UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON. D.C. 20549
FORM 10KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 1998
Commission File Number: 0-24318
DIEHL GRAPHSOFT, INC.
---------------------
(Name of Small Business Issuer in its charter)
Maryland 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: None
Securities registered pursuant to Section 12(g) of the Exchange 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. $6,022,714
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked prices of such common equity, as of a
specified date within the past 60 days. As of August 8, 1998, $4,481,953.
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 8, 1998.
Transitional Small Business Disclosure Format (check one) Yes No X
<PAGE>
TABLE OF CONTENTS
ITEM
Item 1 Description of Business............................................1
Item 2 Description of Property............................................7
Item 3 Legal Proceedings..................................................7
Item 4 Submission of Matters to a Vote of Security Holders................7
Item 5 Market for Common Equity and Related Stockholder Matters...........7
Item 6 Management's Discussion and Analysis...............................8
Item 7 Financial Statements..............................................10
Item 8 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..............................................11
Item 9 Directors, Executive Officers, Promoters and Control Persons......11
Item 10 Executive Compensation...........................................11
Item 11 Security Ownership of Certain Beneficial Owners and Management...11
Item 12 Certain Relationships and Related Transactions...................11
Item 13 Exhibits and Reports on Form 10KSB...............................11
Financial Statements..................................................12-22
Signatures...............................................................23
Documents Incorporated by Reference
Portions of the definitive Proxy Statement to be filed under Regulation 14A for
the annual meeting to be held November 10, 1998 are incorporated by reference
into Part III hereof. <PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Diehl Graphsoft, Inc. ("Company") was founded in June, 1985, with the intent to
develop a new and original approach to computer aided design (CAD) software. The
Company's products are intended to enable sophisticated design, architectural,
and engineering projects to be successfully undertaken on relatively inexpensive
computer hardware, thereby expanding the market for CAD software and decreasing
costs of such work in the industry. The Company's strategy also includes
offering integrated industry specific software tools based on the Company's CAD
technology to service the needs of design, engineering, and architectural
professionals in a cost effective manner.
The business of the Company is more technically described as the design,
development, manufacture and marketing of interactive graphics and CAD software.
As part of its business, the Company 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. The Company also offers electronic
information services on the Internet as a service to its customers and as a
sales tool.
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 markets a 2 and 3 dimensional
CAD program called MiniCAD with broad capabilities including a database, report
generation, and programmability. The Company also markets specialized modules
which enhance the ability of MiniCAD to serve specialized markets such as
architectural, civil, and mechanical engineering. These specialized modules are
included in MiniCAD itself.
Additionally, the company has developed a document management software, Revision
Master, for the Microsoft Windows operating system. The Company began marketing
Revision Master in the business products market in March 1998.
DISTRIBUTION
Distribution of the Company's present software products is accomplished by three
methods (percentage of sales from each for the fiscal year ending May 31, 1998
is shown in parentheses): 1) direct sales between the Company and the end user
(15%); 2) through dealers (9%); and 3) through distributors (76% with 34
distributors, both foreign and domestic). In comparison, for the fiscal year
ending May 31, 1997, distribution was as follows: 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 the
fiscal years ending May 31, 1998 and 1997, sales to two distributors accounted
for approximately 38% and 51% of sales, respectively. The loss of one or both of
these distributors could have a material adverse effect on the Company.
1
<PAGE>
PRODUCT DESCRIPTION
Present Products
Currently, the Company sells MiniCAD into both the Macintosh and Windows
markets, and one product -Revision Master- into the Windows market exclusively,
MiniCAD provided approximately 99% of the Company's revenues for the fiscal year
ended May 31, 1998. The Company 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 and Intergraph.
In fiscal 1998, MiniCAD won the prestigious Designers 3D CAD Shootout, an
international competition pitting the world's leading CAD softwares in head to
head design competition across 22 categories. On its way to winning the
competition as "Best Overall CAD Software", MiniCAD won first place in six
separate categories and second or third place in 12 of 16 others.
Additionally, MiniCAD was named a 1997 finalist for the MacWorld* Editor's
Choice Award in the "Best Science Engineering Tool" category. For the same
period, the Company was named to the SoftLetter 100, a ranking of the top one
hundred software companies based on percentage of overall sales in international
markets. Management believes these awards have a positive effect on sales of the
product. In 1996, MiniCAD for Windows was named by Computer Graphics World as
one of 1996's "Most Innovative Products."
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 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, database 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. The 2-Dimensional drafting system allows the user to draw on a
computer screen an 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
*MacWorld is a registered trademark of IDG Corporation
2
<PAGE>
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 also
developed MiniCAD for the Windows 3.1, Windows NT, and Windows 95 operating
systems.
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, add objects
together, and edit the object at any time. The computer will display the object
as a transparent wireframe, 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. The unique nature of the
database allows the user to reedit the original floorplan or object and
reconstruct a new model with the changes included. The Company also licenses
technology enabling MiniCAD to produce solid modeling. MiniCAD now supports true
3D Boolean operations. Additional capabilities of 3-Dimensional construction are
now under development at the Company. There can be no assurance, however, that
the Company will be able to develop such capabilities.
Database and Report Generation Technology
The database 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 database records.
Programming Technology
As part of the Company's main product, MiniCAD, the Company 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
3
<PAGE>
necessary for the direct manipulation of the drawing and database 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 which provides great benefit to its
users in three ways. First, the system is used by corporate developers for in
house use. Second, third-party developers may use the system to develop add-on
products which work with the Company's products to facilitate their 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.
Vertical Market Solutions: The Design and Drafting Toolkit
The Company has expanded the Drafting and Design Toolkit by adding more industry
specific resources to this collection of industry specific features, tools,
symbols, worksheets, parametrics, and other resources with in the MiniCAD
software to reach targeted markets. An integrated Design and Drafting Toolkit
allows engineers and designers to access tools tailored for their profession
from within MiniCAD. Integrated modules for architecture, mechanical
engineering, space planning, theater lighting design, food service, HVAC,
landscape design and more have been created and included free of charge within
MiniCAD to purchasers of the current product.
