SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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, 1996
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,
10,543,369 shares outstanding
as of June 6, 1996
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,
1996 1995
------------ ----------
CURRENT ASSETS (unaudited) (audited)
Cash and cash equivalents $ 1,675 $ 1,087
Accounts receivable, net 9,143 14,766
Inventories-
Raw materials 8,250 6,930
Work in process 1,810 1,458
Finished goods 5,978 5,692
------- -------
16,038 14,080
Deferred income taxes 1,700 1,700
Net assets of discontinued operations 2,728 1,376
Other current assets 446 803
------- -------
TOTAL CURRENT ASSETS 31,730 33,812
Property, equipment and technology, net 2,754 3,122
Excess of cost over net assets acquired, net 5,138 5,689
Other assets 2,120 2,509
-------- --------
TOTAL ASSETS $ 41,742 $ 45,132
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowing $ 4,000 $ 5,095
Current portion of long-term debt 1,045 5,164
Accounts payable 6,990 8,673
Deferred revenue -- 1,245
Other accrued expenses 1,483 1,973
------- -------
TOTAL CURRENT LIABILITIES 13,518 22,150
Long-term debt, net of current portion 359 517
Other noncurrent liabilities 748 742
------- -------
TOTAL LIABILITIES 14,625 23,409
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value 103 76
Additional paid-in capital 36,531 22,384
Retained earnings (9,285) (677)
Equity adjustments (232) (60)
------- -------
TOTAL SHAREHOLDERS' EQUITY 27,117 21,723
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 41,742 $ 45,132
======== ========
See notes to condensed consolidated financial statements.
PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - in thousands, except per share amounts)
Three Months Ended Nine months Ended
April 30, April 30,
1996 1995 1996 1995
------ ------- ------- -------
NET REVENUES FROM
CONTINUING OPERATIONS $ 10,540 $ 14,053 $ 31,180 $ 42,935
COSTS AND EXPENSES
Cost of revenues 6,676 7,868 18,518 23,390
Selling, general and administrative 4,736 4,764 14,311 14,730
Product development and engineering 1,944 1,983 5,791 6,268
Amortization of cost over
net assets acquired 183 212 550 636
------- ------- ------- -------
13,539 14,827 39,170 45,024
OPERATING LOSS (2,999) (774) (7,990) (2,089)
------- ------- ------- -------
OTHER EXPENSE
Interest expense (96) (374) (572) (908)
Other income(expense), net (50) (18) (46) (97)
------- ------- ------- -------
(146) (392) (618) (1,005)
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (3,145) (1,166) (8,608) (3,094)
Benefit from income taxes -- -- -- 528
------- ------- ------- -------
NET LOSS FROM
CONTINUING OPERATIONS $ (3,145) $ (1,166) $ (8,608) $ (2,566)
Loss from Discontinued Operations
net of income taxes -- (532) -- (1,244)
------- ------- ------- -------
NET LOSS $ (3,145) $ (1,698) $ (8,608) $ (3,810)
======= ======= ======= =======
Net income (loss) per common and
equivalent share
Continuing operations $ (.31) $ (.15) $ (.96) $ (.34)
Discontinued operations -- (.07) -- (.17)
------- ------- ------- -------
$ (.31) $ (.22) $ (.96) $ (.51)
======= ======= ======= =======
Shares used in per share calculation 10,134 7,534 8,964 7,504
======== ======= ======= =======
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,
1996 1995
-------- --------
CASH FLOWS FROM CONTINUING OPERATIONS
Net loss from operations $ (8,608) $ (3,810)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,790 3,546
Benefit for income tax -- (528)
Other (493) (392)
Decrease in accounts receivable 5,623 2,673
Increase in inventories (1,958) (577)
Decrease (increase) in other current assets 357 (65)
Increase (decrease) in accounts payable (1,683) 972
Decrease in other current liabilities (1,735) (939)
------ ------
Net cash provided by (used in) continuing operations (5,707) 880
CASH FLOWS FROM DISCONTINUED OPERATIONS
Loss from discontinued operations (1,054) (1,244)
Non-cash charges and changes in working capital (298) 1,715
------ ------
Net cash provided by (used in) discontinued operations (1,352) 471
------ ------
Net cash provided by (used in) operations (7,059) 1,351
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property and equipment (981) (1,183)
------ ------
Net cash used in investing activities (981) (1,183)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under line of credit (1,095) 1,900
Payments on long-term debt (4,278) (2,204)
Issuance of common stock 14,174 133
Other (173) 169
------ ------
Net cash provided by financing activities 8,628 (2)
CASH AT THE BEGINNING OF THE PERIOD 1,087 995
------ ------
CASH AT THE END OF THE PERIOD $ 1,675 $ 1,161
======= =======
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, 1996 and 1995
1. The accompanying condensed consolidated financial statements, which should
be read in conjunction with the Annual Report on Form 10-K/A 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 April 30, 1996 and the results of operations for
the nine months ended April 30, 1996 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 April 30, 1996 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, LP and Pequot International Fund, Inc. (collectively the
"Investors") for $7,325,000 in a private transaction. As required by the
Purchase Agreement between the Investors and the Company, a shelf
registration was filed with the Securities and Exchange Commission which
became effective on February 28, 1996. See footnote 9 to the financial
statements of the Company's Annual Report on form 10-K/A for details of the
transaction. 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.
