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Filed Pursuant to
Rule 424(b)(1)
Reg. No. 333-14965
1,600,000 SHARES
[LOGO]
AULT INCORPORATED
COMMON STOCK
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The 1,600,000 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
December 12, 1996, the last sale price of the Common Stock on the Nasdaq
National Market was $7.00 per share. See "Price Range of Common Stock."
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AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGES 6-9.
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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..................... $6.50 $0.4875 $6.0125
Total(3)...................... $10,400,000 $780,000 $9,620,000
(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
112,000 shares of Common Stock.
(2) Before deducting expenses of the offering estimated at $310,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
240,000 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 $11,960,000,
$897,000 and $11,063,000, respectively. See "Underwriting."
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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 December
18, 1996.
PRINCIPAL FINANCIAL SECURITIES, INC. CRUTTENDEN ROTH
INCORPORATED
THE DATE OF THIS PROSPECTUS IS DECEMBER 13, 1996
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[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.]
Examples of products within Ault's four major product categories: in the
foreground, clockwise from left, are a switching power supply; a battery
charger; a transformer; and a linear power supply. In the background are three
examples of OEM equipment employing Ault 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."
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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.
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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................. 1,600,000 shares
3,745,776 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>
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(1) Assumes the sale of 1,600,000 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 240,000 shares of Common
Stock, (ii) the warrant to be issued to the Underwriters upon the completion
of this offering to purchase 112,000 shares of Common Stock and (iii)
options to purchase 347,585 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 $2.47
per share, and an additional 117,615 shares reserved for future issuance
under such Plans. See "Description of Capital Stock" and "Underwriting."
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SUMMARY FINANCIAL DATA
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<CAPTION>
YEARS ENDED THREE MONTHS ENDED
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MAY 29, MAY 28, JUNE 2, AUG. 27, SEPT. 1,
1994 1995 1996(2) 1995 1996(2)(3)
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(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
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Gross profit............................................. 3,737 6,327 8,265 1,730 2,132
Operating expenses....................................... 4,768 5,570 6,699 1,487 1,662
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Operating income (loss).................................. (1,031) 757 1,566 243 470
Non-Operating expense, net............................... (289) (424) (658) (181) (169)
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Income (loss) before income taxes........................ (1,320) 333 908 62 301
Income taxes (1)......................................... -- -- 25 -- 74
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Net income (loss)........................................ (1,320) 333 883 62 227
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Net income (loss) per share.............................. $ (0.64) $ 0.16 $ 0.40 $ 0.03 $ 0.10
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</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 2,
1996
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AS OF SEPTEMBER 1, 1996
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ACTUAL AS ADJUSTED(3)
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<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash.............................................................. $ 412 $ 336 $ 647
Working capital................................................... 3,754 4,057 10,009
Property plant & equipment, net................................... 2,849 2,795 5,387
Total assets...................................................... 18,730 18,508 21,411
Notes payable to bank............................................. 5,618 6,520 1,120
Long term debt.................................................... 935 883 116
Stockholders' equity.............................................. 5,571 5,865 15,176
</TABLE>
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(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 as of the beginning of the period to
repay $5,000,000 of its U.S. revolving credit facility, as well as to retire
a $1,000,000 mortgage obligation of Ault Korea and to reduce $400,000 of
Ault Korea's 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 approximately $1,522,000,
$0.54 and 2,836,549, respectively, for the year ended June 2, 1996 and
approximately $388,000, $0.12 and 3,282,320 respectively, for the three
months ended September 1, 1996.
(3) As adjusted to reflect the sale of 1,600,000 shares of Common Stock offered
by the Company hereby and the application of the estimated net proceeds
therefrom. See "Use of Proceeds."
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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.
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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
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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
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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
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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."
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
hereby are estimated to be $9,311,000 ($10,753,000 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 $5,000,000 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 $400,000, 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 1/8 1 11/16
Second Quarter....................................................................... 1 7/16 2 1/4
Third Quarter........................................................................ 1 5/8 2 3/8
Fourth Quarter....................................................................... 1 15/16 3
FISCAL YEAR ENDED JUNE 2, 1996:
First Quarter........................................................................ 2 3/16 3
Second Quarter....................................................................... 2 5/8 3 3/8
Third Quarter........................................................................ 2 3/4 4 3/4
Fourth Quarter....................................................................... 4 1/2 14 3/8
FISCAL YEAR ENDING JUNE 1, 1997:
First Quarter........................................................................ 7 1/2 14 3/4
Second Quarter....................................................................... 8 1/4 11 1/4
Third Quarter (through December 12, 1996)............................................ 7 8 1/4
</TABLE>
On December 12, 1996, the last sale price of the Common Stock on the Nasdaq
National Market was $7.00. 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 1,600,000 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 $ 1,120
----------- -------------
----------- -------------
Current maturities of long term debt.......................................... 387 146
----------- -------------
----------- -------------
Long term debt, excluding current maturities.................................. 883 116
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 3,745,776 shares as adjusted.................. 6,986 16,297
Foreign currency translation adjustment....................................... (37) (37)
Accumulated deficit........................................................... (1,084) (1,084)
----------- -------------
Total stockholders' equity.................................................. 5,865 15,176
----------- -------------
Total capitalization...................................................... $ 6,748 $ 15,292
----------- -------------
----------- -------------
</TABLE>
- ------------------------
(1) See the financial statements of the Company and related notes included
elsewhere in this Prospectus.
