<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 22, 1996
REGISTRATION NO. 333-14965
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AULT INCORPORATED
(Exact name of registrant as specified in its charter)
------------------------
<TABLE>
<S> <C> <C>
MINNESOTA 3679 41-0842932
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification No.)
incorporation or
organization)
</TABLE>
------------------------
7300 BOONE AVENUE NORTH
MINNEAPOLIS, MN 55428-1028
(612) 493-1900
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
------------------------
FREDERICK M. GREEN
AULT INCORPORATED
7300 BOONE AVENUE NORTH
MINNEAPOLIS, MN 55428-1028
(612) 493-1900
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
COPY TO:
Richard A. Primuth, Esq. James C. Diracles, Esq.
Lindquist & Vennum P.L.L.P. Best & Flanagan P.L.L.P.
4200 IDS Center 4000 First Bank Place
80 South 8th Street 601 Second Avenue South
Minneapolis, MN 55402 Minneapolis, MN 55402
(612) 371-3211 (612) 339-7121
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the same offering. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
AULT INCORPORATED
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
FORM S-2 ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus Forepart............. Front Cover Page; Inside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front Cover Page; Additional Information; Back
Cover Page
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................... Cover Page; Prospectus Summary; Rick Factors;
Selected Consolidated Financial Data
4. Use of Proceeds...................................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price...................... Not applicable
6. Dilution............................................. Not applicable
7. Selling Security Holders............................. Not Applicable
8. Plan of Distribution................................. Cover Page; Underwriting
9. Description of Securities to be Registered........... Prospectus Summary; Price Range of Common Stock;
Dividend Policy; Description of Capital Stock
10. Interests of Named Experts and Counsel............... Legal Matters
11. Information with Respect to the Registrant........... Outside Front Cover Page; Prospectus Summary; Risk
Factors; Price Range of Common Stock; Dividend
Policy; Capitalization; Selected Consolidated
Financial Data; Management's Discussion and Analysis
of Financial Condition and Results of Operations;
Business; Management; Principal Stockholders;
Consolidated Financial Statements; Description of
Capital Stock; Available Information; Incorporation
of Certain Documents by Reference
12. Incorporation of Certain Information by Reference.... Incorporation of Certain Documents by Reference
13. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... Not Applicable
</TABLE>
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
SUBJECT TO COMPLETION OCTOBER 31, 1996
1,800,000 SHARES
[LOGO]
AULT INCORPORATED
COMMON STOCK
----------------
The 1,800,000 shares of Common Stock offered hereby are being sold by Ault
Incorporated, a Minnesota corporation ("Ault" or the "Company"). The Company's
Common Stock is traded on the Nasdaq National Market under the symbol "AULT." On
October 31, 1996, the last sale price of the Common Stock on the Nasdaq National
Market was $8.75 per share. See "Price Range of Common Stock."
---------------------
AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGES 6-9.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
Per Share..................... $ $ $
Total(3)...................... $ $ $
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters and other matters. The Company has also agreed to sell to the
Underwriters, for nominal consideration, a five-year warrant to purchase up
to 144,900 shares of Common Stock.
(2) Before deducting expenses of the offering estimated at $ .
(3) The Company has granted the Underwriters a 30-day option to purchase up to
270,000 additional shares of Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public shown above. If the
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ , $
and $ , respectively. See "Underwriting."
---------------------
The shares of Common Stock are offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by them, and subject to the
right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of Principal Financial Securities, Inc. in Dallas, Texas on or about ,
1996.
PRINCIPAL FINANCIAL SECURITIES, INC. CRUTTENDEN ROTH
INCORPORATED
THE DATE OF THIS PROSPECTUS IS , 1996
<PAGE>
[Photo on center of page depicts, in the foreground clockwise from bottom left,
representative examples of Ault's major product categories consisting of a
switching power supply, a battery charger, a transformer and a linear power
supply.]
Representative examples of Ault Incorporated's four major product categories
are pictured in the foreground, clockwise from bottom left: a switching power
supply; a battery charger; a transformer; and a linear power supply. In the
background, are three examples of OEM applications using Ault's products: a
business telephone system, an external modem and a hand-held bar code scanner.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE
COMPANY'S COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE
10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY INFORMATION IS QUALIFIED IN ITS ENTIRETY BY THE MORE
DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING
ELSEWHERE OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS. UNLESS OTHERWISE
INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE
UNDERWRITER'S OVER-ALLOTMENT OPTION. THIS PROSPECTUS CONTAINS FORWARD LOOKING
STATEMENTS AND AN INVESTMENT IN THE COMMON SHARES OFFERED HEREBY INVOLVE A HIGH
DEGREE OF RISK. SEE "RISK FACTORS."
THE COMPANY
Ault Incorporated is the largest U.S. based independent manufacturer of
external power conversion products. The Company is a leader in designing,
developing and supplying custom power conversion products for original equipment
manufacturers (OEMs) of primarily non-consumer electronic equipment. The
Company's custom designed products reduce voltage to a specified level, convert
alternating current ("AC") to direct current ("DC"), and maintain voltage within
required limits. The Company markets and sells principally to OEMs in the
growing vertical markets for telecommunications, data communications, computer
peripherals and medical equipment. The Company's customers include Northern
Telecom, Motorola, U.S. Robotics, AT&T and Spectra Physics. The Company believes
its competitive advantage is that it provides OEM customers with the opportunity
to outsource not only the manufacturing, but also the design engineering,
project management, safety agency certification, and logistics support related
to external power conversion components. Emphasizing its comprehensive
outsourcing capability and through its successful introduction of new products,
Ault has achieved significant sales growth over the past three years.
The worldwide market for power conversion products is currently estimated to
exceed $16 billion in sales, of which the external power conversion market
represents approximately $1.6 billion. The external power conversion market is
divided between independent merchant suppliers, such as Ault, and captive
suppliers providing products to affiliated OEMs. Sales by merchant suppliers of
external power conversion products were approximately $1 billion in 1995. This
merchant market is estimated to be growing at an annual compound rate of 18% as
compared to an annual compound rate of 12% for the overall market. The Company
targets vertical markets that are experiencing rapid growth in demand for
external power supplies. It is estimated that the telecommunications and data
communications markets together are growing at a rate of 30% annually; the
computer peripherals market is growing at 15% annually; and the medical
equipment market is growing at 10% annually.
Ault believes that a number of important trends will cause growth in the
external power conversion market to continue to outpace overall market growth.
Advances in integrated circuit and microprocessor technology have reduced the
power requirements of electronic equipment and increased the power capabilities
and efficiencies of external power conversion products. These advances are
increasing the range of equipment which can be powered externally. Equally
important, users of electronic equipment are demanding smaller, more portable
products with more complex capabilities. Moving the power conversion component
outside of the equipment powered allows the OEM to reduce the equipment size or
to add features that are important to users. Finally, by using an external
product that has already received safety certifications, OEMs can substantially
reduce the time needed to obtain safety agency approval for electronic
equipment, thereby facilitating more rapid product introduction.
Responding to the expressed needs of its customers and anticipating future
customer requirements in its target markets, Ault has introduced 26 new product
families during the past two fiscal years. The Company currently has over 36
product families under development. Further, to maintain its leadership
position, the Company expects in fiscal 1997 to begin shipments of its new high
density power conversion products developed from advanced technology covered by
a recently acquired patent. These new switching power supplies will be less than
one-half the size of existing power supplies providing comparable power.
3
<PAGE>
External power conversion products, in contrast to more widely used internal
devices, are wall plug-in or in-line components located outside the equipment
powered. As such they enable OEMs to reduce product size and thus decrease
weight or incorporate additional features; remove the heat and electromagnetic
interference which threaten the equipment's life and functionality; and minimize
the cost and time associated with safety agency approvals. Having focused almost
exclusively on external power conversion products since 1979, Ault is the only
company based in North America which designs, manufactures and obtains U.S. and
international safety certifications for the full range of external power
conversion products which OEMs choose from when designing new electronic
products. Ault currently offers a line of over 400 product families encompassing
all external product categories: switching power supplies, linear power
supplies, battery chargers and transformers. These products provide power at
virtually all of the output levels which OEMs expect from an external device.
The Company's design and application engineers work closely with customers to
assure that these products are appropriately customized to meet each OEM's
precise power conversion requirements.
Ault's objective is to leverage its domestic leadership position to become
the international leader in the manufacture and sale of custom external power
conversion and related products to OEMs of advanced electronic products. The key
elements of Ault's business strategy designed to enable the Company to achieve
this goal are: (i) focusing on OEMs in large, rapidly growing vertical markets;
(ii) delivering competitive pricing using Pacific Rim as well as domestic
manufacturing venues; (iii) accelerating new product development; (iv) providing
OEMs with comprehensive outsourcing solutions; and (v) expanding initiatives in
international markets.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered hereby................. 1,800,000 shares
3,928,776 shares (1)
Common Stock to be outstanding after the
Offering..................................
Use of proceeds............................. For working capital; repayment of bank debt;
purchase of capital equipment and expansion of
manufacturing capabilities in South Korea,
China and Thailand; and the balance for
general corporate purposes, including possible
acquisitions of complementary businesses or
technologies.
Nasdaq National Market Symbol............... AULT
</TABLE>
- ------------------------
(1) Assumes the sale of 1,800,000 shares of Common Stock offered hereby and
application of the net proceeds therefrom. Assumes no exercise of (i) the
Underwriters' over-allotment option to purchase 270,000 shares of Common
Stock, (ii) the warrant to be issued to the Underwriters upon the completion
of this offering to purchase up to 144,900 shares of Common Stock and (iii)
options to purchase 348,335 shares of Common Stock issuable upon exercise of
outstanding options under the Company's 1986 Stock Plan and Employee Stock
Purchase Savings Plan, which have a weighted average exercise price of $2.39
per share, and an additional 116,865 shares reserved for future issuance
under such Plans. See "Description of Capital Stock" and "Underwriting."
4
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
------------------------------- ------------------------
MAY 29, MAY 28, JUNE 2, AUG. 27, SEPT. 1,
1994 1995 1996(2) 1995 1996(2)(3)
--------- --------- --------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales................................................ $ 17,975 $ 27,054 $ 33,774 $ 6,881 $ 8,678
Cost of goods sold....................................... 14,238 20,727 25,509 5,151 6,546
--------- --------- --------- ----------- -----------
Gross profit............................................. 3,737 6,327 8,265 1,730 2,132
Operating expenses....................................... 4,768 5,570 6,699 1,487 1,662
--------- --------- --------- ----------- -----------
Operating income (loss).................................. (1,031) 757 1,566 243 470
Non-Operating expense, net............................... (289) (424) (658) (181) (169)
--------- --------- --------- ----------- -----------
Income (loss) before income taxes........................ (1,320) 333 908 62 301
Income taxes (1)......................................... -- -- 25 -- 74
--------- --------- --------- ----------- -----------
Net income (loss)........................................ (1,320) 333 883 62 227
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Net income (loss) per share.............................. $ (0.64) $ 0.16 $ 0.40 $ 0.03 $ 0.10
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 2,
1996
----------------- AS OF SEPTEMBER 1, 1996
---------------------------
AS
ACTUAL ADJUSTED(2)(3)
--------- ----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash............................................................ $ 412 $ 336
Working capital................................................. 3,754 4,057
Property plant & equipment, net................................. 2,849 2,795
Total assets.................................................... 18,730 18,508
Notes payable to bank........................................... 5,618 6,520
Long term debt.................................................. 935 883
Stockholders' equity............................................ 5,571 5,865
</TABLE>
- ------------------------
(1) See Note 4 of Notes to Consolidated Financial Statements included elsewhere
in this Prospectus.
(2) On a pro forma basis, as adjusted to give effect to the sale of the number
of shares of Common Stock necessary to retire as of the beginning of the
period the Company's debt under its mortgage and credit facilities (other
than $700,000 of the Korean short term debt), the Company's net income, net
income per common and common equivalent share and weighted average common
and common equivalent shares outstanding would have been $ , $0.
and , respectively, for the year ended June 2, 1996 and $ ,
$0. and respectively, for the three months ended September 1, 1996.
(3) As adjusted to reflect the sale of 1,800,000 shares of Common Stock offered
by the Company hereby and the application of the estimated net proceeds
therefrom. See "Use of Proceeds."
------------------------
Ault was incorporated in Minnesota in 1961. As used herein, "Ault" or the
"Company" refers to Ault Incorporated and its wholly-owned subsidiary, Ault
Korea Corporation ("Ault Korea") located in Suwon City, South Korea. The
Company's executive offices are located at 7300 Boone Avenue North, Minneapolis,
Minnesota 55428-1028 and its telephone number is (612) 493-1900.
5
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE SHARES
OF COMMON STOCK OFFERED BY THIS PROSPECTUS.
THIS PROSPECTUS, INCLUDING THE INFORMATION SET FORTH BELOW AND THE
INFORMATION INCORPORATED INTO THIS PROSPECTUS BY REFERENCE, CONTAINS
FORWARD-LOOKING STATEMENTS CONCERNING POSSIBLE OR ASSUMED FUTURE RESULTS OF
OPERATIONS OR BUSINESS DEVELOPMENTS WHICH ARE TYPICALLY PRECEDED BY THE WORDS
"BELIEVES," "EXPECTS," "ANTICIPATES," "INTENDS" OR SIMILAR EXPRESSIONS. FOR SUCH
FORWARD LOOKING STATEMENTS, THE COMPANY CLAIMS THE PROTECTION OF THE SAFE HARBOR
FOR FORWARD LOOKING STATEMENTS CONTAINED IN THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995. PROSPECTIVE INVESTORS SHOULD UNDERSTAND THAT SUCH
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES WHICH COULD
CAUSE ACTUAL RESULTS TO DIFFER SIGNIFICANTLY FROM THOSE INDICATED IN THE
FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT
LIMITED TO, THE OVERALL LEVEL OF SALES BY OEMS IN THE TELECOMMUNICATIONS, DATA
COMMUNICATIONS, COMPUTER PERIPHERALS AND MEDICAL MARKETS; BUYING PATTERNS OF THE
COMPANY'S EXISTING AND PROSPECTIVE CUSTOMERS; THE IMPACT OF NEW PRODUCTS
INTRODUCED BY COMPETITORS; HIGHER THAN EXPECTED EXPENSE RELATED TO SALES AND NEW
MARKETING INITIATIVES; AVAILABILITY OF ADEQUATE SUPPLIES OF RAW MATERIALS AND
COMPONENTS; AND OTHER RISKS INVOLVING THE COMPANY'S TARGET MARKETS GENERALLY. IN
CONNECTION WITH THE FORWARD-LOOKING STATEMENTS WHICH APPEAR IN THIS PROSPECTUS,
PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY SHOULD CAREFULLY
CONSIDER THE FOLLOWING RISK FACTORS.
COMPETITION. The external power conversion products market is highly
competitive and fragmented. The Company competes with different vendors in each
of its four major product categories. A number of these vendors have
substantially greater financial and other resources than the Company. Some of
these competitors, located in lower labor cost regions of the world, are able to
sell power conversion products at a lower price than the Company, particularly
where the OEM handles the design engineering, shipping, product safety
certifications and other activities associated with production of power
conversion products. While the Company plans to continue to expand its foreign
manufacturing capabilities and manage its costs to remain price competitive,
there can be no assurance that the Company will be able to compete successfully
in the future, particularly where price is perceived as the only difference
among competing products.
Because the power conversion industry is highly fragmented and does not have
significant barriers to entry, opportunities exist for new suppliers, both large
and small, to enter the external power conversion products market. Several large
OEMs have spun off their internal power supply operations as separate businesses
and these operations have periodically competed against the Company in the
external power conversion product market. In addition, the market is served by
many small suppliers, several of which have established leading positions in
certain product areas and/or smaller market segments. While the Company believes
its wide range of products is an advantage in the marketplace, there can be no
assurance that suppliers focusing in a single product area or in smaller market
segments could not erode the Company's market share in that area and have a
material adverse effect on the Company's business.
With the trend toward lower power requirements in 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 an internal power supply in place of the external power conversion products
they currently purchase. If this threat to external power conversion products
materializes, there can be no assurance that the Company will be able to compete
effectively with suppliers of internal power conversion products and this may
adversely affect the Company's financial performance. See "Business--
Competition."
DEPENDENCE ON FOREIGN OPERATIONS. Nearly 80% of the Company's manufacturing
occurs at its facility in South Korea and through manufacturing relationships in
the People's Republic of China ("China") and Thailand. While this Pacific Rim
manufacturing strategy enables the Company to compete worldwide against other
suppliers of external power conversion products, it also involves several risks.
First, while the Company's manufacturing operations in South Korea, China and
Thailand have not been affected by labor
6
<PAGE>
disruptions, civil unrest or political instability, the risk of civil unrest and
political instability is present in each of these countries. Recent and
continuing demonstrations in South Korea concerning unification with North
Korea, as well as renewed incidents between North and South Korea, while not
affecting the Company's current operations, underscore the continued existence
of this risk. Any future civil unrest, labor disruptions, or acts of aggression
could impede the Company's ability to operate in its foreign locations. There
can be no assurance that any of these factors will not have a material adverse
effect on the Company's future business and consequently the Company's operating
results. See "Business--Manufacturing and Sources of Supply." Second, the
Company's foreign operations are subject generally to risks associated with
obtaining government permits and approvals, currency exchange fluctuations,
currency restrictions, trade restrictions, changes in tariff and freight rates,
transportation disruptions and delays, as well as difficulties in staffing and
managing foreign operations.
TECHNOLOGICAL CHANGE AND NEW PRODUCT DEVELOPMENT. The electronic equipment
market is characterized by rapidly changing technology and shorter product life
cycles. The Company's future success will continue to depend upon its ability to
enhance its current products and to develop new products that keep pace with
technological developments and respond to changes in customer requirements. Any
failure by the Company to respond adequately to technological changes and
customer requirements or any significant delay in new product introductions
could have a material adverse effect on the Company's business and results of
operations. In addition, there can be no assurance that new products to be
developed by the Company will achieve market acceptance. See "Business--Business
Strategy" and "Business--Design Engineering and Product Development."
INDUSTRY CYCLICALITY. Historically, the electronics industry has been
affected by general economic and industry-wide downturns which have adversely
affected electronic component manufacturers such as the Company. Although the
industry has experienced rapid growth over the past few years, particularly in
the telecommunications and data communications market segments in which the
Company competes, there can be no assurance that such growth will continue in
the future. During periods of high demand when the Company has attempted to
expand its production capabilities, at times it has incurred additional costs to
hire and train production personnel, obtain raw materials and ship products
rapidly enough to meet customer requirements. Conversely, in periods of lower
demand, the Company has experienced excess production capacity and declines in
gross margin. In recent years, both the Company and its major competitors have
expanded their production capacity and the Company intends to expand its
capacity further in 1997. See "Business--Manufacturing and Sources of Supply."
There is no assurance that market demand will continue to be adequate to absorb
this expanded capacity. The Company's operating results could be adversely
affected during periods when production capacity is underutilized and the
Company is unable to increase sales or product prices to cover fixed costs.
In addition, the life cycle of electronic products and the timing of the
introduction of new products can affect demand for the external power conversion
products supplied by the Company. Delays by Ault's customers in bringing new
products to market, or slower than anticipated acceptance of new products, can
result in interruptions in the timing of the Company's manufacturing and product
shipments which, in turn, could adversely affect operating results. Further, any
reduced demand for electronic equipment, including delays or cancellations by
customers of new product introductions, could have a material adverse affect on
the Company's operations.
FLUCTUATION IN FINANCIAL RESULTS. The Company's financial results are
subject to fluctuation due to various factors, including general business cycles
in the Company's vertical 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. For example, in fiscal
1994 gross profits were adversely affected by the slowdown in the
telecommunications industry after a period of rapid growth, which left the
Company's major telecommunications customers
7
<PAGE>
with excess inventory, resulting in substantially reduced orders for the
Company's products. Price competition in the industries in which the Company
competes is intense, and could result in a decline in gross margin, which in
turn could adversely impact the Company's profitability. In various periods in
the past, the Company's financial results have been affected by all these
factors. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
RELIANCE ON THIRD PARTY DISTRIBUTION. The Company markets and sells its
products primarily through independent manufacturer representatives and
distributors which are not under the direct control of the Company. The Company
employs a limited number of internal sales personnel. While the Company actively
trains and technically assists the individual sales representatives representing
the Company's products, a reduction in the sales efforts by the Company's
current manufacturer representatives and distributors or termination of their
relationships with the Company could adversely affect the Company's sales and
operating results. See "Business--Sales and Distribution."
UNCERTAINTY OF FUTURE ACQUISITIONS. Part of the Company's business strategy
is to identify and acquire compatible technologies, products or businesses and
to utilize these acquisitions to achieve significant growth in sales and
profitability. A portion of the Company's sales growth during fiscal 1997 is
expected to result from the high density power conversion products developed
under a patent acquired in December 1995. The Company is in the process of
obtaining safety agency certifications for these new products. There can be no
assurance that such certifications will be obtained or that the products, once
in the marketplace, will be accepted and result in the sales anticipated by the
Company. See "Business--Design Engineering and Product Development."
Furthermore, there can be no assurance that the Company will be able to locate,
acquire or integrate additional appropriate acquisitions with profitable
results. The completion of future acquisitions requires the expenditure of
sizable amounts of capital and management effort. The Company could be forced to
alter its strategy in the future if suitable acquisition candidates are not
available or are too costly. Moreover, unexpected problems related to the
Company's acquisitions could have a material adverse effect on the Company. See
"Business--Business Strategy."
DEPENDENCE ON OUTSIDE CONTRACTORS. The Company currently depends on third
parties located in foreign countries for a significant portion of the
manufacture and assembly of certain of its products. The Company's reliance on
such outside contractors reduces its control over quality and delivery
schedules. While the Company takes an active role in overseeing quality control
with its third party manufacturers, the failure by one or more of these
subcontractors to deliver quality products or to deliver products in a timely
manner could have a material adverse effect on the Company's operations. In
addition, the Company's third-party manufacturing arrangements are short term in
nature and could be terminated with little or no notice. If this happened, the
Company would be compelled to seek alternative sources to manufacture certain of
its products. There can be no assurance that any such attempts by the Company
would result in suitable arrangements with new third-party manufacturers. See
"Manufacturing and Sources of Supply."
DEPENDENCE ON KEY PERSONNEL; MANAGEMENT OF GROWTH. The Company's success
depends in part upon the continued services of many of its highly skilled
personnel involved in management, engineering and sales, and upon its ability to
attract and retain additional highly qualified employees. The loss of service of
any of these key personnel could have a material adverse effect on the Company.
The Company does not have key-person life insurance on any of its employees. In
addition, the Company's future success will depend on the ability of its
officers and key employees to manage growth successfully and to attract, retain,
motivate and effectively utilize the team approach to manage its employees. If
the Company's management is unable to manage growth effectively, the Company's
business and results of operations could be adversely affected. See
"Management."
INVENTORY OBSOLESCENCE. To satisfy customer demand and to obtain greater
purchasing discounts, the Company expects to carry increased inventory levels of
certain products. During fiscal 1994, the Company's financial results were
adversely affected when its inventory of certain raw materials exceeded the
demand
8
<PAGE>
for the products using those raw materials. The Company attempts to anticipate
and react to new product introductions and to mitigate its exposure to losses
from inventory obsolescence. In the past the Company's gross margin has been
adversely affected by periodic significant 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 the Company's financial results. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business--Sales
and Distribution."
LIMITED PATENT PROTECTION. No assurances can be given that the scope of any
patent protection will prevent competitors, many of which may have financial and
other resources substantially greater than the Company's, from introducing
competing products. The Company does not have patent protection outside of the
U.S. for any of its patented technology. For that reason there can be no
assurance that foreign competitors will not use such technology in products
built and sold outside the U.S. In addition, there can be no assurance that the
Company's patent will be held valid if subsequently challenged; that others will
not claim rights in an ownership of the patent and other proprietary rights held
by the Company; or that the Company's product and processes will not infringe,
or be alleged to infringe, on the proprietary rights of others. Similarly, no
assurances can be given that others will not independently develop or otherwise
acquire substantially equivalent techniques, reverse engineer or gain access to
the Company's proprietary or patented technology. See "Business--Patents."
POSSIBLE VOLATILITY OF STOCK PRICE. The Company's Common Stock recently
began trading on the Nasdaq National Market. The Company believes that factors
such as the announcement of new products by the Company or its competitors,
general market conditions in the telecommunications/data communications industry
and quarterly fluctuations in financial results could cause the market price of
the Common Stock to vary substantially. Historically, the market for the
Company's stock has experienced significant periods of relatively low daily
trading volumes resulting in increased volatility of the stock price. In recent
years, the stock market has experienced price and volume fluctuations which have
particularly affected the market prices of many high technology companies and
which often have been unrelated to the operating performance of such companies.
Such market volatility has impacted the market for the Company's Common Stock
and, in the future, may adversely affect its market price. See "Price Range of
Common Stock."
ANTI-TAKEOVER CONSIDERATIONS. Certain anti-takeover provisions of the
Minnesota Business Corporation Act and the ability of the Board of Directors to
issue preferred stock without stockholder approval under the Company's Rights
Plan may have the effect of delaying or preventing a change in control or merger
of the Company. These provisions could delay, discourage, hinder or preclude an
unsolicited acquisition of the Company, could make it less likely that
stockholders receive a premium for their shares as a result of any such attempt
and could adversely affect the market price of the Common Stock. See
"Description of Capital Stock."
9
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
hereby are estimated to be $ ($ if the Underwriters'
over-allotment option is exercised in full), after deducting the underwriting
discounts and commissions and estimated offering expenses. The Company intends
to use approximately $ of the net proceeds from this offering to repay
funds advanced by its U.S. bank under a revolving note which bears interest at
an average of .75% above the bank's base rate. The Company will invest
approximately $2,500,000 of the net proceeds from this offering in Ault Korea to
be used to upgrade manufacturing and management information systems
capabilities, to acquire and equip a facility in China, to repay its mortgage
debt and to reduce, by approximately $500,000, its short term debt. The Company
also intends to use approximately $1,500,000 of the net proceeds from this
offering to expand its manufacturing capabilities in Thailand by investing in
production facilities and related capital equipment. The balance of the proceeds
from this offering will be used for general corporate purposes, including
working capital. A portion of the net proceeds may be used to acquire
complementary businesses, products or technologies, although the Company has no
agreements and is not involved in any negotiations with respect to any such
transactions. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources,"
"Business--Manufacturing and Sources of Supply" and "Business--Facilities."
Pending such uses, the Company plans to invest the net proceeds from this
offering herein in short-term, investment-grade, interest-bearing securities.
10
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "AULT." Prior to October 30, 1996, the Company's Common Stock was traded
on the Nasdaq National SmallCap Market. The following table sets forth the range
of high and low closing sale prices of the Common Stock on the Nasdaq National
Market or Nasdaq SmallCap Market, as the case may be, for each quarter since the
beginning of fiscal 1995. These prices represent prices between dealers and do
not include retail mark-ups, markdowns or commissions and may not represent
actual transactions.
<TABLE>
<CAPTION>
LOW HIGH
--------- ---------
<S> <C> <C>
FISCAL YEAR ENDED MAY 28, 1995:
First Quarter.................................................................... $ 1.125 $ 1.50
Second Quarter................................................................... 1.125 2.125
Third Quarter.................................................................... 1.625 2.313
Fourth Quarter................................................................... 1.75 3.125
FISCAL YEAR ENDED JUNE 2, 1996:
First Quarter.................................................................... $ 1.125 $ 2.875
Second Quarter................................................................... 1.125 3.875
Third Quarter.................................................................... 3.375 5.00
Fourth Quarter................................................................... 4.50 16.50
FISCAL YEAR ENDING JUNE 1, 1997:
First Quarter.................................................................... $ 6.375 $ 15.125
Second Quarter (through October 31, 1996)........................................ 8.25 11.25
</TABLE>
On October 31, 1996, the last sale price of the Common Stock on the Nasdaq
National Market was $8.75. The Company estimates there are approximately 1,200
beneficial holders of the Company's Common Stock.
DIVIDEND POLICY
The Company has never paid or declared any cash dividends on its Common
Stock and does not intend to pay cash dividends on its Common Stock in the
foreseeable future. The Company presently expects to retain its earnings to
finance the development and expansion of its business. The payment by the
Company of cash dividends, if any, on its Common Stock in the future is subject
to restrictions under the Company's existing line of credit and is also subject
to the discretion of the Board of Directors and will depend on the Company's
earnings, financial condition, capital requirements and other relevant factors.
See "Description of Capital Stock."
11
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 1, 1996 and as adjusted to reflect the receipt of the net proceeds
from the sale of 1,800,000 shares of Common Stock pursuant to this offering.
<TABLE>
<CAPTION>
SEPTEMBER 1, 1996
--------------------------
AS
ACTUAL(1) ADJUSTED(2)
----------- -------------
(IN THOUSANDS)
<S> <C> <C>
Notes payable to bank......................................................... $ 6,520 $
-----------
-----------
Current maturities of long term debt.......................................... 387
-----------
-----------
Long term debt, excluding current maturities.................................. 883
Stockholders' equity (1)
Preferred Stock: no par value, 1,000,000 shares authorized, no shares
issued, and no shares as adjusted (3)..................................... --
Common Stock: no par value, 5,000,000 shares authorized, 2,128,776 shares
issued and outstanding, and 3,928,776 shares as adjusted.................. 6,986
Foreign currency translation adjustment....................................... (37)
Accumulated deficit........................................................... (1,084)
-----------
Total stockholders' equity.................................................. 5,865
----------- ------
Total capitalization...................................................... $ 6,748 $
----------- ------
----------- ------
</TABLE>
- ------------------------
(1) See the financial statements of the Company and related notes included
elsewhere in this Prospectus.
(2) Assumes the sale of 1,800,000 shares of Common Stock offered hereby and
application of the net proceeds therefrom. Assumes no exercise of (i) the
Underwriters' over-allotment option to purchase 270,000 shares of Common
Stock, (ii) the warrant to be issued to the Underwriters upon the completion
of this offering to purchase up to 144,900 shares of Common Stock and (iii)
options to purchase 348,335 shares of Common Stock issuable upon exercise of
outstanding options under the Company's 1986 Stock Plan and Employee Stock
Purchase Savings Plan, which have a weighted average exercise price of $2.39
per share, and an additional 116,865 shares reserved for future issuance
under such Plans. See "Description of Capital Stock" and "Underwriting."
(3) See "Description of Capital Stock" for a description of the terms of the
preferred stock.
12
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company as of and
for the five years ended June 2, 1996 is derived from the consolidated financial
statements that have been audited by McGladrey & Pullen, LLP, independent
accountants. The Company's consolidated financial statements for the three month
periods ended August 27, 1995 and September 1, 1996 are unaudited; however, in
the opinion of the Company all adjustments, consisting of normal recurring
accruals necessary for a fair presentation, have been made. Interim results are
subject to significant seasonable variations and may not be indicative of the
results of operations to be expected for a full fiscal year. The data should be
read in conjunction with the Company's consolidated financial statements and the
notes thereto included elsewhere in this Prospectus and Management's Discussion
and Analysis of Results of Operations and Financial Condition which follows.
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED ENDED
----------------------------------------------------- ----------------------
MAY 31, MAY 30, MAY 29, MAY 28, JUNE 2, AUG. 27, SEPT. 1,
1992 1993 1994 1995 1996(2) 1995 1996(2)
--------- --------- --------- --------- --------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales.................................. $ 23,311 $ 21,198 $ 17,975 $ 27,054 $ 33,774 $ 6,881 $ 8,678
Cost of goods sold......................... 17,267 15,947 14,238 20,727 25,509 5,151 6,546
--------- --------- --------- --------- --------- --------- -----------
Gross profit............................... 6,044 5,251 3,737 6,327 8,265 1,730 2,132
Operating expenses
Marketing.................................. 2,154 2,164 1,878 2,346 2,633 626 706
Design engineering......................... 1,050 1,158 934 1,269 1,575 338 369
General and administrative................. 1,961 1,946 1,956 1,955 2,491 523 587
--------- --------- --------- --------- --------- --------- -----------
Total expenses............................. 5,165 5,268 4,768 5,570 6,699 1,487 1,662
--------- --------- --------- --------- --------- --------- -----------
Operating income (loss).................... 879 (17) (1,031) 757 1,566 243 470
Non-operating income (expense), net........ (233) (214) (289) (424) (658) (181) (169)
--------- --------- --------- --------- --------- --------- -----------
Income (loss) before income taxes.......... 646 (231) (1,320) 333 908 62 301
Income taxes (1)........................... -- -- -- -- 25 -- 74
--------- --------- --------- --------- --------- --------- -----------
Net income (loss).......................... $ 646 $ (231) $ (1,320) $ 333 $ 883 $ 62 $ 227
--------- --------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- --------- -----------
Net income (loss) per share................ $ 0.31 $ (0.11) $ (0.64) $ 0.16 $ 0.40 $ 0.03 $ 0.10
--------- --------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- --------- -----------
Weighted average number of shares and
common equivalent shares outstanding..... 2,093 2,060 2,063 2,106 2,224 2,160 2,384
--------- --------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- --------- -----------
</TABLE>
<TABLE>
<CAPTION>
MAY 31, MAY 30, MAY 29, MAY 28, JUNE 2, SEPT. 1,
1992 1993 1994 1995 1996 1996
--------- --------- --------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash..................................... $ 309 $ 78 $ 133 $ 319 $ 412 $ 336
Working capital.......................... 3,896 3,831 2,703 2,942 3,754 4,057
Property, plant & equipment, net......... 2,071 2,082 1,725 3,002 2,849 2,795
Total assets............................. 11,074 10,109 10,667 15,429 18,730 18,508
Notes payable to bank.................... 1,219 931 1,980 3,570 5,618 6,520
Long-term debt........................... 166 354 233 1,221 935 883
Stockholders' equity..................... 5,686 5,439 4,069 4,484 5,571 5,865
</TABLE>
- --------------------------
(1) See Note 4 of Notes to Consolidated Financial Statements included elsewhere
in this Prospectus.
(2) On a pro forma basis, as adjusted to give effect to the sale of the number
of shares of Common Stock necessary to retire as of the beginning of the
period the Company's debt under its mortgage and credit facilities (other
than $700,000 of the Korean short term debt), the Company's net income, net
income per common and common equivalent shares and weighted average common
and common equivalent shares outstanding would have been $ , $0. ,
and , respectively for the year ended June 2, 1996 and $ ,
$0. , and , respectively for the three months ended September 1,
1996.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements of the Company, including the related notes thereto,
appearing elsewhere in this Prospectus.
OVERVIEW
Ault Incorporated is the largest independent manufacturer of external power
conversion products based in North America. The Company's products are sold to
OEMs of electronic equipment primarily for non-consumer applications in the
telecommunications, data communications, computer peripherals and medical
markets. The Company's power supply and transformer products provide current at
the level appropriate for various types of electronic equipment. The Company's
battery charger products recharge equipment batteries and/or provide a standby
source of power. Applications for the Company's products include modems,
business telephones, residential telephones with advanced features,
point-of-sale terminals, industrial measuring and marking equipment, computers
and computer peripherals, and various types of medical diagnostic and display
equipment.
In 1979 the Company pioneered the development of external power conversion
products and began marketing them to OEMs of electronic equipment as a means of
removing heat and electromagnetic interference from sensitive electrical
equipment, as well as a means of facilitating more rapid introductions of new
electronic equipment by OEMs. Market acceptance of external power conversion
products increased during the 1980s and throughout this period the Company's
reputation for high quality design engineering services and leadership in power
conversion technology grew. As the market for external power conversion products
expanded, however, a significant share of the market was captured by offshore
competitors which could offer more favorable pricing for high volume orders.
Lacking the manufacturing resources to compete on the basis of price for such
high volume orders, the Company experienced periods of inconsistent performance.
In 1987, the Company established Ault Korea Corporation, a wholly owned
South Korean subsidiary ("Ault Korea"), primarily to strengthen the Company's
ability to compete for high volume, price sensitive orders. In early 1994 Ault
took several steps to further strengthen its competitive position. First, the
Company established subcontract arrangements in China and Thailand to
manufacture low cost products in high volumes. Second, the Company adopted a
strategy to introduce an increasing number of new products on a regular basis in
response to the demands of OEMs in its target markets. Finally, the Company
reorganized its personnel into four autonomous teams which were assigned to
customers located in specific geographic regions. Guided by common corporate
values, these teams are charged with responsibility for all aspects of the
customer relationship including sales, design engineering, manufacturing and
other support functions, with a view to achieving continuous improvements in
customer service.
The following is a discussion of certain Company operations and practices
which facilitate an understanding of the Company's financial statements.
DISTRIBUTION. The Company markets its products through a nationwide network
of 20 manufacturer representatives and six national distributor organizations.
The Company markets its products in Europe through a number of distributors and
currently markets its products in the Far East through its subsidiary Ault
Korea. A commission is paid to the Company's manufacturer representatives on
approximately 90% of the Company's sales. These commissions represent an average
of 4.4% of all orders placed through such representatives. Sales through the
Company's distributors are at a discount to the Company's list price for the
product.
14
<PAGE>
ORDERS AND SALES. Orders for standard products are processed by the
Company's customer service employees. Orders for products that require design
engineering are developed by the Company's application engineers, who work with
the Company's design engineers and the customer to develop precisely the power
conversion product required. This team endeavors to maintain a collaborative
relationship with the customer to assure ongoing communications and reliable
delivery of products and services. When a written order is confirmed by the
Company, the Company recognizes the order in its bookings. Contracts for larger
orders generally include provisions for scheduling of shipments over specified
time periods. Sales are recognized by the Company when products are shipped to
the customer. Unshipped bookings are referred to by the Company as order
backlog.
PRICING. Pricing of standard products is determined using established
pricing guidelines. In the case of customized products (products that require
complete or significant new engineering tailored to the customer's specific
needs), the price quoted to the customer is based on a negotiated bidding
process. Custom products accounted for approximately 70% of the Company's net
sales in fiscal 1996. In collaboration with its manufacturer representatives the
Company is able to determine price quotations consistent with margin guidelines.
Such quotations generally include additional amounts for agency certifications
and tooling costs and frequently include additional amounts for non-recurring
engineering.
GROSS PROFIT. The margins which the Company obtains on sales of its
products are determined by a number of factors. Margins are generally lower when
products are readily available from other suppliers (typically transformers) and
usually higher if the product requires specialized design engineering or
technology which is not generally available or is available only from the
Company (typically switching power supplies and battery chargers). Margins are
also impacted by the operating leverage gained from increasing sales volumes. As
the level of sales increases, certain fixed costs are spread over greater
revenue, resulting in higher margins. The Company's strategy is to sell an
increasing percentage of its higher margin switching power supplies and battery
chargers and to rapidly introduce a wide range of high density switching power
supplies. See "Business--Products--Power Supplies." In addition, the Company
expects through increased revenues to better utilize its manufacturing capacity
to achieve better margins. Using a portion of the proceeds from this offering to
expand its manufacturing capabilities in Thailand and China, the Company expects
to significantly increase its available off-shore manufacturing capacity.
MANUFACTURING SOURCE DECISIONS. The decision as to whether products are
manufactured in the United States, South Korea, China or Thailand is dependent
upon the quantity required by the customer, the customer's delivery needs, the
complexity of features and the Company's target margin. Low volume orders
requiring immediate delivery, certain more complex products and product
samples--all of which provide acceptable margins--are generally built in
Minneapolis. As the unit volume of products ordered increases, the pricing
generally becomes more competitive, requiring the use of offshore manufacturing
venues. If delivery time for such larger orders is relatively short, products
are quoted for South Korean manufacturing. Where quantities exceed 5,000 units
and orders permit longer delivery times, such products are generally built in
China or Thailand to achieve improved margins from lower manufacturing costs.
