UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[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 five models; DSS-96, DSS-1000, DSS-3000,
DSS-10000 and DSS-DataNet. Each of these platforms is capable of providing
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end office, tandem, international gateway or Internet access functionality
(DataNet) 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.
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.
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 Memorandum of Understanding between the two companies. 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. Full implementation of the
Memorandum of Understanding is subject to a number of 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 American Telephone & Telegraph
Co. ("AT&T"), Northern Telecom, 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.
The success of Sattel is dependent upon its ability to provide access to
the Public Switched Telecommunications Network. 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
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.
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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
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
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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.
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
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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.
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.
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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.
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...... $ (.80) $ (.18) $ .88 $ .49 $ (.25)
Extraordinary items..... --- --- (.07) .34 ---
Accounting change....... --- --- .07 --- ---
------- ------- ------- ------- -------
Net earnings (loss)... $ (.80) $ (.18) $ .88 $ .83 $ (.25)
======= ======= ======= ======= =======
Fully diluted
Earnings (loss) before
items noted below...... $ (.80) $ (.18) $ .85 $ .49 $ (.25)
Extraordinary items..... --- --- (.07) .34 ---
Accounting change....... --- --- .07 --- ---
------- ------- ------- ------- -------
Net earnings (loss)... $ (.80) $ (.18) $ .85 $ .83 $ (.25)
======= ======= ======= ======= =======
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.
</FN>
</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
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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.
The Company is exploring options with respect to its investment in APC,
including a possible sale of APC. 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 originally attributable to the acquisition of APC. The goodwill
write off has no effect on the Company's cash flow or tangible shareholders'
equity.
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).
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations - (Cont.)
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%.
12
<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
13
<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.
14
<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).
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. 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. The
amended APC Revolver provides for the following financial covenants during
fiscal 1997: minimum tangible net worth of $3,900,000, 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. At June 27, 1996, based upon the
representations and projections of APC's management, the Company believes
that APC will meet the financial covenants during fiscal 1997 or will obtain
any required waivers from the lender. 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.
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. If Sattel
purchases CNC's Series D Preferred Stock, it will also acquire an interest in
CNC's wholesale subsidiary.
15
<PAGE>
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. The restructuring does not
change the Company's earlier announced plans to sell APC. The Company is
presently subject to an agreement with various conditions to sell APC. If
the agreement to sell APC does not culminate in a sale in the near future,
the Company will remove APC from the market. Management will present their
restructuring plans to the Board as soon as possible. Management also will
retain the services of 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, and the Company
believes that it and APC will have adequate working capital in fiscal 1997.
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 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) whether the Company can come to terms with a buyer who is
able to finance a possible acquisition of APC, (viii) new competitors
entering APC's marketplace and (ix) the risks and uncertainties discussed in
Item 1 relating to Sattel's business.
16
<PAGE>
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. 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.
17
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THE DIANA CORPORATION AND SUBSIDIARIES
PAGE
----
Report of Price Waterhouse LLP, Independent Accountants......... 20
Report of Ernst & Young LLP, Independent Auditors............... 21
Consolidated Balance Sheets..................................... 22
Consolidated Statements of Operations........................... 23
Consolidated Statements of Changes in Shareholders' Equity...... 24
Consolidated Statements of Cash Flows........................... 25
Notes to Consolidated Financial Statements...................... 26
18
<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
19
<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
20
<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.
21
<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........... $ (.80) $ (.18) $ .88
Extraordinary item.................. --- --- (.07)
Accounting change................... --- --- .07
------- ------- -------
Net earnings (loss)................. $ (.80) $ (.18) $ .88
======= ======= =======
Fully diluted
Before extraordinary item........... $ (.80) $ (.18) $ .85
Extraordinary item.................. --- --- (.07)
Accounting change................... --- --- .07
------- ------- -------
Net earnings (loss)................. $ (.80) $ (.18) $ .85
======= ======= =======
Weighted average number of common
shares outstanding
Primary............................. 4,192 4,023 3,913
======= ======= =======
Fully diluted....................... 4,192 4,023 4,053
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
22
<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.
23
<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.
24
<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.
25
<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.
26
<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 determined by using identifiable cash flows
over the remaining amortization period.
The Company is exploring options with respect to its investment in APC,
including a possible sale of APC. 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.
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.
27
<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
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 Sattel Technologies, Inc. ("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.
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.
28
<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.
29
<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 $ (.79) $ (.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.
30
<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.
31
<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 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.
The fiscal 1995 financial statements have been reclassified to conform to
fiscal 1996 presentation.
32
<PAGE>
NOTE 4 - Revolving Line of Credit (Continued)
C&L has a Loan and Security Agreement ("C&L Revolver") with a lender
(amended 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 reclassified from current
portion of long-term debt for consistent presentation.
33
<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.
34
<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.
35
<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.
36
<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
===== ====== =====
37
<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):
<TABLE>
<CATION>
Fiscal Year Ended
-----------------
March 30, April 1, April 2,
1996 1995 1994
------- -------- --------
<S> <C> <C> <C>
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 $ --- $ ---
====== ====== ======
</TABLE>
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.
38
<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):
<TABLE>
<CAPTION>
March 30, April 1,
1996 1995
-------- --------
<S> <C> <C>
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 $ --- $ ---
======= =======
</TABLE>
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.
39
<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.
40
<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>
41
<PAGE>
NOTE 15 - Statement of Cash Flows
Supplemental cash flow information is as follows for the last three
fiscal years (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
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
</TABLE>
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 (.57) (.15) .03 (.10)
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.
42
<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 (.18) .09 .10 (.21)
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 under certain
conditions outlined in the Note.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors is incorporated by reference from the
Election of Directors and Principal Shareholders sections of the Company's
definitive proxy statement for the annual meeting of shareholders on August
22, 1996.
Information regarding the executive officers, which is not a part of the
Company's definitive proxy statement, is set forth below:
Name Age Position
---- --- --------
Richard Y. Fisher 63 Chairman of the Board
Donald E. Runge 58 President
Sydney B. Lilly 67 Senior Vice President
R. Scott Miswald 40 Vice President, Controller, Treasurer and
Secretary
43
<PAGE>
The following information is furnished with respect to each executive
officer who is not also a Director of the Company:
R. Scott Miswald, a Certified Public Accountant, became Secretary in
June 1996 and Vice President of the Company in June 1992. Mr. Miswald has
been Treasurer and Controller for the past five years. Mr. Miswald is also
Secretary and Treasurer of Entree.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the Executive Compensation section of the
Company's definitive proxy statement for the annual meeting of shareholders
on August 22, 1996 [excluding the portions thereof specified in Regulation
S-K 402(a) (8)].
