SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED MAY 30, 1999
Commission File Number 0-12611
AULT INCORPORATED
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0842932
(State or other jurisdiction of (IRS Employer
incorporation or organization Identification Number)
7105 NORTHLAND TERRACE 55428-1028
(formerly of 7300 BOONE AVENUE NORTH) (Zip Code)
MINNEAPOLIS, MINNESOTA
(address of principal executive offices)
Registrant's telephone number, including area code: (612) 493-1900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
(Title of Class)
Indicate by check mark whether the 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 (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation 8-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendments to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant was approximately $23,196,000 based upon the closing
price of the Company's common stock on the NASDAQ National Market on
August 4, 1999, multiplied by the number of outstanding shares of the
Company held by persons other than officers, directors and 10% or more
shareholders referred to in the "Security Ownership of Principal
Shareholders and Management" table referred to under Item 12 herein.
On August 4, 1999, there were outstanding 4,383,787 shares of the
Registrant's common stock.
Documents Incorporated by Reference: The Company's Proxy Statement
for its Annual Meeting of Shareholders to be held on September 30,
1999, is incorporated by reference into Part III of this Form 10-K.
The Form 10-K consists of 87 pages. The Exhibit Index is located on
page 44.
AULT INCORPORATED
FORM 10-K
FOR THE FISCAL YEAR ENDED MAY 30, 1999
PART I
ITEM 1. BUSINESS
(a) General Development of Business
Ault Incorporated (herein "Ault" or "Company") was incorporated under
the laws of the State of Minnesota in 1961. The Company designs,
manufactures, and markets a line of external power conversion products
and is a leading domestic supplier of such products to original
equipment manufacturers (OEMs) of data communications equipment,
telecommunications equipment, portable medical equipment, and
microcomputers and related peripherals. To strengthen its position,
in December 1998, the Company purchased the power supply division of
LZR Electronics, Inc., a small closely-held corporation located in
Gaithersburg, Maryland. For further information see "Management's Discussion
and Analysis of Financial Condition and Results of Operations" under Item 7
herein and Note 1 under Notes to Consolidated Financial Statements under
Item 8 herein.
(b) Financial Information About Industry Segments
The Company operates in only one industry segment - the manufacture
and sale of power conversion devices.
(c) Narrative Description of the Business
Ault's power conversion products are used to adapt alternating current
(AC) to provide a source of power at various levels up to 90 watts for
a wide variety of electronic equipment. Most of the Company's
products are located outside the equipment they power as wall plug-in
or as in-line components and are generally referred to as external
power conversion products. A small portion of the Company's products
are located inside the equipment they power, when this feature is
required by OEM customers, and are generally known as internal power
conversion devices. External power conversion products, in contrast
to more widely used internal power conversion devices, enable
designers of electronic equipment to remove heat and hazardous
voltages from the end product thereby allowing the end product to
function more safely and effectively. Also, by removing the power
conversion feature from inside the end product, the OEM is afforded
greater flexibility in designing and styling. These advantages have
particular application in the Company's target markets where advances
in semiconductor technology have reduced power requirements of many
items of equipment to levels supplied by the Company's products, where
rapid growth and strong competition have resulted in competitive
pressure to bring new products to market quickly, and where there is
increasing emphasis on smaller and portable products that perform
increasingly sophisticated functions. Ault's business strategy is to
offer OEMs in these markets an expanding line of high quality power
conversion products and devices, related design engineering and
flexible customer services.
(1) 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 most 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.
The following table summarizes the proportion of sales of the each
of the Company's four major product categories for its last three
fiscal years ended May 30, 1999:
<TABLE>
<CAPTION>
Sale of Products by Category
as a Percentage of Total Sales
Years Ended
Product Type May 30, 1999 May 31, 1998 June 1, 1997
<S> <C> <C> <C>
Switching Power Supplies 49% 37% 42%
Linear Power Supplies 17 15 16
Transformers 25 40 34
Battery Chargers 9 8 8
Total 100% 100% 100%
</TABLE>
Power Supplies. The Company's power supplies provide the entire
power conversion features 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 alternating current
(AC) to direct current (DC) and, in most cases, maintain voltage
within specific limits.
* Switching Power Supplies. The Company believes, the market for
switching power supplies is the fastest growing segment of the overall
external power conversion product market. Switching power supplies
use switching transistors to convert power from AC to DC and 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 these products 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, multiplexers,
digital cameras and point of sales equipment.
The Company's switching power supply products include a family
of universal input 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"), printer
and fiber optic links. The Company also designs universal input
switching power supplies specifically for medical markets. The
Company believes it offers the widest range of external
switching power supply products currently available for medical
applications.
The company designs and manufactures switching power supplies
principally for external applications but also designs and
manufactures these products for internal power when such action
enhances customer relations.
* High Density Switching Power Supplies. In fiscal 1997, the
Company introduced product families based upon patented high density
power conversion technology. This technology enables the Company to
offer switching power supply products less than one-half the size of
its existing switching power supplies which provide comparable power
output. The Company's high density switching power supplies provide
approximately 45 watts to 90 watts of power. Technologies acquired
from the purchase of LZR Electronics in fiscal 1999 will enable the
Company to offer high density power supplies with considerably higher
power ranges. The Company believes that the addition of these
products will enable it to compete for product applications currently
not served by the Company or its competitors, including routers,
servers and wireless communications that operate on higher power
ranges.
* 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, 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. 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 systems within the product. These products reduce AC
voltage from approximately 110 volts (230 volts in some countries)
down to lower voltage that range from 5 to 60 volts AC. The
Company's product line also includes highly customized transformers
that operate within stringent power output tolerances, features that
are not offered 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.
* 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 medical devices, mobile telecom devices, notebook
computers, global positioning equipment and radio frequency
communications products.
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 time 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.
(2) Markets and Customers
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 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/data communications
equipment, and in fiscal 1999 sales in this market represented
approximately 61% of net sales. The Company's products power cable
and ADSL modems, network termination equipment (devices which
interface between 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,
callers identification units and alpha numeric displays, low to
medium speed PC modems and multiplexers (equipment which enables
the simultaneous transmission of multiple channels of information
over the same telephone line).
The Company believes the telecommunications/data communications
market is growing at a rapid rate and is devoting significant
portions of its product development effort toward introduction of
new product families for applications in this combined market.
In fiscal 1999 approximately 22% of the Company's net sales were
to OEMs of computers and computer peripherals such as digitizers,
printers, plotters, portable terminals, point of sales scanners
and optical character readers, LAN hardware and multimedia
speakers for computer applications.
Approximately 12% of net sales in fiscal 1999 were to OEMs of
portable medical equipment such as infusion pumps, patient
monitoring systems, apnea monitors, and portable terminals for
patient history input diagnostics.
The balance of approximately 5% of the Company's net sales in
fiscal 1999 was to OEMs of various industrial equipment, including
digital cameras and mine safety devices.
(3) 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. In fiscal 1999, the Company increased its
engineering staff to 53 and spent approximately 4.8% of its
revenues on product engineering, compared to an average
expenditure of 4.2% for each of the preceding two years. The
Company also utilizes the significant engineering resources of its
Asian subcontractors for the development of products targeted for
subcontract manufacturing. The Company's product development
activities are divided equally between developing products to
satisfy customer needs and new products based upon anticipated
customer needs and marker 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 in the development of new
external power conversion products.
Reflecting an increased emphasis on new product development during
the past years, the Company developed and introduced 35 new
product families in 1999 and 29 in 1998. Several product families
are currently in various stages of development. Anticipating
continued growth of approximately 30% annually in the switching
power supply segment of the power conversion product market, a
significant portion of the new products under development are
switching power supplies.
