-----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, H4roH8a7+Z+F24y9a5XHazvN1/KseyD/0/6yreh+hpXpYhET+mYtcA8RHm5Vo4Xv aq/u4gmZapQAEIzXRn0zLA== 0000940986-99-000001.txt : 19990118 0000940986-99-000001.hdr.sgml : 19990118 ACCESSION NUMBER: 0000940986-99-000001 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990114 ITEM INFORMATION: FILED AS OF DATE: 19990115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MUSTANG SOFTWARE INC CENTRAL INDEX KEY: 0000940986 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 700204718 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-25678 FILM NUMBER: 99506732 BUSINESS ADDRESS: STREET 1: 6200 LAKE MING RD CITY: BAKERSFIELD STATE: CA ZIP: 93306 BUSINESS PHONE: 8058732500 MAIL ADDRESS: STREET 1: 6200 LAKE MING RD CITY: BAKERSFIELD STATE: CA ZIP: 93306 8-K 1 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): December 31, 1998 Mustang Software, Inc. (Exact name of registrant as specified in its charter) California 0-25678 70-0204718 (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification No.) 6200 Lake Ming Road, Bakersfield, CA 93306 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (805) 873-2500 ................................................................. ................................................................. ....... (Former name or former address, if changed since last report.) 2 Item 7. Financial Statements and Exhibits. (a) Financial Statements of Business Acquired. Not applicable. (b) Pro forma financial information. Not Applicable. (c) Exhibits. 4.3 Certificate of Determination of Mustang Software, Inc. relating to the authorization and determination of the Series A Convertible Preferred Stock.* 99.1 Securities Purchase Agreement dated as of December 31, 1998 between the Company and Settondown Capital International Limited and the other investors named therein. 99.2 Escrow Agreement dated as of December 31, 1998 between the Company and Settondown Capital International Limited and the other investors named therein 99.3 Registration Rights Agreement dated as of December 31, 1998 between the Company and Settondown Capital International Limited and the other investors named therein. 99.4 Form of Warrants issued on December 31, 1998 to Investors and Placement Agent. * Previously filed as an exhibit to the Company's registration statement on Form S-3 (file no. 333-66663) filed November 2, 1998, and incorporated herein by reference. 3 Item 9. Sales of Equity Securities Pursuant to Regulation S. On December 31, 1998, pursuant to a Securities Purchase Agreement (the "Agreement") between the Company and the three institutional investors named in the Agreement (collectively the "Investors"), the Company completed a sale of equity securities pursuant to Regulation S under the Securities Act of 1933 (the "Securities Act"). Under the Agreement, the Company sold to the Investors for $250,000 an aggregate of 2,500 shares of its Series A Convertible Preferred Stock (the "Series A Preferred Stock") and Warrants to purchase of 75,000 shares of its Common Stock (the "Warrants"). Subject to certain conditions and limitations, beginning on March 31, 1999, each share of Series A Preferred Stock will be convertible into that number of shares of the Company's Common Stock which is determined by dividing $100 plus 5% per annum thereon from December 31, 1998 to the date of conversion, by the lower of $2.75 per share or the "market price" per share at the time of conversion. The "market price" for purposes of conversion is 90% of the average of the four lowest closing bid prices of the Common Stock during the 10 day trading period immediately preceding the conversion date (the "Lookback Period"). The Lookback Period is increased by two trading days every month commencing on April 1, 1999 and continues to increase by two trading days every month thereafter that the Preferred Stock is outstanding until the Lookback Period equals a maximum of thirty trading days. If not earlier converted, the Preferred Stock will automatically convert into Common Stock on December 31, 2000. Subject to certain conditions and limitations, the Company has the right to force conversion by the holders of the Preferred Stock in the event the closing bid price of the Common Stock is equal to or greater than $2.8125, $3.28125 or $3.75. In such event, the Company may force conversion by the holder of up to 15% of the total number of shares of Series A Preferred Stock, up to a cumulative aggregate of 75% of the total number of shares of Series A Preferred Stock issued to the holders. The Warrants are exercisable until December 31, 2000 at an exercise price of $3.03 per share. For its services in the transaction, the Company paid to Settondown Capital International Limited, as Placement Agent, a fee consisting of $5,000 cash, 125 shares of its Series A Preferred Stock and Warrants to purchase an aggregate of 75,000 shares of Common Stock. The terms of the Series A Preferred Stock and Warrants issued to the Placement Agent are identical to the terms of the corresponding securities issued to the Investors. The Company relied upon Regulation S under the Securities Act for the transaction. The Company and persons acting on its behalf believed that the buyers were outside the United States and no directed selling efforts were made in the United States. Each Investor and the Placement Agent(all of whom had addresses outside the United States) represented that it was not a "U.S. Person" as defined in Regulation S and, at the time the buy order for this transaction was originated, each Investor was outside the United States and no offer to purchase the Securities was made in the United States. Each Investor agreed not to reoffer or sell the securities, or to cause any transferee permitted under the Securities Purchase Agreement to reoffer or sell the Securities, within the United States, or for the account or benefit of a U.S. person, (i) as part of the distribution of the securities at any time, or (ii) otherwise, only in a transaction meeting the requirements of Regulation S, including without limitation, where the offer (i) is not made to a person in the United States and either (A) at the time the buy order is originated, the buyer is outside the United States or the Company and any person acting on its behalf reasonably believe that the buyer is outside the United States, or (B) the transaction is executed in, on or through the facilities of a designated offshore securities market and neither the seller nor any person acting on its behalf knows that the transaction has been pre- arranged with a buyer in the United States, and (ii) no direct selling efforts shall be made in the United States by the buyer, an affiliate or any person acting on their behalf, or in a transaction registered under the Securities Act or pursuant to an exemption from such registration. Appropriate legends were affixed to the certificates evidencing the securities in such transaction. 4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Dated January 14, 1999 MUSTANG SOFTWARE, INC. By: __/s/ James A. Harrer______________ James A. Harrer President and Chief Executive Officer 5 EXHIBIT 99.1 SECURITIES PURCHASE AGREEMENT SECURITIES PURCHASE AGREEMENT dated as of December 31, 1998 (the "Agreement"), between the entities listed on Schedule A attached hereto (collectively referred to as the "Investors"), SETTONDOWN CAPITAL INTERNATIONAL LTD. (the "Placement Agent") located at Charlotte House, Charlotte Street, P.O. Box N. 9204, Nassau, Bahamas, a corporation organized under the laws of Bahamas, and MUSTANG SOFTWARE, INC., a corporation organized and existing under the laws of the State of California (the "Company"). WHEREAS, the parties desire that, upon the terms and subject to the conditions contained herein, the Company shall issue and sell to the Investors, and the Investors shall purchase 2,500 shares of Preferred Stock (as defined below), and (b) Warrants to purchase 75,000 Warrant Shares, for a total aggregate purchase price of $250,000 (the "Aggregate Purchase Price"); and WHEREAS, the Company shall issue to the Placement Agent (in addition to the fees set forth in Section 12.7 below), in return for services rendered herein, 125 shares of Preferred Stock (as defined below), and a Warrant to purchase up to 10,000 Warrant Shares; and WHEREAS, such investments will be made in reliance upon the transaction exemption afforded by Regulation S as promulgated by the Securities and Exchange Commission ("SEC") under the United States Securities Act of 1933, as amended, and the regulations promulgated thereunder (the "Securities Act"), and/or upon such other exemption from the registration requirements of the Securities Act as may be available with respect to any or all of the investments in Securities to be made hereunder. NOW, THEREFORE, the parties hereto agree as follows: 6 ARTICLE I Certain Definitions Section 1.1 "Additional Shares" shall have that meaning set forth in Section 2.5 below. Section 1.2 "Bid Price" shall mean the closing bid price (as reported by Bloomberg L.P.) of the Common Stock on the Principal Market. Section 1.3 "Capital Shares" shall mean the Common Stock and any shares of any other class of common stock whether now or hereafter authorized, having the right to participate in the distribution of earnings and assets of the Company. Section 1.4 "Capital Shares Equivalents" shall mean any securities, rights, or obligations that are convertible into or exchangeable for, or giving any right to, subscribe for any Capital Shares of the Company or any warrants, options or other rights to subscribe for or purchase Capital Shares or any such convertible or exchangeable securities. Section 1.5 "Certificate of Determination" shall mean the Company's Certificate of Determination setting forth all of the rights, privileges and preferences of the Preferred Stock, as annexed hereto as Exhibit A. Section 1.6 "Closing" shall mean the closing of a purchase and sale of the Warrants and Preferred Stock pursuant to Article II below. Section 1.7 "Closing Date" shall be on the Subscription Date. At the Closing Date, all conditions contained in this Agreement (and in all Exhibits annexed hereto) must have been fulfilled at or prior to the Closing Date. In the event such date shall fall on a holiday or a weekend, then the next Trading Day thereafter shall be the Closing Date. Section 1.8 "Common Stock" shall mean the Company's common stock, no par value per share. 7 Section 1.9 "Damages" shall mean any loss, claim, damage, liability, costs and expenses which shall include, but not be limited to, reasonable attorney's fees, disbursements, costs and expenses of expert witnesses and investigation. Section 1.10 "Distribution Compliance Period" means a period that begins when the Securities were first offered to persons other than distributors in reliance upon Regulation S as promulgated under the Securities Act, or the date of closing of the offering, whichever is later, and continues until the end of the relevant provision of Regulation S (one year for equity securities of the Company (a reporting domestic issuer)). Section 1.11 "Effective Date" shall mean the date on which the SEC first declares effective a Registration Statement registering the resale of the following: (i) two hundred (200%) percent of the Underlying Shares (as of the date the Registration Statement is filed), and Warrant Shares, and (ii) two hundred (200%) percent of that number of Underlying Shares (as of the date the Registration Statement is filed), and Warrant Shares issued to the Placement Agent as set forth in Section 1.7 below. Section 1.12 "Escrow Agent" shall mean the law firm of The Goldstein Law Group, PC, pursuant to the terms of the Escrow Agreement attached as Exhibit B. Section 1.13 "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. Section 1.14 "Forced Conversion Period" shall mean 10 consecutive Trading Days. Section 1.15 "Issuance Price" shall mean $1.875 per share. Section 1.16 "Legend" shall have the meaning set forth in Section 8.1. 8 Section 1.17 "Material Adverse Effect" shall mean any effect on the business, operations, properties, prospects, or financial condition of the Company that is material and adverse to the Company and its subsidiaries and affiliates, taken as a whole, and/or any condition, circumstance, or situation that would prohibit or otherwise in any material respect interfere with the ability of the Company to enter into and perform any of its obligations under this Agreement, the Registration Rights Agreement, the Escrow Agreement, the Certificate of Determination or the Warrants in any material respect. Section 1.18 "NASD" shall mean the National Association of Securities Dealers, Inc. Section 1.19 "Outstanding" when used with reference to shares of Common Stock or Capital Shares (collectively the "Shares"), shall mean, at any date as of which the number of such Shares is to be determined, all issued and outstanding Shares, and shall include all such Shares issuable in respect of outstanding scrip or any certificates representing fractional interests in such Shares; provided, however, that "Outstanding" shall not mean any such Shares then directly or indirectly owned or held by or for the account of the Company. Section 1.20 "Person" shall mean an individual, a corporation, a partnership, an association, a limited liability company, a trust or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. Section 1.21 "Preferred Stock" shall mean the Company's Series A Preferred Stock with the rights, privileges and preferences, as set forth in the Certificate of Determination. Section 1.22 "Principal Market" shall mean the Nasdaq National Market, the Nasdaq Small Cap Stock Market, the American Stock Exchange, the OTC Electronic Bulletin Board operated by the National Association of Securities Dealers, Inc., the "pink sheets" published by the National Quotation Bureau, Inc., or the New York Stock Exchange, whichever is at the time the principal trading exchange or market for the Common Stock. 9 Section 1.23 "Purchase Price" shall mean with respect to each share of Preferred Stock, an amount equal to One Hundred ($100) Dollars. Section 1.24 "Registrable Securities" shall mean the Underlying Shares, the Additional Shares, the Warrant Shares, and all Securities issued to the Placement Agent, (i) in respect of which the Registration Statement (covering these securities) has not been declared effective by the SEC, (ii) which have not been sold under circumstances under which all of the applicable conditions of Rule 144 (or any similar provision then in force) under the Securities Act ("Rule 144") are met, (iii) which have not been otherwise transferred to holders who may trade such shares without restriction under the Securities Act, or (iv) the sales of which, in the opinion of counsel to the Company, are subject to any time, volume or manner limitations pursuant to Rule 144(k) (or any similar provision then in effect) under the Securities Act. Section 1.25 "Registration Rights Agreement" shall mean the agreement regarding the filing of the Registration Statement for the resale of the Registrable Securities, entered into between the Company, the Placement Agent, and the Investors on the Subscription Date annexed hereto as Exhibit D. Section 1.26 "Registration Statement" shall mean a registration statement on Form S-3 (if use of such form is then available to the Company pursuant to the rules of the SEC and, if not, on such other form promulgated by the SEC for which the Company then qualifies and which counsel for the Company shall deem appropriate, and which form shall be available for the resale of the Registrable Securities to be registered thereunder in accordance with the provisions of this Agreement, the Registration Rights Agreement, and the Warrants and in accordance with the intended method of distribution of such securities), for the registration of the resale by the Investors and the Placement Agent of the Registrable Securities under the Securities Act. Section 1.27 "Regulation S" shall have the meaning set forth in the recitals of this Agreement. 7 Section 1.28 "SEC" shall mean the Securities and Exchange Commission. Section 1.29 "Securities" shall mean the Preferred Stock, the Underlying Shares, the Additional Shares, the Warrants, the Warrant Shares and any and all Securities issued to the Placement Agent. Section 1.30 "Securities Act" shall have the meaning set forth in the recitals of this Agreement. Section 1.31 "SEC Documents" shall mean the Company's latest Form 10-K (and all amendments thereto) or 10-KSB (and all amendments thereto) as of the time in question, all Form 10-Qs or 10-QSBs and Form 8-Ks filed thereafter, and the Proxy Statement for its latest fiscal year as of the time in question until such time as the Company no longer has an obligation to maintain the effectiveness of a Registration Statement as set forth in the Registration Rights Agreement. Section 1.32 "Subscription Date" shall mean the date on which this Agreement and all Exhibits and attachments hereto, are executed and delivered by the parties hereto and all of the conditions relating to Section 2.1 (b)shall have been fulfilled. Section 1.33 "Trading Day" shall mean any day during which the New York Stock Exchange shall be open for business. Section 1.34 "Underlying Shares" shall mean all shares of Common Stock or other securities issued or issuable pursuant to conversion of the Preferred Stock. Section 1.35 "Warrants" shall have the meaning set forth in Section 2.4 and substantially in the form of Exhibit E. Section 1.36 "Warrant Shares" shall mean all shares of Common Stock or other securities issued or issuable pursuant to the exercise of the Warrants. 