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 31, 1997
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.)
26025 Mureau Road, Calabasas, California 91302
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (818) 878-7711
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$1.00 Par Value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (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.
___ Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.[X]
On September 15, 1997, the aggregate market value of the voting stock of
the Registrant held by stockholders who were not affiliates of the Registrant
was $39,448,000, based on a closing sale price of $6.25 of the Registrant's
common stock on the NASDAQ Bulletin Board. At September 15, 1997, the
Registrant had issued and outstanding an aggregate of 7,179,233 shares of its
common stock. For purposes of this Report, the number of shares held by non-
affiliates was determined by aggregating the number of shares held by
Officers and Directors of Registrant, and by others who, to Registrant's
knowledge, own more than 10% of Registrant's common stock, and subtracting
those shares from the total number of shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE - NONE
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PART I
Forward-Looking Statements
All statements other than historical statements contained in this Report
on Form 10-K constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Without limitation,
these forward looking statements include statements regarding new products to
be introduced by the Company in the future, statements about the Company's
business strategy and plans, statements about the adequacy of the Company's
working capital and other financial resources, and in general statements
herein that are not of a historical nature. Any Form 10-K, Annual Report to
Shareholders, Form 10-Q, Form 8-K or press release of the Company may include
forward-looking statements. In addition, other written or oral statements
which constitute forward-looking statements have been made or may in the
future be made by the Company, including statements regarding future
operating performance, short- and long-term sales and earnings estimates,
backlog, the status of litigation, the value of new contract signings, and
industry growth rates and the Company's performance relative thereto. These
forward-looking statements rely on a number of assumptions concerning future
events, and are subject to a number of uncertainties and other factors, many
of which are outside of the Company's control, that could cause actual
results to differ materially from such statements. These include, but are
not limited to: risks associated with recent operating losses, no assurance
of profitability, the need to increase sales, liquidity deficiency and in
general the other risk factors set forth herein (see Item 7 - Risk Factors).
The Company disclaims any intention or obligation to update or revise any
forward-looking statements whether as a result of new information, future
events or otherwise.
ITEM 1. Business
A. General Development of Business
The Diana Corporation ("the Company") is a Delaware corporation
incorporated in 1961. The Company is engaged, through Sattel Communications
LLC ("Sattel"), in the provision of scalable public network-compatible
central office telephony and Internet switching equipment to communications
service providers.
Sattel's operations were conducted through Sattel Communications Corp.
("SCC") prior to Sattel's formation in April 1996. SCC commenced operations
in November 1994 as a 50/50 joint venture between the Company and Sattel
Technologies, Inc. ("STI"). The purpose of the joint venture was to further
develop STI's central office telecommunications switch by adding new features
and functions, and providing it with Internet access capability. The Company
acquired STI's ownership interest in SCC and SCC acquired the intellectual
property and technology rights of the Digital Switching Systems ("DSS")
switch through a series of transactions in fiscal 1996 and 1997. In fiscal
1997, Sattel granted subordinated equity participation interests, which
amount to approximately a 20% effective ownership interest (before
consideration of the subordination provisions) in Sattel to certain employees
of the Company. Currently, the Company has approximately an 80% ownership
interest in Sattel.
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In November 1996, the Company announced its strategic decision to
dispose of all of its non-Sattel business segments (the "Restructuring").
The consolidation of the Company's central office voice and data switching
equipment business (together, the "Sattel Business") with its other
businesses had resulted in confusion and misperception in the investor
community about the nature and prospects of the Company's various operations.
The Restructuring will reduce the Company to one distinct operation, which
will enable the marketplace to value the Sattel Business as an independent
concern. In February 1997, the Company completed the sale of a majority of
the assets of Atlanta Provision Company, Inc. ("APC"), the wholesale
distribution of meat and seafood segment. The Company is presently seeking
buyers for C&L Communications, Inc. ("C&L"), its telecommunications equipment
distribution segment, and Valley Communications, Inc. ("Valley"), its voice
and data network installation and service segment. The results of APC, C&L
and Valley have been reported separately as discontinued operations (see Note
2 to the Consolidated Financial Statements). As part of the Restructuring,
the Company's Board of Directors approved plans to change the name of the
Company. It is anticipated that the Company's shareholders will vote on a
new name at the next annual meeting of the shareholders.
B. Industry Segment
The Company's business is reported in one business segment: central
office voice and data switching equipment that is designed, developed,
manufactured, engineered, marketed and distributed by Sattel. See Note 12 to
the Consolidated Financial Statements for financial information regarding the
Company's sole business segment.
C. Narrative Description of Business
Principal Products
Sattel's primary products are Digital Switching Systems. Sattel's
primary business is to design, develop, manufacture, engineer, market and
distribute telecommunications switching systems. Sattel's DSS switches are
designed to provide cost-effective and versatile access to the Public
Switched Telecommunications Network ("PSTN") and the Internet. DSS switches
provide end office, tandem, international gateway, value-added services, and
Internet access, either individually, concurrently, or in combination.
Sattel's DSS switches are modular and scalable from 96 to 10,240 subscriber
lines and use an open architecture that is compatible with industry standard
network infrastructures.
The DSS switch comes in four models: DSS 100, DSS 1000, DSS 3000 and
DSS 10000. The basic features of each of these models are set forth in the
following table:
DSS 100 DSS 1000 DSS 3000 DSS 10000
------- -------- -------- ---------
T1s (Min./Max)(1)............ 1-16 1-16 1-80 1-160
E1s (Min./Max)(1)............ 1-12 1-12 1-60 1-120
Lines/Ports (Max.)(1)........ 96 1,024 3,072 10,240
Busy Hour Call Attempts...... 120,000 120,000 375,000 375,000
Physical Size & Dimensions... One 19" x One 19" x 1-3 2-10
10.5" x 24" 30" x 23" Racks Racks
Shelf Unit Rack
(1) Actual maximum varies with mix of numbers of lines and trunks (T1 or E1).
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The DSS switch architecture is based on multiple Motorola 680X0
processors and a VMEbus structure.
DSS switch functionality is directed by software programmed both in
low-level Assembly language (to provide speed for core switching functions)
and higher level languages such as C++. Core switching software, resident on
the switch itself, represents only a fraction of the code typical in larger
traditional central office switches. Certain other value-added software
applications reside on attached "servers," e.g., based on Sun Sparc work
stations.
The DSS switch provides dial tone, subscriber features such as
conferencing and call forwarding, local and long-distance services, and
international signaling. The DSS switch is based on "time-space-time"
switching technology and supports wireless internetworking applications. The
DSS switch also has customer control capabilities that allow the customer to
assign subscribers different levels of service, billing options and parental
control features, such as blocking information provider content. The DSS
switch provides real-time communications and captures both the "called"
number ("DNIS") as well as the "calling" number ("ANI") when available. The
DSS switch qualifies as a Class 5 switch per the Telecommunications Act of
1996 (the "Telecommunications Act"), and as such, affords its owner the
ability to be a Competitive Local Exchange Carrier ("CLEC") as defined in the
Telecommunications Act (see Industry Background).
Examples of specific applications of Sattel's DSS switches include a
facilities-based domestic and international long-distance carrier that is
using DSS switches to provide long-distance services with least-cost routing,
calling card, 800 number in-bound translation as well as equal and dedicated
access services. DSS switches enable another telecom carrier to provide
local and long-distance telecommunications services including calling card,
domestic and international 800, dedicated access and Signaling System 7
("SS7") capabilities.
Industry Background
In the United States, due to regulatory restrictions and historical
monopolies as well as the large capital cost of procuring central office
telephony switching equipment, which provides centralized access to the PSTN,
the provision of public switched telephony services traditionally has been
the domain of larger InterExchange Carriers ("IXCs") and Regional Bell
Operating Companies ("RBOCs") conducting business in defined markets and
providing defined services. Regulatory changes enacted in the
Telecommunications Act have fundamentally altered the PSTN landscape by
permitting companies other than existing Local Exchange Carriers ("LECs")
such as the RBOCs, to provide customer access to the PSTN. The Company
believes that these changes have created an opportunity for
telecommunications companies to expand beyond their traditional markets. For
example, an RBOC may decide to expand beyond its traditional local market to
compete with a LEC in a different geographic market. IXCs may decide to
expand beyond their traditional long-distance markets and provide local
exchange services. Similarly, RBOCs or Internet Service Providers ("ISPs")
may wish to provide additional services such as long-distance service or
Internet access (in the case of an RBOC) or long-distance or local exchange
service (in the case of an ISP). New entrants into the telecommunications
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markets, such as CLECs, are also beginning to compete with existing local
service providers. Sattel's management believes that these developments
create a new and emerging potential market for small-to medium-sized scalable
central office switches.
In addition, the growth in the use of the PSTN by ISPs for connections
to the Internet has created a need for cost-effective additional central
office switching port capacity to handle data calls (which have significantly
higher average call holding times than voice calls). LECs trying to cope
with the significant increase of long-duration data calls may be able to
reduce such calls' effect on their switching resources by off-loading the
traffic using a lower-cost switch to route data calls around their main
switch. ISPs may make their core business more profitable by essentially
becoming a telephone company and purchasing switches that enable them to
terminate calls locally and connect directly to the Internet backbone network
rather than paying the higher per-minute access charges to a LEC. In
addition, the ISP can offer new voice services to generate incremental
revenues to supplement their fixed monthly revenue source from Internet
services. The Company believes that switches with the following
characteristics could provide strategic and competitive advantages, to
capitalize on the foregoing opportunities:
A scalable switch could enable a market participant to enter into
and test a new market at a relatively low initial capital cost per
port by purchasing a less expensive switch with a smaller port
capacity that could be expanded in the future as the business
grows.
An open architecture design that is compatible with existing
industry standards could enable a market participant to minimize
both the time and the expense necessary to make a switch compatible
with the network infrastructure in which it is being used.
Likewise, an open architecture design could enable a participant to
enhance both the timeliness and effort required to add value added
applications, e.g. credit, debit and other card processing.
The DSS switch hardware design is based on an open architecture that
utilizes industry-standard interfaces, components and operating systems. The
"off-the-shelf" components are therefore more easily integrated into the
product, lowering costs and the time required to bring new products,
features and functions into the marketplace. The DSS switch software and
open architecture hardware have been developed for interoperability with data
networks like the Internet, while retaining a "true" central office PSTN
switch functionality, unlike "data only" communications switches. The
flexible software programmed in a combination of low-level and high-level
code enable the DSS switch to offer the functionality of more expensive
traditional central office switches.
Many traditional central office switches have more than 20 million lines
of software code. Consequently, extensive regression testing is required
each time a new feature is added, resulting in long lead time to market of
new revenue generating features that are required to compete successfully in
the marketplace. Sattel's DSS software design with less than 100,000 lines
of code provides for the switching of voice and data and increases the
flexibility of the DSS switch for the integration of third party hardware and
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software to meet specific customer needs. This software design allows
service providers to deploy new revenue generating services relatively
faster.
Management of Sattel believes that the large-scale, monolithic central
office switching systems developed for the centralized, monopolistic telecom
industry are not responsive to the needs of the new and emerging,
competitive, decentralized telecommunications industry. Today's telecom
industry demands cost-efficiency, flexibility and scalability to compete when
opportunities present themselves.
Sattel's objective is to address the small-to-medium-sized central
office switch market for applications in which larger switches cannot be
applied as cost effectively or efficiently. The Company believes that
Sattel's products provide central office functionality in modular, open
architecture hardware configurations with flexible software. This
combination allows for the addition of capacity and functionality to meet
customer requirements efficiently and cost effectively.
DSS switches can perform Class 4 switching (when connecting other
switches in a tandem configuration) or Class 5 Central Office ("CO")
switching (when connecting individual customers to the PSTN). The DSS Class
4 and Class 5 switches are standalone switches. They are not dependent upon
other switches and perform specified functions, such as providing dial tone.
DSS switches can therefore be deployed in central office locations. The
DSS software also enables DSS switches to interoperate with PSTN industry
standards such as SS7.
Telecommunications carriers with CO switching facilities that contain
switches providing access to the PSTN are required to provide access in their
CO to equipment that meets regulatory requirements necessary to qualify as a
Class 5 CO Switch. Switches that meet Class 5 standards generally can be
used by a new entrant in a local market to gain access to the PSTN using an
existing LEC's central office switching facilities.
Sales and Marketing
To meet the needs of customers with diverse and complex network
requirements, Sattel sells it products through the coordinated efforts of its
direct sales force and selected systems integrators, which include value
added resellers ("VARs").
Sattel's direct sales force principally focuses on smaller carriers,
e.g., independent LECs, CLECs, IXCs and ISPs. Sattel also uses indirect
distribution channels such as systems integrators, VARs, original equipment
manufacturers ("OEMs") and distributors to market its products to CLECs,
IXCs, international telephone companies and smaller ISPs.
The direct sale of DSS switches is typically an extended process. A
sales person will make initial contact with the potential customer to
understand the customer's needs and introduce the DSS switch. Thereafter,
Sattel will produce a network design and assist in developing a financial
model to demonstrate the feasibility of the customer's application.
Proof-of-concept testing of a configured switch by the customer is typically
followed by an initial deployment of a limited number of switches for testing
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in either a geographic or market segment. The initial deployment of the
switch in the customer's network may occur with only a limited number of the
switches that will ultimately be deployed. The time from initial contact
with a potential customer to initial deployment is typically several months
or longer.
Sattel seeks strategic relationships with select partners, e.g.,
technology companies, systems integrators, VARs and OEMs to provide total
solutions and more efficiently market its products. Sattel has developed and
intends to continue to develop relationships, including research and
development joint ventures, with companies with complementary technologies.
Customer Service and Support
Sattel services and provides technical support for its products. Sattel
or an authorized third party provides customer training in connection with
the installation of its products. DSS switches may be sold with a service
plan pursuant to which Sattel provides ongoing technical assistance and
maintenance. Sattel has entered into agreements with third parties,
including certain suppliers of adjunct equipment incorporated into Sattel's
switches, to provide support for Sattel's products.
New Product
In January 1997, Sattel announced its Switch Server Architecture ("SSA")
and Access Module designed to support the evolution of local exchange
services and competition growing out of the Telecommunications Act, and the
growing Internet market. SSA intends to bring the client/server paradigm
that has proved successful in enterprise computing to the carrier network
equipment market. The primary SSA components are:
Access Module "Client" - a service access device designed to project a
mix of voice, data, and video services using a variety of digital subscriber
line ("DSL") technologies. The Access Module will segregate services by type
at the first point of connection in the carrier's office. Voice services
will be routed to the Sattel DSS switch, which will act as a server for call
handling and interconnect features these calls require. Data services will
be directed to a fast local data bus and delivered to the Internet switch.
Additional network services such as video can be supported by adding a video
switch and by providing the Access Module with "rules" on recognizing and
routing the subscriber video requests. The first release of the Access
Module is expected to be available in the fourth calendar quarter of 1997.
DSS "Server" - supports telephony services via the DSS switch. Sattel
is modifying its DSS switch to provide high-speed interconnection between the
DSS switch and the new Access Module, and to fully integrate the DSS switch
into SSA. Data services such as Internet access will be enabled through an
Internet Switch Server ("ISS") functional element. Network management,
signaling and administrative services will be enabled via the Customer
Management System ("CMS"). The ISS and CMS Servers are integrated into SSA
through the Select Partner Program.
Select Partner Program - allows third-party hardware and software
vendors to be integrated into the overall SSA network and provides client
access or server-based features to network subscribers.
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The first SSA deliverable will include ISDN PRI capability, consisting
of an SSA shelf, a DSL-1 ISDN interface card, a SSA backplane, and an
Integrated Network Processor ("INP") card to interface to the DSS switch.
The DSL-1 card has been designed, fabricated and the card's firmware has been
successfully tested. The INP card's software has been successfully tested
and interfaced to the DSS switch. At March 31, 1997, prototype testing of
SSA had not been completed. Sattel expects to be able to deliver the ISDN
PRI card in the fourth calendar quarter of 1997.
In May 1997, Sattel and Yurie Systems, Inc. ("Yurie") announced a Hybrid
CO/ATM switch designed to consolidate and concurrently switch "any-to-any"
voice, data and video traffic across public and private ATM networks. The
CO/ATM switch pairs Sattel's DSS switch with Yurie's LDR ATM access
equipment. The Hybrid CO/ATM switch illustrates the benefits of flattening
the traditional PSTN, revealing new opportunities for competitive telcos,
ISPs, private network operators, cable companies, and new entrants to the
increasingly competitive telecom industry.
In June 1997, Sattel and WorldWave Communications, Inc. ("WorldWave")
announced combining Sattel's DSS switch and WorldWave's Wireless Local Loop
("WLL") System, which will provide flexible, cost effective two-way digital
voice and data wireless services. WorldWave's WLL System is designed
specifically to deliver residential telephone service for CLECs who want to
provide voice and data services in new markets and in developing countries.
There can be no assurance that these relationships will result in the
development of salable products which will be beneficial to the future growth
of Sattel or that products produced by these relationships will be developed
in a cost effective manner and be available for sale within the time frame
required to take advantage of the market opportunities.
Sattel believes that the timely development of new products and
enhancements to existing products are essential for it to compete in the low-
to-medium-sized central office switch market. Sattel expects to continue to
devote substantial resources, subject to its available liquidity (see Item 7
- - Liquidity and Capital Resources and Risk Factors), to research and
development as well as to strategic alliances in fiscal 1998.
Raw Materials
Sattel designs, develops, manufactures, engineers, markets and
distributes DSS switches. Sattel has developed its main switching
components, parts of which are subject to pending patents. Certain software
and hardware associated with adjunct and peripheral equipment used by Sattel
to provide certain functions and features are licensed or procured from other
vendors under OEM arrangements, or are developed jointly with other vendors
pursuant to research and development joint ventures, partnerships, or similar
arrangements.
Sattel utilizes certain general purpose hardware components in its
switches, which lowers costs and retains for Sattel the option of acquiring
such components from more than one vendor. Other hardware and/or software
components such as subscriber and data line cards and core switch software
were developed by Sattel or its contractors.
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Sattel performs certain manufacturing functions in house. In addition,
Sattel outsources some of its manufacturing and procurement of raw materials
used in manufacturing to outsource vendors, including STI, Sanmina
Corporation ("Sanmina") and I-PAC Manufacturing, Inc. ("I-PAC"). In March
1997, STI commenced a lawsuit against Sattel (see Note 6 to the Consolidated
Financial Statements). Sattel's outsource vendors have facilities to provide
a turnkey product which includes the manufacturing or procurement of board,
chassis, and system level assemblies for Sattel. In November 1996, pursuant
to a contract with Sattel, Sanmina began manufacturing boards and
subassemblies for Sattel products out of its San Jose, California plant.
Sattel expects that Sanmina could manufacture complete products for Sattel in
the future.
Sattel's outsource manufacturers have 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
additional alternative sources if and as required, could result in delays
which could materially and adversely affect Sattel. See Item 7 - Risk
Factors-Dependence on Outsource Manufacturers and Other Key Suppliers.
Certain software and hardware associated with adjunct and peripheral
equipment used by Sattel to provide certain functions and features are
licensed or procured under OEM arrangements, from other vendors.
Proprietary Rights
Sattel uses a combination of patents, trade secrets, industry know-how,
confidentiality and non-compete agreements and tight control of its software
to protect the products and features that it believes give it competitive
advantages. See Item 7 - Risk Factors-Limited Protection of Proprietary
Technology; Risk of Third-Party Claims of Infringement.
Working Capital Practices
At Sattel's discretion, in order to accommodate customers' requests,
Sattel has granted extended payment terms. The extended terms are typically
negotiated in advance of shipment. At March 31, 1997, Sattel had
approximately $4.6 million of accounts receivable with extended payment
terms, a substantial portion of which has been collected.
Customers and Customer Concentration
The Company believes that the potential customers for Sattel's DSS
switches include, among others, telecommunications companies such as RBOCs,
independent local telephone companies, CLECs, IXCs, wireless telephone
companies, cable TV companies, virtual private network providers, and ISPs.
Sattel markets its switches to targeted customer segments directly with its
own sales force and indirectly markets to other customers through systems
integrators, VARs and distributors. For the fiscal year ended March 31,
1997, Concentric Network Corporation ("CNC") represented approximately 94% of
the Company's revenues. In April 1997, Sattel initiated a lawsuit against
CNC for, among other things, breach of contract (see Item 3 - Legal
Proceedings).
Sattel anticipates that its results of operations in any given period
will continue to fluctuate and depend to a significant extent upon sales to
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a small number of customers. There can be no assurance that Sattel's
principal customers will continue to purchase product from Sattel at current
levels, if at all. Sattel is working diligently to broaden its end-user
customer base and to develop relationships with indirect channels of
distribution.
Sattel's products are targeted at markets for small-to-medium-sized
central office switches for voice and data communications. Sattel's direct
sales force principally focuses on smaller carriers, e.g., independent local
exchange companies, CLECs, IXCs and ISPs. Sattel also uses indirect
distribution channels such as systems integrators, VARs, OEMs and
distributors to market its products to CLECs, IXCs, international telephone
companies and smaller ISPs. This target market is 10,240 lines and under.
With list prices for DSS switches starting at under $175,000, Sattel believes
it can target potential customers with existing switching needs or those who
can use additional switching capacity to lower expenses and/or provide new
services to their customers.
Depending on technological and market developments, future customers may
include cable television companies, and enterprises (such as large
corporations, universities or municipalities) seeking to reduce
telecommunications costs by becoming CLECs.
Among the companies that have taken delivery of the Company's switches
to date are Beehive Telephone Company, CNC, Lightcom International, Inc.,
WorldWave Communications, Inc., Vancouver Telephone Company, Apollo Telecom
and Telesys S.A. Another component of Sattel's long-term strategy is its
expansion into international markets. In order to effect this strategy,
Sattel is seeking out strategic alliances with partners that have established
international distribution channels.
Backlog
The Company only includes in its backlog written orders for products and
related services scheduled to be shipped within one year. The Company does
not believe that the level of, or changes in the levels of, its backlog are
necessarily a meaningful indicator of future results of operations.
Competition
The telecommunications switching equipment and access markets are highly
competitive. Sattel produces small-to-medium-sized scalable central office
switches that currently compete with few, if any, directly comparable
products. One company that may compete with Sattel is DTI, Inc. ("DTI"), a
privately-held company headquartered in Tennessee. Management believes that
DTI's products may compete directly with Sattel's products. Sattel faces
potential competition in the data communications market segment from a number
of national and regional data communications equipment providers. In
addition, the manufacturers of large scale central office switches such as
Lucent Technologies, Inc., Northern Telecom Ltd., Digital Switch Corporation,
Siemens AG, Alcatel Alsthom, Telefonaktiebolaget LM Ericsson and others have
the resources and expertise to compete in the smaller-scale central office
switching equipment segment. While Sattel's management believes that these
larger manufacturers have not at this time demonstrated substantive movement
into Sattel's target market, there is no assurance that they will not do so
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in the future. It is also possible that large communication carriers such
as AT&T Corporation, MCI Communications, Sprint and, when and if legally
permitted, the RBOCs, may enter the small to mid-sized central office
switching equipment business. Many of these competitors possess financial
resources significantly greater than those of Sattel and accordingly could
initiate and support prolonged price competition to gain market share.
Research and Development
In fiscal 1997, the Company made a strategic decision to invest
approximately $4 million in engineering, research and development to provide
new and enhanced features to the DSS switch and to develop new products. The
new and enhanced features include Advanced Call Processing for Operator
Services; Number Portability and Enhanced 911; SS7 to support intelligent
networking applications; Call Management System software; and a Switch
Adjunct Server to more efficiently manage DSS switch resources and enable
Call Management. These new and enhanced features were released in fiscal
1997.
In virtually all cases, Sattel owns the results of the research and
development performed by contract engineers and independent laboratories. In
some instances, however, the development activity requested by Sattel
involves a specific customization of a contractor's proprietary software for
integration into the DSS switch. In those instances, Sattel establishes a
licensing agreement with the contractor.
When Sattel subcontracts development work, the contractor designs and
tests the technology needed to fulfill the contract. Sattel retains the
responsibility to integrate the contractor's work product with the DSS
switch.
The individual contract engineers assist with specific technological
needs of Sattel. Each of the outside laboratories utilized by Sattel has
been selected based on a specific organizational capability and expertise in
one of the following areas: automatic test systems, telecommunications and
engineering processes, UNIX software, Operation Administration Maintenance &
Provisioning ("OAM&P"), telecommunications signaling systems,
telecommunications and data communications software products and Internet
software.
Employees
As of September 12, 1997, the Company had 61 full-time employees. In
addition the Company retained, on a contract basis, additional people for
specific projects. Sattel believes that its future growth and success will
depend in large part upon its ability to continue to attract and retain
highly qualified people. The Company has no collective bargaining agreement
with its employees.
Environmental Regulation
Compliance with federal, state and local regulations relating to
environmental protection have not had a material effect upon capital
expenditures, operating results or the competitive position of the Company.
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Glossary
Advanced Call Processing - Features include Operator Services for busy line
verification and busy line interrupt, exchange service capability for service
provider Number Portability and Enhanced 911.
ANI - Automatic number identification (the phone number of the phone calling
you).
Busy hour call attempts - number of call attempts during the busy hour, an
important concept in traffic engineering, i.e., figuring how much switching
and transmission capacities are needed.
C++ language - An object-oriented programming language.
Call Management System - a DSS switch adjunct processor that handles call
authorizations, time-of-day routing decisions, and call record storage.
Class 4 office - The major switching center to which toll calls from Class 5
central office switches are sent.
Class 5 office - An end office. Connects subscribers to the public switched
telephone network (PSTN).
DNIS - Dialed number identification service.
Enhanced 911 - Emergency call routing with calling number identification
(ANI).
ISDN - Integrated services digital network. There are two interfaces in
ISDN: PRI - Primary rate interface: The ISDN equivalent of a T1 or E1
circuit, and BRI - Basic rate interface: Consists of two bearer B-channels
at 64 kilobits and a data channel at 16 kilobits per second.
Number Portability - Allows telephone numbers to move with a customer between
carriers.
OAM&P - Operation, administration, maintenance and provisioning.
Operator Services - A variety of services provided by an operator, i.e.,
collect calls, third-party billed calls and person-to-person calls.
Ports - an entrance to or exit from a network.
Rack - an open metal structure onto which equipment is mounted.
Shelf unit - a unit that mounts in a rack and holds cards.
Switch Adjunct Server (SAS) - Enables customers to better manage DSS switch
resources and increase processor usability in the switch. SAS leaves more
CPU power in the switch by moving translations to the SAS. The SAS has a
graphical user interface for point-and-click switch maintenance and it
enables users to monitor alarm messages from the switch.
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Servers - Typically a computer that sits on a local area network that is used
as a repository or distributor of data.
Signaling System 7 ("SS7") - An international intelligent network signaling
system that significantly improves call processing. SS7 networks typically
process calls faster than other signaling systems since the call arrives
independently from the voice traffic. SS7 reduces network congestion and
deployment costs through greater port utilization and alternative routing
capabilities. SS7 also enables value-added services to be efficiently
deployed. Examples of these value-added services include credit and debit
card validation, and wireless applications.
T1/E1 circuits - A T1 circuit is a digital transmission link with a capacity
of 1.544 megabits per second (North American standard). An E1 circuit is a
digital transmission link with a capacity of 2.048 megabits per second
(European standard).
Time-space-time switching - A fully electronic switch matrix design
architecture.
Trunks - A communication line between two switching systems.
Unix - A multi-tasking, multi-user operating system for running computers and
telephone systems that allow multiple programs to be run simultaneously and
multiple users to use a single computer.
Workstations - High-speed personal computers that are used for high-powered
processing tasks, i.e., CAD/CAM, engineering.
ITEM 2. Properties
Sattel's and the Company's executive offices are located in
approximately 30,000 square feet of office and warehouse space in Calabasas,
California currently leased by Sattel. The Company also leases office space
in Milwaukee, Wisconsin; and Bridgewater, New Jersey to support its
administrative and sales requirements. The Company is in the process of
closing the offices in Milwaukee and Bridgewater. The Company owns a vacant
parcel of land in Eldridge, Iowa that is for sale. The Company owns a
91,000 square-foot building in Atlanta, Georgia which was formerly used by
APC. The Company has listed this property for sale. Presently, the property
is being leased to the company that purchased APC's business. C&L and Valley
each lease warehouse and office space to support their operations.
ITEM 3. Legal Proceedings
The Diana Corporation Securities Litigation (Civ. No. 97-3186). This is
a consolidation of what were originally nine separate actions brought in the
United States District Court for the Central District of California on behalf
of purchasers of the Company's common stock during a class period that
extended from December 6, 1994 through May 2, 1997. On July 23, 1997, the
Court entered a stipulation and order consolidating the nine actions for all
purposes. On September 9, 1997, plaintiffs filed a consolidated amended
complaint (the "Consolidated Complaint") asserting claims against the
Company, certain of its present and former directors and officers, and others
under Section 10(b) of the Securities Exchange Act of 1934. The Consolidated
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Complaint alleges essentially that the Company and other defendants were
engaged in a scheme to inflate the price of the Company's common stock during
the class period through false and misleading statements and manipulative
transactions. The Consolidated Complaint seeks unspecified damages, but
identifies the significant movement in the Company's stock price during the
putative class period (a swing of more than $115 per share) to imply that the
damages that will be claimed will exceed the Company's assets.
No discovery or substantive proceedings have occurred. The Company must
respond to the consolidated amended complaint by September 30, 1997 if by
motion to dismiss, or by October 17, 1997 if by answer. The Company intends
to defend this action vigorously.
As discussed in Note 16 to the Consolidated Financial Statements, the
Company has adjusted certain previously reported fiscal 1997 unaudited
quarterly financial information. It cannot presently be determined what
effect, if any, such restatements will have on the class actions discussed
above, or any other potential claims by investors which may be asserted
against the Company.
Sattel Communications LLC v. Concentric Network Corporation ("CNC"),
Case No. LC 040906, Superior Court, Los Angeles County, California. Sattel
filed this action as plaintiff in April 1997. The complaint sought damages
of roughly $4.2 million relating to products CNC purchased, plus additional
compensatory and punitive damages for, among other things, breach of
contract. On June 25, 1997, the trial court granted Sattel's motion for pre-
judgment attachment in the amount of $3.6 million. The granting of the
motion was based upon the Court's preliminary determination on the probable
validity of Sattel's claim. On June 30, 1997, Sattel posted an undertaking,
in the form of a $75,000 bond, to secure the attachment. On July 9, 1997,
Sattel secured a final judgment from the Court. The basic terms are: (i) a
$4.4 million judgment against CNC and in favor of Sattel; (ii) certain
restrictions on Sattel's CNC stock holding have been lifted, such that Sattel
has the election to sell up to 25% of its CNC holding immediately following
the completion of CNC's proposed Initial Public Offering ("IPO") at the IPO
price; and (iii) dismissal and mutual release of all claims between the
parties. Sattel agreed to wait until August 15, 1997 before executing upon
the judgment. Subsequently, Sattel has collected both the $4.4 million
judgment and $396,000 from the partial sale of its CNC holdings.
C&L Communications, Inc. v. Stephenson, et al., Case No. 95-CI-16680,
District Court, Bexar County, Texas. C&L Communications, a wholly-owned
subsidiary of the Company, filed this action in November 1995 against three
former officers who resigned in 1995 to form a competing business, AT Supply.
AT Supply and its parent corporation, Teltronics, Inc. of Sarasota, Florida,
are also joined as defendants. The complaint alleges breach of fiduciary
duty, conspiracy and misappropriation of trade secrets. Trial is set for
January 1998. The parties are in the midst of settlement discussions. If
the matter does not settle, C&L intends to continue vigorous pursuit of the
case.
See Note 6 to the Consolidated Financial Statements for a description of
additional legal proceedings in which the Company or its subsidiaries are
defendants.
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ITEM 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the fourth
quarter of fiscal 1997.
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The Company's common stock is included for quotations on the NASDAQ
Bulletin Board under the symbol DNAK. Prior to March 10, 1997, the Company's
common stock was traded on the New York Stock Exchange. 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 prior to March 10, 1997, and
the high and low bid prices per share for the Company's common stock obtained
from trading reports of the National Association of Securities Dealers
subsequent to March 7, 1997. The sales prices have been adjusted to reflect
the 5% stock dividends paid on October 2, 1996 and January 5, 1996:
Fiscal Fiscal
1997 1996
Quarter High Low Quarter High Low
------- ---- --- ------- ---- ---
First 114.286 23.810 First 7.596 3.855
Second 46.190 19.524 Second 12.585 5.102
Third 41.750 25.875 Third 25.357 9.184
Fourth 26.875 4.250 Fourth 29.048 11.786
At September 4, 1997 the Company had 1,273 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.
Sales and Issuance of Unregistered Securities
On November 26, 1996, the Board of Directors authorized the issuance of
2,500 shares of Company common stock to Edward J. Noha in consideration for
previous services as a Director of the Company. On November 26, 1996, the
Board of Directors authorized the issuance of 1,500 shares of Company common
stock to R. Scott Miswald in consideration for current services as an officer
of the Company. The exemption from registration for these issuances was
pursuant to Section 4(2) of the Securities Act of 1933.
On July 17, 1997, the Company issued 1,880,750 shares of its common
stock at $2.00 per share in a private placement under Regulation D of the
Securities Act of 1933. In addition, warrants to purchase 1,880,750 shares
of the Company's common stock were issued to the Regulation D participants.
The Company issued the stock and warrants to certain private investors
including James J. Fiedler, the Company's Chairman and Chief Executive
Officer, Stephen W. Portner, a Director, and the following shareholders that
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own beneficially more than 5% of the common stock of the company: Richard L.
Haydon and Ardent Research Partners.
On July 17, 1997, the Company issued $2,500,000 of 8% convertible notes
at par. The purchasers of the notes are: Buckingham Global Investors, Mid
Ocean Capital, S.A., Offshore Investment Fund Ltd. and Offshore Nominees
Limited. The notes are convertible into the Company's common stock which
will be issued pursuant to the exemption provisions of Regulation S of the
Securities Act of 1933. The conversion price is the lessor of $6.64 or 80%
of the 5 day average closing bid price on a conversion date with a conversion
floor price (the "Conversion Floor Price") of $1.50 per share, provided that
if the average closing bid price for any 20 consecutive trading days prior to
a conversion date is less than $1.50 per share, the Conversion Floor Price
will be adjusted to 80% of such 20 day average closing bid price. A further
restriction on conversion provides that in no event shall the holder be
entitled to convert any portion of the note in excess of that portion of the
note upon conversion of which the sum of (1) the number of shares of common
stock beneficially owned by the holder and its affiliates (other than shares
of common stock which may be deemed beneficially owned through the ownership
of the unconverted portion of this note as defined in the Subscription
Agreement) and (2) the number of shares issuable upon the conversion of the
portion of the note with respect to which the determination of this proviso
is being made, would result in beneficial ownership by the holder and its
affiliates of more than 4.9% of the outstanding common stock of the Company.
The note can be converted equally beginning 45, 75 and 105 days following
July 17, 1997. Interest is payable semi-annually in arrears in the form of
Company common stock based on the above-described conversion price. After
one year, the Company may, by written notice to the holders, prepay the notes
in whole or in part. The notice shall be given at least ten (10) days prior
to the payment date and on such date the Company shall pay the outstanding
principal and all accrued interest on the note, unless prior to such payment
date the holder has delivered a notice of conversion. Any unconverted
principal amount and accrued interest thereon shall at the maturity date be
paid, at the option of the Company, in either (a) cash or (b) common stock
valued at a price equal to the average closing bid price of the common stock
for the five (5) trading days immediately preceding the maturity date.
The 8% convertible notes contain certain event of default provisions.
If an event of default occurs and is not waived by the holders of a majority
of all notes, the Company must redeem the notes at 125% of the outstanding
principal amount due. Significant event of default provisions include among
other things: proceedings for relief under bankruptcy law, insolvency, money
judgment or writ of attachment in excess of $500,000 filed against the
Company and the delisting of the Company's common stock from an exchange or
the Nasdaq Stock Market.
In addition, warrants to purchase 37,037 of common stock at an exercise
price of $6.75 per share were issued to the escrow agent for the Regulation
S offering. These warrants are exercisable after 41 days of issuance and
expire on July 17, 2000. Upon exercise of the warrants, the Company's common
stock will be issued pursuant to the exemption provisions of Regulation S of
the Securities Act of 1933.
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ITEM 6. Selected Financial Data
THE DIANA CORPORATION
SELECTED FINANCIAL DATA
(In Thousands, Except Per Share Amounts)
March 31, March 30, April 1, April 2, April 3,
1997 1996 1995 1994 1993 (1)
-------- -------- ------- ------- -------
(5) (5)
Net sales (2)............... $ 7,154 $ 264 $ --- $ --- $ ---
======= ====== ====== ====== ======
Earnings (loss) from:
Continuing operations (2)(6) $(12,335) $(2,746) $(2,140) $ 1,364 $ 644
Discontinued operations (3). (8,175) (619) 1,420 2,093 1,213
Extraordinary items......... (508) --- --- (266) 1,318
Accounting change........... --- --- --- 262 ---
------- ------ ------ ------ ------
Net earnings (loss)......... $(21,018) $(3,365) $ (720) $ 3,453 $ 3,175
======= ====== ====== ====== ======
Earnings (loss) per common share:
Primary
Continuing operations...... $ (2.34) $ (.62) $ (.51) $ .33 $ .16
Discontinued operations (1.55) (.14) .34 .51 .30
Extraordinary items........ (.10) --- --- (.06) .33
Accounting change.......... --- --- --- .06 ---
------- ------ ------ ------ ------
Net earnings (loss) per
common share........... $ (3.99) $ (.76) $ (.17) $ .84 $ .79
======= ====== ====== ====== ======
Fully diluted
Continuing operations...... $ (2.34) $ (.62) $ (.51) $ .32 $ .16
Discontinued operations.... (1.55) (.14) .34 .49 .30
Extraordinary items........ (.10) --- --- (.06) .33
Accounting change.......... --- --- --- .06 ---
------- ------ ------ ------ ------
Net earnings (loss) per
common share........... $ (3.99) $ (.76) $ (.17) $ .81 $ .79
======= ====== ====== ====== ======
Cash dividends per common
share...................... $ --- $ --- $ --- $ --- $ ---
======= ====== ====== ====== ======
Total assets................ $ 23,244 $29,092 $24,205 $28,522 $27,357
Long-term debt (4).......... 1,958 2,099 2,240 2,501 2,760
Working capital............. 6,161 13,282 15,489 19,007 17,490
Shareholders' equity........ 16,834 24,686 19,729 18,852 15,492
(1) Fiscal 1993 contains 53 weeks. All other years contain 52 weeks.
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(2) Earnings (loss) from continuing operations includes the operating results
of Sattel and the former Milwaukee corporate office. Sattel commenced
operations in November 1994. See Item 1 Business and Note 3 to the
Consolidated Financial Statements. Included in the fiscal 1997 loss are
the following: write-down of investment in CNC of $1,060,000; legal,
accounting and other professional fees of $1,050,000; realized losses on
sale of marketable securities of $736,000; settlement expenses with
a former employee of $600,000; and charges of $1,400,000 for excess and
obsolete inventory.
(3) The increase in the loss from discontinued operations in fiscal 1997 is
due to a provision of $7,550,000 recorded for restructure costs, severance
and the estimated loss on disposal of APC, C&L and Valley. See Note 2 to
the Consolidated Financial Statements.
(4) Includes current portion of long-term debt.
(5) The data in this column is unaudited.
(6) Earnings from continuing operations in fiscal 1994 and 1993 included
interest income and gains on sales of marketable securities of $2,567,000
and $1,123,000, respectively.
ITEM 7.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations - Fiscal Year Ended March 31, 1997 versus March 30,
1996
The Company's historical results of operations have been restated to
reflect the operations of APC, C&L and Valley as discontinued operations.
The following discussion encompasses the results of operations of Sattel and
the Company's corporate office. Sattel's operations were conducted through
Sattel Communications Corp. ("SCC") prior to Sattel's formation in April
1996. SCC commenced operations in November 1994 as a 50/50 joint venture
between the Company and STI. In January 1996, the Company increased its
ownership interest in SCC from 50% to 80% and SCC acquired the intellectual
property and technology rights of the DSS switch. SCC is included in the
consolidated financial statements since the beginning of fiscal 1996 (see
Notes 1 and 3 to the Consolidated Financial Statements).
