ODDHEADER:
ODDHEADER:
ODDFOOTER:
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON. D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 1996
DIEHL GRAPHSOFT, INC.
(Name of Small Business Issuer in its charter)
New Jersey 52-1407016
(State or other Jurisdiction I.R.S. Employer
of incorporation or organization) Identification No.
10270 Old Columbia Road Suite 100
Columbia, Maryland 21046
(Address of principal executive offices) (Zip code)
Issuer's telephone number (410) 290-5114
Securities registered pursuant to section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is be to registered
Common Stock NASDAQ Small Cap Market
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12
months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days Yes _X__ No ____
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-KSB or any amendment to this Form 10-KSB. __X__
State Issuer's Revenues for its most recent fiscal year. $4,927,636
State the aggregate market value of the voting stock held by non-affiliates by
reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of a
specified date within the past 60 days. As of August 26, 1996,
$6,732,679.
(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS)
Check whether the issuer has filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Exchange
Act after the distribution of securities under a plan confirmed by
a court. Yes ___ No ___
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date.
3,140,739 shares of the sole class of common stock
as of August 26, 1996.
TABLE OF CONTENTS
PAGE
Item 1 Description of Business.................... 4
Item 2 Description of Property.................... 11
Item 3 Legal Proceedings.......................... 12
Item 4 Submission of Matters
to a Vote of Security Holders.............. 12
Item 5 Market for Common Equity and Related
Stockholder Matters........................ 12
Item 6 Management's Discussion and Analysis....... 13
Item 7 Financial Statements....................... 15
Item 8 Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure....................... 15
Item 9 Directors, Executive Officers,
Promoters and Control Persons.............. 16
Item 10 Executive Compensation..................... 17
Item 11 Security Ownership of Certain Beneficial
Owners and Management...................... 20
Item 12 Certain Relationships and Related
Transactions............................... 20
Item 13 Exhibits and Reports on Form 8-K............ 21
Financial Statements.................................. 22-33
Signatures ........................................... 34
ITEM 1. DESCRIPTION OF BUSINESS
Diehl Graphsoft, Inc. ("Graphsoft" or the "Company") was founded in
June, 1985, with the intent to develop a new and original approach
to computer aided design (CAD) and computer aided engineering (CAE)
software to enable sophisticated design and engineering projects to
be successfully undertaken on relatively inexpensive computer
hardware, thereby expanding the market for such software and
decreasing costs of such work in the industry. The Company's
strategy also includes offering additional software based on the
Company's CAD technology to service the needs of engineering and
architectural professionals in a cost effective manner.
The business of Graphsoft is more technically described as the
design, development, manufacture and marketing of interactive
graphics software, CAD software and CAE software. As part of that
business, Graphsoft publishes a newsletter four times a year as a
service to its users and as a sales tool for additional products
and upgrades. The Company also creates manuals for its software
users which are included as part of the software products, and has
taken on other projects related to computer graphics and software
development. Graphsoft also offers electronic information services
on American Online, Compuserve, and the Internet as a service to
its customers and as a sales tool.
The Company also acts as a publisher or reseller of other products.
The Company publishes Azimuth for outside authors and, from time to
time, also resells CAD related products manufactured by other
companies through the Company's distribution channels, such as
digitizing tablets by Kurta, rendering software by Strata, Inc.,
and translation software by Kandu Corp.
The Company has developed a related series of CAD software packages
for the Apple MacIntosh microcomputer and for IBM compatible
microcomputers using the Microsoft Windows operating systems. The
Company has developed and marketed a 2 and 3 dimensional CAD
program with broad capabilities including a data-base, report
generation, and programmability. The Company initially acquired
its basic CAD system software from Richard Diehl on September 4,
1985 in exchange for 90,000 common shares in the Company valued at
$1,000.00 at that time. As part of his employment agreement, Mr.
Diehl has agreed to assign rights to future software developed by
him to the Company. See "Certain Transactions." The Company
intends to develop specialized modules which enhance the ability of
this program to serve specialized markets such as architectural,
civil, and mechanical engineering. These specialized modules may
be included in MiniCad itself, or sold as separate packages.
Distribution
Distribution of the Company's present software products is
accomplished by three methods of distribution (percentage of sales
from each for the fiscal year ending May 31, 1996 is shown in
parentheses): 1) direct sales between the Company and the end user
(11%); 2) through dealers (1%); and 3) through distributors (88%
with 32 distributors, both foreign and domestic). In comparison,
for the fiscal year ending May 31, 1995, distribution was as
follows: 1) direct sales between the Company and the end user
(10%); 2) through dealers (4%); and 3) through distributors (86%
with 18 distributors, both foreign and domestic). In the fiscal
years ending May 31, 1996 and 1995, sales to two distributors
accounted for approximately 51% and 44% of sales, respectively.
The Company also engages in extensive advertising of its products
in trade magazines.
Product Description
PRESENT PRODUCTS
Currently, Graphsoft sells MiniCad into both the MacIntosh and
Windows markets, and two products into the MacIntosh market alone:
Blueprint and Azimuth. Minicad provides approximately 94% of
Graphsoft revenues. Blueprint and Azimuth use the same technology
as Minicad, but have reduced capabilities and are sold into
specialized markets. Blueprint is sold as a low end drafting
product; Azimuth is a mapping product. Graphsoft has established
itself in the industry as a medium-cost supplier of MacIntosh and
Windows software, and competes for market share with the largest of
the industry leaders such as AutoDesk, Intergraph, and Claris.
Minicad has won both of the MacIntosh industry's two most
prestigious awards, the 1989 MacWorld World Class Award for CAD,
and the 1990 MacUser Editor's Choice Award for CAD. The Company
also won the MacWorld World Class Award for CAD in 1994. These
awards are made based upon the merits of the products as compared
with other competing products and are the most desired awards in
the Company's industry. Management believes these awards have a
positive effect on sales of the product. MiniCad has also won the
1988 Australian MacWorld* Class Award, the 1992 Switzerland
MacWorld Best CAD Award and was a 1992 MacUsers** Editor's Choice
Award Finalist. There can be no assurance that the Company's
products will continue to achieve this level of industry acceptance
in the future.
