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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 JUNE 1, 2003
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)
7105 NORTHLAND TERRACE, BROOKLYN PARK, MN 55428-1028
Address of principal executive offices
Registrant's telephone number, including area code: (763) 592-1900
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. [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES [_] NO [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $9,749,000 based upon the closing price of the
Company's common stock on the NASDAQ National Market on September 4, 2003,
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 September 4, 2003, there were outstanding 4,665,774 shares of the
Registrant's common stock.
The Form 10-K consists of 56 pages. The Exhibit Index is located on page 52.
Documents Incorporated by Reference: Portions of the definitive Proxy Statement
to be delivered to shareholders for the Annual Meeting of Shareholders to be
held October 16, 2003 are incorporated by reference into Part III.
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AULT INCORPORATED
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 1, 2003
PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Ault Incorporated (herein Ault or the Company) was incorporated under the laws
of the State of Minnesota in 1961. The Company designs, manufactures, and
markets 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 devices and equipment
as well as scanning and printing equipment and industrial equipment.
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). Further information regarding this acquisition is contained in Note 14
of the Notes to Financial Statements under Item 8 herein. Since the acquisition
of the Power General division significant time and resources have been expended
integrating the Massachusetts engineering group and internal power supply line
into Ault's existing processes and team structure. As planned, production of
Power General's open-frame AC-DC power supplies and the DC/DC converters was
transferred from Massachusetts to Ault's existing facilities in Asia. In
addition, through training provided to Ault's field sales organization
worldwide, Ault's customers and prospects have been familiarized with the
additional products and seasoned design engineering capabilities provided by
this acquisition.
On July 17, 2003, the Company announced the consolidation of its manufacturing
operations. The consolidation includes the closing of its Minneapolis production
operations, eliminating approximately 40 jobs in assembly, equipment
maintenance, procurement and administrative support and the integration of
production into Ault's other manufacturing plants. Ault's engineering,
documentation, safety certification/reliability, sales, marketing and
administrative services will remain at the Minneapolis headquarters facility.
The consolidation is anticipated to take up to four months to complete to ensure
continuing service to Ault's global customer base. The consolidation was
implemented to reduce expenses, improve cash flow and return the Company to
profitability. Ault's management estimates that the consolidation will reduce
expenses by approximately $1.3 million annually.
The Company maintains a website at www.aultinc.com. The annual reports on Form
10-K, quarterly reports on Form 10-Q and periodic reports on Form 8-K (and any
amendments to these reports) are available free of charge on the website as soon
as reasonably practical after the reports are filed with the SEC. To obtain
copies of these reports, go to www.
http://www.corporate-ir.net/ireye/ir_site.zhtml?ticker=AULT&script=1901.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company operates in only one industry segment - the manufacture and sale of
power conversion devices.
(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 more than one kilowatt of
continuous power for a wide variety of electronic equipment. A significant
amount of the Company's products are located outside the equipment they power as
a wall plug-in or as in-line components. Both of these styles are generally
referred to as external power conversion products. A smaller percentage of the
Company's products are located inside the equipment they power and are generally
known as internal power conversion
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devices. Both product configurations, external and internal, offer distinct
advantages to the OEM buyer. Internal power products are more generally accepted
among design engineers across all segments of the electronic original equipment
market (EOEM). Internal power has traditionally been the norm in product design
and in terms of range; it provides greater latitude especially in applications
beyond 100 watts. External power still ranks as a high growth area in the power
supply industry due to the 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, diverse design engineering expertise and customized
customer services.
(1) PRODUCTS
Ault's product line includes internal AC/DC and DC/DC switching power
supplies, DC/DC converters, DC mobile adapters and four major
categories of external power conversion products: switching power
supplies, linear power supplies, transformers and battery chargers. The
Company's broad range of power conversion products --- ranging from 1
watt to more than 1 kilowatt --- are capable of providing power at most
output levels that OEMs require to meet their requirements. The
Company's design and application engineers work closely with customers
to ensure that these products are customized to meet each OEM
customer's unique power conversion needs.
The following table summarizes the proportion of sales of each of the
Company's five major product categories for its last three fiscal years
ended June 1, 2003:
SALE OF PRODUCTS BY CATEGORY
AS A PERCENTAGE OF TOTAL SALES
Years Ended
Product Type June 1, June 2, June 3,
2003 2002 2001
Switching Power Supplies 54% 48% 39%
Linear Power Supplies 30 32 41
Transformers 6 11 12
Battery Chargers 7 9 8
DC/DC Converters 3
Total 100% 100% 100%
POWER SUPPLIES. The Company's traditional power supplies provide all
power conversion elements for electronic equipment in power outputs
ranging from 1 to 1200 watts. The majority of the Company's products
contain a component level transformer, which reduces the voltage level,
as well as other circuitry and components, which convert alternating
current (AC) to direct current (DC) and, in most cases, maintain
voltage within specific limits.
* INTERNAL AND EXTERNAL SWITCHING POWER SUPPLIES. The Company
believes the market for switching power supplies in the 1-500
watt range is generally the fastest growing segment of the
overall power supply industry. For internals, switching power
supplies are efficient and easily modified to meet an OEM's
specific footprint and power requirements. In externals,
switching power supplies use switching transistors to convert
power from AC to DC and are more energy efficient, smaller and
lighter in weight than linear units with comparable power
outputs. The applications in which these internal and external
products are currently used include telecommunications
(wireless, wire line, cellular), data communications
(networking, broadband modem, Power over Ethernet, routers,
hubs, switchers), computer and related peripherals, medical
equipment, microprocessor controlled systems, printing and
scanning equipment, security systems, automatic teller
terminals, test equipment, multiplexers, digital cameras and
point of sale equipment.
Most of the Company's internal and external switching power
supplies incorporate a universal input ranging from 90 to 265
volts AC. This universal input means that the power supplies
can be used in virtually any
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country for applications such as local area networks (LANs),
printers and fiber optic links. The Company has also designed
medical grade switching power supplies with similar universal
input ranges.
* 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 12 watts of regulated
power and 25 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 system within
the product. These products reduce AC voltage from
approximately 110 volts (230 volts in some countries) down to
lower voltages that range from 5 to 60 volts AC. The Company's
product line also includes highly customized transformers that
operate within stringent power output tolerances, features
that are 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
manufacturers 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 newer 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.
* HIGH-EFFICIENCY AND HIGH-DENSITY DC/DC CONVERTERS. The
addition of DC/DC converters to the Company's product offering
was in response to customer requests for "on-the-board" power
solutions and Ault's strategy to fulfill the "total solution"
approach as a preferred supplier to valued OEM customers. In
fiscal 2003, as part of the Power General product offering,
Ault acquired a line of DC/DC converters and seasoned
engineers who have developed new, innovative high-density
quarter-brick and eighth-brick designs. These products,
coupled with the high-efficiency DC/DC converters manufactured
by Magnetek under private label arrangements that the Company
introduced in fiscal 2002, provide Ault with a wide range of
converter options to meet the needs of OEMs using distributed
power architecture in their next generation and new electronic
product designs.
* MOBILE PRODUCTS. In late 2002, the Company expanded its
product offering to include a line of mobile products for
powering laptop computers in a broad range of field and
service applications. The product focus is on mobile adapters
in a single and dual output with a primary sales focus on
laptop OEMs and value-added resellers (VARs). The Company
anticipates nearly 65% of the market to be field and service
applications in the business travel, insurance, trucking and
delivery industries. The remainder of the applications is in
emergency fire, police and medical services (20%); military
and government (10%); and a small percentage in
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miscellaneous uses (5%). The first product, the TR75 single
output mobile adapter (75 watts) was introduced in March.
(2) MARKETS AND CUSTOMERS
The Company's marketing efforts are directed primarily toward OEMs
producing non-consumer electronic equipment for broadband modems,
wireless and wire line telecommunications product, personal information
appliances, computer peripherals, medical applications, as well as
industrial and retail data acquisition. These 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/data communications equipment
(broadband modems, wireless and wire line); in fiscal 2003 sales in
this market represented approximately 43% of net sales. The Company's
products include power cable and ADSL modems, 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, caller
identification units and alpha numeric displays, low to medium speed PC
modems and multiplexers (equipment which enables the simultaneous
transmission of multiple channels of information over the same
telephone line).
In fiscal 2003, the telecommunications industry overall remained
sluggish as OEMs in this market segment continued to downsize,
restructure and move inventory. While the Company did not lose any OEM
customers, all of them experienced severe cutbacks in revenue
generation, employee resources and the execution of new
designs/projects. A couple of telecommunication segments, however, did
remain strong: wireless and networking. There are new applications such
as broadband wireless routers and wireless Ethernet devices that
require cost-effective switching power supplies in the 12-32 watt
range. The Company has plans to formally introduce a single-port
Power-over-Ethernet power supply in the first quarter that combines
power through integrated RJ45 jacks as well as data over a single CAT 5
Ethernet cable. Custom versions of this 20-watt product have already
been shipped in late fiscal 2003 to several leading OEMs in the
wireless and networking industries.
Approximately 14% of net sales in fiscal 2003 were to OEMs of portable
medical equipment such as infusion pumps, patient monitoring systems,
apnea monitors, and portable terminals for patient history input
diagnostics.
In fiscal 2003 approximately 2% of the Company's net sales were to OEMs
of computers and computer peripherals such as digitizers, printers,
plotters, portable terminals, point of sale scanners and optical
character readers, LAN hardware and multimedia speakers for computer
applications.
The Company has worked diligently to support the growth of sales
through our network of regional, national and international
distributors. In fiscal 2003, approximately 16% of the Company's net
sales were to our distributors and their broad base of customers. While
the specific percentages per market segment are not available, the
Company's distributors target the same market segments outlined here.
The balance of approximately 25% of the Company's net sales in fiscal
2003 was to OEMs of various kinds of industrial equipment, including
digital cameras, flat panel displays and mine safety devices, as well
as military/aerospace applications such as secure-line telephones.
(3) DESIGN ENGINEERING AND PRODUCT DEVELOPMENT
Design engineering teams at the Company's facilities in the United
States, People Republic of China and South Korea are responsible for
developing new power conversion products and customizing existing
products to meet customer needs. The Company also utilizes the
significant engineering resources of its Asian subcontractors for the
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development of products targeted for subcontract manufacturing. The
Company's product development activities are divided equally between
developing products to satisfy customer needs and new products based
upon anticipated customer needs and market trends. New product
development opportunities are evaluated based upon criteria such as
global market potential, return on investment and technological
advantages. The Company believes that its collaborative efforts with
customers, combined with its forward-looking concern for power
technology and market trends, have enabled it to gain a reputation as a
leading innovator in the development of new power conversion products.
(4) SALES AND DISTRIBUTION
The Company markets its products primarily in the U.S. and Canada
through a network of 18 manufacturer representatives employing
approximately 125 salespersons, each of whom represents, in addition to
Ault's products, several different but complementary product lines of
other manufacturers. The Company also sells through four national
distributor organizations, which employ over 1,000 salespersons, and 14
regional distributors, which employ over 125 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
manufacturer 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.
The Company focuses its selling efforts primarily on OEMs in the U.S.
and Canada. However, many of the larger OEM customers of the Company
manufacture and sell their products globally. As a result, the Company
has extended its presence to markets throughout the world. The
Company's sales in the Pacific Rim are primarily to customers in South
Korea and China.
The Company markets its products in Europe through a network of
distributors who are managed through the Company's customer team
located in Norwood, Massachusetts.
(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 that is 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 States; 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
(CE) a standard for the European Community. In addition, some of the
Company's products have also received Japanese Ministry of
International Trade and Industry (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,
CSA and TUV and is able to conduct most certification tests at its
Minneapolis headquarters. This procedure reduces the time required to
obtain safety certifications.
(6) INNOVATIVE TEAM APPROACH
The Company uses a team-based organizational structure consisting of
six teams. The Company's customer base is divided into five
geographical regions with a specific Ault team assigned to manage the
needs of customers in each
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region. A sixth team, Ault New Business, manages the requirements of
customers who have orders below $60,000 annually as well as qualifying
new business opportunities in the United States. A coordinator that is
selected by the Company's President leads each customer 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 statement 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.
(7) COMPETITION
The Company competes primarily with various manufacturers of external
power conversion products. The industry is highly fragmented, with
manufacturers generally focusing their marketing on specific segments.
