-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UNblshVYoeFvraWLLUmr7Z9L7eSpwQnOtO5RGIOFGnx9/rD9uDvWD+85y46KDf/b Dr8h9yy6ijPwmwF95zOtnw== 0000057201-96-000025.txt : 19960724 0000057201-96-000025.hdr.sgml : 19960724 ACCESSION NUMBER: 0000057201-96-000025 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19950401 FILED AS OF DATE: 19960723 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIANA CORP CENTRAL INDEX KEY: 0000057201 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-GROCERIES & RELATED PRODUCTS [5140] IRS NUMBER: 362448698 STATE OF INCORPORATION: DE FISCAL YEAR END: 0403 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-05486 FILM NUMBER: 96597631 BUSINESS ADDRESS: STREET 1: 8200 W BROWN DEER ROAD CITY: MILWAUKEE STATE: WI ZIP: 53223-1706 BUSINESS PHONE: 4143550037 FORMER COMPANY: FORMER CONFORMED NAME: FH INDUSTRIES CORP DATE OF NAME CHANGE: 19850814 FORMER COMPANY: FORMER CONFORMED NAME: SCOT LAD FOODS INC DATE OF NAME CHANGE: 19841202 10-K/A 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A (Amendment No. 1) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended April 1, 1995 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission file Number 1-5486 THE DIANA CORPORATION (Exact name of registrant as specified in its charter) Delaware 36-2448698 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8200 W. Brown Deer Road, Suite 200, Milwaukee, Wisconsin 53223 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (414) 355-0037 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, $1.00 Par Value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes ___ No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[ ] At June 15, 1995, the aggregate market value of the voting stock of the registrant held by stockholders who were not affiliates of the registrant was $17,127,000. At June 15, 1995, the registrant had issued and outstanding an aggregate of 3,914,837 shares of its Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive proxy statement to be filed within 120 days after the end of the fiscal year covered by this report are incorporated by reference into Part III hereof. ITEM 6. SELECTED FINANCIAL DATA THE DIANA CORPORATION SELECTED FINANCIAL DATA (In Thousands, Except Per Share Amounts)
April 1, April 2, April 3, March 28, March 30, 1995 1994 1993 1992 1991 ------- ------- ------ -------- -------- (3) (2) (4) Net sales $250,386 $243,641 $222,254 $161,607 $185,245 ======= ======= ======= ======= ======= Earnings (loss) from continuing operations.... $ (720) $ 3,457 $ 1,857 $ (1,013) $ (2,519) Loss from discontinued operations............... --- --- --- --- (8,687) Extraordinary items....... --- (266) 1,318 --- 16,937 Accounting change......... --- 262 --- --- --- ------- ------- ------- ------- ------- Net earnings (loss)....... $ (720) $ 3,453 $ 3,175 $ (1,013) $ 5,731 ======= ======= ======= ======= ======= Earnings (loss) per common share: Primary Continuing operations... $ (.19) $ .93 $ .51 $ (.27) $ (.61) Discontinued operations. --- --- --- --- (2.10) Extraordinary items..... --- (.07) .36 --- 4.09 Accounting change....... --- .07 --- --- --- ------- ------- ------- ------- ------- Net earnings (loss)... $ (.19) $ .93 $ .87 $ (.27) $ 1.38 ======= ======= ======= ======= ======= Fully diluted Continuing operations... $ (.19) $ .89 $ .51 $ (.27) $ (.61) Discontinued operations. --- --- --- --- (2.10) Extraordinary items..... --- (.07) .36 --- 4.09 Accounting change....... --- .07 --- --- --- ------- ------- ------- ------- ------- Net earnings (loss)... $ (.19) $ .89 $ .87 $ (.27) $ 1.38 ======= ======= ======= ======= ======= Cash dividends per common share................... $ --- $ --- $ --- $ --- $ --- ======= ======= ======= ======= ======= Total assets............. $ 45,327 $ 54,043 $ 46,072 $ 40,536 $ 34,644 Long-term debt (1)....... 5,869 7,489 6,142 3,409 1,640 Working capital.......... 15,489 21,207 17,490 18,942 21,917 Shareholders' equity..... 19,729 18,852 15,492 12,326 13,959 (1) Includes current portion of long-term debt. (2) The fourth quarter of fiscal 1992 contains the results of C&L, which was acquired in December 1991. (3) Fiscal 1993 contains 53 weeks. All other years contain 52 weeks. (4) In fiscal 1991, discontinued operations consisted of Retailing Corporation of America (RCOA), an operator of specialty retail stores. The extra- ordinary items consisted of gains on the deconsolidation of RCOA and on the extinguishment of debt.
1 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations - Fiscal Year Ended April 1, 1995 versus April 2, 1994 The following is a summary of sales for fiscal 1995 and 1994, including sales by significant product line for APC: 1995 1994 ---- ---- (In Thousands) C&L $ 35,245 $ 28,308 Beef 107,055 116,557 Pork 42,700 40,770 Other 65,386 58,006 ------- ------- APC Total 215,141 215,333 ------- ------- $250,386 $243,641 ======= ======= For the fiscal year ended April 1, 1995, net sales increased $6,745,000 or 2.8% over fiscal 1994. C&L's net sales increased $6,937,000 or 24.5% over fiscal 1994. C&L's sales increase is due primarily to increased sales of call controllers (see discussion in the following paragraph) and products used in digital networks for integrated voice and data communications systems. APC's net sales decreased $192,000 or .1% over fiscal 1994 net sales. APC's overall volume (based on tonnage) during this period increased by 1.8%. The average sales price per pound decreased from $1.22 per pound in fiscal 1994 to $1.20 per pound in fiscal 1995. The decrease in average sales price per pound is attributable to sales price decreases in beef and pork because of excess product availability in these markets as well as changes in the mix of product sold. The decrease in beef sales is primarily attributable to reduced average sales price per pound and to a lesser extent decreased volume. During the second quarter of fiscal 1995 C&L completed the sale of call controllers pursuant to a purchase commitment made by a customer in fiscal 1994. This order resulted in call controller sales of $3,648,000 in fiscal 1995. Sales attributable to this order significantly impacted the increase in C&L's year-to-date call controller sales and total year-to-date sales over the prior year results. During the fourth quarter of fiscal 1995, C&L's sales were 10% below fourth quarter fiscal 1994 sales. This decrease in sales is primarily attributable to lower call controller sales. The fourth quarter of fiscal 1994 included sales under the purchase commitment referred to above. In addition, the market for call controllers has been negatively impacted by a continuing consolidation of long distance carriers and continuing growth of equal access resulting in a reduction of demand for the product. Long distance carriers have historically been the largest customer group purchasing call controllers. The decrease in long distance carriers has and will continue to result in lower unit sales of call controllers. Equal access is the ability of a long distance customer to access a long distance carrier by dialing 1 and not a string of long dialing codes. One of the functions of the call controller is to simplify the access to a carrier network that is not provided equal access. Once access to the carrier network is simplified through equal access, the need for a call controller for this purpose is eliminated. 