UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-12117
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VENTURIAN CORP.
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(Exact name of registrant as specified in its charter)
Minnesota 41-1460782
--------- ----------
(State or other jurisdication of IRS Employer ID Number
incorporation or organziation)
11111 Excelsior Boulevard, Hopkins, MN 55343
- -------------------------------------- -----
(Address of principal executive offices) (Zip code)
Registrant's telephone number,
including area code (612) 931-2500
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Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding twelve months and (2) has been subject to the filing requirements for
at least the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practical date:
Outstanding at October 31, 1998
-------------------------------
$1.00 par value common shares 1,198,081
<PAGE>
VENTURIAN CORP. AND SUBSIDIARIES
FORM 10-Q
INDEX
PART I. Financial Information
Item 1.
Consolidated Condensed Balance Sheets
September 30, 1998 and December 31, 1997 3
Consolidated Condensed Statements of Operations
Three and nine months ended
September 30, 1998 and 1997 4
Consolidated Condensed Statements of Cash Flows
Nine months ended September 30, 1998 and 1997 5
Notes to Consolidated Condensed Financial
Statements 6
Item 2.
Management's Discussion and Analysis of
the Results of Operations and Financial Condition 11
PART II. Other information
Item 2. Changes in Securities and Use of Proceeds 20
Item 6. Exhibits and Reports on Form 8-K 20
<PAGE>
Venturian Corp. and Subsidiaries
Consolidated Condensed Balance Sheets
(In Thousands)
September 30, December 31,
1998 1997
------------ ---------
(Unaudited)
Current assets
Cash and cash equivalents $ 466 $ 473
Accounts receivable, less allowance
for doubtful accounts of $259 in September
1998 and $195 in December 1997 9,787 6,809
Inventories 6,681 5,421
Restricted cash 847 91
Prepaid expenses 216 451
-------- --------
Total current assets 17,997 13,245
Property and equipment - at cost
Buildings and improvements 1,916 1,916
Equipment 5,709 5,391
-------- --------
7,625 7,307
Less accumulated depreciation and amortization 5,610 5,331
-------- --------
2,015 1,976
Land 230 230
-------- --------
2,245 2,206
Other assets
Cash surrender value of life insurance, net 3,509 3,884
Rental real estate, net of depreciation 2,831 2,943
Investment in unconsolidated subsidiary -- 1,040
Other 590 570
-------- --------
6,930 8,437
-------- --------
$ 27,172 $ 23,888
======== ========
Liabilities and Shareholders' Equity
Current liabilities
Bank overdraft $ 497 $ 675
Notes payable to bank 800 2,200
Current maturities of long-term debt 131 193
Accounts payable 1,397 3,346
Advances from customers 1,484 482
Accrued liabilities 5,187 1,398
-------- --------
Total current liabilities 9,496 8,294
Long-term debt, less current maturities 4,385 3,954
Deferred compensation and postretirement benefits 2,186 2,279
Commitments and contingencies -- --
Shareholders' equity
Common stock - $1 par value 1,197 1,130
Additional contributed capital 15,960 15,593
Accumulated deficit (6,052) (7,362)
-------- --------
11,105 9,361
-------- --------
$ 27,172 $ 23,888
======== ========
The accompanying notes are an integral part of these statements.