(4) 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
addition to Ault's products, several different but complementary
product lines of other manufactures. 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
manufactured 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 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
development processes, coordinating pilot runs and assisting OEMs
with their product introductions. Among the logistics services
provided by the Company are warehousing of finished products for
unscheduled requirements and customs clearance in order to
facilitate just-in-time production schedules.
The Company focuses its selling efforts primarily 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.
The Company's sales in the Pacific Rim are primarily to customers
in South Korea and Australia. In fiscal 1998, the Company
finalized an agreement, with a well-recognized sales
representative organization in Japan which will sell the Company's
product in Japan and most Pacific Rim countries. Certain of the
Company's products have already obtained required MITI (Ministry
of International Trade and Industry) approvals in Japan and
actions are being taken to establish a sales administrative
presence in that country to further strengthen opportunity for
selling in the Japanese market.
The Company currently markets its products in Europe through a
network of distributors, with a total of approximately 15
salespersons, who are managed by an engineer employed by the
Company.
(5) Safety Agency Certification
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 products 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 are distributed through the world. In response to these
customer requirements, the vast majority of the Company's products
are designed and manufactured in accordance with certification
requirements of many safety agencies, including Underwriters
Laboratories Incorporated ("UL") in the United Stares; the
Canadian Standards Association (CSA) in Canada; Technischer
Uberwachungs-Verein `(TUV") in Germany; the British Approval Board
for Telecommunication "(BABT") in the United Kingdom, the
International Electrotechnical Committee ("IEC"), a European
standards organization and (EC) a standard for the European
Community. In addition, some of the Company's products have also
received Japanese MITI approval. For certain safety applications,
the Company's products 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 required to
obtain safety certifications. The Company's Minneapolis and South
Korean facilities are certified to ISO 9001.
(6) Innovative Team Approach
The Company uses a team-based organizational structure consisting
of seven teams. The Company's customer base is divided into six
geographical regions with a specific Ault team assigned to manage
the needs of customers in each region. A seventh team, Ault
Express, manages the requirements of customers who have orders of
certain minimum annual levels. 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 statements 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. In 1996, Ault received recognition for its
innovative approach from the trade publication of the American
Manufacturing Association.
(7) 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 principally on
price. Many of these competitors have a smaller presence in the
external 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 American Electronics Company., Ltd. for linear
power supplies; Portrans Electrical Corp., Ltd. and Phihong
Enterprise Co., Ltd. for switching power supplies; and Engineering
Design Sales, Inc. and Xenotronics Company for battery chargers.
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 design,
manufacture and obtain certifying agency approvals for the full
range of external power conversion devices which OEMs consider in
designing their electronic product.
The Company provides a total solution approach to the OEMs' entire
external power conversion product needs through its commitment to
reliable partnerships and its delivery of high quality products
supported by solution oriented design engineering. In addition,
the presence of Ault Korea and Ault China and the expanding
arrangements with subcontract 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.
(8) Manufacturing and Sources of Supply
The Company's manufacturing operations consist of 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; Seoul, South
Korea; Xianghe, China, and at four locations in China and Thailand
using subcontract manufacturers. Ault typically manufactures
prototypes and low volume products at its facility in Minneapolis,
Minnesota. It is anticipated that by the end of fiscal year 2000,
Ault China will be equipped to manufacture substantially all of
the Company's products.
A number of the components and raw material 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 material 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.
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 of its South Korea facility in 1998. The
Company tests 100% of its finished products against its own and
the customers' specifications, then ships the products in custom
engineered protective packaging to minimize any damage during
shipment.
The Company has subcontract manufacturing arrangements with
business partner in Thailand and two in China. 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.
(9) Significant Customers: Backlog
The Company sells its products to over 200 customers and it is the
Company's objective to maintain a diversified customer base and to
avoid, where practicable, dependence upon a single customer. In
fiscal 1999, one customer accounted for 13.3% of the Company's net
sales.
The Company enters into buying commitments and other scheduling
agreements with certain customers. For its larger 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. Most products are
shipped within 4 to 10 weeks of an order. Order backlog at August
4, 1999 was $13,486,000 as compared to $13,643,000 on August 1,
1998. See Order Backlog, under ITEM 7, MANAGEMENT DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS.
(10) 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.
(11) 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 enabled the Company to offer external
switching power supplies less than one-half the size of current
power supply products but with comparable power outputs.
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 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 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.
(12) Seasonality
As indicated by ITEM 8(b) SUPPLEMENTAL FINANCIAL INFORMATION, net
sales of the Company have reflected a certain degree of
seasonality. The Company's first quarter falls during the summer
months and during the first quarter of fiscal 1998 and fiscal
1999, the Company recorded levels of sales which were generally
lower than sales that were recorded for the succeeding periods.
The Company attributes this seasonality to the buying patterns of
its customers, the timing of industry trade shows where new
products are introduced and to other factors. The Company
believes that similar seasonality trends will be experienced in
the future.
(13) Employees
As of August 4, 1999, the Company employed approximately 438 full-
time employees at its facilities as follows:
<TABLE>
<CAPTION>
South
Korea China Taiwan US Total
<S> <C> <C> <C> <C> <C>
Manufacturing 104 118 51 273
Engineering 14 8 31 53
Marketing 8 8 18 34
General and
Administrative 15 22 1 40 78
Total 141 156 1 140 438
</TABLE>
None of the Company's employees are 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.
(14) Executive Officers of the Registrant
Certain information with respect to the executive officers of the
Company is set forth:
<TABLE>
<CAPTION>
Officer
Name Age Position; Former Employment Since
<S> <C> <S> <C>
Frederick M. 56 President and Chief Executive Officer 1980
Green and Director
Carlos S. 62 Vice President, Treasurer, Chief
Montague Financial Officer (Retiring) and 1981
Assistant Secretary
Richard A. 53 Secretary 1995
Primuth
Hokung Choi 59 Vice President - Far East Operations 1989
Gregory L. 46 Vice President - Marketing 1988
Harris
</TABLE>
(15) Risk Factors
The following risk factors are relevant to an understanding of the
business matters discussed herein
* 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-Design Engineering and
Product Development."
* Fluctuation in Financial Results. The Company's financial results
are subject to fluctuation due to various factors, includintg general
business cycles in the Company's markets, the mix of products sold,
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. Price competition in the
markets 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.
* 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.
Some of these countries are economically troubled areas. 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 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 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.
* 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 Right 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 "Note 7 - Stockholders' Equity under NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
* Year 2000 Interruptions. The Company utilizes several microchip
based date referenced systems for its business operations, including
the timely procurement of material and supporting customer
requirements. Because these business matters are also dependent on
support from external sources, the Company cannot provide any
assurance that its ability to provide service to customers will not be
interrupted by the inability of any supporting microchip-based date
referenced system to timely process data. This situation could have
an adverse material effect on the Company's ability to retain
customers and to generate revenue and profitability.
(d) Financial Information About Foreign and Domestic Operations and
Export Sales
Export Sales by the U.S. Operations in fiscal year 1999 represented
14.3% of the Company's gross sales most of which were to OEMs in
Europe and Canada. All other revenues were derived from domestic
sales principally in the U.S. For other financial information about
foreign and domestic operations and export sales including the amount
of export sales for the last 3 years, refer to Note 9, Segment
Information and Foreign Operations, under NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
ITEM 2. PROPERTIES
The Company's headquarters and US manufacturing facility has been
located in Brooklyn Park, a suburb of Minneapolis, Minnesota in a
leased facility, approximately 50,000 square feet in size. The
Company will relocate to a new facility of approximately 65,000 square
feet, also located in Brooklyn Park, in September 1999.
The Company's only other US property is approximately 6,616 square
feet of leased space in Gaithersburg, Maryland. The lease runs for
five years through June of 2004, and the facility houses principally
the Company's Maryland engineering personnel.
