-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Bs1ZTf4pcPYesg5lzR2TdLm/P6qaF5kRqKiLytiEZMB5PntaupZt5MoKrUvCmIlL i5sPdO+wOImcW71+i03grQ== 0000891618-03-000549.txt : 20030205 0000891618-03-000549.hdr.sgml : 20030205 20030205172443 ACCESSION NUMBER: 0000891618-03-000549 CONFORMED SUBMISSION TYPE: SC 13D/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 20030205 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: ACCRUE SOFTWARE INC CENTRAL INDEX KEY: 0001087243 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 943238684 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: SC 13D/A SEC ACT: 1934 Act SEC FILE NUMBER: 005-57729 FILM NUMBER: 03541308 BUSINESS ADDRESS: STREET 1: 48634 MILMONT DRIVE CITY: FREMONT STATE: CA ZIP: 94538 BUSINESS PHONE: 5105804500 MAIL ADDRESS: STREET 1: 48634 MILMONT DR CITY: FREMONT STATE: CA ZIP: 94538 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: SMELICK ROBERT CENTRAL INDEX KEY: 0001162720 FILING VALUES: FORM TYPE: SC 13D/A BUSINESS ADDRESS: STREET 1: C/O STERLING PAYOT CAPITAL INC STREET 2: 65 CLOUDVIEW ROAD CITY: SAUSALITO STATE: CA ZIP: 94865 BUSINESS PHONE: 4152892590 MAIL ADDRESS: STREET 1: C/O STERLING PAYOT CAPITAL INC STREET 2: 65 CLOUDVIEW ROAD CITY: SAUSALITO STATE: CA ZIP: 94965 SC 13D/A 1 f87429a1sc13dza.txt AMENDMENT #1 TO SCHEDULE 13D CUSIP NO. 00437W102 PAGE 1 OF 9 PAGES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------- SCHEDULE 13D/A (RULE 13d-101) INFORMATION TO BE INCLUDED IN STATEMENTS FILED PURSUANT TO RULE 13d-1(A) AND AMENDMENTS THERETO FILED PURSUANT TO RULE 13D-2(a) (AMENDMENT NO. 1)* Accrue Software, Inc. - -------------------------------------------------------------------------------- (Name of Issuer) Common Stock, par value $0.001 per share - -------------------------------------------------------------------------------- (Title of Class of Securities) 00437W102 - -------------------------------------------------------------------------------- (CUSIP Number) Robert M. Smelick, c/o Sterling Payot Company, 65 Cloudview Road, Sausalito, CA 94965, (415) 289-2590 - -------------------------------------------------------------------------------- (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications) February 4, 2003 - -------------------------------------------------------------------------------- (Date of Event which Requires Filing of this Statement) If the filing person has previously filed a statement on Schedule 13G to report the acquisition which is the subject of this Schedule 13D/A, and is filing this schedule because of Rule 13d-1(e), 13d-1(f) or 13d-1(g), check the following box. Note: Schedules filed in paper format shall include a signed original and five copies of the Schedule, including all exhibits. See Rule 13d-7(b) for other parties to whom copies are to be sent. *The remainder of this cover page shall be filled out for a reporting person's initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page. The information required on the remainder of this cover page shall not be deemed to be "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934 ("Act") or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes). SCHEDULE 13D/A CUSIP NO. 00437W102 PAGE 2 OF 9 PAGES - -------------------------------------------------------------------------------- 1 NAME OF REPORTING PERSON I.R.S. IDENTIFICATION NO. OF ABOVE PERSON (ENTITIES ONLY) Robert M. Smelick - -------------------------------------------------------------------------------- 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) (b) X - -------------------------------------------------------------------------------- 3 SEC USE ONLY - -------------------------------------------------------------------------------- 4 SOURCE OF FUNDS* WC, PF - -------------------------------------------------------------------------------- 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) OR 2(e) [ ] - -------------------------------------------------------------------------------- 6 CITIZENSHIP OR PLACE OF ORGANIZATION UNITED STATES OF AMERICA - -------------------------------------------------------------------------------- 7 SOLE VOTING POWER 7,859,484 NUMBER OF --------------------------------------------------------------- SHARES 8 SHARED VOTING POWER BENEFICIALLY 0 OWNED BY --------------------------------------------------------------- EACH 9 SOLE DISPOSITIVE POWER REPORTING 7,859,484 PERSON --------------------------------------------------------------- WITH 10 SHARED DISPOSITIVE POWER 0 - -------------------------------------------------------------------------------- 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 7,859,484 - -------------------------------------------------------------------------------- 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* [ ] - -------------------------------------------------------------------------------- 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 21.4% - -------------------------------------------------------------------------------- 14 TYPE OF REPORTING PERSON* - -------------------------------------------------------------------------------- *SEE INSTRUCTIONS BEFORE FILLING OUT! INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7 (INCLUDING EXHIBITS) OF THE SCHEDULE, AND THE SIGNATURE ATTESTATION. SCHEDULE 13D/A CUSIP NO. 00437W102 PAGE 3 OF 9 PAGES ITEM 1 - SECURITY AND ISSUER Common Stock, par value $0.001 per share(1) Accrue Software, Inc. 48634 Milmont Drive Fremont, California 94538-7353 ITEM 2 - IDENTITY AND BACKGROUND (a) Robert M. Smelick (b) Sterling Payot Company 65 Cloudview Road Sausalito, CA 94965 (c) Mr. Smelick is the managing director of Sterling Payot Management, Inc., the general partner of Sterling Payot Capital, LP, an investment partnership specializing in technology based start-up companies, and he is also a managing principal and founding director of Sterling Payot Company, a private investment banking firm, a member of Headland Management Co., LLC, and the managing member of Red Fox Investment Partners LLC (the aforementioned businesses, collectively, the "Smelick Companies"). Mr. Smelick is also Chairman of the Board of Directors of the Issuer. The principal business address of each of the Smelick Companies is 65 Cloudview Road, Sausalito, CA 94965. Mr. Smelick is the trustee of each of the Alexandra McBryde Smelick Trust dated 6/90, the Christopher Paine Smelick Trust dated 6/90 and the Gillian Sterling Smelick Trust dated 6/90 (the aforementioned trusts, collectively, the "Smelick Trusts"). The sole beneficiary of each of the Smelick Trusts is a child of Mr. Smelick. Mr. Smelick is the spouse of Gail S. Smelick and the son of Mary H. Smelick. The Smelick Companies, the Smelick Trusts, Gail S. Smelick and Mr. Smelick are sometimes collectively referred to herein as the "Smelick Parties". (d) Not applicable. (e) Not applicable. - -------- (1) The additional shares of Common Stock to which this statement relates are issuable upon the conversion of certain Secured Convertible Promissory Notes dated February 4, 2003 (the "Notes"). The principal and, at the request of the holder of the Note, the accrued but unpaid interest on the Notes is convertible upon the consent of the holders of a majority of the outstanding principal amount of the Notes into shares of Common Stock or, in the event that there is a series of Preferred Stock of the Company issued or proposed to be issued, into the most senior series of such Preferred Stock. At this time, no such series of Preferred Stock exists. The number of shares into which the Notes may convert is determined by dividing (i) the principal amount of the Note plus, if applicable, the accrued but unpaid interest under the Note by (ii) $0.06 (as adjusted from time-to-time as set forth in the Notes). SCHEDULE 13D/A CUSIP NO. 00437W102 PAGE 4 OF 9 PAGES (f) Mr. Smelick is a citizen of the United States of America. ITEM 3 - SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION On February 4, 2003, the Smelick Parties acquired two Secured Convertible Promissory Notes in an aggregate principal amount of $395,923.29, which Notes are convertible at $0.06 per share (as adjusted from time-to-time as set forth in the Notes) into an aggregate of 6,598,721 shares of Common Stock or, in the event that there is a Preferred Stock issued or proposed to be issued, into Preferred Stock (as described in the Note). The first such Note, in the principal amount of $60,349.72, was purchased by Mr. Smelick through a cancellation of indebtedness owed by the Issuer to Mr. Smelick pursuant to a $12,000 Secured Promissory Note sold to Mr. Smelick on October 11, 2002 and a $48,000 Secured Promissory Note sold to Mr. Smelick on October 25, 2002 (collectively, the "Smelick Notes"). Mr. Smelick paid for the Smelick Notes with his personal funds. The second Note, in the principal amount of $335,573.57, was purchased by Sterling Payot Capital, LP through a combination of $15,000 of cash and a cancellation of indebtedness in the amount of $320,573.57 owed by the Issuer to Sterling Payot Capital, LP pursuant to a $320,100 Secured Promissory Note sold to Sterling Payot Capital, LP on January 16, 2002 (the "SPC Note"). The amounts paid by Sterling Payot Capital, LP for its Note and the SPC Note were from its working capital. In addition, Mr. Smelick holds stock options to purchase 100,000 shares of Common Stock, which are currently exercisable or exercisable within 60 days of February 4, 2003. ITEM 4 - PURPOSE OF TRANSACTION Mr. Smelick acquired and continues to hold the shares of Common Stock reported herein for investment purposes. Mr. Smelick intends to review continuously his equity position in the Issuer and that of the entities in which he has or shares voting and dispositive control. Depending upon future evaluations of the business prospects of the Issuer and upon other developments, including, but not limited to, general economic and business conditions and money market and stock market conditions, Mr. Smelick may determine to increase or decrease his equity interest in the Issuer or the equity interest in the Issuer of the entities which he controls or shares control by acquiring additional shares of Common Stock or by disposing of all or a portion of such holdings, subject to any applicable legal and contractual restrictions on his ability to do so. Except as disclosed in this Item 4, Mr. Smelick has no current plans or proposals that relate to or would result in any of the following, although Mr. Smelick may consider certain of such types of transactions and reserves the right to develop such plans or proposals in the future: (a) The acquisition by any person of additional securities of the Issuer, or the disposition of securities of the Issuer; (b) An extraordinary corporate transaction, such as a merger, reorganization, or liquidation, involving the Issuer or any of its subsidiaries; SCHEDULE 13D/A CUSIP NO. 00437W102 PAGE 5 OF 9 PAGES (c) A sale or transfer of a material amount of assets of the Issuer or any of its subsidiaries; (d) Any change in the present board of directors or management of the Issuer, including any plans or proposals to change the number or terms of directors or to fill any existing vacancies on the board; (e) Any material change in the present capital or dividend policy of the Issuer; (f) Any other material change in the Issuer's business or corporate structure; (g) Changes in the Issuer's charter, bylaws, or instruments corresponding thereto or other actions that may impede the acquisition of control of the Issuer by any person; (h) Causing a class of securities of the Issuer to be delisted from a national securities exchange or to cease to be authorized to be quoted in an inter-dealer quotation system of a registered national securities association; (i) A class of equity securities of the Issuer becoming eligible for termination of registration pursuant to Section 12(g)(4) of the Securities Exchange Act of 1934; or (j) Any action similar to any of those set forth in (a) through (i) above. ITEM 5 - INTEREST IN SECURITIES OF THE ISSUER (a) (i) Amount beneficially owned: 7,859,484 (ii) Percent of class: 21.4% Mr. Smelick expressly declares that his filing of this Schedule 13D/A shall not be construed as an admission that he is, for the purposes of Section 13(d) or 13(g) of the Act, the beneficial owner of any securities covered by this Schedule 13D/A except for 100,000 shares subject to options exercisable in 60 days which Mr. Smelick owns directly, an additional 409,969 shares which Mr. Smelick owns directly, 118,666 shares owned by Gail S. Smelick, 1,980 shares owned by Mary H. Smelick, an aggregate of 464,331 shares held by the Smelick Trusts and 1,005,828 shares issuable upon the conversion of the Note purchased individually by Mr. Smelick. (b) Number of shares as to which the person has: (i) Sole power to vote or to direct the vote: 7,859,484 (ii) Shared power to vote or to direct the vote: 0 (iii) Sole power to dispose or to direct the disposition of: 7,859,484 SCHEDULE 13D/A CUSIP NO. 00437W102 PAGE 6 OF 9 PAGES (iv) Shared power to dispose or to direct the disposition of: 0 (c) Other than the transaction described in item 3, which occurred in offices located in Menlo Park, California, the person named in item 2 has conducted no other transactions involving Common Stock of the issuer during the last 60 days. (d) Not applicable. During the fiscal year ended March 30, 2002, the Issuer did not pay dividends and has declared its intention to retain future earnings to finance the growth and development of its business and, accordingly, it does not anticipate paying cash dividends on its Common Stock in the foreseeable future. (e) Not applicable. ITEM 6 - CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO SECURITIES OF THE ISSUER Mr. Smelick and the Issuer are parties to a Notice of Stock Option Grant (the "2001 Notice") and Stock Option Agreement dated as of September 28, 2001 (the "2001 Agreement", the 2001 Notice and the 2001 Agreement collectively, the "2001 Option") pursuant to which the Issuer granted Mr. Smelick a nonstatutory stock option to purchase 100,000 shares of Common Stock (the "2001 Option Shares") at an exercise price of $0.22. The 2001 Option vests at a rate of 1/24th per month beginning on April 4, 2001, provided that an additional 25% of the 2001 Option Shares shall vest if Mr. Smelick's employment or consulting relationship is terminated without cause within three months of a change of control of the Issuer, all as more fully described in the 2001 Option which is attached hereto as Exhibits 1 and 2. Mr. Smelick and the Issuer are parties to that certain Secured Convertible Note Purchase Agreement (the "Agreement") dated as of February 4, 2003 pursuant to which the Issuer sold to Mr. Smelick, Sterling Payot Capital, LP and other parties certain Secured Convertible Promissory Notes (the "Note"). Under the Agreement, Mr. Smelick and Sterling Payot Capital, LP purchased Notes in principal amounts of $60,349.72 and $335,573.57, respectively, which are convertible, at the option of a majority of the holders of all Notes sold under to the Agreement, into an aggregate of 6,598,721 shares of Common Stock or, in the event that there is a Preferred Stock issued or proposed to be issued, into Preferred Stock of the Issuer, all as more fully described in the Agreement and Notes which are attached hereto as Exhibits 3, 4 and 5. SCHEDULE 13D/A CUSIP NO. 00437W102 PAGE 7 OF 9 PAGES ITEM 7 - MATERIAL TO BE FILED AS EXHIBITS 1. Notice of Stock Option Grant dated as of September 28, 2001 between Accrue Software, Inc. and Robert M. Smelick. 2. Stock Option Agreement dated as of September 28, 2001 between Accrue Software, Inc. and Robert M. Smelick. 3. Secured Convertible Note Purchase Agreement between Accrue Software, Inc. and the purchasers listed on Exhibit A thereto dated as of February 4, 2003. 4. Secured Convertible Promissory Note issued by Accrue Software, Inc. to Robert M. Smelick in the principal amount of $60,349.72 dated February 4, 2003. 5. Secured Convertible Promissory Note issued by Accrue Software, Inc. to Sterling Payot Capital, LP in the principal amount of $335,573.57 dated February 4, 2003. SCHEDULE 13D/A CUSIP NO. 00437W102 PAGE 8 OF 9 PAGES SIGNATURE After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. Date: February 4, 2003 /s/ Robert M. Smelick -------------------------------- Robert M. Smelick The original statement shall be signed by each person on whose behalf the statement is filed or his authorized representative. If the statement is signed on behalf of a person by his authorized representative (other than an executive officer or general partner of this filing person), evidence of the representative's authority to sign on behalf of such person shall be filed with the statement, provided, however, that a power of attorney for this purpose which is already on file with the Commission may be incorporated by reference. The name and any title of each person who signs the statement shall be typed or printed beneath his signature. Attention: Intentional misstatements or omissions of fact constitute Federal criminal violations (See 18 U.S.C. 1001) SCHEDULE 13D/A CUSIP NO. 00437W102 PAGE 9 OF 9 PAGES EXHIBIT INDEX Description
