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, 1998
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
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11111 Excelsior Boulevard, Hopkins, MN 55343
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 612-931-2500
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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
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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 22, 1999 was $5,529,000.
The number of shares outstanding of each of the registrant's classes of common
stock, as of March 22, 1999:
Class Outstanding at March 22, 1999
----- -----------------------------
Common stock, $1.00 par value 1,212,468
Documents Incorporated by Reference
-----------------------------------
1998 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, 1998
Description Page
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Part I
Item 1.-Business 3
Item 2.-Properties 8
Item 3.-Legal Proceedings 8
Item 4.-Submission of Matters to a Vote of Security Holders 8
Part II
Item 5.-Market for Registrant's Common Equity
and Related Stockholder Matters 9
Item 6.-Selected Financial Data 9
Item 7.-Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 9
Item 8.-Financial Statements and Supplementary Data 10
Item 9.-Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 10
Part III
Item 10.-Directors and Executive Officers of the Registrant 11
Item 11.-Executive Compensation 11
Item 12.-Security Ownership of Certain
Beneficial Owners and Management 11
Item 13.-Certain Relationships and Related Transactions 11
Part IV
Item 14.-Exhibits, Financial Statement Schedules
and Reports on Form 8-K 11
<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. of South Africa and Atio
International Corporation, Inc. whereby Atio International acquired a 50 percent
interest in Venturian Software through funding provided by Atio Corporation
(PTY). Venturian Software changed its name to Atio Corporation USA, Inc. 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 U.S.
government agencies accounted for 35 and 10 percent of Napco sales during 1998
and 1997. Sales to a customer in one foreign country accounted for more than
<PAGE>
20 percent of Napco sales in 1998. Sales to one customer in the United States
accounted for approximately 23 percent and 32 percent of Napco sales in 1997 and
1996. 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 63.5 percent, 77.1 percent and 71.4 percent of Napco's total sales for
the years ended December 31, 1998, 1997 and 1996.
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 9.4 percent, 11.4 percent and 9.3 percent of Napco's total sales for
the years ended December 31, 1998, 1997 and 1996.
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 19.3 percent, 3.1
percent and 11.9 percent of Napco's total sales for the years ended December 31,
1998, 1997 and 1996.
The Special Products Division markets a range of light weapons systems,
spare parts and accessories. Sales for the Special Products Division comprised
2.0 percent, 1.6 percent and 2.5 percent of Napco's total sales for the years
ended December 31, 1998, 1997 and 1996.
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 5.8 percent, 6.8 percent and 4.9 percent of
Napco's total sales for the years ended December 31, 1998, 1997 and 1996.
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 geographic region for the last three years were as
follows (in thousands):
1998 1997 1996
---- ---- ----
United States and Canada $20,036 $14,264 $16,461
Europe 5,921 4,595 4,037
Far East 10,778 3,974 4,791
Mediterranean and Middle East 3,904 1,989 1,051
Latin America 1,044 1,910 899
Africa 30 117 311
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$41,713 $26,849 $27,550
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During 1998, sales to a customer in one foreign country accounted for
20 percent of Napco's sales. During 1997 and 1996, 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 $19,821,000, $13,952,000 and
$15,795,000 in 1998, 1997 and 1996 and consisted primarily of sales to various
U.S. government agencies and to a large number of commercial customers. During
1998 and 1997, sales to U.S. government agencies accounted for 35 and 10 percent
of Napco sales. During 1997 and 1996, sales to one customer in the United States
accounted for 23 and 32 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 $12,266,000 and $36,687,000 at December 31, 1998
and 1997. The order backlog was $15,861,000 at December 31, 1996. The year-end
1997 backlog included two significant orders - 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 with a foreign
government for repowering kits for M41 light tanks. Approximately $461,000
remains to be shipped in 1999 against the $15.9 million order and less than
$100,000 remains to be shipped against the $8.2 million order. Management
expects that nearly all of the balance of its backlog will be filled during
1999.
<PAGE>
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 127 people at December 31, 1998.
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 (see
Note 3 to the Consolidated Financial Statements in the Company's 1998 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 year ended December 31,
1996. The Company's results for 1998 and for the fourth quarter of 1997 include
the Company's share of Atio USA's results of operations for the year ended
December 31, 1998 and 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 years ended December 31, 1998
and 1997. The Company's investment in Atio USA was fully written off during
1998. In February 1999, the Company entered into an agreement to redeem its 45
percent interest in Atio USA for $1,000,000 plus warrants to acquire additional
securities of Atio USA representing 300,000 common shares. The redemption
agreement is subject to Atio USA raising additional equity capital of at least
$5,000,000 from a third party on or prior to July 31, 1999.
Venturian Corp.
Employees
Venturian Corp. employed 4 individuals at December 31, 1998.
<PAGE>
Executive Officers
The present executive officers of Venturian Corp. are:
Name Office Age Officer Since
- ----------------- ------------------------- --- -------------
Gary B. Rappaport Chairman of the Board and 62 1983(1)
Chief Executive Officer -
Venturian Corp. and
Napco International Inc.
Mary F. Jensen Chief Financial Officer - Venturian 44 1987(1)
Corp. and Napco International Inc.
Charles B. Langevin Director, President of 53 1986(1)
Napco International Inc.
Reinhild D. Hinze Treasurer, Vice President 49 1985(1)
Operations - Napco
International Inc. and
Assistant Secretary - Venturian
Corp.
Don M. House, Jr. President and Chief Operating 46 1998(2)
Officer - Venturian Corp.
(1) Each of the indicated officers has been employed by the Company for more
than five years.
(2) Mr. House joined the Company in December 1997. In February 1998 he was
appointed President and Chief Operating Officer by the Board of Directors.
Previously, Mr. House was President of Porsa System, Inc., a designer and
builder of custom fixtures and displays, from July 1996 to July 1997. Mr. House
also served as President of P.C. Express, Inc. from April 1995 to December 1995
and President of Apeiron, Inc., a start-up manufacturer of high precision laser
measurement systems, from May 1994 to April 1995. Mr. House was President of
Comtrol Corp., a manufacturer of multiport serial communications controllers
from October 1989 to October 1993. Prior to October 1989, Mr. House served in
various capacities at Honeywell Information Systems for more than 10 years.
<PAGE>
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 owned by the Company.
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 (see Note 4 to the Consolidated Financial Statements
in the Company's 1998 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 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.
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.
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
Smaby Group, Inc. v. Venturian Corp., Atio Corporation USA, Inc. f/k/a Venturian
Software, Inc. This matter is an arbitration proceeding pending in Hennepin
County, Minnesota. The claimant, Smaby Group, Inc., has filed a "Notice of
Dispute and Claim in Arbitration" dated December 23, 1998, in which the claimant
seeks to recover $641,250 plus interest, costs, and attorneys' fees. The
claimant alleges that such damages are owed as incentive compensation under a
1997 written agreement relating to services provided to the respondents in
connection with activities directed at obtaining additional funding for
Venturian Software, Inc. The Company has responded by denying that any
additional compensation or damages are owing to the claimant, and intends to
vigorously defend this arbitration claim. Management believes that the
likelihood of the Company incurring any liability related to this claim is
remote and that the outcome of the arbitration will not have a material effect
on the Company's financial position or results of operations.
