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 March 30, 1996
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 10, 1996, the aggregate market value of the voting stock of the
registrant held by stockholders who were not affiliates of the registrant was
$353,887,021. At June 10, 1996, the registrant had issued and outstanding an
aggregate of 5,028,590 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>
PART I
ITEM 1. Business
General
The Diana Corporation ("Diana" or the "Company"), was incorporated in
1961 under the laws of the State of Delaware. The Company's operations are
through its subsidiaries: Sattel Communications ("Sattel"), C&L
Communications, Inc. ("C&L"), Valley Communications, Inc. ("Valley") and
Atlanta Provision Company, Inc. ("APC").
The Company's businesses are reported in three business segments:
telecommunications equipment, voice and data network installation and
service; and wholesale distribution of meat and seafood. Financial
information about the Company's business segments is contained in Note 14 to
the Consolidated Financial Statements.
The telecommunications equipment segment consists of Sattel and C&L.
Sattel is a provider of central office voice and data switching equipment for
communications providers worldwide. The Company increased its ownership
interest in Sattel from 50% to 80% in fiscal 1996 (see Note 2 to the
Consolidated Financial Statements). C&L is a distributer of
telecommunications equipment for wide area and local area integrated networks
to transport voice, data and video communications primarily in North America.
The Company owns 100% of C&L.
The voice and data network installation and service segment consists of
Valley. Valley provides design, installation and service for voice and data
networks primarily in California. Valley was acquired by C&L in November
1995 (see Note 2 to the Consolidated Financial Statements). C&L owns 80% of
Valley.
The wholesale distribution of meat and seafood segment consists of APC.
APC is a wholly-owned subsidiary of Entree Corporation ("Entree"). The
Company owns 81.25% of Entree.
Telecommunications Equipment Segment
Sattel
Sattel is a provider of redundant, scaleable, central office voice and
data switching equipment for communications providers worldwide. Sattel
designs, develops, engineers and markets its switching systems worldwide. It
outsources manufacturing, procurement of raw materials, and final assembly
and test of finished systems to Sattel Technologies, Inc. ("STI"). STI has
approximately a 4% effective ownership interest in Sattel. Certain software
and hardware associated with adjunct and peripheral equipment used by Sattel
to provide certain functions and features is licensed, or procured under OEM
arrangements, from other vendors.
Sattel commenced operations as a 50/50 joint venture between the Company
and Sattel Technologies, Inc., a private company, in November 1994. In
January 1996, Diana increased its ownership interest in Sattel from 50% to
80%.
Sattel's product line consists of a series of central office switching
platforms which are divided into four models; DSS-96, DSS-1000, DSS-3000 and
DSS-10000. Each of these platforms is capable of providing end office,
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tandem, international gateway or Internet access functionality either
individually, simultaneously or in any combination. Sattel's switching
products are based on "time-space-time" switching technology. The switch
architecture is based on a design including multiple Motorola 680X0
processors and a VMEbus structure. Sattel believes the system is modular as
it is scaleable from 96 to 10,000 subscriber lines and from 96 to 4096
digital ports.
Sattel also provides a product called DataNet to address the Internet
and Intranet Services market. The DataNet product is a synthesis of
telephone switching technology with data handling and multiplexing
techniques. DataNet has capabilities for passing data over telephone
circuits. The product provides the integration of modem technology into
central office type switches. Sattel believes that a variety of flexible
data access arrangements makes DataNet a complete, self contained voice/data
platform.
The DSS/Switch with DataNet provides a services platform for Internet
Service Providers (ISPs) and other On-line Service Providers. Sattel
believes that DataNet's capability for providing customer control, security,
real time and Local Exchange Company (LEC) billing, and fraud control combine
to make this product a marketable solution for the ISP market. The DataNet
switch allows for customer control because it is a telephony switch and can
provide public network information that allows the customer the ability to
assign subscribers different levels of service, different billing options and
potentially parental control features (such as blocking certain portions of
the Internet based on passwords or identification). Since DataNet is a Class
5 switch, it does provide real time communications and captures both the
"called" number (DNIS) as well as the "calling" number (ANI). By providing
this information to the ISP, the processing of transactions can be made to be
dependent upon a match between either the DNIS or ANI with the transaction
type. For example, rather than using a password approach (that may be
"spoofed" by a "hacker"), the DataNet customer may use the ANI from
subscribers to determine whether or not a financial transaction (such as a
credit card purchase) is allowed. If the ANI attempting the financial
transaction is not correct, the network may disallow the transaction and
capture the phone number of the party that tried to process the transaction.
Sattel presently has a patent application on file with the U.S. Patent
Office with respect to its DataNet product. It intends to file additional
patents related to the DSS switching products and other technology as it is
developed. Sattel relies to a great degree on trade secrets and tight
control of its software to protect its intellectual property rights.
The DataNet product has undergone successful Alpha (internal) and Beta
(customer) testing at MCI's laboratory in Richardson, Texas and it has
undergone successful Beta testing at the MCI Switch Center in Los Angeles,
California by MCI and Concentric Network Corporation ("CNC"). The product
has been shipped for production to CNC and for Beta testing to GTE. All of
the tests to date have been successful, except for one minor problem that was
encountered and corrected at the initial Beta testing in MCI's laboratories.
Sattel has not observed any problems in a customer's production environment
for this product. Sattel is not aware of any problems that the product might
encounter in a production environment, however, since there is not an
extended history of the product in a production environment, the possibility
exists that unforeseen problems might occur. Sattel would immediately address
any problems with the proper technical resources. Sattel's other products
have been tested, installed and are in production both in the United
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States and overseas. No material problems were encountered, however, minor
software and equipment problems were addressed and corrected.
Sattel believes its market consists of emerging telecommunications
companies, Regional Bell Operating Companies, PTT's, Long Distance Carriers
(IXCs), Competitive Access Providers (CAPS), Internet Service Providers and
Cable TV companies. Sattel has divided its market into four segments of
customers: 1. Strategic Accounts, 2. Internet Service Providers (ISP's), 3.
Growth Accounts, and 4. International Accounts. Sattel has positioned its
products in the medium to small end switching market of voice/data
communications. This target market is less than 10,000 lines and is
optimized at the 500-5,000 line size to address the Strategic and Growth
accounts.
In May 1996, Sattel and Concentric Network Corporation ("CNC") announced
a portion of a nonbinding Memorandum of Understanding between the two
companies. Under this arrangement, Sattel will supply its DataNet product
and communications lines and services under a strategic supplier arrangement
to approximately 21 sites across the U.S. for CNC to use in its next
generation network. CNC and Sattel agreed in concept to establish a
wholesale business for other ISP's to use the CNC backbone network. In
addition, the Memorandum of Understanding called for Sattel to invest $10-20
million into CNC and to receive yet-to-be-determined equity interests in both
CNC and the wholesale business. The equity interest in CNC will be in a form
that has rights substantially similar to those of a CNC Series D Preferred
Stock to be issued in the near future. Because of delays in reaching
agreement with respect to the wholesale business, as well as delays in CNC's
overall financing arrangements, Sattel subsequently elected to provide a $5
million bridge loan to CNC. This loan was not a condition of the Memorandum
of Understanding. Full implementation of the Memorandum of Understanding is
subject to final pricing and configuration, due diligence, and the execution
of definitive agreements. Subsequently, the parties agreed that Sattel's
investment in CNC will be limited to $5 million and that the wholesale
business will be outside of CNC. In September 1996, Sattel sold
approximately 50% of its investment in CNC to a third party for $2.5 million.
CNC will offer the wholesale business "most favored nation" prices, terms and
conditions.
Sattel began offering switching equipment in 1995. Sattel has incurred
losses and experienced negative cash flow. There can be no assurance that
revenue will grow at rates anticipated by management or that Sattel will
achieve acceptable profitability or significant positive cash flow from
operations. In addition, Sattel may continue to experience fluctuations in
operating results in the future caused by various factors, including general
economic conditions, industry acceptance of Sattel's product, technological
obsolescence, specific economic conditions in the telecommunications access
industry, user demand, capital expenditures and other costs relating to the
expansion of the operations, and the introduction of new products by Sattel
or its competitors.
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The telecommunications switching equipment and access businesses are
highly competitive. Currently Sattel competes with a number of national and
regional telecommunications equipment providers such as Ascend, Xylogic,
Xircom, Racal Datacom, and US Robotics. In the switching equipment segment,
while Sattel provides smaller scaleable switches, there are other large
manufacturers of large scale switches such as Lucent Technologies, Nortel,
Digital Switch, Siemens and others. While they have not demonstrated
movement at this time, there is no assurance that they will not attempt to
move into Sattel's target market. It is also possible that large
communication carriers such as AT&T, Sprint Corporation, MCI Communications
Corp., and the Regional Bell Operating Companies may enter the
telecommunications access and/or switching equipment business. Many of
Sattel's competitors possess financial resources significantly greater than
those of Sattel and accordingly could initiate and support prolonged price
competition to gain market share.
Future growth at Sattel could place a significant strain on Sattel's
administrative, operational, and financial resources, and increase demands on
its systems and controls. In addition, as Sattel expands there will be
additional demands on the sales, marketing, and administrative resources.
While Sattel believes that its operating and financial control systems are
adequate to address expansion plans, there can be no assurance that such
systems and controls will be adequate to maintain and effectively monitor
future growth. Sattel anticipates that its continued growth will require it
to recruit and hire a substantial number of new managerial, technical, and
sales and marketing personnel. The inability to continue to upgrade the
operating and financial control systems, the inability to recruit and hire
necessary personnel, or the emergence of unexpected expansion difficulties
could adversely effect the Company's business, results of operations, and
financial condition. In addition, production, distribution or other
difficulties could adversely affect Sattel's ability to fulfill market demand
on a timely basis or increase its manufacturing costs.
Sattel is dependent upon its ability to provide continued access to the
Public Switched Telecommunications Network. Sattel's products, which have
been installed in the United States and overseas, have access and are
operating with the PSTN. While not currently envisioned, and as with any
other telecommunications equipment, should the PSTN technical specifications
be changed in any particular country in the future, Sattel may be required to
modify its equipment in order to reflect such changes and to provide
continuous access to that country's PSTN. Any system failure attributable to
Sattel that causes interruptions in the Public Carrier's operations could
have a material adverse effect on the Company.
Sattel's success depends to a significant degree upon the continued
contributions of its senior operating management. The loss of the services
of these individuals, as well as key system development personnel, could have
a material adverse effect on Sattel. Sattel's success also will depend on
its ability to attract and retain qualified management, marketing, technical,
and sales executives and personnel. Competition for such executives and
personnel in the telecommunications access industry is intense and there are
a limited number of persons with sufficient knowledge and experience. There
can be no assurance that Sattel will be successful in attracting and
retaining such executives and personnel.
Sattel's success and ability to compete is dependent in part upon its
technology, although Sattel believes that its success is more dependent upon
its technical expertise than its proprietary rights. Sattel relies upon a
combination of patent, copyright, trademark and trade secret laws, and
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contractual restrictions to establish and protect its technology. There can
be no assurance that the steps taken by Sattel will be adequate to prevent
misappropriation of its technology or that Sattel's competitors will not
independently develop technologies that are substantially equivalent or
superior to Sattel's technology.
A key component of Sattel's strategy is its planned expansion into
international markets. There can be no assurance that Sattel will be able to
obtain the permits and operating licenses required for it to operate, to hire
and train employees or to market, sell and deliver high quality services in
these markets. In addition to the uncertainty as to Sattel's ability to
expand its international presence, there are certain risks inherent to doing
business on an international level, such as unexpected changes in regulatory
requirements, trade barriers, difficulties in staffing and managing foreign
operations, longer payment cycles, problems in collecting accounts
receivable, political instability, fluctuations in currency exchange rates,
seasonal reductions in business activity, and potentially adverse tax
consequences, which could adversely impact the success of Sattel's
international operations. In many countries, Sattel may need to enter into
a joint venture or other strategic relationship with one or more third
parties in order to successfully conduct its operations. There can be no
assurance that such factors will not have an adverse effect on Sattel's
future international operations and, consequently, on Sattel's business,
results of operations and financial condition.
Sattel's DSS/Switch product is manufactured by STI with complete
facilities to provide a turnkey product. STI provides complete manufacturing
of all board, chassis, and system level assemblies for Sattel. Currently,
STI also does final assembly and testing. STI has from time to time
experienced delays in receipt of certain hardware components. A failure by
a supplier to deliver quality products on a timely basis, or the inability to
develop alternative sources if and as required, could result in delays which
could materially adversely affect Sattel. Sattel believes that quality
assurance is maintained to all required levels specified in ISO and
MIL-Specs. Sattel generally uses industry standard components for its
products and has specified alternate sources for these parts under the
approved vendor lists provided to the contractor by Sattel's engineering
department. Certain components, including crystals and microprocessors are
presently single sourced or are available from a limited number of sources.
Any interruption in business between Sattel and STI could have a material
adverse effect on the Company. Certain software and hardware associated with
adjunct and peripheral equipment used by Sattel to provide certain functions
and features is licensed, or procured under OEM arrangements, from other
vendors.
C&L
C&L operates nationwide with its administrative headquarters and
distribution center located in San Antonio, Texas. C&L is an international
distributor of products sold to wide area and local area integrated networks
to transport voice, data and video communications. C&L's principal products
include digital networking products, multiplexors, frame relay access
devices, ATM, digital switches, call controllers, wide area network routers,
ethernet switches and ethernet hubs.
C&L's customers are comprised of long distance carriers, interconnect
companies, value added resellers, networking companies, systems integrators,
independent telephone companies, some large end users and local area network
resellers. The long distance carrier portion of the customer base includes
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virtually all significant U.S. long distance companies. No single customer
accounted for more than 10% of consolidated net sales for the year ended
March 30, 1996.
C&L sales and technical staff have a technical background and knowledge
of the products' technical applications to allow for added services for C&L's
customers. C&L's technical support group deals with multiple vendors'
products. Therefore, C&L operates as a value-added distributor, providing
configurations services, technical support and training in the multiple
vendor solution environment.
In fiscal 1996, C&L's primary product suppliers are Newbridge Networks,
Inc. ("Newbridge") which supplies digital networking products and Mitel
Corporation ("Mitel") which supplies call controllers. For the year ended
March 30, 1996, these two companies supplied approximately 72% of C&L's
inventory purchases. Although C&L has introduced new products from
manufacturers other than Newbridge and Mitel, the loss of either vendor would
have a negative impact on C&L's operations. C&L has no manufacturing
operations.
Newbridge is a leading international manufacturer of digital network
communications systems. In 1992, Newbridge acknowledged C&L as being the
largest of their authorized U.S. distributors, a distinction which it still
holds at March 30, 1996. Mitel is an international manufacturer of call
controllers and other sophisticated business telecommunications equipment.
C&L has been an authorized distributor of Mitel call controllers since early
1985, and C&L's management believes that its relationship with Mitel is
satisfactory.
C&L's competition in the digital networking product market comes from
(1) other telecommunications distributors and (2) manufacturers of digital
products who sell direct. C&L competes by offering high quality products at
competitive prices while providing technical assistance to its customers.
C&L believes that most of its competitors do not offer C&L's level of
technical assistance.
Voice and Data Network Installation and Service Segment
Valley offers its customers broad experience and expertise in design,
engineering, installation and testing of all major structured wiring systems
for voice and data networking. In addition to facility wiring, Valley also
provides electronic data hardware, such as hubs, routers and bridges with
associated support, for Local and Wide Area Networks. Valley offers
engineering expertise in fiber optics, ethernet and token rings networking,
switching products, paging systems, as well as conforming to NEC, ANSI, OSHA
and other industry standards. As part of Valley's overall project design,
the Company works with and sells all industry standard network systems and
products. Most of Valley's business is in local area network design and
installation. The Company's main business is in installation projects
involving 50 or more workstations, with a floor of about $15,000 to $20,000
in total project billings, and exceeding $2,000,000 in the upper range. In
recent years Valley has developed extensive experience in planning and
installing large projects involving fiber optic cable.
Valley has four locations in California: Fremont, Sacramento, Irvine
and Fresno. Valley's business is primarily within these areas, however,
Valley is considering expanding its operations outside of California.
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Valley is a Value Added Reseller (VAR) for several of the largest
industry suppliers. Valley is one of AT&T's largest VARs on the West Coast.
Other structured wiring system manufacturers such as Northern Telecom have
entered into agreements with Valley to represent their product lines as well.
An important component of Valley's success has been the cultivation of
relationships with major equipment manufacturers. Valley is a resource for
potential customers looking for advice on hardware to use for their systems.
Valley periodically offers seminars to its clients on new technologies and
products in conjunction with selected manufacturers.
Valley has positioned itself through business relationships with
hardware manufacturers and design consultants to benefit from the growth in
the networking market. Valley's growth in the low-voltage portion of the
communications market has been fueled in large part by the continuing shift
by major customers from mainframes to LAN systems, and the increasing demand
for higher data systems speeds and the cabling to handle them. This has
resulted in ongoing, retrofit programs for existing customers in addition to
new system installations.
Previously, local phone companies held a monopoly position on
installation and maintenance of telephone cabling within all residential and
commercial buildings in California. In August 1993, the California Public
Utilities Commission issued an order switching responsibility for this
cabling from the local phone company to the owners of the buildings
themselves. The owners are now responsible for managing the design,
administration, engineering, installation and maintenance of all telephone
cabling beyond the Minimum Port of Entry. Owners will be accountable for
compliance to strict standards. Telephone cabling can usually be installed
at the same time as other planned networking systems, for the same customers
with no additional marketing or service calls.
Most of Valley's customers are Fortune 500 companies, large corporations
or governmental agencies. A significant share of Valley's private sector
clients are high-tech companies. No single customer accounts for more than
10% of consolidated sales.
The network installation and service business in California is highly
fragmented with the strong demand for sophisticated networks being tempered
by a very competitive local business climate.
Wholesale Distribution of Meat and Seafood Segment
APC distributes primarily beef, pork, poultry, and seafood in the
southeastern region of the United States. APC sells primarily to retail food
outlets, meat wholesalers, food service enterprises and restaurants. It owns
and operates a warehouse facility in Atlanta, Georgia from which it delivers
these products to its customers. Sam's Club accounted for more than 10% of
consolidated net sales for the year ended March 30, 1996. The products
purchased for distribution are supplied by food manufacturers and processors,
the two largest of which accounted for approximately 37% of total purchases.
APC does not have contracts with any suppliers.
Wholesale meat and seafood distribution in the geographic area in which
APC operates is highly competitive. APC competes with both national and
local food wholesalers and processors, many of which have greater financial
resources and sales volume. Competition is based primarily on price, service
and quality of product.
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Research and Development
The Company had no significant research and development activities
during the last three fiscal years, however, the Company anticipates that,
beginning in fiscal 1997, Sattel will incur material research and development
expenses.
Environmental Protection
Compliance with federal, state and local regulations relating to
environmental protection do not have a material effect upon capital
expenditures, operating results or the competitive position of the Company.
Employees of Registrant
At March 30, 1996, Diana had 496 employees, of whom 60 were within the
telecommunications equipment segment, 182 were within the voice and data
network installation and service segment, 245 were within the wholesale food
distribution segment, and 9 performed corporate functions. In the wholesale
food distribution segment, 185 employees are truck drivers and warehousemen,
some of which are covered by a collective bargaining agreement which expires
in May 1997. In the voice and data network installation and services
segment, 138 technicians are covered by a collective bargaining agreement
which expires in August 1998. No work stoppage occurred in fiscal 1996. The
Company believes that it generally has good relationships with all its
employees.
ITEM 2. Properties
Diana's corporate offices are located in a leased 5,000 square foot
office located in Milwaukee. The Company owns vacant parcels of land in
Eldridge, Iowa.
Sattel leases 3,600 square feet of office and warehouse space in
Chatsworth, California.
C&L leases 8,000 square feet of warehouse space and 9,000 square feet of
office space in San Antonio, Texas. Substantially all of C&L's assets are
pledged as collateral under its Loan and Security Agreement (see Note 4 to
the Consolidated Financial Statements).
Valley leases 21,000 square feet of office and warehouse space which
consists of four locations in Fremont, Sacramento, Irvine and Fresno,
California. Substantially all of Valley's assets are pledged as collateral
under its Loan and Security Agreement (see Note 4 to the Consolidated
Financial Statements).
APC owns a 91,000 square foot building in Atlanta, Georgia which
contains its office and warehouse space. APC owns or leases trucks used in
its distribution activities and various warehouse equipment used in its
warehouse operations. Substantially all of APC's assets are pledged as
collateral under its Loan and Security Agreement (see Note 4 to the
Consolidated Financial Statements).
ITEM 3. Legal Proceedings
There are no material legal proceedings.