Enhanced Functionalities
The Company has implemented broad improvements in the capabilities of the
MiniCAD 7 program, specifically solid modeling, file exchange and rendering
functionalities.
In addition to its various of surface and wireframe modeling tools, MiniCAD now
supports true 3D solid modeling operations. As such, three commands -add,
subtract and intersect- are all users require to quickly and easily create
impressive 3D models. The program can now open and save files created in the DWG
format, the native file format of industry leader AutoCAD. Additionally,
MiniCAD's DXF file exchange capabilities have been improved. These enhancements
allow MiniCAD users to share files with users on competing softwares more easily
than ever. Recent upgrades to MiniCAD's rendering support capabilities allow
users more options for producing striking, high-quality renderings all without
leaving the program's main drawing window.
Manuals and Tutorial
The Company maintains a capability to produce manuals and training materials
in-house. Because of the complexity of the CAD software, these manuals are an
important part of the product to the customer. MiniCAD currently has four
separate manuals, one for the programming language, two which are technical
references for the users to explain specific features (the User manual and the
Reference manual), and the Toolkit manual to explain the industry specific
features contained in MiniCAD. A tutorial to assist new users in learning each
product ships on the product disk and is available for download from the
Company's website. The manuals are produced in FrameMaker in both Macintosh and
Windows and are printed and bound by outside vendors.
4
<PAGE>
Technical Services
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. International
distributors are required to have technical service departments in their
respective countries.
Quality Assurance and Testing
Systematic testing and field testing are methods used by developers to ensure a
quality product free of defects, bugs, and unfriendly features. Systematic
testing is performed at the Company by two quality assurance specialists, who
employ a test suite developed specifically for the Company's products. Results
of these tests are posted, placed in a database for resolution, and reviewed at
engineering meetings.
Field testing consists of sending early versions of the Company's products free
of charge to users who have agreed to test 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 and enterprise document
management 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 these markets. The Company has pursued a strategy of
aggressively marketing high quality, easy-to-use CAD programs through mass
market channels to keep costs, and hence product price, low. However, many of
these companies may have greater capital resources, larger staffs, and more
sophisticated facilities than the Company. Other 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.
New Markets
Revision Master is a new document control software that helps professionals in a
broad range of disciplines to locate, store, and retrieve electronic documents
and related version information throughout a document's life cycle. The
controlled documents can be of any document file type for the Windows 95, 98, or
NT 4.0 operating system, including word proessing, desktop publishing,
computer-aided design format, spreadsheets, and multimedia packages.
Research and Future Products
Future products and product improvements are developed by the employees of the
Company, purchased from outside vendors, or licensed from other developers.
5
<PAGE>
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 products meet or exceed industry
standards, there can be no assurance that the Company will be able to maintain
its present technological position in the future. The Company bears all of its
own research and development expenses.
Future Industry Specific Systems
The Company intends to continue developing industry specific, vertical market
modules for inclusion in MiniCAD. The Company maintains a separate team of
professionals to develop these modules on an ongoing basis. However, there can
be no assurances that the Company will be successful with this strategy.
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. Most
of the Company's products are sold wholesale to a few main distributors, who in
turn market the products through the retail and mail-order channels. The
Company's staff participates in professional seminars and conferences, user
group presentations, and trade shows, and assists in sales. The Company has a
staff of eleven full-time and one part-time marketing professionals.
EMPLOYEES
The Company employs 3 executives, 19 programmers, 3 quality assurance personnel,
8 technical support personnel, 12 marketing personnel, 3 accounting personnel, 2
shipping clerks, 3 customer service personnel, 5 technical administrators, and 2
administrative assistants. The Company employs a total of 60 persons, 58 of them
full-time.
LICENSING AGREEMENTS
The Company maintains a licensing agreement with Altura Software allowing the
Company to convert its developed software for use in a Windows based personal
computer or compatible environment.
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.
6
<PAGE>
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, excluding allocable operating expenses
chargeable under the lease of $12,887.00 through July 31, 2000. The Company
believes these facilities are adequate to meet its needs.
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.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Company is a public company quoted on the NASDAQ Small Cap market (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
Company's common stock for the periods indicated as quoted in the NASDAQ Small
Cap market. These over-the-counter market quotations reflect interdealer prices,
without retail mark-up, mark down or commission, and may not represent actual
transactions.
Fiscal Years Ending May 31, 1998 May 31, 1997
------------ ------------
High Bid Low Bid High Bid Low Bid
-------- ------- -------- -------
First Quarter $ 5 5/8 $ 3 $ 9 $ 6 1/4
Second Quarter 4 5/8 3 9 1/4 6 23/32
Third Quarter 5 3 8 5 1/2
Fourth Quarter 4 1/2 3 5/8 6 5/8 4 7/8
The Company currently has 3,147,637 shares of stock outstanding. As of August 3,
1998, the closing bid and ask prices for the Company's common stock were 2 11/16
and 2 3/4, respectively.
HOLDERS
The Company has approximately 76 recorded holders of its common stock.
DIVIDEND POLICY
The Company 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.
7
<PAGE>
The Company does not currently anticipate paying cash dividends on its common
stock in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
In connection with the Private Securities Litigation Reform Act of 1995 (the
"Litigation Reform Act"), the Company is hereby disclosing certain cautionary
information to be used in connection with written materials (including this
Annual Report on Form 10-KSB) and oral statements made by or on behalf of its
employees and representatives that may contain "forward looking statements"
within the meaning of the Litigation Reform Act. Such statements consist of any
statement other than a recitation of historical fact and can be identified by
the use of forward looking terminology such as "may," "expect," "anticipate,"
"estimate" or "continue" or the negative thereof or other variations thereon or
comparable terminology. The listener or reader is cautioned that all forward
looking statements are necessarily speculative and there are numerous risks and
uncertainties that could cause actual events or results to differ materially
from those referred to in such forward looking statements. The reader or
listener is cautioned that the Company does not have a policy of updating or
revising forward looking statements and thus he or she should not assume that
silence by management over time means that actual events are bearing out as
estimated in such forward looking statements.
