SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-QSB
(Mark One)
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended February 28, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 0-24318
DIEHL GRAPHSOFT, INC
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 52-1407016
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
10270 Old Columbia Road, Columbia, Maryland 21046
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 410-290-5114
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Check whether the registrant(1) has filed all reports required to be filed
by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No _____
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
3,089,312 shares of common stock.
Transitional Small Business Disclosure Format (check one) Yes ____ No __x__
1
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DIEHL GRAPHSOFT, INC.
FORM 10-QSB
INDEX
Number Page
PART I FINANCIAL INFORMATION
Item 1 Financial Statements:
Balance Sheet (unaudited) as of
February 28, 1999 3
Statements of Operations (unaudited) for the three
months ended February 28, 1999 and 1998 and (unaudited)
for the nine months ended February 28, 1999 and 1998 5
Statements of Cash Flows (unaudited) for the nine months
ended February 28, 1999 and 1998 6
Statements of Stockholders' Equity (unaudited) as
of February 28, 1999 and 1998 8
Notes to Financial Statements 9
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II OTHER INFORMATION
Item 2 Changes in Securities and Use of Proceeds 13
Item 6 Exhibits and Reports 13
SIGNATURES 15
2
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DIEHL GRAPHSOFT, INC.
BALANCE SHEET
February 28, 1999
(Unaudited)
ASSETS
------
Current assets:
Cash $ 1,196,733
Marketable securities 7,206,997
Accounts receivable 561,408
Income taxes receivable 90,707
Other receivable 128,784
Inventory 146,678
Prepaid expenses 228,284
-------
Total current assets 9,559,591
=========
Fixed assets:
Equipment 866,164
Furnishings and fixtures 122,230
Leasehold improvements 47,688
------
1,036,082
Accumulated depreciation 692,324
-------
Net fixed assets 343,758
-------
Other assets:
Unamortized organization expenses 21,942
Software development and licensing costs, net
of accumulated amortization of $1,377,191 987,698
Other 4,252
-----
Total other assets 1,013,892
---------
Total assets $10,917,241
===========
See accompanying notes to financial statements
3
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 781,356
-------
Total current liabilities 781,356
-------
Long term liabilities:
Deferred income taxes 367,543
-------
Total liabilities 1,148,899
---------
Stockholders' equity:
Common stock - $.01 par value; 10,000,000
shares authorized, 3,089,312 shares
issued and outstanding 30,893
Additional paid in capital 4,020,100
Retained earnings 5,717,349
---------
Total stockholders' equity 9,768,342
---------
Total liabilities and stockholders' equity $10,917,241
===========
See accompanying notes to financial statements
4
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DIEHL GRAPHSOFT, INC.
STATEMENT OF OPERATIONS
(Unaudited)
For the three month period For the nine month period
ended February 28, ended February 28,
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
Sales $2,409,580 $1,412,494 $5,470,655 $5,077,570
Cost of sales 721,422 447,013 1,663,470 1,525,670
------- ------- --------- ---------
Gross profit 1,688,158 965,481 3,807,185 3,551,900
--------- ------- --------- ---------
Operating expenses:
General &
administrative 525,673 373,914 1,393,923 1,242,686
Selling & marketing 566,197 632,700 1,540,632 1,525,770
Research &
development 145,703 73,570 367,085 245,312
------- ------ ------- -------
Total operating
expenses 1,237,573 1,080,184 3,301,640 3,013,768
--------- --------- --------- ---------
Income (loss) from
operations 450,585 (114,703) 505,545 538,132
------- -------- ------- -------
Other income and expenses
Interest income 114,044 82,454 332,748 263,361
Gain on sale of bond 12,670 - 12,670 -
Gain (loss) on
disposition of
equipment (123) (2,526) (123) (1,626)
---- ------ ---- ------
Total other
income 126,591 79,928 345,295 261,735
------- ------ ------- -------
Income (loss) before
income taxes 577,176 (34,775) 850,840 799,867
Provision (credit) for
income taxes 155,000 (24,000) 216,000 257,000
------- ------- ------- -------
Net income (loss) $ 422,176 $ (10,775) $ 634,840 $ 542,867
=========== ========== ========== ==========
Net income (loss) per
share $ .14 $ (.00) $ .20 $ .17
=========== ========== ========== ==========
Weighted average number
of shares outstanding 3,092,179 3,145,137 3,117,695 3,143,222
--------- --------- --------- ---------
See accompanying notes to financial statements
5
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DIEHL GRAPHSOFT, INC.