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ITEM 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the fourth
quarter of fiscal 1996.
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PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The Company's Common Stock is traded on the New York Stock Exchange
under the symbol DNA. The table below sets forth by quarter the high and low
sales prices of the Company's Common Stock on the New York Stock Exchange
Composite Tape for the last two fiscal years.
Fiscal Fiscal
1996 1995
Quarter High Low Quarter High Low
First 8 3/8 4 1/4 First 13 3/4 7
Second 13 7/8 5 5/8 Second 9 3/8 6 1/2
Third 26 5/8 10 1/8 Third 8 5 5/8
Fourth 30 1/2 12 3/8 Fourth 6 1/4 4
At June 10, 1996, the Company had 1,325 shareholders of record.
There were no cash dividends declared during the last two fiscal years.
The Company has no plans to pay cash dividends in the foreseeable future.
The payment of cash dividends by the Company is restricted by the Company's
subordinated debentures which provide that the consolidated tangible net
worth of the Company cannot be reduced to less than an amount equal to the
aggregate principal amount of the subordinated debentures, or $1,254,000.
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ITEM 6. Selected Financial Data
THE DIANA CORPORATION
SELECTED FINANCIAL DATA
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
March 30, April 1, April 2, April 3, March, 28,
1996 1995 1994 1993 1992
-------- ------- ------ -------- --------
(4) (3) (2)
<S> <C> <C> <C> <C> <C>
Net sales $267,602 $250,386 $243,641 $222,254 $161,607
======= ======= ======= ======= =======
Earnings (loss) before
items noted below....... $ (3,365) $ (720) $ 3,457 $ 1,857 $ (1,013)
Extraordinary items...... --- --- (266) 1,318 ---
Accounting change........ --- --- 262 --- ---
------- ------- ------- ------- -------
Net earnings (loss)...... $ (3,365) $ (720) $ 3,453 $ 3,175 $ (1,013)
======= ======= ======= ======= =======
Earnings (loss) per
common share:
Primary
Earnings (loss) before
items noted below...... $ (.76) $ (.17) $ .84 $ .46 $ (.24)
Extraordinary items..... --- --- (.06) .33 ---
Accounting change....... --- --- .06 --- ---
------- ------- ------- ------- -------
Net earnings (loss)... $ (.76) $ (.17) $ .84 $ .79 $ (.24)
======= ======= ======= ======= =======
Fully diluted
Earnings (loss) before
items noted below...... $ (.76) $ (.17) $ .81 $ .46 $ (.24)
Extraordinary items..... --- --- (.06) .33 ---
Accounting change....... --- --- .06 --- ---
------- ------- ------- ------- -------
Net earnings (loss)... $ (.76) $ (.17) $ .81 $ .79 $ (.24)
======= ======= ======= ======= =======
Cash dividends per common
share................... $ --- $ --- $ --- $ --- $ ---
======= ======= ======= ======= =======
Total assets............. $ 53,533 $ 45,327 $ 54,043 $ 46,072 $ 40,536
Long-term debt (1)....... 4,006 3,307 3,784 3,853 3,409
Working capital.......... 13,283 15,489 19,007 17,490 18,942
Shareholders' equity..... 24,686 19,729 18,852 15,492 12,326
<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) See Note 2 of the Notes to Consolidated Financial Statements regarding
the acquisition of Sattel and Valley.
</TABLE>
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ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations - Fiscal Year Ended March 30, 1996
versus April 1, 1995
In fiscal 1996, the Company acquired an 80% ownership interest in Valley
and increased its ownership interest in Sattel from 50% to 80%. The results
of operations of Valley were included in the consolidated group beginning in
December 1995 and Sattel beginning in January 1996 (see Notes 1 and 2 to the
Consolidated Financial Statements).
The following is a summary of sales by segment (see Note 14 to the
Consolidated Financial Statements) for fiscal 1996 and 1995, including sales
by significant product line for the meat and seafood segment (in thousands):
1996 1995
Telecommunications equipment $ 25,350 $ 35,245
Network installation and service 6,144 ---
Beef 109,785 107,055
Pork 46,822 42,700
Other 79,501 65,386
------- -------
Meat and seafood total 236,108 215,141
------- -------
$267,602 $250,386
======= =======
For the fiscal year ended March 30, 1996, net sales increased
$17,216,000 or 6.9% over fiscal 1995. C&L's net sales decreased $9,895,000
or 28.1% from fiscal 1995. C&L's sales decrease is due primarily to lower
call controller sales and lower sales of digital network communications
products (see further discussion below). APC's net sales increased
$20,967,000 or 9.7% over fiscal 1995 net sales. APC's overall volume (based
on tonnage) during this period increased by 3.4%. The increase in APC's net
sales is primarily attributable to increased business resulting from the
addition of Sam's Club as a customer in December 1994. Approximately 31.8%
of consolidated net sales for the year ended March 30, 1996 were made by APC
to two customers. As discussed above, Valley's fiscal 1996 sales are for a
four month period beginning in December 1995. Sattel did not make any sales
outside the consolidated group within the period from January 1996 to March
1996.
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. In addition, the digital network
communications marketplace in the United States is growing at a slower pace
than in previous years due to the proliferation of voice T-1 circuits.
Network providers are seeking faster access devices which can compress data
more cost effectively. Consequently, there has been downward pricing
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations - (Cont.)
pressure in this market which has impacted the digital products that are sold
by C&L. C&L is addressing the changing dynamics in the telecommunications
marketplace through the introduction of new product lines including frame
relay, digital switches, ATM and ISDN.
For the fifty two weeks ended March 30, 1996, other income (loss)
improved from a loss of $417,000 to income of $519,000. During fiscal 1996,
the Company had gains on sales of marketable securities of $26,000 as
compared to a loss of $1,227,000 incurred during fiscal 1995. In addition,
during fiscal 1996, the Company had smaller amounts of investments in
corporate debt as compared to fiscal 1995 resulting in lower interest income.
The components of other income (loss) are shown in Note 9 to the Consolidated
Financial Statements.
In fiscal 1996 gross profit decreased $506,000 or 4.5% from fiscal 1995.
On a consolidated basis, gross profit as a percentage of net sales was 4.0%
as compared to 4.5% in fiscal 1995. Gross profit was adversely impacted
primarily by decreases in C&L's sales and gross profit margins. The decrease
in C&L's gross profit percentage in fiscal 1996 is attributable to lower
margins on both call controllers and digital products due to the factors
discussed in the sales analyses. In addition, the departure of several of
C&L's key employees, some of which went to work for a newly formed
competitor, has adversely affected C&L's sales and margins (see further
discussion below).
For the fiscal year ended March 30, 1996, selling and administrative
expenses increased $2,071,000 or 20.1% over fiscal 1995. Selling and
administrative expenses have increased primarily because of the inclusion of
Valley's and Sattel's results subsequent to the transactions discussed in the
first paragraph. Selling and administrative expenses as a percentage of net
sales was 4.6% in fiscal 1996 as compared to 4.1% in fiscal 1995.
As a result of recent efforts to sell APC, the Company has concluded
there has been a decrease in the fair value of APC which did not support the
recoverability of the remaining goodwill balance related to the acquisition
of APC. The determination of fair value was based on the sales price
included in a letter of intent and asset purchase agreement relating to a
proposed sale of APC. The sales price of the assets of APC to be sold (which
excluded goodwill and other noncurrent assets) was generally at book value.
The buyer had the option to purchase all of APC's fixed assets at $2,800,000
or to enter into a triple net lease with APC. The carrying amount of each
major component of APC's assets are: current assets - $14,523,000, fixed
assets - $3,170,000 and other noncurrent assets (excluding goodwill) -
$355,000. The Company has prepared projections of APC's cash flows (before
interest expense) for fiscal 1997-1999 which reflect cash flow of
approximately $3.6 million. During the fourth quarter of fiscal 1996, the
Company concluded that an impairment of goodwill has occurred and wrote off
the remaining goodwill of $852,000 originally attributable to the acquisition
of APC. The goodwill write off has no effect on the Company's cash flow or
tangible shareholders' equity. On August 12, 1996, all negotiations and
agreements with third parties concerning the proposed sale of APC were
terminated.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations - (Cont.)
For the fiscal year ended March 30, 1996, interest expense decreased
$22,000 or 2.0% from fiscal 1995. The decrease is primarily attributable to
lower borrowings by C&L under its line of credit due to reduced receivable
and inventory levels.
Equity in loss of unconsolidated subsidiaries increased to a loss of
$370,000 in fiscal 1996 from a loss of $69,000 in fiscal 1995. The
components of these losses are shown in Note 11 to the Consolidated Financial
Statements. The increase in the loss is primarily due to an increased loss
incurred by Sattel attributable to the development of its business prior to
the inclusion of Sattel in the Company's Consolidated Financial Statements in
January 1996 (see Note 1 to the Consolidated Financial Statements).
In October 1995, C&L appointed a new chief executive officer who has
excellent senior management experience in telecommunications switching and
data communications. Subsequently, several employees resigned from C&L
including, among others, the chief financial officer, the vice president of
sales and marketing, the sales manager and six out of fourteen sales people.
Several if not all of these former employees went to work for a newly formed
competitor. Subsequently, a sales person that went to work for the newly
formed competitor returned to C&L. C&L has replaced the other departed
personnel.
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 (in thousands):
1995 1994
Telecommunications equipment $ 35,245 $ 28,308
Beef 107,055 116,557
Pork 42,700 40,770
Other 65,386 58,006
------- -------
Meat and seafood 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%.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations - (Cont.)
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.
The components of other income (loss) are disclosed in Note 9 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
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations - (Cont.)
international business was unsuccessful due to the devaluation of the Peso
and the international sales department and office in Mexico were closed.
Selling and administrative expenses as a percentage of net sales was 4.1% in
fiscal 1995 as compared to 3.8% in fiscal 1994.
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.
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 incurred increased warehouse and transportation
payroll expenses and inventory losses. 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. APC services the
Southeastern region of this national warehouse club. Sam's Club generated a
significant amount of volume at margins that were lower than APC's average
historical margins. Initially, the addition of this new business increased
the operational costs discussed above which management believes is the
primary reason for the loss of $749,000 incurred in the fourth quarter of
fiscal 1995.
Liquidity and Capital Resources
The Company recorded cash flow from operating activities of $1,368,000
as compared to $6,717,000 in fiscal 1995. The decrease in cash flow is
primarily attributable to an increase in net loss and less cash provided by
the net change in working capital items. The increase in receivables is
primarily attributable to the acquisition of Valley partially offset by
reduced receivables at APC and C&L. The increase in accounts payable is
primarily attributable to the acquisition of Valley.
Marketable securities decreased in fiscal 1996 primarily due to the
Company's decision to invest its excess funds in more liquid investments so
that cash is more readily available for its operating requirements. The
Company generated cash of $5,380,000 through sales of marketable securities.
In fiscal 1996, the Company had $696,000 of capital expenditures
consisting primarily of purchases by APC to improve its distribution facility
and Sattel for the development of its business. The Company estimates that
fiscal 1997 capital expenditures will approximate $1.8 million. Significant
capital expenditures are anticipated for testing equipment for Sattel and for
trailers and equipment for APC. The revolving line of credit agreements
discussed in Note 4 to the Consolidated Financial Statements include
covenants that limit fiscal 1997 capital expenditures for C&L, Valley and APC
to $1,100,000.
16
<PAGE>
In fiscal 1996, the Company utilized cash of $4,412,000 in connection
with advances made to Sattel and its acquisitions of Valley and its
additional 30% interest in Sattel (see Note 2 to the Consolidated Financial
Statements). The Company utilized cash of $3,320,000 for the acquisition of
Valley. In addition, the Company received $1 million of seller financing
which is payable over a 5 year period at $200,000 per year. The Company
believes that Valley will generate sufficient cash flow from operations,
after the payment of dividends to Valley's minority shareholders, to service
the acquisition debt. The Company may be required to make future payments to
the sellers through fiscal 2001 based on a percentage of Valley's pretax
earnings as further described in Note 2 to the Consolidated Financial
Statements if Valley's pretax earnings are in excess of certain defined
levels. This arrangement was established to provide the Company a return on
its investment in Valley prior to the payment by the Company of additional
purchase price to the Valley minority shareholders. Additional purchase
price payments will not have an adverse effect on liquidity due to the
minimum earning levels of Valley that are required. Any such payments will
have the effect of limiting the return on the investment in Valley to the
extent of the payments.
APC, C&L and Valley have separate revolving line of credit facilities
which provide working capital financing to these subsidiaries. The terms of
these credit facilities and related borrowings and credit availability under
these credit facilities is described in Note 4 to the Consolidated Financial
Statements.
APC's revolving line of credit facility ("APC Revolver") contains
financial covenants requiring a minimum level of tangible net worth, earnings
and net cash flow. The following is a comparison of APC's performance
against the covenants at March 30, 1996 (in thousands):
Covenant Actual
Requirement Performance
Tangible Net Worth $ 3,900,000 $ 5,575,000
========== ==========
Earnings (400,000) (1,045,000)
========== ==========
Net Cash Flow 230,000 449,000
========== ==========
At March 30, 1996 APC failed to satisfy the earnings covenant due to the
write off of goodwill of $852,000. In June 1996, APC and its lender entered
into a waiver and amendment agreement relating to the APC Revolver in order
to avoid violating certain financial covenants at March 30, 1996 and in
fiscal 1997. The amended APC Revolver provides for the following financial
covenants during fiscal 1997: minimum tangible net worth of $3,900,000
through March 28, 1997 and $4,400,000 on March 29, 1997, a net loss of not
greater than $40,000 and net cash flow on a rolling 13-period basis (measured
at the end of each four week period) ranging from $385,000 to $500,000.
Based upon APC's projections, the Company believes that APC will have
adequate working capital for fiscal 1997. Because the APC Revolver provides
for repayment of borrowings after a 90 day notice from the lender, the
indebtedness is classified as short term. The fiscal 1995 financial
statements have been reclassified to conform to fiscal 1996 presentation. In
October 1996, APC refinanced its revolving line of credit with a new lender.
The new credit facility provides for a revolving line of credit up to $10
million with certain terms more favorable than the previous credit facility.
17
<PAGE>
C&L's revolving line of credit facility ("C&L Revolver") contains
financial covenants requiring minimum levels of tangible net worth and pretax
income computed on a rolling 12-month basis, a minimum ratio of current
assets to current liabilities and a maximum ratio of total liabilities to
tangible net worth. At March 30, 1996, C&L failed to satisfy the pretax
income requirement. In June 1996, C&L and its lender entered into a waiver
and amendment agreement relating to the C&L Revolver in order to avoid
violating certain financial covenants at March 30, 1996 and in fiscal 1997.
The amended C&L Revolver provides for the following financial covenants
during fiscal 1997: minimum tangible net worth of $2,000,000; minimum
cumulative income from operations, calculated on a quarterly basis of
$115,000, $446,000, $730,000 and $1,174,000, respectively; a current ratio of
1:1 and a maximum ratio of total liabilities to equity of 6:1. At June 27,
1996, based upon the representations and projections of C&L's management, the
Company believes that C&L will meet the financial covenants during fiscal
1997 or will obtain any required waivers from the lender.
In May 1996, the Company contributed an additional $10 million to
Sattel. Sattel loaned $5 million to CNC pursuant to a Promissory Note due
September 30, 1996 in favor of Sattel which is convertible into CNC Series D
Preferred Stock under certain conditions outlined in the Note. In addition,
Sattel may, pursuant to the terms of the Memorandum of Understanding, invest
an additional $5,000,000 in Series D Preferred Stock of CNC.
In the fourth quarter of fiscal 1996 and in the first quarter of fiscal
1997, the Company raised approximately $17.4 million, after commissions and
expenses, through the sale of 600,000 shares of Common Stock. The Company
believes that it has adequate resources to meet its liquidity needs for
fiscal 1997. On a long term basis, financing for the Company's operations,
including working capital requirements for Sattel and capital expenditures,
will come from cash generated from operations, the sale of additional equity
or other securities, additional bank borrowings and other sources of capital,
if available. The Company intends to file a registration statement in July
1996 for shelf registration of up to 500,000 shares of common stock, which
may be sold in fiscal 1997 if conditions warrant.
The Company is investigating how it can be restructured in order to
maximize shareholder value. Management is currently looking at several
alternative approaches, based on separating operating units by industry type
into independent publicly traded companies. Management will present their
restructuring plans to the Board as soon as possible. Management has
retained the services of Hambrecht & Quist, LLC, an investment banking firm,
to assist them with this effort.
Forward Looking Statements
The following may be considered "forward looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995: the
Company's estimate of fiscal 1997 capital expenditures, the statements that
the Company believes APC and C&L will meet financial covenants in its loan
agreement or obtain any required waivers during fiscal 1997, the Company
believes that it and APC will have adequate working capital in fiscal 1997,
the Company's estimate of APC's cash flows for fiscal 1997-1999 will be
approximately $3.6 million and the Company believes that Valley will generate
sufficient cash flows from operations to service the acquisition debt
incurred for the Valley acquisition. Actual results or developments may
differ materially from those contained in the forward looking statements.
Factors which may cause such a difference to occur include but are not
18
<PAGE>
limited to (i) whether extraordinary repairs are needed to APC's distribution
facility, (ii) whether the Company can continue to grow its business, (iii)
whether the Company can control the operating expenses of APC which began to
increase in fiscal 1994, (iv) product demand, competition, the cost of
products, and industry conditions, (v) whether vendors continue to provide
credit to APC on satisfactory terms, (vi) whether APC's secured lender
exercises its demand right or grants any necessary waivers and (vii) new
competitors entering APC's marketplace and (viii) the risks and uncertainties
discussed in Item 1 relating to Sattel's business.
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 $.10 per fully diluted share.
In March 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." This statement establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles and goodwill related to those assets to be held and used and for
long-lived assets and certain identifiable intangibles to be disposed of.
This statement is effective for financial statements for fiscal years
beginning after December 15, 1995. Management has concluded that an
impairment of APC's assets has not occurred based on the operating cash flows
of approximately $1.2 million (before interest expense) generated by APC
during fiscal 1996 and estimates of APC's cash flows for future periods. The
Company believes that the adoption of this standard will not have a material
effect on its consolidated results of operations or financial position.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-
Based Compensation." This statement establishes financial accounting and
reporting standards for stock-based employee compensation plans and is
effective for fiscal years beginning after December 15, 1995. The Company
has decided to continue accounting for employee stock compensation under
currently existing accounting principles, but will disclose pro forma results
using the new standard's alternative accounting treatment as is permitted
under SFAS No. 123.
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.
19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THE DIANA CORPORATION AND SUBSIDIARIES
PAGE
Report of Price Waterhouse LLP, Independent Accountants......... 21
Report of Ernst & Young LLP, Independent Auditors............... 22
Consolidated Balance Sheets..................................... 23
Consolidated Statements of Operations........................... 24
Consolidated Statements of Changes in Shareholders' Equity...... 25
Consolidated Statements of Cash Flows........................... 26
Notes to Consolidated Financial Statements...................... 27
20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of The Diana Corporation
In our opinion, the consolidated financial statements listed under Item
14(a)(1) and (2) appearing in this report present fairly, in all material
respects, the financial position of The Diana Corporation and its
subsidiaries at March 30, 1996, and the results of their operations and their
cash flows for the year in conformity with generally accepted accounting
principles. 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 audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Milwaukee, Wisconsin
June 27, 1996, except as to the stock dividend described in Note 17 which is
as of October 2, 1996
21
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Shareholders
The Diana Corporation
We have audited the accompanying consolidated balance sheet of The
Diana Corporation and subsidiaries (the Company) as of April 1,
1995, and the related consolidated statements of operations,
changes in shareholders' equity and cash flows for each of the two
years in the period ended April 1, 1995. Our audits also included
the financial statement schedules as of April 1, 1995 and for each
of the two years in the period ended April 1, 1995 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 the consolidated results of its operations and its cash
flows for each of the two 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 10 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
22
<PAGE>
THE DIANA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
March 30, April 1,
1996 1995
-------- -------
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents............................ $ 6,254 $ 2,440
Marketable securities................................ 1,215 6,211
Receivables, less allowance for
doubtful accounts of $772 and $600.................. 16,171 14,785
Inventories.......................................... 12,337 12,237
Other current assets................................. 1,009 690
------ ------
Total current assets............................... 36,986 36,363
Property and equipment
Land................................................. 357 357
Building and improvements............................ 4,702 4,400
Fixtures and equipment............................... 4,182 3,298
------ ------
9,241 8,055
Less accumulated depreciation........................ (5,083) (4,252)
------ ------
4,158 3,803
Intangible assets...................................... 11,585 4,137
Other assets........................................... 804 1,024
------ ------
$53,533 $45,327
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable..................................... $13,707 $12,355
Accrued liabilities.................................. 2,514 1,390
Revolving line of credit............................. 7,038 6,803
Current portion of long-term debt.................... 444 326
------ ------
Total current liabilities...................... 23,703 20,874
Long-term debt......................................... 3,562 2,981
Other liabilities ..................................... 1,582 1,743
Commitments and contingencies (Note 6).................
