UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended January 4, 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
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
X Yes ___ No
At February 15, 1997, the registrant had issued and outstanding an
aggregate of 5,298,483 shares of its common stock.
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
The Diana Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in Thousands)
<TABLE>
<CAPTION>
January 4, March 30,
1997 1996
(Unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 2,800 $ 4,480
Marketable securities --- 1,213
Receivables 8,341 10
Inventories 3,247 1,087
Net assets of discontinued operations 2,379 7,389
Other current assets 1,546 543
------ ------
Total current assets 18,313 14,722
Property and equipment 2,088 339
Intangible assets 3,805 5,827
Net assets of discontinued operations 8,350 8,180
Other assets 3,187 24
------ ------
$ 35,743 $ 29,092
====== ======
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 3,997 $ 483
Accrued liabilities 1,449 816
Current portion of long-term debt 141 141
------ ------
Total current liabilities 5,587 1,440
Long-term debt 1,817 1,958
Other liabilities 407 1,008
Commitments and contingencies
Shareholders' equity
Preferred stock - $.01 par value --- ---
Common stock - $1 par value 6,007 5,526
Additional paid-in capital 80,125 59,456
Accumulated deficit (52,443) (34,776)
Unrealized loss on marketable securities --- (876)
Treasury stock (5,757) (4,644)
------ ------
Total shareholders' equity 27,932 24,686
------ ------
$ 35,743 $ 29,092
====== ======
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE>
The Diana Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
12 Weeks Ended 40 Weeks Ended
January 4, January 6, January 4, January 6,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net sales $ 4,337 $ --- $ 9,224 $ 264
Cost of sales 1,280 --- 2,438 129
------ ------ ------- -------
Gross profit 3,057 --- 6,786 135
Selling and administra-
tive expenses 3,245 1,083 7,954 2,261
Research and development 1,798 --- 3,035 ---
------ ------ ------- -------
Total operating expenses 5,043 1,083 10,989 2,261
------ ------ ------- -------
Operating loss (1,986) (1,083) (4,203) (2,126)
Interest expense (7) (26) (52) (87)
Non-operating income (loss) (626) 106 (281) 411
Minority interest 55 356 181 408
Income tax credit 836 --- 836 ---
------ ------ ------- -------
Loss from continuing
operations (1,728) (647) (3,519) (1,394)
Earnings (loss) from
discontinued operations (223) 49 (625) 541
Estimated loss on disposal
of discontinued operations (2,050) --- (5,550) ---
------ ------ ------- -------
Loss before extraordinary
item (4,001) (598) (9,694) (853)
Extraordinary item --- --- (227) ---
------ ------ ------- -------
Net loss $ (4,001) $ (598) $ (9,921) $ (853)
====== ====== ======= =======
Earnings (loss) per
common share:
Loss from continuing
operations $ (.33) $ (.15) $ (.67) $ (.32)
Loss from discontinued
operations (.04) .01 (.12) .12
Estimated loss on
disposal (.39) --- (1.06) ---
Extraordinary item --- --- (.04) ---
------ ------ ------- -------
Net earnings (loss) $ (.76) $ (.14) $ (1.89) $ (.20)
====== ====== ======= =======
Weighted average number of
common shares outstanding 5,294 4,328 5,263 4,323
====== ====== ======= =======
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
THE DIANA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in Thousands)
<TABLE>
<CAPTION>
Common Stock Additional Unrealized Loss Treasury Stock Total
Number of Par Paid in Accumulated on Marketable Number of Shareholders'
Shares Value Capital Deficit Securities Shares Cost Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 30, 1996 5,526,282 $ 5,526 $ 59,456 $ (34,776) $ (876) 877,692 $ (4,644) $ 24,686
Net loss --- --- --- (9,921) --- --- --- (9,921)
5% stock dividend 250,893 251 7,474 (7,746) --- --- --- (21)
Change in unrealized loss on
marketable securities --- --- --- --- 876 --- --- 876
Issuance of common stock 230,000 230 12,630 --- --- (200,000) 1,058 13,918
Acquisition of minority interest --- --- --- --- --- 50,000 (2,325) (2,325)
Acquisition of minority interest --- --- 385 --- --- (15,000) 122 507
Other --- --- 180 --- --- (4,000) 32 212
--------- ------ ------- -------- ------- ------- ------- -------
Balance at January 4, 1997 6,007,175 $ 6,007 $ 80,125 $ (52,443) $ --- 708,692 $ (5,757) $ 27,932
========= ====== ======= ======== ======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
The Diana Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
40 Weeks Ended
January 4, January 6,
1997 1996
<S> <C> <C>
Operating Activities:
Loss before extraordinary item $(9,694) $ (853)
Reconciliation of loss to net cash
provided by operating activities:
