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 quarterly period ended March 31, 1996
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-12117
VENTURIAN CORP.
(Exact name of registrant as specified in its charter)
Minnesota 41-1460782
(State or other jurisdication of IRS Employer ID Number
incorporation or organziation)
1600 Second Street South, Hopkins, MN 55343
(Address of principal executive offices) (Zip code)
Registrant's telephone number,
including area code (612) 931-2500
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding twelve months and (2) has been subject to the filing requirements for
at least the past 90 days.
Yes X No __
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practical date:
Outstanding at March 31, 1996
$1.00 par value common shares 747,789
VENTURIAN CORP. AND SUBSIDIARIES
FORM 10-Q
INDEX
PART I. Financial Information
Item 1.
Consolidated Condensed Balance Sheets
March 31, 1996 and December 31, 1995 3
Consolidated Condensed Statements of Operations
Three months ended March 31, 1996 and 1995 4
Consolidated Condensed Statements of Cash Flows
Three months ended March 31, 1996 and 1995 5
Notes to Consolidated Condensed Financial
Statements 6
Item 2.
Management's Discussion and Analysis of
the Results of Operations and Financial Condition 10
PART II. Other information
Item 6. Exhibits and Reports on Form 8-K 15
Venturian Corp. and Subsidiaries
Consolidated Condensed Balance Sheets
(Dollars in thousands)
(Unaudited)
March 31, December 31,
1996 1995
-------- --------
Current assets
Cash and cash equivalents $ 1,572 $ 910
Accounts receivable, less allowance
for doubtful accounts of $170 in March
1996 and $165 in December 1995 5,717 6,666
Inventories 3,717 3,977
Restricted cash 218 658
Real estate held for sale 2,608 2,592
Prepaid expenses 180 243
-------- --------
Total current assets 14,012 15,046
Property and equipment - at cost
Buildings and improvements 1,741 1,741
Equipment 5,351 5,311
-------- --------
7,092 7,052
Less accumulated depreciation and amortization 5,618 5,528
-------- --------
1,474 1,524
Land 529 529
-------- --------
2,003 2,053
Other assets 3,345 3,217
-------- --------
$ 19,360 $ 20,316
======== ========
Liabilities and Stockholders' Equity
Current liabilities
Bank overdraft $ 419 $ 395
Current maturities of long-term debt 147 147
Accounts payable 2,588 3,243
Advances from customers 257 400
Accrued liabilities 1,144 1,484
Rental real estate mortgage and related costs 1,608 1,640
-------- --------
Total current liabilities 6,163 7,309
Long-term debt, less current maturities 201 271
Deferred compensation and postretirement benefits 2,436 2,448
Commitments and contingencies -- --
Stockholders' equity
Common stock - $1 par value 748 748
Additional contributed capital 14,661 14,661
Accumulated deficit (4,849) (5,121)
-------- --------
10,560 10,288
-------- --------
$ 19,360 $ 20,316
======== ========
The accompanying notes are an integral part of these statements.
Venturian Corp. and Subsidiaries
Consolidated Condensed Statements of Operations
(Dollars in thousands)
(Unaudited)
Three months ended
March 31,
------------------
1996 1995
------- -------
Net sales $ 6,783 $ 5,818
Cost of products sold 4,693 3,896
------- -------
Gross profit 2,090 1,922
Operating expenses
Sales and marketing 653 593
Administrative 728 631
Warehousing 452 362
------- -------
Total operating expenses 1,833 1,586
------- -------
Operating profit 257 336
Other income (expense)
Investment income 21 29
Interest expense (94) (95)
Rental income, net of expenses 72 91
Other 23 3
------- -------
Total 22 28
------- -------
Earnings from continuing operations
before income taxes and
discontinued operations 279 364
Income tax expense 7 50
------- -------
Earnings before discontinued operations 272 314
Discontinued operations, net of
income tax benefit of $50 -- (248)
------- -------
Net earnings $ 272 $ 66
======= =======
Earnings (loss) per share
Continuing operations $ .36 $ .42
Discontinued operations -- (.33)
------- -------
Net earnings per share $ .36 $ .09
======= =======
The accompanying notes are an integral part of these statements.
