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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, 1999
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. $7,980,151
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 4, 1999, $4,389,948.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. As of August 4, 1999,
3,055,612 shares of the sole class of common stock.
Transitional Small Business Disclosure Format (check one) Yes No X
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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 5a Certain cautionary information. . . . . . . . . . . . . . . . . . 8
Item 6 Management's Discussion and Analysis
of financial condition and results of operations. . . . . . . . . 12
Item 7 Financial Statements. . . . . . . . . . . . . . . . . . . . . . . 15
Item 8 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure. . . . . . . . . . . . . . . . . . . . . . . 15
Item 9 Directors, Executive Officers, Promoters and Control Persons. . . 16
Item 10 Executive Compensation. . . . . . . . . . . . . . . . . . . . . .16
Item 11 Security Ownership of Certain Beneficial Owners
and Management. . . . . . . . . . . . . . . . . . . . . . . . . .16
Item 12 Certain Relationships and Related Transactions. . . . . . . . . .16
Item 13 Exhibits and Reports on Form 10KSB. . . . . . . . . . . . . . . .16
Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . 17-27
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
Documents Incorporated by Reference
Portions of the definitive Proxy Statement to be filed under Regulation 14A for
the annual meeting to be held November 9, 1999 are incorporated by reference
into Part III hereof.
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PART I
FORWARD-LOOKING INFORMATION
The forward-looking statements included in this report, which reflect
management's best judgment based on factors currently known, involve risks and
uncertainties. Actual results could differ materially from those anticipated in
the forward-looking statements included herein as a result of a number of
factors, including but not limited to those discussed in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
ITEM 1. DESCRIPTION OF BUSINESS
Diehl Graphsoft, Inc. ("Company") was founded in June, 1985. The Company's
strategy is to develop a new and original approach to computer aided design
(CAD) software 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 that business, Diehl Graphsoft periodically publishes a
newsletter 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 a variety of electronic information services at its website
(www.diehlgraphsoft.com) as a service to its customers and as a sales/marketing
vehicle.
The Company has developed a related series of CAD software packages for the
Apple Macintosh and for IBM compatible computers using the Microsoft Windows
operating system. However the Company has focused its software development on
its flagship program, a 2-dimensional and 3dimensional CAD program, formerly
called MiniCAD. The MiniCAD product name was formally changed to MiniCAD
VectorWorks in fiscal 1999 to more closely reflect the functionality of the
program and its competitive position in the computer aided design market.
VectorWorks offers broad capabilities, including a database spreadsheet
function, report generation, and customizable programmability. In fiscal 1999,
the Company licensed and began marketing RenderWorks, a photo realistic
rendering supplemental program for VectorWorks. In fiscal 1998, the Company
also developed and marketed Revision Master, a document management software
program for the Windows operating system. Before the end of the fiscal year,
the Company opted to discontinue marketing of that software to more closely
focus on it's core business of CAD software development.
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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, 1999
is shown in parentheses): 1) through distributors (79% with 38 distributors,
both foreign and domestic); 2) direct sales between the Company and the end user
(20%); 3) through dealers (1%). In comparison, for the fiscal year ending May
31, 1998, distribution was as follows: 1) through distributors (76% with 34
distributors, both foreign and domestic); 2) direct sales between the Company
and the end user (15%); 3) through dealers (9%). In the fiscal years ending May
31, 1999 and 1998, sales to two distributors accounted for approximately 36% and
38% of sales, respectively. The loss of one or both of these distributors could
have a material adverse effect on the Company.
PRODUCT DESCRIPTION
Present Products
The Company sells its products into the computer-aided design and drafting
market for the Macintosh and Windows operating systems. To more appropriately
reflect the scope and influence of its flagship product, MiniCAD, the Company
changed the product name to MiniCAD VectorWorks (VectorWorks) effective January
6, 1999. Market response to the name change has been universally positive.
Additionally, the Company has opted to discontinue sales of Revision Master, a
document management product for the Macintosh; Blueprint, a low-end drafting
product; and Azimuth, a mapping product, in favor of development of new,
vertical market products. VectorWorks provided roughly 89% of the Company's
revenues for fiscal 1999.
The Company has established itself globally as a medium-cost supplier of
Macintosh and Windows software, and competes for market share with the industry
leaders, such as AutoDesk and Bentley Systems. A nationwide survey in Japan
conducted by a major monthly architecture publication, Kenchiku-Chishiki, found
VectorWorks to be the best selling CAD software in Japan, beating AutoDesk's
AutoCAD.
While still under the MiniCAD name, VectorWorks won the Macintosh industry's
two most prestigious awards, the MacWorld World Class Award for CAD (in 1996,
1994, 1989), and the MacUser Editor's Choice Award for CAD (Winner, 1990;
Finalist, 1992). These awards are based upon the merits of the products as
compared with other competing products and are the most desired awards in the
Company's industry. Management believes these awards have a positive effect on
sales of the product. MiniCAD was also named "Best Overall Architectural CADD
Software" as winner of the 1997 International 3D Designer's CAD Shootout. The
Shootout is an annual, head-to-head competition across 22 functional categories
among the leading developers in the CAD industry. On its way to winning the
overall competition, MiniCAD placed first, second or third in 18 of the 22
categories, including first place in the "Most Cost Effective" category.
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MiniCAD has also won the 1995 MacLife Grand Prix Award for Best CAD program in
Japan, and the 1994 Oscar di Applicando Award for best CAD package in Italy. In
1996, MiniCAD for Windows received its first award: it was named by Computer
Graphics World as one of 1996's "Most Innovative Products." There can be no
assurance that the Company's products will continue to achieve this level of
industry acceptance in the future.
The Company also markets a photo-realistic rendering product, RenderWorks.
Established as a powerful presentation tool designed to operate in conjunction
with VectorWorks as a supplemental program to VectorWorks or "plug-in" device,
RenderWorks accounted for roughly 8% of the Company's sales in fiscal 1999. As
the Company's first ever plug-in, RenderWorks has exceeded initial expectations
by generating over $600,000 in sales during its first five months on the
market. RenderWorks exemplifies the Company's commitment to its strategies of
product diversification and reinforcement of its standing in both the Windows
and Macintosh markets.
Core Technology
The Company maintains a core technology of over 1,000,000 lines of computer
code, the actual program which creates the images seen on the computer screen.
This core technology is used to build VectorWorks 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, taken as a whole, form the technological basis
for the Company's business.
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.
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Programming Technology
As part of the Company's main product, VectorWorks, the Company includes a
proprietary macroprogramming capability, VectorScript, which allows users to
extend or customize the program and create custom solutions to their design
challenges. VectorScript contains an extensive application program interface
(A.P.I.) which contains the routines necessary for 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 or create
custom objects.
The Company has encouraged commercial third-party software developers to use
VectorScript to create new, add-on products which work with the Company's
products to facilitate their use in special niche markets by establishing the
VectorWorks Developer's Network (VWDN). Under this agenda, approved commercial
third-party developers received free copies of VectorWorks upon joining the
network. More than 100 developers participated in the VWDN in fiscal 1999.
Company officials expect that number to increase steadily.