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 5,526,282 and 4,810,353 shares....... 5,526 4,810
Additional paid-in capital........................... 59,456 48,548
Accumulated deficit.................................. (34,776) (28,178)
Unrealized loss on marketable securities............. (876) (713)
Treasury stock at cost............................... (4,644) (4,738)
------ ------
Total shareholders' equity..................... 24,686 19,729
------ ------
$53,533 $45,327
====== ======
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
THE DIANA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------
March 30, April 1, April 2,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net sales.............................. $267,602 $250,386 $243,641
Other income (loss).................... 519 (417) 2,697
------- ------- -------
268,121 249,969 246,338
Cost of sales.......................... 256,920 239,198 232,740
Selling and administrative expenses.... 12,385 10,314 9,157
Write-off of goodwill.................. 852 --- ---
------- ------- -------
Operating earnings (loss).............. (2,036) 457 4,441
Interest expense....................... (1,076) (1,098) (1,191)
Non-operating income................... 95 34 ---
Income tax credit (expense)............ (87) --- 400
Equity in earnings (loss) of
unconsolidated subsidiaries.......... (370) (69) 97
Minority interest...................... 109 (44) (290)
------- ------- -------
Earnings (loss) before extraordinary
item and accounting change........... (3,365) (720) 3,457
Extraordinary item..................... --- --- (266)
------- ------- -------
Earnings (loss) before accounting
change............................... (3,365) (720) 3,191
Cumulative effect of accounting change. --- --- 262
------- ------- -------
Net earnings (loss).................... $ (3,365) $ (720) $ 3,453
======= ======= =======
Earnings (loss) per common share:
Primary
Before extraordinary item........... $ (.76) $ (.17) $ .84
Extraordinary item.................. --- --- (.06)
Accounting change................... --- --- .06
------- ------- -------
Net earnings (loss)................. $ (.76) $ (.17) $ .84
======= ======= =======
Fully diluted
Before extraordinary item........... $ (.76) $ (.17) $ .81
Extraordinary item.................. --- --- (.06)
Accounting change................... --- --- .06
------- ------- -------
Net earnings (loss)................. $ (.76) $ (.17) $ .81
======= ======= =======
Weighted average number of common
shares outstanding
Primary............................. 4,401 4,224 4,108
======= ======= =======
Fully diluted....................... 4,401 4,224 4,255
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
24
<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 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
Net loss --- --- --- (3,365) --- --- --- (3,365)
5% stock dividend 195,929 196 3,022 (3,233) --- --- --- (15)
Exercise of stock options --- --- (39) --- --- (12,300) 65 26
Change in unrealized loss on
marketable securities --- --- --- --- (163) --- --- (163)
Acquisition of Sattel 350,000 350 4,594 --- --- --- --- 4,944
Issuance of common stock 170,000 170 3,315 --- --- --- --- 3,485
Other --- --- 16 --- --- (5,524) 29 45
--------- ------ ------- -------- ------- --------- ------- -------
Balance at March 30, 1996 5,526,282 $ 5,526 $ 59,456 $ (34,776) $ (876) 877,692 $ (4,644) $ 24,686
========= ====== ======= ======== ======= ========= ======= =======
</TABLE>
See notes to consolidated financial statements.
25
<PAGE>
THE DIANA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------
March 30, April 1, April 2,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Operating activities
Earnings (loss) before extraordinary
items and accounting change.......... $(3,365) $ (720) $ 3,457
Adjustments to reconcile earnings
(loss) to net cash provided (used) by
operating activities:
Loss (gain) on sale of
marketable securities.............. (26) 1,227 (479)
Depreciation and amortization....... 1,441 1,154 1,098
Provision for losses on accounts
receivable......................... 509 313 153
Write-off of goodwill............... 852 --- ---
Equity in loss (earnings) of
unconsolidated subsidiaries........ 370 69 (97)
Minority interest................... (109) 44 290
Payments of net liabilities of
unconsolidated subsidiary.......... (242) (95) (361)
Other............................... (256) 311 (14)
Changes in current assets and
liabilities........................ 2,194 4,414 (4,355)
------ ------ ------
Net cash provided (used) by operating
activities............................ 1,368 6,717 (308)
Investing activities
Purchases of property and equipment... (696) (599) (555)
Affiliate advances and acquisitions,
net of cash acquired................. (4,412) --- (1,983)
Purchases of marketable securities.... (475) (5,647) (20,218)
Sales of marketable securities........ 5,380 9,276 21,031
Collection of notes receivable........ 138 194 252
Other................................. 55 (195) ---
------ ------ ------
Net cash provided (used) by investing
activities............................ (10) 3,029 (1,473)
Financing activities
Changes in short-term borrowings...... 236 (5,667) 1,190
Payments on long-term debt............ (1,265) (478) (390)
Payments toward bond settlements...... --- (2,822) (178)
Common stock issued................... 3,485 --- ---
------ ------ ------
Net cash provided (used) by financing
activities............................ 2,456 (8,967) 622
------ ------ ------
Increase (decrease) in cash and cash
equivalents........................... 3,814 779 (1,159)
Cash and cash equivalents at the
beginning of the year................. 2,440 1,661 2,820
------ ------ ------
Cash and cash equivalents at the end of
the year.............................. $ 6,254 $ 2,440 $ 1,661
====== ====== ======
</TABLE>
See notes to consolidated financial statements.
26
<PAGE>
THE DIANA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 30, 1996
NOTE 1 - Summary of Significant Accounting Policies
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.
Sattel Communications ("Sattel")
Diana had a 50% ownership interest in Sattel and accounted for its
investment in Sattel using the equity method of accounting from November
1994 to December 1995. In January 1996, Diana increased its ownership
interest in Sattel from 50% to 80%. Sattel was included in the
consolidated group effective January 1996. Sattel is a provider of
central office voice and data switching equipment for communications
providers worldwide.
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%. C&L is a distributor of telecommunications
equipment for wide area and local area integrated networks to transport
voice, data and video communications primarily in North America.
Valley Communications, Inc. ("Valley")
Valley was acquired by C&L on November 20, 1995 and is included in
the consolidated group subsequent to the acquisition date. C&L owns 80%
of Valley. Valley provides design, installation and service for voice
and data networks and equipment primarily in California.
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. APC distributes meat and seafood in the southeastern
United States. A majority of APC's sales are to retail food stores and
meat wholesalers, with the remaining sales to food service enterprises
and restaurants. Diana owns 81.25% of Entree.
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 11). Accounts and transactions between
members of the consolidated group are eliminated in the consolidated
financial statements.
In fiscal 1996, the minority interest attributable to the 20% owners of
Sattel and Valley amounted to $507,000 and is included in other liabilities.
27
<PAGE>
NOTE 1 - Summary of Significant Accounting Policies (Continued)
Fiscal Year
The Company's fiscal year ends on the Saturday closest to March 31.
There were 52 weeks in all years presented.
Financial Instruments
The carrying value of cash and cash equivalents, marketable securities,
receivables, accounts payable and borrowings at March 30, 1996 and April 1,
1995 approximate fair value.
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." 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 (based on published market values), 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.
Concentrations of Risk
APC performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Receivables from APC's
customers are generally due within 7 to 30 days. Approximately 31.8% of
consolidated net sales for the year ended March 30, 1996 were made by APC to
two customers. Approximately 14.1% of consolidated receivables at March 30,
1996 were due from these two customers.
Approximately 72% of C&L's inventory purchases are from two companies.
The loss of either company would have a negative impact on C&L's operations.
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.
28
<PAGE>
NOTE 1 - Summary of Significant Accounting Policies (Continued)
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. Depreciation for income tax purposes is computed on
accelerated cost recovery methods. Expenditures which substantially increase
value or extend asset lives are capitalized. Expenditures for maintenance
and repairs are charged to expense as incurred.
Intangible Assets
Intangible assets consist of the following (in thousands):
1996 1995
Intellectual property rights $ 5,029 $ ---
Goodwill 5,491 2,846
Covenants not to compete 1,021 1,291
Other 44 ---
------ -----
$11,585 $4,137
====== =====
Intellectual property rights are amortized on a straight line basis over
a 20 year period. Goodwill is amortized on a straight line basis over 5-40
years. Covenants not to compete are amortized over the non-compete periods
of 5-7 years. Accumulated amortization was $1,930,000 and $1,598,000 at
March 30, 1996 and April 1, 1995, 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 generally determined by using identifiable
cash flows over the remaining amortization period to estimate fair value.
As a result of recent efforts to sell APC, the Company has concluded
there has been a decrease in the fair value of APC which did not support the
recoverability of the remaining goodwill balance related to the acquisition
of APC. The determination of fair value was based on the sales price
included in a letter of intent and agreement relating to a proposed sale of
APC. During the fourth quarter of fiscal 1996, the Company concluded that an
impairment of goodwill has occurred and wrote off the remaining goodwill of
$852,000 resulting from the acquisition of APC. Management has concluded
that a measurement date with respect to the proposed sale of APC has not been
reached as of March 30, 1996. Management considered the probability of
contingencies, including the potential buyer obtaining suitable financing,
the lack of approval of a formal plan of disposal and management's stated
intent to remove APC from the market if a sale does not culminate in the near
future in arriving at its conclusion.
In March 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." This statement establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles and goodwill related to those assets to be held and used and for
long-lived assets and certain identifiable intangibles to be disposed of.
This statement is effective for financial statements for fiscal years
beginning after December 15, 1995. Management has concluded that an
29
<PAGE>
impairment of APC's assets has not occurred based on the operating cash flows
of approximately $1.2 million (before interest expense) generated by APC
during fiscal 1996 and estimates of APC's cash flows for future periods. The
Company believes that the adoption of this standard will not have a material
effect on its consolidated results of operations or financial position.
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."
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.
30
<PAGE>
NOTE 1 - Summary of Significant Accounting Policies (Continued)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
Reclassifications
Certain amounts in the financial statements as of April 1, 1995 and for
each of the two years in the period ended April 1, 1995 have been
reclassified to conform with the classifications used for the year ended
March 30, 1996.
NOTE 2 - Acquisitions
Sattel Communications
In November 1994, the Company and Sattel Technologies, Inc. ("STI")
entered into a general partnership agreement to establish Sattel, which was
subsequently converted into a limited liability corporation. The Company and
STI each received a 50% interest in Sattel. Profits and losses were
allocated equally among the two partners. Under the terms of this agreement,
initial contributions to be made to the partnership by the Company 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
approved the marketing plan. STI agreed to develop, design and test a
telecommunications product, manufacture three units, provide administrative
services and provide the use of its facilities to Sattel until permanent
facilities were determined. In addition, STI agreed to contribute to the
partnership certain technology and other intangibles.
On January 16, 1996, the Company acquired an additional 30% ownership
interest in Sattel. The acquisition was accounted for as a purchase of a
minority interest. As a result, the Company increased its ownership interest
in Sattel from 50% to 80%. The Company issued 350,000 shares of its newly
issued common stock ("the Diana Shares") to STI in connection with the
transaction. The value assigned to the Diana Shares was $4,944,000, or
$14.125 per share, based on the average closing market price of the Company's
common stock from January 12, 1996 through January 18, 1996. In addition,
the Company agreed to provide Sattel with additional cash to increase its
capital contributions to Sattel to $2.5 million and to loan Sattel $1.425
million. The total purchase price related to the Company's additional 30%
interest in Sattel, including the 350,000 shares issued, the minority
partner's share of additional equity contributions, liabilities assumed and
costs of the acquisition, was allocated based on the fair value of assets
acquired at the acquisition date, consisting principally of intellectual
property rights of approximately $5.1 million.
31
<PAGE>
On May 3, 1996, the Company and STI entered into a Supplemental
Agreement to amend the Exchange Agreement entered into on January 16, 1996.
STI agreed to convey to the Company an additional 15% of Sattel and 50,000
Diana Shares in exchange for being released from certain product development
obligations and STI's proportionate share of a $10 million capital
contribution to Sattel. In May 1996, the Company contributed $10 million to
Sattel pursuant to the Supplemental Agreement. This transaction will result
in a net reduction of approximately $1,825,000 of intangible assets recorded
at March 30, 1996. In addition, subsequent to March 30, 1996, Sattel granted
equity participation interests to certain employees of the Company. The
Company's effective ownership of Sattel remains at approximately 80% after
the grant of these interests. STI's effective ownership interest in Sattel
was reduced to approximately 4% as a result of all of these transactions.
Sattel has an option to purchase the equity participation interests in
the event of the employee's termination from the Company. The purchase price
of the equity participation interest will either be an agreed upon amount or
a price determined by an appraiser. In addition, certain holders of equity
participation interests have the right to require an initial public offering
of Sattel ("IPO") provided Sattel's cumulative pretax income for four
consecutive quarters has been at least $15 million. A minimum of three
holders of equity participation interests holding at least 25% of the profit
interest units are required to provide written notice to Sattel of a request
for an IPO. Sattel may redeem the equity participation interests held by
holders requesting an IPO in lieu of an IPO. The redemption price will
either be an agreed upon amount or a price determined by an appraiser. No
compensation expense will be recognized upon the granting of the equity
interests. The estimated fair value of the equity participation interests at
the date of grant is considered immaterial to the financial statements based
on the subordinated nature of the interests resulting from the priority
distributions payable to Sattel Communications Corp. in accordance with the
Sattel Communications LLC operating agreement. Compensation expense will be
recognized prospectively when it becomes probable that an initial public
offering by Sattel or other defined triggering event will occur.
Compensation cost will be charged to expense over the period from the date
the triggering event becomes probable to the date the equity interest become
convertible or the end of the required service period, whichever occurs
first. If Sattel exercises its option to repurchase equity interests
previously granted upon termination of the employee(s) or in lieu of
initiating an initial public offering of Sattel, total compensation cost will
be equal to the cash paid upon repurchase.
32
<PAGE>
NOTE 2 - Acquisitions
Valley
On November 20, 1995, C&L Acquisition Corporation, a subsidiary of C&L,
acquired 80% of the common stock of Valley from Henry P. Mutz, Christopher M.
O'Connor and Kenneth R. Hurst (collectively, the "Minority Shareholders") for
approximately $4,320,000 (including expenses) and future consideration. The
terms of the future consideration payable to the Minority Shareholders are as
follows: (1) For the year ended August 31, 1996 - 100% of Valley's pretax
earnings as defined in the purchase agreement in excess of $1,300,000; (2)
For the 7 months ended March 31, 1997 - 50% of Valley's pretax earnings in
excess of $758,000, and (3) For the years ended March 31, 1998, 1999, 2000
and 2001 - 50% of Valley's pretax earnings in excess of $1,300,000. The
Company will account for any future consideration with respect to the
acquisition of Valley as an adjustment to the purchase price of Valley in
accordance with EITF 95-8. Funding for the acquisition was obtained from
cash, revolving line of credit draws and a loan of $1,000,000 from the
Minority Shareholders (see Note 5). The acquisition was accounted for as a
purchase. The cost of the acquisition exceeded the fair value of the net
assets of Valley by approximately $2,936,000. The excess is being amortized
on the straight line method over 40 years. Valley is one of the largest
network installation and service companies in California.
Valley has a first right of refusal on the sale of stock by a Minority
Shareholder (except for a sale to a permitted transferee). Generally, the
stock shall be offered to Valley upon the same terms and conditions as
offered to the prospective purchaser except that the offering price of the
stock shall be the proposed sale price or 75% of the appraised value of the
shares as defined in the Stockholders Agreement, whichever is less.
The Minority Shareholders have the option, exercisable at any time
during the Put Period, as defined below, upon the delivery of a written
notice to Valley, to require that Valley purchase from the Minority
Shareholders the number of shares specified in the notice at a price equal to
the appraised value of the shares as defined in the Stockholders Agreement.
The redemption price shall be paid in cash at closing. The term "Put Period"
as used herein shall mean the period of time commencing on the fifteenth day
after receipt by the Minority Shareholders of Valley's audited financial
statements for the fiscal year ended March 31, 2000, and expiring thirty days
after receipt by the Minority Shareholders of Valley's audited financial
statements for the fiscal year ended March 31, 2004.
The Minority Shareholders have the option to require Valley to purchase
the remainder of a Minority Shareholder's ownership interest upon death or
disability (incapacitation for 90 days in any 12-month period) of a Minority
Shareholder. In addition, if a Minority Shareholder is terminated by Valley
for certain causes as defined in the Employment Contract, the Minority
Shareholder has the option to require Valley to purchase 50% of the Minority
Shareholder's ownership interest on the date of termination and 50% on
November 20, 2000. The purchase price of the shares acquired by Valley
pursuant to this paragraph shall be equal to the appraised value of the
shares based on a multiple of earnings as defined in the Employment Contract.
33
<PAGE>
NOTE 2 - Acquisitions (Continued)
The Company will account for any stock acquired by Valley pursuant to
the provisions discussed in the above three paragraphs by the purchase method
of accounting for the acquisition of minority interest in accordance with
Accounting Interpretation No. 26 of APB 16.
Shareholders of Valley owning 10% or more of the outstanding common
stock of Valley shall have the right to require Valley to pay annual
dividends in the amount of the lesser of $1,300,000 (prorated for any period
less than one fiscal year) or the After-Tax Operating Profit of Valley for
such period, provided, however, that such dividend payment (i) does not
reduce the net worth of Valley below $1,400,000, (ii) does not render Valley
insolvent or otherwise impair its capital, (iii) does not violate any
agreement with creditors of Valley, and (iv) does not contravene otherwise
applicable laws.
Valley may sell subordinated notes ("Sub-Debt") due in five (5) years
and bearing interest at twenty-five percent (25%) per annum with interest
payments due quarterly not to exceed the amount of dividends paid by Valley
after November 20, 1995. The Sub-Debt shall be offered to all stockholders
of Valley in proportion to their percentage ownership of the stock of Valley,
provided, however, that if any stockholder declines to purchase any sub-debt,
the sub-debt shall be offered to all stockholders who purchased sub-debt in
proportion to their relative holdings of stock of Valley.
The following unaudited pro forma results of operations for the fifty
two weeks ended March 30, 1996 and April 1, 1995, respectively, assume the
acquisitions of Valley and Sattel occurred at the beginning of each period
(with respect to Sattel in 1995, since its inception in November 1994) (in
thousands, except per share amounts):
1996 1995
Net sales $ 297,307 $ 264,087
======= =======
Net loss $ (3,312) $ (157)
======= =======
Loss per common share $ (.75) $ (.04)
======= =======
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.
NOTE 3 - 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 $.10 per fully diluted share.
34
<PAGE>
NOTE 3 - Marketable Securities (Continued)
The following is a summary of available-for-sale and held-to-maturity
marketable securities (in thousands):
Available-for-Sale Marketable Securities
March 30, 1996
------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
---- --------- --------- -------
Debt securities $ 303 $--- $ 12 $ 291
Equity securities 1,788 --- 864 924
------ --- ---- ------
$ 2,091 $--- $ 876 $ 1,215
====== === ==== ======
Available-for-Sale Marketable Securities
April 1, 1995
------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
---- --------- --------- -------
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
---- --------- --------- -------
U.S. treasury security $ 4,164 $--- $ --- $ 4,164
====== === ==== ======
The gross realized gains on sales of available-for-sale securities
totaled $31,000, $14,000 and $592,000 in fiscal 1996, 1995 and 1994,
respectively, and the gross realized losses totaled $5,000, $1,241,000 and
$113,000 in fiscal 1996, 1995 and 1994, respectively. The net adjustment to
unrealized losses on available-for-sale securities included as a separate
component of shareholders' equity totaled $876,000 and $713,000 at March 30,
1996 and April 1, 1995, 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.
35
<PAGE>
NOTE 3 - Marketable Securities (Continued)
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 March 30, 1996, by
contractual maturity, are shown below (in thousands):
Available-for-Sale Securities
-----------------------------
Estimated
Cost Fair Value
---- ----------
Due after five years $ 303 $ 291
Equity securities 1,788 924
------ ------
$ 2,091 $ 1,215
====== ======
NOTE 4 - Revolving Line of Credit
Revolving line of credit consists of the following (in thousands):
1996 1995
APC $2,996 $4,241
C&L 2,996 2,562
Valley 1,046 ---
----- -----
$7,038 $6,803
===== =====
APC has a Loan and Security Agreement ("APC Revolver") with a lender
(amended for the seventh time effective June 27, 1996) providing a revolving
line of credit through November 1997 of up to $9,500,000 with interest at the
prime rate plus 2.0% (prime was 8.25% at March 30, 1996). A $2 million
letter of credit facility with fees of 2.0% is included within the total
credit facility. At March 30, 1996, APC borrowed $2,996,000 and had letters
of credit of $2,000,000 issued on its behalf by the lender.
