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 OCTOBER 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
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Common Stock, $.01 par value,
9,155,852 shares outstanding
as of November 30, 1995
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
October 31, July 31,
1995 1995
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CURRENT ASSETS (unaudited) (audited)
Cash and cash equivalents $ 3,597 $ 1,087
Accounts receivable, net 11,421 14,766
Inventories-
Raw materials 7,124 6,930
Work in process 481 1,458
Finished goods 8,174 5,692
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15,779 14,080
Deferred income taxes 1,700 1,700
Net assets in discontinued operations 1,613 1,376
Other current assets 898 803
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TOTAL CURRENT ASSETS 35,008 33,812
Property, equipment and technology, net 2,798 3,122
Excess of cost over net assets acquired, net 5,506 5,689
Other assets 2,333 2,509
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TOTAL ASSETS $ 45,645 $ 45,132
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowing $ 4,335 $ 5,095
Current portion of long-term debt 3,159 5,164
Accounts payable 7,177 8,673
Accrued expenses 2,042 3,218
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TOTAL CURRENT LIABILITIES 16,713 22,150
Long-term debt, net of current portion 441 517
Other noncurrent liabilities 728 742
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TOTAL LIABILITIES 17,882 23,409
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value 92 76
Additional paid-in capital 30,026 22,384
Retained earnings (2,263) (677)
Equity adjustments (92) (60)
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TOTAL SHAREHOLDERS' EQUITY 27,763 21,723
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 45,645 $ 45,132
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See notes to condensed consolidated financial statements.
Item 1. Financial Statements (continued)
PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - in thousands, except per share amounts)
Three Months Ended
October 31,
1995 1994
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NET REVENUES FROM CONTINUING OPERATIONS $ 11,084 $ 14,556
COSTS AND EXPENSES
Cost of revenues 5,735 7,710
Selling, general and administrative 4,668 5,041
Product development and engineering 1,810 2,119
Amortization of cost over
net assets acquired 183 212
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12,396 15,082
OPERATING LOSS (1,312) (526)
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OTHER EXPENSE
Interest expense (272) (256)
Other, net (2) (76)
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(274) (332)
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (1,586) (858)
Benefit for income taxes -- 244
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NET LOSS FROM CONTINUING OPERATIONS $ (1,586) $ (614)
Loss from Discontinued Operations
net of income taxes -- (360)
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NET LOSS $ (1,586) $ (974)
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Net loss per common and equivalent share
Continuing operations $ (.17) $ (.08)
Discontinued operations -- (.05)
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$ (.17) $ (.13)
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Shares used in per share calculation 9,113 7,534
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See notes to condensed consolidated financial statements.
PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - in thousands)
For the Three
Months Ended October 31,
1995 1994
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CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES
Net loss from operations $ (1,586) $ (614)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 972 1,109
Benefit for income tax -- (244)
Other (245) (331)
Decrease (increase) in accounts receivable 3,347 (384)
Increase in inventories (1,700) (335)
Increase in other current assets (95) 29
Increase (decrease) in accounts payable (1,498) 370
Increase (decrease) in other current liabilities (1,175) (902)
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Net cash provided by (used in) operating activities (1,980) (1,302)
CASH FLOWS FROM DISCONTINUED OPERATIONS
Loss from discontinued operations (423) (360)
Non-cash charges and changes in working capital 205 351
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Net cash used in discontinued operations (218) (9)
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for purchased technology -- (20)
Expenditures for property and equipment (76) (149)
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Net cash used in investing activities (76) (208)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under line of credit (760) 1,325
Payments on long-term debt (2,081) (737)
Issuance of common stock 7,657 14
Other (32) 260
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Net cash provided by financing activities 4,784 862
CASH AND CASH EQUIVALENTS
AT THE BEGINNING OF THE PERIOD 1,087 995
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CASH AND CASH EQUIVALENTS
AT THE END OF THE PERIOD $ 3,597 $ 377
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See notes to condensed consolidated financial statements.
PENRIL DATACOMM NETWORKS, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months
Ended October 31, 1994 and 1995
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, 1995, 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 October 31, 1995 and
the results of operations for the three months ended October 31, 1994
and 1995. 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 October 31, 1995 presentation.
The Company's policy is to maintain its uninvested cash at minimal
levels. Cash and cash equivalents include highly liquid debt
instruments purchased with a maturity of three months or less.
2. On September 22, 1995, the Company issued an aggregate of 1,465,000
shares of its unregistered common stock to Pequot Partners Fund, L.P.,
Pequot Endowment Fund, L.P and Pequot International Fund, Inc.
(collectively the "Investors") for $7,325,000 in a private transaction.
The Company filed a shelf registration with the Securities and Exchange
Commission on November 20, 1995 covering the shares issued in the
transaction. See footnote 8 to the financial statements of the
Company's Annual Report on form 10-K for details of the stock
registration agreement. In addition, on October 5, 1995, the Company
completed the sale of 50,000 shares of its unregistered common stock to
Cramer Partners, L.P. for $250,000.
3. Previously reported financial statements have been restated to reflect
the Company's wholly-owned subsidiary, Technipower, Inc ("Technipower")
as a discontinued operation. The following is a summary of operating
information for Technipower(in thousands):
Three Months ending
October 31,
1995 1994
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Revenues $ 735 $ 828
Loss from operations
before income taxes (423) (360)
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Because the Company expects to retain the tax benefits associated with
the discontinued operation, no income tax benefit has been recorded for
any year.
The loss from operations for the first quarter of fiscal 1996 was
included in the accrual in fiscal 1995 of $1,000,000 for anticipated
operating losses through the disposal date of Technipower.
