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 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1997
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 jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11111 Excelsior Boulevard, Hopkins, MN 55343
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 612-931-2500
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
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_
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 20, 1998 was $5,384,000.
The number of shares outstanding of each of the registrant's classes of common
stock, as of March 20, 1998:
Class Outstanding at March 20, 1998
----- -----------------------------
Common stock, $1.00 par value 753,289
Documents Incorporated by Reference
1997 Annual Report to Shareholders - Part I and Part II
Proxy Statement--Part III
<PAGE>
Venturian Corp. and Subsidiaries
FORM 10-K
TABLE OF CONTENTS
For the year ended December 31, 1997
<TABLE>
<CAPTION>
Description Page
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<S> <C>
Part I
Item 1.-Business 3
Item 2.-Properties 7
Item 3.-Legal Proceedings 7
Item 4.-Submission of Matters to a Vote of Security Holders 7
Part II
Item 5.-Market for Registrant's Common Equity
and Related Stockholder Matters 8
Item 6.-Selected Financial Data 8
Item 7.-Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 8
Item 8.-Financial Statements and Supplementary Data 9
Item 9.-Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 9
Part III
Item 10.-Directors and Executive Officers of the Registrant 10
Item 11.-Executive Compensation 10
Item 12.-Security Ownership of Certain
Beneficial Owners and Management 10
Item 13.-Certain Relationships and Related Transactions 10
Part IV
Item 14.-Exhibits, Financial Statement Schedules
and Reports on Form 8-K 10
</TABLE>
<PAGE>
Part I
Forward-looking statements contained throughout this Annual Report on
Form 10-K are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. There are certain important factors
that could cause results to differ materially from those anticipated by the
statements made herein, certain of which are set forth. Investors are cautioned
that all forward-looking statements involve risks and uncertainty.
Item 1. Business
Venturian Corp., a Minnesota corporation (the "Company"), was incorporated in
September 1983 as a wholly owned subsidiary of Napco Industries, Inc. Effective
as of the close of business on April 30, 1984, Napco Industries, Inc.
transferred to the Company all of the assets associated with the international
marketing and the U.S. government business which had been conducted by Napco
Industries, Inc. for more than thirty years. As of May 1, 1984, the Company
commenced the active operation of that business under the name of Napco
International Inc.
In June 1987, the Company changed its name to Venturian Corp., and
formed a subsidiary, Napco International Inc., through which the Company
conducts its international marketing and U.S. government business. In October
1992, the Company acquired the capital stock of PC Express, Inc. In July 1995,
the Company discontinued operations of PC Express due to continued losses. In
January 1993, the Company commenced operations of Venturian Software, Inc.
(Venturian Software). In October 1997, the Company entered into a joint venture
agreement with Atio Corporation (PTY) Ltd. (Atio PTY) of South Africa and Atio
International Corporation, Inc. (Atio International) whereby Atio
International acquired a 50 percent interest in Venturian Software through
funding provided by Atio PTY. Venturian Software changed its name to Atio
Corporation USA, Inc. (Atio USA) upon completion of the transaction. The
operations of the parent corporation, Venturian Corp., consist primarily of
investment and management activities.
Napco International Inc.
Napco International Inc. ("Napco") is a distribution, manufacturing and service
business that sells a broad line of defense-related products to commercial
customers, the U.S. government and to foreign governments.
With respect to factors that could cause Napco results to differ
materially from those anticipated by statements made herein, one of the primary
risks relates to its export sales, which could be affected by political
decisions by the U.S. government, which could prevent future sales to foreign
nations, or monetary, military or economic conditions in certain countries that
may affect sales in such countries. Management believes that these risks are
reduced by Napco's wide geographic and product diversification. While
historically there has not been a reliance on one single customer, sales to one
customer in the United States accounted for approximately 23
<PAGE>
percent, 32 percent and 38 percent of Napco sales for the years ended December
31, 1997, 1996 and 1995. During 1997, sales to one other customer in the United
States accounted for 10 percent of Napco sales. Other factors such as
competition, the potential for labor disputes and interruption in sources of
supply also could cause results to differ.
Typically, Napco's sales are made in United States currency. However,
from time to time Napco may enter into contracts denominated in foreign
currency. Napco has sales offices or representatives located in over 60
countries throughout the world. Napco's operations are conducted through its
various product divisions and through its subsidiary, International Precision
Machining, Inc.
The Ordnance Division markets replacement parts for most U.S.-made
military wheeled and tracked vehicles. Its product line covers a wide variety of
items ranging from power train components to tank track. Ordnance Division sales
comprised 77.1 percent, 71.4 percent and 82.3 percent of Napco's total sales for
the years ended December 31, 1997, 1996 and 1995.
The Defense Electronics Division designs, manufactures and markets a
broad range of tactical military electronics equipment, including VHF FM
tactical manpack radios, secure handsets, and active noise reduction intercom
systems. Spare parts are supplied for many U.S. manufactured systems at either
the component or assembly level. The division also designs and supplies
transportable shelters for a variety of applications, such as air traffic
control, ground-to-air communications, command air control, electronic warfare
or for mobile repair facilities. The Defense Electronics Division's sales
comprised 11.4 percent, 9.3 percent and 9.6 percent of Napco's total sales for
the years ended December 31, 1997, 1996 and 1995.
The Tank Automotive Division designs and markets proprietary
modernization kits to improve the reliability, maintainability and performance
of, and to increase the capabilities of, a wide variety of U.S. military wheeled
and tracked vehicles. The division provides technical assistance for the
installation and maintenance of these repowering systems as well as continuing
parts support. The Tank Automotive Division also supplies new trucks, vans and
other wheeled and tracked vehicles for military, medical, industrial and
construction applications. Tank Automotive Division sales were 3.1 percent, 11.9
percent and 4.1 percent of Napco's total sales for the years ended December 31,
1997, 1996 and 1995.
The Special Products Division markets a range of light weapons systems,
spare parts and accessories. Sales for the Special Products Division comprised
1.6 percent and 2.5 percent of Napco's total sales for the years ended December
31, 1997 and 1996 and less than one percent of Napco's total sales for the year
ended December 31, 1995.
International Precision Machining, Inc. (IPM), founded in 1992, is a
majority-owned subsidiary of Napco. IPM is a machining job shop that provides
precision turning and milling services to customer specifications. Sales at IPM,
excluding sales to Napco, comprised 6.8 percent, 4.9 percent and 3.7 percent of
Napco's total sales for the years ended December 31, 1997, 1996 and 1995.
Napco's products are either supplied from inventory, manufactured or
purchased from vendors to meet specific customer orders. Napco does not
routinely allow cancellation of customer orders. However, at times Napco may
accommodate cancellation requests from customers in order to preserve goodwill.
Increases in inventory attributable to cancelled orders and returns from
customers have not been material.
Napco generally warrants the products it sells for a period of one
year, agreeing to repair or replace defective items. Warranty expense has not
been material.
<PAGE>
Napco markets a broad variety of products and generally has alternate
sources of supply for the items it sells. In those instances where Napco has
only a single source of supply, the suppliers generally are large, financially
stable companies. Napco has not experienced, and management has no reason to
believe that Napco will experience, any interruption in supply.
Substantially all of Napco's foreign shipments are licensed by either
the United States Commerce or State Departments.
Napco's sales by principal geographic area for the last three years
were as follows (in thousands):
1997 1996 1995
---- ---- ----
United States and Canada $14,264 $16,461 $14,622
Europe 4,595 4,037 5,465
Far East 3,974 4,791 2,583
Mediterranean and Middle East 1,989 1,051 697
Latin America 1,910 899 731
Africa 117 311 -
------- --------- ---------
$26,849 $27,550 $24,098
====== ====== ======
During 1997, 1996 and 1995, no sales to customers in foreign countries
accounted for more than 10 percent of Napco's sales. In general, the company
considers Napco's sales to customers in specific countries to be more relevant
than sales to individual foreign customers because the primary risks with
respect to its export sales relate to political decisions by the U.S.
government, which could prevent sales to foreign nations, or monetary, military
or economic conditions in certain countries that may affect sales in such
countries.
Napco's sales in the United States were $13,952,000, $15,795,000 and
$14,024,000 in 1997, 1996 and 1995 and consisted primarily of sales to various
U.S. government agencies and to a large number of commercial customers. During
1997, 1996 and 1995, sales to one customer in the United States accounted for
23, 32 and 38 percent of Napco sales. During 1997, sales to one other customer
in the United States accounted for 10 percent of Napco sales. However,
historically, there has not been a reliance on either customer.
Competition
Napco is one of the major independent suppliers of a broad line of parts and
components for United States military vehicles and other equipment maintained by
foreign governments. Because there are many other suppliers of such parts and
components, the pricing of Napco's products is highly competitive.
Backlog
Napco's order backlog totaled $36,687,000 at December 31, 1997, up substantially
over backlog levels at the end of each of the prior two years. The order backlog
was $15,861,000 and $16,300,000 at December 31, 1996 and 1995. The year-end 1997
backlog increased due to two significant orders booked during the year - a $15.9
million order for 659 upgrade kits for M113 armored personnel carriers for the
U.S. Tank-Automotive Armaments Command (TACOM), and an $8.2 million contract for
a foreign government for repowering kits for M41 light tanks. Napco shipped 60
kits for the TACOM order in December 1997 and expects to ship substantially
<PAGE>
all of the remaining kits during 1998 with any balance to be shipped during the
first quarter of 1999. Shipments of the repowering kits will be made primarily
during the second and third quarters of 1998. Management expects that nearly all
of the balance of its backlog will be filled during 1998.
Napco's business with the U.S. Government is principally comprised of
firm fixed price contracts and therefore not subject to renegotiation of
profits, nor are they subject to termination at the unilateral election of the
U.S. Government.
Employees
Napco employed 125 people at December 31, 1997.
Atio Corporation USA, Inc.
In October 1997, the company entered into a joint venture agreement with Atio
Corporation (PTY) Ltd. (Atio PTY) of South Africa and Atio International
Corporation, Inc. (Atio International) whereby Atio International acquired a 50
percent interest in Venturian Software through funding provided by Atio PTY.
Atio PTY's subsidiary (see Note 3 to the Consolidated Financial Statements in
the Company's 1997 Annual Report to Shareholders). As a result of this
transaction, Venturian Corp. owns 45 percent, Atio International owns 50 percent
and Venturian Software's former president owns 5 percent of Venturian Software
effective October 1, 1997. Venturian Software changed its name to Atio
Corporation USA, Inc. (Atio USA) upon completion of the transaction. As of
October 1, 1997, the Company began accounting for its investment in Atio USA
under the equity method of accounting. The Company's results of operations
include all of the results of Atio USA for the nine months ended September 30,
1997 and for the years ended December 31, 1996 and 1995. The Company's results
for the fourth quarter of 1997 include 45 percent of Atio USA's results of
operations for the three months ended December 31, 1997, which have been
reported under the caption "Equity in losses of unconsolidated subsidiary" in
the Company's Statement of Operations for the year ended December 31, 1997.
Atio USA provides customer contact automation software under the
tradename Cybercall(R). Atio USA historically has provided high-technology
information services in the Upper Midwest as a value-added dealer of Magic(TM)
software, providing primarily consulting services and custom applications
development. In 1997, approximately 78 percent of Atio USA sales were derived
from consulting activities, 21 percent from product sales and 1 percent from
training activities. In 1996, approximately 83 percent of Atio USA sales were
derived from consulting activities, 15 percent from product sales and 2 percent
from training activities. In 1995, approximately 74 percent of Atio USA sales
were derived from consulting activities, 23 percent from product sales and 3
percent from training activities.
With respect to factors that could cause Atio USA results to differ
materially from those anticipated by statements made herein, Atio USA is one of
many companies offering web-based call center solutions to customers nationwide.
Because of the rapid growth in this market as well as the pace of technological
improvements and new software development, competition could result in
substantial risk. The ability to hire and retain competent personnel within the
computer telephony industry also provides an element of risk.
<PAGE>
Venturian Corp.
Employees
Venturian Corp. employed 4 individuals at December 31, 1997.
Item 2. Properties
The Company's corporate offices consist of approximately 19,000 square feet
located in a 386,000 square foot industrial plant building acquired by the
Company in 1994. These offices are principally used in Napco's sales and
administrative activities. The building is constructed of steel frame, block and
brick. The building is a multi-tenant building with twenty-seven additional
tenants presently occupying space. The property contains industrial contaminants
which are being remediated (see Note 5 to the Consolidated Financial Statements
in the Company's 1997 Annual Report to Shareholders). During 1997, the Company
formed, and transferred the rental real estate to, its wholly-owned subsidiary,
Hopkins Tech Center LLC. The Company also refinanced debt related to the rental
real estate. The new note payable is payable in monthly installments, including
interest of 8.53 percent per annum, through October 2007, with the remaining
balance due at that time. In addition to the monthly installments of principal
and interest, the Company is also required to escrow amounts for the payment of
property taxes and certain other operating expenses.
The Company is involved in an environmental investigation related to
its former office headquarters location, which was sold in 1994. 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 warranted. This
recommendation is subject to the approval of the Minnesota Pollution Control
Property Transfer Unit.
