-----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, FBIM3JaO2uaggHbb81Nd5Qlb2kksg/EqCKxZVDYg8v1GBk1QBO4/7lyntS7M7gGF wnyB0uAajna8TGQvu6RM0Q== 0000057201-97-000015.txt : 19970924 0000057201-97-000015.hdr.sgml : 19970924 ACCESSION NUMBER: 0000057201-97-000015 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970923 SROS: NASD 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: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-05486 FILM NUMBER: 97683910 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 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended March 31, 1997 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission file Number 1-5486 THE DIANA CORPORATION (Exact name of Registrant as specified in its charter) Delaware 36-2448698 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 26025 Mureau Road, Calabasas, California 91302 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (818) 878-7711 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $1.00 Par Value Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ___ Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[X] On September 15, 1997, the aggregate market value of the voting stock of the Registrant held by stockholders who were not affiliates of the Registrant was $39,448,000, based on a closing sale price of $6.25 of the Registrant's common stock on the NASDAQ Bulletin Board. At September 15, 1997, the Registrant had issued and outstanding an aggregate of 7,179,233 shares of its common stock. For purposes of this Report, the number of shares held by non- affiliates was determined by aggregating the number of shares held by Officers and Directors of Registrant, and by others who, to Registrant's knowledge, own more than 10% of Registrant's common stock, and subtracting those shares from the total number of shares outstanding. DOCUMENTS INCORPORATED BY REFERENCE - NONE PART I Forward-Looking Statements All statements other than historical statements contained in this Report on Form 10-K constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Without limitation, these forward looking statements include statements regarding new products to be introduced by the Company in the future, statements about the Company's business strategy and plans, statements about the adequacy of the Company's working capital and other financial resources, and in general statements herein that are not of a historical nature. Any Form 10-K, Annual Report to Shareholders, Form 10-Q, Form 8-K or press release of the Company may include forward-looking statements. In addition, other written or oral statements which constitute forward-looking statements have been made or may in the future be made by the Company, including statements regarding future operating performance, short- and long-term sales and earnings estimates, backlog, the status of litigation, the value of new contract signings, and industry growth rates and the Company's performance relative thereto. These forward-looking statements rely on a number of assumptions concerning future events, and are subject to a number of uncertainties and other factors, many of which are outside of the Company's control, that could cause actual results to differ materially from such statements. These include, but are not limited to: risks associated with recent operating losses, no assurance of profitability, the need to increase sales, liquidity deficiency and in general the other risk factors set forth herein (see Item 7 - Risk Factors). The Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. ITEM 1. Business A. General Development of Business The Diana Corporation ("the Company") is a Delaware corporation incorporated in 1961. The Company is engaged, through Sattel Communications LLC ("Sattel"), in the provision of scalable public network-compatible central office telephony and Internet switching equipment to communications service providers. Sattel's operations were conducted through Sattel Communications Corp. ("SCC") prior to Sattel's formation in April 1996. SCC commenced operations in November 1994 as a 50/50 joint venture between the Company and Sattel Technologies, Inc. ("STI"). The purpose of the joint venture was to further develop STI's central office telecommunications switch by adding new features and functions, and providing it with Internet access capability. The Company acquired STI's ownership interest in SCC and SCC acquired the intellectual property and technology rights of the Digital Switching Systems ("DSS") switch through a series of transactions in fiscal 1996 and 1997. In fiscal 1997, Sattel granted subordinated equity participation interests, which amount to approximately a 20% effective ownership interest (before consideration of the subordination provisions) in Sattel to certain employees of the Company. Currently, the Company has approximately an 80% ownership interest in Sattel. 1 In November 1996, the Company announced its strategic decision to dispose of all of its non-Sattel business segments (the "Restructuring"). The consolidation of the Company's central office voice and data switching equipment business (together, the "Sattel Business") with its other businesses had resulted in confusion and misperception in the investor community about the nature and prospects of the Company's various operations. The Restructuring will reduce the Company to one distinct operation, which will enable the marketplace to value the Sattel Business as an independent concern. In February 1997, the Company completed the sale of a majority of the assets of Atlanta Provision Company, Inc. ("APC"), the wholesale distribution of meat and seafood segment. The Company is presently seeking buyers for C&L Communications, Inc. ("C&L"), its telecommunications equipment distribution segment, and Valley Communications, Inc. ("Valley"), its voice and data network installation and service segment. The results of APC, C&L and Valley have been reported separately as discontinued operations (see Note 2 to the Consolidated Financial Statements). As part of the Restructuring, the Company's Board of Directors approved plans to change the name of the Company. It is anticipated that the Company's shareholders will vote on a new name at the next annual meeting of the shareholders. B. Industry Segment The Company's business is reported in one business segment: central office voice and data switching equipment that is designed, developed, manufactured, engineered, marketed and distributed by Sattel. See Note 12 to the Consolidated Financial Statements for financial information regarding the Company's sole business segment. C. Narrative Description of Business Principal Products Sattel's primary products are Digital Switching Systems. Sattel's primary business is to design, develop, manufacture, engineer, market and distribute telecommunications switching systems. Sattel's DSS switches are designed to provide cost-effective and versatile access to the Public Switched Telecommunications Network ("PSTN") and the Internet. DSS switches provide end office, tandem, international gateway, value-added services, and Internet access, either individually, concurrently, or in combination. Sattel's DSS switches are modular and scalable from 96 to 10,240 subscriber lines and use an open architecture that is compatible with industry standard network infrastructures. The DSS switch comes in four models: DSS 100, DSS 1000, DSS 3000 and DSS 10000. The basic features of each of these models are set forth in the following table: DSS 100 DSS 1000 DSS 3000 DSS 10000 ------- -------- -------- --------- T1s (Min./Max)(1)............ 1-16 1-16 1-80 1-160 E1s (Min./Max)(1)............ 1-12 1-12 1-60 1-120 Lines/Ports (Max.)(1)........ 96 1,024 3,072 10,240 Busy Hour Call Attempts...... 120,000 120,000 375,000 375,000 Physical Size & Dimensions... One 19" x One 19" x 1-3 2-10 10.5" x 24" 30" x 23" Racks Racks Shelf Unit Rack (1) Actual maximum varies with mix of numbers of lines and trunks (T1 or E1). 2 The DSS switch architecture is based on multiple Motorola 680X0 processors and a VMEbus structure. DSS switch functionality is directed by software programmed both in low-level Assembly language (to provide speed for core switching functions) and higher level languages such as C++. Core switching software, resident on the switch itself, represents only a fraction of the code typical in larger traditional central office switches. Certain other value-added software applications reside on attached "servers," e.g., based on Sun Sparc work stations. The DSS switch provides dial tone, subscriber features such as conferencing and call forwarding, local and long-distance services, and international signaling. The DSS switch is based on "time-space-time" switching technology and supports wireless internetworking applications. The DSS switch also has customer control capabilities that allow the customer to assign subscribers different levels of service, billing options and parental control features, such as blocking information provider content. The DSS switch provides real-time communications and captures both the "called" number ("DNIS") as well as the "calling" number ("ANI") when available. The DSS switch qualifies as a Class 5 switch per the Telecommunications Act of 1996 (the "Telecommunications Act"), and as such, affords its owner the ability to be a Competitive Local Exchange Carrier ("CLEC") as defined in the Telecommunications Act (see Industry Background). Examples of specific applications of Sattel's DSS switches include a facilities-based domestic and international long-distance carrier that is using DSS switches to provide long-distance services with least-cost routing, calling card, 800 number in-bound translation as well as equal and dedicated access services. DSS switches enable another telecom carrier to provide local and long-distance telecommunications services including calling card, domestic and international 800, dedicated access and Signaling System 7 ("SS7") capabilities. Industry Background In the United States, due to regulatory restrictions and historical monopolies as well as the large capital cost of procuring central office telephony switching equipment, which provides centralized access to the PSTN, the provision of public switched telephony services traditionally has been the domain of larger InterExchange Carriers ("IXCs") and Regional Bell Operating Companies ("RBOCs") conducting business in defined markets and providing defined services. Regulatory changes enacted in the Telecommunications Act have fundamentally altered the PSTN landscape by permitting companies other than existing Local Exchange Carriers ("LECs") such as the RBOCs, to provide customer access to the PSTN. The Company believes that these changes have created an opportunity for telecommunications companies to expand beyond their traditional markets. For example, an RBOC may decide to expand beyond its traditional local market to compete with a LEC in a different geographic market. IXCs may decide to expand beyond their traditional long-distance markets and provide local exchange services. Similarly, RBOCs or Internet Service Providers ("ISPs") may wish to provide additional services such as long-distance service or Internet access (in the case of an RBOC) or long-distance or local exchange service (in the case of an ISP). New entrants into the telecommunications 3 markets, such as CLECs, are also beginning to compete with existing local service providers. Sattel's management believes that these developments create a new and emerging potential market for small-to medium-sized scalable central office switches. In addition, the growth in the use of the PSTN by ISPs for connections to the Internet has created a need for cost-effective additional central office switching port capacity to handle data calls (which have significantly higher average call holding times than voice calls). LECs trying to cope with the significant increase of long-duration data calls may be able to reduce such calls' effect on their switching resources by off-loading the traffic using a lower-cost switch to route data calls around their main switch. ISPs may make their core business more profitable by essentially becoming a telephone company and purchasing switches that enable them to terminate calls locally and connect directly to the Internet backbone network rather than paying the higher per-minute access charges to a LEC. In addition, the ISP can offer new voice services to generate incremental revenues to supplement their fixed monthly revenue source from Internet services. The Company believes that switches with the following characteristics could provide strategic and competitive advantages, to capitalize on the foregoing opportunities: A scalable switch could enable a market participant to enter into and test a new market at a relatively low initial capital cost per port by purchasing a less expensive switch with a smaller port capacity that could be expanded in the future as the business grows. An open architecture design that is compatible with existing industry standards could enable a market participant to minimize both the time and the expense necessary to make a switch compatible with the network infrastructure in which it is being used. Likewise, an open architecture design could enable a participant to enhance both the timeliness and effort required to add value added applications, e.g. credit, debit and other card processing. The DSS switch hardware design is based on an open architecture that utilizes industry-standard interfaces, components and operating systems. The "off-the-shelf" components are therefore more easily integrated into the product, lowering costs and the time required to bring new products, features and functions into the marketplace. The DSS switch software and open architecture hardware have been developed for interoperability with data networks like the Internet, while retaining a "true" central office PSTN switch functionality, unlike "data only" communications switches. The flexible software programmed in a combination of low-level and high-level code enable the DSS switch to offer the functionality of more expensive traditional central office switches. Many traditional central office switches have more than 20 million lines of software code. Consequently, extensive regression testing is required each time a new feature is added, resulting in long lead time to market of new revenue generating features that are required to compete successfully in the marketplace. Sattel's DSS software design with less than 100,000 lines of code provides for the switching of voice and data and increases the flexibility of the DSS switch for the integration of third party hardware and 4 software to meet specific customer needs. This software design allows service providers to deploy new revenue generating services relatively faster. Management of Sattel believes that the large-scale, monolithic central office switching systems developed for the centralized, monopolistic telecom industry are not responsive to the needs of the new and emerging, competitive, decentralized telecommunications industry. Today's telecom industry demands cost-efficiency, flexibility and scalability to compete when opportunities present themselves. Sattel's objective is to address the small-to-medium-sized central office switch market for applications in which larger switches cannot be applied as cost effectively or efficiently. The Company believes that Sattel's products provide central office functionality in modular, open architecture hardware configurations with flexible software. This combination allows for the addition of capacity and functionality to meet customer requirements efficiently and cost effectively. DSS switches can perform Class 4 switching (when connecting other switches in a tandem configuration) or Class 5 Central Office ("CO") switching (when connecting individual customers to the PSTN). The DSS Class 4 and Class 5 switches are standalone switches. They are not dependent upon other switches and perform specified functions, such as providing dial tone. DSS switches can therefore be deployed in central office locations. The DSS software also enables DSS switches to interoperate with PSTN industry standards such as SS7. Telecommunications carriers with CO switching facilities that contain switches providing access to the PSTN are required to provide access in their CO to equipment that meets regulatory requirements necessary to qualify as a Class 5 CO Switch. Switches that meet Class 5 standards generally can be used by a new entrant in a local market to gain access to the PSTN using an existing LEC's central office switching facilities. Sales and Marketing To meet the needs of customers with diverse and complex network requirements, Sattel sells it products through the coordinated efforts of its direct sales force and selected systems integrators, which include value added resellers ("VARs"). Sattel's direct sales force principally focuses on smaller carriers, e.g., independent LECs, CLECs, IXCs and ISPs. Sattel also uses indirect distribution channels such as systems integrators, VARs, original equipment manufacturers ("OEMs") and distributors to market its products to CLECs, IXCs, international telephone companies and smaller ISPs. The direct sale of DSS switches is typically an extended process. A sales person will make initial contact with the potential customer to understand the customer's needs and introduce the DSS switch. Thereafter, Sattel will produce a network design and assist in developing a financial model to demonstrate the feasibility of the customer's application. Proof-of-concept testing of a configured switch by the customer is typically followed by an initial deployment of a limited number of switches for testing 5 in either a geographic or market segment. The initial deployment of the switch in the customer's network may occur with only a limited number of the switches that will ultimately be deployed. The time from initial contact with a potential customer to initial deployment is typically several months or longer. Sattel seeks strategic relationships with select partners, e.g., technology companies, systems integrators, VARs and OEMs to provide total solutions and more efficiently market its products. Sattel has developed and intends to continue to develop relationships, including research and development joint ventures, with companies with complementary technologies. Customer Service and Support Sattel services and provides technical support for its products. Sattel or an authorized third party provides customer training in connection with the installation of its products. DSS switches may be sold with a service plan pursuant to which Sattel provides ongoing technical assistance and maintenance. Sattel has entered into agreements with third parties, including certain suppliers of adjunct equipment incorporated into Sattel's switches, to provide support for Sattel's products. New Product In January 1997, Sattel announced its Switch Server Architecture ("SSA") and Access Module designed to support the evolution of local exchange services and competition growing out of the Telecommunications Act, and the growing Internet market. SSA intends to bring the client/server paradigm that has proved successful in enterprise computing to the carrier network equipment market. The primary SSA components are: Access Module "Client" - a service access device designed to project a mix of voice, data, and video services using a variety of digital subscriber line ("DSL") technologies. The Access Module will segregate services by type at the first point of connection in the carrier's office. Voice services will be routed to the Sattel DSS switch, which will act as a server for call handling and interconnect features these calls require. Data services will be directed to a fast local data bus and delivered to the Internet switch. Additional network services such as video can be supported by adding a video switch and by providing the Access Module with "rules" on recognizing and routing the subscriber video requests. The first release of the Access Module is expected to be available in the fourth calendar quarter of 1997. DSS "Server" - supports telephony services via the DSS switch. Sattel is modifying its DSS switch to provide high-speed interconnection between the DSS switch and the new Access Module, and to fully integrate the DSS switch into SSA. Data services such as Internet access will be enabled through an Internet Switch Server ("ISS") functional element. Network management, signaling and administrative services will be enabled via the Customer Management System ("CMS"). The ISS and CMS Servers are integrated into SSA through the Select Partner Program. Select Partner Program - allows third-party hardware and software vendors to be integrated into the overall SSA network and provides client access or server-based features to network subscribers. 6 The first SSA deliverable will include ISDN PRI capability, consisting of an SSA shelf, a DSL-1 ISDN interface card, a SSA backplane, and an Integrated Network Processor ("INP") card to interface to the DSS switch. The DSL-1 card has been designed, fabricated and the card's firmware has been successfully tested. The INP card's software has been successfully tested and interfaced to the DSS switch. At March 31, 1997, prototype testing of SSA had not been completed. Sattel expects to be able to deliver the ISDN PRI card in the fourth calendar quarter of 1997. In May 1997, Sattel and Yurie Systems, Inc. ("Yurie") announced a Hybrid CO/ATM switch designed to consolidate and concurrently switch "any-to-any" voice, data and video traffic across public and private ATM networks. The CO/ATM switch pairs Sattel's DSS switch with Yurie's LDR ATM access equipment. The Hybrid CO/ATM switch illustrates the benefits of flattening the traditional PSTN, revealing new opportunities for competitive telcos, ISPs, private network operators, cable companies, and new entrants to the increasingly competitive telecom industry. In June 1997, Sattel and WorldWave Communications, Inc. ("WorldWave") announced combining Sattel's DSS switch and WorldWave's Wireless Local Loop ("WLL") System, which will provide flexible, cost effective two-way digital voice and data wireless services. WorldWave's WLL System is designed specifically to deliver residential telephone service for CLECs who want to provide voice and data services in new markets and in developing countries. There can be no assurance that these relationships will result in the development of salable products which will be beneficial to the future growth of Sattel or that products produced by these relationships will be developed in a cost effective manner and be available for sale within the time frame required to take advantage of the market opportunities. Sattel believes that the timely development of new products and enhancements to existing products are essential for it to compete in the low- to-medium-sized central office switch market. Sattel expects to continue to devote substantial resources, subject to its available liquidity (see Item 7 - - Liquidity and Capital Resources and Risk Factors), to research and development as well as to strategic alliances in fiscal 1998. Raw Materials Sattel designs, develops, manufactures, engineers, markets and distributes DSS switches. Sattel has developed its main switching components, parts of which are subject to pending patents. Certain software and hardware associated with adjunct and peripheral equipment used by Sattel to provide certain functions and features are licensed or procured from other vendors under OEM arrangements, or are developed jointly with other vendors pursuant to research and development joint ventures, partnerships, or similar arrangements. Sattel utilizes certain general purpose hardware components in its switches, which lowers costs and retains for Sattel the option of acquiring such components from more than one vendor. Other hardware and/or software components such as subscriber and data line cards and core switch software were developed by Sattel or its contractors. 7 Sattel performs certain manufacturing functions in house. In addition, Sattel outsources some of its manufacturing and procurement of raw materials used in manufacturing to outsource vendors, including STI, Sanmina Corporation ("Sanmina") and I-PAC Manufacturing, Inc. ("I-PAC"). In March 1997, STI commenced a lawsuit against Sattel (see Note 6 to the Consolidated Financial Statements). Sattel's outsource vendors have facilities to provide a turnkey product which includes the manufacturing or procurement of board, chassis, and system level assemblies for Sattel. In November 1996, pursuant to a contract with Sattel, Sanmina began manufacturing boards and subassemblies for Sattel products out of its San Jose, California plant. Sattel expects that Sanmina could manufacture complete products for Sattel in the future. Sattel's outsource manufacturers have from time-to-time experienced delays in receipt of certain hardware components. A failure by a supplier to deliver quality products on a timely basis, or the inability to develop additional alternative sources if and as required, could result in delays which could materially and adversely affect Sattel. See Item 7 - Risk Factors-Dependence on Outsource Manufacturers and Other Key Suppliers. Certain software and hardware associated with adjunct and peripheral equipment used by Sattel to provide certain functions and features are licensed or procured under OEM arrangements, from other vendors. Proprietary Rights Sattel uses a combination of patents, trade secrets, industry know-how, confidentiality and non-compete agreements and tight control of its software to protect the products and features that it believes give it competitive advantages. See Item 7 - Risk Factors-Limited Protection of Proprietary Technology; Risk of Third-Party Claims of Infringement. Working Capital Practices At Sattel's discretion, in order to accommodate customers' requests, Sattel has granted extended payment terms. The extended terms are typically negotiated in advance of shipment. At March 31, 1997, Sattel had approximately $4.6 million of accounts receivable with extended payment terms, a substantial portion of which has been collected. Customers and Customer Concentration The Company believes that the potential customers for Sattel's DSS switches include, among others, telecommunications companies such as RBOCs, independent local telephone companies, CLECs, IXCs, wireless telephone companies, cable TV companies, virtual private network providers, and ISPs. Sattel markets its switches to targeted customer segments directly with its own sales force and indirectly markets to other customers through systems integrators, VARs and distributors. For the fiscal year ended March 31, 1997, Concentric Network Corporation ("CNC") represented approximately 94% of the Company's revenues. In April 1997, Sattel initiated a lawsuit against CNC for, among other things, breach of contract (see Item 3 - Legal Proceedings). Sattel anticipates that its results of operations in any given period will continue to fluctuate and depend to a significant extent upon sales to 8 a small number of customers. There can be no assurance that Sattel's principal customers will continue to purchase product from Sattel at current levels, if at all. Sattel is working diligently to broaden its end-user customer base and to develop relationships with indirect channels of distribution. Sattel's products are targeted at markets for small-to-medium-sized central office switches for voice and data communications. Sattel's direct sales force principally focuses on smaller carriers, e.g., independent local exchange companies, CLECs, IXCs and ISPs. Sattel also uses indirect distribution channels such as systems integrators, VARs, OEMs and distributors to market its products to CLECs, IXCs, international telephone companies and smaller ISPs. This target market is 10,240 lines and under. With list prices for DSS switches starting at under $175,000, Sattel believes it can target potential customers with existing switching needs or those who can use additional switching capacity to lower expenses and/or provide new services to their customers. Depending on technological and market developments, future customers may include cable television companies, and enterprises (such as large corporations, universities or municipalities) seeking to reduce telecommunications costs by becoming CLECs. Among the companies that have taken delivery of the Company's switches to date are Beehive Telephone Company, CNC, Lightcom International, Inc., WorldWave Communications, Inc., Vancouver Telephone Company, Apollo Telecom and Telesys S.A. Another component of Sattel's long-term strategy is its expansion into international markets. In order to effect this strategy, Sattel is seeking out strategic alliances with partners that have established international distribution channels. Backlog The Company only includes in its backlog written orders for products and related services scheduled to be shipped within one year. The Company does not believe that the level of, or changes in the levels of, its backlog are necessarily a meaningful indicator of future results of operations. Competition The telecommunications switching equipment and access markets are highly competitive. Sattel produces small-to-medium-sized scalable central office switches that currently compete with few, if any, directly comparable products. One company that may compete with Sattel is DTI, Inc. ("DTI"), a privately-held company headquartered in Tennessee. Management believes that DTI's products may compete directly with Sattel's products. Sattel faces potential competition in the data communications market segment from a number of national and regional data communications equipment providers. In addition, the manufacturers of large scale central office switches such as Lucent Technologies, Inc., Northern Telecom Ltd., Digital Switch Corporation, Siemens AG, Alcatel Alsthom, Telefonaktiebolaget LM Ericsson and others have the resources and expertise to compete in the smaller-scale central office switching equipment segment. While Sattel's management believes that these larger manufacturers have not at this time demonstrated substantive movement into Sattel's target market, there is no assurance that they will not do so 9 in the future. It is also possible that large communication carriers such as AT&T Corporation, MCI Communications, Sprint and, when and if legally permitted, the RBOCs, may enter the small to mid-sized central office switching equipment business. Many of these competitors possess financial resources significantly greater than those of Sattel and accordingly could initiate and support prolonged price competition to gain market share. Research and Development In fiscal 1997, the Company made a strategic decision to invest approximately $4 million in engineering, research and development to provide new and enhanced features to the DSS switch and to develop new products. The new and enhanced features include Advanced Call Processing for Operator Services; Number Portability and Enhanced 911; SS7 to support intelligent networking applications; Call Management System software; and a Switch Adjunct Server to more efficiently manage DSS switch resources and enable Call Management. These new and enhanced features were released in fiscal 1997. In virtually all cases, Sattel owns the results of the research and development performed by contract engineers and independent laboratories. In some instances, however, the development activity requested by Sattel involves a specific customization of a contractor's proprietary software for integration into the DSS switch. In those instances, Sattel establishes a licensing agreement with the contractor. When Sattel subcontracts development work, the contractor designs and tests the technology needed to fulfill the contract. Sattel retains the responsibility to integrate the contractor's work product with the DSS switch. The individual contract engineers assist with specific technological needs of Sattel. Each of the outside laboratories utilized by Sattel has been selected based on a specific organizational capability and expertise in one of the following areas: automatic test systems, telecommunications and engineering processes, UNIX software, Operation Administration Maintenance & Provisioning ("OAM&P"), telecommunications signaling systems, telecommunications and data communications software products and Internet software. Employees As of September 12, 1997, the Company had 61 full-time employees. In addition the Company retained, on a contract basis, additional people for specific projects. Sattel believes that its future growth and success will depend in large part upon its ability to continue to attract and retain highly qualified people. The Company has no collective bargaining agreement with its employees. Environmental Regulation Compliance with federal, state and local regulations relating to environmental protection have not had a material effect upon capital expenditures, operating results or the competitive position of the Company. 10 Glossary Advanced Call Processing - Features include Operator Services for busy line verification and busy line interrupt, exchange service capability for service provider Number Portability and Enhanced 911. ANI - Automatic number identification (the phone number of the phone calling you). Busy hour call attempts - number of call attempts during the busy hour, an important concept in traffic engineering, i.e., figuring how much switching and transmission capacities are needed. C++ language - An object-oriented programming language. Call Management System - a DSS switch adjunct processor that handles call authorizations, time-of-day routing decisions, and call record storage. Class 4 office - The major switching center to which toll calls from Class 5 central office switches are sent. Class 5 office - An end office. Connects subscribers to the public switched telephone network (PSTN). DNIS - Dialed number identification service. Enhanced 911 - Emergency call routing with calling number identification (ANI). ISDN - Integrated services digital network. There are two interfaces in ISDN: PRI - Primary rate interface: The ISDN equivalent of a T1 or E1 circuit, and BRI - Basic rate interface: Consists of two bearer B-channels at 64 kilobits and a data channel at 16 kilobits per second. Number Portability - Allows telephone numbers to move with a customer between carriers. OAM&P - Operation, administration, maintenance and provisioning. Operator Services - A variety of services provided by an operator, i.e., collect calls, third-party billed calls and person-to-person calls. Ports - an entrance to or exit from a network. Rack - an open metal structure onto which equipment is mounted. Shelf unit - a unit that mounts in a rack and holds cards. Switch Adjunct Server (SAS) - Enables customers to better manage DSS switch resources and increase processor usability in the switch. SAS leaves more CPU power in the switch by moving translations to the SAS. The SAS has a graphical user interface for point-and-click switch maintenance and it enables users to monitor alarm messages from the switch. 11 Servers - Typically a computer that sits on a local area network that is used as a repository or distributor of data. Signaling System 7 ("SS7") - An international intelligent network signaling system that significantly improves call processing. SS7 networks typically process calls faster than other signaling systems since the call arrives independently from the voice traffic. SS7 reduces network congestion and deployment costs through greater port utilization and alternative routing capabilities. SS7 also enables value-added services to be efficiently deployed. Examples of these value-added services include credit and debit card validation, and wireless applications. T1/E1 circuits - A T1 circuit is a digital transmission link with a capacity of 1.544 megabits per second (North American standard). An E1 circuit is a digital transmission link with a capacity of 2.048 megabits per second (European standard). Time-space-time switching - A fully electronic switch matrix design architecture. Trunks - A communication line between two switching systems. Unix - A multi-tasking, multi-user operating system for running computers and telephone systems that allow multiple programs to be run simultaneously and multiple users to use a single computer. Workstations - High-speed personal computers that are used for high-powered processing tasks, i.e., CAD/CAM, engineering. ITEM 2. Properties Sattel's and the Company's executive offices are located in approximately 30,000 square feet of office and warehouse space in Calabasas, California currently leased by Sattel. The Company also leases office space in Milwaukee, Wisconsin; and Bridgewater, New Jersey to support its administrative and sales requirements. The Company is in the process of closing the offices in Milwaukee and Bridgewater. The Company owns a vacant parcel of land in Eldridge, Iowa that is for sale. The Company owns a 91,000 square-foot building in Atlanta, Georgia which was formerly used by APC. The Company has listed this property for sale. Presently, the property is being leased to the company that purchased APC's business. C&L and Valley each lease warehouse and office space to support their operations. ITEM 3. Legal Proceedings The Diana Corporation Securities Litigation (Civ. No. 97-3186). This is a consolidation of what were originally nine separate actions brought in the United States District Court for the Central District of California on behalf of purchasers of the Company's common stock during a class period that extended from December 6, 1994 through May 2, 1997. On July 23, 1997, the Court entered a stipulation and order consolidating the nine actions for all purposes. On September 9, 1997, plaintiffs filed a consolidated amended complaint (the "Consolidated Complaint") asserting claims against the Company, certain of its present and former directors and officers, and others under Section 10(b) of the Securities Exchange Act of 1934. The Consolidated 12 Complaint alleges essentially that the Company and other defendants were engaged in a scheme to inflate the price of the Company's common stock during the class period through false and misleading statements and manipulative transactions. The Consolidated Complaint seeks unspecified damages, but identifies the significant movement in the Company's stock price during the putative class period (a swing of more than $115 per share) to imply that the damages that will be claimed will exceed the Company's assets. No discovery or substantive proceedings have occurred. The Company must respond to the consolidated amended complaint by September 30, 1997 if by motion to dismiss, or by October 17, 1997 if by answer. The Company intends to defend this action vigorously. As discussed in Note 16 to the Consolidated Financial Statements, the Company has adjusted certain previously reported fiscal 1997 unaudited quarterly financial information. It cannot presently be determined what effect, if any, such restatements will have on the class actions discussed above, or any other potential claims by investors which may be asserted against the Company. Sattel Communications LLC v. Concentric Network Corporation ("CNC"), Case No. LC 040906, Superior Court, Los Angeles County, California. Sattel filed this action as plaintiff in April 1997. The complaint sought damages of roughly $4.2 million relating to products CNC purchased, plus additional compensatory and punitive damages for, among other things, breach of contract. On June 25, 1997, the trial court granted Sattel's motion for pre- judgment attachment in the amount of $3.6 million. The granting of the motion was based upon the Court's preliminary determination on the probable validity of Sattel's claim. On June 30, 1997, Sattel posted an undertaking, in the form of a $75,000 bond, to secure the attachment. On July 9, 1997, Sattel secured a final judgment from the Court. The basic terms are: (i) a $4.4 million judgment against CNC and in favor of Sattel; (ii) certain restrictions on Sattel's CNC stock holding have been lifted, such that Sattel has the election to sell up to 25% of its CNC holding immediately following the completion of CNC's proposed Initial Public Offering ("IPO") at the IPO price; and (iii) dismissal and mutual release of all claims between the parties. Sattel agreed to wait until August 15, 1997 before executing upon the judgment. Subsequently, Sattel has collected both the $4.4 million judgment and $396,000 from the partial sale of its CNC holdings. C&L Communications, Inc. v. Stephenson, et al., Case No. 95-CI-16680, District Court, Bexar County, Texas. C&L Communications, a wholly-owned subsidiary of the Company, filed this action in November 1995 against three former officers who resigned in 1995 to form a competing business, AT Supply. AT Supply and its parent corporation, Teltronics, Inc. of Sarasota, Florida, are also joined as defendants. The complaint alleges breach of fiduciary duty, conspiracy and misappropriation of trade secrets. Trial is set for January 1998. The parties are in the midst of settlement discussions. If the matter does not settle, C&L intends to continue vigorous pursuit of the case. See Note 6 to the Consolidated Financial Statements for a description of additional legal proceedings in which the Company or its subsidiaries are defendants. 13 ITEM 4. Submission of Matters to a Vote of Security Holders No matter was submitted to a vote of security holders during the fourth quarter of fiscal 1997. PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's common stock is included for quotations on the NASDAQ Bulletin Board under the symbol DNAK. Prior to March 10, 1997, the Company's common stock was traded on the New York Stock Exchange. The table below sets forth by quarter the high and low sales prices of the Company's common stock on the New York Stock Exchange Composite Tape prior to March 10, 1997, and the high and low bid prices per share for the Company's common stock obtained from trading reports of the National Association of Securities Dealers subsequent to March 7, 1997. The sales prices have been adjusted to reflect the 5% stock dividends paid on October 2, 1996 and January 5, 1996: Fiscal Fiscal 1997 1996 Quarter High Low Quarter High Low ------- ---- --- ------- ---- --- First 114.286 23.810 First 7.596 3.855 Second 46.190 19.524 Second 12.585 5.102 Third 41.750 25.875 Third 25.357 9.184 Fourth 26.875 4.250 Fourth 29.048 11.786 At September 4, 1997 the Company had 1,273 shareholders of record. There were no cash dividends declared during the last two fiscal years. The Company has no plans to pay cash dividends in the foreseeable future. The payment of cash dividends by the Company is restricted by the Company's subordinated debentures which provide that the consolidated tangible net worth of the Company cannot be reduced to less than an amount equal to the aggregate principal amount of the subordinated debentures, or $1,254,000. Sales and Issuance of Unregistered Securities On November 26, 1996, the Board of Directors authorized the issuance of 2,500 shares of Company common stock to Edward J. Noha in consideration for previous services as a Director of the Company. On November 26, 1996, the Board of Directors authorized the issuance of 1,500 shares of Company common stock to R. Scott Miswald in consideration for current services as an officer of the Company. The exemption from registration for these issuances was pursuant to Section 4(2) of the Securities Act of 1933. On July 17, 1997, the Company issued 1,880,750 shares of its common stock at $2.00 per share in a private placement under Regulation D of the Securities Act of 1933. In addition, warrants to purchase 1,880,750 shares of the Company's common stock were issued to the Regulation D participants. The Company issued the stock and warrants to certain private investors including James J. Fiedler, the Company's Chairman and Chief Executive Officer, Stephen W. Portner, a Director, and the following shareholders that 14 own beneficially more than 5% of the common stock of the company: Richard L. Haydon and Ardent Research Partners. On July 17, 1997, the Company issued $2,500,000 of 8% convertible notes at par. The purchasers of the notes are: Buckingham Global Investors, Mid Ocean Capital, S.A., Offshore Investment Fund Ltd. and Offshore Nominees Limited. The notes are convertible into the Company's common stock which will be issued pursuant to the exemption provisions of Regulation S of the Securities Act of 1933. The conversion price is the lessor of $6.64 or 80% of the 5 day average closing bid price on a conversion date with a conversion floor price (the "Conversion Floor Price") of $1.50 per share, provided that if the average closing bid price for any 20 consecutive trading days prior to a conversion date is less than $1.50 per share, the Conversion Floor Price will be adjusted to 80% of such 20 day average closing bid price. A further restriction on conversion provides that in no event shall the holder be entitled to convert any portion of the note in excess of that portion of the note upon conversion of which the sum of (1) the number of shares of common stock beneficially owned by the holder and its affiliates (other than shares of common stock which may be deemed beneficially owned through the ownership of the unconverted portion of this note as defined in the Subscription Agreement) and (2) the number of shares issuable upon the conversion of the portion of the note with respect to which the determination of this proviso is being made, would result in beneficial ownership by the holder and its affiliates of more than 4.9% of the outstanding common stock of the Company. The note can be converted equally beginning 45, 75 and 105 days following July 17, 1997. Interest is payable semi-annually in arrears in the form of Company common stock based on the above-described conversion price. After one year, the Company may, by written notice to the holders, prepay the notes in whole or in part. The notice shall be given at least ten (10) days prior to the payment date and on such date the Company shall pay the outstanding principal and all accrued interest on the note, unless prior to such payment date the holder has delivered a notice of conversion. Any unconverted principal amount and accrued interest thereon shall at the maturity date be paid, at the option of the Company, in either (a) cash or (b) common stock valued at a price equal to the average closing bid price of the common stock for the five (5) trading days immediately preceding the maturity date. The 8% convertible notes contain certain event of default provisions. If an event of default occurs and is not waived by the holders of a majority of all notes, the Company must redeem the notes at 125% of the outstanding principal amount due. Significant event of default provisions include among other things: proceedings for relief under bankruptcy law, insolvency, money judgment or writ of attachment in excess of $500,000 filed against the Company and the delisting of the Company's common stock from an exchange or the Nasdaq Stock Market. In addition, warrants to purchase 37,037 of common stock at an exercise price of $6.75 per share were issued to the escrow agent for the Regulation S offering. These warrants are exercisable after 41 days of issuance and expire on July 17, 2000. Upon exercise of the warrants, the Company's common stock will be issued pursuant to the exemption provisions of Regulation S of the Securities Act of 1933. 15 ITEM 6. Selected Financial Data THE DIANA CORPORATION SELECTED FINANCIAL DATA (In Thousands, Except Per Share Amounts) March 31, March 30, April 1, April 2, April 3, 1997 1996 1995 1994 1993 (1) -------- -------- ------- ------- ------- (5) (5) Net sales (2)............... $ 7,154 $ 264 $ --- $ --- $ --- ======= ====== ====== ====== ====== Earnings (loss) from: Continuing operations (2)(6) $(12,335) $(2,746) $(2,140) $ 1,364 $ 644 Discontinued operations (3). (8,175) (619) 1,420 2,093 1,213 Extraordinary items......... (508) --- --- (266) 1,318 Accounting change........... --- --- --- 262 --- ------- ------ ------ ------ ------ Net earnings (loss)......... $(21,018) $(3,365) $ (720) $ 3,453 $ 3,175 ======= ====== ====== ====== ====== Earnings (loss) per common share: Primary Continuing operations...... $ (2.34) $ (.62) $ (.51) $ .33 $ .16 Discontinued operations (1.55) (.14) .34 .51 .30 Extraordinary items........ (.10) --- --- (.06) .33 Accounting change.......... --- --- --- .06 --- ------- ------ ------ ------ ------ Net earnings (loss) per common share........... $ (3.99) $ (.76) $ (.17) $ .84 $ .79 ======= ====== ====== ====== ====== Fully diluted Continuing operations...... $ (2.34) $ (.62) $ (.51) $ .32 $ .16 Discontinued operations.... (1.55) (.14) .34 .49 .30 Extraordinary items........ (.10) --- --- (.06) .33 Accounting change.......... --- --- --- .06 --- ------- ------ ------ ------ ------ Net earnings (loss) per common share........... $ (3.99) $ (.76) $ (.17) $ .81 $ .79 ======= ====== ====== ====== ====== Cash dividends per common share...................... $ --- $ --- $ --- $ --- $ --- ======= ====== ====== ====== ====== Total assets................ $ 23,244 $29,092 $24,205 $28,522 $27,357 Long-term debt (4).......... 1,958 2,099 2,240 2,501 2,760 Working capital............. 6,161 13,282 15,489 19,007 17,490 Shareholders' equity........ 16,834 24,686 19,729 18,852 15,492 (1) Fiscal 1993 contains 53 weeks. All other years contain 52 weeks. 16 (2) Earnings (loss) from continuing operations includes the operating results of Sattel and the former Milwaukee corporate office. Sattel commenced operations in November 1994. See Item 1 Business and Note 3 to the Consolidated Financial Statements. Included in the fiscal 1997 loss are the following: write-down of investment in CNC of $1,060,000; legal, accounting and other professional fees of $1,050,000; realized losses on sale of marketable securities of $736,000; settlement expenses with a former employee of $600,000; and charges of $1,400,000 for excess and obsolete inventory. (3) The increase in the loss from discontinued operations in fiscal 1997 is due to a provision of $7,550,000 recorded for restructure costs, severance and the estimated loss on disposal of APC, C&L and Valley. See Note 2 to the Consolidated Financial Statements. (4) Includes current portion of long-term debt. (5) The data in this column is unaudited. (6) Earnings from continuing operations in fiscal 1994 and 1993 included interest income and gains on sales of marketable securities of $2,567,000 and $1,123,000, respectively. ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations - Fiscal Year Ended March 31, 1997 versus March 30, 1996 The Company's historical results of operations have been restated to reflect the operations of APC, C&L and Valley as discontinued operations. The following discussion encompasses the results of operations of Sattel and the Company's corporate office. Sattel's operations were conducted through Sattel Communications Corp. ("SCC") prior to Sattel's formation in April 1996. SCC commenced operations in November 1994 as a 50/50 joint venture between the Company and STI. In January 1996, the Company increased its ownership interest in SCC from 50% to 80% and SCC acquired the intellectual property and technology rights of the DSS switch. SCC is included in the consolidated financial statements since the beginning of fiscal 1996 (see Notes 1 and 3 to the Consolidated Financial Statements). Sattel's revenues and expenses increased in fiscal 1997 as compared to fiscal 1996, primarily because Sattel's operations in fiscal 1996 consisted of the start-up and development of its business. Sattel had sales of $7,154,000 in fiscal 1997, primarily from sales of DSS switches. Sattel had sales of $6,712,000, or 94% of fiscal 1997 sales, to CNC. In fiscal 1997, Sattel's gross profit was reduced by charges of $1,400,000 for excess and obsolete inventory. In fiscal 1997, selling and administrative expenses increased $8,463,000 over fiscal 1996. Selling and administrative expenses have increased in fiscal 1997 primarily because of the further development of Sattel's business, the settlement expense of $600,000 with a former employee, and to a lesser extent due to increased corporate office expenses. During fiscal 1996, Sattel incurred significantly less selling and administrative expenses as compared to fiscal 1997 because Sattel was in the early stage of developing its business and staff. 17 Selling and administrative expenses for the fiscal year ended March 31, 1997 are comprised of the following (in thousands): Sattel Other Total Sattel's selling and administrative expenses $ 8,226 $ --- $ 8,226 Legal, accounting and other professional fees 238 812 1,050 Salaries, benefits and expenses for Messrs. Fisher, Lilly and Runge prior to separation --- 850 850 Settlement with former employee --- 600 600 Other Milwaukee corporate office operating expenses --- 420 420 Directors and officers liability insurance expense --- 279 279 Amortization of intangible assets 238 --- 238 Other --- 449 449 ------ ------ ------ $ 8,702 $ 3,410 $12,112 ====== ====== ====== The Company anticipates that some of the non-Sattel expenses reflected in the above table will continue to be incurred and funded by the Company in fiscal 1998. Engineering, research and development expenses of $4,060,000 were incurred by Sattel during fiscal 1997. An explanation of the increase in engineering, research and development expenses and the Company's accounting policy for these expenses is in Note 1 to the Consolidated Financial Statements. The components of non-operating income (expense) are shown in Note 9 to the Consolidated Financial Statements. Minority interest in fiscal 1997 represents the minority partners' share of Sattel's loss. In fiscal 1996, the Company has included the results of SCC in its statement of operations as though it had acquired its majority interest at the beginning of fiscal 1996 and added back the minority partner's share of SCC's loss as part of minority interest (see Note 1 to the Consolidated Financial Statements). In December 1996, the Company filed a federal income tax refund claim with the Internal Revenue Service ("IRS") resulting from the carryback of certain prior year deductions to fiscal 1985. In January 1997, the Company received a payment from the IRS for the claim and recorded an income tax credit of $836,000. The loss from continuing operations in fiscal 1997 is primarily due to losses incurred by Sattel and costs related to the Company's corporate office. The increase in the loss from continuing operations in fiscal 1997 as compared to fiscal 1996 is primarily due to (i) an increase in Sattel's operating loss of $6,857,000 (see Note 12 to the Consolidated Financial Statements), (ii) a settlement expense of $600,000 with a former employee, (iii) a non-operating loss of $1,060,000 incurred by Sattel for the write- down of its investment in CNC preferred stock, (iv) an increase in the Company's corporate office operating expenses of $1,001,000 primarily due to an increase in professional fees and directors and officers liability 18 insurance expense and (v) a loss of $736,000 incurred by the Company on the sale of its remaining marketable securities. These expenses and losses were partially offset by an income tax credit of $836,000. The summarized operating results of discontinued operations for fiscal 1997 and fiscal 1996, respectively, are shown in Note 2 to the Consolidated Financial Statements. The operating results from discontinued operations reflected in fiscal 1997 are through the measurement date of November 20, 1996. Operating losses from discontinued operations subsequent to the measurement date are reflected within the estimated loss on disposal. The operating results from discontinued operations reflected in fiscal 1996 are for the entire fiscal year. The estimated loss on disposal of discontinued operations is discussed in Note 2 to the Consolidated Financial Statements. The extraordinary items are discussed in Note 10 to the Consolidated Financial Statements. Results of Operations - Fiscal Year Ended March 30, 1996 versus April 1, 1995 In fiscal 1996, SCC had sales of $264,000 from the sale of three DSS switches. For the fifty-two weeks ended March 30, 1996, selling and administrative expenses increased $1,952,000 over fiscal 1995. Selling and administrative expenses have increased primarily because of the inclusion of SCC's results in fiscal 1996. SCC's expenses relate primarily to the start-up and development of its business. The components of non-operating income (expense) are shown in Note 9 to the Consolidated Financial Statements. In fiscal 1996, the Company has included the results of SCC in its statement of operations as though it had acquired its majority interest at the beginning of fiscal 1996 and added back the minority partner's share of SCC's loss as part of minority interest. The summarized operating results of discontinued operations are shown in Note 2 to the Consolidated Financial Statements. The change in the operating results from discontinued operations from fiscal 1995 to 1996 is primarily attributable to an increase in APC's loss and a reduction in C&L's results. APC's loss increased primarily due to the write-off of goodwill of $852,000. C&L's operating results decreased due to a 28% reduction in its sales, a decrease in gross profit margins and an increase in operating expenses. 19 Liquidity and Capital Resources The Company encountered a liquidity deficiency during fiscal 1997 and subsequently, primarily because (i) certain customers of Sattel were past due on receivables, (ii) Sattel has granted certain customers extended payment terms, (iii) Sattel's revenue growth has been lower than expected and (iv) the Company made payments of $2,349,000 in connection with the Restructuring. As a result of the liquidity deficiency, the Company had become delinquent on certain of its working capital obligations. In July 1997, the Company raised $5,597,000 through equity and debt financings (see Note 15 to the Consolidated Financial Statements for additional information). After completion of the equity and debt financings, collection of $4.4 million from CNC and the anticipated sales of C&L, Valley and APC's real estate, management believes that it will have sufficient resources to provide adequate liquidity to meet the Company's planned capital and operating requirements through March 31, 1998 and for the foreseeable future. Thereafter, the Company's operations will need to be funded either with funds generated through operations or with additional debt or equity financing. If the Company's operations do not provide funds sufficient to fund its operations and the Company seeks outside financing, there can be no assurance that the Company will be able to obtain such financing when needed, on acceptable terms or at all. In addition, any future equity financing or convertible debt financing would cause the Company's shareholders to incur dilution in common stock holdings as a percentage of the total outstanding shares. The Company is seeking buyers for C&L and Valley. The Company believes that these businesses and APC's real estate will be sold prior to March 31, 1998. It is anticipated that the proceeds of the sales of these businesses and assets will be used to fund a portion of the Company's capital and operating requirements in fiscal 1998. Restrictions in the revolving lines of credit of C&L and Valley prevent the Company from presently accessing funds from these subsidiaries. Such restrictions in C&L's revolving line of credit may also initially limit the Company's access to the total proceeds from a sale of Valley prior to any ultimate sale of C&L given the existing ownership structure of Valley. The Company used cash in operating activities of $17,859,000 during fiscal 1997 as compared to positive cash flow of $1,709,000 for fiscal 1996. The decrease in cash flow is primarily attributable to an increase in the loss from continuing operations, an increase in cash used to fund working capital items and a reduction in cash provided by operating activities of discontinued operations. 20 The primary components of cash provided (used) by operating activities in the Consolidated Statement of Cash Flows for fiscal 1997 are as follows (in thousands): Sattel Other Total Operating loss $ (8,740) $(3,410) $(12,150) Cash provided (used) by changes in current assets and liabilities (3,552) 388 (3,164) Depreciation and amortization 467 11 478 Interest and other income 118 341 459 Income tax credit --- 836 836 Interest expense --- (52) (52) Cash used by discontinued operations --- (3,862) (3,862) Loss from discontinued operations --- (625) (625) Other --- 221 221 ------- ------ ------- $(11,707) $(6,152) $(17,859) ======= ====== ======= The Company anticipates that some of the non-Sattel cash flows reflected in the above table will continue to be incurred and funded by the Company in fiscal 1998. The Company has made significant cash disbursements related to the Restructuring. Included in the cash used by discontinued operations of $3,862,000 are payments of $1,444,000 made to Messrs. Fisher ($1,092,000), Lilly ($83,000) and Runge ($269,000) under the Separation Agreements discussed in Note 11 to the Consolidated Financial Statements and payments of $854,000 for professional fees related to the Restructuring. In addition, included in the operating loss of $3,410,000 are disbursements of $600,000 related to a settlement with a former employee. The Company's receivables consisted of the following at March 31, 1997: CNC $ 4,217 All other receivables 377 ------ Total receivables $ 4,594 ====== The increase in receivables at March 31, 1997 is primarily due to the increase in Sattel's sales. At March 31, 1997, Sattel had past due receivables of $3.8 million. At August 15, 1997, Sattel had collected $4.3 million of receivables that were outstanding at March 31, 1997, of which $4.2 million was the result of the judgment discussed in the next paragraph. In April 1997, Sattel commenced legal proceedings against CNC for, among other things, breach of contract relating to payment of $4.2 million of accounts receivable (see Item 3 - Legal Proceedings). In July 1997, Sattel received a court ordered judgment in its favor whereby, among other things, Sattel executed upon a judgment of $4.4 million against CNC on August 15, 1997. In addition, CNC repurchased from Sattel 25% of CNC Preferred Stock owned by Sattel at $12.00 per share or $396,000 on August 2, 1997. The increase in inventory and accounts payable are primarily attributable to purchases from STI of raw materials for DSS switches. See Note 6 to the Consolidated Financial Statements for additional information regarding a legal proceeding commenced by STI against Sattel. 21 Capital expenditures increased to $1,914,000 in fiscal 1997 from $161,000 in fiscal 1996. The increase in capital expenditures is primarily due to purchase of test equipment, development hardware and third-party software by Sattel. The Company anticipates that Sattel's fiscal 1998 capital expenditure requirements will approximate $1.2 million primarily for test equipment and development hardware. In June 1996, CNC executed a Promissory Note for $5,000,000 in favor of Sattel for a bridge loan. CNC granted to Sattel a warrant to purchase a split adjusted 36,765 shares of CNC Series D Preferred Stock ("CNC Preferred Stock") at a split adjusted exercise price of $20.40 per share (equal to the par value of such shares) as additional consideration for the bridge loan to CNC. The warrant is exercisable immediately and expires on June 6, 1999. In August 1996, the Promissory Note and accrued interest receivable were converted into 3,729,110 shares of CNC Preferred Stock. In September 1996, Sattel sold to StreamLogic Corporation 1,838,234 shares, or 49%, of its CNC Preferred Stock for $2.5 million. No gain or loss was recognized in connection with this sale. In August 1997, CNC completed its IPO at an offering price of $12.00 per share. The CNC Preferred Stock owned by Sattel was automatically converted into CNC common stock immediately prior to the closing of the IPO. The value of Sattel's investment in CNC Preferred Stock, after giving effect to a reverse 1 for 15 stock split and based on a $12.00 per share offering price, is approximately $1,512,000. Consequently, Sattel recorded a non-operating loss of $1,060,000 in fiscal 1997 related to the impairment in value of its investment. The investment in CNC Preferred Stock of $1,512,000 is classified within other current assets in the Consolidated Balance Sheet. Sattel is prohibited from selling 75% of its CNC common stock for six months following CNC's IPO. Sattel sold 25% of its CNC common stock in August 1997 at $12.00 per share and received $396,000. Sattel continues to own the warrant from CNC which is now a warrant for CNC common stock as a result of the conversion discussed above. In February 1997, the Company sold a majority of APC's assets (see Note 2 to the Consolidated Financial Statements). The Company has received preferred stock dividends of $797,000 from APC subsequent to the sale of its assets. Further preferred stock dividends will be available when cash held in escrow is released or when APC's building is sold as a result of preferred stock dividends currently in arrears. APC has restricted cash of $100,000 that is held in an escrow account for reimbursement of indemnification claims by the Buyer. The escrow account will remain in existence until February 3, 1998. At that time, indemnification claims by the Buyer of APC up to $100,000 will be repaid and any remaining escrow funds will be disbursed to APC. APC has entered into a lease with the Buyer of APC for the building that terminates on approximately November 15, 1997. In addition, APC has listed the building for sale. The real estate is collateral for two mortgages that amount to $781,000. In the fourth quarter of fiscal 1996 and in the first quarter of fiscal 1997, the Company raised approximately $17.4 million, after commissions and expenses, through the sale of 600,000 shares of common stock. The decrease in intangible assets is primarily attributable to the transaction with STI that occurred on May 3, 1996, which is discussed in Note 3 to the Consolidated Financial Statements. 22 RISK FACTORS The Company is being restructured, through the disposal of APC, C&L and Valley, to consist solely of the operations of Sattel. In February 1997, a majority of the assets of APC were sold. Stockholders of the Company should be aware that the Restructuring involves risks which could adversely affect the value of their Company common stock during and after the Restructuring. In addition, certain characteristics and dynamics of the Company's business and of financial markets generally create risks to the Company's long-term success and to predictable quarterly results. No representation as to the future value of Company common stock is made hereby, nor is any person authorized by the Company to make any such representation. The Company is aware of the following risks, each of which should be considered carefully: Recent Operating Losses; No Assurance of Profitability The Company has reported losses from continuing operations for the last three fiscal years. There can be no assurance that the Company will return to profitability in the short term or ever. Need to Increase Sales Sattel has a limited operating history and has not yet achieved significant sales of its products over an extended period. Net sales of the continuing operations of the Company were $264,000 in the 1996 fiscal year and $7,154,000 in the 1997 fiscal year. Substantially all of fiscal 1997 sales were to a single customer. These sales were not sufficient to offset the operating and other expenses incurred by the Company. Also, the Company has experienced difficulty in collecting payments from its customers. If the Company is to achieve profitability, it will need to increase the market acceptance and sales of its products to levels commensurate with the expense levels of the Company. No assurances can be given that the Company will be successful in this effort. Liquidity Deficiency Recent events have improved the Company's short-term liquidity. The Company nevertheless considers that its liquidity situation, over the longer term, will be dependent on its operating results and not its ability to divest its discontinued subsidiaries and assets. The Company could remain relatively constrained and its ability to access outside sources of capital could be restricted until such time as the Company is able to demonstrate higher levels of sales and more favorable operating results. No assurances can be given that the Company will be able to maintain its liquidity over an extended period of time as required for the Company to achieve its operating goals. See Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources. Fluctuations in Quarterly Operating Results Sattel's sales are subject to quarterly and annual fluctuations due to a number of factors. Sattel expects to experience fluctuations in sales from quarter to quarter due in large part to the capital budgeting and spending patterns of potential customers in the telecommunications industry. Sattel's ability to affect and judge the timing of individual customer orders is, by its nature, limited. Sattel's sales for a given quarter may depend to a significant degree upon planned product shipments to a single customer, often related to specific customer projects and the necessary equipment deployment schedule. 23 Delays or lost sales can be caused by other factors beyond Sattel's control, including changes in implementation priorities and slower than anticipated growth in demand for the services that the DSS switch supports. Delayed sales have occurred in the past and may occur in the future. In addition, Sattel has on occasion in the past experienced delays as a result of the need to modify its products to comply with unique customer specifications. These and similar delays or lost sales could have a material adverse effect on Sattel's business, financial condition and results of operations. Operating results may also fluctuate due to factors such as the timing of new product announcements and introductions by Sattel, its major customers or its existing or potential competitors, delays in new product introductions by Sattel, market acceptance of new or enhanced versions of Sattel's products, changes in the product or customer mix of sales, changes in the level of operating expenses, competitive pricing pressures, the gain or loss of significant customers, increased research and development and sales and marketing expenses associated with new product introductions, and general economic conditions. All of the above factors are difficult for Sattel to forecast, and these or other factors could have a material adverse effect on Sattel's business, financial condition and results of operations for one quarter or a series of quarters. Sattel's expense levels are based in part on its expectations regarding future sales and are fixed in the short term to a large extent. Therefore, Sattel may be unable to adjust spending in a timely manner to compensate for any unexpected shortfall in sales. Any significant decline in demand relative to Sattel's expectations or any material delay of customer orders could have a material adverse effect on Sattel's business, financial condition and results of operations. It is possible that in the future, Sattel's operating results may be below the expectations of public market analysts and investors, which could have a material adverse effect on the price of the Company's common stock. Reductions in Size and Diversification The Company is a smaller and less diversified Company and has a lower asset and revenue base than prior to the Restructuring. Consequently, the effect of any decline in operating results after the Restructuring could more immediately and severely affect the Company, its results of operations and its liquidity. In addition, the Restructuring has resulted in some temporary dislocations and inefficiencies to the business operations, as well as the organization and personnel structures, of the Company. Dependence on Telecommunications Industry and Small- to Medium-Sized Switching Market After the Restructuring, the Company's customers are concentrated in the telecommunications and Internet service industries. Accordingly, the Company's future success depends upon the capital spending patterns of such customers and the demand by such customers for the DSS switch. Sattel is initially targeting the market for small- to medium-sized central office switches in the North America. Historically, there has been little, if any, demand for central office switches similar in functionality, type and size to the DSS switch and, accordingly, there can be no assurance that potential customers will consider the near term value of the DSS switch sufficient to influence their purchasing decisions or that they will pursue strategic business alternatives that would benefit from a less expensive small- to medium-size central office switch. Furthermore, there can be no assurance that telecommunications companies and other potential customers will not 24 adopt alternative architectures or technologies that are incompatible with the DSS switch, which could have a material adverse effect on the Company's business, financial condition and results of operations. Infrastructure improvements requiring the Company's or similar technology may be delayed or prevented by a variety of factors, including cost, regulatory obstacles, the lack of consumer demand for advanced telecommunications services and alternative approaches to service delivery. Concentrated Product Line; New Product Delays Sattel currently derives substantially all of its revenues from the DSS switch and expects that this concentration will continue in the foreseeable future. As a result, any decrease in the overall level of sales of, or the prices for, the DSS switch due to product obsolescence or any other reason could have a material adverse effect on the Company's business, financial condition and results of operations. The Company may consider the acquisition of other companies or technologies provided they are complementary to its core business. The telecommunications equipment market, in general, is characterized by rapidly changing technology, evolving industry standards, changes in end-user requirements, and frequent new product introductions and enhancements. The introduction of products embodying new technologies or the emergence of new industry standards can render existing products obsolete or unmarketable. Sattel's success will depend upon its ability to enhance the DSS switch's technology and to develop and introduce, on a timely basis, new products that keep pace with technological developments and emerging industry standards and address changing customer requirements in a cost-effective manner. There can be no assurance that the Company will be successful in identifying, developing, manufacturing, and marketing product enhancements or new products that respond to technological change or evolving industry standards. There also can be no assurance that the Company will not experience difficulties that could delay or prevent the successful development, introduction and marketing of these products, or that its new products and product enhancements will adequately meet the requirements of the marketplace and achieve market acceptance. Furthermore, from time to time, the Company or its competitors may announce new products or product enhancements, services or technologies that have the potential to replace or shorten the life cycle of the DSS switch and that may cause customers to defer purchasing the DSS switch. There can be no assurance that future technological advances in the telecommunications industry will not diminish any market acceptance of the DSS switch or render the DSS switch obsolete which could have a material adverse effect on the Company's business, financial condition and results of operations. Sattel has experienced delays in completing development and introduction of new products, product variations and features, and there can be no assurance that such delays will not continue or recur in the future. Furthermore, the DSS switch contains a significant amount of complex software that may contain undetected or unresolved errors as products are introduced or as new versions are released. Sattel has in the past discovered software errors in certain DSS switch installations. There can be no assurance that, despite significant testing by the Company, software errors will not be found in new enhancements of the DSS switch after commencement of shipments, resulting in delays in or loss of market acceptance, either of which could have a material adverse effect on the Company's business, financial condition and results of operations. 25 Dependence on Outsource Manufacturers and Other Key Suppliers Sattel's outsource manufacturers have from time to time experienced delays in receipt of certain hardware components. Certain components, including crystals and microprocessors, are presently single sourced or are available from a limited number of sources. An interruption in business between Sattel and its outsource manufacturers could have a material adverse effect on Sattel (see Note 6 to the Consolidated Financial Statements regarding a description of the legal proceedings between STI and Sattel). The Company has established relationships with alternate suppliers such as Sanmina and I-PAC and has assembled product itself in order to reduce its dependency on STI. Some sole-source suppliers are companies which from time to time allocate parts to telecommunications equipment manufacturers due to market demand for telecommunications equipment. Many of Sattel's potential competitors for such parts are much larger and may be able to obtain priority allocations from these shared suppliers, thereby limiting or making unreliable the sources of supply for these components. There can be no assurance that shortages in component parts will not occur in the future or will not result in Sattel having to pay a higher price for components. A failure by a supplier to deliver quality products on a timely basis, or the inability to develop additional alternative sources if and as required, could result in delays which could have a material adverse effect on the Company's business, financial condition and results of operations. Limited Protection of Proprietary Technology; Risk of Third-Party Claims of Infringement Sattel uses a combination of patents, trade secrets, confidentiality and non-compete agreements and tight control of its software to protect the products and features that it believes give it competitive advantages. In particular, Sattel relies on contractual restrictions to establish and protect its rights to the technology developed by outside contractors used to assist in the development of Sattel's products. Sattel's success and ability to compete is dependent in part upon its technology. There can be no assurance that the steps taken by Sattel will be adequate to prevent misappropriation of its technology or that Sattel's competitors will not independently develop technologies that are substantially equivalent or superior to Sattel's technology. In addition, the laws of many foreign countries do not protect the Company's intellectual property rights to the same extent as the laws of the United States. The failure of the Company to protect its proprietary information could have a material adverse effect on the Company's business, financial condition and results of operations. The increased dependence of the telecommunications industry on proprietary technology has resulted in frequent litigation based on allegations of the infringement of patents and other intellectual property. The Company may be subject to litigation to defend against claimed infringements of the rights of others or to determine the scope and validity of the proprietary rights of others. Litigation also may be necessary to enforce and protect trade secrets and other intellectual property rights owned by the Company. Any such litigation could be costly and cause diversion of management's attention, either of which could have a material adverse effect on the Company's business, financial condition and results of operations. Adverse determinations in such litigation could result in the loss of the Company's proprietary rights, subject the Company to significant liabilities, require the Company to seek licenses from third parties, or 26 prevent the Company from manufacturing or selling its products, any one of which could have a material adverse effect on the Company's business, financial condition and results of operations. Furthermore, there can be no assurance that any necessary licenses will be available on reasonable terms. Customer Concentration Approximately 94% of Sattel's revenues for fiscal 1997 were derived from sales to CNC (see Item 3 - Legal Proceedings for a description of the legal proceedings between Sattel and CNC). Sattel anticipates that its results of operations in any given period will continue to depend to a significant extent upon sales to a small number of customers. There can be no assurance that Sattel's principal customers will continue to purchase product from Sattel at current levels, if at all. The loss of one or more major customers could have a material adverse effect on the Company's business, financial condition and results of operations. (See Item 1, Working Capital Practices, for a discussion of extended payment terms granted to certain customers). Difficulties in Managing Growth Sattel has experienced growth in the number of its employees and the scope of its operations. To manage potential future growth effectively, Sattel must improve its operational, financial and management information systems and must hire, train, motivate and manage its employees. The future success of Sattel also will depend on its ability to increase its customer support capability and to attract and retain qualified technical, sales, marketing and management personnel, for whom competition is intense. Sattel is currently attempting to hire a number of sales and engineering personnel and, in some instances, has experienced delays in filling such positions. There can be no assurance that Sattel will be able to effectively achieve or manage any such growth, and failure to do so could delay product development cycles or otherwise have a material adverse effect on the Company's business, financial condition and results of operations. Introduction of DSS Switch with DataNet Capability and Recent Introduction of Switch Server Architecture ("SSA") into the Telecommunications Market Sattel's DSS switch with DataNet capability has undergone successful internal and external testing. The DSS switch with DataNet capability was first available for shipment to customers in April 1996. There can be no assurance of its successful acceptance by the telecommunications market in general. While DataNet continues to be available as an enhancement to the DSS switch, product development focus has shifted to the higher speed access offered by SSA as described below. The Company anticipates future DataNet sales, if any, could be concentrated in international markets and those domestic markets requiring reliable access at lower speeds. In January 1997, the Company announced its new SSA. This switch server architecture encompasses a client/server approach to low, medium and high speed communications. There can be no assurance of its successful acceptance by the telecommunications market in general. Competition to DSS switch The central office switching market in general and the Internet market in particular are extremely competitive. Sattel uses a combination of patents, trade secrets, confidentiality agreements and non-compete agreements to protect the product and features that it believes give it competitive 27 advantages. There can be no assurance, however, that other competitors, some of whom have much greater access to resources and funding, cannot functionally replicate Sattel's critical products and features. Likewise, there is no guarantee that competitors cannot develop features which equal or exceed the Company's offerings. Outsourced Manufacturing; Capacity Constraints Sattel performs certain manufacturing functions in house. In addition, Sattel outsources some of its manufacturing to STI, Sanmina and other non- affiliated contract manufacturers and expects to continue to outsource some, or all, of its manufacturing. The Company's ability to increase capacity may be constrained and it may have less control over manufacturing than it would if it performed all the manufacturing functions in house. There can be no assurance, in the event of substantial increases in demand, that Sattel can successfully deliver its products in a timely fashion and/or without additional expense which would result in a deterioration in product margins. International Risks Sattel's longer term strategy includes greater expansion into international markets. There can be no assurance that Sattel will obtain the permits and operating licenses required for it to operate, to hire and train employees or to market, sell and deliver high quality services in international markets. In addition to the uncertainty as to Sattel's ability to expand its international presence, there are certain risks inherent to doing business on an international level, such as unexpected changes in regulatory requirements, trade barriers, difficulties in staffing and managing foreign operations, longer payment cycles, problems in collecting accounts receivable, political instability, fluctuations in current exchange rates, seasonal reductions in business activity, and potentially adverse tax consequences, which could adversely impact the success of Sattel's international operations. In many countries, Sattel may need to enter into a joint venture or other strategic relationship with one or more third parties in order to successfully homologate its products and to conduct its operations. There can be no assurance that such factors will not have a material adverse effect on Sattel's future international operations and, consequently, on the Company's business, financial condition and results of operations. No Dividends The Company has not paid cash dividends to its stockholders in the last five years. The Company does not anticipate paying cash dividends to stockholders for the foreseeable future. Stock Volatility and Recent Transactions From October 1, 1995 through August 31, 1997, the closing price of the Company's common stock has been as low as $1.375 and as high as $114.29 per share. There can be no assurance that the stock will not continue to be volatile and/or will accurately reflect the actual value of the Company over any specific period of time. Other factors affecting the share price include, but are not limited to, investor expectations, external business factors and news, comments and/or analysis by financial analysts, industry or company specific news and the availability or shortage of common stock ("Float") in the market at any point in time. The share price may also be affected by sales of stock owned by substantial holders. 28 Since March 30, 1996 and to August 31, 1997, the number of common shares has increased from approximately 4.6 million to 7.2 million. The increase was primarily as a result of a 5% stock dividend, the sale of new common shares and the payment in shares for the purchase of STI's remaining interests in Sattel by the Company and Sattel's related acquisition of the intellectual property rights and manufacturing rights of the DSS switch technology. As outlined in Note 3 of the Consolidated Financial Statements, the number of common shares outstanding will increase by approximately 1 million shares upon the conversion of the Sattel Class A and B Units into Company common stock. In addition, warrants to purchase 2,241,787 shares of common stock have been issued by the Company in connection with the July 1997 private placements under Regulation D and S of the Securities Act of 1933 (see Note 15 to the Consolidated Financial Statements). From November 29, 1996 to February 16, 1997, two former officers and directors, Richard Y. Fisher and Donald E. Runge (see Note 11 to the Consolidated Financial Statements), sold all of their share holdings. Mr. Fisher and Mr. Runge sold 557,395 and 467,850 shares, respectively, during this period. Each individual also owns options for 275,378 common shares which are exercisable under certain conditions at an average exercise price of $5.39 per share through December 31, 1997. Accounting Pronouncement In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." This Statement establishes new standards for computing and presenting earnings per share. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997 and requires restatement of all prior-period earnings per share data. Early application of SFAS No. 128 is not permitted. The Company's adoption of the provisions of SFAS No. 128 will result in the dual presentation of basic and diluted per share amounts on the Company's income statement. Diluted per share amounts as calculated under SFAS No. 128 are not expected to materially differ from loss per share amounts previously presented. Impact of Inflation Inflation has not had a significant impact on net sales or loss from continuing operations for the three most recent fiscal years. 29 ITEM 8. Financial Statements and Supplementary Data The Diana Corporation and Subsidiaries PAGE Report of Price Waterhouse LLP, Independent Accountants......... 31 Report of Ernst & Young LLP, Independent Auditors............... 32 Consolidated Balance Sheets..................................... 33 Consolidated Statements of Operations........................... 34 Consolidated Statements of Changes in Shareholders' Equity...... 35 Consolidated Statements of Cash Flows........................... 36 Notes to Consolidated Financial Statements...................... 37 30 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of The Diana Corporation In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) and (2) of this report present fairly, in all material respects, the financial position of The Diana Corporation and its subsidiaries (the "Company") at March 31, 1997 and March 30, 1996, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2, the Company initiated a restructuring plan during fiscal 1997 which resulted in Sattel Communications ("Sattel") becoming the sole operating company comprising the Company's continuing operations. Sattel has a limited operating history and has not yet achieved significant sales of its products. The Company's other operating companies were sold or are held for sale as of March 31, 1997. As discussed in Note 14, management believes the Company will have sufficient cash resources, including proceeds from those net assets held for sale, to fund its operations for the fiscal year ending March 31, 1998. However, any material delay during fiscal 1998 in the timing of disposal and the ultimate receipt of cash proceeds by the Company with respect to the net assets held for sale could have a material adverse effect on the Company. In addition, the Company's viability is further dependent on Sattel achieving sales levels and operating results sufficient to fund the Company's operations. Finally, as discussed in Note 6, the Company is subject to uncertainties relating to class action litigation asserted against the Company and other potential claims by investors, the ultimate effects of which on the Company's financial position, results of operations and cash flows cannot presently be determined. PRICE WATERHOUSE LLP Milwaukee, Wisconsin September 22, 1997 31 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors and Shareholders The Diana Corporation We have audited the accompanying consolidated statements of operations, changes in shareholders' equity and cash flows of The Diana Corporation and subsidiaries ("the Company") for the year ended April 1, 1995. Our audit also included the financial statement schedules for the year ended April 1, 1995 listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of The Diana Corporation and subsidiaries for the year ended April 1, 1995, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. Milwaukee, Wisconsin ERNST & YOUNG LLP June 2, 1995 32 The Diana Corporation and Subsidiaries Consolidated Balance Sheets (Dollars In Thousands) March 31, March 30, 1997 1996 -------- --------- Assets Current assets: Cash and cash equivalents............................ $ 81 $ 4,480 Marketable securities................................ --- 1,213 Receivables.......................................... 4,594 10 Inventories.......................................... 2,937 1,087 Net assets of discontinued operations................ 893 7,389 Other current assets................................. 1,716 543 ------ ------ Total current assets............................... 10,221 14,722 Property and equipment, net............................ 1,944 339 Intangible assets, net................................. 3,755 5,827 Net assets of discontinued operations.................. 7,308 8,180 Other assets........................................... 16 24 ------ ------ $23,244 $29,092 ====== ====== Liabilities and Shareholders' Equity Current liabilities: Accounts payable..................................... $ 2,559 $ 483 Accrued liabilities.................................. 1,360 816 Current portion of long-term debt.................... 141 141 ------ ------ Total current liabilities.......................... 4,060 1,440 Long-term debt......................................... 1,817 1,958 Other liabilities...................................... 533 1,008 Commitments and contingencies (Note 6)................. Shareholders' equity: Preferred stock - $.01 par value. Authorized 5,000,000 shares; none issued............ --- --- Common stock - $1 par value. Authorized 15,000,000 shares; issued 6,007,175 and 5,526,282 shares....... 6,007 5,526 Additional paid-in capital........................... 80,124 59,456 Accumulated deficit.................................. (63,540) (34,776) Unrealized loss on marketable securities............. --- (876) Treasury stock at cost............................... (5,757) (4,644) ------ ------ Total shareholders' equity......................... 16,834 24,686 ------ ------ $23,244 $29,092 ====== ====== See notes to consolidated financial statements. 33 The Diana Corporation and Subsidiaries Consolidated Statements of Operations (In Thousands, Except Per Share Amounts) Fiscal Year Ended ------------------------------ March 31, March 30, April 1, 1997 1996 1995 -------- -------- -------- Net sales.............................. $ 7,154 $ 264 $ --- Cost of goods sold..................... 3,132 129 --- ------- ------- ------- Gross profit........................... 4,022 135 --- Selling and administrative expenses.... 12,112 3,649 1,697 Engineering, research and development.. 4,060 178 --- ------- ------- ------- Total operating expenses............... 16,172 3,827 1,697 ------- ------- ------- Operating loss......................... (12,150) (3,692) (1,697) Interest expense....................... (52) (106) (132) Non-operating income (expense)......... (1,337) 465 (311) Minority interest...................... 368 587 --- Income tax credit...................... 836 --- --- ------- ------- ------- Loss from continuing operations........ (12,335) (2,746) (2,140) Earnings (loss) from discontinued operations.......................... (625) (619) 1,420 Estimated loss on disposal of discontinued operations............. (7,550) --- --- ------- ------- ------- Loss before extraordinary items........ (20,510) (3,365) (720) Extraordinary items.................... (508) --- --- ------- ------- ------- Net loss............................... $(21,018) $ (3,365) $ (720) ======= ======= ======= Earnings (loss) per common share: Continuing operations............... $ (2.34) $ (.62) $ (.51) Discontinued operations............. (1.55) (.14) .34 Extraordinary items................. (.10) --- --- ------- ------- ------- Net loss per common share........... $ (3.99) $ (.76) $ (.17) ======= ======= ======= Weighted average number of common shares outstanding.................. 5,271 4,401 4,224 ======= ======= ======= See notes to consolidated financial statements. 34 The Diana Corporation and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity (Dollars in Thousands)