Venturian Corp. and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Three months ended
March 31,
1996 1995
------- -------
Cash flows from operating activities:
Net earnings $ 272 $ 66
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 142 143
Discontinued operations -- (170)
Change in assets and liabilities:
Accounts receivable 949 (460)
Inventories 260 309
Restricted cash 440 843
Prepaid expenses 63 21
Bank overdraft 24 (30)
Accounts payable (655) 7
Advances from customers (143) 133
Accrued liabilities (340) (203)
Deferred compensation and
postretirement benefits 63 49
Payments on deferred compensation
and postretirement benefits (75) (59)
------- -------
Total adjustments 728 583
------- -------
Net cash provided by operating activities 1,000 649
Cash flows from investing activities:
Purchase of property and equipment (87) (28)
Purchase of other assets (153) (137)
Payments received on notes receivable 4 4
------- -------
Net cash used in investing activities (236) (161)
Cash flows from financing activities
Payments on long-term debt and
rental real estate mortgage and related costs (102) (86)
Proceeds from life insurance loan -- 117
------- -------
Net cash provided by (used in) financing activities (102) 31
------- -------
Net increase in cash and cash equivalents 662 519
Beginning cash and cash equivalents 910 825
------- -------
Ending cash and cash equivalents $ 1,572 $ 1,344
======= =======
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 104 $ 77
Income taxes 2 6
The accompanying notes are an integral part of these statements.
VENTURIAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with the instructions in Regulation S-X pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although management believes
that the disclosures are adequate to make the information presented not
misleading.
In the opinion of management, the unaudited condensed financial statements
reflect all adjustments, which consist of only normal recurring accruals,
necessary to present a fair statement of the results of operations and financial
position for the periods presented. Results of operations for the interim
periods are not necessarily indicative of results for the full year.
On July 31, 1995, the company announced that it had discontinued operations of
PC Express, Inc. The accompanying financial statements and notes have been
restated for all periods to reflect the effects of discontinued operations.
NOTE B - INVENTORIES
Inventories are stated at the lower of cost or market, principally
using the specific identification method for Napco. A portion of Napco's
inventory is acquired on a speculative basis when it becomes available for
purchase. Napco's sales of this inventory may vary from the current period to
several years. It is the company's practice to classify this inventory, which
totaled $1,716,000, net of reserves, at March 31, 1996, with current assets. The
company's obsolescence policy requires that purchases of this inventory be
written off if not sold after four years. The four year period was selected
after a review of customers' historical buying patterns and is reviewed annually
to determine whether the period continues to be appropriate. The company had a
reserve for obsolescence and lower of cost or market valuation of $1,319,000 at
March 31, 1996.
NOTE C - LINES OF CREDIT
Napco has an agreement with a bank to provide a $4,000,000 line of
credit for international transactions and cash advances. The agreement requires
that letters of credit be collateralized 100 percent with a restricted cash
balance. The agreement allows for cash advances of up to 90 percent of the cash
surrender value of certain of the company's life insurance policies. The life
insurance policies are assigned as collateral on the line of credit. Advances on
the line bear interest at one percent over the bank's base rate. At March 31,
1996 approximately $2,000,000 was available for cash advances pursuant to this
agreement. There were no cash advances outstanding against this line of credit
at March 31, 1996.
Napco has additional lines of credit available for international transactions
such as letters of credit and bid, performance and advance payment guarantees on
a transaction basis for which restricted cash balances are required.
Letters of credit issued by financial institutions under all lines of credit
totaled $218,000 as of March 31, 1996, and were collateralized by a restricted
cash balance.