Borrowings under the APC Revolver are restricted based on defined
percentages of eligible accounts receivable and inventories. The amount
available under the APC Revolver at March 30, 1996 was $3,754,000. 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 APC Revolver. The APC Revolver
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.
APC's Revolver contains financial covenants requiring a minimum level of
tangible net worth, earnings and net cash flow. At March 30, 1996 APC failed
to satisfy the earnings covenant. In June 1996, APC and its lender entered
into a waiver and amendment agreement relating to the APC Revolver in order
to avoid violating certain financial covenants at March 30, 1996 and in
fiscal 1997.
Because the APC Revolver provides for repayment of borrowings after a 90
day notice from the lender, the indebtedness is classified as short term.
36
<PAGE>
NOTE 4 - Revolving Line of Credit (Continued)
C&L has a Loan and Security Agreement ("C&L Revolver") with a lender
(amended for the first time effective June 27, 1996) providing a revolving
line of credit through January 1999 of up to $6,000,000, with interest at the
prime rate or LIBOR plus 2.25%. In addition, there is an unused line fee of
.25%. Borrowings under the C&L Revolver are restricted based on defined
percentages of eligible accounts receivable and inventories. The amount
available under the C&L Revolver at March 30, 1996, was $803,000.
Substantially all assets of C&L are pledged as collateral under the C&L
Revolver. The C&L Revolver 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.
C&L's Revolver contains financial covenants requiring minimum levels of
tangible net worth and pretax income computed on a rolling 12-month basis, a
minimum ratio of current assets to current liabilities and a maximum ratio of
total liabilities to tangible net worth. At March 30, 1996, C&L failed to
satisfy the pretax income requirement. In June 1996, C&L and its lender
entered into a waiver and amendment agreement to the C&L Revolver in order to
avoid violating certain financial covenants at March 30, 1996 and in fiscal
1997.
Valley has a Loan and Security Agreement ("Valley Revolver") with a
lender providing a revolving line of credit through March 1999 of up to
$2,500,000 with interest at the prime rate or LIBOR plus 2.25%. In addition,
there is an unused line fee of .25%. Borrowings under the Valley Revolver
are restricted based on defined percentages of eligible accounts receivable
and inventories. The amount available under the Valley Revolver at March 30,
1996 was $1,206,000. Substantially all assets of Valley are pledged as
collateral under the Valley Revolver. The Valley Revolver provides for the
maintenance of certain financial ratios and restricts Valley in a number of
areas including, but not limited to, declaration of dividends, payments of
salaries to officers, mergers and acquisitions, transactions with affiliates,
capital expenditures and additional indebtedness.
At March 30, 1996, the Company classified all borrowings made by C&L and
Valley under their respective revolving lines of credit as current
liabilities in accordance with EITF 95-22. These revolving lines of credit
have 3 year terms expiring in fiscal 1999. C&L's borrowings under its
revolving line of credit at April 1, 1995 have been classified as a current
liability for consistent presentation.
37
<PAGE>
NOTE 5 - Long-Term Debt
Long-term debt consists of the following (in thousands):
March 30, April 1,
Note Due Date 1996 1995
---- ------------ ----------- ----------
Debentures and
interest A January 2002 $ 2,099 $ 2,240
Note payable B October 2000 1,000 ---
Mortgage notes C August 2006 837 875
Notes payable D May 1998 70 158
Other obligations --- 34
------ ------
4,006 3,307
Less current portion (444) (326)
------ ------
$ 3,562 $ 2,981
====== ======
A. Principal of $1,254,000 and capitalized interest of $845,000. Interest
at 11.25%. The debentures are unsecured. The payment of cash dividends
by the Company is restricted by the Company's subordinated debentures
which provide that the consolidated tangible net worth of the Company
cannot be reduced to less than an amount equal to the aggregate
principal amount of the subordinated debentures, or $1,254,000.
B. Note payable to the minority shareholders of Valley collateralized by
the common stock of Valley owned by the Company (see Note 2). Interest
at 10%.
C. Interest at 7% and 8.25%. The mortgage notes are collateralized by land
and building with a carrying value of $2,627,000 as of March 30, 1996.
D. Interest at 8.75% - 11.0%. The notes are collateralized by equipment.
Approximate annual amounts payable by the Company and its subsidiaries
on long-term debt are as follows (in thousands):
1997 .................... $ 444
1998 .................... 403
1999 .................... 397
2000 .................... 399
2001 .................... 404
Thereafter .............. 1,959
------
$ 4,006
======
NOTE 6 - Commitments and Contingencies
The Company and its subsidiaries lease various facilities and equipment
under noncancelable lease arrangements for varying periods. Leases that
expire generally are expected to be renewed or replaced by other leases.
Total rental expense (including contingent rentals) under operating leases in
fiscal 1996, 1995 and 1994 was $2,090,000, $1,870,000 and $1,929,000,
respectively.
38
<PAGE>
NOTE 6 - Commitments and Contingencies (Continued)
Future minimum payments (excluding contingent rentals) under
noncancelable operating leases with initial terms of one year or more for
fiscal years subsequent to March 30, 1996 are as follows (in thousands):
1997 .................... $ 1,094
1998 .................... 751
1999 .................... 567
2000 .................... 393
2001 .................... 300
Thereafter .............. 11
------
$ 3,116
======
C&L participates in an equipment leasing partnership. C&L is subject to
a contingent obligation relating to the equipment lease of approximately
$386,000 at March 30, 1996, if income from the underlying lease is
insufficient to fund future operations of the partnership. The lease for
equipment expires in January 1999. The prior owners of C&L have indemnified
the Company with respect to any future obligations.
39
<PAGE>
NOTE 7 - 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
775,609 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 1996, 1995 and 1994 are as
follows:
1996 1995 1994
Options outstanding at
beginning of year 566,976 544,264 533,110
Changes during year:
5% stock dividend 31,482 27,212 26,654
Options granted 85,000 --- ---
Options exercised (12,300) (4,500) (15,500)
------- ------- -------
Net increase 104,182 22,712 11,154
------- ------- -------
Options outstanding
at end of year 671,158 566,976 544,264
======= ======= =======
Options exercisable 661,158 566,976 544,264
Option price range $2.05-
$20.00
In March 1996, the Company's Board of Directors adopted the Sattel
Communications LLC Employees Nonqualified Stock Option Plan (the "Sattel
Plan"), which permits the Company to grant nonqualified stock options for the
Company's common stock to key employees and directors of Sattel. The Plan is
limited to 500,000 shares of the Company's common stock. The Sattel Plan is
administered by the Company's Board of Directors, which is authorized, among
other things, to determine which persons receive options under the Sattel
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 Sattel Plan may not be exercised after eleven years from the date of
grant, and no options may be granted after March 8, 2007. 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.
40
<PAGE>
NOTE 7 - Stock Options (Continued)
In March 1996, stock options for 300,000 shares of the Company's common
stock were granted under the Sattel Plan at an exercise price of $20.00 per
share . These options, if vested, may be exercised any time between March
31, 1999 and March 31, 2001. The stock options shall vest as follows: (a)
100,000 option shares vest if Sattel's pretax earnings for the fiscal year
ending March 31, 1997 exceeds $15 million, (b) 100,000 option shares vest if
Sattel's pretax earnings for the fiscal year ending March 31, 1998 exceeds
$22.5 million (whether or not the conditions in (a) are satisfied), and (c)
100,000 option shares vest if Sattel's pretax earnings for the fiscal year
ending March 31, 1999 exceeds $33.75 million (whether or not the conditions
in (a) or (b) are satisfied), provided that, in each case, the grantee is
employed by Sattel on March 31, 1999.
Notwithstanding the foregoing, if Sattel's pretax earnings for the
fiscal year ending March 31, 1997 is between $10 million and $15 million, the
option shall vest with respect to 100,000 option shares referred to in (a) in
the previous paragraph, if Sattel pretax earnings for the fiscal year ending
March 31, 1998 exceeds $22.5 million, provided the grantee is employed by
Sattel on March 31, 1999.
NOTE 8 - 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 $25,000, $34,000 and $39,000, for fiscal years 1996,
1995 and 1994, respectively. Certain subsidiaries offer qualified employees
the opportunity to participate in 401(k) plans. The Company accrued $15,000
for matching contributions in fiscal 1996. There were no contributions under
these plans for any other year presented.
NOTE 9 - Other Income (Loss)
Other income (loss) consists of the following for the last three fiscal
years (in thousands):
1996 1995 1994
Interest income........................... $ 326 $ 570 $2,132
Net gains (losses) on sales of marketable
securities (See Note 3)................. 26 (1,227) 479
Other - net............................... 167 240 86
----- ------ -----
$ 519 $ (417) $2,697
===== ====== =====
41
<PAGE>
NOTE 10 - 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 (expense) is as follows (in thousands):
Fiscal Year Ended
March 30, April 1, April 2,
1996 1995 1994
Expense (credit) at statutory rate......... $(1,181) $ (230) $ 1,138
Write-off of goodwill...................... 290 --- ---
Settlements of liabilities of
unconsolidated subsidiary................ (156) (36) (1,357)
Reversal of liabilities of unconsolidated
subsidiary............................... --- --- (71)
Tax effect of net operating loss not
benefited................................ 918 198 180
Other, net................................. 216 68 110
------ ------ ------
Income tax provision....................... $ 87 $ --- $ ---
====== ====== ======
In fiscal 1996, the Company recorded income tax expense of $87,000
primarily attributable to state income taxes of a subsidiary. 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.
42
<PAGE>
NOTE 10 - 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 (in thousands):
March 30, April 1,
1996 1995
Deferred tax assets:
Federal net operating loss carryforwards $ 7,830 $ 6,809
Federal capital loss carryforward 408 417
State net operating loss carryforwards 2,436 2,247
Capitalized interest on Diana debentures 338 394
Deferred compensation 460 530
Allowance for doubtful accounts 278 225
Intangible assets (net) --- 227
General business credit carryforwards 145 145
All other 532 461
------- -------
Total deferred tax assets 12,427 11,455
Valuation allowance for deferred tax assets (9,366) (10,279)
------- -------
Net deferred tax assets 3,061 1,176
Deferred tax liabilities:
Intangible assets (net) 1,949 ---
Building and improvements basis difference 494 523
Tax over book depreciation 245 263
All other 373 390
------- -------
Total deferred tax liabilities 3,061 1,176
------- -------
Net deferred taxes $ --- $ ---
======= =======
The Company has approximately $23,000,000 and $31,250,000 in federal and
state net operating loss carryforwards, respectively. These carryforwards
expire at various dates through fiscal 2011.
NOTE 11 - Equity in Earnings (Loss) of Unconsolidated Subsidiaries
Prior to the Company's acquisition of an additional 30% interest in
Sattel in January 1996 (see Note 2), the Company accounted for its 50%
ownership interest in Sattel under the equity method of accounting. The
Company's proportionate share of Sattel's loss from April 2, 1995 to December
31, 1995 was $393,000. APC has a 50% ownership interest in Fieldstone Meats
of Alabama, Inc. ("Fieldstone"), a company which produces cured hams and
bacon. Diana owns a 50% interest in a partnership that holds promissory
notes, secured by inventory and equipment, due over a five year period which
substantially ended in fiscal 1996. At March 30, 1996 and April 1, 1995, the
carrying value of the Company's investment in unconsolidated subsidiaries was
$312,000 and $557,000, respectively, and is included within other assets.
43
<PAGE>
NOTE 11 - 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 (in thousands):
1996 1995 1994
Sattel $(393) $ (62) $ ---
Fieldstone 7 (35) 48
Partnership 16 28 49
---- ---- ----
$(370) $ (69) $ 97
==== ==== ====
NOTE 12 - 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"). 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.
The amounts included in extraordinary item are not net of taxes due to
the existence of net operating loss carryforwards (see Note 10).
NOTE 13 - 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 1996, 1995
and 1994 are $63,000, $367,000 and $329,000, respectively.
Included in other assets is a receivable of $324,000 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. The sellers are currently employees of
C&L.
C&L leases its building and certain vehicles from certain employees of
C&L. Total rent expense on such leases was $143,000, $144,000 and $141,000
for the years ended March 30, 1996, April 1, 1995 and April 2, 1994,
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.
44
<PAGE>
NOTE 14 - Business Segment Information
The Company operates in the following business segments: the wholesale
distribution of meat and seafood, telecommunications equipment and voice and
data network installation and service. The wholesale distribution of meat
and seafood segment consists of APC. In fiscal 1996, APC had one customer
that comprised 24.9% of its net sales and 21.9% of consolidated net sales.
The telecommunications equipment segment consists of the Company's 80%-owned
subsidiary, Sattel, and C&L. The voice and data network installation and
service segment consists of the Company's 80%-owned subsidiary, Valley, which
was acquired in November 1995. The operating results of Sattel and Valley
have been consolidated since their respective acquisition dates in fiscal
1996 (see Note 2). There are no material export sales. Information by
industry segment is as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Years Ended
------------------------------
March 30, April 1, April 2,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net sales:
Meat and seafood................. $236,108 $215,141 $215,333
Telecommunications equipment..... 25,350 35,245 28,308
Network installation and service. 6,144 --- ---
------- ------- -------
$267,602 $250,386 $243,641
======= ======= =======
Operating earnings (loss):
Meat and seafood................. $ (306) $ 234 $ 1,013
Telecommunications equipment..... (816) 2,734 2,549
Network installation and service. 652 --- ---
Corporate........................ (1,566) (2,511) 879
------- ------- -------
$ (2,036) $ 457 $ 4,441
======= ======= =======
Depreciation and amortization:
Meat and seafood................. $ 639 $ 605 $ 551
Telecommunications equipment..... 695 524 496
Network installation and service. 73 --- ---
Corporate........................ 34 25 51
------- ------- -------
$ 1,441 $ 1,154 $ 1,098
======= ======= =======
Capital expenditures:
Meat and seafood................. $ 408 $ 474 $ 655
Telecommunications equipment..... 241 113 217
Network installation and service. 22 --- ---
Corporate........................ 25 12 3
------- ------- -------
$ 696 $ 599 $ 875
======= ======= =======
Identifiable assets:
Meat and seafood................. $ 18,048 $ 20,569 $ 21,329
Telecommunications equipment..... 21,702 16,720 18,109
Network installation and service. 7,881 --- ---
Corporate........................ 5,902 8,038 14,605
------- ------- -------
$ 53,533 $ 45,327 $ 54,043
======= ======= =======
</TABLE>
45
<PAGE>
NOTE 15 - Statement of Cash Flows
Supplemental cash flow information is as follows for the last three
fiscal years (in thousands):
1996 1995 1994
Change in current assets and
liabilities:
Receivables......................... $ 2,066 $ 189 $(3,797)
Inventories......................... 1,845 3,204 (4,760)
Other current assets................ 292 168 (218)
Accounts payable.................... (1,420) 718 4,287
Other current liabilities........... (589) 135 133
------ ------ ------
$ 2,194 $ 4,414 $(4,355)
====== ====== ======
Supplemental information:
Interest paid......................... $ 1,002 $ 1,001 $ 1,090
Non-cash transactions:
Purchase of minority interest with
common stock......................... 4,944 1,895 ---
Reduction of net liabilities of
unconsolidated subsidiary............ 219 --- 655
Purchase of subsidiary financed by
seller............................... 1,000 --- ---
Purchase of property and equipment
financed by seller................... --- --- 320
NOTE 16 - Quarterly Results of Operations (Unaudited)
Fiscal Year Ended March 30, 1996 (in thousands, except per share
amounts):
12 Weeks 12 Weeks 12 Weeks 16 Weeks
Ended Ended Ended Ended
March 30, January 6, October 14, July 22,
1996 1996 1995 1995
Net sales....................... $64,110 $61,111 $60,828 $81,553
Cost of sales................... 60,834 58,658 58,497 78,931
Net earnings (loss)............. (2,512) (598) 146 (401)
Earnings (loss) per common share (.54) (.14) .03 (.09)
As a result of recent efforts to sell APC, the Company has concluded
there has been a decrease in the market value of APC. During the fourth
quarter of fiscal 1996, the Company concluded that an impairment of goodwill
has occurred and wrote off the remaining goodwill of $852,000 resulting from
the acquisition of APC.
46
<PAGE>
NOTE 16 - Quarterly Results of Operations (Unaudited) (Continued)
Fiscal Year Ended April 1, 1995 (in thousands, except per share
amounts):
12 Weeks 12 Weeks 12 Weeks 16 Weeks
Ended Ended Ended Ended
April 1, January 7, October 15, July 23,
1995 1995 1994 1994
Net sales....................... $64,223 $55,159 $56,255 $74,749
Cost of sales................... 62,218 52,274 53,059 71,647
Net earnings (loss)............. (749) 392 424 (787)
Earnings (loss) per common share (.17) .09 .09 (.20)
NOTE 17 - Subsequent Event
In April 1996, the Company raised approximately $14 million, after
commissions and expenses, through the sale of 430,000 shares of common stock.
In June 1996, Concentric Network Corporation ("CNC") executed a
Promissory Note for $5,000,000 in favor of Sattel due September 30, 1996
which is convertible into CNC Series D Preferred Stock ("CNC Stock") under
certain conditions outlined in the Note. In addition, CNC granted to Sattel
a warrant to purchase 551,470 shares of CNC Stock at an exercise price of
$1.36 per share as additional consideration for the loan to CNC. The warrant
is exercisable immediately and expires on June 6, 1999.
On September 3, 1996, the Board of Directors of the Company declared a
5% stock dividend which was paid on October 2, 1996 to shareholders of record
on September 16, 1996. Per share amounts in the accompanying financial
statements have been restated for the stock dividend.
Note 18 - Subsequent Event (Unaudited)
On August 12, 1996, all negotiations and agreements with third parties
concerning the proposed sale of APC were terminated.
In August 1996, the Promissory Note and accrued interest receivable were
converted into 3,729,110 shares of CNC Series D Preferred Stock. In
September 1996, Sattel sold to a third party 1,838,234 shares of its CNC
Series D Preferred Stock for $2.5 million.
47
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Form 10-K
(a) Financial Statements and Financial Statement Schedules Page Number
(1) The following consolidated financial statements
of The Diana Corporation and its subsidiaries are
included in Item 8:
Report of Price Waterhouse LLP, Independent Accountants 20
Report of Ernst & Young LLP, Independent Auditors 21
Consolidated Balance Sheets - March 30, 1996
and April 1, 1995 22
Consolidated Statements of Operations - Fiscal
Years Ended March 30, 1996, April 1, 1995 and
April 2, 1994 23
Consolidated Statements of Changes in Shareholders'
Equity - Fiscal Years Ended March 30, 1996,
April 1, 1995 and April 2, 1994 24
Consolidated Statements of Cash Flows -
Fiscal Years Ended March 30, 1996,
April 1, 1995 and April 2, 1994 25
Notes to Consolidated Financial Statements 26
(2) The following consolidated financial statement schedules of
The Diana Corporation are included in Item 14(d):
Schedule I - Condensed Financial Information of Registrant 50
Schedule II - Valuation and Qualifying Accounts 54
All other schedules are omitted because the required information is not
present or is not present in amounts sufficient to require submission
of the schedules or because the information required is included in the
consolidated financial statements or the notes thereto.
(b) Reports on Form 8-K:
During the last quarter of fiscal 1996, the Company filed (1) a Form 8-K
on January 31, 1996 regarding its increased ownership interest in Sattel
from 50% to 80%; (2) a Form 8-K/A on January 31, 1996 to amend the Form
8-K filed on December 5, 1995; (3) a Form 8-K on March 7, 1996 regarding
a change in its certifying accountant; (4) a Form 8-K/A on March 8, 1996
to amend the Form 8-K filed on March 7, 1996; and (5) a Form 8-K on
March 19, 1996 related to the sale of APC.
48
<PAGE>
(c) Exhibits
Exhibit
Number Description
3.1 Restated Certificate of Incorporation, as amended September 1, 1992
(incorporated herein by reference to Exhibit 3.1 of Registrant's
Form 10-K for the year ended April 3, 1993).
3.2 By-Laws of Registrant, as amended (April 2, 1991) (incorporated
herein by reference to Exhibit 3.2 of the Registrant's Form 10-K
for the year ended March 30, 1991).
