-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KXg9v+xYlp7uNNubKhopNZlu+5t1iYkyMWf5rsm/HKtR5qizvA9Kmi+GMTfgl+Ba XTuNc57L32WE3sgDF6Qu3Q== 0001144204-09-012045.txt : 20090304 0001144204-09-012045.hdr.sgml : 20090304 20090304125932 ACCESSION NUMBER: 0001144204-09-012045 CONFORMED SUBMISSION TYPE: SC 13D/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 20090304 DATE AS OF CHANGE: 20090304 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: SMART ONLINE INC CENTRAL INDEX KEY: 0001113513 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 954439334 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D/A SEC ACT: 1934 Act SEC FILE NUMBER: 005-80570 FILM NUMBER: 09654538 BUSINESS ADDRESS: STREET 1: 4505 EMPEROR BLVD. STREET 2: SUITE 320 CITY: DURHAM STATE: NC ZIP: 27703 BUSINESS PHONE: 919-765-5000 MAIL ADDRESS: STREET 1: P.O. BOX 12794 CITY: RESEARCH TRIANGLE PARK STATE: NC ZIP: 27709 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: Atlas Capital SA CENTRAL INDEX KEY: 0001315654 IRS NUMBER: 000000000 FILING VALUES: FORM TYPE: SC 13D/A BUSINESS ADDRESS: STREET 1: 118 RUE DU RHONE CITY: GENEVA STATE: V8 ZIP: CH-1204 BUSINESS PHONE: 41 22 849 66 55 MAIL ADDRESS: STREET 1: 118 RUE DU RHONE CITY: GENEVA STATE: V8 ZIP: CH-1204 SC 13D/A 1 v141887_sc13da.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 SCHEDULE 13D Under the Securities Exchange Act of 1934 (Amendment No. 12)* Smart Online, Inc. (Name of Issuer) Common Stock, par value $0.001 (Title of Class of Securities) 83171V 10 0 (CUSIP Number) Avy Lugassy Atlas Capital, SA 118 Rue du Rhone CH-1204 Geneva Switzerland +41 22 718 1 741 (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications) February 24, 2009 (Date of Event which Requires Filing of this Statement) If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of Rule 13d-1(e), 13d-1(f) or 13d-1(g), check the following box: |_| NOTE: Schedules filed in paper format shall include a signed original and five copies of the schedule, including all exhibits. See Rule 13d-7 for other parties to whom copies are to be sent. *The remainder of this cover page shall be filled out for a reporting person's initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page. The information required on the remainder of this cover page shall not be deemed to be "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934 ("Act") or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes). CUSIP NO. 83171V 10 0 - -------------------------------------------------------------------------------- 1. NAMES OF REPORTING PERSONS Atlas Capital, SA - -------------------------------------------------------------------------------- 2. CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) |_| (b) |_| - -------------------------------------------------------------------------------- 3. SEC USE ONLY - -------------------------------------------------------------------------------- 4. SOURCE OF FUNDS OO - -------------------------------------------------------------------------------- 5. CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) OR |_| 2(e): - -------------------------------------------------------------------------------- 6. CITIZENSHIP OR PLACE OF ORGANIZATION: Switzerland - -------------------------------------------------------------------------------- 7. SOLE VOTING POWER: NUMBER OF 6,674,759 (1) SHARES -------------------------------------------------- BENEFICIALLY 8. SHARED VOTING POWER: OWNED BY 0 EACH REPORTING -------------------------------------------------- PERSON WITH 9. SOLE DISPOSITIVE POWER: 6,674,759 (1) -------------------------------------------------- 10. SHARED DISPOSITIVE POWER: 0 - -------------------------------------------------------------------------------- 11. AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON: 6,674,759 (1) - -------------------------------------------------------------------------------- 12. CHECK BOX IF THE AGGREGATE AMOUNT IN ROW 11 EXCLUDES CERTAIN SHARES: |_| - -------------------------------------------------------------------------------- 13. PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11): 36.4% - -------------------------------------------------------------------------------- 14. TYPE OF REPORTING PERSON (SEE INSTRUCTIONS): CO - -------------------------------------------------------------------------------- (1) See Item 5(a) for a detailed explanation of the Reporting Person's beneficial ownership of Common Stock. This Amendment No. 12 (this "Amendment") amends the Report on Schedule 13D, originally filed on April 4, 2008, as amended on April 24, 2008, April 25, 2008, May 5, 2008, May 14, 2008, May 19, 2008, May 22, 2008, June 18, 2008, July 14, 2008, October 14, 2008, November 5, 2008, and February 9, 2009 (as amended, the "Schedule 13D"). Except as provided herein, this Amendment does not modify any of the information previously reported on the Schedule 13D. Capitalized terms used and not otherwise defined have the meaning given to them in the Schedule 13D. Item 3. Source and Amount of Funds or Other Consideration. Item 3 is hereby amended and restated as follows: As of February 24, 2009, the Reporting Person has acquired, in the aggregate, 6,674,759 shares of Common Stock either from the Issuer or from other shareholders of the Issuer. The Reporting Person has paid an aggregate of $18,562,905.66 for these shares from corporate funds, including 56,206 shares acquired from Dennis Michael Nouri (the former President and Chief Executive Officer of the Issuer) pursuant to a note cancellation agreement. In exchange for the shares acquired from Mr. Nouri, the Reporting Person cancelled a note under which Mr. Nouri owed the Reporting Person principal and interest totaling $85,117. Item 4. Purpose of Transaction. Item 4 is hereby amended and restated as follows: The Reporting Person acquired the shares of Common Stock for investment purposes. Subject to, among other things, the Issuer's business prospects, prevailing prices, and market conditions, the Reporting Person may purchase additional shares of Common Stock and/or other securities of the Issuer from time to time in the open market, in privately negotiated transactions, or otherwise. In addition, one of the Reporting Person's investment goals is diversification, which may require the Reporting Person to sell shares of Common Stock. Accordingly, the Reporting Person may, from time to time, make decisions to sell shares of Common Stock based upon then-prevailing market conditions. On February 20, 2008, the Issuer entered a line of credit with Paragon Commercial Bank ("Paragon"), which was renewed on February 19, 2009. This line of credit is secured by an irrevocable standby letter of credit in the amount of $2.5 million issued by HSBC Private Bank (Suisse) SA, with the Reporting Person as account party. In connection with entering the line of credit, the Reporting Person and the Issuer agreed to an amendment to the Reimbursement Agreement, which had been entered into on November 10, 2006. Under the amended agreement, the Issuer has agreed that in the event of a default by the Issuer in the repayment of the line of credit that results in the letter of credit being drawn, the Issuer shall reimburse the Reporting Person any sums that the Reporting Person is required to pay under such letter of credit. At the sole discretion of the Issuer, these payments may be made in cash or by issuing shares of Common Stock at a set per share price of $2.50. The Reimbursement Agreement and the amendment thereto are attached hereto as Exhibits 1 and 2, respectively, and are incorporated herein by reference. In connection with entering the line of credit, the Reporting Person and the