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, 1996
Commission File No. 00-6710
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 September 30, 1996 the aggregate market value of the Company's voting
Common Stock held by non-affiliates of the Company was approximately $125
million.
As of September 30, 1996 there were 11,195,603 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").
PENDING TRANSACTION
On June 16, 1996, the Company entered into a Plan and Agreement of Merger, as
amended August 5, 1996 (the "Merger Agreement") with Bay Networks, Inc.
("Bay") and a subsidiary of Bay. Under the terms of the Merger Agreement, the
Company will transfer (the "Transfer") all of its Access Beyond remote access
products business and any other assets unrelated to its modem business to a
newly formed subsidiary, Access Beyond, Inc. ("Access Beyond") and then
distribute all of the shares of Access Beyond common stock to the Company's
shareholders in a spin-off transaction (the "Spin-Off"). Following the spin-off
the subsidiary of Bay will merge with and into Penril, whose primary
remaining operations will consist of its modem business, with Penril becoming
a wholly owned subsidiary of Bay.
Pursuant to the Spin-Off and merger transaction, shareholders of the Company,
as of the appropriate record dates, will receive one share of Access Beyond
common stock for every share of Penril common stock held, plus $10 in Bay
common stock. The dollar value of Bay shares to be paid is fixed according to
an exchange value determined by averaging the closing prices of Bay common
stock over a specific period prior to closing. In addition to the assets and
liabilities related to the Modem business, Bay will assume the outstanding
bank debt of Penril up to $4 million. All cash of Penril on the date of the
closing of the transactions will be transferred to Access Beyond, Inc.
The transactions are subject to regulatory and Penril stockholders' approval.
RESTRUCTURING OF BUSINESS
As more fully described in Note 2 to the Consolidated Financial Statements,
the Company took actions to strategically restructure its business to reduce
costs and improve competitiveness for the long term. The Company's wholly
owned subsidiary, Access Beyond, Inc., intends to focus its resources on the
growing segment of remote access data communications. As a result of this
plan, the Company recorded a charge of approximately $9.7 million in the
fourth quarter of fiscal 1996. In addition, the Company decided to sell its
Electro-Metrics, Inc. ("EMI") subsidiary which specializes in the production
of sophisticated high frequency electronic instrumentation equipment.
DISCONTINUED OPERATIONS
As noted above, the Board of Directors made the decision to sell EMI and
consequently, EMI has been classified as a discontinued business. The Company
continues to operate EMI and expects EMI to at least operate at a break even
level through the anticipated disposition date which is expected to occur
on or before December 31, 1996. Prior to the end of fiscal 1996, the Company
entered into an agreement subject to certain contingencies, to sell the assets
of Technipower, Inc. ("TPI"). The sale is expected to be completed during the
first quarter of fiscal 1997. The Company recorded a charge of $640,000 in
the fourth quarter of fiscal 1996 for the estimated loss on disposal of both
these business. See Note 3 to the Consolidated Financial Statements for
further discussion of discontinued operations.
MODEM PRODUCTS
The modem family of products includes a variety of products for use in sending
data from one point to another via public or private telephone lines. The
mainstay of this product grouping is the V.34 modem. Based on 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 forms including desktop boxes and modem cards
which implement many modems on a single board. In addition to a wide variety
of modem products and capabilities, Penril's modems support sophisticated
modem management capabilities which are sold together with Penril's modem
products. Products are sold through a world wide network of resellers,
distributors and OEMs. Based on the high end functionality of Penril's
products, Penril focuses its sales efforts on large modem installations,
including telephone companies and PTTs world wide.
In the last six months, Penril has begun aggressive licensing and OEM
development programs involving its advanced modem technology. For
semi-conductor manufacturers, such projects involve the portation of Penril's
modem software to new custom chip environments and the payment of substantial
engineering fees and per chip royalties. For communications companies,
projects involve the design of custom high density modem solutions that
integrate with existing customer products, with anticipated subsequent high
volume purchases of such custom cards.
In addition to high speed modems and modem technology, Penril expects to
continue to sell T1 Customer Premise Equipment. Penril offers a system that
allows multiple telephone and data communications to be transmitted over one
high-speed transmission line at speeds up to 1.54 million bits per second.
This product supports network management, voice, data and video communications
as well as access to long distance carrier networks.
INTERNETWORKING PRODUCTS
The Company's internetworking product line consists largely of products which
serve the LAN and Host Access markets and a new product family called Access
Beyond, serving the remote access market.
The LAN and Host Access products currently sold by the Company include
statistical multiplexers and host access servers (VCX), Ethernet terminal
servers (CSX), Ethernet local and remote bridge routers (BRX), and a line of
CSU/DSU wide area products. The Company's new Access Beyond product family is
targeted at the remote access market, providing a scaleable, modular platform
into which a variety of connectivity options are expected to be offered. The
Access Beyond family of products is expected to replicate the function of most
of the LAN and Host Access Products, allowing the Company to phase out LAN and
Host Access Products models in favor of new Access Beyond models.
The VCX product line of multiplexers ranges from 4-port remote site
multiplexers to enterprise solutions providing up to 304 ports or 36 trunk
lines and multipurpose communication servers that combine both wide area
network ("WAN") and LAN capabilities. These products can function as a data
PBX, X.25 PAD, statistical multiplexer, terminal server or any combination of
these. Although the market for these products is in decline, the Company
continues to serve the installed base and fulfill customer applications.
The CSX Ethernet communications server family provides local and dialup access
to Ethernet LANs. Available as either 8-port or 16-port stand alone units or
as a modular chassis based solution, the CSX server provides terminal and
dialup access for TCP/IP networks. The BRX family includes modular switching
routers that provide up to 16 LAN ports and 2 WAN ports. A key element to the
BRX product line is in the Constellation software which provides a scaleable
router/switching solution. The Company believes that the Constellation
software uses an architecture called Logical Bridge Routing, which enables
network managers to optimize bridge/router port configurations for efficient
high performance. The Constellation software is one of the key elements in the
new Access Beyond product line.
The Access Beyond product line is a scaleable, modular family of remote access
products that integrate WAN transmission and LAN access technologies into a
single modular architecture, while allowing room for growth and investment
protection.
The Company anticipates that a wide range of Access Beyond models will be
available to meet varying site requirements, with chassis sizes ranging from
small 4-port units to completely modular 196-port units, thus allowing the
user to customize the chassis-based units to provide a unique mix of local
area and wide area network interfaces that meet the specific demands of its
network environment. Interface options will include: Ethernet backbone and end
user ports, integrated wide area network interfaces, analog modems, digital
modems, CSU/DSU and ISDN interfaces. The modularity and scaleability of the
Access Beyond product family is intended to give the customer flexibility in
network configuration and expansion potential.
The first phase of Access Beyond includes Ram Rack, a high density modem
product and Access Beyond 1000 Remote Access Servers, which are now being
shipped to customers. These products provide remote users with competitively
priced remote access to Novell, TCP/IP and Appletalk networks. The next phase
of the Access Beyond rollout is expected to include the Access Beyond 2400 and
Access Beyond 4400 modular chassis systems. These products are designed to
expand the flexibility of the product line with optional interfaces for direct
terminal connections, integrated V.34 modems and integrated ISDN terminal
adapters, along with LAN and high speed WAN (T1/E1/PRI) connectivity.
The Company anticipates that future enhancements to its remote access software
will provide integration of the remote access capabilities with full
multi-protocol routing. This combination is expected to provide additional
connectivity options and reduced access costs for corporate remote access
networks by allowing a single Access Beyond server to replace several separate
competitive devices. The software features of Access Beyond are and will be
focused on solving the problems of corporate remote LAN access. With the
growth of the Internet and the World Wide Web, corporate telecommuters and
traveling employees now require simultaneous support for multiple networking
protocols allowing access to a wide variety of applications. Networking
security is provided via a collection of security options.
All Access Beyond products will be monitored and configured with a graphical,
menu-driven Windows-based management tool that provides real-time management
control over the Access Beyond products. This management tool will be based on
the industry standard SNMP protocol to ensure interoperability with equipment
and management systems from other vendors.
The Company believes that it will deliver the industry's first unified
approach to remote access, with one comprehensive product line that can supply
both LAN and WAN technologies required in a single architecture, with complete
management control, and new levels of investment protection for end users.
Existing applications will be changed from dedicated services to faster, lower
cost and more flexible services such as Frame Relay and Ethernet. Access
Beyond is intended to provide a migration path from these older networks to
the remote access networks of the future.
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
The Company owns, or is licensed or otherwise possesses legally enforceable
rights to use, several patents, patent applications, trademarks, trade names,
service marks, copyrights, schematics, technology, know-how, computer software
programs or applications, and tangible or intangible proprietary information
or material essential and necessary to the business of the Company. The
Company may desire in the future to obtain additional licenses related to its
products and 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 technology involved.
The patents owned by Penril include patents entitled "Precoding Scheme for
Transmitting Data Using Optimally-Shaped Constellations over
Intersymbol-Interference Channels" (jointly owned with the University of
Maryland pursuant to a certain Patent Ownership Agreement, dated
April 3, 1996), "Modem and Method for Eight Dimensional Trellis Code Modulation"
and "Radio Frequency Apparatus for Measuring Moisture Content of Materials as a
Function of Dielectric Constant" (expired on November 3, 1992).
The trademarks, trade names, and service marks, owned by Penril include BIAX,
PENRIL, PENRIL CORP., PENRIL DATABILITY NETWORKS, AND THE PENRIL DATABILITY
DESIGN, PENRIL DATACOMM, and PENRIL DATA COMMUNICATIONS.
Penril has historically licensed technology, which helps to support Company
developed designs, including multiplexer base system technology channel bank
system technology, quad voice card technology, quad analog card technology,
high speed data card technology, logic redundancy technology, uninterruptible
power supply technology, drop and insert arrangement technology, networking
technology, V.34 data/fax modem technology, bridge routers and remote access
servers technology, router software technology, V.42bis modem technology,
license under MNP Link protocol technology, and various software licenses.
On June 16, 1996, Penril and Bay entered into a Perpetual License Agreement
whereby Penril licensed Bay certain intellectual property, software, and
technical know-how relating to certain V.34+Xylogics Octal Modem Cards. The
effective date of this Perpetual License Agreement is contingent on certain
terms contained in the Merger Agreement. Should Penril or Bay terminate the
Merger Agreement, this Perpetual License Agreement will become effective under
certain circumstances upon the payment by Bay of $50 million within 10
business days of giving notice of such termination to Penril, but no earlier
than December 16, 1996. The Perpetual License Agreement contemplates that
Penril will develop an 8 port Digital Modem Card for Bay, train Bay's
personnel in the underlying technology, and provide technical assistance where
necessary to permit Bay to market this digital technology. In addition, in
order to practice the licensed technology, a license under a certain patent
must be granted by Penril to Bay. Penril and Bay will negotiate the terms and
conditions of such license. Such license will be subject to the following
conditions: (a) if Bay makes the payment of $50 million should the Merger
Agreement be terminated, the royalty rate for modems covered by such patent
will not exceed the lesser of $.30 per modem or the lowest rate being charged
to any other licensee of such patent, and (b) if no such payment of
$50 million is made, the royalty rate will not exceed that being charged to any
other licensee manufacturing a comparable volume of modems under such license.
The Perpetual License Agreement also grants Bay the right to hire, within 90
days of its effective date, up to five designated Penril employees, which
employees are important to the modem business. Also on June 16, 1996, Penril
and Bay entered into a License Agreement whereby Penril licensed to Bay
certain intellectual property, software and technical know-how relating to
certain V.34+ Xylogics Octal Modem Cards. The License Agreement terminates
December 15, 1996. Bay paid Penril a fee of $4.5 million upon execution of
the License Agreement.
The patents which are associated with EMI and TPI include patents entitled
"Fiber Optic Connector", "Uninterruptible Power Supply", and "Guard Time
Elimination in a TimeDivision Multiplexed, Active Star-coupled, Half-duplex
Mode, Synchronous Communications Network." These patents will be sold as part
of the assts of EMI and TPI. If the sale of these subsidiaries are not
consummated prior to the Transfer, then these patents will be contributed to
Access Beyond as part of the assets of EMI and TPI.
