UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended April 1, 1995
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file Number 1-5486
THE DIANA CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-2448698
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8200 W. Brown Deer Road, Suite 200, Milwaukee, Wisconsin 53223
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (414) 355-0037
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
Common Stock, $1.00 Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
X Yes ___ 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.[ ]
At June 15, 1995, the aggregate market value of the voting stock of the
registrant held by stockholders who were not affiliates of the registrant was
$17,127,000. At June 15, 1995, the registrant had issued and outstanding an
aggregate of 3,914,837 shares of its Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be filed
within 120 days after the end of the fiscal year covered by this report are
incorporated by reference into Part III hereof.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
THE DIANA CORPORATION
SELECTED FINANCIAL DATA
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
April 1, April 2, April 3, March 28, March 30,
1995 1994 1993 1992 1991
------- ------- ------ -------- --------
(3) (2) (4)
<S> <C> <C> <C> <C> <C>
Net sales $250,386 $243,641 $222,254 $161,607 $185,245
======= ======= ======= ======= =======
Earnings (loss) from
continuing operations.... $ (720) $ 3,457 $ 1,857 $ (1,013) $ (2,519)
Loss from discontinued
operations............... --- --- --- --- (8,687)
Extraordinary items....... --- (266) 1,318 --- 16,937
Accounting change......... --- 262 --- --- ---
------- ------- ------- ------- -------
Net earnings (loss)....... $ (720) $ 3,453 $ 3,175 $ (1,013) $ 5,731
======= ======= ======= ======= =======
Earnings (loss) per
common share:
Primary
Continuing operations... $ (.19) $ .93 $ .51 $ (.27) $ (.61)
Discontinued operations. --- --- --- --- (2.10)
Extraordinary items..... --- (.07) .36 --- 4.09
Accounting change....... --- .07 --- --- ---
------- ------- ------- ------- -------
Net earnings (loss)... $ (.19) $ .93 $ .87 $ (.27) $ 1.38
======= ======= ======= ======= =======
Fully diluted
Continuing operations... $ (.19) $ .89 $ .51 $ (.27) $ (.61)
Discontinued operations. --- --- --- --- (2.10)
Extraordinary items..... --- (.07) .36 --- 4.09
Accounting change....... --- .07 --- --- ---
------- ------- ------- ------- -------
Net earnings (loss)... $ (.19) $ .89 $ .87 $ (.27) $ 1.38
======= ======= ======= ======= =======
Cash dividends per common
share................... $ --- $ --- $ --- $ --- $ ---
======= ======= ======= ======= =======
Total assets............. $ 45,327 $ 54,043 $ 46,072 $ 40,536 $ 34,644
Long-term debt (1)....... 5,869 7,489 6,142 3,409 1,640
Working capital.......... 15,489 21,207 17,490 18,942 21,917
Shareholders' equity..... 19,729 18,852 15,492 12,326 13,959
<FN>
(1) Includes current portion of long-term debt.
(2) The fourth quarter of fiscal 1992 contains the results of C&L, which
was acquired in December 1991.
(3) Fiscal 1993 contains 53 weeks. All other years contain 52 weeks.
(4) In fiscal 1991, discontinued operations consisted of Retailing Corporation
of America (RCOA), an operator of specialty retail stores. The extra-
ordinary items consisted of gains on the deconsolidation of RCOA and on
the extinguishment of debt.
</TABLE>
1
<PAGE>
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations - Fiscal Year Ended April 1, 1995
versus April 2, 1994
The following is a summary of sales for fiscal 1995 and 1994, including
sales by significant product line for APC:
1995 1994
---- ----
(In Thousands)
C&L $ 35,245 $ 28,308
Beef 107,055 116,557
Pork 42,700 40,770
Other 65,386 58,006
------- -------
APC Total 215,141 215,333
------- -------
$250,386 $243,641
======= =======
For the fiscal year ended April 1, 1995, net sales increased $6,745,000
or 2.8% over fiscal 1994. C&L's net sales increased $6,937,000 or 24.5% over
fiscal 1994. C&L's sales increase is due primarily to increased sales of
call controllers (see discussion in the following paragraph) and products
used in digital networks for integrated voice and data communications
systems. APC's net sales decreased $192,000 or .1% over fiscal 1994 net
sales. APC's overall volume (based on tonnage) during this period increased
by 1.8%. The average sales price per pound decreased from $1.22 per pound in
fiscal 1994 to $1.20 per pound in fiscal 1995. The decrease in average sales
price per pound is attributable to sales price decreases in beef and pork
because of excess product availability in these markets as well as changes in
the mix of product sold. The decrease in beef sales is primarily
attributable to reduced average sales price per pound and to a lesser extent
decreased volume.
During the second quarter of fiscal 1995 C&L completed the sale of call
controllers pursuant to a purchase commitment made by a customer in fiscal
1994. This order resulted in call controller sales of $3,648,000 in fiscal
1995. Sales attributable to this order significantly impacted the increase
in C&L's year-to-date call controller sales and total year-to-date sales
over the prior year results. During the fourth quarter of fiscal 1995, C&L's
sales were 10% below fourth quarter fiscal 1994 sales. This decrease in
sales is primarily attributable to lower call controller sales. The fourth
quarter of fiscal 1994 included sales under the purchase commitment referred
to above. In addition, the market for call controllers has been negatively
impacted by a continuing consolidation of long distance carriers and
continuing growth of equal access resulting in a reduction of demand for the
product. Long distance carriers have historically been the largest customer
group purchasing call controllers. The decrease in long distance carriers
has and will continue to result in lower unit sales of call controllers.
Equal access is the ability of a long distance customer to access a long
distance carrier by dialing 1 and not a string of long dialing codes. One of
the functions of the call controller is to simplify the access to a carrier
network that is not provided equal access. Once access to the carrier
network is simplified through equal access, the need for a call controller
for this purpose is eliminated.
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations - (Cont.)
The components of other income (loss) and non-operating income are
disclosed in Note 7 to the Consolidated Financial Statements. The decrease
in other income (loss) is attributable to lower interest income from
marketable securities and losses incurred on the disposition of marketable
securities. The increase in interest rates during fiscal 1995 adversely
impacted Diana's marketable securities which prior to the end of the second
quarter of fiscal 1995 consisted primarily of investments in corporate debt
obligations.
Consequently, Diana's corporate office has reduced its investment in
these securities resulting in reduced interest income and losses on
investments that were sold. In addition, during fiscal year 1994, Diana
recorded $747,000 of interest income resulting from the refund of federal
income taxes of $400,000 (shown separately as an income tax credit) paid in
a prior year.
In fiscal 1995 gross profit increased $287,000 or 2.6% over fiscal 1994.
On a consolidated basis, gross profit as a percentage of net sales was 4.5%
in fiscal 1995 unchanged from fiscal 1994. C&L's gross profit percentage was
19.5% in fiscal 1995 as compared to 20.7% in fiscal 1994. The decrease in
C&L's gross profit percentage is due to a lower gross profit percentage
achieved on the large call controller sale discussed above and to an
increasingly competitive market for products used in digital networks for
integrated voice and data communications systems. APC's gross profit
percentage was 2% in fiscal 1995 as compared to 2.3% in fiscal 1994. APC's
fiscal 1995 gross profit and gross profit percentage decreased from fiscal
1994 primarily due to increased transportation and warehouse costs and
inventory losses due to inefficiencies in APC's warehouse and transportation
operations (see discussion below) partially offset by lower product costs.