<PAGE>
Venturian Corp. and Subsidiaries
Consolidated Condensed Statements of Operations
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------- -----------------------------
1998 1997 1998 1997
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 12,209 $ 4,714 $ 32,284 $ 19,535
Cost of products sold 8,665 3,462 22,952 14,284
----------- ----------- ----------- -----------
Gross profit 3,544 1,252 9,332 5,251
Operating expenses
Sales and marketing 837 1,092 2,648 3,313
Administrative 1,120 1,038 2,808 3,152
Warehousing 410 437 1,415 1,329
----------- ----------- ----------- -----------
Total operating expenses 2,367 2,567 6,871 7,794
----------- ----------- ----------- -----------
Operating profit (loss) 1,177 (1,315) 2,461 (2,543)
Other income (expense)
Investment income 32 6 52 17
Interest expense (191) (130) (618) (338)
Rental income 180 149 472 309
Gain from life insurance proceeds -- -- 196 --
Other 2 (3) 6 11
----------- ----------- ----------- -----------
Total 23 22 108 (1)
----------- ----------- ----------- -----------
Earnings (loss) before income taxes and
equity in losses of unconsolidated subsidiary 1,200 (1,293) 2,569 (2,544)
Income taxes 184 -- 219 --
----------- ----------- ----------- -----------
Earnings (loss) before equity
in losses of unconsolidated subsidiary 1,016 (1,293) 2,350 (2,544)
Equity in losses of unconsolidated subsidiary -- -- (1,040) --
----------- ----------- ----------- -----------
Net earnings (loss) $ 1,016 $ (1,293) $ 1,310 $ (2,544)
=========== =========== =========== ===========
Net earnings (loss) per share - Basic $ .85 $ (1.15) $ 1.14 $ (2.26)
=========== =========== =========== ===========
Net earnings (loss) per share - Diluted $ .80 $ (1.15) $ 1.09 $ (2.26)
=========== =========== =========== ===========
Weighted average shares outstanding
Basic 1,197,081 1,129,034 1,153,259 1,127,217
Diluted 1,285,290 1,129,034 1,203,716 1,127,217
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Venturian Corp. and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Nine months ended
September 30,
1998 1997
--------- --------
Cash flows from operating activities:
Net earnings (loss) $ 1,310 $(2,544)
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 391 461
Common stock issued for services 31 25
Equity in losses of unconsolidated subsidiary 1,040 --
Gain from life insurance proceeds (196) --
Change in assets and liabilities:
Accounts receivable (2,892) 340
Inventories (1,260) (775)
Restricted cash (756) (20)
Prepaid expenses 149 (204)
Other -- (308)
Bank overdraft (178) 13
Accounts payable (1,949) (113)
Advances from customers 1,002 365
Accrued liabilities 3,789 40
Deferred compensation and
postretirement benefits 180 161
Payments on deferred compensation
and postretirement benefits (273) (236)
-------- --------
Total adjustments (922) (251)
-------- --------
Net cash provided by (used in) operating activities 388 (2,795)
Cash flows from investing activities:
Purchase of property and equipment (318) (771)
Improvements to rental real estate -- (161)
Purchase of other assets (286) (256)
Proceeds from life insurance 828 --
Other 9 70
-------- --------
Net cash provided by (used in) investing activities 233 (1,118)
Cash flows from financing activities
Payments on long-term debt (295) (1,212)
Proceeds from long-term debt 664 3,775
Proceeds from line of credit 11,000 6,550
Payments on line of credit (12,400) (5,950)
Proceeds from insurance policy loans -- 220
Proceeds from issuance of common stock 403 2
-------- --------
Net cash provided by (used in) financing activities (628) 3,385
-------- --------
Net decrease in cash and cash equivalents (7) (528)
Beginning cash and cash equivalents 473 1,011
-------- --------
Ending cash and cash equivalents $ 466 $ 483
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 434 $ 151
Income taxes 51 2
The accompanying notes are an integral part of these statements.
<PAGE>
VENTURIAN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with the instructions in Regulation S-X pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although management believes
that the disclosures are adequate to make the information presented not
misleading.
In the opinion of management, the unaudited condensed financial statements
reflect all adjustments, which consist of only normal recurring accruals,
necessary to present a fair statement of the results of operations and financial
position for the periods presented. Results of operations for the interim
periods are not necessarily indicative of results for the full year.
NOTE B - 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 $2,111,000 at September 30, 1998 and $1,978,000 at December 31, 1997,
with current assets. The company's obsolescence policy requires that purchases
of this inventory be written off if not sold after four years. The four year
period was selected after a review of customers' historical buying patterns and
is reviewed annually to determine whether the period continues to be
appropriate.
NOTE C - LINES OF CREDIT
Napco has an agreement with a bank to provide a $4,000,000 line of
credit for international transactions and cash advances. The agreement requires
that 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
<PAGE>
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.
In May 1998, the bank agreed to extend the term of this amendment through
October 31, 1998. 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 September 30, 1998, approximately $7,351,000 was available
for cash and letter of credit advances pursuant to the agreement, as amended. As
of September 30, 1998, $800,000 in cash advances were outstanding against the
line of credit and approximately $718,000 in letter of credit advances were
outstanding. At September 30, 1998, approximately $576,000 in letter of credit
advances were outstanding on the special letter of credit agreement, which was
collateralized by a restricted cash balance.