The United States trademarks, trade names and service marks which will be
owned by Access Beyond after the Transfer include ELECTRO-METRICS,
TECHNIPOWER, ACCESS BEYOND, CONSTANT POWER, MULTIVERTER, FORSITE, MUX/ROUTER,
and SUNUPS. The foreign trademarks, trade names and service marks which will
be owned by Access Beyond include TECHNIPOWER in France, the United Kingdom
and Italy.
Access Beyond will license much of its technology including integrated access
software; CSU/DSU technology; frame relay assembler disassembler technology;
PC/TCP SNMP technology; terminal emulation software; remote access software;
router card technology and software; network management software; and basic
frame relay software for LAN interconnect products.
On June 16, 1996, Penril and Bay entered into a Development and License
Agreement on behalf of Access Beyond whereby Bay licensed to Penril on behalf
of Access Beyond certain intellectual property, software, and technical know-how
related to certain 24-port Digital Modem Cards. The agreement
contemplates that Bay will develop a 24-port Digital Modem Card for Access
Beyond, train Access Beyond's personnel in the underlying technology, and
provide technical assistance where necessary to permit Access Beyond to market
this digital technology.
Finally, the consummation of the spin-off transaction is conditioned upon a
transfer of a license for intellectual property, software and technical know-how
pursuant to the terms of that certain Technology License Agreement to be
executed between Penril and Access Beyond. In connection with the Transfer,
Penril and Access Beyond will enter into a Technology License Agreement whereby
Penril will license to Access Beyond certain intellectual property, software
and technical know-how, including those relating to a patent jointly owned
by Penril and the University of Maryland. The Technology License Agreement will
also obligate Penril to use its best efforts to obtain for Access Beyond all
rights obtained by Penril pursuant to cross licensing agreements involving such
jointly owned patent.
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 $7,389,000 (19% of
consolidated revenues) for product development and engineering during fiscal
1996 compared to $7,438,000 (14% of consolidated revenues) in fiscal 1995 and
$8,817,000 (14% of consolidated revenues) in fiscal 1994.
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, 1996, EMI had 71 employees, TPI had 46 employees and Penril
Datability division had 276 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. It is currently anticipated that employees working at EMI and
TPI will remain as employees of these entities when the entities are sold. As
part of the restructuring of the Company, and the spin-off of Access Beyond
and the subsequent merger with Bay, 66 employees have been notified that their
employment will be terminated, approximately 170 employees will be employed by
Access Beyond and approximately 41 employees will remain with Penril after the
merger.
<PAGE>
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:
<TABLE>
<CAPTION>
Operation Location Size Lease Expires
- ----------------- -------------- ----------- --------------
<S> <C> <C> <C>
Penril Datability Gaithersburg, MD 84,000 Sq. Ft. September, 1999
Penril Datability Carlstadt, NJ 44,403 Sq. Ft. September, 2001
Penril Datability Basingstoke, England 6,800 Sq. Ft. August, 2006
</TABLE>
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
The Company is party to several material legal proceedings as summarized
below. With the exception of the proceeding against Rockwell International
Corporation, et. al., and one other legal proceeding incurred in connection
with the modem business, all costs, expenses, liabilities and obligation of
the litigation will be assumed by Access Beyond in connection with the spin-off
transaction and all recoveries from such litigation will be realized by
Access Beyond; provided, however, that Penril may be deemed to have remained
contingently liable for satisfaction of the obligations.
On June 1, 1993 Penril initiated a lawsuit against Standard Microsystems
Corp., ("SMC") Massachusetts, Inc., Ashraf M. Dahad and Kwabena Akufo (the
"SMC Defendants") in the Circuit Court of Maryland for Montgomery County for
breach of contract including, among other things, failure to transfer
technology, unfair competition and false representations. Penril sought relief
in an aggregate amount of approximately $50 million. The SMC Defendants
subsequently brought a counterclaim alleging fraud and breach of contract and
sought recovery of amounts due under the contract which were alleged to be
approximately $1,650,000 in compensatory damages plus unspecified punitive
damages. In September 1996, the Company and the SMC Defendants agreed to drop
the fraud charges and to settle the contractual dispute. The Company will
receive from SMC, in settlement of litigation, $3.5 million, net of legal
payments, in the first quarter of fiscal 1997.
On December 24, 1994, Penril 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 Penril
agreed to develop certain computer hardware and software to NSC's
specifications. Penril 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 Penril. NSC is seeking rescission of the
contract, restitution of monies paid by NSC to Penril, compensatory damages of
$5,000,000 and punitive damages in an unspecified amount. As of September 24,
1996, the litigation was in the discovery stage.
Digital Equipment Corporation ("DEC") has claimed, through a series of written
communications, that Penril has violated DEC patents related to DEC LAT
technology. Penril has taken the position that Datability, Inc., prior to its
acquisition by Penril, had a relationship with DEC that involved the
development of LAT for which Datability has not collected. Both DEC and Penril
have taken the position that it is in the best interests of both parties to
work toward a fair resolution. As of September 24, 1996 no formal claims have
been filed.
On December 6, 1995, Penril filed a lawsuit against Rockwell International
Corporation and U.S. Robotics Access Corporation seeking declaratory,
injunctive, and money damage relief by reason of an alleged patent
infringement by the defendants. The action was filed in the United States
District Court for the District of Maryland. In September 1996, the Company
agreed to settle its lawsuit with U.S. Robotics.
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.
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 fiscal quarters
indicated.
<TABLE>
<CAPTION
1996 1995
High Low High Low
------ ------ ------ ------
<S> <C> <C> <C> <C>
First Quarter $ 8 3/8 $ 4 3/8 $ 4 1/8 $ 2 3/4
Second Quarter 11 1/4 5 1/4 3 3/8 2 1/8
Third Quarter 9 1/4 5 1/2 4 3/4 2 3/4
Fourth Quarter 14 1/8 8 3/8 6 3 1/8
</TABLE>
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 August 31, 1996 was 936. The
Company has not paid a dividend during the preceding two fiscal years and
there can be no assurance that it will pay a dividend.
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.
<CAPTION>
Years Ended July 31,
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Continuing operations
Net Revenues $ 39,435 $ 52,611 $ 61,838 $ 44,108 $ 32,966
Income(Loss) (20,668)(a) (4,614) 2,345 1,027 188
Earnings(Loss) per share (2.14) (0.61) 0.30 0.15 0.03
Discontinued operations
Net Revenues 10,469 8,960 11,995 12,694 13,969
Income(Loss) 404 (1,661) (828) (896) 906
Loss on Disposal (640) (1,400) -- -- --
Earnings(Loss) per share
Discontinued operations 0.04 (0.22) (0.11) (0.13) 0.13
Loss on disposal (0.07 (0.19) -- -- --
Cash Dividends
per share -- -- 0.02 -- 0.02
At Year End:
Total Assets 33,780 44,388 51,061 49,178 28,689
Long-Term Debt 905 5,681 8,890 10,217 1,875
Stockholders' Equity 18,215 21,723 28,580 27,501 22,177
(a) Net Income from continuing operations for fiscal 1996 includes a charge of $9.7 million for restructuring and
$500,000 for costs incurred related to the Merger Agreement with Bay.
</TABLE>
<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, 1996 and 1995 is shown in the table below.
Fiscal 1996 Quarters Ended: October 31,1995 January 31, 1996 April 30, 1996 July 31, 1996
- --------------------------- -------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 9,656 $ 7,691 $ 8,973 $ 13,115
Gross profit 4,757 2,691 3,304 6,274
Net loss (1,597) (3,999) (3,168) (11,904) (a)
Net loss per share (.19) (.43) (.31) (1.11)
Fiscal 1995 Quarters Ended: October 31,1994 January 31, 1995 April 30, 1995 July 31, 1995
- ---------------------------- --------------- ---------------- -------------- -------------
Revenues $ 13,422 $ 12,757 $ 12,682 $ 13,750
Gross profit 6,334 5,844 5,594 5,445
Net loss (619) (936) (1,119) (1,939)
Net loss per share (0.08) (0.12) (0.15) (0.26)
(a) Net loss from continuing operations for the fourth quarter of fiscal 1996 includes a charge of $9.7 million
for restructuring and $500,000 for costs incurred related to the Merger Agreement with Bay.
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL BUSINESS DEVELOPMENTS
Beginning in fiscal year 1994, Penril began to focus its business on remote
access connectivity products. Out of this strategy came the Company's new
remote access product line. The first phase of the new remote access product
line includes the Ram Rack and the Access Beyond 1000 Remote Access Server.
As noted above, the Board of Directors made the decision to sell EMI and
consequently, EMI has been classified as a discontinued business. The Company
continues to operate EMI and expects EMI to at least operate at a break-even
level through the anticipated disposition date which management believes will
be completed by December 31, 1996. Prior to the end of fiscal 1996, the
Company entered into an agreement, subject to certain contingencies, to sell
TPI. The completion of the sale is expected during the first quarter of
fiscal 1997. The Company recorded a charge of $640,000 in the fourth quarter
of fiscal 1996 for the estimated loss on disposal of both these businesses. No
assurance can be given that either or both of EMI and TPI will be sold or that
the timing or terms of any such sale will be favorable to and as anticipated
by the Company.
On June 16, 1996, as amended on August 5, 1996, the Company entered into the
Merger Agreement with Bay and a subsidiary of Bay. Under the terms of the
Merger Agreement, the Company will transfer all of its remote access products
business and any other assets unrelated to its modem business to a newly
formed subsidiary, Access Beyond, Inc. ("Access Beyond") and then distribute
all of the shares of Access Beyond common stock to the Company's stockholders
in a spin-off transaction (the "Spin-Off"). Following the Spin-Off, the
subsidiary of Bay will merge with and into the Company, whose primary
remaining operations will consist of its modem business, with the Company
becoming a wholly owned subsidiary of Bay.
As a result of all of the above items, in the fourth quarter of fiscal 1996,
the Company took actions to strategically restructure the business to focus on
the remote access connectivity products, to reduce costs and improve
competitiveness for the long term. This restructuring plan included the
elimination of the VCP and BRX product lines and the introduction of the new
remote access product line. The decision to restructure and refocus is not
dependent upon consummation of the Merger. As described more fully in Note 2
to the Consolidated Financial Statements, the Company recorded a restructuring
charge in the fourth quarter of fiscal 1996 of $9.7 million. This charge
consisted of a write-down of costs in excess of net assets acquired ($5.0
million), a provision for the write-down of inventories and fixed assets ($2.3
million), a provision for costs associated with contractual obligations for
leased facilities in Hong Kong and Carlstadt, New Jersey ($1.0 million), a
provision for the write-down of purchased technology ($1.0 million), and a
provision for costs associated with termination of approximately 90 employees
($400,000). On an annualized basis this plan is expected to reduce labor
costs by approximately $3 million, reduce amortization and depreciation
expenses by approximately $700,000, and reduce facilities expenses by
approximately $300,000. The Company anticipates completion of the employee
terminations and consolidation of leased facilities by the end of the second
quarter of fiscal 1997, and does not anticipate any additional costs associated
with this restructuring plan.
With the exception of historical information, the matters discussed in this
document may include forward-looking statements that involve risks and
uncertainties. The Company wishes to caution readers that a number of
important factors, including those identified in this section as well as
factors discussed elsewhere in this filing and in other filings with the
Commission, could affect the Company's actual results and cause actual results
to differ materially from those in the forward-looking statements.
NEW ACCOUNTING PRONOUNCEMENTS
During fiscal 1996, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of",
which requires the Company to review long-lived assets, certain identifiable
intangibles, and goodwill related to those assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. As a result of events occurring in the fourth
quarter of fiscal 1996, the Company decided to restructure and refocus its
remaining businesses. Due to these events, the Company determined that the
excess of costs over net assets acquired would not be recoverable, and a
charge of $4,952,000 was taken in the fourth quarter of fiscal 1996 against
the carrying value of this asset. This charge was the remaining balance in
the account "Excess of Costs over Fair Value of Net Assets Acquired"
(See Note 2).
