1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-QSB (Mark One) X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended March 31, 2000. OR Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number: 0-25678 MUSTANG.COM, INC. (Exact name of registrant as specified in its charter) California (State of incorporation) 77-0204718 (I.R.S. employer identification number) 6200 Lake Ming Road Bakersfield, California 93306 (Address of principal executive offices) (661) 873-2500 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: 			Yes	 X 			No As of May 8,2000 there were 6,768,136 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 March 31, 2000 and December 31, 1999 3 Statements of Operations for the three months ended March 31, 2000 and 1999 4 Statements of Cash Flows for the three months ended March 31, 2000 and 1999 5 Notes to Financial Statements 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 7 PART II. Other Information: Item 5 Other Information 16 Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18 ============================================================================== 3 MUSTANG SOFTWARE, INC. BALANCE SHEETS ASSETS March 31, December 31 2000 1999 Unaudited) CURRENT ASSETS: Cash and cash equivalents $13,710,863 $ 8,847,602 Accounts receivable, net of allowance for doubtful accounts of $170,000 and $170,000 at December 31, 1999 and March 31, 2000 respectively 893,656 693,739 Inventories 9,168 13,373 Other -- 3,750 - - ------------------------------------------------------------------------------ Total current assets 14,613,687 9,558,464 - - ------------------------------------------------------------------------------ PROPERTY AND EQUIPMENT: Property and equipment 1,446,653 1,278,371 Accumulated depreciation (708,516) (650,293) - - ------------------------------------------------------------------------------ Net property and equipment 738,137 628,078 - - ------------------------------------------------------------------------------ OTHER ASSETS: Other 244,965 2,485 - - ------------------------------------------------------------------------------ Total other assets 244,965 2,485 - - ------------------------------------------------------------------------------ $ 15,596,789 $10,189,027 = ============================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 551,183 $ 492,942 Current portion of capital lease 9,111 9,111 Accrued payroll and liabilities 274,261 325,005 Income Tax Payable 99,776 99,776 Deferred revenue 315,000 250,000 - - ------------------------------------------------------------------------------ Total current liabilities 1,249,331 1,176,834 - - ------------------------------------------------------------------------------ CAPITAL LEASE OBLIGATION, net of current portion 249,442 251,636 - - ------------------------------------------------------------------------------ COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Common stock, no par value: Authorized--30,000,000 shares Issued and outstanding-5,969,384 and 6,768,136 shares at December 31,1999 and March 31, 2000 respectively 21,560,941 15,966,363 Retained earnings (7,462,925) (7,205,806) - - ------------------------------------------------------------------------------ Total shareholders' equity 14,098,016 8,760,557 - - ------------------------------------------------------------------------------ $ 15,596,789 $10,189,027 = ============================================================================== The accompanying notes are an integral part of these financial statements. 4 MUSTANG.COM, INC. STATEMENTS OF OPERATIONS Three Months Ended March 31, 2000 1999 REVENUE $ 1,409,988 $ 772,982 COSTS OF REVENUE 126,473 48,561 - - ------------------------------------------------------------------------------ Gross profit 1,283,515 724,421 - - ------------------------------------------------------------------------------ OPERATING EXPENSES: Research and development 370,586 129,520 Selling and marketing 629,324 251,629 General and administrative 672,076 347,321 - - ------------------------------------------------------------------------------ Total operating expenses 1,671,986 728,470 - - ------------------------------------------------------------------------------ Income(loss)from operations (388,471) (4,049) - - ------------------------------------------------------------------------------ OTHER INCOME (EXPENSE): Interest expense (6,407) (6,611) Interest income 150,353 20,959 - - ------------------------------------------------------------------------------ Total other income (exp). 143,946 14,348 - - ------------------------------------------------------------------------------ Income (loss) before provision for income taxes (244,525) 10,299 PROVISION (BENEFIT) FOR INCOME TAXES -- -- - - ------------------------------------------------------------------------------ NET INCOME (LOSS) $ (244,525) $ 10,299 = ============================================================================== NET INCOME (LOSS) PER COMMON SHARE - Basic $ (0.04) $ 0.00 = ============================================================================== NET INCOME (LOSS) PER COMMON SHARE - Diluted $ (0.04) $ 0.00 = ============================================================================== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - Basic 6,314,858 4,145,314 = ============================================================================== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - Diluted 6,314,858 4,984,299 = ============================================================================== The accompanying notes are an integral part of these financial statements. 