Sattel's revenues and expenses increased in fiscal 1997 as compared to
fiscal 1996, primarily because Sattel's operations in fiscal 1996 consisted
of the start-up and development of its business.
Sattel had sales of $7,154,000 in fiscal 1997, primarily from sales of
DSS switches. Sattel had sales of $6,712,000, or 94% of fiscal 1997 sales,
to CNC. In fiscal 1997, Sattel's gross profit was reduced by charges of
$1,400,000 for excess and obsolete inventory.
In fiscal 1997, selling and administrative expenses increased $8,463,000
over fiscal 1996. Selling and administrative expenses have increased in
fiscal 1997 primarily because of the further development of Sattel's
business, the settlement expense of $600,000 with a former employee, and to
a lesser extent due to increased corporate office expenses. During fiscal
1996, Sattel incurred significantly less selling and administrative expenses
as compared to fiscal 1997 because Sattel was in the early stage of
developing its business and staff.
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<PAGE>
Selling and administrative expenses for the fiscal year ended March 31,
1997 are comprised of the following (in thousands):
Sattel Other Total
Sattel's selling and administrative
expenses $ 8,226 $ --- $ 8,226
Legal, accounting and other professional
fees 238 812 1,050
Salaries, benefits and expenses for
Messrs. Fisher, Lilly and Runge prior
to separation --- 850 850
Settlement with former employee --- 600 600
Other Milwaukee corporate office operating
expenses --- 420 420
Directors and officers liability
insurance expense --- 279 279
Amortization of intangible assets 238 --- 238
Other --- 449 449
------ ------ ------
$ 8,702 $ 3,410 $12,112
====== ====== ======
The Company anticipates that some of the non-Sattel expenses reflected
in the above table will continue to be incurred and funded by the Company in
fiscal 1998.
Engineering, research and development expenses of $4,060,000 were
incurred by Sattel during fiscal 1997. An explanation of the increase in
engineering, research and development expenses and the Company's accounting
policy for these expenses is in Note 1 to the Consolidated Financial
Statements.
The components of non-operating income (expense) are shown in Note 9 to
the Consolidated Financial Statements.
Minority interest in fiscal 1997 represents the minority partners' share
of Sattel's loss. In fiscal 1996, the Company has included the results of
SCC in its statement of operations as though it had acquired its majority
interest at the beginning of fiscal 1996 and added back the minority
partner's share of SCC's loss as part of minority interest (see Note 1 to the
Consolidated Financial Statements).
In December 1996, the Company filed a federal income tax refund claim
with the Internal Revenue Service ("IRS") resulting from the carryback of
certain prior year deductions to fiscal 1985. In January 1997, the Company
received a payment from the IRS for the claim and recorded an income tax
credit of $836,000.
The loss from continuing operations in fiscal 1997 is primarily due to
losses incurred by Sattel and costs related to the Company's corporate
office. The increase in the loss from continuing operations in fiscal 1997
as compared to fiscal 1996 is primarily due to (i) an increase in Sattel's
operating loss of $6,857,000 (see Note 12 to the Consolidated Financial
Statements), (ii) a settlement expense of $600,000 with a former employee,
(iii) a non-operating loss of $1,060,000 incurred by Sattel for the write-
down of its investment in CNC preferred stock, (iv) an increase in the
Company's corporate office operating expenses of $1,001,000 primarily due to
an increase in professional fees and directors and officers liability
18
<PAGE>
insurance expense and (v) a loss of $736,000 incurred by the Company on the
sale of its remaining marketable securities. These expenses and losses were
partially offset by an income tax credit of $836,000.
The summarized operating results of discontinued operations for fiscal
1997 and fiscal 1996, respectively, are shown in Note 2 to the Consolidated
Financial Statements. The operating results from discontinued operations
reflected in fiscal 1997 are through the measurement date of November 20,
1996. Operating losses from discontinued operations subsequent to the
measurement date are reflected within the estimated loss on disposal. The
operating results from discontinued operations reflected in fiscal 1996 are
for the entire fiscal year.
The estimated loss on disposal of discontinued operations is discussed
in Note 2 to the Consolidated Financial Statements.
The extraordinary items are discussed in Note 10 to the Consolidated
Financial Statements.
Results of Operations - Fiscal Year Ended March 30, 1996 versus April 1, 1995
In fiscal 1996, SCC had sales of $264,000 from the sale of three DSS
switches.
For the fifty-two weeks ended March 30, 1996, selling and administrative
expenses increased $1,952,000 over fiscal 1995. Selling and administrative
expenses have increased primarily because of the inclusion of SCC's results
in fiscal 1996. SCC's expenses relate primarily to the start-up and
development of its business.
The components of non-operating income (expense) are shown in Note 9 to
the Consolidated Financial Statements.
In fiscal 1996, the Company has included the results of SCC in its
statement of operations as though it had acquired its majority interest at
the beginning of fiscal 1996 and added back the minority partner's share of
SCC's loss as part of minority interest.
The summarized operating results of discontinued operations are shown in
Note 2 to the Consolidated Financial Statements. The change in the operating
results from discontinued operations from fiscal 1995 to 1996 is primarily
attributable to an increase in APC's loss and a reduction in C&L's results.
APC's loss increased primarily due to the write-off of goodwill of $852,000.
C&L's operating results decreased due to a 28% reduction in its sales, a
decrease in gross profit margins and an increase in operating expenses.
19
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Liquidity and Capital Resources
The Company encountered a liquidity deficiency during fiscal 1997 and
subsequently, primarily because (i) certain customers of Sattel were past due
on receivables, (ii) Sattel has granted certain customers extended payment
terms, (iii) Sattel's revenue growth has been lower than expected and (iv)
the Company made payments of $2,349,000 in connection with the
Restructuring.
As a result of the liquidity deficiency, the Company had become
delinquent on certain of its working capital obligations. In July 1997, the
Company raised $5,597,000 through equity and debt financings (see Note 15 to
the Consolidated Financial Statements for additional information). After
completion of the equity and debt financings, collection of $4.4 million from
CNC and the anticipated sales of C&L, Valley and APC's real estate,
management believes that it will have sufficient resources to provide
adequate liquidity to meet the Company's planned capital and operating
requirements through March 31, 1998 and for the foreseeable future.
Thereafter, the Company's operations will need to be funded either with funds
generated through operations or with additional debt or equity financing. If
the Company's operations do not provide funds sufficient to fund its
operations and the Company seeks outside financing, there can be no assurance
that the Company will be able to obtain such financing when needed, on
acceptable terms or at all. In addition, any future equity financing or
convertible debt financing would cause the Company's shareholders to incur
dilution in common stock holdings as a percentage of the total outstanding
shares.
The Company is seeking buyers for C&L and Valley. The Company believes
that these businesses and APC's real estate will be sold prior to March 31,
1998. It is anticipated that the proceeds of the sales of these businesses
and assets will be used to fund a portion of the Company's capital and
operating requirements in fiscal 1998. Restrictions in the revolving lines
of credit of C&L and Valley prevent the Company from presently accessing
funds from these subsidiaries. Such restrictions in C&L's revolving line of
credit may also initially limit the Company's access to the total proceeds
from a sale of Valley prior to any ultimate sale of C&L given the existing
ownership structure of Valley.
The Company used cash in operating activities of $17,859,000 during
fiscal 1997 as compared to positive cash flow of $1,709,000 for fiscal 1996.
The decrease in cash flow is primarily attributable to an increase in the
loss from continuing operations, an increase in cash used to fund working
capital items and a reduction in cash provided by operating activities of
discontinued operations.
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<PAGE>
The primary components of cash provided (used) by operating activities
in the Consolidated Statement of Cash Flows for fiscal 1997 are as follows
(in thousands):
Sattel Other Total
Operating loss $ (8,740) $(3,410) $(12,150)
Cash provided (used) by changes in
current assets and liabilities (3,552) 388 (3,164)
Depreciation and amortization 467 11 478
Interest and other income 118 341 459
Income tax credit --- 836 836
Interest expense --- (52) (52)
Cash used by discontinued operations --- (3,862) (3,862)
Loss from discontinued operations --- (625) (625)
Other --- 221 221
------- ------ -------
$(11,707) $(6,152) $(17,859)
======= ====== =======
The Company anticipates that some of the non-Sattel cash flows reflected
in the above table will continue to be incurred and funded by the Company in
fiscal 1998.
The Company has made significant cash disbursements related to the
Restructuring. Included in the cash used by discontinued operations of
$3,862,000 are payments of $1,444,000 made to Messrs. Fisher ($1,092,000),
Lilly ($83,000) and Runge ($269,000) under the Separation Agreements
discussed in Note 11 to the Consolidated Financial Statements and payments of
$854,000 for professional fees related to the Restructuring. In addition,
included in the operating loss of $3,410,000 are disbursements of $600,000
related to a settlement with a former employee.
The Company's receivables consisted of the following at March 31, 1997:
CNC $ 4,217
All other receivables 377
------
Total receivables $ 4,594
======
The increase in receivables at March 31, 1997 is primarily due to the
increase in Sattel's sales. At March 31, 1997, Sattel had past due
receivables of $3.8 million. At August 15, 1997, Sattel had collected $4.3
million of receivables that were outstanding at March 31, 1997, of which $4.2
million was the result of the judgment discussed in the next paragraph.
In April 1997, Sattel commenced legal proceedings against CNC for, among
other things, breach of contract relating to payment of $4.2 million of
accounts receivable (see Item 3 - Legal Proceedings). In July 1997, Sattel
received a court ordered judgment in its favor whereby, among other things,
Sattel executed upon a judgment of $4.4 million against CNC on August 15,
1997. In addition, CNC repurchased from Sattel 25% of CNC Preferred Stock
owned by Sattel at $12.00 per share or $396,000 on August 2, 1997.
The increase in inventory and accounts payable are primarily
attributable to purchases from STI of raw materials for DSS switches. See
Note 6 to the Consolidated Financial Statements for additional information
regarding a legal proceeding commenced by STI against Sattel.
21
<PAGE>
Capital expenditures increased to $1,914,000 in fiscal 1997 from
$161,000 in fiscal 1996. The increase in capital expenditures is primarily
due to purchase of test equipment, development hardware and third-party
software by Sattel. The Company anticipates that Sattel's fiscal 1998
capital expenditure requirements will approximate $1.2 million primarily for
test equipment and development hardware.
In June 1996, CNC executed a Promissory Note for $5,000,000 in favor of
Sattel for a bridge loan. CNC granted to Sattel a warrant to purchase a
split adjusted 36,765 shares of CNC Series D Preferred Stock ("CNC Preferred
Stock") at a split adjusted exercise price of $20.40 per share (equal to the
par value of such shares) as additional consideration for the bridge loan to
CNC. The warrant is exercisable immediately and expires on June 6, 1999. In
August 1996, the Promissory Note and accrued interest receivable were
converted into 3,729,110 shares of CNC Preferred Stock. In September 1996,
Sattel sold to StreamLogic Corporation 1,838,234 shares, or 49%, of its CNC
Preferred Stock for $2.5 million. No gain or loss was recognized in
connection with this sale.
In August 1997, CNC completed its IPO at an offering price of $12.00 per
share. The CNC Preferred Stock owned by Sattel was automatically converted
into CNC common stock immediately prior to the closing of the IPO. The value
of Sattel's investment in CNC Preferred Stock, after giving effect to a
reverse 1 for 15 stock split and based on a $12.00 per share offering price,
is approximately $1,512,000. Consequently, Sattel recorded a non-operating
loss of $1,060,000 in fiscal 1997 related to the impairment in value of its
investment. The investment in CNC Preferred Stock of $1,512,000 is
classified within other current assets in the Consolidated Balance Sheet.
Sattel is prohibited from selling 75% of its CNC common stock for six months
following CNC's IPO. Sattel sold 25% of its CNC common stock in August 1997
at $12.00 per share and received $396,000. Sattel continues to own the
warrant from CNC which is now a warrant for CNC common stock as a result of
the conversion discussed above.
In February 1997, the Company sold a majority of APC's assets (see Note
2 to the Consolidated Financial Statements). The Company has received
preferred stock dividends of $797,000 from APC subsequent to the sale of its
assets. Further preferred stock dividends will be available when cash held
in escrow is released or when APC's building is sold as a result of preferred
stock dividends currently in arrears. APC has restricted cash of $100,000
that is held in an escrow account for reimbursement of indemnification claims
by the Buyer. The escrow account will remain in existence until February 3,
1998. At that time, indemnification claims by the Buyer of APC up to
$100,000 will be repaid and any remaining escrow funds will be disbursed to
APC. APC has entered into a lease with the Buyer of APC for the building
that terminates on approximately November 15, 1997. In addition, APC has
listed the building for sale. The real estate is collateral for two
mortgages that amount to $781,000.
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 decrease in intangible assets is primarily attributable to the
transaction with STI that occurred on May 3, 1996, which is discussed in Note
3 to the Consolidated Financial Statements.
22
<PAGE>
RISK FACTORS
The Company is being restructured, through the disposal of APC, C&L and
Valley, to consist solely of the operations of Sattel. In February 1997, a
majority of the assets of APC were sold. Stockholders of the Company should
be aware that the Restructuring involves risks which could adversely affect
the value of their Company common stock during and after the Restructuring.
In addition, certain characteristics and dynamics of the Company's business
and of financial markets generally create risks to the Company's long-term
success and to predictable quarterly results. No representation as to the
future value of Company common stock is made hereby, nor is any person
authorized by the Company to make any such representation. The Company is
aware of the following risks, each of which should be considered carefully:
Recent Operating Losses; No Assurance of Profitability
The Company has reported losses from continuing operations for the last
three fiscal years. There can be no assurance that the Company will return
to profitability in the short term or ever.
Need to Increase Sales
Sattel has a limited operating history and has not yet achieved
significant sales of its products over an extended period. Net sales of the
continuing operations of the Company were $264,000 in the 1996 fiscal year
and $7,154,000 in the 1997 fiscal year. Substantially all of fiscal 1997
sales were to a single customer. These sales were not sufficient to offset
the operating and other expenses incurred by the Company. Also, the Company
has experienced difficulty in collecting payments from its customers. If the
Company is to achieve profitability, it will need to increase the market
acceptance and sales of its products to levels commensurate with the expense
levels of the Company. No assurances can be given that the Company will be
successful in this effort.
Liquidity Deficiency
Recent events have improved the Company's short-term liquidity. The
Company nevertheless considers that its liquidity situation, over the longer
term, will be dependent on its operating results and not its ability to
divest its discontinued subsidiaries and assets. The Company could remain
relatively constrained and its ability to access outside sources of capital
could be restricted until such time as the Company is able to demonstrate
higher levels of sales and more favorable operating results. No assurances
can be given that the Company will be able to maintain its liquidity over an
extended period of time as required for the Company to achieve its operating
goals. See Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources.
Fluctuations in Quarterly Operating Results
Sattel's sales are subject to quarterly and annual fluctuations due to
a number of factors. Sattel expects to experience fluctuations in sales from
quarter to quarter due in large part to the capital budgeting and spending
patterns of potential customers in the telecommunications industry. Sattel's
ability to affect and judge the timing of individual customer orders is, by
its nature, limited. Sattel's sales for a given quarter may depend to a
significant degree upon planned product shipments to a single customer, often
related to specific customer projects and the necessary equipment deployment
schedule.
23
<PAGE>
Delays or lost sales can be caused by other factors beyond Sattel's
control, including changes in implementation priorities and slower than
anticipated growth in demand for the services that the DSS switch supports.
Delayed sales have occurred in the past and may occur in the future. In
addition, Sattel has on occasion in the past experienced delays as a result
of the need to modify its products to comply with unique customer
specifications. These and similar delays or lost sales could have a material
adverse effect on Sattel's business, financial condition and results of
operations.
Operating results may also fluctuate due to factors such as the timing
of new product announcements and introductions by Sattel, its major customers
or its existing or potential competitors, delays in new product introductions
by Sattel, market acceptance of new or enhanced versions of Sattel's
products, changes in the product or customer mix of sales, changes in the
level of operating expenses, competitive pricing pressures, the gain or loss
of significant customers, increased research and development and sales and
marketing expenses associated with new product introductions, and general
economic conditions. All of the above factors are difficult for Sattel to
forecast, and these or other factors could have a material adverse effect on
Sattel's business, financial condition and results of operations for one
quarter or a series of quarters. Sattel's expense levels are based in part
on its expectations regarding future sales and are fixed in the short term to
a large extent. Therefore, Sattel may be unable to adjust spending in a
timely manner to compensate for any unexpected shortfall in sales. Any
significant decline in demand relative to Sattel's expectations or any
material delay of customer orders could have a material adverse effect on
Sattel's business, financial condition and results of operations. It is
possible that in the future, Sattel's operating results may be below the
expectations of public market analysts and investors, which could have a
material adverse effect on the price of the Company's common stock.
Reductions in Size and Diversification
The Company is a smaller and less diversified Company and has a lower
asset and revenue base than prior to the Restructuring. Consequently, the
effect of any decline in operating results after the Restructuring could more
immediately and severely affect the Company, its results of operations and
its liquidity. In addition, the Restructuring has resulted in some temporary
dislocations and inefficiencies to the business operations, as well as the
organization and personnel structures, of the Company.
Dependence on Telecommunications Industry and Small- to Medium-Sized
Switching Market
After the Restructuring, the Company's customers are concentrated in the
telecommunications and Internet service industries. Accordingly, the
Company's future success depends upon the capital spending patterns of such
customers and the demand by such customers for the DSS switch. Sattel is
initially targeting the market for small- to medium-sized central office
switches in the North America. Historically, there has been little, if any,
demand for central office switches similar in functionality, type and size to
the DSS switch and, accordingly, there can be no assurance that potential
customers will consider the near term value of the DSS switch sufficient to
influence their purchasing decisions or that they will pursue strategic
business alternatives that would benefit from a less expensive small- to
medium-size central office switch. Furthermore, there can be no assurance
that telecommunications companies and other potential customers will not
24
<PAGE>
adopt alternative architectures or technologies that are incompatible with
the DSS switch, which could have a material adverse effect on the Company's
business, financial condition and results of operations. Infrastructure
improvements requiring the Company's or similar technology may be delayed or
prevented by a variety of factors, including cost, regulatory obstacles, the
lack of consumer demand for advanced telecommunications services and
alternative approaches to service delivery.
Concentrated Product Line; New Product Delays
Sattel currently derives substantially all of its revenues from the DSS
switch and expects that this concentration will continue in the foreseeable
future. As a result, any decrease in the overall level of sales of, or the
prices for, the DSS switch due to product obsolescence or any other reason
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company may consider the
acquisition of other companies or technologies provided they are
complementary to its core business.
The telecommunications equipment market, in general, is characterized by
rapidly changing technology, evolving industry standards, changes in end-user
requirements, and frequent new product introductions and enhancements. The
introduction of products embodying new technologies or the emergence of new
industry standards can render existing products obsolete or unmarketable.
Sattel's success will depend upon its ability to enhance the DSS switch's
technology and to develop and introduce, on a timely basis, new products that
keep pace with technological developments and emerging industry standards and
address changing customer requirements in a cost-effective manner. There can
be no assurance that the Company will be successful in identifying,
developing, manufacturing, and marketing product enhancements or new products
that respond to technological change or evolving industry standards. There
also can be no assurance that the Company will not experience difficulties
that could delay or prevent the successful development, introduction and
marketing of these products, or that its new products and product
enhancements will adequately meet the requirements of the marketplace and
achieve market acceptance. Furthermore, from time to time, the Company or
its competitors may announce new products or product enhancements, services
or technologies that have the potential to replace or shorten the life cycle
of the DSS switch and that may cause customers to defer purchasing the DSS
switch. There can be no assurance that future technological advances in the
telecommunications industry will not diminish any market acceptance of the
DSS switch or render the DSS switch obsolete which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Sattel has experienced delays in completing development and introduction
of new products, product variations and features, and there can be no
assurance that such delays will not continue or recur in the future.
Furthermore, the DSS switch contains a significant amount of complex software
that may contain undetected or unresolved errors as products are introduced
or as new versions are released. Sattel has in the past discovered software
errors in certain DSS switch installations. There can be no assurance that,
despite significant testing by the Company, software errors will not be found
in new enhancements of the DSS switch after commencement of shipments,
resulting in delays in or loss of market acceptance, either of which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
25
<PAGE>
Dependence on Outsource Manufacturers and Other Key Suppliers
Sattel's outsource manufacturers have from time to time experienced
delays in receipt of certain hardware components. Certain components,
including crystals and microprocessors, are presently single sourced or are
available from a limited number of sources. An interruption in business
between Sattel and its outsource manufacturers could have a material adverse
effect on Sattel (see Note 6 to the Consolidated Financial Statements
regarding a description of the legal proceedings between STI and Sattel).
The Company has established relationships with alternate suppliers such as
Sanmina and I-PAC and has assembled product itself in order to reduce its
dependency on STI. Some sole-source suppliers are companies which from time
to time allocate parts to telecommunications equipment manufacturers due to
market demand for telecommunications equipment. Many of Sattel's potential
competitors for such parts are much larger and may be able to obtain priority
allocations from these shared suppliers, thereby limiting or making
unreliable the sources of supply for these components. There can be no
assurance that shortages in component parts will not occur in the future or
will not result in Sattel having to pay a higher price for components. A
failure by a supplier to deliver quality products on a timely basis, or the
inability to develop additional alternative sources if and as required, could
result in delays which could have a material adverse effect on the Company's
business, financial condition and results of operations.
Limited Protection of Proprietary Technology; Risk of Third-Party Claims of
Infringement
Sattel uses a combination of patents, trade secrets, confidentiality and
non-compete agreements and tight control of its software to protect the
products and features that it believes give it competitive advantages. In
particular, Sattel relies on contractual restrictions to establish and
protect its rights to the technology developed by outside contractors used to
assist in the development of Sattel's products. Sattel's success and ability
to compete is dependent in part upon 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. In addition,
the laws of many foreign countries do not protect the Company's intellectual
property rights to the same extent as the laws of the United States. The
failure of the Company to protect its proprietary information could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The increased dependence of the telecommunications industry on
proprietary technology has resulted in frequent litigation based on
allegations of the infringement of patents and other intellectual property.
The Company may be subject to litigation to defend against claimed
infringements of the rights of others or to determine the scope and validity
of the proprietary rights of others. Litigation also may be necessary to
enforce and protect trade secrets and other intellectual property rights
owned by the Company. Any such litigation could be costly and cause
diversion of management's attention, either of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. Adverse determinations in such litigation could result in the
loss of the Company's proprietary rights, subject the Company to significant
liabilities, require the Company to seek licenses from third parties, or
26
<PAGE>
prevent the Company from manufacturing or selling its products, any one of
which could have a material adverse effect on the Company's business,
financial condition and results of operations. Furthermore, there can be no
assurance that any necessary licenses will be available on reasonable terms.
Customer Concentration
Approximately 94% of Sattel's revenues for fiscal 1997 were derived from
sales to CNC (see Item 3 - Legal Proceedings for a description of the legal
proceedings between Sattel and CNC). Sattel anticipates that its results of
operations in any given period will continue to depend to a significant
extent upon sales to a small number of customers. There can be no assurance
that Sattel's principal customers will continue to purchase product from
Sattel at current levels, if at all. The loss of one or more major customers
could have a material adverse effect on the Company's business, financial
condition and results of operations. (See Item 1, Working Capital Practices,
for a discussion of extended payment terms granted to certain customers).
Difficulties in Managing Growth
Sattel has experienced growth in the number of its employees and the
scope of its operations. To manage potential future growth effectively,
Sattel must improve its operational, financial and management information
systems and must hire, train, motivate and manage its employees. The future
success of Sattel also will depend on its ability to increase its customer
support capability and to attract and retain qualified technical, sales,
marketing and management personnel, for whom competition is intense. Sattel
is currently attempting to hire a number of sales and engineering personnel
and, in some instances, has experienced delays in filling such positions.
There can be no assurance that Sattel will be able to effectively achieve or
manage any such growth, and failure to do so could delay product development
cycles or otherwise have a material adverse effect on the Company's business,
financial condition and results of operations.
Introduction of DSS Switch with DataNet Capability and Recent Introduction of
Switch Server Architecture ("SSA") into the Telecommunications Market
Sattel's DSS switch with DataNet capability has undergone successful
internal and external testing. The DSS switch with DataNet capability was
first available for shipment to customers in April 1996. There can be no
assurance of its successful acceptance by the telecommunications market in
general. While DataNet continues to be available as an enhancement to the
DSS switch, product development focus has shifted to the higher speed access
offered by SSA as described below. The Company anticipates future DataNet
sales, if any, could be concentrated in international markets and those
domestic markets requiring reliable access at lower speeds.
In January 1997, the Company announced its new SSA. This switch server
architecture encompasses a client/server approach to low, medium and high
speed communications. There can be no assurance of its successful acceptance
by the telecommunications market in general.
Competition to DSS switch
The central office switching market in general and the Internet market
in particular are extremely competitive. Sattel uses a combination of
patents, trade secrets, confidentiality agreements and non-compete agreements
to protect the product and features that it believes give it competitive
27
<PAGE>
advantages. There can be no assurance, however, that other competitors, some
of whom have much greater access to resources and funding, cannot
functionally replicate Sattel's critical products and features. Likewise,
there is no guarantee that competitors cannot develop features which equal or
exceed the Company's offerings.
Outsourced Manufacturing; Capacity Constraints
Sattel performs certain manufacturing functions in house. In addition,
Sattel outsources some of its manufacturing to STI, Sanmina and other non-
affiliated contract manufacturers and expects to continue to outsource some,
or all, of its manufacturing. The Company's ability to increase capacity may
be constrained and it may have less control over manufacturing than it would
if it performed all the manufacturing functions in house. There can be no
assurance, in the event of substantial increases in demand, that Sattel can
successfully deliver its products in a timely fashion and/or without
additional expense which would result in a deterioration in product margins.
International Risks
Sattel's longer term strategy includes greater expansion into
international markets. There can be no assurance that Sattel will 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
international 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 current 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 homologate its products and to conduct its
operations. There can be no assurance that such factors will not have a
material adverse effect on Sattel's future international operations and,
consequently, on the Company's business, financial condition and results of
operations.
No Dividends
The Company has not paid cash dividends to its stockholders in the last
five years. The Company does not anticipate paying cash dividends to
stockholders for the foreseeable future.
Stock Volatility and Recent Transactions
From October 1, 1995 through August 31, 1997, the closing price of the
Company's common stock has been as low as $1.375 and as high as $114.29 per
share. There can be no assurance that the stock will not continue to be
volatile and/or will accurately reflect the actual value of the Company over
any specific period of time. Other factors affecting the share price
include, but are not limited to, investor expectations, external business
factors and news, comments and/or analysis by financial analysts, industry or
company specific news and the availability or shortage of common stock
("Float") in the market at any point in time. The share price may also be
affected by sales of stock owned by substantial holders.
28
<PAGE>
Since March 30, 1996 and to August 31, 1997, the number of common shares
has increased from approximately 4.6 million to 7.2 million. The increase
was primarily as a result of a 5% stock dividend, the sale of new common
shares and the payment in shares for the purchase of STI's remaining
interests in Sattel by the Company and Sattel's related acquisition of the
intellectual property rights and manufacturing rights of the DSS switch
technology. As outlined in Note 3 of the Consolidated Financial Statements,
the number of common shares outstanding will increase by approximately 1
million shares upon the conversion of the Sattel Class A and B Units into
Company common stock. In addition, warrants to purchase 2,241,787 shares of
common stock have been issued by the Company in connection with the July 1997
private placements under Regulation D and S of the Securities Act of 1933
(see Note 15 to the Consolidated Financial Statements).
From November 29, 1996 to February 16, 1997, two former officers and
directors, Richard Y. Fisher and Donald E. Runge (see Note 11 to the
Consolidated Financial Statements), sold all of their share holdings. Mr.
Fisher and Mr. Runge sold 557,395 and 467,850 shares, respectively, during
this period. Each individual also owns options for 275,378 common shares
which are exercisable under certain conditions at an average exercise price
of $5.39 per share through December 31, 1997.
Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." This Statement establishes new standards for computing and
presenting earnings per share. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997 and requires
restatement of all prior-period earnings per share data. Early application
of SFAS No. 128 is not permitted. The Company's adoption of the provisions
of SFAS No. 128 will result in the dual presentation of basic and diluted per
share amounts on the Company's income statement. Diluted per share amounts
as calculated under SFAS No. 128 are not expected to materially differ from
loss per share amounts previously presented.
Impact of Inflation
Inflation has not had a significant impact on net sales or loss from
continuing operations for the three most recent fiscal years.
29
<PAGE>
ITEM 8. Financial Statements and Supplementary Data
The Diana Corporation and Subsidiaries
PAGE
Report of Price Waterhouse LLP, Independent Accountants......... 31
Report of Ernst & Young LLP, Independent Auditors............... 32
Consolidated Balance Sheets..................................... 33
Consolidated Statements of Operations........................... 34
Consolidated Statements of Changes in Shareholders' Equity...... 35
Consolidated Statements of Cash Flows........................... 36
Notes to Consolidated Financial Statements...................... 37
30
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of The Diana Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) of this report present fairly, in all
material respects, the financial position of The Diana Corporation and its
subsidiaries (the "Company") at March 31, 1997 and March 30, 1996, and the
results of their operations and their cash flows for the years then ended 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 audits. We conducted our audits 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 audits provide a
reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2, the
Company initiated a restructuring plan during fiscal 1997 which resulted in
Sattel Communications ("Sattel") becoming the sole operating company
comprising the Company's continuing operations. Sattel has a limited
operating history and has not yet achieved significant sales of its products.
The Company's other operating companies were sold or are held for sale as of
March 31, 1997. As discussed in Note 14, management believes the Company
will have sufficient cash resources, including proceeds from those net assets
held for sale, to fund its operations for the fiscal year ending March 31,
1998. However, any material delay during fiscal 1998 in the timing of
disposal and the ultimate receipt of cash proceeds by the Company with
respect to the net assets held for sale could have a material adverse effect
on the Company. In addition, the Company's viability is further dependent on
Sattel achieving sales levels and operating results sufficient to fund the
Company's operations. Finally, as discussed in Note 6, the Company is
subject to uncertainties relating to class action litigation asserted against
the Company and other potential claims by investors, the ultimate effects of
which on the Company's financial position, results of operations and cash
flows cannot presently be determined.
PRICE WATERHOUSE LLP
Milwaukee, Wisconsin
September 22, 1997
31
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Shareholders
The Diana Corporation
We have audited the accompanying consolidated statements of operations,
changes in shareholders' equity and cash flows of The Diana Corporation and
subsidiaries ("the Company") for the year ended April 1, 1995. Our audit
also included the financial statement schedules for the year 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 audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows
of The Diana Corporation and subsidiaries for the year 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.
Milwaukee, Wisconsin ERNST & YOUNG LLP
June 2, 1995
32
<PAGE>
The Diana Corporation and Subsidiaries
Consolidated Balance Sheets
(Dollars In Thousands)
March 31, March 30,
1997 1996
-------- ---------
Assets
Current assets:
Cash and cash equivalents............................ $ 81 $ 4,480
Marketable securities................................ --- 1,213
Receivables.......................................... 4,594 10
Inventories.......................................... 2,937 1,087
Net assets of discontinued operations................ 893 7,389
Other current assets................................. 1,716 543
------ ------
Total current assets............................... 10,221 14,722
Property and equipment, net............................ 1,944 339
Intangible assets, net................................. 3,755 5,827
Net assets of discontinued operations.................. 7,308 8,180
Other assets........................................... 16 24
------ ------
$23,244 $29,092
====== ======
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable..................................... $ 2,559 $ 483
Accrued liabilities.................................. 1,360 816
Current portion of long-term debt.................... 141 141
------ ------
Total current liabilities.......................... 4,060 1,440
Long-term debt......................................... 1,817 1,958
Other liabilities...................................... 533 1,008
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 6,007,175 and 5,526,282 shares....... 6,007 5,526
Additional paid-in capital........................... 80,124 59,456
Accumulated deficit.................................. (63,540) (34,776)
Unrealized loss on marketable securities............. --- (876)
Treasury stock at cost............................... (5,757) (4,644)
------ ------
Total shareholders' equity......................... 16,834 24,686
------ ------
$23,244 $29,092
====== ======
See notes to consolidated financial statements.
33
<PAGE>
The Diana Corporation and Subsidiaries
Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)
Fiscal Year Ended
------------------------------
March 31, March 30, April 1,
1997 1996 1995
-------- -------- --------
Net sales.............................. $ 7,154 $ 264 $ ---
Cost of goods sold..................... 3,132 129 ---
------- ------- -------
Gross profit........................... 4,022 135 ---
Selling and administrative expenses.... 12,112 3,649 1,697
Engineering, research and development.. 4,060 178 ---
------- ------- -------
Total operating expenses............... 16,172 3,827 1,697
------- ------- -------
Operating loss......................... (12,150) (3,692) (1,697)
Interest expense....................... (52) (106) (132)
Non-operating income (expense)......... (1,337) 465 (311)
Minority interest...................... 368 587 ---
Income tax credit...................... 836 --- ---
------- ------- -------
Loss from continuing operations........ (12,335) (2,746) (2,140)
Earnings (loss) from discontinued
operations.......................... (625) (619) 1,420
Estimated loss on disposal of
discontinued operations............. (7,550) --- ---
------- ------- -------
Loss before extraordinary items........ (20,510) (3,365) (720)
Extraordinary items.................... (508) --- ---
------- ------- -------
Net loss............................... $(21,018) $ (3,365) $ (720)
======= ======= =======
Earnings (loss) per common share:
Continuing operations............... $ (2.34) $ (.62) $ (.51)
Discontinued operations............. (1.55) (.14) .34
Extraordinary items................. (.10) --- ---
------- ------- -------
Net loss per common share........... $ (3.99) $ (.76) $ (.17)
======= ======= =======
Weighted average number of common
shares outstanding.................. 5,271 4,401 4,224
======= ======= =======
See notes to consolidated financial statements.
34
<PAGE>
The Diana Corporation and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
(Dollars in Thousands)
<TABLE>
<CAPTION>
Common Stock Treasury Stock
------------------ Additional Unrealized Loss --------------------- 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 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
Communications Corp.
minority interest 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
Net loss --- --- --- (21,018) --- --- --- (21,018)
5% stock dividend 250,893 251 7,474 (7,746) --- --- --- (21)
Change in unrealized loss on
marketable securities --- --- --- --- 876 --- --- 876
Acquisitions of Sattel
Communications Corp.
minority interest - net --- --- 385 --- --- 35,000 (2,203) (1,818)
Issuance of common stock 230,000 230 12,630 --- --- (200,000) 1,058 13,918
Other --- --- 179 --- --- (4,000) 32 211
--------- ------ ------- -------- ------- --------- ------- -------
Balance at March 31, 1997 6,007,175 $ 6,007 $ 80,124 $ (63,540) $ --- 708,692 $(5,757) $ 16,834
========= ====== ======= ======== ======= ========= ======= =======
</TABLE>
See notes to consolidated financial statements.
35
<PAGE>
The Diana Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
Fiscal Year Ended
------------------------------
March 31, March 30, April 1,
1997 1996 1995
Operating activities: --------- --------- --------
Loss before extraordinary items........... $(20,510) $(3,365) $ (720)
Adjustments to reconcile loss to net cash
provided (used) by operating activities:
Depreciation and amortization........... 478 121 8
Loss (gain) on sales of
marketable securities.................. 736 (26) 1,227
Write-down of CNC preferred stock....... 1,060 --- ---
Minority interest....................... (368) (587) ---
Estimated loss on disposal of
discontinued operations................ 7,550 --- ---
Net change in discontinued operations... (3,862) 5,583 3,867
Other................................... 221 354 90
Changes in current assets and
liabilities............................ (3,164) (371) 1,774
------- ------ ------
Net cash provided (used) by operating
activities................................ (17,859) 1,709 6,246
Investing activities:
Purchases of property and equipment....... (1,914) (161) (12)
Purchases of marketable securities........ --- (475) (5,647)
Proceeds from sales of marketable
securities............................... 1,353 5,380 9,276
Change in notes receivable................ (5,000) 138 194
Proceeds from sale of CNC preferred stock 2,500 --- ---
Affiliate advances and acquisitions,
net of cash acquired..................... --- (1,495) ---
Net proceeds from the sale of APC's assets 640 --- ---
Net change in discontinued operations..... (985) (3,444) (587)
Other..................................... 283 47 (195)
------- ------ ------
Net cash provided (used) by investing
activities................................ (3,123) (10) 3,029
Financing activities:
Changes in short-term borrowings.......... --- --- (2,144)
Repayments of long-term debt.............. (141) (141) (261)
Payments toward bond settlements.......... --- -- (2,822)
Common stock issued....................... 13,918 3,485 ---
Net change in discontinued operations..... 3,314 (888) (3,740)
Extraordinary items....................... (508) --- ---
------- ------ ------
Net cash provided (used) by financing
activities................................ 16,583 2,456 (8,967)
------- ------ ------
Increase (decrease) in cash and cash
equivalents............................... (4,399) 4,155 308
Cash and cash equivalents:
At beginning of year...................... 4,480 325 17
------- ------ ------
At end of year............................ $ 81 $ 4,480 $ 325
======= ====== ======
See notes to consolidated financial statements.
36
<PAGE>
The Diana Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1997
NOTE 1 - Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The consolidated group (hereafter referred to as the "Company") included
the following companies during the past three years:
The Diana Corporation ("Diana") - Diana and its wholly-owned non-
operating subsidiaries are included in the consolidated group for all three
fiscal years. Diana's activities historically consisted primarily of
corporate administration and investing activities.
Sattel Communications LLC ("Sattel") - Diana had a 50% ownership
interest in Sattel Communications Company which was subsequently converted
into Sattel Communications Corp. ("SCC"). Diana accounted for this
investment using the equity method of accounting from November 1994 to
December 1995. In January 1996, Diana increased its ownership interest in
SCC from 50% to 80% and at the same time SCC also acquired the intellectual
property rights and technology rights to the DSS switch. In fiscal 1997, the
Company increased its ownership interest in SCC from 80% to 100% (see Note
3). The Company included the results of SCC in its statement of operations
for fiscal 1996 as though it had acquired its majority interest at the
beginning of fiscal 1996 and added back the minority partner's share of SCC's
loss as part of minority interest. SCC, through its subsidiary Sattel, is a
provider of central office voice and data switching equipment. In April
1996, SCC transferred its assets and liabilities to Sattel, a newly-formed
limited liability company. SCC has an ownership interest in Sattel of
approximately 80% and certain additional preferential rights (see Note 3).
Discontinued Operations - The operations of C&L Communications, Inc.
("C&L"), Valley Communications, Inc. ("Valley"), Atlanta Provision Company,
Inc. ("APC") and Entree Corporation ("Entree") are classified as discontinued
operations. C&L is a wholly-owned subsidiary of Diana. Valley is an 80%-
owned subsidiary of C&L. Entree is an 81.25%-owned subsidiary of Diana. APC
is a wholly-owned subsidiary of Entree. The majority of APC's assets were
sold in February 1997 (see Note 2).
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. Accounts and transactions between members of the
consolidated group are eliminated in the consolidated financial statements.
Certain prior year balances have been reclassified in order to conform
to current year presentation.
Fiscal Year
In fiscal 1997, the Company changed its fiscal year end from a 52 or 53
week year ending on the Saturday closest to March 31 to a fiscal year of 12
calendar months ending on March 31. Fiscal 1996 and 1995 are both 52 week
fiscal years.
37
<PAGE>
NOTE 1 - Summary of Significant Accounting Policies (Continued)
Financial Instruments
The carrying values of cash and cash equivalents, marketable securities,
receivables, accounts payable and borrowings at March 31, 1997 and March 30,
1996 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 non-operating income (expense). 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
non-operating income (expense). Realized gains and losses, interest income
and dividends are included in non-operating income (expense). 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.
Non-Marketable Securities
Non-marketable securities are accounted for on a lower of cost or market
basis. A write-down to market is recognized on the determination that a
permanent impairment of value has occurred.
