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47
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JUNE 2, 1996
Commission File Number 0-12611
AULT INCORPORATED
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0842932
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
7300 BOONE AVENUE NORTH, MINNEAPOLIS, MINNESOTA 55428-1028
(address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 493-1900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
(Title of Class)
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 8-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
amendments to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $15,904,008 based upon the ending price of
the Company's common stock on the national over-the-counter market NASDAQ
Small-Cap Issues on July 30, 1996, multiplied by the number of outstanding
shares of the Company held by persons other than officers, directors and
10% or more shareholders referred to in the "Security Ownership of
Principal Shareholders and Management" table referred to under Item 12
herein.
On August 10, 1996, there were outstanding 2,128,776 shares of the
Registrant's common stock.
Documents Incorporated by Reference: The Company's Proxy Statement for its
Annual Meeting of Shareholders to be held on October 1, 1996 is
incorporated by reference into Part III of this Form 10-K.
The Form 10-K consists of 49 pages. The Exhibit Index is located on page
39.
AULT INCORPORATED
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 2, 1996
PART I
ITEM 1. BUSINESS
(a) General Development of Business
Ault Incorporated (herein "Ault" or "Company") was incorporated under the
laws of the State of Minnesota in 1961. The Company designs, manufactures,
and markets a line of external power conversion products and is a leading
domestic supplier of such products to original equipment manufacturers
(OEMs) of data communications equipment, telecommunications equipment,
portable medical equipment, and microcomputers and related peripherals.
(b) Financial Information About Industry Segments
The Company operates in only one industry segment - the manufacture and
sale of power conversion devices. Financial information regarding this
segment is presented in the financial statements under Item 8 herein.
(c) Narrative Description of the Business
Ault's power conversion products are used to adapt AC wall current to
provide a source of power at various levels up to 90 watts for a wide
variety of electronic equipment. Most of the Company's products are
located outside the equipment they power as wall plug-in or as in-line
components and are generally referred to as external power conversion
products. A small portion of the Company's products are located inside the
equipment they power, when this feature is required by OEM customers, and
are generally know as internal power conversion devices. External power
conversion products, in contrast to more widely used internal power
conversion devices, enable designers of electronic equipment to remove heat
and hazardous voltages from the end product thereby allowing the end
product to function more safely and effectively. Also, by removing the
power conversion feature from inside the end product, the OEM is afforded
greater flexibility in designing and styling. These advantages have
particular application in the Company's target markets where advances in
semiconductor technology have reduced power requirements of many items of
equipment to levels supplied by the Company's products, where rapid growth
and strong competition have resulted in competitive pressure to bring new
products to market quickly, and where there is increasing emphasis on
smaller and portable products that perform increasingly sophisticated
functions. Ault's business strategy is to offer OEMs in these markets an
expanding line of high quality power conversion products and devices,
related design engineering and flexible customer services.
(1) Products
The Company's product line includes transformers, power supplies, and
battery chargers. In fiscal 1994, 1995 and 1996 sales of transformers
represented, respectively, 42%, 42% and 37% of net sales and sales of
power supplies represented, respectively, 51%, 50% and 56% of net sales.
In fiscal 1994, 1995 and 1996 battery chargers represented,
respectively, 7%, 8% and 7% of net sales.
Ault's standard line of external transformers are primarily of the wall
plug-in type. These transformers are utilized primarily in applications
where the OEM wishes to remove hazardous voltages and heat from the end
product. The products reduce AC voltage from approximately 120 volts
(230 volts in some countries) down to lower voltages that range from 5
to 40 volts AC.
The Company's power supplies provide the entire power conversion system
for electronic equipment manufactured by OEMs. These products contain a
transformer, which reduces the voltage level and other components, which
convert alternating electrical current supplied by electric utilities to
direct current and, in the case of regulated power supplies, maintain
the voltage output so that it remains within specified voltage
tolerances despite fluctuations in the input AC voltage.
The Company's line of power supplies consists of both linear and
switching power supplies. Linear power supplies are larger but
generally less expensive than switching power supplies because their
design is based on a simpler technology. Switching power supplies
utilize a more sophisticated technology and, through the use of
switching transistors, convert power at higher frequencies than linear
power supplies. A switching power supply is more energy efficient, as
well as considerably smaller and lighter in weight than a linear unit
with a comparable power rating, but also is substantially more expensive
to manufacture. Linear power supplies tend to be used when the wattage
output required is relatively low. As the power requirement increases,
the switching power supply becomes more advantageous.
Ault manufactures linear power supplies that provide up to 10 watts of
regulated power and 70 watts of unregulated power. In addition, the
Company manufactures a family of 18 watt hybrid power supplies which
combine linear and switching technology to produce an amount of
regulated power in a unit which is only somewhat larger than a switching
power supply of similar power output, but costs somewhat less. The
Company manufactures switching regulated power supplies that produce up
to 90 watts of power. Among the switching power supplies manufactured by
the Company is a family of universal input switching regulated power
supplies that are designed to generate output power from any input power
source ranging from 90 to 270 volts. This family of power supplies is,
therefore, adaptable to OEM needs in virtually any country for powering
high volume products such as local area networks, high end printers and
fiber optic links. Equally adaptable is the Company's universal input
switching regulated power supply designed for medical markets and which
performs within the standards of UL544, CSA125, IEC601 and FCC Class B
emission requirements, (See Safety Standards below). The Company
recently acquired patented high density switching power supply
technology which provides substantially greater power output in the same
physical dimensions and weight of current switching power supplies of
similar power rating. This new technology will enable offering of
products up to 100 watts.
The Company's product line also includes three standard lines of battery
chargers, two of which are designed in three different sizes for use
with gel cell and sealed lead acid rechargeable batteries having up to a
40 amp hour capacity. The third standard line of battery chargers is
designed for use with Nicad batteries. This battery charger
automatically adjusts the power output to the battery capacity of up to
3 amp hours. It senses the charge requirement as indicated by the
temperature and voltage of the battery, and adjusts the amount of charge
to the needs of the battery. The Company also manufactures a line of
battery chargers that accommodate nickel-metal hydride batteries which
do not pose the environmental hazards of nickel cadmium batteries. Ault
produces trickle voltage battery chargers for applications where the
customer's batteries are primarily used as a back-up or in a standby
mode, and self-monitoring battery chargers for applications where the
battery is being discharged often and full recharging is required. The
Company manufactures a family of wall plug-in battery chargers that
satisfy the more rigid UL standards for portable medical equipment
applications and multiple bay lead-acid chargers for camcorder
batteries.
The Company does not generally manufacture internal power conversion
devices, which comprise a substantially larger portion of the power
conversion market. Currently, it does so only where it is in the
interest of enhancing partnership relations with significant customers.
The internal power supply market represents an enormous opportunity for
the Company whose strategies are to eventually establish its position as
an efficient, low-cost producer of technologically advanced internal
power conversion devices, in addition to current external power
conversion products.
(2) Markets and Marketing
The Company directs its marketing efforts primarily to four segments of
the electronics industry: data communications, telecommunications,
portable medical equipment and microcomputers and related peripherals.
In fiscal 1996 sales to OEMs of data communications equipment
represented approximately 30% of net sales. At the present time Ault's
products are principally being used in this market to power a number of
low to medium speed modems and multiplexers (equipment which enables the
simultaneous transmission of multiple channels of information over the
same telephone line).
In fiscal 1996 approximately 20% of the Company's net sales were to OEMs
of microcomputers, related peripherals (such as digitizers, printers,
plotters, portable terminals, point-of-sale scanners and optical
character readers), networking hardware and other data processing
equipment.
Sales in fiscal 1996 to OEMs of telecommunications equipment were
approximately 30% of net sales. At the present time the Company's
products are principally used in this market for charging batteries of
cellular telephones, to power network termination equipment (devices
which interface between the telephone network and the customer's PBX or
other telephone system), line conditioning equipment (devices which
prepare telephone lines for the transmission of computer generated
data), and various items of equipment ancillary to business telephones,
including speaker phones, automatic dialers and alpha-numeric displays.
Approximately 15% of net sales in fiscal 1996 were to OEMs of portable
medical equipment such as infusion pumps, patient monitoring systems,
sudden infant death syndrome monitors, and portable terminals for
patient history input.
The remaining 5% of the Company's sales in fiscal 1996 were divided
among OEMs serving a number of markets, including security systems,
industrial equipment, radio and television transmitting devices and
consumer/hobby items.
The Company markets its products through a nationwide network of 20
manufacturer representative and distributor organizations, employing an
aggregate of approximately 115 salespersons. These sales persons are
technically assisted by the Company's application engineers and other
sales administration staff. The major marketing activity of the Company
is focused on OEMs in the U.S. and Canada although some of these OEMs
sell their products in Europe and have expanded their manufacturing
offshore. These factors have enabled the Company to further
internationalize its market.
The Company's European market strategy is to establish sales in certain
markets through a network of distributors with products and promotional
methods tailored for these markets. In European markets, power
conversion products must operate under lower power frequency and higher
voltage conditions, and must meet other agency certification
requirements that are not customary in U.S. markets. Ault's activities
in Europe thus far have seen only minimum success.
The Company's marketing strategy also targets the Pacific Rim power
conversion market using its Ault Korea subsidiary as a source of sales
and sales promotion. Implementation, so far, has been limited to Korea.
Agency approval to sell products in Japan has not yet resulted in any
significant sales.
Additionally, the Company's marketing effort includes new product
releases to trade journals, trade advertising, and participation in
trade shows.
(3) Product Development and Engineering
The Company's design engineering teams at its US and Korean facilities
are responsible for developing new power conversion products and
improving existing products based upon the needs of customers as
determined through joint collaboration between the customer and the
Company. The Company also designs standard products for use by medical
and non-medical customers with emphasis on smaller packaging, greater
power density and competitive pricing. The Company designed and
introduced 13 and 16 new products in fiscal 1995 and fiscal 1996,
respectively and has several new products in various stages of
development for future introductions. Strong efforts are also being
directed toward development of products tailored to the needs of
European markets and to designs of low cost AC to AC transformers and AC
to DC linear power supplies for foreign manufacture. Product
development activities resulted in expenditures of approximately
$935,000, $1,269,000 and $1,575,000 in fiscal 1994, 1995 and 1996,
respectively. Through increased emphasis on new product development the
Company expects to increase penetration of the markets it currently
serves, and to pursue new opportunities in the field of power
conversion.
(4) Safety Standards
Because the power conversion system is potentially the most hazardous
element in most electronic equipment, virtually all of Ault's customers
require that the Company's products meet the safety standards of
Underwriters' Laboratories. Substantially all of the Company's standard
products are UL listed. In addition, the Company obtains safety
certification from the Canadian Standards Agency (CSA). "Verban
Deutscher Elektrotechniker" (VDE), International Electronique Committee
(IEC) and other certification entities where these certifications are
required by the Company's customers who sell their products in Canadian
and European markets. The Company also has Japanese MITI approval to
sell products in that country, and has met FCC Class B requirements for
products needing this certification. The Company is able to conduct
most of these testings at its plant in Minneapolis, which reduces the
time normally required to satisfy the safety standards of these agencies
and to serve the Company's customers. The Company also has ISO 9001
certification (a system that harmonizes many national and international
quality standards, in addition to those mentioned) that certifies the
Company meets the quality standards required to do business in several
countries.