The Company's subsidiary, Ault Korea Corporation, operates in a 36,000
square foot facility in Suwon City in the province of Kyungki-Do,
Korea.
Ault China, a subsidiary of Ault Korea Corporation occupies a 40,000
square foot leased facility in The Province of Xiang-He in China. The
lease expires in the year 2009.
Management considers all of the Company's properties to be well
maintained and current manufacturing arrangements, including
subcontract arrangements in China and Thailand, are believed to be
adequate for manufacturing requirements.
ITEM 3. LEGAL PROCEEDINGS
No material litigation or other claims are presently pending against
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER
MATTERS
(a) Market Information
Ault common shares are traded in the national over-the-counter market
under the symbol AULT. The following table presents the range of
closing bid prices for the Company's common stock on the NASDAQ Market
for fiscal 1999 and 1998. The bid quotations representing prices in
the over-the-counter market between dealers in securities, do not
include retail mark-ups, mark-downs or commissions and do not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 1998
$ $ $ $
Quarter High Low High Low
<C> <C> <C> <C> <C>
1st 6-1/8 3-3/8 10-1/8 7-3/4
2nd 7-3/8 6-3/5 9-1/8 6-1/2
3rd 8-3/8 6-1/5 7-1/8 4-5/8
4th 11-7/8 6-3/4 8-1/4 5-4/5
</TABLE>
(b) Holders
As of August 4, 1999 there were 288 shareholders of record for the
Company's common stock. This number of record stockholders does not
include beneficial owners of common stock whose shares are held of
record by Depository Trust under the name CEDE & Co.
(c) Dividends
Ault has not paid cash dividends on its common shares, and, under
present policy of its Board of Directors to retain any earnings for
use in the business, does not anticipate paying cash dividends on its
common shares in the foreseeable future.
ITEM 6. SELECTED FINANCIAL SUMMARY
<TABLE>
<CAPTION>
YEARS ENDED
MAY 30, MAY 31, JUNE 1, JUNE 2, MAY 28,
1999 1998 1997 1996 1995
(Amounts in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Net Sales $50,938 $41,136 $40,012 $33,774 $27,054
Gross Profit 14,018 10,761 10,523 8,265 $6,327
Operating Expenses 11,427 8,883 7,941 6,699 $5,570
Operating Income 2,592 1,877 2,582 1,566 $757
Income Before Income Taxes 2,848 1,927 2,275 908 $333
Income Taxes (Benefit) 860 609 (90) 25 -
Net Income $1,988 $1,318 $2,365 $883 $333
Net Income Per Share:
Basic $0.47 $0.32 $0.79 $0.42 $0.16
Diluted 0.45 0.31 0.72 0.39 0.16
Total Assets $33,303 $25,417 $26,094 $18,730 $15,429
Property Equipment and
Leasehold
Improvements, Net $6,808 $4,479 $3,568 $2,849 $3,002
Working Capital 16,364 15,304 15,231 3,754 $2,703
Long Term Notes Payable 1,187 414 441 935 $1,221
Stockholders' Equity $23,442 $19,628 $18,936 $5,571 $4,484
</TABLE>
See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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 make 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; delays in new product introductions; higher
than expected expense related to sales and new marketing initiatives;
availability of adequate supplies of raw materials and components and
other risks affecting the Company's target markets generally,
including risks described under Item 1 above.
RESULTS OF OPERATIONS
Net Sales: Net sales were $50,938,000 for fiscal 1999 up 23.8% from
$41,136,000 for fiscal 1998 which were up 2.8% from $40,012,000 in
fiscal 1997. The improvement in fiscal 1999 is primarily due to
strong growth in sales within the telecommunications and data
communications markets where the Company's products are sold to
original equipment manufacturers (OEMs) for use in applications such
as modems, network routers and wide as well as local area network
systems. The Company believes that orders for its products will
continue to increase in fiscal 2000 because of growth in the
telecommunications/data communications, computer and medical markets
served by the Company, and the acquisition in fiscal 1999 of the power
supply business of LZR Electronics, Inc. Significant among the
applications for the Company's products are cable and analog modems,
wireless telephones, scanners, electronic testing instruments and
portable medical products. Cable modems, fastest growing among these
applications, are designed to process data transmitted over cable
lines that also transmit television signals. Dataquest, a nationally
known marketing research organization, forecast cable modem shipments
growing from 500,000 units in 1998 to 2.4 million units by 2002. The
Company believes that, because of its established relationships with
several major manufacturers of cable modems, it is well positioned to
benefit from growth in demand for these products. Many of these
applications are designed to function with the Company's switching
power supplies, one of the highest margin products of the Company.
Orders and sales for the Company's products for portable medical
product applications also grew during fiscal 1999. These products
utilize the Company's switching power supplies and battery chargers
and are traditionally the Company's highest margin application.
Acquisition of LZR: To strengthen its position in the medical product
application market, the Company acquired the assets of the power
supply division of LZR Electronics, a closely held corporation located
in Gaithersburg, Maryland in December 1998. Prior to being acquired
by Ault, LZR had annual revenues of approximately $6.5 million in
calendar 1997 and 1998. LZR's product line is based on a technology
platform which allows the efficient development of customer specific
power supplies for medical markets requiring lower volumes of
production. In addition to complementing the Company's sales for many
high volume applications, many of LZR's products are agency approved
for medical product applications. The Company believes that its
greater sales channels and larger customer base will enable it to
leverage the LZR product line to greater revenue levels.
New Product Development: Service to customers continues as a strong
strategic focus of the Company. To this end, the Company's
engineering activities are directed to developing products for various
customer applications that are anticipated to generate revenue in
fiscal 2000 and later years. In addition to cable modems and portable
medical products, these applications include uninterruptible power
supplies, power supplies for asymmetric digital subscriber line (ADSL)
modems (a competing technology to cable modem), hubs, routers and
switchers for the networking market. All of these factors are the
basis for the Company's belief that the growth realized in its fiscal
1999 sales will continue through fiscal 2000.
Order Backlog: The Company's order backlog at May 30, 1999 totaled
$12,963,000 compared to $15,340,000 at May 31, 1998 and $14,720,000 at
June 1 1997. The order backlog at May 30, 1999 represented sales for
approximately thirteen weeks and reflected the posture of many OEMs to
limit their contractual commitments to the best lead-times of their
suppliers. Order backlog as an indicator of future shipment and raw
material requirements has changed because of the Company's shorter
lead-times available from customers. These changes require the
Company to place greater reliability on its ability to forecast
customer needs and requirements for on-time shipment of products.
Gross Profit: Gross profit increased to $14,018,000 or 27.5% of net
sales for fiscal 1999, $10,761,000 or 26.2% of net sales for 1998 and
$10,523,000 for fiscal 1997 which was 26.3% of net sales. The
improvements are due principally to the greater proportions in the
sales mix of battery chargers, as well as linear and switching power
supplies, which have higher margins as compared to transformer
products. Revenue from shipments of transformers, traditionally a
lower margin product, decreased during fiscal 1999 compared to fiscal
1998.
Operating Expenses: Operating expenses were $11,427,000 or 22.4% of
net sales in fiscal 1999, as compared to $8,883,000 equaling 21.6% of
net sales for fiscal 1998. In fiscal 1997, operating expenses were
$7,940,000 or 19.8% of net sales. The increased expenditures were
incurred principally due to (1) sales commissions paid to sales
representatives on the larger sales in fiscal 1999, (2) integration of
LZR into the Company, and (3) continued support of strategic
initiatives to achieve the following purposes:
1. Strengthen the Company's sales and marketing competitive position
in the US and Asia.
2. Enhance Asian manufacturing supervision.
3. Provide and maintain direct communication links between Ault US
and Ault Korea.
4. Install and maintain programs to upgrade the quality of
management information services.
