ASSET PURCHASE AGREEMENT AMONG SMART ONLINE, INC.

Exhibit 2.1

 

 

 

 

 

 

 

 

 

 

 

 

 

ASSET PURCHASE AGREEMENT

 

 

AMONG

 

 

SMART ONLINE, INC.,

 

SMART CRM, Inc.

 

COMPUTILITY, INC.

 

AND

 

CERTAIN SHAREHOLDERS OF

COMPUTILITY, INC.

 

 

 

 

( NONMATERIAL SCHEDULES AND EXHIBITS IDENTIFIED IN THE ASSET PURCHASE AGREEMENT

HAVE BEEN OMITTED PURSUANT TO ITEM 601B.2 OF REGULATION S-K.

SMART ONLINE AGREES TO FURNISH SUPPLEMENTALLY TO THE COMMISSION

UPON REQUEST BY THE COMMISSION A COPY OF ANY OMITTED SCHEDULE OR EXHIBIT.)

 

 

TABLE OF CONTENTS

 

 

LIST OF SCHEDULES		v
LIST OF EXHIBITS		vii
1.	DEFINITIONS	1
2.	PURCHASE AND SALE OF ASSETS	3
2.1	Assets To Be Purchased	3
2.2	Excluded Assets	5
2.3	Non-Assignable Contracts	5
3.	PURCHASE PRICE; PAYMENT	6
3.1	Purchase Price	6
3.2	Payment	7
4.	ASSUMPTION OF OBLIGATIONS AND LIABILITIES	7
4.1	Liabilities and Obligations Assumed	7
4.2	Excluded Liabilities and Obligations	7
5.	REPRESENTATIONS AND WARRANTIES OF SELLER AND THE SELLER SHAREHOLDERS	9
5.1	Shareholders of Seller; Corporate Records	9
5.2	Financial Statements	9
5.3	Undisclosed Liabilities	10
5.4	Accounts Receivable	10
5.5	Material Adverse Changes	10
5.6	Litigation	13
5.7	Compliance: Governmental Authorizations	13
5.8	Due Organization	13
5.9	Taxes	14
5.10	Agreements	15
5.11	Title to Property and Related Matters	15
5.12	Patents, Trademarks, Licenses	16
5.13	Due Authorization	16
5.14	Brokerage Fees	17
5.15	Obligation of the Seller Shareholders	17
5.16	Approvals Required	17
5.17	Employee; Benefit Plans	17
5.18	Environmental Matters	20
5.19	Insurance	20
5.20	Customers	21
5.21	Approval	22
5.22	Contractors	22
5.23	Change in Business	22
5.24	Licenses and Permits	22
5.25	Related Party Transactions	23
5.26	The Premises	23

 

 

 

5.27	Improper Payments	25
5.28	Tax Consequences	25
5.29	Seller	25
5.30	Business	25
5.31	Full Disclosure	25
5.32	Investment Representation	25
6.	REPRESENTATIONS AND WARRANTIES OF BUYER	26
6.1	Due Organization	26
6.2	Due Authorization	26
6.3	Brokerage Fees	27
6.4	Approval	27
6.5	No Approvals Required	27
6.6	Full Disclosure	27
6.7	Tax Consequences	27
7.	COVENANTS OF THE PARTIES	28
7.1	Disclosure Documents	28
7.2	Access to Information	28
7.3	Confidentiality	28
7.4	Nondisclosure	29
7.5	Public Announcements	30
7.6	Consents	30
7.7	Filings	30
7.8	All Reasonable Efforts	30
7.9	Notification of Certain Matters	30
7.10	Bonuses and Fees	30
7.11	Documents at Closing	31
7.12	Interim Operations of Seller	31
7.13	Restricted Stock	31
7.14	Prohibition on Trading in Buyer Stock	31
7.15	Independent Contractors	32
7.16	Expenses	32
7.17	Conduct of Seller’s Business Following the Closing Date	32
7.18	Parties’ Access to Records After Closing	33
7.19	Prorations	33
7.20	Bulk Sales and Transfer Taxes	34
7.21	Competing Offers	34
7.22	Further Assurances; Post Closing Assistance	35
8.	THE CLOSING	35
8.1	Time and Place	35
8.2	Deliveries by Seller	35
8.3	Deliveries by the Buyer	38
9.	INDEMNIFICATION	39
9.1	Escrow Agreement	39

 

 

 

9.2	Escrow Events	40
9.3	Limitations on Indemnification	42
9.4	Buyer	43
9.5	Methods of Asserting Claims for Indemnification	43
10.	TERMINATION	44
11.	MEDIATION/ARBITRATION	45
12.	NOTICES	46
13.	MISCELLANEOUS	46
13.1	Nature of Representations and Warranties	46
13.2	Survival of Representations	46
13.3	Entire Agreement	47
13.4	Amendment	47
13.5	Assignment	47
13.6	Choice of Law	47
13.7	Headings	47
13.8	Construction	47
13.9	Effect of Waiver	47
13.10	Severability	47
13.11	Binding Nature	47
13.12	No Third-Party Beneficiaries	48
13.13	Counterparts	48
13.14	Facsimile Signature	48
13.15	Rules of Construction	48

 

 

 

 

 

 

 

LIST OF SCHEDULES

 

2.1(i)	Fixed Assets
2.1(ii) (A)	Common Law State and Federal Trademarks, Service Marks, Trade Names, Trade Logos and Trade Styles
2.1(ii) (M)	Telephone, Facsimile, and Data Numbers
2.1(v)	Customer Contracts
2.1(vii)	Factor Provider Contracts
2.1(viii)	Prepayments
2.1(ix)	Security Deposits
2.1(x)	Amounts due from Factor Providers
2.2(iii)	Excluded Tangible Assets
2.2(iv)	Excluded Contracts
4.1(i)	Liabilities Assumed by Acquisition Sub (Accounts Payable)
4.1(ii)	Liabilities Assumed by Acquisition Sub (Contracts)
5.1(a)	Shareholders
5.2(a)	Financial Statements
5.2(a) (i)	Interim Financial Statements dated June 30, 2005
5.2(a) (ii)	Interim Financial Statements dated August 31, 2005
5.4	Accounts Receivable
5.5	Material Adverse Changes
5.6	Litigation
5.9	Tax Filings