10 ARTICLE II Purchase and Sale of Preferred Stock and Warrants Section 2.1 Investments. (a) The Company agrees to sell and the Investors agree to purchase an aggregate of 2,500 shares of Preferred Stock and Warrants to purchase 75,000 Warrant Shares, against payment of the Purchase Price. (b) The right of the Company to receive the Purchase from the Investors, and the right of the Investors to receive the shares of Preferred Stock and Warrants is subject to the satisfaction on the Closing Date of each of the following conditions: (i) acceptance by the Company, and by all of the Investors, of this Agreement and all duly executed Exhibits thereto by an authorized officer of the Company; (ii) delivery into escrow by the Investors of clear funds for the Purchaser Price (as more fully set forth in the Escrow Agreement attached hereto as Exhibit B); (iii) all representations and warranties of the Investors and of the Company contained herein shall remain true and correct in all material respects as of the Closing Date; (iv) the Company shall have obtained all permits and qualifications required by any state for the offer and sale of the Preferred Stock and the Warrants, or shall have the availability of exemptions therefrom; (v) the sale and issuance of the Preferred Stock and Warrants shall be legally permitted by all laws and regulations to which the Investors and the Company are subject; (vi) delivery of the original shares of Preferred Stock and Warrants as described herein; 11 (vii) receipt by the Investors of an opinion of counsel of the Company as set forth to Exhibit G attached hereto and instructions to the Transfer Agent as set forth in Exhibit H annexed hereto; (viii) written proof that the Certificate of Determination which had been filed with the Secretary of State of the State of California remains in full force and effect, and (ix) payment of all fees as set forth in Section 12.7 below and the Escrow Agreement. Section 2.2 Form of Payment. Each Investor shall pay the Purchase Price by delivering clean funds in United States Dollars by wire transfer to the Escrow Agent, against delivery of the original Securities. The parties have entered into an Escrow Agreement annexed hereto as Exhibit C which is incorporated by this reference. Section 2.3 Wire Instructions. Wire instructions for the Escrow Agent are as follows: Chase Manhattan Bank, NA ABA No. 021000021 For the Account of United States Trust Company of New York Account No. 920-1-073195 In favor of The Goldstein Law Group, PC Attorney Escrow Account Account No. 59-01405 Section 2.4 The Warrants. On the Subscription Date, the Company will issue to the Investors (pro rata) and the Placement Agent Warrants exercisable beginning on the Subscription Date and then exercisable any time over the two year period thereafter, to purchase an aggregate of 75,000 Warrant Shares for the Investors and 10,000 Warrant Shares for the Placement Agent at the Exercise Price (as defined in the Warrant). The Warrants shall be delivered by the Company to the Escrow Agent, and delivered by the Escrow Agent to the Investors and Placement Agent pursuant to the terms of this Agreement and the Escrow Agreement. All of the aforementioned Warrant Shares shall be registered for resale pursuant to the Registration Rights Agreement. 12 Section 2.5 Additional Shares. In the event that (a) within five Trading Days after the date in which the Investors and/or the Placement Agent receive any of the Securities issued hereunder, a "blackout period" occurs in accordance with the Sections 3(h) and 3(i) of the Registration Rights Agreement, and (b) the Bid Price on the Trading Day immediately preceding such "blackout period" (the "Old Bid Price") is greater than the Bid Price on the first Trading Day following such "blackout period" (the "New Bid Price"), the Investors and/or the Placement Agent may sell its Registrable Securities at the New Bid Price pursuant to an effective Registration Statement, and the Company shall issue to the Investors and/or the Placement Agent the number of additional shares equal to the difference between (y) the product of the number of Registrable Securities held by the Investors and/or the Placement Agent during such "blackout period" that are or were not otherwise freely tradeable and the Old Bid Price, divided by the New Bid Price and (z) the number of Registrable Securities held by the Investors and/or the Placement Agent during such "blackout period" that were not otherwise freely tradeable during such Blackout Period. Section 2.6 Liquidated Damages. In addition to any other provisions for liquidated damages in this Agreement or any Exhibit annexed hereto, in the event that the Company does not deliver unlegended Common Stock in connection with the sale of such Common Stock by the Investor(s) and/or the Placement Agent as set forth in Article VIII below within three (3) Trading Days of surrender by the Investor(s) of the Common Stock certificate in accordance with the terms and conditions set forth in Article VIII below (such date of receipt is referred to as the "Receipt Date"), the Company shall pay to the Investor(s), in immediately available funds, upon demand, as liquidated damages for such failure and not as a penalty, one (1%) percent of the Purchase Price of the Common Stock undelivered for every day thereafter for the first ten (10) days and two (2%) percent for every day thereafter that the unlegended shares of Common Stock are not delivered, which liquidated damages shall run from the fourth 13 (4th) Trading Day after the Receipt Date. The parties hereto acknowledge and agree that the sum payable pursuant to the Registration Rights Agreement and as set forth above, and the obligation to issue Registrable Securities under Section 2.6 above, shall constitute liquidated damages and not penalties. The parties further acknowledge that the amount of loss or damages likely to be incurred is incapable or is difficult to precisely estimate, and the parties are sophisticated business parties and have been represented by sophisticated and able legal and financial counsel and negotiated this Agreement at arm's length. Notwithstanding the above, in the event that the Company does not deliver unlegended Common Stock in connection with the sale of such Common Stock by the Investor(s) and/or the Placement Agent as set forth in Article IX below within three (3) Trading Days of the Receipt Date), the Company shall also pay to the Investor(s), in immediately available funds, interest (at the then current prime rate) on the Purchase Price of the Common Stock undelivered for every day thereafter that the unlegended shares of Common Stock are not delivered. Any and all payments required pursuant to this paragraph shall be payable only in cash. 14 ARTICLE III Representations and Warranties of the Investors and Placement Agent Each of the Investors and the Placement Agent represents and warrants to the Company that: Section 3.1 Intent. Each of the Investors and the Placement Agent is entering into this Agreement for its own account and has no present arrangement (whether or not legally binding) at any time to sell the Securities to or through any person or entity; provided, however, that by making the representations herein, the Investors and the Placement Agent do not agree to hold the Securities for any minimum or other specific term and reserves the right to dispose of the Securities at any time in accordance with federal and state securities laws applicable to such disposition. Section 3.2 Authority. This Agreement has been duly authorized and validly executed and delivered by each of the Investors and the Placement Agent is a valid and binding agreement of the Investors and the Placement Agent enforceable against each of them in accordance with its terms, subject to applicable bankruptcy, insolvency, or similar laws relating to, or affecting generally the enforcement of, creditors' rights and remedies or by other equitable principles of general application. Section 3.3 Organization and Standing. Each of the Investors and the Placement Agent is duly organized, validly existing, and in good standing under the laws of the countries and/or states of their incorporation or organization. Section 3.4 Absence of Conflicts. The execution and delivery of this Agreement and any other document or instrument executed in connection herewith, and the consummation of the transactions contemplated thereby, and compliance with the requirements thereof, will not violate any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on 15 Investors and the Placement Agent, or, to the Investors or the Placement Agent's knowledge, (a) violate any provision of any indenture, instrument or agreement to which any of the Investors are a party or are subject, or by which any of the Investors and the Placement Agent or any of their assets is bound; (b) conflict with or constitute a material default thereunder; (c) result in the creation or imposition of any lien pursuant to the terms of any such indenture, instrument or agreement, or constitute a breach of any fiduciary duty owed by Investors or the Placement Agent to any third party; or (d) require the approval of any third- party (which has not been obtained) pursuant to any material contract, agreement, instrument, relationship or legal obligation to which any of the Investors or the Placement Agent is subject or to which any of their assets, operations or management may be subject. Section 3.5 Disclosure; Access to Information. Each of the Investors has received all documents, records, books and other information pertaining to Investors investment in the Company that have been requested by Investors, including the opportunity to ask questions and receive answers. The Company is subject to the periodic reporting requirements of the Exchange Act, and each of the Investors and the Placement Agent has reviewed or received copies of any such reports that have been requested by it. Each of the Investors represents that it has reviewed the Company's, Form 10-KSB for the year ended December 31, 1997, Form 10-QSB's, the proxy statement for the Company's 1998 Annual Meeting, and the Special Meeting of Shareholders held on December 1, 1998 and Form 8-K's filed for the twelve months prior to the Subscription Date. Section 3.6 Manner of Sale. At no time were any of the Investors or the Placement Agent presented with or solicited by or through any leaflet, public promotional meeting, television advertisement or any other form of general solicitation or advertising. 16 Section 3.7 Registration or Exemption Requirements. Each of the Investors and the Placement Agent further acknowledges and understands that the Securities may not be transferred, resold or otherwise disposed of except in a transaction registered under the Securities Act and any applicable state securities laws, or unless an exemption from such registration is available. Each of the Investors and the Placement Agent understands that the certificate(s) evidencing the Securities will be imprinted with a legend that prohibits the transfer of these Securities unless (i) they are registered or such registration is not required, and (ii) if the transfer is pursuant to an exemption from registration. Section 3.8 No Legal, Tax or Investment Advice. Each of the Investors understands that nothing in this Agreement or any other materials presented to the Investors and the Placement Agent in connection with the purchase and sale of the Securities constitutes legal, tax or investment advice. The Investors and the Placement Agent have relied on, and have consulted with, such legal, tax and investment advisors as they, in their sole discretion, have deemed necessary or appropriate in connection with their purchase of the Securities. Section 3.9 Accredited Investor. Each of the undersigned is an "Accredited Investor" as defined below who represents and warrants it is included within one or more of the following categories of "Accredited Investors": (i) Any bank as defined in Section 3(a)(2) of the Act, or any savings and loan associated or other institution as defined in Section 3(a)(5)A of the Act whether acting in its individual or fiduciary capacity, any broker or dealer registered pursuant to Section 15 of the 1934 Act, any insurance company as defined in Section 2(13) of the Act , any investment company registered under the Investment Company Act of 1958, any plan established and maintained by a state, its political subdivisions or any agency or instrumentality of a state or its political subdivisions for the benefits of its employees if such plan has total assets 17 in excess of $500,000 any employee benefit plan within the meaning of Title 1 of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such Act, which is either a bank, savings and loan association, insurance company, or registered investment advisor, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self- directed plan with investment decisions made solely by persons that are accredited investors. (ii) Any private business development company as defined in Section 202(a)(22) of the Investment Advisors Act of 1940. (iii) Any organization described in Section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000. (iv) Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner; (v) Any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeds $1,000,000; (vi) Any natural person who had an individual income in excess of $200,000 in each of the two (2) most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching that same income level in the current year; (vii) Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in Section 230.506(b)(2)(ii) of Regulation D under the Act; 18 (viii) Any entity in which all of the equity owners are accredited investors; and (ix) Any self-directed employee benefit plan with investment decisions made solely by persons that are accredited investors within the meaning of Rule 501 of Regulation D promulgated under the Act. Section 3.10 No Registration, Review or Approval. Each Investor and the Placement Agent acknowledges and understands that the limited private offering and sale of Securities pursuant to this Agreement has not been reviewed or approved by the SEC or by any state securities commission, authority or agency, and is not registered under the Act or under the securities or "blue sky" laws, rules or regulations of any state. Each Investor and the Placement Agent acknowledges, understands and agrees that the Securities are being offered and sold hereunder pursuant to (i) an offshore offering exemption to the registration provisions of the Act pursuant to Regulation S promulgated under such Act, and (ii) a similar exemption to the registration provisions of applicable state securities laws. Each Investor and the Placement Agent understand that the company is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments and understandings of such Investor and the Placement Agent set forth herein in order to determine the applicability of such exemptions and the suitability of each Investor to acquire the Securities. Section 3.11 Investment Intent. Without limiting its ability to resell the Securities pursuant to an effective registration statement, each Investor is acquiring the Securities solely for its own account and not with a view to the distribution, assignment or resale to others. Each Investor understands and agrees that it may bear the economic risk of its investment in the Securities for an indefinite period of time. Section 3.12 Offering Outside the United States. Each Investor is not a "U.S. Person" as defined in Regulation S (as the same may be amended from time to time) promulgated under the Act.1 At the time the buy order for this transaction was originated, each Investor was outside the United States and no offer to 19 purchase the Securities was made in the United States. Each Investor agrees not to reoffer or sell the Securities, or to cause any transferee permitted hereunder to reoffer or sell the Securities, within the United States, or for the account or benefit of a U.S. person, (i) as part of the distribution of the Securities at any time, or (ii) otherwise, only in a transaction meeting the requirements of Regulation S under the Act, including without limitation, where the offer (i) is not made to a person in the United States and either (A) at the time the buy order is originated, the Buyer is outside the United States or the Company and any person acting on its behalf reasonably believe that the buyer is outside the United States, or (B) the transaction is executed in, on or through the facilities of a designated offshore securities market and neither the seller nor any person acting on its behalf knows that the transaction has been pre-arranged with a buyer in the United States, and (ii) no direct selling efforts shall be made in the United States by the buyer, an affiliate or any person acting on their behalf, or in a transaction registered under the Act or pursuant to an exemption from such registration. Section 3.13 Regulation S Offering Transfer Restrictions. (i) The transaction restrictions in connection with this offshore offer and sale restrict each Investor and the Placement Agent from offering and selling to U.S. Persons, or for the account or benefit of a U.S. Person, for a period of time (the "Distribution Compliance Period"). The Distribution Compliance Period for the Securities is one (1) year from the Subscription Date. (ii) A legend substantially in the form of Article VIII herein has been or will be placed on any certificates or other documents evidencing the Securities so as to restrict the resale, pledge, hypothecation or other transfer thereof in accordance with the provisions hereof and the provisions of Regulation S promulgated under the Securities Act. 20 (iii) Offers and sales of the Securities prior to the expiration of the Distribution Compliance Period (or the effective date of the Registration Statement) may be made pursuant to the following conditions: a. The purchaser of the Securities, other than a distributor, certifies that it is not a U.S. Person and is not acquiring the Preferred Stock for the account or benefit of any U.S. Person or is a U.S. Person who purchased the Securities in a transaction that did not require registration