5. Certify products for sale in broader foreign markets and to
respond more expeditiously to customer requirements.
6. Upgrade logistic support to provide forecasting techniques
necessary to meet product delivery lead-times and to support US
Customs requirements necessitated by increased foreign business
activities.
These higher operating expenses will also affect profitability in the
first quarter of fiscal 2000. It is anticipated that expenditures
relating to these matters will contribute to the generation and
support of future business in fiscal 2000 and beyond. The Company's
objective is to reduce the proportion of operating expenses to future
net sales without jeopardizing future business.
Operating Income: Operating income totaled $2,592,000 for fiscal 1999
and $1,877,000 for fiscal 1998 equaling, respectively, 5.1% and 4.6%
of net sales. Operating income totaled $2,582,000 for fiscal 1997 or
6.5% of net sales. The improvements in operating income for fiscal
1999 are due principally to the greater sales and better gross margin
on the mix of products, as previously discussed. The decrease in
operating income from fiscal 1997 to fiscal 1998 was due primarily to
implementation of strategic initiatives.
Non-Operating Income: Other income of $402,000 for fiscal 1999,
$197,000 for fiscal 1998 and $183,000 for fiscal 1997 represented
principally interest income, currency exchange rate gains on foreign
contracts by the Korean subsidiary and income derived from rented
portions of the Korean manufacturing facility. The Company incurred
interest expenses of $146,000 in fiscal 1999, $148,000 in fiscal 1998
and $490,000 in fiscal 1997 paid principally on bank credit facilities
and long-term borrowings.
Income Tax: The Company had pre-tax income of $2,848,000 in fiscal
1999 and $1,927,000 in fiscal 1998 on which US and Korean income tax
of $860,000 or 30% and $609,000 or 32% were incurred. Pre-tax income
for fiscal 1997 equaled $2,275,000 with a net tax benefit of $90,000
after reinstatement of certain deferred tax assets of $681,000. The
tax rates for fiscal 1999 and fiscal 1998 are below the normal rates
because of the utilization of business credits and of net operating
loss carry forwards by the foreign operations to offset portions of
their accrued taxes.
Net Income: The Company reported net income of $1,988,000 for fiscal
1999, $1,318,000 for fiscal 1998 and $2,365,000 for fiscal 1997.
Per Share Earnings: Diluted per share earnings were $0.45 for fiscal
1999 and $0.31 for fiscal 1998 based on outstanding, diluted weighted,
average shares of 4,414,000 and 4,254,000, respectively for each
period. Diluted per share earnings were $0.72 on outstanding, diluted
weighted, average shares of 3,279,000 for fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
The following table describes the Company's working capital position
at May 30, 1999 and at May 31, 1998:
<TABLE>
<CAPTION>
May 30, May 31,
1999 1998
(000)
<S> <C> <C>
Working capital $16,364 15,303
Cash 3,303 5,935
Trading securities fair value 850 866
Current Assets 24,790 20,364
Current Liabilities 8,426 5,061
Current Ratio 2.94 4.02
Unutilized bank credit facilities 4,073 3,264
Cash provided (used) by operations (1,129) 4,801
</TABLE>
Current Working Capital Position: At May 30, 1999, the Company had
current assets of $24,790,000 and current liabilities of $8,426,000,
resulting in working capital of $16,364,000. To support normal growth
in revenue, capital expenditures and attainment of profit goals, the
Company relies, first, on cash flows from operations and, second, on
its credit facilities.
Cash and Investments: At May 30, 1999, the Company had cash and
trading securities totaling $4,153,000, down from $6,801,000 at May
31, 1998 principally because of cash payments made to acquire the
power supply assets of LZR Electronics, Inc. Cost of the acquisition
to the Company amounted to $4,045,000. The cost includes the
recognition of goodwill (including professional fees incurred by the
Company) amounting to $1,490,000, assets with a total value of
$2,105,000 and an assumption of $450,000 in liabilities. The assets
purchased included inventories valued at $1,863,000, manufacturing
equipment and tooling valued at $193,000, contracts, intellectual
property rights and other operating assets valued at $49,000. The
aggregate payments to LZR amounted to $3,505,000, which consisted of
cash payments of $2,555,000 and delivery of a one year, 8.0%
convertible promissory note for $500,000. The note was convertible at
the option of the holder into 78,865 shares of the Company's common
stock and was converted in the third quarter of fiscal 1999.
Credit Facilities: The Company maintains two credit facilities. Its
primary credit facility is with US Bank and a smaller facility with
Korea Exchange Bank supports the South Korean subsidiary. See Note 3,
under NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
The credit arrangement with US Bank includes:
(a) A revolving credit facility of $4.0 million, secured by Company
assets and expiring on December 1, 1999. At May 30, 1999, borrowings
against it amounted to $729,000.
(b) One or more term loans, each up to $400,000. At May 30, 1999,
borrowings totaling $713,000 were outstanding on three term loans.
(c) One or more notes payable, secured by equipment, land, and
buildings. At May 30, 1999, borrowings totaling $876,000 were
outstanding.
The South Korean credit facility is approximately $1.5 million of
which borrowings at May 30, 1999 totaled $698,000.
The Company also has a short-term advancing term note for up to
$3,200,000 through January 1, 2000. This note is in connection with
construction of the new manufacturing/office facility in Minneapolis.
No advances were outstanding as of May 30, 1999. The Company plans to
obtain long-term financing for the facility during fiscal 2000. See
Note 8, under NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
CASH FLOWS FOR FISCAL 1999
Operations: Operations used $1,129,000 of cash during fiscal 1999 due
principally to the following activities in trade receivables,
inventories, accounts payables and accrued expenses:
(a) Increases in trade receivables mainly due to the increased net
sales in fiscal 1999 used $4,025,000 of cash. Further use of cash
from increased net sales is anticipated in fiscal 2000.
(b) Increases in inventories used $253,000 of cash. The increases are
due principally to requirements of customers that the Company carries
additional stockings of finished products to support their emergency
needs. This is a normal business practice in the power supply market.
No changes that are anticipated over the near term are expected to be
of any significant impact on use of cash.
(c) Increases in accounts payable and accrued expenses provided
$466,000 of cash from liabilities associated with purchases of
material to support customer orders and emergency stockings of
finished products. Further contribution to cash from increased
liabilities for these purposes is anticipated in fiscal Y2K.
Investing Activities: Investing activities used net cash of $4,504,000
relating principally to:
(a) Manufacturing and tooling equipment obtained and goodwill, net of
amortization, recognized from LZR Electronics, Inc. transaction.
(b) Purchases of manufacturing and tooling equipment amounting to
$1,544,000, required to support normal operations.
(c) Purchase of land in South Korea. Acquired at a cost of $445,000,
the land is required to relocate the Korean manufacturing facility which
is being acquired by the Korean Government for public improvement purposes.
Financing Activities: Financing activities provided net cash of
$2,745,000, which were comprised principally of the following
transactions:
(a) Borrowings under the revolving credit facilities provided
$729,000 of cash.
(b) Proceeds from long-term borrowings provided $1,491,000 of cash
including a US Bank equipment term loan, a Korea Government Agency
working capital loan and a Kamco Korea Corporation mortgage loan. The
Kamco Korea Corporation mortgage loan was acquired on the South Korean
property that is intended to be the site for the subsidiary's
manufacturing facility when its current facility is acquired by the
Korean Government, as discussed under Investing Activities.
(c) Payments from notes receivable from the sales of common stock
provided $59,000 and proceeds from the issuance of common stock
provided $636,000. LZR Electronics, Inc. converted portions of the
Company's promissory note that was issued as discussed under Cash and
Investments.
(d) Principal payments on long-term borrowings used $170,000 of cash.