4.1 Loan and Security Agreement between C&L Communications, Inc. and
Sanwa Business Credit dated January 2, 1996 (incorporated herein by
reference to Exhibit 10.1 of the Registrant's Registration
Statement on Form S-3 Reg. No. 333-1055).
4.2 First Amendment to Loan and Security Agreement and Waiver Agreement
between C&L Communications, Inc. and Sanwa Business Credit
Corporation dated June 27, 1996.
4.3 Loan and Security Agreement between Barclays Business Credit, Inc.
and Atlanta Provision Company, Inc. dated November 24, 1992
(incorporated herein by reference to Exhibit 10.10 of the
Registrant's Form 10-Q for the 40 weeks ended January 2, 1993).
4.4 Waiver and First Amendment to Loan and Security Agreement between
Atlanta Provision Company, Inc. and Barclays Business Credit, Inc.
dated June 25, 1993 (incorporated herein by reference to Exhibit
4.2 of Registrant's Form 10-Q for the period ended July 24, 1993).
4.5 Waiver and Second Amendment to Loan and Security Agreement between
Atlanta Provision Company, Inc. and Barclays Business Credit, Inc.
dated September 9, 1993 (incorporated herein by reference to
Exhibit 4.1 of Registrant's Form 10-Q for the period ended October
16, 1993).
4.6 Waiver and Third Amendment to Loan and Security Agreement between
Atlanta Provision Company, Inc. and Barclays Business Credit, Inc.
dated June 1, 1994 (incorporated herein by reference to Exhibit 4.8
of Registrant's Form 10-K for the year ended April 2, 1994).
4.7 Waiver and Fourth Amendment to Loan and Security Agreement between
Atlanta Provision Company, Inc. and Shawmut Capital Corporation
(successor to Barclays Business Credit, Inc.) dated June 28, 1995
(incorporated herein by reference to Exhibit 4.9 of Registrant's
Form 10-K for the year ended April 1, 1995).
4.8 Waiver and Fifth Amendment to Loan and Security Agreement between
Atlanta Provision Company, Inc. and Shawmut Capital Corporation
(successor to Barclays Business Credit, Inc.) dated August 31, 1995
(incorporated herein by reference to Exhibit 4.1 of Registrant's
Form 10-Q for the period ended July 22, 1995).
49
<PAGE>
Exhibit
Number Description
4.9 Waiver and Sixth Amendment to Loan and Security Agreement between
Atlanta Provision Company, Inc. and Shawmut Capital Corporation
(successor to Barclays Business Credit, Inc.) dated November 28,
1995 (incorporated herein by reference to Exhibit 4.1 of
Registrant's Form 10-Q for the period ended October 14, 1995).
4.10 Waiver and Seventh Amendment to Loan and Security Agreement between
Atlanta Provision Company, Inc. and Fleet Capital Corporation
(successor to Barclays Business Credit, Inc.) dated June 27, 1996.
4.11 Certain other long-term debt as described in Note 5 of Notes to
Consolidated Financial Statements. The Registrant agrees to
furnish to the Commission, upon request, copies of any instruments
defining the rights of holders of any such long-term debt.
10.1 Employment Arrangement between Richard Y. Fisher and the Registrant
effective April 4, 1993 and ending April 1, 1995 (incorporated
herein by reference to Exhibit 10.12 of Registrant's Form 10-K for
the year ended April 3, 1993).*
10.2 Amended and Restated Employment Agreement between Richard Y. Fisher
and The Diana Corporation dated April 2, 1995 (incorporated herein
by reference to Exhibit 10.2 of Registrant's Form 10-K for the year
ended April 1, 1995).*
10.3 Employment Agreement between Donald E. Runge and Farm House Foods
Corporation dated October 16, 1987, which was guaranteed by the
Registrant on September 29, 1988 (incorporated herein by reference
to Exhibit 10.14 of Registrant's Form 10-K for the year ended April
3, 1993).*
10.4 Employment Agreement between Donald E. Runge and The Diana
Corporation dated April 2, 1995 (incorporated herein by reference
to Exhibit 10.4 of Registrant's Form 10-K for the year ended April
1, 1995).*
10.5 Employment Agreement between Sydney B. Lilly and The Diana
Corporation dated April 2, 1995 (incorporated herein by reference
to Exhibit 10.5 of Registrant's Form 10-K for the year ended April
1, 1995).*
10.6 Consulting Agreement dated December 23, 1991 and ending
December 23, 1996 between C&L Acquisition Corporation and Jack E.
Donnelly (incorporated herein by reference to Exhibit 10.11 of
Registrant's Form 10-K for the year ended April 3, 1993).*
___________________________________________________________________________
* Represents a management contract or compensatory plan, contract or
arrangement in which a director or named executive officer of the
Company participated.
50
<PAGE>
Exhibit
Number Description
10.7 Amendment to Consulting Agreement between C&L Acquisition
Corporation and Jack E. Donnelly dated March 7, 1995 (incorporated
herein by reference to Exhibit 10.7 of Registrant's Form 10-K for
the year ended April 1, 1995).*
10.8 1986 Nonqualified Stock Option Plan of Registrant as amended
(incorporated herein by reference to Exhibit 10.13 of Registrant's
Form 10-K for the year ended April 3, 1993).*
10.9 1993 Nonqualified Stock Option Plan of Entree Corporation
(incorporated herein by reference to Exhibit 10.12 of Registrant's
Form 10-K for the year ended April 2, 1994).*
10.10 Agreement dated May 14, 1995 between Atlanta Provision Company,
Inc. and The United Food & Commercial Workers Union Local 1996
(incorporated herein by reference to Exhibit 10.1 of the
Registrant's Form 10-Q for the period ended July 22, 1995).
10.11 Purchase Agreement dated August 14, 1995 by and between C&L
Acquisition Corporation and Henry Mutz, Chris O'Connor and Ken
Hurst (incorporated herein by reference to Exhibit 2.1 of the
Registrant's Form 8-K/A dated January 31, 1996).
10.12 Exchange Agreement dated January 16, 1996 by and among The Diana
Corporation and Sattel Technologies, Inc. (incorporated herein by
reference to Exhibit 10.2 of the Registrant's Registration
Statement on Form S-3 Reg. No. 333-1055).
10.13 1996 Sattel Communications LLC Employees Nonqualified Stock Option
Plan.
10.14 Agreement Regarding Award of Class B Units between Sydney B. Lilly
and Sattel Communications LLC dated April 1, 1996.*
10.15 Memorandum of Understanding between The Diana Corporation, Sattel
Communications Corp. and Sattel Technologies, Inc. dated May 3,
1996.
10.16 Second Supplemental Agreement Relating to Joint Venture and
Exchange Agreement Reformation between The Diana Corporation,
Sattel Technologies, Inc. and D.O.N. Communications Corp. dated May
3, 1996.
10.17 Operating Agreement of Sattel Communications, LLC.
10.18 Amendment to the Operating Agreement of Sattel Communications LLC.
10.19 Second Amendment to the Operating Agreement of Sattel
Communications LLC.
11 Computation of Earnings Per Share
51
<PAGE>
Exhibit
Number Description
22 Subsidiaries of Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule
___________________________________________________________________________
* Represents a management contract or compensatory plan, contract or
arrangement in which a director or named executive officer of the
Company participated.
52
<PAGE>
THE DIANA CORPORATION AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
March 30, April 1,
1996 1995
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents........................ $ 3,567 $ ---
Marketable securities............................ 1,213 ---
Other current assets............................. 201 389
------ ------
Total current assets........................... 4,981 389
Land and equipment (net)........................... 158 16
Investments in and advances to unconsolidated
subsidiaries...................................... 23,536 23,789
------ ------
$28,675 $24,194
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $ 177 $ ---
Accrued liabilities.............................. 638 682
Current portion of long-term debt................ 141 141
------ ------
Total current liabilities...................... 956 823
Long-term debt..................................... 1,958 2,099
Other liabilities.................................. 1,075 1,543
Shareholders' equity:
Common stock..................................... 5,526 4,810
Additional paid-in capital....................... 59,456 48,548
Accumulated deficit.............................. (34,776) (28,178)
Unrealized loss on marketable securities......... (876) (713)
Treasury stock................................... (4,644) (4,738)
------ ------
Total shareholders' equity..................... 24,686 19,729
------ ------
$28,675 $24,194
====== ======
</TABLE>
See notes to condensed financial statements and notes to consolidated
financial statements.
53
<PAGE>
THE DIANA CORPORATION AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Fiscal Year Ended
March 30, April 1, April 2,
1996 1995 1994
<S> <C> <C> <C>
Other income.......................... $ 774 $ 47 $ 755
Administrative expenses............... (1,878) (1,621) (1,388)
Interest expense...................... (106) (112) (119)
Non-operating income (expense)........ (50) 199 208
Income tax credit..................... --- --- 400
Equity in earnings (loss) of
unconsolidated subsidiaries.......... (2,105) 767 3,601
------ ------ ------
Earnings (loss) before extraordinary
item and accounting change........... (3,365) (720) 3,457
Extraordinary item.................... --- --- (266)
------ ------ ------
Earnings (loss) before accounting
change............................... (3,365) (720) 3,191
Cumulative effect of accounting change --- --- 262
------ ------ ------
Net earnings (loss)................... $(3,365) $ (720) $ 3,453
====== ====== ======
Earnings (loss) per common share:
Primary
Before extraordinary item.......... $ (.76) $ (.17) $ .84
Extraordinary item................. --- --- (.06)
Accounting change.................. --- --- .06
------ ------ ------
Net earnings (loss)................ $ (.76) $ (.17) $ .84
====== ====== ======
Fully diluted
Before extraordinary item.......... $ (.76) $ (.17) $ .81
Extraordinary item................. --- --- (.06)
Accounting change.................. --- --- .06
------ ------ ------
Net earnings (loss)................ $ (.76) $ (.17) $ .81
====== ====== ======
Weighted average number of common
shares outstanding
Primary............................ 4,401 4,224 4,108
====== ====== ======
Fully diluted...................... 4,401 4,224 4,255
====== ====== ======
</TABLE>
See notes to condensed financial statements and notes to consolidated
financial statements.
54
<PAGE>
THE DIANA CORPORATION AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
March 30, April 1, April 2,
1996 1995 1994
<S> <C> <C> <C>
Operating activities
Earnings (loss) before extraordinary items
and accounting change..................... $(3,365) $ (720) $ 3,457
Adjustments to reconcile earnings (loss)
to net cash used by operating activities:
Depreciation & amortization.............. 29 8 10
Equity in (earnings) loss of
unconsolidated subsidiaries............. 2,105 (767) (3,601)
Non-operating income..................... --- --- (208)
Payments of net liabilities of
unconsolidated subsidiary............... (242) (95) (361)
Changes in current assets and liabilities:
Receivables............................ --- 1,374 (1,370)
Other.................................. (79) (181) 184
------ ------ ------
Net cash used by operating activities....... (1,552) (381) (1,889)
Investing activities
Additions to equipment.................... (25) (11) (3)
Purchase of securities.................... (475) --- ---
Proceeds of sale of securities............ 5,380 --- ---
Changes in investments in and advances to
unconsolidated subsidiaries.............. (3,430) 3,475 2,318
------ ------ ------
Net cash provided by investing activities... 1,450 3,464 2,315
Financing activities
Payments on long-term debt................. (141) (261) (261)
Issuance of common stock................... 3,485 --- ---
Payments toward bond settlements........... --- (2,822) (178)
------ ------ ------
Net cash provided (used) by financing
activities................................. 3,344 (3,083) (439)
------ ------ ------
Increase (decrease) in cash................. 3,242 --- (13)
Increase in cash resulting from merger with
subsidiary................................. 325 --- ---
Cash at the beginning of the year........... --- --- 13
------ ------ ------
Cash at the end of the year................. $ 3,567 $ --- $ ---
====== ====== ======
Supplemental information:
Interest paid.............................. $ 106 $ 11 $ 17
Non-cash transactions:
Purchase of minority interest with common
stock..................................... 4,944 1,895 ---
Reduction of net liabilities of
unconsolidated subsidiary................. 219 --- 655
</TABLE>
See notes to condensed financial statements and notes to consolidated
financial statements.
55
<PAGE>
THE DIANA CORPORATION AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The condensed financial information of the Registrant includes the
accounts of the parent company. In fiscal 1996, the parent's wholly-owned
subsidiary, D.O.N., Incorporated was merged into the parent.
Substantially all investments in and advances to unconsolidated
subsidiaries are eliminated in the consolidated financial statements. In
fiscal 1996, other income includes management fees and interest income of
$448,000 that is eliminated in the consolidated financial statements.
Intercompany profits between related parties are eliminated in these
financial statements.
NOTE 2 - LONG-TERM OBLIGATIONS
Approximate annual amounts due on long-term obligations for the
five years subsequent to March 30, 1996 are (in thousands):
1997 $ 141
1998 141
1999 141
2000 141
2001 141
Thereafter 1,394
-----
$2,099
=====
NOTE 3 - COMMITMENTS AND CONTINGENCIES
Diana leases its corporate office space under a noncancelable lease
with a rental commitment of $36,000 in fiscal 1997.
Diana has guaranteed obligations of an unconsolidated subsidiary
not to exceed $1,050,000 of which $370,000 was outstanding at March 30, 1996.
Subsequent to March 30, 1996, Diana guaranteed the obligations of another
unconsolidated subsidiary not to exceed $400,000. Subsequent to March 30,
1996, Diana extended an unsecured line of credit of $1 million at prime plus
2% to an unconsolidated subsidiary.
56
<PAGE>
THE DIANA CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Fiscal Year Ended
March 30, April 1, April 2,
1996 1995 1994
(In Thousands)
<S> <C> <C> <C>
Valuation accounts deducted in balance
sheet from assets to which they apply:
Allowance for doubtful accounts:
Balance at beginning of period...... $ 600 $ 517 $ 784
Additions -
Charged to costs and expenses..... 519 313 153
Reductions -
Accounts written off, net of
recoveries....................... (347) (230) (420)
----- ----- -----
Balance at end of period............ $ 772 $ 600 $ 517
===== ===== =====
Allowance for unrealized losses on
inventory:
Balance at beginning of period...... $ 189 $ 106 $ 345
Additions -
Charged to costs and expenses...... 399 273 123
Reductions -
Amounts written off on sale or
disposal of inventories........... (185) (190) (362)
----- ----- -----
Balance at end of period............ $ 403 $ 189 $ 106
===== ===== =====
Allowance for net unrealized losses on
current marketable securities:
Balance at beginning of period...... $ 713 $ 412 $ ---
Addition-charge against
shareholders' equity............... 163 301 412
----- ----- -----
Balance at end of period............ $ 876 $ 713 $ 412
===== ===== =====
</TABLE>
57
<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 15th day of
October, 1996.
The Diana Corporation
By /s/ R. Scott Miswald
Vice President, Treasurer and
Controller
58
<PAGE>
EXHIBIT 11
THE DIANA CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
Fiscal Year Ended
March 30, April 1, April 2,
1996 1995 1994
(In Thousands, Except Per Share Data)
<S> <C> <C> <C>
Primary
Average shares outstanding............. 4,401 4,224 4,002
Net effect of dilutive stock options -
based on the treasury stock method
using average market price............ --- --- 106
------ ------ ------
Total.................................. 4,401 4,224 4,108
====== ====== ======
Net earnings (loss).................... $(3,365) $ (720) $ 3,453
====== ====== ======
Per share amount....................... $ (.76) $ (.17) $ .84
====== ====== ======
Fully diluted
Average shares outstanding............. 4,401 4,224 4,002
Net effect of dilutive stock options-
based on the treasury stock method
using the greater of average market
price or year end market price........ --- --- 253
------ ------ ------
Total.................................. 4,401 4,224 4,255
====== ====== ======
Net earnings (loss).................... $(3,365) $ (720) $ 3,453
====== ====== ======
Per share amount....................... $ (.76) $ (.17) $ .81
====== ====== ======
</TABLE>
<PAGE>
EXHIBIT 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statement on Form S-3 and in the
Registration Statement on Form S-8 listed below of The Diana Corporation of
our report dated June 27, 1996, except as to the stock dividend described in
Note 17 which is as of October 2, 1996, on the financial statements of The
Diana Corporation included in this Annual Report on Form 10-K.
1. Registration Statement on Form S-3
(Registration No. 33-88392)
2. Registration Statement on Form S-8
(Registration No. 33-67188)
PRICE WATERHOUSE LLP
Milwaukee, Wisconsin
October 11, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-67188) pertaining to The Diana Corporation 1986
Nonqualified Stock Option Plan and the Registration Statement (Form S-3 No.
33-88392) of The Diana Corporation and in the related Prospectus of our
report dated June 2, 1995, with respect to the consolidated financial
statements and schedules of The Diana Corporation included in the Annual
Report (Form 10-K/A, Amendment No. 1) for the fiscal year ended March 30,
1996.
Milwaukee, Wisconsin ERNST & YOUNG LLP
October 11, 1996
OPERATING AGREEMENT
OF
SATTEL COMMUNICATIONS LLC
a California limited liability company
THIS OPERATING AGREEMENT is made and entered into as
of the 1st day of April, 1996, by and among Sattel Communications
Corp., a Nevada corporation ("Sattel") and those individuals
entering into Agreements Regarding Award of Class B Units
referred to in Section 2.3, below, concurrently with this
Agreement. Capitalized terms used herein without definition
shall have the meanings assigned thereto in Exhibit A, hereto.
WHEREAS, Sattel, in order to encourage certain key
employees of Sattel and other key contributing individuals to put
forth their best effort for the success of Sattel, wish to give
said persons an equity stake in the business; and
WHEREAS, it has been determined that the most effective
way to achieve this goal is to transfer the assets of Sattel to a
newly-formed California limited liability company, Sattel
Communication LLC (the "Company"), and to award such persons
rights to profits' interests therein subject to certain
restrictions.
NOW, THEREFORE, in consideration of the mutual promises
made herein, the parties hereby agree to manage and operate the
Company pursuant to this Agreement as follows:
ARTICLE I
General Provisions
1.1. Name. The name of the Company is "Sattel
Communications LLC."
1.2. Purpose. The purpose of the Company is to engage
in any lawful act or activity for which a limited liability
company may be organized under the California Act.
1.3. Term. Unless dissolved earlier pursuant to other
provisions of this Agreement, the Company shall dissolve on
December 31, 2046.
1
<PAGE>
1.4. Registered Office and Agent.
(a) Initial Office and Agent in California. The
Company's registered office shall initially be 9145 Deering
Avenue, Chatsworth, California 91311 and the Company's
registered agent shall initially be Keith Steffel.
(b) Changes. The Board of Directors may from
time to time designate a new registered agent and may from
time to time change the registered office if the Board of
Directors determines such appointment or change to be
appropriate.
ARTICLE II
Capital and Voting
2.1. Units. The equity of the Company shall be
divided into Class A Units and Class B Units. Each Class A Unit
and Class B Unit shall be entitled to one vote on all matters put
to a vote or the consent of the Members.
2.2. Class A Units. In exchange for the Capital
Contribution set forth on Exhibit C hereto (subject to assumption
by the Company of the liabilities specified in such Exhibit),
Sattel will be the holder of 8,000 Class A Units. The execution
of documentation effecting such Capital Contribution (subject to
assumption of such liabilities) will occur concurrently with the
execution of this Agreement (to be signed on behalf of the
Company by the Chief Executive Officer of the Company).
2.3. Class B Units. No Capital Contributions shall be
required in exchange for Class B Units, except as may be required
by the Board of Directors with respect to Class B Units awarded
in the future as provided below. Concurrently with the execution
of this Agreement, certain individuals are entering into
Agreements Regarding Award of Class B Units, having varying
terms, under which they are becoming members holding Class B
Units and parties to this Agreement. Each such agreement, as
well as each future agreement regarding the award of additional
Class B Units, will be considered a part of this Agreement, and
incorporated herein by reference, with respect to rights and
obligations as between the Company and the individual entering
into the agreement. The Board of Directors of the Company may in
the future award additional Class B Units to key employees of the
Company as well as other individuals as determined to be
appropriate by the Board of Directors from time to time. Such
2
<PAGE>
awards will result in a dilution of the other Members' interests
in the Company.
2.4. Return of Capital. No Member is entitled to
withdraw from the Company or receive a return of any part of his
Capital Contribution, except as expressly provided in this
Agreement. No member of the Company has the right to demand that
distributions be in kind.
2.5. Additional Capital Contributions. No Member may
be required to make additional Capital Contributions. If the
Board of Directors determines that the Company needs additional
equity capital, each Member shall be entitled to contribute that
portion of the required equity capital as equals the percentage
of Units which he holds. The Board of Directors may award
additional Class A Units in connection with such contributions.