under the Securities Act; b. The Purchaser of the Securities agrees to sell such securities only in accordance with Regulation S as promulgated under the Securities Act, pursuant to registration under the Securities Act, or pursuant to an available exemption from registration; and agrees not to engage in hedging transactions with regard to such Securities unless in compliance with the Securities Act; and c. The Securities contain a legend, substantially in the form of Article VIII herein, to the effect that transfer of the Securities is prohibited except in accordance with Regulation S, pursuant to registration under the Securities Act, or pursuant to an available exemption from registration; and that hedging transactions involving those Securities may not be conducted unless in compliance with the Securities Act. (iv) Offers and Sales of Warrants and Warrant Shares by the Investors or the Placement Agent must comply with the following conditions, in addition to those listed in Section 3.13 (iii) above: a. Each Warrant must bear a legend stating that the Warrant and the securities to be issued upon its exercise have not been registered under the Securities Act, and that the Warrant may not be exercised by or on behalf of any U.S. Person unless registered under the Securities Act or an exemption from such registration is available; and 21 b. Each person exercising a Warrant is required to give: (1) Written certification that it is not a U.S. Person and that the Warrant is not being exercised on behalf of a U.S. Person; or (2) A written opinion of counsel to the effect that the Warrant and the securities delivered upon exercise thereof have not been registered under the Securities Act or are exempt from registration thereunder; and (A) Procedures are implemented to ensure that the Warrant may not be exercised within the United States, and that the securities may not be delivered within the United States upon exercise, other than in offerings deemed to meet the definition of "offshore transaction" pursuant to Regulation S, unless registered under the Securities Act or an exemption from such registration is available. (v) Investors and the Placement Agent agree not to engage in hedging transactions with respect to the Securities prior to the expiration of the Distribution Compliance Period. For offers and sales of the Securities prior to the expiration of the Distribution Compliance Period, such offering materials must state that hedging transactions involving those securities may not be conducted unless in compliance with the Securities Act and Regulation S promulgated thereunder. (vi) Investors and the Placement Agent agree to comply with the provisions of Regulation S in connection with Offshore Resales, as defined therein. Section 3.14 Understanding. The Subscriber understands that the Company is the issuer of the securities which are the subject of this Agreement, and that, for purposes of Regulation S, a "distributor" is any underwriter, dealer or other person who participates, pursuant to a contractual arrangement, in 22 the distribution of securities offered or sold in reliance on Regulation S and that an "affiliate" is any partner, officer, director or any person directly or indirectly controlling, controlled by or under common control with the person in question. In this regard, the Subscriber shall no, in violation of the provisions of Regulation S, act as a distributor, either directly or through any affiliate, nor shall he sell, transfer, hypothecate or otherwise convey the Securities or any interest therein, other than outside the United States to a non-U.S. person. 23 ARTICLE IV Representations and Warranties of the Company The Company represents and warrants to the Investors and the Placement Agent that: Section 4.1 Organization of the Company. The Company is a corporation duly incorporated and existing in good standing under the laws of the State of California and has all requisite corporate authority to own its properties and to carry on its business as now being conducted except as described in the SEC Documents. The Company is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, other than those in which the failure so to qualify would not reasonably be expected to have a Material Adverse Effect. Section 4.2 Authority. (i) The Company has the requisite corporate power and authority to enter into and perform its obligations under this Agreement, and all Exhibits annexed hereto, and to issue to the Investors the Preferred Stock and Warrants to the Placement Agent, the Underlying Shares, Additional Shares, Preferred Stock, Warrants and the Warrant Shares, (ii) the execution, issuance and delivery of this Agreement, and all Exhibits annexed hereto by the Company and the consummation by it of the transactions contemplated hereby have been duly authorized by all necessary corporate action and no further consent or authorization of the Company or its Board of Directors, and (iii) this Agreement, and all Exhibits annexed hereto have been duly executed and delivered by the Company and constitute valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, or similar laws relating to, or affecting generally the enforcement of, creditors' rights and remedies or by other equitable principles of general application. 24 Section 4.3 Capitalization. The authorized capital stock of the Company consists of 30,000,000 shares of Common Stock, no par value per share, of which 4,098,845 shares are issued and outstanding, and 10,000,000 shares of preferred stock, no par value per share, of which 15,246 have been designated as Series A Preferred Stock, and 5,456 are issued and outstanding. All of the outstanding shares of Common Stock of the Company have been duly and validly authorized and issued and are fully paid and nonassessable. Section 4.4 Common Stock. The Company has registered its Common Stock pursuant to Section 12(g) of the Exchange Act and is in full compliance with all reporting requirements of the Exchange Act, and such Common Stock is currently listed or quoted on the Nasdaq Small Cap Stock Market. The Company is a "Reporting Issuer" as defined in Rule 902 of Regulation S. Section 4.5. SEC Documents. The Company has delivered or made available to the Investors true and complete copies of the SEC Documents filed by the Company with the SEC during the twelve (12) months immediately preceding the Subscription Date (including, without limitation, proxy information and solicitation materials). The Company has not provided to any of the Investors any information that, according to applicable law, rule or regulation, should have been disclosed publicly prior to the date hereof by the Company, but which has not been so disclosed. The SEC Documents comply in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and rules and regulations of the SEC promulgated thereunder and none of the SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Documents comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC or other applicable rules and 25 regulations with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). Section 4.6 Valid Issuances. When issued and payment has been made therefor (in the case of the Investors), the Preferred Stock, Underlying Shares, Warrants, and Warrant Shares, issued to the Placement Agent, and the Additional Shares, the Underlying Shares, the Warrants, and the Warrant Shares sold to the Investors will be duly and validly issued, fully paid, and nonassessable. Neither the issuance of Preferred Stock, Underlying Shares, Warrants, or Warrant Shares, to the Placement Agent, nor the sale of the Additional Shares, the Underlying Shares, the Warrants, or the Warrant Shares to the Investors, pursuant to, nor the Company's performance of its obligations under, this Agreement, and all Exhibits annexed hereto will (i) result in the creation or imposition by the Company of any liens, charges, claims or other encumbrances upon the Preferred Stock, Warrants, Warrant Shares, or Underlying Shares, issued to the Placement Agent, the Additional Shares, the Preferred Stock, the Underlying Shares, the Warrant Shares issued to the Investors, or any of the assets of the Company, or (ii) entitle the holders of Outstanding Capital Shares to preemptive or other rights to subscribe to or acquire the Capital Shares or other securities of the Company. Section 4.7 Corporate Documents. The Company has furnished or made available to each of the Investors true and correct copies of the Company's 26 Articles of Incorporation, as amended and in effect on the date hereof (the "Certificate"), and the Company's By-Laws, as amended and in effect on the date hereof (the "By-Laws"). Section 4.8 No Conflicts. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby, including without limitation the issuance of the Securities, do not and will not (i) result in a violation of the Company's Articles of Incorporation or By-Laws or (ii) conflict with, or constitute a material default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any material agreement, indenture, instrument or any "lock-up" or similar provision of any underwriting or similar agreement to which the Company is a party, or (iii) result in a violation of any federal, state or local law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations) applicable to the Company or by which any property or asset of the Company is bound or affected, nor is the Company otherwise in violation of, conflict with or in default under any of the foregoing as would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. The business of the Company is not being conducted in violation of any law, ordinance or regulation of any governmental entity, except for possible violations that either singly or in the aggregate would not reasonably be expected to have a Material Adverse Effect. The Company is not required under federal, state or local law, rule or regulation to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under this Agreement or issue and sell the Securities, in accordance with the terms hereof; provided that, for purposes of the representation made in this sentence, the Company is assuming and relying upon the accuracy of the relevant representations and agreements of the Investors herein. 27 Section 4.9 No Material Adverse Change. Since December 31, 1997, no Material Adverse Effect has occurred or exists with respect to the Company, except as disclosed in the SEC Documents, or as publicly announced. Section 4.10 No Undisclosed Liabilities. The Company has no liabilities or obligations which are material, individually or in the aggregate, that are not disclosed in the SEC Documents or otherwise publicly announced, other than those set forth in the Company's financial statements or as incurred in the ordinary course of the Company's businesses since December 31, 1997, and which, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect. Section 4.11 No Undisclosed Events or Circumstances. Since December 31, 1997, no event or circumstance has occurred or exists with respect to the Company or its businesses, properties, prospects, operations or financial condition, that, under applicable law, rule or regulation, requires public disclosure or announcement prior to the date hereof by the Company but which has not been so publicly announced or disclosed in the SEC Documents. Section 4.12 Litigation and Other Proceedings. Except as may be set forth in the SEC Documents, there are no lawsuits or proceedings pending or to the knowledge of the Company threatened, against the Company, nor has the Company received any written or oral notice of any such action, suit, proceeding or investigation, which would reasonably be expected to have a Material Adverse Effect. Except as set forth in the SEC Documents, no judgment, order, writ, injunction or decree or award has been issued by or, so far as is known by the Company, requested of any court, arbitrator or governmental agency which would be reasonably expected to result in a Material Adverse Effect. 28 Section 4.13 Accuracy of Reports and Information. The Company is in compliance, to the extent applicable, with all reporting obligations under either Section 12(b), 12(g) or 15(d) of the 1934 Act. The Company has registered its Common Stock pursuant to Section 12 of the 1934 Act and the Common Stock is listed and trades on the Nasdaq National Market. The Company has complied in all material respects and to the extent applicable with all reporting obligations, under either Section 13(a) or 15(d) of the 1934 Act for a period of at least twelve (12) months immediately preceding the offer and sale of the Securities (or for such shorter period that the Company has been required to file such material). Section 4.14 Dilution. The Company is aware and acknowledges that the conversion of the Preferred Stock, and/or exercise of the Warrants, may cause dilution to existing stockholders and may significantly increase the outstanding number of shares of Common Stock. Section 4.15 Employee Relations. The Company is not involved in any labor dispute, nor, to the knowledge of the Company, is any such dispute threatened which could reasonably be expected to have a Material Adverse Effect. None of the Company's employees is a member of a union and the Company believes that its relations with its employees are good. Section 4.16 Environmental Laws. The Company is (i) in compliance with any and all foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants and which the Company know is applicable to them ("Environmental Laws"), (ii) has received all permits, licenses or other approvals required under applicable Environmental Laws to conduct its business, and (iii) is in compliance with all terms and conditions of any such permit, license or approval. 29 Section 4.17 Insurance. The Company is insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company believes to be prudent and customary in the businesses in which the Company is engaged. The Company has no notice to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires, or obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition, financial or otherwise, or the earnings, business or operation, of the Company. Section 4.18 Board Approval. The Board of Directors of the Company has concluded, in its good faith business judgment, that the issuances of the securities of the Company in connection with this Agreement are in the best interests of the Company. 30 ARTICLE V Covenants of the Investors Section 5.1 9.99%Limitations. The number of shares of Common Stock which may be voluntarily acquired by any of the Investors pursuant to the terms of this Agreement shall not exceed the number of such shares which, when aggregated with all other shares of Common Stock then owned by any of the Investors, beneficially or deemed beneficially owned by any of the Investors, inclusive of Warrant Shares, would result in any of the Investors owning more than 9.99% of the issued and outstanding Common Stock of the Company in accordance with Rule 13d-3 of the Exchange Act and the regulations promulgated thereunder. The preceding paragraph shall not interfere with any Investor's right to convert Preferred Stock which in the aggregate totals more than 9.99% of the then outstanding shares of Common Stock so long as the Investor does not own more than 9.99% of the outstanding Common Stock at any given time. The foregoing limitation shall not apply to the Automatic Conversion provision contained in Section IV K of the Certificate of Determination. Section 5.2 Forced Conversion. (a) Circumstances of Forced Conversion. Subject to the other provisions of this Section 5.2, from and after the Effective Date the Company shall have the right to force conversion by the holders of the Preferred Stock of up to a cumulative aggregate of 75% of the total number of shares of Preferred Stock issued by the Company by telecopying written notice of its election to force conversion containing the information set forth in Section 5.2(c) (the "Forced Conversion Notice") to the holders under the following circumstances: 31 1. In the event at any time and from time to time the Closing Bid Price of the Common Stock is equal to or greater than 150% of the Issuance Price during a Forced Conversion Period the Company may force conversion by the holder of up to a maximum of 15% of the total number of shares of Preferred Stock issued by the Company to the holders. Such right to force conversion pursuant to the provisions of this Subsection 5.2(a)1 shall continue until the total number of shares of Preferred Stock converted by holders pursuant to the provisions of this Subsection 5.2(a) equals 25% of the total number of shares of Preferred Stock issued by the Company. 2. In the event, at any time and from time to time, the Closing Bid Price of the Common Stock is equal to or greater than 175% of the Issuance Price during a Forced Conversion Period, the Company may force conversion by the holder of up to a maximum of 15% of the total number of shares of Preferred Stock issued by the Company to the holders. Such right to force conversion pursuant to the provisions of this Subsection 5.2(a)2 shall continue until the total number of shares of Preferred Stock converted by holders pursuant to the provisions of this Subsection 5.2(a)2 equals 25% of the total number of shares of Preferred Stock issued by the Company. 3. In the event, at any time and from time to time, the Closing Bid Price of the Common Stock is equal to or greater than 200% of the Issuance Price during a Forced Conversion Period the Company may force conversion by the holder of up to a maximum of 15% of the total number of shares of Preferred Stock issued by the Company to the holders. Such right to force conversion pursuant to the provisions of this Subsection 5.2(a) 3 shall continue until the total number of shares of Preferred Stock converted by holders pursuant to the provisions of this Subsection 5.2(a) 3 equals 25% of the total number of shares of Preferred Stock issued by the Company. 