Draft 2
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 1, 1996
Commission file number 0-12611
AULT INCORPORATED
MINNESOTA____________ 41-0842932
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization)
Identification No.)
7300 Boone Avenue North
Minneapolis, Minnesota 55428-1028
(Address of principal executive offices)
Registrant's telephone number: (612) 493-1900
Indicate by check mark whether registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months,
and (2) has been subject to such filing requirements for the past
90 days.
YES __X___ NO _______
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock September 1, 1996
No par value 2,128,776 shares
Total pages - - - - 13
Exhibits Index on Page - - - - 12
PART 1. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
AULT INCORPORATED & SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(in Thousands, Except Amounts Per Share)
<TABLE>
<CAPTION>
(UNAUDITED)
FIRST QUARTER ENDED
SEPT. 1, AUGUST 27,
1996 1995
<S> <C> <C>
NET SALES $8,678 $6,881
COST OF GOODS SOLD 6,546 5,151
GROSS PROFIT 2,132 1,730
OPERATING EXPENSES
MARKETING 706 626
DESIGN ENGINEERING 369 338
GENERAL & ADMINISTRATIVE 587 523
1,662 1,487
OPERATING INCOME 470 243
NON-OPERATING INCOME (EXPENSE)
OTHER 17 16
INTEREST EXPENSE (186) (197)
INCOME BEFORE INCOME TAXES 301 62
INCOME TAXES (NOTE 2) 74 --
NET INCOME $227 $62
NET INCOME PER SHARE $0.10 $0.03
WEIGHTED NUMBER OF SHARES &
COMMON EQUIVALENT SHARES 2,383,774 2,159,896
OUTSTANDING
</TABLE>
See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AULT INCORPORATED & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in Thousands)
<TABLE>
<CAPTION>
(UNAUDITED)
SEPT. 1, JUNE 2,
1996 1996
<S> <C> <C>
ASSETS:
CURRENT ASSETS
CASH (NOTE 3) $336 $412
TRADE RECEIVABLES LESS
ALLOWANCE
FOR DOUBTFUL ACCOUNTS OF
$70,000 6,826 7,336
AT SEPTEMBER 1, 1996, AND
$51,000 AT
JUNE 2, 1996
INVENTORIES:
FINISHED GOODS 2,971 2,691
WORK IN PROCESS 305 319
RAW MATERIAL 4,377 4,263
TOTAL INVENTORIES 7,653 7,273
PREPAID AND OTHER EXPENSES 517 460
(NOTE 4)
TOTAL CURRENT ASSETS 15,332 15,481
OTHER ASSETS
OTHER RECEIVABLES, LESS
ALLOWANCE OF 197 197
$65,000 (NOTE 5)
PATENT (NOTE 6) 182 182
OTHER 2 21
PROPERTY, EQUIPMENT AND LEASEHOLD
IMPROVEMENTS, AT COST:
LAND 826 826
BUILDING 735 735
MACHINERY AND EQUIPMENT 5,157 5,113
OFFICE FURNITURE 608 593
E.D.P. EQUIPMENT 1,005 1,005
LEASEHOLD IMPROVEMENTS 687 687
9,018 8,959
LESS ACCUMULATED DEPRECIATION 6,223 6,110
NET EQUIPMENT AND LEASEHOLD
IMPROVEMENTS 2,795 2,849
TOTAL ASSETS $18,508 $18,730
</TABLE>
See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AULT INCORPORATED & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in Thousands)
<TABLE>
<CAPTION>
(UNAUDITED)
SEPT. 1, JUNE 2,
1996 1996
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS'
EQUITY:
CURRENT LIABILITIES:
NOTES PAYABLE TO BANK $6,520 $5,618
CURRENT MATURITIES OF LONG-TERM
DEBT 387 388
(NOTE 7)
ACCOUNTS PAYABLE 3,088 4,513
ACCRUED EXPENSES:
COMPENSATION (NOTE 8) 476 556
OTHER (NOTE 9) 730 627
INCOME TAXES PAYABLE (NOTE 2) 73 25
TOTAL CURRENT LIABILITIES 11,274 11,727
LONG-TERM DEBT, LESS CURRENT
MATURITIES 883 935
INCLUDED ABOVE (NOTE 7)
DEFERRED RENT EXPENSE (NOTE 10) 156 164
DEFERRED COMPENSATION (NOTE 11) 330 333
STOCKHOLDERS' EQUITY:
PREFERRED SHARES, NO PAR VALUE,
AUTHORIZED, 1,000,000 SHARES;
NONE -- --
ISSUED
COMMON SHARES, NO PAR VALUE;
AUTHORIZED 5,000,000 SHARES;
SHARES
OUTSTANDING: SEPTEMBER 1,
1996;
2,128,776; JUNE 2, 1996;
2,119,776
SHARES 6,986 6,967
FOREIGN CURRENCY TRANSLATION
ADJUSTMENTS (NOTE 12) (37) (84)
RETAINED EARNINGS (DEFICIT) (1,084 (1,312)
TOTAL 5,865 5,571