Adjacent to the corporate offices is a 123,000 square foot warehouse in
which Napco performs receiving, inspection, packaging, shipping, light
manufacturing and repair and inventory functions. In addition, Napco has an
arrangement with a subcontractor to provide warehousing and packaging services
related to a significant contract with the U.S. Tank-Automotive Armaments
Command (see Item 1. Backlog).
The Company believes that its facilities, including its arrangements
with subcontractors, as well as its machinery and equipment, are more than
adequate for its current volume. The Company is continually re-evaluating the
adequacy of its facilities.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
Part II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Information required by this item has been included in the Company's 1997 Annual
Report to Shareholders, incorporated herein by reference. Such information and
the related Annual Report caption and page references are: the high and low bid
prices of the Company's common stock for the period ended December 31, 1997,
under the caption "Quarterly Financial Data," page 23; the number of common
stockholders of record as of December 31, 1997, under the caption "Five-Year
Financial Summary," page 24; the Company's dividend policy, under the caption
"Shareholder Information," page 7; and dividend history information, in the
"Five-Year Financial Summary," page 24.
Item 6. Selected Financial Data
Information required by this item has been included in the Company's 1997 Annual
Report to Shareholders, incorporated herein by reference under the caption
"Five-Year Financial Summary," page 24.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations is contained in the Company's 1997 Annual Report to Shareholders,
incorporated herein by reference, pages 2 - 7.
Item 7A. Quantitative and Qualitive Disclosures About Market Risk
None.
<PAGE>
Item 8. Financial Statements and Supplementary Data
The following pages of the Company's 1997 Annual Report to Shareholders are
incorporated herein by reference as follows:
(a) Financial Statements: Page
No(s).
Consolidated Statements of Operations,
three years ended December 31, 1997 8
Consolidated Balance Sheets,
as of December 31, 1997 and 1996 9
Consolidated Statements of Cash Flows,
three years ended December 31, 1997 10
Consolidated Statements of Changes in
Shareholders' Equity, three years ended
December 31, 1997 11
Notes to the Consolidated Financial Statements 12-21
Report of Independent Certified Public Accountants 22
(b) Supplementary Data:
Quarterly Financial Data 23
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
<PAGE>
Part III
Items 10, 11, 12 & 13
Item 10 (Directors and Executive Officers of the Registrant), Item 11 (Executive
Compensation), Item 12 (Security Ownership of Certain Beneficial Owners and
Management) and Item 13 (Certain Relationships and Related Transactions),
constituting Part III of Form 10-K, are incorporated herein by reference to the
company's definitive Proxy Statement with respect to its 1998 Meeting of
Shareholders, which will be filed not later than 120 days after the close of the
fiscal year.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on 8-K
Page
(a) Financial Statements and Schedules
(1) Financial Statements - See Part II, Item 8 (a)
for a complete listing of financial statements
incorporated by reference from the company's
1997 Annual Report to Shareholders
(2) Financial Statement Schedules
Report of Independent Certified Public
Accountants on Schedule 12
Schedule II Valuation and Qualifying Accounts, for
each of the three years in the period
ended December 31, 1997 13
(3) Other schedules are omitted because of the absence of the conditions
under which they are required or because the required information is
provided in the financial statements or the notes thereto.
(b) The Company filed a report on Form 8-K on December 3, 1997. The Company
reported that in October 1997, it had entered into a joint venture agreement
with Atio Corporation International, Inc. (Atio International), Atio Corporation
(PTY) Ltd. (Atio PTY), Venturian Software Enterprises, Inc. (VSE) and Mr. Ilan
Sharon (Sharon), pursuant to which Atio International acquired 50 percent of the
outstanding stock of VSE through funding provided by Atio PTY and VSE changed
its name to Atio Corporation USA, Inc. (Atio USA).
The report on Form 8-K included the following unaudited pro forma condensed
consolidated financial statements, which set forth for the periods and at the
dates indicated, summarized unaudited pro forma condensed consolidated financial
information for the Company. The information was derived from the Company's
historical consolidated financial statements and notes thereto and reflected (a)
the condensed consolidated balance sheet as of September 30, 1997, as if the
transactions set forth in the Form 8-K had occurred on September 30, 1997, and
(b) the condensed consolidated results of operations for the nine months ended
September 30, 1997 and for the year ended December 31, 1996 as if the
transactions set forth in the Form 8-K had occurred on January 1, 1996.
<PAGE>
(c) Exhibits
Exhibit (13)
1997 Annual Report to Shareholders, incorporated herein by reference
Exhibit (21)
Subsidiaries of the Registrant
Exhibit (23.1)
Consent of independent certified public accountants to incorporate
by reference to the Registrant's Registration Statements on
Form S-8 their report dated February 27, 1998
Exhibit (99)
Financial Statements of Atio Corporation USA, Inc.
Exhibit (27.1)
Financial Data Schedule
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE
Board of Directors
Venturian Corp.
In connection with our audit of the consolidated financial statements of
Venturian Corp. and Subsidiaries referred to in our report dated February 27,
1998 which is included in the Annual Report to shareholders and incorporated by
reference, we have also audited Schedule II for each of the three years in the
period ended December 31, 1997. In our opinion, this schedule presents fairly,
in all material respects, the information required to be set forth therein.
/s/ GRANT THORNTON LLP
Minneapolis, Minnesota
February 27, 1998
<PAGE>
Venturian Corp. and Subsidiaries
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Three years ended December 31, 1997
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ----------------------------------------- ---------------- ------------------------------- --------------- ---------------
Balance at Charged to Charged to Balance
beginning of costs and other Deductions at end
Description period expenses accounts (a) of period
- ----------------------------------------- ---------------- -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1995 $ 271,000 $ 5,000 $ - $ 111,000 $ 165,000
Year ended December 31, 1996 $ 165,000 $ 91,000 $ - $ 60,000 $ 196,000
Year ended December 31, 1997 $ 196,000 $ 43,000 $ - $ 44,000 $ 195,000
</TABLE>
(a) Write-offs, less recoveries.
<PAGE>
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.
By: /s/ Gary B. Rappaport
Gary B. Rappaport
Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securites Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Gary B. Rappaport
Gary B. Rappaport
Chairman of the Board, Director and Chief Executive
Officer March 30, 1998
/s/ Don M. House, Jr.
Don M. House, Jr.
President and Chief
Operating Officer March 30, 1998
/s/ Morris M. Sherman
Morris M. Sherman
Director March 30, 1998
/s/ Charles B. Langevin
Charles B. Langevin
Director March 30, 1998
/s/ Stuart B. Utgaard
Stuart B. Utgaard
Director March 30, 1998
/s/ Richard F. McNamara
Richard F. McNamara
Director March 30, 1998
/s/ Mary F. Jensen
Mary F. Jensen
Controller, Treasurer and
Chief Financial Officer March 30, 1998
Management's Discussion and Analysis of Results of Operations
Forward-looking statements contained throughout this Annual Report are
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. There are certain important factors that could cause results
to differ materially from those anticipated by the statements made herein,
certain of which are set forth. Investors are cautioned that all forward-looking
statements involve risks and uncertainty. Among the factors that could cause
actual results to differ materially are the following:
With respect to Napco International, one of the primary risks relates
to its export sales, which could be affected by political decisions by the U.S.
government, which could prevent future sales to foreign nations, or monetary,
military or economic conditions in certain countries that may affect sales in
such countries. Management believes that these risks are reduced by Napco's wide
geographic and product diversification. While historically there has not been a
reliance on one single customer, sales to one customer in the United States
accounted for approximately 23 percent, 32 percent and 38 percent of Napco sales
for the years ended December 31, 1997, 1996 and 1995. During 1997, sales to one
other customer in the United States accounted for 10 percent of Napco sales.
Other factors, such as competition, the potential for labor disputes and
interruption in sources of supply also could cause results to differ.
In October 1997, the company entered into a joint venture agreement
with Atio Corporation (PTY) Ltd. (Atio PTY) of South Africa and Atio
International Corporation, Inc. (Atio International) whereby Atio International
acquired a 50 percent interest in Venturian Software through funding provided by
Atio PTY (see Note 3 to the Consolidated Financial Statements). As a result of
this transaction, Venturian Corp. owns 45 percent, Atio International owns 50
percent and Venturian Software's former president owns 5 percent of Venturian
Software effective October 1, 1997. Venturian Software changed its name to Atio
Corporation USA, Inc. (Atio USA) upon completion of the transaction. As of
October 1, 1997, the company began accounting for its investment in Atio USA
under the equity method of accounting. The company's results of operations
include all of the results of Atio USA for the nine months ended September 30,
1997 and for the years ended December 31, 1996 and 1995. The company's results
for the fourth quarter of 1997 include 45 percent of Atio USA's results of
operations for the three months ended December 31, 1997, which have been
reported under the caption "Equity
<PAGE>
in losses of unconsolidated subsidiary" in the company's Statement of Operations
for the year ended December 31, 1997.
Atio USA is one of many companies offering web-based call center
solutions to customers nationwide. Because of the rapid growth in this market as
well as the pace of technological improvements and new software development,
competition could result in substantial risk. The ability to hire and retain
competent personnel within the computer telephony industry also provides an
element of risk.
Net Sales
Consolidated net sales were $27,579,000, $28,398,000 and $24,845,000
for the years ended December 31, 1997, 1996 and 1995.
Napco sales in 1997 were $26,849,000, a decrease of 3 percent from
$27,550,000 in 1996. Sales in 1996 increased 14 percent from sales of
$24,098,000 a year earlier. Beginning backlog can be a good indication of Napco
sales (see Backlog) and, in 1997, management had expected approximately the same
level of sales as in 1996 based on a similar beginning backlog. However, sales
under the U.S. Government Simplified Non-Standard Acquisition Process (SNAP)
decreased in 1997 due to competition that has increased considerably,
contributing to this year's decline in sales. In 1997, sales under the SNAP
program were $457,000, down from $2,431,000 and $849,000 in 1996 and 1995.
Atio USA sales included in results of operations were $730,000 for the
nine months ended September 30, 1997 and $848,000 and $755,000 for the years
ended December 31, 1996 and 1995. In 1997, approximately 78 percent of Atio USA
sales were derived from consulting activities, 21 percent from product sales and
1 percent from training activities. In 1996, approximately 83 percent of Atio
USA sales were derived from consulting activities, 15 percent from product sales
and 2 percent from training activities. In 1995, approximately 74 percent of
Atio USA sales were derived from consulting activities, 23 percent from product
sales and 3 percent from training activities.
Cost of Products Sold
<PAGE>
Consolidated cost of products sold was 72 percent, 70 percent and 68
percent of net sales for the years ended December 31, 1997, 1996 and 1995.
Napco markets a wide variety of defense-related products, with
relatively high variation in profit margin from product to product. Nonetheless,
cost of products sold has remained relatively stable at approximately 73
percent, 72 percent and 70 percent of Napco sales in 1997, 1996 and 1995.
Cost of products sold was 11 percent of Atio USA net sales for the nine
months ended September 30, 1997. Cost of products sold was 9 percent of net
sales in 1996 and 15 percent of net sales in 1995. Atio USA's cost of products
sold as a percent of net sales has been low historically because a significant
portion of its sales have been derived from consulting activities and the
related expenses have been included in operating expenses as administrative
expense.
Operating Expenses
Consolidated operating expenses were $9,783,000 in 1997, up from
$8,378,000 in 1996 and $7,010,000 in 1995.
Napco operating expenses were $6,904,000, $6,446,000 and $5,807,000 for
the years ended December 31, 1997, 1996 and 1995.
In 1997, Napco sales and marketing expenses increased to $3,142,000,
including commission expense of $459,000. Sales and marketing expenses were
$2,755,000 in 1996, including commission expense of $453,000. In 1995, sales and
marketing expenses totaled $2,355,000, including commission expense of $378,000.
Commission expense was 1.7 percent of net sales in 1997, and 1.6 percent of net
sales in both 1996 and 1995.
Excluding commission expense, Napco sales and marketing expenses were
$2,683,000 in 1997, up 17 percent compared with $2,302,000 a year ago. Sales and
marketing expenses were $1,977,000, excluding commission expense, in 1995. In
mid-year 1996, several new sales and marketing positions were created as part of
an effort to increase sales opportunities. As a result, payroll and related
costs were up by approximately $157,000 in 1997 when compared with 1996 and
$130,000 in 1996 when
<PAGE>
compared with 1995. Advertising, travel and Napco's participation in trade shows
has also increased in the last two years, contributing to higher expense levels.
In addition, Napco incurred approximately $69,000 in 1997 and $100,000 in 1996
for prototype costs in connection with a potential repowering project in the Far
East. In 1997, Napco received an $8.2 million order associated with this
project, which is expected to be shipped in 1998. Prototype costs are expected
to continue through mid-year 1998. Sales and marketing expenses were also up in
1997 due to an increase of approximately $110,000 in contract re-work costs
which are not expected to continue in 1998. Excluding commission expense, sales
and marketing expenses were approximately 10 percent of net sales in 1997 and
approximately 8 percent of net sales in 1996 and 1995.