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the Principal Shareholders section of the
Company's definitive proxy statement for the annual meeting of shareholders
on August 22, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the Compensation Committee Interlocks and
Insider Participation section of the Company's definitive proxy statement for
the annual meeting of shareholders on August 22, 1996.
44
<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.
45
<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).
46
<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.
47
<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.
11 Computation of Earnings Per Share
22 Subsidiaries of Registrant
23 Consents 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.
48
<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.
49
<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.......... $ (.80) $ (.18) $ .88
Extraordinary item................. --- --- (.07)
Accounting change.................. --- --- .07
------ ------ ------
Net earnings (loss)................ $ (.80) $ (.18) $ .88
====== ====== ======
Fully diluted
Before extraordinary item.......... $ (.80) $ (.18) $ .85
Extraordinary item................. --- --- (.07)
Accounting change.................. --- --- .07
------ ------ ------
Net earnings (loss)................ $ (.80) $ (.18) $ .85
====== ====== ======
Weighted average number of common
shares outstanding
Primary............................ 4,192 4,023 3,913
====== ====== ======
Fully diluted...................... 4,192 4,023 4,053
====== ====== ======
</TABLE>
See notes to condensed financial statements and notes to consolidated
financial statements.
50
<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.
51
<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.
52
<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>
53
<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 28th day of
June, 1996.
THE DIANA CORPORATION
By /s/ Richard Y. Fisher
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Richard Y. Fisher Chairman of the Board
Richard Y. Fisher (Principal Executive Officer)
/s/ Donald E. Runge President and Director
Donald E. Runge
/s/ Sydney B. Lilly Senior Vice President and June 28, 1996
Sydney B. Lilly Director
/s/ R. Scott Miswald Vice President, Treasurer and
R. Scott Miswald Controller (Principal Financial
and Accounting Officer)
/s/ Bruce C. Borchardt Director
Bruce C. Borchardt
/s/ Jack E. Donnelly Director
Jack E. Donnelly
/s/ Jay M. Lieberman Director
Jay M. Lieberman
54
FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT
AND WAIVER AGREEMENT
This First Amendment to Loan and Security Agreement and Waiver
Agreement (the "First Amendment") is made as of this 27th day of
June, 1996 by and between Sanwa Business Credit Corporation as
Lender ("Lender") and C&L Communications, Inc. as Borrower
("Borrower").
WHEREAS, Lender and Borrower entered into that certain Loan
and Security Agreement dated as of January 2, 1996 (the
"Agreement), and various other agreements, instruments and
documents (the "Ancillary Agreements") pursuant to which Lender
made certain loans and advances to Borrower upon the terms and
conditions set forth in the Agreement, and
WHEREAS, Borrower has requested certain modifications and
waivers to the Agreement and Lender has agreed to such
modifications, amendments and waivers as set forth in this First
Amendment;
NOW, THEREFORE, in consideration of the terms and conditions
contained herein and of any loans or advances now or hereafter made
to or for the benefit of Borrower by Lender, effective as of the
date hereof, the parties hereto agree to the following amendments,
modifications and waivers to the Agreement.
1. Section 1 of the Agreement is hereby amended by adding the
following subsection 1.68 after subsection 1.67:
" 1.67 "EBIT" shall mean "INCOME FROM OPERATIONS" as
determined in accordance and consistent with the financial
projections provided to Lender by Borrower dated June 17, 1996, a
copy of which is attached hereto as Exhibit "A"."
2. Section 10.1(A)(v) of the Agreement, the Pre-Tax Net
Income covenant, is hereby amended by deleting it in its entirety
and replacing it with the following:
"EBIT of not less than the cumulative amount indicated
below commencing with the EBIT for the quarter ending June
30, 1996 through the period indicated:
CUMULATIVE EBIT REQUIRED THROUGH QUARTER ENDING
------------------------ ----------------------
$ 115,000 June 30, 1996
$ 446,000 September 30, 1996
$ 730,000 December 31, 1996
$ 1,174,000 March 31, 1997
<PAGE>
after March 31, 1997 the cumulative required EBIT shall be as
determined by Lender, in its discretion, based upon annual
projections provided to Lender from time to time pursuant to
Section 10.1(E)(iii);"
3. Section 10.1(E)(i) of the Agreement is hereby amended by
deleting the phrase "and containing the unqualified opinion of such
independent certified public accountants with respect to the
financial statements" that appears therein and replacing it with
the following:
"and containing an unqualified special purpose report on
the stand alone financial statements of Borrower thereby excluding
the consolidation of C&L Acquisition Corporation and Valley
Communications, Inc. and reflecting only the investment in C&L
Acquisition Corporation recorded on the equity method of
accounting."
4. Section 10.1(A)(v) of the Agreement is hereby waived for
the rolling 12 month periods ended March 31, 1996 and April 30,
1996.
5. Sections 10.2(D) and (M) of the Agreement are hereby
waived for the periods ended March 31, 1996 and April 30, 1996.
6. In order to induce the Lender to enter into this First
Amendment, the Borrower represents and warrants that:
a. The execution and delivery of this First Amendment
and the performance by the Borrower of its obligations hereunder
are within the Borrower's corporate powers and authority, have been
duly authorized by all necessary corporate action and do not and
will not contravene or conflict with the charter or by-laws of the
Borrower. This First Amendment has been duly executed and
delivered by the Borrower, and constitutes the legal, valid and
binding obligations of the Borrower, enforceable against the
Borrower in accordance with its terms.
b. No consent, order, qualification, validation,
license, approval or authorization of, or filing, recording,
registration or declaration with, or other action in respect of,
any governmental body, authority, bureau or agency or other person
is required in connection with the execution, delivery or
performance of, or the legality, validity, binding effect or
enforceability of this First Amendment.
c. The execution, delivery and performance by the
Borrower of this First Amendment does not and will not violate any
law, governmental regulation, judgment, order or decree applicable
to the Borrower and does not and will not violate the provisions
of, or constitute a default or any event or default under, or
result in the creation of any security interest or lien upon any
property of the Borrower pursuant to any indenture, mortgage,
instrument, contract, agreement or other undertaking to which the
Borrower is a party or is subject or by which the Borrower or any
of the Borrower's real or personal property may be bound.
<PAGE>
d. The Borrower knows and understands the content of
this First Amendment and has had an opportunity to review and
consider the terms of this First Amendment with counsel of the
Borrower's choice.
7. Borrower agrees to pay all charges, costs, expenses and
reasonable attorneys' fees incurred by Lender in connection with
the negotiation, documentation and preparation of this First
Amendment and any other documents in connection herewith and in
carrying out and enforcing the terms of this First Amendment.