Effect of Foreign Currency Exchange Rate Fluctuations: The economic
downturn in South Korea, which in fiscal 1998 resulted in a dramatic
devaluation of the Won, the country's currency, has improved.
However, compared to its value during the past several years, the Won
remains weak in relation to the value of the US dollar. The effect
of translating the Korean financial statements, which were prepared in
Won, to US dollars, resulted in a net asset value increase of $257,000
during fiscal 1999, which related principally to long-term inter-
company receivables.
Summary: The Company's cash and working capital positions are sound
and, together with its credit facilities, are adequate for the support
of the Company's strategies into fiscal year 2000.
Information about Products and Services: The Company's business
operations are comprised of principally one activity-the design,
manufacture and sale of equipment for converting electric power to a
level used by OEMs principally in computer peripherals, data
communications/telecommunications and medical markets to charge
batteries, and /or power equipment. The Company supports these power
requirements by making available to the OEM products that have various
technical features. These products are managed as one product segment
under the Company's internal organizational structure and the Company
does not consider any financial distinctive measures, including net
profitability and segmentation of assets to be meaningful to
performance assessment.
Information about Revenue by Geography: Distribution of revenue from
the US, from each foreign country that is the source of significant
revenue and from all other foreign countries as a group are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
MAY 30, 1999 MAY 31, 1998
($000)
<S> <C> <C>
US $42,076 $29,871
Canada 1,977 1,283
France 34 3,842
Ireland 2,884 2,316
All Other Foreign Countries 3,967 3,824
Total $50,938 $41,136
</TABLE>
The Company considers a country to be the geographic source of revenue
if it has all contractual obligations to the Company, including
obligation to pay for trade receivable invoices.
IMPACT OF FOREIGN OPERATIONS AND CURRENCY CHANGES
South Korea had a significant fall in the value of its currency during
the third quarter of fiscal 1998, but recovered portions of the early
loss by the end of the fiscal year and showed relative stability
through fiscal 1999. Although products manufactured by the Korean
subsidiary contributed a large portion of total sales, the devalued
Won had no significant impact on the Company's consolidated sales for
the year because the predominant portions of the subsidiary's sales
were made under inter-company contracts with the US operations. Sales
by the subsidiary in its local market are not material in amounts in
contrast to its inter-company sales. The Company's US operations have
no significant exposure to currency risks because the predominant
portions of its foreign contracts are made in US dollars.
AULT ADDRESSES Y2K ISSUE
Y2K (Revised August 17, 1999): The Y2K issue is principally the
result of computer programs that were written and component embedded
logic that were designed using two digits instead of four digits to
define the year segment of a date field. No recognition was given for
the change in date identification after calendar 1999 that would
require a distinction between year 1900 and years after 1999. The
Company's computer equipment, software and hardware with embedded
logic technologies that are time sensitive may recognize a two digit
date field using "00" as the year 1900 instead of 2000. This could
result in a system failure or miscalculations causing disruptions in
business, including among other things, a temporary inability to
process transactions, send invoices or engage in similar normal
business activities.
State of Readiness: The Company is not engaged in the manufacturing of
products that are Y2K sensitive, but it uses Y2K sensitive products of
other manufacturers and relies on services of others such as equipment
suppliers, software providers and suppliers with Y2K sensitive
manufacturing environment. The data shown below describes the
Company's activities and preparedness affecting its suppliers, freight
services, desk-top software, other manufacturing information software
and hardware and electric power support:
US Suppliers: The Company has realigned its network of US suppliers
and is concentrating its efforts to maintain uninterrupted material
support only on suppliers it believes are dealing effectively with the
Y2K issue. Guided by Ault's forecast system and monitored by the
Company, each supplier will carry a minimum of four months of material
enough to cover any potential interruptions during the critical times.
Suppliers are now working from Y2K material forecast data.
Asian Suppliers: Many of our Asian suppliers have been less reliant
on electronic systems, relying to a great extent on manual systems.
Arrangements have been reached where these suppliers are committed to
carry up to eight weeks of supplies through the critical period of
Y2K.
Freight Services: All freight carriers surveyed or visited were
reported as already Y2K compliant.
Desk Top Software:
* Office 95: Users will be upgraded to Office 97 and Excel
spreadsheets troubleshooted, by 8-31-99
* Windows 95 users will be upgraded to NT 4.0, by 8-31-99
* Symix business information software reported as being compliant
will be run in a test environment using a HP 9000 for compliance
proof, by 8-31-99
Other Manufacturing Information & Communications Software: The
following software reported by their manufacturers as compliant. The
Company will conduct test on systems as dated:
* Automatic test equipment for product reliability 8-31-99
* EDI for customer/supplier communications 9-15-99
* Price quotation system. This system was determined not Y2K
compliant. The Company is designing a new system that will be
compliant and ready by 9-09-99
The following systems were documentary certified compliant:
* Lucent Technologies email system
* AT&T telephone system
* Pro-Engineering documentation software
Hardware:
* HP UNIX server was tested compliant.
* About 75% of non-compliant workstations already replaced
* Remaining workstations will be tested and those not compliant
will be replaced by 8-31-99
* HP 10.2 Unix Operating System was reported by the manufacturer to
be of questionable Y2K compliance. The Company will upgrade to HP
version 11.0 and test for compliance by 10-01-99
Electric Power: The Company does not anticipate any interruption to
its US manufacturing due to any non-compliance from the local power
company. Its China facility is already provided with backup generators
and backup generators will be added its Korea facility by October,
1999.
Cost to Address Year 2000 Issues: To date, the Company has not
incurred any significant expenditures in connection with identifying
or evaluating Year 2000 compliance issues and has only used its
internal resources in this effort. The Company presently estimates the
labor costs used on compliance efforts to be approximately $60,000 and
replacement of hardware to be about $50,000. With respect to future
costs, the Company estimates it will spend approximately $50,000 for
remediation, validation and replacement of hardware and software which
the Company presently knows are not compliant and another $25,000 for
future staff time for such remediation. In addition, the Company
estimates that it may spend no more than another $10,000 on
remediation and validation of products and programs which have not yet
been assessed. The Company believes that these estimates are
reasonable and of minimal impact on operations. Capital expenditures
among these costs will be handled in accordance with generally
acceptable accounting principles. All other costs are expensed as
period costs as they are incurred. The Company does not consider that
these period costs will be of any material impact on its operations.
The Company does not anticipate any potential negative financial
impact of Year 2000 compliance issues relating to its business and its
ability to function normally. Any significant business interruption,
however, could have a material, adverse impact on the Company's
financial condition and results of operations.
Risks of Year 2000 Issues: The Company considers any adverse events to
be unlikely and although remote, it recognizes the following
situations as worse case issues that could result from any Year 2000
non-compliance:
1. Customer Litigation. Although the Company believes that its
efforts will ensure that there is no disruptions in the business or
operations of its customers, the possibility exists, though remote,
that some customers may experience problems that may motivate such
customers to commence litigation against the Company for restitution
and damages that they believe may be related to such problems.
2. Disruption of Material Supply. The Company has surveyed its
suppliers with regard to their Y2K readiness and has taken action
towards reasonable assurance that it pool of suppliers will be Y2K
ready. Suppliers will maintain reserves of material through critical
Y2K periods as are indicated by the Company's forecast system.
3. Disruption of the Company's Computer Information System. The
Company has identified all of its hardware and software that will
require compliance. Some have been tested and upgraded or replaced.
Final testing and necessary upgrading are anticipated to complete by
October 1999. The Company considers any disruption of its computer
information system to be unlikely.
4. Disruption of the Company's Computer-based Manufacturing
Supporting System. The company has inventoried all of its vendor
provided computer-based systems, such as its testing and documentation
systems. Although some vendors have provided documentary certification
of compliance, the Company expects to compliance test these equipment
and remedy any defects by September 1999. While no disruptions are
anticipated, the Company believes that if disruptions occur, they will
not be significant and will be dealt with promptly.