Issuer also agreed to an amendment of the Stock Purchase Warrant and Agreement, which had been entered into on January 15, 2007. Under the terms of the amended agreement, the Reporting Person may elect to purchase up to 444,444 shares of Common Stock at $2.70 per share upon termination of, or if the Issuer is in breach under the terms of, the Issuer's line of credit with Paragon. The original Stock Purchase Warrant and Agreement and the amendment thereto are attached hereto as Exhibits 3 and 4, respectively, and are incorporated herein by reference. On November 14, 2007, in an initial closing, the Issuer sold $3.3 million aggregate principal amount of secured subordinated convertible notes due November 14, 2010 (the "Notes") to noteholders, including the Reporting Person (the "Noteholders"). In addition, the Noteholders committed to purchase on a pro rata basis up to $5.2 million aggregate principal amount of Notes upon approval and call by the Issuer's Board of Directors in future closings. On August 12, 2008, the Issuer exercised its option to sell $1.5 million aggregate principal amount of Notes with substantially the same terms and conditions as the Notes sold on November 14, 2007. In connection with the sale of the additional Notes, the Noteholders holding a majority of the aggregate principal amount of the Notes outstanding agreed to increase the aggregate principal amount of Notes that they are committed to purchase from $8.5 million to $15.3 million. On November 21, 2008, the Issuer sold $500,000 aggregate principal amount of Notes to two new investors, and on January 6, 2009, the Issuer sold $500,000 aggregate principal amount of Notes to the Reporting Person, all on substantially the same terms and conditions as the previously issued Notes. On February 24, 2009, the Issuer sold $500,000 aggregate principal amount of Notes to the Reporting Person on substantially the same terms and conditions as the previously issued Notes. On the same date, the Noteholders holding a majority of the aggregate principal amount of the Notes outstanding agreed that the Issuer may sell up to $6 million aggregate principal amount of additional secured subordinated notes to new investors or existing Noteholders at any time on or before December 31, 2009 with a maturity date of November 14, 2010 or later. In addition, the maturity date definition for each of the Notes was changed from November 14, 2010 to the date upon which the Note is due and payable, which is the earlier of (1) November 14, 2010, (2) a change of control, or (3) if an event of default occurs, the date upon which Noteholders accelerate the indebtedness evidenced by the Notes. The formula for calculating the conversion price of the Notes was also amended such that the conversion price of each outstanding Note and any additional note sold in the future would be the same and set at the lowest applicable conversion price, as described below. The Reporting Person currently holds $4,300,000 aggregate principal amount of Notes. The Issuer is obligated to pay interest on the Notes at an annualized rate of 8% payable in quarterly installments commencing three months after the purchase date of the Notes. The Issuer does not have the ability to prepay the Notes without the approval of Noteholders holding at least a majority of the principal amount of the Notes then outstanding. On the earlier of November 14, 2010 or a merger or acquisition or other transaction pursuant to which the Issuer's existing stockholders hold less than 50% of the surviving entity, or the sale of all or substantially all of the Issuer's assets, or similar transaction, or event of default, each Noteholder in its sole discretion shall have the option to: o convert the principal then outstanding on its Notes into shares of Common Stock, or o receive immediate repayment in cash of the Notes, including any accrued and unpaid interest. If a Noteholder elects to convert its Notes under these circumstances, the conversion price will be the lowest "applicable conversion price" determined for each Note. The "applicable conversion price" for each Note shall be calculated by multiplying 120% by the lowest of: o the average of the high and low prices of the Common Stock on the OTC Bulletin Board averaged over the five trading days prior to the closing date of the issuance of such Note, o if the Common Stock is not traded on the Over-The-Counter market, the closing price of the Common Stock reported on the Nasdaq National Market or the principal exchange on which the Common Stock is listed, averaged over the five trading days prior to the closing date of the issuance of such Note, or o the closing price of the Common Stock on the OTC Bulletin Board, the Nasdaq National Market or the principal exchange on which the Common Stock is listed, as applicable, on the trading day immediately preceding the date such Note is converted, in each case as adjusted for stock splits, dividends or combinations, recapitalizations or similar events. Payment of the Notes will be automatically accelerated if the Issuer enters voluntary or involuntary bankruptcy or insolvency proceedings. The Notes and Common Stock into which they may be converted have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), or any state, local, or foreign securities laws. As a result, offers and sales of the Notes were made pursuant to Regulation D under the Securities Act and only to accredited investors. In addition, if the Issuer proposes to file a registration statement to register any of its Common Stock under the Securities Act in connection with the public offering of such securities solely for cash, subject to certain limitations, the Issuer must give each Noteholder who has converted its Notes into Common Stock the opportunity to include such shares of converted Common Stock in the registration. The Issuer has agreed to bear the expenses for any of these registrations, exclusive of any stock transfer taxes, underwriting discounts, and commissions. The Convertible Secured Subordinated Note Purchase Agreement, the Form of Convertible Secured Subordinated Promissory Note, the Registration Rights Agreement, the Security Agreement, the First Amendment to Convertible Secured Subordinated Note Purchase Agreement, the Second Amendment and Agreement to Join as a Party to Convertible Secured Subordinated Note Purchase Agreement and Registration Rights Agreement, the Third Amendment to Convertible Secured Subordinated Note Purchase Agreement and Registration Rights Agreement and Amendment to Convertible Secured Subordinated Promissory Notes, and the Form of Convertible Secured Subordinated Promissory Note to be issued post January 2009 are attached hereto as Exhibits 5 through 12 and are incorporated herein by reference. Except as may be set forth herein, the Reporting Person has no plans or proposals which would relate to or result in any of the matters set forth below: (a) the acquisition by any person of additional securities of the Issuer, or the disposition of securities of the Issuer; (b) an extraordinary corporate transaction, such as a merger, reorganization, or liquidation, involving the Issuer or any of its subsidiaries; (c) a sale or transfer of a material amount of assets of the Issuer or any of its subsidiaries; (d) any change in the present Board of Directors or management of the Issuer, including any plans or proposals to change the number or term of the Issuer's Board of Directors or to fill any existing vacancies thereon; (e) any material change in the present capitalization or dividend policy of the Issuer; (f) any other material change in the Issuer's business or corporate structure; (g) changes in the Issuer's