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 $271,000 as of September 30, 1998.
NOTE D - COMMITMENTS AND CONTINGENCIES
At September 30, 1998, the company had performance and advance payment
guarantees outstanding on various sales contracts totaling $310,000. These
guarantees were backed by insurance bonds, which do not require cash collateral.
In 1994, the company acquired rental real estate that contained industrial
contaminants which were to be remediated by the company. The company received a
Certificate of Completion with respect to remediation of this property on
October 2, 1998.
<PAGE>
NOTE E - INVESTMENT IN UNCONSOLIDATED SUBSIDIARY
Atio Corporation USA, Inc. (Atio USA), formerly Venturian Software
Enterprises, Inc., provides customer contact automation software under the trade
name Cybercall(R).
Prior to October 1997, Atio USA was a 90 percent owned subsidiary of Venturian
Corp. and prior to December 1996 was an 80 percent owned subsidiary of Venturian
Corp. As a result of a transaction entered into in October 1997, Venturian Corp.
owns 45 percent of Atio USA. As of October 1, 1997, Venturian Corp. began
accounting for its investment in Atio USA under the equity method of accounting.
For the nine months ended September 30, 1998, Venturian Corp. recorded
$1,040,000 of equity in losses of unconsolidated subsidiary for its 45 percent
share of Atio USA's losses and has fully written off its investment in Atio USA.
Atio USA has needed additional working capital to fund its operations, and Atio
Corporation International agreed in June 1998 to provide up to $2,400,000 as a
loan to provide for the short-term funding requirements of Atio USA. Atio
Corporation International has the right to convert any portion of the loan to
equity in Atio USA at a price of $1.75 per share, upon demand, within one year
from the date of the loan. In addition, Atio USA may make future capital calls
pursuant to the capital call provisions of a shareholders 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
the capital contributions made by other parties. The company's ownership could
also be diluted based upon a conversion of any portion of the $2,400,000 loan
from Atio International.
Venturian Corp.'s results of operations include all of the results of Atio USA
for the three and nine months ended September 30, 1997.
NOTE F - NEW ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," which was required to be adopted in the first quarter of
1998. SFAS No. 130 established standards for the reporting and display an amount
representing comprehensive income and its components as part of the company's
basic financial statements. Comprehensive income includes certain non-owner
changes in equity that currently are excluded from net income. Because the
company historically has not experienced transactions that would be included in
comprehensive income, the adoption of SFAS No. 130 did not
<PAGE>
have a material effect on the consolidated financial position, results of
operations, or cash flows of the company.
Additionally, the company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," effective January 1, 1998. SFAS No. 131
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. SFAS No. 131 is effective for financial
statements for periods beginning after December 15, 1997; however, the statement
does not need to be applied to interim financial statements in the initial year
of application. Comparative information for the interim periods in the initial
year of application will be reported in the company's financial statements for
interim periods in fiscal 1999.
NOTE G - NET EARNINGS (LOSS) PER SHARE
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), plus the interest expense (net of
tax) applicable to convertible debentures in the amount of $8,000 for the three
and nine months ended September 30, 1998, by the weighted average number of
outstanding common shares and common share equivalents relating to stock options
and convertible debentures, when dilutive.
For the three and nine months ended September 30, 1998, 88,209 and 50,457 shares
of common stock equivalents were included in the computation of diluted net
earnings (loss) per share, including 42,003 and 14,001 shares of common stock
equivalents based on the assumed conversion of convertible debentures issued
during the third quarter (see Note I). Options to purchase 234,650 and 220,783
shares of common stock with an average exercise price of $5.39 and $5.23 were
outstanding for the three and nine months ended September 30, 1998, and options
to purchase 92,600 and 61,933 shares of common stock with an average exercise
price of $7.03 and $6.78 were outstanding for the three and nine months ended
September 30, 1998, but were not included in the computation of diluted net
loss per share because to do so would have been anti-dilutive.
