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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 1, 2002
Commission file number 0-12611
AULT INCORPORATED
MINNESOTA 41-0842932
--------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7105 Northland Terrace
Minneapolis, Minnesota 55428-1028
----------------------------------------
(Address of principal executive offices)
Registrant's telephone number: (763) 592-1900
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Indicate by check mark whether 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, and (2) has been subject to such filing requirements
for the past 90 days.
YES __X___ NO _______
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock January 7, 2003
--------------------- ---------------
No par value 4,588,876 shares
Total pages 21
Exhibits Index on Page 17
PART 1. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
AULT INCORPORATED & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Amounts Per Share)
(Unaudited)
-----------------------------------------------------------
Second Quarter Ended Six Months Ended
--------------------------- ---------------------------
Dec. 1 Dec. 2 Dec. 1 Dec. 2
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net Sales $ 10,523 $ 9,953 $ 21,371 $ 20,254
Cost of Goods Sold 8,380 8,587 16,370 16,479
----------- ----------- ----------- -----------
Gross Profit 2,143 1,366 5,001 3,775
Operating Expenses:
Marketing 1,175 953 2,300 1,964
Design Engineering 1,093 603 1,908 1,291
General and Administrative 1,354 2,548 2,690 3,668
----------- ----------- ----------- -----------
3,622 4,104 6,898 6,923
----------- ----------- ----------- -----------
Operating Loss (1,479) (2,738) (1,897) (3,148)
Other Income (Expense):
Interest Expense (126) (137) (235) (285)
Interest Income 18 30 23 61
Other (41) (68) (124) (252)
----------- ----------- ----------- -----------
(149) (175) (336) (476)
----------- ----------- ----------- -----------
Loss Before Income Taxes (1,628) (2,913) (2,233) (3,624)
Income Tax Benefit (169) (853) (272) (918)
----------- ----------- ----------- -----------
Net Loss (1,459) (2,060) (1,961) (2,706)
Preferred Stock Dividends (36) (55)
----------- ----------- ----------- -----------
Net Loss Applicable to Common Stock $ (1,495) $ (2,060) $ (2,016) $ (2,706)
=========== =========== =========== ===========
Loss Per Share
Basic: $ (0.33) $ (0.45) $ (0.44) $ (0.60)
Diluted: $ (0.33) $ (0.45) $ (0.44) $ (0.60)
Common and Equivalent Shares Outstanding:
Basic 4,580,574 4,537,522 4,576,355 4,536,536
Diluted 4,580,574 4,537,522 4,576,355 4,536,536
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 2
AULT INCORPORATED & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
December 1, June 2,
2002 2002
------------ ------------
Assets:
Current Assets
Cash and Cash Equivalents $ 3,122 $ 4,775
Trade Receivables, Less Allowance for Doubtful Accounts of
$424,000 at December 1, 2002; $320,000 at June 2, 2002 6,943 7,012
Inventories (Note 2) 9,756 8,502
Prepaid and Other Expenses 1,287 2,299
Deferred Taxes 252 252
------------ ------------
Total Current Assets 21,360 22,840
Other Assets:
Goodwill 1,153 1,153
Other 284 262
------------ ------------
1,437 1,415
Property Equipment and Leasehold Improvements:
Land 1,704 1,704
Building and Leasehold Improvements 7,780 7,780
Machinery and Equipment 9,074 7,586
Office Furniture 1,818 1,480
E.D.P. Equipment 2,207 2,234
------------ ------------
22,583 20,784
Less Accumulated Depreciation 8,830 8,342
------------ ------------
13,753 12,442
------------ ------------
$ 36,550 $ 36,697
============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 3
AULT INCORPORATED & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
December 1, June 2,
2002 2002
------------ ------------
Liabilities and Stockholders' Equity:
Current Liabilities
Note Payable to Bank $ 3,029 $ 2,890
Current Maturities of Long-Term Debt (Note 3) 294 281
Accounts Payable 3,676 4,717
Accrued Compensation 541 435
Accrued Commissions 204 286
Other 701 148
------------ ------------
Total Current Liabilities 8,445 8,757
Long-Term Debt, Less Current Maturities (Note 3) 2,604 2,754