For the fiscal year ended April 1, 1995, selling and administrative
expenses increased $1,157,000 or 12.6% over fiscal 1994. Selling and
administrative expenses have increased primarily because of increased selling
and advertising expenses incurred by C&L to penetrate new and existing
markets. During fiscal 1995 C&L incurred expenses attributable to the
development and distribution of an updated product catalog, increased
participation in trade shows and increased advertising and promotional
efforts. In addition, C&L attempted to expand its business outside of the
United States through the development of an international sales department
and the opening of a sales and distribution office in Mexico. As a result of
these efforts, C&L increased its business as evidenced by the sales increase
of 24.5% in fiscal 1995 as compared to fiscal 1994. The attempt to expand
international business was unsuccessful due to the devaluation of the Peso
and the international sales department and office in Mexico were closed. C&L
is reviewing its sales and marketing program in order to reduce expense
levels which increased in fiscal 1995 as a result of the aforementioned
items. Selling and administrative expenses as a percentage of net sales was
4.1% in fiscal 1995 as compared to 3.8% in fiscal 1994.
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations - (Cont.)
For the fiscal year ended April 1, 1995, interest expense decreased
$93,000 or 7.8% over fiscal 1994. The decrease is primarily attributable to
a reduction in short term borrowings by Diana's corporate office. Diana's
corporate office utilized short term (margin) borrowings to purchase some
marketable securities. Some of the proceeds from the sale of marketable
securities as discussed above were used to repay all of the short term
borrowings. Short term borrowings were eliminated during the second quarter
of fiscal 1995.
As further discussed in Note 11 to the Consolidated Financial
Statements, the decrease in minority interest is attributable to the
Company's acquisition of the remaining 20% of C&L's common stock from its
minority shareholders.
In fiscal 1995, APC continued to incur inefficiencies in its warehouse
and transportation operations which began in fiscal 1994. APC incurred
increased warehouse and transportation payroll expenses and inventory losses
resulting from a continuation of the operating inefficiencies. Consequently,
APC made management changes and implemented new procedures in an attempt to
improve its warehouse and transportation operations. Furthermore, during the
latter part of fiscal 1995's third quarter, APC began selling to Sam's Club,
a significant, new customer. APC services the Southeastern region of this
national warehouse club. This new customer will generate a significant
amount of volume at margins that are lower than APC's average historical
margins. Initially, the addition of this new business increased the
operational inefficiencies discussed above which management believes is the
primary reason for the loss of $749,000 incurred in the fourth quarter of
fiscal 1995. After the resolution of these operational inefficiencies, APC
should be able to service this customer at a lower average cost than its
other customers because of efficiencies that should result from shipping
large volumes of product. Although APC does not have a contractual
relationship with Sam's Club, it believes that Sam's Club will continue to
purchase product from APC. Due to the addition of this new customer and the
limits on APC's ability to efficiently service certain customers, APC is
reviewing and evaluating the service requirements and profitability of these
customers to identify less profitable business that can be discontinued.
Results of Operations - Fiscal Year Ended April 2, 1994
versus April 3, 1993
The following is a summary of sales for fiscal 1994 and 1993, including
sales by significant product line for APC:
1994 1993
---- ----
(In Thousands)
C&L $ 28,308 $ 21,517
Beef 116,557 120,454
Pork 40,770 31,617
Other 58,006 48,666
------- -------
APC Total 215,333 200,737
------- -------
$243,641 $222,254
======= =======
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations - (Cont.)
For the fiscal year ended April 2, 1994, net sales increased $21,387,000
or 9.6% over fiscal 1993. C&L's net sales increased $6,791,000 or 31.6% over
fiscal 1993. C&L's sales increase is due primarily to increased sales of
products used in digital networks for integrated voice and data
communications systems and other digital products recently added to C&L's
product line. C&L had smaller increases in call controller sales than its
digital products because of reduced sales in the first and second quarter of
fiscal 1994. The market for call controllers has been negatively impacted by
a continuing consolidation of long distance carriers and continuing growth of
equal access resulting in a reduction of demand for the product. C&L tried
to mitigate this trend through the acquisition of Bobby Hollis D/B/A The
Hollis Group ("Hollis"). Hollis is a national distributor of call
controllers. Hollis' sales for the year ended December 31, 1992 were
$5,760,000. This acquisition resulted in additional call controller business
to C&L, however, it did not offset the effects of market consolidation. In
addition, C&L is attempting to diversify its product line, through the
introduction of ISDN, ATM, frame relay and digital switches, in order to
reduce the significance of the call controller business. APC's net sales
increased $14,596,000 or 7.3% over fiscal 1993. APC's overall volume (based
on tonnage) during this period increased by 5.2%. The average sales price
per pound increased from $1.20 per pound in fiscal 1993 to $1.22 per pound in
fiscal 1994. This increase is primarily due to a modest sales price increase
in all product lines and to a lesser extent a change in the mix of the
product.
In fiscal 1994 gross profit increased $1,956,000 or 21.9% over fiscal
1993. On a consolidated basis, gross profit as a percentage of net sales was
4.5% in fiscal 1994 as compared to 4% in fiscal 1993. The increase in the
gross profit percentage is primarily attributable to an increase of C&L's
higher gross profit sales as a percentage of total sales (11.6% in fiscal
1994 compared to 9.7% in fiscal 1993). C&L's gross profit percentage was
20.7% in fiscal 1994 as compared to 20.5% in fiscal 1993. C&L's gross profit
percentage increased because of increased gross profit margins on products
used in digital networks for integrated voice and data communications
systems. APC's gross profit percentage was 2.3% in fiscal 1994 which was
unchanged from fiscal 1993.
For the fiscal year ended April 2, 1994, selling and administrative
expenses increased $723,000 or 8.6% over fiscal 1993. The primary reasons
for this increase are due to increased selling expenses by C&L to penetrate
new and existing markets and increased expenses related to the acquisition of
Hollis. Selling and administrative expenses as a percentage of net sales was
3.8% in fiscal 1994 which was unchanged from fiscal 1993.
For the fiscal year ended April 2, 1994, interest expense increased
$453,000 or 61.4% over fiscal 1993. The primary reasons for this increase
are due to increased borrowings by APC under its revolving line of credit and
increased margin borrowings by Diana's corporate office used to purchase
marketable securities. In the first and second quarter of fiscal 1993, Diana
provided APC with its working capital funds which resulted in no interest
expense being recorded on a consolidated basis.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations - (Cont.)
The components of other income and non-operating income are disclosed in
Note 7 to the Consolidated Financial Statements. Diana's corporate office
generated increased investment income in fiscal 1994 as compared to fiscal
1993. A portion of the increased investment in marketable securities was
funded by increased margin borrowings discussed above. In addition, in
fiscal 1994 other income included interest income of $747,000 resulting from
the refund of federal income taxes of $400,000 (shown separately as an income
tax credit) paid in a prior year.
The extraordinary items of $266,000 for fiscal 1994 are discussed in
Note 10 to the Consolidated Financial Statements.
APC began to incur inefficiencies in its warehouse and transportation
operations in the third quarter of fiscal 1994, partially attributable to
increased volume. These inefficiencies resulted primarily in increased
payroll expenses which exceeded prior years and budgeted amounts in fiscal
1994. These increased expenses adversely impacted APC's fourth quarter
results. As a result, APC incurred a loss of $71,000 during the fourth
quarter of fiscal 1994 after reporting profitable results of operations
during the first three quarters of fiscal 1994.
Liquidity and Capital Resources
The Company recorded cash flow from operating activities of $6,717,000
as compared to cash used by operating activities of $308,000 in fiscal 1994.
