STOCK PURCHASE AGREEMENT

 

Exhibit 10.40

STOCK PURCHASE AGREEMENT

This Stock Purchase Agreement has been executed as of this 7th day of April, 2009, by and among Mace Security International, Inc (“Buyer”), a Delaware corporation ; CSSS, Inc., California corporation (“CSSS”); David Keays and Bradley Keays,  collectively, David Keays and Bradley Keays are referred to as (the “Shareholders”).

RECITALS:

A.          CSSS is engaged in the business of providing residential and commercial security systems alarm and video monitoring services through out the United States of America (the “Business”).

B.           Buyer desires to acquire all of the outstanding securities, including, without limitation, the issued common stock of CSSS.  Shareholders own all of the issued and outstanding securities of CSSS.  David Keays owns 6,750 shares of CSSS common stock and Bradley Keays owns 1,750 shares of CSSS common stock.  The total outstanding securities of CSSS are 8,500 shares of common stock (“ CSSS Stock ”).

D.           At the time the CSSS Stock is purchased by Buyer and sold by Shareholders, as set forth in this Agreement (“Closing”), CSSS shall own all the assets, and contractual rights historically used in connection with the Business and as further set forth in this Agreement.

D.           Buyer is not willing to enter into this Agreement without the representations, warranties and agreements of the Shareholders set forth in this Agreement.

E.           The Shareholders and CSSS to induce Buyer to enter into this Agreement are willing to make the representations, warranties and agreements set forth in this Agreement.

IN CONSIDERATION of the mutual covenants, agreements, representations and warranties set forth herein, and in reliance thereon, intending to be legally bound, the parties agree as follows:

SECTION 1.  DEFINITIONS

 

The capitalized and certain other terms used herein shall have the meanings ascribed to them in Schedule I to this Agreement.

SECTION 2.  THE PROPOSED TRANSACTION

 

2.01                       Capital Stock .  Subject to the terms and conditions of this Agreement, and in reliance on the representations, warranties and covenants contained herein, at Closing and as of the Closing Date, the Shareholders will sell, convey, assign, transfer and deliver to Buyer, and Buyer will purchase and acquire, the CSSS Stock.

 

2.02                       Assets To Be Owned by CSSS at Closing .  Subject to the terms and conditions of this Agreement, and in reliance on the representations, warranties and covenants contained herein, at Closing and as of the Closing Date, CSSS will have good and marketable title to the following property, free and clear of all liens, mortgages, security interests and claims of third parties, together will any other property which is not listed but is used in the Business (“Purchased Assets”):

(a)        the Customer Contracts, a complete and accurate list of which is set forth on Schedule 2.02(a) ;

(b)        all Accounts Receivable, including without limitation those generated by the advance billing of customers for services not yet rendered by CSSS;

(c)        Inventory;

(d)        all Equipment, a complete and accurate list of the major items of which is set forth in Schedule 2.02(d) ;

(e)        cash and cash equivalents held as refundable deposits from customers or other third parties which relate to the Business and all amounts billed and collected by CSSS to its Customers on or prior to the Closing Date, for services to be rendered by Buyer after the Closing Date;

(f)         all Intellectual Property, a complete and accurate complete and accurate list of which is set forth in Schedule 2.02(f) , together with the goodwill associated therewith and symbolized thereby; and any licenses relating to the Intellectual Property used in or useful to the Business, whether to or from CSSS;

(g)        all Technical Information;

(h)        all Computer Software Assets, a complete and accurate list of which is set forth in Schedule 2.02(h) ;

(i)         all Prepaid Expenses;

(j)         all Contracts and Leases, a complete and accurate list of which is set forth in Schedule 2.02(j) ;

(k)        all Open Orders, a complete and accurate list of which is set forth in Schedule 2.02(k) ;

(l)         all Permits, a complete and accurate list of which is set forth in Schedule 2.02(l) ;

(m)       all Books and Records, including without limitation (i) all property and records used or held for use in the Business, (ii) copies of personnel records of employees who become Hired Employees after the Closing Date, (iii) all office supplies and (iv) the right to receive and retain mail and other communications relating to the Business;

 

(n)        all certifications, ratings, listings and similar benefits from any product or quality control certification organization and all systems and manuals related thereto;

(o)        all memberships of CSSS relating to the Business in, and all rights as a member of, the industry, trade, civic, social and other associations, organizations and clubs listed in Schedule 2.02(o) ;

(p)        all other assets (including causes of action, rights of action, contract rights and warranty and product liability claims against third parties, telephone numbers and listings) relating to the Purchased Assets or the Business;

(q)        Any insurance policies maintained by CSSS with respect to the Business and any prepaid insurance expenses;

(r)         CSSS’s franchise to be a corporation, its certificate of incorporation, bylaws, minute books and other records having to do with the organization and capitalization of CSSS;

(s)        Any claims and rights against third parties (including, without limitation, insurance carriers);

(t)         All payments made by CSSS which constitute prepaid Taxes of the Business and all claims for refunds of Taxes and other governmental charges to the extent such refunds relate to periods ending on or prior to the Closing Date;

(u)        All Plans of CSSS and all payments made by CSSS which constitute prepaid expenses of the Business relating to such Plans; and

(v)        CSSS’s depository and other accounts;

2.03                       Consideration for the Purchased Assets .  Subject to the terms and conditions of this Agreement, and in reliance on the representations, warranties and covenants contained herein, in consideration of the sale, conveyance, assignment, transfer and delivery of the CSSS Stock, and the obligations of the Shareholders under Section 8 of this Agreement, Buyer agrees (a) subject to adjustment following Closing pursuant to Section 2.05, to pay and deliver to CSSS on the Closing Date the Purchase Price, as set forth in Section 2.04, and (b) to assume as of the Closing Date the Assumed Liabilities, as set forth in Section 2.06.