PRODUCT MIX. The mix of products sold impacts both revenue and gross profit
margin. Power supplies and battery chargers generally provide greater margins as
compared to transformers. Gross profit is therefore larger when the mix of sales
is comprised of a greater percentage of power supplies and battery chargers, and
smaller when the percentage of transformer sales to total sales increases.
15
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain financial
data as a percentage of net sales:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
------------------------------------- -----------------------
MAY 29, MAY 28, JUNE 2, AUG. 27, SEPT. 1,
1994 1995 1996 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold................................ 79.2 76.6 75.5 74.9 75.4
--------- --------- --------- --------- ---------
Gross profit...................................... 20.8 23.4 24.5 25.1 24.6
Operating expense................................. 26.5 20.6 19.9 21.6 19.2
--------- --------- --------- --------- ---------
Operating income (loss)........................... (5.7) 2.8 4.6 3.5 5.4
Non-operating expense, net........................ (1.6) (1.6) (1.9) (2.6) (1.9)
--------- --------- --------- --------- ---------
Income (loss) before income taxes................. (7.3) 1.2 2.7 0.9 3.5
Income taxes...................................... -- -- 0.1 -- 0.9
--------- --------- --------- --------- ---------
Net income (loss)................................. (7.3)% 1.2% 2.6% 0.9% 2.6%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
QUARTERS ENDED SEPTEMBER 1, 1996 AND AUGUST 27,1995
NET SALES. Net sales increased 26.1% in the first quarter of fiscal 1997 to
$8,678,000 from $6,881,000 in the first quarter of fiscal 1996. This increase
reflects continued strength in the telecommunications and data communications
market segments, as well as the success of the Company's strategy to partner
with key OEM customers by providing design engineering and other services in the
development of new products. The increase also reflects significant shipments to
new customers, some of which are OEMs which previously had made only modest
purchases from the Company. Products introduced within the last two years
represented 37% of total sales for the quarter. Order backlog at September 1,
1996 was $15.6 million as compared to order backlog of $10.3 million at August
27, 1995.
GROSS PROFIT. Gross profit increased 23.3% in the first quarter of fiscal
1997 to $2,132,000 as compared to $1,730,000 for the same period in fiscal 1996.
As a percentage of net sales, gross profit declined from 25.1% in the first
quarter of fiscal 1996 to 24.6% in the first quarter of fiscal 1997. Gross
profit was adversely impacted in the first quarter of fiscal 1997 because sales
during the quarter included certain products for specific customer orders
manufactured in South Korea which had unfavorable variances in component costs
and production inefficiencies.
OPERATING EXPENSES. Operating expenses increased 11.8% in the first quarter
of fiscal 1997 to $1,662,000 as compared to $1,487,000 in the first quarter of
fiscal 1996. Of the $175,000 increase, approximately $70,000 was due to
increased commissions paid on increased sales. As a percentage of net sales,
operating expenses decreased from 21.6% of net sales in the first quarter of
fiscal 1996 to 19.2% in the first quarter of fiscal 1997 because the Company was
able to support higher sales during the fiscal 1997 quarter at essentially the
same level of general and administrative expense.
NON-OPERATING EXPENSES, NET. Non-operating expenses, net declined 6.8% to
$169,000 in the first quarter of fiscal 1997 as compared to $181,000 in the
first quarter of fiscal 1996, representing in each quarter primarily interest
expense incurred under the Company's lines of credit and the indebtedness
incurred to purchase Ault Korea's manufacturing facility in May 1995. In spite
of greater average borrowings under the Company's primary line of credit during
the first quarter of fiscal 1997, interest expense remained relatively constant
because of a reduction in the interest rate from 4% over the bank's base rate
applicable to the first quarter of fiscal 1996 to approximately 2.3% over the
bank's base rate applicable to the first quarter of 1997.
16
<PAGE>
INCOME TAXES. Although the Company has net operating loss carryforwards and
business credits, it established a $74,000 provision for U.S. income taxes for
the first quarter of fiscal 1997 due to the anticipated application of the
alternative minimum tax. There was no tax provision for the first quarter of
fiscal 1996 due to utilization of net operating loss carry forwards.
NET INCOME. Net income increased 264.2% in the first quarter of fiscal 1997
to $227,000 as compared to $62,000 in the first quarter of fiscal 1996. The
increase in net income is principally due to higher gross profit, but also
reflects the containment of operating expenses.
FISCAL 1996 COMPARED TO FISCAL 1995
NET SALES. Net sales increased 24.8% in fiscal 1996 to $33.8 million as
compared to $27.1 million in fiscal 1995. This increase reflects both higher
sales to OEMs in the telecommunications and data communications market segments,
as well as the Company's ability to use its multiple manufacturing sources in
the Pacific Rim. These factors, together with customer focused design
engineering and other customer services delivered through the Company's
team-based structure, led to greater bookings. Sales of switching power
supplies, the fastest growing segment of the Company's business, increased to
37.1% of total net sales from 28.0% in fiscal 1995. Approximately 30.2% of total
sales in fiscal 1996 came from products that were introduced less than two years
prior, and from a growing list of customers, some of which placed significant
orders for the first time. The Company introduced 15 new product families in
fiscal 1996, compared to 11 in fiscal 1995.
GROSS PROFIT. Gross margin increased 30.6% in fiscal 1996 to $8.3 million
as compared to $6.3 million in fiscal 1995. Gross margin increased from 23.4% in
fiscal 1995 to 24.5% in fiscal 1996, benefitting from the higher net sales
compared to slower growth in fixed costs. Fiscal 1995 cost of sales contained
increased freight costs incurred to expedite the Company's receipt of material
from vendors so that products could be delivered to customers on time, as well
as increased material prices. These expenses were not reflected in price
increases and therefore had an adverse impact on gross profit in fiscal 1995.
OPERATING EXPENSES. Operating expenses increased 20.3% in fiscal 1996 to
$6,699,000 as compared to $5,570,000 in fiscal 1995. As a percentage of net
sales, operating expenses declined from 20.6% in fiscal 1995 to 19.9% in fiscal
1996. The $1,129,000 in fiscal 1996 included approximately $336,000 in increased
commissions paid to manufacturer representatives on the higher sales volume. Of
the balance of $793,000, the principal additional expenses were approximately
$81,000 paid for product certifications; $95,000 expended to prepare Ault Korea
for local and regional sales and marketing; and an increase of $75,000, which
represented one additional week of bonus (one week of bonus was paid in 1995),
paid to the Company's employees for achievement of its income goal for 1996.
Additionally, approximately $80,000 was incurred for increased supervision of
subcontract manufacturers in China and Thailand.
NON-OPERATING EXPENSES, NET. Non-operating expenses, net increased 55.4% in
fiscal 1996 to $658,000 as compared to $424,000 for fiscal 1995. For both
periods, the principal nonoperating expense was interest expense incurred under
the Company's lines of credit. In addition, in late fiscal 1995 the Company
acquired its South Korean manufacturing facility, which it had previously
leased, incurring mortgage indebtedness of approximately $1,550,000. Because the
South Korean facility was purchased late in the fourth quarter of fiscal 1995,
only minimal interest expense related to the facility was incurred for that
fiscal year; in contrast, interest expense related to the facility in fiscal
1996 was approximately $100,000. The additional interest expense of
approximately $196,000 paid in fiscal 1996 resulted primarily from higher bank
borrowings to support increases in inventory and receivables which were
commensurate with increased sales in fiscal 1996. The largest item offsetting
interest expense in the two periods was currency gains related to Ault Korea's
importation of raw materials.
INCOME TAXES. In fiscal 1996, the Company utilized available net operating
loss carryforwards to offset U.S. income taxes otherwise payable, but incurred a
$25,000 liability arising from application of the
17
<PAGE>
alternative minimum tax. The Company incurred no U.S. income taxes in fiscal
1995 due to the utilization of net operating loss carryforwards. At the end of
fiscal 1996, the Company had available tax credits amounting to $633,000 for use
against future U.S. income taxes, and net operating loss carryforwards of
$190,000 and $426,000 in the U.S. and South Korea, respectively, for use against
taxable income. See Note 4, Income Taxes, under NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS.
NET INCOME. Net income increased 164.9% in fiscal 1996 to $883,000 as
compared to $333,000 in fiscal 1995. The increase in net income was due
primarily to greater gross profit which more than offset increased operating
expense and increased interest expense, both of which were required to support
higher levels of sales.
FISCAL 1995 COMPARED TO FISCAL 1994
NET SALES. Net sales increased 50.5% in fiscal 1995 to $27.1 million as
compared to $18.0 million in fiscal 1994. The increase in sales is due to
several factors. First, in fiscal 1995 two of the Company's primary markets,
data communications and telecommunications, recovered from slower growth
experienced during the preceding two fiscal years. Second, reflecting the
success of the Company's increased emphasis on new product development,
approximately 38% of revenues in fiscal 1995 were derived from new product
introductions during the preceding two years. Third, the Company's transition to
team based, customer focused services contributed to an increase in new orders.
Sales of switching power supplies, the fastest growing segment of the Company's
business, increased to 28% of total sales from 18% in fiscal 1994. The Company
introduced 11 new product families in fiscal 1995, as compared to five new
product families in fiscal 1994.
GROSS PROFIT. Gross profit increased 69.3% in fiscal 1995 to $6.3 million
as compared to $3.7 million in fiscal 1994. As a percentage of net sales, gross
profit increased from 20.8% in fiscal 1994 to 23.4% in fiscal 1995. Gross profit
for fiscal 1995 benefited from the higher net sales supported by only minimal
changes in the Company's fixed costs, but were adversely affected by freight
costs incurred to expedite material from slow delivering vendors so that
products would be delivered on time to the Company's customers. Fiscal 1994
gross profits were adversely affected by sales of products at lower than desired
margins as a result of intense price competition and the Company's inability to
maintain adequate margins with its then existing manufacturing sources. In
addition, the Company wrote off $393,000 of raw material that was determined to
be in excess of near term needs. Of this amount, $253,000 was related to Ault
Korea and $140,000 was related to the Minneapolis facility.
OPERATING EXPENSES. Operating expenses increased 16.8% in fiscal 1995 to
$5,570,000 as compared to $4,768,000 in fiscal 1994. As a percentage of net
sales, operating expenses declined from 26.5% of net sales in fiscal 1994 to
20.6% of net sales in 1995. Approximately 57% of this increase was due to
commissions paid to manufacturer representatives. Of the $348,000 balance,
$71,000 was expended for product certifications and $100,000 to increase design
engineering resources at Ault Korea's facility to support increased
manufacturing as well as the Company's strategy to penetrate that regional power
conversion market.
NON-OPERATING EXPENSES, NET. Non-operating expenses, net increased 46.8% in
fiscal 1995 to $424,000 as compared to $289,000 in fiscal 1994. The additional
interest paid in fiscal 1995 was due to increased bank borrowings at higher
rates of interest to provide working capital required to support the growth in
net sales. The largest item offsetting interest expense in fiscal 1995 was a
currency gain on importation of raw material by Ault Korea.
INCOME TAXES. The Company incurred no income taxes in fiscal 1995 because
of the utilization of net operating loss carryforwards. The Company incurred no
income taxes in fiscal 1994 due to a net loss incurred by consolidated
operations.
18
<PAGE>
NET INCOME. The Company reported net income of $333,000 in fiscal 1995, as
compared to a net loss of $1,320,000 in fiscal 1994, due primarily to a higher
level of sales at greater gross margins as well as containment of general and
administrative expenses.
QUARTERLY RESULTS AND SEASONALITY
The following table sets forth certain unaudited quarterly financial data
for each of the Company's last nine quarters. The information has been derived
from unaudited financial statements which in the opinion of management reflect
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of such quarterly information. The operating results for any
quarter do not necessarily indicate the results to be expected for any future
period.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------------
AUG. 28, NOV. 27, FEB. 26, MAY 28, AUG. 27, NOV. 26, FEB. 25, JUNE 2, SEPT. 1,
1994 1994 1995 1995 1995 1995 1996 1996 1996
-------- -------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.......................... $ 5,711 $ 5,899 $ 7,217 $ 8,227 $ 6,881 $ 7,711 $ 8,972 $ 10,210 $ 8,678
Cost of goods sold................. 4,288 4,495 5,607 6,337 5,151 5,872 6,913 7,573 6,546
-------- -------- -------- -------- -------- -------- -------- -------- --------
Gross profit....................... 1,423 1,404 1,610 1,890 1,730 1,839 2,059 2,637 2,132
Operating expenses................. 1,287 1,229 1,414 1,641 1,487 1,508 1,644 2,060 1,662
-------- -------- -------- -------- -------- -------- -------- -------- --------
Operating income................... 137 175 196 249 243 331 415 577 470
Non-operating expense, net......... 93 95 113 123 181 131 145 201 169
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes......... 44 80 83 126 62 200 270 376 301
Income taxes....................... -- -- -- -- -- -- -- 25 74
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net income......................... $ 44 $ 80 $ 83 $ 126 $ 62 $ 200 $ 270 $ 351 $ 227
-------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
As indicated by the foregoing chart, since the beginning of fiscal 1995 net
sales of the Company have reflected a certain degree of seasonality. The
Company's first fiscal quarter falls during the summer months and during the
first quarter of fiscal 1995 and fiscal 1996, the Company recorded the lowest
level of sales in those quarters followed by increased sales in successive
quarters. The Company attributes this seasonality to the buying patterns of its
customers, the timing of industry trade shows where new products are introduced
and other factors. The Company believes similar seasonal trends will be
experienced in future years.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of working capital have been its credit
facility with a U.S. bank and cash flows from operations. Over the past two
years, reflecting improving market conditions and favorable results from the
Company's competitive sales and new product development strategies, net sales
grew at an annual rate of 37.1%, creating increased need for working capital.
The Company has relied more heavily on its credit facility as a source of cash
as growth in trade receivables and inventories of finished product have
increased the use of operating cash flows. This growth in finished goods
inventory reflects increasing demands by customers for the Company to maintain
higher levels of dedicated inventories to support the customers' flexible
delivery needs. These inventories are carried under agreements that do not
expose the Company to any material additional financial exposure. It is
anticipated that the Company will continue to provide this accommodation in
response to competitive pressures.
CREDIT FACILITY. The Company maintains two credit facilities: its primary
credit facility with a U.S. bank, First Bank Minneapolis, N.A., and a credit
facility with a South Korean bank, Korea Exchange Bank.
The U.S. credit facility totals $6.0 million and is collateralized by
security interest in all of the Company's U.S. assets. Borrowing is indexed to a
certain percentage of trade receivables and other assets.
19
<PAGE>
At September 1, 1996, borrowings against the U.S. credit facility amounted to
$5.3 million at an average of 2.33% above the bank's base rate. Since September
1, 1996, the interest rate has been reduced to .75% above the bank's base rate.
In addition, at September 1, 1996, $400,000 of the credit facility was allocated
to support a standby letter of credit provided to the Korea Exchange Bank as
collateral for its credit facility for Ault Korea.
The South Korean bank credit facility amounts to $1.5 million extended to
Ault Korea to cover bank overdrafts, short term financing, and export financing.
Borrowings by the subsidiary at September 1, 1996 amounted to $1.2 million at a
9.0% rate of interest. The Company intends to invest some of the proceeds from
this offering in Ault Korea including approximately $500,000 to reduce this
indebtedness.
CASH FLOWS
Net cash used by operations in the first fiscal quarter of 1997 was
$952,000. Sources of cash consisted primarily of net income of $227,000,
depreciation of $113,000 and a decrease of $491,000 in trade receivables,
largely due to collections of receivables generated by seasonally strong
increases in sales during the previous quarter. Uses of cash consisted primarily
of an increase in inventory $416,000 due to just-in-time stocking programs with
OEMs and $1,424,000 of reductions in trade payables.
Net cash used in investing activities in the first fiscal quarter of 1997
was $41,000, related primarily to purchase of new equipment. Net cash provided
by financing activities was $869,000, consisting of increased borrowing under
the Company's lines of credit to provide additional working capital.
Net cash used by operations in the first fiscal quarter of 1996 was $47,000.
Sources of cash consisted primarily of net income of $62,000, depreciation of
$129,000 and a decrease of $474,000 in trade receivables largely due to
collections of receivables generated by seasonally strong increases in sales
during the previous quarter. Uses of cash consisted primarily of a reduction in
trade payables totaling $728,000, resulting from lower levels of material
purchases and other liabilities necessary to support the level of sales during
the period as compared to the previous quarter.
Net cash used in investing activities in the first fiscal quarter of 1996
was $29,000, related primarily to the purchase of capital equipment. Net cash
from financing activities of less than $1,000 was comprised of borrowings under
the Company's lines of credit, and payments of long term debt and lease
obligations.
Net cash used by operations during fiscal 1996 was $1,378,000. Sources of
cash consisted of net income of $883,000 and depreciation of $509,000.
Additionally, accounts payable and accrued expenses increased $632,000, largely
in support of higher net sales levels for the year. Uses of cash consisted
primarily of increases in trade receivables and inventories amounting to
$2,106,000 and $1,243,000, respectively, in support of higher levels of net
sales for the year.
Net cash used in investing activities in fiscal 1996 was $515,000, related
primarily to the purchase of capital equipment and the purchase of a patent for
$159,000 in December 1995. Net cash provided by financing activities was
$1,959,000 consisting largely of borrowing under the Company's line of credit
totaling $2,048,000, offset in part by $267,000 in principal payments on long
term obligations.
Net cash used by operations during fiscal 1995 was $935,000. Sources
providing cash consisted of net income of $333,000 and a noncash depreciation
adjustment of $528,000. Additionally, increases in accounts payable and accrued
expenses totaled $1,412,000, largely in support of higher net sales as compared
to the previous fiscal period. Uses of cash consisted primarily of an increase
in trade receivables of $1,653,000 resulting from higher levels of net sales and
inventories of $1,124,000 to support just-in-time stocking programs initiated by
several of the Company's largest OEM customers.
Net cash used in investing activities in fiscal 1995 was $1,680,000,
consisting almost entirely of the purchase of the land and building serving as
the manufacturing facility for Ault Korea. Net cash provided by financing
activities was $2,754,000, consisting of increased borrowing totaling $1,590,000
under the
20
<PAGE>
Company's line of credit to support working capital requirements and a mortgage
incurred on the South Korean facility totaling $1,517,000 offset in part by
$387,000 in principal payments on long term obligations.
Net cash used by operations during fiscal 1994 was $721,000. Sources
providing cash included depreciation totaling $482,000, increases in accounts
payable and accrued expense of $987,000 and a provision for inventory allowances
of $307,000 for excess raw materials. Uses of cash consisted of a net loss of
$1,320,000, resulting from lower sales during the period as compared to the
previous year, and overall operating expense levels that were higher than needed
to support the decline in sales. Additional uses of cash included an increase in
trade receivables and inventories totaling $1,393,000, reflecting a significant
increase in net sales during the fourth quarter.
Net cash used in investing activities in fiscal 1994 was $91,000, resulting
from the purchase of capital equipment. Net cash provided by financing
activities was $918,000, consisting of borrowings under the Company's line of
credit totaling $1,049,000, offset by principal payments on long term
obligations of $131,000.
IMPACT OF RECENT ACCOUNTING STANDARD CHANGES
In October, 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard ("SFAS") No. 123, Accounting for Stock-Based
Compensation, which establishes a fair-value-based method for financial
accounting and reporting for stock-based employee compensation plans. The new
standard, however, allows compensation to continue to be measured using the
intrinsic value-based method of accounting prescribed by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, but requires
expanded disclosures. SFAS No. 123 is effective in fiscal year 1997. The Company
has elected to continue to apply the intrinsic value-based method of accounting
for stock options.
IMPACT OF FOREIGN OPERATIONS AND CURRENCY CHANGES
Although products that were manufactured by Ault Korea represented a very
significant portion of total sales, conversion of the South Korean Won to U.S.
dollars had no significant impact on profits because conversion rates were
relatively stable. Also, the Company is not exposed to any significant currency
exchange risk related to its other foreign manufacturing arrangements since all
transactions are conducted in U.S. dollars. Other contracts that are in foreign
currencies are not significant in amount at this time; therefore the Company
believes its exposure to currency exchange risk is minimal.
CURRENT WORKING CAPITAL AND FUTURE OPERATIONS
At September 1, 1996, the Company had working capital of $4.1 million,
compared to $3.8 million at June 2, 1996.
As of September 1, 1996, and June 2, 1996, also, the Company had current
ratios (ratio of current assets to current liabilities) of 1.36:1 and 1.32:1,
respectively.
The Company has realized significant growth in sales over the past nine
quarters employing its current strategies, in spite of the working capital
consumed to maintain inventory levels for key customers and to finance growth in
trade receivables resulting from such growth. Proceeds from this offering will
provide significant working capital for the Company to fund growth in trade
receivables and inventory as well as to fund increased product development.
21
<PAGE>
BUSINESS
Ault Incorporated is the largest independent manufacturer of external power
conversion products based in North America. The Company is a leader in
designing, developing and supplying custom power conversion products for
original equipment manufacturers (OEMs) of primarily non-consumer electronic
equipment. The Company's products reduce voltage to a specified level, convert
alternating current ("AC") to direct current ("DC"), and maintain such voltage
within required limits. The products are generally wall plug-in or in-line units
located outside the equipment they power. The Company markets and sells
principally to OEMs in the growing vertical markets for telecommunications, data
communications, computer peripheral and medical equipment. The Company's
customers include Northern Telecom, Limited, Motorola Inc., U.S. Robotics
Corporation, AT&T Corporation and Spectra Physics AB. The Company believes its
competitive advantage is that it provides OEM customers with the opportunity to
outsource not only the manufacturing, but also the design engineering, project
management, safety agency certification, and logistics support related to
external power conversion components. Emphasizing its comprehensive outsourcing
capability and through its successful introduction of new products, Ault has
achieved significant sales growth over the past three years.
In fiscal 1996 the Company manufactured and delivered over 5,800,000 power
conversion units representing 400 product families. A product family consists of
two or more products conforming to generally similar specifications, including
power output. In fiscal 1997 the Company expects to begin shipments of its new
high density power conversion products developed from leading edge technology
covered by a patent acquired by the Company in December 1995. These new
switching power supplies will be less than one-half the size of existing power
supplies providing comparable power.
MARKET OVERVIEW
Dependence on electronic equipment, such as computers and computer
peripherals, fax machines, modems, medical monitors and business telephones, is
increasing on a worldwide basis. Because electronic equipment is based upon
solid state circuitry and microprocessor technology, such equipment generally
requires a power conversion product to operate. Power conversion products
perform many essential functions relating to the supply and regulation of
electrical power for electronic equipment, including converting AC from a
primary source into the DC required. For some types of electronic equipment,
such as notebook computers and portable medical equipment, the power conversion
product is a battery charger which recharges the equipment's battery and/or
provides a standby source of power. As electronic equipment has become more
complex, power conversion products and their underlying technology have become
more advanced. As a consequence, most of the power conversion products sold in
North America are custom designed to meet the functional requirements of each
OEM's specific application.
Given the need to use a power conversion product in conjunction with all
electronic equipment, the proliferation of that equipment throughout the world
has also led to a steady growth in the market for power conversion products. A
recent study by Micro-Tech Consultants (the "Micro-Tech Study") estimates that
1995 worldwide sales of power conversion products totaled approximately $16.6
billion. Of this amount, approximately $1.6 billion represents sales of external
power conversion products as compared to internal devices (which are
incorporated into electronic equipment). According to a study conducted by Heath
Resource Group (the "Heath Study"), worldwide sales of external power conversion
products by independent or "merchant" suppliers (as distinguished from "captive"
suppliers producing power conversion products for affiliated OEMs) were
approximately $1.0 billion in 1995. These sales are estimated to include
approximately $435 million in North America, $265 million in Europe and $225
million in Asia.
External power conversion products are generally used in applications
requiring power of 50 watts or less, but are available currently for
applications requiring up to 90 watts of power. One of the principal
22
<PAGE>
advantages of external power conversion products, in contrast to more widely
used internal power devices, is that external products remove from the
electronic equipment both the heat and the electromagnetic interference which
threaten the equipment's functionality and its life. Equally important, moving
the power conversion component outside of the equipment powered allows for a
reduction in size of the equipment and/or the incorporation of additional
product features. Further, by using an external product that has already
received necessary safety certifications, OEMs can facilitate the more rapid
introduction of new products by substantially reducing the time needed to obtain
safety agency approvals for the equipment.
During the past several years, advances in integrated circuit and
microprocessor technology have reduced the power requirements of electronic
equipment and increased the efficiency of external power conversion products so
that an increasing range of equipment now can feasibly be powered by an external
power source. In contrast, only a few years ago the power requirements of
certain types of electronic equipment would have required using an external
device which was unacceptably large or heavy. An example of the impact of these
technological advances is the replacement of fixed point-of-sale scanners
powered by large internal devices with hand held scanners powered by smaller
external power conversion products. Similarly, desk-top copiers using internal
power conversion products are being replaced by smaller copiers operating with
external power conversion products.
The advantages of using external power conversion products, together with
the strong growth in certain vertical markets, have resulted in a significant
increase in sales of external power conversion products. The Heath Study
estimates that the U.S. merchant market for external power conversion products
is growing at an annual compound growth rate of 18%. In comparison, based on the
Micro-Tech Study, the overall power conversion market is growing at an estimated
rate of 12% annually. The Company believes that growth in the external power
conversion market will continue to outpace overall market growth, and that
merchant suppliers of external products, such as Ault, will be particularly well
positioned to participate in this expanding market. The factors contributing to
this expanding market are:
EXPANDING MARKET OPPORTUNITIES ARISING FROM ADVANCES IN
TECHNOLOGY. Continuing advances in technology are expected to open new market
opportunities for external power conversion product suppliers as power
requirements for electronic equipment now using internal devices are reduced to
levels which can feasibly be powered by external devices. Internet terminals,
cable modems and multimedia notebook computers are examples of recently
introduced products where reduced power requirements have enabled electronic
equipment designers to specify an external rather than an internal power
conversion product.
INCREASING POWER OUTPUT OF EXTERNAL PRODUCTS. Advances in power conversion
technology, which increase the power output of external devices while
maintaining or reducing unit size and weight, have expanded opportunities for
sales of external power conversion products. For example, the Company expects to
introduce within the next six months a family of switching power supply products
which will provide approximately 80 watts of power and will be less than half
the size of comparable products. This product family will be marketed as an
external power alternative for local area network servers and certain types of
routers, which to date have been powered exclusively by internal power
conversion products.
INCREASING USE OF MERCHANT SUPPLIERS. Merchant power conversion product
manufacturers design and build power conversion products for others as
contrasted to "captive" manufacturers who do so only for their own products. The
merchant segment of the market accounts for approximately one-half of the power
conversion units shipped in the U.S. and, the Company believes, is growing more
rapidly than the "captive" market. As OEMs demand product features and quality
levels that make power conversion products increasingly difficult to design and
manufacture in-house, the Company believes that OEMs will continue to migrate
from captive manufacturers to merchant suppliers of custom designed power
conversion products.
23
<PAGE>
INCREASING EMPHASIS ON SMALLER, PORTABLE PRODUCTS. End user demand is
driving OEMs of electronic equipment to find ways to build smaller, often more
portable products, with an increased number of features. The use of external
power conversion products represents one key way OEMs can design products that
fulfill these expectations. By moving the power conversion function to a wall
plug-in or an in-line unit, electronic product designers can reduce product size
and create free space within the product chassis to accommodate additional
features. Reflective of this trend, OEMs serving the point-of-sale industry have
developed hand held bar code readers and bar code label printers which require
external power conversion products.
OPPORTUNITY FOR MORE RAPID SAFETY AGENCY APPROVAL. OEMs of electronic
products remain under intense pressure to rapidly develop and market globally
new or improved products in an environment characterized by relatively short
product life cycles. By using an external power source which has already
received U.S. and international safety certifications, the design phase is
simplified and OEMs can significantly reduce the waiting period otherwise
required to obtain necessary safety certifications. For many OEMs, the use of
external power conversion products offers an opportunity to more quickly achieve
product introductions.
GLOBALIZATION OF MARKETS. As a result of the increasingly global focus of
many electronics manufacturers, OEMs are seeking to provide products that are
compatible with a wider variety of electronic platforms and are therefore
capable of being used in a wider variety of countries. Rather than designing the
entire product to meet country or region specific power requirements, a single,
global design for the equipment can be used with an external power conversion
product, since only the power conversion product need be adapted to the specific
country or region. The Company believes that an OEM's use of external power
sources is a key to facilitating global product strategies. In addition, to
better serve OEMs in the global market, Ault has pioneered the development of an
"external universal input" switching power supply which accepts a wide range of
power inputs, any of which are converted to the specific level required by the
electronic equipment.
BUSINESS STRATEGY
Ault has manufactured power conversion products since its incorporation in
1961 and has focused almost exclusively on external products since 1979. Ault
has developed a broad line of over 400 linear and switching power supply,
transformer and battery charger product families. The Company offers OEMs custom
products through its design and application engineering capabilities. The
Company also provides OEMs with project management, safety agency certification
and logistics services which reflect its depth of experience. Ault's objective
is to leverage its domestic leadership position to become the international
leader in the manufacture and sale of custom external power conversion and
related products to OEMs of advanced electronic products. The key elements of
Ault's business strategy designed to enable the Company to achieve this goal
are:
FOCUSING ON OEMS IN LARGE, RAPIDLY GROWING VERTICAL MARKETS. Several
rapidly growing vertical markets represent a substantial portion of the $1
billion aggregate market for external power conversion products and are the
focus of the Company's design, engineering and marketing efforts. These target
markets are data communications, telecommunications, computer peripherals and
portable medical equipment. The Company currently sells approximately 60% of its
products into the data and telecommunications markets, which together are
growing annually at over 30% according to the Heath Study. Similarly, the
Company sells 20% of its product into the computer peripherals market, which is
growing at 15% annually. Finally, 15% of Ault's sales are made to the portable
medical equipment market which is showing a 10% growth rate. Given the OEMs'
need for varying unit volumes and a high degree of customization, Ault's
flexible manufacturing capability, its ability to provide customer focused
design engineering and its just-in-time stocking arrangements distinguish it
from most other external power conversion product suppliers.
24
<PAGE>
PROVIDING OEMS WITH COMPREHENSIVE POWER SOLUTIONS. Using a total solution
sales approach, the Company partners with OEMs in its target markets as they
design and develop new products, providing design engineering, project
management, safety agency certification and logistics support services. By
establishing collaborative relationships at the beginning of the product
development cycle, Ault is able-- through its broad product line of linear and
switching power supplies, transformers and battery chargers-- to offer high
quality, technically advanced and competitively priced external power options.
This approach enables Ault to build customer confidence and loyalty while
positioning itself as a single-source power conversion product supplier.
DELIVERING COMPETITIVE PRICING USING MULTIPLE MANUFACTURING VENUES. The
Company believes that its position as both a foreign and domestic manufacturer
provides it with significant competitive advantages in terms of price and
response time. In order to offer competitively priced products the Company began
contract manufacturing in South Korea in 1983, opened a plant in South Korea in
1987 and in 1994 established three subcontract manufacturing arrangements in
China and Thailand. In addition, Ault Korea is currently developing another
manufacturing site in the province of Hebei in northeastern China. In fiscal
1996, production outside the United States accounted for 77% of net sales. The
Company believes the manufacturing costs achievable from these sources enable
Ault, in its target markets, to price its products at levels that are
competitive with its external power conversion competitors. While most of the
Company's products will continue to be manufactured in the Pacific Rim, the
Minneapolis manufacturing facility remains an integral part of the Company's
total solution sales approach because it furnishes its customers with
prototypes, product samples and fast turnaround on small orders.
ACCELERATING NEW PRODUCT DEVELOPMENT. Ault is committed to leveraging its
expertise in power conversion technology to develop new products which will meet
the increasingly demanding requirements of existing and future customers. In
both responding to the expressed needs of its customers and anticipating future
customer requirements in its target markets, Ault has introduced 26 new product
families during the past two fiscal years. The Company currently has over 36
product families under development. The Company expects to introduce
approximately 16 new product families during the current fiscal year. Of
particular significance to its future success, by the end of December the
Company will begin introducing switching power supplies less than one-half the
size of existing switching power supplies providing comparable power output. See
"Business--Products--High Density Switching Power Supplies."
EXPANDING INITIATIVES IN INTERNATIONAL MARKETS. The Company uses its
presence in the Pacific Rim and its successful relationships with existing
customers which have worldwide operations to pursue various international sales
opportunities. In addition, the Company recently negotiated a preliminary
understanding, and expects to finalize an agreement, with a well-recognized
sales representative organization in Japan to sell the Company's products in
Japan and most Pacific Rim countries other than South Korea. Other international
sales initiatives include increased sales activities in Europe and direct sales
in South Korea, as well as several specific product development projects
targeted for international markets.
PRODUCTS
Ault's product line includes the four major types of external power
conversion products: switching power supplies, linear power supplies, battery
chargers and transformers. The Company's power conversion products are capable
of providing power at virtually all output levels which OEMs expect from an
external device. The Company's design and application engineers work closely
with customers to assure that these products are appropriately customized to
meet each OEM customer's precise power conversion product requirements.
25
<PAGE>
The following table summarizes the proportion of sales of each of the
Company's four major product categories for its last three fiscal years and the
three month period ended September 1, 1996.
<TABLE>
<CAPTION>
SALE OF PRODUCTS BY CATEGORY
AS A PERCENTAGE OF TOTAL SALES
-----------------------------------------------------------
THREE MONTHS
ENDED
YEARS ENDED -----------------
---------------------------------------- SEPT. 1,
PRODUCT TYPE MAY 29, 1994 MAY 28, 1995 JUNE 2, 1996 1996
- ---------------------------------------------------------------------- ------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C>
Switching Power Supplies.............................................. 18% 28% 36% 40%
Linear Power Supplies................................................. 33 22 19 19
Transformers.......................................................... 42 42 38 29
Battery Chargers...................................................... 7 8 7 12
--- --- --- ---
TOTAL............................................................... 100% 100% 100% 100%
</TABLE>
POWER SUPPLIES. The Company's power supplies provide the entire power
conversion system for electronic equipment in power outputs ranging from 1 to 90
watts. These products contain a component level transformer, which reduces the
voltage level, as well as other circuitry and components which convert AC to DC
and, in most cases, maintain voltage within specified limits. During fiscal 1996
the Company shipped approximately 1,100,000 units of power supply products
ranged in price from approximately $6 to $60 per unit.
- SWITCHING POWER SUPPLIES. According to the Heath Study, the market for
switching power supplies is the fastest growing segment of the overall
external power conversion product market as reflected in the increasing
percentage of these products sold by the Company during the past three
years. Switching power supplies use switching transistors to convert power
from AC to DC. Switching power supplies are more energy efficient and
considerably smaller and lighter in weight than linear units with
comparable power outputs. For power requirements exceeding 12 watts,
switching power supplies are generally more cost effective. The Company
currently manufactures switching power supplies that produce up to 90
watts of power. The applications in which these products are currently
used include telecommunications products, data communications products,
modems, computers and computer peripherals, medical equipment,
microprocessor controlled systems, security systems, automatic teller
terminals, test equipment and multiplexers.
The Company's switching power supply products include a family of
universal input switching power supplies which provide output power from
input power sources ranging from 90 to 265 volts. This family of power
supplies can be used in virtually any country for applications such as
local area networks ("LANs"), printers and fiber optic links. Building on
this technology, the Company also recently introduced a family of
universal input switching power supplies designed specifically for medical
markets. With this addition, the Company believes it offers the widest
range of external switching power supply products currently available for
medical applications.
The Company also manufactures internal switching power supplies, but only
when providing such products enhances a relationship with a significant
customer. In fiscal 1995 and 1996 sales of internal switching power
supplies represented 0.5% and 4%, respectively, of the Company's net
sales.
- NEW HIGH DENSITY SWITCHING POWER SUPPLIES. During fiscal 1997, the Company
expects to introduce new product families based upon patented high density
power conversion technology. This technology will enable the Company to
offer switching power supply products less than one-half the size of
existing switching power supplies providing comparable power output. By
the end of December, the Company expects to introduce a family of high
density switching power supplies providing approximately 45 watts of power
and the Company expects within the next six months to introduce a new high
density switching power supply product family which will offer
approximately 80 watts of
26
<PAGE>
power. To the Company's knowledge, none of its competitors currently
offers external power supplies that are comparable in size and price to
the high density switching power supplies which the Company will introduce
during the next six months. In addition, using its new high density
technology, the Company expects to develop and introduce during the next
eight months a family of switching power supplies capable of power outputs
in excess of 100 watts. The Company believes that the addition of this
product line will enable it to compete for product applications currently
not served by the Company or its competitors.
- LINEAR POWER SUPPLIES Linear power supplies are larger and generally less
expensive than switching power supplies because their design is based on
technology employing steel laminations with windings of copper wire rather
than switching transistors. Linear power supplies tend to be used when the
wattage output required is relatively low. Ault manufactures linear power
supplies that provide up to 11 watts of regulated power and 70 watts of
unregulated power. The Company's linear power supplies are used in a
variety of applications, including modems, telecommunications products,
computer peripherals, security systems, data communications products,
local area networks, microprocessor controlled systems, test equipment and
multiplexers.
TRANSFORMERS. The Company manufactures a wide variety of wall plug-in
transformers, as part of its full range of power conversion products. These
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. The
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. In response
to customer specifications, the Company also sells highly customized
transformers that operate within stringent power output tolerances. The
manufacture of such custom transformers is a capability not provided by most of
the Company's competitors. The Company's transformers are utilized in a broad
spectrum of applications, including modems, telephone sets, multimedia products
and scanners. During fiscal 1996 the Company shipped approximately 4,600,000
units of transformer products that ranged in price from approximately $2.00 to
$10.00 per unit.
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 portable medical
devices, mobile telecom devices, notebook computers, global positioning
equipment and radio frequency communications products. During fiscal 1996 the
Company shipped approximately 170,000 units of battery chargers that ranged in
price from $4.85 to $555.00.
The Company's products serve the entire range of widely used battery
chemistries such as nickel cadmium, sealed lead acid, gel cell and nickel-metal
hydride. In addition, the Company has developed battery chargers for the
particular requirements of emerging battery chemistries such as zinc air,
lithium ion and lithium polymer. The Company is committed to supporting these
new emerging chemistries and to developing battery charger products to be
introduced as these new battery chemistries become commercially accepted.
The Company sells primarily "smart" battery chargers as distinguished from
trickle chargers. Smart charger products use integrated circuits to control
various charging characteristics while allowing for fast charge times 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. In the first fiscal quarter of 1997, battery charger sales
increased 60% from the comparable quarter in fiscal 1996 and represented 12% of
total sales for the quarter.
27
<PAGE>
VERTICAL MARKETS AND CUSTOMERS
The following table presents applications of the Company's various power
conversion products for some of its top customers.
<TABLE>
<CAPTION>
PRODUCT TYPE MARKET SEGMENT APPLICATION REPRESENTATIVE CUSTOMER
<S> <C> <C> <C>
Switching Power Data communications Cable modems Lan City/Bay Networks,
Supplies Inc.
Data communications Retail scanners Spectra Physics AB
Medical Instrumentation and Tektronix, Inc.
test equipment
Computer peripherals Network router Digital Equipment Corp.
Linear Power Supplies Telecommunications Business PBX Siemens Business
Communications
Systems, Inc.
Telecommunications Wireless telephones AT&T Corporation
Data communications Business modems Motorola Inc.
Transformers Telecommunications Telephones Northern Telecom,
Limited
Data communications PC modems U.S. Robotics
Corporation
Data communications PC modems Multi-Tech Systems,
Inc.
Computer peripherals Multimedia speakers Harmon Industries, Inc.
(JBL)
Battery Chargers Medical Defibrillators Physio Control
International Corp.
Medical Apnea monitors Ohmeda, Inc.
Telecommunications Global positioning Trimble Navigation Ltd.