Losses on sales of marketable securities 736 ---
Depreciation and amortization 346 8
Minority interest (181) 12
Estimated loss on disposal of
discontinued operations 5,550 ---
Net change in discontinued operations (2,808) 5,061
Other (70) 184
Changes in operating assets and liabilities (7,619) (217)
------ ------
Net cash provided (used) by operating activities (13,740) 4,195
Investing activities:
Increase in promissory notes (5,600) ---
Sale of CNC preferred stock 2,500 ---
Additions to property and equipment (1,977) (22)
Purchases of marketable securities --- (469)
Proceeds on sales of marketable securities 1,227 4,273
Net change in discontinued operations (792) (3,312)
Investment in unconsolidated subsidiary --- (1,481)
Other 284 155
------ ------
Net cash provided (used) by investing activities (4,358) (856)
Financing activities:
Repayments of long-term debt (141) (141)
Common stock issued 13,918 ---
Net change in discontinued operations 2,890 (2,259)
Extraordinary item (227) ---
Other (22) 11
------ ------
Net cash provided (used) by financing activities 16,418 (2,389)
------ ------
Increase (decrease) in cash and cash equivalents (1,680) 950
Cash and cash equivalents at the
beginning of the period 4,480 325
------ ------
Cash and cash equivalents at the end
of the period $ 2,800 $ 1,275
====== ======
Non-cash transactions:
Conversion of promissory note into CNC
preferred stock $ 5,000 $ ---
Acquisition of common stock held by
minority shareholder 2,832 ---
Purchase of subsidiary financed by seller --- 1,000
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
The Diana Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the forty weeks ended January 4, 1997 are not necessarily
indicative of the results that may be expected for the fiscal year ended
March 29, 1997. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on
Form 10-K for the fiscal year ended March 30, 1996.
The consolidated group (hereafter referred to as the "Company") included
the following companies during fiscal 1997 and 1996. The following describes
each entity in the consolidated group and its current status:
The Diana Corporation ("Diana")
Diana and its wholly-owned subsidiaries are included in the
consolidated group for fiscal 1997 and 1996. Diana's activities consist
primarily of corporate administration and investing activities.
Sattel Communications Corp. ("SCC")
Diana had a 50% ownership interest in SCC and accounted for its
investment using the equity method of accounting from November 1994 to
December 1995. In January 1996, Diana increased its ownership interest
from 50% to 80%. Subsequently, the Company has increased its ownership
interest in SCC from 80% to 100% (see Note 4). The Company has 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. In April 1996, SCC established Sattel
Communications LLC ("Sattel"). SCC, through its subsidiary Sattel, is
a provider of central office voice and data switching equipment for
communications providers worldwide.
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 (see
Note 3). As such, certain prior year balances have been reclassified in
order to conform to current year presentation.
The computation of loss per common share is based on the weighted
average common shares outstanding (adjusted for the 5% stock dividend, see
Note 5) and dilutive common stock equivalents.
5
<PAGE>
NOTE 2 - Research and Development Costs
Research and development costs are charged to operations when incurred.
Research and development costs were not directly incurred by SCC in the first
three quarters of fiscal 1996 because the intellectual property rights for
its switching products were not acquired by SCC until January 1996. Software
development costs incurred in the development of the Company's switching
products are required to be capitalized once technological feasibility is
established in accordance with Statement of Financial Accounting Standards
("SFAS") No. 86. Technological feasibility is established upon the
successful testing of a prototype or beta-test model based upon the Company'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.
NOTE 3 - Discontinued Operations
On November 20, 1996, the Board of Directors of the Company approved a
restructuring plan 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
APC is a wholly-owned subsidiary of Entree and is Entree's sole
operating company. Valley is an 80%-owned subsidiary of C&L.
The restructuring plan 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 in the second quarter
financial statements. 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 is restricted pursuant to the terms of the
Asset Purchase Agreement. 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.