Inventories
Inventories are stated at the lower of cost or market with cost
determined using the first-in, first-out method. Inventories consist of the
following (in thousands):
March 31, 1997 March 30, 1996
-------------- --------------
Raw materials and work-in-process $2,728 $1,012
Finished goods 323 ---
Consigned and with customers 1,286 75
Allowance for excess and obsolete
inventory (1,400) ---
----- -----
$2,937 $1,087
===== =====
Included in inventory consigned and with customers is inventory of
$897,000 that is subject to sales transactions for which related revenues
were not recorded as of March 31, 1997.
38
<PAGE>
NOTE 1 - Summary of Significant Accounting Policies (Continued)
Sattel has a limited operating history and has not yet achieved
significant sales of its products over an extended period. Management is
trying to increase the market acceptance and sales of Sattel's products.
Management does not believe that the Company will incur any material loss on
the ultimate sale or disposition of inventory. No estimate can be made of a
range of amounts of loss that are reasonably possible should increased sales
of Sattel's products not occur in the near term.
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 the estimated useful lives of the assets which range from 3 to 5 years.
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.
Property and equipment consist of the following (in thousands):
March 31, 1997 March 30, 1996
-------------- --------------
Land $ 50 $ 127
Fixtures and equipment 2,204 290
----- ------
2,254 417
Less accumulated depreciation (310) (78)
----- ------
$1,944 $ 339
===== ======
Intangible Assets
Intangible assets consist of the following (in thousands):
March 31, 1997 March 30, 1996
-------------- --------------
Intellectual property rights $3,721 $5,029
Goodwill --- 754
Other 34 44
----- -----
$3,755 $5,827
===== =====
The Company believes that the intellectual property rights for the DSS
switch are appropriately amortizable over a 20 year period on a straight line
basis. However, the telecommunications equipment market, in general, is
characterized by rapidly changing technology, evolving industry standards,
changes in end-user requirements, and frequent new product introductions and
enhancements. The Company or its competitors may announce new products or
product enhancements, services or technologies that have the potential to
replace or shorten the life cycle of the DSS switch and that may cause
customers to defer purchasing the DSS switch. Accordingly, there can be no
assurance that future technological advances in the telecommunications
industry will not diminish any market acceptance of the DSS switch or render
the DSS switch obsolete. Accumulated amortization was $354,000 and $107,000
at March 31, 1997 and March 30, 1996, respectively. See Note 3 regarding a
discussion of the reduction in intangible assets of $1,825,000 resulting from
the acquisition of a minority interest on May 3, 1996.
39
<PAGE>
NOTE 1 - Summary of Significant Accounting Policies (Continued)
In fiscal 1997, the Company adopted the provisions of 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. The adoption
of this standard did not have a material effect on its consolidated results
of operations or financial position.
Pursuant to SFAS No. 121, long-lived assets and intangible assets are
reviewed for impairment whenever events or circumstances provide evidence
that suggest that the carrying amount of the asset may not be recoverable.
Impairment is generally determined by using estimated undiscounted cash flows
over the remaining amortization period. If the estimates of future
undiscounted cash flows do not support recoverability of the carrying value
of the asset, a loss is recognized for the difference between the fair value
and carrying value of the asset.
The Company obtained an independent appraisal in support of the
recoverability of the net book value of property and equipment and the DSS
switch intellectual property rights at March 31, 1997.
Revenue Recognition
Revenue from product sales is recognized upon shipment to a credit
worthy customer, based on a firm agreement whereby all risks and rewards of
ownership have been transferred, in exchange for cash or a receivable which
is liquid and collectible. The transaction must be complete in all
significant respects as of the date of revenue recognition and free from any
significant uncertainties or future obligations and restrictions.
Accrued Liabilities
At March 31, 1997, accrued liabilities includes unearned revenue of
$362,000 and accrued legal fees of $234,000.
Concentration of Credit and Business Risk
For the year ended March 31, 1997, Concentric Network Corporation
("CNC") accounted for approximately 94% of net sales and 92% of receivables.
In April 1997, Sattel initiated a lawsuit against CNC for, among other
things, breach of contract (see Note 6). The Company performs periodic
credit evaluations of its customers' financial condition and generally does
not require collateral other than, in certain instances, a perfected security
interest in the related equipment. In addition, approximately 86% of
inventories purchased during the year ended March 31, 1997 were supplied by
Sattel Technologies, Inc. ("STI"). However, the Company has established
relationships with alternate suppliers such as Sanmina Corporation and I-PAC
Manufacturing, Inc. and has assembled product itself in order to reduce its
dependency on STI. (See Note 6 for a description of the lawsuit between STI
and Sattel).
Product Warranty
Product warranty costs are charged to operations based upon the
estimated warranty cost per unit sold.
40
<PAGE>
NOTE 1 - Summary of Significant Accounting Policies (Continued)
Research and Development Costs
Research and development costs include all engineering charges related
to new products and the DSS switch, and are charged to operations when
incurred. Engineering, research and development costs were $4,060,000 and
$178,000 in fiscal 1997 and 1996, respectively. Engineering, research and
development costs were not incurred by the Company prior to the fourth
quarter of fiscal 1996 since the intellectual property rights for the
switching products were not acquired by SCC until January 1996. Software
development costs incurred in the development of Sattel's switching products
are required to be capitalized once technological feasibility is established
in accordance with SFAS No. 86. Technological feasibility is established
upon the successful testing of a prototype or beta-test model based upon
Sattel's product development process. Software development costs incurred
during the period between completion of a fully-tested model and general
market release have not been significant, and, accordingly, have not been
capitalized. Various feature development software costs may be incurred,
particularly on a specific customer requirement basis. These costs, however,
are not considered to meet the SFAS No. 86 criteria for capitalization given
the dynamic market nature of such modifications.
Income Taxes
The Company accounts for income taxes using the liability method in
accordance with SFAS No. 109, "Accounting for Income Taxes".
Loss Per Common Share
Loss per common share is determined by using the weighted average number
of shares of common stock outstanding during each period.
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 with a maturity of three months or less at the
date of purchase to be cash equivalents.
41
<PAGE>
NOTE 2 - Discontinued Operations
On November 20, 1996, the Board of Directors of the Company approved a
restructuring plan (the "Restructuring") to separate its central office voice
and data switching equipment business (the "Sattel Business") from the
following businesses:
Segment Company
------- -------
Telecommunications equipment distribution C&L
Voice and data network installation and service Valley
Wholesale distribution of meat and seafood Entree/APC
The Restructuring provided for a spin-off of the non-Sattel businesses,
through a special dividend to the Company's shareholders. Consequently, the
Company reported the results of operations of the telecommunications
equipment distribution segment, the voice and data network installation and
service segment and the wholesale distribution of meat and seafood segment
separately as discontinued operations. Subsequently, the Company received a
purchase offer for a majority of the assets of APC. On February 3, 1997, the
Board of Directors of the Company approved the sale of a majority of the
assets of APC to Colorado Boxed Beef Company ("Colorado"). The sale closed
on February 3, 1997.
Colorado purchased the following assets of APC for $13.5 million:
receivables, inventories, machinery and equipment, furniture and fixtures,
and certain other current assets. Colorado made a cash payment to APC of
$6.9 million of which $712,000 was restricted pursuant to the terms of the
Asset Purchase Agreement. At present, $100,000 remains in escrow and will be
held there until the earlier of February 1998 or the date on which valid
claims against the escrow result in funds being released to Colorado.
Colorado also assumed accounts payable and accrued liabilities of APC of $6.6
million. APC repaid $5.8 million to its lender to extinguish all obligations
under its revolving line of credit.
APC retained real estate with a net book value of $2.6 million. The
real estate is collateral for two mortgage notes that amount to $781,000.
APC has entered into a lease with Colorado that terminates on approximately
November 15, 1997. The real estate is listed for sale.
As a result of the sale of APC's assets, the Company's Board of
Directors terminated the original Restructuring plan for a spin-off of the
non-Sattel businesses. The Company has adopted a revised Restructuring plan
to sell C&L and Valley. The revised Restructuring plan was approved by the
Board of Directors in February 1997. The Company anticipates the sales of
these businesses and APC's real estate will be completed prior to March 31,
1998. The Company believes that the reserve for loss on disposal recorded at
March 31, 1997 of $3,027,000 is sufficient to cover all estimated expenses
and net losses of the remaining discontinued operations to be incurred with
respect to its revised Restructuring plan.
42
<PAGE>
NOTE 2 - Discontinued Operations (Continued)
The estimated loss on disposal of discontinued operations consists of
the following (in thousands):
Estimated operating losses for the disposal
period and loss on disposal of C&L and Valley $ 2,054
Operating losses for the disposal period and
loss on the disposal of APC 2,550
Investment banking fees, including the fair
value of a warrant to purchase common stock 1,100
Professional fees incurred in connection with
the spin-off 854
Severance payments to Messrs. Fisher, Runge and
Lilly (see Note 11) 508
Charge due to acceleration of deferred compen-
sation payments (see Note 11) to Messrs.
Fisher and Runge 137
Other 347
------
$ 7,550
======
Expenses incurred in connection with the Restructuring include amounts
related primarily to legal and accounting fees. The investment banking fees
include the estimated fair value of $800,000 for a warrant to purchase
100,000 shares of Company common stock to be issued to an investment banker
for services provided in connection with the Restructuring (see Note 7).
43
<PAGE>
NOTE 2 - Discontinued Operations (Continued)
The components of net assets and liabilities of discontinued operations
are as follows (in thousands):
March 31, 1997
---------------------------------------------
Telecommuni- Network
Meat and cations Installation
Seafood Equipment and Service Total
-------- ------------ ------------ -----
Receivables $ --- $ 4,720 $ 3,387 $ 8,107
Inventories --- 5,429 176 5,605
Other current assets 939 452 348 1,739
Accounts payable (98) (3,584) (1,280) (4,962)
Revolving lines of credit --- (4,164) (1,100) (5,264)
Other current liabilities (112) (179) (1,014) (1,305)
------- ------- ------- -------
$ 729 $ 2,674 $ 517 3,920
======= ======= =======
Reserve for loss on disposal (3,027)
-------
Net current assets of
discontinued operations $ 893
=======
Property and equipment, net $ 2,572 $ 280 $ 571 $ 3,423
Intangible assets, net --- 2,317 2,892 5,209
Other assets --- 312 88 400
Long term debt (781) --- (667) (1,448)
Other liabilities --- --- (276) (276)
------- ------- ------- -------
Net noncurrent assets of
discontinued operations $ 1,791 $ 2,909 $ 2,608 $ 7,308
======= ======= ======= =======
March 30, 1996
-----------------------------------------------
Telecommuni- Network
Meat and cations Installation
Seafood Equipment and Service Total
-------- ------------ ------------ -----
Receivables $ 8,848 $ 3,609 $ 3,645 $ 16,102
Inventories 4,541 6,172 536 11,249
Other current assets 1,134 878 288 2,300
Accounts payable (7,893) (4,230) (1,101) (13,224)
Revolving lines of credit (2,996) (2,996) (1,046) (7,038)
Other current liabilities (726) (520) (754) (2,000)
------- ------- ------- -------
Net current assets of
discontinued operations $ 2,908 $ 2,913 $ 1,568 $ 7,389
======= ======= ======= =======
Property and equipment, net $ 3,170 $ 308 $ 341 $ 3,819
Intangible assets, net --- 2,780 2,979 5,759
Other assets 355 323 102 780
Long term debt (804) --- (800) (1,604)
Other liabilities --- (200) (374) (574)
------- ------- ------- -------
Net noncurrent assets of
discontinued operations $ 2,721 $ 3,211 $ 2,248 $ 8,180
======= ======= ======= =======
44
<PAGE>
NOTE 2 - Discontinued Operations (Continued)
Operating results, net of minority interest, relating to the
discontinued operations for fiscal years 1995 and 1996 and for fiscal year
1997 through the measurement date of November 20, 1996 are as follows (in
thousands):
Fiscal Year Ending March 31, 1997
---------------------------------------------
Telecommuni- Network
Meat and cations Installation
Seafood Equipment and Service Total
-------- ------------ ------------ -----
Net sales $188,853 $ 19,750 $ 11,540 $220,143
======= ======= ======= =======
Earnings (loss) from
discontinued operations $ (584) $ (51) $ 10 $ (625)
======= ======= ======= =======
Fiscal Year Ending March 30, 1996
---------------------------------------------
Telecommuni- Network
Meat and cations Installation
Seafood Equipment and Service Total
-------- ------------ ------------ -----
Net sales $236,108 $ 25,350 $ 6,144 $267,602
======= ======= ======= =======
Earnings (loss) from
discontinued operations $ (1,067) $ 55 $ 393 $ (619)
======= ======= ======= =======
Fiscal Year Ending April 1, 1995
---------------------------------------------
Telecommuni- Network
Meat and cations Installation
Seafood Equipment and Service Total
-------- ------------ ------------ -----
Net sales $215,141 $ 35,245 $ --- $250,386
======= ======= ======= =======
Earnings (loss) from
discontinued operations $ (724) $ 2,144 $ --- $ 1,420
======= ======= ======= =======
In fiscal 1996, state income taxes of $83,000 were allocated to
discontinued operations. No income taxes have been allocated to discontinued
operations for fiscal 1997 and 1995.
In reclassifying the Company's financial statements for presentation of
discontinued operations, the Company reflected all of APC's interest expense
that was paid to the Company under an intercompany loan to discontinued
operations. Interest expense paid by APC to the Company was $0, $159,000 and
$146,000 in fiscal 1997, 1996 and 1995, respectively. The Company reflected
the corresponding interest income in non-operating income (expense) (see
Note 9). All other intercompany interest has been eliminated in
consolidation. There was no other allocation of interest to discontinued
operations.
Discontinued operations include management's best estimates of the
amounts expected to be realized on the sale of these businesses and assets.
The estimates are based on valuations by independent appraisers. The amounts
the Company will ultimately realize could differ materially in the near term
from the amounts assumed in arriving at the estimated loss on disposal of the
discontinued operations.
45
<PAGE>
NOTE 3 - Acquisitions
In November 1994, the Company and STI entered into a general partnership
agreement to establish Sattel Communications Company, which was subsequently
converted into SCC. The Company and STI each received a 50% interest in the
venture. Profits and losses were allocated equally among the two partners.
Under the terms of this agreement, initial contributions to be made to the
partnership by the Company were operating capital and the cost of a marketing
study which in the aggregate would not exceed $200,000. In addition, the
Company agreed to prepare a business plan and a marketing plan for SCC. STI
agreed to develop, design and test a telecommunications switch with DataNet
capability, manufacture three units, provide administrative services and
provide the use of its facilities to SCC until permanent facilities were
determined. In addition, STI agreed to license SCC to use its proprietary
telecommunications switch (the "DSS switch") in the sale of the DataNet
product.
On January 16, 1996, the Company and STI entered into an Exchange
Agreement by which the Company acquired an additional 30% ownership interest
in SCC, which brought its total ownership interest in SCC to 80%. The
acquisition was accounted for as a purchase of a minority interest. The
acquisition occurred as part of a transaction in which the Company
contributed additional cash, bringing its total cash contributions to $2.5
million, and $1.425 million in loans to SCC to further develop the DSS
switch. In lieu of contributing its proportionate share of the additional
funding to SCC, STI assigned all of its right, title and interest in the DSS
switch and related technologies to SCC. In connection with this transaction,
the Company issued 350,000 shares of its common stock, par value $1.00 per
share, (the "Diana Shares") to STI. The Diana Shares were valued at
$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.
On May 3, 1996, the Company and STI entered into a Supplemental
Agreement by which the Company acquired an additional 15% ownership interest
in SCC. The acquisition occurred as part of a transaction in which the
Company contributed an additional $10 million in cash to SCC. In lieu of
contributing its proportionate share of the additional funding to SCC, and in
exchange for a release from its obligation related to certain product
development efforts, STI agreed to convey to the Company 15% of SCC, together
with 50,000 shares of the Diana Shares it had acquired pursuant to the
Exchange Agreement. This transaction resulted in a net reduction of
approximately $1,825,000 of intangible assets recorded at March 30, 1996. On
October 14, 1996, the Company acquired from STI its remaining 5% ownership
interest in SCC for 15,000 shares of the Company's common stock. At this
time SCC became a wholly-owned subsidiary of the Company.
In April 1996, SCC transferred its assets and liabilities to a newly-
formed limited liability company, Sattel. In addition during fiscal 1997,
Sattel granted subordinated equity participation interests, which amount to
approximately a 20% effective ownership interest (before consideration of the
subordination provisions) in Sattel, to certain employees of the Company.
The Company's effective ownership of Sattel is approximately 80% as a result
of these transactions. Sattel is a California Limited Liability Company
owned by members (the "Members") owning either of two classes of interests,
the "Class A Units" and the "Class B Units" (collectively, the "Units"). SCC
holds 8,000 Class A Units. Additional Class A Units are held by Charles
Chandler, a former employee, and Sydney Lilly, a current director and former
Executive Vice President of the Company. Mr. Chandler and Mr. Lilly hold
46
<PAGE>
NOTE 3 - Acquisitions (Continued)
350 and 100 Class A Units, respectively. Aggregate capital contributed to
Sattel related to these Class A Units totalled $242,000. Initially, 1,550
Class B Units were issued to employees of Sattel in connection with their
continued employment, without capital contribution therefor. Certain current
and former employees of Sattel continue to collectively own 1,507 Class B
Units, representing all of the Class B Units currently outstanding.
The following table reflects the current ownership of the Class B Units
by the management of Sattel and others as of July 1, 1997:
Name Class B Units
---------------- -------------
James J. Fiedler 350
Daniel W. Latham 250
David Held 250
Bruce Thomas 250
Others 407
-----
1,507
=====
No compensation expense was recognized upon the granting of the Class B
Units to the employees. The estimated fair value of such units at the date
of grant was considered immaterial to the financial statements based on the
subordinated nature of the interests resulting from the priority
distributions payable to holders of Class A Units. Compensation expense will
be recognized prospectively when it becomes probable that a conversion or
other defined triggering event will occur. Compensation cost will be charged
to expense over the period from the date the triggering event becomes
probable to the date of the triggering event or the end of the required
service period, whichever occurs first. If Sattel exercises its option to
repurchase equity interests previously granted to employees, total
compensation cost will be equal to the cash paid upon repurchase.
If in the future Sattel achieves cumulative pre-tax profits of at least
$15 million over the four most recent quarters, the members holding Class B
Units not subject to the Board of Directors' authorization discussed in the
next paragraph will have the right and obligation (the "Conversion Rights")
to convert their Class B Units into Company common stock on the basis of 500
shares of Company common stock for each Class B Unit, subject to adjustment
for stock dividends, stock splits, merger, consolidation or stock exchange.
The Conversion Rights are included in Class B Agreements amended in November
1996 in lieu of provisions of the April 1, 1996 agreement that provided
members holding Class B Units might require Sattel to conduct an initial
public offering, upon the achievement of the same cumulative pre-tax profit
measure discussed above, in which the Class B holders would have the right to
convert Class B Units into securities being offered, and would have the right
to have those securities registered under the Securities Act of 1933 (the
"Registration Rights"). If a majority of the Class B Units are redeemed or
purchased by Sattel or an affiliate, or if a triggering event (including the
conversion of a majority of the Class B Units) occurs, the individual Class
A holders are entitled to have their Units redeemed, purchased or to
participate on the same terms as the Class B Units, except with an upward
adjustment in price to reflect the priority of distribution associated with
the Class A Units. Pursuant to agreements regarding Class A Units, the
holders of Class A Units other than SCC also have the right, but not the
obligation, to require the Company to purchase all, but not less than all, of
47
<PAGE>
NOTE 3 - Acquisitions (Continued)
such holder's Class A Units at a price equal to the agreed-upon or appraised
fair market value at any time after April 1, 1999.
As a result of the Company's Restructuring, its continuing operations
are only those of Sattel. The Conversion Rights discussed above provided the
Class B Unit holders with an approximately comparable ownership interest in
the Company as they have in Sattel.
On September 4, 1997, the Board of Directors authorized an amendment to
certain Class B Units owned by directors and employees of Diana and Sattel at
June 30, 1997, to provide for the elimination of the minimum pre-tax profits
measure requirement discussed above and the conversion into Company common
stock at the option of the holder. Consequently, there will be a
compensation charge of approximately $3,825,000 recorded in the second
quarter of fiscal 1998. This charge is based on the value at September 4,
1997 of 600,000 shares of Company common stock at $6.375 per share that will
be issuable to Class B Unit Holders. Assuming that Class A Units, other than
those held by SCC, are convertible on the same basis as a result of the Board
of Directors' authorization discussed above, additional charges of $1,434,000
would be recognized based on 225,000 shares of Company common stock and a per
share price of $6.375.
The following unaudited pro forma results of operations for the last two
fiscal years assume the acquisition of SCC (including the transactions on
May 3, 1996 and October 14, 1996) occurred at the beginning of fiscal 1996
(in thousands, except per share amounts):
1997 1996
------ ------
Net sales $ 7,154 $ 264
======= ======
Loss before extraordinary items $(20,601) $(4,058)
======= ======
Net loss $(21,109) $(4,058)
======= ======
Net loss per common share $ (4.00) $ (.87)
======= ======
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.
48
<PAGE>
NOTE 4 - Marketable Securities
Marketable securities at March 30, 1996 consist of the following (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 1,786 --- 864 922
----- ----- ----- -----
$ 2,089 $ --- $ 876 $ 1,213
===== ===== ===== =====
The gross realized gains on sales of available-for-sale securities
totaled $0, $31,000 and $14,000 in fiscal 1997, 1996 and 1995, respectively,
and the gross realized losses totaled $736,000, $5,000 and $1,241,000 in
fiscal 1997, 1996 and 1995, respectively. The net adjustment to unrealized
losses on available-for-sale securities included as a separate component of
shareholders' equity totaled $0 and $876,000 at March 31, 1997 and March 30,
1996, respectively.
NOTE 5 - Long-Term Debt
Long-term debt consists of the following (in thousands):
March 31, March 30,
1997 1996
-------- --------
Subordinated debentures due January
2002 and capitalized interest $ 1,958 $ 2,099
Less current maturities (141) (141)
------ ------
$ 1,817 $ 1,958
====== ======
The foregoing consists of principal of $1,254,000 and capitalized
interest of $704,000 at 11.25%. The debentures, which were issued in January
1992, are unsecured. The payment of cash dividends by the Company is
restricted by the 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.
Approximate annual amounts payable by the Company on long-term debt are
as follows (in thousands):
1998................ $ 141
1999................ 141
2000................ 141
2001................ 141
2002................ 1,394
-----
$ 1,958
=====
49
<PAGE>
NOTE 6 - Commitments and Contingencies
Diana and Sattel lease their facilities and various 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 under operating leases in fiscal 1997, 1996, and 1995 was
$279,000, $63,000 and $46,000, respectively.
Future minimum payments under noncancelable operating leases with
initial terms of one year or more for fiscal years subsequent to March 31,
1997 are as follows (in thousands):
1998................ $ 126
1999................ 44
2000................ 24
2001................ 5
2002................ ---
----
$ 199
====
The Diana Corporation Securities Litigation (Civ. No. 97-3186). This is
a consolidation of what were originally nine separate actions brought in the
United States District Court for the Central District of California on behalf
of purchasers of the Company's common stock during a class period that
extended from December 6, 1994 through May 2, 1997. On July 23, 1997, the
Court entered a stipulation and order consolidating the nine actions for all
purposes. On September 9, 1997, plaintiffs filed a consolidated amended
complaint (the "Consolidated Complaint") asserting claims against the
Company, certain of its present and former directors and officers, and others
under Section 10(b) of the Securities Exchange Act of 1934. The Consolidated
Complaint alleges essentially that the Company and other defendants were
engaged in a scheme to inflate the price of the Company's common stock during
the class period through false and misleading statements and manipulative
transactions. The Consolidated Complaint seeks unspecified damages, but
identifies the significant movement in the Company's stock price during the
putative class period (a swing of more than $115 per share) to imply that the
damages that will be claimed will exceed the Company's assets.
No discovery or substantive proceedings have occurred. The Company must
respond to the consolidated amended complaint by September 30, 1997 if by
motion to dismiss, or by October 17, 1997 if by answer. The Company intends
to defend this action vigorously.
As discussed in Note 16, the Company has adjusted certain previously
reported fiscal 1997 unaudited quarterly financial information. It cannot
presently be determined what effect, if any, such restatements will have on
the class actions discussed above, or any other potential claims by investors
which may be asserted against the Company.
Sattel Technologies, Inc. v. Sattel Communications LLC, Case No. BC
167829, Superior Court, Los Angeles County, California. STI filed this
action in March 1997, claiming damages for breach of contract and lack of
payment for goods sold and delivered. The damages claimed are roughly $2
million. On April 10, 1997, STI's motion for prejudgment attachment was
denied. Sattel believes that a portion of the claim is legitimate trade debt
and a substantial additional portion is unfounded. Sattel is also
contemplating a number of counterclaims as an offset to the valid debt.
Since April 10, 1997, the parties have engaged in settlement negotiations,
50
<PAGE>
NOTE 6 - Commitments and Contingencies (Continued)
which are still ongoing. If settlement discussions are not successful,
Sattel intends to defend this action vigorously and assert the appropriate
counterclaims. The Company believes the amount accrued of $807,000 is the
proper amount owed to STI at March 31, 1997.
Charles Chandler v. C&L Communications, Diana Corporation, Mellon
Financial Services Corporation and Lisa Chandler, Case No. 97-CI-01290,
District Court, Bexar County, Texas. The plaintiff, Mr. Chandler, a former
officer and director of C&L, filed this case in February 1997, claiming that
the various defendants either negligently or intentionally deprived him of
marketable certificates of the Company's common stock. By the time the
certificates were provided, Mr. Chandler claims that the trading value was
greatly diminished. Discovery is underway. There is no trial date set. The
Company is providing Mellon, the Company's transfer agent, with a defense and
indemnification under a reservation of rights. Ms. Chandler, a former
officer and director of C&L, is represented separately. She has made a claim
for indemnification that, under Texas law, will be determined at the end of
the case. The Company intends to defend the case vigorously. Based upon the
limited discovery to date, the Company believes that Mr. Chandler's claims
against C&L, the Company and Mellon lack substantial merit.
The effects of the matters discussed above cannot presently be
determined. However, it is reasonably possible that events will occur in the
near term to allow the Company to estimate such effects. The Company is also
involved with other proceedings or threatened actions incident to the
operation of its businesses. It is management's opinion that none of these
matters will have a material adverse effect on the Company's financial
position, results of operations or cash flows.
Sattel Communications LLC v. Concentric Network Corporation ("CNC"),
Case No. LC 040906, Superior Court, Los Angeles County, California. Sattel
filed this action as plaintiff in April 1997. The complaint sought damages
of roughly $4.2 million relating to products CNC purchased, plus additional
compensatory and punitive damages for, among other things, breach of
contract. On June 25, 1997, the trial court granted Sattel's motion for pre-
judgment attachment in the amount of $3.6 million. The granting of the
motion was based upon the Court's preliminary determination on the probable
validity of Sattel's claim. On June 30, 1997, Sattel posted an undertaking,
in the form of a $75,000 bond, to secure the attachment. On July 9, 1997,
Sattel secured a final judgment from the Court. The basic terms are: (i) a
$4.4 million judgment against CNC and in favor of Sattel; (ii) certain
restrictions on Sattel's CNC stock holding have been lifted, such that Sattel
has the election to sell up to 25% of its CNC holding immediately following
the completion of CNC's proposed Initial Public Offering ("IPO") at the IPO
price; and (iii) dismissal and mutual release of all claims between the
parties. Sattel agreed to wait until August 15, 1997 before executing upon
the judgment. Subsequently, Sattel has collected both the $4.4 million
judgment and $396,000 from the partial sale of its CNC holdings.
51
<PAGE>
NOTE 7 - Shareholders' Equity
The Company has two nonqualified stock option plans under which options
to acquire up to 1,339,389 shares of the Company's common stock may be
granted to directors, officers and certain employees of the Company and its
subsidiaries. At March 31, 1997, 501,029 options were available for grant
under both plans. Both plans are administered by the Company's Board of
Directors, which is authorized, among other things, to determine which
persons receive options under each plan, the number of shares for which an
option may be granted, and the exercise price and expiration date for each
option. The term of options granted shall not exceed 11 years from the date
of grant of the option or from the date of any extension of the option term.
The following table summarizes the transactions for both stock option
plans for the last three fiscal years:
Option Price
Options Per Share
------- ------------
Outstanding at April 2, 1994 544,264 $ 1.95 - 5.55
5% stock dividend 27,212 ---
Exercised (4,500) 2.15
-------
Outstanding at April 1, 1995 566,976 1.95 - 5.55
5% stock dividend 31,482 ---
Granted 385,000 5.90 - 19.05
Exercised (12,300) 2.15
-------
Outstanding at March 30, 1996 971,158 1.95 - 19.05
5% stock dividend 53,119 ---
Granted 135,024 5.00 - 27.00
Canceled (320,941) 19.05
-------
Outstanding at March 31, 1997 838,360 1.95 - 27.00
=======
Exercisable at March 31, 1997 714,125 1.95 - 19.05
=======
Weighted
Weighted Average Weighted
Average Remaining Average
Option Price Outstanding Exercise Contractual Exercisable Exercise
Per Share Options Price Life (Years) Options Price
- ------------ ------- -------- ----------- ----------- --------
$ 1.95 48,620 $ 1.95 .75 48,620 $ 1.95
4.63- 5.90 657,600 5.58 1.11 645,600 5.59
19.01-27.00 132,140 20.97 4.29 19,905 19.05
------- -------
838,360 7.79 714,125 5.72
======= =======
The Company accounts for these plans under APB Opinion No. 25, under
which the total compensation expense recognized is equal to the difference
between the option exercise price and the underlying market price of the
stock at the measurement date. The Company has adopted the disclosure-only
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."
52
<PAGE>
NOTE 7 - Shareholders' Equity (Continued)
The following pro forma net loss and net loss per common share for
fiscal 1997 and 1996 assume that compensation cost was recognized for the
vested portion of the awards granted in those years, based on the estimated
fair value at the grant date consistent with the provisions of SFAS No. 123
(in thousands, except per share amounts):
1997 1996
---- ----
Net loss - as reported $(21,018) $(3,365)
Net loss - pro forma (21,500) (3,592)
Net loss per share - as reported (3.99) (.76)
Net loss per share - pro forma (4.08) (.82)
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-
average assumptions for grants in fiscal 1997 and 1996:
1997 1996
Expected stock price volatility 93.3% 72.9%
Risk free interest rate 6.2% 6.8%
Expected life of options 4.8 years 4.9 years
The weighted average exercise prices per share for options outstanding
and exercisable at March 31, 1997 are $7.79 and $5.72, respectively. The
weighted average exercise prices per share for options outstanding and
exercisable at March 30, 1996 are $10.20 and $5.60, respectively. The
weighted average fair value of options granted during fiscal 1997 and 1996 is
$17.65 and $3.65 per share, respectively.
During fiscal 1997, the Company made a commitment to issue a warrant to
an investment banker for services provided in connection with the
Restructuring to purchase 100,000 shares of the Company's common stock at
$22.63 per share (see Note 2). The warrant can be exercised at any time
through February 2000. The Company recorded the fair value of the warrant
within discontinued operations (see Note 2). The fair value of the warrant
of $800,000 was estimated using the Black-Scholes option-pricing model with
the following weighted-average assumptions:
Expected stock price volatility 135.91%
Risk free interest rate 5.89%
Expected life of options 3 years
In fiscal 1997, the Company recognized compensation expense of $125,000
in connection with the issuance of restricted stock and the amendment of
certain previously issued stock options.
At March 31, 1997, the Company had 1,078,500 shares of common stock
available for the conversion of Sattel Class A and B Units and for warrants.
See Note 15 regarding activity subsequent to March 31, 1997 impacting
Shareholders' Equity.
53
<PAGE>
NOTE 8 - Income Taxes
A reconciliation of the income tax credit and the amount computed by
applying the statutory federal income tax rate (34%) to loss from continuing
operations before extraordinary items, minority interest and income tax
credit for the last three fiscal years is as follows (in thousands):
1997 1996 1995
-------- -------- -------
Credit at statutory rate................ $ (4,604) $ (1,108) $ (728)
Settlements of liabilities of
unconsolidated subsidiary............. (5) (156) (36)
Tax effect of net operating loss not
benefitted............................ 4,500 1,276 758
Refund of federal income taxes paid
in a prior year....................... (836) --- ---
Other, net.............................. 109 (12) 6
----- ----- ----
Income tax credit....................... $ (836) $ --- $ ---
===== ===== ====
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. The components of the
Company's deferred tax assets and liabilities of continuing operations are as
follows (in thousands):
March 31, March 30,
1997 1996
--------- ---------
Federal net operating loss carryforwards $ 11,950 $ 7,830
State net operating loss carryforwards 1,835 1,629
Reserve for loss on discontinued operations 953 ---
Federal capital loss carryforward 659 408
Excess and obsolete inventory reserve 560 ---
Capitalized interest on Diana debentures 281 338
General business credit carryforwards 145 145
Deferred compensation --- 380
All others 686 225
------ ------
Total deferred tax assets 17,069 10,955
Valuation allowance for deferred tax assets (15,234) (8,352)
------ ------
Net deferred tax assets 1,835 2,603
Intangible assets (net) 1,489 2,256
All others 346 347
------ ------
Total deferred tax liabilities 1,835 2,603
------ ------
Net deferred taxes $ --- $ ---
====== ======
The Company has approximately $35,000,000 in both federal and state net
operating loss carryforwards. These carryforwards expire at various dates
through fiscal 2012. The Tax Reform Act of 1986 imposed substantial
restrictions on the utilization of net operating losses in the event of an
"ownership change" as defined in Section 382 of The Internal Revenue Code of
1986. Subsequent to March 31, 1997, there may have been ownership changes
which would significantly limit the Company's ability to immediately utilize
its net operating loss carryforwards.
54
<PAGE>
NOTE 9 - Non-Operating Income (Expense)
Non-operating income (expense) consists of the following for the last
three fiscal years (in thousands):
1997 1996 1995
------ ------ ------
Write-down of CNC preferred stock $(1,060) $ --- $ ---
Net gains (losses) on sales of
marketable securities (736) 26 (1,227)
Interest income 427 457 743
Gain on settlements of lawsuits --- --- 199
Other 32 (18) (26)
------- ------ ------
$ (1,337) $ 465 $ (311)
======= ====== ======
In June 1996, CNC executed a Promissory Note for $5,000,000 in favor of
Sattel for a bridge loan. CNC granted to Sattel a warrant to purchase a
split adjusted 36,765 shares of CNC Series D Preferred Stock ("CNC Preferred
Stock") at a split adjusted exercise price of $20.40 per share (equal to the
par value of such shares) as additional consideration for the bridge loan to
CNC. The warrant is exercisable immediately and expires on June 6, 1999. In
August 1996, the Promissory Note and accrued interest receivable were
converted into 3,729,110 shares of CNC Preferred Stock. In September 1996,
Sattel sold to StreamLogic Corporation 1,838,234 shares, or 49% of its CNC
Preferred Stock for $2.5 million. No gain or loss was recognized in
connection with this sale.
In August 1997, CNC completed its IPO at an offering price of $12.00 per
share. The CNC Preferred Stock owned by Sattel was automatically converted
into CNC common stock immediately prior to the closing of the IPO. The value
of Sattel's investment in CNC Preferred Stock, after giving effect to a
reverse 1 for 15 stock split and based on a $12.00 per share offering price,
is approximately $1,512,000. The Company deemed this value to be the maximum
fair market value of its holding on an if-converted basis at March 31, 1997
and in addition, concluded the value of that investment was permanently
impaired. Consequently, the Company recorded a non-operating loss of
$1,060,000 in fiscal 1997 related to the impairment of its investment. The
investment in CNC Preferred Stock of $1,512,000 is classified within other
current assets in the Consolidated Balance Sheet. The Company is prohibited
from selling 75% of its CNC common stock for six months following CNC's IPO.
Sattel sold 25% of its CNC common stock in August 1997 at $12.00 per share
and received $396,000. The Company continues to own the warrant from CNC
which is now for CNC common stock as a result of the conversion discussed
above. The fair value of CNC's common stock at September 15, 1997 was $14.25
per share.
55
<PAGE>
NOTE 10 - Extraordinary Items
On October 4, 1996, APC refinanced its revolving line of credit with a
new lender. In connection with the refinancing, APC incurred expenses of
$227,000 which are reflected in the fiscal 1997 Consolidated Statement of
Operations as an extraordinary item pursuant to SFAS No. 4.
In February 1997, APC sold a majority of its assets and used part of the
proceeds to repay its revolving line of credit (see Note 2). APC incurred
expenses of $281,000 in connection with the early repayment which are
reflected in the fiscal 1997 Consolidated Statement of Operations as an
extraordinary item pursuant to SFAS No. 4.
NOTE 11 - Related Party Transactions
On November 11, 1996 the Company loaned $300,000 to each of James J.
Fiedler and Daniel W. Latham. Mr. Fiedler is the Company's Chairman and
Chief Executive Officer and Mr. Latham is the Company's President and Chief
Operating Officer. Messrs. Fiedler and Latham both executed unsecured
Promissory Notes due November 1, 1999 which provide interest at 6.07% per
annum compounded on the anniversary date and payable on November 1, 1999. In
addition, each person agreed to surrender previously awarded options they
each held to purchase 150,000 shares of the Company's common stock.
The Promissory Notes provide for full repayment prior to November 1,
1999 in the event of the following: (a) upon any transfer of Messrs.
Fiedler's or Latham's Class B Units in Sattel (other than to a Permitted
Transferee, as defined in the Agreement Regarding Award of Class B Units (the
"Award Agreement")), or by any such Permitted Transferee (including without
limitation certain transfers contemplated by the Award Agreement) or (b) upon
any exchange or conversion of Class B Units for or into securities registered
under the Securities Exchange Act of 1934, as amended, in accordance with the
Award Agreement. In connection with the employment agreements with Messrs.
Fiedler and Latham entered into on September 4, 1997, the Company's Board of
Directors agreed to forgive the notes. Under the employment agreements,
equal one third portions of the notes will be forgiven at September 4, 1997
and, if their respective employments are renewed, at each of the next two
anniversaries of the date of the employment agreements, provided that each
individual remains as an employee of the Company at each such forgiveness
date.
Messrs. Fiedler and Latham used the proceeds of the loan to each
purchase 100 non-forfeitable Class B Units of Sattel from Mark Jacques, a
former officer of Sattel, for an aggregate purchase price of $600,000. On
November 12, 1996, Sattel entered into a settlement agreement with Mr.
Jacques whereby Mr. Jacques (i) agreed to the assignment to the Company of
the employment agreement between him and Sattel and (ii) retained his
remaining 250 Class B Units of Sattel. Mr. Jacques was terminated as an
employee of the Company in January 1997. Upon a review of the various
transactions and taking into account all of the available information, the
Company has accounted for the loans to Messrs. Fiedler and Latham and their
purchase of Class B Units from Mr. Jacques as a settlement with Mr. Jacques
and recorded an expense of $600,000 during the third quarter of fiscal 1997
(see Note 16).
56
<PAGE>
NOTE 11 - Related Party Transactions (Continued)
The Company entered into Separation Agreements, dated November 20, 1996
(the "Separation Agreements"), with each of Richard Y. Fisher, Sydney B.
Lilly and Donald E. Runge (the "Departing Officers") that provide for
termination of employment and resignation from all offices and directorships
in the Company and its subsidiaries by the Departing Officers, except for Mr.
