Back to GetFilings.com
45
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 1, 1997
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 S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $34,191,835 based upon the ending price of
the Company's common stock on the NASDAQ National Market Issues on July 31,
1997, 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, 1997, there were outstanding 4,089,233 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 September 29, 1997 is
incorporated by reference into Part III of this Form 10-K.
The Form 10-K consists of 47 pages. The Exhibit Index is located on page 42
AULT INCORPORATED
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 1, 1997
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 the largest
U.S. based independent 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 known 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
Ault's product line includes the four major types of external power
conversion products: switching power supplies, linear power supplies,
battery chargers and transformers. The Company's power conversion
products are capable of providing power at virtually all output levels
which OEMs expect from an external product. The Company's design and
application engineers work closely with customers to assure that these
products are appropriately customized to meet each OEM customer's
precise power conversion product requirements.
The following table summarizes the proportion of sales of the each of
the Company's four major product categories for its last three fiscal
years ended June 1, 1997
Sale of Products by Category
as a Percentage of Total Sales
Years Ended
Product Type June 1, June 2, May 28,
1997 1996 1995
Switching Power 42 37 31
Supplies
Linear Power Supplies 16 19 22
Transformers 34 38 42
Battery Chargers 8 6 5
Total 100% 100% 100%
Power Supplies. The Company's power supplies provide the entire power
conversion systems for electronic equipment in power outputs ranging
from 1 to 90 watts. These products contain a component level
transformer, which reduces the voltage level, as well as other circuit
and components which convert AC to DC and, in most cases, maintain
voltage within specific limits.
* Switching Power Supplies. According to a study conducted by Heath
Resource Group (the "Heath Study"), the market for switching power supplies
is the fastest growing segment of the overall external power conversion
product market as reflected in the increasing percentage of these products
sold by the Company during the past three years. Switching power supplies
use switching transistors to convert power from AC to DC and are more
energy efficient and considerably smaller and lighter in weight than linear
units with comparable power outputs. For power requirements exceeding 12
watts, switching power supplies are generally more cost effective. The
company currently manufactures these products up to 90 watts of power. The
application in which these products are currently used include
telecommunications products, data communications products, modems computers
and computer peripherals, medical equipment, microprocessor controlled
systems, security systems, automatic teller terminals, test equipment and
multiplexers.
The Company's switching power supply products include a family of
universal input power supplies which provide output power from input
power sources ranging from 90 to 265 volts. This family of power
supplies can be used in virtually any country for applications such
as local area networks ("LANs"), printer and fiber optic links.
Building on this technology, the Company also recently introduced a
family of universal input switching power supplies designed
specifically for medical markets. With this addition, the Company
believes it offers the widest range of external switching power
supply products currently available for medical applications.
The Company also manufactures internal switching power supplies, but
only when providing such products enhances a
relationship with a significant customer.
New High Density Switching Power Supplies. During fiscal 1997, the
Company introduced new product families based upon patented high
density conversion technology. This technology will enable the
Company to offer switching power supply products less than one-half
the size of existing switching power supplies providing comparable
power output. The Company recently introduced a family of high
density switching power supplies providing approximately 45 watts of
power and the Company expects shortly to introduce a new high density
switching power supply product family which will offer approximately
80 watts of power. In addition, using its new high density
technology, the Company also expects to introduce soon a family of
switching power supplies capable of power outputs in excess of 100
watts. The Company believes that the addition of this product line
will enable it to compete for product applications currently not
served by the Company or its competitors.
* Linear Power Supplies. Linear power supplies are larger and generally
less expensive than switching power supplies because their design is based
on technology employing steel laminations with windings of copper wire
rather than switching transistors. Linear power supplies tend to be used
when the wattage output required is relatively low. Ault manufactures
linear power supplies that provide up to 11 watts of regulated power and 70
watts of unregulated power. The Company's linear power supplies are used
in a variety of applications, including modems, telecommunications
products, local area networks, microprocessor controlled systems, test
equipment and multiplexers.
* Transformers. The Company manufactures a wide variety of wall plug-
in transformers, as part of its full range of power conversion products.
These transformer are used primarily in applications where OEMs desire to
remove heat, electromagnetic interference and weight from electronic
equipment, while incorporating the rest of the power conversion systems
within the product. These products reduce AC voltage from approximately
110 volts (230 volts in some countries) down to lower voltage that range
from 5 to 60 volts AC. In response to customer specifications, the Company
also sells highly customized transformers that operate within stringent
power output tolerances. The manufacture of such custom transformers is, a
capability not provided by most of the Company's competitors. The
Company's transformers are utilized in a broad spectrum of applications,
including modems, telephone sets, multimedia products and scanners.
* Battery Chargers. Ault has been an innovator in battery charging
technology since the early 1980s. Ault specializes in providing custom
designed, advanced solutions for manufactures of portable and battery
powered equipment. Applications for the Company's battery chargers include
medical devices, mobile telecom devices, notebook computers, global
positioning equipment and radio frequency communications products.
The Company's products serve the entire range of widely used battery
chemistries such as nickel cadmium, sealed lead acid, gel cell and
nickel-metal hydride. In addition, the Company has developed battery
chargers for the particular requirements of emerging battery
chemistries such as zinc air, lithium ion and lithium polymer. The
Company is committed to supporting these new emerging chemistries and
to developing battery charger products to be introduced as these new
battery chemistries become commercially accepted.
The Company sells primarily "smart" battery chargers as distinguished
from trickle chargers. Smart charger products used integrated
circuits to control various charging characteristics while allowing
for fast charge time and extended battery life. Trickle charging is
typically used for slow (8 to 10 hours) charging and/or standby
battery maintenance.
The Company believes that the demand for high quality battery chargers
will continue to increase to accommodate the growing sophistication of
portable electronic equipment.
(2) Markets and Customers
The following table presents applications of the Company's various
power conversion products.
<
Product Type Market Segment Applications
Switching Power Data communications Cable modems
Supplies Data communications Retail scanners
Medical Instrumentation
Computer peripherals and Test equipment
Network router
Linear Power Telecommunications Business PBX
Supplies Telecommunications Wireless telephones
Data communications Business modems
Transformers Telecommunications Telephones
Data communications PC modems
Computer peripherals Multimedia speakers
Battery Medical Defibrillators
Chargers Telecommunications Apnea monitors
Global positioning
The Company's marketing efforts are directed primarily toward OEMs
producing non-consumer electronic equipment for telecommunications,
computer peripheral and medical applications. These vertical markets are
characterized by trends toward smaller, portable products capable of
performing increasingly sophisticated functions, as well as intense
competitive pressure to rapidly introduce new products and product
enhancements. Based on its expertise in customizing a broad range of
products to meet customer requirements, the Company believes it is well
positioned to serve the needs of its OEM customers as they respond to these
trends and competitive factors.
Historically, the most significant market for the Company's products
has been OEMs of telecommunications equipment, and in fiscal 1997 sales in
this market represented approximately 30% of net sales. Presently, the
company's products power network termination equipment (devices which
interface between 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, callers identification units and alpha
numeric displays.
An equally significant market for the Company is OEMs of data
communications equipment, and in fiscal 1997 sales in this market also
represented approximately 30% of net sales. In this market Ault's products
are principally being used 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).
The Heath Study estimates that the combined telecommunications/data
communications market is currently growing at an annual rate of
approximately 30%. Recognizing this trend, the Company is devoting a
significant portion of its product development effort to new products for
applications in this combined market, and is developing several new product
families which it expects to introduce within the next two years.
In fiscal 1997 approximately 25% of the Company's net sales were to
OEMs of computers and computer peripherals such as digitizers, printers,
plotters, portable terminals, point of sales scanners and optical character
readers, LAN hardware and multimedia speakers for computer applications.
Approximately 15% of net sales in fiscal 1997 were to OEMs of portable
medical equipment such as infusion pumps, patient monitoring systems, apnea
monitors, and portable terminals for patient history input diagnostics.
(3) Design Engineering and Product Development
Design engineering teams at the Company's facilities in the United
States and South Korea are responsible for developing new power conversion
products and customizing existing products to meet customer needs. The
Company has an engineering staff of 33 and over the last three fiscal years
has spent an average of at least 4.4% of revenues on product engineering.
The Company's product development activities are divided equally between
developing products to satisfy customer needs and new products based upon
anticipated customer needs and market trends. New product development
opportunities are evaluated based upon criteria such as global market
potential, return on investment and technological advantages. The Company
believes that its collaborative efforts with customers, combined with its
forward-looking concern for power technology and market trends, have
enabled it to gain a reputation as a leading innovator of new external
power conversion products.
Reflecting an increased emphasis on new product development during the
past years, the Company developed and introduced 18 new products n 1997 and
15 new product families in 1996. More than 36 product families are
currently in various stages of development. The company expects to
introduce approximately 20 product families during fiscal 1998.
Anticipating continued growth of approximately 30% annually in the
switching power supply segment of the power conversion product market,
about half of the new products under development are switching power
supplies.
In December 1995, the Company purchased a U.S. patent for high density
power conversion technology which it is using to develop families of power
supplies that will provide output comparable to the Company's existing
power supplies that are more than twice as large. This technology served
as a platform for the introduction in fiscal 1997 of a family of high
density switching power supplies providing approximately 45 watts of power
and a series of external power supply products providing 80 watts of power.
The Company expects soon to offer a new series of external power supply
products which will provide approximately 100 watts of power. To the
Company's knowledge, none of its competitors currently offers powers
supplies comparable in size and price to these high density switching power
supplies. The Company believes that these higher output products will
enable it to compete for new electronic equipment applications that
traditionally have been outside the range that could feasibly be powered by
external products. See "Patents."
