-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Gh41rEfzWCAxDwcN0+QQCEbEI+FcDcukhF0dI3EZUk5K+ECWrUk5taxMWRNdzA9t qynAtP7uOAqrawqZv5yXrA== 0000940986-97-000001.txt : 19970401 0000940986-97-000001.hdr.sgml : 19970401 ACCESSION NUMBER: 0000940986-97-000001 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MUSTANG SOFTWARE INC CENTRAL INDEX KEY: 0000940986 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 770204718 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-25678 FILM NUMBER: 97569795 BUSINESS ADDRESS: STREET 1: 6200 LAKE MING RD CITY: BAKERSFIELD STATE: CA ZIP: 93306 BUSINESS PHONE: 8058732500 MAIL ADDRESS: STREET 1: 6200 LAKE MING RD CITY: BAKERSFIELD STATE: CA ZIP: 93306 10KSB 1 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-KSB (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required] For the fiscal year ended December 31, 1996 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] For the transition period from _____________ to ____________ Commission file number 0-25678 MUSTANG SOFTWARE, INC. (Name of small business issuer in its charter) California 77-0204718 (State or other jurisdiction (IRS employer identification number) of incorporation or organization) 6200 Lake Ming Road 93306 Bakersfield, California (Zip Code) California (Address of principal executive offices) Issuer's telephone number: (805) 873-2500 Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock, no par value Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] State issuer's revenues for its most recent fiscal year $3,810,240 State the aggregate market value of the voting stock held by non-affiliates computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within the past 60 days. $4,218,709 based on the closing sale price at March 11, 1997 as reported by The Nasdaq National Market. State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 3,374,967 at March 11, 1997 DOCUMENTS INCORPORATED BY REFERENCE: None 2 This Annual Report on Form 10-KSB contains forward-looking statements. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in the Section under Item 1 - Description of Business - Risk Factors. Readers should not place undue reliance on forward-looking statements, which reflect management's view only as of the date of this Report. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances. Readers should also carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission. MustangTM, Wildcat!TM, WinServerTM, QmodemProTM and Off-Line XpressTM are trademarks of the Company. "Windows", "Windows 95" and "Windows NT" are trademarks of Microsoft Corporation ("Microsoft"). This Report also contains trademarks of other companies 3 Part I Item 1. Description of Business Company Background Mustang Software, Inc. ("Mustang" or the "Company") is a leading telecommunications software company that designs, develops, markets and supports software which permits computer users to communicate with each other online using standard phone lines and LAN and WAN connections. Mustang's products also provide connectivity to the resources and emerging commercial applications of the Internet worldwide network. The Company's products include the Wildcat! line of WEB and FTP software, the QmodemPro line of telecommunications software and the Off-Line Xpress series of E-mail management software. All of the Company's programs operate under DOS and most have companion versions for Microsoft Windows. All are specifically designed to operate in a network environment to take advantage of resource sharing and distributed processing used in multiple-PC networks. The Company believes its software is easy to understand and operate, appeals to users newly joining the telecommunications world and provides a secure solution for business and other users to share information locally and from remote locations. The Company's products are used for a wide range of services including E-mail exchange, file transfer, FAX-back services and information gathering and dissemination using multiple sources including LANs, WANs, the Internet and the global WWW network. The Company markets its products to businesses, educational institutions, government agencies and computer hobbyists. For the business customer, Mustang's telecommunications software offers the capability to enhance sales, improve customer service, market its products and increase employee productivity. The Company currently sells its products to distributors which provide software to the retail and VAR channel, to OEMs which bundle one or more of Mustang's software products with their hardware, and to end users through catalogs, direct mail and media advertising. Mustang began operations in 1986 as a sole proprietorship, became a general partnership in 1987 and was incorporated in California on December 23, 1988. Its executive offices and sales, marketing and administration facilities are located at 6200 Lake Ming Road, Bakersfield, California, 93306 and its telephone number and online number are (805) 873-2500 and (805) 873-2400, respectively. It completed its initial public offering of Common Stock in April 1995. The Company maintains a website on the World Wide Web at "http://www.mustang.com." Information contained on the website does not constitute part of this Report. Risk Factors The Company may from time to time make written or oral forward-looking statements. Written forward-looking statements may appear in documents filed with the Securities and Exchange Commission, in press releases, and in reports to shareholders. The Private Securities Reform Act of 1995 contains a safe harbor for forward-looking statements on which the Company relies in making such disclosures. In connection with this "safe harbor" the Company is hereby identifying important factors that could cause actual results to differ materially from those contained in any forward-looking statements made by or on behalf of the Company. Any such statement is qualified by reference to the following cautionary statements: Variability of Operating Results. Because Mustang generally ships its telecommunications software products within a short period after receipt of an order, it typically does not have a material backlog of unfilled orders, and revenues in any quarter or other period are substantially dependent on orders booked in that period. Orders booked during any particular period are substantially dependent upon numerous factors, including the scheduled release of new products and product enhancements and updates by Mustang and its competitors, the release or anticipated release of complementary products by other software suppliers, market acceptance of such products, enhancements and updates, and numerous other factors, many of which are beyond the Company's control. In addition, Mustang's expense levels for each quarter are, to a significant extent, fixed in advance based upon the Company's expectations as to the net sales during that quarter. Mustang therefore is generally unable to adjust spending in a timely manner to compensate for any unexpected shortfall in net sales. Further, as a result of these factors, any delay in product introductions, whether due to internal delays or delays caused by third party difficulties or any significant shortfall of demand in relation to Mustang's expectations would have an almost immediate adverse impact on Mustang's operating results and on its ability to maintain profitability in a quarter. Mustang has in the past experienced significant variations in quarter-to-quarter operating results. 4 Development, Introduction and Enhancement of Products; Product Concentration. The markets for the Company's products are characterized by rapidly changing technology and frequent new product introductions. Accordingly, the Company believes its future prospects depend on its ability not only to enhance and successfully market its existing products, but also to develop and introduce new products in a timely fashion which achieve market acceptance. There can be no assurance that the Company will be able to identify, design, develop, market or support such products successfully or that the Company will be able to respond effectively to technological changes or product announcements by competitors. In particular, if the Company fails to successfully anticipate customer demand for new products or product enhancements or upgrades or otherwise makes incorrect product development decisions, the Company could be adversely affected both by the loss of anticipated revenue and, possibly, its competitors' increase in their installed base of customers. These adverse results could be particularly significant if the Company were to make a number of incorrect product development decisions in succession or within a short period of time. Mustang has on a number of occasions experienced delays in the commencement of commercial shipments of new products and enhancements, resulting in delay or loss of product revenues. From time to time, Mustang and others may announce new products, capabilities or technologies that have the potential to replace or shorten the life cycle of Mustang's existing product offerings. There can be no assurance that announcements of currently planned or other new product offerings will not cause customers to defer purchasing existing Company products or cause distributors to return products to Mustang. In addition, programs as complex as the software products offered by Mustang may contain undetected errors or "bugs" when they are first introduced or as new versions are released. Delays or difficulties associated with new product introductions or product enhancements, or the introduction of unsuccessful products or products containing undetected "bugs", could have a material adverse effect on Mustang's business, operating results and financial condition." Mustang's products are limited in number and concentrated in the area of telecommunications software. Mustang expects that revenues from these products will continue to account for a substantial portion of the Company's revenues. The life cycles of Mustang's products are difficult to estimate, due in large measure to the recent emergence of the Internet market, the future effect of product enhancements and future competition. Declines in demand for the Company's products, whether as a result of competition, technological change or otherwise, or price reductions in these products would have a material adverse effect on the Company's operating results. Dependence Upon Distributors. Mustang relies on its distribution network for a substantial portion of its sales. Sales to distributors accounted for substantial portions of the Company's revenues, in particular sales in the United States to Ingram Micro Inc. ("Ingram"), Merisel Americas, Inc. ("Merisel") and DistribuPro, Inc., which sells the Company's products to such resellers as CompUSA, Egghead, Computer City, Software Etc., Babbages, Best Buy, Micro Center, Media Play, Fry's Electronics and Office Max. Sales to Ingram and Merisel accounted for 58% and 13% of total revenues during the years ended December 31, 1995 and 1996, respectively. Sales to distributors are expected to continue to account for a substantial percentage of Mustang's total sales. The Company's distributors also represent other lines of products, some of which may be competitive with those of the Company. Mustang's distributors are not within its control and are not obligated to purchase products from the Company. While Mustang encourages its distributors to focus primarily on the promotion and sale of the Company's products, there can be no assurance that these distributors will not give higher priority to the sale of other products, including products developed by existing or potential competitors. Furthermore, there can be no assurance as to the continued viability or stability of the Company's distributors, Mustang's ability to retain its existing distributors or the Company's ability to add or retain new distributors. The loss of Ingram, Merisel or DistribuPro, or a material reduction in orders from any of them, could have a materially adverse effect on the Company's operations. Competition. The market for the Company's products is intensely competitive. Mustang competes with a number of companies, many of which have far greater financial, technical and marketing resources than the Company. There can be no assurance that the Company will be able to compete successfully with such companies. Although the Company believes it currently has certain technological advantages, there can be no assurance that the Company will be able to maintain or capitalize on these perceived competitive advantages. To the extent that Microsoft or others incorporate applications comparable or perceived as comparable to those offered by Mustang into Windows or other products (or separately offer such products), sales of Mustang's products could be materially adversely affected, and there can be no assurance that any such action by Microsoft or others would not render Mustang's Windows-based products noncompetitive or obsolete. 5 Product Returns and Exchange Rights. Mustang's distributors and direct purchasers are generally permitted a 30-day right to return to Mustang the software purchased by them. Although such returns are generally exchanged for other products or credited against future orders, Mustang may be required to accept major product returns for cash or a credit against accounts receivable. Moreover the Company may on occasion grant more liberal rights of return to its distributors, particularly where new products or major upgrades are introduced and sales do not meet expectations. Product returns increased from approximately $1,000,000 in 1995 to approximately $1,200,000 in 1996. The Company has reserved approximately $400,000 at December 31, 1996 for future returns and other collection issues, down from $425,000 so reserved at December 31, 1995. Although management believes that Mustang has provided adequate allowances for exchanges and returns, there can be no assurance that actual returns or exchanges will not exceed Mustang's allowances, particularly in connection with the introduction of new products or enhancements. Mustang intends to introduce new or enhanced products in the future. Such future product introductions may result in higher product returns and exchanges due to the risks inherent in the introduction of such products. Any product returns or exchanges in excess of recorded allowances could have a material adverse effect on Mustang's business, operating results and financial condition. Intellectual Property and Proprietary Rights. The Company regards its software as proprietary and attempts to protect it with copyrights, trademarks, restrictions on disclosure, copying and transferring title and enforcement of trade secret laws. Despite these precautions, it is possible for unauthorized third parties to copy the Company's products and it may be possible for such parties to obtain and use information that the Company regards as proprietary. The Company has no patents, and existing copyright laws afford only limited protection for the Company's software. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as do the laws in the United States. Mustang licenses its products primarily under "shrink wrap" license agreements that are not signed by licensees and therefore may be unenforceable under the laws of certain jurisdictions. As the number of software products increases and the functionality of these products further overlaps, Mustang believes that such software will increasingly become the subject of claims that such software infringes the rights of others. Although the Company does not believe that its products infringe on the rights of third parties, there can be no assurance that third parties will not assert infringement claims against the Company in the future or that any such assertion will not result in costly litigation or require the Company to obtain a license to intellectual property rights of such parties. In addition, there can be no assurance that such licenses will be available on reasonable terms, or at all. Risks from Possible Acquisitions. Although no acquisitions of companies or products are currently being negotiated, the Company may make acquisitions in the future. Mustang's management has only limited experience with acquisitions, which involve numerous risks, including difficulties in the assimilation of acquired operations and products, the diversion of management's attention from other business concerns and the potential loss of key employees of the acquired companies. Dependence on 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. The Company has key-man life insurance on the life of Mr. Harrer in the amount of $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. The continued success of the Company is also dependent upon its ability to attract and retain highly qualified personnel. There can be no assurance that the Company will be able to recruit and retain such personnel Risks From International Sales. International sales account for a significant amount of the Company's revenues. International sales are subject to inherent risks including exposure to currency fluctuations, regulatory requirements, political and economic instability and trade restrictions. Although Mustang's sales are typically made in U.S. dollars, a weakening in the value of foreign currencies relative to the U.S. dollar could have an adverse impact on the Company by increasing the effective price of the Company's products in its international markets. In addition, lower sales levels in Europe, which typically occur during the summer months, may adversely affect the Company's business. 6 Glossary Certain terms used in this Report are defined as follows: Bulletin Board System ("BBS") - See "Online System." below Bundling - A marketing technique in which a product, such as a computer, is sold with other products, such as software, included. Compiler - A program that translates the program code developed by programmers (the source code) into codes that the computer can actually understand (the object code). Configuration - The basic setup of a software program, containing specifications such as the amount of storage space available for program files and what types of printers will be employed. Connectivity - The linking together of computers on a network; can refer to both the hardware and software considerations of connecting computers together. Dedicated Connection - A telecommunication connection that has been designated for one purpose or use. Dial-Up Connection - A connection that is accessed through or by means of a telephone. Distributed Processing - An approach to information management in which data are stored and processed on more than one computer. Enterprise -- An organization, such as a corporation, small business, non-profit institution, government body or other kind of organization, that uses computers FTP - File Transfer Protocol - A method of transmitting files from one connection on the Internet to another. Frame-Relay Link - A method of transmitting data, in a particular structure, or "frame", over leased telephone lines. Global BBS Network - A large interconnection of BBSs that maintain regular communication and share information. Installed Base - The aggregate number of users of a particular hardware or software. Intranet - A network that is contained within an enterprise, the main purpose of which usually is to share company information and computing resources among employees. Internet - An international network connecting businesses, government agencies, universities and other organizations and individuals for the purpose of sharing information. Leased Line - A telephone line leased from a third party that provides a constant telecommunications link. Local Area Network (LAN) - A computer system consisting of personal computers within a department or office, that are connected to each other with cable and are able to share data and application programs. Menu Interface - A connection between two computers or programs through use of a list of options or programs that a user can choose or access. Online System - System that users may dial into, through the use of a computer and modem, to communicate with other users. Operating Environment - The commands and capabilities that users have available to them as a result of using a specific operating system. For example, DOS users have available to them a wide range of DOS commands. These commands constitute the DOS operating environment. Packet Switching - A method of sending data in chunks, or "packets", with a degree of reliability, over a telecommunications line. The line is dedicated to each specific packet while it is being sent and, afterwards, becomes available for the transmission of another packet. Protocol - A format, or set of guidelines, for establishing telecommunications between computers and other devices. Resource Sharing - Making a resource available to multiple computer users. Script Language (SLIQ) - Mustang's term for a sequence of commands/responses for its QmodemPro software. 7 Shrink Wrap License Agreement - Computer software licensing agreements that are printed on a software package and enclosed in plastic film. These agreements provide that, upon breaking the "shrink wrap", a software purchaser agrees to be bound by the terms and conditions of the license agreement. System Operator (sysop) - The individual who manages a computer bulletin board. Telnet - An Internet application that allows users to "log on" to remote computers in order to access programs and applications. Terminal Emulation - Making one terminal act like another (for example, the process of connecting a personal computer to a main frame computer and then using the personal computer as if it were a standard main frame-attached terminal). UUCP- Unix-to-Unix Copy Protocol - A dial-up link for moving e- mail and Usenet newsgroups to and from Wildcat! Message databases. Wide Area Network (WAN) - A network of computers spread out over a large geographical area, across states and even countries. Windows 95 - A graphical user interface developed by Microsoft, with multi-tasking capabilities. Microsoft introduced this updated version of Windows in August 1995. Windows NT - A version of Windows designed for use in LANs and WANs. World Wide Web (WWW) - A specific means of communication on the Internet that presents text and graphics. X.25 Link - A link based upon a telecommunications standard from the Consultative Committee In International Telephone and Telegraph (CCITT), an international telecommunications standards organization. X.25 was developed to guide the establishment of LAN packet- switching as the basis for sending and receiving data. Industry Overview The number of personal computers (PCs) in use has grown extensively in the last several years. An industry source projects that PC penetration in U.S. households will increase from 37% at yearend 1996 to 49% by yearend 2001. Total online households are projected to increase from 11.8 million in 1996 to 51.5 million by the year 2001. These trends, coupled with the introduction of large commercial online services such as the America Online, CompuServe Information Service and Microsoft Network, have fed the growth of the telecommunications software industry and the online services industry. As a result, an increasing number of businesses, educational institutions, government agencies and individuals are making use of telecommunications technology to connect to a growing number of hosts, Websites, online services and the Internet, commonly collectively referred to as the "information superhighway." An industry source has estimated that the number of Internet hosts increased from 1,000,000 in 1992 to 10,000,000 in 1996 and will increase to over 100 million by 2000. At the simplest level, a Website and an online (a "Website/Online") system (formerly known as a bulletin board system or BBS) are each a software program that runs unattended on a personal computer with a modem. It answers the phone and sends and receives information when a user at another computer dials the number and connects over a standard telephone line. A connection to a Website/Online system can also be established through another medium such as a leased line, an X.25 link, a frame-relay link, a telnet connection from the Internet or even LAN or WAN connections. Regardless of the method of connection, the Website/Online system typically requires a caller to log onto the system with a user name and password and then presents a number of choices to the caller through a menu interface. The types of activity provided to the caller by the Website/Online system may consist of mail services, sending and receiving files, answering questionnaires, reading announcements, searching databases, and chatting online. The Website/Online system operator (the "webmaster") has the ability to control all information that is presented and made available for transfer. The Website/Online system has transitioned from a text interface to a graphical presentation of content to callers. 