-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RQ3u+YIyyrI4mjitSk/iez/rmorliG8mv/zTXwx8xM90pq3D/W2GR9eyudwiBr0W WOxA5pMhPOVg9cPOWWWN9w== 0000077328-95-000017.txt : 19951030 0000077328-95-000017.hdr.sgml : 19951030 ACCESSION NUMBER: 0000077328-95-000017 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19950731 FILED AS OF DATE: 19951027 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENRIL DATACOMM NETWORKS INC CENTRAL INDEX KEY: 0000077328 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 341028216 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-06710 FILM NUMBER: 95585078 BUSINESS ADDRESS: STREET 1: 1300 QUINCE ORCHARD BLVD CITY: GAITHERSBURG STATE: MD ZIP: 20878 BUSINESS PHONE: 3014170552 MAIL ADDRESS: STREET 1: 1300 QUINCE ORCHARD BLVD CITY: GAITHERSBURG STATE: MD ZIP: 20878 FORMER COMPANY: FORMER CONFORMED NAME: PENRIL CORP DATE OF NAME CHANGE: 19910429 FORMER COMPANY: FORMER CONFORMED NAME: PENRIL DATA COMMUNICATIONS INC DATE OF NAME CHANGE: 19740529 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K ANNUAL REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE FISCAL YEAR ENDED JULY 31, 1995 Commission File No. 1-7886 PENRIL DATACOMM NETWORKS, INC. A Delaware Corporation IRS Employer Identification No. 34-1028216 1300 Quince Orchard Blvd., Gaithersburg, Maryland 20878 Telephone - (301) 417-0552 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Title of each class: Common Stock, $.01 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ----- As of October 18, 1995 the aggregate market value of the Company's voting Common Stock held by non-affiliates of the Company was approximately $52 million. As of October 18, 1995 there were 9,058,552 shares of the registrant's Common Stock, $.01 par value outstanding. PART I ITEM 1. BUSINESS Penril DataComm Networks, Inc. ("Penril" or the "Company") develops and markets network access devices which enable local, remote or mobile users to access network resources located at remote sites, central sites or any other point in the network. The Company possesses each of the technologies needed for a complete network access solution including: remote Local Area Network (LAN) access, high performance modems and modem channel banks, bridges and routers, host access from asynchronous terminals and multiplexors for efficient access to the Wide Area Network (WAN). In addition, the Company's wholly-owned subsidiary, Electro-Metrics, Inc. (EMI) specializes in the production of sophisticated high frequency electronic instrumentation equipment. During the fourth quarter of fiscal 1995, the Board of Directors made the decision to sell the Technipower, Inc. subsidiary. Consequently, Technipower has been classified as a discontinued operation. Unless otherwise stated, the information contained in this Form 10-K describes the status of the continuing operations of the Company although the effect of the discontinued operation is disclosed. DATA COMMUNICATIONS Revenues from data communications products accounted for 90%, 91 % and 87% of the Company's consolidated revenues in the fiscal years ended July 31, 1995, 1994 and 1993, respectively. These revenues come through a distribution channel composed of value-added resellers (VARs), original equipment manufacturers (OEMs) and selected distributors in more than 40 countries. Sales directly to end-user customers accounted for less than 10% of the Company's revenues. PRODUCTS Penril offers its customers a wide array of network access products. Since the acquisition of Datability Inc. in May 1993, the Company has sought to create an integrated product line which combines the two companies' strengths. This combined technology base is being realized in a single, scaleable hardware platform known as "AccessBeyond"(trademark). Thus, a single hardware platform may include remote LAN access, bridging/routing, multiplexing or host access via the software running on it. Forming the functional basis for "AccessBeyond" is Penril's existing product line which is organized into four distinct areas: LAN Access High Speed Modems T1 Customer Premise Equipment Host Access LAN Access Products Linkup(trademark) Dial Access Server - The Linkup family of remote access products provide both dial-in and dial-out LAN access for TCP/IP, DEC LAT and IPX users. On the wide area network, Linkup's 4 and 8 port devices target smaller sites requiring remote node support, while the 24 port model with integrated modems supports larger installations. Linkup's asynchronous ports support host access applications. The products include Microsoft Windows- based client software along with comprehensive security and management capabilities. To simplify installation, the Company provides Network-in-a- Box(trademark), a pre-configured Linkup remote access solution with everything required for quick and easy installation. BRX Router - The BRX family includes high performance, modular switching routers that provide up to 16 LAN ports and 2 WAN ports, and are offered in either a free standing format or as a card for insertion into customer equipment. The BRX also offers high performance store and forward switching capabilities as evidenced by its 90,000 pps filtering and forwarding rate. The key to the BRX product line is in the Constellation(trademark) multiprotocol bridge/router software which provides a scaleable routing/switching solution. Each BRX product is shipped with an integrated management port which supports an SNMP-based network management software. Constellation Multiprotocol Bridge/Routing Software - Constellation uses an innovative software architecture for high performance bridging and routing featuring one of the broadest suites of protocols available in the market today (including IP, IPX, AppleTalk II, OSPF and RIP among others). WAN support includes X.25, Frame Relay and HDLC. Penril also provides virtual LAN software for advanced switching capabilities. The Company pioneered the concept of Logical Bridge Routing, a methodology which enables network managers to optimize bridge/router port configurations for efficient, high performance networks. The software provides comprehensive network management capabilities. High Speed Modems Penril's V.34bis modems offer the highest performance available today for analog modems. Based on a proprietary DSP and controller design, Penril's V.34bis modems offer many advanced features including data transmission speeds up to 33,600 bits per second, protocol intelligent compression performance (e.g. Internet Asynchronous PPP and SLIP) and remote software upgradeability for implementation of future standards. Modems are delivered in several form factors including desktop boxes and modem cards which implement up to eight modems on a single board. T1 Customer Premise Equipment The Company offers a complete line of multiplexors (MUXs) ranging from products which enable its MUX products to connect to LAN's, to large enterprise devices providing up to 304 ports or 36 trunk lines. Penril MUX products can function as a data PBX, an X.25 PAD, a statistical multiplexor, a terminal server or any combination of these. In the first quarter of fiscal 1996, the Company introduced the VCX 500, a product that implements recently ported multiplexor software onto the "AccessBeyond" hardware platform. This is the first product based on this new architecture. One unique feature of the new architecture is the ability in the future to swap cards which today perform a multiplexing function with cards that will perform other functions such as routing, switching or remote access. This means a customer could purchase the VCX 500 today to replace an older MUX in a network and then upgrade the VCX 500 with routing, switching or remote access functions as the customer's need for those functions arises. Penril is the only MUX supplier with this capability. Penril also supplies a channel bank product which provides channelized T1 support. In late 1994, the Company introduced the Cyclone product. This was the first product to implement technology from both Penril and Datability. Cyclone is a T1 channel bank packaged to include MUX and remote access capability, providing flexible WAN and LAN connectivity. Host Access The Company is a leader in the market for host access (terminal server) products. These products are multipurpose communication servers that combine both wide area and local area networking capability in a modular, cost- effective high performance chassis. The systems offer either single or multiprotocol networking capabilities and a selection of interchangeable line cards which provide a suite of WAN gateway and asynchronous communications options. Although the overall market for host access devices is in decline, the Company continues to have success by integrating its host access functions into the MUX and remote access products. ELECTRONIC INSTRUMENTATION EQUIPMENT Electronic instrumentation equipment products, which are sold by EMI, are marketed by an effective combination of EMI's small direct sales force driving a network of independent sales representatives to both commercial and government agencies. Revenues from these products accounted for 10%, 9% and 13% of the Company's consolidated revenues in the fiscal years ended July 31, 1995, 1994 and 1993, respectively. Electro-Metrics products incorporate technologies that detect, process and measure very weak signals and provide accurate frequency discrimination over a very wide frequency spectrum up to 60 gigahertz. EMI's test equipment products measure and record electromagnetic field strength for testing electromagnetic interference or electromagnetic susceptibility. The equipment offers simple, automated test set-ups, data handling and recording for operators with a minimum of skill and experience. Recently, EMI has expanded its wideband radio technology to the design of equipment for communications security and remote control applications in satellite communications terminals for commercial as well as government users. The acquisition in 1993 of a start-up company's patents and fiber optic modem technology has given EMI an entry into the satellite communications terminal control market. Electro-metrics has also identified new strategic opportunities in test and compliance instrumentation for the rapidly emerging wireless voice and data communications markets. SUPPLIERS Material and components for the Company's products are purchased from outside suppliers. While most components are available from several suppliers, a few are provided from sole-source vendors. The Company believes that in most cases alternative sources of supply could be obtained within a reasonable time period; however, an interruption in the supply of such components could have a temporary adverse effect on the Company's operations. PATENTS, COPYRIGHTS AND LICENSES As with many companies in high technology industries, the Company owns or is licensed under a number of patents and copyrights and may desire in the future to obtain additional licenses related to its products. The Company believes, based on industry practice, that any necessary licenses could be obtained. The costs of such licenses may vary significantly depending on the nature of the patent or copyright. BACKLOG A significant portion of data communications revenues are based on customer purchase orders with immediate shipment requirements. Backlog, which tends not to be significant in data communications products, is a result of the occasional customer order with future scheduled shipment requirements or misalignment of demand and production of a particular product. Because data communications revenues constitute such a significant portion of the revenues of the Company, it is the opinion of the Company's management that the dollar amount of backlog at any given time is not indicative of the actual level of revenues which will ultimately be realized during future periods. Consequently, the Company's management believes that the amount of backlog is not a material consideration in understanding the Company's business operations. COMPETITION The Company encounters substantial competition in the marketing of its products and many of its competitors have greater financial, marketing and technical resources. Important competitive factors in the markets for the Company's products are established customer base, product performance and features, service and support as well as price. The Company believes that it competes favorably with respect to these factors. There can be no assurance that the Company's products will compete successfully with competitive products that may be offered in the future or that aggressive pricing will not negatively impact the profitability of the Company. RESEARCH AND DEVELOPMENT Under its own sponsorship, the Company is continuously engaged in the development of new products as well as the development and enhancement of its existing products. The Company expensed approximately $8,260,000 (14% of consolidated revenues) for product development and engineering during fiscal 1995 compared to $9,567,000 (14% of consolidated revenues) in fiscal 1994 and $6,373,000 (13% of consolidated revenues) in fiscal 1993. ENVIRONMENTAL MATTERS The Company's compliance with federal, state and local environmental laws has had no material effect upon the Company's capital expenditures, earnings or competitive position. EMPLOYEES As of July 31, 1995, the Company employed 324 full-time and 16 part-time employees. The Company believes that its future success will depend largely on its ability to retain certain key personnel and to recruit and retain additional highly skilled employees who are in great demand. The Company has employment contracts with certain officers, but does not have employment contracts with its other employees. The Company has experienced no work stoppages and believes that its employee relations are satisfactory. INTERNATIONAL OPERATIONS The Company has subsidiaries located in the United Kingdom and Hong Kong. Reference is made to Note 10 of the Notes to Consolidated Financial Statements contained in Part II, Item 8. ITEM 2. PROPERTIES The Company and its subsidiaries lease manufacturing, warehouse and office facilities as follows: Operation Location Size Lease Expires - ----------------- -------------- ------------ -------------- Penril Datability Gaithersburg, MD 84,000 Sq. Ft. September, 1999 Penril Datability Carlstadt, NJ 44,403 Sq. Ft. September, 2001 Electro-Metrics Johnstown, NY 40,400 Sq. Ft. August, 2005 Penril Datability Basingstoke, England 6,800 Sq. Ft. August, 2006 Each location has separate space as required for manufacturing, engineering, marketing and administrative activities adequate for present purposes. The Company's executive offices are located in the Gaithersburg, Maryland facility. In addition to the facilities mentioned above, the Company also leases several sales offices throughout the United States. ITEM 3. LEGAL PROCEEDINGS On December 24, 1994, the Company filed a complaint against Network Systems Corporation of Minneapolis, Minnesota ("NSC") in the Circuit Court of Maryland for Montgomery County. The litigation arises out of a contract in which the Company agreed to develop certain computer hardware and software to NSC's specifications. The Company alleges breach of contract, fraudulent inducement and defamation and is seeking specific performance, compensatory damages of $2,000,000 and punitive damages of $5,000,000. On March 28, 1995, NSC filed an answer and counterclaim in which NSC alleges negligent misrepresentation, fraud and breach of contract by the Company. NSC is seeking recision of the contract, restitution of monies paid by NSC to the Company, compensatory damages of $5,000,000 and punitive damages in an unspecified amount. As of October 10, 1995, the litigation was in the discovery stage. The Company believes the counterclaim of NSC is without merit. The Company has initiated a lawsuit against Standard Microsystems Corp., SMC Massachusetts, Inc., Ashraf M. Dahad and Kwabena A. Kufo (the "Defendants") in the Circuit Court of Maryland for Montgomery County for breach of contract including failure to transfer technology, unfair competition and false representations. The suit seeks damages of not less than $8 million. The Defendants subsequently brought a counterclaim alleging breach of contract and recovery of amounts due under the contract which are approximately $1 million. As of October 10, 1995, the litigation was in the discovery stage. In April 1994, the Company was involved in a jury trial brought in the United States District Court for the Northern District of Illinois, Eastern Division by Patricia Hennessy, a former employee in the Company's Chicago sales office, in which Ms. Hennessy alleged unfair discharge. The suit sought compensatory damages and punitive damages together with attorney's fees, costs and interest thereon. In September 1994, the Court entered judgement in favor of the plaintiff in the amount of $240,000. In November 1994, the Court entered judgement in favor of the plaintiff for attorney's fees and costs in the amount of $146,000. These judgements have been appealed. Management believes the Company's position is sound and that the Company should prevail on the appeal. On September 8, 1995, oral arguments were presented to the Court of Appeals and the Court has taken the case under advisement. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded over-the-counter and quoted on the NASDAQ National Market System under the symbol PNRL. The following table sets forth the high and low sales prices as reported by NASDAQ for the periods indicated. 1995 1994 High Low High Low First Quarter $ 4 1/8 $ 2 3/4 $ 5 3/4 $ 3 3/4 Second Quarter 3 3/8 2 1/8 7 1/8 4 7/8 Third Quarter 4 3/4 2 3/4 7 1/2 5 1/4 Fourth Quarter 6 3 1/8 6 3 1/8 The current quoted price of the stock is listed daily in the Wall Street Journal in the NASDAQ National Market System section. The number of holders of record of the Company's Common Stock as of October 18, 1995 was 1,132. Reference is made to Note 8 of the Notes to Consolidated Financial Statements contained in Part II Item 8 for the maximum cash dividends per share permitted under the bank credit facilities. ITEM 6. SELECTED FINANCIAL DATA Data from the Consolidated Statements of Operations included in the following table pertain to the Company's continuing and discontinued operations(in thousands except per share amounts). The results include the operations of Datability, Inc. ("Datability") from May 6, 1993, the date of acquisition. This transaction is described more fully in Note 3 to the accompanying Consolidated Financial Statements.