Results of Operations for the year ended May 31, 1998 compared to year ended May
31, 1997
REVENUE
Product revenues were $7,367,360 for the year ending May 31, 1998 as compared
with $6,022,714 for the year ending May 31, 1997 representing an increase of
22.3%. Revenues from the Windows version of MiniCAD rose from $1,695,139 for the
year ended May 31, 1997 to $2,346,063 for the year ended May 31, 1998
representing an increase of 38.4%. Upgrade revenues from conversion of earlier
versions of MiniCAD for Windows to MiniCAD 7 for Windows rose from $18,180 for
the year ended May 31, 1997 to $407,195 for the year ended May 31, 1998.
Revenues from MiniCAD for the Apple Macintosh also rose to $4,713,470 for the
year ended May 31, 1998 from $4,073,774 for the year ended May 31, 1997,
representing a increase of 15.7%. Upgrade revenues from conversion of earlier
version of MiniCAD for the Macintosh to MiniCAD 7 for the Macintosh increased
from $252,084 for the year ended May 31, 1997 to $1,249,328 for the year ended
May 31, 1998. The increase in upgrade revenues is due to the release of MiniCAD
7 in May 1997 which contained new features for users. New product revenues for
Windows rose from $1,676,959 for the year ended May 31, 1997 to $1,938,868 for
the year ended May 31,1998 with greater recognition and acceptance of the
product in the marketplace but were more than offset by declines of new product
revenues from the Macintosh platform. New product revenues for the Macintosh
declined from $3,821,690 for the year ended May 31, 1997 to $3,464,142 for the
year ended May 31, 1998. This decline mirrors the declines in marketshare
experienced by Apple Computer during the periods. There can be no assurance that
the Company will not experience further declines in new product revenues in the
future.
COST OF REVENUE
Cost of revenue for the year ending May 31, 1998 was $2,056,279 as compared with
$1,650,903 for the year ending May 31, 1997, representing an increase of 24.6%.
8
<PAGE>
The gross profit percentages for the years ended May 31, 1998 and 1997 were
72.1% and 72.6%, respectively. The decrease in gross profit percentage is due to
an increase in amortization of software development costs resulting from an
increased commitment to software development activities. Amortization expenses
charged to cost of revenue totaled $826,086 for the year ended May 31, 1998, as
compared with $645,301 for the year ended May 31, 1997, representing an increase
of 28%. Cost to scrap old and obsolete inventory also declined by $110,272 in
the year ended May 31, 1998 as compared with the year ended May 31, 1997. The
cost to scrap old and obsolete inventory for the year ended May 31, 1997 was
high due to the unexpected declines in revenues from MiniCAD for the Macintosh
just prior to the release of MiniCAD 7 in May 1997.
OPERATING EXPENSES
General and administrative expenses were $1,850,013 for the year ended May 31,
1998 as compared with $1,770,858 for the year ended May 31, 1997 representing an
increase of 4.5%. Legal expenses declined to $66,200 for the year ended May 31,
1997 as compared with $163,892 for the year ended May 31, 1997, due primarily to
a settlement of a patent infringement claim against the Company in June 1996.
Other general and administrative expenses increased with the Company's
commitment to other functional operations and the overall growth of the Company.
Selling and marketing expenses were $2,026,462 for the year ended May 31, 1998
as compared to $1,896,966 for the year ended May 31, 1997, representing an
increase of 6.8%. Advertising expenses for MiniCAD declined to $1,115,101 for
the year ended May 31, 1998 as compared with $1,334,006 for the year ended May
31, 1997. This decrease is attributable to a repositioning of the advertising
campaign away from general trade publications to more industry specific
publications where the costs per reader for the Company's targeted markets is
believed to be less. Salaries and trade show expenses rose to $577,057 for the
year ended May 31, 1998 as compared to $318,321 for the year ended May 31, 1997.
This increase reflects the continuing commitment to reach the broader Windows
market through trade shows and other promotional means.
Research and development expenses were $374,155 for the year ended May 31, 1998
as compared with $243,339 for the year ended May 31, 1997, representing an
increase of 53.8%. This increase is primarily attributable to an increased
commitment by the Company to the development of new engineering technology.
OTHER INCOME AND EXPENSES
Other income was $400,218 for the year ended May 31, 1998 as compared with
$380,084 for the year ended May 31, 1997, representing an increase of 5.3%. This
increase is attributable to an increase in investment income from marketable
securities resulting from a larger investment base in these securities during
the year ended May 31, 1998 as compared with the year ended May 31, 1997. The
increase in average investment base for the year ended May 31, 1998 as compared
with the year ended May 31, 1997 was partly offset by the reduction in interest
rates applied to the average investment base since the Company shifted its
investment base during the periods to include a larger representation of tax
exempt securities which generally carry a lower interest yield.
9
<PAGE>
INCOME TAXES
The provision for income taxes was $467,787 for the year ended May 31, 1998 as
compared with $294,728 for the year ended May 31, 1997, representing a increase
of 58.7%. The effective income tax rate was 32.0% for the year ending May 31,
1998 as compared to 35.1% for the year ending May 31, 1997. The decline in the
effective tax rate for the year ended May 31, 1998 is principally attributable
to an increase in tax exempt investment income.
NET INCOME
Net profit rose to $992,882 or $.32 per share for the year ending May 31, 1998
as compared with $546,004 or $.17 per share for the year ending May 31, 1997,
representing a increase in net income of 81.8%.
LIQUIDITY AND CAPITAL RESOURCES
The Company increased its working capital by $945,176 from $7,419,438 at May 31,
1997 to $8,364,614 at May 31, 1998, representing an increase of 12.7%. This
increase is the result of cash flows from operations during the year ended May
31, 1998. The increase in working capital has been invested in marketable
securities which rose from $6,686,705 at May 31, 1997 to $7,826,800 at May 31,
1998. Marketable securities at May 31, 1998 consist principally of United States
Treasury bills, corporate bonds and municipal obligations. Cash flows from
operations during the year ended May 31, 1998 were also used to purchase
equipment and invest in software development and licensing costs, which are
included on the balance sheet at May 31, 1998. 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 its current working capital
along with the cash generated from future operations will satisfy its operating
cash needs for the foreseeable future.