Other product development efforts currently underway at the Company
include the development of products tailored to the needs of European
markets and the development of low cost AC to DC transformers and AC to DC
linear power supplies.
(4) Sales and Distribution
The Company markets its products primarily in the U.S. and Canada
through a network of 20 manufacturer representatives employing
approximately 115 salespersons, each of whom represents, in addition to
Ault's products, several complementary product lines manufactured by
others. The Company also sells through six national distributor
organizations which employ over 200 salespersons. The Company selects
representatives based upon their industry knowledge as well as account
expertise with products that are synergistic with the Company's products.
Individual salespersons are trained, mentored and technically assisted by
the Company's application engineers and other sales administration staff.
Any reduction in the efforts of these manufactured representatives or
distributors could adversely affect the Company's business and operating
results.
The Company begins the sales process by identifying a potential
customer or market; researching the target or potential customer's total
business, product and strategic needs; and then preparing a total solution
proposal that includes engineering, product development, safety agency
approvals, logistics and project development processes, coordinating pilot
runs and assisting OEMs with their product introductions. Among the
logistics services provided by the Company are warehousing and shipping of
finished products and customs clearance in order to facilitate just-in-time
production schedules.
The Company focuses its selling efforts primarily on OEMs in the U.S.
and Canada. Many of the larger OEM customers of the Company manufacture
and sell their products globally. As a result, the Company has extended
its presence to markets throughout the world.
To date, the Company's sales in the Pacific Rim have been limited and
made primarily to customers in South Korea. In fiscal 1997, the Company
reached an agreement, with a well-recognized sales representative
organization in Japan which will sell the Company's product in Japan and
most Pacific Rim countries other than South Korea. Certain of the
Company's products have already obtained required MITI approvals in Japan
and sales promotion in Japan began during the second half of fiscal 1997.
The Company currently markets its products in Europe through a network
of distributors (with a total of approximately 15 salespersons) with
products and promotional methods tailored for this market. Sales in Europe
during fiscal 1996 and 1997 were, respectively, 6.4% and 11.1% of total net
sales for these periods. The Company intends to expand its marketing
efforts in Europe during fiscal 1998 by introducing specially designed
products it has developed for that market.
(5) Safety Agency Certificates
The power conversion system is potentially the most hazardous element
in most electronic equipment because the power supply modifies standard
power to a level appropriate for such equipment. Virtually all of the
Company's customers require that the power conversion products supplied by
the Company meet or exceed established international safety and quality
standards, since many of the Company's products are used in conjunction
with equipment which are distributed through the world. In response to
these customer requirements, the vast majority of the Company's products
are designed and manufactured in accordance with certification requirements
of many safety agencies, including Underwriters Laboratories Incorporated
("UL") in the United Stares; the Canadian Standards Association (CSA) in
Canada; Technischer Uberwachungs-Verein `(TUV") in Germany; the British
Approval Board for Telecommunication "(BABT") in the United Kingdom; and,
the International Electrotechnical Committee ("IEC"), a European standards
organization. In addition, some of the Company's products have also
received Japanese MITI approval. Whenever safety standards dictate, the
Company manufactures its product to conform to FCC Class B requirements
which regulate the levels of electronic magnetic interference that may be
emitted by electronic equipment. Unlike most of its competitors, the
Company is a certified test laboratory for UL and CSA and is able to
conduct most certification tests at its facility in Minneapolis. This
procedure reduces the time required to obtain safety certifications. The
Company's Minneapolis facility is certified to ISO 9001 and the Company's
South Korea facility is certified to ISO 9002.
(6) Innovative Team Approach
In 1993, the Company moved to a team-based organizational structure
consisting initially of four teams which were recently increased to six
teams. The Company's customer base is divided into six geographical
regions with a specific Ault team assigned to manage the needs of customers
in each region. Each team is headed by a coordinator selected by the
president and an assistant coordinator who is elected annually by the team.
The teams consist of people from all areas of the business, including
salespersons from manufacturer representative organizations and national
distributors as well as the Company's own production personnel, engineers,
technicians, administrative personnel and others. Guided by a written
statements of corporate values, these teams are charged with responsibility
for all aspects of the customer relationship, including sales,
manufacturing, design engineering and other support functions with a view
to achieving continuous improvements in customer service. The Company
believes that its innovative implementation of this team-based
organizational structure provides competitive advantages by increasing
communication with customers as well as facilitating responsiveness to the
needs of the Company's diverse worldwide customer base. Ault received
recognition for its innovative approach from the trade publication of the
American Manufacturing Association.
(7) Competition
The Company competes primarily with various manufacturers of external
power conversion products. The industry is highly fragmented, with
manufacturers generally focusing their marketing on specific segments. The
Company has experienced strong competitions from Taiwanese-based
manufacturers that are principally based on price. Many of these
competitors have a smaller presence in the external conversion market than
the Company, although several are engaged in more than one business and
have significantly greater financial resources.
No single company dominates the overall external power conversion
product market, and the Company's competitors vary depending upon the
particular power conversion product category. The companies with which
Ault competes most directly in each of its major product categories are:
Leader Electronics, Inc. and Golden Pacific Electronics, Inc. for
transformers; Dee Van Enterprise Co., Ltd and Sino American Electronics
Company., Ltd. for linear power supplies; Portrans Electrical Corp., Ltd.
and Phihong Enterprise Co., Ltd. for switching power supplies; and
Engineering Design Sales, Inc. and Xenotronics Company for battery
chargers.
Recently, a number of electronic equipment manufacturers have
dismantled or spun off their power supply operations. While this change
created greater opportunities in the merchant market where the Company
competes, certain of these spin-offs have created large power supply
manufactures with the state-of-the-art manufacturing facilities. Most of
these newer companies are now focusing on the internal power supply market
and/or continue to sell exclusively to a single customer. These companies,
some of which enjoy far greater resources than Ault, could focus on
external power conversion products and/or expand into the same electronic
markets in which the Company now competes, thus intensifying competitions.
The Company competes on the basis of the quality and performance of
its products, the breadth of its product line, customer service,
dependability in meeting delivery schedules, design engineering services,
and price. The Company believes it is currently one of a small number of
companies that design, manufacture and obtain certifying agency approvals
for the full range of external power conversion devices which OEMs consider
in designing their electronic product.
The Company provides a total solution approach to OEM's entire
external power conversion product needs through its commitment to reliable
partnerships and its delivery of high quality products supported by
solution oriented design engineering. In addition, the presence of Ault
Korea and Ault China and the expanding arrangements with manufactures in
China and Thailand provide the Company with additional strength to compete
effectively when price is the primary consideration.
Internal power conversion products continue to be used for most
electronic equipment, and as a result the Company experiences competition
from numerous companies providing such internal products, including both
OEMs and independent suppliers. With the trend toward lower power
requirements in portable electronic equipment and with the increasing
availability of smaller, competitively-priced internal switching power
supplies, certain customers of the Company may choose to return to internal
power supplies in place of the external power conversion products they
currently purchase. In response to this competition, the Company stresses
the several advantages of external power conversion products, which
generally can be obtained with only a relatively small increase in unit
cost.
(8) Manufacturing and Sources of Supply
The Company's manufacturing operations consist of assembly and
integration of electronic components to meet product specifications and
design requirements for a variety of power conversions applications.
Manufacturing is currently conducted at the Company's facility in
Minneapolis, Minnesota (which accounted for 19% of 1997 net sales); at the
Ault Korea facility near Seoul, South Korea (which accounted for 30% of
1997 net sales); at newly formed subsidiary, Ault China, which had no
significant sales contribution in fiscal 1997; and at three locations in
China and Thailand using manufacturing subcontractors (which accounted for
51% of 1997 net sales). Ault typically manufactures prototypes and low
volume products at its facilities in Minneapolis, Minnesota. Ault Korea is
and Ault China will be equipped to manufacture substantially all of the
Company's products.
A number of the components and raw material integral to the
manufacture of the Company's products are purchased from a single supplier
or a limited number of suppliers. Electronic components and raw material
used in the Company's products are nevertheless generally available from a
large number of suppliers, although from time to time shortages of
particular items are experienced.
Quality and reliability are emphasizes in both the design and
manufacture of the Company's products. This emphasis is reflected in the
ISO 9001 certification of the Company's Minneapolis facility in 1991 and
the ISO 9002 certification of its South Korea facility in 1996. The
Company tests 100% of its finished products against its own customers'
specifications, then ships the products in custom engineered protective
packaging to minimize any damage during shipment.
In addition to its internal production capabilities, the Company
established manufacturing arrangements with one subcontractor in Thailand
and two in China for the manufacture of higher volume external power
conversion products. The Company does not have long term commitments from
the subcontractors and the subcontractors build product for the Company
pursuant to individual purchase orders. The Company selects its
subcontract manufacturers based upon their ability to produce high quality
products, the sufficiency of their engineering capabilities to support
products being manufactured; and their ability to meet required delivery
times. In addition, each of the Company's subcontract manufacturers is
regularly reviewed by the Company's Taiwanese-based Director of Far East
Operations with respect to product quality and other performance criteria.
(9) Significant Customer and 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. In fiscal 1997,
however, one customer accounted for 14.5% of the Company's net sales.
The Company enters into buying commitments and other scheduling
agreements with certain customers. For its larger customers, these
agreements allow for order increases and decreases within scheduled limits
and include cancellation charges for completed and in-process products and
procured materials. Most products are shipped within 4 to 10 weeks of an
order. Order backlog at August 7, 1997 was $15,196,000 as compared to
$15,801,000 on August 3, 1996.