(5) Competition
Electronic equipment manufacturers predominantly use internal power
supplies, and, as a result, the Company experiences strong competition
from numerous companies providing such internal equipment, including
both the OEM itself and independent suppliers. In relation to this
competition, the Company stresses the several advantages of external
power conversion products, discussed above, which generally can be
obtained with only a relatively small increase in unit cost.
The Company also competes with the various manufacturers of external
power conversion products. The external power conversion products
industry is highly fragmented with manufacturers generally focusing
their marketing on specific segments of the electronics industry. The
Company has experienced strong competition from foreign manufacturers
who are able to produce their external products at lower cost. Many of
these competitors have a smaller presence in the external power
conversion market than the Company, although several are engaged in more
than one business and have greater overall resources. The Company has
concentrated its marketing on OEMs stressing flexible, reliable
partnerships and its high quality products for commercial and
professional applications. The presence of Ault Korea, a wholly-owned
subsidiary, and expanding subcontract arrangements with manufacturers in
Southeast Asia have enabled the Company to successfully reduce foreign
price competition. Equipped to manufacture substantially all of the
Company's products, Ault Korea Corporation is also responsible for
marketing the Company's products in the Asian basin. The subcontract
arrangements in Southeast Asia are established to manufacture low cost
AC transformers and DC linear power supplies and switching power
supplies that the Company sells under the brand name AULTRA to
distinguish these products from other products of the Company that are
sold under the AULT brand name. Engineering is accomplished through
joint collaboration between the Company and the subcontractors.
The Company competes on the basis of quality and performance of its
products, breadth of product line, customer service, dependability in
meeting delivery schedules, design engineering and price. Management
believes it is currently one of a small number of companies that design,
manufacture and obtain certifying agency listing for the full range of
external power conversion devices which OEMs consider in designing their
electronic products.
(6) Significant Customers; Backlog
The Company sells its products to over 200 customers and it is the
Company's objective to maintain a diversified customer base and to
avoid, where practicable, dependence upon a single customer or a few
customers. In fiscal 1996, one customer accounted for 11% of the
Company's net sales.
The Company manufactures its products on the basis of firm purchase
orders, and ships most products within 4 to 10 weeks after receipt of an
order. Order backlog at August 12, 1996 was $14,845,000 as compared to
$10,359,000 on August 10, 1995.
(7) Manufacturing and Sources of Supply
Manufacturing operations consist principally of the assembly of products
by installing and wiring electronic components and materials on printed
circuit boards to design specifications. Electronic components and raw
materials used in the Company's products are generally available from a
large number of suppliers although from time to time shortage of
particular items are experienced. The Company manufactures certain of
its products in Korea under subcontract with its subsidiary, Ault Korea
Corporation, which is equipped to manufacture all of the Company's
products. The Company also has established subcontract arrangements in
China and Thailand for the manufacture of low cost products.
(8) Warranties
The Company provides a two-year parts and labor warranty against
defects in materials or workmanship on all its products except its
AULTRA line which carries a one year warranty. Warranty expenses have
not been significant.
(9) Patents
The Company holds four patents, but does not generally consider patent
protection to be important to its business, although one patent
contains features that the Company considers unique and which provides
competitive advantages.
(10) Employees
As of August 5, 1996, Ault employed full-time approximately 276
persons. Of this number, approximately 206 were engaged in
manufacturing (131 in Korea and 75 in Minneapolis), 23 in engineering,
and 47 in marketing, general, and administrative positions of which 34
were in Minneapolis, Minnesota and 13 were at the Korean subsidiary.
None of the Company's employees are represented by a labor organization
and the Company has never experienced a work stoppage or interruption
due to a labor dispute. Management believes that its relations with
its employees are good.
(11) Executive Officers of the Registrant
Certain information with respect to the executive officers of the
Company is set forth:
Name Age Position; Former Officer Since
Employment
Frederick M. 53 President and Chief 1980
Green Executive Officer and
Director
Carlos S. 59 Vice President, 1981
Montague Treasurer, Chief
Financial Officer and
Assistant Secretary
Richard A. 50 Secretary 1995
Primuth
Hokung C. Choi 56 Vice President-Far East 1989
Operations
Gregory L. 43 Vice President-Marketing 1988
Harris
(d) Financial Information About Foreign and Domestic Operations and
Export Sales
Export sales by the U.S. operations in fiscal year 1996 ending June 2
represented 19.4% of the Company's gross sales. All other revenues
were derived from domestic sales principally in the U.S. For other
financial information about foreign and domestic operations and export
sales including the amount of export sales for the last 3 years, refer
to Note 9, Operations Information, under NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
Management recognizes that there are certain risks involved in the
Company's foreign operations, such as political risks that may
interrupt the flow of products to customers but believes that any
interruption would be only temporary because of the diversity,
capability and flexibility of its operations.
ITEM 2. PROPERTIES
The Company's headquarters and US manufacturing facility is located in
Brooklyn Park, a suburb of Minneapolis, Minnesota. Approximately 50,000
square feet in size, this facility houses all of the Company's U.S.
operations. The lease on this property expires in August 1999.
The Company's subsidiary, Ault Korea Corporation, operates in a 36,000
square foot facility in Suwon City in the province of Kyungki-Do, Korea,
which the subsidiary purchased in May 1995. The Company has no other
property ownership.
Management considers all of the Company's properties to be well maintained
and current manufacturing arrangements including arrangements made in China
and Thailand to be adequate for manufacturing requirements.
ITEM 3. LEGAL PROCEEDINGS
No material litigation or other claims are presently pending against the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
(a) Market Information
Ault common shares are traded in the national over-the-counter market
under the symbol AULT. The following table presents the range of
closing bid prices for the Company's common stock as reported by
NASDAQ Small Cap Issues for fiscal 1996 and 1995. The bid quotations
representing prices in the over-the-counter market between dealers in
securities do not include retail mark-ups, markdowns or commissions
and do not necessarily represent actual transactions.
Fiscal 1996 Fiscal 1995
Quarter High Low High Low
1st $2-7/8 $2-1/8 $1-1/2 $1-1/18
2nd 3-7/8 2-11/16 2-1/8 1-1/8
3rd 5 3-3/8 2-5/16 1-5/8
4th 16-1/2 4-1/2 3-1/8 1-3/4
(b) Holders
As of August 5, 1996 there were 236 stockholders of record for the
Company's common stock. This number of record stockholders does not
include beneficial owners of common stock whose shares are held of
record by Depository Trust under the name CEDE & Co.
(c) Dividends
Ault has not paid cash dividends on its common shares, and, under
present policy of its Board of Directors to retain any earnings for
use in the business, does not anticipate paying cash dividends on its
common shares in the near future. In addition, the Company's bank
line of credit agreement precludes the payment of dividends.
ITEM 6. SELECTED FINANCIAL DATA
June 2, May 28, May 29, May 30, May 31,
Year Ended 1996 1995 1994 1993 1992
(Information in Thousands, except Net Income (Loss) Per Share)
Net Sales $33,774 $27,054 $17,975 $21,198 $23,311
Cost of Goods Sold 25,509 20,727 14,238 15,947 17,267
Gross Profit 8,265 6,327 $3,737 $5,251 $6,044
Operating Expenses:
Marketing $2,633 $2,346 $1,878 $2,164 $2,154
Design Engineering 1,575 1,269 934 1,158 1,050
General & 2,491 1,955 1,956 1,946 1,961
Administrative
$6,699 $5,570 $4,768 $5,268 $5,165
Operating Income
(Loss) $1,566 $757 ($1,031) ($17) $879
Other 84 22 (1) 18 (29)
Interest Expense (742) (446) (288) (232) (204)
Income (Loss) Before
Income Taxes $908 333 (1,320) (231) 646
Income Taxes (Note 25 -- -- -- --
4)*
Net Income (Loss) $883 $333 ($1,320) ($231) $646
Net Income (Loss) Per
Share $0.40 $0.16 ($0.64) ($0.11) $0.31
Total Assets $18,730 $15,429 $10,667 $10,109 $11,074
Property Plant & $2,849 $3,002 $1,725 $2,082 $2,071
Equipt., Net
Working Capital $3,754 $2,942 $2,913 $3,831 $3,896
Long Term Notes Payable $935 $1,221 $233 $354 $166
Stockholders' Equity $5,571 $4,484 $4,069 $5,439 $5,686
*Refers to notes appearing in Notes to Consolidated Financial Statements
under Item 8.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net sales for fiscal 1996 were $33,774,000, up 24,8% from net sales of
$27,054,000 in fiscal 1995 and 87.9% from sales of $17,975,000 in fiscal
1994. The improvement is due principally to three factors:
* First, the global telecommunications/data-communications market,
including local and wide area networking has been strong, fueled by
advances in technologies and strong domestic and growing foreign economies.
These conditions provided enhanced opportunities for sale of the Company's
products to OEMs manufacturing items such as telephones, modems, point of
sale and industrial measuring equipment.
* Second, the Company's emphasis on teams with strong engineering
capabilities and design activities that are driven principally by OEM
product application needs resulted in the development of 15 new products
during fiscal 1996. In addition to increased sales to existing customers,
this enabled the Company to make sales to several new OEM customers who are
major participants in the market served by the Company. Several new
products, including new generation switching power supplies, with enhanced
features that are important to OEMs are in various stages of development
for fiscal 1997 and future market introduction.
* Lastly, subcontracting arrangements in China and other areas of South
East Asia, and greater utilization of the Korean facility enabled the
Company to lower manufacturing costs and, therefore, to better compete for
price sensitive orders and to fulfill the broader product needs of its OEM
customers.
Compared to fiscal 1996, the lower sales in fiscal 1995 were due to
somewhat weaker market conditions. The lower sales in fiscal 1994 were due
to the Company's inability to compete where pricing was a predominant
issue, as well as to soft market conditions, then existing.
The Company's order backlog at June 2, 1996, was $16,971,000, up from
$10,400,000 at May 28, 1995, and $9,600,000 at May 29, 1994.
Gross profit for fiscal 1996 amounted to $8,265,000 or 24.5% of net sales,
compared to $6,327,000, which was 23.4% of net sales for fiscal 1995, and
$3,737,000 equaling 20.8% of net sales in fiscal 1994. Increased freight
cost to expedite material deliveries, and greater material cost, had an
adverse impact on gross margin in fiscal 1995. Fiscal 1994 margin was
reduced by reserves that were established for excess inventories and
because a smaller portion of the lower revenue had come from domestic
manufacturing; the greater portion coming from foreign manufacturing
sources. Products that are manufactured in the US by the Company generally
have had higher margins compared to those manufactured abroad when they
have competitive advantages in shorter delivery times and value added
features. Fiscal 1996 gross margin benefited from the greater revenue
compared to the levels of fixed cost incurred by the Company, although the
proportion of revenue from US manufactured products had not increased. The
Company anticipates continued modest improvements in gross margin from
increased revenue, cost controls, and more products designed for US
manufacturing.