Manuals and Tutorial
The Company maintains the capability to produce manuals and training materials
in-house. Because of the complexity of the Company's software, these manuals
are an important part of the product to the customer. VectorWorks 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 VectorWorks. A tutorial to assist new
users in learning each product is included on the product disk. The manuals are
produced in FrameMaker, for both Macintosh and Windows, and are printed and
bound by outside vendors. Additionally, the Company markets training videotapes
and compact disks under the MacAcademy product name, through a partnership with
Florida Marketing International.
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.
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Quality Assurance and Testing
Systematic testing and field-testing are the 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 regularly scheduled 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 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.
Research and Future Products
Future products and product improvements are developed by the employees of the
Company, purchased from outside the Company, or licensed from other developers.
Product improvements are required on a continuing basis to prevent the Company's
products from becoming obsolete, resulting in deterioration of sales. While the
Company believes that its products are of a high quality, there can be no
assurance that the Company will be able to maintain its present market position.
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
features for inclusion in VectorWorks. 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.
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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 distributors, who in turn
market the product through 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.
EMPLOYEES
The Company employs 3 executives, 20 programmers, 4 quality assurance
personnel, 7 content developers, 7 technical support personnel, 9 marketing
personnel, 3 graphic design personnel, 3 accounting personnel, 3 shipping
clerks, 3 customer service personnel, 4 quality assurance personnel, 2
technical publication associates, 1 network administrator, and 2 executive
assistants. The Company employs a total of 71 persons, 70 of them full-time.
LICENSING AND 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. The Company also maintains a licensing
agreement with LightWork Design Ltd. relating to technology included in the
RenderWorks plug-in for VectorWorks.
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.
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ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 14,269 square feet of office space and 4,000
square feet of manufacturing space for a total of 18,269 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 $15,180.00 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 fiscal 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Company is a public company quoted on the NASDAQ SmallCap 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
SmallCap 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, 1999 May 31, 1998
------------ ------------
High Bid Low Bid High Bid Low Bid
First Quarter $ 4.38 $ 2.25 $ 5.63 $ 3.00
Second Quarter 3.13 2.50 4.63 3.00
Third Quarter 3.69 2.69 5 3.00
Fourth Quarter 4.06 2.88 4.50 3.63
The Company currently has 3,055,612 shares of stock outstanding. As of August 4,
1999, the closing bid and ask prices for the Company's common stock were 4.375
and 4.50, respectively.
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HOLDERS
The Company has approximately 70 record holders of its common stock. Based on
information from its transfer agent, the Company estimates that it has over 300
beneficial owners of 100 shares or more 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.
The Company does not currently anticipate paying cash dividends on its common
stock in the foreseeable future.
ITEM 5A. CERTAIN CAUTIONARY INFORMATION
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 on it's behalf by
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 "believes" "may," "expects,"
"anticipates," estimates" 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 the items discussed below and risks
elsewhere in this report and other reports and statements of the Company.
COMPETITION
The software industry has limited barriers to entry, and the availability of
desktop computers with continually expanding capabilities at progressively lower
prices contributes to the ease of market entry. Because of these and other
factors, competitive conditions in the industry are likely to intensify in the
future. Increased competition could result in price reductions, reduced revenues
and profit margins, and loss of market share, all of which could adversely
affect the Company's business, consolidated results of operations, and financial
condition.
The Company's products compete directly with software offered by other
competitors. Certain of these competitors have greater financial, technical,
sales and marketing, and other resources than the Company.
The Company believes that the principal factors affecting competition in its
markets are price, product reliability, performance, range of useful features
continuing product enhancements, reputation and training. In addition, the
availability of third-party application software is a competitive factor within
the market. The Company believes that it competes favorably in these areas and
that it's competitive position will depend, in part, upon it's continued ability
to enhance existing products, and to develop and market new products.
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FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company has experienced fluctuations in operating results in interim
periods. Company sales are, in part, a functions of the age of the products in
their life cycle. Early stages of a cycle typically bring in a surge in upgrade
sales. Upgrade sales are sales to existing customers upgrading to the newest
version of the product. New customer sale are also typically higher in the early
stages of the cycle. As the product ages in its life cycle, both upgrade sales
and new customer sales tend to decline. The technology industry is particularly
susceptible to fluctuations operating results within a quarter. The Company
experienced this volatility in fiscal year 1999 with the release of VectorWorks
in January 1999.
The timing of distributor orders can also impact the Company's operating
performance. Foreign distributors in particular may order in irregular
frequencies and for irregular amounts. The timing of these orders can
significally effect the Company's quarterly results. Additionally, the Company's
operating expenses are based in part on its expectations for future revenues and
are relatively fixed in the short term. Accordingly, any revenue shortfall below
expectations could have an immediate and significant adverse effect on the
Company's consolidated results of operations and financial conditions.
Similarly, shortfalls in the Company's revenues or earnings from levels expected
by securities analysts could have an immediate and significant adverse effect on
the trading price of the Company's common stock. Moreover, the company's stock
price is subject to the volatility generally associated with technology stocks
and may also be affected by broader market trends unrelated to performance.
PRODUCT CONCENTRATION
The company's derives a substantial portion of its revenues from new customer
and upgrade sales of VectorWorks. As such, any factor adversely affecting sales
of VectorWorks, including such factors as product life cycle, market acceptance,
product performance and reliability, reputation, price competition, and the
availability of third-party applications, could have a material adverse effect
on the Company's business and consolidated results of operations.
PRODUCT DEVELOPMENT AND INTRODUCTION
The software industry is characterized by rapid technological change as well as
changes in customer requirements and preferences. The software products offered
by the Company are internally complex and, despite extensive testing and quality
control, may contain errors or defects ("bugs"), especially when first
introduced. There can be no assurance that defects or errors will occur in
future releases of VectorWorks or other software products offered by the
Company. Such defects or errors could result in corrective releases to the
Company's software products, damage to the Company's reputation, loss of
revenues an increase in product returns, or lack of market acceptance of its
products, any of which could have a material and adverse effect on the Company's
business and consolidated results of operations.
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The Company believes that its future results will depend largely upon its
ability to offer products that compete favorably with respect to price,
reliability, performance, range of useful features, continuing product
enhancement, reputation and training. Delays or difficulties may result in the
delay or cancellation of planed development projects, and could have a material
and adverse effect on the Company's business and consolidated results of
operations. Further, increased competition in the market for Company products
could also have a negative impact on the business and consolidated results of
operations.
Certain of the Company's historical product development activities have been
performed by independent firms and contractors, while other technologies are
licensed from third parties. The Company generally either owns or licenses the
software developed by third parties. Because talented development personnel are
in high demand, there can be no assurance that independent developers, including
those who have developed products for the Company in the past, will be able to
provide development support to the Company in the future. Similarly, the can be
no assurance that the Company will be able to obtain and renew license
agreements on favorable terms, if at all, and any failure to do so could have
material adverse effect on the Company's business and consolidated results of
operations.
INTERNATIONAL OPERATIONS
The Company anticipates that international operations will continue to account
for a significant portion of its consolidated revenues. Risks inherent in the
Company's international operations include the following: unexpected changes in
regulatory practices and tariffs; difficulties with distributors; longer
collection cycles; potential changes in tax laws; greater difficulty in
protecting intellectual property; and the impact of fluctuating exchange rates
between the US dollar and foreign currencies in markets where the Company does
business. The Company's international results may also be impacted by general
economic and political conditions in these foreign markets. There can be no
assurance that these and other factors will not have a material adverse effect
on the Company's future international operations and, consequently on the
Company's business and consolidated results of operations.
