-----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, VmiWcEPmGlymNH2dIXtAnJRXi0a9tBZzxwpBafnZ00KkXlBvMd+CXGDjSK1CP21A 1JQqorl+9jKqwV+V4dxRXg== 0000950148-98-002391.txt : 19981103 0000950148-98-002391.hdr.sgml : 19981103 ACCESSION NUMBER: 0000950148-98-002391 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19981102 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: S-3 SEC ACT: SEC FILE NUMBER: 333-66663 FILM NUMBER: 98736396 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 S-3 1 FORM S-3 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION VIA EDGAR ON NOVEMBER 2, 1998 REGISTRATION NO. 333- _______ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 MUSTANG SOFTWARE, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
California 7372 77-0204718 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number)
6200 Lake Ming Road Bakersfield, California 93306 (805) 873-2500 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) JAMES A. HARRER President and Chief Executive Officer Mustang Software, Inc. 6200 Lake Ming Road Bakersfield, California 93306 (805) 873-2500 Extension 9001 (805) 873-2457 (Fax) (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) Copies to: Mark A. Klein, Esq. David M. Tamman, Esq. Freshman, Marantz, Orlanski, Cooper & Klein 9100 Wilshire Boulevard, 8-East Beverly Hills, CA 90212-3480 Telephone: (310) 273-1870 Facsimile: (310) 274-8357 Approximate date of commencement of proposed sale to public: From time to time after the effective date of this Registration Statement. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [ ] If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE
PROPOSED PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM PRICE AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE --------------------------- ----------- ------------- ----------------- ---------------- Common stock, no par value per share(2) 1,780,833(3) $2.00 $3,569,569 $992.00
(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(c) and (g) based on the average between the bid and ask prices on The Nasdaq SmallCap Market on October 30, 1998. (2) The shares of Common stock being registered hereunder are being registered for resale by the selling shareholders named in the prospectus (the "Selling Shareholders") and consist of outstanding shares of common stock, shares of common stock issuable upon conversion of outstanding shares of Series A Convertible Preferred Stock ("Series A Preferred Stock") and shares of common stock issuable upon exercise of outstanding warrants. Such common stock, Series A Preferred Stock and warrants were sold by the Company to the Selling Shareholders on September 17, 1998 pursuant to a Securities Purchase Agreement (the "Agreement") between the Company and the Selling Shareholders dated as of September 14, 1998. (3) In accordance with a Registration Rights Agreement dated as of September 14, 1998 between the Company and the Selling Shareholders, entered into in conjunction with the Agreement, the number of shares being registered equals the sum of the following: 641,480 shares of outstanding common stock; 200% of 451,176 shares of common stock issuable upon conversion of 5,456 shares of outstanding Series A Preferred Stock (determined based on 90% of the average of the four lowest closing bid prices of the Company during the 10 trading-day period ending October 30, 1998); and 237,000 shares of common stock issuable upon exercise of outstanding "A" Warrants and "B" Warrants (collectively the "Warrants"). The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. 2 The information contained in this Prospectus is not yet complete, and we may supplement or amend it in the final version. We have filed a registration statement relating to the securities described in this Prospectus with the Securities and Exchange Commission. The Selling Shareholders may not sell these securities, or accept offers to buy them, until the registration statement becomes effective. This Prospectus is not an offer to sell these securities, and we are not soliciting offers to buy them. These securities will not be sold in any state where their offer or sale, or solicitations of offers to buy them, would be unlawful prior to their registration or qualification under the securities laws of any such state. SUBJECT TO COMPLETION--DATED NOVEMBER 2, 1998 MUSTANG SOFTWARE, INC. COMMON STOCK The shareholders of Mustang Software, Inc. listed below in the section of this Prospectus called "Selling Shareholders" are offering and selling up to 1,780,833 shares of Mustang's common stock. Of that common stock, the selling shareholders are offering up to - 641,480 shares that they own outright; - 902,353 shares that they may get upon their conversion of Mustang's Series A Convertible Preferred Stock which they own; and - 237,000 shares that they may purchase upon their exercise of Warrants which they own The selling shareholders acquired Mustang's common stock, Series A Convertible Preferred Stock and Warrants in a private placement that was completed on September 17, 1998. Mustang will not receive any proceeds from the sale of shares by the selling shareholders. Mustang's common stock is listed on The Nasdaq SmallCap Market under the symbol "MSTGC." On ________ __, 1998, the closing price on The Nasdaq SmallCap Market was $______ per share. The selling shareholders may offer their Mustang shares through public or private transactions, in or off the over-the-counter market in the United States, at prevailing market prices, or at privately negotiated prices. For details of how the Selling Shareholders may offer their Mustang common stock, please the section of this Prospectus called "Plan of Distribution." Your purchase of the common stock involves a high degree of risk. See "Risk Factors" beginning at page 4. ---------- The Securities and Exchange Commission or any state securities commission has not approved the Mustang shares offered or sold under this Prospectus, nor have these organizations determined that this prospectus is accurate or complete. Any representation to the contrary is a criminal offense. ---------- The date of this Prospectus is ____________________, 1998 3 WHERE YOU CAN FIND MORE INFORMATION Mustang files annual, quarterly and special reports, proxy statements and other information with the SEC. You may read and copy any document it files at the SEC's public reference rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. The SEC allows Mustang to "incorporate by reference" the information it files with it, which means that Mustang can disclose important information to you by referring you to those documents. The information incorporated by reference is part of this Prospectus, and later information that Mustang files with the SEC will automatically update and supersede this information. Mustang incorporates by reference the documents listed below. Mustang also incorporates by reference any future filings made with the SEC under Sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934 until the selling shareholders sell all their shares. This Prospectus is part of a registration statement that Mustang filed with the SEC (Registration No. 333-____). - Annual Report on Form 10-KSB for the year ended December 31, 1997; - Quarterly Reports on Form 10-QSB for the quarters ended March 31, 1998 and June 30, 1998, - Current Reports on Form 8-K dated June 2, 1998 and October 23, 1998. You may request a copy of these filings, at no cost, by writing us at the following address: 6200 Lake Ming Road, Bakersfield, California 93306, Attention: Chief Financial Officer. You should rely only on the information incorporated by reference or provided in this Prospectus or any supplement. Mustang has not authorized anyone else to provide you with different information. The selling shareholders will not make an offer of these shares in any state that does not permit the offer. You should not assume that the information in this Prospectus or any supplement is accurate as of any date other than the date of those documents. Table of Contents
Page Page ---- ---- Where You Can Find More Information.... 2 Selling Shareholders................ 13 About Mustang.......................... 3 Plan of Distribution................ 15 Risk Factors........................... 4 Description of Securities........... 16 Use of Proceeds........................ 11 Legal Matters....................... 18 Dividend Policy........................ 11 Experts............................. 19 Price Range of Common Stock............ 12
2 4 ABOUT MUSTANG Mustang develops and sells software that assists computer users to communicate with each other more efficiently through the Internet, local area networks called "LANs" or "intranets," wide area networks called "WANs" and standard telephone lines. Mustang markets these products as "Web Essentials." Mustang's Web Essentials line of software applications include: - IMC, short for Internet Message Center, an application that lets businesses manage incoming e-mail with the same efficiency and tracking as call centers handle incoming telephone calls; - FileCenter, a high performance program that permits operators of worldwide web sites known as "webmasters" to provide their users with an organized, searchable library of files; - and ListCaster, a powerful e-mail message server that allows easy mass e-mailings from maintained lists and enables e-mail recipients to correspond with each other through the originating web site. Mustang's other product lines include the Wildcat! line of web server software and the QmodemPro line of telecommunications software. Mustang's products are used for a wide range of services including e-mail exchange, file transfer, fax-back services and information gathering and dissemination using multiple sources such as LANs, WANs, the Internet and the global World Wide Web of the Internet. These products offer the capability for businesses to enhance sales, improve customer service, market products and increase employee productivity. The Company has targeted IMC, its flagship product which has received several prestigious awards as best new product, at the rapidly growing customer management, call center and help desk markets. Mustang began operations in 1986 as a sole proprietorship, became a general partnership in 1987 and incorporated in California on December 23, 1988. Its executive offices and sales, marketing and administration facilities are located at 6200 Lake Ming Road, Bakersfield, California, 93306 and its telephone number is (805) 873-2500. The following are Mustang's trademarks: Mustang(TM), Web Essentials(TM), Internet Message Center(TM), FileCenter(TM), ListCaster(TM), WinServer(TM), Wildcat!(TM), QmodemPro(TM) and Off-Line Xpress(TM). "Windows," "Windows 95" and "Windows NT" are trademarks of Microsoft Corporation. This Prospectus also contains or incorporates trademarks of other companies. 3 5 RISK FACTORS This prospectus contains or incorporates forward-looking statements. You can identify these forward-looking statements by our use of the words "believes," "anticipates," "plans," "expects," "may," "will," "intends," "estimates" and similar expressions, whether in the negative or affirmative. Although we believe that these forward-looking statements reflect our plans, intentions, and expectations reasonably, we can give no assurance that we actually will achieve these plans, intentions or expectations. Our actual results could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have put in the cautionary statements below important factors that we believe could cause our actual results to differ materially from the forward-looking statements that we make. We do not intend to update information contained in any forward-looking statement we make. DECLINE IN REVENUES AND RECENT LOSSES. New technology involving the Internet made our legacy products outmoded. The market place did not accept new versions of our communications products. We still have not had sufficient revenues from our Web Essentials to offset our cost of producing that revenue and our operating expenses and we may never be profitable Over the last several years and recently, our revenues have declined and we have reported losses. The following table shows the revenues and losses we have reported:
Six months ended Year ended December 31, June 30 ---------------------------------------- ------------------------- 1995 1996 1997 1997 1998 ---------- ---------- ---------- ---------- ---------- Revenue $4,819,999 $3,810,240 $1,898,402 $1,258,050 $ 802,638 Net loss 1,096,852 3,452,825 1,340,673 574,366 747,037
The decline in our revenue directly corresponds to the decline in sales of our legacy products, QmodemPro and Wildcat! Bulletin Board System software. These communication products predated the emergence of the Internet and the Web as a widely accepted and used communication medium. Our old products became antiquated for several reasons: - - the built-in communication functions of Windows 95 and Windows NT operating systems; - - the emergence of internet service providers, which provided their own communications software, and Web browsers; and - - the use of commercial web sites instead of bulletin boards. While we were early to release our QmodemPro telecommunications software for Windows 95 and our Wildcat!5 Interactive Net Server, which was capable of creating and managing a web site on the World Wide Web in addition to a traditional bulletin board and was designed to take advantage of the power built into the new Windows 95 and Windows NT operating systems, the products did not achieve the market acceptance that we had expected and did not stem the decline in our revenues. We announced our new Web Essentials product line in April 1997 and released the ListCaster, IMC and FileCenter modules of Web Essentials from May 1997 through October 1997. However, we still have not derived substantial revenues from these products and have continued to have losses. There can be no assurance that we will be able to market any of our new Web Essential products or any other products we may develop successfully. 4 6 MARKET ACCEPTANCE OF NEW PRODUCTS Before we can succeed, our targeted market must accept our new web utilities, especially IMC. Our future depends upon the market place's acceptance of our new Web Essential line of web utilities. We hope that the market will accept Web Essentials, especially our Internet Mail Center program. However, there can be no assurance that Web Essentials will attain the levels of market acceptance necessary for us to become profitable or succeed. VARIABILITY OF OPERATING RESULTS Revenues during any period are dependent on numerous factors, many of which are beyond our control. We typically cannot adjust expenses quickly enough to compensate for an unexpected shortfall in revenues Our operating results from quarter to quarter have varied significantly. Historically, we have not had a material backlog of unfilled orders, and revenues in any quarter or other period are substantially dependent on orders booked in that period. Revenues for any period are dependent upon numerous factors, including - - the scheduled release of new products and product enhancements and updates of our products or those of our competitors; - - the release or anticipated release of complementary products by other software suppliers, the market acceptance of these products, enhancements and updates; and - - numerous other factors, many of which are beyond our control. In addition, we fix, to a significant extent, our expense levels for each quarter in advance based upon our expectations as to net sales during that quarter. Accordingly, we are generally unable to adjust spending in a timely manner to compensate for any unexpected shortfall in net sales. Thus, any delay in product introductions, whether due to internal delays or delays caused by third party difficulties or any significant shortfall of demand in relation to our expectations would have an almost immediate adverse impact on our operating results. In the past, we have experienced significant variations in quarter-to-quarter operating results. COMPETITION Our competition is typically larger than we are. We may not be able to exploit our technological advantages over our competition. The markets for our products are intensely competitive. We compete with a number of companies, many of which have far greater financial, technical and marketing resources than we do. There can be no assurance that we will be able to compete successfully with these companies. Although we think some of our products have certain technological advantages, there can be no assurance that we will be able to maintain or capitalize on these perceived competitive advantages. 