Asset Purchase Agreement dated December 10, 2010 by and between Real Estate School Online, Inc. and Inuvo, Inc. and DF Institute, Inc

 

This Asset Purchase Agreement is entered into as of December 10, 2010 (the “Execution Date”), by and among Real Estate School Online Inc., a Florida corporation (“Seller”), Inuvo, Inc., a Nevada corporation (the “Shareholder”) (Seller and the Shareholder, hereinafter are collectively referred to as the “Selling Parties”), and DF Institute, Inc., an Illinois corporation (“Purchaser”). Capitalized terms used in this Agreement and not otherwise defined herein are defined in Exhibit A.

 

 

Whereas, the Shareholder is the sole securityholder of Seller;

 

Whereas, the Selling Parties wish to provide for the sale and transfer of the Acquired Assets to Purchaser, and Purchaser wishes to purchase and acquire the Acquired Assets from the Selling Parties, on the terms set forth in this Agreement; and

 

Whereas, concurrently with the execution of this Agreement, Seller has delivered to Purchaser evidence reasonably acceptable to Purchaser that the principal terms of this Agreement and the Transactions have been duly approved by the requisite vote of its Board of Directors and the Shareholder in accordance with its Organizational Documents.

 

 

The parties to this Agreement, intending to be legally bound, agree as follows:

 

1.	Sale of Assets; Related Transactions.

 

1.1 Sale of Assets.

 

(a) At the Closing, Seller shall sell, assign, transfer, convey and deliver to Purchaser all of Seller’s right, title and interest in and to the Acquired Assets, free and clear of any Encumbrances other than Permitted Encumbrances, on the terms and subject to the conditions set forth in this Agreement.  For purposes of this Agreement, “Acquired Assets” shall mean and include all of the properties, rights, interests and other tangible and intangible assets of Seller (wherever located); provided, however, that the Acquired Assets shall not include any Exclude d Assets.  Without limiting the generality of the foregoing, the Acquired Assets shall include:

 

(i) all accounts receivable, notes receivable, other receivables, deposits, claims for refunds, rights to offset and rights to payment from customers of Seller for fees and other amounts payable, or that may become payable, to Seller with respect to services performed or products sold by or on behalf of Seller and that are primarily related to or arising out of the Acquired Business (the “Acquired Receivables”);

 

(ii) all prepaid expenses primarily related to or arising out of the Acquired Business;

 

(iii) all inventories (including raw materials, work in process and finished goods) that are primarily related to or used in or necessary for the conduct of, the Acquired Business (the “Acquired Inventory”);

 

(iv) all Acquired Equipment;

 

(v) all advertising and promotional materials, customer lists, phone numbers and other sales-related materials possessed by Seller primarily related to or used in or necessary for the conduct of, the Acquired Business;

 

(vi) all Intellectual Property and Intellectual Property Rights owned by Seller and all licenses for Intellectual Property and Intellectual Property Rights that is licensed to Seller by a third party (including the Restricted Names and the Intellectual Property listed or required to be listed in Part 2.13 of the Seller Disclosure Schedule), in each case, primarily related to used in or necessary for the conduct of the Acquired Business (the “Acquired IP”);

 

(vii) subject to the receipt by Seller of such Consents as are necessary, all rights of Seller under the Contracts listed or required to be listed in Part 2.15 of the Seller Disclosure Schedule and all Acquired Business IP Contracts (the “Acquired Business Contracts”);

 

(viii) all Governmental Authorizations listed or required to be listed in Part 2.17 of the Seller Disclosure Schedule (the “Acquired Governmental Authorizations”);

 

(ix) all claims (including claims for past infringement or misappropriation of the Acquired IP) and causes of action of Seller against other Persons (regardless of whether or not such claims and causes of action have been asserted by Seller) pertaining to or arising out of the Acquired Assets or the Acquired Business, and all rights of indemnity, warranty rights, rights of contribution, rights to refunds, rights of reimbursement and other rights of recovery possessed by Seller (regardless of whether such rights are currently exercisable) pertaining to or arising out of the Acquired Assets or the Acquired Business;

 

(x) all Books and Records; and

 

(xi) all goodwill of the Acquired Business.

 

(b) Notwithstanding anything herein to the contrary, the assets set forth on Exhibit B (the “Excluded Assets”) shall not be sold or transferred hereunder and shall be excluded from the definition of Acquired Assets.

 

1.2 Consideration.

 

(a) As consideration for the sale of the Acquired Assets to Purchaser:

 

(i) at the Closing, Purchaser shall pay to the Selling Parties, in cash, an aggregate purchase price of Seven Hundred Fifty Thousand Dollars ($750,000), as follows (i) a payment to Seller of Seven Hundred Thousand Dollars ($700,000), as adjusted pursuant to Section 1.3(a) (the “Closing Payment”), by wire transfer of same day funds to an account identified by the Selling Parties not less than two business days prior to the Closing Date, and (ii) payment into an escrow account of Fifty Thousand Dollars ($50,000) (the “Escrow Fund”) pursuant to Section 1.2(b).  The Closing Payment, together with the Escrow Fund, as may be adjusted pursuant to Section 1.3, shall be deemed to be the “Purchase Price”; and

 

(ii) at the Closing, Purchaser hereby assumes and agrees, on and after the Closing Date, to pay, perform and discharge promptly and fully when due the Assumed Liabilities.

 

(b) At the Closing, Purchaser shall deliver the Escrow Fund into an escrow account to be established pursuant to an Escrow Agreement, dated as of the Closing Date, substantially in the form attached as Exhibit C hereto (the “Escrow Agreement”).    The Escrow Agent shall hold and disburse the Escrow Fund pursuant to the terms of the Escrow Agreement.