2.04                       Purchase Price .   Buyer shall pay the amount of $ 3,160,000 for the CSSS Stock, as reduced and increased, as set forth in this Agreement (the “ Purchase Price ”).  The Purchase Price is subject to adjustment at and following Closing pursuant to this Subsection 2.04 and Subsection 2.05 below.

(a)        The $3,160,000 Purchase Price shall be adjusted as of the date of Closing by the Closing Date Adjustments.   The Closing Date Adjustments are the total sum of the following amounts based on their balances as of the Closing Date: (i) the Purchase Price shall be increased by the amount of cash in the bank accounts of CSSS, not including cash held as deposits posted by third parties; (ii) the Purchase Price shall be reduced by revenue collected by CSSS for services not fully rendered by CSSS as of the Closing Date; (iii) the Purchase Price shall be reduced by the accounts payable of CSSS, including accrued payroll; and (iv) the Purchase Price shall be reduced by amounts necessary for CSSS to pay Secure Global Solutions post Closing to complete the installation and training of the monitoring software system Secure Global Solutions is currently installing for CSSS, as further set forth in Schedule 2.04(a) .  The Closing Date Adjustments shall be estimated by Buyer and Shareholders on the Closing Date.  On the Closing Date, Buyer and Shareholders shall execute a statement that details the amount of the estimate of each of the Closing Date Adjustments (“Closing Date Adjustment Statement”).  Within sixty (60) days after the Closing Date, Buyer and Shareholders shall cooperate with each other to verify the amounts of the estimated Closing Date Adjustments based on all post closing information.  If based on the post Closing information, the Closing Date Adjustment was to large or to small in amount, the Buyer or Shareholders, as applicable will pay the other party the amount necessary to adjust the Closing Date Adjustment to the correct amount.  All payments of the amount necessary to adjust the Closing Date Adjustment to the correct amount shall be made within ninety (90) days after the Closing Date.

 

(b)        As part of the Purchase Price for the CSSS Stock, Shareholders shall receive the Accounts Receivables payments set forth in Section 2.05.

(i)          $500,000 of the Purchase Price (“ AT&T Holdback ”) will be paid to the Shareholders by Buyer upon either (a) the written release by AT&T to CSSS from any and all liability CSSS has under AT&T Service Order and Addendum to Comprehensive Service Order, between CSSS, Inc. and AT&T Corp, AT&T MA Reference No. 109699, signed February 15, 2007 and March 3, 2007, Contract ID 1148971(“ AT&T Contract ”) or (b) the determination of Buyer, in its sole discretion, that CSSS has no liability or obligations to AT&T under the AT&T Contract.  Any and all amount CSSS is obligated to pay to discharge its obligations under the AT&T Contract, including defense costs, shall reduce the amount of the AT&T Holdback to be paid to the Shareholders.  The AT&T Holdback will be paid to Shareholders on its due date along with accrued interest at the rate of two percent per annum from the date of Closing.

(v)        On the day that is thirteen months from the Closing Date, Buyer shall pay to Seller ten percent of the Purchase Price, after the Closing Date Adjustments (“ RMR Holdback ”), less the Attrition Reduction , as hereafter defined.   The “ Attrition Reduction” shall equal 12 times the difference, if any, between (a) the Qualified RMR attributable to the Customers Contracts of CSSS in existence on the Closing Date, less (b) CSSS’s Qualified RMR, attributable Customer Contracts of CSSS in existence on the Closing Date, for the month ended twelve months from the Closing Date.  If the Attrition Reduction is greater than the RMR Holdback, there shall be no payment to Shareholders but Shareholders shall not be obligated to refund any of the Purchase Price.

2.05                       Accounts Receivables .

(a)        Buyer shall pay to Shareholders the amount equal to ninety five (95%) of the accounts receivable of CSSS in existence on the Closing Date for services fully rendered on or before the Closing Date ( “Accounts Receivable”) and that are actually paid to Buyer during the ninety days after the Closing Date (the “Account Payment Period”).  Buyer and Shareholders acknowledge that that the Accounts Receivable do not include accounts receivable generated by CSSS from the advance billing of customers for services that are to be rendered by CSSS after Closing.  The payments due under this Section 2.05(a) shall be made by Buyer to the Shareholders for each month on or before twenty days after the end of each month.  The payment will be sent with a schedule detailing the Accounts Receivable payments received by CSSS during the prior month.  No further payment will be due or owning with respect to the Accounts Receivable regarding any payments of Accounts Receivable made on and after the Account Payment Period.

(b)        If the Closing Date Adjustments as estimated on the Closing Date were less then the actual Closing Date Adjustment as determined sixty days after the Closing, Buyer may offset and credit against any amount owed to Shareholders under Section 2.05(a) above, any amount Shareholders owe to Buyer under Section 2.04(a) as a result of the estimated Closing Date Adjustments being different from the final Closing Date Adjustments.

2.06                       Assumed Liabilities .  The Buyer acknowledges that CSSS at the Closing Date will have liabilities and obligations relating to the Business, as set forth in Subsections (a), (b), (c), (d) and (e) below and that Buyer will not make any indemnification claim of Shareholders arising out of any of the liabilities and obligations of CSSS, as set forth in Subsections (a), (b), (c), (d) and (e) below:

 

(a)        the Liabilities and Obligations arising pursuant to the Customer Contracts to the extent such Liabilities and Obligations first arise and are related to periods subsequent to the Closing (provided that such obligations do not arise as a result of actions or omissions by CSSS on or prior to Closing); and

(b)        the obligation of CSSS to David Keays in the amount of Two Hundred Thousand ($200,000) which Buyer agrees to cause CSSS to pay at Closing; and

(c)        the Liabilities and Obligations arising pursuant to Open Orders, Contracts, and Leases included within the Purchased Assets and set forth and identified in Schedule 2.02(j), but not including any liability or obligation arising (i) from any payment or payments which became due and owing prior to the Closing Date or (ii) out of or in connection with any breach thereof occurring prior to the Closing Date, or the occurrence of any event prior to the Closing Date which but for the giving of notice or lapse of time or both would constitute a breach or default; and

(d)        the accounts payable in the amounts as listed on the Closing Date Adjustment Statement agreed to by Buyer and Shareholders at Closing, as set forth in Subsection 2.04(a) of this Agreement; and

(e)        Liabilities or Obligations of CSSS arising out of any transactions first occurring, or liabilities or obligations first incurred after the Closing Date relating to the Purchased Assets or the Assumed Liabilities.