6
<PAGE>
NOTE 3 - Discontinued Operations (Continued)
APC retained real estate with a net book value of $2.6 million at
February 1, 1997. The real estate is collateral for two mortgage notes that
amount to $794,000. APC has entered into a one year lease with Colorado.
Each party can terminate the lease with 180 days written notice. The real
estate will soon be listed for sale.
The loss on disposal of discontinued operations for the twelve weeks
ended January 4, 1997 represents the Company's loss on the sale of APC. This
amount reflects a provision for certain liabilities related to the sale and
is net of an anticipated gain on the sale of APC's real estate of $367,000.
APC also incurred expenses of $281,000 subsequent to January 4, 1997
resulting from the early termination of the revolving line of credit
established on October 4, 1996 (see Note 7). The Company will reflect an
extraordinary charge of $281,000 in the fourth quarter for these expenses.
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 has been approved by
the Board of Directors. The Company anticipates the sale of these businesses
will be completed within one year. In the second quarter financial
statements, the Company recorded a charge of $3.5 million for the estimated
loss on disposal in connection with the original restructuring plan. The
Company believes that the reserve for loss recorded at January 4, 1997 of
$4,077,000 is sufficient to cover all estimated expenses and net losses to be
incurred with respect to its revised restructuring plan.
7
<PAGE>
NOTE 3 - Discontinued Operations (Continued)
The components of net assets of discontinued operations included in the
balance sheets at January 4, 1997 and March 30, 1996 are as follows (in
thousands):
<TABLE>
<CAPTION>
January 4, 1997
Telecommuni- Network
Meat and cations Installation
Seafood Equipment and Service Total
<S> <C> <C> <C> <C>
Receivables $ 9,889 $ 5,672 $ 3,390 $ 18,951
Inventories 4,484 5,399 158 10,041
Other current assets 1,625 572 260 2,457
Accounts payable (7,619) (3,952) (999) (12,570)
Revolving lines of credit (5,430) (4,037) (776) (10,243)
Other current liabilities (796) (286) (1,098) (2,180)
------- ------- ------- -------
$ 2,153 $ 3,368 $ 935 6,456
======= ======= =======
Reserve for loss on disposal (4,077)
-------
Net current assets of
discontinued operations $ 2,379
=======
Property and equipment, net $ 3,127 $ 313 $ 527 $ 3,967
Intangible assets --- 2,423 2,914 5,337
Other assets 408 323 96 827
Long term debt (749) --- (733) (1,482)
Other liabilities --- --- (299) (299)
------- ------- ------- -------
Net noncurrent assets of
discontinued operations $ 2,786 $ 3,059 $ 2,505 $ 8,350
======= ======= ======= =======
March 30, 1996
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 --- 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
======= ======= ======= =======
</TABLE>
8
<PAGE>
NOTE 3 - Discontinued Operations (Continued)
Operating results, net of minority interest, relating to the
discontinued operations for these periods is as follows (in thousands):
<TABLE>
<CAPTION>
Forty Weeks Ended January 4, 1997
Telecommuni- Network
Meat and cations Installation
Seafood Equipment and Service Total
<S> <C> <C> <C> <C>
Net sales $188,853 $ 19,750 $ 11,540 $220,143
======= ======= ======= =======
Income (loss) from
operations $ (584) $ (51) $ 10 $ (625)
======= ======= ======= =======
Forty Weeks Ended January 6, 1996
Net sales $182,709 $ 19,382 $ 1,402 $203,493
======= ======= ======= =======
Income (loss) from
operations $ (267) $ 781 $ 27 $ 541
======= ======= ======= =======
</TABLE>
No income taxes have been allocated to discontinued operations for the
forty weeks ended January 4, 1997 or January 6, 1996 because there was no
consolidated income tax expense or income tax expense for continuing
operations in these periods.
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 and $123,000
for the forty ended January 4, 1997 and January 6, 1996, respectively and is
included in non-operating income (loss).
NOTE 4 - Sattel Communications
In November 1994, the Company and Sattel Technologies, Inc. ("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 development of the DataNet product.
9
<PAGE>
NOTE 4 - Sattel Communications (Continued)
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 to pay for 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. In
addition, subsequent to March 30, 1996, SCC granted equity participation
interests to certain employees in a newly-formed limited liability company,
Sattel. The Company's effective ownership of Sattel is 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, a wholly-owned
subsidiary of the Company, 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 350 and 100 Class A Units, respectively.
