SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-QSB
(Mark One)
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended November 30, 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.
3,056,703 shares of common stock.
Transitional Small Business Disclosure Format (check one) Yes ____ No __x__
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DIEHL GRAPHSOFT, INC.
FORM 10-QSB
INDEX
Number Page
PART I FINANCIAL INFORMATION
Item 1 Financial Statements:
Balance Sheet (unaudited) as of
November 30, 1999 3
Statements of Operations (unaudited) for the three months ended
November 30, 1999 and 1998 and (unaudited) for the six months ended
November 30, 1999 and 1998 4
Statements of Cash Flows (unaudited) for the six months
ended November 30, 1999 and 1998 5
Statements of Stockholders' Equity (unaudited) as
of November 30, 1999 and 1998 6
Notes to Financial Statements 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders 13
Item 6 Exhibits and Reports 13
SIGNATURES 14
2
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BALANCE SHEET (Unaudited)
November 30, 1999
ASSETS
Current assets:
Cash $ 1,307,190
Marketable securities 8,390,456
Accounts receivable 352,832
Inventory 96,654
Other current assets 282,186
Total current assets 10,429,318
Fixed assets:
Equipment 938,881
Furnishings and fixtures 131,358
Leasehold improvements 47,688
1,117,927
Accumulated depreciation 775,441
Net fixed assets 342,486
Other assets:
Software development and licensing costs, net
of accumulated amortization of $1,504,773 1,228,413
Other 20,406
Total other assets 1,248,819
Total assets $12,020,623
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 790,206
Income taxes payable 42,861
Total current liabilities 833,067
Long term liabilities:
Deferred income taxes 442,239
Total liabilities 1,275,306
Stockholders' equity:
Common stock - $.01 par value; 10,000,000 shares
authorized, 3,056,703 shares issued and outstanding 30,567
Additional paid in capital 3,899,599
Retained earnings 6,815,151
Total stockholders' equity 10,745,317
Total liabilities and stockholders' equity $12,020,623
See accompanying notes to financial statements
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DIEHL GRAPHSOFT, INC.
STATEMENT OF OPERATIONS
(Unaudited)
For the three month period For the six month period
ended November 30, ended November 30,
1999 1998 1999 1998
Revenues $1,767,705 $1,187,495 $4,447,253 $3,061,075
Cost of revenues 533,056 451,117 1,197,489 942,048
Gross profit 1,234,649 736,378 3,249,764 2,119,027
Operating expenses:
General & administrative 499,766 434,986 1,024,722 868,250
Selling & marketing 624,940 495,636 1,245,144 974,435
Research & development 117,575 96,630 264,702 221,382
Total operating expenses 1,242,281 1,027,252 2,534,568 2,064,067
Income (loss) from
operations (7,632) (290,874) 715,196 54,960
Other income and expenses:
Interest income 123,979 111,020 247,747 218,704
Other - - (5,123) -
Total other income 123,979 111,020 242,624 218,704
Income (loss) before
income taxes 116,347 (179,854) 957,820 273,664
Provision (credit) for
income taxes 30,000 (73,000) 303,000 61,000
Net income (loss) $ 86,347 $ (106,854) $ 654,820 $ 212,664
Net income (loss) per
Share - basic and
fully dituled $ .03 $ (.03) $ .21 $ .07
Weighted average number
of shares outstanding -
basic 3,054,976 3,113,270 3,057,411 3,130,454
Weighted average number
of shares outstanding -
fully diluted 3,076,623 3,113,270 3,069,655 3,130,454
See accompanying notes to financial statements
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DIEHL GRAPHSOFT, INC.