2.07                       Indemnified Liabilities .  Notwithstanding anything to the contrary contained in this Agreement, the Shareholders are indemnifying and holding Buyer and CSSS harmless from and against, all of CSSS’s debts, liabilities and obligations of any nature whatsoever (other than the Assumed Liabilities), whether accrued, absolute or contingent, whether known or unknown, whether due or to become due, including, without limitation, the following:

(a)        the Liabilities or Obligations of CSSS to the Shareholders, respecting dividends, distributions in liquidation, redemptions of stock or other payments;

(b)        Liabilities or Obligations of CSSS arising out of any transactions occurring, or liabilities or obligations incurred, before the Closing Date, other than relating to Buyer’s use or operation of the Purchased Assets or the Assumed Liabilities after the Closing Date;

(c)        Liabilities or Obligations of CSSS arising out of those Contracts identified on Schedule 2.07(c).

(d)        any Liabilities or Obligations of CSSS under or arising out of this Stock Purchase Agreement prior to but not after the Closing Date;

(e)        Liabilities or Obligations arising from events occurring prior to Closing against which CSSS would have been covered by insurance (or indemnification) but for a claim by the insurer (or the indemnitor) that the insured (or the indemnitee) had breached its obligations under the policy of insurance (or the contract of indemnity) or had committed fraud in the insurance application or in entering into the indemnity agreement;

 

(f)         any Liabilities or Obligations of the CSSS to the Shareholders other than the $200,000 obligation to be paid to David Keays as set forth in Subsection 2.06(b) above;

(g)        any Liabilities and Obligations of CSSS to indemnify its officers, directors, employees or agents for actions or inactions prior to Closing;

(h)        all Taxes imposed on CSSS relating to any and all periods prior to Closing;

(i)         all Liabilities and Obligations arising under or imposed pursuant to Environmental Laws, whether or not attributable to actions or failures to act by CSSS, with respect to the ownership of, operation of, or properties utilized in connection with, the Business at any time prior to the Closing Date, or to any property being transferred or leased to Buyer pursuant to this Agreement;

(j)         all Liabilities and Obligations for employee benefits of the Business incurred prior to the Closing Date;

(k)        all other Liabilities or Obligations of CSSS arising out of its conduct of the Business prior to the Closing Date, including without limitation, Product Liabilities; liabilities or obligations related to the infringement by CSSS of any intellectual property of another Person; and any Liabilities or Obligations related to any lawsuit, cause of action, litigation or legal proceeding with respect to any losses, occurrences or events occurring prior to the Closing Date, whether commenced prior to or after the Closing Date, except for those liabilities or obligations constituting a part of the Assumed Liabilities.

(l)         any Plan or any Liabilities or Obligations of the CSSS or the Shareholders with respect to any Plan; and

(m)       all Liabilities and Obligations with respect to indebtedness for borrowed money, bank debt and any mortgage on any real property whether currently or previously occupied or used in the Business, except for those Liabilities and Obligations constituting a part of the Assumed Liabilities.

2.08                       Allocation of Consideration .  Shareholders and Buyer agree that the Purchase Price  shall be allocated ninety five percent to the CSSS Stock and five percent to the Non-Competition covenants contained in Section 8 of this Stock Purchase Agreement.

SECTION 3.  CLOSING

 

The Closing of the transactions contemplated by this Agreement shall take place at 10:00 a.m. at the offices of the Business at 401 West Lincoln Avenue, Anaheim, California, on the later of (a) April 30, 2009 and (b) the fifth business day following the date when all of the conditions to the Closing specified in Sections 9 and 10 have been satisfied or waived, or such other date as the parties may mutually agree to in writing.

SECTION 4.  REPRESENTATIONS AND WARRANTIES OF CSSS AND SHAREHOLDERS

CSSS and the Shareholders, jointly and severally, represent and warrant to Buyer that the statements contained in this Section 4,  are correct and complete as of the date of this Agreement and shall be correct and complete at the Closing Date.  The mere listing (or inclusion of a copy) of a document or other item shall not be deemed adequate to disclose an exception to a representation or warranty made in this Agreement unless (a) the representation or warranty has to do with the existence of the document or other item itself or (b) the Disclosure Schedule identifies the exception with particularity (such as with a cross-reference to a section in a disclosed agreement) and summarizes the relevant facts in reasonable detail.

Wherever a representation or warranty in this Agreement is qualified as having been made “to the best of CSSS’s knowledge,” such phrase shall mean the knowledge of Shareholders, CSSS and the officers, directors and employees of CSSS responsible for the operation of the Business or the Purchased Assets, after reasonable inquiry.

4.01                       Organization; Authority; Name .

(a)        CSSS is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation and is duly authorized, qualified and licensed under all applicable Laws to carry on its business in the places and in the manner as presently conducted, except for where the failure to be so authorized, qualified or licensed would not have a Material Adverse Effect.

(b)        CSSS and the Shareholders have the full legal right, power and authority to enter into this Agreement and to consummate the transactions contemplated by this Agreement.  All corporate action of CSSS necessary to approve the transactions contemplated by this Agreement has been taken.  Each of the Shareholders is of legal age and is competent to execute this Stock Purchase Agreement.

