1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended March 31, 1999.
OR
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 0-25678
MUSTANG SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
California
(State of incorporation)
77-0204718
(I.R.S. employer
identification number)
6200 Lake Ming Road
Bakersfield, California 93306
(Address of principal executive offices)
(661) 873-2500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days:
Yes X No
As of May 11, 1999, there were 4,586,173 shares of the Registrant's
common stock outstanding.
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MUSTANG SOFTWARE, INC.
FORM 10-QSB
INDEX
Page
PART I. Financial Information:
Balance Sheets as of March 31, 1998 and December 31, 1997 3
Statements of Operations for the three months ended March 31,1998
and 1997 4
Statements of Cash Flows for the three months ended March 31, 1998
and 1997 5
Notes to Financial Statements 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II. Other Information:
Item 2. Changes in Securities and Use of Proceeds 16
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
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MUSTANG SOFTWARE, INC.
BALANCE SHEETS
ASSETS
March 31, December 31
1999 1998
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 2,216,444 $ 1,849,700
Accounts receivable, net of allowance for 437,495 409,077
doubtful accounts of $168,200 and $118,000
at December 31, 1998 and March 31, 1999
respectively
Inventories 9,488 9,196
Other -- 19,660
- - ------------------------------------------------------------------------------
Total current assets 2,663,427 2,287,633
- - ------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT:
Property and equipment 1,244,550 1,239,882
Accumulated depreciation (690,576) (647,027)
- - ------------------------------------------------------------------------------
Net property and equipment 553,974 592,855
- - ------------------------------------------------------------------------------
OTHER ASSETS:
Other 11,961 11,183
- - ------------------------------------------------------------------------------
Total other assets 11,961 11,183
- - ------------------------------------------------------------------------------
$ 3,229,362 $ 2,891,671
= ==============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 230,057 $ 233,854
Current portion of capital lease 8,259 8,259
Accrued payroll and liabilities 115,060 114,381
Income Tax Payable 99,776 99,776
Deferred revenue 155,000 125,000
- - ------------------------------------------------------------------------------
Total current liabilities 608,152 581,270
- - ------------------------------------------------------------------------------
CAPITAL LEASE OBLIGATION, net of current portion 258,757 260,747
- - ------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, no par value:
Authorized-10,000,000 shares
7,956 issued and outstanding as of 730,229 730,229
December 31, 1998
Common stock, no par value:
Authorized--30,000,000 shares
Issued and outstanding-4,098,845 and 7,921,454 7,618,954
4,145,314 shares at December 31,1998 and
March 31, 1999 respectively
Retained earnings (6,289,230) (6,299,529)
- - ------------------------------------------------------------------------------
Total shareholders' equity 2,362,453 2,049,654
- - ------------------------------------------------------------------------------
$ 3,229,362 $ 2,891,671
= ==============================================================================
The accompanying notes are an integral part of these financial statements.
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MUSTANG SOFTWARE, INC.
STATEMENTS OF OPERATIONS
Three Months Ended March 31,
1999 1998
REVENUE $ 772,982 $ 398,480
COSTS OF REVENUE 48,561 66,409
- - ------------------------------------------------------------------------------
Gross profit 724,421 332,071
- - ------------------------------------------------------------------------------
OPERATING EXPENSES:
Research and development 129,520 174,278
Selling and marketing 251,629 247,018
General and administrative 347,321 360,585
- - ------------------------------------------------------------------------------
Total operating expenses 728,470 781,881
- - ------------------------------------------------------------------------------
Income(loss)from operations (4,049) (449,810)
- - ------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense (6,611) (8,174)
Interest income 20,959 14,433
- - ------------------------------------------------------------------------------
Total other income (exp). 14,348 6,259
- - ------------------------------------------------------------------------------
Income (loss) before
provision for income taxes 10,299 (443,551)
PROVISION (BENEFIT)
FOR INCOME TAXES -- --
- - ------------------------------------------------------------------------------
NET INCOME (LOSS) $ 10,299 $ (443,551)
= ==============================================================================
NET INCOME (LOSS)
PER COMMON SHARE - BASIC $ 0.00 $ (.13)
= ==============================================================================
NET INCOME (LOSS)
PER COMMON SHARE - DILUTED $ 0.00 $ (.13)
================================================================================
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING - BASIC 4,145,314 3,417,961
= ==============================================================================
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING - DILUTED 4,984,299 3,417,961
The accompanying notes are an integral part of these financial statements.
= ==============================================================================
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MUSTANG SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(loss) $10,299 $(443,551)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 43,549 34,842
Net changes in assets and liabilities 17,055 (12,289)
- - ------------------------------------------------------------------------------
Net cash provided (used) by operating
activities 70,903 (420,998)
- - ------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITES:
Purchase of property and equipment (4,670) (6,545)
- - ------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of stock 302,500 33,118
Payments on capital lease obligation (1,989) (16,432)
- - ------------------------------------------------------------------------------
Net Cash provided (used) by financing
activities 300,511 16,686
- - ------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH 366,744 (410,857)
CASH BALANCE, beginning of period 1,849,700 1,403,776
- - ------------------------------------------------------------------------------
CASH BALANCE, end of period $2,216,444 $ 992,919
= ==============================================================================
SUPPLEMENTAL DISCLOSURES:
Interest paid 6,611 8,174
Taxes paid -- --
The accompanying notes are an integral part of these financial statements.
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MUSTANG SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1. Accounting Policies
The accompanying unaudited Condensed Financial Statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have either been condensed or omitted pursuant to those
rules and regulations. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. The results of operations and cash flows for
the periods presented are not necessarily indicative of the results that may be
expected for the full fiscal year. For further information, refer to the
financial statements and notes thereto for the year ended December 31, 1998,
included in the 1998 Form 10KSB.
The condensed Balance Sheet at December 31, 1998 has been taken from the
audited financial statements at that date and condensed.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition to the comments that follow, further information can be obtained
by referring to the management's discussion and analysis of financial condition
and results of operations section included in the Form 10KSB of Mustang
Software, Inc. Mustang" or the "Company"), filed for the year ended December
31, 1998.
Results of Operations:
Three Months Ended March 31, 1999 and 1998
Revenues for the three months ended March 31, 1999 were $772,982, an
increase of $374,502 or 94.0% over revenues for the same period in 1998. As a
percentage of revenues by product category for the first quarter 1999 vs. 1998
showed the QmodemPro line at 4% and 8%, the Wildcat! line at nil and 52%,the
Company's Internet directed product line consisting of Internet Message Center
("IMC"), ListCaster and FileCenter, at 96% and 32% and other products at 0% and
8% , respectively. Because of its decision to focus on products that are
designed to facilitate interaction on the Internet, Mustang sold its Wildcat!
WinServer, Wildcat! BBS and Off-Line Xpress BBS mail reader product lines to
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Santronics Software, Inc. of Homestead, Florida in November 1998. That accounts
for nil sales of products from this line in the first quarter of 1999. Gross
profit for the quarter increased from $332,071 in 1998 to $724,421 in 1999, and
increased as a percentage of revenues from 83.3% in 1998 to 93.7% in 1999.
Gross profit percentage has averaged between 83-91 % over the last three
calendar years. The Company does not expect the gross profit percentage to
remain at the current level. As more turnkey solutions are sold through the
Mustang Professional Services division, the Company expects the gross profit
percentage to decrease.
Research and development expenses decreased $44,758 in the first quarter
of 1999 from 1998, and decreased as a percentage of revenues from 43.7% in 1998
to 16.8% in 1999. Research and development is concentrated in Windows NT and
Windows 95/98 and directly targets the expanded use of international networks,
including the Internet. The Company has devoted and is devoting a substantial
portion of its research and development resources to the Windows 95/98 and
Windows NT environments and now offers a suite of Web server and
Internet/intranet utility applications for Windows 95/98 and Windows NT
environments. The headcount in this department decreased from 8 at March 31,
1998 to 6 at March 31, 1999. The headcount reduction accounted for the majority
of the decrease in absolute dollars. The increase in revenues accounted for the
decrease as a percentage of revenues.
Selling and marketing expenses for the quarter were $251,629, an increase
of $4,611 over the same quarter the previous year, and they decreased as a
percentage of revenues from 62.0% in first quarter of 1998 to 32.6% in the
three months ended March 31, 1999. The minimal increase in expenses was due
primarily to an increase in the number of trade shows attended.
General and administrative expenses decreased for the quarter compared to the
previous year, from $360,585 in 1998 to $347,321 in 1999, and decreased as a
percentage of revenues, from 90.5% in 1998 to 44.9% in 1999. While remaining
relatively constant in absolute dollars, the increase in the Company's
revenues accounted for the decrease as a percentage of sales.
Liquidity and Capital Resources
Cash and cash equivalents balance at March 31, 1999 were approximately
$2,216,400, an increase of approximately $366,700 from December 31, 1998. On
March 31, 1999, the Company sold for gross proceeds of $250,000 an aggregate of
64,820 shares of its common stock and Warrants to purchase an aggregate of
64,820 shares of its common stock under Regulation S of the Securities Act of
1933. The principal reasons for the increase in cash was the receipt of net
proceeds aggregating approximately $240,000 from this Regulation S sale, the
Company's almost breaking even from operations during the quarter and proceeds
from the exercising of stock options.
Accounts receivable increased approximately $28,000 and Accounts payable
decreased approximately $4,000 in the first quarter of 1999 from the
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period ended December 31, 1998. Accounts receivable average days to collect for
the quarter ended March 31, 1998 and 1999 were 52 and 59 days, respectively.
Average days to collect in 1998 was 52 days. Management's goal is to maintain
receivable collection days at or below 50 for 1999. Inventory levels have
increased $292 at March 31, 1999 from December 31, 1998.
Year 2000 Issue.
Many currently installed computer systems and software products are coded
to accept only two-digit entries in date code fields. Beginning in the year
2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than a year, computer systems and/or software used by many companies may need
to be upgraded to comply with such "Year 2000" requirements. Mustang designed
IMC and its other products to be Year 2000 compliant and has completed a
systematic effort to identify any Year 2000 compliance problems in the various
components of its products. However, management also believes that it is not
possible to determine with complete certainty that all Year 2000 problems
affecting the Company's software products have been identified or corrected due
to the complexity of these products and the fact that these products interact
with other third party vendor products and operate on computer systems which
are not under the Company's control.
In addition to computers and related systems, the operation of office and
facilities equipment, such as fax machines, photocopiers, telephone switches,
security systems, elevators, and other common devices may be affected by the
Year 2000 problem. The Company presently believes that its computers, office
and facilities equipment are Year 2000 compliant, except for its telephone
system. The Company has budgeted approximately $50,000 to upgrade its telephone
system for Year 2000 compliance. The telephone upgrade be completed in the
second quarter and the costs should be within the amount budgeted.
The Company has limited or no control over the actions of third party
suppliers. Thus, while the Company expects that it will be able to resolve any
significant Year 2000 problems with these systems, there can be no assurance
that these suppliers will resolve any or all Year 2000 problems with these
systems before the occurrence of a material disruption to the business of the
Company or any of its customers. Any failure of these third parties to resolve
Year 2000 problems with these systems in a timely manner could have a material
adverse effect on the Company's business, financial condition and results of
operation.
The Company expects to identify and resolve all Year 2000 problems that
would materially adversely affect its business operations. However, management
believes that it is not possible to determine with complete certainty that all
Year 2000 problems affecting the Company have been identified or corrected. The
number of devices that could be affected and the interactions among these
devices are simply too numerous. In addition, one cannot accurately predict how
many Year 2000 problem-related failures will occur or the severity, duration,
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or financial consequences of these perhaps inevitable failures. As a result,
management expects that the Company could likely suffer a significant number of
operational inconveniences and inefficiencies for the Company and its customers
that may divert management's time and attention and financial and human
resources from its ordinary business activities; and a lesser number of serious
system failures that may require significant efforts by the Company or its
clients to prevent or alleviate material business disruptions.
The Company has not developed contingency plans. The Company does not
believe that the Year 2000 problem will have a material adverse effect on the
Company's business or results of operations.
Certain Risk Factors That Could Affect Future Results
Variability of Operating Results; Lengthy Sales Cycle. Mustang's expense
levels are based, in part, on its expectations as to future revenues and are
not expected to decrease, at least in the short term. In fact Mustang expects
expenses to increase from those incurred during the first quarter of 1999 as
implements a strategy to add sales and support personnel in an effort to grow
revenues. Further, Mustang may from time to time be forced by the competitive
environment in which it competes to make tactical or strategic decisions that
disrupt or reduce anticipated revenues. Moreover, during 1998, which was the
first year that the Company achieved material revenues from IMC and its other
Internet-directed products introduced during 1997, the Company observed a trend
that a disproportionate percentage of the Company's net sales were generated
during the last month of a quarter. As a result, a shortfall in sales in any
quarter as compared to expectations may not be identifiable until the end of a
quarter. Mustang may not be able to adjust its spending plan in a timely manner
to compensate for any future revenue shortfall. Any significant shortfall in
sales in relation to the Company's revenue expectations would have a material
adverse impact on the Company's business, results of operations, financial
condition and prospects.
The purchase of the Enterprise Edition of IMC, the Company's core
product, involves a significant commitment of customers' personnel and other
resources. Furthermore, the cost of the software is typically only a small
portion of the related hardware, development, training and integration costs
associated with implementing a complete e-mail management solution. For these
and other reasons, the sales cycle associated with the purchase of IMC is
typically complex, lengthy and subject to a number of significant risks. Such
risks include changes in customers' budgetary constraints and approval at
senior levels of customers' organizations, over which the Company has no
control. The Company's sales cycle can range from four to six months or more
and varies substantially from customer to customer. Because of the lengthy
sales cycle and the dependence of the Company's quarterly revenues upon a
relatively small number of orders that represent large dollar amounts, the loss
or delay of a single order could have a material adverse effect on the
Company's business, financial condition and results of operations.
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Uncertainty of Market for E-mail Management Software and Dependence upon
IMC. Prior to 1998, most of the Company's revenues were derived from its
Wildcat! WinServer and BBS software. Beginning in the second quarter of 1997
and continuing throughout the year, Mustang changed its focus and launched new
products designed to facilitate interaction on the Internet's World Wide Web.