8 The business community makes use of Websites/Online systems for a wide range of applications. For example: * Retail businesses can use Website/Online systems to present "storefronts" on the information superhighway, permitting merchandise to be viewed and ordered online, either directly or through the Internet. * The software industry has made use of Website/Online systems to offer technical support for products and to save shipping costs by making software updates available electronically. * A Website/Online system may be used as a secure contact point for outside sales personnel in remote locations or branch office communication within a business. * The real estate industry has established many Website/Online systems offering sales information, property descriptions and photographic quality pictures of listings to the public. * Automobile dealers may use Website/Online systems to permit the publicc to view vehicle specifications, look at pictures of available models and even negotiate pricing and purchase an automobile electronically. * Governmental agencies make use of Website/Online systems to share information with the public and for inter-office communication. The US Postal Service, for instance, does both by using the Company's Wildcat! software to allow large corporate customers to track their bulk mailing shipments with a phone call to an online system, as well as a separate internal system (or intranet) for its own staff to exchange other information. The Internet is a worldwide network of private and public computer networks that link businesses, universities, government agencies and other users having different computer systems and networks, by means of a common telecommunications standard. Use of the Internet has grown rapidly since its commercialization in the early 1990s. There were approximately 30 million Internet users as of the end of 1994, with the number expected to increase to over 200 million by the year 2000.1 Acc ess to the Internet is often provided by consumer online services, which utilize telephone line connections channeled through a central host computer. In 1996, some online service providers, notably America Online, the largest, moved to a flat pricing model, making access to the Internet more affordable for users. In addition, online services often do not permit full two-way Internet connectivity, acting only as "on-ramps" to the Internet. Website/Online system software is capable of linking to most services on the Internet (at a cost determined by each sysop), while also providing interaction with such services, thus providing Internet access to the masses. The most popular Website/Online system applications are E-mail, news group discussions (USENET), file transfers called "FTP" for file transfer protocol, program operation from remote locations using telnet and, most recently, graphical information viewing and sound on the World Wide Web (WWW). Current Products The Company concentrates its product development primarily on a full line of telecommunications software. Mustang's products generally fall into three categories: BBS/Web server software, telecommunications software and E-mail management software. The BBS/Web server product line is the most comprehensive and includes several choices of core products and a number of optional add-on products. The Company's Wildcat! BBS software was introduced in March 1987. The Company first introduced its Qmodem software 1991 after the product had been acquired from its developer. The Company then rewrote, enhanced and reintroduced the program as QmodemPro in 1992. The life cycles of Mustang's products are difficult to estimate due in large measure to the recent emergence of the WWW market, the future effect of product enhancements and future competition. Declines in demand for these products, whether as a result of competition, technological change or otherwise, or price reductions in these products would have a material adverse effect on the Company's operating results. BBS/Web Server Software Since Wildcat! BBS software was first released, the Company has released five major upgrades and 23 minor revisions of the product. The Wildcat! 5 WinServerTM program was recently developed and released to operate on Windows 95 and Windows NT and is the first Web Server program developed by the Company for the Windows environment. The Wildcat!4 BBS program is a DOS product that is sold in five core configurations, depending primarily on the number of simultaneous connections desired. 9 Windows 95/NT In March 1996, Mustang began commercial shipments of its newly developed Wildcat!5 BBS/Web Server for Windows 95/NT, which the Company believes is the next step in the continuing evolution of BBSs into interactive Web servers. Wildcat! 5 takes advantage of the 32-bit multitasking in Windows 95 and the robust server operations in Windows NT. The Company created the program to bring a total integration between a BBS and the Internet. The program combines the features of a Web server with the superior interactivity of BBSs and online services such as America Online, CompuServe and Microsoft Network. Wildcat! 5's multimedia 32-bit platform offers, Internet access in addition to interactive conferencing, threaded messaging, individual/group chat and file library access, among other things, and allows users to log onto the BBS/Web server with any communication program or terminal emulator through direct dial, telnet or LAN. 10 The Wildcat! 5 line is summarized in the following table. Wildcat! Interactive Net Server (Win ServerTM ) Product line for Windows 95/NT
Product Description Release/Price Title Wildcat! Includes all the basic WIN Server First released Interact- features like messaging, chat and file as Wildcat! v.5 ive Net libraries, and supports up to 2 March 1996; Server authenticated users at a time (there is latest release (WIN no limit on the number of Web surfers). February 1997; ServerTM) Includes full Internet connectivity, a US Suggested Community secure online commerce engine and Retail $249 Edition subscription module (wcSubscribe), and a (2-node) one-year license to distribute a logo- branded custom version of the Wildcat! Navigator. The Community Edition is typically used by someone who may want to create a home page on the World Wide Web and perhaps wishes to provide one or two dial-in lines to those without Internet access. Wildcat! Supports up to 16 authenticated users at First released Interact- a time (there is no limit on the number as Wildcat! v.5 ive Net of Web surfers). And includes everything March 1996; Server that the Community Edition has, plus our latest release (WIN database reporting and statistics tool, February 1997 ServerTM) weReports, and one full year of toll free US Suggested Business technical support via the Platinum Retail $1495 Edition TECHelp program. The Business Edition is (16-node) typically used when a small company needs to implement Internet access or provide a dial-in connection for customers. It is a popular choice for the Small Office/Home Office market. Wildcat! Extends support to 64 authenticated users First released Interact- at a time (there is no limit on the as Wildcat! v.5 ive Net number of Web surfers) and is designed to March 1996; Server be deployed in a corporate environment. latest release (WIN It includes And includes everything that February 1997; ServerTM) the Business Edition has plus a license US Suggested Enterprise for wcExchange, our intranet mail Retail $3995 Edition solution. With wcExchange LAN users can (64-node) access all the messaging features of the WIN server vias their Microsoft Exchange (aka Windows Messaging) Inbox client right on their desktop. 8-pack Allows expansion of the number of First released node simultaneous connections to a WIN Server. March 1996; increase Each added node can be configured to latest release accept dial-up, LAN or Internet February 1997; connections. US Suggested Retail $199 32-pack Allows expansion of the number of First released node simultaneous connections to a WIN Server. March 1996; increase Each added node can be configured to latest release accept dial-up, LAN or Internet February 1997; connections. US Suggested Retail $699 Internet When combined with an Internet connection First release Connect- this package integrates Wildcat! 5 to the November 1996; ivity Pack Internet. It makes the BBS's resources latest release (ICP) available to Internet users while at the February 1997 same time makes the Internet accessible US Suggested to the BBS callers. Includes WWW, FTP, Retail $249 UUCP, and telnet. Included with all Community Editions, Business Editions, and Enterprise Editions. wcExchange A powerful mail transport system that First release connects your WIN Server to the Microsoft April 1996; Exchange (a.k.a. Windows Messaging) Inbox latest release client. It can work by itself or in February 1997 conjunction with other mail transport US Suggested systems such as Microsoft Mail. Included Retail $499 with all Enterprise Editions. 11 wcCasino A suite of Las Vegas-style games that First release offers system administrators and Internet September 1996; Service Providers an added attraction to latest release their sites. The action-packed suite February 1997 boasts three games of chance including US Suggested blackjack, poker and roulette, and each Retail $129 games provides multimedia action. Each game is self-contained for singe user "offline" play and multi-player when connected to a WIN Server. wcCODE This utility is a compiled scripting First release Custom language modeled after BASIC, and is a March 1996; Online tool for developing custom applications latest release Develop- for any Wildcat! online service. In February 1997 ment addition, wcCode gives you easy access to US Suggested Engine all the WIN Server user, file and message Retail $149 databases for developing custom maintenance applications for you system. wcCode can be ran from the ANSI/ASCII interface or the graphical interface of any browser. wcCODE This add-on product contains the wcCODE First release Plus Pack source for the ANSI/ ASCII side of the March 1996; BBS. It requires wcCODE and includes more latest release than 15,000 lines of source code, February 1997 allowing total customization of the US Suggested ANSI/ASCII BBS interface. Retail $349 wcList- Create and administer your own Internet E- First release Serve mail distribution lists and extend your December 1996; WIN Server community to E-mail users latest release worldwide. February 1997 US Suggested Retail $149 wcPPP A virtual terminal server that runs in First release conjunction with the WIN Server to March 1997; provide a raw Internet feed to clients. US Suggested Once connected to the WIN Server using Retail $799 Windows 95 Dial-up networking or any Winsock compatible connection software, clients can run any TCP/IP application. Provides auto-sensing connectivity and automatic IP address negotiation so clients do not need login scripts or IP addressing. wcSDK Allows you to create and maintain your First release own custom applications. The WIN Server July 1996; Software Developers Kit (wcSDK) was latest release created to satisfy the needs of system February 1997; administrators and third party US Suggested programmers developing new programs that Retail $199 extend the features of the WIN Server platform. It consists of two comprehensive reference manuals; one for developing 16-bit code for Wildcat! Navigator clients and one for developing 32-bit code for the Wildcat! server. wcReports Offers webmasters and Intranet system First release administrators the ability to manage June 1996; message forums and file libraries. The latest release program can analyze demographic February 1997 information entered on system US Suggested polls/questionnaires and export any Retail $149 Wildcat! Data set to a variety of formats. It can also create statistical information in GIF format derived from any area for integration into HTML pages. This is included with all Business Editions and Enterprise Editions. wcWeb/db A client/server application development First release tool based on Sapphire/Web from Bluestone March 1997; Technologies. Allows you to create WIN US Suggested Server applications that provide secure Retail $799 access to data on a Microsoft SQL server or any ODBC-compatible database. Offers user authentication and access profiles for security and full control of data. AskSAM Indexes information in almost any format. First release Pro/Pub Gives you the power to provide access to December 1996; your askSam databases via the WIN Server. US Suggested Retail $499 12 HoTMetaL A special "sysop pricing" of HoTMetal PRO First release Pro V3 from SoftQuad, a full-featured /web March 1996; authoring tool for use with the WIN US Suggested Server. Retail $119 AUP A subscription to the online system that First release (Annual or allows you to download the latest Monthly) technological versions of the WIN ServerTM
Mustang has also developed and is freely distributing The Wildcat! Navigator to enable users to connect easily to the BBS/Web server created with Wildcat! 5. The Wildcat! Navigator is a graphical Windows front-end that offers the ease of use of the most popular Web browsers and a complete suite of clients that, among other features, allows easy "point and click" access to the other e-mail and threaded messaging areas, public and private chat conference areas, file libraries and instant paging. DOS The Company continues to offer its Wildcat! 4 BBS Product line for the huge installed base of users who still use DOS as their operating system. The Wildcat! 4 line is summarized in the following table. Wildcat! BBS Product Line for DOS
Product Description Release/Price Title Wildcat! 4 Offers support for a single incoming First release Single phone line. The single line version will August 1994; Line operate on a network, but only one latest release individual at a time on the LAN can make June 1996. use of the system. Designed as an entry US Suggested level BBS for the small business, retail $129 hobbyist or special interest group. Often used to make information available to a relatively small number of individuals or to a group that needs updated information on a periodic basis. Wildcat! 4 Adds support for up to 10 connections in First release MultiLine any combination of network or dial-up. August 1994; 10 Supports operation on multiple PCs on a latest release network or up to eight dial-up June 1996. connections on a single PC. Designed for US Suggested business applications where multiple dial- Retail $249 up or network connections are needed. Often used for dial-in support with maintenance performed locally using a network connection. Wildcat! 4 Extends support to manage up to 48 total First release MultiLine connections. If more than eight dial-up March 1995; 48 connections are desired, multiple Latest release networked PCs are supported with up to June 1996. eight incoming connections each. Designed US Suggested for the medium sized business network Retail $499 that desires to offer BBS services to both dial-up connections and most local area network employees. Often used as a network mail system capable of extending access to an outside sales force or customers. Wildcat! 4 Extends support to manage up to 250 total First release MultiLine connections. Multiple network and dial-up August 1994; Platinum connections are supported in the same latest release manner as the MultiLine 48 version. It June 1996. includes a one year subscription to the US Suggested Company's priority support program, Retail $799 Platinum Customer Access. Designed for the large corporate network or customers desiring a large number of dial-up connections. This version is often used for subscription BBSs and government applications. Wildcat! 4 The BBS Suite contains the Wildcat! First release BBS Suite MultiLine Platinum version (above) August 1994; packaged with all three optional add-on latest release products listed below. The individual BBS June 1996. Suite products are consolidated in a US Suggested single package. The Suite is designed Retail $999 for and marketed to the large corporate and government markets. It is presented as a single product that offers all possible BBS activities with one year of priority support. 13
Wildcat! BBS Optional Add-On Products for Dos
Product Description Release/Price Title wcPRO This utility program offers extended First release Utilities database processing and graphic analysis May 1989; for to the BBS sysop. It is used to latest release Wildcat! manipulate and evaluate many areas of BBS June 1996. operation, including the message section, US Suggested the file database, the user database and Retail $99 the answers given by callers to questionnaires. Using wcPRO, a sysop can export information from these areas to spreadsheet programs, databases or mailing lists. wcPRO also includes a statistical analysis function that generates information about BBS caller activity and performance that would be difficult to generate manually. wcGATE This program gives the BBS sysop the First release Internet & ability to send and receive Internet September 1993; MHS Gate- USENET messages and make them available latest release way to for reading and reply within Wildcat!. June 1996 Wildcat! It also serves as a gateway to process US Suggested messages to and from any application Retail $149 making use of the Novell MHS message protocol. It is capable of processing file transfers sent as message attachments in both MHS format and "unencoded" Internet files. First released in 1991 as wcMHS for Wildcat! 3, the product was updated later that year to add Internet mail support. wcCODE This utility is a programming environment First release Custom that allows the creation of customized August 1994; Online modules that can replace or add to the latest release Develop- functionality of a Wildcat! BBS. The June 1996. ment compiler creates executable code that can US Suggested Engine be directly linked to Wildcat!. It Retail $149 consists of a structured procedural language similar to BASIC that includes all Wildcat! internal functions. Using wcCODE, a sysop can create any number of customized applications to be executed by callers to the BBS. wcBILLING This utility allows system operators First release for (sysop) using Wildcat version 4.11 and June 1995; Wildcat above to track callers' use of their BBS latest release resources and bill for their use June 1996/ instantly. Sysops can design their BBSs US Suggested to require prepay, post-pay or a Retail $149 combination of the two for itemized resources used, such as reading and writing messages, uploading and downloading files, using doors or chat sessions, and more. Sysops may also bill their callers for each minute connected to their BBSs and use the utility as a management tool to track and create reports on the popularity of particular BBS resources and the frequent users of those resources.
14 Telecommunications Software The Qmodem product was first released in 1982, was acquired by the Company in 1991 and was reconfigured and released as QmodemPro in January 1992. Mustang has released four upgrades and seven minor revisions since that time. QmodemPro includes Windows 95, Windows 3.x and DOS products. QmodemPro Product Line
Product Description Release/Price Title QmodemPro Qmodem Pro for Windows 95 was the first First release for communications software offered for use August 1995; Windows 95 with Windows 95, allowing users to take latest release full advantage of their modems. The February 1997 program contains features beyond the US Suggested Windows 95 standard terminal program, Retail $129 including a phone book, a telnet client, programmable toolbar, graphic viewer, OLE 2.0 drag and drop handling, script language, macro keys, host mode, 35 terminal emulations, including ANSI, RIPscrip, VT100, VT220, VT320, IBM3270, and WYSE 30 through 185, and 11 file transfer protocols, including Zmodem, CompuServe B+, Ymodem, Xmodem and ASCII. The program's phone book gives the user a place to store his or her most dialed systems such as a BBS or mainframe, allows association of such numbers with an icon for easy point and click operation and access via the creation of desktop shortcuts. Among others, QmodemPro for Windows 95 features: a programmable toolbar, which can be customized from nearly 50 different program function icons than can be moved and arranged to create a personalized interface; a graphical file viewer, which can be used to display files in GIF (graphics interchange format, BMP (bit map) and JPEG (joint photographic experts group) formats, and even offers a zoom feature; and a powerful script language with quick-learn capabilities for automating online sessions and creating customer interfaces and offering both a compiler and debugger, which, coupled with a new syntax highlighting editor, makes code much easier to read and debug powerful applications with minimal effort. QmodemPro QmodemPro for Windows is a First release for telecommunications program for the December 1993; Windows Microsoft Windows v.3.x environment. It latest release supports 31 terminal emulations, May 1995. including Remote Imaging Protocol (RIP) US Suggested for displaying graphics. File transfers Retail $99 are performed using a choice of ten file transfer protocols including industry standards Kermit, Zmodem and CompuServe's B+. Multimedia sound support can be linked to many program functions. In addition, the package includes both send and receive FAX capabilities for use with any class 1 or 2 FAX modem. Documents may be faxed through QmodemPro for Windows or directly from within any Windows application. Program operation can be automated using the compiled script language (SLIQ) or the programmable macro keys. The installation program allows selection from over 170 popular modems. The Company began marketing a "Lite" version of the product to OEMs of modems and PCs in early 1995. 15 QmodemPro An individual package called a "Network 5 First release for Pack" is the unit of sale for this December 1994; Windows product. Each 5-Pack contains a single latest release Network set of program disks and five sets of May 1995. Edition documentation. The program is identical US Suggested to the standard Windows release but adds Retail $399 support for communicating with modems shared on a local area network using INT 14 and the NASI/NCSI standard. In addition, the Network Edition allows a single copy of QmodemPro for Windows to be installed on a shared network drive with individual configuration files and phone books located on private drives or directories. QmodemPro QmodemPro for DOS is a telecommunications First release for DOS program for the MS-DOS environment. It mid-1992; supports 15 terminal emulations, latest release including Remote Imaging Protocol (RIP) October 1994. for displaying graphics. File transfers US Suggested are performed using a choice of ten file Retail $99 transfer protocols including industry standards Kermit, Zmodem and CompuServe's B+. It supports FAX send with any class 1 or 2 FAX modem, has full mouse support, a script language and programmable key support for automating program operation. The installation program allows selection from over 170 popular modems. Also included is QMGate, an integrated program for automated mail gathering of CompuServe E-mail and Forum messages and MCI E-mail. QmodemPro for DOS includes a special version of the Company's Off-Line Xpress (OLX) for DOS mail reader. E-Mail Management Software