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations - (Cont.) The components of other income (loss) and non-operating income are disclosed in Note 7 to the Consolidated Financial Statements. The decrease in other income (loss) is attributable to lower interest income from marketable securities and losses incurred on the disposition of marketable securities. The increase in interest rates during fiscal 1995 adversely impacted Diana's marketable securities which prior to the end of the second quarter of fiscal 1995 consisted primarily of investments in corporate debt obligations. Consequently, Diana's corporate office has reduced its investment in these securities resulting in reduced interest income and losses on investments that were sold. In addition, during fiscal year 1994, Diana recorded $747,000 of interest income resulting from the refund of federal income taxes of $400,000 (shown separately as an income tax credit) paid in a prior year. In fiscal 1995 gross profit increased $287,000 or 2.6% over fiscal 1994. On a consolidated basis, gross profit as a percentage of net sales was 4.5% in fiscal 1995 unchanged from fiscal 1994. C&L's gross profit percentage was 19.5% in fiscal 1995 as compared to 20.7% in fiscal 1994. The decrease in C&L's gross profit percentage is due to a lower gross profit percentage achieved on the large call controller sale discussed above and to an increasingly competitive market for products used in digital networks for integrated voice and data communications systems. APC's gross profit percentage was 2% in fiscal 1995 as compared to 2.3% in fiscal 1994. APC's fiscal 1995 gross profit and gross profit percentage decreased from fiscal 1994 primarily due to increased transportation and warehouse costs and inventory losses due to inefficiencies in APC's warehouse and transportation operations (see discussion below) partially offset by lower product costs. For the fiscal year ended April 1, 1995, selling and administrative expenses increased $1,157,000 or 12.6% over fiscal 1994. Selling and administrative expenses have increased primarily because of increased selling and advertising expenses incurred by C&L to penetrate new and existing markets. During fiscal 1995 C&L incurred expenses attributable to the development and distribution of an updated product catalog, increased participation in trade shows and increased advertising and promotional efforts. In addition, C&L attempted to expand its business outside of the United States through the development of an international sales department and the opening of a sales and distribution office in Mexico. As a result of these efforts, C&L increased its business as evidenced by the sales increase of 24.5% in fiscal 1995 as compared to fiscal 1994. The attempt to expand international business was unsuccessful due to the devaluation of the Peso and the international sales department and office in Mexico were closed. C&L is reviewing its sales and marketing program in order to reduce expense levels which increased in fiscal 1995 as a result of the aforementioned items. Selling and administrative expenses as a percentage of net sales was 4.1% in fiscal 1995 as compared to 3.8% in fiscal 1994. 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations - (Cont.) For the fiscal year ended April 1, 1995, interest expense decreased $93,000 or 7.8% over fiscal 1994. The decrease is primarily attributable to a reduction in short term borrowings by Diana's corporate office. Diana's corporate office utilized short term (margin) borrowings to purchase some marketable securities. Some of the proceeds from the sale of marketable securities as discussed above were used to repay all of the short term borrowings. Short term borrowings were eliminated during the second quarter of fiscal 1995. As further discussed in Note 11 to the Consolidated Financial Statements, the decrease in minority interest is attributable to the Company's acquisition of the remaining 20% of C&L's common stock from its minority shareholders. In fiscal 1995, APC continued to incur inefficiencies in its warehouse and transportation operations which began in fiscal 1994. APC incurred increased warehouse and transportation payroll expenses and inventory losses resulting from a continuation of the operating inefficiencies. Consequently, APC made management changes and implemented new procedures in an attempt to improve its warehouse and transportation operations. Furthermore, during the latter part of fiscal 1995's third quarter, APC began selling to Sam's Club, a significant, new customer. APC services the Southeastern region of this national warehouse club. This new customer will generate a significant amount of volume at margins that are lower than APC's average historical margins. Initially, the addition of this new business increased the operational inefficiencies discussed above which management believes is the primary reason for the loss of $749,000 incurred in the fourth quarter of fiscal 1995. After the resolution of these operational inefficiencies, APC should be able to service this customer at a lower average cost than its other customers because of efficiencies that should result from shipping large volumes of product. Although APC does not have a contractual relationship with Sam's Club, it believes that Sam's Club will continue to purchase product from APC. Due to the addition of this new customer and the limits on APC's ability to efficiently service certain customers, APC is reviewing and evaluating the service requirements and profitability of these customers to identify less profitable business that can be discontinued. Results of Operations - Fiscal Year Ended April 2, 1994 versus April 3, 1993 The following is a summary of sales for fiscal 1994 and 1993, including sales by significant product line for APC: 1994 1993 ---- ---- (In Thousands) C&L $ 28,308 $ 21,517 Beef 116,557 120,454 Pork 40,770 31,617 Other 58,006 48,666 ------- ------- APC Total 215,333 200,737 ------- ------- $243,641 $222,254 ======= ======= 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations - (Cont.) For the fiscal year ended April 2, 1994, net sales increased $21,387,000 or 9.6% over fiscal 1993. C&L's net sales increased $6,791,000 or 31.6% over fiscal 1993. C&L's sales increase is due primarily to increased sales of products used in digital networks for integrated voice and data communications systems and other digital products recently added to C&L's product line. C&L had smaller increases in call controller sales than its digital products because of reduced sales in the first and second quarter of fiscal 1994. The market for call controllers has been negatively impacted by a continuing consolidation of long distance carriers and continuing growth of equal access resulting in a reduction of demand for the product. C&L tried to mitigate this trend through the acquisition of Bobby Hollis D/B/A The Hollis Group ("Hollis"). Hollis is a national distributor of call controllers. Hollis' sales for the year ended December 31, 1992 were $5,760,000. This acquisition resulted in additional call controller business to C&L, however, it did not offset the effects of market consolidation. In addition, C&L is attempting to diversify its product line, through the introduction of ISDN, ATM, frame relay and digital switches, in order to reduce the significance of the call controller business. APC's net sales increased $14,596,000 or 7.3% over fiscal 1993. APC's overall volume (based on tonnage) during this period increased by 5.2%. The average sales price per pound increased from $1.20 per pound in fiscal 1993 to $1.22 per pound in fiscal 1994. This increase is primarily due to a modest sales price increase in all product lines and to a lesser extent a change in the mix of the product. In fiscal 1994 gross profit increased $1,956,000 or 21.9% over fiscal 1993. On a consolidated basis, gross profit as a percentage of net sales was 4.5% in fiscal 1994 as compared to 4% in fiscal 1993. The increase in the gross profit percentage is primarily attributable to an increase of C&L's higher gross profit sales as a percentage of total sales (11.6% in fiscal 1994 compared to 9.7% in fiscal 1993). C&L's gross profit percentage was 20.7% in fiscal 1994 as compared to 20.5% in fiscal 1993. C&L's gross profit percentage increased because of increased gross profit margins on products used in digital networks for integrated voice and data communications systems. APC's gross profit percentage was 2.3% in fiscal 1994 which was unchanged from fiscal 1993. For the fiscal year ended April 2, 1994, selling and administrative expenses increased $723,000 or 8.6% over fiscal 1993. The primary reasons for this increase are due to increased selling expenses by C&L to penetrate new and existing markets and increased expenses related to the acquisition of Hollis. Selling and administrative expenses as a percentage of net sales was 3.8% in fiscal 1994 which was unchanged from fiscal 1993. For the fiscal year ended April 2, 1994, interest expense increased $453,000 or 61.4% over fiscal 1993. The primary reasons for this increase are due to increased borrowings by APC under its revolving line of credit and increased margin borrowings by Diana's corporate office used to purchase marketable securities. In the first and second quarter of fiscal 1993, Diana provided APC with its working capital funds which resulted in no interest expense being recorded on a consolidated basis. 