ITEM 7. FINANCIAL STATEMENTS
Financial statements for the fiscal years ended May 31, 1998 and 1997 are
attached hereto at Page 12. The following financial statements, including the
independent auditors reports, appear on sequential pages 12 through 22 of this
Annual Report:
1. Report of independent Auditors dated July 31, 1998
2. Consolidated Balance Sheet at May 31, 1998 and 1997
3. Consolidated Statement of Income for the fiscal years ended May 31, 1998
and 1997
4. Consolidated Statement of Cash Flows for the years ended May 31, 1998 and
1997;
5. Consolidated Statement of Stockholders' Equity for the years ended May 31,
1998 and May 31, 1997; and
6. Notes to the Consolidated Financial Statements.
10
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No dispute regarding accounting principles or any other accounting matters was
present.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The information included herein is incorporated by reference to the Company's
definitive proxy statement for the annual shareholder meeting of November 10,
1998.
ITEM 10. EXECUTIVE COMPENSATION
The information included herein is incorporated by reference to the Company's
definitive proxy statement for the annual shareholder meeting of November 10,
1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information included herein is incorporated by reference to the Company's
definitive proxy statement for the annual shareholder meeting of November 10,
1998.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information included herein is incorporated by reference to the Company's
definitive proxy statement for the annual shareholder meeting of November 10,
1998.
ITEM 13. EXHIBITS AND REPORTS ON FORM 10-KSB
(a) Index to Exhibits
Exhibit 3.1 - Articles of Incorporation (Incorporated by reference to
the Company's Form 10KSB filed by the Company on 9-13-97)
Exhibit 3.2 - Bylaws (Incorporated by reference to the Company's Form
10KSB filed by the Company on 9-13-97)
Exhibit 10.1 - Directors Compensation Plan (Incorporated by reference
to The Company's Form 10KSB filed by the Company on 9-13-97)
Exhibit 10.2 - Stock Option Plan (Incorporated by reference to The
Company's Form 10KSB filed by the Company on 9-13-97
Exhibit 10.3 - Amended Agreement for Lease of Space (filled herewith)
Exhibit 21 - Subsidiaries (filled herewith)
Exhibit 23 - Consent of Independent Auditors (filled herewith)
Exhibit 24 - Power of Attorney (filled herewith)
Exhibit 27 - Financial Data Schedule (filled herewith)
(b) The Company made no filing on Form 8-K
11
<PAGE>
Report of Independent Auditors
To the Board of Directors and Stockholders of Diehl Graphsoft, Inc.
We have audited the accompanying consolidated balance sheets of Diehl Graphsoft,
Inc. as of May 31, 1998 and 1997, and the related consolidated statements of
income, stockholders' equity, and cash flows for the years 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 audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Diehl
Graphsoft, Inc. at May 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Vienna, Virginia
July 31, 1998
12
<PAGE>
DIEHL GRAPHSOFT INC.
CONSOLIDATED BALANCE SHEET
May 31,
-------
ASSETS 1998 1997
------ ------ -----
Current assets:
Cash and equivalents $ 376,754 $ 247,359
Marketable securities 7,826,800 6,686,705
Accounts receivable 443,386 331,135
Inventory 81,432 162,828
Income taxes receivable - 133,370
Other 257,764 167,565
------- -------
Total current assets 8,986,136 7,728,962
--------- ---------
Fixed assets:
Equipment 747,599 633,329
Furnishings and fixtures 115,623 110,604
Leasehold improvements 47,688 41,038
------ ------
910,910 784,971
Accumulated depreciation (575,529) (465,816)
-------- --------
Net fixed assets 335,381 319,155
------- -------
Other assets:
Unamortized organization expenses 27,731 32,235
Software development and licensing costs,
net of accumulated amortization 899,547 776,676
Other 4,202 -
----- -------
Total other assets 931,480 808,911
------- -------
Total assets $10,252,997 $8,857,028
========== =========
See accompanying notes to financial statements.
13
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 555,546 $ 279,926
Income taxes payable 62,653 -
Deferred income taxes 3,323 29,598
----- ------
Total current liabilities 621,522 309,524
------- -------
Long term liabilities:
Deferred income taxes 334,678 278,865
------- -------
Total liabilities 956,200 588,389
------- -------
Stockholders' equity:
Common stock - $.01 par value; 10,000,000
shares authorized, 3,147,637 and
3,140,739 share issued and outstanding at
May 31, 1998, and 1997, respectively 31,476 31,407
Additional paid in capital 4,182,812 4,147,605
Retained earnings 5,082,509 4,089,627
--------- ---------
Total stockholders' equity 9,296,797 8,268,639
--------- ---------
Total liabilities and
stockholders' equity $10,252,997 $8,857,028
========== =========
See accompanying notes to financial statements.
14
<PAGE>
DIEHL GRAPHSOFT INC.
CONSOLIDATED STATEMENT OF INCOME
For the year ended May 31,
--------------------------
1998 1997
---- ----
Revenues $7,367,360 $6,022,714
Cost of revenues 2,056,279 1,650,903
--------- ---------
Gross profit 5,311,081 4,371,811
--------- ---------
Operating expenses:
General and administrative 1,850,013 1,770,858
Selling and marketing 2,026,462 1,896,966
Research and development 374,155 243,339
------- -------
Total operating expenses 4,250,630 3,911,163
--------- ---------
Income from operations 1,060,451 460,648
--------- -------
Other income and expenses:
Interest income 399,243 380,383
Other 975 (299)
--- ----
Total other income and expenses 400,218 380,084
------- -------
Income before income taxes 1,460,669 840,732
Provision for income taxes 467,787 294,728
------- -------
Net income $ 992,882 $ 546,004
========== ==========
Net income per share $ .32 $ .17
========= =========
Weighted average number of shares
outstanding 3,144,326 3,164,548
========= =========
See accompanying notes to financial statements.