The Company has experienced strong 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., Friwo, and EMC, Inc. for
linear power supplies; Globtek, Inc., Condor and Phihong Enterprise
Co., Ltd. for switching power supplies; and Engineering Design Sales,
Inc. and Xenotronics Company for battery chargers.
The Company competes on the basis of the quality and performance of its
products, the breadth of its product line, customer service, and
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 internal and external
power conversion devices, which OEMs consider in designing their
electronic product.
The Company provides a total solution approach to the OEM's entire
power conversion product needs (under 1 kilowatt) through its
commitment to reliable partnerships and its delivery of high quality
products supported by solution-oriented design engineering. The
presence of Ault Korea, Ault China and the arrangements with
subcontract manufacturers in China and Thailand allow the Company 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 OEMs and independent suppliers offering
internal products. With the trend toward lower power requirements in
portable electronic equipment and with the increasing availability of
smaller, competitively priced internal switching power supplies,
certain customers of the Company may choose to return to internal power
supplies in place of the external power conversion products they
currently purchase. In response to this issue, the Company is now well
positioned to service the power requirements of its customers, whether
internal or external, as a result of the Power General acquisition.
This acquisition not only provided the engineering expertise to design
internal power supplies, but also has expanded the Company's product
offering significantly to include a line of AC/DC and DC/DC switching
power supplies and DC/DC converters. The Company has seen a variety of
competitors for internal AC/DC power supplies including Power-One,
GlobTek, Condor and Delta Electronics.
The Company competes with a broad range of manufacturers in the DC/DC
converter market. The industry is fragmented, with manufacturers
concentrating their sales and marketing on specific customer
requirements in specific markets. The Company's primary competitors are
Synqor, Power-One, Ericsson, Artesyn, and Galaxy. In the past 12
months, almost all of the key players in the DC/DC market have
introduced models in the isolated, high-efficiency eighth-brick,
quarter-brick, and half-brick models. The largest single market segment
for the sale of
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these high-efficiency models is the telecommunication industry and
since this segment has suffered severely in the down economy, there has
been little business generated for these products. To date, no single
competitor dominates the DC/DC market in terms of market share.
The estimated size of the mobile products market in North America is
$55-$65 million. The major competitors, Targus, Lind and Mobility,
specialize in this market segment. These three companies dominate the
market with combined revenues of approximately $47 million. The rest of
the market includes smaller companies with limited sales to a handful
of key customers.
(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 conversion applications.
Manufacturing is currently conducted at the Company's facilities in
Seoul, South Korea; Xianghe, China; Shanghai, China and at four
locations in China and Thailand using subcontract manufacturers. Ault
has typically manufactured prototypes and low-volume products at its
facility in Minneapolis, Minnesota.
As mentioned earlier, the Company announced the consolidation of its
manufacturing operations on July 17, 2003. The consolidation includes
the closing of its Minneapolis production operations, with the
headquarters location continuing to provide engineering, safety
certification, reliability testing, sales, marketing and administrative
services for its global customers. The plan integrates production into
Ault's other manufacturing plants. Ault headquarters will continue to
provide prototypes and engineering builds as part of its engineering
support services. The consolidation is anticipated to take up to four
months to complete in order to ensure continuing service to Ault's
global customer base.
Electronic components and raw materials used in the Company's products
are generally available from a large number of suppliers, although from
time to time 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, its South Korea facility in 1996 and its China facility in 1998.
The Company tests 100% of its finished products against its own and the
customers' specifications, and then ships the products in
custom-engineered protective packaging to minimize any damage during
shipment.
The Company has subcontract manufacturing arrangements with two
business partners in Thailand and two in China. The Company does not
have long-term commitments with its subcontractors and the
subcontractors build product for the Company pursuant to individual
purchase orders. The Company selects its subcontract manufacturers
based upon their ability to manufacture high-quality products, the
sufficiency of their engineering capabilities to support products being
manufactured; and their ability to meet required delivery times.
(9) SIGNIFICANT CUSTOMERS: BACKLOG
The Company sells its products to over 400 customers, and it is the
Company's objective to maintain a diversified customer base to avoid,
where practicable, dependence upon a single customer. In fiscal 2003,
2002, and 2001, no customers accounted for more than 10% of sales.
The Company's order backlog at June 1, 2003 totaled $13,850,000
compared to $9,310,000 at June 2, 2002. The order backlog represents
sales for approximately 16 weeks.
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.
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(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 no significant patents.
(12) SEASONALITY
In the past three years, sales of the Company have not reflected
seasonality.
(13) EMPLOYEES
As of July 7, 2003, the Company employed approximately 504 full-time
employees at its facilities as follows:
South
Korea China US Total
Manufacturing 71 237 33 341
Engineering 11 10 29 50
Marketing 9 10 11 30
General and Administrative 8 50 25 83
---- ---- ---- -----
Total 99 307 98 504
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 Officer Since
Frederick M. Green 60 President and Chief Executive Officer and Director 1980
Donald L. Henry 47 Vice President, Treasurer, Chief Financial Officer 1999
and Assistant Secretary (Previously 11 years with Abbott
Laboratories, most recently: Controller Fermentation
Operations, Controller Corporate Plant engineering,
Financial Planning and Analysis Manager)
Xiaodong Wang 45 Vice President - Asia Pacific (Previously 2 years with 2000
XD Company as CEO and President and 7 years with Simplot
Company most recently: General Manager of China
Operations, International Project Manager)
Gregory L. Harris 50 Vice President - Business Development 1988
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(15) RISK FACTORS
The following risk factors are relevant to an understanding of the
business matters discussed herein:
* 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."
* THE COMPANY'S FINANCIAL RESULTS ARE INFLUENCED BY A NUMBER OF
FACTORS. The Company's financial results are subject to
fluctuation due to various factors, including general business
cycles in the Company's markets, the mix of products sold, the
stage of each product in its life cycle and the rate and cost
of development of new products. In addition, component and
material costs, the timing of orders from and shipments of
products to customers and deferral or cancellation of orders
from major customers could adversely affect financial results.
* THE COMPANY'S RELIANCE ON SUCH OUTSIDE CONTRACTORS REDUCES ITS
CONTROL OVER QUALITY AND DELIVERY SCHEDULES. 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. 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 of
Supply."
10
* 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 of its employees. In
addition, the Company's future success will depend on the
ability of its officers and key employees to successfully
manage the Company for growth and profitability and to
attract, retain, motivate and effectively utilize the team
approach to manage its employees.
* WHILE WE ACTIVELY TRAIN AND TECHNICALLY ASSIST THE INDIVIDUAL
SALES REPRESENTATIVES REPRESENTING OUR PRODUCTS, A REDUCTION
IN THE SALES EFFORTS BY OUR CURRENT MANUFACTURER
REPRESENTATIVES AND DISTRIBUTORS OR TERMINATION OF THEIR
RELATIONSHIPS WITH US COULD ADVERSELY AFFECT OUR SALES AND
OPERATIONS. The Company markets and sells products primarily
through independent manufacturer representatives and
distributors that are not under our direct control. We employ
a limited number of internal sales personnel.
* TO SATISFY CUSTOMER DEMAND AND TO OBTAIN GREATER PURCHASING
DISCOUNTS, WE CARRY INCREASED INVENTORY LEVELS OF CERTAIN
PRODUCTS. Our financial results may be adversely affected when
our inventory exceeds the demand for those products. Our gross
margin can be adversely affected by increases in costs of raw
materials. There can be no assurance that raw material cost
increases or the cost of carrying increased finished goods
inventory will not have a material adverse effect on our
financial results.
* A PROLONGED REDUCTION IN DEMAND FOR OUR PRODUCTS WILL CONTINUE
TO IMPACT OUR FINANCIAL SUCCESS. In fiscal year 2002, our
sales declined in large part due to a substantial downturn in
sales to the telecommunications and data communications
markets. Sales to these markets stabilized in fiscal 2003. A
further decline in the telecommunications and data
communications markets may have the effect of further reducing
our revenue.
* OUR FINANCING AGREEMENTS CONTAIN RESTRICTIVE COVENANTS WITH
WHICH WE MAY NOT BE ABLE TO COMPLY. We have entered into a
financing agreement that contains restrictive financial
covenants. These covenants require us, among other things, to
maintain a minimum capital base, and also impose certain
limitations on additional capital expenditures and the payment
of dividends. At the end of fiscal 2003, our actual capital
base did not meet the minimum capital base of the covenant.
The Company has received a waiver and amendment for this
covenant. We believe the covenants with the amendment are
achievable based on our expected operating results. Our
ability to comply with restrictive financial covenants depends
upon our future operating performance. Our future operating
performance depends, in part, on general industry conditions
and other factors beyond our control.
* CIVIL UNREST, LABOR DISRUPTIONS, OR ACTS OF AGGRESSION COULD
IMPEDE OUR ABILITY TO OPERATE IN OUR FOREIGN LOCATIONS AND
WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FUTURE BUSINESS
AND CONSEQUENTLY, OUR OPERATING RESULTS. Manufacturing occurs
at our facilities in South Korea and China and through
manufacturing relationships in the People's Republic of China
(China) and Thailand. While this Pacific Rim manufacturing
strategy enables us to compete worldwide against other
suppliers of external power conversion products, it also
involves risks. While, our manufacturing operations in South
Korea, China and Thailand have not been affected by labor
disruptions, civil unrest or political instability, the risk
of civil unrest and political instability is present in each
of these countries.
11
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
AND EXPORT SALES
Export sales by Ault's U.S. operations in fiscal year 2003 represented 15.2% of
the Company's gross sales, most of which were to OEMs in Europe and Canada. All
other revenues were derived from sales in the U.S. For other financial
information about foreign and domestic operations and export sales including the
amount of export sales for the last 3 years, refer to "Note 9 - Segment
Information and Foreign Operations" under NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS.
ITEM 2. PROPERTIES
The Company owns and occupies its headquarters and U.S. manufacturing facility
in Brooklyn Park, a suburb of Minneapolis, Minnesota, which is approximately
65,000 square feet in size.
The Company leases a 10,500-square-foot office in Norwood, Massachusetts.
Ault Korea Corporation owns and occupies a 54,000-square-foot facility in Suwon
City in the province of Kyungki-Do, Korea.
Ault China Corporation owns and occupies a 40,000 square foot facility in the
Province of Xianghe in China. The land use rights expire in 2050.
Ault Shanghai Corporation occupies a 9,000-square-foot leased facility in
Shanghai, China.
Management considers all of the Company's properties to be well maintained, and
current manufacturing arrangements, including subcontract arrangements in China
and Thailand, are believed 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.
12
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
(a) Market Information
Ault common shares are traded on the NASDAQ market under the symbol AULT. The
following table presents the range of closing bid prices for the Company's
common stock on the NASDAQ Market for fiscal 2003 and 2002.
Fiscal 2003 Fiscal 2002
----------- -----------
$ $ $ $
Quarter High Low High Low
1st 4.840 3.000 6.110 5.050
2nd 3.010 1.610 5.338 3.500
3rd 2.550 1.700 4.700 3.660
4th 2.080 1.660 5.050 4.000
(b) Holders
As of September 4, 2003 there were 287 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 the present policy of
its Board of Directors is to retain any earnings for use in the business. The
Board of Directors does not anticipate paying cash dividends on its common
shares in the foreseeable future.
13
ITEM 6. SELECTED FINANCIAL SUMMARY
(Amounts in Thousands, Except Per Share Data)
YEARS ENDED
June 1, June 2, June 3, May 28, May 30,
2003 2002 2001 2000 1999
(1) (2) (3)
Net sales $ 41,479 $ 41,032 $ 85,692 $ 67,913 $ 52,013
Gross profit 8,419 7,944 18,657 16,236 14,018
Operating expenses 15,930 11,968 15,228 13,001 11,426
Operating income (loss) (7,511) (4,024) 3,429 3,235 2,592
Nonoperating income (expense) (393) (234) 172 (311) 256
Income (loss) before income taxes (7,904) (4,258) 3,601 2,924 2,848
Income tax expense (benefit) (340) (694) 1,355 1,061 860
Cumulative effect of accounting
change, net of tax (50)
Preferred stock dividends (128)
Net income (loss) applicable to
common stock $ (7,692) $ (3,564) $ 2,196 $ 1,863 $ 1,988
Net income (loss) per share:
Basic $ (1.67) $ (0.78) $ 0.49 $ 0.42 $ 0.47
Diluted (1.67) (0.78) 0.47 0.40 0.45
Total assets $ 33,065 $ 36,697 $ 43,457 $ 46,256 $ 33,303
Property, plant and equipment, net 13,283 12,442 12,576 10,537 6,808
Working capital 8,431 14,084 17,840 17,708 16,364
Long-term debt, less current maturities 2,483 2,754 3,035 3,657 1,187
Stockholders' equity 17,319 24,753 28,129 25,805 23,442
(1) The 2003 results include a goodwill impairment charge of
$1,153.