During fiscal 1996, Statement of Financial Accounting Standard No. 123 ("SFAS
123"), "Accounting for Stock Based Compensation," which establishes a fair
value based method for stock-based compensation plans, was issued. SFAS 123
includes both recognition and measurement provisions and disclosure
requirements for stock based compensation. The Company has elected not to
adopt the recognition and measurement provisions of SFAS 123. The effect of
adopting this statement in fiscal 1997 is not deemed to be material.
RESULTS OF OPERATIONS
As a result of the Merger Agreement with Bay and the Spin-Off of the LAN and
remote access products business, the following discussion is based on the
Penril historical financial statements, with revenue and expenses which could
be specifically identified with the modem products shown separately from the
LAN and remote access ("Host Access") products. All revenue and expenses
which could not be specifically identified with the modem products were
included with the LAN and Host Access products, consequently the expenses for
the LAN and Host Accss products are in excess of those that would have been
incurred had the Company been a stand alone company. As noted above, TPI and
EMI subsidiaries are classified as discontinued operations and are not
included in this discussion unless otherwise noted. Dollar amounts are
reported in thousands.
Fiscal 1996 Compared to Fiscal 1995
July 31, July 31,
1996 1995 CHANGE
--------- --------- --------
Revenues:
LAN and Host Access products............. $19,916 $33,637 $(13,721)
Modem products........................... 19,519 18,974 545
--------- --------- --------
$39,435 $52,611 $(13,176)
======== ======== ========
The decrease in revenues for Penril's LAN and Host Access products was
primarily attributable to the continued decline in market demand for terminal
servers and multiplexers which resulted in lower volumes and more competitive
pricing. The Company intends to phase out these products, which represent
older technology, and introduce its new remote access product line. The new
remote access product line is designed to meet the growing demand for remote
access technology. The Company believes that its new remote access product
line has a unique product architecture that combines both remote access and
internetworking capabilities which will offer expanded and fully compatible
capabilities to the existing customer base as well as offering new customers a
product line which will be state of the art in remote access. The Company
believes that this new product line will be competitively priced and will
generate revenues over the next fiscal year to offset the decline in revenue
from its older LAN and Host Access product line.
In the fourth quarter of fiscal 1996, the Company and Bay entered into a
License Agreement whereby Bay acquired a license to certain intellectual
property rights related to its modem technology, and the Company was paid $4.5
million. Revenue for the modem business without this license agreement would
have been $15,019,000 in fiscal 1996 compared with $18,974,000 in fiscal 1995.
The decrease in revenue from the sale of modem products was due to slower than
expected sales of Penril's V.34 modems, and a decline in sales of older modem
products. The Company believes that more competitive pricing of its new V.34
modems will result in higher revenues for fiscal 1997 compared to fiscal 1996,
and that these higher revenues should offset the continued decline in sales of
older modem products.
As shown in Note 10 to the Consolidated Financial Statements, exports
represented 44% of the Company's total revenues in fiscal 1996 and 45% of the
Company's revenues in fiscal 1995. Approximately 60% of the Company's exports
related to Modem products in both fiscal 1996 and fiscal 1995. Revenues from
the Company's foreign subsidiaries, which are primarily sales and marketing
operations (in England and Hong Kong) represented 7% of the Company's total
revenues in fiscal 1996 and 5% of the Company's total revenues in fiscal 1995
and over 95% of those revenues were generated from the subsidiary in England.
Due to the growing demand worldwide for data communications products, the
Company believes it will continue to generate revenue from exports of both its
LAN and Host access products and its modem products. Because of the location
of its primary foreign subsidiary, the Company does not believe it has any
significant exposure to exchange rate risk.
As a result of the restructuring plan, the Company will phase out its
Hong Kong subsidiary in fiscal 1997, and relocate its sales and marketing
operations to the U.S. The Company does not anticipate that the restructuring
plan will have a material effect on revenues for either the Modem products or
the LAN and Host access products.
July 31, July 31,
1996 1995 CHANGE
--------- --------- ------
Gross Profit Margin:
LAN and Host Access products............... 37% 46% (9%)
Modem products............................. 49% 41% 8%
The decrease in the gross profit margin for LAN and Host Access products
was due to reductions in product pricing in order to remain competitive in the
marketplace, and increases in manufacturing inefficiencies due to lower sales
volumes. As noted above, the Company entered into a License Agreement with
Bay in the fourth quarter of fiscal 1996 for $4.5 million. Gross profit
margins without this License Agreement would have been 34% in fiscal 1996
compared to 41% in fiscal 1995. The decrease in gross profit margins for
modem products was due to higher costs of materials in the V.34 modem product
line as well as pricing competition and lower manufacturing efficiencies
related to the lower sales volume.
July 31, July 31,
1996 1995 CHANGE
--------- --------- -------
Selling, general and administrative expenses:
LAN and Host Access products............... $16,417 $16,479 $ (62)
Modem products............................. 2,694 2,286 408
--------- --------- ------
$19,111 $18,765 $ 346
========= ========= ======
Selling, general and administrative expenses decreased for the LAN and
Host Access products primarily from lower commissions paid due to lower sales
volume. There was also a reduction in personnel costs as a result of
eliminating several administrative positions in the Gaithersburg, Maryland
facilities during fiscal 1995. This reduction was partially offset by an
charge of $500,000 during the fourth quarter of fiscal 1996, for costs
incurred related to the Merger Agreement with Bay. All expenses which could
not be specifically identified with the modem products were included with the
LAN and Host Access products, consequently the expenses for the LAN and Host
Access products are in excess of those that would have been incurred had the
LAN and Host Access products been a stand alone company.
July 31, July 31,
1996 1995 CHANGE
--------- --------- ------
Product development expenses:
LAN and Host Access products............... $ 5,624 $ 5,520 $ 104
Modem products............................. 1,765 1,918 (153)
--------- --------- ------
$ 7,389 $ 7,438 $ (49)
======== ======== =====
Product development expenses in the LAN and Host Access products
increased because of an increase in personnel costs related to development of
the new Access Beyond product line. Modem product development expenses
decreased because of reductions in personnel costs as a result of Penril's
cost reduction efforts in fiscal 1995. All expenses which could not be
specifically identified with the modem products were included with the LAN and
Host Access products, consequently the expenses for the LAN and Host Access
products are in excess of those that would have been incurred had the LAN and
Host Access products been a stand alone company.
July 31, July 31,
1996 1995 CHANGE
--------- --------- -------
Interest expense............................. $ 698 $ 1,228 $(530)
During fiscal 1996, Penril sold common stock in private placements which
generated approximately $14.7 million in cash. A portion of the proceeds was
used to repay all term debt during fiscal 1996, which resulted in decreased
interest expense.
<PAGE>
Fiscal 1995 Compared to Fiscal 1994
July 31, July 31,
1995 1994 CHANGE
--------- --------- -------
Revenues:
LAN and Host Access products............... $33,637 $39,011 $(5,374)
Modem products............................. 18,974 22,827 (3,853)
--------- --------- -------
$52,611 $61,838 $(9,227)
======== ======== ========
The decrease in revenues for Penril's LAN and Host Access products was
primarily attributable to the declining market for terminal servers and
multiplexers as these products were reaching the end of the product life
cycle, and to a decrease in orders from some of Penril's OEM customers. The
decrease in revenues from modem products was due to unexpected delays in
shipment of the V.34 and V.34bis modems. As shown in Note 10 of the
Consolidated Financial Statements, the Company had total exports of $23.6
million in fiscal 1995 compared with $25.6 million in fiscal 1994.
July 31, July 31,
1995 1994 CHANGE
--------- --------- ------
Gross Profit Margin:
LAN and Host Access products............... 46% 54% (8%)
Modem products............................. 41% 45% (4%)
The decrease in gross profit margins for LAN and Host Access products was
due to lower manufacturing efficiencies. The decrease in gross profit margins
for modem products was due to costs associated with the initial production of
the V.34 modem product line, lower manufacturing efficiencies and pricing
competition related to the decrease in sales.
July 31, July 31,
1995 1994 CHANGE
--------- --------- -------
Selling, general and administrative expenses:
LAN and Host Access products............... $16,479 $16,965 $ (486)
Modem products............................. 2,286 1,850 436
--------- --------- -------
$18,765 $18,815 $ (50)
======== ======== =======
Selling, general and administrative expenses decreased for LAN and Host
Access products primarily because of a reduction in personnel costs as a
result of eliminating several administrative positions in the Gaithersburg,
Maryland facilities during fiscal 1995 as part of the Company's cost reduction
program. Selling, general and administrative expenses for modem products
increased primarily due to additional allowances for bad debts.
July 31, July 31,
1995 1994 CHANGE
--------- --------- -------
Product development expenses:
LAN and Host Access products............... $ 5,520 $ 6,797 $(1,277)
Modem products............................. 1,918 2,020 (102)
--------- --------- -------
$ 7,438 $ 8,817 $(1,379)
======== ======== =======
Product development expenses decreased because of reductions in personnel
costs as a result of Penril's cost reduction efforts in fiscal 1995 and 1994.
July 31, July 31,
1995 1994 CHANGE
--------- --------- -------
Interest expense............................. $ 1,228 $ 908 $ 320
Interest expense increased because of the increase in the prime rate from
7% in fiscal 1994 to 9% in fiscal 1995, and because the rate charged the
Company by its principal bank was raised from prime plus 1/2% to prime plus
2%.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1996, the Company sold 2,607,000 shares of its common stock in
two unrelated series of private placements which generated aggregate proceeds
of $14,744,000. These proceeds were used to repay all of the Company's bank
term debt and all its outstanding subordinated debt which combined totaled
$4.8 million and to fund general working capital needs including the loss of
$11.1 million (excluding restructuring charges) for fiscal 1996.
As a result of the strategic business plan to restructure the Company, the
Company recorded a restructuring charge of $9.7 million in the fourth quarter
of fiscal 1996. This restructuring charge included non-cash items for the
write-down of costs in excess of net assets acquired of approximately $5.0
million, a provision for the write-down of purchased technology of
approximately $1.0 million, a provision for the write-down of inventory of
$2.2 million. This restructuring charge also included items that will require
future cash expenditures for employee severance of approximately $400,000, and
obligations for leased facilities of $1.0 million. The severance payments to
employees will occur in the fiscal 1997 second quarter and the payments under
the leased facilities obligations will occur over the remaining life of the
lease with $282,000 due in fiscal 1997, $289,000 due in fiscal 1998 and
$440,000 due after fiscal 1998.
As a result of lower than expected sales and the build up of inventory to
support the new remote access product line, inventory levels of the Company
increased $1.3 million during the first nine months of fiscal 1996.
Consequently, the Company started a program to reduce inventories that
resulted in a fourth quarter reduction of approximately $750,000. In
addition, as noted above, the Company recorded an inventory write-down
provision of $2.2 million as part of the restructuring charge. These actions
resulted in the Company inventory levels of $9.7 million at July 31, 1996, or
a reduction of $1.7 million below the July 31, 1995 inventory level of $11.4
million.
Contributing to the Company's cash flow in fiscal 1996 was the reduction in
accounts receivable of $6.5 million. This reduction was the result of the
lower sales volumes in fiscal 1996 compared to fiscal 1995 and an aggressive
collection effort that reduced the average collection time from 94 days in
fiscal 1995 to 65 days in fiscal 1996.
The Company's accounts payable also declined by $2.1 million as result of the
lower level of business.
As part of the Transfer, Access Beyond is to receive all the cash and cash
equivalents of the Company. As of September 25, 1996, the Company had cash
and cash equivalents of approximately $3.8 million. In addition, the Company
is expected to generate cash from several non-operating sources. These
anticipated sources include the following:
The Company settled a law suit with Standard Micro Systems Corp on
September 24, 1996. This settlement will result in the Company receiving
in October 1996, $3.5 million in cash after all related expenses have
been paid.
The Company is in discussions with a potential buyer of EMI. Although
there can be no assurance that a sale of EMI wil occur, the Company's
management believes that the sale of EMI will be completed by December
31, 1996 with expected net cash proceeds of $3.0 million to $3.5 million
after transaction expenses.
The Company has entered into a contract to sell TPI, for $4.3 million,
subject to various contingencies. The Company expects this transaction
to close during the first quarter of fiscal 1997 with the payment of to
the Company $1.5 million in cash. The remaining $2.8 million payment is
due, pursuant to the terms of the contract, on or before December 31, 1996.
