SECURITY AGREEMENT
THIS SECURITY AGREEMENT, dated as of October 13, 2003 (this "SECURITY
AGREEMENT"), is entered into by Smart Online, Inc., a Delaware corporation
headquartered at 0000 Xxxxxxxx Xxxxxxx, Xxxxxx, Xxxxx Xxxxxxxx 00000 (the
"DEBTOR") in favor of the persons listed on SCHEDULE A hereto, ("SECURED
PARTIES"), and such other persons as may become Secured Parties of secured
obligations as described herein.
W I T N E S S E T H
WHEREAS, Secured Parties have agreed to allow Debtor to defer certain
payments owed to the Secured Parties pursuant to certain outstanding loans and
employment agreements and in exchange Debtor has agreed to issue to the Secured
Parties certain promissory notes dated October 13, 2003 (the "PROMISSORY NOTES")
by Debtor in favor of Secured Parties, which agreements are evidenced by certain
Deferred Compensation Agreements and certain Loan and Settlement Agreements,
each of which are listed on SCHEDULE A hereto; and
WHEREAS, in order to induce Secured Parties to make the loans under the
Promissory Notes, Debtor has agreed to enter into this Agreement;
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, Debtor and Secured Parties hereby
agree as follows:
1. DEFINITIONS. The following terms when used in this Security
Agreement shall have the meanings set forth below:
1.1 "SECURED COLLATERAL" shall mean all tangible and intangible
property of Debtor of any kind, whether now owned or existing or hereafter
acquired, including, without limitation: (a) all equipment in all of its forms
of Debtor, wherever located, and all parts thereof and all accessions,
additions, attachments, improvements, substitutions and replacements thereto and
therefore (all of the foregoing being "EQUIPMENT"); (b) all inventory in all of
its forms of Debtor, wherever located, including all accessions thereto,
products thereof and documents therefore (all of the foregoing being
"INVENTORY"); (c) all accounts, contracts, contract rights, chattel paper,
documents, instruments, and general intangibles of Debtor, whether or not
arising out of or in connection with the sale or lease of goods or the rendering
of services, and all rights of Debtor now or hereafter existing in and to all
security agreements, guaranties, leases and other contracts securing or
otherwise relating to any such accounts, contracts, contract rights, chattel
paper, documents, instruments, and general intangibles; (d) all books, records,
writings, databases, information and other property relating to, used or useful
in connection with, evidencing, embodying, incorporating or referring to, any of
the foregoing; (e) all software programs (including both source code, object
code and all related applications and data files), whether now owned, licensed
or leased or hereafter acquired by Debtor, all firmware associated therewith;
all documentation (including flow charts, logic diagrams, manuals, guides and
specifications) with respect to such software and firmware described in the
preceding clauses; and all rights with respect to all of the foregoing,
including, without limitation, any and all licenses, options, warranties,
service contracts, program services, test rights, maintenance rights, support
rights, improvement rights, renewal rights and indemnifications and any
substitutions, replacements, additions or model conversions of any of the
foregoing; (f) all intellectual property of Debtor, including, without
limitation,
all inventions, whether patentable or not, trade secrets, patents, trademarks,
service marks, applications for patents, trademarks and service marks,
copyrights (registered and unregistered), software, including both object and
source code, all names and domain names, telephone numbers and email addresses;
(g) all of Debtor's other property and rights of every kind and description and
interests therein; and (h) all products, rents, issues, profits, returns, income
and proceeds of and from any and all of the foregoing, including, without
limitation, all payments under insurance, or any indemnity, warranty or
guaranty, payable by reason of loss or damage to or otherwise with respect to
any of the foregoing.
1.2 "SECURED OBLIGATIONS" shall mean all obligations of Debtor now
or hereafter existing under the Loan Documents, whether for principal, interest,
costs, fees, expenses or otherwise, and all other obligations of Debtor to the
Secured Parties under any other agreement, whether existing now or arising in
the future.
