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 September 30, 1998
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)
(805) 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 October 26, 1998, there were 4,092,845 shares of the Registrant's
Common Stock outstanding.
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<PAGE> 2
MUSTANG SOFTWARE, INC.
FORM 10-QSB
INDEX
Page
PART I. Financial Information:
Balance Sheets as of September 30, 1998 and December 31, 1997 3
Statements of Operations for the three and nine months ended
September 30, 1998and 1997 4
Statements of Cash Flows for the nine months ended
September 30, 1998 and 1997 5
Notes to Financial Statements 6
Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
PART II. Other Information:
Item 2. Changes in Securities and Use of Proceeds 10
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
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<PAGE> 3
<TABLE>
MUSTANG SOFTWARE, INC.
BALANCE SHEETS
ASSETS
<CAPTION>
September 30, December 31,
1998 1997
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,824,294 $ 1,403,776
Accounts receivable, net of allowance for doubtful
accounts of $160,000 and $117,962 at December
31, 1997 and September 30,1998, respectively 242,718 6,378
Income taxes receivable -- 97,004
Inventories 25,896 99,915
Other 58,005 28,215
- - - - ---------------------------------------------------------------------------------------
Total current assets 2,150,913 1,635,288
- - - - ---------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT:
Property and equipment 1,255,008 1,238,713
Accumulated depreciation (630,752) (527,279)
- - - - ---------------------------------------------------------------------------------------
Net property and equipment 624,256 711,434
- - - - ---------------------------------------------------------------------------------------
OTHER ASSETS:
Capitalized software development costs, net 3,030 4,083
Other 90,610 --
- - - - ---------------------------------------------------------------------------------------
Total other assets 93,640 4,083
- - - - ---------------------------------------------------------------------------------------
$2,868,809 $2,350,805
= = = =======================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 187,213 $ 242,451
Accrued payroll and liabilities 174,333 217,318
Income taxes payable 99,776 --
Accrued warranty and support -- 45,000
Deferred revenue 125,000 80,000
- - - - ---------------------------------------------------------------------------------------
Total current liabilities 586,322 584,769
- - - - ---------------------------------------------------------------------------------------
CAPITAL LEASE OBLIGATION, net of current portion 218,476 269,005
- - - - ---------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, no par value:
Authorized-10,000,000 shares
5,246 issued and outstanding at September 30, 1998 524,625 --
Common stock, no par value:
Authorized-30,000,000 shares
Issued and outstanding--3,374,967 and 3,383,694
shares at December 31, 1997 and
September 30, 1998, respectively 7,692,198 6,640,045
Retained earnings (6,152,812) (5,143,014)
- - - - ---------------------------------------------------------------------------------------
Total shareholders' equity 2,064,011 1,497,031
- - - - ---------------------------------------------------------------------------------------
$2,868,809 $2,350,805
= = = =======================================================================================
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<PAGE> 4
<TABLE>
MUSTANG SOFTWARE, INC.
STATEMENTS OF OPERATIONS
<CAPTION>
Three Months Ended Sept 30, Nine Months Ended Sept 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
REVENUE $ 501,963 $ 331,365 $ 1,304,601 $1,589,914
COSTS OF REVENUE 41,576 58,419 141,424 273,283
- - - - ---------------------------------------------------------------------------------------
Gross profit 460,387 272,946 1,163,177 1,316,631
- - - - ---------------------------------------------------------------------------------------
OPERATING EXPENSES:
Research and development 148,055 181,048 449,632 523,157
Selling and marketing 240,264 80,350 710,357 614,743
General and administrative 337,700 273,871 1,025,438 1,059,290
- - - - ---------------------------------------------------------------------------------------
Total operating expenses 726,019 535,269 2,185,427 2,197,190
- - - - ---------------------------------------------------------------------------------------
Income(loss)from operations ( 262,323) (1,022,250) ( 880,559) ( 265,632)
- - - - ---------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense (7,435) (8,961) (23,376) (28,013)
Interest income 10,521 22,189 36,628 85,911
Gain/loss on sale of asset -- -- -- --
- - - - ---------------------------------------------------------------------------------------
Total other income (exp.) 3,086 13,228 13,252 57,898
- - - - ---------------------------------------------------------------------------------------
Income (loss) before
provision for income taxes ( 249,095) (1,008,998) ( 822,661) ( 262,546)
- - - - ---------------------------------------------------------------------------------------
PROVISION (BENEFIT)
FOR INCOME TAXES -- -- 800 800
- - - - ---------------------------------------------------------------------------------------
NET INCOME (LOSS) $(262,546) $ (249,095) $(1,009,798) $(823,461)
= = = =======================================================================================
NET INCOME (LOSS)
PER COMMON SHARE $ (.07) $ (.28) $ (.24) $ (.06)
= = = =======================================================================================
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 4,063,365 3,383,694 3,644,230 3,380,785
= = = =======================================================================================
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<PAGE> 5
<TABLE>
MUSTANG SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
<CAPTION>
Nine Months Ended September 30,
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(loss) $(1,009,798) $( 823,460)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 104,526 113,013
Net changes in assets and liabilities (93,651) (523,309)
- - - - ---------------------------------------------------------------------------------------
Net cash used by operating activities (998,923) (1,233,756)
- - - - ---------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITES:
Purchase of property and equipment (16,298) --
- - - - ---------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of stock 1,486,268 5,563
Payments on capital lease obligation (50,529) (45,805)
- - - - ---------------------------------------------------------------------------------------
Net Cash provided (used) by financing activities 1,435,739 (40,242)
- - - - ---------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH 420,518 (1,273,998)
CASH BALANCE, beginning of period 1,403,776 2,920,231
- - - - ---------------------------------------------------------------------------------------
CASH BALANCE, end of period $1,824,294 $1,646,233
= = = =======================================================================================
SUPPLEMENTAL DISCLOSURES:
Interest paid 23,376 28,013
Taxes paid 800 800
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<PAGE> 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, 1997,
included in the 1997 Form 10KSB.
