Unassociated Document


    

    PROMISSORY
NOTE

    PRIME/LIBOR
RATE

    


    
      	
              $6,500,000.00

            	
              December
      6, 2010

            
	 
      	
              New
      York, New York

            


    

    


    FOR VALUE RECEIVED, the
undersigned, SMART ONLINE
INC. (the “Borrower”) HEREBY PROMISES TO PAY to the
order of ISRAEL DISCOUNT BANK
OF NEW YORK, its successors and assigns (hereinafter the “Bank”), the principal
amount of SIX MILLION FIVE
HUNDRED THOUSAND DOLLARS ($6,500,000.00), in lawful money
of the United States (the “Loan”), or the
aggregate unpaid principal amount of all credit advances (hereinafter each being
referred to as an “Advance” and
collectively, the “Advances”) made to
Borrower, as set forth on Bank’s computer system on the Loan Enquiry Page(s)
(the “Loan Enquiry
Page(s)”) on the maturity date of each such Advance as shown on the Loan
Enquiry Page(s), and in no event later than the Maturity Date, and to pay
interest on the unpaid principal balance of this Promissory Note (this “Note”) in the manner
and at the rate as hereinafter specified and such amounts due
hereunder.

    


    1.           Defined
Terms.  As used in this
Note the following terms shall have the following meanings:

    


    The term
“Additional
Costs” shall have the meaning as defined in Section 17.

    


    The terms
“Advance” or
“Advances”
shall have the meanings as defined in the introductory paragraph.

    


    The term
“Bank” shall
have the meaning as defined in the introductory paragraph.

    


    The term
“Bankruptcy
Code” shall mean Title 11 of the United States Code, as
amended.

     

    The term
“Borrower”
shall have the meaning as defined in the introductory paragraph.

    


    The term
“Business Day”
shall mean any day other than a Saturday, Sunday, or other day on which
commercial banks in New York are authorized or required to close under the laws
of the State of New York.

    


    The term “Collateral” or "SBLC" shall mean
collectively, (i) that certain irrevocable standby letter of credit issued by
HSBC Switzerland in favor of Bank in the aggregate amount of $2,500,000.00 and
(ii) that certain irrevocable standby letter of credit issued by UBS Switzerland
in favor of Bank in the aggregate amount of $4,000,000.00 as may be amended,
assigned or otherwise renewed or replaced from time to time.

    


    The term “Default Interest
Rate” shall have the meaning as defined in Section 4.


    
      
         


      

      
        
        

        
          

        

      

      
         


      

    


    The term
“Event of
Default” shall mean any of the events or conditions specified in Section
12 hereof.

    


    The term
“Indebtedness”
shall mean all items of indebtedness, obligation or liability, whether matured
or unmatured, liquidated or unliquidated, funded or unfunded, direct or
contingent, joint or several, which would properly be included in the liability
section of a balance sheet or in a footnote to a financial statement in
accordance with generally accepted accounting principles, and shall also include
(a) all indebtedness guaranteed, directly or indirectly in any manner, or
endorsed (other than for collection or deposit in the ordinary course of
business) or sold with recourse, (b) all indebtedness in effect guaranteed,
directly or indirectly, through agreements, contingent or otherwise, and (c) all
indebtedness secured by (or for which the holder of such indebtedness has a
right, contingent or otherwise, to be secured by) any mortgage, deed of trust,
pledge, assignment, lien, security interest or other charge or encumbrance upon
property owned or acquired subject thereto, whether or not the liabilities
secured thereby have been assumed or guaranteed.

    


    The terms
“Indemnified
Party” or “Indemnified Parties”
shall have the meanings as defined in Section 27.

    


    The term
“Interest”
means the annual rate of interest payable on the outstanding Advances in
accordance with Sections 3 and 4.

    


    The term
“Interest
Period” means with respect each LIBOR Advance:

    


    (a)           initially,
the period commencing on the date such LIBOR Advance is made and ending two (2),
three (3) or four (4) months thereafter, as selected by Borrower;
and

    


    (b)           each
Interest Period thereafter shall commence on the day immediately following the
expiration of the preceding Interest Period for such LIBOR Advance and shall end
two (2), three (3) or four (4)  months thereafter, as selected by
Borrower, by irrevocable written notice to Bank before 12:00 p.m., New York
time, not less than two (2) Business Days prior to the last day of the then
current Interest Period;

    


    (c)           provided, however, that all of
the foregoing provisions relating to Interest Periods are subject to the
following:

    


    (i)         if
any Interest Period pertaining to a LIBOR Advance would otherwise end on a day
which is not a Business Day, the Interest Period shall be extended to the next
succeeding Business Day unless the result of such extension would be to carry
such Interest Period into another calendar month, in which event such Interest
Period shall end on the immediately preceding Business Day; and

    


    (ii)         if
Borrower shall fail to give notice as provided in clause (b) above, Borrower
shall, in Bank’s sole discretion and determination, be deemed to either (x) have
requested that such LIBOR Advances be continued for a successive Interest
Period, the term of which shall be selected by Bank, or (y) requested the
conversion of such LIBOR Advance to a Prime Rate Advance on the last day of the
then current Interest Period with respect thereto; and

    



    
      
         


      

      
        2

        
          

        

      

      
         


      

    


    (iii)        any
Interest Period that begins on the last Business Day of a calendar month (or on
a day for which there is no numerically corresponding day in the calendar month
at the end of such Interest Period) shall end on the last Business Day of a
calendar month; and

    


    (iv)        notwithstanding
anything to the contrary, no Interest Period may be selected that would end on a
day after the Maturity Date.

    


    The term
“Late Charge”
shall have the meaning as defined in Section 10.