(c)         Stock Ownership; Binding Effect .  Shareholders own all of the issued and outstanding shares of CSSS’s capital stock free and clear of any restrictions on transfer, security interests, liens, pledges, options, purchase rights, contracts, commitments, claims, and demands.  The Shareholders are not parties to any option, warrant, purchase right, or other contract or commitment that could require the Shareholders to sell, transfer, or otherwise dispose of the CSSS Stock (other than this Stock Purchase Agreement).  The Shareholders are not parties to any voting trust, proxy, or other agreement or understanding with respect to the voting of any capital stock of CSSS.

4.02                       Voting.   No Person other than Shareholders has any right to vote the CSSS Stock.  CSSS and the Shareholders have duly executed and delivered this Agreement, and (assuming due authorization, execution and delivery by Buyer) this Agreement constitutes a legal, valid and binding obligation of CSSS and the Shareholders enforceable against each of them in accordance with its terms.

 

4.03                       No Conflict .  The execution, delivery and performance of this Stock Purchase Agreement by CSSS and the Shareholders and the consummation of the transactions contemplated by this Agreement do not and will not:  (a) violate, conflict with or result in the breach of any provision of CSSS’s Articles of Incorporation or Bylaws; (b) conflict with or violate any Law or Governmental Order applicable to the Purchased Assets, the Business, CSSS, the Shareholders or any of their respective assets, properties or businesses; or (c) except as set forth in Schedule 4.03 , conflict with, result in any breach of, constitute a default (or event which with the giving of notice or lapse of time would become a default) under, require any consent under, or give to any other Person any rights of termination, amendment, acceleration, suspension, revocation or cancellation of, or result in the creation of any Lien on the Purchased Assets, the properties of CSSS, or the CSSS Stock pursuant to any note, bond, mortgage, indenture, contract, agreement, lease, sublease, license, permit, authorization, franchise or other instrument or arrangement to which CSSS or any Shareholder is a party or by which any of the Purchased Assets or the CSSS Stock are bound or affected.

4.04                       Governmental Consents and Approvals .  Except as set forth on Schedule 4.04 , the execution, delivery and performance of this Agreement by CSSS and the Shareholders do not and will not require any consent or action by, filing with or notification to, any Governmental Authority.

4.05                       Title to Assets .  CSSS has good and marketable title to the Purchased Assets, free and clear of all Liens.  By virtue of the grant, conveyance, sale, transfer and assignment of the CSSS Stock hereunder, Buyer shall receive at Closing good and marketable title to the CSSS Stock, free and clear of all Liens.

4.06                       Equipment .   Schedule 2.01(d) is a complete and accurate list of all Equipment.  The Equipment is in good and serviceable condition and repair (subject to normal wear and tear).  CSSS has not, nor, to the best of Shareholder’s knowledge, has anyone else, made any modifications to any of the Purchased Assets that would void or invalidate any manufacturer’s warranty or cause the Purchased Assets not to be in compliance with any Law.  CSSS owns all of the Equipment, except only Equipment that is leased under Leases not in default and identified in Schedule 2.01(j) .  CSSS’s central station monitoring facility is listed with Underwriters Laboratories (“UL”).  .  All UL deficiencies reported to CSSS by UL have been fixed or otherwise resolved in all material respects, and to CSSS’s and the Shareholders’ knowledge there are no outstanding or unresolved UL deficiencies with respect to CSSS’s central station or any of the Customer.

4.07                       Contracts .

(a)         Schedule 2.01(a) is a complete and accurate list of the Customer Contracts as of the date of this Agreement.  Complete and accurate originals of all Customer Contracts are filed in the CSSS’s records and will be on CSSS’s leased premises  at Closing.  The Customer Contracts include all of CSSS’s customers to whom CSSS is providing services as of the Closing Date in connection with the Business.  CSSS has billed all of its customers accurately and timely and in accordance with the Customer Contracts.  All Customer Contracts are in full force and effect and are valid, binding and enforceable against the respective parties thereto in accordance with their respective terms, and CSSS is not in default in, nor has there occurred an event or condition  which, with the passage of time or the giving of notice, would constitute a default with regard to the payment or performance of any obligation under any Customer Contract.  CSSS has not received any notice that any person intends or desires to amend or terminate any Customer Contract.

 

(b)        There is no contract, agreement or other arrangement granting any Person any  right to purchase any of the Purchased Assets or the CSSS Stock.

(c)        Except as set forth on Schedule 2.01(a) , no Customer Contract or any other contract, agreement or other arrangement between CSSS and any of CSSS’s customers or any third party, requires the Consent of any Person for the purchase of the CSSS Stock by Buyer under this Agreement.

(d)        All Customers which are alarm dealers have written contracts with the CSSS on a basic form of contract which is attached as Schedule 4.07(d) with only minor non-material changes in the basic form.

(e)        Less than one percent (1%) of CSSS’s Customers are commercial or residential end users of alarms that CSSS bills directly.  CSSS has executed a Monitoring Activation Agreement in the basic form of the contract which is attached as Schedule 4.07(e), with only minor non-material changes in the basic form, with all persons and entities which are the end users of alarms and video equipment that CSSS monitors.

4.08                       Qualified RMR; Attrition Rate .  The Customer Contracts collectively generated monthly Qualified RMR in an amount not less than $280,000 for each of the months of February 2009 and March 2009.  CSSS’s annual Attrition Rate for each of the calendar years, 2007 and 2008 has not exceeded 1.92%.

4.09                       Compliance with Law .  CSSS has always conducted and continues to conduct the Business in accordance with all Laws, Permits and Governmental Orders applicable to CSSS, the Purchased Assets or the Business.  CSSS is not in material violation of any such Law, Permit or Governmental Order.   Schedule 4.09 identifies each Governmental Order applicable to CSSS, the Purchased Assets or the Business, and no such Governmental Order has or has had a Material Adverse Effect.  Neither CSSS nor either of the Shareholders has received any citation or notice that CSSS or any of its current or former officers, directors, shareholders or employees is under investigation or other form of review relating to the Purchased Assets or the Business with respect to any applicable Law.