8. Lender's agreement to the terms and conditions of this
First Amendment is conditioned upon Lender receiving this First
Amendment duly executed by Borrower and Lender and the other
signatories hereto in form and content satisfactory to Lender and
its counsel.
9. Except as specified in numbered paragraphs 4 and 5 above,
Lender is not waiving any rights under the Agreement or any
Ancillary Agreements and, except as expressly stated herein or
previously modified in a writing signed by Lender, all of the
terms, covenants and additions of the Agreement and the Ancillary
Agreements shall remain unmodified in full force and effect. The
waivers set forth in numbered paragraphs 4 and 5 of this First
Amendment shall be effective only to the extent set forth herein.
The waivers provided in this First Amendment shall not establish a
course of dealing and shall not, under any circumstances,
constitute a waiver by Lender of any subsequent failure on the part
of Borrower to comply with the provision of Sections 10.1(A) and
10.2(D) and (M) of this Agreement. The waivers contained herein
are specifically limited to the facts, time periods and
circumstances described herein.
10. This First Amendment shall be part of the Agreement, the
terms of which are incorporated herein, and a breach of any
representation, warranty or covenant contained herein or in the
Agreement or the failure to observe or comply with any term or
agreement contained here, shall constitute a Default under the
Agreement and Lender shall be entitled to exercise all rights and
remedies that it may have under the Agreement, Ancillary Agreements
and applicable law. Capitalized terms used herein and not
otherwise defined shall have the same meaning as provided in the
Agreement.
11. THIS FIRST AMENDMENT AND (UNLESS OTHERWISE EXPRESSLY
STATED THEREIN) EACH OTHER LOAN DOCUMENT AND/OR ANCILLARY AGREEMENT
SHALL BE A CONTRACT MADE UNDER AND GOVERNED BY THE LAWS OF THE
STATE OF ILLINOIS, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES.
WHEREVER POSSIBLE, EACH PROVISION OF THIS AMENDMENT AND EACH OTHER
LOAN DOCUMENT AND ANCILLARY AGREEMENT SHALL BE INTERPRETED IN SUCH
MANNER AS TO BE EFFECTIVE AND VALID UNDER APPLICABLE LAW, BUT IF
ANY PROVISION OF THIS AMENDMENT OR ANY OTHER LOAN DOCUMENT OR
ANCILLARY AGREEMENT SHALL BE PROHIBITED BY OR INVALID UNDER SUCH
LAW, SUCH PROVISION SHALL BE INEFFECTIVE TO THE EXTENT OF SUCH
PROHIBITION OR INVALIDITY, WITHOUT INVALIDATING THE REMAINDER OF
SUCH PROVISION OR THE REMAINING PROVISIONS OF THIS AMENDMENT OR
SUCH OTHER LOAN DOCUMENT OR ANCILLARY AGREEMENT.
<PAGE>
ALL OBLIGATIONS OF THE BORROWER, AND ALL RIGHTS OF THE LENDER AND
OF ANY OTHER HOLDER OF ANY NOTE, EXPRESSED HEREIN OR IN THE NOTES
SHALL BE IN ADDITION TO AND NOT IN LIMITATION OF THOSE PROVIDED BY
APPLICABLE LAW.
12. This First Amendment may be executed in any number of
counterparts and by the different parties on separate counterparts,
and each such counterpart shall be deemed to be an original but all
such counterparts shall together constitute but one and the same
agreement.
13. This First Amendment shall be binding upon the Borrower
and the Lender and their respective successors and assigns, and
shall inure to the sole benefit of the Borrower and the Lender and
the successors and assigns of the Lender.
Delivered at Chicago, Illinois, as of the day and year first
written above.
C&L COMMUNICATIONS, INC.
By: /s/ R. Scott Miswald
Assistant Secretary
SANWA BUSINESS CREDIT CORPORATION
By: /s/ John P. Thacker
Vice President
WAIVER AND SEVENTH AMENDMENT
TO LOAN AND SECURITY AGREEMENT
June 27, 1996
Atlanta Provision Company, Inc.
1400 West Marietta Street, N.W.
Atlanta, Georgia 30318
Attention: Mr. G. Michael Coggins
Ladies and Gentlemen:
Reference is made to that certain Loan and Security Agreement
dated as of November 24, 1992, between Atlanta Provision Company,
Inc. ("Borrower") and Fleet Capital Corporation, successor-in-
interest to Shawmut Capital Corporation, successor-in-interest to
Barclays Business Credit, Inc. ("Lender"), as amended to date (the
"Loan Agreement"). Unless otherwise defined herein, all
capitalized terms used herein shall have the same meanings provided
for such terms in the Loan Agreement.
Borrower has informed Lender that Events of Default have
occurred under the Loan Agreement because of (i) Borrower's
conversion of its $1,400,000 note payable to The Diana Corporation
into preferred stock of Borrower in violation of the prohibition on
transactions with Affiliates or stockholders outside of the
ordinary course of Borrower's business contained in subsection
9.2(d) of the Loan Agreement; and (ii) Borrower's failure to
achieve Consolidated Adjusted Net Earnings from Operations of no
greater loss than $400,000 for fiscal year 1996 as required under
subsection 9.3(b) of the Loan Agreement (collectively, the
"Existing Defaults").
Borrower has requested that Lender (i) waive the Existing
Defaults and (ii) amend certain provisions of the Loan Agreement,
and Lender has agreed to such requests on the terms and conditions
set forth herein.
1. Waiver. Lender hereby waives the Existing Defaults
subject, however, to the condition that the foregoing waiver with
respect to the Existing Default under subsection 9.3(b) of the Loan
Agreement shall be effective only if the audited financial
statements for fiscal year 1996 required to be delivered by
Borrower under subsection 9.1(j)(i) of the Loan Agreement are
timely delivered and demonstrate that Borrower's Consolidated
Adjusted Net Earnings from Operations for such fiscal year are a
loss no greater than $1,045,255.
<PAGE>
Atlanta Provision Company, Inc.
June 27, 1996
Page 2
The foregoing waiver is limited to the Existing Defaults
specified and shall not constitute a waiver of any other existing
or future Default or Event of Default or of any rights that Lender
may have under the Loan Agreement or applicable law with respect
thereto, all of which rights Lender hereby expressly reserves.
2. Amendments. The Loan Agreement is hereby amended as
follows:
(a) Section 9.3(b) of the Loan Agreement (Profitability) is
amended and restated in its entirety, as follows:
"(b) Profitability. Achieve Consolidated Adjusted Net
Earnings From Operations of not to exceed a $39,734 loss for fiscal
year 1997 and not less than positive earnings of $500,000 for each
fiscal year thereafter."