15
<PAGE>
DIEHL GRAPHSOFT INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended May 31,
--------------------------
1998 1997
---- ----
Operating activities:
Net income $ 992,882 $ 546,004
Adjustments:
Amortizations of bond (premiums) and discounts (121,311) (279,638)
Other depreciation and amortization 850,492 648,882
Depreciation 146,264 140,414
Deferred income taxes 29,538 (52,122)
Other (975) 299
Change in operating assets and liabilities:
Accounts receivable (112,251) 5,256
Inventory 81,396 (28,115)
Income taxes receivable/payable 196,023 (5,571)
Other current assets (90,199) (4,036)
Other assets (4,202) -
Accounts payable and accrued expense 310,896 5,985
------- -----
Net cash provided by operating activities 2,278,553 977,358
--------- -------
Investing activities:
Purchase of marketable securities (5,843,839) (5,547,142)
Dispositions of marketable securities 4,826,456 5,359,000
Capitalized software and licensing costs (948,957) (729,704)
Purchase of fixed assets (215,720) (181,306)
Insurance proceeds from automobile disposition 33,577 -
Sale of fixed assets 2,100 -
Capitalized organizational expenses (2,775) (6,125)
------ ------
Net cash used for investing activities (2,149,158) (1,105,277)
---------- ----------
Net change in cash and equivalents 129,395 (127,919)
Cash and equivalents at beginning of period 247,359 375,278
------- -------
Cash and equivalents at end of period $ 376,754 $ 247,359
======= =======
Supplemental disclosure of cash flow information:
Issuance of common stock $ 35,276 $ -
Reduction in accrued expenses (35,276) -
------- -------
$ - $ -
========== ==========
See accompanying notes to financial statements.
16
<PAGE>
DIEHL GRAPHSOFT INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Additional
Common Common Paid in Retained
Shares Stock Capital Earnings Total
-----------------------------------------------------------
Balance-May 31, 1996 3,140,739 $31,407 $4,147,605 $3,543,623 $7,722,635
Net income for year - - - 546,004 546,004
------- ------- ------- ------- -------
Balance-May 31, 1997 3,140,739 31,407 4,147,605 4,089,627 8,268,639
Issuance of common stock 6,898 69 35,207 - 35,276
Net income for year - - - 992,882 992,882
--------- ------ --------- --------- ---------
Balance-May 31, 1998 3,147,637 $31,476 $4,182,812 $5,082,509 $9,296,797
========= ====== ========= ========= =========
See accompanying notes to financial statements.
17
<PAGE>
DIEHL GRAPHSOFT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED MAY 31, 1998 AND 1997
Note 1 Description of Company and Significant Accounting Policies
The Company is principally a computer software developer and publisher of
computer aided design (CAD) and computer aided engineering (CAE) software for
use on relatively inexpensive computer hardware.
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. Significant accounting
policies include the following:
a. Principles of Consolidation - The financial statements consolidate the
financial reporting of the Company along with its two wholly owned
subsidiaries. All significant intercompany transactions have been eliminated.
b. Cash and Cash Equivalents - Temporary investments with a maturity of less
than three months when purchased are treated as cash.
c. Inventory - Inventory is recorded at the lower of cost or market. Cost is
computed using the average cost method of accounting.
d. Fixed Assets - Fixed assets 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.
e. Selling and Marketing - Certain selling and marketing costs are expensed in
the period in which the cost pertains. Other selling and marketing costs are
expensed as incurred.
f. Revenue Recognition - Revenue is recognized at the time the software is
shipped, net of allowance for future estimated returns, provided that no
significant obligations remain.
g. Stock Options - Stock options are accounted for using the intrinsic value
method of accounting. The pro forma effect of applying the fair value method
of accounting to stock options is insignificant to net income.
h. Earnings Per Share - Earnings per share have been computed based on net
income and the weighted average number of shares outstanding. A computation
of the dilutive effect of potential common shares on the weighted average
number of shares outstanding is as follows:
1998 1997
---- ----
Average outstanding shares 3,144,326 3,140,739
Dilutive effect of stock options
and warrants - 23,809
--------- ------
Weighted average number of shares
outstanding 3,144,326 3,164,548
======== =========
18
<PAGE>
Note 2 Business Concentrations
The Company derives its sales from both domestic and foreign customers. Export
sales approximate 50% and 56% of total revenues for the years ended May 31, 1998
and 1997, respectively. The Company also derived 38% and 51% of sales from two
major customers for the years ended May 31, 1998 and 1997, respectively.
Note 3. Investments
Marketable securities are recorded at fair value which approximates cost. Cost
represents the purchase price adjusted for amortization of discounts and
premiums, if any, using the interest method. These securities generally contain
staggered maturities of six years or less. The Company has had no 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,
1998 and 1997 is as follows:
1998 1997
---- ----
Money Market Fund $ 5,000 $ 5,000
United States Treasury Bills 1,370,024 3,177,144
Municipal Bonds 4,325,726 3,504,561
Corporate Bonds 2,126,050 -
--------- ---------
$7,826,800 $6,686,705
========== ==========
Note 4. Software Development and Licensing Costs
The Company develops and tests software code to produce software masters which
becomes the core products sold to customers. The Company also purchases and
licenses software code contractually to include with the software masters. The
cost of software developed, licensed, and purchased for inclusion with the
software masters is amortized using the straight line method over the products'
estimated useful lives, which is typically two years. Software licensed for a
periodic royalty fee, discussed in Note 8, is expensed to the period to which it
pertains.
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, 1998 and 1997 is as follows:
1998 1997
---- ----
Cost incurred for product development
and licensing $1,643,801 $1,928,809
Accumulated amortization 744,254 1,152,133
--------- ---------
$ 899,547 $ 776,676
========= =========
During the years ended May 31, 1998 and 1997, amortization expense reported in
cost of sales totaled $826,086 and $645,301, respectively.
19
<PAGE>
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, 1998
and 1997, the Company contributed $37,747 and $34,081, respectively to the plan.
