-----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, UQqtkFkqEuDVlgVzIaQwGpQc2ByMBKcCRx3WUekQVG841ZQHzqVNu/ptJQUbNLjw FavHZ1LT/WqvSn0DLvbCDg== 0000057201-97-000033.txt : 19971117 0000057201-97-000033.hdr.sgml : 19971117 ACCESSION NUMBER: 0000057201-97-000033 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 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-Q SEC ACT: SEC FILE NUMBER: 001-05486 FILM NUMBER: 97718743 BUSINESS ADDRESS: STREET 1: 26025 MUREAU ROAD CITY: CALABASAS STATE: CA ZIP: 91302 BUSINESS PHONE: 8188787711 MAIL ADDRESS: STREET 1: 26025 MUREAU ROAD CITY: CALABASAS STATE: CA ZIP: 91302 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-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended September 30, 1997 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission file number 1-5486 THE DIANA CORPORATION (Exact name of registrant as specified in its charter) Delaware 36-2448698 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 26025 Mureau Road, Calabasas, California 91302 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (818) 878-7711 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes ___ No At November 14 1997, the registrant had issued and outstanding an aggregate of 7,961,297 shares of its common stock. Part I - Financial Information Item 1. Financial Statements The Diana Corporation and Subsidiaries Condensed Consolidated Balance Sheets (Dollars in Thousands) Sept. 30, 1997 March 31, 1997 ------------ --------- (Unaudited) Assets Current assets Cash and cash equivalents $ 3,327 $ 81 Marketable securities 1,211 --- Receivables, net 471 4,594 Inventories 3,504 2,937 Net assets of discontinued operations 585 893 Other current assets 486 1,716 ------ ------ Total current assets 9,584 10,221 Property and equipment 1,776 1,944 Intangible assets 3,648 3,755 Net assets of discontinued operations 6,658 7,308 Other assets --- 16 ------ ------ $ 21,666 $ 23,244 ====== ====== Liabilities and Shareholders' Equity Current liabilities Accounts payable $ 1,881 $ 2,559 Accrued liabilities 1,413 1,360 Accrued common stock conversion expense 5,522 --- Accrued common stock warrant expense 366 --- Current portion of long-term debt 141 141 ------ ------ Total current liabilities 9,323 4,060 11.25% subordinated debentures, due 2002 1,746 1,817 8.0% convertible notes, due 2000 1,683 --- Other liabilities 519 533 Commitments and contingencies Shareholders' equity Preferred stock - $.01 par value --- --- Common stock - $1 par value 8,047 6,007 Additional paid-in capital 82,006 80,124 Accumulated deficit (75,996) (63,540) Unrealized gain on marketable securities 95 --- Treasury stock (5,757) (5,757) ------ ------ Total shareholders' equity 8,395 16,834 ------ ------ $ 21,666 $ 23,244 ====== ====== See notes to condensed consolidated financial statements. 1 The Diana Corporation and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited) (In Thousands, Except Per Share Amounts) 3 Months 12 Weeks 6 Months 28 Weeks Ended Ended Ended Ended Sept. 30, Oct. 12, Sept. 30, Oct. 12, 1997 1996 1997 1996 Net sales $ 106 $ 3,666 $ 1,050 $ 4,507 Cost of goods sold 37 891 442 1,037 ------ ------ ------- ------ Gross profit 69 2,775 608 3,470 Selling and administrative expenses 2,590 2,821 6,126 4,589 Engineering, research and development 603 874 1,297 1,238 ------ ------ ------- ------ Total operating expenses 3,193 3,695 7,423 5,827 ------ ------ ------- ------ Operating loss (3,124) (920) (6,815) (2,357) Interest expense (123) (19) (123) (45) Non-operating income 4 163 4 346 Non-operating expense (5,522) --- (5,522) --- Minority interest --- (5) --- 126 ------ ------ ------- ------ Loss from continuing operations (8,765) (781) (12,456) (1,930) Loss from discontinued operations --- (229) --- (402) Estimated loss on disposal of discontinued operations --- (3,500) --- (3,500) ------ ------ ------- ------ Net loss before extraordinary item (8,765) (4,510) (12,456) (5,832) Extraordinary item --- (227) --- (227) ------ ------ ------- ------ Net loss $(8,765) $(4,737) $(12,456) $(6,059) ====== ====== ======= ====== Loss per common share: Continuing operations $ (1.27) $ (.15) $ (2.04) $ (.37) Discontinued operations --- (.71) --- (.74) Extraordinary item --- (.04) --- (.04) ------ ------ ------- ------ Net loss per common share $ (1.27) $ (.90) $ (2.04) $ (1.15) ====== ====== ======= ====== Weighted average number of common shares outstanding 6,897 5,279 6,102 5,249 ====== ====== ======= ====== See notes to condensed consolidated financial statements. 