(10) Warranties
The Company provides up to a three-year parts and labor warranty
against defects in materials or workmanship on all of its products.
Servicing and repairs are conducted at the Company's manufacturing
facilities in Minneapolis and South Korea. The Company's warranty expenses
have not been significant.
(11) Patents
The Company holds four patents, three of which it no longer considers
significant. The fourth patent, acquired in December 1995, covers high
density power conversion technology ("high density patent") which is
enabling the Company to offer external switching power supplies less than
one-half the size of current power supply products with comparable power
outputs.
The high density patent was issued by the United States Patent Office
in 1994 and the original applicant did not pursue patent protection in
foreign countries. Since the high density patent was issued prior to its
being assigned to the Company, the Company is precluded from seeking patent
protection in most foreign countries. For that reason, some of its
competitors may use this type of technology for products manufactured and
sold outside the United States. Also there can be no assurance that the
scope of the high density patent will prevent competitors, many of whom
have greater financial and other resources, from introducing competitive
products or from challenging the validity of the high density patent.
(12) Seasonality
As indicated in ITEM 8(b) SUPPLEMENTAL FINANCIAL INFORMATION, net
sales of the Company have reflected a certain degree of seasonality. The
Company's first quarter falls during the summer months and during the first
quarter of fiscal 1996 and fiscal 1997, the Company recorded the lowest
quarterly levels of sales followed by increased sales in successive
quarters. The Company attributes this seasonality to the buying patterns
of its customers, the timing of industry trade shows where new products are
introduced and to other factors. The Company believes that similar
seasonality trends will be experienced in the future.
(13) Employees
As of August 4, 1997, the Company employed approximately 367 full-time
employees. Of this number, approximately 288 were engaged in manufacturing
(113 in Korea, 67 in Minneapolis, and 108 in China); 26 in engineering, and
53 in marketing, general and administrative positions of which 37 were in
Minneapolis, Minnesota, 11 in Korea, 4 in China and 1 in Taiwan.
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.
(14) Executive Officers of the Registrant
Certain information with respect to the executive officers of the Company
is set forth:
Officer
Name Age Position; Former Employment Since
Frederick M. 54 President and Chief Executive 1980
Green Officer and Director
Carlos S. 60 Vice President, Treasurer, Chief 1981
Montague Financial Officer and Assistant
Secretary
Richard A. 51 Secretary 1995
Primuth
Hokung C. Choi 57 Vice President - Far East 1989
Operations
Gregory L. 44 Vice President - Marketing 1988
Harris
(15) Risk Factors
The following risk factors are relevant to an understanding of the
business matters discussed herein.
* Technological Change and New Product Development. The electronic
equipment market is characterized by rapidly changing technology and short
product life cycles. The Company's future success will continue to depend
upon its ability to enhance its current products and to develop new
products that keep pace with technological developments and respond to
changes in customer requirements. Any failure by the Company to respond
adequately to technological changes and customer requirements or any
significant delay in new product introductions could have a material
adverse effect on the Company's business and results of operations. In
addition, there can be no assurance that new products to be developed by
the Company will achieve market acceptance.
* Dependence on Outside Contractors. The Company currently depends on
third parties located in foreign countries for a significant portion of the
manufacture and assembly of certain of its products. The Company's
reliance on such outside contractors reduces its control over quality and
delivery schedules. While the Company takes an active role in overseeing
quality control with its third party manufacturers, the failure by one or
more of these subcontractors to deliver quality products or to deliver
products in a timely manner could have a material adverse effect on the
Company's operations. In addition, the Company's third-party manufacturing
arrangements are short term in nature and could be terminated with little
or no notice. If this happened, the Company would be compelled to seek
alternative sources to manufacture certain of its products. There can be
no assurance that any such attempts by the Company would result in suitable
arrangements with new third-party manufacturers.
* Dependence on Key Personnel; Management of Growth. The Company's
success depends in part upon the continued services of many of its highly
skilled personnel involved in management, engineering and sales, and upon
its ability to attract and retain additional highly qualified employees.
The loss of service of any of these key personnel could have a material
adverse effect on the Company. The Company does not have key-person life
insurance on any its employees. In addition, the Company's future success
will depend on the ability of its officers and key employees to manage
growth successfully and to attract, retain, motivate and effectively
utilize the team approach to manage its employees. If the Company's
management is unable to manage growth effectively, the Company's business
and results of operations could be adversely affected.
* Anti-takeover Considerations. Certain anti-takeover provisions of the
Minnesota Business Corporation Act and the ability of the Board of
Directors to issue preferred stock without stockholder approval under the
Company's Right Plan may have the effect of delaying or preventing a change
in control or merger of the Company. These provisions could delay,
discourage, hinder or preclude an unsolicited acquisition of the Company,
could make it less likely that stockholders receive a premium for their
shares as a result of any such attempt and could adversely affect the
market price of the Common Stock. See "Note 7 - Stockholders' Equity under
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
(d) Financial Information About Foreign and Domestic Operations and Export
Sales
Export Sales by the U.S. Operations in fiscal year 1997 ending June 1
represented 20.4% 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
ownership of real property.
Ault China, a subsidiary of Ault Korea Corporation, occupies a 27,000
square foot leased facility in the Province of Xiang-He in China. The
lease expires in the year 2009.
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 National Market for fiscal 1997 and 1996. The bid quotations
representing prices in the over-the-counter market between dealers in
securities do not include retail mark-ups, mark-downs or commissions
and do not necessarily represent actual transactions.
Fiscal 1997 Fiscal 1996
Quarter High Low High Low
1st 14-3/4 7-1/2 3 2-3/16
2nd 11-1/4 8-1/4 3-3/8 2-5/8
3rd 10-1/8 6-3/4 4-3/4 2-3/4
4th 8-1/2 6-1/2 14-3/8 1-3/4
(b) Holders
As of August 4, 1997 there were 288 shareholders 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.
ITEM 6. SELECTED FINANCIAL DATA
YEARS ENDED
JUNE 1, JUNE 2, MAY 28, MAY 29, MAY 30,
1997 1996 1995 1994 1993
(Amounts in Thousands, Except Per Share Data)
Net Sales $40,012 $33,774 $27,054 $17,975 $21,198
Cost of Goods Sold 29,489 25,509 20,727 14,238 15,947
Gross Profit $10,523 $8,265 $6,327 $3,737 $5,251
Operating Expenses:
Marketing $3,307 $2,633 $2,346 $1,878 $2,164
Design Engineering 1,582 1,575 1,269 934 1,158
General & 3,052 2,491 1,955 1,956 1,946
Administration
$7,941 $6,699 $5,570 $4,768 $5,268
Operating Income (Loss) $2,582 $1,566 $757 ($1,031) $(17)
Other 183 84 22 (1) 18
Interest Expense (490) (742) (446) (288) (232)
Income (Loss) Before
Income Taxes $2,275 $908 $333 ($1,320) ($231)
Income Taxes (Benefit) (90) 25 -- -- --
Net Income (Loss) $2,365 $883 $333 ($1,320) (231)
Income (Loss) Per Share $0.72 $0.40 $0.16 ($0.64) ($0.11)
Total Assets $26,094 $18,730 $15,429 $10,667 $10,109
Property Plant & $3,568 $2,849 $3,002 $1,725 $2,082
Equipment, Net
Working Capital $15,231 $3,754 $2,942 2,913 $354
Long Term Notes Payable $441 $935 $1,221 $233 $354
Stockholders' Equity $18,936 $5,571 $4,484 $4,069 $5,439
ITEM 7 MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
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 provide forward-looking statements
concerning possible or anticipated future results of operations or
business developments which are typically preceded by the words
"believes", "expects", "anticipates", "intends" or similar expression. For
such forward-looking statements, the Company claims the protection of the
safe harbor for forward looking statements contained in the Private
Securities Litigation Reform Act of 1995. Shareholders and the investing
public should understand that such forward-looking statements are subject
to risks and uncertainties which could cause results or developments to
differ significantly from those indicated in the forward-looking
statements. Such risks and uncertainties include, but are not limited to,
the overall level of sales by OEMs in the telecommunications, data
communications, computer peripherals and the medical markets; 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
Company's target markets generally
RESULTS OF OPERATIONS
Net sales for fiscal 1997 were $40,012,000, up 18.5% from net sales of
$33,774,000 in fiscal 1996 which were up by 24.8% from net sales of
$27,054,000 in fiscal 1995. The improvement for each year is due
principally to two factors:
* First, strong growth in the telecommunications and data
communications industries where the Company's products are sold to
original equipment manufacturers (OEMs) for use in applications such as
modems, network routers, and wide as well as local area network systems.
* Second, effectiveness of the Company's strategies in partnering with
OEM customers to provide competitively priced power conversion
products. as well as engineering and other services required
in the development of their new products.
As a contributing factor to its strategy of customer support, the Company
introduced eighteen new products in fiscal 1997, compared to fifteen and
eleven in fiscal 1996 and fiscal 1995, respectively. One of the fiscal
1997 introductions was a family of 45-watt switching power supplies that is
based on the Company's patented high density power conversion technology.
A second new high density product, a 100-watt switching power supply is
planned for introduction during the second quarter of fiscal 1998. This
new product will open opportunities for the Company in the
telecommunications and data communications market for applications that
require this higher level of power. Representing another important
achievement, in fiscal 1997, the Company signed an agreement with Shinko
Shoji, a large Japanese international distributor of electronic products.