(b) Section 9.3(c) of the Loan Agreement (Net Cash Flow) is
amended and restated in its entirely, as follows:
"(c) Net Cash Flow. Achieve a Net Cash Flow on a rolling
thirteen (13) period basis (measured at the end of each four (4)
week period commencing July 22, 1996) of not less than the amount
set forth below opposite the last day of the applicable period:
Period Amount
June 22, 1996 $400,000
July 20, 1996 $385,000
August 17, 1996 $405,000
September 14, 1996 $420,000
October 12, 1996 $425,000
November 9, 1996 $500,000
December 7, 1996 $500,000
January 4, 1997 $480,000
February 1, 1997 $495,000
March 1, 1997 and thereafter $500,000
(c) Section 9.3(d) of the Loan Agreement (Excess
Availability) is amended to delete the reference to Seven Hundred
Fifty Thousand Dollars
<PAGE>
Atlanta Provision Company, Inc.
June 27, 1996
Page 3
($750,000) therein and to replace it with a reference to One
Million Two Hundred Fifty Thousand Dollars ($1,250,000).
3. Effectiveness. Subject to the condition specified in
Paragraph 1 hereof, this Waiver and Seventh Amendment to Loan and
Security Agreement shall be effective as of the date hereof when
duly executed by both parties and delivered to Lender. Except as
expressly amended hereby, the Loan Agreement shall remain in full
force and effect as executed.
4. Counterparts. This Waiver and Seventh Amendment to Loan
and Security Agreement may be executed in counterparts all of
which, taken together, shall constitute but one instrument.
Very truly yours,
FLEET CAPITAL CORPORATION
By: /s/ Alan R. Meier
Senior Vice President
Acknowledged and agreed to
this 27th day of June, 1996
ATLANTA PROVISION COMPANY, INC.
By: /s/ R. Scott Miswald
Secretary
SATTEL COMMUNICATIONS LLC EMPLOYEES
NONQUALIFIED STOCK OPTION PLAN
1. Purpose of the Plan. The purpose of the Plan is
to secure for the Company and its stockholders the benefits of
the incentive inherent in common stock ownership by the key
employees and directors of Sattel Communications LLC and its
Subsidiaries.
2. Definitions. As used herein, the following
definitions shall apply:
(a) "Board" shall mean the Board of Directors of
the Company.
(b) "Committee" shall mean the committee, if any,
appointed in accordance with paragraph 4(a) of the Plan.
(c) "Common Stock" shall mean the Common Stock,
$1.00 par value per share, of the Company.
(d) "Company" shall mean The Diana Corporation, a
Delaware corporation.
(e) "Effective Date" shall mean the date that the
Plan was adopted by the Board.
(f) "Grantee" shall mean a key employee,
director, consultant or advisor of Sattel or a Subsidiary
who is designated by the Board (or the Committee if one is
appointed) as a participant in the Plan.
(g) "Option" shall mean a stock option granted
pursuant to the Plan.
(h) "Plan" shall mean the Sattel Communications
LLC Nonqualified Stock Option Plan as set forth herein and
as amended from time to time.
(i) "Sattel" shall mean Sattel Communications
LLC.
(j) "Share" shall mean one share of Common Stock.
(k) "Subsidiary" shall mean any present or future
corporation, limited liability company or other entity more
than 50% of the outstanding voting interest of which is
owned directly or indirectly by Sattel.
<PAGE>
3. Shares Subject to the Plan. Subject to the
adjustments in paragraph 12 hereof, the aggregate number of
shares of Common Stock deliverable upon the exercise of Options
pursuant to the Plan shall not exceed 500,000 Shares. Such
Shares may either be authorized but unissued Common Stock, or
treasury stock. During the term of the Plan, the Company will
reserve and keep available that number of Shares sufficient to
satisfy the requirements of the Plan. If any Option shall expire
or terminate for any reason without having been exercised in
full, the unpurchased Shares subject thereto shall again be
available for further grants under the Plan.
4. Administration of the Plan.
(a) Plan to be Administered by Board. The Plan
shall be administered by the Board or by a committee of the
Board as appointed from time to time by the Board.
(b) Powers of the Board. The Board is authorized
(but only to the extent not contrary to the express
provisions of the Plan) to (i) select the Grantees to whom
and the times at which Options shall be granted; (ii)
determine the number of Shares to be subject to each said
Option, taking into account the nature of services rendered
by the particular Grantee, the potential contribution of the
Grantee to the success of Sattel and such other factors as
the Board in its discretion shall deem relevant; (iii) grant
Options to Grantees in accordance with the foregoing; (iv)
interpret (and, pursuant to paragraph 11, alter, suspend or
discontinue) the Plan; (v) determine whether the Shares
delivered upon exercise of Options will be treasury stock or
will be authorized but previously unissued Common Stock;
(vi) to prescribe, amend and rescind rules and regulations
relating to the Plan; (vii) determine the form and content
of Options to be issued under the Plan (which need not be
identical) and to make other determinations necessary or
advisable for the administration of the Plan; and (viii)
exercise such other power and authority as may be conferred
pursuant to the Plan from time to time.
The Board (or the Committee if one is appointed
pursuant to paragraph 4(a)) shall maintain a written record
of its proceedings relating to its administration of the
Plan. If a Committee is appointed, a majority of the entire
Committee shall constitute a quorum. All decisions or
determinations of the Board (or the Committee, if one is
appointed) shall be made by not less than a majority of its
members. Any decisions or determinations made in writing
and signed by all of the members of the Board (or the
2
<PAGE>
Committee) shall be fully as effective as if such decision
or determination had been made by a majority vote at a
meeting duly called and held at which a quorum was present.
The Board (or the Committee) shall also have express
authorization to hold meetings by means of conference phone
or similar communication equipment in which all persons
participating in the meeting can hear each other. The
Chairman of the Board, President and Chief Executive
Officer, the Treasurer and any other officer designated by
the Board are hereby authorized to execute instruments
evidencing Options on behalf of the Company and to cause
them to be delivered to the Grantees.
(c) Delegation to Committee. If the Board
delegates its duties and responsibilities under this Plan to
the Committee pursuant to paragraph 4(a), (i) the Committee
shall be authorized (but only to the extent not contrary to
the express provisions of the Plan or to resolutions adopted
by the Board) to exercise all of the powers set forth in
paragraph 4(b) and (ii) all references to the Board in the
Plan shall be read to include the Committee, except to the
extent the Committee's authority is limited by the Board in
the resolution appointing the Committee or at any time
thereafter.