Aggregate capital contributed to Sattel related to these Class A Units
totalled $242,000. The 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 collectively own
1,550 Class B Units, representing all of the Class B Units.
10
<PAGE>
NOTE 4 - Sattel Communications (Continued)
The following table reflects the current ownership of the Class B Units:
Name Class B Units
James J. Fiedler 350
Daniel W. Latham 250
David Held 250
Bruce Thomas 250
Keith Steffel 100
George Perzel 100
Mark Jacques 250
-----
1,550
=====
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 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 amended Class B Agreements in lieu of
provisions of the April 1, 1996 agreement that provided that members holding
Class B Units listed above might require Sattel to conduct an initial public
offering 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 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.
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.
11
<PAGE>
NOTE 4 - Sattel Communications (Continued)
In June 1996, Concentric Network Corporation ("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 551,470 shares of CNC Series D
Preferred Stock ("CNC Preferred Stock") at an exercise price of $1.36 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. Sattel continues to own the warrant
from CNC. The investment in CNC Preferred Stock of $2,572,000 is classified
within other assets in the Condensed Consolidated Balance Sheet.
NOTE 5 - Shareholders' Equity
In April 1996, the Company raised $13,918,000, after commissions and
expenses, through the sale of 430,000 shares of common stock.
On September 3, 1996, the Board of Directors declared a 5% stock
dividend which was paid on October 2, 1996 to shareholders of record on
September 16, 1996. Per share amounts and weighted average shares
outstanding in the accompanying financial statements have been restated for
the stock dividend.
12
<PAGE>
NOTE 6 - 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. Information by industry segment is as follows for the
twelve and forty weeks ended January 4, 1997 (in thousands):
<TABLE>
<CAPTION>
Twelve Weeks Forty Weeks
Ended Ended
January 4, January 4,
1997 1997
<S> <C> <C>
Net sales:
Switching equipment (Sattel) $ 4,337 $ 9,224
======= =======
Operating earnings (loss):
Switching equipment (Sattel) $ (1,079) $ (1,888)
Corporate office (Diana) (907) (2,315)
------- -------
$ (1,986) $ (4,203)
======= =======
Depreciation and amortization:
Switching equipment (Sattel) $ 339
Corporate office (Diana) 7
-------
$ 346
=======
Capital expenditures:
Switching equipment (Sattel) $ 1,964
Corporate office (Diana) 13
-------
$ 1,977
=======
Identifiable assets:
Switching equipment (Sattel) $ 21,752
Discontinued operations 10,729
Corporate office (Diana) 3,262
-------
$ 35,743
=======
</TABLE>
NOTE 7 - Extraordinary Item
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 Condensed Consolidated
Statements of Operations as an extraordinary item pursuant to Statement of
Financial Accounting Standards No. 4.
NOTE 8 - 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
amounts due from Messrs. Fiedler and Latham are included in other non-current
assets in the Condensed Consolidated Balance Sheets.
13
<PAGE>
NOTE 8 - Related Party Transactions (Continued)
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.
Messrs. Fiedler and Latham used the proceeds of the loan to each
purchase 100 non-forfeitable Class B Units of Sattel from Mark Jacques
("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 Jacques whereby 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. Jacques was terminated as an employee
of the Company in January 1997.
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 $186,625 and $749,189, respectively, to Mr. Runge
and Mr. Fisher, in settlement of deferred compensation previously earned and
payments of $342,692 to Mr. Fisher and $82,692 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
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 and amend the Stock
Option Agreements to provide for registration rights. The Company has made
all required payments under the Separation Agreements.
14
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Part II. Other Information
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
The Company's historical results of operations have been restated to
reflect the operations of C&L, Valley and APC as discontinued operations.
The following discussion encompasses the results of operations of the
Company's corporate office and Sattel. Sattel's operations were through 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%. SCC is included in the consolidated financial statements since the
beginning of fiscal 1996 (see Note 1 to the Condensed Consolidated Financial
Statements).
Sattel's revenues and expenses increased in the third quarter and year-
to-date periods of fiscal 1997 as compared to the same time period in fiscal
1996. These increases, as indicated below, are primarily because Sattel's
operations in fiscal 1996 consisted of the start up and development of its
business.