The Off-Line Xpress product was first released under the name "SLMR" in September 1990 and was acquired by the Company in January 1992. Mustang has provided three major upgrades and seven minor revisions since that time. Off-line Xpress is offered in both Windows and DOS versions. Off-Line Xpress (OLX) Product Line
Product Description Release/Price Title Off-Line This is a message management program First release Xpress designed for callers to any brand BBS March 1995; for using the QWK message format. Messages latest release Windows from these BBSs can be downloaded in a November 1995. compressed message packet, saving the US Suggested time required to read mail while Retail $49 connected to the system. OLX works with all BBS programs capable of generating the QWK format. It offers full mouse support, online help, and a built-in text editor which optionally can be replaced with any other editor or word processor if desired. Features include message reply, forwarding, carbon copies, text search, and spell checking of replies and several forms of automation of repetitive tasks and list processing. It also provides multimedia sound support for playing Wave audio (.WAV) files in connection with various program functions. Off-Line This product's features and functionality First release Xpress mirror the Windows product, but omit the January 1992; for DOS Wave audio capacity. latest release October 1994. US Suggested Retail $40
16 Product Development The markets for the Company's products are characterized by rapidly changing technology and frequent new product introductions. Accordingly, the Company believes its future prospects depend on its ability not only to enhance and successfully market its existing products, but also to develop and introduce new products in a timely fashion which achieve market acceptance. There can be no assurance that the Company will be able to identify, design, develop, market or support such products successfully or that the Company will be able to respond effectively to technological changes or product announcements by competitors. In particular, if the Company fails to successfully anticipate customer demand for new products or product enhancements or upgrades or otherwise makes incorrect product development decisions, the Company could be adversely affected both by the loss of anticipated revenue and, possibly, its competitors' increase in their installed base of customers. These adverse results could be particularly significant if the Company were to make a number of incorrect product development decisions in succession or within a short period of time. Mustang has on a number of occasions experienced delays in the commencement of commercial shipments of new products and enhancements, resulting in delay or loss of product revenues. From time to time, Mustang and others may announce new products, capabilities or technologies that have the potential to replace or shorten the life cycle of Mustang's existing product offerings. There can be no assurance that announcements of currently planned or other new product offerings will not cause customers to defer purchasing existing Company products or cause distributors to return products to Mustang. In addition, programs as complex as the software products offered by Mustang may contain undetected errors or "bugs" when they are first introduced or as new versions are released. Delays or difficulties associated with new product introductions or product enhancements, or the introduction of unsuccessful products or products containing undetected "bugs", could have a material adverse effect on Mustang's business, operating results and financial condition. The Company continually monitors and explores emerging telecommunications and messaging technology and believes that product development must be tightly linked to market needs. The Company anticipated the shift from DOS to Windows and successfully released a Windows alternative to its QmodemPro (DOS) product, maintaining momentum as buyer preferences changed. Mustang's product development is now centered in Windows NT and Windows 95 and directly targets the expanded use of international networks, including the Internet. For the years ended December 31, 1995 and 1996, the Company expended $845,896 and $980,413, respectively, on research and development, none of which was customer funded. The Company expected that the release of Windows 95 by Microsoft would generate an immediate demand for products capable of making use of its new features, and devoted a substantial portion of its research and development expenditures to such products. Product development for the QmodemPro line included a release of QmodemPro 2.0, specifically for Windows 95 and jointly released with Microsoft's release of Windows 95 on August 22, 1995. The Company also developed a version of QmodemPro for Windows NT v.4.0 and released this product simultaneously with the release by Microsoft Windows NT v.4.0. Prior to its current development of software for Windows 95 and Windows NT, Mustang did not develop a BBS software program for Windows, believing that the current and earlier versions of Windows were unable to handle competently most multiple telecommunications sessions. The capabilities of the Windows NT and Windows 95 platforms have the ability to support the next generation of BBS/Web Server technology. Accordingly, the Company has devoted and is devoting a substantial portion of its research and development resources to the Windows 95 and Windows NT environments and now offers a suite of Web server and internet/intranet utility applications for Windows 95 and Windows NT. The Company completed its development of, and released several add-on products for Wildcat! 5, including: wcExchange Client, which provides e-mail integration from Wildcat!'s messaging system to Microsoft's Exchange platform allowing LAN users to seamlessly access their Web server e-mail directly from the in-box of Microsoft Exchange; wcSubscribe, which provides an electronic gateway to process charges via credit card or check online; wcCasino, which will offer games for interactive muliplayer gaming; wcReports, which enables the exporting of data and usage statistics; and Wildcat! Custom Connector, which allows customization and personalization of the Wildcat! Navigator with company or organization logos and graphics. 17 Sales, Marketing and Distribution Mustang distributes its product line through distributors and resellers, through OEMs who bundle one of the Company's software products with their own products, and through direct sales to end users. Mustang relies on its distribution network for a substantial portion of its sales. The Company's distributors also represent other lines of products, some of which may be competitive with those of the Company. Mustang's distributors are not within its control and are not obligated to purchase products from the Company. While Mustang encourages its distributors to focus primarily on the promotion and sale of the Company's products, there can be no assurance that these distributors will not give higher priority to the sale of other products, including products developed by existing or potential competitors. Furthermore, there can be no assurance as to the continued viability or stability of the Company's distributors, Mustang's ability to retain its existing distributors (the agreement with each of which may be terminated upon prior notice ranging from 30 to 90 days), or the Company's ability to add or retain new distributors. In the United States, the Company sells primarily through three distributors: Ingram Micro Inc. ("Ingram"), Merisel Americas, Inc. ("Merisel") and DistribuPro, Inc., which sells the Company's products to such resellers as CompUSA, Egghead, Computer City, Software Etc., Babbages, Best Buy, Micro Center, Media Play, Fry's Electronics and Office Max. The Company does not grant specific territories to its domestic distributors. The Company seeks to ensure that all of its distributors are knowledgeable with respect to the Company's products. Mustang's domestic distribution agreements typically provide for terms of one to two years, with automatic one-year renewals and earlier termination upon 30 to 90 days' written notice. The agreements generally provide price protection to the distributors in the event that the Company offers its products at a lower price to any other party. One of these agreements also provides for rebates and other sales incentives if certain purchase requirements are met. During 1995 and 1996, sales to Ingram accounted for 47% and 7%, respectively, of the Company's revenues and during 1995 and 1996, sales to Merisel accounted for 11% and 6%, respectively, of total revenues. No other customer accounted for over 10% of Mustang's revenues in 1995 or 1996. The loss of Ingram or Merisel, or a material reduction in orders from either of them, would have a materially adverse effect on the Company's operations. Internationally, the Company sells through distributors who purchase, warehouse and sell software. Three of Mustang's four international distributors have exclusive distribution rights to specific countries throughout the world, but such rights become non-exclusive at the Company's option if the distributor fails to meet certain minimum purchase obligations. The fourth distributor has nonexclusive rights. The distribution agreements have terms of one or two years from commencement; however, the Company has the right to terminate the distribution agreements within 30 or 60 days of giving notice if the distributors fail to meet the minimum purchase obligations, and either party has the right to terminate the agreement upon written notice in the event of a breach which is not cured within 30 or 60 days after receiving written notice. In 1995 and 1996, revenues from international sales represented approximately 9.1% and 15%, respectively, of total revenues. International sales are subject to inherent risks including exposure to currency fluctuations, regulatory requirements, political and economic instability and trade restrictions. Although Mustang's sales are typically made in U.S. dollars, a weakening in the value of foreign currencies relative to the U.S. dollar could have an adverse impact on the Company by increasing the effective price of the Company's products in its international markets. In addition, lower sales levels in Europe, which typically occur during the summer months, may adversely affect the Company's business. Direct sales by the Company are made by mail order to end users who are solicited through Web Server notices and mailings to Mustang's installed customer base, catalogs and media advertising. Direct sales accounted for 35% and 66% of revenues during the years ended December 31, 1995 and 1996, respectively. Sales to OEMs and business users requiring volume purchases are conducted directly by the Company and are negotiated on a case-by-case basis. Mustang's internal sales force is responsible for expanding and improving the sales volume generated by its sales channels. The sales force is also responsible for communicating the Company's capabilities to targeted audiences, solving application and implementation challenges for resellers and users, as well as coordinating orders. The sales group includes a Customer Service Department which coordinates and processes orders and seeks to ensure customer satisfaction through the timely communication of accurate information to customers. 18 Mustang's marketing efforts are aimed at educating the end user about the capabilities of telecommunications applications in general, Web Server and Internet/Intranets in particular. The Company's activities in media advertising, direct mail, trade shows and free demonstration products are often geared toward explaining product capabilities. The Company in-house public relations department places advertising, arranges editorial comment and places articles regarding Mustang's products. Mustang also distributes free copies of previous versions of its products in order to introduce customers to its product line. These "test-drive" releases are fully supported by the Company's technical support department where "test-drive" support calls are treated as a sales opportunity. Mustang believes that customer service and support is an effective marketing tool. The technical support department is one of the largest departments in the Company, comprising approximately one-fourth of its employees. Mustang provides 45 days of free access (excluding toll charges) to customer support by telephone and through its Web Server. In March 1996, Mustang expanded its "Platinum Customer Access Program," providing a choice of toll-free access to technical support personnel for a charge of $450 per year or "pay-as-you go" access via a "900" telephone number. The Company's marketing services group handles advertising and public relations. It creates advertising, brochures and manuals, manages trade show exhibits and places articles highlighting applications of Mustang products in trade and industry publications. Mustang also provides samples of its products to authors of books covering the use of computers and Web Servers to communicate and participates in online publications. A technical support group assists the Company's marketing efforts by providing a hot line staffed by experienced technical personnel. Typically, orders are shipped within 48 hours; accordingly, backlog is not material to the Company's business or operations. Medium Duplication and Packaging; Suppliers CD-ROM and disk duplication and packaging are typically outsourced, but can still be performed at the Company's facilities in Bakersfield, California. Upgrades and new product releases often generate order volumes that require outside suppliers to provide these services. All manuals and boxes are designed in house and produced using outside suppliers. The Company purchases from various suppliers numerous CD- ROMs and diskettes that are used in the distribution of its software. Because of the availability of alternative sources of supply, the Company believes it is not necessary to enter into written agreements with its suppliers. Although management believes there are numerous sources for CD-ROMs, the Company currently relies on four sources of supply. As such, the Company is vulnerable to changes in product quality and pricing by its suppliers. Future disruptions in the supply of suitable CD-ROMs from the Company's principal suppliers, if prolonged, could have a material adverse effect on the Company's results of operations unless and until the Company were able to obtain suitable replacements. Competition The market for the Company's products is intensely competitive. Mustang competes generally on the basis of product features and functions, technical support and other related services, ease of product setup and use and price/performance. The Company competes with a number of independent software suppliers who offer Web Server or telecommunications software as or among their product line(s). Many of the Company's existing or potential competitors have longer operating histories and significantly greater financial, technical, sales, marketing and other resources than the Company. Certain of these companies, may also have greater name recognition and a larger installed customer base than the Company. Mustang's competitors could in the future introduce products with more features and lower prices than the Company's products. These organizations could also bundle existing or new products with other products or systems to compete with the Company. In addition, if the market for telecommunications software grows as expected by the Company, a number of companies with significantly greater resources than Mustang could attempt to enter or increase their presence in the market by acquiring or forming strategic alliances with competitors of the Company. For example, Microsoft does not currently offer Internet/Intranet functionality or other telecommunications programs that the Company considers comparable or similar to Wildcat! or QmodemPro. To the extent that Microsoft or others incorporate applications comparable or perceived as comparable to those offered by Mustang into Windows or other products (or separately offer such products), sales of Mustang's products could be materially adversely affected, and there can be no assurance that any such action by Microsoft or others would not render Mustang's Windows-based products noncompetitive or obsolete. 19 Proprietary Rights The Company regards its software as proprietary and attempts to protect it with copyrights, trademarks, restrictions on disclosure, copying and transferring title and enforcement of trade secret laws. Mustang has no patents and existing copyright laws afford only limited practical protections for its software. Furthermore, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as do the laws of the United States. Mustang licenses its products primarily under "shrink wrap" license agreements that are not signed by licensees and therefore may be unenforceable under the laws of certain jurisdictions. Despite its precautions, it may be possible for unauthorized third parties to copy certain portions of the Company's products or to obtain and use information that the Company regards as proprietary. Although the Company relies to a degree on the legal protections available to protect its proprietary rights, Mustang believes that, due to the rapid pace of innovation within its industry, factors such as the technological and creative skills of its personnel and its reputation for product support are as, if not more, important to the Company's continued success. As the number of software products increases and the functionality of these products further overlaps, Mustang believes that such software will increasingly become the subject of claims that such software infringes the rights of others. Although the Company does not believe that its products infringe on the rights of third parties, there can be no assurance that third parties will not assert infringement claims against the Company in the future or that any such assertion will not result in costly litigation or require the Company to obtain a license to intellectual property rights of such parties. In addition, there can be no assurance that such licenses will be available on reasonable terms, or at all. Online telecommunications, including through Web Servers, is a relatively new and evolving industry. As such, industry participants may be subject to certain legal risks, some of which are not yet fully developed. For example, court cases indicate that Webmasters may, under certain circumstances, have direct or vicarious liability for copyright infringement and certain torts committed by Web users, including libel and defamation. It is possible that developing legal principles could adversely affect the Company by increasing the legal risks associated with owning and operating a Website, thereby making Websites less attractive relative to other telecommunications methods or formats. Employees On December 31, 1996 the Company employed 40 persons (39 of which were employed full-time), of which 19 were involved in engineering and technical support, 6 in processing orders and shipping/receiving, 9 sales and marketing and 6 in general administration. None of the Company's employees is covered by a collective bargaining agreement. The Company considers its relationship with its employees to be excellent. 20 Item 2. Properties The Company's executive offices and sales, marketing and production facilities occupy an approximately 12,000 square foot building located in Bakersfield, California. This building is leased from the Company's principal shareholders, James A. Harrer and Richard J. Heming. See Item 12. Certain Relationships and Related Transactions. Item 3. Legal Proceedings Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. 21 Part II Item 5. Market for Common Equity and Related Stockholder Matters Shares of the Company's Common Stock have traded on the over-the-counter market since the Company's initial public offering on April 5, 1995 and are included in The Nasdaq National Market under the symbol "MSTG." The following table sets forth for the quarters indicated the high and low last reported sale prices as reported by The Nasdaq National Market.
High Low 1995 Second Quarter (from April 5) $ 8.25 $ 4.88 Third Quarter 10.00 4.75 Fourth Quarter 11.50 5.75 1996 First Quarter $ 9.00 $ 5.50 Second Quarter 7.50 4.00 Third Quarter 3.75 2.25 Fourth Quarter 2.63 1.00
The 3,374,967 shares of Common Stock of the Company outstanding as of March 11, 1997 were held of by 102 shareholders of record, who, the Company believes, held for in excess of 400 beneficial holders. Prior to its initial public offering, the Company had paid cash dividends on its Common Stock, but has not done so since then and anticipates that it will not pay cash dividends in the foreseeable future. 22 Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the Financial Statements and Notes thereto appearing elsewhere in this Prospectus. General Mustang is a leading telecommunications software company that designs, develops, markets and supports software which permits computer users to communicate with each other online using standard phone lines and LAN and WAN connections. Mustang's products also provide connectivity to the resources and emerging commercial applications of the Internet worldwide network. The Company's products include the Wildcat! line of WEB and FTP software, the QmodemPro line of telecommunications software and the Off-Line Xpress series of E-mail management software. All of the Company's programs operate under DOS and most have companion versions for Microsoft Windows. All are specifically designed to operate in a network environment to take advantage of resource sharing and distributed processing used in multiple-PC networks. Because Mustang generally ships its telecommunications software products within a short period after receipt of an order, it typically does not have a material backlog of unfilled orders, and revenues in any quarter or other period are substantially dependent on orders booked in that period. Orders booked during any particular period are substantially dependent upon numerous factors, including the scheduled release of new products and product enhancements and updates by Mustang and its competitors, the release or anticipated release of complementary products by other software suppliers, market acceptance of such products, enhancements and updates, and numerous other factors, many of which are beyond the Company's control. In addition, Mustang's expense levels for each quarter are, to a significant extent, fixed in advance based upon the Company's expectations as to net sales during that quarter. Generally, Mustang is not able to adjust spending timely enough to compensate for unexpected shortfalls in net sales. Further, as a result of these factors, any delay in product introductions, whether due to internal delays or delays caused by third party difficulties or any significant shortfall of demand in relation to Mustang's expectations would have an almost immediate adverse impact on Mustang's operating results and on its ability to maintain profitability in a quarter. The following table presents unaudited selected financial data for each of the eight quarters in the period ended December 31, 1996.
