SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED JULY 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
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of each class:
Common Stock, $.01 par value
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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
-----
As of October 18, 1995 the aggregate market value of the Company's voting
Common Stock held by non-affiliates of the Company was approximately $52
million.
As of October 18, 1995 there were 9,058,552 shares of the registrant's Common
Stock, $.01 par value outstanding.
<PAGE>
PART I
ITEM 1. BUSINESS
Penril DataComm Networks, Inc. ("Penril" or the "Company") develops and
markets network access devices which enable local, remote or mobile users to
access network resources located at remote sites, central sites or any other
point in the network. The Company possesses each of the technologies needed
for a complete network access solution including: remote Local Area Network
(LAN) access, high performance modems and modem channel banks, bridges and
routers, host access from asynchronous terminals and multiplexors for
efficient access to the Wide Area Network (WAN). In addition, the Company's
wholly-owned subsidiary, Electro-Metrics, Inc. (EMI) specializes in the
production of sophisticated high frequency electronic instrumentation
equipment.
During the fourth quarter of fiscal 1995, the Board of Directors made the
decision to sell the Technipower, Inc. subsidiary. Consequently, Technipower
has been classified as a discontinued operation. Unless otherwise stated,
the information contained in this Form 10-K describes the status of the
continuing operations of the Company although the effect of the discontinued
operation is disclosed.
DATA COMMUNICATIONS
Revenues from data communications products accounted for 90%, 91 % and 87% of
the Company's consolidated revenues in the fiscal years ended July 31, 1995,
1994 and 1993, respectively. These revenues come through a distribution
channel composed of value-added resellers (VARs), original equipment
manufacturers (OEMs) and selected distributors in more than 40 countries.
Sales directly to end-user customers accounted for less than 10% of the
Company's revenues.
PRODUCTS
Penril offers its customers a wide array of network access products. Since
the acquisition of Datability Inc. in May 1993, the Company has sought to
create an integrated product line which combines the two companies'
strengths. This combined technology base is being realized in a single,
scaleable hardware platform known as "AccessBeyond"(trademark). Thus, a
single hardware platform may include remote LAN access, bridging/routing,
multiplexing or host access via the software running on it. Forming the
functional basis for "AccessBeyond" is Penril's existing product line which
is organized into four distinct areas:
LAN Access
High Speed Modems
T1 Customer Premise Equipment
Host Access
LAN Access Products
Linkup(trademark) Dial Access Server - The Linkup family of remote access
products provide both dial-in and dial-out LAN access for TCP/IP, DEC LAT and
IPX users. On the wide area network, Linkup's 4 and 8 port devices target
smaller sites requiring remote node support, while the 24 port model with
integrated modems supports larger installations. Linkup's asynchronous ports
support host access applications. The products include Microsoft Windows-
based client software along with comprehensive security and management
capabilities. To simplify installation, the Company provides Network-in-a-
Box(trademark), a pre-configured Linkup remote access solution with
everything required for quick and easy installation.
BRX Router - The BRX family includes high performance, modular switching
routers that provide up to 16 LAN ports and 2 WAN ports, and are offered in
either a free standing format or as a card for insertion into customer
equipment. The BRX also offers high performance store and forward switching
capabilities as evidenced by its 90,000 pps filtering and forwarding rate.
The key to the BRX product line is in the Constellation(trademark)
multiprotocol bridge/router software which provides a scaleable
routing/switching solution. Each BRX product is shipped with an integrated
management port which supports an SNMP-based network management software.
Constellation Multiprotocol Bridge/Routing Software - Constellation uses an
innovative software architecture for high performance bridging and routing
featuring one of the broadest suites of protocols available in the market
today (including IP, IPX, AppleTalk II, OSPF and RIP among others). WAN
support includes X.25, Frame Relay and HDLC. Penril also provides virtual
LAN software for advanced switching capabilities. The Company pioneered the
concept of Logical Bridge Routing, a methodology which enables network
managers to optimize bridge/router port configurations for efficient, high
performance networks. The software provides comprehensive network management
capabilities.
High Speed Modems
Penril's V.34bis modems offer the highest performance available today for
analog modems. Based on a proprietary DSP and controller design, Penril's
V.34bis modems offer many advanced features including data transmission
speeds up to 33,600 bits per second, protocol intelligent compression
performance (e.g. Internet Asynchronous PPP and SLIP) and remote software
upgradeability for implementation of future standards.
Modems are delivered in several form factors including desktop boxes and
modem cards which implement up to eight modems on a single board.
T1 Customer Premise Equipment
The Company offers a complete line of multiplexors (MUXs) ranging from
products which enable its MUX products to connect to LAN's, to large
enterprise devices providing up to 304 ports or 36 trunk lines. Penril MUX
products can function as a data PBX, an X.25 PAD, a statistical multiplexor,
a terminal server or any combination of these.
In the first quarter of fiscal 1996, the Company introduced the VCX 500, a
product that implements recently ported multiplexor software onto the
"AccessBeyond" hardware platform. This is the first product based on this
new architecture. One unique feature of the new architecture is the ability
in the future to swap cards which today perform a multiplexing function with
cards that will perform other functions such as routing, switching or remote
access. This means a customer could purchase the VCX 500 today to replace an
older MUX in a network and then upgrade the VCX 500 with routing, switching
or remote access functions as the customer's need for those functions arises.
Penril is the only MUX supplier with this capability.
Penril also supplies a channel bank product which provides channelized T1
support. In late 1994, the Company introduced the Cyclone product. This was
the first product to implement technology from both Penril and Datability.
Cyclone is a T1 channel bank packaged to include MUX and remote access
capability, providing flexible WAN and LAN connectivity.
Host Access
The Company is a leader in the market for host access (terminal server)
products. These products are multipurpose communication servers that combine
both wide area and local area networking capability in a modular, cost-
effective high performance chassis. The systems offer either single or
multiprotocol networking capabilities and a selection of interchangeable line
cards which provide a suite of WAN gateway and asynchronous communications
options.
Although the overall market for host access devices is in decline, the
Company continues to have success by integrating its host access functions
into the MUX and remote access products.
ELECTRONIC INSTRUMENTATION EQUIPMENT
Electronic instrumentation equipment products, which are sold by EMI, are
marketed by an effective combination of EMI's small direct sales force
driving a network of independent sales representatives to both commercial and
government agencies. Revenues from these products accounted for 10%, 9% and
13% of the Company's consolidated revenues in the fiscal years ended July 31,
1995, 1994 and 1993, respectively.
Electro-Metrics products incorporate technologies that detect, process and
measure very weak signals and provide accurate frequency discrimination over
a very wide frequency spectrum up to 60 gigahertz. EMI's test equipment
products measure and record electromagnetic field strength for testing
electromagnetic interference or electromagnetic susceptibility. The
equipment offers simple, automated test set-ups, data handling and recording
for operators with a minimum of skill and experience.
Recently, EMI has expanded its wideband radio technology to the design of
equipment for communications security and remote control applications in
satellite communications terminals for commercial as well as government
users. The acquisition in 1993 of a start-up company's patents and fiber
optic modem technology has given EMI an entry into the satellite
communications terminal control market. Electro-metrics has also identified
new strategic opportunities in test and compliance instrumentation for the
rapidly emerging wireless voice and data communications markets.
SUPPLIERS
Material and components for the Company's products are purchased from outside
suppliers. While most components are available from several suppliers, a few
are provided from sole-source vendors. The Company believes that in most
cases alternative sources of supply could be obtained within a reasonable
time period; however, an interruption in the supply of such components could
have a temporary adverse effect on the Company's operations.
PATENTS, COPYRIGHTS AND LICENSES
As with many companies in high technology industries, the Company owns or is
licensed under a number of patents and copyrights and may desire in the
future to obtain additional licenses related to its products. The Company
believes, based on industry practice, that any necessary licenses could be
obtained. The costs of such licenses may vary significantly depending on the
nature of the patent or copyright.
BACKLOG
A significant portion of data communications revenues are based on customer
purchase orders with immediate shipment requirements. Backlog, which tends
not to be significant in data communications products, is a result of the
occasional customer order with future scheduled shipment requirements or
misalignment of demand and production of a particular product. Because data
communications revenues constitute such a significant portion of the revenues
of the Company, it is the opinion of the Company's management that the dollar
amount of backlog at any given time is not indicative of the actual level of
revenues which will ultimately be realized during future periods.
Consequently, the Company's management believes that the amount of backlog is
not a material consideration in understanding the Company's business
operations.
COMPETITION
The Company encounters substantial competition in the marketing of its
products and many of its competitors have greater financial, marketing and
technical resources. Important competitive factors in the markets for the
Company's products are established customer base, product performance and
features, service and support as well as price. The Company believes that it
competes favorably with respect to these factors. There can be no assurance
that the Company's products will compete successfully with competitive
products that may be offered in the future or that aggressive pricing will
not negatively impact the profitability of the Company.
RESEARCH AND DEVELOPMENT
Under its own sponsorship, the Company is continuously engaged in the
development of new products as well as the development and enhancement of its
existing products. The Company expensed approximately $8,260,000 (14% of
consolidated revenues) for product development and engineering during fiscal
1995 compared to $9,567,000 (14% of consolidated revenues) in fiscal 1994 and
$6,373,000 (13% of consolidated revenues) in fiscal 1993.
ENVIRONMENTAL MATTERS
The Company's compliance with federal, state and local environmental laws has
had no material effect upon the Company's capital expenditures, earnings or
competitive position.
EMPLOYEES
As of July 31, 1995, the Company employed 324 full-time and 16 part-time
employees. The Company believes that its future success will depend largely
on its ability to retain certain key personnel and to recruit and retain
additional highly skilled employees who are in great demand. The Company has
employment contracts with certain officers, but does not have employment
contracts with its other employees. The Company has experienced no work
stoppages and believes that its employee relations are satisfactory.
INTERNATIONAL OPERATIONS
The Company has subsidiaries located in the United Kingdom and Hong Kong.
Reference is made to Note 10 of the Notes to Consolidated Financial
Statements contained in Part II, Item 8.
ITEM 2. PROPERTIES
The Company and its subsidiaries lease manufacturing, warehouse and office
facilities as follows:
Operation Location Size Lease Expires
- ----------------- -------------- ------------ --------------
Penril Datability Gaithersburg, MD 84,000 Sq. Ft. September, 1999
Penril Datability Carlstadt, NJ 44,403 Sq. Ft. September, 2001
Electro-Metrics Johnstown, NY 40,400 Sq. Ft. August, 2005
Penril Datability Basingstoke, England 6,800 Sq. Ft. August, 2006
Each location has separate space as required for manufacturing, engineering,
marketing and administrative activities adequate for present purposes. The
Company's executive offices are located in the Gaithersburg, Maryland
facility. In addition to the facilities mentioned above, the Company also
leases several sales offices throughout the United States.
ITEM 3. LEGAL PROCEEDINGS
On December 24, 1994, the Company filed a complaint against Network Systems
Corporation of Minneapolis, Minnesota ("NSC") in the Circuit Court of
Maryland for Montgomery County. 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 contract by the Company. NSC is
seeking recision 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. As of October 10, 1995, the litigation was in the
discovery stage. The Company believes the counterclaim of NSC is without
merit.
The Company has initiated a lawsuit against Standard Microsystems Corp., SMC
Massachusetts, Inc., Ashraf M. Dahad and Kwabena A. Kufo (the "Defendants")
in the Circuit Court of Maryland for Montgomery County for breach of contract
including failure to transfer technology, unfair competition and false
representations. The suit seeks damages of not less than $8 million. The
Defendants subsequently brought a counterclaim alleging breach of contract
and recovery of amounts due under the contract which are approximately $1
million. As of October 10, 1995, the litigation was in the discovery stage.
In April 1994, the Company was involved in a jury trial brought in the United
States District Court for the Northern District of Illinois, Eastern Division
by Patricia Hennessy, a former employee in the Company's Chicago sales
office, in which Ms. Hennessy alleged unfair discharge. The suit sought
compensatory damages and punitive damages together with attorney's fees,
costs and interest thereon. In September 1994, the Court entered judgement
in favor of the plaintiff in the amount of $240,000. In November 1994, the
Court entered judgement in favor of the plaintiff for attorney's fees and
costs in the amount of $146,000. These judgements have been appealed.
Management believes the Company's position is sound and that the Company
should prevail on the appeal. On September 8, 1995, oral arguments were
presented to the Court of Appeals and the Court has taken the case under
advisement.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded over-the-counter and quoted on the
NASDAQ National Market System under the symbol PNRL. The following table
sets forth the high and low sales prices as reported by NASDAQ for the
periods indicated.
1995 1994
High Low High Low
First Quarter $ 4 1/8 $ 2 3/4 $ 5 3/4 $ 3 3/4
Second Quarter 3 3/8 2 1/8 7 1/8 4 7/8
Third Quarter 4 3/4 2 3/4 7 1/2 5 1/4
Fourth Quarter 6 3 1/8 6 3 1/8
The current quoted price of the stock is listed daily in the Wall Street
Journal in the NASDAQ National Market System section. The number of holders
of record of the Company's Common Stock as of October 18, 1995 was 1,132.