32 4. In the event the Company causes a forced conversion as set forth herein the Accrual Deduction shall not apply. A Forced Conversion Notice shall not be deemed to affect or otherwise reduce the holders conversion rights as set forth herein as to the shares of Preferred Stock not subject to a Forced Conversion Notice. (b) Delivery of Forced Conversion Notice. No more than 15% of the total number of shares of Preferred Stock issued by the Company shall be subject to forced conversion pursuant to the provisions of Section 5.2(a) during any single 30 calendar day period. The Company shall effect such forced conversions pro rata amongst the holders according to the number of shares of Preferred Stock held by each holder of Preferred Stock. The Forced Conversion Notice must be delivered by the Company prior to 12:00 p.m. Eastern Time on the first Trading Day immediately following the expiration of the Forced Conversion Period. A Forced Conversion Notice shall be deemed delivered on (i) the Trading Day it is faxed by the Company if such notice is faxed (with confirmation that it was received by the holder) prior to 12:00 p.m. Eastern Time, or (ii) the immediately succeeding Trading Day if it is faxed (with confirmation that it was received by the holder) after 12:00 p.m. Eastern Time on a Trading Day or at any time on a day which is not a Trading Day. No Forced Conversion Notice may be deemed delivered, on a day that is not a Trading Day. The Company must forward the original Forced Conversion Notice to the holder via reputable overnight courier for delivery on the Trading Day immediately following transmission of the Forced Conversion Notice via facsimile. In the event the original Forced Conversion Notice is not sent to the holder of the Preferred Stock as set forth above, the Forced Conversion Notice shall be deemed revoked and ineffective. Once the Company has exercised its right to force conversion of the Preferred Stock by giving a Forced Conversion Notice to the holder as set forth above it shall be deemed irrevocable. Each Trading Day on which the Forced Conversion Notice is telecopied to and received by the holder shall be deemed a Conversion Date for the purposes of completing the forced conversion and calculating the number of shares of Common Stock to be 33 issued upon the forced conversion. The Company will transmit the certificates representing shares of Common Stock issuable pursuant to the Forced Conversion Notice (together with the certificates representing the remaining shares of Preferred Stock not being forced to convert, if any) to the holder via reputable overnight courier, by electronic transfer or otherwise within three (3) Trading Days after the Forced Conversion Notice was faxed to holder (the "Forced Conversion Date"). In the event the Company does not deliver the shares of Common Stock upon the forced conversion within seven days after the Forced Conversion Notice was faxed to holder, the holder shall be entitled to liquidated damages determined as set forth in Section IV D above. In the event the Company fails to comply with the terms of the forced conversion in any manner on more than three separate occasions, which shall not include any such failure which has been amicably resolved between the Company and two thirds of the holders within seven days after the holder has received a Forced Conversion Notice or a Forced Conversion Notice within the meaning of the last sentence of this Section, it shall have waived its right to serve a Forced Conversion Notice upon that particular holder at any time in the future. A Forced Conversion Notice shall be deemed to be effective if the information it contains is inaccurate provided that the actual facts would have supported the delivery of the Forced Conversion Notice and the holders are not prejudiced by the inaccurate information. (c) Contents of Forced Conversion Notice. The Forced Conversion Notice shall set forth (i) a calculation referencing the conversion formula contained herein showing the number of shares of Common Stock being issued pursuant to the applicable forced conversion, and (ii) a statement identifying which subsection among 5.2(a)1, 5.2(a) 2, or 5.2(a) 3, that the Company is relying on to force conversion, and the Closing Bid Prices of the Common Stock during the Forced Conversion Period. 34 (d) Mechanics of Forced Conversion. Upon the Company's full compliance with the forced conversion provisions set forth in Sections 5.2(a),(b) and (c), the shares of Preferred Stock that are the subject of a forced conversion shall be automatically canceled and converted into a right to receive shares of Common Stock, and all rights of the Preferred Stock which are the subject of the forced conversion, including the right to conversion, shall cease without further action, provided the holder receives the correct number of shares of Common Stock due upon the forced conversion. Immediately following receipt of the Forced Conversion Notice, if the holder concurs with the Company's conversion calculations in the Forced Conversion Notice, the holder shall surrender their original shares of Preferred Stock which are the subject of the Forced Conversion Notice at the office of the Company, and the Company shall send to the holder a new Preferred Stock certificate for that number of shares of Preferred Stock which remains outstanding, if any, within three Business Days after such surrender by the holder. (e) Adjustments. The number of shares of Common Stock issuable upon the forced conversion of the Preferred Stock shall be adjusted in the manner and under the circumstances as set forth in Section IV of the Certificate of Determination. (f) Holders' Right to Convert. At any time up to the date immediately prior to the Forced Conversion Date, the holders shall have the right to convert the Preferred Stock into Common Stock as more fully provided in Section IV of the Certificate of Determination. 35 ARTICLE VI Covenants of the Company Section 6.1 Registration Rights. The Company shall cause the Registration Rights Agreement to remain in full force and effect so long as any Registrable Securities remain outstanding and the Company shall comply in all material respects with the terms thereof. Section 6.2 Reservation of Common Stock. As of the date hereof, the Company has reserved and the Company shall continue to reserve and keep available at all times, free of preemptive rights, shares of Common Stock for the purpose of enabling the Company to satisfy any obligation to issue the Additional Shares, Underlying Shares, and Warrant Shares; such amount of shares of Common Stock to be reserved shall be calculated based upon the minimum Purchase Price therefor under the terms of this Agreement, the Certificate of Determination, and the Warrants. The number of shares so reserved shall be increased or decreased to reflect potential increases or decreases in the Common Stock that the Company may thereafter be so obligated to issue by reason of adjustments to the Preferred Stock, the Warrants. Section 6.3 Listing of Common Stock. The Company hereby agrees to maintain the listing of the Common Stock on the Principal Market, and as soon as practicable after the Subscription Date to list all of the Underlying Shares, and the Warrant Shares issuable hereunder. The Company further agrees, if the Company applies to have the Common Stock traded on any other Principal Market, it will include in such application all of the Underlying Shares, and the Warrant Shares, and will take such other action as is reasonably necessary or desirable in the opinion of the Investors to cause the Common Stock to be listed on such other Principal Market as promptly as possible. The Company will comply with the listing and trading requirements of its Common Stock on a Principal Market (including, without limitation, maintaining sufficient net tangible assets) and will comply in all respects with the Company's reporting, filing and other obligations under 36 the bylaws or rules of the Principal Market. In the event the Company receives notification from Nasdaq concerning delisting of the Common Stock on the Principal Market, the Company will comply with all applicable listing standards of the Principal Market. Section 6.4 Exchange Act Registration. Until the earlier to occur of (i) four years after the Subscription Date, or (ii) the Securities are no longer held by the Investors, the Company will use its best efforts to maintain the registration of its Common Stock under Section 12 of the Exchange Act, will comply in all respects with its reporting and filing obligations under the Exchange Act, and until the earlier to occur of (i) four years after the Subscription Date or (ii) the Securities are no longer held by the Investors, the Company will not take any action or file any document (whether or not permitted by Exchange Act or the rules thereunder) to terminate or suspend such registration or to terminate or suspend its reporting and filing obligations under said Act. Section 6.5 Legends. The certificates evidencing the Preferred Stock to be sold by the Investors pursuant to Section 9.1 shall be free of legends, except as set forth in Article IX. Section 6.6 Corporate Existence. The Company will take all steps necessary to preserve and continue the corporate existence of the Company. Section 6.7 Consolidation; Merger. The Company shall not, at any time after the date hereof, effect any merger or consolidation of the Company with or into, or a transfer of all or substantially all of the assets of the Company to, another entity (a "Consolidation Event") unless the resulting successor or acquiring entity (if not the Company) assumes by written instrument the obligation to deliver to the Investors and the Placement Agent such shares of stock and/or securities as the Investors and the Placement Agent are entitled to receive pursuant to this Agreement. 37 Section 6.8 Issuance of Underlying Shares, and Warrant Shares. The issuance of the Underlying Shares, and the Warrant Shares pursuant to exercise of the Warrants, and the conversion of the Preferred Stock, shall be made in accordance with the provisions and requirements of Regulation S and any applicable state securities law. Section 6.9 Legal Opinion. The Company's independent counsel shall deliver to the Investors upon execution of this Agreement, an opinion in the form of Exhibit G annexed hereto. The Company will obtain for the Investors and the Placement Agent, at the Company's expense, any and all opinions of counsel which may be reasonably required in order to convert the Preferred Stock, including, but not limited to, obtaining for the Investors and the Placement Agent an opinion of counsel, subject only to receipt of a notice of conversion (the "Notice of Conversion") in the form of Exhibit I, directing the Transfer Agent to remove the legend from the certificate. Section 6.10 20% Rule Limitation. If required by the Principal Market on which the Company's Common Stock is then listed, the Company shall use its best efforts to obtain, as soon as practicable, but no later than seventy-five days after the Subscription Date, shareholder approval of the below market issuances of shares of Common Stock (and securities convertible into and exercisable for Common Stock) to the Investors and the Placement Agent in excess of twenty percent (20%) of the number of shares of Common Stock outstanding as of Subscription Date. In the event that the aforementioned proposal is not so approved (other than in a case where the failure to so obtain shareholder approval has resulted from the failure of the Investors or the Placement Agent to vote all Capital Shares owned by them on the applicable record date in favor of the relevant proposal), the Company shall seek a waiver from The Nasdaq Stock Market (or such other Principal Market) for such below market issuances. In the event the Company does not receive such waiver within the earlier of ten (10) days after the stockholders meeting or eighty-five days after the Subscription Date, the 38 Company shall delist the Common Stock from The Nasdaq Stock Market and immediately list the Common Stock on the OTC Bulletin Board. Notwithstanding the foregoing, in the event the Company has issued an amount of Common Stock equal to twenty percent (20%) of the number of shares of Common Stock outstanding as of Subscription Date, the Investors and the Placement Agent may effect conversions of the Preferred Stock at a price per Underlying Share equal to the lesser of: (i) the Issuance Price, or (ii) the Bid Price on the Trading Day that a Conversion Notice is sent to the Company (or such next successive Trading Day if such day is not a Trading Day). Section 6.11 Restrictions on Future Financings. The Company agrees that it will not, without the prior written consent of all of the Investors, enter into any subsequent or further offer or sale of Common Stock, or any securities or other instruments convertible into shares of Common Stock, with any party that is not a party to this Agreement until the Registration Statement has been effective for sixty days. This restriction shall not apply to: (a) the issuance of securities (other than for cash) in connection with a merger, consolidation, sale of assets, or other disposition, (b) the exchange of Capital Shares for assets, stock, or joint venture interest, (c) an offering of any of the Company's securities at then current market prices with no repricing or reset provisions, or (d) any employee benefit plan; provided, however, that any action contemplated under this Section is subject to the condition that registration right if any, in connection with such action shall not require the filing by the Company of a registration statement of such shares prior to sixty days after the Effective Date. Section 6.12 Conversion of Preferred Stock. The Company will permit the Investors and the Placement Agent to exercise their right to convert the Preferred Stock by telecopying an executed and completed Notice of Conversion to the Company as is set forth in the Certificate of Determination. 39 Section 6.13 Restriction on Future Issuances of Preferred Stock. The Company agrees that except as provided for in this Agreement, it will not issue any additional share or shares of Preferred Stock. Section 6.14 Forced Conversion Limitation. The Company may not serve a Forced Conversion Notice (as defined in Section 5.2(c)) upon any of the Investors if such notice would result in any one Investor holding, at any time, more than 9.99% of the number of shares of Common Stock then outstanding. 40 ARTICLE VII Due Diligence Review; Non-Disclosure of Non-Public Information Section 7.1 Due Diligence Review. The Company shall make available for inspection and review by the Investors, advisors to and representatives of the Investors (who may or may not be affiliated with the Investors), any underwriter participating in any disposition of the Registrable Securities on behalf of the Investors pursuant to the Registration Statement, any such registration statement or amendment or supplement thereto or any blue sky, NASD or other filing, all financial and other records, all SEC Documents and other filings with the SEC, and all other corporate documents and properties of the Company as may be reasonably necessary for the purpose of such review, and cause the Company's officers, directors and employees to supply all such information reasonably requested by any of the Investors or any such representative, advisor or underwriter in connection with such Registration Statement (including, without limitation, in response to all questions and other inquiries reasonably made or submitted by any of them), prior to and from time to time after the filing and effectiveness of the Registration Statement for the sole purpose of enabling the Investors and such representatives, advisors and underwriters and their respective accountants and attorneys to conduct initial and ongoing due diligence with respect to the Company and the accuracy of the Registration Statement. Section 7.2 Non-Disclosure of Non-Public Information (a) The Company shall not disclose non- public information to the Investors, advisors to, or representatives of, the Investors unless prior to disclosure of such information the Company identifies such information as being non-public information and provides each Investor, and its advisors and representatives with the opportunity to accept or refuse to accept such non-public information for review. The Company may, as a condition to disclosing any non-public information hereunder, require each of the Investors advisors and representatives to enter into a confidentiality agreement in form reasonably satisfactory to the Company and the Investors. 41 (b) Nothing herein shall require the Company to disclose non-public information to any of the Investors or their advisors or representatives, and the Company represents that it does not disseminate non- public information to any investors who purchase stock in the Company in a public offering, to money managers or to securities analysts, provided, however, that notwithstanding anything herein to the contrary, the Company will, as hereinabove provided, immediately notify the advisors and representatives of the Investors and, if any, underwriters, of any event or the existence of any circumstance (without any obligation to disclose the specific event or circumstance) of which it becomes aware, constituting non-public information (whether or not requested of the Company specifically or generally during the course of due diligence by such persons or entities), which, if not disclosed in the prospectus included in the Registration Statement would cause such prospectus to include a material misstatement or to omit a material fact required to be stated therein in order to make the statements, therein, in light of the circumstances in which they were made, not misleading. Nothing contained in this Section shall be construed to mean that such persons or entities other than the Investors (without the written consent of the Investors prior to disclosure of such information) may not obtain non- public information in the course of conducting due diligence in accordance with the terms of this Agreement and nothing herein shall prevent any such persons or entities from notifying the Company of their opinion that based on such due diligence by such persons or entities, that the Registration Statement contains an untrue statement of a material fact or omits a material fact required to be stated in the Registration Statement or necessary to make the statements contained therein, in light of the circumstances in which they were made, not misleading. 