As part of the Merger Agreement with Bay, Access Beyond will receive
$1.5 million at the closing pursuant to the Transitional Services Agreement
with the Company.
Prior to the Spin-Off, the Company also anticipates receiving approximately
$5 million ($2.6 million is expected from officers of the Company and $300,000
from directors of the Company) from the exercises of employee and director
stock options. The cash generated from these exercises is expected to be used
for the expenditures related to the Merger and the Spin-Off. These
expenditures include legal and accounting fees (estimated to be $700,000),
investment banker fees (estimated to be $1.3 million) and change of control
payments due to certain officers of the Company (estimated to be $1.3 million).
The Company currently has a line of credit with its principal bank. The
agreement provides a maximum working capital facility of $5.5 million with
borrowing based on qualified accounts receivable and secured by substantially
all of the Company's assets. Interest accrues at the bank's prime rate plus
2% with a commitment fee of 3/8% on the unused portion of the facility. In
the event the facility is canceled prior to its expiration, there is a fee due
the bank equal to 3% of the total facility. As of July 31, 1996, the Company
had borrowed $4 million under the line and had utilized another $90,000 in
connection with a standby letter of credit. Pursuant to the Merger Agreement,
the Company after the merger will retain bank debt up to a maximum of
$4 million.
Currently there are discussions with lending institutions regarding a line of
credit for Access Beyond after the Spin-Off. Although there can be no
assurances, management believes Access Beyond will be able to secure a line of
credit after the Spin-Off. There can be no assurances such a line of credit
will be on economic terms favorable to Access Beyond.
The management of the Company believes that Access Beyond expenditures, during
the first 12 months following the Spin-Off, for fixed assets and capitalized
technology purchases will be approximately $2.2 million, and $700,000 for cash
expenditures related to the employee severance and lease obligations noted
above.
Immediately following the Spin-Off, management believes Access Beyond could
have as much as $7.8 million in cash as well as the right to receive a payment
of $2.8 million from the sale of TPI and possibly proceeds from the sale of
EMI. Based on the Company's expectations with respect to Access Beyond's
product development and production, cash from operations alone will not
satisfy Access Beyond's cash requirements during the first 12 months
following the Spin-Off. However, management expects that cash on hand as
noted above, cash from operations and cash from the sources discussed above,
will satisfy Access Beyond's cash requirements during the first 12 months
after the Spin-Off. There can be no assurance that product development will
proceed at the expected pace, that Access Beyond sales will achieve expected
levels, that staffing and facilities required will be able to be maintianed at
the reduced levels expected under the restructuring plan referred to above, or
that other competitive factors will not result in cash from operations being
less that expected by management. However, Access Beyond has the ability to
defer product development and marketing expenditures if necessary, to match
with cash flow. The deferral of these expenditures could have a negative
impact on future sales of the Access Beyond products. The Company believes,
based on its expected cash on hand, cash from operations, cash from the
sources discussed above and anticipated bank line of credit, that there will
be adequate cash flow to fund operations of Access Beyond.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
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, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ending July 31, 1996. These
financial statements are the responsibility of the Penril'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, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended July 31, 1996 in conformity with generally accepted accounting
principles.
\s\Deloitte & Touche LLP
- ------------------------
Washington, D.C.
September 6, 1996
(September 20, 1996 as to the sixth and ninth paragraphs of Note 7)
<PAGE>
<TABLE>
PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<CAPTION>
Year ended July 31,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
NET REVENUES FROM CONTINUING OPERATIONS $ 39,435 $ 52,611 $ 61,838
COSTS AND EXPENSES
Cost of revenues 22,409 29,394 30,516
Selling, general and administrative 18,611 18,765 18,815
Product development and engineering 7,389 7,438 8,817
Amortization of cost over
net assets acquired 734 834 816
Provision for restructuring costs 9,718 -- --
Merger related expenses 500 -- --
------- ------- -------
59,361 56,431 58,964
OPERATING INCOME (LOSS) FROM CONTINUING
OPERATIONS (19,926) (3,820) 2,874
OTHER EXPENSE
Interest expense (698) (1,228) (908)
Other, net (44) (144) (134)
------ ------ ------
(742) (1,372) (1,042)
------ ------ ------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (20,668) (5,192) 1,832
BENEFIT FOR INCOME TAXES -- 578 513
------ ------ ------
INCOME (LOSS) FROM CONTINUING OPERATIONS (20,668) (4,614) 2,345
INCOME (LOSS) FROM DISCONTINUED OPERATIONS,
net of income taxes 404 (1,661) (828)
LOSS ON DISPOSAL OF DISCONTINUED
OPERATIONS, net of income taxes (640) (1,400) --
------ ------ ------
NET INCOME (LOSS) $ (20,904) $ (7,675) $ 1,517
====== ====== ======
NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE
Continuing operations $ (2.14) $ (0.61) $ 0.30
Discontinued operations 0.04 (0.22) (.11)
Loss on disposal of discontinued
operations (0.07) (0.19) --
------ ------ ------
$ (2.17) $ (1.02) $ 0.19
====== ====== ======
Shares used in per share calculation 9,650 7,559 7,809
====== ====== ======
See notes to consolidated financial statements.
/TABLE
<PAGE>
<TABLE>
PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<CAPTION>
July 31,
1996 1995
ASSETS ------ ------
<S> <C> <C>
Current Assets
Cash and Cash Equivalents $ 4,237 $ 992
Accounts receivable, less allowance for doubtful
accounts of $554 in 1996 and $1,067 in 1995 7,044 13,521
Inventories 9,684 11,427
Deferred income taxes 1,700 1,700
Net assets of discontinued operations 7,337 5,145
Other current assets 249 778
------ ------
TOTAL CURRENT ASSETS 30,251 33,563
------ ------
Property and Equipment, net 2,457 2,648
Excess of Cost Over Fair Value of Net Assets Acquired, net -- 5,689
Other Assets 1,072 2,487
------ ------
TOTAL ASSETS $ 33,780 $ 44,387
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $ 4,000 $ 5,095
Current portion of long-term debt 272 5,164
Accounts payable 6,076 8,156
Accrued compensation and commissions 1,347 894
Deferred revenue -- 1,244
Other accrued expenses 1,758 852
------ ------
TOTAL CURRENT LIABILITIES 13,453 21,405
Long-Term Debt, net of current portion 633 517
Other Noncurrent Liabilities 1,479 742
------ ------
TOTAL LIABILITIES 15,565 22,664
------ ------
Commitments and Contingencies (Note 7)
Stockholders' 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, 10,849,647 shares in
1996 and 7,542,815 shares in 1995 109 76
Additional paid-in capital 39,837 22,384
Retained earnings (deficit) (21,581) (677)
------ ------
18,365 21,783
Equity adjustment from foreign currency translation (150) (60)
------ ------
TOTAL STOCKHOLDERS' EQUITY 18,215 21,723
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 33,780 $ 44,387
====== ======
See notes to consolidated financial statements.</TABLE>
<PAGE>
<TABLE>
PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
(In thousands) Year Ended July 31,
1996 1995 1994
------ ------ ------
CASH FLOWS FROM CONTINUING OPERATIONS
<S> <C> <C> <C>
Net Income (Loss) from operations $ (20,668) $ (4,614) $ 2,345
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 3,452 4,418 3,676
Benefit from deferred income taxes -- (578) (513)
Provision for restructuring costs 9,718 -- --
Other (93) 25 234
(Increase) decrease in assets:
Accounts receivable 6,477 2,508 (1,710)
Inventories (472) 1,122 (1,820)
Other current assets 529 (287) (98)
Increase (decrease) in liabilities:
Accounts payable (2,080) 1,792 (818)
Other liabilities (731) (291) 823
Net cash provided by (used in) continuing ------ ------ ------
operating activities (3,868) 4,095 2,120
CASH FLOWS FROM DISCONTINUED OPERATIONS
Income (Loss) from discontinued operations (236) (3,061) (828)
Non-cash charges and changes in working
capital (2,832) 285 469
Provision for loss on disposal of
discontinued operations 640 1,400 --
------ ------ ------
Net cash used in discontinued operations (2,428) (1,376) (359)
------ ------ ------
Net cash provided by (used in) operations (6,296) 2,719 1,761
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for purchased technology (800) (1,049) (1,126)
Expenditures for property, equipment and
other (747) (417) (933)
------ ------ ------
Net cash used in investing activities (1,547) (1,466) (2,059)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under line of credit (1,095) 1,870 2,740
Borrowings on long-term debt -- -- 1,780
Payments on long-term debt (5,210) (3,300) (4,182)
Issuance of common stock 17,486 74 320
Dividends paid -- -- (147)
Other (93) 94 36
------ ------ ------
Net cash provided by (used in)
financing activities 11,088 (1,262) 547
CASH AND CASH EQUIVALENTS
AT THE BEGINNING OF THE YEAR 992 1,001 752
------ ------ ------
CASH AND CASH EQUIVALENTS
AT THE END OF THE YEAR $ 4,237 $ 992 $ 1,001
====== ====== ======
SUPPLEMENTAL INFORMATION
Cash payments for income taxes $ 20 $ 113 $ 59
====== ====== ======
Cash payments for interest $ 783 $ 1,103 $ 795
====== ====== ======
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED July 31, 1996, 1995 AND 1994
(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, 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)
Net loss (20,904)
Issuance of common stock-
Upon sale in private placements 2,607,267 26 14,718
Upon exercise of stock options 687,284 7 2,735
Upon exercise of warrants 25,000 - -
Shares retired in connection with
options, warrants, and awards (12,719) - -
Foreign currency translation adjustment (90)
---------- ------ ------- ---- ------- ------
BALANCE July 31, 1996 10,849,647 $ 109 $ 39,837 $ -- $( 21,581) $ (150)
========== ====== ======= ==== ======= ======
See notes to consolidated financial statements.
</TABLE>
<PAGE>
PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED July 31, 1996, 1995 AND 1994
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.
Cash and Cash Equivalents: The Company considers cash on hand, deposits in
banks, and highly liquid investments with an original maturity of three months
or less as cash and cash equivalents.
Fair Value of Financial Instruments: The carrying values of cash and cash
equivalents, accounts receivable, and accounts payable approximate fair value
due to the short maturities of such instruments. Long-term debt is carried at
amounts approximating fair values based on current rates offered to the
Company for debt with similar collateral and guarantees, if any, and
maturities.
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. The following table shows the
detail in the inventory account (in thousands):
July 31,
1996 1995
------ ------
Inventories:
Raw material $ 5,823 $ 6,381
Work in process 541 452
Finished goods 3,320 4,594
------ ------
Total inventories $ 9,684 $11,427
====== ======
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 which range from 3 to 10 years. Leasehold improvements
are amortized over the term of the related lease or their estimated useful
lives, whichever is shorter.
The following table shows the detail in the property, equipment and
depreciation (in thousands):
July 31,
1996 1995
------ ------
Machinery, and equipment $10,875 $ 9,952
Purchased software and technology 5,486 5,486
Leasehold improvements 879 865
------ ------
Total property and equipment, at cost 17,240 16,303
Less accumulated depreciation
and amortization (14,783) (13,655)
------ ------
Total property and equipment, net $ 2,457 $ 2,648
====== ======
Revenue Recognition: Revenues are recognized at the time of shipment of the
product or performance of product-related services. Revenues from the license
of product technology is recorded upon delivery of the technology
specification and the fulfillment of other material obligations.
Accounting Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles (GAAP) requires management to
make estimates and assumptions. These estimates and assumptions affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Excess of Cost Over Fair Value of Net Assets Acquired: During fiscal 1996,
the Company adopted the provisions of Statement of Financial Accounting
Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed of", which requires the
Company to review long-lived assets, certain identifiable intangibles, and
goodwill related to those assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. As a result of events occurring in the fourth quarter of fiscal
1996, the Company decided to restructure and refocus its remaining businesses.
Due to these events, the Company determined that the excess of costs over net
assets acquired would not be recoverable, and a charge of $4,952,000 was taken
in the fourth quarter of fiscal 1996 against the carrying value of this asset.
This charge was the remaining balance in the account "Excess of Costs over
Fair Value of Net Assets Acquired" (See Note 2).
