FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 25, 1996
Commission file number 0-12611
AULT INCORPORATED
MINNESOTA____________ 41-0842932
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization)
Identification No.)
7300 Boone Avenue North
Minneapolis, Minnesota 55428-1028
(Address of principal executive offices)
Registrant's telephone number: (612) 493-1900
Indicate by check mark whether registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months,
and (2) has been subject to such filing requirements for the past
90 days.
YES __X___ NO _______
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock February 25, 1996
No par value 2,096,776 shares
Total pages - - - - 22
Exhibits Index on Page - - - - 12
PART 1. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
AULT INCORPORATES & SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Amounts Per Share)
<TABLE>
<CAPTION>
(UNAUDITED)
THIRD QUARTER ENDED NINE MONTHS ENDED
FEB. 25 FEB. 26, FEB. 25 FEB. 26,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net Sales $8,972 $7,217 $23,564 $18,827
Cost of Goods Sold 6,913 5,607 17,936 14,390
Gross Profits 2,059 1,610 5,628 4,437
Operating Expenses
Marketing 660 607 1,935 1,660
Design Engineering 397 330 1,069 892
General & 587 477 1,635 1,378
Administrative
1,644 1,414 4,639 3,930
Operating Income 415 196 989 507
(Loss)
Non-Operating Income
(Expense)
Interest & Other 40 125 12
Income
Interest & Other (185) (113) (582) (312)
Expense
Income (Loss) 270 83 532 207
Before
Income Taxes
Income Taxes (Note 2)
Net Income $270 $83 $532 $207
Net Income Per Share $0.12 $0.04 $0.24 $0.10
Weighted Number of Shares
& Common Equivalent
Shares Outstanding 2,287,135 2,092,557 2,213,604 2,078,350
</TABLE>
See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AULT INCORPORATED & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
(Unaudited)
Feb. 25, May 28,
1996 1995
<S> <C> <C>
Assets
Current Assets
Cash & Cash Equivalents (Note 3) $102 $319
Trade Receivables Less Allowance for
Doubtful Accounts of $35,000 at
November 6,281 5,381
26, 1995, and $38,000 at May 28,
1995
Inventories:
Finished Goods 1,515 1,313
Work In Process 350 530
Raw Material 4,595 4,158
Total Inventories 6,460 6,001
Other Current Assets (Note 4) 674 485
Total Current Assets 13,517 12,186
Property, Equipment and Leasehold
Improvements, at Cost:
Land 805 826
Building 687 732
Machinery and Equipment 4,945 4,843
Office Furniture 566 554
E.D.P. Equipment 995 961
Leasehold Improvements 685 687
8,683 8,603
Less Accumulated Depreciation 5,958 5,601
Net Equipment and Leasehold
Improvements 2,725 3,002
Patent, Net of Amortization (Note 5) 182
Other Assets 203 241
Total Assets $16,627 $15,429
</TABLE>
See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AULT INCORPORATED & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
(Unaudited)
Feb. 25, May 28,
1996 1995
<S> <C> <C>
Liabilities and Stockholders' Equity:
Current Liabilities:
Note Payable to Bank $5,145 $3,570
Current Maturities of Long-Term
Debt (Note 6) 379 334
Accounts Payable 3,687 4,578
Accrued Expenses:
Compensation (Note 7) 769 660
Other 118 102
Total Current Liabilities 10,098 9,244
Long-Term Debt, Less Current Maturities
Included Above (Note 6) 1,071 1,221
Deferred Rent Expense (Note 8) 172 193
Deferred Compensation (Note 9) 289 287
Stockholders' Equity:
Preferred Shares, No Par Value;
Authorized,
1,000,000 Shares; None Issued.