5 MUSTANG.COM, INC. STATEMENTS OF CASH FLOWS Three Months Ended March 31, 2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES: Net income(loss) $ (244,525) $ 10,299 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 57,734 43,549 Net changes in assets and liabilities (389,218) 17,055 - - ------------------------------------------------------------------------------ Net cash provided (used) by operating Activities (576,009) 70,903 - - ------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITES: Purchase of property and equipment (153,114) (4,670) - - ------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of stock 5,594,578 302,500 Payments on capital lease obligation (2,194) (1,989) - - ------------------------------------------------------------------------------ Net Cash provided (used) by financing Activities 5,592,384 300,511 - - ------------------------------------------------------------------------------ NET INCREASE (DECREASE) IN CASH 4,863,261 366,744 CASH BALANCE, beginning of period 8,847,602 1,849,700 - - ------------------------------------------------------------------------------ CASH BALANCE, end of period $13,710,863 $ 2,216,444 = ============================================================================== SUPPLEMENTAL DISCLOSURES: Interest paid 6,407 6,611 Taxes paid -- -- The accompanying notes are an integral part of these financial statements. =============================================================================== 6 MUSTANG.COM, 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, 1999, included in the 1999 Form 10KSB. The condensed Balance Sheet at December 31, 1999 has been taken from the audited financial statements at that date and condensed. 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 of Mustang.com, Inc. Mustang" or the "Company"), filed for the year ended December 31, 1999. Results of Operations: Three Months Ended March 31, 2000 and 1999 Revenues for the three months ended March 31, 2000 were $1,409,988 , an increase of 637,006 or 82.4% over revenues for the same period in 1999. As a percentage of revenues by product category for the first quarter 2000 vs. 1999 showed the QmodemPro line at 1% and 4% and the Company's Internet directed product line consisting of Mustang Message Center ("MMC"), ListCaster and FileCenter, at 99% and 96%, respectively. Gross profit for the quarter increased from $724,421 in 1999 to $1,283,515 in 2000 , and decreased as a percentage of revenues from 93.7% in 1999 to 91.0% in 2000 . Gross profit percentage has averaged between 83-91 % over the last three calendar years. The Company does not expect the gross profit percentage to remain at the current level. As more turnkey solutions are sold through the Mustang Professional Services division, the Company expects the gross profit percentage to decrease. Research and development expenses increased $241,066 in the first quarter of 2000 from 1999 , and increased as a percentage of revenues from 16.8% in 1999 to 26.3% in 2000 . Research and development is concentrated in Windows NT and Windows 95/98 and directly targets the expanded use of international networks, including the Internet. The Company has devoted and is devoting a substantial portion of its research and development resources to the Windows 95/98 and Windows NT environments and now offers a suite of Web server and Internet/intranet utility applications for Windows 95/98 and Windows NT environments. The headcount in this department increased from 6 at March 31, 1999 to 13 at March 31, 2000 . The headcount accounted for the majority of the increase in absolute dollars. Selling and marketing expenses for the quarter were $629,324 , an increase of $ $377,695 over the same quarter the previous year, and they increased as a percentage of revenues from 32.6% in first quarter of 1999 to 44.6% in the three months ended March 31, 2000 . The increase in expenses was due primarily to an increase in the sales and marketing staff. General and administrative expenses increased for the quarter compared to the previous year, from $347,321 in 1999 to $672,076 in 2000, and increased as a percentage of revenues, from 44.9% in 1999 to 8 47.7% in 2000 . Expenses remained consistent as a percent of revenues for the current quarter compared to the same quarter last year. Increase in headcount was the major contributor to the increase in actual dollars. Liquidity and Capital Resources Cash and cash equivalents balance at March 31, 2000 were approximately $13,711,000 , an increase of approximately $ 4,863,000 from December 31, 1999 . In October 1999, Mustang completed a private placement of its securities to accredited investors receiving proceeds, before offering expenses, of approximately $5,600,000. In the financing, Mustang issued 765,908 shares of its common stock at $7.3125 per share and warrants to purchase up to 574,431 shares of its Common Stock. The principal reasons for the increase in cash was the receipt of net proceeds aggregating approximately $8,850,000 from these 1999 equity financings and the exercise of outstanding warrants. Accounts receivable increased approximately $200,000 and Accounts payable increased approximately $58,000 in the first quarter of 2000 from the period ended December 31, 1999 . Accounts receivable average days to collect for the quarter ended March 31, 1999 and 2000 were 59 and 42 days, respectively. Average days to collect in 1999 was 45 