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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 MAY 31, 1998
Commission File Number 0-12611
AULT INCORPORATED
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0842932
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
7300 BOONE AVENUE NORTH, MINNEAPOLIS, MINNESOTA 55428-1028
(address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (612) 493-1900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation 8-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendments to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant was approximately $14,163,000 based upon the ending
price of the Company's common stock on the NASDAQ National Market on
July 31, 1998, 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 10,1998, there were outstanding 4,161,758 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 28,
1998, 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 45.
AULT INCORPORATED
FORM 10-K
FOR THE FISCAL YEAR ENDED MAY 31, 1998
PART I
ITEM 1. BUSINESS
(a) General Development of Business
Ault Incorporated (herein "Ault" or "Company") was incorporated under
the laws of the State of Minnesota in 1961. The Company designs,
manufactures, and markets a line of external power conversion products
and is a leading domestic supplier of such products to original
equipment manufacturers (OEMs) of data communications equipment,
telecommunications equipment, portable medical equipment, and
microcomputers and related peripherals.
(b) Financial Information About Industry Segments
The Company operates in only one industry segment - the manufacture
and sale of power conversion devices. Financial information regarding
this segment is presented in the financial statements under Item 8
herein.
(c) Narrative Description of the Business
Ault's power conversion products are used to adapt alternating current
(AC) to provide a source of power at various levels up to 90 watts for
a wide variety of electronic equipment. Most of the Company's
products are located outside the equipment they power as wall plug-in
or as in-line components and are generally referred to as external
power conversion products. A small portion of the Company's products
are located inside the equipment they power, when this feature is
required by OEM customers, and are generally know as internal power
conversion devices. External power conversion products, in contrast
to more widely used internal power conversion devices, enable
designers of electronic equipment to remove heat and hazardous
voltages from the end product thereby allowing the end product to
function more safely and effectively. Also, by removing the power
conversion feature from inside the end product, the OEM is afforded
greater flexibility in designing and styling. These advantages have
particular application in the Company's target markets where advances
in semiconductor technology have reduced power requirements of many
items of equipment to levels supplied by the Company's products, where
rapid growth and strong competition have resulted in competitive
pressure to bring new products to market quickly, and where there is
increasing emphasis on smaller and portable products that perform
increasingly sophisticated functions. Ault's business strategy is to
offer OEMs in these markets an expanding line of high quality power
conversion products and devices, related design engineering and
flexible customer services.
(1) Products
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 device. 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 May 31, 1998:
Sale of Products by Category
as a Percentage of Total Sales
Years Ended
Product Type May 31, 1998 June 1, 1997 June 2, 1996
Switching Power Supplies 37% 42% 37%
Linear Power Supplies 15 16 19
Transformers 40 34 38
Battery Chargers 8 8 6
Total 100% 100% 100%
Power Supplies. The Company's power supplies provide the entire
power conversion requirements 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 alternating
current (AC) to direct current (DC) and, in most cases, maintain
voltage within specific limits.
* Switching Power Supplies. The Company believes, the market for
switching power supplies is the fastest growing segment of the overall
external power conversion product market. 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. The Company also designs universal input
switching power supplies specifically for medical markets. The
Company believes it offers the widest range of external
switching power supply products currently available for medical
applications.
* High Density Switching Power Supplies. In fiscal 1997, the
Company introduced product families based upon patented high density
power conversion technology. This technology enables the Company to
offer switching power supply products less than one-half the size of
its existing switching power supplies but provide comparable power
output. The Company's high density switching power supplies provide
approximately 45 watts to 80 watts of power. In addition, using its
high density technology, the Company expects to introduce in late
calendar year 1998 a family of switching power supplies capable of
power outputs of up to 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.
The company designs and manufactures switching power supplies
principally for external applications but also designs and
manufactures these products for internal power when such action
enhances customer relations.
* 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. Transformers 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. The
Company's product line also includes highly customized transformer
that operate within stringent power output tolerances. This is a
product not offered 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 use
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) Vertical Markets and Customers
The following table presents applications of the Company's various
power conversion products.
Product Type Market Segment Applications
Switching Power Data Cable modems
Supplies communications Local area
network
Data Retail scanners
communications
Medical Instrumentation and Test
equipment
Diagnostic
monitors
Computer Netwprk router
peripherals Flat panel displays
Linear Power Telecommunica- Business PBX
Supplies tions
Telecommunica- Wireless
tions telephones
Data Business modems
communications
Transformers Telecommunica- Telephones
tions
Data PC modems
communications
Computer Multimedia
peripherals speakers
Battery Medical Defibrillators
Chargers Apnea monitors
Telecommunica- Global
tions 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 1998 sales in this market represented approximately 33% 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 1998 sales in this market
also represented approximately 28% 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).
Because it believes the telecommunications/data communications
market is growing at a rapid rate, the Company is devoting a
significant portion of its product development effort towards
annual market introductions of new products including product
families for applications in this combined market.
In fiscal 1998 approximately 22% 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 14% of net sales in fiscal 1998 were to OEMs of
portable medical equipment such as infusion pumps, patient
monitoring systems, apnea monitors, and portable terminals for
patient history input diagnostics.
The balance of approximately 3% of the Company's net sale in
fiscal 1998 were to OEMs of various industrial equipment,
including digital cameras and mine safety devices.
(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 27 and
over the last three fiscal years has spent an average of at least
4.3% 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 marker 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. The following table summarizes Ault's product
development cycle.
Reflecting an increased emphasis on new product development during
the past years, the Company developed and introduced 29 new
products in 1998, 18 new product families in 1997 and several
product families are currently in various stages of development.
The Company expects to introduce approximately 20 product families
during fiscal 1999. Anticipating continued growth of
approximately 30% annually in the switching power supply segment
of the power conversion product market, a significant portion 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 a
family of power supplies providing output comparable to the
Company's existing power supplies that are approximately twice as
large. This technology serves as a platform upon which a family
of high density switching power supplies providing approximately
45 watts of power and a series of external power supplies
providing 80 watts of power. Later in calendar year 1998, the
Company expects to offer a new series of external power supplies
which will provide approximately 100 watts of power have been
introduced. 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.
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 different but complementary
product lines of other manufactures. 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 markers throughout the world.
The Company's sales in the Pacific Rim had been limited and made
primarily to customers in South Korea. In fiscal year 1998,
further efforts to penetrate Korean market were enhanced to grasp
opportunity offered by the devalued Won for sales to Korean OEMs.
Results, so far, though minimal, have been meeting increasing
success. In fiscal 1998, the Company finalized 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 that market was initiated during the second
half of fiscal 1997. Steps are being taken to establish a sales
administrative presence in Japan to further strengthen opportunity
for selling in that market.
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 that are
tailored for this market. Sales in Europe during fiscal 1997 and
1998 relating to direct market activities were, respectively, 2.2%
and 2.9% of total net sales for these periods. Plans are also to
establish sales administrative presence in this market in fiscal
1999.