Napco administrative expenses were $1,972,000, $2,056,000 and
$1,981,000 in 1997, 1996 and 1995. In 1997, administrative costs were lower
primarily due to a reduced level of incentive payments due to marginal operating
profits for the year. In 1996, administrative expenses were up, in part due to
costs associated with the relocation of Napco's office facility late in 1996 and
also due to legal expenses incurred to explore business opportunities overseas.
Napco warehousing expense was $1,790,000 in 1997 and was up
approximately 9 percent over 1996 levels. Napco warehousing expense increased to
$1,635,000 in 1996, up from $1,471,000 in 1995. In 1997, warehousing expenses
increased due to a sub-contract for a separate facility to warehouse, inspect
and package material for a $15.9 million U.S. government contract received in
1997 (see Backlog). The increase in warehousing expense in 1996 was primarily
due to higher payroll costs related to the 14 percent increase in sales for the
year. Warehousing expense was approximately 7 percent of net sales in 1997 and
approximately 6 percent of net sales in each of the prior two years.
Atio USA operating expenses totaled $2,424,000 for the nine months
ended September 30, 1997, up substantially over operating expenses of $1,296,000
for the year ended December 31, 1996. Operating expenses were $729,000 for Atio
USA for the year ended December 31, 1995. Sales and marketing expenses were
$1,107,000 and administrative expenses were $1,317,000 for the first nine months
of 1997, compared with sales and marketing expenses of $545,000 and
administrative expenses of $751,000 for the year ended December 31, 1996. Sales
and marketing expenses were $257,000 and administrative expenses were $472,000
for the year ended December 31, 1995. Expenses
<PAGE>
increased significantly in 1997 and 1996 as Atio USA increased its focus on
computer telephony technology, expanded its management team and increased its
sales and marketing efforts to introduce its proprietary product, Cybercall(R).
Corporate overhead expenses were $455,000, $636,000 and $482,000 for
the years ended December 31, 1997, 1996 and 1995. Corporate overhead increased
in 1996 primarily due to higher payroll and related costs. Management expects
that corporate overhead will increase in 1998 due to the hiring of a new company
president at the end of 1997.
Operating Profit (Loss)
In 1997, the company reported a consolidated operating loss of
$1,979,000. In 1996 and 1995, the company reported consolidated operating
profits of $81,000 and $919,000.
Napco generated operating profits of $251,000, $1,242,000 and
$1,490,000 for the years ended December 31, 1997, 1996 and 1995. Operating
profits decreased in 1997 due to a 3 percent decrease in sales, and also due to
an increase in operating expenses which were incurred in connection with orders
that, while booked in 1997, will primarily contribute to higher sales in 1998.
Operating expenses also increased due to efforts to increase sales in the
longer-term. While sales increased 14 percent in 1996, higher cost of products
sold and operating expenses led to a decline in the level of operating profit.
Atio USA generated operating losses of $1,775,000 for the nine months
ended September 30, 1997. For the years ended December 31, 1996 and 1995, Atio
USA reported operating losses of $525,000 and $89,000. Increasing losses in 1997
and 1996 were attributable to costs and expenses associated with the
introduction of Cybercall(R).
Other Income (Expense)
Rental income, net of expenses, was $465,000, $428,000 and $456,000 in
1997, 1996 and 1995, and was derived from rental real estate owned by the
company (see Note 5 to the Consolidated Financial Statements).
<PAGE>
Interest expense increased to $512,000 in 1997 as a result of the
refinancing of the company's rental real estate and due to increased borrowings
against the company's line of credit to fund operations. Interest expense
decreased to $371,000 in 1996 from $428,000 in 1995 which resulted from the
repayment of insurance policy loans in early 1996. Interest expense also
includes interest related to the company's deferred compensation plan (see Note
8 to the Consolidated Financial Statements).
Income Tax Expense
The company had no income tax expense or benefit for the years ended
December 31, 1997 and 1996. The company recorded income tax expense of $199,000
for the year ended December 31, 1995 relating to continuing operations. This tax
expense was fully offset by a tax benefit relating to discontinued operations.
The company did not record a net tax benefit for 1997 and 1995 because
the company was unable to carry back losses generated during those years, nor is
it more likely than not that net deferred tax assets will be realized in future
years. In 1996, prior net operating loss carryforwards were utilized to offset
tax expense for the year. At December 31, 1997, the company had approximately
$2,500,000 of net operating loss carryforwards which expire through the year
2012.
Equity in Losses of Unconsolidated Subsidiary
In October 1997, the company entered into a joint venture agreement
with Atio PTY of South Africa and Atio International whereby Atio International
acquired a 50 percent interest in Venturian Software through funding provided by
Atio PTY. Venturian Software issued 2,000,000 shares of its common stock to Atio
International in exchange for $3,500,000 and a royalty-free license with respect
to Atio International's AtioCall products. As a result of this transaction, the
company owns 45 percent, Atio International owns 50 percent and Venturian
Software's former president owns 5 percent of Venturian Software effective
October 1, 1997. Venturian Software changed its name to Atio Corporation USA,
Inc. (Atio USA) upon completion of the transaction. As of October 1, 1997, the
company began accounting for its investment in Atio USA under the equity
<PAGE>
method of accounting. The company recorded $644,000 of equity in losses of
unconsolidated subsidiary for its 45 percent share of Atio USA's losses for the
three months ended December 31, 1997.
Discontinued Operations
On July 31, 1995, the company discontinued operations of its PC Express
subsidiary due to continued losses. PC Express ceased operations effective as of
that date and management proceeded with an orderly liquidation of the
subsidiary. Net losses from operations of PC Express were $1,851,000, net of an
income tax benefit of $336,000, for the seven months ended July 31, 1995, on
sales of $12,202,000. The 1995 loss included a $1,012,000 write-off of goodwill
and non-compete agreements. As of December 31, 1995, management had
substantially completed the liquidation. Based upon the results of the
liquidation, there were insufficient assets to satisfy the remaining obligations
of the subsidiary. Accordingly, the remaining net liabilities of $756,000, net
of income tax expense of $137,000, were written off in 1995.
Backlog
Napco's order backlog totaled $36,687,000 at December 31, 1997, up
substantially over backlog levels at the end of each of the prior two years. The
order backlog was $15,861,000 and $16,300,000 at December 31, 1996 and 1995. The
year-end 1997 backlog increased due to two significant orders booked during the
year - a $15.9 million order for 659 upgrade kits for M113 armored personnel
carriers for the U.S. Tank-Automotive Armaments Command (TACOM), and an $8.2
million contract for a foreign government for repowering kits for M41 light
tanks. Napco shipped 60 kits for the TACOM order in December 1997 and expects to
ship substantially all of the remaining kits during 1998, with any balance to be
shipped during the first quarter of 1999. Shipments of the repowering kits will
be made primarily during the second and third quarters of 1998. Management
expects that nearly all of the balance of its backlog will be filled during
1998.
Management's Discussion and Analysis of Financial Condition
<PAGE>
The company's current ratio was 1.6 to one at December 31, 1997,
compared with 2.2 to one at the end of 1996. Long-term debt at December 31, 1997
totaled $3,954,000 and was approximately 17 percent of total assets at the end
of the year, compared with $1,059,000, or approximately 6 percent of total
assets, last year. Cash and cash equivalents at December 31, 1997 decreased to
$473,000, from $1,011,000 last year.
In September 1997, the company refinanced debt related to its rental
real estate. The new note payable of $3,375,000 is payable in monthly
installments, including interest of 8.53 percent per annum, through October
2007, with the remaining balance due at that time. In addition to the monthly
installments of principal and interest, the company is also required to escrow
amounts for the payment of property taxes and certain other operating expenses.
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 up to $1,000,000 of certain letters of credit be collateralized 100 percent
with a restricted cash balance. The agreement also provides for cash or letter
of credit advances up to $3,000,000, collateralized by the cash surrender value
of certain of the company's life insurance policies. Letters of credit may be
issued for up to $1,000,000 against this line, with the balance available for
cash advances.
In December 1997, the line of credit was amended to provide for
additional working capital advances of up to $3,000,000 through April 30, 1998,
collateralized by accounts receivable, inventory, equipment and other property.
The bank has also agreed to provide an additional $2,000,000 in special letter
of credit advances, as defined in the agreement, through February 28, 1999.
Advances on the $4,000,000 line of credit bear interest at the bank's
base rate and advances on the other lines of credit bear interest at the bank's
base rate plus 3/4 percent. At December 31, 1997, approximately $5,967,000 was
available for cash and letter of credit advances pursuant to the agreement, as
amended. As of December 31, 1997, $2,200,000 in cash advances were outstanding
against the line of credit at an effective rate of 8.5 percent and approximately
$833,000 in letter of credit advances were outstanding. There were no cash
advances outstanding against this line of credit at December 31, 1996.
<PAGE>
Napco has additional lines of credit available for international
transactions on a transaction basis for which restricted cash balances are
required. Letters of credit issued by financial institutions which were
collateralized by a restricted cash balance totaled $91,000 and $65,000 as of
December 31, 1997 and 1996.
As of October 1, 1997, the company began accounting for its investment in Atio
USA under the equity method of accounting, and the company will continue to
report its 45 percent share of Atio USA's results of operations. Proceeds from
the joint venture agreement will be used to fund the future operations of Atio
USA. However, Atio USA will need additional working capital to fund its future
operations. Atio USA is exploring various financing opportunities and is
expected to make future capital calls which the company may elect to meet
pursuant to the capital call provisions of a shareholders agreement entered into
in connection with the joint venture agreement. Should the company elect not to
provide additional funding to Atio USA in response to these capital call
requirements, its ownership percentage could be diluted based upon capital
contributions made by other parties. Management has not determined whether it
will fund further capital requirements of Atio USA. There can be no assurance
that Atio USA will be able to secure the necessary working capital through
external financing or capital calls.
Management believes that the company's present cash reserves and
available credit should be sufficient to fund its operations and to
collateralize all international transactions. In addition, 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
borrowings against life insurance policies or other non-current assets.
Inflation has not adversely affected the company's business and
financial performance. The company is not capital intensive and, therefore,
depreciation on a current cost basis would not significantly affect results. The
company had no material commitments for capital expenditures as of December 31,
1997.
The company does not expect Year 2000 computer issues to significantly
affect its operations. The company is reviewing internally developed programs
for compliance and is contacting external software vendors and other suppliers
regarding compliance. The
<PAGE>
company has not yet made an estimate of the costs involved, but does not expect
such costs to be material.
Shareholder Information
The company paid no dividends in 1997, pursuant to a determination by
the Board of Directors that presently available funds should be used to provide
working capital.
The company's common stock is traded on the Nasdaq Stock Market's
National Market. In February 1998, Nasdaq notified the company that it was not
in compliance with Nasdaq's new public float requirement which became effective
on February 23, 1998. Nasdaq requires a minimum of 750,000 shares not held
directly or indirectly by any officer or director and any other person who is
the beneficial owner of more than 10 percent of the total shares outstanding.
Subsequent to Nasdaq's notification, the company's Board of Directors declared a
three-for-two stock split in order to meet the public float requirement. The
record date for the stock split is April 15, 1998 and is payable on or about
April 30, 1998.
Nasdaq also requires a minimum value of $5,000,000 for the company's public
float. As of March 20, 1998 the company met this requirement, however, future
changes in market prices and other factors could cause the company not to be in
compliance with this requirement. Should this occur, the company would request
an extension of time to remedy this deficiency. If the company were unable to
receive an extension or could not remedy the deficiency, the company's common
stock could be delisted from the National Market and the company would seek
inclusion on the Nasdaq SmallCap Market. The company believes it meets, and will
continue to meet, the inclusion standards for the Nasdaq SmallCap Market. The
company does not believe that listing on the SmallCap Market would have an
adverse effect on the price and liquidity of the company's common stock.