1.3 "LOAN DOCUMENTS" shall mean this Security Agreement and the
Promissory Notes and other agreements listed on SCHEDULE A hereto.
1.4 "SECURED PARTIES" shall mean both the Secured Parties set forth
above and any person that becomes a Secured Parties of any Note in accordance
with the provisions of the Loan Documents.
1.5 "UNIFORM COMMERCIAL CODE" shall mean the Uniform Commercial Code
as in effect in the State of North Carolina or other applicable jurisdiction.
1.6 Other terms used in this Agreement that are defined in the
Uniform Commercial Code shall have the meanings set forth in such code.
2. GRANT OF SECURITY INTEREST.
2.1 GRANT. Debtor hereby assigns and pledges to the Secured Parties,
and hereby grants to the Secured Parties a first priority security interest in,
all of the Secured Collateral.
2.2 SECURITY FOR OBLIGATIONS. This Security Agreement secures the
payment of all Secured Obligations.
2.3 CONTINUING SECURITY INTEREST; TRANSFER OF NOTES. This Security
Agreement shall create a continuing security interest in the Secured Collateral
and shall (a) remain in full force and effect until payment in full of all
Secured Obligations; (b) be binding upon Debtor, its successors, transferees and
assigns, and (c) inure, together with the rights and remedies of the Secured
Parties hereunder, to the benefit of the Secured Parties and its successors,
transferees and assigns. Without limiting the generality of this clause, Secured
Parties may sell, assign, or otherwise transfer (in whole or in part) the
Promissory Notes to any other person, and such other person shall thereupon
become vested with all the rights and benefits in respect thereof granted to the
Secured Parties under this Security Agreement.
2.4 DEBTOR REMAINS LIABLE. Anything herein to the contrary
notwithstanding Debtor shall remain liable under the contracts and agreements
included in the Secured Collateral to the extent set forth therein, and shall
perform all of its duties and obligations under such contracts and agreements to
the same extent as if this Security Agreement had not been executed. The
exercise by Secured Parties of any rights hereunder shall not release Debtor
from any of its duties or obligations under any such contracts or agreements
included in the Secured Collateral. The Secured Parties shall not have any
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obligation or liability under any such contracts or agreements included in the
Secured Collateral by reason of this Security Agreement, nor shall the Secured
Parties be obligated to perform any of the obligations or duties of Debtor
thereunder or to take any action to collect or enforce any claim for payment
assigned hereunder by reason of this Security Agreement.
2.5 SECURITY INTEREST ABSOLUTE. All rights of the Secured Parties
and the security interests granted to the Secured Parties hereunder, and all
obligations of Debtor hereunder, shall be absolute and unconditional,
irrespective of: (a) the failure of Secured Parties to assert any claim or
demand or to enforce any right or remedy against Debtor or to exercise any right
or remedy against any other guarantor of, or Secured Collateral security for,
any Secured Obligations; (b) any change in the time, manner or place of payment
of, or in any other term of, all or any of the Secured Obligations or any other
extension, compromise or renewal of any Secured Obligation; (c) any reduction,
limitation, impairment or termination of any Secured Obligations for any reason,
including any claim of waiver, release, surrender, alteration or compromise, and
shall not be subject to (and Debtor hereby waives any right to or claim of) any
defense or setoff, counterclaim, recoupment or termination whatsoever by reason
of the invalidity, illegality, nongenuineness, irregularity, compromise,
unenforceability of, or any other event or occurrence affect, any Secured
Obligations; (d) any amendment to, rescission, waiver, or other modification of,
or any consent to departure from, any of the terms of any Loan Document; (e) any
addition, exchange, release, surrender or nonperfection of any Secured
Collateral, or any amendment to or waiver or release of or addition to or
consent to departure from any guaranty, for any of the Secured Obligations, or
(f) any other circumstances which might otherwise constitute a defense available
to, or a legal or equitable discharge of, Debtor, any surety or any guarantor.