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $18,508 $18,730
</TABLE>
See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AULT INCORPORATED & SUBSIDIARY
CONSOLIDATED CASH FLOWS
(in Thousands)
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER AUGUST
1, 1996 27, 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
NET INCOME $227 $62
ADJUSTMENTS TO RECONCILE NET
INCOME TO
NET CASH USED IN OPERATING
ACTIVITIES:
DEPRECIATION 113 129
PROVISION FOR DOUBTFUL 19 (13)
ACCOUNTS
PROVISION FOR INVENTORY 36 26
ALLOWANCE
DEFERRED RENT (8) (5)
CHANGES IN ASSETS AND
LIABILITIES:
(INCREASE) DECREASE IN:
TRADE RECEIVABLES 491 474
INVENTORIES (416) 9
PREPAID AND OTHER EXPENSES: (57) (10)
(INCREASE) DECREASE IN:
ACCOUNTS PAYABLE (1,424) (728)
ACCRUED EXPENSES 19 9
INCOME TAX PAYABLE 49
NET CASH PROVIDED BY (USED
IN) (951) (47)
OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING
ACTIVITIES:
PURCHASE OF EQUIPMENT (59) (56)
DECREASE IN OTHER ASSETS 18 27
NET CASH USED IN INVESTING
ACTIVITIES (41) (29)
CASH FLOWS FROM FINANCING
ACTIVITIES:
NET BORROWINGS ON REVOLVING
CREDIT 902 152
AGREEMENT
PROCEEDS FROM ISSUANCE OF 19 1
COMMON STOCK
PRINCIPAL PAYMENTS ON LONG-TERM
BORROWINGS, INCLUDING CAPITAL
LEASE (52) (152)
OBLIGATIONS
NET CASH PROVIDED BY
FINANCING 869 1
ACTIVITIES
EFFECT OF FOREIGN CURRENCY
EXCHANGE RATE 47 (15)
CHANGES ON CASH
DECREASE IN CASH (76) (90)
CASH: BEGINNING 412 319
ENDING $336 $229
</TABLE>
See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AULT INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR FIRST QUARTER ENDING SEPTEMBER 1, 1996
NOTE 1
In the opinion of management, the accompanying unaudited
financial statements contain all adjustments (which consist only
of normal recurring adjustments) necessary to present fairly Ault
Incorporated's consolidated financial position as of September 1,
1996, and changes in financial position for the three months then
ended. The consolidated financial statements include the
operations of the parent company, Ault Incorporated (US
Operation), and its wholly owned subsidiary, Ault Korea
Corporation.
NOTE 2
The Company made an income tax provision of $74,000, applying the
Alternative Minimum Tax, for the quarter ending September 1,
1996. At September 1, 1996, the Company had tax credits amounting
to $633,000 available for use in the US and net operating loss
carryforwards amounting to $426,000 for use in South Korea.
NOTE 3
For the purpose of reporting cash and cash flows, the Company
considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
NOTE 4
Prepaid and other expenses are principally customs duty and value
added taxes, and certain deferred expenses that are related to,
and will be absorbed against revenue in future periods of fiscal
1997. The customs duty and value added taxes are paid by Ault
Korea Corporation to the Korean authority on products that are
manufactured for exportation. These payments are refundable when
the subsidiary submits to the South Korean Government the
appropriate claim and proof of exportation.
NOTE 5
Other receivable of $197,000, after allowance of $65,000
represents portions of amounts due the Company for trade
receivable that was invoiced in fiscal 1991. The customer had
terminated his contract with the Company for reasons that were
external and unrelated to the Company, and refused to make
compensation for cost that the Company had incurred. The matter
has been in litigation brought by the Company, the next court
hearing scheduled for October, 1996. Management believes that
the matter is nearing a conclusion anticipated to be favorable to
the Company without any loss in the amounts claimed.