*MacWorld is a registered trademark of IDG Corporation
**MacUser is a registered trademark of Ziff-Davis, Inc.
Core Technology
The Company maintains a core technology of over 300,000 lines of
computer code, the actual program which creates the images seen on
the computer screen. This core technology is used to build
Minicad, Blueprint and Azimuth, and is available for use in
additional products the Company may choose to create. The code
represents the accumulated result of research and development
expenditures made by the Company since inception. The core
technology can be roughly divided into 2 dimensional drafting, 3
dimensional drafting, data base and report generation, and
programmability. These aspects of the core technology are described
in more detail below, but as a whole they form the technological
basis for the Company's business.
The 2-Dimensional System
The 2-Dimensional CAD system forms the basic technology upon which
CAD is built into Minicad, Blueprint and Azimuth. The 2-Dimensional drafting
system allows the user to draw on a computer
screen a real object such as a house, a nut and bolt, a piece of
furniture, or an engine part, and produce the necessary drawings to
specify the manufacture, evaluation or construction of the item by
a third party. The system duplicates the functionality of a
drafting board as used by conventional draftspersons, and in
addition brings added capability which greatly increases the
overall cost effectiveness for the user.
This core technology includes a broad array of features for support
of basic drafting and CAD functions, including symbol libraries,
list management, class and layer management, text with specialized
fonts, linestyles, fill patterns and user interface considerations,
such as snapping and gridding. More advanced technology such as
code for the Boolean intersections of polygons, polylines,
automatic dimensioning, and special wall objects for architects
increases the value of this technology to the user. Included in
this technology is code to interact with the operating system of
the MacIntosh. The Company has in development and is currently
testing a version of MiniCad for the Windows 3.1, Windows NT, and
the Windows 95 operating systems in order to offer the product for
sale to Windows users, and broaden the market for the Company's
products.
The 3-Dimensional CAD System
The 3-Dimensional system is used to construct actual models of
objects rather than a two dimensional representation. This
technology goes beyond what a customer could do on a conventional
drafting system. Once an object is entered into the computer, the
user may view it from any angle, in any scale, and choose from
various standard projections such as perspective, orthogonal,
isometric, cabinet or cavalier. These projections allow the user
to duplicate traditional ways of displaying an object in three
dimensions. The user can obtain from the computer a drawing with
top, side, front and perspective views of an object after creating
the object just once. This model is linked into the 2-Dimensional
CAD system in a unique way, which allows several views of the
object to be drawn and dimensioned simultaneously. The user may
duplicate the object, may add objects together, and may edit the
object at any time. The computer will display the object as a
transparent wire-frame, solid, or shaded solid.
Key features of the CAD system include the ability to construct
architectural models directly from the floorplan. Modules can also
be constructed from other 2-Dimensional objects for mechanical
applications as well. The unique nature of the data-base allows
the user to re-edit the original floorplan or object and re-construct a new
model with the changes included. Additional
capabilities of 3-Dimensional construction are now under
development at Graphsoft. There can be no assurance, however, that
the Company will be able to develop such capabilities.
Data-base and Report Generation Technology
The data-base technology allows the user to attach text and numeric
information to objects in the CAD system. These data records each
adhere to a particular format described by the user. For example,
a user may define a "Furniture" record which contains information
about the manufacturer, color, item number, date of acquisition and
cost which is attached to each piece of furniture in the drawing.
Another record may specify HVAC system maintenance information, and
can be attached to the appropriate symbols in the drawing. This
technology is flexible and is used by customers to perform facility
management functions and cost estimations.
This technology also includes a spreadsheet-like report generation
capability which works in a similar way to stand-alone
spreadsheets. This spreadsheet allows direct display of
information in the drawing, including sizes, perimeters, areas, and
data-base records.
Programming Technology
As part of Graphsoft's main product, MiniCad, Graphsoft includes a
macro-programming capability to allow users to extend or customize
the program. The Company has marketed its macro-language
programming capability under the name of Minipascal for several
years. This language contains an extensive application programmers
interface (A.P.I.) which contains the routines necessary for the
direct manipulation of the drawing and data-base by the programmer.
With this capability, users can extend the functions of the program
to automate specific tasks in their work.
The Company released a CAD development kit, as a separate product
in April, 1994. This development system is used in three ways.
First, the Company sells the system to corporate developers for in-house use.
Second, the Company sells the system to third party
developers who will develop add-on products which work the
Company's products to facilitate its use in special niche markets.
And third, the system is used by the Company to develop specialized
products for certain high profile niche markets. The system
requires the use of C++, a high level language which provides more
extensive capabilities than provided in older languages, in
addition to the prior language, C++ allows development of
professional quality CAD functions at the most advanced levels.
Present Modular Systems
The Company has also produced software modules to reach specific
target markets in the industry. Three modules, architectural,
mechanical, and general utility, have been created and included
free of charge to purchasers of the current product.
PowerPC
On April 15, 1994, the Company released its port to the PowerPC
environment. The PowerPC is Apple Computer's new platform to
replace the Macintosh. In accomplishing this port over to the new
platform, the Company has received technical assistance from Apple
similar to that given to other companies which develop software
applications for Apple hardware in the form of early releases of
software, hardware and access to internal Apple Computer engineers
and technical materials. The significance of the completion of
this project is that the Company's software will run faster on the
PowerPC than would have otherwise been the case, and thus the
Company has maintained its relative competitive position for
potential sales to users of the new system. Although Apple has not
made an announcement, one possible move that Apple might make is to
license the operating system to outside computer manufacturers.
Were this to occur, additional market opportunities might be
available to the Company in supplying users of machines utilizing
such operating system with its software. There can be no
assurance, however, that Apple will license the operating system to
outside manufacturers or that the Company would be able to take
advantage of such market opportunities, if any.
Manuals and Tutorials
The Company maintains a capability to produce manuals and training
materials in house. Because of the complexity of the CAD, PowerPC
is a registered trademark of IBM Corp. software, these manuals are
an important part of the product to the customer. Minicad
currently has three separate manuals, one for the programming
language, one which is a technical reference for the users to
explain specific features, and a tutorial to assist new users in
learning the products. The manuals are typeset on Apple MacIntosh
computers and printed and bound by outside vendors.