2 The Diana Corporation and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) (In Thousands) 6 Mos. Ended 28 Wks. Ended Sep. 30, 1997 Oct. 12, 1996 ------------- ------------- Operating Activities: Net loss before extraordinary item $(12,456) $ (5,832) Reconciliation of net loss to net cash provided by operating activities: Depreciation and amortization 355 218 Estimated loss on disposal of discontinued operations --- 3,500 Provision for common stock warrants issued 366 --- Provision for Sattel Class A/B Unit convertibility 5,522 --- Minority interest --- (126) Other --- (74) Net change in discontinued operations 777 (4,100) Changes in operating assets and liabilities 2,756 (3,694) ------- ------- Net cash provided (used) by operating activities (2,680) (10,108) Investing activities: Increase in promissory note --- (5,000) Sale of CNC common stock and preferred stock, respectively 397 2,500 Additions to property and equipment (80) (647) Net change in discontinued operations (411) (395) ------- ------- Net cash provided (used) by investing activities (94) (3,542) Financing activities: Repayments of long-term debt (71) (71) Change in note payable 250 --- Payment of note payable (98) --- Common stock issued, net of expenses 5,347 13,918 Net change in discontinued operations 592 4,572 Other --- (21) ------- ------- Net cash provided (used) by financing activities 6,020 18,398 ------- ------- Increase in cash and cash equivalents 3,246 4,748 Cash and cash equivalents at the beginning of the period 81 4,480 ------- ------- Cash and cash equivalents at the end of the period $ 3,327 $ 9,228 ======= ======= Non-cash transactions: Acquisition of common stock held by minority shareholder $ --- $ 1,818 Conversion of promissory note and accrued interest into CNC preferred stock --- 5,072 Issuance of common stock warrants to investment banker and placement agent 366 --- Note payable to related party 98 --- Change in convertibility of Sattel A/B Units 5,552 --- Conversion of note payable to common stock 250 --- Conversion of convertible notes and interest into common stock 825 --- See notes to condensed consolidated financial statements. 3 The Diana Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE 1 - Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended September 30, 1997 are not necessarily indicative of the results that may be expected for the fiscal year ended March 31, 1998. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the fiscal year ended March 31, 1997. The computation of loss per common share is determined by using the weighted average number of shares of common stock outstanding during each period. 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. 4 NOTE 2 - Discontinued Operations (Continued) APC retained real estate with a net book value of $2.6 million. The real estate is collateral for two mortgage notes that amounted 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 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 sale of these businesses will be completed prior to March 31, 1998. The Company believes that the reserve for loss on disposal recorded at September 30, 1997 of $1,908,000 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. 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. NOTE 3 - Notes Payable 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 5 NOTE 3 - Notes Payable (Continued) 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. Through November 14, 1997, 389,186 shares of common stock have been issued in connection with conversions of $2,032,000 of convertible notes and accrued interest. Of those conversion shares, 159,346 were issued as of September 30, 1997. 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 of $86,000 was estimated using the Black-Scholes option pricing model and was recorded as interest expense in the second quarter of fiscal 1998 as the holders of the convertible notes have substantially converted their notes to common stock. NOTE 4 - Commitments and Contingencies Please see Note 6 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1997 for information on various legal proceedings. With respect to the case captioned In Re The Diana Corporation Securities Litigation, as described in such Note 6 to the Consolidated Financial Statements in Form 10-K for the fiscal year ended March 31, 1997, the Company has filed a motion to dismiss the consolidated amended complaint, which is currently in the process of being briefed by the parties. A hearing on the Company's motion is scheduled for December 15, 1997. There are no other material developments to report at this time. NOTE 5 - Shareholders' Equity 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 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. 6 NOTE 5 - Shareholders' Equity (Continued) On May 13, 1997, the Company issued warrants to Superior St. Capital, its investment banking firm, in connection with the equity financing discussed in Note 6. The warrants are for the purchase of 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. During the first quarter of fiscal 1998, the Company recorded a charge of $280,000 for the fair value of these warrants which was estimated using the Black-Scholes option pricing model. 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, namely Bruce Borchardt and Michael Camp. 