(2) The 2001 results include a noncash, pretax cumulative effect
of accounting change related to the adoption of Staff
Accounting Bulletin No. 101 of $77 expense ($50 after tax, or
$0.01 per share).
(3) The 2000 results include a gain on the disposition of the
Korean facility of $1,525.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations
are based on our 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 us to make
estimates and judgments that affect the reported amounts 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 that involve significant
judgments and uncertainties and potentially result in materially different
results under different assumptions and conditions. Application of these
policies is particularly important to the portrayal of our financial condition
and results of operations. We believe the accounting policies described below
meet these characteristics. Our significant accounting policies are more fully
described in the notes to the consolidated financial statements included in this
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
Statement of Financial Accounting Standards (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 No. 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 the net deferred tax asset will
not be realized in the future. Thus a full 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 benefit, which will be recorded in
the consolidated statement of operations.
LIQUIDITY AND CAPITAL RESOURCES
The financial statements have been prepared on a going-concern basis, which
contemplates the realization of assets and satisfaction of liabilities in the
normal course of business. The Company sustained net losses applicable to common
stock of $7,692,073 in 2003 and $3,563,726 in 2002 and at June 1, 2003 had an
accumulated deficit of $2,775,398. The Company utilized $3,179,410 of cash for
operating activities in 2003. Future operations require the Company to borrow
additional funds. The Company has a financing agreement, which includes a
$1,250,000 line-of-credit agreement through April 30, 2005. There was not an
outstanding balance on this line-of-credit at June 1, 2003, however, during
fiscal 2003 the Company violated the financing agreements covenants and
subsequent to year-end received a waiver and an amended agreement with less
restrictive covenants. The Company believes they can remain in compliance with
the agreement, as amended, throughout fiscal 2004. The Company is taking steps
to reduce expenses, improve cash flow and return to profitability, including the
consolidation of its manufacturing operations. This consolidation includes the
closing of its Minneapolis production operations, eliminating approximately 40
jobs in assembly, equipment
15
maintenance, procurement and administrative support and the integration of
production into Ault's other manufacturing plants. Ault's engineering,
documentation, safety certification/reliability, sales, marketing and
administrative services will remain at the Minneapolis headquarters facility.
The consolidation is anticipated to take up to four months to complete to ensure
continuing service to Ault's global customer base.
Based on available funds, current plans and business conditions management
believes that the Company's available cash, borrowings and amounts generated
from operations, will be sufficient to meet the Company's cash requirements for
the next 12 months. The assumptions underlying this belief include, among other
things, that there will be no material adverse developments in the business or
market in general. There can be no assurances however that those assumed events
will occur. If management's plans are not achieved, there may be further
negative effects on the results of operations and cash flows, which could have a
material adverse effect on the Company.
The following table summarizes the Company's working capital position at June 1,
2003 and at June 2, 2002:
June 1, June 2,
2003 2002
-------- --------
($000) ($000)
Working capital 8,431 14,084
Cash and cash equivalents 1,100 4,775
Unutilized bank credit facilities 2,297 4,975
Cash provided by (used in) operations (3,179) 3,559
CURRENT WORKING CAPITAL POSITION
At June 1, 2003, the Company had current assets of $19,448,000 and current
liabilities of $11,017,000 representing working capital of $8,431,000 and a
current ratio of 1.8. This represents a decrease in working capital from
$14,084,000 at June 2, 2002. The Company relies on its credit facilities as
sources of working capital to support normal growth in revenue, capital
expenditures and attainment of profit goals. The Company has not committed to
any material capital expenditures as of June 1, 2003.
CASH AND INVESTMENTS: At June 1, 2003, the Company had cash and securities
totaling $1,100,000, down from $4,775,000 at June 2, 2002. This decrease in cash
was principally due to the net loss from operations.
CREDIT FACILITIES: The Company maintains credit facilities with Associated Bank
and with Korea Exchange Bank. See Note 5, under NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS.
The credit arrangement with Associated Bank is an asset-based credit facility of
$1.25 million, secured by company assets. At June 1, 2003, there were no
borrowings against this facility. The financing agreement contains restrictive
financial covenants. These covenants require the Company, among other things, to
maintain a minimum capital base, and also impose certain limitations on
additional capital expenditures and the payment of dividends. At the end of
fiscal 2003, the Company's actual capital base did not meet the minimum capital
base of the credit agreement. The Company has received a waiver and amendment
for this covenant. Following the August 29, 2003 amendment, the Company believes
the provisions imposed by this credit agreement are achievable based on the
Company's expected operating results for the next year.
The South Korean credit facility is approximately $4.15 million of which
borrowings at June 1, 2003 totaled $3,103,594.
CASH FLOWS FOR FISCAL 2003
OPERATIONS: Operations used $3,179,000 of cash during fiscal 2003 due
principally to the following activities:
(a) The loss net of depreciation of $1,029,000, goodwill
impairment of $1,153,000, and bad debt reserve of $230,000, in
total used cash of $5,152,000.
(b) Decreases in trade receivables due to the decreased net sales
provided $210,000.
16
(c) Increases in inventories net of obsolescence write-downs used
$20,000. The increases are due to the increased sales by our
Asian subsidiaries.
(d) Increases in accrued expenses and accounts payable provided
$1,443,000.
INVESTING ACTIVITIES: Investing activities used net cash of $639,000 mainly
relating to the acquisition of Power General of $366,000 and the purchase of
equipment of $273,000.
FINANCING ACTIVITIES: Financing activities provided net cash of $123,000,
comprising:
(a) Bank borrowing by our China subsidiary provided
$290,000.
(b) Proceeds from stock options exercised provided
$60,000.
(c) Payments of long-term debt used $282,000.
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE FLUCTUATIONS: The effect of translating
the Korean financial statements, which were prepared in Won, to U.S. dollars,
increased cash by approximately $20,000 during the year. The effect of
translating the Chinese financial statements, which were prepared in Yuan to
U.S. dollars, had minimal effect on cash for the year.
CASH FLOWS FOR FISCAL 2002
OPERATIONS: Operations provided $3,559,000 of cash during fiscal 2002 due
principally to the following activities:
(a) The loss net of depreciation of $972,000, amortization of
$100,000, inventory write-off of $999,000, and bad debt
reserve of $1,416,000, in total used cash of $77,000.
(b) Decreases in trade receivables due to the decreased net sales
provided $3,322,000.
(c) Decreases in inventories net of obsolescence write-downs
provided $3,227,000. The decreases are due to the decreased
net sales.
(d) Decreases in accrued expenses and accounts payable used
$3,087,000 of cash from liabilities associated with purchases
of material to support customer orders.
INVESTING ACTIVITIES: Investing activities used net cash of $839,000 mainly
relating to the completion of the new manufacturing/office facility in Korea.
FINANCING ACTIVITIES: Financing activities used net cash of $1,674,000,
comprising:
(a) Payments of the Korean line of credit used $1,211,000.
(b) Payments of long-term debt used $585,000.
(c) Proceeds from stock options exercised provided $122,000.
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE FLUCTUATIONS: The effect of translating
the Korean financial statements, which were prepared in Won, to U.S. dollars,
increased cash by approximately $6,000 during the year. The effect of
translating the Chinese financial statements, which were prepared in Yuan to
U.S. dollars, had minimal effect on cash for the year.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED JUNE 1, 2003
Increase / (Decrease)
Fiscal Fiscal -----------------------
($000) 2003 2002 Amount Percent
-------------------------------------------------
Net Sales $41,479 $41,032 $447 1%
Operating Loss (7,511) (4,024) (3,487) (87)
Net sales were $41,479,000 for fiscal 2003, up 1% from $41,032,000 for fiscal
2002. The increase is due to $2,360,000 in sales resulting from the acquisition
of certain assets and certain liabilities of Power General and an increase in
sales into the Asia Pacific area of $4,249,000, offset by a decrease in sales to
North America and Europe of $6,162,000.
17
The gross margin for fiscal 2003 was 20.3%, compared to 19.4% for fiscal 2002.
Margins increased primarily due to a fiscal 2002 inventory write-down of
$999,000 and offset by lower margin on the products sold from the acquisition of
Power General of $500,000.
Operating expenses increased to $15,930,000 for fiscal 2003 compared to
$11,968,000 in fiscal 2002 primarily due to the following factors: First, the
July 2002 acquisition of certain assets and certain liabilities of Power General
increased costs from fiscal 2002 by $2,654,000 principally due to hiring
engineering and sales staff formerly employed at Power General. The Company
expects approximately $1,732,000 of this expense will continue in fiscal 2004.
Second, 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. Third, recognition of impairment
of $1,153,000 in goodwill related to the LZR acquisition. During the fourth
quarter of fiscal 2003, the annual goodwill impairment test was performed and
the fair value of the Company was assessed to determine whether goodwill carried
was impaired and the extent of such impairment. After performing this evaluation
it was evident that impairment of goodwill had occurred because of a decline in
revenues for the fourth quarter compared to forecasted revenues, as well as a
significant increase in the fourth quarter loss compared to forecast. The
Company did not perform an impairment test prior to the fourth quarter as there
wasn't an event that had occurred or circumstances had changed in such a manner
to warrant an impairment test prior to the fourth quarter. Fourth, these items
were offset by a decrease in bad debt expense for fiscal 2003 when compared to
fiscal 2002. In fiscal 2002 the Company recognized $1,186,000 of additional bad
debt expense for accounts that were uncollectible.
The Company's order backlog at June 1, 2003 totaled $13,850,000 compared to
$9,310,000 at June 2, 2002. The backlog has increased in Asia by $1,400,000 due
to increased order activity, and domestic backlog has increased by $3,000,000
due to a purchase order from a customer covering a one-year period.
Nonoperating expense is $393,000 for fiscal 2003 compared to $234,000 in fiscal
2002. The increase is primarily from (1) lower interest income in fiscal year
2003 compared to fiscal year 2002 of $68,000, and (2) currency exchange rate
gains by the Korean subsidiary of $123,000 less in fiscal 2003 as compared to
fiscal 2002. The Company incurred interest expense of $435,000 in fiscal 2003
and $495,000 in fiscal 2002. The decrease is due to the decrease in bank debt in
Korea.
The effective tax rate was a benefit of 4.3% for fiscal year 2003 compared to a
benefit of 16.3% for fiscal year 2002, and expense of 37.6% for fiscal year
2001. The benefit in 2003 reflects the utilization of the remaining US loss
carrybacks but no benefit for the $3,600,000 US loss carryforwards from 2003, or
any foreign loss carryforwards generated in fiscal year 2003, because a full
valuation allowance has been set up for the loss carryforwards due to the
determination that currently the realization of the deferred tax asset is not
more likely than not.
FISCAL YEAR ENDED JUNE 2, 2002
Increase / (Decrease)
Fiscal Fiscal -----------------------
($000) 2002 2001 Amount Percent
-------------------------------------------------
Net Sales $41,032 $85,692 $(44,660) (52)%
Operating Income
(Loss) (4,024) 3,429 (7,453) (217)
Net sales were $41,032,000 for fiscal 2002, down 52% from $85,692,000 for fiscal
2001. The decrease was due to significantly lower power supply shipments to
major OEMs of telecommunication/data communication equipment of $40,071,000 and
computer and computer peripheral equipment of $9,752,000 primarily due to the
economic slowdown. The decrease was partially offset by an increase in shipments
to the medical markets of $2,099,000 and the industrial markets of $3,064,000.
The gross margin for fiscal 2002 was 19.4%, compared to 21.8% for fiscal 2001.
Margins were decreased primarily due to an inventory write-down of $999,000 due
to the identification of obsolete inventory caused by the continued economic
slowdown.
