Asset Purchase Agreement

ASSET PURCHASE AGREEMENT


This ASSET PURCHASE AGREEMENT (the "Agreement") is made and entered into s of May 7, 1999 ("Effective Date"), by and between PC Specialists, Inc., a California corporation (the "Buyer"), 3SI, Inc., a Colorado corporation (the "Seller"), and 3SI Holdings, Inc., a Colorado corporation (the "Parent"). The Buyer, the Seller and the Parent may be referred to herein collectively as the "Parties" and individually as a "Party."


RECITALS


A. Parent is the sole owner of Seller.


B. Seller is engaged in the business of reselling computers and computer components (the "Business").


C. Seller desires to sell certain assets of the Business to Buyer, upon the conditions set forth in this Agreement.


D. Buyer desires to purchase and acquire these certain assets of the Business, upon the terms and subject to the conditions set forth in this Agreement.


NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants hereinafter contained, the Parties hereby agree as follows:


ARTICLE I PURCHASE AND SALE


1.1 Agreement to Purchase and Sell Assets. Upon the terms and subject to the conditions set forth in this Agreement, at the Closing, Seller will sell, transfer, convey, assign and deliver to the Buyer, and the Buyer will purchase or acquire from the Seller, all right, title and interest of the Seller in and to all of the assets of the Business owned by Seller (other than the Excluded Assets) used in or in connection with, or arising out of, the Business (the "Assets"), including, but not limited to:


(a) All tangible personal property, furniture, machinery, tooling, equipment, fixtures, leasehold improvements, telephone and mobile communications equipment and other fixed assets used in the Business, and all books, manuals and documentation relating thereto, including sales records and normal business records associated with the Business;


(b) All inventory of the Business, wherever located.


(c) All (i) trademarks, trade names and logos and any derivations or thereof, the Internet domain name "SI.com" and any and all rights to the associated Internet website, copyrights, patents, trade secrets and all other intellectual property of the Seller, and all registrations and applications for the same, owned or used in connection with the Assets or the business, (ii) sales promotion materials relating to the Assets or the Business, including Seller's telephone numbers and directory listings, (iii0 all methods of operation and manuals, (iv) all sales and credit and records relating to the Assets or Business, (vi) employee lists of all persons who immediately prior to the Closing Date were employees of the Seller in respect of the Business;


(d) All the Seller's rights under (i) the Amdahl Corporation Contract (the "Amdahl Contract") and the State of New Mexico Contract (the "New Mexico Contract"), the lease for the facility located at 6886 S. Yosemite Street, Englewood, CO 80112 (the "Facility Lease"), (ii) any and all open purchase orders from costumers and the associated orders with suppliers, (iii) any leases for tangible personal property, (iv) all assignable registrations, licenses, permits and approvals, and (v) all representation agreements with sales representatives and agents, used in or relating to the Assets or the Business (hereafter, collectively referred to as the "Contracts");


(e) All computer programs, computer software, the master disk of source codes for internally developed software, and other proprietary computer and computer programming information relating to and used in connection with the Assets or the Business;


(f) Any and all claims and rights against third parties, if and to the extent they relate to the condition of the Assets including, without limitation, all rights under manufactures' and vendors' warranties (collectively the "Claims"); and


(g) All of the Sellers goodwill in, and the going concern value of, the Business.


The Assets shall include, without limitation, all of the Assets reflected on the Sellers May 7, 1999 Balance Sheet attached hereto as Exhibit A ("Balance Sheet"), except for those which have been transferred or disposed of in the ordinary course of the Business after May 7, 1999 ("Balance Sheet Date") and those excluded assets listed in Section 1.2 below. It shall also include a non- exclusive, worldwide, perpetual royalty-free license to use the name "3SI."