Year ended December 31, 1995 1996 First Second Third Fourth First Second Third Fourth Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter (In thousands, except per share data) (unaudited) Summary of Operations: Revenue $1,051 $933 $2,603 $233 $1,203 $1,266 $755 $586 Gross profit 860 754 2,192 82 986 1,019 640 519 Operating expenses 834 996 1,648 1,863 1,712 1,729 1,789 1,576 Income (loss) from operations 26 (241) 543 (1,781) (726) (710) (1,149) (1,057) Net income (loss) 12 (117) 419 (1,410) (651) (649) (1,118) (1,035) Net income (loss) per common share .01 (.03) .12 (.42) (.19) (.19) (.33) (.31)
23 Results of Operations: The following table sets forth, for the years ended December 31, 1994, 1995 and 1996, income statement data of the Company expressed in dollars and as a percentage of revenues and the percentage increase or decrease in the dollar amounts of such data in 1995 from 1994 and 1996 from 1995:
Year ended December 31, Percentage Increase (Decrease) in 1994 1995 1996 Dollar Amounts in 1995 1996 Percent of Percent of Percent of from from Amount Revenue Amount Revenue Amount Revenue 1994 1995 Revenue $4,798,454 100.0% $4,819,999 100.0% $3,810,240 100.0% 0.4% (20.9%) Cost of Revenue 780,222 16.3% 932,000 19.3% 646,199 16.9% 19.5% (30.7%) - - -------------------------------------------------------------------------------------------------------------------------------- Gross profit 4,018,232 83.7% 3,887,999 80.7% 3,164,041 83.1% (3.2%) (18.7%) Operating expenses: Research and development 460,390 9.6% 845,896 17.5% 980,413 25.7% 83.7% 15.9% Selling and marketing 1,132,601 23.6% 2,516,031 52.2% 3,583,958 94.0% 122.1% 42.4% General and administrative 1,621,023 33.8% 1,979,769 41.1% 2,241,695 58.8% 22.1% 13.2% - - -------------------------------------------------------------------------------------------------------------------------------- Income (loss) from operations 804,218 16.8% (1,453,697) (30.2%) (3,642,025) (95.6%) (280.8%) (250.5%) Other income (expense), net (43,128) (0.9%) 192,134 4.0% 190,000 5.0% 545.5% (1.1%) - - ------------------------------------------------------------------------------------------------------------------------------- Income (loss) before provision for income taxes 761,090 15.8% (1,261,563) (26.2%) (3,452,025) (90.6%) (265.8%) (273.6%) Benefit (provision) for income taxes (212,000) (4.4%) 164,711 3.4% (800) 0.0% 177.7% (95.5%) - - ------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 549,090 11.4% $(1,096,852) (22.8%) $(3,452,825) (90.6%) (299.8%) (314.8%) = ===============================================================================================================================
Comparison of Years Ended December 31, 1996 and 1995 Revenues for the year ended December 31, 1996 were $3,810,240 a decrease of $1,009,759 or 20.9% less than revenues for the year ended December 31, 1995. As a percentage of revenues by product category for the year 1996 vs. 1995 showed the QmodemPro line at 3% and 51%, the Wildcat! line at 95% and 45%, and other products at 2% and 4%, respectively. The increase in Wildcat! revenues was directly related to the launch of Wildcat! v. 5 for Windows 95/NT in March 1996. The large percentage of QmodemPro revenues in 1995 was due to the release of QmodemPro for Windows 95 in August 19953. Gross profit for the year decreased from $3,887,999 in 1995 to $3,164,041 in 1996, but increased as a percentage of revenues from 80.7% in 1995 to 83.1% in 19964. The primary reason that gross profit increased as a percentage of revenues in 1996 is that cost of sales declined chiefly as a result of efficiencies achieved by (i) outsourcing production of the (e.g., CD-ROMS), manuals and packaging of Company's products and (ii) electronically distributing updates of the Company's WinServer products rather than using mailings as done in the past. Research and development expenses increased $134,517 in 1996 from 1995, and increased as a percentage of revenues from 17.5% in 1995 to 25.7% in 1996. The increase in research and development expenses is attributable to increases in engineers' salaries and the hiring of additional engineers. To maintain its competitive market position, the Company expects to invest a significant amount of its resources for the development of new products and product enhancements and to continue recruiting and hiring experienced software developers, while at the same time considering the acquisition of software businesses and technologies. Selling and marketing expenses for 1996 were $3,583,958, an increase of $1,067,927 over 1995, and they increased as a percentage of revenues from 52.2% in 1995 to 94.0% in 1996. The items primarily accounting for the increase were advertising and promotional costs for existing products and the launch of Wildcat! v.5 for Windows 95/NT in March 1996 as well as the release of nine add-on products to the Wildcat! line. 24 General and administrative expenses increased for 1996 over the previous year, from $1,979,769 in 1995 to $2,241,695 in 1996, and increased as a percentage of revenue from 41.1% in 1995 to 58.8% in 1996. The items primarily accounting for the increase were higher personnel and facility costs associated with increased operations and expenditures to support the Company's infrastructure and additional costs associated with the Company becoming a public company in April 1995. Other income (expense) decreased only $2,134 from other income (net) of $192,134 in 1995 to other income (net) of $190,000 in 1996. Benefit (provision) for income taxes decreased $165,511, from a benefit of $164,711 in 1995 to a provision of $800 in 1996. The tax benefit in 1995 was due to the utilization of the 1995 net operating loss to recoup taxes paid in prior years. The Company will have net operating losses and research and development credit carryforwards available in subsequent years. Comparison of Years Ended December 31, 1995 and 1994 Revenues for the year ended December 31, 1995 were $4,819,999 an increase of $21,545 or 0.4% over revenues for the year ended December 31, 1994. As a percentage of revenues by product category for the year 1995 vs. 1994 showed the QmodemPro line at 51% and 33%, the Wildcat! line at 45% and 66%, and other products at 4% and 1%, respectively. The increase in QmodemPro revenues was directly related to the launch of QmodemPro for Windows 95 in August 1995. The large percentage of Wildcat! revenues in 1994 was due to the release of Wildcat! Version 4 in July 1994. Gross profit for the year decreased from $4,018,232 in 1994 to $3,887,999 in 1995, and decreased as a percentage of revenues from 83.7% in 1994 to 80.7% in 1995. The decrease in gross profit percentage was primarily the result of the cost of additional auto update plan mailings and a small write off of inventory associated with old versions of Qmodem and Wildcat! in 1995. Research and development expenses increased $385,506 in 1995 from 1994, and increased as a percentage of revenues from 9.6% in 1994 to 17.5% in 1995. The increase in research and development expenses is attributed to the hiring of additional engineers, increases in engineers' salaries and increased square footage for the engineering department completed in October 1994. Research and development is concentrated in Windows NT and Windows 95 and directly targets the expanded use of international networks, including the Internet. The Company expects that the release of Windows 95 by Microsoft will generate demand for products capable of making use of its new features, and has devoted a substantial portion of its research and development expenditures to such products. Selling and marketing expenses for 1995 were $2,516,031, an increase of $1,383,430 over 1994, and they increased as a percentage of revenues from 23.6% in 1994 to 52.2% in 1995. The items primarily accounting for the increase were advertising and promotional costs of existing products and the launch of QmodemPro for Windows 95 in August 1995. The Company also added to the marketing team by hiring a Vice President of Sales and Marketing in November 1995 and director of sales in September 1995. The headcount in the sales and marketing department increased from three at the end of 1994 to 14 at the end of 1995. General and administrative expenses increased for 1995 over the previous year, from $1,621,023 in 1994 to $1,979,769 in 1995, and increased as a percentage of revenue from 33.8% in 1994 to 41.1% in 1995. The increase was primarily from increases in salaries, additions to personnel and additional costs associated with being a public company. 25 Other income (expense) increased $235,262, from net expense of $43,128 in 1994 to net income of $192,134 in 1995. The change was primarily due to the investment income from the net proceeds of the Company's initial public offering. Benefit (provision) for income taxes decreased $376,711, from provision of $212,000 in 1994 to a benefit of $164,711 in 1995. The tax benefit in 1995 was due to the utilization of the 1995 net operating loss to recoup taxes paid in prior years. The Company will have net operating loss and research and development credit carryforwards available in subsequent years. Liquidity and Capital Resources The Company finances its operations from the proceeds of its initial public offering and cash flows from operations. Cash and short-term investment balances at December 31, 1996 were approximately $2,920,000, a decrease of approximately $2,695,000 from December 31, 1995. Cash used in operating activities for 1996 was approximately $2,610,000, as compared to approximately $772,000 used in 1995. The principal reasons for the decrease in cash was the net loss in 1996 of approximately $3,453,000 partially offset by increases in cash resulting from the realization of accounts receivable and income tax receivable of approximately $310,000 and $230,000, respectively, and increases in accounts payable of $115,000. Cash provided from investing activities in 1996 was approximately $940,000. The net change in investments of $1,000,000 accounted for the majority of the change. This resulted from the conversion of a long term investment in 1995 to a short term investment in 1996. The Company provided approximately $6,500,000 in financing activities in 1995 and used $26,000 in 1996. The primary financing activity in 1996 was payments on the Company's capital lease obligation, while in 1995 the financing activity consisted of the proceeds of the Company's initial public offering of Common Stock. Mustang's distributors and direct purchasers are generally permitted a 30-day right to return to Mustang the software purchased by them. Although such returns are generally exchanged for other products or credited against future orders, Mustang may be required to accept major product returns for cash or a credit against accounts receivable. Moreover, the Company may on occasion grant more liberal rights of return to its distributors, particularly where new products or major upgrades are introduced and sales do not meet expectations. Product returns increased from approximately $1,000,000 in 1995 to approximately $1,200,000 in 1996. The Company has reserved approximately $400,000 at December 31, 1996 for future returns and other collection issues, down from $425,000 so reserved at December 31, 1995. Although management believes that Mustang has provided adequate allowances for exchanges and returns, there can be no assurance that actual returns or exchanges will not exceed Mustang's allowances, particularly in connection with the introduction of new products or enhancements. Mustang intends to introduce new or enhanced products in the future. Such future product introductions may result in higher product returns and exchanges due to the risks inherent in the introduction of such products. Any product returns or exchanges in excess of recorded allowances could have a material adverse effect on Mustang's business, operating results and financial condition. Longer term cash requirements, other than normal operating expenses, are anticipated for development of new software products and enhancements of existing products, launching new products and enhancements, financing anticipated growth and the possible acquisition of businesses, software products or technologies complementary to the Company's business. The Company believes that its existing cash, cash equivalents, marketable securities, cash generated from operations and available line of credit, will be sufficient to meet the Company's working capital and capital expenditure requirements for at least the next 12 months. The net proceeds remaining from the Company's initial public offering, current cash balances and cash flow from operations, are expected to be sufficient to meet the Company's working capital and capital expenditure requirements for at least the next 12 months. 26 Item 7. Financial Statements The following financial statements are filed as part of this Report:
Page Report of Independent Public Accountants 27 Balance Sheets as of December 31, 1995 and 1996 28 Statements of Operations for the Years Ended December 31, 1994, 1995 and 1996 29 Statements of Shareholders' Equity for the Years Ended December 31, 1994, 1995 and 1996 30 Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996 31 Notes to Financial Statements 32
Item 8. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. 27 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Mustang Software, Inc.: We have audited the accompanying balance sheets of MUSTANG SOFTWARE, Inc. (a California corporation) as of December 31, 1995 and 1996, and the related statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Mustang Software, Inc. as of December 31, 1995 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Los Angeles, California February 6, 1997 28 MUSTANG SOFTWARE, INC. BALANCE SHEETS ASSETS
December 31, 1995 1996 CURRENT ASSETS: Cash and cash equivalents $ 4,615,404 $2,920,231 Investments 1,000,000 -- Accounts receivable, net of allowance for doubtful accounts of $425,000 and $400,000 at December 31, 1995 and 1996, respectively 352,174 63,529 Income taxes receivable 404,340 173,540 Inventories 230,486 228,136 Prepaid expenses 28,945 55,500 - - ------------------------------------------------------------------------------------------------------------------------------- Total current assets 6,631,349 3,440,936 - - ------------------------------------------------------------------------------------------------------------------------------- PROPERTY AND EQUIPMENT: Property and equipment 1,270,765 1,256,337 Accumulated depreciation (278,604) (393,337) - - ------------------------------------------------------------------------------------------------------------------------------- Net property and equipment 992,161 863,000 - - ------------------------------------------------------------------------------------------------------------------------------- OTHER ASSETS: Capitalized software development costs, net 22,483 5,475 Other 30,882 1,300 - - ------------------------------------------------------------------------------------------------------------------------------- Total other assets 53,365 6,775 - - ------------------------------------------------------------------------------------------------------------------------------- $ 7,676,875 $ 4,310,711 = =============================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 681,547 $ 797,214 Current portion of capital lease 56,057 61,839 Accrued payroll 98,929 95,000 Accrued liabilities 58,666 68,056 Accrued warranty and support 45,000 45,000 Deferred revenue 88,500 80,000 - - ------------------------------------------------------------------------------------------------------------------------------- Total current liabilities 1,028,699 1,147,109 - - ------------------------------------------------------------------------------------------------------------------------------- CAPITAL LEASE OBLIGATION, net of current portion 399,060 337,221 - - ------------------------------------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (Note 7) SHAREHOLDERS' EQUITY: Preferred stock, no par value: Authorized--10,000,000 shares None issued or outstanding -- -- Common stock, no par value: Authorized--30,000,000 shares Issued and outstanding--3,356,300 and 3,374,967 shares at December 31, 1995 and 1996, respectively 6,598,632 6,628,722 Accumulated deficit (349,516) (3,802,341) - - ------------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 6,249,116 2,826,381 - - ------------------------------------------------------------------------------------------------------------------------------- $ 7,676,875 $ 4,310,711 = =============================================================================================================================== The accompanying notes are an integral part of these balance sheets.
29 MUSTANG SOFTWARE, INC. STATEMENTS OF OPERATIONS
Year Ended December 31, 1994 1995 1996 REVENUE $ 4,798,454 $ 4,819,999 $ 3,810,240 COSTS OF REVENUE 780,222 932,000 646,199 - - ------------------------------------------------------------------------------------------------------------------------------- Gross profit 4,018,232 3,887,999 3,164,041 - - ------------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Research and development 460,390 845,896 980,413 Selling and marketing 1,132,601 2,516,031 3,583,958 General and administrative 1,621,023 1,979,769 2,241,695 - - ------------------------------------------------------------------------------------------------------------------------------- Total operating expenses 3,214,014 5,341,696 6,806,066 - - ------------------------------------------------------------------------------------------------------------------------------- Income (Loss) from operations 804,218 (1,453,697) (3,642,025) - - ------------------------------------------------------------------------------------------------------------------------------- OTHER INCOME (EXPENSE): Interest expense (52,803) (47,607) (42,663) Interest income 6,306 241,012 252,620 Other 3,369 (1,271) (19,957) - - ------------------------------------------------------------------------------------------------------------------------------- Total other income (expense) (43,128) 192,134 190,000 - - ------------------------------------------------------------------------------------------------------------------------------- Income (Loss) before provision for income taxes 761,090 (1,261,563) (3,452,025) PROVISION (BENEFIT) FOR INCOME TAXES 212,000 (164,711) 800 - - ------------------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ 549,090 $ (1,096,852) $ (3,452,825) = =============================================================================================================================== NET INCOME (LOSS) PER COMMON SHARE $ .26 $(.36) $ (1.03) = =============================================================================================================================== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 2,131,000 3,049,825 3,360,245 = =============================================================================================================================== The accompanying notes are an integral part of these financial statements.
30 MUSTANG SOFTWARE, INC. STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Accumulated Shares Amount Deficit Total BALANCE, December 31, 1993 2,106,000 $ 13,344 $ 198,246 $ 211,590 Net income -- -- 549,090 549,090 - - ------------------------------------------------------------------------------------------------------------------------------- BALANCE, December 31, 1994 2,106,000 13,344 747,336 760,680 Issuance of stock, net of offering cost of approximately $1,540,000 1,250,000 6,584,538 -- 6,584,538 Exercise of stock options 300 750 -- 750 Net loss -- -- (1,096,852) (1,096,852) - - ------------------------------------------------------------------------------------------------------------------------------- BALANCE, December 31, 1995 3,356,300 6,598,632 (349,516) 6,249,116 Exercise of stock options 2,300 5,750 -- 5,750 Issuance of stock, ESPP 16,367 24,340 -- 24,340 Net loss -- -- (3,452,825) (3,452,825) - - ------------------------------------------------------------------------------------------------------------------------------- BALANCE, December 31, 1996 3,374,967 $ 6,628,722 $ (3,802,341) $ 2,826,381 = =============================================================================================================================== The accompanying notes are an integral part of these financial statements.
31 MUSTANG SOFTWARE, INC. STATEMENTS OF CASH FLOWS
Year Ended December 31, 1994 1995 1996 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 549,090 $ (1,096,852) $ (3,452,825) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 114,316 184,864 196,176 Loss on sale of property and equipment -- 1,271 19,958 Provision for losses on accounts receivable 10,000 400,000 (25,000) Changes in assets and liabilities: Accounts receivable (292,462) (248,371) 313,645 Inventories (141,624) 8,420 2,350 Prepaid expenses -- (28,945) (26,555) Deferred taxes (33,500) 33,500 -- Other assets -- (20,482) 19,182 Accounts payable 14,708 466,890 115,667 Accrued payroll (40,953) 5,471 (3,929) Accrued liabilities 14,825 4,562 9,390 Income taxes receivable/payable 48,931 (522,835) 230,800 Accrued warranty and support 20,000 (25,000) -- Deferred revenue (36,600) 65,800 (8,500) - - ------------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by operating activities 226,731 (771,707) (2,609,641) - - ------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of property and equipment -- 3,000 9,400 Purchase of software -- (7,000) -- Purchases of property and equipment (166,765) (333,093) (68,965) Net change in investments -- (1,000,000) 1,000,000 - - ------------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by investing activities (166,765) (1,337,093) 940,435 - - ------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of stock -- 6,585,288 30,090 Payments on capital lease obligation (26,000) (70,883) (56,057) - - ------------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities (26,000) 6,514,405 (25,967) - - ------------------------------------------------------------------------------------------------------------------------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 33,966 4,405,605 (1,695,173) CASH AND CASH EQUIVALENTS, beginning of year 175,833 209,799 4,615,404 - - ------------------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, end of year $ 209,799 $ 4,615,404 $ 2,920,231 = =============================================================================================================================== SUPPLEMENTAL DISCLOSURES: Interest paid $52,803 $47,607 $42,663 Taxes paid $197,000 $335,000 $800 The accompanying notes are an integral part of these financial statements.
