SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(Amendment No. 2)
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Earliest Event Reported): October 15, 1997
Exact name of Registrant
as specified in its charter: The Diana Corporation
State or Other Jurisdiction of Incorporation: Delaware
Commission File Number: 1-5486
I.R.S. Employer Identification Number: 36-2448698
Address of Principal Executive Office: 26025 Mureau Road
Calabasas, CA 91302
Registrant's Telephone Number, Including Area Code: (818) 878-7711
ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
(a) Previous independent accountants
(i) On October 15, 1997, after completion of the March 31, 1997
fiscal year audit, Price Waterhouse LLP, the Registrant's
former independent accountants, in a letter addressed to the
Registrant's Chairman and CEO with a copy to the Chief
Accountant at the SEC, confirmed that the client - auditor
relationship between The Diana Corporation and Price
Waterhouse LLP had ceased upon the resignation of Price
Waterhouse LLP. During the third quarter of fiscal 1997,
ending on January 4, 1997, the Registrant announced a
restructuring plan to concentrate its resources on one line
of business (communications switching) via its holdings in
Sattel Communications LLC, and to discontinue, from an
accounting standpoint, and to divest its other holdings.
Its largest subsidiary, Atlanta Provision Company, Inc., was
sold in February 1997. The Registrant subsequently moved
its headquarters to Calabasas, California from Milwaukee,
Wisconsin. The remaining two discontinued operations are to
be sold before March 31, 1998. The change in both scope and
size of annual revenues (from over $200,000,000 to
approximately $10,000,000) going forward as well as the
change in management and locations (now the former Sattel
management in California) led to the cessation of the client
- auditor relationship between Price Waterhouse LLP and the
Registrant.
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(ii) The reports of Price Waterhouse LLP on the financial
statements for the past two fiscal years contained no
adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or
accounting principle, except as to the uncertainties noted
in the Report of Independent Accountants filed with the
Registrant's Form 10-K dated September 22, 1997. The
uncertainties noted were as follows:
The Registrant initiated a restructuring plan during fiscal
1997 which resulted in Sattel Communications ("Sattel")
becoming the sole operating company comprising the
Registrant's continuing operations. Sattel has a limited
operating history and has not yet achieved significant sales
of its products. The Registrant's other operating companies
were sold or are held for sale as of March 31, 1997.
Management believes the Registrant 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 Registrant with respect to the net
assets held for sale could have a material adverse effect on
the Registrant. In addition, the Registrant's viability is
further dependent on Sattel achieving sales levels and
operating results sufficient to fund the Company's
operations. Finally, the Registrant is subject to
uncertainties relating to class action litigation asserted
against the Registrant and other potential claims by
investors, the ultimate effects of which on the Registrant's
financial position, results of operations and cash flows
cannot presently be determined.
(iii) The Registrant's Audit Committee members and the
Registrant's Chief Accounting Officer, have begun the
process of searching for a new independent accounting firm.
The Company's audit committee was not involved by Price
Waterhouse LLP regarding its decision to end the client -
auditor relationship with the Registrant.
(iv) Except as mentioned below, in connection with its audits for
the two most recent fiscal years and through October 15,
1997, there have been no disagreements with Price Waterhouse
LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or
procedure which disagreements if not resolved to the
satisfaction of Price Waterhouse LLP would have caused them
to make reference thereto in their report on the financial
statements for such years.
During the audit of the fiscal 1997 financial statements a
difference of opinion arose relating to the audit procedures
necessary with respect to certain customer sales, including
CNC. The difference of opinion was with respect to the
timing and manner of further Price Waterhouse LLP direct
contact in addition to written receivable confirmation
requests with the Registrant's customers and the Registrant
management's concern regarding both pending legal
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proceedings with customers and/or potential adverse effect
on the Registrant's customer relationships. After further
discussion, the manner of the customer contact was mutually
agreed upon and the initial disagreement thus was promptly
(within 1 day) resolved. No disagreements in accounting
related to these sales arose. The Audit Committee discussed
the subject matter of this disagreement with Price
Waterhouse LLP. The Company has authorized Price Waterhouse
LLP to respond fully to the inquiries of its successor
auditors concerning the subject matter of this disagreement.