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations - (Cont.) The components of other income and non-operating income are disclosed in Note 7 to the Consolidated Financial Statements. Diana's corporate office generated increased investment income in fiscal 1994 as compared to fiscal 1993. A portion of the increased investment in marketable securities was funded by increased margin borrowings discussed above. In addition, in fiscal 1994 other income included interest income of $747,000 resulting from the refund of federal income taxes of $400,000 (shown separately as an income tax credit) paid in a prior year. The extraordinary items of $266,000 for fiscal 1994 are discussed in Note 10 to the Consolidated Financial Statements. APC began to incur inefficiencies in its warehouse and transportation operations in the third quarter of fiscal 1994, partially attributable to increased volume. These inefficiencies resulted primarily in increased payroll expenses which exceeded prior years and budgeted amounts in fiscal 1994. These increased expenses adversely impacted APC's fourth quarter results. As a result, APC incurred a loss of $71,000 during the fourth quarter of fiscal 1994 after reporting profitable results of operations during the first three quarters of fiscal 1994. Liquidity and Capital Resources The Company recorded cash flow from operating activities of $6,717,000 as compared to cash used by operating activities of $308,000 in fiscal 1994. Cash outflow from the loss of $720,000 in fiscal 1995 was more than offset by a net decrease in working capital items, primarily inventory and accounts payable. Inventory decreased by $3,204,000 or 20.7% from fiscal 1994 due to better management of inventory through a reduction in inventory levels and increased inventory turnover. At the end of fiscal 1994, APC increased its pork inventories in anticipation of price increases and C&L increased its inventories because of a purchase commitment from a customer. Accounts payable increased by $718,000 or 6.2% from fiscal 1994 which is primarily due to longer payment terms obtained by APC from vendors providing product that is sold to the significant new customer (previously discussed) as compared to payment terms from APC's primary existing vendors. The Company's investments in marketable securities decreased $5,043,000 in fiscal 1995. This decrease is primarily attributable to losses of $1,227,000 incurred on the sales of marketable securities, the elimination of short-term borrowings incurred to purchase marketable securities on margin and the settlement payments in the Ossmann Suit. As more fully discussed in Note 10 to the Consolidated Financial Statements, in March 1994 the Ossmann Suit was settled. In fiscal 1995, pursuant to the settlement, total payments of $3,417,000 were made by the defendants in the litigation of which $2,822,000 was made by the Company. 6 In fiscal 1995, the Company had $599,000 of capital expenditures consisting primarily of purchases by APC to improve its distribution facility and upgrade its warehouse equipment. The Company estimates that fiscal 1996 capital expenditures will approximate $550,000-$750,000. Significant capital expenditures are anticipated for C&L's data processing requirements and improvements to APC's distribution facility. The improvements to APC's distribution facility will eliminate some of the factors contributing to the warehouse inefficiencies previously discussed. C&L's and APC's Loan and Security Agreements include covenants that restrict capital expenditures. In fiscal 1996, C&L's and APC's capital expenditures will be limited to an aggregate of $900,000 because of covenants in their Loan and Security Agreements that restrict capital expenditures. C&L's credit facility provides a revolving line of credit of up to $6,000,000 with interest at the prime rate plus .25% (9.25%) through December 1995. At April 1, 1995, C&L borrowed $2,562,000 and had available unused borrowing capacity of $3,011,000. APC's credit facility provides a revolving line of credit of up to $9,500,000 with interest at the prime rate plus 2% (11%) through November 1997. A $2 million letter of credit facility is included within the total credit facility. At April 1, 1995, APC borrowed $4,241,000 and had letters of credit of $1,500,000 issued on its behalf. At April 1, 1995, APC had available unused borrowing capacity of $3,009,000. APC's Loan and Security Agreement contains financial covenants requiring a minimum level of tangible net worth, earnings and net cash flow. At April 1, 1995 APC failed to satisfy all of the aforementioned financial covenants. In June 1995, APC and its lender entered into a waiver and amendment agreement relating to the Loan and Security Agreement in order to avoid violating certain financial covenants in fiscal 1995 and 1996. The amendment provides for the following financial covenants during fiscal 1996: minimum tangible net worth of $4,000,000, earnings of not less than $400,000 and net cash flow on a rolling thirteen period basis (measured at the end of each four week period) ranging from $(125,000) to $500,000. At June 28, 1995, based upon the representations and projections of APC's management, the Company believed that APC would meet the financial covenants during fiscal 1996 or would obtain any required waivers from the lender. APC's lender did not grant to APC a grace period in connection with the waiver granted to APC. Borrowings under the APC credit facility are classified as short term because APC's Loan and Security Agreement provides for repayment of borrowings after a 90 day notice from the lender. On June 25, 1993, C&L acquired certain assets and assumed certain liabilities of Hollis, a national distributor of call controllers, for $1,983,000. Cash utilized to make this acquisition was obtained primarily from C&L's revolving line of credit and from a loan of $500,000 from one of C&L's minority shareholders which was subsequently repaid. Effective June 1994, the Company acquired the remaining 20% of C&L's common stock from its minority shareholders in exchange for 265,262 shares (adjusted for the 5% stock dividend paid in July 1994) of the Company's common stock. This acquisition will not change the nature of the Company's operation of C&L. 7 In December 1994, the Company and Sattel entered into a general partnership agreement to establish Satcom. The Company and Sattel each received a 50% interest in Satcom. Profits and losses are allocated equally among the two partners. Under the terms of this agreement, initial contributions to be made to the partnership by Diana were operating capital and the cost of a marketing study which in the aggregate would not exceed $200,000. In addition, the Company agreed to prepare a business plan and arrange for ongoing product production if the partners approve the marketing plan. Sattel agreed to develop, design and test a telecommunications product, manufacture three units, provide administrative services and provide the use of its facilities to Satcom until permanent facilities were determined. Accounting Pronouncements Effective April 2, 1994, the Company adopted the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". The effect as of April 2, 1994 of adopting SFAS No. 115 increased net earnings by $412,000, or $.11 per fully diluted share. Effective April 4, 1993, the Company adopted the liability method of accounting for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes". The cumulative effect as of April 4, 1993 of adopting SFAS No. 109 increased net earnings for fiscal 1994 by $262,000. Impact of Inflation Inflation has not had a significant impact on net sales or earnings (loss) before extraordinary items or accounting change for the three most recent fiscal years. 8 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA THE DIANA CORPORATION AND SUBSIDIARIES PAGE Report of Ernst & Young LLP, Independent Auditors............... 10 Consolidated Balance Sheets..................................... 11 Consolidated Statements of Operations........................... 12 Consolidated Statements of Changes in Shareholders' Equity...... 13 Consolidated Statements of Cash Flows........................... 14 Notes to Consolidated Financial Statements...................... 15 9 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors and Shareholders The Diana Corporation We have audited the accompanying consolidated balance sheets of The Diana Corporation and subsidiaries (the Company) as of April 1, 1995 and April 2, 1994, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended April 1, 1995. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Diana Corporation and subsidiaries at April 1, 1995 and April 2, 1994, and the consolidated results of its operations and its cash flows for each of the three years in the period ended April 1, 1995, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. As discussed in Note 8 to the consolidated financial statements, the Company changed its method of accounting for income taxes, effective April 4, 1993. Milwaukee, Wisconsin ERNST & YOUNG LLP June 2, 1995, except for Note 3 as to which the date is June 28, 1995 10 THE DIANA CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)