Mustang released the Business Edition of IMC in September 1997 and its core
product, the Enterprise Edition, in February 1998. The future of the Company is
dependent upon the acceptance by the market of IMC and Mustang's ability to
market this e-mail management solution and related services successfully. IMC
accounted for over 50 percent of the Company's net sales during 1998, but
Mustang has only limited operating history with respect to this product. As a
result, as well as the recent emergence of the commercial e-mail management
market, the Company has neither internal nor industry-based historical
financial data for a significant period upon which to project revenues or base
planned operating expenses. Future operating results will depend on a variety
of factors, including Mustang's ability to maintain or increase market demand
for IMC and its other products and services, usage and acceptance of the
Internet the introduction and acceptance of new, enhanced or alternative
products or services by Mustang or its competitors. Other factors that could
affect its operating results include Mustang's ability to anticipate and
effectively adapt to a developing market and to rapidly changing technologies,
general economic conditions, competition by existing and emerging competitors,
software defects and other quality control problems and the mix of products and
services sold.
Undeveloped and Rapidly Changing Markets. The markets for Mustang's
products and services are at a very early stage of development, are rapidly
changing and are characterized by an increasing number of market entrants that
have introduced or are developing competing products and services for use on
the Internet and the World Wide Web. As is typical for a new and rapidly
evolving industry, demand for and market acceptance of recently introduced
products and services are subject to a high level of uncertainty and risk.
Acceptance and usage of the IMC is dependent on continued growth in use of e-
mail as a primary means of communications by businesses and consumers.
Businesses that already have invested substantial resources in traditional or
other methods of conducting business may be reluctant to adopt new commercial
methodologies or strategies that may limit or compete with their existing
businesses. Individuals with established patterns of purchasing goods and
services may be reluctant to alter those patterns. Accordingly, it is not
assured that sufficient demand for Mustang's products and services will develop
to sustain Mustang's business.
There can be no assurance that use of e-mail as a primary method of
communication or commerce over the Internet will become widespread, that a
substantial market for Mustang's products and services will emerge or that the
IMC will be generally adopted. Mustang's business, financial condition and
results of operations will be materially and adversely affected if the market
fails to develop as expected or develops more slowly than expected. Similarly,
Mustang's business, financial condition and results of operations will be
materially and adversely affected if the Internet infrastructure is not
adequately expanded or managed, or if Mustang's products and services do not
achieve market acceptance by a significant number of businesses.
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Competition. The market for e-mail message management products and
services is intensely competitive, and Mustang expects competition to increase
significantly. There are no substantial barriers to entry into Mustang's
business, and it expects established and new entities to enter the market for
e-mail message management products and services in the near future. It is
possible that a single supplier will dominate one or more market segments
including e-mail management, customer service and call center automation.
Furthermore, since there are many potential entrants to the field, it is
extremely difficult to assess which companies are likely to offer competitive
products and services in the future, and in some cases it is difficult to
discern whether an existing product or service is competitive with the IMC.
Mustang's principal competitors in the e-mail message management market
include Adante, Aptex Software, Brightware, eGain, General Interactive, Kana
Communications, MessageMedia and Micro Computer Systems, each of which provides
software solutions for e-mail management. Mustang also competes with other
firms that provide e-mail message management services on an outsourcing basis.
The Company competes with a number of independent software suppliers who offer
Web Server or telecommunications software as or among their product line(s).
Several of Mustang's current and potential competitors have greater name
recognition, larger installed customer bases, more diversified lines of
products and services and significantly greater financial, technical, marketing
and other resources than Mustang. Such competitors may be able to undertake
more extensive marketing campaigns, adopt more aggressive pricing policies and
make more attractive offers to businesses to induce them to use their products
or services.
Limited Intellectual Property and Proprietary Rights. Mustang relies on a
combination of trade secret, copyright and trademark laws, nondisclosure
agreements and other contractual provisions and technical measures to protect
its proprietary rights. Mustang believes that, due to the rapid pace of
technological innovation for Internet products, Mustang's ability to establish
and maintain a position of technology leadership in the industry depends more
on skills of its development personnel than upon the legal protections afforded
its existing technology. There can be no assurance that trade secret, copyright
and trademark protections will be adequate to safeguard the proprietary
software underlying Mustang's products and services. Similarly, there can be no
assurance that agreements with employees, consultants and others who
participate in the development of its software will not be breached, that
Mustang will have adequate remedies for any breach or that Mustang's trade
secrets will not otherwise become known. Mustang also faces the risk that
notwithstanding Mustang's efforts to protect its intellectual property,
competitors will be able to develop functionally equivalent e-mail message
management technologies without infringing any of Mustang's intellectual
property rights. Despite Mustang's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain and use products
or technology that Mustang considers proprietary, and third parties may attempt
to develop similar technology independently. In addition, effective protection
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of intellectual property rights may be unavailable or limited in certain
countries. Accordingly, there can be no assurance that Mustang's means of
protecting its proprietary rights will be adequate or that Mustang's
competitors will not independently develop similar technology.
As the use of the Internet for commercial activity increases, and the
number of products and service providers that support Internet commerce
increases, Mustang believes that Internet commerce technology providers may
become increasingly subject to infringement claims. There can be no assurance
that plaintiffs will not file infringement claims in the future. Any such
claims, with or without merit, could be time consuming, result in costly
litigation, disrupt or delay the enhancement or shipment of Mustang's products
and services or require Mustang to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on
terms acceptable or favorable to Mustang, which could have a material adverse
effect on Mustang's business, financial condition and results of operations. In
addition, Mustang may initiate claims or litigation against third parties for
infringement of Mustang's proprietary rights or to establish the validity of
Mustang's proprietary rights.
Dependence of Key Personnel. The Company is dependent upon James A.
Harrer, its President and Chief Executive Officer and C. Scott Hunter, its Vice
President and Chief Technical Officer. The loss of either of these executives
could have a material adverse effect on the Company. While the Company has one-
year employment agreements with these executives, such agreements are
terminable by each without any reason upon four months notice. Moreover,
unforeseen circumstances could cause either of them to no longer render
services to the Company. Mustang has key-man life insurance on the life of Mr.
Harrer for $1,000,000. There can be no assurance that the proceeds from this
policy will be sufficient to compensate the Company in the event of Mr.
Harrer's death, and this policy does not cover the Company in the event that he
becomes disabled or is otherwise unable to render services to the Company.
Mustang's 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.
Dependence on Increased Usage; Stability of the Internet. The demand for
products used on the Internet such as those offered by Mustang will depend in
significant part on continued rapid growth in the number of households and
commercial, educational and government institutions with access to the
Internet, in the level of usage by such entities. Usage of the Internet as a
source for information, products and services is a relatively recent
phenomenon. Accordingly, it is difficult to predict whether the number of users
drawn to the Internet will continue to increase and whether any significant
market for usage of the Internet for such purposes will continue to develop and
expand. There can be no assurance that Internet usage patterns will not decline
as the novelty of the medium recedes or that the quality of products and
services offered online will improve significantly to continue to support user
interest. In addition, it is uncertain whether the cost of Internet access will
decline. Failure of the Internet to stimulate user interest and be accessible
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to a broad audience at moderate costs would jeopardize the markets for
Mustang's products and services.
Issues regarding the stability of the Internet's infrastructure remain
unresolved. The rapid rise in the number of Internet users and increased
transmission of audio, video, graphical and other multimedia content over the
Internet has placed increasing strains on the Internet's communications and
transmission infrastructures. Continuation of such trends could lead to
significant deterioration in transmission speeds and reliability of the
Internet and could reduce the usage of the Internet by businesses and
individuals. The Internet continues to experience significant growth in the
number of users and level of use. Without corresponding increases and
improvements in the Internet infrastructure, there can be no assurance that the
Internet will be able to support the demands placed upon it by such continued
growth. Any failure of the Internet to support such increasing number of users
due to inadequate infrastructure, or otherwise, would seriously limit the
development of the Internet as a viable source of communication or commerce.
This could materially and adversely affect the acceptance of Mustang's products
and services which would, in turn, materially and adversely affect Mustang's
business, results of operations, financial condition and prospects.
Government Regulation and Legal Uncertainties. Mustang believes it is not
currently subject to direct regulation by any government agency in the U.S.,
other than regulations generally applicable to businesses, and there are
currently few laws or regulations directly applicable to access to, or commerce
on, the Internet. However, there can be no assurance that federal, state or
foreign agencies will not attempt in the near future to begin to regulate the
market for Internet commerce. More generally, due to the increasing popularity
and use of the Internet, it is possible that a number of laws and regulations
will be adopted with respect to the Internet, covering issues such as user
privacy, pricing, taxation and characteristics and quality of products and
services. For example, the Telecommunications Reform Act of 1996 may subject
certain Internet content providers to criminal penalties for the transmission
of certain information and could also result in liability to Internet service
providers, World Wide Web hosting sites and transaction facilitators such as
Mustang. Various foreign jurisdictions have also moved to regulate access to
the Internet and to strictly control World Wide Web content. Even if Mustang's
business is not directly subject to regulation, the adoption of any such laws
or regulations may inhibit the growth of the Internet, or the businesses of the
users of Mustang's products and services, which could in turn adversely affect
Mustang's business, financial condition and results of operations. Moreover,
the applicability to the Internet of existing laws governing issues such as
property ownership, libel, taxation and personal privacy is uncertain. Such
uncertainty creates the risk that such laws could be interpreted in a manner
that could generally inhibit commerce on the Internet and adversely impact
Mustang's business.
Due to the growth of Internet commerce, Congress has considered
regulating providers of services and transactions in this market, and federal
or state authorities could enact laws, rules or regulations affecting Mustang's
15
business or operations. Government agencies may promulgate rules and
regulations affecting Mustang's activities or those of the users of its
products and services. Any or all of these potential actions could result in
increased operating costs for Mustang or for the principal users of its
products or services and could also reduce the convenience and functionality of
Mustang's products or services. This could result in reduced market acceptance,
which would have a material adverse effect on Mustang's business, financial
condition and results of operations.
Year 2000 Compliance. Many currently installed computer systems and
software products are coded to accept only two- digit entries in date code
fields. Beginning in the year 2000, these date code fields will need to accept
four-digit entries to distinguish 21st century dates from 20th century dates.
As a result, in less than a year, computer systems and/or software used by
many companies may need to be upgraded to comply with such "Year 2000"
requirements. Mustang designed IMC and its other products to be Year 2000
compliant and has completed a systematic effort to identify any Year 2000
compliance problems in the various components of its products. However,
significant uncertainty exists concerning the potential effects associated with
compliance. Although Mustang believes that Mustang's IMC and other products are
Year 2000 compliant, there can be no assurance that coding errors or other
defects will not be discovered in the future. Moreover, Year 2000 problems
affecting other hardware or software products which Mustang's customers rely on
or intend to use beyond the end of 1999 could adversely affect the use or
functionality of Mustang's products. Any Year 2000 compliance problem of
Mustang, its service providers, its customers or the Internet infrastructure
could result in a material adverse effect on the Company's business, operating
results and financial conditions.
16
PART II. Other Information:
Item 2. Changes in Securities and Use of Proceeds
(a) Not applicable.
(b) Not applicable.
(c) On March 31, 1999, pursuant to a Securities Purchase Agreement of that date
(the "Agreement") between the Company and the two institutional investors named
in the Agreement (collectively the "Investors"), the Company completed a sale
of equity securities pursuant to Regulation S under the Securities Act of 1933
(the "Securities Act"). Under the Agreement, the Company sold to the Investors
for $250,000 an aggregate of 61,820 shares of common stock and Warrants to
purchase of 61,820 shares of its Common Stock (the "Warrants").
The Warrants are exercisable until March 31, 2001 at an exercise price of
$4.044 per share.
For its services in the transaction, the Company paid to Settondown Capital
International Limited, as Placement Agent, a fee consisting of 3,000 shares of
its Common Stock and Warrants to purchase 3,000 shares of its Common Stock. The
terms of the Warrants issued to the Placement Agent are identical to the terms
of the Warrants issued to the Investors.
The Company relied upon Regulation S under the Securities Act for the
transaction. The Company and persons acting on its behalf believed that the
buyers were outside the United States and no directed selling efforts were made
in the United States. Each Investor and the Placement Agent(all of whom had
addresses outside the United States) represented that it was not a "U.S.
Person" as defined in Regulation S and, at the time the buy order for this
transaction was originated, each Investor was outside the United States and no
offer to purchase the Securities was made in the United States. Each Investor
agreed not to reoffer or sell the securities, or to cause any transferee
permitted under the Securities Purchase Agreement to reoffer or sell the
Securities, within the United States, or for the account or benefit of a U.S.
person, (i) as part of the distribution of the securities at any time, or (ii)
otherwise, only in a transaction meeting the requirements of Regulation S,
including without limitation, where the offer (i) is not made to a person in
the United States and either (A) at the time the buy order is originated, the
buyer is outside the United States or the Company and any person acting on its
behalf reasonably believe that the buyer is outside the United States, or (B)
the transaction is executed in, on or through the facilities of a designated
offshore securities market and neither the seller nor any person acting on its
behalf knows that the transaction has been pre- arranged with a buyer in the
United States, and (ii) no direct selling efforts shall be made in the United
States by the buyer, an affiliate or any person acting on their behalf, or in a
transaction registered under the Securities Act or pursuant to an exemption
17
from such registration. Appropriate legends were affixed to the certificates
evidencing the securities in such transaction.
(d) Not applicable.
18
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.1 Securities Purchase Agreement dated as of March 31, 1999 between
the Company and Settondown Capital International Limited and the other
investors named therein.
10.2 Registration Rights Agreement dated as of March 31, 1999 between
the Company and Settondown Capital International Limited and the other
investors named therein.
10.3 Form of Stock Purchase Warrant.
(b) Reports on Form 8-K
One report on Form 8-K was filed during the quarter covered by this
Report. This report, reporting events occurring on December 31, 1999, reported
matters under Item 9.