Deferred Tax Liability 275 273
Retirement and Severance Benefits 211 160
Redeemable Convertible Preferred Stock, No Par Value, 2,074
Shares Issued and Outstanding 2,074
Stockholders' Equity:
Preferred Stock, No Par Value, Authorized,
1,000,000 Shares; None Issued
Common Shares, No Par Value, Authorized
10,000,000 Shares; Issued and Outstanding 4,587,876 on
December 1, 2002; and 4,563,610 on June 2, 2002; 20,918 20,858
Notes Receivable arising from the sale of common stock (100) (100)
Accumulated Other Comprehensive Loss (778) (922)
Retained Earnings 2,901 4,917
------------ ------------
22,941 24,753
------------ ------------
$ 36,550 $ 36,697
============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 4
AULT INCORPORATED & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended
December 1, December 2,
2002 2001
------------ ------------
Cash Flows From Operating Activities:
Net Loss $ (1,961) $ (2,706)
Adjustments to Reconcile Net Income to Net Cash
Used in Operating Activities:
Depreciation 487 387
Amortization 50
Provision for Bad Debt 115 1,355
Changes in Assets and Liabilities:
(Increase) Decrease In:
Trade Receivables 727 4,346
Inventories 68 2,799
Prepaid and Other Expenses (410) 44
Increase (Decrease) in:
Accounts Payable (1,125) (1,726)
Accrued Expenses 467 (756)
Income Tax Payable\Receivable 650 (1,059)
------------ ------------
Net Cash Provided by (Used in) Operating Activities (982) 2,734
------------ ------------
Cash Flows From Investing Activities:
Purchase of Equipment and Leasehold Improvements (206) (724)
Power General Acquisition, net of cash acquired (366)
------------ ------------
Net Cash Used in Investment Activities (572) (724)
------------ ------------
Cash Flows From Financing Activities:
Net Borrowings on Revolving Credit Agreements 1,313
Proceeds from Issuance of Common Stock 24 29
Principal Payments on Long-Term Borrowings (137) (388)
------------ ------------
Net Cash Provided by (Used in) Financing Activities (113) 954
------------ ------------
Effect of Foreign Currency Exchange Rate Changes
on Cash 14 4
------------ ------------
Increase (Decrease) in Cash and Cash Equivalents (1,653) 2,968
Cash and Cash Equivalents at Beginning of Period 4,775 3,723
------------ ------------
Cash and Cash Equivalents at End of Period $ 3,122 $ 6,691
============ ============
Non-Cash Transaction:
Issuance of Redeemable Convertible Preferred Stock to Acquire
Power General $ 2,074
Issuance of Common Stock to Pay Preferred Stock Dividends 36
Page 5
AULT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SECOND QUARTER ENDED DECEMBER 1, 2002
- -------------------------------------
1 Summary of Consolidation Principles
- -------------------------------------
The accompanying consolidated financial statements include the accounts of Ault
Incorporated, its wholly owned subsidiaries, Ault Shanghai, Ault Korea
Corporation, and Ault Xianghe Co. Ltd. All significant intercompany transactions
have been eliminated. The foreign currency translation adjustment in footnote 4
represents the translation into United States dollars of the Company's
investment in the net assets of its foreign subsidiaries in accordance with the
provisions of FASB Statement No. 52.
The consolidated balance sheet of the Company as of December 1, 2002, the
related consolidated statements of operations for the three and six months ended
December 1, 2002 and December 2, 2001, and the consolidated statements of cash
flows for the six months ended December 1, 2002 and December 2, 2001 have been
prepared without being audited. In the opinion of the management, these
statements reflect all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the position of Ault Incorporated and
subsidiaries as of December 1, 2002 and December 2, 2001, and the results of
operations and cash flows for all periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted. Therefore, these
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's June 2, 2002 Form 10-K.
The results of operations for the interim periods are not necessarily indicative
of results that will be realized for the full fiscal year.
