-----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, AiGK/slwKma6Kf9Rbr9yaWXjcl1/bwpNmXaH49NO+yFAc7hbODg0T8ACWqhI7frZ bOQ6bgt1kx5LMbDziPuw+Q== 0000940986-99-000006.txt : 19990817 0000940986-99-000006.hdr.sgml : 19990817 ACCESSION NUMBER: 0000940986-99-000006 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MUSTANG SOFTWARE INC CENTRAL INDEX KEY: 0000940986 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 700204718 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-25678 FILM NUMBER: 99690130 BUSINESS ADDRESS: STREET 1: 6200 LAKE MING RD CITY: BAKERSFIELD STATE: CA ZIP: 93306 BUSINESS PHONE: 6618732500 MAIL ADDRESS: STREET 1: 6200 LAKE MING RD CITY: BAKERSFIELD STATE: CA ZIP: 93306 10QSB 1 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-QSB (Mark One) X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended June 30, 1999 OR Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number: 0-25678 MUSTANG SOFTWARE, INC. (Exact name of registrant as specified in its charter) California (State of incorporation) 77-0204718 (I.R.S. employer identification number) 6200 Lake Ming Road Bakersfield, California 93306 (Address of principal executive offices) (661) 873-2500 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No As of August 3, 1999, there were 4,616,456 shares of the Registrant's Common Stock outstanding. =============================================================================== 2 MUSTANG SOFTWARE, INC. FORM 10-QSB INDEX Page PART I. Financial Information: Balance Sheets as of June 30, 1999 and December 31, 1998 3 Statements of Operations for the three and six months ended 4 June 30, 1999 and 1998 Statements of Cash Flows for the six months ended June 30, 1999 and 1998 5 Notes to Financial Statements 6 Management's Discussion and Analysis of Financial Condition and 7 Results of Operations PART II. Other Information: Item 4. Submission of Matters to a Vote of Security Holders 16 Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18 =============================================================================== 3 MUSTANG SOFTWARE, INC. BALANCE SHEETS ASSETS
June 30, December 31 1999 1998 (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 2,251,247 $ 1,849,700 Accounts receivable, net of allowance for 494,430 409,077 doubtful accounts of $168,200 and $150,000 at December 31, 1998 and June 30, 1999 respectively Income taxes receivable -- -- Inventories 12,444 9,196 Other -- 19,660 - - - ----------------------------------------------------------------------------- Total current assets 2,758,121 2,287,633 - - - ----------------------------------------------------------------------------- PROPERTY AND EQUIPMENT: Property and equipment 1,305,358 1,239,882 Accumulated depreciation (734,125) (647,027) - - - ----------------------------------------------------------------------------- Net property and equipment 571,233 592,855 - - - ----------------------------------------------------------------------------- OTHER ASSETS: Capitalized software development costs, net -- -- Other 18,289 11,183 - - - ----------------------------------------------------------------------------- Total other assets 18,289 11,183 - - - ----------------------------------------------------------------------------- $3,347,643 $2,891,671 = =============================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $299,950 $233,854 Current portion of capital lease 8,259 8,259 Accrued payroll and liabilities 137,234 114,381 Income taxes payable 99,776 99,776 Accrued warranty and support -- -- Deferred revenue 135,000 125,000 - - - ----------------------------------------------------------------------------- Total current liabilities 680,219 581,270 - - - ----------------------------------------------------------------------------- CAPITAL LEASE OBLIGATION, net of current portion 256,719 260,747 - - - ----------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred stock, no par value: Authorized-10,000,000 shares 7,956 issued and outstanding as of 730,229 730,229 December 31, 1998 Common stock, no par value: Authorized-30,000,000 shares Issued and outstanding 4,098,845 and 8,086,642 7,618,954 4,615,956 shares at December 31, 1998 and June 30, 1999, respectively Retained earnings (6,406,166) (6,299,529) - - - ----------------------------------------------------------------------------- Total shareholders' equity 2,410,705 2,049,654 - - - ----------------------------------------------------------------------------- $3,347,643 $2,891,671 = =============================================================================== The accompanying notes are an integral part of these financial statements.
