Page 23
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 March 1, 1998
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 March 1, 1998
No par value 4,150,933 shares
Total pages - - - -20
Exhibits Index on Page - - - -19
PART 1. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
AULT INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(in Thousands, Except Amounts Per Share)
<TABLE>
<CAPTION>
(UNAUDITED)
THIRD QUARTER NINE MONTHS ENDED
ENDED
March March 2, March March
1, 1 1, 2,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net Sales $10,294 $10,578 $30,671 $28,504
Cost of Goods Sold 7,621 7,760 22,921 21,167
Gross Profits 2,673 2,818 7,750 7,337
Operating Expenses
Marketing 952 870 2,769 2,365
Design Engineering 478 419 1,309 1,178
General and Administrative 861 771 2,434 1,993
2,291 2,060 6,512 5,536
Operating Income 382 758 1,238 1,801
Other Income (Expense)
Interest Expense (27) (76) (453)
(119)
Other 7 89 142 109
Income Before Income Taxes 362 771 1,261 1,457
Income Taxes (Note 2) 79 151 382 320
Net Income $283 $620 $879 $1,137
Earnings Per Common and
Equivalent Share Outstanding,
Assuming:(Note 3)
Basic EPS $0.07 $0.17 $0.21 $0.42
Diluted EPS $0.07 $0.06 $0.21 $0.38
Common and Equivalent Share
Outstanding (000):
BASIC EPS 4,151 3,735 4,128 2,683
Diluted EPS 4,265 3,995 4,277 2,957
</TABLE>
See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AULT INCORPORATED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in Thousands)
<TABLE>
<CAPTION>
(Unaudited)
March 1, June 1,
<S> <C> <C>
1998 1997
Assets:
Current Assets
Cash & Equivalents (Note 4) $4,087 $3,677
Marketable Securities (Note 4) 847 849
Trade Receivables, Less Allowance
for doubtful Accounts of $86,000 at
March 1, 1998, and $51,000 at June
1, 1997 7,086 8,896
Inventories:
Finished Goods 3,064 2,750
Work in Process 144 256
Raw Materiel 3,599 4,256
Total Inventories 6,807 7,262
Prepaid and Other Expenses (Note 5) 679 660
Deferred Taxes (Note 2) 123 123
Total Current Assets 19,629 21,467
Other Assets:
Other Receivables, Less Allowance
of $65,000, (Note 6) 197 197
Patents, (Note 7) 151 178
Deferred Taxes (Note 2) 468 558
Other 44 126
860 1,059
Property Equipment and Leasehold
Improvement at Cost:
Land 875 875
Building 796 796
Machinery and Equipment 5,842 5,572
Office Furniture 628 519
E.D.P. Equipment 1,524 1,015
Leasehold Improvements 876 657
10,541 9,434
Less Accumulated Depreciation 6,248 5,866
Net Equipment and Leasehold
Improvements 4,293 3,568
Total Assets $24,782 $26,094
</TABLE>
AULT INCORPORATED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in Thousands)
<TABLE>
<CAPTION>
(Unaudited)
March 1, June 1,
1998 1997
<S> <C> <C>
Liabilities and Stockholder's Equity
Current Liabilities:
Note Payable to Bank $395 $756
Current Maturities of Long-Term Debt (Note 8) 187 199
Account Payable 3,080 3,531
Accrued Expenses:
Compensation (Note 9) 375 503
Other (Note 10) 709 817
Income Taxes Payable (Note 2) 306 430
Total Current Liabilities 5,052 6,236
Long-Term Debt, Less Current Maturities
Included Above (Note 8) 454 441
Deferred Rent Expense (Note 11) 84 123
Deferred Compensation (Note 12) 230 358
Stockholder's Equity:
Preferred Stock, No Par Value, Authorized,
1,000,000 Shares; None Issued.