 

(c) For purposes of this Agreement, “Assumed Liabilities” shall mean only the following Liabilities of Seller:

 

(i) all current liabilities in the categories and of the type listed in Part 1.2(c)(i) of the Seller Disclosure Schedule that are related solely to normal operating activities of the Acquired Business and that are included in the Estimated Working Capital and which remain unpaid and are not delinquent as of the Closing Date;

 

(ii) the obligations of Seller under the Acquired Business Contracts, but only to the extent such obligations (A) arise or are to be performed after the Closing Date, (B) do not arise from or relate to any Breach by Seller or its Affiliates of any of such Acquired Business Contracts prior to the Closing Date or any event, circumstance or condition occurring or existing on or prior to the Closing Date that, with notice or lapse of time, would constitute or result in a Breach by Seller or its Affiliates of any of such Acquired Business Contracts, (C) do not arise from the failure to obtain any required Consent from any third party in connection with the assignment and transfer of such Acquired Business Con tracts to Purchaser pursuant to this Agreement and (D) are set forth in written Acquired Business Contracts; and

 

(iii) all Liabilities arising out of or relating to the use, ownership, sale or lease of any of the Acquired Assets after the Closing.

 

(d) Notwithstanding the foregoing, and notwithstanding anything to the contrary  contained in this Agreement, the Assumed Liabilities shall not include, Purchaser shall not be required to assume or to perform or discharge, and Seller and its Affiliates, shall be solely responsible to pay, perform and discharge any other Liability of Seller or any of its Affiliates that is not an Assumed Liability, including without limitation:

 

(i) all current Liabilities not taken into account in determining Final Working Capital;

 

(ii) any Liability of Seller or its Affiliates arising out of or relating to the execution, delivery or performance of any of the Transaction Agreements;

 

(iii) any Liability of Seller or its Affiliates arising from or relating to any acts or omissions of by the Seller or its Affiliates, after the Closing;

 

(iv) any Liability of Seller or its Affiliates arising from or relating to (A) any services performed by Seller or its Affiliates for any Person, (B) any claim or Proceeding against Seller or its Affiliates or (C) any product sold by Seller or its Affiliates;

 

(v) any Liability of Seller or its Affiliates for the payment of any Tax for any period except for all Taxes attributable to the Acquired Business or the Acquired Assets for all taxable periods or ratable portions thereof from and after the Closing Date;

 

(vi) all Liabilities of Seller or its Affiliates to any employee or former employee of the Seller or its Affiliates including, without limitation, (i) Liabilities under or with respect to any Employee Benefit Plan, profit sharing plan or for severance pay or payments triggered by the sale of the Acquired Assets, and (ii) Liabilities with respect to worker’s compensation and unemployment insurance benefits for events, occurrences and or injuries or claims arising prior to the close of business on the Closing Date;

 

(vii) all inter-company Liabilities and obligations;

 

(viii) all Liabilities arising from or related to any breach by Seller or its Affiliates, failure of Seller or its Affiliates to perform, torts related to Seller or its Affiliate’s performance, breach, or non-performance of, violations of Law, infringements or indemnities of Seller or its Affiliates under, guaranties of Seller or its Affiliates pursuant to and overcharges or underpayments by Seller or its Affiliates under, any Acquired Business Contract on or prior to the Closing Date;

 

(ix) any Liability under any Acquired Business Contract, if the Selling Parties shall not have obtained, prior to the Closing Date, any Consent required to be obtained from any Person with respect to the assignment or delegation of any rights or obligations under such Acquired Business Contract in connection with the transactions contemplated under this Agreement;

 

(x) any Liability arising from Seller’s noncompliance with any Legal Requirement or Governmental Authorization;

 

(xi) all Liabilities arising out of or relating to the ownership, operation or conduct by Seller or its Affiliates of any business other than the Acquired Business;

 

(xii) any Liability arising from or related to any Indebtedness of Seller or its Affiliates; or

 

(xiii) any other Liability of any Person, including any Liabilities of Seller or its Affiliates, not otherwise specifically identified in Section 1.2(c).

 

For purposes of this Agreement, all Liabilities not expressly listed in the definition of Assumed Liabilities, including the excluded liabilities described in “(i)” through “(xiii)” above, are referred to as “Excluded Liabilities.”

 

1.3 Working Capital Adjustment.

 

(a) Within three (3) days prior to the date hereof, Seller shall have prepared in good faith and delivered to Purchaser a written estimate of Working Capital as of the Closing Date (the “Estimated Working Capital”), setting forth in reasonable detail the computation thereof, which shall have been prepared in accordance with Seller’s past practices used in preparing the Financial Statements.  If the Estimated Working Capital is less than $0 (such amount the “Target Working Capital”), then the Closing Payment shall be decreased by the amount of such difference.  If the Estimated Working Capital is greater than the Target Working Capital, then the Closing Payment shall be increased by the amount of such difference.

 

(b) Within 60 days following the Closing Date, Purchaser shall prepare and deliver to Seller an unaudited balance sheet of the Acquired Business as of 11:59 p.m. on the business day immediately prior to the Closing Date (the “Closing Date Balance Sheet”), which shall set forth in reasonable detail the computation of Working Capital as of such time (the “Closing Date Working Capital”).

 

(c) Within 30 days after the date on which Purchaser delivers the Closing Date Balance Sheet to Seller (such 30 day period hereinafter the “Objection Period”), Seller shall have the right to dispute any specific line item(s) included in the calculation of the Closing Date Working Capital set forth in the Closing Date Balance Sheet by delivering a written notice to that effect to Purchaser (a “Dispute Notice”).  Any Dispute Notice so delivered shall identify the specific line item(s) being disputed and include a proposed revision of such line item(s).