 

 

 

5.10	Seller’s Contracts and Agreements
5.17(a)	Contracts regarding Transferred Personnel and Contracted Employees
5.17(b)	Employee Programs
5.19	Insurance Policies
5.20	Customers
5.22	Contractors
5.24	Licenses
5.25	Related Party Transactions
5.26	The Premises
8.2(xiii)	Transferred Personnel
8.2(xiv)	Contracted Employees
8.2(xxi)	Terminated Contracts

 

 

 

 

 

 

 

 

 

 

LIST OF EXHIBITS

 

Exhibit A1	Initial Escrow Agreement
Exhibit A2	Secondary Escrow Agreement
Exhibit B	Opinion of Seller’s Counsel
Exhibit C	Employment Agreement of Michael Stuart
Exhibit D	Incentive Stock Option Agreement of Michael Stuart
Exhibit E	Employment Agreement of Brian Donaghy
Exhibit F	Incentive Stock Option Agreement of Brian Donaghy
Exhibit G	Form of Non-Disclosure
Exhibit H	Employment Agreement
Exhibit I	Incentive Stock Option Agreement
Exhibit J	Certificate as to Policy on Insider Trading Policy
Exhibit K	Certificate as to Code of Ethics
Exhibit L	Employee Release
Exhibit M	Release from Seller Shareholders and Key Employees
Exhibit N	Public Announcement
Exhibit O	Stock Power

 

 

 

 

AGREEMENT made this 4th day of October, 2005 by and among SMART ONLINE, INC. , a Delaware corporation ( “Buyer” ), SMART CRM, INC. , a Delaware corporation and a wholly-owned subsidiary of Buyer (“ Acquisition Sub ”), COMPUTILITY, INC. , a Nevada corporation (“ Seller ”) and those shareholders of Seller identified in Section 1 of this Agreement (the “ Seller Shareholders ”).

 

RECITALS

 

A.      Seller is engaged in the business of developing and distributing customer relationship management software; sales force automation software; procuring, deploying, and supporting computer hardware and systems; and other information technology services (the “ Business ”).

 

B.      Seller desires to sell and Buyer and Acquisition Sub desire to purchase certain of the assets of Seller utilized and necessary in connection with the Business, as more particularly described herein, and upon the terms and subject to the conditions herein set forth.

 

C.      The Boards of Directors of Buyer and Acquisition Sub and the Board of Directors and Shareholders of Seller have approved this Agreement by resolutions duly adopted.

 

D.      The Seller Shareholders own a majority of the issued and outstanding capital stock of Seller, and are entering into this Agreement in order to induce Buyer to consummate the transactions described herein.

 

NOW, THEREFORE, in consideration of the mutual promises herein contained and intending to be legally bound hereby the parties agree as follows:

 

1.       DEFINITIONS .

 

For purposes of this Agreement, the terms set forth below shall have the following meanings:

 

 

 

 

“ Business ” has the meaning ascribed to it in the Preamble to this Agreement, and shall also include any activity involving the Purchased Assets, as defined in Section 2.1 hereof, whether by the Seller, a subsidiary of Seller, the Seller Shareholders or any party listed on Schedule 5.25 .

 

“ Code ” means the Internal Revenue Code of 1986, as amended.

 

“ Closing ” means the transaction of the events set forth in Section 8 hereof.

 

“ Closing Date ” means the day on which the Closing is held as set forth in Section 8 hereof.

 

“ Closing Date Balance Sheet ” means the unaudited balance sheet of the Seller as of the Closing Date prepared in accordance with GAAP containing all accruals, including but not limited to all payroll accruals (including bonuses, commissions and vacations).

 

“ Closing Income Statement ” means the unaudited income statement of the Seller for the period January 1, 2005 through the Closing Date.

 

“Contractors” means the individuals or entities set forth in Section 5.22 .

 

“ Financial Statements ” mean the audited balance sheets as of December 31, 2002, 2003, and 2004 and the income statement and cash flows for the years ended December 31, 2002, December 31, 2003, and December 31, 2004.

 

“ Interim Financial Statements ” mean the unaudited financial statements of the Seller for the interim periods set forth in Schedules 5.2(a)(i) and 5.2(a)(ii) prepared in accordance with GAAP, and which shall include the Closing Date Balance Sheet.

 

“ GAAP ” means United States generally accepted accounting principles, consistently applied.

 

“ Purchase Price ” has the meaning ascribed to it in Section 3.1 hereof.

 

“ Purchased Assets ” has the meaning ascribed to it in Section 2.1 hereof.

 

“ SEC ” means the Securities and Exchange Commission.

 

“Seller” shall mean Computility, Inc. and shall include the predecessor entities of Computility, Inc., including Harvest Systems, LLC, Harvest Services, Inc. or any other predecessor entity.

 

 

 

“ Seller Shareholders ” means Brian Donaghy, Michael Stuart and Growth Ventures Group, Inc. (“ Growth Ventures ”).

 

“ Key Employees” means Brian Donaghy and Michael Stuart, collectively.

 

Other capitalized terms used in this Agreement shall have the meanings ascribed to them in the Sections where such terms are initially used or in such other document referred to in this Agreement and attached to this Agreement as an Exhibit.

 

2.       PURCHASE AND SALE OF ASSETS .

 

2 .1       Assets To Be Purchased . Upon the terms and subject to the conditions set forth in this Agreement, Seller shall sell, transfer, convey, and assign to the Acquisition Sub, and the Acquisition Sub shall purchase and acquire from Seller, at the Closing and as of the Closing Date, and all the tangible and intangible assets of Seller, except the Excluded Assets as provided in Section 2.2 of this Agreement, including the following assets of Seller (collectively, the “ Purchased Assets ”). The Purchased Assets include, but are not limited to the following:

 

(i) The right, title, and interest of Seller in and to all machinery, equipment, fixtures, leasehold improvements, furniture, and other personal property set forth on Schedule 2.1(i) , attached hereto and made a part hereof, including all computer equipment used by Seller in the conduct of its business (collectively, the “ Fixed Assets ”);

 