Lilly's directorship of the Company. The Separation Agreements provide for
payment by the Company, as of November 29, 1996, of $186,000 and $749,000,
respectively, to Mr. Runge and Mr. Fisher, in settlement of deferred
compensation previously earned and payments of $343,000 to Mr. Fisher and
$83,000 to each of Mr. Runge and Mr. Lilly as severance settlements resulting
in total payments to the Departing Officers of $1,444,000. In accordance
with provisions of the Amended and Restated Employment Agreements entered
into by the Company and each of the Departing Officers on April 2, 1995, each
Departing Officer shall be entitled to have all medical, dental, hospital,
optometrical, nursing, nursing home and drug expenses for themselves and
their spouses paid by the Company for life, or in the case of Mr. Lilly,
until March 31, 2000. The Separation Agreement for Mr. Fisher provides that
he shall repay in full a promissory note dated April 11, 1988, in the amount
of $42,469. The Separation Agreements further provide that all stock options
of the Departing Officers shall remain exercisable until December 31, 1997
(April 2, 2000 with respect to 82,688 options granted to Mr. Lilly on April
2, 1995) and amends existing Stock Option Agreements with Messrs. Fisher,
Lilly and Runge to provide for, among other things, the Company to maintain
the effectiveness of the Form S-8 Registration Statement currently in effect
covering the exercise of the stock options. The Company has made all
required payments under the Separation Agreements.
Certain of the Company's non-employee directors have provided services
to the Company and/or its subsidiaries for which they were compensated.
Amounts accrued or paid to all directors for these services during fiscal
1997, 1996 and 1995 are $4,000, $13,000 and $217,000, respectively.
In February 1997, APC conveyed its 50% ownership interest in Fieldstone
Meats of Alabama, Inc. to a former officer and director of APC in
consideration for past services as a director of APC.
57
<PAGE>
NOTE 12 - Business Segment Information
The Company operates worldwide in the central office voice and data
switching equipment business segment. This segment consists solely of the
operations of Sattel. In fiscal 1997, Sattel had sales to one domestic
customer that comprised 94% of net sales. In fiscal 1996, Sattel had sales
to two customers that comprised 68% and 32% of net sales. Information by
industry segment is as follows (in thousands):
Fiscal Year Ended
------------------------------
March 31, March 30, April 1,
1997 1996 1995
-------- --------- --------
Net Sales:
Switching equipment................... $ 7,154 $ 264 $ ---
======= ====== ======
Operating loss:
Switching equipment................... $ (8,740) $(1,883) $ ---
Corporate............................. (3,410) (1,809) (1,697)
------- ------ ------
$(12,150) $(3,692) $(1,697)
======= ====== ======
Depreciation and amortization:
Switching equipment................... $ 467 $ 111 $ ---
Corporate............................. 11 10 8
------- ------ ------
$ 478 $ 121 $ 8
======= ====== ======
Capital expenditures:
Switching equipment................... $ 1,902 $ 136 $ ---
Corporate............................. 12 25 12
------- ------ ------
$ 1,914 $ 161 $ 12
======= ====== ======
Identifiable assets:
Switching equipment................... $ 14,811 $ 8,359 $ ---
Discontinued operations............... 8,201 15,569 16,820
Corporate............................. 232 5,164 7,385
------- ------ ------
$ 23,244 $29,092 $24,205
======= ====== ======
58
<PAGE>
NOTE 13 - Statements of Cash Flows
Supplemental cash flow information relating to continuing operations for
the last three fiscal years is as follows (in thousands):
1997 1996 1995
------ ------ ------
Change in current assets and
liabilities:
Receivables.................... $(4,540) $ 173 $ 1,584
Inventories.................... (1,850) (1,005) ---
Other current assets........... 294 108 210
Accounts payable............... 2,076 338 (10)
Other current liabilities...... 856 15 (10)
------ ------ ------
$(3,164) $ (371) $ 1,774
====== ====== ======
Supplemental information:
Interest paid................... $ --- $ --- $ 35
Non-cash transactions:
Purchase of minority interest
with common stock.............. 1,818 4,944 1,895
Conversion of promissory note
and accrued interest into CNC
preferred stock................ 5,072 --- ---
Reduction of net liabilities
of unconsolidated subsidiary... --- 219 ---
NOTE 14 - Liquidity and Capital Resources
The Company encountered a liquidity deficiency in fiscal 1997 and
subsequently, primarily because (i) certain customers of Sattel were past due
on receivables, (ii) Sattel has granted certain customers extended payment
terms, (iii) Sattel's revenue growth has been lower than expected and (iv)
the Company made payments of $2,349,000 in connection with the
Restructuring.
As a result of the liquidity deficiency, the Company had become
delinquent on certain of its working capital obligations. In July 1997, the
Company raised $5,597,000 through equity and debt financings (see Note 15 for
additional information). After completion of the equity and debt financings,
collection of $4.4 million from CNC and the anticipated sales of C&L, Valley
and APC's real estate discussed further below, management believes that it
will have sufficient resources to provide adequate liquidity to meet the
Company's planned capital and operating requirements through March 31, 1998.
Thereafter, the Company's operations will need to be funded either with funds
generated through operations or with additional debt or equity financing. If
the Company's operations do not provide funds sufficient to fund its
operations and the Company seeks outside financing, there can be no assurance
that the Company will be able to obtain such financing when needed, on
acceptable terms or at all.
The Company is seeking buyers for C&L and Valley. It is anticipated
that the proceeds of the sales of these businesses and assets will be used to
fund a portion of the Company's capital and operating requirements in fiscal
1998. Restrictions in the revolving lines of credit of C&L and Valley
prevent the Company from presently accessing funds from these subsidiaries.
59
<PAGE>
NOTE 14 - Liquidity and Capital Resources (Continued)
Such restrictions in C&L's revolving line of credit may also initially limit
the Company's access to the total proceeds from a sale of Valley prior to any
ultimate sale of C&L given the existing ownership structure of Valley.
As discussed above, recent events have improved the Company's short-term
liquidity. The Company nevertheless considers that its liquidity situation,
over the longer term, will be dependent on its operating results and not its
ability to divest its discontinued subsidiaries and assets. The Company
could remain relatively constrained and its ability to access outside sources
of capital could be restricted until such time as the Company is able to
demonstrate higher levels of sales and more favorable operating results. No
assurances can be given that the Company will be able to maintain its
liquidity over an extended period of time as required for the Company to
achieve its operating goals.
NOTE 15 - Subsequent Events
On May 13, 1997, the Company issued warrants to Superior St. Capital,
its investment banking firm, in connection with the equity financing
discussed below to purchase 324,000 shares of the Company's common stock at
$2.25 per share. A warrant to purchase 273,000 shares of common stock is
exercisable immediately and expires five years from issue. A warrant to
purchase 51,000 shares of common stock is exercisable on November 13, 1997
and expires on November 13, 2002. Registration rights were provided to the
owner of the warrants.
In June 1997, the Company's Board of Directors authorized the following
items with respect to the Company's two nonqualified stock option plans:
a) Stock options to purchase 46,897 shares of the Company's common
stock were granted to certain employees of Sattel. In addition, the Board of
Directors authorized the issuance of an additional 100,000 stock options
pursuant to the Company's plan to Sattel employees.
b) All current employees that have been granted stock options will be
eligible to exchange existing stock options for new options that have an
exercise price of $3.00 per share. The new options vest equally over a three
year period commencing June 1, 1997.
c) Stock options to purchase 5,000 shares of the Company's common stock
were granted to each of two outside members of the Board of Directors that
joined the Board in fiscal 1997. These options have an exercise price of
$3.00 per share.
d) The expiration date of stock options owned by outside members of the
Board of Directors as of June 5, 1997 was extended from December 31, 1997 to
December 31, 2000. This extension established a new measurement date for
accounting purposes, the effects of which will be recorded in the first
quarter of fiscal 1998.
In July 1997, the Company issued 1,880,750 shares of its common stock at
$2.00 per share in a private placement under Regulation D of the Securities
Act of 1933. The Company received $3,362,000 from the private placement, net
of fees of $400,000. In addition, warrants to purchase 1,880,750 shares of
the Company's common stock at $3.00 per share were issued to the Regulation
D participants. The warrants are exercisable immediately and expire 5 years
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NOTE 15 - Subsequent Events (Continued)
from issuance. Mr. Fiedler, the Company's Chairman and Chief Executive
Officer, participated in the private placement and purchased 175,000 shares
of common stock and received warrants to purchase 175,000 shares of the
Company's common stock. In addition, Mr. Stephen W. Portner, a Director, and
his daughter collectively participated in the private placement and purchased
11,250 shares of common stock and received warrants to purchase 11,250 shares
of the Company's common stock. The common stock and common stock warrants
issued in the private placement are subject to registration rights.
In July 1997, the Company received $2,235,000 upon the issuance of
$2,500,000 in 8% convertible notes. Fees and expenses amounted to $265,000.
The notes are convertible into the Company's common stock which will be
issued pursuant to the exemption provisions of Regulation S of the Securities
Act of 1933. The conversion price is the lessor of $6.64 or 80% of the 5 day
average closing bid price on a conversion date with a conversion floor price
(the "Conversion Floor Price") of $1.50 per share, provided that if the
average closing bid price for any 20 consecutive trading days prior to a
conversion date is less than $1.50 per share, the Conversion Floor Price will
be adjusted to 80% of such 20 day average closing bid price. A further
restriction on conversion provides that in no event shall the holder be
entitled to convert any portion of the note in excess of that portion of the
note upon conversion of which the sum of (1) the number of shares of common
stock beneficially owned by the holder and its affiliates (other than shares
of common stock which may be deemed beneficially owned through the ownership
of the unconverted portion of this note as defined in the Subscription
Agreement) and (2) the number of shares issuable upon the conversion of the
portion of the note with respect to which the determination of this proviso
is being made, would result in beneficial ownership by the holder and its
affiliates of more than 4.9% of the outstanding common stock of the Company.
The note can be converted equally beginning 45, 75 and 105 days following
July 17, 1997. Interest is payable semi-annually in arrears in the form of
Company common stock based on the above-described conversion price. After
one year, the Company may, by written notice to the holders, prepay the notes
in whole or in part. The notice shall be given at least ten (10) days prior
to the payment date and on such date the Company shall pay the outstanding
principal and all accrued interest on the note, unless prior to such payment
date the holder has delivered a notice of conversion. Any unconverted
principal amount and accrued interest thereon shall at the maturity date be
paid, at the option of the Company, in either (a) cash or (b) common stock
valued at a price equal to the average closing bid price of the common stock
for the five (5) trading days immediately preceding the maturity date. The
fair value of the "in-the-money" portion of the notes at the date of issuance
will be recorded as a debt discount and amortized prospectively as interest
expense.
The 8% convertible notes contain certain event of default provisions.
If an event of default occurs and is not waived by the holders of a majority
of all notes, the Company must redeem the notes at 125% of the outstanding
principal amount due. Significant event of default provisions include among
other things: proceedings for relief under bankruptcy law, insolvency, money
judgment or writ of attachment in excess of $500,000 filed against the
Company and the delisting of the Company's common stock from an exchange or
the Nasdaq Stock Market.
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<PAGE>
NOTE 15 - Subsequent Events (Continued)
In addition, warrants to purchase 37,037 of common stock at an exercise
price of $6.75 per share were issued to the escrow agent for the Regulation
S offering. These warrants are exercisable after 41 days of issuance and
expire on July 17, 2000. Upon exercise of the warrants, the Company's common
stock will be issued pursuant to the exemption provisions of Regulation S of
the Securities Act of 1933. The fair value of the warrants will be recorded
as debt issue costs in the second quarter of fiscal 1998.
Mr. Fiedler, the Company's Chairman and Chief Executive Officer, loaned
the Company $250,000 in June 1997. The principal amount of the loan was
converted to common stock in conjunction with Mr. Fiedler's purchase of
Company common stock pursuant to the Regulation D private placement in July
1997. Mr. Latham, the Company's President and Chief Operating Officer,
loaned the Company $98,000 subsequent to March 31, 1997. This loan was
repaid in July 1997.
NOTE 16 - Quarterly Results of Operations (Unaudited)
Fiscal Year Ended March 31, 1997 (in thousands, except per share
amounts):
12 Weeks Ended
------------------------------------- 16 Weeks
January 4, October 12, Ended
March 31, 1997 1996 July 20,
1997 (Restated) (Restated) 1996
--------- ---------- ----------- --------
Net sales $ 95 $ 2,552 $ 3,666 $ 841
Gross profit (loss) (1,290) 1,842 2,775 695
Loss from:
Continuing operations $ (6,742) $ (3,663) $ (781) $ (1,149)
Discontinued operations (2,000) (2,273) (3,729) (173)
Extraordinary items (281) --- (227) ---
------- ------- -------- -------
Net loss $ (9,023) $ (5,936) $ (4,737) $ (1,322)
======= ======= ======== =======
Loss per common share:
Continuing operations $ (1.27) $ (.69) $ (.15) $ (.22)
Discontinued operations (.38) (.43) (.71) (.03)
Extraordinary items (.05) --- (.04) ---
------- ------- -------- -------
Net loss per common
share $ (1.70) $ (1.12) $ (.90) $ (.25)
======= ======= ======== =======
Fiscal 1997 represents Sattel's first full year of operations as a
consolidated subsidiary of Diana, and as a designer, developer, manufacturer,
marketer and distributor of telecommunications equipment for an industry
which continues to be impacted by deregulation. Sattel's results may
fluctuate from quarter to quarter, however, the Company's quarterly results
for fiscal 1997 are not necessarily indicative of the results which can be
expected on a quarterly basis in the future. Sales during the first three
quarters of fiscal 1997 relate primarily to sales to CNC. There were no
sales to CNC in the fourth quarter.
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<PAGE>
NOTE 16 - Quarterly Results of Operations (Unaudited) (Continued)
Having completed its first full year of operations in its primary
business to design, develop, engineer, manufacture, market and distribute
telecommunications switches, and pursuant to advice received from the
Company's independent accountants, Sattel's sales and gross profit as
previously reported for the second and third quarters of fiscal 1997 have
been adjusted for accounting errors to postpone the recording of sales with
respect to four of Sattel's customers until the occurrence, if any, of
certain future events. As a result, sales for the second and third quarters
of fiscal 1997 were reduced by $380,000 and $1,785,000, respectively, and
gross profit was reduced by $259,000 and $1,215,000, respectively, to reflect
the postponement of sales. In addition, the Company, pursuant to the advice
received from the Company's independent accountants, revised its accounting
with respect to a third quarter settlement involving a former employee of the
Company. The revision resulted in a $600,000 settlement expense being
recorded in the third quarter of fiscal 1997 (see Note 11). The Company also
reclassified $227,000 from loss from discontinued operations to extraordinary
items for the twelve weeks ended October 12, 1996 (see Note 10) and corrected
the recording of certain expenses of $120,000 by moving them from the second
to the third quarter of fiscal 1997.
The results of operations as originally reported for the twelve weeks
ended January 4, 1997 and October 12, 1996 are as follows:
12 Weeks Ended
-------------------------
January 4, October 12,
1997 1996
---------- -----------
Net sales $ 4,337 $ 4,046
Gross profit 3,057 3,034
Loss from:
Continuing operations $ (1,728) $ (642)
Discontinued operations (2,273) (3,956)
------- --------
Net loss $ (4,001) $ (4,598)
======= ========
Loss per common share:
Continuing operations $ (.33) $ (.12)
Discontinued operations (.43) (.75)
------- --------
Net loss per common share $ (.76) $ (.87)
======= ========
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NOTE 16 - Quarterly Results of Operations (Unaudited) (Continued)
Loss from continuing operations for the third and fourth quarters of
fiscal 1997 includes the following significant (income), expenses and losses
(in thousands):
Third Quarter Fourth Quarter
Settlement expense with former employee $ 600 $ ---
Realized loss on sales of marketable
securities 736 ---
Income tax credit (836) ---
Excess and obsolete inventory charges
(also impacted gross profit) --- 1,400
Writedown of CNC investment --- 1,060
---- -----
$ 500 $2,460
==== =====
The loss from discontinued operations consists of the following charges
and losses by quarter in fiscal 1997 (in thousands):
First Second Third Fourth Total
------ ------ ------ ------- -----
Loss from discontinued
operations $(173) $ (229) $ (223) $ --- $ (625)
Estimated loss on disposal --- (3,500) (2,050) (2,000) (7,550)
---- ------ ------ ------ ------
$(173) $(3,729) $(2,273) $(2,000) $(8,175)
==== ====== ====== ====== ======
During the second quarter of fiscal 1997, the Company recorded a
provision of $3,500,000 for estimated losses in connection with the original
Restructuring plan (see Note 2). During the third quarter of fiscal 1997,
the Company recorded a provision of $2,050,000 for estimated losses on the
sale of APC. In the fourth quarter of fiscal 1997, the Company recorded a
provision of $2,000,000 for an adjustment of the estimated proceeds on the
sale of APC's real estate and additional estimated losses related to the
disposal of C&L and Valley.
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<PAGE>
NOTE 16 - Quarterly Results of Operations (Unaudited) (Continued)
Fiscal Year Ended March 30, 1996 (in thousands, except per share
amounts):
12 Weeks Ended 16 Weeks
------------------------------------- Ended
March 30, January 6, October 14, July 22,
1996 1996 1995 1995
--------- ---------- ----------- ---------
Net sales $ --- $ --- $ 264 $ ---
Gross profit --- --- 135 ---
Earnings (loss) from:
Continuing operations $ (1,352) $ (647) $ (307) $ (440)
Discontinued Operations (1,160) 49 453 39
------- ------- -------- --------
Net earnings (loss) $ (2,512) $ (598) $ 146 $ (401)
======= ======= ======== ========
Earnings (loss) per
common share:
Continuing operations $ (.29) $ (.15) $ (.07) $ (.10)
Discontinued operations (.25) .01 .10 .01
------- ------- -------- --------
Net earnings (loss)
per common share $ (.54) $ (.14) $ .03 $ (.09)
======= ======= ======== ========
The primary reason for the increased loss from continuing operations in
the fourth quarter of fiscal 1996 is attributable to an increase in the
start-up activities at Sattel.
During the fourth quarter of fiscal 1996, the Company concluded that an
impairment of goodwill had occurred and wrote off the remaining goodwill of
$852,000 resulting from the acquisition of APC. This is the primary reason
for the increased loss from discontinued operations in the fourth quarter of
fiscal 1996.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Identification of Directors
The Board of Directors is divided into three classes of directors
consisting of two classes of two members and one class of three members or
seven members in the aggregate. However, the Board currently includes only
five members. The election of directors is staggered so that the term of
only one class of directors expires each year. Generally, the term of each
class is three years. Presently, the Board of Directors has two vacant
positions. At September 6, 1997, the Board of Directors consisted of the
following members:
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<PAGE>
Directors With Terms Expiring in 1997
James J. Fiedler, age 51, has been a director of the Company since
August 1996. He has been Chairman and Chief Executive Officer of the Company
since November 1996 and Chairman and Chief Executive Officer of Sattel
Communications ("Sattel"), since September 1995. Previously, Mr. Fiedler was
a principal in the consulting firm of Johnson & Fiedler. From November 1992
to September 1994, Mr. Fiedler was Vice President of Sales and Marketing and
subsequently President and director of Summa Four, Inc. From June 1989 to
July 1992, Mr. Fiedler was Executive Vice President and Chief Operating
Officer of Timeplex, a subsidiary of Unisys engaged in the business of
manufacturing data and telecommunications equipment. Prior to June 1989, Mr.
Fiedler held executive positions with Unisys Corporation and Sperry
Corporation (subsequently acquired by Unisys Corporation). He has been a
director of Entree Corporation since November 1996.
Stephen W. Portner, age 45, was appointed a director of the Company on
August 29, 1997. He is the Managing Director of North America for JMJ
Associates, a global management consulting company, and has served in various
capacities from January 1994 to May 1997 at JMJ Associates. From December
1991 to January 1994, Mr. Portner held positions in plant and project
management as well as Director of Quality for Air Products Incorporated.
Director With Term Expiring in 1998
Sydney B. Lilly, age 68, has been a director of the Company since 1988.
He was Executive Vice President of the Company from April 1995 to November
1996 and a consultant from 1984 to 1995. He was a director of Entree
Corporation from 1991 to 1996.
Directors With Term Expiring in 1999
Jack E. Donnelly, age 62, has been a director of the Company since
November 1991. Since 1986, he has been a principal of Bailey & Donnelly
Associates, Inc., an investment company.
Daniel W. Latham, age 48, has been a director of the Company since
November 1996. He has been President and Chief Operating Officer of the
Company since November 1996 and President and Chief Operating Officer of
Sattel since September 1995. Prior to his association with Sattel, Mr.
Latham was the President of Frontier Long Distance, a leading U.S. long
distance company in the U.S. Mr. Latham also served as a Senior Vice
President at Racal Datacom where he was responsible for world-wide sales.
Prior to Racal, Mr. Latham held executive positions at Digital Equipment
Corporation, the Bell System and IBM. He has been a director of Entree
Corporation since November 1996.
The Board of Directors held a total of 22 meetings during the fiscal
year ended March 31, 1997. Each director, except Mr. Michael Camp, a former
director, attended at least 75% of the aggregate total number of meetings of
the Board of Directors held during the last fiscal year and the total number
of meetings held by all committees of the Board of Directors on which he
served during the year.
The Board of Directors has two standing committees: an Audit Committee
and an Executive Committee. The Audit Committee recommends to the Board of
Directors the independent certified public accountants to perform audit and
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<PAGE>
non-audit services, reviews the scope and results of such services, reviews
with management and the independent certified public accountants the systems
of internal control, assures adherence in accounting and financial reporting
to generally accepted accounting principles and performs such other duties
deemed appropriate by the Board of Directors. Messrs. Donnelly and Portner
are the present members of the Audit Committee and were appointed on
September 10, 1997. Previously, Mr. Jay Lieberman, a former director, was
the sole member of the Audit Committee until February 1997. Mr. Bruce
Borchardt and Mr. Camp were members of the Audit Committee from March 7, 1997
until their resignations on July 1, 1997 and September 5, 1997, respectively.
The Audit Committee did not meet during the fiscal year ended March 31, 1997,
however, it met during April 1997 with Mr. Bruce Borchardt, a former director
and member of the Audit Committee, to discuss the fiscal 1997 audit with the
Company's independent accountants.
The Executive Committee has and may exercise all of the powers of the
Board of Directors in the management of the business and affairs of the
corporation during intervals between meetings of the Board of Directors,
except with respect to amendments to the Certificate of Incorporation or by-
laws, merger, consolidation, sale of all or substantially all of the
corporation's assets, dissolution, declaration of dividends, authorization of
issuance of stock, or filling vacancies on the Board of Directors. The
Executive Committee consists of Messrs. Donnelly, Fiedler, Latham and Lilly.
The Executive Committee met once during the fiscal year ended March 31, 1997.
The Company has no standing nominating or compensation committee of the
Board of Directors, or committees performing similar functions, because
decisions regarding nomination of directors and executive compensation are
made by the full Board of Directors.
Directors receive an annual fee of $15,000, paid on a monthly basis.
Directors are also reimbursed for travel expenses. In addition, Directors
receive $1,250 per meeting for service on the Audit Committee of the Board of
Directors.
In June 1997, stock options to purchase 5,000 shares of the Company's
common stock were granted to each of two outside members of the Board of
Directors that joined the Board in fiscal 1997. These options have an
exercise price of $3.00 per share.
Identification of Executive Officers
The following individuals are the Executive Officers of the Company as
of September 15, 1997:
Name Age Position
---- --- --------
James J. Fiedler 51 Chief Executive Officer
Daniel W. Latham 48 President and Chief Operating Officer
Brian A. Robson 60 Vice President, Controller and Secretary
The following information is furnished with respect to each executive
officer who is not also a Director of the Company:
Mr. Robson was Vice President of Finance and Chief Financial Officer of
Ascom Timeplex from 1989-1996.
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<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the total annual compensation paid or
accrued by the Company for the account of the executive officers of the
Company serving as such at March 31, 1997 and for two former executive
officers:
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term Compensation
Annual Compensation ----------------------
----------------------------------- Restricted
Other Annual Stock Securities
Name and Bonus Compensation Awards Underlying All Other
Principal Position Year Salary($) ($) ($) (3) Options(#) Compensation($)
- ------------------ ---- --------- ------ ------------ --------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
James J. Fiedler 1997 200,000 0 3,750(7) 0 0 0
Chairman, CEO and 1996 111,538(4) 0 0 2.5%(9) 150,000(11) 19,612(13)
Director (1)
Daniel W. Latham 1997 175,000 0 3,750(7) 0 0 170,197(13)
President, COO and 1996 90,865(5) 0 0 1.5%(10) 150,000(11) 26,416(13)
Director (2)
Brian A. Robson 1997 56,250(6) 0 0 0 10,500 13,041(13)
Vice President and
Controller
R. Scott Miswald 1997 125,000 0 0 52,500 0 0
Vice President and 1996 110,000 11,614 0 0 10,000 0
Treasurer 1995 110,000 0 0 0 0 0
Richard Y. Fisher 1997 137,308 0 27,003(8) 0 0 342,692(12)
Former Chairman (3) 1996 210,000 64,550 0 0 0 0
1995 444,538 0 0 0 0 0
Donald E. Runge 1997 137,308 0 0 0 0 82,692(12)
Former President 1996 210,000 64,550 0 0 0 0
and Director (3)
</TABLE>
68
<PAGE>
(1) On November 29, 1996 Mr. Fiedler was appointed Chairman and CEO of the
Company. Mr. Fiedler also remained as Chairman and CEO of Sattel (see
Employment and Severance Agreements).
(2) On November 29, 1996 Mr. Latham was appointed as President and COO of
the Company. Mr. Latham also remained as President and COO of Sattel
(see Employment and Severance Agreements).
(3) Mr. Fisher resigned from the Company as an executive officer and
director on November 29, 1996. Mr. Runge resigned as an executive
officer and director of the Company on August 22, 1996.
(4) Represents part-year compensation from start of employment as CEO of
Sattel on September 11, 1995 to end of fiscal year, based on annualized
salary of $200,000.
(5) Represents part-year compensation from start of employment as President
and COO of Sattel on September 25, 1995 to end of fiscal year, based on
annualized salary of $175,000.
(6) Started employment on October 31, 1996. Current annualized salary:
$135,000.
(7) Directors fees paid to officers.
(8) Perquisites include group health insurance and long-term disability
premium payments.
(9) Mr. Fiedler was granted 250 Class B Units in Sattel (equivalent to a
2.5% ownership interest) of which 44 Class B Units remain subject to
forfeiture as of August 31, 1997.
(10) Mr. Latham was granted 150 Class B Units in Sattel (equivalent to a 1.5
percent ownership interest) of which 26 Class B Units remain subject to
forfeiture as of August 31, 1997.
(11) Performance-based options for the indicated number of shares of Company
common stock surrendered on November 11, 1996 in connection with loans
(see Certain Relationships and Related Transactions).
(12) See Employment and Severance Agreements.
(13) Represents relocation assistance paid by the Company on behalf of the
various individuals. Also includes $98,000 paid to Mr. Latham to cover
his loss on a personal residence and the related real estate
commissions and selling expenses.
The table below provides information regarding stock options granted
during fiscal 1997 to the persons named in the Summary Compensation Tables:
Option Grants in Last Fiscal Year
Individual Grants
---------------------------------------------------
Number of % of Total
Shares Options
Underlying Granted to
Options Employee in Exercise Expiration
Granted(1) Fiscal Year Price Date
---------- ----------- -------- ----------
James J. Fiedler 0 --- $ --- ---
Daniel W. Latham 0 --- --- ---
Brian A. Robson 10,500 (2) 5.4% 19.05 8/20/01
R. Scott Miswald 0 --- --- ---
Richard Y. Fisher 0 --- --- ---
Donald E. Runge 0 --- --- ---
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<PAGE>
Potential Realizable
Value at Assumed Annual
Rate of Stock Price
Appreciation for
Option Term (3)
------------------------
5% 10%
---------- ----------
James J. Fiedler $ --- $ ---
Daniel W. Latham --- ---
Brian A. Robson 55,263 122,117
R. Scott Miswald --- ---
Richard Y. Fisher --- ---
Donald E. Runge --- ---
(1) The options granted under the Sattel Communications LLC 1996 Stock
Option Plan are non-qualified stock options. The exercise price per
share is 100% of the fair market value of a share of common stock on
the date of the grant. In June 1997, current employees owning stock
options, including Mr. Robson, were granted the right to exchange
existing stock options for new options that have an exercise price of
$3.00 per share. The new options vest equally over a three year period
commencing June 1, 1997.
(2) The options vest as follows: October 30, 1997 - 2,625; October 30,
1998 - 2,625; October 30, 1999 - 5,250.
(3) The option term is five years. The dollar amounts under these columns
are the results of calculations at the 5% and 10% rates set by the
Securities and Exchange Commission. The potential realizable values
are not intended to forecast possible future appreciation, if any,
in the market price of the common stock.
The table below provides information regarding the value of in-the-money
stock options held by named executive officers at March 31, 1997. Named
executive officers did not exercise any stock options during the fiscal year.
Unexercised Company Stock Options
Number of Value of Unexercised
Unexercised Options In-the-Money Options
at March 31, 1997 at March 31, 1997 (1)
---------------------------- --------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ------------ -------------- ----------- -------------
James J. Fiedler 0 0 $ 0 $ 0
Daniel W. Latham 0 0 0 0
Brian A. Robson 0 10,500 0 0
R. Scott Miswald 16,578 0 8,343 0
Richard Y. Fisher 275,378 0 166,792 0
Donald E. Runge 275,378 0 166,792 0
(1) Value based on a fair market value of common stock of $6.00 on March 31,
1997, less the option exercise price.
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<PAGE>
Employment and Severance Agreements
The Company has employment agreements with certain executive officers.
Messrs. Fiedler and Latham were employed by Sattel until December 31,
1996 pursuant to contracts that provided for salary of $200,000 and $175,000,
respectively, per year with a year-end bonus equal to 10% and 5%,
respectively, of Sattel's pre-tax earnings for the calendar year, up to the
salary for the year, and such fringe benefits as Sattel's executive committee
should make available. From January 1, 1997 to September 3, 1997, Messrs.
Fiedler and Latham continued their employment at the same salary without a
contract.
On September 4, 1997, Messrs. Fiedler and Latham entered into new
employment agreements with the Company covering the 1998 fiscal year and
providing for salaries of $200,000 and $175,000, respectively, per year.
Such employment agreements provide for customary fringe benefits, including
a car allowance for each Executive of $600 per month. The Executives may
become entitled to bonuses based on the Company's pre-tax profits for each
half year in the fiscal year covered by the employment agreements, equal to
10% of such pre-tax profits in the case of Mr. Fiedler and 5% in the case of
Mr. Latham, but not to exceed 100% of the Executive's annual salary in the
case of Mr. Fiedler and 75% in the case of Mr. Latham. Additionally, the
Executives are entitled to an incentive bonus equal to one-half percent of
the sales revenues of Sattel for each month during the term of the agreement,
subject to certain limitations, and in any event not to exceed 100% of the
Executive's annual salary. As disclosed elsewhere herein, each of the
Executives has a $300,000 note payable to the Company. Under the employment
agreements, equal one third portions of such notes will be forgiven at the
date of the employment agreement, and, if their respective employments are
renewed, at each of the next two anniversaries of the date of the employment
agreements, provided that such Executive remains as an employee of the
Company at each such forgiveness date. These employment agreements also
contemplate that the Class A and Class B units of Sattel, including the units
held by the Executives, will become convertible into the Company's common
stock, at the rate of 500 shares of the Company's common stock for each such
unit, immediately and without the requirements that Sattel achieve cumulative
pre-tax profits of at least $15 million over four consecutive quarters. The
Company has also granted certain registration rights with respect to the
shares of common stock issuable upon such conversion. Copies of the
employment agreements are filed as exhibits to this Annual Report on Form 10-
K, and this description is qualified by reference to such exhibits.
The Company entered into Separation Agreements, dated November 20, 1996
(the "Separation Agreements"), with each of Richard Y. Fisher, Sydney B.
Lilly and Donald E. Runge (the "Departing Officers") that provide for
termination of employment of the Departing Officers by, and resignation of
the Departing Officers from all offices, and, except for Mr. Lilly's
directorship of the Company, directorships in, the Company and its
subsidiaries. The Separation Agreements provide for payment by the Company,
as of November 29, 1996, of $186,000 and $749,000, respectively, to Mr. Runge
and Mr. Fisher, in settlement of deferred compensation previously earned and
payments of $343,000 to Mr. Fisher and $83,000 to each of Mr. Runge and Mr.
Lilly as severance settlements. In accordance with provisions of the Amended
and Restated Employment Agreements entered into by the Company and each of
the Departing Officers on April 2, 1995, each Departing Officer shall be
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<PAGE>
entitled to have all medical, dental, hospital, optometrical, nursing,
nursing home and drug expenses for themselves and their spouses paid by the
Company for life, or in the case of Mr. Lilly, until March 31, 2000. The
Separation Agreement for Mr. Fisher provides that he shall repay in full a
promissory note dated April 11, 1988, in the amount of $42,469. The
Separation Agreements further provide that all stock options of the Departing
Officers shall remain exercisable until December 31, 1997 (April 2, 2000 with
respect to 82,688 options granted to Mr. Lilly on April 2, 1995) and amends
existing Stock Option Agreements with Messrs. Fisher, Lilly and Runge to
provide for, among other things, the Company to maintain the effectiveness of
the Form S-8 Registration Statement currently in effect covering the exercise
of the stock options. The Company has made all required payments under the
Separation Agreements.
Compensation Committee Interlocks and Insider Participation
As noted above, the Board of Directors does not have a compensation
committee, because executive compensation decisions are made by the full
Board. All directors participate in the deliberations.
Mr. Fiedler is the Company's Chairman and Chief Executive Officer. Mr.
Latham is the Company's President and Chief Operating Officer. Messrs.
Fiedler's and Latham's fiscal 1997 compensation and employment contracts were
previously described above. Fiscal 1997 executive compensation decisions
made by the Board of Directors with respect to Messrs. Fiedler and Latham
were made prior to their appointment to the Board of Directors.
In December 1991, Mr. Donnelly entered into a consulting agreement with
the Company to serve as chairman and consultant to C&L Communications, Inc.
("C&L"), one of the Company's subsidiaries. The agreement, which was
subsequently amended, terminates on March 31, 1998. Upon expiration or
termination of the agreement, the Company will pay Mr. Donnelly 10% of the
"increase in value" of C&L. The increase in value is defined generally as
the previous fiscal year's net pre-tax earnings of C&L, multiplied by four,
minus $9 million. During fiscal 1995 Mr. Donnelly's consulting agreement was
amended to provide for an extension of the term of the agreement from
December 23, 1996 to March 31, 1997, and Mr. Donnelly was provided an option
to extend the term one additional year. Also, Mr. Donnelly has the ability
to obtain a loan from the Company at the prime rate, not to exceed 25% of the
amount accrued by the Company for the estimated payment due at the
termination of the agreement. No amounts have been loaned to Mr. Donnelly
pursuant to this provision. In addition Mr. Donnelly is paid $50,000 per
year in accordance with the agreement.
72
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of September 4,
1997 with respect to the common stock ownership of each director, the Chief
Executive Officer, the other executive officers of the Company and two former
executive officers identified in the Summary Compensation Table below
(collectively with the Chief Executive Officer, the "named executive
officers"), all directors and executive officers as a group and each person
or group of persons known by the Company to own beneficially more than 5% of
the common stock of the Company.
<TABLE>
<CAPTION>
Amount and Nature of
Beneficial
Ownership (1)(2) Shares Issuable Shares Issuable
---------------------- Upon Exercise Of Upon Conversion
Number of Percent ----------------------------- of Sattel Class
Name of Beneficial Owner Shares of Class Stock Options(3) Warrants(3) A or B Units(4)
- ------------------------ ----------- -------- ---------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Jack E. Donnelly 20,234 * 12,155 0 0
James J. Fiedler 540,000 7.2 0 175,000 175,000
Daniel W. Latham 125,000 1.7 0 0 125,000
Sydney B. Lilly 193,995 (5) 2.6 125,231 0 50,000
R. Scott Miswald 18,078 (5) * 16,578 0 0
Brian A. Robson 0 * 0 0 0
Stephen W. Portner 22,500 * 0 11,250 0
All Directors and Executives
as a Group (7 individuals) 919,807 11.7 153,964 186,250 350,000
Richard Y. Fisher 275,378 (5) 3.7 275,378 0 0
Donald E. Runge 275,378 3.7 275,378 0 0
Richard L. Haydon
1114 Avenue of the Americas
New York, NY 10036 1,263,000 (6) 16.2 0 625,000 0
Dawson-Samberg Capital
Management, Inc. et al
345 Pequot Avenue
Southport, CT 06490 452,985 (7) 6.3 0 0 0
Ardent Research Partners
200 Park Avenue, 39th floor
New York, NY 10066 450,000 (8) 6.1 0 225,000 0
</TABLE>
* The amount shown is less than 1% of the outstanding shares of common
stock.
73
<PAGE>
(1) Except as otherwise noted, all persons have sole voting and investment
power over the shares listed.
(2) Includes shares of common stock issuable upon the exercise of stock
options and warrants exercisable within 60 days of August 31, 1997; and
shares issuable upon the conversion of Sattel Class A or B Units (see
Note 7).
(3) Only includes stock options or warrants exercisable within 60 days of
August 31, 1997.
(4) Mr. Fiedler and Mr. Latham own 350 and 250 Class B Units of Sattel
Communications, LLC ("Sattel"), respectively. Mr. Lilly owns 100 Class
A Units of Sattel. Mr. Fiedler's and Mr. Latham's Class B Units are
convertible into 175,000 and 125,000 shares, respectively, of the
Company common stock. Mr. Lilly's Class A Units are convertible into
50,000 shares of the Company common stock.
(5) Mr. Fisher owns 20,000 shares (less than 1%) of common stock of Entree
Corporation ("Entree"), an 81.25%-owned subsidiary of the Company. Mr.
Lilly owns 30,000 shares (less than 1%) of Entree common stock. Mr.
Miswald owns 10,000 shares (less than 1%) of Entree common stock. All
directors and executive officers as a group beneficially own 40,000
shares (less than 1%) of Entree common stock.
(6) Based on its Schedule 13D filed July 28, 1997, Mr. Haydon has sole
voting and dispositive power over 1,263,000 shares.
(7) Based on its Schedule 13D filed January 31, 1997, Dawson-Samberg
Capital Management, Inc. ("Dawson-Samberg") has shared voting and
dispositive power over 284,040 shares held in managed accounts for
which it acts as an investment advisor. Porridge Partners II has
sole voting and dispositive power over 63,000 shares. Mr. Arthur
Samberg has sole voting and dispositive power over 105,945 shares.
(8) Based on its Schedule 13D filed August 20, 1997, Ardent Research
Partners, L.P. has sole voting and dispositive power over 450,000
shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Lieberman, a former director of the Company, was paid an aggregate
of $4,000 during fiscal 1997 for consulting services.
Mr. Fiedler, the Company's Chairman and Chief Executive Officer, loaned
the Company $250,000 in June 1997. The principal amount of the loan was
converted to common stock in conjunction with Mr. Fiedler's purchase of
Company common stock pursuant to the Regulation D private placement in July
1997 (see Note 15 to the Consolidated Financial Statements.) Mr. Latham, the
Company's President and Chief Operating officer, loaned the Company $98,000
subsequent to March 31, 1997. This loan was repaid in July 1997. Mr.
Portner, a Director, purchased Company common stock pursuant to the
Regulation D private placement (see Note 15 to the Consolidated Financial
Statements).
74
<PAGE>
On November 11, 1996 the Company loaned $300,000 to each of Messrs.
Fiedler and Latham. Messrs. Fiedler and Latham both executed unsecured
Promissory Notes due November 1, 1999 which provide interest at 6.07% per
annum compounded on the anniversary date and payable on November 1, 1999. In
addition, each person agreed to surrender previously awarded options they
each held to purchase 150,000 shares of the Company's common stock. The
largest amount outstanding to the Company under each promissory note during
the fiscal year ended March 31, 1997 was $300,000.
The Promissory Notes provide for full repayment prior to November 1,
1999 in the event of the following: (a) upon any transfer of Messrs.
Fiedler's or Latham's Class B Units in Sattel (other than to a Permitted
Transferee, as defined in the Agreement Regarding Award of Class B Units (the
"Award Agreement")), or by any such Permitted Transferee (including without
limitation certain transfers contemplated by the Award Agreement) or (b) upon
any exchange or conversion of Class B Units for or into securities registered
under the Securities Exchange Act of 1934, as amended, in accordance with the
Award Agreement. In connection with the employment agreements with Messrs.