42 ARTICLE VIII Legends Section 8.1 Legends. The certificates representing the Securities shall be subject to a legend restricting transfer under the Act, such legend to be substantially as follows: "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (TOGETHER WITH THE REGULATIONS PROMULGATED THEREUNDER, THE "SECURITIES ACT"), AND MAY NOT BE SOLD, OFFERED FOR SALE, TRANSFERRED, PLEDGED OR HYPOTHECATED WITHIN THE UNITED STATES (AS THAT TERM IS DEFINED IN REGULATION S PROMULGATED UNDER THE SECURITIES ACT) OR TO A U.S. PERSON (AS THAT TERM IS DEFINED IN REGULATION S) IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FILED UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS, UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. HEDGING TRANSACTIONS INVOLVING THESE SECURITIES MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH THE SECURITIES ACT." The Warrants shall also be subject to an additional legend stating that the Warrants and the securities to be issued upon their exercise have not been registered under the Securities Act and that the Warrants may not be exercised by or on behalf of any U.S. Person (as defined under Regulation S) unless registered under the Securities Act or any exemption from registration is available. The certificates representing the Securities, and each certificate issued in transfer thereof, will also bear any legend required under any applicable state securities law. Upon receipt of the Notice of Conversion annexed hereto as Exhibit F the Company shall forward to the Transfer Agent an opinion substantially in the form annexed hereto as Exhibit G to have the legend removed and the company shall issue replacement certificates. 43 In addition to the Legend, each certificate representing Preferred Stock will bear the following legend: "These securities may be forcibly converted and are subject to a restriction on transfer provided in that certain Securities Purchase Agreement dated December , 1998 (the `Agreement') by and between Mustang Software, Inc., the entities listed on Schedule A attached to the Agreement and Settondown Capital International Ltd. A copy of the Agreement is available upon request from Mustang Software, Inc., 6200 Lake Ming Road, Bakersfield, CA 93306, Attention: Chief Financial Officer." Upon the execution and delivery hereof, the Company is issuing to the transfer agent for its Common Stock (and to any substitute or replacement transfer agent for its Common Stock upon the Company's appointment of any such substitute or replacement transfer agent) instructions in substantially the form of Exhibit H hereto. Such instructions shall be irrevocable by the Company from and after the date hereof or from and after the issuance thereof to any such substitute or replacement transfer agent, as the case may be, except as otherwise expressly provided in the Registration Rights Agreement. It is the intent and purpose of such instructions, as provided therein, to require the transfer agent for the Common Stock from time to time upon transfer of Registrable Securities by the Investors or the Placement Agent to issue certificates evidencing such Registrable Securities free of the Legend during the following periods and under the following circumstances and without consultation by the transfer agent with the Company or its counsel and without the need for any further advice or instruction or documentation to the transfer agent by or from the Company or its counsel or the Investors: (a) at any time after the Effective Date, upon surrender of one or more certificates evidencing the Warrants or Preferred Stock, that bear the Legend, to the extent accompanied by a notice requesting the issuance of new certificates free of the Legend to replace those surrendered; provided that (i) the 44 Registration Statement shall then be effective; (ii) the Investor(s) and/or the Placement Agent confirm to the transfer agent that it has sold, pledged or otherwise transferred or agreed to sell, pledge or otherwise transfer such Common Stock in a bona fide transaction to a third party that is not an affiliate of the Company; and (iii) the Investor(s) and/or Placement Agent confirm to the transfer agent that the Investor(s) and/or Placement Agent have complied with the prospectus delivery requirement. (b) at any time upon any surrender of one or more certificates evidencing Registrable Securities that bear the Legend, to the extent accompanied by a notice requesting the issuance of new certificates free of the Legend to replace those surrendered and containing representations that (i) the Investor(s) and/or the Placement Agent is permitted to dispose of such Registrable Securities, without limitation as to amount or manner of sale pursuant to Rule 144(k) under the Securities Act or (ii) the Investor(s) and/or Placement Agent has sold, pledged or otherwise transferred or agreed to sell, pledge or otherwise transfer such Registrable Securities, in a manner other than pursuant to an effective registration statement, to a transferee who will upon such transfer be entitled to freely tradeable securities. The Company shall have counsel provide any and all opinions necessary for the sale under Rule 144. Any of the notices referred to above in this Section 8.1 may be sent by facsimile to the Company's transfer agent. Section 8.2 No Other Legend or Stock Transfer Restrictions. No legend other than those specified in Section 8.1 have been or shall be placed on the share certificates representing the Preferred Stock or the Warrants, and no instructions or "stop transfer orders," so called, "stock transfer restrictions," or other restrictions have been or shall be given to the Company's transfer agent with respect thereto other than as expressly set forth in this Article VIII. Section 8.3 Investor's Compliance. Nothing in this Article shall affect in any way any of the Investors obligations under any agreement to comply with all applicable securities laws upon resale of the Securities. 45 ARTICLE IX Choice of Law Section 9.1 Choice of Law; Venue; Jurisdiction. This Agreement will be construed and enforced in accordance with and governed by the laws of the State of California, except for matters arising under the Securities Act, without reference to principles of conflicts of law. The party commencing any legal action shall have the option of choosing the jurisdiction of the U.S. District Court sitting in the Southern District of the State of New York or in the Northern or Central District of California in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if another party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. Each party waives its right to a trial by jury. 46 ARTICLE X Assignment; Entire Agreement, Amendment; Termination Section 10.1 Assignment. The Investor's interest in this Agreement and its ownership of Preferred Stock and Warrants may be assigned or transferred at any time, in whole or in part, to any other person or entity (including any affiliate of the Investor) who agrees to, and truthfully can, make the representations and warranties contained in Article III and who agrees to be bound by the covenants of Article V. The provisions of this Agreement shall inure to the benefit of, and be enforceable by, any transferee of any of the Common Stock purchased or acquired by the Investors hereunder with respect to the Common Stock held by such person. Section 10.2 Termination. This Agreement shall terminate upon the earliest of (i) the date that all the Registrable Securities have been sold by the Investors pursuant to the Registration Statement; (ii) the date the Investors receive an opinion from counsel to the Company that all of the Registrable Securities may be sold under the provisions of Rule 144; or (iii) three years after the Subscription Date; provided, however, that the provisions of Articles III, IV, V, VI (as long as the Securities are beneficially owned by any of the Investors or the Placement Agent, or their permitted assigns), VIII, IX, X, XI, and XII, herein, and the registration rights provisions for the Registrable Securities held by the Investors and the Placement Agent set forth in this Agreement, and the Registration Rights Agreement, shall survive the termination of this Agreement. 47 ARTICLE XI Notices Section 11.1 Notices. All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing and, unless otherwise specified herein, shall be (i) personally served, (ii) deposited in the mail, registered or certified, return receipt requested, postage prepaid, (iii) delivered by reputable air courier service with charges prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed as set forth below or to such other address as such party shall have specified most recently by written notice. Any notice or other communication required or permitted to be given hereunder shall be deemed effective (a) upon hand delivery or delivery by facsimile, with accurate confirmation generated by the transmitting facsimile machine, at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second business day following the date of mailing by reputable courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for such communications shall be: If to Mustang Software, Inc.: Mustang Software, Inc. 6200 Lake Ming Road Bakersfield, CA 93306 Attention: Jim Harrer Facsimile: (805) 873-2457 Telephone: (805) 873-2500 If to the Investors, at the addresses listed on Schedule A. 48 If to the Placement Agent, at the address listed on the first page of this Agreement. with a copy to: The Goldstein Law Group, PC 65 Broadway, 10th Floor New York, NY 10006 Attention: Scott H. Goldstein, Esq. Telephone: (212) 809-4220 Facsimile: (212) 809-4228 Either party hereto may from time to time change its address or facsimile number for notices under this Section 11.1 by giving at least ten (10) days' prior written notice of such changed address or facsimile number to the other party hereto. Section 11.2 Indemnification. The Company agrees to indemnify and hold harmless each of the Investors and each officer, director of the Investors or person, if any, who controls the Investor within the meaning of the Securities Act against any losses, claims, damages or liabilities, joint or several (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees), to which the Investors may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon the breach of any term of this Agreement. This indemnity agreement will be in addition to any liability which the Company may otherwise have. Each Investor agrees that it will indemnify and hold harmless the Company, and each officer, director of the Company or person, if any, who controls the Company within the meaning of the Securities Act, against any losses, claims, damages or liabilities (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees) to which the 49 Company or any such officer, director or controlling person may become subject under the Securities Act or otherwise, insofar as such losses claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon the breach of any term of this Agreement. This indemnity agreement will be in addition to any liability which the Investors or any subsequent assignee may otherwise have. Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve the indemnifying party from any liability which it may have to any indemnified party otherwise than as to the particular item as to which indemnification is then being sought solely pursuant to this Section. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, assume the defense thereof, subject to the provisions herein stated and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation, unless the indemnifying party shall not pursue the action to its final conclusion. The indemnified party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall not be at the expense of the indemnifying party if the indemnifying party has assumed the defense of the action with counsel reasonably satisfactory to the indemnified party; provided that if the indemnified party is one of the Investors, the fees and expenses of 50 such counsel shall be at the expense of the indemnifying party if (i) the employment of such counsel has been specifically authorized in writing by the indemnifying party, or (ii) the named parties to any such action (including any impleaded parties) include both the Investor and the indemnifying party and the Investor shall have been advised by such counsel that there may be one or more legal defenses available to the indemnifying party different from or in conflict with any legal defenses which may be available to the Investors (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the Investors, it being understood, however, that the indemnifying party shall, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable only for the reasonable fees and expenses of one separate firm of attorneys for the Investor(s), which firm shall be designated in writing by the Investor(s)). No settlement of any action against an indemnified party shall be made without the prior written consent of the indemnified party, which consent shall not be unreasonably withheld. Section 11.3 Contribution. In order to provide for just and equitable contribution under the Securities Act in any case in which (i) the indemnified party makes a claim for indemnification pursuant to Section 11.2 hereof but is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that the express provisions of Section 11.2 hereof provide for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of any indemnified party, then the Company and the applicable Investor shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and 51 all attorneys' fees), in either such case (after contribution from others) on the basis of relative fault as well as any other relevant equitable considerations. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in Section 11.2 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contributions from any person who was not guilty of such fraudulent misrepresentation. 52 ARTICLE XII Miscellaneous Section 12.1 Counterparts; Facsimile; Amendments. This Agreement may be executed in multiple counterparts, each of which may be executed by less than all of the parties and shall be deemed to be an original instrument which shall be enforceable against the parties actually executing such counterparts and all of which together shall constitute one and the same instrument. Except as otherwise stated herein, in lieu of the original documents, a facsimile transmission or copy of the original documents shall be as effective and enforceable as the original. This Agreement may be amended only by a writing executed by the Company on the one hand, and all of the Investors, and the Placement Agent, on the other hand. Section 12.2 Entire Agreement. This Agreement, the Exhibits or Attachments hereto, which include, but are not limited to the Certificate of Determination, the Warrants , the Escrow Agreement, and the Registration Rights Agreement set forth the entire agreement and understanding of the parties relating to the subject matter hereof and supersede all prior and contemporaneous agreements, negotiations and understandings between the parties, both oral and written relating to the subject matter hereof. The terms and conditions of all Exhibits and Attachments to this Agreement are incorporated herein by this reference and shall constitute part of this Agreement as is fully set forth herein. Section 12.3 Survival; Severability. The representations, warranties, covenants and agreements of the parties hereto shall survive each Closing hereunder. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that such severability shall be ineffective if it materially changes the economic benefit of this Agreement to any party. 