Excess of Cost Over Fair Value of Net Assets Acquired (in thousands):
July 31,
1996 1995
------ ------
Cost $ -- $ 8,090
Less accumulated amortization -- 2,401
------ ------
$ -- $ 5,689
====== ======
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 1996 and 1995 are
calculated based on the weighted average common shares outstanding. Earnings
per share for fiscal 1994 year are 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.
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, except those costs applicable to third party contracts.
New Accounting Pronouncements: During fiscal 1996, Statement of Financial
Accounting Standard No. 123 ("SFAS 123"), "Accounting for Stock Based
Compensation," which establishes a fair value based method for stock-based
compensation plans, was issued. SFAS 123 includes both recognition and
measurement provisions and disclosure requirements for stock based
compensation. The Company has elected not to adopt the recognition and
measurement provisions of SFAS 123. The effect of adopting this statement in
fiscal 1997 is not deemed to be material.
Reclassifications: Certain reclassifications have been made to prior period
consolidated financial statements to conform to the July 31, 1996
presentation.
2. Restructuring
In the fourth quarter of fiscal 1996, the Company took actions to
strategically restructure its business to improve the Company's financial
performance. The restructuring included a plan to focus the Company's
business operations on the remote access server and remote connectivity
markets ("Remote Access") and away from the data transmission markets. As a
result of this plan the Company recorded a charge of $9,718,000 in the fourth
quarter of fiscal 1996. This charge was for the following costs.
a. The excess of costs over the fair value of net assets acquired through
the Datability, Inc. acquisition in fiscal 1993, was related to data
transmission techniques and, due to the restructuring plan, has no net
realizable value. Accordingly the remaining book value of $4,952,000
was written off.
b. A charge of $2,339,000 was taken for the write-off of inventory and
fixed assets related to the data transmission business.
c. A charge of $1,012,000 was taken for contractual obligations and
settlement costs incurred for leased facilities in Carlstadt, New
Jersey, Hong Kong and Malaysia, which will be vacated under the
restructuring plan.
d. A charge of $979,000 was taken for computer software related to the
data transmission business that was capitalized in accordance with
FAS86, which has no realizable value under the restructuring plan.
e. A charge of $436,000 was taken for severance costs associated with
employees terminated in connection with the restructuring plan.
No such costs were paid as of July 31, 1996.
3. Discontinued Operations
As part of the Company's decision to restructure its business, the Board of
Directors decided to sell Electro-Metrics, Inc. ("EMI"), a wholly owned
subsidiary which manufactures test equipment and systems for analysis of
electromagnetic interference and communications security including
applications in satellite communications. As a result of this decision,
previously reported financial statements have been restated to reflect EMI as
a discontinued operation.
During fiscal 1995, the Board of Directors decided to sell Technipower, Inc
("TPI"), a wholly-owned subsidiary manufacturing uninterruptible power
supplies and power regulating equipment. The divestiture of TPI is expected
to be completed in fiscal 1997 for $4,300,000. The following table sets forth
the selected financial data of both Discontinued OperationS (in thousands):
Year Ended July 31,
1996 1995 1994
----- ----- -----
Revenues $ 10,469 $ 8,960 $ 11,995
====== ====== ======
Income (Loss) from operations
net of income taxes 404 (1,661) (828)
Loss on disposal
net of income taxes (640) (1,400) --
------ ------ ------
Total loss
from discontinued operations $ (236) $ (3,061) $ (828)
====== ====== ======
Depreciation and Amortization $ 431 $ 415 $ 472
====== ====== ======
Capital Expenditures $ 275 $ 245 $ 441
====== ====== ======
Identifiable Assets at year end $ 10,210 $ 7,950 $ 8,112
====== ====== ======
Because the Company expects to retain the tax benefits associated with the
discontinued operations, no income tax benefit has been recorded for any year.
Net assets of the discontinued operations consist of the following (in
thousands):
July 31,
1996 1995
----- -----
Current assets $ 9,135 $ 6,803
Current liabilities (2,229) (1,395)
----- -----
Net current assets 6,906 5,408
Property, plant and equipment, net 783 849
Other non-current tangible assets, net 60 42
Non-current liabilities (4) (10)
----- -----
Net tangible assets 7,745 6,289
Intangible assets, net 232 256
----- -----
7,977 6,545
Estimated loss on disposal (640) (1,400)
----- -----
Net Assets of Discontinued Operations $ 7,337 $ 5,145
===== =====
4. Acquisitions
On May 6, 1993, the Company acquired all of the outstanding stock of
Datability, Inc. ("Datability") The acquisition was accounted for by the
purchase method, and accordingly, the results of operations of Datability are
included in the Consolidated Statements 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 ("Common Stock"). The purchase price totaled
$4,980,000 including acquisition costs of $386,000. At the acquisition date,
the purchase price exceeded the fair value of 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 Common Stock
being returned to the Company thereby reducing the excess of cost over the
fair value of net assets acquired. During the fourth quarter of fiscal 1996,
the Company expensed the remaining portion of excess of cost over the fair
value of net assets acquired.
5. Financing
Bank Financing: On March 15, 1996 the Company amended the credit agreement
with its principal bank. The new agreement provides for a maximum working
capital facility of $5,500,000 with borrowings based on qualified accounts
receivable and secured by substantially all the Company's assets. Interest
accrues at the bank's prime rate plus 2% with a commitment fee of 3/8%
assessed on the unused portion of the facility. In the event the facility is
canceled prior to its expiration, there is a fee due the bank equal to 3% of
the total facility. The agreement expires March 31, 1997. As of July 31,
1996, the Company had $5,412,000 available of which the Company had utilized
$4,000,000 for working capital loans and $90,000 for a letter of credit. On
June 16, 1996, the Company entered into a Plan and Agreement of Merger, as
amended August 5, 1996 (the "Merger Agreement") with Bay Networks, Inc.
("Bay") and a subsidiary of Bay. As part of the Merger Agreement with Bay,
outstanding bank debt up to $4,000,000 remains with the Company after the
Transfer. Average monthly borrowings and weighted average interest rate
for the three years ended July 31, 1996 are as follows (amounts in thousands):
1996 1995 1994
------- ------- -------
Average monthly borrowings under
working capital facility (in thousands) $ 4,353 $ 4,621 $ 1,475
Weighted average interest rate 10.47% 9.6% 7.2%
As of March 7, 1996, the Company had repaid all outstanding term debt with its
principal bank.
Subordinated debt: In April 1995, as part of the bank financing arrangements,
the Company was permitted to make principal payments on the subordinated debt
only after the bank term loans had been reduced by $3,000,000. This reduction
was accomplished by December 1995 at which time the Company made a
subordinated debt principal payment of $174,000 as required by the amended
subordinated debt agreement. The remaining outstanding balance of $805,000
was repaid in May 1996.
Long-Term Debt: Long-term debt at July 31, 1996 and 1995 consisted of (in
thousands):
1996 1995
------ ------
Term Loans $ -- $ 3,848
Subordinated Debt -- 979
------ ------
-- 4,827
Capital leases and other 905 854
------ ------
905 5,681
Less current portion (272) (5,164)
------ ------
Long-term debt $ 633 $ 517
====== ======
Future maturities of long-term debt are as follows:
Year Ending July 31,
1997 $ 272
1998 261
1999 190
2000 146
2001 36
------
Total $ 905
======
6. Income Taxes
The following table sets forth the differences between the tax provision
(benefit) from continuing operations calculated at the statutory federal
income tax rate and the actual tax benefit for the three years ended July 31,
1996 (in thousands):
1996 1995 1994
------ ------ ------
Tax provision at federal
statutory rate $ (7,027) $ (1,724) $ 644
Amortization of non-
deductible intangibles 1,931 283 283
State & foreign taxes, net of
federal benefit (1,137) (218) 236
Utilization of net operating
loss carryforward -- -- (1,195)
Change in valuation allowance 6,093 1,134 (538)
Other 140 (53) 57
------ ------ ------
Income tax benefit $ -- $ (578) $ (513)
====== ====== ======
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,
1996 the Company had consolidated federal net operating loss carryforwards
(including EMI and TPI) of approximately $17,200,000 which expires in 2007
through 2011, and general business and other tax credits of $1,248,000 to
reduce future tax liabilities through 2009 (in thousands):
As of July 31,
1996 1995
---- ----
Deferred tax assets:
Reserves and other contingencies $ 1,500 $ 1,462
Depreciation and amortization 65 34
Restructuring Reserve 1,859 --
Net operating loss 6,780 2,615
General business and other tax credits 1,248 1,248
Loss on discontinued operations 546 546
Valuation reserve (9,837) (3,744)
------ ------
Total deferred tax assets 2,161 2,161
Deferred tax liabilities:
Amortization of technologies (461) (461)
------ ------
Net deferred tax assets $ 1,700 $ 1,700
====== ======
The deferred tax assets will remain with the Company after the Transfer.
7. Commitments and Contingencies
Pending Transaction: Under the terms of the Merger Agreement, the Company
will Transfer all of its remote access products business and any other assets
unrelated to its modem business to a newly formed subsidiary, Access Beyond,
and then distribute all of the shares of Access Beyond common stock to the
Company's stockholders in the Spin-Off. Following the Spin-Off, the
subsidiary of Bay will merge with and into Penril, whose primary remaining
operations will consist of its modem business, with Penril becoming a wholly
owned subsidiary of Bay.
Pursuant to the Spin-Off and merger, stockholders of the Company, as of the
appropriate record dates, will receive one share of Access Beyond common stock
for every share of Penril common stock held, plus $10 in Bay common stock.
The dollar value of Bay shares to be paid is fixed according to an exchange
value determined by averaging the closing prices of Bay common stock over a
specific period prior to consumation of the merger. In addition to the assets
and liabilities related to the modem business, Bay will assume the outstanding
bank debt of Penril up to $4,000,000. All cash of Penril on the date of the
closing of the transactions will be transferred to Access Beyond.
The transactions are subject to regulatory and the Company's stockholders'
approval and certain conditions to closing as set forth in the Merger
Agreement. At the time of the consummation of the merger, the Company is
responsible for payment of the investment banking fees of approximately
$1,300,000 and for change of control payments of approximately $1,300,000 due
to certain officers of the Company.
Leased Facilities: 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
1996, 1995 and 1994 was $1,673,000, $1,941,000 and $1,754,000 respectively.
Approximate aggregate future minimum rentals applicable to operating leases in
effect at July 31, 1996 without consideration of the effects of the Spin-Off
and Merger are as follows (in thousands):
Year Ending July 31,
1997 $1,720
1998 1,758
1999 1,729
2000 775
2001 633
Beyond 2001 135
------
Total minimum rentals $6,750
======
Legal Proceedings: The Company is a party to several material legal
proceedings as summarized below. With the exception of the proceeding against
Rockwell International Corporation, et. al., and one other legal proceeding
incurred in connection with the modem business, all costs, expenses,
liabilities and obligations of the litigation will be assumed by Access Beyond
in connection with the Spin-Off and all recoveries from such litigation will
be realized by Access Beyond; provided, however, that Penril may be deemed to
have remained contingently liable for satisfaction of the obligations.
On June 1, 1993 Penril initiated a lawsuit against Standard Microsystems
Corp., ("SMC") Massachusetts, Inc., Ashraf M. Dahad and Kwabena Akufo (the
"SMC Defendants") in the Circuit Court of Maryland for Montgomery County for
breach of contract including, among other things, failure to transfer
technology, unfair competition and false representations. Penril sought relief
in an aggregate amount of approximately $50,000,000. The SMC Defendants
subsequently brought a counterclaim alleging fraud and breach of contract and
sought recovery of amounts due under the contract which were alleged to be
approximately $1,650,000 in compensatory damages plus unspecified punitive
damages. In September 1996, the Company and the SMC Defendants agreed to drop
the fraud charges and to settle the contractual dispute. The Company will
receive from SMC, in settlement of litigation, $3,500,000, net of legal
payments, in the first quarter of fiscal 1997.
On December 24, 1994, Penril 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 Penril
agreed to develop certain computer hardware and software to NSC's
specifications. Penril 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 Penril. NSC is seeking rescission of the
contract, restitution of monies paid by NSC to Penril, compensatory damages of
$5,000,000 and punitive damages in an unspecified amount. As of July 31, 1996,
the litigation was in the discovery stage.