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 were to record compensation expense of $7,000, in the first quarter of fiscal 1998. NOTE 6 - Related Party Transactions 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 and the conversion into Company common stock at the option of the holder. An accrued expense charge of approximately $4,016,000 was recorded in the second quarter of fiscal 1998. This charge is based on the value at September 4, 1997 of 630,000 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 Sattel Communications Corporation ("SCC"), are convertible on the same basis as a result of the Board of Directors' authorization discussed above, an additional charge of $1,506,000 was accrued based on 236,250 shares of Company common stock and a per share price of $6.375. 7 NOTE 6 - Related Party Transactions (Continued) 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 were forgiven at September 4, 1997 and, if their respective employments are renewed, will be forgiven 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. 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. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations The Company's historical results of operations have been restated to reflect the operations of 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 Sattel Technologies, Inc. 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. For the quarter ended September 30, 1997, Sattel's revenue growth and business development continued to be constrained by the negative impact that the liquidity deficiency and class action suits have had on customer perception. Revenues for the quarter were thus limited to $106,000 consisting of the shipment of a DSS switch as part of an expanding telecommunications network being developed by Cable USA Inc. Revenues for the corresponding period in the prior year were $3,666,000 which consisted almost entirely of shipments of DSS switches under a specific contract with Concentric Network Corporation. This contract was completed in the fiscal year ended March 31, 1997. Sattel's fiscal 1998 year-to-date sales were $1,050,000 compared to $4,507,000 for the corresponding period in fiscal 1997. Gross profit of $69,000 for the quarter ended September 30, 1997, was $2,700,000 lower than the corresponding period for the prior year due to its lower revenue. Selling and administration expense for the quarter ended September 30, 1997 was $2,590,000 compared to $2,821,000 for the corresponding quarter in the prior year. Engineering, research and development costs include all charges related to new products and the DSS switch and are charged to operations when incurred. Engineering, research and development costs for the quarter ended September 30, 1997 were $603,000 compared to $694,000 for the prior quarter ended June 30, 1997 and $874,000 for the corresponding quarter ended October 12, 1996. The decreases in operating expense spending were related to the liquidity deficiency which the Company experienced in late fiscal 1997 and in early fiscal 1998. Management anticipates the spending levels and engineering research and development will increase in the future in order to further develop the Company's product line and business expansion. In regard to the business growth, Sattel has received orders for shipments to Japan, South America, and the United States to provide local, long distance and international gateway services. Shipments and revenues in the current fiscal quarter ending December 31, 1997, are expected to include DSS Switches for installation in Japan (Apollo KK) and the United States. The order from South America is for 18 DSS Switches which, subject to customer funding availability, are to be shipped during a 12 to 18 month schedule. 9 Non-operating expense for the quarter ended September 30, 1997, comprised a one time charge of $5,522,000 in respect of an accrued expense relating to the amendment of certain Class A and B Units as authorized by the Board of Directors on September 4, 1997, and described in Note 6 to the Financial Statements (Related Party Transactions). The loss from continuing operations for the quarter ended September 30, 1997 and the increase in loss from continuing operations over the corresponding period in fiscal 1997 is due to the lower revenue and to the incidence of the one-time charge in respect of the Class A and B Units (see Note 6 to the Financial Statements). Liquidity and Capital Resources As previously disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1997, the Company encountered a liquidity deficiency during the end of fiscal 1997 and in early fiscal 1998, primarily because (i) certain customers of Sattel were past due on receivables, (ii) Sattel 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 discussed in Note 2 to the Condensed Consolidated Financial Statements. 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 financing (see Notes 3 and 5 to the Condensed Consolidated Financial Statements for additional information). After completion of the equity and debt financing, collection of $4.4 million from CNC in August 1997, 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 is currently negotiating with prospective buyers for both of these operations. 