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 1998 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, 1998,
under the caption "Quarterly Financial Data," page 26; the number of common
stockholders of record as of December 31, 1998, under the caption "Five-Year
Financial Summary," page 27; the Company's dividend policy, under the caption
"Shareholder Information," page 10; and dividend history information, in the
"Five-Year Financial Summary," page 27.
Item 6. Selected Financial Data
Information required by this item has been included in the Company's 1998 Annual
Report to Shareholders, incorporated herein by reference under the caption
"Five-Year Financial Summary," page 27.
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 1998 Annual Report to Shareholders,
incorporated herein by reference, pages 3 - 10.
Item 7A. Quantitative and Qualitive Disclosures About Market Risk
The Company's interest income and expense is affected by changes in the general
level of U.S. interest rates. Changes in the U.S. interest rates affect the
interest earned on the Company's cash equivalents and the interest paid on its
debt. The Company maintains approximately 57 percent of its debt with a fixed
rate of interest. The Company uses sensitivity analysis to determine its
exposure to changes in interest rates. The Company does not anticipate exposure
to interest rate market risk will have a material impact on the Company's future
earnings, cash flow, or fair value of debt instruments. As cash equivalents are
short-term investments, the market risk related to interest income as well as
the fair value of cash equivalents, which represent short-term government
securities, will not have a material impact on the Company.
The Company does business with foreign countries. All sales with foreign
countries are billed and received in U.S. dollars and, as a result, the
quantitative and qualitative market risk related to these receivables is not
deemed material.
<PAGE>
Item 8. Financial Statements and Supplementary Data
The following pages of the Company's 1998 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, 1998 11
Consolidated Balance Sheets,
as of December 31, 1998 and 1997 12
Consolidated Statements of Cash Flows,
three years ended December 31, 1998 13
Consolidated Statements of Changes in
Shareholders' Equity, three years ended
December 31, 1998 14
Notes to the Consolidated Financial Statements 15-24
Report of Independent Certified Public Accountants 25
(b) Supplementary Data:
Quarterly Financial Data 26
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 1999 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 1998 Annual Report to Shareholders
(2) Financial Statement Schedules
Report of Independent Certified Public
Accountants on Schedule 14
Schedule II Valuation and Qualifying Accounts, for each
of the three years in the period ended
December 31, 1998 15
(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) Reports on Form 8-K
(1) There were no reports on Form 8-K during the fourth quarter
of 1998.
(c) Exhibits
Exhibit (13)
1998 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 5, 1999
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 5,
1999 (except for Note 17, as to which the date is February 17, 1999) 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, 1998. 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 5, 1999 (except for Note 17,
as to which the date is February 17, 1999)
<PAGE>
Venturian Corp. and Subsidiaries
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Three years ended December 31, 1998
<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, 1996 $165,000 $ 91,000 $ -- $ 60,000 $196,000
Year ended December 31, 1997 $196,000 $ 43,000 $ -- $ 44,000 $195,000
Year ended December 31, 1998 $195,000 $103,000 $ -- $ 81,000 $217,000
</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, 1999
/s/ Don M. House, Jr.
Don M. House, Jr.
President and Chief Operating Officer March 30, 1999
/s/ Morris M. Sherman
Morris M. Sherman
Director March 30, 1999
/s/ Charles B. Langevin
Charles B. Langevin
Director March 30, 1999
/s/ Stuart B. Utgaard
Stuart B. Utgaard
Director March 30, 1999
/s/ Richard F. McNamara
Richard F. McNamara
Director March 30, 1999
/s/ Mary F. Jensen
Mary F. Jensen
Controller, Treasurer and
Chief Financial Officer March 30, 1999
EXHIBIT 13
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, during 1998, sales to a customer in one foreign
country accounted for 20 percent of Napco's sales and sales to U.S. government
agencies accounted for 35 and 10 percent of Napco sales during 1998 and 1997.
Sales to one other customer in the United States accounted for approximately 23
and 32 percent of Napco sales during 1997 and 1996. Other factors, such as
competition, the potential for labor disputes and interruption in sources of
supply also could cause results to differ.
Net Sales
Consolidated net sales were $41,713,000, $27,579,000 and $28,398,000
for the years ended December 31, 1998, 1997 and 1996.
Napco sales increased significantly in 1998 to $41,713,000. Sales in
1998 included shipments against two large programs which were substantially
shipped by year end. The largest program, which was a $15,987,000 contract with
the U.S. Army Tank and Automotive Command for upgrade kits for the M113 armored
personnel carrier, contributed $14,071,000 to Napco sales for the year. The
second program, which was an $8,200,000 contract to repower M41 light tanks,
contributed $8,082,000 to Napco sales for the year. Napco sales in 1997 were
$26,849,000, a decrease of 3 percent from
<PAGE>
$27,550,000 in 1996. Based on beginning backlog of $12,266,000, management
expects that sales in 1999 will not be at the same level as in 1998 (see
Backlog).
Atio USA sales included in results of operations were $730,000 for the
nine months ended September 30, 1997 and $848,000 for the year ended December
31, 1996.
Cost of Products Sold
Consolidated cost of products sold was 71 percent, 72 percent and 70
percent of net sales for the years ended December 31, 1998, 1997 and 1996.
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 71
percent, 74 percent and 72 percent of Napco sales in 1998, 1997 and 1996.
Cost of products sold was 11 percent of Atio USA net sales for the nine
months ended September 30, 1997 and 9 percent of net sales for the year ended
December 31, 1996.
Operating Expenses
Consolidated operating expenses were $9,204,000 in 1998, compared with
$9,633,000 in 1997 and $8,378,000 in 1996.
Napco operating expenses were $8,365,000, $6,754,000 and $6,446,000 for
the years ended December 31, 1998, 1997 and 1996.
In 1998, Napco sales and marketing expenses increased to $3,536,000,
including commission expense of $663,000. In 1997, Napco sales and marketing
expenses were $2,992,000, including commission expense of $459,000. Sales and
marketing expenses were $2,755,000 in 1996, including commission expense of
$453,000. Commission expense was 1.6 percent of net sales in 1998, 1.7 percent
of net sales in 1997, and 1.6 percent of net sales in 1996.
<PAGE>
Napco sales and marketing expenses, excluding commission expense, were
$2,873,000 in 1998, $2,533,000 in 1997 and $2,302,000 in 1996. In 1998, higher
costs were partially attributable to increased travel expenses and other costs
related to the $8.2 million repower program. In addition, marketing expenses
were up by approximately $135,000 due to additions to staff to handle additional
quoting activity. 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 increased by approximately $157,000 in 1997 as
compared with 1996. Advertising, travel and Napco's participation in trade shows
have also increased in the last two years, contributing to higher expense
levels. Excluding commission expense, sales and marketing expenses were
approximately 7 percent of net sales in 1998, approximately 9 percent of net
sales in 1997 and approximately 8 percent of net sales in 1996.