2.6 FURTHER ASSURANCES. Debtor agrees that, from time to time and at
its own expense, Debtor will promptly execute and deliver all further
instruments and documents, and take all further action, that may be necessary or
desirable, or that the Secured Parties may reasonably request, in order to
perfect, preserve and protect any security interest granted or purported to be
granted hereby or to enable the Secured Parties to exercise and enforce their
rights and remedies hereunder with respect to any Secured Collateral, including
any patent, trademark, service xxxx, copyright, or other intellectual property.
With respect to the foregoing and the grant of the security interest hereunder,
Debtor hereby authorizes the Secured Parties to file one or more financing or
continuation statements, and amendments thereto and other documents Secured
Parties determines is useful, relative to all or any part of the Secured
Collateral without the signature of Debtor where permitted by law. A carbon,
photographic or other reproduction of this Security Agreement or any financing
statement covering the Secured Collateral or any part thereof shall be
sufficient as a financing statement where permitted by law.
2.7 TERMINATION. Upon the payment in full of all Secured
Obligations, the security interest granted herein shall terminate and all rights
to the Secured Collateral shall revert to Debtor. Upon any such termination, the
Secured Parties will, at Debtor's sole expense, execute and deliver to Debtor
such documents as Debtor shall reasonably request to evidence such termination.
3. REPRESENTATIONS AND WARRANTIES. Debtor represents and warrants
unto the Secured Parties as follows:
3.1 LOCATION OF OFFICE AND SECURED COLLATERAL. The place of business
and chief executive office of Debtor and the office where Debtor keeps its
records concerning the Secured Collateral is
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located at the address above. All of the Secured Collateral is and will continue
to be located at such place.
3.2 OWNERSHIP; NO LIENS. Debtor owns the Secured Collateral free and
clear of any lien, security interest, charge or encumbrance except a security
interest granted to secure certain obligations to Xxxxxxx Xxxx and except for
the security interest created by this Security Agreement and except as permitted
by the Loan Documents. Debtor has exclusive possession and control of its
Equipment and Inventory.
3.3 VALIDITY. This Security Agreement creates a valid security
interest in the Secured Collateral, securing the payment of the Secured
Obligations, and all filings and other actions necessary or desirable to perfect
and protect such security interest have been duly taken or shall be taken within
three (3) business days.
3.4 CONTINUING INTEREST. Debtor will keep the Secured Collateral
free from any adverse lien, security interest or encumbrance and do such other
acts or things as Secured Parties may from time to time request to establish and
maintain a valid and perfected security interest on the Secured Collateral (free
of any adverse lien, security interest or encumbrance) to secure the payment and
performance of the Secured Obligations and to permit Secured Parties to exercise
all rights and privileges granted to it in this Agreement.
4. EVENTS OF DEFAULT AND REMEDIES.
4.1 EVENTS OF DEFAULT. Any one of the following events shall
constitute a default hereunder: (a) failure of Debtor to pay as and when due any
of the Secured Obligations; (b) failure of Debtor to perform its obligations
under this Security Agreement; (c) if any representation or warranty of Debtor
made in this Security Agreement shall prove to be untrue in any material
respect; or (d) any other default as set forth in either of the Promissory
Notes.
4.2 CERTAIN REMEDIES. If the event of a default the Secured Parties
shall have the following rights:
(a) RIGHTS UNDER THE UCC. The Secured Parties may exercise
in respect of the Secured Collateral, in addition to other rights and remedies
provided for herein or otherwise available to it, all the rights and remedies of
a Secured Parties on default under the UCC (whether or not the UCC applies to
the affected Secured Collateral).