Sattel had sales of $4,337,000 in the third quarter of fiscal 1997,
primarily from the sale of DSS switches. Sattel's fiscal 1997 year-to-date
sales were $9,224,000 primarily from the sale of DSS switches. Approximately
52% and 64% of sales in the third quarter and year-to-date periods of fiscal
1997, respectively, were from sales to CNC.
For the twelve and forty weeks ended January 4, 1997, selling and
administrative expenses increased $2,162,000 and $5,693,000 over the
corresponding periods in fiscal 1996. Selling and administrative expenses
have increased for the twelve weeks ended January 4, 1997 primarily because
of the increase in Sattel's business and to a lesser extent due to increased
corporate office expenses. Selling and administrative expenses have
increased for the forty weeks ended January 4, 1997 primarily because of
increased corporate office expenses and to a lesser extent due to increased
expenses at Sattel. During the third quarter and year-to-date periods of
fiscal 1996, Sattel incurred significantly less selling and administrative
expenses as compared to fiscal 1997 because the business was in the early
stages of its development.
Research and development expense of $1,798,000 and $3,035,000 were
incurred by Sattel during the third quarter and year-to-date periods of
fiscal 1997. An explanation of the increase in research and development
expenses and the Company's accounting policy for these expenses is in Note 2
to the Condensed Financial Statements.
The non-operating loss of $626,000 consists primarily of a loss of
$736,000 on the sale of the Company's remaining marketable securities
partially offset by interest income on short-term investments.
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<PAGE>
Minority interest in fiscal 1997 represents the minority partners' share
of Sattel's third quarter and year-to-date 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 Condensed 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. The Company recorded an
income tax credit of $826,000 in the twelve weeks ended January 4, 1997
relating to this claim and reflected the claim within other current assets in
the January 4, 1997 Condensed Consolidated Balance Sheet.
The loss from continuing operations in the third quarter of fiscal 1996
is primarily due to a loss incurred by Sattel and the Company's corporate
office operating loss. The increase in the loss from continuing operations
for the twelve weeks ended January 4, 1997 as compared to the same period of
time in fiscal 1996 is primarily due to (i) an increase in the Company's
corporate office expenses, (ii) a loss of $726,000 incurred by the Company's
corporate office on the sale of the remaining marketable securities and (iii)
an increase in the loss incurred by Sattel. These unfavorable fluctuations
were partially offset by an income tax credit of $836,000.
The summarized operating results of discontinued operations for the
forty weeks ended January 4, 1997 and January 6, 1996, respectively, are
shown in Note 3 to the Consolidated Financial Statements. The change in the
operating results from discontinued operations from fiscal 1996 to 1997 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 a decrease in gross profit
margins. C&L's operating results decreased due to a decrease in gross profit
margins and an increase in operating expenses.
The estimated loss on disposal of discontinued operations is discussed
in Note 3 to the Condensed Consolidated Financial Statements.
Liquidity and Capital Resources
The Company used cash in operating activities of $13,740,000 during the
forty weeks ended January 4, 1997 as compared to positive cash flow of
$4,195,000 for the same period of time in fiscal 1996. The decrease in cash
flow is primarily attributable to an increase in the net 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.
Included in the net change in working capital items are payments made to
Messrs. Fisher, Lilly and Runge under the Separation Agreements discussed in
Note 8 to the Condensed Consolidated Financial Statements. In addition, the
Company has made payments of $641,000 for professional fees related to the
Restructuring and $200,000 for fees related to the sale of APC, both
discussed in Note 2 to the Condensed Consolidated Financial Statements.
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<PAGE>
The following is a summary of capital contributions made to Sattel (in
thousands):
Cumulative through October 14, 1996 $12,500
Twelve weeks ended January 4, 1997 2,553
January 5, 1997 - February 18, 1997 2,047
------
$17,100
======
In addition, Sattel's note payable to Diana of $1,425,000 will also be
capitalized. Sattel has utilized most of this cash.