Technical Services
A significant part of the Company's business is ongoing customer
support. As is common in the software industry, the Company has
established a group of trained representatives inside the Company
to provide information and assistance to the user. Most support is
provided by telephone or telefax. The Company provides access to
its customer support services free of charge to its customers but
does not provide a toll free number for this service. This policy
reduces telephone bills and tends to limit gratuitous use of
technical support, thus reducing overall support costs while
continuing a high level of service. International distributors are
required to have technical service departments in their respective
countries. The Company supplies support on major network services,
Compuserve, America Online, and the Internet. The Company
maintains an electronic bulletin board service on these networks
which provide files for downloading onto users' computer systems.
Users may send questions to technical support and have them
answered on a daily basis. This service is available locally to
many of the countries with which Graphsoft does business.
Quality Assurance and Testing
Systematic testing and field testing are methods used by developers
to insure a quality product free of defects, bugs, and unfriendly
features. Systematic testing is performed at the Company by a
quality assurance specialist, who employs a test suite developed
specifically for the program. Results of these tests are posted,
placed in a data-base for resolution, and reviewed at engineering
meetings.
Field testing consists of sending early versions of the program
free of charge to users who have agreed to test the program under
certain conditions. The users are interviewed to determine if
changes are necessary before marketing, and are required to return
data sheets on their findings.
Competition
There are presently several full-featured CAD systems on the market
for the Apple Macintosh computer, Microsoft Windows and other
operating systems which may present competition for the Company. In
addition, there are numerous companies which have products aimed at
specific segments of the market. Corel's Visual Cad is a new
competitor due to the port over to the Windows market. These
companies may have greater capital resources, larger staffs and
more sophisticated facilities than the Company. Such companies may
produce products which are more effective than any developed by the
Company and may be more successful than the Company in their
production and marketing of such products. There can be no
assurance that other companies will not enter the markets developed
by the Company.
RESEARCH and FUTURE PRODUCTS
Future products and product improvements are developed by the
employees of the Company. Product improvements are required on a
continuing basis to prevent the Company's products from becoming
obsolete resulting in deterioration of sales. While at the present
time the Company believes that its product is of a high quality,
there can be no assurance that the Company will be able to maintain
its present market position in the future.
Future Modular Systems
The Company intends to use the CAD development system to produce
software modules to reach specific target markets in the industry.
Modules in facilities management and civil engineering are
currently under consideration for development out of a list of 40
potential modules. The Company maintains a separate team of
professionals to develop these modules on an ongoing basis.
Cross Platform Projects
Presently the Company only has products for the Apple Macintosh
computer. Thus the Company presently is limited to the numerically
smaller, as compared to the Windows market, MacIntosh market.
However, the Company feels that product line recognition and in-house expertise
can be exploited to create software lines for other
machines and achieve similar market penetration. Because of the
Macintosh's unique internal operating system in hardware, the
"toolbox", the translation of software for use on other machines is
difficult, but can be performed in substantially less time than it
takes to develop a program from scratch.
SALES AND MARKETING
The Company sells its own products and products of other companies.
The Company markets software though a combination of direct sales
generated from reviews and advertising in trade publications,
retail outlets and bulk distributors and VARS ("value added
resellers"). The Company's President and staff participate in
professional seminars, and conferences and trade shows and assist
in sales. The Company has a staff of two full-time marketing
professionals.
EMPLOYEES
The Company employs four executives, nine programmers, six
technical personnel, twelve technical support personnel, two
marketing personnel, two bookkeepers, and four administrative
assistants.
PROPRIETARY RIGHTS
The Company does not hold any patents and relies on a combination
of trade secret, copyright and trademark laws, nondisclosure and
other contractual agreements and technical measures to protect its
proprietary rights in its products. Despite these precautions,
unauthorized parties may attempt to copy aspects of the Company's
products or to obtain and use information that the Company regards
as proprietary.
The Company believes that because of the rapid pace of
technological change in the CAD software industry, the legal
protection for its products are less significant factors in the
Company's success than the knowledge, ability and experience of the
Company's employees, the frequency of product enhancements and the
timeliness and quality of support services provided by the Company.
The Company believes that its products, trademark and other
proprietary rights do not infringe on the proprietary rights of
third parties. There can be no assurance, however, that third
parties will not assert infringement claims against the Company in
the future.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 10,865 square feet of office space
and 4,000 square feet of manufacturing space for a total of 14,865
square feet of space at 10270 Old Columbia Road, Suite 100,
Columbia, Maryland 21046-1751 from an unrelated party at a monthly
rent, including allocated property taxes, of $11,000 through July
31, 1997. The present lease is for five years expiring July 31,
1998.
ITEM 3. LEGAL PROCEEDINGS
The Company is not presently engaged in any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the last fiscal year, except the following which
were all approved at a Meeting held on June 11 and 12, 1996:
1. Directors Richard Diehl, Joseph Schmelzle and Richard Hug
were elected;
2. The appointment of Ernst & Young was ratified as auditors
for the fiscal year ending May 31, 1996; and,
3. The corporation was reincorporated in Maryland.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information
Diehl Graphsoft, Inc. is a public company (NASDAQ stock symbol
DIEG), with corporate headquarters located in Columbia, MD.
The following table sets forth the range of high and low bid
information for the Corporation's common stock for the periods
indicated as quoted in the National Quotation Bureau's National
Daily Quotation Sheets and/or in the National Association of
Security Dealers, Inc. Automated Quotation System Bulletin Board.
Par Securities, Inc., is the market maker for the Corporation's
common stock. These over-the-counter market quotations reflect
inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions.
Fiscal Years Ending May 31, 1996 May 31, 1995
High Bid Low Bid High Bid Low Bid
First Quarter $ 9 3/4 $3 5/8 $2 $2
Second Quarter 11 1/8 6 1/4 - -
Third Quarter 7 1/2 4 7/8 - -
Fourth Quarter 8 1/8 5 4 3/8 4
Diehl Graphsoft, Inc. currently has 3,140,739 shares of stock
outstanding. As at August 26, 1996, the closing bid and asked
prices for the Company's common stock was 6 5/8 and 7 1/8.