Common shares, No Par Value, Authorized
10,000,000 Shares; Shares Outstanding:
March 1, 1998; 4,150,933, June 1, 1997;
4,075,733 Shares 18,304 18,055
Less Note Receivable From Sale of
Common Stock (204) (204)
Foreign Currency Translation Adjustments
(Note 13) (1,070) 31
Retained Earnings 1,932 1,054
Total 18,962 18,936
Total Liabilities and Stockholder's Equity $24,782 $26,094
</TABLE>
See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AULT INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in Thousands)
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS
ENDED
March 1, March 2,
1998 1997
<S> <C> <C>
Cash Flows From Operating Activities
Net Income: $879 $1,137
Adjustments to Reconcile Net Income to Net
Cash Used in Operating Activities:
Depreciation 382 334
Provision for Doubtful Accounts 35 46
Provision for Inventory Adjustments 45
Loss on Disposal of Equipment 1
Deferred Taxes 90
Deferred Rent Expenses (39) (30)
Decrease in Market Value of Securities 1
Changes in Assets and Liabilities:
(Increase) decrease In:
Trade Receivables 1,775 (974)
Inventories 410 468
Other Current Assets (19) (339)
(Decrease) Increase In:
Accounts Payable (451) (1,970)
Accrued Expenses (364) 359
Income Tax Payable (124) 0
Net Cash Provided by (Used in) Operating
Activities 2,620 (968)
Cash Flows From Investing Activities:
Proceeds From Disposal of Equipment 2
Purchase of Equipment and Leasehold
Improvements (1,107) (783)
Increase in Other Assets 109 (33)
Net Cash Used in Investments Activities (998) (814)
Cash Flows From Financing Activities:
Net Borrowing (Payments) on Revolving
Credit Agreements (361) (4,774)
Proceeds From Issuance of Common Stock 249 10,694
Principal Payments on Long-Term Borrowings
Including Capital Leases (299) (1,181)
Proceeds From Long-Term Borrowings 300 300
Net Cash Provided by (Used in) Financing
Activities (111) 5,039
Effect of Foreign Currency Exchange Rate Changes
on Cash (1,101) 67
Cash and Cash Equivalents:
Increase 456 3,324
Beginning 3,677 412
Ending $4,087 $3,736
</TABLE>
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THIRD QUARTER ENDING MARCH 1, 1998
Note 1, Principles of Consolidation
The accompanying consolidated financial statements include
the accounts of Ault Incorporated, its wholly-owned
subsidiaries, Ault Korea Corporation, and Ault Xianghe Co.
Ltd. 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
subsidiaries in accordance with the provisions of FASB
Statement No. 52.
Note 2, Income Taxes
The Company's tax provision is for US income taxes only and
is accrued at the rate of 38%. The foreign subsidiaries
had no accrued income taxes for the period because of the
utilization of net operating loss carryforwards which
reduced taxable income for the period. See MANAGEMENT
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATION.
Note 3, Net Income Per Share
The Company had presented basic and diluted per share
earnings in accordance with FASB Statement No. 128 which
became effective for the Company as of the third quarter of
fiscal 1998. Basic per share earnings are presented only
for outstanding common stock. In addition to outstanding
common stock, presentation of diluted per share earnings
also assumes the conversion, exercise or issuance of all
potential common stock instruments that are not
antidilutive, using average common market values.
The Company, also has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards
No. 123 Accounting for Stock-Based Compensation.
Accordingly, no compensation cost has been recognized for
the Company's stock option plan. Had compensation cost
been determined for the nine months of fiscal 1997 and
fiscal 1998 based on the fair value of options at the grant
dates consistent with the provisions of SFAS No. 123, the
Company's net income and net income per share would have
changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net Income, as reported $879,000 $1,137,000
Net Income pro forma 560,946 864,235
Net Income, per share as
reported 0.21 0.42
Net Income per share, pro
forma 0.13 0.24
</TABLE>
The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for
grants included in fiscal 1998 and fiscal 1997
calculations.
AULT INCORPORATED AND SUBSIDIARY
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THIRD QUARTER ENDING MARCH 1, 1998
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Expected dividend yield
Expected stock price volatility 67.68% 67.68%
Risk free interest rate 5.47-6.61% 5.85-6.61%
Expected life of options 1-5 4-5
</TABLE>
See MD&A, Impact of Recent Accounting Standard Changes.
Note 4, Cash and Cash Equivalents
For the purpose of reporting cash and cash flows, the
Company considers all highly liquid instruments with a
maturity of three months or less to be cash equivalents.
Marketable securities are comprised of preferred stocks of
various companies.
Note 5, Prepaid and Other Expenses
Prepaid and other expenses are principally customs duty and
value-added taxes, and certain deferred expenses that are
related to and are absorbed against revenue during the
fiscal year, as well as receivables for cash advances made
to foreign subcontractors of the Company. 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. Advances to sub-
contractors are amortized against product deliveries.
Note 6, Other Receivables
Other receivables of $197,000, after allowance of $65,000,
represent amounts due the Company relating to trade
receivable invoices from fiscal 1991. The customer had
terminated its contract with the Company for reasons that
were external and unrelated to the Company and refused to
compensate the Company for costs that were incurred. A
suit by the Company for cost recovery brought against the
customer was determined in the Company's favor, and it is
anticipated that the receivables will be collected by June
1, 1998.