days. Management's goal is to maintain receivable collection days at or below 50 for 2000 . Inventory levels have decreased approximately 4,200 at March 31, 2000 from December 31, 1999 . Certain Risk Factors That Could Affect Future Results Recent Losses; No Assurance of Profitability. During the years ended December 31, 1997, 1998 and 1999, the Company reported revenue of approximately $1,898,000, $2,011,000 and $3,711,000, respectively, and incurred net losses of approximately $1,341,000, $1,157,000 and $906,000, respectively. There can be no assurance that the Company will be able to profitably market the Mustang Message Center, any of its other products or any products it may develop in the future. Until the Company is able to generate sufficient revenues to offset costs and expenses, of which there can be no assurance, Mustang will continue to sustain losses. Moreover, the Company's losses may increase in the future as it tries to implement announced plans to grow revenues. Variability of Operating Results; Lengthy Sales Cycle. Mustang's expense levels are based, in part, on its expectations as to future revenues and are not expected to decrease, at least in the short term. In fact Mustang expects expenses to increase from those incurred during the first quarter of 1999 as implements a strategy to add sales and support personnel in an effort to grow revenues. Further, Mustang may from time to time be forced by the competitive environment in which it competes to make 9 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 MMC 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 MMC, 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 MMC 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 MMC. 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 MMC 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 MMC and Mustang's ability to market this e-mail management solution and related services successfully. MMC accounted for over 50 percent of the Company's net sales during 1998, but Mustang has only limited operating history with respect to this product. As a result, as well as the recent emergence of the commercial e-mail management market, the Company has neither internal nor industry-based historical financial data for a significant period upon which to project revenues or base planned operating expenses. Future operating results will depend on a variety of factors, including Mustang's ability to maintain or increase market demand for MMC 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 10 could affect its operating results include Mustang's ability to anticipate and effectively adapt to a developing market and to rapidly changing technologies, general economic conditions, competition by existing and emerging competitors, software defects and other quality control problems and the mix of products and services sold. Undeveloped and Rapidly Changing Markets. The markets for Mustang's products and services are at a very early stage of development, are rapidly changing and are characterized by an increasing number of market entrants that have introduced or are developing competing products and services for use on the Internet and the World Wide Web. As is typical for a new and rapidly evolving industry, demand for and market acceptance of recently introduced products and services are subject to a high level of uncertainty and risk. Acceptance and usage of the MMC 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 MMC 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 MMC. 11 Mustang's principal competitors in the e-mail message management market include Aptex, Brightware, eGain, Exactis.com, Inc., Kana Communications, MessageMedia and Octane Software, each of which provides software solutions for e-mail management. Mustang also competes with other firms that provide e-mail message management services on an outsourcing basis. The Company competes with a number of independent software suppliers who offer Web Server or telecommunications software as or among their product line(s). Several of Mustang's current and potential competitors have greater name recognition, larger installed customer bases, more diversified lines of products and services and significantly greater financial, technical, marketing and other resources than Mustang. Such competitors may be able to undertake more extensive marketing campaigns, adopt more aggressive pricing policies and make more attractive offers to businesses to induce them to use their products or services. Limited Intellectual Property and Proprietary Rights. Mustang relies on a combination of trade secret, copyright and trademark laws, nondisclosure agreements and other contractual provisions and technical measures to protect its proprietary rights. Mustang believes that, due to the rapid pace of technological innovation for Internet products, Mustang's ability to establish and maintain a position of technology leadership in the industry depends more on skills of its development personnel than upon the legal protections afforded its existing technology. There can be no assurance that trade secret, copyright and trademark protections will be adequate to safeguard the proprietary software underlying Mustang's products and services. Similarly, there can be no assurance that agreements with employees, consultants and others who participate in the development of its software will not be breached, that Mustang will have adequate remedies for any breach or that Mustang's trade secrets will not otherwise become