(5) Safety Agency Certification
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, the
International Electrotechnical Committee ("IEC"), a European
standards organization and (EC) a standard for the European
Community. In addition, some of the Company's products have also
received Japanese MITI approval. For certain safety applications,
the Company's products 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 plant
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
For the past several years, the Company has used a team-based
organizational structure consisting initially of four recently
increased to six distinct 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. In 1996, Ault received recognition for its
innovative approach from the trade publication of the American
Manufacturing Association.
(7) Competition
The Company competes primarily with various manufactures of
external power conversion products. The industry is highly
fragmented, with manufacturers generally focusing their marketing
on specific segments. The Company has experienced strong
competition from Taiwanese-based manufacturers principally 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, certain electronic equipment manufactures 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-off have created large
power supply manufacturers 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 the 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 manufacturers 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 relation 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 18% of 1998 net sales); at the Ault Korea facility near Seoul,
South Korea (which accounted for 31% of 1998 net sales); at the
newly formed subsidiary, Ault China, which had no significant
sales contribution in fiscal 1998, and at three locations in China
and Thailand using manufacturing subcontractors (which accounted
for 51% of 1998 net sales). Ault typically manufactures
prototypes and low volume products at its facilities in
Minneapolis, Minnesota. Ault Korea is and it anticipated that by
fiscal year 2000, 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 emphasized 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.
The Company has subcontract manufacturing arrangements with one
subcontractor in Thailand and two in China. 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
manufactures based upon their ability to manufacture 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 Customers: Backlog
The Company sells its products to over 200 customers and it is the
Company's objective to maintain a diversified customer base and to
avoid, where practicable, dependence upon a single customer. In
fiscal 1998; however, two customers accounted for 9.7% and 9.6% 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
1, 1998 was $13,643,000 as compared to $15,333,000 on August 1,
1997. See Order Backlog, under ITEM 7, MANAGEMENT DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS.
(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 will enable the Company to offer external
switching power supplies less than one-half the size of current
power supply products but 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 competitions 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 by 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 1997 and fiscal
1998, the Company recorded the lowest level 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 represented in the future.
(13) Employees
As of August 4, 1998, the Company employed approximately 399 full-
time employees at its facilities as follows:
South
Korea China Taiwan US Total
Manufacturing 116 116 66 298
Engineering 8 2 17 27
Marketing 4 13 17
General and 14 16 1 26 57
Administrative
Total 142 134 1 122 399
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:
Name Age Position; Former Employment Officer
Since
Frederick M. 55 President and Chief Executive 1980
Green Officer and Director
Carlos S. 61 Vice President, Treasurer, Chief 1981
Montague Financial Officer and Assistant
Secretary
Richard A. 52 Secretary 1995
Primuth
Hokung C. Choi 58 Vice President - Far East 1989
Operations
Gregory L. 45 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
shorter 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. See "Business-Design Engineering and
Product Development."
* 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.
Some of these countries are economically troubled areas. 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. See
"Manufacturing and Sources Supply."
* 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.
* Year 2000 Interruptions. The Company utilizes several microchip
based date referenced systems for its business operations, including
the timely procurement of material and supporting customer
requirements. Because these business matters are also dependent on
support from external sources, the Company cannot provide any
assurance that its ability to provide service to customers will not be
interrupted by the inability of any supporting microchip-based date
referenced system to timely process data. This situation could have
an adverse material effect on the Company's ability to retain
customers and to generate revenue and profitability.
(d) Financial Information About Foreign and Domestic Operations and
Export Sales
Export Sales by the U.S. Operations in fiscal year 1998 ending May 31
represented 27.1% of the Company's gross sales most of which were to
OEMs in Europe and Canada. 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 10, Operations Information, under NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS.
Management recognizes that there are certain risks involved in the
Company's foreign operations, such as political risks that may
interrupt the flow of products to customers but believes that any
interruption would be only temporary because of the diversity,
capability and flexibility of its operations.
ITEM 2. PROPERTIES
The Company's headquarters and US manufacturing facility is located in
Brooklyn Park, a suburb of Minneapolis, Minnesota. Approximately
50,000 square feet in size , this facility houses all of the Company's
U.S. operations. The lease on this property expires in August 1999.
The Company's subsidiary, Ault Korea Corporation, operates in a 36,000
square foot facility in Suwon City in the province of Kyungki-Do
Korea, which the subsidiary purchased in May 1995. The Company has no
other property ownership.
Ault China, a subsidiary of Ault Korea Corporation occupies a 40,000
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 Issues for fiscal 1998 and 1997. 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 1998 Fiscal 1997
Quarter High Low High Low
1st 10-1/8 7-3/4 14-3/4 7-1/2
2nd 9-1/8 6-1/2 11-1/4 8-1/4
3rd 7-1/8 4-5/8 10-1/8 6-3/4
4th 8-1/4 5-4/5 8-1/2 6-1/2
(b) Holders
As of August 6, 1998 there were 290 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. In addition, the Company's bank
line of credit agreement precludes the payment of dividends.
ITEM 6. SELECTED FINANCIAL SUMMARY
YEARS ENDED
MAY 31, JUNE 1, JUNE 2, MAY 28, MAY 29,
1998 1997 1996 1995 1994
(Amounts in Thousands, Except Per Share Data)
Net Sales $41,136 $40,012 $33,774 $27,054 $17,975
Cost of Goods Sold 30,375 29,489 25,509 20,727 14,238
Gross Profit $10,761 $10,523 $8,265 $6,327 $3,737
Operating Expenses:
Marketing $3,707 $3,307 $2,633 $2,346 $1,878
Design Engineering 1,789 1,582 1,575 1,269 934
General & 3,387 3,052 2,491 1,955 1,956
Administration
$8,883 $7,941 $6,699 $5,570 $4,768
Operating Income (Loss) $1,878 $2,582 $1,566 ($757) $(1,031)
Other 197 183 84 22 (1)
Interest Expense (148) (490) (742) (446) (288)
Income Before Income Taxes $1,927 $2,275 $908 $333 $1,320
Income Taxes (Benefit) 609 (90) 25 - -
Net Income (Loss) $1,318 $2,365 $883 $333 $(1,320)
Per Share Earnings, Basic $0.32 $0.79 $0.42 $0.16 $0.64
Per Share Earnings
Diluted $0.31 $0.72 $0.39 $0.16 $0.64
Total Assets $25,417 $26,094 $18,730 $15,429 $10,667
Property Plant & $4,479 $3,568 $2,849 $3,002 $1,725
Equipment, Net
Working Capital $15,304 $15,231 $3,754 $2,703 $2,703
Long Term Notes Payable $414 $441 $935 $1,221 $233
Stockholders' Equity $19,628 $18,936 $5,571 $4,484 $4,069
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 make 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 expressions. 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; delays in new
product introductions; higher than expected expense related to sales
and new marketing initiatives; availability of adequate supplies of
raw materials and components; and other risks affecting the Company's
target markets generally
RESULTS OF OPERATIONS
Net sales for fiscal 1998 were $41,136,000, up 2.8% from net sales of
$40,012,000 in fiscal 1997 which were up by 18.5% from net sales of
$33,774,000 in fiscal 1996. The Company achieved only modest
improvement in its fiscal 1998 net sales principally because
infrastructure, such as transmission stations and wired systems were
not sufficiently in place to support anticipated demand for cable
modems, an emerging new technology product. Because of this
situation, significant orders that were expected from customers who
are leading OEMs in this market did not materialize. The Company
believes that the infrastructure issue is being addressed and, as a
result, anticipates increased demand for cable modems in fiscal 1999.