Under the agreement, Shinko Shoji will be an independent representative
and distributor of the Company's products through out Asia. The alliance
is enabling quicker access to potential new customers in the Pacific Rim,
but has not yet resulted in any significant orders. The Company also has
an agreement with Moli Energy, a Japanese manufacturer of lithium ion
rechargeable batteries, wherein the Company will have exclusive rights to
provide its battery chargers in support of Moli's batteries. Lithium ion
batteries, as compared to other types of batteries are lighter, longer
lasting and more environmentally safe. The product designed by the Company
is awaiting agency approval. Also, to augment low cost production
capabilities being provided by its wholly owned Korean subsidiary and
subcontractors in China and Thailand, the Company established a wholly
owned manufacturing operation in northern China during the third quarter of
fiscal 1997. The new facility commenced shipment of transformer products
late in the fourth quarter and will be equipped to manufacture all of the
Company's products.
In spite of these favorable conditions for the Company, two currently
prevailing market factors are expected to delay the growth in revenues
that was anticipated to occur in early fiscal 1998:
* First, certain customers in the telecommunications and data
communications market have elected to delay introduction of new products,
choosing instead to continue to promote and sell existing designs. It is
believed that receipt of orders for support of new products will begin
during the second quarter of fiscal 1998.
* Second, although the Company is a leading supplier of power
conversion products for cable modems, advancements in the
infrastructure, such as transmission stations and wired systems needed
to support faster growth in the use of cable modems are not yet in
place and are anticipated to delay introduction by OEMs of new cable
modem products for approximately five months. Markets for modems
used in other transmission systems are growing at anticipated rates.
Because of these two reasons, the Company believes that revenues for its
first quarter of fiscal 1998 may only approximate the revenues that were
achieved in its first quarter of fiscal 1997, although it is anticipated
that revenues for the year will compare favorably with the revenues
recorded in fiscal 1997.
The Company's order backlog at June 1, 1997, was $14,720,000, down from
$16,971,000 at June 2, 1996, and as compared to $10,400,000 at May 28,
1995. The order backlog at June 1, 1997, represents shipments for
approximately four months and reflects the current posture of many OEMs to
limit their contractual commitments to the best lead -time of their
customers.
Gross profit for fiscal 1997 amounted to $10,523,000 or 26.3% of net sales
, compared to $8,265,000, which was 24.5% of net sales for fiscal 1996, and
$6,327,000 equaling 23.4% of net sales in fiscal 1995. The improved gross
profit for each fiscal year is due principally to the higher sales with
essentially little change in the Company's fixed cost structure. Also in
fiscal 1997, products that were sold contained a greater proportion of
higher margin switching power supplies than were contained in products that
were sold for the previous fiscal year.
Operating expenses for fiscal 1997 totaled $7,941,000, or 19.8% of net
sales, compared to $6,699,000 for fiscal 1996, which was also 19.8% of net
sales. In fiscal 1995, operating expenses were $5,571,000, or 20.6% of net
sales. Compared to fiscal 1996, the increased expenditure of $1,242,000 in
fiscal 1997 was incurred for commissions paid to sales representatives on
the greater sales and other marketing expenses incurred for sales
promotional activities and to position the Company to compete in the Asian
market. The Company also incurred additional expenses to upgrade its
management information system, and for administration of its foreign
manufacturing activities. Compared to fiscal 1995, the increased
expenditure of $1,128,000 in fiscal 1996 was incurred principally for the
greater but proportionate commissions paid to sales representatives on the
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. It is
the policy of the Company to make performance bonus payments to its US
employees for attaining certain levels of planned profitability.
Accordingly, payments amounting to two weeks of salaries were made in
fiscal 1997 and fiscal 1996 and one week of salaries in fiscal 1995.
Operating income increased by 64.9% to $2,582,000 in fiscal 1997 from
$1,566,000 in fiscal 1996. Fiscal 1996 income represented an increase of
106.9% from $757,000 in fiscal 1995.
Non-operating income of $183,000, $84,000 and $22,000 for fiscal 1997,1996,
and 1995, respectively, were primarily interest income, currency exchange
rate gains from importation of raw material by the Korean subsidiary and
income derived from rented portions of the Korean manufacturing facility.
The Company incurred interest expenses of $490,000 in fiscal 1997, $742,000
in fiscal 1996, and $446,000 in fiscal 1995. Interest expenses declined in
fiscal 1997 and interest income increased due to the availability of funds
that were raised from the public offering of common shares in the third
quarter of the year, portions of which were used for the repayment of
interest bearing indebtedness.
The Company had pre-tax income of $2,275,000 for fiscal 1997 at which its
applicable US and state income tax rate before adjustments for net
operating loss carryforwards (NOL), tax credits and reduction in valuation
allowances amounted to 38.0%. Its recorded tax liability after the
utilization of NOL tax credits and the tax benefits related to stock
options exercise totaled $462,000. At June 1, 1997, the Company's deferred
tax assets amounted to $681,000, of which tax credit carryforwards were
$451,000. The balance of $230,000 related principally to accrued financial
statement expenses that are only recognized for income tax purposes when
they become actual expenses in the future, and to portions of amortized
costs that currently are in excess of amounts calculated for income tax
purposes. Deferred tax assets are recognizable as assets on financial
statements only when there is favorable evidence by past and anticipated
operation performances that they are likely to be of future benefit to the
organization. Because of its past three years of performance and its
future outlook, the Company determined that this test was met, therefore
deferred tax assets amounting to $681,000 were recognized in the fourth
quarter of fiscal 1997. Together with a recorded income tax expense of
$591,000,which contained an amount of $131,000 associated with the exercise
of stock options, the recognition resulted in a net tax benefit to the
Company of $90,000 and increased net income after tax to $2,365,000. In
fiscal 1996, the Company had pre-tax income of $908,000 on which, after the
utilization of NOL resulted in income tax expense of $25,000. Utilization
of tax credits and NOL is limited by the Alternative Minimum Income Tax.
The Company incurred no income taxes in fiscal 1995 on earnings of $333,000
after the utilization of NOL carryforwards. Ault Korea Corporation
reported losses in fiscal 1997 and fiscal 1996 and had no income tax
expenses. The subsidiary also incurred no income tax on profits of $81,000
in fiscal 1995 because of the utilization of NOL. See Note 4. Income
Taxes, under NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Based on 3,302,000 weighted average shares outstanding in fiscal 1997, the
Company reported per share earnings of $0.72. The Company reported per
share earnings of $0.40 in fiscal 1996, and $0.16 in fiscal 1995, based on
weighted average shares and common equivalent shares outstanding of
2,224,000 and 2,106,000 for each year, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of working capital relied on for normal
growth in revenue and attainment of profit goals have been its credit
facilities and cash flows from operations. Since fiscal 1995 however,
market conditions for sale of power conversion products have significantly
improved while strategies of the Company to grow by offering to customers
competitive engineering and services were achieving increasing success.
These factors have presented opportunities to enhance revenue and profits
above that which its existing sources of working capital would support.
Also, growth in trade receivables and inventories that resulted from
increased sales and customer services were using greater amounts of cash,
thereby placing greater reliance on credit facilities to provide the needed
working capital.
Public offering of Common Shares
In view of the opportunities available to the Company for continued
business growth, and the lack of adequate supporting cash flows with which
to pursue them, during the second quarter, the Company filed a registration
statement to conduct a second public offering of its common shares. The
ofering was completed on December 12, 1996, and together with the
underwriters' purchase of over-allotment shares, the Company sold 1,840,000
common shares from which it raised $10,621,000, after underwriters'
discount and other offering expenses.
The net proceeds to the Company were to be expended for the following
purposes:
(a) Repayment of debt in the US at First Bank, Minneapolis, (First Bank)
of approximately $5.2 million
(b) Additional investments of approximately $2.5 million in Ault Korea
Corporation so that it could (1) upgrade its manufacturing and management
information system capabilities, (2) purchase a manufacturing operation in
northern China and equip its leased facility for the manufacture of power
conversion products, (3) repay its mortgage loan, and (4) reduce its short-
term bank debt.
(c) Investment of $1.5 million in Thailand through a joint venture with a
current, major sub-contractor to expand its capabilities and capacity to
manufacture low cost products for the Company.
(d) Application to general corporate purposes, including working capital
of the approximate balance of $1.4 million.
At June 1, 1997, approximately $7,150,000 had been utilized for these
purposes, except that no funds have been used for the Thailand joint
venture.
Credit Facilities
The Company maintains two credit facilities; its primary credit facility
with First Bank, and a smaller facility with Korea Exchange Bank
supporting the South Korean subsidiary.
Prior to application of funds from the public offering, the US credit
facility totaled $6.0 million collateralized by a security interest in all
of the Company's US assets. Indexed to certain percentages of trade
receivables and other assets, borrowings were approximately $5.2 million at
an interest spread of .75% above the prime rate,. Additionally, $400,000
of the credit facility was allocated to a standby letter of credit provided
to Korea Exchange Bank as collateral for the credit facility it provided to
the South Korean subsidiary. Following the public offering, the Company
repaid all indebtedness to First Bank, terminated the letter of credit
agreement and negotiated a new credit arrangement. The new credit
arrangement with First Bank includes the following:
(a) A revolving credit facility of $2.0 million at prime rate of interest,
secured by trade receivables and terminating on October 1, 1997,
although it may be amended for an extended period. At the end of the
fiscal year, there were no borrowings against this credit facility.
(b) An equipment term loan in an amount of $300,000 that is
repayable at 8.1% per annum over four years. At June 1, 1997, all
proceeds from this loan were received by the Company.