known. Mustang also faces the risk that notwithstanding Mustang's efforts to protect its intellectual property, competitors will be able to develop functionally equivalent e-mail message management technologies without infringing any of Mustang's intellectual property rights. Despite Mustang's efforts to protect its proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use products or technology that Mustang considers proprietary, and third parties may attempt to develop similar technology independently. In addition, effective protection of intellectual property rights may be unavailable or limited in certain countries. Accordingly, there can be no assurance that Mustang's means of protecting its proprietary rights will be adequate or that Mustang's competitors will not independently develop similar technology. As the use of the Internet for commercial activity increases, and the number of products and service providers that support Internet commerce increases, Mustang believes that Internet commerce technology providers may become increasingly subject to infringement claims. There can be no assurance that plaintiffs will not file infringement claims in the future. Any such claims, with or without merit, could be time consuming, result in costly litigation, disrupt or delay the enhancement or shipment of Mustang's products and services or require Mustang to enter 12 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 13 businesses and individuals. The Internet continues to experience significant growth in the number of users and level of use. Without corresponding increases and improvements in the Internet infrastructure, there can be no assurance that the Internet will be able to support the demands placed upon it by such continued growth. Any failure of the Internet to support such increasing number of users due to inadequate infrastructure, or otherwise, would seriously limit the development of the Internet as a viable source of communication or commerce. This could materially and adversely affect the acceptance of Mustang's products and services which would, in turn, materially and adversely affect Mustang's business, results of operations, financial condition and prospects. Government Regulation and Legal Uncertainties. Mustang believes it is not currently subject to direct regulation by any government agency in the U.S., other than regulations generally applicable to businesses, and there are currently few laws or regulations directly applicable to access to, or commerce on, the Internet. However, there can be no assurance that federal, state or foreign agencies will not attempt in the near future to begin to regulate the market for Internet commerce. More generally, due to the increasing popularity and use of the Internet, it is possible that a number of laws and regulations will be adopted with respect to the Internet, covering issues such as user privacy, pricing, taxation and characteristics and quality of products and services. For example, the Telecommunications Reform Act of 1996 may subject certain Internet content providers to criminal penalties for the transmission of certain information and could also result in liability to Internet service providers, World Wide Web hosting sites and transaction facilitators such as Mustang. Various foreign jurisdictions have also moved to regulate access to the Internet and to strictly control World Wide Web content. Even if Mustang's business is not directly subject to regulation, the adoption of any such laws or regulations may inhibit the growth of the Internet, or the businesses of the users of Mustang's products and services, which could in turn adversely affect Mustang's business, financial condition and results of operations. Moreover, the applicability to the Internet of existing laws governing issues such as property ownership, libel, taxation and personal privacy is uncertain. Such uncertainty creates the risk that such laws could be interpreted in a manner that could generally inhibit commerce on the Internet and adversely impact Mustang's business. Due to the growth of Internet commerce, Congress has considered regulating providers of services and transactions in this market, and federal or state authorities could enact laws, rules or regulations affecting Mustang's 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 14 adverse effect on Mustang's business, financial condition and results of operations. Need to upgrade its systems and the Mustang Hosted Network to accommodate growth in electronic communications and commerce. In February 2000, Mustang began offering Mustang Message Center as an application service provider with its launch of the Mustang Network, a Web-based hosted application service to provide an alternative for those customers which do not want Mustang Message Center installed onsite at its location. As a consequence of the new solution, the Company faces risks related to the ability of the Mustang Network to operate with higher activity levels while maintaining expected performance. As the volume and complexity of customer communications and electronic commerce increases, Mustang will need to expand its systems and hosted network infrastructure. The expansion and adaptation of its network infrastructure will require substantial financial, operational and management resources. Due to the recent introduction of its hosted Web solution, Mustang's ability to connect and manage a substantially larger number of customers is unknown. Customer demand for Mustang's products