NOTE D - CONTINGENCIES
At March 31, 1996, the company had performance and advance payment
guarantees outstanding on various sales contracts totaling $425,000. These
guarantees were backed by insurance bonds, which do not require cash collateral.
The company has guaranteed certain indebtedness of Mass Merchandisers, Inc., a
former affiliate of Venturian Corp. At March 31, 1996, this indebtedness was
$674,000. This indebtedness is secured by a first mortgage lien against certain
real estate owned and operated by Mass Merchandisers, Inc., a wholly-owned
subsidiary of McKesson Corp.
The company also owns rental real estate that contains industrial contaminants
and must be remediated. In February 1995, a Phase II Investigation Report and
remedial alternatives were submitted for approval to the Minnesota Pollution
Control Agency (MPCA). In connection with the report, management retained a
consultant to prepare cost estimates with respect to remediation of the
property. Two remedial alternatives were prepared and the range of associated
costs were estimated based on each alternative. The first alternative, which
includes groundwater monitoring and soil remediation, is considered to be the
most likely alternative by the consultant. This alternative includes remediation
efforts over a period of five years and has a range of estimated costs from
$332,000 to $1,257,000. Within this range, the consultant believes approximately
$600,000 represents the most likely total cost of remediation. The second
alternative includes costs associated with groundwater extraction and treatment
along with groundwater monitoring and soil remediation. This alternative
includes remediation efforts over a period of five years and has a range of
estimated costs from $625,000 to $1,709,000. The cost estimates are contingent
upon MPCA approval of the remedial alternatives or unforeseen circumstances
which could affect the technologies implemented or the magnitude of the
remediation required.
Estimated remediation costs include capital costs associated with the remedial
activity as well as annual costs over a period of five years. Annual costs
included in the previous cost estimates were calculated using a ten percent
discount rate. Not discounted, the estimated cost of remediation has a range
from $348,000 to $1,290,000 under the first alternative and a range of $695,000
to $1,824,000 under the second alternative. The company accrued approximately
$600,000 for estimated costs of remediation at the time the property was
acquired in March 1994. At March 31, 1996, a liability of approximately $500,000
for remediation costs is included under the caption "Rental real estate mortgage
and related costs" as a current liability.
Because a remediation plan has not been agreed to, management cannot reasonably
estimate the timing of expected payments towards the cost of remediation.
However, depending on the final remediation options approved by the MPCA, the
remediation should commence in the Summer of 1996 and, with the exception of
annual cost items, be completed during 1996.
The company is involved in an environmental investigation related to its former
office headquarters location. Management has retained a consultant to determine
what, if any, remedial action is required at this site. Based upon a 1993 study,
the consultant has recommended that no further investigation or remediation at
the site is needed. This recommendation is subject to the approval of the MPCA
property transfer unit. Management believes that the ultimate liability to be
incurred as a result of this investigation, if any, will not have a material
adverse effect on the company's financial position or results of operations.
NOTE E - RECENTLY ADOPTED ACCOUNTING STANDARDS
The company implemented Statement of Financial Accounting Standards
(SFAS) 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," effective January 1, 1996. SFAS 121
establishes guidance for when to recognize and how to measure impairment losses
of long-lived assets and certain identifiable intagibles, and how to value
long-lived assets to be disposed of. The adoption of this Standard did not have
a material effect on the company's financial position.
Additionally, the company implemented SFAS 123, "Accounting for Stock-Based
Compensation, which established financial accounting and reporting standards for
stock-based employee compensation plans. This Statement defines and encourages
the use of a fair value based method of accounting for an employee stock option
or similar equity instrument. The Statement allows the use of the intrinsic
value based method of accounting as prescribed by current existing accounting
standards for options issued to employees. The company adopted this Standard
effective January 1, 1996, and management has elected to utilize the intrinsic
value based method of accounting for stock-based compensation.
NOTE F - NET EARNINGS (LOSS) PER SHARE
Net earnings (loss) per share is computed based on the weighted average
outstanding common shares and common share equivalents, when dilutive. Weighted
average shares outstanding were 747,789 for the three months ended March 31,
1996 and 1995, respectively.