    


    The term
“LIBOR” shall
mean with respect to an Interest Period, the rate per annum (rounded upwards, if
necessary, to the nearest 1/100 of 1%) equal to the British Bankers Association
LIBOR Rate (“BBA LIBOR”) as published by Bloomberg (or such other commercially
available source providing quotations of BBA LIBOR as designated by Bank from
time to time) at approximately 11:00 A.M. (London time) 2 Business Days prior to
the first day of such Interest Period for a term comparable to such Interest
Period; provided however, if more than one BBA LIBOR Rate is specified, the
applicable rate shall be the arithmetic mean of all such rates.

    


    The term
“LIBOR Advance”
shall mean any Advance for which Borrower has selected LIBOR as the base
interest rate.

    


    The term
“Loan” shall
have the meaning as defined in the introductory paragraph.

    


    The term
“Loan
Documents” shall mean this Note and any other document, instrument or
agreement and any amendments thereto, evidencing or securing the Obligations, or
now or at any time hereafter executed, delivered or recorded in connection with
the Obligations, any other note, any loan commitment, requisition, letter
agreement, line of credit agreement, commercial financing agreement, security
agreement, guaranty of payment, mortgage, deed of trust, pledge agreement, loan
agreement, loan and security agreement, hypothecation agreement, indemnity
agreement, letter of credit application and agreement, and assignment, all as
amended, restated, extended, renewed, supplemented, modified or replaced from
time to time.

    


    The term
“Loan Enquiry
Page(s)” shall have the meaning as defined in the introductory
paragraph.

    


    The term
“Margin” shall
mean: (i) three hundred basis points (300 bps) for LIBOR Advances; and (ii) one
hundred basis points (100 bps) for Prime Rate Advances.

    


    The term
“Maturity Date”
shall mean the earlier to occur of (i) 18 months after the date hereof, (ii) May
31, 2012 or (iii) 180 days prior to the expiration date of the
SBLC.

    


    The term
“Minimum
Advance” shall have the meaning as defined in Section 2(c).

    


    The term
“Note” shall
mean this Promissory Note.

    



    
      
         


      

      
        3

        
          

        

      

      
         


      

    


    The term
“Obligations”
shall mean all existing and future debts, liabilities and obligations of every
kind or nature at any time owing by Borrower to Bank, whether under this Note or
under any other existing or future instrument, document or agreement, between
Borrower and Bank, whether joint or several, related or unrelated, primary or
secondary, matured or contingent, due or to become due, including, without
limitation, the debts, liabilities and obligations in respect of this Note and
any extensions, modifications, substitutions, increases and renewals
thereof.  Without limiting the generality of the foregoing,
Obligations shall include any other loan, advance or extension of credit, under
any existing or future loan agreement, promissory note, or other instrument,
document or agreement either arising directly between Borrower and Bank or
acquired outright, conditionally or as collateral security from another person
or entity by Bank.

    


    The term
“Obligor” shall
mean individually and collectively Borrower, each endorser and surety of this
Note, any person who is primarily or secondarily liable for the repayment of
this Note or any portion thereof (including without limitation each Guarantor),
any person who has granted security for the repayment of the Note, together with
such person’s heirs, personal representatives, successors and
assigns.

    


    The term
“Prime Rate”
shall mean a fluctuating rate per annum equal to the rate of interest publicly
announced by Bank at its principal office from time to time as its Prime
Rate.  Any change in the Prime Rate shall be effective on the date
such change is announced by Bank.

    


    The term
“Prime Rate
Advance” shall mean any Advance for which Borrower has selected the Prime
Rate as the base interest rate.

    


    2.           Advances.

    


    (a)           Each
request by Borrower for an Advance shall be received by Bank not later than
12:00 noon, Eastern Standard Time: (i) on the date of such request in the case
of a Prime Rate Advance, and (ii) three (3) Business Days, in the case of a
LIBOR Advance, before the first day of the applicable Interest
Period.

    


    (b)           Each
request for an Advance shall specify inter alia (i) the
requested date of such Advance, (ii) the requested amount of such Advance, (iii)
whether the requested Advance is a Prime Rate Advance or a LIBOR Advance, and
(iv) if such request is a LIBOR Advance, the applicable Interest
Period.

    


    (c)           A
request for an Advance shall be irrevocable upon Bank’s first receiving
notification thereof and shall be in a minimum amount (“Minimum Advance”) of:
(i) $1,000,000.00; or (ii) the remaining amount of the available undrawn balance
under the Loan if such amount is less than $1,000,000.00.

    


    (d)           A
LIBOR Advance may be refinanced with the proceeds of another LIBOR Advance on
the last day of the applicable Interest Period by giving notice as provided
herein, provided, however, during the
existence of an Event of Default, Bank may, at its option, convert any and all
outstanding LIBOR Advances to Prime Rate Advances.

    


    (e)           Borrower
may, from time to time, upon at least two (2) Business Days prior written notice
to Bank, elect to convert an outstanding LIBOR Advance to Prime Rate Advance,
provided, however, that any
such conversion of a LIBOR Advance shall be made on the last day of the
applicable Interest Period.


    
      
         


      

      
        4

        
          

        

      

      
         


      

    


    (f)           Borrower
may, from time to time, upon at least two (2) Business Days prior written notice
to Bank, elect to convert an outstanding Prime Rate Advance to a LIBOR Advance
by giving Bank irrevocable written notice of such election not later than 12:00
noon, provided
that any such conversion shall (i) be in a minimum integral amount of
$1,000,000.00, and (ii) no Event of Default shall have occurred and be
continuing.