4 MUSTANG SOFTWARE, INC. STATEMENTS OF OPERATIONS
Three Months Ended June 30, Six Months Ended June 30, 1999 1998 1999 1998 REVENUE $ 803,109 $ 404,158 $ 1,576,091 $ 802,638 COSTS OF REVENUE 106,292 33,439 154,853 99,848 - - - ------------------------------------------------------------------------------------ Gross profit 696,817 370,719 1,421,238 702,790 - - - ------------------------------------------------------------------------------------ OPERATING EXPENSES: Research and development 174,334 147,524 303,853 301,577 Selling and marketing 274,883 223,075 526,512 470,093 General and administrative 396,291 306,713 743,613 687,523 - - - ------------------------------------------------------------------------------------ Total operating expenses 845,508 677,312 1,573,978 1,459,193 - - - ------------------------------------------------------------------------------------ Income(loss)from operations (148,691) (306,593) (152,740) (756,403) - - - ------------------------------------------------------------------------------------ OTHER INCOME (EXPENSE): Interest expense (6,562) (7,766) (13,173) (15,941) Interest income 31,242 11,674 52,201 26,107 Gain/Loss on sale of asset 11,625 -- 11,625 -- - - - ------------------------------------------------------------------------------------ Total other income (exp.)36,305 3,908 50,653 10,166 - - - ------------------------------------------------------------------------------------ Income (loss) before provision for income taxes (112,386) (302,685) (102,087) (746,237) - - - ------------------------------------------------------------------------------------ PROVISION (BENEFIT) FOR INCOME TAXES 800 800 800 800 - - - ------------------------------------------------------------------------------------ NET INCOME (LOSS) $ (113,186) $ (303,485) $ (102,887) $ (747,037) = ======================================================================================= NET INCOME (LOSS) PER COMMON SHARE $(.02) $(.09) $(.02) $(.22) = ======================================================================================= WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 4,591,803 3,451,365 4,417,288 3,434,663 = ======================================================================================== The accompanying notes are an integral part of these financial statements.
= ============================================================================== 5 MUSTANG SOFTWARE, INC. STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net income(loss) $ (102,887) $(747,037) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 87,098 69,684 Net changes in assets and liabilities 7,528 (52,387) - - - ----------------------------------------------------------------------- Net cash provided (used) by operating (8,261) (729,740) activities - - - ----------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITES: Purchase of property and equipment (53,858) (12,349) - - - ----------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of stock 467,689 68,903 Payments on capital lease obligation (4,028) (33,271) - - - ----------------------------------------------------------------------- Net Cash provided (used) by financing 463,661 35,632 activities - - - ----------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH 401,542 (706,457) CASH BALANCE, beginning of period 1,849,700 1,403,776 - - - ----------------------------------------------------------------------- CASH BALANCE, end of period $ 2,251,247 $ 697,319 = ========================================================================= SUPPLEMENTAL DISCLOSURES: Interest paid 13,173 15,941 Taxes paid 800 800 The accompanying notes are an integral part of these financial statements.