Although products that were manufactured by the Korean subsidiary
contributed a very significant portion of total sales, conversion of the
Won to US dollars has had no significant impact on gross profit because the
conversion rates have been relatively stable.
Operating expenses for fiscal 1996 totaled $6,699,000, or 19.8% of net
sales, compared to $5,571,000 and $4,768,000, which equaled 20.6% and 26.5%
of net sales for each year, respectively. The increased expenditures in
fiscal 1996 were principally due to greater but proportionate commissions
paid on higher sales, and increased engineering and administrative costs
due respectively, to greater agency fees to certify new products and larger
administrative costs associated with foreign business activities. The
Company also paid performance bonuses equaling two weeks of payroll to all
employees in fiscal 1996, compared to one week in fiscal 1995. It is
anticipated that all of these expenditures will continue in the future
commensurate with levels of business. In fiscal 1994, anticipating
declining sales, the Company reduced the number of its indirect employees
and had restructured its remaining workforce to reduce costs.
The Company reported operating income of $1,566,000 in fiscal 1996 and
$757,000 in fiscal 1995, and an operating loss of $1,031,000 in fiscal
1994.
In fiscal 1996, 1995 and 1994, the Company incurred interest expense of
$742,000, $446,000 and $288,000, respectively, increasing each year
principally because of greater borrowings to support growth in revenues.
Non-operating income of $84,000 in fiscal 1996 and $22,000 in fiscal 1995
came mainly from currency exchange rate gains related to importation of raw
material by the Korean subsidiary.
The Company incurred US income taxes of $25,000 in fiscal 1996, due to
application of the Alternative Minimum Income Tax. At year end, the Company
had $633,000 in tax credits available to reduce future income taxes
payable, and $616,000 in net operating loss carryforwards to reduce future
taxable income. See Note 4 under NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS. Ault Korea accrued no income taxes in fiscal 1996 because of
loss carryforwards that are currently available and applicable through
fiscal 1999.
The Company had net income of $883,000, or $0.40 per share for fiscal 1996,
and net income of $333,000 in fiscal 1995 amounting to $0.16 per share. In
fiscal 1994, the Company had net loss of $1,320,000 or per share loss of
$0.64. Because of the strong order backlog, mentioned above, it is
anticipated that revenue and net profit for the first quarter of fiscal
1997 will compare very favorably with performance achieved in the first
quarter of fiscal 1996. The Company reported revenue of $6,881,000, and
net profit of $62,000 for that quarter. Revenue and net profit for all of
fiscal 1997 are also anticipated to improve, compared to fiscal 1996, if
the Company's strategies for continued new product introductions and
competitive pricing through utilization of offshore manufacturing continue
to succeed and if current favorable market conditions persist.
Liquidity and Capital Resources
The Company's strategies for customer service and growth in sales and
profits in fiscal 1996 were to utilize its cash resources to pursue the
opportunities that would be available if the growing favorable market
condition continued. Principal among these resources were its bank credit
facilities and working capital derivable from operations cash flows.
Expenditure for investing activities that were within affordability of
these resources were also seen as a critical element. At the end of fiscal
1996, the Company had cash of $412,000, up from $319,000 when the year
began, mainly through borrowings under its financing activities to provide
the cash used in its operating and investing activities. Operating
activities used $1,378,000 of cash which was comprised principally of cash
provided by net income and adjustments, trade payable and accrued expenses,
and also cash used in inventories and trade receivables. Net income and
adjustments provided $1,378,000 of cash, of which net income provided
$883,000. Adjustments to net income provided $419,000 of cash of which
depreciation, the principal item, provided $509,000. Growth in trade
receivables mainly from the strong shipments in the fourth quarter used
$2,106,000 of cash. Further use of cash by trade receivables is
anticipated in fiscal 1997 because of expected growth in revenues.
Increases in inventories used $1,243,000 of cash, principally to maintain
certain levels of finished products close to the operations of major
customers for quick response to flexible requirements. Provision of this
support to customers is a competitive factor in securing certain large
orders. The Company is looking at measures that will reduce the levels of
products that must be stored to meet the needs of these customers. Trade
payables and accrued expenses provided $658,000 of cash of which trade
payable provided $152,000. In spite of the increased revenue in fiscal
1996, trade payables grew only nominally because of actions to bring
payables of the Korean subsidiary to a more current basis. Accrued
expenses including salaries and bonuses, income taxes and commissions to
sales representatives provided $506,000 of cash.
Investing activities, which were comprised of purchases of equipment and a
US patent used $515,000 of cash. Expenditure on equipment used $356,000 of
cash, a modest expenditure in view of the levels of revenue for the fiscal
year. Greater levels of expenditures will be required to support
anticipated growth in revenues in fiscal 1997. The balance of $159,000 is
comprised principally of the cost of a US patent on power supply technology
acquired by the Company. The patent enables the Company to accelerate its
plan to offer products with enhanced power features.
Financing activities comprised of borrowings under the credit facilities,
receipts from the exercise of stock options, and payments on long-term
obligations provided $1,959,000 of cash. Activities on long-term
obligations which were related to mortgage payments and capital leases used
$267,000 of cash. See Note 3 under NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS. The Company customarily leases certain portions of its capital
asset requirements, and plans to utilize this means of financing in the
future. Receipts from the exercise of common stock options amounted to
$177,000. At the end of fiscal 1995, the Company had a revolving credit
facility at its US bank amounting to $4,500,000. During the second
quarter of fiscal 1996, the Company negotiated a new agreement that
increased the credit facility to $6,000,000 effective October 1, 1995. At
June 2, 1996, $400,000 of the credit facility was being utilized to provide
a standby letter of credit to Korea Exchange Bank in Korea. This letter of
credit serves as additional collateral to the beneficiary for credits
extended to the Korean subsidiary. No claims have been presented against
it. The balance of $5,600,000 provides working capital to the US
operations at a rate of interest that is 2.0% above the bank's base rate,
down from 4.0% on the old credit facility. At June 2, 1996, utilization
amounted to $4,350,000, up by $780,000 from $3,570,000 when the year began.
Amounts available for borrowing totaled $1,250,000. Negotiations currently
in progress are expected to conclude during the first quarter of fiscal
1997 with adjustments requested by the Company including reduction in the
rate of interest. In fiscal 1996, Ault Korea Corporation established a
$1,500,000 line of credit with Korea Exchange Bank for overdrafts and other
purposes. Utilization at June 2, 1996 amounted to $1,268,000.
The effect of currency exchange rate changes on the translation of the
Korean financial statements from Korean won to US dollars resulted in net
asset value increase of $28,000 for the fiscal year. All of the Company's
sales contracts and foreign subcontracts are in US dollars, and therefore,
the Company assumes no currency exchange risks. Other foreign contracts
are not significant in amounts at this time; therefore, exposure to
currency exchange risks is minimal.
The Company's working capital increased to $3,754,000 at June 2, 1997, from
$2,942,000 at May 29, 1995. Long-term debt decreased from $1,221,000 to
$935,000 during the same period.
The Company believes that cash flows from anticipated profit and other
operating activities together with its credit facilities will be adequate
to support normal growth in revenues through fiscal 1997. Current market
conditions and successful strategies of the Company, however, have
presented the opportunities for enhanced service to customers and expansion
in revenues and profits, for which current resources would be inadequate.
For these reasons, the feasibility of raising the necessary capital through
sale of common shares is being evaluated.
Factors Affecting Future Performance
From time to time, in reports filed with the Securities and Exchange
Commission, in press releases, and in other communications to shareholders
or the investing public, the Company may comment on anticipated future
financial performance. Such forward looking statements are subject to
risks and uncertainties, including, but not limited to the overall level of
activity in the telecommunications/data communications market, buying
patterns of the Company's existing and prospective customers, the impact of
new products introduced by competitors, higher than expected expense,
related to sales and new marketing initiatives, availability of adequate
supplies of raw materials and components, and other risks involving the
telecommunications/data communications industry generally.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) Financial Statements
Index to Consolidated Financial Statements
Page
* Independent Auditor's Report 14
* Consolidated Balance Sheets, June 2, 1996
and May 28, 1995 15
* Consolidated Statements of Operations for
the Years Ended June 2, 1996, May 28, 1995,
and May 29, 1994 17
* Consolidated Statements of Stockholders'
Equity for the Years Ended June 2, 1996,
May 28, 1995 and May 29, 1994 18
* Consolidated Statements of Cash Flows
for the Years Ended June 2, 1996,
May 28, 1995 and May 29, 1994 20
* Notes to Consolidated Financial Statements 22
(b) Supplementary Financial Information
* Quarterly Financial Data 31
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Ault Incorporated and Subsidiary
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of Ault
Incorporated and Subsidiary as of June 2, 1996, and May 28, 1995, and the
related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three fiscal years in the period ended June 2,
1996. 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 that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Ault
Incorporated and Subsidiary as of June 2, 1996, and May 28, 1995, and the
results of their operations and their cash flows for each of the three
fiscal years in the period ended June 2, 1996, in conformity with generally
accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Minneapolis, Minnesota
July 10, 1996
AULT INCORPORATED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 2, 1996 and May 28, 1995
ASSETS (Note 3) June 2, 1996 May 28, 1995
Current Assets
Cash $412,406 $319, 243
Trade Receivables, less allowance
for doubtful accounts 1995 $38,000;
1994 $131,000 7,335,888 5,380,642
Inventories (Note 2) 7,272,794 6,001,464
Prepaid and other expenses 460,078 485,200
Total Current Assets 15,481,166 12,186,549
Other Assets
Other receivable, less allowance of
$65,000 (Note 10) 196,677 196,677
Patent 181,528 --
Other 21,709 43,877
399,414 240,554
Property, Equipment and Leasehold
Improvements, at cost (Note 8)
Land 825,809 825,809
Building 735,413 731,956
Machinery and equipment 5,112,855 4,843,319
Office furniture and equipment 593,481 554,130
Data processing equipment 1,004,749 960,780
Leasehold improvements 686,619 686,619
8,958,926 8,602,613
Less accumulated depreciation 6,109,895 5,600,436
2,849,031 3,002,177
$18,730,111 $15,429,280
See Notes to Consolidated Financial Statements.
