REORGANIZATION, LOCK-UP, PROXY AND RELEASE AGREEMENT
(ALTERNATIVE 1)
This Reorganization Lock-up Proxy and Release Agreement (the
"AGREEMENT") is made and entered into as of January 1, 2004, by and between
Smart Online, Inc., a Delaware corporation (the "CORPORATION"), and the
undersigned stockholder of the Corporation ("STOCKHOLDER"). As used herein, the
"Corporation" includes Smart Online, Inc. and any successor to substantially all
of its business, whether by way of merger, asset sale or otherwise.
1. STOCK ISSUANCE AND CAPITAL RAISING ROYALTY.
(a) Effective immediately upon the later to occur (the "EFFECTIVE
TIME") of (x) effectiveness of the Amendment of the Certificate of Incorporation
set forth on SCHEDULE A attached hereto (the "AMENDMENT"), (y) effectiveness the
conversion of all shares of Series A Preferred Stock of the Corporation into
Common Stock at a rate of one share Common Stock for each share of Series A
Preferred Stock converted and (z) the Corporation closing a Qualifying
Financing:
(i) the Corporation shall issue to Stockholder as soon as
practicable after the Effective Time one additional share of
Common Stock for each share set forth next to the name of the
Stockholder on the signature page of this Agreement
("ALTERNATIVE #1 SHARES") so that Stockholder will own two
shares of Common Stock for each share of Series A Preferred
Stock included in Alternative #1 Shares; and
(ii) Stockholder shall have the right to receive for each
"Alternative #1 Share" within ten (10) business days after the
closing of any Covered Capital Raising Transaction. The Capital
Raising Royalty is the amount derived by multiplying the Net
Proceeds derived from Covered Capital Raising Transactions by
the Applicable Royalty Rate and then multiplying the result by
the Pro Rata Share of Stockholder.
The Amendment shall not be filed with the Secretary of State of the
State of Delaware until the closing of a Qualifying Financing. For purposes of
determining when the Amendment can be filed and the Series A Preferred Stock
converted, it shall be sufficient that the net proceeds and all signed documents
in connection with the Qualifying Financing be held in escrow with the only
condition to release being the filing of the Amendment and the conversion of the
Series A Preferred Stock as contemplated above. Shares of Common Stock issuable
pursuant to this Agreement or the conversion of the Series A Preferred Stock
shall be deemed to be issued at the Effective Time of the Reorganization for all
purposes of this Agreement notwithstanding that stock certificates are not
issued until a later date. The term Reorganization shall mean the issuance of
shares of Common Stock pursuant to this Agreement and pursuant to conversion of
the Series A Preferred Stock.
The Corporation is required to use the first $2,000,000 of net proceeds
of a Qualifying Financing first to repay all outstanding indebtedness in full
(subject to reduction by any concessions creditors are willing to make), but the
Corporation shall not be required to use net proceeds to pay in full outstanding
indebtedness to current and former employees and affiliates who sign standstill
agreements providing for a grace period on the payment of outstanding
indebtedness through December 31, 2003. In the event that the Corporation is
unable to obtain standstill agreements from each current and former employee and
affiliate to which the Corporation is currently indebted providing a grace
period on the payment of outstanding indebtedness through December 31, 2004,
then the aggregate amount of net proceeds for a Qualifying Financing shall be
increased by the amount necessary to repay the debt of these employees and
affiliates who have not signed standstill agreements. With respect to amounts
owed to the Internal Revenue Service, net proceeds must be used to pay all taxes
owed, but the Corporation may agree to make installment payments of interest and
penalties on such basis as the Internal Revenue Service agrees. The Corporation
shall satisfy this use of net proceeds if an amount of net proceeds required to
pay the total indebtedness required to be paid hereunder is placed in escrow
with the attorneys for the Corporation while the Corporation negotiates payments
and releases with its creditors under escrow terms which prohibit use of
escrowed funds for other purposes until the repayment of debt as described
above. Until interest and penalties are determined by agreement with the
Internal Revenue Service and are paid, the Corporation shall also maintain in
such escrow 25% of the amount by which the net proceeds exceeds $2,000,000, such
amount to be used to pay such interest and penalties.