Reference is made to Note 8 of the Notes to Consolidated Financial Statements
contained in Part II Item 8 for the maximum cash dividends per share
permitted under the bank credit facilities.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
Data from the Consolidated Statements of Operations included in the following table pertain to the Company's continuing and
discontinued operations(in thousands except per share amounts). The results include the operations of Datability, Inc.
("Datability") from May 6, 1993, the date of acquisition. This transaction is described more fully in Note 3 to the accompanying
Consolidated Financial Statements.
<CAPTION>
Years Ended July 31,
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Continuing operations
Net Revenues $ 58,219 $ 67,842 $ 50,576 $ 40,336 $ 46,998
Net Income(Loss) (4,492) 2,408 868 593 6,913
Earnings(Loss) per share (.60) .31 .13 .09 1.01
Discontinued operations
Net Revenues 3,351 5,991 6,226 6,599 5,589
Net Income(Loss) (1,783) (891) (737) 501 5
Loss on Disposal (1,400) -- -- -- --
Earnings(Loss) per share
Discontinued operations (.24) (.12) (.11) .07 --
Loss on disposal (.18 -- -- -- --
Cash Dividends
per share -- .02 -- .02 --
At Year End:
Total Assets 45,132 51,823 50,153 29,367 32,333
Long-Term Debt 5,681 8,890 10,217 1,875 5,196
Shareholders' Equity 21,723 28,580 27,501 22,177 20,901
The above data gives effect to the stock split paid in the form of a stock dividend in fiscal 1991 of 33-1/3%.
/TABLE
<PAGE>
<TABLE>
Quarterly Financial Data
A summary of the Company's consolidated results of continuing operations for each of the fiscal quarters for the years ended July
31, 1995 and 1994 is shown in the table below.
Fiscal 1995 Quarters Ended: October 31,1994 January 31, 1995 April 30, 1995 July 31, 1995
- --------------------------- -------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 14,556 $ 14,326 $ 14,053 $ 15,284
Gross profit 6,846 6,514 6,185 6,145
Net loss (614) (786) (1,166) (1,926)
Net loss per share (.08) (.10) (.15) (.25)
Fiscal 1994 Quarters Ended: October 31,1993 January 31, 1994 April 30, 1994 July 31, 1994
- ---------------------------- --------------- ---------------- -------------- -------------
Revenues $ 16,990 $ 17,277 $ 17,132 $ 16,439
Gross profit 8,773 8,594 8,517 8,410
Net income 694 823 375 517
Net income per share .09 .10 .05 .07
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of the results of operations includes the
results of Datability from May 6, 1993, the date of acquisition, and
pertains only to the Company's continuing operations unless otherwise
noted. As discussed in Note 2 to the Consolidated Financial
Statements, operating results reflect the Technipower, Inc subsidiary,
including the uninterruptible power supply business, as a discontinued
operation.
Liquidity and Capital Resources
During fiscal 1995, the Company generated cash of $3,933,000 from
continuing operating activities. Non-cash expenses, including
depreciation of $4,621,000, coupled with reductions in accounts
receivable and inventories and an increase in accounts payable offset
the net loss of $4,492,000. The decrease in accounts receivable of
$2,384,000 is the result of lower sales volume.
The reduction of inventories of $915,000 is due to a concentrated
effort during the fourth quarter of fiscal 1995 to bring inventories
in line with current sales volumes and the expected phase-out of older
products. The inventory management efforts will continue into fiscal
1996 so that any impact from the introduction of new products and the
phase-out of older products is minimized. The increase of accounts
payable of $1,817,000, was caused by the management of payments to
vendors in light of the tight cash position that existed at year-end.
As discussed more fully in Note 8 to the Consolidated Financial
Statements, subsequent to year end, the Company completed the sale of
1,465,000 shares of the Company's unregistered common stock for
$7,325,000 in a private placement to Pequot Partners Fund, L.P.,
Pequot Endowment Fund, L.P. and Pequot International Fund, Inc. The
proceeds have been used to repay $1,500,000 of term debt as discussed
below, and for working capital needs. In addition, in October 1995,
the Company completed the sale of 50,000 shares of its unregistered
common stock to Cramer Partners, L.P. The proceeds of $250,000 will
be used for working capital needs.
In conjunction with the sale of common shares discussed above, the
Company amended the credit agreement with its principal bank. The
agreement, as amended, provides for a working capital facility of
$5,500,000 with borrowings based on qualified accounts receivable and
inventory. At October 13, 1995, the Company had utilized $4,430,000
under the facility. The working capital facility expires on December
31, 1995 at which time, although there are no assurances, the
management believes it will be able to renew the credit agreement
provided the term loans are repaid as described below. Under the
agreement the Company was required to repay $3,300,000 of the term
debt during fiscal 1995. As noted above, the Company was required and
did repay $1,500,000 of the term notes principal balance. The
remaining balance of the term notes after making this payment was
$2,000,000 (compared to $6,668,000 at July 31, 1994). Required
principal payments for the remaining term notes is $137,000 a month
plus accrued interest. Under the terms of the credit agreement as
amended, the Company is required to repay the remaining term notes
prior to December 31, 1995 with the proceeds from the sale of assets.
The Company is currently attempting to sell the Company's Technipower
subsidiary including the uninterruptible power supply business to
comply with this provision. While there is no assurance the Company
will be able to sell Technipower prior to December 31, 1995, the
Company believes it has other remedies available should the sale not
occur. See Note 5 for terms of the current bank financing agreement.
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 coupled with the
sale of assets, including the Technipower subsidiary. In addition it
may be necessary to raise cash from other sources including sales of
securities or other assets of the Company.
Results of Operations
Revenues for fiscal 1995 were $58,219,000 compared to $67,842,000 for
fiscal 1994, a decrease of 14%. Revenues for fiscal 1994 increased
34% compared to fiscal 1993 revenues of $50,576,000. The increase in
revenues in fiscal 1994 over fiscal 1993 is the result of the
acquisition of Datability, Inc at the beginning of the fourth quarter
of fiscal 1993. The decrease in revenues in fiscal 1995 compared to
fiscal 1994 is partially attributable to the declining market for
terminal servers and multiplexors; two main products of the Company.
In addition to these declines, the Company experienced unexpected
delays in the shipment of new products including the newer V.34 and
V.34bis modems. The Company began shipping limited quantities of V.34
modems in the third quarter of fiscal 1995 and V.34bis modems in early
fiscal 1996. Using the current product line as a functional basis,
the Company has embarked on a program to replace the older products
with a new, single hardware platform which includes such functions as
remote LAN access, bridging/routing, multiplexing or host access.
These new products, known as "AccessBeyond", will be introduced during
fiscal 1996 and beyond.
Gross margins in fiscal 1995 decreased to 44% from 50% in fiscal 1994.
This decrease is the result of lower manufacturing efficiencies
related to inventory reduction programs and the lower volumes
experienced in fiscal 1995, as well as the higher costs associated
with the initial production of the V.34 modems that the Company
started shipping in fiscal 1995. Gross margins in fiscal 1994
improved slightly over 1993 as a result of the higher sales volumes in
general and of internetworking products in particular which carried
higher gross margins than did other products.
Selling, general and administrative expenses decreased $389,000 in
fiscal 1995 to $20,326,000 from $20,715,000. During the first half of
fiscal 1994, the Company eliminated several administrative positions
in its Carlstadt, New Jersey facility. In fiscal 1995, the Company
underwent a cost reduction program to reduce staffing at its
Gaithersburg, Maryland facility. These reductions resulted in
personnel cost reductions of $967,000 in fiscal 1995 compared to
fiscal 1994. As a result of the lower revenue levels, commissions
decreased by $285,000. Partially offsetting these reductions were
increases in depreciation and amortization of $573,000 for equipment
used for demonstrations to customers and additional reserves for bad
debts of $550,000. Selling, general and administrative expenses
increased $4,184,000 to $20,715,000 in fiscal 1994 from $16,531,000 in
fiscal 1993 as a result of the Datability acquisition.
Product development and engineering expenses were 14% of revenues for
both fiscal 1995 and 1994, up from 13% in fiscal 1993. Product
development and engineering expenses in fiscal 1995 were $8,260,000
compared to $9,567,000 in fiscal 1994, or a decrease of $1,307,000.
This decrease is attributable primarily to lower personnel costs as a
result of the Company's cost reduction efforts during fiscal 1995.
The increase in fiscal 1994 in product development and engineering
expenses of $3,194,000 from the fiscal 1993 expenses of $6,373,000 was
a result of the Datability acquisition in fiscal 1993.
The increase in amortization of cost over net assets acquired for
fiscal 1995 and fiscal 1994 over the amount expensed in fiscal 1993 is
the result of the Datability acquisition in the last quarter of fiscal
1993.
Interest expense was $1,227,000 for fiscal 1995 compared to $907,000
for fiscal 1994 and $330,000 for fiscal 1993. The increase in the
prime rate from 7% in fiscal 1994 to 9% (reduced to 8-3/4% in the
fourth quarter of fiscal 1995) during 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% led to the increase in interest
expense in fiscal 1995 over fiscal 1994. The Datability acquisition
in the fourth quarter of fiscal 1993 resulted in the Company borrowing
$6,800,000 from its principal bank and assuming another $1,354,000 in
subordinated debt. This increased debt load combined with the working
capital needed in fiscal 1994 to finance the increase in accounts
receivable and inventories caused the increase in interest expense in
fiscal 1994 compared to fiscal 1993.
The benefit from income taxes is determined under Statement of
Financial Accounting Standards No. 109 (SFAS 109), Accounting for
Income Taxes which the Company adopted in fiscal 1994. This statement
requires the Company to record the deferred tax asset generated by net
operating loss carryforwards, general business and other tax credits
and to establish a valuation reserve based on an estimate of the
realizability of the deferred tax asset. This analysis resulted in a
benefit from income taxes, net of certain state taxes due, of $578,000
in fiscal 1995 and $513,000 in fiscal 1994. At July 31, 1995, the
Company had deferred tax assets of $6,154,000 with a valuation reserve
of $4,454,000 to reduce deferred tax assets to the amount expected to
be realized. Management expects the realization of the remaining
asset to occur through the sale of the Company's Technipower
subsidiary which the Company has decided to sell, selling other non-
core business assets and projected income resulting from new products
being introduced in fiscal 1996 and 1997.
In summary, principally due to the cumulative effect of the decrease
in revenues and the lower gross margins experienced as a result of the
manufacturing inefficiencies caused by the lower volumes, the Company
had a loss from continuing operations of $4,492,000 ($.60 per share)
for fiscal 1995. After the operational loss of the discontinued
business and estimated loss from the disposal of that business, the
Company had a net loss of $7,675,000 ($1.02 per share) for the year
ended July 31, 1995.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Penril DataComm Networks, Inc.
Gaithersburg, Maryland
We have audited the accompanying consolidated balance sheets of Penril
DataComm Networks, Inc. and subsidiaries as of July 31, 1995 and 1994,
and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended
July 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Penril DataComm
Networks, Inc. and subsidiaries as of July 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the three
years in the period ended July 31, 1995 in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements,
during the fiscal year ended July 31, 1994 the Company changed its
method of accounting for income taxes to conform with Statement of
Financial Accounting Standards No. 109.
\s\Deloitte & Touche LLP
- ------------------------
Deloitte & Touche LLP
Washington, D.C.
October 17, 1995
<PAGE>
PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year ended July 31,
1995 1994 1993
-------- -------- --------
NET REVENUES FROM CONTINUING OPERATIONS $ 58,219 $ 67,842 $ 50,576
COSTS AND EXPENSES
Cost of revenues 32,529 33,822 26,172
Selling, general and administrative 20,326 20,715 16,531
Product development and engineering 8,260 9,567 6,373
Amortization of cost over
net assets acquired 834 816 308
------- ------- -------
61,949 64,920 49,384
OPERATING INCOME (LOSS) FROM CONTINUING
OPERATIONS (3,730) 2,922 1,192
OTHER EXPENSE
Interest expense (1,227) (907) (330)
Other, net (113) (120) (60)
------ ------ ------
(1,340) (1,027) (390)
------ ------ ------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (5,070) 1,895 802
BENEFIT FOR INCOME TAXES 578 513 66
------ ------ ------
INCOME (LOSS) FROM CONTINUING OPERATIONS $ (4,492) $ 2,408 $ 868
LOSS FROM DISCONTINUED OPERATIONS,
net of income taxes (1,783) (891) (737)
LOSS ON DISPOSAL OF DISCONTINUED
OPERATIONS, net of income taxes (1,400) -- --
------ ------ ------
NET INCOME (LOSS) $ (7,675) $ 1,517 $ 131
====== ====== ======
NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE
Continuing operations $ (.60) $ .31 $ .13
Discontinued operations (.24) (.12) (.11)
Loss on disposal of discontinued
operations (.18) -- --
------ ------ ------
(1.02) .19 .02
====== ====== ======
Shares used in per share calculation 7,559 7,809 6,950
====== ====== ======
See notes to consolidated financial statements.<PAGE>
PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share amounts)
July 31,
1995 1994
ASSETS ------ ------
Current Assets
Cash $ 1,087 $ 995
Accounts receivable, less allowance for doubtful
accounts of $1,134 in 1995 and $997 in 1994 14,766 17,150
Inventories 14,080 14,995
Deferred income taxes 1,700 539
Net assets of discontinued operations 1,376 3,468
Other current assets 803 506
------ ------
TOTAL CURRENT ASSETS 33,812 37,653
------ ------
Property and Equipment, net 3,122 4,703
Excess of Cost Over Net Assets Acquired, net 5,689 6,577
Other Assets 2,509 2,890
------ ------
TOTAL ASSETS $ 45,132 $ 51,823
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $ 5,095 $ 3,225
Current portion of long-term debt 5,164 3,153
Accounts payable 8,673 6,856
Accrued compensation and commissions 1,081 1,291
Deferred revenue 1,245 861
Other accrued expenses 892 1,291
------ ------
TOTAL CURRENT LIABILITIES 22,150 16,677
Long-Term Debt, net of current portion 517 5,737
Other Noncurrent Liabilities 742 829
------ ------
TOTAL LIABILITIES 23,409 23,243
------ ------
Commitments and Contingencies
Shareholders' Equity
Serial preferred stock, $.01 par value; authorized,
100,000 shares; issued, none -- --
Common stock, $.01 par value; authorized, 20,000,000
shares; issued and outstanding, 7,542,815 shares in
1995 and 7,442,368 shares in 1994 76 74
Additional paid-in capital 22,384 21,704
Retained earnings (deficit) (677) 6,998
------ ------
21,783 28,776
Equity adjustment from foreign currency translation (60) (196)
------ ------
TOTAL SHAREHOLDERS' EQUITY 21,723 28,580
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 45,132 $ 51,823
====== ======
See notes to consolidated financial statements.