2 Inventories
- -------------
The components of inventory (in thousands) at December 1, 2002 and June 2, 2002
are as follows:
December 1, June 2,
2002 2002
-------------- ------------
Raw Materials $5,346 $4,609
Work-in-process 1,019 789
Finished Goods 3,391 3,104
-------------- ------------
$9,756 $8,502
============== ============
3 Financing Arrangements and Long-term Debt
- -------------------------------------------
Long-term debt (in thousands) including current maturities contain the
following:
December 1, June 2,
2002 2002
------------ ------------
Term loan, 7.2% interest, due in monthly installments through
December 2003, secured by equipment $ 106 $ 149
Term loan, 7.94% interest, due in monthly installments through
September 2005, secured by furniture 120 151
Term loan, 8.05% interest, due in monthly installments through
February 2015, secured by Company's headquarters building
2,672 2,735
------------ ------------
Total $ 2,898 $ 3,035
Less current maturities 294 281
------------ ------------
$ 2,604 $ 2,754
============ ============
Page 6
AULT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SECOND QUARTER ENDED DECEMER 1, 2002
- ------------------------------------
The Company maintains two credit facilities. It has a credit facility with US
Bank and a facility with Korea Exchange Bank supporting the South Korean
subsidiary. The US Bank agreement is a $4,000,000 revolving line-of-credit
agreement through February 28, 2003. The financing agreement contains certain
financial covenants related to the Company's consolidated net worth, EBITDA,
working capital, and fixed coverage ratio covenants. On December 1, 2002, the
Company is not in compliance with the EBITDA and fixed coverage ratio covenants.
There are no advances outstanding on the US Bank revolving line-of-credit at
December 1, 2002 and the Company does not expect a need to utilize this line of
credit in the current fiscal year.
4 Stockholders' Equity
- ----------------------
Six Months Ended
December 1, 2002
---------------------
($000)
Total Stockholders' Equity - June 2, 2002 $24,753
Net Loss $(1,961)
Net change in Foreign currency translation
adjustment 144
-------------
Comprehensive Income (Loss) (1,817)
Preferred Stock Dividends Declared (55)
Preferred Stock Dividends Paid with Common
Stock 36
Issue 9,500 shares of common stock in
accordance with stock option plan 24
-----------------
Total Stockholders' Equity $22,941
=================
5 Net Loss Per Common Share
- ---------------------------
Basic and diluted earnings per share are presented in accordance with Statement
of Financial Accounting Standards (SFAS) No. 128, EARNINGS PER SHARE. The
Redeemable Convertible Preferred Stock and stock options had no effect on
diluted weighted average shares outstanding, as they were anti-dilutive.
Second Quarter Ended Six Months Ended
-------------------- ----------------
December 1, December 2, December 1, December 2,
2002 2001 2002 2001
----------- ----------- ----------- -------------
Loss Applicable to Common Shareholders (in
thousands) $ (1,495) $ (2,060) $ (2,016) $ (2,706)
Basic - Weighted Average Shares Outstanding 4,580,574 4,537,522 4,576,355 4,536,536
Diluted - Weighted Average Shares Outstanding
4,580,574 4,537,522 4,576,355 4,536,536
Basic Loss per Share $ (0.33) $ (0.45) $ (0.44) $ (0.60)
=========== =========== =========== =============
Diluted Loss per Share $ (0.33) $ (0.45) $ (0.44) $ (0.60)
=========== =========== =========== =============
6. Acquisition
- --------------
On July 16, 2002, the Company purchased a portion of the operating assets of the
Power General division of Nidec America Corporation. The Power General division
developed, manufactured, and sold high efficiency DC/DC converters and custom
power supplies at various power levels up to 1200 watts under the Power General
brand name. Pursuant to the Purchase Agreement, the Company paid the Seller
$366,000 in cash and issued $2,074,000 face amount of the Company's
newly-created Series B 7% Convertible Preferred Stock, no par value (the
"Preferred Stock"). The Preferred Stock issued to Seller is convertible into
488,000 shares of the Company's Common Stock. The Company has filed a
registration statement covering the shares of Common Stock issuable upon
conversion of the Preferred Stock with the Securities and Exchange Commission.
The Company has maintained Power General's engineering group in Massachusetts
and has moved Power General's manufacturing operations and related functions to
Ault's other facilities in North America and Asia.
Page 7
AULT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SECOND QUARTER ENDED DECEMER 2, 2002
- ------------------------------------
The addition of Power General will benefit Ault in a number of ways. First, the
additional engineering capabilities will enhance product development. Second,
the acquisition brings greater product breadth to Ault through the addition of
AC/DC power supplies and DC/DC converter products. This broader offering affords
Ault new business opportunities.
Ault filed a Form 8-K with the Securities and Exchange Commission on July 31,
2002 to announce the acquisition, filed a Form 8-K/A on September 30, 2002 which
included audited financial statement and pro forma financials and filed a Form
8-K/A Amendment 2 on October 18, 2002 which included the consent of the
auditors.