5. Disruption of Communication, Utilities and other Externally
Provided Supports. The Company has surveyed its providers of electric
power, telecommunication, banking and other services and does not
anticipate that it will encounter any non-compliance matters that
originate from these service providers.
Contingency Plan: The Company has established contingency plans for
non-disruption of material supply as well as for the continuation of
the supply of electric power to operate its Asian subsidiaries. The
Company does not anticipate that any further contingency provision
will be required.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Approximately 3% of the Company's total assets are invested in trading
securities of various domestic companies. Although the market value
of these investments is subject to fluctuation from time to time,
management does not believe that any risk of loss of the principal
amounts would be material to the Company's profitability or asset
value.
The Company experiences foreign currency gains and losses, which are
reflected in the financial statements, due to the strengthening and
weakening of the U.S. dollar against currencies of the Company's
foreign subsidiaries. The net exchange gain or foreign loss arising
from this was not material in 1999, 1998 and 1997. The Company
anticipates that it will continue to have exchange gains or losses in
the future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
(a) Financial Statements
Index to Consolidated Financial Statements
Page
* Independent Auditor's Report 19
* Consolidated Balance Sheets, May 30, 20
1999 and May 31, 1998.
* Consolidated Statements of Income for
the Years Ended May 30, 1999, May 31, 22
1998, and June 1, 1997.
* Consolidated Statements of
Stockholders' Equity for the Years 23
ended May 30, 1999, May 31, 1998, and
June 1, 1997.
* Consolidated Statements of Cash Flows
for the Years ended May 30, 1999, May 24
31, 1998, and June 1, 1997.
* Notes to Consolidated Financial 26
Statements
(b) Supplemental Financial Information
* Quarterly Financial Data 36
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 30, 1999 and May 31, 1998, and
the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three fiscal years in the period ended
May 30, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility it 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 30, 1999, and May 31,
1998, and the results of their operations and their cash flows for
each of the three fiscal years in the period ended May 30, 1999, in
conformity with generally accepted accounting principles.
McGladrey & Pullen, LLP
Minneapolis, Minnesota
July 9, 1999
AULT INCORPORATED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
May 30, 1999 and May 31, 1998
<TABLE>
<CAPTION>
ASSETS (Note 3) 1999 1998
<S> <C> <C>
Current Assets
Cash and cash Equivalents $3,303,277 $5,934,794
Investment in trading Securities 849,914 866,174
Trade receivables, less
allowance for doubtful Accounts
of $30,000 in 1999; $31,000 in
1998, (Note 10) 10,466,897 6 ,254,920
Inventories (Note 2) 9,050,605 6,616,359
Prepaid and other expenses 701,743 617,921
Deferred taxes (Note 4) 265,000 74,000
Income tax receivable 152,428 -
Total current assets 24,789,864 20,364,168
Other Assets
Other receivable - 199,209
Intangibles, less
amortization of $126,000
in 1999; $39,000 in 1998 1,559,867 142,197
Deferred taxes (Note 4) 105,000 192,000
Other 40,676 40,908
1,705,543 574,314
Property, Equipment and Leasehold
Improvements at Cost (Note 9)
Land 2,116,875 875,699
Building 816,376 812,867
Machinery and equipment 6,423,234 5,969,052
Office furniture and
equipment 929,913 734,299
Data processing
equipment 1,465,077 1,493,463
Leasehold improvements 975,038 977,998
Construction in
progress (Note 8) 814,735 -
13,541,248 10,863,378
Less accumulated depreciation 6,733,372 6,384,546
6,807,876 4,478,832
$33,303,283 $25,417,314
</TABLE>
See Notes to Consolidated Financial Statements.
AULT INCORPORATED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
May 30, 1999 and May 31, 1998
<TABLE>
<CAPTION>
LIABILITIES AND
STOCKHOLDERS' EQUITY 1999 1998
<S> <C> <C>
Current Liabilities
Notes payable to bank (Note 3) $1,427,614 $236,468
Current maturities of
long-term debt 401,910 213,233
Accounts payable 5,557,255 3,426,989
Accrued expenses:
Compensation 416,693 391,670
Commissions 536,105 475,886
Other 85,956 118,810
Income tax payable - 197,554
Total current liabilities 8,425,533 5,060,610
Long-Term Debt, less
current maturities (Note 3) 1,187,364 413,510
Deferred Rent Expense 14,032 70,162
Retirement and Severance
Benefits (Note 1 234,374 244,911
Commitments and
Contingencies (Note 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
10,000,000 shares; issued
and outstanding
4,372,789 shares in 1999;
4,161,758 shares in 1998 19,827,000 18,358,797
Deduct notes receivable
arising from the
sale of common stock (145,000) (203,750)
Accumulated other
comprehensive loss (599.337) (898,127)
Retained earnings 4,359,317 2,371,201
23,441,980 19,628,121
$33,303,283 $25,417,314
</TABLE>
AULT INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended May 30, 1999, May 31, 1998 and June 1, 1997
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net sales (Note 10) $50,938,193 $41,136,232 $40,011,790
Cost of goods sold 36,919,753 30,375,684 29,489,141
Gross profit 14,018,440 10,760,548 10,522,649
Operating expenses:
Marketing 4,375,893 3,707,267 3,306,320
Design engineering 2,425,303 1,788,736 1,582,046
General and administrative 4,625,370 3,387,120 3,052,244
11,426,566 8,883,123 7,940,610
Operating income 2,591,874 1,877,425 2,582,039
Nonoperating income (expense):
Interest expense (146,016) (148,415) (489,931)
Interest income 292,308 299,271 89,845
Other 109,950 (101,563) 93,126
Income before income taxes 2,848,116 1,926,718 2,275,079
Income taxes (benefit) (Note 4) 860,000 609,000 (90,000)
Net income $1,988,116 $1,317,718 $2,365,079
Earnings per share (Note 1):
Basic $0.47 $0.32 $0.79
Diluted 0.45 0.31 0.72
</TABLE>
See Notes to Consolidated Financial Statements
AULT INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended May 30, 1999, May 31, 1998 and June 1, 1997
<TABLE>
<CAPTION>
Notes
Receivable Accumulated
From Sale Retained Other Total
Common Stock of Common Earnings Comprehensive Stockholders'
Shares Amount Stock (Deficit) Income (Loss) Equity
<S> <C> <C> <C> <C> <C> <C>
Balance, June 2, 1996 2,119,776 $6,966,779 $- $(1,311,596) $(83,928) $5,571,255
Comprehensive income:
Net income - - - 2,365,079 - 2,365,079
Net change in foreign
currency translation
adjustment - - - - 114,716 114,716
Total comprehensive
income 2,479,795)
Issuance of 115,957
shares of common
stock in accordance
with stock purchase
plan and stock option
plan (Notes 5 and 6) 115,957 336,717 (230,750) - - 132,967
Sale of company stock
net of offering
expenses of $442,109 1,840,000 10,620,794 - - - 10,620,794
Income tax benefit
from stock options
exercised (Note 4) - 131,000 - - - 131,000
Balance June 1, 1997 4,075,333 18,055,290 (203,750) 1,053,483 30,788 18,935,811
Comprehensive income:
Net income - - - 1,317,718 - 1,317,718
Net change in
foreign currency
translation adjustment - - - - (928,915) (928,915)
Total comprehensive
income 388,803
Issuance of 86,025 shares
of common stock in
accordance with stock
purchase plan and
stock option plan
(Notes 5 and 6) 86,025 303,507 - - - 303,507
Balance, May 31, 1998 4,161,758 18,358,797 (203,750) 2,371,201 (898,127) 19,628,121
Comprehensive income:
Net income - - - 1,988,116 - 1,988,116
Net change in foreign
currency translation
adjustment - - - - 298,790 298,790
Total comprehensive
income 2,286,906
Issuance of 132,166
shares of common
stock in accordance
with stock purchase
plan and stock option
plan (Notes 5 and 6) 132,166 636,203 - - - 636,203
Issuance of 78,895
shares of common
stock in connection
with acquisition
of LZR Electronics,
Inc. (Note 1) 78,865 500,000 - - - 500,000
Repayment of note
receivable from sale
of common stock - - 58,750 - - 58,750
Income tax benefit
from stock options
exercised (Note 4) - 332,000 - - - 332,000
Balance, May 30, 1999 4,372,789 $19,827,000 $(145,000) $4,359,317 $(599,337) $23,441,980
</TABLE>
See Notes To Consolidated Financial Statements.
