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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 2003
Commission file number 0-12611
AULT INCORPORATED
MINNESOTA 41-0842932
------------------------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7105 Northland Terrace
Minneapolis, Minnesota 55428-1028
---------------------------------
(Address of principal executive offices)
Registrant's telephone number: (763) 592-1900
-----------------
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES __X___ NO _______
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
YES _____ NO ___X___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock October 6, 2003
--------------------- ---------------
No par value 4,666,774 shares
Total pages 21
Exhibit Index on Page 17
Page 1
PART 1. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
AULT INCORPORATED & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Share and Amounts Per Share)
(Unaudited)
Three Months Ended
--------------------------
August 31, September 1,
2003 2002
----------- -----------
Net Sales $10,816 $10,848
Cost of Goods Sold 8,276 7,990
--------- ---------
Gross Profit 2,540 2,858
Operating Expenses:
Marketing 954 1,125
Design Engineering 879 815
General & Administrative 1,404 1,336
Plant Closing Costs 98
--------- ---------
3,335 3,276
--------- ---------
Operating Loss (795) (418)
Non Operating Income (Expense):
Interest Expense (159) (109)
Interest Income 5
Other 30 (83)
--------- ---------
(129) (187)
--------- ---------
Loss Before Income Taxes (924) (605)
Income Tax Benefit (103)
--------- ---------
Net Loss (924) (502)
Preferred Stock Dividends (36) (19)
--------- ---------
Net Loss Applicable to Common Stock $(960) $(521)
========= =========
Loss Per Share:
Basic $(0.21) $(0.11)
Diluted $(0.21) $(0.11)
Common and equivalent shares outstanding:
Basic 4,657,421 4,571,973
Diluted 4,657,421 4,571,973
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 2
AULT INCORPORATED & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
June 1, August 31,
2003 2003
------- ----------
Assets:
Current Assets
Cash and Cash Equivalents $1,190 $1,100
Trade Receivables, Less Allowance for Doubtful Accounts of $565,000
at August 31, 2003; $500,000 at June 1, 2003 8,429 7,417
Inventories (Note 3) 9,517 9,868
Prepaid and Other Expenses 1,648 1,064
------- -------
Total Current Assets 20,784 19,449
Other Assets 53 333
Property Equipment and Leasehold
Improvements:
Land 1,735 1,735
Building and Leasehold Improvements 7,845 7,845
Machinery and Equipment 9,015 8,961
Office Furniture 1,923 1,887
Data Processing Equipment 2,227 2,226
------- -------
22,745 22,654
Less Accumulated Depreciation 9,719 9,371
------- -------
13,026 13,283
------- -------
Total Assets $33,863 $33,065
======= =======
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 3
AULT INCORPORATED & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
June 1, August 31,
2003 2003
------- ----------
Liabilities and Stockholders' Equity:
Current Liabilities
Note Payable to Bank $4,090 $3,104
Current Maturities of Long-Term Debt (Note 6) 542 560
Accounts Payable 6,026 5,696
Accrued Compensation 1,297 1,162
Accrued Commissions 346 300
Other 450 195
-------- --------
Total Current Liabilities 12,751 11,017
Long-Term Debt, Less Current Maturities (Note 6) 2,428 2,483
Deferred Tax Liability 23 23
Retirement and Severance Benefits 182 148
Redeemable Convertible Preferred Stock, No Par Value, 2,074 Shares
Issued and Outstanding 2,074 2,074
Stockholders' Equity:
Preferred Stock, No Par Value, Authorized,
1,000,000 Shares;
Common Shares, No Par Value, Authorized
10,000,000 Shares; Issued and Outstanding 4,665,774 on
August 31, 2003; and 4,648,499 on June 1, 2003; 21,062 21,026
Notes Receivable arising from the sale of common stock (45) (45)
Accumulated Other Comprehensive Loss (877) (886)
Accumulated Deficit (3,735) (2,775)
-------- --------
16,405 17,320
-------- --------
$33,863 $33,065
======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 4
AULT INCORPORATED & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars In Thousands)
(Unaudited)
Three Months Ended
August 31, September 1,
2002 2003
---------- ------------
Cash Flows From Operating Activities:
Net Loss $(924) $(502)
Adjustments to Reconcile Net Loss to Net Cash
Used in Operating Activities:
Depreciation 349 238
Changes in Assets and Liabilities:
(Increase) Decrease In:
Trade Receivables (1,020) (416)
Inventories 415 (294)