Digital Equipment Corporation ("DEC") has claimed, through a series of written
communications, that Penril has violated DEC patents related to DEC LAT
technology. Penril has taken the position that Datability, prior to its
acquisition by Penril, had a relationship with DEC that involved the
development of LAT for which Datability has not collected. Both DEC and Penril
have taken the position that it is in the best interests of both parties to
work toward a fair resolution. As of
July 31, 1996 no formal claims have been filed.
On December 6, 1995, Penril filed a lawsuit against Rockwell International
Corporation and U.S. Robotics Access Corporation seeking declaratory,
injunctive, and money damage relief by reason of an alleged patent
infringement by the defendants. The action was filed in the United States
District Court for the District of Maryland. In September 1996, the Company
agreed to settle its lawsuit with U.S. Robotics.
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. Stockholders' Equity
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. As required by the Purchase
Agreement between the Investors and the Company, a shelf registration was
filed with the Securities and Exchange Commission which became effective on
February 28, 1996. The investors may request one public shelf 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 of Penril, the
Investors are entitled to fill such vacancy by designating one person to the
Board of Directors. In addition, on October 5, 1995, the Company completed
the sale of 50,000 shares of its unregistered common stock to Cramer Partners,
L.P. for $250,000.
In the second half of fiscal 1996, the Company issued 1,092,267 shares of its
unregistered common stock in an unrelated series of private placements which
generated $7,425,000.
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 December 13, 1995, the Company
adopted the 1995 Long-Term Stock Option Incentive Plan (the "1995 Plan") to
replace the 1986 Incentive Plan which expires on October 8, 1996. The
stockholders of the Company approved the 1995 Plan at the Annual Meeting held
April 10, 1996. Under the 1995 Plan, which will terminate December 13, 2005,
key employees of the Company and its subsidiaries may be granted awards
consisting of non-qualified stock options, incentive stock options, and
restricted stock awards. The option price of shares of Common Stock will not
be less than 100% (110% in the case of incentive stock options granted to
optionees holding more than 10% of the voting stock of the Company at the date
of grant) of the fair market value of shares of Common Stock on the date of
grant. No option will be exercisable more than ten years (five years in the
case of incentive stock options granted to optionees holding more than 10% of
the voting stock of the Company on the date of grant) from the date it is
granted. The Company has reserved 1,000,000 shares for issuance under the
1995 Plan. At July 31, 1996, employees had been granted awards for 70,000
shares.
In the case of a "change in control" of Penril, an option holder will
generally have the right, commencing at least five days prior to the "change
in control" and subject to any other limitation on the exercise of the option
in effect on the date of exercise, to immediately exercise any options in full
to the extent not previously exercised, without regard to any vesting
limitations. On July 2, 1996 the Company's Stock Option/Compensation Committee
(the "Committee") took action which caused all of the outstanding Penril
options held by directors and executive officers of Penril to vest.
The terms of restricted stock awards granted under the 1995 Plan are
determined at the time of the award. The Company will hold the shares of
Common Stock under restricted stock awards until all restrictions lapse and
such shares of Common Stock may not be sold or transferred by the employee
until such time. The employee must be employed by the Company when the
restrictions lapse in order to receive the shares of Common Stock when the
restriction's lapse.
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, key
employees of the Company and its subsidiaries may be granted awards consisting
of incentive stock options non-qualified stock options, and 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. At July 31, 1996 an aggregate
of 964,538 shares of Common Stock were reserved for issuance under the 1986
Plan, of which employees have been awarded grants for 962,951 shares of Common
Stock.
In the case of a "change in control" of Penril, an option holder will
generally have the right, commencing at least five days prior to the "change
in control" and subject to any other limitation on the exercise of the option
in effect on the date of exercise, to immediately exercise any options in full
to the extent they previously have not been exercised, without regard to any
vesting limitations. On July 2, 1996 the Committee took action which caused
all of the outstanding Penril options held by directors and executive officers
of Penril to vest.
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.
On October 1, 1992, the Company granted Stock Awards, under the 1986 Plan for
an aggregate of 71,220 Common Stock to all 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 of Common
Stock were issued. Of the total shares of Common Stock awarded, 53,020 were
issued. The Company issued 29,560 shares of Common Stock in October, 1993
which represented 50% of the Stock Awards outstanding on that date and the
remaining 23,460 shares of Common Stock 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 125,333 shares were
reserved for issuance under the Directors Plan at July 31, 1996, of which (5)
directors have been granted awards for 92,000 shares of Common Stock. On July
2, 1996 the Committee took action which caused all of the outstanding Penril
options held by directors and executive officers of Penril to vest.
<TABLE>
A summary of stock option transactions during the three years ended July 31, 1996 is as follows:
1986 Incentive Plan Directors' Plan 1995 Incentive Plan
--------------------------- ------------------------- ------------------------
Number Average Number Average Number Average
of Price of Price of Price
Shares Per Share Shares Per Share Shares Per Share
--------- --------- ------- --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding August 1, 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 -- --
Granted 494,000 7.34 18,000 5.69 70,000 $ 6.77
Exercised (539,284) 4.02 (148,000) 3.87 -- --
Canceled (110,500) 4.32 -- -- -- --
--------- --------- ------- --------- ------ ---------
Outstanding July 31, 1996 962,951 $ 5.54 92,000 $ 3.59 70,000 $ 6.77
========= ========= ======= ========= ====== =========
Exercisable Options at
July 31, 1996 602,384 $ 5.73 92,000 $ 3.59 60,000 $ 6.44
/TABLE
<PAGE>
Warrants:
In March, 1987, Henry D. Epstein joined the Company as President and Chief
Executive Officer and was sold 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. 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.
In August 1995, Mr. Epstein exercised all Class E warrants.
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.
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 $61,000,
$45,000 and $50,000 during fiscal 1996, 1995 and 1994, respectively. There
were no additional Company contributions in any year. As part of the
Transfer, the 401(k) Plan will be transferred to Access Beyond. and active
participation in the 401(k) Plan will be limited to eligible employees of
Access Beyond. Access Beyond intends to split up the 401(k) Plan so the
portion of the plan representing the benefits of participants not employed by
Access Beyond can be terminated. The Company provides no post-employment or
post-retirement benefits.<PAGE>
10. Geographic Area Information
The Company's foreign operations consist 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 1996 1995 1994
U.S. Revenue ------ ------ ------
Domestic $ 19,350 $ 26,190 $ 35,404
Export:
Europe 8,808 9,326 11,665
Pacific Rim 3,868 6,402 4,959
Central and South America 2,393 3,487 4,574
Other International 2,235 4,403 4,353
------ ------ ------
Total Exports 17,304 23,618 25,551
------ ------ ------
Total U.S. Revenue $ 36,654 $ 49,808 $ 60,955
Revenue from foreign subsidiaries 7,392 6,839 7,876
Adjustments and eliminations (4,611) (4,036) (6,993)
------ ------ ------
Total Revenues $ 39,435 $ 52,611 $ 61,838
====== ====== ======
Income (Loss) before taxes
U.S. $(20,267) $ (5,143) $ 2,457
Foreign (531) 688 1,479
Eliminations 130 (737) (2,104)
------ ------ ------
Total Income (Loss) from
continuing operations before
taxes $(20,668) $ (5,192) $ 1,832
====== ====== ======
<PAGE>
Identifiable Assets
U.S. $ 31,325 $ 40,946 $ 47,213
Foreign subsidiaries 2,455 3,441 3,848
------ ------ ------
Total Identifiable Assets $ 33,780 $ 44,387 $ 51,061
====== ====== ======
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, 58, Mr. Margolis has been a director of
Secretary the Company since 1980. He was elected
Secretary of the Company in 1987. For more than
the past five years, Mr. Margolis has been a
partner in the law firm of Benesch, Friedlander,
Coplan & Aronoff P.L.L. in Cleveland, Ohio.
Norman G. Einspruch, 64 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.
Ronald A. Howard, 40, Mr. Howard has served as President of the Penril
Executive Vice President Datability Networks Division since November
1994, and 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.
Class II - Term expiring at the 1997 Annual Meeting:
John P. Lowe, Jr., 44 Mr. Lowe has been a director of the Company
since 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, 70 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 1998 Annual Meeting:
Henry David Epstein, 69, 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.
Howard M. Schneider, 52 Mr. Schneider has been a director of the Company
since 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.
Board members receive an annual stipend of $9,000 and fees of $1,000 per Board
meeting attended, $500 for attendance at a telephonic Board meeting and $250
for attending a meeting of a committee of the Board on the same day as a Board
meeting. The fee for attending a meeting of a Board committee on a day other
than a day on which the Board is meeting is $500. Directors who are employed
by the Company are eligible for the annual Board stipend, but are ineligible
for the per meeting fee paid to outside directors. In addition, non-employee
directors participate in the Non-Employee Directors' Stock Option Plan (the
"Directors' Plan"). Under the Directors' Plan, an option to purchase 24,000
shares of the Company's Common Stock is automatically granted on the first day
of each director's initial term and options to purchase additional shares are
granted automatically in each of the next seven years. No director may
receive options to purchase more than 51,000 shares of Common Stock in the
aggregate. The exercise price for all options granted under the Directors'
Plan is the fair market value of the Common Stock on the date of grant; the
options vest over a period of three years and may not be exercised more than
ten years from the date of grant.
b. Executive Officers
Set forth below is certain information concerning the executive officers
of the Company other than Mr. Epstein and Mr. Howard.
Name, Age and Position
with the Company Business Experience
- ---------------------- -------------------
Richard D. Rose, 42, Mr. Rose was named Senior Vice President
Senior Vice President, in April 1996 and has served as Chief Financial
Chief Financial Officer Officer of the Company since November 1994.
He held the position of Vice President Finance
of the Company from February 1994 until April
1996 and Corporate Controller from 1988 until
February 1994. Mr. Rose was named Vice
President-Controller and Principal Accounting
Officer in December 1990 and served in that
capacity until February 1994.
C.P. Houston, 55, Mr. Houston was named Vice President-
Vice President Operations of the Penril Datability Networks
Division in November 1994. He 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.
David L. Johnson, 58, Prior to his resignation in January 1996,
Executive Vice President Mr. Johnson was President of Penril Electronics,
Inc., a wholly-owned subsidiary, from November
1994 and Executive Vice President of the Company
from 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.
c. Section 16(a) Beneficial Ownership Reporting Compliance
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 1996 were complied with, except that one report covering an open
market sale of shares by Mr. Houston was filed 30 days late, and one report
covering the open market sale of shares by Mr. David L. Johnson, a former
officer of the Company, was filed 10 days late.
Item 11. Executive Compensation.
a. Employment and Other Severance Agreements
Under the terms of a Letter Agreement between the Company and Henry D.
Epstein, Mr. Epstein is serving as President and Chief Executive Officer of
the Company, at an annual salary of $275,000. Mr. Epstein is entitled to a
severance payment equal to two times his total cash compensation for the last
full fiscal year upon termination of his employment in the event of a change
in control of the Company or if he is removed or forced to resign his position
against his will, other than for cause. Upon consummation of the Merger
Agreement with Bay Networks, Mr. Epstein's employment with the Company will
terminate. Accordingly, the severance payment of $550,000 will be paid to Mr.
Epstein in a lump sum on the closing date of the Merger Agreement ("the
Merger").
Ronald A. Howard is presently a party to an Employment Agreement with Penril
dated May 1, 1993 as amended by a letter agreement dated October 25, 1995
(together, the "Howard Employment Agreement"). The Howard Employment
Agreement provides for the employment of Mr. Howard until April 30, 1997 at an
annual salary of $225,000. Under the terms of the Howard Employment
Agreement, if Penril is sold or acquired during the term of the Howard
Employment Agreement, including by way of a transaction such as the Merger,
then immediately upon the closing of such sale, Mr. Howard is entitled to
receive a bonus of $562,500. This bonus is in addition to Mr. Howard's
regular compensation. The Howard Employment Agreement, in addition to Mr.
Howard's base compensation and bonuses, provides for certain benefits and
salary continuation in the event of disability or termination without cause.