charter, bylaws, or instruments corresponding thereto or other actions which may impede the acquisition of control of the Issuer by any person; (h) causing a class of securities of the Issuer to be delisted from a national securities exchange or to cease to be authorized to be quoted in an inter-dealer quotation system of a registered national securities association; (i) a class of equity securities of the Issuer becoming eligible for termination of registration pursuant to Section 12(g)(4) of the Securities Exchange Act of 1934, as amended; or (j) any action similar to any of those enumerated above. Item 5. Interest in Securities of the Issuer. Item 5 is hereby amended and restated as follows: (a) The Reporting Person beneficially owns 6,674,759 shares of Common Stock, which represents approximately 36.4% of the issued and outstanding shares of Common Stock. (b) The Reporting Person has sole power to vote or to direct the vote and sole power to dispose or to direct the disposition of all 6,674,759 shares of Common Stock reported in Item 5(a) of this Schedule 13D. (c) The trading dates, number of shares of Common Stock purchased and price per share for all transactions in the Common Stock that were effected since the triggering date of the Reporting Person's most recently filed Schedule 13D are set forth below. All transactions represent purchases of Common Stock on the OTC Bulletin Board by the Reporting Person, except for the transaction on February 24, 2009, which was a privately negotiated transaction between the Reporting Person and another shareholder of the Issuer. - -------------------------------------------------------------------------- Date of Transaction Number of Shares Purchased Price Per Share - -------------------------------------------------------------------------- 2/5/09 15,000 $2.25 - -------------------------------------------------------------------------- 2/6/09 15,000 $2.25 - -------------------------------------------------------------------------- 2/9/09 15,000 $2.2471 - -------------------------------------------------------------------------- 2/10/09 15,000 $2.2473 - -------------------------------------------------------------------------- 2/24/09 187,274 $2.25 - -------------------------------------------------------------------------- 2/24/09 8,000 $2.10 - -------------------------------------------------------------------------- (d) No other person has the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, the Common Stock beneficially owned by the Reporting Person. (e) Not applicable. Item 7. Material to be Filed as Exhibits. Item 7 is hereby amended and restated as follows: Exhibit 1 Reimbursement Agreement, dated November 10, 2006, by and between the Issuer and the Reporting Person (incorporated herein by reference to Exhibit 10.48 to the Issuer's Annual Report on Form 10-K, as filed with the Securities Exchange Commission (the "SEC") on March 25, 2008) Exhibit 2 Amendment to Reimbursement Agreement, dated February 20, 2008, by and between the Issuer and the Reporting Person (previously filed with the original Schedule 13D) Exhibit 3 Stock Purchase Warrant and Agreement, dated January 15, 2007, by and between the Issuer and the Reporting Person (incorporated herein by reference to Exhibit 10.44 to the Issuer's Registration Statement on Form S-1, as filed with the SEC on April 3, 2007) Exhibit 4 Amendment No. 1 to Stock Purchase Warrant and Agreement, dated February 20, 2008, by and between the Issuer and the Reporting Person (previously filed with the original Schedule 13D) Exhibit 5 Convertible Secured Subordinated Note Purchase Agreement, dated November 14, 2007, by and among the Issuer and certain investors, including the Reporting Person (incorporated herein by reference to Exhibit 4.1 to the Issuer's Quarterly Report on Form 10-Q, as filed with the SEC on November 14, 2007) Exhibit 6 Form of Convertible Secured Subordinated Promissory Note (incorporated herein by reference to Exhibit 4.2 to the Issuer's Quarterly Report on Form 10-Q, as filed with the SEC on November 14, 2007) Exhibit 7 Registration Rights Agreement, dated November 14, 2007, by and among the Issuer and certain investors, including the Reporting Person (incorporated herein by reference to Exhibit 10.6 to the Issuer's Quarterly Report on Form 10-Q, as filed with the SEC on November 14, 2007) Exhibit 8 Security Agreement, dated November 14, 2007, among the Issuer and Doron Roethler, as agent for certain investors, including the Reporting Person (incorporated herein by reference to Exhibit 10.7 to the Issuer's Quarterly Report on Form 10-Q, as filed with the SEC on November 14, 2007) Exhibit 9 First Amendment to Convertible Secured Subordinated Note Purchase Agreement, dated August 12, 2008, by and among the Issuer and certain investors, including the Reporting Person (previously filed with Amendment No. 10 to the Schedule 13D) Exhibit 10 Second Amendment and Agreement to Join as a Party to Convertible Secured Subordinated Note Purchase Agreement and Registration Rights Agreement, dated November 21, 2008, by and among the Issuer and certain investors, including the Reporting Person (previously filed with Amendment No. 11 to the Schedule 13D) Exhibit 11 Third Amendment to Convertible Secured Subordinated Note Purchase Agreement and Registration Rights Agreement and Amendment to Convertible Secured Subordinated Promissory Notes, dated February 24, 2009, by and among the Issuer and certain investors, including the Reporting Person Exhibit 12 Form of Convertible Secured Subordinated Promissory Note to be issued post January 2009 SIGNATURE After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this Statement is true, complete and correct. ATLAS CAPITAL, SA Dated: March 4, 2009 /s/ Avy Lugassy ---------------------------------------- Signature Name: Avy Lugassy Title: Member of the Management EX-11 2 v141887_ex11.txt Exhibit 11 SMART ONLINE, INC. THIRD AMENDMENT TO CONVERTIBLE SECURED SUBORDINATED NOTE PURCHASE AGREEMENT AND REGISTRATION RIGHTS AGREEMENT AND AMENDMENT TO CONVERTIBLE SECURED SUBORDINATED PROMISSORY NOTES THIS THIRD AMENDMENT TO CONVERTIBLE SECURED SUBORDINATED NOTE PURCHASE AGREEMENT AND REGISTRATION RIGHTS AGREEMENT AND AMENDMENT TO CONVERTIBLE SECURED SUBORDINATED PROMISSORY NOTES (this "Agreement") is entered into this 24th day of February 2009, by and among Smart Online, Inc., a Delaware corporation (the "Company"), and each of the undersigned holders (the "Holders," and individually, a "Holder") of Secured Subordinated Convertible Promissory Notes (the "Notes") issued pursuant to that certain Convertible Secured Subordinated Note Purchase Agreement dated as of November 14, 2007, by and among the Company and the Investors referenced on Schedule I attached thereto, as amended on August 12, 2008 and on November 21, 2008 (as amended, the "Original Purchase Agreement"). Capitalized terms used but not defined herein shall have the meanings assigned to them in the Original Purchase Agreement. RECITALS WHEREAS, in connection with the sale of the Notes, the Company entered into the Original Purchase Agreement with the Investors named therein, the Registration Rights Agreement dated as of November 14, 2007, as amended on August 12, 2008 and on November 21, 2008 with the Investors named therein (as amended, the "Original Registration Rights Agreement") and a Security Agreement dated as of November 14, 2007 with Doron Roethler as collateral agent for the holders of the Notes (the "Security Agreement"); WHEREAS, the Company and the Holders desire to amend the Original Purchase Agreement and the Original Registration Rights Agreement to permit the Company to sell Additional