In the third quarter of fiscal 1996, the Company issued 810,000 of its
unregistered common stock in private placements which generated $5,496,000.
In the fourth quarter of fiscal 1996, the Company issued 282,267 shares of
its unregistered common stock in private placements which generated
$2,004,000.
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 Ended Nine months Ended
April 30, April 30,
1996 1995 1996 1995
------ ------ ------ ------
Revenues $ 1,234 $ 782 $ 3,101 $ 2,542
Loss from operations
before income taxes (422) (532) (1,054) (1,244)
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 nine months of fiscal 1996 was
included in the loss on disposal of discontinued operations in fiscal 1995.
Net assets of the discontinued operations consist of the following (in
thousands):
April 30, July 31,
1996 1995
----- -----
Current assets $ 3,591 $ 2,784
Current liabilities (1,055) (650)
----- -----
Net current assets 2,536 2,134
Property, plant and equipment, net 304 375
Other non-current tangible assets, net 36 22
Non-current liabilities (6) (10)
----- -----
Net tangible assets 2,870 2,521
Intangible assets, net 205 255
----- -----
3,075 2,776
Estimated loss on disposal (347) (1,400)
----- -----
$ 2,728 $ 1,376
===== =====
4. In August 1995, Henry D. Epstein, Chairman, exercised 25,000 Class E
warrants issued in October 1992. 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.
On December 13, 1995, the Company adopted the 1995 Long-Term Stock Option
Incentive Plan (the "1995 Plan") to replace the 1986 Incentive Plan which
expires on October 8, 1996. The stockholders of the Company approved the
1995 Plan at the Annual Meeting held April 10, 1996. Under the 1995 Plan,
which will terminate December 13, 2005, awards may be granted to key
employees of the Company and its subsidiaries in one or more of the
following forms: (I)Non-qualified stock options; (ii)Incentive Stock
Options; and (iii)Restricted Stock Awards. The option price of shares of
Common Stock will not be less than 100% (110% in the case of Incentive
Stock Options granted to optionees holding more than 10% of the voting
stock of the Company at the date of grant) of the fair market value of
shares of Common Stock on the date of grant. No option will be exercisable
more than ten years (five years in the case of Incentive Stock Options
granted to optionees holding more than 10% of the voting stock of the
Company on the date of grant) from the date it is granted. The Company has
reserved 1,000,000 shares for issuance under the 1995 Plan.
5. On March 15, 1996 the Company amended the credit agreement with its
principal bank. The new agreement provides for a maximum working capital
facility of $5,500,000 with borrowings based on qualified accounts
receivable and secured by substantially all the Company's assets. 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. In the event the facility
is cancelled prior to its expiration, there is a fee due the bank equal to
3% of the total facility. The agreement expires March 31, 1997. As of
April 30, 1996, the Company had $5,412,000 available of which the Company
had utilized $4,090,000.
As of March 7, 1996, the Company had repaid all outstanding term debt with
its principal bank.