<PAGE>
<TABLE>
<CAPTION>
VENTURIAN CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except share and per share data)
Year ended December 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net sales $ 27,579 $ 28,398 $ 24,845
Cost of products sold 19,775 19,939 16,916
--------- --------- ---------
Gross profit 7,804 8,459 7,929
Operating expenses
Sales and marketing 4,249 3,300 2,612
Administrative 3,744 3,443 2,927
Warehousing 1,790 1,635 1,471
--------- --------- ---------
Total operating expenses 9,783 8,378 7,010
--------- --------- ---------
Operating profit (loss) (1,979) 81 919
Other income (expense)
Investment income 22 42 114
Rental income, net of expenses 465 428 456
Gain (loss) on sale of property and equipment 306 (97) 64
Interest expense (512) (371) (428)
Other 17 1 11
--------- --------- ---------
298 3 217
--------- --------- ---------
Earnings (loss) from continuing operations before income taxes,
equity in losses of unconsolidated subsidiary and discontinued operations (1,681) 84 1,136
Income taxes -- -- 199
--------- --------- ---------
Earnings (loss) from continuing operations before equity in losses
of unconsolidated subsidiary and discontinued operations (1,681) 84 937
Equity in losses of unconsolidated subsidiary (644) -- --
--------- --------- ---------
Earnings (loss) before discontinued operations (2,325) 84 937
Discontinued operations
Loss from discontinued operations, net of income tax benefit -- -- (1,851)
Write-off of net liabilities of PC Express, net of income tax expense -- -- 756
--------- --------- ---------
-- -- (1,095)
--------- --------- ---------
NET EARNINGS (LOSS) $ (2,325) $ 84 $ (158)
========= ========= =========
Net earnings (loss) per share - Basic
Continuing operations $ (3.09) $ .11 $ 1.25
Discontinued operations -- -- (1.46)
--------- --------- ---------
NET EARNINGS (LOSS) PER SHARE $ (3.09) $ .11 $ (.21)
========= ========= =========
Net earnings (loss) per share - Diluted
Continuing operations $ (3.09) $ .11 $ 1.25
Discontinued operations -- -- (1.46)
--------- --------- ---------
NET EARNINGS (LOSS) PER SHARE $ (3.09) $ .11 $ (.21)
========= ========= =========
Weighted average shares outstanding
Basic 751,864 748,712 747,789
Diluted 751,864 786,772 747,948
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
VENTURIAN CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share data)
December 31,
1997 1996
-------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 473 $ 1,011
Accounts receivable, less allowance
for doubtful accounts of $195 in
1997 and $196 in 1996 6,809 4,254
Inventories 5,421 3,668
Restricted cash 91 65
Prepaid expenses and other 451 208
-------- --------
Total current assets 13,245 9,206
PROPERTY AND EQUIPMENT - AT COST
Buildings and improvements 1,916 1,741
Equipment 5,391 5,429
-------- --------
7,307 7,170
Less accumulated depreciation and amortization 5,331 5,690
-------- --------
1,976 1,480
Land 230 314
-------- --------
2,206 1,794
OTHER ASSETS
Cash surrender value of life insurance,
net of policy loans of $220 in 1997 3,884 3,786
Rental real estate, net of accumulated
depreciation of $422 in 1997 and $277 in 1996 2,943 2,898
Investment in unconsolidated subsidiary 1,040 --
Other 570 369
-------- --------
8,437 7,053
-------- --------
$ 23,888 $ 18,053
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft $ 675 $ 409
Note payable to bank 2,200 --
Current maturities of long-term debt 193 227
Accounts payable 3,346 1,981
Advances from customers 482 237
Accrued liabilities
Payroll and related benefits 331 507
Other 1,067 861
-------- --------
Total current liabilities 8,294 4,222
LONG-TERM DEBT, LESS CURRENT MATURITIES 3,954 1,059
DEFERRED COMPENSATION AND POSTRETIREMENT BENEFITS 2,279 2,383
COMMITMENTS AND CONTINGENCIES -- --
SHAREHOLDERS' EQUITY
Common stock - authorized 30,000,000 shares of $1 par
value, issued 753,289 in 1997 and 749,789 in 1996 753 750
Additional contributed capital 15,970 14,676
Accumulated deficit (7,362) (5,037)
-------- --------
9,361 10,389
-------- --------
$ 23,888 $ 18,053
======== ========
The accompanying notes are an integral part of these statements.
<PAGE>
VENTURIAN CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $(2,325) $ 84 $ (158)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 536 534 534
Loss (gain) on sale of property and equipment (306) 97 (64)
Issuance of common stock for services 25 17 --
Equity in losses of unconsolidated subsidiary 644 -- --
Discontinued operations -- -- 923
Change in assets and liabilities, net of effect of change in ownership
of subsidiary in 1997:
Accounts receivable (2,712) 2,412 (3,068)
Inventories (1,753) 309 427
Restricted cash (26) 593 1,445
Prepaid expenses and other (268) 35 36
Other (319) 51 (59)
Bank overdraft 266 14 78
Accounts payable 1,380 (1,262) 1,397
Advances from customers 254 (163) (7)
Accrued liabilities 292 (241) 364
Deferred compensation and
postretirement benefits 245 235 258
Payments on deferred compensation
and postretirement benefits (349) (300) (293)
------- ------- -------
Total adjustments (2,091) 2,331 1,971
------- ------- -------
Net cash provided by (used in) operating activities (4,416) 2,415 1,813
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,126) (388) (323)
Improvements to rental real estate (206) (721) (62)
Purchase of other assets (318) (315) (286)
Proceeds from the sale of property and equipment 490 193 102
Net advances on note receivable from unconsolidated subsidiary (308) -- --
Other 60 14 14
------- ------- -------
Net cash used in investing activities (1,408) (1,217) (555)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit 8,550 -- --
Payments on line of credit (6,350) -- --
Proceeds from long-term debt 4,031 115 213
Payments on long-term debt (1,170) (462) (355)
Proceeds from life insurance loans 220 -- 119
Payments on life insurance loans -- (750) --
Proceeds from issuance of common stock 5 -- --
Discontinued operations, net -- -- (1,150)
------- ------- -------
Net cash provided by (used in) financing activities 5,286 (1,097) (1,173)
------- ------- -------
Net increase (decrease) in cash and cash equivalents (538) 101 85
Beginning cash and cash equivalents 1,011 910 825
------- ------- -------
Ending cash and cash equivalents $ 473 $ 1,011 $ 910
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
VENTURIAN CORP. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
Years ended December 31, 1997, 1996 and 1995
(In thousands)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON CONTRIBUTED ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
---- ------- ------- --------
<S> <C> <C> <C> <C>
Balance at January 1, 1995 $748 $14,661 $(4,963) $ 10,446
Net loss for 1995 -- -- (158) (158)
---- ------- ------- --------
Balance at December 31, 1995 748 14,661 (5,121) 10,288
Issuance of common stock 2 15 -- 17
Net earnings for 1996 -- -- 84 84
---- ------- ------- --------
Balance at December 31, 1996 750 14,676 (5,037) 10,389
Effect of equity transactions of
unconsolidated subsidiary -- 1,267 -- 1,267
Issuance of common stock 3 27 -- 30
Net loss for 1997 -- -- (2,325) (2,325)
---- ------- ------- --------
Balance at December 31, 1997 $753 $15,970 $(7,362) $ 9,361
==== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
VENTURIAN CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 1 - PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Venturian Corp.
and its wholly-owned subsidiaries, Napco International Inc. (Napco) and Napco
International Foreign Sales Corporation, Napco's majority-owned subsidiary,
International Precision Machining, Inc., Venturian's 45 percent-owned
subsidiary, Atio Corporation USA, Inc. (Atio USA, see Note 3), and the accounts
of Venturian's wholly-owned subsidiary, PC Express, Inc., which have been
reflected as discontinued operations (see Note 4), (collectively, the
"company"). Significant intercompany accounts and transactions have been
eliminated in consolidation.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
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 disclosure 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.
A summary of the company's significant accounting policies consistently applied
in the preparation of the accompanying financial statements follows:
Cash and Cash Equivalents - The company considers its investments with an
original maturity of three months or less to be cash equivalents. The company
invests excess funds in reverse repurchase agreements for U.S. government
securities. There were no U.S. government securities repurchased under
agreements to resell at December 31, 1997. At December 31, 1996, the company had
purchased $300,000 of U.S. government securities under agreements to resell.
Generally, the maturity date of the company's reverse repurchase agreements is
the next day of business. Due to the short-term nature of the agreements, the
company does not take possession of the securities, which are instead held at
the bank from which it purchases the securities. The carrying value of the
agreements approximates fair market value because of the short maturity of the
investments, and the company believes that it is not exposed to any significant
risk on its investments in reverse repurchase agreements. Exclusive of the
reverse repurchase agreements, substantially all the cash and cash equivalents
were held at one financial institution in Minnesota at December 31, 1997 and
1996.
Supplemental disclosures of cash flow information for the Statements of Cash
Flows are as follows (in thousands):
Years ended December 31,
------------------------
1997 1996 1995
---- ---- ----
Cash paid during the year for:
Interest.............................. $288 $226 $188
Income taxes............................... 3 21 12
As of October 1, 1997, the company began accounting for its investment in Atio
USA under the equity method of accounting (see Note 3). The following reflects
the effect of a change in ownership of Atio USA (in thousands):
<PAGE>
VENTURIAN CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
Note receivable from unconsolidated subsidiary......... $ 2,866
Other current assets................................... (282)
Equipment, net......................................... (200)
Investment in unconsolidated subsidiary................ (2,671)
Other current liabilities.............................. 287
During the fourth quarter of 1997, the company made a capital contribution to
Atio USA of $3,088,000, through the forgiveness of amounts due to the company.
During the fourth quarter of 1997, the company recorded increases of $1,267,000
to its additional contributed capital and to its investment in Atio USA due to
the effect of equity transactions of Atio USA.
During 1996, based upon a revised cost for environmental remediation of its
rental real estate, the company recorded a reduction of $300,000 in the
liability for environmental remediation and carrying value of the property.
Accounts receivable - The company grants credit to customers in the normal
course of business, but generally does not require collateral or any other
security to support amounts due. Management performs on-going credit evaluations
of customers. The company maintains allowances for potential credit losses
which, when realized, have been within management expectations.
The company has granted credit to two customers whose accounts receivable
balances as of December 31, 1997 and 1996 were approximately $3,223,000 and
$733,000. In addition, the company has granted credit to customers in the Far
East whose accounts receivable balances as of December 31, 1997 and 1996 were
approximately $1,060,000 and $743,000.
Inventories - Inventories are stated at the lower of cost or market, principally
using the specific identification method. A portion of Napco's inventory is
acquired on a speculative basis in varying quantities 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 $1,978,000 and $1,908,000 at December 31, 1997 and 1996, within 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.
Property and Equipment - Depreciation and amortization are provided in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives. Depreciation is computed for financial reporting and
tax purposes using both accelerated and straight-line depreciation methods.
Estimated lives used in the calculation of depreciation for financial statement
purposes are:
Buildings and improvements.............................. 17-40 years
Equipment................................................. 3-15 years
Employee Stock Options - The company's employee stock option plans are accounted
for under the intrinsic value method.
<PAGE>
VENTURIAN CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
Warranties - The company records a warranty accrual at the time of sale for
estimated claims based on actual claims experience. The warranty for Napco's
products generally is for defects in material and workmanship for a period of
one year.
Foreign Currency - From time to time Napco enters into sales contracts
denominated in foreign currency. During 1997 and 1996, Napco also entered into
forward exchange contracts with a bank to hedge against exchange rate
fluctuations related to such sales. Gains and losses on transactions in foreign
currency and forward exchange contracts are included in results of operations.
At December 31, 1997, the company had a foreign exchange contract maturing in
January 1998 for the delivery of 20,893,000 Spanish pesetas and accounts
receivable from a foreign customer totaling 4,431,000 Spanish pesetas. The fair
value of these amounts were $137,000 and $29,000 at December 31, 1997. At
December 31, 1996, the company had a foreign exchange contract maturing in
February 1997 for the delivery of 20,893,000 Spanish pesetas and accounts
receivable from a foreign customer totaling 5,414,000 Spanish pesetas. The fair
value of these amounts were $161,000 and $42,000 at December 31, 1996.
Revenue Recognition - The company recognizes revenue when goods are shipped or
services are rendered.
Net Earnings (Loss) Per Share - On December 31, 1997, the company adopted
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share." As required by SFAS No. 128, all current and prior year net earnings
(loss) per share data have been restated to conform to the provisions of SFAS
No. 128.
The company's basic net earnings (loss) per share amounts have been computed by
dividing net earnings (loss) by the weighted average number of outstanding
common shares. The company's diluted net earnings (loss) per share is computed
by dividing net earnings (loss) by the weighted average number of outstanding
common shares and common share equivalents relating to stock options, when
dilutive.
For the years ended December 31, 1996 and 1995, 38,060 and 159 shares of common
stock equivalents were included in the computation of diluted net earnings
(loss) per share. Options to purchase 119,875, 29,500 and 54,830 shares of
common stock with a weighted average exercise price of $6.91, $8.10, and $8.71
were outstanding during the years ended December 31, 1997, 1996 and 1995, but
were not included in the computation of diluted net earnings (loss) per share
because to do so would have been anti-dilutive.
New Accounting Pronouncements - The Financial Accounting Standards Board (FASB)
has issued SFAS No. 130, "Reporting Comprehensive Income," which requires the
company to display an amount representing total comprehensive income, as defined
by the statement, as part of the company's basic financial statements.
Additionally, SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," requires the company to disclose financial and other
information about its business segments, their products and services, geographic
areas, sales, profits, assets and other information. These statements are
effective for financial statements for periods beginning after December 15,
1997. The adoption of these statements is not expected to have a material effect
on the consolidated financial statements of the company.
Reclassifications - Certain reclassifications have been made to the 1996 and
1995 financial statements to conform with the 1997 presentation.
<PAGE>
VENTURIAN CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 3 - INVESTMENT IN UNCONSOLIDATED SUBSIDIARY
Atio USA, formerly Venturian Software Enterprises, Inc. (Venturian Software),
provides customer contact automation software under the trade name Cybercall(R).
Prior to October 1997, Venturian Software was a 90 percent owned subsidiary of
Venturian Corp. and prior to December 1996 was an 80 percent owned subsidiary of
Venturian Corp. Effective October 1, 1997, Venturian Corp. entered into a joint
venture agreement with Venturian Software, Atio Corporation (PTY) Ltd. (Atio
PTY) of South Africa, Atio Corporation International, Inc. (Atio International)
and Venturian Software's minority shareholder and president, Ilan Sharon
(Sharon), whereby Atio International acquired a 50 percent interest in Venturian
Software through funding provided by Atio PTY.