If this happens, the Company believes that orders for its products in
support of the cable modem industry could improve significantly in
fiscal 1999, thereby enhancing growth in revenue, principally in the
later quarters of the fiscal year. The telecommunications/data
communications market , of which the market for cable modems is a
segment, is a principal user of the Company's products. Other segments
of the telecommunications/data communications market and other markets
served by the Company experienced normal growth rates in fiscal 1998
and are expected to do so in fiscal 1999. Driven by its successful
customer service strategies, the Company's sales grew in fiscal 1997
due to growth in the data communications and telecommunications market
and its resulting demand for power conversion products and related
services. Service to customers continues as a strong strategic focus.
To this end, the Company's engineering activities are directed to
various customer product applications that are anticipated to generate
revenue in fiscal 1999. These applications include uninterruptible
power supplies, as well as power supplies for asymmetric digital
subscriber line modems (a competing technology to cable modem);
medical product applications, and hubs, routers and switches for the
networking market. Like the cable modem market, these programs are
anticipated to generate sales for the Company mainly in the later
quarters of fiscal 1999.
The Company's order backlog at May 31,1998 totaled $15,340,000, up
from $14,720,000 at June 1, 1997, which was down from $16,971,000 at
June 2, 1996. The order backlog at May 31, 1998, represented
shipments for approximately four months and reflected the posture of
many OEMs to limit their contractual commitments to the best lead -
times of their customers. Aided by the order backlog at May 31, 1998,
management believes that sales for the first quarter of fiscal 1999
will compare favorably with sales that were attained in the comparable
quarter of fiscal 1998.
Gross profit for fiscal 1998 amounted to $10,761,000 or 26.2% of net
sales , compared to $10,523,000, which was 26.3% of net sales for
fiscal 1997, and $8,265,000, which amounted to 24.5% of net sales in
fiscal 1996. The relatively stable rates of gross profit for fiscal
1998 and fiscal 1997 are due mainly to better prices on sales of
switching power supplies and battery chargers compared to sales of
other products. Compared to fiscal 1996, the greater gross margin
posted by the Company in fiscal 1997 was also due to better margins
on switching power supplies and the efficiencies of scale supporting
the larger amounts of sales in fiscal 1997.
Operating expenses for fiscal 1998 totaled $8,883,000, which amounted
to 21.6% of net sales, compared to $7,940,000 for fiscal 1997, which
were 19.8% of net sales. In fiscal 1996, operating expenses were
$6,699,000, which were also 19.8% of net sales. Compared to fiscal
1997, the increased expenditure of $942,000 in fiscal 1998 was
incurred principally for payments made to certify the reliability of
new products and for expenditure relating to the implementation of
strategic initiatives, some of which began during the second half of
fiscal 1997. The strategic initiatives were implemented for the
following purposes:
1. Strengthening the Company's sales and marketing competitive
position in the US and Asia.
2. Enhancing Asian manufacturing supervision
3. Providing promotional material for the Company's products
4. Providing direct internet communication links between Ault US
and Ault Korea
5. Installing software for upgrading the quality of management
information services.
It is anticipated that these strategic initiatives will be beneficial
to the generation of future sales and the provision of information for
managing the Company. Compared to fiscal 1996, the increased
expenditure of $1,242,000 in fiscal 1997 was incurred principally for
commissions paid to sales representatives on the higher sales,
expenses incurred for sales promotional activities and to position the
Company to better compete in the Asian market. Additionally, the
Company incurred expenses in fiscal 1997 to initiate upgrading of
its management information system program, as well as for
administration of its expanding foreign manufacturing activities.
Also, in adherence to its policy of making performance bonus payments
to its US employees for attaining certain levels of targeted
profitability, payments amounting to two weeks of salaries were
made to each employee in fiscal 1997 and fiscal 1996. No bonus
payments were made in fiscal 1998.
Operating income decreased by 27.3% to $1,877,000 from $2,582,000 in
fiscal 1997 principally due to the expenditures that were incurred for
implementation of the strategic initiatives discussed above.
Operating income grew in fiscal 1997 by 64.9% from $1,566,000 in
fiscal 1996 due principally to the greater sales attained in fiscal
1997.
Non-operating income of $198,000, $183,000 and $84,000 for fiscal
years 1998, 1997 and 1996, respectively, represented 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 $148,000 in fiscal 1998, $490,000 in fiscal 1997,
and $742,000 in fiscal 1996. 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 fiscal year, portions of which were used for the
repayment of debt.
The Company had pre-tax income of $1,927,000 for fiscal 1998 on which
its recorded income tax liability totaled $609,000, which included the
utilization of deferred tax assets totaling $415,000. In fiscal 1997,
the Company had pre-tax income of $2,275,000 but derived a net tax
benefit of $90,000 after the recognition of deferred tax assets
amounting to $681,000. Pre-tax income totaled $908.000 in fiscal
1996, of which income tax expense totaled $25,000. Ault Korea
Corporation reported pre-tax income of $476,000 in fiscal 1998 on
which it recorded Korean income tax liability of $57,000. The
subsidiary incurred losses in fiscal 1997 and fiscal 1996 and had no
income tax expenses. See Note 4. Income Taxes, under NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
The Company reported diluted per share earnings of $0.31 for fiscal
1998 based on 4,254,172 of outstanding weighted average shares,
compared to diluted per share earnings of $0.72 in fiscal 1997, which
was based on 3,279,709 outstanding weighted average shares. The
Company reported diluted per share earnings of $0.39 for fiscal 1996
which was calculated from weighted average outstanding shares of
2,256,211.
LIQUIDITY AND CAPITAL RESOURCES
The following table describes the Company's working capital resources
and cash flows from operations at May 31, 1998, and June 1, 1997.
May 31, June 1,
1998 1997
(000)
Working capital $15,303 $15,231
Resources:
Cash $5,935 $ 3,677
Trading Securities at market 866 849
Unutilized bank credit
facilities 3,264 2,744
Cash provided by (used in)
operations 4,801 (690)
Current Working Capital Position
The Company's principal sources of working capital 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 at the same time that strategies of the Company
to grow by offering competitive engineering and services to customers
were achieving increasing success. These factors 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 growing requirement of customers for suppliers to maintain
finished products for their emergency needs were using increasing
amounts of cash. This situation placed greater reliance on credit
facilities as a source of working capital. To lessen reliance on
credit facilities, the Company conducted a public offering of its
common shares in fiscal 1997. The proceeds from that public offering
enabled the Company to repay certain debt, to strengthen its
operations and to commence fiscal 1998 with cash amounting to
$3,677,000 and trading securities of $849,000.