(ii) All of Seller’s right, title, and interest in and to the following items if any: (A) all Seller’s common law state and federal trademarks, service marks, trade names, trade logos and trade styles, all of which are listed on Schedule 2.1(ii)(A) , attached hereto and made a part hereof, (B) all Seller’s rights in any pending applications for registration or existing registrations on the Principal or Supplemental Register of the United States Patent and Trademark Office of any of Seller’s marks or names, (C) all Seller’s rights in any pending applications for registration of any of Seller’s marks or names in any state or foreign country, (D) all Seller’s rights in any pending applications for patent and all Seller’s issued patents in the United States or any foreign country including any continuations or continuations-in-part of the applications for patent or improvements thereto, (E) all Seller’s common law and statutory copyrights and registrations in the United States or any foreign country, (F) all Seller’s licenses, (G) all Seller’s inventions, (H) all Seller’s trade secrets, (I) all computer software used in connection with the Business, including source codes for current or former versions of software owned by Seller, a subsidiary of Seller or any party listed in Schedule 5.25 that may be used for the operation of Seller’s business, and third party computer software licensed by Seller, (J) all technical and business confidential or proprietary information including but not limited to discoveries, know-how, and other business or technical confidential information that are used by Seller or in connection with or related to the Business or that provide Seller with a commercial advantage over any or all of its competitors, (K) all promotional, sales and advertising material,

 

 

 

artwork, films, layouts, catalogues, brochures, descriptions of products or services, and package designs, (L) all client lists, customer lists, supplier lists, and prospect lists, (M) the telephone, facsimile, and data numbers listed on Schedule 2.1(ii) (M) , attached hereto and made a part hereof, (N) the right to the name Computility, Inc., Harvest Services Inc., Harvest Systems LLC, and any other trade names currently or previously used by Seller in connection with the Business, and (O) all goodwill related to any of the foregoing (collectively, the “ Intellectual Property ”);

 

(iii) All of Seller’s books and records, including all employee lists, all market and industry analyses, business development materials, all applicant data bases, all files, copies of all books of accounts and ledgers, and all other instruments and documents relating to the assets and Business being acquired by the Buyer pursuant to this Agreement (collectively, the “ Customer Material ”) but excluding Seller’s corporate records;

 

(iv) All of Seller’s rights under the leases and rental agreements, all of which are set forth on Schedule 4.1(ii ), attached hereto and made a part hereof;

 

(v) Except as described in Section 4.2(iii) hereof, all of Seller’s customer contracts, open quotes, agreements, purchase orders and the like, all of which are set forth on Schedule 2.1(v) , attached hereto and made a part hereof, which Schedule also sets forth the total amounts due under such listed contracts as of August 31, 2005;

 

(vi) Except as described in Section 4.2(iii) hereof, all of Seller’s accounts and trade receivables (including but not limited to those accounts receivables set forth on Schedule 5.4) , all unperformed commitments and obligations owing to Seller, and all other instruments, contracts, and agreements of Seller;

 

(vii) The “Factor Provider Contracts” listed on Schedule 2.1(vii) , attached hereto and made a part hereof, pursuant to which Seller assigned the amounts due and payable under the indicated Services Agreements to Bankers Leasing Company and NCMIC (jointly referred to herein as “Factor Providers” ), which Schedule also sets forth the total amounts due under the Factor Provider Contracts to the Factor Providers as of August 31, 2005 (all of the items list in Sections 2.1(iv), (v) , (vi) and (vii) shall be referred to collectively as the “Contracts”);

 

(viii) All prepayments on behalf of Seller including all prepaid payroll, insurance premiums, and other statutory taxes, all of which are set forth on Schedule 2.1(viii) , attached hereto and made a part hereof;

 

 

 

 

(x) All amounts received by Factor Providers and not yet remitted to Seller related to collection by Factor Providers from the Seller’s customers, as set forth on Schedule 2.1 (x) , attached hereto and made a part hereof.

 

(xi) All intangible property rights and proprietary information of Seller relating to Seller’s operation of the Business being acquired by the Buyer and Acquisition Sub pursuant to this Agreement (collectively, the “ Proprietary Information ”);

 

(xii)   All rights of Seller under or pursuant to all warranties, representations, and guaranties made by suppliers or vendors in connection with products or services furnished to the Seller, or otherwise pertaining to the Business or affecting the Purchased Assets;

 

(xiii)   All Seller’s goodwill in connection with the Business, including all rights of Seller under any covenants not-to-compete, confidentiality or non-solicitation agreements running to Seller, and any customer communications or documents;

 

 

2. 2       Excluded Assets . Notwithstanding anything contained in this Agreement to the contrary, the following assets of Seller (the “Excluded Assets” ) are excluded from the Purchased Assets and are not being purchased and sold hereunder:

 

(i) All cash, cash equivalents and bank accounts of Seller as of the Closing Date, except for any Automated Clearing House payments (“ACH Payments”) received from the Factor Providers on or about September 15, 2005, less any amounts disbursed for rent, utilities and payroll (it being understood that such payroll amounts shall be consistent with the salaries or fees paid by the Seller during the six months prior to closing in accordance with the Interim Financial Statements set forth in Schedule 5.2(a)(i) );

 

(ii) All of Seller’s rights in, to and arising out of the promissory note dated November 12, 2004 made by Growth Ventures to Seller in the principal amount of $25,000;

 

(iii) All the tangible assets listed on Schedule 2.2(iii) , attached hereto and made a part hereof, (collectively, the “Excluded Tangible Assets”); and

 

(iv) All the contracts listed on Schedule 2.2(iv) , attached hereto and made a part hereof, (collectively, the “Excluded Contracts”).