Napco administrative expenses were $2,942,000, $1,972,000 and
$2,056,000 in 1998, 1997 and 1996. In 1998, administrative costs increased
primarily due to incentive compensation accruals. In 1997, administrative costs
were lower than 1996 primarily due to a reduced level of incentives.
Napco warehousing expense increased in 1998 to $1,887,000, primarily
due to additional warehousing costs incurred due to a sub-contract for a
separate facility to warehouse, inspect and package material for the $15.9
million U.S. government program. Napco warehousing expense was $1,790,000 in
1997, and was up approximately 9 percent over 1996 levels, when warehousing
expenses were $1,635,000. The increase in 1997 was also due to costs associated
with this program. Warehousing expense was approximately 5, 7 and 6 percent of
net sales in 1998, 1997 and 1996.
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. Expenses increased significantly in 1997
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 $839,000, $455,000 and $636,000 for
the years ended December 31, 1998, 1997 and 1996. Management had expected that
corporate overhead would increase in 1998 due to the hiring of a new company
president
<PAGE>
at the end of 1997. Expenses also increased in 1998 due to costs incurred in
connection with retaining an investment banking firm to assist with the
company's strategy to pursue acquisitions in the consolidating defense industry,
as well as retaining a public relations firm to bring attention to the company's
activities.
Operating Profit (Loss)
The company reported a consolidated operating profit of $2,753,000 in
1998, a consolidated operating loss of $1,979,000 in 1997 and a consolidated
operating profit of $81,000 in 1996.
Napco generated operating profits of $3,592,000, $251,000 and
$1,242,000 for the years ended December 31, 1998, 1997 and 1996. In 1998,
operating profits increased substantially over the prior year primarily as a
result of significantly higher sales. Operating profits in 1997 decreased from
1996 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 did not
have an impact on sales until 1998. Operating expenses have also increased in
the last two years due to efforts to increase sales in the longer-term.
Atio USA generated operating losses of $1,775,000 for the nine months
ended September 30, 1997 and $525,000 for the year ended December 31, 1996.
Higher losses in 1997 were attributable to costs and expenses associated with
the introduction of Cybercall(R).
Other Income (Expense)
Rental income, net of expenses, was $644,000, $465,000 and $428,000 in
1998, 1997 and 1996, and was derived from rental real estate owned by the
company (see Note 4 to the Consolidated Financial Statements). Rental income
increased substantially in 1998 due to increased occupancy rates as well as to
decreased utility and maintenance costs.
Interest expense increased to $782,000 and $512,000 in 1998 and 1997 as
a result of the refinancing of the company's rental real estate in 1997 and due
to increased borrowings against the company's line of credit to fund operations.
Interest expense was
<PAGE>
$371,000 in 1996. Interest expense also includes interest related to the
company's deferred compensation plan (see Note 8 to the Consolidated Financial
Statements).
Income Taxes
The company recorded income tax expense of $63,000 for the year ended
December 31, 1998. While the company had net operating loss carryforwards
sufficient to offset a substantial portion of its taxable income in 1998, income
tax expense was attributable to alternative minimum tax. The company had no
income tax expense or benefit for the years ended December 31, 1997 and 1996.
The company did not record a tax benefit for 1997 because the company was unable
to carry back the 1997 loss, nor was it more likely than not that net deferred
tax assets would be realized in future years. At December 31, 1998, the company
had approximately $900,000 of federal net operating loss carryforwards and
$1,300,000 of state net operating loss carryforwards, which expire through the
year 2013.
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 method
of accounting. The company recorded $1,040,000 and $644,000 of equity in losses
of unconsolidated subsidiary for its share of Atio USA's losses for the year
ended December 31, 1998 and for the three months ended December 31, 1997. The
company's investment in Atio USA was fully written off during 1998.
<PAGE>
Backlog
Napco's order backlog totaled $12,266,000 and $36,687,000 at December
31, 1998 and 1997. The order backlog was $15,861,000 at December 31, 1996. The
year-end 1997 backlog included two significant orders - a $15,987,000 order from
the U.S. Tank-Automotive Armaments Command (TACOM) for upgrade kits for the M113
personnel carriers, and an $8,200,000 contract from a foreign government for
repowering kits for M41 light tanks. Approximately $461,000 remains to be
shipped in 1999 against the $15,987,000 order and less than $100,000 remains to
be shipped against the $8,200,000 order. Management expects that nearly all of
the balance of its backlog will be filled during 1999. Year-end 1998 backlog can
indicate the level of sales in the subsequent year. Therefore, management
expects that 1999 sales will be significantly lower than in 1998 based on
December 31, 1998 backlog.
Management's Discussion and Analysis of Financial Condition
The company's current ratio was 3.2 to one at December 31, 1998,
compared with 1.6 to one at the end of 1997. Long-term debt at December 31, 1998
totaled $4,424,000 and was approximately 20 percent of total assets at the end
of the year. Cash and cash equivalents at December 31, 1998 increased to
$3,009,000, from $473,000 last year.
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.
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, 1998, approximately $3,271,000 was
available for cash and letter of credit advances pursuant to the agreement, as
amended. There were no cash advances outstanding against this line of credit at
December 31, 1998 and approximately $729,000 in letter of credit advances were
outstanding. As of December 31, 1997, $2,200,000 in
<PAGE>
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.
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 $790,000 and $91,000 as of
December 31, 1998 and 1997.
As of October 1, 1997, Venturian Corp. began accounting for its
investment in Atio USA under the equity method of accounting. Proceeds from a
joint venture agreement were used to fund the operations of Atio USA. Atio USA
needed additional working capital to fund its operations, and Atio 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 International had 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 October 1998,
the agreement with Atio International to provide financing was amended to
provide that loans in excess of the $430,000 outstanding at that time would be
either repayable or convertible into shares of Atio USA at a price of $.50 per
share, upon demand, by September 30, 1999. In addition, Atio USA may make future
capital calls pursuant to the capital call provisions of a 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 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. In February 1999,
the company entered into an agreement to redeem its 45 percent interest in Atio
USA for $1,000,000 plus warrants to acquire additional securities of Atio USA
representing 300,000 common shares. The redemption agreement is subject to Atio
USA raising additional equity capital of at least $5,000,000 from a third party
on or prior to July 31, 1999.
During 1998, the company entered into a privately negotiated
transaction with Quarterdeck Public Equities, LLC (Quarterdeck) for the sale of
63,005 shares of Venturian Corp. common stock at $7.00 per share and the
issuance of a $504,000, 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 the period from
<PAGE>
November 28, 1998 to July 30, 2001. After July 30, 2001, the company, at its
option, may require conversion of the debenture into common stock. Upon
conversion of the 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 the company, 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 the company's
prior written consent, provided, however, that Quarterdeck may purchase shares
of the company'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 the
company. 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;
none of those shares had been purchased as of December 31, 1998.
Quarterdeck Public Equities, LLC is an affiliate of Quarterdeck
Investment Partners, Inc., an investment banking firm focusing in the global
aerospace and defense markets. During 1998, the company announced that it had
retained Quarterdeck Investment Partners as its financial adviser in an
initiative to participate in the consolidation of small companies in the global
defense industry.
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
<PAGE>
current cost basis would not significantly affect results. The company had no
material commitments for capital expenditures as of December 31, 1998.