The South Korean credit facility is for $1.5 million of which borrowings at
June 1, 1997 were $756,000 at 9.0% interest, down from $1,113,000 prior to
the public offering.
Cash Flows
Operations: Operations provided $158,000 of net cash in fiscal 1997, which
came from activities that provided $2,730,000 of cash and activities that
used $2,572,000 of cash. The activities that provided $2,730,000 of cash
were:
(a) Net profit adjusted for non-cash items provided net cash of $2,274,000
of which net profit before the adjustments totaled $2,365,000. The non-
cash items were principally depreciation expenses of $490,000, tax benefits
associated with stock options of $131,000,and deferred taxes of $681,000
from the recognition of deferred tax assets, discussed above.
(b) Reduction in inventories which were principally raw material provided
$11,000 of cash.
(c) Increase in income taxes payable provided $405,000 of cash.
The activities that used $2,572,000 of cash were:
(a) Increase in trade receivable used $1,551,000 of cash principally due
to increased sales and timing in collections.
(b) Increase in prepaid expenses used $200,000, which were principally
amounts advanced to sub-contractors of sub-assemblies for the Korean
operation.
(c) Reduction in trade payable and accrued expenses used $820,000 of
cash. The reduction occurred principally because of faster payment terms
that were afforded to foreign vendors and vendors of the Korean operation
to ensure a timely flow of material for manufacturing purposes.
Investing Activities: Investing activities used net cash of $2,217,000 of
which $1,205,000 was expended for the purchase of capital equipment and
tooling and for upgrading management information systems. Additionally,
$848,000 of cash was invested in tax discounted preferred stock with
quarterly dividend payments. The balance of $164,000 was principally for
amortizeable start-up cost associated with the Ault China subsidiary and
expenditures on a project for a former customer, for which the Company is
pursuing recovery through litigation that is currently in process.
Financing Activities: Financing activities provided net cash of $5,209,000
which were comprised of the following items:
(a) Net cash amounting to $10,621,000 received from the public offering of
common shares, discussed above.
(b) The exercise of common stock options by employees and directors at a
price of $337,000. The transaction, net of an amount of $204,000
receivable from the optionees provided net cash of $133,000.
(c) Proceeds from long-term borrowings which included an equipment term
loan and a bank note provided $524,000 of cash. The equipment term loan,
discussed above provided $300,000 of cash. The balance of $224,000 was
provided under a bank note guaranteed by the Korean government under their
small business export program. The note bears a rate of interest that is
approximately 6.5% per annum.
(d) Reduction in revolving credit borrowings that were outstanding at June
2, 1996 used $4,862,000 of cash.
(e) Reduction of long-term debt from balances outstanding at June 2, 1996,
used $1,207,000 of cash which related principally to repayment of mortgage
loan on the South Korean subsidiary's manufacturing facility.
Effect of Foreign Currency Exchange Rate: Although the Korean Won has been
relatively stable, the effect of the translation of the Korean financial
statements, prepared in Won, to US dollars resulted in net asset value
increase of $115,000. The increase occurred principally because portions
of the investment to the subsidiary, discussed above, were used to repay a
substantial portion of its bank and long-term indebtedness.
Current Working Capital Position:
At June 1, 1997, the Company had cash and cash equivalents of $3,677,000,
up $3,265,000 from a balance of $412,000 at June 2, 1996. Ratio of
current assets to current liabilities had increased to 3.4 to 1 from 1.3 to
1 at June 2, 1996, and working capital had improved during the period to
$15,231,000 from $3,754,000.
As a result of the improved working capital situation, management believes
that the Company is better positioned to pursue the opportunities for
growth and profitability that are available in the currently prevailing
market condition and to execute its strategies into fiscal 1998.
Additional sources of funds would be needed, however, to pursue any
significant business opportunity that represents a change in current
strategies.
Impact of Recent Accounting Standard Changes:
SFAS No. 123: In October, 1995, the FASB issued 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
continue to be measured using the intrinsic value-based method of
accounting prescribed by Accounting Principles Board Statement No. 25,
Accounting for Stock Issued to Employees, providing that there were
expanded disclosures. The Company has adopted the disclosure-only
provisions of SFAS No. 123. Accordingly, no compensation costs have been
recognized for the stock option . The effect on net income and per share
earnings if compensation costs were recognized is shown in Note 6. Stock
Option Plan, under NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statement No. 128: The FASB has issued Statement No. 128, Earnings Per
Share, which supersedes APB Opinion No. 15. Statement No. 128 requires the
presentation of earnings per share by all entities that have common stock
or potential common stock, such as options, warrants, and convertible
securities outstanding that trade in a public market. Those entities that
have only common stock outstanding are required to present basic earnings
per-share amounts. All other entities are required to present basic and
diluted per-share amounts. Diluted per-share amounts assume the conversion
,exercise, or issuance of all potential common stock instruments unless
the effect is to reduce a loss or increase the income per common share from
continuing operations. The Company is required to adopt Statement No 128
for annual and interim periods ending after December 15, 1997. The impact
of Statement No. 128 if it were currently adopted is shown in Earnings per
share, Note 1. Nature of Business and Significant Accounting Policies,
Under NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Impact of Foreign Operations and Currency changes
Although products that were manufactured by Ault Korea Corporation
contributed a very significant portion of total sales, conversion of the
Won to US dollars had no significant impact on profits because conversion
rates were relatively stable. Additionally, the Company is not exposed to
any significant currency exchange risk related to its foreign manufacturing
arrangements since most transactions are conducted in US dollars.
Contracts that are in foreign currencies are not significant in amounts at
this time and therefore exposure to currency exchange risk is minimal.
Microchip Based Date-referenced Systems and Year 2000 Compliance
All of the Company's microchip-based date referenced systems, including
computer software and hardware are already year 2000 compliant. There are
no internal matters, therefore, that will affect the Company's ability to
process systems date-referenced information when year 2000 arrives. The
Company does not yet know of the extent to which the current preparedness
of its external business associates would show to adversely affect its
business transactions if test of their systems were made today. The
Company is communicating with these external sources and its objective is
to obtain their commitment that they will be Year 2000 compliant by
December 31, 1998.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not yet applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
(a) Financial Statements
Index to Consolidated Financial Statements
Page
* Independent Auditor's Report 20
* Consolidated Balance Sheets, June 1, 1997 and
June 2, 1996 21
* Consolidated Statements of Operations for the
Years Ended June 1, 1997, June 2, 1996 and May
28, 1995 22
* Consolidated Statements of Stockholders' Equity
for the Years ended June 1, 1997, June 2, 1996
and May 28, 1995 23
* Consolidated Statements of Cash Flows for the
Years ended June 1, 1997, June 2, 1996 and May
28, 1995 24
* Notes to Consolidated Financial Statements 26
(b) Supplemental Financial Information
* Quarterly Financial Data 36
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 1, 1997, and June 2, 1996, and the
related consolidated statements of income, stockholders' equity, and cash
flows for each of the three fiscal years in the period ended June 1, 1997.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe 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 1, 1997, and June 2, 1996, and the
results of their operations and their cash flows for each of the three
fiscal years in the period ended June 1, 1997, in conformity with generally
accepted accounting principles.
McGLADREY & PULLEN, LLP
Minneapolis, Minnesota
July 15, 1997
AULT INCORPORATED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 1, 1997 and June 2, 1996
ASSETS (Note 3) 1997 1996
Current Assets
Cash and cash equivalents $3,677,089 $412,406
Investment in available-for-sale 848,699 0
securities
Trade receivables, less allowance for 8,895,864 7,335,888
doubtful accounts 1997 $55,000; 1996
$51,000 (Note 11)
Inventories (Note 2) 7,261,927 7,272,794
Prepaid and other expenses 660,400 460,078
Deferred taxes (Note 4) 123,000 0
Total current assets 21,466,979 15,481,166
Other Assets
Other receivable, less allowance of 196,677 196,677
$65,000 (Note 10)
Patent, less amortization in 1997 of 178,503 181,528
$3,025
Deferred taxes (Note 4) 558,000 0
Other 126,179 21,709
1,059,359 399,914
Property, Equipment, and Leasehold
Improvements, at cost (Note 8)
Land 875,198 825,809
Building 796,354 735,413
Machinery and equipment 5,571,665 5,112,855
Office furniture and equipment 519,418 593,481
Data processing equipment 1,014,964 1,004,749
Leasehold improvements 656,429 686,619
9,434,028 8,958,926
Less accumulated depreciation 5,865,905 6,109,895
3,568,123 2,849,031
$26,094,461 $18,730,111
See Notes to Consolidated Financial Statements.