=============================================================================== 6 MUSTANG SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS Note 1. Accounting Policies The accompanying unaudited Condensed Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have either been condensed or omitted pursuant to those rules and regulations. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations and cash flows for the periods presented are not necessarily indicative of the results that may be expected for the full fiscal year. For further information, refer to the financial statements and notes thereto for the year ended December 31, 1998, included in the 1998 Form 10KSB. The condensed Balance Sheet at December 31, 1998 has been taken from the audited financial statements at that date and condensed MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In addition to the comments that follow, further information can be obtained by referring to the management's discussion and analysis of financial condition and results of operations section included in the Form 10KSB, filed for the year ended December 31, 1998. Results of Operations: Three Months Ended June 30, 1999 and 1998 Revenues for the three months ended June 30, 1999 were $803,109 an increase of $398,951 or 98.7% over revenues for the same period in 1998. As a percentage of revenues by product category for the second quarter 1999 vs. 1998 showed the Internet directed product line consisting of Internet Message Center ("IMC"), Liscater and FileCenter Web Essential at 98% and 63%, Wildcat! line at nil and 24% and the QmodemPro line at 2% and 7%, respectively. The increase in sales of the Web Essentials line was due to increased acceptance of the Web Essentials products and the increase in products from 1 in 1997 to 3 in 1998. Because of its decision to focus on products that are designed to facilitate interaction on the Internet, Mustang sold its Wildcat! WinServer, Wildcat! BBS and Off-line Xpress BBS mail reader product lines to Santronics Software, Inc. of Homestead, Florida in November 1998. That accounts for nil sales of products from this line in the second quarter of 1999. Gross profit for the quarter increased from $370,719 in 1998 to $696,817 370,71 in 1999, and decreased as a percentage of revenues from 91.7% in 1998 to 86.8% in 1999. Gross profit percentage has averaged approximately 83% to 86% over the last three calendar years. The Company does not expect the gross profit percentage to remain at the current level. As more turnkey solutions are sold through the Mustang Professional Services division, the Company expects the gross profit percentage to decrease. 7 Research and development expenses increased $26,810 in the second quarter of 1999 from 1998, but decreased as a percentage of revenues from 36.5% in 1998 to 21.7% in 1999. 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 has devoted and is devoting a substantial portion of its research and development resources to the Windows 95 and Windows NT environments. The headcount in this department decreased from 8 at June 30, 1998 to 7 at June 30, 1999. Selling and marketing expenses for the quarter were $274,883, an increase of $51,808 over the same quarter the previous year, but they decreased as a percentage of revenues from 55.2% in 1998 to 34.2% in 1999. The items primarily accounting for the increase was the advertising and promotional costs for the new Web Essentials line of products and an increase in the number of trade shows attended in 1999 as compared to 1998. General and administrative expenses increased for the 1999 quarter compared to the previous year, from $306,713 in 1998 to $396,291 in 1999, but decreased as a percentage of revenues, from 75.9% in 1998 to 49.3% in 1999. The items primarily accounting for the increase were legal expenses and costs associated investor relations. The decrease as percent of sales was due to the increase in sales of 98.7%, actual dollars spend only increased 29.2%. Six Months Ended June 30, 1999 and 1998 Revenues for the six months ended June 30, 1999 were $1,576,091, an increase of $773,453 or 96.4% over revenues for the same period in the prior year. As a percentage of revenues by product category showed the Company's Internet directed product line consisting of Internet Message Center ("IMC"), ListCaster and FileCenter at 93% and 48%, the QmodemPro line at 3% and 8% , and the Wildcat! line at nil and 39%, and other at 5% and 3 for the first six months of 1999 and 1998, respectively. Because of its decision to focus on products that are designed to facilitate interaction on the Internet, Mustang sold its Wildcat! WinServer, Wildcat ! BBS and Off-Line Xpress BBS mail reader product lines to Santronics Software, Inc. of Homestead, Florida in November 1998. That accounts for nil sales of products from this line in the first six months of 1999. Gross profit for the first six months increased from $702,790 in 1998 to $1,421,238 in 1999 , and increased as a percentage of revenues from 87.6% in 1998 to 90.2% in 1999 . Gross profit percentage has averaged approximately 83% to 87% over the last three calendar years. The increase in Gross Profit percentage from 1998 to 1999 is due mainly to the increase in sales of the Internet Message Center ("IMC"). The Internet Message Center ("IMC") has higher average selling prices and gross profit percentages then the Company's previous lines of products. As more turnkey solutions are sold through the Mustang Professional Services division, the Company expects the gross profit percentage to decrease. 