The condensed Balance Sheet at December 31, 1997 has been taken from the
audited financial statements at that date and condensed.
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<PAGE> 7
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, 1997.
Results of Operations:
Three Months Ended September 30, 1998 and 1997
Revenues for the three months ended September 30, 1998 were $501,963 a
decrease of $170,598 or 51% above revenues for the same period in 1997. As a
percentage of revenues by product category for the third quarter 1998 vs. 1997
showed the Web Essentials line at 72% and 5%, the QmodemPro line at 5% and 19%,
the Wildcat! line at 21% and 74%, and other products at 2% and 2%,
respectively. The Web Essentials line has been gaining strength since its
inception in May 1997 and has replaced the Wildcat! line as the largest
contributor to the Company's revenues in the quarter ended September 30, 1998.
Gross profit for the quarter increased from $272,946 in 1997 to $460,387
in 1998, and increased as a percentage of revenues from 82.4% in 1997 to 91.7%
in 1998. Gross profit percentage has averaged approximately 80-84% over the
last three calendar years. The Company does not expect the gross profit
percentage to remain at the current level. As more turnkey solutions are sold
through the Mustang Professional Services division, the Company expects the
gross profit percentage to decrease.
Research and development expenses decreased $32,993 in the third quarter
of 1998 from 1997, and decreased as a percentage of revenues from 54.6% in 1997
to 29.5% in 1998. 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 and now offers a suite of Web server and internet/intranet
utility applications for Windows 95 and Windows NT environments. The headcount
in this department decreased from 9 at September 1997 to 7 at September 30,
1998. The headcount reduction accounted for the majority of the decrease in
absolute dollars.
Selling and marketing expenses for the quarter were $240,264, an increase
of $159,914 over the same quarter the previous year, and they increased as a
percentage of revenues from 24.2% in 1997 to 47.9% in 1998. The items primarily
accounting for the increase were advertising and promotional costs for the Web
Essentials line and an increase in expenses resulting from an increase in the
number of trade shows attended in 1998.
General and administrative expenses increased for the quarter over the
previous year, from $273,871 in 1997 to $337,700 in 1998, but decreased as a
percentage of revenues, from 82.6% in 1997 to 67.3% in 1998. The items
primarily accounting for the increase in absolute dollars include consulting
fees and other various professional fees.
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<PAGE> 8
Nine Months Ended September 30, 1998 and 1997
Revenues for the nine months ended September 30, 1998 were $1,304,601, a
decrease of $285,313 or 17.9% under revenues for the same period in the prior
year. As a percentage of revenues by product category showed the Web
Essentials line at 57% and 1%, the QmodemPro line at 7% and 14%, the Wildcat!
line at 32% and 82%, and other at 4% and 3% for the first nine months of 1998
and 1997, respectively. The Web Essentials line has been gaining strength since
its inception in May 1997 and has replaced the Wildcat! line as the largest
contributor to the Company's revenues in the quarter ended September 30, 1998.
The Wildcat! and QmodemPro lines have been decreasing as absolute dollars sold,
the Company expects this trend to continue.
Gross profit for the first nine months decreased from $1,316,631 in 1997
to $1,163,177 in 1998, and increased as a percentage of revenues from 82.8% in
1997 to 89.2% in 1998. Gross profit percentage has averaged approximately 80-
84% over the last three calendar years. The Company does not expect the gross
profit percentage to remain at the current level. As more turnkey solutions are
sold through the Mustang Professional Services division, the Company expects
the gross profit percentage to decrease.