(d) Effect of Board's or Committee's Decision.
All decisions, determinations and interpretations of the
Board (or the Committee) shall be final and conclusive on
all persons affected thereby.
5. Eligibility. The Board shall designate from time
to time the key employees and directors of Sattel and of its
Subsidiaries to whom Options may be granted and the number of
Shares to which each Option applies. No director or executive
officer of the Company shall be eligible to receive Options under
the Plan.
6. Term of Plan. No Option shall be granted under
the Plan on or after the 11th anniversary of the Effective Date.
7. Term of Options. The term of each Option granted
under the Plan shall not exceed 11 years from the date of grant.
8. Option Requirements.
(a) Written Instrument. An Option shall be
evidenced by a written instrument specifying the number of
shares of Common Stock that may be purchased by its exercise
3
<PAGE>
and shall contain such terms and conditions consistent with
the Plan as the Board shall determine. The granting of an
Option pursuant to the Plan shall be effective only if a
written agreement shall have been duly executed and
delivered by and on behalf of the Company.
(b) Option Period. An Option shall not be
exercisable after the expiration of the Option period
specified in the agreement or other document granting the
Option or after such earlier date on which the Option lapses
in accordance with the Option or the Plan.
(c) Option Price. The price per Share at which
each Option granted under the Plan may be exercised shall be
determined by the Board at grant.
(d) Modification of Options. At any time and
from time to time the Board may direct execution of an
instrument providing for the modification, extension or
renewal of any outstanding Option, provided no such
modification, extension or renewal shall confer on the
holder of said Option any right or benefit which could not
be conferred on him by the grant of a new Option at such
time, or materially impair the Option without the consent of
the holder of the Option. In the discretion of the Board,
the date of termination or lapse of any Option may be
advanced if in connection with any merger, consolidation,
sale or transfer by the Company of substantially all of its
assets, any Option is not assumed by the surviving
corporation or the purchaser.
9. Exercise of Option.
(a) Procedure for Exercise. Any Option granted
hereunder shall be exercisable at such times and under such
conditions as shall be permissible under the terms of the
instrument evidencing the Option.
(b) Exercise Period. The Board may provide, in
the instrument evidencing the Option, for the lapse of the
Option prior to the end of the Option period, upon the
occurrence of any event specified in such instrument.
(c) Nontransferability of Options. Unless
otherwise determined by the Board, during his lifetime a
Grantee may not transfer any Option granted to him pursuant
to this Plan and such Options shall be exercisable only by
the Grantee. Upon his death, a Grantee shall have the right
to transfer the Option or Options granted to him by the
4
<PAGE>
terms of his will or under the applicable laws of descent
and distribution, subject to paragraph 9(b), and all such
distributees shall be subject to the same terms and
conditions of this Plan as would the Grantee, except as
otherwise expressly provided herein or as determined by the
Board.
10. Conditions Upon Issuance of Shares and Transfer
Restrictions. Shares shall not be issued with respect to any
Option granted under the Plan unless the issuance and delivery of
such Shares shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as
amended, the rules and regulations promulgated thereunder, any
applicable state securities law and the requirements of any stock
exchange upon which the Shares may then be listed. The inability
of the Company to obtain from any regulatory body authority
deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder shall relieve the
Company of any liability in respect of the non-issuance or sale
of such Shares. As a condition to the exercise of an Option, the
Company may require the person exercising the Option to make such
representations and warranties as may be necessary to assure the
availability of an exemption from the registration requirements
of federal or state securities laws. Any and all Shares with
respect to which an Option has been exercised shall be subject to
such transfer restrictions which the Board may provide in the
instrument evidencing an Option. If deemed necessary by the
Company, Shares of Common Stock acquired under the Plan may not
be sold or otherwise disposed of, except (a) pursuant to an
effective registration statement under the Securities Act of
1933, as amended, or in a transaction which complies with Rule
144 (or any successor rule) promulgated thereunder or which, in
the opinion of counsel for the Company, is exempt from
registration under such Act and (b) in compliance with state
securities laws.
11. Amendment and Termination of the Plan. The Board
may alter, suspend or discontinue the Plan, except that no action
of the Board may, without the consent of the holder of the
Option, impair any then outstanding Option.
12. Adjustment Provisions.
(a) Subject to paragraph 8(d) hereof, if:
(i) any recapitalization, reclassification,
split-up or consolidation of Common Stock is effected;
5
<PAGE>
(ii) the outstanding shares of Common Stock
are exchanged, in connection with a merger or
consolidation of the Company or a sale by the Company
of all or part of its assets, for a different number or
class of shares of stock or other securities of the
Company or for shares of the stock or other securities
of any other corporation;
(iii) new, different or additional shares or
other securities of the Company or of another
corporation are received by the holders of Common
Stock;
(iv) any distribution is made to the holders
of Common Stock other than a cash dividend; or
(v) any other event occurs which in the
judgment of the Board requires equitable adjustment;
then the Board shall make appropriate adjustments to:
[a] the number and class of shares or other
securities that may be issued or transferred
pursuant to Options; and
[b] the purchase price to be paid per Share
under outstanding Options.
(b) Upon the dissolution or liquidation of the
Company, or, if the Board so determines, upon a merger or
consolidation of Company, the Plan together with any Options
granted thereunder, shall terminate upon completion of such
dissolution, liquidation, merger or consolidation.
(c) Adjustments under paragraph (a) shall be made
according to the sole discretion of the Board, and its
decision shall be binding and conclusive.
13. General Provisions.
(a) No Right to Employment. Nothing in the Plan
or in any instrument executed pursuant thereto shall confer
upon any Grantee any right to continue in the employ of
Sattel or a Subsidiary or shall affect the right of
management to terminate the employment of any Grantee, with
or without cause.
(b) Withholding Taxes. The Company may require
Grantee, as a condition of exercise of an Option, to pay or
6
<PAGE>
reimburse any taxes which the Company determines it is
required to withhold in connection with the grant or
exercise of the Option.
(c) No Rights as Stockholders. No Grantee and no
beneficiary or other person claiming through a Grantee shall
have an interest in any shares of Common Stock allocated for
purposes of the Plan or subject to any Option or otherwise
be considered a stockholder of the Company for any purpose
unless and until such shares of Common Stock shall have been
transferred to the Grantee or such person following exercise
of an Option.
(d) Choice of Law. The place of administration
of the Plan shall be within the State of Wisconsin and the
validity, interpretation and administration of the Plan and
any rules, regulations, determinations or decisions made
thereunder and the rights or any and all persons having or
claiming to have any interest therein or thereunder, shall
be determined exclusively in accordance with the laws of the
State of Wisconsin. Without limiting the generality of the
foregoing, the period within which any action in connection
with the Plan must be commenced shall be governed by the
laws of the State of Wisconsin, without regard to the place
where the act or omission complained of took place, the
residents of any party to such action or the place where the
action may be brought.
