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, 1996 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 August 14, 1996, there were 3,362,940 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, 1996 and December 31, 1995 3 Statements of Operations for the three and six months ended June 30, 1996 and 1995 4 Statements of Cash Flows for the six months ended June 30, 1996 and 1995 5 Notes to Financial Statements 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 7 PART II. Other Information: Annual meeting of Shareholders 9 Statement of Operations for the twelve months ended June 30, 1996 10 Exhibits and Reports on Form 8-K 11 Signatures 12 =============================================================================== 3 MUSTANG SOFTWARE, INC. BALANCE SHEETS ASSETS June 30, December 31, 1996 1995 (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 4,551,931 $ 5,615,404 Accounts receivable, net of allowance for doubtful accounts of $425,000 and $725,000 at December 31, 1995 and June 30, 1996, respectively 132,029 352,174 Income taxes receivable 404,340 404,340 Inventories 217,956 230,486 Other 79,425 28,945 - - ---------------------------------------------------------------------- Total current assets 5,385,681 6,631,349 - - ---------------------------------------------------------------------- PROPERTY AND EQUIPMENT: Property and equipment 1,322,224 1,270,765 Accumulated depreciation (363,042) (278,603) - - ---------------------------------------------------------------------- Net property and equipment 959,182 992,162 - - ---------------------------------------------------------------------- OTHER ASSETS: Capitalized software development costs, net 13,981 22,483 Other 21,980 30,882 - - ---------------------------------------------------------------------- Total other assets 35,961 53,365 = ====================================================================== Total Assets $6,380,824 $7,676,876 = ====================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $660,229 $750,124 Accrued payroll and liabilities 219,574 145,077 Accrued warranty and support 45,000 45,000 Deferred revenue 130,000 88,500 - - ---------------------------------------------------------------------- Total current liabilities 1,054,803 1,028,701 - - ---------------------------------------------------------------------- CAPITAL LEASE OBLIGATION, net of current portion 371,719 399,060 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred stock, no par value: Authorized 10,000,000 shares None issued or outstanding -- -- Common stock, no par value: Authorized--30,000,000 shares Issued and outstanding--3,356,000 and 3,362,940 shares at December 31,1995 and June 30, 1996, respectively 6,603,383 6,598,632 Retained earnings (1,649,081) (349,517) - - ---------------------------------------------------------------------- Total shareholders' equity 4,954,302 6,249,115 - - ---------------------------------------------------------------------- Total Liabilities & Shareholders Equity $6,380,824 $7,676,876 = ====================================================================== <FN> The accompanying notes are an integral part of these financial statements. =============================================================================== 4 MUSTANG SOFTWARE, INC. STATEMENTS OF OPERATIONS Six Months Ended June 30, Three Months Ended June 30, 1996 1995 1996 1995 REVENUE $ 2,468,998 $ 1,983,588 $ 1,265,644 $ 932,820 COSTS OF REVENUE 464,219 369,238 246,483 178,608 - - ---------------------------------------------------------------------------------------------- Gross profit 2,004,779 1,614,350 1,019,161 754,212 - - ---------------------------------------------------------------------------------------------- OPERATING EXPENSES: Research and development 491,048 278,743 292,689 145,128 Selling and marketing 1,751,869 729,462 857,553 467,584 General and administrative 1,197,318 821,637 578,995 382,985 - - ---------------------------------------------------------------------------------------------- Total operating expenses 3,440,235 1,829,842 1,729,237 995,697 - - ---------------------------------------------------------------------------------------------- Income(loss)from operations (1,435,456) (215,492) (710,076) (241,485) - - ---------------------------------------------------------------------------------------------- OTHER INCOME (EXPENSE): Interest expense (22,167) (23,212) (10,913) (12,457) Interest income 156,059 87,520 70,239 86,052 Gain/loss on sale of asset 2,000 0 2,000 0 - - ---------------------------------------------------------------------------------------------- Total other income (exp.) 135,892 64,308 61,326 73,595 - - ---------------------------------------------------------------------------------------------- Income (loss) before provision for income taxes (1,299,564) (151,184) (648,750) (167,890) - - ---------------------------------------------------------------------------------------------- PROVISION (BENEFIT) FOR INCOME TAXES -- (45,500) -- (50,500) - - ---------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ (1,299,564) $ (105,684) $ (648,750) $ (117,390) = ============================================================================================== NET INCOME (LOSS) PER COMMON SHARE $ (.39) $ (.04) $ (.19) $ (.03) = ============================================================================================== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 3,360,570 2,731,000 3,362,940 3,356,000 <FN> The accompanying notes are an integral part of these financial statements. ============================================================================== 