Note 7, Patent
Patent cost, net of amortized amounts represents the
contract price of US Patent #5,303,137,1 which was acquired
from a source external to and independent of the Company.
The Company believes that products using the power
conversion technology it represents will generate
significant revenues into fiscal 2002. For amortization
purposes, the patent had been assigned a life of four
years.
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THIRD QUARTER ENDING MARCH 1, 1998
Notes 8, Long-Term Debt
Long-term debt, including current maturities contain the
following:
<TABLE>
<CAPTION> March 1, June 1,
1998 1997
(000)
<S> <C> <C>
8.1% US Bank term loan due in monthly
installments
of $7,340, including interest to
February
February 2001, secured by equipment $234 $288
6.5% note payable, due in quarterly
installments of $28,019 plus interest
through April 2000, secured by
equipment 121 224
Capitalized lease obligations due in
various monthly installments
through June 1999 3 128
8.0% US Bank term loan due in monthly
installments of $7,320, including
interest to November 2001, secured
by equipment 283 0
Total $641 $640
</TABLE>
Note 9, Compensation
Compensation consists principally of amounts accrued for
payment of employee's salaries, vacation and sick pay.
Note 10, Accrued Expenses, Other
Accrued expenses, other, are mainly undue amounts for sales
representatives commissions, fees to product certifying
agencies and provisions for future payment of current
warranty commitments.
Note 11, Deferred Rent
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
expenses on the straight-line method over the term of the
lease. The difference between the payments expense is
recorded as deferred rent.
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THIRD QUARTER ENDING MARCH 1, 1998
Note 12, Deferred Compensation
Deferred compensation is a provisions by Ault Korea
Corporation, in accordance with requirement by the Korea
Government, for the compensation of each current employee
when his/her employment with the subsidiary terminates.
The National Pension Scheme of Korea, does not require the
Company to fund this obligation, but requires the transfer
of certain portions of the liability to the Korean National
Pension Fund. The liabilities recorded by the Company are
net of these transfers.
Note 13, Foreign Currency Translation Adjustments
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 shareholder's equity. The
adjustments that were recorded for the nine months are
reconciled as follows:
<TABLE>
(000)
<S> <C>
Beginning Cumulative Gain at June
1, 1997 $31
Gain (Loss) for the period from:
a. Long-term Inter-Company
Receivables (1,071)
b. Other (30)
Ending Cumulative Loss ($1,070)
</TABLE>
The amounts attributed to long-term inter-company
receivables reflect a change in the Won rate from 892.3
Wons to $1.00 at June 1, 1997, to 1,653.5 Wons to $1.00 at
March 1, 1998 and is computed on outstanding receivables of
$2,327,000.
ITEM 2
MANAGEMENT DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
From time to time, in reports filed with the Securities and
Exchange Commission, in press releases, and in other
communications to shareholders or the investing public, the
Company may provide forward-looking statements concerning
possible or anticipated 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. Shareholders and
the investing public should understand that such forward-
looking statements are subject to risks and uncertainties
which could cause results or developments to differ
significantly from those indicated in the forward-looking
statements. Such risks and uncertainties include, but are
not limited to, the overall level of sales by OEMs in the
telecommunications, data communications, computer
peripherals and the medical markets; buying patterns of the
Company's existing and prospective customers; the impact of
new products introduced by competitors; higher than
expected expense related to sales and new marketing
initiatives; availability of adequate supplies of raw
materials and components; political and economic
developments affecting the Company's foreign subsidiaries
and sub-contractors and other risks involving the Company's
target markets generally
RESULTS OF OPERATIONS
Net Sales: Net sales totaled $10,294,000 for the third
quarter of fiscal 1998, virtually unchanged from
$10,578,000 reported for the third quarter of fiscal 1997.
For the nine months of fiscal 1998, net sales totaled
$30,671,000, which was up 7.6% from net sales of
$28,504,000 for the nine months of fiscal 1997. The
virtually flat revenue for the quarter and the modest
improvement for the nine months, compared to the third
quarter and nine months of fiscal 1997 are due principally
to two factors:
1. Significant orders that were expected from customers
who are leading OEMs in the emerging cable modem market did
not materialize because infrastructure, such as
transmission stations and wired systems, pre-requisites to
greater installation of cable modems, were not in place.
The necessary infrastructure is being developed, and as a
result, increased demand for cable modems is forecast for
fiscal 1999. If this happens, the Company believes that
orders for its products in support of the cable modem
industry could improve significantly in fiscal 1999. The
balance of the telecommunications/data communications
market and other markets served by the Company are growing
at anticipated rates and are expected to do so in fiscal
1999.