5 7 PRODUCT DEVELOPMENT, INTRODUCTION AND ENHANCEMENT OF PRODUCTS; PRODUCT CONCENTRATION Our success depends on choosing to develop and support products that achieve market acceptance. Delays in introducing new products, enhancements or upgrades have hurt us. Our inadvertent release of products with undetected bugs could harm our business. Rapidly changing technology and frequent new product introductions are characteristic of the markets for our products. Accordingly, we believe that our future prospects depend on our ability not only to enhance and successfully market our existing products, but also to develop and introduce new products in a timely fashion which achieve market acceptance. There can be no assurance that we will be able to identify, design, develop, market or support such products successfully or that we will be able to respond effectively to technological changes or product announcements by our competitors. Key to our business our correct anticipation of customer demand for new products, product enhancements or upgrades, and making correct product development decisions. If we do not, our business could suffer, both by the loss of anticipated revenue and, possibly, by the increase in the installed base of our competitor's customers. These adverse results could be particularly significant if we were to make a number of incorrect product development decisions in succession or within a short period. We have had delays on a number of occasions in starting commercial shipments of new products and enhancements, resulting in the delay or loss of product revenues. From time to time, our competition and we may announce new products, capabilities or technologies that have the potential to replace or shorten the life cycle of our existing product offerings. Announcements of currently planned or other new product offerings could cause customers to defer purchasing our existing products. In addition, complex programs such as our software may contain undetected errors or "bugs" when we first introduce them or release new versions. Delays or difficulties associated with new product introductions or product enhancements, or the introduction of unsuccessful products or products containing undetected "bugs," could have a material adverse effect on our business, operating results and financial condition." PRODUCT RETURN RIGHTS Product returns in excess of allowances would adversely affect our financial results. We generally give our customers the right to return our software within 30 days after purchase. Although we believe that we have made adequate allowances for returns, actual returns could exceed our allowances. Product returns in amounts that are more than recorded allowances could have a material adverse effect on our business, operating results and financial condition. 6 8 INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS Third parties might duplicate our software and we may not be able to enforce our rights, especially in foreign countries. Third parties could claim our products infringe on theirs, resulting in costly litigation. We regard our software as proprietary and attempt to protect it with copyrights, trademarks, restrictions on disclosure, copying and transferring title and enforcement of trade secret laws. Despite these precautions, it is possible for unauthorized third parties to copy our products and it may be possible for them to obtain and use information that we feel is proprietary. We have no patents, and existing copyright laws afford only limited protection for our software. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent, as do the laws in the United States. Our licenses may be unenforceable under the laws of certain jurisdictions. As the number of software products increases and the functionality of these products further overlaps, we believe that software will increasingly become the subject of claims that it infringes the rights of others. We do not believe our products infringe on the rights of third parties. Nevertheless, third parties could assert infringement claims against us in the future and such assertion could result in costly litigation or require us to obtain a license to the intellectual property rights of such parties. There can be no assurance that such licenses will be available on reasonable terms, or at all. DEPENDENCE ON KEY PERSONNEL. Our business may suffer if we lose the services of either our President or Chief Technical Officer Our business also may suffer if we cannot recruit or retain qualified technical personnel We are dependent upon James A. Harrer, our President and Chief Executive Officer and C. Scott Hunter, our Vice President and Chief Technical Officer. The loss of either of these executives could have a material adverse effect on us. While we have employment agreements with these executives, they may terminate them without any reason upon four months notice. Moreover, unforeseen circumstances could cause either of them to no longer render services to the Company. The Company has key-man life insurance on the life of Mr. Harrer for $1,000,000. However, the proceeds from this policy may be insufficient to compensate us in case of Mr. Harrer's death. Further, this policy does not cover us in the event that he becomes disabled or is otherwise unable to render services. The continued success of the Company is also dependent upon its ability to attract and retain highly qualified personnel. There can be no assurance that the Company will be able to recruit and retain such personnel. 7 9 RISKS FROM INTERNATIONAL SALES We face a variety of risks by making sales oversees. Historically, international sales have accounted for a significant amount of our revenues. International sales are subject to inherent risks including exposure to currency fluctuations, regulatory requirements, political and economic instability and trade restrictions. Our sales have been typically made in U.S. dollars. However, a weakening in the value of foreign currencies relative to the U.S. dollar could have an adverse impact on us by increasing the effective price of our products in international markets. In addition, lower sales levels in Europe, which typically occur during the summer months, may adversely affect our business. POSSIBLE NASDAQ DELISTING Nasdaq has listed our common stock on The Nasdaq SmallCap Market conditionally. We currently list our common stock on The Nasdaq SmallCap Market. Nasdaq moved the listing from the Nasdaq National Market to The Nasdaq Small Cap Market on October 15, 1998 because we did not meet the maintenance requirements for the Nasdaq National Market. We recently raised $1,500,000 in a private placement of common stock, Series A Convertible Preferred Stock and Warrants. In this transaction, we also arranged for an equity line of credit under which we may "put" to the investors more shares of our common stock, potentially raising additional gross proceeds of up to $5,000,000. Nasdaq moved our listing to The Nasdaq Small Cap Market via an exception from its net tangible assets requirement. In order for us to maintain our listing on The Nasdaq SmallCap Market, we must satisfy each of the following conditions: (1) On or before November 16, 1998, Mustang must file with the SEC and Nasdaq our Form 10-Q for the quarter ended September 30, 1998 evidencing a minimum 1998 evidencing a minimum of $2,000,000 in net tangible assets; (2) On or before December 2, 1998, we must provide Nasdaq with written confirmation that our shareholders have approved the plan to permit the investors in the private financing to convert the Convertible Series A Preferred Stock and exercise the Warrants and permit us to utilize the equity line of credit, if necessary. (3) We must be able to demonstrate compliance with all requirements for continued listing on The Nasdaq SmallCap Market. 8 10 If we do not meet the conditions imposed by Nasdaq, our common stock will be delisted from the Nasdaq Small Cap Market. We also need to continue comply with The Nasdaq Small Cap Market's Maintenance Requirements to keep our listing. We believe that we can meet these conditions, but there can be no assurance that we will do so. In particular, shareholders may not approve our issuance of common stock upon conversion of the Series A Preferred Stock or exercise of the Warrants sold in the private placement. They may not approve our use of the equity line of credit or we may elect not to utilize it. We may be unable to clear our proxy materials with the SEC in time to obtain shareholder approval by December 2, 1998. If any of these events occurred or if we failed to meet the other conditions imposed for continued listing, Nasdaq will delist our common stock from the Nasdaq Stock Market. We will have to maintain certain minimum requirements for the continued listing of our common stock on The Nasdaq SmallCap Market. In this regard, we need: - - net tangible assets of at least $2,000,000, or a market capitalization of at least $35,000,000, or net income in two of the last three years of at least $500,000, - - a public float of at least 500,000 shares with a minimum market value of $1,000,000, - - a minimum bid price of at least $1.00 per share, and a - - minimum of two active market makers and 300 round lot shareholders. If we are unable to satisfy Nasdaq's maintenance requirements, the Nasdaq may delist our common stock from The Nasdaq Stock Market. In that event, public trading, if any, in the common stock would be limited to the over-the-counter markets in the so-called "pink sheets" or the NASD's OTC Electronic Bulletin Board. Consequently, the liquidity of our common stock could be impaired. 9 11 RISK OF LOW PRICED ("PENNY") STOCKS If Nasdaq delisted our common stock we could become subject to the SEC's penny stock rules. In that event, because of the burden placed on broker-dealers to comply with the rules applicable to penny stocks, investors may have difficulty selling our common stock in the open market. If Nasdaq delisted our common stock from the Nasdaq Stock Market, it could become subject to Rule 15g-9 under the Securities Exchange Act of 1934. This rule imposes additional sales practice requirements on broker-dealers who sell so-called "penny" stocks to persons other than established customers and "accredited investors." Generally, accredited investors are individuals with a net worth more than $1,000,000 or annual incomes exceeding $200,000, or $300,000 together with their spouses). For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction before sale. Consequently, the rule may adversely affect the ability of broker-dealers to sell our shares in the secondary market. Subject to some exceptions, the SEC's regulations define a "penny stock" to be any non-Nasdaq equity security that has a market price of less than $5.00 per share, or with an exercise price of less than $5.00 per share. Unless exempt, the rules require delivery, prior to any transaction in a penny stock, of a disclosure schedule relating to the penny stock market and the associated risks. The rules also require disclosure about commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, the rules require that broker-dealers send monthly statements disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. If our common stock became subject to the rules applicable to penny stocks, the market liquidity for the common stock could be severely adversely affected. 10 12 USE OF PROCEEDS The Company will not receive any proceeds from the sales of shares of common stock by the selling shareholders. The Company will add the net proceeds, if any, received from the exercise of the Warrants to working capital and used its for general corporate purposes. There can be no assurance as to whether any, or the number of, Warrants that may be exercised. DIVIDEND POLICY The Company has never declared or paid cash dividends on the common stock since its inception. The Company currently intends to retain all of its earnings, if any, for use in the operation and expansion of its business and does not intend to pay any cash dividends to its stockholders in the foreseeable future. 11 13 PRICE RANGE OF COMMON STOCK Through October 14, 1998, Mustang listed its common stock on the Nasdaq National Market under the symbol "MSTG." Effective on October 15, 1995, Mustang began listing its common stock on The Nasdaq SmallCap Market under the symbol "MSTGC." Nasdaq moved the listing from the Nasdaq National Market to The Nasdaq Small Cap Market conditionally because Mustang did not meet the maintenance requirements for the Nasdaq National Market. In order to maintain the listing on the Nasdaq SmallCap Market, the Company must satisfy certain conditions. See "Risk Factors - Possible Delisting from the Nasdaq Stock Market. The following table sets forth for the quarters indicated the high and low last reported sale prices as reported on the Nasdaq National Market through October 14, 1998 and the high and low bid prices as reported on The Nasdaq SmallCap market from October 15, 1998. Quotations since October 15, 1998 reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
HIGH LOW ---- --- 1996 First Quarter $ 9.00 $ 5.50 Second Quarter 7.50 4.00 Third Quarter 3.75 2.25 Fourth Quarter 2.63 1.00 1997 First Quarter $ 2.50 $ .63 Second Quarter 1.63 .63 Third Quarter 2.13 .56 Fourth Quarter 1.88 .50 1998 First Quarter $ 4.06 $ 1.25 Second Quarter 3.25 1.25 Third Quarter 2.28 1.50 Fourth Quarter (through ______, 1998) 2.06 1.25
The 4,098,845, shares of common stock of the Company outstanding as of October 26, 1998 were held of by 185 shareholders of record, who, the Company believes, held for in excess of 1,538 beneficial holders. On _______ __, 1998, the last sale price of the common stock as reported on The Nasdaq SmallCap Market was $_______per share. 12 14 SELLING SHAREHOLDERS Effective on September 17, 1998, pursuant to a Securities Purchase Agreement (the "Agreement"), the Company completed a private placement of its securities with the four institutional investors (the "Selling Shareholders") named in the table below. One of the investors, namely, Settondown Capital International Limited, served as the placement agent (the "Placement Agent") for itself and the other investors. Under the Agreement, the Company sold to the investors for $1,500,000 an aggregate of 612,000 shares of its common stock, 5,246 shares of its Series A Convertible Preferred Stock (the "Series A Preferred Stock") and Warrants to purchase an aggregate of 180,000 shares of common stock. For its services in the transaction, which included placing the initial $1,500,000 investment, and arranging an equity line of credit for the Company, the Company paid Settondown, as Placement Agent, a fee consisting of $60,000 cash, 29,480 shares of its common stock, 210 shares of its Series A Preferred Stock and Warrants to purchase an aggregate of 57,000 shares of common stock. The Selling Shareholders (including the Placement Agent) are offering for resale pursuant to this Prospectus the shares of common stock issued and underlying the Series A Preferred Stock and Warrants sold on September 17, 1998. The following table sets forth certain information regarding the beneficial ownership of shares of common stock by the Selling Shareholders as of October 30, 1998. The information in the table concerning the Selling Shareholders who may offer shares hereunder from time to time is based on information provided to the Company by such shareholder, except for the assumed conversion of the Series A Preferred Stock into common stock and the assumed exercise of the Warrants by the holders, which are based solely on the assumptions referenced in footnote (1), (2), (3) and (4) to the table. Because the Selling Shareholders may offer all or some of the shares pursuant to this Prospectus, and to the Company's knowledge there are currently no agreements, arrangements or understandings with respect to the sale of any of the shares that may be held by the Selling Shareholders after completion of this offering, no estimate can be given as to the amount of Shares that will be held by the Selling Shareholders after completion of this offering. Information concerning the Selling Shareholders may change from time to time and any changes of which the Company is advised will be set forth in a Prospectus Supplement to the extent required. See "Plan of Distribution."