18
Operating expenses decreased in fiscal 2002 to $11,968,000 compared to
$15,228,000 in fiscal 2001 primarily due to the following factors: First, the
decreased sales decreased the commission expense of the Company by $1,120,000.
Second, the Company has been decreasing expenses and increasing efficiencies
during fiscal 2002, which decreased the operating expenses by $2,993,000. Third,
these items were offset by increased bad debt expense of $818,000.
The Company's order backlog at June 2, 2002 totaled $9,310,000 compared to
$10,792,000 at June 3, 2001.
Nonoperating expense is $234,000 for fiscal 2002 compared to nonoperating income
of $172,000 for the same period in fiscal 2001. The decrease in income is
primarily from (1) the gain on the sale of securities in fiscal 2001 of $56,000,
and (2) currency exchange rate gains by the Korean subsidiary of $400,000 less
in fiscal 2002 as compared to fiscal 2001. The Company incurred interest
expenses of $495,000 in fiscal 2002 and $537,000 in fiscal 2001. The decrease is
due to the decrease in bank debt in Korea.
The effective tax rate was a benefit of 16.3% for fiscal year 2002 compared to
an expense of 37.6% for fiscal year 2001, and expense of 36.3% for fiscal year
2000. The benefit in 2002 reflects the utilization of the US loss carrybacks but
no benefit for any foreign losses due to a full valuation allowance has been set
up for the loss carryforwards due to the determination that currently the
realization is not more likely than not.
INFORMATION ABOUT PRODUCTS AND SERVICES: The Company's business operations are
composed of principally one activity--the design, manufacture and sale of
equipment for converting electric power to a level used by OEMs principally in
computer peripherals, data communications/telecommunications and medical markets
to charge batteries and/or power equipment. The Company supports these power
requirements by making available to the OEM 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.
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 the Seller is convertible into 488,000
shares of the Company's common stock. In addition, in lieu of paying a cash
dividend, the Company may issue shares of its common stock to pay the quarterly
dividend payable on outstanding shares of Preferred Stock. During fiscal 2003,
the Company issued 51,177 shares of its common stock in lieu of paying cash
dividends to the holder of the Preferred 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 maintains Power General's engineering group in Massachusetts and
moved Power General's manufacturing operations and related functions to Ault's
other facilities in North America and Asia.
INFORMATION ABOUT REVENUE BY GEOGRAPHY
Distribution of revenue from the U.S., from each foreign country that is the
source of significant revenue, and from all other foreign countries as a group
are as follows:
19
Fiscal Year Ended
June 1, June 2,
2003 2002
($000) ($000)
------ ------
U.S. $26,352 $27,693
Canada 819 1,041
Ireland 89 632
Korea 5,483 4,952
Belgium 5 215
China 5,302 2,686
Other Foreign 3,429 3,813
------- -------
Total $41,479 $41,032
======= =======
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
Products manufactured by the Korean subsidiary comprised a large portion of
total sales. The Company will experience normal valuation changes as the Korean
and Chinese currencies fluctuate. The effect of translating the Korean and
Chinese financial statements resulted in a net asset value increase of $35,000
during the year, the majority relating to the Korean currency fluctuations.
FORWARD LOOKING STATEMENTS
From time to time, in reports filed with the Securities and Exchange Commission
(SEC), 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
that 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 original equipment manufacturers (OEMs) in the telecommunications,
data communications, medical and other 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; dependence on outside contractors;
reliance on third-party distribution; unanticipated expenses related to
integration of manufacturing and personnel from acquisitions, such as the
acquisition of the Power General assets; dependence on foreign manufacturing and
other operations; and other risks affecting the Company's target markets
generally.
CONTRACTUAL OBLIGATIONS
The following table summarizes the Company's contractual obligations and
commercial commitments as of June 1, 2003 (in thousands):
Payments due by Period
Less than 1-3 4-5 After
Total 1 year years years 5 years
Contractual Obligations:
Long-term debt $3,043 $560 $335 $372 $1,776
Operating leases 949 229 379 340
Total contractual
obligations $3,992 $789 $714 $712 $1,776
20
ACCOUNTING PRONOUNCEMENTS
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
REVENUE RECOGNITION IN FINANCIAL STATEMENTS. SAB No. 101 summarizes certain of
the SEC staff's views in applying generally accepted accounting principles to
selected revenue recognition issues. As a result, the Company changed the method
of accounting for certain sales transactions. Historically, the Company
recognized revenue upon shipment of products to certain international customers
because, even though some products were shipped FOB destination, we used a
common carrier and thus gave up substantially all the risks of ownership. Under
the new accounting method adopted retroactive to May 29, 2000, the Company now
recognizes revenue at the time risk of ownership passes. The cumulative effect
of the change on prior years resulted in a charge to income of $50,000 (net of
taxes of $27,000) for the year ended June 3, 2001.
In June 2001, the Financial Accounting Standards Board (FASB) approved for
issuance SFAS No. 141, BUSINESS COMBINATIONS, and No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS. SFAS No. 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001 and that the
use of the pooling-of-interest method is no longer allowed. The adoption of SFAS
141 did not have an impact on the Company's statements of consolidated
operations, financial position or cash flows. SFAS No. 142 requires that upon
adoption, amortization of goodwill will cease and instead, the carrying value of
goodwill will be evaluated for impairment on an annual basis. In fiscal 2002,
2001 and 2000 the amortization expense was $100,000 each year. On June 3, 2002,
we adopted SFAS No. 142, and the initial impairment test was performed and it
was determined that there was no goodwill impairment on June 3, 2002. During the
fourth quarter of fiscal 2003, the annual goodwill impairment test was performed
and the fair value of the Company was assessed to determine whether goodwill
carried was impaired and the extent of such impairment. After performing this
evaluation it was evident that impairment of goodwill had occurred because of a
decline in revenues for the fourth quarter compared to forecasted revenues, as
well as a significant increase in the fourth quarter loss compared to forecast.
The Company did not perform an impairment test prior to the fourth quarter as
there wasn't an event that had occurred or circumstances had changed in such a
manner to warrant an impairment test prior to the fourth quarter. Accordingly,
an impairment charge of $1,153,153 was recorded in the fourth quarter of fiscal
2003.
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS. SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 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 No. 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 No. 144 on June 3, 2002 and it
did not have an effect on its financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH
EXIT OR DISPOSAL ACTIVITIES, which nullifies EITF Issue No. 94-3. SFAS No. 146
is effective for exit and disposal activities that are initiated after December
31, 2002 and requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred, in contrast to
the date of an entity's commitment to an exit plan, as required by EITF Issue
94-3. The Company adopted SFAS No. 146 effective January 1, 2003 and it did not
have an impact on its financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION - TRANSITION AND DISCLOSURE, which amends SFAS No. 123, ACCOUNTING
FOR STOCK-BASED COMPENSATION. SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require more prominent and more
frequent disclosures in financial statements of the effects of stock-based
compensation. The transition guidance and annual disclosure provisions of SFAS
No. 148 are effective for fiscal years ending after December 15, 2002. The
interim disclosure provisions are effective for financial reports containing
condensed financial statements for interim periods beginning after December 15,
2002. The adoption of SFAS No. 148 did not have an impact on the Company's
consolidated balance sheet or results of operations.
In May 2003, the FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN FINANCIAL
INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY. SFAS No. 150
establishes standards for issuer classification and measurement of certain
financial instruments with characteristics of both liabilities and equity.
Instruments that fall within the scope of SFAS
21
No. 150 must be classified as a liability. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003. For financial
instruments issued prior to June 1, 2003 SFAS No. 150 is effective for the
Company in the second quarter of fiscal year 2004. Management is assessing the
impact that SFAS No. 150 may have on the Company's financial statements.
In November 2002, the FASB issued FASB Interpretation No. (FIN) 45, GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS OF OTHERS. FIN 45 elaborates on the disclosures to be
made by a guarantor about its obligations under certain guarantees that it has
issued. It also clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The recognition and measurement provisions
of this Interpretation are effective for all guarantees issued or modified after
December 31, 2002. The disclosure requirements of FIN 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company has made the additional required disclosures in this report;
see Note 3 regarding product warranty liability. The Company has no guarantees
of others which require disclosure.
ITEM 7A. 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. The Company realized an exchange loss of $23,000 for fiscal 2003, and an
exchange gain $100,000 for fiscal 2002, and a $500,000 gain for fiscal 2001.
As of June 1, 2003, the Company only had 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
(a) Financial Statements
Index to Consolidated Financial Statements
Page
* Independent Auditors' Report 23
* Consolidated Balance Sheets, June 1, 2003 and June 2, 2002 24
* Consolidated Statements of Operations for the Years Ended
June 1, 2003, June 2, 2002, and June 3, 2001 26
* Consolidated Statements of Stockholders' Equity for the
Years Ended June 1, 2003, June 2, 2002, and June 3, 2001 27
* Consolidated Statements of Cash Flows for the Years Ended
June 1, 2003, June 2, 2002, and June 3, 2001 28
* Notes to Consolidated Financial Statements 29
(b) Supplemental Financial Information
* Quarterly Financial Data 44
22
INDEPENDENT AUDITORS' REPORT
Stockholders and Board of Directors
Ault Incorporated and Subsidiaries
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of Ault
Incorporated and Subsidiaries (the Company) as of June 1, 2003 and June 2, 2002
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three fiscal years in the period ended June 1, 2003.
Our audits also included the financial statement schedule listed in the index as
Item 15.(2). These consolidated financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on the consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with the auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Ault Incorporated and Subsidiaries
as of June 1, 2003 and June 2, 2002 and the results of their operations and
their cash flows for each of the three fiscal years in the period ended June 1,
2003, in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note 4 to the consolidated financial statements, the Company
changed its method of accounting for goodwill in fiscal 2003.