NOTE H - SHAREHOLDERS' EQUITY
The company's Board of Directors declared a three-for-two stock split
on February 24, 1998. The record date for the stock split was April 15, 1998 and
the stock split was
<PAGE>
effected on April 30, 1998. The company's share and per share information for
1997 has been restated to reflect the effects of the three-for-two stock split.
NOTE I - PRIVATE PLACEMENT
On July 30, 1998, the company closed on a privately negotiated
transaction whereby Quarterdeck Equity Partners, Inc. ("Quarterdeck") purchased
63,005 shares of Venturian Corp. common stock at $7.00 per share and $504,000 of
an 11 percent convertible debenture. The debenture is convertible at $8.00 per
share into 63,005 shares of common stock, at the option of Quarterdeck, during a
period that begins 120 days after the closing date and that ends three years
after the closing date. Upon conversion of debenture, Quarterdeck would become a
10 percent holder of Venturian common stock. Upon written request of
Quarterdeck, the company has agreed to nominate the president of Quarterdeck to
the Board of Directors of the company at the next annual meeting of shareholders
of the company. In addition, Gary B. Rappaport, Chairman of the Board of
Venturian, has entered into a separate voting agreement whereby he has agreed to
vote his shares in support of the Quarterdeck nominee. Quarterdeck has agreed
that, except for the conversion of the debenture, for a period of two years
neither it nor any of its members or affiliates will purchase any capital stock
or other securities or rights to purchase capital stock or other securities of
the company without Venturian's prior written consent, provided, however, that
Quarterdeck may purchase shares of Venturian's common stock in the open market
with a purchase price not in excess of $55,000 in the aggregate; and provided,
further, that Quarterdeck may purchase in the open market shares of capital
stock or other securities or rights to the extent necessary to maintain its
percentage interest in Venturian. In October 1998, the company authorized
Quarterdeck to acquire up to an additional 35,000 shares of Venturian Corp.
common stock in the open market.
Quarterdeck Equity Partners, Inc. is an affiliate of Quarterdeck Investment
Partners, Inc., a Washington D.C. and Los Angeles based investment bank focusing
in the global aerospace and defense markets. In June, the company announced that
it had retained Quarterdeck Investment Partners as its financial adviser in an
initiative to become a force in the consolidation of small companies in the
global defense industry.
<PAGE>
VENTURIAN CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
September 30, 1998 and 1997
Forward-looking statements contained in this Report on Form 10-Q 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 herein. 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 accounted for 23 percent
and 32 percent of sales for the years ended December 31, 1997 and 1996. Sales to
this customer accounted for approximately 2 percent and 3 percent of net sales
for the three and nine months ended September 30, 1998. Sales to one other
customer accounted for approximately 13 percent and 28 percent of net sales for
the three and nine months ended September 30, 1998. For the year ended December
31, 1997, sales to this customer accounted for 10 percent of Napco sales. Sales
to one additional customer accounted for approximately 41 percent and 25 percent
for the three and nine months ended September 30, 1998. Napco had no sales to
this customer for the three and nine months ended September 30, 1997. Other
factors such as competition, the potential for labor disputes and interruption
in sources of supply also could cause results to differ.
Prior to October 1997, Atio USA was a 90 percent owned subsidiary of Venturian
Corp. and prior to December 1996 was an 80 percent owned subsidiary of Venturian
Corp.
As a result of a of a transaction entered into in October 1997, Venturian Corp.
owns 45 percent of Atio USA. As of October 1, 1997, Venturian Corp. began
accounting for its investment in Atio USA under the equity method of
<PAGE>
accounting. The company's results for the three and nine months ended September
30, 1998 include 45 percent of Atio USA's results of operations which have been
reported under the caption "Equity in losses of unconsolidated subsidiary" in
the company's Condensed Statement of Operations. As of June 30, 1998, the
company had fully written off its investment in Atio USA.
The company's results of operations include all of the results of Atio USA for
the three and nine months ended September 30, 1997, as follows:
Three months Nine months
------------ -----------
Net sales $ 196,000 $730,000
Gross profit 178,000 649,000
Operating expenses 899,000 2,424,000
Operating loss (721,000) (1,775,000)
Net loss $(747,000) $(1,825,000)
RESULTS OF OPERATIONS
Net Sales
Consolidated net sales for the third quarter were $12,209,000 in 1998, compared
with $4,714,000 for the third quarter in 1997. Consolidated net sales for the
first nine months of 1998 totaled $32,284,000, increasing from $19,535,000 for
the first nine months last year.