Years Ended July 31, 1995 1994 1993 1992 1991 ------- ------- ------- ------- ------- Continuing operations Net Revenues $ 58,219 $ 67,842 $ 50,576 $ 40,336 $ 46,998 Net Income(Loss) (4,492) 2,408 868 593 6,913 Earnings(Loss) per share (.60) .31 .13 .09 1.01 Discontinued operations Net Revenues 3,351 5,991 6,226 6,599 5,589 Net Income(Loss) (1,783) (891) (737) 501 5 Loss on Disposal (1,400) -- -- -- -- Earnings(Loss) per share Discontinued operations (.24) (.12) (.11) .07 -- Loss on disposal (.18 -- -- -- -- Cash Dividends per share -- .02 -- .02 -- At Year End: Total Assets 45,132 51,823 50,153 29,367 32,333 Long-Term Debt 5,681 8,890 10,217 1,875 5,196 Shareholders' Equity 21,723 28,580 27,501 22,177 20,901 The above data gives effect to the stock split paid in the form of a stock dividend in fiscal 1991 of 33-1/3%. /TABLE Quarterly Financial Data A summary of the Company's consolidated results of continuing operations for each of the fiscal quarters for the years ended July 31, 1995 and 1994 is shown in the table below. Fiscal 1995 Quarters Ended: October 31,1994 January 31, 1995 April 30, 1995 July 31, 1995 - --------------------------- -------------- --------------- --------------- ------------- Revenues $ 14,556 $ 14,326 $ 14,053 $ 15,284 Gross profit 6,846 6,514 6,185 6,145 Net loss (614) (786) (1,166) (1,926) Net loss per share (.08) (.10) (.15) (.25) Fiscal 1994 Quarters Ended: October 31,1993 January 31, 1994 April 30, 1994 July 31, 1994 - ---------------------------- --------------- ---------------- -------------- ------------- Revenues $ 16,990 $ 17,277 $ 17,132 $ 16,439 Gross profit 8,773 8,594 8,517 8,410 Net income 694 823 375 517 Net income per share .09 .10 .05 .07
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the results of operations includes the results of Datability from May 6, 1993, the date of acquisition, and pertains only to the Company's continuing operations unless otherwise noted. As discussed in Note 2 to the Consolidated Financial Statements, operating results reflect the Technipower, Inc subsidiary, including the uninterruptible power supply business, as a discontinued operation. Liquidity and Capital Resources During fiscal 1995, the Company generated cash of $3,933,000 from continuing operating activities. Non-cash expenses, including depreciation of $4,621,000, coupled with reductions in accounts receivable and inventories and an increase in accounts payable offset the net loss of $4,492,000. The decrease in accounts receivable of $2,384,000 is the result of lower sales volume. The reduction of inventories of $915,000 is due to a concentrated effort during the fourth quarter of fiscal 1995 to bring inventories in line with current sales volumes and the expected phase-out of older products. The inventory management efforts will continue into fiscal 1996 so that any impact from the introduction of new products and the phase-out of older products is minimized. The increase of accounts payable of $1,817,000, was caused by the management of payments to vendors in light of the tight cash position that existed at year-end. As discussed more fully in Note 8 to the Consolidated Financial Statements, subsequent to year end, the Company completed the sale of 1,465,000 shares of the Company's unregistered common stock for $7,325,000 in a private placement to Pequot Partners Fund, L.P., Pequot Endowment Fund, L.P. and Pequot International Fund, Inc. The proceeds have been used to repay $1,500,000 of term debt as discussed below, and for working capital needs. In addition, in October 1995, the Company completed the sale of 50,000 shares of its unregistered common stock to Cramer Partners, L.P. The proceeds of $250,000 will be used for working capital needs. In conjunction with the sale of common shares discussed above, the Company amended the credit agreement with its principal bank. The agreement, as amended, provides for a working capital facility of $5,500,000 with borrowings based on qualified accounts receivable and inventory. At October 13, 1995, the Company had utilized $4,430,000 under the facility. The working capital facility expires on December 31, 1995 at which time, although there are no assurances, the management believes it will be able to renew the credit agreement provided the term loans are repaid as described below. Under the agreement the Company was required to repay $3,300,000 of the term debt during fiscal 1995. As noted above, the Company was required and did repay $1,500,000 of the term notes principal balance. The remaining balance of the term notes after making this payment was $2,000,000 (compared to $6,668,000 at July 31, 1994). Required principal payments for the remaining term notes is $137,000 a month plus accrued interest. Under the terms of the credit agreement as amended, the Company is required to repay the remaining term notes prior to December 31, 1995 with the proceeds from the sale of assets. The Company is currently attempting to sell the Company's Technipower subsidiary including the uninterruptible power supply business to comply with this provision. While there is no assurance the Company will be able to sell Technipower prior to December 31, 1995, the Company believes it has other remedies available should the sale not occur. See Note 5 for terms of the current bank financing agreement. The ability of the Company to generate adequate cash for operational and capital needs is dependent on the success of the Company to increase sales of its data communications products coupled with the sale of assets, including the Technipower subsidiary. In addition it may be necessary to raise cash from other sources including sales of securities or other assets of the Company. Results of Operations Revenues for fiscal 1995 were $58,219,000 compared to $67,842,000 for fiscal 1994, a decrease of 14%. Revenues for fiscal 1994 increased 34% compared to fiscal 1993 revenues of $50,576,000. The increase in revenues in fiscal 1994 over fiscal 1993 is the result of the acquisition of Datability, Inc at the beginning of the fourth quarter of fiscal 1993. The decrease in revenues in fiscal 1995 compared to fiscal 1994 is partially attributable to the declining market for terminal servers and multiplexors; two main products of the Company. In addition to these declines, the Company experienced unexpected delays in the shipment of new products including the newer V.34 and V.34bis modems. The Company began shipping limited quantities of V.34 modems in the third quarter of fiscal 1995 and V.34bis modems in early fiscal 1996. Using the current product line as a functional basis, the Company has embarked on a program to replace the older products with a new, single hardware platform which includes such functions as remote LAN access, bridging/routing, multiplexing or host access. These new products, known as "AccessBeyond", will be introduced during fiscal 1996 and beyond. Gross margins in fiscal 1995 decreased to 44% from 50% in fiscal 1994. This decrease is the result of lower manufacturing efficiencies related to inventory reduction programs and the lower volumes experienced in fiscal 1995, as well as the higher costs associated with the initial production of the V.34 modems that the Company started shipping in fiscal 1995. Gross margins in fiscal 1994 improved slightly over 1993 as a result of the higher sales volumes in general and of internetworking products in particular which carried higher gross margins than did other products. Selling, general and administrative expenses decreased $389,000 in fiscal 1995 to $20,326,000 from $20,715,000. During the first half of fiscal 1994, the Company eliminated several administrative positions in its Carlstadt, New Jersey facility. In fiscal 1995, the Company underwent a cost reduction program to reduce staffing at its Gaithersburg, Maryland facility. These reductions resulted in personnel cost reductions of $967,000 in fiscal 1995 compared to fiscal 1994. As a result of the lower revenue levels, commissions decreased by $285,000. Partially offsetting these reductions were increases in depreciation and amortization of $573,000 for equipment used for demonstrations to customers and additional reserves for bad debts of $550,000. Selling, general and administrative expenses increased $4,184,000 to $20,715,000 in fiscal 1994 from $16,531,000 in fiscal 1993 as a result of the Datability acquisition. Product development and engineering expenses were 14% of revenues for both fiscal 1995 and 1994, up from 13% in fiscal 1993. Product development and engineering expenses in fiscal 1995 were $8,260,000 compared to $9,567,000 in fiscal 1994, or a decrease of $1,307,000. This decrease is attributable primarily to lower personnel costs as a result of the Company's cost reduction efforts during fiscal 1995. The increase in fiscal 1994 in product development and engineering expenses of $3,194,000 from the fiscal 1993 expenses of $6,373,000 was a result of the Datability acquisition in fiscal 1993. The increase in amortization of cost over net assets acquired for fiscal 1995 and fiscal 1994 over the amount expensed in fiscal 1993 is the result of the Datability acquisition in the last quarter of fiscal 1993. Interest expense was $1,227,000 for fiscal 1995 compared to $907,000 for fiscal 1994 and $330,000 for fiscal 1993. The increase in the prime rate from 7% in fiscal 1994 to 9% (reduced to 8-3/4% in the fourth quarter of fiscal 1995) during fiscal 1995 combined with the increase in the rate charged by the Company's principal bank from prime plus 1/2% to prime plus 2% led to the increase in interest expense in fiscal 1995 over fiscal 1994. The Datability acquisition in the fourth quarter of fiscal 1993 resulted in the Company borrowing $6,800,000 from its principal bank and assuming another $1,354,000 in subordinated debt. This increased debt load combined with the working capital needed in fiscal 1994 to finance the increase in accounts receivable and inventories caused the increase in interest expense in fiscal 1994 compared to fiscal 1993. The benefit from income taxes is determined under Statement of Financial Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes which the Company adopted in fiscal 1994. This statement requires the Company to record the deferred tax asset generated by net operating loss carryforwards, general business and other tax credits and to establish a valuation reserve based on an estimate of the realizability of the deferred tax asset. This analysis resulted in a benefit from income taxes, net of certain state taxes due, of $578,000 in fiscal 1995 and $513,000 in fiscal 1994. At July 31, 1995, the Company had deferred tax assets of $6,154,000 with a valuation reserve of $4,454,000 to reduce deferred tax assets to the amount expected to be realized. Management expects the realization of the remaining asset to occur through the sale of the Company's Technipower subsidiary which the Company has decided to sell, selling other non- core business assets and projected income resulting from new products being introduced in fiscal 1996 and 1997. In summary, principally due to the cumulative effect of the decrease in revenues and the lower gross margins experienced as a result of the manufacturing inefficiencies caused by the lower volumes, the Company had a loss from continuing operations of $4,492,000 ($.60 per share) for fiscal 1995. After the operational loss of the discontinued business and estimated loss from the disposal of that business, the Company had a net loss of $7,675,000 ($1.02 per share) for the year ended July 31, 1995. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEPENDENT AUDITORS' REPORT Board of Directors and Shareholders Penril DataComm Networks, Inc. Gaithersburg, Maryland We have audited the accompanying consolidated balance sheets of Penril DataComm Networks, Inc. and subsidiaries as of July 31, 1995 and 1994, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended July 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Penril DataComm Networks, Inc. and subsidiaries as of July 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 1995 in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, during the fiscal year ended July 31, 1994 the Company changed its method of accounting for income taxes to conform with Statement of Financial Accounting Standards No. 109. \s\Deloitte & Touche LLP - ------------------------ Deloitte & Touche LLP Washington, D.C. October 17, 1995 PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Year ended July 31, 1995 1994 1993 -------- -------- -------- NET REVENUES FROM CONTINUING OPERATIONS $ 58,219 $ 67,842 $ 50,576 COSTS AND EXPENSES Cost of revenues 32,529 33,822 26,172 Selling, general and administrative 20,326 20,715 16,531 Product development and engineering 8,260 9,567 6,373 Amortization of cost over net assets acquired 834 816 308 ------- ------- ------- 61,949 64,920 49,384 OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS (3,730) 2,922 1,192 OTHER EXPENSE Interest expense (1,227) (907) (330) Other, net (113) (120) (60) ------ ------ ------ (1,340) (1,027) (390) ------ ------ ------ INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (5,070) 1,895 802 BENEFIT FOR INCOME TAXES 578 513 66 ------ ------ ------ INCOME (LOSS) FROM CONTINUING OPERATIONS $ (4,492) $ 2,408 $ 868 LOSS FROM DISCONTINUED OPERATIONS, net of income taxes (1,783) (891) (737) LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS, net of income taxes (1,400) -- -- ------ ------ ------ NET INCOME (LOSS) $ (7,675) $ 1,517 $ 131 ====== ====== ====== NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE Continuing operations $ (.60) $ .31 $ .13 Discontinued operations (.24) (.12) (.11) Loss on disposal of discontinued operations (.18) -- -- ------ ------ ------ (1.02) .19 .02 ====== ====== ====== Shares