Deloitte & Touche LLP
Minneapolis, Minnesota
August 18, 2003 (August 29, 2003 as to Note 5)
23
AULT INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 1, 2003 AND JUNE 2, 2002
- --------------------------------------------------------------------------------
ASSETS JUNE 1, JUNE 2,
2003 2002
CURRENT ASSETS:
Cash and cash equivalents $ 1,099,602 $ 4,775,190
Trade receivables, less allowance for doubtful
accounts of $500,000 in 2003; $320,000 in
2002 (Note 13) 7,417,098 7,012,451
Inventories (Note 2) 9,867,943 8,501,505
Prepaid and other expenses 1,064,065 2,299,333
Deferred tax asset (Note 6) 251,800
----------- -----------
Total current assets 19,448,708 22,840,279
OTHER ASSETS:
Goodwill (Note 4) 1,153,153
Other 332,902 261,309
----------- -----------
332,902 1,414,462
PROPERTY, PLANT AND EQUIPMENT:
Land 1,734,674 1,704,285
Building and leasehold improvements 7,845,238 7,780,394
Machinery and equipment 8,961,099 7,586,102
Office furniture and equipment 1,887,099 1,479,416
Data processing equipment 2,226,545 2,234,154
----------- -----------
22,654,655 20,784,351
Less accumulated depreciation 9,371,348 8,342,105
----------- -----------
13,283,307 12,442,246
----------- -----------
$33,064,917 $36,696,987
=========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
24
AULT INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 1, 2003 AND JUNE 2, 2002
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY JUNE 1, JUNE 2,
2003 2002
CURRENT LIABILITIES:
Note payable to bank (Note 5) $ 3,103,594 $ 2,889,636
Current maturities of long-term debt (Note 5) 560,110 281,507
Accounts payable 5,695,507 4,717,356
Accrued compensation 1,162,348 434,799
Accrued commissions 300,203 285,578
Other 195,537 147,864
------------ ------------
Total current liabilities 11,017,299 8,756,740
LONG-TERM DEBT, less current maturities (Note 5) 2,483,254 2,753,747
DEFERRED TAX LIABILITY(Note 6) 23,242 273,639
RETIREMENT AND SEVERANCE BENEFITS (Note 1) 147,808 160,129
COMMITMENTS AND CONTINGENCIES (Note 11)
REDEEMABLE CONVERTIBLE PREFERRED STOCK
No par value, 2,074 shares issued and outstanding (Note 8) 2,074,000
STOCKHOLDERS' EQUITY (Notes 7, 9, and 10):
Preferred stock, no par value; authorized 1,000,000 shares;
none issued
Common stock, no par value; authorized 10,000,000 shares;
issued and outstanding 4,648,499 shares in 2003;
4,563,610 shares in 2002 21,026,162 20,857,629
Notes receivable arising from the sale of common stock (45,000) (100,000)
Accumulated other comprehensive loss (886,450) (921,572)
(Accumulated deficit)/retained earnings (2,775,398) 4,916,675
------------ ------------
Total stockholders equity 17,319,314 24,752,732
------------ ------------
$ 33,064,917 $ 36,696,987
============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
25
AULT INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 1, 2003, JUNE 2, 2002, AND JUNE 3, 2001
- --------------------------------------------------------------------------------
JUNE 1, JUNE 2, JUNE 3,
2003 2002 2001
NET SALES $ 41,479,010 $ 41,031,854 $ 85,691,580
COST OF GOODS SOLD 33,060,018 33,087,745 67,034,317
------------ ------------ ------------
Gross profit 8,418,992 7,944,109 18,657,263
OPERATING EXPENSES:
Marketing 4,933,895 3,548,104 6,016,358
Design engineering 4,225,627 2,393,899 2,881,898
General and administrative 5,617,704 6,025,791 6,329,300
Goodwill impairment 1,153,153
------------ ------------ ------------
15,930,379 11,967,794 15,227,556
------------ ------------ ------------
OPERATING (LOSS) INCOME (7,511,387) (4,023,685) 3,429,707
NONOPERATING INCOME (EXPENSE):
Interest expense (434,714) (495,356) (536,890)
Interest income 24,894 93,482 162,126
Other 17,176 167,707 546,432
------------ ------------ ------------
(392,644) (234,167) 171,668
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (7,904,031) (4,257,852) 3,601,375
INCOME TAX EXPENSE (BENEFIT) (Note 6) (340,200) (694,126) 1,355,191
------------ ------------ ------------
NET INCOME (LOSS) BEFORE ACCOUNTING CHANGE (7,563,831) (3,563,726) 2,246,184
CUMULATIVE EFFECT OF ACCOUNTING CHANGE,
NET OF TAX (49,995)
------------ ------------ ------------
NET INCOME (LOSS) (7,563,831) (3,563,726) 2,196,189
PREFERRED STOCK DIVIDENDS (128,242)
------------ ------------ ------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ (7,692,073) $ (3,563,726) $ 2,196,189
============ ============ ============
EARNINGS (LOSS) PER SHARE (Note 1):
Basic:
Net income (loss) before accounting change $ (1.67) $ (0.78) $ 0.50
Cumulative effect of accounting change (0.01)
------------ ------------ ------------
Basic earnings (loss) per share $ (1.67) $ (0.78) $ 0.49
============ ============ ============
Diluted:
Net income (loss) before accounting change $ (1.67) $ (0.78) $ 0.48
Cumulative effect of accounting change (0.01)
------------ ------------ ------------
Diluted earnings (loss) per share $ (1.67) $ (0.78) $ 0.47
============ ============ ============
Weighted average common shares outstanding:
Basic 4,596,882 4,541,322 4,493,120
Diluted 4,596,882 4,541,322 4,691,290
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
26
AULT INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 1, 2003, JUNE 2, 2002, AND JUNE 3, 2001
- --------------------------------------------------------------------------------
NOTES ACCUMULATED
RECEIVABLE OTHER
COMMON STOCK FROM SALE COMPREHENSIVE TOTAL
------------------------- OF COMMON RETAINED INCOME STOCKHOLDERS'
SHARES AMOUNT STOCK EARNINGS (LOSS) EQUITY
BALANCE AT MAY 28, 2000 4,445,432 $20,275,483 $(145,000) $ 6,222,873 $(548,074) $25,805,282
Comprehensive income:
Net income 2,196,189 2,196,189
Net change in foreign currency
translation adjustment (387,186) (387,186)
-----------
Total comprehensive income 1,809,003
Issuance of 90,945 shares of common
stock in accordance with stock purchase
plan and stock option plan (Notes 7 and 9) 90,945 285,230 285,230
Adjust retained earnings for the change in
subsidiary fiscal year end 61,339 61,339
7,855 shares of common stock acquired and
retired for payment of receivables (7,855) (57,927) 45,000 (12,927)
Income tax benefit from stock options
exercised 131,000 131,000
Stock compensation 50,134 50,134
--------- ----------- --------- ----------- --------- -----------
BALANCE AT JUNE 3, 2001 4,528,522 20,683,920 (100,000) 8,480,401 (935,260) 28,129,061
Comprehensive loss:
Net loss (3,563,726) (3,563,726)
Net change in foreign currency
translation adjustment 13,688 13,688
-----------
Total comprehensive loss (3,550,038)
Issuance of 35,088 shares of common
stock in accordance with stock purchase
plan and stock option plan (Notes 7 and 9) 35,088 121,981 121,981
Income tax benefit from stock options
exercised 51,728 51,728
--------- ----------- --------- ----------- --------- -----------
BALANCE AT JUNE 2, 2002 4,563,610 20,857,629 (100,000) 4,916,675 (921,572) 24,752,732
Comprehensive loss:
Net loss (7,692,073) (7,692,073)
Net change in foreign currency
translation adjustment 35,122 35,122
-----------
Total comprehensive loss (7,656,951)
Issuance of 33,712 shares of common
stock in accordance with stock purchase
plan and stock option plan (Notes 7 and 9) 33,712 59,648 59,648
Write-off of stock receivable 55,000 55,000
Issuance of 51,177 shares of common
stock in accordance with redeemable
preferred stock 51,177 108,885 108,885
--------- ----------- --------- ----------- --------- -----------
BALANCE AT JUNE 1, 2003 4,648,499 $21,026,162 $ (45,000) $(2,775,398) $(886,450) $17,319,314
========= =========== ========= =========== ========= ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
27
AULT INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 1, 2003, JUNE 2, 2002, AND JUNE 3, 2001
- --------------------------------------------------------------------------------
JUNE 1, JUNE 2, JUNE 3,
2003 2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(7,563,831) $(3,563,726) $ 2,196,189
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 1,029,287 972,230 991,031
Amortization 100,274 100,275
Allowance for doubtful accounts 230,000 1,416,000 598,000
Adjustment related to change in subsidiary year-end 61,339
Goodwill impairment 1,153,153
Stock compensation 50,134
Realized gain from the sale of securities available for sale (56,060)
Deferred taxes (1,242) 172,283 132,000
Change in assets and liabilities, net of effect of acquisition:
(Increase) decrease in:
Trade receivables 209,723 3,321,769 2,924,698
Inventories (20,264) 4,226,425 817,715
Prepaid and other expenses (241,717) (1,061,044) (40,167)
Increase (decrease) in:
Accounts payable 825,932 (795,834) (6,127,775)
Accrued expenses 617,099 (864,905) 261,680
Income tax payable/receivable 582,450 (364,895) 43,850
----------- ----------- -----------
Net cash provided by (used in) operating activities (3,179,410) 3,558,577 1,952,909
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (272,867) (838,703) (3,161,004)
Power General acquisition, net of cash acquired (366,000)
Proceeds from the sale of securities 553,521
----------- ----------- -----------
Net cash used in investing activities (638,867) (838,703) (2,607,483)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on revolving credit agreement 289,607 (1,211,131) 2,511,318
Write-off of notes receivable arising from sale of common stock 55,000
Proceeds from issuance of common stock 59,648 121,981 227,303
Payments received from notes receivable arising from sale of
common stock 45,000
Principal payments on long-term borrowings (281,507) (584,905) (750,826)
----------- ----------- -----------
Net cash provided by (used in) financing activities 122,748 (1,674,055) 2,032,795
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE
CHANGES ON CASH 19,941 5,990 (73,511)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,675,588) 1,051,809 1,304,710
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,775,190 3,723,381 2,418,671
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,099,602 4,775,190 3,723,381
=========== =========== ===========
NON-CASH TRANSACTION:
Issuance of redeemable convertible preferred stock to acquire
Power General $ 2,074,000
Issuance of common stock to pay preferred stock dividends 108,885
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest (net of capitalized interest of $55,010 in 2001) $ 434,714 $ 495,356 $ 536,890
Taxes 171,819 1,446,117
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
28
AULT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 1, 2003, JUNE 2, 2002, AND JUNE 3, 2001
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS, MANAGEMENT PLANS, AND SIGNIFICANT ACCOUNTING
POLICIES
NATURE OF BUSINESS - Ault Incorporated and Subsidiaries (the Company)
operate in one business segment which includes the design,
manufacturing, and marketing of power conversion products, principally
to original equipment manufacturers of data communications equipment,
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.
MANAGEMENT PLANS - The financial statements have been prepared on a
going-concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The
Company sustained net losses applicable to common stock of $7,692,073
in 2003 and $3,563,726 in 2002 and at June 1, 2003 had an accumulated
deficit of $2,775,398. The Company utilized $3,179,410 of cash for
operating activities in 2003. Future operations require the Company to
borrow additional funds. The Company has a financing agreement, which
includes a $1,250,000 line-of-credit agreement through April 30, 2005.
There was not an outstanding balance on this line-of-credit at June 1,
2003, however, during fiscal 2003 the Company violated the financing
agreements covenants and subsequent to year-end received a waiver and
an amended agreement with less restrictive covenants. The Company
believes they can remain in compliance with the agreement, as amended,
throughout fiscal 2004. The Company is taking steps to reduce expenses,
improve cash flow and return to profitability, including the
consolidation of its manufacturing operations. This consolidation
includes the closing of its Minneapolis production operations,
eliminating approximately 40 jobs in assembly, equipment maintenance,
procurement and administrative support and the integration of
production into Ault's other manufacturing plants. Ault's engineering,
documentation, safety certification/reliability, sales, marketing and
administrative services will remain at the Minneapolis headquarters
facility. The consolidation is anticipated to take up to four months to
complete to ensure continuing service to Ault's global customer base.
Based on available funds, current plans and business conditions
management believes that the Company's available cash, borrowings and
amounts generated from operations, will be sufficient to meet the
Company's cash requirements for the next 12 months. The assumptions
underlying this belief include, among other things, that there will be
no material adverse developments in the business or market in general.
There can be no assurances however that those assumed events will
occur. If management's plans are not achieved, there may be further
negative effects on the results of operations and cash flows, which
could have a material adverse effect on the Company.
A summary of the Company's significant accounting policies follows:
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Ault Incorporated and its wholly owned
subsidiaries, Ault Shanghai, Ault Xianghe Co. Ltd., and Ault Korea
Corporation. All 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 of
its foreign subsidiary in accordance with the provisions of Statement
of Financial Accounting Standards (SFAS) No. 52.
FISCAL YEAR - The Company operates on a 52 to 53-week fiscal year. The
fiscal years for the financial statements presented end on June 1,
2003, June 2, 2002, and June 3, 2001. The years ended June 1, 2003 and
June 2, 2002 contain 52 weeks while the year-ended June 3, 2001
contains 53 weeks. The Company's foreign subsidiaries have an April 30
fiscal year-end, and the Company consolidates the subsidiaries for
financial reporting purposes on a one-month lag basis to facilitate
timely and accurate consolidation and in order to meet financial
reporting deadlines of the Company.
CASH AND CASH EQUIVALENTS - The Company maintains its cash in bank
deposit accounts which, at times, may exceed federally insured limits.
The Company has not experienced any losses in such accounts.
29
AULT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 1, 2003, JUNE 2, 2002, AND JUNE 3, 2001
- --------------------------------------------------------------------------------
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) or market.
GOODWILL - In June 2001, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No.
141, BUSINESS COMBINATIONS, and SFAS No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS. The Company adopted these standards on June 2, 2002.
Under the new rules, goodwill is no longer amortized but will be
reviewed annually for impairment. Refer to Note 4 for details about the
adoption of this standard and the results of initial and annual
impairment tests.
DEPRECIATION - Depreciation is based on the estimated useful lives of
the individual assets. The method 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 Straight-line 3-5
Leasehold improvement Straight-line Lease term
FINANCIAL INSTRUMENTS - The fair value of the long-term debt is
estimated based on the use of discounted cash flow analysis using
interest rates for the same or similar debt offered to the Company
having the same or similar remaining maturities and collateral
requirements. Management estimates the carrying value of the long-term
debt approximates fair value. All other financial instruments
approximate fair value because of the short-term nature of these
instruments.