Number of shares of common stock -------------------------------------------------------- Issuable upon Beneficially conversion Issuable owned of upon before Series A exercise Offered Percent of this Preferred of the in this outstanding offering Stock Warrants offering shares Name of Selling Shareholder (1) (1)(2)(3) (1)(2) (1)(2)(3) (2)(4) - --------------------------------------- ------------ ----------- ----------- ----------- ------------- Settondown Capital International Ltd. 182,480 251,719 102,000 586,199 12.0 The Cutty Hunk Fund Ltd. 153,000 216,823 45,000 414,823 9.5 Canal, Ltd. 153,000 216,988 45,000 414,988 9.5 Manchester Asset Management Ltd. 153,000 216,823 45,000 414,823 9.5
- ---------- (1) The Series A Preferred Stock is not convertible and the Warrants are not exercisable unless, among other things, shareholders so approve or the Company's common stock is no longer listed on The Nasdaq Stock Market. Prior to 13 15 December 2, 1998, the Company plans to hold a Special Meeting of Shareholders seeking approval for the conversion of the Series A Preferred Stock and exercise of the Warrants. Nasdaq has notified the Company that its common stock will be delisted from the Nasdaq Stock Market if shareholders do not approve such conversion or exercise by that date. (2) The information assumes that the Series A Preferred Stock will be convertible and the Warrants will be exercisable either because shareholders approve the same or because the Company's common stock is no longer listed on The Nasdaq Stock Market. (3) Consists of 200% of 451,176 shares of common stock issuable upon exercise of 5,456 shares of outstanding Series A Preferred Stock. The number of shares issuable upon conversion of the Series A Preferred Stock has been determined based on 90% of the average of the four lowest closing bid prices of the Company during the 10-day trading period ended October 30, 1998). The Company agreed to register the number of shares of common stock so determined in a Registration Rights Agreement with the Selling Shareholders entered into concurrently with the Agreement. The number of shares of common stock actually issued upon conversion of the Series A Preferred Stock will depend on the market price of the Company's common stock at the time the Series A Preferred Stock is converted by the Selling Shareholders from time to time. See "Description of Securities." Accordingly, information concerning the number of shares of common stock issuable upon conversion of the Series A Preferred Stock and the number of shares that the Selling Shareholders will offer may change from time to time and any changes of which the Company is advised will be set forth in a Prospectus Supplement to the extent required. (4) Beneficial ownership for purpose of computing the percent of outstanding shares is determined in accordance with the rules of the Securities and Exchange Commission. Shares of common stock issuable upon exercise of the Series A Preferred Stock and Warrants are considered outstanding for purpose of computing the percentage ownership of the Selling Shareholder holding the Series A Preferred Stock and Warrants but are not considered outstanding for purpose of computing percentage ownership of any other Selling Shareholder. To the knowledge of the Company, none of the Selling Shareholders has any material relationship or engaged in any transaction with the Company except pursuant to the Agreement. 14 16 PLAN OF DISTRIBUTION The distribution of the shares by the Selling Shareholders may be effected from time to time in one or more transactions (which may involve block transactions), in special offerings, exchange distributions and/or secondary distributions, in negotiated transactions, in settlement of short sales of common stock or a combination or such methods of sale, at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices. Such transactions may be effected on the over-the-counter market or privately. The Selling Shareholders may effect such transactions by selling the shares to or through broker-dealers, and such broker-dealers may receive compensation in the form of underwriting discounts, concessions or commissions from the Selling Shareholders for whom they may act as agent (which compensation may be in excess of customary commissions). Without limiting the foregoing, such brokers may act as dealers by purchasing any and all of the shares covered by this Prospectus either as agents for others or as principals for their own accounts and reselling such securities pursuant to this Prospectus. The Selling Shareholders and any broker-dealers or other persons acting on the behalf of parties that participate with such Selling Shareholders in the distribution of the shares may be deemed to be underwriters and any commissions received or profit realized by them on the resale of the shares may be deemed to be underwriting discounts and commissions under the Securities Act of 1933 (the "Securities Act"). As of the date of this Prospectus, the Company is not aware of any agreement, arrangement or understanding between any broker or dealer and the Selling Shareholders with respect to the offer or sale of the shares pursuant to this Prospectus. At the time that any particular offering of shares is made, to the extent required by the Securities Act, a prospectus supplement will be distributed, setting forth the terms of the offering, including the aggregate number of shares being offered, the names of any underwriters, dealers or agents, any discounts, commissions and other items constituting compensation from the Selling Shareholders and any discounts, commissions or concessions allowed or reallowed or paid to dealers. Selling Shareholders may also sell their shares pursuant to Rule 144 promulgated under the Securities Act. Each of the Selling Shareholders may from time to time pledge the shares owned by it to secure margin or other loans made to such Selling Shareholder. Thus, the person or entity receiving the pledge of any of the shares may sell them, in a foreclosure sale or otherwise, in the same manner as described above for such Selling Shareholder. The Company will not receive any of the proceeds from any sale of the shares by the Selling Shareholders offered hereby. Pursuant to a Registration Rights Agreement that the Company and the Selling Stockholders entered into at the same time they entered into the Agreement (the "Registration Rights Agreement"), the Company and the Selling Shareholders have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. The Company shall bear customary expenses incident to the registration of the shares for the benefit of such Selling Shareholders in accordance with such agreements, other than underwriting discounts commissions. The Company has agreed to use its best efforts to keep the Registration Statement of which this Prospectus is a part effective until the earliest of (i) the date that all of the common stock which it 15 17 has agreed to register under the Registration Rights Agreement has been sold pursuant to the Registration Statement of which this Prospectus is a part or any post-effective amendment thereto (ii) the date the Selling Shareholders may sell all the shares under the provisions of Rule 144 or (iii) September 17, 2001. DESCRIPTION OF SECURITIES GENERAL The authorized capital stock of the Company consists of 30,000,000 shares of common stock, no par value, and 10,000,000 shares of preferred stock, no par value. THE PRIVATE PLACEMENT Effective on September 17, 1998, pursuant to the Agreement, the Company completed a private placement of its securities to the Selling Shareholders. Under the Agreement, the Company sold to the Selling Shareholders for $1,500,000 an aggregate of 612,000 shares of its common stock, 5,246 shares of its Series A Convertible Preferred Stock (the "Series A Preferred Stock") and Warrants to purchase an aggregate of 180,000 shares of common stock. For its services in the transaction, which included placing the initial $1,500,000 investment, and arranging an equity line of credit for the Company, the Company paid Settondown Capital International Limited, as Placement Agent, a fee consisting of $60,000 cash, 29,480 shares of its common stock, 210 shares of its Series A Preferred Stock and Warrants to purchase an aggregate of 57,000 shares of common stock. COMMON STOCK As of October 26, 1998, 4,063,365 shares of common stock were outstanding. The holders of common stock are entitled to receive dividends when and as declared by the Board of Directors out of any funds legally available therefor. Holders of common stock are entitled to one vote per share on all matters on which the holders of common stock are entitled to vote and the holders of common stock may cumulate their votes in the election of directors upon giving notice as required by law. Cumulative voting means that in any election of directors, each shareholder may give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of shares held by such shareholder, or such shareholder may distribute such number of votes among as many candidates as the shareholder sees fit. There are no preemptive rights associated with any of the shares of common stock. In the event of a liquidation, dissolution or winding up of the Company, holders of common stock are entitled to share equally and ratably in the assets of the Company, if any, remaining after the payment of all debt and liabilities of the Company and the liquidation preference of any outstanding class or series of preferred stock. The shares of common stock offered by the Selling Shareholders hereby will be, when sold, fully paid and nonassessable. The rights, preferences and privileges of holders of common stock are subject to any series of preferred stock which the Company may issue in the future. 16 18 PREFERRED STOCK The Company is authorized to issue preferred stock in series to be designated by the Board of Directors. Material provisions describing the terms of any series of preferred stock which may be issued in the future, such as dividend rate, conversion features, voting rights, redemption rights and liquidation preferences, are determined by the Board of Directors of the Company at the time of issuance. The right of the Board of Directors to issue "blank check" preferred stock may adversely affect the rights of holders of shares of common stock and also could be used by the Company as a means of resisting a change of control of the Company. Of the 10,000,000 shares of preferred stock authorized in general, the Company has authorized 15,246 shares of Series A Convertible Preferred Stock (the "Series A Preferred Stock"), of which 5,456 shares have been issued. All of the Series A Preferred Stock has been issued to the Selling Shareholders. Holders of Series A Preferred Stock are not entitled to dividends and have no voting rights, except as provided otherwise by law. For each share of Series A Preferred Stock held, holders are entitled to a liquidation preference of $100 plus 5 percent per annum thereon from September 17, 1998 to the day immediately prior to any liquidation, dissolution or winding up of Mustang. Subject to certain conditions and limitations (including shareholder approval or the delisting of the Company's common stock from The Nasdaq Stock Market) beginning on December 15, 1998, 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 September 17, 1998 to the date of conversion, by the lower of $1.875 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 be increased by two trading days every month commencing on January 17, 1999 and continue to increase by two trading days every month thereafter that the Series A Preferred Stock is outstanding until the Lookback Period equals a maximum of thirty trading days. If not earlier converted, the Series A Preferred Stock will automatically convert into common stock on September 17, 2000. Subject to certain conditions and limitations, the Company has the right to force conversion by the holders of the Series A 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. WARRANTS Under the Agreement, the Company issued Warrants (the "A" Warrants) to purchase an aggregate of 200,000 shares of common stock. These Warrants will be exercisable until September 13, 2000 at an exercise price of $1.90, an amount equal to 110% of the average closing bid price of the common stock for the five trading days preceding September 17, 1998. 17 19 Under the Agreement, the Company also issued Warrants (the "B" Warrants) to purchase an aggregate of 37,000 shares of common stock. These Warrants are exercisable until September 13, 2000 at an exercise price of $2.08, an amount equal to 120% of the average closing bid price of the common stock for the five trading days preceding September 17, 1998. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the common stock of the Company is U.S. Stock Transfer Corporation, Glendale, California. LEGAL MATTERS The validity of the common stock offered hereby has been passed upon for the Company by Freshman, Marantz, Orlanski, Cooper & Klein, a law corporation, Beverly Hills, California. EXPERTS The financial statements of the Company incorporated into this Prospectus by reference to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1997 have been audited by Arthur Andersen LLP, independent public accountants, and are incorporated herein and in the Registration Statement of which this Prospectus is a part in reliance upon the report of Arthur Andersen LLC and upon the authority of said firm as experts in accounting and auditing. 18 20 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the costs and expenses payable by the Registrant in connection with the sale of the Common Stock being registered hereby, other than underwriting commissions and discounts, all of which are estimated except for the SEC and NASD filing fees.
Item Amount ---- ------ SEC registration fee $ 992 Nasdaq Additional Listing Fee Blue Sky fees and expenses Printing and engraving expenses Legal fees and expenses Accounting fees and expenses Transfer Agent and registrar fees 2,500 Miscellaneous expenses ------ Total
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Amended and Restated Articles of Incorporation and Amended and Restated Bylaws of Mustang Software, Inc., (the "Company") require the Company to indemnify officers and directors of the Company to the fullest extent permissible under California law. Section 317 of the California General Corporation Law makes provision for the indemnification of officers, directors and other corporate agents in terms sufficiently broad to indemnify such persons, under certain circumstances, for liabilities (including reimbursement of expenses incurred) arising under the Securities Act of 1933, as amended (the "Act"). ITEM 16. EXHIBITS 4.1 Form of Common Stock certificate (incorporated by reference to Exhibit 4.1 of the Company's Registration Statement of Form SB-2 (file no. 33-89900-LA)). 4.2 Securities Purchase Agreement dated as of September 14, 1998 between the Company and Settondown Capital International Limited and the other investors named therein. 4.3 Certificate of Determination of Mustang Software, Inc. relating to the authorization and determination of the Series A Convertible Preferred Stock. 4.4 Escrow Agreement dated as of September 14, 1998 between the Company and Settondown Capital International Limited and the other investors named therein 4.5 Registration Rights Agreement dated as of September 14, 1998 between the Company and Settondown Capital International Limited and the other investors named therein 4.6 Form of Stock Purchase Warrant A 4.7 Form of Stock Purchase Warrant B 5 Opinion of Freshman, Marantz, Orlanski, Cooper & Klein, a law corporation (to be filed by amendment) 23.1 Consent of Arthur Andersen LLP 23.2 Consent of Freshman, Marantz, Orlanski, Cooper & Klein, a law corporation (contained in Exhibit 5) 24.1 Power of Attorney (contained on Signature page) 1 21 ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (a) to include any prospectus required by Section 10(a)(3) of the Securities Act; (b) to reflect in the prospectus any facts or events arising after the effective date of this Registration Statement (or the most recent post-effective amendment hereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in this Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b), if in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (c) to include any material information with respect to the plan of distribution not previously disclosed in this Registration Statement or any material change to such information in this Registration Statement. provided, however, that the undertakings set forth in paragraph (a) and (b) above shall not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the Registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") that are incorporated by reference in this Registration Statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference in the Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of this Registration Statement as of the time it was declared effective. For the purpose of determining any liability under the Securities Act of 1933, each post-effective that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. 2 22 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Chatsworth, State of California, on the 2nd day of November, 1998. MUSTANG SOFTWARE, INC. By: /s/ James A. Harrer --------------------------------- James A. Harrer, President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints James A. Harrer and Donald M. Leonard, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution for him in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
Names Title Date ----- ----- ---- /s/ James A. Harrer President and Chief Executive Officer James A. Harrer (Principal Executive Officer) and a Director November 2, 1998 /s/ Donald M. Leonard Vice President Finance, Chief Financial November 2, 1998 Donald M. Leonard Officer (Principal Financial and Accounting Officer) and a Director /s/ C. Scott Hunter Director November 2, 1998 C. Scott Hunter /s/ Stanley A. Hirschman Director November 2, 1998 Stanley A. Hirschman /s/ Michael S. Noling Director November 2, 1998 Michael S. Noling