32 MUSTANG SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS 1. Line of Business Mustang Software, Inc. ("MSI" or the "Company") is a telecommunications software company that designs, develops, markets and supports software for the personal computer. Similar to most companies in this line of business, the Company's products are subject to rapid technological change. Because of technological changes, the Company needs to continuously expend resources to develop new software. In April 1995, the Company completed an initial public offering resulting in net proceeds of approximately $6,500,000. A large portion of the Company's revenue over the three years presented has been derived from sales to one distributor, Ingram Micro Inc. ("Ingram"). Revenue from Ingram accounted for 37%, 47% and 7% of 1994, 1995 and 1996 revenue, respectively. 2. Summary of Significant Accounting Policies a. Revenue Recognition The Company recognizes revenues related to software licenses and software maintenance in compliance with the American Institute of Certified Public Accountants (AICPA) Statement of Position No. 91-1 "Software Revenue Recognition," and Financial Accounting Standards Board (FASB) Statement 48 "Revenue Recognition When Right of Return Exists." Product revenue is recorded at the time of shipment net of estimated allowances for bad debts and for product returns and exchanges. Any insignificant post-contract support obligations are accrued for at the time of the sale. Maintenance and product upgrade agreement revenues are recognized on a straight-line basis over the life of the maintenance or product upgrade agreement, generally twelve months. Returns increased from approximately $1,000,000 in 1995 to approximately $1,200,000 in 1996. Management believes that the approximately $400,000 provided for additional returns is adequate at December 31, 1996. b. Cash and cash equivalents Cash consists of demand deposits with financial institutions. The Company considers all highly liquid short-term investments with original maturities of three months or less to be cash equivalents for the purposes of the balance sheet and statement of cash flows. c. Investments At December 31, 1995, investments consisted of a $1,000,000 corporate commercial paper, which was a held-to-maturity investment. This investment was valued at amortized cost which approximated market and matured in February 1996. At December 31, 1996 no investments were held with original maturities of more than three months. d. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market and consist primarily of manuals, computer disks, and shipping containers. e. Software Development Costs Under the provisions of Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed," the Company is required to capitalize software development costs when "technological feasibility" of the product has been established and anticipated future revenues assure recovery of the capitalized amounts. Because of the relatively short time period between "technological feasibility" and product release, relatively small amounts of software development costs have been capitalized. The ongoing assessment of recoverability of capitalized software development costs requires considerable judgment by management with respect to certain external factors, including, but not limited to, technological obsolescence, anticipated future revenues, estimated economic life, changes in software and hardware technology, and patent and trademark law and litigation. Amortization of capitalized software development costs is provided over an economic life of 36-60 months. Amortization expense was $15,600, $15,700 and $17,000 for the years ended December 31, 1994, 1995 and 1996, respectively. 33 f. Warranties The Company provides a warranty of 90 days. A provision for warranty expense is recorded at the time of shipment. To date, the Company has not experienced any significant warranty claims. g. Property and Equipment Property and equipment consists of the following:
December 31, 1995 1996 Building $ 552,000 $552,000 Vehicles 11,149 11,149 Office Equipment 123,133 120,065 Show Displays 99,585 99,585 Leasehold Improvements 11,510 18,945 Computer Equipment 473,388 454,593 - - ------------------------------------------------------------------------------------------------------------------------------- 1,270,765 1,256,337 Less--Accumulated depreciation (278,604) (393,337) - - ------------------------------------------------------------------------------------------------------------------------------- Net Property and Equipment $ 992,161 $ 863,000 = ===============================================================================================================================
Depreciation of property and equipment is computed using the straight-line method over the following estimated useful lives: Building 20 years Vehicles 5 years Office Equipment 5 to 7 years Show Displays 5 to 7 years Leasehold Improvements 7 years Computer Equipment 3 to 5 years h. Statement of Cash Flows The Company prepares its statement of cash flows using the indirect method as defined under Statement of Financial Accounting Standards No. 95, "Statement of Cash Flows." i. Net Income Per Common Share Net income per common share for the years ended December 31, 1994, 1995 and 1996 is based on the weighted average number of common shares outstanding. For each period presented, per share information was computed pursuant to the rules of the Securities and Exchange Commission (SEC), which require that common stock issued by the Company during the twelve months immediately preceding the Company's initial public offering plus the number of common shares issuable pursuant to the grant of options issued during the same period, be included in the calculation of the shares outstanding using the treasury stock method (dilutive effect of 25,000 shares for the years ended 1994). Stock options are common stock equivalents, but they are excluded in the computation of loss per share in fiscal year 1995 and 1996 because they are anti-dilutive. j. Stock Split On March 15, 1995, the board of directors approved a 202.5 for one common stock split. All information in the accompanying financial statements has been retroactively restated to reflect the split. k. Sales and Concentration of Credit Risk For the year ended December 31, 1994, the Company's largest customer contributed 37% of total revenues. For the years ended December 31, 1995 and 1996, the Company's two largest customers contributed 58% and 13% of total revenues respectively. Sales to countries other than the United States approximated $450,000, $440,000, and $574,700 in 1994, 1995 and 1996, respectively. The Company performs periodic credit evaluations of its customers. The Company maintains reserves for potential credit losses and such losses have been within management's expectations. Accounts receivable from the Company's largest customer at December 31, 1995, totaled approximately $241,000, net of allocated reserves. Accounts receivable from the Company's two largest customers at December 31, 1996, totaled approximately $39,000 and $15,000, net of allocated reserves. 34 l. Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109), under which deferred assets and liabilities are provided on differences between financial reporting and taxable income using enacted tax rates. m. Reclassifications Certain reclassifications have been made to prior years amounts to conform to the current year's presentation. n. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingencies at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. Related Party Transactions In December 1993, the Company entered into a five-year lease agreement with its two principal shareholders for its facility, currently requiring monthly rental payments of $12,817. The shareholders incurred debt of approximately $822,000 to purchase the facility. The Company has guaranteed all of this debt. In the event of default by the shareholders under the loan agreement covering $372,000 of this debt, the lender thereunder may exercise an assignment of the shareholders' interest as landlord in a contingent 20-year lease previously signed by the Company as tenant for the facility. This contingent lease provides for a monthly rent of $6,200 and supersedes the current lease in the event of any such assignment. The lease has been accounted for as a capital lease (see Note 7). 4. Income Taxes Under SFAS 109, deferred tax assets or liabilities are computed based on the temporary differences between financial statement and income tax bases of assets and liabilities using the enacted marginal income tax rate in effect for the year in which the differences are expected to reverse. Deferred income tax expenses or credits are based on the changes in the deferred income tax assets or liabilities from period to period. At December 31, 1996, the Company has net operating loss carryforwards available of approximately $5,500,000 which will expire through the fiscal year 2011. The provision (benefit) for income taxes is comprised of the following components:
Year Ended December 31, 1994 1995 1996 Current: Federal $186,500 $(199,011) -- State 59,000 800 800 Deferred: Federal (28,500) 28,500 -- State (5,000) 5,000 -- - - ------------------------------------------------------------------------------------------------------------------------------- Provision (benefit) for income taxes $212,000 $(164,711) $ 800 = ===============================================================================================================================
35 The approximate tax effect of temporary differences which gave rise to significant deferred tax liabilities and assets are as follows:
Year Ended December 31, 1994 1995 1996 Depreciation and amortization $(23,000) $(28,500) $ (63,500) Research and development credits -- 231,000 305,000 Reserves -- 170,500 271,000 Accrued liabilities 46,000 76,000 73,000 NOL carryforward -- -- 1,122,000 Other 10,500 24,000 116,500 - - ------------------------------------------------------------------------------------------------------------------------------- Deferred tax asset 33,500 473,000 1,824,000 Valuation allowance -- (473,000) (1,824,000) - - ------------------------------------------------------------------------------------------------------------------------------- Net deferred tax asset $ 33,500 $ -- $ -- = ===============================================================================================================================
Due to a limited history of earnings, a valuation reserve was recorded in 1995 and 1996. A reconciliation of the provision for income taxes to the amount computed at the Federal statutory rate is as follows:
Year Ended December 31, 1994 1995 1996 Federal income tax provision at the statutory rate $260,000 $ (428,900) $(1,173,700) State taxes net of Federal benefit 47,000 (77,400) (213,200) Research & development credits (33,000) (139,000) -- Change in valuation allowance (54,000) 473,000 $1,351,000 Other items net, none of which individually exceed 5 percent of Federal taxes at the statutory rate (8,000) 7,589 36,700 - - ------------------------------------------------------------------------------------------------------------------------------- Provision (benefit) for income taxes $212,000 $ (164,711) $800 = ===============================================================================================================================
5. Stock Warrants and Stock Options In 1995, the Company sold to the representatives of the underwriters warrants to purchase 125,000 shares of common stock for $125. The warrants are exercisable for a period of four years commencing April 5, 1996 at an exercise price of $7.80. The Company adopted a stock option plan in 1994 (the 1994 Stock Option Plan). Incentive and nonqualified options under this plan may be granted to employees, officers and consultants of the Company. There are 444,000 shares of common stock reserved for issuance under this plan. The exercise prices of the options are determined by the Board of Directors, but may not be less than 100% of the fair market value on the date of grant. Options generally become exercisable over three years. In October 1995, the FASB issued Statement No. 123 "Accounting for Stock-Based Compensation." Had the company applied the fair-value based method of accounting which is not required, under statement 123, compensation expense from its plans would have had the effects of increasing the 1995, 1996 net loss to the proforma amounts of$1,193,393 and $4,893,945, respectively, with corresponding proforma loss per share of .39 and 1.46, respectively. These proforma amounts were determined by estimating the fair value of each option on its grant date using the Black-Scholes option-pricing model. Assumptions of no dividend yield, 6.25% for risk free interest rate, 6 years expected life and expected rate of volatility of 76.75% and 69.79% in 1995 and 1996, respectively, were applied to all grants for each year presented. The weighted average fair value at grant date for the options granted during 1995 and 1996 was $3.54 and $1.99 per option, respectively. 36 Information with respect to the stock option plan is summarized below:
Outstanding Stock Options Shares Number of Weighted Avg. Price Per Aggregate Available Shares Exercise Price Share Price Balance, January 1, 1994 -- -- $ $ -- $ -- Plan adoption 144,000 -- -- -- Options granted (45,900) 45,900 2.50 2.50 114,750 Options canceled -- -- -- -- Options exercised -- -- -- -- -- - - ------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1994 98,100 45,900 2.50 2.50 114,750 Additional shares authorized 300,000 -- -- -- Options granted (175,500) 175,500 4.94 4.75 - 7.75 866,125 Options canceled 2,250 (2,250) 2.50 2.50 (5,625) Options exercised -- (300) 2.50 2.50 (750) - - ------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1995 224,850 218,850 4.45 2.50 - 7.75 974,500 Options granted (222,380) 222,380 3.49 1.25 - 5.50 775,750 Options canceled 79,500 (79,500) 5.02 2.13 - 4.75 (398,813) Options exercised -- (2,300) 2.50 2. 50 (5,750) - - ------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 81,970 359,430 $ 3.74 $1.25 - $7.75 $1,345,687 = ===============================================================================================================================
At December 31, 1996, 29,100 options were exercisable. The following table summarizes information about options outstanding at December5 31, 1996:
Options Outstanding Options Exercisable Number Weighted Weighted Number Weighted Outstanding Avg. Avg. Exercisable Avg. Range of at Remaining Exercise at Exercise Exercise 12/31/96 Contractual Price 12/31/96 Price Price Life $1.25 - $3.13 172,430 9.32 years $2.34 26,500 $2.50 $4.75 - $7.75 191,000 8.58 years 5.05 52,667 4.96 -------- ------- 363,430 8.93 years $3.76 79,167 $4.13 ======== =======
6. Employee Stock Purchase Plan On July 10, 1995, the Board of Directors approved 50,000 shares of the Company's Common Stock to be included in the Employee Stock Purchase Plan (ESPP). As of December 31, 1996, the Company has issued 16,367 shares of common stock. 37 7. Commitments and Contingencies The Company leases an office facility under a capital lease from its principal shareholders (see Note 3) and certain equipment under operating leases. The shareholders purchased the facility primarily through the issuance of debt that the Company guaranteed. In addition (as discussed in Note 3), one of the lenders obtained, as additional security, an assignment of the shareholders' interest as landlord in a contingent 20-year lease previously signed by the Company. This contingent lease provides for a monthly rent of $6,200 and supersedes the current lease in the event of a default. The lease has been accounted for as a capital lease, because the Company guarantee was required to obtain the debt, the Company has guaranteed all of the debt related to the facility and over ninety percent of the purchase price was financed. The Company's future minimum rental commitments under these leases and the discounted present value of the capital lease obligation (at 10 percent) at December 31, 1996 are summarized as follows:
Office Facility (see Note 3) Building Land Equipment 1997 98,000 40,000 71,500 1998 98,000 40,000 71,500 1999 34,000 40,000 -- 2000 34,000 40,000 -- 2001 34,000 40,000 -- Thereafter 414,000 480,000 -- - - --------------------------------------------------------------------- 712,000 $680,000 $143,000 ======== ======== Less--Portion representing interest 313,000 - - ------------------------------------------- 399,000 Less--Current portion 61,800 - - ------------------------------------------- $337,200 = ===========================================
In calculating the discounted present value of the capital lease obligation, the following assumptions were used: - Monthly payments of $11,535 from December 1993 to November 1998, as adjusted (see Note 3), - Monthly payments of $6,200 from December 1998 to 2013, - $3,333 of each monthly payment relates to land. From time to time, the Company is involved in various legal actions which arise in the ordinary course of business. The Company does not believe that losses, if any, incurred will have a significant impact on the Company's financial position or results of operations. 8. Profit-Sharing Plan The Company has a Profit-Sharing Plan (the "Plan") which covers most full-time employees. Contributions to the Plan are made at the discretion of the Board of Directors. Total contributions to the Plan were approximately $38,000, $1,000 and $0 for the years ended December 31, 1994, 1995 and 1996, respectively, and are accrued in the accompanying financial statements. 38 Part III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act Executive Officers and Directors. The directors and executive officers of the Company are as follows:
Director Name Age Position Since James A. Harrer 38 President, Chief 1988 Executive Officer and Chairman of the Board C. Scott Hunter 29 Vice President 1995 Engineering, Chief Technical Officer and Director Donald M. Leonard 34 Vice President Finance and Chief Financial Officer Richard J. Heming 46 Director 1988 James Stanley 38 Director 1995 ("Stan") Harris(1) Stanley A. Hirschman 50 Director 1995 Michael S. Noling(1) 58 Director 1995 Bruce Fredrickson 53 Director 1996 ___________
(1) Member of Audit Committee. James A. Harrer founded the Company's business in January 1986, has served the Company in various positions and currently serves as its President and Chief Executive Officer and as Chairman of its Board of Directors. Mr. Harrer has primary responsibility for the Company's marketing, overseeing all advertising, public relations, sales promotion, merchandising and package design, identifying new markets, expanding foreign markets and identifying target technology. He was the principal programmer of Mustang's Wildcat! product line through version three. Prior to founding the Company, Mr. Harrer served for seven years as a Branch Manager of Grant Supply Company, an oil field supply company where he controlled all aspects of that company's Bakersfield Division Operations. Mr. Harrer has also taught computer programming at Bakersfield College. C. Scott Hunter joined the Company in June 1988 and has served as the Company's Vice President Engineering since August 1991 and became Chief Technical Officer in April, 1996. Mr. Hunter became a director of the Company upon completion of the Company's initial public offering in April 1995. He is responsible for the coordination of new products under development as well as normal software maintenance. Mr. Hunter became the lead programmer on Wildcat! after the release of Wildcat! 3 and is also the lead programmer on QmodemPro for Windows. Mr. Hunter has been involved actively in programming in Pascal for ten years. Donald M. Leonard has served as the Company's Vice President Finance and Chief Financial Officer since June 1993. Mr. Leonard is responsible for the Company's financial matters and tax strategies, and supervises the development of Mustang's custom internal accounting and customer database system. From January 1991 to June 1993, Mr. Leonard served as a manager in audit and tax at Kenneth E. Rhodes & Co., a Bakersfield accounting firm, where he was responsible for a portion of the client base and supervised the firm's computer operations. From April 1988 to January 1991, he was employed by Rohmiller, Brown, Rhodes & Co., and from January 1985 to April 1988, he was employed by Brown, Waits and Armstrong, both Bakersfield accounting firms. Mr. Leonard obtained a B.S. in Accounting at California State University in Bakersfield in 1987 and is a Certified Public Accountant. Richard J. Heming joined the Company's business in January 1987 and served the Company in various positions until his resignation in November 1996, his last position was Vice President and Chief Operations Officer. Mr. Heming continues to serve the Company as a director. From December 1996 until January 1997, Mr. Heming served as a consultant to the Company5. Prior to his involvement with the Company, Mr. Heming served from June 1985 to January 1987 as an investigator and network manager for a law firm in Bakersfield, California, where he coordinated the installation of a 64-computer network. From 1981 to June 1985, he founded a private investigation practice, established loss prevention programs for several major department store chains and assisted in the design and implementation of a computerized risk management system for the City of Bakersfield. Mr. Heming received his B.A. in Criminology in 1972 from the University of Maryland at College Park. 39 James Stanley ("Stan") Harris became a director of the Company upon completion of the Company's initial public offering in April 1995. Since 1986, Mr. Harris has served as the President, Chief Operating Officer and a director of T. J. Moran and Associates, Inc., a Baton Rouge, Louisiana-based restaurant development and real estate management firm that owns, directly or as a franchisee, and operates various theme restaurants primarily located in the South and Southeast including Ruth's Chris Steak House, T. J. Ribs, Ninfa's Mexican Restaurant, Black-eyed Pea and T. J.'s Highland House. Stanley A. Hirschman became a director of the Company upon completion of the Company's initial public offering in April 1995. Mr. Hirschman is currently Vice President of Global Marketing Partners Inc. Mr. Hirschman served as Vice President, Store Operations, of Software Etc. Stores (now part of the NeoStar Retail Group, Inc.) from February 1989 until May 1996. From September 1984 to February 1989, Mr. Hirschman worked in various management positions at T.J.Maxx, including Assistant Vice President, Store Administration. His previous experience included multi-store management and merchandising responsibilities at Lane Bryant, a clothing retailer, and The Gap, including Director of Operations for its Banana Republic Division. Michael S. Noling became a director of the Company in May 1995, is the Chairman of the Audit Committee and became the Company's Secretary in November 1996. In December 1996, Mr. Noling joined the board of directors of Transoft Technologies Corporation, a privately held company which supplies software and systems to the digital video market. Since December 1995, Mr. Noling also has served as Chairman of the Board of Coryphaeus Software, Inc., a privately held software company that designs and markets software for creating real-time 3D simulations. In September 1993, Mr. Noling joined Wavefront Technologies as President and Chief Executive Officer and was elected to the Board of Directors in December 1993. In June 1995, Silicon Graphics completed the acquisition of Wavefront Technologies and Alias Research to form a combined software company, Alias/Wavefront. Previously, Mr. Noling was Executive Vice President and Chief Financial Officer for Applied Magnetics Corporation, a global high technology computer component supplier listed on the New York Stock Exchange. Prior to joining Applied Magnetics Corporation in March 1991, Mr. Noling was a managing partner with Andersen Consulting, where he had extensive experience in key operating and financial positions. Andersen Consulting is one of the world's leading systems integration and software firms, and is a business unit of Arthur Andersen & Co., S.C. Mr. Noling previously served for one year as a White House Fellow in the U.S. Office of Management and Budget. He received a B.S. in Engineering and a M.B.A. from the University of Wisconsin - Madison. Mr. Noling holds a CPA certificate. Bruce Fredrickson became a director of the Company in October 1996. Mr. Fredrickson has more than 15 years of experience in the computer industry. He currently serves as president of Channel Tactics in Boulder, Colorado, a computer consulting firm specializing in the launch of software and hardware products into the consumer and VAR channels. Prior to founding Channel Tactics in 1991, Mr. Fredrickson served for five years as Vice President of Marketing for Ingram Micro, a large distributor of computer hardware and software. Prior to Ingram Micro, he founded the National Computer Training Institute (NCTI), where he established computer-training centers across the United States. In addition to the Company, Mr. Fredrickson currently serves on the boards of directors of the following companies in the computer industry: InterTrust, Document Directions and Allenbach Industries. He also serves on the advisory board for Comdex. No family relationships exist between any of the executive officers or directors of the Company. Key Employee. In addition to its executive officers, the Company also considers Greg Hewgill key to its operations. Mr. Hewgill has served as a Senior Engineer of the Company since June 1992. Mr. Hewgill is a member of Mustang's product development team, and is the lead programmer for the 32-bit Wildcat! suite of products for the Windows NT and Windows 95 platforms. He also leads the Company's Internet development team. From January 1990 to January 1992, Mr. Hewgill was employed by Technique Computer Systems, a software development company, and was a principal force in the co-development of the Wildcat! utilities TOMCAT!, TNet and SLMR. Mr. Hewgill obtained a B.S. in Mathematics and Computer Science in 1992 from the University of Victoria in British Columbia, Canada. 40 Compliance with Section 16(a) of the Securities Exchange Act of 1934. Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers and persons who own more than 10% of a registered class of the Company's equity securities, to file with the Securities and Exchange Commission ("SEC") initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Directors, executive officers and 10% or greater shareholders are required by the SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. The Company believes, based solely on a review of the copies of such reports furnished to the Company, that each report required of the Company's executive officers, directors and 10% or greater shareholders was duly and timely filed during the year ended December 31, 1996. 6 Item 10. Executive Compensation The following table sets forth all compensation paid by the Company during 1994, 1995 and 1996 to its Chief Executive Officer and the other executive officers whose annual salary and bonus were in excess of $100,000 during 1996: Long term Compensation