8 Research and development expenses increased $2,276 in the first six months of 1999 from 1998 , but decreased as a percentage of revenues from 37.6% in 1998 to 19.3% in 1999 . 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. The decrease as a percent of revenues is due to the actual dollars spent remaining relatively flat while revenue increased 96.4%. Selling and marketing expenses for the first six months of 1999 increased $56,419 30 over the same period the previous year, from $470,093 $534,39 to $526,512 . As a percentage of revenues selling and marketing expenses decreased from 58.6% in 1998 to 33.4% in 1999. The items primarily accounting for the increase was the advertising and promotional costs for the Internet Message Center ("IMC") and an increase in travel related expenses 1999 as compared to 1998 . General and administrative expenses increased $56,090 in the first six months of 1999 from $687,523 in 1998 to $743,613 in 1999, but as a percentage of revenues decreased from 85.7% in 1998 to 47.2% in 1999 . The items primarily accounting for the increase in actual dollars spent were legal and investor relations expenses. Liquidity and Capital Resources Cash and cash equivalents balance at June 30, 1999 were approximately $2,250,000, an increase of approximately $401,000 from December 31, 1998. Accounts receivable increased approximately $85,000 and Accounts Payable increased approximately $66,000 in 1999. Accounts receivable average days to collect for the quarter ended June 30, 1998 and 1999 were 48 and 40 days, respectively. Average days to collect in 1998 were 52 days. Management's goal is to maintain receivable collection days at or below 50 for 1999. Inventory levels have increased approximately $3,000 in 1999 from December 31, 1998. As well as accrued liabilities have increased approximately $22,000. 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 intends to meet its long-term liquidity needs through available cash and cash flow as well as through financing from outside sources. The Company is actively seeking to raise additional capital and has made arrangements to raise funds through a private placement of securities that will not be registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. However, there can be no assurance that the Company will be successful in completing the private placement or otherwise raising additional capital. Further, there can be no assurance, assuming the Company successfully raises additional funds, that the Company will achieve profitability or positive cash flows. If the Company is not successful in raising additional funds, it appears it will be forced to curtail the scope of its operations. 9 Certain Risk Factors That Could Affect Future Results Variability of Operating Results; Lengthy Sales Cycle. Mustang's expense levels are based, in part, on its expectations as to future revenues and are not expected to decrease, at least in the short term. In fact Mustang expects expenses to increase from those incurred during the first half of 1999 as it implements a strategy to add sales and support personnel in an effort to grow revenues. Further, Mustang may from time to time be forced by the competitive environment in which it competes to make tactical or strategic decisions that disrupt or reduce anticipated revenues. Moreover, during 1998, which was the first year that the Company achieved material revenues from IMC and its other Internet-directed products introduced during 1997, the Company observed a trend that a disproportionate percentage of the Company's net sales were generated during the last month of a quarter. As a result, a shortfall in sales in any quarter as compared to expectations may not be identifiable until the end of a quarter. Mustang may not be able to adjust its spending plan in a timely manner to compensate for any future revenue shortfall. Any significant shortfall in sales in relation to the Company's revenue expectations would have a material adverse impact on the Company's business, results of operations, financial condition and prospects. The purchase of the Enterprise Edition of IMC, the Company's core product, involves a significant commitment of customers' personnel and other resources. Furthermore, the cost of the software is typically only a small portion of the related hardware, development, training and integration costs associated with implementing a complete e-mail management solution. For these and other reasons, the sales cycle associated with the purchase of IMC is typically complex, lengthy and subject to a number of significant risks. Such risks include changes in customers' budgetary constraints and approval at senior levels of customers' organizations, over which the Company has no control. The Company's sales cycle can range from four to six months or more and varies substantially from customer to customer. Because of the lengthy sales cycle and the dependence of the Company's quarterly revenues upon a relatively small number of orders that represent large dollar amounts, the loss or delay of a single order could have a material adverse effect on the Company's business, financial condition and results of operations. Uncertainty of Market for E-mail Management Software and Dependence upon IMC. Prior to 1998, most of the Company's revenues were derived from its Wildcat! WinServer and BBS software. Beginning in the second quarter of 1997 and continuing throughout the year, Mustang changed its focus and launched new products designed to facilitate interaction on the Internet's World Wide Web. Mustang released the Business Edition of IMC in September 1997 and its core product, the Enterprise Edition, in February 1998. The future of the Company is dependent upon the acceptance by the market of IMC and Mustang's ability to market this e-mail management solution and related services successfully. IMC accounted for over 50 percent of the Company's net sales during 1998, but Mustang has only limited operating history with respect to this product. As a result, as well as the recent emergence of the commercial e-mail management market, the Company has neither internal nor industry-based historical financial data for a significant period upon which to project revenues or base planned. 