 

(d) In the event that prior to the expiration of the Objection Period: (i) Seller notifies Purchaser of its agreement with the calculation of the Closing Date Working Capital or (ii) Seller fails to deliver a Dispute Notice as provided above, the calculation of the Closing Date Working Capital shall be deemed, on the date of such notification (in the case of (i) above) or upon the expiration of the Objection Period (in the case of (ii) above), to have been finally determined for purposes of this Agreement.  In addition, in the event that Seller delivers a Dispute Notice on or prior to the expiration of the Objection Period, any specific line item(s) included within the calculation of the Closing Date Work ing Capital which such Dispute Notice does not identify as disputed and include a proposed revision thereof shall be deemed, on the date of such delivery, to have been finally determined for purposes of this Agreement.

 

(e) In the event that Seller delivers a Dispute Notice to Purchaser prior to expiration of the Objection Period (the “Objection Date”), Seller and the Purchaser shall promptly meet and attempt in good faith to resolve the disputed line item(s) and negotiate a final determination of the Closing Date Working Capital.  In the event the parties cannot agree upon a final determination of the Closing Date Working Capital within 10 days following the Objection Date, Purchaser or Seller may submit the dispute to an independent accounting firm of national reputation mutually agreed by Purchaser and Seller (the “Dispute Auditors”).  The Dispute Auditors shall be instructed promptly to review the submissions of the parties and the relevant back-up information and designate as the final determination of any disputed line item(s) one of the following:  (A) Purchaser’s calculation as set forth in the Closing Date Balance Sheet or (B) Seller’s calculation as set forth in the Dispute Notice (the foregoing or the Closing Date Working Capital determined in accordance with Section 1.3(c) above, as the case may be, hereinafter, the “Final Working Capital”).  The Dispute Auditors shall not be permitted to designate any calculation other than those set forth in items (A) or (B) above.  The Dispute Auditors shall deliver written notice of their decision simultaneously to Seller and Purchaser within 10 business days after their receipt of the submissions of the parties.  The decision made by the Dispute Auditors shall be deemed the final determination of any disputed line item(s), and shall be conclusive and binding on all parties.  All of the fees and disbursements related to the engagement of the Dispute Auditors shall be paid by the party whose calculation was not designated by the Dispute Auditors as the final determination of the Closing Date Working Capital.

 

(f) If, after the determination of the Final Working Capital in accordance with the provisions of this Section 1.3, the Final Working Capital is greater than the Estimated Working Capital then, within five (5) business days after such final determination, Purchaser shall pay to Seller, in cash, the amount by which Final Working Capital exceeds the Estimated Working Capital.

 

(g) If, after the determination of the Final Working Capital in accordance with the provisions of this Section 1.3, the Final Working Capital is less than the Estimated Working Capital then, within five (5) business days after such final determination, Seller shall pay to Purchaser, in cash, the amount by which the Estimated Working Capital exceeds the Final Working Capital.

 

1.4 Closing.

 

(a) The closing of the sale of the Acquired Assets to Purchaser (the “Closing”) shall take place at the offices of Purchaser immediately following the execution of this Agreement.  For purposes of this Agreement, “Closing Date” shall mean the date and time as of which the Closing takes place.

 

(b) At the Closing:

 

(i) Seller shall execute and deliver to Purchaser such bills of sale, endorsements, assignments and other documents as may be necessary or appropriate in the reasonable judgment of Purchaser to assign, convey, transfer and deliver to Purchaser good and valid title to the Acquired Assets free and clear of any Encumbrances, including without limitation the Bill of Sale attached hereto as Exhibit D (the “Bill of Sale”);

 

(ii) Seller and Purchaser shall execute and deliver to one another the Escrow Agreement and the Assignment and Assumption Agreement attached hereto as Exhibit E (the “Assignment and Assumption Agreement”) and the Transition Services Agreement attached hereto as Exhibit F (the “Transition Services Agreement”);

 

(iii) Purchaser shall pay the Closing Payment to Seller and the Escrow Fund to the Escrow Agent;

 

(iv) Purchaser shall enter into a Consulting Agreement with Jim Sweetin on terms reasonably acceptable to Purchaser;

 

(v) Seller shall deliver evidence, reasonably satisfactory to Purchaser, that the principal terms of this Agreement and the Transactions have been duly approved by the requisite vote of its Board of Directors and the Shareholder in accordance with its Organizational Documents;

 

(vi) Purchaser shall deliver evidence, reasonably satisfactory to Seller, that the principal terms of this Agreement and the Transactions have been duly approved by the requisite vote of its Board of Directors in accordance with its Organizational Documents;

 

(vii) Seller shall deliver evidence (including without limitation a lien release executed by Wells Fargo Bank, National Association), reasonably satisfactory to Purchaser, that (a) as of Closing, the Selling Parties will have caused all Indebtedness pursuant to which any acquired Assets may be bound, to be paid in full or to be retained by Seller or its Affiliates, as applicable; and (b) that all Encumbrances listed in Part 2.6(a) of the Seller Disclosure Schedule have been or will be removed;

 

(viii) Seller shall deliver evidence, reasonably satisfactory to Purchaser, that, as of Closing, Seller has received all Consents set forth on Part 2.3 of the Seller Disclosure Schedule and said consents are in full force and effect;

 

(ix) the Selling Parties shall deliver to Purchaser such other documents as Purchaser may request in good faith for the purpose of (A) evidencing the accuracy of any representation or warranty made by the Selling Parties, (B) evidencing the compliance by the Selling Parties, or the performance by the Selling Parties, any covenant or obligation set forth in this Agreement or (C) otherwise facilitating the consummation or performance of any of the Transactions; and

 

(x) Purchaser shall have registered as a Dealer for sales tax purposes with the Florida Department of Revenue and shall deliver a current annual resale certificate issued to Purchaser by the Florida Department of Revenue certifying that the Acquired Inventory is being purchased for resale.