April 1, April 2, 1995 1994 ------- ------- ASSETS (NOTE 3) Current assets Cash and cash equivalents............................ $ 2,440 $ 1,661 Restricted short-term investment..................... 300 630 Marketable securities................................ 6,211 11,254 Receivables, less allowance for doubtful accounts of $600 and $517.................. 14,785 15,310 Inventories.......................................... 12,237 15,441 Other current assets................................. 390 336 ------ ------ Total current assets............................... 36,363 44,632 Property and equipment Land................................................. 357 357 Building and improvements............................ 4,400 4,154 Fixtures and equipment............................... 3,298 3,315 ------ ------ 8,055 7,826 Less accumulated depreciation........................ (4,252) (3,945) ------ ------ 3,803 3,881 Goodwill, net.......................................... 2,846 2,710 Covenants not to compete, net.......................... 1,291 1,663 Other assets........................................... 1,024 1,157 ------ ------ $45,327 $54,043 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Short-term borrowings................................ $ 4,241 $ 8,766 Accounts payable..................................... 12,355 11,637 Accrued liabilities.................................. 1,390 1,072 Current portion of long-term debt.................... 2,888 1,950 ------ ------ Total current liabilities...................... 20,874 23,425 Long-term debt......................................... 2,981 5,539 Net liabilities of unconsolidated subsidiary........... 698 3,615 Other liabilities ..................................... 1,045 977 Minority interest...................................... --- 1,635 Commitments and contingencies (Note 4)................. 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 4,810,353 and 4,637,530 shares....... 4,810 4,638 Additional paid-in capital........................... 48,548 46,241 Accumulated deficit.................................. (28,178) (25,449) Unrealized loss on marketable securities............. (713) (412) Treasury stock at cost............................... (4,738) (6,166) ------ ------ Total shareholders' equity..................... 19,729 18,852 ------ ------ $45,327 $54,043 ====== ======
See notes to consolidated financial statements. 11 THE DIANA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, Except Per Share Amounts)
Fiscal Year Ended ------------------------------ April 1, April 2, April 3, 1995 1994 1993 -------- -------- -------- Net sales.............................. $250,386 $243,641 $222,254 Other income (loss).................... (417) 2,697 1,471 ------- ------- ------- 249,969 246,338 223,725 Cost of sales.......................... 239,198 232,740 213,309 Selling and administrative expenses.... 10,314 9,157 8,434 ------- ------- ------- Operating earnings..................... 457 4,441 1,982 Interest expense....................... (1,098) (1,191) (738) Non-operating income................... 34 --- 718 Income tax credit...................... --- 400 --- Equity in earnings (loss) of unconsolidated subsidiaries.......... (69) 97 69 Minority interest...................... (44) (290) (174) ------- ------- ------- Earnings (loss) before extraordinary items and accounting change.......... (720) 3,457 1,857 Extraordinary items.................... --- (266) 1,318 ------- ------- ------- Earnings (loss) before accounting change............................... (720) 3,191 3,175 Cumulative effect of accounting change. --- 262 --- ------- ------- ------- Net earnings (loss).................... $ (720) $ 3,453 $ 3,175 ======= ======= ======= Earnings (loss) per common share: Primary Before extraordinary items.......... $ (.19) $ .93 $ .51 Extraordinary items................. --- (.07) .36 Accounting change................... --- .07 --- ------- ------- ------- Net earnings (loss)................. $ (.19) $ .93 $ .87 ======= ======= ======= Fully diluted Before extraordinary items.......... $ (.19) $ .89 $ .51 Extraordinary items................. --- (.07) .36 Accounting change................... --- .07 --- ------- ------- ------- Net earnings (loss)................. $ (.19) $ .89 $ .87 ======= ======= ======= Weighted average number of common shares outstanding Primary............................. 3,832 3,727 3,629 ======= ======= ======= Fully diluted....................... 3,832 3,861 3,629 ======= ======= =======
See notes to consolidated financial statements. 12 THE DIANA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Dollars in Thousands)
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 --------- ------- ---------- ----------- --------------- ------------ ------- ------------ Balance at March 28, 1992 4,637,530 $ 4,638 $ 45,786 $ (30,993) $ --- 1,339,667 $(7,105) $ 12,326 Net earnings --- --- --- 3,175 --- --- --- 3,175 Purchase of treasury stock --- --- --- --- --- 5,000 (9) (9) --------- ------ ------- -------- ------ --------- ------- ------- Balance at April 3, 1993 4,637,530 4,638 45,786 (27,818) --- 1,344,667 (7,114) 15,492 Net earnings --- --- --- 3,453 --- --- --- 3,453 5% stock dividend --- --- 214 (1,084) --- (163,889) 866 (4) Exercise of stock options --- --- (47) --- --- (15,500) 82 35 Unrealized loss on marketable securities --- --- --- --- (412) --- --- (412) Other --- --- 288 --- --- --- --- 288 --------- ------ ------- -------- ------ --------- ------- ------- Balance at April 2, 1994 4,637,530 4,638 46,241 (25,449) (412) 1,165,278 (6,166) 18,852 Net loss --- --- --- (720) --- --- --- (720) 5% stock dividend 172,823 172 1,830 (2,009) --- --- --- (7) Exercise of stock options --- --- (14) --- --- (4,500) 24 10 Change in unrealized loss on marketable securities --- --- --- --- (301) --- --- (301) Acquisition of minority interest --- --- 491 --- --- (265,262) 1,404 1,895 --------- ------ ------- -------- ------- --------- ------- ------- Balance at April 1, 1995 4,810,353 $ 4,810 $ 48,548 $ (28,178) $ (713) 895,516 $ (4,738) $ 19,729 ========= ====== ======= ======== ======= ========= ======= =======
See notes to consolidated financial statements. 13 THE DIANA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands)