Common Shares, No Par Value,
Authorized
5,000,000 Shares; Shares Outstanding: 6,913 6,897
February 25, 1996; 2,096,776 Shares;
May 28, 1995;2,083,776 shares
Deduct Notes Receivable Arising
From Sale of Common Stock (108) (108)
Foreign Currency Translation
Adjustment (Note 10) (146) (111)
Retained Earnings (Deficit) (1,662) (2,194)
Total 4,997 4,484
Total Liabilities and Stockholders'
Equity $16,627 $15,429
</TABLE>
See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AULT INCORPORATED & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
Feb. 25, Feb. 26,
1996 1995
<S> <C> <C>
Cash Flows From Operating Activities:
Net Profit $532 $207
Adjustments to Reconcile Net Income to
Net Cash Provided By(Used In)
Operating Activities:
Depreciation 381 390
Provision for Doubtful Accounts (25)
Provision for Inventory Allowance 49
Deferred Rent (21) (11)
Changes in Assets and Liabilities:
(Increase) Decrease In:
Trade Receivables (875) (1,461)
Inventories (508) (706)
Other Current Assets (189) (246)
Increase (Decrease) In:
Accounts Payable (891) 1,333
Accrued Expenses 127 21
Net Cash Used In Operating
Activities (1,420) (473)
Cash Flows From Investing Activities:
Purchase of Equipment (153) (152)
Decrease (Increase) in Other Assets (95) 78
Net Cash Used In Investing Activities (248) (74)
Cash Flows From Financing Activities:
Net Borrowings on Revolving
Credit Agreement 1,575 749
Proceeds From Issuance of Common Stock 16 35
Principal Payments on Long-Term
Borrowings, Including Capital Lease
Obligations (105) (23)
Net Cash Provided By Financing
Activities 1,486 761
Effect of Foreign Currency Exchange Rate
Changes on Cash (35) (56)
Increase (Decrease)in Cash (217) 158
Cash: Beginning 319 134
End $102 $292
</TABLE>
AULT INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THIRD QUARTER ENDING FEBRUARY 25, 1996
NOTE 1
In the opinion of management, the accompanying unaudited
financial statements contain all adjustments (which only included
normal recurring adjustments) necessary to present fairly Ault
Incorporated's consolidated financial position as of February 25,
1996, and February 26, 1995, and changes in financial position
for the nine months then ended. The consolidated financial
statements include the operations of the parent company, Ault
Incorporated (US operation), and its wholly owned subsidiary,
Ault Korea Corporation.
NOTE 2
No income taxes were accrued for the period. Taxes that were
calculated on profits of the US Operation were offset by the
utilization of tax credit carryforwards. Ault Korea Corporation
reported a loss for the nine months and therefore had no accrued
income taxes.
NOTE 3
For the purpose of reporting cash and cash flows, the Company
considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
NOTE 4
Other current assets for both periods are principally customs
duty and value-added taxes, and certain deferred expenses that
are related to, and will be absorbed against revenue during the
fourth quarter of fiscal 1996. The customs duty and value-added
taxes are paid by Ault Korea Corporation to the Korean authority
on products that are manufactured for exportation. These
payments are refundable when the subsidiary submits to the Korean
Government the appropriate claim and proof of exportation.
NOTE 5
The patent cost, which currently has no amortization charged
against it, represents in its entirety, the contract price of US
Patent #5,303,137,1 acquired by the Company from a source
external to and independent of the Company. The power conversion
technology represented by the patent will allow the Company to
generate significant revenues over the next five years into
fiscal year 2002. For amortization purposes, the patent has been
assigned a life of four years beginning in fiscal 1997.
NOTE 6
Long-term debt, including current maturities, consists of
capitalized lease obligations and a mortgage on the Korean
facility. Capitalized leases amounting to $316,000 are due in
various monthly installments maturing through fiscal year 2000.
The mortgage amounts to $1,134,000 at 8.6% rate of interest, of
which approximately $160,000 of principal and interest is payable
every six months beginning in March, 1996, through the year 2000.
NOTE 7
Compensation consists principally of amounts accrued for sales
representatives' commissions, and provision for employee future
paid time off. Sales commissions are accrued for at the time
that sales are invoiced and future paid time off accrued for in
accordance with the Company's personnel policy.
NOTE 8
The lease on the Company's Minneapolis plant and office
facilities includes scheduled base rent increases over the term
of the lease, which runs for ten years. The total amount of the
base rent payments is being charged to expense on the straight-
line method over the term of the lease. The difference between
the payments and the expense is recorded as deferred rent.
NOTE 9
Deferred compensation is a provision of Ault Korea Corporation,
in accordance with a requirement by the Korean Authority, for the
compensation of each current employee when his/her employment
with the subsidiary terminates.
NOTE 10
The Korean Won is considered the functional currency of the
Korean subsidiary. Accordingly, the effect of translating the
subsidiary's statements into US dollars is recorded as a separate
component of shareholders' equity.