The total cost of the acquisition, which closed on July 16, 2002, was $2,559,278
and was accounted for under the purchase method of accounting. Accordingly, the
acquired assets and liabilities assumed have been recorded at their respective
fair values as of the date of acquisition. The results of operations of the
acquired business is included in the financial statements since the date of the
acquisition. The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed from Nidec on the date of the
acquisition:
Inventories $ 1,048,675
Property and equipment 1,634,971
---------------
Total assets acquired 2,683,646
---------------
Current liabilities 124,368
---------------
Net assets acquired $ 2,559,278
---------------
Pro-forma results of the Company, assuming the acquisition had been made at the
beginning of each period presented, are:
Amounts in thousands, except per share amounts
Second Quarter Ended Six Months Ended
--------------------- ---------------------
Dec. 1, Dec. 2, Dec. 1, Dec. 2,
2002 2001 2002 2001
-------- -------- -------- --------
Revenue $ 10,523 $ 11,300 $ 21,740 $ 22,948
Net Loss (1,459) (3,150) (2,295) (4,886)
Preferred Stock Dividends 36 37 74 75
-------- -------- -------- --------
Net Loss Applicable to Common Stock $ (1,495) $ (3,187) $ (2,369) $ (4,961)
-------- -------- -------- --------
Basic/Diluted Loss Per Share $ (0.33) $ (0.70) $ (0.52) $ (1.09)
Common and equivalent shares outstanding: 4,581 4,538 4,576 4,537
Included in the six months ended December 1, 2002 are approximately $522,000 of
nonrecurring expenses for transition services relating to the transfer of Power
General operations out of the Nidec facility and into an Ault facility.
Page 8
7. Goodwill
- -----------
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
142, Goodwill and Other Intangible Assets, effective June 3, 2002. Under SFAS
No. 142, goodwill is no longer amortized but reviewed for impairment annually,
or more frequently if certain indicators arise. Based on the initial impairment
test, it was determined that none of the goodwill recorded was impaired.
Impairment adjustments recognized after adoption, if any, generally are required
to be recognized as operating expenses. Had the Company been accounting for its
goodwill under SFAS No. 142 for all periods presented, the Company's net loss
and loss per share would have been as follows:
Amounts in thousands, except per share amounts
Second Quarter Ended Six Months Ended
------------------- -------------------
Dec. 1, Dec. 2, Dec. 1, Dec. 2,
2002 2001 2002 2001
------- ------- ------- -------
Reported net loss $(1,495) $(2,060) $(2,016) $(2,706)
Add back goodwill amortization, net of tax -- 27 -- 50
------- ------- ------- -------
Pro forma adjusted net loss (1,495) (2,033) (2,016) (2,656)
======= ======= ======= =======
Basic and diluted net loss per share:
Reported net loss $ (0.33) (0.45) $ (0.44) $ (0.60)
Goodwill amortization, net of tax -- 0.01 -- 0.01
------- ------- ------- -------
Pro forma adjusted basic and diluted net loss
per share $ (0.33) $ (0.44) $ (0.44) $ (0.59)
======= ======= ======= =======
Common and equivalent shares outstanding: 4,581 4,538 4,576 4,537
8. Redeemable Convertible Preferred Stock
- -----------------------------------------
During the first quarter, in connection with the purchase of certain assets and
liabilities of Power General, the Company issued 2,074 shares of redeemable 7%
convertible preferred stock at $1,000 face value. The preferred stock shares are
convertible into common stock at the holders' option at a conversion price of
$4.25 per share and has a mandatory redemption of one-third of the outstanding
shares of unconverted preferred stock on July 16, 2006, one-half of the
remaining outstanding on July 16, 2007, and the rest on July 16, 2008. The
dividends on the preferred stock are cumulative and payable quarterly beginning
October 15, 2002, and can be paid in cash; however, during the first three years
the Company can pay dividends in shares of common stock in lieu of cash. The
Company has declared dividends of $55,000 of which $36,000 have been paid with
common stock.
9. Accounting Pronouncements
- ----------------------------
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS. SFAS 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supercedes
SFAS 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND ASSETS TO BE
DISPOSED OF, and the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS--REPORTING
THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS AND EXTRAORDINARY, UNUSUAL
AND INFREQUENTLY OCCURRING TRANSACTIONS. SFAS 144 requires that long-lived
assets to be disposed of be measured at the lower of carrying amount or fair
value less cost to sell. The Company adopted SFAS 144 on June 3, 2002 and it did
not have an effect on its financial position or results of operations.