Notes to new investors or existing holders of Notes in one or more Subsequent Closings; WHEREAS, the Company and the Holders desire to amend the Notes previously issued to provide that the conversion price of each Note be the same and be calculated based on the lower of the five day average of the high and low price of the Company's Common Stock on the applicable market or exchange or the closing price of the Company's Common Stock on the day immediately preceding conversion of the Note and to provide that the definition of "Conversion Price" contained in any Additional Note issued on or after the date hereof shall be conformed to the definition contained in the Notes, as hereby amended; WHEREAS, Section 9(a) of the Original Purchase Agreement provides that any provision of the Agreement may be amended with the written consent of the Company and the Investors named therein holding at least a majority of the aggregate outstanding principal amount of the Notes; WHEREAS, Section 8 of each of the Notes provides that any provision of the Notes may be amended with the written consent of the Company and the holders of a majority of the aggregate outstanding principal amount of the Notes; WHEREAS, Section 3.6 of the Original Registration Rights Agreement provides that any provision of the Registration Rights Agreement may be amended with the written consent of the Company and the Investors named therein holding at least a majority of the aggregate outstanding principal amount of the Notes; and WHEREAS, the Holders constitute a majority of the aggregate outstanding principal amount of the Notes necessary to amend the provisions of the Original Purchase Agreement; the Original Registration Rights Agreement and each of the Notes. NOW, THEREFORE, in consideration of the promises and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: AGREEMENT 1. Sale of Additional Notes. At any time on or before December 31, 2009, the Company may sell Additional Notes in one or more Subsequent Closings in the aggregate principle amount of up to $6,000,000 (the "Maximum Amount") to either existing holders of the Notes (the "Existing Investors") or to new investors (the "New Investors"), in each case subject to the prior written approval of the Agent. As a condition to the sale of any Additional Note to a New Investor, the Company and New Investor will execute an Agreement to Join as a Party to the Convertible Secured Subordinated Note Purchase Agreement and Registration Rights Agreement, substantially in the form attached hereto as Exhibit A (the "Joinder Agreement"). Promptly after each such Subsequent Closing, the Company shall amend Schedule I to the Original Purchase Agreement, as hereby amended, and Schedule A to the Original Registration Rights Agreement, as hereby amended, to reflect the sale of any such Additional Notes without any action of the Holders or the parties thereto and shall distribute such revised schedules to the parties to such agreements. 2. Amendment to Original Purchase Agreement. The terms "Investor" and "Investors" referenced in the Original Purchase Agreement shall be automatically amended to include any New Investor upon execution of a Joinder Agreement by the Company and the New Investor and the terms "Note" or "Notes" shall be amended to include any Additional Notes purchased by a New Investor or Existing Investors. 3. Amendments to Registration Rights Agreement. (a) The terms "Investor" and "Investors" referenced in the Original Registration Rights Agreement shall be amended to include any New Investor upon execution of a Joinder Agreement by the Company and the New Investor and the terms "Note" or "Notes" shall be amended to include the Additional Note purchased by a New Investor or Existing Investors. (b) Section 1.13 of the Registration Rights Agreement shall be deleted and the following shall be inserted in lieu thereof "1.13 "Maturity Date" shall have the meaning ascribed thereto in the Notes issued on or prior to January 6, 2009." 4. Amendments to Notes. (a) The last sentence of the first paragraph of each Note shall be deleted and the following shall be inserted in lieu thereof: "All unpaid principal, together with any then unpaid and accrued interest and other amounts payable hereunder, shall be due and payable on the earlier of (i) November 14, 2010, (ii) a Change of Control or (iii) when, upon or after the occurrence of an Event of Default (as defined below), such amounts are declared due and payable by Investor or made automatically due and payable in accordance with the terms hereof (such date upon which all amounts payable hereunder are due is referred to herein as the "Maturity Date")." (b) Section 1(c) of each Note shall be deleted and the following shall be inserted in lieu thereof: "(c) "Conversion Price" shall mean the lowest "Applicable Conversion Price" determined for each Note issued under the Note Purchase Agreement. The "Applicable Conversion Price" for each Note issued under the Note Purchase Agreement shall be calculated by multiplying 120% by the lowest of (i) the average of the high and low prices of the Common Stock on the OTC Bulletin Board averaged over the five (5) trading days prior to the Closing Date of the issuance of such Note, (ii) if the Common Stock is not traded on the Over-The-Counter market, the closing price of the Common Stock reported on the Nasdaq National Market or the principal exchange on which the Common Stock is listed, averaged over the five (5) trading days prior to the Closing Date of the issuance of such Note, or (iii) the closing price of the Common Stock on the OTC Bulletin Board, the Nasdaq National Market or the principal exchange on which the Common Stock is listed, as applicable, on the trading day immediately preceding the date such Note is converted (in each case as adjusted for stock splits, dividends or combinations, recapitalizations or similar events)." 5. Maturity Date and Conversion Price of Additional Notes. Notwithstanding the terms of the Original Purchase Agreement and the form of Note attached thereto as Exhibit A, each Holder agrees that the maturity date of any Additional Notes issued hereafter may be a date later than November 14, 2010 as determined by the Company and the purchaser of such Additional Notes, and that the definition of "Conversion Price" set forth in such Additional Notes shall be the same as provided in the Notes, as hereby amended. 6. Waivers. Each Holder, on behalf of itself and each other Investor hereby waives (i) the requirement that the Company provide them with notice of the sale on or prior to December 31, 2009 of Additional Notes up to the Maximum Amount and the right of Investors to participate in such sale of Additional Notes, as required pursuant to Section 1(c) of the Original Purchase Agreement or otherwise and (ii) the requirement that the aggregate principal amount of all Additional Notes issued in any Subsequent Closing shall not be less than $500,000. 7. Consent of the Company and the Holders. The Company and the Holders hereby consent to any New Investors joining as a party to the Original Purchase Agreement, as hereby amended, and the Original Registration Rights Agreement, as hereby amended, to the addition of the name of the purchaser of Additional Notes to the applicable exhibit or schedule to such agreements and to the distribution of such applicable exhibit or schedule, as amended, to the other parties to such agreements. 8. Ratification. Except as specifically amended pursuant to this Agreement, each of the Original Purchase Agreement, the Original Registration Rights Agreement and the Notes remains in full force and effect in accordance with its terms. 