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 November 30, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 0-24318
DIEHL GRAPHSOFT, INC
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 52-1407016
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
10270 Old Columbia Road, Columbia, Maryland 21046
- -------------------------------------------------------------------------------
(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.
3,091,737 shares of common stock.
Transitional Small Business Disclosure Format (check one) Yes ____ No __x__
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
November 30, 1998 3
Statements of Operations (unaudited) for the three
months ended November 30, 1997 and 1998 and (unaudited)
for the six months ended November 30, 1997 and 1998 5
Statements of Cash Flows (unaudited) for the six months
ended November 30, 1997 and 1998 6
Statements of Stockholders' Equity (unaudited) as
of November 30, 1997 and 1998 7
Notes to Financial Statements 8
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II OTHER INFORMATION
Item 2 Changes in Securities 13
Item 4 Submission of Matters to a Vote of Security Holders 13
Item 6 Exhibits and Reports 13
SIGNATURES 14
2
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DIEHL GRAPHSOFT, INC.
BALANCE SHEET
November 30, 1998
(Unaudited)
ASSETS
Current assets:
Cash $ 7,664
Marketable securities 7,894,225
Accounts receivable 301,445
Income taxes receivable 213,439
Inventory 170,642
Other current assets 440,314
-------
Total current assets 9,027,729
=========
Fixed assets:
Equipment 838,194
Furnishings and fixtures 119,290
Leasehold improvements 47,688
-------
1,005,172
Accumulated depreciation 651,024
-------
Net fixed assets 354,148
-------
Other assets:
Unamortized organization expenses 23,872
Software development and licensing costs, net
of accumulated amortization of $1,186,251 982,500
Other 2,402
-------
Total other assets 1,008,774
---------
Total assets $10,390,651
===========
See accompanying notes to financial statements
3
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 670,660
---------
Total current liabilities 670,660
-------
Long term liabilities:
Deferred income taxes 368,693
-------
Total liabilities 1,039,353
---------
Stockholders' equity:
Common stock - $.01 par value; 10,000,000
shares authorized, 3,091,737 shares
issued and outstanding 30,917
Additional paid in capital 4,025,208
Retained earnings 5,295,173
---------
Total stockholders' equity 9,351,298
---------
Total liabilities and stockholders' equity $10,390,651
===========
See accompanying notes to financial statements
4
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DIEHL GRAPHSOFT, INC.
STATEMENT OF OPERATIONS
(Unaudited)
For the three month period For the six month period
ended November 30, ended November 30,
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues $1,187,495 $1,638,168 $3,061,075 $3,665,076
Cost of revenues 451,117 497,312 942,048 1,078,657
------- --------- --------- ---------
Gross profit 736,378 1,140,856 2,119,027 2,586,419
------- --------- --------- ---------
Operating expenses:
General &
administrative 434,986 428,231 868,250 868,772
Selling & marketing 495,636 425,880 974,435 893,070
Research &
development 96,630 79,985 221,382 171,742
--------- ------- --------- ---------
Total operating
expenses 1,027,252 934,096 2,064,067 1,933,584
--------- ------- --------- ---------
Income (loss) from
operations (290,874) 206,760 54,960 652,835
-------- ------- --------- -------
Other income:
Interest income 111,020 91,328 218,704 180,907
Gain on equipment
disposition - 900 - 900
-------- ------- -------- -------
Total other
income 111,020 92,228 218,704 181,807
-------- ------- ------- -------
Income (loss) before
income taxes (179,854) 298,988 273,664 834,642
Provision (credit) for
income taxes (73,000) 91,000 61,000 281,000
---------- --------- -------- --------
Net income (loss) $ (106,854) $ 207,988 $ 212,664 $553,642
=========== ========= ======== ========
Net income (loss) per
share $ (.03) $ .07 $ .07 $ .18
========== ========= ========= =========
Weighted average number
of shares outstanding 3,113,270 3,143,122 3,130,454 3,142,264
========= ========= ========= =========
See accompanying notes to financial statements
5
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DIEHL GRAPHSOFT, INC.