DEPENDENCE ON DISTRIBUTOR CHANNELS
The Company sells its software products primarily to distributors. Company
products are often packaged with other distributor in certain international
markets. Many of these distributors are not highly capitalized and may
experience difficulty during economic downturns. The Company derived 23% and 20%
of its total revenue from sales through its Japanese distributor during the
years ended May 31, 1999 and 1998, respectively. The Company also derived 13%
and 18% of its total revenues from its principal United States distributor
during the years ended May 31, 1999 and 1998, respectively. Terms of agreements
with these and other distributors are subject to change on reasonably short
notice. The loss of, or a significant reduction in, business with anyone of the
Company's major distributors could have a material adverse effect on the
Company's business and consolidated results of operations in future periods.
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INTELLECTUAL PROPERTY
The Company relies on a combination of copyright and trademark laws, trade
secrets, confidentiality procedures, and contractual provisions to protect its
proprietary rights. Despite such efforts to protect the Company's proprietary
rights, unauthorized parties may attempt to copy aspects of the Company's
software products or to obtain and use information that the Company regards as
proprietary. Policing unauthorized use of the Company's software products is
time-consuming and costly. Although the Company is unable to measure the extent
to which piracy of its software products exists, software piracy can be expected
to be a persistent problem. There can be no assurance that the Company's means
of protecting its proprietary rights will be adequate or that its competitors
will not independently develop similar technology. The Company expects that
software product developers will be increasingly subject to infringement claims
as the number of products and competitors in its industry segments grows and
functionality of products in different industry segments overlaps. There can be
no assurance that infringement or invalidity claims (or claims for
indemnification resulting from infringement claims) will not be asserted against
the Company or that any such assertions will not have material adverse effect on
its business. Any such claims, whether with or without merit, could be
time-consuming, result in costly litigation and diversion of resources, cause
product shipment delays, or require the Company to enter into royalty or
licensing agreements. In addition, such royalty or license agreements, if
required, may not be available on acceptable terms, if at all, which could have
a material adverse effect on the Company's business and consolidated results of
operations.
The Company also relies on certain software that it licenses from third parties,
including software that is integrated with internally developed software and
used in its products to perform key functions. There can be no assurance that
these third-party software licenses will continue to be available on
commercially reasonable terms, or that the software will be appropriately
supported, maintained, or enhanced by the licensors. The loss of licenses to,
inability to support, maintain, and enhance any such software, could result in
increased costs, or in delays or reductions in product shipments until
equivalent software could be developed, identified, licensed, and integrated,
which could have a material adverse effect on the Company's business and
consolidated results of operations.
ATTACTION AND RETENTION OF EMPLOYEES
The continued growth and success of the Company depends significantly on the
continued service of highly skilled employees. Competition for these employees
in today's marketplace, especially in the technology industries, is intense. The
Company's ability to attract and retain employees is dependent on a number of
factors including its continued ability to grant stock incentive awards. There
can be no assurance that the Company will be successful in continuing to recruit
new personnel and to retain existing personnel. The loss of one or more key
employees or the Company's inability to maintain existing employees or recruit
new employees could have a material adverse impact on the Company. In addition,
the Company may experience increased compensation costs to attract and retain
skilled personnel.
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IMPACT OF YEAR 2000
The Company has reviewed all products it produces internally for sale to third
parties to determine compliance of its products and have found all products
compliant. However, there can be no assurance that application systems used to
run Company products by the consumer will be compliant or converted in a timely
manner, and any failure in this regard may cause Company products not to
function as designed. There can be no assurances that future compliance issues
may not arise, however, the Company believes any future costs associated with
ensuring that the Company's products are compliant with the year 2000 are not
expected to be material.
ITEM 6. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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, 1999 compared to year ended May
31, 1998
Fiscal year ended May 31,
1999 1998
Revenues 100% 100%
---- ----
Cost and expenses
Cost of revenues 29 30
Generated administrative 25 23
Selling and marketing 27 28
Research and development 6 5
-- --
Total cost and expenses 87 86
-- --
Income from operations 13 14
Interest and other income 6 6
-- --
Income before income taxes 19 20
Provision for income taxes 5 7
-- --
Net income 14 13
== ==
REVENUES
Revenues were $7,980,151 for 1999 as compared with $7,367,360 for 1998
representing an increase of 8.3%. References herein to VectorWorks reflect the
name change and upgrade from MiniCAD introduced in January 1999. Revenues
include sales to existing customers, or upgrade revenue, and sale to new
customers. Revenues from the Windows version of VectorWorks rose to $2,874,274
for 1999 from $2,346,063 for 1998 representing an increase of 22.5%. Upgrade
revenues from conversion of earlier versions of VectorWorks for Windows,
included in revenues from the Windows version above, rose to $513,190 for 1999
from $407,195 for 1998 representing an increase of 26.0%. Revenues from
VectorWorks for the Apple Macintosh declined to $4,186,747 for 1999 from
$4,713,470 for 1998, representing a decrease of 11.2%. Upgrade revenues from
conversion of an earlier version of VectorWorks for the Macintosh, included in
revenues from the Macintosh version above, declined to $847,950 for 1999
12
<PAGE>
from $1,249,328 for 1998. Upgrade revenues in 1998 from the Macintosh for the
were supported by the new features included in the MiniCAD 7 release, late in
fiscal 1997. Upgrade revenues rose for the Windows version and declined for the
Macintosh version during the year ended May 31, 1999 because the Company began
allowing consumers to upgrade to any version from any version near the end of
fiscal 1998 which resulted in many Macintosh version consumers converting to a
Windows-based product. New customer revenues from the Windows version of
VectorWorks rose to $2,361,084 for 1999 from $1,938,868 for 1998 with greater
recognition and acceptance of the product in the marketplace and the new
features included with the introduction of VectorWorks during the fiscal year.
New customer revenues from the Macintosh declined to $3,338,797 for 1999 from
$3,464,142 for 1998. The relative stability with new product sales for the
Macintosh version of VectorWorks reflects the stability experienced by Apple
Macintosh in its marketplace.
Revenues from RenderWorks, a VectorWorks plug-in supplement introduced in
January 1999 for both the Windows and Macintosh markets, were $618,057 for 1999.
Revenues from foreign sales were $4,326,061 for 1999 as compared with $3,731,783
for 1998. Foreign sales represented 54% and 51% of total revenue for 1999 and
1998, respectively. Sales to Japan represented 23% and 20% of total revenues for
1999 and 1998, respectively, with the European countries representing the
substantial remainder of foreign sales in each year.
There can be no assurance that the Company will not experience further declines
in new product revenues in the future.
COST OF REVENUES
Cost of revenue for 1999 was $2,303,027 as compared with $2,194,746 for 1998,
representing an increase of 4.9%. The gross profit percentages for the years
ended May 31, 1999 and 1998 were 71.1% and 70.2%, respectively. Amortization of
software development and licensing costs charged to cost of revenue totaled
$968,008 for 1999, as compared with $826,080 for 1998, representing an increase
of 17%. This increase is due to the Company's increased commitment to research
and development, the cost of which is charged to cost of revenues as a function
of time rather than as a function of revenues. Software royalty expenses also
rose to $158,807 for 1999 from $82,078 for the 1998. This increase is
principally related to royalty fees associated with revenues from RenderWorks,
introduced in the middle of fiscal 1999. Other costs which are a function of
revenue declined, partly off setting these increases due to the decrease in
upgrade revenues which generate less revenue per product sale and are as costly
to produce as a new product.