RETIREMENT AND SEVERANCE BENEFITS - Retirement and severance benefits
represents the accrual of compensation expense, net of deposits, for
the Korean operations' employees that is payable upon termination of
employment.
The Company does not fund the retirement and severance benefits
accrued, but 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 retirement and severance benefit
liability recorded in the consolidated financial statements.
REVENUE RECOGNITION - The Company recognizes revenue for all domestic
shipments at the shipping point. The terms for the domestic shipments
are FOB shipping point. For international shipments the Company
recognizes revenue at the time risk of ownership passes. All of the
Company's product held by distributors are stocked for OEM's and are
noncancelable, and nonreturnable. Payment from distributors are no
different than other customers, 0.5% 10 net 30.
FREIGHT BILLING/EXPENSE - Customer billings for freight are included in
sales, and the freight costs are included in costs of sales in
accordance with Emerging Issues Task Force (EITF) No. 00-10, ACCOUNTING
FOR SHIPPING AND HANDLING FEES AND COSTS.
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 as incurred.
30
AULT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 1, 2003, JUNE 2, 2002, AND JUNE 3, 2001
- --------------------------------------------------------------------------------
ADVERTISING EXPENSE - The Company expenses advertising costs as
incurred. Advertising expenses of approximately $76,000, $45,000, and
$106,000 were charged to operations during the years ended June 1,
2003, June 2, 2002, and June 3, 2001, respectively.
INCOME TAXES - Deferred taxes are provided on a liability method
whereby deferred tax assets are recognized for deductible temporary
differences and operating loss and tax credit carryforwards, and
deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. As a result of the
cumulative losses over the past two years, and the full utilization of
the loss carryback potential, the Company concluded that a full
valuation allowance against the net deferred tax assets was
appropriate. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
STOCK COMPENSATION - The Company's 1986 and 1996 stock option plan has
reserved 600,000 and 1,200,000 common shares, respectively, 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 SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION. Accordingly, no compensation
cost has been recognized for the stock option plan, as all options were
issued with exercised prices at or above fair value. Had compensation
cost for the Company's stock option plans been determined based on the
fair value at the grant date for awards in 2003, 2002, and 2001
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:
JUNE 1, JUNE 2, JUNE 3,
2003 2002 2001
Net income (loss), as reported $(7,692,073) $(3,563,726) $2,196,189
Net income (loss), pro forma (8,092,340) (4,237,331) 1,709,021
Net income (loss), per share, basic, as reported (1.67) (0.78) 0.49
Net income (loss), per share, diluted, as reported (1.67) (0.78) 0.47
Net income (loss), per share, basic, pro forma (1.76) (0.93) 0.38
Net income (loss), per share, diluted, pro forma (1.76) (0.93) 0.36
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 2003, 2002, and 2001:
JUNE 1, JUNE 2, JUNE 3,
2003 2002 2001
Expected dividend yields $ -- $ -- $ --
Expected stock price volatility 73.63% 59.38% 76.58%
Risk-free interest rate 2.01% 4.81% 6.63%
Expected life of options 7.55 years 7.74 years 7.41 years
31
AULT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 1, 2003, JUNE 2, 2002, AND JUNE 3, 2001
- --------------------------------------------------------------------------------
LONG-LIVED ASSETS - In accordance with SFAS No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, the Company reviews its
long-lived assets periodically to determine potential impairment by
comparing the carrying value of the long-lived assets outstanding with
estimated future undiscounted cash flows expected to result from the
use of the assets, including cash flows from disposition. Should the
sum of the expected future undiscounted 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.
EARNINGS (LOSS) PER SHARE - Basic earnings (loss) per share is computed
by dividing net income (loss) by the weighted-average number of common
shares outstanding during the period. Diluted earnings per share is
computed by dividing net income (loss) by the weighted-average number
of common shares outstanding during the period adjusted by common share
equivalents related to stock options, warrants, and the employee stock
purchase plan. Options to purchase 1,093,426, 978,926, and 299,527
shares of common stock were outstanding at the fiscal years ended June
1, 2003, June 2, 2002, and June 3, 2001, respectively, but were
excluded from the computation of common stock equivalents because they
were anti-dilutive.
The following table reflects the calculation of basic and diluted
earnings per share:
JUNE 1, JUNE 2, JUNE 3,
2003 2002 2001
Numerator -
Income (loss) $(7,692,073) $(3,563,726) $2,196,189
------------ ------------ ----------
Denominator:
Basic - weighted-average shares outstanding 4,596,882 4,541,322 4,493,120
Effect of dilutive shares:
Stock options outstanding and employee
stock purchase plan 198,170
------------ ------------ ----------
Diluted - weighted-average shares outstanding 4,596,882 4,541,322 4,691,290
------------ ------------ ----------
Basic earnings (loss) per share $ (1.67) $ (0.78) $ 0.49
============ ============ ==========
Diluted earnings (loss) per share $ (1.67) $ (0.78) $ 0.47
============ ============ ==========
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
COMPREHENSIVE LOSS - The Company's fiscal 2003 comprehensive income
consists of net loss and foreign currency translation adjustments.
32
AULT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 1, 2003, JUNE 2, 2002, AND JUNE 3, 2001
- --------------------------------------------------------------------------------
ACCOUNTING PRONOUNCEMENTS - In December 1999, the Securities and
Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No.
101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS. SAB No. 101
summarizes certain of the SEC staff's views in applying generally
accepted accounting principles to selected revenue recognition issues.
As a result, the Company changed the method of accounting for certain
sales transactions. Historically, the Company recognized revenue upon
shipment of products to certain international customers because, even
though some products were shipped FOB destination, the Company and
customers used a common carrier and thus gave up substantially all the
risks of ownership. Under the new accounting method adopted retroactive
to May 29, 2000, the Company now recognizes revenue at the time risk of
ownership passes. The cumulative effect of the change on prior years
resulted in a minor noncash charge to income of $50,000 (net of taxes
of $27,000) for the year ended June 3, 2001.
In June 2001, the FASB approved for issuance SFAS No. 141, BUSINESS
COMBINATIONS, and No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS
No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001 and that the use of
the pooling-of-interest method is no longer allowed. The adoption of
SFAS 141 did not have an impact on the Company's statements of
consolidated operations, financial position or cash flows. SFAS No. 142
requires that upon adoption, amortization of goodwill will cease and
instead, the carrying value of goodwill will be evaluated for
impairment on an annual basis. In fiscal 2002, 2001 and 2000, the
amortization expense was $100,000 each year. On June 3, 2002, we
adopted SFAS No. 142, and the initial impairment test was performed and
it was determined that there was no goodwill impairment on June 3,
2002. During the fourth quarter of fiscal 2003, the annual goodwill
impairment test was performed and the fair value of the Company was
assessed to determine whether goodwill carried was impaired and the
extent of such impairment. After performing this evaluation it was
evident that impairment of goodwill had occurred because of a decline
in revenues for the fourth quarter compared to forecasted revenues, as
well as a significant increase in the fourth quarter loss compared to
forecast. The Company did not perform an impairment test prior to the
fourth quarter as there wasn't an event that had occurred or
circumstances had changed in such a manner to warrant an impairment
test prior to the fourth quarter. Accordingly, an impairment charge of
$1,153,153 was recorded in the fourth quarter of fiscal 2003.
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets and supersedes SFAS No. 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 No. 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 No. 144 on June 3, 2002, and it did not have an effect on its
financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146,ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES, which nullifies EITF Issue
No. 94-3. SFAS No. 146 is effective for exit and disposal activities
that are initiated after December 31, 2002 and requires that a
liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred, in contrast to the date of
an entity's commitment to an exit plan, as required by EITF Issue No.
94-3. The Company adopted SFAS No. 146 effective January 1, 2003 and it
did not have an impact on its financial position or results of
operations.
33
AULT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 1, 2003, JUNE 2, 2002, AND JUNE 3, 2001
- --------------------------------------------------------------------------------
In December 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR
STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE, which amends SFAS
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation.
In addition, SFAS No. 148 amends the disclosure requirements of SFAS
No. 123 to require more prominent and more frequent disclosures in
financial statements of the effects of stock-based compensation. The
transition guidance and annual disclosure provisions of SFAS No. 148
are effective for fiscal years ending after December 15, 2002. The
interim disclosure provisions are effective for financial reports
containing condensed financial statements for interim periods beginning
after December 15, 2002. The adoption of SFAS No. 148 did not have an
impact on the Company's consolidated balance sheet or results of
operations.
In May 2003, the FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN
FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND
EQUITY. SFAS No. 150 establishes standards for issuer classification
and measurement of certain financial instruments with characteristics
of both liabilities and equity. Instruments that fall within the scope
of SFAS No. 150 must be classified as a liability. SFAS No. 150 is
effective for financial instruments entered into or modified after May
31, 2003. For financial instruments issued prior to June 1, 2003, SFAS
No. 150 is effective for the Company in the second quarter of fiscal
year 2004. Management is assessing the impact that SFAS No. 150 may
have on the Company's financial statements.
In November 2002, the FASB issued FASB Interpretation No. (FIN) 45,
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES,
INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS. FIN 45
elaborates on the disclosures to be made by a guarantor about its
obligations under certain guarantees that it has issued. It also
clarifies that a guarantor is required to recognize, at the inception
of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The recognition and measurement
provisions of this Interpretation are effective for all guarantees
issued or modified after December 31, 2002. The disclosure requirements
of FIN 45 are effective for financial statements of interim or annual
periods ending after December 15, 2002. The Company has made the
additional required disclosures in this report; see Note 3 regarding
product warranty liability. The Company has no guarantees of others,
which require disclosure.
2. INVENTORIES
The components of inventory at June 1, 2003 and June 2, 2002 are as
follows:
JUNE 1, JUNE 2,
2003 2002
Raw materials $6,019,803 $4,608,937
Work-in-process 1,163,304 788,456
Finished goods 2,684,836 3,104,112
---------- ----------
$9,867,943 $8,501,505
========== ==========
34
AULT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 1, 2003, JUNE 2, 2002, AND JUNE 3, 2001
- --------------------------------------------------------------------------------
3. WARRANTY
The Company offers its customers a three-year warranty on products.
Warranty expense is determined by calculating the historical
relationship between sales and warranty costs and applying the
calculation to the current period's sales. Based on warranty repair
costs and the rate of return, the Company periodically reviews and
adjusts its warranty accrual. Actual repair costs are offset against
the reserve. The following table shows the fiscal 2003 year-to-date
activity for the Company's warranty accrual (in thousands):
Beginning Balance $ 113
Charges and Costs Accrued 193
Less Repair Incurred (172)
-----
Ending Balance $ 134
=====
4. GOODWILL
The Company adopted SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS,
on June 3, 2002. Under this standard, purchased goodwill is no longer
amortized over its useful life. Rather, goodwill is subject to a
periodic impairment test based on its fair value. The adoption of the
standard required an initial impairment test as of June 3, 2002. The
Company used the income approach to measure the fair value. Under the
income approach, value is dependent on the present value of future
economic benefits to be derived from ownership. Future net cash flows
available for distribution are discounted at market-based rates of
return to provide indications of value. Based upon this analysis, it
was determined that the current goodwill balances were not impaired as
of June 3, 2002.
During the fourth quarter of fiscal 2003, the annual goodwill
impairment test was performed and assessed the fair value of the
Company to determine whether goodwill was impaired and the extent of
such impairment. The income approach was used to measure the fair value
of goodwill. After performing this evaluation an impairment charge for
goodwill was recorded caused primarily because of a decline in actual
revenues for the fourth quarter compared to forecasted revenues. In
addition, for the last month of fiscal 2003, the Company incurred a net
loss of $1,084,000 compared to the forecast of a profit of $158,000.
Accordingly, an impairment charge of $1,153,153 was recorded in the
fourth quarter of fiscal 2003.
The following table adjusts net loss for goodwill amortization expense
recognized for the periods included in the table.