Year 2000 Analysis
The Year 2000 issue relates to limitations in computer systems and
applications that may prevent proper recognition of the Year 2000. The potential
effect of the Year 2000 issue on the company and its business partners will not
be fully determinable until the year 2000 and thereafter. If Year 2000
modifications are not properly completed either by the company or entities with
which the company conducts business, the company's financial position and
results of operations could be adversely impacted.
The company has initiated a comprehensive project to prepare for the year 2000
("Y2K"). The company has identified three areas determined to be critical for
successful Y2K compliance: (1) internal financial and information systems, (2)
production and other equipment that utilize embedded microprocessors, and (3)
third-party relationships.
INTERNAL FINANCIAL AND INFORMATION SYSTEMS
Like many organizations, the company's most significant exposure to Y2K issues
lies in its internal information systems. The company's initial assessment of
its Y2K status determined that, while the company had relatively few Y2K
specific issues to address, the solutions required the company to undertake a
more comprehensive migration of its overall information systems to more current
and Y2K compliant technologies. The company identified a set of information
systems technologies that are Y2K compliant as its migration target and then
identified the steps necessary to assure its successful migration to these
target technologies and its Y2K compliance.
The majority of this migration has been completed prior to February 1, 1999. The
remaining required steps are scheduled to be completed by March 31, 1999. The
company is in the process of obtaining written confirmation of Y2K compliance
for each of its target technologies. The company has obtained the majority of
these confirmations through direct correspondence with the vendor or via other
vendor published materials. In order to insure compliance in this area, the
company has mailed a letter/survey to all its information systems vendors.
<PAGE>
Management believes that the completion of these steps will eliminate the
majority of potential Y2K issues, however, in the worst case scenario, isolated
problems may occur that may cause minor interruptions in service. Management is
developing a contingency plan for addressing these problems as they occur. This
plan will be completed prior to the end of 1999.
PRODUCTION AND OTHER EQUIPMENT THAT UTILIZE EMBEDDED MICROPROCESSORS
Equipment that utilizes embedded microprocessors and associated software may be
affected by Y2K problems. Such equipment includes intelligent office equipment
such as copiers, heating, ventilation, air conditioning and other building
control systems, intelligent production equipment such as CNC machines, test
equipment such as coordinate measuring machines, and products for resale which
use embedded microprocessors. The company has determined that its production
equipment will generally not be impacted by Y2K issues and is obtaining written
confirmation of Y2K compliance for equipment which may be at risk. Management
believes that, in the worst case scenario, isolated production delays could
occur due to compliance problems. Management is developing a contingency plan
for addressing these problems as they occur. This plan will be completed prior
to the end of 1999.
THIRD-PARTY RELATIONSHIPS
The company's ability to perform is dependent on the ability of its suppliers
and vendors to perform. As such, the company's ability to perform may be
negatively impacted by a supplier's inability to perform due to its Y2K
problems.
The company has identified its current key suppliers and in January 1999 the
company mailed surveys to each of these vendors. The company has received
replies from approximately one third of the vendors. The company intends to
follow-up with vendors who have not replied to this survey by the end of the
first quarter of 1999, and expects to complete an assessment of its Y2K
exposure, and develop contingency plans for any Y2K issues that may be
identified, early in the second quarter of 1999.
The company intends to review this list of suppliers quarterly to determine
compliance levels, identify compliance concerns, develop contingency plans for
suppliers with compliance problems, and to add suppliers to the list as
necessary.
<PAGE>
ESTIMATED COSTS
The company has not fully and completely estimated its Y2K compliance costs at
this time. The company has spent approximately $110,000 on hardware and software
products and services for its internal information systems to insure Y2K
compliance. All costs for Y2K compliance have been expensed in the period
incurred and have been paid for from operating funds. The company does not
anticipate any additional significant outside expenditures in order to achieve
compliance.
While the company has not completed its assessment of the estimated internal
time and associated wages for compliance activities, it estimates that its total
compliance cost (including external expenditures and internal resources) will be
approximately $225,000. The company intends to refine this cost assessment in
the near future.
The company believes that it has taken the necessary and appropriate actions
required to insure that its Y2K risks are minimal. It believes that it has
identified its areas of concern and it believes that it is positioned to
complete all necessary activities to assure compliance prior to January 1, 2000.
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.
Shareholder Information
The company paid no dividends in 1998, pursuant to a determination by
the Board of Directors that presently available funds should be used to provide
working capital.
In February 1998, the company's Board of Directors declared a three-for-two
stock split based on a record date of April 15, 1998. The stock split was
effected on April 30, 1998.
<PAGE>
VENTURIAN CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net sales .............................................................. $ 41,713 $ 27,579 $ 28,398
Cost of products sold .................................................. 29,756 19,925 19,939
----------- ----------- -----------
Gross profit ......................................................... 11,957 7,654 8,459
Operating expenses
Sales and marketing .................................................. 3,536 4,099 3,300
Administrative ....................................................... 3,781 3,744 3,443
Warehousing .......................................................... 1,887 1,790 1,635
----------- ----------- -----------
Total operating expenses ........................................... 9,204 9,633 8,378
----------- ----------- -----------
Operating profit (loss) ................................................ 2,753 (1,979) 81
Other income (expense)
Interest income ...................................................... 72 22 42
Rental income, net of expenses ....................................... 644 465 428
Gain from life insurance proceeds .................................... 218 -- --
Gain (loss) on sale of property and equipment ........................ -- 306 (97)
Interest expense ..................................................... (782) (512) (371)
Other ................................................................ 29 17 1
----------- ----------- -----------
181 298 3
----------- ----------- -----------
Earnings (loss) before income taxes and
equity in losses of unconsolidated subsidiary ........................ 2,934 (1,681) 84
Income taxes ........................................................... 63 -- --
----------- ----------- -----------
Earnings (loss) before equity in losses of unconsolidated subsidiary ... 2,871 (1,681) 84
Equity in losses of unconsolidated subsidiary .......................... (1,040) (644) --
----------- ----------- -----------
NET EARNINGS (LOSS) .................................................... $ 1,831 $ (2,325) $ 84
=========== =========== ===========
Net earnings (loss) per share - Basic .................................. $ 1.57 $ (2.06) $ .07
=========== =========== ===========
Net earnings (loss) per share - Diluted ................................ $ 1.50 $ (2.06) $ .07
=========== =========== ===========
Weighted average shares outstanding
Basic ................................................................. 1,167,111 1,127,796 1,123,068
Diluted ............................................................... 1,237,149 1,127,796 1,180,158
</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)
<TABLE>
<CAPTION>
December 31,
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ............................. $ 3,009 $ 473
Restricted cash ....................................... 790 91
Accounts receivable, less allowance
for doubtful accounts of $217 in
1998 and $195 in 1997 ............................... 4,579 6,809
Inventories ........................................... 4,587 5,421
Prepaid expenses and other ............................ 223 451
--------- ---------
Total current assets ................................ 13,188 13,245
PROPERTY AND EQUIPMENT - AT COST
Buildings and improvements ............................ 1,916 1,916
Equipment ............................................. 6,144 5,391
--------- ---------
8,060 7,307
Less accumulated depreciation and amortization ........ 5,739 5,331
--------- ---------
2,321 1,976