 

2 .3       Non-Assignable Contracts . To the extent that any of the contracts, rights, or commitments for which assignment to Buyer or Acquisition Sub is provided herein are not assignable without the consent of another party, this Agreement shall not constitute an

 

 

 

assignment or an attempted assignment if such assignment or attempted assignment would constitute a breach thereof. Seller agrees to use Seller’s best efforts to obtain the consent of each other party to any such contract, right, or commitment to the assignment thereof to Buyer or Acquisition Sub in all cases in which such consent is required for assignment or transfer. If such consent is not obtained at or prior to the Closing, and if Buyer does not terminate this Agreement in accordance with the provisions of Section 10 hereof, Seller agrees to cooperate with Buyer and Acquisition Sub in subsequently seeking such consent and in any reasonable arrangements (including billing arrangements) designed to provide for Buyer and Acquisition Sub the benefits under any such contract, right, or commitment, including enforcement at the cost and for the account of Buyer and Acquisition Sub of any and all rights of Seller against each other party thereto arising out of the cancellation by such other party or otherwise. If and to the extent that such arrangements cannot be made, Seller will indemnify Buyer and Acquisition Sub for the amounts due and payable under such contracts, rights, or commitments not assigned and not received by Buyer or Acquisition Sub (including any costs incurred in the process of seeking such assignment), and Buyer or Acquisition Sub shall nonetheless be responsible for performing on behalf of Seller with respect to any such contract, right, or commitment.

 

3 .       PURCHASE PRICE; PAYMENT .

 

3 .1       Purchase Price . The purchase price for the Purchased Assets (the “ Purchase Price ”) is four hundred eighty-four thousand two hundred thirteen (484,213) shares of the common stock of Buyer (the “ Compensation Shares ” ) which shall be paid to the Seller and distributed to the Seller’s shareholders listed on Schedule 5.1(a) .

 

 

 

 

 

 

 

(ii) hereof shall bear, in addition to the legend required under Section 3.1(i) , the following legend:

 

Buyer shall reissue certificates to Seller or to Seller's shareholders, as the case may be, without the above legends in accordance with the Buyer’s company policy and subject to Section 7.13 and 7.14 of the Agreement and any State or Federal rules, laws or regulations.

 

3 .2       Payment . Subject to the terms and conditions of this Agreement, Buyer shall pay to Seller the Purchase Price as follows:

 

 

 

4.       ASSUMPTION OF OBLIGATIONS AND LIABILITIES .

 

4 .1       Liabilities and Obligations Assumed . As of the Closing, Buyer or Acquisition Sub shall assume and timely pay, perform, and discharge only those obligations and liabilities of Seller specifically identified on Schedule 4.1(i) and Schedule 4.1(ii) , attached hereto and made a part hereof, which amounts shall include the balance due the Factor Providers for the Factor Provider Contracts set forth on Schedule 2.1(vii) (the “ Assumed Liabilities ”). Except as set forth in the first sentence of this Section 4.1 , Buyer shall not assume, nor be obligated to perform, fulfill, or pay, any obligations or indebtedness of Seller whatsoever.

 

4 .2       Excluded Liabilities and Obligations . Except for the Assumed Liabilities as provided in Section 4.1 hereof, Acquisition Sub and Buyer shall have no liability or obligation to pay, and Seller shall retain and timely pay, perform, and discharge all debts, liabilities, and

 

 

 

obligations of Seller, whether relating to the Business, the Purchased Assets, or otherwise, and arising or accruing prior to the Closing Date, including, without limitation, the following:

 

(i) All liabilities and obligations of Seller accrued since its inception through the Closing Date for the Transferred Personnel, the Key Employees, Contracted Employees, and Contractors including, if any, all earned but unpaid vacations, holidays, and bonuses; all liabilities and obligations of Seller accrued since its inception and continuing after the Closing Date for the employees of Seller who Buyer or Acquisition Sub does not hire, including all unearned but unpaid vacations, holidays, and bonuses, and severance obligations of Seller, if any; and all liabilities and obligations of Seller under or arising out of the contracts listed on Schedules 5.17(a) and (b) ;

 

(ii) All liabilities and obligations of Seller with respect to any claim, demand, cause of action, suit, proceeding, judgment, loss, liability, damage, or expense against Seller, including any claim, demand, cause of action, suit, proceeding, judgment, loss, liability damage or expense arising out of the matters set forth on Schedule 5.6 ;

 

(iii) All obligations and liabilities of Seller to third parties under the leases, rental agreements, licenses, registrations, and other contracts set forth on Schedule 2.1(iv) , (v) and (vi) attached hereto and made a part hereof, to the extent such obligations and liabilities first became accrued and payable prior to the Closing Date;

 

(iv)   All obligations and liabilities of Seller to third parties with respect to the Excluded Assets;

 

(v)   All obligations and liabilities of Seller and Seller Shareholders or any affiliate, person or entity which accrued prior to the Closing Date;

 

(vi)   All accounts payable of Seller as of the Closing Date;

 

(vii)   Any other debt, liability, or obligation of Seller which accrued prior to the Closing Date;

 

(viii)   All income taxes, payroll taxes, statutory federal, state, and local taxes and any taxes which may become due on the account of Seller by virtue of the operation of the Business prior to the Closing Date, a change in Seller’s accounting method or as a result of the sale contemplated by this Agreement; and

 

(ix)   All amounts payable under the Iowa Department of Economic Development Entrepreneurial Ventures Assistance Program pursuant to the agreement made February 19, 2004.

 

 

 

5.       REPRESENTATIONS AND WARRANTIES OF SELLER AND THE SELLER SHAREHOLDERS . The Seller and the Seller Shareholders, jointly and severally, as a material inducement to Buyer and Acquisition Sub to enter into this Agreement and consummate the transactions contemplated hereby, make the following representations and warranties to Buyer and Acquisition Sub, which representations and warranties are true and correct in all respects on this date, and will be true and correct in all respects on the Closing Date as though made on and as of such date. All such representations and warranties are subject to all of the provisions of the Schedules and documents contained in the Exhibits attached to this Agreement.

 

5. 1       Shareholders of Seller; Corporate Records .

 

(a)      The shareholders listed on Schedule 5.1(a) are, and will be on the Closing Date, the sole owners, of record and beneficially, of all the issued and outstanding shares of the Seller’s capital stock, free and clear of all liens, encumbrances, claims, or rights of their parties (whether under option agreements, shareholder agreements, or otherwise). Except as set forth on Schedule 5.1(a), there are no outstanding (i) securities of the Seller, convertible or exchangeable for shares of capital stock or equity securities of the Seller, (ii) options, warrants, calls, or other rights to acquire from the Seller, or other obligations, understandings, or arrangements of the Seller to issue, any capital stock, equity securities, or securities convertible or exchangeable for capital stock or equity securities of the Seller, or (iii) voting agreements, proxies, voting trusts or other agreements with respect to voting the Shares.