Cash outflow from the loss of $720,000 in fiscal 1995 was more than offset by
a net decrease in working capital items, primarily inventory and accounts
payable. Inventory decreased by $3,204,000 or 20.7% from fiscal 1994 due to
better management of inventory through a reduction in inventory levels and
increased inventory turnover. At the end of fiscal 1994, APC increased its
pork inventories in anticipation of price increases and C&L increased its
inventories because of a purchase commitment from a customer. Accounts
payable increased by $718,000 or 6.2% from fiscal 1994 which is primarily due
to longer payment terms obtained by APC from vendors providing product that
is sold to the significant new customer (previously discussed) as compared to
payment terms from APC's primary existing vendors.
The Company's investments in marketable securities decreased $5,043,000
in fiscal 1995. This decrease is primarily attributable to losses of
$1,227,000 incurred on the sales of marketable securities, the elimination of
short-term borrowings incurred to purchase marketable securities on margin
and the settlement payments in the Ossmann Suit. As more fully discussed in
Note 10 to the Consolidated Financial Statements, in March 1994 the Ossmann
Suit was settled. In fiscal 1995, pursuant to the settlement, total payments
of $3,417,000 were made by the defendants in the litigation of which
$2,822,000 was made by the Company.
6
<PAGE>
In fiscal 1995, the Company had $599,000 of capital expenditures
consisting primarily of purchases by APC to improve its distribution facility
and upgrade its warehouse equipment. The Company estimates that fiscal 1996
capital expenditures will approximate $550,000-$750,000. Significant capital
expenditures are anticipated for C&L's data processing requirements and
improvements to APC's distribution facility. The improvements to APC's
distribution facility will eliminate some of the factors contributing to the
warehouse inefficiencies previously discussed. C&L's and APC's Loan and
Security Agreements include covenants that restrict capital expenditures. In
fiscal 1996, C&L's and APC's capital expenditures will be limited to an
aggregate of $900,000 because of covenants in their Loan and Security
Agreements that restrict capital expenditures.
C&L's credit facility provides a revolving line of credit of up to
$6,000,000 with interest at the prime rate plus .25% (9.25%) through December
1995. At April 1, 1995, C&L borrowed $2,562,000 and had available unused
borrowing capacity of $3,011,000.
APC's credit facility provides a revolving line of credit of up to
$9,500,000 with interest at the prime rate plus 2% (11%) through November
1997. A $2 million letter of credit facility is included within the total
credit facility. At April 1, 1995, APC borrowed $4,241,000 and had letters
of credit of $1,500,000 issued on its behalf. At April 1, 1995, APC had
available unused borrowing capacity of $3,009,000. APC's Loan and Security
Agreement contains financial covenants requiring a minimum level of tangible
net worth, earnings and net cash flow. At April 1, 1995 APC failed to
satisfy all of the aforementioned financial covenants. In June 1995, APC and
its lender entered into a waiver and amendment agreement relating to the Loan
and Security Agreement in order to avoid violating certain financial
covenants in fiscal 1995 and 1996. The amendment provides for the following
financial covenants during fiscal 1996: minimum tangible net worth of
$4,000,000, earnings of not less than $400,000 and net cash flow on a rolling
thirteen period basis (measured at the end of each four week period) ranging
from $(125,000) to $500,000. At June 28, 1995, based upon the
representations and projections of APC's management, the Company believed
that APC would meet the financial covenants during fiscal 1996 or would
obtain any required waivers from the lender. APC's lender did not grant to
APC a grace period in connection with the waiver granted to APC. Borrowings
under the APC credit facility are classified as short term because APC's Loan
and Security Agreement provides for repayment of borrowings after a 90 day
notice from the lender.
On June 25, 1993, C&L acquired certain assets and assumed certain
liabilities of Hollis, a national distributor of call controllers, for
$1,983,000. Cash utilized to make this acquisition was obtained primarily
from C&L's revolving line of credit and from a loan of $500,000 from one of
C&L's minority shareholders which was subsequently repaid.
Effective June 1994, the Company acquired the remaining 20% of C&L's
common stock from its minority shareholders in exchange for 265,262 shares
(adjusted for the 5% stock dividend paid in July 1994) of the Company's
common stock. This acquisition will not change the nature of the Company's
operation of C&L.
7
<PAGE>
In December 1994, the Company and Sattel entered into a general
partnership agreement to establish Satcom. The Company and Sattel each
received a 50% interest in Satcom. Profits and losses are allocated equally
among the two partners. Under the terms of this agreement, initial
contributions to be made to the partnership by Diana were operating capital
and the cost of a marketing study which in the aggregate would not exceed
$200,000. In addition, the Company agreed to prepare a business plan and
arrange for ongoing product production if the partners approve the marketing
plan. Sattel agreed to develop, design and test a telecommunications
product, manufacture three units, provide administrative services and provide
the use of its facilities to Satcom until permanent facilities were
determined.
Accounting Pronouncements
Effective April 2, 1994, the Company adopted the provisions of SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities". The
effect as of April 2, 1994 of adopting SFAS No. 115 increased net earnings by
$412,000, or $.11 per fully diluted share.
Effective April 4, 1993, the Company adopted the liability method of
accounting for income taxes in accordance with SFAS No. 109, "Accounting for
Income Taxes". The cumulative effect as of April 4, 1993 of adopting SFAS
No. 109 increased net earnings for fiscal 1994 by $262,000.
Impact of Inflation
Inflation has not had a significant impact on net sales or earnings
(loss) before extraordinary items or accounting change for the three most
recent fiscal years.
8
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THE DIANA CORPORATION AND SUBSIDIARIES
PAGE
Report of Ernst & Young LLP, Independent Auditors............... 10
Consolidated Balance Sheets..................................... 11
Consolidated Statements of Operations........................... 12
Consolidated Statements of Changes in Shareholders' Equity...... 13
Consolidated Statements of Cash Flows........................... 14
Notes to Consolidated Financial Statements...................... 15
9
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Shareholders
The Diana Corporation
We have audited the accompanying consolidated balance sheets of The
Diana Corporation and subsidiaries (the Company) as of April 1,
1995 and April 2, 1994, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each
of the three years in the period ended April 1, 1995. Our audits
also included the financial statement schedules listed in the Index
at Item 14(a). These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedules
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, the financial statements referred to above present
fairly, in all material respects, the consolidated financial
position of The Diana Corporation and subsidiaries at April 1, 1995
and April 2, 1994, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended
April 1, 1995, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material
respects the information set forth therein.
As discussed in Note 8 to the consolidated financial statements,
the Company changed its method of accounting for income taxes,
effective April 4, 1993.
Milwaukee, Wisconsin ERNST & YOUNG LLP
June 2, 1995, except for Note 3
as to which the date is June 28, 1995
10
<PAGE>
THE DIANA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
April 1, April 2,
1995 1994
------- -------
ASSETS (NOTE 3)
<S> <C> <C>
Current assets
Cash and cash equivalents............................ $ 2,440 $ 1,661
Restricted short-term investment..................... 300 630
Marketable securities................................ 6,211 11,254
Receivables, less allowance for
doubtful accounts of $600 and $517.................. 14,785 15,310
Inventories.......................................... 12,237 15,441
Other current assets................................. 390 336
------ ------
Total current assets............................... 36,363 44,632
Property and equipment
Land................................................. 357 357
Building and improvements............................ 4,400 4,154
Fixtures and equipment............................... 3,298 3,315
------ ------
8,055 7,826
Less accumulated depreciation........................ (4,252) (3,945)
------ ------
3,803 3,881
Goodwill, net.......................................... 2,846 2,710
Covenants not to compete, net.......................... 1,291 1,663
Other assets........................................... 1,024 1,157
------ ------
$45,327 $54,043
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings................................ $ 4,241 $ 8,766
Accounts payable..................................... 12,355 11,637
Accrued liabilities.................................. 1,390 1,072
Current portion of long-term debt.................... 2,888 1,950
------ ------
Total current liabilities...................... 20,874 23,425
Long-term debt......................................... 2,981 5,539
Net liabilities of unconsolidated subsidiary........... 698 3,615
Other liabilities ..................................... 1,045 977
Minority interest...................................... --- 1,635
Commitments and contingencies (Note 4).................