Prepaid and Other Expenses (260) (159)
Increase (Decrease) in:
Accounts Payable 303 (194)
Accrued Expenses 459 234
------- -------
Net Cash Used in Operating Activities (678) (1,093)
------- -------
Cash Flows From Investing Activities:
Purchase of Equipment and Leasehold Improvements (90) (107)
Acquisition Cost (366)
------- -------
Net Cash Used in Investment Activities (90) (473)
------- -------
Cash Flows From Financing Activities:
Net Borrowings (Payments) on Revolving Credit Agreements 927
Proceeds from Issuance of Common Stock 24
Principal Payments on Long-Term Borrowings (73) (68)
------- -------
Net Cash Provided by (Used in) Financing Activities 854 (44)
------- -------
Effect of Foreign Currency Exchange Rate Changes
on Cash 4 26
------- -------
Increase (Decrease) in Cash and Cash Equivalents 90 (1,584)
Cash and Cash Equivalents at Beginning of Period 1,100 4,775
------- -------
Cash and Cash Equivalents at End of Period $1,190 $3,191
======= =======
Non-Cash Transaction:
Issuance of Redeemable Convertible Preferred Stock for
Acquisition $2,074
Issuance of Common Stock to Pay Preferred Stock Dividends $36
Page 5
AULT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST QUARTER ENDED AUGUST 31, 2003
1. Summary of Consolidation Principles, Management Plans
The accompanying consolidated financial statements include the accounts of Ault
Incorporated, 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 subsidiaries in accordance with the provisions of FASB
Statement No. 52.
The balance sheet of the Company as of August 31, 2003, and the related
statements of operations and cash flows for the three months ended August 31,
2003 and September 1, 2002 have been prepared without being audited. In the
opinion of the management, these statements reflect all adjustments (consisting
of only normal recurring adjustments) necessary to present fairly the position
of Ault Incorporated and subsidiaries as of August 31, 2003, and the results of
operations and cash flows for all periods presented.
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. This
trend has continued in the first quarter of fiscal 2004, with $960,000 of net
losses applicable to common stock. Future operations will 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 an
outstanding balance on this line-of-credit at August 31, 2003 of $1,024,000. The
Company believes they can remain in compliance with covenants in the financing
agreement, as amended, throughout fiscal 2004. The Company continues to take
steps to reduce expenses, improve cash flow and return to profitability,
including the consolidation of its manufacturing operations in this current
quarter. 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.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted. Therefore, these
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's June 1, 2003 Form 10-K.
The results of operations for the interim periods are not necessarily indicative
of results that will be realized for the full fiscal year.
Page 6
AULT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST QUARTER ENDED AUGUST 31, 2003
2. 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 and 2002 consistent with the provisions of SFAS No. 123, the
Company's net loss and net loss per share would have changed to the pro forma
amounts indicated below:
Amounts in thousands, except per share amounts
Period Ending
---------------------
Aug. 31 Sept. 1,
2003 2002
-------- --------
Net loss, as reported $ (960) $ (521)
Net loss, pro forma (1,039) (644)
Net loss, per share, basic, as reported (0.21) (0.11)
Net loss, per share, diluted, as reported (0.21) (0.11)
Net loss, per share, basic, pro forma (0.22) (0.14)
Net loss, per share, diluted, pro forma (0.22) (0.14)
3. Inventories
The components of inventory (in thousands) at August 31, 2003 and June 1, 2003
are as follows:
August 31, June 1,
2003 2003
---------- -------
Raw Materials $5,890 $6,020
Work-in-process 920 1,163
Finished Goods 2,707 2,685
------ ------
$9,517 $9,868
====== ======
Page 7
AULT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST QUARTER ENDED AUGUST 31, 2003
4. 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 2004 year-to-date activity for
the Company's warranty accrual (in thousands):
Beginning Balance $ 134
Charges and Costs Accrued 18
Less Repair Costs Incurred --
-------
Ending Balance $ 152
=======
5. Plant Closing
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.