9. Validity. The parties agree that this Agreement is entered into in accordance with Section 9(a) of the Original Purchase Agreement, Section 3.6 of the Registration Rights Agreement and Section 8 of each outstanding Note. 10. Governing Law. This Agreement and all actions arising out of or in connection with this Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to the conflicts of laws or choice of law provisions thereof. 11. Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 12. Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their heirs, successors and assigns. 13. Effectiveness of Agreement. This Agreement shall become effective upon its execution by the Company and Holders holding a majority of the aggregate outstanding principal amount of the Notes. [Signature page to follow] IN WITNESS WHEREOF, the parties have executed this Third Amendment to Convertible Secured Subordinated Note Purchase Agreement and Registration Rights Agreement and Amendment to Convertible Secured Subordinated Promissory Notes as of the date first above written. COMPANY: SMART ONLINE, INC. By: /s/ Doron Roethler ----------------------------------- Name: Doron Roethler ----------------------------------- Title: Chairman of BOD ----------------------------------- [Signature Page to Third Amendment to Convertible Secured Subordinated Note Purchase Agreement and Registration Rights Agreement and Amendment to Convertible Secured Subordinated Promissory Notes] HOLDERS: CRYSTAL MANAGEMENT LTD. By: /s/ Doron Roethler ----------------------------------- Name: Doron Roethler ----------------------------------- Title: ----------------------------------- ATLAS CAPITAL S.A. By: /s/ Avy Lugassy 24/02/2009 ----------------------------------- Name: Avy Lugassy ----------------------------------- Title: ----------------------------------- WILLIAM FURR /s/ William Furr -------------------------------------------- THE BLUELINE FUND By: ----------------------------------- Name: ----------------------------------- Title: ----------------------------------- HSBC PRIVATE BANK (SUISSE) SA By: ----------------------------------- Name: ----------------------------------- Title: ----------------------------------- [Signature Page to Third Amendment to Convertible Secured Subordinated Note Purchase Agreement and Registration Rights Agreement and Amendment to Convertible Secured Subordinated Promissory Notes] UBP, UNION BANCAIRE PRIVEE By: /s/ S. Malgioglio /s/ D. Fries ---------------------------------- Name: S. Malgioglio D. Fries ---------------------------------- Title: ---------------------------------- [Signature Page to Third Amendment to Convertible Secured Subordinated Note Purchase Agreement and Registration Rights Agreement and Amendment to Convertible Secured Subordinated Promissory Notes] Exhibit A Form of Agreement to Join Exhibit A SMART ONLINE, INC. AGREEMENT TO JOIN AS A PARTY TO THE CONVERTIBLE SECURED SUBORDINATED NOTE PURCHASE AGREEMENT AND REGISTRATION RIGHTS AGREEMENT This Agreement to Join as a Party to the Convertible Secured Subordinated Note Purchase Agreement and Registration Rights Agreement (this "Agreement") is entered into as of _________ __, 2009, by and between Smart Online, Inc., a Delaware corporation (the "Company"), and the person or entity (a "Purchaser") listed on Schedule A attached hereto. WHEREAS, on November 14, 2007, August 12, 2008, November 21, 2008 and January 6, 2009, the Company sold convertible subordinated promissory notes (the "Notes") in the aggregate principal amount of $5,800,000 pursuant to the terms of a certain Convertible Secured Subordinated Note Purchase Agreement dated as of November 14, 2007, as amended on August 12, 2008, November 21, 2008 and February __, 2009 (as amended or supplemented from time to time, the "Purchase Agreement"); WHEREAS, in connection with the sale of the Notes, the Company entered into the Registration Rights Agreement dated as of November 14, 2007, as amended on August 12, 2008, November 21, 2008 and February __, 2009 with the Investors named therein (as amended or supplemented from time to time, the "Registration Rights Agreement") and a Security Agreement dated as of November 14, 2007 with Doron Roethler as collateral agent for the holders of the Notes (the "Security Agreement") WHEREAS, Section 1 of the Third Amendment to Convertible Secured Subordinated Note Purchase Agreement and Registration Rights Agreement and Amendment to Convertible Secured Subordinated Promissory Notes, dated as of February __, 2009 (the "Third Amendment") provides that the Company is entitled to include additional purchasers of its Notes as parties to the Purchase Agreement and the Registration Rights Agreement by amending Schedule 1 to the Purchase Agreement and Schedule A to the Registration Rights Agreement; WHEREAS, each of the Purchasers desires to join as a party to the Purchase Agreement and the Registration Rights Agreement in connection with its purchase of a Note in the principal amount set forth opposite the Purchaser's name on Schedule A hereto. NOW, THEREFORE, in consideration of the premises, the covenants of the parties set forth below and other good and valuable consideration, the receipt and legal sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. The Purchaser agrees to purchase and the Company agrees to issue and sell to the Purchaser a Note in substantially in the form attached to the Purchase Agreement in the principal amount set forth opposite such Purchaser's name on Schedule A hereto and with the maturity date set forth on Schedule A hereto (the "Additional Note"). In connection therewith, the Purchaser hereby joins as a party and agrees to be bound by the terms and conditions of the Purchase Agreement and the Registration Rights Agreement on the date hereof. The Purchaser hereby acknowledges that such Purchaser has received a copy of the Purchase Agreement, the Registration Rights Agreement and the Security Agreement and has had the opportunity to review the terms thereof. 2. The Purchaser hereby confirms that each representation and warranty contained in Section 3 of the Purchase Agreement, is true in all respects on and as of the date of this Agreement as though such representations and warranties were made by the Purchaser on and as of the date hereof. The Purchaser further confirms that all agreements and conditions contained in the Purchase Agreement that are required to be performed or complied with by the Purchaser on or before the date hereof have been performed and complied with in all material respects as of the date hereof. 3. The Purchaser hereby acknowledges and agrees that pursuant to the Purchase Agreement and the Security Agreement, Doron Roethler is appointed as the agent for the Investors, including the Purchaser, with respect to the matters set forth therein. 4. The Company hereby consents to the Purchaser joining as a party to the Purchase Agreement and the Registration Rights Agreement and to the addition of the name of the Purchaser to Schedule I to the Purchase Agreement and to the addition of the name of the Purchaser to the Schedule A to the Registration Rights Agreement. 5. The Purchaser and the Company agree that Purchaser shall be treated as an "Investor" under the Purchase Agreement and the Registration Rights Agreement and that the Additional Note shall be deemed to be a "Note" under each such agreement. The Purchaser and the Company further agree that no amendment to the Purchase Agreement or the Registration Rights Agreement need be executed by the parties thereto in order to effect such treatment. 6. This Agreement shall be governed by and interpreted in accordance with the laws of the State of Delaware without regard to conflicts of laws principles. 