Napco sales were up substantially, increasing to $12,209,000 from $4,518,000 in
the third quarter of 1997. Sales during this year's third quarter were up
significantly due to shipments totaling approximately $5.0 million against an
$8.2 million contract for repowering kits for the M41 light tank and
approximately $1.5 million in shipments against a $15.9 million contract with
the U.S. government for upgrade kits for the M113 armored personnel carrier.
Shipments against the repowering contract were substantially completed during
the quarter. Napco expects to ship the final 259 of 659 kits on the U.S.
government contract during the last quarter of 1998. In last year's third
quarter, Napco sales were low, in part due to a protest that was filed by a
competitor on the U.S. government contract award. Shipments on the contract,
which were originally scheduled to commence during the third quarter of 1997,
were delayed by the protest and did not begin until December 1997.
<PAGE>
Napco sales were $32,284,000 and $18,805,000 for the nine months ended September
30, 1998 and 1997. Sales on the repowering contract were approximately $8.1
million for the first nine months of 1998, and sales on the U.S. government
contract were approximately $8.2 million for the same period.
Atio USA sales included in results of operations were $196,000 and $730,000 for
the quarter and nine months ended September 30, 1997.
Costs and Expenses
Cost of products sold was 71 percent of net sales during the third quarter and
first nine months of 1998 compared with 73 percent of net sales for the same
periods in 1997.
For Napco sales, cost of products sold was 71 percent of net sales in the third
quarter and for the first nine months of 1998, compared with 76 percent of net
sales in the third quarter and for the first nine months of 1997.
Consolidated operating expenses totaled $2,367,000 for the third quarter of
1998, compared with consolidated operating expenses of $2,567,000 for the same
period a year ago. For the nine months, consolidated operating expenses were
$6,871,000 for the first nine months of 1998, compared with $7,794,000 for the
first nine months of 1997.
Napco operating expenses were $2,167,000 for the third quarter of 1998,
increasing from $1,587,000 for the same period a year ago. For the nine months
ended September 30, 1998, Napco operating expenses of $6,257,000 were also up
compared with operating expenses of $5,002,000 for the first nine months of last
year.
Napco sales and marketing expenses were $837,000 and $2,648,000 for the third
quarter and first nine months of 1998. For the same periods a year ago, Napco
sales and marketing expenses totaled $683,000 and $2,206,000. Commission
expense, which is included in sales and marketing expenses, was approximately 2
percent of net sales in 1998 and 1997, or $245,000, in this year's third quarter
compared with commission expense of approximately $90,000 for the same period in
1997. Year-to-date, commission expense was also approximately 2 percent of net
sales in 1998 and 1997, and totaled approximately $620,000 this year, compared
with $359,000 for the first nine months of 1997. Excluding commission expense,
Napco sales and marketing expenses were
<PAGE>
$592,000 and $593,000 for the third quarters of 1998 and 1997, and $2,028,000
and $1,847,000 for the nine months ended September 30, 1998 and 1997.
Napco administrative expenses were $920,000 in the third quarter of 1998,
compared with $467,000 during the same period of 1997. Year-to-date, Napco
administrative expenses were $2,194,000 in 1998, compared with $1,467,000 for
the nine months ended September 30, 1997. Administrative expenses were up during
the third quarter and also year-to-date in 1998, primarily due to incentive
accruals and, to a lesser extent, due to higher expenses at Napco's
International Machining, Inc. subsidiary.
Napco warehousing expense was $410,000 and $437,000 for the third quarters of
1998 and 1997, and totaled $1,415,000 and $1,329,000 for the first nine months
of each year. Increased warehousing expenses on a year-to-date basis are
primarily attributable to higher expenses related to the large U.S.
government program which have been incurred since the third quarter of 1997.
Operating expenses for Atio USA included in results of operations were $899,000
and $2,424,000 for the three and nine months ended September 30, 1997.