The Company's receivables consist of the following at January 4, 1997
(in thousands):
Trade accounts receivable from CNC $ 5,978
Second largest trade account receivable 873
Third largest trade account receivable 737
Other trade accounts receivable 753
------
$ 8,341
======
The increase in receivables is primarily due to a nominal collection by
Sattel on fiscal 1997 sales. At February 18, 1997, Sattel has collected
$51,000 on receivables reflected in the January 4, 1997 Condensed
Consolidated Balance Sheet. The primary reason for the nominal cash receipts
is due to extended payment terms that Sattel has granted to certain customers
and secondarily due to past due amounts from customers.
Sattel has granted CNC the following payment terms:
Total Invoice
Invoice Date Amount Payment Due Date
September, 1996 $1,838,000 January 15, 1997
September, 1996 1,838,000 March 28, 1997
December, 1996 2,302,000 March 28, 1997
---------
$5,978,000
=========
CNC is involved in negotiations to consummate a sale/leaseback
transaction with a third party lessor. The negotiations are apparently in
the final stages. It has been represented to the Company that the payment
due on January 15, 1997 will be made shortly and that the balance of the
receivable will be collected on or before March 28, 1997.
The second largest trade account receivable consists of amounts past due
of $213,000 and the remaining balance of $660,000 is due on March 15, 1997.
The customer with the third largest trade account receivable was given six
month payment terms. Payment from this customer is due March 31, 1997.
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At the present time, the Company has a material liquidity deficiency
because (i) Sattel's revenue growth has been lower than expected, (ii) Sattel
has granted customers extended payment terms and (iii) the Company has made
payments of $2,184,000 in connection with the Restructuring. The Company's
cash and cash equivalents has decreased from $2,800,000 at January 4, 1997 to
under $1 million at February 18, 1997. The Company is unable to upstream
cash from C&L or Valley due to restrictions in their revolving lines of
credit. The Company has upstreamed cash of $335,000 from APC subsequent to
the sale of its assets, however, it is unable to obtain any further cash
until cash held in escrow is released or until APC's building is sold.
APC's restricted cash is held in an escrow account primarily to secure
the collection of APC receivables purchased by Colorado and for reimbursement
of indemnification obligations. Receivables purchased by Colorado that are
not collected by May 4, 1997 may be returned to APC in exchange for cash held
in escrow. All funds remaining in escrow on May 4, 1997 will be returned to
APC, except for $100,000, which will remain in escrow until February 3, 1998.
APC has entered into a one year lease with Colorado for the building,
however, both parties can terminate the lease for any reason within 180 days
of notice of termination. APC will soon list the building for sale. The
real estate is collateral for two mortgages that amount to $794,000.
The Company will take the following action to remedy the liquidity
deficiency:
1. Continue to work with customers to collect past due receivables.
2. Review all expenses to determine expenditures that can be reduced or
eliminated.
3. Attempt to negotiate a secured line of credit with Hambrecht & Quist,
the Company's investment banking firm, or another financial institution.
4. Actively market APC's building to prospective buyers to quickly sell
this asset.
5. Negotiate a sale and leaseback for certain of Sattel's fixed assets.
There is no assurance that the Company will be able to complete all or
part of the above steps before its remaining cash balances are consumed. The
failure to quickly complete all or part of the above items will have a
material adverse effect on the Company's business, financial condition and
results of operations.
On a longer term basis, the Company will need to improve revenue growth
in order to generate cash from operations and maintain its liquidity. In
addition, on a longer term basis, additional financing for the Company's
operations, including working capital for capital expenditure requirements
for Sattel, may come from the sale of additional equity or other securities,
bank borrowings or other sources of capital if available. There is no
assurance that Sattel will achieve its revenue objectives or that the other
sources of capital will be available.
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<PAGE>
Capital expenditures increased to $1,977,000 in fiscal 1997 from $22,000
in fiscal 1996. The increase in capital expenditures is due to purchase of
test equipment and development hardware and third-party software by Sattel.
The Company anticipates that fourth quarter fiscal 1997 capital expenditure
requirements will approximate $220,000 for Sattel.
In June 1996, Concentric Network Corporation ("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 551,470 shares of CNC Series D
Preferred Stock ("CNC Preferred Stock") at an exercise price of $1.36 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. Sattel continues to own the warrant
from CNC.
In the fourth quarter of fiscal 1996 and in the first quarter of fiscal
1997, the Company raised approximately $17.4 million, after commissions and
expenses, through the sale of 600,000 shares of common stock.
The decrease in intangible assets is primarily attributable to the
transaction discussed in Note 4 to the Condensed Consolidated Financial
Statements.