AULT INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended May 30, 1999, May 31, 1998 and June 1, 1997
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income $1,988,116 $1,317,718 $2,365,079
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation 620,805 528,193 489,950
Amortization 191,576 36,306 3,025
Loss (gain) on disposal of
equipment 1,437 28,830 (4,117)
Deferred taxes 71,198 415,000 (681,000)
Changes in assets and
liabilities, net effect
of acquisition:
(Increase) decrease in:
Trade receivables (4,024,584) 2,640,944 (1,550,600)
Inventories (253,329) 645,568 10,867
Prepaid and other expenses (17,715) 42,479 (200,322)
Trading securities 16,260 (17,475) (848,699)
Increase (decrease) in:
Accounts payable 583,830 (103,926) (981,624)
Accrued expenses (117,863) (500,231) 120,091
Income tax payable (188,830) (232,597) 536,151
Net cash provided by
(used in)
operating activities (1,129,099) 4,800,809 (690,389)
Cash Flows From Investing Activities
Purchase of property and
equipment (1,988,716) (1,467,732) (1,204,925)
Acquisition of LZR
Electronics, Inc. (2,554,509) - -
(Increase) decrease in
intangibles and other assets 39,645 82,739 (163,846)
Net cash used in
investing activities (4,503,580) (1,384,993) (1,368,771)
Cash Flows From Financing Activities
Net borrowings (payments) on
revolving credit agreement 729,133 (519,228) (4,862,124)
Proceeds from long-term
borrowings 1,490,724 300,000 524,140
Proceeds from issuance of
common stock 636,203 303,507 132,967
Payments received from notes
receivable arising from
sale of common stock 58,750 - -
Principal payments on long-
term borrowings (170,246) (313,475) (1,206,650)
Proceeds from sale of common
stock, net of $442,109 of
expenses - - 10,620,794
Net cash provided by
(used in)
financing activities 2,744,564 (229,196) 5,209,127
</TABLE>
(continued)
See Notes to Consolidated Financial Statements.
AULT INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years Ended May 30, 1999, May 31, 1998 and June 1, 1997
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Effect of Foreign Currency
Exchange Rate Changes on Cash 256,598 (928,915) 114,716
Increase (decrease) in cash
and cash equivalents (2,631,517) 2,257,705 3,264,683
Cash and Cash Equivalents
Beginning 5,934,794 3,677,089 412,406
Ending $3,303,277 $5,934,794 $3,677,089
Supplemental Schedule of
Noncash Investing and
Financing Activities
Acquisition of LZR
Electronics, Inc.:
Fair value of assets
purchased:
Inventories $1,863,260 $ - $ -
Prepaid expenses 48,366 - -
Property and equipment 193,298 - -
Goodwill 1,400,000 - -
Total assets purchased 3,504,924 - -
Liabilities assumed
and debt issued:
Accounts payable (421,080) - -
Accrued expenses (29,335) - -
Convertible note payable (500,000) - -
Cash purchase price $2,554,509 $ - $ -
Construction payable
for new facility $734,972 $ - $ -
Supplemental Disclosures
of Cash Flow Information
Cash payments for:
Interest $145,588 $147,149 $534,803
Taxes 971,063 420,370 59,433
</TABLE>
See Notes to Consolidated Financial Statements.
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,
microcomputers 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, its wholly owned
subsidiary, Ault Korea Corporation, and its wholly owned subsidiary,
Ault Xianghe Co. Ltd. (located in China), which commenced operations
in May 1997. 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 Statement of Financial Accounting Standards No. 52.
Acquisition: On December 1, 1998, the Company acquired the power
supply division of LZR Electronics, Inc., a manufacturer, developer,
and seller of power supplies, for approximately $3,050,000. The
purchase method has been used to account for this transaction, with
results of operations included in the financial statements from the
date of acquisition.
Unaudited pro forma results of operations for the years ended May 30,
1999, and May 31, 1998, as though the Company acquired LZR
Electronics, Inc. as of June 2, 1997, are as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Revenues $54,050,000 $47,577,000
Net income 2,018,000 1,285,000
Basic earnings per share 0.48 0.31
Diluted earnings per share 0.46 0.30
</TABLE>
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.
Reclassifications: Certain 1998 and 1997 amounts have been
reclassified to be consistent with the 1999 presentation.
Cash and cash equivalents: 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.
For purposes of reporting cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents. Cash equivalents consist primarily of
short-term commercial paper.
Inventories: Inventories are stated at the lower of cost (first-in,
first-out method) or market.
Investment in trading securities: Trading securities are held for
resale in anticipation of short-term (generally 90 days or less)
fluctuations in market prices. Trading securities, consisting of
preferred stock, are stated at fair value, which approximates cost at
May 30, 1999, and May 31, 1998. Realized and unrealized gains and
losses are included in income, and have been immaterial.
Prepaid and other expenses: Prepaid and other expenses at May 30,
1999, and May 31, 1998, include refundable value-added tax and
refundable custom duties relating to the Korean operations of
approximately $168,000 and $236,000, respectively.
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
(continued)
Intangibles: Intangibles consist primarily of goodwill, which is
being amortized using the straight-line method over its economic
useful life, which has been estimated to be 15 years.
Depreciation: 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 5-15
Data processing Double declining balance
equipment and straight-line 3-5
Leasehold improvements Straight-line Life of lease
</TABLE>
Retirement and severance benefits: Retirement and severance benefits
represents the accrual of compensation expense, net of deposits, for
the Korean operations' employees that is payable upon termination of
employment.
The Company does not fund the retirement and severance benefits
accrued, but rather provides for the estimated accrued liability under
the plans as of the balance sheet date. Under the National Pension
Scheme of Korea, the Company is required to transfer a certain portion
of the retirement allowances of employees to the National Pension
Fund. The amount transferred reduces the retirement and severance
benefit liability recorded in the accompanying financial statements.
Revenue recognition: Revenue from product sales is recognized when
shipped.
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.
Advertising expense: The Company expenses advertising costs as
incurred. Advertising expenses of approximately $229,000, $294,000,
and $106,000 were charged to operations during the years ended May 30,
1999, May 31, 1998, and
June 1, 1997, respectively.
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 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.
Long-lived assets: In accordance with Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of, the Company
reviews its long-lived assets and intangibles related to those assets
periodically to determine potential impairment by comparing the
carrying value of the long-lived assets outstanding with estimated
future cash flows expected to result from the use of the assets,
including cash flows from disposition. Should the sum of the expected
future cash flows be less than the carrying value, the Company would
recognize an impairment loss. An impairment loss would be measured by
comparing the amount by which the carrying value exceeds the fair
value of the long-lived assets and intangibles. To date, management
has determined that no impairment of long-lived assets exists.
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
(continued)
Fair value of financial instruments: The following methods and
assumptions were used to estimate the fair value of certain financial
instruments:
Cash equivalents: The carrying amount approximates fair value.
Investments in trading securities: The fair value of these
investments is based on quoted market prices. 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.