Page 9
ITEM 2 - MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of the financial condition and results of operations
are based on the consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires the Company to
make estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities at the date of our financial statements. Actual results may
differ from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those involving significant
judgments and uncertainties which could potentially result in materially
different results under different assumptions and conditions. Application of
these policies is particularly important to the portrayal of the financial
condition and results of operations. The Company believes the accounting
policies described below meet these characteristics. All significant accounting
policies are more fully described in the notes to the consolidated financial
statements included in the Company's annual report on Form 10-K.
INVENTORY VALUATION - Inventory is written down for estimated surplus and
discontinued inventory items. The amount of the write-down is determined by
analyzing historical and projected sales information, plans for discontinued
products and other factors. Changes in sales volumes due to unexpected economic
or competitive conditions are among the factors that would result in materially
different amounts for this item.
ALLOWANCE FOR DOUBTFUL ACCOUNTS - An allowance is established for estimated
uncollectible accounts receivable. The required allowance is determined by
reviewing customer accounts and making estimates of amounts that may be
uncollectible. Factors considered in determining the amount of the reserve
include the age of the receivable, the financial condition of the customer,
general business, economic and political conditions, and other relevant facts
and circumstances. Unexpected changes in the aforementioned factors would result
in materially different amounts for this item.
DEFERRED TAXES - The Company accounts for income taxes in accordance with SFAS
No. 109, "Accounting for Income Taxes," which requires that deferred tax assets
and liabilities be recognized using enacted tax rates for the effect of
temporary differences between book and tax basis of recorded assets and
liabilities. SFAS 109 also requires that deferred tax assets be reduced by a
valuation allowance if it is likely that some portion or the entire deferred tax
asset will not be realized. Based upon prior taxable income and estimates of
future taxable income, the Company has determined that it is likely that a
portion of the net deferred tax asset will not be fully realized in the future.
Thus a valuation allowance has been established. If actual taxable income varies
from these estimates, the Company may be required to change the valuation
allowance against the deferred tax assets resulting in a change in income tax
expense (benefit), which will be recorded in the consolidated statement of
operations.
RESULTS OF OPERATIONS
Second Quarter Ended December 1, 2002
- -------------------------------------
($000) Favorable / (Unfavorable)
Fiscal Fiscal -------------------------
2003 2002 Amount Percent
--------------------------------------------------------
Net Sales $10,523 $9,953 $ 570 6%
Operating Loss (1,479) (2,738) 1,259 46%
Net sales were $10,523,000 for the second quarter of fiscal 2003 up 6% from
$9,953,000 for the second quarter of fiscal 2002. The increase is due to sales
resulting from the acquisition of certain assets and certain liabilities of
Power General.
Gross margin for the second quarter was 20.4 percent as a percent of sales,
compared with 13.7 percent for the same period last year. Prior year margin was
adversely affected by a $780,000 inventory write down in the second quarter of
fiscal 2002.
Page 10
Operating expenses decreased in the second quarter of fiscal 2003 to $3,622,000
from $4,104,000 in the second quarter of fiscal 2002. The reduction of expenses
in the second quarter of fiscal 2003 is primarily related to 1) the reduction in
bad debt expense. The second quarter of fiscal 2002 had an expense of $1,300,000
for the recognition of uncollectible accounts due to the economic slowdown. 2)
The July 2002 acquisition of certain assets and certain liabilities of Power
General. This acquisition added costs of $655,000 relating to the engineering
and sales staff hired as a result of the acquisition. These costs will continue
in the future. 3) Transition costs of $227,000 for the temporary operation in
the current Power General location.
Six Months Ended December 1, 2002
- ---------------------------------
($000) Favorable / (Unfavorable)
Fiscal Fiscal -------------------------
2003 2002 Amount Percent
--------------------------------------------------------
Net Sales $21,371 $20,254 $1,117 6%
Operating Loss (1,897) (3,148) 1,251 40%
Net sales were $21,371,000 for the first six months of fiscal 2003 up 6% from
$20,254,000 for the first six months of fiscal 2002. The increase is due to
sales resulting from the acquisition of certain assets and certain liabilities
of Power General.