Pursuant to the terms of the joint venture agreement, Venturian Software issued
2,000,000 shares of its common stock to Atio International in exchange for
$3,500,000 to be paid in installments and a royalty-free license with respect to
Atio International's AtioCall products. As a result of this transaction,
Venturian Corp. owns 45 percent, Atio International owns 50 percent and
Venturian Software's former president owns 5 percent of Venturian Software
effective October 1, 1997. Venturian Software changed its name to Atio
Corporation USA, Inc. (Atio USA) upon completion of the transaction. As of
October 1, 1997, Venturian Corp. began accounting for its investment in Atio USA
under the equity method of accounting. Venturian Corp.'s results of operations
include all of the results of Atio USA for the nine months ended September 30,
1997 and for the years ended December 31, 1996 and 1995 (see Note 14). Venturian
Corp. recorded $644,000 of equity in losses of unconsolidated subsidiary for its
45 percent share of Atio USA's losses for the three months ended December 31,
1997.
Venturian Corp. also entered into a shareholders agreement in connection with
the joint venture agreement which, among other things, sets forth certain
matters with respect to the governance of Atio USA and various terms in
connection with additional capital call requirements. The principal terms of the
shareholders agreement shall terminate immediately if a registration statement
filed by Atio USA in connection with the sale of its common shares is declared
effective by the Securities and Exchange Commission and the sale of common
shares is consummated.
The joint venture agreement provides for the $3,500,000 to be paid in various
installment payments with the final payment due in August 1998. Proceeds from
the joint venture agreement will be used to fund the future operations of Atio
USA. However, Atio USA will need additional working capital to fund its future
operations. Atio USA is expected to make future capital calls which Venturian
Corp. may elect to meet pursuant to the capital call provisions of the
shareholders agreement. Should Venturian Corp. elect not to provide additional
funding to Atio USA in response to these capital call requirements, its
ownership percentage could be diluted based upon capital contributions made by
other parties. Management has not determined whether it will fund further
capital requirements of Atio USA.
<PAGE>
VENTURIAN CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
The following is summarized financial information of Atio USA as of December 31,
1997 and for the three months then ended (in thousands):
Current assets........................................ $ 450
Noncurrent assets..................................... 228
Current liabilities................................... 446
Non-current liabilities............................... 500
Shareholders' deficit................................. (268)
Revenues (unaudited).................................. 154
Net loss (unaudited).................................. (1,447)
At December 31, 1997, Atio USA had options outstanding to purchase 171,250
shares of its common stock at a weighted average exercise price of $1.12.
Assuming the exercise of all of these options,Venturian Corp.'s ownership would
be reduced to approximately 43 percent.
Venturian Corp. has made advances to Atio USA for working capital needs pursuant
to a promissory note. Advances to Atio USA are due upon demand and are secured
by all of its receivables and equipment. Atio USA was charged interest at the
prime rate (effective rate of 8.5 percent at December 31, 1997) on advances made
during 1997. Interest income of approximately $6,000 was recorded by Venturian
Corp. under this arrangement for the three months ended December 31, 1997. In
connection with the joint venture agreement, during the fourth quarter of 1997
Venturian Corp. made a capital contribution of $3,088,000 through the
forgiveness of amounts due to Venturian Corp. from Atio USA. At December 31,
1997, Venturian Corp. has a note receivable of $86,000 from Atio USA.
NOTE 4 - DISCONTINUED OPERATIONS
On July 31, 1995, the company discontinued operations of its PC Express
subsidiary due to continued losses. PC Express ceased operations effective as of
that date and management proceeded with an orderly liquidation of the
subsidiary. Net losses from operations of PC Express were $1,851,000, net of an
income tax benefit of $336,000, for the seven months ended July 31, 1995, on
sales of $12,202,000. The 1995 loss included a $1,012,000 write-off of goodwill
and non-compete agreements. As of December 31, 1995, management had
substantially completed the liquidation. Based upon the results of the
liquidation, there were insufficient assets to satisfy the remaining obligations
of the subsidiary. Accordingly, the remaining net liabilities of $756,000, net
of income tax expense of $137,000, were written off during 1995.
The accounts of PC Express have been reclassified to discontinued operations in
the consolidated financial statements.
NOTE 5 - RENTAL REAL ESTATE
The company's rental real estate consists of a 386,000 square foot multi-tenant
building with twenty-seven tenants presently occupying space. Minimum rental
commitments receivable in future years under non-cancelable long-term leases are
$1,106,000 in 1998, $726,000 in 1999, $521,000 in 2000, and $240,000 in 2001 and
2002.
<PAGE>
VENTURIAN CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
In 1996, the MPCA granted approval of the Phase II Investigation and Review of
Remedial Alternatives Report and the Response Action Plan and Remedial Design
Report submitted by a consultant retained by the company in connection with the
environmental remediation of the property. Remediation recommended by the
consultant at the property commenced in 1996 and was completed in 1997 with the
exception of a groundwater monitoring program which began in December 1996. An
agreement in principle was reached with the MPCA in early 1998 to issue a
Certificate of Completion by mid-April 1998 for the property. The Certificate
will likely include a Voluntary Response Action Agreement to continue the
groundwater monitoring program. The company has recorded liabilities of $59,000
and $128,000 as of December 31, 1997 and 1996 for remaining expected costs to
remediate.
Based upon an independent appraisal of the expected value of the property once
remediation has been completed, management believes the property's current
carrying value of $2,943,000 is recoverable.
NOTE 6 - 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 up to
$1,000,000 of certain letters of credit be collateralized 100 percent with a
restricted cash balance. The agreement also provides for cash or letter of
credit advances up to $3,000,000, collateralized by the cash surrender value of
certain of the company's life insurance policies. Letters of credit may be
issued for up to $1,000,000 against this line, with the balance available for
cash advances.
In December 1997, the line of credit was amended to provide for additional
working capital advances of up to $3,000,000 through April 30, 1998,
collateralized by accounts receivable, inventory, equipment and other property.
The bank has also agreed to provide an additional $2,000,000 in special letter
of credit advances, as defined in the agreement, through February 28, 1999.
Advances on the $4,000,000 line of credit bear interest at the bank's base rate
and advances on the other lines of credit bear interest at the bank's base rate
plus 3/4 percent. At December 31, 1997, approximately $5,967,000 was available
for cash and letter of credit advances pursuant to the agreement, as amended. As
of December 31, 1997, $2,200,000 in cash advances were outstanding against the
line of credit at an effective rate of 8.5 percent and approximately $833,000 in
letter of credit advances were outstanding. There were no cash advances
outstanding against this line of credit at December 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 which were collateralized by a
restricted cash balance totaled $91,000 and $65,000 as of December 31, 1997 and
1996.
NOTE 7 - LONG-TERM DEBT
Long-term debt consisted of the following at December 31 (in thousands):
<PAGE>
VENTURIAN CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
1997 1996
------ ------
Rental real estate mortgage (a)................ $3,372 $1,005
Obligation to U.S. government (b).............. 45 90
Mortgage payable (c)........................... 256 -
Other (d)...................................... 474 191
------ ------
4,147 1,286
Less current maturities........................ 193 227
------ ------
$3,954 $1,059
====== =====
(a) The mortgage outstanding at December 31, 1996 was refinanced. The current
obligation is collateralized by rental real estate (see Note 5) and is due in
monthly installments, including interest at 8.53 percent per annum, through
October 2007, with the remaining balance due at that time. In addition to the
monthly installments of principal and interest, the company is also required to
escrow amounts for the payment of property taxes and certain other operating
expenses.
(b) The obligation is payable to the U.S. government pursuant to the terms of a
settlement agreement reached in February 1994 and is collateralized by real
estate. Payments are due in annual installments of $45,000 through 1998, plus
interest at the 52-week United States Treasury bill auction rate, adjusted
annually (weighted average effective rate of 5.36 percent and 4.64 percent
during 1997 and 1996 and 5.36 percent and 4.64 percent at December 31, 1997 and
1996).
(c) The mortgage is collateralized by certain property and is payable in monthly
installments, including interest at the rate of 9.0 percent per annum, through
December 2013.
(d) These obligations are collateralized by certain equipment and are payable in
monthly installments, including interest at rates ranging from 2 to 2.5 percent
over the prime rate.
Aggregate future maturities of long-term debt are $193,000 in 1998, $155,000 in
1999, $132,000 in 2000, $137,000 in 2001, $86,000 in 2002 and $3,444,000
thereafter.
Based upon the borrowing rates currently available to the company for loans with
similar terms and average maturities, the carrying amount of long-term debt
approximates fair market value at December 31, 1997 and 1996.
NOTE 8 - DEFERRED COMPENSATION
The company has deferred compensation agreements with certain present and former
key employees. The agreements provide for monthly retirement benefit payments
for 15 years following an employee's retirement. The company has purchased life
insurance policies to fund the deferred compensation agreements. The company had
recorded $1,708,000 and $1,816,000 at December 31, 1997 and 1996 for its
liability related to these agreements. There was no
<PAGE>
VENTURIAN CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
deferred compensation expense in 1997, 1996 and 1995. Interest expense related
to the deferred compensation agreements was $205,000, $212,000 and $217,000 for
the years ended December 31, 1997, 1996 and 1995.
NOTE 9 - POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The company sponsors an unfunded defined benefit postretirement plan that covers
a limited number of former employees and dependents of former employees who
retired prior to February 1988. The plan provides for medical and dental
benefits as well as limited life insurance benefits. At December 31, 1997 and
1996, the company had recorded $571,000 and $567,000 for the accumulated
postretirement benefit obligation under this plan.
Net interest cost on the accumulated postretirement benefit obligation was
$32,000, $39,000 and $40,000 for the years ended December 31, 1997, 1996 and
1995.
For measurement purposes, a 5 percent annual rate of increase in the per capita
cost of covered medical benefits was assumed for 1998, decreasing to 4 percent
in 1999 and thereafter. A 4 percent annual rate of increase in the per capita
cost of covered dental benefits was assumed for all years. The health care cost
trend rate assumption has an effect on the amounts reported. To illustrate,
increasing the assumed health care cost trend rate by one percentage point in
each year would increase the accumulated postretirement benefit obligation at
December 31, 1997 by $32,000. The effect of a one percent increase in the health
care cost trend rate would not have a significant effect on interest cost
included in the net periodic postretirement benefit cost for the years ended
December 31, 1997, 1996 and 1995.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7 percent.
NOTE 10 - PENSION AND PROFIT SHARING PLANS
The company has retirement plans, in the form of pension or profit sharing
plans, that are provided for substantially all employees of the company. No
contributions to the profit sharing plan were made for the years ended December
31, 1997, 1996 or 1995.
Benefits under the defined benefit pension plan are provided pursuant to the
terms of a collective bargaining agreement covering approximately one-third of
the company's employees. The agreement expires in August 1998. Benefits under
the plan are based on years of service. Net pension expense includes the
following components (in thousands):
Years ended December 31,
------------------------
1997 1996 1995
----- ----- ----
Service cost - benefits
earned during the year .................... $ 11 $ 14 $ 11
Interest cost on projected
benefit obligation ........................ 57 57 55
Actual return on plan assets ................ (101) (180) (71)
Net amortization and deferral ............... 37 127 17
----- ----- ----
Net pension expense ......................... $ 4 $ 18 $ 12
===== ===== ====
<PAGE>
VENTURIAN CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
Assumptions used in the accounting were:
Discount rate ............................. 7% 7% 7%
Expected long-term
return on assets ........................ 7.5% 7.5% 7.5%
Increase in compensation level ............ N/A N/A N/A
The following sets forth the plan's funded status and amounts recognized in the
consolidated balance sheet as of December 31 (in thousands):
1997 1996
----- -----
Accumulated benefit obligation,
including vested benefits of $825 and
$848 at December 31, 1997 and 1996 ............. $ 834 $ 864
===== =====
Plan assets at fair value, invested
in fixed income securities ..................... $ 907 $ 898
Projected benefit obligations for
participants' service rendered to date ......... 834 864
----- -----
Difference ....................................... 73 34
Unrecognized prior service cost .................. 120 127
Unrecognized net gain ............................ (197) (157)
Unrecognized net transition asset ................ (56) (61)
----- -----
Pension liability recognized in
the consolidated balance sheet ................. $ (60) $ (57)
===== =====
The company's funding policy for the defined benefit plan has been to contribute
such amounts as necessary, computed on an actuarial basis, to provide the plan
with assets sufficient to meet the benefit payment requirements.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
At December 31, 1997, the company had performance and advance payment guarantees
outstanding on various sales contracts totaling $406,000. These guarantees were
backed by insurance bonds, which do not require cash collateral.
The company owns rental real estate that contains industrial contaminants which
are being remediated (see Note 5).
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
<PAGE>
VENTURIAN CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
further investigation or remediation at the site is needed. This recommendation
is subject to the approval of the Minnesota Pollution Control 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.