STATEMENT OF CASH FLOWS
(Unaudited)
For the six months
ended November 30,
1999 1998
Cash flows from operating activities:
Net income $ 654,820 $ 212,664
Adjustments to reconcile net income to net
Cash provided by operating activities:
Deferred income taxes 39,483 30,692
Amortization of bond premiums and discounts (73,906) (35,887)
Other amortization 538,976 435,909
Depreciation and amortization 79,988 75,495
Other 5,123 -
Changes in operating assets and liabilities:
Accounts receivable 17,914 141,941
Inventory 26,947 (89,210)
Other assets 28,654 (180,750)
Accounts payable and accrued expenses 93,558 115,114
Income taxes receivable/payable 95,835 (276,092)
Net cash provided by operating activities: 1,507,392 429,876
Cash flows from investing activities:
Purchases of marketable securities - (2,995,538)
Maturities of marketable securities 352,245 2,964,000
Capitalized software costs (663,597) (515,003)
Purchase of fixed assets (69,462) (94,262)
Net cash used in investing activities (380,814) (640,803)
Cash flows from financing activities:
Redemption of common stock (64,838) (158,163)
Net used in financing activities (64,838) (158,163)
Net change in cash 1,061,740 (369,090)
Cash balance beginning of period 245,450 376,754
Cash balance end of period $1,307,190 $ 7,664
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 167,682 $ 306,400
Issuance of common stock $ 9,097 $ -
Reduction in accrued expenses 9,097 -
$ - $ -
See accompanying notes to financial statements
5
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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, 1998 3,147,637 $ 31,476 $ 4,182,812 $ 5,082,509 $ 9,296,797
Redemption of
Common stock (55,900) (559) (157,604) - (158,163)
Net Income - - - 212,664 212,664
Balance
November 30, 1998 3,091,737 $ 30,917 $ 4,025,208 $ 5,295,173 $ 9,351,298
Balance
May 31, 1999 3,071,312 $ 30,713 $ 3,955,194 $ 6,160,331 $10,146,238
Issuance of
Common stock 2,591 26 9,071 - 9,097
Redemption of
Common stock (17,200) (172) (64,666) - (64,838)
Net Income - - - 654,820 654,820
Balance
November 30, 1999 3,056,703 $ 30,567 $ 3,899,599 $ 6,815,151 $10,745,317
See accompanying notes to financial statements
6
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DIEHL GRAPHSOFT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all necessary adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and six month
period ended November 30, 1999 are not necessarily indicative of the results
that may be expected for the year ended May 31, 2000.
NOTE B - Lease Commitment
The Company entered into an agreement for lease of space in Columbia,
Maryland which provides for minimum monthly payments of $30,501 plus allocable
common area maintenance expenses from August 2000 through July 2010.
NOTE C - WEIGHTED AVERAGE SHARES OUTSTANDING
Weighted average number of shares outstanding during the periods is
computed as follows:
For the three months For the six months
ended November 30, ended November 30,
1999 1998 1999 1998
Average outstanding shares 3,054,976 3,113,270 3,057,411 3,130,454
Dilutive effect of stock
options and warrants 21,647 - 12,244 -
Weighted average number of
shares outstanding 3,076,623 3,113,270 3,069,655 3,130,454
7
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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, and others as reported in the Company's
Annual Report Form 10KSB for the fiscal year ended May 31, 1999, elsewhere in
the report and in other reports, documents and statements filed by the Company.
The reader or listener is cautioned that the Company does not have a
policy of updating or revising forward looking statements and thus he or
she should not assume that silence by management over time means that actual
events are bearing out as estimated in such forward looking statements.
Results of Operations for the three and six months ended November 30, 1999
as compared to the three and six months ended November 30, 1998.
REVENUES
Revenues for the three months ended November 30,1999 rose to $1,767,705 as
compared to $1,187,495 for the three months ended November 30, 1998 representing
a increase of 48.9%. Revenues for the six month period ended November 30, 1999
rose to $4,447,253 from $3,061,075 for the six month period ended November 30,
1998 representing an increase of 45.3%. Revenues include sales to existing
customers, or upgrade revenues, and sales to new customers.
Revenues from the Windows version of VectorWorks rose to $715,857 for the
three months ended November 30, 1999 from $497,088 for the three months ended
November 30, 1998. Revenues from the Windows version of VectorWorks rose to
$1,522,869 for the six months ended November 30, 1999 $1,151,656 for
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earlier versions of VectorWorks for Windows, included in revenues from the
Windows version above rose to $87,840 for the three months ended November 30,
1999 from $77,629 for the three months ended November 30, 1998. These
upgrade revenues from the Windows version of VectorWorks rose to $221,059 for
the six months ended November 30, 1999 from $183,692 for the six months
ended November 30, 1998. New customer revenues from the Windows version of
VectorWorks rose to $628,017 for the three months ended Novembeer 30, 1999 from
$419,459 for the three months ended November 30, 1998. These same new customer
revenues from the Windows version of VectorWorks rose to $1,301,810 for the six
months ended November 30, 1999 from $967,964 for the three months ended November
30, 1998. Increases in sales of the Windows version of VectorWorks were most
notable in foreign markets and reflect the acceptance of the product and
increased recognition in the industry.
