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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT
Under Section 13 or 15(d) of the Securities Exchange Act of 1934
FOR THE QUARTER ENDED JANUARY 31, 1995
Commission File No. 1-7886
PENRIL DATACOMM NETWORKS, INC.
A Delaware Corporation
IRS Employer Identification No. 34-1028216
1300 Quince Orchard Blvd., Gaithersburg, Maryland 20878
Telephone - (301) 417-0552
Indicate by check mark 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 and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Common Stock, $.01 par value,
7,534,204 shares outstanding
as of March 2, 1995
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
January 31, July 31,
1995 1994
---------- --------
CURRENT ASSETS (unaudited) (audited)
Cash $ 1,449 $ 997
Accounts receivable, net 16,903 18,348
Inventories-
Raw materials 8,220 7,180
Work in process 2,088 2,219
Finished goods 7,058 7,445
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17,366 16,844
Other current assets 1,658 585
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TOTAL CURRENT ASSETS 37,376 36,774
Property, equipment and technology, net 4,417 5,177
Excess of cost over net assets acquired, net 6,443 6,901
Other assets 3,669 3,491
-------- --------
TOTAL ASSETS $ 51,905 $ 52,343
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowing $ 5,125 $ 3,225
Current portion of long-term debt 6,004 3,153
Accounts payable 8,330 7,217
Accrued expenses 3,069 3,880
------- -------
TOTAL CURRENT LIABILITIES 22,528 17,475
Long-term debt, net of current portion 1,521 5,762
Other noncurrent liabilities 659 526
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TOTAL LIABILITIES 24,708 23,763
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value 75 74
Additional paid-in capital 22,327 21,704
Retained earnings 4,886 6,998
Equity adjustments (91) (196)
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TOTAL SHAREHOLDERS' EQUITY 27,197 28,580
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 51,905 $ 52,343
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See notes to condensed consolidated financial statements.
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Item 1. Financial Statements (continued)
PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - in thousands, except per share amounts)
Three Months Ended Six Months Ended
January 31, January 31,
1995 1994 1995 1994
------ ------- ------- -------
NET REVENUES $ 15,258 $ 18,809 $ 30,642 $ 37,320
COSTS AND EXPENSES
Cost of revenues 8,571 10,022 17,014 19,378
Selling, general and administrative 5,239 5,403 10,565 11,055
Product development and engineering 2,353 2,555 4,622 5,019
Amortization of cost over
net assets acquired 233 252 466 500
------- ------- ------- -------
16,396 18,232 32,667 35,952
OPERATING INCOME (LOSS) (1,138) 577 (2,025) 1,368
------- ------- ------- -------
OTHER EXPENSE
Interest expense (278) (212) (534) (413)
Other, net (6) (38) (81) (77)
------- ------- ------- -------
(284) (250) (615) (490)
INCOME (LOSS) BEFORE INCOME TAXES (1,422) 327 (2,640) 878
BENEFIT FROM INCOME TAXES 284 297 528 253
NET INCOME (LOSS) $ (1,138) $ 624 $ (2,112) $ 1,131
========= ======= ======== ======
Net income (loss) per common and
equivalent share $ (.15) $ .08 $ (.28) $ .14
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Shares used in per share calculation 7,499 8,094 7,473 7,903
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See notes to condensed consolidated financial statements.
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PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - in thousands)
For the Six
Months Ended January 31,
1995 1994
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) from continuing operations $ (2,112) $ 1,131
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,489 1,718
Benefit for income tax (528) (350)
Other (220) 395
Decrease (increase) in accounts receivable 1,445 (811)
Increase in inventories (522) (2,675)
Increase in other current assets (81) (555)
Increase in accounts payable 1,113 497
Increase (decrease) in other current liabilities (688) 528
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Net cash provided by (used in) operating activities 896 (122)
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for purchased technology (20) (297)
Expenditures for property and equipment (1,172) (671)
------ ------
Net cash used in investing activities (1,192) (968)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under line of credit 1,900 854
Borrowings on long-term debt 84 1,927
Payments on long-term debt (1,473) (2,183)
Issuance of common stock 132 82
Dividends paid - (147)
Other 105 217
------ ------
Net cash provided by financing activities 748 750
CASH AT THE BEGINNING OF THE PERIOD 997 774
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CASH AT THE END OF THE PERIOD $ 1,449 $ 434
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See notes to condensed consolidated financial statements.