Common Stock Treasury Stock ------------------ Additional Unrealized Loss --------------------- Total Number of Par Paid in Accumulated on Marketable Number of Shareholders' Shares Value Capital Deficit Securities Shares Cost Equity --------- ------- ---------- ----------- --------------- ------------ ------- ------------ Balance at April 2, 1994 4,637,530 $ 4,638 $ 46,241 $ (25,449) $ (412) 1,165,278 $(6,166) $ 18,852 Net loss --- --- --- (720) --- --- --- (720) 5% stock dividend 172,823 172 1,830 (2,009) --- --- --- (7) Exercise of stock options --- --- (14) --- --- (4,500) 24 10 Change in unrealized loss on marketable securities --- --- --- --- (301) --- --- (301) Acquisition of minority interest --- --- 491 --- --- (265,262) 1,404 1,895 --------- ------ ------- -------- ------ --------- ------- ------- Balance at April 1, 1995 4,810,353 4,810 48,548 (28,178) (713) 895,516 (4,738) 19,729 Net loss --- --- --- (3,365) --- --- --- (3,365) 5% stock dividend 195,929 196 3,022 (3,233) --- --- --- (15) Exercise of stock options --- --- (39) --- --- (12,300) 65 26 Change in unrealized loss on marketable securities --- --- --- --- (163) --- --- (163) Acquisition of Sattel Communications Corp. minority interest 350,000 350 4,594 --- --- --- --- 4,944 Issuance of common stock 170,000 170 3,315 --- --- --- --- 3,485 Other --- --- 16 --- --- (5,524) 29 45 --------- ------ ------- -------- ------- --------- ------- ------- Balance at March 30, 1996 5,526,282 5,526 59,456 (34,776) (876) 877,692 (4,644) 24,686 Net loss --- --- --- (21,018) --- --- --- (21,018) 5% stock dividend 250,893 251 7,474 (7,746) --- --- --- (21) Change in unrealized loss on marketable securities --- --- --- --- 876 --- --- 876 Acquisitions of Sattel Communications Corp. minority interest - net --- --- 385 --- --- 35,000 (2,203) (1,818) Issuance of common stock 230,000 230 12,630 --- --- (200,000) 1,058 13,918 Other --- --- 179 --- --- (4,000) 32 211 --------- ------ ------- -------- ------- --------- ------- ------- Balance at March 31, 1997 6,007,175 $ 6,007 $ 80,124 $ (63,540) $ --- 708,692 $(5,757) $ 16,834 ========= ====== ======= ======== ======= ========= ======= =======
See notes to consolidated financial statements. 35 The Diana Corporation and Subsidiaries Consolidated Statements of Cash Flows (In Thousands) Fiscal Year Ended ------------------------------ March 31, March 30, April 1, 1997 1996 1995 Operating activities: --------- --------- -------- Loss before extraordinary items........... $(20,510) $(3,365) $ (720) Adjustments to reconcile loss to net cash provided (used) by operating activities: Depreciation and amortization........... 478 121 8 Loss (gain) on sales of marketable securities.................. 736 (26) 1,227 Write-down of CNC preferred stock....... 1,060 --- --- Minority interest....................... (368) (587) --- Estimated loss on disposal of discontinued operations................ 7,550 --- --- Net change in discontinued operations... (3,862) 5,583 3,867 Other................................... 221 354 90 Changes in current assets and liabilities............................ (3,164) (371) 1,774 ------- ------ ------ Net cash provided (used) by operating activities................................ (17,859) 1,709 6,246 Investing activities: Purchases of property and equipment....... (1,914) (161) (12) Purchases of marketable securities........ --- (475) (5,647) Proceeds from sales of marketable securities............................... 1,353 5,380 9,276 Change in notes receivable................ (5,000) 138 194 Proceeds from sale of CNC preferred stock 2,500 --- --- Affiliate advances and acquisitions, net of cash acquired..................... --- (1,495) --- Net proceeds from the sale of APC's assets 640 --- --- Net change in discontinued operations..... (985) (3,444) (587) Other..................................... 283 47 (195) ------- ------ ------ Net cash provided (used) by investing activities................................ (3,123) (10) 3,029 Financing activities: Changes in short-term borrowings.......... --- --- (2,144) Repayments of long-term debt.............. (141) (141) (261) Payments toward bond settlements.......... --- -- (2,822) Common stock issued....................... 13,918 3,485 --- Net change in discontinued operations..... 3,314 (888) (3,740) Extraordinary items....................... (508) --- --- ------- ------ ------ Net cash provided (used) by financing activities................................ 16,583 2,456 (8,967) ------- ------ ------ Increase (decrease) in cash and cash equivalents............................... (4,399) 4,155 308 Cash and cash equivalents: At beginning of year...................... 4,480 325 17 ------- ------ ------ At end of year............................ $ 81 $ 4,480 $ 325 ======= ====== ====== See notes to consolidated financial statements. 36 The Diana Corporation and Subsidiaries Notes to Consolidated Financial Statements March 31, 1997 NOTE 1 - Summary of Significant Accounting Policies Basis of Presentation and Principles of Consolidation The consolidated group (hereafter referred to as the "Company") included the following companies during the past three years: The Diana Corporation ("Diana") - Diana and its wholly-owned non- operating subsidiaries are included in the consolidated group for all three fiscal years. Diana's activities historically consisted primarily of corporate administration and investing activities. Sattel Communications LLC ("Sattel") - Diana had a 50% ownership interest in Sattel Communications Company which was subsequently converted into Sattel Communications Corp. ("SCC"). Diana accounted for this investment using the equity method of accounting from November 1994 to December 1995. In January 1996, Diana increased its ownership interest in SCC from 50% to 80% and at the same time SCC also acquired the intellectual property rights and technology rights to the DSS switch. In fiscal 1997, the Company increased its ownership interest in SCC from 80% to 100% (see Note 3). The Company included the results of SCC in its statement of operations for fiscal 1996 as though it had acquired its majority interest at the beginning of fiscal 1996 and added back the minority partner's share of SCC's loss as part of minority interest. SCC, through its subsidiary Sattel, is a provider of central office voice and data switching equipment. In April 1996, SCC transferred its assets and liabilities to Sattel, a newly-formed limited liability company. SCC has an ownership interest in Sattel of approximately 80% and certain additional preferential rights (see Note 3). Discontinued Operations - The operations of C&L Communications, Inc. ("C&L"), Valley Communications, Inc. ("Valley"), Atlanta Provision Company, Inc. ("APC") and Entree Corporation ("Entree") are classified as discontinued operations. C&L is a wholly-owned subsidiary of Diana. Valley is an 80%- owned subsidiary of C&L. Entree is an 81.25%-owned subsidiary of Diana. APC is a wholly-owned subsidiary of Entree. The majority of APC's assets were sold in February 1997 (see Note 2). Investments in 20%-50% owned subsidiaries in which management has the ability to exercise significant influence are accounted for using the equity method of accounting. Accounts and transactions between members of the consolidated group are eliminated in the consolidated financial statements. Certain prior year balances have been reclassified in order to conform to current year presentation. Fiscal Year In fiscal 1997, the Company changed its fiscal year end from a 52 or 53 week year ending on the Saturday closest to March 31 to a fiscal year of 12 calendar months ending on March 31. Fiscal 1996 and 1995 are both 52 week fiscal years. 37 NOTE 1 - Summary of Significant Accounting Policies (Continued) Financial Instruments The carrying values of cash and cash equivalents, marketable securities, receivables, accounts payable and borrowings at March 31, 1997 and March 30, 1996 approximate fair value. Marketable Securities The Company accounts for marketable securities in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Under SFAS No. 115, management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in non-operating income (expense). Marketable equity securities and debt securities not classified as held-to-maturity are classified as available-for-sale. Available-for-sale securities are carried at fair value (based on published market values), with the unrealized gains and losses reported in a separate component of shareholders' equity. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in non-operating income (expense). Realized gains and losses, interest income and dividends are included in non-operating income (expense). For purposes of determining the gain or loss on a sale, the cost of securities sold is determined using the average cost of all shares of each such security held at the dates of sale. Non-Marketable Securities Non-marketable securities are accounted for on a lower of cost or market basis. A write-down to market is recognized on the determination that a permanent impairment of value has occurred. Inventories Inventories are stated at the lower of cost or market with cost determined using the first-in, first-out method. Inventories consist of the following (in thousands): March 31, 1997 March 30, 1996 -------------- -------------- Raw materials and work-in-process $2,728 $1,012 Finished goods 323 --- Consigned and with customers 1,286 75 Allowance for excess and obsolete inventory (1,400) --- ----- ----- $2,937 $1,087 ===== ===== Included in inventory consigned and with customers is inventory of $897,000 that is subject to sales transactions for which related revenues were not recorded as of March 31, 1997. 38 NOTE 1 - Summary of Significant Accounting Policies (Continued) Sattel has a limited operating history and has not yet achieved significant sales of its products over an extended period. Management is trying to increase the market acceptance and sales of Sattel's products. Management does not believe that the Company will incur any material loss on the ultimate sale or disposition of inventory. No estimate can be made of a range of amounts of loss that are reasonably possible should increased sales of Sattel's products not occur in the near term. Property and Equipment Property and equipment are stated at cost. Provisions for depreciation are computed on the straight-line method for financial reporting purposes over the estimated useful lives of the assets which range from 3 to 5 years. Depreciation for income tax purposes is computed on accelerated cost recovery methods. Expenditures which substantially increase value or extend asset lives are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. Property and equipment consist of the following (in thousands): March 31, 1997 March 30, 1996 -------------- -------------- Land $ 50 $ 127 Fixtures and equipment 2,204 290 ----- ------ 2,254 417 Less accumulated depreciation (310) (78) ----- ------ $1,944 $ 339 ===== ====== Intangible Assets Intangible assets consist of the following (in thousands): March 31, 1997 March 30, 1996 -------------- -------------- Intellectual property rights $3,721 $5,029 Goodwill --- 754 Other 34 44 ----- ----- $3,755 $5,827 ===== ===== The Company believes that the intellectual property rights for the DSS switch are appropriately amortizable over a 20 year period on a straight line basis. However, the telecommunications equipment market, in general, is characterized by rapidly changing technology, evolving industry standards, changes in end-user requirements, and frequent new product introductions and enhancements. The Company or its competitors may announce new products or product enhancements, services or technologies that have the potential to replace or shorten the life cycle of the DSS switch and that may cause customers to defer purchasing the DSS switch. Accordingly, there can be no assurance that future technological advances in the telecommunications industry will not diminish any market acceptance of the DSS switch or render the DSS switch obsolete. Accumulated amortization was $354,000 and $107,000 at March 31, 1997 and March 30, 1996, respectively. See Note 3 regarding a discussion of the reduction in intangible assets of $1,825,000 resulting from the acquisition of a minority interest on May 3, 1996. 39 NOTE 1 - Summary of Significant Accounting Policies (Continued) In fiscal 1997, the Company adopted the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This statement establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. The adoption of this standard did not have a material effect on its consolidated results of operations or financial position. Pursuant to SFAS No. 121, long-lived assets and intangible assets are reviewed for impairment whenever events or circumstances provide evidence that suggest that the carrying amount of the asset may not be recoverable. Impairment is generally determined by using estimated undiscounted cash flows over the remaining amortization period. If the estimates of future undiscounted cash flows do not support recoverability of the carrying value of the asset, a loss is recognized for the difference between the fair value and carrying value of the asset. The Company obtained an independent appraisal in support of the recoverability of the net book value of property and equipment and the DSS switch intellectual property rights at March 31, 1997. Revenue Recognition Revenue from product sales is recognized upon shipment to a credit worthy customer, based on a firm agreement whereby all risks and rewards of ownership have been transferred, in exchange for cash or a receivable which is liquid and collectible. The transaction must be complete in all significant respects as of the date of revenue recognition and free from any significant uncertainties or future obligations and restrictions. Accrued Liabilities At March 31, 1997, accrued liabilities includes unearned revenue of $362,000 and accrued legal fees of $234,000. Concentration of Credit and Business Risk For the year ended March 31, 1997, Concentric Network Corporation ("CNC") accounted for approximately 94% of net sales and 92% of receivables. In April 1997, Sattel initiated a lawsuit against CNC for, among other things, breach of contract (see Note 6). The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral other than, in certain instances, a perfected security interest in the related equipment. In addition, approximately 86% of inventories purchased during the year ended March 31, 1997 were supplied by Sattel Technologies, Inc. ("STI"). However, the Company has established relationships with alternate suppliers such as Sanmina Corporation and I-PAC Manufacturing, Inc. and has assembled product itself in order to reduce its dependency on STI. (See Note 6 for a description of the lawsuit between STI and Sattel). Product Warranty Product warranty costs are charged to operations based upon the estimated warranty cost per unit sold. 40 NOTE 1 - Summary of Significant Accounting Policies (Continued) Research and Development Costs Research and development costs include all engineering charges related to new products and the DSS switch, and are charged to operations when incurred. Engineering, research and development costs were $4,060,000 and $178,000 in fiscal 1997 and 1996, respectively. Engineering, research and development costs were not incurred by the Company prior to the fourth quarter of fiscal 1996 since the intellectual property rights for the switching products were not acquired by SCC until January 1996. Software development costs incurred in the development of Sattel's switching products are required to be capitalized once technological feasibility is established in accordance with SFAS No. 86. Technological feasibility is established upon the successful testing of a prototype or beta-test model based upon Sattel's product development process. Software development costs incurred during the period between completion of a fully-tested model and general market release have not been significant, and, accordingly, have not been capitalized. Various feature development software costs may be incurred, particularly on a specific customer requirement basis. These costs, however, are not considered to meet the SFAS No. 86 criteria for capitalization given the dynamic market nature of such modifications. Income Taxes The Company accounts for income taxes using the liability method in accordance with SFAS No. 109, "Accounting for Income Taxes". Loss Per Common Share Loss per common share is determined by using the weighted average number of shares of common stock outstanding during each period. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Statement of Cash Flows For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments with a maturity of three months or less at the date of purchase to be cash equivalents. 41 NOTE 2 - Discontinued Operations On November 20, 1996, the Board of Directors of the Company approved a restructuring plan (the "Restructuring") to separate its central office voice and data switching equipment business (the "Sattel Business") from the following businesses: Segment Company ------- ------- Telecommunications equipment distribution C&L Voice and data network installation and service Valley Wholesale distribution of meat and seafood Entree/APC The Restructuring provided for a spin-off of the non-Sattel businesses, through a special dividend to the Company's shareholders. Consequently, the Company reported the results of operations of the telecommunications equipment distribution segment, the voice and data network installation and service segment and the wholesale distribution of meat and seafood segment separately as discontinued operations. Subsequently, the Company received a purchase offer for a majority of the assets of APC. On February 3, 1997, the Board of Directors of the Company approved the sale of a majority of the assets of APC to Colorado Boxed Beef Company ("Colorado"). The sale closed on February 3, 1997. Colorado purchased the following assets of APC for $13.5 million: receivables, inventories, machinery and equipment, furniture and fixtures, and certain other current assets. Colorado made a cash payment to APC of $6.9 million of which $712,000 was restricted pursuant to the terms of the Asset Purchase Agreement. At present, $100,000 remains in escrow and will be held there until the earlier of February 1998 or the date on which valid claims against the escrow result in funds being released to Colorado. Colorado also assumed accounts payable and accrued liabilities of APC of $6.6 million. APC repaid $5.8 million to its lender to extinguish all obligations under its revolving line of credit. APC retained real estate with a net book value of $2.6 million. The real estate is collateral for two mortgage notes that amount to $781,000. APC has entered into a lease with Colorado that terminates on approximately November 15, 1997. The real estate is listed for sale. As a result of the sale of APC's assets, the Company's Board of Directors terminated the original Restructuring plan for a spin-off of the non-Sattel businesses. The Company has adopted a revised Restructuring plan to sell C&L and Valley. The revised Restructuring plan was approved by the Board of Directors in February 1997. The Company anticipates the sales of these businesses and APC's real estate will be completed prior to March 31, 1998. The Company believes that the reserve for loss on disposal recorded at March 31, 1997 of $3,027,000 is sufficient to cover all estimated expenses and net losses of the remaining discontinued operations to be incurred with respect to its revised Restructuring plan. 42 NOTE 2 - Discontinued Operations (Continued) The estimated loss on disposal of discontinued operations consists of the following (in thousands): Estimated operating losses for the disposal period and loss on disposal of C&L and Valley $ 2,054 Operating losses for the disposal period and loss on the disposal of APC 2,550 Investment banking fees, including the fair value of a warrant to purchase common stock 1,100 Professional fees incurred in connection with the spin-off 854 Severance payments to Messrs. Fisher, Runge and Lilly (see Note 11) 508 Charge due to acceleration of deferred compen- sation payments (see Note 11) to Messrs. Fisher and Runge 137 Other 347 ------ $ 7,550 ====== Expenses incurred in connection with the Restructuring include amounts related primarily to legal and accounting fees. The investment banking fees include the estimated fair value of $800,000 for a warrant to purchase 100,000 shares of Company common stock to be issued to an investment banker for services provided in connection with the Restructuring (see Note 7). 43 NOTE 2 - Discontinued Operations (Continued) The components of net assets and liabilities of discontinued operations are as follows (in thousands): March 31, 1997 --------------------------------------------- Telecommuni- Network Meat and cations Installation Seafood Equipment and Service Total -------- ------------ ------------ ----- Receivables $ --- $ 4,720 $ 3,387 $ 8,107 Inventories --- 5,429 176 5,605 Other current assets 939 452 348 1,739 Accounts payable (98) (3,584) (1,280) (4,962) Revolving lines of credit --- (4,164) (1,100) (5,264) Other current liabilities (112) (179) (1,014) (1,305) ------- ------- ------- ------- $ 729 $ 2,674 $ 517 3,920 ======= ======= ======= Reserve for loss on disposal (3,027) ------- Net current assets of discontinued operations $ 893 ======= Property and equipment, net $ 2,572 $ 280 $ 571 $ 3,423 Intangible assets, net --- 2,317 2,892 5,209 Other assets --- 312 88 400 Long term debt (781) --- (667) (1,448) Other liabilities --- --- (276) (276) ------- ------- ------- ------- Net noncurrent assets of discontinued operations $ 1,791 $ 2,909 $ 2,608 $ 7,308 ======= ======= ======= ======= March 30, 1996 ----------------------------------------------- Telecommuni- Network Meat and cations Installation Seafood Equipment and Service Total -------- ------------ ------------ ----- Receivables $ 8,848 $ 3,609 $ 3,645 $ 16,102 Inventories 4,541 6,172 536 11,249 Other current assets 1,134 878 288 2,300 Accounts payable (7,893) (4,230) (1,101) (13,224) Revolving lines of credit (2,996) (2,996) (1,046) (7,038) Other current liabilities (726) (520) (754) (2,000) ------- ------- ------- ------- Net current assets of discontinued operations $ 2,908 $ 2,913 $ 1,568 $ 7,389 ======= ======= ======= ======= Property and equipment, net $ 3,170 $ 308 $ 341 $ 3,819 Intangible assets, net --- 2,780 2,979 5,759 Other assets 355 323 102 780 Long term debt (804) --- (800) (1,604) Other liabilities --- (200) (374) (574) ------- ------- ------- ------- Net noncurrent assets of discontinued operations $ 2,721 $ 3,211 $ 2,248 $ 8,180 ======= ======= ======= ======= 44 NOTE 2 - Discontinued Operations (Continued) Operating results, net of minority interest, relating to the discontinued operations for fiscal years 1995 and 1996 and for fiscal year 1997 through the measurement date of November 20, 1996 are as follows (in thousands): Fiscal Year Ending March 31, 1997 --------------------------------------------- Telecommuni- Network Meat and cations Installation Seafood Equipment and Service Total -------- ------------ ------------ ----- Net sales $188,853 $ 19,750 $ 11,540 $220,143 ======= ======= ======= ======= Earnings (loss) from discontinued operations $ (584) $ (51) $ 10 $ (625) ======= ======= ======= ======= Fiscal Year Ending March 30, 1996 --------------------------------------------- Telecommuni- Network Meat and cations Installation Seafood Equipment and Service Total -------- ------------ ------------ ----- Net sales $236,108 $ 25,350 $ 6,144 $267,602 ======= ======= ======= ======= Earnings (loss) from discontinued operations $ (1,067) $ 55 $ 393 $ (619) ======= ======= ======= ======= Fiscal Year Ending April 1, 1995 --------------------------------------------- Telecommuni- Network Meat and cations Installation Seafood Equipment and Service Total -------- ------------ ------------ ----- Net sales $215,141 $ 35,245 $ --- $250,386 ======= ======= ======= ======= Earnings (loss) from discontinued operations $ (724) $ 2,144 $ --- $ 1,420 ======= ======= ======= ======= In fiscal 1996, state income taxes of $83,000 were allocated to discontinued operations. No income taxes have been allocated to discontinued operations for fiscal 1997 and 1995. In reclassifying the Company's financial statements for presentation of discontinued operations, the Company reflected all of APC's interest expense that was paid to the Company under an intercompany loan to discontinued operations. Interest expense paid by APC to the Company was $0, $159,000 and $146,000 in fiscal 1997, 1996 and 1995, respectively. The Company reflected the corresponding interest income in non-operating income (expense) (see Note 9). All other intercompany interest has been eliminated in consolidation. There was no other allocation of interest to discontinued operations. Discontinued operations include management's best estimates of the amounts expected to be realized on the sale of these businesses and assets. The estimates are based on valuations by independent appraisers. The amounts the Company will ultimately realize could differ materially in the near term from the amounts assumed in arriving at the estimated loss on disposal of the discontinued operations. 45 NOTE 3 - Acquisitions In November 1994, the Company and STI entered into a general partnership agreement to establish Sattel Communications Company, which was subsequently converted into SCC. The Company and STI each received a 50% interest in the venture. Profits and losses were allocated equally among the two partners. Under the terms of this agreement, initial contributions to be made to the partnership by the Company were operating capital and the cost of a marketing study which in the aggregate would not exceed $200,000. In addition, the Company agreed to prepare a business plan and a marketing plan for SCC. STI agreed to develop, design and test a telecommunications switch with DataNet capability, manufacture three units, provide administrative services and provide the use of its facilities to SCC until permanent facilities were determined. In addition, STI agreed to license SCC to use its proprietary telecommunications switch (the "DSS switch") in the sale of the DataNet product. On January 16, 1996, the Company and STI entered into an Exchange Agreement by which the Company acquired an additional 30% ownership interest in SCC, which brought its total ownership interest in SCC to 80%. The acquisition was accounted for as a purchase of a minority interest. The acquisition occurred as part of a transaction in which the Company contributed additional cash, bringing its total cash contributions to $2.5 million, and $1.425 million in loans to SCC to further develop the DSS switch. In lieu of contributing its proportionate share of the additional funding to SCC, STI assigned all of its right, title and interest in the DSS switch and related technologies to SCC. In connection with this transaction, the Company issued 350,000 shares of its common stock, par value $1.00 per share, (the "Diana Shares") to STI. The Diana Shares were valued at $4,944,000, or $14.125 per share, based on the average closing market price of the Company's common stock from January 12, 1996 through January 18, 1996. On May 3, 1996, the Company and STI entered into a Supplemental Agreement by which the Company acquired an additional 15% ownership interest in SCC. The acquisition occurred as part of a transaction in which the Company contributed an additional $10 million in cash to SCC. In lieu of contributing its proportionate share of the additional funding to SCC, and in exchange for a release from its obligation related to certain product development efforts, STI agreed to convey to the Company 15% of SCC, together with 50,000 shares of the Diana Shares it had acquired pursuant to the Exchange Agreement. This transaction resulted in a net reduction of approximately $1,825,000 of intangible assets recorded at March 30, 1996. On October 14, 1996, the Company acquired from STI its remaining 5% ownership interest in SCC for 15,000 shares of the Company's common stock. At this time SCC became a wholly-owned subsidiary of the Company. In April 1996, SCC transferred its assets and liabilities to a newly- formed limited liability company, Sattel. In addition during fiscal 1997, Sattel granted subordinated equity participation interests, which amount to approximately a 20% effective ownership interest (before consideration of the subordination provisions) in Sattel, to certain employees of the Company. The Company's effective ownership of Sattel is approximately 80% as a result of these transactions. Sattel is a California Limited Liability Company owned by members (the "Members") owning either of two classes of interests, the "Class A Units" and the "Class B Units" (collectively, the "Units"). SCC holds 8,000 Class A Units. Additional Class A Units are held by Charles Chandler, a former employee, and Sydney Lilly, a current director and former Executive Vice President of the Company. Mr. Chandler and Mr. Lilly hold 46 NOTE 3 - Acquisitions (Continued) 350 and 100 Class A Units, respectively. Aggregate capital contributed to Sattel related to these Class A Units totalled $242,000. Initially, 1,550 Class B Units were issued to employees of Sattel in connection with their continued employment, without capital contribution therefor. Certain current and former employees of Sattel continue to collectively own 1,507 Class B Units, representing all of the Class B Units currently outstanding. The following table reflects the current ownership of the Class B Units by the management of Sattel and others as of July 1, 1997: Name Class B Units ---------------- ------------- James J. Fiedler 350 Daniel W. Latham 250 David Held 250 Bruce Thomas 250 Others 407 ----- 1,507 ===== No compensation expense was recognized upon the granting of the Class B Units to the employees. The estimated fair value of such units at the date of grant was considered immaterial to the financial statements based on the subordinated nature of the interests resulting from the priority distributions payable to holders of Class A Units. Compensation expense will be recognized prospectively when it becomes probable that a conversion or other defined triggering event will occur. Compensation cost will be charged to expense over the period from the date the triggering event becomes probable to the date of the triggering event or the end of the required service period, whichever occurs first. If Sattel exercises its option to repurchase equity interests previously granted to employees, total compensation cost will be equal to the cash paid upon repurchase. If in the future Sattel achieves cumulative pre-tax profits of at least $15 million over the four most recent quarters, the members holding Class B Units not subject to the Board of Directors' authorization discussed in the next paragraph will have the right and obligation (the "Conversion Rights") to convert their Class B Units into Company common stock on the basis of 500 shares of Company common stock for each Class B Unit, subject to adjustment for stock dividends, stock splits, merger, consolidation or stock exchange. The Conversion Rights are included in Class B Agreements amended in November 1996 in lieu of provisions of the April 1, 1996 agreement that provided members holding Class B Units might require Sattel to conduct an initial public offering, upon the achievement of the same cumulative pre-tax profit measure discussed above, in which the Class B holders would have the right to convert Class B Units into securities being offered, and would have the right to have those securities registered under the Securities Act of 1933 (the "Registration Rights"). If a majority of the Class B Units are redeemed or purchased by Sattel or an affiliate, or if a triggering event (including the conversion of a majority of the Class B Units) occurs, the individual Class A holders are entitled to have their Units redeemed, purchased or to participate on the same terms as the Class B Units, except with an upward adjustment in price to reflect the priority of distribution associated with the Class A Units. Pursuant to agreements regarding Class A Units, the holders of Class A Units other than SCC also have the right, but not the obligation, to require the Company to purchase all, but not less than all, of 47 NOTE 3 - Acquisitions (Continued) such holder's Class A Units at a price equal to the agreed-upon or appraised fair market value at any time after April 1, 1999. As a result of the Company's Restructuring, its continuing operations are only those of Sattel. The Conversion Rights discussed above provided the Class B Unit holders with an approximately comparable ownership interest in the Company as they have in Sattel. On September 4, 1997, the Board of Directors authorized an amendment to certain Class B Units owned by directors and employees of Diana and Sattel at June 30, 1997, to provide for the elimination of the minimum pre-tax profits measure requirement discussed above and the conversion into Company common stock at the option of the holder. Consequently, there will be a compensation charge of approximately $3,825,000 recorded in the second quarter of fiscal 1998. This charge is based on the value at September 4, 1997 of 600,000 shares of Company common stock at $6.375 per share that will be issuable to Class B Unit Holders. Assuming that Class A Units, other than those held by SCC, are convertible on the same basis as a result of the Board of Directors' authorization discussed above, additional charges of $1,434,000 would be recognized based on 225,000 shares of Company common stock and a per share price of $6.375. The following unaudited pro forma results of operations for the last two fiscal years assume the acquisition of SCC (including the transactions on May 3, 1996 and October 14, 1996) occurred at the beginning of fiscal 1996 (in thousands, except per share amounts): 1997 1996 ------ ------ Net sales $ 7,154 $ 264 ======= ====== Loss before extraordinary items $(20,601) $(4,058) ======= ====== Net loss $(21,109) $(4,058) ======= ====== Net loss per common share $ (4.00) $ (.87) ======= ====== This pro forma information does not purport to be indicative of the results that actually would have been obtained if the combined operations had been conducted during the periods presented and is not intended to be a projection of future results. 48 NOTE 4 - Marketable Securities Marketable securities at March 30, 1996 consist of the following (in thousands): Available-for-Sale Marketable Securities -------------------------------------------- March 30, 1996 -------------------------------------------- Gross Gross Estimated Unrealized Unrealized Fair Cost Gains Losses Value ---- ---------- ---------- --------- Debt securities $ 303 $ --- $ 12 $ 291 Equity securities 1,786 --- 864 922 ----- ----- ----- ----- $ 2,089 $ --- $ 876 $ 1,213 ===== ===== ===== ===== The gross realized gains on sales of available-for-sale securities totaled $0, $31,000 and $14,000 in fiscal 1997, 1996 and 1995, respectively, and the gross realized losses totaled $736,000, $5,000 and $1,241,000 in fiscal 1997, 1996 and 1995, respectively. The net adjustment to unrealized losses on available-for-sale securities included as a separate component of shareholders' equity totaled $0 and $876,000 at March 31, 1997 and March 30, 1996, respectively. NOTE 5 - Long-Term Debt Long-term debt consists of the following (in thousands): March 31, March 30, 1997 1996 -------- -------- Subordinated debentures due January 2002 and capitalized interest $ 1,958 $ 2,099 Less current maturities (141) (141) ------ ------ $ 1,817 $ 1,958 ====== ====== The foregoing consists of principal of $1,254,000 and capitalized interest of $704,000 at 11.25%. The debentures, which were issued in January 1992, are unsecured. The payment of cash dividends by the Company is restricted by the subordinated debentures which provide that the consolidated tangible net worth of the Company cannot be reduced to less than an amount equal to the aggregate principal amount of the subordinated debentures, or $1,254,000. Approximate annual amounts payable by the Company on long-term debt are as follows (in thousands): 1998................ $ 141 1999................ 141 2000................ 141 2001................ 141 2002................ 1,394 ----- $ 1,958 ===== 49 NOTE 6 - Commitments and Contingencies Diana and Sattel lease their facilities and various equipment under noncancelable lease arrangements for varying periods. Leases that expire generally are expected to be renewed or replaced by other leases. Total rental expense under operating leases in fiscal 1997, 1996, and 1995 was $279,000, $63,000 and $46,000, respectively. Future minimum payments under noncancelable operating leases with initial terms of one year or more for fiscal years subsequent to March 31, 1997 are as follows (in thousands): 1998................ $ 126 1999................ 44 2000................ 24 2001................ 5 2002................ --- ---- $ 199 ==== The Diana Corporation Securities Litigation (Civ. No. 97-3186). This is a consolidation of what were originally nine separate actions brought in the United States District Court for the Central District of California on behalf of purchasers of the Company's common stock during a class period that extended from December 6, 1994 through May 2, 1997. On July 23, 1997, the Court entered a stipulation and order consolidating the nine actions for all purposes. On September 9, 1997, plaintiffs filed a consolidated amended complaint (the "Consolidated Complaint") asserting claims against the Company, certain of its present and former directors and officers, and others under Section 10(b) of the Securities Exchange Act of 1934. The Consolidated Complaint alleges essentially that the Company and other defendants were engaged in a scheme to inflate the price of the Company's common stock during the class period through false and misleading statements and manipulative transactions. The Consolidated Complaint seeks unspecified damages, but identifies the significant movement in the Company's stock price during the putative class period (a swing of more than $115 per share) to imply that the damages that will be claimed will exceed the Company's assets. No discovery or substantive proceedings have occurred. The Company must respond to the consolidated amended complaint by September 30, 1997 if by motion to dismiss, or by October 17, 1997 if by answer. The Company intends to defend this action vigorously. As discussed in Note 16, the Company has adjusted certain previously reported fiscal 1997 unaudited quarterly financial information. It cannot presently be determined what effect, if any, such restatements will have on the class actions discussed above, or any other potential claims by investors which may be asserted against the Company. Sattel Technologies, Inc. v. Sattel Communications LLC, Case No. BC 167829, Superior Court, Los Angeles County, California. STI filed this action in March 1997, claiming damages for breach of contract and lack of payment for goods sold and delivered. The damages claimed are roughly $2 million. On April 10, 1997, STI's motion for prejudgment attachment was denied. Sattel believes that a portion of the claim is legitimate trade debt and a substantial additional portion is unfounded. Sattel is also contemplating a number of counterclaims as an offset to the valid debt. Since April 10, 1997, the parties have engaged in settlement negotiations, 50 NOTE 6 - Commitments and Contingencies (Continued) which are still ongoing. If settlement discussions are not successful, Sattel intends to defend this action vigorously and assert the appropriate counterclaims. The Company believes the amount accrued of $807,000 is the proper amount owed to STI at March 31, 1997. Charles Chandler v. C&L Communications, Diana Corporation, Mellon Financial Services Corporation and Lisa Chandler, Case No. 97-CI-01290, District Court, Bexar County, Texas. The plaintiff, Mr. Chandler, a former officer and director of C&L, filed this case in February 1997, claiming that the various defendants either negligently or intentionally deprived him of marketable certificates of the Company's common stock. By the time the certificates were provided, Mr. Chandler claims that the trading value was greatly diminished. Discovery is underway. There is no trial date set. The Company is providing Mellon, the Company's transfer agent, with a defense and indemnification under a reservation of rights. Ms. Chandler, a former officer and director of C&L, is represented separately. She has made a claim for indemnification that, under Texas law, will be determined at the end of the case. The Company intends to defend the case vigorously. Based upon the limited discovery to date, the Company believes that Mr. Chandler's claims against C&L, the Company and Mellon lack substantial merit. The effects of the matters discussed above cannot presently be determined. However, it is reasonably possible that events will occur in the near term to allow the Company to estimate such effects. The Company is also involved with other proceedings or threatened actions incident to the operation of its businesses. It is management's opinion that none of these matters will have a material adverse effect on the Company's financial position, results of operations or cash flows. Sattel Communications LLC v. Concentric Network Corporation ("CNC"), Case No. LC 040906, Superior Court, Los Angeles County, California. Sattel filed this action as plaintiff in April 1997. The complaint sought damages of roughly $4.2 million relating to products CNC purchased, plus additional compensatory and punitive damages for, among other things, breach of contract. On June 25, 1997, the trial court granted Sattel's motion for pre- judgment attachment in the amount of $3.6 million. The granting of the motion was based upon the Court's preliminary determination on the probable validity of Sattel's claim. On June 30, 1997, Sattel posted an undertaking, in the form of a $75,000 bond, to secure the attachment. On July 9, 1997, Sattel secured a final judgment from the Court. The basic terms are: (i) a $4.4 million judgment against CNC and in favor of Sattel; (ii) certain restrictions on Sattel's CNC stock holding have been lifted, such that Sattel has the election to sell up to 25% of its CNC holding immediately following the completion of CNC's proposed Initial Public Offering ("IPO") at the IPO price; and (iii) dismissal and mutual release of all claims between the parties. Sattel agreed to wait until August 15, 1997 before executing upon the judgment. Subsequently, Sattel has collected both the $4.4 million judgment and $396,000 from the partial sale of its CNC holdings. 51 NOTE 7 - Shareholders' Equity The Company has two nonqualified stock option plans under which options to acquire up to 1,339,389 shares of the Company's common stock may be granted to directors, officers and certain employees of the Company and its subsidiaries. At March 31, 1997, 501,029 options were available for grant under both plans. Both plans are administered by the Company's Board of Directors, which is authorized, among other things, to determine which persons receive options under each plan, the number of shares for which an option may be granted, and the exercise price and expiration date for each option. The term of options granted shall not exceed 11 years from the date of grant of the option or from the date of any extension of the option term. The following table summarizes the transactions for both stock option plans for the last three fiscal years: Option Price Options Per Share ------- ------------ Outstanding at April 2, 1994 544,264 $ 1.95 - 5.55 5% stock dividend 27,212 --- Exercised (4,500) 2.15 ------- Outstanding at April 1, 1995 566,976 1.95 - 5.55 5% stock dividend 31,482 --- Granted 385,000 5.90 - 19.05 Exercised (12,300) 2.15 ------- Outstanding at March 30, 1996 971,158 1.95 - 19.05 5% stock dividend 53,119 --- Granted 135,024 5.00 - 27.00 Canceled (320,941) 19.05 ------- Outstanding at March 31, 1997 838,360 1.95 - 27.00 ======= Exercisable at March 31, 1997 714,125 1.95 - 19.05 ======= Weighted Weighted Average Weighted Average Remaining Average Option Price Outstanding Exercise Contractual Exercisable Exercise Per Share Options Price Life (Years) Options Price - ------------ ------- -------- ----------- ----------- -------- $ 1.95 48,620 $ 1.95 .75 48,620 $ 1.95 4.63- 5.90 657,600 5.58 1.11 645,600 5.59 19.01-27.00 132,140 20.97 4.29 19,905 19.05 ------- ------- 838,360 7.79 714,125 5.72 ======= ======= The Company accounts for these plans under APB Opinion No. 25, under which the total compensation expense recognized is equal to the difference between the option exercise price and the underlying market price of the stock at the measurement date. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." 52 NOTE 7 - Shareholders' Equity (Continued) The following pro forma net loss and net loss per common share for fiscal 1997 and 1996 assume that compensation cost was recognized for the vested portion of the awards granted in those years, based on the estimated fair value at the grant date consistent with the provisions of SFAS No. 123 (in thousands, except per share amounts): 1997 1996 ---- ---- Net loss - as reported $(21,018) $(3,365) Net loss - pro forma (21,500) (3,592) Net loss per share - as reported (3.99) (.76) Net loss per share - pro forma (4.08) (.82) The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted- average assumptions for grants in fiscal 1997 and 1996: 1997 1996 Expected stock price volatility 93.3% 72.9% Risk free interest rate 6.2% 6.8% Expected life of options 4.8 years 4.9 years The weighted average exercise prices per share for options outstanding and exercisable at March 31, 1997 are $7.79 and $5.72, respectively. The weighted average exercise prices per share for options outstanding and exercisable at March 30, 1996 are $10.20 and $5.60, respectively. The weighted average fair value of options granted during fiscal 1997 and 1996 is $17.65 and $3.65 per share, respectively. During fiscal 1997, the Company made a commitment to issue a warrant to an investment banker for services provided in connection with the Restructuring to purchase 100,000 shares of the Company's common stock at $22.63 per share (see Note 2). The warrant can be exercised at any time through February 2000. The Company recorded the fair value of the warrant within discontinued operations (see Note 2). The fair value of the warrant of $800,000 was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions: Expected stock price volatility 135.91% Risk free interest rate 5.89% Expected life of options 3 years In fiscal 1997, the Company recognized compensation expense of $125,000 in connection with the issuance of restricted stock and the amendment of certain previously issued stock options. At March 31, 1997, the Company had 1,078,500 shares of common stock available for the conversion of Sattel Class A and B Units and for warrants. See Note 15 regarding activity subsequent to March 31, 1997 impacting Shareholders' Equity. 53 NOTE 8 - Income Taxes A reconciliation of the income tax credit and the amount computed by applying the statutory federal income tax rate (34%) to loss from continuing operations before extraordinary items, minority interest and income tax credit for the last three fiscal years is as follows (in thousands): 1997 1996 1995 -------- -------- ------- Credit at statutory rate................ $ (4,604) $ (1,108) $ (728) Settlements of liabilities of unconsolidated subsidiary............. (5) (156) (36) Tax effect of net operating loss not benefitted............................ 