used in per share calculation 7,559 7,809 6,950 ====== ====== ====== See notes to consolidated financial statements. PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands except share amounts) July 31, 1995 1994 ASSETS ------ ------ Current Assets Cash $ 1,087 $ 995 Accounts receivable, less allowance for doubtful accounts of $1,134 in 1995 and $997 in 1994 14,766 17,150 Inventories 14,080 14,995 Deferred income taxes 1,700 539 Net assets of discontinued operations 1,376 3,468 Other current assets 803 506 ------ ------ TOTAL CURRENT ASSETS 33,812 37,653 ------ ------ Property and Equipment, net 3,122 4,703 Excess of Cost Over Net Assets Acquired, net 5,689 6,577 Other Assets 2,509 2,890 ------ ------ TOTAL ASSETS $ 45,132 $ 51,823 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Short-term borrowings $ 5,095 $ 3,225 Current portion of long-term debt 5,164 3,153 Accounts payable 8,673 6,856 Accrued compensation and commissions 1,081 1,291 Deferred revenue 1,245 861 Other accrued expenses 892 1,291 ------ ------ TOTAL CURRENT LIABILITIES 22,150 16,677 Long-Term Debt, net of current portion 517 5,737 Other Noncurrent Liabilities 742 829 ------ ------ TOTAL LIABILITIES 23,409 23,243 ------ ------ Commitments and Contingencies Shareholders' Equity Serial preferred stock, $.01 par value; authorized, 100,000 shares; issued, none -- -- Common stock, $.01 par value; authorized, 20,000,000 shares; issued and outstanding, 7,542,815 shares in 1995 and 7,442,368 shares in 1994 76 74 Additional paid-in capital 22,384 21,704 Retained earnings (deficit) (677) 6,998 ------ ------ 21,783 28,776 Equity adjustment from foreign currency translation (60) (196) ------ ------ TOTAL SHAREHOLDERS' EQUITY 21,723 28,580 ------ ------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 45,132 $ 51,823 ====== ====== See notes to consolidated financial statements. PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended July 31, 1995 1994 1993 ------ ------ ------ CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES Net Income (Loss) from operations $ (4,492) $ 2,408 $ 868 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 4,621 3,837 2,755 Benefit from deferred taxes (578) (538) -- Other (105) 136 (326) (Increase) decrease in assets: Accounts receivable 2,384 (1,508) (3,347) Inventories 915 (1,924) (2,809) Other current assets (297) (68) (116) Increase (decrease) in liabilities: Accounts payable 1,817 (788) 1,280 Other liabilities (332) 730 (111) Net cash provided by (used in) continuing ------ ------ ------ operating activities 3,933 2,285 (1,806) CASH FLOWS FROM DISCONTINUED OPERATIONS Loss from discontinued operations (3,183) (891) (737) Non-cash charges and changes in working capital 824 539 (116) Provision for loss on disposal of discontinued operations 1,400 -- -- ------ ------ ------ Net cash used in discontinued operations (959) (352) (853) CASH FLOWS FROM INVESTING ACTIVITIES Acquisition costs -- -- (208) Expenditures for purchased technology (1,049) (1,126) (973) Expenditures for property, equipment and other (690) (1,261) (1,190) ------ ------ ------ Net cash used in investing activities (1,739) (2,387) (2,371) CASH FLOWS FROM FINANCING ACTIVITIES Net borrowings under line of credit 1,870 2,740 485 Borrowings on long-term debt -- 1,724 9,500 Payments on long-term debt (3,300) (4,184) (6,755) Issuance of common stock 193 319 908 Dividends paid -- (147) -- Other 94 221 (110) ------ ------ ------ Net cash provided by (used in) financing activities (1,143) 673 4,028 CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 995 776 1,778 ------ ------ ------ CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR $ 1,087 $ 995 $ 776 ====== ====== ====== SUPPLEMENTAL INFORMATION Cash payments for income taxes $ 113 $ 59 $ 127 ====== ====== ====== Cash payments for interest $ 1,103 $ 795 $ 260 ====== ====== ====== See notes to consolidated financial statements. PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED JULY 31, 1995, 1994 AND 1993 (In thousands, except shares)
Additional Retained Common Stock Paid-in Unearned Earnings Currency Shares Amount Capital Compensation (Deficit) Adjustment --------------- --------- ------------ -------- ---------- BALANCE AUGUST 1, 1992 5,940,993 $ 59 $ 16,538 $ - $ 5,497 $ 83 Net income 131 Issuance of common stock- For acquisition of Datability, Inc. 1,050,000 11 4,583 Upon exercise of stock options 56,663 1 115 For employee stock award program 63,080 245 (143) Upon exercise of warrants 220,000 2 790 Foreign currency translation adjustment (411) --------- ----- ------- ----- ------ ------ BALANCE JULY 31, 1993 7,330,736 73 22,271 (143) 5,628 (328) Net income 1,517 Dividends paid (147) Issuance of common stock- Upon exercise of stock options 132,700 1 367 Upon exercise of warrants 180,000 2 400 Shares retired in connection with the exercise of options and warrants (66,840) (1) (458) Shares returned in conjunction with the valuation of Datability, Inc. (124,388) (1) (828) Shares returned in conjunction with employee stock award program (9,840) (32) 21 Amortization of unearned income 106 Foreign currency translation adjustment 132 --------- ----- ------- ----- ------ ------ BALANCE JULY 31, 1994 7,442,368 74 21,720 (16) 6,998 (196) Net loss (7,675) Issuance of common stock- Upon exercise of stock options 33,067 1 73 Upon exercise of warrants 80,000 1 194 For acquisition of patent rights 50,000 1 118 Shares retired in connection with options, warrants, and awards (62,620) (1) (194) 16 Deferred tax benefit from exercise of options - - 473 Foreign currency translation adjustment 136 --------- ------ ------- ---- ------- ------ BALANCE JULY 31, 1995 7,542,815 $ 76 $ 22,384 $ -- $( 677) $ (60) See notes to consolidated financial statements.
PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JULY 31, 1995, 1994 AND 1993 1. Summary of Significant Accounting Policies Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All significant intercompany accounts and transactions have been eliminated. The Company operates in the high technology electronics equipment industry. It designs, develops and manufactures products for three distinct markets: data communications, uninterruptible power supplies and radio frequency communication products. Revenue Recognition: Revenues are recognized at the time of shipment of the product or performance of product-related services. Inventories: Inventories are stated at the lower of cost (first-in, first-out method) or market. The inventories include the cost of material and, when applicable, labor and manufacturing overhead. Property, Equipment and Depreciation: Additions to property and equipment are recorded at cost. The Company provides depreciation for financial reporting purposes using primarily the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the term of the related lease or their estimated useful lives, whichever is shorter. Excess of Cost Over Net Assets Acquired: The excess of cost over net assets acquired is amortized using the straight-line method over ten years. The Company periodically evaluates the intangible assets in relation to the operating performance and future contribution to the underlying business and makes adjustments, if necessary, for any impairment of these assets. Income Taxes: During fiscal 1994, the Company changed its method of accounting for income taxes to comply with the provisions of Statement of Financial Accounting Standards No. 109 (FAS 109), "Accounting for Income Taxes." Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. A valuation allowance is established to reduce deferred tax assets to the amount expected to be realized. Earnings Per Share: Earnings per share for fiscal 1995 is calculated based on the weighted average common shares outstanding. Earnings per share for previous years is calculated using the modified treasury stock method, which limits the assumed purchase of treasury shares to 20% of the outstanding common shares. Any remaining proceeds are assumed first to retire debt, with any remaining proceeds invested in commercial paper. The difference between fully diluted and primary earnings per share was not significant in any year. On September 22, 1995, the Company completed the sale of 1,465,000 shares of its common stock and used $1,500,000 of the proceeds to pay down its term debt. If this transaction had occurred at the beginning of fiscal 1995, the unaudited proforma net loss per share on continuing operations for the year would have been $.55. Software Development Costs: Certain acquired software development costs are being amortized over their estimated economic life, principally five years, commencing when each product is available for general release. Internal software development and any other costs of development are expensed as incurred. Reclassifications: Certain reclassifications have been made to prior period consolidated financial statements to conform to the July 31, 1995 presentation. 2. Discontinued Operations In July 1995, the Board of Directors decided to focus more of the Company's resources on its main business of data communications and therefore decided to sell Technipower, Inc. (Technipower), a subsidiary manufacturing uninterruptible power supplies and power regulating equipment. As a result of this action, the Company recorded estimated costs relating to the disposition of Technipower of $1,400,000. Previously reported financial statements have been restated to reflect Technipower as a discontinued operation. The following is a summary of operating information for Technipower(in thousands): Year Ended July 31, 1995 1994 1993 ----- ----- ----- Revenues $ 3,351 $ 5,991 $ 6,226 Loss from operations before income taxes (1,783) (891) (737) Loss on disposal before income taxes (1,400) -- -- ------ ------ ------ Total loss from discontinued operations $(3,183) $ (891) $ (737) ====== ===== ===== Because the Company expects to retain the tax benefits associated with the discontinued operation, no income tax benefit has been recorded for any year. The loss on disposal before income taxes for fiscal 1995 includes an accrual of approximately $1,000,000 in operating losses through the anticipated disposal date of Technipower. Net assets of the discontinued operations consist of the following (in thousands): July 31, 1995 1994 ----- ----- Current assets $ 2,784 $ 3,128 Current liabilities 650 495 ----- ----- Net current assets 2,134 2,633 Property, plant and equipment, net 375 474 Other non-current tangible assets, net 22 62 Non-current liabilities 10 25 ----- ----- Net tangible assets 2,521 3,144 Intangible assets, net 255 324 ----- ----- 2,776 3,468 Estimated loss on disposal (1,400) -- ----- ----- $ 1,376 $ 3,468 ===== ===== 3. Acquisitions On May 6, 1993, the Company acquired all of the outstanding stock of Datability, Inc. The acquisition was accounted for by the purchase method, and accordingly, the results of operations of Datability are included in the Consolidated Statement of Operations from the date of acquisition. Datability has been consolidated with the Company's data communications operations located in Gaithersburg, Maryland. The acquisition was accomplished through the issuance of 1,050,000 shares of the Company's common stock. The purchase price totalled $4,980,000 including acquisition costs of $386,000. At the acquisition date, the purchase price exceeded net assets acquired by $8,169,000. Under terms of the agreement, the final purchase price was dependent upon the valuation of the net assets acquired. During fiscal 1994, a valuation adjustment of $829,000 resulted in 124,388 shares of the Company's common stock being returned to the Company thereby reducing the excess of cost over net assets acquired. The unaudited proforma results from continuing operations of the Company for the fiscal year ended July 31, 1993, assuming the acquisition of Datability had occurred at the beginning of the year, is as follows (in thousands except per share amounts): Net revenues $ 62,651 Net income (loss) (1,402) Earnings (loss) per common and equivalent share (.20) The unaudited proforma results reflect proforma adjustments for the amortization of goodwill, recognition of interest expense and the issuance of 1,050,000 shares of the Company's stock. The unaudited proforma results do not purport to represent what the actual results would have been had the acquisition occurred at the beginning of the year nor do they purport to represent the future results of the combined entity. 