 

1.5 Substitute Arrangements.  Notwithstanding any provision of this Agreement to the contrary, nothing in this Agreement shall be deemed to constitute an agreement to assign any claim, Contract, Governmental Authorization, license, lease, commitment, permit or any right or privilege arising thereunder if an attempted assignment thereof, without the Consent of any Person or Governmental Body, would render any Contract void.  The Selling Parties will use commercially reasonable efforts to obtain any Consents required to assign to Purchaser all rights, benefits and interests under each Acquired Business Contract that requires the Consent of a third party, without any conditions to such transfer or changes or modifications of terms thereunder, in a manner to permit the Acquired Business to be conducted by Purchaser following the Closing as it is currently conducted.  If any such Consent has not been obtained by the Closing, or if an attempted assignment of any such Contract would otherwise be ineffective so that Purchaser would not receive the benefit of all rights thereunder of the Seller or its Affiliates, as applicable, the Selling Parties will provide for Purchaser, at the sole cost and expense of the Selling Parties, any arrangement reasonably requested by Purchaser intended to provide for Purchaser all of the benefits of such rights, including entering into a sublease or subcontract on the same terms and conditions as the underlying lease or Contract or bringing appropriate legal action seeking to enforce for the benefit of Purchaser any and all rights of Seller and its Affiliates, as applicable, against the other party or parties to such claim, Contract, license, lease or commitment.

 

1.6 Allocation of Purchase Price.  Purchaser and the Selling Parties shall each file all Tax Returns (including amended returns and claims for refund) in a manner consistent with the allocation of the Purchase Price among the Acquired Assets and Assumed Liabilities as set forth on Exhibit G.  Neither Purchaser nor the Selling Parties shall take any position with respect to Taxes that is inconsistent with such allocation, including in any audit or examination by any Governmental Body unless, and only to the extent that, it is required to do so pursuant to a Final Determination (as defin ed in Section 1313(a) of the Code) and any similar state or local tax provision.  Purchaser and the Selling Parties shall prepare and timely file such reports and information returns as may be required under applicable Legal Requirements to report the allocation of the Purchase Price among the Acquired Assets and Assumed Liabilities in accordance with this Section 1.6.  Each Party agrees to notify the other Party in the event that any Governmental Body takes or proposes to take a position for Tax purposes that is inconsistent with the allocation set forth on Exhibit G.

 

1.7 Prorations.  Notwithstanding anything herein to the contrary, any Taxes imposed on or with respect to the Acquired Assets and other expense items such as rent, utilities and similar expenses with respect to the Acquired Business that relate to a period beginning before the Closing Date and ending after the Closing Date shall be apportioned as of the Closing Date such that Seller shall be liable for (and shall reimburse Purchaser to the extent that Purchaser shall have paid) that portion of such Taxes and other expense items relating to, or arising in respect of, periods through the day before the Closing Date and Purchaser shall be liable for (an d shall reimburse Seller to the extent that Seller shall have paid) that portion of such Taxes and other expense items relating to, or arising in respect to, periods from and after the Closing Date.  Appropriate settlement of such amounts will be made within thirty (30) days after the amount of any such item is finally known.

 

2.	Representations and Warranties of the Selling Parties.

 

The Selling Parties jointly represent and warrant as of the Closing Date, that each of the representations and warranties contained in this Section 2 is true and correct, except as expressly otherwise set forth in the Seller Disclosure Schedule.  The Seller Disclosure Schedule will be arranged in paragraphs corresponding to the numbered and lettered paragraphs contained in this Section 2, and the disclosure in any such numbered and lettered Section of the Seller Disclosure Schedule shall be deemed to qualify each Section of this Agreement to which such information is applicable (regardless of whether or not such Section is qualified by reference to the Seller Disclosure Schedule and regardless of whether or not the Seller Disclosure Schedule references such Section), so long as application to such Section is readil y apparent on its face (and without the need to review or investigate any referenced documents or matters).

2.1 Due Organization; Etc.  Part 2.1 of the Seller Disclosure Schedule lists each Selling Party’s form of organization, its jurisdiction of organization and each other jurisdiction in which it is authorized to do business.  Each Selling Party has delivered to Purchaser accurate and complete copies of its Organizational Documents.  Each Selling Party is an entity duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, and Seller has full corporate power and authority to conduct the Acquired Business as it is now being conducted, to own or use the properties and assets that it purports to own or use in connection with the Acquired Business, and to perform all its obligations under the Acquired Business Contracts.  Each Selling Party is duly qualified, authorized, registered or licensed to do business and is in good standing under the laws of each jurisdiction in which either the ownership or use of the Acquired Assets owned or used by it, or the conduct of the Acquired Business by it, requires such qualification, authorization, registration or licensure.  Seller does not have any Subsidiaries, nor has it ever owned, beneficially or otherwise, any shares or other securities of, or any direct or indirect interest of any nature in, any Entity.  The Selling Parties have never conducted the Acquired Business under or otherwise used, for any purpose or in any jurisdiction, any fictitious name, assumed name, trade name or other name in connection with the Acquired Business, other than the names listed in Part 2.1 of the Seller Disclosure Schedule.   ;Neither Seller nor the Shareholder has ever approved or commenced any proceeding or made any election contemplating the dissolution or liquidation of Seller or any other Entity in which the Acquired Business is conducted, as applicable, or the winding up or cessation of their business or affairs.