10 operating expenses. Future operating results will depend on a variety of factors, including Mustang's ability to maintain or increase market demand for IMC, and its other products and services, usage and acceptance of the Internet the introduction and acceptance of new, enhanced or alternative products or services by Mustang or its competitors. Other factors that could affect its operating results include Mustang's ability to anticipate and effectively adapt to a developing market and to rapidly changing technologies, the financial resources Mustang has to devote to developing enhanced versions of its products, general economic conditions, competition by existing and emerging competitors, software defects and other quality control problems and the mix of products and services sold. Undeveloped and Rapidly Changing Markets. The markets for Mustang's products and services are at a very early stage of development, are rapidly changing and are characterized by an increasing number of market entrants that have introduced or are developing competing products and services for use on the Internet and the World Wide Web. As is typical for a new and rapidly evolving industry, demand for and market acceptance of recently introduced products and services are subject to a high level of uncertainty and risk. Acceptance and usage of the IMC is dependent on continued growth in use of e-mail as a primary means of communications by businesses and consumers. Businesses that already have invested substantial resources in traditional or other methods of conducting business may be reluctant to adopt new commercial methodologies or strategies that may limit or compete with their existing businesses. Individuals with established patterns of purchasing goods and services may be reluctant to alter those patterns. Accordingly, it is not assured that sufficient demand for Mustang's products and services will develop to sustain Mustang's business. There can be no assurance that use of e-mail as a primary method of communication or commerce over the Internet will become widespread, that a substantial market for Mustang's products and services will emerge or that the IMC will be generally adopted. Mustang's business, financial condition and results of operations will be materially and adversely affected if the market fails to develop as expected or develops more slowly than expected. Similarly, Mustang's business, financial condition and results of operations will be materially and adversely affected if the Internet infrastructure is not adequately expanded or managed, or if Mustang's products and services do not achieve market acceptance by a significant number of businesses. Competition. The market for e-mail message management products and services is intensely competitive, and Mustang expects competition to increase significantly. There are no substantial barriers to entry into Mustang's business, and it expects established and new entities to enter the market for e-mail message management products and services in the near future. It is possible that a single supplier will dominate one or more market segments including e-mail management, customer service and call center automation. Furthermore, since there are many potential entrants to the field, it is extremely difficult to assess which companies are likely to offer competitive products and services in the future, and in some cases it is difficult to discern whether an existing product or service is competitive with the IMC. 11 Mustang's principal competitors in the e-mail message management market include Adante, Aptex Software, Brightware, eGain, General Interactive, Kana Communications, MessageMedia and Micro Computer Systems, each of which provides software solutions for e-mail management. Mustang also competes with other firms that provide e-mail message management services on an outsourcing basis. The Company competes with a number of independent software suppliers who offer Web Server or telecommunications software as or among their product line(s). Several of Mustang's current and potential competitors have greater name recognition, larger installed customer bases, more diversified lines of products and services and significantly greater financial, technical, marketing and other resources than Mustang. Such competitors may be able to undertake more extensive marketing campaigns, adopt more aggressive pricing policies and make more attractive offers to businesses to induce them to use their products or services. Such competitors may also be able to devote more financial resources and personnel to research and development activities, which could have the effect of making their products more technologically advanced and attractive to customer than Mustang's products. Limited Intellectual Property and Proprietary Rights. Mustang relies on a combination of trade secret, copyright and trademark laws, nondisclosure agreements and