Fiedler and Latham entered into on September 4, 1997, the Company's Board of
Directors agreed to forgive the notes. Under the employment agreements,
equal one third portions of the notes will be forgiven at September 4, 1997
and, if their respective employments are renewed, at each of the next two
anniversaries of the date of the employment agreements, provided that each
individual remains as an employee of the Company at each such forgiveness
date.
75
<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 31
Report of Ernst & Young LLP, Independent Auditors 32
Consolidated Balance Sheets - March 31, 1997
and March 30, 1996 33
Consolidated Statements of Operations - Fiscal
Years Ended March 31, 1997, March 30, 1996 and
April 1, 1995 34
Consolidated Statements of Changes in Shareholders'
Equity - Fiscal Years Ended March 31, 1997,
March 30, 1996 and April 1, 1995 35
Consolidated Statements of Cash Flows -
Fiscal Years Ended March 31, 1997,
March 30, 1996 and April 1, 1995 36
Notes to Consolidated Financial Statements 37
(2) The following consolidated financial statement schedules of
The Diana Corporation are included in Item 14(d):
Schedule I - Condensed Financial Information of Registrant 82
Schedule II - Valuation and Qualifying Accounts 86
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 1997, the Company filed (1) a Form
8-K on February 5, 1997 announcing the completion of the sale of
assets of APC to Colorado Boxed Beef Company; (2) a Form 8-K on
March 3, 1997 providing the required information pursuant to Item 2
regarding the sale of assets of APC; (3) a Form 8-K on March 3, 1997
filing various exhibits and (4) a Form 8-K on March 13, 1997
changing the Company's fiscal year to a twelve month period ending
March 31.
76
<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 March 7, 1997.
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 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 (incorporated herein by reference to
Exhibit 4.2 of Registrant's Form 10-K/A for the year ended March 30,
1996).
4.3 Loan and Security Agreement by and between Valley Communications,
Inc. and Sanwa Business Credit Corporation dated March 14, 1996
(incorporated herein by reference to Exhibit 4.1 of Registrant's
Form 10-Q for the period ended July 20, 1996).
4.4 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.
4.5 Second Amendment to Loan and Security Agreement and Waiver
Agreement between C&L Communications, Inc. and Sanwa Business Credit
Corporation dated July 10, 1997.
4.6 First Amendment to Loan and Security Agreement by and between
Valley Communications, Inc. and Sanwa Business Credit Corporation
dated May 29, 1997.
4.7 Form of Subscription Agreement (incorporated herein by reference
to Exhibit 4.1 of Registrant's Form 8-K filed on July 31, 1997).
4.8 Form of Note (incorporated herein by reference to Exhibit 4.2 of
Registrant's Form 8-K filed on July 31, 1997).
4.9 Form of Registration Rights Agreement (incorporated herein by
reference to Exhibit 4.3 of Registrant's Form 8-K filed on July 31,
1997).
4.10 Form of Offshore Warrant Subscription Agreement (incorporated
herein by reference to Exhibit 4.4 of Registrant's Form 8-K filed
on July 31, 1997).
__________________________________________________________________________
* Represents a management contract or compensatory plan, contract or
arrangement in which a director or named executive officer of the
Company participated.
77
<PAGE>
Exhibit
Number Description
- ------- -----------
4.11 Waiver of Events of Default for Sanwa Business Credit Corporation
to C&L Communications, Inc. dated September 1, 1997.
4.12 Second Amendment to Loan and Security Agreement by and between
Valley Communications, Inc. and Sanwa Business Credit Corporation
dated September 16, 1997.
4.13 Stock and Warrant Purchase Agreement dated June 6, 1997 by and
between The Diana Corporation and James J. Fiedler.
4.14 Warrant issued to James J. Fiedler dated June 6, 1997 to purchase
shares of common stock of The Diana Corporation.
4.15 Registration Rights Agreement dated June 6, 1997 by and among The
Diana Corporation and James J. Fiedler.
10.1 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).*
10.2 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).*
10.3 1986 Nonqualified Stock Option Plan of as amended
(incorporated herein by reference to Exhibit 10.13 of Registrant's
Form 10-K for the year ended April 3, 1993).*
10.4 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).*
10.5 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 Registrant's
Form 8-K/A filed February 1, 1996).
10.6 First Amendment to Purchase Agreement dated November 20, 1995 by
and between C&L Acquisition Corporation and Henry Mutz, Chris
O'Connor and Ken Hurst (incorporated herein by reference to Exhibit
2.2 of Registrant's Form 8-K/A filed February 1, 1996).
10.7 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 Registrant's Registration Statement on
Form S-3 Reg. No. 333-1055).
___________________________________________________________________________
* Represents a management contract or compensatory plan, contract or
arrangement in which a director or named executive officer of the
Company participated.
78
<PAGE>
Exhibit
Number Description
- ------- -----------
10.8 1996 Sattel Communications LLC Employees Nonqualified Stock Option
Plan (incorporated herein by reference to Exhibit 10.13 of
Registrant's Form 10-K for the year ended March 30, 1996).
10.9 Memorandum of Understanding between The Diana Corporation, Sattel
Communications Corp. and Sattel Technologies, Inc. dated May 3, 1996
(incorporated herein by reference to Exhibit 10.15 of Registrant's
Form 10-K for the year ended March 30, 1996).
10.10 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
(incorporated herein by reference to Exhibit 10.16 of Registrant's
Form 10-K for the year ended March 30, 1996).
10.11 Third Supplemental Agreement Relating to Joint Venture between The
Diana Corporation and Sattel Technologies, Inc. dated October 14,
1996 (incorporated herein by reference to Exhibit 10.3 of
Registrant's Amendment No. 2 to Form S-3 filed October 21, 1996).
10.12 Operating Agreement of Sattel Communications, LLC (incorporated
herein by reference to Exhibit 10.17 of Registrant's Form 10-K/A for
the year ended March 30, 1996).
10.13 Amendment to the Operating Agreement of Sattel Communications LLC
(incorporated herein by reference to Exhibit 10.18 of Registrant's
Form 10-K/A for the year ended March 30, 1996).
10.14 Second Amendment to the Operating Agreement of Sattel
Communications LLC (incorporated herein by reference to Exhibit
10.19 of Registrant's Form 10-K/A for the year ended March 30,
1996).
10.15 Asset Purchase Agreement dated January 31, 1997 by and among
Atlanta Provision Company, Inc. and Colorado Boxed Beef Company
(incorporated herein by reference to Exhibit 10.1 of Registrant's
Form 8-K filed March 3, 1997).
10.16 Agreement Regarding Class A Units dated October 2, 1996 by and
between Sydney B. Lilly and Sattel Communications LLC (incorporated
herein by reference to Exhibit 10.2 of Registrant's Form 8-K filed
March 3, 1997).
10.17 Amended and Restated Agreement Regarding Award of Class B Units
dated November 11, 1996 by and between James J. Fiedler and Sattel
Communications LLC (incorporated herein by reference to Exhibit 10.3
of Registrant's Form 8-K filed March 3, 1997).*
___________________________________________________________________________
* Represents a management contract or compensatory plan, contract or
arrangement in which a director or named executive officer of the
Company participated.
79
<PAGE>
Exhibit
Number Description
- ------- -----------
10.18 Amended and Restated Agreement Regarding Award of Class B Units
dated November 11, 1996 by and between Daniel W. Latham and Sattel
Communications LLC (incorporated herein by reference to Exhibit 10.4
of Registrant's Form 8-K filed March 3, 1997).*
10.19 Amendment to Stock Option Agreements dated November 20, 1996 by and
between The Diana Corporation and Richard Y. Fisher (incorporated
herein by reference to Exhibit 10.5 of Registrant's Form 8-K filed
March 3, 1997).*
10.20 Separation Agreement dated November 20, 1996 by and between The
Diana Corporation and Richard Y. Fisher (incorporated herein by
reference to Exhibit 10.6 of Registrant's Form 8-K filed March 3,
1997).
10.21 Amendment to Stock Option Agreements dated November 20, 1996 by and
between The Diana Corporation and Sydney B. Lilly (incorporated
herein by reference to Exhibit 10.7 of Registrant's Form 8-K filed
March 3, 1997).*
10.22 Separation Agreement dated November 20, 1996 by and between The
Diana Corporation and Sydney B. Lilly (incorporated herein by
reference to Exhibit 10.8 of Registrant's Form 8-K filed March 3,
1997).*
10.23 Amendment to Stock Option Agreements dated November 20, 1996 by and
between The Diana Corporation and Donald E. Runge (incorporated
herein by reference to Exhibit 10.9 of Registrant's Form 8-K filed
March 3, 1997).
10.24 Separation Agreement dated November 20, 1996 by and between The
Diana Corporation and Donald E. Runge (incorporated herein by
reference to Exhibit 10.10 of Registrant's Form 8-K filed March 3,
1997).
10.25 Employment Agreement dated November 27, 1996 by and between The
Diana Corporation and R. Scott Miswald (incorporated herein by
reference to Exhibit 10.11 of Registrant's Form 8-K filed March 3,
1997).*
10.26 Form of Indemnification Agreement dated November 26, 1996 or
November 27, 1996 between The Diana Corporation and (i) Bruce C.
Borchardt, (ii) Jack E. Donnelly, (iii) James J. Fiedler, (iv) Jay
M. Lieberman and (v) R. Scott Miswald (incorporated herein by
reference to Exhibit 10.12 of Registrant's Form 8-K filed March 3,
1997).*
10.27 Loan Agreement and Promissory Note dated November 11, 1996 by and
between The Diana Corporation and James J. Fiedler (incorporated
herein by reference to Exhibit 10.13 of Registrant's Form 8-K filed
March 3, 1997).*
___________________________________________________________________________
* Represents a management contract or compensatory plan, contract or
arrangement in which a director or named executive officer of the
Company participated.
80
<PAGE>
Exhibit
Number Description
- ------- -----------
10.28 Loan Agreement and Promissory Note dated November 11, 1996 by and
between The Diana Corporation and Daniel W. Latham (incorporated
herein by reference to Exhibit 10.14 of Registrant's Form 8-K filed
March 3, 1997).*
10.29 Employment Agreement dated September 4, 1997 by and between
The Diana Corporation and James J. Fiedler.*
10.30 Employment Agreement dated September 4, 1997 by and between
The Diana Corporation and Daniel W. Latham.*
10.31 Agreement dated November 17, 1995 between Valley Communications,
Inc. and Communications Workers of America Local 9412 (incorporated
herein by reference to Exhibit 10.1 of Registrant's Form 10-Q for
the period ended July 20, 1996).
10.32 Limited Liability Company Agreement of SatLogic LLC dated as of
September 12, 1996 (incorporated herein by reference to Exhibit 10.3
of Registrant's Form 10-Q/A for the period ended July 20, 1996).
10.33 Stockholder Protection Rights Agreement dated as of September 10,
1996 between The Diana Corporation and ChaseMellon Shareholder
Services, L.L.C. as Rights Agent (incorporated herein by reference
to Exhibit 1 of Registrant's Form 8-A filed September 11, 1996).
22 Subsidiaries of Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule
____________________________________________________________________________
* Represents a management contract or compensatory plan, contract or
arrangement in which a director or named executive officer of the
Company participated.
81
<PAGE>
The Diana Corporation and Subsidiaries
Schedule I - Condensed Financial Information of Registrant
Condensed Balance Sheets
(In Thousands)
March 31, March 30,
1997 1996
-------- --------
Assets
Current assets:
Cash and cash equivalents........................ $ 28 $ 3,567
Marketable securities............................ --- 1,213
Other current assets............................. 106 201
------ ------
Total current assets........................... 134 4,981
Land and equipment (net)........................... 83 158
Investments in and advances to unconsolidated
subsidiaries..................................... 19,904 23,336
------ ------
$20,121 $28,475
====== ======
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable................................. $ 283 $ 177
Accrued liabilities.............................. 513 638
Current portion of long-term debt................ 141 141
------ ------
Total current liabilities..................... 937 956
Long-term debt..................................... 1,817 1,958
Other liabilities.................................. 533 875
Shareholders' equity:
Common stock..................................... 6,007 5,526
Additional paid-in capital....................... 80,124 59,456
Accumulated deficit.............................. (63,540) (34,776)
Unrealized loss on marketable securities......... --- (876)
Treasury stock................................... (5,757) (4,644)
------ ------
Total shareholders' equity..................... 16,834 24,686
------ ------
$20,121 $28,475
====== ======
See notes to condensed financial information and notes to consolidated
financial statements.
82
<PAGE>
The Diana Corporation and Subsidiaries
Schedule I - Condensed Financial Information of Registrant (Continued)
Statements of Operations
(In Thousands, Except Per Share Amounts)
Fiscal Year Ended
--------------------------------
March 31, March 30, April 1,
1997 1996 1995
-------- -------- --------
Administrative expenses............... $ (3,410) $(1,809) $(1,621)
Interest expense...................... (52) (106) (112)
Non-operating income (expense)........ (326) 474 246
Income tax credit..................... 836 --- ---
Equity in loss of unconsolidated
subsidiaries......................... (9,383) (1,305) (653)
------- ------ ------
Loss from continuing operations....... (12,335) (2,746) (2,140)
Earnings (loss) from discontinued
operations........................... (8,175) (619) 1,420
------- ------ ------
Loss before extraordinary items....... (20,510) (3,365) (720)
Extraordinary items................... (508) --- ---
------- ------ ------
Net loss.............................. $(21,018) $(3,365) $ (720)
======= ====== ======
Earnings (loss) per common share:
Continuing operations................ $ (2.34) $ (.62) $ (.51)
Discontinued operations.............. (1.55) (.14) .34
Extraordinary items.................. (.10) --- ---
------- ------ ------
Net loss per common share............ $ (3.99) $ (.76) $ (.17)
======= ====== ======
Weighted average number of common
shares outstanding................... 5,271 4,401 4,224
======= ====== ======
See notes to condensed financial information and notes to combined financial
statements.
83
<PAGE>
The Diana Corporation and Subsidiaries
Schedule I - Condensed Financial Information of Registrant (Continued)
Statements of Cash Flows
(In Thousands)
Fiscal Year Ended
----------------------------
March 31, March 30, April 1,
1997 1996 1995
-------- -------- --------
Operating activities:
Loss before extraordinary items.............$(20,510) $(3,365) $ (720)
Adjustments to reconcile loss to net cash
used by operating activities:
Equity in (earnings) loss of
unconsolidated subsidiaries.............. 17,558 1,924 (767)
Other..................................... (595) (427) 64
Changes in current assets and liabilities. 1,231 115 1,042
------ ------ ------
Net cash used by operating activities........ (2,316) (1,753) (381)
Investing activities:
Purchases of marketable securities.......... --- (475) ---
Proceeds from sales of marketable securities 1,353 5,380 ---
Changes in investments in and advances to
unconsolidated subsidiaries................ (15,945) (3,229) 3,475
Other....................................... 100 (25) (11)
------ ------ ------
Net cash provided (used) by investing
activities................................. (14,492) 1,651 3,464
Financing activities:
Repayments of long-term debt................ (141) (141) (261)
Payments toward bond settlements............ --- --- (2,822)
Common stock issued......................... 13,918 3,485 ---
Extraordinary items......................... (508) --- ---
------ ------ ------
Net cash provided (used) by financing
activities.................................. 13,269 3,344 (3,083)
------ ------ ------
Increase (decrease) in cash.................. (3,539) 3,242 ---
Increase in cash resulting from merger with
subsidiary.................................. --- 325 ---
Cash at the beginning of the year............ 3,567 --- ---
------ ------ ------
Cash at the end of the year.................. $ 28 $ 3,567 $ ---
====== ====== ======
Supplemental information:
Interest paid............................... $ --- $ --- $ 11
Non-cash transactions:
Purchase of minority interest with common
stock...................................... 1,818 4,944 1,895
Reduction of net liabilities of
unconsolidated subsidiary.................. --- 219 ---
See notes to condensed financial information and notes to consolidated
financial statements.
84
<PAGE>
The Diana Corporation and Subsidiaries
Schedule I - Condensed Financial Information of Registrant (Continued)
Notes to Condensed Financial Information
NOTE 1 - BASIS OF PRESENTATION
The condensed financial information of the 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 1997 and 1996, other income includes interest income of $69,000 and
$193,000, respectively, that is eliminated in the consolidated financial
statements. Intercompany profits between related parties are eliminated in
these financial statements.
NOTE 2 - LONG-TERM OBLIGATIONS
Annual amounts due on long-term obligations (debentures issued in
January 1992) for the five years subsequent to March 31, 1997 are (in
thousands):
1998 $ 141
1999 141
2000 141
2001 141
2002 1,394
-----
$1,958
=====
NOTE 3 - COMMITMENTS AND CONTINGENCIES
The Company leases its former corporate office space located in
Milwaukee, Wisconsin under a noncancelable lease with a rental commitment of
$36,000 in fiscal 1998.
The Company has guaranteed certain obligations of APC to Colorado,
pursuant to the Asset Purchase Agreement dated January 31, 1997 between APC
and Colorado, and the Lease dated January 31, 1997 between APC and Colorado.
85
<PAGE>
The Diana Corporation and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
Fiscal Year Ended
------------------------------
March 31, March 30, April 1,
1997 1996 1995
------- ------- --------
(In Thousands)
Inventories - allowance for
obsolescence and loss:
Balance at beginning of year....... $ --- $ --- $ ---
Additions charged to expense....... 1,400 --- ---
----- ----- -----
Balance at end of year............. $1,400 --- ---
===== ===== =====
Allowance for net unrealized losses on
current marketable securities:
Balance at beginning of year........ $ 876 $ 713 $ 412
Charge (credit) against
shareholders' equity.............. (876) 163 301
----- ----- -----
Balance at end of year.............. $ --- $ 876 $ 713
===== ===== =====
86
<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 22nd day of
September, 1997.
The Diana Corporation
By /s/ James J. Fiedler
James J. Fiedler, Chairman of
the Board and Chief Executive
Officer
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
and in the capacities and on the dates indicated.
Signature Title Date
/s/ James J. Fiedler Chairman of the Board and
James J. Fiedler Chief Executive Officer
(Principal Executive
Officer)
/s/ Brian A. Robson Vice President, Controller
Brian A. Robson and Secretary (Principal
Financial and Accounting
Officer)
/s/ Jack E. Donnelly Director September 22, 1997
Jack E. Donnelly
/s/ Daniel W. Latham Director, President and
Daniel W. Latham Chief Operating Officer
Director
Sydney B. Lilly
Director
Stephen W. Portner
87
BY LAWS OF
THE DIANA CORPORATION
ARTICLE I
Offices
SECTION 1. REGISTERED OFFICE. The registered office shall be
in the City of Wilmington, County of New Castle, State of Delaware.
SECTION 2. OTHER OFFICES. The corporation may also have
offices at such other places both within and without the State of
Delaware as the board of directors may from time to time determine
or the business of the corporation may require.
ARTICLE II
Meetings of Stockholders
SECTION 1. PLACE OF MEETINGS. Meetings of stockholders for
any purpose may be held at such place, within or without the State
of Delaware, as shall be stated in the notice of the meeting or in
a duly executed waiver of notice thereof.
SECTION 2. ANNUAL MEETING. The board of directors may fix
the date, time and place of the annual meeting of stockholders, but
if no such date, time and place is fixed by the board of directors
for any calendar year, the annual meeting for such calendar year,
commencing with the year 1980, shall be held at the executive
offices of the corporation on the fourth Tuesday in June if not a
legal holiday, and if a legal holiday, then on the next business
day following at 10:00 a.m., local time. At each annual meeting
the stockholders shall elect directors and transact such other
business as may properly be brought before the meeting. (Amended
January 22, 1980)
SECTION 3. SPECIAL MEETINGS. Special meetings of the
stockholders, for any purpose or purposes, unless prescribed by
statute, may be called by the Chairman of the Board, the Secretary,
or the Board of Directors. (Amended April 11, 1988)
SECTION 4. WRITTEN NOTICE. Written notice of the annual
meeting and each special meeting of stockholders stating the place,
date and hour of the meeting, and in the case of a special meeting
stating the purpose or purposes for which the special meeting is
called, shall be given to each stockholder entitled to vote at such
meeting not less than ten nor more than sixty days before the date
of the meeting. Whenever the language of a proposed resolution is
included in a written notice of a meeting of stockholders the
resolution may be adopted at such meeting with such clarifying or
other amendments as do not enlarge its original purpose without
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further notice to stockholders not present in person or by proxy at
such meeting.
SECTION 5. LIMITATION ON BUSINESS TRANSACTED. Business
transacted at any special meeting of stockholders shall be limited
to the purposes stated in the notice.
SECTION 6. VOTING LIST. The officer who has charge of the
stock ledger of the corporation shall prepare and make, at least
ten days before every meeting of stockholders, a complete list of
the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and
the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for
any purpose germane to the meeting, during ordinary business hours,
for a period of at least ten days prior to the meeting, either at
a place within the city where the meeting is to be held, which
place shall be specified in the notice of the meeting, or, if not
so specified, at the place where the meeting is to be held. The
list shall also be produced and kept at the time and place of the
meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
SECTION 7. QUORUM. The holders of issued and outstanding
stock entitled to cast a majority of the total number of votes
which may be cast thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the
stockholders except as otherwise provided by statute or by the
Certificate of Incorporation. Treasury shares shall not be counted
in determining the total number of outstanding shares for voting
purposes at any given time. If, however, such quorum shall not be
so present or represented at any meeting of the stockholders, the
stockholders entitled to vote thereat, present in person or
represented by proxy, shall have power to adjourn the meeting from
time to time, without notice other than announcement at the
meeting, until a quorum shall be so present or represented. At
such adjourned meetings at which a quorum shall be present in
person or represented by proxy, any business may be transacted
which might have been transacted at the original meeting. If the
adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting,
a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
SECTION 8. MAJORITY CONTROL. When a quorum is present at any
meeting, the vote of the holders of stock having a majority of the
voting power present in person or represented by proxy at such
meeting shall decide any question brought before such meeting,
unless the question is one upon which, by express provision of the
statutes or of the Certificate of Incorporation, a different vote
is required, in which case such express provision shall govern and
control the decision of such question.
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SECTION 9. VOTING POWER. Every stockholder of record, except
a holder of stock which has been called for redemption and with
respect to which an irrevocable deposit of funds has been made,
shall have the right, at every stockholders' meeting, to such a
vote for every share, and to such a fraction of a vote with respect
to every fractional share, of stock of the corporation registered
in his name on the books of the corporation as may be provided in
the Certificate of Incorporation, and to one vote for every share,
and to a fraction of a vote equal to every fractional share, of
stock of the corporation registered in his name on the books of the
corporation if no express provision for voting rights is made in
the Certificate of Incorporation. Treasury stock shall not be
voted, directly or indirectly, at any meeting of stockholders or be
counted in connection with the expression of consent or dissent to
corporate action in writing without a meeting.
SECTION 10. PROXIES. Every stockholder entitled to vote at
a meeting of stockholders or to express consent or dissent to
corporate action in writing without a meeting may authorize another
person or persons to act for him by proxy. Every proxy shall be
executed in writing by the stockholder or by his duly authorized
attorney in fact and filed with the Secretary of the corporation.
A proxy, unless coupled with an interest sufficient in law to
support an irrevocable power and stated to be irrevocable, shall be
revocable at will, notwithstanding any other agreement or any
provision in the proxy to the contrary, but the revocation of a
proxy shall not be effective until notice thereof has been given to
the Secretary of the corporation. No unrevoked proxy shall be
valid after three years from the date of its execution, unless a
longer time is expressly provided therein. A proxy shall not be
revoked by the death of incapacity of the maker unless, before the
vote is counted or the authority is exercised, written notice of
such death or incapacity is given to the Secretary of the
corporation.
SECTION 11. ACTION WITHOUT A MEETING. Unless otherwise
provided in the Certificate of Incorporation, any action required
to be taken at any annual or special meeting of stockholders of the
corporation, or any action which may be taken at any annual or
special meeting of such stockholders, may be taken without a
meeting, without prior notice and without a vote, if a consent in
writing, setting forth the action so taken, shall be signed by the
holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon
were present and voted. Prompt notice of the taking of corporate
action without a meeting by less than unanimous written consent of
stockholders shall be given to those stockholders who have not
consented thereto in writing.
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ARTICLE III
DIRECTORS
SECTION 1. GENERAL POWERS AND NUMBER
The business and affairs of the Company shall be managed by
its Board of Directors. The directors shall be divided into 3
classes; the term of office of the directors of the 1st class to
expire at the Annual Meeting of Shareholders to be held in 1988;
that of the 2nd class to expire at the Annual Meeting of
Shareholders to be held in 1989; and that of the 3rd class to
expire at the Annual Meeting of Shareholders to be held in 1990.
At each annual meeting starting in 1988, the number of directors
equal to the number of the class whose term expires at the time of
such meeting shall be elected to hold office until the 3rd
succeeding annual meeting. The number of directors of the Company
shall be seven (Amended September 27, 1991). This number of
directors may be changed only by the affirmative vote of (i) the
holders of at lease 75% of the shares of the corporation entitled
to vote on such change, or (ii) a majority of the directors in
office at the time of the vote. When the number of directors is
changed, any increase or decrease in directorships shall be
apportioned among the classes so as to make all classes as nearly
equal in number as possible. (Amended April 11, 1988)
SECTION 2. VACANCIES
A director may be removed from office only for cause, and only
by affirmative vote of a majority of the shares entitled to vote
for the election of such director, taken at a meeting of
shareholders called for that purpose. Except as may otherwise be
provided by law, cause for removal shall be construed to exist only
if the director whose removal is proposed has been convicted of a
felony by a court of competent jurisdiction and such conviction is
no longer subject to direct appeal or has been adjudged by a court
of competent jurisdiction to be liable for negligence or misconduct
in the performance of his duty to the Company in a matter of
substantial importance to the Company, and such adjudication is no
longer subject to direct appeal. A director may resign at any time
by filing his written resignation with the Secretary of the
Company.
Any vacancy occurring in the Board of Directors, including a
vacancy created by an increase in the number of directors, may be
filled until the expiration of the term of that class of directors
in which the vacancy exists by the affirmative vote of a majority
of the directors then in office, though less than a quorum of the
Board of Directors.
All nominations for election to the Board of Directors,
including any nomination to fill a vacancy (whether created by an
increase in the number of directors, a resignation of a Director,
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or otherwise) other than those made by the remaining directors then
in office, must be made at a meeting of stockholders called for the
election of directors. (Amended April 11, 1988)
SECTION 3. [BLANK] (AMENDED APRIL 11, 1988)
Meetings of the Board of Directors
SECTION 4. PLACE OF MEETINGS. The board of directors may
hold meetings, both regular and special, either within or without
the State of Delaware.
SECTION 5. ANNUAL MEETING. The first meeting of each newly
elected board of directors shall be held in the same place as the
annual meeting of stockholders immediately following such meeting
and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting,
provided a quorum shall be present. In the event such meeting is
not held at such time and place, the meeting may be held at such
time and place as shall be specified in a notice given as
hereinafter provided for special meetings of the board of
directors, or as shall be specified in a written waiver signed by
all of the directors.
SECTION 6. REGULAR MEETINGS WITHOUT NOTICE. Regular meetings
of the board of directors may be held without notice at such date,
time and place as shall from time to time be determined by
resolution of the board.
SECTION 7. SPECIAL MEETINGS. Special meetings of the board
of directors may be called by the Chief Executive Officer or the
Secretary, and shall be called by the Chief Executive Officer or
the Secretary upon the written request of any two or more
directors. Notice of the date, time and place of such meetings
shall be served upon or telephoned to each director at least 24
hours, or mailed (postage prepaid) or telegraphed, cable or telexed
(charges prepaid) to each director at his address as shown on the
books of the corporation at least 48 hours prior to the time of the
meeting.
SECTION 8. QUORUM. At all meetings of the board a majority
of the total number of directors shall constitute a quorum for the
transaction of business and the act of a majority of the directors
present at any meeting at which there is a quorum shall be the act
of the board of directors, except as may be otherwise specifically
provided by statute or by the Certificate of Incorporation. If a
quorum shall not be present at any meeting of the board of
directors, the directors present thereat may adjourn the meeting
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from time to time, without notice other than announcement at the
meeting, until a quorum shall be present.
SECTION 9. ACTION WITHOUT A MEETING. Unless otherwise
restricted by the Certificate of Incorporation or these By-Laws:
(a) Unanimous Consent. Any action required or permitted
to be taken at any meeting of the board of directors or of any
committee thereof may be taken without a meeting if all
members of the board or committee, as the case may be, consent
thereto in writing, and the writing or writings are filed with
the minutes or proceedings of the board or committee.
(b) Telephone Conferences. Members of the board of
directors or any committee designated by the board, may
participate in a meeting of the board or committee by means of
a conference telephone or similar communications equipment by
means of which all persons participating in the meeting can
hear each other, and participation in a meeting pursuant to
this subsection shall constitute presence in person at such
meeting.
Committees of the Board of Directors
SECTION 10. EXECUTIVE COMMITTEE. The board of directors may,
by resolution passed by a majority of the whole board, designate an
Executive Committee consisting of the Chief Executive Officer and
not less than three other directors which, during intervals between
meetings of the board of directors, shall have and may exercise all
of the powers of the board of directors in the management of the
business and affairs of the corporation, and may authorize the seal
of the corporation to be affixed to all papers which may require
it; provided, however, that the Executive Committee shall have no
power or authority in reference to amending the Certificate of
Incorporation, adopting an agreement of merger or consolidation,
recommending to the stockholders the sale, lease or exchange of all
or substantially all of the corporation's property or assets,
recommending to the stockholders a dissolution of the corporation
or a revocation of a dissolution, or amending the By-Laws of the
corporation, or to declare a dividend, authorize the issuance of
stock or fill vacancies on the board of directors. The board of
directors may also designate one or more directors as alternate
members of the Executive Committee who may replace any absent or
disqualified member at any meeting of the Executive Committee. The
board of directors may, at any time, by resolution passed by a
majority of the whole board, limit the exercise of the foregoing
powers by the Executive Committee, or suspend the operations of the
Executive Committee.
Three members shall constitute a quorum for the transaction of
business. The Chief Executive Officer shall act as chairman of the
Executive Committee, shall preside at all meetings of the Executive
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Committee and shall appoint one person (who need not be a member)
to act as secretary at each meeting of the Executive Committee. In
the absence of the Chief Executive Officer, or in the event of his
disability or refusal to act, such other member of the Executive
Committee as the Executive Committee or the board of directors
shall designate shall preside at meetings of the Executive
Committee. Meetings of the Executive Committee may be called by
the Chief Executive Officer or any two members of the Executive
Committee. Notice of any meeting of the Executive Committee shall
be sufficient if given in the same manner as notice of a special
meeting of the board of directors.
The Executive Committee shall keep regular minutes of its
meetings. The acting secretary of each meeting of the Executive
Committee shall furnish to the Secretary of the corporation (when
not the same person) a true and correct copy of the proceedings of
such meeting and the Secretary of the corporation shall thereupon
record such proceedings in the minute book of the corporation.
SECTION 11. OTHER COMMITTEES OF DIRECTORS. In addition to
the Executive Committee, the board of directors may, by resolution
passed by a majority of the whole board, designate one or more
committees, each committee to consist of two or more of the
directors of the corporation, except that the Audit Committee may
consist of one or more of the directors of the corporation. The
board may designate one or more directors as alternate members of
any committee, who may replace any absent or disqualified member at
any meeting of the committee. Any such committee, to the extent
provided in the resolution, shall have and may exercise the powers
of the board of directors in the management of the business and
affairs of the corporation, and may authorize the seal of the
corporation to be affixed to all papers which may require it; but
no such committee shall have the power of authority in reference to
amending the Certificate of Incorporation, adopting an agreement of
merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the corporation's
property and assets, recommending to the stockholders a dissolution
of the corporation, or a revocation of a dissolution, or amending
the By-Laws, of the corporation; and, unless the resolution,
By-Laws, or Certificate of Incorporation expressly so provide, no
such committee shall have power of authority to declare a dividend
or to authorize the issuance of stock or to fill vacancies on the
board of directors. Such committee or committees shall have such
name or names as may be determined from time to time by resolution
adopted by the board of directors.
Unless otherwise provided by the board of directors, a
majority of the members of any committee appointed by the board of
directors pursuant to this Section shall constitute a quorum at any
meeting thereof and the act of a majority of the members present at
a meeting at which a quorum is present shall be the act of such
committee. Any such committee shall, subject to any rules
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prescribed by the board of directors, prescribe its own rules for
calling, giving notice of and holding meetings and its method of
procedure at such meetings. (Amended June 23, 1981).
SECTION 12. RECORD OF PROCEEDINGS. Each committee shall keep
regular written minutes of its meetings and actions taken by it and
report the same to the board of directors when required.
Directors Fees
SECTION 13. FEES. Each director and member of a committee of
directors shall be paid such reasonable fee, if any, as shall be
fixed by the board of directors for each meeting of the board of
directors or committee of directors which he shall attend and may
be paid such other compensation for his services as a director or
member as may be fixed by the board of directors. No such payment
shall preclude any director or member from serving the corporation
in any other capacity and receiving compensation therefor.
ARTICLE IV
Notices
SECTION 1. FORM OF NOTICES. Whenever, under the provisions
of the statutes or of the Certificate of Incorporation or of these
By-Laws, notice is required to be given to any director, any member
of a committee of directors or any stockholder, it shall not be
construed to mean personal notice, but such notice may be given in
writing, by mail, addressed to such director, member or
stockholder, at his address as it appears on the records of the
corporation, with postage thereon prepaid, and such notice shall be
deemed to be given at the time when the same shall be deposited in
the United States mail. Notice to any director or any member of a
committee of directors may also be given by telex, cable or
telegram and such notice shall be deemed to be given when delivered
to the telegraph company or transmitted by the teletype as the case
may be.
SECTION 2. WAIVER OF NOTICE. Whenever any notice is required
to be given under the provisions of the statutes or of the
Certificate of Incorporation or of these By-Laws, a written waiver
thereof, signed by the person or persons entitled to notice,
whether before or after the time stated therein, shall be deemed
equivalent thereto. Neither the business to be transacted at, nor
the purpose of, any regular of special meeting of the stockholders,
directors or members of a committee of directors need be specified
in the waiver of notice unless so required by the Certificate of
Incorporation.
Attendance of a person at any meeting shall constitute a
waiver of notice of such meeting, except where a person attends a
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meeting for the express purpose of objecting, at the beginning of
the meeting, to the transaction of any business because the meeting
was not lawfully called or convened.
ARTICLE V
Officers
SECTION 1. NUMBER. The officers of the corporation, except
those elected by delegated authority pursuant to Section 3 of this
Article, shall be chosen by the board of directors and shall
include a Chief Executive Officer, a Chairman of the Board, a
President, one or more Vice Presidents, a Secretary and a
Treasurer. The board of directors may also choose a Vice Chairman
of the Board, a Chief Financial Officer, one or more Executive Vice
Presidents, one or more Senior Vice Presidents, a Controller and
one or more Assistant Secretaries, Assistant Treasurers and
Assistant Controllers. Any number of offices may be held by the
same person, unless the Certificate of Incorporation or these
By-Laws otherwise provided.
SECTION 2. ELECTION AND TERM OF OFFICE. The board of
directors at its first meeting after each annual meeting of
stockholders shall choose a Chief Executive Officer and a Chairman
of the Board from among the directors, and shall choose a
President, one or more Vice Presidents, a Secretary and a
Treasurer, none of whom need be a member of the board. The
officers of the corporation, except those elected by delegated
authority pursuant to Section 3 of this Article, shall be elected
annually by the board of directors, and each such officer shall
hold his office until his successor shall have been elected and
qualified, or until his earlier death, resignation, or removal.
SECTION 3. SUBORDINATE OFFICERS, COMMITTEES AND AGENTS. The
board of directors may from time to time elect such other officers
and appoint such committees, employees or other agents as it shall
deem necessary or appropriate, each of whom shall hold office for
such period, have such authority, and perform such duties as are
provided in these By-Laws, or as the board of directors may from
time to time determine. The board of directors may delegate to any
officer or committee the power to elect subordinate officers and to
retain or appoint employees or other agents, or committees thereof,
and to prescribe the authority and duties of such subordinate
officers, committees, employees or other agents.
SECTION 4. SALARIES. The salaries of all officers, employees
and agents of the corporation who are elected or appointed by the
board of directors shall be fixed from time to time by the board of
directors or by such officer or committee as may be designated by
the board of directors. The salaries or other compensation of any
other officers, employees and other agents shall be fixed from time
to time by the officer or committee to which the power to elect
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such officers or to retain or appoint such employees or other
agents has been delegated pursuant to Section 3 of this Article.
No officer shall be prevented from receiving such salary or other
compensation by reason of the fact that he is also a director of
the corporation.
SECTION 5. RESIGNATIONS. Any officer or agent may resign at
any time by giving written notice to the board of directors, or to
the Chief Executive Officer or the Secretary of the corporation.
Any such resignation shall take effect at the date of the receipt
of such notice or at any later time specified therein and, unless
otherwise specified therein, the acceptance of such resignation
shall not be necessary to make it effective.
SECTION 6. REMOVAL. Any officer, committee, employee or
other agent of the corporation may be removed, either for or
without cause, by the board of directors or by the officer or
committee which elected or appointed such officer, committee or
other agent whenever in the judgment of the board or of such
officer or committee the best interests of the corporation will be
served thereby.
SECTION 7. VACANCIES. Any vacancy occurring in any office of
the corporation because of death, resignation, removal,
disqualification, or any other cause, shall be filled by the board
of directors or by the officer or committee to which the power to
fill such office has been delegated pursuant to Section 3 of this
Article, as the case may be, and if the office is one for which
these By-Laws prescribe a term, shall be filled for the unexpired
portion of the term.
SECTION 8. GENERAL POWERS. All officers of the corporation
as between themselves and the corporation, shall, respectively,
have such authority and perform such duties in the management of
the property and affairs of the corporation as may be determined by
resolution of the board of directors, or in the absence of
controlling provisions in a resolution of the board of directors,
as may be provided in these By-Laws.
SECTION 9. EXECUTION OF DOCUMENTS. The Chief Executive
Officer, the Chairman of the Board, the Vice Chairman of the Board
and the President shall each have the power and authority to sign
and execute, in the name of the corporation, bonds, mortgages and
other contracts and instruments, under the seal of the corporation
or otherwise, except in cases where the signing and execution
thereof shall be expressly delegated by the board of directors or
these By-Laws to some other officer, employee or agent of the
corporation.
SECTION 10. CHAIRMAN OF THE BOARD. The Chairman of the Board
shall preside at all meetings of the board of directors and
stockholders and, in the absence of the President or in the event
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of his inability or refusal to act, shall perform the duties and
exercise the powers of the President. The Chairman of the Board
shall also perform such other duties and have such other powers as
the board of directors may from time to time prescribe.
SECTION 11. VICE CHAIRMAN OF THE BOARD. The Vice Chairman of
the Board shall, in the absence of the Chairman of the Board or in
the event of his inability or refusal to act, perform the duties
and exercise the powers of the Chairman of the Board, and shall
perform such other duties and have such other powers as the board
of directors may from time to time prescribe.
SECTION 12. PRESIDENT. The President shall be an executive
officer of the corporation and, in the absence of the Vice Chairman
of the Board or in the event of his inability or refusal to act,
shall perform the duties and exercise the powers of the Vice
Chairman of the Board. The President shall also perform such other
duties and exercise such other powers as the board of directors may
from time to time prescribe.
SECTION 13. CHIEF EXECUTIVE OFFICER. Either the Chairman of
the Board, the Vice Chairman of the Board or the President may be
the Chief Executive Officer of the corporation, and the board of
directors shall from time to time designate which of such officers
shall be the Chief Executive Officer. The Chief Executive Officer
shall have general and active management control of the business of
the corporation, shall see that all orders and resolutions of the
board of directors are carried into effect and shall have general
supervision and direction of all other officers of the corporation.