EXHIBIT INCORPORATED BY REFERENCE FILED ------------------------- NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH - ------ ------------------- ---- ---- ------ -------- 1 Notice of Stock Option Grant dated as of September 28, 2001 13D 11/8/01 3 between Accrue Software, Inc. and Robert M. Smelick 2 Stock Option Agreement dated as of September 28, 2001 13D 11/8/01 4 between Accrue Software, Inc. and Robert M. Smelick. 3 Secured Convertible Note Purchase Agreement between Accrue Software, Inc. and the purchasers listed on Exhibit A thereto dated as of February 4, 2003. X 4 Secured Convertible Promissory Note issued by Accrue Software, Inc. to Robert M. Smelick in the principal amount of $60,349.72 dated February 4, 2003. X 5 Secured Convertible Promissory Note issued by Accrue Software, Inc. to Sterling Payot Capital, LP in the principal amount of $335,573.57 dated February 4, 2003. X
EX-3 3 f87429a1exv3.txt EXHIBIT 3 Exhibit 3 ACCRUE SOFTWARE, INC. SECURED CONVERTIBLE NOTE PURCHASE AGREEMENT FEBRUARY 4, 2003 ACCRUE SOFTWARE, INC. SECURED CONVERTIBLE NOTE PURCHASE AGREEMENT This Secured Convertible Note Purchase Agreement (the "Agreement") is made as of the 4th day of February, 2003 by and between Accrue Software, Inc., a Delaware corporation (the "Company") and each of the purchasers listed on Exhibit A attached to this Agreement (each a "Purchaser" and together the "Purchasers"). RECITALS The Company desires to issue and sell, and each Purchaser desires to purchase, a secured convertible promissory note in substantially the form attached to this Agreement as Exhibit B (the "Note") which shall be convertible on the terms stated therein into equity securities of the Company. The Notes and the equity securities issuable upon conversion thereof (and the securities issuable upon conversion of such equity securities) are collectively referred to herein as the "Securities." AGREEMENT In consideration of the mutual promises contained herein and other good and valuable consideration, receipt of which is hereby acknowledged, the parties to this Agreement agree as follows: 1. PURCHASE AND SALE OF NOTES. (a) SALE AND ISSUANCE OF NOTES. Subject to the terms and conditions of this Agreement, each Purchaser agrees to purchase at the Closing (as defined below) and the Company agrees to sell and issue to each Purchaser a Note in the principal amount set forth opposite such Purchaser's name on Exhibit A. The purchase price of each Note shall be equal to 100% of the principal amount of such Note. The Company's agreements with each of the Purchasers are separate agreements, and the sales of the Notes to each of the Purchasers are separate sales, subject to Section 6(c) hereof. (b) CLOSING; DELIVERY. (i) The purchase and sale of the Notes shall take place at the offices of Venture Law Group, a Professional Corporation, 2775 Sand Hill Road, Menlo Park, California, at 10:00 a.m., on February 4th, 2003, or at such other time and place as the Company and the Purchasers mutually agree upon, orally or in writing (which time and place are designated as the "Initial Closing"). In the event there is more than one closing, the term "Closing" shall apply to each such closing, unless otherwise specified herein. (ii) At each Closing, the Company shall deliver to each Purchaser the Note to be purchased by such Purchaser against (1) payment of the purchase price therefor by check payable to the Company or by wire transfer to a bank designated by the Company, (2) delivery of counterpart signature pages to this Agreement and the Note, and (3) delivery of a validly completed and executed IRS Form W-8 BEN or IRS Form W-9, as applicable, establishing such Purchaser's exemption from withholding tax, which forms are attached to this Agreement as Exhibit C. (iii) Until the earlier of (A) such time as the aggregate amount of principal indebtedness evidenced by the Notes equals a total of $810,000, or (B) the date 150 days from the date hereof, the Company may sell additional Notes to such persons or entities as determined by the Company, or to any Purchaser who desires to acquire additional Notes. All such sales shall be made on the terms and conditions set forth in this Agreement. For purposes of this Agreement, and all other agreements contemplated hereby, any additional purchaser so acquiring Notes shall be deemed to be a "Purchaser" for purposes of this Agreement, and any notes so acquired by such additional purchaser shall be deemed to be "Notes" and "Securities" as applicable. 2. STOCK PURCHASE AGREEMENT. Each Purchaser understands and agrees that the conversion of the Notes into equity securities of the Company in connection with a proposed equity financing of the Company will require such Purchaser's execution of certain agreements relating to the purchase and sale of such securities as well as any rights relating to such equity securities. 3. SECURITY INTEREST. The indebtedness represented by the Notes shall be secured by certain of the assets of the Company and its direct and indirect United States subsidiaries (the "Collateral") in accordance with the provisions of the Note. 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to, and covenants with, the Purchasers, as follows: (a) ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to carry on its business as now conducted and as proposed to be conducted. The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure so to qualify would have a material adverse effect on its business, financial condition or properties (a "Material Adverse Effect"). (b) AUTHORIZATION. The Agreement and the Notes, and the Common Stock issuable upon conversion of the Notes, have been duly authorized by the Board of Directors of the Company. The Agreement and the Notes, when executed and delivered by the Company, shall constitute valid and legally binding obligations of the Company, enforceable against the Company in accordance with their respective terms except as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and other laws of general -2- application affecting enforcement of creditors' rights generally, as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies. (c) NON-CONTRAVENTION. The execution and delivery of this Agreement, the issuance and sale of the Notes (and the stock issuable upon conversion of the Notes), to be sold by the Company under this Agreement, the fulfillment of the terms of this Agreement and the consummation of the transactions contemplated hereby will not (A) conflict with or constitute a violation of, or default (with the passage of time or otherwise) under, (i) any material bond, debenture, note or other evidence of indebtedness, or any material lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument to which the Company is a party or by which it or its property is bound, (ii) the certificate of incorporation, by-laws or other organizational documents of the Company, or (iii) any law, administrative regulation, ordinance or order of any court or governmental agency, arbitration panel or authority binding as of the Closing upon the Company or its property which is reasonably likely to result in a Material Adverse Effect. No consent, approval, authorization or other order of, or registration, qualification or filing with, any regulatory body, administrative agency, or other governmental body in the United States is required for the execution and delivery of this Agreement and the valid issuance and sale of the Notes to be sold pursuant to this Agreement, other than such as have been made or obtained, and except for any securities filings required to be made under federal or state securities laws or the requirements of the National Association of Securities Dealers, Inc. and which may be required to be made after the Closing. For purposes of clauses (i) and (iii) of this paragraph (c), "the Company" shall be deemed to include all direct and indirect United States subsidiaries of the Company. (d) CAPITALIZATION. The capitalization of the Company is described in the Company's filings (the "SEC Documents") with the Securities and Exchange Commission (the "SEC") as of the dates set forth therein. The Company has not issued any capital stock since September 21, 2000, other than pursuant to employee benefit plans disclosed in the Company's SEC Documents. Except as set forth in or contemplated by the Company's SEC Documents, there are no outstanding rights (including, without limitation, preemptive rights), warrants or options to acquire, or instruments convertible into or exchangeable for, any unissued shares of capital stock or other equity interest in the Company, or any contract, commitment, agreement, understanding or arrangement of any kind to which the Company is a party and relating to the issuance or sale of any capital stock of the Company, any such convertible or exchangeable securities or any such rights, warrants or options. No preemptive right, co-sale right, registration right or limitation or restriction on granting the registration rights set forth in Section 10 hereof, right of first refusal or other similar right exists (or has not been waived) with respect to the issuance and sale of the Notes. (e) LEGAL PROCEEDINGS. There is no legal or governmental proceeding pending, or, to the knowledge of the Company, threatened, to which the Company or any subsidiary of the Company is a party or of which the business or property of the Company or any subsidiary of the Company is subject that is not disclosed in the Company's SEC Documents, which is reasonably likely to result in a Material Adverse Effect. -3- (f) NO VIOLATIONS. The Company is not in violation of its certificate of incorporation, bylaws or other organizational document, or, except as otherwise described in the SEC Documents, violation of any law, administrative regulation, ordinance or order of any court or governmental agency, arbitration panel or authority applicable to the Company, which violation, individually or in the aggregate, has had, or would be reasonably likely to have, a Material Adverse Effect, and the Company is not in default (and there exists no condition which, with the passage of time or otherwise, would constitute a material default) in the performance of any bond, debenture, note or any other evidence of indebtedness in any indenture, mortgage, deed of trust or any other agreement or instrument to which the Company is a party or by which the Company is bound or by which the property of the Company is bound, which has had, or would be reasonably likely to have, individually or in the aggregate, a Material Adverse Effect. For purposes of this paragraph (f), "the Company" shall be deemed to include all direct and indirect subsidiaries of the Company. (g) REPORTING STATUS. The Company has filed all reports, schedules, registration statements, forms and other documents required to be filed by the Company with the SEC, including those that the Company may file with the SEC after the date of this Agreement until the Closing ("SEC Filings") required to be filed as of the date hereof. The SEC Filings (i) were or will be filed on a timely basis, (ii) at the time filed, were or will be prepared in compliance in all material respects with the applicable requirements of the Securities Act and the Exchange Act, as the case may be, and the rules and regulations of the SEC thereunder applicable to such SEC Filings, and (iii) did not or will not at the time they were or are filed contain any untrue statement of a material fact or omit to state a material fact required to be stated in such SEC Filings or necessary in order to make the statements in such SEC Filings, in the light of the circumstances under which they were made, not misleading. (h) COLLATERAL. The Company and each of its direct and indirect United States subsidiaries has good title to the Collateral, free of any Liens except Permitted Liens. This Agreement creates in favor of the Purchasers a valid security interest in all of the Company's right, title and interest in and to the Collateral, and upon the filing of appropriate UCC financing statements with the Delaware Secretary of State, the Purchasers' security interest hereunder and under the Notes will be duly perfected in all of the Collateral in which a security interest may be perfected by such filing. 5. