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 APRIL 30, 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 June 7, 1995
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
April 30, July 31,
1995 1994
------- -------
CURRENT ASSETS (unaudited) (audited)
Cash $ 1,161 $ 997
Accounts receivable, net 15,315 18,348
Inventories-
Raw materials 8,394 7,180
Work in process 2,864 2,219
Finished goods 6,368 7,445
------- -------
17,626 16,644
Other current assets 2,258 585
------- -------
TOTAL CURRENT ASSETS 36,360 36,774
Property, equipment and technology, net 3,890 5,177
Excess of cost over net assets acquired, net 6,159 6,901
Other assets 2,780 3,491
------- -------
TOTAL ASSETS $ 49,189 $ 52,343
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowing $ 5,125 $ 3,225
Current portion of long-term debt 2,921 3,153
Accounts payable 8,265 7,217
Accrued expenses 2,707 3,880
------- -------
TOTAL CURRENT LIABILITIES 19,018 17,475
Long-term debt, net of current portion 3,868 5,762
Other noncurrent liabilities 740 526
------- -------
TOTAL LIABILITIES 23,626 23,763
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value 75 74
Additional paid-in capital 22,327 21,704
Retained earnings 3,188 6,998
Equity adjustments (26) (196)
------- -------
TOTAL SHAREHOLDERS' EQUITY 25,563 28,580
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 49,189 $ 52,343
======= =======
See notes to condensed consolidated financial statements.
2
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 Nine Months Ended
April 30, April 30,
1995 1994 1995 1994
------- ------- ------- -------
NET REVENUES $ 14,835 $ 18,448 $ 45,477 $ 55,768
COSTS AND EXPENSES
Cost of revenues 8,603 9,743 25,617 29,121
Selling, general and administrative 5,077 5,517 15,642 16,572
Product development and engineering 2,228 2,687 6,850 7,706
Amortization of cost over
net assets acquired 233 183 699 683
------- ------- ------- -------
16,141 18,130 48,808 54,082
OPERATING INCOME (LOSS) (1,306) 318 (3,331) 1,686
------- ------- ------- -------
OTHER EXPENSE
Interest expense (374) (223) (908) (636)
Other, net (18) (1) (99) (78)
------- ------- ------- -------
(392) (224) (1,007) (714)
INCOME (LOSS) BEFORE INCOME TAXES (1,698) 94 (4,338) (972)
BENEFIT (PROVISION) FROM INCOME TAXES -- (9) 528 244
NET INCOME (LOSS) $ (1,698) $ 85 $ (3,810) $ 1,216
======= ======= ======= =======
Net income (loss) per common and
equivalent share $ (.22) $ .01 $(.51) $ .15
======= ======= ======= =======
Shares used in per share calculation 7,534 7,991 7,534 7,904
======= ======= ======= =======
See notes to condensed consolidated financial statements.
3
PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - in thousands)
For the Nine
Months Ended April 30,
1995 1994
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) from continuing operations $ (3,810) $ 1,216
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 3,776 2,533
Benefit for income tax (528) (244)
Other (189) 675
Decrease (increase) in accounts receivable 2,933 (3,149)
Increase in inventories (982) (2,056)
Increase in other current assets (133) (284)
Increase (decrease) in accounts payable 1,048 (145)
Increase (decrease) in other current liabilities (567) 496
------- -------
Net cash provided by (used in) operating activities 1,548 (1,170)
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for purchased technology (255) (463)
Expenditures for property and equipment (1,205) (1,558)
------- -------
Net cash used in investing activities (1,460) (2,021)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under line of credit 1,900 3,094
Borrowings on long-term debt 84 2,656
Payments on long-term debt (2,208) (3,232)
Issuance of common stock 132 270
Dividends paid -- (147)
Other 168 197
------- -------
Net cash provided by financing activities 77 2,838
CASH AT THE BEGINNING OF THE PERIOD 997 774
------- -------
CASH AT THE END OF THE PERIOD $ 1,161 $ 421
======= =======
See notes to condensed consolidated financial statements.