Revenues from the Macintosh version of VectorWorks rose to $801,358 for the
three months ended November 30, 1999 from $637,253 for the three months ended
November 30, 1998. Revenues from the Macintosh version of VectorWorks rose to
2,299,697 for the six months ended November 30, 1999 as compared to $1,806,437
for the six months ended November 30, 1998. Upgrade revenues from conversion of
earlier versions of VectorWorks for the Macintosh rose to $123,540 for the three
months ended November 30, 1999 as compared to $68,318 for the three months ended
November 30, 1998. These upgrade revenues from conversion of earlier version
of VectorWorks for the Macintosh declined to $301,722 for the six months ended
November 30, 1999 from $308,822 for the six months ended November 30,
1998. New customer revenues from the Macintosh version of VectorWorks rose to
$677,818 for the three months ended November 30, 1999 from$568,935 for the
three months ended November 30, 1998. These new customer revenues from the
Macintosh version of VectorWorks rose to $1,997,975 for the six months ended
November 30, 1999 from $1,497,615 for the six months ended November 30, 1998.
Sales for the Macintosh version have shown growth principally in foreign
markets where VectorWorks was introduced at the beginning of this fiscal year.
Revenues from RenderWorks, a VectorWorks plug-in introduced in January 1999
were $196,297 for the three months ended November 30, 1999 and $498,523 for the
six months ended November 30, 1999.
Foreign sales rose to $1,070,229 for the three months ended November 30,
1999 from $636,907 for the three months ended November 30, 1998. Foreign sales
represented 60.5% and 53.6% of total sales during the three months ended
November 30, 1999 and 1998 respectively. Foreign sales rose to $2,951,282 for
the six months ended November 30, 1999 from $1,886,508 for the six months ended
November 30, 1998. Foreign sales represented 66.4% and 61.6% of total sales
during the six months ended November 30, 1999 and 1998 respectively. Foreign
sales to Japan, included with total foreign sales above were 22.5% and 13.9% of
total sales for the three months ended November 30, 1999 and 1998 respectively.
Foreign sales to Japan included with total foreign sales above were 28.9% and
30.6% of total sales for the six months ended November 30, 1999 and 1998
respectively. Foreign sales to the European countries represented the
substantial remainder of foreign sales during the periods.
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The cost of revenues for the three months ended November 30, 1999 rose to
$533,056 from $451,117 for the three months ended November 30, 1998 representing
an increase of 18.2%. The cost of revenues for the six months ended November 30,
1999 rose to $1,197,489 from $942,048 for the six months ended November 30, 1998
representing an increase of 27.1%. The gross profit percentages for the three
months ended November 30, 1999 and 1998 were 69.8% and 62.0% respectively. The
gross profit percentages for the six months ended November 30, 1999 and 1998
were 73.1% and 69.2% respectively. Software licensing and development
amortization expenses included in cost of revenues, which is not directly a
function of revenue, rose to $271,830 for the three months ended November 30,
1999 from $223,432 for the three months ended November 30, 1998. Software
licensing and development amortization expense and related payroll costs
included in costs of revenues rose to $641,637 for the six months ended November
30, 1999 from $468,647 for the six months ended November 30, 1998. The increase
in amortization expenses is attributable to the Company's commitment to
development of new engineering technology. Profit margins rose even giving
effect to the increases in software licensing and development and reflect the
increase in international sales which transfer substantial cost to the local
foreign distributors where products are translated to native languages.
Consequently, other salary expenses and materials charged to cost of revenues
did not rise proportionally to the increase in revenue in the three and six
month periods ended November 30, 1999 as compared with the three and six months
periods ended November 30, 1998. These salaries included technical support to
customers and documentation of product manuals and other publications.
OPERATING EXPENSES
General and administrative expenses rose to $499,766 for the three
months ended November 30, 1999 from $434,986 for the three months ended November
30, 1998 representing an increase of 14.9%. General and administrative expenses
rose to $1,024,722 in the six month period ended November 30, 1999 from $868,250
for the six months ended November 30, 1998. Salary expense and overall fringe
benefit expenses rose to 238,981 during the three months ended November 30, 1999
from $205,993 during the three months ended November 30, 1998. Salary and
overall fringe benefit expenses rose to $521,135 during the six months ended
November 30, from $423,242 for the six months ended November 30, 1998. These
increases reflect the Company's commitment to other areas of operations.
Research and development expenses rose to $117,575 for the three months
ended November 30, 1999 from $96,630 for the three months ended November
30, 1998 representing an increase of 21.7%. Research and development expenses
rose to $264,702 for the six months ended November 30, 1999 from $221,382 for
the six months
10
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ended November 30, 1998 representing and increase of 19.6%. This increase
reflects the increased commitment by the Company to develop new engineering
technology.