4,500 1,276 758 Refund of federal income taxes paid in a prior year....................... (836) --- --- Other, net.............................. 109 (12) 6 ----- ----- ---- Income tax credit....................... $ (836) $ --- $ --- ===== ===== ==== Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and income tax purposes. The components of the Company's deferred tax assets and liabilities of continuing operations are as follows (in thousands): March 31, March 30, 1997 1996 --------- --------- Federal net operating loss carryforwards $ 11,950 $ 7,830 State net operating loss carryforwards 1,835 1,629 Reserve for loss on discontinued operations 953 --- Federal capital loss carryforward 659 408 Excess and obsolete inventory reserve 560 --- Capitalized interest on Diana debentures 281 338 General business credit carryforwards 145 145 Deferred compensation --- 380 All others 686 225 ------ ------ Total deferred tax assets 17,069 10,955 Valuation allowance for deferred tax assets (15,234) (8,352) ------ ------ Net deferred tax assets 1,835 2,603 Intangible assets (net) 1,489 2,256 All others 346 347 ------ ------ Total deferred tax liabilities 1,835 2,603 ------ ------ Net deferred taxes $ --- $ --- ====== ====== The Company has approximately $35,000,000 in both federal and state net operating loss carryforwards. These carryforwards expire at various dates through fiscal 2012. The Tax Reform Act of 1986 imposed substantial restrictions on the utilization of net operating losses in the event of an "ownership change" as defined in Section 382 of The Internal Revenue Code of 1986. Subsequent to March 31, 1997, there may have been ownership changes which would significantly limit the Company's ability to immediately utilize its net operating loss carryforwards. 54 NOTE 9 - Non-Operating Income (Expense) Non-operating income (expense) consists of the following for the last three fiscal years (in thousands): 1997 1996 1995 ------ ------ ------ Write-down of CNC preferred stock $(1,060) $ --- $ --- Net gains (losses) on sales of marketable securities (736) 26 (1,227) Interest income 427 457 743 Gain on settlements of lawsuits --- --- 199 Other 32 (18) (26) ------- ------ ------ $ (1,337) $ 465 $ (311) ======= ====== ====== In June 1996, CNC executed a Promissory Note for $5,000,000 in favor of Sattel for a bridge loan. CNC granted to Sattel a warrant to purchase a split adjusted 36,765 shares of CNC Series D Preferred Stock ("CNC Preferred Stock") at a split adjusted exercise price of $20.40 per share (equal to the par value of such shares) as additional consideration for the bridge loan to CNC. The warrant is exercisable immediately and expires on June 6, 1999. In August 1996, the Promissory Note and accrued interest receivable were converted into 3,729,110 shares of CNC Preferred Stock. In September 1996, Sattel sold to StreamLogic Corporation 1,838,234 shares, or 49% of its CNC Preferred Stock for $2.5 million. No gain or loss was recognized in connection with this sale. In August 1997, CNC completed its IPO at an offering price of $12.00 per share. The CNC Preferred Stock owned by Sattel was automatically converted into CNC common stock immediately prior to the closing of the IPO. The value of Sattel's investment in CNC Preferred Stock, after giving effect to a reverse 1 for 15 stock split and based on a $12.00 per share offering price, is approximately $1,512,000. The Company deemed this value to be the maximum fair market value of its holding on an if-converted basis at March 31, 1997 and in addition, concluded the value of that investment was permanently impaired. Consequently, the Company recorded a non-operating loss of $1,060,000 in fiscal 1997 related to the impairment of its investment. The investment in CNC Preferred Stock of $1,512,000 is classified within other current assets in the Consolidated Balance Sheet. The Company is prohibited from selling 75% of its CNC common stock for six months following CNC's IPO. Sattel sold 25% of its CNC common stock in August 1997 at $12.00 per share and received $396,000. The Company continues to own the warrant from CNC which is now for CNC common stock as a result of the conversion discussed above. The fair value of CNC's common stock at September 15, 1997 was $14.25 per share. 55 NOTE 10 - Extraordinary Items On October 4, 1996, APC refinanced its revolving line of credit with a new lender. In connection with the refinancing, APC incurred expenses of $227,000 which are reflected in the fiscal 1997 Consolidated Statement of Operations as an extraordinary item pursuant to SFAS No. 4. In February 1997, APC sold a majority of its assets and used part of the proceeds to repay its revolving line of credit (see Note 2). APC incurred expenses of $281,000 in connection with the early repayment which are reflected in the fiscal 1997 Consolidated Statement of Operations as an extraordinary item pursuant to SFAS No. 4. NOTE 11 - Related Party Transactions On November 11, 1996 the Company loaned $300,000 to each of James J. Fiedler and Daniel W. Latham. Mr. Fiedler is the Company's Chairman and Chief Executive Officer and Mr. Latham is the Company's President and Chief Operating Officer. Messrs. Fiedler and Latham both executed unsecured Promissory Notes due November 1, 1999 which provide interest at 6.07% per annum compounded on the anniversary date and payable on November 1, 1999. In addition, each person agreed to surrender previously awarded options they each held to purchase 150,000 shares of the Company's common stock. The Promissory Notes provide for full repayment prior to November 1, 1999 in the event of the following: (a) upon any transfer of Messrs. Fiedler's or Latham's Class B Units in Sattel (other than to a Permitted Transferee, as defined in the Agreement Regarding Award of Class B Units (the "Award Agreement")), or by any such Permitted Transferee (including without limitation certain transfers contemplated by the Award Agreement) or (b) upon any exchange or conversion of Class B Units for or into securities registered under the Securities Exchange Act of 1934, as amended, in accordance with the Award Agreement. In connection with the employment agreements with Messrs. Fiedler and Latham entered into on September 4, 1997, the Company's Board of Directors agreed to forgive the notes. Under the employment agreements, equal one third portions of the notes will be forgiven at September 4, 1997 and, if their respective employments are renewed, at each of the next two anniversaries of the date of the employment agreements, provided that each individual remains as an employee of the Company at each such forgiveness date. Messrs. Fiedler and Latham used the proceeds of the loan to each purchase 100 non-forfeitable Class B Units of Sattel from Mark Jacques, a former officer of Sattel, for an aggregate purchase price of $600,000. On November 12, 1996, Sattel entered into a settlement agreement with Mr. Jacques whereby Mr. Jacques (i) agreed to the assignment to the Company of the employment agreement between him and Sattel and (ii) retained his remaining 250 Class B Units of Sattel. Mr. Jacques was terminated as an employee of the Company in January 1997. Upon a review of the various transactions and taking into account all of the available information, the Company has accounted for the loans to Messrs. Fiedler and Latham and their purchase of Class B Units from Mr. Jacques as a settlement with Mr. Jacques and recorded an expense of $600,000 during the third quarter of fiscal 1997 (see Note 16). 56 NOTE 11 - Related Party Transactions (Continued) The Company entered into Separation Agreements, dated November 20, 1996 (the "Separation Agreements"), with each of Richard Y. Fisher, Sydney B. Lilly and Donald E. Runge (the "Departing Officers") that provide for termination of employment and resignation from all offices and directorships in the Company and its subsidiaries by the Departing Officers, except for Mr. Lilly's directorship of the Company. The Separation Agreements provide for payment by the Company, as of November 29, 1996, of $186,000 and $749,000, respectively, to Mr. Runge and Mr. Fisher, in settlement of deferred compensation previously earned and payments of $343,000 to Mr. Fisher and $83,000 to each of Mr. Runge and Mr. Lilly as severance settlements resulting in total payments to the Departing Officers of $1,444,000. In accordance with provisions of the Amended and Restated Employment Agreements entered into by the Company and each of the Departing Officers on April 2, 1995, each Departing Officer shall be entitled to have all medical, dental, hospital, optometrical, nursing, nursing home and drug expenses for themselves and their spouses paid by the Company for life, or in the case of Mr. Lilly, until March 31, 2000. The Separation Agreement for Mr. Fisher provides that he shall repay in full a promissory note dated April 11, 1988, in the amount of $42,469. The Separation Agreements further provide that all stock options of the Departing Officers shall remain exercisable until December 31, 1997 (April 2, 2000 with respect to 82,688 options granted to Mr. Lilly on April 2, 1995) and amends existing Stock Option Agreements with Messrs. Fisher, Lilly and Runge to provide for, among other things, the Company to maintain the effectiveness of the Form S-8 Registration Statement currently in effect covering the exercise of the stock options. The Company has made all required payments under the Separation Agreements. Certain of the Company's non-employee directors have provided services to the Company and/or its subsidiaries for which they were compensated. Amounts accrued or paid to all directors for these services during fiscal 1997, 1996 and 1995 are $4,000, $13,000 and $217,000, respectively. In February 1997, APC conveyed its 50% ownership interest in Fieldstone Meats of Alabama, Inc. to a former officer and director of APC in consideration for past services as a director of APC. 57 NOTE 12 - Business Segment Information The Company operates worldwide in the central office voice and data switching equipment business segment. This segment consists solely of the operations of Sattel. In fiscal 1997, Sattel had sales to one domestic customer that comprised 94% of net sales. In fiscal 1996, Sattel had sales to two customers that comprised 68% and 32% of net sales. Information by industry segment is as follows (in thousands): Fiscal Year Ended ------------------------------ March 31, March 30, April 1, 1997 1996 1995 -------- --------- -------- Net Sales: Switching equipment................... $ 7,154 $ 264 $ --- ======= ====== ====== Operating loss: Switching equipment................... $ (8,740) $(1,883) $ --- Corporate............................. (3,410) (1,809) (1,697) ------- ------ ------ $(12,150) $(3,692) $(1,697) ======= ====== ====== Depreciation and amortization: Switching equipment................... $ 467 $ 111 $ --- Corporate............................. 11 10 8 ------- ------ ------ $ 478 $ 121 $ 8 ======= ====== ====== Capital expenditures: Switching equipment................... $ 1,902 $ 136 $ --- Corporate............................. 12 25 12 ------- ------ ------ $ 1,914 $ 161 $ 12 ======= ====== ====== Identifiable assets: Switching equipment................... $ 14,811 $ 8,359 $ --- Discontinued operations............... 8,201 15,569 16,820 Corporate............................. 232 5,164 7,385 ------- ------ ------ $ 23,244 $29,092 $24,205 ======= ====== ====== 58 NOTE 13 - Statements of Cash Flows Supplemental cash flow information relating to continuing operations for the last three fiscal years is as follows (in thousands): 1997 1996 1995 ------ ------ ------ Change in current assets and liabilities: Receivables.................... $(4,540) $ 173 $ 1,584 Inventories.................... (1,850) (1,005) --- Other current assets........... 294 108 210 Accounts payable............... 2,076 338 (10) Other current liabilities...... 856 15 (10) ------ ------ ------ $(3,164) $ (371) $ 1,774 ====== ====== ====== Supplemental information: Interest paid................... $ --- $ --- $ 35 Non-cash transactions: Purchase of minority interest with common stock.............. 1,818 4,944 1,895 Conversion of promissory note and accrued interest into CNC preferred stock................ 5,072 --- --- Reduction of net liabilities of unconsolidated subsidiary... --- 219 --- NOTE 14 - Liquidity and Capital Resources The Company encountered a liquidity deficiency in fiscal 1997 and subsequently, primarily because (i) certain customers of Sattel were past due on receivables, (ii) Sattel has granted certain customers extended payment terms, (iii) Sattel's revenue growth has been lower than expected and (iv) the Company made payments of $2,349,000 in connection with the Restructuring. As a result of the liquidity deficiency, the Company had become delinquent on certain of its working capital obligations. In July 1997, the Company raised $5,597,000 through equity and debt financings (see Note 15 for additional information). After completion of the equity and debt financings, collection of $4.4 million from CNC and the anticipated sales of C&L, Valley and APC's real estate discussed further below, management believes that it will have sufficient resources to provide adequate liquidity to meet the Company's planned capital and operating requirements through March 31, 1998. Thereafter, the Company's operations will need to be funded either with funds generated through operations or with additional debt or equity financing. If the Company's operations do not provide funds sufficient to fund its operations and the Company seeks outside financing, there can be no assurance that the Company will be able to obtain such financing when needed, on acceptable terms or at all. The Company is seeking buyers for C&L and Valley. It is anticipated that the proceeds of the sales of these businesses and assets will be used to fund a portion of the Company's capital and operating requirements in fiscal 1998. Restrictions in the revolving lines of credit of C&L and Valley prevent the Company from presently accessing funds from these subsidiaries. 59 NOTE 14 - Liquidity and Capital Resources (Continued) Such restrictions in C&L's revolving line of credit may also initially limit the Company's access to the total proceeds from a sale of Valley prior to any ultimate sale of C&L given the existing ownership structure of Valley. As discussed above, recent events have improved the Company's short-term liquidity. The Company nevertheless considers that its liquidity situation, over the longer term, will be dependent on its operating results and not its ability to divest its discontinued subsidiaries and assets. The Company could remain relatively constrained and its ability to access outside sources of capital could be restricted until such time as the Company is able to demonstrate higher levels of sales and more favorable operating results. No assurances can be given that the Company will be able to maintain its liquidity over an extended period of time as required for the Company to achieve its operating goals. NOTE 15 - Subsequent Events On May 13, 1997, the Company issued warrants to Superior St. Capital, its investment banking firm, in connection with the equity financing discussed below to purchase 324,000 shares of the Company's common stock at $2.25 per share. A warrant to purchase 273,000 shares of common stock is exercisable immediately and expires five years from issue. A warrant to purchase 51,000 shares of common stock is exercisable on November 13, 1997 and expires on November 13, 2002. Registration rights were provided to the owner of the warrants. In June 1997, the Company's Board of Directors authorized the following items with respect to the Company's two nonqualified stock option plans: a) Stock options to purchase 46,897 shares of the Company's common stock were granted to certain employees of Sattel. In addition, the Board of Directors authorized the issuance of an additional 100,000 stock options pursuant to the Company's plan to Sattel employees. b) All current employees that have been granted stock options will be eligible to exchange existing stock options for new options that have an exercise price of $3.00 per share. The new options vest equally over a three year period commencing June 1, 1997. c) Stock options to purchase 5,000 shares of the Company's common stock were granted to each of two outside members of the Board of Directors that joined the Board in fiscal 1997. These options have an exercise price of $3.00 per share. d) The expiration date of stock options owned by outside members of the Board of Directors as of June 5, 1997 was extended from December 31, 1997 to December 31, 2000. This extension established a new measurement date for accounting purposes, the effects of which will be recorded in the first quarter of fiscal 1998. In July 1997, the Company issued 1,880,750 shares of its common stock at $2.00 per share in a private placement under Regulation D of the Securities Act of 1933. The Company received $3,362,000 from the private placement, net of fees of $400,000. In addition, warrants to purchase 1,880,750 shares of the Company's common stock at $3.00 per share were issued to the Regulation D participants. The warrants are exercisable immediately and expire 5 years 60 NOTE 15 - Subsequent Events (Continued) from issuance. Mr. Fiedler, the Company's Chairman and Chief Executive Officer, participated in the private placement and purchased 175,000 shares of common stock and received warrants to purchase 175,000 shares of the Company's common stock. In addition, Mr. Stephen W. Portner, a Director, and his daughter collectively participated in the private placement and purchased 11,250 shares of common stock and received warrants to purchase 11,250 shares of the Company's common stock. The common stock and common stock warrants issued in the private placement are subject to registration rights. In July 1997, the Company received $2,235,000 upon the issuance of $2,500,000 in 8% convertible notes. Fees and expenses amounted to $265,000. The notes are convertible into the Company's common stock which will be issued pursuant to the exemption provisions of Regulation S of the Securities Act of 1933. The conversion price is the lessor of $6.64 or 80% of the 5 day average closing bid price on a conversion date with a conversion floor price (the "Conversion Floor Price") of $1.50 per share, provided that if the average closing bid price for any 20 consecutive trading days prior to a conversion date is less than $1.50 per share, the Conversion Floor Price will be adjusted to 80% of such 20 day average closing bid price. A further restriction on conversion provides that in no event shall the holder be entitled to convert any portion of the note in excess of that portion of the note upon conversion of which the sum of (1) the number of shares of common stock beneficially owned by the holder and its affiliates (other than shares of common stock which may be deemed beneficially owned through the ownership of the unconverted portion of this note as defined in the Subscription Agreement) and (2) the number of shares issuable upon the conversion of the portion of the note with respect to which the determination of this proviso is being made, would result in beneficial ownership by the holder and its affiliates of more than 4.9% of the outstanding common stock of the Company. The note can be converted equally beginning 45, 75 and 105 days following July 17, 1997. Interest is payable semi-annually in arrears in the form of Company common stock based on the above-described conversion price. After one year, the Company may, by written notice to the holders, prepay the notes in whole or in part. The notice shall be given at least ten (10) days prior to the payment date and on such date the Company shall pay the outstanding principal and all accrued interest on the note, unless prior to such payment date the holder has delivered a notice of conversion. Any unconverted principal amount and accrued interest thereon shall at the maturity date be paid, at the option of the Company, in either (a) cash or (b) common stock valued at a price equal to the average closing bid price of the common stock for the five (5) trading days immediately preceding the maturity date. The fair value of the "in-the-money" portion of the notes at the date of issuance will be recorded as a debt discount and amortized prospectively as interest expense. The 8% convertible notes contain certain event of default provisions. If an event of default occurs and is not waived by the holders of a majority of all notes, the Company must redeem the notes at 125% of the outstanding principal amount due. Significant event of default provisions include among other things: proceedings for relief under bankruptcy law, insolvency, money judgment or writ of attachment in excess of $500,000 filed against the Company and the delisting of the Company's common stock from an exchange or the Nasdaq Stock Market. 61 NOTE 15 - Subsequent Events (Continued) In addition, warrants to purchase 37,037 of common stock at an exercise price of $6.75 per share were issued to the escrow agent for the Regulation S offering. These warrants are exercisable after 41 days of issuance and expire on July 17, 2000. Upon exercise of the warrants, the Company's common stock will be issued pursuant to the exemption provisions of Regulation S of the Securities Act of 1933. The fair value of the warrants will be recorded as debt issue costs in the second quarter of fiscal 1998. Mr. Fiedler, the Company's Chairman and Chief Executive Officer, loaned the Company $250,000 in June 1997. The principal amount of the loan was converted to common stock in conjunction with Mr. Fiedler's purchase of Company common stock pursuant to the Regulation D private placement in July 1997. Mr. Latham, the Company's President and Chief Operating Officer, loaned the Company $98,000 subsequent to March 31, 1997. This loan was repaid in July 1997. NOTE 16 - Quarterly Results of Operations (Unaudited) Fiscal Year Ended March 31, 1997 (in thousands, except per share amounts): 12 Weeks Ended ------------------------------------- 16 Weeks January 4, October 12, Ended March 31, 1997 1996 July 20, 1997 (Restated) (Restated) 1996 --------- ---------- ----------- -------- Net sales $ 95 $ 2,552 $ 3,666 $ 841 Gross profit (loss) (1,290) 1,842 2,775 695 Loss from: Continuing operations $ (6,742) $ (3,663) $ (781) $ (1,149) Discontinued operations (2,000) (2,273) (3,729) (173) Extraordinary items (281) --- (227) --- ------- ------- -------- ------- Net loss $ (9,023) $ (5,936) $ (4,737) $ (1,322) ======= ======= ======== ======= Loss per common share: Continuing operations $ (1.27) $ (.69) $ (.15) $ (.22) Discontinued operations (.38) (.43) (.71) (.03) Extraordinary items (.05) --- (.04) --- ------- ------- -------- ------- Net loss per common share $ (1.70) $ (1.12) $ (.90) $ (.25) ======= ======= ======== ======= Fiscal 1997 represents Sattel's first full year of operations as a consolidated subsidiary of Diana, and as a designer, developer, manufacturer, marketer and distributor of telecommunications equipment for an industry which continues to be impacted by deregulation. Sattel's results may fluctuate from quarter to quarter, however, the Company's quarterly results for fiscal 1997 are not necessarily indicative of the results which can be expected on a quarterly basis in the future. Sales during the first three quarters of fiscal 1997 relate primarily to sales to CNC. There were no sales to CNC in the fourth quarter. 62 NOTE 16 - Quarterly Results of Operations (Unaudited) (Continued) Having completed its first full year of operations in its primary business to design, develop, engineer, manufacture, market and distribute telecommunications switches, and pursuant to advice received from the Company's independent accountants, Sattel's sales and gross profit as previously reported for the second and third quarters of fiscal 1997 have been adjusted for accounting errors to postpone the recording of sales with respect to four of Sattel's customers until the occurrence, if any, of certain future events. As a result, sales for the second and third quarters of fiscal 1997 were reduced by $380,000 and $1,785,000, respectively, and gross profit was reduced by $259,000 and $1,215,000, respectively, to reflect the postponement of sales. In addition, the Company, pursuant to the advice received from the Company's independent accountants, revised its accounting with respect to a third quarter settlement involving a former employee of the Company. The revision resulted in a $600,000 settlement expense being recorded in the third quarter of fiscal 1997 (see Note 11). The Company also reclassified $227,000 from loss from discontinued operations to extraordinary items for the twelve weeks ended October 12, 1996 (see Note 10) and corrected the recording of certain expenses of $120,000 by moving them from the second to the third quarter of fiscal 1997. The results of operations as originally reported for the twelve weeks ended January 4, 1997 and October 12, 1996 are as follows: 12 Weeks Ended ------------------------- January 4, October 12, 1997 1996 ---------- ----------- Net sales $ 4,337 $ 4,046 Gross profit 3,057 3,034 Loss from: Continuing operations $ (1,728) $ (642) Discontinued operations (2,273) (3,956) ------- -------- Net loss $ (4,001) $ (4,598) ======= ======== Loss per common share: Continuing operations $ (.33) $ (.12) Discontinued operations (.43) (.75) ------- -------- Net loss per common share $ (.76) $ (.87) ======= ======== 63 NOTE 16 - Quarterly Results of Operations (Unaudited) (Continued) Loss from continuing operations for the third and fourth quarters of fiscal 1997 includes the following significant (income), expenses and losses (in thousands): Third Quarter Fourth Quarter Settlement expense with former employee $ 600 $ --- Realized loss on sales of marketable securities 736 --- Income tax credit (836) --- Excess and obsolete inventory charges (also impacted gross profit) --- 1,400 Writedown of CNC investment --- 1,060 ---- ----- $ 500 $2,460 ==== ===== The loss from discontinued operations consists of the following charges and losses by quarter in fiscal 1997 (in thousands): First Second Third Fourth Total ------ ------ ------ ------- ----- Loss from discontinued operations $(173) $ (229) $ (223) $ --- $ (625) Estimated loss on disposal --- (3,500) (2,050) (2,000) (7,550) ---- ------ ------ ------ ------ $(173) $(3,729) $(2,273) $(2,000) $(8,175) ==== ====== ====== ====== ====== During the second quarter of fiscal 1997, the Company recorded a provision of $3,500,000 for estimated losses in connection with the original Restructuring plan (see Note 2). During the third quarter of fiscal 1997, the Company recorded a provision of $2,050,000 for estimated losses on the sale of APC. In the fourth quarter of fiscal 1997, the Company recorded a provision of $2,000,000 for an adjustment of the estimated proceeds on the sale of APC's real estate and additional estimated losses related to the disposal of C&L and Valley. 64 NOTE 16 - Quarterly Results of Operations (Unaudited) (Continued) Fiscal Year Ended March 30, 1996 (in thousands, except per share amounts): 12 Weeks Ended 16 Weeks ------------------------------------- Ended March 30, January 6, October 14, July 22, 1996 1996 1995 1995 --------- ---------- ----------- --------- Net sales $ --- $ --- $ 264 $ --- Gross profit --- --- 135 --- Earnings (loss) from: Continuing operations $ (1,352) $ (647) $ (307) $ (440) Discontinued Operations (1,160) 49 453 39 ------- ------- -------- -------- Net earnings (loss) $ (2,512) $ (598) $ 146 $ (401) ======= ======= ======== ======== Earnings (loss) per common share: Continuing operations $ (.29) $ (.15) $ (.07) $ (.10) Discontinued operations (.25) .01 .10 .01 ------- ------- -------- -------- Net earnings (loss) per common share $ (.54) $ (.14) $ .03 $ (.09) ======= ======= ======== ======== The primary reason for the increased loss from continuing operations in the fourth quarter of fiscal 1996 is attributable to an increase in the start-up activities at Sattel. During the fourth quarter of fiscal 1996, the Company concluded that an impairment of goodwill had occurred and wrote off the remaining goodwill of $852,000 resulting from the acquisition of APC. This is the primary reason for the increased loss from discontinued operations in the fourth quarter of fiscal 1996. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY Identification of Directors The Board of Directors is divided into three classes of directors consisting of two classes of two members and one class of three members or seven members in the aggregate. However, the Board currently includes only five members. The election of directors is staggered so that the term of only one class of directors expires each year. Generally, the term of each class is three years. Presently, the Board of Directors has two vacant positions. At September 6, 1997, the Board of Directors consisted of the following members: 65 Directors With Terms Expiring in 1997 James J. Fiedler, age 51, has been a director of the Company since August 1996. He has been Chairman and Chief Executive Officer of the Company since November 1996 and Chairman and Chief Executive Officer of Sattel Communications ("Sattel"), since September 1995. Previously, Mr. Fiedler was a principal in the consulting firm of Johnson & Fiedler. From November 1992 to September 1994, Mr. Fiedler was Vice President of Sales and Marketing and subsequently President and director of Summa Four, Inc. From June 1989 to July 1992, Mr. Fiedler was Executive Vice President and Chief Operating Officer of Timeplex, a subsidiary of Unisys engaged in the business of manufacturing data and telecommunications equipment. Prior to June 1989, Mr. Fiedler held executive positions with Unisys Corporation and Sperry Corporation (subsequently acquired by Unisys Corporation). He has been a director of Entree Corporation since November 1996. Stephen W. Portner, age 45, was appointed a director of the Company on August 29, 1997. He is the Managing Director of North America for JMJ Associates, a global management consulting company, and has served in various capacities from January 1994 to May 1997 at JMJ Associates. From December 1991 to January 1994, Mr. Portner held positions in plant and project management as well as Director of Quality for Air Products Incorporated. Director With Term Expiring in 1998 Sydney B. Lilly, age 68, has been a director of the Company since 1988. He was Executive Vice President of the Company from April 1995 to November 1996 and a consultant from 1984 to 1995. He was a director of Entree Corporation from 1991 to 1996. Directors With Term Expiring in 1999 Jack E. Donnelly, age 62, has been a director of the Company since November 1991. Since 1986, he has been a principal of Bailey & Donnelly Associates, Inc., an investment company. Daniel W. Latham, age 48, has been a director of the Company since November 1996. He has been President and Chief Operating Officer of the Company since November 1996 and President and Chief Operating Officer of Sattel since September 1995. Prior to his association with Sattel, Mr. Latham was the President of Frontier Long Distance, a leading U.S. long distance company in the U.S. Mr. Latham also served as a Senior Vice President at Racal Datacom where he was responsible for world-wide sales. Prior to Racal, Mr. Latham held executive positions at Digital Equipment Corporation, the Bell System and IBM. He has been a director of Entree Corporation since November 1996. The Board of Directors held a total of 22 meetings during the fiscal year ended March 31, 1997. Each director, except Mr. Michael Camp, a former director, attended at least 75% of the aggregate total number of meetings of the Board of Directors held during the last fiscal year and the total number of meetings held by all committees of the Board of Directors on which he served during the year. The Board of Directors has two standing committees: an Audit Committee and an Executive Committee. The Audit Committee recommends to the Board of Directors the independent certified public accountants to perform audit and 66 non-audit services, reviews the scope and results of such services, reviews with management and the independent certified public accountants the systems of internal control, assures adherence in accounting and financial reporting to generally accepted accounting principles and performs such other duties deemed appropriate by the Board of Directors. Messrs. Donnelly and Portner are the present members of the Audit Committee and were appointed on September 10, 1997. Previously, Mr. Jay Lieberman, a former director, was the sole member of the Audit Committee until February 1997. Mr. Bruce Borchardt and Mr. Camp were members of the Audit Committee from March 7, 1997 until their resignations on July 1, 1997 and September 5, 1997, respectively. The Audit Committee did not meet during the fiscal year ended March 31, 1997, however, it met during April 1997 with Mr. Bruce Borchardt, a former director and member of the Audit Committee, to discuss the fiscal 1997 audit with the Company's independent accountants. The Executive Committee has and may exercise all of the powers of the Board of Directors in the management of the business and affairs of the corporation during intervals between meetings of the Board of Directors, except with respect to amendments to the Certificate of Incorporation or by- laws, merger, consolidation, sale of all or substantially all of the corporation's assets, dissolution, declaration of dividends, authorization of issuance of stock, or filling vacancies on the Board of Directors. The Executive Committee consists of Messrs. Donnelly, Fiedler, Latham and Lilly. The Executive Committee met once during the fiscal year ended March 31, 1997. The Company has no standing nominating or compensation committee of the Board of Directors, or committees performing similar functions, because decisions regarding nomination of directors and executive compensation are made by the full Board of Directors. Directors receive an annual fee of $15,000, paid on a monthly basis. Directors are also reimbursed for travel expenses. In addition, Directors receive $1,250 per meeting for service on the Audit Committee of the Board of Directors. In June 1997, stock options to purchase 5,000 shares of the Company's common stock were granted to each of two outside members of the Board of Directors that joined the Board in fiscal 1997. These options have an exercise price of $3.00 per share. Identification of Executive Officers The following individuals are the Executive Officers of the Company as of September 15, 1997: Name Age Position ---- --- -------- James J. Fiedler 51 Chief Executive Officer Daniel W. Latham 48 President and Chief Operating Officer Brian A. Robson 60 Vice President, Controller and Secretary The following information is furnished with respect to each executive officer who is not also a Director of the Company: Mr. Robson was Vice President of Finance and Chief Financial Officer of Ascom Timeplex from 1989-1996. 67 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth the total annual compensation paid or accrued by the Company for the account of the executive officers of the Company serving as such at March 31, 1997 and for two former executive officers: Summary Compensation Table
Long-Term Compensation Annual Compensation ---------------------- ----------------------------------- Restricted Other Annual Stock Securities Name and Bonus Compensation Awards Underlying All Other Principal Position Year Salary($) ($) ($) (3) Options(#) Compensation($) - ------------------ ---- --------- ------ ------------ --------- ---------- ---------------- James J. Fiedler 1997 200,000 0 3,750(7) 0 0 0 Chairman, CEO and 1996 111,538(4) 0 0 2.5%(9) 150,000(11) 19,612(13) Director (1) Daniel W. Latham 1997 175,000 0 3,750(7) 0 0 170,197(13) President, COO and 1996 90,865(5) 0 0 1.5%(10) 150,000(11) 26,416(13) Director (2) Brian A. Robson 1997 56,250(6) 0 0 0 10,500 13,041(13) Vice President and Controller R. Scott Miswald 1997 125,000 0 0 52,500 0 0 Vice President and 1996 110,000 11,614 0 0 10,000 0 Treasurer 1995 110,000 0 0 0 0 0 Richard Y. Fisher 1997 137,308 0 27,003(8) 0 0 342,692(12) Former Chairman (3) 1996 210,000 64,550 0 0 0 0 1995 444,538 0 0 0 0 0 Donald E. Runge 1997 137,308 0 0 0 0 82,692(12) Former President 1996 210,000 64,550 0 0 0 0 and Director (3)
68 (1) On November 29, 1996 Mr. Fiedler was appointed Chairman and CEO of the Company. Mr. Fiedler also remained as Chairman and CEO of Sattel (see Employment and Severance Agreements). (2) On November 29, 1996 Mr. Latham was appointed as President and COO of the Company. Mr. Latham also remained as President and COO of Sattel (see Employment and Severance Agreements). (3) Mr. Fisher resigned from the Company as an executive officer and director on November 29, 1996. Mr. Runge resigned as an executive officer and director of the Company on August 22, 1996. (4) Represents part-year compensation from start of employment as CEO of Sattel on September 11, 1995 to end of fiscal year, based on annualized salary of $200,000. (5) Represents part-year compensation from start of employment as President and COO of Sattel on September 25, 1995 to end of fiscal year, based on annualized salary of $175,000. (6) Started employment on October 31, 1996. Current annualized salary: $135,000. (7) Directors fees paid to officers. (8) Perquisites include group health insurance and long-term disability premium payments. (9) Mr. Fiedler was granted 250 Class B Units in Sattel (equivalent to a 2.5% ownership interest) of which 44 Class B Units remain subject to forfeiture as of August 31, 1997. (10) Mr. Latham was granted 150 Class B Units in Sattel (equivalent to a 1.5 percent ownership interest) of which 26 Class B Units remain subject to forfeiture as of August 31, 1997. (11) Performance-based options for the indicated number of shares of Company common stock surrendered on November 11, 1996 in connection with loans (see Certain Relationships and Related Transactions). (12) See Employment and Severance Agreements. (13) Represents relocation assistance paid by the Company on behalf of the various individuals. Also includes $98,000 paid to Mr. Latham to cover his loss on a personal residence and the related real estate commissions and selling expenses. The table below provides information regarding stock options granted during fiscal 1997 to the persons named in the Summary Compensation Tables: Option Grants in Last Fiscal Year Individual Grants --------------------------------------------------- Number of % of Total Shares Options Underlying Granted to Options Employee in Exercise Expiration Granted(1) Fiscal Year Price Date ---------- ----------- -------- ---------- James J. Fiedler 0 --- $ --- --- Daniel W. Latham 0 --- --- --- Brian A. Robson 10,500 (2) 5.4% 19.05 8/20/01 R. Scott Miswald 0 --- --- --- Richard Y. Fisher 0 --- --- --- Donald E. Runge 0 --- --- --- 69 Potential Realizable Value at Assumed Annual Rate of Stock Price Appreciation for Option Term (3) ------------------------ 5% 10% ---------- ---------- James J. Fiedler $ --- $ --- Daniel W. Latham --- --- Brian A. Robson 55,263 122,117 R. Scott Miswald --- --- Richard Y. Fisher --- --- Donald E. Runge --- --- (1) The options granted under the Sattel Communications LLC 1996 Stock Option Plan are non-qualified stock options. The exercise price per share is 100% of the fair market value of a share of common stock on the date of the grant. In June 1997, current employees owning stock options, including Mr. Robson, were granted the right to exchange existing stock options for new options that have an exercise price of $3.00 per share. The new options vest equally over a three year period commencing June 1, 1997. (2) The options vest as follows: October 30, 1997 - 2,625; October 30, 1998 - 2,625; October 30, 1999 - 5,250. (3) The option term is five years. The dollar amounts under these columns are the results of calculations at the 5% and 10% rates set by the Securities and Exchange Commission. The potential realizable values are not intended to forecast possible future appreciation, if any, in the market price of the common stock. The table below provides information regarding the value of in-the-money stock options held by named executive officers at March 31, 1997. Named executive officers did not exercise any stock options during the fiscal year. Unexercised Company Stock Options Number of Value of Unexercised Unexercised Options In-the-Money Options at March 31, 1997 at March 31, 1997 (1) ---------------------------- -------------------------- Name Exercisable Unexercisable Exercisable Unexercisable ---- ------------ -------------- ----------- ------------- James J. Fiedler 0 0 $ 0 $ 0 Daniel W. Latham 0 0 0 0 Brian A. Robson 0 10,500 0 0 R. Scott Miswald 16,578 0 8,343 0 Richard Y. Fisher 275,378 0 166,792 0 Donald E. Runge 275,378 0 166,792 0 (1) Value based on a fair market value of common stock of $6.00 on March 31, 1997, less the option exercise price. 70 Employment and Severance Agreements The Company has employment agreements with certain executive officers. Messrs. Fiedler and Latham were employed by Sattel until December 31, 1996 pursuant to contracts that provided for salary of $200,000 and $175,000, respectively, per year with a year-end bonus equal to 10% and 5%, respectively, of Sattel's pre-tax earnings for the calendar year, up to the salary for the year, and such fringe benefits as Sattel's executive committee should make available. From January 1, 1997 to September 3, 1997, Messrs. Fiedler and Latham continued their employment at the same salary without a contract. On September 4, 1997, Messrs. Fiedler and Latham entered into new employment agreements with the Company covering the 1998 fiscal year and providing for salaries of $200,000 and $175,000, respectively, per year. Such employment agreements provide for customary fringe benefits, including a car allowance for each Executive of $600 per month. The Executives may become entitled to bonuses based on the Company's pre-tax profits for each half year in the fiscal year covered by the employment agreements, equal to 10% of such pre-tax profits in the case of Mr. Fiedler and 5% in the case of Mr. Latham, but not to exceed 100% of the Executive's annual salary in the case of Mr. Fiedler and 75% in the case of Mr. Latham. Additionally, the Executives are entitled to an incentive bonus equal to one-half percent of the sales revenues of Sattel for each month during the term of the agreement, subject to certain limitations, and in any event not to exceed 100% of the Executive's annual salary. As disclosed elsewhere herein, each of the Executives has a $300,000 note payable to the Company. Under the employment agreements, equal one third portions of such notes will be forgiven at the date of the employment agreement, and, if their respective employments are renewed, at each of the next two anniversaries of the date of the employment agreements, provided that such Executive remains as an employee of the Company at each such forgiveness date. These employment agreements also contemplate that the Class A and Class B units of Sattel, including the units held by the Executives, will become convertible into the Company's common stock, at the rate of 500 shares of the Company's common stock for each such unit, immediately and without the requirements that Sattel achieve cumulative pre-tax profits of at least $15 million over four consecutive quarters. The Company has also granted certain registration rights with respect to the shares of common stock issuable upon such conversion. Copies of the employment agreements are filed as exhibits to this Annual Report on Form 10- K, and this description is qualified by reference to such exhibits. The Company entered into Separation Agreements, dated November 20, 1996 (the "Separation Agreements"), with each of Richard Y. Fisher, Sydney B. Lilly and Donald E. Runge (the "Departing Officers") that provide for termination of employment of the Departing Officers by, and resignation of the Departing Officers from all offices, and, except for Mr. Lilly's directorship of the Company, directorships in, the Company and its subsidiaries. The Separation Agreements provide for payment by the Company, as of November 29, 1996, of $186,000 and $749,000, respectively, to Mr. Runge and Mr. Fisher, in settlement of deferred compensation previously earned and payments of $343,000 to Mr. Fisher and $83,000 to each of Mr. Runge and Mr. Lilly as severance settlements. In accordance with provisions of the Amended and Restated Employment Agreements entered into by the Company and each of the Departing Officers on April 2, 1995, each Departing Officer shall be 71 entitled to have all medical, dental, hospital, optometrical, nursing, nursing home and drug expenses for themselves and their spouses paid by the Company for life, or in the case of Mr. Lilly, until March 31, 2000. The Separation Agreement for Mr. Fisher provides that he shall repay in full a promissory note dated April 11, 1988, in the amount of $42,469. The Separation Agreements further provide that all stock options of the Departing Officers shall remain exercisable until December 31, 1997 (April 2, 2000 with respect to 82,688 options granted to Mr. Lilly on April 2, 1995) and amends existing Stock Option Agreements with Messrs. Fisher, Lilly and Runge to provide for, among other things, the Company to maintain the effectiveness of the Form S-8 Registration Statement currently in effect covering the exercise of the stock options. The Company has made all required payments under the Separation Agreements. Compensation Committee Interlocks and Insider Participation As noted above, the Board of Directors does not have a compensation committee, because executive compensation decisions are made by the full Board. All directors participate in the deliberations. Mr. Fiedler is the Company's Chairman and Chief Executive Officer. Mr. Latham is the Company's President and Chief Operating Officer. Messrs. Fiedler's and Latham's fiscal 1997 compensation and employment contracts were previously described above. Fiscal 1997 executive compensation decisions made by the Board of Directors with respect to Messrs. Fiedler and Latham were made prior to their appointment to the Board of Directors. In December 1991, Mr. Donnelly entered into a consulting agreement with the Company to serve as chairman and consultant to C&L Communications, Inc. ("C&L"), one of the Company's subsidiaries. The agreement, which was subsequently amended, terminates on March 31, 1998. Upon expiration or termination of the agreement, the Company will pay Mr. Donnelly 10% of the "increase in value" of C&L. The increase in value is defined generally as the previous fiscal year's net pre-tax earnings of C&L, multiplied by four, minus $9 million. During fiscal 1995 Mr. Donnelly's consulting agreement was amended to provide for an extension of the term of the agreement from December 23, 1996 to March 31, 1997, and Mr. Donnelly was provided an option to extend the term one additional year. Also, Mr. Donnelly has the ability to obtain a loan from the Company at the prime rate, not to exceed 25% of the amount accrued by the Company for the estimated payment due at the termination of the agreement. No amounts have been loaned to Mr. Donnelly pursuant to this provision. In addition Mr. Donnelly is paid $50,000 per year in accordance with the agreement. 72 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information as of September 4, 1997 with respect to the common stock ownership of each director, the Chief Executive Officer, the other executive officers of the Company and two former executive officers identified in the Summary Compensation Table below (collectively with the Chief Executive Officer, the "named executive officers"), all directors and executive officers as a group and each person or group of persons known by the Company to own beneficially more than 5% of the common stock of the Company.