AGREEMENT REGARDING AWARD OF CLASS B UNITS
This Agreement is dated as of the 1st day of April,
1996, by and between Sydney B. Lilly (the "Executive") and Sattel
Communications LLC, a California limited liability company (the
"Company"). All capitalized terms used herein and not otherwise
defined have the same meaning as set forth in the Operating
Agreement of Sattel Communications LLC dated as of April 1, 1996
(the "Operating Agreement").
1. Award of Class B Units. In consideration for the
services to be rendered by the Executive to the Company, the
Executive is awarded 100 Class B Units in the Company (the
"Units"), subject to the terms and conditions of this Agreement
and the Operating Agreement.
2. Consent to Terms of Operating Agreement. The Execu-
tive acknowledges receipt of a copy of the Operating Agreement.
By his execution of this Agreement, the Executive agrees to be
bound by all of the terms and provisions of the Operating
Agreement.
3. Transferability. The transferability of Class B
Units is restricted by Article VII of the Operating Agreement and
Section 4 of this Agreement. Any transfer in violation of the
Operating Agreement or this Agreement shall be void and of no
legal effect.
4. Permitted Transfers.
4.1. Permitted Transferees. The Executive may
transfer all or any part of his Class B Units which are not
subject to forfeiture to (i) the Company, (ii) Sattel or
(iii) a group consisting of Executive's spouse, issue or a
trust created for the benefit of his spouse or issue (such
spouse, issue or trust being hereinafter referred to as a
"Permitted Transferee"); provided, however, that (i) any
such Permitted Transferee shall agree in writing to be bound
by the terms and conditions of this Agreement, (ii) if the
proposed transfer is to a trust, prior to the transfer the
Board of Directors shall have approved the trustee thereof
in writing and (iii) any transfer to a Permitted Transferee
shall only be of the economic interest, as defined in
Section 17001(n) of the California Act, attributable to the
transferred Class B Units. Thus, the Executive still
retains the right to vote and to exercise all rights and
decisions under this Agreement and the Operating Agreement
as regards the Class B Units transferred to the Permitted
Transferee unless said Permitted Transferee is admitted to
the Company as a Member as provided in Article VII of the
Operating Agreement.
4.2. Subsequent Transfers. A Permitted
Transferee may transfer all or any portion of the Class B
1
<PAGE>
Units transferred to such Permitted Transferee only to the
Company, Sattel, the Executive or another Permitted
Transferee in accordance with Section 4.1.
5. Purchase of Interest on Termination of Employment.
If the Executive's employment with The Diana Corporation
terminates, the provisions of this Section 5 shall govern the
Company's option to purchase any Class B Units then held by the
Executive or a Permitted Transferee.
5.1. Option to Purchase. Upon and following the
Executive's termination of employment with The Diana
Corporation, the Company will have the continuing right, but
not the obligation, to purchase all, but not less than all,
of the Class B Units held by the Executive and all Permitted
Transferees for their Fair Market Value as determined below.
Such right shall be exercised by written notice given by the
Company to the Executive and shall apply to all Units held
at the time the notice is given. Prior to any such
purchase, the Class B Units shall remain subject in all
respects to this Agreement and the Operating Agreement.
Notwithstanding the foregoing, if the Executive's employment
terminates because of death or disability, the Company's
option to purchase the Class B Units will not become
effective until one year after the termination of
employment.
5.2. Determination of Fair Market Value. For purposes
of this Agreement, the "Fair Market Value" (which shall mean
the "Agreed Fair Market Value" and the "Appraised Fair
Market Value," as applicable) of the Class B Units to be
purchased pursuant to Section 5.1 or Section 6.3 hereof
shall be determined as of the close of the fiscal quarter
immediately preceding the date the Company's notice is given
the case of Section 5.1 or as of the close of the fiscal
quarter immediately preceding the date the requisite notice
is given by the other Unit holders in the case of Section
6.3, whichever is applicable to the purchase. The Fair
Market Value shall be determined pursuant to the following
procedure:
(a) The holders of a majority of the Class B
Units which are to be purchased may reach agreement with the
Company as to the Fair Market Value of the Class B Units
(the "Agreed Fair Market Value"). All selling Class B Unit
holders are then bound to sell at such Agreed Fair Market
Value.
(b) If the parties cannot reach agreement as to
the Fair Market Value of the Class B Units within thirty
(30) days after the date the Company's notice is given in
the case of Section 5.1 or the date the requisite notice is
given by the other Unit holders in the case of Section 6.3,
2
<PAGE>
whichever is applicable to the purchase, any selling party
or the Company may request that the Fair Market Value of the
Class B Units to be purchased be determined by appraisal
according to the procedure set forth in Section 5.3, below
(the "Appraised Fair Market Value"); provided, however, that
only one appraisal of the Class B Units shall be performed
if there are multiple sellers of the Class B Units that
request an appraisal.
5.3. Appraisal. The Appraised Fair Market Value
shall be determined by an appraiser which (i) shall be an
investment banking firm which has a seat on the New York
Stock Exchange and (ii) shall be approved by the Company and
the holders of a majority of the Class B Units to be sold.
If the parties cannot agree upon an appraiser within fifteen
(15) days after the expiration of the thirty (30) day period
for determining the Agreed Fair Market Value under Section
5.2(a), above, the Company and the holders of a majority of
the Class B Units to be sold shall each select an appraiser
which shall be an investment banking firm which has a seat
on the New York Stock Exchange, and the two (2) appraisers
so selected shall select an appraiser meeting the same
criteria who shall determine the Appraised Fair Market Value
for purposes of this Section 5.3. The determination of such
appraiser shall be binding and conclusive on the parties
concerned for purposes hereof. Such appraisal shall be
performed as soon as practicable, and the Company will bear
the cost of the appraisal. In valuing the Class B Units,
the appraiser shall appraise the Company on the basis of the
sale of all of the equity interests in the Company to a
single purchaser and then determine a value for the Class B
Units by first taking into account the terms of the
Operating Agreement.
5.4. Closing for Purchase. The closing of any
purchase of Class B Units pursuant hereto shall occur at the
Company's principal office on such day as the Company shall
select, but not more one hundred and twenty (120) days after
the date on which the Company's notice is given in the case
of Section 5.1 or the date the requisite notice is given by
the other Unit holders in the case of Section 6.3, whichever
is applicable to the purchase. At the closing, the seller
or sellers shall deliver to the Company the Class B Units to
be purchased, free and clear of any liens, security
interests, encumbrances, charges or other restrictions, and
all such instruments or documents of conveyance as shall be
reasonably required by the Company in connection with the
purchase of such Class B Units.