4.10                       Tax Matters .

(a)        Except as noted in Schedule 4.10 , CSSS has duly and timely filed all returns for Taxes required to be filed by it or for which it may be held responsible under applicable Law, all such Tax returns are true, correct and complete in all material respects, and CSSS has timely paid or accrued (or had paid or accrued on its behalf) all Taxes due for all periods ending on or prior to the Closing Date with respect to which a taxing or collection authority has issued a proposed or final assessment or made any similar claim.  All amounts required to be withheld or collected by CSSS from customers or from or on behalf of employees or independent contractors for income, social security and unemployment insurance Taxes have been collected or withheld and either paid to the appropriate Governmental Authority or set aside and, to the extent required by law, held in accounts for such purpose.

 

(b)        CSSS has complied in all respects with all applicable laws relating to withholding taxes and tax information reporting and has, within the time and manner prescribed by Law, withheld from each employee’s wages and other payments and paid over to the proper Governmental Authority all amounts required to have been so withheld and paid.  All persons who have provided services to CSSS and have been classified as independent contractors for tax purposes were properly so classified.  The records of the CSSS contain all information and documents necessary to comply in all material respects with applicable tax information reporting and tax withholding requirements under applicable Law and such records identify with specificity all amounts subject to backup holding under Section 3406 of the Code.  The CSSS has complied in all material respects with all sales tax resale certificate exemption requirements.

(c)        There are no existing circumstances that will result in the assertion of any claim for taxes against CSSS by any Governmental Authority with respect to any period for which tax returns are required to have been filed or taxes required to have been paid.

(d)        CSSS has not directly or through any subsidiary conducted any activities in any jurisdiction which require CSSS (or such subsidiary) to pay tax or file a tax return of a type that it has not filed in the most recently ending preceding taxable period for which such type of tax or tax return would be due.

(e)        There is no audit or other proceeding presently pending or threatened with regard to any tax liability or any tax return of CSSS or any subsidiary or affiliate of CSSS or any Shareholder relating to the CSSS or any of its affiliates.

(f)         CSSS has not waived any statute of limitations or agreed to any extension of time that has the effect of deferring the payment or collection of any tax or the filing of any tax return. There is not currently in effect any power of attorney authorizing any person to act on behalf of the CSSS or to receive information relating to CSSS with respect to any tax matter (other than authorizations included as an integral part of any tax return previously filed by the CSSS).

(g)        CSSS has not been a beneficiary or otherwise participated in any “reportable transaction” within the meaning of Treasury Regulation Section 1.6011-4(b)(1) that was or will ever be required to be disclosed under Treasury Regulation Section 1.6011-4. No tax return filed by CSSS contained a disclosure statement under Section 6662 of the Code (or any similar provision of Law) or has been filed by or on behalf of CSSS nor has CSSS ever been advised to make such disclosure which was not in fact made.

(h)        CSSS does not have any “permanent establishments” in any country other than the United States and has not otherwise engaged in any activity that has exposed,  or will expose, it to the taxing jurisdiction of any such other country.

(i)         Schedule 4.10(i) identifies all tax returns of CSSS filed after December 31, 2003, and the taxable period covered by each such tax return and identifies those tax returns or periods that have been audited or are currently the subject of an audit by a Governmental Authority. CSSS has provided to Buyer complete and accurate copies of the following materials:

 

(i)           All income tax returns filed by CSSS that relate to taxable periods ending after December 31, 2003;

(ii)          All examination reports relating to taxes of CSSS issued since December 31, 2003 in connection with tax audit or examinations or asserted failures to file tax returns or to pay any taxes;

(iii)         All statements of taxes assessed since December 31, 2003 that were not shown on tax returns filed by CSSS before assessment and all related correspondence;

(iv)         All written rulings from and written agreements with any Governmental Authority relating to taxes of CSSS that were received since December 31, 2003;

(v)          Copies of all tax opinions relating to and in the audit files of CSSS; and

(vi)         To the extent requested by Buyer, any document relating to taxes or tax returns relating to CSSS or the Shareholders.

(j)          There is no dispute or claim concerning any Taxes of CSSS either (i) claimed or raised by any Governmental Authority in writing or (ii) as to which any of the directors, officers or representatives of CSSS have knowledge except as disclosed in Schedule 4.10.  No returns for Taxes of CSSS are currently under audit or examination by any Governmental Authority.

(k)        CSSS has not waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to an assessment or deficiency for Taxes.

(l)         There are no Liens for Taxes (other than for current Taxes not yet due and payable) on CSSS or any of the Purchased Assets.

(m)       CSSS has been a validly existing C corporation within the meaning of the Code.

4.11                       Litigation .  Except as set forth on Schedule 4.11 , no Action is pending or, to the best of CSSS’s knowledge, threatened, against CSSS or the Shareholders relating to the Purchased Assets or the Business, at law or in equity.  Neither CSSS nor any Shareholder has received notice of any of the above, and, to the best of CSSS’s knowledge, no facts or circumstances exist which would give rise to any of the foregoing.  Also listed on Schedule 4.11 are all instances where CSSS or any Shareholder is the plaintiff, or complaining or moving party, in any action that is in any way related to the Purchased Assets or the Business.

4.12                       Conduct of CSSS’s Business .  Since December 31, 2008, except for the execution and delivery of this Agreement or as disclosed on Schedule 4.12 , the Business has been conducted in all material respects in the ordinary course and consistent with past practice, and there has not been any:

 

(a)        sale or transfer of, or any agreement to sell or transfer, any of the Purchased Assets or any plan, agreement or arrangement granting any  right to purchase or acquire any interest in any of the Purchased Assets, or requiring Consent of any party to the transfer and assignment of any of the Purchased Assets, or any loss or damage to the Assets;

(b)        waiver of any material rights or claims of CSSS related to the Purchased Assets;

(c)        material breach, amendment or termination of any Customer Contract;

(d)        transaction by CSSS outside the ordinary course of its business and related to the Purchased Assets;

(e)        any increase in rates for service to Customers and there has not been any amnesty or incentive program regarding payment of overdue accounts receivable;

(f)         all Customer Contract entered into by CSSS have been in the ordinary course of business with standard terms and pricing;

(g)        occurrence, event, incident, action or failure to act that has had, or that reasonably is expected to have, a Material Adverse Effect on CSSS or the Business; or

(h)        any action by CSSS, the Shareholders, or any employee, officer or agent of CSSS or the Shareholders committing to do any of the foregoing.