 

(b)      True, complete, and correct copies of the Articles of Incorporation, Bylaws and all minutes of the Seller have heretofore been delivered to the Buyer, as such documents or instruments are presently in effect.

 

 

(a)      The Financial Statements for the fiscal years ended December 31, 2002, December 31, 2003, and December 31, 2004 are attached as Schedule 5.2(a) , attached hereto and made a part hereof. The Interim Financial Statements for the period January 1, 2005 through June 30, 2005 have been attached hereto as Schedule 5.2(a)(i) and made a part hereof, and the Interim Financial Statements for the period January 1, 2005 through August 31, 2005 have been attached hereto as Schedule 5.2(a)(ii) and made a part hereof. The Financial Statements and the Interim Financial Statements and the financial information contained therein (i) are in accordance in all material respects with the books and records of the Seller for the items reflected therein and accurately account in all material respects for the financial condition and transactions of the Seller, (ii) have been prepared by the Seller in accordance with GAAP, and (iii) present fairly the assets, liabilities, and results of operations of the Seller as of the dates and for the periods indicated. Since June 30, 2005 (the “ Balance Sheet Date ”), there has been no material adverse change in the condition (financial or otherwise) of the Seller, or of any properties or the Seller’s Business, and the Seller’s Business has been conducted only in the

 

 

 

Seller’s ordinary course. The Interim Financial Statements set forth in Schedule 5.2(a)(ii) reflect all liabilities, contingent or otherwise, of the Seller as of the Balance Sheet Date, except performance obligations under executory contracts and other liabilities which have not historically been reflected on the Financial Statements. Such liabilities not so reflected were incurred in the ordinary course of business and, except as may be reflected on Schedule 5.5 , do not in the aggregate have any material adverse effect upon the condition, financial or otherwise, of the Seller. The contingency, tax and other reserves reflected on the Financial Statements are adequate, appropriate and reasonable in accordance with GAAP.

 

(b)      All books and records of Seller, financial and other, are in all material respects complete and correct and have been maintained in accordance with good business and accounting practices, and the financial records reflect all payroll accruals including but not limited to all bonuses, vacations, holidays, and other compensation.

 

5. 3       Undisclosed Liabilities . Seller does not have any liabilities or obligations of any nature, fixed or contingent, that are not shown or otherwise provided for in the Financial Statements and the Interim Financial Statements. There are no material loss contingencies (as such term is used in Statement of Financial Accounting Standards No. 5 of the Financial Accounting Standards Board) of the Seller that will not be adequately provided for. The Seller is not a guarantor, indemnitor or otherwise liable for any indebtedness of any other person, firm, or corporation except as an endorser of checks received by the Seller and deposited in the ordinary course of business.

 

5 .4       Accounts Receivable . Attached hereto and made a part hereof as Schedule 5.4 , is a list of all accounts receivable and billable items not yet billed of Seller and aging schedule pertaining thereto as of the Closing Date. All of the accounts receivable and billable items not yet billed of Seller now and on the Closing Date are bona fide accounts receivable of Seller representing the sales price of (or other sums or fees receivable for or in respect of) goods, merchandise, or services sold or performed by Seller in valid transactions in the regular course of its business to or for the benefit of its customers. Subject to balance due the Factor Providers as set forth in Schedule 4.1(ii) , such accounts receivable are collectible in full and are not subject to offset or counterclaim or otherwise in controversy.

 

5. 5       Material Adverse Changes . Except as specifically stated in Schedule 5.5 , attached hereto and made a part hereof, or required by this Agreement, from January 1, 2005 to the date of this Agreement, the Business of the Seller has been operated in the Seller’s ordinary course and there has not been:

 

(a)      Any adverse changes in the business, condition (financial or otherwise), results of operations, properties, assets, liabilities, earnings, accounts receivables or net worth of the Seller for such period or at any time during such period;

 

 

 

(b)      Any other event or condition of any character which it is reasonable to expect will, individually or in the aggregate with other events or conditions, adversely affect the future, the condition (financial or otherwise), assets, liabilities, working capital, reserves, earnings, accounts receivables, business, or prospects of the Seller, or the Business;

 

(c)      Any damage, destruction, or loss (whether or not covered by insurance) affecting the Seller or its assets, properties, or business;

 

(d)      Any cancellation of any debts (except in the ordinary course of business) or any waiver of any material rights of value to the Seller;

 

(e)      Any cancellation or breaches on any existing contract of which Seller is a party that would have a material adverse effect on the Business of Seller;

 

(f)      Any statute, rule, regulation, or order adopted by any governmental body, agency, or authority that adversely affects the Seller or the Business or the Seller’s financial condition;

 

(g)      Except as required or permitted by the terms of this Agreement, there has not been any payment of bonuses or accrued salaries, nor any obligation to make any payment of bonuses or salaries, out of the ordinary course of business or agreements to materially increase the rate or terms of compensation payable or to become payable by Seller to its directors, officers, or key employees; provided, however, that this subsection shall not restrict or limit the Seller in any way from hiring additional personnel who are required for its operations;

 

(h)      Any transfer, lapse, or grant of any rights in the Seller’s patents, trademarks, trade names, or copyrights or any disposition or disclosure to any person of any trade secrets relating to the Seller’s Business,;

 

(i)      Any modification, change, or termination of any contract or other document referred to in this Agreement or any of the Schedules hereto, or relating to the Seller’s Business, or the failure to renew or extend any material contract relating to the Seller’s Business, except in the ordinary course of business;

 

(j)      Any action which has increased the cost of the Seller in funding or maintaining any employee pension or retirement plans or other employee benefit plans;

 

(k)      The entering into, creation or allowance of any new mortgage, lien, or encumbrance on any assets of the Seller other than the liens and encumbrances arising in the ordinary course of business;

 

 

 

(l)      Any increase or any change in any assumptions underlying or methods of calculating any bad debt, contingency, tax, or other reserves or any change in its accounting practices, methods, or assumptions (including changes in estimates or valuation methods);

 