Fiscal Year Ended ------------------------------ April 1, April 2, April 3, 1995 1994 1993 -------- -------- -------- Operating activities Earnings (loss) before extraordinary items and accounting change.......... $ (720) $ 3,457 $ 1,857 Adjustments to reconcile earnings (loss) to net cash provided (used) by operating activities: Loss (gain) on sale of marketable securities.............. 1,227 (479) (285) Depreciation and amortization....... 1,154 1,098 852 Provision for losses on accounts receivable......................... 313 153 406 Non-operating income................ --- --- (625) Equity in loss (earnings) of unconsolidated subsidiaries........ 69 (97) (69) Minority interest................... 44 290 174 Payments of net liabilities of unconsolidated subsidiary.......... (95) (361) (63) Other............................... 311 (14) (320) Changes in current assets and liabilities........................ 4,414 (4,355) (2,838) ------ ------ ------ Net cash provided (used) by operating activities............................ 6,717 (308) (911) Investing activities Additions to property and equipment... (599) (555) (251) Acquisitions, net of cash acquired.... --- (1,983) (163) Purchases of marketable securities.... (5,647) (20,218) (15,982) Sales of marketable securities........ 9,276 21,031 6,895 Collection of notes receivable........ 194 252 268 Other................................. (195) --- --- ------ ------ ------ Net cash provided (used) by investing activities............................ 3,029 (1,473) (9,233) Financing activities Changes in short-term borrowings...... (4,525) (226) 8,992 Payments on long-term debt............ (1,620) (390) (330) Proceeds from long-term debt.......... --- 1,416 268 Payments toward bond settlements...... (2,822) (178) (1,081) Purchase of treasury stock............ --- --- (9) ------ ------ ------ Net cash provided (used) by financing activities............................ (8,967) 622 7,840 ------ ------ ------ Increase (decrease) in cash and cash equivalents........................... 779 (1,159) (2,304) Cash and cash equivalents at the beginning of the year................. 1,661 2,820 5,124 ------ ------ ------ Cash and cash equivalents at the end of the year.............................. $ 2,440 $ 1,661 $ 2,820 ====== ====== ======
See notes to consolidated financial statements. 14 THE DIANA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 1, 1995 NOTE 1 - Summary of Significant Accounting Policies Fiscal Year The Company's fiscal year ends on the Saturday closest to March 31. There were 53 weeks in fiscal 1993 and 52 weeks in all other years presented. Basis of Presentation The consolidated group (hereafter referred to as the "Company") included the following companies during the past three years. The following describes each entity in the consolidated group and its current status: The Diana Corporation ("Diana") Diana and its wholly-owned subsidiaries are included in the consolidated group for all three fiscal years. Entree Corporation ("Entree") Entree and its wholly-owned subsidiary, Atlanta Provision Company, Inc. ("APC"), are included in the consolidated group for all three fiscal years. Diana owns 81.25% of Entree. C&L Communications, Inc. ("C&L") C&L is included in the consolidated group for all three fiscal years. Effective June 1994, Diana increased its ownership interest in C&L from 80% to 100% (see Note 11). Investments in 20%-50% owned subsidiaries in which management has the ability to exercise significant influence are accounted for using the equity method of accounting (see Note 9). Accounts and transactions between members of the consolidated group are eliminated in the consolidated financial statements. Cash Equivalents and Restricted Short-term Investments The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Short-term investments are valued at cost which approximates market. Certain short-term investments are pledged to third parties and are therefore restricted and not considered cash equivalents for purposes of financial reporting. 15 NOTE 1 - Summary of Significant Accounting Policies (Continued) 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", as of April 2, 1994. Prior to April 2, 1994, the Company accounted for marketable securities under SFAS No. 12, "Accounting for Certain Marketable Securities". Under SFAS No. 115, management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Debt securities are classified as held-to- maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in other income (loss). Marketable equity securities and debt securities not classified as held-to-maturity are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in a separate component of shareholders' equity. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in other income (loss). Realized gains and losses, interest income and dividends are included in other income (loss). For purposes of determining the gain or loss on a sale, the cost of securities sold is determined using the average cost of all shares of each such security held at the dates of sale. Inventories Inventories, consisting of finished product, are stated at the lower of cost or market. Items are removed from inventory based on the specific identification method or the average cost method. Property and Equipment Property and equipment are stated at cost. Provisions for depreciation are computed on the straight-line method for financial reporting purposes over 3 to 10 years for equipment and 5 to 25 years for building and improvements. Goodwill Goodwill is amortized on a straight-line basis over a forty year period. Accumulated amortization was $388,000 and $309,000 at April 1, 1995 and April 2, 1994, respectively. Goodwill is reviewed for impairment whenever events or circumstances provide evidence that suggest that the carrying amount of the asset may not be recoverable. Impairment is determined by using identifiable cash flows over the remaining amortization period. 16 NOTE 1 - Summary of Significant Accounting Policies (Continued) Covenants Not to Compete Covenants not to compete are amortized on a straight-line basis over the non-compete periods of five to seven years. Accumulated amortization was $1,210,000 and $838,000 at April 1, 1995 and April 2, 1994, respectively. Revenue Recognition The Company recognizes revenue when product is shipped. Income Taxes The Company accounts for income taxes using the liability method in accordance with SFAS No. 109, "Accounting for Income Taxes", in 1995 and 1994, and the liability method in accordance with SFAS No. 96, "Accounting for Income Taxes", in 1993. Earnings (Loss) Per Common Share Primary and fully diluted per share amounts are determined by dividing earnings (loss) by the weighted average number of shares of common stock and materially dilutive common stock equivalents (stock options) outstanding. Concentrations of Credit Risk Trade accounts receivable are the only financial instruments which potentially subject the Company to significant concentrations of credit risk. APC distributes meat and seafood primarily to retail food outlets, meat wholesalers, food service enterprises and restaurants. APC performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. C&L distributes telecommunications equipment nationwide primarily to long-distance carriers, systems integrators and interconnect companies. C&L performs periodic credit evaluations of its customers' financial condition and generally does not require collateral, however, C&L attempts to obtain a purchase money security interest in product sold to small to medium sized customers. At April 1, 1995, APC and C&L had no significant concentrations of credit risk. Reclassifications Certain reclassifications have been made to the 1994 and 1993 financial statements to conform with the 1995 presentation. 17 NOTE 2 - Marketable Securities Effective April 2, 1994, the Company adopted the provisions of SFAS No. 115. In accordance with SFAS No. 115, prior period financial statements have not been restated to reflect the change in accounting principle. The effect as of April 2, 1994 of adopting SFAS No. 115 increased net earnings by $412,000 or $.11 per fully diluted share. The following is a summary of available-for-sale and held-to-maturity marketable securities: Available-for-Sale Marketable Securities April 1, 1995 ------------------------------------------ Gross Gross Estimated Unrealized Unrealized Fair Cost Gains Losses Value ---- --------- --------- ------- (In Thousands) U.S. corporate securities $ 1,156 $ 21 $ 58 $ 1,119 Other debt securities --- --- --- --- ------ --- ---- ------ Total debt securities 1,156 21 58 1,119 Equity securities 1,604 --- 676 928 ------ --- ---- ------ $ 2,760 $ 21 $ 734 $ 2,047 ====== === ==== ====== Held-to-Maturity Marketable Securities April 1, 1995 ------------------------------------------ Gross Gross Estimated Unrealized Unrealized Fair Cost Gains Losses Value ---- --------- --------- ------- (In Thousands) U.S. treasury security $ 4,164 $--- $ --- $ 4,164 ====== === ==== ====== Available-for-Sale Marketable Securities April 2, 1994 ------------------------------------------ Gross Gross Estimated Unrealized Unrealized Fair Cost Gains Losses Value ---- --------- --------- ------- (In Thousands) U.S. corporate securities $ 8,976 $ 23 $ 375 $ 8,624 Other debt securities 2,181 --- --- 2,181 ------ --- ---- ------ Total debt