Operating loss totaled $1,897,000 for the first six months of fiscal 2003
compared a loss of $3,148,000 for the same period in fiscal 2002. Margins for
the first two quarters of fiscal 2003 is 23.4% of sales compared to 18.6% of
sales for the same period in fiscal 2002. The increase in margin is primarily
due to 1) a $780,000 inventory write down in the second quarter of fiscal 2002.
2) The increase in the value of orders that were manufactured by the Company's
subsidiaries as opposed to the Company's subcontractors. This contributed
$108,000 of higher margins. 3) The volume of orders at the China facility
exceeded the fixed cost mark in the first six months of fiscal 2003 compared to
the first six months of fiscal 2002. This increased margins by $389,000. 4) The
higher cost of the transition of Power General production into an Ault facility
resulted in higher costs of $288,000 and decreased margins. As of the end of the
quarter the transition has been complete.
Operating expenses decreased in the first six months of fiscal 2003 to
$6,898,000 from $6,923,000 in the first six months of fiscal 2002. The decrease
in expenses is primarily related to 1) a decrease in the bad debt expense for
fiscal 2003. The Company recognized $1,300,000 of additional bad debt expense
for accounts that were uncollectible in fiscal 2002. 2) The July 2002
acquisition of certain assets and certain liabilities of Power General increased
costs from fiscal 2002 by $998,000. These additional costs are related to the
engineering and sales staff hired as a result of the acquisition. These costs
will continue in the future. 3) Transition costs of $404,000 for temporary
operations in the current Power General location. The transition for the
manufacturing of these products is complete and these costs will not continue.
4) A reduction in headcount in fiscal 2002, reduced expenses in fiscal 2003 by
$115,000.
ORDER BACKLOG: The Company's order backlog at December 1, 2002 totaled
$7,994,000 compared to $8,365,000 at June 2, 2002. The order backlog represents
sales for approximately ten weeks.
Page 11
NON-OPERATING INCOME AND EXPENSES: Nonoperating expense is $336,000 for the
first six months of fiscal 2003 compared to $476,000 for the same period in
fiscal 2002. The Company had interest income of $23,000 in the first two
quarters of fiscal 2003 and $61,000 for the same period in fiscal 2002. Other
expense is $124,000 for the first six months of fiscal 2003 and $252,000 in the
first six months of fiscal 2002. Both amounts are primarily related to the
currency exchange rate loss in Korea. The Company incurred interest expenses of
$235,000 in the first six months of fiscal 2003 and $285,000 in the same period
of fiscal 2002, paid on bank credit facilities and long-term borrowings.
INCOME TAX: The Company had a pre-tax loss of $2,233,000 for the six-month
period in fiscal 2003 on which it accrued a consolidated income tax benefit of
$272,000. For the six-month period in fiscal 2002 the Company had a pre-tax loss
of $3,624,000 on which a tax benefit of $918,000 was accrued. The effective tax
rate is a benefit of 12% for the first two quarters of 2003, and a benefit of
25% for the same period in fiscal 2002. In the first two quarters of fiscal 2003
the Company did not take a benefit from either foreign or U.S. loss
carryforwards generated because it was likely the Company will be unable to use
such losses. The Company has recognized the benefit that will be realized from
the loss carrybacks. In the first two quarters of fiscal 2002 the Company did
not take a benefit from the foreign loss carryforwards the loss generated
because it was likely the Company will be unable to use such losses.
NET LOSS: The Company reported a basic and diluted per share loss of $0.44 for
the first six months of fiscal 2002, based on 4,576,000 outstanding weighted
average shares, compared to basic and diluted per share loss of $0.60 for the
same period of fiscal 2002, based on 4,537,000 outstanding weighted average
shares.
LIQUIDITY AND CAPITAL RESOURCES
The following table describes the Company's liquidity and financial position on
December 1, 2002, and on June 2, 2002:
December 1, June 2,
2002 2002
------------------- --------------
($000) ($000)
Working capital $12,898 $14,083
Cash and cash equivalents 3,122 4,775
Unutilized bank credit facilities 975 4,975
CURRENT WORKING CAPITAL POSITION
As of December 1, 2002, the Company had current assets of $21,360,000 and
current liabilities of $8,462,000, which amounted to working capital of
$12,898,000 and a current ratio of 2.5 to 1.0. This represents a decrease from
its working capital of $14,083,000 as of June 2, 2002. The Company relies on its
credit facilities and cash flows from operations as sources of working capital
to support normal growth in revenue, capital expenditures and attainment of
profit goals. The Company has not committed any funds to capital expenditures as
of December 1, 2002.
