimination, or similar tortious conduct, or based on actual or alleged

breach of contract with respect to any person's employment by Seller, nor to the

knowledge of Seller is there any basis for any such claim that could reasonably

be expected to have a material adverse effect on Seller.

 

5. Representations and Warranties of PhotoWorks and Buyer. PhotoWorks and Buyer

   represent and warrant to Seller as follows:

 

      5.1 Organization, Standing, and Authority of Buyer. Buyer is a corporation

duly organized, validly existing and in good standing under the laws of the

State of Washington. Buyer has all requisite corporate power and authority to

enter into this Agreement and to consummate the transactions contemplated

hereby. The execution and delivery of this Agreement and the consummation of the

transactions contemplated hereby have been duly authorized by all necessary

corporate action on the part of Buyer. This Agreement constitutes the valid and

binding obligation of Buyer, enforceable against Buyer in accordance with its

terms, except to the extent that enforceability may be limited by applicable

bankruptcy, reorganization, insolvency, moratorium or other laws affecting the

enforcement of creditors' rights generally and by general principles of equity.

 

      5.2 Organization, Standing, and Authority of PhotoWorks. PhotoWorks is a

corporation duly organized, validly existing and in good standing under the laws

of the State of Washington. PhotoWorks has all requisite corporate power and

authority to enter into this Agreement and to consummate the transactions

contemplated hereby. The execution and delivery of this Agreement and the

consummation of the transactions contemplated hereby have been duly authorized

by all necessary corporate action on the part of PhotoWorks. This Agreement

constitutes the valid and binding obligation of PhotoWorks, enforceable against

PhotoWorks in accordance with its terms, except to the extent that

enforceability may be limited by applicable bankruptcy, reorganization,

insolvency, moratorium or other laws affecting the enforcement of creditors'

rights generally and by general principles of equity.

 

      5.3 Shares; Capitalization. Upon issuance at Closing, the Shares will be

duly authorized, fully-paid, and non-assessable, and clear of all liens,

charges, security interests, encumbrances or other restrictions and shall not be

subject to preemptive rights or similar rights of stockholders. The number of

shares and type of all authorized, issued and outstanding capital stock, options

and other securities of the PhotoWorks (whether or not presently convertible

into or exercisable or exchangeable for shares of capital stock of PhotoWorks)

is as set forth in the SEC Reports (as defined in Section 5.7) as of the

respective dates thereof, and are set forth on Schedule 5.3 as of the date

 

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hereof. All outstanding shares of capital stock are duly authorized, validly

issued, fully paid and nonassessable and have been issued in compliance with all

applicable securities laws. Except as set forth in the SEC Reports, there are no

outstanding options, warrants, script rights to subscribe to, calls or

commitments of any character whatsoever relating to, or securities, rights or

obligations convertible into or exercisable or exchangeable for, or giving any

person any right to subscribe for or acquire, any shares of common stock of

PhotoWorks or its subsidiaries, or contracts, commitments, understandings or

arrangements by which PhotoWorks or its subsidiaries is or may become bound to

issue additional shares of its common stock, or securities or rights convertible

or exchangeable into shares of common stock. Except as set forth in the SEC

Reports, there are no anti-dilution or price adjustment provisions contained in

any security issued by PhotoWorks or its subsidiaries (or in any agreement

providing rights to security holders).

 

      5.4 Required Filings and Consent. None of the execution and delivery by

Buyer or PhotoWorks of this Agreement or the consummation of the transactions

contemplated hereby will require any consent, approval, order or authorization

of, or registration, declaration or filing with, any third party except for such

consents, authorizations, filings, approvals and registrations which are listed

on Schedule 5.4 or which in the aggregate, if not obtained or made, would not

have or reasonably be expected to result in (i) an adverse effect on the

legality, validity or enforceability of this Agreement, (ii) a material adverse

effect on the results of operations, assets, prospects, business or condit