The Chief Executive Officer shall also perform such other duties
and have such other powers as the board of directors may from time
to time prescribe. In the event of the absence of the Chief
Executive Officer or of his inability or refusal to act, the
Chairman of the Board or the Vice Chairman of the Board or the
President (whoever does not hold the office of Chief Executive
Officer), in the order designated by the board of directors, shall
perform the duties and exercise the powers of the Chief Executive
Officer.
SECTION 14. EXECUTIVE VICE PRESIDENTS, SENIOR VICE PRESIDENTS
AND VICE PRESIDENTS. The Executive Vice Presidents, Senior Vice
Presidents and Vice Presidents shall perform such duties and have
such other powers as the board of directors of the Chief Executive
Officer may from time to time prescribe.
SECTION 15. SECRETARY. The Secretary shall attend all
meetings of the board of directors and all meetings of the
stockholders, record all the proceedings of all such meetings in a
book to be kept for that purpose and shall perform like duties for
the standing committees when requested. He shall give, or cause to
be given, notice of all meetings of the stockholders and special
meetings of the board of directors, and shall perform such other
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duties and have such other powers as the board of directors or the
Chief Executive Officer may from time to time prescribe. He shall
have custody of the corporate seal of the corporation and he, or an
Assistant Secretary, shall have authority to affix the same to any
instrument requiring it and when so affixed, it may be attested by
his signature of such Assistant Secretary. The board of directors
may give general authority to any other officer to affix the seal
of the corporation and to attest the affixing by his signature.
SECTION 16. ASSISTANT SECRETARIES. In the absence of the
Secretary or in the event of his inability or refusal to act, the
Assistant Secretary (or in the event there be more than one, the
Assistant Secretaries in the order designated by the board of
directors, or in the absence of any designation, then in the order
of their election) shall perform the duties and exercise the powers
of the Secretary. The Assistant Secretaries shall also perform
such other duties and exercise such other powers as the board of
directors or the Chief Executive Officer may from time to time
prescribe.
SECTION 17. CHIEF FINANCIAL OFFICER. The Chief Financial
Officer of the corporation shall, under the direction and
supervision of the Chief Executive Officer, supervise and manage
the financial affairs of the corporation. He shall have direct
supervision and direction of all other officers, employees and
agents of the corporation who are involved primarily in the conduct
of the financial affairs of the corporation. He shall also perform
such other duties and have such other powers as the board of
directors or the Chief Executive Officer may from time to time
prescribe.
SECTION 18. TREASURER. The Treasurer shall have the custody
of the corporate funds and securities and shall keep full and
accurate accounts of receipts and disbursements in books belonging
to the corporation and shall deposit all moneys and other valuable
effects in the name and to the credit of the corporation in such
depositories as may be designated by the board of directors, the
Chief Executive Officer or the Chief Financial Officer. The
Treasurer shall render to the Chief Executive Officer, the Chief
Financial Officer and the board of directors, at its regular
meetings, or otherwise when the board of directors so requests, an
account of all his transactions as Treasurer and of the financial
condition of the corporation. The Treasurer shall also perform
such other duties and have such other powers as the board of
directors, the Chief Executive Officer or the Chief Financial
Officer may from time to time prescribe.
SECTION 19. ASSISTANT TREASURERS. In the absence of the
Treasurer or in the event of his inability or refusal to act, the
Assistant Treasurer (or in the event there be more than one, the
Assistant Treasurers in the order designated by the board of
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directors, or in the absence of any designation, then in the order
of their election) shall exercise the powers and perform the duties
of the Treasurer. The Assistant Treasurers shall also perform such
other duties and exercise such other powers as the board of
directors, the Chief Executive Officer or the Chief Financial
Officer may from time to time prescribe.
SECTION 20. PERFORMANCE BOND OF TREASURER AND ASSISTANT
TREASURERS. If required by the board of directors, the Treasurer
and each Assistant Treasurer shall give the corporation a bond in
such sum and with such surety or sureties as shall be satisfactory
to the board of directors for the faithful performance of the
duties of his office and for the restoration to the corporation, in
case of his death, resignation, retirement or removal from office,
of all books, papers, vouchers, money and other property of
whatever kind in his possession or under his control belonging to
the corporation.
SECTION 21. CONTROLLER. The Controller shall plan and direct
corporate accounting and control policies and procedures and shall
disburse the funds of the corporation as may be ordered by the
board of directors, taking proper vouchers for such disbursements,
and shall render to the Chief Executive Officer, the Chief
Financial Officer, the Treasurer and the board of directors, at its
regular meetings, or otherwise when the board of directors so
requests, an account of all his transactions as Controller and of
the financial condition of the corporation.
SECTION 22. ASSISTANT CONTROLLERS. In the absence of the
Controller or in the event of his inability or refusal to act, the
Assistant Controller (or in the event there be more than one, the
Assistant Controllers in the order designated by the board of
directors, or in the absence of any designation, then in the order
of their election) shall perform the duties and exercise the powers
of the Controller. The Assistant Controllers shall also perform
such other duties and have such other powers as the board of
directors, the Chief Executive Officer and the Chief Financial
Officer may from time to time prescribe.
ARTICLE VI
Certificate of Stock
SECTION 1. CERTIFICATES. Every holder of stock in the
corporation shall be entitled to have a certificate, signed by, or
in the name of the corporation by the Chairman of the Board, the
Vice Chairman of the Board, the President or an Executive, Senior
or other Vice President, and by the Treasurer or an Assistant
Treasurer, or the Secretary or an Assistant Secretary of the
corporation, certifying the number of shares owned by such holder
in the corporation.
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SECTION 2. CLASSES OF STOCK - DESIGNATION. If the
corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers,
designations, preferences and relative, participating, optional or
other rights, if any, of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences
and/or rights shall be set forth in full or summarized on the face
or back of the certificate which the corporation shall issue to
represent such class or series of stock, provided that, except as
otherwise provided in the General Corporation Law of Delaware, in
lieu of the foregoing requirements there may be set forth on the
face or back of the certificate which the corporation shall issue
to represent such class or series of stock, a statement that the
corporation will furnish without charge to each stockholder who so
requests the powers, designations, preferences and relative,
participating, optional or other special rights of each class of
stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights.
SECTION 3. FACSIMILE SIGNATURES. When a certificate is
countersigned (1) by a transfer agent other than the corporation or
its employees, or (2) by a registrar other than the corporation or
its employees, any other signature on the certificate may be a
facsimile. In case any officer, transfer agent, or registrar who
has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent,
or registrar before such certificate is issued, it may be issued by
the corporation with the same effect as if he were such officer,
transfer agent or registrar at the date of issue.
SECTION 4. TRANSFER OF STOCK. The transfer of shares of
stock and certificates representing shares of stock shall be
governed by Article 8 of the Uniform Commercial Code as adopted and
in effect in the State of Delaware. Whenever any transfer of
shares of stock shall be made for collateral security, and not
absolutely, if the transferor and transferee request the
corporation to do so when the certificates representing the shares
are presented for transfer, the fact that the transfer is being
made for collateral security shall be expressed in the entry for
transfer.
SECTION 5. LOST, STOLEN, OR DESTROYED CERTIFICATES. The
corporation shall issue a new stock certificate in the place of any
certificate previously issued when the holder of record of the
certificate:
(a) Claim. Makes proof in affidavit form that it has
been lost, destroyed, or wrongfully taken;
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(b) Timely Request. Requests the issuance of a new
certificate before the corporation has notice that
the certificate has been acquired by a purchaser
for value in good faith and without notice of any
adverse claim;
(c) Bond. Gives a bond in such form, and with such
surety or sureties, with fixed or open penalty, as
the corporation may direct, to indemnify the
corporation, its transfer agents and registrars
against any claim that may be made on account of
the alleged loss, destruction, or theft or the
certificate; and
(d) Other Requirements. Satisfies any other reasonable
requirements imposed by the corporation.
When a certificate has been lost, apparently destroyed, or
wrongfully taken and the holder of record fails to notify the
corporation within a reasonable time after he has notice of it, and
the corporation registers a transfer of the shares represented by
such certificate before receiving such notification, the holder of
record is precluded from making any claim against the corporation
for the transfer or for a new certificate.
SECTION 6. FIXING RECORD DATE. In order that the corporation
may determine the stockholders entitled to notice of or to vote at
any meeting of stockholders or any adjournment thereof, or to
express consent to corporate action in writing a meeting, or
entitled to receive payment of any dividend or other distribution
or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the board of directors may fix,
in advance, a record date, which shall not be more than sixty nor
less than ten days before the date of such meeting, nor more than
sixty days prior to any other action. A determination of
stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the board of directors may fix a
new record date for the adjourned meeting.
SECTION 7. REGISTERED STOCKHOLDERS. The corporation shall be
entitled to recognize the exclusive right of a person registered on
its books as the owner of stock to receive dividends, and to vote
as such owner, and shall not be bound to recognize any equitable or
other claim to or interest in such stock on the part of any other
person, whether or not it shall have express or other notice
thereof, except as otherwise provided by the laws of Delaware.
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ARTICLE VII
General Provisions
SECTION 1. FISCAL YEAR. Each fiscal year of the corporation
shall end on March 31st of each year. (Amended March 7, 1997)
SECTION 2. SEAL. The corporate seal shall have inscribed
thereon the name of the corporation, the year of its organization
and the words "Corporate Seal, Delaware." The seal may be used by
causing it or a facsimile thereof to be impressed or affixed or
reproduced or otherwise.
SECTION 3. AMENDMENTS. These By-Laws may be altered or
repealed at any meeting of the stockholders or of the Board of
Directors without a meeting as respectively provided in Section 11
of Article II and Section 9 or Article III; provided, however, that
Article II, Section 3, and Article III, Sections 1 and 2, and
Article VII, Section 3 may be amended or repealed only by an
affirmative vote of not less than seventy-five percent (75%) of the
shares present or represented at an Annual or Special Meeting of
the Stockholders at which a quorum is in attendance. (Amended
April 11, 1988)
ARTICLE VIII
SECTION 1. MISCELLANEOUS. Unless otherwise ordered by the
board of directors, the Chief Executive Officer, the Chairman of
the Board, the Vice Chairman of the Board, the President, any
Executive, Senior or other Vice President, or the Secretary, in
person or by proxy or proxies appointed by any of them, shall have
full power and authority on behalf of the corporation to vote, act
and consent with respect to any shares of stock issued by other
corporations which the corporation may own or as to which the
corporation otherwise has the right to vote, act or consent.
ARTICLE IX
Indemnification
SECTION 1. The corporation shall indemnify any person who was
or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation) by reason of
the fact that such person is or was serving as a director or
officer of the corporation, or is or was serving at the request of
the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees),
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judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action,
suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests
of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was
unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that
his conduct was unlawful.
SECTION 2. The corporation shall indemnify any person who
becomes a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right
of the corporation to procure a judgment in its favor by reason of
the fact that such person is or was serving as a director or
officer of the corporation, or is or was serving at the request of
the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees),
judgments, and amounts paid in settlement actually and reasonably
incurred by him in connection with the defense or settlement of
such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests
of the corporation, except in such cases as involve gross
negligence or willful misconduct in the performance of his duties.
SECTION 3. Expenses incurred by a director, officer, employee
or agent of the corporation in defending a civil or criminal
action, suit or proceeding may be paid by the corporation in
advance of the final disposition of such action, suit or proceeding
as authorized by the board of directors upon receipt of an
undertaking by or on behalf of such person to repay such amounts
unless it shall ultimately be determined that he is entitled to be
indemnified by the corporation as provided in these By-Laws.
SECTION 4. The indemnification provided by these By-Laws
shall not be deemed exclusive of any other rights to which those
indemnified may be entitled under any agreement, vote of
stockholders or disinterested directors or otherwise, both as to
action in his official capacity and as to action in another
capacity while holding such office, and shall continue as to a
person who has ceased to be a director, officer, employee or agent
and shall inure to the benefit of the heirs, executors and
administrators of such a person.
SECTION 5. The corporation may purchase and maintain
insurance on behalf of any person who is or was a director or
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officer of the corporation, or is or was serving at the request of
the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against such person and
any resulting expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement incurred by him in any such
capacity, or arising out of his status as such, whether or not the
corporation would have the power to so indemnify him under the
provisions of these By-Laws.
(Amended August 1, 1982)
ARTICLE X
Indemnification Saving Clause and Retroactivity
SECTION 1. The invalidity or unenforceability of any
provision in Article IX, in whole or in part, shall not affect the
validity or enforceability of the affected provision to the full
extent permitted by law to be enforceable, nor of the remaining
provisions of that Article IX.
SECTION 2. The indemnification provided in Article IX shall
be retroactive in application ab initio of the corporation.
(Amended August 1, 1982)
18
SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIS SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT
(together with all appendices, exhibits, schedules and
attachments hereto, collectively this "Amendment") is made and
entered into as of July 10, 1997, by and between C&L
COMMUNICATIONS, INC., a Texas corporation ("Borrower") and SANWA
BUSINESS CREDIT CORPORATION, a Delaware corporation ("Lender").
RECITALS
WHEREAS, Borrower and Lender entered into that certain Loan
and Security Agreement dated as of January 2, 1996, as amended by
that certain First Amendment to Loan and Security Agreement and
Waiver Agreement dated as of June 27, 1996 (collectively, the
"Loan Agreement") together with documents ancillary thereto;
WHEREAS, there currently exists several Events of Default
pursuant to the Loan Agreement due to Borrower's failure to
comply with certain covenants, as more fully described herein;
WHEREAS, Borrower has requested and Lender has agreed to
waive certain Events of Default, as more fully described herein;
WHEREAS, Borrower has requested and Lender has agreed to
reset a financial covenant, as more fully described herein;
WHEREAS, Borrower and Lender wish to amend the Loan
Agreement to incorporate the aforesaid;
NOW THEREFORE, for and in consideration of the premises, the
mutual covenants hereinafter set forth and other good and
valuable consideration, the receipt and sufficiency of which the
parties hereby acknowledge, the parties hereby agree as follows:
ARTICLE
1.
RECITALS AND DEFINITIONS
1.1. Borrower represents and warrants that the foregoing
recitals are true and correct and constitute an integral part of
this Amendment and Borrower and Lender hereby agree that all of
the recitals of this Amendment are hereby incorporated herein and
made a part hereof.
1.2. Unless otherwise defined herein or the context
otherwise requires, all capitalized terms used herein shall have
the same meanings as ascribed to them in the Loan Agreement.
1
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ARTICLE
2.
AMENDMENT OF THE LOAN AGREEMENT
2.1. Section 10.1(A) of the Loan Agreement hereby is
deleted in its entirety and the following substituted therefor:
At all times during the Term, maintain: (i) a ratio of
total liabilities to Tangible Net Worth of not more than
6.0:1.0; (ii) Tangible Net Worth at least equal to
$2,000,000, to be adjusted for any dividends paid to or for
the benefit of the holder or holders of Borrower's Stock, as
permitted by Section 10.2(C); but in no event less than
$1,500,000; (iii) a ratio of Current Assets to Current
Liabilities of not less than 1.0:1.0; and (iv) EBIT of not
less than the cumulative amount indicated below commencing
with the EBIT for the quarter ending June 30, 1997 through
the period indicated; all as determined for each of the
foregoing financial covenants in accordance with generally
accepted accounting principles consistently applied:
CUMULATIVE EBIT REQUIRED THROUGH QUARTER ENDING
$ 172,000 June 30, 1997
$ 478,000 September 30, 1997
$ 804,000 December 31, 1997
$1,153,000 March 31, 1998
After March 31, 1998 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);"
ARTICLE
3.
WAIVER
3.1. Lender hereby waives the following existing Events of
Default under the Loan Agreement:
a. Borrower's failure to comply with the EBIT
covenant set forth in Section 10.1(A) of the Loan Agreement for
the fiscal year ending on March 31, 1997;
b. Borrower's failure to comply with the management
fee covenant set forth in Section 10.2(D) of the Loan Agreement
for the fiscal year ending on March 31, 1997;
c. Borrower's failure to comply with the balance
sheet, profit and loss statement and cash flow projection
deliveries set forth in Section 10.1(E)(iii) for the fiscal year
ending on March 31, 1997; and
d. Borrower's failure to comply with deliveries of
financial statements for April and May 1997 set forth in Section
10.1(E)(ii).
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Except as specified in this Article 3, Lender is not
waiving any rights under the Loan Agreement or under any
Ancillary Agreements. Borrower acknowledges that except to the
extent expressly modified in this Agreement, Lender's waiver
herein shall not be construed as a bar to or waiver of any such
right or remedy which Lender would otherwise have on any future
occasion, whether similar in kind or otherwise. The waivers set
forth in this Article 3 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 provisions of the Loan Agreement. The waivers
contained herein are specifically limited to the facts, time
periods and circumstances described herein.
ARTICLE
4.
REPRESENTATIONS AND WARRANTIES
4.1. Borrower hereby makes the following representations
and warranties to Lender, which representations and warranties
shall constitute the continuing covenants of Borrower and shall
remain true and correct until all of Borrower's Liabilities are
paid and performed in full:
a. The representations and warranties of Borrower
contained in the Loan Agreement are true and correct on and as of
the date hereof as though made on and as of such date;
b. Except as described hereinbefore, no Event of
Default or event which, but for the lapse of time or the giving
of notice, or both, would constitute an Event of Default under
the Loan Agreement has occurred and is continuing or would result
from the execution and delivery of this Amendment;
c. Except as described hereinbefore, Borrower is in
full compliance with all of the terms, conditions and all
provisions of the Loan Agreement and the other agreements;
d. This Amendment and all other agreements required
hereunder to be executed by Borrower and delivered to Lender,
have been duly authorized, executed and delivered on Borrower's
behalf pursuant to all requisite corporate authority and this
Amendment and each of the other agreements required hereunder to
be executed and delivered by Borrower to Lender constitute the
legal, valid and binding obligations of Borrower enforceable in
accordance with their terms, except as enforceability thereof may
be limited by bankruptcy, insolvency, reorganization, moratorium
or other similar laws relating to creditors' rights; and
e. Borrower hereby acknowledges and agrees that
Borrower has no defense, offset or counterclaim to the payment of
said principal, interest, fees or other liabilities and hereby
waives and relinquishes any such defense, offset or counterclaim
and Borrower hereby releases Lender and its respective officers,
directors, agents, affiliates, successors and assigns
from any claim, demand or cause of action, known or unknown,
contingent or liquidated, which may exist or hereafter be known
to exist relating to any matter prior to the date hereof.
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ARTICLE
5.
RATIFICATION
Except as expressly amended hereby, the Loan Agreement and
all other agreements executed in connection therewith shall
remain in full force and effect. The Loan Agreement, as amended
hereby, and all rights and powers created thereby and thereunder
or under such other agreements, are in all respects ratified and
confirmed. From and after the date hereof, the Loan Agreement
shall be deemed amended and modified as herein provided but,
except as so amended and modified, the Loan Agreement shall
continue in full force and effect and the Loan Agreement and this
Amendment shall be read, taken and construed as one and the same
instrument. On and after the date hereof, the term "Agreement"
as used in the Loan Agreement and all other references to the
Loan Agreement therein, in any other instrument, document or
writing executed by Borrower or any guarantor or furnished to
Lender by Borrower or any guarantor in connection therewith or
herewith shall mean the Loan Agreement as amended by this
Amendment.
ARTICLE
6.
MISCELLANEOUS
6.1. Borrower agrees to pay to Lender, contemporaneously
herewith, all out-of-pocket costs and expenses of Lender,
including without limitation, reasonable attorneys' fees, costs,
expenses incurred by Lender in connection with the negotiation,
preparation, execution and delivery of this Amendment and all
other matters pertaining hereto.
6.2. Borrower agrees to pay Lender, contemporaneously
herewith, an amendment fee in the amount of $5,000 in
consideration of Lender's agreements contained herein.
6.3. This Amendment may be signed in any number of
counterparts, each of which shall be deemed to be an original,
but all of which together shall constitute one and the same
instrument.
6.4. Except as otherwise specified herein, this Amendment
embodies the entire agreement and understanding between Lender
and Borrower with respect to the subject matter hereof and
supersedes all prior agreements, consents and understandings
relating to such subject matter.
6.5. The headings in this Amendment have been inserted for
convenience only and shall be given no substantive meaning or
significance in construing the terms of this Amendment.
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6.6. This Amendment shall inure to the benefit of Lender
and its successors and assigns and shall be binding upon and
inure to the successors and assigns of Borrower, except that
Borrower may not assign any of its rights in and to this
Amendment.
6.7. This Amendment may be executed in any number of
counterparts, each of which shall be deemed to be an original,
but all of which together shall constitute one in the same
document.
6.8. THIS 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 STATE
OF ILLINOIS, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES.
WHEREVER POSSIBLE, EACH PROVISION OF THIS AMENDMENT AND EACH
OTHER LOAN AGREEMENT AND/OR 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 PROVISIONS 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 AND/OR
ANCILLARY AGREEMENT. ALL OBLIGATIONS OF THE BORROWER, AND
RIGHTS OF THE LENDER AND OF ANY OTHER HOLDER OF ANY NOTE,
EXPRESSED HEREIN OR IN THE LOAN DOCUMENTS SHALL BE IN ADDITION TO
AND NOT IN LIMITATION OF THE THOSE PROVIDED BY APPLICABLE LAW.
IN WITNESS WHEREOF, Borrower and Lender have caused this
Amendment to Loan and Security Agreement to be executed and
delivered in Chicago, Illinois as of the day and year written
above.
C&L COMMUNICATIONS, INC.
By: /s/ R. Scott Miswald
Assistant Secretary
SANWA BUSINESS CREDIT CORPORATION
By: /s/ Andrew J. Heinz
Vice President
5
AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIS AMENDMENT TO LOAN AND SECURITY AGREEMENT (together with
all appendices, exhibits, schedules and attachments hereto,
collectively this "Amendment") is made and entered into as of May
29, 1997, by and between VALLEY COMMUNICATIONS, INC., a
California corporation ("Borrower") and SANWA BUSINESS CREDIT
CORPORATION, a Delaware corporation ("Lender").
RECITALS
WHEREAS, Borrower and Lender entered into that certain Loan
and Security Agreement dated as of March 14, 1996 (the "Loan
Agreement") together with documents ancillary thereto;
WHEREAS, there currently exists several Events of Default
pursuant to the Loan Agreement due to Borrower's failure to
comply with certain covenants, as more fully described herein;
WHEREAS, Borrower has requested and Lender has agreed to
waive certain Events of Default, as more fully described herein;
WHEREAS, Borrower has requested and Lender has agreed to
reset certain financial covenants, as more fully described
herein;
WHEREAS, Borrower and Lender wish to amend the Loan
Agreement to incorporate the aforesaid;
NOW THEREFORE, for and in consideration of the premises, the
mutual covenants hereinafter set forth and other good and
valuable consideration, the receipt and sufficiency of which the
parties hereby acknowledge, the parties hereby agree as follows:
ARTICLE
1.
RECITALS AND DEFINITIONS
1.1. Borrower represents and warrants that the foregoing
recitals are true and correct and constitute an integral part of
this Amendment and Borrower and Lender hereby agree that all of
the recitals of this Amendment are hereby incorporated herein and
made a part hereof.
1.2. Unless otherwise defined herein or the context
otherwise requires, all capitalized terms used herein shall have
the same meanings as ascribed to them in the Loan Agreement.
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ARTICLE
2.
AMENDMENT OF THE LOAN AGREEMENT
2.1. Section 10.1(A) of the Loan Agreement hereby is
deleted in its entirety and the following substituted therefor:
At all times during the Term, maintain: (i) a ratio of
total liabilities to Tangible Net Worth of not more than
4.0:1.0; (ii) Tangible Net Worth at least equal to
$1,350,000, to be adjusted for any dividends paid to or for
the benefit of the holder or holders of Borrower's Stock, as
permitted by Section 10.2(C); provided, however, that for
all times during the fiscal year ending on March 31, 1998,
Tangible Net Worth (as adjusted) shall be at least equal to
$1,225,000; (iii) a ratio of Current Assets to Current
Liabilities of not less than 1.1:1.0; and (iv) Pre-Tax Net
Income of not less than $350,000 at the end of each fiscal
year of Borrower or such pro rata share thereof; all as
determined for each of the foregoing financial covenants in
accordance with generally accepted accounting principles
consistently applied;
2.2. Section 10.2(L) of the Loan Agreement hereby is
deleted in its entirety and the following substituted therefor:
Make capital expenditures in Borrower's fiscal year
ending on March 31, 1998 which, in the aggregate, exceed
$500,000 and make capital expenditures in Borrower's fiscal
year ending on March 31, 1999 which, in the aggregate exceed
$250,000.
ARTICLE
3.
WAIVER
3.1. Lender hereby waives the following existing Events of
Default under the Loan Agreement:
a. Borrower's failure to comply with the Tangible Net
Worth covenant set forth in Section 10.1(A) of the Loan Agreement
for the fiscal year ending on March 31, 1997;
b. Borrower's failure to comply with the Pre-Tax Net
Income covenant set forth in Section 10.1(A) of the Loan
Agreement for the fiscal year ending on March 31, 1997;
c. Borrower's failure to comply with the capital
expenditure covenant set forth in Section 10.2(L) for the fiscal
year ending on March 31, 1997; and
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d. Borrower's failure to comply with the balance
sheet, profit and loss statement and cash flow projection
deliveries set forth in Section 10.1(E)(iii) for the fiscal year
ending on March 31, 1997.
Except as specified in this Article 3, Lender is not
waiving any rights under the Loan Agreement or under any
Ancillary Agreements. Borrower acknowledges that except to the
extent expressly modified in this Agreement, Lender's waiver
herein shall not be construed as a bar to or waiver of any such
right or remedy which Lender would otherwise have on any future
occasion, whether similar in kind or otherwise. The waivers set
forth in this Article 3 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 provisions of the Loan Agreement. The waivers
contained herein are specifically limited to the facts, time
periods and circumstances described herein.
ARTICLE
4.
REPRESENTATIONS AND WARRANTIES
4.1. Borrower hereby makes the following representations
and warranties to Lender, which representations and warranties
shall constitute the continuing covenants of Borrower and shall
remain true and correct until all of Borrower's Liabilities are
paid and performed in full:
a. The representations and warranties of Borrower
contained in the Loan Agreement are true and correct on and as of
the date hereof as though made on and as of such date;
b. Except as described hereinbefore, no Event of
Default or event which, but for the lapse of time or the giving
of notice, or both, would constitute an Event of Default under
the Loan Agreement has occurred and is continuing or would result
from the execution and delivery of this Amendment;
c. Except as described hereinbefore, Borrower is in
full compliance with all of the terms, conditions and all
provisions of the Loan Agreement and the other agreements;
d. This Amendment and all other agreements required
hereunder to be executed by Borrower and delivered to Lender,
have been duly authorized, executed and delivered on Borrower's
behalf pursuant to all requisite corporate authority and this
Amendment and each of the other agreements required hereunder to
be executed and delivered by Borrower to Lender constitute the
legal, valid and binding obligations of Borrower enforceable in
accordance with their terms, except as enforceability thereof may
be limited by bankruptcy, insolvency, reorganization, moratorium
or other similar laws relating to creditors' rights; and
e. Borrower hereby acknowledges and agrees that
Borrower has no defense, offset or counterclaim to the payment of
said principal, interest, fees or other liabilities and hereby
waives and relinquishes any such defense, offset or counterclaim
and Borrower hereby releases Lender and its respective officers,
directors, agents, affiliates, successors and assigns
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from any claim, demand or cause of action, known or unknown,
contingent or liquidated, which may exist or hereafter be known
to exist relating to any matter prior to the date hereof.
ARTICLE
5.
RATIFICATION
Except as expressly amended hereby, the Loan Agreement and
all other agreements executed in connection therewith shall
remain in full force and effect. The Loan Agreement, as amended
hereby, and all rights and powers created thereby and thereunder
or under such other agreements, are in all respects ratified and
confirmed. From and after the date hereof, the Loan Agreement
shall be deemed amended and modified as herein provided but,
except as so amended and modified, the Loan Agreement shall
continue in full force and effect and the Loan Agreement and this
Amendment shall be read, taken and construed as one and the same
instrument. On and after the date hereof, the term "Agreement"
as used in the Loan Agreement and all other references to the
Loan Agreement therein, in any other instrument, document or
writing executed by Borrower or any guarantor or furnished to
Lender by Borrower or any guarantor in connection therewith or
herewith shall mean the Loan Agreement as amended by this
Amendment.
ARTICLE
6.
MISCELLANEOUS
6.1. Borrower agrees to pay to Lender, contemporaneously
herewith, all out-of-pocket costs and expenses of Lender,
including without limitation, reasonable attorneys' fees, costs,
expenses incurred by Lender in connection with the negotiation,
preparation, execution and delivery of this Amendment and all
other matters pertaining hereto.
6.2. Borrower agrees to pay Lender, contemporaneously
herewith, an amendment fee in the amount of $5,000 in
consideration of Lender's agreements contained herein.
6.3. This Amendment may be signed in any number of
counterparts, each of which shall be deemed to be an original,
but all of which together shall constitute one and the same
instrument.
6.4. Except as otherwise specified herein, this Amendment
embodies the entire agreement and understanding between Lender
and Borrower with respect to the subject matter hereof and
supersedes all prior agreements, consents and understandings
relating to such subject matter.
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6.5. The headings in this Amendment have been inserted for
convenience only and shall be given no substantive meaning or
significance in construing the terms of this Amendment.
6.6. This Amendment shall inure to the benefit of Lender
and its successors and assigns and shall be binding upon and
inure to the successors and assigns of Borrower, except that
Borrower may not assign any of its rights in and to this
Amendment.
6.7. This Amendment may be executed in any number of
counterparts, each of which shall be deemed to be an original,
but all of which together shall constitute one in the same
document.
6.8. THIS 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 STATE
OF ILLINOIS, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES.
WHEREVER POSSIBLE, EACH PROVISION OF THIS AMENDMENT AND EACH
OTHER LOAN AGREEMENT AND/OR 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 PROVISIONS 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 AND/OR
ANCILLARY AGREEMENT. ALL OBLIGATIONS OF THE BORROWER, AND
RIGHTS OF THE LENDER AND OF ANY OTHER HOLDER OF ANY NOTE,
EXPRESSED HEREIN OR IN THE LOAN DOCUMENTS SHALL BE IN ADDITION TO
AND NOT IN LIMITATION OF THE THOSE PROVIDED BY APPLICABLE LAW.
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IN WITNESS WHEREOF, Borrower and Lender have caused this
Amendment to Loan and Security Agreement to be executed and
delivered in Chicago, Illinois as of the day and year written
above.
VALLEY COMMUNICATIONS, INC.
By: /s/ R. Scott Miswald
Assistant Secretary
SANWA BUSINESS CREDIT CORPORATION
By: /s/ G. M. Adams
First Vice President
6
SANWA BUSINESS CREDIT CORPORATION
One South Wacker Drive
Chicago, Illinois 60606
September 1, 1997
VIA FACSIMILE AND CERTIFIED MAIL
Mr. Michael Sonaco
President & CEO
C&L Communications, Inc.
12000 Network Blvd.
Suite 300
San Antonio, Texas 78249
Re: Waiver of Events of Default/Sanwa Business Credit Corporation
Loan Facility to C&L Communications, Inc.
Dear Mr. Sonaco:
Reference is made to that certain Loan and Security Agreement dated
as of January 2, 1996, as amended, by and between C&L
Communications, Inc. ("Borrower") and Sanwa Business Credit
Corporation ("SBCC"). You have advised us that there now exists
certain Events of Default under the Loan Agreement due to (i)
Borrower's failure to timely deliver to SBCC its year-end (March
31, 1997) audited financial statements in accordance with Section
10.1(E)(i) of the Loan Agreement and (ii) Borrower's failure to
deliver to SBCC the monthly Covenant Compliance Certificate in
accordance with Section 10.1(M) of the Loan Agreement for the
periods ending on April 30, 1997, May 31, 1997, June 30, 1997 and
July 31, 1997 (collectively, the "Events of Default").
SBCC hereby waives the Events of Default. SBCC's waiver of the
Events of Default shall in no way be deemed a waiver or forbearance
of any other default, whether now existing or hereafter arising or
any other Event of Default under the Loan Agreement or any
Ancillary Agreement.
Yours very truly,
/s/ Andrew Heinz
Vice President/Credit Manager
Collateral Lending Department
Sanwa Business Credit Corp.
cc: Mr. James Fiedler
The Diana Corporation
8200 West Brown Deer Road
Suite 200
Milwaukee, WI 53223
Mr. Kenneth Hunt, Esq.
Godfrey & Kahn, S.C.
780 North Water Street
Milwaukee, WI 53202
Mr. Bradley Schmarak, Esq.
Sachnoff & Weaver, Ltd.
30 South Wacker Drive
29th Floor
Chicago, Illinois 60606-7484
SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIS SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT
(together with all appendices, exhibits, schedules and
attachments hereto, collectively this "Amendment") is made and
entered into as of September 16, 1997, by and between VALLEY
COMMUNICATIONS, INC., a California corporation ("Borrower") and
SANWA BUSINESS CREDIT CORPORATION, a Delaware corporation
("Lender").
RECITALS
WHEREAS, Borrower and Lender entered into that certain Loan
and Security Agreement dated as of March 14, 1996, as amended
from time to time (the "Loan Agreement"), together with documents
ancillary thereto;
WHEREAS, there currently exists several Events of Default
pursuant to the Loan Agreement due to Borrower's failure to
comply with certain covenants, as more fully described herein;
WHEREAS, Borrower has requested and Lender has agreed to
waive certain Events of Default, as more fully described herein;
WHEREAS, Borrower has requested and Lender has agreed to
reset certain financial covenants, as more fully described
herein;
WHEREAS, Borrower and Lender wish to amend the Loan
Agreement to incorporate the aforesaid;
NOW THEREFORE, for and in consideration of the premises, the
mutual covenants hereinafter set forth and other good and
valuable consideration, the receipt and sufficiency of which the
parties hereby acknowledge, the parties hereby agree as follows:
ARTICLE
1.
RECITALS AND DEFINITIONS
1.1. Borrower represents and warrants that the foregoing
recitals are true and correct and constitute an integral part of
this Amendment and Borrower and Lender hereby agree that all of
the recitals of this Amendment are hereby incorporated herein and
made a part hereof.
1.2. Unless otherwise defined herein or the context
otherwise requires, all capitalized terms used herein shall have
the same meanings as ascribed to them in the Loan Agreement.
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ARTICLE
2.
AMENDMENT OF THE LOAN AGREEMENT
2.1. Section 10.1(A) of the Loan Agreement hereby is
deleted in its entirety and the following substituted therefor:
(i) Maintain a ratio of total liabilities to Tangible
Net Worth of not more than 5.00:1.0 during the period
commencing on April 1, 1997 and ending on March 31, 1998
("Borrower's 1998 Fiscal Year") and of not more than 4.0:1.0
for all time thereafter; (ii) maintain at all times Tangible
Net Worth at least equal to $1,350,000, to be adjusted for
any dividends paid to or for the benefit of the holder or
holders of Borrower's Stock, as permitted by Section
10.2(C); provided, however, that for all times during
Borrower's 1998 Fiscal Year, Tangible Net Worth (as
adjusted) shall be at least equal to $950,000; (iii)
maintain a ratio of Current Assets to Current Liabilities of
not less than 1.0:1.0 during Borrower's 1998 Fiscal Year and
of not less than 1.1:1.0 for all times thereafter; and (iv)
maintain Pre-Tax Net Income of not less than $350,000 at the
end of each fiscal year of Borrower; all as determined for
each of the foregoing financial covenants in accordance with
generally accepted accounting principles consistently
applied;
ARTICLE
3.
WAIVER
3.1. Lender hereby waives the following existing Events of
Default under the Loan Agreement:
a. Borrower's failure to comply with the Tangible Net
Worth covenant set forth in Section 10.1(A)(ii) of the Loan
Agreement for the period commencing as of June 30, 1997, and
ending as of the date hereof; and
b. Borrower's failure to timely comply with the
audited financial statement deliveries set forth in Section
10.1(E)(i) for the fiscal year ending on March 31, 1997;
provided, however that this waiver is conditioned upon Borrower
delivering such audited financial statements to Lender on or
before September 30, 1997.
Except as specified in this Article 3, Lender is not
waiving any rights under the Loan Agreement or under any
Ancillary Agreements. Borrower acknowledges that except to the
extent expressly modified in this Agreement, Lender's waiver
herein shall not be construed as a bar to or waiver of any such
right or remedy which Lender would otherwise have on any future
occasion, whether similar in kind or otherwise. The waivers set
forth in this Article 3 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 provisions of the
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<PAGE>
Loan Agreement. The waivers contained herein are specifically
limited to the facts, time periods and circumstances described
herein.
ARTICLE
4.
REPRESENTATIONS AND WARRANTIES
4.1. Borrower hereby makes the following representations
and warranties to Lender, which representations and warranties
shall constitute the continuing covenants of Borrower and shall
remain true and correct until all of Borrower's Liabilities are
paid and performed in full:
a. The representations and warranties of Borrower
contained in the Loan Agreement are true and correct on and as of
the date hereof as though made on and as of such date;
b. Except as described hereinbefore, no Event of
Default or event which, but for the lapse of time or the giving
of notice, or both, would constitute an Event of Default under
the Loan Agreement has occurred and is continuing or would result
from the execution and delivery of this Amendment;
c. Except as described hereinbefore, Borrower is in
full compliance with all of the terms, conditions and all
provisions of the Loan Agreement and the other agreements;
d. This Amendment and all other agreements required
hereunder to be executed by Borrower and delivered to Lender,
have been duly authorized, executed and delivered on Borrower's
behalf pursuant to all requisite corporate authority and this
Amendment and each of the other agreements required hereunder to
be executed and delivered by Borrower to Lender constitute the
legal, valid and binding obligations of Borrower enforceable in
accordance with their terms, except as enforceability thereof may
be limited by bankruptcy, insolvency, reorganization, moratorium
or other similar laws relating to creditors' rights; and
e. Borrower hereby acknowledges and agrees that
Borrower has no defense, offset or counterclaim to the payment of
said principal, interest, fees or other liabilities and hereby
waives and relinquishes any such defense, offset or counterclaim
and Borrower hereby releases Lender and its respective officers,
directors, agents, affiliates, successors and assigns from any
claim, demand or cause of action, known or unknown, contingent or
liquidated, which may exist or hereafter be known to exist
relating to any matter prior to the date hereof.
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<PAGE>
ARTICLE
5.
RATIFICATION
Except as expressly amended hereby, the Loan Agreement and
all other agreements executed in connection therewith shall
remain in full force and effect. The Loan Agreement, as amended
hereby, and all rights and powers created thereby and thereunder
or under such other agreements, are in all respects ratified and
confirmed. From and after the date hereof, the Loan Agreement
shall be deemed amended and modified as herein provided but,
except as so amended and modified, the Loan Agreement shall
continue in full force and effect and the Loan Agreement and this
Amendment shall be read, taken and construed as one and the same
instrument. On and after the date hereof, the term "Agreement"
as used in the Loan Agreement and all other references to the
Loan Agreement therein, in any other instrument, document or
writing executed by Borrower or any guarantor or furnished to
Lender by Borrower or any guarantor in connection therewith or
herewith shall mean the Loan Agreement as amended by this
Amendment.
ARTICLE
6.
MISCELLANEOUS
6.1. Borrower agrees to pay to Lender, contemporaneously
herewith, all out-of-pocket costs and expenses of Lender,
including without limitation, reasonable attorneys' fees, costs,
expenses incurred by Lender in connection with the negotiation,
preparation, execution and delivery of this Amendment and all
other matters pertaining hereto.
6.2. Borrower agrees to pay Lender, contemporaneously
herewith, an amendment fee in the amount of $2,500 in
consideration of Lender's agreements contained herein.
6.3. This Amendment may be signed in any number of
counterparts, each of which shall be deemed to be an original,
but all of which together shall constitute one and the same
instrument.
6.4. Except as otherwise specified herein, this Amendment
embodies the entire agreement and understanding between Lender
and Borrower with respect to the subject matter hereof and
supersedes all prior agreements, consents and understandings
relating to such subject matter.
6.5. The headings in this Amendment have been inserted for
convenience only and shall be given no substantive meaning or
significance in construing the terms of this Amendment.