(2) Assumes the sale of 1,600,000 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 240,000 shares of Common
Stock, (ii) the warrant to be issued to the Underwriters upon the completion
of this offering to purchase 112,000 shares of Common Stock and (iii)
options to purchase 347,585 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 $2.47
per share, and an additional 117,615 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 as of the beginning of the period to
repay $5,000,000 of its U.S. revolving credit facility, as well as to retire
a $1,000,000 mortgage obligation of Ault Korea and to reduce $400,000 of
Ault Korea's 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 approximately $1,522,000,
$0.54, and 2,836,549, respectively for the year ended June 2, 1996 and
approximately $388,000, $0.12, and 3,282,320, 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 30.6% 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 $400,000 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, the Company has recently begun
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% 31% 37% 40%
Linear Power Supplies................................................. 33 22 19 19
Transformers.......................................................... 42 42 38 29
Battery Chargers...................................................... 7 5 6 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 that
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. The
Company recently introduced 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 power. To
the
26
<PAGE>
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.
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<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 International
(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 International (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 served as a platform for
the recent introduction of a family of high density switching power supplies
providing approximately 45 watts of power; and the Company expects to offer,
within the next six months, a new series of external power supply products which
will provide 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
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<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
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<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).................. 75 Director
Delbert W. Johnson(1)................... 57 Director
John G. Kassakian....................... 53 Director
Edward C. Lund(2)....................... 79 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. Mr. Green is also a director of Communications Systems, Inc.
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 Engineer, 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 ......................................... 96,250 4.5% 2.4%
7300 Boone Avenue North
Minneapolis, MN 55428
Carlos S. Montague.......................................... 71,575 3.4% 1.8
Hokung Choi................................................. 52,400 2.4% 1.3
Gregory L. Harris........................................... 44,500 2.1% 1.1
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)........................................ 315,925 14.7% 8.0
</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, 46,250 shares; Mr. Johnson, 4,000 shares; Mr.
Kassakian, 4,000 shares, Mr. Lund, 4,000 shares, Mr. Mitchell, 4,500 shares,
Mr. Sutton, 4,000 shares, Mr. Duddleston, 4,000 shares, Mr. Harris, 44,500
shares, Mr. Choi, 36,000 shares; Mr. Montague, 26,000 shares; and all
directors and officers as a group, 177,250 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 December 1,
1996, the Company had outstanding 2,145,776 shares of Common Stock, held by 229
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 266,500 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. On December 12, 1996, the Board of Directors
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......................... 351,000
Cruttenden Roth Incorporated................................ 351,000
Adams, Harkness & Hill, Inc................................. 35,000
Advest Inc.................................................. 35,000
Robert W. Baird & Co. Inc................................... 35,000
The Chicago Corporation..................................... 35,000
Cowen & Co.................................................. 35,000
Dain Bosworth Incorporated.................................. 35,000
EVEREN Securities, Inc...................................... 35,000
First Albany Corporation.................................... 35,000
Gerard Klauer Mattison & Co., LLC........................... 35,000
Ladenburg, Thalmann & Co. Inc............................... 35,000
McDonald & Co. Securities Inc............................... 35,000
Morgan Keegan & Co. Inc..................................... 35,000
Needham & Co. Inc........................................... 35,000
Nesbitt Burns Inc........................................... 35,000
Piper Jaffray Inc........................................... 35,000
Rauscher Pierce Refsnes, Inc................................ 35,000
SoundView Financial Group, Inc.............................. 35,000
Stephens Inc................................................ 35,000
Sutro & Co.................................................. 35,000
Tucker Anthony Inc.......................................... 35,000
C.L. King & Associates, Inc................................. 22,000
John G. Kinnard & Co. Inc................................... 22,000
Kirkpatrick, Pettis, Smith, Polian Inc...................... 22,000
Pennsylvania Merchant Group Ltd............................. 22,000
Pryor, McClendon, Counts & Co............................... 22,000
Sanders Morris Mundy Inc.................................... 22,000
Southwest Securities Inc.................................... 22,000
R.J. Steichen & Co.......................................... 22,000
Van Kasper & Co............................................. 22,000
----------
Total....................................................... 1,600,000
----------
----------
</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 $0.27 per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of
42
<PAGE>
$0.10 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 240,000
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 1,600,000 shares are being offered.
The Company has agreed to sell to the Representatives, for nominal
consideration, a warrant to purchase from the Company 112,000 shares of Common
Stock 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 paid a due diligence fee of $25,000 to the Representatives
of the Underwriters which will be credited against the underwriting discounts
and commissions set forth on the cover page.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
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.
43
<PAGE>
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 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 and 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 December 12, 1996, the Company signed an underwriting
agreement with an investment banker to undertake a public offering of 1,600,000
shares of common stock at a price to the public of $6.50 per share. The
agreement includes an overallotment option to sell an additional 240,000 shares
and entitles the underwriters to purchase from the Company for $100 warrants for
the purchase of 112,000 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.
On December 12, 1996 the Board of Directors 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]
Internal and external views of an Ault wide range switching power supply,
used to power high-speed modems, bar code scanners and small network servers.
<PAGE>
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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................................................................... 44
Available Information..................................................... 44
Incorporation of Certain Documents by Reference........................... 44
Consolidated Financial Statements......................................... F-1
</TABLE>
1,600,000 SHARES
[LOGO]
COMMON STOCK
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P R O S P E C T U S
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PRINCIPAL FINANCIAL
SECURITIES, INC.
CRUTTENDEN ROTH
INCORPORATED
DECEMBER 13, 1996
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