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 $2,680,000 during the first two quarters of fiscal 1998 as compared to $10,108,000 for the first two quarters of fiscal 1997. The decrease in the use of cash is primarily attributable to the collection of accounts receivable by Sattel and the liquidity deficiency which the Company experienced. In addition, cash 10 generated by discontinued operations provided some capital for operations in fiscal 1998 while discontinued operations used $4,100,000 in cash during fiscal 1997, the majority of which was funded through the increase in various lines of credit. The decrease in receivables at September 30, 1997 is due to the collection of $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. 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 is primarily attributable to purchases of raw materials for DSS switches. Capital expenditures of $80,000 during the first two quarters of fiscal 1998 compared to capital expenditures of $647,000 in the first two quarters of fiscal 1997. The decrease in capital expenditures is primarily due to the liquidity deficiency which the Company experienced. 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 the fourth quarter of 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 Condensed 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 $397,000. 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 11 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 $767,000 at September 30, 1997. 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. 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. Subsequent to September 30, 1997, certain former executive officers of the Company exercised stock options. As of November 14, 1997, 392,878 shares of common stock were issued at an aggregate exercise price of $2,039,000 with respect to these transactions. The Company is also in discussions involving strategic alliances, joint ventures and potential acquisitions with entities that have complementary technologies, services and/or established sales and marketing channels and that are strategically aligned with its core business. Forward-Looking Statements All statements other than historical statements contained in this Report on Form 10-Q 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 revenue 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 in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1997. 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. 12 Part II. Other Information Item 1. Legal Proceedings Please see Note 6 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1997 for information on various legal proceedings. With respect to the case captioned In Re The Diana Corporation Securities Litigation, as described in such Note 6 to the Consolidated Financial Statements in Form 10-K for the fiscal year ended March 31, 1997, the Company has filed a motion to dismiss the consolidated amended complaint, which is currently in the process of being briefed by the parties. A hearing on the Company's motion is scheduled for December 15, 1997. There are no other material developments to report at this time. Item 2. Changes in Securities and Use of Proceeds c) Issuances of equity securities not registered under the Securities Act of 1933 are described in Notes 3 and 5 of the Condensed Consolidated Financial Statements. Item 6. Exhibits and Reports on Form 8-K a) Exhibits: 27 - Financial Data Schedule b) Reports on Form 8-K: (1) A Form 8-K was filed by the Company on July 31, 1997 which covered: Item 7, "Financial Statements and Exhibits" and Item 9, "Sales of Equity Securities Pursuant to Regulation S". On July 17, 1997, the Company sold $2,500,000 in 8% Convertible Notes due July 17, 2000. (2) A Form 8-K was filed by the Company on October 23, 1997 which covered: Item 4, "Changes in Registrant's Certifying Accountant". On October 15, 1997, Price Waterhouse LLP confirmed that the client - auditor relationship between The Diana Corporation and Price Waterhouse LLP had ceased. (3) A Form 8-K/A (Amendment #1) was filed by the Company on October 28, 1997 to include a letter from Price Waterhouse LLP which was not available for the original Form 8-K filing on October 23, 1997. (4) A Form 8-K/A (Amendment #2) was filed by the Company on November 5, 1997 at the request of the Securities and Exchange Commission which covered Item 4, "Changes in Registrant's Certifying Accountant" and Item 7, "Financial Statements and Exhibits." 13 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE DIANA CORPORATION By: /s/ James J. Fiedler Chairman of the Board and Chief Executive Officer (Principal Executive Officer) By: /s/ Brian A. Robson Vice President, Controller and Secretary (Principal Financial and Accounting Officer) DATE: November 14, 1997 14 EX-27 2
5 THIS LEGEND CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF THE DIANA CORPORATION AS OF AND FOR THE 6 MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS MAR-31-1998 APR-1-1997 SEP-30-1997 3327 1211 471 0 3504 9584 1776 0 21666 9323 3429 0 0 8047 348 21666 1050 1050 442 442 7423 5522 119 (12456) 0 (12456) 0 0 0 (12456) (2.04) (2.04)
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