OPERATING EXPENSES
General and administrative expenses were $2,011,997 for 1999 as compared with
$1,720,838 for 1998 representing an increase of 16.9%. Salary expenses for
general and administrative operations and overall fringe benefit costs were
$1,093,729 for 1999 as compared with $914,565 for 1998. These expenses rose with
the issue of executive bonuses and the overall growth of the Company during 1999
when compared to 1998. Rent expense rose to $211,552 for 1999 as compared
13
<PAGE>
to $145,873 for 1998. This increase reflects an increase in base rates to
reflect current market conditions and a slight increase in usable space. Other
general and administrative expenses increased with the Company's commitment to
other components of operations and the overall growth of the Company.
Selling and marketing expenses were $2,185,821 for 1999 as compared to
$2,017,170 for 1998, representing an increase of 8.4%. Advertising expenses for
VectorWorks declined to $927,012 for 1999 as compared with $1,115,101 for 1998.
This decrease is attributable to a continuing reduction in advertising in
general computer publications most notably for the Macintosh version which is
believed to be less effective than other means of reaching the target market.
Trade show expenses rose to $347,463 for 1999 as compared to $212,652 for 1998.
Salary expenses and contract fees for selling and marketing operations rose to
$656,218 for 1999 from $402,759 for 1998. This increase reflects the Company's
continuing commitment to reach the broader Windows market through the use of
trade shows and other promotional means and its increased emphasis on research
for new products and product features.
Research and development expenses were $474,200 for 1999 as compared with
$374,155 for 1998, representing an increase of 26.7%. 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 $454,791 for 1999 as compared with $400,218 for 1998,
representing an increase of 13.6%. This increase is attributable to an increase
in investment income from marketable securities resulting from a larger
investment base in these securities during 1999 as compared with 1998. The
increase is partly attributable to an increase in interest rates applied to the
average investment base since the Company shifted its investment base during the
periods away from tax exempt securities which generally carry a lower interest
yield.
INCOME TAXES
The provision for income taxes was $382,075 for 1999 as compared with $467,787
for 1998, representing a decline of 18.3%. The effective income tax rate was
26.2% for 1999 as compared to 32.0% for 1998. The decline in the effective tax
rate for 1999 is attributable to the tax benefits from tax exempt foreign sales
which rose substantially with the Company's Foreign Sales Corporation being in
existence for the full 1999 fiscal year and for less than one quarter of the
1998 fiscal year. The reduction in effective tax rate from tax exempt foreign
sales for 1999 and 1998 was 2.8% and .6% respectively. The Company benefited
from a charitable donation of an older version of MiniCAD which reduced the
effective tax rate for 1999 by 2.6%. The Company also received a reduction in
effective tax rate during 1999 as compared to 1998 from increased research and
development credits pertaining to an increased commitment to this area. These
effective tax rate decreases were partly offset by a reduction in the benefit
from tax exempt securities which declined due to a reduction in the investment
base in these securities.
14
<PAGE>
NET INCOME
Net income rose to $1,077,822 or $.35 per share for the year ending May 31, 1999
as compared with $992,882 or $.32 per share for the year ending May 31, 1998,
representing an increase in net income of 8.6%.
LIQUIDITY AND CAPITAL RESOURCES
The Company increased its working capital by $706,718 to $9,071,332 at May 31,
1999 from $8,364,614 at May 31, 1998, representing an increase of 8.4%. This
increase is the result of cash flows from operations during 1999. The increase
in working capital has been invested in marketable securities, which rose to
$8,673,465 at May 31, 1999 from $7,826,800 at May 31, 1998. Of the Company's
marketable securities held at May 31, 1999, 36% were held in United States
Treasury bill, 35% were held in corporate bonds and 29% were held in municipal
obligations. Company securities are generally held with maturities of seven
years or less. Cash flows from operations during 1999 were also used to purchase
equipment and invest in software development and licensing costs, which are
included on the balance sheet at May 31, 1999. Furthermore, cash flows from
operations were used to repurchase Company stock during 1999. Repurchased shares
totaled 78,200 with an average price of $3.02 per share.
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. 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, 1999 and 1998 are
attached hereto at Page 12. The following financial statements, including the
independent auditors reports, appear on sequential pages 17 through 27 of this
Annual Report:
1. Report of Independent Auditors dated July 30, 1999
2. Consolidated Balance Sheet at May 31, 1999 and 1998
3. Consolidated Statement of
Income for the years ended May 31, 1999
and 1998
4. Consolidated Statement of Cash Flows for the years ended May 31, 1999 and
1998;
5. Consolidated Statement of Stockholders' Equity for the years ended May 31,
1999 and May 31, 1998; and
6. Notes to the Consolidated Financial Statements.
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.
15
<PAGE>
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 9,
1999.
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 9,
1999.
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 9,
1999.
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 9,
1999.
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 during the fourth quarter of fiscal
1999.
16
<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, 1999 and 1998, 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, 1999 and 1998, and the consolidated results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
Vienna, Virginia /s/ Ernst & Young LLP
July 30, 1999
17
<PAGE>
DIEHL GRAPHSOFT INC.
CONSOLIDATED BALANCE SHEET
May 31,
ASSETS 1999 1998
- ------ ----------- ----------
Current assets:
Cash and equivalents $ 245,450 $ 376,754
Marketable securities 8,673,465 7,826,800
Accounts receivable 370,746 443,386
Income taxes receivable 52,974 -
Inventory 123,601 81,432
Other 310,840 257,764
----------- ----------
Total current assets 9,777,076 8,986,136
----------- ----------
Fixed assets:
Equipment 923,471 747,599
Furnishings and fixtures 127,660 115,623
Leasehold improvements 47,688 47,688
---------- ----------
1,098,819 910,910
Accumulated depreciation (745,354) (575,529)
---------- ----------
Net fixed assets 353,465 335,381
---------- ----------
Other assets:
Software development and licensing costs,
net of accumulated amortization 1,099,932 899,547
Other 24,265 31,933
---------- ----------
Total other assets 1,124,197 931,480
---------- ----------
Total assets $11,254,738 $10,252,997
========== ==========
See accompanying notes to financial statements.
18
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY May 31,
1999 1998
Current liabilities:
Accounts payable and accrued expenses $ 705,744 $ 555,546
Income taxes payable - 62,653
Deferred income taxes - 3,323
---------- ----------
Total current liabilities 705,744 621,522
---------- ----------
Long term liabilities:
Deferred income taxes 402,756 334,678
---------- ----------
Total liabilities 1,108,500 956,200
---------- ----------
Stockholders' equity:
Common stock - $.01 par value; 10,000,000
shares authorized, 3,071,312 and
3,147,637 shares issued and outstanding at
May 31, 1999, and 1998, respectively 30,713 31,476
Additional paid in capital 3,955,194 4,182,812
Retained earnings 6,160,331 5,082,509
---------- ----------
Total stockholders' equity 10,146,238 9,296,797
---------- ----------
Total liabilities and
stockholders' equity $11,254,738 $10,252,997
========== ==========
See accompanying notes to financial statements.
