SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-QSB
(Mark One)
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended August 31, 1998
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OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-24318
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DIEHL GRAPHSOFT, INC
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(Exact name of registrant as specified in its charter)
Maryland 52-1407016
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(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
10270 Old Columbia Road, Columbia, Maryland 21046
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 410-290-5114
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Check whether the registrant(1) has filed all reports required to be filed
by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
3,147,637 shares of common stock.
- ---------------------------------
Transitional Small Business Disclosure Format (check one) Yes No x
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1
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DIEHL GRAPHSOFT, INC.
FORM 10-QSB
INDEX
Number Page
PART I FINANCIAL INFORMATION
Item 1 Financial Statements:
Balance Sheet (unaudited) as of August 31, 1998 3
Statements of Operations (unaudited) for the three
months ended August 31, 1998 and 1997 5
Statements of Cash Flows (unaudited) for the three
months ended August 31, 1998 and 1997 6
Statements of Stockholders' Equity (unaudited) as
of August 31, 1998 and 1997 7
Notes to Financial Statements 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II OTHER INFORMATION
Item 2 Changes in Securities 12
Item 6 Exhibits and Reports 12
SIGNATURES 13
2
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DIEHL GRAPHSOFT, INC.
BALANCE SHEET
AUGUST 31, 1998
(Unaudited)
ASSETS
------
Current assets:
Cash $ 741,766
Marketable securities 7,875,792
Accounts receivable 277,557
Inventory 114,607
Other current assets 285,894
-------
Total current assets 9,295,616
---------
Fixed assets:
Equipment 780,155
Furnishings and fixtures 117,302
Leasehold improvements 47,688
------
945,145
Accumulated depreciation 610,791
-------
Net fixed assets 334,354
-------
Other assets:
Unamortized organization expenses 25,940
Software development and licensing costs, net
of accumulated amortization of $962,819 932,732
Other 4,202
-----
Total other assets 962,874
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Total assets $10,592,844
===========
See accompanying notes to financial statements
3
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LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 516,875
Income taxes payable 113,678
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Total current liabilities 630,553
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Long term liabilities:
Deferred income taxes 345,976
-------
Total liabilities 976,529
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Stockholders' equity:
Common stock - $.01 par value; 10,000,000
shares authorized, 3,147,637 shares
issued and outstanding 31,476
Additional paid in capital 4,182,812
Retained earnings 5,402,027
---------
Total stockholders' equity 9,616,315
---------
Total liabilities and stockholders' equity $10,592,844
===========
See accompanying notes to financial statements
4
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DIEHL GRAPHSOFT, INC.
STATEMENT OF OPERATIONS
(Unaudited)
For the three months
ended August 31,
----------------
1998 1997
---- ----
Revenues $1,873,580 $2,026,908
Cost of revenues 490,931 581,345
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Gross profit 1,382,649 1,445,563
--------- ---------
Operating expenses:
General and administrative 433,264 440,541
Selling & marketing 478,799 467,190
Research and development 124,752 91,757
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Total operating expenses 1,036,815 999,488
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Income from operations 345,834 446,075
Interest income 107,684 89,579
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Income before income taxes 453,518 535,654
Provision for income taxes 134,000 190,000
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Net income $ 319,518 $ 345,654
========== ==========
Net income per share $ .10 $ .11
========== ==========
Weighted average number of shares outstanding 3,147,637 3,141,406
========= =========
See accompanying notes to financial statements
5
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DIEHL GRAPHSOFT, INC.
STATEMENT OF CASH FLOWS
(Unaudited)
For the three months
ended August 31,
----------------
1998 1997
---- ----
Cash flows from operating activities:
Net income $ 319,518 $ 345,654
Adjustments:
Deferred income taxes 7,975 26,540
Amortization of bond premiums and discounts (17,454) (37,580)
Other depreciation and amortization 245,671 241,624
Changes in operating assets and liabilities:
Accounts receivable 165,829 (166,392)
Inventory (33,175) 51,212
Other assets (28,130) 17,349
Accounts payable and accrued expenses (38,671) 265,485
Income taxes receivable/payable 51,025 163,260
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Net cash provided by operating activities: 672,588 907,152
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Cash flows from investing activities:
Purchases of marketable securities (2,995,538) (1,621,699)
Maturities of marketable securities 2,964,000 1,580,000
Capitalized software and licensing costs (241,803) (260,260)
Purchase of fixed assets (34,235) (47,813)
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Net cash used in investing activities (307,574) (349,772)
-------- --------
Net increase in cash 365,012 557,380
Cash balance at beginning of period 376,754 247,359
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Cash balance at end of period $ 741,766 $ 804,739
========= =========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 75,000 $ -
====== =======
Issuance of common stock $ - $ 14,500
Reduction in accrued expenses 14,500
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$ - $ -
========= =========
See accompanying notes to financial statements
6
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DIEHL GRAPHSOFT, INC.