AULT INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR FIRST QUARTER ENDING SEPTEMBER 1, 1996
NOTE 6
The patent cost, which currently has no amortization charged
against it, represents the contract price of US Patent
#5,303137,1 acquired by the Company from a source external to and
independent of the company. The Company believes products using
the power conversion technology it represents will generate
significant revenues into fiscal 2002. For amortization
purposes, the patent has been assigned a life of four years
beginning in fiscal 1997.
NOTE 7
Long term debt, including current maturities consists of
capitalized lease obligations and a mortgage on the South Korean
facility. Capitalized leases amounting to approximately $256,000
are due in various monthly installments maturing through fiscal
year 1998. The mortgage, which has a current balance of
approximately $1,014,000 at 9.0% rate of interest requires
installment payments of about $160,000 in March and September
through the year 2000.
NOTE 8
Compensation consists of principally amounts accrued for payment
of employees' salaries, vacation and sick leave.
NOTE 9
Accrued expenses, other, are mainly undue amounts for sales
representatives' commission and provisions for warranty
obligations.
NOTE 10
The lease on the Company's Minneapolis plant and office
facilities includes scheduled base rent increases over the term
of the lease, which runs for ten years. The total amount of the
base rent payments is being charged to expense on the straight-
line method over the term of the lease. The difference between
the payments and the expense is recorded as deferred rent.
NOTE 11
Deferred compensation is a provision of Ault Korea Corporation,
in accordance with requirement by the South Korean Authority, for
compensation of each current employee when his/her employment
with the subsidiary terminates.
NOTE 12
The Korean Won is considered the functional currency of the
Korean subsidiary. Accordingly, the effect of translating the
subsidiary's statement into US dollars is recorded as a separate
component of shareholder's equity.
ITEM 2 - MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND
RESULTS OF OPERATIONS
Results of Operations
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 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 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.
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. The increase is principally due to 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 declined 4% 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
prime applicable to the first quarter of fiscal 1996 to
approximately 2.3% over prime rate applicable to the first
quarter of fiscal 1997.
Income Taxes. Although the Company has net operating loss
carryforwards and business credits, it established a $74,000
provision for US income taxes for the first quarter of fiscal
1997 due to anticipated application of the Alternative Minimum
Income Tax for fiscal 1997. There was no tax provision for the
first quarter of fiscal 1996 due to utilization of net operating
loss carryforwards.
Net income increased 226.1% 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.
Liquidity and Capital Resources
The Company's principal sources of working capital have been its
credit facility with a US bank and cash flows from operations.
Since the beginning of fiscal 1995, 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%, creating increased demand for working
capital. The Company has relied more heavily on its credit
facility as a source of cash as growth in trade receivables and
growth in inventories of finished product have increased the use
of operating cash flows. The growth in inventories of finished
products reflects increasing demands by customers for the Company
to maintain specified levels of finished goods inventories to
support just-in-time delivery to the customers. These
inventories are carried under agreements that do not expose the
Company to any material additional operating cost. It is
anticipated that the Company will continue to provide this
accommodation in response to competitive pressures.
The Company maintains two credit facilities: its primary credit
facility with a US bank and a credit facility with a South Korean
bank.
The US credit facility totals $6.0 million collateralized by a
security interest in all of the Company's US assets. Borrowing
is indexed to a certain percentage of trade receivables and other
assets. At September 1, 1996, borrowings against the US credit
facility amounted to $5.3 million at an average of 2.33% above
the bank's prime rate. Effective September 1, 1996, the interest
spread has been reduced to .75% above the prime rate. In
addition, at September 1, 1996, $400,000 of the credit facility
was allocated to a standby letter of credit provided to a South
Korean bank as collateral for a credit facility for Ault Korea.
The South Korean bank facility amounts to $1.5 million, of which
borrowings by the subsidiary at September 1, 1996 amounted to
$1.2 million at a 9.0% rate of interest.
Cash Flows
Operations. Operations used $951,000 of net cash for the quarter
ended September 1, 1996, which came from activities that provided
$946,000 of cash and activities that used $1,897,000 of cash.
The activities that provided $902,000 of cash were:
a. Net profit and non cash expenses provided $388,000 of cash
of which net profit totaled $227,000. Non cash expenses totaled
$161,000, of which depreciation, the significant item provided
$113,000.
b. Reduction in trade receivable provided $491,000 of cash,
principally due to collections that were made on the large sales
for the preceding fourth quarter of fiscal 1996.
c. Accrued income taxes of $74,000 for the quarter reduced by
payment of amounts due from fiscal 1996 provided $48,000 of cash.
d. Accrual expenses provided $18,000 of cash.