Sattel and StreamLogic have entered into an agreement to establish
SatLogic LLC ("SatLogic"), a company that will be jointly owned by Sattel and
StreamLogic. SatLogic's business purpose will be the implementation and
execution, directly or indirectly, of a wholesale business created to sell or
resell network services elements to other value added network service
providers such as Internet service providers as well as other transactions.
SatLogic will initially be capitalized with a $500,000 cash contribution by
Sattel and a promissory note from StreamLogic in favor of SatLogic for
$1,000,000 secured by the pledge of 735,294 shares of CNC Series D Preferred
Stock owned by StreamLogic. In addition, Sattel and StreamLogic have agreed
to a total commitment of capital to SatLogic of $2 million of which each is
responsible for half.
RISK FACTORS
The Company is being restructured to consist solely of the operations of
Sattel. The restructuring will be achieved through the disposal of APC, C&L
and Valley (the "Restructuring"). 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. 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:
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Reductions in Size and Diversification; Dislocations
After the Restructuring, the Company will be a smaller and less
diversified Company than currently is the case and will have a smaller asset
and revenue base. 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 than currently is
the case. In addition, the Restructuring may result in some temporary
dislocations and inefficiencies to the business operations, as well as the
organization and personnel structures, of the Company.
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.
Dependence on Telecommunications Industry and Small- to Medium-Sized
Switching Market
After the Restructuring, the Company's customers will be 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
adopt alternative architectures or technologies that are incompatible with
the DSS switch, which would 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; Rapid Technological Change; 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 telecommunications equipment market 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
20
<PAGE>
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 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 and, thereby, materially adversely affect 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.
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. Any interruption in business
between Sattel and STI, Sanmina Corporation ("Sanmina") or other outsource
manufacturers could have a material adverse effect on Sattel. Some of the
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 materially adversely affect Sattel's business, financial
condition and results of operations.
21
<PAGE>
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 litigations 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
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 52% and 64% of Sattel's revenues for the quarter and year-
to-date ended December 31, 1996, respectively, were derived from sales to
CNC. For the same periods, Sattel's three largest customers accounted for a
majority of its revenues. 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.
<PAGE>
Difficulties in Managing Growth
Sattel has experienced and may continue to experience growth in the
number of its employees and the scope of its operations. In particular,
Sattel intends to increase its engineering, sales, marketing and support
staff. These increases will result in increased responsibilities for
management. To manage potential future growth effectively, Sattel must
improve its operational, financial and management information systems and
must hire, train, motivate and manage a growing number of 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. During strong business cycles in the industry, Sattel expects to
experience difficulty in filling its needs for qualified sales, engineering
and other personnel. 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 Sattel's business, financial condition and results of operations.
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.
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 materially
adversely affect Sattel's business, financial condition and results of
operations.
Sattel's agreements with its customers typically provide that they may
change delivery schedules within time frames prior to the schedules shipments
date, without significant penalty.
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
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<PAGE>
forecast, and these or other factors can materially adversely affect 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. There can be no assurance
that Sattel will be able to attain profitability on a quarterly or annual
basis. In addition, it is possible that in the future, Sattel's operating
results may be below the expectations of public market analysts and
investors. In such an event the price of the Company's common stock would
likely be materially and adversely affected.
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 customer in April 1996. There can be no
assurance of its successful acceptance in volume by, and operation in, the
telecommunications market in general.
In January the Company announced its new SSA. This architecture
encompasses a client/server approach to low, medium and high speed
communications. There can be no assurance of its successful acceptance in
volume by, and operation in, 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-competition
agreements to protect the product and features that it believes give it
competitive 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 currently outsources its manufacturing to STI, Sanmina and other
non-affiliated contract manufacturers and expects to continue to outsource
manufacturing. As a result, the Company's ability to increase capacity may
be constrained and it expects to have less control over manufacturing than it
would if it performed these 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.
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<PAGE>
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 delivery 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 an
adverse effect on Sattel's future international operations and, consequently,
on the Company's business, results of operations and financial conditions.
Stock Volatility and Recent Transactions
From the period of October 1, 1995 through February 16, 1997, the
closing price of the Company's common stock has been as low as $9.93 and as
high as $98.32 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 including former
officers (see below).