3 EX-4.2 2 EXHIBIT 4.2 1 EXHIBIT 4.2 SECURITIES PURCHASE AGREEMENT SECURITIES PURCHASE AGREEMENT dated as of September 14, 1998 (the "Agreement"), between the entities listed on Schedule A attached hereto (collectively referred to as the "Investor"), 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 Investor, from time to time as provided herein, and the Investor shall purchase up to (a) 5,246 shares of Preferred Stock (as defined below), (b) 612,000 shares of Common Stock, (c) Warrants to purchase up to 240,000 Warrant Shares, and (d) pursuant to the Company's option of exercising its "Put" rights upon the Investors for the purchase and sale of up to an additional $5,000,000 of the Common Stock for a total aggregate purchase price of $6,500,000 (the "Aggregate Purchase Price"); and WHEREAS, the Company shall issue to the Placement Agent (in addition to the fees set forth in Section 13.7 below), in return for services rendered, from time to time as provided herein, up to 210 shares of Series A Convertible Preferred Stock, a Class A Warrant to purchase up to 50,000 Warrant Shares, a Class B Warrant to purchase up to 21,000 Warrant Shares, and 15,000 shares of Common Stock; and WHEREAS, such investments will be made in reliance upon the provisions of Section 4(2) ("Section 4(2)") and Regulation D ("Regulation D") of 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 Common Stock to be made hereunder. NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I Certain Definitions Section 1.1 "Additional Shares" shall have that meaning set forth in Section 2.6 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 2 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 one of the closings of a purchase and sale of the Common Stock, Warrants, and Preferred Stock pursuant to Article II below. Section 1.7 "Closing Date" shall mean, with respect to the purchase of the Initial Shares the Closing Date shall be on the Subscription Date. The Closing Date for the Put Shares shall be on the Fifth Trading Day following each Put Date. For each Closing Date, all conditions contained in this Agreement (and in all Exhibits annexed hereto) must have been fulfilled at or prior to each 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 "Commitment Amount" shall mean up to the $6,500,000 which the Investors have agreed to provide to the Company in order to purchase the Initial Shares, and Put Shares pursuant to the terms and conditions of this Agreement. Section 1.9 "Commitment Period" shall mean the period commencing on the earlier to occur of (i) the Effective Date, or (ii) such earlier date as the Company and all of the Investors may mutually agree in writing, and expiring on the earliest to occur of (x) the date on which the Investors shall have purchased Put Shares pursuant to this Agreement for an aggregate Purchase Price of $5,000,000, (y) the date this Agreement is terminated pursuant to Section 2.4, or (z) the date occurring two years after the Effective Date. Section 1.10 "Common Stock" shall mean the Company's common stock, no par value per share. Section 1.11 "Condition Satisfaction Date" shall have the meaning set forth in Section 7.2. Section 1.12 "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 1.13 "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 Initial Shares of Common Stock, Underlying Shares (as of the date the Registration Statement is filed), and Warrant Shares, and (ii) two hundred (200%) percent of that number of shares of Common Stock, Underlying Shares (as of the date the Registration Statement is filed), and Warrant Shares issued to the Placement Agent as set forth in Section 13.7 below. 3 Section 1.14 "Escrow Agent" shall mean the law firm of Goldstein, Goldstein & Reis, LLP, pursuant to the terms of the Escrow Agreement attached as Exhibit B. Section 1.15 "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. Section 1.16 "Forced Conversion Period" shall mean 10 consecutive Trading Days. Section 1.17 "Floor Price" shall mean a Bid Price of One Dollar ($1.00) per share of Common Stock. Section 1.18 "Initial Shares" shall mean collectively the Initial Shares of Common Stock and the Initial Shares of Preferred Stock as set forth in Section 2.8. Section 1.19 "Initial Shares of Common Stock" shall mean the shares of Common Stock issuable by the Company to the Investors pursuant to Section 2.8 below. Section 1.20 "Initial Shares of Preferred Stock" shall mean the shares of Preferred Stock issuable by the Company to the Investors pursuant to Section 2.8 below. Section 1.21 "Initial Shares Investment Amount" shall mean $1,500,000. Section 1.22 "Initial Shares of Common Stock Investment Amount" shall mean $975,400. Section 1.23 "Investment Amount" shall mean, upon proper notification by the Company to each of the Investors, the dollar amount to be invested by each of the Investors to purchase Put Shares with respect to any Put Notice in accordance with Section 2.2 hereof. Section 1.24 "Issuance Price" shall mean $1.875 per share. Section 1.25 "Legend" shall have the meaning set forth in Section 9.1. Section 1.26 "Market Price" on any given date shall mean the average of the three lowest Bid Prices of the Common Stock during the Valuation Period. Section 1.27 "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. 4 Section 1.28 "Maximum Put Amount" on any Put Date shall mean the amount indicated opposite the range in which the Closing Price is on such Put Date and below the 30 Day Average Daily Trading Volume on such Put Date, as set forth in the Table below:
30-Day 30-Day 30-Day 30-Day 30-Day 30-Day Avg. Avg. Avg. Avg. Avg. Avg. Closing Daily Daily Daily Daily Daily Daily Price Trading Trading Trading Trading Trading Trading Volume Volume Volume Volume Volume Volume 20,000- 50,001- 75,001- 100,001- 125,001- 150,001- 50,000 75,000 100,000 125,000 150,000 Above $1.00 - $1.50 $100,000 $150,000 $200,000 $250,000 $300,000 $350,000 $1.51 - $2.00 $150,000 $200,000 $250,000 $300,000 $350,000 $400,000 $2.01 - $2.50 $200,000 $250,000 $300,000 $350,000 $400,000 $450,000 $2.51 - $3.00 $250,000 $300,000 $350,000 $400,000 $450,000 $500,000 $3.01 - $3.50 $300,000 $350,000 $400,000 $450,000 $500,000 $550,000 $3.51 - $4.00 $350,000 $400,000 $450,000 $500,000 $550,000 $600,000 $4.01 - $4.50 $400,000 $450,000 $500,000 $550,000 $600,000 $650,000 $4.51 - $5.00 $450,000 $500,000 $550,000 $600,000 $650,000 $700,000 $5.01 - $5.50 $500,000 $550,000 $600,000 $650,000 $700,000 $750,000 $5.51 - $6.00 $550,000 $600,000 $650,000 $700,000 $750,000 $800,000 $6.01 - $6.50 $600,000 $650,000 $700,000 $750,000 $800,000 $850,000 $6.51 - $7.00 $650,000 $700,000 $750,000 $800,000 $850,000 $900,000 $7.01 - Above $700,000 $750,000 $800,000 $850,000 $900,000 $950,000
Section 1.29 "NASD" shall mean the National Association of Securities Dealers, Inc. Section 1.30 "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 5 such Shares then directly or indirectly owned or held by or for the account of the Company. Section 1.31 "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 1.32 "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 1.33 "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. Section 1.34 "Purchase Price" shall mean (a) with respect to the Initial Shares of Common Stock, eighty five (85%) percent of the Bid Price on the Trading Day immediately preceding the Subscription Date, (b) with respect to each Initial Share of Preferred Stock, an amount equal to $100, and (c) with respect to Put Shares, eighty eight (88%) percent of the Market Price upon a Put Date (or such other date on which the Purchase Price is calculated in accordance with the terms and conditions of this Agreement). Section 1.35 "Put" shall mean each occasion in which the Company elects to exercise its right to tender a Put Notice requiring the Investors (pro rata) to purchase shares of the Company's Common Stock, subject to the terms of this Agreement. Section 1.36 "Put Date" shall mean the Trading Day during the Commitment Period that a Put Notice to issue and sell Put Shares to the Investors is deemed delivered pursuant to Section 2.2(b) hereof. Section 1.37 "Put Notice and/or Compliance Certificate" shall mean a written notice to each of the Investors setting forth the Investment Amount that the Company intends to Put to the Investors (pro rata), including the certification that the Company has complied in all material respects with all obligations and conditions contained in this Agreement, in the form annexed hereto as Exhibit C. Section 1.38 "Put Shares" shall mean all shares of Common Stock or other securities issued or issuable pursuant to a Put that has occurred or may occur in accordance with the terms and conditions of this Agreement. Section 1.39 "Registrable Securities" shall mean the Initial Shares of Common Stock, the Underlying Shares (not including the shares of Common Stock underlying the Repricing 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 6 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 1.40 "Registration Rights Agreement" shall mean the agreement regarding the filing of the Registration Statement for the resale of the Registrable Securities, and the shares of Common Stock underlying the Repricing Shares, entered into between the Company, the Placement Agent, and the Investors on the Subscription Date annexed hereto as Exhibit D. Section 1.41 "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 1.42 "Regulation D" shall have the meaning set forth in the recitals of this Agreement. Section 1.43 "Repricing Date" shall mean the earlier to occur of (i) the Effective Date or (ii) the first anniversary of the Subscription Date. Section 1.44 "Repricing Shares" shall mean that number of shares of Preferred Stock issuable pursuant to Section 2.9 below. Section 1.45 "Reset Price" shall mean eighty five (85%) percent of the Market Price on the applicable Repricing Date. Section 1.46 "SEC" shall mean the Securities and Exchange Commission. Section 1.47 "Section 4(2)" shall have the meaning set forth in the recitals of this Agreement. Section 1.48 "Securities" shall mean the Initial Shares, the Put Shares, the Repricing Shares, the Underlying Shares, the Additional Shares, the Warrant Shares and any and all Securities issued to the Placement Agent. Section 1.49 "Securities Act" shall have the meaning set forth in the recitals of this Agreement. Section 1.50 "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 7 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 1.51 "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 the Initial Shares shall have been fulfilled. Section 1.52 "Trading Cushion" shall mean the mandatory fifteen (15) Trading Days between Put Dates. Section 1.53 "Trading Day" shall mean any day during which the New York Stock Exchange shall be open for business. Section 1.54 "Underlying Shares" shall mean all shares of Common Stock or other securities issued or issuable pursuant to conversion of the Preferred Stock. Section 1.55 "Valuation Event" shall mean an event in which the Company at any time during a Valuation Period takes any of the following actions: (a) subdivides or combines its Common Stock; (b) pays a dividend in its Capital Shares or makes any other distribution of its Capital Shares; (c) issues any additional Capital Shares ("Additional Capital Shares") at a price per share less, or for other consideration, lower than the Bid Price in effect immediately prior to such issuance, or without consideration, other than (i) as provided in the foregoing Subsections (a) and (b) above, , (ii) upon exercise of warrants and options outstanding on the Subscription Date, (iii) pursuant to the Company's employee benefit plans as in effect as of the Subscription Date, and (iv) a firmly underwritten public offering of the Common Stock; (d) issues any warrants, options or other rights to subscribe for or purchase any Additional Capital Shares and the price per share for which Additional Capital Shares may at any time thereafter be issuable pursuant to such warrants, options or other rights shall be less than the Bid Price in effect immediately prior to the issuance of such warrants, options or other rights, except pursuant to the Company's employee benefit plan as in effect as of the Subscription Date; (e) issues any securities convertible into or exchangeable for Capital Shares and the consideration per share for which Additional Capital Shares may at any time thereafter be issuable pursuant to the terms of such convertible or exchangeable securities shall be at or less than the Bid Price in effect immediately prior to the issuance of such warrants, options or other rights, except pursuant to the Company's employee benefit plan as in effect as of the Subscription Date; (f) makes a distribution of its assets or evidences of indebtedness to the holders of its Capital Shares as a dividend in liquidation or by way of return of capital or other than as a dividend payable out of earnings or surplus legally available for 8 dividends under applicable law or any distribution to such holders made in respect of the sale of all or substantially all of the Company's assets (other than under the circumstances provided for in the foregoing subsections (a) through (e)); or (g) takes any action affecting the number of Outstanding Capital Shares, other than an action described in any of the foregoing Subsections (a) through (f) hereof, inclusive, which in the opinion of the Company's Board of Directors, determined in good faith, would have a Material Adverse Effect upon the rights of the Investor at the time of a Put or exercise of the Warrants. Notwithstanding anything to the contrary contained in this Section 1.54, a Valuation Event shall not include any event involving the issuance of any Registrable Securities, Common Stock underlying the Repricing Shares, Preferred Stock or Warrants. Section 1.56 "Valuation Period" shall mean, (i) with respect to the Purchase Price on any Put Date, the five (5) Trading Day period consisting of the three (3) Trading Days immediately preceding and the one (1) Trading Day following the Trading Day on which a Put Notice is deemed to be delivered, and the Trading Day on which such notice is deemed to be delivered; and (ii) with respect to the Repricing Shares, the five (5) Trading Days immediately preceding the Repricing Date; provided, however, that if a Valuation Event occurs during a Valuation Period, a new Valuation Period shall begin on the Trading Day immediately after the occurrence of such Valuation Event and end on the fifth Trading Day thereafter. Section 1.57 "Warrant A" shall have the meaning set forth in Section 2.5 and substantially in the form of Exhibit E. Section 1.58 "Warrant B" shall have the meaning set forth in Section 2.6 and substantially in the form of Exhibit F. Section 1.59 "Warrants" shall mean collectively the Warrant A and Warrant B. Section 1.60"Warrant Shares" shall mean all shares of Common Stock or other securities issued or issuable pursuant to the exercise of Warrant A or Warrant B. ARTICLE II Purchase and Sale of Common Stock, Preferred Stock and Warrants Section 2.1 Investments. (a) Puts. Upon the terms and conditions set forth herein (including, without limitation, the provisions of Article VII hereof), on any Put Date the Company may make a Put by the delivery of a Put Notice/Compliance Certificate in the form attached hereto as Exhibit C. The number of Put Shares that the Investors shall receive pursuant to such Put shall be determined by dividing the Investment Amount specified in the Put Notice by the Purchase Price on such Put Date, which aggregate Investment Amount shall not exceed the Maximum Put Amount on such date, and 9 shall be distributed pro rata amongst the Investors. (b) Maximum Aggregate Amount of Puts. Notwithstanding the provisions of section 2.1(a), the Company may not make a Put, and the Investors may not be compelled to purchase any Put Shares, unless and until holders of Common Stock approve the issuance of shares of Common Stock (and securities convertible into or exercisable for Common Stock) equal to 20% or more of the Common Stock outstanding immediately prior to the Subscription Date in accordance with applicable rules of The Nasdaq Stock Market; provided, however, that if at the time the Company wishes to make a Put, the Common Stock is not listed on The Nasdaq Stock Market or the rules of the Principal Market do not otherwise require shareholder approval for the issuance of shares of Common Stock (and securities convertible into or exercisable for Common Stock) equal to 20% or more of the Common Stock outstanding immediately prior to the Subscription Date, such approval by holders of Common Stock shall not be required to make a Put. Section 2.2 Mechanics For a Put. (a) Put Notice. At any time after the forty fifth (45th) day following the Repricing Date, the Company may deliver a Put Notice to the Investors, subject to the conditions set forth in Section 7.2 and below; provided, however, the Investment Amount for each Put as designated by the Company in the applicable Put Notice shall be neither less than $50,000 nor more than the Maximum Put Amount. (b) Date of Delivery of Put Notice. A Put Notice shall be deemed delivered on (i) the Trading Day it is received by facsimile or otherwise by the Investors if such notice is received prior to 12:00 p.m. Eastern Time, or (ii) the immediately succeeding Trading Day if it is received by facsimile or otherwise 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 Put Notice may be deemed delivered, on a day that is not a Trading Day. Section 2.3 Put Closings. On each Closing Date for a Put (i) the Company shall deliver to the Escrow Agent for the benefit of the Investors one or more certificates, at the Investors option, representing the Put Shares to be purchased by the Investors pursuant to Section 2.1 herein, registered in the name of the Investors; and (ii) each of the Investors shall deliver to escrow their portion of the Investment Amount specified in the Put Notice by wire transfer of immediately available funds to the Escrow Agent on or before the Closing Date. In addition, on or prior to the Closing Date for a Put, each of the Company, and the Investors shall deliver to the Escrow Agent all documents, instruments and writings required to be delivered or reasonably requested by either of them pursuant to this Agreement in order to implement and effect the transactions contemplated herein. Payment of funds to the Company, payment of Placement Agent fees as set forth in Section 13.7 below and delivery of the certificates to the Investors shall occur on the Closing Date for the applicable Put in accordance with the Escrow Agreement; provided, however, that to the extent the Company has not paid the fees, expenses, and disbursements of the Escrow Agent and Placement Agent in accordance with Section 13.7, the amount of such fees, expenses and disbursements shall be paid out of the funds that the Escrow Agent is holding for the Company to the respective parties, in immediately available funds, at the 10 direction of the Investors, with no reduction in the number of Put Shares issuable to the Investors on such Closing Date. Section 2.4 Termination of Investment Obligation. The obligation of the Investors to purchase shares of Common Stock pursuant to a Put shall terminate permanently (including with respect to a Closing Date that has not yet occurred but for which a Put Notice has been delivered to the Investors) in the event that (i) there shall occur any stop order or suspension of the effectiveness of the Registration Statement for an aggregate of twenty (20) Trading Days during the Commitment Period, for any reason other than deferrals or suspensions in accordance with the Registration Rights Agreement as a result of corporate developments subsequent to the Subscription Date that