Failure to make such contribution will result in a dilution of
any non-contributing Member's interest in the Company.
2.6. Members. The members of the company are Sattel,
those individuals entering into Agreements Regarding Award of
Class B Units referred to in Section 2.3, any other person or
entity to whom Class A Units or Class B Units are awarded under
this Article II (such person or entity to become a member upon
such award), and any successors thereto admitted as members to
the Company in accordance with this Agreement.
ARTICLE III
Capital Accounts
3.1. Capital Accounts. There shall be established and
maintained with respect to each Member a capital account
("Capital Account") in accordance with the following:
(a) Credits. To each Member's Capital Account
there shall be credited such Member's Capital Contributions
and such Member's allocable share of Profits pursuant to
Article V, below.
(b) Debits. To each Member's Capital Account
there shall be debited the amount of cash and the Asset
Value of any property distributed to such Member and such
Member's allocable share of Losses pursuant to Article V,
below.
(c) Transfers. In the event any Member assigns
all or any part of his Units in accordance with the terms of
this Agreement, his transferee shall succeed to the Capital
3
<PAGE>
Account of the transferor to the extent it relates to the
transferred Units.
3.2. Interpretation. The provisions of Section 3.1,
above, and the other provisions of this Agreement relating to the
maintenance of Capital Accounts are intended to comply with
Section 1.704-1(b) of the Treasury Regulations and shall be
interpreted and applied in a manner consistent therewith.
ARTICLE IV
Distributions
4.1. Current Distributions.
(a) Current Tax Distributions. To the extent
permitted by law and consistent with the Company's
obligations to its creditors as determined by the Board of
Directors, the Company shall make Tax Distributions on or
before the Tax Distribution Dates. The aggregate amount of
the Tax Distribution made with respect to any given Tax
Distribution Date shall be the product of (i) the estimated
federal taxable income of the Company under the provisions
of the Code, for the Fiscal Period ending on the last day of
the calendar month immediately preceding the Tax Distribu-
tion Date and commencing on the first day of the calendar
month that includes the immediately previous Tax Distribu-
tion Date, multiplied by (ii) the Tax Rate. Notwithstanding
the foregoing, to the extent the Company has had an
estimated federal taxable loss for any prior Fiscal Period
in that Fiscal Year, the amount in clause (i) above shall be
reduced by that portion of the loss remaining after reducing
taxable income for prior Fiscal Periods in such Fiscal Year
for the loss. Each Member shall receive a Tax Distribution
proportional with the amount of federal taxable income to be
allocated to such Member pursuant to Article V hereof.
(b) Additional Tax Distributions. In the event
any income tax return of the Company, as a result of an
audit or otherwise, reflects items of income, gain, loss, or
deduction which are different from the amounts estimated
pursuant to Section 4.1(a) above with respect to the Fiscal
Year of such return in a manner that results in additional
income or gain of the Company being allocated to the
Members, an additional Tax Distribution shall be made under
the principles of Section 4.1(a) above, except that (i) the
last day of the calendar month in which such adjustment
occurs shall be treated as a Tax Distribution Date, and (ii)
4
<PAGE>
the amount of such additional income or gain shall be
treated as the federal taxable income of the Company.
(c) Cash Available for Distribution. Upon the
approval of the Board of Directors, Cash Available for
Distribution shall be distributed to the Members in
proportion to the number of Units held by each Member.
4.2. Distributions of Cash Available from a Capital
Event. Cash Available from a Capital Event shall be distributed
among the Members as follows:
(a) First, an amount equal to (or in proportion
to if less than) $2,525,253 shall be distributed 99% to the
Class A Members and 1% to the Class B Members in proportion
to the number of Units held by the respective classes of
Members; and
(b) The balance, if any, shall be distributed to
the Members in proportion to the number of Units held by
each Member.
4.3. Liquidating Distribution. In the event the
Company is liquidated pursuant to Article IX, below, distribu-
tions pursuant to Section 8.3(d), below, shall be distributed to
the Members in accordance with their Capital Account balances,
after making the adjustments for allocations under Article V,
below, up to and including the date of the liquidating
distribution.
ARTICLE V
Allocation of Profits and Losses
5.1. Allocation of Profits. Except as provided in
Exhibit D hereto, Profits shall be allocated among the Members in
accordance with the following provisions:
(a) First, 99% to the Class A Units and 1% to the
Class B Units, in proportion to the number of Units held by
the respective classes of Members, until the Class A Units
have been allocated Profits which equal the sum of (i) the
amount of Losses allocated to the Class A Members pursuant
to Section 5.2 hereof (expressed as a positive number) and
(ii) $2.5 million less (iii) their initial Capital Accounts;
and
(b) The balance among the Members in proportion
to the Units held by each Member.
5
<PAGE>
5.2. Allocation of Losses. Except as provided in
Exhibit D hereto, Losses shall be allocated among the Members in
proportion to the allocation of Profits pursuant to Section 5.1
above, except that to the extent Losses exceed all prior Profits
reduced by prior distributions pursuant to Article IV hereof,
such Losses shall be allocated among the Members holding Class A
Units in proportion to the Units held by each Class A Member,
provided, however, that no allocation shall be made to any Member
to the extent that such allocation would produce an Adjusted
Capital Account Deficit within the meaning of Section 1.704-
1(b)(2)(ii)(d) of the Treasury Regulations.
ARTICLE VI
Management of the Company
6.1. Authority and Powers of the Board of Directors.
(a) Authority. Except as otherwise provided in
this Agreement, the Members hereby delegate to the Board of
Directors, on behalf of and as agent for the Members, all of
the Member's rights and powers to do all acts necessary,
convenient or incidental to carrying out the business of the
Company. The Board of Directors shall have all of the
rights, powers and obligations of the members of a limited
liability company, the management of which has been reserved
to its members under the California Act.
(b) No Other Representatives. Except as other-
wise provided in this Agreement, only the Board of
Directors, and the Officers acting under its direction,
shall have the right, power and authority to act and
transact business on behalf of the Company, and no Member,
in his capacity as such, shall have the authority to act or
transact business on behalf of the Company in any manner.
6.2. Structure of the Board of Directors.
(a) Number, Tenure and Qualifications of Direc-
tors. The Directors shall be elected by Majority Consent.
The number of Directors of the Company shall be eight (8)
unless provided otherwise by Majority Consent. Members of
the Board of Directors need not be members of the Company.
(b) Withdrawal of Director. Unless otherwise
provided by Majority Consent, an individual shall cease to
be a Director upon the earliest to occur of any of the
following: (i) his voluntary resignation, which shall be
effective upon delivery of a written notice from him to the
6
<PAGE>
Company unless the notice specifies a later effective date;
(ii) his removal by Majority Consent; or (iii) his death,
incapacity or inability to act as a Director for any reason.
(c) Effect of Withdrawal. If a Director ceases
to be a Director for any reason, the remaining Director or
Directors, if any, shall continue to act as such unaffected
thereby. Upon withdrawal of a Director the Members shall,
as promptly as practicable, choose a substitute Director as
provided in Section 6.2(a), above. If the Company at any
time lacks Directors, the Members shall perform the duties
of the Board of Directors by Majority Consent unless and
until the Members elect by Majority Consent a substitute
Director or Directors. The lack of Directors shall not
cause a dissolution or termination of the Company.
6.3. Actions by Board of Directors. Any actions of
the Board of Directors shall be taken in the manner set forth
below.
(a) Manner of Acting. The consent of the Direc-
tors to any act or failure to act may be given at a meeting
in which a majority in number of the Directors participate
in person or by telephone or other electronic means.
Consent to any act or failure to act shall be deemed given
at a meeting of the Board of Directors if approved by the
affirmative vote of a majority of the Directors.
Alternatively, the Directors may act by unanimous written
consent without the need for a meeting.
(b) Meetings. Meetings of the Board of Directors
may be called by the president of the Company or by any one
Director. Meetings not held by electronic means shall be
held at the principal place of business of the Company or at
such other place as may be designated by a majority in
number of the Directors.
(c) Voting. Each Director shall be entitled to
one vote. Any Director abstaining from voting on a given
matter shall be deemed to have voted in the same manner as
the majority, if any, of the Directors not abstaining from
voting on that issue. Any Director having a personal stake,
other than the economic stake inuring to the Director solely
as a result of holding Units or of his employer holding
Units, in the outcome of an issue, including, but not
limited to, a personal stake as a transferor of Units, shall
abstain from voting on the issue unless all Directors have
such a personal stake.
7
<PAGE>
(d) Notice. No matter shall be voted upon at a
meeting of the Board of Directors unless at least twenty-
four (24) hours notice of such matter is given or such
notice is waived by any Director not receiving it. A Direc-
tor shall be deemed to have waived notice of any matter
acted upon at any meeting he attends or in which he partici-
pates unless at the beginning of the meeting or promptly
upon commencement of his participation therein he objects to
the consideration of such matter because of lack of proper
notice. No prior notice shall be required for any action
taken by written consent of the Directors.
(e) Expenses. All reasonable and customary out-
of-pocket expenses incurred by a Director in connection with
the Company's business shall be paid by the Company or be
reimbursed to the Director by the Company.
(f) Emergency Actions. Notwithstanding any other
provisions of this Article VI, if Directors who could
authorize an action or decision at a duly called meeting
reasonably determine, in writing, that the Company is facing
a significant business emergency that requires immediate
action, those Directors may, without complying with gener-
ally applicable procedures for meetings or actions by
unanimous consent, authorize any action or decision that
they deem reasonably necessary to allow the Company to
benefit from a significant opportunity or to protect the
Company from significant loss or damage, provided that they
make reasonable efforts under the circumstances to contact
and consult all Directors concerning the action or decision
and the reason why the action or decision must be made
without observing generally applicable procedures.
6.4. Officers.
(a) Number of Officers. The Officers of the
Company may consist of the offices of chief executive
officer, president and chief operating officer, one or more
vice-presidents, secretary, and chief financial officer and
treasurer, each of whom shall be appointed by the Board of
Directors and shall have such authority from the Board of
Directors as is provided below or as is specially authorized
by the Board of Directors. The Board of Directors may
appoint such other Officers and assistant Officers as it
deems necessary. If specifically authorized by the Board of
Directors, an Officer may appoint one or more Officers or
assistant Officers. The same individual may simultaneously
hold more than one office in the Company.
8
<PAGE>
(b) Appointment and Term of Office. The Officers
of the Company shall be appointed by the Board of Directors
for such term as is determined by the Board of Directors.
Officers need not be members of the Company. If no term is
specified, they shall hold office until their removal or
resignation. The appointment of an Officer or the designa-
tion of a specified term does not grant to the Officer any
contract rights, and the Board of Directors may remove the
Officer, with or without cause, at any time. Such removal
shall be without prejudice to any rights created pursuant to
an agreement, if any, with the individual so removed.
(c) Chief Executive Officer. The chief executive
officer shall be the principal executive officer of the
Company and, subject to the control of the Board of
Directors, shall in general supervise and control all of the
business and affairs of the Company and its officers. He
may sign certificates, deeds, mortgages, bonds, contracts,
leases or other documents or instruments necessary or proper
to be executed in the course of the Company's regular busi-
ness or which the Board of Directors has authorized to be
executed, except in cases where the signing and execution
thereof shall be expressly delegated by the Board of
Directors to some other Officer or agent of the Company, or
shall be required by law to be otherwise signed or executed,
and he in general shall perform all duties incident to the
office of chief executive officer and such other duties as
may be prescribed by the Board of Directors from time to
time. Except as otherwise provided by the Board of
Directors, the chief executive officer may authorize the
president or other Officer or agent of the Company to sign,
execute, and acknowledge such documents or instruments in
his place and stead.
(d) President and Chief Operating Officer. In
the absence of the chief executive officer or in the event
or his death, inability or refusal to act, the president and
chief operating officer shall perform the duties of the
chief executive officer, and when so acting shall have all
the powers and duties of the chief executive officer. In
addition, the president and chief operating officer shall be
responsible for the administration and management of the
areas of the business and affairs of the Company assigned to
him from time to time by the Board of Directors or the chief
executive officer.
(e) Vice-Presidents. In the absence of the
president and chief operating officer, or in the event of
his death, inability or refusal to act, the vice-president,
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if one has been elected (or in the event that there is more
than one, the vice-presidents in the order designated by the
Board of Directors, or in the absence of designation, then
in the order of their appointment), shall perform the duties
of the president and chief operating officer, and when so
acting, shall have all the powers of and be subject to all
the restrictions on the president and chief operating
officer. Any vice-president shall perform such duties as
from time to time may be assigned to him by the president
and chief operating officer or by the Board of Directors.
(f) Secretary. The secretary shall: (i) keep
the minutes of the proceedings of the Board of Directors in
one or more books provided for that purpose; (ii) see that
all notices are duly given in accordance with the provisions
of Section 6.3(d) above; (iii) be custodian of the records
of the Company, including all records required to be
maintained by the Company pursuant to Section 17058 of the
California Act; (iv) when requested or required, authenti-
cate any records of the Company; (v) keep a register of the
address of each Member; and (vi) in general perform all
duties incident to the office of secretary and such other
duties as from time to time may be assigned to him by the
chief executive officer or by the Board of Directors.
(g) Chief Financial Officer and Treasurer. The
chief financial officer and treasurer shall: (i) have
charge and custody of and be responsible for all funds and
securities of the Company; (ii) receive and give receipts
for moneys due and payable to the Company from any source
whatsoever, and deposit all such moneys in the name of the
Company in such bank, trust company, or other depository as
shall be selected by the Board of Directors; and (iii) in
general perform all of the duties incident to the office of
chief financial officer and treasurer and such other duties
as from time to time may be assigned to him by the chief
executive officer or by the Board of Directors.
(h) Assistant Secretaries and Assistant Trea-
surers. The assistant secretaries and assistant treasurers,
if any, shall in general perform such duties as shall be
assigned to them by the secretary or the treasurer, respec-
tively, or by the chief executive officer or the Board of
Directors.
6.5. Limitation on Liability of the Directors and
Officers; Indemnification. No Director or Officer shall be
liable, responsible or accountable in damages or otherwise to the
Company or the Members for any act or omission pursuant to the
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authority granted by this Agreement if the Director or Officer,
as the case may be, acted in good faith and in a manner he
reasonably believed to be within the scope of the authority
granted to him by this Agreement and in or not opposed to the
best interests of the Company, provided that the Director or
Officer, as the case may be, shall not be relieved of liability
in respect of any claim, issue, or matter as to which he shall
have been finally adjudicated to have breached this Section 6.5
or violated Section 17153 of the California Act. The Company
shall defend, indemnify, save harmless and pay all judgments,
claims, costs or expenses (including reasonable attorneys' fees)
incurred by the parties indemnified hereunder. The Company shall
advance costs or expenses (including reasonable attorneys' fees)
to the indemnified parties so long as each indemnified party
undertakes to repay such amounts if he or she is adjudicated not
to be entitled to indemnification hereunder.
6.6. Actions by Members. Any actions of the Members
shall be taken in the manner set forth below.
(a) Manner of Acting. Except as otherwise
provided in this Agreement, the consent of the Members to
any act or failure to act may be given by Majority Consent
at a meeting in which a quorum of such Members participate
in person or by telephone or other electronic means.
Members holding sufficient Units to give Majority Consent to
the action taken at any meeting shall constitute a quorum of
the Members at such meeting. Alternatively, the Members may
act by unanimous written consent without the need for a
meeting.
(b) Meetings. Meetings of the Members may be
called by the President or by any Director of the Company.
Meetings not held by electronic means shall be held at the
principal place of business of the Company or at such other
place as may be designated by Majority Consent of the
Members.
(c) Voting. Each Unit shall be entitled to one
vote. Each Member shall vote all of the Units held by him
in the same manner as to any given matter submitted for
consent.
(d) Notice. No matter shall be voted upon at a
meeting of Members unless at least forty-eight (48) hours
notice of such matter is given or such notice is waived by
any Member not receiving it. A Member shall be deemed to
have waived notice of any matter acted upon at any meeting
which he attends or in which he participates unless at the
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beginning of the meeting or promptly upon commencement of
its participation therein he objects to the consideration of
such matter because of lack of proper notice. No prior
notice shall be required for any action taken by written
consent.
6.7. Other Permissible Activities. Any Member of the
Company may engage in or possess interests in other business
ventures of every kind and description, for his own account or
otherwise, including, but not limited to, any customers, suppli-
ers or other persons transacting business with the Company, and
nothing in this Agreement shall be deemed to prohibit any Member
or his Affiliates from investing in, dealing with or otherwise
engaging in business with any person transacting business with
the Company. Neither the Company nor any of its Members shall
have any rights by virtue of this Agreement, by the relationship
created hereby, or by the Articles of Organization in or to such
other business ventures or to the income or profits derived
therefrom, and the pursuit of such ventures shall not be deemed
wrongful or improper.
6.8. Initial Directors and Officers. The initial
members of the Board of Directors and the initial Officers of the
Company shall be as listed in Exhibit E to this Agreement.
ARTICLE VII
Transfer of Units
7.1. Transferability of Class A Units. No Member
holding Class A Units of the Company may sell, assign,
hypothecate, or in any way transfer (the foregoing being
hereinafter referred to as a "transfer") any Class A Units which
it may now own or hereinafter acquire, whether voluntarily or by
operation of law. Upon any such transfer, the Company
immediately shall be dissolved.
7.2. Transferability of Class B Units. No Member
holding Class B Units of the Company may voluntarily sell,
assign, hypothecate, or in any way transfer the Class B Units
which he may now own or hereinafter acquire, except in accordance
with any agreement governing Class B Units between such Member
and the Company.
7.3. Right of Transferee to Become a Member. Any
transferee of Class B Units pursuant to an involuntary transfer
of a Member's interest therein, or pursuant to an agreement of
the kind referred to in Section 7.2, is only entitled to an
economic interest in said Class B Units (within the meaning of
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Section 17001(n) of the California Act). The transferee may only
become a member of the Company with the consent of those Members
holding a majority of the Units, determined by excluding the
Class B Units held by the transferring Member, which consent may
be withheld for any reason whatsoever.
ARTICLE VIII
Dissolution, Termination and
Liquidation of the Company
8.1. Events Causing Dissolution. The Company shall be
dissolved upon either (a) the bankruptcy (within the meaning of
Section 17001(c) of the California Act) or insolvency of any of
the Members, unless otherwise provided below, (b) the approval of
such dissolution by the Board of Directors or the Members by
Majority Consent, (c) the expiration of the term set out in
Section 1.3 hereof or (d) the entry of a decree of dissolution
pursuant to Section 17351 of the California Act. The Company
shall not be dissolved upon any other event. Upon the occurrence
of an event set out in subsection (a) hereof to a holder of Class
B Units, the Company shall dissolve unless the business of the
Company is continued by the affirmative vote of those Members
holding a majority of the dollar value of the Capital Accounts
and a majority of the Units, determined by excluding the Capital
Account and Units held by the affected Class B Unit holder.
8.2. Termination. Dissolution of the Company shall be
effective on the date on which the occurrence under Section 8.1,
above, occurs (unless the Members vote to continue the Company
pursuant thereto), but the Company shall not terminate until a
Certificate of Dissolution has been duly filed under the
California Act, the affairs of the Company have been wound up,
and the assets of the Company have been distributed as provided
in Section 8.3, below. Notwithstanding the dissolution of the
Company, prior to the liquidation and termination of the Company,
the business of the Company and the affairs of its Members, as
such, shall continue to be governed by this Agreement.
8.3. Distribution of Assets Upon Termination.
(a) Upon the dissolution of the Company pursuant
to Section 8.1, unless the Company is continued pursuant
thereto, a designated Officer (or if there is none, a person
approved by Majority Consent as the liquidating trustee of
the Company (the "Liquidating Trustee")), shall proceed
diligently to wind up the affairs of the Company and
distribute its assets in accordance with the provisions of
Section 8.3(d).
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(b) All saleable assets of the Company may be
sold in connection with any dissolution at public or private
sale or at such price and upon such terms as the designated
Officer or the Liquidating Trustee, as the case may be, may
deem advisable. A Member or any partnership, corporation or
other entity in which a Member is in any way interested may
purchase assets at such sale. The designated Officer or the
Liquidating Trustee, as the case may be, in its sole and
absolute discretion, may in accordance with Section 8.3(d)
distribute the assets of the Company in kind on the basis of
the fair market value thereof.
(c) Profits and Losses of the Company shall be
determined as of the end of the period of winding up in
accordance with the provisions of this Agreement and shall
be credited or charged to the respective Capital Accounts of
the Members.