LIABILITIES AND STOCKHOLDERS' EQUITY June 2, 1996 May 28, 1995
Current Liabilities
Note payable to bank (Note 3) $5,617,820 $3,569,613
Current maturities on long-term debt 387,664 333,731
Accounts payable 4,512,539 4,578,468
Accrued expenses:
Compensations 556,448 373,312
Other 627,333 389,496
Income tax payable (Note 4) 25,000 --
Total current liabilities 11,727,104 9,244,620
Long-term Debt, less current maturities
(Note 3) 935,064 1,221,196
Deferred Rent Expense (Note 8) 163,972 192,877
Deferred Compensation/Severance 332,716 287,039
Commitments and Contingencies (Notes
5,6, and 8)
Stockholders' Equity (Notes 6 and 7)
Preferred stock, no par value;
authorized 1,000,00 shares; none
issued
Common stock, no par value;
authorized 5,000,000 shares;
issued and outstanding 1995
2,083,776; 1994 2,062,526 shares 6,966,779 6,897,332
Deduct notes receivable arising from
the sale common stock -- (107,813)
Foreign currency translation
adjustment (83,928) (111,686)
Accumulated deficit (1,311,596) (2,194,285)
5,571,255 4,483,548
$18,730,111 $15,429,280
AULT INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended June 2, 1996, May 28, 1995, and May 29, 1994
June 2,1996 May 28,1995 May 29,1994
Net sales $33,773,875 $27,054,421 $17,974,661
Cost of goods sold 25,509,262 20,727,224 14,237,723
Gross profit 8,264,613 6,327,197 3,736,938
Operating expenses:
Marketing 2,632,857 2,346,459 1,877,777
Design engineering 1,575,038 1,268,874 934,624
General and
administrative 2,491,057 1,955,311 1,955,965
6,698,952 5,570,644 4,768,366
Operating
income (loss) 1,565,661 756,553 (1,031,428)
Non-operating income
(expense):
Other 84,333 22,325 (851)
Interest expense (742,305) (445,611) (287,563)
Income (loss)
before income
taxes 907,689 333,267 (1,319,842)
Income taxes (Note 4) 25,000 0 0
Net income
(loss) 882,689 $333,267 $(1,319,842)
Net income (loss) per
share $0.40 $0.16 $(0.64)
Weighted average
number of shares
and common
equivalent shares
outstanding 2,223,543 2,105,556 2,062,526
See Notes to Consolidated Financial Statements.
AULT INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended June 2, 1996, May 28, 1995, and May 29, 1994
Notes
Receivable
From Sale of
Common Stock Common
Shares Amount Stock
Balance, May 30, 1993 2,062,526 $6,862,801 $(107,813)
Net loss 0 0 0
Net change in foreign
currency translation
adjustment 0 0 0
Balance, May 29, 1994 2,062,526 6,862,801 (107,813)
Net income 0 0 0
Net change in foreign
currency translation
adjustment 0 0 0
Issuance of 21,250 shares of
common stock in accordance
with the stock option plan
(Note 6) 21,250 34,531 0
Balance, May 28, 1995 2,083,776 $6,897,332 $(107,813)
Net income 0 0 0
Net change in foreign
currency translation
adjustment 0 0 0
Issuance of 36,000 shares of
common stock in accordance
with the stock option plan
(Note 6) 36,000 69,447 0
Payment of Notes receivable
which arose from the sale
of common stock 0 0 (107,813)
Balance, June 2, 1996 2,119,776 $6,966,799 $ 0
See Notes to Consolidated Financial Statements.
AULT INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
Years Ended June 2, 1996, May 28, 1995, and May 29, 1994
Foreign
Currency
Accumulated Translation
Deficit Adjustment Total
Balance, May 30, 1993 $(1,207,710) $(107,806) $ 5,439,472
Net loss (1,319,842) 0 (1,319,842)
Net change in foreign
currency translation
adjustment 0 (50,254) (50,254)
Balance, May 29, 1994 (2,527,552) (158,060) 4,069,376
Net income 333,267 0 333,267
Net change in foreign
currency translation
adjustment 0 46,374 46,374
Issuance of 21,250 shares of
common stock in accordance
with the stock option plan
(Note 6) 0 0 34,531
Balance, May 28, 1995 $(2,194,285) $(111,686) $4,483,548
Net income 882,689 0 882,689
Net change in foreign
currency translation
adjustment 0 27,758 27,758
Issuance of 36,000 shares of
common stock in accordance
with the stock option plan
option plan (Note 6) 0 0 69,447
Payment of notes receivable
which arose from the sale
of common stock 107,813
Balance, June 2, 1996 $1,311,596 $(83,928) $5,571,255
See Notes to Consolidated Financial Statements.
AULT INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 2, 1996, May 28, 1995, and May 29, 1994
June 2, May 28,1995 May 29, 1994
1996
Cash Flows From Operating
Activities
Net income (loss) $882,689 $333,267 $(1,319,842)
Adjustments to reconcile
net income (loss) to net
cash provided by (used
in) operating activities:
Depreciation 509,458 528,109 481,570
Amortization 2,363 2,451 1,078
Provision for doubtful
accounts 67,000 10,000 61,000
Provision for inventory
allowance (130,000) (272,000) 307,000
Loss on disposal of
equipment 0 0 191
Deferred rent expense (28,905) (15,505) (3,005)
Changes in assets and
liabilities:
(Increase) decrease
in:
Trade receivables (2,106,114) (1,652,739) (1,017,574)
Inventories (1,242,606) (1,123,580) (375,417)
Prepaid and other
expenses 10,511 (156,607) 157,142
Increase (decrease)
in:
Accounts payable 480,653 1,264,569 897,723
Accrued expenses 480,653 147,251 89,082
Net cash pro-
vided by(used
in)operating
activities (1,378,418) (934,784) (721,052)
Cash Flows From Investing
Activities
Proceeds from sale of
equipment 0 0 1,114
Purchase of property and
equipment (356,312) (1,720,930) (100,530)
(Increase) decrease in
other assets (158,573) 40,992 8,122
Net cash used in
investing
activities (514,885) (1,679,938) (91,294)
AULT INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended June 2, 1996, May 28, 1995, and May 29, 1994
June 2, 1996 May 28, 1995 May 29, 1994
Cash Flows From Financing
Activities
Net borrowings (payments)
on revolving credit
agreement 2,048,207 1,589,669 1,048,552
Proceeds from long-term
borrowings 0 1,517,290 0
Net proceeds from
issuance of common
stock 69,447 34,531 0
Principal payments on long-
term borrowings,
including capital
lease obligations (266,759) (387,303) (130,550)
Net cash provided
by (used in)
financinng
activities 1,958,708 2,754,187 918,002
Effect of Foreign Currency
Exchange Rate Changes on
Cash 27,758 46,374 (50,254)
Increase (decrease) in
cash 93,163 185,839 55,402
Cash
Beginning 319,243 133,404 78,002
Ending $412,406 $319,243 $133,404
Supplemental Disclosures of
Cash Flow Information
Cash payments for:
Interest $676,810 $414,979 $284,736
Supplemental Schedule of Non-
cash Financing Activities
Capital lease obligations
for equipment $ 0 $50,142 $25,672
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Nature of business: The Company and its subsidiary operate in one business
segment which includes the design, manufacturing and marketing of power
conversion products, principally to original equipment manufacturers of
data communications equipment, micro-computers and related peripherals,
tele-communications equipment, and portable medical equipment. Sales are
to customers worldwide, and credit is granted based upon the credit
policies of the Company.
A summary of the Company's significant accounting policies follows:
Principles of consolidation: The accompanying consolidated financial
statements include the accounts of Ault Incorporated and its wholly-owned
subsidiary, Ault Korea Corporation. All significant inter-company
transactions have been eliminated. The foreign currency translation
adjustment represents the translation into United States dollars of the
Company's investment in the net assets of its foreign subsidiary in
accordance with the provisions of FASB Statement No. 52.
Cash: The Company maintains its cash in bank deposit accounts which, at
times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts.
Inventories: Inventories are stated at the lower of cost (first-in, first-
out method) or market.
Prepaid and other expenses: Prepaid and other expenses at June 2, 1996,
and May 28, 1995, include refundable value added tax and refundable custom
duties relating to the Korean operations of approximately $303,000 and
$335,000, respectively.
Patent: The patent is stated at cost, will start to be used during fiscal
year 1997, and will be amortized using the straight-line method over its
economic useful life, which has been estimated to be three years.
Depreciation: It is the Company's policy to include depreciation expense
on assets acquired under capital leases with depreciation expense on owned
assets. Depreciation is based on the estimated useful lives of the
individual assets. The methods and estimated useful lives are as follows:
Method Years
Building Straight-line 36
Machinery and equipment Straight-line 3-10
Office furniture and Straight-line 5-10
equipment
Data processing equipment Double declining balance
and straight-line 5
Leasehold improvements Straight-line 5-10
Deferred compensation/severance: Deferred compensation/severance
represents the accrual of compensation expense for the Korean operations
employees that is payable upon termination of employment.
Design engineering: Design engineering costs are those incurred for
research, design and development of new products and redesign of existing
products. These costs are expensed currently.
Income taxes: Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences,
and operating loss and tax credit carryforwards and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects
of changes in tax laws and rates on the date
of enactment.
Investment tax credits, research and development credits, and job credits
are accounted for by the flow-through method whereby they reduce income
taxes currently payable and the provision for income taxes in the period
the assets giving rise to such credits are placed in service. To the
extent such credits are not currently utilized on the Company's tax return,
deferred tax assets, subject to considerations about the need for a
valuation allowance, are recognized for the carryforward amount.
Use of estimates in the preparation of financial statements: 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 disclosures
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.
Fair value of financial instruments: The following methods and assumptions
were used to estimate the fair value of each class of financial
instruments:
Cash equivalents: The carrying amount approximates fair value.
Long-term debt: The fair value of the long-term debt is estimated based on
interest rates for the same or similar debt offered to the Company having
the same or similar remaining maturities and collateral requirements. The
carrying value of the long-term debt approximates fair value.
Recently issued accounting standards: In October 1995, the FASB issues
SFAS No. 123, Accounting for Stock-Based Compensation, which establishes a
fair-value-based method for financial accounting and reporting for stock-
based employee compensation plans. However, the new standard allows
compensation to continu7e to be measured by using the intrinsic value-based
method of accounting prescribed by Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees, but requires expanded
disclosures. SFAS No. 123 is effective in fiscal year 1997. The Company
has elected to continue to apply the intrinsic value-based method of
accounting for stock options.
Earnings (loss) per share: Earnings (loss) per share have been computed
using the weighted average number of common shares and, for the fiscal
years ended June 2, 1996, and May 28, 1995, certain dilutive common
equivalent shares outstanding. None of the common equivalent shares have
been included in the computation for the years ended May 29, 1994, and May
29, 1994, since their inclusion would have an antidilutive effect.
Fiscal year: The Company operates on a 52 to 53 week fiscal year. The
fiscal years for the financial statements presented ended June 2, 1996, May
28, 1995, and May 29, 1994.
Note 2. Inventories
The components of inventory at May 28, 1995, and May 29, 1994, are as
follows:
1996 1995
Raw materials $4,263,468 $4,158,430
Work in process 318,711 530,150
Finished goods 2,690,615 1,312,884
$7,272,794 $6,001,464
The inventory amounts at May 28, 1995, presented net of a $130,000
inventory valuation allowance. There is no valuation allowance at June 2,
1996.