 

2.2 Authority; Binding Nature of Agreements.  Each Selling Party has the absolute and unrestricted right, power and authority to enter into and to perform its obligations under each of the Transaction Agreements to which such Selling Party is a party; and the execution, delivery and performance by the Selling Parties of such Transaction Agreements have been duly authorized by all necessary action on the part of the Selling Parties.  Each Transaction Agreement to which any Selling Party is a party constitutes the legal, valid and binding obligation of such Selling Party, enforceable against such Selling Party in accordance with its terms, su bject to any applicable bankruptcy, insolvency, reorganization, moratorium or similar laws now or hereafter in effect relating to creditors’ rights generally or to general principles of equity.

 

2.3 Non-Contravention; Consents.  Except as set forth in Part 2.3 of the Seller Disclosure Schedule, neither the execution and delivery of any of the Transaction Agreements, nor the consummation or performance of any of the Transactions, will directly or indirectly (with or without notice or lapse of time):

 

(a) contravene, conflict with or result in a violation of, or give any Governmental Body or other Person the right to challenge any of the Transactions or to exercise any remedy or obtain any relief under, any Legal Requirement or any Order to which the Selling Parties or any of the Acquired Assets, is subject;

 

(b) cause any of the Acquired Assets to be reassessed or revalued by any taxing authority or other Governmental Body;

 

(c) contravene, conflict with or result in a violation of any of the terms or requirements of, or give any Governmental Body the right to revoke, withdraw, suspend, cancel, terminate or modify, any Acquired Governmental Authorization;

 

(d) contravene, conflict with or result in a violation of (i) any of the provisions of the Organizational Documents of the Selling Parties or (ii) any resolution adopted by the Shareholder or the Board of Directors of Seller;

 

(e) contravene, conflict with or result in a violation or breach of, or result in a default under, any provision of any Acquired Business Contract or give any Person the right to (i) declare a default or exercise any remedy under any Acquired Business Contract, (ii) accelerate the maturity or performance of any Acquired Business Contract or (iii) cancel, terminate or modify any Acquired Business Contract; or

 

(f) result in the imposition or creation of any Encumbrance upon or with respect to any of the Acquired Assets.

 

Except as listed in Part 2.3 of the Seller Disclosure Schedule, no filing with or notice to, Consent from or vote or other approval by any Person is or will be required to be obtained by either Selling Party in connection with the execution and delivery of any of the Transaction Agreements or the consummation or performance of any of the Transactions.  All filings, notices, Consents, votes or other approvals set forth or required to be set forth on Part 2.3 of the Seller Disclosure Schedule have been made, given, or obtained and are in full force and effect.

 

2.4 Financial Statements.

 

(a) Part 2.4 of the Seller Disclosure Schedules sets forth the following financial statements (collectively, the “Financial Statements”): (i) the unaudited balance sheets of the Acquired Business as of December 31, 2008 and December 31, 2009 and the related unaudited statements of operations for the 12 month periods then ended, and (ii) the unaudited balance sheets of the Acquired Business as of October 31, 2010 (the “Interim Balance Sheet”) and the related unaudited statements of operations for the ten months then ended.  Except as set forth on Part 2.4 of the Seller Disclosure Schedule the Financial Statements (i) have been prepared from, and are in accordance with in all material respects, the books of account and other financial records of the Selling Parties with respect to the Acquired Business, (ii) are accurate and complete in all material respects, and (iii) present fairly in all material respects the financial position of the Acquired Business as of the respective dates thereof and the results of operations of the Acquired Business and for the periods covered thereby.

 

(b) There are no Liabilities primarily related to or arising out of the Acquired Business, except for (i) Liabilities identified as such in the “Liabilities” column of the Interim Balance Sheet, (ii) Liabilities which have arisen since the date of the Interim Balance Sheet in the Ordinary Course of Business, and (iii) Liabilities which are not, individually or in the aggregate, material to the Acquired Business as a whole.

 

2.5 Absence of Changes.

 

Since October 31, 2010 (i) the Seller has conducted the Acquired Business in the Ordinary Course of Business, (ii) there has not been any material adverse change in, and no event has occurred that could reasonably be expected to have a material adverse effect on, the Acquired Business; (iii) there has not been any material loss, damage or destruction to, or any interruption in the use of, any of the Acquired Assets (whether or not covered by insurance); and (iv) Seller has not:

 

(a) sold or otherwise transferred, or leased or licensed, any material assets used in the Acquired Business to any other Person other than in the Ordinary Course of Business;

 

(b) except as set forth in the Balance Sheet, written off as uncollectible, or established any extraordinary reserve with respect to, any account receivable or other Indebtedness included in the Acquired Assets;

 

(c) amended or terminated any Acquired Business Contract;

 

(d) caused any of the Acquired Assets to become subject to any Encumbrance other than Permitted Encumbrances;

 

(e) purchased or otherwise acquired from any other Person any material asset for use in the Acquired Business, except for supplies acquired in the Ordinary Course of Business;

 

(f) forgiven any debt or otherwise released or waived any material right or claim related to the Acquired Business;

 

(g) changed any of its methods of accounting or accounting practices in any material respect with respect to the Acquired Business;

 

(h) entered into any transaction or taken any other action, in each case related to the Acquired Business, outside the Ordinary Course of Business; and

 

(i) except for the Transactions contemplated hereby, agreed, committed or offered (in writing or otherwise) to take any of the actions referred to in clauses “(a)” through “(h)” above.