(m)      Any lease or sublease of real property or the exercise of any purchase options or rights of first refusal contained in any lease or sublease, or the termination, surrender, cancellation, or assignment of any of Seller’s properties demised under any leases, or any part thereof;

 

(n)      The incurring of any indebtedness for borrowed money, the entering into of any commitment to borrow money, or making any loans in respect to borrowed money to third parties, or the agreement to guaranty any obligations of third parties (other than in connection with the negotiation and collection of negotiable instruments in the ordinary course of business, and for accounts payable and trade debt incurred in the ordinary course of business, which shall be set forth in the Closing Date Balance Sheet);

 

(o)      The writing up or writing down of the value on its financial statements of any of the Seller’s assets;

 

(p)      Any contracts entered into with third parties for services outside of the ordinary course of business or whose term, payment terms, or pricing are outside of the ordinary course of business;

 

(q)      Any issuance or agreement to issue any additional shares of common stock or any other voting security of the Seller or any rights to acquire any such additional common stock or voting security, except for shares issuable upon exercise of previously granted employee stock options, which are reported in Section 5.1 ;

 

(r)      Any merger, consolidation or sale of assets or securities of the Seller, or the authorization of the same, other than as contemplated in this Agreement, or any purchase of all or substantially all of the assets of any entity, or any other extraordinary corporate transaction;

 

(s)      Any indebtedness, guaranty or encumbrance on the assets of the Seller not otherwise set forth in the Agreement;

 

(t)      Any verbal or written notice from any customer, or any discussions with any customers, which might cause the Seller or any of the Seller Shareholders to believe the customer may cease to be a customer of the Seller after the Closing Date or to wish to renegotiate or otherwise change the terms and conditions (including, but not limited to, price) between the customer and the Seller;

 

 

 

(u)      Any verbal or written notice concerning any plans by any customer of the Seller to either develop the capability to provide or obtain the production and services currently provided by the Seller from the internal resources of the customer or any affiliated person or entity or any third party vendor; and

 

(v)      The agreement, whether in writing or otherwise, to take any action described in this Section 5.5 .

 

5. 6       Litigation . Except as set forth in Schedule 5.6 , attached hereto and made a part hereof, there are no actions, suits, claims, investigations, or legal, administrative, or arbitration proceedings pending or, to Seller’s knowledge, threatened against the Seller, whether at law or in equity, or before or by any federal, state, municipal, local, foreign, or other governmental department, commission, board, bureau, agency, or instrumentality, or any basis for any such action, suit, claim, investigation, or proceeding. The Seller is not subject to any judgment. The Seller is not in violation of or in default under any order, judgment, writ, injunction, or decree of any federal, state, local, or foreign governmental or regulatory entity (or any department, agency, authority, or political subdivision thereof) or court or arbitrator. Also set forth on Schedule 5.6 is a description of the settlement of any proceedings of the nature described in this Section 5.6 since January 1, 2004, together with a description of the amount and nature of each settlement.

 

5 .7       Compliance: Governmental Authorizations . The Seller has not failed to file any report or return required by any government or governmental agency which failure would adversely affect the Seller, its assets or financial condition or results of operations of its business. The Seller has complied in all material respects with all federal, state, local or foreign laws, ordinances, regulations, and orders applicable to its business, including without limitation, federal and state anti-trust, securities, banking collection, consumer protection, immigration, environmental, health, occupational safety and health, plant closing, pension, requirements of any Board of Fire Underwriters, laws and regulations. Seller has all federal, state, local and foreign governmental licenses and permits necessary for the conduct of the Business. Such licenses and permits are in full force and effect, and there are no violations of any such licenses or permits. No proceedings are pending or, to Seller’s knowledge, threatened to revoke or limit the use of such licenses or permits that would have an adverse effect on the business of Seller.

 

5 .8       Due Organization . The Seller is a corporation duly organized, validly existing, and in good standing under the laws of the State of Nevada; it is qualified to do business and in good standing in each state where the properties owned, leased, or operated, or the business conducted, by it require such qualification except where failure to so qualify would not have a material adverse effect on its financial condition, properties, business, or results of operations. The Seller has the power to own its properties and assets and to carry on its business

 

 

as now presently conducted. The Seller is registered to do business in the State of Iowa as a foreign corporation, has a current Certificate of Authority from the State of Iowa.

 

5. 9       Taxes .

 

(a)      Except as disclosed on Schedule 5.9 , attached hereto and made a part hereof, all (i) federal, state, local, or foreign tax returns (collectively, the “ Returns ”) required to be filed with respect to the properties, assets, operations, income, payroll and net worth of Seller have been timely filed or appropriate extensions have been obtained and such Returns are true, correct, and complete in all material respects; (ii) all such tax returns have been prepared in accordance with all applicable laws and requirements, and accurately reflect in all material respects taxable income (or other measure of Tax) of the Seller, and (iii) all taxes and governmental charges, including, without limitation, any interest and penalties (collectively “ Taxes ”) due pursuant to such Returns or in connection with Seller's operations have been paid or adequate provision therefore has been made on the Financial Statements. Except as disclosed on Schedule 5.9 , there are no outstanding agreements or waivers extending the statutory period of limitation concerning any tax liability of Seller, no examination of any Return of Seller is currently in progress and no governmental authority has, within the last three (3) years, notified Seller or Seller Shareholders of any tax claim, investigation, or proceeding or conducted any audit. All monies required to be collected or withheld by the Seller for income taxes, social security, or other payroll taxes have been collected or withheld, and either paid to the appropriate governmental agencies, set aside in accounts for such purpose, or accrued, reserved against and entered upon the books of the Seller and the Seller is not liable for any taxes or penalties for failure to comply with any of the foregoing. The Seller has not made, is not obligated to make, and will not, as a result of the transactions contemplated hereby, make or become obligated to make any “excess parachute payment” within the meaning of Section 280G of the Code (determined without regard to subsection (b)(4) thereof).

 

(b)      There exist no grounds for the assertion or assessment of any additional Taxes against the Seller or its assets. No claim has been made by a taxing authority in any jurisdiction where the Seller does not file tax returns that Seller is or may be subject to taxation by that jurisdiction.

 

(c)      True, correct, and complete copies of all federal or state income tax returns, tax examination reports, and statements of deficiencies assessed against, or agreed to by, the Seller with respect to the last two years have been delivered to Buyer.