Shareholders' equity
Preferred stock - $.01 par value.
Authorized 5,000,000 shares; none issued............ --- ---
Common stock - $1 par value. Authorized 15,000,000
shares; issued 4,810,353 and 4,637,530 shares....... 4,810 4,638
Additional paid-in capital........................... 48,548 46,241
Accumulated deficit.................................. (28,178) (25,449)
Unrealized loss on marketable securities............. (713) (412)
Treasury stock at cost............................... (4,738) (6,166)
------ ------
Total shareholders' equity..................... 19,729 18,852
------ ------
$45,327 $54,043
====== ======
</TABLE>
See notes to consolidated financial statements.
11
<PAGE>
THE DIANA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------
April 1, April 2, April 3,
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Net sales.............................. $250,386 $243,641 $222,254
Other income (loss).................... (417) 2,697 1,471
------- ------- -------
249,969 246,338 223,725
Cost of sales.......................... 239,198 232,740 213,309
Selling and administrative expenses.... 10,314 9,157 8,434
------- ------- -------
Operating earnings..................... 457 4,441 1,982
Interest expense....................... (1,098) (1,191) (738)
Non-operating income................... 34 --- 718
Income tax credit...................... --- 400 ---
Equity in earnings (loss) of
unconsolidated subsidiaries.......... (69) 97 69
Minority interest...................... (44) (290) (174)
------- ------- -------
Earnings (loss) before extraordinary
items and accounting change.......... (720) 3,457 1,857
Extraordinary items.................... --- (266) 1,318
------- ------- -------
Earnings (loss) before accounting
change............................... (720) 3,191 3,175
Cumulative effect of accounting change. --- 262 ---
------- ------- -------
Net earnings (loss).................... $ (720) $ 3,453 $ 3,175
======= ======= =======
Earnings (loss) per common share:
Primary
Before extraordinary items.......... $ (.19) $ .93 $ .51
Extraordinary items................. --- (.07) .36
Accounting change................... --- .07 ---
------- ------- -------
Net earnings (loss)................. $ (.19) $ .93 $ .87
======= ======= =======
Fully diluted
Before extraordinary items.......... $ (.19) $ .89 $ .51
Extraordinary items................. --- (.07) .36
Accounting change................... --- .07 ---
------- ------- -------
Net earnings (loss)................. $ (.19) $ .89 $ .87
======= ======= =======
Weighted average number of common
shares outstanding
Primary............................. 3,832 3,727 3,629
======= ======= =======
Fully diluted....................... 3,832 3,861 3,629
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
12
<PAGE>
THE DIANA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in Thousands)
<TABLE>
<CAPTION>
Common Stock Additional Unrealized Loss Treasury Stock Total
Number of Par Paid in Accumulated on Marketable Number of Shareholders'
Shares Value Capital Deficit Securities Shares Cost Equity
--------- ------- ---------- ----------- --------------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 28, 1992 4,637,530 $ 4,638 $ 45,786 $ (30,993) $ --- 1,339,667 $(7,105) $ 12,326
Net earnings --- --- --- 3,175 --- --- --- 3,175
Purchase of treasury stock --- --- --- --- --- 5,000 (9) (9)
--------- ------ ------- -------- ------ --------- ------- -------
Balance at April 3, 1993 4,637,530 4,638 45,786 (27,818) --- 1,344,667 (7,114) 15,492
Net earnings --- --- --- 3,453 --- --- --- 3,453
5% stock dividend --- --- 214 (1,084) --- (163,889) 866 (4)
Exercise of stock options --- --- (47) --- --- (15,500) 82 35
Unrealized loss on
marketable securities --- --- --- --- (412) --- --- (412)
Other --- --- 288 --- --- --- --- 288
--------- ------ ------- -------- ------ --------- ------- -------
Balance at April 2, 1994 4,637,530 4,638 46,241 (25,449) (412) 1,165,278 (6,166) 18,852
Net loss --- --- --- (720) --- --- --- (720)
5% stock dividend 172,823 172 1,830 (2,009) --- --- --- (7)
Exercise of stock options --- --- (14) --- --- (4,500) 24 10
Change in unrealized loss on
marketable securities --- --- --- --- (301) --- --- (301)
Acquisition of minority interest --- --- 491 --- --- (265,262) 1,404 1,895
--------- ------ ------- -------- ------- --------- ------- -------
Balance at April 1, 1995 4,810,353 $ 4,810 $ 48,548 $ (28,178) $ (713) 895,516 $ (4,738) $ 19,729
========= ====== ======= ======== ======= ========= ======= =======
</TABLE>
See notes to consolidated financial statements.
13
<PAGE>
THE DIANA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------
April 1, April 2, April 3,
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Operating activities
Earnings (loss) before extraordinary
items and accounting change.......... $ (720) $ 3,457 $ 1,857
Adjustments to reconcile earnings
(loss) to net cash provided (used) by
operating activities:
Loss (gain) on sale of
marketable securities.............. 1,227 (479) (285)
Depreciation and amortization....... 1,154 1,098 852
Provision for losses on accounts
receivable......................... 313 153 406
Non-operating income................ --- --- (625)
Equity in loss (earnings) of
unconsolidated subsidiaries........ 69 (97) (69)
Minority interest................... 44 290 174
Payments of net liabilities of
unconsolidated subsidiary.......... (95) (361) (63)
Other............................... 311 (14) (320)
Changes in current assets and
liabilities........................ 4,414 (4,355) (2,838)
------ ------ ------
Net cash provided (used) by operating
activities............................ 6,717 (308) (911)
Investing activities
Additions to property and equipment... (599) (555) (251)
Acquisitions, net of cash acquired.... --- (1,983) (163)
Purchases of marketable securities.... (5,647) (20,218) (15,982)
Sales of marketable securities........ 9,276 21,031 6,895
Collection of notes receivable........ 194 252 268
Other................................. (195) --- ---
------ ------ ------
Net cash provided (used) by investing
activities............................ 3,029 (1,473) (9,233)
Financing activities
Changes in short-term borrowings...... (4,525) (226) 8,992
Payments on long-term debt............ (1,620) (390) (330)
Proceeds from long-term debt.......... --- 1,416 268
Payments toward bond settlements...... (2,822) (178) (1,081)
Purchase of treasury stock............ --- --- (9)
------ ------ ------
Net cash provided (used) by financing
activities............................ (8,967) 622 7,840
------ ------ ------
Increase (decrease) in cash and cash
equivalents........................... 779 (1,159) (2,304)
Cash and cash equivalents at the
beginning of the year................. 1,661 2,820 5,124
------ ------ ------
Cash and cash equivalents at the end of
the year.............................. $ 2,440 $ 1,661 $ 2,820
====== ====== ======
</TABLE>
See notes to consolidated financial statements.
14
<PAGE>
THE DIANA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 1, 1995
NOTE 1 - Summary of Significant Accounting Policies
Fiscal Year
The Company's fiscal year ends on the Saturday closest to March 31.