Annual Compensation Name and Principal Securities All Other Positions Year Salary Bonus(1) Other(2) Underlying Compens- Options (#)(3) ation(4) James A. Harrer 1996 $151,050 $ 0 $ 0 0 $10,254 President and CEO 1995 $ 99,400 $30,800 $ 8,054 0 $ 8,592 1994 $ 68,000 $40,660 $18,056 0 $ 6,559 Richard J. Heming 1996 $129,993 $ 0 $ 0 0 $12,284 Director(5) 1995 $ 94,320 $ 700 $ 6,717 0 $13,192 1994 $ 68,000 $40,540 $17,465 0 $ 5,136 C. Scott Hunter 1996 $106,200 $ 0 $ 0 7,500 $ 1,658 Vice President of 1995 $ 68,400 $50,700 $ 0 50,000 $ 1,362 Engineering 1994 $ 59,800 $25,600 $ 0 9,000 $ 1,121 __________
(1) Includes a cash contribution by the Company to a 401(k) profit sharing plan paid in 1994, 1995 and 1996 on behalf of such officer for 1993, 1994 and 1995, respectively. (2) Consists of an automobile allowance paid by the Company. (3) Consists of options granted under Mustang's 1994 Incentive and Nonstatutory Stock Option Plan (the "Stock Option Plan"). Options vest over three years, commencing one year from the date of grant.. (4) Consists of life and health insurance premiums paid by the Company. (5) In November 1996, Mr. Heming resigned as Vice President and Chief Operations Officer. Following his resignation, Mr. Heming served the Company in a consulting capacity. The amount in the table under salary reflects salary paid to Mr. Heming during 1996 as an employee and amounts paid to him as a consultant. (6) Effective February 8, 1997, the Company entered into employment agreements with Messrs. Harrer, Hunter and Leonard. Each of the agreements is for a one-year term and automatically renews for succeeding one year terms unless either the Company or the employee provides the other with a notice of non-renewal at least 30 days prior to the expiration of the then current term. The agreements are terminable by either party with or without cause upon the expiration of 30 days' notice of termination. Upon a termination by the Company without cause or by the Employee for good reason (which includes because of a change of control of the Company), the employee is entitled to compensation equal to nine months' salary and continued health benefits for nine months. Upon a termination by the employee without good reason or by the Company with cause, the employee is entitled to compensation equal to four months' salary and continued health benefits for four months 41 Neither Mr. Harrer nor Mr. Heming holds any options to purchase Common Stock of the Company and none were granted to either of them during 1996. The following table provides certain information regarding stock option grants made to C. Scott Hunter during 1996: OPTION GRANTS IN LAST FISCAL YEAR
Number of Percent of Securities Total Options Underlying Granted to Exercise Expiration Options Employees Price Date Name Granted (#) in 1996 ($/Sh) Bruce Fredrickson 15,000 6.7% 2.75 9/30/2006 Scott Hunter 7,500 3.4% 3.00 7/7/2006
Messrs. Harrer, Heming or Hunter exercised no options during 1996. The following table provides certain information concerning Mr. Hunter's unexercised options at December 31, 1996: FY-END OPTION VALUES
Number of Shares Value of Underlying Unexercised Unexercised In-the-Money Options at Options at December 31, 1996 December 31, 1996 Name Exercisable Unexercisable Exercisable Unexercisable C. Scott Hunter 22,667 43,833 (1) (1)
__________ (1) None of Mr. Hunter's options were in the money at December 31, 1996. Compensation of Directors The Company pays its outside directors $1,000 (except for Mr. Fredrickson who is paid $2,500) for each board meeting attended and reimburses them for reasonable expenses incurred in attending meetings. Except in the case of Mr. Fredrickson, upon becoming a director and in January 1996, each of the Company's outside directors was granted stock options to purchase 5,000 shares of Common Stock from the Company 1994 Incentive Stock Option Plan and Nonstatutory Stock Option Plan, exercisable at the fair market value per share on the date of grant vesting in three equal annual installments, subject to the optionee remaining a director on the respective vesting date. Upon becoming a director, Mr. Fredrickson was granted options to purchase 15,000 shares of Common Stock from the Company 1994 Incentive Stock Option Plan and Nonstatutory Stock Option Plan, exercisable at the fair market value per share on the date of grant vesting in two equal annual installments, subject to the Mr. Fredrickson remaining a director on the vesting date. 42 Item 11. Security Ownership of Certain Beneficial Owners and Management. The following table sets forth as of March 11, 1997, information regarding the beneficial ownership of the Company's Common Stock by (i) each person known by the Company to be the beneficial owner of more than five percent of the outstanding shares of Common Stock, (ii) each of the directors of the Company beneficially owning Common Stock, (iii) each of the executive officers named in the Summary Compensation Table in Item 10, and (iv) the executive officers and directors of the Company as a group. Common Stock
Beneficially owned Name of beneficial owner or identity of group Number Percent Richard J. Heming 849,250 25.1% James A. Harrer 722,450 21.4% C. Scott Hunter 53,580 1.6% All executive officers and directors as a group (8) persons) 1,658,370 49.1% __________
(1) Includes any shares purchasable upon exercise of options exercisable within 60 days of March 15, 1997. Item 12. Relationships and Related Transactions The Company leases its executive offices and sales, marketing and production facilities from Messrs. Harrer and Heming pursuant to a lease that commenced on December 1, 1993 and expires on November 30, 1998. The lease provides for a monthly base rent of $11,535, subject to annual increases through the term of the lease, plus a percentage of operating expenses and utility costs. The Company believes that this lease is on terms no less favorable than those that could have been obtained from an unaffiliated third party, and that the rent is comparable to that for similar facilities in the area. Messrs. Harrer and Heming incurred debt in the aggregate amount of $822,000, pursuant to two loans in the respective original principal amounts of $450,000 and $372,000, to purchase said facilities. Monthly payments of Messrs. Harrer and Heming under these two loans equal approximately $4,500 and $2,900, respectively. The Company has guaranteed all of this debt and has subordinated its leasehold interest in the facilities to the lenders. In addition, in the event of a default by Messrs. Harrer and Heming under the loan agreement covering $372,000 of this debt, the lender thereunder may exercise an assignment from Messrs. Harrer and Heming of their interest as landlord in a contingent 20-year lease, previously signed by the Company as tenant, for such facilities. In that event, this contingent lease provides for a monthly rent of $6,200, would supersede the current lease, and would obligate the Company to pay such rent through November 2013. 43 Item 13. Exhibits, List and Reports on Form 8-K (a) Exhibits
Exhibit No. Description 3 (i) Amended and Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 2.1 of the Company's Registration Statement on Form SB-2 (file no. 89900-LA)). 3 (ii) Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 2.2 of the Company's Registration Statement on Form SB-2 (file no. 89900-LA)). 4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4 .1 of the Company's Registration Statement on Form SB-2 (file no. 89900-LA)). 10.2 Form of Indemnification Agreement (incorporated by reference to corresponding Exhibit of the Company's Registration Statement on Form SB-2 (file no. 89900-LA). 10.3 Office Lease, dated December 1, 1993, regarding the Company's offices in Bakersfield, California, between the Company and James A. Harrer and Richard J. Heming (incorporated by reference to corresponding Exhibit of the Company's Registration Statement on Form SB-2 (file no. 89900-LA). 10.4 Distribution Agreement, dated December 9, 1991, by and between the Company and Ingram Micro Inc. (incorporated by reference to corresponding Exhibit of the Company's Registration Statement on Form SB-2 (file no. 89900-LA). 10.5 Business Loan Agreement, dated November 28, 1994, by and between the Company and Wells Fargo Bank, National Association (incorporated by reference to corresponding Exhibit of the Company's Registration Statement on Form SB-2 (file no. 89900-LA). 10.6 Promissory Note, dated November 28, 1994, by the Company in favor of Wells Fargo Bank, National Association (incorporated by reference to corresponding Exhibit of the Company's Registration Statement on Form SB-2 (file no. 89900-LA). 10.7 Commercial Guaranties, dated November 28, 1994, by each of James A. Harrer and Richard J. Heming (incorporated by reference to corresponding Exhibit of the Company's Registration Statement on Form SB-2 (file no. 89900-LA). 10.8 Commercial Security Agreement, dated November 28, 1994, by and between the Company and Wells Fargo Bank, National Association (incorporated by reference to corresponding Exhibit of the Company's Registration Statement on Form SB-2 (file no. 89900-LA). 10.9 Commercial Guaranty, dated October 29, 1993, by and between the Company and Zions First National Bank (incorporated by reference to corresponding Exhibit of the Company's Registration Statement on Form SB-2 (file no. 89900-LA). 10.10 Loan Agreement, dated October 29, 1993, by and among Zions First National Bank, James A. Harrer and Richard J. Heming (incorporated by reference to corresponding Exhibit of the Company's Registration Statement on Form SB-2 (file no. 89900-LA). 10.11 Promissory Note dated October 29, 1993, by Messrs. Harrer and Heming in favor of Zions First National Bank (incorporated by reference to corresponding Exhibit of the Company's Registration Statement on Form SB-2 (file no. 89900-LA). 10.12 "504" Note, dated October 6, 1993, by Messrs. Harrer and Heming in favor of Mid State Development Corporation (incorporated by reference to corresponding Exhibit of the Company's Registration Statement on Form SB-2 (file no. 89900-LA). 10.13 Small Business Administration Guaranty dated October 6, 1993, by the Company in favor of Mid State Development Corporation (incorporated by reference to corresponding Exhibit of the Company's Registration Statement on Form SB-2 (file no. 89900-LA). 44 10.14 Lease Agreement, dated October 6, 1993, by and between the Company and Messrs. Harrer and Heming (incorporated by reference to corresponding Exhibit of the Company's Registration Statement on Form SB-2 (file no. 89900-LA). 10.15 Assignment of Lessor's Interest in Lease to CDC, dated October 6, 1993, by Messrs. Harrer and Heming in favor of Mid State Development Corporation (incorporated by reference to corresponding Exhibit of the Company's Registration Statement on Form SB-2 (file no. 89900-LA). 10.16 Distribution Agreement, by and between the Company and Merisel Americas, Inc. (incorporated by reference to corresponding Exhibit of the Company's Registration Statement on Form SB-2 (file no. 89900-LA). 10.17 Mustang Software Bundling Agreement, by and between the Company and AT&T Global Information Solutions Company (incorporated by reference to corresponding Exhibit of the Company's Registration Statement on Form SB-2 (file no. 89900-LA). 10.18 Underwriting Agreement dated April 5, 1995 by and between the Company and Cruttenden Roth Incorporated, as Representative of the several Underwriters. 10.19 Representative's Warrant Agreement dated April 12, 1995 by and between the Company and Cruttenden Roth Incorporated. 10.20. Representative's Warrant (see Exhibit A to Exhibit 10.19) 10.21 Employment Agreement dated as of February 8, 1997 between the Company and James A. Harrer. 10.22 Employment Agreement dated as of February 8, 1997 between the Company and C. Scott Hunter. 10.23 Employment Agreement dated as of February 8, 1997 between the Company and Donald M. Leonard 11. Computaion of Earnings per share 22.1 Consent of Arthur Andersen to incorporation by reference of their report on 1996 Financial Statements into the Company's Registration Statements on Form S-8 relating the Company's 1994 Incentive and Stock Option Plans and the Company's Employee Stock Purchase Plan 24.1 Power of Attorney (contained on Signature Page) 27. Financial Data Schedule
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the last quarter of the period covered by this Report. 45 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), the Registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Bakersfield, State of California, on March 29, 1997 MUSTANG SOFTWARE, INC. By___/s/ James A. Harrer___ James A. Harrer, President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints James A. Harrer and Donald M. Leonard, acting individually, as his attorney- in-fact, each with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Report and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by said attorney to any and all amendments to said Report. In accordance with the Exchange Act, this Report has been signed by the following persons on behalf on the Registrant in the capacities and on the dates stated. Signature Title Date /s/ James A. Harrer President and Chief March 29, 1997 James A. Harrer Executive Officer (Principal Executive Officer) and a Director /s/ Donald M. Leonard Vice President March 29, 1997 Donald M. Leonard Finance and Chief Financial Officer (Principal Financial and Accounting Officeer) /s/ C. Scott Hunter Director March 29, 1997 C. Scott Hunter /s/ Richard J. Heming Director March 29, 1997 Richard J. Heming /s/ Stanley A. Hirschman Director March 29, 1997 Stanley A. Hirschman /s/ Michael S. Noling Director March 29, 1997 Michael S. Noling /s/ James Stanley Harris Director March 29,1997 James Stanley ("Stan") Harris /s/ Bruce Fredrickson Director March 29, 1997 Bruce Fredrickson EX-10.21 2 Exhibit 10.21 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (Agreement) is made and effective as of the 8th day of February 1997 by and between MUSTANG SOFTWARE, INC., a California corporation (the Company), and JAMES A. HARRER (the Employee), with respect to the following facts: A. The Company wants to be assured of the continued association and services of the Employee to take advantage of his experience, knowledge and abilities in the Company's business and is willing to employ the Employee, and the Employee desires to be so employed, on the terms and conditions set forth in this Agreement. B. The Employee from time to time in his employment may learn trade secrets and other confidential information concerning the Company, and the Company desires to safeguard such trade secrets and confidential information against unauthorized use and disclosure. ACCORDINGLY, the parties agree as follows: 1 EMPLOYMENT 1.1 Employment and Duties. The Company employs the Employee as President and Chief Executive Officer and Employee accepts such employment and agrees to do, on the terms and conditions set forth below and during the term of this Agreement the following duties: Employees duties shall include primary responsibility for the Companys marketing, overseeing advertising, public relations, sales promotion, merchandising and package design, identifying new markets, expanding foreign markets, identifying target technology, the duties as President set forth in Article III, section 7 of the Amended and Restated By-laws of the Company and such other duties and acts in connection with the Companys business, as reasonably may be required by the Companys Board of Directors. 1.2 Service to Others. Employee will devote his entire productive time, ability and attention to, and will diligently and conscientiously use his best efforts to further the Company's business and will not, without the prior written consent of the Company's Board of Directors in each instance, do services of any kind, whether or not for compensation, for any person other than the Company, which services, in the sole opinion of the Company's Board of Directors, might materially interfere with the performance of his duties under this Agreement. Employee is not prohibited from making personal investments in other businesses, if those investments do not require Employee to participate in the operation of such businesses in which he invests and so long as none of the investments are in companies, partnerships, ventures or entities of any type or kind, or with an individual or individuals, in competition with or in the same or similar business as the Company. This limitation does not apply to any stock purchases in any company that is listed on the New York or American Stock Exchanges or the Nasdaq Stock Market provided such purchases do not exceed, in the aggregate, 1 percent of the outstanding stock of such company. 2 COMPENSATION 2.1 Compensation. As the total compensation for the services which the Employee renders to the Company, the Company will pay Employee the following: 2.1.1 An annual base salary in the amount of $144,000. Said salary, less applicable federal, state and local payroll and withholding deductions, will be payable by the Company on a semimonthly basis (in accordance with the Companys standard payroll practices applicable to all employees) during the term of this Agreement. The annual base salary may be increased by the Company from time to time but, if so increased, will not later be decreased. 2.1.2 Employee will be entitled to group medical and life insurance as presently in place for Employee on the date this Agreement is made, and reimbursement of ordinary and necessary business expenses, travel or otherwise, and those expenses incurred by Employee in the furtherance of his obligations under this Agreement. 2.1.3 Employee will be entitled to four (4) weeks paid vacation per year to be taken during such period(s) of his choosing. Employees vacation that is earned but not used during the year may be carried over into another year up to an aggregate maximum of five (5) days. The Company shall pay Employee the appropriate amount, based on Employees base annual salary at the date of termination, for any earned but unused vacation time existing at the date of termination of this Agreement. 2.2 Illness. Subject to Sections 3.2.1 and 3.2.2, if the Employee is unable to render the services required under this Agreement on account of personal injuries or physical or mental illness, he will continue to receive all payments provided in this Agreement; provided, however, that any such payments may, at the sole option of the Company, be reduced by any amount that the Employee receives as disability compensation for the period covered by such payments under insurance policies, if any, maintained by the Company or under government programs. 3 TERM OF EMPLOYMENT AND TERMINATION 3.1 Term. Unless sooner terminated pursuant to Section 3.2, the term of employment under this Agreement will be for one (1) year from the date of this Agreement; provided, however, that such term of employment will be renewed automatically for successive one (1) year terms unless written notice of non renewal is given by either the Company or Employee not less than thirty (30) days prior to the end of the initial term or any subsequent one (1) year term. Any such notice of non renewal will for purposes of subsection 3.2 of this Agreements be deemed a notice of termination without Cause (as defined below) if given by the Company and a notice termination by Employee without Good Reason (as defined below) if given by Employee. 3.2 Termination. Employment under this Agreement will terminate prior to the expiration of its term upon the happening of any of the following events: 3.2.1 The death of Employee. 3.2.2 If Employee is absent from work because of illness or incapacity or for any other reason for a cumulative period of more than one hundred eighty (180) days in any consecutive twelve month period, the Company may terminate this Agreement upon the expiration of thirty days written notice to Employee. 3.2.3 At the Company's option, with Cause or without Cause, the Company may terminate this Agreement upon the expiration of thirty days written notice to Employee. Cause means (a) the willful and continued failure by the Employee to substantially perform his duties under this Agreement (other than any such failure resulting from Employees incapacity due to physical or mental illness), (b) the willful engaging by Employee in misconduct which is materially damaging to the Company, monetarily or otherwise, or which would substantially impair the reputation and public perception of Company, or (c) the wilful violation by Employee of any of the provisions of Section 5 of this Agreement. 3.2.4 At Employees option, with Good Reason or without Good Reason, Employee may terminate this Agreement upon the expiration of thirty days written notice to the Company. Good Reason means (a) a Change in Control of the Company (as defined below) or (b) a failure by the Company to comply with any material provision of this Agreement which has not been cured within 10 days after notice of the noncompliance has been given by Employee to the Company. Change in Control means a change in control of a nature that would be required to be reported in response to Item 1 of Form 8- K or Item 5(e) of Schedule 14A under Regulation 14A promulgated under the Securities Exchange Act of 1934 (the Exchange Act); provided that, without limitation, such a Change in Control will be deemed to have occurred if (i) any person (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than the Company, or any person who on the date of this Agreement is a director or officer of the Company, is or becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities or, (ii) any person (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than the Company, acquires all or substantially all of the assets or business of the Company, or (iii) during any period of two consecutive quarters during the term of this Agreement, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority of directors, unless the election of each director who was not a director at the beginning of such period has been approved in advance by directors representing at least two-thirds of the directors then in office who were directors at the beginning of the period. 4 DUTIES AND COMPENSATION UPON TERMINATION. 4.1 Duties. In the event that employment under this Agreement is terminated, Employee shall continue to perform his duties through the date of termination. After that neither the Company nor Employee shall have any remaining duties or obligations under this Agreement except that (a) the Company shall pay to the Employee, or his estate, such compensation as is due pursuant to Section 2.l, prorated through the date of termination, plus such severance compensation, if any, as is due pursuant to Section 4.2 and (b) Employee shall continue to be bound by Section 5. 4.2 Severance Compensation. 4.2.1 At the date of termination and provided Employee has continued to perform his duties through the date of termination, in addition to the compensation payable to Employee pursuant to Section 4.1, the Company shall pay Employee, in a lump sum, the amount equal to 8.33% of Employees annual base salary in effect at the date of termination multiplied by the number of months corresponding to the grounds for termination in the table below. Grounds for Termination Number of Months Death or Disability of Employee pursuant to Zero (0) Section 3.2.1 or 3.2.2. By Company without Cause pursuant to Section Nine (9) 3.2.3. By Employee with Good Reason pursuant to Section 3.2.4. By Company with Cause pursuant to Section Four (4) 3.2.3. By Employee without Good Reason pursuant to Section 3.2.4. 