Net assets of the discontinued operations consist of the following (in
thousands):
October 31, July 31,
1995 1995
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Current assets $ 3,088 $ 2,784
Current liabilities 691 650
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Net current assets 2,397 2,134
Property, plant and equipment, net 346 375
Other non-current tangible assets, net 43 22
Non-current liabilities 10 10
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Net tangible assets 2,776 2,521
Intangible assets, net 238 255
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3,014 2,776
Estimated loss on disposal (977) (1,400)
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$ 2,037 $ 1,376
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4. In August 1995, Henry D. Epstein exercised 25,000 Class E warrants
which where issued in March 1987. These warrants were issued with a
per share exercise price of $3.625, the fair market value of the
Company's common shares on the date the warrants were issued. Mr.
Epstein exercised the warrants by remitting 12,719 shares with a fair
market value of $7.125 per share on the date of the exercise.
5. The Company amended the credit agreement with its principal bank on
September 19, 1995. The agreement as amended, provides for a working
capital facility of $5,500,000 with borrowings based on qualified
accounts receivable and inventory. Interest accrues at the bank's
prime rate plus 2% with a commitment fee of 3/8% assessed on the unused
portion of the facility. See footnote 5 to the financial statements of
the Company's Annual Report on form 10-K for details of the amended
agreement. The bank has agreed in principle to extend the due date of
$1,500,000 of the term note to March 31, 1996.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
In the first quarter of fiscal 1996, the Company completed the sale
of 1,515,000 shares of the Company's common stock for $7,575,000 in a
private placement to Pequot Partners Fund, L.P., Pequot Endowment
Fund, L.P, Pequot International Fund, Inc. and Cramer Partners, L.P.
The proceeds were used to repay term debt and for general working
capital needs. See footnote 8 of the Company's report on form 10-K
for details on the transaction.
As a result of the above transaction, the Company was able to reduce
accounts payable by $1,496,000 and fund the loss of $1,586,000
(net of depreciation and other non-cash items of $727,000 but
including cash used for discontinued operations of $642,000). Also
contributing to cash flow was the reduction of accounts receivable of
$3,347,000 keeping accounts receivable in line with the sales levels.
Inventories increased by $1,700,000 as a result of lower than expected
sales during October 1995. The Company is reviewing inventory
positions in order to bring inventory levels back in line with
revenues and to minimize the impact from the introduction of new
products and the phase-out of older products.
In conjunction with the sale of common shares noted above, the Company
amended the credit agreement with its principal bank. See note 5 to
the financial statements of the Company's Annual Report on form 10-K
for details of the amended agreement. The bank has agreed in
principle to extend the due date of $1,500,000 of the term note to
March 31, 1996. Although there are no assurances of success, the
Company is currently attempting to sell the Technipower subsidiary and
is also investigating the possible sale of additional equity of the
Company to finance the growth of new products including the Access
Beyond (trademark) product line, and to reduce debt.
The ability of the Company to generate adequate cash for ongoing
operational and capital needs beyond the immediate needs is dependent
on the success of the Company to increase sales of its data
communications products coupled with the sale of assets, In addition,
it may be necessary to raise cash from other sources including sales
of securities.
RESULTS OF OPERATIONS
Sales for Penril Datability Networks, the Company's data
communications division, were down $3,700,000 from the year earlier
comparative quarter as a result of lower sales in the domestic market
place as a result of lower purchases by some of the Company's larger
original equipment manufacturing customers and the declining market
for some of the Company's older products. In addition, the Company
experienced some delays in shipments of V.34 modems to several
international customers until technical issues had been resolved.
These issues were resolved during the quarter. These lower sales were
only partially offset by an increase in licensing revenue.
Gross margins for the first quarter of fiscal 1996 increased to 48%
from 47% for the first quarter of fiscal 1995. Gross margins on
product sales declined to 41% because of lower manufacturing
efficiencies in fiscal 1996 compared to fiscal 1995 and price
competition experienced in data communications products. More than
offsetting this decline in gross margins is the increase in licensing
revenues noted above which carry no associated costs.
For the fiscal 1995 first quarter, the Company recorded a tax benefit
of $244,000 as a result of the loss before income taxes. The benefit
was based on the annualized effective tax rate projected for the full
fiscal year. For fiscal 1996, the Company has reviewed the deferred
tax asset for realizability. This review indicated no adjustment
should be made to the asset during the first quarter of fiscal 1996.
In July 1995, the Company decided to sell the Technipower subsidiary
and consequently classified it as a discontinued business. As a
result, the loss from Technipower for the fiscal 1995 first quarter
has been reclassified. The loss for the fiscal 1996 first quarter of
$423,000 was accrued at the end of fiscal 1995 and is included in the
net assets of the discontinued operations.
In summary, as a result of the lower revenues and decrease in product
gross margins accompanied by inefficiencies caused by the lower
volumes, the Company had a loss from continuing operations of
$1,586,000 ($.17 per share) for the first quarter of fiscal 1996.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibits
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None
Reports on Form 8-K
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On October 6, 1995 the Company filed a report on Form 8-K reporting
the sale on September 22, 1995 of an aggregate 1,465,000 shares of its
unregistered common stock.
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: December 15, 1995 BY:/s/ Henry D. Epstein
-----------------------------------
Henry D. Epstein
Chief Executive Officer and
Chairman of the Board of Directors
DATE: December 15, 1995 BY:/s/ Richard D. Rose
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Richard D. Rose
Vice President and
Chief Financial Officer