AULT INCORPORATED AND SUBSIDIARY
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
Current Liabilities
Note payable to bank (Note 3) $755,696 $5,617,820
Current maturities of long-term debt 199,118 387,664
Accounts payable 3,530,915 4,512,539
Accrued expenses:
Compensation 503,308 556,448
Other 816,811 627,633
Income tax payable 430,151 25,000
Total current liabilities 6,235,999 11,727,104
Long-Term Debt, less current maturities (Note 441,100 935,064
3)
Deferred Rent Expense (Note 8) 123,167 163,972
Retirement and Severance Benefits 358,384 332,716
Commitments and Contingencies (Note 8)
Stockholders' Equity (Notes 3, 5, 6, and 7)
Preferred stock, no par value; authorized
1,000,000 shares; none issued 0 0
Common stock, no par value; authorized
5,000,000 shares; issued and
and outstanding 1997; 4,075,733 shares; 18,055,290 6,966,779
1996; 2,119,776 shares
Deduct notes receivable arising from the
sale of common stock (203,750) 0
Foreign currency translation adjustment 30,788 (83,928)
Retained earnings (deficit) 1,053,483 (1,311,596)
18,935,811 5,571,255
$26,094,461 $18,730,111
AULT INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 1, 1997, June 2, 1996, and May 28, 1995
1997 1996 1995
Net sales (Note 11) $40,011,790 $33,773,875 $27,054,421
Cost of goods sold 29,489,141 25,509,262 20,727,224
Gross profit 10,522,649 8,264,613 6,327,197
Operating expenses:
Marketing 3,306,320 2,632,857 2,346,459
Design engineering 1,582,046 1,575,038 1,268,874
General and administrative 3,052,244 2,491,057 1,955,311
7,940,610 6,698,952 5,570,644
Operating income 2,582,039 1,565,661 756,553
Nonoperating income (expense):
Other 182,971 84,333 22,325
Interest expense (489,931) (742,305) (445,611)
Income before income taxes 2,275,079 907,689 333,267
Income taxes (benefit) (Note 4) (90,000) 25,000
Net income $2,365,079 $882,689 $333,267
Net income per share $0.72 $0.40 $0.16
Weighted average number of shares and
common equivalent shares outstanding 3,302,170 2,223,543 2,105,556
See Notes to Consolidated Financial Statements.
AULT INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended June 1, 1997, June 2, 1996, and May 28, 1995
Foreign
Notes Currency
Receivable Transla-
Common Stock From Sale Retained tion
of Common Earnings Adjust-
Shares Amount Stock (Deficit) ments Total
Balance, May 29, 1994 2,062,526 $6,862,801 $(107,813) $(2,527,552) $(158,060) $4,069,376
Net income -- -- -- 333,267 -- 333,267
Net change in foreign
currency translation -- -- -- -- 46,374 46,374
adjustment
Issuance of 21,250
shares of common stock
in accordance with the
stock option plan
(Note 6) 21,250 34,531 -- -- -- 34,531
Balance, May 28,1995 2,083,776 6,897,332 (107,813) (2,194,285) (111,686) 4,483,548
Net income -- -- -- 882,689 -- 882,689
Net change in foreign
Currency translation
adjustment -- -- -- -- 27,758 27,758
Issuance of 36,000
shares of common
stock in accordance
with stockoption plan
(Note 6) 36,000 69,447 -- -- -- 69,447
Payment of notes
receivable which
arose from the sale
of common stock -- -- 107,813 -- -- 107,813
Balance june 2,
1996 2,119,776 6,966,779 -- (1,311,596) (83,928) 5,571,255
Net income -- -- -- 2,365,079 -- 2,365,079
Net change in
foreign currency
translation
adjustment -- -- -- -- 114,716 114,716
Issuance of 115,957
shares of common
stock in accordance
with stock purchase
plan and stock
option plan (Notes
5 and 6) 115,957 336,717 (203,750) -- -- 132,967
Sale of company
stock, net of
offering expenses
of $442,109 1,840,000 10,620,794 -- -- -- 10,620,794
Income tax benefit
from stock options
exercised (Note 4) -- 131,000 -- -- -- 131,000
Balance on June 1,
1997 4,075,733 $18,055,290 $(203,750) $1,053,483 $30,788 $18,935,811
See Notes to Consolidated Financial Statements.
AULT INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 1, 1997, June 2, 1996, and May 28, 1995
1997 1996 1995
Cash Flows From Operating Activities:
Net income $2,365,079 $882,689 $333,267
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation 489,950 509,458 528,109
Amortization 3,025 2,363 2,451
Provision for doubtful accounts 50,000 67,000 10,000
Provision for inventory allowance 0 (130,000) (272,000)
Gain on disposal of equipment (4,117) 0 0
Deferred taxes (681,000) 0 0
Tax benefit associated with stock 131,000 0 0
options
Deferred rent expense (40,805) (28,905) (15,505)
Changes in assets and liabilities:
(Increase) decrease in:
Trade receivables (1,550,600) (2,106,114) (1,652,739)
Inventories 10,867 (1,242,606) (1,123,580)
Prepaid and other expenses (200,322) 10,511 (156,607)
Increase (decrease) in:
Accounts payable (981,624) 151,533 1,264,569
Accrued expenses 161,706 480,653 147,251
Income tax payable 405,151 25,000 0
Net cash provided by (used in)
operating activities 158,310 (1,378,418) (934,784)
Cash Flows From Investing Activities:
Purchase of property and equipment (1,204,925) (356,312) (1,720,930)
(Increase) decrease in patent and
other assets (163,846) (158,573) 40,9920
Purchase of available-for-sale
securities (848,699) 0 0
Net cash used in investing activities (2,217,470) (514,885) (1,679,938)
Cash Flows From Financing Activities:
Net (payments) borrowings on revolving
credit agreement (4,862,124) 2,048,207 1,589,669
Proceeds from long-term borrowings 524,140 0 1,517,290
Proceeds from issuance of common stock 132,967 69,447 34,531
Net payments from notes receivable
arising from sale of common stock 0 107,813 0
Principal payments on long-term
borrowings, including capital lease
obligations (1,206,650) (266,759) (387,303)
Proceeds from sale of common stock net
of $442,109 of expenses 10,620,794 0 0
Net cash provided by financing
activities 5,209,127 1,958,708 2,754,187
(Continued)
AULT INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended June 1, 1997, June 2, 1996, and May 28, 1995
1997 1996 1995
Effect of Foreign Currency Exchange
Rate Changes on Cash 114,716 27,758 46,374
Increase in cash and cash equivalents 3,264,683 93,163 185,839
Cash and Cash Equivalents
Beginning 412,406 319,243 133,404
Ending $3,677,089 $412,406 $319,243
Supplemental Disclosures of Cash Flow
Information
Cash payments for:
Interest $534,803 $676,810 $414,979
Taxes 59,433
Supplemental Schedule of Noncash $0 $0 $50,142
Financing Activities Capital lease
obligations for equipment
See Notes to Consolidated Financial Statements.
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,
telecommunications 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 and cash equivalents: 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.
For purposes of reporting cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents. Cash equivalents consist primarily of short-term
commercial paper.
Inventories: Inventories are stated at the lower of cost (first-in, first-
out method) or market.
Investment in available-for-sale securities: Available-for-sale securities
consist of marketable equity securities. These investments are stated at
fair value which approximates cost at June 1, 1997. There were no
investments in available-for-sale securities at June 2, 1996.
Prepaid and other expenses: Prepaid and other expenses at June 1, 1997,
and June 2, 1996 include refundable value-added tax and refundable custom
duties relating to the Korean operations of approximately $224,000 and
$303,000, respectively.
Patent: The patent is stated at cost and is being amortized using the
straight-line method over its economic useful life, which has been
estimated to be five 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
Retirement and severance benefits: Retirement and severance benefits
represents the accrual of compensation expense, net of deposits, for the
Korean operations' employees that is payable upon termination of
employment.
The Company does not fund the retirement and severance benefits accrued,
rather provides for the estimated accrued liability under the plans as of
the balance sheet date. Under the National Pension Scheme of Korea, the
Company is required to transfer a certain portion of the retirement
allowances of employees to the National Pension Fund. The amount
transferred reduces the amount payable to employees and is reflected in the
accompanying financial statements.
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.
Long-lived assets: In accordance with Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of, the Company reviews its long-lived
assets and intangibles related to those assets periodically to determine
potential impairment by comparing the carrying value of the long-lived
assets outstanding with estimated future cash flows expected to result from
the use of the assets, including cash flows from disposition. Should the
sum of the expected future cash flows be less than the carrying value, the
Company would recognize an impairment loss. An impairment loss would be
measured by comparing the amount by which the carrying value exceeds the
fair value of the long-lived assets and intangibles. To date, management
has determined that no impairment of long-lived assets exists.
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.
Earnings per share: Earnings per share have been computed using the
weighted average number of common shares and certain dilutive common
equivalent shares outstanding.
The FASB has issued Statement No. 128, Earnings Per Share, which supersedes
APB Opinion No. 15. Statement 128 requires the presentation of earnings
per share by all entities that have common stock or potential common stock,
such as options, warrants, and convertible securities, outstanding that
trade in a public market. Those entities that have only common stock
outstanding are required to present basic earnings per-share amounts. All
other entities are required to present basic and diluted per-share amounts.
Diluted per-share amounts assume the conversion, exercise, or issuance of
all potential common stock instruments unless the effect is to reduce a
loss or increase the income per common share from continuing operations.
All entities required to present per-share amounts must initially apply
Statement No. 128 for annual and interim periods ending after December 15,
1997. Earlier application is not permitted.
Because the Company has potential common stock outstanding (stock purchase
warrants, as discussed in Note 7, and stock options to employees and
directors, as discussed in Note 6), the Company will be required to present
basic and diluted earnings per share. If the company had applied Statement
No. 128 in the accompanying financial statements, the following per-share
amounts would have been reported:
June 1, 1997 June 2, 1996 May 28, 1995
Basic earnings per share $0.79 $0.42 $0.16
Diluted earnings per shar 0.72 0.40 0.16
The weighted-average number of shares of common stock used to compute the
basic earnings per share was increased by 287,392, 130,191 and 28,213
shares for the years ended June 1, 1997, June 2, 1996 and May 28, 1995,
respectively, for the assumed exercise of stock purchase warrants and
employee and director stock options in computing the diluted per-share
data.