</TABLE>
The Company's marketing efforts are directed primarily toward OEMs producing
non-consumer electronic equipment for telecommunications, data communications,
computer peripheral and medical applications. These vertical markets are
characterized by trends toward smaller, portable products capable of performing
increasingly sophisticated functions, as well as intense competitive pressure to
rapidly introduce new products and product enhancements. Based on its expertise
in customizing a broad range of products to meet customer requirements, the
Company believes it is well positioned to serve the needs of its OEM customers
as they respond to these trends and competitive factors.
Historically, the most significant market for the Company's products has
been OEMs of telecommunications equipment, and in fiscal 1996 sales in this
market represented approximately 30% of net sales. Presently, the Company's
products power network termination equipment (devices which interface between
the 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. Customers in this market
include Northern Telecom, Limited (which accounted for approximately 11% of the
Company's net sales during fiscal 1996), AT&T Corporation, Mitel Corporation and
Siemens Business Communications Systems, Inc.
28
<PAGE>
An equally significant market for the Company is OEMs of data communications
equipment, and in fiscal 1996 sales in this market also represented
approximately 30% of net sales. In this market Ault's products are principally
being used to power a number of low to medium speed modems and multiplexers
(equipment which enables the simultaneous transmission of multiple channels of
information over the same telephone line). Customers in this market include U.S.
Robotics Corp., Motorola Inc., Hayes Microcomputer Products, Inc. and Multi-Tech
Systems, Inc.
The Heath Study estimates that the combined telecommunications/data
communications market is currently growing at an annual rate of approximately
30%. Recognizing this trend, the Company is devoting a significant portion of
its product development effort to new products for applications in this combined
market, and is currently developing 22 new product families which it expects to
introduce within the next two years.
In fiscal 1996 approximately 20% 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. Customers in this
market include Spectra Physics AB, Tektronix, Inc., Harmon Industries, Inc.
(JBL) and IBM.
Approximately 15% of net sales in fiscal 1996 were to OEMs of portable
medical equipment such as infusion pumps, patient monitoring systems, apnea
monitors, and portable terminals for patient history input and diagnostics.
Customers in this market include American Medical Electronics, Inc., Physio
Control International Corp., Datascope Corporation, Ohmeda, Inc. and Life Care
Medical Products.
The remaining 5% of the Company's net sales in fiscal 1996 were divided
among OEMs serving a number of markets, including security systems and
industrial equipment. Customers in this market segment include Invisible Fence
Company, Inc., Mettler Toledo AG, Diebold Inc. and Royal Appliance Manufacturing
Co.
DESIGN ENGINEERING AND PRODUCT DEVELOPMENT
Design engineering teams at the Company's facilities in the United States
and South Korea are responsible for developing new power conversion products and
customizing existing products to meet customer needs. The Company has an
engineering staff of 33 and over the last three fiscal years has spent at least
4.7% of revenues on product engineering. The Company's product development
activities are divided equally between developing products to satisfy specific
customer needs and new products based upon anticipated customer needs and market
trends. New product development opportunities are evaluated based upon criteria
such as global market potential, return on investment and technological
advantages. The Company believes that its collaborative efforts with customers,
combined with its forward-looking concern for power technology and market
trends, have enabled it to gain a reputation as a leading innovator of new
external power conversion products. The following table summarizes Ault's
product development cycle.
29
<PAGE>
THE PRODUCT DEVELOPMENT CYCLE
<TABLE>
<CAPTION>
TYPICAL TIME
LINE ACTIVITIES
<S> <C> <C> <C>
Specification Review Week 1-2 - Project Authorized by Customer Team and New
Phase Product Development Committee
- Specification Review
Product Design Phase Week 3-8 - Electrical and Mechanical Design
- Cost Targets Compared to Quote
- Customer Approves Quote
Design Release Phase Month 3-4 - Build Prototypes
- Testing/Design Verification
- Documentation
- Safety Agency Approval
- Engineering Design Package Release
Pilot Run Phase Month 5-6 - Production Startup Plans
- Manufacturing Processes Developed
- Factory and Equipment Sizing
Manufacturing Release Month 7-10 - Manufacturing Process Package Released
Phase - Production Schedule Released
- Full Production Commenced
</TABLE>
The Company believes the product development cycle described above is at
least as rapid as offered by its principal competitors.
Reflecting an increased emphasis on new product development during the past
several years, the Company developed and introduced 15 new product families in
1996 and 11 product families in fiscal 1995. More than 36 product families are
currently in various stages of development. The Company expects to introduce
approximately 16 product families during fiscal 1997. Anticipating continued
growth of 30% annually in the switching power supply segment of the power
conversion product market, about half of the new products under development are
switching power supplies.
In December 1995, the Company purchased a U.S. patent for high density power
conversion technology which it is using to develop a family of power supplies
providing output comparable to the Company's existing power supplies in units
that are less than one-half the size. This technology will serve as a platform
for the development and introduction by the end of December of a family of power
supplies with approximately 45 watts of power, and within the next six months of
a new series of external power supply products which will offer approximately 80
watts of power. To the Company's knowledge, none of its competitors currently
offers power supplies comparable in size and price to these high density
switching power supplies. In addition, using its new high density technology,
the Company expects to develop and introduce within the next eight months a
family of switching power supplies capable of power outputs in excess of 100
watts. The Company believes that these higher output products will enable it to
compete for new electronic equipment applications that traditionally have been
outside the range that could feasibly be powered by external products. See
"Patents."
Other product development efforts currently underway at the Company include
the development of products tailored to the needs of European markets and the
development of low cost AC to AC transformers and AC to DC linear power
supplies.
SALES AND DISTRIBUTION
The Company markets its products primarily in the U.S. and Canada through a
network of 20 manufacturer representatives employing approximately 115
salespersons, each of whom represents, in
30
<PAGE>
addition to Ault's, several complementary product lines manufactured by others.
The Company also sells through six national distributor organizations which
employ over 200 salespersons. The Company selects representatives based upon
their industry knowledge as well as account expertise with products that are
synergistic with the Company's products. Individual salespersons are trained,
mentored and technically assisted by the Company's application engineers and
other sales administration staff. Any reduction in the efforts of these
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 market 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 management, as well as manufacturing. Project management services
include tracking multiple product development processes, coordinating pilot runs
and assisting OEMs with their product introductions. Among the logistics
services provided by the Company are warehousing and shipping of finished
product and customs clearance in order to facilitate just-in-time production
schedules.
The Company focuses its selling efforts on OEMs in the U.S. and Canada. Many
of the larger OEM customers of the Company manufacture and sell their products
globally. As a result, the Company has extended its presence to markets
throughout the world.
To date, Company sales in the Pacific Rim have been limited and made
primarily to customers in South Korea. In September 1996 the Company negotiated
a preliminary understanding, and expects to finalize an agreement, with a
well-recognized sales representative organization in Japan which will sell the
Company's products in Japan and most Pacific Rim countries other than South
Korea. Certain of the Company's products have already obtained required MITI
approvals in Japan. The Company expects to begin sales promotion in Japan during
the second half of fiscal 1997.
The Company currently markets its products in Europe through a network of
distributors (with a total of approximately 15 salespersons) with products and
promotional methods tailored for this market. Sales in Europe during fiscal 1995
and 1996 were, respectively, 5.9% and 6.4% of total net sales for these periods.
The Company intends to expand its marketing efforts in Europe during 1997 by
introducing specially designed products it has recently developed for that
market.
SAFETY AGENCY CERTIFICATIONS
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 product supplied by the Company meet or exceed
established international safety and quality standards, since many of the
Company's products are used in conjunction with equipment which is distributed
throughout the world. In response to these customer requirements, the vast
majority of the Company's products are designed and manufactured in accordance
with the 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 Telecommunications ("BABT") in the
United Kingdom; and, the International Electrotechnical Committee ("IEC"), a
European standards organization. In addition, some of the Company's products
have also received Japanese MITI approval. Whenever safety standards dictate,
the Company manufactures its product to conform to FCC Class B requirements
which regulate the levels of electronic magnetic interference that may be
emitted by electronic equipment. Unlike most of its competitors, the Company is
a certified test laboratory for UL and CSA and is able to conduct most
certification tests at its plant in Minneapolis. This procedure reduces the time
normally required to obtain safety certificates from these agencies from four to
six months to generally less than one month. In addition to safety agency
certifications, the Company's
31
<PAGE>
Minneapolis facility is certified to ISO 9001 and the Company's South Korean
facility is certified to ISO 9002.
INNOVATIVE TEAM APPROACH
In 1993, the Company moved to a team-based organizational structure
consisting of four distinct teams. The Company's customer base was divided into
four geographical regions with a specific Ault team assigned to manage the needs
of customers in each region. Each team is headed by a coordinator selected by
the President and an assistant coordinator who is elected annually by the team.
The teams consist of people from all areas of the business, including
salespersons from manufacturer representative organizations and national
distributors as well as the Company's own production personnel, engineers,
technicians, administrative personnel and others. Guided by a written 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. Ault received
recognition for this innovative approach from the trade publication of the
American Manufacturing Excellence Association.
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 that compete
principally on price. Many of these competitors have a smaller presence in the
external power conversion market than the Company, although several are engaged
in more than one business and have significantly greater financial resources.
No single company dominates the overall external power conversion product
market, and the Company's competitors vary depending upon the particular power
conversion product category. The companies with which Ault competes most
directly in each of its major product categories are: Leader Electronics, Inc.
and Golden Pacific Electronics, Inc. for transformers; Dee Van Enterprise Co.,
Ltd. and Sino America Electronics Company, Ltd. for linear power supplies;
Potrans Electrical Corp., Ltd. and Phihong Enterprise Co., Ltd. for switching
power supplies; and Engineering Design & Sales, Inc. and Xenotronics Company for
battery chargers.
Recently, a number of electronic equipment manufacturers have dismantled or
spun off their power supply operations. While this change has created greater
opportunities in the merchant market where the Company competes, certain of
these spin-offs have created large power supply manufacturers with state-
of-the-art manufacturing facilities. Most of these newer companies are now
focusing on the internal power supply market and/or continue to sell exclusively
to a single customer. These companies, some of which enjoy far greater resources
than Ault, could focus on external power conversion products and/or expand into
the same electronic equipment markets in which the Company now competes, thus
intensifying competition.
The Company competes on the basis of the quality and performance of its
products, the breadth of its product line, customer service, dependability in
meeting delivery schedules, design engineering services and price. The Company
believes it is currently one of a small number of companies that designs,
manufactures and obtains certifying agency approvals for the full range of
external power conversion devices which OEMs consider in designing their
electronic products.
The Company provides a total solution approach to OEMs' entire external
power conversion product needs through its commitment to reliable partnerships
and its delivery of high quality products supported
32
<PAGE>
by solution-oriented design engineering. In addition, the presence of Ault Korea
and the expanding arrangements with manufacturers in China and Thailand provide
the Company with additional strength to compete effectively when price is the
primary consideration.
Internal power conversion products continue to be used for most electronic
equipment, and as a result the Company experiences competition from numerous
companies providing such internal products, including both OEMs and independent
suppliers. With the trend toward lower power requirements in portable electronic
equipment and with the increasing availability of smaller, competitively-priced
internal switching power supplies, certain customers of the Company may choose
to return to internal power supplies in place of the external power conversion
products they currently purchase. In relation to this competition, the Company
stresses the several advantages of external power conversion products, which
generally can be obtained with only a relatively small increase in unit cost.
MANUFACTURING AND SOURCES OF SUPPLY
The Company's manufacturing operations consist of the 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 facility in Minneapolis, Minnesota (which
accounted for 23% of 1996 net sales); at the Ault Korea facility near Seoul,
South Korea (which accounted for 38% of 1996 net sales); and at three locations
in China and Thailand using manufacturing subcontractors (which accounted for
39% of 1996 net sales). Ault typically manufactures prototypes and low volume
products at its facilities in Minneapolis, Minnesota. Ault Korea is equipped to
manufacture substantially all of the Company's products.
A number of the components and raw materials integral to the manufacture of
the Company's products are purchased from a single supplier or a limited number
of suppliers. Electronic components and raw materials used in the Company's
products are nevertheless generally available from a large number of suppliers,
although from time to time shortages of particular items are experienced. In the
past, the Company's gross margin has been adversely affected by periodic
significant increases in costs of raw materials.
Quality and reliability are emphasized in both the design and manufacture of
the Company's products. This emphasis is reflected in the ISO 9001 certification
of the Company's Minneapolis facility in 1991 and the ISO 9002 certification of
its South Korean facility in 1996. The Company tests 100% of its finished
products against its own and its customers' specifications, then ships the
products in custom engineered protective packaging to minimize any damage during
shipment. Inventory and production control in the Korean subsidiary have been
inconsistent and have resulted in write-offs of inventory and delays in product
deliveries. A portion of the proceeds of this offering will be used to upgrade
Ault Korea's management information system to improve financial controls and
facilitate more efficient communication between the subsidiary and the Company.
In 1996, Ault Korea retained new independent accountants to strengthen its
financial reporting.
In addition to its internal production capabilities, the Company has
developed manufacturing arrangements with one subcontractor in Thailand and two
in China for the manufacture of higher volume external power conversion
products. The Company does not have long term commitments from the
subcontractors and the subcontractors build product for the Company pursuant to
individual purchase orders. The Company selects its subcontract manufacturers
based upon their ability to manufacture high quality products; the sufficiency
of their engineering capabilities to support products being manufactured; and
their ability to meet required delivery times. In addition, each of the
Company's subcontract manufacturers is regularly reviewed by the Company's
Taiwanese-based Director of Far East Operations with respect to product quality
and other performance criteria.
Ault Korea is negotiating to purchase a Korean company which owns a
manufacturing facility in Hebei province in northeastern China. The current
owner of the Korean company has been hired by Ault Korea to manage this
facility. The addition of this facility, which, if acquired, is expected to be
operational
33
<PAGE>
in February, 1997, will not only increase the Company's overall production
capacity, but it will also enable Ault to be less dependent on its three
subcontract manufacturers. A portion of the proceeds from this offering will be
used to equip this production facility. In addition, the Company intends to
expand its manufacturing capabilities in Thailand by investing approximately
$1,500,000 in a joint venture with the Thai subcontractor currently
manufacturing products for the Company. It is anticipated the joint venture will
own the existing production facility and will build and equip an expansion of
this facility to significantly increase its production capabilities.
BACKLOG
The Company manufactures its products on the basis of firm purchase orders.
Backlog at September 30, 1996 was $15.6 million as compared to $11.3 million at
September 30, 1995. The Company enters into buying commitment and order
scheduling agreements. For its largest 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.
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.
PATENTS
The Company holds four patents, three of which it no longer considers
significant. The fourth patent, acquired in December 1995, covers high density
power conversion technology ("high density patent") which will enable the
Company to offer external switching power supplies less than one-half the size
of current power supply products with comparable power outputs. The Company
believes this patented technology will be important to its future success. See
"Business--Design Engineering and Product Development."
The high density patent was issued by the United States Patent Office in
1994 and the original applicant did not pursue patent protection in foreign
countries. Since the high density patent was issued prior to its being assigned
to the Company, the Company is precluded from seeking patent protection in most
foreign countries. For that reason some of its competitors may use this type of
technology for products manufactured and sold outside of the United States. Also
there can be no assurance that the scope of the high density patent will prevent
competitors, many of whom have greater financial and other resources, from
introducing competitive products or from challenging the validity of the high
density patent.
LITIGATION
There is no material litigation pending against the Company.
EMPLOYEES
On September 30, 1996, Ault had 255 full-time employees. Of this number,
approximately 173 were engaged in manufacturing (112 in South Korea and 61 in
Minneapolis), 33 in engineering (23 in Minneapolis and 10 in South Korea), and
49 in marketing, general, and administrative positions (36 in Minneapolis and 13
in South Korea).
None of the Company's employees is 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.
34
<PAGE>
PROPERTIES
The Company's headquarters and U.S. manufacturing facility is located in
Brooklyn Park, a suburb of Minneapolis, Minnesota. Approximately 50,000 square
feet in size, this facility is leased by the Company with annual lease payments
of approximately $201,000. The lease expires in August 1999.
Ault Korea currently occupies 36,000 square feet of production and
engineering space on land owned by Ault Korea in Suwon City, in the province of
Kyungki-Do, South Korea. This production facility was purchased from the Korea
Exchange Bank on May 29, 1995 under a mortgage with semi-annual payment
installments over a five-year period through March 2000. Although the title to
this real estate will not be transferred until payment of the final installment,
the Company has accounted for this transaction as a purchase of real estate as
of May 29, 1995.
Ault Korea is negotiating to purchase a Korean company which owns a
manufacturing facility with approximately 40,000 square feet in Hebei province
in northeastern China. From the proceeds of this offering, the Company intends
to invest approximately $600,000 to furnish this facility with capital equipment
necessary to manufacture its products.
35
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------- --- -----------------------------------
<S> <C> <C>
Frederick M. Green...................... 53 President and Chief Executive
Officer and Director
Gregory L. Harris....................... 43 Vice President of Sales and
Marketing
Carlos S. Montague...................... 59 Vice President, Chief Financial
Officer and Assistant Secretary
Hokung Choi............................. 56 Vice President Far East Operations
James M. Duddleston(1).................. 74 Director
Delbert W. Johnson(1)................... 57 Director
John G. Kassakian....................... 53 Director
Edward C. Lund(2)....................... 78 Director
Eric G. Mitchell, Jr.(1)(2)............. 50 Director
Matthew A. Sutton(2).................... 73 Director
</TABLE>
- ------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
FREDERICK M. GREEN joined the Company in 1980 as the Executive Vice
President and was elected as the President of the Company in November 1985. In
1988 Mr. Green assumed the additional responsibilities of Chief Executive
Officer and Chairman of the Board of Directors. From 1978 to 1980, Mr. Green
served as the Director of Manufacturing for the Large Computer Manufacturing
Division of Control Data Corporation. Mr. Green holds a Bachelor of Science
degree in Mechanical Engineering from the University of Minnesota and a Masters
Degree in Business Administration from the College of St. Thomas, St. Paul,
Minnesota.
GREGORY L. HARRIS joined the Company in October 1988 as the Vice President
of Sales and Marketing. From 1976 to September 1988, Mr. Harris served in a
number of sales and marketing positions at Wang Laboratories, Inc. and IBM. His
background includes general management level responsibilities for sales,
support, service, finance and administration, as well as involvement in
marketing strategies and product research and development. Mr. Harris holds a
Bachelor of Science Degree in Business and Psychology from Morgan State College
and Master studies at Johns Hopkins University and Ohio State University.
CARLOS S. MONTAGUE joined the Company in May 1980 and was elected as the
Vice President of the Company in 1981. Mr. Montague was elected as the
Treasurer, Chief Financial Officer and Assistant Secretary in 1983. For the
eleven years preceding his employment by the Company, Mr. Montague served in a
number of accounting positions at Minnesota Mutual Life Insurance Company and
Control Data Corporation. Mr. Montague holds a Bachelor of Arts degree in
Accounting from Dyke College, Cleveland, Ohio.
HOKUNG CHOI joined the Company in March 1983 as the Director of Quality and
Automation. In 1987, Mr. Choi was instrumental in the establishment of the
Company's wholly owned subsidiary, Ault Korea Corporation, and served as its
Director until May 1989. Mr. Choi was elected as Vice President Far East
Operations in July 1989. Prior to joining Ault, Mr. Choi was employed for
sixteen years with Burroughs Corporation, Conrac Corporation and Control Data
Corporation as Senior Industrial Engineering, Industrial Engineering Manager,
and Manufacturing Engineering and Planning Manager, respectively. Mr. Choi
graduated from Seoul National University and attended South Korea University
Graduate Business School in South Korea. He holds an MBA from California State
University, Fresno, California. Mr. Choi's brother, Y.C. Choi, is employed by
Ault Korea as its Vice President of Operations.
36
<PAGE>
JAMES D. DUDDLESTON has served as a director of the Company since 1988. Mr.
Duddleston is a self employed consultant and retired business executive.
DELBERT W. JOHNSON has served as a director of the Company since 1983. Since
1981 Mr. Johnson has been Chairman and Chief Executive Officer of Pioneer Metal
Finishing Co., a subsidiary of Safeguard Scientifics, Inc. ("Safeguard"), a
manufacturer of fabricated metal products. Mr. Johnson is also a director of
Safeguard, Tennant Company, First Bank System Inc., Coherent Communication
Systems Corp. and Compucom Systems, Inc.
JOHN G. KASSAKIAN has served as a director of the Company since 1984. Mr.
Kassakian is a Professor of Electrical Engineering and Director of the
Laboratory for Electromagnetic and Electronic Systems, Massachusetts Institute
of Technology, Cambridge, Massachusetts. Mr. Kassakian is also a director of
Sheldahl, Inc.
EDWARD C. LUND, a retired business executive, has served as a director of
the Company since 1974. Prior to his retirement in 1981, he served as Corporate
Vice President of Administration for Honeywell, Inc.
ERIC G. MITCHELL, JR. has served as a director of the Company since 1992.
For the past fourteen years Mr. Mitchell has been President of The Pricing
Advisor, Inc., a business consulting company.
MATTHEW A. SUTTON has served as a director of the Company since 1987. Mr.
Sutton is an independent management consultant and retired executive. From 1987
to 1988, Mr. Sutton was employed as a consultant by Honeywell Consultants, Ltd.
He also served as the Executive Vice President of Defense and Marine Systems and
Group Vice President of Aerospace/Avionics of Honeywell Inc. from 1981 to 1987.
Mr. Sutton is also a director of Lexington Standard Corporation.
37
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of the Common Stock
including currently exercisable options or options exercisable within 60 days of
the date of this Prospectus by (i) each person known to the Company to
beneficially own more than 5% of the outstanding Common Stock, (ii) each
director of the Company and (iii) all directors and executive officers of the
Company as a group. Except as otherwise indicated in the table below, all
stockholders have sole voting and investment power over the shares beneficially
owned. This table does not reflect any shares that may be acquired in this
offering by these existing stockholders.
<TABLE>
<CAPTION>
AMOUNT OF BENEFICIAL OWNERSHIP
------------------------------------------------
PERCENTAGE OWNED
-----------------------------------
NAME OF BENEFICIAL OWNER SHARES(1) BEFORE OFFERING AFTER OFFERING
- ------------------------------------------------------------ ----------- ---------------- -----------------
<S> <C> <C> <C>
Frederick M. Green ......................................... 87,500 3.8% 2.2%
7300 Boone Avenue North
Minneapolis, MN 55428
Carlos S. Montague.......................................... 72,075 3.1% 1.8
Hokung Choi................................................. 47,900 2.1% 1.2
Gregory L. Harris........................................... 40,000 1.7% 1.0
Matthew A. Sutton........................................... 15,000 * *
James M. Duddleston......................................... 10,500 * *
John G. Kassakian........................................... 8,100 * *
Edward C. Lund.............................................. 6,500 * *
Eric G. Mitchell, Jr........................................ 5,400 * *
Delbert W. Johnson.......................................... 5,300 * *
All Directors and Officers as a
Group (11 persons)........................................ 298,275 13.0% 7.6
</TABLE>
- ------------------------
* Indicates ownership of less than 1%.
(1) Includes the following numbers of shares of Common Stock which may be
purchased pursuant to stock options which are exercisable within 60 days of
the date hereof: Mr. Green, 37,500 shares; Mr. Johnson, 4,500 shares; Mr.
Kassakian, 4,500 shares, Mr. Lund, 4,500 shares, Mr. Mitchell, 4,500 shares,
Mr. Sutton, 4,500 shares, Mr. Duddleston, 4,500 shares, Mr. Harris, 40,000
shares, Mr. Choi, 31,500 shares; Mr. Montague, 26,500 shares; and all
directors and officers as a group, 162,500 shares.
38
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue 5,000,000 shares of Common Stock, no par
value, and 1,000,000 shares of Preferred Stock, no par value. At October 1,
1996, the Company had outstanding 2,131,276 shares of Common Stock, held by 230
holders of record. No shares of Preferred Stock were outstanding. All shares of
Common Stock presently outstanding are, and all shares of Common Stock being
sold in this offering will be, legally issued, fully paid and nonassessable.
The Board of Directors may establish any classes or series of Common Stock
with such rights and priorities as it deems appropriate and fix the dividend
rate, redemption price, liquidation price, conversion rights and sinking or
purchase fund rights. Holders of Common Stock are entitled to one vote for each
share on all matters voted upon by stockholders. Stockholders have no preemptive
or other rights to subscribe for additional securities of the Company. Subject
to the prior rights of holders of any outstanding shares of Preferred Stock,
holders of shares of Common Stock presently outstanding are, and holders of all
shares of Common Stock purchased in this offering will be, entitled to receive
such dividends as may be declared by the Board of Directors from funds legally
available and, upon liquidation, to share pro rata in the remaining assets
available for distribution to shareholders after payment of any preferential
claims.
PREFERRED STOCK
The Board of Directors of the Company is authorized, without further
shareholder action, to issue Preferred Stock in one or more classes or series
and to fix the voting power, dividend, redemption rights or privileges, rights
on liquidation or dissolution, conversion rights and privileges, sinking or
purchase fund rights, and other preferences, privileges and restrictions, of
such class or series.
The voting and other rights of the holders of Common Stock will be subject
to, and may be adversely affected by, the rights of holders of any Preferred
Stock that may be issued in the future. The Company has no present plans to
issue any shares of Preferred Stock.
OUTSTANDING STOCK OPTIONS
As of September 1, 1996, the Company had outstanding and unexercised options
to acquire 336,250 shares of Common Stock awarded pursuant to an option plan
maintained by the Company. Of this amount, options to purchase 221,750 shares
are currently exercisable at exercise prices ranging from $1.19 to $3.69 per
share. The Company had reserved as of September 30, 1996 an additional 28,950
shares for future grants under its 1986 Stock Option Plan. On October 1, 1996,
the shareholders approved an amendment to the Company's Stock Option Plan
reserving an additional 100,000 shares of its Common Stock for issuance upon
exercise of options under the plan. In addition, effective October 1, 1996, the
Board of Directors granted options to purchase 125,000 shares of Common Stock
under the Stock Option Plan and granted options to purchase 6,000 shares to
non-employee directors which were not issued pursuant to the Stock Option Plan.
RIGHTS PLAN
Each share of Common Stock has one Preferred Stock Purchase Right ("Right")
attached. Each whole Right entitles the holder to buy one-one hundredth of a
share of the Company's Series A Junior Participating Preferred Stock at an
initial exercise price of $36.00 (subject to adjustment). The Rights will become
exercisable only if, with certain exceptions, a person or group becomes an
"Acquiring Person" by acquiring 15% or more of the outstanding Common Stock or
announcing a tender offer of 15% or more of the Common Stock. If the Rights
become exercisable, a holder generally will be entitled to purchase for the
exercise price of $36.00 that number of shares of Common Stock having then
current market value of $72.00 (subject to adjustment consistent with any
adjustment in the exercise price. If the Company is
39
<PAGE>
acquired in a merger or other business combination transaction, each Right will
entitle its holder to purchase, at the Right's exercise price, that number of
shares of the acquiring company's common stock having a then current market
value of twice the Right's exercise price.
At any time after the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 15% or more of the outstanding
Common Stock and prior to the acquisition by such person or group of 50% or more
of the outstanding Common Stock, the Board of Directors may exchange the Rights
(other than Rights owned by such person or group which become void), in whole or
in part, at an exchange ratio of one share of Common Stock, or one one-hundredth
of a share of Preferred Stock (or of a share of a class or series of the
Company's preferred stock having equivalent rights, preferences and privileges)
per Right (subject to adjustment). In addition, the Company will be entitled to
redeem the Rights, upon approval of a majority of the independent directors of
the Company, at $.001 per Right (subject to adjustment) at any time prior to the
tenth day after a public announcement that a person or group has acquired
beneficially 15% or more of the Common Stock. The Rights will expire on February
13, 2006 if not previously redeemed or exercised.
Until a Right is exercised, the holder thereof, as such, will have no rights
as a stockholder of the Company, including, without limitation, the right to
vote or to receive dividends. The Rights have certain anti-takeover effects. The
Rights will cause substantial dilution to a person or group that attempts to
acquire the Company unless the offer is conditional on a substantial number of
Rights being acquired. The Rights, however, should not affect any prospective
offeror willing to make an offer at an equitable price and which is otherwise in
the best interests of the Company and its stockholders, as determined by the
Board of Directors. The Rights should not interfere with any merger or other
business combination approved by the Board of Directors since the Board of
Directors may, at its option, redeem the Rights at any time until there is an
Acquiring Person.
The foregoing summary of certain terms of the Rights is qualified in its
entirety by reference to the Rights Agreement, a copy of which is incorporated
by reference as an exhibit to the Registration Statement.
ANTI-TAKEOVER PROVISIONS OF MINNESOTA BUSINESS CORPORATION ACT
Section 302A.671 of the Minnesota Business Corporation Act provides that,
unless the acquisition of certain new percentages of voting control of the
Company (in excess of 20%, 33 1/3% or 50%) by an existing shareholder or other
person is approved by a majority of the shareholders of the Company other than
the acquirer (if already a shareholder) and officers and directors who are also
employees of the Company, the shares acquired above such new percentage level of
voting control will not be entitled to voting rights. The Company is required to
hold a special shareholders' meeting to vote on any such acquisition within 55
days after the delivery to the Company by the acquirer of an information
statement describing, among other things, the acquirer and any plans of the
acquirer to liquidate or dissolve the Company and copies of definitive financing
agreements for any financing of the acquisition not to be provided by funds of
the acquirer. If any acquirer does not submit an information statement to the
Company within 10 days after acquiring shares representing a new threshold
percentage of voting control of the Company, or if the disinterested
shareholders vote not to approve such an acquisition, the Company may redeem the
shares so acquired by the acquirer at their market value. Section 302A.671
generally does not apply to a cash offer to purchase all shares of voting stock
of the issuing corporation if such offer has been approved by a majority vote of
disinterested board members of the issuing corporation.
Section 302A.673 of the Minnesota Business Corporation Act restricts certain
transactions between the Company and a shareholder who becomes the beneficial
holder of 10% or more of the Company's outstanding voting stock (an "interested
shareholder") unless a majority of the disinterested directors of the Company
have approved, prior to the date on which the shareholder acquired a 10%
interest, either the business combination transaction suggested by such a
shareholder or the acquisition of shares that
40
<PAGE>
made such a shareholder a statutory interested shareholder. If such prior
approval is not obtained, the statute imposes a four-year prohibition from the
interested shareholder's share acquisition date on mergers, sales of substantial
assets, loans, substantial issuances of stock and various other transactions
involving the Company and the statutory interested shareholder or its
affiliates.
In the event of certain tender offers for stock of the Company, Section
302A.675 of the Minnesota Business Corporation Act precludes the tender offeror
from acquiring additional shares of stock (including acquisitions pursuant to
mergers, consolidations or statutory share exchanges) within two years following
the completion of such an offer unless the selling shareholders are given the
opportunity to sell the shares on terms that are substantially equivalent to
those contained in the earlier tender offer. The Section does not apply if a
committee of the Board consisting of all of its disinterested directors
(excluding present and former officers of the corporation) approves the
subsequent acquisition before shares are acquired pursuant to the earlier tender
offer.
In certain circumstances, these statutory provisions could also have the
effect of delaying or preventing a change in the control of the Company.
TRANSFER AGENT AND REGISTRAR
Norwest Bank Minnesota, N.A., Minneapolis, Minnesota, is the Transfer Agent
and Registrar for the Company's Common Stock.
41
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their representatives,
Principal Financial Securities, Inc. and Cruttenden Roth Incorporated (the
"Representatives"), have jointly agreed to purchase from the Company the
following respective numbers of shares of Common Stock at the public offering
price less the underwriting discounts and commissions set forth on the cover
page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ------------------------------------------------------------ ----------
<S> <C>
Principal Financial Securities, Inc.........................
Cruttenden Roth Incorporated................................
----------
Total....................................................... 1,800,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of the Common Stock offered hereby if any of such shares are
purchased.
The Company has been advised by the Representatives of the Underwriters that
the Underwriters propose to offer the shares of Common Stock to the public
initially at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow, and such dealers may reallow,
a concession not in excess of $ per share to certain other dealers. After
the public offering, the public offering price and other selling terms may be
changed by the Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 270,000
additional shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase such additional shares
in the same proportion as set forth in the table above, and the Company will be
obligated, pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of Common Stock offered hereby. If the additional
shares are purchased, the Underwriters will offer such additional shares on the
same terms as those on which the 1,800,000 shares are being offered.
The Company has agreed to sell to the Representatives, for nominal
consideration, a warrant to purchase from the Company 126,000 shares of Common
Stock (up to 144,900 shares if the over-allotment option is exercised) at an
exercise price per share equal to 120% of the Offering price (the
"Representatives' Warrant"). The Representatives' Warrant is exercisable for a
period of five years after the effective date of the Offering and beginning one
year from the completion of the Distribution. The Representatives' Warrant is
transferable and contains anti-dilution provisions providing for appropriate
adjustments on the occurrence of certain events, and contains customary demand
and participatory registration rights. The Representatives' Warrant includes a
net exercise provision permitting the holder(s) to pay the exercise price by
cancellation of a number of shares with a fair market value equal to the
exercise price of the Representatives' Warrant. In addition, the Company has
granted certain registration rights to the holders of the Representatives'
Warrant.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
42
<PAGE>
The Company, its officers and directors have agreed that they will not sell,
offer to sell, issue, distribute or otherwise dispose of any shares of Common
Stock for a period of 90 days after commencement of this offering without the
prior written consent of the Representatives of the Underwriters.
The rules of the Securities and Exchange Commission (the "Commission")
generally prohibit the Underwriters and other members of the selling group, if
any, from making a market in the Company's Common Stock during the "cooling-off"
period immediately preceding the commencement of sales in the offering. The
Commission has, however, adopted an exemption from these rules that permits
passive market making under certain conditions. These rules permit an
Underwriter or other member of the selling group, if any, to continue to make a
market in the Company's Common Stock subject to the conditions, among others,
that its bid not exceed the highest bid by a market maker not connected with the
offering and that its net purchases on any one trading day not exceed prescribed
limits. Pursuant to these exemptions, certain Underwriters and other members of
the selling group, if any, may engage in passive market making in the Company's
Common Stock during the cooling-off period.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Lindquist & Vennum P.L.L.P., Minneapolis, Minnesota.
Richard A. Primuth, a partner of Lindquist & Vennum P.L.L.P., is an officer and
holder of Common Stock of the Company. Certain legal matters relating to the
offering will be passed upon for the Underwriters by Best & Flanagan,
Professional Limited Liability Partnership, Minneapolis, Minnesota.
EXPERTS
The Consolidated Financial Statements and Schedule of the Company included
or incorporated by reference in this Prospectus and Registration Statement have
been audited by McGladrey & Pullen, LLP, independent accountants, to the extent
and for the periods indicated in their reports appearing elsewhere or
incorporated by reference herein, and are included in reliance upon the reports
and upon the authority of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the regional offices located at Seven World Trade Center, Suite 1300, New York,
New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of such material can also be obtained from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission also maintains a Web
site (http://www.sec.gov) at which reports, proxy and information statements and
other information regarding the Company may be accessed. Such reports, proxy
statements and other information can also be inspected at the offices of the
National Association of Securities Dealers, Inc., 1735 K Street N.W.,
Washington, D.C. 20006. The Company's Common Stock is quoted on The Nasdaq
National Market ("Nasdaq").
The Company has filed with the Commission a Registration Statement on Form
S-2 with respect to the Common Stock offered hereby. This Prospectus does not
contain all of the information set forth in the Registration Statement as
permitted by the rules and regulations of the Commission. For further
information pertaining to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement and the exhibits thereto, copies
of which may be inspected without charge at the
43
<PAGE>
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, and copies thereof may be obtained from the
Commission upon payment of the prescribed fees.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year ended June 2,
1996, Proxy Statement for the 1996 Annual Meeting of Shareholders and Form 10-Q
for the quarter ended September 1, 1996 are incorporated by reference in this
Prospectus. All other reports filed by the Company pursuant to Section 13(a) or
15(d) of the Exchange Act since the end of the fiscal year covered by the
above-referenced Annual Report are incorporated by reference in this Prospectus.
Statements contained in the foregoing documents incorporated by reference herein
shall be deemed to be modified or superseded for purposes hereof to the extent
that statements contained herein modify or supersede such statements. Any
statements so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus has been delivered, on the written or oral
request of such person, a copy of any or all of the other documents referred to
above which have been incorporated by reference in this Prospectus, other than
exhibits to such documents. Requests for such copies should be directed to
Carlos Montague, Chief Financial Officer, Ault Incorporated, 7300 Boone Avenue
North, Minneapolis, Minnesota 55428-1028, telephone number (612) 493-1900.
44
<PAGE>
AULT INCORPORATED AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT AUDITOR'S REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS..... F-2
Consolidated balance sheets as of May 28, 1995, June 2, 1996, and
September 1, 1996 (unaudited)......................................... F-3
Consolidated statements of operations for the years ended May 29, 1994,
May 28, 1995, June 2, 1996, and the three-month periods ended August
27, 1995, and September 1, 1996 (unaudited)........................... F-4
Consolidated statements of stockholders' equity for the years ended May
29, 1994, May 28, 1995, and June 2, 1996, and the three-month period
ended September 1, 1996 (unaudited)................................... F-5
Consolidated statements of cash flows for the years ended May 29, 1994,
May 28, 1995, June 2, 1996, and the three-month periods ended August
27, 1995, and September 1, 1996 (unaudited)........................... F-6
Notes to consolidated financial statements for the years ended May 29,
1994, May 28, 1995, June 2, 1996, and the three-month periods ended
August 27, 1995, and September 1, 1996 (unaudited).................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Ault Incorporated and Subsidiary
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of Ault
Incorporated and Subsidiary as of May 28, 1995, and June 2, 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three fiscal years in the period ended June 2, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Ault
Incorporated and Subsidiary as of May 28, 1995, and June 2, 1996, and the
results of their operations and their cash flows for each of the three fiscal
years in the period ended June 2, 1996, in conformity with generally accepted
accounting principles.
McGLADREY & PULLEN, LLP
Minneapolis, Minnesota
July 10, 1996
F-2
<PAGE>
AULT INCORPORATED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 28, JUNE 2, SEPTEMBER 1,
1995 1996 1996
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS (NOTE 3)
Current Assets
Cash....................................... $ 319,243 $ 412,406 $ 336,077
Trade receivables, less allowance for
doubtful accounts 1996 $51,000; 1995
$38,000 (Note 11)........................ 5,380,642 7,335,888 6,826,487
Inventories (Note 2)....................... 6,001,464 7,272,794 7,653,107
Prepaid and other expenses................. 485,200 460,078 516,578
------------ ------------ -------------
Total current assets................... 12,186,549 15,481,166 15,332,249
------------ ------------ -------------
Other Assets
Other receivable, less allowance of
approximately $65,000 (Note 10).......... 196,677 196,677 196,677
Patent..................................... -- 181,528 181,528
Other...................................... 43,877 21,709 2,958
------------ ------------ -------------
240,554 399,914 381,163
------------ ------------ -------------
Property, Equipment, and Leasehold
Improvements, at cost (Note 8)
Land....................................... 825,809 825,809 825,809
Building................................... 731,956 735,413 735,413
Machinery and equipment.................... 4,843,319 5,112,855 5,157,588
Office furniture and equipment............. 554,130 593,481 607,936
Data processing equipment.................. 960,780 1,004,749 1,004,749
Leasehold improvements..................... 686,619 686,619 686,619
------------ ------------ -------------
8,602,613 8,958,926 9,018,114
Less accumulated depreciation................ 5,600,436 6,109,895 6,223,292
------------ ------------ -------------
3,002,177 2,849,031 2,794,822
------------ ------------ -------------
$ 15,429,280 $ 18,730,111 $ 18,508,234
------------ ------------ -------------
------------ ------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Note payable to bank (Note 3).............. $ 3,569,613 $ 5,617,820 $ 6,520,127
Current maturities of long-term debt....... 333,731 387,664 387,188
Accounts payable........................... 4,578,468 4,512,539 3,088,481
Accrued expenses:
Compensation............................. 373,312 556,448 475,684
Other.................................... 389,496 627,633 729,841
Income tax payable (Note 4)................ -- 25,000 73,476
------------ ------------ -------------
Total current liabilities.............. 9,244,620 11,727,104 11,274,797
------------ ------------ -------------
Long-Term Debt, less current maturities (Note
3)......................................... 1,221,196 935,064 883,063
------------ ------------ -------------
Deferred Rent Expense (Note 8)............... 192,877 163,972 155,890
------------ ------------ -------------
Deferred Compensation/Severance.............. 287,039 332,716 329,735
------------ ------------ -------------
Commitments and Contingencies (Notes 5, 6,
and 8).....................................