<PAGE>
PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended July 31,
1995 1994 1993
------ ------ ------
CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES
Net Income (Loss) from operations $ (4,492) $ 2,408 $ 868
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 4,621 3,837 2,755
Benefit from deferred taxes (578) (538) --
Other (105) 136 (326)
(Increase) decrease in assets:
Accounts receivable 2,384 (1,508) (3,347)
Inventories 915 (1,924) (2,809)
Other current assets (297) (68) (116)
Increase (decrease) in liabilities:
Accounts payable 1,817 (788) 1,280
Other liabilities (332) 730 (111)
Net cash provided by (used in) continuing ------ ------ ------
operating activities 3,933 2,285 (1,806)
CASH FLOWS FROM DISCONTINUED OPERATIONS
Loss from discontinued operations (3,183) (891) (737)
Non-cash charges and changes in working
capital 824 539 (116)
Provision for loss on disposal of
discontinued operations 1,400 -- --
------ ------ ------
Net cash used in discontinued operations (959) (352) (853)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition costs -- -- (208)
Expenditures for purchased technology (1,049) (1,126) (973)
Expenditures for property, equipment and
other (690) (1,261) (1,190)
------ ------ ------
Net cash used in investing activities (1,739) (2,387) (2,371)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under line of credit 1,870 2,740 485
Borrowings on long-term debt -- 1,724 9,500
Payments on long-term debt (3,300) (4,184) (6,755)
Issuance of common stock 193 319 908
Dividends paid -- (147) --
Other 94 221 (110)
------ ------ ------
Net cash provided by (used in)
financing activities (1,143) 673 4,028
CASH AND CASH EQUIVALENTS
AT THE BEGINNING OF THE YEAR 995 776 1,778
------ ------ ------
CASH AND CASH EQUIVALENTS
AT THE END OF THE YEAR $ 1,087 $ 995 $ 776
====== ====== ======
SUPPLEMENTAL INFORMATION
Cash payments for income taxes $ 113 $ 59 $ 127
====== ====== ======
Cash payments for interest $ 1,103 $ 795 $ 260
====== ====== ======
See notes to consolidated financial statements.
<PAGE>
<TABLE>
PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 1995, 1994 AND 1993
(In thousands, except shares)
<CAPTION> Additional Retained
Common Stock Paid-in Unearned Earnings Currency
Shares Amount Capital Compensation (Deficit) Adjustment
--------------- --------- ------------ -------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AUGUST 1, 1992 5,940,993 $ 59 $ 16,538 $ - $ 5,497 $ 83
Net income 131
Issuance of common stock-
For acquisition of Datability, Inc. 1,050,000 11 4,583
Upon exercise of stock options 56,663 1 115
For employee stock award program 63,080 245 (143)
Upon exercise of warrants 220,000 2 790
Foreign currency translation adjustment (411)
--------- ----- ------- ----- ------ ------
BALANCE JULY 31, 1993 7,330,736 73 22,271 (143) 5,628 (328)
Net income 1,517
Dividends paid (147)
Issuance of common stock-
Upon exercise of stock options 132,700 1 367
Upon exercise of warrants 180,000 2 400
Shares retired in connection
with the exercise of options and warrants (66,840) (1) (458)
Shares returned in conjunction
with the valuation of Datability, Inc. (124,388) (1) (828)
Shares returned in conjunction with
employee stock award program (9,840) (32) 21
Amortization of unearned income 106
Foreign currency translation adjustment 132
--------- ----- ------- ----- ------ ------
BALANCE JULY 31, 1994 7,442,368 74 21,720 (16) 6,998 (196)
Net loss (7,675)
Issuance of common stock-
Upon exercise of stock options 33,067 1 73
Upon exercise of warrants 80,000 1 194
For acquisition of patent rights 50,000 1 118
Shares retired in connection with
options, warrants, and awards (62,620) (1) (194) 16
Deferred tax benefit from exercise of options - - 473
Foreign currency translation adjustment 136
--------- ------ ------- ---- ------- ------
BALANCE JULY 31, 1995 7,542,815 $ 76 $ 22,384 $ -- $( 677) $ (60)
See notes to consolidated financial statements.
</TABLE>
<PAGE>
PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1995, 1994 AND 1993
1. Summary of Significant Accounting Policies
Principles of Consolidation: The consolidated financial statements
include the accounts of the Company and its subsidiaries, all of which
are wholly owned. All significant intercompany accounts and
transactions have been eliminated. The Company operates in the high
technology electronics equipment industry. It designs, develops and
manufactures products for three distinct markets: data communications,
uninterruptible power supplies and radio frequency communication
products.
Revenue Recognition: Revenues are recognized at the time of shipment
of the product or performance of product-related services.
Inventories: Inventories are stated at the lower of cost (first-in,
first-out method) or market. The inventories include the cost of
material and, when applicable, labor and manufacturing overhead.
Property, Equipment and Depreciation: Additions to property and
equipment are recorded at cost. The Company provides depreciation for
financial reporting purposes using primarily the straight-line method
over the estimated useful lives of the assets.
Leasehold improvements are amortized over the term of the related
lease or their estimated useful lives, whichever is shorter.
Excess of Cost Over Net Assets Acquired: The excess of cost over net
assets acquired is amortized using the straight-line method over ten
years. The Company periodically evaluates the intangible assets in
relation to the operating performance and future contribution to the
underlying business and makes adjustments, if necessary, for any
impairment of these assets.
Income Taxes: During fiscal 1994, the Company changed its method of
accounting for income taxes to comply with the provisions of Statement
of Financial Accounting Standards No. 109 (FAS 109), "Accounting for
Income Taxes." Deferred income tax assets and liabilities are
computed annually for differences between the financial statement and
tax bases of assets and liabilities that will result in taxable or
deductible amounts in the future. A valuation allowance is
established to reduce deferred tax assets to the amount expected to be
realized.
Earnings Per Share: Earnings per share for fiscal 1995 is calculated
based on the weighted average common shares outstanding. Earnings per
share for previous years is calculated using the modified treasury
stock method, which limits the assumed purchase of treasury shares to
20% of the outstanding common shares. Any remaining proceeds are
assumed first to retire debt, with any remaining proceeds invested in
commercial paper. The difference between fully diluted and primary
earnings per share was not significant in any year. On September 22,
1995, the Company completed the sale of 1,465,000 shares of its common
stock and used $1,500,000 of the proceeds to pay down its term debt.
If this transaction had occurred at the beginning of fiscal 1995, the
unaudited proforma net loss per share on continuing operations for the
year would have been $.55.
Software Development Costs: Certain acquired software development
costs are being amortized over their estimated economic life,
principally five years, commencing when each product is available for
general release. Internal software development and any other costs of
development are expensed as incurred.
Reclassifications: Certain reclassifications have been made to prior
period consolidated financial statements to conform to the July 31,
1995 presentation.
2. Discontinued Operations
In July 1995, the Board of Directors decided to focus more of the
Company's resources on its main business of data communications and
therefore decided to sell Technipower, Inc. (Technipower), a
subsidiary manufacturing uninterruptible power supplies and power
regulating equipment. As a result of this action, the Company
recorded estimated costs relating to the disposition of Technipower of
$1,400,000.
Previously reported financial statements have been restated to reflect
Technipower as a discontinued operation. The following is a summary
of operating information for Technipower(in thousands):
Year Ended July 31,
1995 1994 1993
----- ----- -----
Revenues $ 3,351 $ 5,991 $ 6,226
Loss from operations
before income taxes (1,783) (891) (737)
Loss on disposal
before income taxes (1,400) -- --
------ ------ ------
Total loss
from discontinued operations $(3,183) $ (891) $ (737)
====== ===== =====
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 on disposal before income taxes for fiscal 1995 includes an
accrual of approximately $1,000,000 in operating losses through the
anticipated disposal date of Technipower.
Net assets of the discontinued operations consist of the following (in
thousands):
July 31,
1995 1994
----- -----
Current assets $ 2,784 $ 3,128
Current liabilities 650 495
----- -----
Net current assets 2,134 2,633
Property, plant and equipment, net 375 474
Other non-current tangible assets, net 22 62
Non-current liabilities 10 25
----- -----
Net tangible assets 2,521 3,144
Intangible assets, net 255 324
----- -----
2,776 3,468
Estimated loss on disposal (1,400) --
----- -----
$ 1,376 $ 3,468
===== =====
3. Acquisitions
On May 6, 1993, the Company acquired all of the outstanding stock of
Datability, Inc. The acquisition was accounted for by the purchase
method, and accordingly, the results of operations of Datability are
included in the Consolidated Statement of Operations from the date of
acquisition. Datability has been consolidated with the Company's data
communications operations located in Gaithersburg, Maryland.
The acquisition was accomplished through the issuance of 1,050,000
shares of the Company's common stock. The purchase price totalled
$4,980,000 including acquisition costs of $386,000. At the
acquisition date, the purchase price exceeded net assets acquired by
$8,169,000. Under terms of the agreement, the final purchase price
was dependent upon the valuation of the net assets acquired. During
fiscal 1994, a valuation adjustment of $829,000 resulted in 124,388
shares of the Company's common stock being returned to the Company
thereby reducing the excess of cost over net assets acquired.
The unaudited proforma results from continuing operations of the
Company for the fiscal year ended July 31, 1993, assuming the
acquisition of Datability had occurred at the beginning of the year,
is as follows (in thousands except per share amounts):
Net revenues $ 62,651
Net income (loss) (1,402)
Earnings (loss) per common and
equivalent share (.20)
The unaudited proforma results reflect proforma adjustments for the
amortization of goodwill, recognition of interest expense and the
issuance of 1,050,000 shares of the Company's stock. The unaudited
proforma results do not purport to represent what the actual results
would have been had the acquisition occurred at the beginning of the
year nor do they purport to represent the future results of the
combined entity.
4. Balance Sheet Detail
(in thousands)
July 31,
1995 1994
------ ------
Inventories:
Raw material $ 6,930 $ 6,133
Work in process 1,458 1,768
Finished goods 5,692 7,094
------ ------
Total inventories $ 14,080 $ 14,995
====== ======
Property and equipment, net:
Machinery, and equipment $11,734 $11,236
Purchased software and technology 5,486 5,466
Leasehold improvements 980 981
------ ------
Total property and equipment, at cost 18,200 17,683
Less accumulated depreciation
and amortization 15,078 12,980
------ ------
Total property and equipment, net $ 3,122 $ 4,703
====== ======
Excess of cost over net assets acquired,net
Cost $ 8,090 $ 8,144
Less accumulated amortization 2,401 1,567
------ ------
$ 5,689 $ 6,577
====== ======
5. Financing
Bank Financing: In conjunction with the sale of common stock as
described more fully in Note 8, the Company amended the credit
agreement with its principal bank subsequent to July 31, 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.
The agreement expires December 31, 1995. At July 31, 1995, the
Company had utilized $5,192,000 of which $97,000 was for outstanding
letters of credit. Average monthly borrowings under the working
capital facility were $4,621,000 at a weighted average interest rate
of 9.6% for fiscal 1995, $1,475,000 at a weighted average interest
rate of 7.2% for fiscal 1994, and $471,000 at a weighted average
interest rate of 6.0% for fiscal 1993.
In addition, the Company at July 31, 1995 had $3,848,000 in term loans
with its principal bank which expire December 1996 through September
1997. These notes require monthly payments with interest at the bank's
prime rate plus 2%. The agreement as amended in September 1995,
requires $1,500,000 of the proceeds from the equity financing be
applied to reduce the principal balance of the term loans. In
addition, the Company is required to repay the remaining term loans by
December 31, 1995 with proceeds from the sale of assets.