Note 3. Financing Arrangements and Long-Term Debt
Financing arrangement: At June 2, 1996, the Company had a $6,000,000
revolving line of credit agreement and had approximately $1,234,000 of
unused availability under the line. As part of this agreement, $400,000 is
available as a standby letter of credit. This $400,000 letter of credit
was issued but not drawn upon on June 2, 1996. Interest on advances is
payable at 1 to 3 percent over the bank's base rate, which is determined by
the amount outstanding under this line, currently 11 percent at June 2,
1996. All advances are due on demand and are secured by all of the
Company's assets. In addition, the agreement contains certain reporting
and operating covenants, one of which is restriction on payment of
dividends. Also, the Company's Korean subsidiary maintains a $1,500,000
facility agreement to cover bank overdrafts, short-term financing, and
export financing.
Long-term debt:
1996 1995
9% mortgage payable, due in various
installments ranging from $39,476 to
$159,761, including interest to March
2000, secured by land and building $1,033,007 $1,236,776
Capitalized lease obligations, due in
various monthly installments with
interest ranging from 8.9% to 16.3%,
to Mach 1998, secured by equipment 149,721 267,784
Other notes payable 50,367
Total $1,322,728 $1,554,927
Less current maturities 387,664 333,731
$935,064 $1,221,196
Approximate maturities of long-term debt for years subsequent to June 2,
1996, are as follows:
1997 $338,000
1998 368,000
1999 264,000
2000 303,000
$1,323,000
Note 4. Income Taxes
Pretax income (loss) for domestic and foreign operations was as follows:
1996 1995 1994
Domestic $891,344 $252,514 $ 929,178)
Foreign (8,655) 80,753 ( 390,664)
Total $882,689 $333,267 (1,319,842)
Income tax expense (credits) for the years ended May 28, 1995, May 29,
1994, and May 30, 1993, differs from the expected rate for the following
reasons:
1996 1995 1994
Computed expected tax provision
(benefit):
Domestic $367,000 $101,000 $(315,000)
Foreign -- 7,000 (82,000)
State 6,000 6,000 (40,000)
Generation (utilization) of net
operating loss carryforwards
Domestic (348,000) (107,000) 355,000
Foreign -- (7,000)
Effect of Korean tax holiday 82,000
status
$25,000 $ -- $ --
Net deferred taxes consist of the following components as of June 2, 1996,
and May 28, 1995:
1996 1995
Deferred tax assets:
Tax credit carryforwards $633,000 $660,000
Loss carryforwards 161,000 407,000
Allowance for doubtful accounts 46,000 41,000
Inventory allowances 23,000 43,000
Accrued vacation 30,000 27,000
Accrued warranty 31,000 27,000
Equipment and leasehold
improvements 118,000 117,000
1,042,000 1,322,000
Less valuation allowance 1,042,000 1,322,000
Deferred tax liabilities:
Equipment and leasehold
improvements
$ - $ -
During the years ended June 2, 1996, and May 28, 1995, the Company recorded
a valuation allowance of $1,042,000 and $1,322,000, respectively, on the
deferred tax assets to reduce the total to an amount that management
believes will ultimately be realized. Realization of deferred tax assets
is dependent upon sufficient future taxable income during the period that
temporary differences and carryforwards are expected to be available to
reduce taxable income.
At June 2, 1996, the Company had net operating loss carryforwards to reduce
future taxable income in the United States and Korea of approximately
$190,000 and 426,000, respectively. The Company also has tax credit
carryforwards of approximately $663,000 available to offset against future
income taxes in the United States for income tax purposes. The net
operating loss and tax credit carryforwards expire in varying amounts as
follows for income tax reporting purposes:
Net Operating Loss Tax Credits
1997 $ 27,000
1998 78,000
1999 426,000 234,000
2000 52,000
2001 22,000
2004 14,000
2005 42,000
2006 40,000
2007 35,000
2008 31,000
2009 187,000 13,000
2010 3,000 41,000
2011 4,000
$616,000 $663,000
Note 5. Employee Benefit Plans
Pension Plan: The Company has a pension plan covering substantially all
U.S. employees. The Company is required to match 25 percent of the
employees' first 6 percent of contributions and may make additional
contributions to the plan to the extent authorized by the Board of
Directors. The contribution amount charged to operating expenses in the
years ended June 2, 1996, May 28, 1995, and May 29, 1994, approximated
$38,000, $33,000 and $32,000, respectively.
Stock Purchase Plan: On March 10, 1996, the Company established a stock
purchase plan in which up to 600,000 shares of common stock may be
purchased by employees. The purchase price is equal to the lesser of 85
percent of the fair market value of the shares on the date the Phase
commences or 85 percent of the fair market value of the shares on the
termination date of the Phase. Each Phase is one year and the commencement
date of Phase I was March 18, 1996. Shares may be purchased in March 1997,
the end of Phase I, for employees currently participating; therefore, no
shares have been purchased under this plan during the fiscal year ended
June 2, 1996.
Note 6. Stock Option Plan
The Company has a Stock Option Plan which provides up to 500,000 shares to
be designated as either non-qualified or incentive options at the
discretion of the Board of Directors. The plan provides for annual grants
of options to officers, other key employees and non-employee directors.
The following is a summary of the options granted, expired, and
outstanding:
Number Option Price
of
Shares Per Share Total
Outstanding at May 30, 1993 268,650 $1.375-3.50 $ 592,656
Expired (59,400) 1.375-3.50 (137,106)
Outstanding at May 29, 1994 209,250 1.625-3.50 455,550
Granted 81,000 1.188 96,188
Exercised (21,250) 1.625 (34,531)
Expired (5,750) 1.188-3.50 (12,500)
Outstanding at May 28, 1995 263,250 1.188-3.50 504,707
Granted 100,000 2.313 231,300
Exercised (36,000) 1.188-2.75 (69,447)
Outstanding at June 2, 1996 327,250 $1.188-3.50 $666,560
All of the options above are non-qualified. At June 2, 1996, options to
purchase 211,550 shares of common stock were exercisable under the plan.
The Company has available 46,950 shares for future option grants.
Note 7. Stockholders' Equity
The Board of Directors is empowered to establish and to designate classes
and series of preferred shares and to set the terms of such shares,
including terms with respect to redemption, dividends, liquidation,
conversion, and voting rights. The Restated Articles provide that the
preferred shares are senior to the common shares with respect to dividends
and liquidation. No preferred shares have been issued.
During the fiscal year ended June 2, 1996, the Company adopted a
shareholders' rights plan. Under this plan, a Class A, Junior
Participating Preferred Stock with no par value was created. In addition,
a dividend of one Right was declared for each share of common stock at an
exercise price of $36 per Right and a redemption price of $0.001 per Right.
Each Right is equal to a right to purchase one one-hundredth of a share of
the Class A, Junior Participating Preferred Stock. 50,000 shares of
preferred stock are reserved for the exercise of the Rights. No Rights
were exercised during the year ended June 2, 1996.
Note 8. Commitments and Contingencies
Capital leases: The Company is leasing certain equipment under capital
leases. The cost and accumulated depreciation of assets acquired under
capital leases at June 2, 1996 and May 28, 1995, are as follows:
1996 1995
Cost $684,114 $684,114
Accumulated depreciation 461,136 338,618
$222,978 $345,496
The future minimum lease payments under capital leases and the aggregate
present value of the net minimum lease payments at June 2, 1996, are as
follows:
1997 $485,706
1998 436,778
1999 308,564
2000 319,996
Total minimum lease payments 1,551,064
Less amount representing interest 228,336
$1,322,728
The capital lease obligations are included under long-term debt.
Operating leases: The Company leases its United States plant under an
operating lease with a term of 120 months through August 1999. In
addition, certain equipment and motor vehicles are leased under operating
leases with terms of approximately 36 months.
The lease on the United States plant and office facilities includes
scheduled base rent increases over the term of the lease. The total amount
of the base rent payments is being charged to expense on the straight-line
method over the term of the lease. In addition to the base rent payment,
the Company pays a monthly allocation of the building's operating expenses.
The Company has recorded a deferred credit to reflect the excess of rent
expense over cash payments since inception of the lease.
Approximate minimum annual rental commitments at June 2, 1996, are as
follows:
Amount
1997 $288,000
1998 275,000
1999 263,000
2000 70,000
2001 2,000
$898,000
Total rental expense for the years ended June 2,1996, May 28, 1995, and May
29, 1994, was approximately $385,000, $428,000, and $372,000, respectively.
Note 9. Operations Information
Foreign manufacturing is done by the Korean subsidiary and certain
nonaffiliated companies in China and Thailand. All United States
manufacturing is done by Ault Incorporated. A summary of the Company's
manufacturing operations by geographic area is presented below:
1996 1995 1994
United States:
Customer sales $33,359,291 $26,785,479 $17,699,823
Sales to subsidiary
Total $33,359,291 $26,785,479 $17,699,823
Operating profit (loss) $1,560,693 $ 710,964 $(700,168)
Total assets 14,414,074 11,823,983 8,917,705
Capital expenditures 194,129 144,894 94,583
Depreciation and amortization 314,810 359,280 330,450
Korea:
Customer sales $414,584 $ 268,942 $274,838
Sales to parent 10,496,364 8,751,528 5,237,870
Total $10,910,948 $ 9,020,470 $ 5,512,708
Operating profit (loss) $62,970 $ 90,209 $(361,329)
Total assets 6,505,582 6,198,105 3,118,965
Capital expenditures 162,183 1,626,273 36,079
Depreciation and amortization 197,011 171,280 152,158
Adjustments and eliminations:
Intercompany sales 10,496,364 8,751,528 5,237,870
Operating profit (loss) ( 44,620) 30,069
Total assets (2,186,545) (2,592,808) (1,369,980)
Consolidated:
Sales 33,773,875 27,054,421 17,974,661
Operating profit (loss) 1,565,661 756,553 (1,031,428)
Total assets 18,730,111 15,429,280 10,666,690
Capital expenditures 356,312 1,771,167 130,662
Depreciation and amortization 511,821 530,560 482,608
Sales from the subsidiary to the parent company are based upon profit
margins which represent competitive pricing of similar products.
Export sales: The Company also had foreign export sales amounting to
20.17, 16.7, and 14.7 percent of total sales for the years ended June 2,
1996, May 28, 1995, and May 29, 1994, respectively.
The sales were made principally to the following locations:
1996 1995 1994
Canada 8.9% 6.5% 9.6%
Elsewhere 10.5% 10.2% 5.1%
19.4% 16.7% 14.7%
Other foreign production: In addition to the manufacturing done by the
Korean subsidiary, the Company also purchased finished assemblies from
certain manufacturers in China and Thailand in amounts approximating
$9,941,000, $5,314,000 and $1,335,000 for the years ended June 2, 1996, May
28, 1995, and May 29, 1994, respectively.