Stockholders' Equity (Notes 3, 5, 6, and
7).........................................
Preferred stock, no par value; authorized
1,000,000 shares; none issued............ -- -- --
Common stock, no par value; authorized
5,000,000 shares......................... 6,897,332 6,966,779 6,986,056
Deduct notes receivable arising from the
sale of common stock..................... (107,813) -- --
Foreign currency translation adjustment.... (111,686) (83,928) (36,935)
Accumulated deficit........................ (2,194,285) (1,311,596) (1,084,372)
------------ ------------ -------------
4,483,548 5,571,255 5,864,749
------------ ------------ -------------
$ 15,429,280 $ 18,730,111 $ 18,508,234
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
AULT INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
FOR THE YEARS ENDED THREE MONTHS ENDED
------------------------------------------- --------------------------
MAY 29, MAY 28, JUNE 2, AUGUST 27, SEPTEMBER 1,
1994 1995 1996 1995 1996
------------- ------------- ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales (Note 11)...................... $ 17,974,661 $ 27,054,421 $ 33,773,875 $ 6,880,767 $8,678,463
Cost of goods sold....................... 14,237,723 20,727,224 25,509,262 5,150,775 6,545,685
------------- ------------- ------------- ------------ ------------
GROSS PROFIT....................... 3,736,938 6,327,197 8,264,613 1,729,992 2,132,778
------------- ------------- ------------- ------------ ------------
Operating expenses:
Marketing.............................. 1,877,777 2,346,459 2,632,857 625,572 706,368
Design engineering..................... 934,624 1,268,874 1,575,038 338,411 369,089
General and administrative............. 1,955,965 1,955,311 2,491,057 522,604 586,958
------------- ------------- ------------- ------------ ------------
4,768,366 5,570,644 6,698,952 1,486,587 1,662,415
------------- ------------- ------------- ------------ ------------
OPERATING INCOME (LOSS)............ (1,031,428) 756,553 1,565,661 243,405 470,363
Non-operating income (expense):
Other.................................. (851) 22,325 84,333 15,754 16,441
Interest expense....................... (287,563) (445,611) (742,305) (196,765) (185,855)
------------- ------------- ------------- ------------ ------------
INCOME (LOSS) BEFORE INCOME
TAXES............................ (1,319,842) 333,267 907,689 62,394 300,949
Income taxes (Note 4).................... -- -- 25,000 -- 73,725
------------- ------------- ------------- ------------ ------------
NET INCOME (LOSS).................. $ (1,319,842) $ 333,267 $ 882,689 $ 62,394 $ 227,224
------------- ------------- ------------- ------------ ------------
------------- ------------- ------------- ------------ ------------
Net income (loss) per share.............. $ (0.64) $ 0.16 $ 0.40 $ 0.03 $ 0.10
Weighted average number of shares and
common equivalent shares outstanding... 2,062,526 2,105,556 2,223,543 2,159,896 2,383,774
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
AULT INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES FOREIGN
COMMON STOCK RECEIVABLE CURRENCY
---------------------- FROM SALE OF ACCUMULATED TRANSLATION
SHARES AMOUNT COMMON STOCK DEFICIT ADJUSTMENT TOTAL
--------- ----------- --------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, May 30, 1993............ 2,062,526 $ 6,862,801 $ (107,813) $(1,207,710) $(107,806) $ 5,439,472
Net loss....................... -- -- -- (1,319,842) -- (1,319,842)
Net change in foreign currency
translation adjustment....... -- -- -- -- (50,254) (50,254)
--------- ----------- --------------- ------------ ----------- -----------
Balance, May 29, 1994............ 2,062,526 6,862,801 (107,813) (2,527,552) (158,060) 4,069,376
Net income..................... -- -- -- 333,267 -- 333,267
Net change in foreign currency
translation adjustment....... -- -- -- -- 46,374 46,374
Issuance of 21,250 shares of
common stock in accordance
with the stock option plan
(Note 6)..................... 21,250 34,531 -- -- -- 34,531
--------- ----------- --------------- ------------ ----------- -----------
Balance, May 28, 1995............ 2,083,776 6,897,332 (107,813) (2,194,285) (111,686) 4,483,548
Net income..................... -- -- -- 882,689 -- 882,689
Net change in foreign currency
translation adjustment....... -- -- -- -- 27,758 27,758
Issuance of 36,000 shares of
common stock in accordance
with stock option plan (Note
6)........................... 36,000 69,447 -- -- -- 69,447
Payment of notes receivable
which arose from the sale of
common stock................. -- -- 107,813 -- -- 107,813
--------- ----------- --------------- ------------ ----------- -----------
Balance, June 2, 1996............ 2,119,776 $ 6,966,779 $ -- $(1,311,596) $ (83,928) $ 5,571,255
Net income (unaudited)......... -- -- -- 227,224 -- 227,224
Net change in foreign currency
translation adjustment
(unaudited).................. -- -- -- -- 46,993 46,993
Issuance of 9,000 shares of
common stock in accordance
with stock option plan
(unaudited).................. 9,000 19,277 -- -- -- 19,277
--------- ----------- --------------- ------------ ----------- -----------
Balance, September 1, 1996
(unaudited).................... 2,128,776 $ 6,986,056 $ -- $(1,084,372) $ (36,935) $ 5,864,749
--------- ----------- --------------- ------------ ----------- -----------
--------- ----------- --------------- ------------ ----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
AULT INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
FOR THE YEARS ENDED THREE MONTHS ENDED
------------------------------------- ------------------------
MAY 29, MAY 28, JUNE 2, AUGUST 27, SEPTEMBER 1,
1994 1995 1996 1995 1996
----------- ----------- ----------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net income (loss).............................. $(1,319,842) $ 333,267 $ 882,689 $ 62,394 $ 227,224
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation................................. 481,570 528,109 509,458 128,778 113,397
Amortization................................. 1,078 2,451 2,363 421 371
Provision for doubtful accounts.............. 61,000 10,000 67,000 (13,000) 19,000
Provision for inventory allowance............ 307,000 (272,000) (130,000) 26,000 36,000
Loss on disposal of equipment................ 191 -- -- -- --
Deferred rent expense........................ (3,005) (15,505) (28,905) (4,657) (8,082)
Changes in assets and liabilities:
(Increase) decrease in:
Trade receivables........................ (1,017,574) (1,652,739) (2,106,114) 473,845 490,401
Inventories.............................. (375,417) (1,123,580) (1,242,606) 8,751 (416,313)
Prepaid and other expenses............... 157,142 (156,607) 10,511 (10,318) (56,500)
Increase (decrease) in:
Accounts payable......................... 897,723 1,264,569 151,533 (728,094) (1,424,058)
Accrued expenses......................... 89,082 147,251 480,653 8,543 18,463
Income tax payable....................... -- -- 25,000 -- 48,476
----------- ----------- ----------- ---------- ------------
NET CASH USED IN OPERATING
ACTIVITIES.......................... (721,052) (934,784) (1,378,418) (47,337) (951,621)
----------- ----------- ----------- ---------- ------------
Cash Flows From Investing Activities
Proceeds from sale of equipment................ 1,114 -- -- -- --
Purchase of property and equipment............. (100,530) (1,720,930) (356,312) (56,519) (59,188)
(Increase) decrease in patent and other
assets....................................... 8,122 40,992 (158,573) 27,074 18,380
----------- ----------- ----------- ---------- ------------
NET CASH USED IN INVESTING
ACTIVITIES.......................... (91,294) (1,679,938) (514,885) (29,445) (40,808)
----------- ----------- ----------- ---------- ------------
Cash Flows From Financing Activities
Net borrowings on revolving credit agreement... 1,048,552 1,589,669 2,048,207 151,644 902,307
Proceeds from long-term borrowings............. -- 1,517,290 -- -- --
Net proceeds from issuance of common stock..... -- 34,531 69,447 813 19,277
Payments received from repayment of notes
receivable................................... -- -- 107,813 -- --
Principal payments on long-term borrowings,
including capital lease obligations.......... (130,550) (387,303) (266,759) (152,150) (52,477)
----------- ----------- ----------- ---------- ------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES.......................... 918,002 2,754,187 1,958,708 307 869,107
----------- ----------- ----------- ---------- ------------
Effect of Foreign Currency Exchange Rate Changes
on Cash........................................ (50,254) 46,374 27,758 (14,162) 46,993
----------- ----------- ----------- ---------- ------------
INCREASE (DECREASE) IN CASH........... 55,402 185,839 93,163 (90,637) (76,329)
Cash
Beginning...................................... 78,002 133,404 319,243 319,243 412,406
----------- ----------- ----------- ---------- ------------
Ending......................................... $ 133,404 $ 319,243 $ 412,406 $ 228,606 $ 336,077
----------- ----------- ----------- ---------- ------------
----------- ----------- ----------- ---------- ------------
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest................................... $ 284,736 $ 414,979 $ 676,810 $ 196,056 $ 183,839
Taxes...................................... -- -- -- -- 25,250
----------- ----------- ----------- ---------- ------------
----------- ----------- ----------- ---------- ------------
Supplemental Schedule of Noncash Financing
Activities
Capital lease obligations for equipment........ $ 25,672 $ 50,142 $ -- $ -- $ --
----------- ----------- ----------- ---------- ------------
----------- ----------- ----------- ---------- ------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: The Company and its subsidiary operate in one business
segment which includes the design, manufacturing, and marketing of power
conversion products, principally to original equipment manufacturers of data
communications equipment, micro-computers and related peripherals,
telecommunications equipment, and portable medical equipment. Sales are to
customers worldwide, and credit is granted based upon the credit policies of the
Company.
A summary of the Company's significant accounting policies follows:
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial
statements include the accounts of Ault Incorporated and its wholly-owned
subsidiary, Ault Korea Corporation. All significant 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 FASB
Statement No. 52.
CASH: 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.
INVENTORIES: Inventories are stated at the lower of cost (first-in,
first-out method) or market.
PREPAID AND OTHER EXPENSES: Prepaid and other expenses at May 28, 1995, and
June 2, 1996, include refundable value added tax and refundable custom duties
relating to the Korean operations of approximately $335,000 and $303,000,
respectively.
PATENT: The patent is stated at cost, will start to be used during the
fiscal year 1997, and will be amortized using the straight-line method over its
economic useful life, which has been estimated to be three years.
DEPRECIATION: It is the Company's policy to include depreciation expense on
assets acquired under capital leases with depreciation expense on owned assets.
Depreciation is based on the estimated useful lives of the individual assets.
The methods and estimated useful lives are as follows:
<TABLE>
<CAPTION>
METHOD YEARS
------------------------------ --------
<S> <C> <C>
Building Straight-line 36
Machinery and equipment Straight-line 3-10
Office furniture and equipment Straight-line 5-10
Data processing equipment Double declining balance 5
and straight-line
Leasehold improvements Straight-line 5-10
</TABLE>
DEFERRED COMPENSATION/SEVERANCE: Deferred compensation/severance represents
the accrual of compensation expense for the Korean operations' employees that is
payable upon termination of employment.
DESIGN ENGINEERING: Design engineering costs are those incurred for
research, design, and development of new products and redesign of existing
products. These costs are expensed currently.
INCOME TAXES: Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences, and
operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
F-7
<PAGE>
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
Investment tax credits, research and development credits, and job credits
are accounted for by the flow-through method whereby they reduce income taxes
currently payable and the provision for income taxes in the period the assets
giving rise to such credits are placed in service. To the extent such credits
are not currently utilized on the Company's tax return, deferred tax assets,
subject to considerations about the need for a valuation allowance, are
recognized for the carryforward amount.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and assumptions
were used to estimate the fair value of each class of financial instruments:
CASH EQUIVALENTS: The carrying amount approximates fair value.
LONG-TERM DEBT: The fair value of the long-term debt is estimated based on
interest rates for the same or similar debt offered to the Company having the
same or similar remaining maturities and collateral requirements. The carrying
value of the long-term debt approximates fair value.
RECENTLY ISSUED ACCOUNTING STANDARDS: In October 1995, the FASB issued SFAS
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which establishes a
fair-value-based method for financial accounting and reporting for stock-based
employee compensation plans. However, the new standard allows compensation to
continue to be measured by using the intrinsic value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES, but requires expanded disclosures. SFAS No. 123 is
effective in fiscal year 1997. The Company has elected to continue to apply the
intrinsic value-based method of accounting for stock options.
EARNINGS (LOSS) PER SHARE: Earnings (loss) per share have been computed
using the weighted average number of common shares and, for the fiscal years
ended May 28, 1995, and June 2, 1996, and for the three months ended August 27,
1995, and September 1, 1996, certain dilutive common equivalent shares
outstanding. None of the common equivalent shares have been included in the
computation for the year ended May 29, 1994, since their inclusion would have an
antidilutive effect.
FISCAL YEAR: The Company operates on a 52 to 53 week fiscal year. The
fiscal years for the financial statements presented ended May 29, 1994, May 28,
1995, and June 2, 1996.
INTERIM FINANCIAL INFORMATION (UNAUDITED): The financial statements and
notes related thereto as of August 27, 1995, and September 1, 1996, and for the
three-month periods then ended, are unaudited, but in the opinion of management
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the financial position and results of
operations. The operating results for the interim periods are not indicative of
the operating results to be expected for a full year or for other
F-8
<PAGE>
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
interim periods. Not all disclosures required by generally accepted accounting
principles necessary for a complete presentation have been included.
NOTE 2. INVENTORIES
The components of inventory are as follows:
<TABLE>
<CAPTION>
MAY 28, JUNE 2, SEPTEMBER 1,
1995 1996 1996
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials................................ $ 4,158,430 $ 4,263,468 $ 2,971,100
Work in process.............................. 530,150 318,711 305,001
Finished goods............................... 1,312,884 2,690,615 4,377,006
----------- ----------- ------------
$ 6,001,464 $ 7,272,794 $ 7,653,107
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
The inventory amount at May 28, 1995, and September 1, 1996, are presented
net of a $130,000 and $36,000 inventory valuation allowance, respectively. There
is no valuation allowance at June 2, 1996.
NOTE 3. FINANCING ARRANGEMENTS AND LONG-TERM DEBT
FINANCING ARRANGEMENT: At June 2, 1996, the Company had a $6,000,000
revolving line of credit agreement and had approximately $1,234,000 of unused
availability under the line. As part of this agreement, $400,000 has been
allocated to support a standby letter of credit. This $400,000 letter of credit
was issued but not drawn upon on June 2, 1996. Interest on advances is a tiered
interest rate that ranges from 1 to 3 percent over the bank's base rate, which
is determined by the amount outstanding under this line, averaging 11 percent at
June 2, 1996. All advances are due on demand and are secured by all of the
Company's assets. In addition, the agreement contains certain reporting and
operating covenants, one of which is a restriction on payment of dividends.
Also, the Company's Korean subsidiary maintains a credit facility of $1,500,000
with a Korean bank to cover bank overdrafts, short term financing and export
financing.
LONG-TERM DEBT:
<TABLE>
<CAPTION>
MAY 28, JUNE 2,
1995 1996
------------ ------------
<S> <C> <C>
9% mortgage payable, due in semi-annual installments of $121,410
including interest to March 2000, secured by land and
building........................................................ $ 1,236,776 $ 1,033,007
Capitalized lease obligations, due in various monthly
installments, with interest ranging from 8.9% to 11.0%, to March
1998, secured by equipment...................................... 267,784 149,721
Other notes payable............................................... 50,367 140,000
------------ ------------
Total............................................................. 1,554,927 1,322,728
Less current maturities........................................... 333,731 387,664
------------ ------------
$ 1,221,196 $ 935,064
------------ ------------
------------ ------------
</TABLE>
F-9
<PAGE>
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. FINANCING ARRANGEMENTS AND LONG-TERM DEBT (CONTINUED)
Approximate maturities of long-term debt for years subsequent to June 2,
1996, are as follows:
<TABLE>
<S> <C>
1997.................................... $ 388,000
1998.................................... 368,000
1999.................................... 264,000
2000.................................... 303,000
-------------
$ 1,323,000
-------------
-------------
</TABLE>
NOTE 4. INCOME TAXES
Pretax income (loss) for domestic and foreign operations was as follows:
<TABLE>
<CAPTION>
MAY 29, MAY 28, JUNE 2,
1994 1995 1996
------------- ---------- ----------
<S> <C> <C> <C>
Domestic............................................... $ (929,178) $ 252,514 $ 891,344
Foreign................................................ (390,664) 80,753 (8,655)
------------- ---------- ----------
Total.................................................. $ (1,319,842) $ 333,267 $ 882,689
------------- ---------- ----------
------------- ---------- ----------
</TABLE>
Income tax expense (credits) for the years ended May 29, 1994, May 28, 1995,
and June 2, 1996, differs from the expected rate for the following reasons:
<TABLE>
<CAPTION>
MAY 29, MAY 28, JUNE 2,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Computed expected tax provision (benefit):
Domestic............................................. $ (315,000) $ 101,000 $ 367,000
Foreign.............................................. (82,000) 7,000
State................................................ (40,000) 6,000 6,000
Generation (utilization) of net operating loss
carryforwards:
Domestic............................................. 355,000 (107,000) (348,000)
Foreign.............................................. -- (7,000) --
Effect of Korean tax holiday status.................... 82,000 -- --
----------- ----------- -----------
$ -- $ -- $ 25,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-10
<PAGE>
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. INCOME TAXES (CONTINUED)
Net deferred taxes consist of the following components as of May 28, 1995,
and June 2, 1996:
<TABLE>
<CAPTION>
MAY 28, JUNE 2,
1995 1996
------------ ------------
<S> <C> <C>
Deferred tax assets:
Tax credit carryforwards........................................ $ 660,000 $ 633,000
Loss carryforwards.............................................. 407,000 161,000
Allowance for doubtful accounts................................. 41,000 46,000
Inventory allowances............................................ 43,000 23,000
Accrued vacation................................................ 27,000 30,000
Accrued warranty................................................ 27,000 31,000
Equipment and leasehold improvements............................ 117,000 118,000
------------ ------------
1,322,000 1,042,000
Less valuation allowance.......................................... 1,322,000 1,042,000
------------ ------------
$ -- $ --
------------ ------------
------------ ------------
</TABLE>
At May 28, 1995, and June 2, 1996, the Company recorded a valuation
allowance of $1,322,000 and $1,042,000, respectively, on the deferred tax assets
to reduce the total to an amount that management believes will ultimately be
realized. Realization of deferred tax assets is dependent upon sufficient future
taxable income during the period that temporary differences and carryforwards
are expected to be available to reduce taxable income.
At June 2, 1996, the Company had net operating loss carryforwards to reduce
future taxable income in the United States and Korea of approximately $190,000
and $426,000, respectively. The Company also has tax credit carryforwards of
approximately $633,000 available to offset against future income taxes in the
F-11
<PAGE>
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. INCOME TAXES (CONTINUED)
United States for income tax purposes. The net operating loss and tax credit
carryforwards expire in varying amounts as follows for income tax reporting
purposes:
<TABLE>
<CAPTION>
NET
OPERATING TAX
LOSS CREDITS
---------- ----------
<S> <C> <C>
1997.................................... $ -- $ 27,000
1998.................................... -- 78,000
1999.................................... 426,000 234,000
2000.................................... -- 52,000
2001.................................... -- 22,000
2004.................................... -- 14,000
2005.................................... -- 42,000
2006.................................... -- 40,000
2007.................................... -- 35,000
2008.................................... -- 31,000
2009.................................... 187,000 13,000
2010.................................... 3,000 41,000
2011.................................... -- 4,000
---------- ----------
$ 616,000 $ 633,000
---------- ----------
---------- ----------
</TABLE>
NOTE 5. EMPLOYEE BENEFIT PLANS
PENSION PLAN: The Company has a pension plan covering substantially all
U.S. employees. The Company is required to match 25 percent of the employees'
contributions up to six percent of salary and may make additional contributions
to the plan to the extent authorized by the Board of Directors. The contribution
amount charged to operating expenses in the years ended May 29, 1994, May 28,
1995, and June 2, 1996, approximated $32,000, $33,000, and $38,000,
respectively.
STOCK PURCHASE PLAN: On March 10, 1996, the Company established a stock
purchase plan in which up to 100,000 shares of common stock may be purchased by
employees. The purchase price is equal to the lesser of 85 percent of the fair
market value of the shares on the date the Phase commences or 85 percent of the
fair market value of the shares on the termination date of the Phase. Each Phase
is one year and the commencement date of Phase I was March 18, 1996. Shares may
be purchased in March 1997, the end of the Phase I, for employees currently
participating; therefore, no shares were purchased under this plan during the
fiscal year ended June 2, 1996.
NOTE 6. STOCK OPTION PLAN
1986 STOCK OPTION PLAN: The Company has a Stock Option Plan which provides
up to 500,000 shares to be designated as either nonqualified or incentive
options at the discretion of the Board of Directors. The plan provides for
annual grants of options to officers, other employees, and nonemployee
directors.
F-12
<PAGE>
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. STOCK OPTION PLAN (CONTINUED)
The following is a summary of the options granted, expired, and outstanding:
<TABLE>
<CAPTION>
OPTION PRICE
NUMBER OF ---------------------------
SHARES PER SHARE TOTAL
----------- -------------- -----------
<S> <C> <C> <C>
Outstanding at May 30, 1993......................... 268,650 $1.375-3.50 $ 701,031
Granted........................................... 6,000 1.375 8,250
Expired........................................... (59,400) 1.375-3.50 (137,106)
----------- -----------
Outstanding at May 29, 1994......................... 215,250 1.375-3.50 572,175
Granted........................................... 87,000 1.188-2.125 108,938
Exercised......................................... (21,250) 1.625 (34,531)
Expired........................................... (5,750) 1.188-3.50 (12,500)
----------- -----------
Outstanding at May 28, 1995......................... 275,250 1.188-3.50 634,082
Granted........................................... 106,000 2.313-3.688 253,428
Exercised......................................... (36,000) 1.188-2.75 (69,447)
----------- -----------
Outstanding at June 2, 1996......................... 345,250 1.188-3.688 818,063
Exercised......................................... (9,000) 1.188-3.50 (19,283)
----------- -----------
Outstanding at September 1, 1996.................... 336,250 1.188-3.688 $ 798,780
----------- -----------
----------- -----------
</TABLE>
All of the options above are incentive stock options. At June 2, 1996, and
September 1, 1996, options to purchase 229,550 and 221,750, respectively, shares
of common stock were exercisable under the plan. The Company has available
28,950 shares for future option grants at June 2, 1996, and September 1, 1996.
NOTE 7. STOCKHOLDERS' EQUITY
The Board of Directors is empowered to establish and to designate classes
and series of preferred shares and to set the terms of such shares, including
terms with respect to redemption, dividends, liquidation, conversion, and voting
rights. The Restated Articles provide that the preferred shares are senior to
the common shares with respect to dividends and liquidation. No preferred shares
have been issued.
During the fiscal year ended June 2, 1996, the Company adopted a
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 $.001 per Right. Each Right is equal to a
right to purchase one one-hundredth of a share of the Class A, Junior
Participating Preferred Stock. 50,000 shares of preferred stock are reserved for
the exercise of the Rights. No Rights were exercised during the year ended June
2, 1996, nor the three months ended September 1, 1996.
F-13
<PAGE>
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. COMMITMENTS AND CONTINGENCIES
CAPITAL LEASES: The Company is leasing certain equipment under capital
leases. The cost and accumulated depreciation of assets acquired under capital
leases are as follows:
<TABLE>
<CAPTION>
MAY 28, JUNE 2,
1995 1996
---------- ----------
<S> <C> <C>
Cost.................................................................. $ 684,114 $ 684,114
Accumulated depreciation.............................................. 338,618 461,136
---------- ----------
$ 345,496 $ 222,978
---------- ----------
---------- ----------
</TABLE>
The future minimum lease payments under capital leases and the aggregate
present value of the net minimum lease payments at June 2, 1996, are as follows:
<TABLE>
<S> <C>
1997.................................................................. $ 485,706
1998.................................................................. 436,778
1999.................................................................. 308,584
2000.................................................................. 319,996
-------------
Total minimum lease payments.......................................... 1,551,064
Less amount representing interest..................................... 228,336
-------------
$ 1,322,728
-------------
-------------
</TABLE>
The capital lease obligations are included under long term debt.
OPERATING LEASES: The Company leases its United States plant under an
operating lease with a term of 120 months through August 1999. In addition,
certain equipment and motor vehicles are leased under operating leases with
terms of approximately 36 months.
The lease on the United States plant and office facilities includes
scheduled base rent increases over the term of the lease. The total amount of
the base rent payments is being charged to expense on the straight-line method
over the term of the lease. In addition to the base rent payment, the Company
pays a monthly allocation of the building's operating expenses. The Company has
recorded a deferred credit to reflect the excess of rent expense over cash
payments since inception of the lease.
Approximate minimum annual rental commitments at June 2, 1996, are as
follows:
<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
1997.................................... $ 288,000
1998.................................... 275,000
1999.................................... 263,000
2000.................................... 70,000
2001.................................... 2,000
----------
$ 898,000
----------
----------
</TABLE>
Total rental expense for the years ended May 29, 1994, May 28, 1995, and
June 2, 1996, was approximately $372,000, $428,000, and $385,000, respectively.
F-14
<PAGE>
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. OPERATIONS INFORMATION
Foreign manufacturing is done by the Korean subsidiary and certain
nonaffiliated companies in China and Thailand. All United States manufacturing
is done by Ault Incorporated. A summary of the Company's manufacturing
operations by geographic area is presented below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THREE MONTHS ENDED
------------------------------------------- --------------------------
MAY 29, MAY 28, JUNE 2, AUGUST 27, SEPTEMBER 1,
1994 1995 1996 1995 1996
------------- ------------- ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
United States:
Customer sales......................... $ 17,699,823 $ 26,785,479 $ 33,359,291 $ 6,837,849 $8,337,650
Sales to subsidiary.................... -- -- -- -- --
------------- ------------- ------------- ------------ ------------
Total.................................... $ 17,699,823 $ 26,785,479 $ 33,359,291 $ 6,837,849 $8,337,650
------------- ------------- ------------- ------------ ------------
------------- ------------- ------------- ------------ ------------
Operating profit (loss)................ $ (700,168) $ 710,964 $ 1,560,693 219,342 $ 416,437
Total assets........................... 8,917,705 11,823,983 14,414,074 11,440,622 15,339,505
Capital expenditures................... 94,583 144,894 194,129 31,184 43,004
Depreciation and amortization.......... 330,450 359,280 314,810 82,289 79,836
Korea:
Customer sales......................... $ 274,838 $ 268,942 $ 414,584 $ 42,918 $ 340,813
Sales to parent........................ 5,237,870 8,751,528 10,496,364 2,623,092 2,352,510
------------- ------------- ------------- ------------ ------------
Total.................................... $ 5,512,708 $ 9,020,470 $ 10,910,948 $ 2,666,010 $2,693,323
------------- ------------- ------------- ------------ ------------
------------- ------------- ------------- ------------ ------------
Operating profit (loss)................ $ (361,329) $ 90,209 $ 62,970 $ (9,680) $ 47,986
Total assets........................... 3,118,965 6,198,105 6,502,582 5,701,484 5,736,172
Capital expenditures................... 36,079 1,626,273 162,183 25,335 16,184
Depreciation and amortization.......... 152,158 171,280 197,011 46,489 33,561
Adjustments and eliminations:
Intercompany sales..................... 5,237,870 8,751,528 10,496,364 2,623,092 2,352,510
Operating profit (loss)................ 30,069 (44,620) -- 33,743 5,940
Total assets........................... (1,369,980) (2,592,808) (2,186,545) (2,389,495) (2,567,443)
Consolidated:
Sales.................................. 17,974,661 27,054,421 33,773,875 6,880,767 8,678,463
Operating profit (loss)................ (1,031,428) 756,553 1,565,661 243,405 470,363
Total assets........................... 10,666,690 15,429,280 18,730,111 14,752,611 18,508,234
Capital expenditures................... 130,662 1,771,167 356,312 56,519 59,188
Depreciation and amortization.......... 482,608 530,560 511,821 128,778 113,397
</TABLE>
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 14.7,
16.7, and 19.4 percent of total sales for the years ended May 29, 1994, May 28,
1995, and June 2, 1996, respectively, and 17.8 and 21.7 percent for the three
months ended August 27, 1995, and September 1, 1996, respectively.
F-15
<PAGE>
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. OPERATIONS INFORMATION (CONTINUED)
The sales were made principally to the following locations:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THREE MONTHS ENDED
--------------------------------------- ------------------------------
MAY 29, MAY 28, JUNE 2, AUGUST 27, SEPTEMBER 1,
1994 1995 1996 1995 1996
------------ ------------ ----------- ------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Canada................................ 9.6% 6.5% 8.9% 11.5% 12.7%
Elsewhere............................. 5.1 10.2 10.5 6.3 9.0
--- --- --- --- ---
14.7% 16.7% 19.4% 17.8% 21.7%
--- --- --- --- ---
--- --- --- --- ---
</TABLE>
OTHER FOREIGN PRODUCTION: In addition to the manufacturing done by the
Korean subsidiary, the Company has subcontracting agreements for the purchase of
finished assemblies from certain manufacturers in China and Thailand in amounts
approximating $1,335,000, $5,314,000, and $9,941,000 for the years ended May 29,
1994, May 28, 1995, and June 2, 1996, respectively, and $1,220,000 and
$2,289,000 for the three months ended August 27, 1995, and September 1, 1996,
respectively.
NOTE 10. OTHER RECEIVABLE
At May 28, 1995, June 2, 1996, the Company has a receivable in the amount of
$196,677, net of a $65,000 allowance, due from a customer for whom payment is
delinquent. The Company has filed suit and is pursuing collection in this
matter. The receivable has been classified as a long-term asset since the
Company is uncertain as to when the receivable will be collected.
NOTE 11. MAJOR CUSTOMER
The Company has a major customer which accounted for more than 10 percent of
net sales for the year ended June 2, 1996 and the three months ended September
1, 1996:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THREE MONTHS ENDED
---------------------------------------- -------------------------------
MAY 29, MAY 28, JUNE 2, AUGUST 27, SEPTEMBER 1,
1994 1995 1996 1995 1996
------------- ------------ ----------- -------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales Percentage 9.4% 8.8% 11.0% 9.5% 11.9%
Accounts Receivable Percentage 4.8% 10.2% 14.8% 9.4% 10.0%
</TABLE>
NOTE 12. SUBSEQUENT EVENTS (UNAUDITED)
PUBLIC OFFERING: On October 23, 1996, the Company signed a letter of intent
with an investment banker to undertake a public offering of 1,800,000 shares of
common stock at a price based on market conditions at the time of effectiveness.
The letter of intent includes an overallotment option to sell an additional
270,000 shares and entitles the underwriters to purchase from the Company for
$100 warrants for the purchase of up to 144,900 shares of the Company's common
stock. These warrants will expire five years from the effective date of the
Registration Statement and are exercisable at 120 percent of the public offering
price. The Company plans to use the proceeds from this offering to repay funds
advanced under its credit facilities, repayment of long term debt, upgrade
manufacturing and management information capabilities and for general corporate
purposes, including working capital.
F-16
<PAGE>
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
STOCK OPTIONS: On October 1, 1996, the shareholders approved an amendment
to the Company's Stock Option Plan reserving an additional 100,000 shares of its
common stock for issuance upon exercise of options under the plan.
In addition, effective October 1, 1996, the Board of Directors granted
options to purchase 125,000 shares of common stock under the Stock Option Plan
and granted options to purchase 6,000 shares to non-employee directors which
were not issued pursuant to the Stock Option Plan.
FINANCING ARRANGEMENT: On September 1, 1996, the Company amended its U.S.
credit facility agreement to reduce the interest rate on advances to 0.75
percent above the bank's base rate.
F-17
<PAGE>
[Photo on center of page depicts exterior and interior view of Ault's switching
power supply]
Ault's wide range switching power supply from the size 7 product family
which is used to power high speed modems, bar code scanners and small network
servers.
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 10
Price Range of Common Stock............................................... 11
Dividend Policy........................................................... 11
Capitalization............................................................ 12
Selected Consolidated Financial Data...................................... 13
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 14
Business.................................................................. 22
Management................................................................ 36
Principal Stockholders.................................................... 38
Description of Capital Stock.............................................. 39
Underwriting.............................................................. 42
Legal Matters............................................................. 43
Experts................................................................... 43
Available Information..................................................... 43
Incorporation of Certain Documents by Reference........................... 44
Consolidated Financial Statements......................................... F-1
</TABLE>
1,800,000 SHARES
[LOGO]
COMMON STOCK
----------------
P R O S P E C T U S
-------------------
PRINCIPAL FINANCIAL
SECURITIES, INC.
CRUTTENDEN ROTH
INCORPORATED
, 1996
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following fees and expenses will be paid by the Company in connection
with issuance and distribution of the securities registered hereby and do not
include underwriting commissions and discounts. All of such expenses, except for
the SEC, NASD and NASDAQ fees are estimated.
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 6,120
NASD filing fee................................................... $ 2,519
Nasdaq listing fee................................................ $ 33,156
Legal fees and expenses........................................... $ 95,000
Accounting fees and expenses...................................... $ 65,000
Blue Sky fees and expenses........................................ $ 5,000
Transfer agent and registrar fees................................. $ 1,500
Printing expenses................................................. $ 86,000
Miscellaneous expenses............................................ $ 15,000
---------
TOTAL....................................................... $ 309,295
---------
---------
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 302A.521 of Minnesota Statutes requires the Registrant to indemnify
a person made or threatened to be made a party to a proceeding by reason of the
former or present official capacity of the person with respect to the
Registrant, against judgments, penalties, fines, including reasonable expenses,
if such person (1) has not been indemnified by another organization or employee
benefit plan for the same judgments, penalties, fines, including, without
limitation, excise taxes assessed against the person with respect to an employee
benefit plan, settlements, and reasonable expenses, including attorneys' fees
and disbursements, incurred by the person in connection with the proceeding with
respect to the same acts or omissions; (2) acted in good faith; (3) received no
improper personal benefit, and statutory procedure has been followed in the case
of any conflict of interest by a director; (4) in the case of a criminal
proceeding, had no reasonable cause to believe the conduct was unlawful; and (5)
in the case of acts or omissions occurring in the person's performance in the
official capacity of director or, for a person not a director, in the official
capacity of officer, committee member or employee, reasonably believed that the
conduct was in the best interests of the Registrant, or, in the case of
performance by a director, officer or employee of the Registrant as a director,
officer, partner, trustee, employee or agent of another organization or employee
benefit plan, reasonably believed that the conduct was not opposed to the best
interests of the Registrant. In addition, Section 302A.521, subd. 3, requires
payment by the Registrant, upon written request, of reasonable expenses in
advance of final disposition in certain instances. a decision as to required
indemnification is made by a disinterested majority of the Board of Directors
present at a meeting at which a disinterested quorum is present, or by a
designated committee of the Board, by special legal counsel, by the shareholders
or by a court. The Registrant's Bylaws provide for indemnification of officers,
directors and employees to the fullest extent permitted by Minnesota law as it
may be amended from time to time.
As permitted by Section 302A.251 of the Minnesota Business Corporation Act,
the Restated Articles of Incorporation of the Registrant eliminate the liability
of the directors of the Registrant for monetary damages arising from any breach
of fiduciary duties as a member of the Registrant's Board of Directors (except
as expressly prohibited by Minnesota Statutes, Section 302A.251, subd. 4).
II-1
<PAGE>
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- ----------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
1.2 Form of Agreement Among Underwriters.
3.1 Restated Articles of Incorporation, as amended, incorporated by
reference from Exhibit 3(A) of the Registrant's Form 10-K for
the fiscal year ended May 29, 1988.
3.2 Bylaws, as amended, incorporated by reference from Exhibit 3(B)
of the Registrant's Registration Statement No. 2-85224 filed on
July 18, 1983.
4.1 Rights Agreement incorporated by reference from the Registrant's
Form 8-K filed on March 1, 1996.
4.2 Form of Underwriters' Warrant.
5.1 Opinion and Consent of Lindquist & Vennum P.L.L.P., counsel to
the Company.
10.1 Management Incentive Compensation Plan incorporated by reference
from Exhibit 10(B) of the Registrant's Registration Statement
No. 2-85224 filed on July 18, 1983.
10.2 1986 Employee Stock Option Plan incorporated by reference from
Exhibit 10(C) of the Registrant's Form 10-K for the fiscal year
ended May 31, 1987.
10.3 10-Year Building Lease Contract incorporated by reference from
Exhibit 10(E) of the Registrant's Form 10-K for the fiscal year
ended May 28, 1989.
10.4 Financing Agreement on Credit Facility, incorporated by
reference from Exhibit 10(F) of the Registrant's Form 10-K for
the fiscal year ended May 28, 1995.
10.5 First and Second Amendments to financing agreement on credit
facility incorporated by reference from Exhibit 10(G) of the
Registrant's Form 10-K for the fiscal year ended June 2, 1996.
10.6 Third and Fourth Amendments to financing agreement on credit
facility.
10.7 Employee Stock Purchase Plan incorporated by reference from the
Registrant's Form S-8 Registration Statement (Commission File
No. 333-4609) filed on May 24, 1996.
21 Subsidiary of Registrant, incorporated by reference from Exhibit
22 to the Registrant's Form 10-K for the fiscal year ended May
31, 1995.
24.1 Consent of McGladrey & Pullen, LLP.
24.2 Consent of Lindquist & Vennum P.L.L.P. (included in Exhibit 5.1
to the Registration Statement).
25 Powers of Attorney (included on the signature page of the
Registration Statement as filed on October 28, 1996).
</TABLE>
II-2
<PAGE>
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter had been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is public policy as expressed in the Securities Act
and will be governed by the final adjudication of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4), or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and this offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Minneapolis, State of
Minnesota, on the 22nd day of November, 1996.
AULT INCORPORATED
BY: /s/ FREDERICK M. GREEN
----------------------------------------
Frederick M. Green,
PRESIDENT, CEO AND DIRECTOR
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed below by the following
persons in the capacities indicated on November 22, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ---------------------------------------- ------------------------------
<C> <S> <C> <C>
/s/ FREDERICK M. GREEN
-------------------------------- President, Chief Executive
Frederick M. Green Officer and Director
/s/ CARLOS S. MONTAGUE Vice President, Chief
-------------------------------- Financial Officer and
Carlos S. Montague Assistant Secretary
/s/ JAMES M. DUDDLESTON
-------------------------------- Director
James M. Duddleston
By: /s/ FREDERICK M. GREEN
---------------------------
/s/ DELBERT W. JOHNSON Frederick M. Green,
-------------------------------- Director President, Chief Executive
Delbert W. Johnson Officer and Director and
as Attorney-in-Fact
/s/ JOHN G. KASSAKIAN
-------------------------------- Director
John G. Kassakian
/s/ EDWARD C. LUND
-------------------------------- Director
Edward C. Lund
/s/ ERIC G. MITCHELL, JR.