Corporate overhead expenses, included in administrative expense, totaled
$200,000 in the third quarter of 1998, compared with $81,000 for the same period
a year earlier. Year-to-date corporate overhead totaled $614,000 in 1998,
compared with $368,000 for the first nine months of last year. Higher expense
levels both for the third quarter and year-to-date in 1998 are attributable to
the addition of a new company president late in the fourth quarter of 1997 and
also due to higher expenses incurred to pursue the company's strategy of
increasing shareholder value through an initiative to become proactive in the
consolidation of the defense industry.
Operating Profit (Loss)
The company reported operating profits of $1,177,000 and $2,461,000 for the
three and nine months ended September 30, 1998. For the third quarter and
year-to-date in 1997, the company reported operating losses of $1,315,000 and
$2,543,000.
Napco reported operating profits of $1,377,000 and $3,075,000 for the three and
nine months ended September 30,
<PAGE>
1998 on stronger sales and higher gross profit margins. In 1997, Napco reported
operating losses of $513,000 and $400,000 for the third quarter and nine months.
Lower sales as well as increases in costs and expenses contributed to the
operating losses for both periods a year ago.
Other Income (Expense)
Other income includes rental income, net of expenses, of $180,000 and $149,000
for the third quarters of 1998 and 1997. Year-to-date, rental income, net of
expenses, was $472,000 in 1998 and $309,000 in 1997. Net rental income was
higher in 1998 due to increased occupancy rates as well as to a decrease in
utility and maintenance costs.
Other income also included a $196,000 gain from life insurance proceeds recorded
during the first quarter of 1998.
Interest expense increased to $191,000 in the third quarter of 1998, from
$130,000 for the same period a year ago. Interest expense was $618,000 for the
first nine of 1998, compared with $338,000 for the same period during 1997. The
increase in interest expense was due both to the refinancing of the company's
rental real estate and also due to increased borrowings against the company's
line of credit to fund operations.
Income Taxes
The company recorded income tax expense of $184,000 and $219,000 for the three
and nine months ended September 30, 1998. The company had net operating loss
carryforwards sufficient to offset a substantial portion of its taxable income.
Income tax expense was attributable to taxable income in excess of net operating
loss carryforwards and to alternative minimum tax. The company did not record a
tax benefit for the quarter and nine months ended September 30, 1997 because no
taxes would have been recoverable from a carryback of the net loss.
Equity in Losses of Unconsolidated Subsidiary
The company recorded $1,040,000 of equity in losses of unconsolidated subsidiary
for the nine months ended September 30, 1998. These losses represent the
company's 45 percent share of Atio USA's losses for the periods presented. As of
June 30, 1998, the company had fully written off its investment in Atio USA.
<PAGE>
Net Earnings (Loss)
The company reported net earnings of $1,016,000 and $1,310,000 for the third
quarter and nine months ended September 30, 1998, compared with net losses of
$1,293,000 and $2,544,000 for the same periods last year. In 1998, the net
earnings (loss) are after deducting the company's 45 percent equity in the
losses of Atio USA. In 1997, the net loss included all of the results of
operations of Atio USA.
Backlog
Napco's backlog totaled $15,855,000 at September 30, 1998, compared with backlog
of $36,687,000 at December 31, 1997. At year end, Napco's backlog included $14.5
million of a $15.9 million order for upgrade kits for the M113 armored personnel
carrier and an $8.2 million order for the repower of M41 light tanks. The $8.2
million order has been substantially shipped at September 30, 1998 and 259 kits
remain to be shipped against the 659 kit order for upgrade kits. Napco expects
to ship the balance of these kits in the fourth quarter of 1998. Order bookings
during 1998 have been slow, although sales activity at Napco has been high and a
number of significant quotations are pending award. Management expects that
several of these programs will be awarded during the last quarter of 1998 and
first quarter of 1999, although there can be no assurances that Napco will be
awarded any of these programs.
FINANCIAL CONDITION
The company's current ratio was 1.9 to one at September 30, 1998, compared with
1.6 to one at the end of 1997. Long-term debt at September 30, 1998 and December
31, 1997 totaled $4,385,000 and $3,954,000 and was approximately 16 percent and
17 percent of total assets at the end of the quarter and prior year.