STATEMENT OF CASH FLOWS
(Unaudited)
For the three months
ended November 30,
1998 1997
Cash flows from operating activities:
Net income $ 212,664 $ 553,642
Adjustments to reconcile net income to net
Cash provided by operating activities:
Deferred income taxes 30,692 21,204
Amortization of bond premiums and discounts (35,887) (80,422)
Depreciation and amortization 511,404 477,565
Changes in operating assets and liabilities:
Accounts receivable 141,941 (259,527)
Inventory (89,210) 1,034
Other assets (180,750) (12,944)
Accounts payable and accrued expenses 115,114 231,506
Income taxes receivable/payable (276,092) 148,596
-------- ---------
Net cash provided by operating activities: 429,876 1,080,654
-------- ---------
Cash flows from investing activities:
Purchases of marketable securities (2,995,538) (2,130,753)
Maturities of marketable securities 2,964,000 1,825,000
Capitalized software costs (515,003) (439,939)
Purchase of fixed assets (94,262) (127,553)
-------- --------
Net cash used in investing activities (640,803) (873,245)
-------- --------
Cash flows from financing activities:
Redemption of common stock (158,163) -
--------- -------
Net used in financing activities (158,163) -
--------- -------
Net change in cash (369,090) 207,409
Cash balance beginning of period 376,754 247,359
------- -------
Cash balance end of period $ 7,664 $ 454,768
======== ========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 306,400 $ 111,200
========= ========
Issuance of common stock $ - $ 20,745
Reduction in accrued expenses - 20,745
--------- ------
$ - $ -
======== ========
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 3,148 32 20,713 - 20,745
Net Income - - - 553,642 553,642
-------- ------- ---------- ---------- ----------
Balance
November 30, 1997 3,143,887 $31,439 $4,168,318 $4,643,269 $8,843,026
========= ======= ========== ========== ==========
Balance
May 31, 1998 3,147,637 $31,476 $4,182,812 $5,082,509 $9,296,797
Redemption of
Common stock (55,900) (559) (157,604) - (158,163)
Net Income - - - 212,664 212,664
--------- ------- -------- --------- --------
Balance
November 30, 1998 3,091,737 $30,917 $4,025,208 $5,295,173 $9,351,298
========= ======= ========== ========== ==========
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 and six month
period ended November 30, 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 and
six month period ended November 30, 1997 have been reclassified to conform with
the presentation of expenses reported for the three and six month period ended
November 30, 1998.
NOTE C - WEIGHTED AVERAGE SHARES OUTSTANDING
Weighted average number of shares outstanding during the periods is
computed as follows:
For the three months For the six months
ended November 30, ended November 30,
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
Average outstanding shares 3,113,270 3,143,122 3,130,454 3,142,264
Dilutive effect of stock
options and warrants - - - -
--------- --------- --------- ---------
Weighted average number of
shares outstanding 3,113,270 3,143,122 3,130,454 3,142,264
========= ========= ========= =========
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 "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. Included in such risks are (1) the acceptance of new product
introductions, (2) quality of engineering in new software, (3) lost goodwill
associated with change in product name of the Company's principal product
MiniCAD to VectorWorks, (4) delays pertaining to planned introduction of new
products, (5) lack of diversified product portfolio, (6) effect of competitor
inroads into the Company's markets, (7) limited barriers to entry, (8) reliance
on international markets and foreign currency fluctuations, (9) dependence on
distributor channels, (10) fluctuations in quarterly operations associated with
the age of Company products in their life cycles and the timing of orders from
distributors, (11) intellectual property infringements, and (12) attraction and
retention of quality employees, among others. 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 and six months ended November 30, 1998
as compared to the three and six months ended November 30, 1997.
Revenues for the three months ended November 30, 1998 declined to
$1,187,495 as compared to $1,638,168 for the three months ended November 30,
1997 representing a decrease of 27.5%. Revenues for the six month period ended
November 30, 1998 declined to $3,061,075 as compared to $3,665,076 for the six
month period ended November 30, 1997 representing a decrease of 16.5%. Upgrade
sales of MiniCAD declined to $145,944 for the three months ended November 30,
1998 as compared to $172,094 for the three months ended November 30, 1997.