2. Enhanced price competition from Asian countries
whose currencies have been devalued due to their
unfavorable economic situations.
The Company believes that it is implementing the necessary
strategies which could overcome the price competitive issue
and realize greater revenue growth rates for fiscal 1999.
To this end, fifteen new products were introduced during
the nine months, and approximately nine new introductions
are due for the fourth quarter of the current fiscal year.
The following products are among the introductions:
A 9 to 11-watt and a12 to 15-watt family of switching
power supplies that are designed for applications such
as business and residential wireless telephones and
networking devices. Shipments are expected to start
during the second calendar quarter of 1998.
A 60 to 80-watt family of switching power supplies
designed for applications such as routers, LANS and
servers. These products were introduced late in the
third quarter and it is anticipated that they will be
well received for their designated applications.
The Company is also well positioned to benefit from the
emerging market for Asynchronous Digital Subscriber Line
(ADSL) modems, an alternative to cable modems, due to its
engineering partnerships with customers who are leading
participants in this market. ADSL modems are designed to
process data transmitted through telephone lines in
contrast to cable modems which receive data transmitted
through cables carrying other audio/video signals.
Technical issues which delayed introduction of the
Company's 80 to 100-watt high density power supplies have
been resolved. These products are undergoing final safety
agency testing and shipments are anticipated to begin
during the first quarter of fiscal 1999. Aside from having
greater competitive features when compared to conventional
products, these high output products will enable the
Company to compete in markets such as printers and high-
power portable computers that traditionally have used
internal power supplies because external products with the
required power ratings have not been available.
The Company's strategy on foreign market penetration has
continued to show increasing successful results. Revenue
from Asian markets, including Japan is anticipated to
exceed $2.0 million in the current fiscal year, up from
$0.9 million in fiscal 1997. An alliance with Shinko Shoji,
a major Japanese and international distributor, continues
to provide exposure to opportunities for sale in the
Japanese market. In various stages of product designs and
sample approvals, these sale opportunities are anticipated
to provide a significant increase in revenues from Asian
markets in fiscal 1999. Strategies to enable greater
European market penetration are also realizing increasing
success. Revenue from European markets is anticipated to
exceed $1.5 million in the current fiscal year, up from
$0.6 million in fiscal 1997. The Company is in various
stages of discussion with major European OEMs on potential
contracts that are anticipated to be generate revenue
growth in the fourth quarter as well as in fiscal year
1999. In view of the opportunities for greater European
sales, the Company has strengthened its European sales
effort by establishing contracts with sales representatives
for major accounts, in addition to existing distributorship
arrangements.
The Company expanded the capacity of its subsidiary in
China, during the second quarter, as a source of low cost
manufacturing in response to anticipated growth in customer
requirements, and to further counter foreign price
competition.
Order Backlog: Order backlog at March 1, 1998, totaled
$14.1 million, down modestly from $14.7 million at June
1,1997. Orders booked for the nine months of fiscal 1998
totaled $30.6 million, compared to $23.3 million booked
during the nine months of fiscal 1997. Orders booked for
the third quarter totaled $10.8 compared to $7.4 million
booked during the third quarter of fiscal 1997.
Given the various factors discussed above, the Company
anticipates stronger future revenue for the fourth quarter
of fiscal 1998, compared to the quarter just ended, and for
fiscal 1999, compared to fiscal 1998.
Gross Profit: Gross profit decreased 5.5% in the third
quarter of fiscal 1998 to $2.7 million as compared to $2.8
million for the third quarter of fiscal 1997. For the nine
months, gross profit increased by 5.6% to $7.8 million in
fiscal 1998 from $7.3 million in fiscal 1997. As a
percentage of net sales, gross profit totaled 26.0% and
26.6% for the third quarter of fiscal 1998 and fiscal 1997,
respectively. For the nine months gross profits totaled
25.3% in fiscal 1998 and 25.7% in fiscal 1997. The lower
rates for fiscal 1998 reflect principally a higher sales
mix of the Company's lower margin transformer products,
compared to other products of the Company that command
greater margins.
Operating Expenses: Operating expenses increased 11.2% in
the third quarter of fiscal 1998 to $2.3 million from $2.1
million in fiscal 1997, and increased by 17.6% to $6.5
million from $5.5 million for the third quarter of fiscal
1997. The increase is due principally to commissions paid
to sales representatives on the additional sales, to
safety agency fees paid for certification of new product,
and to expenditures relating to the implementation of
strategic initiatives, some of which began during the
second half of fiscal 1997. The strategic initiatives are
being implemented for the following purpose:
1. To strengthen the Company's sales and marketing
competitive position in the US and Asia.