-------------------------------- Director
Eric G. Mitchell, Jr.
-------------------------------- Director
Matthew A. Sutton
</TABLE>
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ------------------------------------------------------------ ----
<C> <S> <C>
1.1 Form of Underwriting Agreement
1.2 Form of Agreement Among Underwriters
4.2 Form of Underwriters' Warrant
5.1 Opinion and Consent of Lindquist & Vennum P.L.L.P., Counsel
to the Company
10.6 Third and Fourth Amendments to financing agreement on credit
facility
24.1 Consent of McGladrey & Pullen, LLP
</TABLE>
<PAGE>
1,800,000 Shares*
AULT INCORPORATED
Common Shares
UNDERWRITING AGREEMENT
Minneapolis, Minnesota
November ___, 1996
PRINCIPAL FINANCIAL SECURITIES, INC.
CRUTTENDEN ROTH INCORPORATED
As Representatives of
the several Underwriters
c/o Principal Financial Securities, Inc.
701 Fourth Avenue South, Suite 1000
Minneapolis, Minnesota 55415
Ladies and Gentlemen:
Ault Incorporated, a Minnesota corporation (the "Company"), confirms its
agreement with Principal Financial Securities, Inc. ("Principal") and
Cruttenden Roth Incorporated ("Cruttenden") and each of the other
underwriters, if any, named in Schedule A hereto (collectively the
"Underwriters," which term shall also include any underwriter substituted as
hereinafter provided in Section 11), for whom Principal and Cruttenden are
acting as representatives (in such capacities, the "Representatives"), with
respect to (i) the proposed sale by the Company, and the proposed purchase by
the Underwriters, acting severally and not jointly, of an aggregate of
1,800,000 common shares (the "Firm Shares") no par value per share ("Common
Stock"), (ii) the grant by the Company to the Underwriters, acting severally
and not jointly, of the option described in Section 2(b) hereof to purchase
all or any part of 270,000 additional shares of Common Stock for the purpose
of covering over-allotments, if any, and (iii) the sale by the Company to the
Underwriters of a warrant to purchase up to 144,900 shares of Common Stock of
the Company as described in Section 2(c) hereof (the "Underwriters' Warrant").
Any and all shares of Common Stock to be purchased by the Underwriters
pursuant to the option described in Section 2(b) hereof are referred to
hereinafter as the "Option Shares," and the Firm Shares and the Option Shares,
if any, purchased by the Underwriters are hereinafter collectively referred to
as the "Shares." It is understood that the Underwriters propose to conduct a
public offering and sale of the Shares (the "Offering").
- --------------------
*Plus an option to purchase up to 270,000 additional shares to cover
over-allotments.
<PAGE>
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
(a) The Company represents and warrants to, and agrees with, each of the
several Underwriters as follows:
(i) The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-2 (No.
333-_________), including a prospectus subject to completion, for the
registration of the Shares and the Underwriters' Warrant under the
Securities Act of 1933, as amended (the "Act"), and may have filed with
the Commission one or more amendments thereto. After the execution of
this Agreement, the Company will file with the Commission either (A) if
such registration statement, as it may have been amended, has been
declared by the Commission to be effective under the Act as of the time
of effectiveness of this Agreement, a prospectus in the form most
recently included in an amendment to such registration statement (or, if
no such amendment shall have been filed, in such registration statement),
with such changes or insertions as are required by Rule 430A under the
Act or permitted by Rule 424(b) under the Act and as have been provided
to and approved by the Representatives prior to the execution of this
Agreement, or (B) if such registration statement, as it may have been
amended, has not been declared by the Commission to be effective under
the Act as of the time of effectiveness of this Agreement, an amendment
to such registration statement, including a form of prospectus, a copy of
which amendment has been furnished to and approved by the Representatives
prior to the execution of this Agreement. As used in this Agreement, the
term "Registration Statement" means such registration statement, as
amended at the time when it was or is declared effective, including all
financial schedules and exhibits thereto and including any information
omitted therefrom pursuant to Rule 430A under the Act and included in the
Prospectus (as deemed below); the term "Preliminary Prospectus" means
each prospectus subject to completion filed with such registration
statement or any amendment thereto (including the prospectus subject to
completion, if any, included in the Registration Statement or any
amendment thereto at the time the Registration Statement was or is
declared effective); the term "Prospectus" means the prospectus first
filed with the Commission pursuant to Rule 424(b) under the Act or, if no
prospectus is required to be filed pursuant to said Rule 424(b), the
prospectus included in the Registration Statement; and the term "Rules
and Regulations" means the rules and regulations adopted by the
Commission under either the Act or the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), as applicable.
(ii) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus or any part thereof and, to the
best knowledge of the Company, no proceedings for a stop order have been
instituted or are pending or threatened. When any Preliminary Prospectus
was filed with the Commission, it (A) contained all statements required
to be stated therein in accordance with, and complied in all material
respects with the requirements of, the Act and the Rules and Regulations
and (B) did not include any untrue statement of a material fact or omit
to state any material fact necessary in order to make the statements
therein, in the light
-2-
<PAGE>
of the circumstances under which they were made, not misleading. When
the Registration Statement or any amendment thereto was or is declared
effective, it (A) contained or will contain all statements required to be
stated therein in accordance with, and complied or will comply in all
material respects with the requirements of, the Act and the Rules and
Regulations and (B) did not or will not include any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein not misleading. When the Prospectus or any amendment
or supplement thereto is filed pursuant to Rule 424(b) under the Act (or,
if the Prospectus or such amendment or supplement is not required to be
so filed, when the Registration Statement or the amendment thereto
containing such amendment or supplement to the Prospectus was or is
declared effective) and on the Closing Date and the Option Closing Date,
if any (each as defined in Section 2 hereof), the Prospectus, as amended
or supplemented at any such time, (A) contained or will contain all
statements required to be stated therein in accordance with, and complied
or will comply in all material respects with the requirements of, the Act
and the Rules and Regulations and (B) did not or will not include any
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The foregoing
representations with regard to misstatements or omissions in the
Registration Statement and Prospectus do not apply to the statements with
respect to the public offering of the Shares set forth under the heading
"Underwriting" and the stabilization legend in any Preliminary Prospectus
and the Prospectus and the last paragraph on the outside front cover page
of the Prospectus which statements have been furnished by the Underwriters
expressly for use therein and constitute the only information furnished in
writing by or on behalf of the Underwriters for inclusion in the Prospectus
(the "Provided Information").
(iii) The Company and Ault Korea Corporation ("Subsidiary") are
corporations duly organized, validly existing and in good standing under
the laws of the State of Minnesota and the Republic of Korea,
respectively. The Company and Subsidiary are duly qualified to transact
business as a foreign corporation and are in good standing under the laws
of each jurisdiction in which their ownership or leasing of any
properties or the character or conduct of their operations requires such
qualification, except where failure to be so qualified, individually or
in the aggregate, would not result in a material adverse effect on the
condition, financial or otherwise, or on the earnings, business affairs,
financial position, prospects, value, operation, properties, results of
operation or business of the Company and its subsidiary taken as a whole
(each a "Material Adverse Effect"). All of the outstanding shares of
capital stock of Subsidiary have been duly authorized and validly issued,
are fully paid and non-assessable and (except as otherwise stated in the
Registration Statement), all of the outstanding shares of capital stock
of Subsidiary are owned beneficially by the Company free and clear of any
security interest, other encumbrance or adverse claim, subject to the
security interest granted to First Bank National Association (the "First
Bank") in the shares of Subsidiary pursuant to the Financing Agreement,
dated as of
-3-
<PAGE>
April 28, 1995, as amended, between First Bank and the Company. There
are no outstanding rights, warrants or options to acquire, or instruments
convertible into or exchangeable for, any shares of capital stock or
other equity interest in Subsidiary. Except for Subsidiary, the Company
does not own any stock of or other equity interest in, or otherwise
control directly or indirectly, any corporation, firm, partnership,
trust, joint venture or other business entity.
(iv) Each of the Company and Subsidiary has all requisite power and
authority (corporate and other), and has obtained and currently maintains
in full force and effect and is operating in compliance with any and all
authorizations approvals, orders, licenses, certificates, franchises and
permits of and from any and all governmental or regulatory officials and
bodies (including those having jurisdiction over environmental or similar
matters) necessary or required to own or lease its properties and conduct
its business as described in the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus) and any amendment
or supplement thereto, and is and has been doing business in compliance
with all applicable federal, state, local and foreign laws, rules and
regulations, except where failure to be in compliance therein
individually or in the aggregate, would not result in a Material Adverse
Effect. Neither the Company nor Subsidiary has received any notice or
notices of proceedings relating to the revocation or modification of any
such authorization, approval, order, license, certificate, franchise or
permit.
(v) The Company has all requisite power and authority (corporate and
other) to enter into this Agreement and to consummate the transactions
provided for herein; and this Agreement has been duly authorized,
executed and delivered by the Company. This Agreement, assuming due
authorization, execution and delivery by the Underwriters, constitutes
the legal, valid and binding obligation of the Company enforceable
against the Company in accordance with its terms except as enforceability
may be limited by the application of bankruptcy, insolvency, moratorium
or similar laws affecting the rights of creditors generally and by
judicial limitations on the right of specific performance. The Company's
execution and delivery of this Agreement, its performance of its
obligations hereunder, the consummation of the transactions contemplated
hereby, and its conduct of its business and those of Subsidiary as
described in the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus) and any amendment or supplement
thereto, do not and will not conflict with or result in a breach or
violation of any of the terms or provisions of the Company's Restated
Articles of Incorporation or Bylaws, each as amended to date, or the
charter or bylaws of Subsidiary. The Company's execution and delivery of
this Agreement, its performance of its obligations hereunder and the
consummation of the transactions contemplated hereby do not and will not
conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, or result in the creation
or imposition of any material liens, charges, claims, encumbrances,
pledges, security interests, defects or other like restrictions or
material
-4-
<PAGE>
equities of any kind whatsoever upon, any right, property or assets
(tangible or intangible) of the Company pursuant to the terms of (A) any
lease, license, contract, indenture, mortgage, deed of trust, voting
trust agreement, shareholders agreement, note, loan, credit agreement,
other indebtedness or any other agreement or instrument to which the
Company is a party or by which it is or may be bound or to which any of
its properties or assets (tangible or intangible) is or may be subject,
or (B) any statute, judgment, decree, order, rule or regulation
applicable to the Company or Subsidiary or any of their activities or
properties adopted or issued by an arbitrator, court, regulatory body or
administrative agency or other governmental agency or body (including
those having jurisdiction over environmental or similar matters),
domestic or foreign, having jurisdiction over the Company or Subsidiary
or any of their activities or properties. The conduct of the business of
the Company and Subsidiary as described in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus)
and any amendment or supplement thereto does not and will not conflict
with or result in a material breach or violation of any of the terms or
provisions of, or constitute a material default under or result in the
creation or imposition of any material liens, charges, claims,
encumbrances, pledges, security interests, defects or other like
restrictions or material equities of any kind whatsoever, upon any right,
property or assets (tangible or intangible) of the Company or Subsidiary
pursuant to the terms of any agreement or instrument described in clause
(A) of the preceding sentence or any statute, judgment, decree, order,
rule or regulation described in clause (B) of the preceding sentence.
(vi) No consent, approval, authorization or order of, or filing with,
any governmental agency or body or any court is required in connection
with the issuance of the Shares to be sold by the Company, the Company's
performance of its obligations hereunder, the Offering or the
consummation of the other transactions contemplated hereby, except (a)
such as may be required under the state securities or "Blue Sky" laws of
any jurisdiction or the bylaws and rules of the National Association of
Securities Dealers, Inc. (the "NASD") in connection with the purchase and
distribution of the Shares by the Underwriters, (b) as of the date hereof
(but not the Closing Date or the Option Closing Date, if any), any filing
of the Prospectus pursuant to Rule 424(b) or 430A of the Rules and
Regulations and, if the Registration Statement is not effective as of the
time of effectiveness of this Agreement, an order of the Commission
declaring the Registration Statement to be effective under the Act, and
(c) such other approvals as have been obtained and remain in full force
and effect.
(vii) The authorized, issued and outstanding capital stock of the
Company is set forth in, and conforms to the description thereof contained
in, the Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus) and any amendment or supplement thereto.
All of the issued shares of capital stock of the Company have been duly
authorized and validly issued, and are fully paid and nonassessable; the
holders thereof have no rights of rescission with respect thereto
-5-
<PAGE>
and are not subject to personal liabilities by reason of being such
holders; and none of such shares have been issued in violation of the
preemptive rights of any security holders of the Company. The shares of
Common Stock to be issued upon the exercise of the Underwriters' Warrant,
after payment therefore in accordance with the terms therewith, will be
validly issued, fully paid and non-assessable, with no personal liability
attaching to the ownership thereof. The Firm Shares and the Option
Shares have been duly authorized and at the Closing Date or the Option
Closing Date (as the case may be), after payment therefor in accordance
herewith, will be validly issued, fully paid and nonassessable, with no
personal liability attaching to the ownership thereof. Upon the issuance
and delivery pursuant to this Agreement of the Shares to be sold by the
Company, the Underwriters will acquire good, record and marketable title
to such Shares free and clear of any liens, charges, claims,
encumbrances, pledges, security interests, defects or other like
restrictions or like material equities of any kind whatsoever. There are
no preemptive or other rights to subscribe for or to purchase, nor any
restriction upon the voting or transfer of, any Common Stock pursuant to
the Company's Restated Articles of Incorporation or Bylaws, each as
amended to date, and the Shares to be sold by the Company are not
otherwise subject to any preemptive or other similar rights of any
security holder. The Company is not a party to or bound by any
instrument, agreement or other arrangement providing for it to issue any
capital stock, rights, warrants, options or other securities, except for
this Agreement or as described in the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus). No holders
of any securities of the Company have the right to include any securities
issued by the Company in the Registration Statement or any registration
statement to be filed by the Company within 180 days after the Closing
Date or to require the Company to file a registration statement under the
Act during such 180-day period. The Shares have been approved for
listing upon notice of issuance on the National Market of the National
Association of Securities Dealers, Inc's Automated Quotations System (the
"Nasdaq National Market").
(viii) The historical financial statements and schedules of the
Company and Subsidiary included in the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus) and any
amendment or supplement thereto fairly present the financial position and
the results of operations of the Company as of the dates and for the
periods therein specified. Such financial statements and schedules have
been prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved and with the Rules
and Regulations, subject, in the case of unaudited quarterly financial
information, to normal year-end adjustments and to the fact that footnote
disclosure with respect thereto may not fully comply with generally
accepted accounting principles as applied to audited financial
statements. The selected financial data set forth under the caption
"Selected Consolidated Financial Data" in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus)
fairly present, on the basis stated therein, the information included
therein. Each of the Company and Subsidiary
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maintains a system of internal accounting controls sufficient to provide
reasonable assurance that (A) transactions are executed in accordance
with management's general or specific authorizations; (B) transactions
are recorded as necessary to permit preparation of financial statements
in conformity with generally accepted accounting principles and to
maintain asset accountability; (C) access to assets is permitted only in
accordance with management's general or specific authorization; and (D)
the recorded accountability for assets is compared with the existing
assets at reasonable intervals and appropriate action is taken with
respect to any differences. The Company's internal accounting controls
are sufficient to cause the Company to comply in all material respects
with the Foreign Corrupt Practices Act of 1977, as amended. McGladrey &
Pullen, L.L.P., whose reports are filed with the Commission as a part of
the Registration Statement, are independent public accountants as
required by the Act and the Rules and Regulations and McGladrey & Pullen
have been the only public accountants engaged by the Company since July
1, 1990. The Company has not had any "disagreement" (as used in Item 304
of Regulation S-K of the Rules and Regulations) with McGladrey & Pullen
or its Subsidiary's independent public account and has not experienced
any "reportable event" (as used in such Item 304).
(ix) Each of the Company and Subsidiary has filed all federal, state
and local tax returns and all tax returns with foreign tax authorities that
are required to be filed by it or has duly requested extensions thereof.
The Company has paid all taxes required to be paid by it and any other
assessment, fine or penalty levied against it, to the extent that any of
the foregoing is due and payable, except for any such assessment, fine or
penalty that is currently being contested in good faith.
(x) No transfer tax, stamp duty or other similar tax is payable by
or on behalf of the Underwriters in connection with the issuance by the
Company or the purchase by the Underwriters of the Shares to be sold by
the Company.
(xi) Each of the Company and Subsidiary has (A) good, record and
marketable title to all of the properties and assets described in the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) as owned by the Company or Subsidiary, free and
clear of all liens, charges, encumbrances or restrictions, except such
liens, charges, encumbrances or restrictions as are described in the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) or such as do not materially affect the condition
(financial or other), business, results of operations or properties of
the Company and Subsidiary taken as a whole, (B) peaceful and undisturbed
possession under all leases to which the Company or Subsidiary is a party
as lessee, (C) all governmental licenses, certificates, permits,
authorizations, approvals, franchises or other rights necessary to engage
in the business currently conducted by the Company or Subsidiary, and (D)
no reason to believe that any governmental body or agency is considering
limiting, suspending or revoking any such license, certificate, permit,
authorization, approval,
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franchise or right. All leases to which the Company or Subsidiary is a
party are valid and binding and no default by the Company or Subsidiary
has occurred and is continuing thereunder except such as do not,
individually or in the aggregate, result in a Material Adverse Effect.
(xii) Each of the Company and Subsidiary owns or has a valid right to
use all Intellectual Property being used in or necessary to the conduct of
its business as now operated and as now proposed to be operated. Except
as disclosed in the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) or separately
disclosed in writing to Best & Flanagan, Professional Limited Liability
Partnership (hereinafter "Underwriters' Counsel") prior to the execution
and delivery hereof, no claim is pending or, to the best knowledge of the
Company, threatened against the Company or its officers to the effect
that any Intellectual Property right that is owned by or licensed to the
Company or Subsidiary or that the Company or Subsidiary otherwise has the
right to use is invalid or unenforceable by the Company or Subsidiary, as
the case may be, or infringes the right of a third party (including any
former employer of any of the Company's employees). Except as disclosed
in writing to Underwriters' Counsel prior to the execution and delivery
hereof, to the best of the Company's knowledge, the conduct of the
Company's and Subsidiary's business as now conducted and as now proposed
to be conducted does not and will not infringe (A) any copyright or
legally enforceable right with respect to trade secrets of any third
party or (B) any other Intellectual Property right of any third party.
As used herein "Intellectual Property" means all patents; all trademarks,
service marks, trade names and copyrights, and all registrations thereof;
all trade secrets; all rights in know-how (including all proprietary or
confidential information); all inventions (including all unpatentable
inventions and all unpatented inventions, regardless of whether a patent
application has been made therefor); all designs; all processes; all
works of authorship; all computer programs; all mask works; all technical
data and information; all licenses and rights in and to any of the
foregoing; and all other intellectual property.
(xiii) Each of the Company and Subsidiary is insured (including all
inventory held for others under "stocking" or similar arrangement) by
insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the business in
which it is engaged. Neither the Company nor Subsidiary has been refused
any insurance coverage sought or applied for or has any reason to believe
that it will not be able to renew its existing insurance coverage as and
when such coverage expires or to obtain similar coverage from similar
insurers.
(xiv) Neither the Company nor Subsidiary is in breach of, or in
default under, any material term, covenant or provision of any license,
contract, indenture, mortgage, installment sale agreement, lease, deed of
trust, voting trust agreements, shareholders agreement, note, loan, credit
agreement or other indebtedness, or any
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other agreement or instrument evidencing an obligation for borrowed
money, or any other agreement or instrument to which the Company or
Subsidiary is a party or by which the Company or Subsidiary may be bound
or to which any of its property or assets (tangible or intangible) are
subject or affected, except as disclosed in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus)
and except as to defaults that have been and continue to be validly and
effectively waived. The Company and Subsidiary are not in violation of
any term or provision of their respective charter documents or bylaws,
each as amended to date.
(xv) Except as disclosed in the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus), there is not
pending or, to the best of the Company's knowledge, threatened against
the Company or Subsidiary, or involving the properties or business of the
Company or Subsidiary, any action, suit, proceeding, inquiry,
investigation, litigation or governmental proceeding (including those
having jurisdiction over environmental or similar matters), domestic or
foreign, that (A) is required to be disclosed in the Prospectus (or such
Preliminary Prospectus) and is not so disclosed, (B) questions the
validity of the capital stock of the Company or the validity or
enforceability of this Agreement, (C) questions the validity of any
action taken or to be taken by the Company pursuant to or in connection
with this Agreement, or (D) could adversely affect the present or
prospective ability of the Company to perform its obligations under this
Agreement. Any such proceedings summarized in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus)
are accurately summarized in all material respects.
(xvi) Subsequent to the respective dates as of which information is
set forth in the Registration Statement and Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus),
and except as may otherwise be indicated or contemplated herein or therein,
the Company has not (A) issued any securities other than the Shares to be
sold by the Company pursuant to this Agreement, except pursuant to
options outstanding as of such dates, (B) incurred any material liability
or obligation, direct or contingent, for borrowed money, (C) entered into
any transaction other than in the ordinary course of business, or (D)
declared or paid any dividend or made any other distribution on or in
respect of its capital stock.
(xvii) Each of the Company and Subsidiary has a reasonably
satisfactory employer-employee relationship with its employees and is in
compliance in all respects with all federal, state, local, and where
applicable, foreign, laws and regulations regarding employment and
employment practices, terms and conditions of employment and wages and
hours except where failure to so comply, individually or in the
aggregate, would not result in a Material Adverse Effect. No labor or
other dispute with the employees of the Company or Subsidiary exists, or,
to the best knowledge of the Company, is imminent; and the Company is not
aware of any existing or imminent labor disturbance by the employees of
any of the principal suppliers, manufacturers or contractors of the
Company or Subsidiary that might be
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expected to result in an adverse effect upon the business of the Company
or Subsidiary.
(xviii) Except as disclosed in the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus), neither the
Company nor Subsidiary maintains, sponsors or contributes, or is under an
obligation to contribute, to any program or arrangement that is an
"employee pension benefit plan," an "employee welfare benefit plan"
(other than a Cafeteria Plan or any other standard group life, health or
disability plan) or a "multi-employer plan," as such terms are defined in
Sections 3(2), 3(1), and 3(37), respectively, of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"). Neither the Company
nor Subsidiary has at any time since October 1, 1991 contributed to, or
been under any obligation to contribute to, any "defined benefit plan,"
as defined in Section 3(35) of ERISA. Neither the Company nor Subsidiary
has ever completely or partially withdrawn from a "multi-employer plan."
(xix) The minute books of the Company made available to Underwriters'
Counsel (A) contain all material minutes and consents from all meetings
and actions of the Company's stockholders, its board of directors, and
the committees of such board since the date of the Company's organization
and (B) reflect all transactions referred to in such minutes accurately
in all material respects.
(xx) All agreements filed as exhibits to the Registration Statement
to which the Company or Subsidiary is a party or by which the Company or
Subsidiary may be bound or to which any of its assets, properties or
businesses may be subject have been duly and validly authorized, executed
and delivered by the Company or Subsidiary, as the case may be, and
constitute the legal, valid and binding agreements of the Company or
Subsidiary, as the case may be, enforceable in accordance with their
respective terms, except as enforceability may be limited by the
application of bankruptcy, insolvency, moratorium or similar laws
affecting the rights of creditors generally and by judicial limitations
on the right of specific performance. The descriptions in the
Registration Statement, the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) and any amendment or
supplement thereto of agreements and other documents are accurate and
fairly present the information required to be shown with respect thereto
by Form S-2 under the Act. There are no agreements or other documents
that are required by the Act or the Rules and Regulations to be described
in the Registration Statement or the Prospectus or filed as exhibits to
the Registration Statement that are not described or filed as required.
(xxi) Neither the Company nor any of its officers, directors, or
affiliates (within the meaning of the Rules and Regulations) has taken or
will take, directly or indirectly, any action designed to or that has
constituted or that might reasonably be
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expected to cause or result in, under the Exchange Act or otherwise,
stabilization or manipulation of the price of the Common Stock.
(xxii) There are no claims, payments, issuances, arrangements or
understandings for services in the nature of a finder's, broker's,
advisory or origination fee or otherwise, either with respect to the sale
of the Shares hereunder or with respect to the proceeds received by the
Company from the sale of the Shares hereunder. Other than as reflected
in this Agreement or described in the Prospectus (or if the Prospectus is
not in existence, any Preliminary Prospectus), there are no other
arrangements, agreements, understandings, payments or issuances with
respect to the Company or any of its officers, directors, or affiliates
that may affect the Underwriters' compensation, as determined by the
National Association of Securities Dealers, Inc. ("NASD").
(xxiii) Except as disclosed in writing to Underwriters' Counsel prior
to the execution and delivery hereof, the Company has delivered or caused
to be delivered to the Representatives agreements, acceptable in form and
substance to the Representatives, pursuant to which each of the Company's
officers and directors listed in the Prospectus or the Preliminary
Prospectus have agreed not to sell, transfer or otherwise dispose of any
shares of Common Stock for a period of 90 days following the Closing Date.
(xxiv) Neither the Company nor Subsidiary nor, to the best of the
Company's knowledge, their respective officers, employees, agents,
affiliates or any other person acting on behalf of any of the foregoing,
has, directly or indirectly, given or agreed to give any money, gift or
similar benefit (other than legal price concessions to customers in the
ordinary course of business) to any customer, supplier, employee or agent
of a customer or supplier, or official or employee of any governmental
agency or instrumentality (domestic or foreign) or any political party or
candidate for office (domestic or foreign) or other person who was, is,
or may be in a position to help or hinder the business of the Company or
Subsidiary (or assist it in connection with any actual or proposed
transaction) that (A) might subject the Company or Subsidiary or any
other such person to any damage or penalty in any civil, criminal or
governmental litigation or proceeding, (B) if not given in the past,
might have had a Material Adverse Effect, or (C) if not continued in the
future, might have a Material Adverse Effect.
(xxv) Since January 1, 1995, no (A) supplier of merchandise to the
Company or Subsidiary has ceased shipments of merchandise to the Company,
(B) sales representative or distributor has ceased selling products of
the Company, and (C) no customer who previously purchased more than
$500,000 of product from the Company has ceased buying product from the
Company other than in the nominal and ordinary course of business
consistent with past practices, which cessation would
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adversely affect the condition (financial or other), business, results of
operations or properties of the Company or Subsidiary.
(xxvi) The Company has provided Underwriters' Counsel with copies of
all correspondence between the Company and the Company's shareholders
relating to the subject matter of this Agreement and has provided
Underwriters' Counsel with all other information in its possession
related to such shareholders.
(xxvii) The Company has provided Underwriters' Counsel with copies of
all material documentation relating to the Company's patent(s).
(xxviii) The Restated Articles of Incorporation of the Company
previously filed with the Commission are currently effective and have not
been amended.
2. PURCHASE, SALE AND DELIVERY OF THE SHARES; REPAYMENT OF CREDIT.
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, and subject to the terms and conditions herein
set forth, the Company agrees to issue and sell to the Underwriters an
aggregate of 1,800,000 Firm Shares. Each Underwriter, severally and not
jointly, agrees to purchase from the Company, at the price of $ per
Share, that number of Firm Shares set forth in Schedule A opposite such
Underwriter's name plus any additional number of Firm Shares that such
Underwriter may become obligated to purchase pursuant to the provisions of
Section 11 hereof.
(b) In addition, on the basis of the representations, warranties,
covenants and agreements herein contained and upon not less than two business
days' notice from the Representatives, for a period of 30 days from the
Effective Date, the Company agrees to sell to the Underwriters, severally and
not jointly, all or any part of the 270,000 Option Shares at a purchase price
per Share equal to that set forth in subsection 2(a) above. The Underwriters
may exercise their option to purchase all or any portion of the Option Shares
only one time. Delivery of Option Shares shall be made concurrently with
payment therefor. The time and date of delivery of any of the Option Shares
is herein called the "Option Closing Date." On the Option Closing Date (if
any), each of the Underwriters, acting severally and not jointly, shall
purchase that proportion of the total number of Option Shares that the
aggregate number of Firm Shares set forth in Schedule B hereto opposite the
name of such Underwriter bears to the total number of Firm Shares, subject in
each case to such adjustments as the Representatives in their discretion shall
make to eliminate any sales or purchases of fractional shares. Option Shares
may be purchased by the Underwriters only for the purpose of covering
over-allotments that may be made in connection with the offering and
distribution of the Firm Shares. No Option Shares shall be delivered unless
the Firm Shares shall be simultaneously delivered or shall theretofore have
been delivered as herein provided.
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(c) In addition, the Company hereby agrees to sell to the Underwriters,
for $100.00, on the Closing Date, a warrant to purchase 126,000 shares of
Common Stock of the Company (and on the Option Closing Date, if any, a warrant
to purchase up to 18,900 shares (calculated at a rate of seven shares for each
100 Option Shares purchased) at an exercise price equal to 120% of the
Offering Price, exercisable for a period of five years after the effective
date of the Offering and beginning one year from completion of the Offering,
and the Company agrees to execute and deliver Warrants, share amounts
allocated among the Underwriters as directed by the Representatives, as of the
Closing Date, and the Option Closing Date respectively, as attached hereto as
Exhibit A.
(d) Payment of the respective aggregate purchase prices of the Firm
Shares purchased from the Company shall be made by the several Underwriters on
the Closing Date by wire transfer or by certified or official bank checks in
same day funds, payable to or upon the order of the Company or to such other
persons as the Company may designate in writing to the Representatives no
later than three business dates prior to the Closing Date, at the offices of
Principal or at such other place as shall be agreed upon by the
Representatives and the Company, upon delivery of certificates (in form and
substance satisfactory to the Representatives) representing the Firm Shares to
the Representatives. Delivery and payment for the Firm Shares shall be made
at a.m., Minneapolis time, on , 1996, or at such other time
on the same or such other date, not later than , 1996, as shall be
designated in writing by the Representatives. The time and date of payment
for and delivery of the Firm Shares is herein called the "Closing Date". In
addition, in the event that Option Shares are purchased by the Underwriters,
payment (in same day funds) of the purchase price for, and delivery of
certificates for, the Option Shares shall be made at the above-mentioned
office of the Representatives or at such other place as shall be agreed upon
by the Representatives and the Company, on the Option Closing Date as
specified in the notice from the Representatives to the Company, but not later
than 30 days from the Effective Date. Certificates for the Firm Shares and
the Option Shares, if any, shall be in definitive, fully registered form,
shall bear no restrictive legends and shall be in such denominations and
registered in such names as the Representatives may request in writing at
least two business days prior to the Closing Date or the Option Closing Date,
as the case may be. The certificates for the Firm Shares and the Option
Shares, if any, shall be made available to the Representatives at such office
or such other place as the Representatives may designate for inspection,
checking and packaging not later than _______ a.m., Minneapolis time, on the
last business day prior to the Closing Date or the Option Closing Date, as the
case may be.
(e) In addition, upon the completion of the closing contemplated by this
Section 2, Principal shall reimburse the Company for any amounts advanced to
Principal in payment of the Underwriters' out-of-pocket expenses, minus
outstanding amounts, if any, owed by the Company to the Underwriters or
Underwriters' Counsel on the Closing Date pursuant to Section 5.
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3. PUBLIC OFFERING OF THE FIRM SHARES.
As soon after the Registration Statement becomes effective as the
Representatives deem advisable, the several Underwriters propose to make a
public offering of their respective portions of the Firm Shares at the price
and upon the other terms set forth in the Prospectus.
4. COVENANTS OF THE COMPANY.
(a) The Company covenants and agrees with each of the several
Underwriters as follows:
(i) The Company will use its best efforts to cause the Registration
Statement, if not effective at the time of execution of this Agreement,
and any amendments thereto to become effective as promptly as possible.
The Company will not file with the Commission the prospectus or amendment
referred to in the second sentence of Section l(a)(i) hereof, any
amendment or supplement to such prospectus or any amendment to the
Registration Statement, or any document under the Exchange Act before
termination of the offering of the Shares by the Underwriters of which
the Representatives shall not previously have been advised and furnished
with a copy, or to which the Representatives shall have reasonably
objected (unless required by law) by notice to the Company in writing
within five business days after having been provided a copy thereof (or
such shorter period as the Company reasonably requests, provided that
such period shall not in any event be less than three business days), or
which is not in compliance with the Act, the Exchange Act or the Rules
and Regulations. During the time when a prospectus relating to the
Shares is required to be delivered under the Act, the Company will comply
with all requirements imposed upon it by the Act and the Rules and
Regulations to the extent necessary to permit the continuance of sales of
or dealings in the Shares in accordance with the provisions hereof and of
the Prospectus, as amended or supplemented. The Company will prepare and
file with the Commission, promptly upon a request by the Representatives
or Underwriters' Counsel, any amendments to the Registration Statement or
amendments or supplements to the Prospectus that may be necessary or
advisable in connection with the distribution of the Shares by the
several Underwriters, and will use its best efforts to cause the same to
be filed with the Commission as promptly as possible.
(ii) As soon as the Company is advised or obtains knowledge thereof,
the Company will advise the Representatives, with a confirmation in
writing, of (A) the time when the Registration Statement or any amendment
thereto has been filed or declared effective or the Prospectus or any
amendment or supplement thereto has been filed, (B) the issuance by the
Commission of any stop order, or of the initiation or threatening of any
proceeding, suspending the effectiveness of the Registration Statement or
any amendment thereto or any order preventing or suspending the use of
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any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, (C) the issuance by any state securities commission
of any notice of any proceedings for the suspension of the qualification
of the Shares for offering or sale in any jurisdiction or of the
initiation, or the threatening, of any proceeding for that purpose, (D)
the receipt of any comments from the Commission, and (E) any request by
the Commission for any amendment to the Registration Statement or any
amendment or supplement to the Prospectus or for additional information.
The Company will use its best efforts to prevent the issuance of any such
order or the imposition of any such suspension and, if any such order is
issued or suspension is imposed, to obtain the withdrawal thereof as
promptly as possible.
(iii) If required, the Company will file the Prospectus and any
amendment or supplement thereto with the Commission in the manner and
within such time period required by Rule 424(b) of the Rules and
Regulations.
(iv) To the extent reasonably required, the Company will arrange for
the qualification of the Shares for offering and sale under the securities
or "Blue Sky" laws of such jurisdictions as the Representatives may
reasonably designate and will continue such qualifications in effect for
as long as may be necessary to complete the distribution of the Shares,
provided, however, that in connection therewith the Company shall not be
required to qualify as a foreign corporation or to execute a general
consent to service of process in any jurisdiction.
(v) If, at any time when a prospectus relating to the Shares is
required to be delivered under the Act, any event occurs as a result of
which, in the opinion of the Company or counsel for the Company, the
Prospectus, as then amended or supplemented, includes an untrue statement
of a material fact or omits to state a material fact required to be
stated therein or necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading, or if it is otherwise necessary at any time to amend or
supplement the Prospectus to comply with the Act or the Rules and
Regulations, the Company will promptly notify the Representatives thereof
and, subject to Section 4(a)(i) hereof, prepare and file with the
Commission, at the Company's expense, an amendment to the Registration
Statement or an amendment or supplement to the Prospectus that corrects
such statement or omissions or effects such compliance. If, at any time
when a prospectus relating to the Shares is required to be delivered under
the Act, any event occurs as a result of which, in the reasonable opinion
of the Representatives or Underwriters' Counsel, the Prospectus, as then
amended or supplemented, includes an untrue statement of a material fact
or omits to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, the
Representatives will promptly notify the Company thereof and the Company
will, subject to section 4(a)(i) hereof, prepare and file with the
Commission, at the Company's expense, an amendment to the Registration
Statement or an amendment or supplement to the
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Prospectus that corrects such statement or omission or effects such
compliance. The Company will furnish to the Underwriters and dealers
(whose names and addresses shall be furnished to the Company by the
Representatives) to which Shares may have been sold by the
Representatives on behalf of the Underwriters and to any other dealers
upon request, a reasonable number of copies of any amendment or
supplement prepared pursuant to this paragraph (v).
(vi) The Company will furnish to each of the Representatives and
Underwriters' Counsel, without charge, a signed copy of the registration
statement originally filed with respect to the Shares and each amendment
thereto, in each case including exhibits thereto, and to each other
Underwriter, a conformed copy of such registration statement and each
amendment thereto, in each case without exhibits thereto. So long as any
Underwriter or dealer is required by the Act or the Rules and Regulations
to deliver a prospectus, the Company will also furnish as many copies of
each Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto as the Representatives may reasonably request. The
Company consents to the use of the Prospectus and any amendment or
supplement thereto by the Underwriters and by all dealers to whom Shares
may be sold, both in connection with the offering for sale of the Shares
and for such period of time thereafter as the Prospectus is required by
law to be delivered in connection therewith.
(vii) The Company will notify the Representatives promptly of any
material adverse change in the condition (financial or other), business,
results of operations or properties of the Company and Subsidiary taken
as a whole, occurring any time prior to payment being made to the Company
on the Closing Date or to the Company on the Option Closing Date, and
will take such steps as may be reasonably requested by you to remedy
and/or publicize the same.
(viii) After the "effective date of the registration statement" as
defined under Rule 158(c) of the Rules and Regulations, the Company will
make generally available to its security holders, within 45 days after
the end of each of its first term quarters of the Company, in the manner
specified in Rule 158(b) of the Rules and Regulations, and to the
Representatives, an earnings statement that will satisfy the provisions
of Section 11(a) of the Act and Rule 158(a) of the Rules and Regulations.
(ix) For so long as the Company is subject to the periodic reporting
requirements of the Exchange Act, the Company will furnish to its
shareholders and the Representatives, as soon as practicable, annual
reports (including financial statements audited by independent public
accountants) and unaudited quarterly reports of earnings. During such
period, but in no event for more than five years after the Closing Date,
the Company also will deliver to the Representatives:
A. quarterly reports as furnished to the Commission on a concurrent
basis;
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B. annual reports as furnished to the Commission;
C. as soon as they are available, copies of all reports (financial or
other) mailed to shareholders;
D. as soon as they are available, copies of all reports, other than
preliminary proxy materials, and financial statements furnished to or
filed with the Commission, the NASD or the Nasdaq National Market;
E. every press release and every material news item or article of
interest sent to the financial community in respect of the Company or
its affairs that was released or prepared by the Company; and
F. any additional information of a public nature concerning the Company
that the Representatives may reasonably request from time to time.
(x) The Company will maintain a Transfer Agent and Registrar for the
Common Stock. Effective as of the Closing Date, the Company will cause
the Transfer Agent for the Common Stock to mark appropriate "stop
transfer" restrictions in its records relating to the certificates
representing all shares of Common Stock subject to restrictions under the
agreements described in Section l(a)(xxiii) hereof.
(xi) During the 180-day period commencing with the Closing Date, the
Company will not, without the prior written consent of the
Representatives, (A) offer, sell, offer to sell, contract to sell, grant
any option for the sale of, transfer or otherwise dispose (or announce
any offer, sale, contract to sell, grant any option for sale, transfer or
other disposition) of any shares of Common Stock (except pursuant to this
Agreement), or other securities convertible into, or exercisable or
exchangeable for, shares of Common Stock or (B) file any registration
statement relating to any such securities with the Commission or any
other authority, provided, however that the Company may grant or issue
such securities pursuant to any employee stock option plan (or its
successor), stock purchase plan or warrant agreement described in the
Prospectus and may file a registration statement on Form S-8 with respect
to any employee stock option plan or stock purchase plan.
(xii) The Company will apply the net proceeds from the sale of the
Shares sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus unless a different application of proceeds
is approved pursuant to a resolution of its Board of Directors and prior
written notice is given to the Representatives. During the 180-day period
commencing with the Closing Date, no portion of the net proceeds will be
used directly or indirectly to acquire any securities issued by the
Company.