(v) During the two most recent fiscal years and through October
15, 1997, the Registrant's management believes that there
have been no reportable events (as defined in Regulation S-K
Item 304(a)(1)(v)) except as follows:
(1) During the year-end audit of the accounts for fiscal
1997, the following weaknesses in internal control
were identified:
(1.1) Errors, including instances of failure to
properly consider, with respect to the
Registrant's policy, the effect of non-
standard contract provisions on revenue
recognition.
(1.2) Need for a more structured approach by which
to thoroughly complete and document a review
of relevant terms and conditions for all
contracts consistent with the Registrant's
revenue recognition policy/procedure and
required revenue recognition criteria.
Upon further review by the Company it was determined
that certain sales transactions at the Registrant's
Sattel Communications ("Sattel") operation were not
consistent with the Sattel policy and procedure and
the criteria required to support revenue recognition
in accordance with generally accepted accounting
principles. These errors resulted in revisions to
previously reported unaudited financial information
with respect to the second and third quarters of
fiscal 1997. These revisions, which were included and
reported in Note 16 Quarterly Results of Operations
(Unaudited) of Form 10-K filed in respect of the
fiscal year 1997, were as follows:
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FISCAL YEAR ENDED MARCH 31, 1997
(In Thousands, Except Per Share Amounts)
12 Weeks Ended
----------------------------------------
October 12, 1996 January 4, 1997
------------------- -------------------
Originally Originally
Reported Revised Reported Revised
---------- ------- ---------- -------
Net Sales $ 4,046 $ 3,666 $ 4,337 $ 2,552
Gross Profit
(Loss) 3,034 2,775 3,057 1,842
Net Loss $(4,598) $(4,737) $(4,001) $(5,936)
Net Loss Per
Common Share $ (.87) $ (.90) $ (.76) $ (1.12)
(2) In addition to the matter reported in (v)(1) above, it
was also noted that internal control weaknesses
existed, which did not result in revisions to
previously reported financial information, relative to
insufficient identification and control surrounding
Sattel's maintenance of detailed historical cost and
accumulated depreciation information by individual
asset, and that the timeliness and quality of account
reconciliations and supporting analysis requires
improvement in order to ensure that procedures are in
place to support expected increases in transaction
volumes anticipated by the Registrant.
The following actions are being taken by the Registrant's
management to correct the identified weaknesses:
- Strengthening of the Registrant's financial organization
to increase the number of personnel qualified to address
revenue recognition issues and to improve the timeliness
and quality of account reconciliations and analysis.
- Implementation of a more timely and diligent review and
resolution by management of all non-standard contract
terms and conditions.
- Development and implementation of a comprehensive system
to identify and properly address relevant revenue
recognition considerations.
- Implementation of an enhanced fixed assets accounting and
control system.
(b) New independent accountants
(i) The Registrant will file a separate current report on Form
8-K once it has engaged its new independent accountants.
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits
16.1 Letter dated November 5, 1997 from Price Waterhouse
LLP
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
(Registrant)
Date: November 5, 1997 /s/ Brian A. Robson
Vice President and Controller
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Price Waterhouse LLP
100 East Wisconsin Avenue
Suite 1500
Milwaukee, WI 53202
November 5, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
The Diana Corporation
We have read Item 4 of The Diana Corporation's Form 8-K/A
(Amendment No. 2) dated October 15, 1997 and are in agreement with
the statements contained in paragraph 4(a) therein, with the
following exceptions:
(a)(i) We make no comment regarding the sentences following the
first sentence of paragraph 4(a)(i).
(a)(v) We make no comment regarding the actions which management
has indicated are being taken to correct the identified
weaknesses.
Further, we wish to note that the identified weaknesses reported in
paragraph 4(a)(v) were communicated in writing by us to the Audit
Committee.
Yours very truly,
/s/ Price Waterhouse LLP