Holders.
The Corporation has approximately 94 holders of its common stock.
Dividend Policy
The Corporation has never declared or paid cash dividends on its
common stock, and may elect to retain its net income in the future
to increase its capital base. The Corporation does not currently
anticipate paying cash dividends on its common stock in the
foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations for the year ended May 31, 1996 compared to
year ended May 31, 1995
Revenue. Product revenues were $4,927,636 for the year ending May
31, 1996 as compared with $5,112,270 for the year ending May 31,
1995. This 4% decline in revenue is largely attributable to the
overall decline in sales for MacIntosh based applications software
during the year ended May 31, 1996 as compared with the year ended
May 31, 1995.
Cost of Revenue. Cost of revenue for the year ending May 31, 1996
was $1,233,986 as compared with cost of revenue of $881,269 for the
year ending May 31, 1995 representing the costs to produce the
product. The gross profit percentages for the year ended May 31,
1996 and 1995 were 75% and 83% respectively. This decrease in gross
profit percentage is due to an increase in amortization of software
development costs. This expense rose due to an increased commitment
to research and development activities and the change in the useful
lives from three years to two years. The effect of this change in
the useful lives was approximately $130,000 and is included in the
amortization expense charged to cost of revenue. Amortization
expenses charged to cost of revenue totalled $387,567 for the year
ended May 31, 1996 as compared with $213,399 for the year ended May
31, 1995. Salaries for technical support personnel also rose by
$46,151 in the year ended May 31, 1996 compared with the year ended
May 31, 1995 as a result in enhancements in the technical service
program. Costs to scrap old and obsolete inventory also rose by
$44,690 in the year ended May 31, 1996 compared with the year ended
May 31, 1995. The increase in this cost is attributable to the
unexpected decline in sales of MiniCad 5 prior to the introduction
of MiniCad 6 in the second quarter of the fiscal year ended May 31,
1996.
Operating Expenses.
General and administrative costs were $2,606,873 for the year ended
May 31, 1996 as compared with $2,143,254 for the year ended May 31,
1995. This increase is the result of increased legal expenses of
$370,596 for the year ended May 31, 1996 as compared with $39,635
for the year ended May 31, 1995. This increase is attributable to
the cost of defending a patent infringement claim. Costs associated
with being a public company also rose by $74,583 for the year ended
May 31, 1996 as compared with the year ended May 31, 1995.
Other operating expenses incurred for research and development
activities were $224,471 for the year ended May 31, 1996 from
$140,049 for the year ended May 31, 1995. This increase is
primarily attributable to an increased commitment by the Company in
this area as well as the technical matters associated with
developing MiniCad 6 for Windows. Depreciation and amortization
expenses were to $113,200 for the year ended May 31, 1996 as
compared with $79,200 for the year ended May 31, 1995. This
increase is primarily attributable to an increase in equipment
purchases for research and development needs.
Other Income and Expenses. Other income was $337,734 for the year
ended May 31, 1996 compared with $136,002 for the year ended May 31,
1995. This increase is attributable to an increase in investment
income on marketable securities resulting from the sale of common
stock during the year ended May 31, 1996.
Income Taxes. The effective income tax rate was 38.4% for the year
ending May 31, 1996 compared to 38.6% for the year ending May 31,
1995. The effective income tax rate for 1996 reflects a benefit
from the increase in investment income that is nontaxable.
Net Income. Net profit declined to $668,998 or $.22 per share for
the year ending May 31, 1996 as compared with $1,225,957 or $.50 per
share for the year ending May 31, 1995. This decrease is largely
attributable to declining sales and increased cost of sales and
operating expenses during the year ended May 31, 1996
Liquidity and Capital Resources
The Company increased its working capital by $2,129,532 from
$4,867,638 at May 31, 1995 to $6,997,170 at May 31, 1996. This
increase is the result of cash flows from operations of $1,046,054
and proceeds from the sale of common stock which totalled $1,671,395
during the year ended May 31, 1996. The increase in working capital
has been principally invested in marketable securities which rose
from $3,736,516 at May 31, 1995 to $6,218,925 at May 31, 1996.
Marketable securities at May 31, 1996 consist principally of United
States Treasury bills and municipal obligations. Cash flow from
operations and the proceeds from the sale of common stock during the
year ended May 31, 1996 were also used to purchase equipment and
invest in software development costs, which are included in the
balance sheet at May 31, 1996.
The Company's future capital requirements will depend upon many
factors, including the extent, timing and progress of the Company's
development of new software. The Company anticipates that its
existing capital resources and earnings from operations will be
adequate to satisfy the capital requirements for the next twelve
months.
The Company will continue to have working capital needs that will be
affected by the progress of the Company's research and development
activities and capital expenditures. However, the Company expects
that the cash generated from future operations and the proceeds from
the initial public offering will satisfy its operating cash needs
for the foreseeable future.
ITEM 7. FINANCIAL STATEMENTS
Financial statements for the fiscal years ending May 31, 1995 and
1996 are attached hereto at Page 24 - 33. The following financial
statements, including the independent auditors' reports, appear on
sequential pages 22 through 33 of this Annual Report pursuant to the
requirements of Item 13 above:
1. Independent Auditors' Reports dated July 19,
1996
and July 27, 1995, respectively;
2. Balance Sheets at May 31, 1996 and 1995;
3. Statements of Operations for the fiscal years
ended
May 31, 1996 and 1995;
4. Statements of Cash Flows for the years
ended May 31,
1996 and 1995;
5. Statement of Stockholders' Equity for the years
ended May 31, 1996 and May 31, 1995; and
6. Notes to the Financial Statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
On June 12, 1996 the shareholders ratified the appointment of Ernst
& Young, LLP, as the Company's new auditors. No dispute regarding
accounting principles or any other accounting matters was present.