19
<PAGE>
DIEHL GRAPHSOFT INC.
CONSOLIDATED STATEMENT OF INCOME
For the year ended May 31,
1999 1998
---- ----
Revenues $7,980,151 $7,367,360
Cost of revenues 2,303,027 2,194,746
--------- ---------
Gross profit 5,677,124 5,172,614
--------- ---------
Operating expenses:
General and administrative 2,011,997 1,720,838
Selling and marketing 2,185,821 2,017,170
Research and development 474,200 374,155
--------- ---------
Total operating expenses 4,672,018 4,112,163
--------- ---------
Income from operations 1,005,106 1,060,451
--------- ---------
Other income and expenses:
Interest income 439,932 399,243
Other 14,859 975
--------- ---------
Total other income and expenses 454,791 400,218
--------- ---------
Income before income taxes 1,459,897 1,460,669
Provision for income taxes 382,075 467,787
--------- ---------
Net income $1,077,822 $ 992,882
========= =========
Net income per share (basic and diluted) $ .35 $ .32
========= =========
Weighted average number of shares
outstanding 3,108,825 3,144,326
========= =========
See accompanying notes to financial statements.
20
<PAGE>
<PAGE>
DIEHL GRAPHSOFT INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended May 31,
1999 1998
--------- ------
Operating activities:
Net income $1,077,822 $ 992,882
Adjustments:
Amortizations of bond premiums, net (108,389) (121,311)
Other amortization 975,726 850,492
Depreciation 170,415 146,264
Deferred income taxes 64,755 29,538
Other (14,859) (975)
Changes in operating assets and liabilities:
Accounts receivable 72,640 (112,251)
Inventory (42,169) 81,396
Income taxes receivable/payable (115,627) 196,023
Other current assets (53,076) (90,199)
Other assets (50) (4,202)
Accounts payable and accrued expenses 157,698 310,896
--------- ---------
Net cash provided by operating activities 2,184,886 2,278,553
Investing activities:
Purchase of marketable securities (6,056,994) (5,843,839)
Dispositions of marketable securities 5,333,700 4,826,456
Capitalized software and licensing costs (1,168,393) (948,957)
Purchase of fixed assets (188,622) (215,720)
Insurance proceeds from automobile disposition - 33,577
Sale of fixed assets - 2,100
Capitalized organizational expenses - (2,775)
--------- ---------
Net cash used for investing activities (2,080,309) (2,149,158)
--------- ---------
Financing activities:
Redemption of common stock (235,881) -
--------- ---------
Net cash used for financing activities (235,881) -
--------- ---------
Net change in cash and equivalents (131,304) 129,395
Cash and equivalents at year 376,754 247,359
--------- ---------
Cash and equivalents at year $ 245,450 $ 376,754
========= =========
Supplemental disclosure of cash flow information:
Issuance of common stock $ 7,500 $ 35,276
Reduction in accrued expenses (7,500) (35,276)
--------- ---------
$ - $ -
========= =========
See accompanying notes to financial statements.
21
<PAGE>
DIEHL GRAPHSOFT INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
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 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
Issuance of common stock 1,875 19 7,481 - 7,500
Redemption of common
stock (78,200) (782) (235,099) - (235,881)
Net income for year - - - 1,077,822 1,077,822
--------- ------ --------- --------- ----------
Balance - May 31, 1999 3,071,312 $30,713 $3,955,194 $6,160,331 $10,146,238
========= ====== ========= ========= ==========
See accompanying notes to financial statements.
22
<PAGE>
DIEHL GRAPHSOFT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED MAY 31, 1999 AND 1998
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
numbers of shares outstanding is as follows:
23
<PAGE>
1999 1998
Average outstanding shares 3,108,825 3,144,326
Dilutive effect of stock options
and warrants - -
--------- --------
Weighted average number of shares
outstanding 3,108,825 3,144,326
========= =========
i. Reclassification of Expenses - Certain 1998 expenses reported in
the consolidated statement of income have been reclassified
to conform with their 1999 presentation.
Note 2 Business Concentrations
The Company derives its sales from both domestic and foreign customers. Export
sales approximate 54% and 51% of total revenues for the years ended May 31, 1999
and 1998, respectively. Sales to Japan included with export sales approximated
23% and 20% of total revenues for the years ended May 31, 1999 and 1998,
respectively. The Company also derived 36% and 38% of sales from two major
customers for the years ended May 31, 1999 and 1998, respectively.
Note 3. Investments
Marketable securities are recorded at 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 seven years
or less. The Company has accumulated unrealized losses on its investments
totaling approximately $87,000 at May 31, 1999 and no significant accumulated
unrealized gain or loss at May 31, 1998. A summary of marketable securities
which are intended to be held to maturity at May 31, 1999 and 1998 is as
follows:
1999 1998
---- ----
Money Market Fund $ 5,000 $ 5,000
United States Treasury Bills 3,079,742 1,370,024
Municipal Bonds 3,057,265 4,325,726
Corporate Bonds 2,531,458 2,126,050
--------- ---------
$8,673,465 $7,826,800
The reported cost of securities expected to mature within one year from May 31,
1999 and 1998 total $450,000 and $200,465, respectively.
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. Periodic royalty fees
for license software, as discussed in Note 8, are expensed in the related
period.
24
<PAGE>
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, 1999 and 1998 is as follows:
1999 1998
---- ----
Cost incurred for product development
and licensing $ 2,729,378 $1,643,801
Accumulated amortization 1,629,446 744,254
----------- ---------
$ 1,099,932 $ 899 547
=========== =========
During the years ended May 31, 1999 and 1998, amortization expense reported in
cost of sales totaled $968,008 and $826,080, respectively.
Note 5. Pension Plan
The Company maintains a 401K defined contribution pension plan which provides
for all eligible employees to contribute up to 15% of qualifying wages to the
plan. The Company may make discretionary contributions up to 50% of the first 6%
the employee elects to contribute to the plan. For the years ended May 31, 1999
and 1998, the Company contributed $52,946 and $37,747, respectively to the plan.