19
SIGNATURES
In accordance with the requirements of the Securities Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Signature Title Date
_/s/ James A. Harrer___
James A. Harrer President and Chief Executive May 14, 1999
Officer (Principal Executive
Officer) and a Director
_/s/ Donald M. Leonard_
Donald M. Leonard Vice President and Chief May 14, 1999
Financial Officer (Principal Financial
and Accounting Officer)
and a Director
1
Exhibit 10.1
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT dated as of March 31, 1999
(the "Agreement"), between the entities listed on Schedule A
attached hereto (collectively referred to as the "Investors"),
SETTONDOWN CAPITAL INTERNATIONAL LTD. (the "Placement Agent")
located at Charlotte House, Charlotte Street, P.O. Box N. 9204,
Nassau, Bahamas, a corporation organized under the laws of
Bahamas, and MUSTANG SOFTWARE, Inc., a corporation organized and
existing under the laws of the State of California (the
"Company").
WHEREAS, the parties desire that, upon the terms and subject
to the conditions contained herein, the Company shall issue and
sell to each Investor, and each Investor shall purchase (a)
30,910 shares of Common Stock (as defined below), for a total of
61,820, and (b) a warrant to purchase 30,910 shares of Common
Stock, for an aggregate purchase price of $250,000 (the
"Aggregate Purchase Price"); and
WHEREAS, the Company shall issue to the Placement Agent (in
addition to the fees set forth in Section 12.7 below), in return
for services rendered, 3,000 shares of Common Stock (together
with the Common Stock to be issued to the Investors, the
"Shares"), and a warrant (together with the warrants to be issued
to the Investors, the "Warrants") to purchase up to 3,000 shares
of Common Stock (together with the shares of Common Stock issued
or issuable pursuant to the exercise of the Investors warrant,
the "Warrant Shares").
WHEREAS, such investments will be made in reliance upon the
transaction exemption afforded by Regulation S as promulgated by
the Securities and Exchange Commission ("SEC") under the United
States Securities Act of 1933, as amended, and the regulations
promulgated thereunder (the "Securities Act"), and/or upon such
other exemption from the registration requirements of the
Securities Act as may be available with respect to any or all of
the investments in Securities to be made hereunder.
NOW, THEREFORE, the parties hereto agree as follows:
2
ARTICLE I
Certain Definitions
Section 1.1 "Bid Price" shall mean the closing bid price
(as reported by Bloomberg L.P.) of the Common Stock on the
Principal Market.
Section 1.2 "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 1.3 "Capital Shares Equivalents" shall mean any
securities, rights, or obligations that are convertible into or
exchangeable for, or giving any right to, subscribe for any
Capital Shares of the Company or any warrants, options or other
rights to subscribe for or purchase Capital Shares or any such
convertible or exchangeable securities.
Section 1.4 "Certificate of Determination" shall mean the
Company's Certificate of Determination setting forth all of the
rights, privileges and preferences of the Preferred Stock.
Section 1.5 "Closing" shall mean the closing of a
purchase and sale of the Warrants and Shares pursuant to Article
II below.
Section 1.6 "Closing Date" shall be on the Subscription
Date. At the Closing Date, all conditions contained in this
Agreement (and in all Exhibits annexed hereto) must have been
fulfilled at or prior to the Closing Date. In the event such
date shall fall on a holiday or a weekend, then the next Trading
Day thereafter shall be the Closing Date.
Section 1.7 "Common Stock" shall mean the Company's
common stock, no par value per share.
Section 1.8 "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 1.9 "Distribution Compliance Period" means a period
that begins when the Securities were first offered to persons
other than distributors in reliance upon Regulation S as
promulgated under the Securities Act, or the date of closing of
the offering, whichever is later, and continues until the end of
the relevant provision of Regulation S (one year for equity
securities of the Company (a reporting domestic issuer)).
Section 1.10 "Effective Date" shall mean the date on which
the SEC first declares effective a Registration Statement
registering the resale of the following: (i) one hundred (100%)
percent of the Shares (as of the date
3
the Registration Statement is filed), (ii) one hundred
(100%) percent of that number of Warrant Shares (as of the date
the Registration Statement is filed).
Section 1.11 "Legend" shall have the meaning set forth in
Section 8.1.
Section 1.12 "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, or the Warrants in any material respect.
Section 1.13 "NASD" shall mean the National Association of
Securities Dealers, Inc.
Section 1.14 "Outstanding" when used with reference to
Capital Shares, shall mean, at any date as of which the number of
such Capital Shares is to be determined, all issued and
outstanding Capital Shares, and shall include all such Capital
Shares issuable in respect of outstanding scrip or any
certificates representing fractional interests in such Capital
Shares; provided, however, that "Outstanding" shall not mean any
such Capital Shares then directly or indirectly owned or held by
or for the account of the Company.
Section 1.15 "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 1.16 "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 1.17 "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 1.18 "Purchase Price" shall mean, with respect to
each share of Common Stock, an amount equal to $4.044.
Section 1.19 "Registrable Securities" shall mean the
Shares and the Warrant Shares, (i) in respect of which the
Registration Statement (covering these securities) has not been
declared effective by the SEC, (ii) which have
4
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 1.20 "Registration Rights Agreement" shall mean
the agreement regarding the filing of the Registration Statement
for the resale of the Registrable Securities, entered into
between the Company, the Placement Agent, and the Investors on
the Subscription Date annexed hereto as Exhibit A.
Section 1.21 "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 1.22 "Regulation S" shall have the meaning set
forth in the recitals of this Agreement.
Section 1.23 "SEC" shall mean the Securities and Exchange
Commission.
Section 1.24 "Securities" shall mean the Shares, the
Warrants, and the Warrant Shares.
Section 1.25 "Securities Act" shall have the meaning set
forth in the recitals of this Agreement.
Section 1.26 "SEC Documents" shall mean the Company's
latest Form 10-K (and all amendments thereto) or 10-KSB (and all
amendments thereto) as of the time in question, all Form 10-Qs or
10-QSBs and Form 8-Ks filed thereafter, and the Proxy Statement
for its latest fiscal year as of the time in question until such
time as the Company no longer has an obligation to maintain the
effectiveness of a Registration Statement as set forth in the
Registration Rights Agreement.
Section 1.27 "Subscription Date" shall mean the date on
which this Agreement and all Exhibits and attachments hereto, are
executed and delivered by the parties hereto and all of the
conditions relating to Section 2.1 (b)shall have been fulfilled.
Section 1.28 "Trading Day" shall mean any day during which
the New York Stock Exchange shall be open for business.
Section 1.29 "Warrants" shall have the meaning set forth
in Section 2.4 and substantially in the form of Exhibit B.
Section 1.30 "Warrant Shares" shall mean all shares of
Common Stock or other securities issued or issuable pursuant to
the exercise of the Warrants.
5
ARTICLE II
Purchase and Sale of Common Stock and Warrants
Section 2.1 Investments.
(a) The Company agrees to sell and the Investors agree
to purchase an aggregate of 61,820 shares of Common Stock and
warrants to purchase 61,820 warrant shares, against payment of
the Purchase Price.
(b) The right of the Company to receive the Purchase
Price from the Investors, and the right of the Investors to
receive the shares of Common Stock and warrant is subject to the
satisfaction on the Closing Date of each of the following
conditions:
(i) acceptance by the Company, and by all of the
Investors, of this Agreement and all duly executed
Exhibits thereto by an authorized officer of the
Company;
(ii) delivery by the Investors to the Company of
evidence of wire transfer of funds for the Purchase
Price;
(iii) all representations and warranties of the
Investors and of the Company contained herein shall
remain true and correct in all material respects as of
the Closing Date;
(iv) the Company shall have obtained all permits and
qualifications required by any state for the offer and
sale of the Common Stock and the Warrants, or shall
have the availability of exemptions therefrom;
(v) the sale and issuance of the Common Stock and
Warrants shall be legally permitted by all laws and
regulations to which the Investors and the Company are
subject;
(vi) delivery of the original shares of Common Stock
and Warrants (delivered next day overnight courier, fax
receipt upon shipment);
(vii) receipt by the Investors of an opinion of
counsel of the Company as set forth to Exhibit C
attached hereto and instructions to the Transfer Agent
as set forth in Exhibit D annexed hereto;
Section 2.2 Form of Payment. Each Investor shall pay the
Purchase Price by delivering evidence of wire transfer to the
Company, against delivery of the original Securities.
6
Section 2.3 Wire Instructions. Wire instructions are as
follows:
Mustang Software, Inc.
Wells Fargo Bank, N.A. - San Francisco
ABA #121000248
For further credit to account:
TR #358-141559
attn: Laurie Vaughn
Section 2.4 The Warrants. On the Subscription Date, the
Company will issue to the Investors (pro rata) and the Placement
Agent Warrants exercisable beginning on the Subscription Date and
then exercisable any time over the two year period thereafter, to
purchase an aggregate of 61,820 Warrant Shares for the Investors
and 3,000 Warrant Shares for the Placement Agent at the Exercise
Price (as defined in the Warrant). The Warrants shall be
delivered by the Company to the Investors and Placement Agent
pursuant to the terms of this Agreement. All of the
aforementioned Warrant Shares shall be registered for resale
pursuant to the Registration Rights Agreement.
Section 2.5 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 Investors and/or the Placement Agent as
set forth in Article VIII below within three (3) Trading Days of
surrender by the Investor(s) and/or the Placement Agent of the
Common Stock certificate in accordance with the terms and
conditions set forth in Article VIII below (such date of receipt
is referred to as the "Receipt Date"), the Company shall pay to
the Investor(s) and/or the Placement Agent, 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.
7
ARTICLE III
Representations and Warranties of the Investors and Placement Ag
ent
Each of the Investors and the Placement Agent represents and
warrants to the Company that:
Section 3.1 Intent. Each of the Investors and the
Placement Agent is entering into this Agreement for its own
account and has no present arrangement (whether or not legally
binding) at any time to sell the Securities to or through any
person or entity; provided, however, that by making the
representations herein, the Investors and the Placement Agent do
not agree to hold the Securities for any minimum or other
specific term and reserves the right to dispose of the Securities
at any time in accordance with federal and state securities laws
applicable to such disposition.
Section 3.2 Authority. This Agreement has been duly
authorized and validly executed and delivered by each of the
Investors and the Placement Agent is a valid and binding
agreement of the Investors and the Placement Agent enforceable
against each of them in accordance with its terms, subject to
applicable bankruptcy, insolvency, or similar laws relating to,
or affecting generally the enforcement of, creditors' rights and
remedies or by other equitable principles of general application.
Section 3.3 Organization and Standing. Each of the
Investors and the Placement Agent is duly organized, validly
existing, and in good standing under the laws of the countries
and/or states of their incorporation or organization.
Section 3.4 Absence of Conflicts. The execution and
delivery of this Agreement and any other document or instrument
executed in connection herewith, and the consummation of the
transactions contemplated thereby, and compliance with the
requirements thereof, will not violate any law, rule, regulation,
order, writ, judgment, injunction, decree or award binding on
Investors and the Placement Agent, or, to the Investors or the
Placement Agent's knowledge, (a) violate any provision of any
indenture, instrument or agreement to which any of the Investors
or the Placement Agent are a party or are subject, or by which
any of the Investors and the Placement Agent or any of their
assets is bound; (b) conflict with or constitute a material
default thereunder; (c) result in the creation or imposition of
any lien pursuant to the terms of any such indenture, instrument
or agreement, or constitute a breach of any fiduciary duty owed
by Investors or the Placement Agent to any third party; or (d)
require the approval of any third-party (which has not been
obtained) pursuant to any material contract, agreement,
instrument, relationship or legal obligation to which any of the
Investors or the Placement Agent is subject or to which any of
their assets, operations or management may be subject.
8
Section 3.5 Disclosure; Access to Information. Each of
the Investors has received all documents, records, books and
other information pertaining to Investors investment in the
Company that have been requested by Investors, including the
opportunity to ask questions and receive answers. The Company is
subject to the periodic reporting requirements of the Exchange
Act, and each of the Investors and the Placement Agent has
reviewed or received copies of any such reports that have been
requested by it. Each of the Investors represents that it has
reviewed the Company's, Form 10-KSB for the year ended December
31, 1998, the proxy statement for the Company's 1998 Annual
Meeting, and the Special Meeting of Shareholders held on December
1, 1998 and Form 8-K's filed for the twelve months prior to the
Subscription Date.
Section 3.6 Manner of Sale. At no time were any of the
Investors or the Placement Agent presented with or solicited by
or through any leaflet, public promotional meeting, television
advertisement or any other form of general solicitation or
advertising.
Section 3.7 Registration or Exemption Requirements. Each
of the Investors and the Placement Agent further acknowledges and
understands that the Securities may not be transferred, resold or
otherwise disposed of except in a transaction registered under
the Securities Act and any applicable state securities laws, or
unless an exemption from such registration is available. Each of
the Investors and the Placement Agent understands that the
certificate(s) evidencing the Securities will be imprinted with a
legend that prohibits the transfer of these Securities unless (i)
they are registered or such registration is not required, and
(ii) if the transfer is pursuant to an exemption from
registration.
Section 3.8 No Legal, Tax or Investment Advice. Each of
the Investors understands that nothing in this Agreement or any
other materials presented to the Investors and the Placement
Agent in connection with the purchase and sale of the Securities
constitutes legal, tax or investment advice. The Investors and
the Placement Agent have relied on, and have consulted with, such
legal, tax and investment advisors as they, in their sole
discretion, have deemed necessary or appropriate in connection
with their purchase of the Securities.
Section 3.9 Accredited Investor. Each of the undersigned
is an "Accredited Investor" as defined below who represents and
warrants it is included within one or more of the following
categories of "Accredited Investors":
(i) Any bank as defined in Section 3(a)(2) of the Act,
or any savings and loan associated or other institution
as defined in Section 3(a)(5)A of the Act whether
acting in its individual or fiduciary capacity, any
broker or dealer registered pursuant to Section 15 of
the 1934 Act, any insurance company as defined in
Section 2(13) of the Act , any investment company
registered under the Investment Company Act of 1958,
any plan established and maintained by a state, its
political subdivisions or any agency or instrumentality
of a state or its political subdivisions for the
9
benefits of its employees if such plan has total assets
in excess of $500,000 any employee benefit plan within
the meaning of Title 1 of the Employee Retirement
Income Security Act of 1974 if the investment decision
is made by a plan fiduciary, as defined in Section
3(21) of such Act, which is either a bank, savings and
loan association, insurance company, or registered
investment advisor, or if the employee benefit plan has
total assets in excess of $5,000,000 or, if a self-
directed plan with investment decisions made solely by
persons that are accredited investors.