 

2.6 Title To Assets.

 

(a) Seller has good title to, or in the case of leased property, a valid leasehold interest in, all of the Acquired Assets (whether real or personal, tangible or intangible).  Except as set forth in Part 2.6(a) of the Seller Disclosure Schedule, none of the Acquired Assets is subject to any Encumbrances (including, without limitation, tax-related Encumbrances) other than Permitted Encumbrances.  At the Closing, Seller will transfer to Purchaser good and valid title to all Acquired Assets, free and clear of any Encumbrances other than Permitted Encumbrances

 

(b) Except as set forth in Part 2.6(b) of the Seller Disclosure Schedule, the Acquired Assets constitute all of the assets, properties, rights and goodwill necessary to carry on the Acquired Business as presently conducted, and are sufficient to carry on the Acquired Business in the Ordinary Course of Business.  Except as set forth in Part 2.6(b) of the Seller Disclosure Schedule, neither the Shareholder nor any of its Affiliates (other than the Seller) has title to, or in the case of leased property, a leasehold interest in, any of the Acquired Assets.

 

2.7 Fraudulent Transfers.  Neither Selling Party is insolvent, nor will either Selling Party be rendered insolvent by any of the Transactions.  Immediately after consummation of the Transactions, (i) each Selling Party will be able to pay its debts as they become due, (ii)  each Selling Party will not have unreasonably small assets with which to conduct its business and (iii) taking into account all pending and threatened Proceedings against each Selling Party, final judgments against each Selling Party in actions for money damages are not reasonably anticipated to be rendered at a time when, or in amounts such that, such Selling Party will be unable to satisfy any such judgments promptly.  As used in this Section, “insolvent” means that the sum of the then existing saleable value of a Selling Party’s assets, as applicable, does not and will not exceed its then existing debts and other liabilities.

 

2.8 Receivables.  Part 2.8 of the Seller Disclosure Schedule lists a complete breakdown and aging of all Acquired Receivables as of November 30, 2010.  All Acquired Receivables: (a) represent valid obligations of customers arising from bona fide transactions entered into in the Ordinary Course of Business and (b) are current and collectible in full, except as set forth in Part 2.8 of the Seller Disclosure Schedule.  Part 2.8 of the Seller Disclosure Schedule lists all unreturned security deposits and other deposits related to the Acquired Business.

 

2.9 Suppliers.  Part 2.9 of the Seller Disclosure Schedule lists for calendar year 2009 and for the ten-months ended October 31, 2010 the top 10 suppliers of the Acquired Business for each such period, based on the dollar amount of purchases for such periods.  Except as set forth on Part 2.9 of the Seller Disclosure Schedule, none of such suppliers has notified any Selling Party in writing that it intends to stop doing business with, decrease the rate of products or services provided to, or change the terms (whether related to payment, price or otherwise) on which it does business with, the Acquired Business, in each case, as compared to th e business in place between such suppliers, on the one hand, and Seller and its Affiliates, on the other hand, in the Acquired Business as of the date hereof (whether as a result of the consummation of the transactions contemplated hereby or otherwise).

 

2.10 Inventory.  Part 2.10 of the Seller Disclosure Schedule lists a complete breakdown of all Acquired Inventory as of the Closing Date.  All Acquired Inventory (a) is of such quality and quantity as to be usable and saleable in the Ordinary Course of Business, (b) has been priced at the lower of cost or market value using the “last-in, first-out” method and (c) is free of any material defect or deficiency.  The inventory levels maintained in the Acquired Business (i) are not excessive in light of the normal operating requirements for the Acquired Business and (ii) are adequate for the conduct of the Acquired Business in the Ordinary Course of Business.

 

2.11 Equipment, Etc.  Part 2.11 of the Seller Disclosure Schedule lists all Acquired Equipment and lists the date of acquisition, original cost and the book value of each asset included therein.  The Acquired Equipment constitutes all of the equipment, leaselines, materials, prototypes, tools, supplies, vehicles, furniture, fixtures, improvements and other tangible assets primarily related to or used in the conduct of the Acquired Business in the manner in which such business is currently being conducted.  Part 2.11 of the Seller Disclosure Schedule also lists all Acquired Equipment leased on behalf of the Acquired Business a nd identifies each lease therefor.  All Acquired Equipment (a) is structurally sound, free of defects and deficiencies and in good condition and repair (ordinary wear and tear excepted), (b) complies in all material respects with, and is being operated and otherwise used in full compliance with, all applicable Legal Requirements and (c) is adequate and appropriate for the uses to which it is being put.

 

2.12 Real Property.  Except as set forth in Part 2.12 of the Seller Disclosure Schedule, there is no real property or any interest in real property (including any leasehold interest) which is used or utilized by the Acquired Business.

 

2.13 Intellectual Property.

 

(a) Part 2.13(a) of the Seller Disclosure Schedule lists each Acquired Business Product.

 

(b) Part 2.13(b) of the Seller Disclosure Schedule lists (i) each item of Registered IP and all internet domain names included in the Acquired IP in which the Seller purports to have an ownership interest of any nature (whether exclusively, jointly, with another Person, or otherwise) (ii) the jurisdiction in which such item of Registered IP has been registered or filed and the applicable registration or serial number and (iii) to the Knowledge of the Selling Parties, any other Person that has or purports to have an ownership interest in such item of Registered IP and the nature of such ownership interest. The Selling Parties have made available to the Purchaser accurate copies of all applications and all other corr espondence and other material documents related to each such item of Registered IP.

 

(c) Part 2.13(c) of the Seller Disclosure Schedule lists (i) all Intellectual Property Rights or Intellectual Property licensed to the Seller related to, used in or necessary for the operation of the Acquired Business, other than any non-customized software that (A) is so licensed solely in executable or object code form pursuant to a nonexclusive, internal use software license, (B) is not incorporated into the development, manufacturing, or distribution of, the products or services of the Acquired Business and (C) is generally available on standard terms for less than $5,000 (“In-Licensed IP”), (ii) the corresponding Contract o r Contracts pursuant to which the In-Licensed IP is licensed and (iii) whether the license or licenses granted for the In-Licensed IP is exclusive or nonexclusive.