Note 6. Income Taxes
Significant components of deferred tax assets and liabilities at May 31, 1999
and 1998 are as follows:
1999 1998
---- ----
Deferred tax asset:
Accounts payable and
accrued expenses $ 70,143 $ 91,148
Deferred tax liabilities:
Accounts receivable (46,561) (68,453)
Unamortized software (408,484) (324,877)
Other (17,854) (35,819)
------ ------
Net deferred tax liability $(402,756) $(338,001)
======= =======
The provision for income taxes for the years ended May 31, 1999 and 1998
consist of the following:
1999 1998
---- ----
Current provision:
Federal $261,110 $367,659
State 56,210 70,590
------- -------
25
<PAGE>
Total current portion 317,320 438,249
------- -------
Deferred provision:
Federal 53,017 24,185
State 11,738 5,353
------- -------
Total deferred income taxes 64,755 29,538
------- -------
Total provisions for federal and
state income taxes $382,075 $467,787
======= =======
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, 1999 and 1998:
1999 1998
---- ----
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 (4.5) (6.2)
Benefit from charitable donation (2.6) -
Benefit from tax exempt sales (2.8) (0.6)
Benefit from research tax credit (1.4) (0.3)
Other (1.1) 0.5
--- ---
26.2% 32.0%
==== ====
For the years ended May 31, 1999 and 1998, the Company paid income taxes of
$432,947 and $242,226, 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, 1999 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, 1999 carry exercise prices ranging from $3.87 per share
26
<PAGE>
to $6.44 per share with a weighted average exercise price of $4.89 per share and
weighted average remaining contractual life of 3.8 years. Option activity for
the years ended May 31, 1999 and 1998 is summarized as follows:
1999 1998
---- ----
Options outstanding at beginning of year 97,000 87,000
Options issued - 10,000
Options cancelled - -
Options exercised for issuance of stock - -
------ ------
Options outstanding at end of year 97,000 97,000
====== ======
As of May 31, 1999 and 1998 vested options outstanding totaled 69,500 and 60,600
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, 1999 and 1998, rent expense totaled $211,552 and $145,873,
respectively. Future annual minimum lease payments, exclusive of allocable
common area maintenance expenses chargeable under the lease, are required as
follows:
May 31, Total
2000 181,385
2001 30,360
b. Software Licensing Agreement - The Company maintains two principal software
licensing agreements for use of software with its principal software master. One
agreement permits the Company to convert its developed software for use on a
Windows based personal computer or compatible environment and 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. The other agreement permits the Company to sell a
plug-in supplement software program for use with it's principal software
master and provides for a royalty of nine percent of qualifying sales as
defined in the agreement. During the year ended May 31, 1999 and 1998, royalty
expenses charged to cost of revenues totaled $158,807 and $71,570
respectively.
27
<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.
Date: August 27, 1999 BY: /s/ Richard Diehl
Richard Diehl
President
Chief Executive Officer
Chairman, Board of Directors
In accordance with the exchange act, this report has been signed below by the
following person in the capacities and on the date indicated.
DIEHL GRAPHSOFT, INC. a Maryland Corporation
Date: August 27, 1999 /s/Richard Diehl
Richard Diehl
President
Chief Executive Officer
Chairman, Board of Directors
Date: August 27, 1999 /s/Joseph Schmelzle
Joseph Schmelzle
Treasurer
Chief Financial and
Accounting Officer
Director
Date: August 27, 1999 /s/ Joseph Schmelzle
Joseph Schmelzle
Attorney in Fact for
Richard Hug, Director
Date: August 27, 1999 /s/ Joseph Schmelzle
Joseph Schmelzle
Attorney in Fact for
Frederic Unger, Director
28
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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
Section1(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
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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,
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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
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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,
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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.
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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
<PAGE>
SIXTH AMENDMENT TO LEASE
THIS SIXTH AMENDMENT TO LEASE (the "Amendment") is made as of
this 17th day of November 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 meanings ascribed to such terms in the
Lease (as hereinafter defined).
RECITALS
WHEREAS, by lease dated 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, and as further amended by that certain
Fifth Amendment to Lease dated as of August 1, 1998 the "Lease"), Landlord
leased to Tenant 16,718 rentable square feet of space (the "Premises") commonly
known as Suite 100 at 10270 Old Columbia Road, Columbia, Maryland; and
WHEREAS, Tenant desires to lease an additional 1,551 rentable
square feet of space (the "Adjacent Premises", more specifically depicted on
Exhibit A hereto) commonly known as Suite 310 at 10290 Old Columbia Road,
Columbia, Maryland (the "Adjacent Building," which term shall include the land
and building in which the Adjacent Premises are located) 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 undersigned, 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 November 16, 1998, Tenant leases from
Landlord, and Landlord leases to Tenant, in addition to the Premises previously
held by Tenant pursuant to the Lease, the Adjacent Premises
3. With respect to the Adjacent Premises only:
(a) With respect to each calendar month throughout
the term, Tenant shall pay to Landlord
rent ("Adjacent Premises Rent") of $22,877.28 per annum, payable in advance in
equal monthly installments of $1,906.44, payable on or before the first day of
each
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calendar month at the address set forth in the Lease (as the same may be
changed from time to time).
(b) Additional Rent.
(i) Obligation to Pay: Definitions.
In addition to paying Adjacent Premises Rent specified in Paragraph
(a) hereof, Tenant shall pay as "Additional Rent" the amounts determined
as hereinafter set forth. The Adjacent Premises 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) Taxes. "Taxes" means and includes (1) all
real estate taxes,
-----
assessments (whether general or special), sewer rents, rates and charges, front
foot benefit charges, transit taxes, taxes based upon receipt of rent or value
of Lease, and any other federal, state or local governmental charge, tax or the
like, general, special, ordinary or extra ordinary, which may now or hereafter
be levied or assessed against or in connection with the ownership, leasing,
operation and receipt rent from the Adjacent Building, payable (adjusted after
protest or litigation, if any) for any part of the term of this Lease,
exclusive of penalties or discounts, due and payable, (2) any taxes or the like
which shall such taxes to be applied to the period such item is be levied in
lieu of any such taxes, including, but not limited to, any tax, assessment,
levy, or charge on rents received from the Adjacent Building or measured by
rents received from the Adjacent Building (or a portion thereof), or a charge,
fee or tax on Landlord which is otherwise related to the Adjacent Building, or
and an income or franchise tax, (3) any assessments, special assessments or
installments thereof (including interest on such installments) against the
Adjacent Building which shall be required to be paid during the calendar year
in respect to which taxes are being determined, and (4) the expenses of
contesting the amount or validity of any such taxes, charges or assessments,
including, but not limited to, attorneys' fees, appraisers' fees, experts' fees
and other costs incurred without regard to the tax year involved, such expense
to be applicable to the year in which such charges are incurred.
(B) Operating Expenses. "Operating Expenses" means and
includes the flow 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 of electricity (except electricity 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), steam, water, fuel, heating, lighting,
air conditioning, window cleaning, security service, insurance (including, but
not limited to, fire, extended coverage, liability, loss of rent, workmen's
compensation, or any other insurance carried in good faith by Landlord and
applicable to the Adjacent 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 Adjacent 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
<PAGE>
expenses incurred under the provisions of any collective bargaining agreement
, or 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 Adjacent Building, the Property or any part thereof, the charges of any
independent contractor who, under contract with Landlord or its
representatives, does any of the work of operating, maintaining or
repairing of the Adjacent Building, the Property or any part thereof, legal
and accounting expenses, or any other expense or charge, whether or not herein
before mentioned, which in accordance with generally accepted accounting
and management principles would be considered as an expense of maintaining
, operating, or repairing the Adjacent Building, the Property or any part
thereof. If any Operating 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. For purposes of determining Operating Expenses for any
year, if the entire rentable area of the Adjacent Building shall not have been
occupied for any part of the year, Operating Expenses shall include the amount
of such expenses that would reasonably have been incurred had the entire
Adjacent Building been occupied throughout the year.
3. Operating Expenses shall not include franchise or
income taxes imposed on the Landlord, except to the extent hereinbefore
provided, nor the cost to 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 Operating
Expense)to a tenant who has undertaken to perform such work or service in lieu
of the performance thereof by the Landlord, Operating 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 which is either (i) required by governmental rules,
regulations, laws or ordinances, or (ii) reasonably expected to
materially improve operations or efficiency of the Property's systems,
structures or equipment (and which is not solely a cosmetic
enhancement of the Adjacent Building exterior or Common Areas), 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
Operating 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 interest rate most recently
publicly announced by Riggs National Bank of Washington, D.C. (or any other
bank designated by Landlord as its primary bank, from time to time) as its
"prime", "base" or "reference" commercial loan base rate of interest for
unsecured 90-day loans to its most credit-worthy commercial borrowers (the
"Base Rate"), or Landlord's then current primary bank as designated to Tenant
by notice from Landlord from time to time.