(ii) Any private business development company as
defined in Section 202(a)(22) of the Investment
Advisors Act of 1940.
(iii) Any organization described in Section
501(c)(3) of the Internal Revenue Code, corporation,
Massachusetts or similar business trust, or
partnership, not formed for the specific purpose of
acquiring the securities offered, with total assets in
excess of $5,000,000.
(vi) Any director, executive officer, or general
partner of the issuer of the securities being offered
or sold, or any director, executive officer, or general
partner of a general partner;
(v) Any natural person whose individual net worth, or
joint net worth with that person's spouse, at the time
of his purchase exceeds $1,000,000;
(vi) Any natural person who had an individual income in
excess of $200,000 in each of the two (2) most recent
years or joint income with that person's spouse in
excess of $300,000 in each of those years and has a
reasonable expectation of reaching that same income
level in the current year;
(vii) Any trust, with total assets in excess of
$5,000,000, not formed for the specific purpose of
acquiring the securities offered, whose purchase is
directed by a sophisticated person as described in
Section 230.506(b)(2)(ii) of Regulation D under the
Act;
(viii) Any entity in which all of the equity owners
are accredited investors; and
(ix) Any self-directed employee benefit plan with
investment decisions made solely by persons that are
accredited investors within the meaning of Rule 501 of
Regulation D promulgated under the Act.
10
Section 3.10 No Registration, Review or Approval. Each
Investor and the Placement Agent acknowledges and understands
that the limited private offering and sale of Securities pursuant
to this Agreement has not been reviewed or
approved by the SEC or by any state securities commission,
authority or agency, and is not registered under the Act or under
the securities or "blue sky" laws, rules or regulations of any
state. Each Investor and the Placement Agent acknowledges,
understands and agrees that the Securities are being offered and
sold hereunder pursuant to (i) an offshore offering exemption to
the registration provisions of the Act pursuant to Regulation S
promulgated under such Act, and (ii) a similar exemption to the
registration provisions of applicable state securities laws.
Each Investor and the Placement Agent understand that the company
is relying upon the truth and accuracy of the representations,
warranties, agreements, acknowledgments and understandings of
such Investor and the Placement Agent set forth herein in order
to determine the applicability of such exemptions and the
suitability of each Investor to acquire the Securities.
Section 3.11 Investment Intent. Without limiting its
ability to resell the Securities pursuant to an effective
registration statement, or an exemption from such registration,
each Investor is acquiring the Securities solely for its own
account and not with a view to the distribution, assignment or
resale to others. Each Investor understands and agrees that it
may bear the economic risk of its investment in the Securities
for an indefinite period of time.
Section 3.12 Offering Outside the United States. Each
Investor is not a "U.S. Person" as defined in Regulation S (as
the same may be amended from time to time) promulgated under the
Act.1 At the time the buy order for this transaction was
originated, each Investor was outside the United States and no
offer to purchase the Securities was made in the United States.
Each Investor agrees not to reoffer or sell the Securities, or to
cause any transferee permitted hereunder to reoffer or sell the
Securities, within the United States, or for the account or
benefit of a U.S. person, (i) as part of the distribution of the
Securities at any time, or (ii) otherwise, only in a transaction
meeting the requirements of Regulation S under the Act, including
without limitation, where the offer (i) is not made to a person
in the United States and either (A) at the time the buy order is
originated, the Buyer is outside the United States or the Company
and any person acting on its behalf reasonably believe that the
buyer is outside the United States, or (B) the transaction is
executed in, on or through the facilities of a designated
offshore securities market and neither the seller nor any person
acting on its behalf knows that the transaction has been pre-
arranged with a buyer in the United States, and (ii) no direct
selling efforts shall be made in the United States by the buyer,
an affiliate or any person acting on their behalf, or in a
transaction registered under the Act or pursuant to an exemption
from such registration.
Section 3.13 Regulation S Offering Transfer Restrictions.
11
(i) The transaction restrictions in connection with
this offshore offer and sale restrict each Investor and
the Placement Agent from offering and selling to U.S.
Persons, or for the account or benefit of a U.S.
Person, for a period of time (the "Distribution
Compliance Period"). The Distribution Compliance
Period for the Securities is one (1) year from the
Subscription Date.
(ii) A legend substantially in the form of Article VIII
herein has been or will be placed on any certificates
or other documents evidencing the Securities so as to
restrict the resale, pledge, hypothecation or other
transfer thereof in accordance with the provisions
hereof and the provisions of Regulation S promulgated
under the Securities Act.
(iii) Offers and sales of the Securities prior to
the expiration of the Distribution Compliance Period
(or the effective date of the Registration Statement)
may be made pursuant to the following conditions:
a. The purchaser of the Securities, other than a
distributor, certifies that it is not a U.S. Person and is not
acquiring the Securities for the account or benefit of any U.S.
Person or is a U.S. Person who purchased the Securities in a
transaction that did not require registration under the
Securities Act;
b. The Purchaser of the Securities agrees to
sell such securities only in accordance with Regulation S as
promulgated under the Securities Act, pursuant to registration
under the Securities Act, or pursuant to an available exemption
from registration; and agrees not to engage in hedging
transactions with regard to such Securities unless in compliance
with the Securities Act; and
c. The Securities contain a legend,
substantially in the form of Article VIII herein, to the effect
that transfer of the Securities is prohibited except in
accordance with Regulation S, pursuant to registration under the
Securities Act, or pursuant to an available exemption from
registration; and that hedging transactions involving those
Securities may not be conducted unless in compliance with the
Securities Act.
(iv) Offers and Sales of Warrants and Warrant Shares by
the Investors or the Placement Agent must comply with
the following conditions, in addition to those listed
in Section 3.13 (iii) above:
a. Each Warrant must bear a legend stating that
the Warrant and the securities to be issued upon its exercise
have not been registered under the Securities Act, and that the
Warrant may not be exercised by or on behalf of any U.S. Person
unless registered under the Securities Act
12
or an exemption from such registration is
available; and
b. Each person exercising a Warrant is required
to give:
(1) Written certification that it is not a
U.S. Person and that the Warrant is not being exercised on behalf
of a U.S. Person; or
(2) A written opinion of counsel to the
effect that the Warrant and the securities delivered upon
exercise thereof have not been registered under the Securities
Act or are exempt from registration thereunder; and
(A) Procedures are implemented to
ensure that the Warrant may not be exercised within the United
States, and that the securities may not be delivered within the
United States upon exercise, other than in offerings deemed to
meet the definition of "offshore transaction" pursuant to
Regulation S, unless registered under the Securities Act or an
exemption from such registration is available.
(v) Investors and the Placement Agent agree not to
engage in hedging transactions with respect to the
Securities prior to the expiration of the Distribution
Compliance Period. For offers and sales of the
Securities prior to the expiration of the Distribution
Compliance Period, such offering materials must state
that hedging transactions involving those securities
may not be conducted unless in compliance with the
Securities Act and Regulation S promulgated thereunder.
(vi) Investors and the Placement Agent agree to comply
with the provisions of Regulation S in connection with
Offshore Resales, as defined therein.
Section 3.14 Understanding. The Subscriber understands
that the Company is the issuer of the securities which are the
subject of this Agreement, and that, for purposes of Regulation
S, a "distributor" is any underwriter, dealer or other person who
participates, pursuant to a contractual arrangement, in the
distribution of securities offered or sold in reliance on
Regulation S and that an "affiliate" is any partner, officer,
director or any person directly or indirectly controlling,
controlled by or under common control with the person in
question. In this regard, the Subscriber shall not, in violation
of the provisions of Regulation S, act as a distributor, either
directly or through any affiliate, nor shall he sell, transfer,
hypothecate or otherwise convey the Securities or any interest
therein, other than outside the United States to a non-U.S.
person.
13
ARTICLE IV
Representations and Warranties of the Company
The Company represents and warrants to the Investors and the
Placement Agent that:
Section 4.1 Organization of the Company. The Company is a
corporation duly incorporated and existing in good standing under
the laws of the State of California and has all requisite
corporate authority to own its properties and to carry on its
business as now being conducted except as described in the SEC
Documents. The Company is duly qualified as a foreign
corporation to do business and is in good standing in every
jurisdiction in which the nature of the business conducted or
property owned by it makes such qualification necessary, other
than those in which the failure so to qualify would not
reasonably be expected to have a Material Adverse Effect.
Section 4.2 Authority. (i) The Company has the requisite
corporate power and authority to enter into and perform its
obligations under this Agreement, and all Exhibits annexed
hereto, and to issue to the Investors and the Placement Agent the
Shares, the 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 4,172,431 shares are issued and
outstanding, and 10,000,000 shares of preferred stock, no par
value per share, of which 15,246 have been designated as Series A
Preferred Stock, and 8,081 are issued and outstanding. All of
the outstanding shares of Common Stock of the Company have been
duly and validly authorized and issued and are fully paid and
nonassessable.
Section 4.4 Common Stock. The Company has registered its
Common Stock pursuant to Section 12(g) of the Exchange Act and is
in full compliance with all reporting requirements of the
Exchange Act, and such Common Stock is currently listed or quoted
on the Nasdaq Small Cap Stock Market. The Company is a
"Reporting Issuer" as defined in Rule 902 of Regulation S.
Section 4.5. SEC Documents. The Company has delivered or
made available to the Investors true and complete copies of the
SEC Documents filed
14
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 Shares,
Warrants and the Warrant Shares will be duly and validly issued,
fully paid, and nonassessable. Neither the issuance of the
Shares, Warrants nor the Warrant Shares, 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 Shares, Warrants or the Warrant
Shares, or any of the assets of the Company, or (ii) entitle the
holders of Outstanding Capital Shares to preemptive or other
rights to subscribe to or acquire the Capital Shares or other
securities of the Company.
Section 4.7 Corporate Documents. The Company has
furnished or made available to each of the Investors true and
correct copies of the Company's Articles of Incorporation, as
amended and in effect on the date hereof (the "Certificate"), and
the Company's By-Laws, as amended and in effect on the date
hereof (the "By-Laws").
Section 4.8 No Conflicts. The execution, delivery and
performance of this Agreement by the Company and the consummation
by the Company of the transactions contemplated hereby, including
without limitation the issuance of the Securities, do not and
will not (i) result in a violation of the Company's
15
Articles of Incorporation or By-Laws or (ii) conflict with, or
constitute a material default (or an event that with notice or
lapse of time or both would become a default) under, or give to
others any rights of termination, amendment, acceleration or
cancellation of, any material agreement, indenture, instrument or
any "lock-up" or similar provision of any underwriting or similar
agreement to which the Company is a party, or (iii) result in a
violation of any federal, state or local law, rule, regulation,
order, judgment or decree (including federal and state securities
laws and regulations) applicable to the Company or by which any
property or asset of the Company is bound or affected, nor is the
Company otherwise in violation of, conflict with or in default
under any of the foregoing as would not reasonably be expected to
have, individually or in the aggregate, a Material Adverse
Effect. The business of the Company is not being conducted in
violation of any law, ordinance or regulation of any governmental
entity, except for possible violations that either singly or in
the aggregate would not reasonably be expected to have a Material
Adverse Effect. The Company is not required under federal, state
or local law, rule or regulation to obtain any consent,
authorization or order of, or make any filing or registration
with, any court or governmental agency in order for it to
execute, deliver or perform any of its obligations under this
Agreement or issue and sell the Securities, in accordance with
the terms hereof; provided that, for purposes of the
representation made in this sentence, the Company is assuming and
relying upon the accuracy of the relevant representations and
agreements of the Investors herein.
Section 4.9 No Material Adverse Change. Since December
31, 1998, no Material Adverse Effect has occurred or exists with
respect to the Company, except as disclosed in the SEC Documents,
or as publicly announced.
Section 4.10 No Undisclosed Liabilities. The Company has
no liabilities or obligations which are material, individually or
in the aggregate, that are not disclosed in the SEC Documents or
otherwise publicly announced, other than those set forth in the
Company's financial statements or as incurred in the ordinary
course of the Company's businesses since December 31, 1998, and
which, individually or in the aggregate, would not reasonably be
expected to have a Material Adverse Effect.
Section 4.11 No Undisclosed Events or Circumstances.
Since December 31, 1998, 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.
16
Section 4.12 Litigation and Other Proceedings. Except as
may be set forth in the SEC Documents, there are no lawsuits or
proceedings pending or to the knowledge of the Company
threatened, against the Company, nor has the Company received any
written or oral notice of any such action, suit, proceeding or
investigation, which would reasonably be expected to have a
Material Adverse Effect. Except as set forth in the SEC
Documents, no judgme
nt, 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 4.13 Accuracy of Reports and Information. The
Company is in compliance, to the extent applicable, with all
reporting obligations under either Section 12(b), 12(g) or 15(d)
of the 1934 Act. The Company has registered its Common Stock
pursuant to Section 12 of the 1934 Act and the Common Stock is
listed and trades on the Nasdaq SmallCap Market. The Company has
complied in all material respects and to the extent applicable
with all reporting obligations, under either Section 13(a) or
15(d) of the 1934 Act for a period of at least twelve (12) months
immediately preceding the offer and sale of the Securities (or
for such shorter period that the Company has been required to
file such material).
Section 4.14 Dilution. The Company is aware and
acknowledges that the issuance of the Shares and exercise of the
Warrants may cause dilution to existing stockholders and may
significantly increase the outstanding number of shares of Common
Stock.
Section 4.15 Employee Relations. The Company is not
involved in any labor dispute, nor, to the knowledge of the
Company, is any such dispute threatened which could reasonably be
expected to have a Material Adverse Effect. None of the
Company's employees is a member of a union and the Company
believes that its relations with its employees are good.