4. Balance Sheet Detail (in thousands) July 31, 1995 1994 ------ ------ Inventories: Raw material $ 6,930 $ 6,133 Work in process 1,458 1,768 Finished goods 5,692 7,094 ------ ------ Total inventories $ 14,080 $ 14,995 ====== ====== Property and equipment, net: Machinery, and equipment $11,734 $11,236 Purchased software and technology 5,486 5,466 Leasehold improvements 980 981 ------ ------ Total property and equipment, at cost 18,200 17,683 Less accumulated depreciation and amortization 15,078 12,980 ------ ------ Total property and equipment, net $ 3,122 $ 4,703 ====== ====== Excess of cost over net assets acquired,net Cost $ 8,090 $ 8,144 Less accumulated amortization 2,401 1,567 ------ ------ $ 5,689 $ 6,577 ====== ====== 5. Financing Bank Financing: In conjunction with the sale of common stock as described more fully in Note 8, the Company amended the credit agreement with its principal bank subsequent to July 31, 1995. The agreement as amended, provides for a working capital facility of $5,500,000 with borrowings based on qualified accounts receivable and inventory. Interest accrues at the bank's prime rate plus 2% with a commitment fee of 3/8% assessed on the unused portion of the facility. The agreement expires December 31, 1995. At July 31, 1995, the Company had utilized $5,192,000 of which $97,000 was for outstanding letters of credit. Average monthly borrowings under the working capital facility were $4,621,000 at a weighted average interest rate of 9.6% for fiscal 1995, $1,475,000 at a weighted average interest rate of 7.2% for fiscal 1994, and $471,000 at a weighted average interest rate of 6.0% for fiscal 1993. In addition, the Company at July 31, 1995 had $3,848,000 in term loans with its principal bank which expire December 1996 through September 1997. These notes require monthly payments with interest at the bank's prime rate plus 2%. The agreement as amended in September 1995, requires $1,500,000 of the proceeds from the equity financing be applied to reduce the principal balance of the term loans. In addition, the Company is required to repay the remaining term loans by December 31, 1995 with proceeds from the sale of assets. The amended bank facility requires the Company to maintain a ratio of current assets to current liabilities of at least 1.6 to 1, a ratio of adjusted earnings to interest expense of (4.2) to 1 at July 31, 1995 and (4.9) to 1 at October 31, 1995, and a ratio of adjusted earnings to fixed charges of (1.2) to 1 at July 31, 1995 and (2.0) to 1 at October 31, 1995. Subordinated debt: In April 1995, as part of the bank financing arrangements, the Company was required to amend its subordinated debt agreement. This amendment reduced the principal payment due May 6, 1995 to $75,775 with additional principal payments allowed only after the bank term loans have been reduced by $3,000,000. Interest, which is payable monthly, accrues at the prime rate plus 1%. The outstanding principal balance is due on May 6, 1996. Principal and interest payments must be suspended in the event the Company is in default of its loan agreement with its principal bank. At July 31, 1995, the Company had outstanding subordinated debt of $979,000. Long-Term Debt: Long-term debt at July 31, 1995 and 1994 consisted of (in thousands): 1995 1994 ------ ------ Term Loans $ 3,848 $ 6,668 Subordinated Debt 979 1,054 ------ ------ 4,827 7,722 Capital leases and other 854 1,168 ------ ------ 5,681 8,890 Less current portion (5,164) (3,153) ------ ------ Long-term debt $ 517 $ 5,737 ====== ====== Future maturities of long-term debt (of which $1,847,000 was paid by October 17, 1995) are as follows: Year Ending July 31, 1996 $ 5,164 1997 201 1998 151 1999 165 ------ Total $ 5,681 ====== 6. Income Taxes Effective August 1, 1993, the Company changed its method of accounting for income taxes to comply with the provisions of Statement of Financial Accounting Standards No. 109 (FAS 109), "Accounting for Income Taxes." The provisions of FAS 109 changes the asset recognition of net operating loss and tax credit carryforwards. There was no cumulative effect of adopting this accounting change. The differences between the tax provision (benefit) from continuing operations calculated at the statutory federal income tax rate and the actual tax benefit for each year is shown in the table below. 1995 1994 1993 ------ ------ ------ Tax provision at federal statutory rate $ (1,724) $ 644 $ 273 Amortization of non- deductible intangibles 283 283 192 State & foreign taxes, net of federal benefit (218) 236 78 Utilization of net operating loss carryforward -- (1,195) (668) Change in valuation allowance 1,134 (538) - Other (53) 57 59 ------ ------ ------ Income tax benefit $ (578) $ (513) $ (66) The primary components of temporary differences which give rise to the Company's net deferred tax asset are shown in the table below. At July 31, 1995 the Company had federal net operating loss carryforwards of approximately $6,691,000 of which $1,505,000 expires in 2007 and $5,186,000 expires in 2010 and general business and other tax credits of $1,248,000 to reduce future tax liabilities through 2008. As of July 31, 1995 1994 ---- ---- Deferred tax assets: Reserves and other contingencies $ 1,838 $ 1,152 Depreciation and amortization 16 201 Other -- 199 Net operating loss 2,854 264 General business and other tax credits 1,248 1,302 Loss on discontinued operations 582 -- Valuation reserve (4,454) (2,148) ------ ------ Total deferred tax assets 2,084 970 Deferred tax liabilities: Amortization of technologies (384) (431) ------ ------ Net deferred tax assets $ 1,700 $ 539 ====== ====== 7. Commitments and Contingencies The Company leases office and manufacturing facilities and equipment under lease agreements, certain of which are renewable at the Company's option and/or provide for increases in rent related to increases in the Consumer Price Index and other factors. Rent expense for the fiscal years 1995, 1994 and 1993 was $1,941,000, $1,754,000, and $1,370,000, respectively. Approximate aggregate future minimum rentals applicable to operating leases in effect at July 31, 1995 are as follows (in thousands): Year Ending July 31, 1996 $ 1,762 1997 1,717 1998 1,777 1999 1,824 2000 934 Beyond 2000 1,539 ------ Total minimum rentals $ 9,553 ====== The Company initiated a lawsuit in December 1994 against Network Systems Corporation ("NSC") for breach of contract, fraudulent inducement and defamation. The suit is seeking specific performance, compensatory damages of $2,000,000 and punitive damages of $5,000,000. The litigation arises out of a contract in which the Company agreed to develop certain computer hardware and software to NSC's specifications. NSC subsequently brought a counterclaim alleging negligent misrepresentation, fraud and breach of contract by the Company. NSC is seeking recision of the contract, restitution of monies paid by NSC to the Company, compensatory damages of $5,000,000 and punitive damages in an unspecified amount. As of July 31, 1995, the litigation was in the discovery stage. The Company has initiated a lawsuit against Standard Microsystems Corp. ("SMC") for breach of contract including failure to transfer technology, unfair competition and false representations. The suit seeks damages of $8 million. SMC subsequently brought a counterclaim alleging breach of contract and recovery of amounts due under the contract which are approximately $1 million. As of July 31, 1995, the litigation was in the discovery stage. In April 1994, the Company was involved in a jury trial in which a former employee in the Company's Chicago sales office alleged employment discrimination based on sex. The suit sought compensatory damages and punitive damages together with attorney's fees, costs and interest thereon. The court entered judgement in favor of the plaintiff in the amount of $240,000 plus attorney's fees and costs in the amount of $146,000. These judgements have been appealed. On September 8, 1995, oral arguments were presented to the Court of Appeals and the Court has taken the case under advisement. Management believes the Company's position is sound and that the Company should prevail on the appeal. The Company is involved in other routine litigation. Management believes none of the litigation will have a material adverse effect on the Company's financial position or results of operations. 8. Shareholders' Equity Subsequent Event: On September 22, 1995, the Company issued an aggregate of 1,465,000 shares of its unregistered common stock to Pequot Partners Fund, L.P., Pequot Endowment Fund, L.P and Pequot International Fund, Inc. (collectively the "Investors") for $7,325,000 in a private transaction. The Company is required to file a shelf registration with the SEC prior to December 31, 1995 covering the shares issued in the transaction and keep the shelf registration effective for three years. The Investors may request one public registration after the three years until the later of September 22, 1999 or 30 days after the Company files its annual report on form 10-K for the fiscal year ended July 31, 1999. If the Company does not keep the shelf registration effective for the required three years, the Investors are entitled to require the Company to effect up to two public registrations during that time. As part of the transaction, the Company has agreed to increase the Board of Directors of Penril by one and, so long as the Investors collectively own in the aggregate not less than 10% of the issued and outstanding common stock, the Investors are entitled to fill such vacancy by designating one person to the Board of Directors. Serial Preferred Stock: The Company's Serial Preferred Stock may be issued in one or more series. The shares of any series may be convertible into Common Stock, may have priority over Common Stock in the payment of dividends and in the distribution of assets in the event of liquidation or dissolution of the Company, and may have preferential or other voting rights, all as determined by the Board of Directors at the time it approves the series. Employee Stock Options and Stock Awards: On October 8, 1986, the Company adopted the 1986 Incentive Plan (the "1986 Plan"). Under the 1986 Plan, which will terminate on October 8, 1996, awards may be granted to key employees of the Company and its subsidiaries in one or more of the following forms: (i) Incentive Stock Options; (ii) Non-qualified Stock Options; and (iii) Restricted Stock Awards. The option price of shares of Common Stock subject to options granted under the 1986 Plan will not be less than 100% (110% in the case of Incentive Stock Options granted to optionees holding more than ten percent of the voting stock of the Company at the date of grant) of the fair market value of shares of Common Stock at the date of grant. No option will be exercisable more than ten years (five years in the case of Incentive Stock Options granted to optionees holding more than ten percent of the Voting Stock of the Company on the date of grant) from the date it is granted. An aggregate of 1,503,822 shares were reserved for issuance under the 1986 Plan at July 31, 1995. The terms of Restricted Stock Awards ("Stock Awards") granted under the 1986 Plan are determined at the time of issuance and are evidenced by a written Restricted Stock Agreement. Any Stock Awards granted are subject to approval by a majority of all "disinterested directors" as defined in Rule 16b-3 of the General Rules and Regulations under the Securities Exchange Act of 1934. Of the total shares reserved under the 1986 Plan, a maximum of 400,000 shares are available for grant in the form of Stock Awards. On October 1, 1992, the Company granted Stock Awards for 71,220 common shares of the Company to all manufacturing, engineering, marketing and administrative employees of the Gaithersburg, Maryland facility. The Stock Awards granted vested over two years and employees had to be employed by the Company when the vested shares were issued. Of the total shares awarded, 53,020 were issued. The Company issued 29,560 shares on October, 1993 which represented 50% of the Stock Awards outstanding on that date and the remaining 23,460 shares on October 1, 1994. Compensation related to the Stock Award Program was amortized over the vesting period. Non-Employee Director Stock Options: On December 9, 1987, the Company adopted the Non-Employee Directors' Stock Option Plan ("Directors Plan"). Under the Directors Plan an option to purchase 24,000 shares is automatically granted to each non-employee director on the first day of his initial term. In addition, options to purchase shares are automatically granted to each non-employee director on the fifth business day after the Annual Report on Form 10-K is filed with the Securities and Exchange Commission as follows: in each of the first two successive years after the initial grant an option to purchase 6,000 shares is granted, and in each of the next five successive years an option to purchase 3,000 shares is granted. The option price per share of any option granted under the Directors Plan is the fair market value of a share of Common Stock on the date the option is granted. No option will be exercisable more than ten years from the date of grant. An aggregate of 273,333 shares were reserved for issuance under the Directors Plan at July 31, 1995. A summary of stock option transactions during the three years ended July 31, 1995 is as follows: 1986 Incentive Plan Directors Plan ------------------ ------------------ Number Average Number Average of Price of Price Shares Per Share Shares Per Share ------- -------- -------- --------- Outstanding August 1, 1992 617,168 4.01 180,000 3.02 Granted 635,250 4.28 15,000 3.75 Exercised (26,666) 2.60 (30,000) 1.53 Canceled (33,000) 3.79 - - --------- ------ ------- ------ Outstanding July 31, 1993 1,192,752 4.15 165,000 3.35 Granted 81,500 4.76 39,000 4.84 Exercised (132,700) 2.77 - - Canceled (104,133) 4.67 - - --------- ------ ------- ------ Outstanding July 31, 1994 1,037,419 $ 4.15 204,000 $ 3.64 Granted 348,000 3.12 18,000 3.25 Exercised (33,067) 2.23 - - Canceled (233,617) 4.15 - - --------- ------ ------- ------ Outstanding July 31, 1995 1,118,735 $ 3.89 222,000 $ 3.61 Exercisable Options at July 31, 1995 531,968 $ 4.14 158,000 $ 3.37 Warrants: In March, 1987, Henry D. Epstein joined the Company as President and Chief Executive Officer and was issued Class A warrants to purchase 400,000 shares of Common Stock at $2.23 per share and Class B warrants to purchase 80,000 shares of Common Stock at $2.34 per share. Mr. Epstein exercised 220,000 Class A warrants in January 1993, 80,000 Class A warrants in January 1994 and 100,000 Class A warrants in February 1994. In February 1995, Mr. Epstein exercised all 80,000 Class B warrants. All exercises were accomplished by delivery of shares previously held. In October 1992, the Company issued a warrant to purchase 166,000 shares of common stock at $4.50 per share, the fair market value on the date of issuance, to Coast Federal Savings Bank ("Coast") in settlement of a law suit brought against the Company. In addition, the Company issued Class E warrants to purchase 25,000 shares of common stock at $3.625 per share, the fair market value on the date of issuance, to Mr. Henry Epstein in consideration for Mr. Epstein, in his capacity as a stockholder of Penril, assisting Penril in settling the litigation with Coast. The Coast warrant expired June 7, 1995. The Class E warrants were exercised subsequent to July 31, 1995. Cash Dividends: The Company declared a $.02 per share cash dividend to the holders of record on December 16, 1993 and paid December 30, 1993. There were 7,332,296 shares outstanding on the record date. No cash dividends are allowed under the current banking arrangement. 