2. Enhancing Asian manufacturing supervision
3. Providing promotional material for the Company's
products
4. Providing direct internet communication link between
Ault US and Ault Korea, and to
5. Providing software for upgrading the quality of
management information services.
Further expenditures on strategic initiatives and agency
fees will be incurred during the fourth quarter of fiscal
1998.
As a percentage of net sales, operating expenses were
22.2% for the third quarter and 21.2% for the nine months
of fiscal 1998, compared to 19.5 % and 19.4% for the third
quarter and nine months, respectively, of fiscal 1997.
Non-operating Income: Non-operating income of $142,000
and $109,000 for fiscal 1998 and fiscal 1997,
respectively, are principally interest income from short-
term investments. Interest expense of $119,000 for fiscal
1998 and $453,000 for fiscal 1997 are amounts paid
principally on leasing contracts and on short-term bank
borrowings. The expenditures for fiscal 1998 are lower
because bank indebtedness was substantially reduced using
proceeds from a public offering which closed in December,
1996.
Income Tax: The Company had pre-tax income of $362,000
for the third quarter and $1,261,000 for the nine months of
fiscal 1998. On these amounts, US income taxes of $79,000
and $382,000 were accrued, respectively, for each period at
a rate of 38.0% on profits of the US operation. The
availability of deferred tax assets, which include
business credits and net operating loss carryforwards are
expected to reduce actual tax payments for fiscal 1998 to a
rate of approximately 29.0%. The foreign subsidiaries had
no accrued tax liabilities for these two periods due to net
loss for fiscal 1997and utilization in fiscal 1998 of net
operating loss carryforwards. The Company had pre-tax
income of $771,000 and $1,457,000 for the third quarter and
nine months, respectively, of fiscal 1997. On these
amounts, US income tax of $151,000 was accrued for the
third quarter and $320,000 for the nine months due to
anticipated tax liabilities from application of the
Alternative Minimum Income Tax. The foreign subsidiary
incurred losses for these periods, and therefore had no
accrued tax liabilities.
Net Income: Net income totaled $283,000 for the third
quarter and $879,000 for the nine months of fiscal 1998,
compared to $620,000 for the third quarter and $1,137,000
for the nine months of fiscal 1997.
In fiscal 1998, basic per share earnings were $0.07 for the
third quarter and $0.21 for the nine months calculated on
weighted common shares of 4,150,933 and 4,128,252,
respectively. Basic per share earnings in fiscal 1997
totaled $0.17 for the third quarter calculated on weighted
common shares of 3,735,448 and $0.42 for the nine months
derived from of 2,686,282 weighted common shares.
Diluted per share earnings in fiscal 1998 were $0.07 for
the third quarter, and $0.21 for the nine months based on
weighted common and equivalent shares of 4,265,129 and
4,244,376, respectively. Diluted per share earnings in
fiscal 1997 were $0.16 for the third quarter, and $0.38 for
the nine months based on common and equivalent weighted
shares of 3.994.501 and 2,957,263 respectively.
LIQUIDITY AND CAPITAL RESOURCES
The following table describes the Company's working capital
resources at March 1, 1998, and at March 2, 1997:
<TABLE>
<CAPTION>
March 1, March 2,
1998 1997
(000)
<S> <C> <C>
Working Capital $14,577 $14,434
Cash $4,087 $3,736
Marketable Securities at market 847
4,934 3,736
Bank Credit Facilities 3,500 3,500
Cash Flows:
Cash provided (used) by operations 2,666 (968)
Cash (used) in investing activities (998) (814)
Cash provided by (used in) financing
activities (111) 5,039
</TABLE>
Working Capital:
The Company's principal sources of working capital on which
it relies to support normal growth in revenues and for
attainment of profit goals have been its credit facilities
and its cash flows from operations. The Company has sought
external sources of financing for strategic matters where
the objectives go beyond normal enhancements in revenue and
profit. To this end , the Company completed a public sale
of its common shares during the third quarter of fiscal
1997, from which it raised $10,621,000, after underwriters'
discount and other offering expenses. From the proceeds,
certain bank revolving credit obligations and mortgage
debts were repaid and a wholly owned facility in China was
established to serve as a low cost manufacturing resource
for the Company. Working capital provided from the public
offering enabled the Company to begin fiscal 1998 with
cash and liquid investments totaling $4,526,000. At March
1, 1998, cash and liquid investments totaled $4,934,000, up
from $4,526,000 at June 1, 1997.