    


    (g)           Subject
to the terms and conditions hereof and the terms and conditions set forth in the
Loan Documents, Advances that are repaid or prepaid may not be
reborrowed.

    


    (h)           Borrower
shall utilize the Advances for working purposes and financing for additional
debt.

    


    (i)           Borrower
shall not be permitted to request or receive any further Advances after six
months from the date hereof.

    


    3.           Principal
and Interest.

    


    (a)           Interest
shall be payable on the outstanding daily unpaid principal amount of each
Advance from the date hereof until payment in full is made and shall accrue and
be payable at the rates set forth or provided for herein, before and after
default, before and after maturity, before and after judgment and before and
after the commencement of any proceeding under the Bankruptcy Code, with
interest on overdue interest to bear interest and to be compounded at the
Default Interest Rate, in each case, to the fullest extent permitted by
applicable laws.

    


    (b)           Interest
accrued on each Advance shall be due quarterly and payable in arrears on the
last day of each February, May and August and November commencing on the last
day of February, 2011. Except as otherwise provided in Section 4, the unpaid
principal amount of each Advance shall bear interest as follows:

    


    (i)        
 With respect to a LIBOR Advance at a rate per annum equal to LIBOR for the
applicable Interest Period plus the
Margin;

    


    (ii)         With
respect to a Prime Rate Advance at a rate per annum equal to the Prime Rate
plus the
Margin; and

    


    (iii)        If
the rate of interest calculated in accordance with subparagraphs (i) or (ii)
above is less than four percent (4.00%) percent (the “Floor”), then the
rate per annum for such Advance shall be equal to the Floor.  At no
time during the term of the Loan shall any unpaid principal amount bear interest
at a rate per annum that is less than the Floor.

    


    (c)           The
unpaid principal amount of any Advance may, at any time and from time to time,
be voluntarily paid or prepaid in whole or in part except that, with respect to
any voluntary prepayment, (i) Bank shall have received written notice of any
prepayment by 12:00 noon, Eastern Standard Time on a Business Day on the date of
prepayment in the case of a Prime Rate Advance, and five (5) Business Days, in
the case of a LIBOR Advance, before the date of prepayment, which notice shall
identify the date and amount of the prepayment, (ii) each prepayment of an
Advance shall be accompanied by payment of interest accrued to the date of
payment on the amount of principal paid, and (iii) any payment or prepayment of
all or any part of any LIBOR Advance on a day other than the last day of the
applicable Interest Period shall be accompanied by a prepayment premium equal
to, and to partially compensate the Bank, for the amount of interest which Bank
would have earned on the principal amount so prepaid from the date of such
prepayment to the last day of the then current Interest Period for such LIBOR
Advance.  Bank shall not be obligated to accept any prepayment of a
LIBOR Advance unless it is accompanied by the prepayment premium.

     

    
      
         


      

      
        5

        
          

        

      

      
         


      

    


    (d)           Bank
may act without liability upon the basis of telephonic notice believed by Bank
in good faith to be from Borrower.  Borrower shall immediately confirm
to Bank, in writing, each telephonic notice.  All Advances are made at
Bank’s sole and absolute discretion and Bank may, at its option and in its sole
and absolute discretion and without notice to the undersigned, decline to make
any Advance requested by Borrower.  Borrower hereby expressly
authorizes Bank to record in its computer system the amount and date of each
Advance, the applicable rate of interest, the applicable Interest Period, the
maturity date, and each payment of principal and interest thereon.  In
the event of any discrepancy between any such notation by Bank and any records
of Borrower, the records of Bank shall be controlling and
conclusive.

    


    (e)           All
amounts due and owing hereunder shall be paid in full no later than the earlier
of: (i) demand by Bank; (ii) Maturity Date; or (iii) the occurrence and
continuation of an Event of Default.

    


    4.           Default
Rate.  At the option of
the Bank, upon the occurrence and during the continuance of any Event of
Default, and in any event if any installment of principal or interest or any fee
or cost or other amount payable under this Note, or any other Loan Document, is
not paid when due, the Obligations shall thereafter bear interest at a
fluctuating interest rate per annum at all times equal to the rate otherwise
applicable thereto plus five (5%) percent per annum (the “Default Interest
Rate”), to the fullest extent permitted by applicable
law.  Accrued and unpaid interest on past due amounts (including
interest on past due interest) shall be compounded monthly, on the last day of
each calendar month, to the fullest extent permitted by applicable
law.

    


    5.           Computation
of Interest and Fees.

    


    (a)           Computation
of interest on the Loan and all fees under this Note shall be calculated on the
basis of a year of 360 days and the actual number of days
elapsed.  Borrower acknowledges that such latter calculation method
will result in a higher yield to the Bank than a method based on a year of 365
or 366 days.

     

    (b)           Under
no circumstances or event whatsoever shall the aggregate of all amounts deemed
interest hereunder and charged or collected pursuant to the terms of this Note
exceed the highest rate permissible under any law which a court of competent
jurisdiction shall, in a final determination, deem applicable
hereto.  In the event that such court determines Bank has charged or
received interest hereunder in excess of the highest applicable rate, Bank shall
apply, in its sole discretion, and set off such excess interest received by Bank
against other Obligations due or to become due and such rate shall automatically
be reduced to the maximum rate permitted by such law.

     

    
      
         


      

      
        6

        
          

        

      

      
         


      

    


    6.           Manner
and Treatment of Payments.

    


    (a)           Each
payment due on this Note, or under any other Loan Document, shall be made to
Bank, at Bank’s office located at 511 Fifth Avenue, New York, New York
10017-4997, for the account of Bank, in immediately available funds not later
than 3:00 p.m., New York local time, on the day of payment (which must be a
Business Day).  All payments received after these deadlines shall be
deemed received on the next succeeding Business Day.  All payments
shall be made in lawful money of the United States of America.