The amended bank facility requires the Company to maintain a ratio of
current assets to current liabilities of at least 1.6 to 1, a ratio of
adjusted earnings to interest expense of (4.2) to 1 at July 31, 1995
and (4.9) to 1 at October 31, 1995, and a ratio of adjusted earnings
to fixed charges of (1.2) to 1 at July 31, 1995 and (2.0) to 1 at
October 31, 1995.
Subordinated debt: In April 1995, as part of the bank financing
arrangements, the Company was required to amend its subordinated debt
agreement. This amendment reduced the principal payment due May 6,
1995 to $75,775 with additional principal payments allowed only after
the bank term loans have been reduced by $3,000,000. Interest, which
is payable monthly, accrues at the prime rate plus 1%. The
outstanding principal balance is due on May 6, 1996. Principal and
interest payments must be suspended in the event the Company is in
default of its loan agreement with its principal bank. At July 31,
1995, the Company had outstanding subordinated debt of $979,000.
Long-Term Debt: Long-term debt at July 31, 1995 and 1994 consisted of
(in thousands):
1995 1994
------ ------
Term Loans $ 3,848 $ 6,668
Subordinated Debt 979 1,054
------ ------
4,827 7,722
Capital leases and other 854 1,168
------ ------
5,681 8,890
Less current portion (5,164) (3,153)
------ ------
Long-term debt $ 517 $ 5,737
====== ======
Future maturities of long-term debt (of which $1,847,000 was paid by
October 17, 1995) are as follows:
Year Ending July 31,
1996 $ 5,164
1997 201
1998 151
1999 165
------
Total $ 5,681
======
6. Income Taxes
Effective August 1, 1993, the Company changed its method of accounting
for income taxes to comply with the provisions of Statement of
Financial Accounting Standards No. 109 (FAS 109), "Accounting for
Income Taxes." The provisions of FAS 109 changes the asset
recognition of net operating loss and tax credit carryforwards. There
was no cumulative effect of adopting this accounting change.
The differences between the tax provision (benefit) from continuing
operations calculated at the statutory federal income tax rate and the
actual tax benefit for each year is shown in the table below.
1995 1994 1993
------ ------ ------
Tax provision at federal
statutory rate $ (1,724) $ 644 $ 273
Amortization of non-
deductible intangibles 283 283 192
State & foreign taxes, net of
federal benefit (218) 236 78
Utilization of net operating
loss carryforward -- (1,195) (668)
Change in valuation allowance 1,134 (538) -
Other (53) 57 59
------ ------ ------
Income tax benefit $ (578) $ (513) $ (66)
The primary components of temporary differences which give rise to the
Company's net deferred tax asset are shown in the table below. At
July 31, 1995 the Company had federal net operating loss carryforwards
of approximately $6,691,000 of which $1,505,000 expires in 2007 and
$5,186,000 expires in 2010 and general business and other tax credits
of $1,248,000 to reduce future tax liabilities through 2008.
As of July 31,
1995 1994
---- ----
Deferred tax assets:
Reserves and other contingencies $ 1,838 $ 1,152
Depreciation and amortization 16 201
Other -- 199
Net operating loss 2,854 264
General business and other tax credits 1,248 1,302
Loss on discontinued operations 582 --
Valuation reserve (4,454) (2,148)
------ ------
Total deferred tax assets 2,084 970
Deferred tax liabilities:
Amortization of technologies (384) (431)
------ ------
Net deferred tax assets $ 1,700 $ 539
====== ======
7. Commitments and Contingencies
The Company leases office and manufacturing facilities and equipment
under lease agreements, certain of which are renewable at the
Company's option and/or provide for increases in rent related to
increases in the Consumer Price Index and other factors. Rent expense
for the fiscal years 1995, 1994 and 1993 was $1,941,000, $1,754,000,
and $1,370,000, respectively. Approximate aggregate future minimum
rentals applicable to operating leases in effect at July 31, 1995 are
as follows (in thousands):
Year Ending July 31,
1996 $ 1,762
1997 1,717
1998 1,777
1999 1,824
2000 934
Beyond 2000 1,539
------
Total minimum rentals $ 9,553
======
The Company initiated a lawsuit in December 1994 against Network
Systems Corporation ("NSC") for breach of contract, fraudulent
inducement and defamation. The suit is seeking specific performance,
compensatory damages of $2,000,000 and punitive damages of $5,000,000.
The litigation arises out of a contract in which the Company agreed to
develop certain computer hardware and software to NSC's
specifications. NSC subsequently brought a counterclaim alleging
negligent misrepresentation, fraud and breach of contract by the
Company. NSC is seeking recision 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. As of July 31, 1995,
the litigation was in the discovery stage.
The Company has initiated a lawsuit against Standard Microsystems
Corp. ("SMC") for breach of contract including failure to transfer
technology, unfair competition and false representations. The suit
seeks damages of $8 million. SMC subsequently brought a counterclaim
alleging breach of contract and recovery of amounts due under the
contract which are approximately $1 million. As of July 31, 1995, the
litigation was in the discovery stage.
In April 1994, the Company was involved in a jury trial in which a
former employee in the Company's Chicago sales office alleged
employment discrimination based on sex. The suit sought compensatory
damages and punitive damages together with attorney's fees, costs and
interest thereon. The court entered judgement in favor of the
plaintiff in the amount of $240,000 plus attorney's fees and costs in
the amount of $146,000. These judgements have been appealed. On
September 8, 1995, oral arguments were presented to the Court of
Appeals and the Court has taken the case under advisement. Management
believes the Company's position is sound and that the Company should
prevail on the appeal.
The Company is involved in other routine litigation.
Management believes none of the litigation will have a material
adverse effect on the Company's financial position or results of
operations.
8. Shareholders' Equity
Subsequent Event: 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 is required to file a shelf
registration with the SEC prior to December 31, 1995 covering the
shares issued in the transaction and keep the shelf registration
effective for three years. The Investors may request one public
registration after the three years until the later of September 22,
1999 or 30 days after the Company files its annual report on form 10-K
for the fiscal year ended July 31, 1999. If the Company does not keep
the shelf registration effective for the required three years, the
Investors are entitled to require the Company to effect up to two
public registrations during that time. As part of the transaction, the
Company has agreed to increase the Board of Directors of Penril by one
and, so long as the Investors collectively own in the aggregate not
less than 10% of the issued and outstanding common stock, the
Investors are entitled to fill such vacancy by designating one person
to the Board of Directors.
Serial Preferred Stock: The Company's Serial Preferred Stock may be
issued in one or more series. The shares of any series may be
convertible into Common Stock, may have priority over Common Stock in
the payment of dividends and in the distribution of assets in the
event of liquidation or dissolution of the Company, and may have
preferential or other voting rights, all as determined by the Board of
Directors at the time it approves the series.
Employee Stock Options and Stock Awards: On October 8, 1986, the
Company adopted the 1986 Incentive Plan (the "1986 Plan"). Under the
1986 Plan, which will terminate on October 8, 1996, awards may be
granted to key employees of the Company and its subsidiaries in one or
more of the following forms: (i) Incentive Stock Options; (ii)
Non-qualified Stock Options; and (iii) Restricted Stock Awards. The
option price of shares of Common Stock subject to options granted
under the 1986 Plan will not be less than 100% (110% in the case of
Incentive Stock Options granted to optionees holding more than ten
percent of the voting stock of the Company at the date of grant) of
the fair market value of shares of Common Stock at 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
ten percent of the Voting Stock of the Company on the date of grant)
from the date it is granted. An aggregate of 1,503,822 shares were
reserved for issuance under the 1986 Plan at July 31, 1995.
The terms of Restricted Stock Awards ("Stock Awards") granted under
the 1986 Plan are determined at the time of issuance and are evidenced
by a written Restricted Stock Agreement. Any Stock Awards granted are
subject to approval by a majority of all "disinterested directors" as
defined in Rule 16b-3 of the General Rules and Regulations under the
Securities Exchange Act of 1934. Of the total shares reserved under
the 1986 Plan, a maximum of 400,000 shares are available for grant in
the form of Stock Awards.
On October 1, 1992, the Company granted Stock Awards for 71,220 common
shares of the Company to all manufacturing, engineering, marketing and
administrative employees of the Gaithersburg, Maryland facility. The
Stock Awards granted vested over two years and employees had to be
employed by the Company when the vested shares were issued. Of the
total shares awarded, 53,020 were issued. The Company issued 29,560
shares on October, 1993 which represented 50% of the Stock Awards
outstanding on that date and the remaining 23,460 shares on October 1,
1994. Compensation related to the Stock Award Program was amortized
over the vesting period.
Non-Employee Director Stock Options: On December 9, 1987, the Company
adopted the Non-Employee Directors' Stock Option Plan ("Directors
Plan"). Under the Directors Plan an option to purchase 24,000 shares
is automatically granted to each non-employee director on the first
day of his initial term. In addition, options to purchase shares are
automatically granted to each non-employee director on the fifth
business day after the Annual Report on Form 10-K is filed with the
Securities and Exchange Commission as follows: in each of the first
two successive years after the initial grant an option to purchase
6,000 shares is granted, and in each of the next five successive years
an option to purchase 3,000 shares is granted. The option price per
share of any option granted under the Directors Plan is the fair
market value of a share of Common Stock on the date the option is
granted. No option will be exercisable more than ten years from the
date of grant. An aggregate of 273,333 shares were reserved for
issuance under the Directors Plan at July 31, 1995.
A summary of stock option transactions during the three years ended
July 31, 1995 is as follows:
1986 Incentive
Plan Directors Plan
------------------ ------------------
Number Average Number Average
of Price of Price
Shares Per Share Shares Per Share
------- -------- -------- ---------
Outstanding August 1, 1992 617,168 4.01 180,000 3.02
Granted 635,250 4.28 15,000 3.75
Exercised (26,666) 2.60 (30,000) 1.53
Canceled (33,000) 3.79 - -
--------- ------ ------- ------
Outstanding July 31, 1993 1,192,752 4.15 165,000 3.35
Granted 81,500 4.76 39,000 4.84
Exercised (132,700) 2.77 - -
Canceled (104,133) 4.67 - -
--------- ------ ------- ------
Outstanding July 31, 1994 1,037,419 $ 4.15 204,000 $ 3.64
Granted 348,000 3.12 18,000 3.25
Exercised (33,067) 2.23 - -
Canceled (233,617) 4.15 - -
--------- ------ ------- ------
Outstanding July 31, 1995 1,118,735 $ 3.89 222,000 $ 3.61
Exercisable Options
at July 31, 1995 531,968 $ 4.14 158,000 $ 3.37
Warrants:
In March, 1987, Henry D. Epstein joined the Company as President and
Chief Executive Officer and was issued Class A warrants to purchase
400,000 shares of Common Stock at $2.23 per share and Class B warrants
to purchase 80,000 shares of Common Stock at $2.34 per share. Mr.
Epstein exercised 220,000 Class A warrants in January 1993, 80,000
Class A warrants in January 1994 and 100,000 Class A warrants in
February 1994. In February 1995, Mr. Epstein exercised all 80,000
Class B warrants. All exercises were accomplished by delivery of
shares previously held.
In October 1992, the Company issued a warrant to purchase 166,000
shares of common stock at $4.50 per share, the fair market value on
the date of issuance, to Coast Federal Savings Bank ("Coast") in
settlement of a law suit brought against the Company. In addition,
the Company issued Class E warrants to purchase 25,000 shares of
common stock at $3.625 per share, the fair market value on the date of
issuance, to Mr. Henry Epstein in consideration for Mr. Epstein, in
his capacity as a stockholder of Penril, assisting Penril in settling
the litigation with Coast. The Coast warrant expired June 7, 1995.
The Class E warrants were exercised subsequent to July 31, 1995.
Cash Dividends: The Company declared a $.02 per share cash dividend
to the holders of record on December 16, 1993 and paid December 30,
1993. There were 7,332,296 shares outstanding on the record date. No
cash dividends are allowed under the current banking arrangement.
9. Retirement and Savings Plan
The Company's Retirement and Savings Plan ("401(k) Plan") is a defined
contribution plan including provisions of section 401(k) of the
Internal Revenue Code. Employees of the Company who have completed 90
days of service ("Participants") are eligible to participate in the
401(k) Plan. The 401(k) Plan permits, but does not require, the
Company to match employee contributions. In addition, the Company may
make discretionary contributions to the 401(k) Plan which will be
allocated to each Participant based on the ratio of such Participant's
eligible compensation to the total of all Participants' eligible
compensation. Amounts contributed by the Company vest as to 30% after
1 year of eligible service, 60% after 2 years of eligible service and
100% after 3 years of eligible service. Participants may elect to
direct the investment of their contributions in accordance with the
provisions of the 401(k) Plan. The Company made matching
contributions of $55,000, $46,000 and $45,000 during fiscal 1995, 1994
and 1993, respectively. There were no additional Company
contributions in any year. The Company provides no post-employment or
post-retirement benefits.