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each Purchaser hereby represents and warrants to the Company that: (a) AUTHORIZATION. Such Purchaser has full power and authority to enter into this Agreement. This Agreement, when executed and delivered by the Purchaser, will constitute a valid and legally binding obligation of the Purchaser, enforceable in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and any other laws of general application affecting enforcement of creditors' rights generally, and as limited by laws relating to the availability of a specific performance, injunctive relief, or other equitable remedies. -4- (b) PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made with the Purchaser in reliance upon the Purchaser's representation to the Company, which by the Purchaser's execution of this Agreement, the Purchaser hereby confirms, that the Securities to be acquired by the Purchaser will be acquired for investment for the Purchaser's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that the Purchaser has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, the Purchaser further represents that the Purchaser does not presently have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Securities. The Purchaser has not been formed for the specific purpose of acquiring any of the Securities. (c) KNOWLEDGE. The Purchaser is aware of the Company's business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. (d) RESTRICTED SECURITIES. The Purchaser understands that the Securities have not been, and will not be, registered under the Securities Act of 1933, as amended (the "Securities Act"), by reason of a specific exemption from the registration provisions of the Securities Act which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of the Purchaser's representations as expressed herein. The Purchaser understands that the Securities are "restricted securities" under applicable U.S. federal and state securities laws and that, pursuant to these laws, the Purchaser must hold the Securities indefinitely unless they are registered with the Securities and Exchange Commission and qualified by state authorities, or an exemption from such registration and qualification requirements is available. The Purchaser acknowledges that, except as expressly set forth herein, the Company has no obligation to register or qualify the Securities for resale. The Purchaser further acknowledges that if an exemption from registration or qualification is available, it may be conditioned on various requirements including, but not limited to, the time and manner of sale, the holding period for the Securities, and on requirements relating to the Company which are outside of the Purchaser's control, and which the Company is under no obligation and may not be able to satisfy. (e) NOT A LISTED SECURITY. The Purchaser understands that the Company's stock is not listed on a national securities exchange, and that the Company has made no assurances that the Company's stock will ever be traded on a national securities exchange. (f) LEGENDS. The Purchaser understands that the Securities, and any securities issued in respect thereof or exchange therefor, may bear one or all of the following legends: (i) "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. EXCEPT IN COMPLIANCE WITH RULE 144 PROMULGATED UNDER THE SECURITIES ACT OF -5- 1933 OR ANY OTHER AVAILABLE EXEMPTION FROM REGISTRATION, NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933." (ii) THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE HELD BY A PERSON WHO MAY BE DEEMED TO BE AN AFFILIATE OF THE ISSUER FOR PURPOSES OF RULE 144 PROMULGATED UNDER THE ACT. (iii) Any legend required by the Blue Sky laws of any state to the extent such laws are applicable to the shares represented by the certificate so legended. (g) ACCREDITED INVESTOR. The Purchaser is an accredited investor as defined in Rule 501(a) of Regulation D promulgated under the Securities Act. (h) FOREIGN INVESTORS. If a Purchaser is not a United States person (as defined by Rule 902(k) under the Securities Act), such Purchaser hereby represents that it has satisfied itself as to the full observance of the laws of its jurisdiction in connection with any invitation to subscribe for the Securities or any use of this Agreement, including (i) the legal requirements within its jurisdiction for the purchase of the Securities, (ii) any foreign exchange restrictions applicable to such purchase, (iii) any governmental or other consents that may need to be obtained and (iv) the income tax and other tax consequences, if any, that may be relevant to the purchase, holding, redemption, sale or transfer of the Securities. Such Purchaser's subscription and payment for, and his or her continued beneficial ownership of the Securities, will not violate any applicable securities or other laws of Purchaser's jurisdiction. Such Purchaser also hereby represents that such Purchaser is not a "10-percent shareholder" as defined in Section 871(h) of the Internal Revenue Code of 1986, as amended. 6. CONDITIONS OF THE PURCHASERS' OBLIGATIONS AT CLOSING. The obligations of each Purchaser to the Company under this Agreement are subject to the fulfillment, on or before the Closing, of each of the following conditions, unless otherwise waived: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company contained in Section 4 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the date of the Closing. (b) QUALIFICATIONS. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Securities pursuant to this Agreement shall be obtained and effective as of the Closing. (c) MINIMUM AMOUNT. A minimum of $500,000 aggregate principal amount of the Notes shall be purchased by the Purchasers at the initial Closing under this Agreement. -6- 7. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING. The obligations of the Company to each Purchaser under this Agreement are subject to the fulfillment, on or before the Closing, of each of the following conditions, unless otherwise waived: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of each Purchaser contained in Section 5 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the Closing. (b) QUALIFICATIONS. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Securities pursuant to this Agreement shall be obtained and effective as of the Closing. (c) DELIVERY OF FORM W-8 BEN OR FORM W-9. Each Purchaser shall have completed and delivered to the Company a validly executed IRS Form W-8 BEN or IRS Form W-9, as applicable, establishing such Purchaser's exemption from withholding tax. 8. COVENANTS OF THE COMPANY. (a) NEGATIVE COVENANTS. Until the earlier to occur of the conversion or repayment in full of the Notes, the Company shall not do any of the following without the prior written consent of Purchasers holding a majority of the outstanding principal amount of the Notes, which consent will not be unreasonably withheld or delayed: (i) SECURED INDEBTEDNESS. Create, incur, assume, or be liable for any secured Indebtedness which is senior in right of payment to the Notes other than Permitted Indebtedness or Permitted Senior Indebtedness. (ii) LIENS. Create, incur, or allow any Lien on any of its property, except for Permitted Liens. (iii) DIVIDENDS AND DISTRIBUTIONS. Pay any dividends or make any distribution or payment other than dividends payable solely in the Company's Common Stock or redeem, retire or purchase any capital stock except for repurchases of stock from former employees, consultants, or directors of Company under the terms of applicable repurchase agreements, provided that no Event of Default (as defined in the Notes) has occurred, is continuing or would exist after giving effect to the repurchases. (b) AFFIRMATIVE COVENANTS. (i) REGISTRATION OF INTELLECTUAL PROPERTY. The Company shall, within a period of thirty (30) days following the initial Closing, file with the U.S. Copyright Office (the "CO") registrations with respect to all material copyrights of the Company, provided that the legal, registration and other related costs and expenses associated with such registrations and filings do not exceed $2,000 in the aggregate. With respect to any registrations so filed, the Company shall also concurrently make such filings as are required such that the Purchasers have -7- a first priority security interest in such copyrights (subject to Permitted Liens created to secure Senior Permitted Indebtedness). At the request of the Purchasers holding a majority of the outstanding principal amount of the Notes, the Company shall also take commercially reasonable actions to register any additional copyrights developed or acquired hereafter with the CO. (ii) PERFECTION OF SECURITY INTEREST. The Company shall file any amendments to UCC-1 financing statements or filings with the CO and PTO, and shall make new filings, as are required in order to perfect the Purchasers' security interest in the Collateral (including Collateral developed or acquired hereafter), including without limitation as required upon the reorganization of the Company under the laws of a jurisdiction other than the State of Delaware. (iii) PRESERVATION OF COLLATERAL. The Company shall keep all of its inventory in good and marketable condition, free from material defects. Returns and allowances between the Company and its account debtors will follow the Company's customary practices in the ordinary course of business. (iv) ADDITIONAL CLOSINGS. The Company shall use reasonable efforts to sell the remaining amount of Notes authorized for sale hereunder ($810,000 less the principal amount of Notes sold in the Initial Closing) within the time period provided by Section 1(b) hereof (provided, however, that the Company shall not be required to sell Notes in any transaction that would not comply with applicable law). (c) CERTAIN DEFINITIONS. As used in this Agreement, the following capitalized terms have the following meanings: (i) "Indebtedness" shall mean indebtedness owed by the Company to banks, commercial finance lenders, insurance companies, leasing or equipment financing institutions, lending institutions or any other parties, which is for money borrowed or the deferred purchase price or leasing of equipment, whether or not secured. (ii) "Lien" shall mean, with respect to any asset or property of the Company, any security interest, mortgage, pledge, lien, claim, charge or other encumbrance in, of, or on such property or the income therefrom, including, without limitation, the interest of a vendor or lessor under a conditional sale agreement, capital lease or other title retention agreement, or any agreement to provide any of the foregoing, and the filing of any financing statement or similar instrument under the Uniform Commercial Code or comparable law of any jurisdiction. (iii) "Permitted Indebtedness" shall mean: (i) Indebtedness to trade creditors incurred in the ordinary course of business; (ii) Indebtedness secured by Permitted Liens; (v) Indebtedness of Company to any of its subsidiaries; (iii) Indebtedness which is first applied to fully pay all amounts due under the Notes; and (iv) extensions, refinancings, modifications, amendments and restatements of any items of Permitted Indebtedness set forth above, provided that the principal amount thereof is not increased or the terms thereof are not modified to impose more burdensome terms upon Company, as the case may be. -8- (iv) "Permitted Senior Indebtedness" shall mean Indebtedness secured by the Permitted Liens described in subsections (iv), (v), (x) and (xii) of the definition of Permitted Liens. (v) "Permitted Liens" means (i) Liens for taxes not yet delinquent or Liens for taxes being contested in good faith and by appropriate proceedings for which adequate reserves have been established; (ii) Liens in respect of property or assets imposed by law which were incurred in the ordinary course of business, such as carriers', warehousemen's, materialmen's and mechanics' Liens and other similar Liens arising in the ordinary course of business which are not delinquent or remain payable without penalty or which are being contested in good faith and by appropriate proceedings; (iii) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, statutory obligations, contract bids, government contracts, performance and return of money bonds and other similar obligations, incurred in the ordinary course of business, whether pursuant to statutory requirements, common law or consensual arrangements; (iv) Liens securing obligations under a capital lease if such Liens do not extend to property other than the property leased under such capital lease; (v) Liens upon any equipment or other property acquired or held by Company or any of its subsidiaries to secure the purchase price of such equipment or other property or Indebtedness incurred solely for the purpose of financing the acquisition of such equipment or other property, so long as such Lien extends only to the equipment or other property financed, and any accessions, replacements, substitutions and proceeds (including insurance proceeds) thereof or thereto; (vi) Liens in favor of customs and revenue authorities arising as a matter of law to secure payments of customs duties in connection with the importation of goods; (vii) Liens which constitute rights of setoff of a customary nature or banker's liens, whether arising by law or by contract; (viii) Leases or subleases and licenses or sublicenses granted in the ordinary course of Company's business; (ix) Liens securing Indebtedness which is first applied to fully pay all amounts due under the Notes; (x) Liens securing indebtedness of a Person (other than an existing subsidiary of the Company) existing at the time such Person becomes a subsidiary of the Company or is merged with or into the Company or a subsidiary of the Company or Liens securing Indebtedness incurred in connection with an acquisition, merger or consolidation; provided, that such Liens were in existence prior to the date of such acquisition, merger or consolidation, were not incurred in anticipation thereof, and do not extend to any other assets; (xi) Liens which are expressly subordinate to the Notes; and (xii) Liens upon property or assets purchased or otherwise acquired for consideration after the date hereof that do not extend to any other property or assets except those purchased or otherwise acquired; provided that, with respect to clauses (x)(but only if the primary purpose of such acquisition, merger or consolidation is capital raising) and (xii) above, the Company's consolidated net tangible assets are equal to or greater than 250% of the Company's aggregate secured indebtedness (including the Notes and the proposed secured indebtedness to be secured by such Liens). (vi) "Person" means any corporation, individual, limited liability company, joint stock company, joint venture, partnership, unincorporated association, -9- governmental regulatory entity, country, state or political subdivision thereof, trust, municipality or other entity. 9. COVENANT OF THE HOLDERS. (a) FURTHER ASSURANCES. At any time and from time to time, upon the written request of the Company and at the Company's expense, the Holders will promptly and duly authenticate and deliver such instruments and documents and take such further action as the Company may reasonably request for the purpose of enabling the Company to incur Permitted Indebtedness and Senior Permitted Indebtedness and otherwise preserving such rights under this Agreement including, without limitation, filing any financing statements or amendments thereto under the UCC as in effect with respect to Permitted Liens. 10. REGISTRATION RIGHTS. 10.1 DEFINITIONS. As used in this Section 10: (a) The terms "register," "registered," and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act of 1933, as amended (the "Securities Act"), and the subsequent declaration or ordering of the effectiveness of such registration statement; (b) The term "Registrable Securities" means: (i) the shares of the Company's Common Stock issued or issuable upon conversion of the Notes (including Common Stock issued or issuable upon conversion of Preferred Stock which is issued upon conversion of the Notes); and (ii) any other shares of Common Stock of the Purchaser issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, the Securities, excluding in all cases, however, any Registrable Securities sold by a person in a transaction in which such person's rights under this Agreement and the Note are not assigned; provided, however, that Common Stock or other securities shall only be treated as Registrable Securities if and so long as they have not been (A) sold to or through a broker or dealer or underwriter in a public distribution or a public securities transaction, or (B) sold in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act under Section 4(1) thereof so that all transfer restrictions, and restrictive legends with respect thereto, if any, are removed upon the consummation of such sale; (c) The number of shares of "Registrable Securities then outstanding" shall mean the number of shares of Common Stock outstanding which are, and the number of shares of Common Stock issuable pursuant to the then exercisable or convertible securities which are, Registrable Securities; (d) The term "Holder" means any holder of outstanding Registrable Securities who, subject to the limitations set forth in Section 10.7 below, acquired such Registrable Securities in a transaction or series of transactions not involving any registered public offering; and -10- (e) The term "Form S-3" means such form under the Securities Act as in effect on the date hereof or any registration form under the Securities Act subsequently adopted by the Securities and Exchange Commission ("SEC") which permits inclusion or incorporation of substantial information by reference to other documents filed by the Purchaser with the SEC. 10.2 COMPANY REGISTRATION. If (but without any obligation to do so) the Company proposes to register (including for this purpose a registration effected by the Company for stockholders other than the Holders) any of its stock under the Securities Act in connection with the public offering of such securities solely for cash (other than a registration relating solely to the sale of securities to participants in a Company stock plan or a transaction covered by Rule 145 under the Securities Act, a registration in which the only stock being registered is Common Stock issuable upon conversion of debt securities which are also being registered), the Company shall, at such time, promptly give each Holder written notice of such registration. Upon the written request of each Holder given within 20 days after mailing of such notice by the Company in accordance with Section 11(e), the Company shall, subject to the provisions of Section 10.6, cause to be registered under the Securities Act all of the Registrable Securities that each such Holder has requested to be registered. 