Section 4.16 Environmental Laws. The Company is (i) in
compliance with any and all foreign, federal, state and local
laws and regulations relating to the protection of human health
and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants and which the Company know is
applicable to them ("Environmental Laws"), (ii) has received all
permits, licenses or other approvals required under applicable
Environmental Laws to conduct its business, and (iii) is in
compliance with all terms and conditions of any such permit,
license or approval.
Section 4.17 Insurance. The Company is insured by
insurers of recognized financial responsibility against such
losses and risks and in such amounts as management of the Company
believes to be prudent and customary in the businesses in which
the Company is engaged. The Company has no notice to believe
that it will not be able to renew its existing insurance coverage
as and when such coverage expires, or obtain similar coverage
from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect
the condition, financial or otherwise, or the earnings, business
or operation, of the Company.
Section 4.18 Board Approval. The Board of Directors of
the Company has concluded, in its good faith business judgment,
that the issuances of the securities of the Company in connection
with this Agreement are in the best interests of the Company.
17
ARTICLE V
Covenants of the Investors
Section 5.1 9.99%Limitations. The number of shares of
Common Stock which may be voluntarily acquired by any of the
Investors pursuant to the terms of this Agreement shall not
exceed the number of such shares which, when aggregated with all
other shares of Common Stock then owned by any of the Investors,
beneficially or deemed beneficially owned by any of the
Investors, inclusive of Warrant Shares, would result in any of
the Investors owning more than 9.99% of the issued and
outstanding Common Stock of the Company in accordance with Rule
13d-3 of the Exchange Act and the regulations promulgated
thereunder.
The preceding paragraph shall not interfere with any
Investor's right to convert Preferred Stock which in the
aggregate totals more than 9.99% of the then outstanding shares
of Common Stock so long as the Investor does not own more than
9.99% of the outstanding Common Stock at any given time. The
foregoing limitation shall not apply to the Automatic Conversion
provision contained in Section IV K of the Certificate of
Determination.
18
ARTICLE VI
Covenants of the Company
Section 6.1 Registration Rights. The Company shall cause
the Registration Rights Agreement to remain in full force and
effect so long as any Registrable Securities remain outstanding
and the Company shall comply in all material respects with the
terms thereof.
Section 6.2 Reservation of Common Stock. As of the date
hereof, the Company has reserved and the Company shall continue
to reserve and keep available at all times, free of preemptive
rights, shares of Common Stock for the purpose of enabling the
Company to satisfy any obligation to issue the Warrant Shares.
Section 6.3 Listing of Common Stock. The Company hereby
agrees to maintain the listing of the Common Stock on the
Principal Market, and as soon as practicable after the
Subscription Date to list all of the 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
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.
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
Securities shall be free of legends, except as set forth in
Article VIII.
Section 6.6 Corporate Existence. The Company will take
all steps necessary to preserve and continue the corporate
existence of the Company.
19
Section 6.7 Consolidation; Merger. The Company shall
not, at any time after the date hereof, effect any merger or
consolidation of the Company with or into, or a transfer of all
or substantially all of the assets of the Company to, another
entity (a "Consolidation Event") unless the resulting successor
or acquiring entity (if not the Company) assumes by written
instrument the obligation to deliver to the Investors and the
Placement Agent such shares of stock and/or securities as the
Investors and the Placement Agent are entitled to receive
pursuant to this Agreement.
Section 6.8 Issuance of Shares and Warrant Shares. The
issuance of the Shares and the Warrant Shares pursuant to
exercise of the Warrants shall be made in accordance with the
provisions and requirements of Regulation S and any applicable
state securities law.
Section 6.9 Legal Opinion. The Company's independent
counsel shall deliver to the Investors upon execution of this
Agreement, an opinion in the form of Exhibit C annexed hereto.
Section 6.10 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.
20
ARTICLE VII
Due Diligence Review; Non-Disclosure of Non-Public Information
Section 7.1 Due Diligence Review. The Company shall make
available for inspection and review by the Investors, advisors to
and representatives of the Investors (who may or may not be
affiliated with the Investors), any underwriter participating in
any disposition of the Registrable Securities on behalf of the
Investors pursuant to the Registration Statement, any such
registration statement or amendment or supplement thereto or any
blue sky, NASD or other filing, all financial and other records,
all SEC Documents and other filings with the SEC, and all other
corporate documents and properties of the Company as may be
reasonably necessary for the purpose of such review, and cause
the Company's officers, directors and employees to supply all
such information reasonably requested by any of the Investors or
any such representative, advisor or underwriter in connection
with such Registration Statement (including, without limitation,
in response to all questions and other inquiries reasonably made
or submitted by any of them), prior to and from time to time
after the filing and effectiveness of the Registration Statement
for the sole purpose of enabling the Investors and such
representatives, advisors and underwriters and their respective
accountants and attorneys to conduct initial and ongoing due
diligence with respect to the Company and the accuracy of the
Registration Statement.
Section 7.2 Non-Disclosure of Non-Public Information
(a) The Company shall not disclose non-public
information to the Investors, advisors to, or representatives of,
the Investors unless prior to disclosure of such information the
Company identifies such information as being non-public
information and provides each Investor, and its advisors and
representatives with the opportunity to accept or refuse to
accept such non-public information for review. The Company may,
as a condition to disclosing any non-public information
hereunder, require each of the Investors advisors and
representatives to enter into a confidentiality agreement in form
reasonably satisfactory to the Company and the Investors.
(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
21
Statement would cause such prospectus to include a material
misstatement or to omit a material fact required to be stated
therein in order to make the statements, therein, in light of the
circumstances in which they were made, not misleading. Nothing
contained in this Section shall be construed to mean that such
persons or entities other than the Investors (without the written
consent of the Investors prior to disclosure of such information)
may not obtain non-public information in the course of conducting
due diligence in accordance with the terms of this Agreement and
nothing herein shall prevent any such persons or entities from
notifying the Company of their opinion that based on such due
diligence by such persons or entities, that the Registration
Statement contains an untrue statement of a material fact or
omits a material fact required to be stated in the Registration
Statement or necessary to make the statements contained therein,
in light of the circumstances in which they were made, not
misleading.
22
ARTICLE VIII
Legends
Section 8.1 Legends. The certificates representing the
Securities shall be subject to a legend restricting transfer
under the Act, such legend to be substantially as follows:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(TOGETHER WITH THE REGULATIONS PROMULGATED THEREUNDER, THE
"SECURITIES ACT"), AND MAY NOT BE SOLD, OFFERED FOR SALE,
TRANSFERRED, PLEDGED OR HYPOTHECATED WITHIN THE UNITED
STATES (AS THAT TERM IS DEFINED IN REGULATION S PROMULGATED
UNDER THE SECURITIES ACT) OR TO A U.S. PERSON (AS THAT TERM
IS DEFINED IN REGULATION S) IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FILED UNDER SAID ACT AND ANY
APPLICABLE STATE SECURITIES LAWS, UNLESS AN EXEMPTION FROM
SUCH REGISTRATION IS AVAILABLE. HEDGING TRANSACTIONS
INVOLVING THESE SECURITIES MAY NOT BE CONDUCTED UNLESS IN
COMPLIANCE WITH THE SECURITIES ACT."
The Warrants shall also be subject to an additional legend
stating that the Warrants and the securities to be issued upon
their exercise have not been registered under the Securities Act
and that the Warrants may not be exercised by or on behalf of any
U.S. Person (as defined under Regulation S) unless registered
under the Securities Act or any exemption from registration is
available.
The certificates representing the Securities, and each
certificate issued in transfer thereof, will also bear any legend
required under any applicable state securities law.
Upon 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 D hereto. Such
instructions shall be irrevocable by the Company from and after
the date hereof or from and after the issuance thereof to any
such substitute or replacement transfer agent, as the case may
be, except as otherwise expressly provided in the Registration
Rights Agreement. It is the intent and purpose of such
instructions, as provided therein, to require the transfer agent
for the Common Stock from time to time upon transfer of
Registrable Securities by the Investors or the Placement Agent to
issue certificates evidencing such Registrable Securities free of
the Legend during the following periods and under the following
circumstances and without consultation by the transfer agent with
the Company or its counsel and without the need for any further
advice or instruction or documentation to the transfer agent by
or from the Company or its counsel or the Investors:
23
(a) at any time after the Effective Date, upon
surrender of one or more certificates evidencing the Warrants,
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 shall then be effective; (ii) the Investor(s) and/or
the Placement Agent confirm to the transfer agent that it has
sold, pledged or otherwise transferred or agreed to sell, pledge
or otherwise transfer such Common Stock in a bona fide
transaction to a third party that is not an affiliate of the
Company; and (iii) the Investor(s) and/or Placement Agent confirm
to the transfer agent that the Investor(s) and/or Placement Agent
have complied with the prospectus delivery requirement.
(b) at any time upon any surrender of one or more
certificates evidencing Registrable Securities that bear the
Legend, to the extent accompanied by a notice requesting the
issuance of new certificates free of the Legend to replace those
surrendered and containing representations that (i) the
Investor(s) and/or the Placement Agent is permitted to dispose of
such Registrable Securities, without limitation as to amount or
manner of sale pursuant to Rule 144(k) under the Securities Act
or (ii) the Investor(s) and/or Placement Agent has sold, pledged
or otherwise transferred or agreed to sell, pledge or otherwise
transfer such Registrable Securities, in a manner other than
pursuant to an effective registration statement, to a transferee
who will upon such transfer be entitled to freely tradeable
securities. The Company shall have counsel provide any and all
opinions necessary for the sale under Rule 144.
Any of the notices referred to above in this Section 8.1 may
be sent by facsimile to the Company's transfer agent.
Section 8.2 No Other Legend or Stock Transfer
Restrictions. No legend other than those specified in Section
8.1 have been or shall be placed on the certificates representing
the Shares or the Warrants, and no instructions or "stop transfer
orders," so called, "stock transfer restrictions," or other
restrictions have been or shall be given to the Company's
transfer agent with respect thereto other than as expressly set
forth in this Article VIII.
Section 8.3 Investor's Compliance. Nothing in this
Article shall affect in any way any of the Investors obligations
under any agreement to comply with all applicable securities laws
upon resale of the Securities.
24
ARTICLE IX
Choice of Law
Section 9.1 Choice of Law; Venue; Jurisdiction. This
Agreement will be construed and enforced in accordance with and
governed by the laws of the State of California, except for
matters arising under the Securities Act, without reference to
principles of conflicts of law. The party commencing any legal
action shall have the option of choosing the jurisdiction of the
U.S. District Court sitting in the Southern District of the State
of New York or in the Northern or Central District of California
in connection with any dispute arising under this Agreement and
hereby waives, to the maximum extent permitted by law, any
objection, including any objection based on forum non conveniens,
to the bringing of any such proceeding in such jurisdictions.
Each party hereby agrees that if another party to this Agreement
obtains a judgment against it in such a proceeding, the party
which obtained such judgment may enforce same by summary judgment
in the courts of any country having jurisdiction over the party
against whom such judgment was obtained, and each party hereby
waives any defenses available to it under local law and agrees to
the enforcement of such a judgment. Each party to this Agreement
irrevocably consents to the service of process in any such
proceeding by the mailing of copies thereof by registered or
certified mail, postage prepaid, to such party at its address set
forth herein. Nothing herein shall affect the right of any party
to serve process in any other manner permitted by law. Each
party waives its right to a trial by jury.
25
ARTICLE X
Assignment; Entire Agreement, Amendment; Termination
Section 10.1 Assignment. The Investor's interest in this
Agreement and its ownership of the Shares and Warrants may be
assigned or transferred at any time, in whole or in part, to any
other person or entity (including any affiliate of the Investor)
who agrees to, and truthfully can, make the representations and
warranties contained in Article III and who agrees to be bound by
the covenants of Article V. The provisions of this Agreement
shall inure to the benefit of, and be enforceable by, any
transferee of any of the Common Stock purchased or acquired by
the Investors hereunder with respect to the Common Stock held by
such person.
Section 10.2 Termination. This Agreement shall terminate
upon the earliest of (i) the date that all the Registrable
Securities have been sold by the Investors pursuant to the
Registration Statement; (ii) the date the Investors receive an
opinion from counsel to the Company that all of the Registrable
Securities may be sold under the provisions of Rule 144; or (iii)
three years after the Subscription Date; provided, however, that
the provisions of Articles III, IV, V, VI (as long as the
Securities are beneficially owned by any of the Investors or the
Placement Agent, or their permitted assigns), VIII, IX, X, XI,
and XII, herein, and the registration rights provisions for the
Registrable Securities held by the Investors and the Placement
Agent set forth in this Agreement, and the Registration Rights
Agreement, shall survive the termination of this Agreement.
26
ARTICLE XI
Notices
Section 11.1 Notices. All notices, demands, requests,
consents, approvals, and other communications required or
permitted hereunder shall be in writing and, unless otherwise
specified herein, shall be (i) personally served, (ii) deposited
in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service
with charges prepaid, or (iv) transmitted by hand delivery,
telegram, or facsimile, addressed as set forth below or to such
other address as such party shall have specified most recently by
written notice. Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a)
upon hand delivery or delivery by facsimile, with accurate
confirmation generated by the transmitting facsimile machine, at
the address or number designated below (if delivered on a
business day during normal business hours where such notice is to
be received), or the first business day following such delivery
(if delivered other than on a business day during normal business
hours where such notice is to be received) or (b) on the second
business day following the date of mailing by reputable courier
service, fully prepaid, addressed to such address, or upon actual
receipt of such mailing, whichever shall first occur. The
addresses for such communications shall be:
If to Mustang Software, Inc.:
Mustang Software, Inc.
6200 Lake Ming Road
Bakersfield, CA 93306
Attention: Jim Harrer
Facsimile: (661) 873-2457
Telephone: (661) 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:
The Goldstein Law Group
65 Broadway, 10th Floor
New York, New York 10006
Attention: Jeff Stein
Telephone: (212) 809-4220
Facsimile: (212) 809-4228
Either party hereto may from time to time change its address
or facsimile number for notices under this Section 11.1 by giving
at least ten (10) days' prior written notice of such changed
address or facsimile number to the other party hereto.