Upgrade sales of MiniCAD declined to $492,514 for the six months ended November
30, 1998 as compared to $663,356 for the six months ended November 30, 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 six months ended November 30, 1998. Sales of MiniCAD
for Windows declined to $497,087 for the three months ended November 30, 1998 as
compared to $545,478 for the three months ended November 30, 1997. Sales of
9
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MiniCad for Windows rose to $1,151,656 for the six months end November 30, 1998
as compared to $1,024,447 for the six months ended November 30, 1997. Domestic
sales of MiniCAD for the Macintosh declined $301,858 for the three months ended
November 30, 1998 as comared with $634,472 for the three months ended November
30, 1997. Domestic sales of MiniCAD for the Macintosh declined to $715,451 for
the six months ended November 30, 1998 as compared with $1,526,115 for the six
months ended November 30, 1997. The softening sales of MiniCAD for Windows and
the decrease in sales of MiniCAD for the Macintosh in the United States reflects
the aging of the product in its life cycle. Both upgrade sales and new product
sales contributed to this decline. Foreign sales compare better in the three and
six month periods ended November 30, 1998 when compared with the three and six
month periods ended November 30, 1997 than domestic sales do because foreign
product introduction of MiniCAD 7 lagged domestic introduction by six to nine
months. Hence, in international markets, the product is not as old in its life
cycle. The Company believes part of the decrease in domestic Macintosh sales
is also attributable to the continuing uncertainty in the commercial Macintosh
market in general.
The cost of revenues for the three months ended November 30, 1998 declined to
$451,117 as compared to $497,312 for the three months ended November 30, 1997
representing a decrease of 9.3%. The cost of revenues for the six months ended
November 30, 1998 declined to $942,048 as compared to $1,078,657 for the six
months ended November 30, 1997 representing a decrease of 12.7%. The gross
profit percentages for the three months ended November 30, 1998 and 1997 were
62.0% and 69.6% respectively. The gross profit percentages for the six months
ended November 30, 1998 and 1997 were 69.2% and 70.6% respectively. The decrease
in gross profit percentages for the three and six months ended November 30, 1998
as compared with the three and six months ended November 30, 1997 is due to an
increase in amortization of software development and licensing costs.
Amortization of software licensing and development included in cost of revenues
which are not directly a function of revenue rose to $ 223,432 for the three
months ended November 30, 1998 as compared to $208,817 for the three months
ended November 30, 1997. Amortization of software licensing and development
included in costs of revenues rose to $432,050 for the six months ended November
30, 1998 as compared to $413,422 for the six months ended November 30, 1997. The
increase in amortization expenses is attributable to the Company's commitment to
development of new engineering technology. Salary expenses charges to cost of
sales also did not decline proportionally with revenue in the three and six
month periods ended November 30, 1998 as compared with the three and six
months periods ended November 30, 1998 since these costs also do not directly
function with revenue. These salaries included technical support to
customers and documentation of product manuals and other publications.
General and administrative expenses increased to $434,986 for the three
months ended November 30, 1998 from $428,231 for the three months ended November
30, 1997 representing an increase of 1.6%. General and administrative expenses
remained effectively unchanged in the six month period ended November 30, 1998
totaling $868,250 as compared with $868,772 for the six months ended November
30, 1997. Rent expense increased to $54,068 in the three months ended November
30, 1998 as compared to $36,020 for the three months ended November 30, 1997.
Rent expense increased to $92,985 for the six months ended November 30, 1998 as
compared to $69,807 for the six months ended November 30, 1997. This increase is
attributable to an increase in the use of space and cost per square foot for the
space. This increase was offset by declines in legal fees which totaled $12,629
in the three months ended November 30, 1998 as compared to $39,078 for the three
months ended November 30, 1997. Legal fees totaled $15,307 for the six months
ended November 30, 1998 as compared to $48,189 for the six months ended November
30, 1997. This decline reflects the cost to defend an appeal of a court order
pertaining to a patent infringement claim in 1997.
10
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Research and development expenses increased to $96,630 for the three
months ended November 30, 1998 from $79,985 for the three months ended November
30, 1997 representing and increase of 21%. Research and development expenses
increased to $221,382 for the six months ended November 30, 1998 as compared to
$171,742 for the six months ended November 30, 1997 representing and increase of
29%. This increase reflects the increased commitment by the Company to develop
new engineering technology.