and services could be greatly reduced if its fails to maintain high capacity data transmission. In addition, as it upgrades its network infrastructure, the Company is likely to encounter equipment or software incompatibility. Mustang may not be able to expand or adapt its hosted network infrastructure to meet additional demand or its customers' changing requirements in a timely manner or at all. Growth in Demand for its Hosted Network Solution May Adversely Affect Mustang's Near Term Results of Operations. During 1999, 99% of Mustang's revenues were derived from sales and related services from the onsite installation of the Mustang Message Center at customers' locations. An additional consequence of the Mustang Network solution is the risk that customers who might have otherwise purchased Mustang Message Center and related services will prefer the Mustang Network solution. Mustang Message Center over the Mustang Network offers the same functionality as the onsite installation of the Mustang Message Center but at a substantially lower up front cost. Mustang believes that to remain competitive it must offer Mustang Message Center as an application service provider and that, over time, providing this service will generate revenues that more than make up for lost sales of onsite installations. However, in the near term, its results of operations could suffer if onsite sales are lost due to the popularity of its hosted solution. Risks of Unplanned System Interruptions and Capacity Constraints. Mustang expects that its customers will experience interruptions with its hosted network from time to time. These interruptions could be due to hardware and operating system failures. The Company expects a substantial portion of its revenue to be derived from customers who use its hosted network. If it is correct (of which there can be no assurance), its 15 business will suffer if Mustang experiences frequent or long system interruptions that result in the unavailability or reduced performance of its hosted network or reduce its ability to provide remote management services. Mustang expects to experience occasional temporary capacity constraints due to sharply increased traffic or, as has been the case for other Web-based businesses, the possibility that it will be targeted by hackers, either of which could cause unanticipated system disruptions, slower response times, impaired quality and degradation in levels of customer service. If this were to continue to happen, Mustang's business and reputation could be seriously harmed. The Company's success largely depends on the efficient and uninterrupted operation of its computer and communications hardware and network systems. Substantially all of the Company's computer and communications systems are located in Bakersfield, Kern County, California. Mustang's systems and operations are vulnerable to damage or interruption from fire, earthquake, power loss, telecommunications failure and similar events. Any unplanned interruption of services may harm Mustang's ability to attract and retain customers. Dependence on relationships with, and the system integrity of, hosting partners for the Mustang Network. Mustang's hosted network consists of virtual data centers co-located in the physical data centers of its hosting partners. Accordingly, it relies on the speed and reliability of the systems and networks of these hosting partners. If its hosting partners experience system interruptions or delays, or if the Company does not maintain or develop relationships with hosting partners, its business could suffer. The lead-time to add system capacity for Mustang's hosted network at its hosting partner has increased recently from 90 days to six months and could extend longer in the future as the use and offerings of application service providers continue to grow. If Mustang does not anticipate demand for its hosted network accurately and does not provide sufficient lead-time to its hosted partner for expansion or timely arrange for alternative hosting partners, if available, to handle growth, its results of operations and financial condition could be materially adversely affected. 16 PART II. Other Information: Item 5. Other Information. On February 28, 2000 Mustang announced that it entered into an agreement with Quintus Corporation for Quintus to acquire registrant in a stock merger. Under the terms of the agreement, Quintus will exchange 0.793 shares of Quintus common stock for each outstanding share of the Company's common stock. All outstanding options and warrants to purchase registrant's common stock will also be assumed by Quintus, adjusted for the exchange ratio. Completion of the acquisition is subject to customary closing conditions, including approval of registrant's shareholders. The special shareholders meeting of the Company scheduled for May 11, 2000 to consider approving the acquisition has been adjourned until 10:00 a.m., local time, May 18, 2000, at the Rio Bravo Resort, 12000 Lake Ming Road, Bakersfield, California 93306. 17 Item 6. Exhibits and Reports on Form 8-K (b) Reports on Form 8-K Two reports on Form 8-K were filed during the quarter covered by this Report. These reports, reporting events occurring on February 10 and February 28, 2000, each reported matters under Item 5. 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 May 15, 2000 Officer (Principal Executive Officer) _/s/ Donald M. Leonard_ Donald M. Leonard Vice President and Chief May 15, 2000 Financial Officer (Principal Financial and Accounting Officer)