"COVERED CAPITAL RAISING TRANSACTION" means (i) any Qualifying Financing
occurring on or before December 31, 2004 and (ii) any other transaction in which
the Corporation receives cash or cash equivalents from the sale of capital stock
or debt convertible into shares of capital stock (including any exercise during
2004 of warrants or options issued in connection with the sale of capital stock
or convertible debt occurring on or after the Effective Time and on or before
December 31, 2004), provided the sale occurs on or after the Effective Time and
on or before December 31, 2004.
"APPLICABLE ROYALTY RATE" means (i) 20% of Net Proceeds in excess of $5
million and up to $10 million, (ii) 30% of Net Proceeds in excess of Ten Million
and up to $15 million and (iii) 40% of Net Proceeds in excess of $15 million and
up to $20 million. In determining the forgoing dollar break points, all Net
Proceeds received from any Covered Capital Raising Transaction shall be added
together on a cumulative basis.
"NET PROCEEDS" means all cash and cash equivalents received by the
Corporation in Covered Capital Raising Transactions, less investment banking
fees, commissions and expenses and financial consulting, legal, accounting,
travel and other fees and expenses incurred in the process of selling the
securities not to exceed ten percent of the cash and cash equivalents received
in such Capital Raising Transactions ("Net Proceeds").
"QUALIFYING FINANCING" means one or more sales by the Corporation of
shares of its Common Stock for a purchase price of not less than an average of
$1.30 per share for all shares issued in the financing (including shares issued
to finders) and resulting in aggregate net proceeds (after deducting transaction
expenses of up to 10% of money raised) of not less than $2,000,000, provided
that (i) neither the number of shares sold nor the purchase price of such shares
is subject to future adjustment (including any adjustment based on subsequent
dilutive issuances or the Corporation's financial performance), (ii) neither the
shares of Common Stock issued in such transaction(s) nor the purchasers of such
shares of Common Stock are entitled to any liquidation preference, dividend
rights or redemption right or any other right to receive greater economic
benefits from ownership of their Common Stock than other holders of Common
Stock, (it being understood that registration rights, Board voting or observer
rights, first refusal rights, representations, warranties, indemnification and
other similar contractual provisions do not disqualify this transaction from
being a Qualifying Financing) or to any special voting or approval rights,
except that the Corporation can agree (x) to elect a number of designees of the
investors in a Qualifying Financing to its Board of Directors provided the
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number is not more than one third of the number of Directors constituting the
whole Board; and (y) to restrictions on the use of proceeds if such restrictions
are not inconsistent with this Agreement, and (iii) the Corporation agrees to
use at least $2,000,000 of the net proceeds from such financing to repay its
outstanding indebtedness.
"PRO RATA SHARE" of Stockholder for purposes of calculating the Capital
Raising Royalty means the percentage derived by dividing (i) the number of
Reorganization Shares of Stockholder, by (ii) the aggregate number of
Reorganization Shares of all stockholders of the Corporation who sign agreements
with the Corporation requiring the Corporation to pay a Capital Raising Royalty.
"REORGANIZATION SHARES" means shares of Series A Preferred Stock owned
by any stockholder of the Corporation who has signed any agreement requiring the
Corporation to pay any Capital Raising Royalty.
(c) The Corporation shall have the right to require Stockholder to
provide the following as a condition to Stockholder receiving any Alternative
One Shares or the Corporation making any payment required by this Agreement:
(i) the certificate representing shares of Series A Preferred Stock
of Stockholder; and
(ii) a stock power signed by Stockholder in form and substance
acceptable to the Corporation.
(d) Stockholder hereby represents and warrants to the Corporation:
(i) Stockholder is the sole owner of the number of Series A
Preferred Stock set forth on the signature page to this
Agreement (the "Covered Preferred Shares") with full power to
execute, deliver and perform this Agreement, and no consent or
approval of any person or entity is required to execute, deliver
and perform this Agreement;
(ii) There are no liens or other encumbrances on the Covered
Preferred Shares;
(iii) Execution, delivery and performance of this Agreement by
Stockholder does not violate any agreement the Stockholder has
with any other person or entity;
(iv) All action required to authorize execution, delivery and
performance of this Agreement by Stockholder has been taken; and
(v) Stockholder has reviewed the attached Business Plan dated
December 2003 provided by the Corporation, fully understands the
same and the Corporation has afforded the Stockholder the
opportunity to ask any questions Stockholder desires to ask.