 

(d) Part 2.13(d) of the Seller Disclosure Schedule lists each Acquired Business IP Contract in which the aggregate fees and royalties (including maintenance and support fees for the first year of maintenance and support, if any) paid or payable to the Seller or its Affiliates equal or exceed $5,000 and pursuant to which any Person has been granted any license under, or otherwise has received or acquired any right (whether or not currently exercisable) or interest in, any Acquired IP.  Neither the Seller nor any of its Affiliates is bound by, and no owned Acquired IP is subject to, any Contract containing any covenant or other provision that in any way limits or restricts the ability of Purchaser to use, e xploit, assert, or enforce any owned Acquired IP anywhere in the world.

 

(e) The Selling Parties have provided to Purchaser a complete and accurate copy of each standard form of Acquired Business IP Contract used in connection with the Acquired Business, including each standard form of (i) end user license agreement, (ii) development agreement, (iii) employee agreement containing any assignment or license of Intellectual Property or Intellectual Property Rights or any confidentiality provision, (iv) consulting or independent contractor agreement, including any agreements used in marketing, advertising or promoting the Acquired Business, containing any assignment or license of Intellectual Property or Intellectual Property Rights or any confidentiality provision or (v) confidentiality or nondisclosure agreement.  Part 2.13(e) of the Seller Disclosure Schedule lists each Acquired Business IP Contract that deviates in any material respect from the corresponding standard form agreement provided to Purchaser.

 

(f) Seller and its Affiliates exclusively own all right, title, and interest to and in the Acquired IP (other than In-Licensed IP) free and clear of any Encumbrances (other than licenses granted pursuant to the Contracts listed in Part 2.13(d) of the Seller Disclosure Schedule).  Each Person who is or was involved in the creation or development of any Acquired IP has signed a valid, enforceable agreement containing an assignment of Intellectual Property Rights (including a release of all copyright rights) to Seller and its Affiliates, as applicable, and confidentiality provisions protecting the Acquired IP.  Seller and its Affiliates have taken all reasonable steps to maintain the confidentialit y of and otherwise protect and enforce the Acquired IP.  Neither the Seller nor any of its Affiliates have assigned or otherwise transferred ownership of, or agreed to assign or otherwise transfer ownership of, any Acquired IP to any other Person, other than pursuant to this Agreement.

 

(g) To the Knowledge of the Selling Parties, (i) no Person has infringed, misappropriated or otherwise violated, and no Person is currently infringing, misappropriating or otherwise violating, any Acquired IP and (ii) the use of the Acquired IP has not has infringed, misappropriated or otherwise violated and is not currently infringing, misappropriating or otherwise violating any Intellectual Property Right of any other Person.  Part 2.13(g) of the Seller Disclosure Schedule lists (and the Selling Parties have provided to Purchaser a complete and accurate copy of) each letter or other written or electronic communication or correspondence that has been sent or otherwise delivered by or to the Seller or its Affiliates or their respective Representatives since October 31, 2005 regarding any actual, alleged or suspected infringement or misappropriation of any Acquired IP (or any actual, alleged or suspected infringement or misappropriation of any Intellectual Property Right of any other Person resulting from the use of any Acquired IP), and provides a brief description of the current status of the matter referred to in such letter, communication or correspondence.

 

(h) No Acquired Business Product developed by and proprietary to Seller contains, is derived from, is distributed with, or is being or was developed using Open Source Code that is licensed under any terms that (i) impose or could impose a requirement or condition that any Acquired Business Product or part thereof (A) be disclosed or distributed in source code form, (B) be licensed for the purpose of making modifications or derivative works, or (C) be redistributable at no charge, or (ii) otherwise impose or could impose any other material limitation, restriction, or condition on the right or ability of the Acquired Business to use or distribute any Acquired Business Product.

 

2.14 Privacy, Data Security.

 

(a) Part 2.14(a) of the Seller Disclosure Schedule lists each Seller Privacy Policy and the Selling Parties have provided a copy of each such policy to Purchaser.  Seller and its Affiliates have complied at all times and in all material respects with all of Seller Privacy Policies and with all Legal Requirements applicable to the Acquired Business pertaining to privacy, User Data, or Personal Data.

 

(b) Part 2.14(b) of the Seller Disclosure Schedule identifies and describes each distinct electronic or other database containing (in whole or in part) Personal Data maintained by or for the Acquired Business at any time (the “Seller Databases”), the types of Personal Data in each Seller Database, the means by which such Personal Data was collected, and the security policies that have been adopted and maintained with respect to each Seller Database.  No material breach or violation of any such security policy has occurred or, to the best of the Selling Parties’ Knowledge, is threatened, and there has been no unau thorized or illegal use of or access to any Personal Data in any of Seller Databases.

 

(c) Neither the execution, delivery, or performance of this Agreement (or any of the ancillary agreements) nor the consummation of any of the transactions contemplated by this Agreement (or any of the ancillary agreements), nor Purchaser’s possession or use of the User Data or any data or information in Seller Databases, will result in any material violation of any Seller Privacy Policy or any material Legal Requirement pertaining to privacy, User Data, or Personal Data.

 

2.15 Acquired Business Contracts.

 

(a) Except as set forth on Part 2.15 of the Seller Disclosure Schedule, the Selling Parties have delivered or made available to Purchaser accurate and complete copies of all Acquired Business Contracts, including all amendments thereto, listed on Part 2.15 of the Seller Disclosure Schedule.  Each Acquired Business Contract is valid and in full force and effect and is enforceable in accordance with its terms.