securities 11,157 23 375 10,805 Equity securities 509 --- 60 449 ------ --- ---- ------ $11,666 $ 23 $ 435 $11,254 ====== === ==== ====== 18 NOTE 2 - Marketable Securities (Continued) The gross realized gains on sales of available-for-sale securities totaled $14,000, $592,000 and $313,000 in fiscal 1995, 1994 and 1993, respectively, and the gross realized losses totaled $1,241,000, $113,000 and $28,000 in fiscal 1995, 1994 and 1993, respectively. The net adjustment to unrealized losses on available-for-sale securities included as a separate component of shareholders' equity totaled $713,000 and $412,000 at April 1, 1995 and April 2, 1994, respectively. The Company considers its marketable securities to be primarily a resource for potential acquisitions. Pending such uses, the Company invests its marketable securities for the purpose of generating additional income and/or capital appreciation. The Company does not limit its potential investments of marketable securities based on level of risk or investment concentration. Expected maturities of marketable securities will differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties. The amortized cost and estimated fair value of marketable securities at April 1, 1995, by contractual maturity, are shown below: Available-for-Sale Securities ----------------------------- Estimated Cost Fair Value ---- ---------- (In Thousands) Due after five years $ 1,156 $ 1,119 Equity securities 1,604 928 ------ ------ $ 2,760 $ 2,047 ====== ====== Held-to-Maturity Securities --------------------------- Estimated Cost Fair Value ---- ---------- (In Thousands) Due in one year or less $ 4,164 $ 4,164 ====== ====== 19 NOTE 3 - Short-Term Borrowings and Long-Term Debt Short-term borrowings consist of the following (in thousands): April 1, April 2, 1995 1994 -------- -------- Borrowings under APC's line of credit $4,241 $6,622 Margin borrowings --- 2,144 ----- ----- $4,241 $8,766 ===== ===== APC has a Loan and Security Agreement ("Agreement") with a lender (amended effective June 28, 1995) providing a revolving line of credit through November 1997 of up to $9,500,000 with interest at the prime rate plus 2% (prime was 9% at April 1, 1995). A $2 million letter of credit facility with fees of 2% is included within the total credit facility. At April 1, 1995, APC borrowed $4,241,000 and had letters of credit of $1,500,000 issued on its behalf by the lender. APC's Loan and Security Agreement contains financial covenants requiring a minimum level of tangible net worth, earnings and net cash flow. At April 1, 1995 APC failed to satisfy all of the aforementioned financial covenants. In June 1995, APC and its lender entered into a waiver and amendment agreement relating to the Loan and Security Agreement in order to avoid violating certain financial covenants in fiscal 1995 and 1996. APC's lender did not grant to APC a grace period in connection with the waiver granted to APC. Borrowings under the Agreement are restricted based on defined percentages of eligible accounts receivable and inventories. The amount available under the Agreement at April 1, 1995 was $3,009,000. APC pays a fee of 1/2% on the average unused line of credit. Substantially all assets of APC are pledged as collateral under the Agreement. The Agreement provides for the maintenance of certain financial ratios and restricts APC in a number of areas, including, but not limited to, declaration of dividends, mergers and acquisitions, transactions with affiliates, capital expenditures and additional indebtedness. Borrowings under the Agreement are classified as short term because the Agreement provides for repayment of borrowings after a 90 day notice from the lender. The fiscal 1994 financial statements have been reclassified to conform to the fiscal 1995 presentation. 20 NOTE 3 - Short-Term Borrowings and Long-Term Debt (Continued) Long-term debt consists of the following: April 1, April 2, Note Company Due Date 1995 1994 ---- ------- ------------ ----------- ---------- (In Thousands) Debentures and interest A Diana January 2002 $ 2,240 $ 2,381 Note payable Diana --- 120 Notes payable B APC October 1996 158 306 Mortgage notes C APC August 2006 875 924 Line of credit D C&L December 1995 2,562 3,705 Other obligations E C&L October 1996 34 53 ------ ------ 5,869 7,489 Less current portion (2,888) (1,950) ------ ------ $ 2,981 $ 5,539 ====== ====== A. Principal of $1,254,000 and capitalized interest of $986,000. Interest at 11.25%. The debentures are unsecured (see Note 10). B. Interest at 9.5% and 11%. The notes are collateralized by trailers and equipment. C. Interest at 7% and 8.25%. The mortgage notes are collateralized by land and building with a carrying value of $2,618,000 as of April 1, 1995. D. C&L has a Loan and Security Agreement ("Loan Agreement") with a lender providing a revolving line of credit through December 23, 1995 of up to $6,000,000, with interest at the prime rate plus .25%. Borrowings under the Loan Agreement are restricted based on defined percentages of eligible accounts receivable and inventories. The amount available under the Loan Agreement at April 1, 1995, was $3,011,000. Substantially all assets of C&L are pledged as collateral under the Loan Agreement. The Loan Agreement provides for the maintenance of certain financial ratios and restricts C&L in a number of areas, including, but not limited to, declaration of dividends, payment of salaries to officers, mergers and acquisitions, transactions with affiliates, capital expenditures and additional indebtedness. E. Interest at 3.9%. The obligation is collateralized by equipment. 21 NOTE 3 - Short-Term Borrowings and Long-Term Debt (Continued) Approximate annual amounts payable by Diana and its subsidiaries on long-term debt for the next five fiscal years are as follows (in thousands): 1996 .................... $ 2,888 1997 .................... 247 1998 .................... 192 1999 .................... 195 2000 .................... 200 NOTE 4 - Commitments and Contingencies Diana subleases its corporate office space under a noncancelable operating lease. APC leases tractors and trailers used in its distribution activities under operating leases with terms ranging from five to eight years. APC also leases various equipment used in its warehouse operations under operating leases with terms generally not exceeding one year. C&L leases its building and certain vehicles and equipment under operating leases. Total rental expense (including contingent rentals based on miles driven) under operating leases in fiscal 1995, 1994 and 1993 was $1,870,000, $1,929,000 and $1,907,000, respectively. Future minimum payments (excluding contingent rentals) under noncancelable operating leases with initial terms of one year or more for fiscal years subsequent to April 1, 1995 are as follows (in thousands): 1996 $ 1,037 1997 693 1998 483 1999 369 2000 213 Thereafter 139 In connection with the sale of substantially all of the assets of Diana's wholesale food business, the buyer assumed certain indebtedness of Diana, which terminates in 1998, for which Diana remains primarily liable. Such indebtedness aggregated approximately $469,000 at April 1, 1995. The buyer has pledged a letter of credit for the benefit of the trustee of the indebtedness as collateral for this indebtedness. C&L participates in an equipment leasing arrangement. C&L is subject to a future subscription obligation relating to the equipment lease for approximately $495,000 at April 1, 1995, if income from the underlying lease is insufficient to fund future operations of the arrangement. The lease for equipment expires in January 1999. The sellers have indemnified the Company with respect to any future subscription obligations. In the opinion of management, all of the matters discussed above will be resolved without a material adverse impact on the Company's consolidated financial position. 