9. Retirement and Savings Plan The Company's Retirement and Savings Plan ("401(k) Plan") is a defined contribution plan including provisions of section 401(k) of the Internal Revenue Code. Employees of the Company who have completed 90 days of service ("Participants") are eligible to participate in the 401(k) Plan. The 401(k) Plan permits, but does not require, the Company to match employee contributions. In addition, the Company may make discretionary contributions to the 401(k) Plan which will be allocated to each Participant based on the ratio of such Participant's eligible compensation to the total of all Participants' eligible compensation. Amounts contributed by the Company vest as to 30% after 1 year of eligible service, 60% after 2 years of eligible service and 100% after 3 years of eligible service. Participants may elect to direct the investment of their contributions in accordance with the provisions of the 401(k) Plan. The Company made matching contributions of $55,000, $46,000 and $45,000 during fiscal 1995, 1994 and 1993, respectively. There were no additional Company contributions in any year. The Company provides no post-employment or post-retirement benefits. 10. Geographic Area Information The Company's foreign operations consists principally of sales and marketing activities through subsidiaries located in Hong Kong and the United Kingdom. Certain information, including the effect of intercompany transactions, relating to the Company's operations on a geographic basis is as follows (in thousands): Revenues 1995 1994 1993 U.S. Revenue ------ ------ ------ Domestic $ 33,338 $41,397 $28,152 Europe 6,780 11,129 9,738 Pacific Rim 7,195 5,257 4,989 Central and South America 3,503 4,581 4,120 Other International 4,600 4,595 2,778 ------ ------ ------ Total U.S. Revenue $ 55,416 $66,959 $49,777 ====== ====== ====== Revenue from foreign subsidiaries 6,839 7,876 5,032 Adjustments and eliminations (4,036) (6,993) (4,233) ------ ------ ------ Total Revenues $ 58,219 $67,842 $50,576 ====== ====== ====== Income (Loss) before taxes U.S. $ (5,021) $ 2,520 $ 1,219 Foreign 688 1,479 443 Eliminations (737) (2,104) (860) ------ ------ ------ Total Income (Loss) from continuing operations before taxes $ (5,070) $ 1,895 $ 802 ====== ====== ====== Identifiable Assets U.S. $ 41,691 $47,975 $47,497 Foreign subsidiaries 3,441 3,848 2,506 ------ ------ ------ Total Identifiable Assets $ 45,132 $51,823 $50,003 ====== ====== ====== ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. Directors and Executive Officers of the Registrant. a. Directors Name, Age and Positions with the Company other than Director Business Experience - ----------------------- ------------------------------- Class I - Term Expiring at the 1996 Annual Meeting: Richard D. Margolis, 57, Mr. Margolis has been a director of Secretary the Company since 1980. He was elected Secretary of the Company in May 1987. For more than the past five years, Mr. Margolis has been a partner in the law firm of Benesch, Friedlander, Coplan & Aronoff in Cleveland, Ohio. Norman G. Einspruch, 63 Dr. Einspruch has been a director of the Company since September 1993. He has been a Professor of Electrical and Computer Engineering at the University of Miami since 1977 and has been Chairman of the Department of Industrial Engineering since June 1994. In addition, Dr. Einspruch has been Senior Fellow in Science and Technology since 1990 and was Dean of the College of Engineering at the University of Miami from 1977 to 1990. Dr. Einspruch is also a director of Ogden Corporation. Class II - Term expiring at the 1997 Annual Meeting: John P. Lowe, Jr., 43 Mr. Lowe has been a director of the Company since March 1987. Mr. Lowe has been Of Counsel to the Adair Law Firm in Rochester, New York and at the law firm of Bureau Francis Lefebvre in New York, New York since January 1995. Prior to January 1995 Mr. Lowe had been a member of the law firm of Bureau Francis Lefebvre since 1989. Michael H. Newlin, 69 Mr. Newlin has been a director of the Company since December 1991. Since April 1994, Mr. Newlin has served as a consultant to Jupiter Corporation of Wheaton, MD and Meridan Corporation of Alexandria, VA. He was Acting Deputy Assistant Secretary of State, Bureau of Political-Military Affairs, Department of State from November 1992 to February 1994. From February 1992 through October 1992 he was Deputy Executive Chairman, UN Special Commission on Iraq- UN Headquarters New York. From October 1991 through January 1992, Mr. Newlin was a consultant to the United States Department of State. From 1988 through 1991, Mr. Newlin was United States Ambassador to United Nations Organization in Vienna and served as United States Ambassador to Algeria from 1981 to 1985. Class III - Term Expiring at the 1995 Annual Meeting: Henry David Epstein, 68, Mr. Epstein was named President, Chairman of the Board, Chief Executive Officer and a director President and Chief of the Company by the Board of Directors Executive Officer in March 1987, and was named Chairman of the Board in December 1987. He has headed Ideonics, his own Florida-based financial and technology consulting firm since 1985. From 1977 to 1985 he was employed by Loral Corporation, a manufacturer of military electronics equipment, most recently as Senior Group Vice President. Howard M. Schneider, 51 Mr. Schneider has been a director of the Company since April 1988. For more than the past five years, he has been President of BT Securities Corporation, an affiliate of Bankers Trust Company of New York. b. Executive Officers Set forth below is certain information concerning the executive officers of the Company other than Mr. Epstein. Name, Age and Position with the Company Business Experience - ---------------------- ------------------- David L. Johnson, 57, Mr. Johnson has been President of Executive Vice President Penril Electronics, Inc., a wholly-owned subsidiary, since November 1994 and Executive Vice President of the Company since September 1991. From September 1990 to September 1991, he held the position of Senior Vice President of the Company. From May 1993, with the acquisition of Datability, Inc., until November 1994, Mr. Johnson served as Co- President of the Company's Penril Datability Networks Division. From 1987 until the acquisition of Datability, Inc., Mr. Johnson was the President of the Penril DataComm Division. Ronald A. Howard, 39, Mr. Howard was named President of the Executive Vice President Penril Datability Networks Division in November 1994, having served as Co- President of the division from May 1993 until November 1994. He has held the position of Executive Vice President of the Company since May 1993. Mr. Howard was President of Datability Inc. from its founding in 1977 until it was acquired by the Company in May 1993. Richard D. Rose, 41, Mr. Rose was named Chief Financial Vice President and Officer of the Company in November 1994. Chief Financial Officer He has held the position of Vice President Finance of the Company since February 1994 and Corporate Controller since 1988. Mr. Rose was named Vice President-Controller and Principal Accounting Officer in December 1990. C.P. Houston, 54, Mr. Houston was named Vice President- Vice President Operations of the Penril Datability Networks Division in November 1994. Mr. Houston was Vice President-Administrator of Penril Datability Networks Division, from 1988 until November 1994. Mr. Houston was named a Vice President of the Company in September 1992. c. Section 16 Reporting Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors, executive officers and persons who own more than 10% of the Company's Common Stock to file with the Securities and Exchange Commission (SEC) initial reports of ownership and reports of changes in ownership of the Common Stock. Such persons are required by SEC regulations to provide the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required, all Section 16(a) filing requirements during fiscal year 1995 were complied with, except that one report covering an open market sale of shares by Mr. Houston was filed two days late, and two reports covering the open market sale of shares by Mr. Johnson were filed four days and 21 days late. Item 11. Executive Compensation. a. Employment and Other Severance Agreements The Company entered into an employment agreement with Henry D. Epstein in 1989 pursuant to which Mr. Epstein is serving as Chairman of the Board, President and Chief Executive Officer at a salary of $275,000 per year. In the event that there should be a change in control of the Company or Mr. Epstein is removed or forced to resign his position with the Company against his will, other than for cause, the agreement entitles him to a severance payment equal to two times Mr. Epstein's cash compensation for the last full fiscal year prior to termination of his employment. Ronald A. Howard entered into an employment agreement with the Company in May 1993 in connection with the Company's acquisition of Datability, Inc. Mr. Howard is serving as Executive Vice President of the Company and President of the Penril Datability Networks Division. In the event Mr. Howard's employment is terminated for any reason other than death, disability or for cause, the agreement requires the Company to pay Mr. Howard his annual salary for the remainder of the term of the agreement. Mr. Howard's employment agreement was amended effective September 15, 1995 to (i) increase his annual salary from $200,000 a year to $225,000, (ii) extend the expiration date for one year to April 30, 1997 and (iii) provide that if the Company is sold during the term of the employment agreement, Mr. Howard will be entitled to an amount equal to 2-1/2 times his annual salary. In January 1995, the Company entered into an agreement with Richard D. Rose which provides that the Company will pay Mr. Rose a bonus of $120,000 and guarantee payment of his salary for a period of one year if the Company is sold while Mr. Rose is an employee of the Company and if Mr. Rose agrees to remain under the new ownership for a period of at least one year at his current position or similar position. b. Compensation The following tables show information with respect to the annual compensation for services in all capacities to the Company for the fiscal years ended July 31, 1995, 1994 and 1993 of those persons who were, at July 31, 1995 (i) the chief executive officer and (ii) the other four most highly compensated executive officers of the Company (the "named executive officers"). SUMMARY COMPENSATION TABLE Annual Compensation Long-Term Compensation Awards Name and Restricted Stock Options/ All Other Principal Position Year Salary Stock Awards(1) SARs(2) Compensation(3) - ------------------ ---- -------- --------------- ------------------ ---------------- Henry D. Epstein 1995 $274,997 $ -- -- $11,428 Chairman of the Board 1994 274,997 -- -- 12,018 President and Chief 1993 265,595 -- 120,000 9,942 Executive Officer David L. Johnson 1995 200,000 -- -- 26,646 Executive Vice President 1994 200,000 -- -- 1,011 1993 193,752 4,800 90,000 1,004 Ronald A. Howard (4) 1995 200,000 -- 30,000 5,458 Executive Vice President 1994 203,333 -- -- 250 1993 46,154 -- 90,000 -- C.P. Houston 1995 120,290 -- 10,000 250 Vice President 1994 116,847 -- 5,000 250 1993 104,021 3,520 5,000 -- Richard D. Rose 1995 125,848 -- 20,000 4,547 Vice President and 1994 115,335 -- 5,000 4,311 Chief Financial Officer 1993 84,235 2,640 15,000 3,646
(1) On October 1, 1992 a restricted stock award was granted for 1,200 shares to Mr. Johnson, for 880 shares to Mr. Houston, and for 660 shares to Mr. Rose. The table reflects the fair market value of such shares on the date of grant. All such shares vested as to 50% after one year from date of grant and as to 100% after two years from date of grant, provided, in each case, the recipient was still employed by the Company on the vesting dates. (2) Number of shares granted under the 1986 Incentive Plan. The options are exercisable at prices ranging from $2.31 to $4.375 per share, the fair market value at the date of grant. The Company does not grant SARs. (3) Includes for fiscal 1995, $250 paid for the benefit of each of the named executives pursuant to the Company's 401(k) Plan, except for Mr. Johnson for which the amount paid was $175. Also includes for Mr. Epstein, Mr. Johnson, and Mr. Rose, $4,040, $783, $280 respectively, paid under the Company's Split-Dollar Life Insurance Program and for Mr. Epstein, Mr. Johnson, Mr. Howard, and Mr. Rose, $7,338, $1,188, $5,208 and $4,017, respectively, paid to the Exec-U- Care Medical Insurance Trust. Includes $24,500 paid to Mr. Johnson as a commission. (4) Mr. Howard joined the Company in May 1993. Option/SAR Grants In Last Fiscal Year % of Total Potential Realizable Options/SARs Value At Assumed Annual Rates Granted to of Stock Price Appreciation Option/SARs Employees in Exercise or Market Price on For Option Term(2) Name Granted Fiscal Year(1) Base Price Date of Grant Expiration Date 5% 10% - ------------ ----------- -------------- ----------- --------------- --------------- ------------ ---------- Henry D. Epstein -- -- -- -- -- -- -- David L. Johnson -- -- -- -- -- -- -- Ronald A. Howard 30,000 8.6% $2.875 $2.875 03/02/2005 54,242 137,460 C.P. Houston 10,000 2.9% 2.310 2.310 12/02/2004 14,527 36,815 Richard D. Rose 20,000 5.7% 2.310 2.310 12/02/2004 29,055 73,631 (1) Reflects only options; the Company does not grant SARs. (2) Assumed annual appreciation rates are set by the SEC and are not a forecast of future appreciation. The actual realized value depends on the market value of the Common Stock on the exercise date, and no gain to the optionees is possible without an increase in the price of the Common Stock. All assumed values are pre-tax and do not include dividends. /TABLE Aggregated Option/SAR Exercises In Last Fiscal Year And Fiscal Year-end Option/SAR Values