Amount and Nature of Beneficial Ownership (1)(2) Shares Issuable Shares Issuable ---------------------- Upon Exercise Of Upon Conversion Number of Percent ----------------------------- of Sattel Class Name of Beneficial Owner Shares of Class Stock Options(3) Warrants(3) A or B Units(4) - ------------------------ ----------- -------- ---------------- ----------- --------------- Jack E. Donnelly 20,234 * 12,155 0 0 James J. Fiedler 540,000 7.2 0 175,000 175,000 Daniel W. Latham 125,000 1.7 0 0 125,000 Sydney B. Lilly 193,995 (5) 2.6 125,231 0 50,000 R. Scott Miswald 18,078 (5) * 16,578 0 0 Brian A. Robson 0 * 0 0 0 Stephen W. Portner 22,500 * 0 11,250 0 All Directors and Executives as a Group (7 individuals) 919,807 11.7 153,964 186,250 350,000 Richard Y. Fisher 275,378 (5) 3.7 275,378 0 0 Donald E. Runge 275,378 3.7 275,378 0 0 Richard L. Haydon 1114 Avenue of the Americas New York, NY 10036 1,263,000 (6) 16.2 0 625,000 0 Dawson-Samberg Capital Management, Inc. et al 345 Pequot Avenue Southport, CT 06490 452,985 (7) 6.3 0 0 0 Ardent Research Partners 200 Park Avenue, 39th floor New York, NY 10066 450,000 (8) 6.1 0 225,000 0
* The amount shown is less than 1% of the outstanding shares of common stock. 73 (1) Except as otherwise noted, all persons have sole voting and investment power over the shares listed. (2) Includes shares of common stock issuable upon the exercise of stock options and warrants exercisable within 60 days of August 31, 1997; and shares issuable upon the conversion of Sattel Class A or B Units (see Note 7). (3) Only includes stock options or warrants exercisable within 60 days of August 31, 1997. (4) Mr. Fiedler and Mr. Latham own 350 and 250 Class B Units of Sattel Communications, LLC ("Sattel"), respectively. Mr. Lilly owns 100 Class A Units of Sattel. Mr. Fiedler's and Mr. Latham's Class B Units are convertible into 175,000 and 125,000 shares, respectively, of the Company common stock. Mr. Lilly's Class A Units are convertible into 50,000 shares of the Company common stock. (5) Mr. Fisher owns 20,000 shares (less than 1%) of common stock of Entree Corporation ("Entree"), an 81.25%-owned subsidiary of the Company. Mr. Lilly owns 30,000 shares (less than 1%) of Entree common stock. Mr. Miswald owns 10,000 shares (less than 1%) of Entree common stock. All directors and executive officers as a group beneficially own 40,000 shares (less than 1%) of Entree common stock. (6) Based on its Schedule 13D filed July 28, 1997, Mr. Haydon has sole voting and dispositive power over 1,263,000 shares. (7) Based on its Schedule 13D filed January 31, 1997, Dawson-Samberg Capital Management, Inc. ("Dawson-Samberg") has shared voting and dispositive power over 284,040 shares held in managed accounts for which it acts as an investment advisor. Porridge Partners II has sole voting and dispositive power over 63,000 shares. Mr. Arthur Samberg has sole voting and dispositive power over 105,945 shares. (8) Based on its Schedule 13D filed August 20, 1997, Ardent Research Partners, L.P. has sole voting and dispositive power over 450,000 shares. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Mr. Lieberman, a former director of the Company, was paid an aggregate of $4,000 during fiscal 1997 for consulting services. Mr. Fiedler, the Company's Chairman and Chief Executive Officer, loaned the Company $250,000 in June 1997. The principal amount of the loan was converted to common stock in conjunction with Mr. Fiedler's purchase of Company common stock pursuant to the Regulation D private placement in July 1997 (see Note 15 to the Consolidated Financial Statements.) Mr. Latham, the Company's President and Chief Operating officer, loaned the Company $98,000 subsequent to March 31, 1997. This loan was repaid in July 1997. Mr. Portner, a Director, purchased Company common stock pursuant to the Regulation D private placement (see Note 15 to the Consolidated Financial Statements). 74 On November 11, 1996 the Company loaned $300,000 to each of Messrs. Fiedler and Latham. Messrs. Fiedler and Latham both executed unsecured Promissory Notes due November 1, 1999 which provide interest at 6.07% per annum compounded on the anniversary date and payable on November 1, 1999. In addition, each person agreed to surrender previously awarded options they each held to purchase 150,000 shares of the Company's common stock. The largest amount outstanding to the Company under each promissory note during the fiscal year ended March 31, 1997 was $300,000. The Promissory Notes provide for full repayment prior to November 1, 1999 in the event of the following: (a) upon any transfer of Messrs. Fiedler's or Latham's Class B Units in Sattel (other than to a Permitted Transferee, as defined in the Agreement Regarding Award of Class B Units (the "Award Agreement")), or by any such Permitted Transferee (including without limitation certain transfers contemplated by the Award Agreement) or (b) upon any exchange or conversion of Class B Units for or into securities registered under the Securities Exchange Act of 1934, as amended, in accordance with the Award Agreement. In connection with the employment agreements with Messrs. Fiedler and Latham entered into on September 4, 1997, the Company's Board of Directors agreed to forgive the notes. Under the employment agreements, equal one third portions of the notes will be forgiven at September 4, 1997 and, if their respective employments are renewed, at each of the next two anniversaries of the date of the employment agreements, provided that each individual remains as an employee of the Company at each such forgiveness date. 75 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Form 10-K (a) Financial Statements and Financial Statement Schedules Page Number (1) The following consolidated financial statements of The Diana Corporation and its subsidiaries are included in Item 8: Report of Price Waterhouse LLP, Independent Accountants 31 Report of Ernst & Young LLP, Independent Auditors 32 Consolidated Balance Sheets - March 31, 1997 and March 30, 1996 33 Consolidated Statements of Operations - Fiscal Years Ended March 31, 1997, March 30, 1996 and April 1, 1995 34 Consolidated Statements of Changes in Shareholders' Equity - Fiscal Years Ended March 31, 1997, March 30, 1996 and April 1, 1995 35 Consolidated Statements of Cash Flows - Fiscal Years Ended March 31, 1997, March 30, 1996 and April 1, 1995 36 Notes to Consolidated Financial Statements 37 (2) The following consolidated financial statement schedules of The Diana Corporation are included in Item 14(d): Schedule I - Condensed Financial Information of Registrant 82 Schedule II - Valuation and Qualifying Accounts 86 All other schedules are omitted because the required information is not present or is not present in amounts sufficient to require submission of the schedules or because the information required is included in the consolidated financial statements or the notes thereto. (b) Reports on Form 8-K: During the last quarter of fiscal 1997, the Company filed (1) a Form 8-K on February 5, 1997 announcing the completion of the sale of assets of APC to Colorado Boxed Beef Company; (2) a Form 8-K on March 3, 1997 providing the required information pursuant to Item 2 regarding the sale of assets of APC; (3) a Form 8-K on March 3, 1997 filing various exhibits and (4) a Form 8-K on March 13, 1997 changing the Company's fiscal year to a twelve month period ending March 31. 76 (c) Exhibits Exhibit Number Description - ------- ----------- 3.1 Restated Certificate of Incorporation, as amended September 1, 1992 (incorporated herein by reference to Exhibit 3.1 of Registrant's Form 10-K for the year ended April 3, 1993). 3.2 By-Laws of Registrant, as amended March 7, 1997. 4.1 Loan and Security Agreement between C&L Communications, Inc. and Sanwa Business Credit dated January 2, 1996 (incorporated herein by reference to Exhibit 10.1 of Registrant's Registration Statement on Form S-3 Reg. No. 333-1055). 4.2 First Amendment to Loan and Security Agreement and Waiver Agreement between C&L Communications, Inc. and Sanwa Business Credit Corporation dated June 27, 1996 (incorporated herein by reference to Exhibit 4.2 of Registrant's Form 10-K/A for the year ended March 30, 1996). 4.3 Loan and Security Agreement by and between Valley Communications, Inc. and Sanwa Business Credit Corporation dated March 14, 1996 (incorporated herein by reference to Exhibit 4.1 of Registrant's Form 10-Q for the period ended July 20, 1996). 4.4 Certain other long-term debt as described in Note 5 of Notes to Consolidated Financial Statements. The Registrant agrees to furnish to the Commission, upon request, copies of any instruments defining the rights of holders of any such long-term debt. 4.5 Second Amendment to Loan and Security Agreement and Waiver Agreement between C&L Communications, Inc. and Sanwa Business Credit Corporation dated July 10, 1997. 4.6 First Amendment to Loan and Security Agreement by and between Valley Communications, Inc. and Sanwa Business Credit Corporation dated May 29, 1997. 4.7 Form of Subscription Agreement (incorporated herein by reference to Exhibit 4.1 of Registrant's Form 8-K filed on July 31, 1997). 4.8 Form of Note (incorporated herein by reference to Exhibit 4.2 of Registrant's Form 8-K filed on July 31, 1997). 4.9 Form of Registration Rights Agreement (incorporated herein by reference to Exhibit 4.3 of Registrant's Form 8-K filed on July 31, 1997). 4.10 Form of Offshore Warrant Subscription Agreement (incorporated herein by reference to Exhibit 4.4 of Registrant's Form 8-K filed on July 31, 1997). __________________________________________________________________________ * Represents a management contract or compensatory plan, contract or arrangement in which a director or named executive officer of the Company participated. 77 Exhibit Number Description - ------- ----------- 4.11 Waiver of Events of Default for Sanwa Business Credit Corporation to C&L Communications, Inc. dated September 1, 1997. 4.12 Second Amendment to Loan and Security Agreement by and between Valley Communications, Inc. and Sanwa Business Credit Corporation dated September 16, 1997. 4.13 Stock and Warrant Purchase Agreement dated June 6, 1997 by and between The Diana Corporation and James J. Fiedler. 4.14 Warrant issued to James J. Fiedler dated June 6, 1997 to purchase shares of common stock of The Diana Corporation. 4.15 Registration Rights Agreement dated June 6, 1997 by and among The Diana Corporation and James J. Fiedler. 10.1 Consulting Agreement dated December 23, 1991 and ending December 23, 1996 between C&L Acquisition Corporation and Jack E. Donnelly (incorporated herein by reference to Exhibit 10.11 of Registrant's Form 10-K for the year ended April 3, 1993).* 10.2 Amendment to Consulting Agreement between C&L Acquisition Corporation and Jack E. Donnelly dated March 7, 1995 (incorporated herein by reference to Exhibit 10.7 of Registrant's Form 10-K for the year ended April 1, 1995).* 10.3 1986 Nonqualified Stock Option Plan of as amended (incorporated herein by reference to Exhibit 10.13 of Registrant's Form 10-K for the year ended April 3, 1993).* 10.4 1993 Nonqualified Stock Option Plan of Entree Corporation (incorporated herein by reference to Exhibit 10.12 of Registrant's Form 10-K for the year ended April 2, 1994).* 10.5 Purchase Agreement dated August 14, 1995 by and between C&L Acquisition Corporation and Henry Mutz, Chris O'Connor and Ken Hurst (incorporated herein by reference to Exhibit 2.1 of Registrant's Form 8-K/A filed February 1, 1996). 10.6 First Amendment to Purchase Agreement dated November 20, 1995 by and between C&L Acquisition Corporation and Henry Mutz, Chris O'Connor and Ken Hurst (incorporated herein by reference to Exhibit 2.2 of Registrant's Form 8-K/A filed February 1, 1996). 10.7 Exchange Agreement dated January 16, 1996 by and among The Diana Corporation and Sattel Technologies, Inc. (incorporated herein by reference to Exhibit 10.2 of Registrant's Registration Statement on Form S-3 Reg. No. 333-1055). ___________________________________________________________________________ * Represents a management contract or compensatory plan, contract or arrangement in which a director or named executive officer of the Company participated. 78 Exhibit Number Description - ------- ----------- 10.8 1996 Sattel Communications LLC Employees Nonqualified Stock Option Plan (incorporated herein by reference to Exhibit 10.13 of Registrant's Form 10-K for the year ended March 30, 1996). 10.9 Memorandum of Understanding between The Diana Corporation, Sattel Communications Corp. and Sattel Technologies, Inc. dated May 3, 1996 (incorporated herein by reference to Exhibit 10.15 of Registrant's Form 10-K for the year ended March 30, 1996). 10.10 Second Supplemental Agreement Relating to Joint Venture and Exchange Agreement Reformation between The Diana Corporation, Sattel Technologies, Inc. and D.O.N. Communications Corp. dated May 3, 1996 (incorporated herein by reference to Exhibit 10.16 of Registrant's Form 10-K for the year ended March 30, 1996). 10.11 Third Supplemental Agreement Relating to Joint Venture between The Diana Corporation and Sattel Technologies, Inc. dated October 14, 1996 (incorporated herein by reference to Exhibit 10.3 of Registrant's Amendment No. 2 to Form S-3 filed October 21, 1996). 10.12 Operating Agreement of Sattel Communications, LLC (incorporated herein by reference to Exhibit 10.17 of Registrant's Form 10-K/A for the year ended March 30, 1996). 10.13 Amendment to the Operating Agreement of Sattel Communications LLC (incorporated herein by reference to Exhibit 10.18 of Registrant's Form 10-K/A for the year ended March 30, 1996). 10.14 Second Amendment to the Operating Agreement of Sattel Communications LLC (incorporated herein by reference to Exhibit 10.19 of Registrant's Form 10-K/A for the year ended March 30, 1996). 10.15 Asset Purchase Agreement dated January 31, 1997 by and among Atlanta Provision Company, Inc. and Colorado Boxed Beef Company (incorporated herein by reference to Exhibit 10.1 of Registrant's Form 8-K filed March 3, 1997). 10.16 Agreement Regarding Class A Units dated October 2, 1996 by and between Sydney B. Lilly and Sattel Communications LLC (incorporated herein by reference to Exhibit 10.2 of Registrant's Form 8-K filed March 3, 1997). 10.17 Amended and Restated Agreement Regarding Award of Class B Units dated November 11, 1996 by and between James J. Fiedler and Sattel Communications LLC (incorporated herein by reference to Exhibit 10.3 of Registrant's Form 8-K filed March 3, 1997).* ___________________________________________________________________________ * Represents a management contract or compensatory plan, contract or arrangement in which a director or named executive officer of the Company participated. 79 Exhibit Number Description - ------- ----------- 10.18 Amended and Restated Agreement Regarding Award of Class B Units dated November 11, 1996 by and between Daniel W. Latham and Sattel Communications LLC (incorporated herein by reference to Exhibit 10.4 of Registrant's Form 8-K filed March 3, 1997).* 10.19 Amendment to Stock Option Agreements dated November 20, 1996 by and between The Diana Corporation and Richard Y. Fisher (incorporated herein by reference to Exhibit 10.5 of Registrant's Form 8-K filed March 3, 1997).* 10.20 Separation Agreement dated November 20, 1996 by and between The Diana Corporation and Richard Y. Fisher (incorporated herein by reference to Exhibit 10.6 of Registrant's Form 8-K filed March 3, 1997). 10.21 Amendment to Stock Option Agreements dated November 20, 1996 by and between The Diana Corporation and Sydney B. Lilly (incorporated herein by reference to Exhibit 10.7 of Registrant's Form 8-K filed March 3, 1997).* 10.22 Separation Agreement dated November 20, 1996 by and between The Diana Corporation and Sydney B. Lilly (incorporated herein by reference to Exhibit 10.8 of Registrant's Form 8-K filed March 3, 1997).* 10.23 Amendment to Stock Option Agreements dated November 20, 1996 by and between The Diana Corporation and Donald E. Runge (incorporated herein by reference to Exhibit 10.9 of Registrant's Form 8-K filed March 3, 1997). 10.24 Separation Agreement dated November 20, 1996 by and between The Diana Corporation and Donald E. Runge (incorporated herein by reference to Exhibit 10.10 of Registrant's Form 8-K filed March 3, 1997). 10.25 Employment Agreement dated November 27, 1996 by and between The Diana Corporation and R. Scott Miswald (incorporated herein by reference to Exhibit 10.11 of Registrant's Form 8-K filed March 3, 1997).* 10.26 Form of Indemnification Agreement dated November 26, 1996 or November 27, 1996 between The Diana Corporation and (i) Bruce C. Borchardt, (ii) Jack E. Donnelly, (iii) James J. Fiedler, (iv) Jay M. Lieberman and (v) R. Scott Miswald (incorporated herein by reference to Exhibit 10.12 of Registrant's Form 8-K filed March 3, 1997).* 10.27 Loan Agreement and Promissory Note dated November 11, 1996 by and between The Diana Corporation and James J. Fiedler (incorporated herein by reference to Exhibit 10.13 of Registrant's Form 8-K filed March 3, 1997).* ___________________________________________________________________________ * Represents a management contract or compensatory plan, contract or arrangement in which a director or named executive officer of the Company participated. 80 Exhibit Number Description - ------- ----------- 10.28 Loan Agreement and Promissory Note dated November 11, 1996 by and between The Diana Corporation and Daniel W. Latham (incorporated herein by reference to Exhibit 10.14 of Registrant's Form 8-K filed March 3, 1997).* 10.29 Employment Agreement dated September 4, 1997 by and between The Diana Corporation and James J. Fiedler.* 10.30 Employment Agreement dated September 4, 1997 by and between The Diana Corporation and Daniel W. Latham.* 10.31 Agreement dated November 17, 1995 between Valley Communications, Inc. and Communications Workers of America Local 9412 (incorporated herein by reference to Exhibit 10.1 of Registrant's Form 10-Q for the period ended July 20, 1996). 10.32 Limited Liability Company Agreement of SatLogic LLC dated as of September 12, 1996 (incorporated herein by reference to Exhibit 10.3 of Registrant's Form 10-Q/A for the period ended July 20, 1996). 10.33 Stockholder Protection Rights Agreement dated as of September 10, 1996 between The Diana Corporation and ChaseMellon Shareholder Services, L.L.C. as Rights Agent (incorporated herein by reference to Exhibit 1 of Registrant's Form 8-A filed September 11, 1996). 22 Subsidiaries of Registrant 23 Consent of Independent Auditors 27 Financial Data Schedule ____________________________________________________________________________ * Represents a management contract or compensatory plan, contract or arrangement in which a director or named executive officer of the Company participated. 81 The Diana Corporation and Subsidiaries Schedule I - Condensed Financial Information of Registrant Condensed Balance Sheets (In Thousands) March 31, March 30, 1997 1996 -------- -------- Assets Current assets: Cash and cash equivalents........................ $ 28 $ 3,567 Marketable securities............................ --- 1,213 Other current assets............................. 106 201 ------ ------ Total current assets........................... 134 4,981 Land and equipment (net)........................... 83 158 Investments in and advances to unconsolidated subsidiaries..................................... 19,904 23,336 ------ ------ $20,121 $28,475 ====== ====== Liabilities and Shareholders' Equity Current liabilities: Accounts payable................................. $ 283 $ 177 Accrued liabilities.............................. 513 638 Current portion of long-term debt................ 141 141 ------ ------ Total current liabilities..................... 937 956 Long-term debt..................................... 1,817 1,958 Other liabilities.................................. 533 875 Shareholders' equity: Common stock..................................... 6,007 5,526 Additional paid-in capital....................... 80,124 59,456 Accumulated deficit.............................. (63,540) (34,776) Unrealized loss on marketable securities......... --- (876) Treasury stock................................... (5,757) (4,644) ------ ------ Total shareholders' equity..................... 16,834 24,686 ------ ------ $20,121 $28,475 ====== ====== See notes to condensed financial information and notes to consolidated financial statements. 82 The Diana Corporation and Subsidiaries Schedule I - Condensed Financial Information of Registrant (Continued) Statements of Operations (In Thousands, Except Per Share Amounts) Fiscal Year Ended -------------------------------- March 31, March 30, April 1, 1997 1996 1995 -------- -------- -------- Administrative expenses............... $ (3,410) $(1,809) $(1,621) Interest expense...................... (52) (106) (112) Non-operating income (expense)........ (326) 474 246 Income tax credit..................... 836 --- --- Equity in loss of unconsolidated subsidiaries......................... (9,383) (1,305) (653) ------- ------ ------ Loss from continuing operations....... (12,335) (2,746) (2,140) Earnings (loss) from discontinued operations........................... (8,175) (619) 1,420 ------- ------ ------ Loss before extraordinary items....... (20,510) (3,365) (720) Extraordinary items................... (508) --- --- ------- ------ ------ Net loss.............................. $(21,018) $(3,365) $ (720) ======= ====== ====== Earnings (loss) per common share: Continuing operations................ $ (2.34) $ (.62) $ (.51) Discontinued operations.............. (1.55) (.14) .34 Extraordinary items.................. (.10) --- --- ------- ------ ------ Net loss per common share............ $ (3.99) $ (.76) $ (.17) ======= ====== ====== Weighted average number of common shares outstanding................... 5,271 4,401 4,224 ======= ====== ====== See notes to condensed financial information and notes to combined financial statements. 83 The Diana Corporation and Subsidiaries Schedule I - Condensed Financial Information of Registrant (Continued) Statements of Cash Flows (In Thousands) Fiscal Year Ended ---------------------------- March 31, March 30, April 1, 1997 1996 1995 -------- -------- -------- Operating activities: Loss before extraordinary items.............$(20,510) $(3,365) $ (720) Adjustments to reconcile loss to net cash used by operating activities: Equity in (earnings) loss of unconsolidated subsidiaries.............. 17,558 1,924 (767) Other..................................... (595) (427) 64 Changes in current assets and liabilities. 1,231 115 1,042 ------ ------ ------ Net cash used by operating activities........ (2,316) (1,753) (381) Investing activities: Purchases of marketable securities.......... --- (475) --- Proceeds from sales of marketable securities 1,353 5,380 --- Changes in investments in and advances to unconsolidated subsidiaries................ (15,945) (3,229) 3,475 Other....................................... 100 (25) (11) ------ ------ ------ Net cash provided (used) by investing activities................................. (14,492) 1,651 3,464 Financing activities: Repayments of long-term debt................ (141) (141) (261) Payments toward bond settlements............ --- --- (2,822) Common stock issued......................... 13,918 3,485 --- Extraordinary items......................... (508) --- --- ------ ------ ------ Net cash provided (used) by financing activities.................................. 13,269 3,344 (3,083) ------ ------ ------ Increase (decrease) in cash.................. (3,539) 3,242 --- Increase in cash resulting from merger with subsidiary.................................. --- 325 --- Cash at the beginning of the year............ 3,567 --- --- ------ ------ ------ Cash at the end of the year.................. $ 28 $ 3,567 $ --- ====== ====== ====== Supplemental information: Interest paid............................... $ --- $ --- $ 11 Non-cash transactions: Purchase of minority interest with common stock...................................... 1,818 4,944 1,895 Reduction of net liabilities of unconsolidated subsidiary.................. --- 219 --- See notes to condensed financial information and notes to consolidated financial statements. 84 The Diana Corporation and Subsidiaries Schedule I - Condensed Financial Information of Registrant (Continued) Notes to Condensed Financial Information NOTE 1 - BASIS OF PRESENTATION The condensed financial information of the includes the accounts of the parent company. In fiscal 1996, the parent's wholly-owned subsidiary, D.O.N., Incorporated was merged into the parent. Substantially all investments in and advances to unconsolidated subsidiaries are eliminated in the consolidated financial statements. In fiscal 1997 and 1996, other income includes interest income of $69,000 and $193,000, respectively, that is eliminated in the consolidated financial statements. Intercompany profits between related parties are eliminated in these financial statements. NOTE 2 - LONG-TERM OBLIGATIONS Annual amounts due on long-term obligations (debentures issued in January 1992) for the five years subsequent to March 31, 1997 are (in thousands): 1998 $ 141 1999 141 2000 141 2001 141 2002 1,394 ----- $1,958 ===== NOTE 3 - COMMITMENTS AND CONTINGENCIES The Company leases its former corporate office space located in Milwaukee, Wisconsin under a noncancelable lease with a rental commitment of $36,000 in fiscal 1998. The Company has guaranteed certain obligations of APC to Colorado, pursuant to the Asset Purchase Agreement dated January 31, 1997 between APC and Colorado, and the Lease dated January 31, 1997 between APC and Colorado. 85 The Diana Corporation and Subsidiaries Schedule II - Valuation and Qualifying Accounts Fiscal Year Ended ------------------------------ March 31, March 30, April 1, 1997 1996 1995 ------- ------- -------- (In Thousands) Inventories - allowance for obsolescence and loss: Balance at beginning of year....... $ --- $ --- $ --- Additions charged to expense....... 1,400 --- --- ----- ----- ----- Balance at end of year............. $1,400 --- --- ===== ===== ===== Allowance for net unrealized losses on current marketable securities: Balance at beginning of year........ $ 876 $ 713 $ 412 Charge (credit) against shareholders' equity.............. (876) 163 301 ----- ----- ----- Balance at end of year.............. $ --- $ 876 $ 713 ===== ===== ===== 86 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized this 22nd day of September, 1997. The Diana Corporation By /s/ James J. Fiedler James J. Fiedler, Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the and in the capacities and on the dates indicated. Signature Title Date /s/ James J. Fiedler Chairman of the Board and James J. Fiedler Chief Executive Officer (Principal Executive Officer) /s/ Brian A. Robson Vice President, Controller Brian A. Robson and Secretary (Principal Financial and Accounting Officer) /s/ Jack E. Donnelly Director September 22, 1997 Jack E. Donnelly /s/ Daniel W. Latham Director, President and Daniel W. Latham Chief Operating Officer Director Sydney B. Lilly Director Stephen W. Portner 87 EX-3.2 2 BY LAWS OF THE DIANA CORPORATION ARTICLE I Offices SECTION 1. REGISTERED OFFICE. The registered office shall be in the City of Wilmington, County of New Castle, State of Delaware. SECTION 2. OTHER OFFICES. The corporation may also have offices at such other places both within and without the State of Delaware as the board of directors may from time to time determine or the business of the corporation may require. ARTICLE II Meetings of Stockholders SECTION 1. PLACE OF MEETINGS. Meetings of stockholders for any purpose may be held at such place, within or without the State of Delaware, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. SECTION 2. ANNUAL MEETING. The board of directors may fix the date, time and place of the annual meeting of stockholders, but if no such date, time and place is fixed by the board of directors for any calendar year, the annual meeting for such calendar year, commencing with the year 1980, shall be held at the executive offices of the corporation on the fourth Tuesday in June if not a legal holiday, and if a legal holiday, then on the next business day following at 10:00 a.m., local time. At each annual meeting the stockholders shall elect directors and transact such other business as may properly be brought before the meeting. (Amended January 22, 1980) SECTION 3. SPECIAL MEETINGS. Special meetings of the stockholders, for any purpose or purposes, unless prescribed by statute, may be called by the Chairman of the Board, the Secretary, or the Board of Directors. (Amended April 11, 1988) SECTION 4. WRITTEN NOTICE. Written notice of the annual meeting and each special meeting of stockholders stating the place, date and hour of the meeting, and in the case of a special meeting stating the purpose or purposes for which the special meeting is called, shall be given to each stockholder entitled to vote at such meeting not less than ten nor more than sixty days before the date of the meeting. Whenever the language of a proposed resolution is included in a written notice of a meeting of stockholders the resolution may be adopted at such meeting with such clarifying or other amendments as do not enlarge its original purpose without 1 further notice to stockholders not present in person or by proxy at such meeting. SECTION 5. LIMITATION ON BUSINESS TRANSACTED. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. SECTION 6. VOTING LIST. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. SECTION 7. QUORUM. The holders of issued and outstanding stock entitled to cast a majority of the total number of votes which may be cast thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders except as otherwise provided by statute or by the Certificate of Incorporation. Treasury shares shall not be counted in determining the total number of outstanding shares for voting purposes at any given time. If, however, such quorum shall not be so present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be so present or represented. At such adjourned meetings at which a quorum shall be present in person or represented by proxy, any business may be transacted which might have been transacted at the original meeting. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. SECTION 8. MAJORITY CONTROL. When a quorum is present at any meeting, the vote of the holders of stock having a majority of the voting power present in person or represented by proxy at such meeting shall decide any question brought before such meeting, unless the question is one upon which, by express provision of the statutes or of the Certificate of Incorporation, a different vote is required, in which case such express provision shall govern and control the decision of such question. 2 SECTION 9. VOTING POWER. Every stockholder of record, except a holder of stock which has been called for redemption and with respect to which an irrevocable deposit of funds has been made, shall have the right, at every stockholders' meeting, to such a vote for every share, and to such a fraction of a vote with respect to every fractional share, of stock of the corporation registered in his name on the books of the corporation as may be provided in the Certificate of Incorporation, and to one vote for every share, and to a fraction of a vote equal to every fractional share, of stock of the corporation registered in his name on the books of the corporation if no express provision for voting rights is made in the Certificate of Incorporation. Treasury stock shall not be voted, directly or indirectly, at any meeting of stockholders or be counted in connection with the expression of consent or dissent to corporate action in writing without a meeting. SECTION 10. PROXIES. Every stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by proxy. Every proxy shall be executed in writing by the stockholder or by his duly authorized attorney in fact and filed with the Secretary of the corporation. A proxy, unless coupled with an interest sufficient in law to support an irrevocable power and stated to be irrevocable, shall be revocable at will, notwithstanding any other agreement or any provision in the proxy to the contrary, but the revocation of a proxy shall not be effective until notice thereof has been given to the Secretary of the corporation. No unrevoked proxy shall be valid after three years from the date of its execution, unless a longer time is expressly provided therein. A proxy shall not be revoked by the death of incapacity of the maker unless, before the vote is counted or the authority is exercised, written notice of such death or incapacity is given to the Secretary of the corporation. SECTION 11. ACTION WITHOUT A MEETING. Unless otherwise provided in the Certificate of Incorporation, any action required to be taken at any annual or special meeting of stockholders of the corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of corporate action without a meeting by less than unanimous written consent of stockholders shall be given to those stockholders who have not consented thereto in writing. 3 ARTICLE III DIRECTORS SECTION 1. GENERAL POWERS AND NUMBER The business and affairs of the Company shall be managed by its Board of Directors. The directors shall be divided into 3 classes; the term of office of the directors of the 1st class to expire at the Annual Meeting of Shareholders to be held in 1988; that of the 2nd class to expire at the Annual Meeting of Shareholders to be held in 1989; and that of the 3rd class to expire at the Annual Meeting of Shareholders to be held in 1990. At each annual meeting starting in 1988, the number of directors equal to the number of the class whose term expires at the time of such meeting shall be elected to hold office until the 3rd succeeding annual meeting. The number of directors of the Company shall be seven (Amended September 27, 1991). This number of directors may be changed only by the affirmative vote of (i) the holders of at lease 75% of the shares of the corporation entitled to vote on such change, or (ii) a majority of the directors in office at the time of the vote. When the number of directors is changed, any increase or decrease in directorships shall be apportioned among the classes so as to make all classes as nearly equal in number as possible. (Amended April 11, 1988) SECTION 2. VACANCIES A director may be removed from office only for cause, and only by affirmative vote of a majority of the shares entitled to vote for the election of such director, taken at a meeting of shareholders called for that purpose. Except as may otherwise be provided by law, cause for removal shall be construed to exist only if the director whose removal is proposed has been convicted of a felony by a court of competent jurisdiction and such conviction is no longer subject to direct appeal or has been adjudged by a court of competent jurisdiction to be liable for negligence or misconduct in the performance of his duty to the Company in a matter of substantial importance to the Company, and such adjudication is no longer subject to direct appeal. A director may resign at any time by filing his written resignation with the Secretary of the Company. Any vacancy occurring in the Board of Directors, including a vacancy created by an increase in the number of directors, may be filled until the expiration of the term of that class of directors in which the vacancy exists by the affirmative vote of a majority of the directors then in office, though less than a quorum of the Board of Directors. All nominations for election to the Board of Directors, including any nomination to fill a vacancy (whether created by an increase in the number of directors, a resignation of a Director, 4 or otherwise) other than those made by the remaining directors then in office, must be made at a meeting of stockholders called for the election of directors. (Amended April 11, 1988) SECTION 3. [BLANK] (AMENDED APRIL 11, 1988) Meetings of the Board of Directors SECTION 4. PLACE OF MEETINGS. The board of directors may hold meetings, both regular and special, either within or without the State of Delaware. SECTION 5. ANNUAL MEETING. The first meeting of each newly elected board of directors shall be held in the same place as the annual meeting of stockholders immediately following such meeting and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event such meeting is not held at such time and place, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the board of directors, or as shall be specified in a written waiver signed by all of the directors. SECTION 6. REGULAR MEETINGS WITHOUT NOTICE. Regular meetings of the board of directors may be held without notice at such date, time and place as shall from time to time be determined by resolution of the board. SECTION 7. SPECIAL MEETINGS. Special meetings of the board of directors may be called by the Chief Executive Officer or the Secretary, and shall be called by the Chief Executive Officer or the Secretary upon the written request of any two or more directors. Notice of the date, time and place of such meetings shall be served upon or telephoned to each director at least 24 hours, or mailed (postage prepaid) or telegraphed, cable or telexed (charges prepaid) to each director at his address as shown on the books of the corporation at least 48 hours prior to the time of the meeting. SECTION 8. QUORUM. At all meetings of the board a majority of the total number of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically provided by statute or by the Certificate of Incorporation. If a quorum shall not be present at any meeting of the board of directors, the directors present thereat may adjourn the meeting 5 from time to time, without notice other than announcement at the meeting, until a quorum shall be present. SECTION 9. ACTION WITHOUT A MEETING. Unless otherwise restricted by the Certificate of Incorporation or these By-Laws: (a) Unanimous Consent. Any action required or permitted to be taken at any meeting of the board of directors or of any committee thereof may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes or proceedings of the board or committee. (b) Telephone Conferences. Members of the board of directors or any committee designated by the board, may participate in a meeting of the board or committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this subsection shall constitute presence in person at such meeting. Committees of the Board of Directors SECTION 10. EXECUTIVE COMMITTEE. The board of directors may, by resolution passed by a majority of the whole board, designate an Executive Committee consisting of the Chief Executive Officer and not less than three other directors which, during intervals between meetings of the board of directors, shall have and may exercise all of the powers of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; provided, however, that the Executive Committee shall have no power or authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property or assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the By-Laws of the corporation, or to declare a dividend, authorize the issuance of stock or fill vacancies on the board of directors. The board of directors may also designate one or more directors as alternate members of the Executive Committee who may replace any absent or disqualified member at any meeting of the Executive Committee. The board of directors may, at any time, by resolution passed by a majority of the whole board, limit the exercise of the foregoing powers by the Executive Committee, or suspend the operations of the Executive Committee. Three members shall constitute a quorum for the transaction of business. The Chief Executive Officer shall act as chairman of the Executive Committee, shall preside at all meetings of the Executive 6 Committee and shall appoint one person (who need not be a member) to act as secretary at each meeting of the Executive Committee. In the absence of the Chief Executive Officer, or in the event of his disability or refusal to act, such other member of the Executive Committee as the Executive Committee or the board of directors shall designate shall preside at meetings of the Executive Committee. Meetings of the Executive Committee may be called by the Chief Executive Officer or any two members of the Executive Committee. Notice of any meeting of the Executive Committee shall be sufficient if given in the same manner as notice of a special meeting of the board of directors. The Executive Committee shall keep regular minutes of its meetings. The acting secretary of each meeting of the Executive Committee shall furnish to the Secretary of the corporation (when not the same person) a true and correct copy of the proceedings of such meeting and the Secretary of the corporation shall thereupon record such proceedings in the minute book of the corporation. SECTION 11. OTHER COMMITTEES OF DIRECTORS. In addition to the Executive Committee, the board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, each committee to consist of two or more of the directors of the corporation, except that the Audit Committee may consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Any such committee, to the extent provided in the resolution, shall have and may exercise the powers of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power of authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation, or a revocation of a dissolution, or amending the By-Laws, of the corporation; and, unless the resolution, By-Laws, or Certificate of Incorporation expressly so provide, no such committee shall have power of authority to declare a dividend or to authorize the issuance of stock or to fill vacancies on the board of directors. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the board of directors. Unless otherwise provided by the board of directors, a majority of the members of any committee appointed by the board of directors pursuant to this Section shall constitute a quorum at any meeting thereof and the act of a majority of the members present at a meeting at which a quorum is present shall be the act of such committee. Any such committee shall, subject to any rules 7 prescribed by the board of directors, prescribe its own rules for calling, giving notice of and holding meetings and its method of procedure at such meetings. (Amended June 23, 1981). SECTION 12. RECORD OF PROCEEDINGS. Each committee shall keep regular written minutes of its meetings and actions taken by it and report the same to the board of directors when required. Directors Fees SECTION 13. FEES. Each director and member of a committee of directors shall be paid such reasonable fee, if any, as shall be fixed by the board of directors for each meeting of the board of directors or committee of directors which he shall attend and may be paid such other compensation for his services as a director or member as may be fixed by the board of directors. No such payment shall preclude any director or member from serving the corporation in any other capacity and receiving compensation therefor. ARTICLE IV Notices SECTION 1. FORM OF NOTICES. Whenever, under the provisions of the statutes or of the Certificate of Incorporation or of these By-Laws, notice is required to be given to any director, any member of a committee of directors or any stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director, member or stockholder, at his address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to any director or any member of a committee of directors may also be given by telex, cable or telegram and such notice shall be deemed to be given when delivered to the telegraph company or transmitted by the teletype as the case may be. SECTION 2. WAIVER OF NOTICE. Whenever any notice is required to be given under the provisions of the statutes or of the Certificate of Incorporation or of these By-Laws, a written waiver thereof, signed by the person or persons entitled to notice, whether before or after the time stated therein, shall be deemed equivalent thereto. Neither the business to be transacted at, nor the purpose of, any regular of special meeting of the stockholders, directors or members of a committee of directors need be specified in the waiver of notice unless so required by the Certificate of Incorporation. Attendance of a person at any meeting shall constitute a waiver of notice of such meeting, except where a person attends a 8 meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting was not lawfully called or convened. ARTICLE V Officers SECTION 1. NUMBER. The officers of the corporation, except those elected by delegated authority pursuant to Section 3 of this Article, shall be chosen by the board of directors and shall include a Chief Executive Officer, a Chairman of the Board, a President, one or more Vice Presidents, a Secretary and a Treasurer. The board of directors may also choose a Vice Chairman of the Board, a Chief Financial Officer, one or more Executive Vice Presidents, one or more Senior Vice Presidents, a Controller and one or more Assistant Secretaries, Assistant Treasurers and Assistant Controllers. Any number of offices may be held by the same person, unless the Certificate of Incorporation or these By-Laws otherwise provided. SECTION 2. ELECTION AND TERM OF OFFICE. The board of directors at its first meeting after each annual meeting of stockholders shall choose a Chief Executive Officer and a Chairman of the Board from among the directors, and shall choose a President, one or more Vice Presidents, a Secretary and a Treasurer, none of whom need be a member of the board. The officers of the corporation, except those elected by delegated authority pursuant to Section 3 of this Article, shall be elected annually by the board of directors, and each such officer shall hold his office until his successor shall have been elected and qualified, or until his earlier death, resignation, or removal. SECTION 3. SUBORDINATE OFFICERS, COMMITTEES AND AGENTS. The board of directors may from time to time elect such other officers and appoint such committees, employees or other agents as it shall deem necessary or appropriate, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these By-Laws, or as the board of directors may from time to time determine. The board of directors may delegate to any officer or committee the power to elect subordinate officers and to retain or appoint employees or other agents, or committees thereof, and to prescribe the authority and duties of such subordinate officers, committees, employees or other agents. SECTION 4. SALARIES. The salaries of all officers, employees and agents of the corporation who are elected or appointed by the board of directors shall be fixed from time to time by the board of directors or by such officer or committee as may be designated by the board of directors. The salaries or other compensation of any other officers, employees and other agents shall be fixed from time to time by the officer or committee to which the power to elect 9 such officers or to retain or appoint such employees or other agents has been delegated pursuant to Section 3 of this Article. No officer shall be prevented from receiving such salary or other compensation by reason of the fact that he is also a director of the corporation. SECTION 5. RESIGNATIONS. Any officer or agent may resign at any time by giving written notice to the board of directors, or to the Chief Executive Officer or the Secretary of the corporation. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 6. REMOVAL. Any officer, committee, employee or other agent of the corporation may be removed, either for or without cause, by the board of directors or by the officer or committee which elected or appointed such officer, committee or other agent whenever in the judgment of the board or of such officer or committee the best interests of the corporation will be served thereby. SECTION 7. VACANCIES. Any vacancy occurring in any office of the corporation because of death, resignation, removal, disqualification, or any other cause, shall be filled by the board of directors or by the officer or committee to which the power to fill such office has been delegated pursuant to Section 3 of this Article, as the case may be, and if the office is one for which these By-Laws prescribe a term, shall be filled for the unexpired portion of the term. SECTION 8. GENERAL POWERS. All officers of the corporation as between themselves and the corporation, shall, respectively, have such authority and perform such duties in the management of the property and affairs of the corporation as may be determined by resolution of the board of directors, or in the absence of controlling provisions in a resolution of the board of directors, as may be provided in these By-Laws. SECTION 9. EXECUTION OF DOCUMENTS. The Chief Executive Officer, the Chairman of the Board, the Vice Chairman of the Board and the President shall each have the power and authority to sign and execute, in the name of the corporation, bonds, mortgages and other contracts and instruments, under the seal of the corporation or otherwise, except in cases where the signing and execution thereof shall be expressly delegated by the board of directors or these By-Laws to some other officer, employee or agent of the corporation. SECTION 10. CHAIRMAN OF THE BOARD. The Chairman of the Board shall preside at all meetings of the board of directors and stockholders and, in the absence of the President or in the event 10 of his inability or refusal to act, shall perform the duties and exercise the powers of the President. The Chairman of the Board shall also perform such other duties and have such other powers as the board of directors may from time to time prescribe. SECTION 11. VICE CHAIRMAN OF THE BOARD. The Vice Chairman of the Board shall, in the absence of the Chairman of the Board or in the event of his inability or refusal to act, perform the duties and exercise the powers of the Chairman of the Board, and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. SECTION 12. PRESIDENT. The President shall be an executive officer of the corporation and, in the absence of the Vice Chairman of the Board or in the event of his inability or refusal to act, shall perform the duties and exercise the powers of the Vice Chairman of the Board. The President shall also perform such other duties and exercise such other powers as the board of directors may from time to time prescribe. SECTION 13. CHIEF EXECUTIVE OFFICER. Either the Chairman of the Board, the Vice Chairman of the Board or the President may be the Chief Executive Officer of the corporation, and the board of directors shall from time to time designate which of such officers shall be the Chief Executive Officer. The Chief Executive Officer shall have general and active management control of the business of the corporation, shall see that all orders and resolutions of the board of directors are carried into effect and shall have general supervision and direction of all other officers of the corporation. The Chief Executive Officer shall also perform such other duties and have such other powers as the board of directors may from time to time prescribe. In the event of the absence of the Chief Executive Officer or of his inability or refusal to act, the Chairman of the Board or the Vice Chairman of the Board or the President (whoever does not hold the office of Chief Executive Officer), in the order designated by the board of directors, shall perform the duties and exercise the powers of the Chief Executive Officer. SECTION 14. EXECUTIVE VICE PRESIDENTS, SENIOR VICE PRESIDENTS AND VICE PRESIDENTS. The Executive Vice Presidents, Senior Vice Presidents and Vice Presidents shall perform such duties and have such other powers as the board of directors of the Chief Executive Officer may from time to time prescribe. SECTION 15. SECRETARY. The Secretary shall attend all meetings of the board of directors and all meetings of the stockholders, record all the proceedings of all such meetings in a book to be kept for that purpose and shall perform like duties for the standing committees when requested. He shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the board of directors, and shall perform such other 11 duties and have such other powers as the board of directors or the Chief Executive Officer may from time to time prescribe. He shall have custody of the corporate seal of the corporation and he, or an Assistant Secretary, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by his signature of such Assistant Secretary. The board of directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by his signature. SECTION 16. ASSISTANT SECRETARIES. In the absence of the Secretary or in the event of his inability or refusal to act, the Assistant Secretary (or in the event there be more than one, the Assistant Secretaries in the order designated by the board of directors, or in the absence of any designation, then in the order of their election) shall perform the duties and exercise the powers of the Secretary. The Assistant Secretaries shall also perform such other duties and exercise such other powers as the board of directors or the Chief Executive Officer may from time to time prescribe. SECTION 17. CHIEF FINANCIAL OFFICER. The Chief Financial Officer of the corporation shall, under the direction and supervision of the Chief Executive Officer, supervise and manage the financial affairs of the corporation. He shall have direct supervision and direction of all other officers, employees and agents of the corporation who are involved primarily in the conduct of the financial affairs of the corporation. He shall also perform such other duties and have such other powers as the board of directors or the Chief Executive Officer may from time to time prescribe. SECTION 18. TREASURER. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the board of directors, the Chief Executive Officer or the Chief Financial Officer. The Treasurer shall render to the Chief Executive Officer, the Chief Financial Officer and the board of directors, at its regular meetings, or otherwise when the board of directors so requests, an account of all his transactions as Treasurer and of the financial condition of the corporation. The Treasurer shall also perform such other duties and have such other powers as the board of directors, the Chief Executive Officer or the Chief Financial Officer may from time to time prescribe. SECTION 19. ASSISTANT TREASURERS. In the absence of the Treasurer or in the event of his inability or refusal to act, the Assistant Treasurer (or in the event there be more than one, the Assistant Treasurers in the order designated by the board of 12 directors, or in the absence of any designation, then in the order of their election) shall exercise the powers and perform the duties of the Treasurer. The Assistant Treasurers shall also perform such other duties and exercise such other powers as the board of directors, the Chief Executive Officer or the Chief Financial Officer may from time to time prescribe. SECTION 20. PERFORMANCE BOND OF TREASURER AND ASSISTANT TREASURERS. If required by the board of directors, the Treasurer and each Assistant Treasurer shall give the corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the board of directors for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation. SECTION 21. CONTROLLER. The Controller shall plan and direct corporate accounting and control policies and procedures and shall disburse the funds of the corporation as may be ordered by the board of directors, taking proper vouchers for such disbursements, and shall render to the Chief Executive Officer, the Chief Financial Officer, the Treasurer and the board of directors, at its regular meetings, or otherwise when the board of directors so requests, an account of all his transactions as Controller and of the financial condition of the corporation. SECTION 22. ASSISTANT CONTROLLERS. In the absence of the Controller or in the event of his inability or refusal to act, the Assistant Controller (or in the event there be more than one, the Assistant Controllers in the order designated by the board of directors, or in the absence of any designation, then in the order of their election) shall perform the duties and exercise the powers of the Controller. The Assistant Controllers shall also perform such other duties and have such other powers as the board of directors, the Chief Executive Officer and the Chief Financial Officer may from time to time prescribe. ARTICLE VI Certificate of Stock SECTION 1. CERTIFICATES. Every holder of stock in the corporation shall be entitled to have a certificate, signed by, or in the name of the corporation by the Chairman of the Board, the Vice Chairman of the Board, the President or an Executive, Senior or other Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the corporation, certifying the number of shares owned by such holder in the corporation. 13 SECTION 2. CLASSES OF STOCK - DESIGNATION. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other rights, if any, of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in the General Corporation Law of Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. SECTION 3. FACSIMILE SIGNATURES. When a certificate is countersigned (1) by a transfer agent other than the corporation or its employees, or (2) by a registrar other than the corporation or its employees, any other signature on the certificate may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. SECTION 4. TRANSFER OF STOCK. The transfer of shares of stock and certificates representing shares of stock shall be governed by Article 8 of the Uniform Commercial Code as adopted and in effect in the State of Delaware. Whenever any transfer of shares of stock shall be made for collateral security, and not absolutely, if the transferor and transferee request the corporation to do so when the certificates representing the shares are presented for transfer, the fact that the transfer is being made for collateral security shall be expressed in the entry for transfer. SECTION 5. LOST, STOLEN, OR DESTROYED CERTIFICATES. The corporation shall issue a new stock certificate in the place of any certificate previously issued when the holder of record of the certificate: (a) Claim. Makes proof in affidavit form that it has been lost, destroyed, or wrongfully taken; 14 (b) Timely Request. Requests the issuance of a new certificate before the corporation has notice that the certificate has been acquired by a purchaser for value in good faith and without notice of any adverse claim; (c) Bond. Gives a bond in such form, and with such surety or sureties, with fixed or open penalty, as the corporation may direct, to indemnify the corporation, its transfer agents and registrars against any claim that may be made on account of the alleged loss, destruction, or theft or the certificate; and (d) Other Requirements. Satisfies any other reasonable requirements imposed by the corporation. When a certificate has been lost, apparently destroyed, or wrongfully taken and the holder of record fails to notify the corporation within a reasonable time after he has notice of it, and the corporation registers a transfer of the shares represented by such certificate before receiving such notification, the holder of record is precluded from making any claim against the corporation for the transfer or for a new certificate. SECTION 6. FIXING RECORD DATE. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the board of directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. SECTION 7. REGISTERED STOCKHOLDERS. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of stock to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such stock on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. 15 ARTICLE VII General Provisions SECTION 1. FISCAL YEAR. Each fiscal year of the corporation shall end on March 31st of each year. (Amended March 7, 1997) SECTION 2. SEAL. The corporate seal shall have inscribed thereon the name of the corporation, the year of its organization and the words "Corporate Seal, Delaware." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. SECTION 3. AMENDMENTS. These By-Laws may be altered or repealed at any meeting of the stockholders or of the Board of Directors without a meeting as respectively provided in Section 11 of Article II and Section 9 or Article III; provided, however, that Article II, Section 3, and Article III, Sections 1 and 2, and Article VII, Section 3 may be amended or repealed only by an affirmative vote of not less than seventy-five percent (75%) of the shares present or represented at an Annual or Special Meeting of the Stockholders at which a quorum is in attendance. (Amended April 11, 1988) ARTICLE VIII SECTION 1. MISCELLANEOUS. Unless otherwise ordered by the board of directors, the Chief Executive Officer, the Chairman of the Board, the Vice Chairman of the Board, the President, any Executive, Senior or other Vice President, or the Secretary, in person or by proxy or proxies appointed by any of them, shall have full power and authority on behalf of the corporation to vote, act and consent with respect to any shares of stock issued by other corporations which the corporation may own or as to which the corporation otherwise has the right to vote, act or consent. ARTICLE IX Indemnification SECTION 1. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that such person is or was serving as a director or officer of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), 16 judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. SECTION 2. The corporation shall indemnify any person who becomes a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person is or was serving as a director or officer of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, and amounts paid in settlement actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, except in such cases as involve gross negligence or willful misconduct in the performance of his duties. SECTION 3. Expenses incurred by a director, officer, employee or agent of the corporation in defending a civil or criminal action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding as authorized by the board of directors upon receipt of an undertaking by or on behalf of such person to repay such amounts unless it shall ultimately be determined that he is entitled to be indemnified by the corporation as provided in these By-Laws. SECTION 4. The indemnification provided by these By-Laws shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. SECTION 5. The corporation may purchase and maintain insurance on behalf of any person who is or was a director or 17 officer of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and any resulting expenses (including attorneys' fees), judgments, fines and amounts paid in settlement incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to so indemnify him under the provisions of these By-Laws. (Amended August 1, 1982) ARTICLE X Indemnification Saving Clause and Retroactivity SECTION 1. The invalidity or unenforceability of any provision in Article IX, in whole or in part, shall not affect the validity or enforceability of the affected provision to the full extent permitted by law to be enforceable, nor of the remaining provisions of that Article IX. SECTION 2. The indemnification provided in Article IX shall be retroactive in application ab initio of the corporation. (Amended August 1, 1982) 18 EX-4.5 3 SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT THIS SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT (together with all appendices, exhibits, schedules and attachments hereto, collectively this "Amendment") is made and entered into as of July 10, 1997, by and between C&L COMMUNICATIONS, INC., a Texas corporation ("Borrower") and SANWA BUSINESS CREDIT CORPORATION, a Delaware corporation ("Lender"). RECITALS WHEREAS, Borrower and Lender entered into that certain Loan and Security Agreement dated as of January 2, 1996, as amended by that certain First Amendment to Loan and Security Agreement and Waiver Agreement dated as of June 27, 1996 (collectively, the "Loan Agreement") together with documents ancillary thereto; WHEREAS, there currently exists several Events of Default pursuant to the Loan Agreement due to Borrower's failure to comply with certain covenants, as more fully described herein; WHEREAS, Borrower has requested and Lender has agreed to waive certain Events of Default, as more fully described herein; WHEREAS, Borrower has requested and Lender has agreed to reset a financial covenant, as more fully described herein; WHEREAS, Borrower and Lender wish to amend the Loan Agreement to incorporate the aforesaid; NOW THEREFORE, for and in consideration of the premises, the mutual covenants hereinafter set forth and other good and valuable consideration, the receipt and sufficiency of which the parties hereby acknowledge, the parties hereby agree as follows: ARTICLE 1. RECITALS AND DEFINITIONS 1.1. Borrower represents and warrants that the foregoing recitals are true and correct and constitute an integral part of this Amendment and Borrower and Lender hereby agree that all of the recitals of this Amendment are hereby incorporated herein and made a part hereof. 1.2. Unless otherwise defined herein or the context otherwise requires, all capitalized terms used herein shall have the same meanings as ascribed to them in the Loan Agreement. 1 ARTICLE 2. AMENDMENT OF THE LOAN AGREEMENT 2.1. Section 10.1(A) of the Loan Agreement hereby is deleted in its entirety and the following substituted therefor: At all times during the Term, maintain: (i) a ratio of total liabilities to Tangible Net Worth of not more than 6.0:1.0; (ii) Tangible Net Worth at least equal to $2,000,000, to be adjusted for any dividends paid to or for the benefit of the holder or holders of Borrower's Stock, as permitted by Section 10.2(C); but in no event less than $1,500,000; (iii) a ratio of Current Assets to Current Liabilities of not less than 1.0:1.0; and (iv) EBIT of not less than the cumulative amount indicated below commencing with the EBIT for the quarter ending June 30, 1997 through the period indicated; all as determined for each of the foregoing financial covenants in accordance with generally accepted accounting principles consistently applied: CUMULATIVE EBIT REQUIRED THROUGH QUARTER ENDING $ 172,000 June 30, 1997 $ 478,000 September 30, 1997 $ 804,000 December 31, 1997 $1,153,000 March 31, 1998 After March 31, 1998 the cumulative required EBIT shall be as determined by Lender, in its discretion, based upon annual projections provided to Lender from time to time pursuant to Section 10.1(E)(iii);" ARTICLE 3. WAIVER 3.1. Lender hereby waives the following existing Events of Default under the Loan Agreement: a. Borrower's failure to comply with the EBIT covenant set forth in Section 10.1(A) of the Loan Agreement for the fiscal year ending on March 31, 1997; b. Borrower's failure to comply with the management fee covenant set forth in Section 10.2(D) of the Loan Agreement for the fiscal year ending on March 31, 1997; c. Borrower's failure to comply with the balance sheet, profit and loss statement and cash flow projection deliveries set forth in Section 10.1(E)(iii) for the fiscal year ending on March 31, 1997; and d. Borrower's failure to comply with deliveries of financial statements for April and May 1997 set forth in Section 10.1(E)(ii). 2 Except as specified in this Article 3, Lender is not waiving any rights under the Loan Agreement or under any Ancillary Agreements. Borrower acknowledges that except to the extent expressly modified in this Agreement, Lender's waiver herein shall not be construed as a bar to or waiver of any such right or remedy which Lender would otherwise have on any future occasion, whether similar in kind or otherwise. The waivers set forth in this Article 3 shall not establish a course of dealing and shall not, under any circumstances, constitute a waiver by Lender of any subsequent failure on the part of Borrower to comply with the provisions of the Loan Agreement. The waivers contained herein are specifically limited to the facts, time periods and circumstances described herein. ARTICLE 4. REPRESENTATIONS AND WARRANTIES 4.1. Borrower hereby makes the following representations and warranties to Lender, which representations and warranties shall constitute the continuing covenants of Borrower and shall remain true and correct until all of Borrower's Liabilities are paid and performed in full: a. The representations and warranties of Borrower contained in the Loan Agreement are true and correct on and as of the date hereof as though made on and as of such date; b. Except as described hereinbefore, no Event of Default or event which, but for the lapse of time or the giving of notice, or both, would constitute an Event of Default under the Loan Agreement has occurred and is continuing or would result from the execution and delivery of this Amendment; c. Except as described hereinbefore, Borrower is in full compliance with all of the terms, conditions and all provisions of the Loan Agreement and the other agreements; d. This Amendment and all other agreements required hereunder to be executed by Borrower and delivered to Lender, have been duly authorized, executed and delivered on Borrower's behalf pursuant to all requisite corporate authority and this Amendment and each of the other agreements required hereunder to be executed and delivered by Borrower to Lender constitute the legal, valid and binding obligations of Borrower enforceable in accordance with their terms, except as enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to creditors' rights; and e. Borrower hereby acknowledges and agrees that Borrower has no defense, offset or counterclaim to the payment of said principal, interest, fees or other liabilities and hereby waives and relinquishes any such defense, offset or counterclaim and Borrower hereby releases Lender and its respective officers, directors, agents, affiliates, successors and assigns from any claim, demand or cause of action, known or unknown, contingent or liquidated, which may exist or hereafter be known to exist relating to any matter prior to the date hereof. 3 ARTICLE 5. RATIFICATION Except as expressly amended hereby, the Loan Agreement and all other agreements executed in connection therewith shall remain in full force and effect. The Loan Agreement, as amended hereby, and all rights and powers created thereby and thereunder or under such other agreements, are in all respects ratified and confirmed. From and after the date hereof, the Loan Agreement shall be deemed amended and modified as herein provided but, except as so amended and modified, the Loan Agreement shall continue in full force and effect and the Loan Agreement and this Amendment shall be read, taken and construed as one and the same instrument. On and after the date hereof, the term "Agreement" as used in the Loan Agreement and all other references to the Loan Agreement therein, in any other instrument, document or writing executed by Borrower or any guarantor or furnished to Lender by Borrower or any guarantor in connection therewith or herewith shall mean the Loan Agreement as amended by this Amendment. ARTICLE 6. MISCELLANEOUS 6.1. Borrower agrees to pay to Lender, contemporaneously herewith, all out-of-pocket costs and expenses of Lender, including without limitation, reasonable attorneys' fees, costs, expenses incurred by Lender in connection with the negotiation, preparation, execution and delivery of this Amendment and all other matters pertaining hereto. 6.2. Borrower agrees to pay Lender, contemporaneously herewith, an amendment fee in the amount of $5,000 in consideration of Lender's agreements contained herein. 6.3. This Amendment may be signed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 6.4. Except as otherwise specified herein, this Amendment embodies the entire agreement and understanding between Lender and Borrower with respect to the subject matter hereof and supersedes all prior agreements, consents and understandings relating to such subject matter. 6.5. The headings in this Amendment have been inserted for convenience only and shall be given no substantive meaning or significance in construing the terms of this Amendment. 4 6.6. This Amendment shall inure to the benefit of Lender and its successors and assigns and shall be binding upon and inure to the successors and assigns of Borrower, except that Borrower may not assign any of its rights in and to this Amendment. 6.7. This Amendment may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one in the same document. 6.8. THIS AMENDMENT AND (UNLESS OTHERWISE EXPRESSLY STATED THEREIN) EACH OTHER LOAN DOCUMENT AND/OR ANCILLARY AGREEMENT SHALL BE A CONTRACT MADE UNDER AND GOVERNED BY THE LAWS OF STATE OF ILLINOIS, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES. WHEREVER POSSIBLE, EACH PROVISION OF THIS AMENDMENT AND EACH OTHER LOAN AGREEMENT AND/OR ANCILLARY AGREEMENT SHALL BE INTERPRETED IN SUCH MANNER AS TO BE EFFECTIVE AND VALID UNDER APPLICABLE LAW, BUT IF ANY PROVISION OF THIS AMENDMENT OR ANY OTHER LOAN DOCUMENT OR ANCILLARY AGREEMENT SHALL BE PROHIBITED BY OR INVALID UNDER SUCH LAW, SUCH PROVISIONS SHALL BE INEFFECTIVE TO THE EXTENT OF SUCH PROHIBITION OR INVALIDITY, WITHOUT INVALIDATING THE REMAINDER OF SUCH PROVISION OR THE REMAINING PROVISIONS OF THIS AMENDMENT OR SUCH OTHER LOAN DOCUMENT AND/OR ANCILLARY AGREEMENT. ALL OBLIGATIONS OF THE BORROWER, AND RIGHTS OF THE LENDER AND OF ANY OTHER HOLDER OF ANY NOTE, EXPRESSED HEREIN OR IN THE LOAN DOCUMENTS SHALL BE IN ADDITION TO AND NOT IN LIMITATION OF THE THOSE PROVIDED BY APPLICABLE LAW. IN WITNESS WHEREOF, Borrower and Lender have caused this Amendment to Loan and Security Agreement to be executed and delivered in Chicago, Illinois as of the day and year written above. C&L COMMUNICATIONS, INC. By: /s/ R. Scott Miswald Assistant Secretary SANWA BUSINESS CREDIT CORPORATION By: /s/ Andrew J. Heinz Vice President 5 EX-4.6 4 AMENDMENT TO LOAN AND SECURITY AGREEMENT THIS AMENDMENT TO LOAN AND SECURITY AGREEMENT (together with all appendices, exhibits, schedules and attachments hereto, collectively this "Amendment") is made and entered into as of May 29, 1997, by and between VALLEY COMMUNICATIONS, INC., a California corporation ("Borrower") and SANWA BUSINESS CREDIT CORPORATION, a Delaware corporation ("Lender"). RECITALS WHEREAS, Borrower and Lender entered into that certain Loan and Security Agreement dated as of March 14, 1996 (the "Loan Agreement") together with documents ancillary thereto; WHEREAS, there currently exists several Events of Default pursuant to the Loan Agreement due to Borrower's failure to comply with certain covenants, as more fully described herein; WHEREAS, Borrower has requested and Lender has agreed to waive certain Events of Default, as more fully described herein; WHEREAS, Borrower has requested and Lender has agreed to reset certain financial covenants, as more fully described herein; WHEREAS, Borrower and Lender wish to amend the Loan Agreement to incorporate the aforesaid; NOW THEREFORE, for and in consideration of the premises, the mutual covenants hereinafter set forth and other good and valuable consideration, the receipt and sufficiency of which the parties hereby acknowledge, the parties hereby agree as follows: ARTICLE 1. RECITALS AND DEFINITIONS 1.1. Borrower represents and warrants that the foregoing recitals are true and correct and constitute an integral part of this Amendment and Borrower and Lender hereby agree that all of the recitals of this Amendment are hereby incorporated herein and made a part hereof. 1.2. Unless otherwise defined herein or the context otherwise requires, all capitalized terms used herein shall have the same meanings as ascribed to them in the Loan Agreement. 1 ARTICLE 2. AMENDMENT OF THE LOAN AGREEMENT 2.1. Section 10.1(A) of the Loan Agreement hereby is deleted in its entirety and the following substituted therefor: At all times during the Term, maintain: (i) a ratio of total liabilities to Tangible Net Worth of not more than 4.0:1.0; (ii) Tangible Net Worth at least equal to $1,350,000, to be adjusted for any dividends paid to or for the benefit of the holder or holders of Borrower's Stock, as permitted by Section 10.2(C); provided, however, that for all times during the fiscal year ending on March 31, 1998, Tangible Net Worth (as adjusted) shall be at least equal to $1,225,000; (iii) a ratio of Current Assets to Current Liabilities of not less than 1.1:1.0; and (iv) Pre-Tax Net Income of not less than $350,000 at the end of each fiscal year of Borrower or such pro rata share thereof; all as determined for each of the foregoing financial covenants in accordance with generally accepted accounting principles consistently applied; 2.2. Section 10.2(L) of the Loan Agreement hereby is deleted in its entirety and the following substituted therefor: Make capital expenditures in Borrower's fiscal year ending on March 31, 1998 which, in the aggregate, exceed $500,000 and make capital expenditures in Borrower's fiscal year ending on March 31, 1999 which, in the aggregate exceed $250,000. ARTICLE 3. WAIVER 3.1. Lender hereby waives the following existing Events of Default under the Loan Agreement: a. Borrower's failure to comply with the Tangible Net Worth covenant set forth in Section 10.1(A) of the Loan Agreement for the fiscal year ending on March 31, 1997; b. Borrower's failure to comply with the Pre-Tax Net Income covenant set forth in Section 10.1(A) of the Loan Agreement for the fiscal year ending on March 31, 1997; c. Borrower's failure to comply with the capital expenditure covenant set forth in Section 10.2(L) for the fiscal year ending on March 31, 1997; and 2 d. Borrower's failure to comply with the balance sheet, profit and loss statement and cash flow projection deliveries set forth in Section 10.1(E)(iii) for the fiscal year ending on March 31, 1997. Except as specified in this Article 3, Lender is not waiving any rights under the Loan Agreement or under any Ancillary Agreements. Borrower acknowledges that except to the extent expressly modified in this Agreement, Lender's waiver herein shall not be construed as a bar to or waiver of any such right or remedy which Lender would otherwise have on any future occasion, whether similar in kind or otherwise. The waivers set forth in this Article 3 shall not establish a course of dealing and shall not, under any circumstances, constitute a waiver by Lender of any subsequent failure on the part of Borrower to comply with the provisions of the Loan Agreement. The waivers contained herein are specifically limited to the facts, time periods and circumstances described herein. ARTICLE 4. REPRESENTATIONS AND WARRANTIES 4.1. Borrower hereby makes the following representations and warranties to Lender, which representations and warranties shall constitute the continuing covenants of Borrower and shall remain true and correct until all of Borrower's Liabilities are paid and performed in full: a. The representations and warranties of Borrower contained in the Loan Agreement are true and correct on and as of the date hereof as though made on and as of such date; b. Except as described hereinbefore, no Event of Default or event which, but for the lapse of time or the giving of notice, or both, would constitute an Event of Default under the Loan Agreement has occurred and is continuing or would result from the execution and delivery of this Amendment; c. Except as described hereinbefore, Borrower is in full compliance with all of the terms, conditions and all provisions of the Loan Agreement and the other agreements; d. This Amendment and all other agreements required hereunder to be executed by Borrower and delivered to Lender, have been duly authorized, executed and delivered on Borrower's behalf pursuant to all requisite corporate authority and this Amendment and each of the other agreements required hereunder to be executed and delivered by Borrower to Lender constitute the legal, valid and binding obligations of Borrower enforceable in accordance with their terms, except as enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to creditors' rights; and e. Borrower hereby acknowledges and agrees that Borrower has no defense, offset or counterclaim to the payment of said principal, interest, fees or other liabilities and hereby waives and relinquishes any such defense, offset or counterclaim and Borrower hereby releases Lender and its respective officers, directors, agents, affiliates, successors and assigns 3 from any claim, demand or cause of action, known or unknown, contingent or liquidated, which may exist or hereafter be known to exist relating to any matter prior to the date hereof. ARTICLE 5. RATIFICATION Except as expressly amended hereby, the Loan Agreement and all other agreements executed in connection therewith shall remain in full force and effect. The Loan Agreement, as amended hereby, and all rights and powers created thereby and thereunder or under such other agreements, are in all respects ratified and confirmed. From and after the date hereof, the Loan Agreement shall be deemed amended and modified as herein provided but, except as so amended and modified, the Loan Agreement shall continue in full force and effect and the Loan Agreement and this Amendment shall be read, taken and construed as one and the same instrument. On and after the date hereof, the term "Agreement" as used in the Loan Agreement and all other references to the Loan Agreement therein, in any other instrument, document or writing executed by Borrower or any guarantor or furnished to Lender by Borrower or any guarantor in connection therewith or herewith shall mean the Loan Agreement as amended by this Amendment. ARTICLE 6. MISCELLANEOUS 6.1. Borrower agrees to pay to Lender, contemporaneously herewith, all out-of-pocket costs and expenses of Lender, including without limitation, reasonable attorneys' fees, costs, expenses incurred by Lender in connection with the negotiation, preparation, execution and delivery of this Amendment and all other matters pertaining hereto. 6.2. Borrower agrees to pay Lender, contemporaneously herewith, an amendment fee in the amount of $5,000 in consideration of Lender's agreements contained herein. 6.3. This Amendment may be signed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 6.4. Except as otherwise specified herein, this Amendment embodies the entire agreement and understanding between Lender and Borrower with respect to the subject matter hereof and supersedes all prior agreements, consents and understandings relating to such subject matter. 4 6.5. The headings in this Amendment have been inserted for convenience only and shall be given no substantive meaning or significance in construing the terms of this Amendment. 6.6. This Amendment shall inure to the benefit of Lender and its successors and assigns and shall be binding upon and inure to the successors and assigns of Borrower, except that Borrower may not assign any of its rights in and to this Amendment. 6.7. This Amendment may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one in the same document. 6.8. THIS AMENDMENT AND (UNLESS OTHERWISE EXPRESSLY STATED THEREIN) EACH OTHER LOAN DOCUMENT AND/OR ANCILLARY AGREEMENT SHALL BE A CONTRACT MADE UNDER AND GOVERNED BY THE LAWS OF STATE OF ILLINOIS, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES. WHEREVER POSSIBLE, EACH PROVISION OF THIS AMENDMENT AND EACH OTHER LOAN AGREEMENT AND/OR ANCILLARY AGREEMENT SHALL BE INTERPRETED IN SUCH MANNER AS TO BE EFFECTIVE AND VALID UNDER APPLICABLE LAW, BUT IF ANY PROVISION OF THIS AMENDMENT OR ANY OTHER LOAN DOCUMENT OR ANCILLARY AGREEMENT SHALL BE PROHIBITED BY OR INVALID UNDER SUCH LAW, SUCH PROVISIONS SHALL BE INEFFECTIVE TO THE EXTENT OF SUCH PROHIBITION OR INVALIDITY, WITHOUT INVALIDATING THE REMAINDER OF SUCH PROVISION OR THE REMAINING PROVISIONS OF THIS AMENDMENT OR SUCH OTHER LOAN DOCUMENT AND/OR ANCILLARY AGREEMENT. ALL OBLIGATIONS OF THE BORROWER, AND RIGHTS OF THE LENDER AND OF ANY OTHER HOLDER OF ANY NOTE, EXPRESSED HEREIN OR IN THE LOAN DOCUMENTS SHALL BE IN ADDITION TO AND NOT IN LIMITATION OF THE THOSE PROVIDED BY APPLICABLE LAW. 5 IN WITNESS WHEREOF, Borrower and Lender have caused this Amendment to Loan and Security Agreement to be executed and delivered in Chicago, Illinois as of the day and year written above. VALLEY COMMUNICATIONS, INC. By: /s/ R. Scott Miswald Assistant Secretary SANWA BUSINESS CREDIT CORPORATION By: /s/ G. M. Adams First Vice President 6 EX-4.11 5 SANWA BUSINESS CREDIT CORPORATION One South Wacker Drive Chicago, Illinois 60606 September 1, 1997 VIA FACSIMILE AND CERTIFIED MAIL Mr. Michael Sonaco President & CEO C&L Communications, Inc. 12000 Network Blvd. Suite 300 San Antonio, Texas 78249 Re: Waiver of Events of Default/Sanwa Business Credit Corporation Loan Facility to C&L Communications, Inc. Dear Mr. Sonaco: Reference is made to that certain Loan and Security Agreement dated as of January 2, 1996, as amended, by and between C&L Communications, Inc. ("Borrower") and Sanwa Business Credit Corporation ("SBCC"). You have advised us that there now exists certain Events of Default under the Loan Agreement due to (i) Borrower's failure to timely deliver to SBCC its year-end (March 31, 1997) audited financial statements in accordance with Section 10.1(E)(i) of the Loan Agreement and (ii) Borrower's failure to deliver to SBCC the monthly Covenant Compliance Certificate in accordance with Section 10.1(M) of the Loan Agreement for the periods ending on April 30, 1997, May 31, 1997, June 30, 1997 and July 31, 1997 (collectively, the "Events of Default"). SBCC hereby waives the Events of Default. SBCC's waiver of the Events of Default shall in no way be deemed a waiver or forbearance of any other default, whether now existing or hereafter arising or any other Event of Default under the Loan Agreement or any Ancillary Agreement. Yours very truly, /s/ Andrew Heinz Vice President/Credit Manager Collateral Lending Department Sanwa Business Credit Corp. cc: Mr. James Fiedler The Diana Corporation 8200 West Brown Deer Road Suite 200 Milwaukee, WI 53223 Mr. Kenneth Hunt, Esq. Godfrey & Kahn, S.C. 780 North Water Street Milwaukee, WI 53202 Mr. Bradley Schmarak, Esq. Sachnoff & Weaver, Ltd. 30 South Wacker Drive 29th Floor Chicago, Illinois 60606-7484 EX-4.12 6 SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT THIS SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT (together with all appendices, exhibits, schedules and attachments hereto, collectively this "Amendment") is made and entered into as of September 16, 1997, by and between VALLEY COMMUNICATIONS, INC., a California corporation ("Borrower") and SANWA BUSINESS CREDIT CORPORATION, a Delaware corporation ("Lender"). RECITALS WHEREAS, Borrower and Lender entered into that certain Loan and Security Agreement dated as of March 14, 1996, as amended from time to time (the "Loan Agreement"), together with documents ancillary thereto; WHEREAS, there currently exists several Events of Default pursuant to the Loan Agreement due to Borrower's failure to comply with certain covenants, as more fully described herein; WHEREAS, Borrower has requested and Lender has agreed to waive certain Events of Default, as more fully described herein; WHEREAS, Borrower has requested and Lender has agreed to reset certain financial covenants, as more fully described herein; WHEREAS, Borrower and Lender wish to amend the Loan Agreement to incorporate the aforesaid; NOW THEREFORE, for and in consideration of the premises, the mutual covenants hereinafter set forth and other good and valuable consideration, the receipt and sufficiency of which the parties hereby acknowledge, the parties hereby agree as follows: ARTICLE 1. RECITALS AND DEFINITIONS 1.1. Borrower represents and warrants that the foregoing recitals are true and correct and constitute an integral part of this Amendment and Borrower and Lender hereby agree that all of the recitals of this Amendment are hereby incorporated herein and made a part hereof. 1.2. Unless otherwise defined herein or the context otherwise requires, all capitalized terms used herein shall have the same meanings as ascribed to them in the Loan Agreement. 1 ARTICLE 2. AMENDMENT OF THE LOAN AGREEMENT 2.1. Section 10.1(A) of the Loan Agreement hereby is deleted in its entirety and the following substituted therefor: (i) Maintain a ratio of total liabilities to Tangible Net Worth of not more than 5.00:1.0 during the period commencing on April 1, 1997 and ending on March 31, 1998 ("Borrower's 1998 Fiscal Year") and of not more than 4.0:1.0 for all time thereafter; (ii) maintain at all times Tangible Net Worth at least equal to $1,350,000, to be adjusted for any dividends paid to or for the benefit of the holder or holders of Borrower's Stock, as permitted by Section 10.2(C); provided, however, that for all times during Borrower's 1998 Fiscal Year, Tangible Net Worth (as adjusted) shall be at least equal to $950,000; (iii) maintain a ratio of Current Assets to Current Liabilities of not less than 1.0:1.0 during Borrower's 1998 Fiscal Year and of not less than 1.1:1.0 for all times thereafter; and (iv) maintain Pre-Tax Net Income of not less than $350,000 at the end of each fiscal year of Borrower; all as determined for each of the foregoing financial covenants in accordance with generally accepted accounting principles consistently applied; ARTICLE 3. WAIVER 3.1. Lender hereby waives the following existing Events of Default under the Loan Agreement: a. Borrower's failure to comply with the Tangible Net Worth covenant set forth in Section 10.1(A)(ii) of the Loan Agreement for the period commencing as of June 30, 1997, and ending as of the date hereof; and b. Borrower's failure to timely comply with the audited financial statement deliveries set forth in Section 10.1(E)(i) for the fiscal year ending on March 31, 1997; provided, however that this waiver is conditioned upon Borrower delivering such audited financial statements to Lender on or before September 30, 1997. Except as specified in this Article 3, Lender is not waiving any rights under the Loan Agreement or under any Ancillary Agreements. Borrower acknowledges that except to the extent expressly modified in this Agreement, Lender's waiver herein shall not be construed as a bar to or waiver of any such right or remedy which Lender would otherwise have on any future occasion, whether similar in kind or otherwise. The waivers set forth in this Article 3 shall not establish a course of dealing and shall not, under any circumstances, constitute a waiver by Lender of any subsequent failure on the part of Borrower to comply with the provisions of the 2 Loan Agreement. The waivers contained herein are specifically limited to the facts, time periods and circumstances described herein. ARTICLE 4. REPRESENTATIONS AND WARRANTIES 4.1. Borrower hereby makes the following representations and warranties to Lender, which representations and warranties shall constitute the continuing covenants of Borrower and shall remain true and correct until all of Borrower's Liabilities are paid and performed in full: a. The representations and warranties of Borrower contained in the Loan Agreement are true and correct on and as of the date hereof as though made on and as of such date; b. Except as described hereinbefore, no Event of Default or event which, but for the lapse of time or the giving of notice, or both, would constitute an Event of Default under the Loan Agreement has occurred and is continuing or would result from the execution and delivery of this Amendment; c. Except as described hereinbefore, Borrower is in full compliance with all of the terms, conditions and all provisions of the Loan Agreement and the other agreements; d. This Amendment and all other agreements required hereunder to be executed by Borrower and delivered to Lender, have been duly authorized, executed and delivered on Borrower's behalf pursuant to all requisite corporate authority and this Amendment and each of the other agreements required hereunder to be executed and delivered by Borrower to Lender constitute the legal, valid and binding obligations of Borrower enforceable in accordance with their terms, except as enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to creditors' rights; and e. Borrower hereby acknowledges and agrees that Borrower has no defense, offset or counterclaim to the payment of said principal, interest, fees or other liabilities and hereby waives and relinquishes any such defense, offset or counterclaim and Borrower hereby releases Lender and its respective officers, directors, agents, affiliates, successors and assigns from any claim, demand or cause of action, known or unknown, contingent or liquidated, which may exist or hereafter be known to exist relating to any matter prior to the date hereof. 3 ARTICLE 5. RATIFICATION Except as expressly amended hereby, the Loan Agreement and all other agreements executed in connection therewith shall remain in full force and effect. The Loan Agreement, as amended hereby, and all rights and powers created thereby and thereunder or under such other agreements, are in all respects ratified and confirmed. From and after the date hereof, the Loan Agreement shall be deemed amended and modified as herein provided but, except as so amended and modified, the Loan Agreement shall continue in full force and effect and the Loan Agreement and this Amendment shall be read, taken and construed as one and the same instrument. On and after the date hereof, the term "Agreement" as used in the Loan Agreement and all other references to the Loan Agreement therein, in any other instrument, document or writing executed by Borrower or any guarantor or furnished to Lender by Borrower or any guarantor in connection therewith or herewith shall mean the Loan Agreement as amended by this Amendment. ARTICLE 6. MISCELLANEOUS 6.1. Borrower agrees to pay to Lender, contemporaneously herewith, all out-of-pocket costs and expenses of Lender, including without limitation, reasonable attorneys' fees, costs, expenses incurred by Lender in connection with the negotiation, preparation, execution and delivery of this Amendment and all other matters pertaining hereto. 6.2. Borrower agrees to pay Lender, contemporaneously herewith, an amendment fee in the amount of $2,500 in consideration of Lender's agreements contained herein. 6.3. This Amendment may be signed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 6.4. Except as otherwise specified herein, this Amendment embodies the entire agreement and understanding between Lender and Borrower with respect to the subject matter hereof and supersedes all prior agreements, consents and understandings relating to such subject matter. 6.5. The headings in this Amendment have been inserted for convenience only and shall be given no substantive meaning or significance in construing the terms of this Amendment. 4 6.6. This Amendment shall inure to the benefit of Lender and its successors and assigns and shall be binding upon and inure to the successors and assigns of Borrower, except that Borrower may not assign any of its rights in and to this Amendment. 6.7. This Amendment may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one in the same document. 