would require such Registration Statement to be amended to reflect such event in order to maintain its compliance with the disclosure requirements of the Securities Act or (ii) the Company shall at any time fail to comply with the requirements of Section 6.3, 6.4 or 6.6; provided, that in the case of clause (i) above, the Investors' obligation to purchase shares of Common Stock shall be reinstated when the Investors receive copies of the supplemented or amended prospectus contemplated by the Registration Rights Agreement. Section 2.5 The Warrants. (a) Warrant A. On the Subscription Date, the Company will issue to the Investors (pro rata) and the Placement Agent Warrant A's exercisable beginning on the Subscription Date and then exercisable any time over the two year period there following, to purchase an aggregate of 150,000 Warrant Shares for the Investors and 50,000 Warrant Shares for the Placement Agent at the Exercise Price (as defined in the Warrant). The Warrant A's shall be delivered by the Company to the Escrow Agent, and delivered 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. (b) Warrant B. On the Subscription Date, and thereafter on the Closing Date of each of the first two Puts, the Company will issue warrants to the Investors (pro rata) and the Placement Agent in the form of Warrant B to purchase an aggregate of 30,000 Warrant Shares for the Investors (pro rata), and 7,000 Warrant shares for the Placement Agent, at the Exercise Price (as defined in the Warrant). Subject to the express provisions of the Warrant B, each Warrant B shall be exercisable for a two year period commencing on the date a Warrant B is issued. When issuable, each Warrant B shall be delivered by the Company to the Escrow Agent, and delivered to the Investors and the 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. Section 2.6 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 11 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 2.7 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 IX 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 IX 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 (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. Section 2.8 Initial Purchase. (a) The Company agrees to sell and the Investors agree to purchase (i) an aggregate of 612,000 Initial Shares of Common Stock , and (ii) 5,246 shares of Preferred Stock, against payment of the Initial Shares Investment Amount. The Initial Shares of Common Stock will be subject to repricing as described in Section 2.9 herein. (b) The right of the Company to receive the Initial 12 Shares Investment Amount from the Investors, and the right of the Investors to receive the Initial Shares and Warrants A and B (as set forth in Section 2.5) is subject to the satisfaction on the Closing Date for the Initial Shares, 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 Initial Shares Investment Amount (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 Subscription Date; (iv) the Company shall have obtained all permits and qualifications required by any state for the offer and sale of the Common Stock and the Warrants, or shall have the availability of exemptions therefrom; (v) the sale and issuance of the Common Stock, the Warrants, and the proposed issuance of the Common Stock underlying both the Preferred Stock and Warrants shall be legally permitted by all laws and regulations to which the Investors and the Company are subject; and all duly executed Exhibits hereto for the sale of the Securities; (vi) delivery of the original Initial Shares and Warrants as described herein; (vii) receipt by the Investors of an opinion of counsel of the Company as set forth in 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 has been filed with the Secretary of State of the State of California; and (ix) payment of all fees as set forth in Section 13.7 below and the Escrow Agreement. Section 2.9 Repricing. (a) If on the Repricing Date, the Reset Price is lower than the Purchase Price with respect to the Initial Shares of Common Stock, then the Company shall issue to the Investors pro rata based on the number of Initial Shares of Common Stock purchased by that Investor on the Subscription Date, that number of shares of Preferred Stock (if any, rounded to the nearest 13 whole share of Preferred Stock) derived from the following formula: {[(Initial Shares of Common Stock Investment Amount/Reset Price) - 612,000] x the Bid Price on the Repricing Date}/100 Such shares of Preferred Stock so issuable, if any, pursuant to this repricing shall be delivered within three (3) Trading Days after the Repricing Date. (b) The Company agrees to file and use its best efforts to cause to be effective, a post effective amendment to the Registration Statement (or registration statement) to include the shares of Common Stock underlying the Repricing Shares (pursuant to the terms of the Registration Rights Agreement). The Company may only issue the Repricing Shares if the Certificate of Determination remains in full force and effect as of the applicable Repricing Date and the Company files an amendment to the Certificate of Determination authorizing these additional shares. In the event the Company is obligated to issue Repricing Shares, as set forth above, but is unable to issue such Repricing Shares, for any reason, within five Trading Days after the applicable Repricing Date, the Company agrees that it shall immediately pay to the Investors, and/or Placement Agent, the dollar value equal to the number of shares of Common Stock underlying the Repricing Shares (had the Repricing Shares been converted on the Repricing Date) to be issued multiplied by the Bid Price on the Repricing Date. In the event the Company has not obtained approval from a majority of the holders of the Common Stock of the issuance of shares of Common Stock (and securities convertible into or exercisable for Common Stock) equal to 20% or more of the Common Stock outstanding immediately prior to the Subscription Date in accordance with applicable rules of The Nasdaq Stock Market or the Principal Market, if so required, the Company agrees that it will issue such Repricing Shares and comply with the provisions set forth in Section 6.11 below. ARTICLE III Representations and Warranties of the Investors Each of the Investors represents and warrants to the Company that: Section 3.1 Intent. Each of the Investors 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 Common Stock to or through any person or entity; provided, however, that by making the representations herein, the Investors do not agree to hold the Common Stock for any minimum or other specific term and reserves the right to dispose of the Common Stock at any time in accordance with federal and state securities laws applicable to such disposition. Section 3.2 Sophisticated Investor. Each of the Investors are sophisticated investors (as described in Rule 506(b)(2)(ii) of Regulation D) and accredited investors (as defined in Rule 501 of Regulation D), and the Investors have such experience in business and financial matters that they are capable of evaluating the merits and risks of an investment in the Securities. Each of the Investors acknowledge that an investment in the Common Stock is speculative and involves a high degree of risk. Each of the Investors currently has the ability 14 to fund the purchase of the Initial Shares and the Put Shares. Section 3.3 Authority. This Agreement has been duly authorized and validly executed and delivered by each of the Investors and is a valid and binding agreement of the Investors 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 3.4 Not an Affiliate. None of the Investors is an officer, director or "affiliate" (as that term is defined in Rule 405 of the Securities Act) of the Company. Section 3.5 Organization and Standing. Each of the Investors is duly organized, validly existing, and in good standing under the laws of the countries and/or states of their incorporation or organization. Section 3.6 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 Investors, or, to the Investors 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 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 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 is subject or to which any of their assets, operations or management may be subject. Section 3.7 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 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 Form 8- K's filed for the twelve months prior to the Subscription Date. Section 3.8 Manner of Sale. At no time were any of the Investors presented with or solicited by or through any leaflet, public promotional meeting, television advertisement or any other form of general solicitation or advertising. Section 3.9 Registration or Exemption Requirements. Each of the Investors 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 15 from such registration is available. Each of the Investors 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 3.10 No Legal, Tax or Investment Advice. Each of the Investors understands that nothing in this Agreement or any other materials presented to the Investors in connection with the purchase and sale of the Securities constitutes legal, tax or investment advice. The Investors 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. 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 the Common Stock and Preferred Stock to the Placement Agent, the Initial Shares, Underlying Shares, Additional Shares, Put Shares, Repricing 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. 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 3,457,365 shares are issued and outstanding, and 10,000,000 shares of Preferred Stock, no par value per share, none of which 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 16 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 National Market. 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 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 Common Stock, Preferred Stock, Repricing Shares, Underlying Shares, Warrants, and Warrant Shares, issued to the Placement Agent, and the Initial Shares, the Put Shares, the Additional Shares, the Repricing 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 Common Stock, Preferred Stock, Repricing Shares, Underlying Shares, Warrants, or Warrant Shares, to the Placement Agent, nor the sale of the Initial Shares, the Additional Shares, the Put Shares, the Repricing 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 Common Stock, Preferred Stock, Warrant Shares, Repricing Shares, or Underlying Shares, issued to the Placement Agent, the Initial Shares, the Additional Shares, the Put Shares, the Repricing Shares, the Preferred Stock, the Underlying Shares, the Warrant Shares issued to the 17 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 No General Solicitation or Advertising in Regard to this Transaction. Neither the Company nor any of its affiliates nor any distributor or any person acting on its or their behalf (i) has conducted or will conduct any general solicitation (as that term is used in Rule 502(c) of Regulation D) or general advertising with respect to any of the Initial Shares, Put Shares, the Additional Shares, the Repricing Shares, the Underlying Shares, the Warrants, or the Warrant Shares, or (ii) made any offers or sales of any security or solicited any offers to buy any security under any circumstances that would require registration of the Common Stock issued to the Placement Agent, the Initial Shares, the Additional Shares, the Put Shares, the Repricing Shares, the Underlying Shares, the Warrants, or the Warrant Shares under the Securities Act. Section 4.8 Corporate Documents. The Company has furnished or made available to each of the Investors true and correct copies of the Company's 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 4.9 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 Common Stock, Preferred Stock, Underlying Shares, Warrants, and Warrant Shares, 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 "lockup" 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 Common Stock, Preferred Stock, or Warrants A and B, 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. 18 Section 4.10 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 4.11 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 4.12 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 4.13 No Integrated Offering. To the Company's knowledge, neither the Company, nor any of its affiliates, nor any person acting on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, other than pursuant to this Agreement or pursuant to the Company's existing employee benefit plan, under circumstances that would require registration of the Common Stock under the Securities Act, or cause the offering of the Securities pursuant to this Agreement to be integrated with prior or future offerings by the Company for purposes of the Securities Act or any applicable stockholder approval provisions, except as set forth in the SEC Documents. Section 4.14 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. Section 4.15 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). 19 Section 4.16 Dilution. The Company is aware and acknowledges that issuance of the Common Stock, and the conversion of the Preferred Stock and the Repricing Shares, 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 4.17 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 4.18 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. Section 4.20 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 4.21 Board Approval and Agreement To Vote. 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. ARTICLE V Covenants of the Investors Section 5.1 4.99% Limitation. The number of shares of Common Stock required to be 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 4.99% of all of such Common Stock as would be outstanding on such Closing Date, as determined in accordance with Rule 13d-3 of the Exchange Act and the regulations promulgated thereunder. For purposes of this Section, in the event that the amount of Common Stock outstanding as determined in accordance with Rule 13d-3 of the Exchange Act and the regulations promulgated thereunder is greater on a Closing Date 20 than on the date upon which any Put Notice associated with such Closing Date is given, the amount of Common Stock outstanding on such Closing Date shall govern for purposes of determining whether any of the Investors, when aggregating all purchases of Common Stock made pursuant to this Agreement and, if any, Warrant Shares, would own more than 4.99% of the Common Stock following such Closing. Each Investor agrees that it will not convert any share or shares of Preferred Stock which would result, at any one time, in any Investor being the owner of more than 4.99% of the total number of shares of Common Stock then outstanding. The preceding sentence shall not interfere with any Investor's right to convert Preferred Stock into more than 4.99% of the then outstanding shares of Common Stock in the aggregate, over time, and is not intended to mean that each Investor is limited in its conversion to an aggregate total of no more than 4.99% of then outstanding shares of Common Stock. 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: 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 21 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. 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 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 22 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. (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. 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. 23 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, Repricing Shares, Underlying Shares, Put 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, 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 (but in any event prior to the commencement of the Commitment Period) to list all of the Initial Shares of Common Stock, the Additional Shares, the Put Shares, the shares of Common Stock underlying the Repricing Shares, 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 Initial Shares of Common Stock, the Put Shares, the Additional Shares, the shares of Common Stock underlying the Repricing Shares, 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 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. The Company has received notice from the Nasdaq National Market that the Company does not meet the listing requirements of the Nasdaq National Market, and the Company represents that immediately following the Closing of the Initial Shares the Company will not meet all of the listing requirements of the Nasdaq National 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 Common Stock to be sold by the Investors pursuant to Section 9.1 24 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 Notice of Certain Events Affecting Registration; Suspension of Right to Make a Put. The Company will immediately notify each of the Investors and the placement Agent upon the occurrence of any of the following events in respect of a registration statement or related prospectus in respect of an offering of Registrable Securities: (i) receipt of any request for additional information by the SEC or any other federal or state governmental authority during the period of effectiveness of the Registration Statement for amendments or supplements to the Registration Statement or related prospectus; (ii) the issuance by the SEC or any other federal or state governmental authority of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose; (iii) receipt of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; (iv) the happening of any event that makes any statement made in the Registration Statement or related prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires the making of any changes in the Registration Statement, related prospectus or documents so that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the related prospectus, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and (v) the Company's reasonable determination that a post-effective amendment to the Registration Statement would be appropriate. The Company will promptly make available to the Investors any such supplement or amendment to the related prospectus. The Company shall not deliver to the Investors any Put Notice during the continuation of any of the foregoing events. Section 6.8 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. Section 6.9 Issuance of Put Shares, Underlying Shares, Common Stock underlying the Repricing Shares, and Warrant Shares. The issuance of the Underlying Shares, Put Shares, and the Warrant Shares pursuant to exercise of Warrants A and B, and the conversion of the Preferred Stock, shall be made in accordance with the provisions and requirements of Section 4(2) of the Securities Act, or Regulation D and any applicable state 25 securities law. Section 6.10 Legal Opinion. The Company's independent counsel shall deliver to the Investors upon execution of this Agreement, and upon the Closings for (i) Initial Shares, and (ii) Put Shares as set forth in Section 7.2 (m) below, 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 6.11 20% Rule Limitation. If required by The Nasdaq Stock Market or otherwise on 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 Company shall delist the Common Stock from The Nasdaq Stock Market and immediately list the Common Stock on the OTC Bulletin Board. Section 6.12 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 6.13 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. 