As a result of these decisions, the Company recorded charges of $98,000, for
severance related to workforce reductions of approximately 40 employees. Cash of
$300,000 is expected to be used in connection with severance charges, which will
begin to be paid in the second quarter and completely paid by the end of fiscal
year 2004.
A summary of the restructuring activity during the three-month period ending
August 31, 2003 is as follows:
Current Period Restructuring
Balance at Plant Closing Cash Liabilities at
June 1, 2003 Charges Payments August 31, 2003
---------------- ---------------- ----------- -----------------
Employee termination costs $0 $98,000 $0 $98,000
Page 8
AULT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST QUARTER ENDED AUGUST 31, 2003
6. Debt
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 2004. The rate
at August 31, 2003 and June 1, 2003 was 11.00%. 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 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. There were
advances outstanding on the revolving line of credit of $1,024,000 and $0 at
August 31, 2003 and June 1, 2003. Also, the Company's Korean subsidiary
maintains an unsecured $3,637,000 credit facility agreement to cover bank
overdrafts, short-term financing, and export financing at a rate of 6.25%.
Advances outstanding relating to the Korean facility were $3,078,000 and
$3,104,000 at August 31, 2003 and June 1, 2003, respectively.
Long-term debt (in thousands) including current maturities contain the
following:
August 31, June 1,
2003 2003
--------- ------
Term loan, 7.2% interest due in monthly installments through
December 2003, secured by equipment $38 $61
Term loan, 7.94% interest rate due in monthly installments
through September 2005, secured by furniture 71 87
Term loan, 5.3% interest rate due in January 2004 290 290
Term loan, 8.05% interest rate due in monthly installments to
February 2015, secured by Company's headquarters building 2,571 2,605
------ ------
Total 2,970 3,043
Less Current Maturities 542 560
------ ------
$2,428 $2,483
====== ======
7. Stockholders' Equity
Three Months Ended
August 31, 2003
------------------
($000)
Total Stockholders' Equity - June 1, 2003 $17,320
Net Loss $(924)
Net change in Foreign currency translation
adjustment 9
------
Comprehensive Loss (915)
Preferred Stock Dividends Declared (36)
Preferred Stock Dividends Paid with Common
Stock 36
--------
Total Stockholders' Equity $16,405
========
Page 9
AULT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST QUARTER ENDED AUGUST 31, 2003
8. Net Income Per Common Share
Basic and diluted earnings per share are presented in accordance with SFAS No.
128, EARNINGS PER SHARE. The Redeemable Convertible Preferred Stock and stock
options had no effect on diluted weighted average shares outstanding, as they
were anti-dilutive.
Three Months Ended
August 31, 2003 September 1, 2002
--------------- -----------------
Loss Applicable to Common Shareholders (in
thousands) $(960) $(521)
Basic - Weighted Average Shares Outstanding 4,657,421 4,571,973
Diluted - Weighted Average Shares Outstanding 4,657,421 4,571,973
Basic Loss per Share (0.21) (0.11)
Diluted Loss per Share (0.21) (0.11)
9. Aquisition
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 benefits the Company in a number of ways. First,
the additional engineering capabilities have enhanced 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.