     

    (b)           Bank
shall have the unconditional right and discretion (and Borrower hereby
authorizes Bank) to charge Borrower’s operating and/or deposit account(s) for
all of Borrower’s Obligations as they become due from time to time under this
Note, or any other Loan Document, including, without limitation, interest,
principal, fees, indemnification obligations and reimbursement of
expenses.

     

    (c)           Any
payment due under this Note which is paid by check or draft shall be subject to
the condition that any receipt issued therefore shall be ineffective unless and
until the amount due is actually received by Bank.  Each payment
received by Bank shall be applied as follows: first, to the payment
of any and all costs, fees and expenses incurred by or payable to Bank in
connection with the collection or enforcement of this Note; second, to the
payment of all unpaid late charges (if any); third, to the payment
of all accrued and unpaid interest hereunder; and fourth, to the
payment of the unpaid principal balance of this Note, or in any other manner
which Bank may, in its sole discretion, elect from time to time.

     

    7.           Security
Interest in Collateral.

    


    (a)           To
secure payment to Bank and performance of the Obligations, Borrower hereby
grants to Bank a continuing security interest in, a general lien upon and a
right of set-off against the Collateral.

    


    (b)           Borrower
hereby authorizes Bank, at any time and from time to time, to file financing
statements, continuation statements and amendments thereto under the Uniform
Commercial Code naming Borrower as debtor and Bank as secured party and
indicating therein the types or describing the items of Collateral herein
specified.  Borrower will not, without the prior written consent of
Bank, file or authorize or permit to be filed in any jurisdiction any such
financing or like statement in which Bank is not named as the sole secured party
covering the Collateral set forth herein.

     

    
      
         


      

      
        7

        
          

        

      

      
         


      

    


    (c)           Bank,
at its discretion, whether any of the Obligations be due may, in its name or in
the name of Borrower or otherwise, demand, sue for, collect or receive any money
or property at any time payable or receivable on account of or in exchange for,
or make any compromise or settlement deemed desirable with respect to, any of
the Collateral, but shall be under no obligation so to do, or Bank may extend
the time of payment, arrange for payment in installments, or otherwise modify
the terms of, or release, any of the Collateral, without thereby incurring
responsibility to, or discharging or otherwise affecting any liability of
Borrower.  Bank shall not be required to take any steps necessary to
preserve any rights of prior parties to any of the Collateral.  Upon
default hereunder or in connection with any of the Obligations (whether such
default be that of Borrower or of any other party obligated thereon), Bank shall
have the rights and remedies provided by law.  Borrower will pay to
Bank all reasonable out of pocket expenses (including reasonable expense for
legal services of every kind) of, or incidental to, the enforcement of any of
the provisions hereof or of any of the Obligations, or any actual or attempted
sale, or any exchange, enforcement, collection, compromise or settlement of any
of the Collateral or receipt of the proceeds thereof, and for the care of the
Collateral and defending or asserting the rights and claims of Bank in respect
thereof, by litigation or otherwise, including expense of insurance, and all
such expenses shall be indebtedness within the terms of this
Note.  Bank, at any time, at its option, may apply the net cash
receipts from the Collateral to the payment of principal of and/or interest on
any of the Obligations, whether or not then due, making proper rebate of
interest or discount.  Notwithstanding that Bank, whether in its own
behalf and/or in behalf of another and/or of others, may continue to hold
Collateral and regardless of the value thereof, Borrower shall be and remain
liable for the payment in full, principal and interest, of any balance of the
Obligations and expenses at any time unpaid.

    


    8.           Right of
Set-Off.  To secure payment
of this Note and all other Obligations of Borrower to Bank, Borrower and any
Obligor of this Note hereby grant Bank a continuing lien and/or right of set-off
upon any and all deposit and/or operating accounts now or hereafter maintained
with Bank, any and all securities and other property of Borrower and any Obligor
and the proceeds thereof now or hereafter coming into the possession or control
of Bank, hereby authorizing Bank, at any time, without prior notice, to
appropriate and apply such deposits or the proceeds of the sale of such
securities or other property to any such Obligations, although contingent and
although unmatured, it being understood that Bank shall be under no obligation
to effect any such appropriation and application.

    


    9.           Repayment
Extension.  If any payment of
principal or interest shall be due on a Saturday, Sunday or any other day on
which banking institutions in the State of New York are required or permitted to
be closed, such payment shall be made on the next succeeding Business Day, and
such extension of time shall in such case be included in the computation of the
payment of interest.

    


    10.         Late
Charge.  Borrower shall
unconditionally pay to Bank a late charge (the “Late Charge”) equal
to the greater of (a) five (5%) percent of the payment then due or (b) $200.00,
if any such payment in whole or in part is not received by Bank within ten (10)
days after its due date.  The Late Charge is in addition to the
Default Interest Rate, if applicable, and shall be payable together with the
next payment due hereunder or, at Bank’s option, upon demand by Bank, provided, however, that if any
such late charge is not recognized as liquidated damages for such delinquency,
and if deemed to be interest in excess of the amount permitted by applicable
law, Bank shall be entitled to collect a late charge only at the highest rate
permitted by law, and any payment actually collected by Bank in excess of such
lawful amount shall be deemed a payment in reduction of the principal sum then
outstanding, and shall be so applied.