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PENRIL DATACOMM NETWORKS, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months
Ended January 31, 1995 and 1994
1. The accompanying condensed consolidated financial statements, which
should be read in conjunction with the Annual Report on Form 10-K for
the fiscal year ended July 31, 1994, apply to the Company and its
wholly-owned subsidiaries and reflect all adjustments which are, in the
opinion of management, necessary for a fair presentation of the
Company's consolidated financial position as of January 31, 1995 and
the results of operations for the three and six months ended
January 31, 1995 and 1994. The results of operations for such
periods, however, are not necessarily indicative of the results to be
expected for a full fiscal year.
Certain reclassifications have been made to prior period consolidated
financial statements to conform to the January 31, 1995 presentation.
2. The Company has recorded a benefit for income taxes for the three and
six months ended January 31, 1995 of $284,000 and $528,000, respectively.
The benefit is based on the projected annualized effective tax rate for
the fiscal year including the effects of state taxes and foreign tax
liabilities.
3. As noted in the Company's Annual Report on Form 10-K, the Company had a
working capital facility which expired on December 31, 1994. The bank
has agreed to extend the facility until April 15, 1995. The facility,
as extended, provides for a total borrowing capacity of $5,500,000
subject to a maximum based on qualified accounts receivable. At
January 31, 1995, the Company had borrowed the maximum allowed under the
formula.
The Company also has an acquisition term loan and other term loans with
its principal bank which require monthly payments. These loans bear
interest ranging from the prime rate to the prime rate plus 1/2% and
require payments of $210,000 per month plus accrued interest.
At January 31, 1995, the total principal due under all term loans was
$5,407,000.
At January 31, 1995, the Company was not in compliance with one of the
covenants in the loan agreement. Therefore, the portion of these loans
due after January 31, 1996 totalling in the aggregate, $2,887,000, has
been classified as a current liability. The Bank has agreed not to take
any action regarding the non-compliance. The Company is in the process
of renegotiating the loan agreement with its principal bank.
4. In February 1995, Henry D. Epstein exercised 80,000 Class B warrants
which were issued in March 1987. These warrants were issued with a
per share exercise price of $2.34, the fair market value of the Company's
common shares on the date the warrants were issued. Mr. Epstein
exercised the warrants by remitting 62,400 shares with a fair market
value of $3.00 on the date of the exercise.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
During the first half of fiscal 1995, the Company has generated cash of
$896,000 from operating activities primarily from non-cash expenses
(mostly depreciation) of $1,741,000, a reduction in accounts receivable of
$1,445,000 and an increase in accounts payable and other current liabilities
of $445,000.
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These are partially offset by the loss from operations of $2,112,000 and an
increase in inventories of $522,000. The decrease in accounts receivable is
the result of the normal collection of earlier sales and the lower sales
volume while the increase in accounts payable results from better management
of payments to vendors.
The increase in inventories, which are significantly lower than the increase
experienced in the comparable fiscal 1994 period, are the result of lower
than expected sales in January partially offset by the reduction in
inventories of products being phased out. The Company regularly provides a
reserve for products which are obsolete and therefore does not expect any
unusual write-offs as a result of the phase out of older products.
In addition to cash generated from operations, the Company has increased the
amount borrowed from its principal bank. As described in the Notes to
Condensed Consolidated Financial Statements, the working capital facility
was originally scheduled to expire on December 31, 1994. The bank has
agreed to extend the facility until April 15, 1995 and is currently
renegotiating the loan agreement. At January 31, 1995, the Company had
borrowed the maximum allowed under the facility. Because of the significant
loss for the first six months of fiscal 1995, the Company was not in
compliance with one of the covenants of the loan agreement. As a result of
the non-compliance, all outstanding loans have been classified entirely as a
current liability. The bank has agreed not to take any action regarding the
non-compliance while negotiations for a new loan agreement are proceeding.