The Company's working capital at March 1, 1998, totaled
$14,578,000 compared to $14,434,000 at March 2, 1997. Ratio
of current assets to current liabilities at March 1, 1998,
and March 2, 1997, were 3.9 to 1 and 3.8 to 1,
respectively.
Credit Facilities:
The Company maintains two credit facilities; its primary
credit facility with US Bancorp in the US, and a smaller
facility with Korea Exchange Bank that supports the South
Korean subsidiary. The US Bancorp credit facility will
expire on October 1, 1998. It is comprised of the
following features:
(a) A revolving credit facility of $2.0 million at prime
rate of interest and secured by trade receivables. There
were no borrowings against it at the end of the quarter.
(b) One or more term loans, each up to an amount of
$300,000. At March 1, 1998, borrowings amounting to
$517,000 were outstanding on two term loans. See Note 8
under NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
The Company believes that this credit facility is adequate
for the support of current strategies and that a greater
facility could be successfully negotiated, if an
opportunity arose that necessitates it.
The South Korean credit facility amounts to $1.5 million
and was established for the purpose of supporting bank
overdrafts , short-term financing and export financing.
Advances outstanding at March 1, 1998, totaled $395,000,
and amounts available for borrowing totaled $1,105,000.
Cash Flows:
Operations: Operations provided $2,622,000 of net cash for
the nine months which resulted from activities that
provided $3,559,000 of cash and activities that used
$939,000 of cash. The activities that provided $3,559,000
were:
(a) Net profit: Net profit provided $879,000 of cash for
the nine months. Additional contribution of cash from
profits is anticipated for the fourth quarter.
(b) Adjustments to net profit: Adjustments to net profits
provided $514,000 of cash, of which, depreciation charges
provided $382,000. In addition, amortization charges
provided net cash of $132,000, of which deferred taxes
provided $90,000.
(c) Trade receivables: Reduction in trade receivables
provided $1,775,000 of cash. In addition to successful
collection techniques, the reduction was afforded by
collections from the large receivable balances at June 1,
1997, which reflected strong sales in the fourth quarter of
fiscal 1997, compared to sales for the third quarter of
fiscal 1998. Further contribution to cash is not
anticipated for the fourth quarter of fiscal 1998 because
of anticipated increases in net sales and the additional
receivables that would be generated from it.
(d) Inventories: Reduction in inventories provided
$410,000 of cash mainly due to greater efficiencies in
procurement timing . Changes in inventories for the
remaining quarter of fiscal 1998 are not anticipated to
result in any further significant reduction in use of cash.
The activities that used $939,000 of cash were:
(a) Trade payables: Reduction in trade liabilities used
$451,000 of cash. The reduction is mainly associated with
payments for raw material purchases and liabilities for
sub-contract manufacturing. These liabilities are
anticipated to increase during the fourth quarter, and
therefore, no further use of cash by trade liabilities is
anticipated for fiscal 1998.
(b) Other current assets: Increases in other current
assets, which are principally deferred expenses, used
$19,000 of cash. These deferred expenses are applicable to
future revenues and will be amortized during the balance
of fiscal 1998
(c) Accrued expenses: Reduction in liabilities for
commissions payable to sales representatives and for
employee vacation time used $364,000 for the six months.
(d) Income tax payments: Payment of actual US income
taxes for fiscal 1997 and ofinstallments for fiscal 1998,
net of accrued taxes for the year used $124,000 of cash.
Additional installment payments are estimated for the
fourth quarter of fiscal 1998.
Investing activities: Investing activities used net cash
of $998,000 for the period. These expenditures were
principally for the purchase of manufacturing, tooling and
engineering equipment for productivity improvements,
manufacturing capacity expansion at the Company's facility
in China and equipment to enhance the quality of management
information services.
Additional expenditures for these purposes for the
remaining quarters of fiscal 1998 are anticipated to be
approximately $250,000.
Financing activities: Financing activities used $111,000 of
cash for the nine months which was comprised of the
following activities:
(a) Net payments on revolving credit agreement: Net
payments by the South Korean subsidiary on revolving credit
agreements used $361,000 of cash for the nine months. See
Credit Facilities above.
(b) Exercise of common stock options by employees:
Receipts from this activity provided $249,000 of cash for
the nine months.
(c) Equipment term loan: Under a note with US Bancorp,
(see Credit Facility above) the Company borrowed $300,000
to support the cost of capital asset procurements, as
discussed above.