(xiii) The Company will furnish to the Underwriters as early as
practicable prior to each of the date hereof, the Closing Date and the
Option Closing Date, if
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any, but no later than two full business days prior thereto, a copy of
the latest available audited or unaudited interim financial statements of
the Company that have been read by the Company's independent public
accountants, as stated in their letters to be furnished pursuant to
Section 6(h) hereof.
(xiv) The Company will use its best efforts to maintain its listing
on Nasdaq National Market.
(xv) The Company will apply the net proceeds from the sale of the
Shares sold by it and conduct its, and cause Subsidiary to conduct its,
operations in a manner that will not subject it to registration as an
investment company under the Investment Company Act of 1940, as amended.
5. PAYMENT OF EXPENSES.
(a) The Company hereby agrees to pay promptly all costs, expenses and
fees (collectively, the "Offering Expenses") incident to the performance of
the obligations of the Company under this Agreement, including all expenses
and fees incurred in connection with or by (i) the engagement of accountants,
counsel for the Company and the Transfer Agent and Registrar for the Common
Stock, (ii) the preparation, duplication, printing, filing and distribution of
the Registration Statement, any Preliminary Prospectus and the Prospectus and
any amendments and supplements thereto (including, without limitation, the
registration fee payable to the Commission) and the duplication, printing, and
distribution of this Agreement, the Selected Dealer Agreements, Agreement
between Underwriters, and related documents used in connection with the
Offering, if any, including in each case the cost of all copies supplied to
the Underwriters in quantities as hereinabove stated, (iii) the printing,
engraving, issuance and delivery of certificates representing the Shares, (iv)
the qualification of the Shares under state securities or "Blue Sky" laws,
including filing fees, costs of printing and mailing of a "Preliminary Blue
Sky Memorandum" and "Final Blue Sky Memorandum" and disbursements and
reasonable fees of Underwriters' Counsel in connection therewith, (v) filings
and other actions incident to obtaining a review of the offering by the NASD,
and (vi) the travel and lodging expenses of the Company's officers in
connection with meetings with prospective investors in the Shares. Any such
fees or disbursements of Underwriters' Counsel referred to in the foregoing
clause (iv), or any filing or registration fees referred to in the foregoing
clauses (ii) and (v), if invoiced at least two days prior to the Closing Date
or the Option Closing Date, if any, shall be paid no later than the Closing
Date or the Option Closing Date, as the case may be, or if not invoiced at
least two days prior to the Closing Date, shall be paid within five days of
invoice.
(b) If this Agreement is terminated in accordance with the provisions of
Section 6, Section 10 or Section 12 of this Agreement, the Underwriters shall
be entitled to retain all amounts advanced by the Company to the Underwriters
to cover their out-of-pocket
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expenses, including, but not limited to, the fees and disbursements of
Underwriters' Counsel, that shall have been incurred by them in connection
with the proposed purchase and sale of the Shares, subject to a maximum of
$100,000, including the $25,000 previously paid to the Underwriters by the
Company (receipt of which is hereby acknowledged) for due diligence review.
6. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS.
The obligations of the several Underwriters to purchase and pay for the
Firm Shares shall be subject, in their sole discretion, to the accuracy of the
representations and warranties of the Company herein as of the date hereof and
as of the Closing Date, as if they had been made on and as of the Closing
Date, to the accuracy on and as of the Closing Date of the statements of the
officers of the Company individually made in certificates delivered pursuant
to the provisions hereof, to the performance by the Company on and as of the
Closing Date of their respective covenants and obligations hereunder, and to
the following further conditions:
(a) If the Registration Statement or any amendment thereto filed prior
to the Closing Date has not been declared effective as of the time of
execution hereof, the Registration Statement or such amendment shall have been
declared effective not later than a.m., Minneapolis time, on the date on
which the amendment to the Registration Statement originally filed with
respect to the Shares or to the Registration Statement, as the case may be,
containing information regarding the initial public offering price of the
Shares has been filed with the Commission, or such later date and time as
shall have been consented to in writing by the Representatives. If required,
the Prospectus and any amendment or supplement thereto shall have been filed
in accordance with Rule 424(b) under the Act. No stop order suspending the
effectiveness of the Registration Statement or any amendment thereto shall
have been issued and no proceedings for that purpose shall have been
instituted or, to the best knowledge of the Company or the Representatives
shall be contemplated by the Commission. The Company shall have complied, to
the reasonable satisfaction of the Representatives and Underwriters' Counsel,
with any request of the Commission for additional information (to be included
in the Registration Statement or the Prospectus or otherwise).
(b) The Representatives shall not have reasonably determined, with the
advice of Underwriters' Counsel, and advised the Company that (i) the
Registration Statement, or any amendment thereto, includes an untrue statement
of a material fact or omits to state a material fact necessary to make the
statements therein not misleading or (ii) the Prospectus, or any amendment or
supplement thereto, includes an untrue statement of a material fact or omits
to such a material fact necessary in order to make the Statements therein, in
the light of the circumstances under which they were made, not misleading.
(c) The Representatives shall have received from Underwriters' Counsel
an opinion dated the Closing Date, with respect to the issuance and sale of
the Shares, the
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Registration Statement, the Prospectus and such other related matters as the
Representatives reasonably may request. Underwriters' Counsel shall have
received from the Company such papers and information as they may reasonably
request to enable them to review or pass upon such matters or in order to
evidence the accuracy, completeness or satisfaction of any of the
representations, warranties or covenants of the Company contained herein.
(d) The Representatives shall have received from Lindquist & Vennum,
P.L.L.P., counsel to the Company, an opinion, dated the Closing Date and in
form and substance satisfactory to Underwriters' Counsel, to the effect that:
(i) The Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Minnesota. Each of
the Company and Subsidiary is duly qualified to transact business as a
foreign corporation and is in good standing in each United States
jurisdiction in which its ownership or leasing of any properties or the
character or conduct of its operations requires such qualification except
where failure to be so qualified or in good standing, individually or in
the aggregate, would not result in a Material Adverse Effect.
(ii) Each of the Company and Subsidiary has all requisite corporate
power and authority necessary or required to own or lease its properties
and conduct its business as described in the Prospectus. To such
counsel's actual knowledge, there is no material authorization, approval,
order, license, certificate, franchise or permit of or from any
governmental or regulatory official or body of any United States
jurisdiction (including any official or body having jurisdiction over
environmental or similar matters) necessary or required to own or lease
the property or to conduct the business of the Company and Subsidiary as
described in the Prospectus, except for such as have been obtained and
are in full force and effect.
(iii) The Company has all requisite corporate power and authority to
enter into this Agreement and to consummate the transactions provided for
herein; and this Agreement has been duly authorized, executed and
delivered by the Company. This Agreement, assuming due authorization,
execution and delivery by the Underwriters, constitutes the legal, valid
and binding obligation of the Company, enforceable against the Company in
accordance with its terms, except as enforceability may be limited by the
application of bankruptcy, insolvency, moratorium or similar laws
affecting the rights of creditors generally and by judicial limitations
on the right of specific performance, and except as the enforceability of
the indemnification or contribution provisions hereof may be limited by
federal or state securities laws. The Company's execution and delivery
of this Agreement, its performance of its obligations hereunder, the
consummation of the transactions contemplated hereby, and its conduct
of its business as described in the Prospectus, do not and will not
conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under the terms of the Company's
Restated Articles of Incorporation or Bylaws, each as amended to the date
of the opinion. The Company's execution and
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delivery of this Agreement, its performance of its obligations
hereunder and the consummation of the transactions contemplated
hereby do not and will not conflict with or result in a breach or
violation of any of the terms or provisions of, or result in the
creation or imposition of any material liens, charges, claims,
encumbrances, pledges, security interests, defects or other like
restriction or material equities of any kind whatsoever upon, any
right, property or assets (tangible or intangible) of the Company
or Subsidiary pursuant to the terms of (A) any lease, license,
contract, indenture, mortgage, deed of trust, voting trust
agreement, shareholders agreement, note, loan, credit agreement,
other indebtedness or any other agreement or instrument, which such
counsel has reviewed and to which the Company or Subsidiary is a
party or by which it is or may be bound or to which any of their
respective properties or assets (tangible or intangible) is or may
be subject, or (B) any United States or Minnesota statute, rule or
regulation, or to the extent actually known to such counsel, any
other statute, rule or regulation or any judgment, decree or order
applicable to the Company or Subsidiary or any of their respective
activities or properties adopted or issued by any arbitrator,
court, regulatory body or administrative agency or other
governmental agency or body (including those having jurisdiction
over environmental or similar matters), domestic or foreign, having
jurisdiction over the Company or Subsidiary or any of their
respective activities or properties. To the best of such Counsel's
knowledge, the Company's and Subsidiary's conduct of their
respective businesses as described in the Prospectus does not
conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, or result in
the creation or imposition of any material liens, charges, claims,
encumbrances, pledges, security interests, defects or other like
restrictions or material equities of any kind whatsoever upon, any
right, property or assets (tangible or intangible) of the Company
or Subsidiary pursuant to the terms of (A) any agreement or
instrument described in clause (A) of the preceding sentence or any
statute, judgment, decree, order, rule or regulation described in
clause (B) of the preceding sentence.
(iv) No consent, approval, authorization or order of, or filing
with, any governmental agency or body or, to such counsel's knowledge,
any court is required in connection with the issuance of the Shares to be
sold by the Company, the Company's performance of its obligations
hereunder, the Offering or the consummation of the other transactions
contemplated hereby, except such as may be required under the state
securities or "Blue Sky" laws of any jurisdiction or as may be required
by the bylaws and rules of the NASD in connection with the purchase and
distribution of the Shares by the Underwriters and except such other
approvals as have been obtained and remain in full force and effect.
(v) Upon completion of the Offering, the authorized, issued and
outstanding capital stock of the Company will be as set forth in, and
will conform as to legal matters in all material respects to, the
description thereof contained in, the Prospectus under the caption
"Description of Capital Stock." Upon completion of the
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Offering, all of the issued shares of Common Stock of the Company will
have been duly authorized and validly issued and will be fully paid and
non-assessable; and none of such shares have been issued in violation of
the preemptive rights of any security holders of the Company. All shares
of Common Stock issuable upon the exercise of the Underwriters' Warrant
will be, after payment therefore in accordance with the terms therewith,
validly issued, fully paid and non-assessable. The Firm Shares to be
sold to the Company have been duly authorized and, when paid for in
accordance herewith, will be validly issued, fully paid and
non-assessable. The certificates which represent the Firm Shares are in
due and proper legal form. Upon the issuance and delivery pursuant to
this Agreement of the Shares to be sold by the Company, the Underwriters
will acquire good, record and marketable title to such Shares free and
clear of any liens, charges, claims, encumbrances, pledges, security
interests, defects or other like restrictions or like material equities
of any kind whatsoever. As of the Closing Date there are no preemptive
or other rights to subscribe for or to purchase, nor any restrictions
upon the voting or transfer of, any Common Stock pursuant to the
Company's Restated Articles of Incorporation or Bylaws, each as amended
to date, and to the best of such counsel's knowledge the Shares to be
sold by the Company are not otherwise subject to any preemptive or other
similar rights of any security holder. There are no shares of capital
stock of the Company outstanding other than Common Stock. To the best of
such counsel's knowledge, the Company is not a party to or bound by any
instrument, agreement or other arrangement providing for it to issue any
capital stock, rights, warrants, options or other securities, except for
this Agreement or as described in the Prospectus. To the best of such
counsel's knowledge, no holders of any securities of the Company or of
any options, warrants or other convertible or exchangeable securities of
the Company exercisable for or convertible or exchangeable for securities
of the Company have the right (and have not waived the right) to include
any securities issued by the Company in the Registration Statement or any
registration statement to be filed by the Company within 180 days of the
date hereof or to require the Company to file a registration statement
under the Act during such 180-day period. The Shares have been approved
for listing upon notice of issuance on Nasdaq National Market. The
certificates representing the Shares are in due and proper form.
(vi) The Registration Statement has become effective under the Act.
Any required filing of the Prospectus pursuant to Rule 424(b) of the
Rules and Regulations has been made in accordance with the time period
required thereby. To such counsel's knowledge, no stop order suspending
the effectiveness of the Registration Statement has been issued, and no
proceedings for that purpose have been instituted or are pending or
threatened, by the Commission.
(vii) At the time the Registration Statement was declared effective
by the Commission, the Registration Statement and the Prospectus and any
amendment or supplement thereto (other than the financial statements, and
notes thereto, the financial schedules, and the other financial and
statistical data included in the
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Registration Statement or the Prospectus, as to which such counsel
expresses no opinion) complied as to form in all material respects with
the requirements of the Act and the Rules and Regulations. The contracts
and other documents filed as exhibits to the Registration Statement and
summarized in the Prospectus are in all material respects accurately and
fairly summarized therein to the extent required, and such counsel does not
know or believe, after a reasonable investigation, of any contract or other
documents of a character required to be described in the Prospectus or
the Registration Statement or required to be filed as an exhibit to the
Registration Statement that are not filed or described as required.
(viii) All descriptions in the Prospectus of statutes,
regulations, and legal and governmental proceedings are correct in all
material respects and include the information required to be shown with
respect to such matters, except as to patent litigation and other patent
matters as to which such counsel need express no opinion.
(ix) Such counsel have reviewed all contracts and other documents
specifically referred to in the Registration Statement and the Prospectus
(other than documents pertaining only to the Subsidiary), and the
summaries of and other disclosures regarding such contracts and other
documents included in the Registration Statement and the Prospectus are
correct in all material respects and include the information required to
be shown with respect thereto. To such counsel's knowledge, there are no
contracts or other documents of a character required to be filed as
exhibits to the Registration Statement or required to be described in the
Registration Statement or the Prospectus that were not filed or disclosed
as required.
(x) To such counsel's knowledge, no transaction of the Company or
its Subsidiary would be considered "Certain Transactions" as defined in
Item 404 of Regulation S-K of the Commission.
(xi) To such counsel's knowledge, upon the conclusion of the
Offering, neither the Company nor Subsidiary was in breach of, or in
default under, any material term, covenants or provision of any material
license, contract, indenture, mortgage, installment sale agreement,
lease, deed of trust, voting trust agreement, shareholders agreement,
note, loan or credit agreement, or any other agreement or instrument
evidencing an obligation for borrower money, or any other material
agreement or instrument to which the Company or Subsidiary is a party or
by which the Company or Subsidiary may be bound or to which any of their
respective property
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or assets (tangible or intangible), are subject or affected except as
disclosed in the Prospectus and except as to such defaults which have
been and continue to be validly and effectively waived. The Company is
not in violation of any terms or provision of its Restated Articles of
Incorporation or Bylaws, each as amended to date.
(xii) Except as disclosed in the Prospectus, to such counsel's
knowledge, there is not pending or, to such counsel's knowledge,
threatened against the Company or Subsidiary (or any circumstances that
may give rise to the same), or involving the properties or business of
the Company or Subsidiary, any action, suit, proceeding, inquiry,
investigation, litigation or governmental proceeding (including those
having jurisdiction over environmental or similar matters), domestic or
foreign, that (A) is required to be disclosed in the Prospectus and is
not so disclosed, (B) questions the validity of the capital stock of the
Company or the validity or enforceability of this Agreement, (C)
questions the validity of any action taken or to be taken by the Company
pursuant to or in connection with this Agreement, or (D) could materially
adversely affect the present or prospective ability of the Company to
perform its obligations under this Agreement.
(xiii) To such counsel's knowledge, except as disclosed in the
Prospectus or to Underwriters' Counsel under Section l(a)(xii), no claim
is pending or threatened against the Company or Subsidiary or any of
their respective officers to the effect that any Intellectual Property
right that is owned by or licensed to or by the Company or Subsidiary or
that the Company or Subsidiary otherwise has the right to use or is using
is invalid or unenforceable by the Company or Subsidiary or infringes the
right of a third party (including any former employer of any of the
employees of the Company or Subsidiary).
In addition, such opinion shall contain a statement to the effect that,
in the course of the preparation by the Company and its counsel of the
Registration Statement and the Prospectus, such counsel participated in
certain meetings and telephone conferences with certain of the officers of
the Company and the independent public accountants for the Company, at which
the Registration Statement and the Prospectus were discussed and, in
connection with the preparation thereof, such counsel reviewed certain
documents furnished by the Company or otherwise in such counsel's possession.
Between the date of effectiveness of the Registration Statement and the
Closing Date, such counsel participated in certain additional meetings and/or
telephone conferences with certain officers of the Company at which the
contents of the Registration Statement and the Prospectus were discussed.
Based on the information so obtained and after conducting an investigation
which it considers reasonable, such counsel does not believe that the
Registration Statement or any amendment thereto at the time it became
effective contained any untrue statement of a material fact or omitted to
state any material fact required to be stated therein or necessary to make
the statements therein not misleading or that as of the date hereof, the
Prospectus or any amendment thereto contains any untrue statement of a
material fact or omits to state a material fact necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading.
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In rendering such opinion, such counsel may rely as to matters of fact,
to the extent they deem proper, on certificates and written statements of
responsible officers of the Company and certificates or other written
statements of officers of departments of various jurisdictions having custody
of documents respecting the corporate existence or good standing of the
Company, provided that copies of any such statements or certificates shall be
delivered to Underwriters' Counsel contemporaneously.
References to the Prospectus and Registration Statement in this Section
6(d) shall include any amendment or supplement thereto at the date of such
opinion.
(e) The Representatives shall have received from Merchant & Gould,
patent counsel for the Company, an opinion, dated the Closing Date, to the
effect that:
(i) the statements in the Prospectus under the captions "Business -
Power Supplies - New High Density Switching Power Supplies," "Business -
Design Engineering and Product Development" and "Business - Patents" have
been reviewed by such counsel and are, to the best of such counsel's
knowledge, accurate in all material respects and fairly present the patent
information disclosed therein;
(ii) to the best of such counsel's knowledge, the Registration
Statement and the Prospectus do not contain any untrue statement of a
material fact with respect to the patent position of the Company or
Subsidiary, or omit to state any material fact relating to the patent
position of the Company or Subsidiary which is required to be stated in the
Registration Statement and the Prospectus or is necessary to make the
statements therein not misleading; and
(iii) except as disclosed in the Prospectus, to the best of such
counsel's knowledge, there is no claim, action or proceeding by any person
pending or threatened which challenges the rights of the Company or
Subsidiary with respect to such patents and licenses.
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(f) The Representatives shall have received a certificate, dated the
Closing Date, of the President and the Chief Financial Officer of the Company
to the effect that each of such officers have carefully examined the
Registration Statement, the Prospectus and this Agreement and, to the best of
their knowledge, that:
(i) Each of the representations and warranties of the Company in
this Agreement are true and correct, as if made on and as of the Closing
Date, and the Company has complied in all material respects with all
agreements and covenants and satisfied all conditions contained in this
Agreement on its part to be performed or satisfied at or prior to the
Closing Date.
(ii) No stop order suspending the effectiveness of the Registration
Statement has been issued, and no proceedings for that purpose have been
instituted or are pending or, to the best of such officer's knowledge,
are contemplated or threatened by the Commission.
(iii) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, (A) there has
been no material adverse change, or development involving a prospective
material adverse change (including a change in management or control of
the Company), in the condition (financial or otherwise), business
prospects, net worth or results of operations of the Company or
Subsidiary, except in each case as described in or contemplated by the
Prospectus (exclusive of any amendment or supplement thereto); (B)
neither the Company nor Subsidiary has entered into any transactions not
in the ordinary course of business; (C) neither the Company nor
Subsidiary has incurred any material liabilities or obligations, direct
or contingent, other than as disclosed in the Prospectus; (D) neither the
Company nor Subsidiary has sustained a loss material to the Company or
Subsidiary by fire, flood, accident, hurricane, earthquake, theft,
sabotage or other calamity or malicious act, whether or not such loss
shall have been insured, or from any labor dispute or from any legal or
governmental proceeding; (E) except as set forth in the Prospectus, no
action, suit or proceeding, at law or in equity, is pending or, to the
knowledge of such officer, threatened against the Company or Subsidiary
or affecting any of the properties or business of the Company or
Subsidiary before or by any court or federal, state or foreign
commission, board or other administrative agency, which if adversely
decided would have a Material Adverse Effect; and (F) there has not
occurred any other event required to be set forth in the Prospectus that
has not been so set forth.
References to the Prospectus and Registration Statement in this Section
6(f) shall include any amendment or supplement thereto at the date of such
certificate.
(g) The Representatives shall have received a certificate dated the
Closing Date from an officer of the Company which shall list the debts of the
Company to be repaid out of the net proceeds of the Offering to the Company,
and a mutually agreed-upon escrow agent
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shall have been appointed by the Company and the Underwriters to receive into
escrow any amounts to be used to repay such debts.
(h) The Representatives shall have received from McGladrey & Pullen,
L.L.P. letters dated the date hereof and the Closing Date, respectively, in
form and substance satisfactory to the Representatives and Underwriters'
Counsel, with respect to the matters set forth below;
(i) confirming that they are and were independent public
accountants with respect to the Company within the meaning of the Act and
the Rules and Regulations;
(ii) stating that it is their opinion that the audited financial
statements and schedules examined by them and indicated in the
Registration Statement and the Prospectus comply as to form in all
material respects with the applicable accounting requirements of the Act
and the Rules and Regulations;
(iii) stating that, on the basis of certain procedures which
included a reading of the latest available unaudited interim consolidated
financial statements of the Company (with an indication of the date of
the latest available unaudited interim consolidated financial
statements), a reading of the latest available minutes of meetings and
actions of the shareholders and board of directors and the various
committees of the board of directors of the Company, inquiries of
officers and other employees of the Company responsible for financial and
accounting matters and other specified procedures and inquires, nothing
came to their attention that caused them to believe that (A) the
unaudited consolidated financial statements, if any, and schedules of the
Company included in the Registration Statement and the Prospectus do not
comply as to form in all material respects with the applicable accounting
requirements of the Act and the Rules and Regulations or are not fairly
presented in conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the audited
consolidated financial statements of the Company included in the
Registration Statement and the Prospectus, (B) at a specified date not
more than five days prior to the date of such letter, there was any
change in the capital stock or long-term debt of the Company, or any
decrease in the stockholder's equity, net current assets or net assets of
the Company, in each case, as compared with amounts shown in the June 2,
1996 consolidated balance sheet included in the Registration Statement
and the Prospectus, except for changes set forth in such letter, and (C)
during the periods from June 2, 1996 to such specified date, there was
any decrease in revenues, gross profits, income before income taxes and
extraordinary items, or net income or any decrease in net income per
common share of the Company, in each case as compared with the
corresponding period beginning May 29, 1995, except for changes set forth
in such letter;
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(iv) stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings, statements and
other financial information pertaining to the Company set forth in the
Prospectus in each case to the extent that such amounts, numbers,
percentages, statements and information may be derived from the general
accounting records, including work sheets, of the Company with the
results obtained from the application of specified readings, inquiries
and other appropriate procedures (which procedures do not constitute an
examination in accordance with generally accepted auditing standards) set
forth in the letter and found them to be in agreement; and
(v) stating they have conducted a review of the consolidated
financial statements for the first quarter of this current fiscal year
and have been retained to conduct a similar review for the next two
quarters.
(vi) statements as to such other matters incident to the
transactions contemplated hereby as the Underwriters may reasonably
request.
In the event that any of the letters referred to above set forth any such
changes, decreases or increases, it shall be a further condition to the
obligations of the Underwriters that (A) such letter shall be accompanied by a
written explanation of the Company as to the significance thereof, unless the
Representatives deem such explanation unnecessary, and (B) such changes,
decreases or increases do not, in the sole judgment of the Representatives,
make it impractical or inadvisable to proceed with the purchase and delivery
of the Shares as contemplated by the Registration Statement originally filed
with respect to the Shares, as amended as of the date hereof.
References to the Registration Statement and the Prospectus in this
Section 6(h) with respect to either letter referred to above shall include any
amendment or supplement thereto at the date of such letter.
(i) The Company shall have furnished the Representatives with a written
agreement of each of the directors and officers of the Company listed in the
Prospectus or any Preliminary Prospectus, that each of them will not, directly
or indirectly, offer, sell or otherwise dispose of any equity securities of
the Company, or of any security convertible into or exchangeable or
exercisable for any equity security of the Company, excluding the exercise of
outstanding stock options for Common Stock within 180 days after the Effective
Date without the prior consent of the Representatives.
(j) No order suspending the sale of the Shares in any jurisdiction
designated by the Representatives pursuant to Section 4(a)(iv) hereof shall be
in effect on the Closing Date and no proceedings for that purpose shall have
been instituted or, to the knowledge of the Company or the Representatives,
shall be contemplated.
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(k) The Company shall have executed and delivered the Underwriters'
Warrant as directed by the Representatives.
(l) The Representatives shall have received such further certificates,
opinions, documents, financial statements and information as they shall have
reasonably requested all of which shall be in form and substance reasonably
satisfactory to them.
If any condition of the Underwriters' obligations hereunder to be
fulfilled prior to or at the Closing Date is not so fulfilled, the
Representatives may terminate this Agreement or, if the Representatives so
elect, they may waive any such conditions that have not been fulfilled or
extend the time for their fulfillment. All opinions, certificates, letters
and documents delivered pursuant to this Agreement will comply with the
provisions hereof only if they are reasonably satisfactory in an material
respects to the Representatives and Underwriters' Counsel. The Company shall
furnish to the Representatives such conformed copies of such opinions,
certificates, letters and documents in such quantities as the Representatives
and Underwriters' Counsel shall reasonably request.
The respective obligations of the several Underwriters to purchase and
pay for the Option Shares, if any, shall be subject, in their discretion, to
each of the foregoing conditions of this Section 6 to purchase the Firm
Shares, with all references to the Firm Shares and the Closing Date being
deemed to refer to such Option Shares and the Option Closing Date,
respectively.
7. INDEMNIFICATION.
(a) The Company agrees to indemnity and hold harmless each of the
Underwriters (including specifically each person who may be substituted for an
Underwriter as provided in Section 11 hereof) and each person, if any, who
controls any Underwriter (a "Controlling Person") within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, against any and
all losses, claims, damages, expenses or liabilities, joint or several (and
actions in respect thereof), whatsoever (including any and all expenses
whatsoever reasonably incurred in investigating, preparing or defending
against any litigation, commenced or threatened, or any claim whatsoever), as
such are incurred, (i) to which such Underwriter or such Controlling Person
may become subject under the Act, the Exchange Act or any other statute or at
common law or otherwise or under the laws of foreign countries, arising out of
or based upon any untrue statement or alleged untrue statement of a material
fact contained (A) in any Preliminary Prospectus, the Registration Statement
or the Prospectus (as from time to time amended and supplemented) or (B) in
any application or other document or written communication (in this Section 7
collectively called "application") executed by the Company or based upon
written information furnished by the Company in any jurisdiction in order to
qualify the Common Stock under the securities laws thereof or filed with the
Commission, any state securities commissions or agency, the NASD, the Nasdaq
National Market or any other securities exchange, or the omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not
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<PAGE>
misleading in light of the circumstances under which they were made, or (ii)
to which such Underwriter or such Controlling Person may become liable to any
party which relate to or arise out of such Underwriter's or such Controlling
Person's consummation of the transactions contemplated hereby or such
Underwriter's or such Controlling Person's role in connection herewith;
PROVIDED, HOWEVER, that the Company shall not be liable to the extent that any
such loss, claim, damage, expense or liability arises out of or is based upon
an untrue statement or omission made in any Preliminary Prospectus, the
Registration Statement or Prospectus or any amendment thereof or supplement
thereto or in any application in reliance upon, and in strict conformity with,
the Provided Information. The Company shall not be liable to any Underwriter
or any person controlling such Underwriter under the indemnity agreement in
this subsection with respect to any Preliminary Prospectus to the extent that
any such loss, claim, damage or liability of such Underwriter results solely
from an untrue statement of a material fact contained in, or the omission of a
material fact from, such Preliminary Prospectus which untrue statement or
omission was corrected in the applicable Prospectus (as then amended or
supplemented) if the Company shall sustain the burden of proving that such
Underwriter sold Shares to the person alleging such loss, claim, damage or
liability without sending or giving, at or prior to the written confirmation
of such sale, a copy of the applicable Prospectus (as then amended or
supplemented) if the Company had previously furnished copies thereof to such
Underwriter.
(b) Each of the Underwriters agrees severally, but not jointly, to
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the Registration Statement and each other person, if
any, who controls the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, against losses, claims, damages, expenses
or liabilities to the same extent as the foregoing indemnity from the Company
to the Underwriters, provided, however, that such Underwriter shall only be
liable to the extent that any such loss, claim, damage, expense or liability
arises out of or is based upon an untrue statement or omission made in any
Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment thereof or supplement thereto or in any application in reliance
upon, and in strict conformity with, the Provided Information furnished by
such Underwriter with respect to such Underwriter.
(c) Promptly after receipt by an indemnified party under this Section 7
of notice of the commencement of any action, suit or proceeding, such
indemnified party shall, if a claim in respect thereof is to be made against
one or more indemnifying parties under this Section 7, notify each party
against whom indemnification is to be sought in writing of the commencement
thereof (but the failure so to notify an indemnifying party shall not relieve
it from any liability that it may have under this Section 7 except to the
extent that it has been prejudiced in any material respect by such failure or
from any liability that it may have otherwise). In case any such action is
brought against any indemnified party, and it notifies the indemnifying party
or parties of the commencement thereof, the indemnifying party or parties will
be entitled to participate therein, and to the extent it may elect by written
notice delivered to the indemnified party promptly after receiving the
aforesaid notice from such indemnified party, to assume the defense thereof
with counsel reasonably satisfactory to such
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<PAGE>
indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such
case but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel shall
have been authorized in writing by the indemnifying parties in connection with
the defense of such action, (ii) the indemnifying parties shall not have
employed counsel reasonably satisfactory to such indemnified party to have
charge of the defense of such actions within a reasonable time after notice of
commencement of the action, or (iii) such indemnified party or parties shall
have reasonably concluded that there may be defenses available to it or them
that are different from or additional to those available to one or all of the
indemnifying parties (in which case the indemnifying parties shall not have
the right to assume the defense of such action on behalf of the indemnified
party or parties), in any of which events such fees and expenses of one
additional counsel shall be borne by the indemnifying parties. In no event
shall the indemnifying parties be liable for fees and expenses of more than
one counsel (in addition to any local counsel) separate from their own counsel
for all indemnified parties in connection with any one action or separate but
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances. Anything in this Section 7 to the
contrary notwithstanding, an indemnifying party shall not be liable for any
settlement of any claims or action effected without its written consent,
provided, however, that such consent was not unreasonably withheld.
(d) In order to provide for just and equitable contribution in any case
in which (i) an indemnified party makes claim for indemnification pursuant to
this Section 7, but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of this Section 7 provide for indemnification in such
case, or (ii) contribution under the Act may be required on the part of any
indemnified party, then each indemnifying party shall contribute to the
aggregate amount paid as a result of such losses, claims, damages, expenses or
liabilities (or action in respect thereof) (A) in such proportion as is
appropriate to reflect the relative benefits received by each of the
contributing parties, on the one hand, and the party to be indemnified on the
other hand, from the Offering or (B) if the allocation provided by clause (A)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (A) above but
also the relative fault of each of the contributing parties, on the one hand,
and the party to be indemnified on the other hand in connection with the
statements or omission that resulted in such losses, claims, damages, expenses
or liabilities, as well as any other relevant equitable considerations. In
any case where the Company is the contributing party and the Underwriters are
the indemnified party, the relative benefits received by the Company on the
one hand, and the Underwriters, on the other, shall be deemed to be in the
same proportion as the total proceeds from the offering of the Shares (net of
underwriting discounts and other commissions paid to the Underwriters but
before deducting the other expenses incurred by the Company in connection with
the sale of the Shares) bear to the total underwriting discounts and other
commissions received by the Underwriters hereunder, in each case as set
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<PAGE>
forth in the table on the cover page of the Prospectus. Relative fault shall
be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact related to information supplied by the
Company or by the Underwriters, and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission. The amount paid or payable by an indemnified party as
a result of the losses, claims, damages, expenses or liabilities (or actions
in respect thereof) referred to above in this Section 7(d) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 7(d) the Underwriters shall not
be required to contribute any amount in excess of the underwriting discount
and other commissions applicable to the Shares purchased by the Underwriters
hereunder. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. For
purposes of this Section 7, each person, if any, who controls the Company
within the meaning of the Act, each officer of the Company who has signed the
Registration Statement, and each director of the Company shall have the same
rights to contribution as the Company, subject in each case to this Section
7(d). Any party entitled to contribution will, promptly after receipt of
notice of commencement of any action, suit or proceeding against such party in
respect to which a claim for contribution may be made against another party or
parties under this Section 7(d), notify such party or parties from whom
contribution may be sought, but the omission so to notify such party or
parties shall not relieve the party or parties from whom contribution may be
sought from any obligation it or they may have hereunder or otherwise than
under this Section 7(d), but only to the extent that such party or parties
were not adversely affected by such omission. The contribution agreement set
forth above shall be in addition to any liabilities which any indemnifying
party may have at common law or otherwise.
(e) The obligations of the Company and the Underwriters under this
Section 7 shall be in addition to any liability that the Company or
Underwriters may have at common law or otherwise.
8. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY.
All representations, warranties, agreements and covenants contained in
this Agreement or contained in certificates of officers of the Company
submitted pursuant hereto, shall be deemed to be representations, warranties,
agreements and covenants at the Closing Date and the Option Closing Date, as
the case may be, and such representations, warranties, agreements and
covenants of the Company and the indemnity agreements contained in Section 7
hereof, shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any Underwriter, the Company or any
Controlling Person, and shall survive termination of this Agreement or the
issuance and delivery of the Shares to the Underwriters, provided that to the
extent any such representations, warranties, agreements or covenants are
expressly waived in writing by the Representatives, the survival
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of the same shall be as set forth in such waiver or, if not so set forth, as
provided in this Section 8.
9. EFFECTIVE DATE.
This Agreement shall become effective at _____ a.m., Minneapolis time, on
the next full business day following the date hereof, or at such earlier time
after the Registration Statement becomes effective as the Representatives, in
their discretion, shall release the Shares for the sale to the public on a
when, as and if issued basis, provided, however, that the provisions of
Section 5, 7 and 10 of this Agreement shall at all times be effective. For
purposes of this Section 9, the Shares to be purchased hereunder shall be
deemed to have been so released upon the earlier to dispatch by the
Representatives of telegrams, telexes, facsimile transmissions or other
written forms of communication to securities dealers releasing such Shares for
offering or the release by the Representatives for publication of the first
newspaper advertisement that is subsequently published relating to the Shares.
10. TERMINATION.
(a) Subject to subsection (c) of this Section 10, the Representatives
shall have the right to terminate this Agreement (i) if any calamitous
domestic or international event or act or occurrence has materially disrupted,
or in the Representatives' reasonable opinion will in the immediate future
materially disrupt, general securities markets in the United States; (ii) if
trading in the Common Stock shall have been suspended by the Commission or the
Nasdaq National Market; (iii) if trading on the New York Stock Exchange, the
American Stock Exchange or the Nasdaq National Market or in the
over-the-counter market shall have been suspended, or minimum or maximum
prices for trading shall have been fixed, or maximum ranges for prices for
securities shall have been required on the over-the-counter market by the NASD
or by order of the Commission or any other government authority having
jurisdiction; (iv) if the United States shall have become involved in a war or
major hostilities; (v) if a banking moratorium has been declared by a New
York, Minnesota or federal authority; (vi) if a moratorium in foreign exchange
trading has been declared; (vii) if the Company or Subsidiary shall have
sustained a loss material to the Company and Subsidiary taken as a whole by
fire, flood, accident, hurricane, earthquake, theft, sabotage or other
calamity or malicious act, whether or not such loss shall have been insured,
or from any labor dispute or any legal or governmental proceeding; (viii) if
there shall have been such material adverse change, or any development
involving a prospective material adverse change (including a change in
management or control of the Company) in the condition (financial or
otherwise), business prospects, net worth or results of operations of the
Company and Subsidiary taken as a whole, except in each case as described in
or contemplated by the Prospectus (exclusive of any amendment or supplement
thereto); or (ix) if there shall be such material adverse general market
conditions as in the Underwriters' reasonable judgment would make it
inadvisable to proceed with the offering, sale or delivery of the Shares.
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<PAGE>
(b) If the Representatives elect to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section 10, they
shall so notify the Company on the same day as such election is made by
telephone or telegram, confirmed by letter.
(c) Notwithstanding any contrary provision contained in this Agreement,
any election hereunder or any termination of this Agreement (including
pursuant to Sections 11 and 12 hereof), and whether or not this Agreement is
otherwise carried out, the provisions of Section 5 and Section 7 shall not be
in any way affected by such election or termination or failure to carry out
the terms of this Agreement or any part hereof.
11. SUBSTITUTION OF THE UNDERWRITERS.
If one or more of the Underwriters shall fail or refuse (otherwise than
for a reason sufficient to justify the termination of this Agreement under the
provisions of Section 6, Section 10 or Section 12 hereof) to purchase all or a
portion of the Shares that it or they are obligated to purchase on such date
under this Agreement (the "Defaulted Securities"), the Representatives, or if
either of the Representatives is the defaulting underwriter, the
non-defaulting Representative shall have the right, within 36 hours
thereafter, to make arrangements for one or more of the non-defaulting
Underwriters, or any other underwriters, to purchase all, but not less than
all, of the Defaulted Securities in such amounts as may be agreed upon and
upon the terms herein set forth. If, however, the Representatives, or if
either of the Representatives is the defaulting underwriter, the
non-defaulting Representative shall not have completed such arrangements
within such 36-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the
total number of Firm Shares to be purchased on such date, the non-defaulting
Underwriter or Underwriters shall be obligated to purchase the full amount
thereof; in the case where there are more than one non-defaulting Underwriter,
then in the proportions that their respective underwriting obligations
hereunder bear to the underwriting obligations of all non-defaulting
Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the total
number of Firm Shares, this Agreement shall terminate without liability on the
part of any non-defaulting Underwriters or the Company unless otherwise agreed
by the Company and the Representatives, or if either of the Representatives is
the defaulting underwriter, the non-defaulting Representative.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect to any default by such Underwriter under
this Agreement.
In any event of any such default that does not result in a termination of
this Agreement, the Representatives, or if either of the Representatives is
the defaulting underwriter, the non-defaulting Representative shall have the
right to postpone the Closing
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<PAGE>
Date for a period not exceeding seven business days in order to effect any
required changes in the Registration Statement or Prospectus or in any other
documents or arrangements.
12. DEFAULT BY THE COMPANY.
If the Company shall fail to sell and deliver to the Underwriters the
Firm Shares to be sold and delivered by the Company at the Closing Date or the
Option Shares to be sold and delivered by the Company at the Option Closing
Date, if any, under the terms of this Agreement, then the Underwriters may at
their option, by written notice from the Representatives to the Company,
either (a) terminate this Agreement without any liability on the part of any
non-defaulting party other than pursuant to this Section 12 or (b) purchase
the Shares which the Company has agreed to sell and deliver in accordance with
the terms hereof. No action taken pursuant to this Section 12 shall relieve
the Company from liability in respect of such default.
13. REPRESENTATION OF UNDERWRITERS.
The Representatives will act for the several Underwriters in connection
with the transactions contemplated by this Agreement and any action under this
Agreement taken by the Representatives jointly or by Principal individually
will be binding upon all of the Underwriters.
14. NOTICES.
All notices and communications hereunder may be mailed or transmitted by
any standard form of telecommunications and, except as herein otherwise
specifically provided, shall be in writing and shall be deemed to have been
duly given when delivered to a notice party hereto at the address specified
herein or at the address subsequently communicated in writing by the notice
parties. Notices to the Underwriters shall be directed to the Representatives
in care of Principal Financial Securities, Inc., The Fountain Place, 1445 Ross
Avenue, Suite 2300, Dallas, Texas 75202, Attn: Kathy Klock, with a copy to
Best & Flanagan, Professional Limited Liability Partnership, 4000 First Bank
Place, 601 Second Avenue South, Minneapolis, Minnesota 55402, Attention:
James C. Diracles, Esq. Notices to the Company shall be directed to the
address of the Company as set forth on the facing page to the Registration
Statement, with a copy to Lindquist & Vennum, P.L.L.P., 4200 IDS Center,
Minneapolis, Minnesota 55402, Attention: Richard A. Primuth, Esq.