Research and development expenses decreased $73,525 in the first nine
months of 1998 from 1997, but increased as a percentage of revenues from 32.9%
in 1997 to 34.8% in 1998. The headcount in this department decreased from 9 at
September 1997 to 7 at September 30, 1998. The headcount reduction accounted
for the majority of the decrease in absolute dollars and the decline in
revenues accounted for the increase as a percentage of revenues. 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.
Selling and marketing expenses for the first nine months of 1998 increased
$95,614 over the same period the previous year, from $614,743 to $710,357. As a
percentage of revenues selling and marketing expenses increased from 38.7% in
1997 to 54.5% in 1998. The items primarily accounting for the increase were
advertising and promotional costs for the Web Essentials line of products and
an increase in trade shows and the costs associated with them.
General and administrative expenses decreased $33,852 in the first nine
months of 1998 from $1,059,290 in 1997 to $1,025,438 in 1998, but as a
percentage of revenues increased from 66.6% in 1997 to 78.6% in 1998.
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<PAGE> 9
Liquidity and Capital Resources
Cash and cash equivalents balance at September 30, 1998 were approximately
$1,824,000, an increase of approximately $421,000 from December 31, 1997.
Accounts receivable increased approximately $236,000 in 1998, from $6,378 at
December 31, 1997 to $242,718 at September 30, 1998. Accounts receivable
average days to collect for the quarter ended September 30, 1997 and 1998 were
65 and 55 days, respectively, and for the nine months ended September 30, 1997
and 1998 were 58 and 51 days, respectively. Average days to collect for the
year 1997 was 64 days. Management's goal is to maintain receivable collection
days at or below 50 for 1998. Management is aggressively pursuing delinquent
accounts through collections and increasing the credit approval process in an
effort to bring the average days to collect within 50 days. Inventory levels
have decreased approximately $74,000 in 1998 from December 31, 1997 amounts.
The Company also completed a $1.5 million equity financing which is detailed in
Part II, Item 2(c) below.
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 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 and cash generated from operations will be
sufficient to meet the Company's working capital and capital expenditure
requirements for at least the next 12 months.
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<PAGE> 10
PART II - OTHER INFORMATION
Item 2. Change in Securities
(a) Not applicable
(b) Not applicable
(c) In September 1998, pursuant to a Securities Purchase Agreement dated as of
September 14, 1998 (the "Agreement") between the Company and the institutional
investors named in the Agreement (collectively the "Investors"), the Company
completed a private placement of its securities to the Investors. Under the
Agreement, the Company sold to the Investors for $1,500,000 an aggregate of
612,000 shares of its common stock, 5,246 shares of its Series A Convertible
Preferred Stock (the "Series A Preferred Stock") and Warrants to purchase an
aggregate of 180,000 shares of its common stock.
Subject to certain conditions and limitations (including shareholder approval
or the delisting of the Company's Common Stock from the Nasdaq Stock Market)
beginning on December 15, 1998, each share of Series A Preferred Stock will be
convertible into that number of shares of the Company's Common Stock which is
determined by dividing $100 plus 5% per annum thereon from September 17, 1998
to the date of conversion, by the lower of $1.875 per share or the "market
price" per share at the time of conversion. The "market price" for purposes of
conversion is 90% of the average of the four lowest closing bid prices of the
Common Stock during the 10 day trading period immediately preceding the
conversion date (the "Lookback Period"). The Lookback Period is increased by
two trading days every month commencing on January 17, 1999 and continue to
increase by two trading days every month thereafter that the Preferred Stock is
outstanding until the Lookback Period equals a maximum of thirty trading days.
If not earlier converted, the Preferred Stock will automatically convert into
Common Stock on September 17, 2000. Subject to certain conditions and
limitations, the Company has the right to force conversion by the holders of
the Preferred Stock in the event the closing bid price of the Common Stock is
equal to or greater than $2.8125, $3.28125 or $3.75. In such event, the Company
may force conversion by the holder of up to 15% of the total number of shares
of Series A Preferred Stock, up to a cumulative aggregate of 75% of the total
number of shares of Series A Preferred Stock issued to the holders.
Subject to shareholder approval or the delisting of the Company's Common Stock
from the Nasdaq Stock Market, the warrants are exercisable until September 13,
2000. Of the total warrants issued (including the warrants issued to the
Placement Agent, as described below, 200,000 are exercisable at an exercise
price of $1.90 per share and 37,000 are exercisable at $2.08 per share.