53 Section 12.4 Title 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. Section 12.5 Reporting Entity for the Common Stock. The reporting entity relied upon for the determination of the trading price or trading volume of the Common Stock on any given Trading Day for the purposes of this Agreement and all Exhibits shall be Bloomberg, L.P. or any successor thereto. The written mutual consent of the Investor and the Company shall be required to employ any other reporting entity. Section 12.6 Replacement of Certificates. Upon (i) receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of a certificate representing the Preferred Stock, and (ii) in the case of any such loss, theft or destruction of such certificate, upon delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or (iii) in the case of any such mutilation, on surrender and cancellation of such certificate, the Company at its expense will execute and deliver, in lieu thereof, a new certificate of like tenor. Section 12.7 Fees and Expenses. Each of the parties shall pay its own fees and expenses (including the fees of any attorneys, accountants, appraisers or others engaged by such party) in connection with this Agreement and the transactions contemplated hereby, except that the Company shall pay on the Subscription Date (i) the sum of Five Thousand ($5,000) Dollars in cash out of the proceeds received by the Company on the Subscription Date to Goldstein, Goldstein & Reis, LLP for legal, administrative, and escrow fees, and (ii) to the Placement Agent (A) 125 shares of Preferred Stock, and (B) a Warrant to purchase 10,000 Warrant Shares, for Placement Agent fees. 54 Section 12.8 Noncircumvention. The Company and the Investors agree that they shall not circumvent this Agreement and the Company's obligation to pay fees to the Placement Agent, and the Company, the Investors and the Placement Agent agree that they will not circumvent the provisions of this Agreement or the Escrow Agreement and the Company's obligation for the payment of fees to the Escrow Agent. [Remainder of Page Intentionally Left Blank] [Signature Page Follows] 55 IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase Agreement to be executed by the undersigned, thereunto duly authorized, as of the date first set forth above. MUSTANG SOFTWARE, INC. By __/s/ James A. Harrer ______ James A Harrer, President By___/s/ Donald M. Leonard_____ Donald M. Leonard, Chief Financial Officer SETTONDOWN CAPITAL INTER- NATIONAL LTD., Placement Agent By__/s/ Dawn E. Davis__________ Dawn E. Davis AVALON CAPITAL, LTD. By___/s/ Giora Lavie___________ Giora Lavie, Attorney-in-Fact THE CUTTYHUNK FUND LIMITED By__/s/ Geoffrey M. Lewis______ Geoffrey M. Lewis Director 56 SCHEDULE A INVESTORS: 1. AVALON CAPITAL, LTD. 17 Earlsfort Terrace Dublin #2 Ireland, Attention: Giora Lavie Telephone: 01197235441937 Facsimile: 01197235441870. Initial Investment Amount: $125,000 No. of Shares of Preferred Stock: 1,250 Warrant: 37,500 2. THE CUTTYHUNK FUND LIMITED 73 Front Street Hamilton HM 12, Bermuda Attention: Robert Rans Telephone: (441) 295-8658 Facsimile: (441) 292-6274. Initial Investment Amount: $125,000 No. of Shares of Preferred Stock: 1,250 Warrant: 37,500 57 EXHIBIT 99.2 EXHIBIT B ESCROW AGREEMENT THIS AGREEMENT is made as of the 31st day of December, 1998 by and among MUSTANG SOFTWARE, INC., with its principal office at 6200 Lake Ming Road, Bakersfield, CA 93306 (hereinafter the "Company"), the "Purchasers" specified on Schedule A attached hereto, with their respective principal offices at the addresses set forth in Schedule A, SETTONDOWN CAPITAL INTERNATIONAL LTD., (the "Placement Agent") located at Charlotte House, Charlotte Street, P.O. Box N. 9204, Nassau, Bahamas, and THE GOLDSTEIN LAW GROUP, PC, 65 Broadway, 10th Fl., New York, NY 10006 (hereinafter the "Escrow Agent"). W I T N E S S E T H: WHEREAS, the Purchasers will be purchasing Preferred Stock and Warrants (collectively the "Securities"), from the Company at a purchase price as set forth in a Securities Purchase Agreement (the "Purchase Agreement") dated as of December 31, 1998, which will be issued as per the terms contained herein and in the Purchase Agreement executed by the Company and Purchasers; and WHEREAS, the Company will be issuing, Preferred Stock, and Warrants (also referred to as the "Securities") to the Placement Agent pursuant to the Purchase Agreement; and WHEREAS, it is intended that the purchase of Securities be consummated in accordance with the requirements set forth by Regulation S promulgated under the Securities Act of 1933, as amended; and WHEREAS, the Company has requested that the Escrow Agent hold the Purchase Price in escrow until the Escrow Agent has received the Securities. The Escrow Agent will then immediately wire transfer or otherwise deliver at the Company's discretion immediately available funds to the Company's account and arrange for delivery of the Securities to the Investors and the Securities to the Placement Agent as per the terms and conditions in the Purchase Agreement. 58 ESCROW AGREEMENT THIS AGREEMENT is made as of the 31st day of December, 1998 by and among MUSTANG SOFTWARE, INC., with its principal office at 6200 Lake Ming Road, Bakersfield, CA 93306 (hereinafter the "Company"), the "Purchasers" specified on Schedule A attached hereto, with their respective principal offices at the addresses set forth in Schedule A, SETTONDOWN CAPITAL INTERNATIONAL LTD., (the "Placement Agent") located at Charlotte House, Charlotte Street, P.O. Box N. 9204, Nassau, Bahamas, and THE GOLDSTEIN LAW GROUP, PC, 65 Broadway, 10th Fl., New York, NY 10006 (hereinafter the "Escrow Agent"). W I T N E S S E T H: WHEREAS, the Purchasers will be purchasing Preferred Stock and Warrants (collectively the "Securities"), from the Company at a purchase price as set forth in a Securities Purchase Agreement (the "Purchase Agreement") dated as of December 31, 1998, which will be issued as per the terms contained herein and in the Purchase Agreement executed by the Company and Purchasers; and WHEREAS, the Company will be issuing, Preferred Stock, and Warrants (also referred to as the "Securities") to the Placement Agent pursuant to the Purchase Agreement; and WHEREAS, it is intended that the purchase of Securities be consummated in accordance with the requirements set forth by Regulation S promulgated under the Securities Act of 1933, as amended; and WHEREAS, the Company has requested that the Escrow Agent hold the Purchase Price in escrow until the Escrow Agent has received the Securities. The Escrow Agent will then immediately wire transfer or otherwise deliver at the Company's discretion immediately available funds to the Company's account and arrange for delivery of the Securities to the Investors and the Securities to the Placement Agent as 59 per the terms and conditions in the Purchase Agreement. NOW, THEREFORE, in consideration of the covenants and mutual promises contained herein and other good and valuable consideration, the receipt and legal sufficiency of which are hereby acknowledged and intending to be legally bound hereby, the parties agree as follows: ARTICLE 1 TERMS OF THE ESCROW FOR THE INITIAL SHARES 1.1 The parties hereby agree to establish an escrow account with the Escrow Agent whereby the Escrow Agent shall hold the funds for the purchase of the Initial Shares. 1.2 Upon Escrow Agent's receipt of the Purchase Price into its attorney trustee account, it shall notify the Company, or the Company's designated attorney or agent, of the amount of funds it has received into its account. 1.3 The Company, upon receipt of said notice and acceptance of the Purchase Agreement by both parties, as evidenced by the Company's and the Purchasers and Placement Agent's execution thereof, shall deliver to the Escrow Agent the Securities issued to the Purchasers and the Placement Agent. Escrow Agent shall then communicate with the Company to confirm the validity of such issuance. 1.4 Once Escrow Agent confirms the validity of the issuance of the Securities, the Escrow Agent shall immediately wire that amount of funds necessary to purchase the Securities per the written instructions of the Company. The Company will furnish Escrow Agent with a "Net Letter" directing payment of Placement Agent fees, and administrative, legal and escrow fees as per the terms of the Purchase Agreement, such fees are to be remitted to in accordance with wire instructions that will be sent to Escrow Agent from the Company, with the net balance payable to the Company. 60 Once the funds (as set forth above) have been received per the Company's instructions, the Escrow Agent shall then arrange to have the Securities delivered as per instructions from the Purchasers and the Placement Agent. ARTICLE 2 MISCELLANEOUS 2.1 No waiver or any breach of any covenant or provision herein contained shall be deemed a waiver of any preceding or succeeding breach thereof, or of any other covenant or provision herein contained. No extension of time for performance of any obligation or act shall be deemed any extension of the time for performance of any other obligation or act. 2.2 All notices or other communications required or permitted hereunder shall be in writing, and shall be sent by fax, overnight courier, registered or certified mail, postage prepaid, return receipt requested, and shall be deemed received upon receipt thereof, as follows: (a) Mustang Software, Inc. 6200 Lake Ming Road Bakersfield, CA 93306 Attention: Jim Harrer Facsimile: (805) 873-2457 Telephone: (805) 873-2500 (b) If to the Purchasers, at the addresses set forth on Schedule A hereto. (c) Settondown Capital International Ltd. Charlotte House, Charlotte Street P.O. Box N. 9204 Nassau, Bahamas Attention: Anthony L. M. Inder Riden Telephone: (242) 325-1033 Facsimile: (242) 323-7918 61 (d) The Goldstein Law Group, PC 65 Broadway, 10th Fl. New York, NY 10006 Attn: Sheldon E. Goldstein, Esq. Telephone: (212) 809-4220 Facsimile: (212) 809-4228 or to such other person at such other place as shall designated in writing; 2.3 This Agreement shall be binding upon and shall inure to the benefit of the permitted successors and assigns of the parties hereto. 2.4 This Agreement is the final expression of, and contains the entire agreement between, the parties with respect to the subject matter hereof and supersedes all prior understandings with respect thereto. 2.5 Whenever required by the context of this Agreement, the singular shall include the plural and masculine shall include the feminine. This Agreement shall not be construed as if it had been prepared by one of the parties, but rather as if both parties had prepared the same. Unless otherwise indicated, all references to Articles are to this Agreement. 2.6 The Company acknowledges and confirms that it is not being represented in a legal capacity by The Goldstein Law Group, PC and it has had the opportunity to consult with its own legal advisors prior to the signing of this Agreement. 2.7 This Agreement will be construed and enforced in accordance with and governed by the laws of the State of New York, except for matters arising under the Act, without reference to principles of conflicts of law. Each of the parties consents to the jurisdiction of the U.S. District Court sitting in the Southern District of the State of New York in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent 62 permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if another party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. Each party waives its right to a trial by jury. 2.8 This Agreement may be altered or amended only with the consent of all of the parties hereto. Should the Company, any of the Purchasers or the Placement Agent attempt to change this Agreement in a manner which, in the Escrow Agent's discretion, shall be undesirable, the Escrow Agent may resign as Escrow Agent by notifying the Company and the Purchasers in writing. In the case of the Escrow Agent's resignation or removal pursuant to the foregoing, its only duty, until receipt of notice from the Company and the Purchasers or their agent that a successor escrow agent shall have been appointed, shall be to hold and preserve the funds. Upon receipt by the Escrow Agent of said notice from the Company and the Purchasers of the appointment of a successor escrow agent, the name of a successor escrow account and a direction to transfer the funds, the Escrow Agent shall promptly thereafter transfer all of the funds held in escrow to said successor escrow agent. Immediately after said transfer, the Escrow Agent shall furnish the Company and the Purchasers with proof of such transfer. The Escrow Agent is authorized to disregard any notices, requests, instructions or demands received by it from the Company or the Purchasers after notice of resignation or removal shall have been given, unless 63 the same shall be the aforementioned notice from the Company and the Purchasers to transfer the funds to a successor escrow agent or to return same to the respective parties. 2.9 The Escrow Agent shall be reimbursed by the Company and the Purchasers for any reasonable expenses incurred in the event there is a conflict between the parties and the Escrow Agent shall deem it necessary to retain counsel. 2.10 The Escrow Agent shall not be liable for any action taken or omitted by it in good faith in accordance with the advice of the Escrow Agent's counsel; and in no event shall the Escrow Agent be liable or responsible except for the Escrow Agent's own gross negligence or willful misconduct. 2.11 The Company and the Purchasers warrant to and agree with the Escrow Agent that, unless otherwise expressly set forth in this Agreement: (i) there is no security interest in the Securities or any part thereof; (ii) no financing statement under the Uniform Commercial Code is on file in any jurisdiction claiming a security interest or in describing (whether specifically or generally) the Securities or any part thereof; and (iii) the Escrow Agent shall have no responsibility at any time to ascertain whether or not any security interest exists in the Securities or any part thereof or to file any financing statement under the Uniform Commercial Code with respect to the Securities or any part thereof. 2.12 The Escrow Agent in its capacity as such has no liability hereunder to either party other than to hold the funds and the Securities and to deliver them under the terms hereof. Each party hereto agrees 64 to indemnify and hold harmless the Escrow Agent in its capacity as such from and with respect to any suits, claims, actions or liabilities arising in any way out of this transaction including the obligation to defend any legal action brought which in any way arises out of or is related to this Escrow. [Remainder of page intentionally blank] [Signature page follows] 65 IN WITNESS WHEREOF, the parties hereto have cause this Escrow Agreement to be executed as of the 31st day of December, 1998. MUSTANG SOFTWARE, INC. By __/s/ James A. Harrer ______ James A Harrer, President By___/s/ Donald M. Leonard_____ Donald M. Leonard, CFO SETTONDOWN CAPITAL INTER NATIONAL LTD., Placement Agent By__/s/ Dawn E. Davis__________ Dawn E. Davis AVALON CAPITAL, LTD., Investor By___/s/ Giora Lavie___________ Giora Lavie, Attorney-in-Fact THE CUTTY HUNK FUND LIMITED, Investor By__/s/ Geoffrey M. Lewis______ Geoffrey M. Lewis Director GOLDSTEIN, GOLDSTEIN & REIS, LLP, Escrow Agent By__/s/ Scott H. Goldstein_____ Scott H. Goldstein 66 EXHIBIT 99.3 EXHIBIT C REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT, dated the 31st day of December, 1998, between the entities listed on Schedule A attached hereto (referred to as a the "Purchaser" or "Purchasers"), SETTONDOWN CAPITAL INTERNATIONAL LTD. (the "Placement Agent" together with the Purchaser is also hereinafter referred to as the "Holder" or "Holders") located at Charlotte House, Charlotte Street, P.O. Box N. 9204, Nassau, Bahamas, a corporation organized under the laws of Bahamas, and MUSTANG SOFTWARE, INC., a corporation incorporated under the laws of the State of California, and having its principle place of business at 6200 Lake Ming Road, Bakersfield, CA 93306 (the "Company"). WHEREAS, simultaneously with the execution and delivery of this Agreement, the Purchaser is purchasing from the Company, pursuant to a Securities Purchase Agreement dated the date hereof (the "Securities Purchase Agreement"), shares of Preferred Stock, and Warrants (hereinafter collectively referred to as the "Securities" of the Company); All capitalized terms not hereinafter defined shall have that meaning assigned to them in the Securities Purchase Agreement; and WHEREAS, simultaneously with the execution and delivery of this Agreement, the Company shall issue to the Placement Agent, in return for services rendered, from time to time as provided in the Securities Purchase Agreement, shares of Preferred Stock, and Warrants (hereinafter also collectively referred to as the "Securities" of the Company).; and WHEREAS, the Company desires to grant to the Holders the registration rights set forth herein with respect to the securities set forth in Section 1.24 Securities Purchase Agreement. 67 NOW, THEREFORE, the parties hereto mutually agree as follows: Section 1. Registrable Securities. As used herein the term "Registrable Security" means the Securities; provided, however, that with respect to any particular Registrable Security, such security shall cease to be a Registrable Security when, as of the date of determination, (i) it has been effectively registered under the Securities Act of 1933, as amended (the "1933 Act") and disposed of pursuant thereto, (ii) registration under the 1933 Act is no longer required for the immediate public distribution of such security as a result of the provisions of Rule 144 promulgated under the 1933 Act, or (iii) it has ceased to be outstanding. The term "Registrable Securities" means any and/or all of the securities falling within the foregoing definition of a "Registrable Security." In the event of any merger, reorganization, consolidation, recapitalization or other change in corporate structure affecting the Common Stock, such adjustment shall be made in the definition of "Registrable Security" as is appropriate in order to prevent any dilution or enlargement of the rights granted pursuant to this Section 1. REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT, dated the 31st day of December, 1998, between the entities listed on Schedule A attached hereto (referred to as a the "Purchaser" or "Purchasers"), SETTONDOWN CAPITAL INTERNATIONAL LTD. (the "Placement Agent" together with the Purchaser is also hereinafter referred to as the "Holder" or "Holders") located at Charlotte House, Charlotte Street, P.O. Box N. 9204, Nassau, Bahamas, a corporation organized under the laws of Bahamas, and MUSTANG SOFTWARE, INC., a corporation incorporated under the laws of the State of California, and having its principle place of business at 6200 Lake Ming Road, Bakersfield, CA 93306 (the "Company"). 