Selling and marketing expenses increased to $495,636 for the three months
ended November 30, 1998 from $425,880 for the three months ended November 30,
1997 representing an increase of 16%. Selling and marketing expenses increased
to $974,435 for the six months ended November 30, 1998 as compared to $893,070
for the six months ended November 30, 1997 representing an increase of 9%.
Trade show expenses rose from $31,650 for the three months ended November 30,
1997 to $70,241 for the three months ended November 30, 1998. Trade show
expenses rose from $53,172 for the six months ended November 30, 1997 to
$118,297 for the six months ended November 30, 1998. Salary expenses also rose
from $ 67,138 for the three months November 30, 1997 to $115,141 for the three
months ended November 30, 1998. Salary expenses rose from $174,236 for the six
months ended November 30, 1997 to $236,650 for the six months ended November
30, 1998. This increase reflects an increased commitment to marketing industry
specific solutions to customers in a more labor intensive manner than that
required for publication advertising. Publication advertising expenses did
decline, mostnotably in general computer publications, to offset the increases
in these other costs.
Interest income rose to $111,020 for the three months ended November 30,
1998 as compared with $91,328 for the three months ended November 30, 1997
representing an increase of 22%. Interest income rose to $218,704 for the six
months ended November 30, 1998 as compared to $180,907 for the six months ended
November 30, 1997 representing an increase of 21%. This increase reflects a
larger investment base and a partial shift in the investment portfolio from U.S.
Government obligations to corporate obligations during the three and six months
ended November 30, 1998 when compared with the three and six months ended
November 30, 1997. These corporate obligations generally carry slightly higher
yields than U.S. Government obligations do.
The Company reported a net loss of $106,854 for the three months ended
November 30, 1998 as compared to a net profit of $207,988 for the three months
ended November 30, 1997. These results are after giving effect to a credit for
income taxes of $73,000 for the three months ended November 30, 1998 and a
provision for income taxes of $91,000 for the three months ended November 30,
1997. The Company reported net income of $212,664 for the six months ended
November 30, 1998 and $553,642 for the six months ended November 30, 1997. The
effective tax rates for the three months ended November 30, 1998 and 1997 were
(40.6% )and 30.5%, respectively. The effective tax rates for the six months
ended November 30, 1998 and 1997 were 22.3% and 33.7% 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 from taxation, and the tax benefits from a charitable donation of an
earlier version of MiniCAD in September 1997 which will provide tax benefits to
the Company throughout the current fiscal year. The declining tax rates are also
attributable to increasing investment income relative to overall pretax income
in the three and six months ended November 30, 1998 as compared with the three
and six months ended November 30, 1997. Certain U.S. Government and municipal
interest is in whole or part exempt from taxation.
11
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Liquidity and Capital Resources
The Company increased its working capital by $423,891 or 5.3% from
$7,933,178 at November 30, 1997 to $8,357,069 at November 30, 1998. Working
capital remained effectively unchanged from $8,364,614 at May 31, 1998. The
increase from November 30, 1997 to November 30, 1998 is primarily due to cash
flows from operations during the period. These cash flows have been inpart
invested in equipment and software development. The Board of Directors
authorized the repurchase of a maximumn of 300,000 shares of Company common
stock in September 1998. During the three months ended November 30, 1998 the
Company repurchased and retired 55,900 shares at an average price of $2.83 per
share. The Company continues to maintain its excess cash 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.
12
<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 November 30, 1998, the net proceeds were allocated to
working capital and were invested temporarily in short term
U.S. Government, corporate and municipal obligations.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting on November 10 and 24,
1998
Against/ Absten- Broker
For Withheld tions Non-votes
Election
Of Directors
Joseph Schmelzle 1,999,940 1,147,697
Frederick Unger Continuing in Office
Richard Hug Continuing in Office
Richard Diehl Continuing in Office
Ratification of
Appointment of
Independent
Auditors 1,999,940 1,147,697
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 November 30, 1998.
13
<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: January 14, 1999 By:/s/Richard Diehl
Richard Diehl, President
Chief Executive Officer
DATE: January 14, 1999 /s/ Joseph Schmelzle
Joseph Schmelzle, Treasurer
Chief Financial and Accounting Officer
14
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