    


    11.         Representations
and Warranties.  Borrower
represents and warrants to Bank that:

    


    Existence and Qualification;
Power - Borrower is a corporation or limited liability company duly
formed, validly existing and in good standing under the laws of the state of its
organization.  Borrower is duly qualified or registered to transact
business and is in good standing in each jurisdiction in which the conduct of
its business or the ownership or leasing of its properties makes such
qualification or registration necessary.  Borrower has all requisite
corporate power and/or other authority to conduct its business, to own and lease
its properties and to execute and deliver this Note and each Loan Document to
which it is a party and to perform its Obligations;

     

    
      
         


      

      
        8

        
          

        

      

      
         


      

    


    Compliance with Laws
- Borrower is in compliance in all material respects with all laws, regulations
and other legal requirements applicable to its business, has obtained all
authorizations, consents, approvals, orders, licenses and permits from, and has
accomplished (or obtained exemptions from) all filings, registrations and
qualifications that are necessary for the transaction of its
business;

    


    Authority; Compliance With
Other Agreements and Instruments - the execution, delivery and
performance by Borrower of this Note and the other Loan Documents to which it is
a party has been duly authorized by all necessary corporate, partnership or
membership action, as applicable, and does not and will not: (i) require any
consent or approval not heretofore obtained of any manager, director,
stockholder, member, partner, security holder or creditor of such party; (ii)
violate or conflict with any provision of Borrower’s partnership agreement,
articles of organization, operating agreement, articles of incorporation,
charter, by-laws or other comparable instruments; or (iii) result in a breach by
Borrower or constitute a default by Borrower under, or cause or permit the
acceleration of any obligation owed under, any indenture or loan or credit
agreement or any other contractual obligation to which Borrower is a party or by
which Borrower or any of its property is bound or affected;

    


    Financial Statements
- the financial statements of Borrower previously  furnished to Bank
are complete and correct and fairly present the financial condition of Borrower
through to the date for such fiscal period, and the result of Borrower’s
operations as of the end of the most recent fiscal quarter reflect no material
adverse change in the financial condition of Borrower;

    


    No Default - no event
has occurred and no event is continuing which with the giving of notice or the
lapse of time or both would constitute an Event of Default;

    


    Representations and
Warranties - prior to the making of each Advance all representations and
warranties contained herein, or the other Loan Documents, shall be true and
correct in all material respects and of the same force and effect as though such
representations and warranties had been made as of the date of the making of
such Advance.

    


    Regulations T, U and X;
Investment Company Act - no part of the proceeds of the Loan will be used
to purchase or carry, or to extend credit to others for the purpose of
purchasing or carrying, any margin stock within the meaning of Regulations T, U
or X of the Board of Governors of the Federal Reserve
System.  Borrower is not or is not required to be registered as an
“investment company” under the Investment Company Act of 1940; and

    


    Patriot Act
Compliance - Borrower is not involved in any activity, directly or
indirectly, which would constitute a violation of applicable laws concerning
money laundering, the funding of terrorism or similar activities.  No
part of the proceeds of the Loan will be used to fund activities which would
constitute a violation of the United States Bank Secrecy Act, the United States
Money Laundering Control Act of 1986, the United States International Money
Laundering Abatement and Anti-terrorist Financing Act of 2001.

     

    
      
         


      

      
        9

        
          

        

      

      
         


      

    


    12.         Events of
Default.  The occurrence of
any one or more of the following events shall constitute an “Event of Default”
under this Note:

    


    Payments – if
Borrower, or any other Obligor, fails to make any payment of principal or
interest under the Obligations when such payment is due and payable;
or

    


    Other Charges - if
Borrower, or any other Obligor, fails to pay any other charges, fees, expenses
or other monetary obligations owing to Bank arising out of or incurred in
connection with this Note within  ten (10) Business Days after the
date such payment is due and payable; or

    


    Particular Covenant
Defaults - if Borrower fails to perform, comply with or observe any
covenant or undertaking contained in any Loan Document and such failure
continues for thirty (30) days after the occurrence thereof; or

    


    Financial Information
– if (i) any statement, report, financial statement, or certificate made or
delivered by Borrower, or any other Obligor, to Bank is not true and correct in
all material respects when made or delivered, or (ii) otherwise fails to comply
with such other requirement or covenants set forth in the line letter agreement
executed contemporaneously herewith.

    


    Warranties or
Representations - if any warranty, representation or other statement by
or on behalf of Borrower contained in or pursuant to this Note, the other Loan
Documents or in any document, agreement or instrument furnished in compliance
with, relating to, or in reference to this Note, is false, erroneous, or
misleading in any material respect when made; or

    


    Agreements with
Others - (i) if Borrower shall default beyond any grace period in the
payment of principal or interest of any material Indebtedness of Borrower; or
(ii) if Borrower otherwise defaults under the terms of any such Indebtedness if
the effect of such default is to enable the holder of such Indebtedness to
accelerate the payment of Borrower’s obligations, which are the subject thereof,
prior to the maturity date or prior to the regularly scheduled date of payment;
or

    


    Other Agreements with
Bank - if any Obligor breaches or violates the terms of, or if a default
occurs under, any other existing or future agreement (related or unrelated)
(including, without limitation, the other Loan Documents) between any Obligor
and Bank; or

    


    Judgments - if any
final judgment exceeding $50,000 for the payment of money (i) which is not fully
and unconditionally covered by insurance or (ii) for which Borrower has not
established a cash or cash equivalent reserve in the full amount of such
judgment, shall be rendered by a court of record against Borrower and such
judgment shall continue unsatisfied and in effect for a period of thirty (30)
consecutive days without being vacated, discharged, satisfied or bonded pending
appeal; or

     

    
      
         


      

      
        10

        
          

        

      

      
         


      

    