NOTE G - RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 financial
statements to conform with the 1996 presentation.
VENTURIAN CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION
March 31, 1996 and 1995
RESULTS OF OPERATIONS
Net Sales
First quarter 1996 consolidated net sales were $6,783,000, increasing
approximately 17 percent over sales of $5,818,000 for the same period in 1995.
Napco sales increased to $6,573,000 in the first quarter of 1996 from $5,676,000
for the same period last year. While backlog at the start of 1995 may have
indicated first quarter sales at near the same levels as a year ago (see
Backlog), Napco received an order for approximately $3.8 million early in 1996,
and approximately $1.0 million was included in shipments for the first quarter.
First quarter Venturian Software sales totaled $210,000, up from $150,000 in the
first quarter of 1995. The increase in Venturian Software sales in 1996 was
attributable to higher consulting revenues during the quarter, which increased
to $178,000 in the first quarter of 1996 from $120,000 in the same period last
year.
Costs and Expenses
On a consolidated basis, cost of products sold was 69.2 percent of net sales in
the first quarter of 1996 compared with 67.0 percent of net sales for the same
period a year ago.
For Napco sales, cost of products sold was 71.2 percent of net sales for the
first quarter of 1996, compared with 68.3 percent for the same period in 1995.
Sales from stock inventory in the first quarter of 1995 had a favorable effect
on cost of products sold a year ago. Sales from stock inventory typically have
low costs because stock inventory is acquired over a period of several years,
oftentimes on speculative surplus buys. In addition, the cost of acquiring stock
inventory is written off after four years in accordance with Napco's
obsolescence policy (see Note B), so oftentimes there is no cost associated with
the sale. Sales of stock inventory totaled $574,000 in the first quarter of
1995. In 1996, sales from stock were $250,000 for the quarter. Excluding sales
from stock inventory, cost of products sold was 73.2 and 72.4 percent of net
sales for the quarters ended March 31, 1996 and 1995, respectively.
Venturian Software cost of products sold was 7.6 percent of net sales for the
first quarter of 1996 and 12.0 percent of net sales a year ago. Venturian
Software's cost of products sold as a percent of net sales is low because a
significant portion of its sales are derived from consulting revenues and the
related payroll costs are included in operating expenses as administrative
expense.
Consolidated operating expenses totaled $1,838,000 for the quarter ended March
31, 1996, compared with $1,586,000 for the comparable period in 1995.
Napco operating expenses totaled $1,467,000 for the first quarter of 1996, and
increased $119,000 compared with operating expenses of $1,348,000 for the same
period last year. Napco sales and marketing expenses totaled $552,000 for the
quarter, increasing just slightly compared with $540,000 for the same period a
year ago. Napco administrative expenses of $463,000 in the first quarter also
were up only marginally from $446,000 in the first quarter of 1995. Napco
warehousing expenses increased to $452,000 in the first quarter of 1996, from
$362,000 for the same period in 1995, primarily the result of higher costs due
to increases in warehouse personnel. In addition, warehousing costs for the
first quarter included one-time costs of approximately $30,000 for the
transportation and disposal of industrial chemicals used in production.
Operating expenses for Venturian Software were $225,000 and $155,000 in the
first quarters of 1996 and 1995, respectively. Expenses increased due to an
increase in marketing staff and higher expenses related to new product
introduction. Venturian Software expanded its product line in the first quarter
to include CybercallTM, which links three technologies: computer networks,
telecommunications and the World Wide Web, allowing web browsers and agents to
be joined by voice and web page connections.
Corporate overhead expenses increased to $141,000 in the first quarter of 1996,
compared with $91,000 for the quarter ended March 31, 1995. Corporate overhead
expenses increased in part due to costs associated with the hiring of a new
company president during the quarter.