On July 30, 1998, the company closed on a privately negotiated transaction
whereby Quarterdeck Equity Partners, Inc. ("Quarterdeck") purchased 63,005
shares of Venturian Corp. common stock at $7.00 per share and $504,000 of an 11
percent convertible debenture. The debenture is convertible at $8.00 per share
into 63,005 shares of common stock, at the option of Quarterdeck, during a
period that begins 120 days after the closing date and that ends three years
after the closing date. In October 1998, the company authorized Quarterdeck to
acquire up to an additional 35,000 shares of Venturian Corp. common stock in the
open market.
<PAGE>
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.
In May 1998, the bank agreed to extend the term of this amendment through
October 31, 1998. 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 September 30, 1998, approximately $7,351,000 was available
for cash and letter of credit advances pursuant to the agreement, as amended. As
of September 30, 1998, $800,000 in cash advances were outstanding against the
line of credit and approximately $718,000 in letter of credit advances were
outstanding. At September 30, 1998, approximately $576,000 in letter of credit
advances were outstanding on the special letter of credit agreement, which was
collateralized by a restricted cash balance.
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 $271,000 as of September 30, 1998.
As of October 1, 1997, the company began accounting for its 45 percent
investment in Atio USA under the equity method of accounting. As of June 30,
1998, the company had fully written off its investment in Atio USA.
Atio USA has needed additional working capital to fund its operations, and Atio
Corporation International agreed in June 1998 to provide up to $2,400,000 as a
loan to provide for the short-term funding requirements of Atio USA. Atio
Corporation International has the right to convert any portion of the loan to
equity in Atio USA at a price of $1.75 per share, upon demand, within one year
from the date
<PAGE>
of the loan. In addition, Atio USA may make future capital calls which the
company may elect to meet pursuant to the capital call provisions of a
shareholders 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. The company's ownership percentage could also be diluted based
upon a conversion of any portion of the $2,400,000 loan from Atio Corporation
International. 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 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.
The company has initiated a comprehensive project to prepare for the year 2000
("Y2K"), and is in the process of identifying those areas with which the company
has exposure to Y2K issues. The company has identified three areas determined to
be critical for successful Y2K compliance: (1) financial and information system
applications, (2) production applications, and (3) third-party relationships.
FINANCIAL AND INFORMATION SYSTEMS. In August 1998, the company upgraded its
accounting system to a Y2K compliant version. In addition, the company uses an
independent service bureau to process payroll and payroll tax related operations
and has been notified by the service bureau that its payroll application is Y2K
compliant. The company has also reviewed its internally developed programs and
systems as well as its hardware requirements. Action plans have been developed
with respect to these systems and the company's plan is to be compliant in these
areas by late 1998. The total costs associated with compliance in these areas
has not been, and is not expected to be material.
PRODUCTION APPLICATIONS. The company has initiated a review of its key
production hardware and software to determine year 2000 compliance. The company
does not expect the cost of compliance in this area to be material.
THIRD-PARTY RELATIONSHIPS. Although the company believes that the information
systems of its vendors and customers (insofar as they relate to the company's
business) will
<PAGE>
comply with Y2K requirements, the company intends to confirm with each key
vendor and customer by letter survey prior to December 31, 1998 their readiness
or intent to be Y2K compliant. The failure of any key vendor or customer to
provide such information will result in the company's developing contingency
plans at that time. Any costs that may be incurred by the company that are
related to external systems Y2K issues are unknown at this time (other than the
immaterial costs of the survey itself), however, management expects that after
reviewing and evaluating responses to the survey, it will be able to complete an
assessment of its Y2K exposure and estimate the costs associated with resolving
any Y2K issues.
Cost estimates are based on currently available information and are management's
best estimates. However, there is no guarantee that these estimates will be
achieved, and actual results may differ from those anticipated. Developments
which could affect estimates include, but are not limited to, the availability
and cost of trained personnel; the ability to locate and correct all relevant
code and equipment; and planning and modification success of third party
suppliers of products and services as well as customers. The company will
continue to assess and evaluate cost estimates and target dates for year 2000
compliance on a periodic basis.
<PAGE>
VENTURIAN CORP. AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 27. Financial Data Schedule (for SEC use only)
b) No report on Form 8-K was filed during the quarter for which this
report is filed.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
VENTURIAN CORP.
---------------
(Registrant)
By: /s/ Mary F. Jensen
------------------
Mary F. Jensen
Chief Financial Officer
Date: November 12, 1998
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