Subsequent to April 30, 1996, the Company repaid its outstanding subordinated
debt of $805,000. This amount was included in the Current portion of
long-term debt as of April 30, 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, LP, 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 9 of the Company's report on form 10-K/A
for details of the transaction.
In the third quarter of fiscal 1996, the Company issued 810,000 shares
of its unregistered common stock in private placements which generated
$5,496,000 and in the fourth quarter of fiscal 1996 the Company issued
282,000 shares of its unregistered common stock in private placements
generating $2,004,000.
As a result of these financings, the Company was able to reduce
accounts payable by $1,683,000 and fund the loss of $8,608,000
(including depreciation and other non-cash items of $2,790,000 but
excluding cash used for discontinued operations of $1,352,000). Also
contributing to cash flow was the reduction of accounts receivable of
$5,623,000 keeping accounts receivable in line with the sales levels.
Inventories increased by $1,958,000 as a result of lower than expected
sales during the first nine months of fiscal 1996, and because of a
build-up of inventory for the new Access Beyond product line. As a
result of efforts begun during the third quarter, inventory levels at
April 30, 1996 were approximately the same as at January 31, 1996.
The Company is working with several vendors on programs that should
result in lower inventories by the end of the fourth quarter of fiscal
1996.
A portion of the proceeds from the sale of common stock noted above
was used to reduce term debt with the Company's principal bank and,
subsequent to April 30, 1996, to repay the principal balance of the
subordinated debt of $805,000. As of March 7, 1996, the Company had
re-paid all of the outstanding bank term debt. As discussed in Note 5
to the Company's condensed consolidated financial statements, on March
15, 1996, the credit agreement with its principal bank was amended.
The amended agreement which expires March 31, 1997, provides for a
maximum working capital facility of $5,500,000 based on qualified
accounts receivable with interest at the bank's prime rate plus 2%.
As of April 30, 1996, the Company had utilized $4,090,00 of the
facility. See Note 5 for the terms of the new working capital
agreement.
The ability of the Company to generate adequate cash for ongoing
operational and capital needs is dependent on its success in
increasing sales of its data communications products coupled with the
sale of assets. The Company is currently attempting to sell the
Technipower subsidiary. In addition, it may be necessary to raise
cash from other sources including sales of securities.
RESULTS OF OPERATIONS
For the Company's data communications segment revenue increased in the
third quarter of fiscal 1996 when compared to the second quarter of
fiscal 1996. Sales for modems, WAN, and OEM products improved over
last quarter. In addition, the Company began shipping its new Access
Beyond products during the third quarter. Revenue for the third
quarter of fiscal 1996 was $8,973,000 compared to $7,692,000 for the
second quarter of fiscal 1996. Revenue for the third quarter of
fiscal 1996 decreased $3,513,000 compared to the third quarter of
fiscal 1995, and for the first nine months of fiscal 1996 decreased
$11,755,000 compared to the same period of fiscal 1995. These
decreases in revenue were the result of fewer orders by some of the
Company's OEM customers, slower than expected sales of the Company's
new V.34 modem, and a declining market for the Company's older product
lines.
Revenues for the Company's electronic instrumentation segment
increased $196,000 (14%) in the third quarter of fiscal 1996 compared
to the same period in fiscal 1995, and increased $786,000 (19%) in the
first nine months of fiscal 1996 compared to the same period in fiscal
1995. New orders for large system integration installations and new
orders from original equipment manufacturers are the main reasons for
these increases. Revenue decreased $298,000 in the third quarter of
fiscal 1996 compared to the second quarter of fiscal 1996 because of
the federal government budget delays which prevented several agencies
from ordering products due to lack of funding.
Gross profit margins for the data communications segment improved from
35% in the second quarter to 37% in the third quarter as a result of
product mix. Gross margins declined to 41% in the first nine months of
fiscal 1996 from 46% in the first nine months of fiscal 1995 and in
the third quarter of fiscal 1996 declined to 37% compared to 44% in
the same period in fiscal 1995. Gross margins on product sales of the
electronic instrumentation segment declined to 36% from 41% in the
prior quarter. Gross margins on product sales of the electronic
instrumentation segment declined to 39% in the first nine months of
fiscal 1996 from 44% during the same period in fiscal 1995. Margin
declines in both segments was due to pricing pressures from the
competition.