22 NOTE 5 - Stock Options In fiscal 1986, the Company's Board of Directors adopted The Diana Corporation 1986 Nonqualified Stock Option Plan (the "Plan"), which permits the Company to grant nonqualified stock options to key employees and directors of the Company and its subsidiaries. The Plan is limited to 771,750 common shares. The Plan is administered by the Company's Board of Directors, which is authorized, among other things, to determine which persons receive options under the Plan, the number of shares for which an option may be granted, and the exercise price and expiration date for each option. Options granted under the Plan may not be exercised after eleven years from the date of grant, and no options may be granted after December 10, 1997. The exercise price will not be less than the fair market value of the Company's common stock on the date of grant, although the Board has discretion to set the exercise price at any amount that it may establish from time to time. Transactions for fiscal 1995, 1994 and 1993 are as follows: 1995 1994 1993 ---- ---- ---- Options outstanding at beginning of year 544,264 533,110 528,110 Changes during year: 5% stock dividend 27,212 26,654 --- Granted --- --- 5,000 Exercised (4,500) (15,500) --- ------- ------- ------- Net increase 22,712 11,154 5,000 ------- ------- ------- Options outstanding at end of year 566,976 544,264 533,110 ======= ======= ======= Options exercisable 566,976 544,264 533,110 Option price range $2.15- $2.26- $2.38- $6.12 $6.43 $6.75 NOTE 6 - Employee Benefit Plans APC contributes to a multiemployer defined benefit pension plan pursuant to the terms of a collective bargaining agreement. Amounts contributed to this plan by APC were $34,000, $39,000 and $36,000, for fiscal years 1995, 1994 and 1993, respectively. In fiscal 1995, C&L established a 401(k) plan which covers all employees. APC has a 401(k) plan which covers non-union employees. There were no contributions under these plans for any years presented. 23 NOTE 7 - Other Income (Loss) and Non-Operating Income Other income (loss) consists of the following for the last three years: 1995 1994 1993 ------ ------ ------ (In Thousands) Interest income........................... $ 570 $2,132 $ 901 Net gains (losses) on sales of marketable securities (See Note 2)................. (1,227) 479 285 Other..................................... 240 86 285 ----- ----- ----- $ (417) $2,697 $1,471 ===== ===== ===== Non-operating income consists of the following for the last three years: 1995 1994 1993 ------ ------ ------ (In Thousands) Gain on settlements of lawsuits $ 34 $ --- $ --- Gain from extinguishment of certain net liabilities of unconsolidated subsidiary --- --- 625 Refund of certain expenses of a subsidiary --- --- 93 ----- ----- ----- $ 34 $ --- $ 718 ===== ===== ===== NOTE 8 - Income Taxes Effective April 4, 1993, the Company adopted the liability method of accounting for income taxes in accordance with SFAS No. 109. The cumulative effect as of April 4, 1993 of adopting SFAS No. 109 increased net earnings for fiscal 1994 by $262,000. A reconciliation of the income tax provision and the amount computed by applying the statutory federal income tax rate (34%) to earnings (loss) before extraordinary items, accounting change, minority interest and income tax credit is as follows: Fiscal Year Ended ----------------- April 1, April 2, April 3, 1995 1994 1993 ------- -------- -------- (In Thousands) Expense (credit) at statutory rate......... $ (230) $ 1,138 $ 691 Settlements of liabilities of unconsolidated subsidiary................ (36) (1,357) (1,773) Reversal of liabilities of unconsolidated subsidiary............................... --- (71) (212) Tax effect of net operating loss not recognized............................... 198 180 1,214 Other, net................................. 68 110 80 ------ ------ ------ Income tax provision....................... $ --- $ --- $ --- ====== ====== ====== In fiscal 1994, the Company recorded an income tax credit of $400,000 resulting from the refund of federal income taxes paid in a prior year. 24 NOTE 8 - Income Taxes (Continued) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and income tax purposes. Components of the Company's deferred tax assets and liabilities are as follows: April 1, April 2, 1995 1994 -------- -------- (In Thousands) Deferred tax assets: Federal net operating loss carryforwards $ 6,809 $ 7,274 Federal capital loss carryforward 417 --- State net operating loss carryforwards 2,247 2,175 Capitalized interest on Diana debentures 394 451 Deferred compensation 530 437 Allowance for doubtful accounts 225 197 Covenants not to compete 227 157 General business credit carryforwards 145 145 Unrealized loss on marketable securities 242 140 All other 219 227 ------- ------- Total deferred tax assets 11,455 11,203 Valuation allowance for deferred tax assets (10,279) (10,039) ------- ------- Net deferred tax assets 1,176 1,164 Deferred tax liabilities: Building and improvements basis difference 523 552 Tax over book depreciation 263 245 All other 390 367 ------- ------- Total deferred tax liabilities 1,176 1,164 ------- ------- Net deferred taxes $ --- $ --- ======= ======= The Company has approximately $20,025,000 in net operating loss carryforwards for federal income tax purposes expiring in the years 2005 to 2010. NOTE 9 - Equity in Earnings (Loss) of Unconsolidated Subsidiaries Diana owns a 50% interest in a partnership that holds promissory notes, secured by inventory and equipment, due over a five year period ending November 1995 with interest at 12%. APC has a 50% ownership interest in Fieldstone Meats of Alabama, Inc. ("Fieldstone"), a company which produces cured hams and bacon. Diana also owns a 50% interest in Sattel Communications Company, a partnership which was formed to develop and market telecommunications products. At April 1, 1995 and April 2, 1994, the carrying value of the Company's investment in these unconsolidated subsidiaries was $557,000 and $604,000, respectively, and is included within other assets. 25 NOTE 9 - Equity in Earnings (Loss) of Unconsolidated Subsidiaries (Continued) The Company's equity in the earnings (loss) of unconsolidated subsidiaries for the last three fiscal years are as follows: 1995 1994 1993 ------ ------ ------ (In Thousands) Partnership $ 28 $ 49 $ 63 Fieldstone (35) 48 6 Sattel Communications (62) --- --- ---- ---- ---- $ (69) $ 97 $ 69 ==== ==== ==== NOTE 10 - Extraordinary Items Carl and Dorothy Ossmann, Mary Leach, Wilmer and Florence Tiede, and Rosemary and Ray Ward V. The Diana Corporation, Donald E. Runge and Richard Y. Fisher (the "Ossmann Suit"), and First Trust National Association and Norwest Bank Minnesota V. Farm House Foods Corporation and The Diana Corporation (the "First Trust Suit"). On or about February 15, 1991, the Ossmann Suit was filed as a class action in the United States District Court, District of Minnesota, Civil Action No. 3-91-CV94. The Ossmann Suit sought to recover against Diana on behalf of all holders of outstanding Farm House 11-1/2% Subordinated Capital Notes Due 1989, Farm House 11% Senior Subordinated Debentures Due 1997, and/or Farm House Floating Rate Subordinated Capital Notes Due 1989 (collectively, the "Farm House Bonds"). In May 1992, the Court entered a final Judgment and Order approving a Settlement Agreement between the defendants and those plaintiffs who did not elect to exclude themselves from the class. Persons holding approximately $3.9 million in principal amount of Farm House Bonds elected not to participate in the settlement (the "opt-outs"). The Ossmann Suit proceeded on behalf of the opt-outs who were certified as a new class and who were joined by the plaintiffs in the First Trust Suit, who were permitted to intervene as plaintiffs on certain claims. In March 1992, the First Trust Suit was commenced in the United States District Court for the Eastern District of Wisconsin, Civil Action No. 92-C-0291. This action seeks to recover against Diana on behalf of the opt-outs. In March 1994, the remaining parties to the Ossmann Suit and the First Trust Suit entered into an Amended Memorandum of Understanding (the "Settlement") providing for settlement of the matter. In fiscal 1995, the defendants made total payments of $3,237,000 to the trustees pursuant to the Settlement as full and complete payment of all amounts due, including principal and accrued interest with a carrying value of $3,391,000 and trustee fees and costs. In addition, a payment of $180,000 was made to the attorneys of the class pursuant to the Settlement. The Company accounted for the Settlement in accordance with SFAS No. 76, "Extinguishment of Debt" and recorded an extraordinary loss, including the direct costs of settlement, of $266,000 in fiscal 1994. 