27
Section 11.2 Indemnification. The Company agrees to
indemnify and hold harmless each of the Investors and each
officer, director of the Investors or person, if any, who
controls the Investor within the meaning of the Securities Act
against any losses, claims, damages or liabilities, joint or
several (which shall, for all purposes of this Agreement,
include, but not be limited to, all costs of defense and
investigation and all attorneys' fees), to which the Investors
may become subject, under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon the
breach of any term of this Agreement. This indemnity agreement
will be in addition to any liability which the Company may
otherwise have.
Each Investor agrees that it will indemnify and hold harmless the
Company, and each officer, director of the Company or person, if
any, who controls the Company within the meaning of the
Securities Act, against any losses, claims, damages or
liabilities (which shall, for all purposes of this Agreement,
include, but not be limited to, all costs of defense and
investigation and all attorneys' fees) to which the 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
28
(i) the employment of such counsel has been specifically
authorized in writing by the indemnifying party, or (ii) the
named parties to any such action (including any impleaded
parties) include both the Investor and the indemnifying party and
the Investor shall have been advised by such counsel that there
may be one or more legal defenses available to the indemnifying
party different from or in conflict with any legal defenses which
may be available to the Investors (in which case the indemnifying
party shall not have the right to assume the defense of such
action on behalf of the Investors, it being understood, however,
that the indemnifying party shall, in connection with any one
such action or separate but substantially similar or related
actions in the same jurisdiction arising out of the same general
allegations or circumstances, be liable only for the reasonable
fees and expenses of one separate firm of attorneys for the
Investor(s), which firm shall be designated in writing by the
Investor(s)). No settlement of any action against an indemnified
party shall be made without the prior written consent of the
indemnified party, which consent shall not be unreasonably
withheld.
Section 11.3 Contribution. In order to provide for just
and equitable contribution under the Securities Act in any case
in which (i) the indemnified party makes a claim for
indemnification pursuant to Section 11.2 hereof but is judicially
determined (by the entry of a final judgment or decree by a court
of competent jurisdiction and the expiration of time to appeal or
the denial of the last right of appeal) that such indemnification
may not be enforced in such case notwithstanding the fact that
the express provisions of Section 11.2 hereof provide for
indemnification in such case, or (ii) contribution under the
Securities Act may be required on the part of any indemnified
party, then the Company and the applicable Investor shall
contribute to the aggregate losses, claims, damages or
liabilities to which they may be subject (which shall, for all
purposes of this Agreement, include, but not be limited to, all
costs of defense and investigation and all attorneys' fees), in
either such case (after contribution from others) on the basis of
relative fault as well as any other relevant equitable
considerations. The amount paid or payable by an indemnified
party as a result of the losses, claims, damages or liabilities
(or actions in respect thereof) referred to above in Section 11.2
shall be deemed to include any legal or other expenses reasonably
incurred by such indemnified party in connection with
investigating or defending any such action or claim. No person
guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to
contributions from any person who was not guilty of such
fraudulent misrepresentation.
29
ARTICLE XII
Miscellaneous
Section 12.1 Counterparts; Facsimile; Amendments. This
Agreement may be executed in multiple counterparts, each of which
may be executed by less than all of the parties and shall be
deemed to be an original instrument which shall be enforceable
against the parties actually executing such counterparts and all
of which together shall constitute one and the same instrument.
Except as otherwise stated herein, in lieu of the original
documents, a facsimile transmission or copy of the original
documents shall be as effective and enforceable as the original.
This Agreement may be amended only by a writing executed by the
Company on the one hand, and all of the Investors, and the
Placement Agent, on the other hand.
Section 12.2 Entire Agreement. This Agreement, the
Exhibits or Attachments hereto, which include, but are not
limited to the Warrants and the Registration Rights Agreement,
set forth the entire agreement and understanding of the parties
relating to the subject matter hereof and supersede all prior and
contemporaneous agreements, negotiations and understandings
between the parties, both oral and written relating to the
subject matter hereof. The terms and conditions of all Exhibits
and Attachments to this Agreement are incorporated herein by this
reference and shall constitute part of this Agreement as is fully
set forth herein.
Section 12.3 Survival; Severability. The representations,
warranties, covenants and agreements of the parties hereto shall
survive each Closing hereunder. In the event that any provision
of this Agreement becomes or is declared by a court of competent
jurisdiction to be illegal, unenforceable or void, this Agreement
shall continue in full force and effect without said provision;
provided that such severability shall be ineffective if it
materially changes the economic benefit of this Agreement to any
party.
Section 12.4 Title and Subtitles. The titles and
subtitles used in this Agreement are used for convenience only
and are not to be considered in construing or interpreting this
Agreement.
Section 12.5 Reporting Entity for the Common Stock. The
reporting entity relied upon for the determination of the trading
price or trading volume of the Common Stock on any given Trading
Day for the purposes of this Agreement and all Exhibits shall be
Bloomberg, L.P. or any successor thereto. The written mutual
consent of the Investor and the Company shall be required to
employ any other reporting entity.
Section 12.6 Replacement of Certificates. Upon (i)
receipt of evidence reasonably satisfactory to the Company of the
loss, theft, destruction or mutilation of a certificate
representing the Common Stock, and (ii) in the case of any such
loss, theft or destruction of such certificate,
30
upon delivery of an indemnity agreement or security reasonably
satisfactory in form and amount to the Company or (iii) in the
case of any such mutilation, on surrender and cancellation of
such certificate, the Company at its expense will execute and
deliver, in lieu thereof, a new certificate of like tenor.
Section 12.7 Fees and Expenses. Each of the parties shall
pay its own fees and expenses (including the fees of any
attorneys, accountants, appraisers or others engaged by such
party) in connection with this Agreement and the transactions
contemplated hereby, except that the Company shall pay on the
Subscription Date to the Placement Agent 3,000 shares of Common
Stock, and (B) a warrant to purchase 3,000 shares of Common
Stock, for Placement Agent fees.
Section 12.8 Noncircumvention. The Company and the
Investors agree that they shall not circumvent this Agreement and
the Company's obligation to pay fees to the Placement Agent, and
the Placement Agent agrees that it will not circumvent the
provisions of this Agreement.
[Remainder of Page Intentionally Left Blank]
[Signature Page Follows]
31
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:________________________
C. Scott Hunter, Vice President
By:________________________
Donald M. Leonard,
Chief Financial Officer
SETTONDOWN CAPITAL INTER-
NATIONAL LTD., Placement Agent
By:________________________
INVESTORS:
Settondown Capital
International, Ltd.
By:________________________
The Cuttyhunk Fund Limited
By:________________________
32
SCHEDULE A
Investors:
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
The Cuttyhunk Fund Limited
73 Front Street
Hamilton HM 12, Bermuda
Attention: Robert Rans
Telephone: (441) 295-8658.
Facsimile: (441) 292-6274
1
Exhibit 10.2
EXHIBIT A
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated the 31st day of
March, 1999, 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,
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, and
Warrants (hereinafter also collectively referred to as the
"Securities" of the Company).; and
WHEREAS, the Company desires to grant to the Holders the
registration rights set forth herein with respect to the
securities set forth in Section 1.24 Securities Purchase
Agreement.
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
2
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.
The Holder understands that no disposition or transfer of the
Securities may be made by Holder in the absence of (i) an opinion
of counsel to the Holder that such transfer may be made without
registration under the 1933 Act or (ii) such registration.
Section 3. Registration Rights.
(a) The Company agrees that it will prepare and file
with the Securities and Exchange Commission ("Commission"), no
earlier than thirty (30) days nor later than forty-five (45)
following the Closing 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 under the
Act.
The Company shall use its best efforts to cause (i) the
Registration Statement to become effective on or before ninety
(90) days following the Closing Date. The number of shares of
Common Stock designated in the Registration Statement to be
registered shall be one hundred (100%) percent of the number of
Securities that would be required if all the Registrable
Securities were issued on the day before the filing of the
Registration Statement.
(b) The Company will maintain the Registration
Statement, or post-effective amendment filed under this Section 3
hereof current under the 1933 Act, until the earlier of (i) the
date that all of the Registrable Securities have been sold
pursuant to the applicable Registration Statement, (ii) the date
the holders thereof receive an opinion of counsel that the
Registrable Securities may be sold under the provisions of Rule
144 or (iii) three years after the Subscription Date for the
Registration Statement.
(c) All fees, disbursements and out-of-pocket expenses
and costs incurred by the Company in connection with the
preparation and filing of the Registration Statement under
subparagraph 3(a) and in complying with applicable securities and
Blue Sky laws (including, without limitation, all attorneys'
fees) shall be borne by the Company. The Holder shall bear the
cost of underwriting discounts and commissions, if any,
applicable to the Registrable Securities being registered and the
fees and expenses of its counsel. The Company shall qualify any
of the securities for sale in such states as such Holder
reasonably designates and shall furnish indemnification in the
manner provided in Section 6 hereof. However, the Company shall
not be
3
required to qualify in any state which will require an escrow or
other restriction relating to the Company and/or the sellers.
The Company at its expense will supply the Holder with copies of
the Registration Statement and the prospectus or offering
circular included therein and other related documents in such
quantities as may be reasonably requested by the Holder.
(d) The Company shall not be required by this Section
3 to include Holder's Registrable Securities in any Registration
Statement which is to be filed if, in the opinion of counsel for
both the Holder and the Company (or, should they not agree, in
the opinion of another counsel experienced in securities law
matters acceptable to counsel for the Holder and the Company) the
proposed offering or other transfer as to which such registration
is requested is exempt from applicable federal and state
securities laws and would result in all purchasers or transferees
obtaining securities which are not "restricted securities", as
defined in Rule 144 under the 1933 Act.
(e) In the event the Registration Statement to be
filed by the Company pursuant to Section 3(a) above is not filed
with the Commission on or before forty-five (45) days after the
Closing Date, and/or the Registration Statement is not declared
effective by the Commission on or before ninety (90) days
following the Closing 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) No provision contained herein shall preclude the
Company from selling securities pursuant to any registration
statement in which it is required to include Registrable
Securities pursuant to this Section 3.
(g) If at any time or from time to time after the
Effective Date, the Company notifies the Holders in writing of
the existence of a Potential Material Event (as defined in
Section 3(i) below), the Holders shall not offer or sell any
Registrable Securities or engage in any other transaction
involving or relating to Registrable Securities, from the time of
the giving of notice with respect to a Potential Material Event
until such Holder receives written notice from the Company that
such Potential Material Event either has been disclosed to the
public or no longer constitutes a Potential Material Event;
provided, however, that the Company may not so suspend the right
to such holders of Securities for more than one (1) twenty (20)
day period in the aggregate during any twelve month period,
during the periods the Registration Statement is required to be
in effect. If a Potential Material Event shall occur prior to
the date the Registration Statement is filed, then the Company's
obligation to file the Registration Statement shall be delayed
without penalty for not more than twenty (20) days.
4
The Company must give each Holder notice in writing at least two
(2) business days prior to the first day of the blackout period.
(h) "Potential Material Event" means any of the
following: (a) the possession by the Company of material
information not for disclosure in a registration statement; or
(b) any material engagement or activity by the Company which
would be adversely affected by disclosure in a registration
statement at such time, that the Registration Statement would be
materially misleading absent the inclusion of such information.
Section 4. Cooperation with Company. Holder will cooperate
with the Company in all respects in connection with this
Agreement, including timely supplying all information reasonably
requested by the Company and executing and returning all
documents reasonably requested in connection with the
registration and sale of the Registrable Securities.
Section 5. Registration Procedures. If and whenever
the Company is required by any of the provisions of this
Agreement to effect the registration of any of the Registrable
Securities under the Act, the Company shall (except as otherwise
provided in this Agreement), as expeditiously as possible:
(a) prepare and file with the Commission such
amendments and supplements to the registration statements and the
prospectus used in connection therewith as may be necessary to
keep such registration statement effective and to comply with the
provisions of the Act with respect to the sale or other
disposition of all securities covered by such registration
statement whenever the Holder of such securities shall desire to
sell or otherwise dispose of the same (including prospectus
supplements with respect to the sales of securities from time to
time in connection with a registration statement pursuant to Rule
415 promulgated under the Act);
(b) furnish to each Holder such numbers of copies of a
summary prospectus or other prospectus, including a preliminary
prospectus or any amendment or supplement to any prospectus, in
conformity with the requirements of the Act, and such other
documents, as such Holder may reasonably request in order to
facilitate the public sale or other disposition of the securities
owned by such Holder;
(c) register and qualify the securities covered by the
Registration Statement, under such other securities or blue sky
laws of such jurisdictions as the Holder shall reasonably
request, and do any and all other acts and things which may be
necessary or advisable to enable each Holder to consummate the
public sale or other disposition in such jurisdiction of the
securities owned by such Holder, except that the Company shall
not for any such purpose be required to qualify to do business as
a foreign corporation in any jurisdiction wherein it is not so
qualified or to file therein any general consent to service of
process;
(d) list such securities on the Nasdaq SmallCap Stock
Market or
5
other national securities exchange on which any securities of the
Company are then listed, if the listing of such securities is
then permitted under the rules of such exchange or Nasdaq;
(e) enter into and perform its obligations under an
underwriting agreement, if the offering is an underwritten
offering, in usual and customary form, with the managing
underwriter or underwriters of such underwritten offering;
(f) notify each Holder of Registrable Securities
covered by the Registration Statement, at any time when a
prospectus relating thereto covered by the Registration
Statement, is required to be delivered under the Act, of the
happening of any event of which it has knowledge as a result of
which the prospectus included in the Registration Statement, as
then in effect, includes an untrue statement of a material fact
or omits to state a material fact required to be stated therein
or necessary to make the statements therein not misleading in the
light of the circumstances then existing.
Section 6. Information by Holder. Each Holder of
Registrable Securities included in any registration statement
shall furnish to the Company such information regarding such
Holder and the distribution proposed by such Holder as the
Company may request in writing and as shall be required in
connection with any registration, qualification or compliance
referred to in this Section.