STATEMENT OF STOCKHOLDER' EQUITY
(Unaudited)
Additional
Common Common Paid in Retained
shares stock Capital Earnings Total
------ ----- ------- -------- -----
Balance
May 31, 1997 3,140,739 $31,407 $4,147,605 $4,089,627 $8,268,639
Issuance of
Common Stock 2,000 20 14,480 - 14,500
Net Income - - - 345,654 345,654
------- ------- ------- ------- -------
Balance
August 31, 1997 3,142,739 $31,427 $4,162,085 $4,435,281 $8,628,793
========= ======= ========== ========== ==========
Balance
May 31, 1998 3,147,637 $31,476 $4,182,812 $5,082,509 $9,296,797
Net Income - - - 319,518 319,518
------- ------- ------- ------- -------
Balance
August 31, 1998 3,147,637 $31,476 $4,182,812 $5,402,027 $9,616,315
========= ======= ========== ========== =========
See accompanying notes to financial statements
7
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DIEHL GRAPHSOFT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all necessary adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three month period
ended August 31, 1998 are not necessarily indicative of the results that may be
expected for the year ended May 31, 1999.
NOTE B - RECLASSIFICATION OF EXPENSES
Certain expenses reported in the statement of operations for the three
month period ended August 31, 1997 have been reclassified to conform with the
presentation of expenses reported for the three month period ended August 31,
1998.
NOTE C - WEIGHTED AVERAGE SHARES OUTSTANDING
Weighted average number of shares outstanding during the periods is
computed as follows:
For the three months
ended August 31,
----------------
1998 1997
---- ----
Average outstanding shares 3,147,637 3,141,406
Dilutive effect of stock
options and warrants - -
--------- ---------
Weighted average number of
shares outstanding 3,147,637 3,141,406
========= =========
8
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DIEHL GRAPHSOFT, INC.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Report on Form 10-QSB) 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 "many," "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 three months ended August 31, 1998 as
compared to the three months ended August 31, 1997.
Revenues for the three months ended August 31, 1998 declined to $1,873,580
as compared to $2,026,908 for the three months ended August 31, 1997
representing a decrease of 8%. Upgrade sales of MiniCAD declined to $346,569 for
the three months ended August 31, 1998 as compared to $491,262 for the three
months ended August 31, 1997. The decrease in upgrade sales reflects the release
of MiniCAD 7 in May 1997 which generated a surge in upgrade sales after its
release. The Company did not issue a comparable release in the three months
ended August 31, 1998. Sales of MiniCAD for Windows rose to $654,568 for the
three months ended August 31, 1998 as compared to $478,970 for the three months
ended August 31, 1997. This increase incorporates a decrease in sales within the
United States of $76,126. Foreign sales of MiniCAD for Windows rose to $444,838
for the three months ended August 31, 1998 as compared with $193,115 for the
three months ended August 31, 1997. Most major international distributors
commenced distribution of MiniCAD 7 in the latter half of fiscal 1998. The
decrease in sales within the United States reflects the aging of the product in
its life cycle. Foreign sales of MiniCAD for the Macintosh rose to $755,591 for
the three months ended August 31, 1998 as compared with $540,968 for the three
months ended August 31, 1997. Most of this increase reflects increases in
upgrade sales which rose $139,445 from the three months ended August 31, 1997 to
the three months ended August 31, 1998. Sales of MiniCAD for the Macintosh in
the United States declined substantially from $891,643 for the three months
ended August 31, 1997 to $413,594 for the three months ended August 31, 1998.
Included in this decrease is a decline in upgrade revenues of $293,795 from the
three months ended August 31, 1997 to the three months ended August 31, 1998.
The decrease in upgrade revenues reflects the timing of the release of MiniCAD 7
in May 1997 with many users upgrading shortly after the new release. The
remaining decrease in sales of MiniCAD for the Macintosh in the United States
reflects the aging of the product in its life cycle. The Company believes part
of the decrease is also attributable to the continuing uncertainty the Company
has with the Macintosh market in general.