1.2 Excluded Assets. The Assets shall not include, and Seller shall not sell to Buyer, any of the following items (collectively, the "Excluded Assets"):


(a) All cash on hand or in bank accounts, and any other cash equivalents, including without limitation certificates of deposit, commercial paper, treasury bills, asset or money market accounts, marketable securities and all such similar accounts or investments;


(b) All accounts receivable earned in the Business before the Closing Date (the "Accounts Receivable");


(c) Pension, profit sharing and savings plans and trusts and any assets thereof;


(d) All tangible personal property consumed by Seller in the ordinary course of business between the date hereof and the Closing Date;


(e) All amounts due the Seller in connection with any tax refunds, prepaid taxes, rights under any tax-sharing agreement, or similar payments for periods ending on or prior to the Closing Date;


(f) The corporate minute books, corporate seals, corporate lists, sales records, tax return work papers, and similar corporate records of Seller;


(g) All governmental licenses and permits, or similar rights that cannot by their terms be assigned to Buyer;


(h) Any and all amounts payable to the Seller from related or affiliated parties of the Seller;


(i) All software development costs and prepaid royalties of the Seller;


(j) The assets used in the development and delivery of the KEWi products and services, which business the Seller shall continue to conduct after the Closing Date;


(k) The corporate names "3SI, Inc. and 3SI Holdings, Inc.; and


(l) The equipment leased from Tatonka Capital Corporation which lease is now the subject of a lawsuit between Seller and Tatonka Capital Corporation.


1.3 Liabilities.


(a) Except as specifically provided for in this Section 1.3, Buyer shall not assume and shall not be responsible for, any liabilities, debts or obligations of Seller or of the Business, of any kind or nature whatsoever. Buyer agrees, as of the Closing Date, to assume only the following liabilities and obligations of Seller (collectively, the "Assumed Liabilities"):


(i) The continuing obligations incurred on or after the Closing Date under each of the Contracts, provided, however, that Buyer's obligation to assume the Contracts is limited in accordance with Section 12.4 below;


(ii) All liabilities and obligations relating to the Assets or the Business incurred on and after the Closing Date; and


(iii) One half of the cost of all sales, use, transfer, recording, and similar taxes (other than income taxes) arising out of the sale and transfer of the Assets.


(b) The Assumed Liabilities shall not include, and Buyer shall not assume or be liable for, and does not undertake or attempt to assume or discharge any of the following:


(i) All current or long term liabilities of Seller relating to the Assets or the Business set forth on the Balance Sheet, including (but not by way of limitation) accounts payable, accrued payroll, customer deposits, lines of credit, bank debit, notes payable, capital leases, and amounts due to related parties;


(ii) All Current liabilities of Seller relating to the Assets or the Business arising in the ordinary course of business from the Balance Sheet Date through the Closing Date, including (but not by way of limitation) accounts payable, accrued payroll, customer deposits, lines of credit, bank debt, notes payable, capital leases (if any), and amounts due to related parties;


(iii) Any income tax liability or obligation of Seller relating to the operation of the Business prior to the Closing Date or arising from, or incident to, the sale, assignment, transfer and delivery of the Assets, or any delinquent sales, payroll or other delinquent tax obligation;


(iv) Any accrued, but unpaid employee benefits, including (but not by way of limitation) sick leave, vacation time and any unpaid commissions either due and payable on or prior to the Closing or due and payable upon receipt of accounts receivable to be collected and paid to Seller.


(v) Any workers' compensation liabilities with respect to employees of the Business relating to illnesses or injuries occurring prior to the Closing Date;


(vi) Any liability or obligation of Seller created under this Agreement or arising out of the transactions contemplated hereby, except as specifically provided in this Agreement;


(vii) Any liability or obligation of Seller arising out of or relating to any pension, retirement or profit-sharing plan or trust, including (but not by way of limitation) Seller's 401K Plan; and


(viii) any other liabilities or obligations of Seller not expressly assumed by Buyer hereunder.