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<PAGE> 11
For its services in the transaction, which included placing the initial
$1,500,000 investment, and arranging an equity line of credit for the Company,
the Company paid to Settondown Capital International Limited, as Placement
Agent, a fee consisting of $60,000 cash, 29,480 shares of its common stock, 210
shares of its Series A Preferred Stock and Warrants to purchase an aggregate of
57,000 shares of common stock.
Exemption from registration requirements is claimed under the Securities Act of
1933 (the "Securities Act") in reliance on Section 4(2) of the Securities Act
and Regulation D promulgated thereunder. The recipients of securities in the
private placement each represented their intention to acquire the securities
for investment only and not with a view to, or for sale in connection with, any
distribution thereof and appropriate legends were affixed to the certificates
evidencing the securities in such transaction. All recipients had adequate
access to information about the Company.
(d) Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
3(i).1 Amended and Restated Articles of Incorporation (incorporated by
reference to Exhibit 3.1 of the Company's Registration Statement of Amendment
No. 1 to Form SB-2 (file no. 33-89900-LA) filed March 27, 1995).
3(i).2 Certificate of Determination of Mustang Software, Inc. relating to the
authorization and determination of the Series A Convertible Preferred Stock
(incorporated by reference to Exhibit 4.3 of the Company's Registration
Statement of Form S-3 (file no. 333-66663) filed November 2, 1998).
10.1 Securities Purchase Agreement dated as of September 14, 1998 between
the Company and Settondown Capital International Limited and the other
investors named therein. (incorporated by reference to Exhibit 4.2 of the
Company's Registration Statement of Form S-3 (file no. 333-66663) filed
November 2, 1998).
10.2 Escrow Agreement dated as of September 14, 1998 between the Company
and Settondown Capital International Limited and the other investors named
therein (incorporated by reference to Exhibit 4.4 of the Company's Registration
Statement of Form S-3 (file no. 333-66663) filed November 2, 1998).
10.3 Registration Rights Agreement dated as of September 14, 1998 between
the Company and Settondown Capital International Limited and the other
investors named therein (incorporated by reference to Exhibit 4.5 of the
Company's Registration Statement of Form S-3 (file no. 333-66663) filed
November 2, 1998).
10.4 Form of Stock Purchase Warrant A (incorporated by reference to Exhibit
4.6 of the Company's Registration Statement of Form S-3 (file no. 333-66663)
filed November 2, 1998).
10.5 Form of Stock Purchase Warrant B (incorporated by reference to Exhibit
4.7 of the Company's Registration Statement of Form S-3 (file no. 333-66663)
filed November 2, 1998).
(b) No report on Form 8-K was filed during the quarter covered by this report.
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<PAGE> 12
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
Officer (Principal Executive
Officer) and a Director November 13, 1998
_/s/ Donald M. Leonard_
Donald M. Leonard Vice President Finance and Chief
Financial Officer (Principal
Financial and Accounting Officer) November 13, 1998
<PAGE> 1 EXHIBIT 11.
MUSTANG SOFTWARE, INC.
COMPUTATION OF EARNINGS PER SHARE
(In thousands, except earnings per share) (Unaudited)
- - -----------------------------------------------------------------------------
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1998 1997 1998
- - ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average number of common shares outstanding 3,384 4,063 3,381 3,644
Common stock equivlents from outstanding stock options 0 0 0 0
- - --------------------------------------------------------------------------------------------
Average common and common stock equivalents outstanding 3,384 4,063 3,381 3,644
==============================================================================================
Net Income $ (249) $ (263) $( 823) $(1,010)
==============================================================================================
Earnings per share (1) $ (.07) $ (.06) $ (.24) $ (.28)
==============================================================================================
</TABLE>
(1) Fully diluted earnings per share have not been presented because the effects
are not material.
- - -----------------------------------------------------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1998
<CASH> $1,824,294
<SECURITIES> 0
<RECEIVABLES> 242,718
<ALLOWANCES> 117,962
<INVENTORY> 25,896
<CURRENT-ASSETS> 2,150,913
<PP&E> 1,255,008
<DEPRECIATION> 630,752
<TOTAL-ASSETS> 2,868,809
<CURRENT-LIABILITIES> 586,322
<BONDS> 218,476
0
524,625
<COMMON> 7,692,198
<OTHER-SE> (6,152,812)
<TOTAL-LIABILITY-AND-EQUITY> 2,868,809
<SALES> 1,304,601
<TOTAL-REVENUES> 1,304,601
<CGS> 141,424
<TOTAL-COSTS> 141,424
<OTHER-EXPENSES> 2,185,427
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,376
<INCOME-PRETAX> (1,008,998)
<INCOME-TAX> (1,008,998)
<INCOME-CONTINUING> (1,008,998)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,009,798)
<EPS-PRIMARY> ( .28)
<EPS-DILUTED> ( .28)
</TABLE>