10.3 FORM S-3 REGISTRATION. In case the Company shall receive from any Holder or Holders of not less than fifty percent (50%) of the Registrable Securities then outstanding a written request or requests that the Company effect a registration on Form S-3 and any related qualification or compliance with respect to all or a part of the Registrable Securities owned by such Holder or Holders, the Company will: (a) promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders; (b) as soon as practicable, effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holder's or Holders' Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holder or Holders joining in such request as are specified in a written request given within 15 days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to effect any such registration, qualification or compliance, pursuant to this Section 10.3: (1) if Form S-3 is not available for such offering by the Holders; (2) if the Company shall furnish to the Holders a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such Form S-3 Registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement for a period of not more than 90 days after receipt of the request of the Holder or Holders under this Section 10.3; provided, however, that the Company shall not utilize this right more than once in any twelve month period; (3) if the Company has, within the 12 month period preceding the date of such request, already effected two registrations on Form S-3 for the Holders; or (4) in any particular jurisdiction in which the -11- Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance; and (c) Subject to the foregoing, the Company shall file a registration statement on Form S-3 covering the Registrable Securities and other securities so requested to be registered promptly after receipt of the request or requests of the Holders. 10.4 OBLIGATIONS OF THE COMPANY. Whenever required under this Section 10 to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its commercially reasonable efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to 90 days; (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement; (c) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them; (d) Cause all such Registrable Securities registered pursuant hereunder to be listed on each securities exchange on which similar securities issued by the Company are then listed. 10.5 FURNISH INFORMATION. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 10 with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be required to effect the registration of such Holder's Registrable Securities. 10.6 EXPENSES OF REGISTRATION. (a) COMPANY REGISTRATION. All expenses other than underwriting discounts and commissions incurred in connection with registrations, filings or qualifications of Registrable Securities pursuant to Section 10.2 for each Holder (which right may be assigned as provided in Section 10.10), including (without limitation) all registration, filing, and qualification fees, printers' and accounting fees, fees and disbursements of counsel for the Company shall be borne by the Company. The Company shall not be required to pay the fees or expenses of separate counsel to the selling Holders. -12- (b) REGISTRATION ON FORM S-3. All expenses incurred in connection with a registration requested pursuant to Section 10.3, including (without limitation) all registration, filing, qualification, printer and accounting fees shall be borne by the Company. The Company shall not be required to pay any underwriters' or brokers' fees, discounts or commissions relating to the Registrable Securities, or the fees or expenses of separate counsel to the selling Holders. 10.7 UNDERWRITING REQUIREMENTS. In connection with any offering involving an underwriting of shares of the Company's capital stock, the Company shall not be required under Section 10.2 to include any of the Holders' securities in such underwriting unless they accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it (or by other persons entitled to select the underwriters), and then only in such quantity as the underwriters determine in their sole discretion will not jeopardize the success of the offering by the Company. If the total amount of securities, including Registrable Securities, requested by stockholders to be included in such offering exceeds the amount of securities sold other than by the Company that the underwriters determine in their sole discretion is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Registrable Securities, which the underwriters determine in their sole discretion will not jeopardize the success of the offering (the securities so included to be apportioned pro rata among the selling stockholders according to the total amount of securities entitled to be included therein owned by each selling stockholder or in such other proportions as shall mutually be agreed to by such selling stockholders) but in no event shall the amount of securities of the selling Holders included in the offering be reduced below 20% of the total amount of securities included in such offering. For purposes of the preceding parenthetical concerning apportionment, for any selling stockholder which is a holder of Registrable Securities and which is a partnership or corporation, the partners, retired partners and stockholders of such holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing persons shall be deemed to be a single "selling stockholder," and any pro-rata reduction with respect to such "selling stockholder" shall be based upon the aggregate amount of shares carrying registration rights owned by all entities and individuals included in such "selling stockholder," as defined in this sentence. 10.8 INDEMNIFICATION. In the event any Registrable Securities are included in a registration statement under this Section 10: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder and each person, if any, who controls such Holder within the meaning of the Securities Act or the Securities Exchange Act of 1934, as amended (the "Exchange Act"), against any losses, claims, damages, or liabilities (joint or several) to which any of the foregoing persons may become subject, under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or -13- (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law; and the Company will pay, as incurred, any legal or other expenses reasonably incurred by any person intended to be indemnified pursuant to this subsection 10.8(a), in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 10.8(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company, which consent shall not be unreasonably withheld, nor shall the Company be liable in any such case for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by such Holder or controlling person; (b) To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement, each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act, any other Holder selling securities in such registration statement and any controlling person of any such other Holder, against any losses, claims, damages, or liabilities (joint or several) to which any of the foregoing persons may become subject, under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will pay, as incurred, any legal or other expenses reasonably incurred by any person intended to be indemnified pursuant to this subsection 10.8(b), in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 10.8(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; provided that in no event shall any indemnity under this subsection 10.8(b) exceed the gross proceeds from the offering received by such Holder; (c) Promptly after receipt by an indemnified party under this Section 10.8 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 10.8, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under -14- this Section 10.8, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 10.8; (d) If the indemnification provided in this Section 10.8 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage or expense referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage or expense as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission; and (e) The obligations of the Company and Holders under this Section 10.8 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 10, and otherwise. 10.9 REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to making available to the Holders the benefits of Rule 144 promulgated under the Securities Act ("Rule 144") and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration, the Company agrees to use its best efforts to: (a) make and keep public information available, as those terms are understood and defined in Rule 144, at all times; (b) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and (c) furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144, the Securities Act and the Exchange Act, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC which permits the selling of any such securities without registration. 10.10 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company to register Registrable Securities pursuant to this Section 10 may only be assigned by a Holder to a transferee or assignee of all of such Holder's interest in Holder's Note, and shall be subject to the restrictions on transfers contained in such Note. Such assignment shall be effective only if -15- immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Securities Act. 10.11 TERMINATION OF REGISTRATION RIGHTS. The rights granted under this Section 10 shall terminate upon the earlier of (a) five (5) years following the date of this Agreement, or (b) with respect to any Holder, at such time as such Holder may sell all of such Holder's Registrable Securities in any one three month period pursuant to Rule 144 or such successor rule as may be adopted. 11. MISCELLANEOUS. (a) SUCCESSORS AND ASSIGNS. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. (b) GOVERNING LAW. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of law. (c) COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument. (d) TITLES AND SUBTITLES. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. (e) NOTICES. Any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient upon receipt, when delivered personally or by courier, overnight delivery service or confirmed facsimile, or 48 hours after being deposited in the U.S. mail as certified or registered mail with postage prepaid, if such notice is addressed to the party to be notified at such party's address or facsimile number as set forth below or as subsequently modified by written notice. (f) FINDER'S FEE. Each party represents that it neither is nor will be obligated for any finder's fee or commission in connection with this transaction. Each Purchaser agrees to indemnify and to hold harmless the Company from any liability for any commission or compensation in the nature of a finder's fee (and the costs and expenses of defending against such liability or asserted liability) for which each Purchaser or any of its officers, employees, or representatives is responsible. The Company agrees to indemnify and hold harmless each Purchaser from any liability for any commission or compensation in the nature of a finder's fee -16- (and the costs and expenses of defending against such liability or asserted liability) for which the Company or any of its officers, employees or representatives is responsible. (g) AMENDMENTS AND WAIVERS. Any term of this Agreement may only be amended or waived with the written consent of the Company and the holders of at least a majority of the outstanding principal amount of the Notes (provided that amendment of Section 10 hereof shall instead require the written consent of the holders of at least of majority of the Registrable Securities then outstanding). Any amendment or waiver effected in accordance with this Section 11(g) shall be binding upon each Purchaser and each transferee of the Securities, each future holder of all such Securities, and the Company. (h) SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith, in order to maintain the economic position enjoyed by each party as close as possible to that under the provision rendered unenforceable. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (i) such provision shall be excluded from this Agreement, (ii) the balance of the Agreement shall be interpreted as if such provision were so excluded and (iii) the balance of the Agreement shall be enforceable in accordance with its terms. (i) ENTIRE AGREEMENT. This Agreement, and the documents referred to herein constitute the entire agreement between the parties hereto pertaining to the subject matter hereof, and any and all other written or oral agreements existing between the parties hereto are expressly canceled. (j) EXCULPATION AMONG PURCHASERS. Each Purchaser acknowledges that it is not relying upon any person, firm or corporation, other than the Company and its officers and directors, in making its investment or decision to invest in the Company. Each Purchaser agrees that no Purchaser nor the respective controlling persons, officers, directors, partners, agents, or employees of any Purchaser shall be liable for any action heretofore or hereafter taken or omitted to be taken by any of them in connection with the Securities. (k) ADVICE OF LEGAL COUNSEL. Each party acknowledges and represents that, in executing this Agreement, it has had the opportunity to seek advice as to its legal rights from legal counsel and that the person signing on its behalf has read and understood all of the terms and provisions of this Agreement. This Agreement shall not be construed against any party by reason of the drafting or preparation thereof. (l) FEES AND EXPENSES. The Company shall pay promptly after the Closing the fees and expenses of Fenwick & West, the counsel for the Purchasers, incurred in connection with performing due diligence with respect to this Agreement, the documents referred to herein and the transactions contemplated hereby and thereby, provided such fees and expenses do not exceed, in the aggregate, $15,000. (m) CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE -17- COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF THE SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO THE QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM THE QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON THE QUALIFICATION BEING OBTAINED UNLESS THE SALE IS SO EXEMPT. [Signature Pages Follow] -18- The parties have executed this Secured Convertible Note Purchase Agreement as of the date first written above. COMPANY: ACCRUE SOFTWARE, INC. By: /s/ Jonathan D. Becher President and CEO Name: Jonathan D. Becher Address: 48634 Milmont Drive Fremont, CA 94538-7353 Facsimile Number: (510) 580-4501 PURCHASERS: RS ORPHAN FUND, LP By: /s/ Paul H. Stephens Name: Paul H. Stephens Title: Investment Advisory General Partner Address: 388 Market St. San Francisco, CA 94111 Facsimile Number: -19- PURCHASERS: RS ORPHAN OFFSHORE FUND, LP By: /s/ Paul H. Stephens Name: Paul H. Stephens Title: Investment Advisory General Partner Address: 388 Market St. San Francisco, CA 94111 Facsimile Number: STERLING PAYOT CAPITAL, LP By: /s/ Robert M. Smelick Name: Robert M. Smelick Title: General Partner Address: 65 Cloudview Rd. Sausalito, CA 94956 Facsimile Number: ROBERT M. SMELICK /s/ Robert M. Smelick Robert M. Smelick Address: 65 Cloudview Rd. Sausalito, CA 94956 Facsimile Number: -20- PURCHASERS: ELIZABETH W. KORRELL /s/ Elizabeth W. Korrell Elizabeth W. Korrell Address: 2607 Ninth Avenue West Seattle, WA 98119 Facsimile Number: 206-266-1860 SIGNATURE PAGE TO SECURED CONVERTIBLE NOTE PURCHASE AGREEMENT Exhibit A - Schedule of Purchasers Exhibit B - Form of Promissory Note Exhibit C - Purchaser Withholding Exemptions EXHIBIT A SCHEDULE OF PURCHASERS FIRST CLOSING