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<PAGE>
6.6. This Amendment shall inure to the benefit of Lender
and its successors and assigns and shall be binding upon and
inure to the successors and assigns of Borrower, except that
Borrower may not assign any of its rights in and to this
Amendment.
6.7. This Amendment may be executed in any number of
counterparts, each of which shall be deemed to be an original,
but all of which together shall constitute one in the same
document.
6.8. THIS 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 STATE
OF ILLINOIS, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES.
WHEREVER POSSIBLE, EACH PROVISION OF THIS AMENDMENT AND EACH
OTHER LOAN AGREEMENT AND/OR 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 PROVISIONS 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 AND/OR
ANCILLARY AGREEMENT. ALL OBLIGATIONS OF THE BORROWER, AND
RIGHTS OF THE LENDER AND OF ANY OTHER HOLDER OF ANY NOTE,
EXPRESSED HEREIN OR IN THE LOAN DOCUMENTS SHALL BE IN ADDITION TO
AND NOT IN LIMITATION OF THE THOSE PROVIDED BY APPLICABLE LAW.
IN WITNESS WHEREOF, Borrower and Lender have caused this
Second Amendment to Loan and Security Agreement to be executed
and delivered in Chicago, Illinois as of the day and year written
above.
VALLEY COMMUNICATIONS, INC.
By: /s/ R. Scott Miswald
Assistant Secretary
SANWA BUSINESS CREDIT CORPORATION
By: /s/ Andrew J. Heinz
Vice President
5
STOCK AND WARRANT PURCHASE AGREEMENT
THIS STOCK AND WARRANT PURCHASE AGREEMENT is made this 6th day
of June, 1997 by and between The Diana Corporation ("Diana") and
the person identified as "Buyer" on the signature page hereof
("Buyer").
1. Purchase and Sale of Stock. Buyer hereby purchases, and
Diana hereby sells and issues to Buyer, 175,000 shares of common
stock, $1.00 par value, of Diana (the "Purchased Stock"), and a
warrant (the "Warrant") to purchase 175,000 shares of common stock
(the "Warrant Stock") for an aggregate purchase price of $350,000
(the "Purchase Price"). The Warrant is being executed
contemporaneously herewith. Diana represents that each of the
Purchased Stock and the Warrant Stock has been duly authorized for
issuance and, upon issuance of the Purchased Stock in accordance
herewith against payment of the Purchase Price, and upon issuance
of the Warrant Stock against payment of the exercise price of the
Warrant, will be validly issued, fully paid and nonassessable.
2. Investment Representations and Covenants. (a) Buyer
represents that it is an "accredited investor" within the meaning
of Rule 501(a) under the Securities Act of 1933, as amended (the
"Securities Act"), and is a financially sophisticated financial or
institutional investor that purchases equity securities in the
ordinary course of business. Buyer is acquiring the Purchased
Stock for investment purposes only, for its own account, and not
with a view to the distribution thereof, other than pursuant to
Rule 144 under the Securities Act or other exemption from or
registration under the Securities Act. Buyer understands that the
offer and sale of the Purchased Stock and Warrant to Buyer have not
been registered under the Securities Act or under state securities
laws and, accordingly, may not be transferred unless so registered
or exemptions from such registration are available.
(b) Buyer has reviewed Diana's most recent Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K filed
since the date of the Form 10-K, and Diana's 1996 Annual Report to
Stockholders and Proxy Statement. Buyer understands that an
investment in the Purchased Stock is speculative and involves a
high degree of risk. At this time, Diana is experiencing a severe
liquidity deficiency.
(c) Diana shall promptly deliver to Buyer a certificate
representing the Purchased Stock. The certificates representing
the Purchased Stock shall (unless registered under the Securities
Act and applicable state securities laws) have a legend in
substantially the following form:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY
NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT (A)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH LAWS OR
(B) THE HOLDER HEREOF FURNISHES AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE DIANA CORPORATION TO THE EFFECT THAT AN
EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE.
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(d) Buyer (if not James Fiedler) acknowledges and agrees that
it is requiring that James Fiedler also purchase Common Stock and
warrants of Diana on the same terms and conditions set forth
herein.
3. Miscellaneous. (a) This Agreement constitutes the entire
agreement between the parties and all prior agreements, discussions
and understandings of the parties are merged and made a part of
this Agreement.
(b) This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of
the which shall constitute one and the same instrument.
(c) Any notice required or permitted to be given or made by
either party to the other hereunder shall be deemed delivered if
hand delivered, five days after being mailed postage prepaid, one
business day after being sent prepaid by overnight courier or
delivery service, or after being sent by facsimile transmission and
received by receiving equipment to the parties at their respective
addresses set forth opposite the signatures hereto or to such
changed address as either party shall designate by proper notice to
the other.
(d) This Agreement shall be governed by and construed in
accordance with the laws of Delaware without regard to the
principles of conflicts of law thereunder.
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IN WITNESS WHEREOF, the undersigned have executed this
Agreement as of the date first above written.
Address for Notice:
THE DIANA CORPORATION
26025 Mureau Road
Calabasas, California 91302
Fax No. (818) 878-7633 By: /s/ Daniel W. Latham
President and Chief
Operating Officer
Address for Notice: BUYER
24905 Ariella Drive James J. Fiedler
Calabasas, California 91302
By: /s/ James J. Fiedler
Fax No. (818) 225-8746
3
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
RELATED THERETO OR AN OPINION OF COUNSEL, REASONABLY SATISFACTORY
TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE
SECURITIES ACT OF 1933.
No. B-1 WARRANT 175,000 Shares
To Purchase Shares of Common Stock of
The Diana Corporation
THIS CERTIFIES that, for value received, James J. Fiedler is
entitled, upon the terms and subject to the conditions hereinafter
set forth, to purchase from The Diana Corporation, a Delaware
corporation (the "Company"), that number of fully paid and
nonassessable shares of the Company's Common Stock, $1.00 par value
(the "Common Stock") at the purchase price per share as set forth
in Section 1 below ("Exercise Price"). The number of shares and
Exercise Price are subject to adjustment as provided in Section 10
hereof.
1. Number of Shares; Exercise Price; Term.
(a) Subject to adjustments as provided herein, this
Warrant is exercisable for 175,000 shares of Common Stock, at a
purchase price of $3.00 per share.
(b) Subject to the terms and conditions set forth
herein, this Warrant shall be exercisable during the term
commencing on the date hereof and ending on the fifth anniversary
of the date hereof and shall be void thereafter.
2. Title to Warrant. This Warrant and all rights hereunder
may be transferred, in whole or in part, by the Warrant holder to
any affiliate at any time without the written consent of the
Company, but may not be transferred to any third party without the
prior written consent of the Company, which will not be
unreasonably withheld. Transfers shall occur at the office or
agency of the Company by the holder hereof in person or by duly
authorized attorney, upon surrender of this Warrant together with
the Assignment Form annexed hereto properly endorsed.
3. Exercise of Warrant. The purchase rights represented by
this Warrant are exercisable by the registered holder hereof, in
whole or in part, at any time, or from time to time, during the
term hereof as described in Section 1 above, by the surrender of
this Warrant and the Notice of Exercise annexed hereto duly
completed and executed on behalf of the holder hereof, at the
office of the Company in Calabasas, California (or such other
office or agency of the Company as it may designate by notice in
writing to the registered holder hereof at the address of such
holder appearing on the books of the Company), upon payment in cash
or check acceptable
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to the Company of the purchase price of the shares thereby
purchased whereupon the holder of this Warrant shall be entitled to
receive a certificate for the number of shares so purchased and, if
this Warrant is exercised in part, a new Warrant for the
unexercised portion of this Warrant. The Company agrees that, upon
exercise of this Warrant in accordance with the terms hereof the
shares so purchased shall be deemed to be issued to such holder as
the record owner of such shares as of the close of business on the
date on which this Warrant shall have been exercised. Certificates
for shares purchased hereunder and, on partial exercise of this
Warrant, a new Warrant for the unexercised portion of this Warrant
shall be delivered to the holder hereof as promptly as practicable
after the date on which this Warrant shall have been exercised.
The Company covenants that all shares which may be issued upon
the exercise of rights represented by this Warrant will, upon
exercise of the rights represented by this Warrant and payment of
the Exercise Price, be fully paid and nonassessable and free from
all taxes, liens and charges in respect of the issue thereof (other
than taxes in respect of any transfer occurring contemporaneously
or otherwise specified herein).
4. No Fractional Shares or Scrip. No fractional shares or
scrip representing fractional shares shall be issued upon the
exercise of this Warrant. In lieu of any fractional share to which
such holder would otherwise be entitled, such holder shall be
entitled, at its option, to receive either (i) a cash payment equal
to the excess of fair market value for such fractional share above
the Exercise Price for such fractional share (as mutually
determined by the Company and the holder) or (ii) a whole share if
the holder tenders the Exercise Price for one whole share.
5. Charges, Taxes and Expenses. Issuance of certificates
for shares upon the exercise of this Warrant shall be made without
charge to the holder hereof for any issue or transfer tax or other
incidental expense in respect of the issuance of such certificates,
all of which taxes and expenses shall be paid by the Company, and
such certificates shall be issued in the name of the holder of this
Warrant or in such name or names as may be directed by the holder
of this Warrant (with the prior written consent of the Company,
which will not be unreasonably withheld); provided, however, that
in the event certificates for shares are to be issued in a name
other than the name of the holder of this Warrant, this Warrant
when surrendered for exercise shall be accompanied by an assignment
document in form and substance satisfactory to the Company duly
executed by the holder hereof and the Notice of Exercise duly
completed and executed and stating in whose name and certificates
are to be issued; and provided further, that such assignment shall
be subject to applicable laws and regulations. Upon any transfer
involved in the issuance or delivery of any certificates for shares
of the Company's securities, the Company may require, as a
condition thereto, the payment of a sum sufficient to reimburse it
for any transfer tax incidental thereto.
6. No Rights as Shareholders. This Warrant does not entitle
the holder hereof to any voting rights or other rights as a
shareholder of the Company prior to the exercise hereof.
7. Exchange and Registry of Warrant. The Company shall
maintain a registry showing the name and address of the registered
holder of this Warrant. This Warrant may be surrendered for
exchange, transfer or exercise, in accordance with its terms, at
the office of the
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Company, and the Company shall be entitled to rely in all respects,
prior to written notice to the contrary, upon such registry.
8. Loss, Theft, Destruction or Mutilation of Warrant. Upon
receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of this Warrant, and in
case of loss, theft or destruction, of indemnity or security
reasonably satisfactory to it, and upon reimbursement to the
Company of all reasonable expenses incidental thereto, and upon
surrender and cancellation of this Warrant, if mutilated, the
Company will make and deliver a new Warrant of like tenor and dated
as of such cancellation, in lieu of this Warrant.
9. Saturdays, Sundays, Holidays, etc. If the last or
appointed day for the taking of any action or the expiration of any
right required or granted herein shall be a Saturday or a Sunday or
shall be a legal holiday, then such action may be taken or such
right may be exercised on the next succeeding day not a Saturday or
a Sunday or a legal holiday.
10. Adjustments and Termination of Rights. The purchase
price per share and the number of shares purchasable hereunder are
subject to adjustment from time to time as follows:
(a) Merger. If at any time there shall be a merger or
consolidation of the Company with or into another corporation when
the Company is not the surviving corporation, then, as part of such
merger or consolidation, lawful provision shall be made so that the
holder of this Warrant shall thereafter be entitled to receive upon
exercise of this Warrant, during the period specified herein and
upon payment of the aggregate Exercise Price then in effect, the
number of shares of stock or other securities or property of the
successor corporation resulting from such merger or consolidation,
to which a holder of the stock deliverable upon exercise of this
Warrant would have been entitled in such merger or consolidation if
this Warrant had been exercised immediately before such merger or
consolidation. In any such case, appropriate adjustment shall be
made in the application of the provisions of this Warrant with
respect to the rights and interests of the holder after the merger
or consolidation.
(b) Reclassification, etc. If the Company at any time
shall, by subdivision, combination or reclassification of
securities or otherwise, change any of the securities as to which
purchase rights under this Warrant exist into the same or a
different number of securities of any other class or classes, this
Warrant shall thereafter represent the right to acquire such number
and kind of securities as would have been issuable as the result of
such change with respect to the securities which were subject to
the purchase rights under this Warrant immediately prior to such
subdivision, combination, reclassification or other change.
(c) Split, Subdivision or Combination of Shares. If the
Company at any time while this Warrant remains outstanding and
unexpired shall split, subdivide or combine the Common Stock as to
which purchase rights under this Warrant exist, the Exercise Price
shall be proportionately decreased in the case of a split or
subdivision or proportionately increased in the case of a
combination.
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(d) Common Stock Dividends. If the Company at any time
while this Warrant is outstanding and unexpired shall pay a
dividend with respect to Common Stock payable in, or make any other
distribution with respect to Common Stock of, shares of Common
Stock, then the Exercise Price shall be adjusted, from and after
the date of determination of the shareholders entitled to receive
such dividend or distribution, to that price determined by
multiplying the Exercise Price in effect immediately prior to such
date of determination by a fraction (i) the numerator of which
shall be the total number of shares of Common Stock outstanding
immediately prior to such dividend or distribution, and (ii) the
denominator of which shall be the total number of shares of the
Common Stock outstanding immediately after such dividend or
distribution.
(e) Other Dividends. If the Company at any time while
this Warrant is outstanding and unexpired shall pay a dividend
(other than dividends out of retained earnings), or make any other
distribution with respect to Common Stock payable in stock (other
than Common Stock) or other securities or property, then the
Company may, at its option, either (i) decrease the per share
Exercise Price of this Warrant by an appropriate amount based upon
the value distributed on each share of Common Stock as determined
in good faith by the Company's Board of Directors or (ii) provide
by resolution of the Company's Board of Directors that on exercise
of this Warrant, the holder hereof shall receive, in addition to
the shares of Common Stock otherwise receivable on exercise hereof,
the same number and kind of stock, other securities and property
which such holder would have received had the holder held the
shares of Common Stock receivable on exercise hereof on and before
the record date for such dividend or distribution.
(f) Adjustment of Number of Shares. Upon each
adjustment in the Exercise Price pursuant to 10(c) or 10(d) above,
the number of shares of Common Stock purchasable hereunder shall be
adjusted, to the nearest whole share, to the product obtained by
multiplying the number of shares purchasable immediately prior to
such adjustment in the Exercise Price by a fraction (i) the
numerator of which shall be the Exercise Price immediately prior to
such adjustment, and (ii) the denominator of which shall be the
Exercise Price immediately after such adjustment.
11. Notice of Adjustments; Notices. Whenever the Exercise
Price or number of shares purchasable hereunder shall be adjusted
pursuant to Section 10 hereof, the Company shall (within twenty
days) issue a certificate signed by its Chief Executive Officer
setting forth, in reasonable detail, the event requiring the
adjustment, the amount of the adjustment, the method by which such
adjustment was calculated and the Exercise Price and number of
shares purchasable hereunder after giving effect to such
adjustment, and shall cause a copy of such certificate to be mailed
(by first class mail, postage prepaid) to the holder of this
Warrant. The Company shall notify the holder of this Warrant at
least twenty days prior to the date of any transaction referred to
in Section 10(a) or (b) or of the sale of all or substantially all
the assets of the Company.
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12. Miscellaneous.
(a) Governing Law. This Warrant shall be binding upon
any successors or assigns of the Company. This Warrant shall
constitute a contract under the laws of Delaware and for all
purposes shall be construed in accordance with and governed by the
laws of said state, without giving effect to the conflict of laws
principles.
(b) Restrictions. THESE SECURITIES HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF
COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933.
(c) Amendments. This Warrant may be amended and the
observance of any term of this Warrant may be waived only with the
written consent of the Company and the holders hereof.
(d) Notice. Any notice required or permitted hereunder
shall be deemed effectively given upon personal delivery to the
party to be notified or three business days after deposit with the
United States Post Office, by certified mail, postage prepaid and
addressed to the party to be notified at the address indicated
below for the Company, or at the address for a holder set forth in
the registry maintained by the Company pursuant to Section 7, such
party, or at such other address as such other party may designate
by ten-day advance written notice.
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IN WITNESS WHEREOF, The Diana Corporation has caused this
Warrant to be executed by its officer thereunto duly authorized.
Dated: June 6, 1997
THE DIANA CORPORATION
By: /s/ Daniel W. Latham, President
and Chief Operating Officer
Address: 26025 Mureau Road
Calabasas, California 91302
Acknowledged and Agreed:
By: /s/ James J. Fiedler
Name: James J. Fiedler
Title:
Address: 24905 Ariella Drive
Calabasas, CA 91302
6
REGISTRATION RIGHTS AGREEMENT
AGREEMENT made as of the 6th day of June, 1997, by and among
The Diana Corporation, a Delaware corporation (the "Company"), and
the undersigned original holder of a portion of the Purchased Stock
(as defined below) and Warrants (as defined below).
W I T N E S S E T H:
WHEREAS, on this date, the Company has issued 175,000 shares
of Common Stock (the "Purchased Stock") and warrants (the
"Warrants) to purchase an aggregate of 350,000 shares of Common
Stock;
NOW, THEREFORE, in consideration of the mutual covenants
herein contained and other valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, the parties
hereto hereby agree as follows:
1. Definitions. The following terms shall be used in this
Agreement with the following respective meanings:
"Affiliate" means (i) any Person directly or indirectly
controlling, controlled by or under common control with another
Person; (ii) any Person owning or controlling ten percent or more
of the outstanding voting securities of such other Person; (iii)
any officer, director or partner of such Person; and (iv) if such
Person is an officer, director or partner, any such company for
which such Person acts in such capacity.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's Common Stock, $1.00 par
value per share.
"Exchange Act" means the Securities Exchange Act of 1934, or
any successor Federal statute, and the rules and regulations of
the Commission (or of any other Federal agency then administering
the Exchange Act) thereunder, all as the same shall be in effect
at the time.
"Holder" means any holder of Registrable Stock.
"NASD" means the National Association of Securities Dealers,
Inc.
"Person" means any natural person, partnership, corporation
or other legal entity.
"Registrable Stock" means (a) the Purchased Stock, (b) the
Common Stock issued or issuable upon exercise of the Warrants,
and (c) any other shares of Common Stock issued in respect of
such shares by way of a stock dividend, or stock split or in
connection with a
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combination of shares, recapitalization, merger, consolidation,
share exchange or reorganization; provided, however, Common Stock
will cease to be Registrable Stock (i) following sale thereof
pursuant to a Registration Statement or (ii) two years or more
have elapsed since exercise or expiration of all of the Warrants.
"Registration Statement" means a registration statement
filed by the Company with the Commission for a public offering
and sale of securities of the Company (other than a registration
statement on Form S-8, Form S-4, or successor form).
"Securities Act" means the Securities Act of 1933, or any
successor Federal statute, and the rules and regulations of the
Commission (or of any other Federal agency then administering the
Securities Act) thereunder, all as the same shall be in effect at
the time.
2. Required Registration. (a) The Holder or Holders of at
least fifty percent of all Registrable Stock may by notice in
writing to the Company request the Company to register under the
Securities Act all or any portion of shares of Registrable Stock
held by or issuable to such requesting Holder or Holders for sale
in connection with nonunderwritten open market or privately
negotiated transactions. Notwithstanding anything to the
contrary contained herein, the Company shall not be required to
seek to cause a Registration Statement to become effective
pursuant to this Section 2: (A) within 120 days after the
effective date of a Registration Statement filed by the Company,
provided that the Company shall use its best efforts to achieve
effectiveness of a registration requested hereunder promptly
following such 120-day period if such request is made during such
120-day period; (B) if the Company shall furnish to holders a
certificate signed by the chief executive officer of the Company
stating that in the good faith judgment of the Company it would
be seriously detrimental to the Company or its shareholders for a
registration statement to be filed in the near future due to
pending Company events, or that it would require disclosure of
material non-public information relating to the Company which, in
the reasonable opinion of the Company, should not be disclosed,
then the Company's obligation to comply with this Section 2 shall
be deferred for a period not to exceed ninety (90) days from the
date of receipt of written request from such Holders.
(b) Following receipt of any notice given under this
Section 2 by Holders of Registrable Stock, the Company shall
promptly notify all Holders from whom notice has not been
received that such registration is to be effected and shall use
its reasonable best efforts to register under the Securities Act
the number of shares of Registrable Stock specified in such
notice (and in all notices received by the Company from other
Holders within twenty (20) days after the giving of such notice
by the Company to such other Holders). The Company shall be
obligated to register Registrable Stock pursuant to this Section
2 on one occasion only.
3. Registration Procedures. If and whenever the Company is
required by the provisions of Section 2 hereof to effect the
registration of shares of Registrable Stock under the Securities
Act, the Company will, at the expense of the Company, as
expeditiously as reasonably possible:
(a) In accordance with the Securities Act and the
rules and regulations of the Commission, prepare and file
with the Commission a Registration Statement with respect
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to such securities and use its reasonable best efforts to
cause such Registration Statement to become and remain
effective until the securities covered by such Registration
Statement have been sold, and prepare and file with the
Commission such amendments to such Registration Statement
(and use its reasonable best efforts to cause post-effective
amendments to become and remain effective) and supplements
to the prospectus contained therein as may be necessary to
keep such Registration Statement effective and such
Registration Statement and prospectus accurate and complete
until the Registrable Stock covered by such Registration
Statement has been sold or the securities are no longer
Registrable Stock;
(b) Furnish to the participating Holders such
reasonable number of copies of the Registration Statement
(including all exhibits thereto), preliminary prospectus,
final prospectus and such other documents as such
participating Holders may reasonably request in order to
facilitate the public offering of such securities;
(c) Use its reasonable best efforts to register or
qualify the securities covered by such Registration
Statement under such state securities or blue sky laws of
such jurisdictions (i) as shall be reasonably appropriate
for the distribution of the securities covered by such
Registration Statement or (ii) as such participating Holders
may reasonably request within twenty (20) days following the
original filing of such Registration Statement, except that
the Company shall not for any purpose be required to execute
a general consent to service of process, to subject itself
to taxation, or to qualify to do business as a foreign
corporation in any jurisdiction where it is not so
qualified;
(d) Notify the Holders participating in such
registration, promptly after it shall receive notice
thereof, of the date and time when such Registration
Statement and each post-effective amendment thereto has
become effective or a supplement to any prospectus forming a
part of such Registration Statement has been filed;
(e) Notify the Holders participating in such
registration promptly of any request by the Commission or
any state securities commission or agency for the amending
or supplementing of such Registration Statement or
prospectus or for additional information;
(f) Prepare and file within thirty days with the
Commission, and immediately notify such participating
Holders of the need to file and of the filing of, such
amendments or supplements to such Registration Statement or
prospectus as may be necessary to correct any statements or
omissions if, at the time when a prospectus relating to such
securities is required to be delivered under the Securities
Act, any event has occurred as the result of which any such
prospectus or any other prospectus as then in effect would
include an untrue statement of a material fact or omit to
state any material fact required to be stated therein or
necessary to make the statements therein not misleading;
(g) In case any of such participating Holders or any
underwriter for any such Holders is required to deliver a
prospectus at a time when the prospectus then in
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circulation is not in compliance with the Securities Act or
the rules and regulations of the Commission, prepare
promptly upon request such amendments or supplements to such
Registration Statement and such prospectus as may be
necessary in order for such prospectus to comply with the
requirements of the Securities Act and such rules and
regulations;
(h) Advise such participating Holders, promptly after
it shall receive notice or obtain knowledge thereof, of the
issuance of any stop order by the Commission or any state
securities commission or agency suspending the effectiveness
of such Registration Statement or the initiation or
threatening of any proceeding for that purpose and promptly
use reasonable best efforts to prevent the issuance of any
stop order or to obtain its withdrawal if such stop order
should be issued; and
(i) Use its reasonable best efforts to comply with all
applicable rules and regulations of the Commission and shall
make generally available as soon as practicable after the
effective date of the applicable Registration Statement an
earnings statement satisfying the provisions of Section
11(a) of the Securities Act.
4. Expenses.
(a) With respect to each registration effected
pursuant to Section 2 hereof, all fees, costs and expenses
of the Company incidental to such registration in connection
therewith shall be borne by the Company.
(b) The fees, costs and expenses of registration to be
borne as provided in paragraph (a) above, shall include,
without limitation, all registration, filing fees, printing
expenses, fees and disbursements of counsel and accountants
for the Company, and all legal fees and disbursements and
other expenses of complying with state securities or blue
sky laws of any jurisdictions in which the securities to be
offered are to be registered or qualified. The Holders
shall bear all of their own expenses, including without
limitation, brokerage expenses and their own usual and
customary legal fees and expenses.
5. Indemnification and Contribution.
(a) The Company will indemnify and hold harmless each
Holder of shares of Registrable Stock which are included in
a Registration Statement pursuant to the provisions of this
Agreement, the directors, officers, employees and agents of
such Holder, and any Person who controls such Holder within
the meaning of the Securities Act or the Exchange Act, and
each of their successors, from and against any and all
claims, actions, demands, losses, expenses, damages or
liabilities, joint or several, to which they or any of them
may become subject under the Securities Act, the Exchange
Act or other federal or state statutory law or regulation,
at common law or otherwise, insofar as such claims, actions,
demands, losses, expenses, damages or liabilities arise out
of or are based upon any untrue statement or alleged untrue
statement of any material fact
4
<PAGE>
contained in such Registration Statement (including all
documents incorporated therein by reference) as originally
filed or in any amendment thereto, any preliminary or final
prospectus contained therein or any amendment or supplement
thereto, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements
therein not misleading; provided, however, that the Company
will not be liable in any such case to the extent that any
such claim, action, demand, loss, expense, damage, or
liability arises out of or is based upon an untrue statement
or alleged untrue statement or omission or alleged omission
so made in reliance upon and in conformity with information
furnished in writing by such Holder for use in the
preparation thereof; provided, further, that the foregoing
indemnity shall not inure to the benefit of any Holder and
the officers, directors, agents, employees of the Holder,
and each Person who controls the Holder, if the Holder shall
have sold Registrable Stock in violation of Section 6
hereof.
(b) Each Holder of shares of the Registrable Stock
which are included in a registration pursuant to the
provisions of this Agreement will, severally and not
jointly, indemnify and hold harmless the Company, the
directors, officers, employees and agents of the Company and
any person who controls the Company within the meaning of
the Securities Act or the Exchange Act from and against any
and all claims, actions, demands, losses, expenses, damages
or liabilities, joint or several, to which they or any of
them may become subject under the Securities Act, the
Exchange Act or other federal or state statutory law or
regulation, at common law or otherwise, insofar as such
claims, actions, demands, losses, expenses, damages or
liabilities arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact
contained in such Registration Statement (including all
documents incorporated therein by reference) as originally
filed or in any amendment thereto, any preliminary or final
prospectus contained therein or any amendment or supplement
thereto, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only
to the extent that such untrue statement or alleged untrue
statement or omission or alleged omission was so made in
reliance upon and in conformity with information furnished
in writing by such Holder for use in the preparation
thereof.
(c) Promptly after receipt by a party to be
indemnified pursuant to the provisions of paragraph (a) or
(b) of this Section 5 (an "indemnified party") of notice of
the commencement of any action involving the subject matter
of the foregoing indemnity provisions, such indemnified
party will, if a claim thereof is to be made against the
indemnifying party pursuant to the provisions of paragraph
(a) or (b), notify the indemnifying party of the
commencement thereof; but the omission so to notify the
indemnifying party will not relieve it from any liability
which it may have to an indemnified party otherwise than
under this Section 5 and shall not relieve the indemnifying
party from liability under this Section 5 unless such
indemnifying party is prejudiced by such omission. The
indemnifying party shall be entitled to appoint counsel of
the indemnifying party's choice at the indemnifying party's
expense to represent the indemnified party in any action for
which indemnification is sought (in which case the
5
<PAGE>
indemnifying party shall not be responsible for the fees and
expenses of any separate counsel retained by the indemnified
party or parties except as set forth below); provided,
however, that such counsel shall be reasonably satisfactory
to the indemnified party. Notwithstanding the indemnifying
party's election to appoint counsel to represent the
indemnified party in an action, the indemnified party shall
have the right to employ separate counsel, and the
indemnifying party shall bear the reasonable fees, costs and
expenses of such separate counsel if (i) the use of counsel
chosen by the indemnifying party to represent the
indemnified party would present such counsel with a conflict
of interest that would make such representation
inappropriate in the circumstances, (ii) the indemnifying
party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within
a reasonable time after notice of the institution of such
action or (iii) the indemnifying party shall authorize the
indemnified party to employ separate counsel at the expense
of the indemnifying party. An indemnifying party will not,
without the prior written consent of the indemnified
parties, settle or compromise or consent to the entry of any
judgment with respect to any pending or threatened claim,
action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder
unless such settlement, compromise or consent includes an
unconditional release of each indemnified party from all
liability arising out of such claim, action, suit or
proceeding.
(d) In order to provide for just and equitable
contribution to joint liability under the Securities Act in
any case in which either (i) any Holder exercising rights
under this Agreement, or any controlling Person of any such
Holder, makes a claim for indemnification pursuant to this
Section 5 but it is judicially determined (by the entry of a
final judgment or decree by a court of competent
jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such
indemnification may not be enforced in such case
notwithstanding the fact that this Section 5 provides for
indemnification is such case, or (ii) contribution under the
Securities Act may be required on the part of any such
selling Holder or any such controlling Person in
circumstances for which indemnification is provided under
this Section 5; then, and in each such case, the Company and
such Holder will contribute to the aggregate losses, claims,
damages or liabilities to which they may be subject
(including legal and other expenses reasonably incurred in
connection with or defending same) in such proportion as is
appropriate to reflect the relative fault of the
indemnifying party, on the one hand, and the indemnified
party, on the other. Relative fault shall be determined by
reference to whether any alleged untrue statement or
omission relates to information provided by the indemnifying
party, on the one hand, or by the indemnified party, on the
other hand. The parties agree that it would not be just and
equitable if contribution were determined by pro rata
allocation or any other method of allocation which does not
take account of the equitable considerations referred to
above. Notwithstanding the provisions of this paragraph
(d), no person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
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(e) The provisions of this Section 5 will remain in
full force and effect, regardless of any investigation made
by or on behalf of any Holder or the Company or any of the
officers, directors, employees or agents or controlling
persons referred to in Section 5 hereof, and will survive
the sale by a Holder of securities covered by a Registration
Statement.
(f) The liability of a Holder under this Section 5
shall not exceed an amount equal to the net proceeds
received by a Holder from the sale of Registrable Stock.
6. Holder Cooperation. Prior to any offers or sales under
the Registration Statement, each Holder agrees to obtain prior
confirmation from the Company that no "Blackout Condition"
exists. The Company shall provide such confirmation (if true)
within one business day of the request from a Holder. "Blackout
Condition" means (i) the existence of material, nonpublic
information, (ii) the unavailability of any required financial
information as the result of an actual or proposed acquisition or
disposition, or (iii) the existence of any financing or other
transaction, event or condition which would make it
disadvantageous, in the Company's reasonable opinion, for
Registrable Stock to be sold under the Registration Statement.
In connection with the registration and sale of the Registrable
Stock, each Holder will (i) cooperate with the Company in
preparing the Registration Statement and provide the Company with
all information, documents and agreements that the Company may
deem reasonably necessary, (ii) discontinue offers and sales of
the Registrable Stock under the Registration Statement upon
notification of a Blackout Condition or of any stop order or
suspension of effectiveness of the Registration Statement, (iii)
discontinue use of any prospectus following notice by the Company
that the prospectus must be amended or supplemented (iv) only use
the most recent prospectus included in the Registration
Statement, (v) upon presentation of the stock certificate
representing any Registrable Stock sold under the Registration
Statement, certify that the sale was made in accordance with the
terms hereof and the plan of distribution described in the
Registration Statement, and (vi) comply with applicable federal
and state securities laws including without limitation the
prospectus delivery requirements under the Securities Act and the
applicable requirements of Rule 10b-5 and Regulation M under the
Exchange Act.
7. Notices. Any notice required or permitted to be given
hereunder shall be in writing and shall be deemed to be properly
given when sent by registered or certified mail, return receipt
requested, by Federal Express, DHL or other guaranteed overnight
delivery service or by facsimile transmission, addressed as
follows:
If to the Company: The Diana Corporation
26025 Mureau Road
Calabasas, California 91302
Telecopy: (818) 878-7633
Attention: Daniel W. Latham
If to a Holder: at the address set forth on the
signature page hereof
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and if to any other Holder at such Holder's address for notice as
set forth in the register maintained by the Company, or, as to
any of the foregoing, to such other address as any such party may
give the others notice of pursuant to this Section, provided that
a change of address shall only be effective upon receipt.
8. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware.
9. Waivers; Amendments. No waiver of any right hereunder
by any party shall operate as a waiver of any other right, or of
the same right with respect to any subsequent occasion for its
exercise. This Agreement may not be amended except by a writing
executed by the Company and the Holders of at least two-thirds of
the Registrable Stock.
10. Successors and Assigns. This Agreement shall be
binding upon and shall inure to the benefit of the respective
legal representatives, successors and assigns of the parties
hereto. A Holder may assign its rights hereunder in connection
with an assignment of a Warrant or Registrable Stock, provided
the disposition covers at least 50,000 shares of Common Stock and
the transferee agrees in writing to the terms hereof.
11. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but
all of which together shall constitute one and the same
instrument.
12. Prior Understandings. This Agreement represents the
complete agreement of the parties with respect to the
transactions contemplated hereby and supersedes all prior
agreements and understandings.
13. Headings. Headings in this Agreement are included for
reference only and shall have no effect upon the construction or
interpretation of any part of this Agreement.
14. Severability. If any provision of this Agreement shall
be held to be illegal, invalid or unenforceable, such illegality,
invalidity or unenforceability shall attach only to such
provision and shall not in any manner affect or render illegal,
invalid or unenforceable any other provision of this Agreement,
and this Agreement shall be carried out as if any such illegal,
invalid or unenforceable provision were not contained herein.
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IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above recited.
THE DIANA CORPORATION
By: /s/ Daniel W. Latham, President
and Chief Operating Officer
By: /s/ James J. Fiedler
Address: 24905 Ariella Drive
Calabasas, CA 91302
Telecopy: (818) 225-8746
9
EMPLOYMENT AGREEMENT
THIS AGREEMENT, is made as of September 4, 1997, provided that the
employment hereunder shall be deemed to have commenced on April 1,
1997, by and between THE DIANA CORPORATION, a Delaware Corporation
(the "Company"), and JAMES J. FIEDLER (the "Executive").
R E C I T A L S
WHEREAS, Executive is willing to be employed by Company, and the
Company is willing to employ the Executive, upon the terms and
conditions set forth in this Agreement.
NOW, THEREFORE, in order to set forth the terms and conditions of
Executive's employment with Company and in consideration of the
covenants and agreements of the parties herein contained, the
receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
1.Employment Services. Subject to the terms and upon the
conditions hereinafter set forth, the Company hereby employs
Executive as Chairman and Chief Executive Officer.
Executive accepts such employment and agrees to devote his
full time and use his best efforts to perform his duties
pursuant to this Agreement and to further the business of
the Company. Executive shall not, without the prior written
consent of the Company as authorized by the Company's Board
of Directors ("Board of Directors"), engage directly or
indirectly in any other business or occupation during his
employment under this Agreement.
2.Term and Termination.
2.1Term. Subject to Section 2.2 hereof, the employment of
Executive under this Agreement shall be deemed to have
commenced on April 1, 1997 and will continue until the
occurrence of the first of the following:
a) March 31, 1998 (i.e. a term of one year);
b) Executive's death; or
c) Executive's illness, physical or mental disability
or other incapacity resulting in Executive's
inability to effectively perform the essential
functions of his job, with or without reasonable
accommodation, for a cumulative period of twelve
(12) weeks during any period of twelve (12)
consecutive months.
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The term of this Agreement may only be extended by the
written agreement of both the Company (as approved by the
Board of Directors) and the Executive, as provided in
Section 11.1.
2.2Termination. The employment of Executive under this
Agreement may also be terminated at the option of the Board
of Directors upon the occurrence of any of the following:
a) Executive's conduct involving fraud or moral
turpitude or Executive's dishonesty involving
Company's business,
b) Executive's chronic absence from work other than
by reason of illness or injury,
c) Executive's conviction of any felony,
d) Executive's conviction of any misdemeanor which is
substantially related to Executive's services
hereunder,
e) Executive's continuing use of illegal drugs or
other illegal substance (whether or not on the
job) after receiving a written notice from the
Company to halt such usage or Executive's
conviction of a crime involving illegal drugs or
other illegal substance,
f) Executive's continuing use of alcohol (whether or
not on the job) after receiving a written notice
from the Company to halt such usage or Executive's
conviction of a crime involving alcohol, which
impairs Executive's ability to perform Executive's
duties under this Agreement or has an adverse
effect (other than an insignificant effect) on the
reputation of the Company or its relationship with
any customer or supplier of the Company,
g) Executive's illegal conduct either within or
outside the scope of Executive's employment which
has an adverse effect (other than an insignificant
effect) on the reputation of the Company or its
relationship with any customer or supplier of the
Company,
h) Executive's breach of his obligations under
Sections 6, 7, 8 or 9 hereof, or
i) Executive's breach of any other provision of this
Agreement.
If the Board of Directors terminates the employment of the
Executive without any such reason as aforesaid, which
Executive agrees the Board of Directors is entitled to do
since Executive serves at the discretion of the Board of
Directors, then Executive shall nevertheless be entitled to
salary and medical benefits only hereunder until the earlier
of (i) the date specified in Section 2.1 and (ii) the first
anniversary of such termination. In the case of any other
termination of the Executive's employment, the salary and
benefits hereunder will terminate as of the date of such
termination. Reference is made to Section 11.1 of this
Agreement
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regarding the authority of the Board of Directors to make
determinations on behalf of the Company for purposes of this
Agreement.
2.3Effect of Termination. Executive's obligations in Sections
6, 7, 8, and 9 hereof shall survive the termination of
Executive's employment hereunder for any reason. However,
if this Agreement is not renewed for at least one additional
year beyond the date specified in Section 2.1(a), then the
additional twelve month period of non-competition (i.e.
after termination of employment) provided in Section 9 shall
not be applicable to Executive.
3.Salary. During the term of his employment under this
Agreement, as compensation for his services hereunder and in
consideration of the covenants of Executive herein,
Executive shall be entitled to a salary at a rate of Two
Hundred Thousand Dollars ($200,000) per year. Such salary
will be paid in equal semi-monthly installments or with such
other frequency as Company shall elect (but not less
frequently than semi-monthly) and shall be subject to
withholding and other deductions by reason of federal or
state law.
4.Reimbursement for Expenses. Company agrees to reimburse
Executive for all reasonable business expenses incurred by
him in connection with the performance of his obligations
under this Agreement, subject to established reimbursement
policies of the Company in effect from time-to-time
regarding expense reimbursement.
5.Fringe Benefits. Executive shall be entitled to the
following fringe benefits during the term of his employment
under this Agreement. The Executive understands that he
will recognize income to the extent provided by law in
respect of certain of the benefits hereunder, including
cancellation of indebtedness income, and that these benefits
shall be subject to withholding and other deductions by
reason of federal or state law.
5.1Vacation and Car Allowance. (a) Executive shall be allowed
four (4) weeks of vacation per year, with full pay and
without loss of any other compensation or benefits, during
the term of this Agreement. Executive shall coordinate the
schedule of his vacations with other executives and the
personnel of Company and its affiliates so as to avoid any
adverse effects on the Company's operations.
(b) Executive will receive a car allowance of $600 per month.