STATEMENT OF CASH FLOWS
(Unaudited)
For the nine months
ended February 28,
------------------
1999 1998
---- ----
Cash flows from operating activities:
Net income $ 634,840 $ 542,867
Adjustments to reconcile net income to net
Cash provided by operating activities:
Gain on sale of bond (12,670) -
Loss on disposition of equipment 123 1,626
Amortization of bond premiums and
discounts (55,390) (104,311)
Deferred income taxes 29,543 42,463
Depreciation and other amortization 999,663 716,542
Changes in operating assets and liabilities:
Accounts receivable (118,022) (89,464)
Inventory (65,246) 67,445
Other current assets (99,304) (8,405)
Other assets (50) (4,000)
Accounts payable and accrued expenses 233,310 247,685
Income taxes receivable/payable (153,360) 57,311
-------- ------
Net cash provided by operating activities: 1,393,437 1,469,759
--------- ---------
Cash flows from investing activities:
Purchases of marketable securities (2,995,538) (3,793,873)
Sale and maturities of marketable securities 3,683,400 3,488,000
Capitalized software and licensing costs (964,638) (746,374)
Insurance proceeds from automobile desposition - 33,577
Purchase of fixed assets (125,887) (152,186)
Organizational expenses - (2,775)
------ ------
Net cash used in investing activities (402,663) (1,173,631)
-------- ----------
Cash flows from financing activities:
Redemption of common stock (170,795) -
-------- --------
Net cash used in financing activities (170,795) -
-------- --------
Net increase in cash 819,979 296,128
Cash balance beginning of period 376,754 247,359
------- -------
Cash balance end of period $1,196,733 $ 543,487
========== =========
See accompanying notes to financial statements
6
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For the nine months
ended February 28,
------------------
1999 1998
---- ----
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 339,817 $ 157,226
========== =========
Issuance of common stock $ 7,500 $ 35,277
Reduction in accrued expenses (7,500) 35,277
------ ------
$ - $ -
========== =========
See accompanying notes to financial statements
7
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DIEHL GRAPHSOFT, INC.
STATEMENT OF STOCKHOLDER' EQUITY
(Unaudited)
Additional
Common Common Paid in Retained
shares stock Capital Earnings Total
------ ----- ------- -------- -----
Balance
May 31, 1997 3,140,739 $31,407 $4,147,605 $4,089,627 $8,268,639
Issuance of
Common Stock 6,898 69 35,208 - 35,277
Net Income - - - 542,867 542,867
------- ------- ------- ------- -------
Balance
February 28,
1998 3,147,637 $31,476 $4,182,813 $4,632,494 $8,846,783
==== ========= ======= ========== ========== ==========
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 (60,200) (602) (170,193) - (170,795)
Net Income - - - 634,840 634,840
------- ------- ------- ------- -------
Balance
February 28,
1999 3,089,312 $30,893 $4,020,100 $5,717,349 $9,768,342
==== ========= ======= ========== ========== ==========
See accompanying notes to financial statements
8
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DIEHL GRAPHSOFT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all necessary adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and nine month
period ended February 28, 1999 are not necessarily indicative of the results
that may be expected for the year ended May 31, 1999.
NOTE B - RECLASSIFICATION OF EXPENSES
Certain expenses reported in the statement of operations for the three and
nine month period ended February 28, 1998 have been reclassified to conform with
the presentation of expenses reported for the three and nine month period ended
February 28, 1999.
NOTE C - WEIGHTED AVERAGE SHARES OUTSTANDING
Weighted average number of shares outstanding during the periods is
computed as follows:
For the three months For the nine months
ended February 28, ended February 28,
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
Average outstanding shares 3,092,179 3,145,137 3,117,695 3,143,222
Dilutive effect of stock
options and warrants - - - -
Weighted average number of --------- --------- --------- ---------
shares outstanding 3,092,179 3,145,137 3,117,695 3,143,222
========= ========= ========= =========
9
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DIEHL GRAPHSOFT, INC.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In connection with the Private Securities Litigation Reform Act of 1995
(the "Litigation Reform Act"), the Company is hereby disclosing certain
cautionary information to be used in connection with written materials
(including this Report on Form 10-QSB) and oral statements made by or on behalf
of its employees and representatives that may contain "forward looking
statements" within the meaning of the Litigation Reform Act. Such statements
consist of any statement other than a recitation of historical fact and can be
identified by the use of forward looking terminology such as "may," "expect,"
"anticipate," "estimate" or "continue" or the negative thereof or other
variations thereon or comparable terminology. The listener or reader is
cautioned that all forward looking statements are necessarily speculative and
there are numerous risks and uncertainties that could cause actual events or
results to differ materially from those referred to in such forward looking
statements. Included in such risks are (1) the acceptance of new product
introductions, (2) quality of engineering in new software, (3) lost goodwill
associated with change in product name of the Company's principal product
MiniCAD to VectorWorks, (4) delays pertaining to planned introduction of new
products, (5) lack of diversified product portfolio, (6) effect of competitor
inroads into the Company's markets, (7) limited barriers to entry, (8) reliance
on international markets and foreign currency fluctuations, (9) dependence on
distributor channels, (10) fluctuations in quarterly operations associated with
the age of Company products in their life cycles and the timing of orders from
distributors, (11) intellectual property infringements, and (12) attraction and
retention of quality employees, among others. The reader or listener is
cautioned that the Company does not have a policy of updating or revising
forward looking statements and thus he or she should not assume that silence by
management over time means that actual events are bearing out as estimated in
such forward looking statements.