9
<PAGE>
The cost of revenues for the three months ended August 31, 1998 declined to
$490,931 as compared to $581,345 for the three months ended August 31, 1997
representing a decrease of 16%. The gross profit percentages for the three
months ended August 31, 1998 and 1997 were 73.8% and 71.3% respectively.
Amortization of software licensing and development included in cost of revenues
rose to $ 208,619 for the three months ended August 31, 1998 as compared to
$204,605 for the three months ended August 31, 1997. The decline in overall
costs and increase in profit margins reflects a decrease in upgrade sales in the
United States which generally bring in less revenue per unit shipped but require
the same cost to deliver as new product sales. The decline also reflects a
decrease in overall sales within the United States and a substantial increase in
foreign sales which generally cost less to produce with foreign distributors
handling reproduction of the product in their native languages at their own
expense.
General and administrative expenses declined to $433,264 for the three
months ended August 31, 1998 from $440,541 for the three months ended August 31,
1997 representing an decrease of 2%. Salary expenses declined to $138,875 for
the three months ended August 31, 1998 as compared with $172,762 for the three
months ended August 31, 1997. There decreases reflects streamlining of costs
within administrative operations which were partly offset by increases in
other costs commensurate with growth in research and development operations.
Research and development expenses increased to $124,752 for the three
months ended August 31, 1998 from $91,757 for the three months ended August 31,
1997 representing and increase of 36%. This increase reflects the increased
commitment by the Company to develop new engineering technology.
Selling and marketing expenses increased to $478,799 for the three months
ended August 31, 1998 from $467,190 for the three months ended August 31, 1997.
representing an increase of 2%. Trade show expenses rose from the three months
ended August 31, 1997 to the three months ended August 31, 1998 with an
increased commitment to marketing industry specific solutions to customers.
These increases were partly offset by declines in credit card expenses and
expenses for sales aids during the three months ended August 31, 1998. Each of
these expenses were higher in the three months ended August 31, 1997 due to
the large volume of upgrade sales in that period.
Interest income rose to $107,684 for the three months ended August 31, 1998
as compared with $89,579 for the three months ended August 31, 1997 representing
an increase of 20%. This increase reflects a larger investment base and a
partial shift in the investment portfolio from tax exempt municipal obligations
during the three months ended August 31, 1997 to other corporate and government
securities during the three months ended August 31, 1998 which generally carry
higher yields than tax exempt municipal obligations.
Net income decreased to $319,518 for the three months ended August 31, 1998
from $345,654 for the three months ended August 31, 1997 representing a decrease
of 8%. This decrease is after giving effect to a provision for income taxes of
$134,000 for the three months ended August 31, 1998 and $190,000 for the three
months ended August 31, 1997. The effective tax rates were 29.5% and 35.5%,
respectively. The decrease in effective tax rates reflects the establishment of
a foreign sales corporation by the Company in March 1998, which exempts certain
profits related to foreign sales, and the tax benefits from charitable donation
of an earlier version of MiniCAD in September 1997 which will provide tax
benefits to the Company throughout the current fiscal year.
10
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Liquid and Capital Resources
The Company increased its working capital by $921,959 from $7.743,104 at
August 31, 1997 to $8,665,063 at August 31, 1998. Working capital also rose from
$8,364,614 at May 31, 1998 representing an increase of $300,449. The increase
from August 31, 1997 to August 31, 1998 is primarily due to cash flows form
operations during the period. These cash flows have been invested into equipment
and software development with remaining excess flows placed temporarily in
marketable securities. Company marketable securities continue to be in short to
intermediate term government and corporate instruments.
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 its capital requirements
for the next twelve months.
11
<PAGE>
PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On February 28, 1995, the Company completed its initial public
offering of common stock and warrants and raised net proceeds
of $4,135,075 including the exercise of warrants. The
effective date of the registration statement for the initial
public offering was November 29, 1994. From February 28, 1995
through August 31, 1998, the net proceeds were allocated to
working capital and were invested temporarily in short term
U.S. Government, Corporate and municipal obligations.
Item 6. Exhibits and Reports
Exhibit 27 - Financial Data Schedule
The Company has filed no reports on Form 8-K during the three
months ended August 31. 1998.
12
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DIEHL GRAPHSOFT, INC.
DATE: October 14, 1998 By:/s/Richard Diehl
Richard Diehl, President
Chief Executive Officer
DATE: October 14, 1998 By:/s/ Joseph Schmelzle
Joseph Schmelzle, Treasurer
Chief Financial and Accounting Officer
13
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