26 In fiscal 1993, the Company recorded an aggregate extraordinary gain of $1,318,000 as a result of a settlement in May 1992 in the Ossmann Suit and a cash offer completed in January 1993. The May 1992 settlement, among other things, provided for Diana to issue debentures (see Note 3) to holders of Farm House Foods Corporation ("Farm House") bonds who participated in the settlement in May 1992 and who properly filed a proof of claim. Diana debentures with principal and interest totaling $2,661,000 were issued to settle $3,190,000 of Farm House bonds and $660,000 of accrued interest. The Company accounted for the May 1992 settlement in accordance with SFAS No. 15. In January 1993, the Company completed an offer to purchase Farm House bonds for cash from certain bondholders that declined to participate in the May 1992 settlement. The Company purchased $1,300,000 of Farm House bonds (principal and accrued interest) for a cash payment of $526,000. The Company accounted for the cash offer in accordance with SFAS No. 76. The amounts included in extraordinary items are not net of taxes due to the existence of net operating loss carryforwards (see Note 8). 27 NOTE 11 - Related Party Transactions Certain of the Company's non-employee directors provide services to the Company and/or its subsidiaries for which they are compensated. Amounts accrued or paid to all directors for these services during fiscal 1995, 1994 and 1993 are $367,000, $329,000 and $278,000, respectively. Included in other assets is a receivable of $358,000 from the sellers of C&L. Pursuant to the Stock Purchase Agreement executed in connection with the acquisition of C&L, the sellers are to reimburse the Company for any of the Company's net operating losses used to offset taxable income generated by certain investments owned by C&L. As of April 1, 1995, the receivable represents 34% of the initial excess of the financial reporting basis over the income tax basis of such investments, less amounts collected for use of net operating losses in fiscal 1993 through 1995. The sellers are currently employed as officers by C&L. C&L leases its building and certain vehicles from certain officers of C&L. Total rent expense on such leases was $144,000, $141,000 and $158,000 for the years ended April 1, 1995, April 2, 1994 and April 3, 1993, respectively. Effective June 1994, the Company acquired the remaining 20% of C&L's common stock from its minority shareholders in exchange for 265,262 shares (adjusted for the 5% stock dividend paid in July 1994) of the Company's common stock. This acquisition was accounted for as a purchase. The total cost of the acquisition of $1,895,000, based on a market value of $7.14 per share assigned to the Company's common stock, exceeded the fair value of the net assets of C&L that were acquired by $215,000. The excess is being amortized on the straight line method over the remaining amortization period of goodwill resulting from the initial acquisition of C&L in December 1991. The pro forma results of operations assuming that this transaction had occurred on April 4, 1993 are as follows: Fiscal Years Ended ----------------------- April 1, April 2, 1995 1994 -------- -------- (In Thousands, Except Per Share Amounts) Earnings (loss) before extraordinary items and accounting change $ (676) $3,747 ===== ===== Fully diluted earnings (loss) per share before extraordinary items and accounting change $ (.17) $ .91 ===== ===== 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. 28 NOTE 12 - Business Segment Information The Company's principal business is the wholesale distribution of meat and seafood and telecommunications equipment. The Company's wholesale meat and seafood distribution operations are principally conducted in the southeastern United States and the wholesale telecommunications distribution operations are conducted throughout the United States. There are no material foreign sales and no sales to a single customer totaling more than 10% of consolidated sales. Fiscal Years Ended ------------------------------ April 1, April 2, April 3, 1995 1994 1993 -------- -------- -------- (In Thousands) Net sales: Meat and seafood................. $215,141 $215,333 $200,737 Telecommunications equipment..... 35,245 28,308 21,517 Corporate........................ --- --- --- ------- ------- ------- $250,386 $243,641 $222,254 ======= ======= ======= Operating earnings (loss): Meat and seafood................. $ 234 $ 1,013 $ 587 Telecommunications equipment..... 2,734 2,549 1,778 Corporate........................ (2,511) 879 (383) ------- ------- ------- $ 457 $ 4,441 $ 1,982 ======= ======= ======= Depreciation and amortization: Meat and seafood................. $ 605 $ 551 $ 420 Telecommunications equipment..... 524 496 412 Corporate........................ 25 51 20 ------- ------- ------- $ 1,154 $ 1,098 $ 852 ======= ======= ======= Capital expenditures: Meat and seafood................. $ 474 $ 655 $ 277 Telecommunications equipment..... 113 217 103 Corporate........................ 12 3 5 ------- ------- ------- $ 599 $ 875 $ 385 ======= ======= ======= Identifiable assets: Meat and seafood................. $ 20,569 $ 21,329 $ 17,956 Telecommunications equipment..... 16,720 18,109 12,798 Corporate........................ 8,038 14,605 15,318 ------- ------- ------- $ 45,327 $ 54,043 $ 46,072 ======= ======= ======= 29 NOTE 13 - STATEMENT OF CASH FLOWS Supplemental cash flow information is as follows for the last three fiscal years: 1995 1994 1993 ---- ---- ---- (In Thousands) Change in current assets and liabilities: Restricted short-term investments $ 330 $ --- $ 1,457 Receivables......................... 189 (3,797) (1,196) Inventories......................... 3,204 (4,760) 601 Other current assets................ (162) (218) (61) Accounts payable.................... 718 4,287 (3,280) Other current liabilities........... 135 133 (359) ------ ------ ------ $ 4,414 $(4,355) $(2,838) ====== ====== ====== Supplemental information: Interest paid......................... $ 1,001 $ 1,090 $ 556 Non-cash transactions: Purchase of minority interest with common stock......................... 1,895 --- --- Reduction of net liabilities of unconsolidated subsidiary............ --- 655 --- Purchase of property and equipment financed by seller................... --- 320 134 Record obligation for Diana debentures and capitalized interest............. --- --- 2,660 NOTE 14 - Quarterly Results of Operations (Unaudited) Fiscal Year Ended April 1, 1995: 12 Weeks 12 Weeks 12 Weeks 16 Weeks Ended Ended Ended Ended April 1, January 7, October 15, July 23, 1995 1995 1994 1994 -------- --------- ---------- ------- (In Thousands, Except Per Share Amounts) Net sales....................... $64,223 $55,159 $56,255 $74,749 Cost of sales................... 62,218 52,274 53,059 71,647 Earnings (loss) before extra- ordinary items and accounting change......................... (749) 392 424 (787) Earnings (loss) per common share (.19) .10 .10 (.22) 30 NOTE 14 - Quarterly Results of Operations (Unaudited) - (Continued) Fiscal Year Ended April 2, 1994: 12 Weeks 12 Weeks 12 Weeks 16 Weeks Ended Ended Ended Ended April 2, January 8, October 16, July 24, 1994 1994 1993 1993 -------- --------- ---------- ------- (In Thousands, Except Per Share Amounts) Net sales....................... $58,809 $56,695 $55,318 $72,819 Cost of sales................... 55,980 54,034 52,513 70,213 Earnings (loss) before extra- ordinary items and accounting change......................... 1,876 1,746 819 (984) Earnings (loss) per common share .48 .48 .23 (.27) During the fourth quarter of fiscal 1994, the Company recorded non- operating income of $1,500,000 due to the reversal of a provision of $1,500,000 recorded in the first quarter of fiscal 1994 related to the litigation discussed in Note 10. The first quarter of fiscal 1994 was restated to reflect the cumulative effect as of April 4, 1993 of adopting SFAS No. 109 (see Note 8). For the sixteen weeks ended July 24, 1993, loss before extraordinary items and cumulative effect of accounting change was increased by $12,000, or $.00 per share, and net loss was reduced by $250,000, or $.07 per share. 31 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 23rd day of July, 1996. THE DIANA CORPORATION By /s/ R. Scott Miswald Vice President, Treasurer and Controller -----END PRIVACY-ENHANCED MESSAGE-----