 

(d)      The Seller has not ever (i) joined in or been required to join in filing a consolidated or combined federal, state, or local income tax return, (ii) been the subject of a tax ruling that has continuing effect, (iii) been the subject of a closing agreement with any taxing authority that has continuing effect, or (iv) granted a power of attorney with respect to any tax matters that has continuing effect.

 

 

 

(e)      The Seller shall be responsible for the preparation and timely filing of all corporate tax returns and tax reports required by law of the Seller for all periods ending on or prior to the Closing Date. The Seller shall pay the costs associated with such preparation. Copies of all such returns shall be delivered into the possession of the Buyer immediately upon preparation.

 

(f)      The Seller is not a party to any tax-sharing agreement.

 

(g)      The Seller is not a “foreign person” within the meaning of Section 1445 of the Internal Revenue Code and the regulations promulgated thereunder.

 

(h)      The Seller does not own any interest in any entity characterized as a partnership for federal income tax purposes.

(i)      Seller has fully paid and has no liability, including liability arising out of any employer or co-employer arrangement, for payroll, social security or any other taxes related to any employee, co-employee or independent contractor.

 

5. 10       Agreements . Schedule 5.10 , attached hereto and made a part hereof, contains a true and complete list of all contracts, agreements, leases, mortgages, obligations, arrangements, restrictions, and other instruments to which the Seller is a party or by which the Seller or its assets may be bound. True and correct copies of all written items set forth on Schedule 5.10 , and a memorandum describing in full each oral item or contract listed on Schedule 5.10 , have been or will have been made available to Buyer prior to the date hereof. No event has occurred that (whether with or without notice or lapse of time) would constitute a material default by the Seller under any of the contracts or agreements set forth in Schedule 5.10 , and no other party has alleged the existence of any such default. Neither the Seller nor the Seller Shareholders have knowledge of any material default by the other parties to such contracts or agreements. Except for any contract set forth in Schedule 8.2(xxi) , no contract is presently expected to result in a loss to the Seller upon completion or performance thereof or payment thereunder. No contract contains any covenant limiting or restricting the freedom of the Seller to engage in any business or compete with any person. The Seller has complied in all material respects with all other provisions of all such contracts.

 

5 .11       Title to Property and Related Matters . The Seller has, and at the time of the Closing will have, good and marketable title to the Purchased Assets, free and clear of any security interests, mortgages, liens, or encumbrances, except (i) the security interest of the Factor Providers under the Factor Provider Contracts, (ii) the equipment set forth on Schedule 2.1 (i) which is subject to a security interest under a capital lease set forth on Schedule 4.1 , and (iii) liens for current taxes not yet delinquent. Except as set forth in said Schedule 4.1 and except for matters that may arise in the ordinary course of business, the Fixed Assets are in good operating condition and repair, reasonable wear and tear and depreciation excepted, and have been

 

 

 

maintained and used in material conformity with all applicable federal, state, and local laws, regulations, and ordinances (including but not limited to zoning, environmental, and occupational safety and health regulations), and there does not exist any condition that materially interferes with the use thereof in the ordinary course of the business of the Seller. All non-cash assets constituting, used principally in connection with, and necessary to the conduct of, the Seller’s Business are owned or leased by the Seller, and are being conveyed to the Buyer or Acquisition Sub hereunder, with the exception of the Excluded Assets. None of the Seller’s tangible personal property is subject to any contract for its sale to any party other than in the ordinary course of business, and none of the Seller’s tangible personal property is subject to any contract for its use by any party other than in the ordinary course of business.

 

5 .12       Patents, Trademarks, Licenses . Except as set forth on Schedule 2.1(ii) (A), there are no trademarks, copyrights or patents owned by or licensed to the Seller. All trademarks, copyrights, or patents owned by the Seller are free and clear of all liens, encumbrances, or claims of third parties and are not subject to any license. Schedule 2.1(ii) (A) contains a complete list of the trademarks, service marks, trade names, domain names, fictitious names, symbols, logos, trade dress, copyrights, and patents used by the Seller in connection with its business. The Seller has adequate and sufficient rights, registered or unregistered, to use such intellectual property as currently used in its business, free and clear of any lien or competing rights or interests of other which would preclude or otherwise impair such use by the Seller. The Seller has not infringed upon any intellectual property rights of any third person or entity, including without limitation any patent rights, trademarks, trade names, copyrights, or other intellectual property rights. The operations of the Business as currently conducted do not infringe upon any trademark, trade name, copyright or patent of any third party. The Seller has not received any claim of infringement of any trademark, trade name, copyright, patent application, or patent of any third party.

 

5. 13       Due Authorization . This Agreement has been duly authorized, executed and delivered by the Seller and constitutes a valid and binding agreement of the Seller, enforceable in accordance with its terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, moratorium, and other similar laws relating to, limiting, or affecting the enforcement of creditors rights generally, or by the application of equitable principles. Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby, nor compliance with any of the provisions hereof, will violate any order, writ, injunction, or decree of any court or governmental authority, or violate or conflict with in any material respect or constitute a default under (or give rise to any right of termination, cancellation, or acceleration under), any provisions of the Seller’s Articles of Incorporation or Bylaws, the terms or conditions or provisions of any note, bond, lease, mortgage, or agreement of any kind to which the Seller is a party or by which the Seller or its properties may be bound, but subject to Section 2.3 of this Agreement, or violate in any material respect any statute, law, rule, or regulation applicable to the Seller. No consent or approval by any governmental authority is required in connection with the execution and delivery by the Seller of this Agreement or the consummation of the transactions contemplated hereby.

 

 

 

5 .14       Brokerage Fees . The Seller has not incurred, and will not incur, any liability for brokerage or finder’s fees or similar charges in connection with the transactions contained within this Agreement.

 

5 .15       Obligation of the Seller Shareholders . This Agreement constitutes the valid and legally binding obligation of the Seller Shareholders, enforceable in accordance with its terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, moratorium and other similar laws relating to, limiting or affecting the enforcement of creditors' rights generally. Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will constitute a violation of or default under, or conflict in any material respect with, any judgment, decree, statute, or regulation of any governmental authority applicable to the Seller Shareholders or any contract, commitment, agreement, or restriction of any kind to which the Seller Shareholders are a party or by which the Seller Shareholders are bound.