<PAGE>
10. Geographic Area Information
The Company's foreign operations consists principally of sales and
marketing activities through subsidiaries located in Hong Kong and the
United Kingdom. Certain information, including the effect of
intercompany transactions, relating to the Company's operations on a
geographic basis is as follows (in thousands):
Revenues 1995 1994 1993
U.S. Revenue ------ ------ ------
Domestic $ 33,338 $41,397 $28,152
Europe 6,780 11,129 9,738
Pacific Rim 7,195 5,257 4,989
Central and South America 3,503 4,581 4,120
Other International 4,600 4,595 2,778
------ ------ ------
Total U.S. Revenue $ 55,416 $66,959 $49,777
====== ====== ======
Revenue from foreign subsidiaries 6,839 7,876 5,032
Adjustments and eliminations (4,036) (6,993) (4,233)
------ ------ ------
Total Revenues $ 58,219 $67,842 $50,576
====== ====== ======
Income (Loss) before taxes
U.S. $ (5,021) $ 2,520 $ 1,219
Foreign 688 1,479 443
Eliminations (737) (2,104) (860)
------ ------ ------
Total Income (Loss) from
continuing operations before
taxes $ (5,070) $ 1,895 $ 802
====== ====== ======
Identifiable Assets
U.S. $ 41,691 $47,975 $47,497
Foreign subsidiaries 3,441 3,848 2,506
------ ------ ------
Total Identifiable Assets $ 45,132 $51,823 $50,003
====== ====== ======
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
a. Directors
Name, Age and Positions
with the Company other
than Director Business Experience
- ----------------------- -------------------------------
Class I - Term Expiring at the 1996 Annual Meeting:
Richard D. Margolis, 57, Mr. Margolis has been a director of
Secretary the Company since 1980. He was elected
Secretary of the Company in May 1987.
For more than the past five years, Mr.
Margolis has been a partner in the law
firm of Benesch, Friedlander, Coplan &
Aronoff in Cleveland, Ohio.
Norman G. Einspruch, 63 Dr. Einspruch has been a director of the
Company since September 1993. He has
been a Professor of Electrical and
Computer Engineering at the University
of Miami since 1977 and has been
Chairman of the Department of Industrial
Engineering since June 1994. In
addition, Dr. Einspruch has been Senior
Fellow in Science and Technology since
1990 and was Dean of the College of
Engineering at the University of Miami
from 1977 to 1990. Dr. Einspruch is
also a director of Ogden Corporation.
Class II - Term expiring at the 1997 Annual Meeting:
John P. Lowe, Jr., 43 Mr. Lowe has been a director of the
Company since March 1987. Mr. Lowe has
been Of Counsel to the Adair Law Firm in
Rochester, New York and at the law firm
of Bureau Francis Lefebvre in New York,
New York since January 1995. Prior to
January 1995 Mr. Lowe had been a member
of the law firm of Bureau Francis
Lefebvre since 1989.
Michael H. Newlin, 69 Mr. Newlin has been a director of the
Company since December 1991. Since
April 1994, Mr. Newlin has served as a
consultant to Jupiter Corporation of
Wheaton, MD and Meridan Corporation of
Alexandria, VA. He was Acting Deputy
Assistant Secretary of State, Bureau of
Political-Military Affairs, Department
of State from November 1992 to February
1994. From February 1992 through
October 1992 he was Deputy Executive
Chairman, UN Special Commission on Iraq-
UN Headquarters New York. From October
1991 through January 1992, Mr. Newlin
was a consultant to the United States
Department of State. From 1988 through
1991, Mr. Newlin was United States
Ambassador to United Nations
Organization in Vienna and served as
United States Ambassador to Algeria from
1981 to 1985.
Class III - Term Expiring at the 1995 Annual Meeting:
Henry David Epstein, 68, Mr. Epstein was named President,
Chairman of the Board, Chief Executive Officer and a director
President and Chief of the Company by the Board of Directors
Executive Officer in March 1987, and was named Chairman of
the Board in December 1987. He has
headed Ideonics, his own Florida-based
financial and technology consulting firm
since 1985. From 1977 to 1985 he was
employed by Loral Corporation, a
manufacturer of military electronics
equipment, most recently as Senior Group
Vice President.
Howard M. Schneider, 51 Mr. Schneider has been a director of the
Company since April 1988. For more than
the past five years, he has been
President of BT Securities Corporation,
an affiliate of Bankers Trust Company of
New York.
b. Executive Officers
Set forth below is certain information concerning the executive
officers of the Company other than Mr. Epstein.
Name, Age and Position
with the Company Business Experience
- ---------------------- -------------------
David L. Johnson, 57, Mr. Johnson has been President of
Executive Vice President Penril Electronics, Inc., a wholly-owned
subsidiary, since November 1994 and
Executive Vice President of the Company
since September 1991. From September
1990 to September 1991, he held the
position of Senior Vice President of the
Company. From May 1993, with the
acquisition of Datability, Inc., until
November 1994, Mr. Johnson served as Co-
President of the Company's Penril
Datability Networks Division. From 1987
until the acquisition of Datability,
Inc., Mr. Johnson was the President of
the Penril DataComm Division.
Ronald A. Howard, 39, Mr. Howard was named President of the
Executive Vice President Penril Datability Networks Division in
November 1994, having served as Co-
President of the division from May 1993
until November 1994. He has held the
position of Executive Vice President of
the Company since May 1993. Mr. Howard
was President of Datability Inc. from
its founding in 1977 until it was
acquired by the Company in May 1993.
Richard D. Rose, 41, Mr. Rose was named Chief Financial
Vice President and Officer of the Company in November 1994.
Chief Financial Officer He has held the position of Vice
President Finance of the Company since
February 1994 and Corporate Controller
since 1988. Mr. Rose was named Vice
President-Controller and Principal
Accounting Officer in December 1990.
C.P. Houston, 54, Mr. Houston was named Vice President-
Vice President Operations of the Penril Datability
Networks Division in November 1994. Mr.
Houston was Vice President-Administrator
of Penril Datability Networks Division,
from 1988 until November 1994. Mr.
Houston was named a Vice President of
the Company in September 1992.
<PAGE>
c. Section 16 Reporting
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors, executive officers and persons who own more than
10% of the Company's Common Stock to file with the Securities and
Exchange Commission (SEC) initial reports of ownership and reports of
changes in ownership of the Common Stock. Such persons are required
by SEC regulations to provide the Company with copies of all Section
16(a) forms they file.
To the Company's knowledge, based solely on a review of the
copies of such reports furnished to the Company and written
representations that no other reports were required, all Section 16(a)
filing requirements during fiscal year 1995 were complied with, except
that one report covering an open market sale of shares by Mr. Houston
was filed two days late, and two reports covering the open market sale
of shares by Mr. Johnson were filed four days and 21 days late.
Item 11. Executive Compensation.
a. Employment and Other Severance Agreements
The Company entered into an employment agreement with Henry D.
Epstein in 1989 pursuant to which Mr. Epstein is serving as Chairman
of the Board, President and Chief Executive Officer at a salary of
$275,000 per year. In the event that there should be a change in
control of the Company or Mr. Epstein is removed or forced to resign
his position with the Company against his will, other than for cause,
the agreement entitles him to a severance payment equal to two times
Mr. Epstein's cash compensation for the last full fiscal year prior to
termination of his employment.
Ronald A. Howard entered into an employment agreement with the
Company in May 1993 in connection with the Company's acquisition of
Datability, Inc. Mr. Howard is serving as Executive Vice President of
the Company and President of the Penril Datability Networks Division.
In the event Mr. Howard's employment is terminated for any reason
other than death, disability or for cause, the agreement requires the
Company to pay Mr. Howard his annual salary for the remainder of the
term of the agreement. Mr. Howard's employment agreement was amended
effective September 15, 1995 to (i) increase his annual salary from
$200,000 a year to $225,000, (ii) extend the expiration date for one
year to April 30, 1997 and (iii) provide that if the Company is sold
during the term of the employment agreement, Mr. Howard will be
entitled to an amount equal to 2-1/2 times his annual salary.
In January 1995, the Company entered into an agreement with
Richard D. Rose which provides that the Company will pay Mr. Rose a
bonus of $120,000 and guarantee payment of his salary for a period of
one year if the Company is sold while Mr. Rose is an employee of the
Company and if Mr. Rose agrees to remain under the new ownership for a
period of at least one year at his current position or similar
position.
b. Compensation
The following tables show information with respect to the annual
compensation for services in all capacities to the Company for the
fiscal years ended July 31, 1995, 1994 and 1993 of those persons who
were, at July 31, 1995 (i) the chief executive officer and (ii) the
other four most highly compensated executive officers of the Company
(the "named executive officers").<PAGE>
<TABLE>
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation Awards
Name and Restricted Stock Options/ All Other
Principal Position Year Salary Stock Awards(1) SARs(2) Compensation(3)
- ------------------ ---- -------- --------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
Henry D. Epstein 1995 $274,997 $ -- -- $11,428
Chairman of the Board 1994 274,997 -- -- 12,018
President and Chief 1993 265,595 -- 120,000 9,942
Executive Officer
David L. Johnson 1995 200,000 -- -- 26,646
Executive Vice President 1994 200,000 -- -- 1,011
1993 193,752 4,800 90,000 1,004
Ronald A. Howard (4) 1995 200,000 -- 30,000 5,458
Executive Vice President 1994 203,333 -- -- 250
1993 46,154 -- 90,000 --
C.P. Houston 1995 120,290 -- 10,000 250
Vice President 1994 116,847 -- 5,000 250
1993 104,021 3,520 5,000 --
Richard D. Rose 1995 125,848 -- 20,000 4,547
Vice President and 1994 115,335 -- 5,000 4,311
Chief Financial Officer 1993 84,235 2,640 15,000 3,646
</TABLE>
<PAGE>
(1) On October 1, 1992 a restricted stock award was granted for
1,200 shares to Mr. Johnson, for 880 shares to Mr. Houston,
and for 660 shares to Mr. Rose. The table reflects the fair
market value of such shares on the date of grant. All such
shares vested as to 50% after one year from date of grant
and as to 100% after two years from date of grant, provided,
in each case, the recipient was still employed by the
Company on the vesting dates.
(2) Number of shares granted under the 1986 Incentive Plan. The
options are exercisable at prices ranging from $2.31 to
$4.375 per share, the fair market value at the date of
grant. The Company does not grant SARs.
(3) Includes for fiscal 1995, $250 paid for the benefit of each
of the named executives pursuant to the Company's 401(k)
Plan, except for Mr. Johnson for which the amount paid was
$175. Also includes for Mr. Epstein, Mr. Johnson, and Mr.
Rose, $4,040, $783, $280 respectively, paid under the
Company's Split-Dollar Life Insurance Program and for Mr.
Epstein, Mr. Johnson, Mr. Howard, and Mr. Rose, $7,338,
$1,188, $5,208 and $4,017, respectively, paid to the Exec-U-
Care Medical Insurance Trust. Includes $24,500 paid to Mr.
Johnson as a commission.
(4) Mr. Howard joined the Company in May 1993.
<PAGE>
<TABLE>
Option/SAR Grants In Last Fiscal Year
% of Total Potential Realizable
Options/SARs Value At Assumed Annual Rates
Granted to of Stock Price Appreciation
Option/SARs Employees in Exercise or Market Price on For Option Term(2)
Name Granted Fiscal Year(1) Base Price Date of Grant Expiration Date 5% 10%
- ------------ ----------- -------------- ----------- --------------- --------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Henry D. Epstein -- -- -- -- -- -- --
David L. Johnson -- -- -- -- -- -- --
Ronald A. Howard 30,000 8.6% $2.875 $2.875 03/02/2005 54,242 137,460
C.P. Houston 10,000 2.9% 2.310 2.310 12/02/2004 14,527 36,815
Richard D. Rose 20,000 5.7% 2.310 2.310 12/02/2004 29,055 73,631
(1) Reflects only options; the Company does not grant SARs.
(2) Assumed annual appreciation rates are set by the SEC and are not a forecast of future appreciation. The actual realized
value depends on the market value of the Common Stock on the exercise date, and no gain to the optionees is possible without
an increase in the price of the Common Stock. All assumed values are pre-tax and do not include dividends.
/TABLE
<PAGE>
Aggregated Option/SAR Exercises In Last Fiscal Year
And Fiscal Year-end Option/SAR Values
<TABLE>
Per Share Value of Unexercised In-
Number of Unexercised Exercise Price The-Money Options/SARs
Shares Options/SARs at Fiscal of Unexercised at Fiscal Year-End
Acquired on Value Year-End Exercisable/ Options at Fiscal Exercisable/
Name Exercise Realized Unexercisable(1)(2) Year-End Unexercisable(1)(3)
- -------------- ---------- -------- ---------------------- --------------- -----------------------
<S> <C> <C> <C> <C> <C>
Henry D. Epstein -- -- 72,000/48,000 $4.38 63,000/42,000
David L. Johnson 25,600 79,303 172,400/36,000 $2.31-4.375 301,846/40,000
Ronald A. Howard(4) -- -- 54,000/66,000 2.875-4.375 47,250/102,750
C.P. Houston -- -- 41,167/15,550 2.31-7.50 5,250/35,400
Richard D. Rose -- -- 37,167/29,500 2.31-7.50 17,333/62,300
(1) Reflects only stock options; the Company does not grant SARs.