68 WHEREAS, simultaneously with the execution and delivery of this Agreement, the Purchaser is purchasing from the Company, pursuant to a Securities Purchase Agreement dated the date hereof (the "Securities Purchase Agreement"), shares of Preferred Stock, and Warrants (hereinafter collectively referred to as the "Securities" of the Company); All capitalized terms not hereinafter defined shall have that meaning assigned to them in the Securities Purchase Agreement; and WHEREAS, simultaneously with the execution and delivery of this Agreement, the Company shall issue to the Placement Agent, in return for services rendered, from time to time as provided in the Securities Purchase Agreement, shares of Preferred Stock, and Warrants (hereinafter also collectively referred to as the "Securities" of the Company); and WHEREAS, the Company desires to grant to the Holders the registration rights set forth herein with respect to the securities set forth in Section 1.23 Securities Purchase Agreement. NOW, THEREFORE, the parties hereto mutually agree as follows: Section 1. Registrable Securities. As used herein the term "Registrable Security" means the Securities; provided, however, that with respect to any particular Registrable Security, such security shall cease to be a Registrable Security when, as of the date of determination, (i) it has been effectively registered under the Securities Act of 1933, as amended (the "1933 Act") and disposed of pursuant thereto, (ii) registration under the 1933 Act is no longer required for the immediate public distribution of such security as a result of the provisions of Rule 144 promulgated under the 1933 Act, or (iii) it has ceased to be outstanding. The term "Registrable Securities" means any and/or all of the securities falling within the foregoing definition of a "Registrable Security." In the event of any merger, reorganization, consolidation, recapitalization or other change in corporate structure affecting the Common Stock, such adjustment shall be made in the definition of "Registrable Security" as is appropriate in order to prevent any dilution or enlargement of the rights granted pursuant to this Section 1. 69 Section 2. Restrictions on Transfer. The Holder acknowledges and understands that prior to the registration of the Securities as provided herein, the Securities are "restricted securities" as defined in Rule 144 promulgated under the Act. The Holder understands that no disposition or transfer of the Securities may be made by Holder in the absence of (i) an opinion of counsel to the Holder that such transfer may be made without registration under the 1933 Act or (ii) such registration. Section 3. Registration Rights. (a) The Company agrees that it will prepare and file with the Securities and Exchange Commission ("Commission"), no later than March 31, 1999, a registration statement (on Form S-3, or other appropriate registration statement) under the 1933 Act (the "Registration Statement"), at the sole expense of the Company (except as provided in Section 3(c) hereof), in respect of all holders of Registrable Securities, so as to permit a public offering and sale of the Registrable Securities under the Act. The Company shall use its best efforts to cause (i) the Registration Statement to become effective on or before May 15, 1999. The number of shares of Common Stock designated in the Registration Statement to be registered shall be two hundred (200%) percent of the number of Securities that would be required if all the Registrable Securities were issued on the day before the filing of the Registration Statement. (b) The Company will maintain the Registration Statement, or post-effective amendment filed under this Section 3 hereof current under the 1933 Act, until the earlier of (i) the date that all of the Registrable Securities have been sold pursuant to the applicable Registration Statement, (ii) the date the holders thereof receive an opinion of counsel that the Registrable Securities may be sold under the provisions of Rule 144 or (iii) three years after the Subscription Date for the Registration Statement. 70 (c) All fees, disbursements and out-of- pocket expenses and costs incurred by the Company in connection with the preparation and filing of the Registration Statement under subparagraph 3(a) and in complying with applicable securities and Blue Sky laws (including, without limitation, all attorneys' fees) shall be borne by the Company. The Holder shall bear the cost of underwriting discounts and commissions, if any, applicable to the Registrable Securities being registered and the fees and expenses of its counsel. The Company shall qualify any of the securities for sale in such states as such Holder reasonably designates and shall furnish indemnification in the manner provided in Section 6 hereof. However, the Company shall not be required to qualify in any state which will require an escrow or other restriction relating to the Company and/or the sellers. The Company at its expense will supply the Holder with copies of the Registration Statement and the prospectus or offering circular included therein and other related documents in such quantities as may be reasonably requested by the Holder. (d) The Company shall not be required by this Section 3 to include Holder's Registrable Securities in any Registration Statement which is to be filed if, in the opinion of counsel for both the Holder and the Company (or, should they not agree, in the opinion of another counsel experienced in securities law matters acceptable to counsel for the Holder and the Company) the proposed offering or other transfer as to which such registration is requested is exempt from applicable federal and state securities laws and would result in all purchasers or transferees obtaining securities which are not "restricted securities", as defined in Rule 144 under the 1933 Act. (e) In the event the Registration Statement to be filed by the Company pursuant to Section 3(a) above is not filed with the Commission on or before March 31, 1999 and/or the Registration Statement is not declared effective by the Commission on or before May 15, 1999, then the Company will pay Holder (pro rated on a daily basis), as liquidated damages for such failure and not as a penalty, two (2%) 71 percent of the purchase price of the then outstanding Securities for every thirty (30) day period until the Registration Statement has been filed and/or declared effective. Such payment of the liquidated damages shall be made to the Holder in cash, immediately upon demand, provided, however, that the payment of such liquidated damages shall not relieve the Company from its obligations to register the Securities pursuant to this Section. (f) No provision contained herein shall preclude the Company from selling securities pursuant to any registration statement in which it is required to include Registrable Securities pursuant to this Section 3. (g) If at any time or from time to time after the Effective Date, the Company notifies the Holders in writing of the existence of a Potential Material Event (as defined in Section 3(i) below), the Holders shall not offer or sell any Registrable Securities or engage in any other transaction involving or relating to Registrable Securities, from the time of the giving of notice with respect to a Potential Material Event until such Holder receives written notice from the Company that such Potential Material Event either has been disclosed to the public or no longer constitutes a Potential Material Event; provided, however, that the Company may not so suspend the right to such holders of Securities for more than one (1) twenty (20) day period in the aggregate during any twelve month period, during the periods the Registration Statement is required to be in effect. If a Potential Material Event shall occur prior to the date the Registration Statement is filed, then the Company's obligation to file the Registration Statement shall be delayed without penalty for not more than twenty (20) days. The Company must give each Holder notice in writing at least two (2) business days prior to the first day of the blackout period. (h) "Potential Material Event" means any of the following: (a) the possession by the Company 72 of material information not for disclosure in a registration statement; or (b) any material engagement or activity by the Company which would be adversely affected by disclosure in a registration statement at such time, that the Registration Statement would be materially misleading absent the inclusion of such information. Section 4. Cooperation with Company. Holder will cooperate with the Company in all respects in connection with this Agreement, including timely supplying all information reasonably requested by the Company and executing and returning all documents reasonably requested in connection with the registration and sale of the Registrable Securities. Section 5. Registration Procedures. If and whenever the Company is required by any of the provisions of this Agreement to effect the registration of any of the Registrable Securities under the Act, the Company shall (except as otherwise provided in this Agreement), as expeditiously as possible: (a) prepare and file with the Commission such amendments and supplements to the registration statements and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Act with respect to the sale or other disposition of all securities covered by such registration statement whenever the Holder of such securities shall desire to sell or otherwise dispose of the same (including prospectus supplements with respect to the sales of securities from time to time in connection with a registration statement pursuant to Rule 415 promulgated under the Act); (b) furnish to each Holder such numbers of copies of a summary prospectus or other prospectus, including a preliminary prospectus or any amendment or supplement to any prospectus, in conformity with the requirements of the Act, and such other documents, as such Holder may reasonably request in order to facilitate the public sale or other disposition of the securities owned by such Holder; 73 (c) register and qualify the securities covered by the Registration Statement, under such other securities or blue sky laws of such jurisdictions as the Holder shall reasonably request, and do any and all other acts and things which may be necessary or advisable to enable each Holder to consummate the public sale or other disposition in such jurisdiction of the securities owned by such Holder, except that the Company shall not for any such purpose be required to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified or to file therein any general consent to service of process; (d) list such securities on the NASDAQ SmallCap Stock Market or other national securities exchange on which any securities of the Company are then listed, if the listing of such securities is then permitted under the rules of such exchange or NASDAQ; (e) enter into and perform its obligations under an underwriting agreement, if the offering is an underwritten offering, in usual and customary form, with the managing underwriter or underwriters of such underwritten offering; (f) notify each Holder of Registrable Securities covered by the Registration Statement, at any time when a prospectus relating thereto covered by the Registration Statement, is required to be delivered under the Act, of the happening of any event of which it has knowledge as a result of which the prospectus included in the Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. Section 6. Information by Holder. Each Holder of Registrable Securities included in any registration statement shall furnish to the Company such information regarding such Holder and the distribution proposed by such Holder as the Company may request in writing and as shall be required in connection with any registration, qualification or compliance referred to in this Section. 74 Section 7. Assignment. The rights granted the Holders under this Agreement shall not be assigned without the written consent of the Company, which consent shall not be unreasonably withheld. This Agreement is binding upon and inures to the benefit of the parties hereto and their respective heirs, successors and permitted assigns. Section 8. Termination of Registration Rights. The rights granted pursuant to this Agreement shall terminate as to each Investor (and permitted transferee under Section 7 above) upon the occurrence of any of the following: (a) all such Holder's securities subject to this Agreement have been registered; (b) all of such Holder's securities subject to this Agreement may be sold without such registration pursuant to Rule 144 promulgated by the SEC pursuant to the Securities Act; (c) all of such Holder's securities subject to this Agreement can be sold pursuant to Rule 144(k); or (d) two years from the issuance of the Registrable Securities. Section 9. Indemnification. (a) In the event of the filing of any Registration Statement with respect to Registrable Securities pursuant to Section 3 hereof, the Company agrees to indemnify and hold harmless the Holder and each person, if any, who controls the Holder within the meaning of the Securities Act ("Distributing Holders") against any losses, claims, damages or liabilities, joint or several (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees), to which the Distributing Holders may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any 75 untrue statement or alleged untrue statement of any material fact contained in any such Registration Statement, or any related preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto, or arise out of or are based upon 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; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such Registration Statement, preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by the Distributing Holders, specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Distributing Holder agrees that it will indemnify and hold harmless the Company, and each officer, director of the Company or person, if any, who controls the Company within the meaning of the Securities Act, against any losses, claims, damages or liabilities (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees) to which the Company or any such officer, director or controlling person may become subject under the Securities Act or otherwise, insofar as such losses claims, damages or liabilities (or actions in respect thereof; arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in a Registration Statement, requested by such Distributing Holder, or any related preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that such untrue statement or 76 alleged untrue statement or omission or alleged omission was made in such Registration Statement, preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by such Distributing Holder, specifically for use in the preparation thereof and, provided further, that the indemnity agreement contained in this Section 9(b) shall not inure to the benefit of the Company with respect to any person asserting such loss, claim, damage or liability who purchased the Registrable Securities which are the subject thereof if the Company failed to send or give (in violation of the Securities Act or the rules and regulations promulgated thereunder) a copy of the prospectus contained in such Registration Statement to such person at or prior to the written confirmation to such person of the sale of such Registrable Securities, where the Company was obligated to do so under the Securities Act or the rules and regulations promulgated thereunder. This indemnity agreement will be in addition to any liability which the Distributing Holders may otherwise have. (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve the indemnifying party from any liability which it may have to any indemnified party otherwise than as to the particular item as to which indemnification is then being sought solely pursuant to this Section. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, assume the defense thereof, subject to the provisions herein stated and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be 77 liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation, unless the indemnifying party shall not pursue the action to its final conclusion. The indemnified party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall not be at the expense of the indemnifying party if the indemnifying party has assumed the defense of the action with counsel reasonably satisfactory to the indemnified party; provided that if the indemnified party is the Distributing Holder, the fees and expenses of such counsel shall be at the expense of the indemnifying party if (i) the employment of such counsel has been specifically authorized in writing by the indemnifying party, or (ii) the named parties to any such action (including any impleaded parties) include both the Distributing Holder and the indemnifying party and the Distributing Holder shall have been advised by such counsel that there may be one or more legal defenses available to the indemnifying party different from or in conflict with any legal defenses which may be available to the Distributing Holder (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the Distributing Holder, it being understood, however, that the indemnifying party shall, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable only for the reasonable fees and expenses of one separate firm of attorneys for the Distributing Holder, which firm shall be designated in writing by the Distributing Holder). No settlement of any action against an indemnified party shall be made without the prior written consent of the indemnified party, which consent shall not be unreasonably withheld. Section 10. Contribution. In order to provide for just and equitable contribution under the Securities Act in any case in which (i) the Distributing Holder makes a claim for indemnification pursuant to Section 9 hereof but is judicially 78 determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that the express provisions of Section 9 hereof provide for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of any Distributing Holder, then the Company and the applicable Distributing Holder shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees), in either such case (after contribution from others) on the basis of relative fault as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the applicable Distributing Holder, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Distributing Holder agree that it would not be just and equitable if contribution pursuant to this Section were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in this Section. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this Section shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 79 Section 11. Notices. Any notice pursuant to this Agreement by the Company or by the Holder shall be in writing and shall be deemed to have been duly given if delivered by (i) hand, (ii) by facsimile and followed by mail delivery or (iii) if mailed by certified mail, return receipt requested, postage prepaid, addressed as follows: (a) If to the Holder, to its, his or her address set forth on the signature page of this Agreement, with a copy to the person designated in the Securities Purchase Agreement. (b) If to the Company, at the address set forth herein, or to such other address as any such party may designate by notice to the other party. Notices shall be deemed given at the time they are delivered personally or five (5) days after they are mailed in the manner set forth above. If notice is delivered by facsimile to the Company and followed by mail, delivery shall be deemed given two (2) days after such facsimile is sent. Section 12. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Section 13. Headings. The headings in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Section 14. Choice of Law; Venue; Jurisdiction. This Agreement will be construed and enforced in accordance with and governed by the laws of the State of California, except for matters arising under the Securities Act, without reference to principles of conflicts of law. The party commencing any legal action shall have the option of choosing the jurisdiction of the U.S. District Court sitting in the Southern District of the State of New York or in the Northern or Central District of California in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent 80 permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if another party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. Each party waives its right to a trial by jury. Section 15. Severability. If any provision of this Agreement shall for any reason be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision hereof and this Agreement shall be construed as if such invalid or unenforceable provision had never been contained herein. 81 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, on the day and year first above written. Attest: MUSTANG SOFTWARE, INC. By __/s/ James A. Harrer _ By___/s/ Donald M. Leonard_____ Name: James Harrer Name: Donald M. Leonard Title: President Title: Chief Financial Officer SETTONDOWN CAPITAL INTERNATIONAL LTD., Placement Agent By__/s/ Dawn E. Davis__________ Dawn E. Davis AVALON CAPITAL, LTD., Investor By___/s/ Giora Lavie___________ Giora Lavie, Attorney-in-Fact THE CUTTY HUNK FUND LIMITED, Investor By__/s/ Geoffrey M. Lewis______ Geoffrey M. Lewis Director 82 EXHIBIT 99.4 EXHIBIT D "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (TOGETHER WITH THE REGULATIONS PROMULGATED THEREUNDER, THE "SECURITIES ACT"), AND MAY NOT BE SOLD, OFFERED FOR SALE, TRANSFERRED, PLEDGED OR HYPOTHECATED WITHIN THE UNITED STATES (AS THAT TERM IS DEFINED IN REGULATION S PROMULGATED UNDER THE SECURITIES ACT) OR TO A U.S. PERSON (AS THAT TERM IS DEFINED IN REGULATION S) IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FILED UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS, UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. HEDGING TRANSACTIONS INVOLVING THESE SECURITIES MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH THE SECURITIES ACT. THIS WARRANT MAY NOT BE EXERCISED BY OR ON BEHALF OF ANY U.S. PERSON (AS THAT TERM IS DEFINED IN REGULATION S) UNLESS REGISTERED UNDER THE ACT OR AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE." STOCK PURCHASE WARRANT No. __ To Purchase ______ Shares of Common Stock of MUSTANG SOFTWARE, INC. THIS CERTIFIES that, for value received, ___________ (the "Investor"), is entitled, upon the terms and subject to the conditions hereinafter set forth, at any time on or after the date hereof and on or prior to December 30, 2000 (the "Termination Date") but not thereafter, to subscribe for and purchase from MUSTANG SOFTWARE, INC., a California corporation (the "Company"), ( ) shares of Common Stock (the "Warrant Shares"). The purchase price of one share of Common Stock (the "Exercise Price") under this Warrant shall be equal to one hundred ten (110%) percent of the average closing bid price of the Common Stock on the Principal Market, for 83 the five (5) trading days preceding the Subscription Date, as defined in the Securities Purchase Agreement (the "Agreement") between the Company and Investor and is subject to its terms. The Exercise Price and the number of shares for which the Warrant is exercisable shall be subject to adjustment as provided herein. This Warrant is being issued in connection with the Agreement In the event of any conflict between the terms of this Warrant and the Agreement, the Agreement shall control. 1. Title of Warrant. Prior to the expiration hereof and subject to compliance with applicable laws, this Warrant and all rights hereunder are transferable, in whole or in part, at the office or agency of the Company by the holder hereof in person or by duly authorized attorney, upon surrender of this Warrant together with the Assignment Form annexed hereto properly endorsed. 2. Authorization of Shares. The Company covenants that all shares of Common Stock which may be issued upon the exercise of rights represented by this Warrant will, upon exercise of the rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). 3. Exercise of Warrant. The Holder may not exercise its purchase rights granted hereunder until one of the following two events has occurred: (i) the Company has obtained shareholder approval for the below market issuance of more than 20% of the outstanding shares of Common Stock as set forth in the Agreement, or (ii) the Common Stock is no longer traded on a Principal Market. In the event the Common Stock is traded on a Principal Market that does not mandate such shareholder approval, then the aforementioned exercise restrictions shall not apply. In the event the Company fails to obtain shareholder approval as set forth in (i) above, the Company agrees to immediately list the Common Stock on the OTC Bulletin Board (pursuant to the 84 terms of the Agreement) and in such case the aforementioned restrictions shall not apply. Exercise of the purchase rights represented by this Warrant may be made at any time or times, in whole, before the close of business on the Termination Date, or such earlier date on which this Warrant may terminate as provided in paragraph 11 below, assuming one of the aforementioned events has occurred, by the surrender of this Warrant and the Subscription Form annexed hereto duly executed, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered holder hereof at the address of such holder appearing on the books of the Company) and upon payment of the Exercise Price of the shares thereby purchased; whereupon the holder of this Warrant shall be entitled to receive a certificate for the number of shares of Common Stock so purchased. Certificates for shares purchased hereunder shall be delivered to the holder hereof within five business days after the date on which this Warrant shall have been exercised as aforesaid. Payment of the Exercise Price of the shares may be by certified check or cashier's check or by wire transfer (of same day funds) to an account designated by the Company in an amount equal to the Exercise Price multiplied by the number of shares being purchased. 4. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. 5. Charges, Taxes and Expenses. Issuance of certificates for shares of Common Stock upon the exercise of this Warrant shall be made without charge to the holder hereof for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the holder of this Warrant or in such name or names as may be directed by the holder of this Warrant; provided, however, that in the event certificates for shares of Common Stock are to be issued in a name other than the name of the holder of this Warrant, this Warrant when surrendered for 85 exercise shall be accompanied by the Assignment Form attached hereto duly executed by the holder hereof; and provided further, that upon any transfer involved in the issuance or delivery of any certificates for shares of Common Stock, the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. 6. Closing of Books. The Company will at no time close its shareholder books or records in any manner which interferes with the timely exercise of this Warrant. 7. No Rights as Shareholder until Exercise. This Warrant does not entitle the holder hereof to any voting rights or other rights as a shareholder of the Company prior to the exercise thereof. If, however, at the time of the surrender of this Warrant and purchase the holder hereof shall be entitled to exercise this Warrant, the shares so purchased shall be and be deemed to be issued to such holder as the record owner of such shares as of the close of business on the date on which this Warrant shall have been exercised. 8. Assignment and Transfer of Warrant. This Warrant may be assigned by the surrender of this Warrant and the Assignment Form annexed hereto duly executed at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered holder hereof at the address of such holder appearing on the books of the Company); provided, however, that this Warrant may not be resold or otherwise transferred except (i) in a transaction registered under the Securities Act, or (ii) in a transaction pursuant to an exemption, if available, from such registration and whereby, if requested by the Company, an opinion of counsel reasonably satisfactory to the Company is obtained by the holder of this Warrant to the effect that the transaction is so exempt. 9. Loss, Theft, Destruction or Mutilation of Warrant. The Company represents and warrants that upon receipt by the Company of evidence reasonably 86 satisfactory to it of the loss, theft, destruction or mutilation of any Warrant or stock certificate, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of this Warrant or stock certificate. 10. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a legal holiday. 11. Effect of Certain Events. If at any time the Company proposes (i) to sell or otherwise convey all or substantially all of its assets or (ii) to effect a transaction (by merger or otherwise) in which more than 50% of the voting power of the Company is disposed of (collectively, a "Sale or Merger Transaction"), in which the consideration to be received by the Company or its shareholders consists solely of cash, and in case the Company shall at any time effect a Sale or Merger Transaction in which the consideration to be received by the Company or its shareholders consists in part of consideration other than cash, the holder of this Warrant shall have the right thereafter to purchase, by exercise of this Warrant and payment of the aggregate Exercise Price in effect immediately prior to such action, the kind and amount of shares and other securities and property which it would have owned or have been entitled to receive after the happening of such transaction had this Warrant been exercised immediately prior thereto. 12. Adjustments of Exercise Price and Number of Warrant Shares. The number and kind of securities purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of any of the following. 87 In case the Company shall (i) declare or pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock to holders of its outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock or (iv) issue any shares of its capital stock in a reclassification of the Common Stock, the number of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the holder of this Warrant shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which he would have owned or have been entitled to receive had such Warrant been exercised in advance thereof. An adjustment made pursuant to this paragraph shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. 13. Voluntary Adjustment by the Company. The Company may at its warrant, at any time during the term of this Warrant, reduce the then current Exchange Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. 14. Notice of Adjustment. Whenever the number of Warrant shares or number or kind of securities or other property purchasable upon the exercise of this Warrant or the Exercise Price is adjusted, as herein provided, the Company shall promptly mail by registered or certified mail, return receipt requested, to the holder of this Warrant notice of such adjustment or adjustments setting forth the number of Warrant Shares (and other securities or property) purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Shares after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth computation by which such adjustment was made. Such notice, in absence of manifest error, shall be conclusive evidence of the correctness of such adjustment. 15. Authorized Shares. The Company covenants that during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common 88 Stock a sufficient number of shares to provide for the issuance of Common Stock upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of the Company's Common Stock upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such shares of Common Stock may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the NASDAQ SmallCap Market or any domestic securities exchange upon which the Common Stock may be listed. 16. Miscellaneous. (a) Issue Date; Choice of Law; Venue; Jurisdiction. The provisions of this Warrant shall be construed and shall be given effect in all respects as if it had been issued and delivered by the Company on the date hereof. This Warrant shall be binding upon any successors or assigns of the Company. This Warrant will be construed and enforced in accordance with and governed by the laws of the State of New York, except for matters arising under the Securities Act, without reference to principles of conflicts of law. The party commencing any legal action shall have the option of choosing the jurisdiction of the U.S. District Court sitting in the Southern District of the State of New York or in the Northern or Central District of California in connection with any dispute arising under this Warrant and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if the other party to this Warrant obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any country having jurisdiction over the party against whom such judgment was obtained, and each party hereby 89 waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Warrant irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. Each party waives its right to a trial by jury. (b) Restrictions. The holder hereof acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered (or if no exemption from registration exists), will have restrictions upon resale imposed by state and federal securities laws. Each certificate representing the Warrant Shares issued to the Holder upon exercise (if not registered or if no exemption from registration exists) will bear the following legend: "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (TOGETHER WITH THE REGULATIONS PROMULGATED THEREUNDER, THE "SECURITIES ACT"), AND MAY NOT BE SOLD, OFFERED FOR SALE, TRANSFERRED, PLEDGED OR HYPOTHECATED WITHIN THE UNITED STATES (AS THAT TERM IS DEFINED IN REGULATION S PROMULGATED UNDER THE SECURITIES ACT) OR TO A U.S. PERSON (AS THAT TERM IS DEFINED IN REGULATION S) IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FILED UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS, UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. HEDGING TRANSACTIONS INVOLVING THESE SECURITIES MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH THE SECURITIES ACT. THIS WARRANT MAY NOT BE EXERCISED BY OR ON BEHALF OF ANY U.S. PERSON (AS THAT TERM IS DEFINED IN REGULATION S) UNLESS REGISTERED UNDER THE ACT OR AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE." 90 (c) Modification and Waiver. This Warrant and any provisions hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. (d) Notices. Any notice, request or other document required or permitted to be given or delivered to the holders hereof of the Company shall be delivered or shall be sent by certified or registered mail, postage prepaid, to each such holder at its address as shown on the books of the Company or to the Company at the address set forth in the Agreement. IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officers thereunto duly authorized. Dated: December 31, 1998 MUSTANG SOFTWARE, INC. By ______________________________ Name: Title: 91 NOTICE OF EXERCISE To: MUSTANG SOFTWARE, INC. (1) The undersigned hereby elects to purchase ________ shares of Common Stock of MUSTANG SOFTWARE, INC. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price in full, together with all applicable transfer taxes, if any. (2) Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned or in such other name as is specified below: _______________________________ (Name) _______________________________ (Address) _______________________________ Dated: ______________________________ Signature 92 ASSIGNMENT FORM (To assign the foregoing warrant, execute this form and supply required information. Do not use this form to exercise the warrant.) FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to _______________________________________________ whose address is ________________________________________________ ________________________________________________. Dated: ______________, Holder's Signature: _____________________________ Holder's Address: _____________________________ _____________________________ Signature Guaranteed: ___________________________________________ NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in an fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant. -----END PRIVACY-ENHANCED MESSAGE-----