5 MUSTANG SOFTWARE, INC. STATEMENTS OF CASH FLOWS Six Months Ended June 30, 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES: Net income(loss) $ (1,299,564) $ (105,684) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 98,142 72,400 Net changes in assets and liabilities 211,998 (50,787) - - ---------------------------------------------------------------------------- Net cash provided (used) by operating activities (989,424) (84,071) - - ---------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITES: Purchase of property and equipment (51,459) (107,221) - - ---------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of stock 4,751 6,584,538 Payments on capital lease obligation (27,341) (26,000) - - ---------------------------------------------------------------------------- Net Cash provided (used) by financing activities (22,590) 6,558,538 - - ---------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH (1,063,473) 6,367,246 CASH BALANCE, beginning of period 5,615,404 209,799 - - ---------------------------------------------------------------------------- CASH BALANCE, end of period $ 4,551,931 $ 6,577,045 = ============================================================================= SUPPLEMENTAL DISCLOSURES: Interest paid 22,167 23,212 	Taxes paid 0 0 <FN> 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, 1995, included in the 1995 Form 10KSB. The condensed Balance Sheet at December 31, 1995 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, filed for the year ended December 31, 1995. Results of Operations: Three Months Ended June 30, 1996 and 1995 - ----------------------------------------- Revenues for the three months ended June 30, 1996 were $1,265,644 an increase of $332,824 or 35.7% over revenues for the same period in 1995. As a percentage of revenues by product category for the third quarter 1996 vs. 1995 showed the QmodemPro line at 2% and 24%, the Wildcat! line at 96% and 69%, and other products at 2% and 7%, respectively. The large percentage of Wildcat! revenues was directly related to the launch of Wildcat! v.5 for Win95/NT in the first quarter of 1996. Gross profit for the quarter increased from $754,212 in 1995 to $1,019,161 in 1996, and decreased as a percentage of revenues from 80.9% in 1995 to 80.5% in 1996. Gross profit percentage has averaged approximately 80-84% over the last three calendar years. Research and development expenses increased $147,561 in the second quarter of 1996 from 1995, and increased as a percentage of revenues from 15.6% in 1995 to 23.1% in 1996. Research and development is concentrated in Windows NT and Windows 95 and directly targets the expanded use of international networks, including the Internet. The Company expects that the release of Windows 95 by Microsoft will generate an immediate demand for products capable of making use of its new features, and has devoted a substantial portion of its research and development expenditures to such products. The headcount in this department increased from 11 to 14 in 1995 to 1996, respectively. Selling and marketing expenses for the quarter were $857,553, an increase of $389,969 over the same quarter the previous year, and they increased as a percentage of revenues from 50.1% in 1995 to 67.8% in 1996. The items primarily attributing to the increase were advertising and promotional costs of existing products and the launch of Wildcat! version 5 in March 1996. The increase in headcount from 3 in 1995 to 12 in 1996, also contributed to the increase. General and administrative expenses increased slightly for the quarter over the previous year, from $382,985 in 1995 to $578,995 in 1996, and incresed as a percentage of revenues, from 41.1% in 1995 to 45.7% in 1996. The items rimarily accounting for the increase were, insurance, investor relations, and legal and accounting expenses. These increases were directly related to the Company going public in April 1995. The General and administrative headcount increased 10% from the prior year. =============================================================================== 8 Six Months Ended June 30, 1996 and 1995 - --------------------------------------- Revenues for the six months ended June 30, 1996 were $2,468,998, an increase of $485,410 or 24.5% over revenues for the same period in the prior year. As a percentage of revenues by product category showed the QmodemPro line at 1% and 27%, the Wildcat! line at 97% and 66%, and other at 2% and 7% for the first six months of 1996 and 1995, respectively. The large percentage of revenues attributed to the Wildcat! line in the six months ended June 30, 1996 was due to the launch of Wildcat! v.5 for Win95/NT in March 1996. Gross profit for the first six months increased from $1,614,350 in 1995 to $2,004,779 in 1996, but decreased as a percentage of revenues from 81.4% in 1995 to 81.2% in 1996. Gross profit percentage has averaged approximately 80-84% over the last three calendar years. Research and Development expenses increased $212,305 in the first six months of 1996 from 1995, and increased as a percentage of revenues from 14.1% in 1995 to 19.9% in 1996. Absolute spending increased 76.2% due in large part to the hiring of additional engineers by the Company and increases in engineers' salaries. To maintain its competitive market position, the Company expects to invest a significant amount of its resources for the development of new products and product enhancements and to continue recruiting and hiring experienced software developers, while at the same time considering the acquisition of software businesses