The activities that used $1,897,000 of cash were:
a. Increases in inventories used $416,000 of cash mainly due to
the need to maintain finished goods inventory for certain key
customers as discussed above.
b. Reduction in trade payable and accrued payments used
$1,424,000 of cash. The reduction occurred because of the
greater payment of liabilities that were associated with the
fourth quarter higher net sales, compared to the liabilities
incurred for the lower net sales in the first quarter of fiscal
1997 and remained unpaid at the end of the quarter.
c. Increase in prepaid and other expenses used $57,000 of cash.
Investment Activities. Investment activities, principally
purchases of equipment used $41,000 of cash. Significantly
larger expenditures will be needed to support growth for the
remaining quarters of fiscal 1997.
Other Financing Activities. Other financing activities which
were principally payments on long-term debt used $52,000 of cash
and exercise of common stock options provided $19,000.
Financing activities provided $869,000 in cash. Net borrowings
on revolving credit awareness provided $902,000 of cash.
Impact of Recent Accounting Standard Changes
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 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
contributed a very significant portion of total sales, conversion
of the Won to US 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 foreign manufacturing arrangements since all
transactions are conducted in US dollars. Other contracts that
are in a foreign currency are not significant in amount at this
time and therefore 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 achieved significant growth in sales and
profitability over the past nine quarters by employing its
current strategies and utilizing only its available sources of
working capital as discussed above. The resulting growth in
accounts receivables and growth in inventories from enhanced
services required by customers, are constraints to the Company's
ability to pursue new opportunities and to achieve continued
rapid growth rate and greater profitability. For these reasons,
the feasibility of raising additional capital is being evaluated.
AULT INCORPORATED
PART II. OTHER INFORMATION
ITEMS 1-5 Not Applicable
EXHIBIT INDEX
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
11 Computation of Per Share Earnings filed herewith
at page
27 Financial Data Schedules filed electronically at
page
(a) None
(b) Reports on Form 8-K. There were no reports on
Form 8-K filed for the quarter ended September 1,
1996.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
AULT INCORPORATED
(REGISTRANT)
<TABLE>
<S> <C> <C>
DATED: 10/14/96 /s/ Frederick M. Green
Frederick M. Green, President
Chief Executive Officer and
Chairman
DATED: 10/14/96 /s/ Carlos S. Montague
Carlos S. Montague, Vice President
Chief Financial Officer and
Controller
</TABLE>
AULT INCORPORATED & SUBSIDIARY
CALCULATIONS OF CONSOLIDATED EARNINGS PER SHARE
(in Thousands of Dollars, Except Per Share Data)
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
SEPT. 1, AUG. 27,
1996 1995
<S> <C> <C>
Earnings Per Common Share:
Net Income $227 $62
Average Shares of Common Stock
and
Equivalent Outstanding:
Common Shares Beginning
of 2,119,776 2,083,775
Period
Weighted Average Number
of
Shares of Common Stock 5,666 333
From
Exercise of Options
Additional Outstanding
Common
Shares From Fully 256,681 75,787
Dilutive
Options, Weighted
Average*
Weighted Average Number of
Shares and 2,383,774 2,159,896
Common Equivalent Shares
Outstanding
Earnings Per Share $0.10 $0.03
<FN>
*Common stock equivalent for exercisable options amounting
to 104,738 shares in fiscal 1995, had an antidilutive effect
on the earnings per share, because of their higher exercise
prices compared to their market values. These shares were,
therefore, excluded from the per share earnings
calculations.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 2 THRU 4 OF THE COMPANY'S FORM 10-Q FOR FIRST QUARTER ENDED 9-01-96 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERRENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-01-1997
<PERIOD-START> JUN-03-1996
<PERIOD-END> SEP-01-1996
<CASH> 336
<SECURITIES> 0
<RECEIVABLES> 6826
<ALLOWANCES> 0
<INVENTORY> 7653
<CURRENT-ASSETS> 15332
<PP&E> 9018
<DEPRECIATION> 6223
<TOTAL-ASSETS> 18508
<CURRENT-LIABILITIES> 11274
<BONDS> 0
0
0
<COMMON> 6986
<OTHER-SE> (1454)
<TOTAL-LIABILITY-AND-EQUITY> 18508
<SALES> 8678
<TOTAL-REVENUES> 8678
<CGS> 6546
<TOTAL-COSTS> 6546
<OTHER-EXPENSES> 1645
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 186
<INCOME-PRETAX> 301
<INCOME-TAX> 74
<INCOME-CONTINUING> 227
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 227
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