7. This Agreement may be executed in one or more counterparts. 8. This Agreement shall become effective with respect to the Purchaser upon the receipt by the Company of the funds set forth on Schedule A. 9. The Company agrees that upon its receipt of the funds set forth on Schedule A it shall issue to the Purchase a Note in substantially the form attached to the Purchase Agreement with the maturity date stated in Schedule A and that it shall amend Schedule I to the Purchase Agreement and Schedule A to the Registration Rights Agreement to reflect the purchase of the Additional Note by the Purchaser. [Signature page to follow] IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. COMPANY: SMART ONLINE, INC. By: ----------------------------------- Name: ----------------------------------- Title: ----------------------------------- PURCHASER: [NAME OF PURCHASER] By: ----------------------------------- Name: ----------------------------------- Title: ----------------------------------- [Signature page to Agreement to Join as a Party] SCHEDULE A TO AGREEMENT TO JOIN AS A PARTY - ------------------------------ --------------------- --------------------------- Name and Address Principal Amount of Maturity Date of Additional Additional Note Note - ------------------------------ --------------------- --------------------------- [Name of Purchaser $ [Address] Attn: Tel: Fax: Email: - ------------------------------ --------------------- --------------------------- EX-12 3 v141887_ex12.txt Exhibit 12 [Form of Note to be issued post January 2009] THIS NOTE AND THE SECURITIES ISSUABLE UPON THE CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER ANY APPLICABLE STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES OR AN EXEMPTION THEREFROM UNDER SUCH ACT AND UNDER ANY APPLICABLE STATE SECURITIES LAWS. THE COMPANY, IN ITS SOLE DISCRETION, SHALL HAVE THE RIGHT TO REQUIRE AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY TO THE EFFECT THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED IN CONNECTION WITH ANY PROPOSED TRANSFER NOR IS SUCH TRANSFER IN VIOLATION OF ANY APPLICABLE STATE SECURITIES LAWS. THIS LEGEND SHALL BE ENDORSED UPON ANY NOTE ISSUED IN EXCHANGE FOR THIS NOTE. SMART ONLINE, INC. CONVERTIBLE SECURED SUBORDINATED PROMISSORY NOTE $[_______________] __________ __, 20__ Durham, NC FOR VALUE RECEIVED, Smart Online, Inc., a Delaware corporation (the "Company") promises to pay to [____________________] ("Investor"), or its registered assigns, in lawful money of the United States of America the principal sum of [__________] Dollars ($[_________]), or such lesser amount as shall equal the outstanding principal amount hereof, together with interest from the date of this Note on the unpaid principal balance at a rate equal to 8.00% per annum, computed on the basis of the actual number of days elapsed and a year of 360 days. All unpaid principal, together with any then unpaid and accrued interest and other amounts payable hereunder, shall be due and payable on the earlier of (i) ________ __, 20__, (ii) a Change of Control or (iii) when, upon or after the occurrence of an Event of Default (as defined below), such amounts are declared due and payable by Investor or made automatically due and payable in accordance with the terms hereof (such date upon which all amounts payable hereunder are due is referred to herein as the "Maturity Date"). This Note is one of the "Notes" issued pursuant to the Convertible Secured Subordinated Note Purchase Agreement of even date herewith (as amended, modified or supplemented, the "Note Purchase Agreement") between the Company and the Investors (as defined in the Note Purchase Agreement). Capitalized terms used herein and not otherwise defined shall have the meanings assigned thereto in the Note Purchase Agreement. This Note and the Investor are subject to certain restrictions, and are entitled to certain rights and privileges, set forth in the Note Purchase Agreement. THE OBLIGATIONS DUE UNDER THIS NOTE ARE SECURED BY A SECURITY AGREEMENT (THE "SECURITY AGREEMENT") DATED AS OF THE DATE HEREOF AND EXECUTED BY COMPANY FOR THE BENEFIT OF INVESTOR. ADDITIONAL RIGHTS OF INVESTOR ARE SET FORTH IN THE SECURITY AGREEMENT. The following is a statement of the rights of Investor and the conditions to which this Note is subject, and to which Investor, by the acceptance of this Note, agrees: 1. Definitions. As used in this Note, the following capitalized terms have the following meanings: (a) "Business Day" shall mean any day other than a Saturday or Sunday or other day on which the New York Stock Exchange is permitted or required by law to close. (b) the "Company" includes the corporation initially executing this Note and any Person which shall succeed to or assume the obligations of the Company under this Note. (c) "Conversion Price" shall mean the lowest "Applicable Conversion Price" determined for each Note issued under the Note Purchase Agreement. The "Applicable Conversion Price" for each Note issued under the Note Purchase Agreement shall be calculated by multiplying 120% by the lowest of (i) the average of the high and low prices of the Common Stock on the OTC Bulletin Board averaged over the five (5) trading days prior to the Closing Date of the issuance of such Note, (ii) if the Common Stock is not traded on the Over-The-Counter market, the closing price of the Common Stock reported on the Nasdaq National Market or the principal exchange on which the Common Stock is listed, averaged over the five (5) trading days prior to the Closing Date of the issuance of such Note, or (iii) the closing price of the Common Stock on the OTC Bulletin Board, the Nasdaq National Market or the principal exchange on which the Common Stock is listed, as applicable, on the trading day immediately preceding the date such Note is converted (in each case as adjusted for stock splits, dividends or combinations, recapitalizations or similar events). (d) "Change of Control" shall mean (i) any consolidation or merger or other transaction or series of transactions involving the Company pursuant to which the Company's stockholders own less than fifty percent (50%) of the voting securities of the surviving entity (other than an equity financing) or (ii) the sale of all or substantially all of the assets of the Company. (e) "Event of Default" has the meaning given in Section 4 hereof. 2 (f) "Lien" shall mean, with respect to any property, any security interest, mortgage, pledge, lien, claim, charge or other encumbrance in, of, or on such property or the income therefrom, including, without limitation, the interest of a vendor or lessor under a conditional sale agreement, capital lease or other title retention agreement, or any agreement to provide any of the foregoing, and the filing of any financing statement or similar instrument under the Uniform Commercial Code or comparable law of any jurisdiction. (g) "Note Purchase Agreement" has the meaning given in the introductory paragraph hereof. (h) "Obligations" shall mean and include all loans, advances, debts, liabilities and obligations, howsoever arising, owed by the Company to Investor of every kind and description (whether or not evidenced by any note or instrument and whether or not for the payment of money), now existing or hereafter arising under or pursuant to the terms of this Note, the Note Purchase Agreement and the Security Agreement, including, all interest, fees, charges, expenses, attorneys' fees and costs and accountants' fees and costs chargeable to and payable by the Company hereunder and thereunder, in each case, whether direct or indirect, absolute or contingent, due or to become due, and whether or not arising after the commencement of a proceeding under Title 11 of the United States Code (11 U. S. C. Section 101 et seq.), as amended from time to time (including post-petition interest) and whether or not allowed or allowable as a claim in any such proceeding. (i) "Person" shall mean and include an individual, a partnership, a corporation (including a business trust), a joint stock company, a limited liability company, an unincorporated association, a joint venture or other entity or a governmental authority. (j) "Requisite Percentage" shall mean, at least a majority of the aggregate outstanding principal amount of the Notes issued pursuant to the Note Purchase Agreement. (k) "Securities Act" shall mean the Securities Act of 1933, as amended. (l) "Security Agreement" has the meaning given in the introductory paragraphs to this Note. (m) "Transaction Documents" shall mean this Note, each of the other Notes issued under the Note Purchase Agreement, the Note Purchase Agreement, the Registration Rights Agreement and the Security Agreement. 