and technologies. Selling and marketing expenses for the first six months of 1996 increased $1,022,407 over the same period the previous year, from $729,462 to $1,751,869. As a percentage of revenues selling and marketing expenses increased from 36.8% in 1995 to 71.0% in 1996. The items primarily accounting for the increase were advertising and promotional costs for existing products and the launch of Wilcat! Version 5 for Windows 95/NT in March 1996. General and Administrative expenses increased $375,681 in the first six months of 1996 from $821,637 in 1995 to $1,197,318 in 1996, as a percentage of revenues increased from 41.4% in 1995 to 48.5% in 1996. The items primarily accounting for the increase in actual dollars spent were higher personnel and facility costs associated with increased operations and expenditures to support the Company's infrastructure and additional cost associated with the Company going public in April 1995. Liquidity and Capital Resources - ------------------------------- Cash and cash equivalents balance at June 30, 1996 were approximately $4,552,000, a decrease of approximately $1,063,500 from December 31, 1995. Accounts receivable decreased approximately $220,000 in 1996. Accounts receivable average days to collect for the quarter ended June 30, 1995 and 1996 were 47 and 55 days, respectively. Average days to collect in 1995 was 50 days. Management's goal is to maintain receivable collection days at or below 50 for 1996. Inventory levels have stayed equal in 1996 with December 31, 1995 amounts. Longer term cash requirements, other than normal operating expenses, are anticipated for development of new software products and enhancements of existing products, launching new products and enhancements, financing anticipated growth and the possible acquisition of businesses, software products or technologies complementary to the Company's business. The Company believes that its existing cash, cash equivalents, marketable securities, cash generated from operations and available line of credit, will be sufficient to meet the Company's working capital and capital expenditure requirements for at least the next 12 months. =============================================================================== 9 Part II. Other Information Item 4. In Connection with the Annual Meeting of Shareholders held May 13, 1996, MUSTANG SOFTWARE, INC., does hereby certify and declare as follows: 1. That the number of shares of Common Stock of MUSTANG SOFTWARE, INC. issued and outstanding on the record date for said meeting, April 9, 1996 was 3,357,800. 2. That the number of shares represented and voting in person or by proxy at said meeting was as follows: 	By Proxy 3,213,081 	In Person 16,000	Total 3,229,081 3. That the total number of shares present in person and by proxy equal 96.2% of the total shares issued and outstanding, thereby constituting a quorum for purposes of the meeting. 4. That the number of shares cast for each of the individuals listed below to serve until the next Annual Meeting of shareholders and until their successors are elected and have qualified was as follows: NAME FOR ABSTAIN 	 		James A. Harrer		3,226,481		2,600 		James Stanley Harris	3,226,481		2,600 Richard J. Heming 3,226,481 2,600 		Stanley A. Hirschman	3,226,481		2,600 		C. Scott Hunter		3,226,481		2,600 		Michael S. Noling	3,226,481		2,600 5. To approve amendments to the Company's 1994 Incentive and Nonstatutory Stock Option Plan (the Stock Option Plan) to increase by 300,000 shares the number shares of Common Stock that can be optioned and sold under the Stock Option Plan. FOR AGAINST ABSTAIN BROKER NON-VOTES 2,225,762 27,701 6,005 969,613 6. To approve and adopt the Company's Employee Stock Purchase Plan. FOR AGAINST ABSTAIN BROKER NON-VOTES 2,237,513 16,325 5,630 969,613 7. To ratify the appointment of Arthur Andersen LLP as independent accountants for the year ending December 31, 1996. FOR AGAINST ABSTAIN 3,221,856 5,175 2,050 =============================================================================== 10 Item 5. Statement of Operations for the 12 Months Ended June 30, 1996 as a Provision of Section 11 (a) of the Securities Act of 1933 and Rule 58 promugated thereafter. MUSTANG SOFTWARE, INC. STATEMENT OF OPERATIONS Twelve Months Ended June 30, 1996 REVENUE $ 5,305,409 COSTS OF REVENUE 1,026,981 ------------ Gross profit 4,278,428 ------------ OPERATING EXPENSES: Research and development 1,058,201 Selling and marketing 3,538,438 General and administrative 2,355,450 ------------ Total operating expenses 6,952,089 ------------ Income(loss)from operations (2,674,661) ------------ OTHER INCOME (EXPENSE): Interest expense (46,562) Interest income 309,551 Other 729 ------------ Total other income (exp.) 263,718 ------------ Income (loss) before provision for income taxes (2,410,943) PROVISION (BENEFIT) FOR INCOME TAXES (119,211) ------------ NET INCOME (LOSS) $ (2,290,732) ============ NET INCOME (LOSS) PER COMMON SHARE $ (.68) ============= WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 3,358,282 ============= =============================================================================== 11 Item 6.	Exhibits and Reports on Form 8-K No reports on Form 8-K were filed by the Company during the quarter ended June 30, 1996. =============================================================================== 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 August 13, 1996 /s/ Donald M. Leonard ------------------------- Donald M. Leonard Vice President Finance and Chief Financial Officer (Principal Financial and Accounting Officer) August 13, 1996