2. APPOINTMENT OF PROXY.
(a) The undersigned Stockholder hereby irrevocably constitutes and
appoints ▇▇▇▇▇▇▇ ▇▇▇▇▇ attorney and proxy with full power of substitution to act
and vote all the shares of the Corporation held by the undersigned in connection
with any meeting or written consent of the stockholders of the Corporation to
approve the matters described below, and at any adjournment or adjournments
thereof, provided such stockholders meeting is held, or written consent is
circulated, on
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or before April 30, 2004. The undersigned hereby directs this proxy to be voted
solely with respect to the following matters:
(i) For approval of the Amendment to the Certificate of
Incorporation in the form attached on Schedule A to this
Agreement (the "Amendment").
(ii) For approval of the conversion of all shares of Series A
Preferred Stock of the Corporation into Common Stock as provided
in the Amendment.
(b) This proxy is given to induce the Corporation to enter into this
Agreement, it being agreed by the undersigned Stockholder that entering into
this Agreement causes the appointment of the named proxy to be coupled with an
interest.
(c) In the event that, as the result of a stock split or stock
dividend or combination of shares or any other change, or exchange for other
securities, by reclassification, reorganization, merger, consolidation,
recapitalization or otherwise, Stockholder should be entitled to new or
additional or different shares of stock or securities, such new or substitute
shares or securities shall be subject to this proxy.
(d) The Amendment shall not be filed with the Secretary of State of
the State of Delaware until the closing of a Qualifying Financing.
3. LOCKUP AGREEMENT.
(a) Stockholder hereby agrees that, except as permitted under
subsection (b) of this Section 3, during the Restricted Period, as defined
herein, Stockholder will not:
(i) Sell any securities of the Corporation or Holding Company.
(ii) Transfer, assign or otherwise dispose of any securities of the
Corporation or Holding Company.
(iii) Pledge, hypothecate or otherwise create a lien on any securities
of the Corporation or the Holding Company.
(iv) Loan to any person or entity any securities of the Corporation
or Holding Company.
(v) Sell short any securities of the Corporation or Holding Company.
(vi) Acquire a put option or grant a call option with respect to any
securities of the Corporation or Holding Company.
(vii) Enter into any agreement concerning any of the foregoing
transactions, or otherwise facilitate any other person
conducting any of the foregoing transactions.
(b) For purposes of this Section 3, Holding Company shall mean any
company whose stock is publicly traded (i) with which the Corporation merges or
consolidates or (ii) of which the Corporation or its successor becomes a
subsidiary. For purposes of this Section 3, the Restricted Period shall mean the
period beginning on the Effective Time and ending on September 30, 2006.
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Commencing October 1, 2005, Stockholder may sell, during any calendar month
until the end of the Restricted Period, up to eight and one half percent (8.5%)
of the shares of the Corporation owned by Stockholder as of the Effective Time
or any shares of Holding Company issued in respect of such shares owned as of
the Effective Time. The Board of Directors of the Corporation or Holding Company
may terminate the Restricted Period or allow Stockholder to take a prohibited
action prior to termination of the Restricted Period with respect to some or all
of the securities owned by the Stockholder, if the Board provides all other
stockholders of the Corporation or Holding Company who have the same Restricted
Period with the same termination or waiver at the same time and to the same
extent as for Stockholder.
(c) Notwithstanding the foregoing, provided the transferee first
signs a Lockup Agreement on substantially the terms set forth in this Section 3
and reasonably acceptable to the Corporation or Holding Company, Stockholder may
transfer securities of the Corporation or Holding Company without payment or
other consideration: (i) if Stockholder is an individual, to any family member,
(ii) if Stockholder is a corporation, to any direct or indirect parent or
subsidiary or any shareholder of Stockholder, (iii) if Stockholder is a
partnership, to any partner of Stockholder, (iv) if Stockholder is a limited
liability company, to any member of Stockholder, and (v) if Stockholder is a
trust, to any beneficiary of such trust.
(d) Stockholder further agrees that before and after termination of
the Restricted Period, Stockholder will comply with all securities laws, rules
and regulations when purchasing or reselling securities of the Corporation or
Holding Company, including, without limitation, those prohibiting sales and
purchases of securities while in possession of material nonpublic information.
(e) The securities of Stockholder shall have a legend in form and
substance acceptable to the Corporation and Holding Company referring to the
restrictions of this Agreement and the Corporation or Holding Company may
instruct the transfer agent of the Corporation Holding Company to stop any
transfer of any securities in violation of this Agreement and may take any other
action required to avoid violation of this Agreement, including, without
limitation, obtaining an injunction.