Per Share Value of Unexercised In- Number of Unexercised Exercise Price The-Money Options/SARs Shares Options/SARs at Fiscal of Unexercised at Fiscal Year-End Acquired on Value Year-End Exercisable/ Options at Fiscal Exercisable/ Name Exercise Realized Unexercisable(1)(2) Year-End Unexercisable(1)(3) - -------------- ---------- -------- ---------------------- --------------- ----------------------- Henry D. Epstein -- -- 72,000/48,000 $4.38 63,000/42,000 David L. Johnson 25,600 79,303 172,400/36,000 $2.31-4.375 301,846/40,000 Ronald A. Howard(4) -- -- 54,000/66,000 2.875-4.375 47,250/102,750 C.P. Houston -- -- 41,167/15,550 2.31-7.50 5,250/35,400 Richard D. Rose -- -- 37,167/29,500 2.31-7.50 17,333/62,300 (1) Reflects only stock options; the Company does not grant SARs. (2) Based on the year-end per share closing price of $5.25 (as reported on the National Association of Securities Dealers Automated Quotation System on July 31, 1995), 10,000 options held by Mr. Houston and 10,000 options held by Mr. Rose were not in-the-money. (3) Represents the difference between the option exercise price (if less than $5.25) and $5.25. (4) On September 8, 1995, Mr. Howard was granted an option under the 1986 Incentive Plan for 250,000 shares at $7.875 per share. /TABLE c. Retirement and Savings Plan The Company's Retirement and Savings Plan ("401(k) Plan") is a defined contribution plan including provisions of Section 401(k) of the Internal Revenue Code. Employees of the Company who have completed 90 days of eligibility service ("Participants") are eligible to participate in the 401(k) Plan. The 401(k) Plan permits, but does not require the Company to make matching contributions. In addition, the Company may make discretionary contributions to the 401(k) Plan which will be allocated to each Participant based on the ratio of such Participant's eligible compensation to the total of all Participants' eligible compensation. Amounts contributed by the Company vest as to 30% after 1 year of eligible service, 60% after 2 years of eligible service and 100% after 3 years of eligible service. Participants may elect to direct the investment of their contributions in accordance with the provisions of the 401(k) Plan. d. Report of Stock Option/Compensation Committee The Company's executive compensation program is administered by the Stock Option/ Compensation Committee (the "Committee") of the Board of Directors. During fiscal 1995 the Committee was composed of the five non-employee directors. The primary functions of the Committee are to consider and award stock options, to determine the compensation and benefits of the Chief Executive Officer and to review and approve, or modify if deemed appropriate, the recommendations of the Chief Executive Officer with respect to the compensation and benefits of the other executive officers. The Company's compensation program consists of both cash and equity components. Compensation determinations are guided by the following principles: (1) the compensation program should provide motivation by emphasizing performance; (2) the compensation of the Company's executive officers should be reasonably comparable to and competitive with that offered by similarly situated companies, and (3) the compensation program should seek to align the interests of the Company's executive officers with the long-term interests of the Company's shareholders principally through the granting of stock options. The goals of the Company's compensation policy are to attract and retain qualified personnel and to motivate them to enhance the long-term performance of the Company. Chief Executive Officer. Henry D. Epstein is serving as the Company's Chairman of the Board, President and Chief Executive Officer pursuant to an employment agreement entered into in 1989. The employment agreement provides that Mr. Epstein's salary may be fixed by the Board of Directors from time to time and he will be paid such bonus compensation as may be determined by the Board in its discretion. Since the Committee consists of all of the non- employee members of the Board, the Board has delegated the determination of Mr. Epstein's salary and bonus to the Committee. In September 1991 Mr. Epstein's salary was fixed at $275,000 per year and it remains at that level. Executive Officers. The Company's salary and bonus program for its executive officers other than the Chief Executive Officer is presented by the Chief Executive Officer to the Committee each year and final determinations are generally made by the Chief Executive Officer with the advice and consent of the Committee. Factors considered by the Chief Executive Officer in determining salaries are typically subjective, such as his perception of the individual's performance, level of responsibility, the Company's financial performance and compensation in the industry for comparable positions. No specific quantitative formula is used. Bonus Plan. Part of the cash component of the Company's compensation program consists of bonuses paid under the Company's Incentive Bonus Plan. Availability of awards under the Incentive Bonus Plan are based on increasing percentages of executives' base salaries, as determined by the achievement of the percentages of certain goals set forth in the Company's annual budgeted profit and cash plan. At the beginning of each fiscal year, the Chief Executive Officer presents to the Committee for its approval his recommendation of the specific goals and realization formulas for the Incentive Bonus Plan for the forthcoming fiscal year. The Chief Executive Officer is not a participant in the Incentive Bonus Plan. At the end of the fiscal year, additional awards may be made by the Committee if it is determined that an executive has made an unusual contribution to the Company's success. The Committee did not make any grants under the Incentive Bonus Plan for fiscal 1995 because the operating performance of the Company did not meet the specified goals. Option Plan. The principal purposes of the 1986 Incentive Plan are to motivate key employees to increase the Company's profitability and to encourage them to obtain and hold the Company's stock, thereby aligning the interests of the employees with those of the shareholders. The 1986 Incentive Plan may also be used by the Committee in cases where it is believed that due to extraordinary performance an executive's cash compensation should be supplemented with an option or restricted stock grant. The Committee, generally on the recommendation of the Chief Executive Officer, selects those key employees of the Company and its subsidiaries who are eligible to receive awards. The number of options granted is determined by a number of subjective criteria including the optionee's ability to influence the Company's long-term growth and profitability as well as contributions made by the optionee and the number and terms of the options already held by the optionee. All options are granted at the current market price. Since the value of an option bears a direct relationship to the Company's stock price, it is an effective incentive for managers to create value for shareholders. Deductibility of Executive Compensation Section 162(m) of the Internal Revenue Code denies a tax deduction to a public company for annual compensation in excess of $1 million paid to its chief executive officer or any of its four other most highly compensated executive officers unless specified requirements are met. The Committee does not expect that Section 162(m) will have an effect on the Company in fiscal 1995. The Committee will from time to time review the potential effects of Section 162(m) on the Company and in the future may decide to restructure one or more components of the Company's executive compensation program to comply with the requirements for deductibility established by Section 162(m). Respectfully submitted, John P. Lowe, Jr. Michael H. Newlin Norman G. Einspruch Richard D. Margolis Howard M. Schneider Compensation Committee Interlocks and Insider Participation No member of the Compensation Committee was, during fiscal 1995, an officer or employee of the Company or of any of its subsidiaries, or formerly an officer of the Company or of any of its subsidiaries, except that Richard D. Margolis, a member of the Compensation Committee, is Secretary (but not an employee) of the Company. Mr. Margolis is a partner in the law firm of Benesch, Friedlander, Coplan & Aronoff, which firm has performed legal services for the Company since 1974. John P. Lowe, Jr., also a member of the Compensation Committee, has been Of Counsel to the Adair Law Firm and at the law firm of Bureau Francis Lefebvre. Mr. Lowe's firm performed a limited amount of legal services for the Company in fiscal 1995. STOCK PERFORMANCE GRAPH The following graph is a comparison of the cumulative total returns during the preceding five fiscal year period for the Company, the NASDAQ Stock Market (U.S. Companies) Index and the Hambrecht & Quist Technology Index assuming an initial investment of $100 on July 31, 1990 and the reinvestment of all dividends when received. Years Ended Penril Datacomm H&Q NASDAQ July 31, Networks, Inc. Technology Stock Market - ------------- --------------- ----------- ------------ 1990 100.00 100.00 100.00 1991 140.00 115.12 118.07 1992 75.56 129.89 138.72 1993 68.89 143.94 168.67 1994 71.11 159.68 173.65 1995 93.33 279.97 242.94 Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth, as of September 30, 1995, based in part on information provided to the Company by the persons named in the table, the number of shares of Common Stock beneficially owned by each director, each executive officer named in the Summary Compensation Table in Item 11 and by the directors and executive officers of the Company as a group, and by the persons or groups of persons known to management to be the beneficial owners of more than 5% of the Common Stock. Amount and Name and Address Nature of Beneficial Percentage of Beneficial Owner Ownership (1) Ownership - ------------------------- ------------------- ------------- Directors and Executive Officers: Henry David Epstein 1300 Quince Orchard Boulevard Gaithersburg, Maryland 20878 901,929 (2) 9.9% Norman G. Einspruch P.O. Box 248581 Coral Gables, Florida 33124 18,000 (3) (4) John P. Lowe, Jr. 30 Corporate Woods Suite 200 Rochester, New York 14623 42,000 (3) (4) Richard D. Margolis 2300 BP America Building 200 Public Square Cleveland, Ohio 44114-2378 42,000 (3) (4) Michael H. Newlin 6517 Wilmett Road Bethesda, Maryland 20817 35,000 (3) (4) Howard M. Schneider 130 Liberty Street New York, New York 10006 42,000 (3) (4) David L. Johnson 1300 Quince Orchard Boulevard Gaithersburg, Maryland 20878 172,400 (5) 1.9% Ronald A. Howard 1300 Quince Orchard Boulevard Gaithersburg, Maryland 20878 637,614 (6) 7.0% C.P. Houston 1300 Quince Orchard Boulevard Gaithersburg, Maryland 20878 42,667 (5) (4) Richard D. Rose 1300 Quince Orchard Boulevard Gaithersburg, Maryland 20878 52,760 (7) (4) All directors and executive officers as a group (10 individuals) 1,986,370 (8) 20.7% Five Percent Shareholders: Pequot Partners Fund, L.P., Pequot Endowment Fund, L.P. and Pequot International Fund Inc. 354 Pequot Avenue Southport, CT 06490 1,465,000 (9) 16.2% Cramer Partners, L.P. 56 Beaver Street, Suite 701 New York, New York 10004 705,000 (10) 7.8% (1) Includes, in certain instances, shares held in the name of an executive officer's or director's spouse or minor children, the reporting of which is required by applicable rules of the Securities and Exchange Commission, but as to which shares the executive officer or director may have disclaimed beneficial ownership. (2) This figure is composed of 726,029 shares owned directly by Mr. Epstein, nd 72,000 shares which may be acquired from the Company within 60 days of September 30, 1995 pursuant to the exercise of options granted under the Company's 1986 Incentive Plan. This figure also includes 103,900 shares Mr. Epstein transferred to Henriette Wenkart Epstein but has the right to vote so long as she is the beneficial owner of such shares, pursuant to a seven year, irrevocable proxy. (3) Includes 18,000 shares for Dr. Einspruch, 42,000 shares for Messrs. Lowe, Schneider, and Margolis and 30,000 shares for Mr. Newlin which may be acquired from the Company within 60 days of September 30, 1995, pursuant to the exercise of stock options granted under the Non-Employee Directors' Stock Option Plan. (4) Less than 1%. (5) Includes only shares which may be acquired from the Company within 60 days of September 30, 1995, pursuant to the exercise of options granted under the Company's 1986 Incentive Plan. (6) Includes, in addition to shares owned directly by Mr. Howard, 54,000 shares which may be acquired from the Company within 60 days of September 30, 1995 pursuant to the exercise of options granted under the Company's 1986 Plan. In May 1993, the Company acquired all of the outstanding stock of Datability, Inc. by the issuance of 940,999 shares after adjustment of the Company's Common Stock in a merger, Mr. Howard, a shareholder of Datability, Inc., acquired all of the