4
PENRIL DATACOMM NETWORKS, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three and nine months
Ended April 30, 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 April 30, 1995 and the results of
operations for the three and nine months ended April 30, 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 April 30,
1995 presentation.
2. The Company has recorded a benefit for income taxes for the
nine months ended April 30, 1995 of $528,000. 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 with a total borrowing
capacity of $5,500,000 which expired on December 31, 1994. In
addition, the Company has several term loans with its
principal bank. These loans require payments of $210,000 per
month plus accrued interest. In April 1995, the Company
completed negotiations with its principal bank to extend the
working capital facility to December 31, 1995 and continue the
term loan monthly principal payments of $210,000. The maximum
amount available under the working capital facility is limited
to the total of eligible accounts receivable plus eligible
inventory less outstanding term loans. The amounts borrowed
under the new agreement bear interest at the prime rate plus
2%.
At April 30, 1995, the Company had borrowed $5,222,000 under
the working capital facility, including $91,000 for letters of
credit.
Long-term debt at April 30, 1995 and July 31, 1994 consisted
of (in thousands):
April 30, July 31,
1995 1994
------ ------
Term Loans $ 4,778 $ 6,668
Subordinated Debt 1,054 1,054
------ ------
5,832 7,722
Capital leases and other 957 1,193
------ ------
6,789 8,915
Less current portion (2,921) (3,153)
------ ------
Long-term debt $ 3,868 $ 5,762
====== ======
The amended credit facility requires the Company to maintain a
ratio of adjusted earnings to interest expense of 1.5 to 1 at
April 30, 1995 and 2.0 to 1 thereafter, a ratio of adjusted
earning to fixed charges of 1.5 to 1 beginning July 31, 1995
and a debt to equity ratio of 1.2 to 1.
5
As part of the amended credit agreement, Datability, Inc., a
wholly-owned subsidiary of the Company, was required to amend
the subordinated debt agreement. This amendment reduced the
principal payment due May 6, 1995 to $75,775, with additional
principal payments allowed only after the term loans have been
reduced by $3,000,000. All other terms remain unchanged.
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 nine months of fiscal 1995, the Company generated
cash of $1,548,000 from operating activities. Non-cash expenses of
$3,059,000 (including depreciation and amortization of $3,776,000)
plus a reduction in accounts receivable of $2,933,000 and an increase
in accounts payable of approximately $1,048,000 offset an operating
loss of $3,810,000 and an increase in inventory of $982,000. The
decrease in accounts receivable is the result of normal collection of
earlier sales and lower sales volume. The increase in accounts
payable is the result of better management of payments to vendors.
The increase in inventories of $982,000 for the first nine months of
fiscal year 1995 is due to lower than expected sales in April 1995.
The increase is partially offset by a reduction in inventories of
products being phased out. The Company regularly provides a reserve
for products which are obsolete and no unusual write-offs are expected
as a result of the phase out of older products.
The Company has renegotiated its credit agreement with its principal
bank. As described in the Notes to Condensed Consolidated Financial
Statements, the working capital facility provides a maximum of
$5,500,000 and is scheduled to expire on December 31, 1995. At April
30, 1995 the Company had borrowed $5,222,000.
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 transactions occur, some portion of
the cash generated will be used to reduce the amount borrowed from its
principal bank.
The ability of the Company to generate adequate cash for operational
and capital needs is dependent on the success of the Company to
increase sales of its data communications products, of which several
have been introduced in fiscal 1995, along with the sale of the
Technipower product lines.
RESULTS OF OPERATIONS
During the third quarter of fiscal 1995, the Company's net revenues
were $14,835,000 compared to $18,448,000 in the third quarter of 1994,
or a decrease of $3,613,000 (19%). Revenues for the first nine months
of fiscal 1995 were $45,477,000 compared to $55,768,000 for the same
period in fiscal 1994, a decrease of $10,291,000 (18%). Revenues for
both the three and nine months of fiscal 1995 are lower than the prior
year's comparable revenues because customers have been holding orders
awaiting the release of the newer V.34 modems and because there were
lower than expected shipments of new wide area networking technology
products. The Company began shipping, in limited quantities, V.34
modems during the third quarter.