There were 53 weeks in fiscal 1993 and 52 weeks in all other years presented.
Basis of Presentation
The consolidated group (hereafter referred to as the "Company") included
the following companies during the past three years. The following describes
each entity in the consolidated group and its current status:
The Diana Corporation ("Diana")
Diana and its wholly-owned subsidiaries are included in the
consolidated group for all three fiscal years.
Entree Corporation ("Entree")
Entree and its wholly-owned subsidiary, Atlanta Provision Company,
Inc. ("APC"), are included in the consolidated group for all three
fiscal years. Diana owns 81.25% of Entree.
C&L Communications, Inc. ("C&L")
C&L is included in the consolidated group for all three fiscal
years. Effective June 1994, Diana increased its ownership interest in
C&L from 80% to 100% (see Note 11).
Investments in 20%-50% owned subsidiaries in which management has the
ability to exercise significant influence are accounted for using the equity
method of accounting (see Note 9). Accounts and transactions between members
of the consolidated group are eliminated in the consolidated financial
statements.
Cash Equivalents and Restricted Short-term Investments
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. Short-term
investments are valued at cost which approximates market. Certain short-term
investments are pledged to third parties and are therefore restricted and not
considered cash equivalents for purposes of financial reporting.
15
<PAGE>
NOTE 1 - Summary of Significant Accounting Policies (Continued)
Marketable Securities
The Company accounts for marketable securities in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", as of April 2, 1994.
Prior to April 2, 1994, the Company accounted for marketable securities under
SFAS No. 12, "Accounting for Certain Marketable Securities".
Under SFAS No. 115, management determines the appropriate classification
of debt securities at the time of purchase and reevaluates such designation
as of each balance sheet date. Debt securities are classified as held-to-
maturity when the Company has the positive intent and ability to hold the
securities to maturity. Held-to-maturity securities are stated at amortized
cost, adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization is included in other income (loss). Marketable
equity securities and debt securities not classified as held-to-maturity are
classified as available-for-sale. Available-for-sale securities are carried
at fair value, with the unrealized gains and losses reported in a separate
component of shareholders' equity. The amortized cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in other income (loss). Realized gains and
losses, interest income and dividends are included in other income (loss).
For purposes of determining the gain or loss on a sale, the cost of
securities sold is determined using the average cost of all shares of each
such security held at the dates of sale.
Inventories
Inventories, consisting of finished product, are stated at the lower of
cost or market. Items are removed from inventory based on the specific
identification method or the average cost method.
Property and Equipment
Property and equipment are stated at cost. Provisions for depreciation
are computed on the straight-line method for financial reporting purposes
over 3 to 10 years for equipment and 5 to 25 years for building and
improvements.
Goodwill
Goodwill is amortized on a straight-line basis over a forty year period.
Accumulated amortization was $388,000 and $309,000 at April 1, 1995 and
April 2, 1994, respectively. Goodwill is reviewed for impairment whenever
events or circumstances provide evidence that suggest that the carrying
amount of the asset may not be recoverable. Impairment is determined by
using identifiable cash flows over the remaining amortization period.
16
<PAGE>
NOTE 1 - Summary of Significant Accounting Policies (Continued)
Covenants Not to Compete
Covenants not to compete are amortized on a straight-line basis over the
non-compete periods of five to seven years. Accumulated amortization was
$1,210,000 and $838,000 at April 1, 1995 and April 2, 1994, respectively.
Revenue Recognition
The Company recognizes revenue when product is shipped.
Income Taxes
The Company accounts for income taxes using the liability method in
accordance with SFAS No. 109, "Accounting for Income Taxes", in 1995 and
1994, and the liability method in accordance with SFAS No. 96, "Accounting
for Income Taxes", in 1993.
Earnings (Loss) Per Common Share
Primary and fully diluted per share amounts are determined by dividing
earnings (loss) by the weighted average number of shares of common stock and
materially dilutive common stock equivalents (stock options) outstanding.
Concentrations of Credit Risk
Trade accounts receivable are the only financial instruments which
potentially subject the Company to significant concentrations of credit risk.
APC distributes meat and seafood primarily to retail food outlets, meat
wholesalers, food service enterprises and restaurants. APC performs periodic
credit evaluations of its customers' financial condition and generally does
not require collateral. C&L distributes telecommunications equipment
nationwide primarily to long-distance carriers, systems integrators and
interconnect companies. C&L performs periodic credit evaluations of its
customers' financial condition and generally does not require collateral,
however, C&L attempts to obtain a purchase money security interest in
product sold to small to medium sized customers. At April 1, 1995, APC and
C&L had no significant concentrations of credit risk.
Reclassifications
Certain reclassifications have been made to the 1994 and 1993 financial
statements to conform with the 1995 presentation.
17
<PAGE>
NOTE 2 - Marketable Securities
Effective April 2, 1994, the Company adopted the provisions of SFAS No.
115. In accordance with SFAS No. 115, prior period financial statements have
not been restated to reflect the change in accounting principle. The effect
as of April 2, 1994 of adopting SFAS No. 115 increased net earnings by
$412,000 or $.11 per fully diluted share.
The following is a summary of available-for-sale and held-to-maturity
marketable securities:
Available-for-Sale Marketable Securities
April 1, 1995
------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
---- --------- --------- -------
(In Thousands)
U.S. corporate securities $ 1,156 $ 21 $ 58 $ 1,119
Other debt securities --- --- --- ---
------ --- ---- ------
Total debt securities 1,156 21 58 1,119
Equity securities 1,604 --- 676 928
------ --- ---- ------
$ 2,760 $ 21 $ 734 $ 2,047
====== === ==== ======
Held-to-Maturity Marketable Securities
April 1, 1995
------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
---- --------- --------- -------
(In Thousands)
U.S. treasury security $ 4,164 $--- $ --- $ 4,164
====== === ==== ======
Available-for-Sale Marketable Securities
April 2, 1994
------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
---- --------- --------- -------
(In Thousands)
U.S. corporate securities $ 8,976 $ 23 $ 375 $ 8,624
Other debt securities 2,181 --- --- 2,181
------ --- ---- ------
Total debt securities 11,157 23 375 10,805
Equity securities 509 --- 60 449
------ --- ---- ------
$11,666 $ 23 $ 435 $11,254
====== === ==== ======
18
<PAGE>
NOTE 2 - Marketable Securities (Continued)
The gross realized gains on sales of available-for-sale securities
totaled $14,000, $592,000 and $313,000 in fiscal 1995, 1994 and 1993,
respectively, and the gross realized losses totaled $1,241,000, $113,000 and
$28,000 in fiscal 1995, 1994 and 1993, respectively. The net adjustment to
unrealized losses on available-for-sale securities included as a separate
component of shareholders' equity totaled $713,000 and $412,000 at April 1,
1995 and April 2, 1994, respectively.
The Company considers its marketable securities to be primarily a
resource for potential acquisitions. Pending such uses, the Company invests
its marketable securities for the purpose of generating additional income
and/or capital appreciation. The Company does not limit its potential
investments of marketable securities based on level of risk or investment
concentration.