Land .................................................. 230 230
--------- ---------
2,551 2,206
OTHER ASSETS
Cash surrender value of life insurance,
net of policy loans of $220 in 1998 and 1997 ........ 3,445 3,884
Rental real estate, net of accumulated
depreciation of $572 in 1998 and $422 in 1997 ....... 2,891 2,943
Investment in unconsolidated subsidiary ............... -- 1,040
Other ................................................. 405 570
--------- ---------
6,741 8,437
--------- ---------
$ 22,480 $ 23,888
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft ........................................ $ 161 $ 675
Note payable to bank .................................. -- 2,200
Current maturities of long-term debt .................. 211 193
Accounts payable ...................................... 1,565 3,346
Advances from customers ............................... 36 482
Accrued liabilities
Payroll and related benefits ........................ 986 331
Other ............................................... 849 785
Deferred revenue ...................................... 371 282
--------- ---------
Total current liabilities ........................... 4,179 8,294
LONG-TERM DEBT, LESS CURRENT MATURITIES ................. 4,424 3,954
DEFERRED COMPENSATION AND POSTRETIREMENT BENEFITS ....... 2,180 2,279
COMMITMENTS AND CONTINGENCIES ........................... -- --
SHAREHOLDERS' EQUITY
Common stock - authorized 30,000,000 shares of $1 par
value, issued 1,212,468 in 1998 and 1,129,934 in 1997 1,212 1,130
Additional contributed capital ........................ 16,016 15,593
Accumulated deficit ................................... (5,531) (7,362)
--------- ---------
11,697 9,361
--------- ---------
$ 22,480 $ 23,888
========= =========
</TABLE>
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,
---------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) .............................................. $ 1,831 $ (2,325) $ 84
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization ................................ 570 536 534
Loss (gain) on sale of property and equipment ................ -- (306) 97
Issuance of common stock for services ........................ 31 25 17
Gain from life insurance proceeds ............................ (218)
Equity in losses of unconsolidated subsidiary ................ 1,040 644 --
Change in assets and liabilities, net of effect
of change in ownership of subsidiary in 1997:
Restricted cash .......................................... (699) (26) 593
Accounts receivable ...................................... 2,230 (2,712) 2,412
Inventories .............................................. 834 (1,753) 309
Prepaid expenses and other ............................... 228 (268) 35
Other .................................................... 170 (319) 51
Accounts payable ......................................... (1,781) 1,380 (1,262)
Advances from customers .................................. (446) 254 (163)
Accrued liabilities ...................................... 719 10 (241)
Deferred revenue ......................................... 89 282 --
Deferred compensation and
postretirement benefits ................................ 266 245 235
Payments on deferred compensation
and postretirement benefits ............................ (365) (349) (300)
--------- --------- ---------
Total adjustments ............................................ 2,668 (2,357) 2,317
--------- --------- ---------
Net cash provided by (used in) operating activities .............. 4,499 (4,682) 2,401
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ............................... (753) (1,126) (388)
Improvements to rental real estate ............................... (98) (206) (721)
Increase in cash surrender value ................................. (304) (318) (315)
Proceeds from life insurance ..................................... 961 -- --
Proceeds from the sale of property and equipment ................. -- 490 193
Net advances on note receivable from unconsolidated subsidiary ... -- (308) --
Other ............................................................ (17) 60 14
--------- --------- ---------
Net cash used in investing activities ............................ (211) (1,408) (1,217)
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft ................................................... (514) 266 14
Proceeds from line of credit ..................................... 10,900 8,550 --
Payments on line of credit ....................................... (13,100) (6,350) --
Proceeds from long-term debt ..................................... 925 4,031 115
Payments on long-term debt ....................................... (437) (1,170) (462)
Proceeds from life insurance loans ............................... -- 220 --
Payments on life insurance loans ................................. -- -- (750)
Proceeds from issuance of common stock ........................... 474 5 --
--------- --------- ---------
Net cash provided by (used in) financing activities .............. (1,752) 5,552 (1,083)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ............... 2,536 (538) 101
Beginning cash and cash equivalents ................................ 473 1,011 910
--------- --------- ---------
Ending cash and cash equivalents ................................... $ 3,009 $ 473 $ 1,011
========= ========= =========
</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, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON CONTRIBUTED ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1996 ................ $ 1,125 $ 14,284 $ (5,121) $ 10,288
Issuance of common stock ................ 2 15 -- 17
Net earnings for 1996 ................... -- -- 84 84
----------- ----------- ----------- -----------
Balance at December 31, 1996 .............. 1,127 14,299 (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 .............. 1,130 15,593 (7,362) 9,361
Issuance of common stock ................ 82 423 -- 505
Net earnings for 1998 ................... -- -- 1,831 1,831
----------- ----------- ----------- -----------
Balance at December 31, 1998 .............. $ 1,212 $ 16,016 $ (5,531) $ 11,697
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
VENTURIAN CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
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, and Napco's majority-owned subsidiary,
International Precision Machining, Inc. On October 17, 1997, Atio Corporation
USA, Inc. (Atio USA, see Note 3) became Venturian's 45 percent-owned subsidiary.
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. At December 31, 1998, the company had purchased $2,100,000 of U.S.
government securities under agreements to resell. There were no U.S. government
securities repurchased under agreements to resell at December 31, 1997.
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, 1998 and
1997.
Supplemental disclosures of cash flow information for the Statements of Cash
Flows are as follows (in thousands):
Years ended December 31,
----------------------------
1998 1997 1996
---- ---- ----
Cash paid during the year for:
Interest.................................. $569 $288 $226
Income taxes.............................. 129 3 21
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 the change in ownership of Atio USA as of October 1, 1997 (in
thousands):
Note receivable from unconsolidated subsidiary.............. $ 2,866
<PAGE>
VENTURIAN CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
Other current assets........................................ (282)
Equipment, net.............................................. (200)
Investment in unconsolidated subsidiary..................... (2,671)
Other current liabilities................................... 287
During 1997, the company made a capital contribution to Atio USA of $3,088,000,
through the forgiveness of amounts due to the company.
During 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.
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 three customers whose accounts receivable
balances as of December 31, 1998 were approximately $2,416,000. In addition, the
company has granted credit to customers in the Far East whose accounts
receivable balances as of December 31, 1998 were approximately $1,284,000.
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 $2,302,000 and $1,978,000 at December 31, 1998 and 1997, 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. Under this method, compensation expense is
recognized for the amount by which the market price of the common stock on the
date of grant exceeds the exercise price of an option.
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.
<PAGE>
VENTURIAN CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
Foreign Currency - From time to time Napco enters into sales contracts
denominated in foreign currency. During 1997, 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. There were no forward
exchange contracts outstanding at December 31, 1998.
Revenue Recognition - The company recognizes revenue when goods are shipped or
services are rendered.
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 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 years ended December 31, 1998 and 1997, 70,038 and 57,090 shares of
common stock equivalents were included in the computation of diluted net
earnings (loss) per share, including 26,252 shares of common stock equivalents
in 1998 based on the assumed conversion of convertible debentures (see Note 7).