26 Section 6.14 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 6.15 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. ARTICLE VII Conditions to Delivery of Puts and Conditions to Closing Section 7.1 Conditions Precedent to the Obligation of the Company to Issue and Sell Common Stock Associated With A Put. The obligation hereunder of the Company to issue and sell the Put Shares to the Investors incident to each Closing for Put Shares is subject to the satisfaction, at or before each such Closing, of each of the conditions set forth below. (a) Accuracy of each of the Investors Representation and Warranties. The representations and warranties of each of the Investors shall be true and correct in all material respects as of the date of this Agreement and as of the date of each such Closing as though made at each such time. (b) Performance by the Investors. The Investors shall have performed, satisfied and complied in all respects with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Investors at or prior to such Closing. Section 7.2 Conditions Precedent to the Right of the Company to Deliver a Put Notice and the Obligation of the Investors to Purchase Put Shares. The right of the Company to deliver a Put Notice and the obligation of the Investors hereunder to acquire and pay for the Put Shares incident to a Closing for Put Shares is subject to the satisfaction, on (i) the date of delivery of such Put Notice and (ii) the applicable Closing Date for each Put (each a "Condition Satisfaction Date"), of the conditions in Section 2.1, 2.2, 2.3 above, and each of the following conditions: (a) Registration of the Common Stock with the SEC. The Company shall have filed with the SEC a Registration Statement with respect to the resale of that number of Put Shares indicated in the applicable Put Notice and all Registrable Securities, and the shares of Common Stock underlying the Repricing Shares, if any, in accordance with the terms of the Registration Rights Agreement. As set forth in the Registration Rights Agreement and herein, the Registration Statement (including all Put Shares in the Put Notice) shall have previously become effective and shall remain effective during at least the five Trading Days immediately preceding each Condition Satisfaction Date and each Put Date, and (i) neither the Company nor any of the Investors shall have received notice that the SEC has issued or intends to issue a stop order with respect to the Registration Statement or that the SEC otherwise has suspended or withdrawn the effectiveness of the Registration Statement, either 27 temporarily or permanently, or intends or has threatened to do so, and (ii) no other suspension of the use or withdrawal of the effectiveness of the Registration Statement or related prospectus shall exist. (b) Authority. The Company shall have obtained all permits and qualifications required by any state for the offer and sale of the Put Shares, or shall have the availability of exemptions therefrom. The sale and issuance of the Put Shares shall be legally permitted by all laws and regulations to which the Company is subject. (c) Accuracy of the Company's Representations and Warranties. The representations and warranties of the Company in this Agreement and all Exhibits attached hereto shall be true and correct in all material respects as of each Condition Satisfaction Date as though made at each such time with respect to all periods, and as to all events and circumstances occurring or existing to and including each Condition Satisfaction Date. (d) Performance by the Company. The Company shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by this Agreement, the Escrow Agreement, the Registration Rights Agreement, the Certificate of Determination, the Warrants to be performed, satisfied or complied with by the Company at or prior to each Condition Satisfaction Date. (e) No Injunction. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction that prohibits or adversely affects any of the transactions contemplated by this Agreement or any of the Exhibits annexed hereto, and no proceeding shall have been commenced that may have the effect of prohibiting or adversely affecting any of the transactions contemplated by this Agreement or any of the Exhibits annexed hereto. (f) Adverse Changes. No event that had or is reasonably likely to have a Material Adverse Effect has occurred since the Subscription Date. (g) No Suspension of Trading In or Delisting of Common Stock. The trading of the Common Stock (including, without limitation, the Put Shares) is not suspended by the SEC or the Principal Market, and the Common Stock (including, without limitation, the Put Shares) shall have been approved for listing or quotation on and shall not have been delisted from the Principal Market. The issuance of shares of Common Stock with respect to the applicable Put Closing, if any, shall not violate the shareholder approval requirements of the Principal Market. The Company shall not have received any notice from the Principal Market concerning delisting of the Common Stock on the Principal Market (other than that set forth in this Agreement), and the Company shall meet all listing requirements during the thirty (30) day period immediately preceding any Closing Date for a Put. However, in no event shall the Company be permitted to serve a Put Notice if the Principal Market is the "pink sheets". (h) 9.99% Percent Limitation. On each Closing Date 28 for the Put Shares, the number of Put Shares then to be purchased by any of the Investors shall not exceed the number of such shares of Common Stock 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, would result in any of the Investors owning more than 9.99% of all of such Common Stock as would be outstanding on such Closing Date, as determined in accordance with Rule 16a-1 of the Exchange Act and the regulations promulgated thereunder. For purposes of this Section 7.2(h), in the event that the amount of Common Stock outstanding as determined in accordance with Rule 16 a-1 of the Exchange Act and the regulations promulgated thereunder is greater on a Closing Date than on the date upon which the Put Notice associated with such Closing Date is given, the amount of Common Stock outstanding on such Closing Date shall govern for purposes of determining whether any of the Investors, when aggregating all purchases of Common Stock made pursuant to this Agreement and, if any, Warrant Shares, would own more than 9.99% of the Common Stock following such Closing. (i) Minimum Bid Price. The Bid Price must equal or exceed the Floor Price during the three Trading Day immediately preceding each Condition Satisfaction Date (as adjusted for stock splits, stock dividends, reverse stock splits, and similar events); (j) Minimum Average Trading Volume. The average trading volume for the Common Stock during the 30 Trading Days immediately preceding each Condition Satisfaction Date must exceed 20,000 shares per Trading Day. (k) No Knowledge. The Company has no knowledge of any event more likely than not to have the effect of causing such Registration Statement (including all Put Shares in the Put Notice) to be suspended or otherwise ineffective (which event is more likely than not to occur within the ten Trading Days following the Trading Day on which such Notice is deemed delivered). (l) Trading Cushion. The Trading Cushion shall have elapsed since the next preceding Put Date. (m) Legal Opinion. The Investors shall receive an opinion from counsel to the Company substantially in the form of Exhibit G annexed hereto on each Closing for Put Shares, dated as of the particular Put Closing Date. (n) 20% Approval. The Company shall have obtained shareholder approval (or a waiver) for the issuance of below market securities pursuant to the terms of this Agreement, including the Put Shares in the Put Notice, if required by the Principal Market. (o) Other. On each Condition Satisfaction Date, the Investors shall have received from the Company and been reasonably satisfied with such other certificates and documents as shall have been reasonably requested by the Investors in order for the Investors to confirm the Company's satisfaction of the conditions set forth in this Section 7.2, including, without limitation, a certificate in substantially the form and substance of Exhibit C hereto, executed in either case by an executive officer of the Company and to the effect that all the conditions 29 to such Closing shall have been satisfied as at the date of each such certificate. ARTICLE VIII Due Diligence Review; Non-Disclosure of Non-Public Information Section 8.1 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 8.2 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. (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 30 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. ARTICLE IX Legends Section 9.1 Legends. Unless otherwise provided below, or covered by an effective registration statement or an exemption to registration, each certificate representing the Initial Shares of Common Stock, Warrants, Preferred Stock, and the shares of Common Stock underlying the Repricing Shares, will bear the following legend (the "Legend"): THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION THAT IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. 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 September __, 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 31 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, or the effective date of the effective date of a registration statement covering the shares of Common Stock underlying the Repricing Shares, upon surrender of one or more certificates evidencing the Initial Shares of Common Stock, Warrants, Preferred Stock, or shares of Common Stock underlying the Repricing Shares, 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 Registration Statement (or a registration statement covering the shares of Common Stock underlying the Repricing Shares) 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 or shares of Common Stock underlying the Repricing Shares, 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, or shares of Common Stock underlying the Repricing Shares, 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, or shares of Common Stock underlying the Repricing Shares, 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 9.1 may be sent by facsimile to the Company's transfer agent. Section 9.2 No Other Legend or Stock Transfer Restrictions. No legend other than the one specified in Section 9.1 has been or shall be placed on the share certificates representing the Common Stock, 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 IX. 32 Section 9.3 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 Common Stock. ARTICLE X Choice of Law Section 10.1 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. ARTICLE XI Assignment; Entire Agreement, Amendment; Termination Section 11.1 Assignment. The Investor's interest in this Agreement and its ownership of Preferred Stock 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 11.2 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 commencement of the Commitment Period; 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 33 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. ARTICLE XII Notices Section 12.1 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. If to the Placement Agent, at the address listed on the first page of this Agreement. with a copy to: Goldstein, Goldstein & Reis, LLP 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 12.1 by giving at least ten (10) days' prior written notice of such changed address or facsimile number to the other party hereto. 34 Section 12.2 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 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 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 35 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 12.3 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 12.2 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 12.2 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 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 12.2 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. ARTICLE XIII Miscellaneous Section 13.1 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 36 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 13.2 Entire Agreement. This Agreement, the Exhibits or Attachments hereto, which include, but are not limited to the Certificate of Determination, Warrant A and B, 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 supersedes 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 13.3 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. Section 13.4 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 13.5 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 13.6 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 Put Shares 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 13.7 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 Twelve Thousand ($12,000) 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) the sum equal to four percent (4%) of the Initial Shares Investment Amount payable in cash out of the proceeds 37 received by the Company on the Subscription Date, (B) 210 shares of Preferred Stock, (C) a Warrant A to purchase 50,000 Warrant Shares, (D) a Warrant B to purchase 7,000 Warrant Shares and (E) 29,480 shares of Common Stock, for Placement Agent fees. On each Closing Date for a Put, the Company shall pay (i) one-half of one (.5%) percent of the proceeds to Goldstein, Goldstein & Reis, LLP for legal, administrative, and escrow agent fees, and (ii) five and one-half (5.50%) percent of the proceeds to the Placement Agent. In addition to the aforementioned fees, on the first Closing for a Put, the Company shall issue to the Placement Agent 5,000 shares of Common Stock to be included in the Registration Statement and a Warrant B to purchase 7,000 shares of Common Stock, and on the second Closing for a Put, the Company shall issue to the Placement Agent 5,000 shares of Common Stock and a Warrant B to purchase 7,000 shares of Common Stock for Placement Agent fees. Section 13.8 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] 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/ [Signature Illegible] --------------------------------- SETTONDOWN CAPITAL INTER- NATIONAL LTD., Investor By /s/ [Signature Illegible] --------------------------------- 38 THE CUTTY HUNK FUND LIMITED, Investor By /s/ [SIGNATURE ILLEGIBLE] ---------------------------------- CANAL LTD, Investor By /s/ [SIGNATURE ILLEGIBLE] ---------------------------------- MANCHESTER ASSET MANAGEMENT LTD, Investor By /s/ [SIGNATURE ILLEGIBLE] ---------------------------------- SCHEDULE A INVESTORS: 1. 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. Initial Investment Amount: $375,000 No. of Initial Shares of Common Stock: 153,000 No. of Initial Shares of Preferred Stock: 1,312 Warrant A: 37,500 Warrant B: 7,500 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: $375,000 No. of Initial Shares of Common Stock: 153,000 No. of Initial Shares of Preferred Stock: 1,311 Warrant A: 37,500 Warrant B: 7,500 3. Canal, Ltd., c/o Hemisphere Management Limited, Hemisphere House, 9 Church Street, P.O. Box HM 951, Hamilton, HM DX Bermuda, Attention: Marty Brandt, Telephone: (441) 295-9166, Facsimile: (441) 292-6145. Initial Investment Amount: $375,000 No. of Initial Shares of Common Stock: 153,000 No. of Initial Shares of Preferred Stock: 1,312 Warrant A: 37,500 Warrant B: 7,500 4. Manchester Asset Management 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. Initial Investment Amount: $375,000 No. of Initial Shares of Common Stock: 153,000 No. of Initial Shares of Preferred Stock: 1,311 Warrant A: 37,500 Warrant B: 7,500 EX-4.3 3 EXHIBIT 4.3 1 EXHIBIT 4.3 [STATE OF CALIFORNIA LOGO] SECRETARY OF STATE I, BILL JONES, Secretary of State of the State of California, hereby certify: That the attached transcript has been compared with the record on file in this office, of which it purports to be a copy, and that it is full, true and correct. IN WITNESS WHEREOF, I execute this certificate and affix the Great Seal of the State of California this Sept. 08 1998 --------------------------------- /s/ BILL JONES --------------------------------- [SEAL] Secretary of State 2 A0513452 ENDORSED - FILED IN THE OFFICE OF THE SECRETARY OF STATE OF THE STATE OF CALIFORNIA AUG 28 1998 BILL JONES, SECRETARY OF STATE CERTIFICATE OF DETERMINATION OF MUSTANG SOFTWARE, INC. JAMES A. HARRER and DONALD M. LEONARD certify that: 1. They are the President and Chief Financial Officer of Mustang Software, Inc., a California corporation (hereinafter referred to as "the Company"). 2. The Company is authorized to issue 10,000,000 shares of Preferred Stock, none of which has been issued. The Company is authorized to issue 15,246 shares of Series A Preferred Stock, none of which has been issued. 