(b) SALE OF SECURED COLLATERAL. Secured Parties may (i)
require Debtor to, and Debtor hereby agrees that it will, at its expense and
upon request of the Secured Parties forthwith, assemble all or part of the
Secured Collateral as directed by the Secured Parties and make it available to
the Secured Parties at a place to be designated by the Secured Parties which is
reasonably convenient to both parties and (ii) without notice except as
specified below, sell the Secured Collateral or any part thereof in one or more
parcels at public or private sale, at any Secured Parties's office or elsewhere,
for cash, on credit or for future delivery, and upon such other terms as the
Secured Parties may deem commercially reasonable. Debtor agrees that, to the
extent notice of sale shall be required by law, at least ten days' prior notice
to Debtor of the time and place of any public sale or the time after which any
private sale is to be made shall constitute reasonable notification. The Secured
Parties shall not be obligated to make any sale of the Secured Collateral
regardless of notice of sale having been given. The
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Secured Parties may adjourn any public or private sale from time to time by
announcement at the time and place fixed therefore, and such sale may, without
further notice, be made at the time and place to which it was so adjourned.
(c) PROCEEDS OF SALE AND DEFICIENCIES. The proceeds received
by the Secured Parties in respect of any sale of, collection from, or other
realization upon all or any part of the Secured Collateral may, in the
discretion of the Secured Parties and after deduction of all costs and expenses
of the sale (including reasonably attorneys fees), be held by the Secured
Parties as Secured Collateral for, and/or then or at any time thereafter applied
in whole or in part against all or any part of the Secured Obligations in such
order as the Secured Parties shall elect. Any surplus of such cash or cash
proceeds held by the Secured Parties and remaining after payment in full of all
the Secured Obligations shall be paid over to Debtor or to whomsoever may be
lawfully entitled to receive such surplus. Debtor shall remain liable to Secured
Parties for any deficiency.
5. MISCELLANEOUS PROVISIONS
5.1 AMENDMENTS, ETC. No amendment to or waiver of any provision of
this Security Agreement, nor consent to any departure by Debtor herefrom, shall
in any event be effective unless the same shall be in writing and signed on
behalf of the Secured Parties, and then such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given.
5.2 NOTICES. All notices and other communications hereunder shall be
in writing and sent by registered or certified mail, by nationally recognized
courier service, by facsimile transmission, or by personal delivery, addressed
to Debtor or the Secured Parties at their respective addresses set forth above
or at such other address as shall be designated by Debtor or by any Secured
Parties in a written notice to Debtor and all Secured Parties at their
respective addresses set above or as have been changed from time to time.
5.3 NO WAIVER; REMEDIES. No failure on the part of any Secured
Parties to exercise, and no delay in exercising, any right hereunder shall
operate as a waiver thereof; nor shall any single or partial exercise of any
right hereunder preclude any other or further exercise thereof or the exercise
of any other right. The remedies herein provided are cumulative and not
exclusive of any remedies provided by law. The Secured Parties shall exercise
any of the rights of the Secured Parties hereunder (including any amendment of
this Agreement or waiver of any rights) only as decided by Xxxxxxx Xxxxx or a
person designated in writing by Xxxxxxx Xxxxx. In the event Xxxxxxx Xxxxx shall
die or be incapacitated without having designated a person to decide whether and
how to exercise the rights of the Secured Parties hereunder, a majority of the
Secured Parties, without regard to the amount owed to each, shall determine how
to exercise the rights of all the Secured Parties hereunder, but any amounts
collected shall be shared pro rata based on the amount owed by Debtor to each
Secured Party. This Agreement may be amended only upon written consent of (i)
Debtor; (ii) Xxxxxxx Xxxxx; and (iii) a majority of the Secured Parties without
regard to the amount owed to each.
5.4 SEVERABILITY. Wherever possible each provision of this Security
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Security Agreement shall be
prohibited by or invalid under such law, such provision shall be ineffective to
the extent of such prohibition or invalidity, without invalidating the remainder
of such provision or the remaining provisions of this Security Agreement.
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5.5 GOVERNING LAW. This Security Agreement shall be governed by and
construed in accordance with internal laws of the State of North Carolina.
5.6 ENTIRE AGREEMENT. This Security Agreement and the other Loan
Documents constitute the entire understanding among the parties hereto with
respect to the subject matter hereof and supersede any prior agreements, written
or oral with respect thereto.