4.13                       Noncompete Agreements .   Schedule 4.13 is a complete and accurate list of all Restrictive Agreements as of the date of this Agreement, complete and accurate copies of which are attached to Schedule 4.13 .  None of the Restrictive Agreements have been modified, altered, terminated or otherwise amended.  The Transactions do not violate any of the terms and provisions of the Restrictive Agreements.  The Customer Contracts do not contain any restrictive covenant provisions.

4.14                       Reliance on Advisors .  CSSS and the Shareholders have relied on their own advisors for all legal, accounting, tax or other advice whatsoever in connection with this Agreement and the Transactions.

4.15                       Contracts .

(a)         Schedule 4.15(a) sets forth a list of all Material Contracts to be assumed by Buyer as part of the Assumed Liabilities.  The Material Contracts constitute all contracts material to the conduct of the Business as presently conducted by CSSS.  All Contracts are valid, binding and in full force and effect, and neither CSSS nor any other party to any Contract is in default there under.  The Business is in compliance with all applicable cost accounting standards (“CAS”) requirements with respect to any Contracts with the United States or any agency thereof or any prime contractor thereof, except for such noncompliance that would not (i) result in the United States or any agency thereof or any prime contractor thereof having the right to terminate or otherwise cease performance of such Contracts; (ii) result in the United States or any agency thereof having the right or ability to bar CSSS from engaging in any future business arrangements with the United States or any agency thereof; or (iii) have a Material Adverse Effect.

 

(b)        Except as noted in Schedule 4.15(b) , none of the Material Contracts contains any provision providing for the termination of the Contract or giving any party thereto the right to terminate such Contract by reason of the execution of this Agreement or the consummation of the transactions contemplated herein, and none of the terms of any Material Contract will be altered by reason of the execution of this Agreement or the consummation of the transactions contemplated herein.

(c)        None of the Material Contracts has been awarded to CSSS as a result of or on the condition that, and none of the Open Orders has been bid on the condition that, (i) CSSS was, is or remains a “small business” enterprise or (ii) CSSS qualifies under any other governmental set aside program, in either case, the eligibility for which may be terminated as a result of the consummation of the transactions contemplated by this Agreement.

4.16                       Open Orders .  All Open Orders to connect alarm end users to CSSS’s monitoring equipment have been and are processed in a timely manner in the ordinary course of business.  There are valid and executed Customer Contracts and Monitoring Activation Agreements in existence for each Open Order.

4.17                       Permits .   Schedule 2.02(l) sets forth a list of all Permits required or useful in the conduct of the Business.  All Permits are in full force and effect and no suspension or cancellation of any have been threatened.  No Permits or parts thereof are subject to loss by reason of dormancy or non use.  No claims have been made by any Governmental Authority or any Person relating to the Permits and no such claim is contemplated by any Governmental Authority or other Person, nor does any basis therefore exist.  Except as noted in Schedule 2.01(l) , no Permit will be terminated or require the consent of the issuer to continue in effect as a result of the execution of this Agreement or the consummation of the transactions contemplated herein.

4.18                       Technical Information .  Except as noted in Schedule 4.18 , the patterns, manufacturer’s manuals and copies of all other Technical Information included in the Purchased Assets constitute all such items in the possession of CSSS and required to permit CSSS to carry on the Business in substantially the same manner as the Business was conducted by under the ownership of the Shareholders.

4.19                       Depositary Accounts, Etc.    Schedule 4.19 sets forth a list of (a) all banks, trust companies, savings and loan associations, and brokerage or other firms at which CSSS has depository accounts or have issued bank guarantees, bills of exchange, letters of credit or banker’s acceptances for the account of CSSS, and (b) all credit card and similar accounts on which CSSS may be liable and the names of the persons holding such cards or authorized to use such accounts.

 

4.20                       Insurance .   Schedule 4.20 sets forth a list of all insurance policies held by or on behalf of CSSS as of the date hereof and of all public liability insurance and errors and omission policies held by or on behalf of CSSS for the past three (3) years, copies of which have been supplied to Buyer.  Such policies are sufficient in all respects for compliance by CSSS with all requirements of law and with the requirements of all of the Contracts, and, except as noted on Schedule 4.20 , CSSS has not received any notice of actual or proposed cancellation or of reduction in coverage of, or of any increase in premium under, such policies of insurance, and to the best of CSSS’s knowledge, there are no retrospective or audit premium charges due under any insurance policies now or formerly in effect with respect to CSSS.

4.21                       Compliance with Laws; Litigation .  CSSS has been, and is, operating the Business in compliance with the requirements of all applicable laws regarding such operations.  Except as noted in Schedule 4.21 , CSSS is not engaged in, or a party to, or threatened with, any Actions and after due inquiry, CSSS does not know of any basis for any such Actions.  There are no outstanding orders, rulings, decrees, judgments, stipulations or proceedings to which CSSS is a party or by which CSSS is bound, by or with any court, arbitrator or administrative agency.

4.22                       Absence of Sensitive Payments .  CSSS has not made any contributions, payments or gifts to or for the private use of any governmental official, governmental employee or governmental agent in any amount where either the payment or the purpose in making such contribution, payment or gift is illegal under the laws of the United States or any other jurisdiction; CSSS has not established or maintained any unrecorded fund or asset for any purpose or made any false or artificial entries on its books; and CSSS has not made any payments to any Person with the intention or understanding that any part of such payment was to be used for any purpose other than that described in the document supporting the payment.