Thomas Monahan, Certified Public Accountant, had been the
Corporation's auditor for the previous four years.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS
Directors and Executive Officers
Name Age Positions Held with The Corporation
Richard Diehl 41 President, Director
Donald Webster 48 Executive Vice President
Joseph Schmelzle 41 Vice-President, Treasurer/Secretary,
and Director
E. Diane Reynolds 37 Vice President, Marketing
Sean Flaherty 27 Vice President, Engineering
Richard Hug 61 Director
The above officers and directors will hold office until the next
annual meeting scheduled for November 21, 1996 or until their
successors are elected and qualified.
RICHARD DIEHL. Mr. Diehl is the founder of the Company and served
as its President and as a director since inception. Prior to
starting the Company, Mr. Diehl was a computer engineer for Privac,
Inc. of Falls Church, Virginia from January to March, 1985. From
November, 1981 to December 1984, he worked as a computer engineer
for the Bendix Aerospace Technology Center in Columbia, Maryland.
From July, 1980 to November 1981, Mr. Diehl had been an engineering
technician with W.R. Grace & Co. Mr. Diehl has received his B.S.
degree in Mass Communication from Towson State University, Towson,
Maryland, in 1980 and his M.S. degree in Computer Science from Johns
Hopkins University, Baltimore, Maryland in 1984.
DONALD WEBSTER. Mr. Webster has been with the Company since 1992 in
the capacity of Executive Vice President. From 1987 until 1992, he
was Director of Communications Services for Arthur Young in its
National Marketing Office in Reston, Virginia, dealing primarily
with video production. From 1977 to 1987, Mr. Webster was a Vice
President of Ramcor, Inc., a manager of classified programs for the
Department of Defense. From 1972 to 1976, he attended the Maryland
Fine Arts College but did not complete a degree. From 1974 until
1977, he worked as Marketing Director for the Graham Group and from
1969 to 1972 he was a Captain in the United States Army serving as
a military intelligence officer working with aerial surveillance.
JOSEPH SCHMELZLE. Mr. Schmelzle has been Vice-President, Finance,
Treasurer and a Director of the Company since inception. He devotes
about five hours per week to the Company. Mr. Schmelzle has been
self-employed since 1991 as an accountant. From 1985 until 1991 Mr.
Schmelzle was employed by Thomas Havey & Company, Washington, D.C.,
initially as a Supervisor in the Audit Department and later as
Manager of that department. He held the position of senior
accountant with Touche Ross & Company, Baltimore, Maryland from 1983
to 1985. During mid-1983, Mr. Schmelzle was an internal auditor
with the Federal National Mortgage Association, Washington, D.C.,
and from 1979 to 1983 he was a senior accountant with Deloitte
Haskins & Sells, Baltimore, Maryland. Mr. Schmelzle received his
B.S. in accounting from Clarkson College in 1977, and an M.B.A.,
Finance and Applied Economics, from the University of Rochester,
Rochester, New York in 1979.
E. DIANE REYNOLDS. Ms. Reynolds has served the Company as Vice
President for Marketing since 1987. She is a 1980 Phi Beta Kappa,
summa cum laude graduate of Dickinson College and holds an MA in
English. Prior to coming to Graphsoft, she held positions with
Waverly Press as a proofreader, with the U.S. Department of Labor as
a clerical employee and was an Instructor in the English Department
at the University of Maryland, College Park.
SEAN FLAHERTY. Mr. Flaherty has been with the Company since 1985,
and spent the first five years of his employment with the Company
working closely with Mr. Diehl in the creation of the Company's
product. In 1991, Mr. Flaherty took over day to day control of
the Company's engineering department and was appointed Vice
President. He has delayed completion of his undergraduate
engineering degree from the University of Maryland in order to
commit his time to Graphsoft.
RICHARD HUG. Mr. Hug has not previously served the Company. Mr.
Hug has been employed by Environmental Elements Corporation
("Environmental") since 1974, initially when it was a subsidiary of
Koppers Company, Inc. where Mr. Hug was a Vice President from 1973
to 1983. Mr. Hug served Environmental, a supplier of engineered air
pollution control systems and services, as President from 1974 until
1985 when he became its Chief Executive Officer and Chairman of the
Board of Directors. He stepped down as Chief Executive Officer in
1990, but continues to serve Environmental as Chairman of the
Board.
Mr. Hug also serves as President of The Great American Car Wash,
Inc., Deco-Sign Products, Inc. and Hug Enterprises, Inc., unrelated
private companies in which he holds ownership interests.
ITEM 10. EXECUTIVE COMPENSATION
Compensation of Officers and Directors:
Three officers of the Company, Richard Diehl, Donald Webster, and
Sean Flaherty received compensation aggregating $60,000 or more for
the fiscal years ended May 31, 1995 and 1996. Directors are not
compensated for serving on the Board of Directors. For the fiscal
years ended May 31, 1995 and 1996, Mr. Diehl received $199,361 and
$192,914, respectively. The Company intends to continue to reward
Mr. Diehl with bonuses based upon the performance of the Company.
Bonuses are awarded by the Board of Directors based on the Company's
performance without specific criteria. During the fiscal years
ended May 31, 1995 and 1996, Donald Webster received $67,067 and
$88,573, respectively. All officers and directors as a group (5
persons) received an aggregate of $537,544 and $440,854 of cash
compensation for the fiscal years ended May 31, 1995 and 1996,
respectively. No contingent forms of remuneration, property, or
other benefits were conferred during that period.
SUMMARY COMPENSATION TABLE
Annual Compensation
Name Position Fiscal Year Salary Bonus
Richard Diehl President 1995 $140,000 $59,361
1996 169,000 23,914
Donald Webster Executive 1995 67,067 -
Vice President 1996 88,573 -
Sean Flaherty Vice President 1995 61,705 -
1996 74,159 -
All Officers and Directors 1995 537,544 59,361
(5 persons) 1996 440,854 23,914
The Company has entered into a written employment and assignment
agreement with Richard Diehl. Pursuant to this Agreement, Mr. Diehl
assigned his rights to any and all improvements of the CAD software
presently marketed by the Company which he may develop from time to
time while employed by the Company. The capacity, annual salary and
term of employment is set forth below.