Richard D. Rose is presently a party to a letter agreement with Penril dated
January 18, 1995 as amended by a letter agreement dated March 19, 1996 (the
"Rose Employment Agreement"). The Rose Employment Agreement provides for
employment of Mr. Rose as Senior Vice President and Chief Financial Officer of
Penril for a one year term from the date of the Rose Employment Agreement with
automatic renewal unless notice is given by either Mr. Rose or Penril at least
sixty (60)days prior to such anniversary date. Under the terms of the Rose
Employment Agreement, Mr. Rose's annual salary is $150,000. Penril has
guaranteed a performance bonus of $50,000 for calendar year 1996 which will be
pro-rated if Penril is sold or acquired prior to December 31, 1996. In
addition, Mr. Rose is entitled to a bonus of $150,000 upon consummation of the
Merger.
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, 1996, 1995 and 1994 of those persons who were, at July
31, 1996 (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 All Other
Principal Position Year Salary Stock Options(1) Compensation(2)
- ------------------ ---- ----------- ------------------ ----------------
<S> <C> <C> <C> <C>
Henry D. Epstein 1996 $274,997 60,000 $ 13,075
Chairman of the Board 1995 274,997 -- 11,428
President and Chief 1994 274,997 -- 12,018
Ronald A. Howard 1996 221,877 250,000 784
Executive Vice President 1995 200,000 30,000 5,458
1994 203,333 -- 250
Richard D. Rose 1996 153,768 30,000 4,746
Senior Vice President and 1995 125,848 20,000 4,547
Chief Financial Officer 1994 115,335 5,000 4,311
C.P. Houston 1996 114,247 -- 2,911
Vice President 1995 120,290 10,000 250
1994 116,847 5,000 250
David L. Johnson (3) 1996 125,785 -- 2,558
Executive Vice President 1995 200,000 -- 26,646
1994 200,000 -- 1,011
</TABLE>
<PAGE>
(1) Number of shares granted under the 1986 Incentive Plan and 1995
Long-Term Incentive Plan. The options are exercisable at prices
ranging from $2.31 to $7.875 per share, the fair market value at
the date of grant. The Company does not grant SARs.
(2) Includes for fiscal 1996, $300 paid for the benefit of each of the
named executives pursuant to the Company's 401(k) Plan, except for
Mr. Johnson. Also includes for Mr. Epstein, Mr. Howard, Mr.
Johnson, and Mr. Rose, $4,260, $274, $809, and $274 respectively,
paid under the Company's Split-Dollar Life Insurance Program and
for each of the named executives, $8,515, $210, $2,611, $4,172 and
$1,749, respectively, paid to the Exec-U-Care Medical Insurance
Trust.
(3) Mr. Johnson resigned from the Company in January 1996.
<PAGE>
<TABLE>
Option Grants In Last Fiscal Year
% of Total Potential Realizable
Options Value At Assumed Annual Rates
Granted to of Stock Price Appreciation
Options Employees in Exercise or Market Price on For Option Term(2)
Name Granted (1) Fiscal Year(1) Base Price Date of Grant Expiration Date 5% 10%
- ------------ ----------- -------------- ----------- --------------- --------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Henry D. Epstein 60,000 10.6% $6.44 $6.44 04/08/2006 243,005 615,822
Ronald A. Howard 250,000 44.3% $7.88 $7.88 09/05/2005 1,238,1363,137,680
Richard D. Rose 20,000 3.5% $6.44 $6.44 04/07/2006 81,002 205,274
Richard D. Rose 10,000 1.8% $5.69 $5.69 11/03/2005 35,784 90,684
C.P. Houston -- -- -- -- -- -- --
David L. Johnson -- -- -- -- -- -- --
(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 Exercises In Last Fiscal Year
And Fiscal Year-end Option Values
<TABLE>
Per Share Value of Unexercised In-
Number of Unexercised Exercise Price The-Money Options
Shares Options at Fiscal of Unexercised at Fiscal Year-End
Acquired on Value Year-End Exercisable/ Options at Fiscal Exercisable/
Name Exercise Realized Unexercisable(1) Year-End Unexercisable(1)(2)
- -------------- ---------- -------- ---------------------- --------------- -----------------------
<S> <C> <C> <C> <C> <C>
Henry D. Epstein -- $ -- 180,000/-- $4.38-6.44 $ 1,362,000/--
Ronald A. Howard 99,000 520,875 271,000/-- 2.875-7.875 1,393,605/--
Richard D. Rose 96,667 571,852 --/-- -- --/--
C.P. Houston 15,000 102,412 41,667/-- 2.31-7.50 338,136/--
David L. Johnson 196,400 884,883 --/-- -- --/--
(1) Reflects only stock options; the Company does not grant SARs.
(2) Based on the year-end per share closing price of $12.63 (as reported on the NASDAQ on July 31, 1996).
represents the difference between the option exercise price and $12.63.
/TABLE
<PAGE>
c. 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. 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 stockholders 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. 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 1996 because the operating performance of the Company did not meet
the specified goals.
Option Plans The principal purposes of the 1986 Incentive Plan and the
1995 Long-Term 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
stockholders. The incentive plans 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 stockholders.
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
1996. 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 Howard M. Schneider
Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee, the members of which consisted
of John P. Lowe, Jr., Norman G. Einspruch, Michael H. Newlin, Howard M.
Schneider, and Richard D. Margolis during fiscal 1996, was during fiscal 1996,
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 until April 10,
1996, is Secretary (but not an employee) of the Company. Mr. Margolis is a
partner in the law firm of Benesch, Friedlander, Coplan & Aronoff P.L.L.,
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
1996.
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, 1991 and the reinvestment
of all dividends when received.
<TABLE>
<CAPTION>
Years Ended Penril DataComm H&Q NASDAQ
July 31, Networks, Inc. Technology Stock Market
- ------------- --------------- ----------- ------------
<S> <C> <C> <C>
1991 100.00 100.00 100.00 1992 53.93 112.83 117.44
1993 49.24 125.03 142.80
1994 50.76 138.70 146.95
1995 66.62 243.19 206.34 1996 160.28 240.25 224.99
</TABLE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of August 31, 1996, 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.
<TABLE>
<CAPTION
Amount and
Name and Address Nature of Beneficial Percentage
of Beneficial Owner Ownership (1) Ownership
- ------------------------- ------------------- -------------
<S> <C> <C>
Directors and Executive Officers:
Henry David Epstein
1300 Quince Orchard Boulevard
Gaithersburg, Maryland 20878 862,179 (2) 7.8%
Norman G. Einspruch
P.O. Box 248581
Coral Gables, Florida 33124 36,000 (3) (4)
John P. Lowe, Jr.
30 Corporate Woods
Suite 200
Rochester, New York 14623 51,000 (3) (4)
Richard D. Margolis
2300 BP America Building
200 Public Square
Cleveland, Ohio 44114-2378 31,000 (4)
Michael H. Newlin
6517 Wilmett Road
Bethesda, Maryland 20817 12,000 (4)
Howard M. Schneider
130 Liberty Street
New York, New York 10006 21,000 (3) (4)
David L. Johnson (10)
1300 Quince Orchard Boulevard
Gaithersburg, Maryland 20878 -- --
Ronald A. Howard
1300 Quince Orchard Boulevard
Gaithersburg, Maryland 20878 925,603 (5) 8.2%
C.P. Houston
1300 Quince Orchard Boulevard
Gaithersburg, Maryland 20878 41,667 (6) (4)
Richard D. Rose
1300 Quince Orchard Boulevard
Gaithersburg, Maryland 20878 46,667 (4)
All directors and executive officers
as a group
(10 individuals) 2,027,116 (7) 17.7%
Five Percent Shareholders:
Pequot Partners Fund, L.P.,
Pequot Endowment Fund, L.P. and
Pequot International Fund Inc.
354 Pequot Avenue
Southport, CT 06490 1,875,000 (8) 17.0%
Cramer Partners, L.P.
56 Beaver Street, Suite 701
New York, New York 10004 1,060,650 (9) 9.6%
</TABLE>
(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 823,029 shares owned directly by Mr. Epstein,
and 39,150 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 20,000 shares for Dr. Einspruch, 21,000 shares for Mr.
Schneider, and 51,000 shares for Mr. Lowe, which may be acquired from
the Company within 60 days of August 31, 1996 pursuant to the exercise
of stock options granted under the Non-Employee Directors' Stock Option
Plan.
(4) Less than 1%.
(5) Includes, in addition to shares owned directly by Mr. Howard, 271,000
shares which may be acquired from the Company within 60 days of
August 31, 1996 pursuant to the exercise of options granted under the
Company's 1986 Plan.
(6) Includes only shares which may be acquired from the Company within 60
days of August 31, 1996, pursuant to the exercise of options granted
under the Company's 1986 Incentive Plan.
(7) Includes, in addition to shares owned by members of the group, 404,667
shares which certain members of the group have the right to acquire from
the Company within 60 days of August 31, 1996 pursuant to the exercise
of stock options.
(8) Includes 36,500 shares of Common Stock to be owned by Dawson-Samberg
Capital Management, Inc., 787,100 shares of Common Stock to be 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"), 352,900 shares of
Common Stock to be 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 698,500 shares of Common Stock to be
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 to be the beneficial owners, as such
term is used in Rule 13d-3 of the Exchange Act, of the shares of Common
Stock to be 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 Exchange Act. Each of the
Partners disclaims beneficial ownership of the Common Stock to be
beneficially owned by the other partners.
(9) James J. Cramer, President of J.J. Cramer & Co. and Karen Cramer, Vice
President of J.J. Cramer & Co. will have shared voting and dispositive
power with respect to the shares to be held by the Partnership.
(10) Mr. Johnson resigned from the Company in January 1996.
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, 1996
Consolidated Balance Sheets as of July 31, 1996 and 1995
Consolidated Statements of Cash Flows for each of the
three years in the period ended July 31, 1996
Consolidated Statements of Shareholders' Equity
for each of the three years in the period ended
July 31, 1996
Notes to Consolidated Financial Statements for
the years ended July 31, 1996, 1995, and 1994
(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
On June 18, 1996 the Company filed a report on Form 8-K reporting on plans to
Spin-Off the Access Beyond unit to stockholders and the signing of a
definitive merger agreement with Bay Networks, Inc. and Beta Acquisition Corp.
<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 7, 1996
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 7, 1996 Chairman of the Board of Directors
Date: October 7, 1996
\s\John P. Lowe, Jr.
- ---------------------------
John P. Lowe, Jr.,
Director \s\Ronald A. Howard
Date: October 7, 1996 ------------------------------
Ronald A. Howard,
Director and Executive Vice President
Date: October 7, 1996
\s\Richard D. Margolis
- ---------------------------
Richard D. Margolis,
Director \s\Richard D. Rose
Date: October 7, 1996 ------------------------------
Richard D. Rose
Vice President and Chief Financial
Officer
\s\Michael H. Newlin Date: October 7, 1996
- ---------------------------
Michael H. Newlin,
Director
Date: October 7, 1996
\s\Howard M. Schneider
- ---------------------------
Howard M. Schneider,
Director
Date: October 7, 1996
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Penril DataComm Networks, Inc.
Gaithersburg, Maryland
We have audited the consolidated financial statements of Penril DataComm
Networks, Inc. and subsidiaries as of July 31, 1996 and 1995, and for each of
the three years in the period ended July 31, 1996, and have issued our report
thereon dated September 6, 1996 (September 20, 1996 as to the sixth and ninth
paragraphs of Note 7), 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.
\s\Deloitte & Touche LLP
Washington, D.C.
September 6, 1996
(September 20, 1996 as to the sixth and ninth paragraphs of Note 7)
<PAGE>
<TABLE>
SCHEDULE II
PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<CAPTION>
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
<S> <C> <C> <C> <C>
Fiscal 1996 $ 1,067 $ 502 $ 20 $ (1,035) $ 554
====== ==== == ======= =====
Fiscal 1995 $ 965 $ 815 $ 5 $ (718) $ 1,067
====== ==== == ======= =====
(a) Recoveries of accounts previously written off.
(b) Write-off of bad debts.
/TABLE
<PAGE>
<TABLE>
INDEX TO EXHIBITS
Page 1 of 2
<CAPTION>
Exhibit
No. EXHIBIT DESCRIPTION Ref.