Note 6. Income Taxes
Significant components of deferred tax assets and liabilities at May 31, 1998
and 1997 are as follows:
1998 1997
---- ----
Deferred tax asset:
Accounts payable and
accrued expenses $ 91,148 $ 100,713
Deferred tax liabilities:
Accounts receivable (68,453) (91,271)
Unamortized software (324,877) (286,918)
Other (35,819) (30,987)
------- -------
Net deferred tax liability $(338,001) $(308,463)
======== ========
The provision for income taxes for the years ended May 31, 1998 and 1997
consist of the following:
1998 1997
---- ----
Current provision:
Federal $367,659 $302,475
State 70,590 44,375
------ -------
Total current portion 438,249 346,850
------- -------
Deferred provision:
Federal 24,185 (42,676)
State 5,353 (9,446)
----- ------
Total deferred income taxes 29,538 (52,122)
------ -------
Total provisions for federal and
state income taxes $467,787 $294,728
======= =======
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, 1998 and 1997:
20
<PAGE>
1998 1997
---- ----
Expected federal income tax
provision 34.0% 34.0%
State income tax net of federal
benefit 4.6 4.6
Benefit from tax-exempt securities (6.6) (3.5)
---- -----
32.0% 35.1%
===== =====
For the years ended May 31, 1998 and 1997, the Company paid income taxes of
$242,226 and $352,421, respectively.
Note 7. Stock Warrants
The Company completed a sale of common stock and warrants in February 1995.
Underwriter warrants, issued with the sale, carry an exercise price of $7.00 per
unit for the right to receive one share of stock and one additional warrant
which provides the right to purchase one additional share of stock at $6.75 per
share. All 60,000 underwriter warrants originally issued remain outstanding at
May 31, 1998 and are due to expire in November, 1999.
Note 8. Stock Options
The Company maintains a stock option plan that provides for the issuance of a
maximum of 300,000 shares of stock which may be issued as incentive stock
options or non-qualified stock options. These options, which are
non-transferable, carry a maximum life of ten years and are issuable to
officers, directors, and key employees in such amounts and terms as determined
by the Board of Directors within the limitations of the plan. Company options
outstanding at May 31, 1998 carry exercise prices ranging from $3.87 per share
to $6.44 per share with a weighted average exercise price of $4.89 per share and
weighted average remaining contractual life of 4.8 years. Option activity for
the years ended May 31, 1998 and 1997 is summarized as follows:
1998 1997
---- ----
Options outstanding at beginning of year 87,000 64,000
Options issued 10,000 35,000
Options cancelled - (10,000)
Options exercised for issuance of stock - ( 2,000)
------ -------
Options outstanding at end of year 97,000 87,000
====== ======
As of May 31, 1998 and 1997 vested options outstanding totaled 60,600 and 54,000
respectively.
Note 9. Commitments
a. Lease Agreement - The Company leases office space in Columbia, Maryland,
under an operating agreement that expires in July 2000. For the years ended
May 31, 1998 and 1997, rent expense totaled $145,873 and $132,742,
respectively. Future annual minimum lease payments, exclusive of allocable
common area maintenance expenses chargeable under the lease, are required as
follows:
21
<PAGE>
May 31, Total
------- -----
1999 $151,394
2000 158,508
2001 26,545
b. Software Licensing Agreement - The Company maintains a software licensing
agreement for use of software with its principal software master which
permits the Company to convert its developed software for use on a Windows
based 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 year ended May 31, 1998 and
1997, royalty expenses charged to cost of revenues totaled $71,570 and
$48,000 respectively.
22
<PAGE>
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 the undersigned, "Thereunto
duly authorized.
DIEHL GRAPHSOFT, INC. a Maryland Corporation
Date: August 31, 1998 BY: /s/Richard Diehl
Richard Diehl
President
Chief Executive Officer
Chairman, Board of Directors
Date: August 31, 1998 BY: /s/Joseph Schmelzle
Joseph Schmelzle
Treasurer
Chief Financial and
Accounting Officer
Director
Date: August 31, 1998 BY: /s/ Joseph Schmelzle
Joseph Schmelzle
Attorney in Fact for
Richard Hug, Director
Date: August 31, 1998 BY: /s/ Joseph Schmelzle
Joseph Schmelzle
Attorney in Fact for
Frederic Unger, Director
23
<PAGE>
EXHIBIT INDEX
Exhibit 10.3 - Amendment Agreement for Lease of Space
Exhibit 21 - Subsidiaries
Exhibit 23 - Consent of Independent Auditors
Exhibit 24 - Power of Attorney
Exhibit 27 - Financial Data Schedule
FIFTH AMENDMENT TO LEASE
This Fifth Amendment to Lease (the "Amendment") is made as of this 31st day
of July 1998, by and between Rivers Jack Limited Partnership ("Landlord") and
Diehl Graphsoft, Inc. ("Tenant"). All capitalized terms used but not defined
herein shall have the meaning ascribed to such terms in the Lease (as hereafter
defined).
RECITALS
WHEREAS, by lease dates January 11, 1993 (as amended by that certain First
Amendment to Lease dated as of March 2, 1993, and as further amended by that
certain Second Amendment to Lease dated as of October 21, 1994, and as further
amended by that certain Third Amendment to Lease dated as of November 15, 1995,
and as further amended by that certain Fourth Amendment to Lease dated as of
October 12, 1997, the "Lease"), Landlord leased to Tenant 7,190 rentable square
feet of space (the "Premises") commonly known as Suite 100 at 10270 Old Columbia
Road, Columbia, Maryland; and
WHEREAS, Tenant desires to extend the term of the Lease, upon the terms and
conditions more specifically hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual promises herein set forth,
of Ten Dollars($10.00)cash in hand paid by each party to the other, the receipt
and legal sufficiency of which are hereby acknowledged by each of the under
signed, and for other good and valuable consideration, Landlord and Tenant do
hereby agree as follows:
1. The foregoing recitals, being an integral part hereof and not mere
precatory language, are herein fully incorporated by this reference.