1.4 Total Purchase Price and Method of Payment. The total purchase price (the "Purchase Price") to be paid by Buyer for the Assets shall consist of (i) a cash payment to Seller of Five Hundred Thousand Dollars ($500,000) payable at the Closing ("Initial Payment") and (ii) the Contingent Payments (as defined below). The Initial Payment shall be payable by certified check or wire transfer as designated by Seller. In addition to the Initial Payment, upon satisfying the specific contingencies set forth below, Buyer shall pay Seller the following amounts:


(a) For the period between the Closing and the date one year after the Closing ("Year 1 Period"): (a) $250,000 upon renewal of the Amdahl Contract; (b) $75,000 upon renewal of the New Mexico Contract; and (c) an amount equal to 75% of the 3SI Division Profits for the year 1 Period.


(b) For the period between the end of the Year 1 Period and the date one year thereafter ("Year 2 Period"): (a) $250,000 upon renewal of the Amdahl Contract; (b) $75,000 upon renewal of the New Mexico Contract; and (c) an amount equal to 50% of the 3SI Division Profits for the Year 2 Period.


(c) For the period between the end of the Year 2 Period and the date one year thereafter ("Year 3 Period"): an amount equal to 50% of the 3SI Division Profits for the Year 3 Period.


Hereinafter, the amounts in subsections 1.4(a), (b) and (c) shall be referred to collectively as the "Contingent Payments." Each Contingent Payment shall be made by certified check or wire transfer within fifteen (15) days of satisfying such contingency. In no event shall the purchase price exceed $3,000,000. If the sum of the Initial Purchase Payment and the Contingent Payments made according to the terms set forth above does not equal the $3,000,000 threshold by the date that is three years after the Closing Date, then no further Purchase Price consideration shall be paid.


1.5 Determination of 3SI division Profits: Dispute Resolution.


(a) "3SI Division Profits" shall be defined as 3SI Gross Revenues less the sum of 3SI Direct Expenses, the 3SI Overhead Charge, and any contingent Payments made in the applicable period.


(i) "3SI Gross Revenues" shall equal any and all revenues derived from "A" all Colorado and Wyoming-based activities; (B) the Amdahl Contract; and (C) the New Mexico Contract in a given year.


(ii) "3SI Direct Expenses" shall equal any and all expenses incurred in a given year for the sole benefit of the 3SI division, including: (A) cost of goods sold; (B) direct payroll and benefits; (C) third party labor used internally or as part of any engagement; (D) facilities and equipment rental; (E) utilities and telephone (not including phone, utilities or maintenance for the New Mexico facility); (F) alarm and security; (G) insurance; (H) supplies; (I) printing and postage; (J) recruiting; (K) vehicle mileage and repair; (L) travel and entertainment; (M) meetings and conventions; (N) applicable federal and state taxes; and (O) any other expenses incurred for the direct benefit of the 3SI Division.


(iii) "3SI Overhead Charge" shall equal two percent of 3SI Gross Revenues. This overhead charge reflects corporate overhead which is otherwise not directly expensed to Buyer's satellite offices, including: marketing and promotion activities; executive and managerial involvement; legal and professional services; finance and interest charges; investment in infrastructure and depreciation; purchasing services: credit and collections services; accounts payable services; general accounting and financial services; customer service and RMA coordination; vendor relations; operations and MIS support and general corporate support.


(iv) "3SI Division shall mean that portion of the business of Buyer after the Closing Date related to (A) all Colorado and Wyoming- based activities; (B) the servicing of the Amdahl Contract; and (C) the servicing of the New Mexico Contract.


(b) At such time as Buyer shall determine 3SI Division Profits for each of Year One and Year Two (which shall be no later than 45 days following the end of such year), Buyer shall provide Seller with a statement setting forth the calculation of 3SI Division Profits for such year.