4.23                       Environmental Matters .  Except as noted in Schedule 4.23 , CSSS has conducted all activities of the Business in compliance with, and all properties owned, leased or operated by CSSS in connection with the Business comply with, all Environmental Laws.  Except as noted in Schedule 4.23 , no facts, events or conditions relating to the facilities, properties or operations of the Business will prevent, hinder or limit continued compliance with any Environmental Laws.

4.24                       Benefit Plans and Employment Arrangements .

(a)         Schedule 4.24(a) sets forth a true and correct list of (i) the name, current annual compensation rate (including bonus and commissions), title, current base salary rate, accrued bonuses, accrued sick leave, accrued severance pay and accrued vacation benefits for each present employee of the Business; (ii) each collective bargaining, union or other employee organization agreement; (iii) each employment, advisory or consulting agreement; (iv) each employee confidentiality or other agreement protecting proprietary processes, formulae or information; (v) each corporation or other trade or business which is an ERISA Affiliate; and (vi) each Plan.   Schedule 4.24(a) identifies which Plans, if any, are (i) defined benefit pension plans intended to be qualified under Section 401(a) of the Code, (ii) defined contribution plans intended to be qualified under Section 401(a) of the Code, (iii) Multiemployer Plans, (iv) any other Plan (including but not limited to any such program, contract or arrangement contained in an employment, advisory or consulting agreement), which provides benefits of any kind after termination of employment, such as, but not limited to, severance pay, continuation pay, termination pay or deferred compensation, (v) “employee welfare benefit plans” within the meaning of ERISA, and (vi) not “employee welfare benefit plans” within the meaning of ERISA.

 

(b)        With respect to each Plan, CSSS has delivered to Buyer true, correct and complete copies of all current written documents setting forth the terms and conditions of such Plan (or a written summary of such terms in the case of an unwritten Plan) and, in the case of each Plan subject to ERISA, copies of the plan document, the most current summary plan description and any modifications thereto, the most recently filed IRS Form 5500 (including attachments) and the most recent actuarial valuation and report, as applicable, and other material related documents of such Plan such as insurance contracts.

(c)        The acquisition by Buyer of the Purchased Assets and the employment of the Hired Employees by Buyer will not, directly or indirectly, give rise to any withdrawal liability or potential withdrawal liability on the part of Buyer with respect to any Multiemployer Plan in which CSSS or any ERISA Affiliate participates or to which CSSS or any ERISA Affiliate has or has had any obligation to contribute.  Except as noted in Schedule 4.24 , CSSS has no unfulfilled obligation to contribute to any Multiemployer Plan or collectively bargained welfare plan.  Neither CSSS nor any ERISA Affiliate has incurred any liability which arises from either a complete or partial withdrawal (as defined in Section 4203 or 4205 of ERISA, respectively) from any Multiemployer Plan that has not been discharged and neither CSSS nor any ERISA Affiliate has incurred a decline in contributions to a Multiemployer Plan such that, if the current rate of contributions continues, a 70% or greater decline in contributions will occur within the next three plan years.

(d)        Except as noted in Schedule 4.24 , neither CSSS nor any ERISA Affiliate maintains or contributes to, or has ever maintained or had an obligation to contribute to, a Plan subject to Title IV of ERISA or to the minimum funding requirements or standards of Section 412 of the Code or Section 302 of ERISA.  All liabilities of CSSS and of each ERISA Affiliate with respect to each Plan and to each Multiemployer Plan have been fully paid.  The assets of each Plan subject to Title IV of ERISA are sufficient to fund all benefit liabilities (within the meaning of Section 4001(a)(16) of ERISA) and there are no unfunded vested benefits under any Multiemployer Plan allocable to CSSS or any ERISA Affiliate.  There does not exist any condition, there has not occurred any event, and there has not been any omission, with respect to the sponsorship, funding or administration of any Plan, which has or could result in a Lien upon or claim with respect to any of CSSS, the Purchased Assets, or Buyer’s being liable for any contribution, withdrawal liability, benefit, claim, settlement, Tax, penalty or payment of any nature.  All contributions required to be made under the terms of any Plan have been timely made in accordance with applicable law, including without limitation, Department of Labor Reg. §2510.3-102.

(e)        Except as noted in Schedule 4.24(e) , each group health plan that provides health coverage to any present or former employee of the Business has operated in compliance with all requirements of Sections 601 through 608 of ERISA and/or Section 4980B of the Code, relating to the continuation of coverage under certain circumstances in which coverage would otherwise cease.   Schedule 4.24(e) sets forth a true and complete list of all current employees, and former employees since March 1, 2009, of the Business and their respective beneficiaries who are receiving or who are eligible to elect to receive such continuation coverage under such group health plans pursuant to such provisions of ERISA and the Code.  Each group health plan that is subject to the requirements of the Health Insurance Portability and Accountability Act, including, without limitation, the privacy and security provisions thereof, has been operated in compliance therewith.

 

(f)         Each Plan has at all times been administered in accordance with its terms, all applicable provisions of ERISA (including the “fiduciary responsibility” and “prohibited transaction” rules thereof), the Code and other applicable laws, and each Plan intended to be a qualified plan under Section 401(a) of the Code has received a favorable determination letter from the Internal Revenue Service which has not been revoked and has been timely amended to comply with all changes in law that have become effective with respect to the Plan since the effective date of its most recent determination letter.  All applicable requirements under ERISA or the Code as to the filing of reports, documents and notices regarding the Plans with the Department of Labor, the Internal Revenue Service and the Pension Benefit Guaranty Corporation and the furnishing of such reports, documents or notices to participants and beneficiaries on or prior to the date hereof have been complied with.  There are no active suits, governmental investigations or proceedings pending or threatened against any Plan or against any fiduciary thereof respecting the fiduciary’s duties to the Plan or any trust under the Plan.  There is no action or claim (other than routine claims for benefits made in the ordinary course of Plan administration) pending or, to the knowledge of CSSS, threatened against or with respect to any Plan, and no facts exist which could give rise to any such action or claim.