5.5. Payment for Purchase and Adjustment of
Purchase Price. The Company may pay the entire purchase
price to the selling parties at the closing. Alternatively,
3
<PAGE>
the Company may pay one-third of the purchase price in cash
at the closing, with the remaining two-thirds of the pay-
ments to be made on the first and second anniversaries of
the closing unless the Company chooses to accelerate said
payments. The deferred payments will bear interest at a
rate of 10% per annum until paid. If there is a Triggering
Event within six months after the date as of which the Fair
Market Value is determined, the Executive will receive an
additional payment equal to the excess, if any, of the
amount that would have been paid based on the IPO price or
sales terms (net of expenses reasonably appropriate to the
sale) over the initial Appraised or Agreed Fair Market
Value. In the event of an IPO, the payment will be made in
cash. In the event of a sale, payment will be made in the
form of consideration given in the sale. In addition, the
deferred payments shall be accelerated and paid upon the
occurrence of a Triggering Event.
6. Right to Participate in Initial Public Offering
("IPO"). If there has not been a Triggering Event, the Executive
will have the right to participate in an IPO of any entity then
conducting the Company's business on the terms provided below.
By executing this Agreement, the Executive agrees to do whatever
is necessary with his Class B Units in order to position the
Company for such IPO and to otherwise cooperate to the fullest
extent possible.
6.1. Conversion of Class B Units. If the
Company's business shall be the subject of an IPO, the
Executive shall have the right to convert his Class B Units
into shares of the entity which are being offered in the IPO
(the "Stock") having a value equal to the value of the Units
so converted. The value of the Class B Units for this
purpose shall be their Fair Market Value; provided, however,
that an appraiser, if used, shall appraise the Company on
the basis of the public selling price of the Stock. Any
such conversion of the Class B Units may be deferred until
compliance with all state or federal securities laws.
6.2. Registration. The entity participating in
the IPO (the "Corporation") will use its best efforts to
effectuate a registration or registrations of the Stock
under the Securities Act of 1933, as amended, as shall be
necessary in the judgment of the managing underwriter to
effectuate an orderly sale (over such period of time and in
such amounts determined by the managing underwriter to be
reasonably feasible) of the Stock owned by the Executive or
Permitted Transferees, all other outstanding stock of the
Corporation subject to registration rights and any stock
that the Corporation wants to sell. All sales shall be made
first by the Corporation and second by other parties in
accordance with their relative rights and priorities. In
connection with any such registrations, the parties agree to
4
<PAGE>
cooperate with each other and execute such agreements and
other documents as shall be reasonably requested. The
Corporation's obligations under this Section 6.2 shall
terminate when the Executive or his Permitted Transferees
are able to sell any Stock pursuant to Rule 144 (other than
Rule 144(k)) under the Securities Act.
6.3. Executive's Right to Have Units Redeemed. If
the Company elects to redeem Units in lieu of undertaking an
IPO pursuant to other Agreements Regarding Award of Class B
Units of even date herewith, the Executive may elect to have
his Units (and those of his Permitted Transferees) redeemed
as well. The price at which such Units will be redeemed is
the Agreed Fair Market Value as determined pursuant to
Section 5.2(a) or the Appraised Fair Market Value as
determined pursuant to Section 5.2(b) hereof, whichever is
applicable; provided, however, the cost of the appraisal
will be borne one-half by the selling parties (divided in
proportion to the Units being sold) and one-half by the
Company. The closing of the purchase and payment for the
Class B Units shall be governed by Sections 5.4 and 5.5
hereof.
7. Cooperation If a Triggering Event Occurs. In the
event of a Triggering Event, the Executive (and his Permitted
Transferees) will be entitled, and required, to participate in
such Triggering Event on the same terms (in the event of a sale
after sharing expenses reasonably appropriate to the sale) as
Diana or its Affiliate owning the equity interests in the
Company, except as otherwise specifically modified by this
Agreement.
8. Miscellaneous. Any amendment to this agreement
must be in a writing signed by the Company and the Executive.
This Agreement shall be governed by the laws of the State of
California without application of choice of law principles. All
pronouns and variations thereof shall be deemed to refer to the
masculine, feminine, neuter, singular or plural as the context
may require. This Agreement constitutes the entire agreement
among the parties hereto pertaining to the subject matter hereof
and supersedes all prior agreements and understandings (oral or
written) of the parties in connection with any matter covered
hereby, including any prior commitments, whether oral or written,
for equity interests, real or phantom, in the business of the
Company.
9. Notices. All notices required or permitted to be
given pursuant to this Agreement shall be in writing and shall be
considered as properly given or made if delivered personally or
if mailed by certified mail (return receipt requested), with
proper postage, to the addresses of the parties set forth beneath
their respective signature lines of this Agreement. All notices
shall be deemed effective on the date when delivered personally,
5
<PAGE>
or five business days after having been mailed. Any party
hereto may change its address by like notice stating its new
address to the other party.
10. Arbitration. Any controversy or claim arising out
of or relating to this Agreement, or the breach thereof, shall be
settled by arbitration conducted before a single arbitrator in
accordance with the Commercial Arbitration rules of the American
Arbitration Association, and judgment upon the award entered by
the arbitrator may be entered in any court having jurisdiction
thereof.
Executed as of the day and year first above written.
SATTEL COMMUNICATIONS LLC
By: /s/ James J. Fiedler
Chairman of the Board and
Chief Executive Officer
Address: 9145 Deering Avenue
Chatsworth, CA 91311
EXECUTIVE:
By: /s/ Sydney B. Lilly
Address: 3111 Bel Aire Drive, #23F
Las Vegas, Nevada 89109
MEMORANDUM OF UNDERSTANDING
WHEREAS, The Diana Corporation ("Diana"), Sattel
Communications Corp. (formerly known as D.O.N. Communications
Corp.) ("SCC"), and Sattel Technologies, Inc. ("Sattel") entered
into a Second Supplemental Agreement relating to Joint Venture and
Exchange Agreement Reformation dated May 3, 1996 (the "Reformation
Agreement");
WHEREAS, the parties always intended that the matters below be
a part of the Reformation Agreement;
NOW, THEREFORE, the parties acknowledge and agree as follows:
1. That the said $10.0 million cash contribution is hereby
accepted as a contribution to capital under Internal Revenue
Code Section 118;
2. That SCC shall not issue any additional stock to Diana in
respect of such $10.0 million contribution;
3. That any future cash contributions to SCC are not governed by
the Reformation Agreement.