Operating Profit
The company reported an operating profit of $257,000 for the quarter ended March
31, 1996, compared with an operating profit of $336,000 in the first quarter of
1995.
Napco reported operating profits of $429,000 and $450,000 for the first quarters
of 1996 and 1995, respectively. While sales in 1996 increased approximately 16
percent over the prior period, higher costs and expenses resulted in relatively
flat operating profits from year to year. In addition, 1995 results benefited
from a higher level of sales of stock inventory.
Venturian Software reported operating losses of $31,000 and $23,000 for the
first quarters of 1996 and 1995, respectively.
Other Income (Expense)
Other income includes rental income, net of expenses, of $72,000 and $91,000 for
the first quarters of 1996 and 1995, respectively, derived from rental real
estate acquired in March 1994.
Income Taxes
The company recorded income tax expense of $7,000 and $50,000 for the first
quarter of 1996 and 1995, respectively, related to continuing operations. While
the company had net operating loss carryforwards sufficient to offset current
tax expense in both years, income tax expense was attributable to alternative
minimum tax. In 1995, the tax expense was fully offset by a tax benefit related
to discontinued operations.
Discontinued Operations
On July 31, 1995, the company discontinued operations of its PC Express
subsidiary due to continued losses. Net losses from operations of PC Express
were $248,000, net of an income tax benefit of $50,000, for the first quarter of
1995, on sales of $5,758,000.
Backlog
Napco's backlog was $15,466,000 at the beginning of 1996 compared with a
beginning backlog of $15,025,000 in 1995. Napco booked nearly $9 million in new
orders during the first quarter, and backlog at March 31, 1996 was $17,516,000,
compared with $13,515,000 at the end of the first quarter a year ago.
Venturian Software's backlog consists primarily of hours in demand for
consulting with its clients who are using its MagicTM Software as their
development tool. Product backlog is low since orders are shipped from inventory
or direct from the company's supplier.
Financial Condition
Liquidity and Capital Resources - Current assets were $14,012,000 and exceeded
current liabilities by $7,849,000 at March 31, 1996. The current ratio was 2.3
to one, up slightly from 2.1 to one at the start of the year.
Cash and cash equivalents increased to $1,572,000 at March 31, 1996 from
$910,000 at December 31, 1995. Restricted cash was reduced from $658,000 at the
end of 1995 to $218,000 at March 31, 1996, due to a reduction in the amount of
bid, performance and advance payment bonds outstanding which require cash
collateral.
Napco has an agreement with a bank to provide a $4,000,000 line of credit for
international transactions and cash advances. The agreement requires that
letters of credit be collateralized 100 percent with a restricted cash balance.
The agreement allows for cash advances of up to 90 percent of the cash surrender
value of certain of the company's life insurance policies. The life insurance
policies are also assigned as collateral on the line of credit. Advances on the
line bear interest at one percent over the bank's base rate. At March 31, 1996,
approximately $2,000,000 was available for cash advances pursuant to this
agreement. There were no cash advances outstanding on this line of credit at
March 31, 1996.
Napco has additional lines of credit available for international letters of
credit and bid and performance guarantees on a transaction basis for which
restricted cash balances are required. Letters of credit issued by financial
institutions under all lines of credit totaled $218,000 at March 31, 1996 and
were collateralized by a restricted cash balance.
Management believes that its present cash reserves should be sufficient to fund
its operations and to collateralize all international transactions as required.
Management has been successful in obtaining insurance bonds with no collateral
requirements for certain of its international transactions rather than utilizing
its traditional bank lines of credit. The company has additional sources of
funds in the form of borrowing against life insurance policies or other
non-current assets.
VENTURIAN CORP. AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 27. Financial Data Schedule (for SEC use only)
b) No report on Form 8-K was filed during the quarter for which this
report is filed.
SIGNATURE
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.
VENTURIAN CORP.
(Registrant)
By: /s/ Mary F. Jensen
Mary F. Jensen
Chief Financial Officer
Date: May 8, 1996
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