<PAGE>
5. Operating Expenses shall not include: (i) principal
payments or interest payments on any permanent mortgages and ground rent
payments on any ground leases in an amount equal to the payments made during
the base year of the lease; (ii) cost of repairs or other work occasioned by
fire, windstorm or other casualty or condemnation to the extent Landlord is
reimbursed by insurance proceeds or condemnation awards; (iii) the cost of
correcting latent defects (not standard repairs) during the initial warranty
period after construction (all repairs and replacements resulting from ordinary
wear and tear, use, fire, casualty, vandalism, and other matters shall not be
deemed to be latent construction defects); (iv) Landlord's costs of electricity
and other services sold to tenants which services are not standard for the
Adjacent Building and for which Landlord is reimbursed by tenants; (v)
depreciation of the Adjacent Building or any fixtures or improvements therein,
existing at the Lease Commencement Date; (vi) costs (limited to penalties,
fines and associated legal expenses) incurred due to criminal violation by
Landlord or any tenant in the Adjacent Building of the terms of any applicable
federal, state and local government laws, codes and similar regulations that
would not have been incurred but for any such criminal violations by Landlord,
it being intended that each party shall be responsible for costs resulting from
its own violation of such laws, codes and regulations as the same shall pertain
to the Adjacent Building; provided that any interest or penalties incurred in
connection with assessments or taxes which are reasonably contested by Landlord
shall be included as an Operating Expense; (vii) cost of Landlord's general
overhead and general administrative expenses (individual, partnership or
corporate, as the case may be), which costs would not be chargeable to
operating expense of the Adjacent Building and/or the Land, in accordance with
generally accepted accounting principles, consistently applied; and (viii)
all items and services for which Tenant or other Adjacent Building tenants
specifically reimburse Landlord.
(C) [ Intentionally Omitted ].
(D) Tenant's Percentage. "Tenant's Percentage"
means the quotient of the rentable area of the Adjacent Premises divided by
the rentable area of the Adjacent Building and shall be 3.47%. In the event of
any changes in either or both of the rentable area of the Premises or the
rentable area of the Adjacent Building, the Tenant's Percentage shall be
appropriately modified.
(E) Rent Tax. "Rent Tax" means and includes
any excise, sales or transaction privilege tax imposed or levied by the
City, any government or governmental agency upon Landlord as a result of
Landlord's receipt of any payment from Tenant, and also means and includes
any tax or other charge based in whole or in part upon the value of this Lease
, upon receipt, payment or right to collect Rent hereunder; provided,
however, there is excluded herefrom any tax, charge, assessment or the like
which is imposed in lieu of real estate taxes and other ad valorem taxes.
(ii) Tax Escalation. Tenant shall pay to
Landlord as Rent, in addition to installments of Adjacent Premises Rent
required by Paragraph (a) hereof, an amount ("Tax Escalation Amount") equal
to Tenant's Percentage of the amount by which Taxes assessed with respect to
each calendar year (or pro-rated portion thereof, in the event that the
Tenant vacates the Adjacent Premise' during a entire calendar year)
(beginning with calendar year 1999) exceed the Base Tax Amount (which shall
be deemed to be
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the Taxes allocable to the Adjacent Building with
respect to calendar year 1999). Landlord may calculate the Tax Escalation
Amount in any manner consistent with the foregoing. Tenant shall pay to
Landlord the Tax Escalation Amount with respect to each 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. Upon receipt by
Landlord of all bills for Taxes attributable to a calendar year, Landlord shall
furnish Tenant with a written statement of the actual Tax Escalation Amount of
such calendar year. If the total amount paid by Tenant during any calendar year
of the Term is less than the actual Tax Escalation Amount due from Tenant for
such calendar year as shown on such statement, Tenant shall pay the deficiency
to Landlord within fifteen (15) days after demand therefor by Landlord. If the
total amount paid by Tenant during any calendar year exceeds the actual Tax
Escalation Amount due from Tenant for such calendar year, such excess shall be
credited against payments hereunder next due. If no such payments are next due,
such excess shall be refunded by Landlord. The amount of any refund of taxes
received by Landlord shall be credited against Taxes for the year in which such
refund is received. In determining the amount of Taxes for the year, the amount
of special assessments to be included shall be limited to the amount of the
installment (plus any interest payable thereon) of such special assessment
which would have been required to have been paid during such year if the
Landlord had elected to have such special assessment paid over the maximum
period of time permitted by law.
(iii) Operating Expense Escalation.
(A) Tenant shall pay to Landlord as Additional
Rent, in addition to the Base Rent required by Paragraph l (a) hereof, an
amount ("Operating Expense Escalation Amount") equal to Tenant's
Percentage of the amount by which Operating Expenses incurred by Landlord
with respect to each calendar year (or pro-rated portion thereof, in the
event that the Tenant vacates the Adjacent Premises during a entire calendar
year) (beginning with calendar year 1999) exceed the Operating Expense
Base Amount (which shall be deemed to be the Operating Expenses
attributable to calendar year 1999). Landlord may calculate the Operating
Expense Escalation Amount in any manner consistent with the foregoing.
Tenant shall pay to Landlord the Operating Expense Escalation Amount with
respect to each calendar year, in monthly installments at the same time
and place as installments of Base Annual Rent under Paragraph l (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
Operating 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 Operating 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. During such thirty-day period, Tenant
may, at its sole cost and expense, cause a certified public accountant to
inspect Landlord's books and records relating to the calculation of Operating
Expenses. 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
<PAGE>
receipt thereof. If the total amount paid by Tenant during any calendar year
exceeds the actual Operating Expense Escalation Amount due from Tenant for
such calendar year, such excess shall be credited against payments next due
hereunder. If no such payments are next due, such excess shall be refunded by
Landlord.
(B) In the event the Adjacent 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 operating expenses for such calendar
year to reflect the Operating Expenses that would have been incurred by
Landlord for such year had the Adjacent Building been fully Leased and occupied
during the entire calendar year, and Tenant shall pay Landlord, in the manner
provided in Paragraph l(b)(v) hereof, Tenant's Percentage of such adjusted
Operating Expenses in excess of the Operating Expense Base Amount.
(iv) [ Intentionally Omitted ].
(v) Direct Payment of Rent Tax. In the event that
there shall be a Rent Tax imposed, asserted, assessed, levied upon or
required to be paid or collected by Landlord, Tenant shall pay to
Landlord, each month with thepayment of such month's Base Rent, the portion
of Rent Tax which (in Landlord's sole judgment) is attributable to results
from or is assessed upon or with respect to payments of Rent due hereunder for
such month.
(vi) Manner and Timing of Payment. All amounts due The
under this section as Additional Rent shall be payable in the manner
and at such place as installments of Base Annual Rent provided for in
Paragraph l(a) hereof. Without limitation on other obligations of Tenant which
shall survive the expiration of the term of the Lease, the obligations of
Tenant to pay the Additional Rent provided for in this Paragraph 1 shall
survive the expiration of the term of the Lease. For any calendar year, which
does not fall entirely within the term of the l ease, Tenant shall be
obligated to pay only a pro rata share of the Tax Escalation Amount and the
Operating Expense Escalation Amount as hereinabove determined based on
the number of days of the term of the Lease falling within the calendar year
in question.