2. Interest. Accrued interest on this Note shall be payable in cash in quarterly installments commencing on the third month anniversary of the date of issuance of this Note with the final installment payable on the Maturity Date. 3. Prepayment. This Note may not be prepaid without the consent of a Requisite Percentage. Any prepayment must be made in connection with the prepayment of all outstanding Notes. 4. Events of Default. The occurrence of any of the following shall constitute an "Event of Default" under this Note and the other Transaction Documents: 3 (a) Failure to Pay. The Company shall fail to pay (i) when due any principal or interest payment on the due date hereunder or (ii) any other payment required under the terms of this Note or any other Transaction Document on the date due and, with respect to this subclause (ii) only, such payment shall not have been made within five (5) days of the Company's receipt of written notice to the Company of such failure to pay; (b) Non-Performance of Affirmative Covenants. The Company shall default in the due observance or performance of any material covenant set forth in the Note, the Note Purchase Agreement on the Security Agreement, which default shall continue uncured for 15 days after receipt of written notice to the Company thereof; (c) Voluntary Bankruptcy or Insolvency Proceedings. The Company shall (i) apply for or consent to the appointment of a receiver, trustee, liquidator or custodian of itself or of all or a substantial part of its property, (ii) be unable, or admit in writing its inability, to pay its debts generally as they mature, (iii) make a general assignment for the benefit of its or any of its creditors, (iv) be dissolved or liquidated, (v) become insolvent (as such term may be defined or interpreted under any applicable statute), (vi) commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or consent to any such relief or to the appointment of or taking possession of its property by any official in an involuntary case or other proceeding commenced against it, or (vii) take any action for the purpose of effecting any of the foregoing; (d) Involuntary Bankruptcy or Insolvency Proceedings. Proceedings for the appointment of a receiver, trustee, liquidator or custodian of the Company or of all or a substantial part of the property thereof, or an involuntary case or other proceedings seeking liquidation, reorganization or other relief with respect to the Company or the debts thereof under any bankruptcy, insolvency or other similar law now or hereafter in effect shall be commenced and an order for relief entered or such proceeding shall not be dismissed or discharged within 30 days of commencement; (e) Misrepresentations. Any of the representations and warranties of the Company in the Note Purchase Agreement or the Security Agreement proves to have been false or misleading in any material respect when made or furnished or deemed made; (f) Judgments. One or more judgments, decrees or orders (excluding settlement orders) for the payment of money shall be entered against the Company or any of its subsidiaries involving in the aggregate a liability of $1,000,000 or more, and any such judgment, decree or order shall continue without discharge or stay for a period of sixty (60) days; or (g) Cross-Defaults. The Company or any of its subsidiaries shall default in the performance or observance of any agreement or instrument relating to any indebtedness, or any other event shall occur or condition exist, and the effect of such default, event or condition is to cause or permit the holder or holders of any such indebtedness to cause indebtedness, in excess of $500,000 individually or in the aggregate, to become due prior to its stated maturity. 4 5. Rights of Investor upon Default. Upon the occurrence or existence of any Event of Default (other than an Event of Default described in Sections 4(c) or 4(d)) and at any time thereafter during the continuance of such Event of Default, Investor may, with the consent of the Agent, by written notice to the Company, declare all outstanding Obligations payable by the Company hereunder to be immediately due and payable without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived. Upon the occurrence or existence of any Event of Default described in Sections 4(c) and 4(d), immediately and without notice, all outstanding Obligations payable by the Company hereunder shall automatically become immediately due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived. In addition to the foregoing remedies, upon the occurrence or existence of any Event of Default and subject to the consent of the Agent, Investor may exercise any other right power or remedy granted to it by the Transaction Documents or otherwise permitted to it by law, either by suit in equity or by action at law, or both. 6. Conversion. (a) Optional Conversion. At the Maturity Date, each Investor shall have the option to convert the entire principal amount of this Note then outstanding into Common Stock. The number of shares of Common Stock that this Note may be converted into shall be determined by dividing the principal amount then outstanding by the Conversion Price at the time of conversion. If the Investor elects to convert this Note at maturity, it shall provide the Company with written notice of its election at least one (1) day prior to the Maturity Date. Upon conversion, the Investor shall deliver to the Company the original of this Note (or a notice to the effect that the original Note has been lost, stolen or destroyed and an agreement reasonably acceptable to the Company whereby the holder agrees to indemnify the Company from any loss incurred by it in connection with this Note). However, upon such conversion of this Note, this Note shall be deemed converted and of no further force and effect, whether or not the Note is delivered for cancellation as set forth in the preceding sentence. If there shall occur a Change of Control, the Company shall give written notice to the Investor at least five (5) days prior to any closing thereof and the Investor's election to convert this Note shall be conditional upon the consummation thereof. (b) Mechanics of Optional Conversion. As soon as practicable following surrender by the Investor of the original of its Note, the Company shall issue and deliver to Investor a certificate or certificates for the shares of Common Stock into which the Note has been converted (bearing such legends as may be required or advisable in the opinion of counsel to the Company). Such conversion shall be deemed to have been made immediately prior to the close of business on the Maturity Date, and the Investor shall be treated for all purposes as the record holder or holders of such Common Stock on such date. (c) Fractional Shares; Interest; Effect of Conversion. No fractional shares shall be issued upon conversion of this Note. In lieu of the Company issuing any fractional shares to Investor upon the conversion of this Note, the Company shall pay to Investor an amount equal to the product obtained by multiplying the Conversion Price by the fraction of a share not issued pursuant to the previous sentence. Upon conversion of this Note in full and the payment of any amounts specified in this Section 6(c), the Company shall be forever released from all its obligations and liabilities under this Note. 5 7. Successors and Assigns. Subject to the restrictions on transfer described in Sections 9 and 10 below, the rights and obligations of the Company and Investor shall be binding upon and benefit the successors, assigns, heirs, administrators and transferees of the parties. 