shares included in the table (other than the option shares) through this merger. (7) Includes, in addition to shares owned directly by Mr. Rose, 38,667 shares which may be acquired from the Company within 60 days of September 30, 1995, pursuant to the exercise of options granted under the Company's 1986 Incentive Plan. (8) Includes, in addition to shares owned by members of the group, 553,734 shares which certain members of the group have the right to acquire from the Company within 60 days of September 30, 1995 pursuant to the exercise of stock options. (9) Includes 636,000 shares of Common Stock owned by Pequot Partners Fund, L.P., a Delaware limited partnership, whose general partner and investment manager is Pequot General Partners, a Connecticut general partnership ("General Partners"), 260,000 shares of Common Stock owned by Pequot Endowment Fund, L.P., a Delaware limited partnership whose general partner and investment manager is Pequot Endowment Partners, L.P., a Delaware limited partnership("Endowment Partners") and 569,000 shares of Common Stock owned by Pequot International Fund, Inc., a British Virgin Islands corporation, whose investment manager is DS International Partners, L.P., a Delaware limited partnership ("International Partners"). (Pequot Partners Fund, L.P., Pequot Endowment Fund, L.P. and Pequot International Fund Inc. are collectively referred to as the "Funds"). General Partners, Endowment Partners and International Partners (collectively, the "Partners") are the beneficial owners (as such term is used in Rule 13d-3 of the Securities Exchange Act of 1934, as amended (the "Act")) of the shares of Common Stock owned by the Fund for which they act as investment manager, respectively. The Partners may be deemed to constitute a group as such term is used in Section 13(d)(3) of the Act. Each of the Partners disclaims beneficial ownership of the Common Stock beneficially owned by the other partners. (10) Includes 519,000 shares owned by Cramer Partners, L.P. (the "Partnership") and 186,000 owned by Global Assets Management ("GAM"). J.J. Cramer & Co. acts as an investment adviser and manager of the Partnership and GAM, and has sole voting and dispositive power over the 519,000 shares held by the Partnership and shared dispositive power over the 186,000 shares held by GAM. GAM has sole voting power and shared dispositive power with respect to the 186,000 shares it holds. James J. Cramer, President of J.J. Cramer & Co. and Karen Cramer, Vice President of J.J. Cramer & Co. have shared voting and dispositive power with respect to the 519,000 shares held by the Partnership and shared dispositive power with respect to the 186,000 shares held by GAM. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS NONE PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements -------------------- Included in Part II of this report: Independent Auditors' Report Consolidated Statements of Operations for each of the three years in the period ended July 31, 1995 Consolidated Balance Sheets as of July 31, 1995 and 1994 Consolidated Statements of Cash Flows for each of the three years in the period ended July 31, 1995 Consolidated Statements of Shareholders' Equity for each of the three years in the period ended July 31, 1995 Notes to Consolidated Financial Statements for the years ended July 31, 1995, 1994, and 1993 (a) 2. Financial Statement Schedule ----------------------------- Included in Part IV of this report: Independent Auditors' Report on Schedule Schedule II -Valuation and Qualifying Accounts Other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the Financial Statements or notes thereto. 3. Exhibits The exhibits are set forth on the attached Exhibit Index which is incorporated by reference. Exhibits are included only in the copies of this Form 10-K filed with the Securities and Exchange Commission and NASDAQ. 4. Reports on Form 8-K None SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Penril DataComm Networks, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PENRIL DATACOMM NETWORKS, INC. By:\s\Henry D. Epstein ------------------------------ Henry D. Epstein President, Chief Executive Officer, and Chairman of the Board of Directors Date: October 27, 1995 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated: \s\Norman G. Einspruch \s\Henry D. Epstein - --------------------------- ------------------------------ Norman G. Einspruch, Henry D. Epstein, Director Chief Executive Officer and Date: October 27, 1995 Chairman of the Board of Directors Date: October 27, 1995 \s\John P. Lowe, Jr. - --------------------------- John P. Lowe, Jr., Director \s\Richard D. Rose Date: October 27, 1995 ------------------------------ Richard D. Rose, Vice President, Chief Financial Officer and Chief Accounting Officer \s\Richard D. Margolis Date: October 27, 1995 - --------------------------- Richard D. Margolis, Director Date: October 27, 1995 \s\Michael H. Newlin - --------------------------- Michael H. Newlin, Director Date: October 27, 1995 \s\Howard M. Schneider - --------------------------- Howard M. Schneider, Director Date: October 27, 1995 INDEPENDENT AUDITORS' REPORT Board of Directors and Shareholders Penril DataComm Networks, Inc. Gaithersburg, Maryland We have audited the consolidated financial statements of Penril DataComm Networks, Inc. and subsidiaries as of July 31, 1995 and 1994, and for each of the three years in the period ended July 31, 1995, and have issued our report thereon dated October 17, 1995 (which report is included herein). Our audits also included the financial statement schedule of Penril DataComm Networks, Inc., listed in Item 14. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Deloitte & Touche LLP Washington, D.C. October 17, 1995 SCHEDULE II PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (in thousands) Balance Charged Charged at to Costs to Balance Beginning and Other Deductions at End Description of Period Expenses Accounts(a) (b) of Period - ------------ --------- -------- ----------- ---------- --------- ALLOWANCE FOR DOUBTFUL ACCOUNTS APPLICABLE TO ACCOUNTS RECEIVABLE-FROM CONTINUING OPERATIONS Fiscal 1995 $ 997 $ 846 $ 5 $ (714) $ 1,134 ==== ==== == ===== ===== Fiscal 1994 $ 927 $ 196 $ 8 $ (134) $ 997 ==== ==== == ===== ===== (a) Recoveries of accounts previously written off. (b) Write-off of bad debts. INDEX TO EXHIBITS Page 1 of 2 Exhibit No. EXHIBIT DESCRIPTION Ref. - ------- ------------------- ---- 2.01 Agreement and Plan of Merger dated May 6, 1994 among the Company, Datability, Inc., PD Acquisition Corp. and the stockholders of Datability listed on Appendix I together with Appendix I thereto (Exhibit 2.01 to Form 8-K filed (May 21, 1993) * 3.01 Amended and restated By-Laws of the Company (Exhibit (3)(a)(ii) to Form 10-K filed December 18, 1987). * 3.02 Certificate of Amendment of Certificate of Incorporation of the Company (Exhibit 4.3 to Form S-3 filed April 29, 1991). * 4.01 Amended and Restated Credit Agreement dated as of May 6, 1993 between the Company and Signet Bank/Maryland. (Exhibit 4.01 to Form 8-K filed May 21, 1993) * 4.02 Amendment No.1 to the Amended and Restated Credit Agreement dated as of May 6, 1993 between the Company and Signet Bank/Maryland. Amends the agreement at 4.05 above. (Exhibit 4.01 to Form 10-Q filed March 3,1995) * 4.03 Amendment No.2 to the Amended and Restated Credit Agreement dated as of May 6, 1993 between the Company and Signet Bank/Maryland. Amends the agreements at 4.01 and 4.02 above. (Exhibit 4.07 to Form 10-K filed October 28, 1994) * 4.04 Second Amended and Restated Credit Agreement dated as of April 25, 1995 to the Amended and Restated Credit Agreement dated as of May 6, 1993 between Penril DataComm Networks, Inc. and Signet Bank/Maryland. Amends the agreements at 4.01, 4.02 and 4.03 above. (Exhibit 4.01 to Form 10-Q filed June 14, 1995) * 4.05 Amendment No.1 dated as of September 19, 1995 to the Second Amended and Restated Credit Agreement between Penril DataComm Networks, Inc. and Signet Bank/Maryland. Amends the agreement at 4.04 above. 4.06 Subordinated Promissory Note of Datability, Inc. dated May 6, 1993 in the principal amount of $909,126 payable to the order of Howard International Corp. (Exhibit 4.02 to Form 8-K filed May 21, 1993) * 4.07 Subordinated Promissory Note of Datability, Inc. dated May 6, 1993 in the principal amount of $395,374 payable to the order of John Howard (Exhibit 4.03 to Form 8-K filed May 21, 1993) * 4.08 Amendment No. 1 dated as of April 25, 1995 to the Subordination Agreement dated as of May 6, 1993, among Howard International Corporation, John Howard, Signet Bank/Maryland, and Datability, Inc. (Exhibit 4.02 to Form 10-Q filed June 14, 1995) * 4.09 Stock Purchase Agreement dated as of September 22, 1995 among Registrant and Pequot Partners Fund, L.P., Pequot International Fund Inc., and Pequot Endowment Fund, L.P. (Exhibit 4.01 to Form 8-K filed October 6, 1995) * INDEX TO EXHIBITS Page 2 of 2 Exhibit No. EXHIBIT DESCRIPTION PAGE - ------- -------------------- ---- 4.10 Registration Rights Agreement dated as of September 22, 1995 among Registrant and Pequot Partners Fund, L.P., Pequot International Fund Inc., and Pequot Endowment Fund, L.P. (Exhibit 4.01 to Form 8-K filed October 6, 1995) * 10.01 1986 Incentive Plan of Penril DataComm Networks, Inc., As Amended (Exhibit 4.1 to Form S-8 filed April 29, 1991). * 10.02 Employment Agreement dated September 21, 1989, between the Company and Henry D. Epstein. (Exhibit 10.05 to Form 10-K filed October 11, 1989) * 10.03 Employment Agreement dated as of May 1, 1994 between the Company and Ronald A. Howard (Exhibit 10.01 to Form 8-K filed May 21, 1994) * 10.04 Amendment to Employment Agreement dated October 25, 1995 between the Company and Ronald A. Howard. Amends 10.03 above. 10.05 1987 Non-Employee Directors' Stock Option Plan of Penril DataComm Networks, Inc., as Amended (Exhibit 4.1 to Form S-8 filed April 29, 1991). * 22 Subsidiaries of the Registrant 23 Independent Auditors' Consent * Indicates Exhibits incorporated herein by reference. Documents not so marked have been filed herewith. EXHIBIT 22 PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT Jurisdiction of Name (1) Incorporation - ----------------------- --------------------- Datability, Inc. Delaware Electro-Metrics, Inc. Delaware Technipower, Inc. Delaware Penril Electronics, Inc. Delaware Penril Technologies, Inc. Delaware Penril Power Systems, Inc. Delaware Penril DataComm Ltd. United Kingdom Penril (Far East) Ltd. Hong Kong Penril International Ltd. U. S. Virgin Islands (1) This also represents the name under which the subsidiary does business. EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Penril DataComm Networks, Inc.'s Registration Statement No. 33-31824 on Form S-3, Registration Statement No. 33- 40216 on Form S-8, Registration Statement No. 33-40217 on Form S-3, Registration Statement No. 33-40218 on Form S-8, and Registration Statement No. 33-63440 on Form S-3 of our reports dated October 17, 1995, appearing in this Annual Report on Form 10-K of Penril DataComm Networks, Inc. for the year ended July 31, 1995. Deloitte & Touche LLP Washington, D.C. October 27, 1995 EX-27 2
5 0000077328 PENRIL DATACOMM NETWORKS, INC. 1,000 YEAR JUL-31-1995 JUL-31-1995 1,087 0 15,900 1,134 14,080 33,812 14,363 11,241 45,132 22,150 0 76 0 0 22,384 45,132 58,219 58,219 32,529 61,949 113 846 1,227 (5,070) (578) (4,492) (3,183) 0 0 (7,675) (1.02) (1.02)
EX-4 3 AMENDMENT NO. 1 dated as of September 19, 1995 to the SECOND AMENDED AND RESTATED CREDIT AGREEMENT dated as of April 25, 1995 between PENRIL DATACOMM NETWORKS, INC. and SIGNET BANK/MARYLAND TABLE OF CONTENTS PAGE Section 1. Definitions. . . . . . . . . . . . . . . . . . 1 Section 2. Amendments to the Amended Agreement. . . . . . 1 Section 3. Effectiveness. . . . . . . . . . . . . . . . . 2 Section 4. Integration; Confirmation. . . . . . . . . . . 3 Section 5. Counterparts. . . . . . . . . . . . . . . . . 3 Section 6. Successors and Assigns. . . . . . . . . . . . 3 Section 7. Governing Law. . . . . . . . . . . . . . . . . 