At May 31, 1998, the Company had cash and cash equivalents and
investments in trading securities totaling $6,801,000, up from
$4,526,000 at June 1, 1997. Ratio of current assets to current
liabilities increased to 4.02 to 1 from 3.44 to 1 at June 1, 1997, and
working capital increased during the period to $15,303,000 from
$15,231,000 at June 1, 1997.
Credit Facilities
The Company currently maintains two credit facilities; its primary
credit facility with USBank, and a smaller facility with Korea
Exchange Bank that supports the South Korean subsidiary.
The credit arrangement with USBank includes the following:
(a) A revolving credit facility of $2.0 million at prime rate of
interest, secured by trade receivables and expiring on October 1,
1998, although it may be amended for an extended period. At the end
of the fiscal year, there were no outstanding borrowings against it.
(b) One or more term loans, each up to an amount of $300,000. At May
31, 1998, borrowings amounting to $483,000 were outstanding on two
term loans. See Note 3,under NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS.
The South Korean credit facility is for approximately $1.5 million of
which borrowings at May 31, 1998, were $236,000.
Cash Flows
Operations: Operations provided $4,801,000 of net cash in fiscal
1998, which came from activities that provided $5,560,000 of cash and
activities that used $759,000 of cash. The activities that provided
$5,560,000 of cash were the following:
(a) Net profit adjusted for non-cash items provided net cash of
$2,348 ,000, of which net profit before adjustments totaled
$1,318,000. The non-cash items were principally depreciation of
assets which provided $528,000 of cash, and utilization of deferred
tax assets which provided $415,000 of cash.
(b) Reduction in trade receivables provided $2,665,000 of cash. The
reduction was principally afforded by collections in fiscal 1998 of
the greater sales that were made during the fourth quarter of fiscal
1997, as compared to growth in receivables from sales during the
fourth quarter of fiscal 1998.
(c) Reduction in inventories due to enhanced control measures and
lower customer requirements for stocking of products for emergencies
provided $646,000 of cash.
The activities that used $759,000 of cash were:
(a) Changes in accounts payable, prepaid expenses and accrued
expenses used $509,000 of cash. The reduction occurred principally
because of payment of liabilities that were incurred to support
shipments for the fourth quarter of fiscal 1997.
(b) Increases in investment trading securities used $17,000 of cash.
These trading securities are principally investment-grade preferred
stocks with dividends that provide a tax advantage to the Company.
(c) Changes in income taxes payable used $233,000 of cash..
Investing Activities: Investing activities used net cash of
$1,385,000 which was expended mainly for the purchase of capital
equipment and tooling, expanding manufacturing capacity in China and
for upgrading management information systems.
Financing Activities: Financing activities used net cash of $229,000
of which $519,000 was expended to reduce Ault Korea's bank
indebtedness in view of the currency exchange rate that favored the
US dollar. Additionally, the Company received an amount of $304,000
from the exercise of common stock options by employees.
Effect of Foreign Currency Exchange Rate Fluctuations: The current
economic crisis in South Korea saw a dramatic devaluation in the Won,
the country's currency, late in the Company's second quarter of
fiscal 1998. The Won has since regained some strength, but, compared
to its value during the past several years, remains weak in relation
to the value of the US dollar. The effect of the translation of the
Korean financial statements, which were prepared in Won, to US
dollars, resulted in a net asset value decrease of $929,000, which
related principally to long-term inter-company receivables as follows:
(000)
Beginning cumulative gain at June 1, 1997 $ 31
Loss in fiscal 1998 from:
a. Long-term inter-company receivables (870)
b. Other (90)
Total $( 929)
Summary:
The Company's cash and working capital positions are sound and,
together with its credit facilities, are adequate for the support of
normal growth in revenue and profit beyond the current fiscal year.
Impact of Recent Accounting Standard Changes:
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 initially applied Statement No. 128 for the
year ended May 31, 1998, and, as required by the statement, has
restated al1 per share information for the prior years. See Note 1,
Nature of Business and Significant Accounting Policies, and Note 8,
Earnings Per Share, Under NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Statement No. 130: The FASB has issued Statement No. 130, Reporting
Comprehensive Income, effective for fiscal years beginning after
December 15, 1997. Statement No. 130 requires reporting items which
are components of other comprehensive income, such as foreign currency
items and unrealized gains and losses on certain investments in debt
and equity securities. The Company will adopt this statement in the
fiscal year ending May, 30, 1999. See Note 1, Nature of Business and
Significant Accounting Policies, Under NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS.
Statement No. 131: FASB has issued Statement No. 131, Disclosures
About Segments of an Enterprise and Related Information, effective
for fiscal years beginning after December 15, 1997. Statement No. 131
requires disclosure of certain information for each reportable
segment, including general information, profit and loss information,
segment assets, etc. The Company will adopt this statement in the
fiscal year ending May 30, 1999. The Company does not expect this
statement to have a significant effect on its financial statements.
See Note 1, Nature of Business and Significant Accounting Policies,
Under NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impact of Foreign Operations and Currency changes:
South Korea had a significant fall in the value of its currency
during the third quarter of fiscal 1998, but recovered portions of the
early loss by the end of the fiscal year. Although products that were
manufactured by the Korean subsidiary contributed a very significant
portion of total sales, the devalued Won had no significant impact
on the Company's consolidated sales for the fiscal year because the
greater portions of the subsidiary's sales were made under
intercompany contracts with the US operations. Sales by the
subsidiary in its local market are comprised only of a small portion
of its total sales in contrast to its intercompany sales. The
Company's US operations have no significant exposure to currency
risks because the predominant portions of its foreign contracts are
made in US dollars.
Microchip Based Date-referenced Systems and Year 2000 Compliance
Most of the Company's microchip-based date referenced systems,
including computer software and hardware are already year 2000
compliant. Others are being examined for compliance and it is
believed that the solution to any non-compliance found will not be
difficult. There are no internal matters, therefore, that are
expected to 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 and external infrastructure would show to
adversely affect its business transactions if they were tested today.
The Company is communicating with these external sources and its
objective is to obtain their commitment, with some verification, that
they will be Year 2000 compliant by December 31, 1998.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Approximately 3% of the Company's total assets is invested in trading
securities of various domestic companies. Although the market value
of these investments is subject to fluctuation from time to time,
management does not believe that any risk of loss of the principal
amounts would be material to the Company's profitability or asset
value.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
(a) Financial Statements
Index to Consolidated Financial Statements
Page
* Independent Auditor's Report 18
* Consolidated Balance Sheets, May 31, 1998 and
June 1, 1997. 19
* Consolidated Statements of Operations for the
Years Ended May 31, 1998 June 1, 1997
and June 2, 1996. 21
* Consolidated Statements of Stockholders'
Equity for the Years ended May 31, 1998
June 1, 1997 and June 2, 1996. 22
* Consolidated Statements of Cash Flows for the
Years ended May 31, 1998, June 1, 1997 and
and June 2, 1996. 23
* Notes to Consolidated Financial Statements 25
(b) Supplemental Financial Information
* Quarterly Financial Data 38
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 May 31, 1998, and June 1, 1997, and
the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three fiscal years in the period ended
May 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe 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 May 31, 1998, and June 1,
1997, and the results of their operations and their cash flows for
each of the three fiscal years in the period ended May 31, 1998, in
conformity with generally accepted accounting principles.
