SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q/A QUARTERLY REPORT Pursuant to 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 16,844 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. 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. 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. 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. 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 The Company manufactures products for three distinct business segments: data communcations, power regulating equipment, and electronic instrumentation. 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 power regulating equipment business which is produced by 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 Revenues for the data communications segment for the third quarter of fiscal 1995 were $12,682,000 compared to $15,573,000 in the third quarter of 1994, a decrease of $2,891,000 (19%). Revenues for the first nine months of fiscal 1995 were $38,861,000 compared to $46,720,000 in fiscal 1994, a decrease of $7,859,000 (17%). 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. Revenues for the power regulating equipment segment for the third quarter of fiscal 1995 were $782,000 compared to $1,316,000 in the third quarter of 1994, a decrease of $534,000 (41%). Revenues for the first nine months of fiscal 1995 were $2,542,000 compared to $4,369,000 in fiscal 1994, a decrease of $1,827,000 (42%). Both three and nine months of fiscal 1995 are lower than prior year's comparable revenues because there were fewer contracts for UPS installations. Revenues for the electronic instrumentation segment for the third quarter of fiscal 1995 was $1,371,000 compared to $1,559,000 in the third quarter of 1994, a decrease of $188,000 (12%). Revenues for the first nine months of fiscal 1995 were $4,074,000 compared to $4,679,000 in fiscal 1994, a decrease of $605,000 (12%). The decrease in both three and nine months of fiscal 1995 are due to fewer orders for large system installation integrated systems. Gross margins in the data communications segment for the nine months of fiscal 1995 were 46% compared to 51% for the nine months of fiscal 1994. The decline in margins was 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. Gross margins in the UPS segment for the nine months of fiscal 1995 were 12% compared to 21% for the nine months of fiscal 1994. The decline in margins was 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. Gross margins for the electronic instrumentation segment for the nine months of fiscal 1995 remained unchanged at 44% compared to the nine months of fiscal 1994. Selling, general and administrative costs for the Company decreased by $440,000 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 primarily the result of eliminating several administrative functions, within the data communications segment, 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 within the data communications segment. 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 within the data communications segment 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. 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: February 16, 1996 BY:/s/ Henry D. Epstein ----------------------------------- Henry D. Epstein Chief Executive Officer and Chairman of the Board of Directors DATE: February 16, 1996 BY:/s/ Richard D. Rose ----------------------------------------- Richard D. Rose Chief Financial Officer