CASH AND INVESTMENTS: As of December 1, 2002, the Company had cash totaling
$3,122,000, compared to $4,775,000 as of June 2, 2002. This decrease was
primarily due to payments for the acquisition of Power General of $366,000, and
payments to fund operations including the operations of Power General after the
acquisition of $1,285,000.
CREDIT FACILITIES: The Company maintains two credit facilities. It has a credit
facility with US Bank and a facility with Korea Exchange Bank supporting the
South Korean subsidiary. The US Bank agreement is a $4,000,000 revolving
line-of-credit agreement through February 28, 2003. The financing agreement
contains certain financial covenants related to the Company's consolidated net
worth, EBITDA, working capital, and fixed coverage ratio covenants. On December
1, 2002, the Company is not in compliance with the EBITDA and fixed coverage
ratio covenants. There are no advances outstanding on the US Bank revolving
line-of-credit at December 1, 2002 and the Company does not expect a need to
utilize this line of credit in the current fiscal year.
Page 12
CASH FLOWS FOR FISCAL 2002
OPERATIONS: Operations used $985,000 of cash during the first six months of
fiscal 2003 due principally to the following activities:
(a) The loss net of depreciation used cash of $1,474,000.
(b) Decreases in trade receivables provided $727,000.
INVESTING ACTIVITIES: Investing activities used net cash of $572,000 relating to
the acquisition of Power General ($366,000) and purchase of new equipment
($206,000).
FINANCING ACTIVITIES: Financing activities used net cash of $113,000, comprised
of $137,000 payment on debt, and $24,000 from proceeds from the issuance of
common stock.
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE FLUCTUATIONS: The effect of translating
the Korean financial statements, which were prepared in Won to US dollars, had
an increase effect on cash of approximately $14,000 during the first six months
of the year. The effect of translating the Chinese financial statements, which
were prepared in Yuan to US dollars, had minimal effect on cash for the first
six months of the fiscal year.
SUMMARY: The Company's cash and working capital positions are sound and together
with its credit facilities, are adequate to support the Company's strategies for
the remainder of fiscal 2003.
INFORMATION ABOUT PRODUCTS AND SERVICES: The Company's business operations are
comprised of one activity--the design, manufacture and sale of equipment for
converting electric power to a level used by OEMs in data
communications/telecommunications and medical markets to charge batteries,
and/or power equipment. The Company supports these power requirements by making
available to the OEMs products that have various technical features. These
products are managed as one product segment under the Company's internal
organizational structure and the Company does not consider any financial
distinctive measures, including net profitability and segmentation of assets to
be meaningful to performance assessment.
INFORMATION ABOUT REVENUE BY GEOGRAPHY
Distribution of revenue from the US, from each foreign country that is the
source of significant revenue and from all other foreign countries as a group
are as follows:
Six Months Ended
December 1, 2002 December 2, 2001
----------------------------------------
($000) ($000)
US $13,683 $14,846
Korea 2,579 2,208
China 2,180 680
UK 1,321 1,208
Canada 330 454
Belgium 297 111
Other Foreign 981 747
------------------ ---------------------
Total $21,371 $20,254
================== =====================
The Company considers a country to be the geographic source of revenue if it has
contractual obligations, including obligation to pay for trade receivable
invoices.
IMPACT OF FOREIGN OPERATIONS AND CURRENCY CHANGES:
The Company will experience normal valuation changes as the Korean and Chinese
currency fluctuates. The effect of translating the Korean and Chinese financial
statements resulted in a net asset increase of $144,000 during the first six
months of fiscal 2003.
Page 13
FORWARD LOOKING STATEMENTS
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 that 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 original equipment manufacturers (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; fuel prices;
and other risks affecting the Company's target markets.
Page 14
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company experiences foreign currency gains and losses, which are reflected
in the financial statements, due to the strengthening and weakening of the U.S.
dollar against currencies of the Company's foreign subsidiaries. The Company
anticipates that it will continue to have exchange gains or losses in the
future.