Expected maturities of marketable securities will differ from
contractual maturities because the issuers of the securities may have the
right to prepay obligations without prepayment penalties. The amortized cost
and estimated fair value of marketable securities at April 1, 1995, by
contractual maturity, are shown below:
Available-for-Sale Securities
-----------------------------
Estimated
Cost Fair Value
---- ----------
(In Thousands)
Due after five years $ 1,156 $ 1,119
Equity securities 1,604 928
------ ------
$ 2,760 $ 2,047
====== ======
Held-to-Maturity Securities
---------------------------
Estimated
Cost Fair Value
---- ----------
(In Thousands)
Due in one year or less $ 4,164 $ 4,164
====== ======
19
<PAGE>
NOTE 3 - Short-Term Borrowings and Long-Term Debt
Short-term borrowings consist of the following (in thousands):
April 1, April 2,
1995 1994
-------- --------
Borrowings under APC's line of credit $4,241 $6,622
Margin borrowings --- 2,144
----- -----
$4,241 $8,766
===== =====
APC has a Loan and Security Agreement ("Agreement") with a lender
(amended effective June 28, 1995) providing a revolving line of credit
through November 1997 of up to $9,500,000 with interest at the prime rate
plus 2% (prime was 9% at April 1, 1995). A $2 million letter of credit
facility with fees of 2% is included within the total credit facility. At
April 1, 1995, APC borrowed $4,241,000 and had letters of credit of
$1,500,000 issued on its behalf by the lender.
APC's Loan and Security Agreement contains financial covenants requiring
a minimum level of tangible net worth, earnings and net cash flow. At April
1, 1995 APC failed to satisfy all of the aforementioned financial covenants.
In June 1995, APC and its lender entered into a waiver and amendment
agreement relating to the Loan and Security Agreement in order to avoid
violating certain financial covenants in fiscal 1995 and 1996. APC's lender
did not grant to APC a grace period in connection with the waiver granted to
APC.
Borrowings under the Agreement are restricted based on defined
percentages of eligible accounts receivable and inventories. The amount
available under the Agreement at April 1, 1995 was $3,009,000. APC pays a
fee of 1/2% on the average unused line of credit. Substantially all assets
of APC are pledged as collateral under the Agreement. The Agreement provides
for the maintenance of certain financial ratios and restricts APC in a number
of areas, including, but not limited to, declaration of dividends, mergers
and acquisitions, transactions with affiliates, capital expenditures and
additional indebtedness.
Borrowings under the Agreement are classified as short term because the
Agreement provides for repayment of borrowings after a 90 day notice from the
lender. The fiscal 1994 financial statements have been reclassified to
conform to the fiscal 1995 presentation.
20
<PAGE>
NOTE 3 - Short-Term Borrowings and Long-Term Debt (Continued)
Long-term debt consists of the following:
April 1, April 2,
Note Company Due Date 1995 1994
---- ------- ------------ ----------- ----------
(In Thousands)
Debentures and
interest A Diana January 2002 $ 2,240 $ 2,381
Note payable Diana --- 120
Notes payable B APC October 1996 158 306
Mortgage notes C APC August 2006 875 924
Line of credit D C&L December 1995 2,562 3,705
Other obligations E C&L October 1996 34 53
------ ------
5,869 7,489
Less current portion (2,888) (1,950)
------ ------
$ 2,981 $ 5,539
====== ======
A. Principal of $1,254,000 and capitalized interest of $986,000. Interest
at 11.25%. The debentures are unsecured (see Note 10).
B. Interest at 9.5% and 11%. The notes are collateralized by trailers and
equipment.
C. Interest at 7% and 8.25%. The mortgage notes are collateralized by land
and building with a carrying value of $2,618,000 as of April 1, 1995.
D. C&L has a Loan and Security Agreement ("Loan Agreement") with a lender
providing a revolving line of credit through December 23, 1995 of up to
$6,000,000, with interest at the prime rate plus .25%. Borrowings under
the Loan Agreement are restricted based on defined percentages of
eligible accounts receivable and inventories. The amount available
under the Loan Agreement at April 1, 1995, was $3,011,000.
Substantially all assets of C&L are pledged as collateral under the Loan
Agreement. The Loan Agreement provides for the maintenance of
certain financial ratios and restricts C&L in a number of areas,
including, but not limited to, declaration of dividends, payment of
salaries to officers, mergers and acquisitions, transactions with
affiliates, capital expenditures and additional indebtedness.
E. Interest at 3.9%. The obligation is collateralized by equipment.
21
<PAGE>
NOTE 3 - Short-Term Borrowings and Long-Term Debt (Continued)
Approximate annual amounts payable by Diana and its subsidiaries on
long-term debt for the next five fiscal years are as follows (in thousands):
1996 .................... $ 2,888
1997 .................... 247
1998 .................... 192
1999 .................... 195
2000 .................... 200
NOTE 4 - Commitments and Contingencies
Diana subleases its corporate office space under a noncancelable
operating lease. APC leases tractors and trailers used in its distribution
activities under operating leases with terms ranging from five to eight
years. APC also leases various equipment used in its warehouse operations
under operating leases with terms generally not exceeding one year. C&L
leases its building and certain vehicles and equipment under operating
leases. Total rental expense (including contingent rentals based on miles
driven) under operating leases in fiscal 1995, 1994 and 1993 was $1,870,000,
$1,929,000 and $1,907,000, respectively.
Future minimum payments (excluding contingent rentals) under
noncancelable operating leases with initial terms of one year or more for
fiscal years subsequent to April 1, 1995 are as follows (in thousands):
1996 $ 1,037
1997 693
1998 483
1999 369
2000 213
Thereafter 139
In connection with the sale of substantially all of the assets of
Diana's wholesale food business, the buyer assumed certain indebtedness of
Diana, which terminates in 1998, for which Diana remains primarily liable.
Such indebtedness aggregated approximately $469,000 at April 1, 1995. The
buyer has pledged a letter of credit for the benefit of the trustee of the
indebtedness as collateral for this indebtedness.
C&L participates in an equipment leasing arrangement. C&L is subject to
a future subscription obligation relating to the equipment lease for
approximately $495,000 at April 1, 1995, if income from the underlying lease
is insufficient to fund future operations of the arrangement. The lease for
equipment expires in January 1999. The sellers have indemnified the Company
with respect to any future subscription obligations.
In the opinion of management, all of the matters discussed above will be
resolved without a material adverse impact on the Company's consolidated
financial position.
22
<PAGE>
NOTE 5 - Stock Options
In fiscal 1986, the Company's Board of Directors adopted The Diana
Corporation 1986 Nonqualified Stock Option Plan (the "Plan"), which permits
the Company to grant nonqualified stock options to key employees and
directors of the Company and its subsidiaries. The Plan is limited to
771,750 common shares. The Plan is administered by the Company's Board of
Directors, which is authorized, among other things, to determine which
persons receive options under the Plan, the number of shares for which an
option may be granted, and the exercise price and expiration date for each
option. Options granted under the Plan may not be exercised after eleven
years from the date of grant, and no options may be granted after
December 10, 1997. The exercise price will not be less than the fair market
value of the Company's common stock on the date of grant, although the Board
has discretion to set the exercise price at any amount that it may establish
from time to time. Transactions for fiscal 1995, 1994 and 1993 are as
follows:
1995 1994 1993
---- ---- ----
Options outstanding at
beginning of year 544,264 533,110 528,110
Changes during year:
5% stock dividend 27,212 26,654 ---
Granted --- --- 5,000
Exercised (4,500) (15,500) ---
------- ------- -------
Net increase 22,712 11,154 5,000
------- ------- -------
Options outstanding
at end of year 566,976 544,264 533,110
======= ======= =======
Options exercisable 566,976 544,264 533,110
Option price range $2.15- $2.26- $2.38-
$6.12 $6.43 $6.75
NOTE 6 - Employee Benefit Plans
APC contributes to a multiemployer defined benefit pension plan pursuant
to the terms of a collective bargaining agreement. Amounts contributed to
this plan by APC were $34,000, $39,000 and $36,000, for fiscal years 1995,
1994 and 1993, respectively. In fiscal 1995, C&L established a 401(k) plan
which covers all employees. APC has a 401(k) plan which covers non-union
employees. There were no contributions under these plans for any years
presented.