3. The following resolution was duly adopted by the Board of Directors: WHEREAS, the board of directors is authorized by the Articles of Incorporation to divide the Preferred Stock into any number of series, and to fix the designation and number of shares of such series, and to determine the rights, preferences, privileges and restrictions of any wholly unissued series of Preferred Stock, BE IT RESOLVED, that the Board of Directors hereby establishes a series of Preferred Stock, designated Series A Preferred Stock, and the number of shares of such series shall be 15,246. RESOLVED FURTHER, that the rights, preferences, privileges and restrictions of the Series A Preferred Stock shall be as follows: I. Dividends. The Series A Preferred Stock shall not be entitled to receive dividends. II. Liquidation, Dissolution or Winding Up A. Treatment at Liquidation, Dissolution or Winding Up. In the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, before any distribution may be made with respect to the Company's Common Stock or any other series of capital stock, holders of each share of Series A Preferred Stock shall be entitled to receive out of the assets available for distribution to shareholders $100 plus 5 percent per annum thereon from the Issuance Date (as defined below) to the Trading Day (as defined below) immediately prior to such liquidation, dissolution or winding up of the Company ( the "Liquidation Amount"). B. If the assets of the Company available for distribution to shareholders shall be insufficient to pay the holders of shares of Series A Preferred Stock the full Liquidation Amount to which they shall be entitled, then the entire assets and funds of the Company shall be distributed ratably to the holders of shares of Series A Preferred Stock 3 C. After the payment of the Liquidation Amount shall have been made in full to the holders of the Series A Preferred Stock or funds necessary for such payment shall have been set aside by the Company in trust for the account of holders of the Series A Preferred Stock so as to be available for such payments, the holders of the Series A Preferred Stock shall be entitled to no further participation in the distribution of the assets of the Company, and the remaining assets of the Company legally available for distribution to shareholders shall be distributed among the holders of Common Stock and any other classes or series of Preferred Stock of the Company in accordance with their respective terms. III. Voting. Holders of Series A Preferred Stock shall have no voting rights except as expressly required by law or as expressly provided herein. IV. Conversion of Series A Preferred Stock. The holder of Series A Preferred Stock shall have the right, at such holder's option, to convert the Series A Preferred Stock into shares of Common Stock, on the following terms and conditions: A. Conversion. Subject to the provisions of Section IV. M hereof, at any time or times from and after the ninetieth day after the Issuance Date, any holder of the Series A Preferred Stock shall be entitled to convert any whole number of shares of Series A Preferred Stock into fully paid and nonassessable shares of Common Stock, which is determined by dividing (x) $100 plus five percent per annum thereon from the Issuance Date (as defined below) to the Trading Day immediately prior to the Conversion Date (as defined below), by (y) the Conversion Price (as defined below) (the "Conversion Rate"). B. Certain Definitions. For purposes of this Certificate of Determination, the following terms shall have the following meanings: A "Business Day" shall be any day other than a Saturday, Sunday, national holiday or a day on which the New York Stock Exchange is closed. The "Closing Bid Price" shall mean, for any security as of any date, the last closing bid price for such security on the Nasdaq Stock Market as reported by Bloomberg Financial Markets ("Bloomberg"), or, if the Nasdaq Stock Market is not the principal trading market for such security, the last closing bid price of such security on the principal securities exchange or trading market where such security is listed or traded as reported by Bloomberg, or if the foregoing do not apply, the last closing bid price of such security in the over-the-counter market on the OTC Electronic Bulletin board for such security as reported by Bloomberg, or, the last closing trade price of such security as reported by Bloomberg, or, if no last closing bid or trade price is reported for such security by Bloomberg, the closing bid price shall be determined by reference to the closing bid price as reported on the Principal Market, and if not so reported shall be determined from the average of the bid prices of any market makers for such security as reported in the "pink sheets" published by the National Quotation Bureau, Inc. If the Closing Bid Price cannot be calculated for such security on such date on any of the foregoing bases, the Closing Bid Price of such security on such date shall be the fair market value as mutually 4 agreed by the Company and the holders of two thirds of the outstanding shares of Series A Preferred Stock. The "Conversion Price" shall mean, as of any Conversion Date (as defined below) the lesser of (i) one hundred (100%) percent of the Closing Bid Price of the Common Stock on the Trading Day immediately preceding the Issuance Date, or (ii) ninety percent (90%) of the average of the four lowest Closing Bid Prices of the Common Stock during the ten (10) day trading period (the "Lookback Period") immediately preceding the Conversion Date (the "Market Price"). The Lookback Period shall be increased by two Trading Days every month commencing on the first Trading Day of the fourth month after the Issuance Date, and continue to increase by two Trading Days every month thereafter that the Series A Preferred Stock is outstanding until the Lookback Period equals a maximum of thirty Trading Days. "Effective Date" shall mean the date on which the Securities and Exchange Commission (the "SEC") first declares effective a Registration Statement registering the resale of two hundred (200%) percent of the number of shares of Common Stock issuable (irrespective of any shareholder approval requirement) upon conversion of all of the Series A Preferred Stock outstanding on the Trading Day immediately preceding the day such Registration Statement is filed. The "Issuance Date" shall mean, with respect to each share of Series A Preferred Stock, the date of issuance of the applicable share of Series A Preferred Stock. A "Trading Day" shall mean a day on which the New York Stock Exchange is open. The "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. C. Accrual Deduction. In the event the Market Price is greater than $2.8125, then the number of shares of Common Stock to be issued upon the conversion of the Series A Preferred Stock shall be reduced by the number of shares of Common Stock derived from the following formula: ((100 x Market Price) / $1.875) - 150) / (Market Price x 2) D. Exercise of Conversion Rights. Holders of Series A Preferred Stock may exercise their right to convert the Series A Preferred Stock by telecopying an executed and completed notice of conversion (the "Notice of Conversion") to the Company and delivering to Company the original Notice of Conversion and the certificate representing the Series A Preferred Stock being converted by reputable overnight courier. Each business date on which a Notice of Conversion is telecopied to and received by the Company along with a copy of the originally executed Series A Preferred Stock certificates in accordance with the provisions hereof shall be deemed a "Conversion Date". The Company will 5 transmit, or instruct its transfer agent to transmit, the certificates representing shares of Common Stock issuable upon conversion of any share of Series A Preferred Stock (together with the certificates representing the share or shares of Series A Preferred Stock not so converted) to the holder thereof via reputable overnight courier, by electronic transfer or otherwise within three (3) Business Days after the Conversion Date, provided the Company has received the original Notice of Conversion and Series A Preferred Stock certificate being so converted on or before the close of business of the second Business Day after the Conversion Date. In addition to any other remedies which may be available to the holders of shares of Series A Preferred Stock, in the event that the Company fails to deliver, such shares of Common Stock within such three (3) Business Day period, the holder will be entitled to revoke the relevant Notice of Conversion by delivering a notice to such effect to the Company whereupon the Company and the holder shall each be restored to their respective positions immediately prior to delivery of such Notice of Conversion. The Notice of Conversion and Series A Preferred Stock certificates representing the portion of the Series A Preferred Stock converted shall be delivered as follows: To the Company: Mustang Software, Inc. 6200 Lake Ming Road Bakersfield, California 93306 Attention: Don Leonard Telephone: (805) 873-2580 Facsimile: (805) 873-2474 In the event that shares representing the Common Stock issuable upon conversion of the Series A Preferred Stock (the "Conversion Shares") are not delivered by the Company within three (3) Business Days after the Conversion Date, the Company shall pay to the holders thereof, in immediately available funds, upon demand, as liquidated damages for such failure and not as a penalty, for each shares of Series A Preferred Stock sought to be converted, $0.50 for each of the first ten (10) days and $1.00 for each day thereafter that the Conversion Shares are not delivered. Such liquidated damages shall run from the fourth (4th) Business Day after the Conversion Date. Any and all payments required pursuant to this paragraph shall be payable only in cash. E. Capital Reorganization or Reclassification. If the Common Stock issuable upon the conversion of the Series A Preferred Stock shall be changed into the same or different number of shares of any class or classes of stock, whether by capital reorganization, reclassification or otherwise, then and in each such event, the holders of Series A Preferred Stock shall have the right thereafter to convert such shares into the kind and amount of shares of stock and other securities and property receivable upon such capital reorganization, reclassification or other change which such holders would have received had their shares of Series A Preferred Stock been converted immediately prior to such capital reorganization, reclassification or other change. 6 F. Reorganization, Merger or Sale of Assets. If at any time or from time to time there shall be a capital reorganization of the Common Stock (other than a subdivision, combination, reclassification or exchange of shares provided for elsewhere in this Section) or a merger or consolidation of the Company with or into another corporation, or the sale of all or substantially all of the Company's properties and assets to any other person (any of which events is herein referred to as a "Reorganization"), then as a part of such Reorganization, provision shall be made so that the holders of the Series A Preferred Stock shall thereafter be entitled to receive upon conversion of the Series A Preferred Stock, the number of shares of stock or other securities or property of the Company, or of the successor corporation resulting from such Reorganization, to which such holder would have been entitled if such holder had converted its shares of Series A Preferred Stock immediately prior to such Reorganization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section with respect to the rights of the holders of the Series A Preferred Stock after the Reorganization, to the end that the provisions of this Section (including adjustment of the number of shares issuable upon conversion of the Series A Preferred Stock) shall be applicable after that event in as nearly equivalent a manner as may be practicable. G. Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Price of Series A Preferred Stock, the Company, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of such Series A Preferred Stock a certificate executed by the president and chief financial officer (or in the absence of a person designated as the chief financial officer, by the treasurer) setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment are based. The Company shall, upon written request at any time of any holder of Series A Preferred Stock, furnish or cause to be furnished to such holder a certificate setting forth (A) the Conversion Price at the time in effect, and (B) the number or shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of a share of Series A Preferred Stock. H. Lost or Stolen Certificates. Upon receipt by the Company of evidence of the loss, theft, destruction or mutilation of any Series A Preferred Stock certificate(s), and (in the case of loss, theft or destruction) of indemnity or security reasonably satisfactory to the Company, and upon the cancellation of the Series A Preferred Stock certificate(s), if mutilated, the Company shall execute and deliver new certificates for Series A Preferred Stock of like tenure and date. However, the Company shall not be obligated to reissue such lost or stolen certificates for shares of Series A Preferred Stock if the holder contemporaneously requests the Company to convert such shares of Series A Preferred Stock into Common Stock. I. Fractional Shares. The Company shall not issue any fraction of a share of Common Stock upon any conversion. The Company shall round such fraction of a share of Common Stock up to the nearest whole share. J. Partial Conversion. In the event some but not all of 7 the shares of Series A Preferred Stock represented by a certificate or certificates surrendered by a holder are converted, the Company shall execute and deliver to or on the order of the holder, at the expense of the Company, a new certificate representing the number of shares of Series A Preferred Stock which were not converted. K. Automatic Conversion. Each share of Series A Preferred Stock outstanding two years from the Issuance Date shall automatically be converted into Common Stock on such date at the Conversion Price and such date shall be deemed the Conversion Date with respect to such shares. L. Taxes. The Company shall pay any and all original issue and/or transfer taxes which may be imposed upon it with respect to the issuance and delivery of Common Stock upon conversion of the Series A Preferred Stock. M. Conversion Restrictions. Holders may not convert shares of Series A Preferred Stock unless and until the Company receives shareholder approval for the below market issuance of the Common Stock and the Common Stock issuable upon the exercise of the Warrants and conversion of the Series A Preferred Stock, of more than 20% of the outstanding shares of Common Stock on the initial Issuance Date, provided, however, that the foregoing restriction shall not apply in the event the Common Stock is not listed on The Nasdaq Stock Market or the rules of the Principal Market do not otherwise require shareholder approval for the below market issuance of the Common Stock and the Common Stock issuable upon the exercise of the Warrants and conversion of the Series A Preferred Stock, of more than 20% of the outstanding shares of Common Stock immediately prior to the initial Issuance Date. Subject to the provisions of the foregoing sentence each holder may convert no more than one third of the number of shares of Series A Preferred Stock originally issued to it for each 30 calendar day period, which shall be cumulative such that if a holder does not convert any shares of Series A Preferred Stock in one 30 calendar day period, it may then convert up to two thirds during the subsequent 30 day period. V. No Reissuance of Series A Preferred Stock. No share or shares of Series A Preferred Stock acquired by the Company by reason of purchase, conversion or otherwise shall be reissued, and all such shares shall be canceled, retired and eliminated from the shares which the Company shall be authorized to issue. The Company may from time to time take such appropriate corporate action as may be necessary to reduce the authorized number of shares of the Series A Preferred Stock accordingly. VI. Reservation of Shares. The Company shall, so long as any of the Series A Preferred Stock are outstanding reserve and keep available out of its authorized and unissued Common Stock, solely for the purpose of effecting the conversion of the Series A Preferred Stock, such number of shares of Common Stock as shall from time to time be sufficient to effect the conversion of all of the Series A Preferred Stock then outstanding; provided that the number of shares of Common Stock so reserved shall at no time be less than 200% of the number of shares of Common Stock for which the Series A Preferred Stock are at any time convertible and if at any time the number of authorized but 8 unissued shares of Common Stock shall not be sufficient to maintain such number of shares of Common Stock, the Company shall take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. VII. Restrictions and Limitations. A. Corporate Action. Except as expressly provided herein or as required by law, so long as any shares of Series A Preferred Stock remain outstanding, the Company shall not, without the approval by vote or written consent by the holders of at least two thirds of the then outstanding shares of Series A Preferred Stock, voting as a separate class take any action that would adversely affect the rights, preferences or privileges of the holders of Series A Preferred Stock. B. Protective Provisions. Without limiting the generality of the preceding paragraph, the Company shall not so long as any shares of Series A Preferred Stock remain outstanding amend its Articles of Incorporation without the approval by the holders of at least two thirds of the then outstanding shares of Series A Preferred Stock if such amendment would: 1. create any other class or series of capital stock entitled to seniority as to the payment of dividends in relation to the holders of Series A Preferred Stock; 2. reduce the amount payable to the holders of Series A Preferred Stock upon the voluntary or involuntary liquidation, dissolution or winding up of the Company, or change the relative seniority of the liquidation preferences of the holders of Series A Preferred Stock to the rights upon liquidation of the holders of other capital stock of the Company, 3. cancel or modify the conversion rights of the holders of Series A Preferred Stock provided for in Section IV herein; 4. cancel or modify the rights of the holders of the Series A Preferred Stock provided for in this Section. VIII. No Dilution or Impairment. The Company shall not, by amendment of its Articles of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Certificate of Determination set forth herein, but shall at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate in order to protect the rights of the holders of the Series A Preferred Stock against dilution or other impairment. Without limiting the generality of the foregoing, the Company (a) shall not establish a par value of any shares of stock receivable on the conversion of the Series A Preferred Stock above the amount payable therefor on such conversion, (b) shall take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of stock on the conversion of all Series A Preferred Stock from time to time outstanding, and (c) shall not consolidate with or merge into any other person or entity, or permit any such person or entity to consolidate with or merge into the Company (if the Company is not the surviving person), unless such other person or entity shall 9 expressly assume in writing and will be bound by all of the terms of the Series A Preferred Stock set forth herein. IX. Notices of Record Date. In the event of: 1. any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or 2. any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company, any merger of the Company, or any transfer of all or substantially all of the assets of the Company to any other corporation, or any other entity or person, or 3. any voluntary or involuntary dissolution, liquidation or winding up of the Company, then and in each such event the Company shall mail or cause to be mailed to each holder of Series A Preferred Stock a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right and a description of such dividend, distribution or right, (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, merger, dissolution, liquidation or winding up is expected to become effective and (iii) the time, if any, that is to be fixed, as to when the holders of record of Common Stock (or other securities) shall be entitled to exchange their shares of Common Stock (or other securities) for securities or other property deliverable upon such reorganization, reclassification, recapitalization, transfer, merger, dissolution, liquidation or winding up. Such notice shall be mailed at least ten (10) Business Days prior to the date specified in such notice on which such action is to be taken. We declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of own knowledge. Dated: August 27, 1998 /s/ JAMES A HARRER ___________________________________ James A. Harrer /S/ DONALD M. LEONARD ___________________________________ Donald M. Leonard EX-4.4 4 EXHIBIT 4.4 1 EXHIBIT 4.4 ESCROW AGREEMENT THIS AGREEMENT is made as of the day of September, 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 GOLDSTEIN, GOLDSTEIN & REIS, LLP, 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 Common Stock, Preferred Stock and Warrants (collectively the "Initial Shares"), from the Company at a purchase price as set forth in a Securities Purchase Agreement (the "Agreement") dated as of September , 1998, which will be issued as per the terms contained herein and in the Agreement executed by the Company and Purchaser; and WHEREAS, the Company will be issuing Common Stock, Preferred Stock, and Warrants (also referred to as the Initial Shares) to the Placement Agent pursuant to the Agreement; and WHEREAS, the Company shall have a Put of additional Common Stock to the Purchasers for the remainder of the Commitment Amount after the Initial Shares Investment Amount and the Purchase Price for the Preferred Stock has been paid to the Company, in accordance with the terms and conditions in the Agreement; and WHEREAS, it is intended that the purchase of Securities be consummated in accordance with the requirements set forth by Regulation D promulgated under the Securities Act of 1933, as amended; and WHEREAS, the Company has requested that the Escrow Agent hold the Initial Shares Investment Amount, and the remainder of the Commitment Amount in escrow until the Escrow Agent has received the Initial Shares, and the Put Shares. 