5.2Bonuses.
a) With reasonable promptness after the end of each
half year included in each of the Company's fiscal
years covered by this
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Agreement, the Executive shall receive a bonus
equal to ten percent (10%) of the Company's
pre-tax profits for said half year but not to
exceed for such fiscal year as a whole one hundred
percent (100%) of the amount of Executive's annual
salary. The Company's pre-tax profits shall be
its income after all expenses, adjustments and
deductions except income taxes, but shall not
include the effects, if any, of extraordinary
items and accounting changes, as set forth in its
consolidated financial statements (audited, if
applicable) for such half year or year as included
in its second quarter report on Form 10-Q for such
fiscal year or in its annual report on Form 10-K
for such fiscal year as filed with the Securities
and Exchange Commission (in the absence of such
filing, to be based on the Company's financial
statements otherwise prepared). In any event, the
sum of the Company's pre-tax profits for the first
half of such fiscal year and the second half of
such fiscal year shall not exceed the total for
such full fiscal year as included in such annual
report on Form 10-K. For comparative purposes, in
the Company's 1996 annual report on Form 10-K/A,
the amount of such pre-tax profits in fiscal year
1996 was a loss of $3.365 million (i.e., a
negative amount) as captioned in the Company's
consolidated statements of operations as "net
earnings (loss)", since the Company reflected
neither taxes nor tax benefit in such year.
b) During the term of the Executive's employment
under this Agreement, with reasonable promptness
after the end of each month, commencing with the
month of April 1997, in order to emphasize sales
revenue growth for Sattel Communications LLC
("Sattel"), which is presently an 80% owned
indirect subsidiary of the Company, Executive
shall receive a bonus equal to one-half percent
(0.5%) of the sales revenues of Sattel for such
month, provided that: (i) the gross margin of
Sattel's sales for such month (defined as net
sales revenues less cost of sales) shall be at a
level of sixty-two percent (62%) or greater
(provided that such requirement shall instead be
fifty-five percent (55%) for months prior to and
including September 1997), (ii) such bonus based
on revenues of Sattel shall be payable only as and
when sales revenues are received by Sattel in the
form of cash, and (iii) for each fiscal year
covered by this Agreement, the aggregate amount
for all months of such bonus based on sales
revenues of Sattel shall not exceed thirty percent
(30%) of the amount of Executive's annual salary,
provided that, if the sales revenues of Sattel for
such fiscal year as a whole exceed $18 million,
then such percentage limitation shall instead be
fifty percent (50%) of the amount of
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Executive's annual salary, and if the sales
revenues of Sattel for such fiscal year as a whole
exceed $25 million, then such percentage
limitation shall instead be one hundred percent
(100%) of the amount of Executive's annual salary.
The Company may delay or limit the payment of any
bonus pursuant to this Section 5.2(b) until such
time as these requirements are met. If for any
reason an excess bonus is paid, for example
because sales revenues in a previous month are
reversed, due to a refund, then the Company shall
be entitled to a corresponding refund of bonus
and/or a credit against a future bonus, as
appropriate.
With respect to both paragraphs a) and b) above, (i)
the amounts of pre-tax profits of the Company and sales
revenues of Sattel shall be calculated based on
generally accepted accounting principles consistently
applied, except as specifically mentioned above and
(ii) such provisions have been agreed to in
contemplation of the Company's fiscal year ending on or
about March 31, 1998, and it is understood that such
provisions might be continued unchanged, or might be
amended or deleted or replaced with other provisions,
according to the mutual agreement of the parties, in
connection with the extension, if any, of this
Agreement. See Sections 2.1 and 11.1 of this
Agreement.
5.3Other Fringe Benefits. Executive may receive such other
additional fringe benefits, if any, as the Board of
Directors may from time-to-time make available to Executive
at the Board of Directors' sole discretion. The parties
understand that the Company is in the process of arranging a
new equity financing, for which the efforts of the Executive
have been substantial, in the amount of $3.5 million or
greater. Subject to the closing of such additional equity
financing, Executive shall be entitled to the following:
a) Executive has a $300,000 note payable to the
Company. On the date of this Agreement (or, if
later, on the date such $3.5 million financing
condition is met), a portion of such note will be
forgiven in the amount of $100,000 of the unpaid
principal, and interest on such forgiven portion.
Thereafter, if this Agreement shall be renewed for
an additional year or years, pursuant to Sections
2.1 and 11.1 hereof, the Company agrees that
additional portions of such note in the principal
amounts of $100,000 and $100,000, respectively,
will be forgiven at the dates that are twelve (12)
months and twenty-four (24) months, respectively,
after the date of this Agreement. Such three
scheduled instances of forgiveness are each
subject to the conditions (i) that the Executive
remains as an employee of the Company at each such
forgiveness date and (ii)
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that the Company shall not be, or be rendered as a
consequence of such forgiveness, bankrupt or
insolvent at such respective dates.
b) The Company notes that the Class B units of Sattel
are convertible (the holders thereof having both
the right and the obligation to convert the same
into shares of the Company's common stock) upon,
among other things, Sattel achieving cumulative
pre-tax profits of at least $15 million over four
consecutive quarters in the future. Such
conversion is at a rate of 500 shares of the
Company's common stock for each Class B unit,
subject to adjustment. At such time as, among
other things, a majority of the Class B units are
so converted, then the Class A units of Sattel
shall also be converted on the same terms as the
Class B units, except with a possible upwards
adjustment to reflect the priority of distribution
associated with the Class A units. The Company
will waive the foregoing condition that Sattel
achieve cumulative pre-tax profits of at least $15
million over four consecutive quarters in order
for the Class B units, and the Class A units, to
be convertible. Instead, the Company will
establish terms permitting, but not requiring, the
Class B units to be converted at the election of
the holders following the date such $3.5 million
financing is achieved as referred to above or at
any time thereafter. The Class A units will also
become convertible, on the same terms as the Class
B units, at the option of the holders, at such
time as a majority of the Class B units have
actually been converted by the holders thereof or
at any time thereafter. These new terms for
conversion will apply only to holders of the Class
A and B units who are currently (or were as of
June 30, 1997) directors, officers or employees of
the Company and its subsidiaries. As to all other
holders, the previously existing terms and
conditions shall remain unchanged. The Executive
will be entitled to participate therein on the
same basis as all other holders of the Class B
units or Class A units, according to the units
held by the Executive. The Company does not
contemplate that any demand registration rights
under federal or state securities laws will be
applicable to any such conversion, and such
securities, including the shares of the Company's
common stock issuable upon conversion, will only
be available for resale in accordance with
applicable securities laws and exemptions
thereunder, including Rule 144 under the
Securities Act of 1933, as amended. However, as
soon as reasonably practicable, but not earlier
than the time the Company becomes current in its
reporting under the Securities Exchange Act of
1934, the Company intends to file a registration
statement on Form S-8 to
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cover such conversion to the extent registration
on such form for such conversion is then
available. Additionally, in case registration on
such form for such purpose is not reasonably
practicable or available, the Company will give
appropriate consideration to allowing a piggy-back
registration.
6.Definitions. As used in this Agreement, the following words
have the meanings specified:
a) "Proprietary Ideas" means ideas, suggestions,
inventions and work relating in any way to the
business and activities of Company which may be
subjects of protection under applicable laws,
including common law, including patents,
copyrights, trade secrets, trademarks, service
marks or other intellectual property rights.
b) "Inventions" means inventions, designs,
discoveries, improvements and ideas, whether or
not patentable, including without limitation,
novel or improved products, processes, machines,
software, promotional and advertising materials,
business data processing programs and systems, and
other manufacturing and sales techniques, which
either (a) relate to (i) the business of Company
as conducted from time-to-time or (ii) the
Company's actual or demonstrably anticipated
research or development, or (b) result from any
work performed by Executive for Company.
c) "Confidential Information" means Proprietary Ideas
and also information related to Company's
business, whether or not in written or printed
form, not generally known in the trade or industry
of which Executive has or will become informed
during the period of employment by the Company,
which may include but is not limited to product
specifications, manufacturing procedures, methods,
equipment, compositions, technology, formulas,
trade secrets, know-how, research and development
programs, sales methods, customer lists, mailing
lists, customer usages and requirements, software
and other confidential technical or business
information and data; provided, however, that
Confidential Information shall not include any
information which is in the public domain by means
other than disclosure by Executive.
d) As used in Sections 6, 7, 8, and 9 only, the term
"Company" shall include all entities affiliated
with the Company.
7.Disclosure and Assignment of Inventions. Executive agrees
to disclose to the Company (and, if requested to do so, to
provide a written description thereof to the Company), and
hereby assigns to Company all of Executive's rights in and
to, any Inventions conceived or reduced to practice at any
time during Executive's
7
<PAGE>
employment by Company, either solely or jointly with others
and whether or not developed on Executive's own time or with
Company's resources. Executive agrees that Inventions first
reduced to practice within one (1) year after termination of
Executive's employment by Company shall be treated as if
conceived during such employment unless Executive can
establish specific events giving rise to the conception
which occurred after such employment. Further, Executive
disclaims and will not assert any rights in Inventions as
having been made, conceived or acquired prior to employment
by Company except such as are specifically listed at the
conclusion of this Agreement. Executive shall cooperate
with Company and shall execute and deliver such documents
and do such other acts and things as Company may request, at
Company's expense, to obtain and maintain letters patent or
registrations covering any Inventions and to vest in Company
all rights therein free of all encumbrances and adverse
claims.
8.Confidential Information. Except as required by law or
regulatory agencies, Executive shall not disclose to Company
or induce Company to use any secret or confidential
information belonging to persons not affiliated with
Company, including any former employer of Executive. In
addition to all duties of loyalty imposed on Executive by
law, Executive shall maintain Confidential Information in
strict confidence and secrecy and shall not at any time,
during or at any time after termination of employment with
Company, directly or indirectly, use or disclose to others
any Confidential Information, or use it for the benefit of
any person or entity (including Executive) other than
Company, without the prior written consent of any duly
authorized officer of Company (except for disclosures to
persons acting on Company's behalf with a need to know such
information). Executive shall carefully preserve any
documents, records and tangible data relating to Inventions
or Confidential Information coming into Executive's
possession and shall deliver the same and any copies thereof
to Company upon request and, in any event, upon termination
of Executive's employment by Company.
9.Non-Competition.
a) At all times during Executive's employment by the
Company (whether pursuant to this Agreement or
otherwise) and, to the fullest extent permitted by
applicable law, for a period of twelve (12) months
following the termination of such employment,
Executive will not, in any capacity whatsoever, in
any state in the United States or in any other
country, directly or indirectly, participate in or
assist in the ownership, management, operation or
control of, or have any beneficial interest in, or
provide employment, consulting or other services
for, any corporation, partnership, association or
other person or entity ("Competitive
8
<PAGE>
Business") which is engaged in the development,
manufacture, marketing, distribution, service
and/or sale of voice or data switching equipment,
and which directly competes or is planning to
directly compete with the Company's products or
services (including products and services under
development). If the business is multi-faceted,
this restriction shall apply to only that part of
the business which is competitive to Company.
b) In furtherance of the foregoing, but as an
independent obligation of Executive, Executive
agrees that he will not, to the fullest extent
permitted by applicable law, during the one-year
period following termination of his employment
with Company, be connected in any way with the
solicitation of any then current or potential
customers or suppliers of Company if such
solicitation is likely to result in a loss of
business for Company.
c) In furtherance of the foregoing, but as an
independent obligation of the Executive, Executive
agrees that, to the fullest extent permitted by
applicable law, during the one year following
termination of his employment with the Company, he
will not solicit for employment, employ or engage
as a consultant any person who had been an
employee of the Company at any time in the
one-year period prior to termination of
Executive's employment with Company.
d) In the event the covenants set forth in this
Section 9 are found to be unenforceable or invalid
by reason of being overly broad, the parties
hereto intend that such covenants shall be limited
to such scope, geographic area and duration as
shall make such covenants valid and enforceable.
10.Government Laws, Regulations and Contracts. Executive
agrees to comply, and to do all things necessary for Company
to comply, with all federal, state, local and foreign laws
and regulations and government contracts which may be
applicable to the business and operations of Company.
11.Miscellaneous.
11.1Amendment and Modification. Company (by action of its Board
of Directors) and Executive may amend, modify and supplement
this Agreement only in such manner as may be agreed upon by
Company and Executive in writing. This provision shall be
applicable to any extension of the term of this Agreement as
provided in Section 2.1. All determinations, waivers,
consents, approvals or other acts on the part of the Company
that are permitted or required by this Agreement shall
similarly require the approval of the Board of Directors.
9
<PAGE>
11.2 Entire Agreement. This instrument embodies the entire
agreement between the parties hereto with respect to
the employment relationship created hereby and
supersedes and discharges any prior agreements
pertaining to employment between Executive and the
Company. There have been and are no agreements,
representations or warranties between the parties other
than those set forth or provided for herein relating to
such employment relationship.
11.3 Assignment. This Agreement shall not be assigned by
either party without the written consent of the other
party. Inasmuch as this Agreement contemplates the
provision of personal services by the Executive,
ordinarily this Agreement shall not be assignable by
the Executive. This Agreement shall not be assigned by
the Company except with the prior written consent of
the Executive, which he shall not unreasonably
withhold. Any attempted assignment without such
written consent shall be null and void and without
legal effect.
11.4 Binding Effect; Specific Performance. Subject to
Section 11.3 hereof, this Agreement shall be binding
upon and inure to the benefit of the respective parties
hereto and their successors, assigns, heirs, executors,
administrators and personal representatives. The
parties hereto shall be entitled, at their option, to
the remedy of specific performance to the fullest
extent permitted by applicable law in enforcing the
provisions of this Agreement.
11.5 Arbitration. Any dispute, controversy or claim arising
out of or relating to this Agreement, or the breach
hereof, or the employment relationship hereunder, shall
be settled by binding arbitration in Los Angeles,
California administered by the American Arbitration
Association under its Commercial Arbitration Rules, and
judgment on the award rendered by the arbitrators may
be entered in any court having jurisdiction thereof.
11.6 Agreement Severable; Waiver. This is a severable
Agreement and in the event that any part of this
Agreement shall be held to be unenforceable, all other
parts of this Agreement shall remain valid and fully
enforceable as if the unenforceable part or parts had
not been included herein. No waiver of any provision
of this Agreement shall be binding unless executed in
writing by the party to be bound hereby. No waiver of
a breach of any of the provisions of this Agreement
shall be deemed to be or shall constitute a waiver of a
breach of any other provision of this Agreement,
whether or not similar, nor shall such waiver
constitute a continuing waiver of such breach unless
otherwise expressly provided. No failure or delay in
exercising any right, power or remedy hereunder shall
operate as a waiver thereof, nor shall any single or
partial exercise of any such right, power or remedy
preclude any other or further exercise thereof or the
exercise of any other right, power or remedy.
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<PAGE>
11.7 Notices. For purposes of this Agreement, notices and
all other communications provided for in the Agreement
shall be in writing and shall be deemed to have been
duly given when actually delivered to the recipient or
when mailed by United States certified or registered
mail, return receipt requested, postage prepaid,
addressed as follows:
If to Executive, to: James J. Fiedler
26025 Mureau Rd.
Calabasas, CA 91302
If to Company, to: The Diana Corporation
Attn: Board of Directors
26025 Mureau Rd.
Calabasas, CA 91302
or to such other address as either party may have
furnished to the other in writing in accordance
herewith except that notices of a change of address
shall be effective only upon receipt.
11.8 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
CALIFORNIA, WITHOUT REFERENCE TO THE CHOICE OF LAW
PRINCIPLES THEREOF.
EXECUTIVE ACKNOWLEDGES HAVING READ, EXECUTED AND RECEIVED A
COPY OF THIS AGREEMENT, INCLUDING THE FOLLOWING NOTICE, AND
AGREES THAT, WITH RESPECT TO THE SUBJECT MATTER HEREOF, IT
CONSTITUTES EXECUTIVE'S ENTIRE AGREEMENT WITH COMPANY,
SUPERSEDING ANY PREVIOUS ORAL OR WRITTEN COMMUNICATIONS,
REPRESENTATIONS, UNDERSTANDINGS OR AGREEMENTS WITH THE
COMPANY OR ANY OF ITS OFFICIALS OR REPRESENTATIVES.
Notwithstanding anything to the contrary in Section 7
hereof, this Agreement does not apply to an Invention for
which no equipment, supplies, facility, or trade secret
information of the Company was used and which was developed
entirely on Executive's own time, unless (a) the Invention
relates (i) to the business of the Company as conducted from
time-to-time or (ii) to the Company's actual or demonstrably
anticipated research or development, or (b) the Invention
results from any work performed by the Executive for the
Company.
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IN WITNESS WHEREOF, the parties have caused this Agreement
to be executed as of the day and year first above written.
THE DIANA CORPORATION ("Company")
By: /s/ Jack E. Donnelly Date: September 4, 1997
JAMES J. FIEDLER ("Executive")
By: /s/ James J. Fiedler Date: September 4, 1997
List of Inventions Excepted From Section 7 Above:
None
12
EMPLOYMENT AGREEMENT
THIS AGREEMENT, is made as of September 4, 1997, provided that the
employment hereunder shall be deemed to have commenced on April 1,
1997, by and between THE DIANA CORPORATION, a Delaware Corporation
(the "Company"), and DANIEL W. LATHAM (the "Executive").
R E C I T A L S
WHEREAS, Executive is willing to be employed by Company, and the
Company is willing to employ the Executive, upon the terms and
conditions set forth in this Agreement.
NOW, THEREFORE, in order to set forth the terms and conditions of
Executive's employment with Company and in consideration of the
covenants and agreements of the parties herein contained, the
receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
1. Employment Services. Subject to the terms and upon the
conditions hereinafter set forth, the Company hereby employs
Executive as Chairman and Chief Executive Officer.
Executive accepts such employment and agrees to devote his
full time and use his best efforts to perform his duties
pursuant to this Agreement and to further the business of
the Company. Executive shall not, without the prior written
consent of the Company as authorized by the Company's Board
of Directors ("Board of Directors"), engage directly or
indirectly in any other business or occupation during his
employment under this Agreement.
2. Term and Termination.
2.1 Term. Subject to Section 2.2 hereof, the employment of
Executive under this Agreement shall be deemed to have
commenced on April 1, 1997 and will continue until the
occurrence of the first of the following:
a) March 31, 1998 (i.e. a term of one year);
b) Executive's death; or
c) Executive's illness, physical or mental disability
or other incapacity resulting in Executive's
inability to effectively perform the essential
functions of his job, with or without reasonable
accommodation, for a cumulative period of twelve
(12) weeks during any period of twelve (12)
consecutive months.
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The term of this Agreement may only be extended by the
written agreement of both the Company (as approved by the
Board of Directors) and the Executive, as provided in
Section 11.1.
2.2 Termination. The employment of Executive under this
Agreement may also be terminated at the option of the Board
of Directors upon the occurrence of any of the following:
a) Executive's conduct involving fraud or moral
turpitude or Executive's dishonesty involving
Company's business,
b) Executive's chronic absence from work other than
by reason of illness or injury,
c) Executive's conviction of any felony,
d) Executive's conviction of any misdemeanor which is
substantially related to Executive's services
hereunder,
e) Executive's continuing use of illegal drugs or
other illegal substance (whether or not on the
job) after receiving a written notice from the
Company to halt such usage or Executive's
conviction of a crime involving illegal drugs or
other illegal substance,
f) Executive's continuing use of alcohol (whether or
not on the job) after receiving a written notice
from the Company to halt such usage or Executive's
conviction of a crime involving alcohol, which
impairs Executive's ability to perform Executive's
duties under this Agreement or has an adverse
effect (other than an insignificant effect) on the
reputation of the Company or its relationship with
any customer or supplier of the Company,
g) Executive's illegal conduct either within or
outside the scope of Executive's employment which
has an adverse effect (other than an insignificant
effect) on the reputation of the Company or its
relationship with any customer or supplier of the
Company,
h) Executive's breach of his obligations under
Sections 6, 7, 8 or 9 hereof, or
i) Executive's breach of any other provision of this
Agreement.
If the Board of Directors terminates the employment of the
Executive without any such reason as aforesaid, which
Executive agrees the Board of Directors is entitled to do
since Executive serves at the discretion of the Board of
Directors, then Executive shall nevertheless be entitled to
salary and medical benefits only hereunder until the earlier
of (i) the date specified in Section 2.1 and (ii) the first
anniversary of such termination. In the case of any other
termination of the Executive's employment, the salary and
benefits hereunder will terminate as of the date of such
termination. Reference is made to Section 11.1 of this
Agreement
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regarding the authority of the Board of Directors to make
determinations on behalf of the Company for purposes of this
Agreement.
2.3 Effect of Termination. Executive's obligations in Sections
6, 7, 8, and 9 hereof shall survive the termination of
Executive's employment hereunder for any reason. However,
if this Agreement is not renewed for at least one additional
year beyond the date specified in Section 2.1(a), then the
additional twelve month period of non-competition (i.e.
after termination of employment) provided in Section 9 shall
not be applicable to Executive.
3. Salary. During the term of his employment under this
Agreement, as compensation for his services hereunder and in
consideration of the covenants of Executive herein,
Executive shall be entitled to a salary at a rate of One
Hundred Seventy-Five Thousand Dollars ($175,000) per year.
Such salary will be paid in equal semi-monthly installments
or with such other frequency as Company shall elect (but not
less frequently than semi-monthly) and shall be subject to
withholding and other deductions by reason of federal or
state law.
4. Reimbursement for Expenses. Company agrees to reimburse
Executive for all reasonable business expenses incurred by
him in connection with the performance of his obligations
under this Agreement, subject to established reimbursement
policies of the Company in effect from time-to-time
regarding expense reimbursement.
5. Fringe Benefits. Executive shall be entitled to the
following fringe benefits during the term of his employment
under this Agreement. The Executive understands that he
will recognize income to the extent provided by law in
respect of certain of the benefits hereunder, including
cancellation of indebtedness income, and that these benefits
shall be subject to withholding and other deductions by
reason of federal or state law.
5.1 Vacation and Car Allowance. (a) Executive shall be allowed
four (4) weeks of vacation per year, with full pay and
without loss of any other compensation or benefits, during
the term of this Agreement. Executive shall coordinate the
schedule of his vacations with other executives and the
personnel of Company and its affiliates so as to avoid any
adverse effects on the Company's operations.
(b) Executive will receive a car allowance of $600 per month.
5.2 Bonuses.
a) With reasonable promptness after the end of each
half year included in each of the Company's fiscal
years covered by this
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Agreement, the Executive shall receive a bonus
equal to five percent (5%) of the Company's
pre-tax profits for said half year but not to
exceed for such fiscal year as a whole seventy-
five percent (75%) of the amount of Executive's
annual salary. The Company's pre-tax profits
shall be its income after all expenses,
adjustments and deductions except income taxes,
but shall not include the effects, if any, of
extraordinary items and accounting changes, as set
forth in its consolidated financial statements
(audited, if applicable) for such half year or
year as included in its second quarter report on
Form 10-Q for such fiscal year or in its annual
report on Form 10-K for such fiscal year as filed
with the Securities and Exchange Commission (in
the absence of such filing, to be based on the
Company's financial statements otherwise
prepared). In any event, the sum of the Company's
pre-tax profits for the first half of such fiscal
year and the second half of such fiscal year shall
not exceed the total for such full fiscal year as
included in such annual report on Form 10-K. For
comparative purposes, in the Company's 1996 annual
report on Form 10-K/A, the amount of such pre-tax
profits in fiscal year 1996 was a loss of $3.365
million (i.e., a negative amount) as captioned in
the Company's consolidated statements of
operations as "net earnings (loss)", since the
Company reflected neither taxes nor tax benefit in
such year.
b) During the term of the Executive's employment
under this Agreement, with reasonable promptness
after the end of each month, commencing with the
month of April 1997, in order to emphasize sales
revenue growth for Sattel Communications LLC
("Sattel"), which is presently an 80% owned
indirect subsidiary of the Company, Executive
shall receive a bonus equal to one-half percent
(0.5%) of the sales revenues of Sattel for such
month, provided that: (i) the gross margin of
Sattel's sales for such month (defined as net
sales revenues less cost of sales) shall be at a
level of sixty-two percent (62%) or greater
(provided that such requirement shall instead be
fifty-five percent (55%) for months prior to and
including September 1997), (ii) such bonus based
on revenues of Sattel shall be payable only as and
when sales revenues are received by Sattel in the
form of cash, and (iii) for each fiscal year
covered by this Agreement, the aggregate amount
for all months of such bonus based on sales
revenues of Sattel shall not exceed thirty percent
(30%) of the amount of Executive's annual salary,
provided that, if the sales revenues of Sattel for
such fiscal year as a whole exceed $18 million,
then such percentage limitation shall instead be
fifty percent (50%) of the amount of
4
<PAGE>
Executive's annual salary, and if the sales
revenues of Sattel for such fiscal year as a whole
exceed $25 million, then such percentage
limitation shall instead be one hundred percent
(100%) of the amount of Executive's annual salary.
The Company may delay or limit the payment of any
bonus pursuant to this Section 5.2(b) until such
time as these requirements are met. If for any
reason an excess bonus is paid, for example
because sales revenues in a previous month are
reversed, due to a refund, then the Company shall
be entitled to a corresponding refund of bonus
and/or a credit against a future bonus, as
appropriate.
With respect to both paragraphs a) and b) above, (i)
the amounts of pre-tax profits of the Company and sales
revenues of Sattel shall be calculated based on
generally accepted accounting principles consistently
applied, except as specifically mentioned above and
(ii) such provisions have been agreed to in
contemplation of the Company's fiscal year ending on or
about March 31, 1998, and it is understood that such
provisions might be continued unchanged, or might be
amended or deleted or replaced with other provisions,
according to the mutual agreement of the parties, in
connection with the extension, if any, of this
Agreement. See Sections 2.1 and 11.1 of this
Agreement.
5.3 Other Fringe Benefits. Executive may receive such other
additional fringe benefits, if any, as the Board of
Directors may from time-to-time make available to Executive
at the Board of Directors' sole discretion. The parties
understand that the Company is in the process of arranging a
new equity financing, for which the efforts of the Executive
have been substantial, in the amount of $3.5 million or
greater. Subject to the closing of such additional equity
financing, Executive shall be entitled to the following:
a) Executive has a $300,000 note payable to the
Company. On the date of this Agreement (or, if
later, on the date such $3.5 million financing
condition is met), a portion of such note will be
forgiven in the amount of $100,000 of the unpaid
principal, and interest on such forgiven portion.
Thereafter, if this Agreement shall be renewed for
an additional year or years, pursuant to Sections
2.1 and 11.1 hereof, the Company agrees that
additional portions of such note in the principal
amounts of $100,000 and $100,000, respectively,
will be forgiven at the dates that are twelve (12)
months and twenty-four (24) months, respectively,
after the date of this Agreement. Such three
scheduled instances of forgiveness are each
subject to the conditions (i) that the Executive
remains as an employee of the Company at each such
forgiveness date and (ii)
5
<PAGE>
that the Company shall not be, or be rendered as a
consequence of such forgiveness, bankrupt or
insolvent at such respective dates.
b) The Company notes that the Class B units of Sattel
are convertible (the holders thereof having both
the right and the obligation to convert the same
into shares of the Company's common stock) upon,
among other things, Sattel achieving cumulative
pre-tax profits of at least $15 million over four
consecutive quarters in the future. Such
conversion is at a rate of 500 shares of the
Company's common stock for each Class B unit,
subject to adjustment. At such time as, among
other things, a majority of the Class B units are
so converted, then the Class A units of Sattel
shall also be converted on the same terms as the
Class B units, except with a possible upwards
adjustment to reflect the priority of distribution
associated with the Class A units. The Company
will waive the foregoing condition that Sattel
achieve cumulative pre-tax profits of at least $15
million over four consecutive quarters in order
for the Class B units, and the Class A units, to
be convertible. Instead, the Company will
establish terms permitting, but not requiring, the
Class B units to be converted at the election of
the holders following the date such $3.5 million
financing is achieved as referred to above or at
any time thereafter. The Class A units will also
become convertible, on the same terms as the Class
B units, at the option of the holders, at such
time as a majority of the Class B units have
actually been converted by the holders thereof or
at any time thereafter. These new terms for
conversion will apply only to holders of the Class
A and B units who are currently (or were as of
June 30, 1997) directors, officers or employees of
the Company and its subsidiaries. As to all other
holders, the previously existing terms and
conditions shall remain unchanged. The Executive
will be entitled to participate therein on the
same basis as all other holders of the Class B
units or Class A units, according to the units
held by the Executive. The Company does not
contemplate that any demand registration rights
under federal or state securities laws will be
applicable to any such conversion, and such
securities, including the shares of the Company's
common stock issuable upon conversion, will only
be available for resale in accordance with
applicable securities laws and exemptions
thereunder, including Rule 144 under the
Securities Act of 1933, as amended. However, as
soon as reasonably practicable, but not earlier
than the time the Company becomes current in its
reporting under the Securities Exchange Act of
1934, the Company intends to file a registration
statement on Form S-8 to
6
<PAGE>
cover such conversion to the extent registration
on such form for such conversion is then
available. Additionally, in case registration on
such form for such purpose is not reasonably
practicable or available, the Company will give
appropriate consideration to allowing a piggy-back
registration.
6. Definitions. As used in this Agreement, the following words
have the meanings specified:
a) "Proprietary Ideas" means ideas, suggestions,
inventions and work relating in any way to the
business and activities of Company which may be
subjects of protection under applicable laws,
including common law, including patents,
copyrights, trade secrets, trademarks, service
marks or other intellectual property rights.
b) "Inventions" means inventions, designs,
discoveries, improvements and ideas, whether or
not patentable, including without limitation,
novel or improved products, processes, machines,
software, promotional and advertising materials,
business data processing programs and systems, and
other manufacturing and sales techniques, which
either (a) relate to (i) the business of Company
as conducted from time-to-time or (ii) the
Company's actual or demonstrably anticipated
research or development, or (b) result from any
work performed by Executive for Company.
c) "Confidential Information" means Proprietary Ideas
and also information related to Company's
business, whether or not in written or printed
form, not generally known in the trade or industry
of which Executive has or will become informed
during the period of employment by the Company,
which may include but is not limited to product
specifications, manufacturing procedures, methods,
equipment, compositions, technology, formulas,
trade secrets, know-how, research and development
programs, sales methods, customer lists, mailing
lists, customer usages and requirements, software
and other confidential technical or business
information and data; provided, however, that
Confidential Information shall not include any
information which is in the public domain by means
other than disclosure by Executive.
d) As used in Sections 6, 7, 8, and 9 only, the term
"Company" shall include all entities affiliated
with the Company.
7. Disclosure and Assignment of Inventions. Executive agrees
to disclose to the Company (and, if requested to do so, to
provide a written description thereof to the Company), and
hereby assigns to Company all of Executive's rights in and
to, any Inventions conceived or reduced to practice at any
time during Executive's
7
<PAGE>
employment by Company, either solely or jointly with others
and whether or not developed on Executive's own time or with
Company's resources. Executive agrees that Inventions first
reduced to practice within one (1) year after termination of
Executive's employment by Company shall be treated as if
conceived during such employment unless Executive can
establish specific events giving rise to the conception
which occurred after such employment. Further, Executive
disclaims and will not assert any rights in Inventions as
having been made, conceived or acquired prior to employment
by Company except such as are specifically listed at the
conclusion of this Agreement. Executive shall cooperate
with Company and shall execute and deliver such documents
and do such other acts and things as Company may request, at
Company's expense, to obtain and maintain letters patent or
registrations covering any Inventions and to vest in Company
all rights therein free of all encumbrances and adverse
claims.
8. Confidential Information. Except as required by law or
regulatory agencies, Executive shall not disclose to Company
or induce Company to use any secret or confidential
information belonging to persons not affiliated with
Company, including any former employer of Executive. In
addition to all duties of loyalty imposed on Executive by
law, Executive shall maintain Confidential Information in
strict confidence and secrecy and shall not at any time,
during or at any time after termination of employment with
Company, directly or indirectly, use or disclose to others
any Confidential Information, or use it for the benefit of
any person or entity (including Executive) other than
Company, without the prior written consent of any duly
authorized officer of Company (except for disclosures to
persons acting on Company's behalf with a need to know such
information). Executive shall carefully preserve any
documents, records and tangible data relating to Inventions
or Confidential Information coming into Executive's
possession and shall deliver the same and any copies thereof
to Company upon request and, in any event, upon termination
of Executive's employment by Company.
9. Non-Competition.
a) At all times during Executive's employment by the
Company (whether pursuant to this Agreement or
otherwise) and, to the fullest extent permitted by
applicable law, for a period of twelve (12) months
following the termination of such employment,
Executive will not, in any capacity whatsoever, in
any state in the United States or in any other
country, directly or indirectly, participate in or
assist in the ownership, management, operation or
control of, or have any beneficial interest in, or
provide employment, consulting or other services
for, any corporation, partnership, association or
other person or entity ("Competitive
8
<PAGE>
Business") which is engaged in the development,
manufacture, marketing, distribution, service
and/or sale of voice or data switching equipment,
and which directly competes or is planning to
directly compete with the Company's products or
services (including products and services under
development). If the business is multi-faceted,
this restriction shall apply to only that part of
the business which is competitive to Company.
b) In furtherance of the foregoing, but as an
independent obligation of Executive, Executive
agrees that he will not, to the fullest extent
permitted by applicable law, during the one-year
period following termination of his employment
with Company, be connected in any way with the
solicitation of any then current or potential
customers or suppliers of Company if such
solicitation is likely to result in a loss of
business for Company.
c) In furtherance of the foregoing, but as an
independent obligation of the Executive, Executive
agrees that, to the fullest extent permitted by
applicable law, during the one year following
termination of his employment with the Company, he
will not solicit for employment, employ or engage
as a consultant any person who had been an
employee of the Company at any time in the
one-year period prior to termination of
Executive's employment with Company.
d) In the event the covenants set forth in this
Section 9 are found to be unenforceable or invalid
by reason of being overly broad, the parties
hereto intend that such covenants shall be limited
to such scope, geographic area and duration as
shall make such covenants valid and enforceable.
10. Government Laws, Regulations and Contracts. Executive
agrees to comply, and to do all things necessary for Company
to comply, with all federal, state, local and foreign laws
and regulations and government contracts which may be
applicable to the business and operations of Company.
11. Miscellaneous.
11.1 Amendment and Modification. Company (by action of its Board
of Directors) and Executive may amend, modify and supplement
this Agreement only in such manner as may be agreed upon by
Company and Executive in writing. This provision shall be
applicable to any extension of the term of this Agreement as
provided in Section 2.1. All determinations, waivers,
consents, approvals or other acts on the part of the Company
that are permitted or required by this Agreement shall
similarly require the approval of the Board of Directors.
9
<PAGE>
11.2 Entire Agreement. This instrument embodies the entire
agreement between the parties hereto with respect to
the employment relationship created hereby and
supersedes and discharges any prior agreements
pertaining to employment between Executive and the
Company. There have been and are no agreements,
representations or warranties between the parties other
than those set forth or provided for herein relating to
such employment relationship.
11.3 Assignment. This Agreement shall not be assigned by
either party without the written consent of the other
party. Inasmuch as this Agreement contemplates the
provision of personal services by the Executive,
ordinarily this Agreement shall not be assignable by
the Executive. This Agreement shall not be assigned by
the Company except with the prior written consent of
the Executive, which he shall not unreasonably
withhold. Any attempted assignment without such
written consent shall be null and void and without
legal effect.
11.4 Binding Effect; Specific Performance. Subject to
Section 11.3 hereof, this Agreement shall be binding
upon and inure to the benefit of the respective parties
hereto and their successors, assigns, heirs, executors,
administrators and personal representatives. The
parties hereto shall be entitled, at their option, to
the remedy of specific performance to the fullest
extent permitted by applicable law in enforcing the
provisions of this Agreement.
11.5 Arbitration. Any dispute, controversy or claim arising
out of or relating to this Agreement, or the breach
hereof, or the employment relationship hereunder, shall
be settled by binding arbitration in Los Angeles,
California administered by the American Arbitration
Association under its Commercial Arbitration Rules, and
judgment on the award rendered by the arbitrators may
be entered in any court having jurisdiction thereof.
11.6 Agreement Severable; Waiver. This is a severable
Agreement and in the event that any part of this
Agreement shall be held to be unenforceable, all other
parts of this Agreement shall remain valid and fully
enforceable as if the unenforceable part or parts had
not been included herein. No waiver of any provision
of this Agreement shall be binding unless executed in
writing by the party to be bound hereby. No waiver of
a breach of any of the provisions of this Agreement
shall be deemed to be or shall constitute a waiver of a
breach of any other provision of this Agreement,
whether or not similar, nor shall such waiver
constitute a continuing waiver of such breach unless
otherwise expressly provided. No failure or delay in
exercising any right, power or remedy hereunder shall
operate as a waiver thereof, nor shall any single or
partial exercise of any such right, power or remedy
preclude any other or further exercise thereof or the
exercise of any other right, power or remedy.
10
<PAGE>
11.7 Notices. For purposes of this Agreement, notices and
all other communications provided for in the Agreement
shall be in writing and shall be deemed to have been
duly given when actually delivered to the recipient or
when mailed by United States certified or registered
mail, return receipt requested, postage prepaid,
addressed as follows:
If to Executive, to: Daniel W. Latham
26025 Mureau Rd.
Calabasas, CA 91302
If to Company, to: The Diana Corporation
Attn: Board of Directors
26025 Mureau Rd.
Calabasas, CA 91302
or to such other address as either party may have
furnished to the other in writing in accordance
herewith except that notices of a change of address
shall be effective only upon receipt.
11.8 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
CALIFORNIA, WITHOUT REFERENCE TO THE CHOICE OF LAW
PRINCIPLES THEREOF.
EXECUTIVE ACKNOWLEDGES HAVING READ, EXECUTED AND RECEIVED A
COPY OF THIS AGREEMENT, INCLUDING THE FOLLOWING NOTICE, AND
AGREES THAT, WITH RESPECT TO THE SUBJECT MATTER HEREOF, IT
CONSTITUTES EXECUTIVE'S ENTIRE AGREEMENT WITH COMPANY,
SUPERSEDING ANY PREVIOUS ORAL OR WRITTEN COMMUNICATIONS,
REPRESENTATIONS, UNDERSTANDINGS OR AGREEMENTS WITH THE
COMPANY OR ANY OF ITS OFFICIALS OR REPRESENTATIVES.
Notwithstanding anything to the contrary in Section 7
hereof, this Agreement does not apply to an Invention for
which no equipment, supplies, facility, or trade secret
information of the Company was used and which was developed
entirely on Executive's own time, unless (a) the Invention
relates (i) to the business of the Company as conducted from
time-to-time or (ii) to the Company's actual or demonstrably
anticipated research or development, or (b) the Invention
results from any work performed by the Executive for the
Company.
11
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement
to be executed as of the day and year first above written.
THE DIANA CORPORATION ("Company")
By: /s/ Jack E. Donnelly Date: September 4, 1997
DANIEL W. LATHAM ("Executive")
By: /s/ Daniel W. Latham Date: September 4, 1997
List of Inventions Excepted From Section 7 Above:
None
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS LEGEND CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF THE DIANA CORPORATION AS OF AND FOR THE 52
WEEKS ENDED MARCH 31, 1997 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-31-1997
<PERIOD-START> MAR-31-1996
<PERIOD-END> MAR-31-1997
<CASH> 81
<SECURITIES> 0
<RECEIVABLES> 4594
<ALLOWANCES> 0
<INVENTORY> 2937
<CURRENT-ASSETS> 10221
<PP&E> 2254
<DEPRECIATION> (310)
<TOTAL-ASSETS> 23244
<CURRENT-LIABILITIES> 4060
<BONDS> 1817
0
0
<COMMON> 6007
<OTHER-SE> 10827
<TOTAL-LIABILITY-AND-EQUITY> 23244
<SALES> 7154
<TOTAL-REVENUES> 7154
<CGS> 3132
<TOTAL-COSTS> 3132
<OTHER-EXPENSES> 16172
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 52
<INCOME-PRETAX> (13171)
<INCOME-TAX> 836
<INCOME-CONTINUING> (12335)
<DISCONTINUED> (8175)
<EXTRAORDINARY> (508)
<CHANGES> 0
<NET-INCOME> (21018)
<EPS-PRIMARY> (3.99)
<EPS-DILUTED> (3.99)
</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 September 22, 1997 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)
3. Registration Statement on Form S-3
(Registration No. 333-1055)
PRICE WATERHOUSE LLP
Milwaukee, Wisconsin
September 22, 1997
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 Statements (Form S-3 Nos.
33-88392 and 333-1055) 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 31, 1997.
Milwaukee, Wisconsin ERNST & YOUNG LLP
September 22, 1997