6
Gross margins for the third quarter of fiscal 1995 decreased to 42%
from 44% in the second quarter. Gross margins for the nine months of
fiscal 1995 were 44% compared to 47% for the nine months of fiscal
1994. The decline in margins is the result of lower production
volumes which generated higher unfavorable manufacturing variances in
fiscal 1995 compared to fiscal 1994 and in the fiscal 1995 third
quarter, start-up manufacturing costs on the newer V.34 modems along
with lower margins on products being phased out.
Selling, general and administrative costs decreased by $440,000 (8%)
to $5,077,000 in the third quarter of fiscal 1995 from $5,517,000 in
the third quarter of fiscal 1994. For the first nine months, selling,
general and administrative expenses were $15,642,000 compared to
$16,572,000 for the first nine months of fiscal 1994, or a decrease of
$930,000 (6%). The decrease was the result of eliminating several
administrative functions in the Carlstadt, New Jersey facility during
the first quarter of fiscal 1994, and the result of lower commissions
expense due to lower sales volume. These were partially offset by the
addition of international sales personnel.
Product development and engineering expenses for the third quarter of
1995 were $2,228,000 compared to $2,687,000 for the third quarter of
fiscal 1994, or a decrease of $459,000 (17%). For the first nine
months of fiscal 1995, product development and engineering expenses
were $6,850,000 compared to $7,706,000 or a decrease of $856,000
(11%). 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.
Additional reductions in payroll costs were made during the third
quarter of fiscal 1995.
Interest expense for the first nine months of fiscal 1995 was $908,000
compared to $636,000 for the same period in fiscal 1994. The increase
in the prime interest rate from 7.0% in fiscal 1994 to 9.0% in the
third quarter of fiscal 1995 combined with the increase in the rate
charged by the Company's principal bank from prime plus 1/2% to prime
plus 2% has been the reason for the increased interest expense for
both three and nine month periods.
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.
A review in the third quarter of fiscal 1995 indicates no additional
benefit was available for the three months ending April 30, 1995.
7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On December 24, 1994 the Company filed a complaint against
Network Systems Corporation of Minneapolis, Minnesota ("NSC") in the
Circuit Court for Montgomery County, Maryland. The litigation arises
out of a contract in which the Company agreed to develop certain
computer hardware and software to NSC's specifications. The Company
alleges breach of contract, fraudulent inducement and defamation and
is seeking specific performance, compensatory damages of $2,000,000
and punitive damages of $5,000,000. On March 28, 1995 NSC filed an
answer and counterclaim in which NSC alleges negligent
misrepresentation, fraud, and breach of the contract by the Company.
NSC is seeking recession of the contract, restitution of monies paid
by NSC to the Company, compensatory damages of $5,000,000 and punitive
damages in an unspecified amount. The Company believes the
counterclaim of NSC is without merit.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of the shareholders of the Company was held on
March 22, 1995, at which time the shareholders elected two Class II
directors listed in the proxy statement. The vote was:
Directors IN FAVOR WITHHELD
--------- ---------- ----------
John P. Lowe, Jr. 6,813,269 83,634
Michael H. Newlin 6,840,116 56,787
Item 6. Exhibits and Reports on Form 8-K
Exhibits
--------
4.01 Second Amended and Restated Credit Agreement dated
as of April 25, 1995 to the Amended and Restated
Credit Agreement dated as of May 6, 1993 between
Penril Datacomm Networks, Inc. and Signet
Bank/Maryland
4.02 Amendment No. 1 dated as of April 25, 1995 to the
Subordination Agreement dated as of May 6, 1993,
among Howard International Corporation, John
Howard, Signet Bank/Maryland, and Datability, Inc.
Reports on Form 8-K
-------------------
None
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.
-------------------------------------------
(Registrant)
DATE: June 14, 1995 BY:/s/ Henry D. Epstein
-----------------------------------
Henry D. Epstein
Chief Executive Officer and
Chairman of the Board of Directors
DATE: June 14, 1995 BY:/s/ Richard D. Rose
-----------------------------------------
Richard D. Rose
Chief Financial Officer
8