Amounts in thousands, except per share amounts
Year Ended
-------------------------------
June 1, June 2, June 3,
2003 2002 2001
------- ------- --------
Reported net (loss) income $(7,692) $(3,564) $2,196
Add back goodwill amortization, net of tax -- 100 100
------- ------- ------
Pro forma adjusted net loss (7,692) (3,464) 2,296
======= ======= ======
Basic net (loss) income per share:
Reported net (loss) income $ (1.67) $ (0.78) $ 0.49
Goodwill amortization, net of tax -- 0.02 0.02
-------- -------- -------
Pro forma adjusted basic net (loss) income
per share $ (1.67) $ (0.76) $ 0.51
======== ======== =======
Diluted net (loss) income per share:
Reported net (loss) income $ (1.67) $ (0.78) $ 0.47
Goodwill amortization, net of tax - 0.02 0.02
-------- -------- -------
Pro forma adjusted diluted net (loss) income
per share $ (1.67) $ (0.76) $ 0.49
======== ======== =======
Common and equivalent shares outstanding:
Basic 4,597 4,541 4,493
Diluted 4,597 4,541 4,691
35
AULT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 1, 2003, JUNE 2, 2002, AND JUNE 3, 2001
- --------------------------------------------------------------------------------
The following table shows the Company's year to date activity for its
goodwill (in thousands):
Beginning Balance $ 1,153
Purchased Goodwill --
Less Goodwill Impaired (1,153)
-------
Ending Goodwill Balance $ --
=======
5. FINANCING ARRANGEMENT AND LONG-TERM DEBT
FINANCING ARRANGEMENT - The Company has a financing agreement, which
includes a $1,250,000 revolving line-of-credit agreement through April
30, 2005. Interest on advances is at the prime rate plus 2% (prime plus
7% default rate) for fiscal year 2003 and prime plus 2.8% for fiscal
year 2002. The rate at June 1, 2003 was 11.00% and on June 2, 2002 the
rate was 7.55%. All advances are due on demand and are secured by all
assets of the Company. The Company's financing agreement contains
restrictive financial covenants. These covenants require the Company,
among other things, to maintain a minimum capital base, and also impose
certain limitations on additional capital expenditures and the payment
of dividends. At the end of fiscal 2003, the Company's actual capital
base did not meet the minimum capital base of the credit agreement. The
Company has received a waiver and amendment for this covenant.
Following the August 29, 2003 waiver, the Company believes the
provisions imposed by this credit agreement are achievable based on the
Company's expected operating results for the next year. There were no
advances outstanding on the revolving line of credit at June 1, 2003 or
June 2, 2002. Also, the Company's Korean subsidiary maintains an
unsecured $4,150,000 credit facility agreement to cover bank
overdrafts, short-term financing, and export financing at a rate of
6.25% on June 1, 2003 and June 2, 2002. Advances outstanding relating
to the Korean facility were $3,103,594 and $2,889,636 at June 1, 2003
and June 2, 2002, respectively.
LONG-TERM DEBT -
JUNE 1, JUNE 2,
2003 2002
7.2% term loan, due in monthly installments of $7,978, including
interest to December 2003, secured by equipment $ 60,782 $ 148,676
7.94% term loan, due in monthly installments of $6,144, including
interest to September 2004, secured by furniture 87,464 151,466
8.05% term loan, due in monthly installments of $28,756, including
interest to February 2015, secured by the Company's headquarter
building in Minneapolis 2,605,501 2,735,112
5.3% term loan, due in January 2004 289,617 --
---------- ----------
Total 3,043,364 3,035,254
Less current maturities 560,110 281,507
---------- ----------
$2,483,254 $2,753,747
========== ==========
36
AULT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 1, 2003, JUNE 2, 2002, AND JUNE 3, 2001
- --------------------------------------------------------------------------------
Maturities of long-term debt for years subsequent to June 1, 2003 are
as follows:
2004 $ 560,110
2005 170,362
2006 164,882
2007 178,656
2008 193,581
Thereafter 1,775,773
----------
$3,043,364
==========
6. INCOME TAXES
Pretax income (loss) for domestic and foreign operations was as
follows:
JUNE 1, JUNE 2, JUNE 3,
2003 2002 2001
Domestic $(6,549,516) $(2,654,385) $3,890,363
Foreign (1,354,515) (1,603,467) (288,988)
----------- ----------- ----------
Total $(7,904,031) $(4,257,852) $3,601,375
=========== =========== ==========
The components of the provision (benefit) for income taxes are as
follows:
JUNE 1, JUNE 2, JUNE 3,
2003 2002 2001
Current:
Domestic $(340,200) $(952,026) $1,031,191
Foreign 125,000
State (18,600) 192,000
Deferred 151,500 132,000
--------- --------- ----------
$(340,200) $(694,126) $1,355,191
========= ========= ==========
The income tax provision differs from the amount of income tax
determined by applying the U.S. federal income tax rate to pretax
income for the fiscal years ended June 1, 2003, June 2, 2002, and June
3, 2001, due to the following:
JUNE 1, JUNE 2, JUNE 3,
2003 2002 2001
Computed expected tax provision $(2,687,000) $(1,405,060) $1,224,000
Increase (decrease) in income taxes resulting from:
Nondeductible expenses 4,888 10,087 11,000
State income taxes, net of federal benefit 59,000 (31,360) 85,000
Foreign taxes 125,000 (180,000)
Current year R&D tax credits 84,000 (10,000)
Change in valuation allowance 2,282,912 502,207 180,000
Other 21,000 45,191
----------- ----------- ----------
$ (340,200) $ (694,126) $1,355,191
============ ============ ==========
37
AULT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 1, 2003, JUNE 2, 2002, AND JUNE 3, 2001
- --------------------------------------------------------------------------------
Net deferred taxes consist of the following components:
JUNE 1, JUNE 2,
2003 2002
Deferred tax assets:
Allowance for doubtful accounts $ 163,000 $ 95,000
Inventory reserve 206,000 110,000
Accrued vacation 90,000 53,000
Accrued warranty 46,000 42,000
Goodwill deductible for tax 360,000
Equipment and leasehold improvements (261,000) (264,000)
Tax credit carryforwards and other (8,298) (58,000)
Federal NOL carryforwards 1,229,000
Foreign deferred tax asset 1,140,210 682,000
Foreign deferred liability (23,242)
Valuation allowance (2,964,912) (682,000)
------------ ----------
$ (23,242) $ (22,000)
============ ==========
The components giving rise to the net deferred tax asset described
above have been included in the consolidated balance sheet:
JUNE 1, JUNE 2,
2003 2002
Current assets $ 0 $ 252,000
Noncurrent liabilities (23,242) (274,000)
The Company has net operating loss carryforwards, based on its tax
records, of approximately $6,436,000 as of June 1, 2003, with various
expiration dates through 2023. Based on prior taxable income and
estimates of future taxable income, the Company has determined that it
is likely that the net deferred tax asset will not be fully realized in
the future. Thus a full valuation allowance has been established.
7. EMPLOYEE BENEFIT PLANS
401(k) EMPLOYER MATCH PLAN - The Company has a 401(k) plan covering
substantially all U.S. employees. The Company is required to match 25%
of the employees' first 6% 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 fiscal years ended June 1, 2003, June 2, 2002, and June 3, 2001
approximated $58,000, $72,000, and $67,000, 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% of the fair market value of the shares on the date the phase
commences or 85% 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 23,212, 13,588, and 15,740
shares purchased under this plan during the fiscal year ended June 1,
2003, June 2, 2002, and June 3, 2001, respectively.
38
AULT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 1, 2003, JUNE 2, 2002, AND JUNE 3, 2001
- --------------------------------------------------------------------------------
8. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In July 2002, 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 is convertible into common stock at the holders' option
at a conversion price of $4.25 principal amount of preferred stock for
each 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 shares on July 16, 2007, and the
remaining outstanding shares 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 based on the fair market value of the common stock at the time
the dividends are declared. In fiscal 2003 the Company declared
dividends of $127,000, of which $108,000 have been paid with 51,177
shares of common stock.
9. STOCK OPTION PLAN
Information relating to all outstanding options as of June 1, 2003,
June 2, 2002, and June 3, 2001 is as follows:
JUNE 1, JUNE 2, JUNE 3,
2003 2002 2001
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Options outstanding at beginning of year 978,926 $5.70 867,676 $5.71 832,964 $5.22
Options exercised (10,500) 2.32 (21,500) 3.23 (83,463) 3.20
Options expired (13,000) 4.00 (26,250) 7.15 (32,825) 5.69
Options granted 138,000 3.11 159,000 5.57 151,000 7.02
--------- -------- --------
Options outstanding at end of year 1,093,426 $5.43 978,926 $5.70 867,676 $5.71
========= ===== ======== ===== ======== =====
Options exercisable at end of year 905,176 $5.58 782,926 $5.60 641,027 $5.69
========= ===== ======== ===== ======== =====
Weighted-average fair value of
options granted during the year $1.94 $3.81 $5.52
The following table summarizes information about stock options
outstanding at June 1, 2003:
Options Outstanding Options Exercisable
--------------------------- ------------------------
Weighted-
Number Average Weighted- Number Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise at June 1, Contractual Exercise at June 1, Exercise
Prices 2003 Life (Years) Price 2003 Price
$1.19 - $1.72 24,000 1.1 $ 1.20 24,000 $1.20
1.73 - 2.58 59,000 3.6 2.34 59,000 2.34
2.59 - 3.45 123,000 4.1 3.17 32,250 3.18
3.46 - 4.31 218,124 5.4 3.78 218,124 3.78
4.32 - 5.17 10,000 5.3 5.06 10,000 5.06
5.18 - 6.03 278,800 7.1 5.82 208,800 5.84
6.04 - 6.90 62,918 3.9 6.52 61,668 6.52
6.91 - 7.76 197,000 5.7 7.38 170,750 7.42
7.77 - 8.63 120,584 4.5 8.44 120,584 8.44
------------- --------- --------
$1.19 - $8.63 1,093,426 5.4 $ 5.43 905,176 $5.58
============= ========= ==== ====== ======== =====
39
AULT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 1, 2003, JUNE 2, 2002, AND JUNE 3, 2001
- --------------------------------------------------------------------------------
10. 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.
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 $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 years ended
June 1, 2003, June 2, 2002, and June 3, 2001.
The Company has notes receivable from certain officers of the Company
arising from the sale of common stock recorded as an offset to
stockholders' equity. During 2003 the Company wrote off $55,000 as
compensation expense.
11. COMMITMENT AND CONTINGENCIES
OPERATING LEASES - The Company leases its Massachusetts office under an
operating lease through December 2008. In addition, certain equipment
and motor vehicles are leased under operating leases with terms of
approximately 36 months.
Approximate minimum annual rental commitments at June 1, 2003 are as
follows:
2004 $161,875
2005 168,000
2006 168,000
2007 168,000
2008 172,375
--------
$838,250
========
Total rental expense for the fiscal years ended June 1, 2003, June 2,
2002, and June 3, 2001 was approximately $393,000, $44,000, and
$66,000, respectively.
12. SEGMENT INFORMATION AND FOREIGN OPERATIONS
The Company has adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. This statement requires disclosure
of certain information for each reportable segment, including general
information, profit and loss information, segment assets, etc.
40
AULT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 1, 2003, JUNE 2, 2002, AND JUNE 3, 2001
- --------------------------------------------------------------------------------
The Company conducts its business within one reportable segment: the
power conversion product industry. The Korean subsidiary, the Chinese
subsidiaries, and certain nonaffiliated companies in China and Thailand
do foreign manufacturing. A summary of the Company's revenues, net
income, and identifiable assets by geographic area is presented below:
JUNE 1, JUNE 2, JUNE 3,
2003 2002 2001
Revenues:
Domestic operations $ 31,009,020 $ 34,811,779 $ 76,323,990
Korean and Chinese operations - customers 10,469,990 6,220,075 9,367,590
Korean and Chinese operations - parent 10,572,884 9,711,255 13,957,754
Eliminations (10,572,884) (9,711,255) (13,957,754)
------------ ------------ ------------
Consolidated $ 41,479,010 $ 41,031,854 $ 85,691,580
============ ============ ============
Net income (loss) applicable to common stock:
Domestic operations $ (6,337,558) $ (1,835,369) $ 2,466,909
Korean and Chinese operations (1,354,515) (1,729,515) (288,987)
Eliminations -- 1,158 18,267
------------ ------------ ------------
Consolidated $ (7,692,073) $ (3,563,726) $ 2,196,189
============ ============ ============
Identifiable assets:
Domestic operations $ 27,823,792 $ 30,619,959 $ 37,517,703
Korean and Chinese operations 21,218,530 17,549,919 15,683,510
Eliminations (15,977,405) (11,472,891) (9,744,534)
------------ ------------ ------------
Consolidated $ 33,064,917 $ 36,696,987 $ 43,456,679
============ ============ ============
Long-lived assets: JUNE 1, JUNE 2, JUNE 3,
2003 2002 2001
Domestic operations $ 6,493,373 $ 5,904,130 $ 6,444,191
Korean and Chinese operations 6,789,934 6,538,116 6,131,581
----------- ------------ ------------
Consolidated $13,283,307 $ 12,442,246 $ 12,575,772
=========== ============ ============
Sales from the subsidiary to the parent company are based upon profit
margins, which represent competitive pricing of similar products.