2. Effective as of the date hereof, the term of the Lease (as set forth on
the schedule on page 1 of the Lease) shall be amended to mean the period
commencing on May 1, 1993, and expiring (unless sooner terminated in accordance
with the terms and conditions of the Lease) on July 31, 2000.
3. (a) Commencing with the 6th Lease Year (beginning August 1, 1998),
monthly installments of Base Rent for the Premises shall be increased to Twelve
Thousand, Eight Hundred Eighty Six Dollars and Seventy Nine Cents ($12,886.79)
(b) Commencing with the 7th Lease Year (beginning August 1, 1999),
monthly installments of Base Rent for the Premises shall be increased to
Thirteen Thousand, Two Hundred Seventy Three Dollars and Forty Cents (13,273.40)
4. Rider 5 is deleted, in its entirety, from the Lease.
5. A portion of Section 1(b) of the Lease, from the beginning of Section
1(b) through Section 1(b)(3), inclusive, is hereby amended to read, effective
as of the date hereof, in its entirety as follows:
(b) Additional Rent
(1) Obligation to Pay: Definitions
In addition to paying Base Annual Rent specified in Paragraph (a) hereof,
Tenant shall pay as "Additional Rent" the amounts determined as hereinafter
set forth. The Base Annual Rent (and any installments thereof) and the
Additional Rent are sometimes herein collectively referred to as the
"Rent". In connection with the determination of the Tenant's obligation to
pay Rent, the relevant terms are defined as follows:
(A) [Intentionally Omitted]
(B) CAM Expenses:
"CAM Expenses" means and includes the following:
1. Those expenses incurred or paid on behalf of the Landlord in
respect of the operation, repair and maintenance of the Property, the cost
(except to the extent such cost applies to utilities or services used in
the Premises or in other demised premises, if the cost thereof is billed
directly to Tenant or the tenants of such other demised premises) of
electricity, water, lighting, window cleaning, snow removal service, trash
removal service, security service, insurance (including, but not limited
to, fire, extended coverage, liability, loss of rent, workmen's
compensation, elevator, or any other insurance carried in good faith by
Landlord and applicable to the Building, the Property or any party thereof)
painting, uniforms, customary management fees, supplies, sundries, sales or
use taxes on supplies or services, costs of wages and salaries of all
persons engaged in the operation, maintenance and repair of the Building,
the Property or any part thereof, and so-called fringe benefits, including
Social Security taxes, unemployment insurance taxes, cost for providing
coverage for disability benefits, cost of any pensions, hospitalization,
welfare or retirement plans, or any other similar or like expenses incurred
under the provisions of any collective bargaining agreement, and any other
cost or expense which Landlord pays or incurs to provide benefits for
employees so engaged in the operation, maintenance and repair of the
Building, the Property or any part thereof, the changes of any independent
contractor who, under contract with Landlord or its representatives, does
any of the work of operating, maintaining or repairing of the Building, the
Property or any part thereof, legal and accounting expenses, or any other
expense or charge, whether or not hereinbefore mentioned, which in
accordance with generally accepted accounting and management principles
would be considered as an expense of maintaining, operating, or repairing
the Building, the Property of any part thereof. If any CAM Expense, though
paid in one year, relates to more than one calendar year, at the option of
Landlord, such expense may be proportionately allocated among such related
calendar years.
2. CAM Expenses shall also include the cost, as reasonably
amortized by the Landlord, with interest at the prime rate (as that term is
defined in subparagraph (4) hereof) on the unamortized amount, of any
capital improvements made after completion of initial construction of the
Building which are reasonably intended to reduce CAM Expenses below the
level of CAM Expenses which would otherwise have been incurred without such
capital improvements for the relevant year. For purposes of determining CAM
Expenses for any year, if the entire rentable area of the Building shall
not have been occupied for any part of the year, CAM Expenses shall include
the amount of such expenses that would reasonably have been incurred had
the entire Building been occupied throughout the year.
3. CAM Expenses shall not include franchise or income taxes
imposed on the Landlord, except to the extent hereinbefore provided, nor
the Landlord of any work or service performed in any instance for any
tenant (including the Tenant) at the cost of such tenant. If the Landlord
is not furnishing any particular work or service (the cost of which if
performed by the Landlord would constitute an CAM Expense) to a tenant who
has under taken to perform such work or service in lieu of the performance
thereof by the Landlord, CAM Expenses shall be deemed for the purposes of
this Section to be increased by an amount equal to the additional operating
expense which would reasonably have been incurred during such period by the
Landlord if it had at its own expense furnished such work or service to
such tenant.
4. If Landlord makes any capital improvement during the term of
this Lease in order to comply with safety or any other requirements of any
federal, state or local law or governmental regulation, then the Tenant's
proportionate share of the reasonable annual amortization of the cost of
such improvement, with interest at the prime rate, shall be deemed an CAM
Expense in each of the calendar years during which such amortization
occurs, and the Tenant shall be responsible for said proportionate share of
any such charges. The "prime rate" shall mean the Corporate Base Rate most
recently publicly announced by the First National Bank of Chicago, or
Landlord's then current primary bank as designated to Tenant by notice from
Landlord from time to time, for unsecured 90-day loans to its most credit
worthy customers.
(C) Tenant's Percentage:
"Tenant's Percentage" means the quotient of the rentable
area of the Premises divided by the rentable area of the Building, which is
currently thirty-seven and thirty-six hundredths percent (37.36%). In the
event of any changes in either or both of the rentable area of the Premises
or the rentable area of the Building, the Tenant's Percentage shall be
appropriately modified.
(D) (Intentionally Omitted)
(2) [Intentionally Omitted]
(3) Payment of CAM Expenses
(A) Tenant shall pay to Landlord as Additional Rent, in
addition to the Base Rent required by Paragraph 1(a) hereof, an amount (CAM
Expense Percentage Amount") equal to Tenant's Percentage of the CAM
Expenses incurred by Landlord with respect to each calendar year during the
Term hereof. Tenant shall pay to Landlord the CAM Expense Percentage Amount
with respect to such calendar year, in monthly installments at the same
time and place as installments of Base Annual Rent under Paragraph 1 (a)
hereof are to be paid, in an amount estimated from time to time by Landlord
by a written notice to Tenant. Landlord shall cause to be kept books and
records showing CAM Expenses in accordance with an appropriate system of
accounts and accounting practices consistently maintained. As promptly as
practicable following the close of each calendar year, Landlord shall
deliver to Tenant its certificate specifying the amount of CAM Expenses for
such calendar year. The certificate of Landlord shall constitute a
determination which is final and conclusive on both Landlord and Tenant,
unless Tenant asserts in a writing addressed to Landlord specified error(s)
in Landlord's certificate within thirty (30) days after delivery thereof.