Minneapolis, Minnesota
July 8, 1998
AULT INCORPORATED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
May 31, 1998 and June 1, 1997
ASSETS 1998 1997
Current Assets
Cash and cash equivalents $5,934,794 $3,677,089
Investment in trading securities 866,174 848,699
Trade receivable, less allowance for
doubtful accounts: 1998, $31,000;
1997 $55,000 (Notes 3 AND 11) 6,254,920 8,895,864
Inventories (Note 2) 6,616,359 7,261,927
Prepaid and the expenses 617,921 660,400
Deferred taxes (Note 4) 74,000 123,000
Total current assets 20,364,168 21,466,979
Other Assets
Other receivable, less allowance
of $65,000 in 1997 199,209 196,677
Patent, less amortization in
1998 of$39,330 142,197 178,503
Deferred taxes (Note 4) 192,000 558,000
Other 40,908 126,179
574,314 1,059,359
Property, Equipment, and Leasehold
Improvements, at cost (Note 9)
Land 875,699 875,198
Building 812,867 796,354
Machinery and equipment 5,969,052 5,571,665
Office furniture and equipment 734,299 519,418
Data processing equipment 1,493,463 1,014,964
Leasehold improvements 977,998 656,429
10,863,378 9,434,028
Less accumulated depreciation 6,384,546 5,865,905
4,478,832 3,568,123
$25,417,314 $26,094,461
See Notes to Consolidated Financial Statements.
LIABILITIES AND STOCKHOLDERS' EQUITY
1998 1997
Current Liabilities
Note payable to bank (Note 3) $ 236,468 $ 755,696
Current maturities of long-term
debt 213,233 199,118
Accounts payable 3,426,989 3,530,915
Accrued expenses:
Compensation 391,670 503,308
Commissions 475,886 527,328
Other 118,810 289,483
Income tax payable 197,554 430,151
Total current liabilities 5,060,610 6,235,999
Long-Term Debt, less current
maturities (Note 3) 413,510 441,100
Deferred Rent Expense (Note 9) 70,162 123,167
Retirement and Severance Benefits 244,911 358,384
Commitments and Contingencies (Note 9)
Stockholders' Equity (Notes 3, 5, 6,
and 7)
Preferred stock, no par value;
authorized 1,000,000 shares;
none issued - -
Common stock, no par value;
authorized 5,000,000 shares;
issued and outstanding 1998
4,161,758 shares; 1997,
4,075,733 shares 18,358,797 18,055,290
Deduct notes receivable arising
from the sale of common stock (203,750) (203,750)
Foreign currency translation adjustment (898,127) 30,788
Retained earnings 2,371,201 1,053,483
19,628,121 18,935,811
$25,417,314 $26,094,461
AULT INCORPORATED AND SUBSICIARY
CONSOLIDATED STATEMENT OF INCOME
Years Ended May 31, 1998, June 1, 1997, and June 2, 1996
1998 1997 1996
Net sales (note 11) $41,136,232 $40,011,790 $33,773,875
Cost of goods sold 30,375,684 29,489,141 25,509,262
Gross profit 10,760,548 10,522,649 8,264,613
Operating expenses:
Marketing 3,707,267 3,306,320 2,632,857
Design engineering 1,788,736 1,582,046 1,575,038
General and
administrative 3,387,120 3,052,244 2,491,057
8,883,123 7,940,610 6,698,952
Operating income 1,877,425 2,582,039 1,565,661
Non operating income
(expense):
Interest expense (148,415) (489,931) (742,305)
Other 197,708 182,971 84,333
Income before
income taxes 1,926,718 2,275,079 907,689
Income taxes (benefit)
(Note 4) 609,000 (90,000) 25,000
Net income $1,317,718 $2,365,079 $882,689
Earnings per $0.32 $0.79 $0.42
share-basic (Note 8)
Earnings per
share-diluted (Note 8) 0.31 0.72 0.39
See Notes to Consolidated Financial Statements.
AULT INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended May 31, 1998, June 1, 1997, and June 2, 1996
Notes
Receivable Foreign
From Currency
Sale Trans-
of Retained lation
Common Stock Common Earnings Adjust-
Shares Amount Stock (Deficit) ments Total
ent
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
adjustments - - - - 27,758 27,758
Issuance of 36,000
shares of common
stock in accordance
with stock
option 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 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 June 1, 1997 4,075,733 18,055,290 (203,750) 1,053,483 30,788 18,935,811
Net income - - - 1,317,718 - 1,317,718
Net change in foreign
currency translation
djustment - - - - (928,915) (928,915
Issuance of 86,025
shares of common
stock in accordance
with stock purchase
plan and stock
option plan
(Notes 5 and 6) 86,025 303,507 - - - 303,507
Balance,
May 31, 1998 4,161,758 $18,358,797 $(203,750) $2,371,201 $(898,127) $19,628,121
See Notes To Consolidated Financial Statements.
AULT INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended May 31, 1998, June 1, 1997, and June 2, 1996
1998 1997 1996
Cash Flows From Operating Activities
Net income $1,317,718 2,365,079 882,689
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation 528,193 489,950 509,458
Amortization 36,306 3,025 2,363
Provision for doubtful accounts (24,000) 50,000 67,000
Provision for inventory allowance - - (130,000)
Loss (gain) on disposal
of equipment 28,830 (4,117) -
Deferred taxes 415,000 (681,000) -
Tax benefit associated with
stock options - 131,000 -
Deferred rent expense (53,005) (40,805) (28,905)
Changes in assets and liabilities:
(Increase) decrease in:
Trade receivables 2,664,944 (1,550,600) (2,106,114)
Inventories 645,568 10,867 (1,242,606)
Prepaid and other expenses 42,479 (200,322) 10,511
Trading securities (17,475) (848,699) -
Increase (decrease) in:
Accounts payable (103,926) (981,624) 151,533
Accrued expenses (447,226) 161,706 480,653
Income tax payable (232,597) 405,151 25,000
Net cash provided by (used in)
operating activities 4,800,809 (690,389) (1,378,418
Cash Flows From Investing Activities
Purchase of property and equipment (1,467,732) (1,204,925) (356,312)
(Increase) decrease in patent and
other assets 82,739 (163,846) (158,573)
Net cash used in
investment activities (1,384,993) (1,368,771) (514,885)
Cash Flows From Financing Activities
Net (payments) borrowings on
revolving credit agreement (519,228) (4,862,124) 2,048,207
Proceeds from long-term borrowings 300,000 524,140 -
Proceed from issuance of
common stock 303,507 132,967 69,447
Net payments from notes receivable
arising from sale of
common stock - - 107,813
Principal payments on long-term
borrowings. including capital
lease obligations (313,475) (1,206,650) (266,759)
Proceeds from sale of common stock,
net of $442,109 of expenses - 10,620,794 -
Net cash provided by
financing activities (229,196) 5,209,127 1,958,708
(Continued)
AULT INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
Years Ended May 31, 1998, June 1, 1997, and June 2, 1996
1998 1997 1996
Effect of Foreign Currency Exchange
Rate Changes on Cash (928,915 114,716 27,758
Increase (decrease) in cash
and cash equivalents 2,257,705 3,264,683 93,163
Cash and Cash Equivalents
Beginning 3,677,089 412,406 319,243
Ending $5,934,794 $3,677,089 $412,406
Supplemental Disclosures of Cash Flow
Information
Cash payments for:
Interest $147,149 $534,803 $676,810
Taxes 420,370 59,433 -
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 manufactures of data communications equipment,
microcomputers 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 statement include the accounts of Ault Incorporated, its
wholly-owned subsidiary, Ault Korea Corporation, and its wholly-owned
subsidiary, Ault Xianghe Co. Ltd. (located in China), which commenced
operations in May 1997. All significant intercompany 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 for its foreign subsidiary in accordance
with 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 loses 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 trading securities: Trading securities are held for
resale in anticipation of short-term (generally 90 days or less)
fluctuations in market prices. Trading securities, consisting of
marketable equity securities, are stated at fair value, which
approximates cost at May 31, 1998, and June 1, 1997. Realized and
unrealized gains and losses are included in income.