Options to purchase 55,950, 179,813 and 44,250 shares of common stock with a
weighted average exercise price of $6.95, $4.61, and $5.40 were outstanding
during the years ended December 31, 1998, 1997 and 1996, but were not included
in the computation of diluted net earnings (loss) per share because to do so
would have been anti-dilutive.
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 effected on April 30, 1998. The company's share and per
share information for 1997 and 1996 has been restated to reflect the effects of
the three-for-two stock split.
Reclassifications - Certain reclassifications have been made to the 1997 and
1996 financial statements to conform with the 1998 presentation.
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.
<PAGE>
VENTURIAN CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
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 year ended December 31, 1996 (see Note 15). Venturian Corp.
recorded $1,040,000 of equity in losses of unconsolidated subsidiary for its
share of Atio USA's losses for the year ended December 31, 1998 and $644,000 for
the three months ended December 31, 1997. Venturian Corp.'s investment in Atio
USA was fully written off during 1998.
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 terminate 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 provided 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 were used to fund the operations of Atio USA. Atio
USA needed additional working capital to fund its operations, and Atio
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 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 October 1998 the agreement with Atio International to provide financing
was amended to provide that loans in excess of $430,000 advanced at that time
would be either repayable or convertible into shares of Atio USA at a price of
$.50 per share, upon demand, by September 30, 1999. In addition, Atio USA may
make future capital calls pursuant to the capital call provisions of a
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 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 ownership could be further reduced upon conversion of options
outstanding to purchase the common stock of Atio USA. In February 1999,
Venturian entered into an agreement to redeem its 45 percent interest in Atio
USA (see Note 17).
The following is summarized financial information of Atio USA as of December 31,
1998 and for the year then ended and as of December 31, 1997 and for the three
months then ended (in thousands):
<PAGE>
VENTURIAN CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
December 31,
1998
(unaudited) 1997
----------------------
Current assets............................ $ 333 $ 450
Noncurrent assets......................... 466 228
Current liabilities....................... 2,585 446
Non-current liabilities................... 500 500
Shareholders' deficit..................... (2,286) (268)
Revenues.................................. 712 154 (unaudited)
Net loss ................................. (4,081) (1,447) (unaudited)
NOTE 4 - 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
$1,125,000 in 1999, $687,000 in 2000, $410,000 in 2001, and $327,000 in 2002 and
$41,000 in 2003.
In 1996, the Minnesota Pollution Control Agency 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. In 1998, the MPCA issued a Certificate of
Completion for the property.
Management believes the property's current carrying value of $2,891,000 is
recoverable.
NOTE 5 - 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.
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, 1998, approximately $3,271,000 was available
for cash and letter of credit advances pursuant to the agreement, as amended.
There were no cash advances outstanding against this line of credit at December
31, 1998 and approximately $729,000 in letter of credit advances were
outstanding. 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.
<PAGE>
VENTURIAN CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
The agreement terminates on June 30, 1999. Management expects to renew the
agreement under similar terms and conditions.
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 $790,000 and $91,000 as of December 31, 1998 and
1997.
NOTE 6 - LONG-TERM DEBT
Long-term debt consisted of the following at December 31 (in thousands):
1998 1997
---- ----
Rental real estate mortgage (a).................... $3,350 $3,372
Convertible debenture (b).......................... 504 -
Mortgage payable (c)............................... 212 256
Other (d).......................................... 569 519
------ ------
4,635 4,147
Less current maturities............................ 211 193
------ ------
$4,424 $3,954
====== ======
(a) The obligation is collateralized by rental real estate (see Note 4) 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 an 11 percent convertible debenture due July 2002 (see
Note 7) with interest payable quarterly.
(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 1.5 to 2.0
percent over the prime rate.
Aggregate future maturities of long-term debt are $211,000 in 1999, $224,000 in
2000, $171,000 in 2001, $624,000 in 2002, $57,000 in 2003 and $3,348,000
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, 1998 and 1997.
<PAGE>
VENTURIAN CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 7 - CONVERTIBLE DEBENTURE AND SALE OF COMMON STOCK
During 1998, the company entered into a privately negotiated transaction with
Quarterdeck Public Equities, LLC (Quarterdeck) for the sale of 63,005 shares of
Venturian Corp. common stock at $7.00 per share and the issuance of a $504,000,
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
the period from November 28, 1998 to July 30, 2001. After July 30, 2001, the
company, at its option, may require conversion of the debenture into common
stock. Upon conversion of the 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 the company,
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 the company's prior written consent, provided, however, that
Quarterdeck may purchase shares of the company'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 the company. 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; none of those shares had been purchased as of
December 31, 1998. Quarterdeck Public Equities, LLC is an affiliate of
Quarterdeck Investment Partners, Inc., an investment banking firm focusing in
the global aerospace and defense markets.
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 $1,569,000 and $1,708,000 at December 31, 1998 and 1997 for its
liability related to these agreements. Interest expense related to the deferred
compensation agreements was $198,000, $205,000 and $212,000 for the years ended
December 31, 1998, 1997 and 1996.
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, 1998 and
1997, the company had recorded $574,000 and $571,000 for the accumulated
postretirement benefit obligation under this plan.
Net interest cost on the accumulated postretirement benefit obligation was
$32,000, $32,000 and $39,000 for the years ended December 31, 1998, 1997 and
1996.
<PAGE>
VENTURIAN CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
For measurement purposes, a 4 percent annual rate of increase in the per capita
cost of covered medical and 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, 1998 by $39,000. 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, 1998, 1997 and 1996.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 6 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, 1998, 1997 or 1996.
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 2001. Benefits under
the plan are based on years of service. 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. Plan assets are invested in fixed income
securities.
Assumptions used to calculate costs and actuarial present values are reviewed
regularly by the company and its independent actuaries. A 7 percent discount
rate and a 7.5 percent long-term rate of return on investments were used in the
calculation in 1998, 1997 and 1996. An increase in compensation levels was not
applicable. The funded status of the plan follows (in thousands):
Years ended December 31,
--------------------------
1998 1997 1996
---- ---- ----
Fair value of plan assets...................... $904 $907 $898
Benefit obligation............................. 851 834 864
---- ---- ----
Excess plan assets............................. $ 53 $ 73 $ 34
==== ==== ====
Pension liability.............................. $(60) $(60) $(57)
==== ==== ====
NOTE 11 - COMMITMENTS AND CONTINGENCIES
At December 31, 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.
The company has guaranteed certain office lease commitments of Atio USA totaling
$160,000 as of December 31, 1998.
<PAGE>
VENTURIAN CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
The company is subject to various legal proceedings in the normal course of
business. Management believes the outcome of these proceedings will not have a
material adverse effect on the company's financial position or results of
operations.
NOTE 12 - RISKS AND UNCERTAINTIES
The Year 2000 issue relates to limitations in computer systems and applications
that may prevent proper recognition of the year 2000. The potential effect of
the Year 2000 issue on the company and its business partners will not be fully
determinable until the year 2000 and thereafter. If Year 2000 modifications are
not properly completed either by the company or entities with whom the company
conducts business, the company's financial position and results of operations
could be adversely impacted.