Results of Operations for the three and nine months ended February 28, 1999 as
compared to the three and nine months ended February 28, 1998.
Revenues for the three months ended February 28, 1999 were $2,409,580 as
compared to $1,412,494 for the three months ended February 28, 1998 representing
an increase of 70.6%. Revenues for the nine months ended February 28, 1999 were
$5,470,655 as compared to $5,077,570 for the nine months ended February 28, 1998
representing an increase of 7.7%. The following table sets forth the changes in
the selective components of revenue for the three and nine month periods ended
February 28, 1999 as compared with the three and nine month periods ended
February 28, 1998. References to Vectorworks reflect the name change and upgrade
from MiniCAD associated with the new product introduction of Vectorworks on
approximately January 1, 1999.
For the three month period For the nine month period
ended February 28, ended February 28,
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
Vectorworks for
Windows
(New product) $660,164 $448,006 $1,628,128 $1,333,156
10
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Vectorworks for
Windows (Upgrades) 166,926 79,950 350,618 219,246
Vectorworks for
the Macintosh
(New product) 910,252 630,845 2,407,867 2,548,677
Vectorworks for
the Macintosh
(Upgrades) 263,854 220,257 572,676 744,317
Growth was in all areas in the three month ended February 28, 1998 as
compared to the three months ended February 28, 1998. This growth is
attributable to the introduction of Vectorworks in the first half of the third
quarter. The growth in new product Macintosh sales during the three months ended
February 28, 1999 as compared to the three months ended February 28, 1998
suggests this market may be stabilizing for the Company with Apple Computer
stabilizing its market position in the hardware industry. The Company also
posted revenues of $319,472 during the three months ended February 28, 1999 from
the successful introduction of Renderworks, a supplemental product for
Vectorworks.
The cost of revenues for the three months ended February 28, 1999 was $721,422
as compared to $447,013 for the three months ended February 28, 1998
representing an increase of 61.4%. The cost of revenues for the nine months
ended February 28, 1999 was $1,663,470 as compared to $1,525,670 for the nine
months ended February 28, 1998 representing an increase of 9.0%. The gross
profit percentages for the three months ended February 28, 1999 and 1998 were
70.0% and 68.4% respectively. The gross profit percentages for the nine months
ended February 28, 1999 and 1998 were 69.6% and 70.0% respectively. The slight
improvement in gross profit percentage during the three months ended February
28, 1999 as compared to the three months ended February 28, 1998 is due to the
spreading of fixed cost components of cost of revenues over a larger revenue
base. This is after giving effect to the increase in upgrade revenues during the
three months ended February 28, 1999 as compared with the three months ended
February 28, 1998. Upgrade versions are sold substantially below the price of a
new version and are as costly to produce as a new product itself.
General and Administrative expenses rose to $525,673 for the three months
ended February 28, 1999 as compared to $373,914 for the three months ended
February 28, 1998 representing and increase of 40.6%. General and administrative
expenses rose to $1,393,923 for the nine months ended February 28, 1999 as
compared to $1,242,686 for the nine months ended February 28, 1998, representing
an increase of 12.1%. Cost rose in many categories during the three months ended
February 28, 1999 as compared with the three months ended February 28, 1998.
Traveling expenses increased by $16,314 due principally to reimbursements to
contractor during the quarter. Rent expense increased $21,537 due principally to
increased cost per square foot of leased space. Payroll and related benefits
represent the majority of the remaining increase. These costs reflect in part
the issuance of bonuses during the three months ended February 28, 1999 and the
overall increase in costs of servicing other departments. These same increases
in rent and payroll and related benefits contributed principally to the increase
in expenses for the nine months ended February 28, 1999 as compared to the nine
months ended February 28, 1998.