    Assignment for Benefit of
Creditors, etc. - if Borrower makes or proposes in writing, an assignment
for the benefit of creditors generally, offers a composition or extension to
creditors, or makes or sends notice of an intended bulk sale of any business or
assets now or hereafter owned or conducted by Borrower; or

    


    Bankruptcy, Dissolution,
etc. - upon the commencement of any action for the dissolution or
liquidation of Borrower, or the commencement of any proceeding to avoid any
transaction entered into by Borrower, or the commencement of any case or
proceeding for reorganization or liquidation of Borrower’s debts under the
Bankruptcy Code or any other state or federal law, now or hereafter enacted for
the relief of debtors, whether instituted by or against Borrower; provided however, that
Borrower shall have twenty (20) Business Days to obtain the dismissal or
discharge of involuntary proceedings filed against it, it being understood that
during such twenty (20) Business Day period, Bank may seek adequate protection
in any bankruptcy proceeding; or

    


    Receiver - upon the
appointment of a receiver, liquidator, custodian, trustee or similar official or
fiduciary for Borrower or for Borrower’s property; or

    


    Execution Process,
etc. - the issuance of any execution or distraint process against any
property of Borrower; or

    


    Termination of
Business - if Borrower ceases any material portion of its business
operations as presently conducted; or

    


    Investigations - any
indication or evidence received by Bank that reasonably leads it to believe
Borrower may have directly or indirectly been engaged in any type of activity
which, would be reasonably likely to result in the forfeiture of any material
property of Borrower to any governmental entity, federal, state or local;
or

    


    Liens - if any lien
in favor of Bank shall cease to be valid, enforceable and perfected and prior to
all other liens other than permitted liens; or

    


    Concealment/Removal of
Property - if Borrower, or any other Obligor, conceals, removes or
permits to be concealed or removed any part of Borrower’s property with intent
to hinder, delay, or defraud any of its creditors; or

    


    Fraudulent Conveyance
- the making or suffering by Borrower, or any other Obligor, of a transfer of
any property, which is fraudulent under the law of any applicable jurisdiction;
or

    


    Security – if all or
any part of any security granted by Borrower for the Obligations shall, in
the  reasonable discretion of Bank, materially diminish in value and
Borrower fails upon demand of Bank to furnish such further security or to make
payment on account of any of the Obligations as would be satisfactory to Bank;
or

    


    Material Adverse
Effect – if there is any change in Borrower’s financial condition which,
in Bank’s reasonable opinion, has or would be reasonably likely to have a
material adverse effect with respect to (a) the assets, properties, financial
condition, credit worthiness, business prospects, material agreements or results
of business operations of Borrower, or (b) Borrower’s ability to pay the
Obligations in accordance with the terms hereof, or (c) the validity or
enforceability of this Note or any of the other Loan Documents or the rights and
remedies of Bank hereunder or thereunder.

     

    
      
         


      

      
        11

        
          

        

      

      
         


      

    


    13.           Rights
and Remedies upon Demand or Default.  Upon demand or
following the occurrence of an Event of Default hereunder, Bank, in Bank’s sole
discretion and without notice or demand to Borrower or any other Obligor, may:
(a) declare the entire outstanding principal balance of this Note, together with
all accrued interest and all other sums due under this Note to be immediately
due and payable, and the same shall thereupon become immediately due and payable
without presentment, demand or notice, which are hereby expressly waived (b)
exercise its right of set-off against any money, funds, credits or other
property of any nature whatsoever of Borrower  or any other Obligor
now or at any time hereafter in the possession of, in transit to or from, under
the control or custody of, or on deposit with, Bank or any affiliate of Bank in
any capacity whatsoever, including without limitation, any balance of any
deposit account and any credits with Bank or any affiliate of Bank; (c)
terminate any outstanding commitments of Bank to Borrower or any Obligor; (d)
draw under the SBLC and apply all or a portion of the proceeds of the SBLC in
reduction of the Obligations and the Bank shall not be liable or in any way
responsible to the Borrower by reason of any draw under the SBLC or any
certifications presented to either UBS Switzerland or HSBC Switzerland in
connection thereof; and (e) exercise any or all rights, powers, and remedies
provided for in the Loan Documents or now or hereafter existing at law, in
equity, by statute or otherwise.

    


    14.           Remedies
Cumulative.  Each right, power
and remedy of Bank hereunder, under the other Loan Documents or now or hereafter
existing at law, in equity, by statute or otherwise shall be cumulative and
concurrent, and the exercise or the beginning of the exercise of any one or more
of them shall not preclude the simultaneous or later exercise by Bank of any or
all such other rights, powers or remedies.  No failure or delay by
Bank to insist upon the strict performance of any one or more provisions of this
Note or of the Loan Documents or to exercise any right, power or remedy
consequent upon a breach thereof or a default hereunder shall constitute a
waiver thereof, or preclude Bank from exercising any such other rights, powers
or remedy.  By accepting full or partial payment after the due date of
any amount of principal or interest on this Note, or other amounts payable on
demand, Bank shall not be deemed to have waived the right either to require
prompt payment when due and payable of all other amounts of principal or
interest on this Note or other amounts payable on demand, or to exercise any
rights and remedies available to it in order to collect all such other amounts
due and payable under this Note.

    


    15.           Inability
to Determine LIBOR.  If prior to the
first day of any Interest Period, Bank shall have determined (which
determination shall be conclusive and binding upon Borrower, absent manifest
error) that LIBOR can not be determined by any of the means set forth in the
definition of “LIBOR” and, by reason of circumstances affecting the London
Interbank Market, quotations of interest rates for the relevant Interest Periods
are not being provided to Bank in the relevant amount or for the relevant
maturities for purposes of determining LIBOR for such Interest Period, Bank
shall forthwith furnish notice of such determination, confirmed in writing, to
Borrower and thereafter any outstanding LIBOR Advance shall, on the last day of
the then applicable current Interest Period, be converted to a Prime Rate
Advance.