Name Capacities Annual Salary Term
Richard Diehl President and $169,000 2 Years (ending
Director October 31, 1997)
Stock Grant Program
The Company has adopted a Stock Grant Program and reserved 150,000
shares of its authorized common stock for the issuance to officers,
directors, key employees, and consultants as determined by the Board
of Directors. The recipient must continue employment with the
Company for two years following the grant and agree not to engage in
any activity which would be considered in competition with the
Company's business. If the employee violates any one of these
conditions, the ownership of the stock issued under the program
shall revert back to the Company. Grants totalling 25,000 shares
were made prior to May 31, 1990, and none have been made since that
date.
Stock Option Program
The Company has reserved 150,000 shares of its authorized common
stock for the issuance to officers, directors, key employees, and
consultants as determined by the Board of Directors. Options are
nontransferable and expire if not exercised within five years. The
options may not be exercised by the employee until after the
completion of two years of employment with the Company. The maximum
exercisable in any one year is one-fifth of the option granted. The
exercisable options do accumulate up to the total options granted in
the fifth year. The options are issuable to officers, directors,
key employees and consultants in such amounts and prices as
determined by the Board of Directors.
As of May 31, 1995 five options covering 64,000 shares were issued,
of these three grants totalling 44,000 common shares were made to
officers of the Company under the Stock Grant Plan. As of May 31,
1994 and 1995, no options have been granted pursuant to this plan.
Option/SAR Grants in Last Fiscal Year
(Individual Grants)
% total
No. of sec. options/SARs
underlying granted to Exercise or
options/ employees base price Expiration
Name SARS granted in fiscal year ($/Sh) Date
Donald Webster 20,000 45% $4.25 12/12/99
E. Diane Reynolds 4,000 9% $4.25 12/12/99
Sean Flaherty 20,000 45% $4.25 12/12/99
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth information with respect to the share
ownership as of the date of this filing of the Company's common
stock by its officers and directors, both individually and as a
group, and by the present record and/or beneficial owners of more
than 5% of the outstanding amount of such stock:
Number of Percentage
Shares of shares
Name Owned Owned
Richard Diehl 1,933,055 61.5%
7128 Chilton Court
Clarksville, MD 21029
Donald Webster 20,000 .6%
6011 Fox Run
Fairfax, VA 22030
Joseph Schmelzle 110,250 3.5%
6 Wellwood Court
Silver Spring, MD 20905
Diane Reynolds 22,250 .7%
353 Ourtime Lane
Columbia, MD 21045
Sean Flaherty 29,900 .9%
7822 Edmunds Way
Elkridge, MD 21227
Officers
and Directors
as a Group
(5 persons) 2,143,305 68.2%
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective November 1, 1995, the Company entered into a two year
employment contract with Richard Diehl which provides
for salary of
$169,000 per annum. In addition, he receives life insurance equal
to twice his annual salary, disability insurance, vacation pay, sick
leave and use of a Company car. No proceeds will be used to pay any
of this compensation.
On August 16, 1994, the Company's Board of Directors declared a
three for four reverse split of all issued and outstanding shares of
its common stock.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Index to Exhibits
(1) (i) Articles of Incorporation*
(ii) By-Laws*
(2) Form of Common Stock*
*Incorporated by reference from Form 10-SB2 previously filed
(b) One 8-K was filed during the last quarter of the fiscal year
covered by this report reporting the change in Certified Public
Accountants.
Report of Independent Auditors
To the Board of Directors and Stockholders
Diehl Graphsoft, Inc.
We have audited the balance sheet of Diehl Graphsoft, Inc. as of May
31, 1996, and the related statements of operations, stockholders'
equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audit. The financial statements of Diehl
Graphsoft, Inc. for the year ended May 31, 1995, were audited by
other auditors whose report dated July 27, 1995, expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 1996 financial statements referred to above
present fairly, in all material respects, the financial position of
Diehl Graphsoft, Inc. at May 31, 1996, and the results of its
operations and its cash flows for the year then ended, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Baltimore, Maryland
July 19, 1996
THOMAS MONAHAN
CERTIFIED PUBLIC ACCOUNTANT
208 LEXINGTON AVENUE
PATERSON, NEW JERSEY 07502
(718) 601-0181
To the Board of Directors and Stockholders
Diehl Graphsoft, Inc.
I have audited the balance sheet of Diehl Graphsoft, Inc. as of
May 31, 1995, and the related statements of operations, cash flows
and stockholders' equity for the years ended May 31, 1994 and 1995.
These financial statements are the responsibility of the Company's
management. My responsibility is to express an opinion on these
financial statements based on my audit.
I conducted my audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. I believe that my audit provides a
reasonable basis for my opinion.
In my opinion, the 1996 financial statements referred to above
present fairly, in all material respects, the financial position of
Diehl Graphsoft, Inc. at May 31, 1994 and 1995, and the results of
its operations, shareholders' equity and cash flows for the years
ended May 31, 1994 and 1995, in conformity with generally accepted
accounting principles.
/s/ Thomas Monahan
July 27, 1995
Paterson, New Jersey
DIEHL GRAPHSOFT, INC.
BALANCE SHEET
May 31,
ASSETS 1996 1995
Current assets:
Cash & cash equivalents $ 375,278 $ 722,116
Marketable securities 6,218,925 3,736,516
Accounts receivable 336,391 525,372
Inventory 134,713 132,820
Income taxes receivable 127,799 -
Due from officer 5,000 230,000
Other current assets 158,529 121,161
Total current assets 7,356,635 5,467,985
Fixed assets:
Equipment 511,350 405,334
Furnishings & fixtures 77,767 72,418
Leasehold improvements 33,963 21,779
623,080 499,531
Accumulated depreciation (344,518) (294,260)
Net fixed assets 278,562 205,271
Other assets:
Deferred organization expenses 29,692 -
Software development costs, net of
accumulated amortization 692,272 465,863
Total other assets 721,964 465,863
Total assets $8,357,161 $6,139,119
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
expenses $ 273,941 $ 116,991
Income taxes payable - 263,197
Deferred income taxes 85,524 220,159
Total current liabilities 359,465 600,347
Long term liabilities:
Deferred income taxes 275,061 156,530
Total liabilities 634,526 756,877
Stockholders' equity:
Common stock - $.01 par value;
10,000,000 shares authorized,
3,140,739 and 2,893,125 shares
issued and outstanding at
May 31, 1996 and 1995,
respectively 31,407 28,931
Additional paid in capital 4,147,605 2,478,686
Retained earnings 3,543,623 2,874,625
Total stockholders' equity 7,722,635 5,382,242
Total liabilities and
stockholders' equity $8,357,161 $6,139,119
See accompanying notes to financial statements.