Selling and marketing expenses declined to $566,197 for the three months
ended February 28, 1999 as compared to $632,700 for the three months ended
11
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February 28, 1998 representing a decrease of 10.5%. Selling and marketing
expenses rose to $1,540,632 for the nine months ended February 28, 1999 as
compared to $1,525,770 for the nine months ended February 28, 1998 representing
an increase of 1.0%. Advertising expenses declined to $228,196 for the three
months ended February 28, 1999 as compared to $313,692 for the three months
ended February 28, 1998. Advertising expenses declined to 675,384 for the nine
months ended February 28, 1999 as compared to $822,081 for the for the nine
months ended February 28, 1998. This decrease reflects the continuing reduction
in advertising in general purpose computer publications which were not
returning the desired investment. These decreases were partly offset by
increases in payroll costs and contract fees, most notably in product
development which represents a restructuring of the marketing division with
focus on a core outlook to new product features.
Research and development expenses rose to $145,703 for the three months
ended February 28, 1999 as compared to $73,570 for the three months ended
February 28, 1998 representing an increase of 98.0% . Research and development
expenses rose to $367,085 for the nine months ended February 28, 1999 as
compared to $245,312 for the nine months ended February 28, 1998 representing an
increase of 49.6%. This increase reflects the increased commitment by the
Company to hiring new engineers for product research and development.
Interest income rose to $114,044 for the three months ended February 28,
1999 as compared to $82,454 for the three months ended February 28, 1998
representing an increase of 38.3%. Interest income rose to $332,748 for the nine
months ended February 28, 1999 as compared to $263,361 for nine months ended
February 28, 1998 representing an increase of 26.3%. This increase reflects a
shift away from municipal obligations to corporate obligations which generally
carry a higher yield than tax exempt municipals.
Net income of $422,176 was reported for the three months ended February 28,
1999 as compared to a net loss of $10,775 for the three months ended February
28, 1998. Net income increased by $91,973 to $634,840 for the nine months ended
February 28, 1999 as compared to $542,867 for the nine months ended February 28,
1998. The net income for the three months ended February 28, 1999 is after
giving effect to a provision for income taxes of $155,000. The net loss for the
three months ended February 28, 1998 is after giving effect to a credit for
income taxes of $24,000. The increase in net income for the nine months ended
February 28, 1999 as compared to the nine months ended February 28, 1998 is
after giving effect to a provision for income taxes of $216,000 and $257,000
respectively. The effective tax rate for the three months ended February 28,
1999 was 26.9%. The effective tax credit rate for the three months ended
February 28, 1998 was 69.0%. The effective tax rates for the nine months ended
February 28, 1999 and 1998 were 24.4% and 32.1% respectively. The large tax
credit rate of 69% for the three months ended February 28, 1998 principally
reflects the tax benefit of tax exempt municipal interest during the quarter.
The decrease in effective tax rate for the nine months ended February 28, 1999
as compared to the nine months ended February 28, 1998 reflects the tax benefits
from tax exempt profits associated with the formation of a foreign sales
corporation in March 1998 and a charitable donation of an older version of
Company product which will provide tax benefits to the Company through the
fiscal year.
12
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Liquidity and Capital Resources
The company increased its working capital by $873,940 or 11.1% from
$7,904,295 at February 28, 1999 to $8,778,235 at February 28, 1999. Working
capital increased by $413,621 or 4.9% from $8,364,614 at May 31, 1998. The
increase in working capital is primarily due to cash flows from operations
during the period. These cash flows have in part been invested into equipment
and software development and in part used to repurchase Company stock. During
the nine months ended February 28, 1999, the Company repurchased 60,200 shares
at an average price of $2.84 per share. The Company continues to maintain its
excess cash in short to intermediate term government and corporate obligations.
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.
13
PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On February 28, 1995, the Company completed its initial public
offering of common stock and warrants and raised net proceeds
of $4,135,075 including the exercise of warrants. The
effective date of the registration statement for the initial
public offering was November 29, 1994. From February 28, 1995
through February 28, 1999, the net proceeds were allocated to
working capital and were invested temporarily in short term
U.S. Government, corporate and municipal obligations.
Item 6. Exhibits and Reports
Exhibit 27 - Financial Data Schedule
The Company has filed no reports on Form 8-K during the three
months ended February 28, 1999.
14
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DIEHL GRAPHSOFT, INC.
DATE: April 12, 1999 By:/s/Richard Diehl
Richard Diehl, President
Chief Executive Officer
DATE: April 12, 1999 /s/ Joseph Schmelzle
Joseph Schmelzle, Treasurer
Chief Financial and Accounting Officer
15
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<PERIOD-END> Feb-28-1999
<CASH> 1196733
<SECURITIES> 7206997
<RECEIVABLES> 561408
<ALLOWANCES> 0
<INVENTORY> 146678
<CURRENT-ASSETS> 9559591
<PP&E> 1036082
<DEPRECIATION> 692324
<TOTAL-ASSETS> 10917241
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<COMMON> 30893
<OTHER-SE> 9737449
<TOTAL-LIABILITY-AND-EQUITY> 10917241
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<CGS> 721422
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