(c) In the event that Seller does not object to the determination by Buyer of 3SI Division Profits for a given year by written notice of objection (the `Notice of Objection") delivered to Buyer within ten (10) days after Seller's receipt of such determination, which Notice of Objection shall describe in reasonable detail Seller's proposed adjustment to the proposed 3SI Division Profits determination, the proposed 3SI Division Profits for such year shall be deemed final and binding.


(d) Buyer shall issue and deliver to the Seller the appropriate Contingent Payment, if any, to be issued and delivered within 5 days after the calculation for such year shall have become final and binding on the parties (the "Contingent Payment Date").


(e) If Seller does deliver a Notice of Objection to Buyer in accordance with subsection 1.5 (c), then the dispute shall be resolved as follows:


(i) Seller and Buyer shall promptly endeavor to agree upon the calculation of 3SI Division Profits for such year. In the event that a written agreement determining the amount of 3SI Division Profits for such year has not been reached within ten (10) days after the date of receipt by Buyer and Seller of Seller's Notice of Objection thereto, then Buyer's determination of 3SI Division Profits for such year shall be submitted to a nationally recognized, independent auditing firm upon which Seller and Buyer shall agree (the "Accountants"). If the parties cannot agree on a nationally recognized, independent auditing firm, the parties shall submit the matter to arbitration in accordance with Section 13.3. and the Accountants shall be selected by the arbitrators appointed pursuant to such Section 13.3.


(ii) Within thirty (30) days of the submission of any dispute concerning the determination of 3SI Division Profits to the Accountants, the Accountants shall render a decision in accordance with this Section 1.5 along with a statement of reasons therefore. The decision of the Accountants shall be final and binding upon each party hereto.


(iii) The fees and expenses of the Accountants for any determination under this Section 1.5 shall be borne by Buyer if the determination of 3SI Division Profits by the Accountants exceeds the Buyer's determination of 3SI Division Profits by more than 10% (using the Buyer's determination of 3SI Division Profits as the denominator); otherwise the fees and expenses shall be borne by Seller.


(iv) In determining 3SI Division Profits for a given year, Buyer shall provide Seller and its representatives reasonable access to all books and records of Buyer necessary to verify the calculations and Buyer shall cooperate with Seller and its representatives in their efforts to verify the calculations.


1.6 Allocation of Purchase Price. The Purchase Price shall be allocated among the Assets as provided in Exhibit B. Each Party agrees that it shall not take any position that varies from or is inconsistent with such allocation in any filing made by such party with the United States Internal Revenue Service or with any other local, state or federal regulatory authority.


1.7 Non-Compete. At the Closing, each of Seller, Parent and certain principals/shareholders of Parent shall enter into a Non- Compete Agreement with Buyer in the form attached hereto as Exhibit C (the "Non-Compete Agreement").


1.8 Closing. The date of Closing (herein referred to as the "Closing Date") shall be on or before May 15, 1999 with the actual day of Closing on or before such date as mutually agreed to by the parties in writing. Unless otherwise agreed, the Closing shall take place at the offices of Luce, Forward, Hamilton & Scripps LLP, 600 West Broadway, Suite 2600, San Diego, California, at the hour of 9:00 a.m.


ARTICLE II REPRESENTATIONS AND WARRANTIES OF SELLER AND PARENT


Except as specifically disclosed by Seller or Parent to Buyer in this Agreement or in Seller's Disclosure Memorandum (which disclosures shall be deemed to modify and qualify each of the following representations and warranties of Seller), Seller and Parent jointly and severally represent and warrant to Buyer as follows:


2.1 Corporate Status. Each of Seller and Parent is a corporation which is duly organized, validly existing, and in good standing under the laws of the State of Colorado. Each of Seller and Parent is duly qualified to do business in each jurisdiction in which the character of and location of its assets or operations makes qualification to do business as a foreign corporation necessary. Each of Seller and Parent has full corporate power to carry on its business as it is now being conducted and as proposed to be conducted and to own and operate its assets. Each of Seller and Parent has full corporate power and authority to execute and deliver this Agreement and perform the transactions contemplated hereby.