(g)        Except as noted in Schedule 4.24 , CSSS has not carried on discussions regarding organization with any labor union and there has not been any strike, work stoppage, labor dispute or other labor trouble relating to employees of the Business, and there are no significant threats of work stoppage or labor trouble by employees of the Business.

(h)        None of the Plans that are welfare benefit plans within the meaning of §3(1) of ERISA provides for benefits or coverage for any former or retired employee or their beneficiaries, except to the extent required by §4980B of the Code.

(i)         All insurance premiums have been paid in full subject only to normal retrospective adjustments in the ordinary course, with respect to the Plans for Plan or contract years ending on or before the Closing Date.  All insurance premiums due or payable with respect to the periods from the end of the most recent Plan or contract year to and including the Closing Date have been paid or fully accrued in the Financial Statements.  No such premium is overdue or in a grace period for late payments.

(j)         All expenses and liabilities relating to all of the Plans have been paid or fully accrued in the Financial Statements and, to the extent required, in the financial statements of the applicable Plan.

(k)        Any fidelity bond required to be obtained under ERISA with respect to any Plan has been obtained and is in full force and effect.

 

(l)         Except as noted in Schedule 4.25(l) , neither (i) the execution of this Agreement or the instruments of transfer and other documents and agreements delivered or to be delivered pursuant hereto by CSSS, (ii) the performance by CSSS, hereunder or thereunder, nor (iii) the consummation of the transactions contemplated hereby or thereby, will result in the creation or acceleration of any obligation or liability to any Plan or to any employee or former employee of CSSS.

(m)       Each Plan or any other arrangement that is a nonqualified deferred compensation plan subject to the requirements of Section 409A of the Code has been operated at all times in compliance therewith.

4.25                       Obligations to Pay Fees .  Except as noted in Schedule 4.25 , CSSS has no liability or obligation to pay any fees or commissions to any investment banker, broker, finder or agent with respect to the transactions contemplated by this Agreement for which Buyer could become liable or obligated.

4.26                       Completeness of Disclosure .  This Agreement, the Disclosure Schedules, and all other documents and written information furnished to Buyer and its representatives by CSSS, the Shareholders or their respective representatives, taken as a whole, do not and will not include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein not misleading.  If CSSS or the Shareholders become aware of any fact or circumstance that would change a representation or warranty of CSSS or the Shareholders in this Agreement or any other statement made or document provided to Buyer, the party with such knowledge shall promptly give notice of such fact or circumstance to Buyer.  None of (a) such notification, (b) any pre-closing investigation by Buyer or CSSS, the Purchased Assets or the Business, or (c) the Closing, shall relieve the Shareholders of their indemnification or other obligations under this Agreement.

SECTION 5.  REPRESENTATIONS AND WARRANTIES OF BUYER

 

Buyer represents and warrants that the statements contained in this Section 5 are correct and complete as of the date of this Agreement.

5.01                       Organization, Good Standing, and Authority .  Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has full corporate power and authority to execute this Agreement and the other documents and agreements delivered or to be delivered pursuant hereto, to perform all the terms and conditions hereof and thereof to be performed by it, and to consummate the transactions contemplated hereby and thereby.  This Agreement and the other documents and agreements delivered or to be delivered by Buyer in connection with this Agreement have been duly authorized and approved by all necessary and proper corporate action and constitute, and will constitute the valid and binding obligations of Buyer, enforceable against Buyer in accordance with their respective terms.

5.02                       No Violation .  Neither the execution and delivery by Buyer of this Agreement or the other documents and agreements delivered or to be delivered pursuant hereto by Buyer and the performance by Buyer hereunder or thereunder, nor the consummation of the transactions contemplated hereby or thereby, will violate, conflict with, result in the breach of, or accelerate the performance required by any of the terms, conditions or provisions of (a) the Articles of Organization of Buyer, (b) any covenant, agreement or understanding to which Buyer is a party, or (c) any order, ruling, decree, judgment, arbitration award or stipulation to which Buyer is subject, or constitute a default there under.

 

5.03                       Consents and Approvals of Governmental Authorities and Others .  No approval or authorization of, filing or registration with, or notification to, any Governmental Authority is required in connection with the execution and delivery of this Agreement by Buyer or the performance of its obligations hereunder or the consummation of the transactions contemplated hereby.  No consent, approval or authorization of any Person is required in connection with the execution or delivery of this Agreement by Buyer, the purchase by Buyer of the Business and the Purchased Assets, or the performance by Buyer of any other obligation under this Agreement.

5.04                       Obligation to Pay Certain Fees .  Neither Buyer nor any of its officers, members, managers, employees or Affiliates has agreed to pay any fees or commissions to any investment banker, broker, finder or agent with respect to the transactions contemplated by this Agreement, except for a broker’s fee to Vertex Capital Corporation (Barry Epstein, sole owner).   Buyer represents that CSSS is not liable or obligated to pay the fee of Vertex Capital Corporation.

5.05                       Litigation .  There are no Actions pending, or, to the knowledge of Buyer, threatened, by any Person or Governmental Authority challenging the legality, validity or propriety of the transactions contemplated by this Agreement.

5.06                       Completeness of Disclosure .  The representations and warranties contained in this Section 5 and in the Disclosure Schedules delivered pursuant hereto do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements and information contained in this Section 5.

SECTION 6.  COVENANTS OF CSSS AND SHAREHOLDERS

 

6.01                       Employees .  CSSS shall permit Buyer to discuss the possibility of employment with current employees of the Business, and shall not interfere with or impede Buyer’s right to do so, either directly or indirectly.

6.02                       Taxes .  CSSS and the Shareholders shall pay, or cause to be paid, in a timely manner, all Taxes arising from the sale of the CSSS Stock and all Taxes due or paya