4.2.2 Following the date of termination, the Company shall continue to provide Employee with (or pay the premiums for) the same medical coverage that the Company provided to Employee as of the date of termination for the number of months corresponding to the grounds for termination in the table set forth in subsection 4.2.1. The provisions of this Agreement to pay Employee severance compensation in the event Employee is terminated for Cause will not diminish or otherwise affect the Companys right to claim and recover damages from Employee as result of any of the events or conduct leading to Employees termination for Cause. 5 TRADE SECRETS 5.1 Trade Secrets. The Employee shall not, without the prior written content of the Company's Board of Directors in each instance, disclose or use in any way, either during his employment by the Company or after it, except as required in the course of his employment with the Company, any confidential business or technical information or trade secret of the Company acquired in the course of such employment, whether or not patentable, copyrightable or otherwise protected by law, and whether or not conceived of or prepared by him (collectively, the Trade Secrets) including, without limitation, any information concerning: existing and contemplated products; Inventions (as defined below); manufacturing procedures, methods, machines, compositions, technology or formulas; research and development programs; customer lists, customer usage and requirements; operating procedures; investments; financing; costs; employees; salaries; purchasing; accounting; marketing; merchandising; sales methods; pricing; profits; plans for future development; the identity, requirements, preferences, practices and methods of doing business of specific parties with whom the Company transacts business; and all other information which is related to any product, service or business of the Company, all of which Trade Secrets are the exclusive and valuable property of the Company. Notwithstanding the foregoing, Trade Secrets do not include information which is generally known in the industry in which the Company transacts business or is acquired from public sources and not gained in breach of this Agreement; Inventions means inventions, mask works, ideas, processes, formulas, source and object codes, data, programs, other works of authorship, know- how, improvements, discoveries, developments, designs and techniques. 5.2 Tangible Items. All files, accounts, records, documents, books, forms, notes, reports, memoranda, studies, compilations of information, correspondence and all copies, abstracts and summaries of the foregoing, and all other physical items related to the Company, other then a merely personal item, whether of a public nature or not, and whether prepared by the Employee or not, are and shall remain the exclusive property of the Company and shall not be removed from the premise of the Company except as required in the course of employment by the Company, without the prior written consent of the Company's Board of Directors in each instance, and the same shall be promptly returned to the Company by the Employee on the expiration or termination of his employment or at any time prior to it upon the request of the Company. Notwithstanding the foregoing or anything to the contrary herein, Employee may remove and retain the following Company items as additional severance compensation irrespective of the reason for termination: the laptop computer and pilot personal organizer primarily used by Employee as of the date of termination. 5.3 Solicitation of Employees. During his employment by the Company and for the nonsolicitation period after such employment specified in the table below (such period not to include any period of violation this subsection by the Employee or period which is required for litigation to enforce this subsection and during which the Employee is in violation of it), Employee will not, directly or indirectly, either for his own benefit or purposes or the benefit or purposes of any other person, employ or offer to employ, call on, solicit, interfere with or attempt to divert or entice away any employee or independent contractor of the Company (or any person whose employment or status as an independent contractor has terminated within the twelve months preceding the date of such solicitation) in any capacity if that person possesses or has knowledge of any Trade Secrets of the Company. Nonsolication Period If person to be solicited is an employee 12 months If person to be solicited is an independent 6 months contractor 5.4 Injunctive Relief. Employee acknowledges and agrees that it would be difficult to fully compensate the Company for damages resulting from the breach or threatened breach of these provisions and, accordingly that the Company will be entitled to temporary and injunctive relief, including temporary restraining orders, preliminary injunctions and permanent injunctions, to enforce such provisions without the necessity of proving actual damages and without the necessity of posting any bond or other undertaking in connection with it. This provision with respect to injunctive relief will not, however, diminish the Companys right to claim and recover damages. 6 MISCELLANEOUS 6.1 Severable Provisions. The provisions of this Agreement are severable, and if any one or more provisions may be determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions, and any partially unenforceable provisions to the extent enforceable, will nevertheless be binding and enforceable. 6.2 Successors and Assigns. All of the terms, provisions and obligations of this Agreement will inure to the benefit of and will be binding upon the parties to this Agreement and their respective heirs, representatives, successors and assigns. Notwithstanding the preceding sentence, neither this Agreement nor any rights under this Agreement will be assigned, pledged, hypothecated or otherwise transferred by the Employee without the prior written consent of the Company in each instance. 6.3 Governing Law. The validity, construction and interpretation of this Agreement will be governed in all respects by the laws of the State of California applicable to contracts made and to be performed wholly within that state. 6.4 Consent to Jurisdiction. Employee and the Company, to the fullest extent he or it may effectively do so under applicable law, irrevocably (i) submit to the exclusive jurisdiction of any court of the State of California or the United States of America sitting in or covering the City of Bakersfield over any suit, action or proceeding arising out of or relating to this Agreement, (ii) waive and agree not to assert, by way of motion, as a defense or otherwise, any claim that he or it is not subject to the jurisdiction of any such court, any objection that he or it may now or later have to the establishment of the venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum, and (iii) consents to process being served in any such suit, action or proceeding by mailing a copy of it by registered or certified air mail, postage prepaid, return receipt requested, to the address of such party specified in or designated pursuant to Section 6.7. Each party agrees that such service (i) will be deemed in every respect effective service of process upon such party in any such suit, action or proceeding and (ii) will to the fullest extent permitted by law be taken and held to be valid personal service upon and personal delivery to such party. 6.5 Headings. Section and subsection headings are not to be considered part of this Agreement and are included solely for convenience and reference and in no way define, limit or describe the scope of this Agreement or the intent of any its provisions. 6.6 Entire Agreement. This Agreement contains the entire Agreement between the parties pertaining to the subject matter of it, and supersedes all prior Agreements, understandings, negotiations and discussions, whether oral or written, relating to the subject matter of this Agreement. No supplement, modification or waiver of this Agreement will be valid unless executed by the party to be bound by it. No waiver of any of the provisions of this Agreement will be deemed or will constitute a waiver of any other provision of this Agreement (whether or not similar), nor will such waiver constitute a continuing waiver unless otherwise expressly provided. 6.7 Notice. Any notice or other communication required or permitted under this Agreement will be in writing and will be deemed to have been given (i) if personally delivered, when so delivered, (ii) if mailed, one (1) week after having been placed in the United States mail, registered or certified, postage prepaid, addressed to the party to whom it is directed at the address set forth below or (iii) if given by telex, telecopier or e-mail, when such notice or other communication is transmitted to the telex or telecopier number or e-mail address specified below and the appropriate answer back or confirmation is received. If to the Company: Mustang Software 6200 Lake Ming Road Bakersfield CA 93306 Attention: Chief Financial Officer Telecopier Number: (805) 873-2599 If to Employee: James A. Harrer 6721 Park West Circle Bakersfield, CA 93308 Telecopier Number: ________________ E-mail address: jim.harrer@mustang.com Either party may change the address to which such notices are to be addressed by giving the other party notice in the above manner. 6.8 Attorneys Fees. In the event any party takes legal action to enforce any of the terms of this Agreement, the unsuccessful party to such action will pay the successful partys expenses, including attorneys' fees, incurred in such action. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date and year first set forth above. The Company Employee Mustang Software, Inc. By:_/s/Michael S. Noling_____ __/s/James A. Harrer____ Michael S. Noling James A. Harrer Its Secretary EX-10.22 3 Exhibit 10.22 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (Agreement) is made and effective as of the 8th day of February, 1997 by and between MUSTANG SOFTWARE, INC., a California corporation (the Company), and C. SCOTT HUNTER (the Employee), with respect to the following facts: A. The Company wants to be assured of the continued association and services of the Employee to take advantage of his experience, knowledge and abilities in the Company's business and is willing to employ the Employee, and the Employee desires to be so employed, on the terms and conditions set forth in this Agreement. B. The Employee from time to time in his employment may learn trade secrets and other confidential information concerning the Company, and the Company desires to safeguard such trade secrets and confidential information against unauthorized use and disclosure. ACCORDINGLY, the parties agree as follows: 1 EMPLOYMENT 1.1 Employment and Duties. The Company employs the Employee as Vice President Engineering and Chief Technical Officer and Employee accepts such employment and agrees to do, on the terms and conditions set forth below and during the term of this Agreement the following duties: Employees duties shall include primary responsibility for coordination of new products under development and software maintenance and such other duties and acts in connection with the Companys business, as reasonably may be required by the Companys Board of Directors. 1.2 Service to Others. Employee will devote his entire productive time, ability and attention to, and will diligently and conscientiously use his best efforts to further the Company's business and will not, without the prior written consent of the Company's Board of Directors in each instance, do services of any kind, whether or not for compensation, for any person other than the Company, which services, in the sole opinion of the Company's Board of Directors, might materially interfere with the performance of his duties under this Agreement. Employee is not prohibited from making personal investments in other businesses, if those investments do not require Employee to participate in the operation of such businesses in which he invests and so long as none of the investments are in companies, partnerships, ventures or entities of any type or kind, or with an individual or individuals, in competition with or in the same or similar business as the Company. This limitation does not apply to any stock purchases in any company that is listed on the New York or American Stock Exchanges or the Nasdaq Stock Market provided such purchases do not exceed, in the aggregate, 1 percent of the outstanding stock of such company. 2 COMPENSATION 2.1 Compensation. As the total compensation for the services which the Employee renders to the Company, the Company will pay Employee the following: 2.1.1 An annual base salary in the amount of $108,000. Said salary, less applicable federal, state and local payroll and withholding deductions, will be payable by the Company on a semimonthly basis (in accordance with the Companys standard payroll practices applicable to all employees) during the term of this Agreement. The annual base salary may be increased by the Company from time to time but, if so increased, will not later be decreased. 2.1.2 Employee will be entitled to group medical and life insurance as presently in place for Employee on the date this Agreement is made, and reimbursement of ordinary and necessary business expenses, travel or otherwise, and those expenses incurred by Employee in the furtherance of his obligations under this Agreement. 2.1.3 Employee will be entitled to three (3) weeks paid vacation per year to be taken during such period(s) of his choosing. Employees vacation that is earned but not used during the year may be carried over into another year up to an aggregate maximum of five (5) days. The Company shall pay Employee the appropriate amount, based on Employees base annual salary at the date of termination, for any earned but unused vacation time existing at the date of termination of this Agreement. 2.2 Illness. Subject to Sections 3.2.1 and 3.2.2, if the Employee is unable to render the services required under this Agreement on account of personal injuries or physical or mental illness, he will continue to receive all payments provided in this Agreement; provided, however, that any such payments may, at the sole option of the Company, be reduced by any amount that the Employee receives as disability compensation for the period covered by such payments under insurance policies, if any, maintained by the Company or under government programs. 3 TERM OF EMPLOYMENT AND TERMINATION 3.1 Term. Unless sooner terminated pursuant to Section 3.2, the term of employment under this Agreement will be for one (1) year from the date of this Agreement; provided, however, that such term of employment will be renewed automatically for successive one (1) year terms unless written notice of non renewal is given by either the Company or Employee not less than thirty (30) days prior to the end of the initial term or any subsequent one (1) year term. Any such notice of non renewal will for purposes of subsection 3.2 of this Agreements be deemed a notice of termination without Cause (as defined below) if given by the Company and a notice termination by Employee without Good Reason (as defined below) if given by Employee. 3.2 Termination. Employment under this Agreement will terminate prior to the expiration of its term upon the happening of any of the following events: 3.2.1 The death of Employee. 3.2.2 If Employee is absent from work because of illness or incapacity or for any other reason for a cumulative period of more than one hundred eighty (180) days in any consecutive twelve month period, the Company may terminate this Agreement upon the expiration of thirty days written notice to Employee. 3.2.3 At the Company's option, with Cause or without Cause, the Company may terminate this Agreement upon the expiration of thirty days written notice to Employee. Cause means (a) the willful and continued failure by the Employee to substantially perform his duties under this Agreement (other than any such failure resulting from Employees incapacity due to physical or mental illness), (b) the willful engaging by Employee in misconduct which is materially damaging to the Company, monetarily or otherwise, or which would substantially impair the reputation and public perception of Company, or (c) the wilful violation by Employee of any of the provisions of Section 5 of this Agreement. 3.2.4 At Employees option, with Good Reason or without Good Reason, Employee may terminate this Agreement upon the expiration of thirty days written notice to the Company. Good Reason means (a) a Change in Control of the Company (as defined below) or (b) a failure by the Company to comply with any material provision of this Agreement which has not been cured within 10 days after notice of the noncompliance has been given by Employee to the Company. Change in Control means a change in control of a nature that would be required to be reported in response to Item 1 of Form 8- K or Item 5(e) of Schedule 14A under Regulation 14A promulgated under the Securities Exchange Act of 1934 (the Exchange Act); provided that, without limitation, such a Change in Control will be deemed to have occurred if (i) any person (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than the Company, or any person who on the date of this Agreement is a director or officer of the Company, is or becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities or, (ii) any person (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than the Company, acquires all or substantially all of the assets or business of the Company, or (iii) during any period of two consecutive quarters during the term of this Agreement, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority of directors, unless the election of each director who was not a director at the beginning of such period has been approved in advance by directors representing at least two-thirds of the directors then in office who were directors at the beginning of the period. 4 DUTIES AND COMPENSATION UPON TERMINATION. 4.1 Duties. In the event that employment under this Agreement is terminated, Employee shall continue to perform his duties through the date of termination. After that neither the Company nor Employee shall have any remaining duties or obligations under this Agreement except that (a) the Company shall pay to the Employee, or his estate, such compensation as is due pursuant to Section 2.l, prorated through the date of termination, plus such severance compensation, if any, as is due pursuant to Section 4.2 and (b) Employee shall continue to be bound by Section 5. 4.2 Severance Compensation. 4.2.1 At the date of termination and provided Employee has continued to perform his duties through the date of termination, in addition to the compensation payable to Employee pursuant to Section 4.1, the Company shall pay Employee, in a lump sum, the amount equal to 8.33% of Employees annual base salary in effect at the date of termination multiplied by the number of months corresponding to the grounds for termination in the table below. Grounds for Termination Number of Months Death or Disability of Employee pursuant to Zero (0) Section 3.2.1 or 3.2.2. By Company without Cause pursuant to Section Nine (9) 3.2.3. By Employee with Good Reason pursuant to Section 3.2.4. By Company with Cause pursuant to Section Four (4) 3.2.3. By Employee without Good Reason pursuant to Section 3.2.4. 4.2.2 Following the date of termination, the Company shall continue to provide Employee with (or pay the premiums for) the same medical coverage that the Company provided to Employee as of the date of termination for the number of months corresponding to the grounds for termination in the table set forth in subsection 4.2.1. The provisions of this Agreement to pay Employee severance compensation in the event Employee is terminated for Cause will not diminish or otherwise affect the Companys right to claim and recover damages from Employee as result of any of the events or conduct leading to Employees termination for Cause. 5 TRADE SECRETS 5.1 Trade Secrets. The Employee shall not, without the prior written content of the Company's Board of Directors in each instance, disclose or use in any way, either during his employment by the Company or after it, except as required in the course of his employment with the Company, any confidential business or technical information or trade secret of the Company acquired in the course of such employment, whether or not patentable, copyrightable or otherwise protected by law, and whether or not conceived of or prepared by him (collectively, the Trade Secrets) including, without limitation, any information concerning: existing and contemplated products; Inventions (as defined below); manufacturing procedures, methods, machines, compositions, technology or formulas; research and development programs; customer lists, customer usage and requirements; operating procedures; investments; financing; costs; employees; salaries; purchasing; accounting; marketing; merchandising; sales methods; pricing; profits; plans for future development; the identity, requirements, preferences, practices and methods of doing business of specific parties with whom the Company transacts business; and all other information which is related to any product, service or business of the Company, all of which Trade Secrets are the exclusive and valuable property of the Company. Notwithstanding the foregoing, Trade Secrets do not include information which is generally known in the industry in which the Company transacts business or is acquired from public sources and not gained in breach of this Agreement; Inventions means inventions, mask works, ideas, processes, formulas, source and object codes, data, programs, other works of authorship, know- how, improvements, discoveries, developments, designs and techniques. 5.2 Tangible Items. All files, accounts, records, documents, books, forms, notes, reports, memoranda, studies, compilations of information, correspondence and all copies, abstracts and summaries of the foregoing, and all other physical items related to the Company, other then a merely personal item, whether of a public nature or not, and whether prepared by the Employee or not, are and shall remain the exclusive property of the Company and shall not be removed from the premise of the Company except as required in the course of employment by the Company, without the prior written consent of the Company's Board of Directors in each instance, and the same shall be promptly returned to the Company by the Employee on the expiration or termination of his employment or at any time prior to it upon the request of the Company. Notwithstanding the foregoing or anything to the contrary herein, Employee may remove and retain the following Company items as additional severance compensation irrespective of the reason for termination: the laptop computer and pilot personal organizer primarily used by Employee as of the date of termination. 5.3 Solicitation of Employees. During his employment by the Company and for the nonsolicitation period after such employment specified in the table below (such period not to include any period of violation this subsection by the Employee or period which is required for litigation to enforce this subsection and during which the Employee is in violation of it), Employee will not, directly or indirectly, either for his own benefit or purposes or the benefit or purposes of any other person, employ or offer to employ, call on, solicit, interfere with or attempt to divert or entice away any employee or independent contractor of the Company (or any person whose employment or status as an independent contractor has terminated within the twelve months preceding the date of such solicitation) in any capacity if that person possesses or has knowledge of any Trade Secrets of the Company. Nonsolication Period If person to be solicited is an employee 12 months If person to be solicited is an independent 6 months contractor 5.4 Injunctive Relief. Employee acknowledges and agrees that it would be difficult to fully compensate the Company for damages resulting from the breach or threatened breach of these provisions and, accordingly that the Company will be entitled to temporary and injunctive relief, including temporary restraining orders, preliminary injunctions and permanent injunctions, to enforce such provisions without the necessity of proving actual damages and without the necessity of posting any bond or other undertaking in connection with it. This provision with respect to injunctive relief will not, however, diminish the Companys right to claim and recover damages. 6 MISCELLANEOUS 6.1 Severable Provisions. The provisions of this Agreement are severable, and if any one or more provisions may be determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions, and any partially unenforceable provisions to the extent enforceable, will nevertheless be binding and enforceable. 6.2 Successors and Assigns. All of the terms, provisions and obligations of this Agreement will inure to the benefit of and will be binding upon the parties to this Agreement and their respective heirs, representatives, successors and assigns. Notwithstanding the preceding sentence, neither this Agreement nor any rights under this Agreement will be assigned, pledged, hypothecated or otherwise transferred by the Employee without the prior written consent of the Company in each instance. 6.3 Governing Law. The validity, construction and interpretation of this Agreement will be governed in all respects by the laws of the State of California applicable to contracts made and to be performed wholly within that state. 