(2) Based on the year-end per share closing price of $5.25 (as reported on the National Association of Securities Dealers
Automated Quotation System on July 31, 1995), 10,000 options held by Mr. Houston and 10,000 options held by Mr. Rose were
not in-the-money.
(3) Represents the difference between the option exercise price (if less than $5.25) and $5.25.
(4) On September 8, 1995, Mr. Howard was granted an option under the 1986 Incentive Plan for 250,000 shares
at $7.875 per share.
/TABLE
<PAGE>
c. Retirement and Savings Plan
The Company's Retirement and Savings Plan ("401(k) Plan") is a defined
contribution plan including provisions of Section 401(k) of the Internal Revenue
Code. Employees of the Company who have completed 90 days of eligibility
service ("Participants") are eligible to participate in the 401(k) Plan. The
401(k) Plan permits, but does not require the Company to make matching
contributions. In addition, the Company may make discretionary contributions to
the 401(k) Plan which will be allocated to each Participant based on the ratio
of such Participant's eligible compensation to the total of all Participants'
eligible compensation. Amounts contributed by the Company vest as to 30% after
1 year of eligible service, 60% after 2 years of eligible service and 100% after
3 years of eligible service. Participants may elect to direct the investment of
their contributions in accordance with the provisions of the 401(k) Plan.
d. Report of Stock Option/Compensation Committee
The Company's executive compensation program is administered by the Stock
Option/ Compensation Committee (the "Committee") of the Board of Directors.
During fiscal 1995 the Committee was composed of the five non-employee
directors. The primary functions of the Committee are to consider and award
stock options, to determine the compensation and benefits of the Chief Executive
Officer and to review and approve, or modify if deemed appropriate, the
recommendations of the Chief Executive Officer with respect to the compensation
and benefits of the other executive officers.
The Company's compensation program consists of both cash and equity
components. Compensation determinations are guided by the following principles:
(1) the compensation program should provide motivation by emphasizing
performance; (2) the compensation of the Company's executive officers should be
reasonably comparable to and competitive with that offered by similarly situated
companies, and (3) the compensation program should seek to align the interests
of the Company's executive officers with the long-term interests of the
Company's shareholders principally through the granting of stock options. The
goals of the Company's compensation policy are to attract and retain qualified
personnel and to motivate them to enhance the long-term performance of the
Company.
Chief Executive Officer. Henry D. Epstein is serving as the Company's
Chairman of the Board, President and Chief Executive Officer pursuant to an
employment agreement entered into in 1989. The employment agreement provides
that Mr. Epstein's salary may be fixed by the Board of Directors from time to
time and he will be paid such bonus compensation as may be determined by the
Board in its discretion. Since the Committee consists of all of the non-
employee members of the Board, the Board has delegated the determination of Mr.
Epstein's salary and bonus to the Committee. In September 1991 Mr. Epstein's
salary was fixed at $275,000 per year and it remains at that level.
Executive Officers. The Company's salary and bonus program for its
executive officers other than the Chief Executive Officer is presented by the
Chief Executive Officer to the Committee each year and final determinations are
generally made by the Chief Executive Officer with the advice and consent of the
Committee. Factors considered by the Chief Executive Officer in determining
salaries are typically subjective, such as his perception of the individual's
performance, level of responsibility, the Company's financial performance and
compensation in the industry for comparable positions. No specific quantitative
formula is used.
Bonus Plan. Part of the cash component of the Company's compensation
program consists of bonuses paid under the Company's Incentive Bonus Plan.
Availability of awards under the Incentive Bonus Plan are based on increasing
percentages of executives' base salaries, as determined by the achievement of
the percentages of certain goals set forth in the Company's annual budgeted
profit and cash plan. At the beginning of each fiscal year, the Chief Executive
Officer presents to the Committee for its approval his recommendation of the
specific goals and realization formulas for the Incentive Bonus Plan for the
forthcoming fiscal year. The Chief Executive Officer is not a participant in
the Incentive Bonus Plan. At the end of the fiscal year, additional awards may
be made by the Committee if it is determined that an executive has made an
unusual contribution to the Company's success. The Committee did not make any
grants under the Incentive Bonus Plan for fiscal 1995 because the operating
performance of the Company did not meet the specified goals.
Option Plan. The principal purposes of the 1986 Incentive Plan are to
motivate key employees to increase the Company's profitability and to encourage
them to obtain and hold the Company's stock, thereby aligning the interests of
the employees with those of the shareholders. The 1986 Incentive Plan may also
be used by the Committee in cases where it is believed that due to extraordinary
performance an executive's cash compensation should be supplemented with an
option or restricted stock grant. The Committee, generally on the
recommendation of the Chief Executive Officer, selects those key employees of
the Company and its subsidiaries who are eligible to receive awards.
The number of options granted is determined by a number of subjective
criteria including the optionee's ability to influence the Company's long-term
growth and profitability as well as contributions made by the optionee and the
number and terms of the options already held by the optionee. All options are
granted at the current market price. Since the value of an option bears a
direct relationship to the Company's stock price, it is an effective incentive
for managers to create value for shareholders.
Deductibility of Executive Compensation
Section 162(m) of the Internal Revenue Code denies a tax deduction to a
public company for annual compensation in excess of $1 million paid to its chief
executive officer or any of its four other most highly compensated executive
officers unless specified requirements are met. The Committee does not expect
that Section 162(m) will have an effect on the Company in fiscal 1995. The
Committee will from time to time review the potential effects of Section 162(m)
on the Company and in the future may decide to restructure one or more
components of the Company's executive compensation program to comply with the
requirements for deductibility established by Section 162(m).
Respectfully submitted,
John P. Lowe, Jr. Michael H. Newlin Norman G. Einspruch
Richard D. Margolis Howard M. Schneider
Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee was, during fiscal 1995, an officer
or employee of the Company or of any of its subsidiaries, or formerly an officer
of the Company or of any of its subsidiaries, except that Richard D. Margolis, a
member of the Compensation Committee, is Secretary (but not an employee) of the
Company. Mr. Margolis is a partner in the law firm of Benesch, Friedlander,
Coplan & Aronoff, which firm has performed legal services for the Company since
1974. John P. Lowe, Jr., also a member of the Compensation Committee, has been
Of Counsel to the Adair Law Firm and at the law firm of Bureau Francis Lefebvre.
Mr. Lowe's firm performed a limited amount of legal services for the Company in
fiscal 1995.
STOCK PERFORMANCE GRAPH
The following graph is a comparison of the cumulative total returns during
the preceding five fiscal year period for the Company, the NASDAQ Stock Market
(U.S. Companies) Index and the Hambrecht & Quist Technology Index assuming an
initial investment of $100 on July 31, 1990 and the reinvestment of all
dividends when received.
Years Ended Penril Datacomm H&Q NASDAQ
July 31, Networks, Inc. Technology Stock Market
- ------------- --------------- ----------- ------------
1990 100.00 100.00 100.00
1991 140.00 115.12 118.07
1992 75.56 129.89 138.72
1993 68.89 143.94 168.67
1994 71.11 159.68 173.65
1995 93.33 279.97 242.94
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of September 30, 1995, based in part on
information provided to the Company by the persons named in the table, the
number of shares of Common Stock beneficially owned by each director, each
executive officer named in the Summary Compensation Table in Item 11 and by the
directors and executive officers of the Company as a group, and by the persons
or groups of persons known to management to be the beneficial owners of more
than 5% of the Common Stock.
<PAGE>
Amount and
Name and Address Nature of Beneficial Percentage
of Beneficial Owner Ownership (1) Ownership
- ------------------------- ------------------- -------------
Directors and Executive Officers:
Henry David Epstein
1300 Quince Orchard Boulevard
Gaithersburg, Maryland 20878 901,929 (2) 9.9%
Norman G. Einspruch
P.O. Box 248581
Coral Gables, Florida 33124 18,000 (3) (4)
John P. Lowe, Jr.
30 Corporate Woods
Suite 200
Rochester, New York 14623 42,000 (3) (4)
Richard D. Margolis
2300 BP America Building
200 Public Square
Cleveland, Ohio 44114-2378 42,000 (3) (4)
Michael H. Newlin
6517 Wilmett Road
Bethesda, Maryland 20817 35,000 (3) (4)
Howard M. Schneider
130 Liberty Street
New York, New York 10006 42,000 (3) (4)
David L. Johnson
1300 Quince Orchard Boulevard
Gaithersburg, Maryland 20878 172,400 (5) 1.9%
Ronald A. Howard
1300 Quince Orchard Boulevard
Gaithersburg, Maryland 20878 637,614 (6) 7.0%
C.P. Houston
1300 Quince Orchard Boulevard
Gaithersburg, Maryland 20878 42,667 (5) (4)
Richard D. Rose
1300 Quince Orchard Boulevard
Gaithersburg, Maryland 20878 52,760 (7) (4)
All directors and executive officers
as a group
(10 individuals) 1,986,370 (8) 20.7%
Five Percent Shareholders:
Pequot Partners Fund, L.P.,
Pequot Endowment Fund, L.P. and
Pequot International Fund Inc.
354 Pequot Avenue
Southport, CT 06490 1,465,000 (9) 16.2%
Cramer Partners, L.P.
56 Beaver Street, Suite 701
New York, New York 10004 705,000 (10) 7.8%
<PAGE>
(1) Includes, in certain instances, shares held in the name of an executive
officer's or director's spouse or minor children, the reporting of which is
required by applicable rules of the Securities and Exchange Commission, but
as to which shares the executive officer or director may have disclaimed
beneficial ownership.
(2) This figure is composed of 726,029 shares owned directly by Mr. Epstein,
nd 72,000 shares which may be acquired from the Company within 60 days of
September 30, 1995 pursuant to the exercise of options granted under the
Company's 1986 Incentive Plan. This figure also includes 103,900 shares
Mr. Epstein transferred to Henriette Wenkart Epstein but has the right to
vote so long as she is the beneficial owner of such shares, pursuant to a
seven year, irrevocable proxy.
(3) Includes 18,000 shares for Dr. Einspruch, 42,000 shares for Messrs. Lowe,
Schneider, and Margolis and 30,000 shares for Mr. Newlin which may be
acquired from the Company within 60 days of September 30, 1995, pursuant to
the exercise of stock options granted under the Non-Employee Directors'
Stock Option Plan.
(4) Less than 1%.
(5) Includes only shares which may be acquired from the Company within 60 days
of September 30, 1995, pursuant to the exercise of options granted under
the Company's 1986 Incentive Plan.
(6) Includes, in addition to shares owned directly by Mr. Howard, 54,000 shares
which may be acquired from the Company within 60 days of September 30, 1995
pursuant to the exercise of options granted under the Company's 1986 Plan.
In May 1993, the Company acquired all of the outstanding stock of
Datability, Inc. by the issuance of 940,999 shares after adjustment of the
Company's Common Stock in a merger, Mr. Howard, a shareholder of
Datability, Inc., acquired all of the shares included in the table (other
than the option shares) through this merger.
(7) Includes, in addition to shares owned directly by Mr. Rose, 38,667 shares
which may be acquired from the Company within 60 days of September 30,
1995, pursuant to the exercise of options granted under the Company's 1986
Incentive Plan.
(8) Includes, in addition to shares owned by members of the group, 553,734
shares which certain members of the group have the right to acquire from
the Company within 60 days of September 30, 1995 pursuant to the exercise
of stock options.
(9) Includes 636,000 shares of Common Stock owned by Pequot Partners Fund,
L.P., a Delaware limited partnership, whose general partner and investment
manager is Pequot General Partners, a Connecticut general partnership
("General Partners"), 260,000 shares of Common Stock owned by Pequot
Endowment Fund, L.P., a Delaware limited partnership whose general
partner and investment manager is Pequot Endowment Partners, L.P., a
Delaware limited partnership("Endowment Partners") and 569,000 shares of
Common Stock owned by Pequot International Fund, Inc., a British Virgin
Islands corporation, whose investment manager is DS International Partners,
L.P., a Delaware limited partnership ("International Partners"). (Pequot
Partners Fund, L.P., Pequot Endowment Fund, L.P. and Pequot International
Fund Inc. are collectively referred to as the "Funds"). General Partners,
Endowment Partners and International Partners (collectively, the
"Partners") are the beneficial owners (as such term is used in Rule 13d-3
of the Securities Exchange Act of 1934, as amended (the "Act")) of the
shares of Common Stock owned by the Fund for which they act as investment
manager, respectively. The Partners may be deemed to constitute a group as
such term is used in Section 13(d)(3) of the Act. Each of the Partners
disclaims beneficial ownership of the Common Stock beneficially owned by
the other partners.
(10) Includes 519,000 shares owned by Cramer Partners, L.P. (the "Partnership")
and 186,000 owned by Global Assets Management ("GAM"). J.J. Cramer & Co.
acts as an investment adviser and manager of the Partnership and GAM, and
has sole voting and dispositive power over the 519,000 shares held by the
Partnership and shared dispositive power over the 186,000 shares held by
GAM. GAM has sole voting power and shared dispositive power with respect
to the 186,000 shares it holds.