(vii) Other Elements of Additional Rent. All costs
and expenses which Tenant assumes or agrees to pay to Landlord pursuant
to this Lease shall be deemed Additional Rent and shall be paid to Landlord
without any deduction or set-off whatsoever. In the event of non-payment
at such costs and expenses, Landlord shall have all the rights and remedies
herein provided for in case of non-payment of Rent.
(c) The Landlord shall provide the following services to the adjacent
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Premises:
(i) Heat and Air Conditioning. Air conditioning and heat for normal
office purposes only to provide, in Landlord's judgment and subject
to all governmental rules, regulations and guidelines applicable thereto,
comfortable occupancy Monday through Friday from 8:00 a.m. to 6:00 p.m., and
Saturday from 9:00 a.m. to 1:00 p.m., Sundays and holidays excepted. Tenant
agrees not to use any apparatus or device, in or upon or about the Adjacent
Premises which in any way may increase the amount of such services usually
furnished or supplied to said Adjacent Premises, and Tenant further agrees not
to connect any apparatus or device with the conduits or pipes, or other mean
by which such services are supplied for the purpose of using additional or
unusual amounts of such services, without written consent of Landlord.
Should Tenant use such services under this provision to excess or request the
use of these services at other than operating hours listed above, Landlord
reserves the right to charge for such services. The charge shall be payable as
Additional Rent. Should Tenant refuse to make payment upon demand of
Landlord, such excess charge shall constitute a breach of the obligation
to pay Rent under this Lease and shall entitle Landlord to the rights
hereinafter granted for such breach.
(ii) Electricity for Ordinary Uses. Electric power
for lighting and operation of normal office equipment, air conditioning and
heating as may be required for comfortable occupancy of the Adjacent Premises
between Monday and Friday from 8:00 a.m. to 6:00 p.m. and Saturdays from 9:00
a.m. to 1:00 p.m., Sundays and holidays excepted. Electric power furnished by
the Landlord is intended to be that consumed in normal office use for the
lighting, heating, ventilating, air conditioning and normal office equipment.
Landlord reserves the right, if consumption of electricity by Tenant exceeds
that required for normal office use as specified, at Landlord's sole
discretion, to either separately meter the Adjacent Premises at Tenant's
expense or to assess an extra monthly charge against Tenant (which shall be
Additional Rent) in an amount which, in Landlord's reasonable judgment,
compensates for such excess usage. If the Tenant refuses to pay upon demand of
Landlord such meter installation charge or extra monthly charge, such refusal
shall constitute a breach of the obligation to pay Rent under this Lease and
shall entitle Landlord to the rights hereinafter granted for such breach.
(iii) Water. Hot and cold water for drinking,
lavatory and toilet purposes from the regular Adjacent Building supply through
fixtures installed by Landlord (or by Tenant with Landlord's written consent).
(iv) Exterior and Structural. Landlord agrees to
maintain the exterior and interior of the Property to include lawn and
shrub care, snow removal, maintenance of mechanical and electrical
equipment, architectural finish, excluding only those items specifically
excepted elsewhere in this Lease.
(v) Additional Work or Service. Should Tenant
require any work or service in addition to the work or services described above
or outside of the hours or days specified above, Landlord may, on terms to
be
<PAGE>
agreed and upon reasonable advance notice by Tenant, furnish such
additional work or service and Tenant agrees to pay the Landlord such
charges as may be agreed on, but in no event at a charge less than Landlord's
actual cost plus overhead for the additional work or services provided, it
being agreed that the cost to the Landlord of such additional services shall
be excluded from Operating Expense but shall be Additional Rent; it is
further agreed that Landlord may discontinue provision of any work or
service upon Tenant's failure to pay therefor within thirty (30) days after
notice of the amount and such failure shall constitute a breach of Tenant's
obligation to pay Rent under this Lease and shall entitle Landlord to the
rights hereinafter granted for such breach.
(vi) No Warranty: Waiver of Landlord's Liability.
It is understood that Landlord does not warrant that any of the services
referred to above. or any other services which Landlord may supply, will
be free from interruption. Tenant acknowledges that any one or more such
services may be suspended by reason of operation of law, mechanical breakdown,
casualty, repair, inspection, renewal or other causes beyond the reasonable
control of Landlord, including but not limited to acts of God, acts of civil
disobedience, strikes, inability to secure electricity, gas, water or other
fuel at the Adjacent Building, or act or default of Tenant or other parties.
No such interruption or discontinuance of service shall be deemed an eviction
or disturbance of Tenant's use and possession of the Premises, or any part
thereof, or render Landlord liable to Tenant for damages, or relieve Tenant
from performance of Tenant's obligations under this Lease.
(d) Tenant will contract directly with a vendor approved in
advance by Landlord for the provision of char services to the Adjacent
Premises, which contract shall require the Premises to be serviced by such
vendor on a schedule approved by Landlord.
4. The rental payments hereinabove described are applicable
to the Adjacent Premises only, and shall not in any way affect Tenant's rental
payment or other obligation with respect to the Premises (as defined in the
Lease). Tenant's use and occupancy of the Adjacent Premises shall, with the
exception of the rental payments and services described above, se subject to
all of the terms, conditions and requirements of the Lease applicable to the
Premises (including without limitation that the term of the Lease, including
Tenant's right to occupy the Adjacent Premises, shall expire on July 31, 2000).
5. The terms of the Lease are hereby amended to reflect the
terms set forth in this Amendment. Except 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.
Signatures Follow
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have executed this
Sixth Amendment to Lease as of the date and year first written above.
WITNESS: LANDLORD:
RIVERS JACK LIMITED PARTNERSHIP
By: DRAPER & KRAMER, INC.,
as Manager
/s/ Felicia A. Caldwell /s/ William P. Holms III
Name: Felicia A. Caldwell Name: William P. Holms III
Title: Administrative Assistant Title: Dir. Of Prop Mgt.
/s/ Philip J. Wadden /s/ Eamonn Collopy
Name: Philip J. Wadden Name: Eamonn Collopy
Title: Administrative Assistant Title: Vice President
TENANT:
ATTEST: DIEHL GRAPHSOFT, INC.
/s/ Marianne M. Kubilus /s/ Richard Diehl
Name: Marianne M. Kubilus Name: Richard Diehl
Title: Exec. Asst. Title: C.E.O
<PAGE>
Exhibit 21
Subsidiaries of Small Business Issuer
Diehl Technologies, Inc.
Incorporated in State of Delaware
Diehl Graphsoft International Inc.
Incorported in Barbados
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
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 30, 1999, 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, 1999.
/s/ Ernst & Young LLP
Vienna, Virginia
July 30, 1999
<PAGE>
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,
herein authorized.
Dated as of: August 3, 1999
/s/ Richard Diehl /s/ Richard Hug
Richard Diehl Richard Hug
President Director
/s/ Joseph Schmelzle /s/ Frederic Unger
Joseph Schmelzle Frederic Unger
Chief Financial Officer Director
<PAGE>
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