(d) Upon the dissolution and winding up of the
Company, the assets of the Company shall be distributed in
the following order of priority to the extent available:
(i) First, to creditors of the Company in
satisfaction of any debts and liabilities of the
Company (except for any loans made by Members) whether
by payment or the establishment of any reserve which
the designated Officer or the Liquidating Trustee deems
necessary in its sole discretion to provide for any
contingent, conditional or unmatured liabilities or
obligations of the Company; at the expiration of such
period of time as the authorized Officer or the
Liquidating Trustee, as the case may be, deems advis-
able, the balance remaining in any such reserve after
payment of any such liabilities and obligations shall
be distributed in the manner hereinafter set forth in
this Section 8.3(d);
(ii) Second, to the Members that have made
loans to the Company pro rata (in accordance with the
amount of principal of such loans then outstanding)
until each shall have received the outstanding princi-
pal of, and accrued and unpaid interest on, such loans;
and
(iii) Third, to the Members, in an amount
equal to the positive balances in their respective
Capital Accounts in proportion to such positive
balances.
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All distributions pursuant to this Section 8.3(d) shall be made
no later than the later of (i) the end of the Fiscal Year during
which the liquidation of the Company occurs or (ii) 180 days
after the date of such liquidation.
8.4. Limitation on Liability. Each holder of a Unit
shall look solely to the assets of the Company for all distribu-
tions from the Company and the return of his Capital Contribution
thereto and shall have no recourse (upon dissolution or other-
wise) against any other Members, Officers, Directors or any of
their Affiliates.
ARTICLE IX
Miscellaneous
9.1. Books and Records. Books and records of the
Company shall be maintained at the principal office of the Com-
pany or at any other place designated by the Board of Directors
and shall be available for examination by any Member or his duly
authorized representative(s) at any reasonable time for a proper
purpose. Among the books and records maintained shall be those
required by Section 17058 of the California Act.
9.2. Amendments to Operating Agreement. Any amendment
or modification hereof or the Articles of Organization of the
Company shall be valid if in writing and approved by Majority
Consent, provided, however, that the holders of Class B Units
shall be entitled to vote as a class on any matter which will
adversely affect the rights of the Class B Units. Notwith-
standing the foregoing, an amendment or modification of any
agreement regarding Units between the Company and a holder of
Units may be modified or amended only by a written agreement
between the Company and such holder.
9.3. Binding Provisions. The covenants and agreements
contained herein shall be binding upon, and inure to the benefit
of, the successors and assigns of the respective parties hereto.
This Agreement shall not inure to the benefit of any person other
than the parties hereto, and no third party beneficiary claims
may be based on this Agreement.
9.4. Governing Law. This Agreement shall be construed
and interpreted in accordance with the internal laws of
California, without application of choice of law principles.
9.5. Arbitration. All disputes and differences of any
kind arising under this Agreement, including any dispute as to
the existence or validity of this Agreement or the arbitrability
15
<PAGE>
of any particular issue which cannot be settled amicably by the
parties, shall be finally settled in an arbitration to be
conducted under the rules of the American Arbitration Association
(the "AAA") by a single arbitrator selected under the rules of
the AAA. Any such arbitration proceeding shall be conducted in
English and shall be held at a site in the United States selected
under the rules of the AAA. The decision of any such arbitrator
shall be final and binding upon the parties and may be enforced
in any court of competent jurisdiction, and no party shall seek
redress against any other in any court or tribunal except solely
for the purpose of obtaining execution of any arbitral award or
of obtaining a judgment consistent therewith.
9.6. Notices. Unless otherwise provided herein, all
notices, requests, demands and other communications hereunder
shall be in writing and shall be deemed to have been duly given
when personally delivered, when delivered by reputable courier
service, when transmitted by facsimile, or five (5) business days
after being mailed, certified mail, with postage prepaid,
addressed as follows (or to such other person or address as the
Company, Director or Member may have designated from time to time
by notice in writing pursuant hereto): if to the Company, c/o
Chairman, The Diana Corporation, 8200 West Brown Deer Road,
Milwaukee, Wisconsin 53223, or if to a Director or Member, to
the address of the Director or Member, as the case may be, stated
in the Company's records.
9.7. Entire Agreement. This Agreement, and any agree-
ments being executed in connection herewith, embody the entire
agreement and understanding between the parties and supersede all
prior agreements and understandings relating to the Company.
There are no representations, warranties, covenants, promises or
agreements on the part of any party to another person which are
not explicitly set forth herein and/or in the appendices hereto.
9.8. Specific Performance. The parties hereto declare
that it is impossible to measure in money the damages which may
be suffered by a party by reason of the failure of another party
to perform any of its obligations under this Agreement or under
any of the agreements that may be executed pursuant hereto.
Accordingly, the parties agree that the provisions of this
Agreement and each of the agreements that may be executed pursu-
ant hereto may be specifically enforced, and if any arbitration
proceeding shall be instituted to enforce the provisions hereof
or any of the agreements that may be executed pursuant hereto,
the party against whom the same is brought and its successors and
assigns shall waive any claim or defense that the party bringing
such action may be compensated adequately with money damages,
shall not urge such claim or defense in any such proceeding and
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<PAGE>
shall consent to an order granting specific performance of this
Agreement or any agreement that may be executed pursuant hereto.
9.9. Headings. The headings to the Articles and
Sections of this Agreement are for reference only and shall not
be used in construing the provisions hereof or otherwise affect
the meaning hereof.
9.10. Interpretation. When the context in which words
are used in this Agreement indicates that such is the intent,
words in the singular shall include the plural and vice versa,
and pronouns in the masculine shall include the feminine and
neuter and vice versa.
IN WITNESS WHEREOF, the undersigned has executed this
Agreement as of the date first above written.
SATTEL COMMUNICATIONS CORP.
/s/ Richard Y. Fisher, President
The individuals entering into Agreements Regarding
Award of Class B Units referred to in Section 2.3, above,
concurrently with this Agreement, by their execution and delivery
of such agreements, have also become parties to this Agreement.
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ACKNOWLEDGEMENT
THE UNDERSIGNED hereby acknowledges that Exhibit B
hereto contains a true and correct copy of the Articles of
Organization filed by me with the California Secretary of State
to organize the Company.
/s/ Debra S. Koenig, Organizer
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EXHIBIT A
Definitions
For purposes of this Agreement, the following terms
shall have the meanings set forth below and any derivatives of
such terms shall have correlative meanings:
"Affiliate" means, as to any Person, another Person
which controls the first Person or which the first Person
controls or which is under common control with the first Person.
The term "control" shall mean the power to elect a majority of
the Board of Directors or other governing body of a Person or the
power to direct the affairs of such Person, whether by reason of
ownership of voting stock or other equity interest, by contract
or otherwise.
"Agreement" means the Operating Agreement dated
February 20, 1996 of Sattel Communications LLC, a California
limited liability company.
"Articles of Organization" means the Articles of
Organization of the Company as filed with the Secretary of State
of California, as amended, a copy of which is attached to the
Agreement as Exhibit B.
"Asset Value" means as of any date, with respect to any
asset, the asset's adjusted basis for federal income tax purposes
as of such date, except as follows:
(i) The initial Asset Value of any asset con-
tributed by a Member to the Company shall be the gross
fair market value of such asset, as reasonably determined by
the Board of Directors;
(ii) The Asset Values of all assets of the Com-
pany shall be adjusted to equal their respective gross fair
market values, as reasonably determined by the Board of
Directors, as of the following times: (a) the acquisition
of additional Units by any new or existing Member in
exchange for more than a de minimis Capital Contribution;
(b) the distribution by the Company to a Member of more than
a de minimis amount of the Company's property as considera-
tion for Units if the Board of Directors reasonably deter-
mines that such adjustment is necessary or appropriate to
reflect the relative economic interests of the Members; and
(c) the liquidation of the Company within the meaning of
Section 1.704-1(b)(2)(ii)(g) of the Treasury Regulations;
(iii) The Asset Value of any asset of the Company
distributed to any Member shall be the gross fair market
<PAGE>
value of such asset on the date of distribution reasonably
determined by the Board of Directors;
(iv) The Asset Value of the assets of the Company
shall be increased (or decreased) to reflect any adjustments
to the adjusted basis of such assets pursuant to Sections
734(b) or 743(b) of the Code, but only to the extent
required by Section 1.704-1(b)(2)(iv)(m) of the Treasury
Regulations; provided, however, that Asset Values shall not
be adjusted pursuant to this clause (iv) to the extent the
Board of Directors reasonably determines that an adjustment
pursuant to clause (ii), above, is necessary or appropriate
in connection with a transaction that otherwise would result
in an adjustment pursuant to this clause (iv); and
(v) If the Asset Value of an asset has been
determined or adjusted pursuant to clause (i), (ii), or
(iv), above, such Asset Value shall thereafter be adjusted
by the Depreciation taken into account with respect to such
asset for purposes of computing Profits and Losses.
"Board of Directors" means the Directors acting as a
group pursuant to the provisions of Article VI of this Agreement.
"California Act" means the Beverly-Killea Limited
Liability Company Act, as amended from time to time.
"Capital Contribution" means the gross amount of cash,
property, services rendered, or promissory notes or other written
obligations to provide cash or property or to perform services,
in each case at its Asset Value, contributed to the Company by
any Member with respect to his Units in accordance with the terms
of this Agreement.
"Capital Event" means a sale, transfer, conveyance, or
disposition of Company assets, whether or not in contemplation of
or in connection with a liquidation of the Company, which assets
have a fair market value greater than 25% of the aggregate fair
market value of all of the Company's assets.
"Cash Available for Distribution" means Cash Flow less
Tax Distributions.
"Cash Available from a Capital Event" means cash
proceeds realized by the Company from a Capital Event less (i)
the payment of all expenses related to the generation of such
cash proceeds, (ii) the payment of indebtedness which the Board
of Directors determines must or should be paid with proceeds from
the Capital Event, and (iii) reserves established in the sole
discretion of the Board of Directors.
<PAGE>
"Cash Flow" means cash funds provided from the
operation of the Company's business, excluding a Capital Event,
without deduction for depreciation, but after deducting cash
funds used to pay all other expenses, debt payments, capital
improvements and replacements and amounts set aside for the
restoration or creation of reserves.
"Code" means the Internal Revenue Code of 1986, as
amended (or any corresponding provisions of succeeding law).
"Company" means Sattel Communications LLC.
"Depreciation" means, for each Fiscal Year of the
Company, an amount equal to the depreciation, amortization, or
other cost recovery deduction allowable with respect to an asset
for such Fiscal Year under the Code, except that if the Asset
Value of an asset differs from its adjusted basis for federal
income tax purposes at the beginning of such Fiscal Year, Depre-
ciation shall be an amount that bears the same ratio to such
beginning Asset Value as the federal income tax depreciation,
amortization, or other cost recovery deduction for such Fiscal
Year bears to such beginning adjusted tax basis; provided,
however, that if the adjusted basis for federal income tax
purposes of an asset at the beginning of such Fiscal Year is
zero, Depreciation shall be determined with reference to such
beginning Asset Value using any reasonable method selected by the
Board of Directors consistent with the purpose and intent hereof.
"Director" means any person appointed to serve on the
Board of Directors pursuant to Article VI of this Agreement.
"Fiscal Period" means a portion of a Fiscal Year.
"Fiscal Year" means any 12-month period selected by the
Company from time to time as its fiscal year, provided that in
the year of the formation, sale or liquidation of the Company, a
Fiscal Year can be less than a 12-month period.
"Majority Consent" means the consent, determined in
accordance with Section 6.6 of this Agreement, of holders of more
than fifty percent (50%) of all Units at the time of such
consent, unless otherwise expressly provided in the Agreement.
"Member Nonrecourse Debt" has the meaning set forth for
Partner Nonrecourse Debt in Section 1.704-2(b)(4) of the Treasury
Regulations.
"Member Nonrecourse Debt Minimum Gain" means an amount,
with respect to each Member Nonrecourse Debt, equal to the
Minimum Gain that would result if such Member Nonrecourse Debt
<PAGE>
were treated as a Nonrecourse Liability, determined in accordance
with Section 1.704-2(i)(3) of the Treasury Regulations.
"Members" means the members of the Company described in
Section 2.5.
"Minimum Gain" has the same meaning as "partnership
minimum gain" as set forth in Sections 1.704-2(b)(2) and (d) of
the Treasury Regulations.
"Nonrecourse Deductions" has the meaning set forth in
Section 1.704-2(b)(1) of the Treasury Regulations. The amount of
Nonrecourse Deductions for a Fiscal Period of the Company equals
the net increase, if any, in the amount of Minimum Gain during
that Fiscal Period, determined according to the provisions of
Section 1.704-2(c) of the Treasury Regulations.
"Nonrecourse Liability" has the meaning set forth in
Section 1.704-2(b)(3) of the Treasury Regulations.
"Officers" means the individuals appointed as the
officers of the Company as provided in Section 6.8 or Section 6.4
of this Agreement.
"Person" means any individual, corporation, partner-
ship, joint venture, trust or unincorporated organization, a
government or any agency or political subdivision thereof or any
other entity.
"Profits" and "Losses" mean, for each Fiscal Period,
an amount equal to the Company's taxable income or loss for such
Fiscal Period, determined in accordance with Section 703(a) of
the Code (for this purpose, all items of income, gain, loss, or
deduction required to be stated separately pursuant to Section
703(a)(1) of the Code shall be included in taxable income or
loss), with the following adjustments:
(i) Any income of the Company that is exempt from
federal income tax and not otherwise taken into account in
computing Profits or Losses pursuant to this definition
shall be added to such taxable income or loss;
(ii) Any expenditures of the Company described
in Section 705(a)(2)(B) of the Code or treated as Section
705(a)(2)(B) expenditures described in Section 1.704-
1(b)(2)(iv)(i) of the Treasury Regulations, and not other-
wise taken into account in computing Profits or Losses
pursuant to this definition, shall be subtracted from such
taxable income or loss;
<PAGE>
(iii) In the event the Asset Value of any asset
of the Company is adjusted pursuant to the definition
thereof, the amount of such adjustment shall be taken into
account as gain or loss from the disposition of such asset
for purposes of computing Profits and Losses;
(iv) Gain or loss resulting from any disposition
of any property by the Company with respect to which gain or
loss is recognized for federal income tax purposes shall be
computed by reference to the Asset Value of the property
disposed of, notwithstanding that the adjusted tax basis of
such property differs from its Asset Value;
(v) In lieu of the depreciation, amortization,
and other cost recovery deductions taken into account in
computing such taxable income or loss, there shall be taken
into account Depreciation for such Fiscal Year or other
period; and
(vi) To the extent an adjustment to the adjusted
tax basis of any asset of the Company pursuant to Sections
734(b) or 743(b) of the Code is required pursuant to Section
1.704-1(b)(2)(iv)(m) of the Treasury Regulations to be taken
into account in determining Capital Accounts as a result of
a distribution other than in complete liquidation of a Mem-
ber's Units, the amount of such adjustment shall be treated
as an item of gain (if the adjustment increases the basis of
the asset) or loss (if the adjustment decreases the basis of
the asset) from the disposition of the asset and shall be
taken into account for purposes of computing Profits or
Losses.
"Sattel" means Sattel Communications Corp..
"Tax Distribution" means the amount distributed to
Members pursuant to Section 4.1(a) and (b).
"Tax Distribution Dates" means, except as provided in
Section 4.1(b), January 15, April 15, June 15 and September 15 of
each Fiscal Year commencing with June 15, 1996.
"Tax Rate" means the highest combined marginal income
tax rate for Federal and California purposes for the Fiscal
Period at issue applicable to corporations or individuals,
whichever is greater, assuming in determining the tax rate that
would apply to individuals maximum applicability of the phase-out
of itemized deductions contained in Section 68 of the Code.
"Treasury Regulations" means the regulations adopted
from time to time by the Department of the Treasury under the
<PAGE>
Code, and any references to "partners" or "partnership" therein
shall refer, as appropriate, to Members and the Company, respec-
tively.
"Units" means the Class A and Class B Units of the
Company into which the proprietary interests in the Company are
divided.
<PAGE>
EXHIBIT B
STATE OF CALIFORNIA
ACTING SECRETARY OF STATE
TONY MILLER
LIMITED LIABILITY COMPANY
ARTICLES OF INCORPORATION
1. Limited liability company name: Sattel Communications LLC
2. Latest date on which the limited liability company is to
dissolve: December 31, 2046
3. The purpose of the limited liability company is to engage in
any lawful act or activity for which a limited liability
company may be organized under the Beverly-Killea Limited
Liability Company Act.
4. Enter the name of initial agent for service of process and
check the appropriate provision below: Keith Steffel, which
is [x] an individual residing in California.
5. If the initial agent for service of process is an individual,
enter a business or residential street address in California:
9145 Deering Avenue, Chatsworth, California 91311.
6. The limited liability company will be managed by: [x] limited
liability company members
7. If other matters are to be included in the articles of
incorporation attach one or more separate pages. Number of
pages attached, if any: N/A
8. It is hereby declared that I am the person who executed this
instrument, which execution is my act and deed:
/s/ Debra S. Koenig, Organizer
Date: February 22, 1996
<PAGE>
EXHIBIT C
Sattel Capital Contribution
For its Class A Units, Sattel is transferring to the
Company all of its assets (excluding its interest in the
Company), subject to assumption by the Company of all of its
liabilities. These assets and liabilities include those listed
on the schedule attached hereto under the column titled "Final
03/31/96."
<PAGE>
The Diana Corporation
Sattel Communications
Lead Schedule
Final
03/31/96
--------
ASSETS
CURRENT ASSETS
Cash $ 913,301
Accounts receivable 0
Due from Sattel Technologies, Inc. 9,945
Inventories 1,087,422
Advance to Sattel Technologies, Inc. 221,378
Prepaid expenses 40,403
---------
2,272,449
Equipment - Net 167,499
Deferred Organization Costs 44,064
Other Assets 79,970
---------
Total Assets $2,563,982
=========
LIABILITIES AND CAPITAL
CURRENT LIABILITIES
Accounts payable 306,008
Unearned revenue 138,856
Accrued payroll 30,701
Accrued interest 17,391
Other accrued liabilities 8,077
---------
Total current liabilities 501,033
Note Payable to The Diana Corporation 1,425,000
Partner's Capital 637,949
---------
Total Liabilities and Capital $2,563,982
=========
<PAGE>
EXHIBIT D
Allocations in Extraordinary Situations
This Exhibit sets forth certain allocations that will
apply to the extent and under the circumstances provided below in
lieu of the allocation provided in Article V of the Agreement.
In no event will an allocation or distribution under the
Agreement (including this Exhibit D) be made which results in, or
increases, an Adjusted Capital Account Deficit as of the end of
the Fiscal Year to which such allocation or distribution relates.
Except as otherwise provided, capitalized terms have the
definitions provided with respect to the Agreement.
1. Special Allocations. The following special alloca-
tions shall be made in the following order:
(a) Minimum Gain Chargeback. Except as otherwise
provided in Section 1.704-2(f) of the Treasury Regulations,
notwithstanding any other provision of this Exhibit, if
there is a net decrease in Minimum Gain during any Fiscal
Period, each Member shall be specially allocated items of
income and gain for such Fiscal Period (and, if necessary,
subsequent Fiscal Period) in an amount equal to such
Member's share of the net decrease in Minimum Gain,
determined in accordance with Section 1.704-2(g) of the
Treasury Regulations. The items to be so allocated shall be
determined in accordance with Sections 1.704-2(f)(6) and
(j)(2) of the Treasury Regulations. This Section 1(a) is
intended to comply with the minimum gain chargeback
requirement in Section 1.704-2(f) of the Treasury
Regulations and shall be interpreted consistently therewith.
(b) Member Minimum Gain Chargeback. Except as
otherwise provided in Section 1.704-2(i)(4) of the Treasury
Regulations, notwithstanding any other provision of this
Exhibit, if there is a net decrease in Member Nonrecourse
Debt Minimum Gain attributable to a Member Nonrecourse Debt
during any Fiscal Period, each Member who has a share of the
Member Nonrecourse Debt Minimum Gain attributable to such
Member Nonrecourse Debt, determined in accordance with
Section 1.704-2(i)(5) of the Treasury Regulations, shall be
specially allocated items of income and gain for such Fiscal
Period (and, if necessary, subsequent Fiscal Periods) in an
amount equal to such Member's share of the net decrease in
Member Nonrecourse Debt Minimum Gain attributable to such
Member Nonrecourse Debt, determined in accordance with
Section 1.704-2(i)(4) of the Treasury Regulations. The
<PAGE>
items to be so allocated shall be determined in accordance
with Sections 1.704-2(i)(4) and (j)(2) of the Treasury
Regulations. This Section 1(b) is intended to comply
with the minimum gain chargeback requirement in Section
1.704-2(i)(4) of the Treasury Regulations and shall be
interpreted consistently therewith.