James J. Cramer, President of J.J. Cramer & Co. and Karen Cramer, Vice
President of J.J. Cramer & Co. have shared voting and dispositive power
with respect to the 519,000 shares held by the Partnership and shared
dispositive power with respect to the 186,000 shares held by GAM.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
NONE
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a) 1. Financial Statements
--------------------
Included in Part II of this report:
Independent Auditors' Report
Consolidated Statements of Operations for each of
the three years in the period ended July 31, 1995
Consolidated Balance Sheets as of July 31, 1995 and 1994
Consolidated Statements of Cash Flows for each of the
three years in the period ended July 31, 1995
Consolidated Statements of Shareholders' Equity
for each of the three years in the period ended
July 31, 1995
Notes to Consolidated Financial Statements for
the years ended July 31, 1995, 1994, and 1993
(a) 2. Financial Statement Schedule
-----------------------------
Included in Part IV of this report:
Independent Auditors' Report on Schedule
Schedule II -Valuation and Qualifying Accounts
Other schedules are omitted because of the absence of conditions under which
they are required or because the required information is given in the Financial
Statements or notes thereto.
3. Exhibits
The exhibits are set forth on the attached Exhibit Index which is incorporated
by reference. Exhibits are included only in the copies of this Form 10-K filed
with the Securities and Exchange Commission and NASDAQ.
4. Reports on Form 8-K None
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Penril DataComm Networks, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
PENRIL DATACOMM NETWORKS, INC.
By:\s\Henry D. Epstein
------------------------------
Henry D. Epstein
President, Chief Executive Officer, and
Chairman of the Board of Directors
Date: October 27, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated:
\s\Norman G. Einspruch \s\Henry D. Epstein
- --------------------------- ------------------------------
Norman G. Einspruch, Henry D. Epstein,
Director Chief Executive Officer and
Date: October 27, 1995 Chairman of the Board of Directors
Date: October 27, 1995
\s\John P. Lowe, Jr.
- ---------------------------
John P. Lowe, Jr.,
Director \s\Richard D. Rose
Date: October 27, 1995 ------------------------------
Richard D. Rose,
Vice President, Chief Financial Officer
and Chief Accounting Officer
\s\Richard D. Margolis Date: October 27, 1995
- ---------------------------
Richard D. Margolis,
Director
Date: October 27, 1995
\s\Michael H. Newlin
- ---------------------------
Michael H. Newlin,
Director
Date: October 27, 1995
\s\Howard M. Schneider
- ---------------------------
Howard M. Schneider,
Director
Date: October 27, 1995
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Penril DataComm Networks, Inc.
Gaithersburg, Maryland
We have audited the consolidated financial statements of Penril DataComm
Networks, Inc. and subsidiaries as of July 31, 1995 and 1994, and for each of
the three years in the period ended July 31, 1995, and have issued our report
thereon dated October 17, 1995 (which report is included herein). Our audits
also included the financial statement schedule of Penril DataComm Networks,
Inc., listed in Item 14. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Deloitte & Touche LLP
Washington, D.C.
October 17, 1995
<PAGE>
SCHEDULE II
PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance Charged Charged
at to Costs to Balance
Beginning and Other Deductions at End
Description of Period Expenses Accounts(a) (b) of Period
- ------------ --------- -------- ----------- ---------- ---------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
APPLICABLE TO ACCOUNTS RECEIVABLE-FROM CONTINUING OPERATIONS
Fiscal 1995 $ 997 $ 846 $ 5 $ (714) $ 1,134
==== ==== == ===== =====
Fiscal 1994 $ 927 $ 196 $ 8 $ (134) $ 997
==== ==== == ===== =====
(a) Recoveries of accounts previously written off.
(b) Write-off of bad debts.
<PAGE>
INDEX TO EXHIBITS
Page 1 of 2
Exhibit
No. EXHIBIT DESCRIPTION Ref.
- ------- ------------------- ----
2.01 Agreement and Plan of Merger dated May 6, 1994 among
the Company, Datability, Inc., PD Acquisition Corp. and
the stockholders of Datability listed on Appendix I
together with Appendix I thereto (Exhibit 2.01 to Form
8-K filed (May 21, 1993) *
3.01 Amended and restated By-Laws of the Company (Exhibit
(3)(a)(ii) to Form 10-K filed December 18, 1987). *
3.02 Certificate of Amendment of Certificate of
Incorporation of the Company (Exhibit 4.3 to Form
S-3 filed April 29, 1991). *
4.01 Amended and Restated Credit Agreement dated as of May
6, 1993 between the Company and Signet Bank/Maryland.
(Exhibit 4.01 to Form 8-K filed May 21, 1993) *
4.02 Amendment No.1 to the Amended and Restated Credit
Agreement dated as of May 6, 1993 between the Company
and Signet Bank/Maryland. Amends the agreement at 4.05
above. (Exhibit 4.01 to Form 10-Q filed March 3,1995) *
4.03 Amendment No.2 to the Amended and Restated Credit
Agreement dated as of May 6, 1993 between the Company
and Signet Bank/Maryland. Amends the agreements at
4.01 and 4.02 above. (Exhibit 4.07 to Form 10-K filed
October 28, 1994) *
4.04 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.
Amends the agreements at 4.01, 4.02 and 4.03 above.
(Exhibit 4.01 to Form 10-Q filed June 14, 1995) *
4.05 Amendment No.1 dated as of September 19, 1995 to the
Second Amended and Restated Credit Agreement between
Penril DataComm Networks, Inc. and Signet
Bank/Maryland. Amends the agreement at 4.04
above.
4.06 Subordinated Promissory Note of Datability, Inc. dated
May 6, 1993 in the principal amount of $909,126 payable
to the order of Howard International Corp. (Exhibit
4.02 to Form 8-K
filed May 21, 1993) *
4.07 Subordinated Promissory Note of Datability, Inc. dated
May 6, 1993 in the principal amount of $395,374 payable
to the order of John Howard
(Exhibit 4.03 to Form 8-K filed May 21, 1993) *
4.08 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.
(Exhibit 4.02 to Form 10-Q filed June 14, 1995) *
4.09 Stock Purchase Agreement dated as of September 22, 1995
among Registrant and Pequot Partners Fund, L.P., Pequot
International Fund Inc., and Pequot Endowment Fund,
L.P. (Exhibit 4.01 to Form 8-K filed October 6, 1995) *
<PAGE>
INDEX TO EXHIBITS
Page 2 of 2
Exhibit
No. EXHIBIT DESCRIPTION PAGE
- ------- -------------------- ----
4.10 Registration Rights Agreement dated as of September 22,
1995 among Registrant and Pequot Partners Fund, L.P.,
Pequot International Fund Inc., and Pequot Endowment
Fund, L.P. (Exhibit 4.01 to Form 8-K filed October 6,
1995) *
10.01 1986 Incentive Plan of Penril DataComm Networks, Inc.,
As Amended (Exhibit 4.1 to Form S-8 filed
April 29, 1991). *
10.02 Employment Agreement dated September 21, 1989, between
the Company and Henry D. Epstein. (Exhibit 10.05 to
Form 10-K filed October 11, 1989) *
10.03 Employment Agreement dated as of May 1, 1994 between
the Company and Ronald A. Howard (Exhibit
10.01 to Form 8-K filed May 21, 1994) *
10.04 Amendment to Employment Agreement dated October 25,
1995 between the Company and Ronald A. Howard. Amends
10.03 above.
10.05 1987 Non-Employee Directors' Stock Option Plan of
Penril DataComm Networks, Inc., as Amended
(Exhibit 4.1 to Form S-8 filed April 29, 1991). *
22 Subsidiaries of the Registrant
23 Independent Auditors' Consent
* Indicates Exhibits incorporated herein by reference.
Documents not so marked have been filed herewith.
<PAGE>
EXHIBIT 22
PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
Jurisdiction of
Name (1) Incorporation
- ----------------------- ---------------------
Datability, Inc. Delaware
Electro-Metrics, Inc. Delaware
Technipower, Inc. Delaware
Penril Electronics, Inc. Delaware
Penril Technologies, Inc. Delaware
Penril Power Systems, Inc. Delaware
Penril DataComm Ltd. United Kingdom
Penril (Far East) Ltd. Hong Kong
Penril International Ltd. U. S. Virgin Islands
(1) This also represents the name under which the subsidiary does business.
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Penril DataComm Networks, Inc.'s
Registration Statement No. 33-31824 on Form S-3, Registration Statement No. 33-
40216 on Form S-8, Registration Statement No. 33-40217 on Form S-3, Registration
Statement No. 33-40218 on Form S-8, and Registration Statement No. 33-63440 on
Form S-3 of our reports dated October 17, 1995, appearing in this Annual Report
on Form 10-K of Penril DataComm Networks, Inc. for the year ended July 31, 1995.
Deloitte & Touche LLP
Washington, D.C.
October 27, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000077328
<NAME> PENRIL DATACOMM NETWORKS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1995
<PERIOD-END> JUL-31-1995
<CASH> 1,087
<SECURITIES> 0
<RECEIVABLES> 15,900
<ALLOWANCES> 1,134
<INVENTORY> 14,080
<CURRENT-ASSETS> 33,812
<PP&E> 14,363
<DEPRECIATION> 11,241
<TOTAL-ASSETS> 45,132
<CURRENT-LIABILITIES> 22,150
<BONDS> 0
<COMMON> 76
0
0
<OTHER-SE> 22,384
<TOTAL-LIABILITY-AND-EQUITY> 45,132
<SALES> 58,219
<TOTAL-REVENUES> 58,219
<CGS> 32,529
<TOTAL-COSTS> 61,949
<OTHER-EXPENSES> 113
<LOSS-PROVISION> 846
<INTEREST-EXPENSE> 1,227
<INCOME-PRETAX> (5,070)
<INCOME-TAX> (578)
<INCOME-CONTINUING> (4,492)
<DISCONTINUED> (3,183)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,675)
<EPS-PRIMARY> (1.02)
<EPS-DILUTED> (1.02)
</TABLE>
AMENDMENT NO. 1
dated as of September 19, 1995
to the
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
dated as of April 25, 1995
between
PENRIL DATACOMM NETWORKS, INC.
and
SIGNET BANK/MARYLAND
<PAGE>
TABLE OF CONTENTS
PAGE
Section 1. Definitions. . . . . . . . . . . . . . . . . . 1
Section 2. Amendments to the Amended Agreement. . . . . . 1
Section 3. Effectiveness. . . . . . . . . . . . . . . . . 2
Section 4. Integration; Confirmation. . . . . . . . . . . 3
Section 5. Counterparts. . . . . . . . . . . . . . . . . 3
Section 6. Successors and Assigns. . . . . . . . . . . . 3
Section 7. Governing Law. . . . . . . . . . . . . . . . . 4
Exhibit A - Form of Guarantor Consent
AMENDMENT NO. 1
This AMENDMENT NO. 1 (This "Amendment No. 1") is dated as of
September 19, 1995 and is between PENRIL DATACOMM NETWORKS, INC.,
a Delaware corporation (the "Borrower"), and SIGNET
BANK/MARYLAND, a Maryland banking corporation (the "Bank").
The Borrower and the Bank are parties to a Second Amended
and Restated Credit Agreement dated as of April 25, 1995 (the
"Amended Agreement"). The Borrower has requested the Bank to
amend the Amended Agreement in certain respects. The Bank is
agreeable to the Borrower's request, all on the terms and
conditions set forth in this Amendment No. 1. Accordingly, the
parties hereto agree as follows:
Section 1. Definitions. Terms used herein and not defined
which are defined in the Amended Agreement shall have for the
purposes hereof the respective meanings set forth therein.
Section 2. Amendments to the Amended Agreement.
(a) Section 5.5 of the Amended Agreement is hereby amended
to read in full as follows:
Section 5.5 Consolidated EBITDA to Consolidated Interest
Expense. The ratio of Consolidated EBITDA to Consolidated
Interest Expense on the last day of each fiscal quarter specified
below, in each case computed for the four consecutive fiscal
quarters ending on such date, will not be less than the ratio set
forth below for such fiscal quarter. For purposes of this
Section 5.5, a negative ratio greater than one set forth below
(e.g. a ratio of (5.0) to 1.0 for the fiscal quarter ended
October 31, 1995) would be a ratio less than the agreed minimum
ratio of (4.906) to 1.0 for that quarter. Similarly, a positive
ratio less than one set forth below would be a ratio less than
the agreed minimum.
Fiscal Quarter Ended Minimum Ratio
- --------------------- -------------
July 31, 1995 (4.202) to 1.0
October 31, 1995 (4.906) to 1.0
January 31, 1996 and (4.917) to 1.0
each fiscal quarter thereafter
(b) Section 5.6 of the Amended Agreement is hereby amended
to read in full as follows:
Section 5.6 Consolidated EBITDA to Adjusted Fixed Charges.