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 Initial Shares, and Put Shares to the Investors, and the shares of Preferred Stock, Common Stock and Warrants to the Placement Agent as per the terms and conditions in the 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 Initial Shares Investment Amount 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 Agreement by both parties, as evidenced by the Company's and the Purchasers and Placement Agent's execution 2 thereof, shall deliver to the Escrow Agent the Initial Shares and the Securities issued to 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 Initial Shares and the Securities issued to the Placement Agent, the Escrow Agent shall immediately wire that amount of funds necessary to purchase the Initial Shares 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 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. 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 TERMS OF THE ESCROW FOR THE PUT SHARES 2.1 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 Put Shares. 2.2 Upon Escrow Agent's receipt of confirmation in writing that the Company has properly served a Put Notice in accordance with the Agreement, and once it has received the Purchase Price for the Put Shares 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. 2.3 The Company, upon receipt of said notice and acceptance by the Purchasers, as evidenced by written notice by the Purchasers, shall deliver to the Escrow Agent the Put Shares being purchased, along with the Securities being issued to the Placement Agent (as per the terms of the Subscription Agreement). Escrow Agent shall then communicate with the Company to confirm the validity of such issuance. 2.4 Once Escrow Agent confirms the validity of the issuance of the Put Shares along with the Securities being issued to the Placement Agent (as per the terms of the Subscription Agreement), he shall immediately wire that amount of funds necessary to purchase of the Put Shares per the written instructions of the Company. The Company will furnish Escrow Agent with a "Net Letter" directing payment of placement agent fees and legal, administrative and escrow fees as per the terms of the 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. Once the funds 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 3 3 MISCELLANEOUS 3.1 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. 3.2 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 (d) Goldstein, Goldstein & Reis, LLP 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; 3.3 This Agreement shall be binding upon and shall inure to the benefit of the permitted successors and assigns of the parties hereto. 3.4 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. 3.5 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 4 Agreement. 3.6 The Company acknowledges and confirms that it is not being represented in a legal capacity by Goldstein, Goldstein & Reis, LLP and it has had the opportunity to consult with its own legal advisors prior to the signing of this Agreement. 3.7 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 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. 3.8 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 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. 3.9 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. 3.10 The Escrow Agent shall not be liable for any 5 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. 3.11 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. 3.12 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 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. IN WITNESS WHEREOF, the parties hereto have cause this Escrow Agreement to be executed as of the ____ day of September, 1998. 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/ [SIGNATURE ILLEGIBLE] ------------------------------ SETTONDOWN CAPITAL INTER- NATIONAL LTD., Investor By /s/ [SIGNATURE ILLEGIBLE] ------------------------------ THE CUTTY HUNK FUND LIMITED, Investor By /s/ [SIGNATURE ILLEGIBLE] ------------------------------ 6 CANAL, LTD, Investor By /s/ [SIGNATURE ILLEGIBLE] ------------------------------- MANCHESTER ASSET MANAGEMENT LTD, Investor By /s/ [SIGNATURE ILLEGIBLE] ------------------------------- GOLDSTEIN, GOLDSTEIN & REIS, LLP, Escrow Agent By /s/ SCOTT H. GOLDSTEIN ------------------------------- Scott H. Goldstein EX-4.5 5 EXHIBIT 4.5 1 EXHIBIT 4.5 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT, dated the 14th day of September, 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 Common Stock, 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 Common Stock, 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 1.36 of the Securities Purchase Agreement, and the shares of Common Stock underlying the Repricing Shares. 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. 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. 2 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"), within forty five (45) days after the Subscription Date, 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 (except for the shares of Common Stock underlying the Repricing Shares) under the Act. The Company agrees that it will file a post effective amendment or supplement to the Registration Statement, so as to permit a public offering and sale of the shares of Common Stock underlying the Repricing Shares (the "Repricing Shares Amendment") within thirty days after the Repricing Date. In the event the Effective Date does not occur prior to the Repricing Date, or the Registration Statement is not effective on the Repricing Date, the Company agrees to file within forty five days after the Repricing Date, with the Commission a registration statement (on Form S-3, or other appropriate registration statement) under the 1933 Act (the "Repricing Shares Registration Statement"), at the sole expense of the Company (except as provided in Section 3(c) hereof), so as to permit a public offering and sale of the Registrable Securities. The Company shall use its best efforts to cause (i) the Registration Statement to become effective within one hundred twenty (120) days from the Subscription Date, (ii) the Repricing Shares Amendment to become effective within one hundred twenty (120) days after the Repricing Date, and (iii) the Repricing Shares Registration Statement to become effective within one hundred twenty (120) days after the Repricing Date. 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 (excluding the shares of Common Stock underlying the Repricing Shares) were issued on the day before the filing of the Registration Statement. The number of shares of Common Stock designated in the Repricing Shares Amendment (and the Repricing Shares Registration Statement) to be registered shall be two hundred (200%) percent of the number of shares of Common Stock that would be required if all the Repricing Shares were issued on the day before the filing of the Registration Statement. (b) The Company will maintain the Registration Statement, Repricing Shares Amendment, and the Repricing Shares 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, and two years after the Repricing 3 Date. (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, Repricing Shares Amendment, or Repricing Shares 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, Repricing Shares Amendment, and Repricing Shares 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 a 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 within forty five (45) days from the Subscription Date and/or the Registration Statement is not declared effective by the Commission within one hundred twenty (120) days from the Subscription Date, 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%) 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) In the event the Repricing Shares Amendment and/or Repricing Shares Registration Statement to be filed by the Company pursuant to Section 3(a) above is not filed with the Commission and/or the Repricing Shares Amendment, and Repricing Shares Registration Statement is not declared effective by the Commission as set forth in Section 3(a) above, 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%) percent of the purchase price of the then outstanding Repricing Shares for every thirty (30) day period until the Repricing Shares 4 Amendment and/or Repricing Shares Registration Statement, has been filed and/or declared effective. Such payment of 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. If the Company does not remit the damages to the Holder as set forth above, the Company will pay the Holder reasonable costs of collection, including attorneys fees, in addition to the liquidated damages. The registration of the Securities pursuant to this provision shall not affect or limit Holder's other rights or remedies as set forth in this Agreement. (g) 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. (h) 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. (i) "Potential Material Event" means any of the following: (a) the possession by the Company 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 5 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; (c) register and qualify the securities covered by the Registration Statement, Repricing Shares Amendment and Repricing Shares 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 National 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, Repricing Shares Amendment and Repricing Shares Registration Statement, at any time when a prospectus relating thereto covered by the Registration Statement, Repricing Shares Amendment and Repricing Shares 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, Repricing Shares Amendment and/or Repricing Shares 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 furnished to the Company such information regarding such Holder and the distribution proposed by such Holder as the 6 Company may request in writing and as shall be required in connection with any registration, qualification or compliance referred to in this Section. 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 untrue statement or alleged untrue statement of any material fact contained in any such Registration Statement, Repricing Shares Amendment and/or Repricing Shares 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, Repricing Shares Amendment and/or Repricing Shares 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 7 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, Repricing Shares Amendment and/or Repricing Shares 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 alleged untrue statement or omission or alleged omission was made in such Registration Statement, Repricing Shares Amendment and/or Repricing Shares 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 8 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 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 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 9 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. 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 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 10 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. [Remainder of Page Intentionally Left Blank] 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/ DONALD M. LEONARD By: /s/ JAMES HARRER ------------------------ ----------------------------- Name: Donald M. Leonard Name: James Harrer Title: Chief Financial Title: President Officer SETTONDOWN CAPITAL INTERNATIONAL LTD., Placement Agent By /s/ [SIGNATURE ILLEGIBLE] ------------------------------- SETTONDOWN CAPITAL INTERNATIONAL LTD., Investor By /s/ [SIGNATURE ILLEGIBLE] ------------------------------- THE CUTTY HUNK FUND LIMITED, Investor By /s/ [SIGNATURE ILLEGIBLE] ------------------------------- CANAL LTD, Investor By /s/ [SIGNATURE ILLEGIBLE] ------------------------------- MANCHESTER ASSET MANAGEMENT LTD, Investor By /s/ [SIGNATURE ILLEGIBLE] ------------------------------- EX-4.6 6 EXHIBIT 4.6 1 EXHIBIT 4.6 THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER REGULATION D PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THIS WARRANT SHALL NOT CONSTITUTE AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. THE SECURITIES ARE "RESTRICTED" AND MAY NOT BE RESOLD OR TRANSFERRED EXCEPT AS PERMITTED UNDER THE ACT PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. FORM OF STOCK PURCHASE WARRANT A 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 September , 2000 (the "Termination Date") but not thereafter, to subscribe for and purchase from MUSTANG SOFTWARE, INC., a ____ 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 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 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. 2 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 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 3 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 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. 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 4 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 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 National 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 5 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 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 U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION THAT IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION". (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 A to be executed by its officers thereunto duly authorized. Dated: September __, 1998 MUSTANG SOFTWARE, INC. By ______________________________ Name: Title: NOTICE OF EXERCISE 6 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 A, 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 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: _________________________________________ EX-4.7 7 EXHIBIT 4.7 1 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. EXHIBIT 4.7 THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER REGULATION D PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THIS WARRANT SHALL NOT CONSTITUTE AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. THE SECURITIES ARE "RESTRICTED" AND MAY NOT BE RESOLD OR TRANSFERRED EXCEPT AS PERMITTED UNDER THE ACT PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. FORM OF STOCK PURCHASE WARRANT B 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 September , 2000 (the "Termination Date") but not thereafter, subject to the restrictions set forth in paragraph 3 below, to subscribe for and purchase from MUSTANG SOFTWARE, INC., a ____ 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 twenty (120%) percent of the average closing bid price of the Common Stock on the Principal Market, for 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 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 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 exercise shall be accompanied by the Assignment Form attached 3 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 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 4 Company or its shareholders consists solely of cash, or 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: 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 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 5 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 National 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 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 U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN 6 EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION THAT IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION". (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 B to be executed by its officers thereunto duly authorized. Dated: September __, 1998 MUSTANG SOFTWARE, INC. By ______________________________ Name: Title: 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 B, 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 7 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. EX-23.1 8 EXHIBIT 23.1 1 EXHIBIT 23.1 CONSENT OF ARTHUR ANDERSEN LLP As independent public accountants, we hereby consent to the incorporation of our report dated February 6, 1998 on the financial statements of Mustang Software, Inc. (the "Company") from the Company's Annual Report on Form 10-KSB for the year ended December 31, 1997 and to all references to our firm included in or made a part of its Registration Statement on Form S-3. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Los Angeles, California October 30, 1998 -----END PRIVACY-ENHANCED MESSAGE-----