Note 10. Other Receivable
At June 2, 1996, and May 28, 1995, the Company has a receivable in the
amount of $196,677, net of a $65,000 allowance, due from a customer for
whom payment is delinquent. The Company has filed suit, and in the opinion
of management and the Company's legal counsel, the risk of an unfavorable
outcome is minimal. The receivable has been classified as a long-term
asset since the Company is uncertain as to when the receivable will be
collected.
Note 11. Major Customer
The Company has a major customer which accounted for more than 10 percent
of net sales during the year ended June 2, 1996, as follows:
Sales Percentage Accounts Receivable
1996 1995 1994 1996 1995
11.0% 8.8% 9.4% 14.8% 10.1%
ITEM 8(b). SUPPLEMENTAL FINANCIAL INFORMATION
QUARTERLY FINANCIAL DATA
(Unaudited)
(Amounts in Thousands, Except Per Share Data)
Fiscal Quarters
1996 1st 2nd 3rd 4th
Net Sales $6,881 $7,711 $8,972 $10,210
Gross Profit $1,730 $1,839 $2,059 $2,637
Income (Loss) Before Income $62 $200 $270 $376
Taxes
Net Income (Loss) $62 $200 $270 $351
Earnings (Loss) Per Share $0.03 $0.09 $0.12 $0.16
1995
Net Sales $5,711 $5,899 $7,217 $8,227
Gross Profit $1,423 $1,404 $1,610 $1,890
Income (Loss) Before Income $44 $80 $83 $126
Taxes
Net Income (Loss) $44 $80 $83 $126
Earnings (Loss) Per Share $0.02 $0.04 $0.04 $0.06
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information called for by Item 405 under Regulation S-K with respect to the
Company's executive officers is contained under Item 1(c), Narrative
Description of The Business-Executive Officers of the Registrant. The
information required by this item with respect to directors will be
presented under the caption "Election of Directors" in the Company's
definitive proxy statement for its Annual Meeting to be held on October 1,
1996, and is expressly incorporated herein by reference. Such proxy
statement will be filed with the Securities and Exchange Commission not
later than 120 days from the end of the Company's 1996 fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 402 under Regulation S-K, to the extent
applicable, will be set forth under the caption "Executive Compensation and
Other Information" and under "General" in the Company's definitive proxy
materials for its October 1, 1996 Annual Meeting to be filed within 120
days from the end of the Company's fiscal year 1996 which information is
expressly incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information called for by Item 403 under Regulation S-K, to the extent
applicable, will be set forth under the caption "Security Ownership of
Principal Shareholders and Management" in the Company's definitive proxy
statement for its October 1, 1996 Annual Meeting to be filed within 120
days from the end of the Company's fiscal year 1996, which information is
expressly incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not Applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following financial statements are included in Part II, Item 8:
Page
Independent Auditor's Report
Consolidated Financial Statements:
- Balance Sheets, June 2, 1996 and May 28, 1995 15
- Consolidated Statements of Operations for the
Years Ended June 2, 1996, May 28, 1995, and May 29, 17
1994
- Consolidated Statements of Stockholders' Equity
for the Years Ended June 2, 1996, May 28, 1995,
May 29, 1994 18
- Consolidated Statements of Cash Flows for the
Years Ended June 2, 1996, May 28, 1995, and May 29, 20
1994
- Notes to Consolidated Financial Statements 22
(2) The following financial statement schedule for the
years ended June 2, 1996, May 28, 1995 and May 29,
1994 is submitted herewith following the signature
page of this report:
- Independent Auditor's Report on the Schedule 36
- Schedule II - Valuation and Qualifying Accounts 37
All other Schedules are omitted because they are not
applicable of the required information is shown in
the financial statements or notes thereto.
(3) Exhibits 39
(a) The Exhibits required to be filed with this
report or incorporated by referrence aare listed
in the Exhibit Index which follows the
Financial Statement Schedules.
(b) Reports on Form 8-K During 3 Months Ended June 2,
1996:
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Ault Incorporated has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
AULT INCORPORATED
/s/Frederick M. Green August 22, 1996
Frederick M. Green
President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Signature Title Date
/s/Frederick M. Green President, Chief August 22, 1996
Frederick M. Green Executive Officer
and Director
/s/Carlos S. Montague Vice President, August 22, 1996
Carlos S. Montague Treasurer, Chief
Financial Officer,
Assistant Secretary
and Controller*
/s/Matthew A. Sutton Director August 22, 1996
Matthew A. Sutton
/s/Eric G. Mitchell, Jr. Director August 22, 1996
Eric G. Mitchell, Jr.
/s/Delbert W. Johnson Director August 22, 1996
Delbert W. Johnson
/s/John G. Kassakian Director August 22, 1996
John G. Kassakian
/s/Edward C. Lund Director August 22, 1996
Edward C. Lund
/s/James M. Duddleston Director August 22, 1996
James M. Duddleston
*Principal Financial Officer and Principal Accounting Officer
*******************************************************************
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF
AULT INCORPORATED
FOR
YEAR ENDED JUNE 2, 1996
*******************************************************************
FINANCIAL STATEMENT SCHEDULES
*******************************************************************
INDEPENDENT AUDITORS REPORT
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
Ault Incorporated and Subsidiary
Minneapolis, Minnesota
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The consolidated
supplemental schedule II is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not a part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in our audits of the basic consolidated
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic consolidated financial statements taken
as a whole.
McGLADREY & PULLEN,LLP
/s/ McGladrey & Pullen, LLP
Minneapolis, Minnesota
June 10, 1996
SCHEDULE II
AULT INCORPORATED AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
Years Ended May 29, 1995, May 29, 1994, and May 30, 1993
Balance Charged
at to Costs Balance
Beginning and at End of
of Period Expenses Deductions Period
Year Ended June 2, 1996
Allowance for
doubtful accounts $103,000 $67,000 (a) $54,000 $116,000
Reserve for
warranties 66,000 101,000 90,000 77,000
Allowance for
inventory valuation
in excess of net
realizable value 130,000 (130,000) -- --
Year Ended May 28, 1995
Allowance for
doubtful accounts $131,000 $6,000 $34,000 $103,000
Reserve for
warranties 69,000 49,000 52,000 66,000
Allowance for
inventory valuation
in excess of net
realizable value 402,000 (272,000) 0 130,000
Year Ended May 29, 1994
Allowance for
doubtful accounts $160,000 $61,000 (a) $90,000 $131,000
Reserve for
warranties 68,000 37,000 36,000 69,000
Allowance for
inventory valuation
in excess of net
realizable value 106,000 307,000 11,000 402,000
(a)Represents charge-off of accounts receivable, net of recoveries.
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF
AULT INCORPORATED
FOR
YEAR ENDED JUNE 2, 1996
*******************************************************************
EXHIBITS
*******************************************************************
AULT INCORPORATED
EXHIBIT INDEX TO
FORM 10-K FOR THE YEAR ENDED JUNE 2, 1996
Required Regulation S-K
Exhibit Items
SK Title of
Reference Document Location
3(a) Restated Filed as Exhibit 3(a) to Form 10-
Articles of K for fiscal 1988 and
Incorporation, incorporated herein by reference
as amended.
3(b) Bylaws, as Filed as Exhibit 3(b) to
amended.. Registration Statement No. 2-
85224 and incorporated herein by
reference.
4.1 Rights Agreement Filed electronically on Form 8-K
for March 1996 and herein
incorporated by reference.
10.1 Management Filed as Exhibit 10(b) to
Incentive Registration Statement No.2-85224
Compensation and incorporated herein by
Plan reference.
10.2 1986 Employee Filed as Exhibit 10(c) to Form 10-
Stock Option K for fiscal 1987 and
Plan incorporated herein by reference.
10.3 Ten Year Filed as Exhibit 10(e) to Form 10-
Building Lease K for fiscal 1989 and
Contract incorporated herein by reference.
10.4 Financing Filed as Exhibit 10(f) to Form 10-
Agreement on K for fiscal 1995 and
Credit Facility incorporated herein by reference.
10.5 First and Second Filed electronically at page 40
Amendments to as Exhibit 10(g)
Financing
Agreement on
Credit Facility
10.6 Employee Stock Filed electronically Commission
Purchase Plan File #333-4609 and herein
incorporated by reference.
21 Subsidiary of Filed as Exhibit 22 to Form 10-K
Registrant for fiscal 1995 and incorporated
herein by reference.
23 Consent of Filed herewith at Page 48.
Independent
Auditors
27 Financial Data Filed electronically at Page 49.
Schedule
Pursuant to provisions of Item 601(b)(A)(iii)(a) of Regulation S-K, copies
of instruments defining the rights of holders of long-term debt of the
Company are not being filed and in lieu thereof, Company agrees to furnish
copies thereof to the Securities and Exchange Commission upon request.
FIRST AMENDMENT TO
FINANCING AGREEMENT
This First Amendment to Financing Agreement, dated as of September 30,
1995 ("Amendment"), is made by and between AULT INCORPORATED, a Minnesota
corporation (the "Borrower") and REPUBLIC ACCEPTANCE CORPORATION, a
Minnesota corporation ("Republic").
WHEREAS, the Borrower and Republic have entered into a Financing
Agreement dated as of April 28, 1995 (the "Agreement"); and
WHEREAS, the obligations and indebtedness of the Borrower to Republic
under the Agreement are secured, inter alia, by a Security Agreement dated
as of April 28, 1995 between the Borrower and Republic (the "Security
Agreement") and a Pledge Agreement dated as of April 28, 1995, between the
Borrower and Republic (the "Pledge Agreement"); and
WHEREAS, Republic and the Borrower desire to amend the Agreement, the
Security Agreement, and the Pledge Agreement in order to amend certain of
the provisions therein, upon the terms and conditions set forth herein,
NOW THEREFORE, in consideration of the premises and for good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto covenant and agree to be bound as follows:
Section 1. Capitalized Terms. All capitalized terms used herein
and not otherwise defined herein shall have the meanings assigned to them
in the Agreement.
Section 2. Amendments.
2.01 Section II(A) of the Agreement is hereby amended to read as
follows:
(A) We agree to pay interest on the net balance owed to you
at the close of each day at a rate per annum (computed on the
basis of actual number of days elapsed and a year of 360 days)
which is equal to a) from the date of this Agreement through
September 30, 1995, a rate per annum which is four percent (4%)
in excess of the publicly announced reference rate (or other
publicly announced prime rate) of interest charged by the Bank,
and b) from and after September 30, 1995, a rate per annum, which
is three percent (3%) in excess of the publicly announced
reference rate (or other publicly announced prime rate) of
interest charged by the Bank. Such interest will be due and
payable to you at the close of each month.