DIEHL GRAPHSOFT, INC.
STATEMENT OF OPERATIONS
For the year ended
May 31,
1996 1995
Revenues $4,927,636 $5,112,270
Cost of revenue 1,233,986 881,269
Gross profit 3,693,650 4,231,001
Operating expenses:
General and administrative 2,606,873 2,143,254
Depreciation and amortization 113,200 79,047
Research and development 224,471 140,049
Total operating expenses 2,944,544 2,362,350
Income from operations 749,106 1,868,651
Other income and expenses:
Interest income 344,142 133,781
Gain (loss) on disposition
of equipment (6,408) 2,221
Total other income and
expenses 337,734 136,002
Income before income taxes 1,086,840 2,004,653
Provision for income taxes 417,842 778,696
Net income $ 668,998 $1,225,957
Net income per share $ .22 $ .50
Weighted average number of
shares outstanding 3,050,693 2,443,125
See accompanying notes to financial statements.
DIEHL GRAPHSOFT, INC.
STATEMENT OF CASH FLOWS
For the year ended
May 31,
1996 1995
Operating activities:
Net income $ 668,998 $1,225,957
Adjustments:
Depreciation and amortization 500,767 292,446
Gain (loss) on retirement of
fixed assets 6,408 (2,221)
Deferred income taxes (16,104) 140,123
Change in operating assets
and liabilities:
Accounts receivable 188,981 (236,013)
Inventory (1,893) (19,873)
Income taxes receivable (127,799) -
Other current assets (67,060) 161,389
Accounts payable and
accrued expenses 156,953 13,482
Income taxes payable (263,197) 95,548
Net cash provided by operating
activities 1,046,054 1,670,838
Investing activities:
Purchase of investments (3,322,412) (3,482,135)
Sale of investments 840,000 50,000
Capitalized software (613,975) (367,621)
Purchase of property,
plant & equipment (192,900) (139,819)
Due from officers 225,000 (230,000)
Net cash used by investing
activities (3,064,287) (4,169,575)
Financing activities:
Net proceeds from issuance of
common stock 1,671,395 2,463,680
Net cash provided by financing
activities 1,671,395 2,463,680
Net change in cash (346,838) (35,057)
Cash at beginning of period 722,116 757,173
Cash at end of period $ 375,278 $ 722,116
See accompanying notes to financial statements.
DIEHL GRAPHSOFT, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
Additional
Common Common Paid in Retained
Shares Stock Capital Earnings Total
Balance-
May 31, 1994 2,293,125 $22,931 $ 21,006 $1,648,668 $1,692,605
Sale of common
stock 600,000 6,000 2,457,680 - 2,463,680
Net income for
year - - - 1,225,957 1,225,957
Balance-
May 31, 1995 2,893,125 28,931 2,478,686 2,874,625 5,382,242
Sale of common
stock 247,614 2,476 1,668,919 - 1,671,395
Net income for
year - - - 668,998 668,998
Balance-
May 31, 1996 3,140,739 $31,407 $4,147,605 $3,543,623 $7,722,635
See accompanying notes to financial statements.
DIEHL GRAPHSOFT, INC.
NOTES TO FINANCIAL STATEMENTS
FOR YEARS ENDED MAY 31, 1996 AND 1995
Note 1. Description of Company and Summary of Significant
Accounting Policies.
The Company is a computer software developer and publisher of
computer aided design (CAD) and computer aided engineering (CAE)
software for use on relatively inexpensive computer hardware.
Certain amounts reported in the financial statements as of and for
the year ended May 31, 1995 have been reclassified to conform with
the 1996 presentation.
Significant accounting policies are:
a. Cash and Cash Equivalents - Temporary investments with a
maturity of less than three months are treated as cash.
b. Inventory - Inventory is recorded at the lower of cost or
market. Cost is computed using the first in, first out method
of accounting.
c. Property and Equipment - Property and equipment are stated at
cost less accumulated depreciation. Depreciation is computed
using the declining balance and straight line methods over
lives of generally five to seven years.
d. Advertising and Marketing - Certain advertising costs are
expensed in the period in which the advertisement is
published. Other advertising and marketing costs are expensed
as incurred. Costs included in operating expenses for the
years ended May 31, 1996 and 1995 totaled $954,244 and
$1,069,409, respectively.
e. Revenue Recognition - Revenue is recognized at the time the
software is shipped, net of allowance for future estimated
returns, provided that no significant vendor obligations
remain.
f. Earnings Per Share - Earnings per share have been computed by
dividing net income by the weighted average number of shares
outstanding during the year. Fully diluted earnings per share
are not materially different from earnings per share.
Note 2. Use of Estimates and Business Concentration
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results
could differ from those estimates.
The Company derives its sales from both domestic and foreign
customers. Export sales approximate 49% and 24% of total revenues
for the years ended May 31, 1996 and 1995, respectively. The
Company also derived 51% and 44% of sales from two major customers
for the years ended May 31, 1996 and 1995, respectively.
Note 3. Investments
Marketable securities are recorded at cost which approximates fair
value. Cost represents the purchase price adjusted for
amortization of discounts and premiums, if any, using the interest
method. The Company has not had any significant unrealized gains
or losses on its investments during the periods presented. A
summary of marketable securities which are held available for sale
at May 31, 1996 and 1995 is as follows:
1996 1995
Money Market Fund $ 5,000 $ 5,000
United States Treasury Bills 4,790,335 2,681,032
Municipal Bonds 1,423,590 1,050,484
$6,218,925 $3,736,516
Note 4. Software Development Costs
The Company develops and tests software code to produce a software
master which becomes the core product sold to customers. The
Company also purchases software code contractually to include with
the software master. The software developed and purchased for
inclusion with the software master is amortized using the straight
line method over the product's estimated useful life.