The ratio of Consolidated EBITDA (determined without adding to
Consolidated Net Income Consolidated Interest Expense in respect
of Revolving Loans and in respect of Subordinated Debt) to
Adjusted Fixed Charges (determined without adding the amount of
the payment required under Section 2.10 (c)) on the last day of
each fiscal quarter set forth below (computed for that quarter
alone) will not be less than the ratio set forth below for such
fiscal quarter. For purposes of this Section 5.6, a negative
ratio greater than one set forth below (e.g. a ratio of (2.100)
to 1.0 for the fiscal quarter ended October 31, 1995) would be a
ratio less than the agreed minimum ratio of (2.035) to 1.0 for
that quarter. Similarly, a positive ratio less than one set
forth below would be a ratio less than the agreed minimum.
Fiscal Quarter Ended Minimum Ratio
- -------------------- -------------
July 31, 1995 (1.177) to 1.0
October 31, 1995 (2.035) to 1.0
January 31, 1996 and (8.261) to 1.0
each fiscal quarter thereafter
(c) Section 8.1(i) of the Amended Agreement is hereby amended
to read in full as follows:
(i) the Borrower shall (A) fail to repay the Term Loans and
the Acquisition Loan with Net Sale Proceeds pursuant to Section
2.10(c) by an aggregate amount of $2,000,000 prior to 1:00 P.M.
(local time in Bethesda, Maryland) on December 31, 1995 or (B)
the Borrower shall otherwise fail to pay when due any principal
of or interest on any Loan, any fee or other amount payable
hereunder to under the Notes or any other Loan Document;
Section 3. Effectiveness. This Amendment No. 1 shall become
effective as of July 31, 1995 on the date (the "Effective Date")
when the last of the following conditions shall have been
satisfied:
(i) the Bank shall have received counterparts of this
Amendment No. 1 duly executed by itself and the Borrower;
(ii) The Bank shall have received counterparts of Guarantor
Consents and Agreements, substantially in the form of Exhibit A
to this Amendment No. 1, duly signed by each Guarantor;
(iii) the fact that the representations and warranties of
the Borrower contained in the Amended Agreement shall be true on
and as of the Effective Date;
(iv) the Bank shall have received all documents it may
reasonably request relating to the existence of the Borrower and
its authority to execute, deliver and perform this Amendment No.
1, and the validity of this Amendment No. 1 and any other matters
relevant hereto, all in form and substance satisfactory to the
Bank, and
(v) the borrower shall have received net cash proceeds of
not less than $1,500,000 from the sale or issuance of its capital
stock and shall have applied at least $1,500,000 of such proceeds
to repay the Acquisition Loan or the Term Loans in the order
required as if such net proceeds were net Sale Proceeds under
Section 2.10(c) (ii), (iii) or (iv).
On the Effective Date, the Amended Agreement will be
automatically amended as set forth herein, effective as of July
31, 1995. On and after the Effective Date, the rights and
obligations of the parties hereto shall be governed by the
Amended Agreement as amended by this Amendment No. 1.
Section 4. Integration; Confirmation. On and after the
Effective Date, each reference in the Amended Agreement to "this
Agreement", "herein", "hereunder" or words of similar import, and
each reference to any other document delivered in connection with
the Amended Agreement to the "Credit Agreement", the "Amended
Agreement" or the "Amended and Restated Credit Agreement" shall
be deemed to be a reference to the Amended Agreement as amended
by this Amendment No. 1, all other terms and provision of the
Amended Agreement shall continue in full force and effect and
unchanged and are hereby confirmed in all respects.
Section 5. Counterparts. This Amendment No. 1 may be
signed in any number of counterparts, each of which shall be an
original, all of which taken together shall constitute a single
integrated agreement with the same effect as if the signatures
thereto and hereto were upon the same instrument. Complete sets
of counterparts shall be lodged with the Borrower and the Bank.
Section 6. Successors and Assigns. The provisions of this
Amendment No. 1 shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns,
including any successor or assignee arising by operation of law.
Section 7. Governing Law. This Amendment No. 1 shall be
governed by and construed in accordance with the laws of the
State of Maryland.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment No. 1 to be duly executed as of the date and year first
above written.
PENRIL DATACOMM NETWORKS, INC.
By: \s\R.D. Rose
----------------------------
Title: CFO
1300 Quince Orchard Blvd.
Gaithersburg, Maryland 20878
Telecopier Number: (301) 948-5761
with a copy to:
Richard D. Margolis, Esq.
Benesch, Friedlander, Coplan
& Aronoff
2300 BP America Building
200 Public Square
Cleveland, Ohio 44114
Telephone Number: (216) 363-4500
Telecopier Number: (216) 363-4588
SIGNET BANK/MARYLAND
By: \s\Michele Riley Levenson
----------------------------
Title: Vice President
7799 Leesburg Pike, Suite 500
Falls Church, Virginia 22043
Telecopier Number: (703) 506-9712
with a copy to:
Brian D. Murphy, Esq.
McGuire, Woods, Battle & Boothe
One James Center
Richmond, Virginia 23219
Telephone Number: (804) 775-4332
Telecopier Number: (804) 775-1062<PAGE>
EXHIBIT A
September 19, 1995
Signet Bank/Maryland
Commercial Lending
7700 Wisconsin Avenue
Suite 400
Bethesda, Maryland 20814
Ladies and Gentlemen:
Penril Datacomm Networks, Inc., a Delaware corporation
("Penril"), and Signet Bank/Maryland ("the Bank") are parties to
a Second Amended and Restated Credit Agreement dated as of April
25, 1995 (the "1995 Credit Agreement"). Penril is obligated
under the 1995 Credit Agreement to use the proceeds of all
Revolving Loans available thereunder for its and its Restricted
Subsidiary's general working capital requirements and to advance
a not insubstantial portion of the proceeds of Revolving Loans
to its Restricted Subsidiaries. Each of the undersigned is a
Restricted Subsidiary of Penril.
Each of the undersigned (a "Guarantor" and collectively the
"Guarantors") has guaranteed to the Bank the full payment and
performance of all Penril's obligations under the 1995 Credit
Agreement pursuant to a Guaranty dated as of the respective
dates set forth on Schedule 1 hereto (each a "Guaranty" and
collectively the "Guaranties"), and secured its guaranty with
the grant of a security interest in favor of the Bank in all of
its tangible and intangible personal property pursuant to a
Security Agreement (or, in the case of Penril Datacomm, Ltd., a
Debenture) dated as of the respective dates set forth on
Schedule 1 hereto (the "Security Agreement"), each between a
Guarantor and the Bank.
By reason of the violation of the covenants in Sections 5.5
and 5.6 of the Credit Agreement for its fiscal quarter ended
July 31, 1995, Penril is in Default under the 1995 Credit
Agreement. Penril has requested the Bank to waive this Default,
to modify Sections 5.5 and 5.6 of the Credit Agreement to
conform to Penril's current financial projections and to make
certain other changes to the 1995 Credit Agreement. The Bank is
agreeable thereto, all on the terms and conditions set forth in
Amendment No. 1 dated as of the date hereof ("Amendment No. 1")
to the 1995 Credit Agreement.
Each Guarantor acknowledges that it is familiar with the
contents of Amendment No. 1. Each Guarantor further
acknowledges that it has, independently and without reliance on
the Bank, and based on such financial and other information as
it has deemed appropriate, made its own analysis of Penril's
condition and of its ability to perform its obligations under
the 1995 Credit Agreement, as amended by Amendment No. 1 (the
"Amended Agreement"), and the Notes referred to therein.
Each Guarantor hereby consents to the changes to the 1995
Credit Agreement effected by Amendment No. 1 and acknowledges
and agrees that its obligations under its Guaranty shall
continue in full force and effect from and after the
effectiveness of Amendment No. 1. Each Guarantor acknowledges
and agrees that the obligations of Penril under the Amended
Agreement shall continue in all respects to constitute
"Obligations" guaranteed under each Guaranty.
This Consent may be signed in any number of counterparts,
each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument.
This Consent shall become effective as to each Guarantor when
the Bank shall have received counterparts hereof (which may be
delivered by telecopier or other means of facsimile
transmission) signed by such Guarantor.
PENRIL ELECTRONICS INC.
By: \s\R.D. Rose
----------------------
Title: Secretary
PENRIL TECHNOLOGIES INC.
By: \s\R.D. Rose
----------------------
Title: Secretary
TECHNIPOWER INC.
By: \s\R.D. Rose
----------------------
Title: Secretary
ELECTRO-METRICS INC.
By: \s\R.D. Rose
----------------------
Title: Secretary
DATABILITY INC.
By: \s\R.D. Rose
----------------------
Title: Secretary
<PAGE>
PENRIL INTERNATIONAL, LTD.
By: \s\R.D. Rose
----------------------
Title: President
PENRIL DATACOMM, LTD.
By: \s\R.D. Rose
----------------------
Title: Secretary
PENRIL (FAR EAST) LIMITED
By: \s\R.D. Rose
----------------------
Title: Director
PENRIL POWER SYSTEMS, INC.
By: \s\R.D. Rose
----------------------
Title: Director
<PAGE>
EXHIBIT 1
GUARANTOR DATE OF GUARANTY
- --------- ----------------
PENRIL ELECTRONICS INC. MAY 6, 1993
PENRIL TECHNOLOGIES, INC. MAY 6, 1993
TECHNIPOWER INC. MAY 6, 1993
ELECTRO-METRICS INC. MAY 6, 1993
DATABILITY INC. MAY 6, 1993
PENRIL INTERNATIONAL, LTD. OCTOBER 27, 1993
PENRIL DATACOMM, LTD. OCTOBER 15, 1993
PENRIL (FAR EAST) LIMITED DECEMBER 22, 1993
PENRIL POWER SYSTEMS, INC. MAY 18, 1995
Penril DataComm Networks, Inc.
1300 Quince Orchard Blvd.
Gaithersburg, MD 20878
Mr. Ronald A. Howard
9010 Falls Road October 25, 1995
Potomac, MD 20854
Re: Amendment to Employment Agreement
Dear Ron:
Reference is made to the Employment Agreement dated as of
May 1, 1993(the "Employment Agreement") between Penril DataComm
Networks, Inc. and Ronald A. Howard. Unless otherwise indicated,
capitalized terms used herein shall have the same meaning as in
the Employment Agreement.
1. Amendments to Employment Agreement.
In consideration of the mutual covenants set forth herein,
the parties agree that the Employee Agreement is hereby
amended, effective immediately, in the following respects:
(a) Section 3 of the Employment Agreement is hereby amended
to delete the date "April 30, 1996" and to substitute for it
the date "April 30, 1997."
(b) Subsection 4(a) of the Employment Agreement is hereby
amended to delete the dollar figure "$200,000" and to
substitute for it the dollar figure "$225,000."
(c) Section 4 of the Employment Agreement is hereby amended
by to add a new subsection 4(f) thereto to read as follow"
"(f) If the Company is sold or acquired during the term
of this Agreement, whether by sale of shares, merger,
consolidation, share exchange, sale of all or
substantially all assets or otherwise, then immediately
upon the closing of such sale or acquisition, Executive
shall receive a bonus equal to 30 months salary at the
rate specified in subsection 4(a) hereof."
<PAGE>
(d) Section 9 of the Employment Agreement is hereby amended to
add a new subsection (g) thereto to read as follows:
"(g) Sections 3.02 and 3.04 of the Merger Agreement are
hereby incorporated herein by reference and made part
hereof, and shall be binding on Executive to the same
extent as if fully set forth herein, with the following
changes:(i) the covenants set forth in subsections (b)
and (c) of Section 3.02 of the Merger Agreement shall
be binding on Executive through April 30, 1997; (ii)
the convenants set forth in Section 3.04 of the Merger
Agreement shall be binding on Executive through April
30, 1997; and (iii) the covenant set forth in
subsection 3.04 (a)(iv) of the Merger Agreement shall
not prevent Executive from being appointed or elected
to the Board of Directors of the Company."
2. Section Headings.
The section headings in this letter agreement are inserted
for convenience only and shall not be part of this
instrument.
3. Governing Law.
This letter agreement shall be governed by and construed in
accordance with the laws of the State of New York.
4. Effect of Amendment.
Except as amended and supplemented hereby, all of the terms,
conditions, covenants and provisions of the Employment
Agreement shall remain and continue in full force and effect
and are hereby ratified, repeated and confirmed in all
respects.
5. Entire Agreement.
This letter agreement and the Employment Agreement as
amended and supplemented hereby constitute the entire
agreement and the understanding between the parties hereto
with respect to Executive's employment relationship with the
Company and supersede any and all prior agreements and
understandings relating thereto.
<PAGE>
6. Counterparts; Effectiveness.
This letter agreement may be signed in any number of
counterparts, each of which shall be original, with the same
effect as if the signatures thereto and hereto were upon the
same instrument. This letter agreement shall not be
effective and binding upon either party hereto until signed
by both of them.
Please confirm your agreement to the foregoing by signing
where indicated on the counterpart of this letter agreement
provided and returning it to the undersigned.
Very truly yours,
PENRIL DATACOMM NETWORKS, INC.
BY: \s\Henry David Esptein
---------------------
Henry David Epstein
Chairman, President
and Chief Executive Officer
AGREED TO:
\s\Ronald A. Howard
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Ronald A. Howard
Dated: October 25, 1995