TYPE OF ORIGINAL PRINCIPAL PURCHASER NAME AND ADDRESS CONSIDERATION AMOUNT OF NOTE -------------------------- ------------- -------------- RS Orphan Fund, LP Cash $ 79,000 388 Market Street San Francisco, CA 94111 RS Orphan Offshore Fund, LP Cash $ 21,000 388 Market Street San Francisco, CA 94111 Sterling Payot Capital, LP Forgiveness of $335,573.57(1) 65 Cloudview Rd. indebtedness Sausalito, CA 94956 Robert M. Smelick Forgiveness of $ 60,349.72(2) 65 Cloudview Rd. indebtedness Sausalito, CA 94956 Elizabeth W. Korrell Cash $ 5,000.00 2607 Ninth Avenue West Seattle WA 98119
- ------------------ (1) Includes principal and accrued interest through the Closing of promissory note in the aggregate principal amount of $320,100 surrendered at the time of the Closing and the payment of $15,000 in cash. (2) Includes principal and accrued interest through the Closing of promissory notes in the aggregate principal amount of $60,000 surrendered as payment at the time of the Closing. EXHIBIT B FORM OF SECURED CONVERTIBLE PROMISSORY NOTE EXHIBIT C PURCHASER WITHHOLDING EXEMPTIONS EX-4 4 f87429a1exv4.txt EXHIBIT 4 Exhibit 4 THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. EXCEPT IN COMPLIANCE WITH RULE 144 PROMULGATED UNDER THE SECURITIES ACT OF 1933 OR ANY OTHER AVAILABLE EXEMPTION FROM REGISTRATION, NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933. SECURED CONVERTIBLE PROMISSORY NOTE $60,349.72 February 4, 2003 Fremont, California For value received, Accrue Software, Inc., a Delaware corporation (the "Company"), promises to pay to Robert M. Smelick (the "Holder"), the principal sum of Sixty Thousand Three Hundred Forty Nine and 72/100 Dollars ($60,349.72). Interest shall accrue from the date of this Note on the unpaid principal amount at a rate equal to 6.0% per annum, compounded annually. This Note is one of a series of Secured Convertible Promissory Notes containing substantially identical terms and conditions issued pursuant to that certain Secured Convertible Promissory Note Purchase Agreement dated February 4, 2003 (the "Purchase Agreement"). Such Notes are referred to herein as the "Notes," and the holders thereof are referred to herein as the "Holders." All other capitalized terms not defined herein shall have the meanings ascribed to such terms in the Purchase Agreement. This Note is subject to the following terms and conditions. 1. MATURITY. Unless converted as provided in Section 2, this Note will automatically mature and be due and payable on February 4, 2006 (the "Maturity Date"). Subject to Section 2 below, interest shall accrue on this Note but shall not be due and payable until the Maturity Date. Notwithstanding the foregoing, the entire unpaid principal sum of this Note, together with accrued and unpaid interest thereon, shall become immediately due and payable upon the occurrence of any Event of Default (as defined herein). 2. CONVERSION. The Notes shall be converted into equity securities of the Company (each a "Conversion") upon the terms and conditions set forth below: (a) OPTIONAL CONVERSION. Upon the written request of the Holders of a majority of the outstanding principal amount of the Notes (the "Majority Holders"), the entire principal amount of and (if requested by the Majority Holders) accrued interest on this and all other Notes shall be converted at the option of the Majority Holders either into shares of the Company's Common Stock or, in the event that there is a series of Preferred Stock of the Company issued or proposed to be issued, into the most senior series of such Preferred Stock. If the Majority Holders, as the case may be, elect to convert accrued interest into equity securities upon a Conversion, this election shall apply equally to all of the Notes. (b) AUTOMATIC CONVERSION. In the event that the closing bid or sales prices (whichever is applicable) of the Company's Common Stock is at least $0.20 per share (as adjusted for stock splits, stock dividends, recapitalizations and like transactions) for a period of 60 consecutive trading days, the entire principal amount of and accrued interest on this and all other Notes shall automatically be converted (an "Automatic Conversion") into shares of the Company's Common Stock. The Company shall promptly thereafter provide the Holder written notice of the terms, effect and mechanics of such Automatic Conversion. (c) CONVERSION PRICE. The number of shares of Common Stock or Preferred Stock, as applicable, to be issued upon a Conversion shall be equal to the quotient obtained by dividing (i) the entire principal amount of this Note plus (as applicable) accrued interest by (ii) $0.06 (as adjusted pursuant to Section 2(d)) (the "Conversion Price"), rounded to the nearest whole share. (d) CONVERSION PRICE ADJUSTMENTS. The Conversion Price shall be subject to adjustment from time to time as follows: (i) ISSUANCE OF ADDITIONAL STOCK BELOW PURCHASE PRICE. If the Company should issue, at any time after the date on which the first Note was sold (the "Purchase Date"), any Additional Stock (as defined below) without consideration or for a consideration per share less than the Conversion Price in effect immediately prior to the issuance of such Additional Stock, the Conversion Price in effect immediately prior to each such issuance shall automatically be adjusted as set forth in this Section 2(d), unless otherwise provided in this Section 2(d). (A) PRICE ADJUSTMENT FORMULA. Whenever the Conversion Price is adjusted pursuant to this Section 2(d), the Conversion Price shall be adjusted to a price equal to the price paid per share for such Additional Stock. (B) DEFINITION OF "ADDITIONAL STOCK". For purposes of this Section 2(d), "Additional Stock" shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to Section 2(d)(D) by the Company after the Purchase Date) other than (1) Common Stock issued pursuant to stock dividends, stock splits or similar transactions; (2) Shares of Common Stock issued or issuable to employees, consultants or directors of the Company pursuant to a stock option plan or restricted stock plan or incentive arrangement approved by the Board of Directors of the Company; -2- (3) Capital stock, or options or warrants to purchase capital stock, issued to financial institutions or lessors in connection with commercial credit arrangements, equipment financings, commercial property lease transactions or similar transactions approved by the Board of Directors where the principal purpose thereof is not to raise additional equity capital for the Company; (4) Capital stock, or warrants or options to purchase capital stock, issued in connection with bona fide acquisitions, mergers or similar transactions, the terms of which are approved by the Board of Directors of the Company; (5) Shares of Common Stock issued or issuable upon conversion of the Preferred Stock of the Company; and (6) Capital stock issued or issuable to an entity as a component of any business relationship with such entity for the purpose of (A) joint venture, technology licensing or development activities, (B) distribution, supply or manufacture of the Company's products or services or (C) any other arrangements involving corporate partners that are primarily for purposes other than raising capital, the terms of which business relationship with such entity are approved by the Board of Directors. (C) DETERMINATION OF CONSIDERATION. In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by the Company for any underwriting or otherwise in connection with the issuance and sale thereof. In the case of the issuance of the Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined by the Board of Directors. (D) DEEMED ISSUANCES OF COMMON STOCK. In the case of the issuance after the Purchase Date of securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (the "Common Stock Equivalents"), the following provisions shall apply for all purposes of this Section 2(d): (1) The aggregate maximum number of shares of Common Stock deliverable upon conversion, exchange or exercise (assuming the satisfaction of any conditions to convertibility, exchangeability or exercisability, including, without limitation, the passage of time, but without taking into account potential antidilution adjustments) of any Common Stock Equivalents and subsequent conversion, exchange or exercise thereof shall be deemed to have been issued at the time such securities were issued or such Common Stock Equivalents were issued and for a consideration equal to the consideration, if any, received by the Company for any such securities and related Common Stock Equivalents (excluding any cash received on account of accrued interest or accrued dividends), plus the minimum additional consideration, if any, to be received by the Company (without taking into account potential antidilution adjustments) upon the -3- conversion, exchange or exercise of any Common Stock Equivalents (the consideration in each case to be determined in the manner provided in Section 2(d)(i)(C). (2) In the event of any change in the number of shares of Common Stock deliverable or in the consideration payable to the Company upon conversion, exchange or exercise of any Common Stock Equivalents including, but not limited to, a change resulting from the antidilution provisions thereof, the Conversion Price, to the extent in any way affected by or computed using such Common Stock Equivalents, shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the conversion, exchange or exercise of such Common Stock Equivalents. (3) Upon the termination or expiration of the convertibility, exchangeability or exercisability of any Common Stock Equivalents, the Conversion Price, to the extent in any way affected by or computed using such Common Stock Equivalents, shall be recomputed to reflect the issuance of only the number of shares of Common Stock (and Common Stock Equivalents that remain convertible, exchangeable or exercisable) actually issued upon the conversion, exchange or exercise of such Common Stock Equivalents. (4) The number of shares of Common Stock deemed issued and the consideration deemed paid therefor pursuant to Section 2(d)(i)(D)(1) shall be appropriately adjusted to reflect any change, termination or expiration of the type described in either Section 2(d)(i)(D)(2) or 2(d)(i)(D)(3). (E) LIMITS ON CONVERSION PRICE ADJUSTMENTS. Notwithstanding any other provisions of this Section (2)(d)(i), no adjustment of the Conversion Price pursuant to this Section 2(d)(i) shall (1) except to the limited extent provided for in Sections 2(d)(i)(D)(2) and 2(d)(i)(D)(3), have the effect of increasing the Conversion Price above the Conversion Price in effect immediately prior to such adjustment, and (2) have the effect of decreasing the Conversion Price below the fair market value of the Company's Common Stock as of the Closing (as defined in the Purchase Agreement)(as adjusted for stock splits, stock dividends, recapitalizations and like transactions). (ii) STOCK SPLITS AND DIVIDENDS. In the event the Company should at any time after the Purchase Date fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or Common Stock Equivalents without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Conversion Price shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of this Note shall be increased in proportion to such increase in outstanding shares of Common Stock and Common Stock Equivalents. -4- (iii) REVERSE STOCK SPLITS. If the number of shares of Common Stock outstanding at any time after the Purchase Date is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of this Note shall be decreased in proportion to such decrease in outstanding shares. (e) MECHANICS AND EFFECT OF CONVERSION. No fractional shares of the Company's capital stock will be issued upon conversion of this Note. In lieu of any fractional share to which the Holder would otherwise be entitled, the Company will pay to the Holder in cash the amount of the unconverted principal and interest balance of this Note that would otherwise be converted into such fractional share. Upon conversion of this Note pursuant to this Section 2, the Holder shall surrender this Note, duly endorsed, at the principal offices of the Company or any transfer agent of the Company. At its expense, the Company will, as soon as practicable thereafter, issue and deliver to such Holder, at such principal office, a certificate or certificates for the number of shares to which such Holder is entitled upon such conversion, together with any other securities and property to which the Holder is entitled upon such conversion under the terms of this Note, including a check payable to the Holder for any cash amounts payable as described herein. Upon conversion of this Note, the Company will be forever released from all of its obligations and liabilities under this Note with regard to that portion of the principal amount and accrued interest being converted including without limitation the obligation to pay such portion of the principal amount and accrued interest. (f) PAYMENT OF INTEREST. Upon conversion of the principal amount of this Note into the Company's equity securities, any interest accrued on this Note that is not by reason of Section 2(a) or 2(b) hereof simultaneously converted into equity securities shall be immediately paid to the Holder. (g) REGULATORY COMPLIANCE. Notwithstanding the foregoing, in the event that the Company's Common Stock is listed on the Nasdaq Stock Market or another national securities exchange (or a listing application is pending with any such exchange), a Conversion of this Note (or a conversion into Common Stock of Preferred Stock issued pursuant to a Conversion of this Note) shall only be effective to the maximum extent permissible under the applicable rules and regulations of such an exchange without the approval of the transaction by the Company's stockholders. In the event such stockholder approval is required to give full effect to the Conversion of this Note, the maximum amount of principal and accrued interest (or the maximum number of shares of convertible Preferred Stock) that is permissible to be converted without the approval of the Company's stockholders shall be converted as otherwise provided herein and the Company shall promptly seek to obtain the stockholder approval necessary to give full effect to the Conversion. 