Selling and marketing expenses rose to $624,940 for the three months ended
November 30, 1999 from $495,636 for the three months ended November 30, 1998
representing an increase of 26.1%. Selling and marketing expenses rose to
$1,245,144 for the six months ended November 30, 1999 from $974,435 for the six
months ended November 30, 1998 representing an increase of 27.8%. Salary
expenses and related contract fees substantially contributed to the increase
rising to $245,673 for the three months ended November 30, 1999 from $133,341
for the three months ended November 30, 1998. Salary expenses and related
contract fees also rose to $544,711 for the six months ended November 30, 1999
from $254,850 for the six months ended November 30, 1998. This increase
principally reflects the Company's commitment to market research of new products
and new product features. These increases were partly offset by declines in
trade show expenses in the three and six month periods ended November 30, 1999
as compared with the three and six month periods ended November 30, 1998. These
declines reflect a streamlining of these costs and the shows that are attended.
OTHER INCOME AND EXPENSES
Other income and expenses rose to $123,979 for the three months ended
November 30, 1999 from $111,020 for the three months ended November 30, 1998
representing and increase of 11.7%. Other income and expenses rose to $242,624
for the six months ended November 30, 1999 from $218,704 for the six months
ended November 30, 1998 representing an increase of 10.9%. Interest income
rose to $123,979 for the three months ended November 30, 1999 from $111,020
for the three months ended November 30, 1998. Interest income rose to $247,747
for the six months ended November 30, 1999 from $218,704 for the six
months ended November 30, 1998. This increase reflects a larger investment base
and a partial shift in the investment portfolio from tax exempt municipal
obligations to other corporate and U.S. government obligations during the three
and six months ended November 30, 1999 when compared with the three and six
months ended November 30, 1998. These corporate and U.S. government obligations
generally carry slightly higher yields than tax exempt municipal obligations.
INCOME TAXES
The provision for income taxes was $30,000 for the three months ended
November 30, 1999 as compared to a credit of $73,000 for the three months ended
November 30, 1998. The provision for income taxes was $303,000 for the six
months ended November 30, 1999 as compared to $61,000 for the six months ended
November 30, 1998. The effective tax rates were 25.8% and (40.6%) for the three
months ended November 30, 1999 and 1998, respectively. The effective tax rates
were 31.6% and 22.2% for the six months ended November 30, 1999 and 1998,
respectively. The effective tax rate for the three months ended November 30,
1998 reflects a loss before the credit for
11
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income taxes during the period. The effective tax rates were otherwise lower in
the three and six month periods ended November 30, 1998 when compared to the
three and six month periods ended November 30, 1999 because of the tax benefits
of a charitable donation of an earlier version of VectorWorks and the greater
portion of total income being derived from tax exempt investment income during
the periods.
NET INCOME
The Company reported a net income of $86,347 or $.03 per share (basic and
fully diluted) for the three months ended November 30, 1999 as compared to a net
loss of $106,854 or $.03 per share (basic and fully diluted) for the three
months ended November 30, 1998. The Company reported net income of $654,820 or
$.21 per share (basic and fully diluted) for the six months ended November 30,
1998 and $212,664 or $.07 per share (basic and fully diluted) for the six months
ended November 30, 1998 representing an increase of 208%.
LIQUIDITY AND CAPITAL RESOURCES
The Company increased its working capital by $1,239,182 or 14.8% from
$8,357,069 at November 30, 1998 to $9,596,251 at November 30, 1999. Working
capital also rose from $9,071,332 at May 31, 1999 representing an increase of
$524,919. The increase from November 30, 1998 to November 30, 1999 is primarily
due to cash flows from operations during the period. These cash flows have been
in part invested in equipment and software development. During the six months
ended November 30, 1999, the Company also used these cash flows to repurchase
and retire 17,200 shares of common stock at an average price of $3.77 per share.
The Company continues to maintain its excess cash in marketable securities
having maturities of generally seven years or less. At November 30, 1999,
marketable securities consisted of 30% corporate bonds, 32% municipal
obligations and 38% U.S. Government obligations. At November 30, 1999, the
Company held cash and marketable securities of $3.17 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.
12
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PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting on November 9, 1999
Against/ Absten- Broker
For Withheld tions Non-votes
Election
Of Directors
Joseph Schmelzle Continuing in Office
Richard Hug Continuing in Office
Frederick Unger 2,122,824 - - 932,788
Richard Diehl 2,122,324 500 - 932,788
Ratification of
Appointment of
Independent
Auditors 2,122,824 - - 932,788
Item 6. Exhibits and Reports
Exhibit 27 - Financial Data Schedule
The Company has filed no reports on Form 8-K during the three
months ended November 30, 1999.
13
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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: January 14, 2000 By:/s/Richard Diehl
Richard Diehl, President
Chief Executive Officer
DATE: January 14, 2000 /s/ Joseph Schmelzle
Joseph Schmelzle, Treasurer
Chief Financial and Accounting Officer
14
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