The company has guaranteed certain office lease commitments of Atio USA totaling
$255,000 as of December 31, 1997.
NOTE 12 - EMPLOYEE STOCK PLANS
The company has a stock option plan that provides participating employees the
right to purchase common stock of the company through incentive and
non-qualified stock options. Shares available for grant under this stock option
plan expired in 1994. At December 31, 1997, options to purchase 33,000 shares
were outstanding, all of which were exercisable.
In 1995, the company adopted and the shareholders approved a new stock option
plan which provides for the granting of options to purchase shares of the
company's common stock. In May 1996, the shareholders approved an amendment to
the plan to allow for an aggregate of 250,000 shares of the company's stock to
be granted under the plan. At December 31, 1997, 150,300 shares were available
for grant under this plan and options to purchase 98,700 shares were
outstanding, of which 51,800 were exercisable.
Under both plans, incentive stock options may not be granted at a purchase price
less than the fair market value of the common shares on the date of the grant
(or, for an option granted to a person holding more than 10 percent of the
company's voting stock, at less than 110 percent of fair market value). The term
of each option under both plans is fixed at the date of grant and may not exceed
ten years from the date the option is granted (except that an incentive stock
option granted to a person holding more than 10 percent of the company's voting
stock may be exercisable only for five years). Options may be made exercisable
in whole or in installments. No options have been granted to a person holding
more than 10 percent of the company's voting stock in the last three years. No
compensation expense has been recorded by the company in the previous three
years.
A summary of the company's stock option transactions is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------------------------------
1997 1996 1995
------------------ ------------------ -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year...........124,150 $ 6.75 51,000 $ 8.36 63,620 $ 8.80
Granted.....................................31,000 9.77 125,000 6.27 - -
Exercised...................................(1,000) 5.75 - - - -
Forfeited..................................(12,450) 6.72 (45,850) 7.08 (8,500) 8.44
Expirations................................(10,000) 9.08 (6,000) 7.77 (4,120) 15.00
------- -------- -------
Outstanding at end of year.................131,700 $ 7.30 124,150 $ 6.75 51,000 $ 8.36
======= ======== ======
Options exercisable at end of year......... 84,800 $ 7.19 73,250 $ 7.49 49,000 $ 8.30
======== ======== ======
<PAGE>
VENTURIAN CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
Weighted-average fair value of options
granted during the year $ 6.81 $ 3.44 N/A
</TABLE>
The following information applies to stock options that are outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Exercise Number Average Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
- --------------- ----------- ---------------- ------ ----------- -----
<S> <C> <C> <C> <C> <C>
$5.00 to $ 5.75 67,700 8 years $5.69 41,600 $5.71
$8.00 to $10.25 64,000 6 years 8.99 43,200 8.62
------- ------
131,700 84,800
======= ======
</TABLE>
The company's pro forma net earnings (loss) and net earnings (loss) per share
for 1997 and 1996, had the fair value based method been used, are set forth
below. These effects may not be representative of the future effects of applying
this method.
(In thousands, except per share data)
1997 1996
---- ----
Net earnings (loss) As reported.......... $(2,325) $ 84
Pro forma............ (2,475) (11)
Net earnings (loss) per
share - basic and diluted As reported.......... $ (3.09) $ .11
Pro forma............ (3.29) (.02)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted-average
assumptions used in 1997 and 1996: zero dividend yield; expected volatility of
67.00 and 64.68 percent; risk-free interest rates of 5.98 and 5.66 percent; and
an expected life of seven and five years.
The company has a Key Employee Stock Purchase Plan for its officers and key
employees under which the company provides loans for the employees to purchase
shares of Venturian Corp. common stock on the open market. The company has
agreed to repurchase the shares covered by the plan at the purchase price,
adjusted for a proportionate increase or decrease in the book value per share
since the date of purchase. The company has also agreed to purchase the covered
shares at the book value per share at the normal retirement age of the plan
participant. The plan authorizes the purchase of 100,000 shares of common stock.
Of the authorized shares, 56,365 shares have been purchased through December 31,
1997, and loans totaling $132,000 were outstanding from key employees under the
plan. The loans are interest bearing at 8 percent per annum and are
collateralized by 18,595 Venturian shares which had a market value of $172,000
at December 31, 1997. The company's obligation to repurchase the outstanding
shares under the plan at December 31, 1997 was approximately $190,000.
NOTE 13 - INCOME TAXES
<PAGE>
VENTURIAN CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
The components of income tax expense were as follows (in thousands):
Years ended December 31,
1997 1996 1995
------ ------ ------
Current expense ........................ $ - $ - $ 199
Deferred expense........................ - - -
------ ------ ------
Total expense...................... $ - $ - $ 199
====== ====== =====
Additionally, a current income tax benefit of $199,000 in 1995 was recorded
relating to discontinued operations. The 1995 current income tax benefit
consisted of $336,000 relating to the loss from discontinued operations, net of
a current tax expense of $137,000 relating to the write-off of net liabilities
of PC Express.
Income tax expense (benefit) for each of the last three years differed from the
expected amount computed by applying the statutory federal income tax rate to
earnings (loss) from continuing operations before income taxes, equity in losses
of unconsolidated subsidiary and discontinued operations due to the following
(in thousands):
Years ended December 31,
<TABLE>
<CAPTION>
1997 1996 1995
----- ---- -----
<S> <C> <C> <C>
Expected income tax expense (benefit)
at statutory rate .............................. $(572) $ 29 $ 386
Difference in tax resulting from:
Allocation of net deferred tax
asset to deconsolidated subsidiary(a) ..... 424 -- --
Change in valuation allowance(b) ............. 206 29 (169)
Net change in cash surrender
value of life insurance policies ........... (60) (56) (46)
Other ........................................ 2 (2) 28
----- ---- -----
Actual income tax expense ........................ $ -- $ -- $ 199
===== ==== =====
Actual income tax expense
percentage ..................................... N/A N/A 17.5%
</TABLE>
(a) Approximately $1,222,000 of net operating losses were allocated to Atio USA
due to Atio USA no longer being a member of the company's consolidated tax
return as a result of the decrease in the company's ownership of Atio USA as of
October 1, 1997 (see Note 3). Approximately $1,120,000 of these net operating
losses were incurred during 1997.
(b) The change in the valuation allowance is attributable to deferred items
relating to continuing operations and excludes the effects of the investment in
unconsolidated subsidiary and net operating losses from discontinued operations.
Deferred tax assets and liabilities are recorded based on the differences
between the tax bases of assets and liabilities and their carrying amounts for
financial reporting purposes. Deferred tax expense (benefit) is the result of
changes in deferred tax assets and liabilities. Deferred income tax assets and
liabilities were as follows at December 31 (in thousands):
<PAGE>
VENTURIAN CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
1997 1996
---- ----
Deferred tax assets:
Deferred compensation and
retirement benefits ................. $ 864 $ 903
Inventory write-off
and capitalization .................. 1,016 723
Alternative minimum tax
credit carryforwards ................ 123 123
Net operating loss carryforwards ...... 929 970
Other ................................. 291 316
------- -------
3,223 3,035
Valuation allowance ................... (2,913) (2,943)
------- -------
310 92
Deferred tax liabilities:
Investment in unconsolidated subsidiary (236) --
Depreciation .......................... (74) (92)
------- -------
$ -- $ --
======= =======
At December 31, 1997 the company had approximately $2,500,000 of net operating
loss carryforwards which expire through the year 2012.
NOTE 14 - SEGMENT INFORMATION
Segment information for the company is as follows (in thousands):
Years ended December 31,
------------------------
1997 1996 1995
-------- -------- --------
Net sales
Napco International ............... $ 26,849 $ 27,550 $ 24,098
Atio USA (a) ...................... 730 848 755
Elimination ....................... -- -- (8)
-------- -------- --------
$ 27,579 $ 28,398 $ 24,845
======== ======== ========
Operating profit (loss)
Napco International ............... $ 251 $ 1,242 $ 1,490
Atio USA (a) ...................... (1,775) (525) (89)
Corporate ......................... (455) (636) (482)
-------- -------- --------
$ (1,979) $ 81 $ 919
======== ======== ========
Depreciation and amortization
Napco International ............... $ 317 $ 356 $ 359
Atio USA (a) ...................... 27 14 6
Corporate ......................... 192 164 169
-------- -------- --------
$ 536 $ 534 $ 534
======== ======== ========
Additions to property and equipment
Napco International ............... $ 981 $ 294 $ 234
Atio USA (a) ...................... 134 77 7
<PAGE>
VENTURIAN CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
Corporate ......................... 11 17 82
-------- -------- --------
$ 1,126 $ 388 $ 323
======== ======== ========
Assets at year-end
Napco International ............... $ 16,006 $ 10,941 $ 13,752
Atio USA (see Note 3) ............. -- 362 290
Corporate ......................... 7,882 6,750 6,274
-------- -------- --------
$ 23,888 $ 18,053 $ 20,316
======== ======== ========
(a) Reflects the results of operations through September 30, 1997 (see Note 3).
Napco manufactures and supplies a wide variety of defense-related products to
governments and commercial customers around the world. A substantial portion of
Napco's sales are replacement parts for U.S. made military and tracked vehicles.
Napco's sales by geographic region for the last three years were as follows (in
thousands):
Years ended December 31,
------------------------
1997 1996 1995
------- ------- -------
United States
and Canada ......... $14,264 $16,461 $14,622
Europe .................. 4,595 4,037 5,465
Far East ................ 3,974 4,791 2,583
Mediterranean and
Middle East ........ 1,989 1,051 697
Latin America ........... 1,910 899 731
Africa .................. 117 311 --
------- ------- -------
$26,849 $27,550 $24,098
======= ======= =======
During 1997, 1996 and 1995, no sales to customers in foreign countries accounted
for more than 10 percent of Napco's sales. In general, the company considers
Napco's sales to customers in specific countries to be more relevant than sales
to individual foreign customers because the primary risks with respect to its
export sales relate to political decisions by the U.S. government, which could
prevent future sales to foreign nations, or monetary, military or economic
conditions in certain countries that may affect sales in such countries.
Napco's sales in the United States were $13,952,000, $15,795,000 and $14,024,000
in 1997, 1996 and 1995 and consisted primarily of sales to various U.S.
government agencies and to a large number of commercial customers. During 1997,
1996 and 1995, sales to one customer in the United States accounted for 23, 32
and 38 percent of Napco sales. During 1997, sales to one other customer in the
United States accounted for 10 percent of Napco sales. However, historically
there has not been a reliance on either customer.
NOTE 15 - SUBSEQUENT EVENT
<PAGE>
VENTURIAN CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
The company's common stock is traded on the Nasdaq National Market. In February
1998, Nasdaq notified the company that it was not in compliance with Nasdaq's
new public float requirement which became effective on February 23, 1998. Nasdaq
requires a minimum of 750,000 shares not held directly or indirectly by any
officer or director and any other person who is the beneficial owner of more
than 10 percent of the total shares outstanding. Subsequent to Nasdaq's
notification, the company's Board of Directors declared a three-for-two stock
split in order to meet the public float requirement. The record date for the
stock split is April 15, 1998 and is payable on or about April 30, 1998.
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Venturian Corp.
We have audited the accompanying consolidated balance sheets of
Venturian Corp. (a Minnesota corporation) and Subsidiaries as of December 31,
1997 and 1996 and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. 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 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 our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Venturian Corp. and Subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/S/ GRANT THORNTON LLP
Minneapolis, Minnesota
February 27, 1997
<PAGE>
VENTURIAN CORP. AND SUBSIDIARIES
Quarterly Financial Data
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
1997 1996 1997 1996 1997 1996 1997 (a) 1996
------- ------ ------- ------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ............... $ 6,743 $6,783 $ 8,078 $ 7,752 $ 4,714 $ 6,820 $8,044 $ 7,043
Gross profit ............ 1,902 2,090 2,247 2,025 1,252 2,060 2,403 2,284
Net earnings (loss) ..... (896) 272 (355) (44) (1,293) (97) 219 (47)
Earnings (loss) per share
Basic ................. $ (1.19) $ .36 $ (.47) $ (.06) $ (1.72) $ (.13) $ .29 $ (.06)
Diluted ............... (1.19) .36 (.47) (.06) (1.72) (.13) .28 (.06)
</TABLE>
(a) As of October 1, 1997, the company began accounting for its investment in
Atio USA under the equity method of accounting.
Stock prices are based upon the high and low sales prices of Venturian Corp.