Prepaid and other expenses: Prepaid and other expenses at May 31,
1998, and June 1, 1997, include refundable value-added tax and
refundable custom duties relating to the Korean operations of
approximately $236,000 and $224,000, 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.
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
(Continued)
Depreciation: It is the Company's policy to include depreciation
expenses 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 equipment Straight-line 5-15
Data processing equipment Double declining
balance and
straight-line 3-5
Leasehold improvements Straight-line Life of
lease
Retirement and severance benefits: Retirement and severance benefits
represents the accrual of compensation expense, net of deposit, 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 assists 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 for the carryforward amount.
Use of estimates in the preparation of financial statement: 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.
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
(Continued)
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 certain financial
instruments:
Cash equivalents: The carrying amount approximates fair value.
Investments in available-for-sale securities: The fair value of
these investments is based on quoted market prices. 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.
Earning per share: The FASB has issued Statement No. 128, Earning
Per Share, which superseded 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 initially applied Statement No. 128 for the year ended May
31, 1998, and, as required by the statement, has restated all per
share information for the prior years.
Comprehensive income: The FASB has issued Statement No. 130,
Reporting Comprehensive Income, effective for fiscal years beginning
after December 15, 1997. Statement No. 130 requires reporting items
which are components of other comprehensive income, such as foreign
currency items and unrealized gains and losses on certain investments
in debt and equity securities. The Company will adopt this statement
in the fiscal year ending May 30, 1999.
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
(Continued)
Segments: The FASB has issued Statement No. 131, Disclosures About
Segments of an Enterprise and Related Information, effective for
fiscal years beginning after December 15, 1997. Statement No. 131
requires disclosure of certain information for each reportable
segment, including general information, profit and loss information,
segment assets, etc. The Company will adopt this statement in the
fiscal year ending May 30, 1999. The Company does not expect this
statement to have a significant effect on the financial statements.
Fiscal year: The Company operates on a 52- to 53-week fiscal year.
The fiscal years for the financial statements presented ended May 31,
1998, June 1, 1997, and June 2, 1996.
Note 2. Inventories
The components of inventory at May 31, 1998, and June 1, 1997, are as
follows:
1998 1997
Raw materials $3,743,940 $4,255,624
Work in process 277,943 256,042
Finished goods 2,594,476 2,750,261
$6,616,359 $7,261,927
Note 3. Financing Arrangement and Long-Term Debt
Financing arrangement: At May 31, 1998, the Company had a
$2,000,000 revolving line-of- credit agreement through October 1,
1998. Interest on advances is at the bank's reference rate, 8.5
percent at May 31, 1998. All advances are due on demand and are
secured by trade receivables. 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 May 31, 1998. 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 $236, 468 at May31, 1998.
Long-term debt:
May 31, June 1,
1998 1997
7.97% term loan, due in monthly
installments of $7,320,
including interest to November
2001, secured by equipment $267,502 -
8.11% term loan, due in monthly
installments of $7,340,
including interest of February
2001, secured by trade
receivables 215,665 288,045
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Financing Arrangement and Long-Term Debt (Continued)
May 31, June 1,
1998 1997
6.5% note payable, due in quarterly installments
of $28,019 plus interest through April 2000,
secured by equipment 143,576 224,140
Other notes payable - 128,033
Total 626,743 640,218
Less current maturities 213,233 199,118
$413,510 441,100
Approximate maturities of long-term debt for years subsequent to May
31, 1998, are as follows:
1999 $213,000
2000 226,000
2001 145,000
2002 43,000
$627,000
Note 4. Income Taxes
Pretax income (loss) for domestic and foreign operations was as
follows:
May 31, June 1, June 2
1998 1997 1996
Domestic $1,516,396 $2,394,204 $916,344
Foreign 410,322 (119,125) (8,655)
Total $1,926,718 $2,275,079 $907,689
The components of the provision (benefit) for income taxes are as
follows:
May 31, June 1, June 2,
1998 1997 1996
Current:
Domestic (b) $129,000 $412,000 $25,000
Foreign 21,000 - -
State 44,000 48,000 -
Deferred 415,000 (681,000) -
Additional capital from
benefit of stock
options exercised (a) - 131,000 -
$609,000 $(90,000) $25,000
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Income Taxes (Continued)
(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 excise of stock options were not material in
1996 and 1998.
May 31, June 1, June 2,
1998 1997 1996
(b) Domestic tax expense before
application of net
operating loss and tax
credits carryforward $346,000 $680,000 $270,000
Federal net operating loss - (65,000) (245,000)
Tax credits (217,000) (203,000) -
Domestic tax expense $129,000 $412,000 $25,000
The income tax provision differs from the amount of income tax
determined by applying U.S. federal income tax rate to pretax income
for the year ended May 31, 1998, June 1, 1997, and June 2, 1996, due
to the following:
1998 1997 1996
Computed expected tax provision
(benefit) $655,000 $774,000 $309,000
Increase (decrease) in income
taxes resulting from:
Nondeductible expenses 9,000 28,000 -
State income taxes, net of
federal benefit 39,000 82,000 6,000
Lower rates on earnings of
foreign operations (66,000) 12,000 3,000
Utilization of net operating loss
and tax credit
carryforwards:
Domestic - (268,000) (293,000)
Foreign - - -
State - (35,000) -
Reduction in valuation allowance (28,000) (711,000) -
Nonutilization of foreign tax
benefit - 28,000 -
$609,000 $(90,000) $25,000
Net deferred taxes consist of the following components as of May 31,
1998, June 1, 1997:
1998 1997
Deferred tax assets:
Tax credit carryforwards $107,000 $451,00
0
Loss carryforwards 17,000 28,000
Allowance for doubtful accounts 13,000 48,000
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Income Taxes (continued)
1998 1997
Inventory allowances - 9,000
Accrued vacation 28,000 34,000
Accrued warranty 33,000 32,000
Equipment and leasehold improvements 68,000 107,000
266,000 709,000
Less valuation allowance - 28,000
$266,000 $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 May 31, 1998, as follows:
Current assets $74,000
Noncurrent assets 192,000
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 $266,000 of
deferred tax assets at May 31, 1998, will be realized.