other contractual provisions and technical measures to protect its proprietary rights. Mustang believes that, due to the rapid pace of technological innovation for Internet products, Mustang's ability to establish and maintain a position of technology leadership in the industry depends more on skills of its development personnel than upon the legal protections afforded its existing technology. There can be no assurance that trade secret, copyright and trademark protections will be adequate to safeguard the proprietary software underlying Mustang's products and services. Similarly, there can be no assurance that agreements with employees, consultants and others who participate in the development of its software will not be breached, that Mustang will have adequate remedies for any breach or that Mustang's trade secrets will not otherwise become known. Mustang also faces the risk that notwithstanding Mustang's efforts to protect its intellectual property, competitors will be ableto develop functionally equivalent e-mail message management technologies without infringing any of Mustang's intellectual property rights. Despite Mustang's efforts to protect its proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use products or technology that Mustang considers proprietary, and third parties may attempt to develop similar technology independently. In addition, effective protection of intellectual property rights may be unavailable or limited in certain countries. Accordingly, there can be no assurance that Mustang's means of protecting its proprietary rights will be adequate or that Mustang's competitors will not independently develop similar technology. As the use of the Internet for commercial activity increases, and the number of products and service providers that support Internet commerce increases, Mustang believes that Internet commerce technology providers may become increasingly subject to infringement claims. There can be no assurance that plaintiffs will not file infringement claims in the future. Any such claims, with or without merit, could be time consuming, result in costly litigation, disrupt or delay the enhancement or shipment of Mustang's products and services or require 12 Mustang to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable or favorable to Mustang, which could have a material adverse effect on Mustang's business, financial condition and results of operations. In addition, Mustang may initiate claims or litigation against third parties for infringement of Mustang's proprietary rights or to establish the validity of Mustang's proprietary rights. Dependence of Key Personnel. The Company is dependent upon James A. Harrer, its President and Chief Executive Officer and C. Scott Hunter, its Vice President and Chief Technical Officer. The loss of either of these executives could have a material adverse effect on the Company. While the Company has one- year employment agreements with these executives, such agreements are terminable by each without any reason upon four months notice. Moreover, unforeseen circumstances could cause either of them to no longer render services to the Company. Mustang has key-man life insurance on the life of Mr. Harrer for $1,000,000. There can be no assurance that the proceeds from this policy will be sufficient to compensate the Company in the event of Mr. Harrer's death, and this policy does not cover the Company in the event that he becomes disabled or is otherwise unable to render services to the Company. Mustang's success of the Company is also dependent upon its ability to attract and retain highly qualified personnel. There can be no assurance that the Company will be able to recruit and retain such personnel. Dependence on Increased Usage; Stability of the Internet. The demand for products used on the Internet such as those offered by Mustang will depend in significant part on continued rapid growth in the number of households and commercial, educational and government institutions with access to the Internet, in the level of usage by such entities. Usage of the Internet as a source for information, products and services is a relatively recent phenomenon. Accordingly, it is difficult to predict whether the number of users drawn to the Internet will continue to increase and whether any significant market for usage of the Internet for such purposes will continue to develop and expand. There can be no assurance that Internet usage patterns will not decline as the novelty of the medium recedes or that the quality of products and services offered online will improve significantly to continue to support user interest. In addition, it is uncertain whether the cost of Internet access will decline. Failure of the Internet to stimulate user interest and be accessible to a broad audience at moderate costs would jeopardize the markets for Mustang's products and services. Issues regarding the stability of the Internet's infrastructure remain unresolved. The rapid rise in the number of Internet users and increased transmission of audio, video, graphical and other multimedia content over the Internet has placed increasing strains on the Internet's communications and transmission infrastructures. Continuation of such trends could lead to significant deterioration in transmission speeds and reliability of the Internet and could reduce the usage of the Internet by businesses and individuals. The Internet continues to experience significant growth in the number of users and level of use. Without corresponding increases and improvements in the Internet infrastructure, there