Selling, general and administrative expenses for the data
communications segment decreased $723,000 (6%) to $11,551,000 in the
first nine months of fiscal 1996 from $12,274,000 for the same period
in fiscal 1995. Reductions in personnel costs accounted for $486,000
of the decreased expenditures. Expenses for the third quarter of
fiscal 1996 were $4,025,000 which remained level with expenses for the
prior quarter.
Selling, general and administrative expenses for the Company's
electronic instrumentation segment increased $130,000 to $1,227,000 in
the first nine months of fiscal 1996 from $1,097,000 in the first
nine months of fiscal 1995. Increases in sales commissions and
administrative personnel costs associated with the new facilities in
Johnstown, New York accounted for the increased costs. Expenses for
the third quarter of fiscal 1996 decreased to $345,000 from $452,000
in the prior quarter, due to lower commissions and promotional
expenses.
Product development and engineering expenses in the data
communications segment were $5,299,000 in the first nine months of
fiscal 1996 compared to $5,666,000 in the first nine months of fiscal
1995. The decrease is primarily attributable to lower personnel
expenses as a result of the Company's cost reduction efforts during
fiscal 1995. Product development costs for the third quarter of fiscal
1996 compared to fiscal 1995 were approximately the same with the
third quarter of fiscal 1996 product development expenses of
$1,775,000 compared to $1,747,000 for the same period in fiscal 1995.
Product development and engineering costs in the electronic
instrumentation segment were $409,000 in the first nine months of
fiscal 1996 compared to $602,000 in the first nine months of fiscal
1995, a decrease of $193,000. This decrease is a result of
engineering efforts related to the large systems orders noted above.
Interest expense for the first nine months of fiscal 1996 declined
$336,000 compared with the same period in fiscal 1995. In the third
quarter it declined $278,000 compared to the third quarter of last
fiscal year. The repayment of all term debt during the third quarter
resulted in this decrease of interest expense.
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 first nine months of fiscal
1995 has been reclassified. The $1,054,000 loss for the first nine
months of fiscal 1996 was accrued at the end of fiscal 1995 and is
included in the net assets of the discontinued operations.
Improved revenues and margins in the third quarter of fiscal 1996
improved the results for the data communications segment. The segment
had a loss of $3,168,000 for the third quarter of fiscal 1996 compared
to a loss of $3,999,000 for the second quarter of fiscal 1996.
Results for the third quarter and first nine months of fiscal 1996
were down compared to the same periods last year. Lower revenues and
decreased margins contributed to a greater loss for the third quarter
of fiscal 1996 compared to third quarter losses of fiscal 1995 of
$1,119,000. The segment had a loss of $8,764,000 for the first nine
months of fiscal 1996 compared to a loss of $3,202,000 for the same
period in fiscal 1995.
Results for the electronic instrumentation segment improved in the
third quarter of fiscal 1996 with net income of $23,000 compared to a
loss of $47,000 for the same period last fiscal year. However, the
decrease in revenue in the third quarter of fiscal 1996 caused net
income to decline when compared to second quarter net income of
$122,000. Results for the first nine months of fiscal 1996 improved
with net income of $156,000 compared to $108,000 for the same period
in fiscal 1995.
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the shareholders of the Company was held on
April 10, 1996, at which time the shareholders elected two Class III
directors listed in the proxy statement. The vote was:
Directors In Favor Withheld
------------------ ------------ ------------
Henry D. Epstein 9,293,527 164,574
Howard M. Schneider 9,303,920 154,181
The shareholders also voted to approve the Company's 1995 Long-Term
Incentive Plan which will replace the expiring 1986 Incentive Plan.
The vote was:
Abstain/
In Favor Against Not Voted
------------ ----------- ------------
5,159,952 324,948 3,973,201
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
--------
4.01 Third Amended and Restated Credit Agreement dated
as of March 15, 1996 between Penril DataComm
Networks, Inc. and Signet Bank/Maryland
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, 1996 BY:/s/ Henry D. Epstein
------------------------------
Henry D. Epstein
Chief Executive Officer and
Chairman of the Board of Directors
DATE: June 14, 1996 BY:/s/ Richard D. Rose
---------------------------
Richard D. Rose
Chief Financial Officer