(f) Unless the Corporation obtains lock-up agreements at least as
restrictive as the provisions of this Section 3 from each of the following
groups of securities holders of the Corporation, which agreements cover all
securities of the Corporation owned by such persons immediately after the
Effective Time of the Reorganization (including options to acquire such
securities), the provisions of this Section 3 shall be of no force or effect:
(i) holders of 80% of the shares of Common Stock issued in the Reorganization to
persons who own Series A Preferred Stock immediately prior to the Effective Time
of the Reorganization and do not elect Alternative #2, (ii) ▇▇▇▇▇▇▇ ▇▇▇▇▇
(including any of his affiliates), (iii) each person who is an employee of the
Corporation as of the Effective Time of the Reorganization, (iv) holders of 80%
of the shares of Common Stock of the Corporation outstanding immediately
following the Effective Time of the Reorganization, not including shares issued
in a Qualifying Financing or shares of Common Stock issued in the Reorganization
to holders of Series A Preferred Stock, and (v) holders of options (but not
warrants) to purchase 75% of the shares of Common Stock issuable upon exercise
of all options outstanding immediately following the Effective Time of the
Reorganization.
The percentage of shares of capital stock of the Corporation owned by
Stockholder that is subject to the provisions of this Section 3 shall be the
percentage obtained by dividing (i) the aggregate number of shares of Common
Stock outstanding immediately after the Effective Time of
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the Reorganization (not including shares issued in the Qualifying Financing),
plus the number of shares of Common Stock issuable upon exercise of stock
options outstanding immediately after the Effective Time of the Reorganization
(not including any options issued in connection with the Qualifying Financing)
in each case owned by people who sign lockup agreements with provisions at least
as restrictive as this Section 3 by (ii) the aggregate number of shares of
Common Stock outstanding immediately after the Effective Time of the
Reorganization (not including shares issued in the Qualifying Financing), plus
the number of shares of Common Stock issuable upon exercise of stock options
outstanding immediately after the Effective Time of the Reorganization (not
including any options issued in connection with the Qualifying Financing).
4. RELEASES.
(a) In consideration of the release provided in subsection (b)
below, Stockholder, for himself/herself/itself and for each of Stockholder's
directors, officers, employees, agents, attorneys, legal successors and assigns,
hereby absolutely, unconditionally and irrevocably releases and forever
discharges the Corporation and its directors, officers, employees, agents,
attorneys, legal successors and assigns, individually and jointly, from any and
all causes of actions, suits, promises, representations, contracts, obligations,
claims, counterclaims, defenses, demands, debts, accounts, reckonings,
obligations, costs, rights of set off, demands or liabilities whatsoever, in law
or equity, whether the same or whether the facts on which the same may be based
are now known or unknown, suspected or unsuspected, which he/she/it, has, may
have, has ever had, or hereafter can, shall or may have, for, upon or by reason
of any matter, cause or thing whatsoever occurring through the date of this
Agreement arising out of Stockholder's purchase or ownership of any securities
of the Corporation (collectively, "LIABILITIES").
(b) In consideration of the release provided in subsection (a)
above, the Corporation hereby absolutely, unconditionally and irrevocably
releases and forever discharges Stockholder and, as applicable, its directors,
officers, employees, agents, attorneys, legal successors and assigns,
individually and jointly, from any and all causes of actions, suits, promises,
representations, contracts, obligations, claims, counterclaims, defenses,
demands, debts, accounts, reckonings, obligations, costs, rights of set off,
demands or liabilities whatsoever, in law or equity, whether the same or whether
the facts on which the same may be based are now known or unknown, suspected or
unsuspected, which he/she/it, has, may have, has ever had, or hereafter can,
shall or may have, for, upon or by reason of any matter, cause or thing
whatsoever occurring through the date of this Agreement arising out of
Stockholder's purchase or ownership of any securities of the Corporation
(collectively, "LIABILITIES").