ITEM 2
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Net sales were $8,972,000 for the third quarter of fiscal 1996,
up 24% from $7,217,000 for the third quarter of fiscal 1995. For
the nine months of fiscal 1996, net sales were $23,564,000, an
increase of 25% from $18,827,000 for the nine months of fiscal
1995. The improvemen is due principally to three factors:
(1) Driven worldwide by leading technologies in communication,
transmission and processing of data, tele-communications/
data-communications, principal market served by the Company,
and the personal computer market have continued to show
strong activity. Anticipated to continue at least well into
fiscal 1997, this favorable market environment is providing
enhanced opportunities for sale to OEMs manufacturing items such
as point of sales equipment, telephones, modems, local area
network systems, and cable communication services. (2) Several
recently developed products reflecting greater emphasis on design
engineering are generating significant bookings and revenues for
the Company. The Company designs products at its Minneapolis
facility, at its Korean subsidiary, Ault Korea Corporation, and
under subcontract arrangements in South East Asian countries,
including China. Ault Korea also designs products for direct
sale in its local area market where there are growing
opportunities for additional revenues. The Company's strategies
require continued emphasis on the development of products for
custom and standard applications that represent significant
revenue opportunities. (3) Subcontracting arrangements and greater
utilization of the Korean facility are enabling the Company to
better compete for price sensitive orders and to fulfill the
broader product needs of its OEM customers. Compared to fiscal
1995, the greater sales in fiscal 1996 are due to more favorable
market conditions and success of the Company's design and
manufacturing strategies.
Order backlog at February 25, 1996, amounted to $14,507,000, up
23% from $11,776,000 at February 26, 1995. The order backlog,
and anticipated future orders are bases for the Company to
believe that its performance in the last quarter of fiscal 1996
should compare favorably with performance for the quarter just
ended.
Gross profit for the third quarter of fiscal 1996 was $2,059,000
or 22.9% of net sales, compared to $1,610,000, which equaled
22.3% of net sales for the third quarter of fiscal 1995. For the
nine months of fiscal 1996, gross profit was $5,607,000, or 23.9%
of net sales, compared to $4,437,000, or 23.6% of net sales for
the nine months of fiscal 1995. The modest improvement in margin
is due to the larger sales which afforded more efficient
utilization of fixed costs. The lack of success so far in
efforts to increase demand for higher cost products that are
manufactured in the US is a principal factor that currently
impedes further margin improvement. Certain products being
introduced to customers are anticipated to bring modest
improvement in gross margin.
Although products that were manufactured by the Korean subsidiary
contributed a significant portion of total sales, conversion of
the Won to US dollars has had no material impact on gross profit
because the conversion rates have been relatively stable.
Operating expenses for the third quarter of fiscal 1996 amounted
to $1,644,000 or 18% of net sales compared to $1,414,000, which
equaled 20% of net sales for the third quarter of fiscal 1995.
For the nine months, operating expenses were $4,639,000, or 20%
of net sales for fiscal 1996, and $3,930,000, or 21% of net sales
for fiscal 1995. The higher expenditures for fiscal 1996 are due
to the greater but proportionate commissions paid on the
increased sales, and increased engineering and administrative
costs due, respectively, to greater agency fees to certify new
product, and larger administrative costs associated with foreign
business activities.
The Company had operating profit of $415,000 and $989,000 for the
third quarter and nine months, respectively, of fiscal 1996,
compared to $196,000 for the third quarter and $507,000 for the
nine months of fiscal 1995.
Non-operating income of $125,000 in fiscal 1996, and $12,000 in
fiscal 1995 are principally interest earned on short-term
investments and currency exchange rates gains on importation of
raw materials by the Korean subsidiary. Non-operating expenses
of $582,000 for fiscal 1996, and $207,000 for fiscal 1995 are
principally interest expenses of the Company. Fiscal 1995
payments are on bank indebtedness and capital leases. Fiscal
1996 payments contain approximately $85,000 of mortgage interest
on the Korean facility that was purchased late in fiscal 1995.
The balance of $447,000 was also principally interest payments on
bank indebtedness and capital leases, which, compared to fiscal
1995, are higher due to greater borrowings to support revenue
growth.
The Company has no accrued income taxes for the periods. Taxes
that were calculated on profit of the US operation were offset by
the application of tax credit carryforwards. Ault Korea
Corporation incurred a loss for the periods, and, therefore, had
no income taxes.