(VENT) as quoted on the NASDAQ Stock Market's National Market. Market quotations
reflect interdealer prices, without retail mark-up, mark-down or commission and
may not necessarily reflect actual market transactions.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High ..... $ 13.25 $ 8.25 $ 12.25 $ 14.25 $ 11.25 $ 13.25 $ 10.88 $ 11.25
Low ...... 8.13 5.00 9.50 6.75 9.00 9.75 9.13 7.25
</TABLE>
<PAGE>
VENTURIAN CORP. AND SUBSIDIARIES
Five-Year Financial Summary
(In thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales ................................... $ 27,579 $28,398 $ 24,845 $ 25,206 $ 23,045
Earnings (loss) from continuing operations
before equity in losses of
unconsolidated subsidiary, discontinued
operations and cumulative effect of
a change in accounting principle .......... (1,681) 84 937 267 (1,462)
Equity in losses of unconsolidated subsidiary (644) -- -- -- --
Discontinued operations ..................... -- -- (1,095) (3,235) 304
Cumulative effect of a change
in accounting principle ................... -- -- -- -- (571)
Net earnings (loss) ......................... (2,325) 84 (158) (2,968) (1,729)
PER SHARE DATA
Net earnings (loss) per share - Basic
Earnings (loss) from continuing
operations before discontinued operations
and cumulative effect of a change
in accounting principle ................. $ (3.09) $ .11 $ 1.25 $ .36 $ (1.96)
Discontinued operations ................... -- -- (1.46) (4.33) .41
Cumulative effect of a change
in accounting principle ................. -- -- -- -- (.76)
Net earnings (loss) per share - Basic ....... (3.09) .11 (.21) (3.97) (2.31)
Net earnings (loss) per share - Diluted
Earnings (loss) from continuing
operations before discontinued operations
and cumulative effect of a change
in accounting principle ................. (3.09) .11 1.25 .36 (1.96)
Discontinued operations ................... -- -- (1.46) (4.33) .41
Cumulative effect of a change
in accounting principle ................. -- -- -- -- (.76)
Net earnings (loss) per share - Diluted ..... (3.09) .11 (.21) (3.97) (2.31)
Year end stock price ........................ 9.25 8.13 5.00 5.75 7.25
Shareholders of record at year end .......... 501 537 724 591 724
FINANCIAL POSITION
Working capital ............................. $ 4,951 $ 4,984 $ 6,181 $ 6,515 $ 9,965
Current ratio ............................... 1.6 2.2 2.0 2.4 2.4
Total assets ................................ $ 23,888 $18,053 $ 20,316 $ 19,111 $ 23,243
Long-term liabilities at year end ........... 6,233 3,442 3,755 3,971 2,855
</TABLE>
Exhibit (21)
Venturian Corp. and Subsidiaries
SUBSIDIARIES OF THE REGISTRANT
December 31, 1997
The Company's subsidiaries are:
State or Other
Jurisdiction in which
Name Incorporated or Organized
---- -------------------------
Napco International Inc. Minnesota
Hopkins Tech Center LLC Minnesota
Napco International Foreign Sales Corporation U.S. Virgin Islands
Atio Corporation USA, Inc. Minnesota
PC Express, Inc. Minnesota
Exhibit 23.1
Venturian Corp. and Subsidiaries
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our reports dated February 27, 1998 accompanying the consolidated
financial statements and schedule incorporated by reference or included in the
Annual Report of Venturian Corp. on Form 10-K for the year ended December 31,
1997. We hereby consent to the incorporation by reference of said reports in the
Registration Statements of Venturian Corp. on Forms S-8 (File No. 2-93660,
effective October 29, 1984 and File No. 333-09223, effective August 30, 1996).
/s/ GRANT THORNTON LLP
Minneapolis, Minnesota
February 27, 1998
FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
ATIO CORPORATION USA, INC.
1997 ANNUAL REPORT
<PAGE>
CONTENTS
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.................. 3
FINANCIAL STATEMENTS
BALANCE SHEETS................................................... 4
STATEMENTS OF OPERATIONS......................................... 5
STATEMENTS OF SHAREHOLDERS' DEFICIT.............................. 6
STATEMENTS OF CASH FLOWS......................................... 7
NOTES TO FINANCIAL STATEMENTS.................................... 9
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Atio Corporation USA, Inc.
We have audited the accompanying balance sheet of Atio
Corporation USA, Inc. (a Minnesota corporation) as of December 31, 1997, and the
related statements of operations, shareholders' deficit, and cash flows for the
year then ended. 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 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 financial position of Atio
Corporation USA, Inc. as of December 31, 1997, and the results of its operations
and its cash flows for the year then ended, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. As shown in the
financial statements, the Company has incurred accumulated losses since
inception of $4,138,850 and losses are expected to continue due to continuing
sales and marketing efforts and further development of its products. These
factors, among others, as discussed in note B, raise substantial doubt about the
Company's ability to continue as a going concern. As indicated in note B, the
Company is continuing its efforts to raise the additional funds required to
carry on its activities. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Grant Thornton LLP
Minneapolis, Minnesota
February 20, 1998
<PAGE>
ATIO CORPORATION USA, INC.
BALANCE SHEETS
DECEMBER 31,
<TABLE>
<CAPTION>
ASSETS 1997 1996
----------- -----------
(audited) (unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 318,783 $ 133,635
Accounts receivable, net 87,401 98,573
Prepaid expenses 43,872 37,002
----------- -----------
Total current assets 450,056 269,210
FURNITURE AND EQUIPMENT, AT COST 297,319 118,615
Less accumulated depreciation and amortization 69,696 25,594
----------- -----------
227,623 93,021
----------- -----------
$ 677,679 $ 362,231
=========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Due to affiliates $ 137,025 $ 1,079,284
Accounts payable 252,066 19,395
Accrued salaries and benefits 23,665 59,608
Other accrued expenses 32,893 41,210
Advances from customers -- 9,260
----------- -----------
Total current liabilities 445,649 1,208,757
COMMITMENTS -- --
REDEEMABLE COMMON STOCK 500,000 --
SHAREHOLDERS' DEFICIT
Common stock, $.01 par value, authorized 11,000,000 shares; issued and
outstanding 3,800,000 shares as of December 31, 1997 and 2,000,000 shares
as of December 31, 1996 38,000 20,000
Additional paid-in capital 5,896,213 --
Accumulated deficit (4,138,850) (866,526)
----------- -----------
1,795,363 (846,526)
Stock subscription receivable (2,063,333) --
----------- -----------
(267,970) (846,526)
----------- -----------
$ 677,679 $ 362,231
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
ATIO CORPORATION USA, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
1997 1996 1995
----------- ----------- ---------
(audited) (unaudited) (unaudited)
Net revenues
Services $ 698,284 $ 721,012 $ 581,577
Products 185,620 127,237 173,718
----------- ----------- ---------
883,904 848,249 755,295
Costs and expenses
Cost of products sold 98,368 76,652 114,463
Sales and marketing expense 1,558,782 545,240 257,252
General and administrative 1,419,059 483,685 272,695
Technical support 756,169 267,836 200,086
Research and development 267,159 -- --
----------- ----------- ---------
4,099,537 1,373,413 844,496
----------- ----------- ---------
Operating loss (3,215,633) (525,164) (89,201)
Interest expense (56,691) -- --
----------- ----------- ---------
NET LOSS $(3,272,324) $ (525,164) $ (89,201)
=========== =========== =========
The accompanying notes are an integral part of these statements.
<PAGE>
ATIO CORPORATION USA, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIT
FOR THE YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Common stock
------------ Additional Stock Total
Shares Par paid-in Accumulated subscription shareholders'
issued value capital deficit receivable deficit
---------- -------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances as of December 31, 1994
(unaudited) 1,000,000 $ 10,000 $ -- $ (252,161) $ -- $ (242,161)
Net loss -- -- -- (89,201) -- (89,201)
---------- -------- ----------- ----------- ----------- -----------
Balances as of December 31, 1995 (unaudited)
1,000,000 10,000 -- (341,362) -- (331,362)
Net loss -- -- -- (525,164) -- (525,164)
Issuance of additional common stock
to parent 1,000,000 10,000 -- -- -- 10,000
---------- -------- ----------- ----------- ----------- -----------
Balances as of December 31, 1996 (unaudited)
2,000,000 20,000 -- (866,526) -- (846,526)
Net loss -- -- -- (3,272,324) -- (3,272,324)
Capital contribution by affiliate -- -- 3,088,307 -- -- 3,088,307
Issuance of common stock, net of expenses
of $174,094 2,000,000 20,000 3,305,906 -- (3,000,000) 325,906
Redeemable common stock (200,000) (2,000) (498,000) -- -- (500,000)
Development services provided -- -- -- -- 266,667 266,667
Collections on stock subscription
receivable -- -- -- -- 670,000 670,000
---------- -------- ----------- ----------- ----------- -----------
Balances as of December 31, 1997
(audited) 3,800,000 $ 38,000 $ 5,896,213 $(4,138,850) $(2,063,333) $ (267,970)
========== ======== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
ATIO CORPORATION USA, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996 1995
----------- --------- ---------
(audited) (unaudited) (unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(3,272,324) $(525,164) $ (89,201)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 44,102 15,209 6,179
Development services 266,667 -- --
Issuance of common stock -- 10,000 --
Changes in operating assets and liabilities:
Accounts receivable 11,172 62,519 (94,521)
Prepaid expenses (6,870) 612 (20,222)
Other assets -- 21,780 5,119
Accounts payable 232,671 19,395 (1,309)
Accrued salaries and benefits (35,943) 21,625 11,204
Other accrued expenses (8,317) 22,699 5,559
Advances from customers (9,260) (4,720) 3,700
----------- --------- ---------
Net cash used in operating activities (2,778,102) (356,045) (173,492)
Cash flows from investing activities:
Purchase of property and equipment (178,704) (77,411) (7,182)
Cash flows from financing activities:
Net advances from affiliates 2,146,048 528,914 154,748
Proceeds from issuance of common stock 995,906 -- --
----------- --------- ---------
Net cash provided by financing activities 3,141,954 528,914 154,748
----------- --------- ---------
Net increase (decrease) in cash 185,148 95,458 (25,926)
Cash, beginning of year 133,635 38,177 64,103
----------- --------- ---------
Cash, end of year $ 318,783 $ 133,635 $ 38,177
=========== ========= =========
</TABLE>
<PAGE>
ATIO CORPORATION USA, INC.
STATEMENTS OF CASH FLOWS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31,
Supplemental disclosure of non-cash investing and financing activities:
During 1997, Venturian Corp. (Venturian) made a capital contribution of
$3,088,307 through the forgiveness of amounts owed to Venturian.
During 1997, 200,000 shares of the Company's common stock were reclassified
to redeemable common stock, based upon the terms of the shareholders
agreement entered into in 1997 (see note C).
During 1997, the Company reduced the stock subscription receivable for
development services provided by Atio PTY during 1997.
During 1996, the Company issued 1,000,000 shares of its common stock, par
value of $10,000, to Venturian in consideration for Venturian providing
working capital advances to the Company.
The accompanying notes are an integral part of these statements.
<PAGE>
ATIO CORPORATION USA, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(DATA RELATED TO DECEMBER 31, 1996 AND 1995 IS UNAUDITED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Atio Corporation USA, Inc., formerly Venturian Software Enterprises, Inc.,
(the "Company" or "Atio USA") provides customer contact automation software
under the trade name Cybercall(R). The Company historically has provided
high-technology information services in the Upper Midwest as a value-added
dealer of Magic(TM) software, providing primarily consulting services and
custom applications development.
Prior to October 1997, the Company was a 90 percent owned subsidiary of
Venturian Corp. ("Venturian") and prior to December 1996 was an 80 percent
owned subsidiary of Venturian. Effective October 1, 1997, the Company entered
into a joint venture agreement (see note B) with Venturian, Atio Corporation
(PTY) Ltd. ("Atio PTY") of South Africa, Atio Corporation International, Inc.
("Atio International") and the Company's minority shareholder and president,
Ilan Sharon ("Sharon"), whereby Atio International acquired a 50 percent
interest in the Company through funding provided by Atio PTY.
As a result of this agreement, at December 31, 1997 Atio International owns
50 percent, Venturian owns 45 percent and Sharon owns 5 percent of the
Company. The Company changed its name to Atio Corporation USA, Inc. upon
completion of the transaction.
Accounts Receivable
The Company grants credit to customers in the normal course of business, but
generally does not require collateral to support the amounts due. Management
performs ongoing credit evaluations of customers. The Company maintains
allowances for potential credit losses which, when realized, have been within
management's expectations. The allowance for doubtful accounts was $76,433
and $3,279 as of December 31, 1997 and 1996.
<PAGE>
ATIO CORPORATION USA, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(DATA RELATED TO DECEMBER 31, 1996 AND 1995 IS UNAUDITED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Furniture and Equipment - Depreciation and Amortization
Depreciation and amortization are provided in amounts sufficient to relate
the cost of depreciable assets to operations over their estimated service
lives. Depreciation is computed for financial reporting purposes using
straight-line depreciation methods and for tax purposes using accelerated
methods. Estimated lives used in the calculation of depreciation for
financial reporting purposes range from 3 to 10 years.
Employee Stock Options
The Company's employee stock option plans are accounted for under the
intrinsic value method.
Revenue Recognition
The Company recognizes revenue when products are shipped or services are
rendered.
Research and Development
The Company expenses research and development costs as incurred.
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 the disclosure
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.
<PAGE>
ATIO CORPORATION USA, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(DATA RELATED TO DECEMBER 31, 1996 AND 1995 IS UNAUDITED)
NOTE B - ABILITY TO CONTINUE AS A GOING CONCERN
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of
the Company as a going concern. However, the Company has incurred accumulated
losses since inception of $4,138,850 and, to date, the research, development,
sales and marketing and other business operations of the Company have been
funded primarily through the private sale of the Company's securities and
advances from affiliates.