Since January 6, 1996, the number of common shares was increased from
approximately 4.3 million to 5.3 million. The increase from 4.3 million to
5.3 million shares was primarily as a result of a 5% stock dividend, the sale
of new common shares and the payment in shares for the intellectual property
rights and manufacturing rights of the Sattel technology as well as the
purchase of STI's remaining interest in Sattel by the Company. As outlined
in Note 4 of the Condensed Consolidated Financial Statements, the number may
increase an additional 1 million shares upon the conversion of the Sattel
Class A and B Units into Company common stock.
25
<PAGE>
From November 29, 1996 to February 16, 1997, two former officers and
directors, Richard Y. Fisher and Donald E. Runge (see Note 8 to the Condensed
Consolidated Financial Statements), have sold substantial portions of their
share holdings. Mr. Fisher sold approximately 68% of his shares (400,000)
during December 1996 and January 1997. Mr. Runge sold approximately 32% of
his shares (approximately 150,000) during January 1997.
The Company believes that Mr. Fisher currently owns approximately
185,000 shares and that Mr. Runge currently owns approximately 315,000
shares. Each individual also owns options for 275,378 common shares which
are exercisable through December 31, 1997.
Stock Exchange Listing
The Company has received preliminary favorable indications from the
NASDAQ staff that quotation on such market will be approved. The Company was
recently notified by the New York Stock Exchange ("NYSE") that the NYSE is
considering commencing delisting action because the Company has substantially
reduced its operations with the sale of APC. The Company has filed an
application to have the Company common stock quoted on the NASDAQ National
Market.
Forward Looking Statements
The following may be considered "forward looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995: the
Company's estimate of fourth quarter fiscal 1997 capital expenditures and
statements regarding the Company's liquidity. Actual results or developments
may differ materially from those contained in the forward looking statements.
Factors which may cause such a difference to occur include but are not
limited to (i) whether the Company can continue to grow its business, (ii)
product demand, competition, the cost of products, and industry conditions,
and (iii) the risks and uncertainties relating to Sattel's business. See
"Risk Factors" above.
Item 5. Other Information
On November 29, 1996, Richard Y. Fisher resigned as Chairman of the
Board of Directors and Chief Executive Officer and Sydney B. Lilly resigned
as Executive Vice President. James J. Fiedler was appointed Chairman of the
Board of Directors and Chief Executive Officer of the Company effective
November 29, 1996. In addition, Daniel W. Latham was elected a director of
the Company on November 20, 1996 and was appointed President and Chief
Operating Officer of the Company effective November 29, 1996. J. Michael
Camp was elected a director of the Company effective November 29, 1996.
On February 10, 1997, the Company issued a news release announcing that
it had sold three DSS switches to Lightcom International, Inc. One of the
switches was delivered and recorded as a sale in the quarter ended January 4,
1997. The Company anticipates that the other two switches will be delivered
in fiscal 1998.
26
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
27 - Financial Data Schedule
b) Reports on Form 8-K:
None
Signatures
Pursuant to the requirements 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.
THE DIANA CORPORATION
By: /s/ James J. Fiedler
Chairman of the Board and
Chief Executive Officer
(Principal Executive
Officer)
By: /s/ R. Scott Miswald
Vice President and Treasurer
(Principal Financial and
Accounting Officer)
DATE: February 18, 1997
27
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF THE DIANA CORPORATION AS OF AND FOR THE 40
WEEKS ENDED JANUARY 4, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-29-1997
<PERIOD-START> MAR-31-1996
<PERIOD-END> JAN-04-1997
<CASH> 2800
<SECURITIES> 0
<RECEIVABLES> 8341
<ALLOWANCES> 0
<INVENTORY> 3247
<CURRENT-ASSETS> 18313
<PP&E> 2317
<DEPRECIATION> (229)
<TOTAL-ASSETS> 35743
<CURRENT-LIABILITIES> 5587
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0
0
<COMMON> 6007
<OTHER-SE> 21925
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<SALES> 9224
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<CGS> 2438
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<OTHER-EXPENSES> 10989
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<INCOME-PRETAX> (4355)
<INCOME-TAX> 836
<INCOME-CONTINUING> (3519)
<DISCONTINUED> (6175)
<EXTRAORDINARY> (227)
<CHANGES> 0
<NET-INCOME> (9921)
<EPS-PRIMARY> (1.89)
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