THE DIANA CORPORATION
By: /s/ Richard Y. Fisher, Chairman
SATTEL COMMUNICATIONS CORP.
By: /s/ Richard Y. Fisher, Assistant Secretary
SATTEL TECHNOLOGIES, INC.
By: /s/ George M. Weischadle, President
SECOND SUPPLEMENTAL AGREEMENT RELATING TO
JOINT VENTURE AND EXCHANGE AGREEMENT REFORMATION
THIS AGREEMENT is made and entered into this 3rd day of May,
1996, by and among The Diana Corporation, a Delaware corporation
("Diana"), D.O.N. Communications Corp., a Nevada corporation
("DCC"), Sattel Technologies, Inc., a California corporation
("Sattel"), and Space Risk Management Limited, organized in the
Cayman Islands ("SRML").
WHEREAS, the parties hereto have entered into a Supplemental
Agreement Relating to Joint Venture dated January 16, 1996 (the
"First Supplemental Agreement");
WHEREAS, Diana and Sattel have entered into an Exchange
Agreement dated January 16, 1996 (the "Exchange Agreement");
WHEREAS, the parties wish to confirm their agreement to amend
the First Supplemental Agreement and to amend and reform Exchange
Agreement as more specifically set forth below;
NOW THEREFORE, the parties hereto agree as follows:
1. Amendments to First Supplemental Agreement.
Paragraphs 1, 2(c), 4(c), 7 and 9, and Exhibits A and D,
of the First Supplemental Agreement are hereby deleted.
2. Reformation of Exchange Agreement. (a) Sattel hereby
transfers, assigns and conveys to Diana all right, title and
interest in and to an additional 150 shares of common stock of DCC,
free and clear of all liens, claims, encumbrances and restrictions.
Upon execution hereof, Sattel shall deliver to Diana a certificate
or certificates representing such additional 150 shares of common
stock of DCC, duly endorsed or endorsed in blank or accompanied by
validly executed stock powers.
(b) Sattel hereby transfers, assigns and conveys to Diana
all right, title and interest in and to 50,000 shares of common
stock of Diana, free and clear of all liens, claims, encumbrances
and restrictions. Upon execution hereof, Sattel shall deliver to
Diana a certificate representing the Diana Shares accompanied by
validly executed stock powers for 50,000 of such shares.
3. Mutual Release. (a) Sattel hereby releases, discharges
and holds harmless Diana and its officers, directors, employees,
agents, representatives, successors and assigns from all actions,
claims, causes of action, covenants, contracts, agreements,
obligations and liabilities arising out of agreement
<PAGE>
or imposed by law or otherwise, incurring or arising at any time
prior to execution hereof, and in each case relating to the
obligations of Diana or Sattel under the registration rights
provisions of the Exchange Agreement (Exhibit A thereto), provided
Diana's obligation under such registration rights provisions shall
survive execution hereof with respect to future obligations.
(b) Diana hereby releases, discharges and holds harmless
Sattel and its officers, directors, employees, agents,
representatives, successors and assigns from all actions, claims,
causes of action, covenants, contracts, agreements, obligations and
liabilities arising out of agreement or imposed by law or
otherwise, incurring or arising at any time prior to execution
hereof; provided all existing agreements of Sattel shall survive
execution hereof with respect to future obligations.
4. Cooperation in Sale of Diana Stock. Diana agrees to
cooperate with Sattel in Sattel's efforts to sell up to 100,000
shares of Diana common stock.
IN WITNESS WHEREOF, the parties hereto have executed this
agreement as of the date first above written.
THE DIANA CORPORATION
By: /s/ Richard Y. Fisher
Chairman
D.O.N. COMMUNICATIONS CORP.
By: /s/ Richard Y. Fisher
Assistant Secretary
SATTEL TECHNOLOGIES, INC.
By: /s/ George M. Weischadle
SPACE RISK MANAGEMENT LIMITED
By: DISSOLVED
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............. 4,192 4,023 3,812
Net effect of dilutive stock options -
based on the treasury stock method
using average market price............ --- --- 101
Total.................................. 4,192 4,023 3,913
====== ====== ======
Net earnings (loss).................... $(3,365) $ (720) $ 3,453
====== ====== ======
Per share amount....................... $ (.80) $ (.18) $ .88
====== ====== ======
Fully diluted
Average shares outstanding............. 4,192 4,023 3,812
Net effect of dilutive stock options-
based on the treasury stock method
using the greater of average market
price or year end market price........ --- --- 241
------ ------ ------
Total.................................. 4,192 4,023 4,053
====== ====== ======
Net earnings (loss).................... $(3,365) $ (720) $ 3,453
====== ====== ======
Per share amount....................... $ (.80) $ (.18) $ .85
====== ====== ======
</TABLE>
EXHIBIT 22
THE DIANA CORPORATION AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
All significant subsidiaries of the Registrant have been listed.
Indentations indicate indirectly owned subsidiaries which are directly owned
by the named subsidiary.
State of
Subsidiaries of the Registrant Incorporation
- ------------------------------ -------------
Entree Corporation............................................ Delaware
Atlanta Provision Company, Inc.............................. Georgia
C&L Communications, Inc....................................... Texas
Valley Communications, Inc.................................. California
Sattel Communications Corp.................................... California
Sattel Communications LLC................................... California
EXHIBIT 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements 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 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
June 27, 1996
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) for the fiscal year ended March 30, 1996.
Milwaukee, Wisconsin ERNST & YOUNG LLP
June 27, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF THE DIANA CORPORATION AS OF AND FOR
THE 52 WEEKS ENDED MARCH 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-30-1996
<PERIOD-START> APR-02-1995
<PERIOD-END> MAR-30-1996
<CASH> 6254
<SECURITIES> 1215
<RECEIVABLES> 16943
<ALLOWANCES> (772)
<INVENTORY> 12337
<CURRENT-ASSETS> 36986
<PP&E> 9241
<DEPRECIATION> (5083)
<TOTAL-ASSETS> 53533
<CURRENT-LIABILITIES> 23703
<BONDS> 3562
<COMMON> 5526
0
0
<OTHER-SE> 19160
<TOTAL-LIABILITY-AND-EQUITY> 53533
<SALES> 267602
<TOTAL-REVENUES> 268121
<CGS> 256920
<TOTAL-COSTS> 256920
<OTHER-EXPENSES> 13237
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1076
<INCOME-PRETAX> (3365)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3365)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3365)
<EPS-PRIMARY> (.80)
<EPS-DILUTED> (.80)
</TABLE>