The future of the Company is dependent upon its ability to raise additional
working capital to fund its sales and marketing efforts and its continued
development of its products. The Company is currently seeking additional
sources of financing to fund its operations and management expects to make
future capital calls (see note C). There is no assurance that the Company
will achieve a profitable level of operations or that the Company will be
able to obtain the necessary working capital through external financing or
capital calls. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts
or amounts of liabilities that might be necessary should the Company be
unable to continue in existence.
NOTE C - JOINT VENTURE AGREEMENT
Effective October 1, 1997, the Company entered into a joint venture agreement
(see note A). Pursuant to the terms of the joint venture agreement, the
Company issued 2,000,000 shares of its common stock to Atio International in
exchange for $3,500,000 and a royalty-free license with respect to Atio
International's AtioCall products. The joint venture agreement provides for
the $3,500,000 to be paid by Atio PTY, on behalf of Atio International, in
various installment payments with the final payment due in August 1998.
There were additional agreements entered into in connection with the joint
venture agreement as follows:
<PAGE>
ATIO CORPORATION USA, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(DATA RELATED TO DECEMBER 31, 1996 AND 1995 IS UNAUDITED)
NOTE C - JOINT VENTURE AGREEMENT - Continued
Technology and License Agreement
The Technology and License Agreement (the "License Agreement"), among other
things, provides (i) the Company with a worldwide exclusive right, on a
royalty-free basis, to Atio International's AtioCall products, (ii) for the
transfer of the AtioCall product rights to the Company, subject to certain
conditions, no later than December 31, 1999, (iii) that Atio PTY furnish
certain development services in connection with this exclusive right, and
(iv) that the Company pay an initial prepayment for such development
services through the offset of $800,000 of the amount owing by Atio PTY for
the purchase of the Company's common stock.
The License Agreement is effective until the earlier of various dates
defined in the License Agreement including, among others, (i) when the
AtioCall product rights are transferred to the Company, (ii) the closing of
a merger of the Company and Atio International whereby Atio International
acquires all of the common stock or assets of the Company, or (iii)
December 31, 1999, if the transfer of the AtioCall product rights has not
occurred and the Company is not then actively engaged in the marketing of
computer telephony products.
Technology Development and Support Agreement
The Technology Development and Support Agreement (the "Development
Agreement"), among other things, provides for Atio PTY to perform such
product development services as to which the Company and Atio PTY mutually
agree. The Company is required to purchase development services exclusively
from Atio PTY until March 1, 1999; thereafter, the Company may purchase
such services from any source. Compensation for the development and support
services is based upon annual budgets mutually agreed to by Atio PTY and
the Company. The Development Agreement also provides for additional
compensation to Atio PTY of five percent of the Company's gross profit from
the licensing of AtioCall products, effective September 1, 1998. During the
year ended December 31, 1997, Atio PTY provided development services to the
Company of $266,667, which were paid for through an offset to the stock
subscription receivable.
<PAGE>
ATIO CORPORATION USA, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(DATA RELATED TO DECEMBER 31, 1996 AND 1995 IS UNAUDITED)
NOTE C - JOINT VENTURE AGREEMENT - Continued
The Development Agreement is effective until September 1, 1999 and for so
long thereafter as the Company and Atio PTY mutually agree.
Shareholders Agreement
The Shareholders Agreement (the "Shareholders Agreement"), among other
things, sets forth (i) various terms and restrictions for the transfer of
any of the Company's shares of common stock, (ii) certain matters with
respect to the governance of the Company, and (iii) the Company's
responsibility to redeem Sharon's shares of common stock upon his
termination or death, at a price as defined in the Shareholders Agreement.
The Shareholders Agreement also provides for (i) various terms in
connection with additional capital call requirements, (ii) Venturian having
the right to cause the Company to be merged with and into Atio
International, with Atio International as the surviving company, and (iii)
for 28,000 of the Company's shares of common stock issued to Atio
International to be held as security interest until all of the installment
payments on the stock subscription receivable have been made and all of the
development services have been rendered by Atio PTY as provided for in the
respective agreements.
The principal terms of the Shareholders Agreement shall terminate
immediately if a registration statement filed by the Company in connection
with the sale of its common shares is declared effective by the Securities
and Exchange Commission and the sale of common shares is consummated.
During 1997, 200,000 shares of the Company's common stock were reclassified
to redeemable common stock, based upon the Company's responsibility to
redeem those shares.
<PAGE>
ATIO CORPORATION USA, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(DATA RELATED TO DECEMBER 31, 1996 AND 1995 IS UNAUDITED)
NOTE C - JOINT VENTURE AGREEMENT - Continued
Distribution Agreement
The Distribution Agreement (the "Distribution Agreement") provides for Atio
International to have exclusive distribution rights outside of North
America for the Company's Cybercall products. The terms of the Distribution
Agreement, among other things, (i) provide Atio International with the
right, subject to certain limitations, to appoint dealers to market and
distribute the Cybercall products to end users, (ii) sets forth various
pricing and payment terms, and (iii) defines responsibilities for end-user
support.
The Distribution Agreement is effective for five years or until that
earlier date if the AtioCall product rights revert back to Atio
International per the terms of the License Agreement. The Distribution
Agreement may be renewed for additional terms upon the mutual agreement of
the parties.
Services Agreement
Pursuant to the terms of the Services Agreement (the "Services Agreement"),
Atio International is to provide the Company with certain general and
product development services, as defined, for $29,708 per month plus
quarterly and annual incentive payments, as defined.
The term of the Services Agreement is for four years and may be renewed for
successive one-year periods. The Services Agreement may be terminated by
the Company prior to that time upon written notice and may result in 12
months of additional payments upon termination.
NOTE D - DUE TO AFFILIATES
The Company has received advances from Venturian for working capital needs.
Advances from Venturian at December 31, 1997 are due upon demand and are
collateralized by all of the Company's receivables and equipment. The
Company was charged interest at the prime rate (effective rate of 8.5% as
of December 31, 1997) on advances received during 1997. Interest expense of
$56,691 was recorded by the Company for the year ended December 31, 1997.
<PAGE>
ATIO CORPORATION USA, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(DATA RELATED TO DECEMBER 31, 1996 AND 1995 IS UNAUDITED)
NOTE D - DUE TO AFFILIATES - Continued
In connection with the joint venture agreement (see notes A and C), during
1997 Venturian made a capital contribution of $3,088,307 to the Company
through the forgiveness of amounts owed to Venturian. As of December 31, 1997
and 1996, advances of $85,661 and $1,079,284 were payable to Venturian. The
amount due to Venturian of $85,661 was paid in full during 1998.
Pursuant to the Services Agreement (see note C), the Company owed Atio
International $51,364 for certain general services performed during the year
ended December 31, 1997.
NOTE E - EMPLOYEE BENEFIT PLANS
Through December 31, 1997, the Company participated in a defined contribution
401(k) plan sponsored by Venturian. Substantially all employees were eligible
to participate in the Venturian plan after completing at least one year of
service, as defined in the plan. The 401(k) plan allowed employees to defer a
portion of their salary on a pretax basis through contributions to the plan.
Employer matching contributions were at the discretion of Venturian
management.
Effective January 1, 1998, the Company established its own defined
contribution plan with similar features.
NOTE F - LEASE COMMITMENTS
The Company's operations are conducted in a leased facility under an
agreement expiring in July 2000. In addition, the Company also leases certain
office equipment under operating leases. Rent expense was $41,869, $15,787
and $10,000 during the years ended December 31, 1997, 1996 and 1995, which
included $10,000 in 1996 and 1995 for facility rent charged by Venturian.
<PAGE>
ATIO CORPORATION USA, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(DATA RELATED TO DECEMBER 31, 1996 AND 1995 IS UNAUDITED)
NOTE F - LEASE COMMITMENTS - Continued
Future minimum annual rental commitments under noncancelable leases are as
follows for the years ending December 31:
1998 $138,774
1999 144,653
2000 102,483
2001 27,870
2002 27,870
Thereafter 2,321
------
$443,971
NOTE G - INCOME TAXES
Through September 30, 1997, the Company's results of operations were included
in Venturian's consolidated income tax returns. No income tax benefit was
allocated to the Company during the nine months ended September 30, 1997 and
the years ended December 31, 1996 and 1995. For the three months ended
December 31, 1997, the Company will file a short period income tax return as
a stand alone entity. Approximately $1,222,000 of net operating losses
incurred prior to September 30, 1997 were allocated to the Company due to the
Company no longer being a member of Venturian's consolidated tax return.
Approximately $1,120,000 of these net operating losses were incurred during
1997.
As of December 31, 1997, the Company has net operating loss carryforwards of
approximately $2,735,000, including the net operating losses allocated to the
Company, available to offset future earnings through 2012. The Company's
ability to utilize the net operating loss carryforwards may be limited as a
result of equity ownership changes.
Deferred tax assets and liabilities are recorded based upon the differences
between the tax bases of assets and liabilities and their carrying amounts
for financial reporting purposes.
<PAGE>
ATIO CORPORATION USA, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(DATA RELATED TO DECEMBER 31, 1996 AND 1995 IS UNAUDITED)
NOTE G - INCOME TAXES - Continued
As of December 31, 1997, the Company has a net long-term deferred tax asset
of approximately $1,012,000 which has been fully offset by a valuation
allowance, due to the uncertainty of the net deferred tax asset providing a
benefit in the future.
NOTE H - STOCK OPTIONS
In November 1996, the Company's board of directors and shareholders approved
a stock option plan which provides participating employees the right to
purchase common stock of the Company through incentive and non-qualified
stock options. A total of 755,000 shares of common stock are reserved for
issuance under the plan. At December 31, 1997, 565,000 shares were available
for grant under the plan.
Under the plan, incentive stock options may not be granted at a purchase
price less than fair market value of the common shares on the date of the
grant (or for an option granted to a person holding more than 10% of the
Company's voting stock at less than 110% of fair market value). Under the
plan, the option term is fixed at the date of grant and may not exceed ten
years from the date the option is granted (except that an incentive stock
option granted to a person holding more than 10% of the Company's voting
stock may be exercisable only for five years). Options become exercisable in
installments generally over two years. No options have been granted to a
person holding more than 10% of the Company's voting stock. No compensation
expense has been recorded by the Company since the inception of the plan.
<PAGE>
ATIO CORPORATION USA, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(DATA RELATED TO DECEMBER 31, 1996 AND 1995 IS UNAUDITED)
NOTE H - STOCK OPTIONS - Continued
A summary of the Company's stock option transactions for the years ended
December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
Weighted Weighted
average average
exercise exercise
Shares price Shares price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding at beginning of year 100,000 $1.00 - $ -
Granted 90,000 1.22 100,000 1.00
Forfeited (18,750) 1.00 - -
-------- -------
Outstanding at end of year 171,250 1.12 100,000 1.00
======= =======
Options exercisable at end of year 76,250 $1.00 -
======= =======
Weighted average fair value of options
granted during the year $1.13 $.92
</TABLE>
The following information applies to grants that are outstanding at December
31, 1997:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------- -------------------
Weighted
average
remaining Weighted Weighted
Exercise Number contractual average Number average
prices outstanding life exercise price exercisable exercise price
------ ----------- ---- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 161,250 9 years $1.00 76,250 $1.00
$3.00 10,000 10 years $3.00 -
------- ------
171,250 76,250
======= ======
</TABLE>
<PAGE>
ATIO CORPORATION USA, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(DATA RELATED TO DECEMBER 31, 1996 AND 1995 IS UNAUDITED)
NOTE H - STOCK OPTIONS - Continued
The Company's pro forma net loss for 1997 and 1996, had the fair value based
method been used, are set forth below. These effects may not be
representative of the future effects of applying this method.
1997 1996
-------------- --------
Net loss As reported $(3,272,324) $(525,164)
Pro forma (3,344,944) (529,258)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted-average
assumptions used in 1997 and 1996: zero dividend yield; expected volatility
of 200%; risk-free interest rates of 6.37% and 5.67%; and an expected life of
3 years.
NOTE I - MAJOR CUSTOMERS
During the years ended December 31, 1997, 1996 and 1995 one customer
accounted for 36%, 45% and 44% and another customer accounted for 12%, 26%
and 13% of the Company's net revenues. Two other customers each accounted for
more than 10% of net revenues during the year ended December 31, 1997.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 473
<SECURITIES> 0
<RECEIVABLES> 7,004
<ALLOWANCES> 195
<INVENTORY> 5,421
<CURRENT-ASSETS> 13,245
<PP&E> 7,537
<DEPRECIATION> 5,391
<TOTAL-ASSETS> 22,888
<CURRENT-LIABILITIES> 8,294
<BONDS> 0
0
0
<COMMON> 753
<OTHER-SE> 8,608
<TOTAL-LIABILITY-AND-EQUITY> 22,888
<SALES> 27,579
<TOTAL-REVENUES> 27,579
<CGS> 9,783
<TOTAL-COSTS> 9,783
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 512
<INCOME-PRETAX> (1,681)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,325)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,325)
<EPS-PRIMARY> (3.09)
<EPS-DILUTED> (3.09)
</TABLE>