3. PAYMENT. -5- (a) PAYMENT. Except as expressly contemplated herein, all payments shall be made in lawful money of the United States of America at such place as the Holder hereof may from time to time designate in writing to the Company. Payment shall be credited first to the accrued interest then due and payable and the remainder applied to principal. (b) MANDATORY PREPAYMENT ON LIQUIDATION. If a Liquidation Event (as defined below) is consummated prior to the Maturity Date or a Conversion, the Company shall pay the Holder an amount (the "Liquidation Amount") equal to 150% of the principal amount of this Note, plus accrued interest. The Liquidation Amount shall be paid in cash unless the Majority Holders consent in writing to the payment of all or any portion of the Liquidation Amount in consideration other than cash. The value of any such consideration other than cash shall be deemed to be the fair value thereof as determined by the Board of Directors irrespective of any accounting treatment. Upon payment of the Liquidation Amount, the Company will be forever released from all of its obligations and liabilities under this Note. For purposes of this Note, a "Liquidation Event" shall mean (i) a sale of all or substantially all of the assets or business of the Company whether by merger, sale of assets, sale of stock or otherwise, (ii) any reorganization, consolidation or merger of the Company where the outstanding voting securities of the Company immediately before the transaction represent or are converted into less than 50% of the outstanding voting power of the surviving entity (or its parent entity) immediately after the transaction, (iii) a sale or exchange of the Company's capital stock by the stockholders of the Company in one transaction or a series of related transactions where more than 50% of the outstanding voting power of the Company is acquired by a person or entity or group of related persons or entities, or (iv) any liquidation or dissolution of the Company, whether by bankruptcy, a general assignment for the benefit of creditors, receivership or otherwise. (c) NOTICES OF CERTAIN TRANSACTIONS. In case of any consolidation or merger of the Company, any consolidation or merger of the Company with or into another corporation (other than a consolidation or merger in which the Company is the surviving entity), or any transfer of all or substantially all of the assets of the Company (a "Change of Control"), the Company will mail or cause to be mailed to the Holder a notice specifying the effective date on which such consolidation, merger or transfer, and the time, if any is to be fixed, as of which the holders of record of Common Stock are to be determined. Such notice shall be mailed at least twenty (20) days prior to the record date or effective date for the event specified in such notice. In the event that the Majority Holders submit a written request for Conversion in connection with a Change of Control (a "Change of Control Conversion Request"), such Change of Control Conversion Request will be conditioned on, and will be effected immediately prior to, the occurrence of such Change of Control. At such time, the respective Holders of the Notes shall be deemed to have become the respective holders of record of the capital stock of the Company issued pursuant to the Conversion. 4. EVENTS OF DEFAULT. -6- (a) DEFINITION. The occurrence of any of the following shall constitute an "Event of Default" under this Note: (i) FAILURE TO PAY. The Company's failure to pay any principal or interest or any other amount required to be paid by it under the terms of this Note on the date due, and such failure shall continue for five (5) business days after the Holder has given written notice of such default to the Company; (ii) FAILURE TO COMPLY WITH COVENANTS. The Company's failure to perform or observe any other material covenant or agreement contained in any Note or the Purchase Agreement, and such failure shall continue for fifteen (15) business days after the Holder has given written notice of such failure to the Company (provided, however, that no notice from the Holder shall be required to commence the 15 business day cure period if the Company has knowledge of failure to perform or observe any such material covenant or agreement and has not complied with Section 4(b) hereof); (iii) VOLUNTARY BANKRUPTCY OR INSOLVENCY PROCEEDINGS. The Company's (A) applying for or consenting to the appointment of a receiver, trustee, liquidator or custodian of itself or of all or a substantial part of its property, (B) making a general assignment for the benefit of all or any of its creditors, (C) commencing dissolution or liquidation proceedings, (D) commencing any voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or consenting to any such relief or to the appointment of or taking possession of its property by any official in an involuntary case or other proceeding commenced against it, or (E) taking any action for the purpose of effecting any of the foregoing; or (iv) INVOLUNTARY BANKRUPTCY OR INSOLVENCY PROCEEDINGS. Commencement of any proceedings for the appointment of a receiver, trustee, liquidator or custodian of Company or of all or a substantial part of the property thereof, or an involuntary case or other proceedings seeking liquidation, reorganization or other relief with respect to the Company or the debts thereof under any bankruptcy, insolvency or other similar law now or hereafter in effect shall be commenced and an order for relief entered or such proceeding shall not be dismissed or discharged within thirty (30) days of commencement. (v) DEFAULT ON OTHER OBLIGATIONS. The occurrence of a default or event of default in any agreement between the Company and a third party that gives the third party the right to accelerate any indebtedness exceeding $500,000 or more or that could have a Material Adverse Effect (as defined in the Purchase Agreement) on the Company; and such failure shall continue for fifteen (15) business days after written notice of such default to the Company. -7- (vi) FAILURE TO OBTAIN STOCKHOLDER APPROVAL. The Company does not receive the requisite approval of its stockholders pursuant to Section 2(g) hereof within 120 days of written request to obtain such approval from the Majority Holders. (b) NOTICE. The Company shall, as promptly as possible and in any event within three (3) business days of the occurrence thereof, notify the Holder of the occurrence of an Event of Default (i.e. upon the occurrence of one of the events described in Section 4(a) above without giving effect to the cure periods or notices required under clauses (i), (ii) and (v) thereof). (c) REMEDIES. Upon the occurrence of any Event of Default, the Majority Holders, at their option, may (i) by notice to the Company, declare the unpaid principal amount of this Note, all interest accrued and unpaid hereon and all other amounts payable hereunder to be immediately due and payable, whereupon the unpaid principal amount of this Note, all such interest and all such other amounts shall become immediately due and payable, without presentment, demand, protest or further notice of any kind, provided that if an event described in Section 4(a)(iii) or (iv) shall occur, all interest and all such other amounts shall become immediately due and payable automatically, without the giving of any such notice; and (ii) whether or not the actions referred to in clause (i) have been taken, exercise any or all of the Holders' rights and remedies under the Purchase Agreement and proceed to enforce all other rights and remedies available to the Holders under applicable law. 5. TRANSFER; SUCCESSORS AND ASSIGNS. The terms and conditions of this Note shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Notwithstanding the foregoing, the Holder may not assign, pledge, or otherwise transfer this Note without the prior written consent of the Company, which consent shall not be unreasonably withheld. Subject to the preceding sentence, this Note may be transferred only upon surrender of the original Note for registration of transfer, duly endorsed, or accompanied by a duly executed written instrument of transfer in form satisfactory to the Company. Thereupon, a new note for the same principal amount and interest will be issued to, and registered in the name of, the transferee. Interest and principal are payable only to the registered holder of this Note. 6. GOVERNING LAW. This Note and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of law. 7. NOTICES. Any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient upon receipt, when delivered personally or by courier, overnight delivery service or confirmed facsimile, or 48 hours after being deposited in the U.S. mail as certified or registered mail with postage prepaid, if such notice is addressed to the party to be notified at such party's address or facsimile number as set forth below or as subsequently modified by written notice. -8- 8. AMENDMENTS AND WAIVERS. Any term of this Note may be amended only with the written consent of the Company and the Majority Holders. Any amendment or waiver effected in accordance with this Section 8 shall be binding upon the Company, each Holder and each transferee of any Note. 9. STOCKHOLDERS, OFFICERS AND DIRECTORS NOT LIABLE. In no event shall any stockholder, officer or director of the Company be liable for any amounts due or payable pursuant to this Note. 10. SENIORITY. The indebtedness evidenced by this Note is hereby expressly senior in right of payment to the prior payment of all other indebtedness of the Company other than Permitted Senior Indebtedness (as defined in the Purchase Agreement), and the Company shall not be permitted to incur secured indebtedness which is senior in right of payment to the Notes other than Permitted Senior Indebtedness while this Note is outstanding. 11. SUBORDINATION. The indebtedness evidenced by this Note is hereby expressly subordinated, to the extent and in the manner hereinafter set forth, in right of payment to the prior payment in full of all of the Company's Permitted Senior Indebtedness. Upon any receivership, insolvency, assignment for the benefit of creditors, bankruptcy, reorganization, or arrangement which creditors (whether or not pursuant to bankruptcy or other insolvency laws), sale of all or substantially all of the assets, dissolution, liquidation, or any other marshaling of the assets and liabilities of the Company or in the event this Note shall be declared due and payable, (i) no amount shall be paid by the Company, whether in cash or property in respect of the principal of or interest on this Note at the time outstanding, unless and until the full amount of any Permitted Senior Indebtedness then outstanding shall be paid in full (but only to the extent of the value of the collateral securing any such Permitted Senior Indebtedness), and (ii) no claim or proof of claim shall be filed with the Company by or on behalf of the holder of this Note which shall assert any right to receive any payments in respect of the principal of and interest on this Note except subject to the payment in full all of the Permitted Senior Indebtedness then outstanding (but only to the extent of the value of the collateral securing any such Permitted Senior Indebtedness). Nothing contained in the preceding paragraphs shall impair, as between the Company and the Holder, the obligation of the Company, which is absolute and unconditional, to pay to the Holder hereof the principal hereof and interest hereon as and when the same shall become due and payable, or shall prevent the Holder, upon default hereunder, from exercising all rights, powers and remedies otherwise provided herein or by applicable law, all subject to the rights, if any, of the holders of Permitted Senior Indebtedness under the preceding paragraphs to receive cash or other properties otherwise payable or deliverable to the Holder pursuant to this Note. At any time and from time to time, upon the written request of the Company, the Holders will promptly and duly authenticate and deliver such instruments and documents and take such further action as the Company may reasonably request to give effect to the -9- purpose and intent of this Section 11, including without limitation to permit the creation of Permitted Liens (as defined in the Purchase Agreement). 12. SECURITY INTEREST. The Company hereby grants to the Holder a first priority security interest (subject to Permitted Liens created to secure Senior Permitted Indebtedness) in all assets and property now or hereafter owned or held by the Company, including without limitation: accounts, inventory, goods, equipment, fixtures, general intangibles (including goodwill and all intellectual property, including without limitation patents, patent applications, copyrights, trademarks and trade names), contract rights, royalties, documents, cash, securities, letters of credit, certificates of deposit, notes, instruments, chattel paper, deposit accounts, other financial assets, claims (whether by litigation, settlement, payment through insurance or otherwise, and including claims of past, present and future infringement) and all proceeds of the foregoing (the "Collateral"). In addition, the Company hereby appoints Holder as its attorney-in-fact for the purpose of signing and filing any uniform commercial code financial statements or other documents considered necessary or appropriate by Holder to perfect or enhance the foregoing grant of Holder's security interest, or deliver any notices required thereunder. 13. USURY. Anything herein to the contrary notwithstanding, if during any period for which interest is computed hereunder, the amount of interest computed on the basis provided for in this Note, together with all fees, charges and other payments which are treated as interest under applicable law, as provided for herein or in any other document executed in connection herewith, would exceed the amount of such interest computed on the basis of the Highest Lawful Rate, the Company shall not be obligated to pay, and the Holder shall not be entitled to charge, collect, receive, reserve or take, interest in excess of the Highest Lawful Rate, and during any such period the interest payable hereunder shall be computed on the basis of the Highest Lawful Rate. As used herein, "Highest Lawful Rate" means the maximum non-usurious rate of interest, as in effect from time to time, which may be charged, contracted for, reserved, received or collected by the Holder in connection with this Note under applicable law. 14. EXPENSES. The Company agrees to pay on demand all the losses, costs, and expenses (including, without limitation, attorneys' fees and disbursements) which the Holder incurs in connection with enforcement or attempted enforcement of this Note, or the protection or preservation of the Holder's rights under this Note, whether by judicial proceedings or otherwise. Such costs and expenses include, without limitation, those incurred in connection with any workout or refinancing, or any bankruptcy, insolvency, liquidation or similar proceedings. 