15. PARTIES.
This Agreement shall inure solely to the benefit of, and shall be binding
upon, the Underwriters, the Company and the Controlling Persons, directors and
officers referred to in Section 7 hereof, and their respective successors,
legal representatives and assigns, and no other person shall have or be
construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provisions herein contained.
No
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<PAGE>
purchaser of Shares from any Underwriter shall be deemed to be a successor by
reason merely of such purchase. In all dealings with the Company under this
Agreement, the Representatives shall act on behalf of each of the several
Underwriters.
16. CONSTRUCTION.
This Agreement shall be governed by the laws of the State of Minnesota
without giving effect to the choice of law or conflict of laws principles
thereof. The word "including" as used herein shall not be construed so as to
exclude any other thing not referred to or described.
17. COUNTERPARTS.
This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original and all of which taken together shall
be deemed to be one and the same instrument.
18. ENTIRE AGREEMENT.
This Agreement, including the schedules hereto, contains the entire
agreement between the parties hereto in connection with the subject matter
hereof.
If the foregoing correctly sets forth the understanding between the
Underwriters and the Company, please so indicate in the space provided below
for that purpose, whereupon this letter shall constitute a binding agreement
among us.
Very truly Yours,
AULT INCORPORATED
By:_____________________________________
Name: Frederick M. Green
Title: President and CEO
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CONFIRMED AND ACCEPTED as of the date
first above written:
PRINCIPAL FINANCIAL SECURITIES, INC. and
CRUTTENDEN ROTH INCORPORATED,
as Representatives of the several Underwriters
PRINCIPAL FINANCIAL SECURITIES, INC.
By:___________________________________
Name:______________________________
Title:_______________________________
CRUTTENDEN ROTH INCORPORATED
By:___________________________________
Name:______________________________
Title:_______________________________
62306
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<PAGE>
SCHEDULE A
LIST OF UNDERWRITERS
NAME SHARES
PRINCIPAL FINANCIAL SECURITIES, INC. ________ shares
CRUTTENDEN ROTH INCORPORATED ________ shares
62306
<PAGE>
1,800,000 Shares*
AULT INCORPORATED
Common Shares
(No Par Value Per Share)
AGREEMENT AMONG UNDERWRITERS
November __, 1996
Principal Financial Securities, Inc.
Cruttenden Roth Incorporated
701 Fourth Avenue South, Suite 1100
Minneapolis, Minnesota 55415
Ladies and Gentlemen:
We understand that Ault Incorporated, a Minnesota corporation (the
"Company") desires to enter into an agreement substantially in the form of
Exhibit A hereto (with such changes as are made in accordance with Section 1
hereof, the "Underwriting Agreement") with you and the other prospective
underwriters, if any, named in Schedule A to the Underwriting Agreement for
the sale by the Company to the Underwriters (as defined below), severally and
not jointly, of an aggregate of 1,800,000 shares (the "Firm Shares") of Common
Stock, no par value per share, of the Company ("Common Stock"). In addition,
the Company proposes to grant to the Underwriters, pursuant to the
Underwriting Agreement, an option to purchase up to an aggregate of 270,000
additional shares (the "Option Shares") of Common Stock for the purpose of
covering over-allotments, if any, in connection which the sale of the Firm
Shares; and to sell to the Lead Underwriter (as hereinafter defined), for
$100.00, a warrant to purchase up to 144,900 shares of Common Stock on the
terms and conditions set forth in the Underwriting Agreement and the warrant
attached to the Underwriting Agreement as Exhibit A (the "Underwriter's
Warrant"). The Firm Shares and any Option Shares purchased pursuant to the
Underwriting Agreement are herein called the "Shares."
We understand that changes may be made in those who are to be
Underwriters and in the respective numbers of Shares to be purchased by them,
but that the number of Shares to be purchased by the Underwriters as set forth
in Schedule A to the Underwriting Agreement will not be changed without the
consent of the Underwriters except as provided herein or in the Underwriting
Agreement. The Parties on whose behalf you execute the Underwriting Agreement
are herein called the "Underwriters," and you, co-managers of the Offering, are
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*Plus an option to purchase up to 270,000 additional
shares to cover over-allotments.
<PAGE>
herein called the "Representatives." As further described hereinafter the
Representatives are authorized to exercise all the authority and discretion
vested in the Underwriters by the provisions of this Agreement, the
Underwriting Agreement or any Selected Dealer Agreements (as defined below).
We desire to confirm the agreement among you, the undersigned and the
other Underwriters, if any, with respect to the purchase of the Shares by the
Underwriters, severally and not jointly, from the Company. The aggregate
number of Shares that any Underwriter will be obligated to purchase pursuant
to the terms of the Underwriting Agreement is herein called the "Underwriting
Obligation" of that Underwriter.
1. AUTHORITY OF REPRESENTATIVES; COMPENSATION. We hereby authorize the
Representatives on our behalf, (a) to enter into the Underwriting Agreement
with the Company in substantially the form attached hereto as EXHIBIT A, but
with such changes therein as the Representatives may deem appropriate (other
than as to the purchase price of the Shares to be purchased by the
Representatives or, except as provided herein or in the Underwriting
Agreement, as to the number of Shares to be purchased by the Underwriters),
providing for the purchase by us, severally and not jointly, from the Company,
at the purchase price per share determined as set forth in said EXHIBIT A, of
the number of Firm Shares set forth opposite our name in SCHEDULE A to said
EXHIBIT A, and our proportionate share of the Option Shares (but not of the
Underwriter's Warrant) that the Representatives determines to purchase from
the Company, (b) to take all such actions as the Representatives, in their
discretion, may deem necessary or desirable in order to carry out the
provisions of the Underwriting Agreement and of this Agreement and the sale
and distribution of the Shares, and (c) to determine all matters relating to
the public advertisement of the Shares.
As our share of the compensation for your services hereunder, we will pay
you, and we authorize you to charge to our account on the Closing Date and the
Additional Closing Dates referred to in the Underwriting Agreement, a sum
equal to not more than $_________ of the underwriting discount per share for
each share of Stock which we are then obligated to purchase from the Company
pursuant to the Underwriting Agreement.
2. PUBLIC OFFERING OF SHARES. The sale of the Shares to the public is
to be made, as herein provided, as soon after the Registration Statement (as
defined in the Underwriting Agreement) becomes effective as is advisable in
the judgment of the Representatives. The purchase price to be paid by the
Underwriters for the Shares and the initial public offering price are to be
determined by agreement between the Representatives and the Company. The
Shares shall be first offered to the public at the initial public offering
price as so determined (the "Initial Public Offering Price"). The
Representatives will advise us by telegram, telex, facsimile transmission or
other written form of communication (electronic or otherwise) or orally by
telephone of the date on which the Shares shall be released for offering, the
date on which the Registration Statement shall become effective and the price
at which the Shares are initially to be offered. We agree not to sell any of
the Shares until the Representatives have released the Shares for that
purpose. We authorize the Representatives, after the initial public offering,
to change the public offering price, the concession and the reallowance if, in
the discretion of the Representatives, such action becomes desirable by reason
of changes in
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<PAGE>
general market conditions or otherwise. The public offering price at the time
in effect is herein called the "Offering Price." After notice from the
Representatives that the Shares are released for public sale, we will offer to
the public, in conformity with the provisions hereof and with the terms of
offering set forth in the Prospectus (as defined in the Underwriting
Agreement), such shares of the Firm Shares allocated to us as the
Representatives advise us are not reserved.
3. OFFERING TO DEALERS AND RETAIL SALES. We authorize the
Representatives to reserve for offering and sale, and on our behalf to sell,
to retail purchasers (such sales being herein called "Retail Sales") and to
dealers selected by the Representatives (such dealers, which may include any
of the Underwriters, being herein called "Selected Dealers") all or any part
of our Underwriting Obligation as the Representatives, in their discretion,
shall determine. Such sales, if any, shall be made (a) in the case of Retail
Sales, at the Offering Price and (b) in the case of sales to Selected Dealers,
at the Offering Price less such concession or concessions as the
Representatives, in their discretion, shall determine. Except for such sales
as are designated by a purchaser to be for the account of a particular
Underwriter or Selected Dealer, any sales to Selected Dealers made for our
account shall be as nearly as practicable in the ratio that the number of
Shares reserved for our account for offering to Selected Dealers bears to the
aggregate number of Shares of all Underwriters so reserved.
The Representatives shall notify us promptly on the date of the public
offering as to the number of Shares, if any, that we may retain for direct
sale by us. Prior to the termination of the provisions referred to in Section
13 hereof, the Representatives may reserve for offering and sale as
hereinbefore provided any Shares theretofore retained by us remaining unsold
and we may, with the consent of the Representatives, retain any Shares
theretofore reserved by the Representatives remaining unsold.
We agree that, from time to time prior to the termination of the
provisions referred to in Section 13 hereof, we shall furnish to the
Representatives such information as they may request in order to determine the
number of shares of our Underwriting Obligation that then remain unsold and we
shall upon the request of the Representatives sell to the Representatives for
the account of any Underwriter as many of such unsold Shares as the
Representatives may designate at the Offering Price, less all or any part of
the concession to Selected Dealers as the Representatives, in their
discretion, shall determine. The provisions of Section 4 hereof shall not be
applicable in respect of any such sale.
We authorize the Representatives to determine the form and manner of any
communications or agreements with Selected Dealers. In particular, any
agreements with Selected Dealers (collectively, the "Selected Dealer
Agreements") shall be in the form of EXHIBIT B hereto with such changes
therein as the Representatives, in their discretion, shall determine to be
necessary or desirable. The Representatives are authorized to act as manager
under any Selected Dealer Agreements and we agree, in such event, to be
governed by the terms and conditions of any Selected Dealer Agreements.
It is understood that any Selected Dealer to whom an offer may be made as
hereinbefore provided shall be actually engaged in the investment banking or
securities
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<PAGE>
business and shall either (a) represent that it is a member in good standing
of the National Association of Securities Dealers, Inc. (the "NASD") or (b)
represent that it is a dealer with its principal place of business located
outside the United States, its territories and its possessions and not
registered as a broker or dealer under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and agree not to make any offers or sales of
Shares within the United States, its territories or its possessions or to
persons who are nationals thereof or residents therein. Each Selected Dealer
shall agree to comply with the provisions of Section 24 of Article III of the
Rules of Fair Practice of the NASD, and each Selected Dealer who is not a
member of the NASD also shall agree to comply with (x) the NASD's
interpretation with respect to free-riding and withholding, (y) the provisions
of Sections 8 and 36 of Article III of the NASD's Rules of Fair Practice as
though such Selected Dealer were a member of the NASD, and (z) Section 25 of
Article III of the NASD's Rules of Fair Practice as that Section applies to a
non-member foreign dealer. The several Underwriters may allow, and the
Selected Dealers, if any, may reallow, such concession or concessions as the
Representatives may determine from time to time on sales of Shares to any
qualified dealer, all subject to the Rules of Fair Practice of the NASD.
The Representatives, and any of the several Underwriters with the prior
consent of the Representatives, may make purchases or sales of Shares from or
to any of the other Underwriters, at the Offering Price less all or any part
of the gross spread, and from or to any of the Selected Dealers at the
Offering Price less all or any part of the concession to Selected Dealers.
Upon the request of the Representatives, we will advise the Representatives of
the identity of any dealer to whom we allow such a discount and any
Underwriter or Selected Dealer from whom we receive such a discount.
4. REPURCHASES IN THE OPEN MARKET. Any Shares sold by us (otherwise
than through the Representatives) that shall be contracted for or purchased in
the open market by the Representatives on behalf of any Underwriter or
Underwriters shall be repurchased by us on demand at a price equal to the cost
of such purchase plus commissions and taxes on redelivery. Any Shares
delivered on such repurchase need not be the identical shares originally sold
by us. In lieu of delivery of such shares to us, the Representatives may sell
such shares in any manner for our account and charge us with the amount of any
loss or expense or credit us with the amount of any profit, less any expense,
resulting from such sale, or charge our account with an amount not in excess
of the concession to Selected Dealers.
5. DELIVERY AND PAYMENT. Upon the request of the Representatives, we
shall deliver to the Representatives payment for the Shares to be purchased by
us under the Underwriting Agreement in an amount equal to the Initial Public
Offering Price for such Shares less concessions to Selected Dealers. Such
payment shall be made in such form and at such time and place as may be
specified in such request, and we authorize the Representatives to make
payment for such Shares against delivery thereof for our account hereunder.
If we are a member of or clear through a member of The Depository Trust
Company, the Representatives may, in their discretion, deliver Shares to us
through the facilities of The Depository Trust Company.
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<PAGE>
The Representatives shall remit to us, as promptly as practicable, the
amounts received by them from Selected Dealers and retail purchasers as
payment in respect of Shares sold by the Representatives for our account
pursuant to Section 3 hereof for which payment has been received. Shares
purchased by us under the Underwriting Agreement and not reserved or sold by
the Representatives for our account pursuant to Section 3 hereof shall be
delivered to us as promptly as practicable after receipt by the
Representatives. Any Shares purchased by us and so reserved that remain
unsold at any time prior to the settlement of accounts hereunder may, in the
discretion of the Representatives, and shall, upon the request of the
Representatives, be delivered to us, but, until termination of the Selected
Dealer Agreements pursuant to their terms, such delivery shall be for carrying
purposes only. In the event Shares reserved for sale in Retail Sales or to
Selected Dealers shall not be purchased and paid for in due course as
contemplated hereby, we agree (a) to accept delivery when tendered by the
Representatives of any Shares so reserved for our account and not so purchased
and paid for and (b) if we shall have received payment from the
Representatives in respect of any such Shares, to reimburse the
Representatives on demand for the full amount that they shall have paid us in
respect of such Shares.
In the event of our failure to tender payment for Shares as provided in
the Underwriting Agreement, the Representatives shall have the right to
arrange for other persons, who may include Representatives or any other
Underwriters to purchase such Shares that we had agreed to purchase, but
without relieving us from liability for our default.
6. AUTHORITY TO BORROW. We authorize the Representatives to advance
funds for our account (charging current interest rates) and to arrange loans
for our account or the account of the Underwriters for the purpose of carrying
out the provisions of this Agreement, and in connection therewith to execute
and deliver any notes or other instruments and to hold or pledge as security
therefor all or any part of the Shares constituting our Underwriting
Obligation and all or any part of the Common Stock purchased hereunder for our
account. Any lender is hereby authorized to accept the instructions of the
Representatives in all matters relating to such loans. Any part of the Shares
and Common Stock so held by the Representatives may be delivered to us for
carrying purposes and, if so delivered, will be redelivered to the
Representatives upon demand.
7. ALLOCATION OF EXPENSES AND LIABILITY. We agree to pay, and authorize
the Representatives to charge our account with, (a) all transfer taxes on
sales made by the Representatives for our account, except as herein otherwise
provided, and (b) our proportionate share (based on our Underwriting
Obligation) of all expenses incurred by the Representatives in connection with
the purchase, carrying, sale and distribution of the Shares and all other
expenses arising under the terms of the Underwriting Agreement or this
Agreement. The Representatives' determination of all such expenses and their
allocation thereof shall be final and conclusive. The Representatives may at
any time make partial distributions of credit balances or call for payment of
debit balances. Funds for our account at any time in the hands of the
Representatives may be held in their general funds without accountability for
interest. As soon as practicable after the termination of this Agreement, the
net credit or debit balance in our account, after proper charge and credit for
all interim payments and receipts, shall be paid to or paid by us, provided
that the Representatives may establish such reserves as they, in their
discretion, shall deem necessary or desirable to cover
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possible additional expenses chargeable to the several Underwriters.
Notwithstanding any settlement, we will remain liable for any taxes on
transfers for our account and for our proportionate share (based on our
Underwriting Obligation) of all expenses and liabilities incurred by the
Representatives for the accounts of the several Underwriters.
8. LIABILITY FOR FUTURE CLAIMS. Neither any statement by the
Representatives of any credit or debit balance in our account nor any
reservation from distribution to cover possible additional expenses relating
to the Shares shall constitute any representation by the Representatives as to
the existence or non-existence of possible unforeseen expenses or liabilities
of or charges against the several Underwriters. Notwithstanding the
distribution of any net credit balance to us or the termination of this
Agreement or both, we shall be and remain liable for, and will pay on demand,
(a) our proportionate share (based on our Underwriting Obligation) of all
expenses and liabilities that may be incurred by or for the accounts of the
Underwriters, or any of them, based on the claim that the Underwriters
constitute an association, unincorporated business, partnership or any
separate entity and (b) any transfer taxes paid after such settlement on
account of any sale or transfer for our account.
9. STABILIZATION AND OVER-ALLOTMENT. We authorize the Representatives
on our behalf and for our account, during the term of this Agreement, in their
discretion, and without obligating them to do so, (a) to buy and sell shares
of Common Stock in the open market or otherwise for either long or short
account, on such terms and at such prices as they may determine and (b) in
arranging for sales, to over-allot and cover such over-allotments, PROVIDED
that at no time shall the net commitment of any Underwriter under authority of
this Section 9, either for long or short account, exceed an amount equivalent
to 15% of the Underwriting Obligation of such Underwriter. During or after
the term of this Agreement the Representatives may cover any short position
incurred under the preceding sentence by purchase of Option Shares from the
Company pursuant to the action contained in Section 2(b) of the Underwriting
Agreement or otherwise. All purchases, sales and over-allotments under
authority of this Section shall be for the accounts of each of the several
Underwriters as nearly as practicable in proportion to their respective
Underwriting Obligations. We agree to take up at cost on demand any shares of
Common Stock so purchased for our account and to deliver on demand any shares
of Common Stock so sold or over-allotted for our account. We also authorize
the Representatives to deliver Shares to be purchased by us under the
Underwriting Agreement or hereunder and any other shares of Common Stock
purchased by the Representatives for our account pursuant to this Section 9,
against sales made by the Representatives for our account pursuant to any
provisions of this Agreement. Notwithstanding the foregoing limitations, in
the event of a default by one or more Underwriters in respect of their
obligations under this paragraph, each non-defaulting Underwriter shall assume
its proportionate share of the obligations of such defaulting Underwriter
without relieving such defaulting Underwriter of its liability hereunder.
In the event that the Representatives effect any stabilizing purchases
pursuant to this Section 9, they will notify each Underwriter promptly of the
date and time when the first stabilizing purchase is effected and the date and
time when stabilizing is terminated. We agree that we will not, at any time
prior to the termination of this Agreement, (a) effect any stabilizing
purchases without the prior written consent of the Representatives or (b)
otherwise
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bid for, purchase, sell or attempt to induce others to purchase or sell,
directly or indirectly, any Common Stock other than (i) with the prior written
consent of the Representatives, (ii) as otherwise explicitly provided for in
this Agreement or the Underwriting Agreement relating to the Shares or (iii)
purchases or sales as broker on unsolicited orders for the accounts of others.
We authorize the Representatives to file with the Securities and Exchange
Commission (the "Commission") all notices and reports that may be required as
a result of any transactions made pursuant to this Section 9.
We agree to advise the Representatives, from time to time upon request of
the Representatives during the term of this Agreement, of the number of Shares
retained by us or purchased by us from other Underwriters and Selected Dealers
remaining unsold, and will, upon the Representatives' request, release to the
Representatives for the accounts of one or more of the several Underwriters,
such number of Shares as the Representatives designates at such price, not
less than the net price to Selected Dealers or more than the public offering
price, as the Representatives may determine.
If, pursuant to the provisions of the first paragraph of this Section 9
and prior to the termination of this Agreement (or such earlier date as the
Representatives may have determined on notice to the Underwriters) the
Representatives purchase or contract to purchase any Shares that were retained
by or released to us for direct sale, which shares were theretofore not
effectively placed for investment by us, we authorize the Representatives, in
their discretion, either to charge our account with an amount equal to the
concession to Selected Dealers with respect thereto or to require us to
repurchase such shares at a price equal to the total cost of such purchase,
including commissions, if any, and transfer tax on the redelivery. Shares
delivered on such purchase need not be the identical shares originally
purchased by and delivered to us.
Upon the termination of this Agreement, the Representatives are
authorized in their discretion, in lieu of delivering to us any Shares then
held for our account pursuant to this Section 9, to sell such shares for our
account at such price or prices as the Representatives may determine and debit
or credit our account for the loss or profit resulting from such sale.
10. OPEN MARKET TRANSACTIONS. We agree that we will not make bids or
offers, or make or induce purchases for our own account or the accounts of
customers, in the open market or otherwise, either before or after the
purchase of the Shares and for either long or short account, of any shares of
Common Stock, or any right to purchase any such security except (a) as
provided in this Agreement, the Underwriting Agreement or any Selected Dealer
Agreement or otherwise approved by the Representatives in writing, (b) in
brokerage transactions not involving solicitation of the customer's order, and
(c) in connection with option and option-related transactions that are
consistent with the Commission's "no-action" position set forth in Release No.
17609, as amended in Release No. 1956S, under the Exchange Act. We further
agree that we will not lend, either before or after the purchase of the
Shares, any shares of Common Stock to any customer, Underwriter, Selected
Dealer or any other securities broker or dealer. Prior to the completion (as
defined in Rule 10b-6 of the Exchange Act) of our participation in the
distribution, we will otherwise comply with Rule 10b-6 under the Exchange Act.
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<PAGE>
11. BLUE SKY LAWS. Prior to the initial offering by the Underwriters,
the Representatives shall inform us as to the states and other jurisdictions
under the respective securities or blue sky laws of which it is believed that
the Shares have been qualified for sale or are exempt from such qualification,
but the Representatives do not assume any responsibility or obligation as to
the accuracy of such information or as to the right of any Underwriter or
dealer to offer or sell the Shares in any state or other jurisdiction.
12. DEFAULT BY UNDERWRITERS. Default by one or more Underwriters in
respect of their obligations under the Underwriting Agreement shall not
release us from any of our obligations or in any way affect the liability of
any defaulting Underwriter to the other Underwriters for damages resulting
from such default. In the event of such a default by one or more
Underwriters, the Representatives are authorized increase, prorata with the
other non-defaulting Underwriters, the number of Shares that we shall be
obligated to purchase from the Company; PROVIDED, HOWEVER, that the aggregate
of all such increases for all non-defaulting Underwriters shall not exceed 10%
of the Shares and, if the aggregate number of the Shares not taken up by such
defaulting Underwriters exceeds such 10%, the Representatives are further
authorized, but shall not be obligated, to arrange for the purchase by other
persons, who may include the Representatives or any other non-defaulting
Underwriter, if any, of all or a portion of the Shares not taken up by such
defaulting Underwriters. In the event any such increases or arrangements are
made, the respective numbers of the Shares to be purchased by the
non-defaulting Underwriters and by any such other person or persons shall be
taken as the basis for the Underwriters' obligations under this Agreement, but
this shall not in any way affect the liability of any defaulting Underwriter
to the other Underwriters for damages resulting from such default.
In the event of a default by one or more Underwriters in respect of their
obligations under this Agreement to take up and pay for any shares of Common
Stock purchased by the Representatives for the Underwriters' respective
accounts pursuant to Section 9 hereof, or to deliver any such shares of Common
Stock sold or over-allotted by the Representatives for the Underwriters'
respective accounts pursuant to any provision of this Agreement, and to the
extent that arrangements shall not have been made by the Representatives for
other persons to assume the obligations of such defaulting Underwriter or
Underwriters, each non-defaulting Underwriter shall assume its proportionate
share of the aforesaid obligations of each such defaulting Underwriter without
relieving any such defaulting Underwriter of its liability therefor.
13. TERMINATION. Section 2; the second paragraph and the first sentence
of the third paragraph of Section 3; Section 4; the first sentence of Section
9 and Section 10 hereof will terminate at the close of business on the
forty-fifth calendar day after the effective date of the Registration
Statement, unless extended or sooner terminated as hereinafter provided. The
Representatives may extend such provisions, or any of them, for a period not
to exceed 30 additional calendar days by notice to us to such effect. The
Representatives may terminate any of such provisions at any time by notice to
us, and the Representatives may terminate all such provisions at any time by
notice to us to the effect that the offering provisions of this Agreement are
terminated.
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<PAGE>
14. GENERAL POSITION OF THE REPRESENTATIVES. In taking action under
this Agreement, the Representatives shall act only as agent of the several
Underwriters. The authority of the Representatives shall include the taking
of such actions as they may deem necessary or desirable in respect of all
matters pertaining to any and all offers and sales of the Shares, including
the right to make any modifications that they consider necessary or desirable
in the arrangements with Selected Dealers or others. The Representatives
shall be under no liability for or in respect of the value of the Shares; the
validity or the form of the Shares, the Registration Statement, the Prospectus
or agreements or other instruments executed by the Company or others; the
delivery of the Shares; or the performance by the Company or others of any
agreement on its or their part. Representatives shall not be liable under any
of the provisions hereof or for any matters connected herewith, except for
want of good faith and except for any liability arising under the Securities
Act of 1933, as amended (the "Act"). Only obligations expressly assumed
herein by the Representatives as such shall be implied from this Agreement.
In representing the Underwriters hereunder, the Representatives shall act as
representative of each of the Underwriters respectively. Nothing herein
contained shall constitute the several Underwriters partners with the
Representatives or with each other or render any Underwriter liable for the
commitments of any other Underwriter, except as otherwise provided in Section
12 hereof or Section 11 of the Underwriting Agreement. If the Underwriters
shall be deemed to constitute a partnership for Federal income tax purposes,
it is our intent that the Underwriters be excluded from the application of
Subchapter K, Chapter 1, Subtitle A, of the Internal Revenue Code of 1986, as
amended. We elect to be so excluded and agree not to take any position
inconsistent with such election. We authorize the Representatives, in their
discretion, to execute and file on behalf of the Underwriters such evidence of
election as may be required by the Internal Revenue Service. The commitments
and liabilities of each of the several Underwriters are several in accordance
with their respective Underwriting Obligations and are not joint.
Except as otherwise provided, all actions that may or shall be taken by
the Representatives pursuant to any provision of this Agreement, the
Underwriting Agreement, any Selected Dealer Agreement or any other document
relating to the offering and sale of the Shares may be taken, notwithstanding
any other provision hereof or any provision of the Underwriting Agreement, any
Selected Dealer Agreement or any such other document, by Representatives. In
furtherance of the foregoing, Representatives is authorized to exercise all
the authority and discretion vested in the Underwriters by the provisions of
this Agreement, the Underwriting Agreement or any Selected Dealer Agreements.
15. ACKNOWLEDGMENT OF RECEIPT OF REGISTRATION STATEMENT, ETC. We hereby
confirm that we have examined the Registration Statement as heretofore filed
by the Company with the Commission and each amendment thereto, if any, filed
through the date hereof, that we are willing to be named as an underwriter
therein and to accept the responsibilities of an underwriter thereunder, and
that we are willing to proceed as therein contemplated. We confirm that we
have authorized the Representatives to advise the Company on our behalf (a) as
to the statements to be included in any Preliminary Prospectus (as defined in
the Underwriting Agreement) and in the Prospectus under the heading
"Underwriting" insofar as they relate to us and (b) that there is no other
information about us required to be stated in the Registration Statement or
Prospectus. We understand that the aforementioned documents are subject to
further change and that we will be supplied with
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copies of any further amendments or supplements to the Registration Statement
and of any amended or supplemented Prospectus promptly, if and when received
by the Representatives, but the making of such changes, amendments and
supplements shall not release us or affect our obligations hereunder or under
the Underwriting Agreement.
16. (a) INDEMNITY. We agree to indemnify and hold harmless each other
Underwriter (including the Representatives) and any person who controls any
such Underwriter within the meaning of Section 15 of the Act, to the extent
that, and upon the terms on which, we agree to indemnify and hold harmless the
Company and other specified persons as set forth in the Underwriting
Agreement. Our indemnity agreement contained in this Section 16 shall remain
in full force and effect regardless of any investigation made by or on behalf
of such other Underwriter or controlling person and shall survive the delivery
of any payment for the Shares and the termination of this Agreement and the
similar agreements entered into with the other Underwriters.
(b) CLAIMS AGAINST UNDERWRITERS. Each Underwriter (including the
Representatives) will pay, upon the request of the Representatives, as
contribution, their proportionate share (based upon their Underwriting
Obligation) or any loss, claim, damage or liability, joint or several, paid or
incurred by any Underwriter (including the Representatives) to any person
other than an Underwriter, arising out of or based upon any untrue statement
or alleged untrue statement of a material fact contained in the Registration
Statement, the Prospectus, any amendment or supplement thereto or any
Preliminary Prospectus or any other selling or advertising material approved
by the Representatives for use by the Underwriters in connection with the sale
of the Shares, or the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading (other than an untrue statement or alleged untrue statement or
omission or alleged omission made in conformity with written information
furnished to the Company through the Representatives by or on behalf of an
Underwriter expressly for use therein) or relating to any transaction
contemplated by this Agreement; and will pay such proportionate share of any
legal or other expense reasonably incurred by the Representatives or with
their consent in connection with investigating or defending against any such
loss, claim, damage or liability, or any action in respect thereof. In
determining the amount of our obligation under this paragraph, appropriate
adjustment may be made by the Representatives to reflect any amounts received
by any one or more Underwriters in respect of such claim from the Company
pursuant to Section 7 of the Underwriting Agreement or otherwise. There shall
be credited against any amount paid or payable by us pursuant to this
paragraph any loss, claim, damage, liability or expense that is incurred by us
as a result of any such claim asserted against us, and if such loss, claim,
damage, liability or expense is incurred by us subsequent to any payment by us
pursuant to this paragraph, appropriate provision shall be made to effect such
credit, by refund or otherwise. If any such claim is asserted, the
Representatives may take such action in connection therewith as they deem
necessary or desirable, including retention of counsel for the Underwriters,
and in their discretion separate counsel for any particular Underwriter or
group of Underwriters, and the fees and disbursements of any counsel so
retained by the Representatives shall be included in the amounts payable
pursuant to this paragraph. In determining amounts payable pursuant to this
paragraph, any loss, claim, damage, liability or expense incurred by any
person who controls any Underwriter within the meaning of Section 15 of the
Act that has been incurred
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by reason of such control relationship shall be deemed to have been incurred
by such Underwriter. Any Underwriter may elect to retain, at its own expense,
its own counsel. The Representatives may settle or consent to the settlement
of any such claim on advice of counsel retained by them. Whenever the
Representatives receive notice of the assertion of any claim to which the
provisions of this paragraph would be applicable, they shall give prompt
notice thereof to each Underwriter. If one or more Underwriters default in
their obligation to make any payments under this paragraph, each
non-defaulting Underwriter shall be obligated to pay its proportionate share
of all defaulted payments, based upon the proportion the Underwriting
Obligation of such non-defaulting Underwriter bears to the aggregate
Underwriting Obligations of all non-defaulting Underwriters. Nothing herein
shall relieve a defaulting Underwriter from liability for its default.
17. CAPITAL REQUIREMENTS. We confirm that the incurring by us of our
obligations under this Agreement and under the Underwriting Agreement will not
place us in violation of the net capital requirements of Rule 15c3-l under the
Exchange Act or of any applicable rules relating to capital requirements of
the NASD, if we are a member, or of any securities exchange to which we are
subject.
18. UNDERTAKING TO MAIL PROSPECTUSES. As contemplated by Rule l5c2-8
under the Exchange Act, the Representatives agree to mail a copy of the
Prospectus to any person making a written request therefor during the period
referred to in said Rule, the mailing to be made to the address given in the
request. We confirm that we have delivered all Preliminary Prospectuses and
revised Preliminary Prospectuses, if any, required to be delivered under the
provisions of said Rule 15c2-8 and agree to deliver all Prospectuses required
to be delivered thereunder. We acknowledge that the copies of the Preliminary
Prospectuses furnished to us have been distributed to dealers who have been
notified of the foregoing requirements pertaining to the delivery of
Preliminary Prospectuses and Prospectuses. The Representatives have
heretofore delivered to us such number of copies of Preliminary Prospectuses
as have been reasonably requested by us, receipt of which is hereby
acknowledged, and will deliver such number of copies of Prospectuses as will
be reasonably required by us. We have made a record of our distribution of
each Preliminary Prospectus, and when furnished with copies of any revised
Preliminary Prospectus we have, upon your request, promptly forwarded copies
thereof to each person to whom we had theretofore distributed Preliminary
Prospectuses.
19. MISCELLANEOUS. Any notice hereunder from the Representatives to us
or from us to the Representatives shall be deemed to have been duly given if
sent by registered mail, telegram or teletype, to us at our address as set
forth in our Underwriters' Questionnaire previously delivered to the
Representatives, or to the Representatives in care of Principal Financial
Services, Inc., The Fountain Place, 1445 Ross Avenue, Suite 2300, Dallas,
Texas 75202, Attention: Kathy Klock.
We understand that the Representative are members in good standing of the
NASD. We hereby confirm that we are actually engaged in the investment
banking or securities business and that either (a) we are a member in good
standing of the NASD or (b) we are a dealer with its principal place of
business located outside the United States, its territories and its
possessions and not registered as a broker or dealer under the Exchange Act
and we agree
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not to make any sales within the United States, its territories or its
possessions or to persons who are nationals thereof or residents therein
(except that we may participate in sales to Selected Dealers and others under
Section 3 of this Agreement). We hereby agree to comply with the provisions
of Section 24 of Article III of the Rules of Fair Practice of the NASD, and,
if we are not a member of the NASD, we also hereby agree to comply with (x)
the NASD's interpretation with respect to free-riding and withholding, (y) the
provisions of Sections 8 and 36 of Article III of the NASD's Rules of Fair
Practice as though we were a member of the NASD, and (z) Section 25 of Article
III of the NASD's Rules of Fair Practice as that Section applies to a
non-member foreign dealer. In connection with sales and offers to sell Shares
made by us outside the United States, its territories and possessions (1) we
will either furnish to each person to whom any such sale or offer is made a
copy of the then-current Preliminary Prospectus or the Prospectus, as the case
may be, or inform such person that such Preliminary Prospectus or Prospectus
will be available upon request and (2) we will furnish to each person to whom
any such sale or offer is made such prospectus, advertisement or other
offering document containing information relating to the Shares or the Company
as may be required under the law of the jurisdiction in which such sale or
offer is made. Any prospectus, advertisement or other offering document
furnished by us to any person in accordance with the preceding sentence and
any such additional offering material as we may furnish to any person (A)
shall comply in all respects with the law of the jurisdiction in which it is
so furnished (B) shall be prepared and so furnished at our sole risk and
expense and (C) shall not contain information relating to the Shares or the
Company that is inconsistent in any respect with the information contained in
the then current Preliminary Prospectus or in the Prospectus, as the case may
be.
This Agreement shall be governed by and construed in accordance with the
laws of the State of Minnesota without giving effect to the choice of law or
conflict of laws principles thereof.
This instrument may be signed by or on behalf of the Underwriters in one
or more counterparts each of which shall constitute one and the same agreement
among all the Underwriters and shall become effective at such time as all the
Underwriters shall have signed or have had signed on their behalf such
counterparts and the Representatives shall have confirmed all such
counterparts. The Representatives may confirm such counterparts by facsimile
signature.
Please confirm that the foregoing correctly states the understanding
between us by signing and returning to us a counterpart hereof.
Very truly yours,
By:
-----------------------------------------------
As Attorney-in-Fact for each of the several
Underwriters named in Schedule A to the
Underwriting Agreement referred to above
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Confirmed as of the date
first above written:
PRINCIPAL FINANCIAL SECURITIES, INC.
CRUTTENDEN ROTH INCORPORATED
Representatives
By: Principal Financial Securities, Inc.
By:
-------------------------------------
Authorized Signature
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Form of Underwriters' Warrant
WARRANT TO PURCHASE SHARES
OF COMMON STOCK
Company: Ault Incorporated, a Minnesota corporation (the "Company"), and any
corporation that shall succeed to the obligations of the Company under
this Warrant.
Number of Shares:
-------------------------------------------------------
Class of Stock: Common Stock
-------------------------------------------------------
Initial Exercise Price: $ per share [120% of Public Offering]
-------------------------------------------------------
Date Exercisable: [1 year after Closing Date]
-------------------------------------------------------
Expiration Date: [5 years after Closing Date]
-------------------------------------------------------
Date of Grant: [Closing Date]
-------------------------------------------------------
THIS CERTIFIES THAT, for value received, ________________________ is
entitled to purchase the above number (as adjusted pursuant to Section 6
hereof) of fully paid and nonassessable shares of the above Class of Stock of
the Company at the Initial Exercise Price above (as adjusted pursuant to
Section 6 hereof), subject to the provisions and upon the terms and conditions
set forth herein.
1. DEFINITIONS.
As used herein, the following terms, unless the context otherwise
requires, shall have the following meanings:
(a) "Act" shall mean the Securities Act of 1933, as amended, or any
similar federal statute, and the rules and regulations thereunder, as shall be
in effect at the time.
<PAGE>
(b) "Common Stock" shall mean shares of the presently authorized
Common Shares of the Company and any stock into which such Common Shares may
hereafter be exchanged.
(c) "Holder" shall mean any person who shall at the time be the
holder of this Warrant.
(d) "Shares" shall mean the shares of the Class of Stock that the
Holder is entitled to purchase upon exercise of this Warrant, as adjusted
pursuant to Section 6 hereof.
(e) "Warrant Price" shall mean the Initial Exercise Price at which
this Warrant may be exercised, as adjusted pursuant to Section 6 hereof.
2. NUMBER OF SHARES.
Holder is entitled to purchase _________ shares of the Company's Common
Stock, subject to the terms and conditions of this Warrant.
3. TERM.
The purchase right represented by this Warrant is exercisable, in whole
or in part, commencing on the Date Exercisable, and thereafter at any time on
or before the Expiration Date.
4. METHOD OF EXERCISE; PAYMENT; ISSUANCE OF NEW WARRANT.
Subject to Section 3 hereof, the purchase right represented by this
Warrant may be exercised by the Holder, in whole or in part, by the surrender
of this Warrant (with the notice of exercise form attached hereto as Appendix
A duly executed) at the principal office of the company and by the payment to
the Company, by check made payable to the Company drawn on a United States
bank and for United States funds, or by an instrument canceling indebtedness
of the Company to the Holder, of an amount equal to the then applicable
Warrant Price per share multiplied by the number of Shares then being
purchased. In the event of any exercise of the purchase right represented by
this Section 4, certificates for the Shares so purchased shall be delivered to
the Holder within thirty (30) days of receipt of such payment and, unless this
Warrant has been fully exercised or expired, a new Warrant representing the
portion of the Shares, if any, with respect to which this warrant shall not
then have been exercised shall also be issued to the Holder within such thirty
(30) day period.
5. EXERCISE PRICE.
The Warrant Price at which this Warrant may be exercised shall be the
Initial Exercise Price, as adjusted from time to time pursuant to Section 6
hereof.
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6. ADJUSTMENT OF NUMBER AND KIND OF SHARES AND ADJUSTMENT OF WARRANT
PRICE.
6.1 CERTAIN DEFINITIONS. As used in this Section 6 the following terms
shall have the following respective meanings:
(a) OPTIONS: rights, options or warrants to subscribe for,
purchase or otherwise acquire either shares of Common Stock or Convertible
Securities.
(b) CONVERTIBLE SECURITIES: any evidences of indebtedness, shares
of stock or other securities directly or indirectly convertible into or
exchangeable for Common Stock.