At May 31, 1998, 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 $107,000
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 Credit
2002 $ 137,000 $ -
2007 - 18,000
2008 - 31,000
2009 - 13,000
2010 - 41,000
2011 - 4,000
137,000 $107,000
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 May 31, 1998, June 1, 1997, and June 2,
1996, approximated $39,000, $37,000, and $38,000, 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 from the
commencement date of a Phase. There were 10,825 and 13,957 shares
purchased under this plan during the years ended May 31, 1998, and
June 1, 1997, respectively.
Note 6. Stock Option Plan
The Company's 1996 stock option plan has reserved 500,000 common
shares for issuance under qualified and nonqualified 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 at 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 1998 and 1997 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:
1998 1997
Net income, as reported $1,317,718 $2,365,079
Net Income, pro forma 700,698 1,969,063
Net income, per share, basic, as
reported 0.32 0.79
Net income, per share, diluted, as
reported 0,31 0,72
Net income, per share, basic, pro forma 0.17 0.65
Net income, per share, diluted, pro
forma 0.17 0.60
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Stock Option Plan (Continued)
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 1998 and 1997:
1998 1997
Expected dividend yields - -
Expected stock price volatility 63.14% 67.68%
Risk-free interest rate 6.04% 6.18%
Expected life of options 4 years 5 years
The pro forma effect on net income in 1998 and 1997 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 May
31, 1998, June 1, 1997, and June 2, 1996, is as follows:
1998 1997 1996
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Options outstanding at
beginning of year 426,750 4.44 345,250 $ 2.37 275,25 $ 2.31
Options exercised (75,200) 3.30 (102,000) 2.68 (36,00) 1.93
Options expired (2,500) 7.75 - - - -
Options granted 163,500 8.43 183,500 7.35 106,00 2.39
Options outstanding
at end of year 512,550 5.86 426,750 4.44 345,25 $ 2.37
Weighted-average fair
value of options
granted during the year $4.66 $ 4.34 $ 1.39
The following table summarizes information about stock options
outstanding at May 31, 1998:
Options Outstanding Options Exercisable
Weighted-
Average
Remaining
Number Contrac-
Outstand- Life Weighted- Number Weighted-
Range of ing tual Average Exercisable Average
Exercise at May Life Exercise at May Exercise
Prices 31, 1998 (Years) Price 31,1998 Price
$1.19-$1.630 52,000 6.0 $1.21 52,000 $ 1.21
2.13- 2.750 107,550 6.1 2.38 82,550 2.40
3.50- 3.690 21,000 5.0 3.54 21,000 3.54
6.00- 7.750 173,500 8.1 7.28 83,500 7.2
8.50- 8.630 158,500 9.0 8.50 44,125 8.52
$1.19- 8.863 512,250 7.6 $5.86 283,175 $ 4.65
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 of
Incorporation provide that the preferred shares are senior to the
common shares with respect to dividends and liquidation. No preferred
shares have been issued.
The Company has a shareholders' rights plan. Under this plan, a Class
A, Junior Participating Preferred Stock with no par value was created.
In addition, a dividend of one right was declared for each share of
common stock at an exercise price of $36 per right and a redemption
price of $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, 100,000
shares of preferred stock are reserved for the exercise of the rights.
No rights were exercised during the year-ended May 31, 1998, and June
1, 1997.
The Company has notes receivable from certain officers of the Company
arising from the sale of common stock as an offset to stockholders'
equity. The notes are due in September 2001.
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. Earnings Per Share
In fiscal 1998 the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings Per Share. Earning per share
amounts presented for 1997 and 1996 have been restated for the
adoption of SFAS No. 128. The following table reflects the
calculation of basic and diluted earnings per share.
1997 1998 1996
Earnings per share-basic:
Income available to common
shareholders $ 1,317,718 $ 2,365,079 $ 882,689
Weighted-average shares
outstanding 4,136,059 3,011,062 2,093,513
Earnings per share-basic 0.32 0.79 0.42
Earnings per share-diluted:
Income available to common
shareholders 1,317,718 2,365,079 882,689
Weighted average shares
outstanding 4,136,059 3,011,062 2,096,513
Dilutive impact of options
outstanding 118,113 263,488 162,698
Dilutive impact of warrants
outstanding - 5,159 -
Weighted-average shares and
dilutive shares outstanding 4,254,172 3,27,709 2,256,211
Earnings per share-diluted $0.31 $0.72 $0.39
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
Note 9. Commitments and Contingencies
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 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 operation 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 May 31, 1998, are as
follows:
1999 $ 273,000
2000 77,000
2001 2,000
$ 352,000
Total rental expense for the years ended May 31, 1998, June 1, 1997,
and June2, 1996, was approximately $391,000, $456,00, and $385,000,
respectively.
Note 10. 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:
May 31, June 1, June 2,
1998 1997 1996
United States:
Customer sales $ 39,849,215 $ 39,022,322 $ 33,359,291
Sales to subsidiary - - -
Total $ 39,849,215 $ 39,022,322 $ 33,359,291
Operating profit 1,306,611 2,639,853 1,560,693
Total assets 24,381,633 24,231,186 14,414,074
Capital expenditures 413,503 336,000 194,129
Depreciation and amortization 380,561 323,228 314,810
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Operations information (Continued)
May 31, June 1 June 2,
1998 1997 1996
Korea and China:
Customer sales $ 1,287,017 $ 989,468 $ 414,574
Sales to parent 9,056,631 7,965,817 10,496,364
Total $ 10,343,648 8,955,285 $ 10,910,948
Operating profit (loss) $ 636,752 (114,268) 62,970
Total assets 7,108,449 7,435,977 6,502,582
Capital expenditures 1,054,229 868,925 162,183
Depreciation and amortization 183,938 169,747 197,011
Adjustments and eliminations
Intercompany sales
Intercompany sales $ 9,056,631 $ 7,965,817 $ 10,496,364
Operating profit (loss) (65,937) 56,454 (58,002)
Total assets (6,072,768) (5,572,702) (2,186,545
Consolidated:
Sales $ 41,136,232 $ 40,011,790 $ 33,773,875
Operating profit 1,877,426 2,582,039 1,565,661
Total assets 25,417,314 26,094,461 18,730,111
Capital expenditures 1,467,732 1,204,925 356,312
Depreciation and amortization 564,499 492,975 511,821
Sales from the subsidiary to the parent company are based upon profit
margins which represent competitive pricing similar products.