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.
6
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,
or any related preliminary prospectus, final prospectus, offering
circular, notification or amendment or supplement thereto, or
arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading;
provided, however, that the Company will not be liable in any
such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in
such Registration Statement, preliminary prospectus, final
prospectus, offering circular, notification or amendment or
supplement thereto in reliance upon, and in conformity with,
written information furnished to the Company by the Distributing
Holders, specifically for use in the preparation thereof. This
indemnity agreement will be in addition to any liability which
the Company may otherwise have.
(b) Each Distributing Holder agrees that it will
indemnify and hold harmless the Company, and each officer,
director of the Company or person, if any, who controls the
Company within the meaning of the Securities Act, against any
losses, claims, damages or liabilities (which shall, for all
purposes of this Agreement, include, but not be limited to, all
costs of defense and investigation and all attorneys' fees) to
which the Company or any such officer, director or controlling
person may become subject under the Securities Act or otherwise,
insofar as such losses claims, damages or liabilities (or actions
in respect thereof; arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact
contained in a Registration Statement, requested by such
Distributing Holder, or any related preliminary prospectus, final
prospectus, offering circular, notification or amendment or
supplement thereto, or arise out of or are based upon the
omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading, but in each case only to the extent that
such untrue statement or alleged untrue statement or omission or
alleged omission was made in such Registration Statement,
preliminary prospectus, final prospectus, offering circular,
notification or amendment or supplement thereto in reliance upon,
and in conformity with, written information furnished to the
Company by such
7
Distributing Holder, specifically for use in the preparation
thereof and, provided further, that the indemnity agreement
contained in this Section 9(b) shall not inure to the benefit of
the Company with respect to any person asserting such loss,
claim, damage or liability who purchased the Registrable
Securities which are the subject thereof if the Company failed to
send or give (in violation of the Securities Act or the rules and
regulations promulgated thereunder) a copy of the prospectus
contained in such Registration Statement to such person at or
prior to the written confirmation to such person of the sale of
such Registrable Securities, where the Company was obligated to
do so under the Securities Act or the rules and regulations
promulgated thereunder. This indemnity agreement will be in
addition to any liability which the Distributing Holders may
otherwise have.
(c) Promptly after receipt by an indemnified party
under this Section of notice of the commencement of any action,
such indemnified party will, if a claim in respect thereof is to
be made against the indemnifying party under this Section, notify
the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve the
indemnifying party from any liability which it may have to any
indemnified party otherwise than as to the particular item as to
which indemnification is then being sought solely pursuant to
this Section. In case any such action is brought against any
indemnified party, and it notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to
participate in, and, to the extent that it may wish, jointly with
any other indemnifying party similarly notified, assume the
defense thereof, subject to the provisions herein stated and
after notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof, the
indemnifying party will not be 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
8
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
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.
9
(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
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.
10
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:________________________ By:________________________
Name: Donald M. Leonard Name: C. Scott Hunter
Title: Chief Financial Officer Title: Vice President
SETTONDOWN CAPITAL INTER-
NATIONAL LTD., Placement Agent
By:________________________
INVESTORS:
The Cuttyhunk Fund Limited Settondown Capital International, Ltd.,
By: ________________________ By:________________________
1
Exhibit 10.3
EXHIBIT B
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (TOGETHER
WITH THE REGULATIONS PROMULGATED THEREUNDER, THE "SECURITIES
ACT"), AND MAY NOT BE SOLD, OFFERED FOR SALE, TRANSFERRED,
PLEDGED OR HYPOTHECATED WITHIN THE UNITED STATES (AS THAT TERM IS
DEFINED IN REGULATION S PROMULGATED UNDER THE SECURITIES ACT) OR
TO A U.S. PERSON (AS THAT TERM IS DEFINED IN REGULATION S) IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FILED UNDER SAID
ACT AND ANY APPLICABLE STATE SECURITIES LAWS, UNLESS AN EXEMPTION
FROM SUCH REGISTRATION IS AVAILABLE. HEDGING TRANSACTIONS
INVOLVING THESE SECURITIES MAY NOT BE CONDUCTED UNLESS IN
COMPLIANCE WITH THE SECURITIES ACT. THIS WARRANT MAY NOT BE
EXERCISED BY OR ON BEHALF OF ANY U.S. PERSON (AS THAT TERM IS
DEFINED IN REGULATION S) UNLESS REGISTERED UNDER THE ACT OR AN
EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE."
STOCK PURCHASE WARRANT
No. ___
To Purchase ________ Shares of Common Stock of
MUSTANG SOFTWARE, INC.
THIS CERTIFIES that, for value received, ___________________
(the "Investor"), is entitled, upon the terms and subject to the
conditions hereinafter set forth, at any time on or after the
date hereof and on or prior to March 31, 2001 (the "Termination
Date") but not thereafter, to subscribe for and purchase from
MUSTANG SOFTWARE, INC., a California corporation (the "Company"),
( ) shares of Common Stock (the "Warrant Shares"). The
purchase price of one share of Common Stock (the "Exercise
Price") under this Warrant shall be $4.044 . 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).
2
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
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.
3
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
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
4
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
5
full authority to its officers who are charged with the duty of
executing stock certificates to execute and issue the necessary
certificates for shares of the Company's Common Stock upon the
exercise of the purchase rights under this Warrant. The Company
will take all such reasonable action as may be necessary to
assure that such shares of Common Stock may be issued as provided
herein without violation of any applicable law or regulation, or
of any requirements of the NASDAQ SmallCap Market or any
domestic securities exchange upon which the Common Stock may be
listed.
16. Miscellaneous.
(a) Issue Date; Choice of Law; Venue; Jurisdiction.
The provisions of this Warrant shall be construed and shall be
given effect in all respects as if it had been issued and
delivered by the Company on the date hereof. This Warrant shall
be binding upon any successors or assigns of the Company. This
Warrant will be construed and enforced in accordance with and
governed by the laws of the State of New York, except for matters
arising under the Securities Act, without reference to principles
of conflicts of law. The party commencing any legal action shall
have the option of choosing the jurisdiction of the U.S. District
Court sitting in the Southern District of the State of New York
or in the Northern or Central District of California in
connection with any dispute arising under this Warrant and hereby
waives, to the maximum extent permitted by law, any objection,
including any objection based on forum non conveniens, to the
bringing of any such proceeding in such jurisdictions. Each
party hereby agrees that if the other party to this Warrant
obtains a judgment against it in such a proceeding, the party
which obtained such judgment may enforce same by summary judgment
in the courts of any country having jurisdiction over the party
against whom such judgment was obtained, and each party hereby
waives any defenses available to it under local law and agrees to
the enforcement of such a judgment. Each party to this Warrant
irrevocably consents to the service of process in any such
proceeding by the mailing of copies thereof by registered or
certified mail, postage prepaid, to such party at its address set
forth herein. Nothing herein shall affect the right of any party
to serve process in any other manner permitted by law. Each
party waives its right to a trial by jury.
(b) Restrictions. The holder hereof acknowledges that
the Warrant Shares acquired upon the exercise of this Warrant, if
not registered (or if no exemption from registration exists),
will have restrictions upon resale imposed by state and federal
securities laws. Each certificate representing the Warrant
Shares issued to the Holder upon exercise (if not registered or
if no exemption from registration exists) will bear the following
legend:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(TOGETHER WITH THE REGULATIONS PROMULGATED THEREUNDER, THE
"SECURITIES ACT"), AND MAY NOT BE SOLD, OFFERED FOR SALE,
TRANSFERRED, PLEDGED OR HYPOTHECATED WITHIN THE UNITED
STATES (AS THAT TERM IS DEFINED IN REGULATION S
6
PROMULGATED UNDER THE SECURITIES ACT) OR TO A U.S. PERSON
(AS THAT TERM IS DEFINED IN REGULATION S) IN THE ABSENCE OF
AN EFFECTIVE REGISTRATION STATEMENT FILED UNDER SAID ACT AND
ANY APPLICABLE STATE SECURITIES LAWS, UNLESS AN EXEMPTION
FROM SUCH REGISTRATION IS AVAILABLE. HEDGING TRANSACTIONS
INVOLVING THESE SECURITIES MAY NOT BE CONDUCTED UNLESS IN
COMPLIANCE WITH THE SECURITIES ACT. THIS WARRANT MAY NOT BE
EXERCISED BY OR ON BEHALF OF ANY U.S. PERSON (AS THAT TERM
IS DEFINED IN REGULATION S) UNLESS REGISTERED UNDER THE ACT
OR AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE."
(c) Modification and Waiver. This Warrant and any
provisions hereof may be changed, waived, discharged or
terminated only by an instrument in writing signed by the party
against which enforcement of the same is sought.
(d) Notices. Any notice, request or other document
required or permitted to be given or delivered to the holders
hereof of the Company shall be delivered or shall be sent by
certified or registered mail, postage prepaid, to each such
holder at its address as shown on the books of the Company or to
the Company at the address set forth in the Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant to
be executed by its officers thereunto duly authorized.
Dated: March 31, 1999 MUSTANG SOFTWARE, INC.
By:________________________
7
NOTICE OF EXERCISE
To: MUSTANG SOFTWARE, INC.
(1) The undersigned hereby elects to purchase ________ shares of
Common Stock of mustang Software, INC. pursuant to the terms of
the attached Warrant, and tenders herewith payment of the
purchase price in full, together with all applicable transfer
taxes, if any.
(2) Please issue a certificate or certificates representing said
shares of Common Stock in the name of the undersigned or in such
other name as is specified below:
(Name)
(Address)________________________
Dated:
Signature
8
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.
9
EXHIBIT C
FORM OF OPINION OF THE COMPANY'S INDEPENDENT COUNSEL
March 31, 1999
To the Investors set forth in Schedule A of
the Securities Purchase Agreement referred to below
and SETTONDOWN CAPITAL INTERNATIONAL LTD.
Charlotte House, Charlotte Street,
P.O. Box N. 9204
Nassau, Bahamas
Re: Securities Purchase Agreement dated March 31, 1999
Ladies and Gentlemen:
Reference is made to the Securities Purchase Agreement dated as
of March 31, 1999 (the "Agreement") by and between Mustang
Software, Inc. Inc., a California corporation (the "Company"),
SETTONDOWN CAPITAL INTERNATIONAL, LTD. (the "Placement Agent")
and the entities listed on Schedule A thereto (collectively the
"Investor"), which provides for the issuance and sale by the
Company of an aggregate of 64,820 shares of its Common Stock (the
"Shares") and Warrants to purchase up to 64,820 shares of Common
Stock (the "Warrants"). This opinion is rendered to you pursuant
to Section 6.10 of the Agreement, and all terms used herein have
the meanings defined for them in the Agreement unless otherwise
defined herein.
We have acted as counsel for the Company in connection with the
negotiation and preparation of the Agreement and the transactions
contemplated thereby and the issuance of the Shares and the
Warrants. As such counsel, we have made such legal and factual
examinations and inquiries as we have deemed advisable or
necessary for the purpose of rendering this opinion. In
addition, we have examined originals or copies of corporate
records of the Company, certificates of public officials and
officers of the Company and such other documents and questions of
law that we consider necessary or advisable for the purpose of
rendering this opinion. In such examination, we have assumed the
genuineness of all signatures on original documents, the
authenticity of all documents submitted to us as originals, the
conformity to original documents of all copies submitted to us as
copies thereof, the legal capacity of natural persons, and the
due execution and delivery of all documents (except as to due
execution and delivery by the Company) where due execution and
delivery are prerequisites to the effectiveness thereof.
For purposes of this opinion, we are assuming that each Investor
has all requisite power and authority, and has taken any and all
necessary corporate action, to execute and deliver the Agreement
and the Registration Rights Agreement (collectively the
Agreements") and we are assuming that the representations and
warranties made by the Investor in the Agreement are true and
correct. As used in this opinion, the expression "to our
knowledge" or
10
similar phrase with reference to any matter means that after an
examination of documents made available to us by the Company and
after inquiries of officers of the Company and attorneys in our
office who have spent significant time representing the Company
as to their present knowledge of such matters, we find no reason
to believe that opinions expressed herein are incorrect; but
beyond that we have made no independent factual investigation for
the purpose of rendering this opinion.
We are admitted to the bar in the State of California and we
express no opinion as to the laws of any other jurisdiction
except the laws of the United States of America to the extent
specifically referred to herein. No opinion is expressed as to
whether a California court would recognize and enforce the
provisions of the Agreements or Warrants choosing a particular
venue or forum to resolve any dispute between the parties.
The opinions hereinafter expressed are subject to the following
qualifications:
(a) With respect to the enforceability of any
agreement, the effect of bankruptcy, insolvency,
reorganization, moratorium and other similar laws
(including, without limitation, California and federal laws
relating to fraudulent transfers or conveyances) and court
decisions of general application, and other legal or
equitable principles of general application, relating to,
limiting, or affecting the enforcement of creditors' rights
generally;
(b) The discretion of any court of competent
jurisdiction in awarding equitable remedies, including but
not limited to specific performance or injunctive relief and
limitations imposed by federal or state securities laws;
(c) Limitations imposed by applicable law or public
policy on the enforceability of the indemnification and/or
contribution provisions of the Registration Rights
Agreement;
(d) The effect of Chapter 5 of the California
Corporations Code which limits the ability of California
corporations to make distributions to shareholders unless
its meets the requirements of, or does not violate,
applicable sections of that Chapter.