Fiscal year: The Company operates on a 52- to 53- week fiscal year. The
fiscal years for the financial statements presented ended June 1, 1997,
June 2, 1996 and May 28, 1995.
Note 2. Inventories
The components of inventory at June 1, 1997, and June 2, 1996 are as
follows:
1997 1996
Raw materials $4,225,624 $4,263,468
Work in process 256,042 318,711
Finished goods 2,750,261 2,690,615
$7,261,927 $7,272,794
Note 3. Financing Arrangement and Long-Term Debt
Financing arrangement: At June 1, 1997, the Company had a $2,000,000
revolving line-of-credit agreement through October 31, 1997. Interest on
advances is at the bank's reference rate, currently 8.5 percent at June 1,
1997. 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 a restriction on the payment of
any dividends. There were no advances outstanding at June 1, 1997. Also,
the Company's Korean subsidiary maintains a modest facility agreement to
cover bank overdrafts, short-term financing, and export financing.
Advances outstanding relating to the Korean facility were $755,696 at June
1, 1997.
Long-term debt:
CAPTION>
June 1, 1997 June 2, 1996
9% mortgage payable, paid in 1997 $-- $1,033,007
8.1% term loan, due in monthly 288,045 --
installments of $7,340, including interest
to February 2001, secured by equipment
6.5% note payable, due in quarterly 224,140 --
installments of $28,019 plus interest
through April 2000, secured by equipment
Capitalized lease obligations, due in 63,033 149,721
various monthly installments, with
interest ranging from 8.9% to 16.3%, to
June 1999, secured by equipment
Other notes payable 65,000 140,000
Total 640,218 1,322,728
Less current maturities 199,118 387,664
$441,100 $935,064
Approximate maturities of long-term debt for years subsequent to June 1,
1997, are as follows:
1998 $199,000
1999 186,000
2000 191,000
2001 64,000
$640,000
Note 4. Income Taxes
Pretax income (loss) for domestic and foreign operations was as follows:
June 1, 1997 June 2, 1996 May 28, 1995
Domestic $2,394,204 $916,344 $252,514
Foreign (119,125) (8,655) 80,753
Total $2,275,079 $907,689 $333,267
The components of the provision (benefit) for income taxes as follows:
June 1, 1997 June 2, 1996 May 25, 1995
Current:
Domestic (b) $412,000 $25,000 $ --
Foreign -- -- --
State 48,000 -- --
Deferred (681,000) -- --
Additional 131,000 -- --
capital from
benefit of stock
options exercised
(a)
$(90,000) $25,000 $ --
(a) Stock options which were exercised by employees resulted in
compensation to them for income tax purposes based on the increase in fair
market value of the Company's common stock subsequent to the date of grant
of those options. As required, this compensation was not recognized as an
expense for financial accounting purposes, and the related tax benefits
were recorded directly to the Company's capital. The compensation
deductions resulting from the exercise of stock options were not material
in previous years.
June 1, June 2, May 25,
1997 1996 1995
(b) Domestic tax expense $680,000 $270,000 $115,000
before application of net
operating loss and tax credit
carryforwards
Federal net operating loss (65,000) (245,000) (115,000)
Tax credits (203,000) -- --
Domestic tax expense $412,000 $25,000 $ --
Income tax expense (benefit) for the years ended June 1, 1997, June 2, 1996
and May 28, 1995, differs from the expected rate for the following reasons:
1997 1996 1995
Computed expected tax provision
(benefit):
Domestic $814,000 $312,000 $86,000
Foreign (28,000) -- 7,000
State income taxes, net of
federal benefit 82,000 6,000 6,000
Utilization of net operating
loss and tax credit
carryforwards:
Domestic (268,000) (293,000) (92,000)
Foreign -- -- (7,000)
State (35,000) -- --
Reduction in valuation (711,000) -- --
allowance
Non-utilization of foreign tax 28,000 -- --
benefit
Non-deductible expenses 28,000 -- --
$(90,000) $ 25,000 $ --
Net deferred taxes consist of the following components as of June 1, 1997,
and June 2, 1996:
1997 1996
Deferred tax assets:
Tax credit carryforwards $451,000 $ 633,000
Loss carryforwards 28,000 161,000
Allowance for doubtful accounts 48,000 46,000
Inventory allowances 9,000 23,000
Accrued vacation 34,000 30,000
Accrued warranty 32,000 31,000
Equipment and leasehold 107,000 118,000
improvements
709,000 1,042,000
Less valuation allowance 28,000 1,042,000
$681,000 $ --
The components giving rise to the net deferred tax asset described above
have been included in the accompanying consolidated balance sheet as of
June 1, 1997, as follows:
Current assets $123,000
Noncurrent assets $586,000
Less valuation allowance 28,000
Net noncurrent assets $558,000
At June 1, 1997, the Company reduced the valuation allowance to reflect the
deferred tax assets utilized in 1997 to reduce current income taxes and to
recognize net deferred tax assets of $681,000 at June 1, 1997. The
recognized deferred tax assets results from the expected utilization of net
operating losses and tax credit carryforwards and reversal of certain
temporary differences.
The Company has assessed its past earnings history and trends, budgeted
sales, and expiration of dates of carryforwards and has determined that it
is more likely than not that the $681,000 of deferred tax assets will be
realized. The remaining valuation allowance of $28,000 relates to deferred
tax assets relating to net operating losses of its Korean subsidiary which
the Company, at this time, has determined to be not realizable.
At June 1, 1997, the Company had net operating loss carryforwards to reduce
future taxable income in Korea of approximately $137,000. The Company also
has tax credit carryforwards of approximately $451,000 available to reduce
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 Tax
Loss Credits
1999 $ -- $157,000
2000 -- 52,000
2001 -- 22,000
2002 137,000 --
2004 -- 14,000
2005 -- 42,000
2006 -- 40,000
2007 -- 35,000
2008 -- 31,000
2009 -- 13,000
2010 -- 41,000
2011 -- 4,000
$137,000 $451,000
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 amounts charged to operating expenses in the
years ended June 1, 1997, June 2, 1996 and May 28, 1995, approximated
$37,000, $38,000 and $33,000, respectively.
Stock purchase plan: On March 10, 1996, the Company established a stock
purchase plan in which up to 100,000 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. There were 13,957
shares purchased under this plan during the year ended June 1, 1997. No
shares were purchased under this plan during the year ended June 2, 1996.
Note 6. Stock Option Plan
The Company has reserved 500,000 common shares for issuance under qualified
and non-qualified stock options for its key employees and directors.
Option prices are the market value of the stock at the time the option was
granted. Options become exercisable as determined at the date of grant by
a committee of the Board of Directors. Options expire ten years after the
date of grant unless an earlier expiration date is set a the time of grant.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-based
Compensation. Accordingly, no compensation cost has been recognized for
the stock option plan. Had compensation cost for the Company's stock
option plans been determined based on the fair value at the grant date for
awards in 1997 and 1996 consistent with the provisions of SFAS No 123, the
Company's net income and net income per share would have changed to the pro
forma amounts indicated below:
1997 1996
Net income, as reported $2,365,079 $882,689
Net income, pro forma 1,969,063 827,227
Net income, per share, as 0.72 0.40
reported
Net income, per share, pro forma 0.60 0.37
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997 and 1996:
1997 1996
Expected divident yield -- --
Expected stock price volatility 67.68% 65.32%
Risk-free interest rate 6.18% 5.84%
Expected life of options 5 years 4 years
The pro forma effect on net income in 1997 and 1996 is not representative
of the pro forma effect in future years because it does not take into
consideration pro forma compensation expense related to grants made prior
to 1996.
Additional information relating to all outstanding options as of June 1,
1997, June 2, 1996 and May 28, 1995 is as follows:
1997 1996 1995
Weighted Weighted
Average Average
Shares Exercise Shares Exercise Shares
Price Price
Options outstanding at 345,250 $2.37 275,250 $2.31 215,250
beginning of year
Options exercised (102,000) 2.68 (36,000) 1.93 (21,250)
Options expired -- -- -- -- (5,750)
Options granted 183,500 7.35 106,000 2.39 87,000
Options outstanding at
end of year 426,750 $4.44 345,250 $2.37 275,250
Weighted-average fair
value of options,
granted during the year $4.34 $1.39
The following table summarizes information about stock options outstanding
at June 1, 1997:
Options Outstanding Options Exercisable
Weighted-
Number Average Weighted- Number Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise at June 1, Contractual Exercise at June 1, Exercise
Prices 1997 Life Price 1997 Price
(Years)
$1.19-$1.63 58,000 7.0 $1.20 38,250 $1.21
2.13- 2.75 161,250 6.7 2.42 111,250 2.47
3.50- 3.69 24,000 5.8 3.54 24,000 3.54
6.50- 7.75 183,500 9.0 7.35 31,250 7.75
$1.19-$7.75 426,750 7.7 $4.44 204,750 $3.16
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
shareholder's 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 years ended June 1, 1997, and June 2, 1996.
In December 1996, the Company completed a secondary stock offering of
1,840,000 shares of common stock. Proceeds from the issuance of common
stock were $10,620,794, net of offering expenses of $442,109. In
connection with this offering, warrants to purchase 112,000 shares of
common stock were issued. These warrants are exercisable at $7.80 per
share through December 2001.
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 1, 1997, and June 2, 1996 are as follows:
1997 1996
Cost $627,693 $684,114
Accumulated Depreciation 514,355 461,136
113,338 222,978
The future minimum lease payments under capital leases and the aggregate
present value of the net minimum lease payments at June 1, 1997, are as
follows:
1998 $63,729
1999 535
Total minimum lease payments 64,264
Lease amount representing interest 1,231
63,033
The capital lease obligations are included under long-term debt.