(d) Principal payments on long-term borrowings and capital
leases: Payments for these purposes during the nine months
used $299,000 of cash. See Note 8, Long-term Debt, under
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Effect of foreign currency exchange rate fluctuations: The
current economic crisis in South Korea saw a dramatic
devaluation in the Won, the country's currency, late in
the Company's second quarter of fiscal 1998. The Won has
since regained some strength but remains weak relative to
the value of the US dollar The effect of the translation
of the Korean financial statements, which were prepared in
Won, to US dollars resulted in a net asset value decrease
of $1.101,000 of which was $1,071,000 related to long-term
inter-company receivables. See Note 13, under NOTE TO
CONSOLIDATED FINANCIAL STATEMENTS.
Summary:
The Company's cash and working capital positions are sound
and, together with its credit facilities, are adequate for
the support of anticipated growth in revenue and profit
beyond the current fiscal year. Without added use of short-
term bank debt, however, a reduction in current cash would
occur during the remaining three months of fiscal 1998,
since cash flows from operations may be inadequate to
support expenditures for capital assets and growth in
revenues that are anticipated. Any reduction, however, is
not likely to be significant.
Impact of Recent Accounting Standard Changes:
SFAS No. 123: In October, 1995, the FASB issued SFAS No.
123, Accounting for Stock-Based Compensation, which
establishes a fair-value-based method for financial
accounting and reporting for stock-based employee
compensation plans. However, the new standard allows
compensation to continue to be measured using the intrinsic
value-based method of accounting prescribed by Accounting
Principles Board Statement No. 25, Accounting for Stock
Issued to Employees, providing that there are expanded
disclosures. The Company has adopted the disclosure-only
provisions of SFAS No. 123. Accordingly, no compensation
costs have been recognized for stock options. The effect on
net income and per share earnings if compensation costs
were recognized is shown in Note 3, Net Income Per Share,
under NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statement No. 128: The FASB has issued Statement No. 128,
Earnings Per Share, which supersedes APB Opinion No. 15.
Statement No. 128 requires the presentation of earnings per
share by all entities that have common stock or potential
common stock, such as options, warrants, and convertible
securities outstanding that trade in a public market.
Those entities that have only common stock outstanding are
required to present basic earnings per-share amounts. All
other entities are required to present basic and diluted
per-share amounts. Diluted per-share amounts assume the
conversion exercise or issuance of all potential common
stock instruments unless the effect reduces a loss or
increases the income per common share from continuing
operations. The Company has outstanding stock purchase
warrants and stock options to employees and directors, and
therefore, as required, has adopted Statement No 128 for
annual and interim periods effective for its third quarter
which began on December 1, 1997.
Impact of Foreign Operations and Currency changes:
Although products that were manufactured by Ault Korea
Corporation contributed a very significant portion of total
sales, conversion of the Won to US dollars had no
significant impact on revenues for the nine months because
conversion rates were relatively stable for most of the
period. The Company's US operations do not now have and
are not anticipated to have any significant future exposure
to currency risks because most of its foreign contracts are
in US dollars. The greater portions of Ault Korea
Corporation's material requirements are purchased from
countries that have strong, relatively stable currencies.
Because of those strong currencies, cost to the subsidiary
for material contracts may therefore be greater until the
Won regains stable strength. The subsidiary may also
experience certain amounts of currency exchange loss from
material contracts due to fluctuations in the Won rate.
Conversely, it is anticipated that the subsidiary may
experience certain amounts of currency exchange gains from
its high percentage of foreign sales that are contracted at
the stronger foreign currency rates.. The net result is
anticipated to be reflected in lower cost on the Company's
consolidated statements of operations, although its impact
on consolidated costs and profits is not anticipated to be
material.
Microchip-Based Date-Referenced Systems and Year 2000
Compliance:
All of the Company's microchip-based date referenced
systems, including computer software and hardware are
already year 2000 compliant. There are no internal
matters, therefore, that will affect the Company's ability
to process systems date-referenced information when year
2000 arrives. The Company does not yet know of the extent
to which its external business associates are prepared to
conduct business transactions in year 2000. The Company is
communicating with these external sources with the
objective of obtaining their commitment to be Year 2000
compliant by December 31, 1998.
AULT INCORPORATED AND SUBSIDIARY
PART II. OTHER INFORMATION
ITEM 1-5 Not Applicable
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
<TABLE>
<CAPTION>
Reference Title of Document Location
Part 1 Exhibits
<S> <C> <C>
11 Computation of Per Filed herewith at page
Share Earnings 5
27 Financial Data Filed Electronically
Scheduling
(a) None
(b) Reports on Form 8-K There were no reports
on Form 8-K filed for
the quarter ended
March 1, 1998.