23
<PAGE>
NOTE 7 - Other Income (Loss) and Non-Operating Income
Other income (loss) consists of the following for the last three years:
1995 1994 1993
------ ------ ------
(In Thousands)
Interest income........................... $ 570 $2,132 $ 901
Net gains (losses) on sales of marketable
securities (See Note 2)................. (1,227) 479 285
Other..................................... 240 86 285
----- ----- -----
$ (417) $2,697 $1,471
===== ===== =====
Non-operating income consists of the following for the last three years:
1995 1994 1993
------ ------ ------
(In Thousands)
Gain on settlements of lawsuits $ 34 $ --- $ ---
Gain from extinguishment of certain net
liabilities of unconsolidated subsidiary --- --- 625
Refund of certain expenses of a subsidiary --- --- 93
----- ----- -----
$ 34 $ --- $ 718
===== ===== =====
NOTE 8 - Income Taxes
Effective April 4, 1993, the Company adopted the liability method of
accounting for income taxes in accordance with SFAS No. 109. The cumulative
effect as of April 4, 1993 of adopting SFAS No. 109 increased net earnings
for fiscal 1994 by $262,000.
A reconciliation of the income tax provision and the amount computed by
applying the statutory federal income tax rate (34%) to earnings (loss)
before extraordinary items, accounting change, minority interest and income
tax credit is as follows:
Fiscal Year Ended
-----------------
April 1, April 2, April 3,
1995 1994 1993
------- -------- --------
(In Thousands)
Expense (credit) at statutory rate......... $ (230) $ 1,138 $ 691
Settlements of liabilities of
unconsolidated subsidiary................ (36) (1,357) (1,773)
Reversal of liabilities of unconsolidated
subsidiary............................... --- (71) (212)
Tax effect of net operating loss not
recognized............................... 198 180 1,214
Other, net................................. 68 110 80
------ ------ ------
Income tax provision....................... $ --- $ --- $ ---
====== ====== ======
In fiscal 1994, the Company recorded an income tax credit of $400,000
resulting from the refund of federal income taxes paid in a prior year.
24
<PAGE>
NOTE 8 - Income Taxes (Continued)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and income tax purposes. Components of the
Company's deferred tax assets and liabilities are as follows:
April 1, April 2,
1995 1994
-------- --------
(In Thousands)
Deferred tax assets:
Federal net operating loss carryforwards $ 6,809 $ 7,274
Federal capital loss carryforward 417 ---
State net operating loss carryforwards 2,247 2,175
Capitalized interest on Diana debentures 394 451
Deferred compensation 530 437
Allowance for doubtful accounts 225 197
Covenants not to compete 227 157
General business credit carryforwards 145 145
Unrealized loss on marketable securities 242 140
All other 219 227
------- -------
Total deferred tax assets 11,455 11,203
Valuation allowance for deferred tax assets (10,279) (10,039)
------- -------
Net deferred tax assets 1,176 1,164
Deferred tax liabilities:
Building and improvements basis difference 523 552
Tax over book depreciation 263 245
All other 390 367
------- -------
Total deferred tax liabilities 1,176 1,164
------- -------
Net deferred taxes $ --- $ ---
======= =======
The Company has approximately $20,025,000 in net operating loss
carryforwards for federal income tax purposes expiring in the years 2005 to
2010.
NOTE 9 - Equity in Earnings (Loss) of Unconsolidated Subsidiaries
Diana owns a 50% interest in a partnership that holds promissory notes,
secured by inventory and equipment, due over a five year period ending
November 1995 with interest at 12%. APC has a 50% ownership interest in
Fieldstone Meats of Alabama, Inc. ("Fieldstone"), a company which produces
cured hams and bacon. Diana also owns a 50% interest in Sattel
Communications Company, a partnership which was formed to develop and market
telecommunications products. At April 1, 1995 and April 2, 1994, the
carrying value of the Company's investment in these unconsolidated
subsidiaries was $557,000 and $604,000, respectively, and is included within
other assets.
25
<PAGE>
NOTE 9 - Equity in Earnings (Loss) of Unconsolidated Subsidiaries (Continued)
The Company's equity in the earnings (loss) of unconsolidated
subsidiaries for the last three fiscal years are as follows:
1995 1994 1993
------ ------ ------
(In Thousands)
Partnership $ 28 $ 49 $ 63
Fieldstone (35) 48 6
Sattel Communications (62) --- ---
---- ---- ----
$ (69) $ 97 $ 69
==== ==== ====
NOTE 10 - Extraordinary Items
Carl and Dorothy Ossmann, Mary Leach, Wilmer and Florence Tiede, and
Rosemary and Ray Ward V. The Diana Corporation, Donald E. Runge and Richard
Y. Fisher (the "Ossmann Suit"), and First Trust National Association and
Norwest Bank Minnesota V. Farm House Foods Corporation and The Diana
Corporation (the "First Trust Suit"). On or about February 15, 1991, the
Ossmann Suit was filed as a class action in the United States District Court,
District of Minnesota, Civil Action No. 3-91-CV94. The Ossmann Suit sought
to recover against Diana on behalf of all holders of outstanding Farm House
11-1/2% Subordinated Capital Notes Due 1989, Farm House 11% Senior
Subordinated Debentures Due 1997, and/or Farm House Floating Rate
Subordinated Capital Notes Due 1989 (collectively, the "Farm House Bonds").
In May 1992, the Court entered a final Judgment and Order approving a
Settlement Agreement between the defendants and those plaintiffs who did not
elect to exclude themselves from the class. Persons holding approximately
$3.9 million in principal amount of Farm House Bonds elected not to
participate in the settlement (the "opt-outs"). The Ossmann Suit proceeded
on behalf of the opt-outs who were certified as a new class and who were
joined by the plaintiffs in the First Trust Suit, who were permitted to
intervene as plaintiffs on certain claims. In March 1992, the First Trust
Suit was commenced in the United States District Court for the Eastern
District of Wisconsin, Civil Action No. 92-C-0291. This action seeks to
recover against Diana on behalf of the opt-outs. In March 1994, the
remaining parties to the Ossmann Suit and the First Trust Suit entered into
an Amended Memorandum of Understanding (the "Settlement") providing for
settlement of the matter. In fiscal 1995, the defendants made total payments
of $3,237,000 to the trustees pursuant to the Settlement as full and complete
payment of all amounts due, including principal and accrued interest with a
carrying value of $3,391,000 and trustee fees and costs. In addition, a
payment of $180,000 was made to the attorneys of the class pursuant to the
Settlement. The Company accounted for the Settlement in accordance with SFAS
No. 76, "Extinguishment of Debt" and recorded an extraordinary loss,
including the direct costs of settlement, of $266,000 in fiscal 1994.
26
<PAGE>
In fiscal 1993, the Company recorded an aggregate extraordinary gain of
$1,318,000 as a result of a settlement in May 1992 in the Ossmann Suit and a
cash offer completed in January 1993. The May 1992 settlement, among other
things, provided for Diana to issue debentures (see Note 3) to holders of
Farm House Foods Corporation ("Farm House") bonds who participated in the
settlement in May 1992 and who properly filed a proof of claim. Diana
debentures with principal and interest totaling $2,661,000 were issued to
settle $3,190,000 of Farm House bonds and $660,000 of accrued interest. The
Company accounted for the May 1992 settlement in accordance with SFAS No. 15.