NOTE 13 - 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, 1998, options to purchase 44,000 shares
were outstanding under this plan, 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 375,000 shares of the company's stock to
be granted under the plan. At December 31, 1998, 188,350 shares were available
for grant under this plan and options to purchase 175,250 shares were
outstanding, of which 134,092 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. During 1998, 38,600 incentive stock options were
granted to a holder of more than 10 percent of the company's voting stock. No
other 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,
-----------------------------------------------------------------------------
1998 1997 1996
---------------------- --------------------- ---------------------
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 ..... 197,550 $ 4.87 186,225 $ 4.50 76,500 $ 5.57
Granted .............................. 41,600 7.64 46,500 6.51 187,500 4.18
Exercised ............................ (15,400) 4.64 (1,500) 3.83 -- --
Forfeited ............................ (4,500) 3.83 (18,675) 4.48 (68,775) 4.72
</TABLE>
<PAGE>
VENTURIAN CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Expirations .......................... -- (15,000) 6.05 (9,000) 5.18
------- ------- -------
Outstanding at end of year ........... 219,250 $ 5.43 197,550 $ 4.87 186,225 $ 4.50
======= ======= =======
Options exercisable at end of year ... 178,092 $ 5.55 127,200 $ 4.79 109,875 $ 4.99
======= ======= =======
Weighted-average fair value of
options granted during the year $ 3.75 $ 4.54 $ 2.29
</TABLE>
The following information applies to stock options that are outstanding at
December 31, 1998:
<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>
$3.83 to $ 5.33 129,150 6.05 years $4.31 103,890 $4.41
$6.05 to $ 7.77 90,100 7.23 years 7.03 74,202 7.14
------- -------
219,250 178,092
======= =======
</TABLE>
The company's pro forma net earnings (loss) and net earnings (loss) per share
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.
<TABLE>
<CAPTION>
(In thousands, except per share data) Years ended December 31,
-----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net earnings (loss) As reported....................... $ 1,831 $(2,325) $ 84
Pro forma......................... 1,672 (2,475) (11)
Net earnings (loss) per
share - basic As reported....................... $ 1.57 $ (2.06) $ .07
Pro forma......................... 1.43 (2.19) (.01)
Net earnings (loss) per
share - diluted As reported....................... $ 1.50 $ (2.06) $ .07
Pro forma......................... 1.37 (2.19) (.01)
</TABLE>
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 1998, 1997 and 1996: zero dividend yield; expected
volatility of 59.00, 67.00 and 64.68 percent; risk-free interest rates of 5.58,
5.98 and 5.66 percent; and an expected life of five, 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
<PAGE>
VENTURIAN CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
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 150,000 shares of
common stock. Of the authorized shares, 84,548 shares have been purchased
through December 31, 1998. The company's obligation to repurchase the
outstanding shares under the plan at December 31, 1998 was approximately
$244,000.
NOTE 14 - INCOME TAXES
The components of income tax expense were as follows (in thousands):
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current expense ..................................... $ 63 $ -- $ --
Deferred expense .................................... -- -- --
------- ------- -------
$ 63 $ -- $ --
======= ======= =======
</TABLE>
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) before income taxes and equity in losses of unconsolidated
subsidiary due to the following (in thousands):
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected income tax expense (benefit)
at statutory rate .............................. $ 998 $ (572) $ 29
Difference in tax resulting from:
Allocation of net deferred tax
asset to deconsolidated subsidiary(a) ..... -- 424 --
Change in valuation allowance(b) ............. (771) 206 29
Effect of cash surrender value ............... (120) (60) (56)
Other ........................................ (44) 2 (2)
------- ------- -------
Actual income tax expense ........................ $ 63 $ -- $ --
======= ======= =======
Actual income tax expense
percentage ..................................... 2.2% N/A N/A
</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 excludes the effect of the investment
in unconsolidated subsidiary.
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, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Deferred compensation and
retirement benefits ...................................... $ 777 $ 864
Inventory .................................................. 571 1,016
Alternative minimum tax credit carryforwards ............... 186 123
Net operating loss carryforwards ........................... 361 929
Other ...................................................... 315 291
------- -------
2,210 3,223
Valuation allowance ........................................ (2,142) (2,913)
------- -------
68 310
Deferred tax liabilities:
Investment in unconsolidated subsidiary .................... -- (236)
Depreciation ............................................... (68) (74)
------- -------
$ -- $ --
======= =======
</TABLE>
At December 31, 1998 the company had approximately $900,000 of federal net
operating loss carryforwards and $1,300,000 of state net operating loss
carryforwards which expire through the year 2013.
During the fourth quarter of 1998, the company recorded a $163,000 reduction of
income tax expense to adjust to the company's annual effective tax rate. The
effect of this adjustment was to increase basic net earnings per share by $.13
for the quarter and diluted net earnings per share by $.12 for the quarter.
NOTE 15 - SEGMENT INFORMATION
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.
During 1998, the company had one reportable segment: Napco defense-related
products. 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. During 1997 and 1996, the company had two reportable segments:
Napco defense-related products and Atio software products. Atio provides
customer contact automation software under the trade name Cybercall(R).
<PAGE>
VENTURIAN CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
Segment information for the company is as follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31, 1997 Napco Atio
Defense-related Software
Products Products Total
---------- ---------- ----------
<S> <C> <C> <C>
Revenues from external customers ................... $ 26,849 $ 730 $ 27,579
Depreciation and amortization ...................... 317 27 344
Segment profit (loss) .............................. 251 (1,775) (1,524)
Segment assets ..................................... 16,006 -- 16,006
Expenditures for long-lived assets ................. 981 134 1,115
Year ended December 31, 1996
Revenues from external customers ................... $ 27,550 $ 848 $ 28,398
Depreciation and amortization ...................... 356 14 370
Segment profit (loss) .............................. 1,242 (525) 717
Segment assets ..................................... 10,941 362 11,303
Expenditures for long-lived assets ................. 294 77 371
<CAPTION>
Reconciliation to Consolidated Amounts Years ended December 31,
------------------------------------------
1998 1997 1996
---------- ---------- ----------
Total depreciation and amortization
for reportable segments .......................... $ 369 $ 344 $ 370
Unallocated amount
for corporate headquarters ....................... 201 192 164
---------- ---------- ----------
Total consolidated depreciation
and amortization ................................. $ 570 $ 536 $ 534
========== ========== ==========
Profit or Loss
Total profit or loss for reportable segments ....... $ 3,592 $ (1,524) $ 717
Unallocated amounts
Corporate headquarters ........................... (839) (455) (636)
Rental income, net ............................... 644 465 428
Gain from life insurance proceeds ................ 218 -- --
Interest, net .................................... (710) (490) (329)
Gain (loss) on sale of equipment ................. -- 306 (97)
Other ............................................ 29 17 1
---------- ---------- ----------
Consolidated earnings (loss) before
income taxes and equity in losses
of unconsolidated subsidiary ..................... $ 2,934 $ (1,681) $ 84
========== ========== ==========
Assets
Total assets for reportable segments ............... $ 16,720 $ 16,006 $ 11,303
Corporate headquarters and rental property ......... 5,760 7,882 6,750
---------- ---------- ----------
Total consolidated assets ........................ $ 22,480 $ 23,888 $ 18,053
========== ========== ==========
</TABLE>
<PAGE>
VENTURIAN CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
Geographic Information
Napco's sales by geographic region for the last three years were as follows (in
thousands):
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
United States
and Canada .................................... $ 20,036 $ 14,264 $ 16,461
Europe ............................................. 5,921 4,595 4,037
Far East ........................................... 10,778 3,974 4,791
Mediterranean and
Middle East ................................... 3,904 1,989 1,051
Latin America ...................................... 1,044 1,910 899
Africa ............................................. 30 117 311
---------- ---------- ----------
$ 41,713 $ 26,849 $ 27,550
========== ========== ==========
</TABLE>
Sales are attributed to countries based on the location of the customer. All
long-lived assets are located in the United States.