    
      
         


      

      
        12

        
          

        

      

      
         


      

    


    16.           Illegality.  Notwithstanding
any other provision herein, if the adoption of or any change in any law, rule,
regulation, guideline or order, or the interpretation or application thereof
shall make it unlawful for Bank to make or maintain LIBOR Advances as
contemplated hereunder (a) Bank shall promptly give notice thereof to Borrower,
(b) the obligation of Bank to make LIBOR Advances, continue LIBOR Advances as
such and convert Prime Rate Advances to LIBOR Advances shall forthwith be
cancelled and (c) Bank’s outstanding LIBOR Advances, if any, shall be converted
automatically to Prime Rate Advances as of the date notice is given to Borrower
under Subsection (a) hereof.

    


    17.           Additional
Costs.  If, as a result
of any change in applicable law, regulation, guideline or order, or in the
interpretation or application thereof by any governmental authority charged with
the administration thereof, there shall be imposed upon or made applicable to
Bank any reserve requirement against this Note or any other costs or assessments
(hereinafter “Additional Costs”),
Borrower shall pay to Bank, on demand (which demand shall be in writing and
which will set forth a calculation of such Additional Costs), an amount
sufficient to compensate Bank for such Additional Cost.  Bank’s
calculation of the amount of such Additional Costs shall be presumed correct
absent manifest error.

    


    18.           Collection
Expenses.  If this Note is
placed in the hands of an attorney for collection following the occurrence of an
Event of Default hereunder, Borrower agrees to pay to Bank upon demand costs and
expenses, including all attorney’s fees and court costs, paid or incurred by
Bank in connection with the enforcement or collection of this Note (whether or
not any action has been commenced by Bank to enforce or collect this Note) or in
successfully defending any counterclaim or other legal proceeding brought by
Borrower contesting Bank’s right collect the outstanding principal balance of
this Note.  The obligation of Borrower to pay all such costs and
expenses shall not be merged into any judgment by confession against
Borrower.  All of such costs and expenses shall bear interest at the
highest rate of Interest permitted under this Note from the date of payment by
Bank until repaid in full by the Obligor.

    


    19.           Interest
Rate after Judgment.  If judgment is
entered against Borrower on this Note, the amount of the judgment entered (which
may include principal, interest, fees and costs) shall bear interest at the
higher of (i) the legal rate of interest then applicable to judgments in the
jurisdiction in which judgment was entered, or (ii) if otherwise permitted by
applicable law, the Default Interest Rate provided herein.

    


    20.           Certain
Waivers by Borrower.  Borrower waives
demand, presentment, protest and notice of demand, of non-payment, of dishonor,
and of protest of this Note.  Bank, without notice to or further
consent of Borrower or any other Obligor and without in any respect
compromising, impairing, releasing, lessening or affecting the obligations of
Borrower hereunder or under of the Loan Documents, may: (a) release, surrender,
waive, add, substitute, settle, exchange, compromises, modify, extend or grant
indulgences with respect to (i) this Note, (ii) any of the Loan Documents,
and/or (iii) all or any part of any collateral or security for this Note; and/or
(iv) any Obligor; (b) complete any blank space in this Note according to the
terms upon which the loan evidenced hereby is made; and (c) grant any extension
or other postponements of the time of payment hereof.

     

    
      
         


      

      
        13

        
          

        

      

      
         


      

    


    21.           Choice of
Law: Forum Selection: Consent to Jurisdiction.  This Note shall
be governed by, construed and interpreted in accordance with the laws of the
State of New York (excluding the choice of law rules
thereof).  Borrower hereby irrevocably submits to the jurisdiction of
any New York court or federal court sitting in the State of New York in any
action or proceeding arising out of or relating to this Note, and hereby
irrevocably waives any objection to the laying of venue of any such action or
proceeding in any such court and any claim that any such action or proceeding
has been brought in an inconvenient forum.  A final judgment in any
such action or proceeding shall be conclusive and may be enforced in any other
jurisdiction by suit on the judgment or in any other manner provided by
law.

    


    22.           Subsequent
Holders.  In the event that
any holder of this Note transfers this Note for value, Borrower agrees that
except with respect to a subsequent holder with actual knowledge of a claim or
defense, no subsequent holder of this Note shall be subject to any claims or
defenses which Borrower may have against a prior holder (which claims or
defenses are not waived as to prior holder), all of which are waived as to the
subsequent holder, and that all such subsequent holders shall have all of the
rights of a holder in due course with respect to Borrower even though the
subsequent holder may not qualify, under applicable law, absent this paragraph,
as a holder in due course.

    


    23.           Invalidity
of Any Part.  If any provision
or part of any provision of this Note shall for any reason be held invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision (or any remaining part of
any provision) of this Note, and this Note shall be construed as if such
invalid, illegal or unenforceable provision (or part thereof) had never been
contained in this Note, but only to the extent of its invalidity, illegality, or
unenforceability.  In any event, if any such provision pertains to the
repayment of the Obligations evidenced by this Note, then and in such event, at
Bank’s option, the outstanding principal balance of this Note, together with all
accrued and unpaid interest thereon, shall become immediately due and
payable.