The costs to establish the technological feasibility of software
products, including the designing, coding and testing activities
that are necessary to establish that a software product is both
feasible and can be produced, are treated as research and
development costs and are expensed as incurred.
A summary of software development costs at May 31, 1996 and 1995 is
as follows:
May 31,
1996 1995
Cost incurred for product development $1,531,026 $917,050
Accumulated amortization 838,754 451,187
$ 692,272 $465,863
During the years ended May 31, 1996 and 1995, amortization expense
reported in cost of sales totaled $387,567 and $213,399,
respectively.
Note 5. Pension Plan
The Company maintains a 401K defined contribution pension plan
which provides for all eligible employees to contribute up to 15%
of qualifying wages to the plan. The Company may make
discretionary contributions up to 50% of the first 6% the employee
elects to contribute to the plan. For the years ended May 31, 1996
and 1995, the Company contributed $29,271 and $41,663, respectively
to the plan.
Note 6. Income Taxes
Significant components of deferred tax assets and liabilities at
May 31, 1996 and 1995 are as follows:
1996 1995
Deferred tax asset:
Accounts payable and
accrued expenses $ 95,192 $ 45,182
Deferred tax liabilities:
Accounts receivable (129,567) (201,880)
Unamortized software (267,355) (179,917)
Other (58,855) (40,074)
Net deferred tax liability $(360,585) $(376,689)
The provision for income taxes for the years ended May 31, 1996 and
1995 consist of the following:
1996 1995
Current provisions:
Federal $366,663 $531,282
State 67,283 107,291
Total current portion 433,946 638,573
Deferred income taxes:
Federal (14,177) 123,424
State (1,927) 16,699
Total deferred income taxes (16,104) 140,123
Total provisions for federal and
state income taxes $417,842 $778,696
The Company's provision for income taxes resulted in effective tax
rates that varied from the statutory federal income tax rate as
follows for the years ended May 31, 1996 and 1995:
1996 1995
Expected federal income tax
provision - 34% 34.0% 34.0%
State income tax net of federal
benefit 4.6% 4.6%
Other (0.2%) 0.2%
38.4% 38.8%
For the years ended May 31, 1996 and 1995, the Company paid income
taxes of $529,855 and $371,322, respectively.
Note 7. Stock Option Plan and Warrants
The Company maintains a non-qualified stock option plan and has
reserved 150,000 shares of its authorized common stock for issuance
to key employees, officers, directors and consultants. Options are
accounted for using the intrinsic value method of accounting.
Options are nontransferable and expire if not exercised within five
years. The options may not be exercised by the employee until
after the completion of two years of employment with the Company.
The maximum exercisable in any one year is one-fifth of the option
granted. The exercisable options do accumulate up to the total
options granted in the fifth year. The options are issuable to
officers, directors, key employees and consultants in such amounts
and prices as determined by the Board of Directors. The Company
issued options for 64,000 common shares during the year ended May
31, 1995 with an option price of $4.25 per share which remain
outstanding at May 31, 1996.
The Company completed a sale of common stock and warrants in
February 1995. Each warrant granted the right to purchase one
additional share of stock at a price ranging from $6.75 per share
to $7.00 per share prior to the expiration of the warrant. A
summary of warrant activity since the sale is as follows:
Warrants issued in February 1995 and
outstanding at May 31, 1995 660,000
Warrants exercised (247,614)
Warrants canceled (352,386)
Warrants outstanding at May 31, 1996 60,000
Note 8. Commitments
a. Lease Agreement - The Company leases office space in Columbia,
Maryland under an agreement that expires in July 1998. For
the years ended May 31, 1996 and 1995 rent expense totaled
$105,450 and $67,540, respectively. Future annual minimum
lease payments plus allocated property taxes are required as
follows:
May 31, Total
1997 $131,845
1998 135,156
1999 22,526
b. Employment Agreement - The Company maintains a two year
employment agreement with its president which provides for a
salary of $169,000 per year through November 1, 1997 plus
allocable benefits as described in the agreement.
c. Software Licensing Agreement - On July 23, 1994, the Company
entered into a "Small Development Software Licensing
Agreement" with Altura Software, Inc., a corporation formed
under the laws of California ("Altura"). The agreement
permits the Company to use Alturas' software as a basis to
converts its Apple based software for use in an IBM personal
computer or compatible environment. The agreement requires
the Company to pay an annual royalty equal to the greater of
$48,000 or three percent of qualifying sales as defined in the
agreement capped at the Company's option at $250,000 per
year.
During the years ended May 31, 1996 and 1995, the product was
in a developmental stage which required no royalty fee.
According to the agreement, the Company incurred developmental
fees for use of the software which are accounted for pursuant
to the accounting policy for purchased and developed software
described in Note 4.
Note 9. Reorganization
Effective June 24, 1996, the Company consummated a tax-free
reorganization for the purpose of becoming a Maryland corporation
by issuing one share of a new class of $.01 par value common stock
in exchange for each share of the then outstanding no par value
common stock. The effect of this reorganization is reflected as if
it had occurred at the beginning of the earliest period presented.
Note 10. Officer Loan
The Company issued a loan to its president in February 1995 for
$230,000 for a term of one year with interest at a rate of 7%. The
loan was repaid in full during the year ended May 31, 1996 and an
additional advance of $5,000 was made and remained outstanding at
May 31, 1996.
SIGNATURES:
In accordance with Section 13 or 15(d) of the Exchange Act,
the Registrant caused this report to be signed on its behalf by
this undersigned, thereunto duly authorized.
DIEHL GRAPHSOFT, INC.
a New Jersey Corporation
Date: September 5, 1996 BY: s/Richard Diehl
Richard Diehl
President
Chief Executive Officer
Chairman, Board of Directors
Date: September 5, 1996 BY: s/Donald Webster
Donald Webster
Executive Vice President
Date: September 5, 1996 BY: s/Joseph Schmelzle
Joseph Schmelzle
Treasurer
Chief Financial and
Accounting Officer
Director