6.4 Consent to Jurisdiction. Employee and the Company, to the fullest extent he or it may effectively do so under applicable law, irrevocably (i) submit to the exclusive jurisdiction of any court of the State of California or the United States of America sitting in or covering the City of Bakersfield over any suit, action or proceeding arising out of or relating to this Agreement, (ii) waive and agree not to assert, by way of motion, as a defense or otherwise, any claim that he or it is not subject to the jurisdiction of any such court, any objection that he or it may now or later have to the establishment of the venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum, and (iii) consents to process being served in any such suit, action or proceeding by mailing a copy of it by registered or certified air mail, postage prepaid, return receipt requested, to the address of such party specified in or designated pursuant to Section 6.7. Each party agrees that such service (i) will be deemed in every respect effective service of process upon such party in any such suit, action or proceeding and (ii) will to the fullest extent permitted by law be taken and held to be valid personal service upon and personal delivery to such party. 6.5 Headings. Section and subsection headings are not to be considered part of this Agreement and are included solely for convenience and reference and in no way define, limit or describe the scope of this Agreement or the intent of any its provisions. 6.6 Entire Agreement. This Agreement contains the entire Agreement between the parties pertaining to the subject matter of it, and supersedes all prior Agreements, understandings, negotiations and discussions, whether oral or written, relating to the subject matter of this Agreement. No supplement, modification or waiver of this Agreement will be valid unless executed by the party to be bound by it. No waiver of any of the provisions of this Agreement will be deemed or will constitute a waiver of any other provision of this Agreement (whether or not similar), nor will such waiver constitute a continuing waiver unless otherwise expressly provided. 6.7 Notice. Any notice or other communication required or permitted under this Agreement will be in writing and will be deemed to have been given (i) if personally delivered, when so delivered, (ii) if mailed, one (1) week after having been placed in the United States mail, registered or certified, postage prepaid, addressed to the party to whom it is directed at the address set forth below or (iii) if given by telex, telecopier or e-mail, when such notice or other communication is transmitted to the telex or telecopier number or e-mail address specified below and the appropriate answer back or confirmation is received. If to the Company: Mustang Software 6200 Lake Ming Road Bakersfield CA 93306 Attention: President Telecopier Number: (805) 873-2457 E-mail address: jim.harrer@mustang.com If to Employee: C. Scott Hunter 6737 Park West Circle Bakersfield, CA 93308 E-mail address: scott.hunter@mustang.com Either party may change the address to which such notices are to be addressed by giving the other party notice in the above manner. 6.8 Attorneys Fees. In the event any party takes legal action to enforce any of the terms of this Agreement, the unsuccessful party to such action will pay the successful partys expenses, including attorneys' fees, incurred in such action. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date and year first set forth above. Employee The Company Mustang Software, Inc. By:_/s/James A. Harrer______ ____/s/C.Scott Hunter____ James A. Harrer C. Scott Hunter Its President EX-10.23 4 Exhibit 10.23 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and effective as of the 8th day of February, 1997 by and between MUSTANG SOFTWARE, INC., a California corporation (the Company), and DONALD M. LEONARD (the Employee), with respect to the following facts: A. The Company wants to be assured of the continued association and services of the Employee to take advantage of his experience, knowledge and abilities in the Company's business and is willing to employ the Employee, and the Employee desires to be so employed, on the terms and conditions set forth in this Agreement. B. The Employee from time to time in his employment may learn trade secrets and other confidential information concerning the Company, and the Company desires to safeguard such trade secrets and confidential information against unauthorized use and disclosure. ACCORDINGLY, the parties agree as follows: 1 EMPLOYMENT 1.1 Employment and Duties. The Company employs the Employee as Vice President Finance and Chief Financial Officer and Employee accepts such employment and agrees to do, on the terms and conditions set forth below and during the term of this Agreement the following duties: Employees duties shall include primary responsibility for the Companys financial matters and tax strategies, supervision of the development and maintenance of the Companys accounting and customer database system, the duties as Chief Financial Officer set forth in Article III, section 10 of the Amended and Restated By-laws of the Company and such other duties and acts in connection with the Companys business, as reasonably may be required by the Companys Board of Directors. 1.2 Service to Others. Employee will devote his entire productive time, ability and attention to, and will diligently and conscientiously use his best efforts to further the Company's business and will not, without the prior written consent of the Company's Board of Directors in each instance, do services of any kind, whether or not for compensation, for any person other than the Company, which services, in the sole opinion of the Company's Board of Directors, might materially interfere with the performance of his duties under this Agreement. Employee is not prohibited from making personal investments in other businesses, if those investments do not require Employee to participate in the operation of such businesses in which he invests and so long as none of the investments are in companies, partnerships, ventures or entities of any type or kind, or with an individual or individuals, in competition with or in the same or similar business as the Company. This limitation does not apply to any stock purchases in any company that is listed on the New York or American Stock Exchanges or the Nasdaq Stock Market provided such purchases do not exceed, in the aggregate, 1 percent of the outstanding stock of such company. 2 COMPENSATION 2.1 Compensation. As the total compensation for the services which the Employee renders to the Company, the Company will pay Employee the following: 2.1.1 An annual base salary in the amount of $85,000. Said salary, less applicable federal, state and local payroll and withholding deductions, will be payable by the Company on a semimonthly basis (in accordance with the Companys standard payroll practices applicable to all employees) during the term of this Agreement. The annual base salary may be increased by the Company from time to time but, if so increased, will not later be decreased. 2.1.2 Employee will be entitled to group medical and life insurance as presently in place for Employee on the date this Agreement is made, and reimbursement of ordinary and necessary business expenses, travel or otherwise, and those expenses incurred by Employee in the furtherance of his obligations under this Agreement. 2.1.3 Employee will be entitled to two (2) weeks paid vacation per year to be taken during such period(s) of his choosing. Employees vacation that is earned but not used during the year may be carried over into another year up to an aggregate maximum of five (5) days. The Company shall pay Employee the appropriate amount, based on Employees base annual salary at the date of termination, for any earned but unused vacation time existing at the date of termination of this Agreement. 2.2 Illness. Subject to Sections 3.2.1 and 3.2.2, if the Employee is unable to render the services required under this Agreement on account of personal injuries or physical or mental illness, he will continue to receive all payments provided in this Agreement; provided, however, that any such payments may, at the sole option of the Company, be reduced by any amount that the Employee receives as disability compensation for the period covered by such payments under insurance policies, if any, maintained by the Company or under government programs. 3 TERM OF EMPLOYMENT AND TERMINATION 3.1 Term. Unless sooner terminated pursuant to Section 3.2, the term of employment under this Agreement will be for one (1) year from the date of this Agreement; provided, however, that such term of employment will be renewed automatically for successive one (1) year terms unless written notice of non renewal is given by either the Company or Employee not less than thirty (30) days prior to the end of the initial term or any subsequent one (1) year term. Any such notice of non renewal will for purposes of subsection 3.2 of this Agreements be deemed a notice of termination without Cause (as defined below) if given by the Company and a notice termination by Employee without Good Reason (as defined below) if given by Employee. 3.2 Termination. Employment under this Agreement will terminate prior to the expiration of its term upon the happening of any of the following events: 3.2.1 The death of Employee. 3.2.2 If Employee is absent from work because of illness or incapacity or for any other reason for a cumulative period of more than one hundred eighty (180) days in any consecutive twelve month period, the Company may terminate this Agreement upon the expiration of thirty days written notice to Employee. 3.2.3 At the Company's option, with Cause or without Cause, the Company may terminate this Agreement upon the expiration of thirty days written notice to Employee. Cause means (a) the willful and continued failure by the Employee to substantially perform his duties under this Agreement (other than any such failure resulting from Employees incapacity due to physical or mental illness), (b) the willful engaging by Employee in misconduct which is materially damaging to the Company, monetarily or otherwise, or which would substantially impair the reputation and public perception of Company, or (c) the wilful violation by Employee of any of the provisions of Section 5 of this Agreement. 3.2.4 At Employees option, with Good Reason or without Good Reason, Employee may terminate this Agreement upon the expiration of thirty days written notice to the Company. Good Reason means (a) a Change in Control of the Company (as defined below) or (b) a failure by the Company to comply with any material provision of this Agreement which has not been cured within 10 days after notice of the noncompliance has been given by Employee to the Company. Change in Control means a change in control of a nature that would be required to be reported in response to Item 1 of Form 8- K or Item 5(e) of Schedule 14A under Regulation 14A promulgated under the Securities Exchange Act of 1934 (the Exchange Act); provided that, without limitation, such a Change in Control will be deemed to have occurred if (i) any person (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than the Company, or any person who on the date of this Agreement is a director or officer of the Company, is or becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities or, (ii) any person (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than the Company, acquires all or substantially all of the assets or business of the Company, or (iii) during any period of two consecutive quarters during the term of this Agreement, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority of directors, unless the election of each director who was not a director at the beginning of such period has been approved in advance by directors representing at least two-thirds of the directors then in office who were directors at the beginning of the period. 4 DUTIES AND COMPENSATION UPON TERMINATION. 4.1 Duties. In the event that employment under this Agreement is terminated, Employee shall continue to perform his duties through the date of termination. After that neither the Company nor Employee shall have any remaining duties or obligations under this Agreement except that (a) the Company shall pay to the Employee, or his estate, such compensation as is due pursuant to Section 2.l, prorated through the date of termination, plus such severance compensation, if any, as is due pursuant to Section 4.2 and (b) Employee shall continue to be bound by Section 5. 4.2 Severance Compensation. 4.2.1 At the date of termination and provided Employee has continued to perform his duties through the date of termination, in addition to the compensation payable to Employee pursuant to Section 4.1, the Company shall pay Employee, in a lump sum, the amount equal to 8.33% of Employees annual base salary in effect at the date of termination multiplied by the number of months corresponding to the grounds for termination in the table below. Grounds for Termination Number of Months Death or Disability of Employee pursuant to Zero (0) Section 3.2.1 or 3.2.2. By Company without Cause pursuant to Section Nine (9) 3.2.3. By Employee with Good Reason pursuant to Section 3.2.4. By Company with Cause pursuant to Section Four (4) 3.2.3. By Employee without Good Reason pursuant to Section 3.2.4. 4.2.2 Following the date of termination, the Company shall continue to provide Employee with (or pay the premiums for) the same medical coverage that the Company provided to Employee as of the date of termination for the number of months corresponding to the grounds for termination in the table set forth in subsection 4.2.1. The provisions of this Agreement to pay Employee severance compensation in the event Employee is terminated for Cause will not diminish or otherwise affect the Companys right to claim and recover damages from Employee as result of any of the events or conduct leading to Employees termination for Cause. 5 TRADE SECRETS 5.1 Trade Secrets. The Employee shall not, without the prior written content of the Company's Board of Directors in each instance, disclose or use in any way, either during his employment by the Company or after it, except as required in the course of his employment with the Company, any confidential business or technical information or trade secret of the Company acquired in the course of such employment, whether or not patentable, copyrightable or otherwise protected by law, and whether or not conceived of or prepared by him (collectively, the Trade Secrets) including, without limitation, any information concerning: existing and contemplated products; Inventions (as defined below); manufacturing procedures, methods, machines, compositions, technology or formulas; research and development programs; customer lists, customer usage and requirements; operating procedures; investments; financing; costs; employees; salaries; purchasing; accounting; marketing; merchandising; sales methods; pricing; profits; plans for future development; the identity, requirements, preferences, practices and methods of doing business of specific parties with whom the Company transacts business; and all other information which is related to any product, service or business of the Company, all of which Trade Secrets are the exclusive and valuable property of the Company. Notwithstanding the foregoing, Trade Secrets do not include information which is generally known in the industry in which the Company transacts business or is acquired from public sources and not gained in breach of this Agreement; Inventions means inventions, mask works, ideas, processes, formulas, source and object codes, data, programs, other works of authorship, know- how, improvements, discoveries, developments, designs and techniques. 5.2 Tangible Items. All files, accounts, records, documents, books, forms, notes, reports, memoranda, studies, compilations of information, correspondence and all copies, abstracts and summaries of the foregoing, and all other physical items related to the Company, other then a merely personal item, whether of a public nature or not, and whether prepared by the Employee or not, are and shall remain the exclusive property of the Company and shall not be removed from the premise of the Company except as required in the course of employment by the Company, without the prior written consent of the Company's Board of Directors in each instance, and the same shall be promptly returned to the Company by the Employee on the expiration or termination of his employment or at any time prior to it upon the request of the Company. Notwithstanding the foregoing or anything to the contrary herein, Employee may remove and retain the following Company items as additional severance compensation irrespective of the reason for termination: the laptop computer and pilot personal organizer primarily used by Employee as of the date of termination. 5.3 Solicitation of Employees. During his employment by the Company and for the nonsolicitation period after such employment specified in the table below (such period not to include any period of violation this subsection by the Employee or period which is required for litigation to enforce this subsection and during which the Employee is in violation of it), Employee will not, directly or indirectly, either for his own benefit or purposes or the benefit or purposes of any other person, employ or offer to employ, call on, solicit, interfere with or attempt to divert or entice away any employee or independent contractor of the Company (or any person whose employment or status as an independent contractor has terminated within the twelve months preceding the date of such solicitation) in any capacity if that person possesses or has knowledge of any Trade Secrets of the Company. Nonsolication Period If person to be solicited is an employee 12 months If person to be solicited is an independent 6 months contractor 5.4 Injunctive Relief. Employee acknowledges and agrees that it would be difficult to fully compensate the Company for damages resulting from the breach or threatened breach of these provisions and, accordingly that the Company will be entitled to temporary and injunctive relief, including temporary restraining orders, preliminary injunctions and permanent injunctions, to enforce such provisions without the necessity of proving actual damages and without the necessity of posting any bond or other undertaking in connection with it. This provision with respect to injunctive relief will not, however, diminish the Companys right to claim and recover damages. 6 MISCELLANEOUS 6.1 Severable Provisions. The provisions of this Agreement are severable, and if any one or more provisions may be determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions, and any partially unenforceable provisions to the extent enforceable, will nevertheless be binding and enforceable. 6.2 Successors and Assigns. All of the terms, provisions and obligations of this Agreement will inure to the benefit of and will be binding upon the parties to this Agreement and their respective heirs, representatives, successors and assigns. Notwithstanding the preceding sentence, neither this Agreement nor any rights under this Agreement will be assigned, pledged, hypothecated or otherwise transferred by the Employee without the prior written consent of the Company in each instance. 6.3 Governing Law. The validity, construction and interpretation of this Agreement will be governed in all respects by the laws of the State of California applicable to contracts made and to be performed wholly within that state. 6.4 Consent to Jurisdiction. Employee and the Company, to the fullest extent he or it may effectively do so under applicable law, irrevocably (i) submit to the exclusive jurisdiction of any court of the State of California or the United States of America sitting in or covering the City of Bakersfield over any suit, action or proceeding arising out of or relating to this Agreement, (ii) waive and agree not to assert, by way of motion, as a defense or otherwise, any claim that he or it is not subject to the jurisdiction of any such court, any objection that he or it may now or later have to the establishment of the venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum, and (iii) consents to process being served in any such suit, action or proceeding by mailing a copy of it by registered or certified air mail, postage prepaid, return receipt requested, to the address of such party specified in or designated pursuant to Section 6.7. Each party agrees that such service (i) will be deemed in every respect effective service of process upon such party in any such suit, action or proceeding and (ii) will to the fullest extent permitted by law be taken and held to be valid personal service upon and personal delivery to such party. 6.5 Headings. Section and subsection headings are not to be considered part of this Agreement and are included solely for convenience and reference and in no way define, limit or describe the scope of this Agreement or the intent of any its provisions. 6.6 Entire Agreement. This Agreement contains the entire Agreement between the parties pertaining to the subject matter of it, and supersedes all prior Agreements, understandings, negotiations and discussions, whether oral or written, relating to the subject matter of this Agreement. No supplement, modification or waiver of this Agreement will be valid unless executed by the party to be bound by it. No waiver of any of the provisions of this Agreement will be deemed or will constitute a waiver of any other provision of this Agreement (whether or not similar), nor will such waiver constitute a continuing waiver unless otherwise expressly provided. 6.7 Notice. Any notice or other communication required or permitted under this Agreement will be in writing and will be deemed to have been given (i) if personally delivered, when so delivered, (ii) if mailed, one (1) week after having been placed in the United States mail, registered or certified, postage prepaid, addressed to the party to whom it is directed at the address set forth below or (iii) if given by telex, telecopier or e-mail, when such notice or other communication is transmitted to the telex or telecopier number or e-mail address specified below and the appropriate answer back or confirmation is received. If to the Company: Mustang Software 6200 Lake Ming Road Bakersfield CA 93306 Attention: President Telecopier Number: (805) 873-2457 E-mail address: jim.harrer@mustang.com If to Employee: Donald M. Leonard 9412 Brookstone Court Bakersfiled, CA 93312 Telecopier Number: (805) 588-9250 E-mail address: don.leonard@mustang.com Either party may change the address to which such notices are to be addressed by giving the other party notice in the above manner. 6.8 Attorneys Fees. In the event any party takes legal action to enforce any of the terms of this Agreement, the unsuccessful party to such action will pay the successful partys expenses, including attorneys' fees, incurred in such action. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date and year first set forth above. The Company Employee Mustang Software, Inc. By:_/s/James A. Harrer________ ___/s/Donald M. Leonard__ James A. Harrer Donald M. Leonard Its President EX-11 5 1 EXHIBIT 11. MUSTANG SOFTWARE, INC. COMPUTATION OF EARNINGS PER SHARE (In thousands, except earnings per share) - - ---------------------------------------------------------------------------- Three Months Ended Twelve Months Ended December 31, December 31, 1995 1996 1995 1996 - - --------------------------------------------------------------------------------------------- Weighted average number of common shares outstanding 3,356 3,363 3,050 3,360 Common stock equivlents from outstanding stock options 0 0 0 0 - - --------------------------------------------------------------------------------------------- Average common and common stock equivalents outstanding 3,356 3,363 3,050 3,360 =============================================================================================== Net Income (Loss) $(1,410) $(1,035) $(1,097) $(3,453) =============================================================================================== Earnings (Loss) per share (1) $ (.42) $ (.31) $ (.36) $ (1.03) ===============================================================================================
(1) Fully diluted earnings per share have not been presented because the effects are not material. - - ---------------------------------------------------------------------------- EX-27 6 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1996 DEC-31-1996 $2,920,231 0 463,529 400,000 228,136 3,440,936 1,256,337 393,337 4,310,711 1,147,109 337,221 0 0 6,628,722 (3,802,341) 4,310,711 3,810,240 3,810,240 646,199 646,199 6,806,066 0 42,663 (3,452,025) (3,452,825) (3,452,825) 0 0 0 (3,452,825) (1.03) (1.03)
EX-22.2 7 EXHIBIT 22.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation into both (1) the Registration Statement on Form S- 8 of Mustang Software, Inc. (file no. 333-07269) relating to 444,000 shares of Common Stock issuable upon exercise of options granted under the Mustang Software, Inc. 1994 Incentive and Nonstatutory Stock Option Plan and (2) the Registration Statements on Form S-8 of Mustang Software, Inc. (file no. 333- 07235) relating to 50,000 shares of Common Stock issuable to participants pursuant to the Mustang Software, Inc. Employee Stock Purchase Plan of our report dated February 6, 1997 on the financial statements of Mustang Software, Inc. which appears in this Annual Report on Form 10-KSB for the year ended December 31, 1996. Los Angeles, California March 29, 1997 Arthur Andersen L.L.P. -----END PRIVACY-ENHANCED MESSAGE-----