    


    24.           WAIVER OF
JURY TRIAL.  BORROWER HEREBY
(i)  COVENANTS AND AGREES NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE
TRIABLE OF RIGHT BY A JURY, AND (ii) WAIVES TRIAL BY JURY IN ANY ACTION OR
PROCEEDING TO WHICH BANK AND BORROWER MAY BE PARTIES ARISING OUT OF, IN
CONNECTION WITH OR IN ANY WAY PERTAINING TO THIS NOTE, ANY OF THE LOAN DOCUMENTS
AND/OR ANY TRANSACTIONS, OCCURRENCES, COMMUNICATIONS, OR UNDERSTANDINGS (OR THE
LACK OF ANY OF THE FOREGOING) RELATING IN ANY WAY TO BORROWER-BANK RELATIONSHIP
BETWEEN THE PARTIES.  IT IS UNDERSTOOD AND AGREED THAT THIS WAIVER
CONSTITUTES A WAIVER OF TRIAL BY JURY OF ALL CLAIMS AGAINST ALL PARTIES TO SUCH
ACTIONS OR PROCEEDINGS, INCLUDING CLAIMS AGAINST PARTIES WHO ARE NOT PARTIES TO
THIS NOTE.  THIS WAIVER OF JURY TRIAL IS SEPARATELY GIVEN, KNOWINGLY,
WILLINGLY AND VOLUNTARILY MADE BY BORROWER AND BORROWER HEREBY AGREES THAT NO
REPRESENTATIONS OF FACT OR OPINION HAVE BEEN MADE BY ANY INDIVIDUAL TO INDUCE
THIS WAIVER OF TRIAL BY JURY OR TO IN ANY WAY MODIFY OR NULLIFY ITS
EFFECT.  BANK IS HEREBY AUTHORIZED TO SUBMIT THIS NOTE TO ANY COURT
HAVING JURISDICTION OVER THE SUBJECT MATTER AND BORROWER SO AS TO SERVE AS
CONCLUSIVE EVIDENCE OF SUCH WAIVER OF RIGHT TO TRIAL BY
JURY.  BORROWER REPRESENTS AND WARRANTS THAT IT HAS BEEN REPRESENTED
IN THE SIGNING OF THIS NOTE AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT
LEGAL COUNSEL, SELECTED OF ITS OWN FREE WILL, AND/OR THAT IT HAS HAD THE
OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL.

     

    
      
         


      

      
        14

        
          

        

      

      
         


      

    


    25.           Waiver of
Defenses, Counterclaims, etc.  Borrower hereby
waives, in any litigation (whether or not arising out of or related to this note
or any other obligation or liabilities to Bank) in which Borrower and Bank shall
be adverse parties, the right to interpose any defense, set-off or counterclaim
of any nature or description, excluding mandatory counterclaims that, if not
raised in such proceeding, would be waived.

    


    26.           Indemnification.  The
Borrower agrees: (i) to pay and reimburse Bank for all of
its  reasonable and documented out-of-pocket costs and expenses
incurred in connection with the preparation and execution of, and any amendment,
supplement or modification to, this Note and the other Loan Documents, and the
consummation and administration of the transactions contemplated hereby and
thereby, including the reasonable fees, disbursements and other charges of
internal and external counsel, (ii) to pay and reimburse Bank for reasonable and
documented out-of-pocket costs and expenses incurred in connection with the
enforcement or preservation of any rights under this Note, Loan Documents and
any such other documents, including the reasonable fees, disbursements and other
charges of its counsel, whether internal or external, (iii) to pay, indemnify
and hold harmless the Bank and its directors, officers and agents (each, an
“Indemnified
Party” and collectively, “Indemnified Parties”)
from and against any and all other liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements of any
kind or nature whatsoever, including reasonable and documented fees,
disbursements and other charges internal or external counsel for all Indemnified
Parties in connection with the execution, delivery, enforcement, performance and
administration of this Note or the Loan Documents and any such other documents
or the use of the proceeds thereof, including any of the foregoing relating to
the violation of, noncompliance with or liability applicable to the operations
of the Borrower, any of its subsidiaries; provided that the Borrower shall have
no obligation hereunder to any Indemnified Party with respect to damages caused
directly by the gross negligence or willful misconduct of such Indemnified Party
as determined by a non-appealable final judgment.

    


    27.           Miscellaneous.  Time is of the
essence under this Note.  The paragraph headings of this Note are for
convenience only, and shall not limit or otherwise affect any of the terms
hereof.  This Note and the other Loan Documents, if any, constitute
the entire agreement between the parties with respect to their subject matter
and supersede all prior letters, representations, or agreements, oral or
written, with respect thereto. No modification, release, or waiver of this Note
shall be deemed to be made by Bank unless in writing signed by Bank, and each
such waiver, if any, shall apply only with respect to the specific instance
involved.  No course of dealing or conduct shall be effective to
modify, release or waive any provisions of this Note or any of the other Loan
Documents.  Borrower acknowledges that this Note is an instrument for
the payment of money only within the meaning of Section 3213 of the New York
Civil Practice Law & Rules.  This Note shall inure to the benefit
of and be enforceable by Bank and Bank’s successors and assigns and any other
person to whom Bank may grant an interest in the obligations evidenced by this
Note and shall be binding upon and enforceable against Borrower and Borrower’s
successors and assigns.  Whenever used herein, the singular number
shall include the plural, the plural the singular, and the use of the masculine,
feminine, or neuter gender shall include all genders.

     

    
      
         


      

      
        15

        
          

        

      

      
         


      

    


    Borrower:

    


    SMART
ONLINE INC.

    


    
      
        
          	
                  By:  

                	      
                  /s/
      Dror Zoreff

                
	 
      	
                  Name:  

                	
                  Dror
      Zoreff

                
	 
      	
                  Title:

                	
                  Interim
      Chief Executive Officer

                
	 
      	 
      	
                  and
      President

                


        

      

    

     

    
      
         


      

      
        16