Page 10
AULT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST QUARTER ENDED AUGUST 31, 2003
The total cost of the acquisition, which closed on July 16, 2002, was $2,559,278
and was accounted for under the purchase method of accounting. Accordingly, the
acquired assets and liabilities assumed have been recorded at their respective
fair values as of the date of acquisition. The results of operations of the
acquired business is included in the financial statements since the date of the
acquisition. The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed from Nidec on the date of the
acquisition:
Inventories $ 1,048,675
Property and equipment 1,634,971
-----------
Total assets acquired 2,683,646
-----------
Current liabilities 124,368
-----------
Net assets acquired $ 2,559,278
===========
Pro-forma results of the Company, assuming the acquisition had been made at the
beginning of each period presented, are:
Amounts in thousands, except per share amounts
Period Ending
----------------------------
Aug. 31 Sept. 1,
2003 2002
------------ ------------
Revenue $ 10,816 $ 11,217
Net Loss (924) (836)
Preferred Stock Dividends 36 36
------------- ------------
Net Loss Applicable to Common Stock $ (960) $ (872)
------------- ------------
Basic/Diluted Loss Per Share $ (0.21) $ (0.19)
Common and equivalent shares outstanding: 4,657 4,572
10. Accounting Pronouncements
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.
Page 11
ITEM 2 - MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of the financial condition and results of operations
are based on the consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires the Company to
make estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities at the date of our financial statements. Actual results may
differ from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those involving significant
judgments and uncertainties which could potentially result in materially
different results under different assumptions and conditions. Application of
these policies is particularly important to the portrayal of the financial
condition and results of operations. The Company believes the accounting
policies described below meet these characteristics. All significant accounting
policies are more fully described in the notes to the consolidated financial
statements included in the Company's annual report on Form 10-K.
INVENTORY VALUATION - Inventory is written down for estimated surplus and
discontinued inventory items. The amount of the write-down is determined by
analyzing historical and projected sales information, plans for discontinued
products and other factors. Changes in sales volumes due to unexpected economic
or competitive conditions are among the factors that would result in materially
different amounts for this item.
ALLOWANCE FOR DOUBTFUL ACCOUNTS - An allowance is established for estimated
uncollectible accounts receivable. The required allowance is determined by
reviewing customer accounts and making estimates of amounts that may be
uncollectible. Factors considered in determining the amount of the reserve
include the age of the receivable, the financial condition of the customer,
general business, economic and political conditions, and other relevant facts
and circumstances. Unexpected changes in the aforementioned factors would result
in materially different amounts for this item.
DEFERRED TAXES - The Company accounts for income taxes in accordance with SFAS
NO. 109, "Accounting for Income Taxes," which requires that deferred tax assets
and liabilities be recognized using enacted tax rates for the effect of
temporary differences between book and tax basis of recorded assets and
liabilities. SFAS 109 also requires that deferred tax assets be reduced by a
valuation allowance if it is likely that some portion or the entire deferred tax
asset will not be realized. Based upon prior taxable income and estimates of
future taxable income, the Company has determined that it is likely that a
portion of the net deferred tax asset will not be fully realized in the future.
Thus a valuation allowance has been established. If actual taxable income varies
from these estimates, the Company may be required to change the valuation
allowance against the deferred tax assets resulting in a change in income tax
expense (benefit), which will be recorded in the consolidated statement of
operations.
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. This trend has continued in the first quarter of
fiscal 2004, with $960,000 of net losses applicable to common stock. Future
operations will 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 an outstanding balance on this line-of-credit
at August 31, 2003 of $1,024,000. The Company believes they can remain in
compliance with covenants in the financing agreement, as amended, throughout
fiscal 2004. The Company continues to take steps to reduce expenses, improve
cash flow and return to profitability, including the consolidation of its
manufacturing operations in this current quarter. 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
Page 12
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.
RESULTS OF OPERATIONS
First Quarter Ended August 31, 2003
($000) Increase / (Decrease)
Fiscal Fiscal -----------------------
2004 2003 Amount Percent
---------------- ------------------ ------------- ------------
Net Sales $10,816 $10,848 ($32) 0%
Operating Loss (795) (418) (377) (90%)
Net sales were $10,816,000 for the first quarter of fiscal 2004 down from
$10,848,000 for the first quarter of fiscal 2002. The decrease is due to lower
sales from North America and Europe of $1,167,000, offset by in increase in
sales from Asia Pacific of $1,135,000.
The gross margin for fiscal 2004 was 23.5%, compared to 26.3% for fiscal 2003.
Margins decreased primarily due to higher sales in the Asia Pacific area, which
have lower margins than North America and Europe.