(c) Qualified Income Offset. In the event any
Member unexpectedly receives any adjustments, allocations or
Distributions described in Section 1.704-1(b)(2)(ii)(d)(4),
(5) or (6), items of income and gain (including gross
income) shall be specially allocated to each such Member in
an amount and manner sufficient to eliminate, to the extent
required by the Treasury Regulations, the Adjusted Capital
Account Deficit of such Member as quickly as possible,
provided that an allocation pursuant to this Section 1(c)
shall be made if and only to the extent that such Member
would have an Adjusted Capital Account Deficit after all
other allocations provided for in this Exhibit have been
tentatively made as if this Section 1(c) were not in the
Agreement.
(d) Nonrecourse Deductions. Nonrecourse Deduc-
tions for any Fiscal Period shall be allocated among the
Members in accordance with Article V of the Agreement.
(e) Imputed Interest. To the extent the Company
has taxable interest income or deduction with respect to any
obligation of a Member to the Company pursuant to Section
483, Sections 1271 through 1288, or Section 7872 of the
Code:
(i) Such interest income or deduction shall
be specially allocated to the Members to whom such
obligation relates; and
(ii) The amount of such interest income
or deduction shall be excluded from the Capital
Contributions credited or debited to such Member's
Capital Account in connection with payments of prin-
cipal with respect to such obligations.
(f) Allocations Relating to Taxable Issuance of
Units. Any income, gain, loss, or deduction realized as a
direct or indirect result of the issuance of Units shall be
allocated among the Members so that, to the extent possible,
the net amount of such items, together with all other
allocations under the Agreement to each Member, shall be
equal to the net amount that would have been allocated to
each such Member if such items had not been realized.
<PAGE>
2. Curative Allocations. The allocations set forth
in Sections 1(a), 1(b), 1(c), 1(d), 1(e) and 1(f), above, (the
"Regulatory Allocations") are intended to comply with certain
requirements of the Treasury Regulations. It is the intent of
the Members that, to the extent possible, all Regulatory Allo-
cations shall be offset either with other Regulatory Allocations
or with special allocations of other items of income, gain, loss,
or deduction pursuant to this Section 2. Therefore, notwith-
standing any other provision of this Exhibit (other than the
Regulatory Allocations), the designated Officer shall make such
offsetting special allocations of income, gain, loss, or deduc-
tion in whatever manner they determine appropriate so that, after
such offsetting allocations are made, each Member's Capital
Account balance is, to the extent possible, equal to the Capital
Account balance such Member would have had if the Regulatory
Allocations were not part of this Exhibit. In exercising his
discretion under this Section 2, the designated Officer shall
take into account future Regulatory Allocations under Sections
1(a) and 1(b), above, that, although not yet made, are likely to
offset other Regulatory Allocations previously made under
Sections 1(d), above.
3. Transfer of Units. In the event Units are
transferred pursuant to the Agreement during any Fiscal Period,
the Profits (or Losses) allocated to the Members for each such
Fiscal Period shall be allocated among the transferring Members
in proportion to the Units each holds from time to time during
such Fiscal Period in accordance with Section 706 of the Code,
using any convention permitted by law and selected by the
designated Officer.
4. Tax Allocations.
(a) Capital Contributions. In accordance with
Section 704(c) of the Code and the Treasury Regulations
thereunder, income, gain, loss, and deduction with respect
to any Capital Contribution shall, solely for tax purposes,
be allocated among the Members so as to take account of any
variation between the adjusted basis of such property to the
Company for federal income tax purposes and its initial Fair
Market Value.
(b) Adjustment of Asset Value. In the event the
Asset Value of any asset of the Company is adjusted, subse-
quent allocations of income, gain, loss, and deduction with
respect to such asset shall take account of any variation
between the adjusted basis of such asset for federal income
tax purposes and its Asset Value as so adjusted in the same
manner as under Section 704(c) of the Code and the Treasury
Regulations thereunder.
<PAGE>
(c) Elections. Any elections or other decisions
relating to such allocations shall be made by the designated
Officer in any manner that reasonably reflects the purpose
and intent of this Agreement. Allocations pursuant to this
Section 4 are solely for purposes of federal, state, and
local taxes and shall not affect, or in any way be taken
into account in computing, any Capital Account or share of
Profits, Losses, other items, or distributions pursuant to
any provision of the Agreement.
5. Income Tax Consequences. The Members are aware
of the income tax consequences of the allocations made by this
Exhibit and hereby agree to be bound by the provisions hereof
in reporting their shares of income and loss for income tax
purposes.
<PAGE>
EXHIBIT E
Officers and Directors
Directors:
Michael Camp
Charles Chandler
James Fiedler
Richard Fisher
Daniel Latham
Donald Runge
Michael Sonaco
George Weischadle
Officers:
James Fielder Chairman of the Board and
Chief Executive Officer
Daniel Latham President and Chief Operating
Officer
Keith Steffel Chief Financial Officer, Secretary
and Treasurer
Mel Ethem Vice President and General Manager
of North American Operations
George Perzel Vice President International Sales
Edmund Daly Chief Technology Officer
Bruce Thomas Vice President Hardware Technology
David Held Vice President Software Technology
Mark Jacques Vice President Service and Support
AMENDMENT TO THE
OPERATING AGREEMENT
OF
SATTEL COMMUNICATIONS LLC
THIS AMENDMENT to the Operating Agreement of Sattel
Communications LLC dated as of April 1, 1996 (the "Operating
Agreement") is entered into as of the date of consent specified
below. All terms used herein which are not otherwise defined
shall have the meaning set forth in the Operating Agreement.
1. Exhibit A - Definitions.
(a) Modifications.
(i) The definition of "Capital Contribution"
contained in Exhibit A of the Operating Agreement is
modified by adding the following sentence at the end of
the definition:
Notwithstanding the foregoing, the amount of the
initial Capital Contribution of Sattel is $637,949.
(ii) The definition of "Cash Available for
Distribution" contained in Exhibit A of the Operating
Agreement is deleted and replaced with the following:
"Cash Available for Distribution" for any Fiscal
Period means Cash Flow less the sum of (a) distribu-
tions of the Priority Return, (b) Tax Distributions and
(c) distributions of Unreturned Capital, for that
Fiscal Period.
(iii) The definition of "Tax Distribution"
contained in Exhibit A of the Operating Agreement is
deleted and replaced with the following:
"Tax Distribution" means the amount distributed to
Members pursuant to Section 4.1(b) and (c).
(iv) The definition of "Tax Distribution
Dates" contained in Exhibit A of the Operating
Agreement is deleted and replaced with the following:
<PAGE>
"Tax Distribution Dates" means, except as provided
in Section 4.1(c), January 15, April 15, June 15 and
September 15 of each Fiscal Year commencing with
June 15, 1996.
(v) For purposes of clarification, in the
definition of "Majority Consent" contained in Exhibit A
of the Operating Agreement, the phrase "holders of more
than fifty percent (50%) of all Units" is modified to
read "Members holding more than fifty percent (50%) of
all Units (with Units held by a transferee of a Class B
Member who is a permitted transferee under the
agreement governing the Class B Units between the
Company and the Member treated as held by the Member,
unless the transferee is admitted as a Member)".
(b) Additions. The following definitions are
added to Exhibit A of the Operating Agreement:
"Priority Return" means a sum equal to an annual
rate of eight percent (8%), compounded annually, for
the actual number of days occurring in the period for
which the Priority Return is being determined, of the
average daily balance of the Class A Member's Unre-
turned Capital from time to time during the period to
which the Priority Return relates, commencing on the
date any Class A Member first makes a Capital
Contribution after June 1, 1996, other than for
additional Class A Units.
"Unreturned Capital" means, as of any date, the
excess, if any, of (a) the aggregate Capital
Contributions of such Class A Member after June 1,
1996, other than for additional Class A Units, over (b)
the aggregate distributions as of such date to such
Class A Member pursuant to Sections 4.1(d) and 4.2(b)
of this Agreement.
3. Articles IV and V. Articles IV and V of the
Operating Agreement are hereby deleted in their entirety and are
replaced with the following:
ARTICLE IV
Distributions
4.1. Current Distributions. To the extent permitted
by law and consistent with the Company's obligations to its
creditors as determined by the Board of Directors, the Company
2
<PAGE>
shall make the following distributions from Cash Flow in the
order of priority set forth herein.
(a) Priority Return. First, the Company shall
distribute to each Class A Member an amount equal to the
excess, if any, of (i) the Priority Return of the Class A
Member from the date such Class A Member first has Unre-
turned Capital to the date of such distribution, over (ii)
the sum of all prior distributions to such Class A Member
pursuant to this Section 4.1(a) and Section 4.2(a). If less
than the total amount distributable to all Class A Members
under this Section 4.1(a) is to be distributed, the amount
distributed shall be allocated among the Class A Members in
proportion to the then unsatisfied amounts owing to them.
(b) Current Tax Distributions. Second, the
Company shall make Tax Distributions on or before the Tax
Distribution Dates. The aggregate amount of the Tax
Distribution made with respect to any given Tax Distribution
Date shall be the product of (i) the estimated federal
taxable income of the Company under the provisions of the
Code, for the Fiscal Period ending on the last day of the
calendar month immediately preceding the Tax Distribution
Date and commencing on the first day of the calendar month
that includes the immediately previous Tax Distribution
Date, multiplied by (ii) the Tax Rate. Notwithstanding the
foregoing, to the extent the Company has had an estimated
federal taxable loss for any prior Fiscal Period in that
Fiscal Year, the amount in clause (i) above shall be reduced
by that portion of the loss remaining after reducing taxable
income for prior Fiscal Periods in such Fiscal Year for the
loss. Each Member shall receive a Tax Distribution propor-
tional with the amount of federal taxable income to be
allocated to such Member pursuant to Article V hereof.
(c) Additional Tax Distributions. Third, in the
event any income tax return of the Company, as a result of
an audit or otherwise, reflects items of income, gain, loss,
or deduction which are different from the amounts estimated
pursuant to Section 4.1(b) above with respect to the Fiscal
Year of such return in a manner that results in additional
income or gain of the Company being allocated to the
Members, an additional Tax Distribution shall be made under
the principles of Section 4.1(b) above, except that (i) the
last day of the calendar month in which such adjustment
occurs shall be treated as a Tax Distribution Date, and (ii)
the amount of such additional income or gain shall be
treated as the federal taxable income of the Company.
3
<PAGE>
(d) Return of Unreturned Capital. Fourth, the
Company shall distribute to each Class A Member an amount
equal to the Member's Unreturned Capital. If less than the
total amount distributable to all Class A Members under this
Section 4.1(d) is to be distributed, the amount distributed
shall be allocated among the Class A Members in proportion
to the then unsatisfied amounts owing to them.
(e) Cash Available for Distribution. Finally,
Cash Available for Distribution shall be distributed to the
Members in proportion to the number of Units held by each
Member.
4.2. Distributions of Cash Available from a Capital
Event. Cash Available from a Capital Event shall be distributed
among the Members in the following priority:
(a) Priority Return. First, the Company shall
distribute to each Class A Member an amount equal to the
excess, if any, of (i) the Priority Return of the Class A
Member from the date such Class A Member first has Unre-
turned Capital to the date of such distribution, over (ii)
the sum of all prior distributions to such Class A Member
pursuant to Section 4.1(a) and this Section 4.2(a). If less
than the total amount distributable to all Class A Members
under this Section 4.2(a) is to be distributed, the amount
distributed shall be allocated among the Class A Members in
proportion to the then unsatisfied amounts owing to them.
(b) Return of Unreturned Capital. Second, the
Company shall distribute to each Class A Member an amount
equal to the Member's Unreturned Capital. If less than the
total amount distributable to all Class A Members under this
Section 4.2(b) is to be distributed, the amount distributed
shall be allocated among the Class A Members in proportion
to the then unsatisfied amounts owing to them.
(c) Special Distribution. Third, the Company
shall distribute to Sattel an amount equal to $2,500,000
less the sum of all prior distributions made pursuant to
this Section 4.2(c); and
(d) Other Distributions. The Company shall
distribute the balance of any Cash Available from a Capital
Event to the Members in proportion to the number of Units
held by each Member.
4
<PAGE>
4.3. Liquidating Distribution. In the event the
Company is liquidated pursuant to Article IX, below, distribu-
tions pursuant to Section 8.3(d), below, shall be distributed to
the Members in accordance with their Capital Account balances,
after making the adjustments for allocations under Article V,
below, up to and including the date of the liquidating distribu-
tion.
ARTICLE V
Allocation of Profits and Losses
5.1. Allocation of Profits. Except as provided in
Exhibit D hereto, Profits for any Fiscal Period shall be
allocated among the Members in accordance with the following
provisions:
(a) First, to the Class A Members, to the extent
of the excess, if any, of (1) the cumulative Priority Return
distributions the Class A Members have received pursuant to
Sections 4.1(a) and 4.2(a) hereof (regardless of when made)
over (ii) the cumulative items of income and gain allocated
to such Class A Members pursuant to this Section 5.1(a) for
all prior Fiscal Periods;
(b) Second, 99% to the Class A Units and 1% to
the Class B Units, in proportion to the number of Units held
by the respective classes of Members, until the Class A
Units have been allocated Profits equal to the amount of
Losses allocated to the Class A Members pursuant to Section
5.2 hereof (expressed as a positive number);
(c) Third, 99% of Sattel and 1% to the Class B
Units, in proportion to the number of Units held by the
Class B Members, until Sattel has been allocated Profits
under this Section 5.1(c) equal to $2.5 million less the
initial Capital Contribution of Sattel; and
(d) The balance among the Members in proportion
to the Units held by each Member.
5.2. Allocation of Losses. Except as provided in
Exhibit D hereto, Losses for any Fiscal Period shall be allocated
among the Members in proportion to the Units held by each Member,
except that to the extent Losses exceed all prior Profits reduced
by prior distributions pursuant to Article IV hereof, such Losses
shall be allocated among the Members holding Class A Units in
proportion to the Units held by each Class A Member, provided,
however, that no allocation shall be made to any Member to the
5
<PAGE>
extent that such allocation would violate the Treasury
Regulations promulgated under Section 704(b) of the Code.
3. Other Amendments.
(a) Section 9.2. For purposes of clarification,
in the first sentence of Section 9.2 of the Operating
Agreement, regarding amendments, the phrase "holders of
Class B Units shall be entitled to vote" is modified to read
"Members holding Class B Units shall be entitled to act."
(b) Section 2.5. Section 2.5 of the Operating
Agreement is modified by adding the following sentence at
the end of such section.
Notwithstanding the foregoing, an existing Class A
Member may at any time make a Capital Contribution
without the issuance of any additional Units, upon
approval of the Board of Directors.
4. Effect of Amendment. Except as otherwise modified
by this Amendment, the Operating Agreement shall remain in full
force and effect.
The undersigned, constituting the holders of all of the
outstanding Class A Units and a majority of the outstanding
Class B Units (a total of 1,650 B Units are outstanding as of the
date of this consent), hereby consent to the foregoing Amendment
as of June 5, 1996. This consent may be executed in
counterparts, all of which when taken together shall constitute
one and the same instrument.
SATTEL COMMUNICATIONS CORP.
(8,000 Class A Units)
By: /s/ Richard Y. Fisher, President
/s/ James J. Fiedler
(250 Class B Units)
___________________________________
Daniel W. Latham
(150 Class B Units)
(signatures continued on next page)
6
<PAGE>
/s/ Mark Jacques (450 Class B Units)
___________________________________
Bruce E. Thomas (250 Class B Units)
___________________________________
David Held (250 Class B Units)
___________________________________
George M. Perzel (100 Class B Units)
/s/ Keith R. Steffel
(100 Class B Units)
/s/ Sydney B. Lilly
(100 Class B Units)
7
SECOND AMENDMENT
TO THE
OPERATING AGREEMENT
OF
SATTEL COMMUNICATIONS LLC
THIS SECOND AMENDMENT to the Operating Agreement of
Sattel Communications LLC dated as of April 1, 1996 (the
"Operating Agreement"), is entered into as of the date of consent
specified below. All terms used herein which are not otherwise
defined shall have the meanings set forth in the Operating
Agreement.
1. Amendments.
(a) Section 2.2 of the Operating Agreement is
amended by adding the following sentence at the end of
thereof: "Subject to Section 2.5, the Board of Directors of
the Company may, in exchange for Capital Contributions,
issue additional Class A Units to Sattel or other Persons as
determined by the Board of Directors of the Company."
(b) Section 4.2 of the Operating Agreement is
amended by deleting the word "and" after subparagraph (c),
redesignated subparagraph (d) as (e), and adding the
following after subparagraph (c):
"(d) Second Special Distribution. Fourth,
the Company shall distribute to Class A
Members other than Sattel an amount equal to
the Capital Contributions for the applicable
Class A Units less the sum of all prior
distributions made pursuant to this Section
4.2(d); and".
(c) Section 7.1 of the Operating Agreement is
amended to add the following clause at the end of the first
sentence after the word "law": ", except for a Member other
than Sattel in accordance with any agreement governing Class
A Units between such Member and the Company."
(d) Section 7.3 of the Operating Agreement is
amended to read in its entirety as follows:
7.3. Right of Transferee to Become a Member.
Any transferee of Class A Units or Class B Units
pursuant to an involuntary transfer of a Member's
1
<PAGE>
interest therein, or pursuant to an agreement of the
kind referred to in Section 7.1 or 7.2, is only
entitled to an economic interest in said Class A Units
or Class B Units (within the meaning of Section
17001(n) of the California Act). The transferee may
only become a member of the Company with the consent of
those Members holding a majority of the Units,
determined by excluding the Class A Units or Class B
Units held by the transferring Member, which consent
may be withheld for any reason whatsoever.
(e) Section 8.1 of the Operating Agreement is
amended to read in its entirety as follows:
8.1 Events Causing Dissolution. The Company
shall be dissolved upon either (a) the bankruptcy
(within the meaning of Section 17001(c) of the
California Act) or insolvency of any of the Members,
unless otherwise provided below, (b) the approval of
such dissolution by the Board of Directors or the
Members by Majority Consent, (c) the expiration of the
term set out in Section 1.3 hereof, (d) the entry of a
decree of dissolution pursuant to Section 17351 of the
California Act, or (e) upon a transfer of Class A Units
that causes dissolution under Section 7.1. Upon the
occurrence of an event set out in subsection (a) hereof
to a holder of Class A Units (other than Sattel) or
Class B Units, the Company shall dissolve unless the
business of the Company is continued by the affirmative
vote of those Members holding a majority of the dollar
value of the Capital Accounts and a majority of the
Units, determined by excluding the Capital Account and
Units held by the affected Class A or Class B Unit
holder.
(f) The definition of "Agreement" is amended by
changing "February 20, 1996" to "April 1, 1996."
(g) The definition of "Members" is amended by
changing "Section 2.5" to "Section 2.6."
2. Waiver and Consent.
(a) Each of the undersigned hereby consents to
the admission of Charles Chandler and Syd Lilly as Members
holding Class A Units and waives its right under Section 2.5
of the Operating Agreement (and the Operating Agreement is
hereby amended not to permit Members) to contribute equity
capital in connection with the issuance of 350 Class A units
to Charles Chandler and the issuance of 100 Class A Units to
2
<PAGE>
Syd Lilly. Mr Lilly's 100 Class B Units are hereby
cancelled and shall be considered void.
(b) Each of the undersigned hereby waives (once
the Operating Agreement is hereby amended not to require)
compliance with Article VII of the Operating Agreement in
connection with the issuance of 100 Class A Units to Syd
Lilly as a result of a deemed transfer from Charles
Chandler.
3. Effect of Amendment. Except as otherwise modified
by this Agreement, the Operating Agreement shall remain in full
force and effect.
The undersigned, constituting the holders of all of the
outstanding Class A Units and a majority of the outstanding Class
B Units (a total of 1,650 B Units are outstanding as of the date
of this Consent) hereby consent to the foregoing Amendment as of
September 12, 1996. This Consent may be executed in
counterparts, all of which when taken together shall constitute
one and the same instrument.
SATTEL COMMUNICATIONS CORP.
(8,000 Class A Units)
/s/ Richard Y. Fisher, President
/s/ James J. Fiedler (250 Class B Units)
__________________________________
Daniel W. Latham (150 Class B Units)
/s/ Mark Jacques (450 Class B Units)
3
<PAGE>
___________________________________
Bruce E. Thomas (250 Class B. Units)
___________________________________
David Held (250 Class B Units)
___________________________________
George M. Perzel (100 Class B Units)
/s/ Keith R. Steffel (100 Class B Units)
/s/ Sydney B. Lilly (100 Class B Units)
4