As of December 1, 2002, the Company had only fixed rate debt outstanding. Thus,
interest rate fluctuations would not impact interest expense or cash flows. If
the Company were to undertake additional debt, interest rate changes could
impact earnings and cash flows.
ITEM 4 - CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
The Company's Chief Executive Officer, Frederick M. Green, and Chief Financial
Officer, Donald L. Henry, have reviewed the Company's disclosure controls and
procedures within 90 days prior to the filing of this report. Based upon this
review, these officers believe that the Company's disclosure controls and
procedures are effective in ensuring that material information related to the
Company is made known to them by others within the Company.
(b) Changes in Internal Controls.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls during the quarter
covered by this report or from the date of the review to the date of this Form
10-Q.
Page 15
PART II
ITEM 1 LEGAL PROCEEDINGS:
Not Applicable
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Recent Sales of Unregistered Securities
As previously disclosed, on July 16, 2002, the Company purchased a portion of
the operating assets of the Power General division of Nidec America Corporation
(the "Seller") pursuant to an Asset Purchase Agreement between the Company and
the Seller dated July 16, 2002 (the "Purchase Agreement"). Pursuant to the
Purchase Agreement, the Company paid Seller $366,000 in cash and issued
$2,074,000 in face amount of the Company's newly-created Series B 7% Convertible
Preferred Stock, no par value (the "Preferred Stock"). The cash portion of the
purchase price was paid from the Company's working capital. At the current
conversion price of $4.25 per share, the Preferred Stock issued to Seller is
convertible into 488,000 shares of the Company's Common Stock and the Company
agreed to file a registration statement covering the shares of Common Stock
issuable upon conversion of the Preferred Stock with the Securities and Exchange
Commission ("SEC"). The Company filed a Form S-3 Registration Statement with SEC
on October 8, 2002
The Company believes that the issuance of the Preferred Stock was exempt
pursuant to Section 4(2) of the Securities Act of 1993. Under the terms of the
Purchase Agreement, the Seller agreed that it was acquiring the Preferred Stock
for its own account and not with a present view to public resale.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES:
Not Applicable
ITEM 4 Submission of Matters to a Vote of Security Holders;
The following matter was voted upon at the Annual Meeting of Stockholders held
on September 24, 2002, and received the votes set forth below:
All of the following persons nominated were elected to serve as directors and
received the number of votes set opposite their respective names:
For Withheld
--------------------------- ---------------------------
F. Green 3,973,606 466,650
J. Colwell 3,973,906 466,650
C. Barnett 3,973,906 466,650
J. Kassakian 3,973,902 466,654
F. Sims 3,973,906 466,650
M. Walker 3,973,902 466,654
D. Larkin 3,973,906 466,650
The proposal to ratify and approve an amendment to the Company's 1996 Stock Plan
to increase the number of Shares authorized to be issued under such Plan by
150,000 shares to 1,200,000 passed by a vote of 3,460,422 for and 307,884
against.
ITEM 5 OTHER INFORMATION
Not Applicable.
Page 16
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
99.1 Certificate pursuant to 18 U.S.C. ss.1350
(b) Reports on form 8-K
On July 31, 2002, Ault filed a Form 8-K dated July 16, 2002 to report an event
under Item 2, Acquisition or Disposition of Assets. On September 30, 2002, Ault
filed Amendment No. 1 to Form 8-K on Form 8-K/A to provide under Item 7,
Financial Statements and Exhibits, the required financial statements and pro
forma financial information. On October 18, 2002, Ault filed Amendment No. 2 to
Form 8-K on Form 8-K/A to provide under Item 7, Financial Statements and
Exhibits, the required consent of the auditors.
Page 17
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AULT INCORPORATED
(REGISTRANT)
DATED: January 13, 2003 /s/ Frederick M. Green
---------------- -----------------------------
Frederick M. Green, President
Chief Executive Officer and
Chairman
DATED: January 13, 2003 /s/ Donald L. Henry
---------------- -----------------------------
Donald L. Henry
Chief Financial Officer
Page 18
CERTIFICATION
I, Frederick M. Green, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ault Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: January 13, 2003 /s/ Frederick M. Green
-------------------- --------------------------
Frederick M. Green
President and
Chief Executive Officer
Page 19
CERTIFICATION
I, Donald L. Henry, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ault Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: January 13, 2003 /s/ Donald L. Henry
-------------------- --------------------------
Donald L. Henry
Chief Financial Officer
Page 20