Operating expenses increased in the first quarter of fiscal 2004 to $3,335,000
from $3,276,000 in the first quarter of fiscal 2003. The additional expenses in
the first quarter of fiscal 2004 are primarily related to the closing of the
Company's US manufacturing plant to Asia of $98,000.
ORDER BACKLOG: The Company's order backlog at August 31, 2003 totaled
$12,293,000 compared to $13,850,000 at June 2, 2002. The order backlog
represents sales for approximately fifteen weeks.
NON-OPERATING INCOME AND EXPENSE: Nonoperating expense is $129,000 for the first
quarter of fiscal 2004 compared to $187,000 for the same period in fiscal 2003.
Other income was $30,000 for the first quarter of fiscal 2004 and an expense of
$83,000 in the first quarter of fiscal 2003. Both amounts are primarily related
to the currency exchange rate gains and losses in Korea. The Company incurred
interest expenses of $159,000 in the first three months of fiscal 2004 and
$109,000 in the same period of fiscal 2003, paid on bank credit facilities and
long-term borrowings. The increase is due to higher amounts outstanding on the
credit facilities and higher interest rates.
INCOME TAX: The Company had a pre-tax loss of $924,000 for the three-month
period in fiscal 2004 on which it accrued no consolidated income tax benefit.
For the three-month period in fiscal 2003 the Company had a pre-tax loss of
$605,000 on which a tax benefit of $103,000 was accrued. The effective tax rate
is 0% for the first quarter of 2004, and a benefit of 17% for the same period in
fiscal 2003. In the first quarter of fiscal 2004 and 2003 the Company did not
take a benefit from the loss carryforwards the loss generated, and has a full
valuation allowance because it was likely the Company will be unable to use such
losses. In 2003, the Company recognized the remaining loss carrybacks.
NET LOSS: The Company reported a basic and diluted per share loss of $0.21 for
the first quarter of fiscal 2004 based on 4,657,000 outstanding weighted average
shares, compared to basic and diluted per share loss of $0.11 for the first
quarter of fiscal 2003, based on 4,572,000 outstanding weighted average shares.
Page 13
LIQUIDITY AND CAPITAL RESOURCES
The following table describes the Company's liquidity and financial position on
August 31, 2003, and on June 1, 2003:
August 31, June 1,
2003 2003
----------- -----------
($000) ($000)
Working capital $8,033 $8,432
Cash 1,190 1,100
Unutilized bank credit facilities 785 2,297
CURRENT WORKING CAPITAL POSITION
As of August 31, 2003, the Company had current assets of $20,784,000 and current
liabilities of $12,751,000 representing working capital of $8,033,000 and a
current ratio of 1.6. This represents an decrease in working capital from
$8,432,000 at June 1, 2003. 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 any
funds to capital expenditures as of August 31, 2003.
CASH AND INVESTMENTS: As of August 31, 2003, the Company had cash and securities
totaling $1,190,000, up from $1,100,000 as of June 1, 2003. This increase in
cash was primarily due to additional borrowings on the credit facility offset by
cash used for operations.
CREDIT FACILITIES: The credit arrangement with Associated Bank is an asset-based
credit facility of $1.25 million, secured by company assets. At August 31, 2003,
there were borrowings against this facility of $1,024,000. 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 $3,637,000 of which borrowings
at August 31, 2003 totaled $3,078,000.
CASH FLOWS FOR FISCAL 2004
OPERATIONS: Operations used $678,000 of cash during the first three months of
fiscal 2004 due principally to the following activities:
(a) The loss net of depreciation used cash of $575,000.
(b) Increases in trade receivables used $1,020,000 of cash, primarily
related to additional sales from the Asia Pacific area.
(c) Decreases in inventories provided $415,000 of cash, primarily related
to the consolidation of the Minneapolis manufacturing facility.
(d) Increases in accounts payable and accrued expenses provided $762,000,
primarily related to extended payment terms from several vendors.
INVESTING ACTIVITIES: Investing activities used net cash of $90,000 principally
relating to the purchase of tooling in the Asia facilities.