6.2 ADJUSTMENTS. The number and kind of securities purchasable upon the
exercise of this Warrant and the Warrant Price shall be subject to adjustment
from time to time upon the occurrence of certain events, as follows:
(a) RECLASSIFICATION, REORGANIZATION, CONSOLIDATION OR MERGER. In
the case of any reclassification of the Common Stock, or any reorganization,
consolidation or merger of the Company with or into another corporation (other
than a merger or reorganization with respect to which the Company is the
continuing corporation and which does not result in any reclassification of
the Common Stock), the Company, or such successor corporation, as the case may
be, shall execute a new warrant, providing that the Holder shall have the
right to exercise such new warrant and upon such exercise to receive, in lieu
of each share of the Class of Stock theretofore issuable upon exercise of this
Warrant, the number and kind of securities receivable upon such
reclassification, reorganization, consolidation or merger by a holder of
shares of the same Class of Stock of the Company for each share of the Class
of Stock. The aggregate warrant price of the new warrant shall be the
aggregate Warrant Price in effect immediately prior to the reclassification,
reorganization, consolidation or merger. Such new warrant shall provide for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 6 including, without limitation,
adjustments to the Warrant Price and to the number of shares issuable upon
exercise of this Warrant. The provisions of this subsection (a) shall
similarly apply to successive reclassification, reorganizations,
consolidations or mergers.
(b) SPLIT, SUBDIVISION OR COMBINATION OR SHARES. If the Company at
any time while this Warrant remains outstanding and unexpired shall split,
subdivide or combine the Class of Stock for which this Warrant is then
exercisable, the Warrant Price shall be proportionately decreased in the case
of a split or subdivision or proportionately increased in the case of a
combination. Any adjustment under this subsection (b) shall become effective
when the split, subdivision or combination becomes effective.
(c) STOCK DIVIDENDS. If the Company at any time while this Warrant
remains outstanding and unexpired shall pay a dividend with respect to the
Class of
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Stock for which this Warrant is then exercisable, payable in shares of that
Class of Stock, Options or Convertible Securities, the Warrant Price shall be
adjusted, from and after the date of determination of the shareholders
entitled to receive such dividend or distributions, to that price determined
by multiplying the Warrant Price in effect immediately prior to such date of
determination by a fraction (i) the numerator of which shall be the total
number of shares of that Class of Stock outstanding immediately prior to such
dividend or distribution, and (ii) the denominator of which shall be the total
number of shares of the same Class of Stock outstanding immediately after such
dividend or distribution (including shares of that Class of Stock issuable
upon exercise, conversion or exchange of any Options or Convertible securities
issued as such dividend or distribution). If the Options or Convertible
Securities issued as such dividend or distribution by their terms provide,
with the passage of time or otherwise, for any decrease in the consideration
payable to the Company, or any increase in the number of shares issuable upon
exercise, conversion or exchange thereof (by change of rate or otherwise), the
Warrant Price shall, upon any such decrease or increase becoming effective, be
reduced to reflect such decrease or increase as if such decrease or increase
became effective immediately prior to the issuance of the Options or
Convertible Securities as the dividend or distribution. Any adjustment under
this subsection (c) shall become effective on the record date.
6.3 ADJUSTMENT OF NUMBER OF SHARES. Upon each adjustment in the Warrant
Price pursuant to this Section 6, the number of Shares issuable upon exercise
of this Warrant shall be adjusted to the product obtained by multiplying the
number of Shares issuable immediately prior to such adjustment in the Warrant
Price by a fraction (i) the numerator of which shall be the Warrant Price
immediately prior to such adjustment, and (ii) the denominator of which shall
be the Warrant Price immediately after such adjustment.
6.4 NO IMPAIRMENT. The Company will not, by amendment of its Restated
Articles of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any
of the terms to be observed or performed hereunder by the Company but will at
all times in good faith assist in the carrying out of all the provisions of
this Section 6 and in the taking of all such actions as may be necessary or
appropriate in order to protect against impairment of the rights of the holder
of this Warrant to adjustments in the Warrant Price.
7. NOTICE OF ADJUSTMENTS.
Whenever the Warrant Price shall be adjusted pursuant to Section 6
hereof, the Company shall issue a certificate signed by its chief financial
officer setting forth, in reasonable detail, the event requiring the
adjustment, the amount of the adjustment, the method by which such adjustment
was calculated and the Warrant Price after giving effect to such adjustment,
and shall cause a copy of such certificate to be mailed (by first class mail,
postage prepaid) to the Holder.
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8. RIGHT TO CONVERT WARRANT INTO STOCK.
8.1 RIGHT TO CONVERT. In addition to the rights granted under Section 4
of this Warrant, the Holder shall have the right to require the Company to
convert this Warrant (the "Conversion Right") into shares of the Class of
Stock for which the Warrant is then exercisable, as provided in this Section
8. Upon exercise of the Conversion Right, the Company shall deliver to the
Holder (without payment by the Holder of any Warrant Price) that number of
shares of stock equal to the quotient obtained by dividing (x) the value of
this Warrant at the time the conversion Right is exercised (determined by
subtracting the aggregate Warrant Price immediately prior to the exercise of
the Conversion Right from the aggregate fair market value of the Shares
issuable upon exercise of this Warrant immediately prior to the exercise of
the Conversion Right, as determined pursuant to Section 8.4 below) by (y) the
fair market value (as determined pursuant to Section 8.4 below) of one share
of that Class of Stock immediately prior to the exercise of the Conversion
Right.
8.2 METHOD OF EXERCISE. The Conversion Right may be exercised at any
time by the Holder by the surrender of this Warrant at the principal office of
the Company together with a written statement specifying that the Holder
thereby intends to exercise the Conversion Right. Certificates of the shares
of stock issuable upon exercise of the Conversion Right shall be delivered to
the Holder within thirty (30) days following the Company's receipt of this
Warrant together with the aforesaid written statement.
8.3 AUTOMATIC CONVERSION PRIOR TO EXPIRATION. To the extent this
Warrant is not previously exercised, and if the fair market value of one share
of Common Stock is greater than the Warrant Price per share, this Warrant
shall be deemed automatically exercised in accordance with Section 8.1 hereof
(even if not surrendered) immediately before its expiration. To the extent
this Warrant or any portion thereof is deemed automatically exercised pursuant
to this Section 8.3, the Company agrees to notify Holder within a reasonable
period of time of the number of shares of the Class of Stock, if any, Holder
is to receive by reason of such automatic exercise. The Company shall issue
to the Holder certificates for the Shares issued upon such automatic
conversion in accordance with Section 8.2 above, although the Company may
condition receipt of the certificate upon surrender of the Warrant to the
Company.
8.4 VALUATION OF STOCK. For purposes of this Section 8, the fair market
value of one share of the Class of Stock issuable upon exercise of this
Warrant shall mean:
(a) The average of the Nasdaq National Market closing price or, if
no closing price is reported, the closing bid and asked prices of the Common
Stock, quoted in the Over-The-Counter Market Summary or the closing price
quoted on any exchange on which the Common Stock is listed, whichever is
applicable, as published in The Wall Street Journal for the ten (10)
trading days prior to the date of determination of fair market value.
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(b) If the Common Stock is not traded Over-The-Counter or on an
exchange, the fair market value of the Class of Stock per share shall be as
determined in good faith by the Company's Board of Directors; provided,
however, that if the Holder in good faith disputes in writing the fair market
value determined by the Board of Directors within thirty (30) days of being
informed of such fair market value, the fair market value shall be determined
by an independent appraiser, appointed in good faith by the Company's Board of
Directors and whose reasonable expenses shall be borne equally by the Company
and the Holder.
9. COMPLIANCE WITH ACT; TRANSFERABILITY OF WARRANT; DISPOSITION OF
SHARES.
9.1 LEGENDS. The Shares issued upon exercise of this Warrant shall be
imprinted with a legend in substantially the following form:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE
REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE
144 OR AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO
THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT
REQUIRED."
9.2 TRANSFERABILITY AND NEGOTIABILITY OF WARRANT AND SHARES. This
Warrant and the Shares issued upon exercise thereof may not be transferred or
assigned in whole or in part without compliance with applicable federal and
state securities laws by the transferor and the transferee (including, without
limitation, the delivery of investment representation letters and legal
opinions reasonably satisfactory to the Company, if reasonably requested by
the Company). Subject to the provisions of this Section 9.2, title to this
Warrant may be transferred in the same manner as a negotiable instrument
transferable by endorsement and delivery. This Warrant may also be
transferred, in whole or in part, by delivery of this original Warrant to the
Company along with an executed "Notice of Transfer" in the form attached
hereto as Appendix B.
10. REGISTRATION RIGHTS. The Shares issuable upon exercise of this
Warrant have been registered for sale under Rule 415 of the Securities Act of
1933. The Company hereby agrees to maintain such registration for five years
from the date of issuance of this Warrant. The provisions of this Section 10
apply if this registration is not maintained by the Company at any time in the
future, and also apply to any additional shares issued, or issuable, pursuant
to the anti-dilution provisions of Section 6 above.
10.1 OPTIONAL (PIGGYBACK) REGISTRATIONS. If at any time or times after
the date hereof, the Company shall determine to register any of its securities
(for itself or for any other securities holder of the Company) under the Act
or any successor legislation (other than a registration relating to stock
option plans, employee benefit plans or a Rule 145
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transaction), and in connection therewith the Company may lawfully register
the Common Stock of the holders of Registrable Securities (as defined below),
the company will promptly give written notice thereof to the then holders (the
"Registered Holders") of all outstanding Registrable Securities and will use
its best efforts to include in such registration and to effect the
registration under the Act of all Registrable Securities which such Registered
Holders may request in writing delivered to the Company within 15 days after
receipt by such Registered Holder of the notice given by the Company;
provided, however, that in connection with an underwritten offering by the
Company of any of its securities if the managing underwriter shall impose a
limitation on the number of shares of common Stock which may be included in
such registration by a group including the Registered Holders and other
holders of Common Stock because, in its reasonable and good faith judgment,
such limitation is necessary to effect an orderly public distribution, such
limitation shall be imposed upon the Registered Holders and such other holders
pro rata on the basis of the total number of shares of Common Stock owned by
them; and further provided, however, that in no event shall such limitation
have the effect of reducing the number of shares to be registered by the
Company. In the event of such a limitation, shares of persons who are not
Registered Holders will not be included in such registration. If the Company
includes in such registration any securities to be offered by it, all expenses
of the registration and offering shall be borne by the Company, except that
the Registered Holders shall bear underwriting commissions and discounts
attributable to their Registrable Securities being registered. If the
registration is of exclusively a secondary offering, the Registered Holders
shall bear their proportionate share of the expenses of the registration and
offering (provided all stockholders registering shares thereunder bear their
proportionate share of expenses), except expenses which the Company would have
incurred whether or not registration was attempted, including, without
limitation, the expense of preparing normal audited or unaudited financial
statements or summaries consistent with applicable Securities and Exchange
Commission reports. Without in any way limiting the types of registrations to
which this Section 10.1 shall apply, in the event that the Company shall
effect any "shelf registration" under Rule 415 promulgated under the Act, or
any other similar rule or regulation, then for each shelf registration
effected by the Company, the Company shall take all necessary action,
including, without limitation, the filing of post-effective amendments, to
permit the Registered Holders to include their shares in such registrations in
accordance with the terms of this Section 10.1.
10.2 SHORT FORM REGISTRATIONS. In addition to the registration
provided in Section 10.1 above, the Registered Holders of an aggregate of not
less than 25% of the Registrable Securities then outstanding shall be entitled
to request by written notice to the Company from time to time that the Company
register the offering and sale of all or a portion of their Registrable
Securities on Form S-3 (or any similar short form registration), provided that
the Company is then eligible to use such short form registration. In such
event, the Company will notify all of the Registered Holders of Registrable
Securities who would be entitled to notice of a proposed registration under
Section 10.1 of such request. Upon the written request of any such Registered
Holder after receipt from the Company of such notification, the Company will
either (i) elect to
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<PAGE>
make a primary offering in which case the rights of the Registered Holders
shall be as set forth in Section 10.1, or (ii) use its best efforts to cause
such of the Registrable Securities as may be requested by any Registered
Holders (including the Registered Holder or Holders giving the initial notice
of intent to register hereunder) to be registered under the Act in accordance
with the terms of this Section 10.3, provided that the Company will not be
obligated to effect such a registration (x) for shares of common Stock having
an aggregate offering price of less than $250,000, or (y) if the original
request for registration hereunder was made at a time within three (3) months
after the effective date of a prior registration pursuant to Section 10.1
hereof, or (z) if the effective dates of two registrations pursuant to this
Section 10.2 shall have occurred during the twelve month period immediately
prior to such request for registration hereunder. All expenses of such
registrations and offerings shall be borne by the Company, except that the
Registered Holders shall bear underwriting commissions and discounts
attributable to their Registrable Securities being registered and the Company
shall not be required to keep said registration effective for more than 180
days.
10.3 REQUIRED REGISTRATIONS. If registration under Form S-3 is not
available to the Company at any time, and at any one time one or more of the
Registered Holders of any aggregate of not less than 51% of the Registrable
Securities then outstanding shall notify the Company in writing that such
Registered Holder(s) intend to offer or cause to be offered for public sale
all or any portion of their Registrable Securities, the Company will notify
all of the Registered Holders of Registrable Securities who would be entitled
to notice of a proposed registration under Section 10.1 of such notification.
Upon the written request of any such Registered Holder after receipt from the
Company of such notification, the Company will use its best efforts to cause
such of the Registrable Securities as may be requested by any Registered
Holders (including the Registered Holder or Holders giving the initial notice
of intent to register hereunder) to be registered under the Act in accordance
with the terms of this Section 10.3, provided the Company will not be
obligated to effect a registration hereunder for shares of Common Stock having
an aggregate offering price of less than $500,000. All expenses of such
registrations and offering shall be borne by the Company, except that the
Registered Holders shall bear underwriting commissions and discounts
attributable to their Registrable securities being registered.
10.4 REGISTRABLE SECURITIES. For the purposes of this Section 10, the
term "Registrable Securities" shall mean (i) the Common Stock issued or
issuable upon exercise of the Warrants to be issued under this Agreement, (ii)
any other shares of Common Stock acquired by any of the Registered Holders
from the Company at any time and from time to time after the date hereof
pursuant to this Warrant and (iii) any Common Stock issued or issuable with
respect to the Common Stock referred to in (i), (ii) and (iii) hereof by way
of a stock dividend or stock split or in connection with a combination of
shares, recapitalization, merger, consolidation or other reorganization;
except for any shares of such Common Stock which have at any time been sold in
a registered public offering or pursuant to Rule 144 promulgated under the Act
or under circumstances not requiring investment representations. In the event
that the number of
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<PAGE>
shares requested by the Registered Holders to be included in a registration
under Section 10.2 or 10.3 shall exceed the number which the managing
underwriter, if any, shall reasonably and in good faith agree in writing to
include therein, the shares to be so included shall be allocated pro rata
among the Registered Holders in proportion to the amount of Registrable
Securities owned by them. The registration rights granted under this Section
10 may be assigned to any subsequent holder of the Registrable Securities,
provided that notice of such transfer and assignment, together with the name
and address of the transferee, is given to the Company.
10.5 FURTHER OBLIGATIONS OF THE COMPANY. Whenever, under the preceding
paragraphs of this Section 10, the Company is required hereunder to register
Registrable Securities, it agrees that it shall also do the following:
(a) Prepare and file with the Securities and Exchange Commission
such amendments and supplements to said registration statement and the
prospectus used in connection therewith as may be necessary to keep said
registration statement effective and to comply with the provisions of the Act
with respect to the sale of securities covered by said registration statement
for the period necessary to complete the proposed public offering;
(b) Furnish to each Registered Holder such copies of each
preliminary and final prospectus and such other documents as each such
Registered Holder may reasonably request to facilitate the public offering of
such Registered Holder's Registrable Securities;
(c) Enter into any underwriting agreement with provisions
reasonably required by the proposed underwriter, if any, of the offering;
(d) Use its best efforts to register or qualify the Registrable
Securities covered by said registration statement under the securities or
"blue-sky" laws of such jurisdictions as any selling Registered Holder may
reasonably request; and
(e) Furnish to each selling Registered Holder a signed counterpart,
addressed to the prospective sellers, of
(i) an opinion of counsel for the Company, and
(ii) "comfort" letter(s) signed by the independent public
accountants who have certified the company's financial statements
included in the registration statement,
covering substantially the same matters with respect to the registration
statement (and the prospectus included therein) and (in the case of the
accountant's letter) with respect to events subsequent to the date of the
financial statements, as are customarily covered
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<PAGE>
in opinions of issuer's counsel and in accountant's letters delivered
to the underwriters in underwritten public offerings of securities.
10.6 UNDERWRITTEN REGISTRATIONS.
(a) The Company shall have the right to select the managing
underwriter or underwriters for any underwritten offering made pursuant to a
registration under Section 10.1 hereof, and the Registered Holders
participating in any registration under Section 10.2 or 10.3 hereof shall have
the right to consult with the Company in the selection of the managing
underwriter or underwriters thereof, if any.
(b) In connection with any underwritten offering by the Company,
the Registered Holders shall, if requested by the managing underwriter or
underwriters thereof, agree not to sell any of their Registrable Securities in
any transaction other than pursuant to such underwritten offering for a period
of up to 90 days beginning on the effective date of the registration
statement, provided that the Company's officers and directors and each holder
of 10% or more of the Company's issued and outstanding Common Stock also agree
to such limitations.
10.7 RULE 144 REQUIREMENTS. The Company shall undertake to make
publicly available and available to the Registered Holders of Registrable
Securities, pursuant to Rule 144 under the Act, such information as is
necessary to enable Registered Holders to make sales of their stock pursuant
to that Rule. The Company shall furnish to any such Registered Holder, upon
request (after the preceding sentence shall have become applicable), a written
statement executed by the Company as to the steps it has taken to comply with
the current public information requirements of Rule 144.
10.8 INDEMNIFICATION. Incident to any registration statement referred
to in the preceding paragraphs of this Section 10, the Company will indemnify
each underwriter, each Registered Holder of Registrable Securities so
registered, and each person controlling any of them against all claims,
losses, damages and liabilities including legal and other expenses incurred in
investigating or defending against the same, arising out of or based upon any
untrue statement or alleged untrue statement of a material fact contained
therein or any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or arising out of any violation by the Company of the Act, the
1934 Act, any state securities or "blue-sky" laws or any rule or regulation
thereunder in connection with such registration, except insofar as the same
may have been caused by an untrue statement or omission based upon information
furnished in writing to the Company by such Registered Holder expressly for
use therein, and with respect to such untrue statement or omission in the
information furnished in writing to the Company by such Registered Holder,
such Registered Holder will indemnify the underwriters, the Company, its
directors and officers, and the other Registered Holders and each person
controlling any of them against any claims, losses, damages, expenses or
liabilities to which any of them may become subject; provided, however, that
the liability of any Registered Holder
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<PAGE>
hereunder shall be limited to the amount of proceeds received by such Holder
in the offering giving rise to the claim. Notwithstanding the foregoing, to
the extent that the provisions on indemnification and contribution contained
in any underwriting agreement entered into by a Registered Holder in
connection with the underwritten public offering of any of such Registered
Holder's Registrable Securities are in conflict with the foregoing provisions,
the provisions in the underwriting agreement shall be controlling with respect
to such Holder.
11. MISCELLANEOUS.
No fractional shares of the Shares shall be issued in connection with any
exercise hereunder, but in lieu of such fractional shares the Company shall
make a cash payment therefor upon the basis of the Warrant Price then in
effect. The terms and provisions of this Warrant shall inure to the benefit
of, and be binding upon, the Company and the Holders hereof and their
respective successors and assigns. This Warrant shall be governed by and
construed under the laws of the State of Minnesota as applied to contracts
entered into between residents of the State of Minnesota to be wholly
performed in the State of Minnesota. The titles of the sections and
subsections of this Warrant are for convenience only and are not to be
considered in construing this Warrant. All pronouns used in the Warrant shall
be deemed to include masculine, feminine and neuter forms.
AULT INCORPORATED
By:
-------------------------------------
Title:
---------------------------------
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APPENDIX A
NOTICE OF EXERCISE
TO: Ault Incorporated
1. The undersigned hereby elects to purchase ___________ shares of the
Common Stock of Ault Incorporated pursuant to terms of the attached Warrant,
and tenders herewith payment of the purchase price of such shares in full,
together with all applicable transfer taxes, if any.
2. Please issue a certificate or certificates representing said shares
of the Common Stock in the name of the undersigned or in such other name as is
specified below:
3. The undersigned represents it is acquiring the shares of Common
Stock solely for its own account and not as a nominee for any other party, and
for investment purposes only, not with a view toward the resale or
distribution thereof.
----------------------------------------
(Name)
----------------------------------------
(Address)
----------------------------------------
----------------------------------------
----------------------------------------
(Taxpayer Identification Number)
- ----------------------------------------
[print name of Holder]
By:
------------------------------------
Title:
---------------------------------
Date:
---------------------------------
rcf\\62752
<PAGE>
APPENDIX B
NOTICE OF TRANSFER
TO: Ault Incorporated
1. The transferor hereby elects to transfer, from the attached Warrant,
a Warrant to purchase ____________________ shares of the Common Stock of Ault
Incorporated, to the transferee set forth below.
2. Please issue a new Warrant to the transferee below at the address
set forth below and issue a new Warrant for the balance of the original
Warrant to the transferor as specified below.
3. The transferee represents it is acquiring the Warrant solely for its
own account and not as nominee for any other party, and for investment
purposes only, not with a view toward the resale or distribution thereof.
Transferor:
----------------------------------------
----------------------------------------
(Address)
----------------------------------------
----------------------------------------
Transferee:
----------------------------------------
----------------------------------------
(Address)
----------------------------------------
----------------------------------------
rcf\\62752
<PAGE>
EXHIBIT 5.1
[LINDQUIST & VENNUM P.L.L.P. LETTERHEAD]
November 22, 1996
Ault Incorporated
7300 Boone Avenue North
Minneapolis, Minnesota 55428-1910
Re: Registration Statement on Form S-2
File No. 333-14965
Ladies and Gentlemen:
In connection with (i) the proposed issuance by Ault Incorporated (the
"Company") of 1,800,000 common shares of the Company, no par value ("Common
Stock"), plus up to an additional 270,000 shares of Common Stock to be issued
if the Underwriters exercise their entire over-allotment option and (ii) the
proposed issuance to the Underwriters of warrants to purchase up to 144,900
shares of Common Stock (the "Underwriters' Warrant"), please be advised that
as counsel to the Company and based upon examination of documents and records
of the Company as we deemed necessary and the above referenced Registration
Statement on Form S-2, as amended, filed with the Securities and Exchange
Commission pursuant to the Securities Act of 1933 (the "Registration
Statement"), it is our opinion that:
1. The Company is a validly existing corporation in good standing under the
laws of the State of Minnesota.
2. The 1,800,000 shares of Common Stock being offered by the Company, plus
up to an additional 270,000 shares of Common Stock to be issued if the
Underwriters exercise their over-allotment option, when issued and paid
for as contemplated by the Registration Statement, will be validly
issued, fully paid and nonassessable.
3. The shares of Common Stock issuable upon exercise of the Underwriters'
Warrant, when issued and paid for as contemplated by the Underwriters'
Warrant, will be validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, and to the reference to our firm under the heading
"Legal Matters" in the Prospectus included within the Registration Statement.
Very truly yours,
LINDQUIST & VENNUM P.L.L.P.
/s/ Lindquist & Vennum P.L.L.P.
<PAGE>
THIRD AMENDMENT TO
FINANCING AGREEMENT
This Third Amendment to Financing Agreement, dated as of September 12,
1996 ("Amendment"), is made by and between AULT INCORPORATED, a Minnesota
corporation (the "Borrower") and REPUBLIC ACCEPTANCE CORPORATION, a Minnesota
corporation ("Republic").
WHEREAS, the Borrower and Republic have entered into a Financing Agreement
dated as of April 28, 1995, as amended by that First Amendment to Financing
Agreement dated as of September 30, 1995 and by that Second Amendment to
Financing Agreement dated as of January 18, 1996 (collectively, the
"Agreement"); and
WHEREAS, the obligations and indebtedness of the Borrower to Republic under
the Agreement are secured, INTER ALIA, by a Security Agreement dated as of April
28, 1995 between the Borrower and Republic (as amended, the "Security
Agreement") and a Pledge Agreement dated as of April 28, 1995 between the
Borrower and Republic (as amended, the "Pledge Agreement"); and
WHEREAS, Republic and the Borrower desire to amend the Agreement in order
to amend certain of the provisions therein, upon the terms and conditions set
forth herein.
NOW THEREFORE, in consideration of the premises and for good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto covenant and agree to be bound as follows:
Section 1. CAPITALIZED TERMS. All capitalized terms used herein and
not otherwise defined herein shall have the meanings assigned to them in the
Agreement.
Section 2. AMENDMENTS.
2.01 Section I of the Agreement is hereby amended to read as
follows:
At our request, you in your sole discretion may
lend to us (i) up to eighty percent (80%) of the net
amount of accounts which are listed in current schedules
provided by us and which are deemed eligible for
advances by you, or any greater or lesser percentage at
your absolute and sole discretion, not to exceed a
maximum amount of $6,700,000 from time to time
outstanding ("Eligible Account Advances"); and (ii) up
to twenty-five percent (25%) of the net amount of
inventory which is listed in monthly inventory
certificates provided by us and which is deemed eligible
for advances by you, or any greater or lesser percentage
at your absolute and sole discretion, not to exceed a
maximum amount of $700,000 from time to time outstanding
("Eligible Inventory
<PAGE>
Advances"); and (iii) up to an aggregate amount of $400,000.00
against a maximum of eighty percent (80%) of the fair market value
of our existing equipment, which amount shall be reduced as set
forth below (the "Existing Equipment Advance"); and (iv) between
December 1, 1995 and May 31, 1996, up to an aggregate amount of
$200,000 against a maximum of eighty percent (80%) of the purchase
price of our new equipment purchases, as evidenced by our
submission to you of the original invoices for such new equipment,
which amount shall be reduced as set forth below (the "New
Equipment Advances"); and (v) $266,308.00, which amount shall be
reduced as set forth below (the "Initial Overline Advance"); and
(vi) between September 1, 1996 and June 1, 1997, up to an
aggregate amount of $200,000 against a maximum of eighty percent
(80%) of the purchase price of our new equipment purchases, as
evidenced by our submission to you of the original invoices for
such new equipment, which amount shall be reduced as set forth
below (the "Additional New Equipment Advances"); PROVIDED HOWEVER,
that the maximum aggregate amount of all such advances from time
to time outstanding under clauses (i) through (vi) above shall not
exceed $6,700,000. Loans for additional sums requested by us may
be made at your sole discretion based upon your valuation of other
collateral or other factors. All borrowings pursuant hereto shall
be due on demand. Nothing set forth in this Agreement, the
Security Agreement, the Pledge Agreement or any other agreement
between you and us shall in any way limit your discretion to make
or not to make loans to us hereunder or your right to demand
payment of our obligations to you hereunder.
In addition, at our request, and subject to your
authorization in your sole discretion, First Bank
National Association (the "Bank") may from time to time
issue letters of credit for our account (the "Letters of
Credit") up to an aggregate amount outstanding at any
time (whether drawn or undrawn) of no more than
$400,000. Upon the occurrence of any draw under a
Letter of Credit that you have in writing guaranteed,
you will pay to the Bank 100% of such draw and treat
such payment as an advance against Eligible Accounts by
you to us hereunder and a reimbursement by us in full of
such draw, whether or not you have determined for all
other purposes to cease making loans to us hereunder.
The amount of any unreimbursed draw and the amount
available to be drawn under any Letter of Credit shall
both be treated as an outstanding advance against Eligible
Accounts hereunder for the purpose of determining the
amount which may be advanced under this Section I
against Eligible Accounts. We also agree that at any
time that the Bank issues a Letter of Credit payable in
currency other than U.S. Dollars, the amount of the
exposure
2
<PAGE>
related to the borrowings under this Agreement connected with such
Letter of Credit shall be increased by a percentage to be set by
you in your sole discretion unless and until we purchase an
appropriate foreign exchange forward contract or otherwise
mitigate the foreign exchange risk to your satisfaction.
Unless demand for payment of the Existing
Equipment Advance is sooner made, commencing on December
1, 1995 and continuing on the first (1st) day of each
month thereafter until the Existing Equipment Advance is
paid in full, the Existing Equipment Advance shall be
reduced in equal monthly principal installments based
upon a forty-eight (48) month amortization of the
Existing Equipment Advance.
Unless demand for payment of the Initial Overline
Advance is sooner made, commencing on December 1, 1995 and
continuing on the first (1st) day of each month thereafter
until the Initial Overline Advance is paid in full, the
Initial Overline Advance shall be reduced in equal monthly
principal installments based upon a thirty-six (36) month
amortization of the Initial Overline Advance.
Unless demand for payment of the New Equipment
Advances is sooner made, commencing on June 1, 1996 and
continuing on the first day of each month thereafter until
the New Equipment Advances are paid in full, the New
Equipment Advances shall be reduced in equal monthly
principal installments based upon a forty-eight month
amortization of the outstanding principal amount of the
New Equipment Advances as of June 1, 1996.
Unless demand for payment of the Additional New
Equipment Advances is sooner made, commencing on June 1,
1997 and continuing on the first day of each month
thereafter until the Additional New Equipment Advances are
paid in full, the Additional New Equipment Advances shall
be reduced in equal monthly principal installments based
upon a forty-eight month amortization of the outstanding
principal amount of the Additional New Equipment Advances
as of June 1, 1997.
You may from time to time furnish to us a statement
of our account. Any such statement shall be conclusive on
us unless and except as written objections thereto calling
your attention to errors are received by you within 30 days
after it is mailed or delivered to us.
3
<PAGE>
2.02 Section II(A) of the Agreement is hereby amended to read as
follows:
(A) We agree to pay interest on the net balance
owed to you at the close of each day at a rate per annum
(computed on the basis of actual number of days elapsed
and a year of 360 days) which is equal to a) from the
date of this Agreement through September 30, 1995, a
rate per annum which is four percent (4%) in excess of
the publicly announced reference rate (or other publicly
announced prime rate) of interest charged by the Bank,
b) from and after September 30, 1995, through September
1, 1996, a rate per annum which is three percent (3%) in
excess of the publicly announced reference rate (or
other publicly announced prime rate) of interest charged
by the Bank, and c) from and after September 1, 1996, a
rate per annum which is two and one-half percent (2.5%)
in excess of the publicly announced reference rate (or
other publicly announced prime rate) of interest charged
by the Bank. Such interest will be due and payable to
you at the close of each month.
Section 3. CONDITIONS TO EFFECTIVENESS OF AMENDMENT. This Amendment
shall not become effective until, and shall become effective as the date first
written above when, each of the following provisions shall have been fulfilled:
3.01 Republic shall have received this Amendment, duly executed
by the Borrower;
3.02 Republic shall have received a copy of the resolutions of
the Board of Directors of the Borrower ratifying and authorizing the execution,
delivery and performance of this Amendment, certified as true and accurate by
the Borrower's Secretary or Assistant Secretary; and
3.03 Republic shall have received such other documents as
Republic may reasonably request, including, without limitation, the
Reaffirmation of Subordination Agreement in the form attached as Exhibit A, duly
executed by the Subordinated Lender as defined therein.
Section 4. ACKNOWLEDGMENTS. The Borrower acknowledges and agrees that
its obligations to Republic under the Agreement exist and are owing without
offset, defense or counterclaim assertable by the Borrower against Republic.
The Borrower further acknowledges and agrees that its obligations to Republic
under the Agreement, as amended, constitute "Obligations" within the meaning of
the Security Agreement and the Pledge Agreement and are secured by the Security
Agreement and the Pledge Agreement.
Section 5. EFFECT OF AMENDMENTS; REPRESENTATIONS AND WARRANTIES; NO
WAIVER. Republic and the Borrower agree that after this Amendment becomes
effective, the Agreement, as hereby amended, shall remain in full force and
effect. The Borrower warrants and represents that on and as of the date hereof
and after giving effect to this Amendment, (i) all of the representations and
warranties contained in the Agreement are correct and complete, as of the
4
<PAGE>
date hereof, and (ii) there will exist no Event of Default under the Security
Agreement or the Pledge Agreement on such date. The Borrower represents and
warrants that the Borrower has all power and legal right and authority to enter
into this Amendment.
Section 6. INCORPORATION OF AGREEMENT AND OTHER LOAN DOCUMENTS BY
REFERENCE; RATIFICATION OF LOAN DOCUMENTS. Except as expressly modified under
this Amendment, all of the terms, conditions, provisions, agreements,
requirements, promises, obligations, duties, covenants and representations of
the Borrower under the Agreement, the Security Agreement, the Pledge Agreement
and any and all other documents and agreements entered into with respect to the
obligations under the Agreement (collectively, the "Loan Documents") are
incorporated herein by reference and are hereby ratified and affirmed in all
respects by the Borrower. All references in the Agreement to "this Agreement,"
"herein," "hereof," and similar references, and all references in the other Loan
Documents to the "Agreement," shall be deemed to refer to the Agreement, as
amended by this Amendment.
Section 7. MERGER AND INTEGRATION, SUPERSEDING EFFECT. This Amendment,
from and after the date hereof, embodies the entire agreement and understanding
between the parties hereto.
Section 8. GOVERNING LAW. This Amendment is governed by the laws of
the State of Minnesota.
IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to
Financing Agreement to be executed as of the date and year first above written.
AULT INCORPORATED
By /s/ Frederick M. Green
-------------------------------------------
Its President and CEO
REPUBLIC ACCEPTANCE CORPORATION
By /s/
- -------------------------------------------
Its Account Executive
5
<PAGE>
FOURTH AMENDMENT TO
FINANCING AGREEMENT
This Fourth Amendment to Financing Agreement, dated as of September ___,
1996 ("Amendment"), is made by and between AULT INCORPORATED, a Minnesota
corporation (the "Borrower") and FIRST BANK NATIONAL ASSOCIATION (the "Lender").
WHEREAS, the Borrower and Republic Acceptance Corporation have entered into
a Financing Agreement dated as of April 28, 1995, as amended by that First
Amendment to Financing Agreement dated as of September 30, 1995, by that Second
Amendment to Financing Agreement dated as of January 18, 1996 and by that Third
Amendment to Financing Agreement dated as of September 12, 1996 (collectively,
the "Agreement"); and
WHEREAS, the obligations and indebtedness of the Borrower to Republic under
the Agreement are secured, inter alia, by a Security Agreement dated as of April
28, 1995 between the Borrower and Republic (as amended, the "Security
Agreement") and a Pledge Agreement dated as of April 28, 1995 between the
Borrower and Republic (as amended, the "Pledge Agreement"); and
WHEREAS, Republic has assigned to the Lender all obligations and
indebtedness owing by the Borrower under the Agreement, the Agreement, the
Security Agreement and the Pledge Agreement and all related documents and
undertakings by assignment agreement dated as of September 12, 1996; and
WHEREAS, the Lender and the Borrower desire to amend the Agreement in order
to amend certain of the provisions therein, upon the terms and conditions set
forth herein.
NOW, THEREFORE, in consideration of the premises and for good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto covenant and agree to be bound as follows:
Section 1. CAPITALIZED TERMS. All capitalized terms used herein and not
otherwise defined herein shall have the meanings assigned to them in the
Agreement.
Section 2. AMENDMENTS.
2.01 Section II(A) of the Agreement is hereby amended to read as
follows:
(A) We agree to pay interest on the net balance owed to you
at the close of each day at a rate per annum (computed on the basis
of actual number of days elapsed and a year of 360 days) which is
equal to a) from the date of this Agreement through September 30,
1995, a rate per annum which is four percent (4%) in excess of the
publicly announced reference rate (or other publicly
<PAGE>
announced prime rate) of interest charged by the Bank, b) from and
after September 30, 1995, through September 1, 1996, a rate per
annum which is three percent (3%) in excess of the publicly
announced reference rate (or other publicly announced prime rate)
of interest charged by the Bank, and c) from and after September 1,
1996, a rate per annum which is three-quarters of one percent
(.75%) in excess of the publicly announced reference rate (or other
publicly announced prime rate) of interest charged by the Bank.
Such interest will be due and payable to you at the close of each
month.
Section 3. CONDITIONS TO EFFECTIVENESS OF AMENDMENT. This Amendment shall
not become effective until, and shall become effective as the date first written
above when, each of the following provisions shall have been fulfilled:
3.01 The Lender shall have received this Amendment, duly executed
by the Borrower;
3.02 The Lender shall have received a copy of the resolutions of
the Board of Directors of the Borrower ratifying and authorizing the execution,
delivery and performance of this Amendment, certified as true and accurate by
the Borrower's Secretary or Assistant Secretary.
Section 4. ACKNOWLEDGMENTS. The Borrower acknowledges and agrees that
its obligations to the Lender under the Agreement exist and are owing without
offset, defense or counterclaim assertable by the Borrower against the Lender or
Republic. The Borrower further acknowledges and agrees that its obligations to
the Lender and Republic under the Agreement, as amended, constitute
"Obligations" within the meaning of the Security Agreement and the Pledge
Agreement and are secured by the Security Agreement and the Pledge Agreement.
Section 5. EFFECT OF AMENDMENTS; REPRESENTATIONS AND WARRANTIES; NO
WAIVER. The Lender and the Borrower agree that after this Amendment becomes
effective, the Agreement, as hereby amended, shall remain in full force and
effect. The Borrower warrants and represents that on and as of the date hereof
and after giving effect to this Amendment, (i) all of the representations and
warranties contained in the Agreement are correct and complete, as of the date
hereof, and (ii) there will exist no Event of Default under the Security
Agreement or the Pledge Agreement on such date. The Borrower represents and
warrants that the Borrower has all power and legal right and authority to enter
into this Amendment. The Borrower acknowledges that any participant in the
obligations owed to the Lender under the Agreement may charge interest at rates
other than the rate or rates set forth in this Amendment.
Section 6. INCORPORATION OF AGREEMENT AND OTHER LOAN DOCUMENTS BY
REFERENCE; RATIFICATION OF LOAN DOCUMENTS. Except as expressly modified under
this Amendment, all of the terms, conditions, provisions, agreements,
requirements, promises, obligations, duties, covenants and representations of
the Borrower under the Agreement, the Security Agreement, the Pledge
2
<PAGE>
Agreement and any and all other documents and agreements entered into with
respect to the obligations under the Agreement (collectively, the "Loan
Documents") are incorporated herein by reference and are hereby ratified and
affirmed in all respects by the Borrower. All references in the Agreement to
"this Agreement," "herein," "hereof," and similar references, and all references
in the other Loan Documents to the "Agreement," shall be deemed to refer to the
Agreement, as amended by this Amendment.
Section 7. MERGER AND INTEGRATION, SUPERSEDING EFFECT. This Amendment,
from and after the date hereof, embodies the entire agreement and understanding
between the parties hereto.
Section 8. GOVERNING LAW. This Amendment is governed by the laws of
the State of Minnesota.
IN WITNESS WHEREOF, the parties hereto have caused this Fourth Amendment to
Financing Agreement to be executed as of the date and year first above written.
AULT INCORPORATED
By /s/ Frederick M. Green
-------------------------------------------
Its President and CEO
FIRST BANK NATIONAL ASSOCIATION
By /s/
-------------------------------------------
Its Vice President
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement of our
report, dated July 10, 1996, relating to the consolidated financial
statements of Ault Incorporated and Subsidiary, and to the reference to our
Firm under the captions "Selected Consolidated Financial Data", and "Experts"
in Amendment No. 2 to the Registration Statement and related Prospectus.
We also consent to the incorporation by reference in such Registration
Statement of our report dated July 10, 1996, on the Financial Statement
Schedule for the three years ended June 2, 1996, which report was
included in the Ault Incorporated Annual Report on Form 10-K.
McGladrey & Pullen, LLP
Minneapolis, Minnesota
November 22, 1996