Notwithstanding any assertion of error by Tenant, Tenant shall pay any
deficiency to Landlord as shown by such certificate on the date of the
monthly installment of Rent next due after receipt thereof. If the total
amount paid by Tenant during any calendar year exceeds the actual CAM
Expense Percentage Amount due from Tenant for such calendar year, such
excess shall be credited against payments next due hereunder. If not such
payments are next due, such excess shall be refunded by Landlord. Landlord
will allow Tenant at Tenant's expense at least ten (10) days prior notice
to Landlord during normal business hours to have reasonable access to
Landlord's books and records relating to actual expenses for the purpose of
verifying such expenses.
(B) In the event the Building is not fully Leased and occupied
during any portion of any calendar year during the term of the Lease, an
appropriate adjustment will be made in CAM Expenses for such calendar year
to reflect the CAM Expenses that would have been incurred by Landlord for
such year had the Building been fully Leased and occupied during the entire
calendar year, and Tenant shall pay Landlord, in the manner provided in
Paragraph 1(b)(v) hereof, Tenant's Percentage of such adjusted CAM Expenses
in excess of the CAM Expense Base Amount.
6. Section 2 of the Lease is hereby amended to read, in its entirety,
as follows:
2. Services
(a) The Tenant shall be Responsible for provision of the
following services to the Premises:
(1) Utilities
The Tenant will contract directly with any authorized
supplier thereof for the provision of electrical service,
natural gas and other utilities to the Premises. All such
services shall be separately metered, and Tenant covenants
and agrees to pay when due any bills or invoices issued in
connection with such utility service directly to the provider
or supplier thereof.
(2) Cleaning and Janitorial Service
Tenant will contract directly with a vendor approved in
advance by Landlord for the provision of char services to the
Premises, which contract shall require the Premises to be
serviced by such vendor on a schedule approved by Landlord.
(3) Parking
Tenant shall have the right, in common with other tenants and
authorized persons, to use the parking facility adjacent to
the building on a first-come, first-served, unallocated and
nonexclusive basis.
7. Expect as expressly modified herein, the Lease is and shall remain
in full force and effect; Tenant acknowledges and represents that Landlord is
not, as of the date hereof, in default of any of its obligations under the
Lease.
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have executed this Fifth Amendment
to Lease as of the date and year first written above.
WITNESS: LANDLORD:
RIVERS JACK LIMITED PARTNERSHIP
By: Draper and Kramer, Incorporated
as Manager
/s/ Hazel Matsuda-Begy /s/ William P. Holmes III
Name: Hazel Matsuda-Begy Name: William P. Holmes III
Title: Accts Admin Title: Dir of Prop Mgt, East Const
ATTEST: TENANT:
DIEHL GRAPHSOFT, INC.
/s/ Marianne M Kubilus By:/s/ Richard Diehl
Name: Marianne M Kubilus Name: Richard Diehl
Title: Exec Asst Title: President
Exhibit 21
Subsidiaries of Small Business Issuer
Diehl Technologies, Inc.
Incorporated in State of Delaware
Diehl Graphsoft International Inc.
Incorported in Barbados
EXHIBIT 23
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-31587) pertaining to the Amended and Restated Stock Option Plan of
Diehl Graphsoft, Inc. of our report dated July 31, 1998, with respect to the
consolidated financial statements of Diehl Graphsoft, Inc. included in the
Annual Report
(Form 10-KSB) for the year ended May 31, 1998.
/s/ Ernst & Young LLP
Vienna, Virginia
July 31, 1998
Exhibit 24
DIEHL GRAPHSOFT INC.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned Director(s) of
Diehl Graphsoft, Inc., incorporated in the State of Maryland, hereby constitute
and appoint Richard Diehl and Joseph Schmelzle, and either of them, the true and
lawful agents and attorneys-in-fact of the undersigned with full power and
authority in either said agent and attorney-in-fact, to sign for the undersigned
and in their respective names as Directors of Diehl Graphsoft, Inc., the Annual
Report on Form 10-KSB, and any and all further amendments to said report, hereby
ratifying and confirming all acts taken by such agent and attorney-in-fact, as
herein authorized.
Dated as of: August 27 , 1998
/s/ Richard Diehl /s/ Richard Hug
- ----------------- ---------------
Richard Diehl Richard Hug
/s/ Joseph Schmelzle /s/ Frederic Unger
- -------------------- ------------------
Joseph Schmelzle Frederic Unger
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> 0
</LEGEND>
<CIK> 000819005
<NAME> Diehl Graphsoft, Inc.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> May-31-1998
<PERIOD-START> Jun-01-1997
<PERIOD-END> May-31-1998
<CASH> 376,754
<SECURITIES> 7,826,800
<RECEIVABLES> 443,386
<ALLOWANCES> 0
<INVENTORY> 81,432
<CURRENT-ASSETS> 8,986,136
<PP&E> 910,910
<DEPRECIATION> 575,529
<TOTAL-ASSETS> 10,252,997
<CURRENT-LIABILITIES> 621,522
<BONDS> 0
0
0
<COMMON> 31,476
<OTHER-SE> 9,265,321
<TOTAL-LIABILITY-AND-EQUITY> 10,252,997
<SALES> 7,367,360
<TOTAL-REVENUES> 7,367,360
<CGS> 2,056,279
<TOTAL-COSTS> 4,250,630
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,460,669
<INCOME-TAX> 467,787
<INCOME-CONTINUING> 992,882
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 992,882
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
</TABLE>