15. WAIVERS. The Company hereby waives diligence, demand, presentment, protest or further notice of any kind. The Company agrees to make all payments under this Note without setoff or deduction and regardless of any counterclaim or defense. No single or partial exercise of any power under this Note shall preclude any other or further exercise of such power or exercise of any other power. No delay or omission on the part of the Holder in exercising any right under this Note shall operate as a waiver of such right or any other right hereunder. -10- 16. COUNTERPARTS. This Note may be executed in any number of counterparts, each of which will be deemed to be an original and all of which together will constitute a single agreement. 17. LOSS OF NOTE. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Note or any Note exchanged for it, and indemnity satisfactory to the Company (in case of loss, theft or destruction) or surrender and cancellation of such Note (in the case of mutilation), the Company will make and deliver in lieu of such Note a new Note of like tenor. COMPANY: ACCRUE SOFTWARE, INC. By: /s/ Jonathan D. Becher President and CEO Name: Jonathan D. Becher Address: 48634 Milmont Drive Fremont, CA 94538-7353 Facsimile Number: (510) 580-4501 AGREED TO AND ACCEPTED: ROBERT M. SMELICK /s/ Robert M. Smelick Robert M. Smelick Address: 65 Cloudview Rd. Sausalito, CA 94956 Facsimile Number: -11- EX-5 5 f87429a1exv5.txt EXHIBIT 5 Exhibit 5 THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. EXCEPT IN COMPLIANCE WITH RULE 144 PROMULGATED UNDER THE SECURITIES ACT OF 1933 OR ANY OTHER AVAILABLE EXEMPTION FROM REGISTRATION, NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933. SECURED CONVERTIBLE PROMISSORY NOTE $335,573.57 February 4, 2003 Fremont, California For value received, Accrue Software, Inc., a Delaware corporation (the "Company"), promises to pay to Sterling Payot Capital, LP (the "Holder"), the principal sum of Three Hundred Thirty Five Thousand Five Hundred Seventy Three and 57/100 Dollars ($335,573.57). Interest shall accrue from the date of this Note on the unpaid principal amount at a rate equal to 6.0% per annum, compounded annually. This Note is one of a series of Secured Convertible Promissory Notes containing substantially identical terms and conditions issued pursuant to that certain Secured Convertible Promissory Note Purchase Agreement dated February 4, 2003 (the "Purchase Agreement"). Such Notes are referred to herein as the "Notes," and the holders thereof are referred to herein as the "Holders." All other capitalized terms not defined herein shall have the meanings ascribed to such terms in the Purchase Agreement. This Note is subject to the following terms and conditions. 1. MATURITY. Unless converted as provided in Section 2, this Note will automatically mature and be due and payable on February 4, 2006 (the "Maturity Date"). Subject to Section 2 below, interest shall accrue on this Note but shall not be due and payable until the Maturity Date. Notwithstanding the foregoing, the entire unpaid principal sum of this Note, together with accrued and unpaid interest thereon, shall become immediately due and payable upon the occurrence of any Event of Default (as defined herein). 2. CONVERSION. The Notes shall be converted into equity securities of the Company (each a "Conversion") upon the terms and conditions set forth below: (a) OPTIONAL CONVERSION. Upon the written request of the Holders of a majority of the outstanding principal amount of the Notes (the "Majority Holders"), the entire principal amount of and (if requested by the Majority Holders) accrued interest on this and all other Notes shall be converted at the option of the Majority Holders either into shares of the Company's Common Stock or, in the event that there is a series of Preferred Stock of the Company issued or proposed to be issued, into the most senior series of such Preferred Stock. If the Majority Holders, as the case may be, elect to convert accrued interest into equity securities upon a Conversion, this election shall apply equally to all of the Notes. (b) AUTOMATIC CONVERSION. In the event that the closing bid or sales prices (whichever is applicable) of the Company's Common Stock is at least $0.20 per share (as adjusted for stock splits, stock dividends, recapitalizations and like transactions) for a period of 60 consecutive trading days, the entire principal amount of and accrued interest on this and all other Notes shall automatically be converted (an "Automatic Conversion") into shares of the Company's Common Stock. The Company shall promptly thereafter provide the Holder written notice of the terms, effect and mechanics of such Automatic Conversion. (c) CONVERSION PRICE. The number of shares of Common Stock or Preferred Stock, as applicable, to be issued upon a Conversion shall be equal to the quotient obtained by dividing (i) the entire principal amount of this Note plus (as applicable) accrued interest by (ii) $0.06 (as adjusted pursuant to Section 2(d)) (the "Conversion Price"), rounded to the nearest whole share. (d) CONVERSION PRICE ADJUSTMENTS. The Conversion Price shall be subject to adjustment from time to time as follows: (i) ISSUANCE OF ADDITIONAL STOCK BELOW PURCHASE PRICE. If the Company should issue, at any time after the date on which the first Note was sold (the "Purchase Date"), any Additional Stock (as defined below) without consideration or for a consideration per share less than the Conversion Price in effect immediately prior to the issuance of such Additional Stock, the Conversion Price in effect immediately prior to each such issuance shall automatically be adjusted as set forth in this Section 2(d), unless otherwise provided in this Section 2(d). (A) PRICE ADJUSTMENT FORMULA. Whenever the Conversion Price is adjusted pursuant to this Section 2(d), the Conversion Price shall be adjusted to a price equal to the price paid per share for such Additional Stock. (B) DEFINITION OF "ADDITIONAL STOCK". For purposes of this Section 2(d), "Additional Stock" shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to Section 2(d)(D) by the Company after the Purchase Date) other than (1) Common Stock issued pursuant to stock dividends, stock splits or similar transactions; (2) Shares of Common Stock issued or issuable to employees, consultants or directors of the Company pursuant to a stock option plan or restricted stock plan or incentive arrangement approved by the Board of Directors of the Company; -2- (3) Capital stock, or options or warrants to purchase capital stock, issued to financial institutions or lessors in connection with commercial credit arrangements, equipment financings, commercial property lease transactions or similar transactions approved by the Board of Directors where the principal purpose thereof is not to raise additional equity capital for the Company; (4) Capital stock, or warrants or options to purchase capital stock, issued in connection with bona fide acquisitions, mergers or similar transactions, the terms of which are approved by the Board of Directors of the Company; (5) Shares of Common Stock issued or issuable upon conversion of the Preferred Stock of the Company; and (6) Capital stock issued or issuable to an entity as a component of any business relationship with such entity for the purpose of (A) joint venture, technology licensing or development activities, (B) distribution, supply or manufacture of the Company's products or services or (C) any other arrangements involving corporate partners that are primarily for purposes other than raising capital, the terms of which business relationship with such entity are approved by the Board of Directors. (C) DETERMINATION OF CONSIDERATION. In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by the Company for any underwriting or otherwise in connection with the issuance and sale thereof. In the case of the issuance of the Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined by the Board of Directors. (D) DEEMED ISSUANCES OF COMMON STOCK. In the case of the issuance after the Purchase Date of securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (the "Common Stock Equivalents"), the following provisions shall apply for all purposes of this Section 2(d): (1) The aggregate maximum number of shares of Common Stock deliverable upon conversion, exchange or exercise (assuming the satisfaction of any conditions to convertibility, exchangeability or exercisability, including, without limitation, the passage of time, but without taking into account potential antidilution adjustments) of any Common Stock Equivalents and subsequent conversion, exchange or exercise thereof shall be deemed to have been issued at the time such securities were issued or such Common Stock Equivalents were issued and for a consideration equal to the consideration, if any, received by the Company for any such securities and related Common Stock Equivalents (excluding any cash received on account of accrued interest or accrued dividends), plus the minimum additional consideration, if any, to be received by the Company (without taking into account potential antidilution adjustments) upon the -3- conversion, exchange or exercise of any Common Stock Equivalents (the consideration in each case to be determined in the manner provided in Section 2(d)(i)(C). (2) In the event of any change in the number of shares of Common Stock deliverable or in the consideration payable to the Company upon conversion, exchange or exercise of any Common Stock Equivalents including, but not limited to, a change resulting from the antidilution provisions thereof, the Conversion Price, to the extent in any way affected by or computed using such Common Stock Equivalents, shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the conversion, exchange or exercise of such Common Stock Equivalents. (3) Upon the termination or expiration of the convertibility, exchangeability or exercisability of any Common Stock Equivalents, the Conversion Price, to the extent in any way affected by or computed using such Common Stock Equivalents, shall be recomputed to reflect the issuance of only the number of shares of Common Stock (and Common Stock Equivalents that remain convertible, exchangeable or exercisable) actually issued upon the conversion, exchange or exercise of such Common Stock Equivalents. (4) The number of shares of Common Stock deemed issued and the consideration deemed paid therefor pursuant to Section 2(d)(i)(D)(1) shall be appropriately adjusted to reflect any change, termination or expiration of the type described in either Section 2(d)(i)(D)(2) or 2(d)(i)(D)(3). (E) LIMITS ON CONVERSION PRICE ADJUSTMENTS. Notwithstanding any other provisions of this Section (2)(d)(i), no adjustment of the Conversion Price pursuant to this Section 2(d)(i) shall (1) except to the limited extent provided for in Sections 2(d)(i)(D)(2) and 2(d)(i)(D)(3), have the effect of increasing the Conversion Price above the Conversion Price in effect immediately prior to such adjustment, and (2) have the effect of decreasing the Conversion Price below the fair market value of the Company's Common Stock as of the Closing (as defined in the Purchase Agreement)(as adjusted for stock splits, stock dividends, recapitalizations and like transactions). (ii) STOCK SPLITS AND DIVIDENDS. In the event the Company should at any time after the Purchase Date fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or Common Stock Equivalents without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Conversion Price shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of this Note shall be increased in proportion to such increase in outstanding shares of Common Stock and Common Stock Equivalents. -4- (iii) REVERSE STOCK SPLITS. If the number of shares of Common Stock outstanding at any time after the Purchase Date is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of this Note shall be decreased in proportion to such decrease in outstanding shares. (e) MECHANICS AND EFFECT OF CONVERSION. No fractional shares of the Company's capital stock will be issued upon conversion of this Note. In lieu of any fractional share to which the Holder would otherwise be entitled, the Company will pay to the Holder in cash the amount of the unconverted principal and interest balance of this Note that would otherwise be converted into such fractional share. Upon conversion of this Note pursuant to this Section 2, the Holder shall surrender this Note, duly endorsed, at the principal offices of the Company or any transfer agent of the Company. At its expense, the Company will, as soon as practicable thereafter, issue and deliver to such Holder, at such principal office, a certificate or certificates for the number of shares to which such Holder is entitled upon such conversion, together with any other securities and property to which the Holder is entitled upon such conversion under the terms of this Note, including a check payable to the Holder for any cash amounts payable as described herein. Upon conversion of this Note, the Company will be forever released from all of its obligations and liabilities under this Note with regard to that portion of the principal amount and accrued interest being converted including without limitation the obligation to pay such portion of the principal amount and accrued interest. (f) PAYMENT OF INTEREST. Upon conversion of the principal amount of this Note into the Company's equity securities, any interest accrued on this Note that is not by reason of Section 2(a) or 2(b) hereof simultaneously converted into equity securities shall be immediately paid to the Holder. (g) REGULATORY COMPLIANCE. Notwithstanding the foregoing, in the event that the Company's Common Stock is listed on the Nasdaq Stock Market or another national securities exchange (or a listing application is pending with any such exchange), a Conversion of this Note (or a conversion into Common Stock of Preferred Stock issued pursuant to a Conversion of this Note) shall only be effective to the maximum extent permissible under the applicable rules and regulations of such an exchange without the approval of the transaction by the Company's stockholders. In the event such stockholder approval is required to give full effect to the Conversion of this Note, the maximum amount of principal and accrued interest (or the maximum number of shares of convertible Preferred Stock) that is permissible to be converted without the approval of the Company's stockholders shall be converted as otherwise provided herein and the Company shall promptly seek to obtain the stockholder approval necessary to give full effect to the Conversion. 