(c) It is the parties' intention in executing this Agreement and in
giving and receiving the consideration called for by this Agreement that this
Agreement shall be effective as a full and final accord and satisfaction and
release of all Liabilities released under subsections (a) or (b) (the "RELEASED
LIABILITIES"). Each party acknowledges that it is aware that it or its attorneys
or its accountants may hereafter discover Liabilities or facts in addition to or
different from those which it now knows or believes to exist with respect to the
Released Liabilities, but that it is its intention hereby to fully, finally, and
forever settle and release all disputes and differences with respect to the
Released Liabilities. In furtherance of this intention, the releases hereby
given shall be and remain in effect as a full and complete release
notwithstanding the discovery or existence of any such additional or different
Liability or fact.
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(d) The above releases shall not be effective for any claims arising
from a breach of this Agreement, for any claims relating to fraud or for any
claims relating to any untrue statement of a material fact or any failure to
disclose a material fact necessary in order to make the statements made with
respect to the transactions contemplated by this Agreement, in light of the
circumstances under which they were made, not misleading. Nothing contained
herein shall be construed to supercede or amend the terms of any
confidentiality, noncompetitive or similar agreement between Stockholder and the
Corporation.
5. TERMINATION OF EXISTING AGREEMENTS. Stockholder and the Corporation
hereby agree to terminate the Stock Rights Agreement dated as of August 10,
1999, as amended to date, and the Amended and Restated Stockholders' Agreement,
dated as of August 6, 1999, as amended to date. Termination shall be effective
upon the Effective Time.
6. TERMINATION OF THIS AGREEMENT. The Corporation agrees not to file the
Amendment with the Secretary of State of the State of Delaware, unless the
Corporation has closed a Qualifying Financing. This Agreement may be terminated
by either Stockholder or the Corporation, if the Effective Time does not occur
on or before April 30, 2004. Upon termination neither Stockholder nor the
Corporation shall have any liability to the other arising out of the Agreement.
Termination shall be effective upon receipt of written notice of termination
provided by Stockholders to the principal office of the Corporation or by the
Corporation to the address of Stockholder set forth below the signature of
Stockholder.
7. This Agreement shall be subject to the laws of the State of Delaware.
8. This Agreement may be executed in one or more counterparts.
9. The Corporation may assign this Agreement to any successor to
substantially all of its business.
[The remainder of the page is intentionally left blank.]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement, as
of the date first above written.
SMART ONLINE, INC.
By: _______________________________________
▇▇▇▇▇▇▇ ▇▇▇▇▇, Chief Executive Officer
STOCKHOLDER:
___________________________________________
Print Name_________________________________
Address____________________________________
______________ Number Shares of Series A Convertible Preferred Stock of
Stockholder Subject to this Agreement. These shares are subject to Alternative
#1 of the Reorganization.
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SCHEDULE A
CERTIFICATE OF AMENDMENT OF
THE CERTIFICATE OF INCORPORATION
OF
SMART ONLINE, INC.
(PURSUANT TO SECTION 242 OF THE GENERAL CORPORATION LAW
OF THE STATE OF DELAWARE)
IT IS HEREBY CERTIFIED THAT:
1. The name of the corporation is Smart Online, Inc. (the
"Corporation"). The Certificate of Incorporation was originally filed on August
10, 1993 under the name American Institute for Financial Research, Inc.
2. The Board of Directors of the Corporation duly adopted a
resolution proposing and declaring it advisable that Article IVC4(b) of the
Certificate of Incorporation of the Corporation be amended in its entirety to
read as follows:
(b) AUTOMATIC CONVERSION. Each share of Series A Preferred
Stock shall automatically be converted into shares of Common Stock
immediately upon, and contemporaneously with, (i) the closing of the
sale of the Corporation's Common Stock in a public offering registered
under the Securities Act of 1933, as amended (the "Act"), other than a
registration relating solely to a transaction under Rule 145 under such
Act (or any successor thereto) or to an employee benefit plan of the
Corporation (a "Qualified Public Offering"), or (ii) the vote or written
consent of 80 percent of the issued and outstanding shares of Series A
Preferred Stock
3. This amendment to the Certificate of Incorporation was duly
adopted in accordance with the applicable provisions of Section 242 of the
General Corporation Law of Delaware.
4. This amendment to the Certificate of Incorporation shall be
effective on and as of the date of filing of this Certificate of Amendment with
the Office of the Secretary of State of the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
executed in its name by its President on this the ___ day of _____________,
2004, and the statements contained herein are affirmed as true under penalties
of perjury.
SMART ONLINE, INC.
By:_________________________________
D. ▇▇▇▇▇▇▇ ▇▇▇▇▇, President
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