The Company reported net income of $270,000, amounting to per
share earnings of $0.12 for the third quarter, and $532,000, or
per share earnings of $0.24 for the nine months of fiscal 1996.
In fiscal 1995, the Company had net income of $83,000, or per
share earnings of $0.04 for the third quarter, and $207,000,
equaling $0.10 for the nine months.
Liquidity and Capital Resources
The Company's fiscal 1996 strategies for customer service and a
positive growth rate, were to utilize its resources to exploit
the opportunities seen in growing, favorable market conditions.
Principal among these resources were its bank credit facility and
working capital derivable from operations cash flows. Both of
these resources however would require careful management for the
desired results. Expenditures for investing activities that are
commensurate with these resources were also seen as a critical
element. At the end of the nine months, the Company had cash of
$102,000, down from $319,000 when the year began through cash
flow activities in operations, investing, and financing. In the
interest of reduced borrowing costs, however, the Company,
normally does not retain significant amounts of cash. Cash flows
from operations used $1,420,000, comprised of net profits and
related adjustments, and activities in trade receivables,
inventories and other current assets, and payables and accrued
expenses. Net profit and related activities provided $916,000 of
cash of which $532,000 came from net profit. The balance of
$384,000 came principally from reserves for depreciation of
capital assets taken during the period. Profits and adjustments
are anticipated to contribute additional cash during the next
quarter. Trade receivables used $875,000 of cash resulting
mainly from increased shipments during the third quarter. Strong
shipments are anticipated during the last quarter, but any
additional use of cash is not expected to be significant because
of expected levels of collections. Increase in inventories used
$508,000 of cash principally because of purchases to support the
large order backlog, and commitments by the Company to carry
additional inventories for the unscheduled requirements of
certain customers. Any further growth in inventories for the
balance of the fiscal year is expected to be minimal, and,
therefore, no material change in cash flows is expected from it.
Amounting to cash use of $189,000, and principally for refundable
payments and deferred costs, (see NOTE 4, under NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS), other current assets are
anticipated to decrease and contribute to cash flows mainly
through charges against revenue during the fourth quarter. Trade
payables and accrued expenses together used $764,000 of cash,
which was predominantly by the Korean subsidiary to bring
indebtedness to material vendors on a more current basis. No
further change in vendor payments that would use any significant
amounts of cash is anticipated in the fourth quarter.
Investing activities, principal of which were purchase of
manufacturing equipment and tooling and a patent on engineering
designs used $248,000 of cash. Purchase of equipment and tooling
used $153,000 of cash. Further acquisitions during the fourth
quarter are not expected to use any significant amounts of cash.
No further expenditures on patent, which used $182,000 of cash,
is being planned; (See NOTE 5, under NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS). Reduction in other assets during the
period contributed $87,000 to cash flows.
Principal financing activities during the nine months were in
connection with the Company's credit facilities, exercise of
common stock options, and activities on long-term obligations.
Activities on long-term obligations, which were related to
mortgage payment and capital leases used $105,000 of cash.
Mortgage payments on the Ault Korea facility used $124,000 of
cash, while net effect of lease payments and new lease contracts
provided $19,000 of cash. See NOTE 6, under NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS. Net effect of new lease
contracts and payments during the fourth quarter is expected to
be also minimal. Exercise of common stock options yielded
$16,000 of cash during the nine months. Borrowings against the
Company's credit facilities provided $1,575,000 of cash during
the period, of which $859,000 was incurred by the Korean
subsidiary at its local bank. The remaining $716,000 was
incurred by the US operations.
At the end of fiscal 1995, the Company had a revolving credit
facility amounting to $4,500,000; all of which were at its US
bank. During the second quarter of fiscal 1996, the Company
negotiated a new agreement that increased the credit facility to
$6,000,000 effective October 1, 1995. At February 26, 1996,
$400,000 of the credit facility was being utilized to provide a
standby letter of credit to Korea Exchange Bank in Korea. This
letter of credit guarantees to the bank that the domestic letters
of credit it issues to local vendors on the subsidiary's behalf,
and overdraft services to the subsidiary would be paid to the
extent of the document's value. No claims have been presented
against it. The balance of $5,600,000 provides working capital
to the US operations at a rate of interest that is 2% above the
bank's base rate, down from 4% on the old credit facility. At
February 25, 1996, utilization amounted to $4,286,000, up from
$3,570,000 when the fiscal year began. During the second
quarter, also, Ault Korea Corporation completed an agreement with
Korea Exchange Bank wherein, collateralized by inventories and
the standby letter of credit, that bank allows the subsidiary up
to $800,000 of credit to support its working capital needs. At
the end of the period, all of the credit facility had been
utilized principally for payments to material vendors, as
discussed under trade payables.