- ------- ------------------- ----
<S> <C> <C>
2.01 Agreement and Plan of Merger dated June 16, 1996 among the
Company, Bay Networks, Inc., and Beta Acquisition Corp.
(Exhibit 2.01 to Form 8-K filed June 19, 1996) *
2.02 Amended Agreement dated August 5, 1996 among Penril DataComm
Networks, Inc., Bay Networks, Inc., and Beta Acquisition Corp.
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 Third Amended and Restated Credit Agreement dated as of
March 15, 1996 between Penril DataComm Networks, Inc. and
Signet Bank (Exhibit 4.01 to Form 10-Q filed June 14, 1996 *
4.02 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) *
4.03 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. (Exhibit 10.04 to Form 10-K
filed October 27, 1995) *
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). *
10.06 1995 Long-Term Incentive Plan of Penril DataComm Networks, Inc.
(Exhibit 4.4 to Form S-8 filed May 31, 1996) *
10.07 Perpetual License Agreement dated as of June 16, 1996 between
Penril DataComm Networks, Inc. and Bay Networks, Inc. (Exhibit
10.01 to Form 8-K filed June 18, 1996) *
10.08 License Agreement dated as of June 16, 1996 between Penril
DataComm Networks, Inc. and Bay Networks, Inc. (Exhibit 10.02
to Form 8-K filed June 18, 1996) *
10.09 Employment Agreement between the Company and Richard D. Rose dated
January 18, 1995 as amended March 19, 1996.
11 Computation of Per Share Earnings
22 Subsidiaries of the Registrant
23 Independent Auditors' Consent
* Indicates Exhibits incorporated herein by reference.
Documents not so marked have been filed herewith.
</TABLE>
EXHIBIT 2.02
AMENDMENT AGREEMENT
This Agreement is made and entered into as of the 5th day of August, 1996, by
and among Bay Networks, Inc., a Delaware corporation (the "Buyer"), Beta
Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of the
Buyer (the "Transitory Subsidiary"), and Penril DataComm Networks, Inc., a
Delaware corporation (the "Company"). The Buyer, the Transitory Subsidiary and
the Company are referred to collectively in this Agreement as the "Parties".
WITNESSETH:
WHEREAS, a Plan and Agreement of Merger dated as of June 16,
1996, was executed and entered into by and among the Parties (the "Merger
Agreement"); and
WHEREAS, the Parties desire to amend the Merger Agreement as
provided herein;
NOW, THEREFORE, for good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the Parties hereby agree as
follows:
1. Amendment to Section 1.2 of the Merger Agreement.
Section 1.2 of the Merger Agreement is hereby amended and
restated in its entirety to read as follows:
"1.2 The Closing. The closing of the transactions
contemplated by this Agreement (the "Closing") shall take
place at a mutually agreed upon location, commencing at 9:00
a.m. local time on a mutually agreeable date as soon as
practicable after the date on which all of the conditions to
the obligations of the Parties to consummate the
transactions contemplated by this Agreement have been
satisfied or waived (the "Closing Date"), but in no event
later than November 25, 1996.
2. Amendment to Section 1.9 of the Merger Agreement.
Section 1.9 of the Merger Agreement is hereby amended and
restated in its entirety to read as follows:
"1.9 Fractional Shares. No certificates or script
representing fractional Merger Shares shall be issued to
former Company Stockholders upon the surrender for exchange
of Certificates, and such former Company Stockholders shall
not be entitled to any voting rights, rights to receive any
dividends or distributions or other rights as a stockholder
of the Buyer with respect to any fractional Merger Shares
that would otherwise be issued to such former Company
Stockholders. In lieu of any fractional Merger Shares that
would otherwise be issued, each former Company Stockholder
that would have been entitled to receive a fractional Merger
Share shall, upon proper surrender of such person's
Certificates, receive a cash payment equal to the Buyer
Stock Market Price, multiplied by the fraction of a share
that such Company Stockholder would otherwise be entitled to
receive.
3. Amendment to Section 6.1 of the Merger Agreement. Section
6.1 of the Merger Agreement is hereby amended and restated
in its entirety to read as follows:
"6.1 Termination of Agreement. The Parties may terminate
this Agreement prior to the Effective Time (whether before
or after Requisite Stockholder Approval) as provided below:
(a) the Parties may terminate this Agreement by mutual
written consent;
(b) the Buyer may terminate this Agreement by giving
written notice to the Company in the event the Company
is in breach, and the Company may terminate this
Agreement by giving written notice to the Buyer and
the Transitory Subsidiary in the event the Buyer or
the Transitory Subsidiary is in breach, of any
material representation, warranty or covenant
contained in this Agreement, and such breach is not
remedied within 10 days of delivery of written notice
thereof;
(c) any Party may terminate this Agreement by giving
written notice to the other Parties at any time after
the Company Stockholders have voted on whether to
approve this Agreement and the Merger in the event
this Agreement and the Merger failed to receive the
Requisite Stockholder Approval;
(d) the Buyer may terminate this Agreement by giving
written notice to the Company if the Closing shall not
have occurred (i) on or before November 25, 1996, by
reason of the failure of any condition precedent under
Section 5.1 or 5.2 hereof (unless the failure results
primarily from a breach by the Buyer or the Transitory
Subsidiary of any representation, warranty or covenant
contained in this Agreement);
(e) the Company may terminate this Agreement by giving
written notice to the Buyer and the Transitory
Subsidiary if the Closing shall not have occurred (i)
on or before November 25, 1996, by reason of the
failure of any condition precedent under Section 5.1
or 5.3 hereof (unless the failure results primarily
from a breach by the Company of any representation,
warranty or covenant contained in this Agreement); or
(f) any Party may terminate this Agreement if the
Board of Directors of the Company shall have withdrawn
or modified in a manner adverse to the Buyer its
approval or recommendation to the Company Stockholders
of this Agreement or the Merger or shall have approved
or recommended to the Company Stockholders that they
accept the terms of any Acquisition Proposal or shall
have resolved to take any of the foregoing actions;
provided, however, that reasonable delay required to
comply with the Company Board Fiduciary Duties shall
not be deemed to be a withdrawal or a modification
adverse to the Buyer.
4. Replacement of Exhibit C to the Merger Agreement.
Exhibit C to the Merger Agreement is replaced in its entirety by
Exhibit C attached hereto.
5. Effect of Modification. In the event of any
inconsistency between the provisions of the Merger Agreement
and the applicable provisions of this Agreement, the
provisions of this Agreement shall control in all respects.
Otherwise, the Merger Agreement shall remain in full force
and effect.
6. Successors and Assigns; Governing Law. Subject to the Merger
Agreement as amended hereby, this Agreement shall inure to
the benefit of and bind the respective heirs, personal
representatives, successors and assigns of the parties
hereto and shall be governed by and construed in accordance
with the internal laws (and not the law of conflicts) of the
State of Delaware.
7. Severability; Modifications. Should one or more of the
provisions of this Agreement be determined by a court of law
to be illegal or unenforceable, the other provisions shall
nevertheless remain effective and shall be enforceable.
This Agreement shall not be modified without the prior
consent of each of the Parties.
8. Execution in Counterparts. This Agreement may be executed in
two or more counterparts, each of which shall be deemed an
original but all of which together shall constitute one and
the same instrument.
This Agreement, once executed, may be delivered to either party
through the use of facsimile transmission. In this regard, any and all
signatures of the parties appearing on any facsimile copies of this Agreement
shall be deemed, unless otherwise proved, the lawful and valid signature of
the executing party.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date set forth below.
Effective date of this Agreement: August 5, 1996.
THE BUYER:
BAY NETWORKS, INC.
By:____________________________
Title:_________________________
THE TRANSITORY SUBSIDIARY:
BETA ACQUISITION CORP.
By:____________________________
Title:_________________________
THE COMPANY:
PENRIL DATACOMM NETWORKS, INC.
By:____________________________
Title:_________________________
Amendment Agreement
EXHIBIT 10.09
March 19, 1996
Mr. Richard Rose
Vice President and Chief Financial Officer
Penril DataComm Networks, Inc.
1300 Quince Orchard Blvd.
Gaithersburg, MD 20878
Dear Rick:
The following updates my letter of January 18, 1995 concerning
our understanding regarding the possible sale of Penril DataComm
Networks, Inc. and is effective for one year from the date hereof
("Anniversary Date").
This understanding will automatically renew on the Anniversary
Date, as long as you continue as an employee of Penril, unless either
party gives written notice to the other sixty (60) days prior to the
Anniversary Date. As you know, Penril DataComm Networks, Inc. is not
actively solicity buyers for the company.
If Penril DataComm Networks, Inc. is sold with your assistance
and support and if you agree to remain under the new ownership for a
period of at least one year in your current or similar position, then
Penril will:
Guarantee the payment of that year's salary at your then
current rate. In addition, Penril will pay you a bonus of
$150,000. Payment of the bonus will be made within sixty (60)
days after the transaction closes.
Additionally, Penril has guaranteed you a performance bonus of
$50,000 for calendar 1996. If the company is sold prior to
December 31, 1996 we will prorate the bonus accordingly.
Sincerely,
\s\Henry D. Epstein
--------------------
Accepted:
\s\R.D.Rose
- ------------------
Richard Rose
EXHIBIT 11
<TABLE>
PENRIL DATACOMM NETWORKS, INC AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(In thousands except per share amounts)
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Income (Loss) from Continuing
Operations, as reported $ (20,668) $ (4,614) $ 2,345
Imputed Earnings -- -- --
-------- -------- --------
Adjusted Income from Continuing
Operations (20,668) (4,614) 2,345
Loss from Discontinued Operations (236) (3,061) (828)
-------- -------- --------
Adjusted Net income $ (20,904) $ (7,675) $ 1,517
======== ======== ========
Shares used in this Computation:
Weighted Average Common Shares 9,650 7,559 7,443
Shares applicable to Common Stock
Equivalents -- -- 366
-------- -------- --------
9,650 7,559 7,809
======== ======== ========
Earnings (Loss)Per Share:
Continuing Operations $ (2.14) $ (0.61) $ 0.30
Discontinued Operations (0.03) (0.41) (0.11)
-------- -------- --------
$ (2.17) $ (1.02) $ 0.19
======== ======== ========
</TABLE>
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
CONSTANT POWER SYSTEMS, INC. DELAWARE
PENRIL DATACOMM LTD. UNITED KINGDOM
PENRIL (FAR EAST) LTD. HONG KONG
PENRIL INTERNATIONAL LTD. U.S. VIRGIN ISLANDS
ACCESS BEYOND, INC. DELAWARE
(1) This also represents the name under which the subsidiary does business.
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Penril DataComm Networks,
Inc.'s Registration Statement No. 33-64437 on Form S-3, Registration Statement
No. 33-64439 on Form S-3, 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,
Registration Statement No. 33-87180 on Form S-3, and Restration Statement
No.333-04901 on Form S-8 of our report dated September 6, 1996 (September 20,
1996 as to the sixth and ninth paragraphs of Note 7), appearing in this Annual
Report on Form 10-K of Penril DataComm Networks, Inc. for the year ended July
31, 1996.
\s\Deloitte & Touche, LLP
- -------------------------
Washington, DC
October 7, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-END> JUL-31-1996
<CASH> 4,237
<SECURITIES> 0
<RECEIVABLES> 7,044
<ALLOWANCES> 554
<INVENTORY> 1,700
<CURRENT-ASSETS> 30,251
<PP&E> 17,240
<DEPRECIATION> 14,783
<TOTAL-ASSETS> 33,780
<CURRENT-LIABILITIES> 13,453
<BONDS> 0
0
0
<COMMON> 109
<OTHER-SE> 18,256
<TOTAL-LIABILITY-AND-EQUITY> 33,780
<SALES> 39,435
<TOTAL-REVENUES> 39,435
<CGS> 22,409
<TOTAL-COSTS> 22,409
<OTHER-EXPENSES> 18,611
<LOSS-PROVISION> 502
<INTEREST-EXPENSE> 698
<INCOME-PRETAX> (20,668)
<INCOME-TAX> 0
<INCOME-CONTINUING> (20,668)
<DISCONTINUED> (236)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,904)
<EPS-PRIMARY> (2.17)
<EPS-DILUTED> (2.17)
</TABLE>