(e) The net impact or result of any conflict of laws
between or among laws of competing jurisdictions and the
applicability of the law of any jurisdiction in such
instance beyond California;
(f) The limitations imposed by a California court
which might not permit the exercise or attempted exercise of
any right or remedy provided in any agreement if such
exercise or attempted exercise is deemed to be in breach of
a covenant of good faith and fair dealing implied under
California law to exist in all agreements or if the party
seeking to exercise same fails to act in a commercially
reasonable manner;
11
(g) The limitations imposed by California law and
court decisions relating to the strict enforcement of
certain covenants in contracts absent a showing of damage or
increased risk to the parties seeking enforcement (such
covenants may include, without limitation, covenants to
provide reports or notices;
(h) The unenforceability, under certain circumstances,
of contractual provisions respecting various self-help or
summary remedies, especially if their operation would work a
substantial forfeiture or imposes a substantial penalty upon
the burdened party;
(i) The effect of certain California court decisions,
indicating that a California court would probably refuse to
give strict and literal effect to contractual provisions if
it concluded that enforcement of such provisions, on the
basis of the facts and circumstances then before such court,
was not reasonably necessary to protect the rights and
interest of the party seeking enforcement. Depending on the
particular facts of such a hypothetical instance, such
refusal might rest on one or more public policies as
expressed in the statutes and appellate authorities in
California disfavoring forfeitures, penalties and restraints
against, or the imposition of burdens upon, the alienation
of property;
(j) The effect of Section 1670.5 of the California
Civil Code, which provides that if a court as a matter of
law finds a contract or any clause of a contract to have
been "unconscionable" at the time it was made, the court may
refuse to enforce the contract, or the court may enforce the
remainder of the contract without the "unconscionable"
clause so as to avoid an "unconscionable" result. That
Section also permits parties to present evidence as to the
commercial setting, purpose and effect of any contract or
clause thereof claimed to be "unconscionable" to aid the
court in making its determination;
(k) The effect of section 1671 of the California Civil
Code, which, in essence, provides that a provision in a
contract liquidating the damages for a breach of contract is
valid unless the party seeking to invalidate the provision
establishes that the provision was unreasonably under the
circumstances existing at the time the contract was made.
(l) The effect of Trident Center v. Connecticut
General Life Ins. Co., 847 F.2d 564 (9th Cir. 1988), in
which the Ninth Circuit Court of Appeal, applying what it
said was California law, held that parol evidence was
admissible to vary the provisions of an unambiguous
agreement. To the extent that Trident accurately expresses
California law in the subject matter, our opinion assumes
that no party to any agreement or document referenced herein
in any action seeking to enforce it offers any parol
evidence which varies the express terms of said agreement or
document.
12
In addition, we express no opinion as to compliance with
applicable (i) anti-fraud (or adequacy of disclosure) provisions
of federal or state securities laws or common law or (ii)
applicable state securities or Blue Sky laws in connection with
the purchase and distribution of the securities by the Investor
(except as expressly set forth in paragraph 4 below).
Based upon and subject to the foregoing, we are of the
opinion that:
1. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of
California and has all requisite power and authority (corporate
and other) to carry on its business and to own, lease and operate
its properties and assets as described in the Company's SEC
Documents. To our knowledge, the Company does not own or control
any other business entity. The Company is duly qualified as a
foreign corporation to do business and is in good standing in
every jurisdiction in which the Company owns or leases property,
other than those in which the failure so to qualify would not
have a Material Adverse Effect.
2. The Company has the requisite corporate power and
authority to enter into and perform its obligations under the
Agreements and the Warrants and to issue the Shares, the Warrants
and the Warrant Shares. The execution and delivery of the
Agreements, and the execution, issuance and delivery of the
Shares and the Warrants, by the Company and the consummation by
it of the transactions contemplated by the Agreements have been
duly authorized by all necessary corporate action and no further
consent or authorization of the Company or its Board of Directors
or shareholders is required. Each of the Agreements has been
duly executed and delivered, and the Shares and Warrants, have
been duly executed, issued and delivered, by the Company and each
of the Agreements and the Warrants constitute valid and binding
obligations of the Company enforceable against the Company in
accordance with their respective terms.
3. The execution, delivery and performance of the
Agreements and the Warrants by the Company and the consummation
by the Company of the transactions contemplated thereby (other
than the performance of the Company's indemnification obligations
thereunder, concerning which we express no opinion) do not (i)
result in a violation of the Company's Articles of Incorporation
(the "Articles") or Bylaws; (ii) to our knowledge, conflict with,
or constitute a material default (or an event that with notice or
lapse of time or both would become a default) under, or give to
others any rights of termination, amendment, acceleration or
cancellation of, any material agreement, indenture, instrument or
any "lock-up" or similar provision of any underwriting or similar
agreement to which the Company is a party, except for such
conflicts, defaults, terminations, amendments, accelerations and
cancellations as would not, individually or in the aggregate,
have a Material Adverse Effect; or (iii) to our knowledge result
in a violation of any federal or California law, rule or
regulation applicable to the Company or by which any property or
asset of the Company is bound or affected, except for such
violations as would not, individually or in the aggregate, have a
Material
13
Adverse Effect. To our knowledge, the Company is not in violation
of any terms of its Articles or Bylaws.
4. Subject to the accuracy of your representations in
Article III of the Agreement, we are of the opinion that the
offer, sale and issuance of the Shares and Warrants (and the
shares of Common Stock issuable upon exercise of the Warrants to
the Investor in conformity with the terms of the Agreement
constitute transactions exempt from the registration requirements
of Section 5 of the Securities Act and from the qualification
requirements of Part 2, Chapter 2 (Section 25110 et seq.) of the
California Corporate Securities Law.
5. The Shares issuable to the Placement Agent and
Investors, when issued, sold and delivered in accordance with the
terms of the Agreement, will be duly and validly issued, fully
paid and nonassessable and will be free and clear of any liens or
encumbrances (other than liens and encumbrances created by or
resulting from the actions or inactions of the Investor or
Placement Agent, as to which we express no opinion) and
preemptive or similar rights contained in the Company's Articles
or Bylaws or, to our knowledge, in any agreement to which the
Company is party. The Common Stock issuable upon exercise of the
Warrants has been duly and validly reserved and, upon issuance in
accordance with the respective terms of the Warrants, will be
duly and validly issued, fully paid and nonassessable and free
and clear of any liens or encumbrances (other than liens and
encumbrances created by or resulting from the actions or
inactions of the Investor or Placement Agent, as to which we
express no opinion) or similar rights contained in the Company's
Articles or Bylaws or, to our knowledge, in any agreement to
which the Company is party.
6. To our knowledge, except as disclosed in the SEC
Documents, there are no claims, actions, suits, proceedings or
investigations that are pending against the Company or its
properties, or against any officer or director of the Company in
his or her capacity as such, nor has the Company received any
written threat of any such claims, actions, suits, proceedings,
or investigations which are required to be and have not been
disclosed in the SEC Documents.
7. To our knowledge, there are no outstanding options,
warrants, calls or commitments of any character whatsoever
relating to, or securities, rights or obligations convertible
into or exchangeable for, or giving any right to subscribe for or
acquire any shares of Common Stock or contracts, commitments,
understanding, or arrangements by which the Company is or may
become bound to issue additional shares of Common Stock, or
securities or rights convertible or exchangeable into shares of
Common Stock, except as described in the SEC Documents. To our
knowledge, the Company is not a party to or subject to the
provisions of any order, writ, injunction, judgment or decree of
any court or government agency or instrumentality.
8. Subject to the payment of any applicable listing fees
by the Company, the issuance of the Shares and Warrants to the
Investor and to the Placement Agent will not violate the
applicable listing agreement between the
14
Company and any securities exchange or market on which the
Company's securities are listed.
9. The authorized capital stock of the Company consists of
30,000,000 shares of Common Stock, no par value per share and
10,000,000 shares of Preferred Stock, no par value per share.
This opinion is furnished to the Investors solely for their
benefit in connection with the transactions described above and
may not be relied upon by any other person or for any other
purpose without our prior written consent. This opinion is given
as of the date hereof, and we disclaim any obligation to advise
you of developments in areas covered by this opinion that occur
after the date hereof.
Very truly yours,
FRESHMAN, MARANTZ, ORLANSKI,
COOPER & KLEIN
A Law Corporation
15
EXHIBIT D
INSTRUCTIONS TO TRANSFER AGENT
Mustang Software, Inc.
_______________, 1999
[Name and address of Transfer Agent]
Dear Sirs:
Reference is made to the Securities Purchase Agreement and all
Exhibits and Attachments thereto (the "Agreement") dated as of
March 31, 1999, between ________________ (the "Investor"),
Settondown Capital International Ltd. (the "Placement Agent") and
Mustang Software, Inc. (the "Company"). Pursuant to the
Agreement, subject to the terms and conditions set forth in the
Agreement the Investors have agreed to purchase from the Company
and the Company has agreed to sell to the Investors and the
Placement Agent shares of Common Stock of the Company, no par
value per share (the "Common Stock"), and (ii) the Company has
agreed to issue to the Investors and the Placement Agent ??? and
to the Placement Agent warrants to purchase Common Stock (the
"Warrants"). As a condition to the effectiveness of the
Agreement, the Company has agreed to
issue to you, as the transfer agent for the Common Stock (the
"Transfer Agent"), these instructions relating to the Common
Stock, and Warrants to be issued to the Investors and the
Placement Agent (or a permitted assignee) pursuant to the
Agreement, or upon exercise of the Warrants. All terms used
herein and not otherwise defined shall have the meaning set forth
in the Agreement.
1. ISSUANCE OF COMMON STOCK WITHOUT THE LEGEND
Pursuant to the Agreement, the Company is required to
prepare and file with the Commission, and maintain the
effectiveness of, a registration statement or registration
statements registering the resale of the Common Stock to be
acquired by the Investors and the Placement Agent (i) under the
Agreement and (ii) upon exercise of the Warrants. The Company
will advise the Transfer Agent in writing of the effectiveness of
any such registration statement promptly upon its being declared
effective. The Transfer Agent shall be entitled to rely on such
advice and shall assume that the effectiveness of such
registration statement remains in effect unless the Transfer
Agent is otherwise advised in writing by the Company and shall
not be required to independently confirm the continued
effectiveness of such registration statement. In the
circumstances set forth in the following two paragraphs, the
Transfer Agent shall deliver to the Investors and the Placement
Agent certificates representing Common Stock not bearing the
Legend without requiring further advice or instruction or
additional documentation from the Company or its counsel or the
Investor or its counsel or any other party (other than as
described in such paragraphs).
16
At any time after the effective date of the applicable
registration statement (provided that the Company has not
informed the Transfer Agent in writing that such registration
statement is not effective) upon any surrender of one or more
certificates evidencing Common Stock which bear the Legend, to
the extent accompanied by a notice requesting the issuance of new
certificates free of the Legend to replace those surrendered, the
Transfer Agent shall deliver to the Investor the certificates
representing the Common Stock not bearing the Legend, in such
names and denominations as the Investor, and/or Placement Agent
shall request.
In the event the Company files a Form S-3 registration
statement and such registration statement is declared effective
by the Securities and Exchange Commission in connection with any
such event, the Investor (or its permitted assignee) shall
confirm in writing to the Transfer Agent that (i) the Investor
and/or Placement Agent 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 (ii) the Investor and/or Placement
Agent confirms to the transfer agent that it has complied with
the prospectus delivery requirement.
In the event the Company files a registration statement
other than on Form S-3, which is subsequently declared effective
by the Securities and Exchange Commission, the Investors need not
confirm the above in writing to the Transfer Agent.
In the event a registration statement is not filed by the
Company, or for any reason the registration statement which is
filed by the Company is not declared effective by the Securities
and Exchange Commission the Investor and/or Placement Agent, or
its permitted assignee, or either of their brokers confirms to
the Transfer Agent that (i) the Investor and/or Placement Agent
has held the shares of Common Stock for at least one year, (ii)
counting the shares surrendered as being sold upon the date the
unlegended Certificates would be delivered to the Investor and/or
Placement Agent (or the Trading Day immediately following if such
date is not a Trading Day), the Investor and/or Placement Agent
will not have sold more than the greater of (a) one percent (1%)
of the total number of outstanding shares of Common Stock or (b)
the average weekly trading volume of the Common Stock for the
preceding four weeks during the three months ending upon such
delivery date (or the Trading Day immediately following if such
date is not a Trading Day), and (iii) the Investor and/or
Placement Agent has complied with the manner of sale and notice
requirements of Rule 144 under the Securities Act.
Any advice, notice, or instructions to the Transfer Agent
required or permitted to be given hereunder may be transmitted
via facsimile to the Transfer Agent's facsimile number of ( )
___-____.
17
2. MECHANICS OF DELIVERY OF CERTIFICATES REPRESENTING COMMON
STOCK
In connection with any Closing pursuant to which the
Investor acquires Common Stock under the Agreement, the Transfer
Agent shall deliver to the Transfer Agent as defined in the
Agreement certificates representing Common Stock (with or without
the Legend, as appropriate) immediately.
3. FEES OF TRANSFER AGENT; INDEMNIFICATION
The Company agrees to pay the Transfer Agent for all fees
incurred in connection with these Irrevocable Instructions. The
Company agrees to indemnify the Transfer Agent and its officers,
employees and agents, against any losses, claims, damages or
liabilities, joint or several, to which it or they become subject
based upon the performance by the Transfer Agent of its duties in
accordance with the Irrevocable Instructions.
4. THIRD PARTY BENEFICIARY
The Company and the Transfer Agent acknowledge and agree
that the Investor is an express third party beneficiary of these
Irrevocable Instructions and shall be entitled to rely upon, and
enforce, the provisions thereof.
MUSTANG SOFTWARE, INC.
By:________________________
AGREED
By:________________________
Name:
Title:
_______________________________
1 Pursuant to Regulation S, a "U.S. Person" means: (i) any
natural person resident in the United States, (ii) any
partnership or corporation organized or incorporated under the
laws of the United States, (iii) any estate of which any executor
or administrator is a U.S. Person, (iv) any trust of which any
trustee is a U.S. Person, (v) any agency or branch of a foreign
entity located in the United States, (vi) any non-discretionary
account or similar account (other than an estate or trust) held
by a dealer or other fiduciary for the benefit or account of a
U.S. Person, (vii) any discretionary account or similar account
(other than an estate or trust) held by a dealer or other
fiduciary organized, incorporated or (if an individual resident
in the United States), or (viii) any partnership or corporation,
if organized under the laws of any foreign jurisdiction and
formed by any U.S. Person principally, for the purpose of
investing in securities and registered under the Act, unless it
is organized or incorporated and owned by accredited investors
(as defined in Rule 501(a) under the Act who are not natural
persons, estates or trusts.