2.2 Corporate Actions. All corporate or other actions and proceedings necessary to be taken by or on the part of either Seller or Parent in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement, including the obtaining of approval by the directors and shareholders of Seller, have been duly and validly taken, and this Agreement has been duly and validly authorized, executed and delivered by each of Seller and Parent and constitutes the legal, valid and binding obligation of each of Seller and Parent, enforceable against each of Seller and Parent in accordance with and subject to its terms.


2.3 No Defaults. Neither the execution, delivery or performance by either Seller or Parent of this Agreement nor the consummation by either Seller or Parent of the transactions contemplated hereby is an event that, of itself or with the giving of notice or the passage of time or both, will:


(a) Violate or conflict with the provisions of the articles of Incorporation or Bylaws of either Seller or Parent;


(b) Violate or conflict with or result in any breach of or any default under, result in any termination or modification of, or cause any acceleration of any obligation under, any contract, mortgage, indenture, agreement, lease or other instrument to which either Seller or Parent is a party or by which it is bound, or by which it may be affected, or result in the creation of any lien or encumbrance upon any of either Seller's or Parent's assets, except for agreements, indentures and instruments related to the financing of the transactions contemplated by this Agreement; or


(c) Violate any judgment, decree, order, statute, rule or regulation applicable to either Seller or Parent.


2.4 Breach. Neither Seller nor parent is in violation or breach of any of the terms, conditions or provisions of its Articles of Incorporation, as amended, its Bylaws, or any indenture, mortgage or deed of trust or other contracts, lease, instrument, court order, judgment, arbitration award, or decree materially affecting the business of either Seller or Parent, to which either Seller or Parent is a party or by which it is otherwise bound, where the effect thereof would have a material adverse effect on either Seller or Parent.


2.5 Approvals and Consents. No approvals or consents of persons or entities not a party to this Agreement are legally or contractually required to be obtained by either Seller or Parent in connection with the consummation of the transactions contemplated by this Agreement. To each of Seller's and Parent's knowledge, no permit, license, consent, approval or authorization of, or filing with, any governmental regulatory authority or agency is required in connection with the execution, delivery and performance of this Agreement, or the consummation of the transactions contemplated hereby, except where its absence would not have a material adverse effect on the Business and Assets taken as a whole.


2.6 Title to and Condition of Assets; Leases.


(a) Seller has good, valid and marketable title to all of the Assets, free and clear of all liens, encumbrances and security interests of every kind or character.


(b) Seller owns or leases all tangible assets necessary for the conduct of its Business. Each such tangible asset is free from defects (patent and latent), ahs been maintained in accordance with normal industry practice, is in good operating condition and repair (subject to normal wear and tear), and is suitable for the purposes for which it presently is used.


(c) Seller and Seller's landlord have all rights necessary to occupy the Facility and to enter into the lease agreements and assignments contemplated by this Agreement.


(d) The assets of Seller subject to the liens by Tatonka Capital Corporation, Community First Financial, StorageTek Financial Services, MicroAge Computer Centers, Access Graphics, Inc. and Information Leasing Corporation are not included in the Assets to be transferred to Buyer in this transaction.


2.7 Inventory. The inventory of the Business as reflected on the Balance Sheet or acquired thereafter has been acquired and maintained in the ordinary course of business; is of good and merchantable quality; consists substantially of a quality, quantity, and condition usable or saleable in the ordinary course of business within a period of one (1) year from the Closing Date; and is not subject to any write down or write off for obsolescence or otherwise under generally accepted accounting principles. Seller is not under any liability or obligation with respect to the return of inventory in the possession of any third party.


2.8 Financial Statements of Seller. The Balance Sheet and all other financial statements of Seller provided to Buyer, including the footnotes thereto ("Seller Financial Statements"), have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods indicated. The Financial Statements fairly present the financial condition of Seller at the date thereof, and the related statement of income, shareholders' equity and changes in financial position fairly present the results of the operations of Seller, if any, and the changes in the financial position of the period indicated.