can be no assurance that the Internet will be able to support the demands placed upon it by such continued growth. Any failure of the Internet to support such increasing number of users due to inadequate 13 infrastructure, or otherwise, would seriously limit the development of the Internet as a viable source of communication or commerce. This could materially and adversely affect the acceptance of Mustang's products and services which would, in turn, materially and adversely affect Mustang's business, results of operations, financial condition and prospects. Government Regulation and Legal Uncertainties. Mustang believes it is not currently subject to direct regulation by any government agency in the U.S., other than regulations generally applicable to businesses, and there are currently few laws or regulations directly applicable to access to, or commerce on, the Internet. However, there can be no assurance that federal, state or foreign agencies will not attempt in the near future to begin to regulate the market for Internet commerce. More generally, due to the increasing popularity and use of the Internet, it is possible that a number of laws and regulations will be adopted with respect to the Internet, covering issues such as user privacy, pricing, taxation and characteristics and quality of products and services. For example, the Telecommunications Reform Act of 1996 may subject certain Internet content providers to criminal penalties for the transmission of certain information and could also result in liability to Internet service providers, World Wide Web hosting sites and transaction facilitators such as Mustang. Various foreign jurisdictions have also moved to regulate access to the Internet and to strictly control World Wide Web content. Even if Mustang's business is not directly subject to regulation, the adoption of any such laws or regulations may inhibit the growth of the Internet, or the businesses of the users of Mustang's products and services, which could in turn adversely affect Mustang's business, financial condition and results of operations. Moreover, the applicability to the Internet of existing laws governing issues such as property ownership, libel, taxation and personal privacy is uncertain. Such uncertainty creates the risk that such laws could be interpreted in a manner that could generally inhibit commerce on the Internet and adversely impact Mustang's business. Due to the growth of Internet commerce, Congress has considered regulating providers of services and transactions in this market, and federal or state authorities could enact laws, rules or regulations affecting Mustang's business or operations. Government agencies may promulgate rules and regulations affecting Mustang's activities or those of the users of its products and services. Any or all of these potential actions could result in increased operating costs for Mustang or for the principal users of its products or services and could also reduce the convenience and functionality of Mustang's products or services. This could result in reduced market acceptance, which would have a material adverse effect on Mustang's business, financial condition and results of operations. 14 Year 2000 Compliance. Many currently installed computer systems and software products are coded to accept only two- digit entries in date code fields. Beginning in the year 2000, these date code fields will need to accept four-digit entries to distinguish 21st century dates from 20th century dates. As a result, in less than a year, computer systems and/or software used by many companies may need to be upgraded to comply with such "Year 2000" requirements. Mustang designed IMC and its other products to be Year 2000 compliant and has completed a systematic effort to identify any Year 2000 compliance problems in the various components of its products. However, significant uncertainty exists concerning the potential effects associated with compliance. Although Mustang believes that Mustang's IMC and other products are Year 2000 compliant, there can be no assurance that coding errors or other defects will not be discovered in the future. Moreover, Year 2000 problems affecting other hardware or software products which Mustang's customers rely on or intend to use beyond the end of 1999 could adversely affect the use or functionality of Mustang's products. Any Year 2000 compliance problem of Mustang, its service providers, its customers or the Internet infrastructure could result in a material adverse effect on the Company's business, operating results and financial conditions. Nasdaq Maintenance Requirements; Possible Delisting of Common Stock from Nasdaq Market. Mustang currently lists its common stock on The Nasdaq SmallCap Market. Nasdaq moved the listing from the Nasdaq National Market to The Nasdaq Small Cap Market on October 15, 1998 because the Company did not meet the maintenance requirements for the Nasdaq National Market. Mustang has to maintain certain minimum requirements for the continued listing of its common stock on The Nasdaq SmallCap Market. In this regard, it needs: net tangible assets of at least $2,000,000, or a market capitalization of at least $35,000,000, or net income in two of the last three years of at least $500,000; a public float of at least 500,000 shares with a minimum market value of $1,000,000; a minimum bid price of at least $1.00 per share; and a minimum of two active market makers and 300 round lot shareholders. While Mustang met the requirements for continued listing at December 31, 1998, it reported only $2,251,247 of