Export sales: The Company also had foreign export sales amounting
to 27.1, 20.4, and 19.4 percent of total sales for the years ended May
31, 1998, June 1, 1997, and June 2, 1996, respectively.
The sales were made principally to the following locations:
Years
Ended
May 31, June 1, June 2,
1998 1997 1996
Canada 3.1% 7.8% 8.9%
France 9.3% 8.0% 0.2%
Ireland 5.6% 0.1% -
Elsewhere 9.1% 4.5% 10.3%
27.1% 20.4% 19.4%
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
Note 10. Operations Information (Continued)
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. Total purchases under these agreements were
approximately $15,340,000, $15,248,000, and $9,941,000 for the years
ended May 31, 1998, June 1, 1997, and June 2, 1996, respectively.
Note 11. Major Customers
The Company had major customers during the years ended May 31, 1998,
June 1, 1997, and June 2, 1996, as follows:
For the Years Ended
May 31, June 1, June 2,
1998 1997 1996
Sales percentage:
Customer A 9.7% 7.5% -
Customer B 9.6% 7.2% 5.5%
Customer C 5.1% - -
Customer D 5.4% 6.9% 11.0%
Accounts receivable percentage:
Customer A - 11.6% -
Customer B 5.4% 10.9% 8.6%
Customer C 10.9% - -
Customer D 6.0% 6.1% 14.8%
ITEM 8(B) SUPPLEMENTAL FINANCIAL INFORMATION
QUARTERLY FINANCIAL DATA
(Unaudited)
(Amounts in thousands, Except Per Share Data)
Fiscal Quarters
1998 1st 2nd 3rd 4th
(UNAUDITED)
Net Sales $9,423 $10,954 $10,294 $10,465
Gross Profit $2,208 $2,868 $2,673 $3,010
Income Before Income Taxes $146 $753 $361 $666
Net Income (Note 4) $87 $509 $282 $439
Net Income Per Share:
Basic $0.02 $0.12 $0.07 $0.11
Diluted $0.02 $0.12 $0.07 $0.10
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 (Note 4) $227 $290 $620 $1,228
Net Income Per Share:
Basic $0.11 $0.14 $0.17 $0.31
Diluted $0.09 $0.12 $0.16 $0.29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNANTS ON ACCOUNTING
AND FINANCIAL
DISCLOSURE
Not Applicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information called for by Item 405 under Registration 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 28, 1998 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 1998 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 1934" in the Company's definitive proxy
statement for its Annual Meeting to be held on September 28, 1998 and
is expressly incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 403 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, 1998 Annual Meeting
to be filed within 120 days from the end of the Company's fiscal 1998
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 28, 1998 Annual Meeting
to be filed within 120 days from the end of the Company's fiscal year
1998, 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
(a)(1) The following financial statements are included in Part II,
Item 8:
Page
Independent Auditor's Report 18
Consolidated Financial Statements
-- Balance Sheets, May 31, 1998 and June 1 19
1997.
-- Consolidated Statements of Operations for
the Years 21
Ended May 31, 1998, June 1, 1997 and June
2,1996.
-- Consolidated Statements of Stockholders'
Equity for 22
the Years Ended May 31, 1998, June 1, 1997
and June 2, 1996.
-- Consolidated Cash Statements of cash flow
for the Years Ended 23
May 31, 1998, June 1, 1997 and June 2, 1996.
-- Notes to Consolidated Financial Statements 25
(2) The following financial statements schedule for the years ended
May 31,
1998, June 1, 1997 and June 2, 1996 are submitted herein
following the
signature page of this report.
Page
Independent Auditor's report on the Schedule 42
Schedule II - Valuation and Qualifying
Accounts 43
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 during 3 months ended May 31, 1998.
There were no reports on Form 8-K filed for the quarter
ended May 31, 1998.
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, 1998
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, 1998
Frederick M. Green Executive Officer and
Director
/s/Carlos S. Montague Vice President, August 25, 1998
Carlos S. Montague Treasurer, Chief
Financial Officer,
Assistant Secretary and
Controller*
/s/Matthew A. Sutton Director August 25, 1998
Matthew A. Sutton
Director
Eric G. Mitchell, Jr.
/s/Delbert W. Johnson Director August 25, 1998
Delbert W. Johnson
/s/John G. Kassakian Director August 25, 1998
John G. Kassakian
/s/Edward C. Lund Director August 25, 1998
Edward C. Lund
/s/James M. Duddleston Director August 25, 1998
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 MAY 31,1998
*******************************************************************
FINANCIAL STATEMENT SCHEDULES
*******************************************************************
G25
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 consolidated financial statements taken as a whole. The
consolidated supplemental schedule II is presented for purposes of
complying with the Securities and Exchange Commission's rules and is
not a part of the basic consolidated financial statements. This
schedule has been subject as 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 8, 1998
SCHEDULE
II
AULT INCORPORATED AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
Years Ended May 31, 1998, June 1, 1997, and June 2, 1996
Balance Charged Balance
at to at
Beginning Costs and End of
of Period Expenses Deductions Period
Year ended May 31, 1998:
Allowance for doubtful
accounts $ 120,000 $ 95,000 $ 184,000 (a) $ 31,000
Reserved for warranties 81,000 97,000 95,000 83,000
Year ended June 1, 1997:
Allowance for doubful
accounts 116,000 50,000 46,000 (a) 120,000
Reserve for warranties 77,000 72,000 68,000 81,000
Year ended June 2, 1996:
Allowance for doubtful
accounts 103,000 67,000 54,000 (a) 116,000
Reserve for warranties 66,000 101,000 90,000 77,000
Allowance for inventory
valuation in excess
of net realizable value 130,000 - 130,000 -
(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 MAY 31, 1998
*******************************************************************
EXHIBITS
*******************************************************************
AULT INCORPORATED
EXHIBIT INDEX TO
FORM 10-K FOR THE YEAR ENDED JUNE 1, 1997
Required Registration S-K
Exhibit Items
SK Reference
SK
Refer-
ence Title of Documents Location
3(a) Restated Articles of Fled as Exhibit 3(a) to Form 10-K for fiscal
Incorporation, as 1988 and incorporated herein by reference
amended
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 10.8 to Form 10-Q for Third
Facility Quarter of fiscal 1998 and incorporated
herein by reference
10.8 1986 Employee stock Filed electronically. Commission File #
Option plan, Amended 333-4609
and herein incorporated by reference
10.9 1996 Employee stock Filed electronically. Commission File #
Option plan 333-4609
and herein incorporated by reference
11 Computation of Per
Share Filed herewith at page 48
Earnings
21 Subsidiary of Filed as Exhibit 21 to Form 10-K for fiscal
Registrant 1997 and incorporated herein by reference.
23 Consent of Filed herewith at page 49
Independent Auditors
27 Financial Data Filed electronically
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 note being filed and in lieu thereof, Company
agrees to furnish copies thereof to the Securities and Exchange
Commission upon request.
27, 1998