Operating leases: The Company leases its United States plant under an
operating lease 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 1, 1997, are as
follows:
1998 $305,000
1999 273,000
2000 77,000
2001 2,000
$657,000
Total rental expense for the years ended June 1, 1997, June 2, 1996 and May
28, 1995, was approximately $456,000, $385,000, and $428,000, respectively.
Note 9. Operations Information
Foreign manufacturing is done by the Korean subsidiary, including its
wholly owned subsidiary located in China, 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:
June 1, June 2, May 28,
1997 1996 1995
United States:
Customer sales $39,022,322 $33,359,291 $26,785,479
Sales to subsidiary -- -- --
Total $39,022,322 $33,359,291 $26,785,479
Operating profit $2,639,853 1,560,693 $710,964
Total assets 24,231,186 14,414,074 11,823,983
Capital expenditures 336,000 194,129 144,894
Depreciation and 323,228 314,810 359,280
amortization
Korea and China:
Customer sales $989,468 $414,584 $268,942
Sales to parent 7,965,817 10,496,364 8,751,528
Total $8,955,285 $10,910,948 $9,020,470
Operating profit (loss) $(114,268) $62,970 $90,209
Total assets 7,435,977 6,502,582 6,198,105
Capital expenditures 868,925 162,183 1,626,273
Depreciation and 169,747 197,011 171,280
amortization
Adjustments and
eliminations:
Intercompany sales 7,965,817 10,496,364 8,751,528
Operating profit (loss) 56,454 -- (44,620)
Total assets (5,572,702) (2,186,545) (2,592,808)
Consolidated:
Sales 40,011,790 33,773,875 27,054,421
Operating profit 2,582,039 1,565,661 756,553
Total assets 26,094,460 18,730,111 15,429,280
Capital expenditures 1,204,925 356,312 1,771,167
Depreciation and 492,975 511,821 530,560
amortization
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 20.4,
19.4 and 16.7 percent of total sales for the years ended June 1, 1997, June
2, 1996 and May 28, 1995, respectively.
The sales were made principally to the following locations:
Years Ended
June 1, June 2, May 28,
1997 1996 1995
Canada 7.8% 8.9% 6.5%
Elsewhere 12.6% 10.5% 10.2%
20.4% 19.4% 16.7%
Other foreign production: In addition to the manufacturing done by the
Korean subsidiary, the Company has subcontracting agreements for the
purchase of finished assemblies from certain manufacturers in China and
Thailand in amounts approximating $15,248,000, $9,941,000 and $5,314,000
for the years ended June 1, 1997, and June 2, 1996, and May 28, 1995,
respectively.
Note 10. Other Receivable
At June 1, 1997, and June 2, 1996, 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, 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 Customers.
The Company has major customers which accounted for more than 10 percent of
net sales during the years ended June 1, 1997, June 2, 1996, and May 28,
1995, as follows:
June 1, June 2, May 28,
1997 1996 1995
Sales percentage
Customer A 14.5% 5.5% 4.1%
Customer B 6.9% 11.0% 8.8%
Accounts receivable
percentage
Customer A 20.7% 7.5% 3.7%
Customer B 6.1% 14.8% 10.2%
ITEM 8(B) SUPPLEMENTAL FINANCIAL INFORMATION
QUARTERLY FINANCIAL DATA
(Unaudited)
(Amounts in thousands, Except Per Share Data)
Fiscal Quarters
1997 1st 2nd 3rd 4th
Net Sales $8,678 $9,248 $10,578 $11,508
Gross Profit $2,132 $2,387 $2,818 $3,186
Income Before Income Taxes $301 $385 $771 $818
Net Income $227 $290 $620 $1,228
Earnings Per Share $0.10 $0.12 $0.15 $0.35
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 Before Income Taxes $62 $200 $270 $376
Net Income $62 $200 $270 $351
Earnings Per Share $0.03 $0.09 $0.12 $0.16
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 401 under Regulation S-K with respect to the
Company's executive officers is contained under Item 1, 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 September
29, 1997 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 1997 fiscal year.
Information called for by item 405 under Regulation S-K with respect to the
information relating to compliance with 16(a) of the Exchange Act is
presented under the caption "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" in the Company's definitive proxy
statement for its Annual Meeting to be held on September 29, 1997 and is
expressly incorporated herein by reference.
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" under "General" in the company's definitive proxy
materials for its September 29, 1997 Annual Meeting to be filed within 120
days from the end of the company's fiscal 1997 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 September 29, 1997 Annual Meeting to be filed within 120
days from the end of the Company's fiscal year 1997, 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 20
Consolidated Financial Statements
-- Balance Sheets, June 1 1997 and June 2, 1996 21
-- Consolidated Statements of Operations for
the Years Ended June 1, 1997, June 2, 1996
and May 28, 1995 22
-- Consolidated Statements of Stockholders'
Equity for the Years Ended June 1, 1997,
June 2, 1996 and May 28, 1995 23
-- Consolidated Statements of Cash Flows for
the Years Ended June 1, 1997, June 2, 1996
and May 28, 1995 24
-- Notes to Consolidated Financial Statements 26
(2) The following financial statement scheduleS for the
year ended June 1, 1997, June 2, 1996 and May 28,
1995 are submitted herein following the signature
page of the report.
-- Independent Auditor's report on the Schedule 40
-- Schedule II - Valuation and Qualifying
Accounts 40
All other Schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
(3) Exhibits
The Exhibits required to be filed with this report or incorporated by
reference are listed in the Exhibit Index which follows the Financial
Statements Schedules.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the last quarter of the
period covered by this report.
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 25, 1997
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 25, 1997
Frederick M. Green Executive Officer and
Director
/s/Carlos S. Montague Vice President, August 25, 1997
Carlos S. Montague Treasurer, Chief
Financial Officer,
Assistant Secretary and
Controller*
/s/Matthew A. Sutton Director August 25, 1997
Matthew A. Sutton
/s/Eric G. Mitchell, Jr. Director August 25, 1997
Eric G. Mitchell, Jr.
/s/Delbert W. Johnson Director August 25, 1997
Delbert W. Johnson
/s/John G. Kassakian Director August 25, 1997
John G. Kassakian
/s/Edward C. Lund Director August 25, 1997
Edward C. Lund
/s/James M. Duddleston Director August 25, 1997
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 1, 1997
*******************************************************************
FINANCIAL STATEMENT SCHEDULES
*******************************************************************
INDEPENDENT AUDITOR'S REPORT
ON THE SUPPLEMENTARY INFORMATION
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
consoldiated 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
Minneapolis, Minnesota
July 15, 1997
SCHEDULE II
AULT INCORPORATED AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
Years Ended June 1, 1997, June 2, 1996, and May 28, 1995
Charged
Balance at to
Beginning of Costs Balance at
Period and Deductions End of
Expenses Period
Year ended June 1, 1997:
Allowance for doubtful $116,000 $50,000 $46,000 (a) $120,000
accounts
Reserve for warranties 77,000 72,000 68,000 81,000
Year ended June 2, 1996:
Allowance for doubtful 103,000 67,000 54,000 (a) 116,000
accounts
Reserve for warranties 66,000 101,000 90,000 77,000
Allowance for inventory 130,000 -- 130,000 --
valuation in excess of net
realizable value
Year ended May 28, 1995:
Allowance for doubtful 131,000 6,000 34,000 (a) 103,000
accounts
Reserve for warranties 69,000 49,000 52,000 66,000
Allowance for inventory 402,000 -- 272,000 130,000
valuation in excess of net
realizable value
(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 1, 1997
*******************************************************************
EXHIBIT INDEX
*******************************************************************
AULT INCORPORATED
EXHIBIT INDEX TO
FORM 10-K FOR THE YEAR ENDED JUNE 1, 1997
Required Regulation S-K
Exhibit Items
SK
Refer-
ence Title of Documents Location
3(a) Restated Articles of Filed as Exhibit 3(a) to Form 10-K for
Incorporation, as fiscal 1988 and incorporated herein by
amended reference
3(b) Bylaws, as amended Filed as Exhibit 3(b) to 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 Incentive Filed as Exhibit 10(b) to Registration
Compensation Plan Statement 2-85224 and incorporated herein by
reference
10.2 1986 Employee Stock Filed as Exhibit 10(c) to Form 10-K for
Option Plan fiscal 1987 and incorporated herein by
reference
10.3 Ten Year Building Filed as Exhibit 10(c) to Form 10-K for
Lease Contract fiscal 1987 and incorporated herein by
reference
10.4 Financing Agreement Filed as Exhibit 10(f) to Form 10-K for
on Credit Facility fiscal 1995 and incorporated herein by
reference
10.5 First and Second Filed electronically as Exhibit 10(g) to
Amendments to Form 10-K for fiscal 1996
Financing Agreement
on Credit Facility
10.6 Employee Stock Filed electronically Commission File #333-
Purchase Plan 4609 and herein incorporated by reference
10.7 Agreement to Credit Filed as Exhibit 10.6 to Form 10-Q for Third
Facility Quarter of fiscal 1997 and incorporated
herein by reference
11 Computation of Per
Share Filed herewith, Document 2 at Page 44
Earnings
21 Subsidiary of Filed as Exhibit 22 to Form 10-K for fiscal
Registrant 1987 and incorporated herein by reference,
and herewith as Exhibit 21, Document 3
at Page 45
23 Consent of Filed herewith, Document 4 at Page 46
Independent Auditors
27 Financial Data Filed herewith, Document 5 at Page 47
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.