In order to generate cash, The Company is also attempting to sell the
variable autotransformer and power supply product lines which are part of
the Company's Technipower subsidiary. If the transaction occurs, it is
anticipated some portion of the cash generated will be available to finance
growth of data communications products.
The ability of the Company to generate adequate cash for operational and
capital needs is dependent on the Company successfully completing the loan
negotiations with its principal bank.
RESULTS OF OPERATIONS
During the second quarter of fiscal 1995, the Company instituted an expense
reduction program at the Datability Networks division. This program is
expected to result in savings of over $3,000,000 annually with the financial
benefits beginning in the third quarter of fiscal 1995.
Revenues for the second quarter of fiscal 1995 were $15,258,000 compared to
$18,809,000 for the second quarter of fiscal 1994, or a decrease of
$3,551,000 (19%). For the first half of fiscal 1995 revenues were
$30,642,000 compared to $37,320,000, or a decrease of $6,678,000 (18%).
Revenues for both the three and six months compared to the prior year are
lower as customers have been holding orders awaiting the release of
the newer technology V.34 modems and shipments of new wide area networking
products. The Company expects to start shipping V.34 modems during the
third quarter. Revenues for the second quarter of fiscal 1995 were at
the same level as the first quarter of fiscal 1995.
Gross margins for the second quarter of fiscal 1995 decreased to 44% from
47% in the second quarter of fiscal 1994. Gross margins for the first half
of fiscal 1995 were 45% compared to 48% for the first half of fiscal 1994.
The decline in margins is the result of the lower production volumes which
generated higher unfavorable manufacturing variances in fiscal 1995 compared
to fiscal 1994.
Selling, general and administrative costs decreased by $164,000 (3%) to
$5,239,000 in the second quarter of fiscal 1995 from $5,403,000 in the
second quarter of fiscal 1994. Lower commissions in the second quarter
of fiscal 1995 due to the lower sales volume are the cause of this
reduction. For the first half
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of fiscal 1995, selling, general and administrative expenses were
$10,565,000 compared to $11,055,000 for the first half of fiscal 1994, or a
decrease of $490,000 (4%). This decrease was caused by lower commissions
due to the lower sales volume and the savings that resulted from deleting
several administrative functions in the Carlstadt, New Jersey facility
during the first quarter of fiscal 1994.
Product development and engineering expenses for the second quarter of
fiscal 1995 were $2,353,000 compared to $2,555,000 for the second quarter of
fiscal 1994, or a decrease of $202,000 (8%). For the first six months of
fiscal 1995, product development and engineering expenses were $4,622,000
compared to $5,019,000, or a decrease of $397,000 (8%). During fiscal 1994,
the Company consolidated several engineering tasks in Gaithersburg which
resulted in overall savings and reduced total payroll costs by approximately
$200,000 per quarter.
The amount of debt outstanding at January 31, 1995 was $12,650,000. The
increase in outstanding debt along with the increase in average interest
rates from 7.4% for the first six months of fiscal 1994 to 8.5% for the
first six months of fiscal 1995, have increased the interest expense for
both the three and six months ended January 31, 1995 compared to the same
periods in fiscal 1994.
For the first six months of fiscal 1995, the Company has recorded a tax
benefit of $528,000 as a result of the loss before income taxes of
$2,640,000. The benefit is based on the annualized effective tax rate
projected for the full fiscal year including the effect of state taxes and
foreign taxes. In the first six months of fiscal 1994, the Company recorded
a tax benefit of $253,000 as a result of a review of the reserve
requirements under SFAS 109, Accounting for Income Taxes.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 6. Exhibits and Reports on Form 8-K
Exhibits
None
Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Penril DataComm Networks, Inc.
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(Registrant)
DATE: March 13, 1995 BY:/s/ Henry D. Epstein
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Henry D. Epstein
Chief Executive Officer and
Chairman of the Board of Directors
DATE: March 13, 1995 BY:/s/ Richard D. Rose
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Richard D. Rose
Chief Financial Officer