4 Exhibit A - Form of Guarantor Consent AMENDMENT NO. 1 This AMENDMENT NO. 1 (This "Amendment No. 1") is dated as of September 19, 1995 and is between PENRIL DATACOMM NETWORKS, INC., a Delaware corporation (the "Borrower"), and SIGNET BANK/MARYLAND, a Maryland banking corporation (the "Bank"). The Borrower and the Bank are parties to a Second Amended and Restated Credit Agreement dated as of April 25, 1995 (the "Amended Agreement"). The Borrower has requested the Bank to amend the Amended Agreement in certain respects. The Bank is agreeable to the Borrower's request, all on the terms and conditions set forth in this Amendment No. 1. Accordingly, the parties hereto agree as follows: Section 1. Definitions. Terms used herein and not defined which are defined in the Amended Agreement shall have for the purposes hereof the respective meanings set forth therein. Section 2. Amendments to the Amended Agreement. (a) Section 5.5 of the Amended Agreement is hereby amended to read in full as follows: Section 5.5 Consolidated EBITDA to Consolidated Interest Expense. The ratio of Consolidated EBITDA to Consolidated Interest Expense on the last day of each fiscal quarter specified below, in each case computed for the four consecutive fiscal quarters ending on such date, will not be less than the ratio set forth below for such fiscal quarter. For purposes of this Section 5.5, a negative ratio greater than one set forth below (e.g. a ratio of (5.0) to 1.0 for the fiscal quarter ended October 31, 1995) would be a ratio less than the agreed minimum ratio of (4.906) to 1.0 for that quarter. Similarly, a positive ratio less than one set forth below would be a ratio less than the agreed minimum. Fiscal Quarter Ended Minimum Ratio - --------------------- ------------- July 31, 1995 (4.202) to 1.0 October 31, 1995 (4.906) to 1.0 January 31, 1996 and (4.917) to 1.0 each fiscal quarter thereafter (b) Section 5.6 of the Amended Agreement is hereby amended to read in full as follows: Section 5.6 Consolidated EBITDA to Adjusted Fixed Charges. The ratio of Consolidated EBITDA (determined without adding to Consolidated Net Income Consolidated Interest Expense in respect of Revolving Loans and in respect of Subordinated Debt) to Adjusted Fixed Charges (determined without adding the amount of the payment required under Section 2.10 (c)) on the last day of each fiscal quarter set forth below (computed for that quarter alone) will not be less than the ratio set forth below for such fiscal quarter. For purposes of this Section 5.6, a negative ratio greater than one set forth below (e.g. a ratio of (2.100) to 1.0 for the fiscal quarter ended October 31, 1995) would be a ratio less than the agreed minimum ratio of (2.035) to 1.0 for that quarter. Similarly, a positive ratio less than one set forth below would be a ratio less than the agreed minimum. Fiscal Quarter Ended Minimum Ratio - -------------------- ------------- July 31, 1995 (1.177) to 1.0 October 31, 1995 (2.035) to 1.0 January 31, 1996 and (8.261) to 1.0 each fiscal quarter thereafter (c) Section 8.1(i) of the Amended Agreement is hereby amended to read in full as follows: (i) the Borrower shall (A) fail to repay the Term Loans and the Acquisition Loan with Net Sale Proceeds pursuant to Section 2.10(c) by an aggregate amount of $2,000,000 prior to 1:00 P.M. (local time in Bethesda, Maryland) on December 31, 1995 or (B) the Borrower shall otherwise fail to pay when due any principal of or interest on any Loan, any fee or other amount payable hereunder to under the Notes or any other Loan Document; Section 3. Effectiveness. This Amendment No. 1 shall become effective as of July 31, 1995 on the date (the "Effective Date") when the last of the following conditions shall have been satisfied: (i) the Bank shall have received counterparts of this Amendment No. 1 duly executed by itself and the Borrower; (ii) The Bank shall have received counterparts of Guarantor Consents and Agreements, substantially in the form of Exhibit A to this Amendment No. 1, duly signed by each Guarantor; (iii) the fact that the representations and warranties of the Borrower contained in the Amended Agreement shall be true on and as of the Effective Date; (iv) the Bank shall have received all documents it may reasonably request relating to the existence of the Borrower and its authority to execute, deliver and perform this Amendment No. 1, and the validity of this Amendment No. 1 and any other matters relevant hereto, all in form and substance satisfactory to the Bank, and (v) the borrower shall have received net cash proceeds of not less than $1,500,000 from the sale or issuance of its capital stock and shall have applied at least $1,500,000 of such proceeds to repay the Acquisition Loan or the Term Loans in the order required as if such net proceeds were net Sale Proceeds under Section 2.10(c) (ii), (iii) or (iv). On the Effective Date, the Amended Agreement will be automatically amended as set forth herein, effective as of July 31, 1995. On and after the Effective Date, the rights and obligations of the parties hereto shall be governed by the Amended Agreement as amended by this Amendment No. 1. Section 4. Integration; Confirmation. On and after the Effective Date, each reference in the Amended Agreement to "this Agreement", "herein", "hereunder" or words of similar import, and each reference to any other document delivered in connection with the Amended Agreement to the "Credit Agreement", the "Amended Agreement" or the "Amended and Restated Credit Agreement" shall be deemed to be a reference to the Amended Agreement as amended by this Amendment No. 1, all other terms and provision of the Amended Agreement shall continue in full force and effect and unchanged and are hereby confirmed in all respects. Section 5. Counterparts. This Amendment No. 1 may be signed in any number of counterparts, each of which shall be an original, all of which taken together shall constitute a single integrated agreement with the same effect as if the signatures thereto and hereto were upon the same instrument. Complete sets of counterparts shall be lodged with the Borrower and the Bank. Section 6. Successors and Assigns. The provisions of this Amendment No. 1 shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, including any successor or assignee arising by operation of law. Section 7. Governing Law. This Amendment No. 1 shall be governed by and construed in accordance with the laws of the State of Maryland. IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to be duly executed as of the date and year first above written. PENRIL DATACOMM NETWORKS, INC. By: \s\R.D. Rose ---------------------------- Title: CFO 1300 Quince Orchard Blvd. Gaithersburg, Maryland 20878 Telecopier Number: (301) 948-5761 with a copy to: Richard D. Margolis, Esq. Benesch, Friedlander, Coplan & Aronoff 2300 BP America Building 200 Public Square Cleveland, Ohio 44114 Telephone Number: (216) 363-4500 Telecopier Number: (216) 363-4588 SIGNET BANK/MARYLAND By: \s\Michele Riley Levenson ---------------------------- Title: Vice President 7799 Leesburg Pike, Suite 500 Falls Church, Virginia 22043 Telecopier Number: (703) 506-9712 with a copy to: Brian D. Murphy, Esq. McGuire, Woods, Battle & Boothe One James Center Richmond, Virginia 23219 Telephone Number: (804) 775-4332 Telecopier Number: (804) 775-1062 EXHIBIT A September 19, 1995 Signet Bank/Maryland Commercial Lending 7700 Wisconsin Avenue Suite 400 Bethesda, Maryland 20814 Ladies and Gentlemen: Penril Datacomm Networks, Inc., a Delaware corporation ("Penril"), and Signet Bank/Maryland ("the Bank") are parties to a Second Amended and Restated Credit Agreement dated as of April 25, 1995 (the "1995 Credit Agreement"). Penril is obligated under the 1995 Credit Agreement to use the proceeds of all Revolving Loans available thereunder for its and its Restricted Subsidiary's general working capital requirements and to advance a not insubstantial portion of the proceeds of Revolving Loans to its Restricted Subsidiaries. Each of the undersigned is a Restricted Subsidiary of Penril. Each of the undersigned (a "Guarantor" and collectively the "Guarantors") has guaranteed to the Bank the full payment and performance of all Penril's obligations under the 1995 Credit Agreement pursuant to a Guaranty dated as of the respective dates set forth on Schedule 1 hereto (each a "Guaranty" and collectively the "Guaranties"), and secured its guaranty with the grant of a security interest in favor of the Bank in all of its tangible and intangible personal property pursuant to a Security Agreement (or, in the case of Penril Datacomm, Ltd., a Debenture) dated as of the respective dates set forth on Schedule 1 hereto (the "Security Agreement"), each between a Guarantor and the Bank. By reason of the violation of the covenants in Sections 5.5 and 5.6 of the Credit Agreement for its fiscal quarter ended July 31, 1995, Penril is in Default under the 1995 Credit Agreement. Penril has requested the Bank to waive this Default, to modify Sections 5.5 and 5.6 of the Credit Agreement to conform to Penril's current financial projections and to make certain other changes to the 1995 Credit Agreement. The Bank is agreeable thereto, all on the terms and conditions set forth in Amendment No. 1 dated as of the date hereof ("Amendment No. 1") to the 1995 Credit Agreement. Each Guarantor acknowledges that it is familiar with the contents of Amendment No. 1. Each Guarantor further acknowledges that it has, independently and without reliance on the Bank, and based on such financial and other information as it has deemed appropriate, made its own analysis of Penril's condition and of its ability to perform its obligations under the 1995 Credit Agreement, as amended by Amendment No. 1 (the "Amended Agreement"), and the Notes referred to therein. Each Guarantor hereby consents to the changes to the 1995 Credit Agreement effected by Amendment No. 1 and acknowledges and agrees that its obligations under its Guaranty shall continue in full force and effect from and after the effectiveness of Amendment No. 1. Each Guarantor acknowledges and agrees that the obligations of Penril under the Amended Agreement shall continue in all respects to constitute "Obligations" guaranteed under each Guaranty. This Consent may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Consent shall become effective as to each Guarantor when the Bank shall have received counterparts hereof (which may be delivered by telecopier or other means of facsimile transmission) signed by such Guarantor. PENRIL ELECTRONICS INC. By: \s\R.D. Rose ---------------------- Title: Secretary PENRIL TECHNOLOGIES INC. By: \s\R.D. Rose ---------------------- Title: Secretary TECHNIPOWER INC. By: \s\R.D. Rose ---------------------- Title: Secretary ELECTRO-METRICS INC. By: \s\R.D. Rose ---------------------- Title: Secretary DATABILITY INC. By: \s\R.D. Rose ---------------------- Title: Secretary PENRIL INTERNATIONAL, LTD. By: \s\R.D. Rose ---------------------- Title: President PENRIL DATACOMM, LTD. By: \s\R.D. Rose ---------------------- Title: Secretary PENRIL (FAR EAST) LIMITED By: \s\R.D. Rose ---------------------- Title: Director PENRIL POWER SYSTEMS, INC. By: \s\R.D. Rose ---------------------- Title: Director EXHIBIT 1 GUARANTOR DATE OF GUARANTY - --------- ---------------- PENRIL ELECTRONICS INC. MAY 6, 1993 PENRIL TECHNOLOGIES, INC. MAY 6, 1993 TECHNIPOWER INC. MAY 6, 1993 ELECTRO-METRICS INC. MAY 6, 1993 DATABILITY INC. MAY 6, 1993 PENRIL INTERNATIONAL, LTD. OCTOBER 27, 1993 PENRIL DATACOMM, LTD. OCTOBER 15, 1993 PENRIL (FAR EAST) LIMITED DECEMBER 22, 1993 PENRIL POWER SYSTEMS, INC. MAY 18, 1995 EX-10 4 Penril DataComm Networks, Inc. 1300 Quince Orchard Blvd. Gaithersburg, MD 20878 Mr. Ronald A. Howard 9010 Falls Road October 25, 1995 Potomac, MD 20854 Re: Amendment to Employment Agreement Dear Ron: Reference is made to the Employment Agreement dated as of May 1, 1993(the "Employment Agreement") between Penril DataComm Networks, Inc. and Ronald A. Howard. Unless otherwise indicated, capitalized terms used herein shall have the same meaning as in the Employment Agreement. 1. Amendments to Employment Agreement. In consideration of the mutual covenants set forth herein, the parties agree that the Employee Agreement is hereby amended, effective immediately, in the following respects: (a) Section 3 of the Employment Agreement is hereby amended to delete the date "April 30, 1996" and to substitute for it the date "April 30, 1997." (b) Subsection 4(a) of the Employment Agreement is hereby amended to delete the dollar figure "$200,000" and to substitute for it the dollar figure "$225,000." (c) Section 4 of the Employment Agreement is hereby amended by to add a new subsection 4(f) thereto to read as follow" "(f) If the Company is sold or acquired during the term of this Agreement, whether by sale of shares, merger, consolidation, share exchange, sale of all or substantially all assets or otherwise, then immediately upon the closing of such sale or acquisition, Executive shall receive a bonus equal to 30 months salary at the rate specified in subsection 4(a) hereof." (d) Section 9 of the Employment Agreement is hereby amended to add a new subsection (g) thereto to read as follows: "(g) Sections 3.02 and 3.04 of the Merger Agreement are hereby incorporated herein by reference and made part hereof, and shall be binding on Executive to the same extent as if fully set forth herein, with the following changes:(i) the covenants set forth in subsections (b) and (c) of Section 3.02 of the Merger Agreement shall be binding on Executive through April 30, 1997; (ii) the convenants set forth in Section 3.04 of the Merger Agreement shall be binding on Executive through April 30, 1997; and (iii) the covenant set forth in subsection 3.04 (a)(iv) of the Merger Agreement shall not prevent Executive from being appointed or elected to the Board of Directors of the Company." 2. Section Headings. The section headings in this letter agreement are inserted for convenience only and shall not be part of this instrument. 3. Governing Law. This letter agreement shall be governed by and construed in accordance with the laws of the State of New York. 4. Effect of Amendment. Except as amended and supplemented hereby, all of the terms, conditions, covenants and provisions of the Employment Agreement shall remain and continue in full force and effect and are hereby ratified, repeated and confirmed in all respects. 5. Entire Agreement. This letter agreement and the Employment Agreement as amended and supplemented hereby constitute the entire agreement and the understanding between the parties hereto with respect to Executive's employment relationship with the Company and supersede any and all prior agreements and understandings relating thereto. 6. Counterparts; Effectiveness. This letter agreement may be signed in any number of counterparts, each of which shall be original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This letter agreement shall not be effective and binding upon either party hereto until signed by both of them. Please confirm your agreement to the foregoing by signing where indicated on the counterpart of this letter agreement provided and returning it to the undersigned. Very truly yours, PENRIL DATACOMM NETWORKS, INC. BY: \s\Henry David Esptein --------------------- Henry David Epstein Chairman, President and Chief Executive Officer AGREED TO: \s\Ronald A. Howard - -------------------------- Ronald A. Howard Dated: October 25, 1995 -----END PRIVACY-ENHANCED MESSAGE-----