2.9 Events Since Balance Sheet Date. Except as set forth in the Balance Sheet, and as disclosed in this Agreement or in Seller's Disclosure Memorandum, there has not been since the Balance Sheet Date:


(a) Any material adverse change in the assets or liabilities of the Business, other than changes in the ordinary course of business;


(b) Any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the Assets; or


(c) Any material transactions entered into or any material liabilities or obligations incurred by the Business, other than in the ordinary course of Business.


2.10 Current Liabilities. At Closing the current liabilities of Seller relating to the Business do not exceed the current assets of the Business.


2.11 Liabilities. Except for those liabilities (i) reflected or reserved against in the Balance Sheet, (ii) not yet due and payable or obligations to be performed or satisfied after the date hereof under contracts and agreements set forth in Seller's Disclosure Memorandum, (iii) disclosed in this Agreement or Seller's Disclosure Memorandum, and (iv) incurred in the ordinary course of business of the Business between the Balance Sheet Date and the Closing, there are no liabilities or obligations of Seller relating to the Business, known or unknown, due or not yet due, liquidated or unliquidated, fixed, contingent or otherwise, where the effect thereof would have a material adverse effect on the Business or the Assets.


2.12 Taxes. Seller has filed all applicable federal, state, local and foreign tax returns required to be filed to date, in accordance with provisions of law pertaining thereto, and has paid all taxes, interest, penalties and assessments shown as due thereon or otherwise due and payable by Seller (including without limitation income, withholding, excise, unemployment, social security, occupation, transfer, franchise, property, sales and use taxes, import, duties or charges, and all penalties an interest in respect thereof) except where the failure to file such returns or pay such taxes has no material adverse effect on the Business and the Assets taken as a whole.


2.13 Facility Lease. The Facility Lease is in full force and effect; all rents and additional rents due to date have been paid; Seller has been in peaceable possession since the commencement of the original term of lease and is not in default thereunder and no waiver, indulgence or postponement of the Seller's obligations thereunder has been granted by the lessor; and there exists no event of default or event, occurrence, condition or act (including the transaction contemplated hereby) which, with the giving of notice, the lapse of time or the happening of any further events or condition, would be a default under the Facility Lease (other than payments not yet due which would become a default if not paid when due). Seller has not knowingly violated or been given notice of violation of any of the terms or conditions under the Facility Lease, and to the best knowledge of Seller, all of the covenants to be performed by any other party under such lease have been fully performed. The Facility is in a condition of good maintenance and repair and is adequate and suitable for the purposes for which it is presently being used. To the best knowledge of Seller, neither the Facility nor the operation or maintenance thereof, violate any restrictive covenant or any provision of any federal, state or local law, ordinance, rule or regulation, or encroaches on any property owned by others. No condemnation proceeding is pending or threatened which would preclude or impair the use of the Facility for the purposes for which it is currently used.


2.14 Contracts. Seller has delivered to Buyer true and correct copies of each Contract. As of the date of this Agreement, all such Contracts are, and as of the Effective Date will be, valid, enforceable in accordance with their terms and in full force and effect, and to the knowledge of Seller, Seller is not, and as of the Effective Date Seller will not be, in default thereunder. As of the date of this Agreement, neither Seller nor Parent has received notice that any party to any Contract intends to cancel or terminate such Contract.


2.15 Permits. Set forth in the Seller's Disclosure Memorandum is a complete and accurate list of all material permits, licenses, approvals, franchises, notices, authorizations issued by governmental entities or other regulatory authorities, federal, state or local (collectively the "Permits") held by Seller in connection with the Business. The Permits are all the permits required for the conduct of the business of Seller. Each permit is in full force and effect, and Seller has not engaged in any activity which would cause or permit revocation or suspension of any such Permit, and no action or p ...