EXPORT SALES - The Company also had foreign export sales amounting to
11.2%, 17.3%, and 25.9% of total sales for the fiscal years ended June
1, 2003, June 2, 2002, and June 3, 2001, respectively.
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
$5,918,000, $10,388,000, and $35,710,000 for the fiscal years ended
June 1, 2003, June 2, 2002, and June 3, 2001, respectively.
41
AULT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 1, 2003, JUNE 2, 2002, AND JUNE 3, 2001
- --------------------------------------------------------------------------------
13. MAJOR CUSTOMER
The Company had no customers with revenues or accounts receivable of
more than 10% of the total during the fiscal year ended June 1, 2003.
During the fiscal year ended June 2, 2002, the Company had a major
customer with 2.8% of total sales and 10.1% of total accounts
receivable. During the fiscal year ended June 3, 2001, the Company had
a major customer with 5.0% of total sales and 11.1% of total accounts
receivable.
14. 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. Diluted EPS reflects the potential
dilution that could occur if the Preferred Stock was converted into
common stock of the Company during reported periods. The Preferred
Stock was excluded from Diluted EPS in the current year as the effect
of its inclusion would be antidilutive. The Company has maintained
Power General's engineering group in Massachusetts and has moved Power
General's manufacturing operations and related functions to The
Company's other facilities in North America and Asia.
The addition of Power General will benefit the Company in a number of
ways. First, the additional engineering capabilities will enhance
product development. Second, the acquisition brings greater product
breadth to the Company through the addition of AC/DC power supplies and
DC/DC converter products. This broader offering affords The Company new
business opportunities.
The Company 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
==========
42
AULT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 1, 2003, JUNE 2, 2002, AND JUNE 3, 2001
- --------------------------------------------------------------------------------
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
Year Ended
-------------------------------
June 1, June 2, June 3,
2003 2002 2001
-------- ------- --------
Revenue $41,848 $46,421 $107,528
Net (Loss) Income (7,899) (6,887) 1,429
Preferred Stock Dividends 146 146 146
------- ------- --------
Net (Loss) Income Applicable to Common Stock $(8,045) $(7,033) $ 1,283
======= ======= ========
Basic (Loss) Income Per Share $ (1.75) $ (1.55) $ 0.29
Diluted (Loss) Income Per Share $ (1.75) $ (1.55) $ 0.27
Common and equivalent shares outstanding:
Basic 4,597 4,541 4,493
Diluted 4,597 4,541 4,691
43
ITEM 8 (B). SUPPLEMENTAL FINANCIAL INFORMATION
-------------------------------------------------------------------------------------
QUARTERLY FINANCIAL DATA
(Unaudited)
(Amounts in Thousands, Except Per Share Data)
-------------------------------------------------------------------------------------
FISCAL QUARTERS
1ST 2ND 3RD 4TH
Fiscal Year 2003:
Net Sales $ 10,848 $ 10,523 $ 9,940 $ 10,168
Gross Profit 2,858 2,143 1,862 1,556
Loss Before Income Taxes (605) (1,628) (1,823) (3,848)
Net Loss Applicable to Common Stock (521) (1,495) (1,829) (3,847)
Loss Per Share:
Basic (0.11) (0.33) (0.40) (0.83)
Diluted (0.11) (0.33) (0.40) (0.83)
Fiscal Year 2002:
Net Sales 10,301 9,953 9,484 11,294
Gross Profit 2,409 1,366 1,957 2,212
Income (Loss) Before Income Taxes (711) (2,913) (691) 57
Net Loss Applicable to Common Stock (646) (2,060) (610) (248)
Loss Per Share:
Basic (0.14) (0.45) (0.13) (0.05)
Diluted (0.14) (0.45) (0.13) (0.05)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not Applicable.
ITEM 9A. 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 evaluated the
Company's disclosure controls and procedures as of the end of the
period covered by this report. Based upon that review, they have
concluded that these 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 Control Over Financial Reporting
There have been no significant changes in internal control over
financial reporting that occurred during the period covered by
this report that have materially affected, or are reasonable
likely to materially affect, the registrant's internal control
over financial reporting.
44
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 October 16, 2003 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 2003
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 "General--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 30, 2003 and is expressly incorporated herein by
reference.
45
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 402 under Regulation S-K, to the extent
applicable, will be set forth under the caption "Executive Compensation and
Other Information" under "General" in the Company's definitive proxy materials
for its September 30, 2003 Annual Meeting to be filed within 120 days from the
end of the Company's fiscal 2003, which information is expressly incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 201(d) and Item 403 under Regulation S-K, to
the extent applicable, will be set forth under the caption "Security Ownership
of Principal Shareholders and Management" in the Company's definitive proxy
statement for its October 16, 2003 Annual Meeting to be filed within 120 days
from the end of the Company's fiscal year 2003, which information is expressly
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not Applicable.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Not Applicable.
46
PART IV.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT, SCHEDULES AND REPORTS ON 8-K
(1) THE FOLLOWING FINANCIAL STATEMENTS ARE INCLUDED IN PART II, ITEM 8:
PAGE
Independent Auditors' Reports 23
Consolidated Financial Statements
-- Balance Sheets, June 1, 2003 and June 2, 2002. 24
-- Consolidated Statements of Operations for the Years 26
Ended June 1, 2003, June 2, 2002 and June 3, 2001.
-- Consolidated Statements of Stockholders' Equity for 27
the Years Ended June 1, 2003, June 2, 2002 and June 3, 2001.
-- Consolidated Statements of Cash Flows for the Years 28
Ended June 1, 2003, June 2, 2002 and June 3, 2001.
-- Notes to Consolidated Financial Statements 29
(2) THE FOLLOWING FINANCIAL STATEMENT SCHEDULE FOR THE YEARS ENDED JUNE 1,
2003, JUNE 2, 2002 AND JUNE 3, 2001 IS SUBMITTED HEREIN FOLLOWING THE
SIGNATURE PAGE OF THIS REPORT.
-- Schedule II - Valuation and Qualifying Accounts 50
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
(a) The Exhibits required pursuant to Item 601 of Regulation S-K to be
filed with this report or incorporated by reference are listed in the
Exhibit Index, which follows the Financial Statement Schedules.
(b) Reports on Form 8-K during three months ended June 1, 2003 - None
47
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
Frederick M. Green
August 29, 2003
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.
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints FREDERICK M.
GREEN and DONALD L. HENRY as his true and lawful attorneys-in-fact and agents,
each acting alone, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign any or all
amendments to this Annual Report on Form 10-K and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all said attorneys-in-fact and agents,
each acting alone, or his substitute or substitutes, may lawfully do or cause to
be done by virtue thereof.
*Principal Financial Officer and Principal Accounting Officer
SIGNATURE TITLE DATE
/s/ Frederick M. Green President, Chief Executive August 29, 2003
- ---------------------------- Officer and Director
Frederick M. Green
/s/ Donald L. Henry Vice President, Treasurer, August 29, 2003
- ---------------------------- Chief Financial Officer,
Donald L. Henry Secretary and Controller*
/s/ Marvonia Pearson Walker Director August 29, 2003
- ----------------------------
Marvonia Pearson Walker
/s/ Brian T. Chang Director August 29, 2003
- ----------------------------
Brian T. Chang
/s/ John G. Kassakian Director August 29, 2003
- ----------------------------
John G. Kassakian
/s/ David J. Larkin Director August 29, 2003
- ----------------------------
David J. Larkin
/s/ Carol A. Barnett Director August 29, 2003
- ----------------------------
Carol A. Barnett
/s/ John Colwell, Jr. Director August 29, 2003
- ----------------------------
John Colwell, Jr.
48
*******************************************************************
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF
AULT INCORPORATED
FOR
YEAR ENDED JUNE 1, 2003
*******************************************************************
FINANCIAL STATEMENT SCHEDULES
*******************************************************************
49
SCHEDULE II
AULT INCORPORATED AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 1, 2003, JUNE 2, 2002, AND JUNE 3, 2001
Balance at Charged to Balance at
Beginning Costs and End of
of Period Expenses Deductions Period
- -----------------------------------------------------------------------------------------------------------------------
Year ended June 1, 2003:
Allowance for doubtful accounts $ 320,000 $ 230,000 $ 50,000(a) $ 500,000
Reserve for warranties 113,000 193,000 172,000 134,000
Year ended June 2, 2002:
Allowance for doubtful accounts 676,000 1,416,000 1,772,000(a) 320,000
Reserve for warranties 133,000 133,000 153,000 113,000
Year ended June 3, 2001:
Allowance for doubtful accounts 123,000 598,000 45,000(a) 676,000
Reserve for warranties 78,000 304,000 249,000 133,000
(a) Represents charge-off of accounts receivable, net of recoveries.
50
*******************************************************************
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF
AULT INCORPORATED
FOR
YEAR ENDED JUNE 1, 2003
*******************************************************************
EXHIBITS
*******************************************************************
51
AULT INCORPORATED
EXHIBIT INDEX TO
FORM 10-K FOR THE YEAR ENDED
JUNE 1, 2003
Required Registration S-K
Exhibit Items
SK Item Title of Documents Location
3(a) Restated Articles of Incorporation, as amended Filed as Exhibit 3(a) to Form 10-K for fiscal 1988 and incorporated
herein by reference
3(b) Bylaws, as amended Filed as Exhibit 3(b) to Registration Statement No. 2-85224 and
incorporated herein by reference
3(c) Amendment to Articles of Incorporation Filed herewith as Exhibit 3(c) Fiscal 1999
4.1 Rights Agreement Filed electronically on Form 8-K for March 1996 and incorporated herein
by reference
10.1 Management Incentive Compensation Plan Filed as Exhibit 10(b) to Registration Statement 2-85224 and
incorporated herein by reference
10.2 1986 Employee Stock Option Plan Filed as Exhibit 10(c) to Form 10-K for fiscal 1987 and incorporated
herein by reference
10.3 Employee Stock Purchase Plan Filed electronically. Commission File #333-4609 and herein incorporated
by reference
10.4 1986 Employee Stock Filed electronically. Commission File #333-4609 and herein incorporated
by reference
Option Plan, Amended
10.5 1996 Employee Stock Filed electronically. Commission File #333-4609 and herein incorporated
by reference
Option Plan
21 Subsidiary of Registrant Filed as Exhibit 21 to Form 10-K for fiscal 1997 and incorporated
herein by reference
23 Consent of Independent Auditors Filed herewith at page 53
31 Certifications pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 (Rules Filed herewith at page 54-55
13a-14 and 15d-14 of the Exchange Act).
32 Certifications pursuant Section 906 of
the Sarbanes-Oxley Act of 2002 (18 U.S.C. Filed herewith at page 56
ss.1350).
Pursuant to provisions of Item 601(b)(A)(iii)(a) of Regulation S-K, copies of
instruments defining the rights of holders of long-term debt of the Company are
not being filed and in lieu thereof, Company agrees to furnish copies thereof to
the Securities and Exchange Commission upon request.
52
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-100409 on Form S-3 and Registration Statements No. 333-51458, No. 333-08992,
No. 333-38455, No. 333-04609, No. 33-53988, No. 33-19662, No. 2-87376, No.
33-33566, and No. 333-91389 on Form S-8 of Ault Incorporated and Subsidiaries of
our report dated August 18, 2003 (August 29, 2003 as to Note 5), appearing in
this Annual Report on Form 10-K of Ault Incorporated and Subsidiaries for the
year ended June 1, 2003.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
September 12, 2003
53