</TABLE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange
Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
AULT INCORPORATED
(REGISTRANT)
DATED: 4/15/98 /s/ Frederick M. Green
Frederick M. Green, President
Chief Executive Officer and
Chairman
DATED: 4/15/98 /s/ Carlos S. Montague
Carlos S. Montague, Vice President
Chief Financial Officer and
Controller
AULT INCORPORATED & SUBSIDIARY
COMPUTATION OF CONSOLIDATED EARNINGS PER SHARE
(In Thousands of Dollars, Except Per Share Data)
<TABLE>
<CAPTION>
(Unaudited)
Three Months Nine Months
Ended March 1 Ended March 1,
1998 1998
<S> <C> <C>
Basic EPS Computation:
Net Income to Common Stockholders $283 $879
Common Shares Outstanding:
Beginning of Year 4,075,733 4,075,733
Common Shares From Exercise of
Employee Stock Options
Daily Weighted:
First Quarter 75,200 52,519
Total Weighted Common Shares 4,150,933 4,128,252
Net Income $0.07 $0.21
Diluted EPS Computation:
Net Income to Common Stockholders $283 $879
Total Weighted Common Shares 4,150,933 4,128,252
Dilutive Potential Common Shares,
Daily Weighted, From:
Assumed Conversion of Outstanding
Dilutive:
Employee Stock Options 180,550 257,564
Employee Stock Purchase Plan,
Phase 2 11,605 11,605
192,155 269,169
Less Common Shares Purchasable From
Proceeds:
Employee Stock Options 68,309 109,638
Employee Stock Purchase Plan,
Phase 2 9,650 10,407
77,959 120,045
Adjusted Weighted Average Shares* 4,265,129 4,277,376
Net Income $0.07 $0.21
<FN>
*In fiscal 1998, options totaling 329,000 shares for the
third quarter and 252,186 shares for the nine months and
warrants totaling 112,000 shares were excluded from dilutive
EPS calculations because of their higher exercise prices
compared to the average market values.
</FN>
</TABLE>
AULT INCORPORATED & SUBSIDIARY
COMPUTATION OF CONSOLIDATED EARNINGS PER SHARE
(In Thousands of Dollars, Except Per Share Data)
<TABLE>
<CAPTION>
(Unaudited)
Three Months Nine Months
Ended March 2, Ended March 2,
1997 1997
<S> <C> <C>
Basic EPS Computation:
Net Income to Common Stockholders $620 $1,137
Common Shares Outstanding:
Beginning of Year 2,119,776 2,119,776
Common Shares from Exercise of Employee
Stock Options Daily Weighted:
First Quarter 9,000
Second Quarter 17,000
Third Quarter (4,000 Shares) 1,980 17,572
Public Offering of Common Shares, Daily
Weighted:
Third Quarter (1,600,000 Shares) 1,424,176 474,725
Third Quarter (240,000 Shares) Underwriters'
Over-allotment 163,516 71,209
Total Weighted Common Shares 3,735,448 2,683,282
Net Income $0.17 $0.42
Diluted EPS Computation:
Net Income to Common Stockholders $620 $1,137
Total Weighted Common Shares 3,735,448 2,683,282
Diluted Potential Common Shares, Daily
Weighted, From:
Assumed Conversion of Outstanding Diluted
Employee Stock Options 493,847 448,086
Employee Stock Purchase Plan, Phase 1 13,957 13,957
Warrants 76,308 25,436
584,112 487,479
Less Common Shares Purchasable From Proceeds:
Employee Stock Options 246,327 184,930
Employee Stock Purchase Plan, Phase 1 7,536 6,885
Warrants 71,196 21,683
325,059 213,498
Adjusted Weighted Average Shares 3,994,501 2,957,263
Net Income $0.16 $0.38
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS OF THE
COMPANY'S FORM 10-Q FOR THE THIRD QUARTER ENDED MARCH 1, 1998, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-02-1997
<PERIOD-END> MAR-01-1998
<CASH> 4087
<SECURITIES> 847
<RECEIVABLES> 7086
<ALLOWANCES> 0
<INVENTORY> 6807
<CURRENT-ASSETS> 19629
<PP&E> 10541
<DEPRECIATION> 6248
<TOTAL-ASSETS> 24782
<CURRENT-LIABILITIES> 5052
<BONDS> 0
0
0
<COMMON> 18304
<OTHER-SE> 658
<TOTAL-LIABILITY-AND-EQUITY> 24782
<SALES> 30671
<TOTAL-REVENUES> 30671
<CGS> 22921
<TOTAL-COSTS> 29433
<OTHER-EXPENSES> (142)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 119
<INCOME-PRETAX> 1261
<INCOME-TAX> 382
<INCOME-CONTINUING> 879
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 879
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
</TABLE>