IN WITNESS WHEREOF, the parties have caused this Security Agreement to
be duly executed and delivered by their duly authorized officer as of the date
first above noted.
DEBTOR
SMART ONLINE, INC.
(Corporate Seal)
By: /s/ Xxxxxx Xxxxxxx Xxxxx
---------------------------
Title: Chief Executive Officer
ATTEST:
/s/ Xxxxx Xxxxxxx
------------------
Secretary
SECURED PARTIES
/s/ Xxxxxx Xxxxxxx Xxxxx
-------------------------------
Xxxxxx Xxxxxxx Xxxxx
/s/ Xxxxx Xxxxx
-------------------------------
Xxxxx Xxxxx
/s/ Xxxxx Xxxxxxx
-------------------------------
Xxxxx Xxxxxxx
/s/ Xxxxxx Xxxx
-------------------------------
Xxxxxx Xxxx
/s/ Xxxx Xxxxx
------------------------------
Xxxx Xxxxx
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SCHEDULE A
TO
SECURITY AGREEMENT DATED OCTOBER ___, 2003
---------------------------- ---------------------------------------------------
SECURED PARTY ADDRESS
---------------------------- ---------------------------------------------------
000-000 Xxxxxx Xxxxxx
Xxxxxx Xxxxxxx Xxxxx Xxxxxx Xxxx, Xxxxx Xxxxxxxx 00000
---------------------------- ---------------------------------------------------
000 Xxxxxx Xxxx
Xxxxx Xxxxx Xxxxxx Xxxx, Xxxxx Xxxxxxxx 00000
---------------------------- ---------------------------------------------------
000 Xxxxxxx Xxxxxxxx Xxxxx
Xxxxx Xxxxxxx Xxxxxx Xxxx, Xxxxx Xxxxxxxx 00000
---------------------------- ---------------------------------------------------
000 Xxxxxxxx Xxxxx
Xxxxxx Xxxx Xxxxxx Xxxx, Xxxxx Xxxxxxxx 00000
---------------------------- ---------------------------------------------------
000-000 Xxxxxxxxxx Xxxxx
Xxxx Xxxxx Xxxxxx Xxxx, Xxxxx Xxxxxxxx 00000
---------------------------- ---------------------------------------------------
SECURED OBLIGATIONS
-------------------
$358,229.13 Promissory Note dated October 13, 2003 to Xxxxxx Xxxxxxx Xxxxx.
$83,733.20 Promissory Note dated October 13, 2003 to Xxxxxx Xxxxxxx Xxxxx.
$346,733.20 Promissory Note dated October 13, 2003 to Xxxxx Xxxxx.
$91,875.00 Promissory Note dated October 13, 2003 to Xxxxx Xxxxxxx.
$113,039.78 Promissory Note dated October 13, 2003 to Xxxxxx Xxxx.
$54, 925.00 Promissory Note dated October 13, 2003 to Xxxx Xxxxx.
Loan and Settlement Agreement dated October 13, 2003 with Xxxxxx Xxxxxxx Xxxxx.
Deferred Compensation Agreement dated October 13, 2003 with Xxxxxx Xxxxxxx
Xxxxx.
Deferred Compensation Agreement dated October 13, 2003 with Xxxxx Xxxxx.
Deferred Compensation Agreement dated October 13, 2003 with Xxxxx Xxxxxxx.
Deferred Compensation Agreement dated October 13, 2003 with Xxxxxx Xxxx.
Deferred Compensation Agreement dated October 13, 2003 with Xxxx Xxxxx.
Employment Agreement dated July 14, 1999 with Xxxxxx Xxxxxxx Xxxxx.
Employment Agreement dated July 14, 1999 with Xxxxx Xxxxx.
Employment Agreement dated June 29, 1999 with Xxxxx Xxxxxxx.
Employment Agreement dated September 15, 2001with Xxxxxx Xxxx.
Employment Agreement dated April 1, 2002 with Xxxx Xxxxx.