3. PAYMENT. -5- (a) PAYMENT. Except as expressly contemplated herein, all payments shall be made in lawful money of the United States of America at such place as the Holder hereof may from time to time designate in writing to the Company. Payment shall be credited first to the accrued interest then due and payable and the remainder applied to principal. (b) MANDATORY PREPAYMENT ON LIQUIDATION. If a Liquidation Event (as defined below) is consummated prior to the Maturity Date or a Conversion, the Company shall pay the Holder an amount (the "Liquidation Amount") equal to 150% of the principal amount of this Note, plus accrued interest. The Liquidation Amount shall be paid in cash unless the Majority Holders consent in writing to the payment of all or any portion of the Liquidation Amount in consideration other than cash. The value of any such consideration other than cash shall be deemed to be the fair value thereof as determined by the Board of Directors irrespective of any accounting treatment. Upon payment of the Liquidation Amount, the Company will be forever released from all of its obligations and liabilities under this Note. For purposes of this Note, a "Liquidation Event" shall mean (i) a sale of all or substantially all of the assets or business of the Company whether by merger, sale of assets, sale of stock or otherwise, (ii) any reorganization, consolidation or merger of the Company where the outstanding voting securities of the Company immediately before the transaction represent or are converted into less than 50% of the outstanding voting power of the surviving entity (or its parent entity) immediately after the transaction, (iii) a sale or exchange of the Company's capital stock by the stockholders of the Company in one transaction or a series of related transactions where more than 50% of the outstanding voting power of the Company is acquired by a person or entity or group of related persons or entities, or (iv) any liquidation or dissolution of the Company, whether by bankruptcy, a general assignment for the benefit of creditors, receivership or otherwise. (c) NOTICES OF CERTAIN TRANSACTIONS. In case of any consolidation or merger of the Company, any consolidation or merger of the Company with or into another corporation (other than a consolidation or merger in which the Company is the surviving entity), or any transfer of all or substantially all of the assets of the Company (a "Change of Control"), the Company will mail or cause to be mailed to the Holder a notice specifying the effective date on which such consolidation, merger or transfer, and the time, if any is to be fixed, as of which the holders of record of Common Stock are to be determined. Such notice shall be mailed at least twenty (20) days prior to the record date or effective date for the event specified in such notice. In the event that the Majority Holders submit a written request for Conversion in connection with a Change of Control (a "Change of Control Conversion Request"), such Change of Control Conversion Request will be conditioned on, and will be effected immediately prior to, the occurrence of such Change of Control. At such time, the respective Holders of the Notes shall be deemed to have become the respective holders of record of the capital stock of the Company issued pursuant to the Conversion. 4. EVENTS OF DEFAULT. -6- (a) DEFINITION. The occurrence of any of the following shall constitute an "Event of Default" under this Note: (i) FAILURE TO PAY. The Company's failure to pay any principal or interest or any other amount required to be paid by it under the terms of this Note on the date due, and such failure shall continue for five (5) business days after the Holder has given written notice of such default to the Company; (ii) FAILURE TO COMPLY WITH COVENANTS. The Company's failure to perform or observe any other material covenant or agreement contained in any Note or the Purchase Agreement, and such failure shall continue for fifteen (15) business days after the Holder has given written notice of such failure to the Company (provided, however, that no notice from the Holder shall be required to commence the 15 business day cure period if the Company has knowledge of failure to perform or observe any such material covenant or agreement and has not complied with Section 4(b) hereof); (iii) VOLUNTARY BANKRUPTCY OR INSOLVENCY PROCEEDINGS. The Company's (A) applying for or consenting to the appointment of a receiver, trustee, liquidator or custodian of itself or of all or a substantial part of its property, (B) making a general assignment for the benefit of all or any of its creditors, (C) commencing dissolution or liquidation proceedings, (D) commencing any voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or consenting to any such relief or to the appointment of or taking possession of its property by any official in an involuntary case or other proceeding commenced against it, or (E) taking any action for the purpose of effecting any of the foregoing; or (iv) INVOLUNTARY BANKRUPTCY OR INSOLVENCY PROCEEDINGS. Commencement of any proceedings for the appointment of a receiver, trustee, liquidator or custodian of Company or of all or a substantial part of the property thereof, or an involuntary case or other proceedings seeking liquidation, reorganization or other relief with respect to the Company or the debts thereof under any bankruptcy, insolvency or other similar law now or hereafter in effect shall be commenced and an order for relief entered or such proceeding shall not be dismissed or discharged within thirty (30) days of commencement. (v) DEFAULT ON OTHER OBLIGATIONS. The occurrence of a default or event of default in any agreement between the Company and a third party that gives the third party the right to accelerate any indebtedness exceeding $500,000 or more or that could have a Material Adverse Effect (as defined in the Purchase Agreement) on the Company; and such failure shall continue for fifteen (15) business days after written notice of such default to the Company. -7- (vi) FAILURE TO OBTAIN STOCKHOLDER APPROVAL. The Company does not receive the requisite approval of its stockholders pursuant to Section 2(g) hereof within 120 days of written request to obtain such approval from the Majority Holders. (b) NOTICE. The Company shall, as promptly as possible and in any event within three (3) business days of the occurrence thereof, notify the Holder of the occurrence of an Event of Default (i.e. upon the occurrence of one of the events described in Section 4(a) above without giving effect to the cure periods or notices required under clauses (i), (ii) and (v) thereof). (c) REMEDIES. Upon the occurrence of any Event of Default, the Majority Holders, at their option, may (i) by notice to the Company, declare the unpaid principal amount of this Note, all interest accrued and unpaid hereon and all other amounts payable hereunder to be immediately due and payable, whereupon the unpaid principal amount of this Note, all such interest and all such other amounts shall become immediately due and payable, without presentment, demand, protest or further notice of any kind, provided that if an event described in Section 4(a)(iii) or (iv) shall occur, all interest and all such other amounts shall become immediately due and payable automatically, without the giving of any such notice; and (ii) whether or not the actions referred to in clause (i) have been taken, exercise any or all of the Holders' rights and remedies under the Purchase Agreement and proceed to enforce all other rights and remedies available to the Holders under applicable law. 5. TRANSFER; SUCCESSORS AND ASSIGNS. The terms and conditions of this Note shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Notwithstanding the foregoing, the Holder may not assign, pledge, or otherwise transfer this Note without the prior written consent of the Company, which consent shall not be unreasonably withheld. Subject to the preceding sentence, this Note may be transferred only upon surrender of the original Note for registration of transfer, duly endorsed, or accompanied by a duly executed written instrument of transfer in form satisfactory to the Company. Thereupon, a new note for the same principal amount and interest will be issued to, and registered in the name of, the transferee. Interest and principal are payable only to the registered holder of this Note. 6. GOVERNING LAW. This Note and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of law. 7. NOTICES. Any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient upon receipt, when delivered personally or by courier, overnight delivery service or confirmed facsimile, or 48 hours after being deposited in the U.S. mail as certified or registered mail with postage prepaid, if such notice is addressed to the party to be notified at such party's address or facsimile number as set forth below or as subsequently modified by written notice. -8- 8. AMENDMENTS AND WAIVERS. Any term of this Note may be amended only with the written consent of the Company and the Majority Holders. Any amendment or waiver effected in accordance with this Section 8 shall be binding upon the Company, each Holder and each transferee of any Note. 9. STOCKHOLDERS, OFFICERS AND DIRECTORS NOT LIABLE. In no event shall any stockholder, officer or director of the Company be liable for any amounts due or payable pursuant to this Note. 10. SENIORITY. The indebtedness evidenced by this Note is hereby expressly senior in right of payment to the prior payment of all other indebtedness of the Company other than Permitted Senior Indebtedness (as defined in the Purchase Agreement), and the Company shall not be permitted to incur secured indebtedness which is senior in right of payment to the Notes other than Permitted Senior Indebtedness while this Note is outstanding. 11. SUBORDINATION. The indebtedness evidenced by this Note is hereby expressly subordinated, to the extent and in the manner hereinafter set forth, in right of payment to the prior payment in full of all of the Company's Permitted Senior Indebtedness. Upon any receivership, insolvency, assignment for the benefit of creditors, bankruptcy, reorganization, or arrangement which creditors (whether or not pursuant to bankruptcy or other insolvency laws), sale of all or substantially all of the assets, dissolution, liquidation, or any other marshaling of the assets and liabilities of the Company or in the event this Note shall be declared due and payable, (i) no amount shall be paid by the Company, whether in cash or property in respect of the principal of or interest on this Note at the time outstanding, unless and until the full amount of any Permitted Senior Indebtedness then outstanding shall be paid in full (but only to the extent of the value of the collateral securing any such Permitted Senior Indebtedness), and (ii) no claim or proof of claim shall be filed with the Company by or on behalf of the holder of this Note which shall assert any right to receive any payments in respect of the principal of and interest on this Note except subject to the payment in full all of the Permitted Senior Indebtedness then outstanding (but only to the extent of the value of the collateral securing any such Permitted Senior Indebtedness). Nothing contained in the preceding paragraphs shall impair, as between the Company and the Holder, the obligation of the Company, which is absolute and unconditional, to pay to the Holder hereof the principal hereof and interest hereon as and when the same shall become due and payable, or shall prevent the Holder, upon default hereunder, from exercising all rights, powers and remedies otherwise provided herein or by applicable law, all subject to the rights, if any, of the holders of Permitted Senior Indebtedness under the preceding paragraphs to receive cash or other properties otherwise payable or deliverable to the Holder pursuant to this Note. At any time and from time to time, upon the written request of the Company, the Holders will promptly and duly authenticate and deliver such instruments and documents and take such further action as the Company may reasonably request to give effect to the -9- purpose and intent of this Section 11, including without limitation to permit the creation of Permitted Liens (as defined in the Purchase Agreement). 12. SECURITY INTEREST. The Company hereby grants to the Holder a first priority security interest (subject to Permitted Liens created to secure Senior Permitted Indebtedness) in all assets and property now or hereafter owned or held by the Company, including without limitation: accounts, inventory, goods, equipment, fixtures, general intangibles (including goodwill and all intellectual property, including without limitation patents, patent applications, copyrights, trademarks and trade names), contract rights, royalties, documents, cash, securities, letters of credit, certificates of deposit, notes, instruments, chattel paper, deposit accounts, other financial assets, claims (whether by litigation, settlement, payment through insurance or otherwise, and including claims of past, present and future infringement) and all proceeds of the foregoing (the "Collateral"). In addition, the Company hereby appoints Holder as its attorney-in-fact for the purpose of signing and filing any uniform commercial code financial statements or other documents considered necessary or appropriate by Holder to perfect or enhance the foregoing grant of Holder's security interest, or deliver any notices required thereunder. 13. USURY. Anything herein to the contrary notwithstanding, if during any period for which interest is computed hereunder, the amount of interest computed on the basis provided for in this Note, together with all fees, charges and other payments which are treated as interest under applicable law, as provided for herein or in any other document executed in connection herewith, would exceed the amount of such interest computed on the basis of the Highest Lawful Rate, the Company shall not be obligated to pay, and the Holder shall not be entitled to charge, collect, receive, reserve or take, interest in excess of the Highest Lawful Rate, and during any such period the interest payable hereunder shall be computed on the basis of the Highest Lawful Rate. As used herein, "Highest Lawful Rate" means the maximum non-usurious rate of interest, as in effect from time to time, which may be charged, contracted for, reserved, received or collected by the Holder in connection with this Note under applicable law. 14. EXPENSES. The Company agrees to pay on demand all the losses, costs, and expenses (including, without limitation, attorneys' fees and disbursements) which the Holder incurs in connection with enforcement or attempted enforcement of this Note, or the protection or preservation of the Holder's rights under this Note, whether by judicial proceedings or otherwise. Such costs and expenses include, without limitation, those incurred in connection with any workout or refinancing, or any bankruptcy, insolvency, liquidation or similar proceedings. 15. WAIVERS. The Company hereby waives diligence, demand, presentment, protest or further notice of any kind. The Company agrees to make all payments under this Note without setoff or deduction and regardless of any counterclaim or defense. No single or partial exercise of any power under this Note shall preclude any other or further exercise of such power or exercise of any other power. No delay or omission on the part of the Holder in exercising any right under this Note shall operate as a waiver of such right or any other right hereunder. -10- 16. COUNTERPARTS. This Note may be executed in any number of counterparts, each of which will be deemed to be an original and all of which together will constitute a single agreement. 17. LOSS OF NOTE. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Note or any Note exchanged for it, and indemnity satisfactory to the Company (in case of loss, theft or destruction) or surrender and cancellation of such Note (in the case of mutilation), the Company will make and deliver in lieu of such Note a new Note of like tenor. COMPANY: ACCRUE SOFTWARE, INC. By: /s/ Jonathan D. Becher President and CEO Name: Jonathan D. Becher Address: 48634 Milmont Drive Fremont, CA 94538-7353 Facsimile Number: (510) 580-4501 AGREED TO AND ACCEPTED: STERLING PAYOT CAPITAL, LP By: /s/ Robert M. Smelick Name: Robert M. Smelick Title: General Partner Address: 65 Cloudview Rd. Sausalito, CA 94956 Facsimile Number: -11- -----END PRIVACY-ENHANCED MESSAGE-----