8. Waiver and Amendment. Any provision of this Note may be amended, waived or modified upon the written consent of the Company and the holders of a Requisite Percentage. 9. Transfer of this Note or Securities Issuable on Conversion Hereof. With respect to any offer, sale or other disposition of this Note or securities into which such Note may be converted, Investor will give written notice to the Company prior thereto, describing briefly the manner thereof, together with (unless waived by the Company) a written opinion of Investor's counsel, or other evidence if reasonably satisfactory to the Company, to the effect that such offer, sale or other distribution may be effected without registration or qualification (under any federal or state law then in effect). Upon receiving such written notice and reasonably satisfactory opinion, if so requested, or other evidence, the Company, as promptly as practicable, shall notify Investor that Investor may sell or otherwise dispose of this Note or such securities, all in accordance with the terms of the notice delivered to the Company. If a determination has been made pursuant to this Section 9 that the opinion of counsel for Investor, or other evidence, is not reasonably satisfactory to the Company, the Company shall so notify Investor promptly after such determination has been made. Each Note thus transferred and each certificate representing the securities thus transferred shall bear a legend as to the applicable restrictions on transferability in order to ensure compliance with the Securities Act, unless in the opinion of counsel for the Company such legend is not required in order to ensure compliance with the Securities Act. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions. Subject to the foregoing, transfers of this Note shall be registered upon registration books maintained for such purpose by or on behalf of the Company. Prior to presentation of this Note for registration of transfer, the Company shall treat the registered holder hereof as the owner and holder of this Note for the purpose of receiving all payments of principal and interest hereon and for all other purposes whatsoever, whether or not this Note shall be overdue and the Company shall not be affected by notice to the contrary. Notwithstanding anything in this Section 9 to the contrary, no opinion of counsel shall be required with respect to any transfer by an Investor to its officers, directors, partners, members or other affiliates. 10. Assignment by the Company. Neither this Note nor any of the rights, interests or obligations hereunder may be assigned, by operation of law or otherwise, in whole or in part, by the Company without the prior written consent of the holders of a Requisite Percentage. 6 11. Notices. All notices, requests, demands, consents, instructions or other communications required or permitted hereunder shall in writing and faxed, mailed or delivered to each party at the respective addresses of the parties as set forth in the Note Purchase Agreement, or at such other address or facsimile number as the Company shall have furnished to Investor in writing. All such notices and communications will be deemed effectively given the earlier of (i) when received, (ii) when delivered personally, (iii) one business day after being delivered by facsimile (with receipt of appropriate confirmation), (iv) one business day after being deposited with an overnight courier service of recognized standing or (v) two days after being deposited in the U.S. mail, first class with postage prepaid. 12. Pari Passu Notes. Investor acknowledges and agrees that the payment of all or any portion of the outstanding principal amount of this Note and all interest hereon shall be pari passu in right of payment and in all other respects to the other Notes issued pursuant to the Note Purchase Agreement or pursuant to the terms of such Notes. In the event Investor receives payments in excess of its pro rata share of the Company's payments to the Investors of all of the Notes, then Investor shall hold in trust all such excess payments for the benefit of the holders of the other Notes and shall pay such amounts held in trust to such other holders upon demand by such holders. 13. Usury. In the event any interest is paid on this Note which is deemed to be in excess of the then legal maximum rate, then that portion of the interest payment representing an amount in excess of the then legal maximum rate shall be deemed a payment of principal and applied against the principal of this Note. 14. Waivers. The Company hereby waives notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor and all other notices or demands relative to this instrument. 15. Remedies Cumulative. The remedies of Investor as provided herein and in the Note Purchase Agreement and in any other documents governing or securing repayment hereof shall be cumulative and concurrent and may be pursued singly, successively, or together, at the sole discretion of Investor to the extent provided herein and in the Note Purchase Agreement and may be exercised as often as occasion therefore shall arise. No act or omission of the Investor, including specifically, but without limitation, any failure to exercise any right, remedy or recourse, shall be effective as a waiver of any right of the Investor hereunder, unless set forth in a written document executed by the Investor, and then only to the extent specifically recited therein. A waiver or release with reference to one event shall not be construed as continuing, as a bar to, or as a waiver or release of any subsequent right, remedy or recourse as to any subsequent event. All notices, waivers, releases and/or consents by an Investor shall be directed to the Company only through the Agent. 16. No Rights of a Stockholder. Nothing contained in this Note shall be construed as conferring upon the Investor or any other Person the right to vote or consent or to receive notice as an stockholder in respect of meetings of stockholders for the election of directors of the Company or any other matters or any rights whatsoever as a stockholder of the Company prior to the time that this Note is converted pursuant to Section 6. 17. Governing Law. This Note and all actions arising out of or in connection with this Note shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to the conflicts of law provisions of the State of Delaware, or of any other state. (Signature Page Follows) 7 The Company has caused this Note to be issued as of the date first written above. SMART ONLINE, INC. a Delaware corporation By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- 8 -----END PRIVACY-ENHANCED MESSAGE-----