6.8. THIS AMENDMENT AND (UNLESS OTHERWISE EXPRESSLY STATED THEREIN) EACH OTHER LOAN DOCUMENT AND/OR ANCILLARY AGREEMENT SHALL BE A CONTRACT MADE UNDER AND GOVERNED BY THE LAWS OF STATE OF ILLINOIS, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES. WHEREVER POSSIBLE, EACH PROVISION OF THIS AMENDMENT AND EACH OTHER LOAN AGREEMENT AND/OR ANCILLARY AGREEMENT SHALL BE INTERPRETED IN SUCH MANNER AS TO BE EFFECTIVE AND VALID UNDER APPLICABLE LAW, BUT IF ANY PROVISION OF THIS AMENDMENT OR ANY OTHER LOAN DOCUMENT OR ANCILLARY AGREEMENT SHALL BE PROHIBITED BY OR INVALID UNDER SUCH LAW, SUCH PROVISIONS SHALL BE INEFFECTIVE TO THE EXTENT OF SUCH PROHIBITION OR INVALIDITY, WITHOUT INVALIDATING THE REMAINDER OF SUCH PROVISION OR THE REMAINING PROVISIONS OF THIS AMENDMENT OR SUCH OTHER LOAN DOCUMENT AND/OR ANCILLARY AGREEMENT. ALL OBLIGATIONS OF THE BORROWER, AND RIGHTS OF THE LENDER AND OF ANY OTHER HOLDER OF ANY NOTE, EXPRESSED HEREIN OR IN THE LOAN DOCUMENTS SHALL BE IN ADDITION TO AND NOT IN LIMITATION OF THE THOSE PROVIDED BY APPLICABLE LAW. IN WITNESS WHEREOF, Borrower and Lender have caused this Second Amendment to Loan and Security Agreement to be executed and delivered in Chicago, Illinois as of the day and year written above. VALLEY COMMUNICATIONS, INC. By: /s/ R. Scott Miswald Assistant Secretary SANWA BUSINESS CREDIT CORPORATION By: /s/ Andrew J. Heinz Vice President 5 EX-4.13 7 STOCK AND WARRANT PURCHASE AGREEMENT THIS STOCK AND WARRANT PURCHASE AGREEMENT is made this 6th day of June, 1997 by and between The Diana Corporation ("Diana") and the person identified as "Buyer" on the signature page hereof ("Buyer"). 1. Purchase and Sale of Stock. Buyer hereby purchases, and Diana hereby sells and issues to Buyer, 175,000 shares of common stock, $1.00 par value, of Diana (the "Purchased Stock"), and a warrant (the "Warrant") to purchase 175,000 shares of common stock (the "Warrant Stock") for an aggregate purchase price of $350,000 (the "Purchase Price"). The Warrant is being executed contemporaneously herewith. Diana represents that each of the Purchased Stock and the Warrant Stock has been duly authorized for issuance and, upon issuance of the Purchased Stock in accordance herewith against payment of the Purchase Price, and upon issuance of the Warrant Stock against payment of the exercise price of the Warrant, will be validly issued, fully paid and nonassessable. 2. Investment Representations and Covenants. (a) Buyer represents that it is an "accredited investor" within the meaning of Rule 501(a) under the Securities Act of 1933, as amended (the "Securities Act"), and is a financially sophisticated financial or institutional investor that purchases equity securities in the ordinary course of business. Buyer is acquiring the Purchased Stock for investment purposes only, for its own account, and not with a view to the distribution thereof, other than pursuant to Rule 144 under the Securities Act or other exemption from or registration under the Securities Act. Buyer understands that the offer and sale of the Purchased Stock and Warrant to Buyer have not been registered under the Securities Act or under state securities laws and, accordingly, may not be transferred unless so registered or exemptions from such registration are available. (b) Buyer has reviewed Diana's most recent Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K filed since the date of the Form 10-K, and Diana's 1996 Annual Report to Stockholders and Proxy Statement. Buyer understands that an investment in the Purchased Stock is speculative and involves a high degree of risk. At this time, Diana is experiencing a severe liquidity deficiency. (c) Diana shall promptly deliver to Buyer a certificate representing the Purchased Stock. The certificates representing the Purchased Stock shall (unless registered under the Securities Act and applicable state securities laws) have a legend in substantially the following form: THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT (A) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH LAWS OR (B) THE HOLDER HEREOF FURNISHES AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE DIANA CORPORATION TO THE EFFECT THAT AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. 1 (d) Buyer (if not James Fiedler) acknowledges and agrees that it is requiring that James Fiedler also purchase Common Stock and warrants of Diana on the same terms and conditions set forth herein. 3. Miscellaneous. (a) This Agreement constitutes the entire agreement between the parties and all prior agreements, discussions and understandings of the parties are merged and made a part of this Agreement. (b) This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of the which shall constitute one and the same instrument. (c) Any notice required or permitted to be given or made by either party to the other hereunder shall be deemed delivered if hand delivered, five days after being mailed postage prepaid, one business day after being sent prepaid by overnight courier or delivery service, or after being sent by facsimile transmission and received by receiving equipment to the parties at their respective addresses set forth opposite the signatures hereto or to such changed address as either party shall designate by proper notice to the other. (d) This Agreement shall be governed by and construed in accordance with the laws of Delaware without regard to the principles of conflicts of law thereunder. 2 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written. Address for Notice: THE DIANA CORPORATION 26025 Mureau Road Calabasas, California 91302 Fax No. (818) 878-7633 By: /s/ Daniel W. Latham President and Chief Operating Officer Address for Notice: BUYER 24905 Ariella Drive James J. Fiedler Calabasas, California 91302 By: /s/ James J. Fiedler Fax No. (818) 225-8746 3 EX-4.14 8 THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933. No. B-1 WARRANT 175,000 Shares To Purchase Shares of Common Stock of The Diana Corporation THIS CERTIFIES that, for value received, James J. Fiedler is entitled, upon the terms and subject to the conditions hereinafter set forth, to purchase from The Diana Corporation, a Delaware corporation (the "Company"), that number of fully paid and nonassessable shares of the Company's Common Stock, $1.00 par value (the "Common Stock") at the purchase price per share as set forth in Section 1 below ("Exercise Price"). The number of shares and Exercise Price are subject to adjustment as provided in Section 10 hereof. 1. Number of Shares; Exercise Price; Term. (a) Subject to adjustments as provided herein, this Warrant is exercisable for 175,000 shares of Common Stock, at a purchase price of $3.00 per share. (b) Subject to the terms and conditions set forth herein, this Warrant shall be exercisable during the term commencing on the date hereof and ending on the fifth anniversary of the date hereof and shall be void thereafter. 2. Title to Warrant. This Warrant and all rights hereunder may be transferred, in whole or in part, by the Warrant holder to any affiliate at any time without the written consent of the Company, but may not be transferred to any third party without the prior written consent of the Company, which will not be unreasonably withheld. Transfers shall occur at the office or agency of the Company by the holder hereof in person or by duly authorized attorney, upon surrender of this Warrant together with the Assignment Form annexed hereto properly endorsed. 3. Exercise of Warrant. The purchase rights represented by this Warrant are exercisable by the registered holder hereof, in whole or in part, at any time, or from time to time, during the term hereof as described in Section 1 above, by the surrender of this Warrant and the Notice of Exercise annexed hereto duly completed and executed on behalf of the holder hereof, at the office of the Company in Calabasas, California (or such other office or agency of the Company as it may designate by notice in writing to the registered holder hereof at the address of such holder appearing on the books of the Company), upon payment in cash or check acceptable 1 to the Company of the purchase price of the shares thereby purchased whereupon the holder of this Warrant shall be entitled to receive a certificate for the number of shares so purchased and, if this Warrant is exercised in part, a new Warrant for the unexercised portion of this Warrant. The Company agrees that, upon exercise of this Warrant in accordance with the terms hereof the shares so purchased shall be deemed to be issued to such holder as the record owner of such shares as of the close of business on the date on which this Warrant shall have been exercised. Certificates for shares purchased hereunder and, on partial exercise of this Warrant, a new Warrant for the unexercised portion of this Warrant shall be delivered to the holder hereof as promptly as practicable after the date on which this Warrant shall have been exercised. The Company covenants that all shares which may be issued upon the exercise of rights represented by this Warrant will, upon exercise of the rights represented by this Warrant and payment of the Exercise Price, be fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously or otherwise specified herein). 4. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. In lieu of any fractional share to which such holder would otherwise be entitled, such holder shall be entitled, at its option, to receive either (i) a cash payment equal to the excess of fair market value for such fractional share above the Exercise Price for such fractional share (as mutually determined by the Company and the holder) or (ii) a whole share if the holder tenders the Exercise Price for one whole share. 5. Charges, Taxes and Expenses. Issuance of certificates for shares upon the exercise of this Warrant shall be made without charge to the holder hereof for any issue or transfer tax or other incidental expense in respect of the issuance of such certificates, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the holder of this Warrant or in such name or names as may be directed by the holder of this Warrant (with the prior written consent of the Company, which will not be unreasonably withheld); provided, however, that in the event certificates for shares are to be issued in a name other than the name of the holder of this Warrant, this Warrant when surrendered for exercise shall be accompanied by an assignment document in form and substance satisfactory to the Company duly executed by the holder hereof and the Notice of Exercise duly completed and executed and stating in whose name and certificates are to be issued; and provided further, that such assignment shall be subject to applicable laws and regulations. Upon any transfer involved in the issuance or delivery of any certificates for shares of the Company's securities, the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. 6. No Rights as Shareholders. This Warrant does not entitle the holder hereof to any voting rights or other rights as a shareholder of the Company prior to the exercise hereof. 7. Exchange and Registry of Warrant. The Company shall maintain a registry showing the name and address of the registered holder of this Warrant. This Warrant may be surrendered for exchange, transfer or exercise, in accordance with its terms, at the office of the 2 Company, and the Company shall be entitled to rely in all respects, prior to written notice to the contrary, upon such registry. 8. Loss, Theft, Destruction or Mutilation of Warrant. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of this Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor and dated as of such cancellation, in lieu of this Warrant. 9. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday or a Sunday or shall be a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday or a Sunday or a legal holiday. 10. Adjustments and Termination of Rights. The purchase price per share and the number of shares purchasable hereunder are subject to adjustment from time to time as follows: (a) Merger. If at any time there shall be a merger or consolidation of the Company with or into another corporation when the Company is not the surviving corporation, then, as part of such merger or consolidation, lawful provision shall be made so that the holder of this Warrant shall thereafter be entitled to receive upon exercise of this Warrant, during the period specified herein and upon payment of the aggregate Exercise Price then in effect, the number of shares of stock or other securities or property of the successor corporation resulting from such merger or consolidation, to which a holder of the stock deliverable upon exercise of this Warrant would have been entitled in such merger or consolidation if this Warrant had been exercised immediately before such merger or consolidation. In any such case, appropriate adjustment shall be made in the application of the provisions of this Warrant with respect to the rights and interests of the holder after the merger or consolidation. (b) Reclassification, etc. If the Company at any time shall, by subdivision, combination or reclassification of securities or otherwise, change any of the securities as to which purchase rights under this Warrant exist into the same or a different number of securities of any other class or classes, this Warrant shall thereafter represent the right to acquire such number and kind of securities as would have been issuable as the result of such change with respect to the securities which were subject to the purchase rights under this Warrant immediately prior to such subdivision, combination, reclassification or other change. (c) Split, Subdivision or Combination of Shares. If the Company at any time while this Warrant remains outstanding and unexpired shall split, subdivide or combine the Common Stock as to which purchase rights under this Warrant exist, the Exercise Price shall be proportionately decreased in the case of a split or subdivision or proportionately increased in the case of a combination. 3 (d) Common Stock Dividends. If the Company at any time while this Warrant is outstanding and unexpired shall pay a dividend with respect to Common Stock payable in, or make any other distribution with respect to Common Stock of, shares of Common Stock, then the Exercise Price shall be adjusted, from and after the date of determination of the shareholders entitled to receive such dividend or distribution, to that price determined by multiplying the Exercise Price in effect immediately prior to such date of determination by a fraction (i) the numerator of which shall be the total number of shares of Common Stock outstanding immediately prior to such dividend or distribution, and (ii) the denominator of which shall be the total number of shares of the Common Stock outstanding immediately after such dividend or distribution. (e) Other Dividends. If the Company at any time while this Warrant is outstanding and unexpired shall pay a dividend (other than dividends out of retained earnings), or make any other distribution with respect to Common Stock payable in stock (other than Common Stock) or other securities or property, then the Company may, at its option, either (i) decrease the per share Exercise Price of this Warrant by an appropriate amount based upon the value distributed on each share of Common Stock as determined in good faith by the Company's Board of Directors or (ii) provide by resolution of the Company's Board of Directors that on exercise of this Warrant, the holder hereof shall receive, in addition to the shares of Common Stock otherwise receivable on exercise hereof, the same number and kind of stock, other securities and property which such holder would have received had the holder held the shares of Common Stock receivable on exercise hereof on and before the record date for such dividend or distribution. (f) Adjustment of Number of Shares. Upon each adjustment in the Exercise Price pursuant to 10(c) or 10(d) above, the number of shares of Common Stock purchasable hereunder shall be adjusted, to the nearest whole share, to the product obtained by multiplying the number of shares purchasable immediately prior to such adjustment in the Exercise Price by a fraction (i) the numerator of which shall be the Exercise Price immediately prior to such adjustment, and (ii) the denominator of which shall be the Exercise Price immediately after such adjustment. 11. Notice of Adjustments; Notices. Whenever the Exercise Price or number of shares purchasable hereunder shall be adjusted pursuant to Section 10 hereof, the Company shall (within twenty days) issue a certificate signed by its Chief Executive Officer setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated and the Exercise Price and number of shares purchasable hereunder after giving effect to such adjustment, and shall cause a copy of such certificate to be mailed (by first class mail, postage prepaid) to the holder of this Warrant. The Company shall notify the holder of this Warrant at least twenty days prior to the date of any transaction referred to in Section 10(a) or (b) or of the sale of all or substantially all the assets of the Company. 4 12. Miscellaneous. (a) Governing Law. This Warrant shall be binding upon any successors or assigns of the Company. This Warrant shall constitute a contract under the laws of Delaware and for all purposes shall be construed in accordance with and governed by the laws of said state, without giving effect to the conflict of laws principles. (b) Restrictions. THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933. (c) Amendments. This Warrant may be amended and the observance of any term of this Warrant may be waived only with the written consent of the Company and the holders hereof. (d) Notice. Any notice required or permitted hereunder shall be deemed effectively given upon personal delivery to the party to be notified or three business days after deposit with the United States Post Office, by certified mail, postage prepaid and addressed to the party to be notified at the address indicated below for the Company, or at the address for a holder set forth in the registry maintained by the Company pursuant to Section 7, such party, or at such other address as such other party may designate by ten-day advance written notice. 5 IN WITNESS WHEREOF, The Diana Corporation has caused this Warrant to be executed by its officer thereunto duly authorized. Dated: June 6, 1997 THE DIANA CORPORATION By: /s/ Daniel W. Latham, President and Chief Operating Officer Address: 26025 Mureau Road Calabasas, California 91302 Acknowledged and Agreed: By: /s/ James J. Fiedler Name: James J. Fiedler Title: Address: 24905 Ariella Drive Calabasas, CA 91302 6 EX-4.15 9 REGISTRATION RIGHTS AGREEMENT AGREEMENT made as of the 6th day of June, 1997, by and among The Diana Corporation, a Delaware corporation (the "Company"), and the undersigned original holder of a portion of the Purchased Stock (as defined below) and Warrants (as defined below). W I T N E S S E T H: WHEREAS, on this date, the Company has issued 175,000 shares of Common Stock (the "Purchased Stock") and warrants (the "Warrants) to purchase an aggregate of 350,000 shares of Common Stock; NOW, THEREFORE, in consideration of the mutual covenants herein contained and other valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. Definitions. The following terms shall be used in this Agreement with the following respective meanings: "Affiliate" means (i) any Person directly or indirectly controlling, controlled by or under common control with another Person; (ii) any Person owning or controlling ten percent or more of the outstanding voting securities of such other Person; (iii) any officer, director or partner of such Person; and (iv) if such Person is an officer, director or partner, any such company for which such Person acts in such capacity. "Commission" means the Securities and Exchange Commission. "Common Stock" means the Company's Common Stock, $1.00 par value per share. "Exchange Act" means the Securities Exchange Act of 1934, or any successor Federal statute, and the rules and regulations of the Commission (or of any other Federal agency then administering the Exchange Act) thereunder, all as the same shall be in effect at the time. "Holder" means any holder of Registrable Stock. "NASD" means the National Association of Securities Dealers, Inc. "Person" means any natural person, partnership, corporation or other legal entity. "Registrable Stock" means (a) the Purchased Stock, (b) the Common Stock issued or issuable upon exercise of the Warrants, and (c) any other shares of Common Stock issued in respect of such shares by way of a stock dividend, or stock split or in connection with a 1 combination of shares, recapitalization, merger, consolidation, share exchange or reorganization; provided, however, Common Stock will cease to be Registrable Stock (i) following sale thereof pursuant to a Registration Statement or (ii) two years or more have elapsed since exercise or expiration of all of the Warrants. "Registration Statement" means a registration statement filed by the Company with the Commission for a public offering and sale of securities of the Company (other than a registration statement on Form S-8, Form S-4, or successor form). "Securities Act" means the Securities Act of 1933, or any successor Federal statute, and the rules and regulations of the Commission (or of any other Federal agency then administering the Securities Act) thereunder, all as the same shall be in effect at the time. 2. Required Registration. (a) The Holder or Holders of at least fifty percent of all Registrable Stock may by notice in writing to the Company request the Company to register under the Securities Act all or any portion of shares of Registrable Stock held by or issuable to such requesting Holder or Holders for sale in connection with nonunderwritten open market or privately negotiated transactions. Notwithstanding anything to the contrary contained herein, the Company shall not be required to seek to cause a Registration Statement to become effective pursuant to this Section 2: (A) within 120 days after the effective date of a Registration Statement filed by the Company, provided that the Company shall use its best efforts to achieve effectiveness of a registration requested hereunder promptly following such 120-day period if such request is made during such 120-day period; (B) if the Company shall furnish to holders a certificate signed by the chief executive officer of the Company stating that in the good faith judgment of the Company it would be seriously detrimental to the Company or its shareholders for a registration statement to be filed in the near future due to pending Company events, or that it would require disclosure of material non-public information relating to the Company which, in the reasonable opinion of the Company, should not be disclosed, then the Company's obligation to comply with this Section 2 shall be deferred for a period not to exceed ninety (90) days from the date of receipt of written request from such Holders. (b) Following receipt of any notice given under this Section 2 by Holders of Registrable Stock, the Company shall promptly notify all Holders from whom notice has not been received that such registration is to be effected and shall use its reasonable best efforts to register under the Securities Act the number of shares of Registrable Stock specified in such notice (and in all notices received by the Company from other Holders within twenty (20) days after the giving of such notice by the Company to such other Holders). The Company shall be obligated to register Registrable Stock pursuant to this Section 2 on one occasion only. 3. Registration Procedures. If and whenever the Company is required by the provisions of Section 2 hereof to effect the registration of shares of Registrable Stock under the Securities Act, the Company will, at the expense of the Company, as expeditiously as reasonably possible: (a) In accordance with the Securities Act and the rules and regulations of the Commission, prepare and file with the Commission a Registration Statement with respect 2 to such securities and use its reasonable best efforts to cause such Registration Statement to become and remain effective until the securities covered by such Registration Statement have been sold, and prepare and file with the Commission such amendments to such Registration Statement (and use its reasonable best efforts to cause post-effective amendments to become and remain effective) and supplements to the prospectus contained therein as may be necessary to keep such Registration Statement effective and such Registration Statement and prospectus accurate and complete until the Registrable Stock covered by such Registration Statement has been sold or the securities are no longer Registrable Stock; (b) Furnish to the participating Holders such reasonable number of copies of the Registration Statement (including all exhibits thereto), preliminary prospectus, final prospectus and such other documents as such participating Holders may reasonably request in order to facilitate the public offering of such securities; (c) Use its reasonable best efforts to register or qualify the securities covered by such Registration Statement under such state securities or blue sky laws of such jurisdictions (i) as shall be reasonably appropriate for the distribution of the securities covered by such Registration Statement or (ii) as such participating Holders may reasonably request within twenty (20) days following the original filing of such Registration Statement, except that the Company shall not for any purpose be required to execute a general consent to service of process, to subject itself to taxation, or to qualify to do business as a foreign corporation in any jurisdiction where it is not so qualified; (d) Notify the Holders participating in such registration, promptly after it shall receive notice thereof, of the date and time when such Registration Statement and each post-effective amendment thereto has become effective or a supplement to any prospectus forming a part of such Registration Statement has been filed; (e) Notify the Holders participating in such registration promptly of any request by the Commission or any state securities commission or agency for the amending or supplementing of such Registration Statement or prospectus or for additional information; (f) Prepare and file within thirty days with the Commission, and immediately notify such participating Holders of the need to file and of the filing of, such amendments or supplements to such Registration Statement or prospectus as may be necessary to correct any statements or omissions if, at the time when a prospectus relating to such securities is required to be delivered under the Securities Act, any event has occurred as the result of which any such prospectus or any other prospectus as then in effect would include an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; (g) In case any of such participating Holders or any underwriter for any such Holders is required to deliver a prospectus at a time when the prospectus then in 3 circulation is not in compliance with the Securities Act or the rules and regulations of the Commission, prepare promptly upon request such amendments or supplements to such Registration Statement and such prospectus as may be necessary in order for such prospectus to comply with the requirements of the Securities Act and such rules and regulations; (h) Advise such participating Holders, promptly after it shall receive notice or obtain knowledge thereof, of the issuance of any stop order by the Commission or any state securities commission or agency suspending the effectiveness of such Registration Statement or the initiation or threatening of any proceeding for that purpose and promptly use reasonable best efforts to prevent the issuance of any stop order or to obtain its withdrawal if such stop order should be issued; and (i) Use its reasonable best efforts to comply with all applicable rules and regulations of the Commission and shall make generally available as soon as practicable after the effective date of the applicable Registration Statement an earnings statement satisfying the provisions of Section 11(a) of the Securities Act. 4. Expenses. (a) With respect to each registration effected pursuant to Section 2 hereof, all fees, costs and expenses of the Company incidental to such registration in connection therewith shall be borne by the Company. (b) The fees, costs and expenses of registration to be borne as provided in paragraph (a) above, shall include, without limitation, all registration, filing fees, printing expenses, fees and disbursements of counsel and accountants for the Company, and all legal fees and disbursements and other expenses of complying with state securities or blue sky laws of any jurisdictions in which the securities to be offered are to be registered or qualified. The Holders shall bear all of their own expenses, including without limitation, brokerage expenses and their own usual and customary legal fees and expenses. 5. Indemnification and Contribution. (a) The Company will indemnify and hold harmless each Holder of shares of Registrable Stock which are included in a Registration Statement pursuant to the provisions of this Agreement, the directors, officers, employees and agents of such Holder, and any Person who controls such Holder within the meaning of the Securities Act or the Exchange Act, and each of their successors, from and against any and all claims, actions, demands, losses, expenses, damages or liabilities, joint or several, to which they or any of them may become subject under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise, insofar as such claims, actions, demands, losses, expenses, damages or liabilities arise out of or are based upon any untrue statement or alleged untrue statement of any material fact 4 contained in such Registration Statement (including all documents incorporated therein by reference) as originally filed or in any amendment thereto, any preliminary or final prospectus contained therein or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company will not be liable in any such case to the extent that any such claim, action, demand, loss, expense, damage, or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in reliance upon and in conformity with information furnished in writing by such Holder for use in the preparation thereof; provided, further, that the foregoing indemnity shall not inure to the benefit of any Holder and the officers, directors, agents, employees of the Holder, and each Person who controls the Holder, if the Holder shall have sold Registrable Stock in violation of Section 6 hereof. (b) Each Holder of shares of the Registrable Stock which are included in a registration pursuant to the provisions of this Agreement will, severally and not jointly, indemnify and hold harmless the Company, the directors, officers, employees and agents of the Company and any person who controls the Company within the meaning of the Securities Act or the Exchange Act from and against any and all claims, actions, demands, losses, expenses, damages or liabilities, joint or several, to which they or any of them may become subject under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise, insofar as such claims, actions, demands, losses, expenses, damages or liabilities arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in such Registration Statement (including all documents incorporated therein by reference) as originally filed or in any amendment thereto, any preliminary or final prospectus contained therein or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was so made in reliance upon and in conformity with information furnished in writing by such Holder for use in the preparation thereof. (c) Promptly after receipt by a party to be indemnified pursuant to the provisions of paragraph (a) or (b) of this Section 5 (an "indemnified party") of notice of the commencement of any action involving the subject matter of the foregoing indemnity provisions, such indemnified party will, if a claim thereof is to be made against the indemnifying party pursuant to the provisions of paragraph (a) or (b), notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to an indemnified party otherwise than under this Section 5 and shall not relieve the indemnifying party from liability under this Section 5 unless such indemnifying party is prejudiced by such omission. The indemnifying party shall be entitled to appoint counsel of the indemnifying party's choice at the indemnifying party's expense to represent the indemnified party in any action for which indemnification is sought (in which case the 5 indemnifying party shall not be responsible for the fees and expenses of any separate counsel retained by the indemnified party or parties except as set forth below); provided, however, that such counsel shall be reasonably satisfactory to the indemnified party. Notwithstanding the indemnifying party's election to appoint counsel to represent the indemnified party in an action, the indemnified party shall have the right to employ separate counsel, and the indemnifying party shall bear the reasonable fees, costs and expenses of such separate counsel if (i) the use of counsel chosen by the indemnifying party to represent the indemnified party would present such counsel with a conflict of interest that would make such representation inappropriate in the circumstances, (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of the institution of such action or (iii) the indemnifying party shall authorize the indemnified party to employ separate counsel at the expense of the indemnifying party. An indemnifying party will not, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action, suit or proceeding. (d) In order to provide for just and equitable contribution to joint liability under the Securities Act in any case in which either (i) any Holder exercising rights under this Agreement, or any controlling Person of any such Holder, makes a claim for indemnification pursuant to this Section 5 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 5 provides for indemnification is such case, or (ii) contribution under the Securities Act may be required on the part of any such selling Holder or any such controlling Person in circumstances for which indemnification is provided under this Section 5; then, and in each such case, the Company and such Holder will contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (including legal and other expenses reasonably incurred in connection with or defending same) in such proportion as is appropriate to reflect the relative fault of the indemnifying party, on the one hand, and the indemnified party, on the other. Relative fault shall be determined by reference to whether any alleged untrue statement or omission relates to information provided by the indemnifying party, on the one hand, or by the indemnified party, on the other hand. The parties agree that it would not be just and equitable if contribution were determined by pro rata allocation or any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this paragraph (d), no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 6 (e) The provisions of this Section 5 will remain in full force and effect, regardless of any investigation made by or on behalf of any Holder or the Company or any of the officers, directors, employees or agents or controlling persons referred to in Section 5 hereof, and will survive the sale by a Holder of securities covered by a Registration Statement. (f) The liability of a Holder under this Section 5 shall not exceed an amount equal to the net proceeds received by a Holder from the sale of Registrable Stock. 6. Holder Cooperation. Prior to any offers or sales under the Registration Statement, each Holder agrees to obtain prior confirmation from the Company that no "Blackout Condition" exists. The Company shall provide such confirmation (if true) within one business day of the request from a Holder. "Blackout Condition" means (i) the existence of material, nonpublic information, (ii) the unavailability of any required financial information as the result of an actual or proposed acquisition or disposition, or (iii) the existence of any financing or other transaction, event or condition which would make it disadvantageous, in the Company's reasonable opinion, for Registrable Stock to be sold under the Registration Statement. In connection with the registration and sale of the Registrable Stock, each Holder will (i) cooperate with the Company in preparing the Registration Statement and provide the Company with all information, documents and agreements that the Company may deem reasonably necessary, (ii) discontinue offers and sales of the Registrable Stock under the Registration Statement upon notification of a Blackout Condition or of any stop order or suspension of effectiveness of the Registration Statement, (iii) discontinue use of any prospectus following notice by the Company that the prospectus must be amended or supplemented (iv) only use the most recent prospectus included in the Registration Statement, (v) upon presentation of the stock certificate representing any Registrable Stock sold under the Registration Statement, certify that the sale was made in accordance with the terms hereof and the plan of distribution described in the Registration Statement, and (vi) comply with applicable federal and state securities laws including without limitation the prospectus delivery requirements under the Securities Act and the applicable requirements of Rule 10b-5 and Regulation M under the Exchange Act. 7. Notices. Any notice required or permitted to be given hereunder shall be in writing and shall be deemed to be properly given when sent by registered or certified mail, return receipt requested, by Federal Express, DHL or other guaranteed overnight delivery service or by facsimile transmission, addressed as follows: If to the Company: The Diana Corporation 26025 Mureau Road Calabasas, California 91302 Telecopy: (818) 878-7633 Attention: Daniel W. Latham If to a Holder: at the address set forth on the signature page hereof 7 and if to any other Holder at such Holder's address for notice as set forth in the register maintained by the Company, or, as to any of the foregoing, to such other address as any such party may give the others notice of pursuant to this Section, provided that a change of address shall only be effective upon receipt. 8. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware. 9. Waivers; Amendments. No waiver of any right hereunder by any party shall operate as a waiver of any other right, or of the same right with respect to any subsequent occasion for its exercise. This Agreement may not be amended except by a writing executed by the Company and the Holders of at least two-thirds of the Registrable Stock. 10. Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the respective legal representatives, successors and assigns of the parties hereto. A Holder may assign its rights hereunder in connection with an assignment of a Warrant or Registrable Stock, provided the disposition covers at least 50,000 shares of Common Stock and the transferee agrees in writing to the terms hereof. 11. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 12. Prior Understandings. This Agreement represents the complete agreement of the parties with respect to the transactions contemplated hereby and supersedes all prior agreements and understandings. 13. Headings. Headings in this Agreement are included for reference only and shall have no effect upon the construction or interpretation of any part of this Agreement. 14. Severability. If any provision of this Agreement shall be held to be illegal, invalid or unenforceable, such illegality, invalidity or unenforceability shall attach only to such provision and shall not in any manner affect or render illegal, invalid or unenforceable any other provision of this Agreement, and this Agreement shall be carried out as if any such illegal, invalid or unenforceable provision were not contained herein. 8 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above recited. THE DIANA CORPORATION By: /s/ Daniel W. Latham, President and Chief Operating Officer By: /s/ James J. Fiedler Address: 24905 Ariella Drive Calabasas, CA 91302 Telecopy: (818) 225-8746 9 EX-10.29 10 EMPLOYMENT AGREEMENT THIS AGREEMENT, is made as of September 4, 1997, provided that the employment hereunder shall be deemed to have commenced on April 1, 1997, by and between THE DIANA CORPORATION, a Delaware Corporation (the "Company"), and JAMES J. FIEDLER (the "Executive"). R E C I T A L S WHEREAS, Executive is willing to be employed by Company, and the Company is willing to employ the Executive, upon the terms and conditions set forth in this Agreement. NOW, THEREFORE, in order to set forth the terms and conditions of Executive's employment with Company and in consideration of the covenants and agreements of the parties herein contained, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1.Employment Services. Subject to the terms and upon the conditions hereinafter set forth, the Company hereby employs Executive as Chairman and Chief Executive Officer. Executive accepts such employment and agrees to devote his full time and use his best efforts to perform his duties pursuant to this Agreement and to further the business of the Company. Executive shall not, without the prior written consent of the Company as authorized by the Company's Board of Directors ("Board of Directors"), engage directly or indirectly in any other business or occupation during his employment under this Agreement. 2.Term and Termination. 2.1Term. Subject to Section 2.2 hereof, the employment of Executive under this Agreement shall be deemed to have commenced on April 1, 1997 and will continue until the occurrence of the first of the following: a) March 31, 1998 (i.e. a term of one year); b) Executive's death; or c) Executive's illness, physical or mental disability or other incapacity resulting in Executive's inability to effectively perform the essential functions of his job, with or without reasonable accommodation, for a cumulative period of twelve (12) weeks during any period of twelve (12) consecutive months. 1 The term of this Agreement may only be extended by the written agreement of both the Company (as approved by the Board of Directors) and the Executive, as provided in Section 11.1. 2.2Termination. The employment of Executive under this Agreement may also be terminated at the option of the Board of Directors upon the occurrence of any of the following: a) Executive's conduct involving fraud or moral turpitude or Executive's dishonesty involving Company's business, b) Executive's chronic absence from work other than by reason of illness or injury, c) Executive's conviction of any felony, d) Executive's conviction of any misdemeanor which is substantially related to Executive's services hereunder, e) Executive's continuing use of illegal drugs or other illegal substance (whether or not on the job) after receiving a written notice from the Company to halt such usage or Executive's conviction of a crime involving illegal drugs or other illegal substance, f) Executive's continuing use of alcohol (whether or not on the job) after receiving a written notice from the Company to halt such usage or Executive's conviction of a crime involving alcohol, which impairs Executive's ability to perform Executive's duties under this Agreement or has an adverse effect (other than an insignificant effect) on the reputation of the Company or its relationship with any customer or supplier of the Company, g) Executive's illegal conduct either within or outside the scope of Executive's employment which has an adverse effect (other than an insignificant effect) on the reputation of the Company or its relationship with any customer or supplier of the Company, h) Executive's breach of his obligations under Sections 6, 7, 8 or 9 hereof, or i) Executive's breach of any other provision of this Agreement. If the Board of Directors terminates the employment of the Executive without any such reason as aforesaid, which Executive agrees the Board of Directors is entitled to do since Executive serves at the discretion of the Board of Directors, then Executive shall nevertheless be entitled to salary and medical benefits only hereunder until the earlier of (i) the date specified in Section 2.1 and (ii) the first anniversary of such termination. In the case of any other termination of the Executive's employment, the salary and benefits hereunder will terminate as of the date of such termination. Reference is made to Section 11.1 of this Agreement 2 regarding the authority of the Board of Directors to make determinations on behalf of the Company for purposes of this Agreement. 2.3Effect of Termination. Executive's obligations in Sections 6, 7, 8, and 9 hereof shall survive the termination of Executive's employment hereunder for any reason. However, if this Agreement is not renewed for at least one additional year beyond the date specified in Section 2.1(a), then the additional twelve month period of non-competition (i.e. after termination of employment) provided in Section 9 shall not be applicable to Executive. 3.Salary. During the term of his employment under this Agreement, as compensation for his services hereunder and in consideration of the covenants of Executive herein, Executive shall be entitled to a salary at a rate of Two Hundred Thousand Dollars ($200,000) per year. Such salary will be paid in equal semi-monthly installments or with such other frequency as Company shall elect (but not less frequently than semi-monthly) and shall be subject to withholding and other deductions by reason of federal or state law. 4.Reimbursement for Expenses. Company agrees to reimburse Executive for all reasonable business expenses incurred by him in connection with the performance of his obligations under this Agreement, subject to established reimbursement policies of the Company in effect from time-to-time regarding expense reimbursement. 5.Fringe Benefits. Executive shall be entitled to the following fringe benefits during the term of his employment under this Agreement. The Executive understands that he will recognize income to the extent provided by law in respect of certain of the benefits hereunder, including cancellation of indebtedness income, and that these benefits shall be subject to withholding and other deductions by reason of federal or state law. 5.1Vacation and Car Allowance. (a) Executive shall be allowed four (4) weeks of vacation per year, with full pay and without loss of any other compensation or benefits, during the term of this Agreement. Executive shall coordinate the schedule of his vacations with other executives and the personnel of Company and its affiliates so as to avoid any adverse effects on the Company's operations. (b) Executive will receive a car allowance of $600 per month. 