 

5 .16       Approvals Required . No approval, authorization, consent, order, or other action of, or filing with, any person, firm, or corporation or any court, administrative agency, or other governmental authority is required in connection with the execution and delivery by the Seller Shareholders of this Agreement or the consummation by them of the transactions described herein, except to the extent that Seller Shareholders may be required to file reports in accordance with relevant regulations under federal and state securities laws upon execution of this Agreement and/or consummation of the transactions contemplated hereby.

 

5 .17       Employee; Benefit Plans .

 

(a)       Schedule 5.17 (a) , attached hereto and made a part hereof, sets forth the number and names of the employees of Seller as of the date hereof, and includes and indicates those individuals for which Seller has entered into a co-employer agreement with Merit Resources, Inc.

 

(b)      Seller does not have any “employee benefit plans” (as such term is defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (“ ERISA ”) (the “ Benefit Plans ”). Schedule 5.17(b) , attached hereto and made a part hereof, identifies all programs, including, without limitation, any pension plans, health and welfare plans, life, disability, medical, dental or hospitalization insurance plans, sick-leave, vacation accrual or holiday plans, bonus, savings, profit-sharing or other similar benefit plans, deferred compensation, stock option, stock ownership and stock purchase plans covering employees or former employees of Seller (“ Employee Programs ”). Seller does not sponsor or contribute to, nor has it ever sponsored or been required to contribute to, any “multiemployer plan” as such term is defined in Section 3(37) of ERISA. As applicable with respect to each Employee Programs, the Seller has delivered to the Buyer true and complete copies of (i) each Employee

 

 

 

Programs, including all amendments thereto, and in the case of an unwritten Employee Programs, a written description thereof, (ii) all trust documents, investment management contracts, custodial agreements, and insurance contracts relating thereto, (iii) the current summary plan description and each summary of material modifications thereof, (iv) the two (2) most recent summary annual reports, actuarial reports, financial statements, and trustee reports, and (v) all records, notices, and filings concerning (x) any governmental audit or investigations, (y) “prohibited transactions” within the meaning of Section 406 of ERISA or Section 4975 of the Internal Revenue Code and (z) “reportable events” within the meaning of Section 4043 of ERISA. There are no pending or, to the knowledge of Seller or the Seller Shareholders, threatened investigations or audits by governmental agencies or any claims by or on behalf of the Employee Programs or by any employee of the Seller alleging a breach or breaches of such plans, or fiduciary duties thereunder, violations of other applicable federal or state law with respect to the Employee Programs or arising out of events relating to the employment of the employees of the Seller, which could result in a monetary liability, or any material non-monetary liability, on the part of the Seller under ERISA or any other law, nor, to the knowledge of Seller or the Seller Shareholders, is there any basis for such a claim.

 

(c)      Except as disclosed on Schedule 5.17(a) Seller does not have any written contracts, or oral contracts, including any employment, co-employment, management, agency, or consulting contracts, with respect to any of its current, former, or retired employees or consultants.

 

(d)      Seller is not a party to any collective bargaining agreement and there are no union organizational activities or efforts to effect a representation election pending or, to Seller’s knowledge, threatened.

 

(e)      Seller has complied in all material respects with all applicable laws relating to the employment of labor, including the provisions thereof relating to benefits required to be provided under Part VI of Subtitle B of Title I of ERISA or Section 4980B(f) of the Code (collectively, “ COBRA ”), wages, hours, working conditions, employee benefit plans, and the payment of withholding and social security taxes.

 

(f)      No present or former employee or consultant of the Seller has any claim against the Seller (whether under federal or state law, any employment agreement, or otherwise) on account of or for (a) overtime pay, other than overtime pay for the current payroll period, (b) wages or salary for any period other than the current payroll period, (c) vacation, time off, or pay in lieu of vacation or time off, other than that earned in respect of the current fiscal year, or (d) any violation of any statute, ordinance or regulation relating to minimum wages or maximum hours of work.

 

(g)      Neither the Seller nor any agent, representative or employee of the Seller has committed any unfair labor practice as defined in the National Labor Relations Act of 1947, as amended, and there is not now pending or, to Seller’s knowledge, threatened any charge

 

 

or complaint against the Seller by the National Labor Relations Board or any representative thereof.

 

(h)      Seller has not had any worker’s compensation claims asserted against it during the three (3) years preceding the date hereof.

 

(i)      With regard to Schedule 5.17(b) :

 

(i)      All contributions to, and payments from, any Employee Programs which may have been required in accordance with the terms of such Employee Programs or any related document have been timely made. All such contributions to, and payments from, any Employee Programs, except those to be made from a trust, qualified under Section 401(a) of the Code, for any period ending before the Closing Date that are not yet, but will be, required, shall be paid on or before the Closing Date.

 

(ii)      Neither the Seller, nor any fiduciary, trustee or administrator of any Employee Programs, has engaged in or, in connection with the transactions contemplated by this Agreement, will engage in any transaction with respect to any Employee Programs which would subject any such Employee Programs, the Seller, the Seller Shareholders, the Buyer, or the Acquisition Sub to a tax, penalty, or liability for a “prohibited transaction” under Section 406 of ERISA or Section 4975 of the Code.

 

(iii)      All insurance premiums with respect to any insurance policy related to any Employee Programs which are due and payable for any period up to and including the Closing Date shall have been paid on or before the Closing Date, and, with respect to any such insurance policy or premium payment obligation, neither the Seller nor the Buyer shall be subject to a retroactive rate adjustment, loss sharing arrangement, or other actual or contingent liability.

 

(iv)      With respect to each Employee Programs that is a “group health plan” within the meaning of Section 607 of ERISA and that is subject to Section 4980B of the Code, the Seller complies in all respects with the continuation coverage requirements of the Code and ERISA.

 

(v)      None of the Employee Programs provides benefits, including, without limitation, death or medical benefits, beyond termination of service or retirement other than (A) coverage mandated by law or (B) death or retirement benefits under Employee Programs qualified under Section 401(a) of the Code. Seller has not made a written or oral