In January 1993, the Company completed an offer to purchase Farm House bonds
for cash from certain bondholders that declined to participate in the May
1992 settlement. The Company purchased $1,300,000 of Farm House bonds
(principal and accrued interest) for a cash payment of $526,000. The Company
accounted for the cash offer in accordance with SFAS No. 76.
The amounts included in extraordinary items are not net of taxes due to
the existence of net operating loss carryforwards (see Note 8).
27
<PAGE>
NOTE 11 - Related Party Transactions
Certain of the Company's non-employee directors provide services to the
Company and/or its subsidiaries for which they are compensated. Amounts
accrued or paid to all directors for these services during fiscal 1995, 1994
and 1993 are $367,000, $329,000 and $278,000, respectively.
Included in other assets is a receivable of $358,000 from the sellers of
C&L. Pursuant to the Stock Purchase Agreement executed in connection with
the acquisition of C&L, the sellers are to reimburse the Company for any of
the Company's net operating losses used to offset taxable income generated by
certain investments owned by C&L. As of April 1, 1995, the receivable
represents 34% of the initial excess of the financial reporting basis over
the income tax basis of such investments, less amounts collected for use of
net operating losses in fiscal 1993 through 1995. The sellers are currently
employed as officers by C&L.
C&L leases its building and certain vehicles from certain officers of
C&L. Total rent expense on such leases was $144,000, $141,000 and $158,000
for the years ended April 1, 1995, April 2, 1994 and April 3, 1993,
respectively.
Effective June 1994, the Company acquired the remaining 20% of C&L's
common stock from its minority shareholders in exchange for 265,262 shares
(adjusted for the 5% stock dividend paid in July 1994) of the Company's
common stock. This acquisition was accounted for as a purchase. The total
cost of the acquisition of $1,895,000, based on a market value of $7.14 per
share assigned to the Company's common stock, exceeded the fair value of the
net assets of C&L that were acquired by $215,000. The excess is being
amortized on the straight line method over the remaining amortization period
of goodwill resulting from the initial acquisition of C&L in December 1991.
The pro forma results of operations assuming that this transaction had
occurred on April 4, 1993 are as follows:
Fiscal Years Ended
-----------------------
April 1, April 2,
1995 1994
-------- --------
(In Thousands, Except Per Share Amounts)
Earnings (loss) before extraordinary
items and accounting change $ (676) $3,747
===== =====
Fully diluted earnings (loss) per share
before extraordinary items and
accounting change $ (.17) $ .91
===== =====
This pro forma information does not purport to be indicative of the
results that actually would have been obtained if the combined operations had
been conducted during the periods presented and is not intended to be a
projection of future results.
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NOTE 12 - Business Segment Information
The Company's principal business is the wholesale distribution of meat
and seafood and telecommunications equipment. The Company's wholesale meat
and seafood distribution operations are principally conducted in the
southeastern United States and the wholesale telecommunications distribution
operations are conducted throughout the United States. There are no material
foreign sales and no sales to a single customer totaling more than 10% of
consolidated sales.
Fiscal Years Ended
------------------------------
April 1, April 2, April 3,
1995 1994 1993
-------- -------- --------
(In Thousands)
Net sales:
Meat and seafood................. $215,141 $215,333 $200,737
Telecommunications equipment..... 35,245 28,308 21,517
Corporate........................ --- --- ---
------- ------- -------
$250,386 $243,641 $222,254
======= ======= =======
Operating earnings (loss):
Meat and seafood................. $ 234 $ 1,013 $ 587
Telecommunications equipment..... 2,734 2,549 1,778
Corporate........................ (2,511) 879 (383)
------- ------- -------
$ 457 $ 4,441 $ 1,982
======= ======= =======
Depreciation and amortization:
Meat and seafood................. $ 605 $ 551 $ 420
Telecommunications equipment..... 524 496 412
Corporate........................ 25 51 20
------- ------- -------
$ 1,154 $ 1,098 $ 852
======= ======= =======
Capital expenditures:
Meat and seafood................. $ 474 $ 655 $ 277
Telecommunications equipment..... 113 217 103
Corporate........................ 12 3 5
------- ------- -------
$ 599 $ 875 $ 385
======= ======= =======
Identifiable assets:
Meat and seafood................. $ 20,569 $ 21,329 $ 17,956
Telecommunications equipment..... 16,720 18,109 12,798
Corporate........................ 8,038 14,605 15,318
------- ------- -------
$ 45,327 $ 54,043 $ 46,072
======= ======= =======
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NOTE 13 - STATEMENT OF CASH FLOWS
Supplemental cash flow information is as follows for the last three
fiscal years:
1995 1994 1993
---- ---- ----
(In Thousands)
Change in current assets and
liabilities:
Restricted short-term investments $ 330 $ --- $ 1,457
Receivables......................... 189 (3,797) (1,196)
Inventories......................... 3,204 (4,760) 601
Other current assets................ (162) (218) (61)
Accounts payable.................... 718 4,287 (3,280)
Other current liabilities........... 135 133 (359)
------ ------ ------
$ 4,414 $(4,355) $(2,838)
====== ====== ======
Supplemental information:
Interest paid......................... $ 1,001 $ 1,090 $ 556
Non-cash transactions:
Purchase of minority interest with
common stock......................... 1,895 --- ---
Reduction of net liabilities of
unconsolidated subsidiary............ --- 655 ---
Purchase of property and equipment
financed by seller................... --- 320 134
Record obligation for Diana debentures
and capitalized interest............. --- --- 2,660
NOTE 14 - Quarterly Results of Operations (Unaudited)
Fiscal Year Ended April 1, 1995:
12 Weeks 12 Weeks 12 Weeks 16 Weeks
Ended Ended Ended Ended
April 1, January 7, October 15, July 23,
1995 1995 1994 1994
-------- --------- ---------- -------
(In Thousands, Except Per Share Amounts)
Net sales....................... $64,223 $55,159 $56,255 $74,749
Cost of sales................... 62,218 52,274 53,059 71,647
Earnings (loss) before extra-
ordinary items and accounting
change......................... (749) 392 424 (787)
Earnings (loss) per common share (.19) .10 .10 (.22)
30
<PAGE>
NOTE 14 - Quarterly Results of Operations (Unaudited) - (Continued)
Fiscal Year Ended April 2, 1994:
12 Weeks 12 Weeks 12 Weeks 16 Weeks
Ended Ended Ended Ended
April 2, January 8, October 16, July 24,
1994 1994 1993 1993
-------- --------- ---------- -------
(In Thousands, Except Per Share Amounts)
Net sales....................... $58,809 $56,695 $55,318 $72,819
Cost of sales................... 55,980 54,034 52,513 70,213
Earnings (loss) before extra-
ordinary items and accounting
change......................... 1,876 1,746 819 (984)
Earnings (loss) per common share .48 .48 .23 (.27)
During the fourth quarter of fiscal 1994, the Company recorded non-
operating income of $1,500,000 due to the reversal of a provision of
$1,500,000 recorded in the first quarter of fiscal 1994 related to the
litigation discussed in Note 10.
The first quarter of fiscal 1994 was restated to reflect the cumulative
effect as of April 4, 1993 of adopting SFAS No. 109 (see Note 8). For the
sixteen weeks ended July 24, 1993, loss before extraordinary items and
cumulative effect of accounting change was increased by $12,000, or $.00 per
share, and net loss was reduced by $250,000, or $.07 per share.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized this 23rd day of
July, 1996.
THE DIANA CORPORATION
By /s/ R. Scott Miswald
Vice President, Treasurer and
Controller