5.2Bonuses. a) With reasonable promptness after the end of each half year included in each of the Company's fiscal years covered by this 3 Agreement, the Executive shall receive a bonus equal to ten percent (10%) of the Company's pre-tax profits for said half year but not to exceed for such fiscal year as a whole one hundred percent (100%) of the amount of Executive's annual salary. The Company's pre-tax profits shall be its income after all expenses, adjustments and deductions except income taxes, but shall not include the effects, if any, of extraordinary items and accounting changes, as set forth in its consolidated financial statements (audited, if applicable) for such half year or year as included in its second quarter report on Form 10-Q for such fiscal year or in its annual report on Form 10-K for such fiscal year as filed with the Securities and Exchange Commission (in the absence of such filing, to be based on the Company's financial statements otherwise prepared). In any event, the sum of the Company's pre-tax profits for the first half of such fiscal year and the second half of such fiscal year shall not exceed the total for such full fiscal year as included in such annual report on Form 10-K. For comparative purposes, in the Company's 1996 annual report on Form 10-K/A, the amount of such pre-tax profits in fiscal year 1996 was a loss of $3.365 million (i.e., a negative amount) as captioned in the Company's consolidated statements of operations as "net earnings (loss)", since the Company reflected neither taxes nor tax benefit in such year. b) During the term of the Executive's employment under this Agreement, with reasonable promptness after the end of each month, commencing with the month of April 1997, in order to emphasize sales revenue growth for Sattel Communications LLC ("Sattel"), which is presently an 80% owned indirect subsidiary of the Company, Executive shall receive a bonus equal to one-half percent (0.5%) of the sales revenues of Sattel for such month, provided that: (i) the gross margin of Sattel's sales for such month (defined as net sales revenues less cost of sales) shall be at a level of sixty-two percent (62%) or greater (provided that such requirement shall instead be fifty-five percent (55%) for months prior to and including September 1997), (ii) such bonus based on revenues of Sattel shall be payable only as and when sales revenues are received by Sattel in the form of cash, and (iii) for each fiscal year covered by this Agreement, the aggregate amount for all months of such bonus based on sales revenues of Sattel shall not exceed thirty percent (30%) of the amount of Executive's annual salary, provided that, if the sales revenues of Sattel for such fiscal year as a whole exceed $18 million, then such percentage limitation shall instead be fifty percent (50%) of the amount of 4 Executive's annual salary, and if the sales revenues of Sattel for such fiscal year as a whole exceed $25 million, then such percentage limitation shall instead be one hundred percent (100%) of the amount of Executive's annual salary. The Company may delay or limit the payment of any bonus pursuant to this Section 5.2(b) until such time as these requirements are met. If for any reason an excess bonus is paid, for example because sales revenues in a previous month are reversed, due to a refund, then the Company shall be entitled to a corresponding refund of bonus and/or a credit against a future bonus, as appropriate. With respect to both paragraphs a) and b) above, (i) the amounts of pre-tax profits of the Company and sales revenues of Sattel shall be calculated based on generally accepted accounting principles consistently applied, except as specifically mentioned above and (ii) such provisions have been agreed to in contemplation of the Company's fiscal year ending on or about March 31, 1998, and it is understood that such provisions might be continued unchanged, or might be amended or deleted or replaced with other provisions, according to the mutual agreement of the parties, in connection with the extension, if any, of this Agreement. See Sections 2.1 and 11.1 of this Agreement. 5.3Other Fringe Benefits. Executive may receive such other additional fringe benefits, if any, as the Board of Directors may from time-to-time make available to Executive at the Board of Directors' sole discretion. The parties understand that the Company is in the process of arranging a new equity financing, for which the efforts of the Executive have been substantial, in the amount of $3.5 million or greater. Subject to the closing of such additional equity financing, Executive shall be entitled to the following: a) Executive has a $300,000 note payable to the Company. On the date of this Agreement (or, if later, on the date such $3.5 million financing condition is met), a portion of such note will be forgiven in the amount of $100,000 of the unpaid principal, and interest on such forgiven portion. Thereafter, if this Agreement shall be renewed for an additional year or years, pursuant to Sections 2.1 and 11.1 hereof, the Company agrees that additional portions of such note in the principal amounts of $100,000 and $100,000, respectively, will be forgiven at the dates that are twelve (12) months and twenty-four (24) months, respectively, after the date of this Agreement. Such three scheduled instances of forgiveness are each subject to the conditions (i) that the Executive remains as an employee of the Company at each such forgiveness date and (ii) 5 that the Company shall not be, or be rendered as a consequence of such forgiveness, bankrupt or insolvent at such respective dates. b) The Company notes that the Class B units of Sattel are convertible (the holders thereof having both the right and the obligation to convert the same into shares of the Company's common stock) upon, among other things, Sattel achieving cumulative pre-tax profits of at least $15 million over four consecutive quarters in the future. Such conversion is at a rate of 500 shares of the Company's common stock for each Class B unit, subject to adjustment. At such time as, among other things, a majority of the Class B units are so converted, then the Class A units of Sattel shall also be converted on the same terms as the Class B units, except with a possible upwards adjustment to reflect the priority of distribution associated with the Class A units. The Company will waive the foregoing condition that Sattel achieve cumulative pre-tax profits of at least $15 million over four consecutive quarters in order for the Class B units, and the Class A units, to be convertible. Instead, the Company will establish terms permitting, but not requiring, the Class B units to be converted at the election of the holders following the date such $3.5 million financing is achieved as referred to above or at any time thereafter. The Class A units will also become convertible, on the same terms as the Class B units, at the option of the holders, at such time as a majority of the Class B units have actually been converted by the holders thereof or at any time thereafter. These new terms for conversion will apply only to holders of the Class A and B units who are currently (or were as of June 30, 1997) directors, officers or employees of the Company and its subsidiaries. As to all other holders, the previously existing terms and conditions shall remain unchanged. The Executive will be entitled to participate therein on the same basis as all other holders of the Class B units or Class A units, according to the units held by the Executive. The Company does not contemplate that any demand registration rights under federal or state securities laws will be applicable to any such conversion, and such securities, including the shares of the Company's common stock issuable upon conversion, will only be available for resale in accordance with applicable securities laws and exemptions thereunder, including Rule 144 under the Securities Act of 1933, as amended. However, as soon as reasonably practicable, but not earlier than the time the Company becomes current in its reporting under the Securities Exchange Act of 1934, the Company intends to file a registration statement on Form S-8 to 6 cover such conversion to the extent registration on such form for such conversion is then available. Additionally, in case registration on such form for such purpose is not reasonably practicable or available, the Company will give appropriate consideration to allowing a piggy-back registration. 6.Definitions. As used in this Agreement, the following words have the meanings specified: a) "Proprietary Ideas" means ideas, suggestions, inventions and work relating in any way to the business and activities of Company which may be subjects of protection under applicable laws, including common law, including patents, copyrights, trade secrets, trademarks, service marks or other intellectual property rights. b) "Inventions" means inventions, designs, discoveries, improvements and ideas, whether or not patentable, including without limitation, novel or improved products, processes, machines, software, promotional and advertising materials, business data processing programs and systems, and other manufacturing and sales techniques, which either (a) relate to (i) the business of Company as conducted from time-to-time or (ii) the Company's actual or demonstrably anticipated research or development, or (b) result from any work performed by Executive for Company. c) "Confidential Information" means Proprietary Ideas and also information related to Company's business, whether or not in written or printed form, not generally known in the trade or industry of which Executive has or will become informed during the period of employment by the Company, which may include but is not limited to product specifications, manufacturing procedures, methods, equipment, compositions, technology, formulas, trade secrets, know-how, research and development programs, sales methods, customer lists, mailing lists, customer usages and requirements, software and other confidential technical or business information and data; provided, however, that Confidential Information shall not include any information which is in the public domain by means other than disclosure by Executive. d) As used in Sections 6, 7, 8, and 9 only, the term "Company" shall include all entities affiliated with the Company. 7.Disclosure and Assignment of Inventions. Executive agrees to disclose to the Company (and, if requested to do so, to provide a written description thereof to the Company), and hereby assigns to Company all of Executive's rights in and to, any Inventions conceived or reduced to practice at any time during Executive's 7 employment by Company, either solely or jointly with others and whether or not developed on Executive's own time or with Company's resources. Executive agrees that Inventions first reduced to practice within one (1) year after termination of Executive's employment by Company shall be treated as if conceived during such employment unless Executive can establish specific events giving rise to the conception which occurred after such employment. Further, Executive disclaims and will not assert any rights in Inventions as having been made, conceived or acquired prior to employment by Company except such as are specifically listed at the conclusion of this Agreement. Executive shall cooperate with Company and shall execute and deliver such documents and do such other acts and things as Company may request, at Company's expense, to obtain and maintain letters patent or registrations covering any Inventions and to vest in Company all rights therein free of all encumbrances and adverse claims. 8.Confidential Information. Except as required by law or regulatory agencies, Executive shall not disclose to Company or induce Company to use any secret or confidential information belonging to persons not affiliated with Company, including any former employer of Executive. In addition to all duties of loyalty imposed on Executive by law, Executive shall maintain Confidential Information in strict confidence and secrecy and shall not at any time, during or at any time after termination of employment with Company, directly or indirectly, use or disclose to others any Confidential Information, or use it for the benefit of any person or entity (including Executive) other than Company, without the prior written consent of any duly authorized officer of Company (except for disclosures to persons acting on Company's behalf with a need to know such information). Executive shall carefully preserve any documents, records and tangible data relating to Inventions or Confidential Information coming into Executive's possession and shall deliver the same and any copies thereof to Company upon request and, in any event, upon termination of Executive's employment by Company. 9.Non-Competition. a) At all times during Executive's employment by the Company (whether pursuant to this Agreement or otherwise) and, to the fullest extent permitted by applicable law, for a period of twelve (12) months following the termination of such employment, Executive will not, in any capacity whatsoever, in any state in the United States or in any other country, directly or indirectly, participate in or assist in the ownership, management, operation or control of, or have any beneficial interest in, or provide employment, consulting or other services for, any corporation, partnership, association or other person or entity ("Competitive 8 Business") which is engaged in the development, manufacture, marketing, distribution, service and/or sale of voice or data switching equipment, and which directly competes or is planning to directly compete with the Company's products or services (including products and services under development). If the business is multi-faceted, this restriction shall apply to only that part of the business which is competitive to Company. b) In furtherance of the foregoing, but as an independent obligation of Executive, Executive agrees that he will not, to the fullest extent permitted by applicable law, during the one-year period following termination of his employment with Company, be connected in any way with the solicitation of any then current or potential customers or suppliers of Company if such solicitation is likely to result in a loss of business for Company. c) In furtherance of the foregoing, but as an independent obligation of the Executive, Executive agrees that, to the fullest extent permitted by applicable law, during the one year following termination of his employment with the Company, he will not solicit for employment, employ or engage as a consultant any person who had been an employee of the Company at any time in the one-year period prior to termination of Executive's employment with Company. d) In the event the covenants set forth in this Section 9 are found to be unenforceable or invalid by reason of being overly broad, the parties hereto intend that such covenants shall be limited to such scope, geographic area and duration as shall make such covenants valid and enforceable. 10.Government Laws, Regulations and Contracts. Executive agrees to comply, and to do all things necessary for Company to comply, with all federal, state, local and foreign laws and regulations and government contracts which may be applicable to the business and operations of Company. 11.Miscellaneous. 11.1Amendment and Modification. Company (by action of its Board of Directors) and Executive may amend, modify and supplement this Agreement only in such manner as may be agreed upon by Company and Executive in writing. This provision shall be applicable to any extension of the term of this Agreement as provided in Section 2.1. All determinations, waivers, consents, approvals or other acts on the part of the Company that are permitted or required by this Agreement shall similarly require the approval of the Board of Directors. 9 11.2 Entire Agreement. This instrument embodies the entire agreement between the parties hereto with respect to the employment relationship created hereby and supersedes and discharges any prior agreements pertaining to employment between Executive and the Company. There have been and are no agreements, representations or warranties between the parties other than those set forth or provided for herein relating to such employment relationship. 11.3 Assignment. This Agreement shall not be assigned by either party without the written consent of the other party. Inasmuch as this Agreement contemplates the provision of personal services by the Executive, ordinarily this Agreement shall not be assignable by the Executive. This Agreement shall not be assigned by the Company except with the prior written consent of the Executive, which he shall not unreasonably withhold. Any attempted assignment without such written consent shall be null and void and without legal effect. 11.4 Binding Effect; Specific Performance. Subject to Section 11.3 hereof, this Agreement shall be binding upon and inure to the benefit of the respective parties hereto and their successors, assigns, heirs, executors, administrators and personal representatives. The parties hereto shall be entitled, at their option, to the remedy of specific performance to the fullest extent permitted by applicable law in enforcing the provisions of this Agreement. 11.5 Arbitration. Any dispute, controversy or claim arising out of or relating to this Agreement, or the breach hereof, or the employment relationship hereunder, shall be settled by binding arbitration in Los Angeles, California administered by the American Arbitration Association under its Commercial Arbitration Rules, and judgment on the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. 11.6 Agreement Severable; Waiver. This is a severable Agreement and in the event that any part of this Agreement shall be held to be unenforceable, all other parts of this Agreement shall remain valid and fully enforceable as if the unenforceable part or parts had not been included herein. No waiver of any provision of this Agreement shall be binding unless executed in writing by the party to be bound hereby. No waiver of a breach of any of the provisions of this Agreement shall be deemed to be or shall constitute a waiver of a breach of any other provision of this Agreement, whether or not similar, nor shall such waiver constitute a continuing waiver of such breach unless otherwise expressly provided. No failure or delay in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. 10 11.7 Notices. For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when actually delivered to the recipient or when mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed as follows: If to Executive, to: James J. Fiedler 26025 Mureau Rd. Calabasas, CA 91302 If to Company, to: The Diana Corporation Attn: Board of Directors 26025 Mureau Rd. Calabasas, CA 91302 or to such other address as either party may have furnished to the other in writing in accordance herewith except that notices of a change of address shall be effective only upon receipt. 11.8 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT REFERENCE TO THE CHOICE OF LAW PRINCIPLES THEREOF. EXECUTIVE ACKNOWLEDGES HAVING READ, EXECUTED AND RECEIVED A COPY OF THIS AGREEMENT, INCLUDING THE FOLLOWING NOTICE, AND AGREES THAT, WITH RESPECT TO THE SUBJECT MATTER HEREOF, IT CONSTITUTES EXECUTIVE'S ENTIRE AGREEMENT WITH COMPANY, SUPERSEDING ANY PREVIOUS ORAL OR WRITTEN COMMUNICATIONS, REPRESENTATIONS, UNDERSTANDINGS OR AGREEMENTS WITH THE COMPANY OR ANY OF ITS OFFICIALS OR REPRESENTATIVES. Notwithstanding anything to the contrary in Section 7 hereof, this Agreement does not apply to an Invention for which no equipment, supplies, facility, or trade secret information of the Company was used and which was developed entirely on Executive's own time, unless (a) the Invention relates (i) to the business of the Company as conducted from time-to-time or (ii) to the Company's actual or demonstrably anticipated research or development, or (b) the Invention results from any work performed by the Executive for the Company. 11 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the day and year first above written. THE DIANA CORPORATION ("Company") By: /s/ Jack E. Donnelly Date: September 4, 1997 JAMES J. FIEDLER ("Executive") By: /s/ James J. Fiedler Date: September 4, 1997 List of Inventions Excepted From Section 7 Above: None 12 EX-10.30 11 EMPLOYMENT AGREEMENT THIS AGREEMENT, is made as of September 4, 1997, provided that the employment hereunder shall be deemed to have commenced on April 1, 1997, by and between THE DIANA CORPORATION, a Delaware Corporation (the "Company"), and DANIEL W. LATHAM (the "Executive"). R E C I T A L S WHEREAS, Executive is willing to be employed by Company, and the Company is willing to employ the Executive, upon the terms and conditions set forth in this Agreement. NOW, THEREFORE, in order to set forth the terms and conditions of Executive's employment with Company and in consideration of the covenants and agreements of the parties herein contained, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Employment Services. Subject to the terms and upon the conditions hereinafter set forth, the Company hereby employs Executive as Chairman and Chief Executive Officer. Executive accepts such employment and agrees to devote his full time and use his best efforts to perform his duties pursuant to this Agreement and to further the business of the Company. Executive shall not, without the prior written consent of the Company as authorized by the Company's Board of Directors ("Board of Directors"), engage directly or indirectly in any other business or occupation during his employment under this Agreement. 2. Term and Termination. 2.1 Term. Subject to Section 2.2 hereof, the employment of Executive under this Agreement shall be deemed to have commenced on April 1, 1997 and will continue until the occurrence of the first of the following: a) March 31, 1998 (i.e. a term of one year); b) Executive's death; or c) Executive's illness, physical or mental disability or other incapacity resulting in Executive's inability to effectively perform the essential functions of his job, with or without reasonable accommodation, for a cumulative period of twelve (12) weeks during any period of twelve (12) consecutive months. 1 The term of this Agreement may only be extended by the written agreement of both the Company (as approved by the Board of Directors) and the Executive, as provided in Section 11.1. 2.2 Termination. The employment of Executive under this Agreement may also be terminated at the option of the Board of Directors upon the occurrence of any of the following: a) Executive's conduct involving fraud or moral turpitude or Executive's dishonesty involving Company's business, b) Executive's chronic absence from work other than by reason of illness or injury, c) Executive's conviction of any felony, d) Executive's conviction of any misdemeanor which is substantially related to Executive's services hereunder, e) Executive's continuing use of illegal drugs or other illegal substance (whether or not on the job) after receiving a written notice from the Company to halt such usage or Executive's conviction of a crime involving illegal drugs or other illegal substance, f) Executive's continuing use of alcohol (whether or not on the job) after receiving a written notice from the Company to halt such usage or Executive's conviction of a crime involving alcohol, which impairs Executive's ability to perform Executive's duties under this Agreement or has an adverse effect (other than an insignificant effect) on the reputation of the Company or its relationship with any customer or supplier of the Company, g) Executive's illegal conduct either within or outside the scope of Executive's employment which has an adverse effect (other than an insignificant effect) on the reputation of the Company or its relationship with any customer or supplier of the Company, h) Executive's breach of his obligations under Sections 6, 7, 8 or 9 hereof, or i) Executive's breach of any other provision of this Agreement. If the Board of Directors terminates the employment of the Executive without any such reason as aforesaid, which Executive agrees the Board of Directors is entitled to do since Executive serves at the discretion of the Board of Directors, then Executive shall nevertheless be entitled to salary and medical benefits only hereunder until the earlier of (i) the date specified in Section 2.1 and (ii) the first anniversary of such termination. In the case of any other termination of the Executive's employment, the salary and benefits hereunder will terminate as of the date of such termination. Reference is made to Section 11.1 of this Agreement 2 regarding the authority of the Board of Directors to make determinations on behalf of the Company for purposes of this Agreement. 2.3 Effect of Termination. Executive's obligations in Sections 6, 7, 8, and 9 hereof shall survive the termination of Executive's employment hereunder for any reason. However, if this Agreement is not renewed for at least one additional year beyond the date specified in Section 2.1(a), then the additional twelve month period of non-competition (i.e. after termination of employment) provided in Section 9 shall not be applicable to Executive. 3. Salary. During the term of his employment under this Agreement, as compensation for his services hereunder and in consideration of the covenants of Executive herein, Executive shall be entitled to a salary at a rate of One Hundred Seventy-Five Thousand Dollars ($175,000) per year. Such salary will be paid in equal semi-monthly installments or with such other frequency as Company shall elect (but not less frequently than semi-monthly) and shall be subject to withholding and other deductions by reason of federal or state law. 4. Reimbursement for Expenses. Company agrees to reimburse Executive for all reasonable business expenses incurred by him in connection with the performance of his obligations under this Agreement, subject to established reimbursement policies of the Company in effect from time-to-time regarding expense reimbursement. 5. Fringe Benefits. Executive shall be entitled to the following fringe benefits during the term of his employment under this Agreement. The Executive understands that he will recognize income to the extent provided by law in respect of certain of the benefits hereunder, including cancellation of indebtedness income, and that these benefits shall be subject to withholding and other deductions by reason of federal or state law. 5.1 Vacation and Car Allowance. (a) Executive shall be allowed four (4) weeks of vacation per year, with full pay and without loss of any other compensation or benefits, during the term of this Agreement. Executive shall coordinate the schedule of his vacations with other executives and the personnel of Company and its affiliates so as to avoid any adverse effects on the Company's operations. (b) Executive will receive a car allowance of $600 per month. 5.2 Bonuses. a) With reasonable promptness after the end of each half year included in each of the Company's fiscal years covered by this 3 Agreement, the Executive shall receive a bonus equal to five percent (5%) of the Company's pre-tax profits for said half year but not to exceed for such fiscal year as a whole seventy- five percent (75%) of the amount of Executive's annual salary. The Company's pre-tax profits shall be its income after all expenses, adjustments and deductions except income taxes, but shall not include the effects, if any, of extraordinary items and accounting changes, as set forth in its consolidated financial statements (audited, if applicable) for such half year or year as included in its second quarter report on Form 10-Q for such fiscal year or in its annual report on Form 10-K for such fiscal year as filed with the Securities and Exchange Commission (in the absence of such filing, to be based on the Company's financial statements otherwise prepared). In any event, the sum of the Company's pre-tax profits for the first half of such fiscal year and the second half of such fiscal year shall not exceed the total for such full fiscal year as included in such annual report on Form 10-K. For comparative purposes, in the Company's 1996 annual report on Form 10-K/A, the amount of such pre-tax profits in fiscal year 1996 was a loss of $3.365 million (i.e., a negative amount) as captioned in the Company's consolidated statements of operations as "net earnings (loss)", since the Company reflected neither taxes nor tax benefit in such year. b) During the term of the Executive's employment under this Agreement, with reasonable promptness after the end of each month, commencing with the month of April 1997, in order to emphasize sales revenue growth for Sattel Communications LLC ("Sattel"), which is presently an 80% owned indirect subsidiary of the Company, Executive shall receive a bonus equal to one-half percent (0.5%) of the sales revenues of Sattel for such month, provided that: (i) the gross margin of Sattel's sales for such month (defined as net sales revenues less cost of sales) shall be at a level of sixty-two percent (62%) or greater (provided that such requirement shall instead be fifty-five percent (55%) for months prior to and including September 1997), (ii) such bonus based on revenues of Sattel shall be payable only as and when sales revenues are received by Sattel in the form of cash, and (iii) for each fiscal year covered by this Agreement, the aggregate amount for all months of such bonus based on sales revenues of Sattel shall not exceed thirty percent (30%) of the amount of Executive's annual salary, provided that, if the sales revenues of Sattel for such fiscal year as a whole exceed $18 million, then such percentage limitation shall instead be fifty percent (50%) of the amount of 4 Executive's annual salary, and if the sales revenues of Sattel for such fiscal year as a whole exceed $25 million, then such percentage limitation shall instead be one hundred percent (100%) of the amount of Executive's annual salary. The Company may delay or limit the payment of any bonus pursuant to this Section 5.2(b) until such time as these requirements are met. If for any reason an excess bonus is paid, for example because sales revenues in a previous month are reversed, due to a refund, then the Company shall be entitled to a corresponding refund of bonus and/or a credit against a future bonus, as appropriate. With respect to both paragraphs a) and b) above, (i) the amounts of pre-tax profits of the Company and sales revenues of Sattel shall be calculated based on generally accepted accounting principles consistently applied, except as specifically mentioned above and (ii) such provisions have been agreed to in contemplation of the Company's fiscal year ending on or about March 31, 1998, and it is understood that such provisions might be continued unchanged, or might be amended or deleted or replaced with other provisions, according to the mutual agreement of the parties, in connection with the extension, if any, of this Agreement. See Sections 2.1 and 11.1 of this Agreement. 5.3 Other Fringe Benefits. Executive may receive such other additional fringe benefits, if any, as the Board of Directors may from time-to-time make available to Executive at the Board of Directors' sole discretion. The parties understand that the Company is in the process of arranging a new equity financing, for which the efforts of the Executive have been substantial, in the amount of $3.5 million or greater. Subject to the closing of such additional equity financing, Executive shall be entitled to the following: a) Executive has a $300,000 note payable to the Company. On the date of this Agreement (or, if later, on the date such $3.5 million financing condition is met), a portion of such note will be forgiven in the amount of $100,000 of the unpaid principal, and interest on such forgiven portion. Thereafter, if this Agreement shall be renewed for an additional year or years, pursuant to Sections 2.1 and 11.1 hereof, the Company agrees that additional portions of such note in the principal amounts of $100,000 and $100,000, respectively, will be forgiven at the dates that are twelve (12) months and twenty-four (24) months, respectively, after the date of this Agreement. Such three scheduled instances of forgiveness are each subject to the conditions (i) that the Executive remains as an employee of the Company at each such forgiveness date and (ii) 5 that the Company shall not be, or be rendered as a consequence of such forgiveness, bankrupt or insolvent at such respective dates. b) The Company notes that the Class B units of Sattel are convertible (the holders thereof having both the right and the obligation to convert the same into shares of the Company's common stock) upon, among other things, Sattel achieving cumulative pre-tax profits of at least $15 million over four consecutive quarters in the future. Such conversion is at a rate of 500 shares of the Company's common stock for each Class B unit, subject to adjustment. At such time as, among other things, a majority of the Class B units are so converted, then the Class A units of Sattel shall also be converted on the same terms as the Class B units, except with a possible upwards adjustment to reflect the priority of distribution associated with the Class A units. The Company will waive the foregoing condition that Sattel achieve cumulative pre-tax profits of at least $15 million over four consecutive quarters in order for the Class B units, and the Class A units, to be convertible. Instead, the Company will establish terms permitting, but not requiring, the Class B units to be converted at the election of the holders following the date such $3.5 million financing is achieved as referred to above or at any time thereafter. The Class A units will also become convertible, on the same terms as the Class B units, at the option of the holders, at such time as a majority of the Class B units have actually been converted by the holders thereof or at any time thereafter. These new terms for conversion will apply only to holders of the Class A and B units who are currently (or were as of June 30, 1997) directors, officers or employees of the Company and its subsidiaries. As to all other holders, the previously existing terms and conditions shall remain unchanged. The Executive will be entitled to participate therein on the same basis as all other holders of the Class B units or Class A units, according to the units held by the Executive. The Company does not contemplate that any demand registration rights under federal or state securities laws will be applicable to any such conversion, and such securities, including the shares of the Company's common stock issuable upon conversion, will only be available for resale in accordance with applicable securities laws and exemptions thereunder, including Rule 144 under the Securities Act of 1933, as amended. However, as soon as reasonably practicable, but not earlier than the time the Company becomes current in its reporting under the Securities Exchange Act of 1934, the Company intends to file a registration statement on Form S-8 to 6 cover such conversion to the extent registration on such form for such conversion is then available. Additionally, in case registration on such form for such purpose is not reasonably practicable or available, the Company will give appropriate consideration to allowing a piggy-back registration. 6. Definitions. As used in this Agreement, the following words have the meanings specified: a) "Proprietary Ideas" means ideas, suggestions, inventions and work relating in any way to the business and activities of Company which may be subjects of protection under applicable laws, including common law, including patents, copyrights, trade secrets, trademarks, service marks or other intellectual property rights. b) "Inventions" means inventions, designs, discoveries, improvements and ideas, whether or not patentable, including without limitation, novel or improved products, processes, machines, software, promotional and advertising materials, business data processing programs and systems, and other manufacturing and sales techniques, which either (a) relate to (i) the business of Company as conducted from time-to-time or (ii) the Company's actual or demonstrably anticipated research or development, or (b) result from any work performed by Executive for Company. c) "Confidential Information" means Proprietary Ideas and also information related to Company's business, whether or not in written or printed form, not generally known in the trade or industry of which Executive has or will become informed during the period of employment by the Company, which may include but is not limited to product specifications, manufacturing procedures, methods, equipment, compositions, technology, formulas, trade secrets, know-how, research and development programs, sales methods, customer lists, mailing lists, customer usages and requirements, software and other confidential technical or business information and data; provided, however, that Confidential Information shall not include any information which is in the public domain by means other than disclosure by Executive. d) As used in Sections 6, 7, 8, and 9 only, the term "Company" shall include all entities affiliated with the Company. 7. Disclosure and Assignment of Inventions. Executive agrees to disclose to the Company (and, if requested to do so, to provide a written description thereof to the Company), and hereby assigns to Company all of Executive's rights in and to, any Inventions conceived or reduced to practice at any time during Executive's 7 employment by Company, either solely or jointly with others and whether or not developed on Executive's own time or with Company's resources. Executive agrees that Inventions first reduced to practice within one (1) year after termination of Executive's employment by Company shall be treated as if conceived during such employment unless Executive can establish specific events giving rise to the conception which occurred after such employment. Further, Executive disclaims and will not assert any rights in Inventions as having been made, conceived or acquired prior to employment by Company except such as are specifically listed at the conclusion of this Agreement. Executive shall cooperate with Company and shall execute and deliver such documents and do such other acts and things as Company may request, at Company's expense, to obtain and maintain letters patent or registrations covering any Inventions and to vest in Company all rights therein free of all encumbrances and adverse claims. 8. Confidential Information. Except as required by law or regulatory agencies, Executive shall not disclose to Company or induce Company to use any secret or confidential information belonging to persons not affiliated with Company, including any former employer of Executive. In addition to all duties of loyalty imposed on Executive by law, Executive shall maintain Confidential Information in strict confidence and secrecy and shall not at any time, during or at any time after termination of employment with Company, directly or indirectly, use or disclose to others any Confidential Information, or use it for the benefit of any person or entity (including Executive) other than Company, without the prior written consent of any duly authorized officer of Company (except for disclosures to persons acting on Company's behalf with a need to know such information). Executive shall carefully preserve any documents, records and tangible data relating to Inventions or Confidential Information coming into Executive's possession and shall deliver the same and any copies thereof to Company upon request and, in any event, upon termination of Executive's employment by Company. 9. Non-Competition. a) At all times during Executive's employment by the Company (whether pursuant to this Agreement or otherwise) and, to the fullest extent permitted by applicable law, for a period of twelve (12) months following the termination of such employment, Executive will not, in any capacity whatsoever, in any state in the United States or in any other country, directly or indirectly, participate in or assist in the ownership, management, operation or control of, or have any beneficial interest in, or provide employment, consulting or other services for, any corporation, partnership, association or other person or entity ("Competitive 8 Business") which is engaged in the development, manufacture, marketing, distribution, service and/or sale of voice or data switching equipment, and which directly competes or is planning to directly compete with the Company's products or services (including products and services under development). If the business is multi-faceted, this restriction shall apply to only that part of the business which is competitive to Company. b) In furtherance of the foregoing, but as an independent obligation of Executive, Executive agrees that he will not, to the fullest extent permitted by applicable law, during the one-year period following termination of his employment with Company, be connected in any way with the solicitation of any then current or potential customers or suppliers of Company if such solicitation is likely to result in a loss of business for Company. c) In furtherance of the foregoing, but as an independent obligation of the Executive, Executive agrees that, to the fullest extent permitted by applicable law, during the one year following termination of his employment with the Company, he will not solicit for employment, employ or engage as a consultant any person who had been an employee of the Company at any time in the one-year period prior to termination of Executive's employment with Company. d) In the event the covenants set forth in this Section 9 are found to be unenforceable or invalid by reason of being overly broad, the parties hereto intend that such covenants shall be limited to such scope, geographic area and duration as shall make such covenants valid and enforceable. 10. Government Laws, Regulations and Contracts. Executive agrees to comply, and to do all things necessary for Company to comply, with all federal, state, local and foreign laws and regulations and government contracts which may be applicable to the business and operations of Company. 11. Miscellaneous. 11.1 Amendment and Modification. Company (by action of its Board of Directors) and Executive may amend, modify and supplement this Agreement only in such manner as may be agreed upon by Company and Executive in writing. This provision shall be applicable to any extension of the term of this Agreement as provided in Section 2.1. All determinations, waivers, consents, approvals or other acts on the part of the Company that are permitted or required by this Agreement shall similarly require the approval of the Board of Directors. 9 11.2 Entire Agreement. This instrument embodies the entire agreement between the parties hereto with respect to the employment relationship created hereby and supersedes and discharges any prior agreements pertaining to employment between Executive and the Company. There have been and are no agreements, representations or warranties between the parties other than those set forth or provided for herein relating to such employment relationship. 11.3 Assignment. This Agreement shall not be assigned by either party without the written consent of the other party. Inasmuch as this Agreement contemplates the provision of personal services by the Executive, ordinarily this Agreement shall not be assignable by the Executive. This Agreement shall not be assigned by the Company except with the prior written consent of the Executive, which he shall not unreasonably withhold. Any attempted assignment without such written consent shall be null and void and without legal effect. 11.4 Binding Effect; Specific Performance. Subject to Section 11.3 hereof, this Agreement shall be binding upon and inure to the benefit of the respective parties hereto and their successors, assigns, heirs, executors, administrators and personal representatives. The parties hereto shall be entitled, at their option, to the remedy of specific performance to the fullest extent permitted by applicable law in enforcing the provisions of this Agreement. 11.5 Arbitration. Any dispute, controversy or claim arising out of or relating to this Agreement, or the breach hereof, or the employment relationship hereunder, shall be settled by binding arbitration in Los Angeles, California administered by the American Arbitration Association under its Commercial Arbitration Rules, and judgment on the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. 11.6 Agreement Severable; Waiver. This is a severable Agreement and in the event that any part of this Agreement shall be held to be unenforceable, all other parts of this Agreement shall remain valid and fully enforceable as if the unenforceable part or parts had not been included herein. No waiver of any provision of this Agreement shall be binding unless executed in writing by the party to be bound hereby. No waiver of a breach of any of the provisions of this Agreement shall be deemed to be or shall constitute a waiver of a breach of any other provision of this Agreement, whether or not similar, nor shall such waiver constitute a continuing waiver of such breach unless otherwise expressly provided. No failure or delay in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. 10 11.7 Notices. For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when actually delivered to the recipient or when mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed as follows: If to Executive, to: Daniel W. Latham 26025 Mureau Rd. Calabasas, CA 91302 If to Company, to: The Diana Corporation Attn: Board of Directors 26025 Mureau Rd. Calabasas, CA 91302 or to such other address as either party may have furnished to the other in writing in accordance herewith except that notices of a change of address shall be effective only upon receipt. 11.8 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT REFERENCE TO THE CHOICE OF LAW PRINCIPLES THEREOF. EXECUTIVE ACKNOWLEDGES HAVING READ, EXECUTED AND RECEIVED A COPY OF THIS AGREEMENT, INCLUDING THE FOLLOWING NOTICE, AND AGREES THAT, WITH RESPECT TO THE SUBJECT MATTER HEREOF, IT CONSTITUTES EXECUTIVE'S ENTIRE AGREEMENT WITH COMPANY, SUPERSEDING ANY PREVIOUS ORAL OR WRITTEN COMMUNICATIONS, REPRESENTATIONS, UNDERSTANDINGS OR AGREEMENTS WITH THE COMPANY OR ANY OF ITS OFFICIALS OR REPRESENTATIVES. Notwithstanding anything to the contrary in Section 7 hereof, this Agreement does not apply to an Invention for which no equipment, supplies, facility, or trade secret information of the Company was used and which was developed entirely on Executive's own time, unless (a) the Invention relates (i) to the business of the Company as conducted from time-to-time or (ii) to the Company's actual or demonstrably anticipated research or development, or (b) the Invention results from any work performed by the Executive for the Company. 11 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the day and year first above written. THE DIANA CORPORATION ("Company") By: /s/ Jack E. Donnelly Date: September 4, 1997 DANIEL W. LATHAM ("Executive") By: /s/ Daniel W. Latham Date: September 4, 1997 List of Inventions Excepted From Section 7 Above: None 12 EX-27 12
5 THIS LEGEND CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF THE DIANA CORPORATION AS OF AND FOR THE 52 WEEKS ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS MAR-31-1997 MAR-31-1996 MAR-31-1997 81 0 4594 0 2937 10221 2254 (310) 23244 4060 1817 0 0 6007 10827 23244 7154 7154 3132 3132 16172 0 52 (13171) 836 (12335) (8175) (508) 0 (21018) (3.99) (3.99)
EX-22 13 EXHIBIT 22 THE DIANA CORPORATION AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT All significant subsidiaries of the Registrant have been listed. Indentations indicate indirectly owned subsidiaries which are directly owned by the named subsidiary. State of Subsidiaries of the Registrant Incorporation - ------------------------------ ------------- Entree Corporation............................................ Delaware Atlanta Provision Company, Inc.............................. Georgia C&L Communications, Inc....................................... Texas Valley Communications, Inc.................................. California Sattel Communications Corp.................................... California Sattel Communications LLC................................... California EX-23.1 14 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-3 and in the Registration Statement on Form S-8 listed below of The Diana Corporation of our report dated September 22, 1997 on the financial statements of The Diana Corporation included in this Annual Report on Form 10-K. 1. Registration Statement on Form S-3 (Registration No. 33-88392) 2. Registration Statement on Form S-8 (Registration No. 33-67188) 3. Registration Statement on Form S-3 (Registration No. 333-1055) PRICE WATERHOUSE LLP Milwaukee, Wisconsin September 22, 1997 EX-23.2 15 EXHIBIT 23.2 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-67188) pertaining to The Diana Corporation 1986 Nonqualified Stock Option Plan and the Registration Statements (Form S-3 Nos. 33-88392 and 333-1055) of The Diana Corporation and in the related Prospectus of our report dated June 2, 1995, with respect to the consolidated financial statements and schedules of The Diana Corporation included in the Annual Report (Form 10-K) for the fiscal year ended March 31, 1997. Milwaukee, Wisconsin ERNST & YOUNG LLP September 22, 1997 -----END PRIVACY-ENHANCED MESSAGE-----