2.02 Section II(C)of the Agreement is hereby amended to read as
follows:
We agree that there will be a minimum charge net to you of
$10,000 per month until such time that this Agreement is
terminated pursuant to Section VIII of the Agreement. In
addition, in the event that we give the requisite 30-day written
notice of termination of this Agreement pursuant to Section VIII
of the Agreement, we will pay to you (i) if the effective date of
such termination occurs prior to May 31, 1996, a prepayment
charge in the amount of $180,000; (ii) if the effective date of
such termination occurs on or after May 31, 1996 but prior to May
31, 1997, a prepayment charge in the amount of $120,000;and (iii)
if the effective date of such termination occurs on or after May
31, 1997 but prior to May 31, 1998, a prepayment charge in the
amount of $60,000; provided however that if this Agreement is
terminated solely as a result of the refinancing of our
obligations hereunder with a First Bank System affiliate, and the
payment in full of our obligations hereunder, we will incur no
prepayment charge.
2.03 Section II(E) of the Agreement is hereby amended to read as
follows:
(E) We further agree to pay you a wire transfer charge of
$15.00 per wire transfer with respect to our account.
2.04 Section IV(B) of the Agreement is hereby amended to read as
follows:
(B) Until our authority to do so is terminated by written
notice from you (which notice you may give at any time), we will
at our expense and on your behalf collect as your property and in
trust for you all amounts unpaid on accounts, and shall not
mingle such collections with our own funds. We shall remit all
collections to you in kind, duly endorsed, on the same day if
practical, otherwise on the following business day; and you shall
credit the same to our account (subject to final collection
thereof) after allowing one day for collection of checks. This
provision is subject to your rights under paragraphs 4 and 5 of
the Security Agreement of even date herewith.
2.05 Section 7 of the Security Agreement is hereby amended to
read as follows:
7. EVENTS OF DEFAULT. Each of the following occurrences
shall constitute an event of default under this Agreement (herein
called "Event of Default"): (i) Debtor shall fail to pay any or
all of the Obligations when due, on demand or otherwise, or shall
fail to observe or perform any covenant or agreement in this
Agreement or in any other agreement with the Secured Party; (ii)
any representation or warranty by Debtor set forth in this
Agreement or in any other agreement with the Secured Party or
made to Secured Party by or on financial statements or reports
submitted to Secured Party by or on behalf of Debtor shall prove
materially false or misleading; (iii) Debtor or any guarantor of
any Obligation shall (A) fail to conduct its business
substantially as now conducted; (B) be or become insolvent
(however defined); or (C) file or have filed against it,
voluntarily or involuntarily, any act, process or proceeding
under any bankruptcy or insolvency or receivership law or other
statue or law providing for the modification or adjustment of the
rights of creditors; (E) if a corporation, partnership or
organization, be dissolved or liquidated or, if a partnership,
suffer the death of a partner or, if an individual, die; or (iv)
Secured Party shall in good faith believe that the prospects of
due and punctual payment of any or all of the Obligations is
impaired. THE FOREGOING EVENTS OF DEFAULT AD THE REMEDIES UPON
EVENT OF DEFAULT SET FORTH BELOW IN SECTION 8 ARE IN ADDITION TO
AND SUPPLEMENT THE RIGHTS OF THE SECURED PARTY UNDER THAT CERTAIN
FINANCING AGREEMENT OF EVEN DATE HEREWITH BETWEN THE DEBTOR AND
THE SECURED PARTY (THE "FINANCING AGREEMENT"), INCLUDING WITHOUT
LIMITATION THE RIGHT OF THE SECURTED PARTY TO DEMAND PAYMENT OF
THE OBLIGATIONS UNDER THE FINANCING AGREEMENT IN FULL AT ANY TIME
IN ITS ABSOLUTE DISCRETION. NOTHING SET FORT HIN THIS AGREEMENT
(INCLUDING THE PROVISIONS OF THIS SECTION 7 OR THE REMEDIES WITH
RESPECT THERETO AS SET FORTH IN SECTION 8) SHALL IN ANY WAY
LIMITE THE SECURED PARTY'S DISCRETION TO MAKE OR NOT MAKE LOANS
TO THE DEBTOR OR THE SECURED PARTY'S RIGHT TO DEMAND PAYMENT OF
THE OBLIGATIONS.
Section 2.06 Section 11 of the Pledge Agreement is hereby
amended to read as follows:
Section 11. Default. Each of the following occurrences
shall constitute an Event of Default under this Agreement: (a)
the Pledgor shall fail to observe or perform any covenant or
agreement applicable to the Pledgor under this Agreement; or (b)
any representation or warranty made by the Pledgor in the
Agreement or in any financial statements, reports or certificates
heretofore or at any time hereafter submitted by or on behalf of
the Pledgor to Republic shall prove to have been false or
materially misleading when made; or (c) any Event of Default
shall occur and be continuing under (and as more particularly
described in) that Security Agreement of even date herewith
between the Pledgor and Republic. THE FOREGOING EVENTS OF
DEFAULT AND THE REMEDIES UPON EVENT OF DEFAULT SET FORTH BELOW IN
SECTION 12 ARE IN ADDITION TO AND SUPPLEMENT THE RIGHTS OF THE
REPUBLIC UNDER THAT CERTAIN FINANCING AGREEMENT OF EVEN DATE
HEREWITH BETWEEN THE PLEDGOR AND THE REPUBLIC (THE "FINANCING
AGREEMENT"), INCLUDING WITHOUT LIMITATION THE RIGHT OF THE
REPUBLIC TO DEMAND PAYMENT OF THE OBLIGATIONS UNDER THE FINANCING
AGREEMENT IN FULL AT ANY TIME IN ITS ABSOLUTE DISCRETION.
NOTHING SET FORTH IN THIS AGREEMENT (INCLUDING THE PROVISIONS OF
THIS SECTION 11 OR THE REMEDIES WITH REPSECT THERETO AS SET FORTH
IN SECTION 12) SHALL IN ANY WAY LIMIT REPBULIC'S DISCRETION TO
MAKE OR NOT MAKE LOANS TO THE PLEDGOR OR REPUBLIC'S RIGHT TO
DEMAND PAYMENT OF THE OBLIGATIONS.
Section 3. Conditions to Effectiveness of Amendment. This
Amendment shall not become effective until, and shall become effective as
the date first written above when, each of the following provisions shall
have been fulfilled:
3.01 Republic shall have received this Amendment, duly executed
by the Borrower;
3.02 Republic shall have received a copy of the resolutions of
the Board of Directors of the Borrower ratifying and authorizing the
execution, delivery and performance of this Amendment, certified as true
and accurate by the Borrower's Secretary or Assistant Secretary; and
3.03 Republic shall have received such other documents as
Republic may reasonably request.
Section 4. Acknowledgments. The Borrower acknowledges and agrees
that its obligations to Republic under the Agreement and exist and are
owing without offset, defense or counterclaim assertable by the Borrower
against Republic. The Borrower further acknowledges and agrees that its
obligations to Republic under the Agreement, as amended, constitute
"Obligations" within the meaning of the Security Agreement and the Pledge
Agreement and are secured by the Security Agreement and the Pledge
Agreement, each as amended.
Section 5. Effect of Amendments; Representations and Warranties;
No Waiver. Republic and the Borrower agree that after this Amendment
becomes effective, the Agreement, as hereby amended, shall remain in full
force and effect. The Borrower warrants and represents that on and as of
the date hereof, and contained in the Agreement are correct and complete,
as of the date hereof, and (ii) there will exist no Event of Default under
the Security Agreement or the Pledge Agreement on such date. The Borrower
represents and warrants that the Borrower has all power and legal right and
authority to enter into this Amendment.
Section 6. Incorporation of Agreement and Other Loan Documents by
Reference; Ratification of Loan Documents. Except as expressly modified
under this Amendment, all terms, conditions, provisions, agreements,
requirements, promises, obligations, duties, covenants and representations
of the Borrower under the Agreement, the Security Agreement, the Pledge
Agreement and any and all other documents and agreements entered into with
respect to the obligations under the Agreement (collectively, the "Loan
Documents") are incorporated herein by reference and are hereby ratified
and affirmed in all respects by the Borrower. All references in the
Agreement to "this Agreement," "herein," "hereof," and similar references,
and all reference in the other Loan Documents to the "Agreement," shall be
deemed to refer to the Agreement, as amended by this Amendment.
Section 7. Merger and Integration, Superseding Effect. This
Amendment from and after the date hereof, embodies the entire agreement and
understanding between the parties hereto.
Section 8. Governing Law. This Amendment is governed by the laws
of the State of Minnesota.
IN WITNESS WHEREOF, the parties hereto have caused this First
Amendment to Financing Agreement to be executed as of the date and year
first above written.
AULT INCORPORATED
By /s/Carlos S. Montague
Its Vice President and
Chief Financial Officer
REPUBLIC ACCEPTANCE CORPORATION
By /s/Richard Ogle
Its Account Executive
PARTICIPATION AGREEMENT
THIS AGREEMENT, mad the 30th day of September, 1995 between First Bank
National Association (hereafter referred to as "Participant" and Republic
Acceptance Corporation (hereafter called "Republic");
WITNESSETH:
WHEREAS, Republic has made and will continue to make loans or advances
to Ault Incorporated (hereafter referred to as "Client") pursuant to a
Financing Agreement dated as of April 28, 1995 by and between the Client
and Republic, as amended (the "Financing Agreement") which Financing
Agreement is secured security interests in and pledges of property of the
client pursuant to a security agreement and a pledge agreement each dated
April 28, 1995 and subject to other rights created or evidenced by written
instruments, all as listed in Exhibit A hereto (copies of all thereof being
attached hereto); and
WHEREAS, Republic desires that Participant participates in its present
and future investment represented by loans and advances to Client secured
as aforesaid, and Participant desires thus to participate.
NOW THEREFORE IT IS MUTUALLY AGREED AS FOLLOWS:
1. Terms used in this agreement are defined as follows:
Total Investment: Aggregate loans and advances by Republic to
Client, less principal payments received, not to exceed Six
Million and No/100 Dollars ($6,000,000) from time to time
outstanding.
Ownership Ratio: The ratio of each party's investment to the
Total Investment.
Participant's Investment: Total amount disbursed by Participant
to Republic hereunder less principal payments received.
Republic's Investment: Total Investment minus Participant's
Investment.
Participation Formula: Participant's Investment specified in
paragraph 2 of this Agreement except that in the event of
liquidation the term shall mean the Ownership Ratio at the
commencement of the liquidation.
2. Participant's Investment shall be determined as follows:
Republic's Investment will be the first Three Million and No/100 Dollars
($3,000,000) of loans and advances, together with all loans and advances in
excess of Four Million Five Hundred Thousand and No/100 Dollars
($4,500,000). Participant's Investment will be all amounts of the Total
Investment in excess of the first Three Million and No/100 Dollars
($3,000,000) up to a maximum amount of Four Million Five Hundred Thousand
and No/100 Dollars ($4,500,000).
3. Upon execution of this agreement, Participant shall pay to
Republic the sum equal to Participant's Investment.