 

(b) Seller has not, and to Seller’s Knowledge, no other Person has violated or breached in any material respect, or declared or committed any material default under, any Acquired Business Contract.  Seller has not received any written notice regarding any actual or alleged material breach of, or default under, any Acquired Business Contract.  To Seller’s Knowledge, no event has occurred and no circumstance or condition exists, that would reasonably be expected to (with or without notice or lapse of time) result in a material breach of any Acquired Business Contract or give any Person the right to declare a default under, accelerate the maturity or performance of, or terminate or modi fy, any Acquired Business Contract.

 

2.16 Compliance with Legal Requirements.  Seller has complied in all material respects since October 31, 2005, with each Legal Requirement that is applicable to the conduct or operation of the Acquired Business or the ownership or use of any of the Acquired Assets.  Seller has not received any written notice from any Governmental Body regarding any actual or alleged material violation of any Legal Requirement that is applicable to the conduct or operation of the Acquired Business or the ownership or use of any of the Acquired Assets.  To Seller’s Knowledge, no event has occurred, and no condition or circumstance exists, that could (with or without notice or lapse of time) constitute or result directly or indirectly in a material violation by the Seller of any Legal Requirement that is applicable to the conduct or operation of the Acquired Business or the ownership or use of any of the Acquired Assets.

 

2.17 Governmental Authorizations.

 

(a) Part 2.17 of the Seller Disclosure Schedule lists each Governmental Authorization that is held by the Seller and relates to, or is necessary for the conduct of, the Acquired Business.  The Selling Parties have delivered or made available to Purchaser accurate and complete copies of all of such Governmental Authorizations and all amendments thereto.  Each such Governmental Authorization is valid and in full force and effect.

 

(b) Seller is and has at all times since October 31, 2005 complied in all material respects with all of the terms and requirements of each Governmental Authorization related to, used in, or necessary for the conduct of, the Acquired Business.  Seller has not received any notice or other communication (in writing or otherwise) from any Governmental Body or any other Person regarding (i) any actual, alleged, possible or potential violation of or failure to comply with any term or requirement of any Governmental Authorization or (ii) any actual, proposed, possible or potential revocation, withdrawal, suspension, cancellation, termination or modification of any Governmental Authorization, in each ca se that relates to, or is necessary for the conduct of, the Acquired Business

 

2.18 Tax Matters.  There is no outstanding claim, audit or other examination or proceeding with respect to Taxes or failure to file any Tax Return that may result in a Liability to the Acquired Business.  There are no Taxes of Seller or its Affiliates that form or could form the basis for any Encumbrances on any of the Acquired Assets or could increase the amount of any Assumed Liabilities and there are no grounds for the assertion or assessment of any such Encumbrances.  Seller and its Affiliates, as applicable, have timely collected or withheld, and timely paid to the appropriate taxing authorities, set aside in accounts for suc h purpose, or accrued, reserved against and entered upon the Financial Statements, all monies required to have been collected or withheld from Business Employees for income Taxes and social security and other payroll Taxes.  There is no Proceeding pending or, to the Knowledge of the Selling Parties, threatened against any of the Seller or its Affiliates with respect to any Taxes associated with the Acquired Assets or the Acquired Business.  Neither the Seller nor any of its Affiliates have any liability for the Taxes of any other Person, the non-payment of which would result in an Encumbrance on any Acquired Asset, would otherwise materially and adversely affect the Acquired Business or would result in Purchaser becoming liable or responsible therefor.  There has not been any waiver or extension of any statute of limitations in respect of Taxes associated with the Acquired Assets or the Acquired Business which waiver is currently in effect.

 

2.19 Employee Matters.  Part 2.19 of the Seller Disclosure Schedule lists the name, title and annual compensation of each employee of Seller and its Affiliates whose primary responsibilities are related to the Acquired Business, including any such employee who is on a leave of absence or on layoff status (such individuals are collectively referred to herein as “Business Employees”).

 

2.20 Environmental Matters.  Seller is in compliance with all Environmental, Health, and Safety Requirements applicable to the Acquired Business.  Seller has not received any written notice, report or other information regarding any actual or alleged violation of Environmental, Health, and Safety Requirements applicable to the Acquired Business, or any liabilities or potential liabilities (whether accrued, absolute, contingent, unliquidated or otherwise), including any investigatory, remedial or corrective obligations, relating to any facilities used in the Acquired Business arising under E nvironmental, Health, and Safety Requirements.

 

2.21 Proceedings; Orders.  Except as set forth in Part 2.21 of the Seller Disclosure Schedule, there is no pending Proceeding, and, to the Knowledge of the Selling Parties, no Person has threatened in writing to commence any Proceeding (a) that could reasonably be expected to affect the Acquired Business, any of the Acquired Assets or the obligations of the Selling Parties under this Agreement or any of the Transaction Agreements (whether or not the Selling Parties are named as a party thereto) or (b) that challenges, or that may have the effect of preventing, delaying, making illegal or otherwise interfering with, any of the Transactions.   ;To the Knowledge of the Selling Parties, no event has occurred, and no claim or dispute or other condition or circumstance exists, that could directly or indirectly give rise to or serve as a basis for the commencement of any such Proceeding.  There is no Order to which the Acquired Business or any Acquired Asset is subject and none of the Seller or its Affiliates are subject to any Order that relates to the Acquired Business or the Acquired Assets.  To the Knowledge of the Selling Parties, there is no proposed Order that, if issued or otherwise put into effect, (i) may have an adverse effect on the business, condition, assets, liabilities, operations, financial performance, net income of the Acquired Business or on the ability of the Shareholder or Seller to comply with or perform any covenant or obligation under any of the Transaction Agreements or (ii) may have the effect of preventing, delaying, making illegal or otherwise interfering with any of the Transactions.