FINANCING ACTIVITIES: Financing activities provided cash of $854,000, primarily
comprised of additional borrowing on the US line-of-credit.
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE FLUCTUATIONS: The effect of translating
the Korean financial statements, which were prepared in Won to US dollars, had
an increase effect on cash of approximately $4,000 during the first three months
of fiscal 2004. The effect of translating the Chinese financial
Page 14
statements, which were prepared in Yuan to US dollars, had minimal effect on
cash for the first three months of fiscal 2004.
SUMMARY: The Company's cash and working capital positions are sound and,
together with its credit facilities, adequate to support the Company's
strategies for the remainder of fiscal 2004.
INFORMATION ABOUT PRODUCTS AND SERVICES: The Company's business operations are
comprised of one activity--the design, manufacture and sale of equipment for
converting electric power to a level used by OEMs in data
communications/telecommunications and medical markets to charge batteries,
and/or power equipment. The Company supports these power requirements by making
available to the 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.
INFORMATION ABOUT REVENUE BY GEOGRAPHY
Distribution of revenue from the US, from each foreign country that is the
source of significant revenue and from all other foreign countries as a group
are as follows:
THREE MONTHS ENDED
August 31, 2003 September 1, 2002
------------------------------------------
($000) ($000)
US $5,969 $6,977
Korea 2,386 1,318
China 1,191 905
UK 707 694
Canada 271 233
Other Foreign 292 721
------------------------------------------
Total $10,816 $10,848
==========================================
The Company considers a country to be the geographic source of revenue if it has
contractual obligations, including an obligation to pay for trade receivable
invoices.
IMPACT OF FOREIGN OPERATIONS AND CURRENCY CHANGES:
Products manufactured by the Korean subsidiary contributed 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 increase of $9,000.
FORWARD LOOKING STATEMENTS
From time to time, in reports filed with the Securities and Exchange Commission,
in press releases, and in other communications to shareholders or the investing
public, the Company may make forward-looking statements concerning possible or
anticipated future results of operations or business developments 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, computer peripherals and the medical markets; buying
patterns of the Company's existing and prospective customers; the impact of new
products introduced by competitors; delays in new product introductions; higher
than expected expense related to sales and new marketing initiatives;
availability of adequate supplies of raw materials and components; dependence on
outside contractors; reliance on third party distribution; successful
integration of the Power General assets; dependence on foreign operations; and
other risks affecting the Company's target markets generally.
Page 15
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company experiences foreign currency gains and losses, which are reflected
in the financial statements, due to the strengthening and weakening of the U.S.
dollar against currencies of the Company's foreign subsidiaries. The Company
anticipates that it will continue to have exchange gains or losses in the
future.
The Company is exposed to certain market risks on the line of credit agreement
because of the variable interest rate charged. Market risk is the potential loss
arising from the adverse changes in market rates and prices, such as interest
rates. Market risk is estimated as the potential increase in fair value
resulting from a hypothetical one percent increase in interest rates which
assuming an average outstanding debt balance of $5.0 million would result in an
annual interest expense increase of approximately $50,000.
ITEM 4 - CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company's Chief Executive Officer, Frederick M. Green, and Chief Financial
Officer, Donald L. Henry, have 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.
Page 16
PART II
ITEM 1 LEGAL PROCEEDINGS:
Not Applicable
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Recent Sales of Unregistered Securities
Not Applicable
ITEM 3 DEFAULTS UPON SENIOR SECURITIES:
Not Applicable
ITEM 4 SUMBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5 OTHER INFORMATION
Not Applicable.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
31.1 Certification of CEO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of CFO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of CEO and CFO Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on form 8-K
A. Form 8-K filed August 11, 2003 announcing the fourth quarter fiscal
2003 financial results.
Page 17
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AULT INCORPORATED
(REGISTRANT)
DATED: October 14, 2003 /s/ Frederick M. Green
----------------------------- ------------------------------------
Frederick M. Green, President
Chief Executive Officer and
Chairman
DATED: October 14, 2003 /s/ Donald L. Henry
----------------------------- ------------------------------------
Donald L. Henry
Chief Financial Officer
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