4. Subsequently, on a weekly basis, Participant will pay to or
receive from Republic the sum required to bring Participant's Investment to
the amount required by the Participation Formula; provided, that Republic
shall not be obligated to pay Participant except by distribution, in
accordance with the Ownership Ration, of principal payments received from
or on account of Client. Unless the client is in the process of
liquidation, payments to or by Participant shall not be required in amounts
less than $10,000.
5. Republic and Participant shall each own an undivided interest in
all outstanding loans made to Client and in all principal payments received
on such loans in the amount of the Ownership Ratio.
6. When Republic and Participant agree that legal action against
Client is necessary, Republic shall have the right to employ attorneys and
incur liquidation costs consisting of attorneys' fees, legal expenses, and
such other expenses which in Republic's judgment are justified to assure
maximum ultimate realization. Participant's share of all losses, including
liquidation costs, shall be the percentage represented by its ownership
ratio.
7. Republic shall continue to perform the operational functions
including the making of loans, credit investigation of the purchasers,
handling of collections and maintenance of the required records relating to
the loans.
8. all rights, privileges and powers to Republic in the Client's
agreements, or in any papers or documents relating thereto, and all rights
of recourse to collateral security, shall be for the joint and several
benefit of Republic and Participant, to be exercised by Participant, for
the benefit of Republic and Participant, until such time as conditions
exist which require Republic to join in action with Participant or take
action on its own.
9. Either party to this participation agreement may cancel it on
thirty days notice. In such event Participant's Investment will be
liquidated in accordance with the method outlined in Paragraph 4 or
Republic may pay Participant its Participant's Investment and accrued
charges and end Participant's participation, whichever Republic elects.
10. Participant shall receive or be credited, monthly, from interest
collected by Republic on the advances to Client the sum equivalent to
simple interest at the rate of one percent (1.00%) in excess of the
reference rate of First Bank National Association based on the average
daily amount of Participant's investment. The balance of such interest
shall belong to Republic. In addition, Republic shall receive all other
fees and charges payable by the Client to Republic under the Financing
Agreement.
11. For the purpose of fixing the Participation Formula in case of
liquidation, unless otherwise agreed in writing, liquidation shall be
deemed to commence at the time Republic gives or receives notice of
cancellation of the participation agreement, whichever is earlier.
12. In the event it is determined to liquidate the Total Investment,
because of a default by Client or otherwise, all monies thereafter
collected on account of the advances shall be applied in the following
order:
(a) to out of pocket costs and expenses, including attorney's fees,
court costs and other liquidation expenses incurred;
(b) to repayment of the Total Investment; and
(c) to interest due the respective parties, ratably.
13. Authorized representatives of either Republic or Participant
shall have complete access to the other's business records concerning the
Client and this participation.
IN WITNESS WHEREOF, the parties hereto have executed this
Participation Agreement the day and year first above written.
FIRST BANK NATIONAL ASSOCIATION
By /s/Melody Holland-Rehder
Its Vice President
REPUBLIC ACCEPTANCE CORPORATION
By /s/Rich Ogle
Its Account Executive
SECOND AMENDMENT TO
FINANCING AGREEMENT
This Second Amendment to Financing Agreement, dated as of January _____,
1996 ("Amendment"), is made by and between AULT INCORPORATED, a Minnesota
corporation (the "Borrower") and REPUBLIC ACCEPTANCE CORPORATION, a
Minnesota corporation ("Republic").
WHEREAS, the Borrower and Republic have entered into a Financing Agreement
dated as of April 28, 1995, and as amended by that First Amendment to
Financing Agreement dated as of September 30, 1995 (collectively, the
"Agreement"); and
WHEREAS, the obligations and indebtedness of the Borrower to Republic under
the Agreement are secured, inter alia, by a Security Agreement dated as of
April 28, 1995 between the Borrower and Republic (the "Security Agreement")
and a Pledge Agreement dated as of April 28, 1995, between the Borrower and
Republic (the "Pledge Agreement"); and
WHEREAS, Republic and the Borrower desire to amend the Agreement in order
to amend certain of the provisions therein, upon the terms and conditions
set forth herein.
NOW THEREFORE, in consideration of the premises and for good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto covenant and agree to be bound as follows:
Section 1. Capitalized Terms. All capitalized terms used herein
and not otherwise defined herein shall have the meanings assigned to them
in the Agreement.
Section 2. Amendments.
2.01 Section I of the Agreement is hereby amended to read as
follows:
At our request, you in your sole discretion may lend to us
(i) up to eighty percent (80%) of the net amount of accounts
which are listed in current schedules provided by us and which
are deemed eligible for advances by you, or any greater or lesser
percentage at your absolute and sole discretion, not to exceed a
maximum amount of $6,000,000 from time to time outstanding
("Eligible Account Advances"); and (ii) up to twenty-five percent
(25%) of the net amount of inventory which is listed in monthly
inventory certificates provided by us and which is deemed
eligible for advances by you, or any greater or lesser percentage
at your absolute and sole discretion, not to exceed a maximum
amount of $700,000 from time to time outstanding ("Eligible
Inventory Advances"); and (iii) up to an aggregate amount of
$400,000.00 against a maximum of eighty percent (80%) of the fair
market value of our existing equipment, which amount shall be
reduced as set forth below (the "Existing Equipment Advance");
and (iv) between December 1, 1995 and May 31, 1996, up to an
aggregate amount of $200,000 against a maximum of eighty percent
(80%) of the purchase price of our new equipment purchases, as
evidenced by our submission to you of the original invoices for
such new equipment, which amount shall be reduced as set forth
below (the "New Equipment Advances"); provided however, that the
maximum aggregate amount of all such advances from time to time
outstanding shall not exceed $6,000,000. Loans for additional
sums requested by us may be made at your sole discretion based
upon your valuation of other collateral or other factors. All
borrowings pursuant hereto shall be due on demand. Nothing set
forth in this agreement or any other agreement between you and us
shall in any way limit your discretion to make or not to make
loans to us hereunder or your right to demand payment of our
obligations to you hereunder.
In addition, at our request, and subject to your
authorization in your sole discretion, First Bank National
Association (the "Bank") may from time to time issue letters of
credit for our account (the "Letters of Credit"). Upon the
occurrence of any draw under a Letter of Credit that you have in
writing guaranteed, you will pay to the Bank 100% of such draw
and treat such payment as an advance against Eligible Accounts by
you to us hereunder and a reimbursement by us in full of such
draw, whether or not you have determined for all other purposes
to cease making loans to us hereunder. The amount of any
unreimbursed draw and the amount available to be drawn under any
Letter of Credit shall both be treated as an outstanding advance
against Eligible Accounts hereunder for the purpose of
determining the amount which may be advanced under this Section I
against Eligible Accounts. We also agree that at any time that
the Bank issues a Letter of Credit payable in currency other than
U.S. Dollars, the amount of the exposure related to the
borrowings under this Agreement connected with such Letter of
Credit shall be increased by a percentage to be set by you in
your sole discretion unless and until we purchase an appropriate
foreign exchange forward contract or otherwise mitigate the
foreign exchange risk to your satisfaction.
Unless demand for payment of the Existing Equipment Advance
is sooner made, commencing on December 1, 1995 and continuing on
the first (1st) day of each month thereafter until the Existing
Equipment Advance is paid in full, the Existing Equipment Advance
shall be reduced in equal monthly principal installments based
upon a forty-eight (48) month amortization of the Existing
Equipment Advance.
Unless demand for payment of the Initial Overline Advance is
sooner made, commencing on December 1, 1995 and continuing on the
first (1st) day of each month thereafter until the Initial
Overline Advance is paid in full, the Initial Overline Advance
shall be reduced in equal monthly principal installments based
upon a thirty-six (36) month amortization of the Initial Overline
Advance.
Unless demand for payment of the New Equipment Advances is
sooner made, commencing on June 1, 1996 and continuning on the
first day of each month thereafter until the New Equipment
Advances are paid in full, the New Equipment Advances shall be
reduced in equal monthly principal installments based upon a
forty-eight (48) month amortization of the outstanding principal
amount of the New Equipment Advances as of June 1, 1996.
You may from time to time furnish to us a statement of our
account. Any such statement shall be conclusive on us unless and
except as written objections thereto calling your attention to
errors are received y you within 30 days after it is mailed or
delivered to us.
Section 3. Conditions to Effectiveness of Amendment. This
Amendment shall not become effective until, and shall be come effective as
of the date first written above when, each of the following provisions
shall have been fulfilled:
3.01 Republic shall have received this Amendment, duly executed
by the Borrower;
3.02 Republic shall have received a copy of the resolutions of
the Board of Directors of the Borrower ratifying and authorizing the
execution, delivery and performance of this Amendment, certified as true
and accurate by the Borrower's Secretary or Assistant Secretary; and
3.03 Republic shall have received such other documents as
Republic may reasonably request.
Section 4. Acknowledgments. The Borrower acknowledges and agrees
that its obligations to Republic under the Agreement and exist and are
owing without offset, defense or counterclaim assertable by the Borrower
against Republic. The Borrower further acknowledges and agrees that its
obligations to Republic under the Agreement, as amended, constitute
"Obligations" within the meaning of the Security Agreement and the Pledge
Agreement and are secured by the Security Agreement and the Pledge
Agreement.
Section 5. Effect of Amendments; Representations and Warranties;
No Waiver. Republic and the Borrower agree that after this Amendment
becomes effective, the Agreement, as hereby amended, shall remain in full
force and effect. The Borrower warrants and represents that on and as of
the date hereof and after giving effect to this Amendment, (i) all of the
representations and warranties contained in the Agreement are correct and
complete, as of the date hereof, and (ii) there will exist no Event of
Default under the Security Agreement or the Pledge Agreement on such date.
The Borrower represents and warrants that the Borrower has all power and
legal right and authority to enter into this Amendment.
Section 6. Incorporation of Agreement and Other Loan Documents by
Reference; Ratification of Loan Documents. Except as expressly modified
under this Amendment, all of the terms, conditions, provisions, agreements,
requirements, promises, obligations, duties, covenants and representations
of the Borrower under the Agreement, the Security Agreement, the Pledge
Agreement and any and all other documents and agreements entered into with
respect to the obligations under the Agreement (collectively, the "Loan
Documents") are incorporated herein by reference and are hereby ratified
and affirmed in all respects by the Borrower. All references in the
Agreement to "this Agreement," "herein," "hereof," and similar references,
and all references in the other Loan Documents to the "Agreement," shall be
deemed to refer to the Agreement, as amended by the Amendment.
Section 7. Merger and Integration, Superseding Effect. This
Amendment, from and after the date hereof, embodies the entire agreement
and understanding between the parties hereto.
Section 8. Governing Law. This Amendment is governed by the laws
of the State of Minnesota.
IN WITNESS WHEREOF, the parties hereto have caused this Second
Amendment to Financing Agreement to be executed as of the date and year
first above written.
AULT INCORPORATED
By /s/Carlos S. Montague
Its Vice President and
Chief Financial Officer
REPUBLIC ACCEPTANCE CORPORATION
By /s/Richard Ogle
Its Account Executive