net tangible assets at that date. Accordingly, if the Company reports losses during the quarter ending September 30, 1999 or future quarters that causes its net tangible assets to drop below $2,000,000 and if it is unable or unwilling to raise needed capital to satisfy the net tangible asset requirement, it could be delisted from The Nasdaq Stock Market. Similarly, if Mustang is unable to satisfy Nasdaq's other maintenance requirements, Nasdaq may delist its common stock from The Nasdaq Stock Market. If Mustang's stock is delisted from The Nasdaq Stock Market, public trading, if any, in the common stock would be limited to the over-the-counter markets in the so-called "pink sheets" or the NASD's OTC Electronic Bulletin Board. Consequently, the liquidity of its common stock and Mustang's ability to raise additional equity capital, if required, could be impaired. 15 Penny Stock Regulation. If Nasdaq delisted its common stock from the Nasdaq Stock Market, Mustang could become subject to Rule 15g-9 under the Securities Exchange Act of 1934. This rule imposes additional sales practice requirements on broker-dealers who sell so-called "penny" stocks to persons other than established customers and "accredited investors." Generally, accredited investors are individuals with a net worth more than $1,000,000 or annual incomes exceeding $200,000, or $300,000 together with their spouses). For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction before sale. Consequently, the rule may adversely affect the ability of broker-dealers to sell our shares in the secondary market. Subject to some exceptions, the SEC's regulations define a "penny stock" to be any non-Nasdaq equity security that has a market price of less than $5.00 per share. Unless exempt, the rules require delivery, prior to any transaction in a penny stock, of a disclosure schedule relating to the penny stock market and the associated risks. The rules also require disclosure about commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, the rules require that broker-dealers send monthly statements disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. If Mustang's common stock became subject to the rules applicable to penny stocks, the market liquidity for the common stock could be severely adversely affected. 16 Part II. Other Information Item 4. Submission of Matters to a Vote of Security Holders On June 7, 1999, registrant held its annual meeting of shareholders. Each of the following directors was elected by vote indicated after his name: NAME FOR WITHHELD James A. Harrer 3,529,650 1,575 Anthony Mazzarella 3,529,650 1,575 Stanley A. Hirschman 3,529,650 1,575 Michael S. Noling 3,529,650 1,575 Phillip E. Pearce 3,529,650 1,575 To approve amendments to the Company's 1994 Incentive and Nonstatutory Stock Option Plan to increase the total number of shares of Common Stock that can be optioned and sold under the Stock Option Plan to 1,100,000 shares. The following were the number of votes cast for, against or withheld, as well as the number of abstentions and broker non-votes, as to such matter FOR AGAINST ABSTAIN BROKER NON-VOTES 1,190,600 155,820 19,104 2,165,701 To ratify the appointment of Arthur Andersen LLP as the Company's independent accountants for the year ending December 31, 1999. The following were the number of votes cast for, against or withheld, as well as the number of abstentions and broker non-votes, as to such matter FOR AGAINST ABSTAIN 3,526,825 4,206 194 17 Item 6. Exhibits and Reports on Form 8-K (a) No Form 8-K was filed during the quarter ended June 30, 1999. (b) Exhibits. The following exhibit is filed as a part of this Report. Ex. 11 Computation of Earnings Per Share Ex. 27 Financial Data Schedule. 18 SIGNATURES In accordance with the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Signature Title Date _/s/ James A. Harrer___ James A. Harrer President and Chief Executive August 13, 1999 Officer (Principal Executive Officer) and a Director _/s/ Donald M. Leonard_ Donald M. Leonard Vice President and Chief August 13, 1999 Financial Officer (Principal Financial and Accounting Officer) and a Director EX-11 2 1 EXHIBIT 11. MUSTANG SOFTWARE, INC. COMPUTATION OF EARNINGS PER SHARE (In thousands, except earnings per share) (Unaudited) - - ----------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 - - ------------------------------------------------------------------------------ Weighted average number of common shares outstanding 4,592 3,451 4,417 3,434 Common stock equivlents from outstanding stock options 0 0 0 0 - - ------------------------------------------------------------------------------ Average common and common stock equivalents outstanding 4,592 3,451 4,417 3,434 ================================================================================ Net Income $(113) $ (303) $ (103) $ (747) ================================================================================ Earnings per share (1) $(.02) $ (.09) $ (.02) $ (.22) ================================================================================
(1) Fully diluted earnings per share have not been presented because the effects are not material. - - ----------------------------------------------------------------------------- EX-27 3
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-1999 Jun-30-1999 $2,251,247 0 494,430 150,000 12,444 2,758,121 1,305,358 (734,125) 3,347,643 608,219 0 0 0 8,086,642 (6,406,166) 3,347,643 803,109 803,109 106,292 106,292 845,508 0 6,562 (112,386) 800 (113,186) 0 0 0 (113,186) .00 .00
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