Major Customers
During 1998, sales to a customer in one foreign country accounted for 20 percent
of Napco's sales. During 1997 and 1996, 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 $19,821,000, $13,952,000 and $15,795,000
in 1998, 1997 and 1996 and consisted primarily of sales to various U.S.
government agencies and to a large number of commercial customers. During 1998
and 1997, sales to U.S. government agencies accounted for 35 and 10 percent of
Napco sales. During 1997 and 1996, sales to one other customer in the United
States accounted for 23 and 32 percent of Napco sales. However, historically
there has not been a reliance on any one customer.
NOTE 16 - COMPREHENSIVE INCOME
The company adopted Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income,"
effective January 1, 1998. SFAS No. 130 established standards for the reporting
and display of 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 have any
effect on the consolidated financial position, results of operations, or cash
flows of the company. Comprehensive income for the year ended December 31, 1998
equals net income.
NOTE 17 - SUBSEQUENT EVENT
<PAGE>
VENTURIAN CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
On February 17, 1999, the company entered into an agreement to redeem its 45
percent interest in Atio USA for $1,000,000 plus warrants to acquire additional
securities of Atio USA representing 300,000 common shares. The redemption
agreement is subject to Atio USA raising additional equity capital of at least
$5,000,000 from a third party on or prior to July 31, 1999.
<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,
1998 and 1997 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, 1998. 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, 1998 and 1997, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
/S/ GRANT THORNTON LLP
Minneapolis, Minnesota
February 5, 1999 (except for Note 17,
as to which the date is February 17, 1999)
<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
1998(a) 1997(a) 1998 1997(a) 1998 1997(a) 1998(c) 1997(a)(b)
------- ------- ------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ...................... $ 7,396 $ 6,743 $12,679 $ 8,078 $12,209 $ 4,714 $ 9,429 $ 8,044
Gross profit ................... 2,364 1,752 3,424 2,247 3,544 1,252 2,625 2,403
Net earnings (loss) ............ (188) (896) 482 (355) 1,016 (1,293) 521 219
Earnings (loss) per share
Basic ........................ $ (.17) $ (.79) $ .43 $ (.31) $ .85 $ (1.15) $ .43 $ .19
Diluted ...................... (.17) (.79) .41 (.31) .80 (1.15) .40 .19
</TABLE>
(a) Net earnings (loss) per share and stock price data have been restated to
reflect the three-for-two stock split that was effective April 15, 1998.
(b) As of October 1, 1997, the company began accounting for its investment in
Atio USA under the equity method of accounting.
(c) During the fourth quarter of 1998, the company recorded a $163,000 reduction
of income tax expense to adjust to the company's annual effective tax rate. The
effect of the adjustment was to increase basic net earnings per share by $.13
for the quarter and diluted net earnings per share by $.12 for the quarter.
Market Quotations
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High ......................... $ 7.50 $ 8.83 $ 8.00 $ 8.17 $ 7.38 $ 7.50 $ 10.25 $ 7.25
Low .......................... 5.83 5.42 6.00 6.33 6.00 6.00 6.50 6.09
</TABLE>
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.
<PAGE>
VENTURIAN CORP. AND SUBSIDIARIES
Five-Year Financial Summary
(In thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales .............................................. $ 41,713 $ 27,579 $ 28,398 $ 24,845 $ 25,206
Earnings (loss) from continuing
operations before equity in losses of
unconsolidated subsidiary
and discontinued operations .......................... 2,871 (1,681) 84 937 267
Equity in losses of unconsolidated subsidiary .......... (1,040) (644) -- -- --
Discontinued operations ................................ -- -- -- (1,095) (3,235)
Net earnings (loss) .................................... $ 1,831 ($ 2,325) $ 84 ($ 158) ($ 2,968)
PER SHARE DATA
Net earnings (loss) per share - Basic
Earnings (loss) from continuing
operations before discontinued operations .......... $ 1.57 $ (2.06) $ .07 $ .83 $ .24
Discontinued operations .............................. -- -- -- (.97) (2.89)
Net earnings (loss) per share - Basic ................ 1.57 (2.06) .07 (.14) (2.65)
Net earnings (loss) per share - Diluted
Earnings (loss) from continuing
operations before discontinued operations .......... 1.50 (2.06) .07 .83 .24
Discontinued operations .............................. -- -- -- (.97) (2.89)
Net earnings (loss) per share - Diluted .............. 1.50 (2.06) .07 (.14) (2.65)
Year end stock price ................................... $ 7.75 $ 6.17 $ 5.42 $ 3.33 $ 3.83
Shareholders of record at year end ..................... 446 501 537 724 591
FINANCIAL POSITION
Working capital ........................................ $ 9,009 $ 4,951 $ 4,984 $ 6,181 $ 6,515
Current ratio .......................................... 3.2 1.6 2.2 2.0 2.4
Total assets ........................................... $ 22,480 $ 23,888 $ 18,053 $ 20,316 $ 19,111
Long-term liabilities at year end ...................... 6,604 6,233 3,442 3,755 3,971
</TABLE>
Exhibit 21
Venturian Corp. and Subsidiaries
SUBSIDIARIES OF THE REGISTRANT
December 31, 1998
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
Exhibit 23.1
Venturian Corp. and Subsidiaries
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our reports dated February 5, 1999 (except for Note 17, as to
which the date is February 17, 1999) 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, 1998. 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
March 24, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,009
<SECURITIES> 0
<RECEIVABLES> 4,796
<ALLOWANCES> 217
<INVENTORY> 4,587
<CURRENT-ASSETS> 13,188
<PP&E> 8,290
<DEPRECIATION> 5,739
<TOTAL-ASSETS> 22,480
<CURRENT-LIABILITIES> 4,179
<BONDS> 0
0
0
<COMMON> 1,212
<OTHER-SE> 10,485
<TOTAL-LIABILITY-AND-EQUITY> 22,480
<SALES> 41,713
<TOTAL-REVENUES> 41,713
<CGS> 9,204
<TOTAL-COSTS> 9,204
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 782
<INCOME-PRETAX> 2,934
<INCOME-TAX> 63
<INCOME-CONTINUING> 1,831
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,831
<EPS-PRIMARY> 1.57
<EPS-DILUTED> 1.50
</TABLE>