The effect of foreign currency exchange rate changes on the
translation of the Korean financial statements from Korean won to
US dollars resulted in net asset value decrease of $35,000 during
the nine months. All of the Company's sales contracts are in US
dollars, and therefore, the Company assumes no currency exchange
risks on these contracts. Ault Korea, in addition to shipments
to the US, sells only in its local market at this time;
consequently, the Company assumes no currency exchange risks.
Neither Ault Korea Corporation nor the US operation currently has
any significant amounts of raw material importation that would
expose the Company to any significant currency exchange risk.
However, management plans to monitor the situation, and to, at
the appropriate time, take proper actions to minimize risks.
Signifying improving ability to meet current obligations, the
Company's working capital increased during the quarter from
$2,942,000 at May 29, 1995, to $3,419,000 at February 25, 1996.
Long-term debt, including current maturities, decreased from
$1,555,000 to $1,450,000 over the same period.
The Company believes that cash flows from anticipated profit and
other operating activities together with its two credit
facilities will be sufficient to support strategies into fiscal
1997. Additional sources of funds would be needed, however, to
pursue any significant business opportunity that represents a
change in current strategies.
AULT INCORPORATED
PART II. OTHER INFORMATION
ITEM 1 - 5 Not Applicable
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
Reference Title of Document Location
Part 1 Exhibits
11 Computation of Per Share Earnings Filed herewith at
Page 19
27 Financial Data Schedule Filed electronically
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the quarter
ended February 25, 1996.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
AULT INCORPORATED
(REGISTRANT)
<TABLE>
<S> <C> <C>
DATED: 4/10/96 /s/ Frederick M. Green
Frederick M. Green, President
Chief Executive Officer and
Chairman
DATED: 4/10/96 /s/ Carlos S. Montague
Carlos S. Montague, Vice President
Chief Financial Officer and
Controller
</TABLE>
AULT INCORPORATED & SUBSIDIARY
CALCULATIONS OF CONSOLIDATED EARNINGS PER SHARE
(In Thousands of Dollars, Except Per Share Data)
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
Feb. 25, Feb. 26,
1996 1995
<S> <C> <C>
Primary Earnings Per Common
Share:
Net Income $532 $207
Average Shares of Common Stock
and
Equivalent Outstanding:
Common Shares Beginning
of Period 2,083,776 2,062,526
Common Stock From
Exercise of Options,
Weighted 13,000 7,043
Additional Outstanding
Common Stock From Fully
Dilutive Options, Weighted* 116,828 8,781
Used to Compute Primary
Earnings Per Share 2,213,604 2,078,350
Primary Earnings Per Share $0.24 $0.10
<FN>
*Common stock equivalent for exercisable options amounting
to 104,738 shares in fiscal 1995, had an antidilutive effect
on the earnings per share, because of their higher exercise
prices compared to their market values. These shares were,
therefore, excluded from the per share earnings
calculations.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND
ON PAGES 2 THRU 4 OF THE COMPANY'S FORM 10-Q FOR THIRD QUARTER ENDED 02-25-96,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERRENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-02-1996
<PERIOD-START> MAY-29-1995
<PERIOD-END> FEB-25-1996
<CASH> 102
<SECURITIES> 0
<RECEIVABLES> 6281
<ALLOWANCES> 13
<INVENTORY> 6460
<CURRENT-ASSETS> 13517
<PP&E> 8683
<DEPRECIATION> 5958
<TOTAL-ASSETS> 16627
<CURRENT-LIABILITIES> 10098
<BONDS> 0
0
0
<COMMON> 6913
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 16627
<SALES> 23564
<TOTAL-REVENUES> 23564
<CGS> 17936
<TOTAL-COSTS> 17936
<OTHER-EXPENSES> 4639
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 582
<INCOME-PRETAX> 532
<INCOME-TAX> 0
<INCOME-CONTINUING> 532
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 532
<EPS-PRIMARY> .24
<EPS-DILUTED> .24
</TABLE>