Earning per share: Basic earnings per share is computed by dividing
income available to common shareholders by the weighted-average number
of common shares outstanding during the period. Diluted earnings per
share is computed by dividing income available to common shareholders
by the weighted-average number of common shares outstanding during the
period adjusted by common share equivalents related to stock options
(when dilutive), warrants, and the employee stock purchase plan.
Options to purchase 227,413, 217,435, and 31,250 shares of common
stock were outstanding during the years ended May 30, 1999, May 31,
1998, and June 1, 1997, respectively, but were excluded from the
computation of common stock equivalents because they were anti-
dilutive.
The following table reflects the calculation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
May 30, May 31, June 1, 31, 1,
1999 1998 1997
<S> <C> <C> <C>
Numerator:
Income available to common
shareholders $1,988,116 $1,317,718 $2,365,079
Denominator:
Basic-weighted-average
shares outstanding 4,195,849 4,136,059 3,011,062
Effect of dilutive shares:
Stock options outstanding 218,443 118,113 263,488
Warrants outstanding 173 - 5,159
Diluted-weighted-average
shares outstanding 4,414,465 4,254,172 3,279,709
Basic earnings per share $0.47 $0.32 $0.79
Diluted earnings per share $0.45 $0.31 $0.72
</TABLE>
Comprehensive income: The Financial Accounting Standards Board has
issued Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income. This statement requires reporting items which
are components of other comprehensive income, such as foreign currency
translation adjustments and unrealized gains and losses on certain
investments in debt and equity securities, and is presented in the
statements of stockholders' equity. The adoption of Statement No. 130
had no impact on total stockholders' equity.
The Company initially applied Statement No. 130 for the year ended May
30, 1999. Prior-year financial statements have been reclassified to
conform to the requirements of Statement No. 130.
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
(continued)
Fiscal year: The Company operates on a 52- to 53-week fiscal year.
The fiscal years for the financial statements presented end May 30,
1999, May 31, 1998, and June 1, 1997, all of which contain 52 weeks.
Note 2. Inventories
The components of inventory at May 30, 1999, and May 31, 1998, are as
follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Raw materials $4,958,646 $3,743,940
Work in process 216,341 277,943
Finished goods 3,875,618 2,594,476
$9,050,605 $6,616,359
</TABLE>
Note 3. Financing Arrangement and Long-Term Debt
Financing arrangement: On June 2, 1999, the Company entered into a
new financing agreement which includes a $4,000,000 revolving line-of-
credit agreement through December 1, 1999. Interest on advances is at
the bank's reference rate less one-half percent, 7.75 percent at May
30, 1999. All advances are due on demand and are secured by
substantially all assets of the Company. In addition, the agreement
contains certain reporting and operating covenants, one of which is a
restriction on the payment of any dividends. Advances outstanding on
the revolving line of credit were $729,133 at May 30, 1999. Also, the
Company's Korean subsidiary maintains a facility agreement to cover
bank overdrafts, short-term financing, and export financing. Advances
outstanding relating to the Korean facility were $698,481 and $236,468
at May 30, 1999, and May 31, 1998, respectively.
<TABLE>
<CAPTION>
Long-term debt:
May 30, 1999 May 31, 1998
<S> <C> <C>
7.97% term loan, due in monthly
installments of $7,320, including
interest to November 2001, secured
by equipment $198,501 $267,502
8.0% term loan, due in monthly
installments of $7,340, including
interest to February 2001,
secured by equipment 143,221 215,665
7.2% term loan, due in monthly
installments of $7,978, including
interest to December 2003,
secured by equipment 371,199 -
7.5% note payable, quarterly
interest payments until August 1999,
thereafter due in quarterly
principal installments of $46,588,
plus interest, through November 2001,
secured by Korean Government-funded agency 372,702 -
7.5% note payable, quarterly
interest payments until April 2000,
thereafter due in quarterly
principal installments of $52,464
plus interest, through April 2002,
secured by Korean
Government-funded agency 419,709 -
8.0% note payable, due in quarterly
installments of $20,985 plus interest,
through April 2000, secured by land,
buildings, and Korean
Government-funded agency 83,942 -
6.5% note payable - 143,576
Total 1,589,274 626,743
Less current maturities 410,910 213,233
$1,187,364 $413,510
</TABLE>
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Financing Arrangement and Long-Term Debt (continued)
Approximate maturities of long-term debt for years subsequent to May
30, 1999, are as follows:
<TABLE>
<C> <C>
2000 $402,000
2001 618,000
2002 428,000
2003 88,000
2004 53,000
$1,589,000
</TABLE>
Note 4. Income Taxes
Pretax income (loss) for domestic and foreign operations was as
follows:
<TABLE>
<CAPTION>
May 30, May 31, June 1,
1999 1998 1997
<S> <C> <C> <C>
Domestic $2,729,229 $1,516,396 $2,394,204
Foreign 118,887 410,322 (119,125)
Total $2,848,116 $1,926,718 $2,275,079
</TABLE>
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
May 30, May 31, June 1,
1999 1998 1997
<S> <C> <C> <C>
Current:
Domestic (a) $699,000 $129,000 $543,000
Foreign 10,000 21,000 -
State 74,000 44,000 48,000
Deferred 77,000 415,000 (681,000)
$860,000 $609,000 $(90,000)
</TABLE>
<TABLE>
<CAPTION>
May 30, May 31, June 1,
1999 1998 1997
<S> <C> <C> <C>
Domestic tax expense before
application of tax credits and
net operating loss and
tax credit carryforwards $903,000 $346,000 $811,000
Federal net operating loss - - (65,000)
Tax credits (204,000) (217,000) (203,000)
Domestic tax expense $699,000 $129,000 $543,000
</TABLE>
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Income Taxes (continued)
The income tax provision differs from the amount of income tax
determined by applying the U.S. federal income tax rate to pretax
income for the years ended May 30, 1999, May 31, 1998, and June 1,
1997, due to the following:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Computed expected tax
provision (benefit) $968,000 $655,000 $774,000
Increase (decrease) in income
taxes resulting from:
Nondeductible expenses 8,000 9,000 28,000
State income taxes, net
of federal benefit 67,000 39,000 82,000
Foreign taxes at higher
(lower) rates (30,000) (66,000) 12,000
Utilization of net operating loss
and tax credit carryforwards - - (303,000)
Current year R&D tax credits:
Domestic (80,000) - -
State (79,000) - -
Reduction in valuation allowance - (28,000) (711,000)
Nonutilization of foreign tax benefit - - 28,000
Other 6,000 - -
$860,000 $609,000 $(90,000)
</TABLE>
Net deferred taxes consist of the following components as of May 30,
1999 and May 31, 1998:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Deferred tax assets:
Tax credit carryforwards $49,000 $124,000
Allowance for doubtful accounts 12,000 13,000
Future income tax benefit from
stock options exercised 181,000 -
Accrued vacation 42,000 28,000
Accrued warranty 30,000 33,000
Equipment and leasehold improvements 56,000 68,000
$370,000 $266,000
</TABLE>
The components giving rise to the net deferred tax asset described
above have been included in the accompanying consolidated balance
sheet as of May 30, 1999, as follows:
<TABLE>
<S> <C>
Current assets $265,000
Noncurrent assets 105,000
</TABLE>
At June 1, 1997, the Company reduced the valuation allowance to
reflect the deferred tax assets utilized in 1997 to reduce current
income taxes and to recognize net deferred tax assets of $681,000 at
June 1, 1997. The recognized deferred tax assets results from the
expected utilization of net operating losses and tax credit
carryforwards and reversal of certain temporary differences.
The Company has assessed its past earnings history and trends,
budgeted sales, and expiration of dates of carryforwards and has
determined that it is more likely than not that the $370,000 of
deferred tax assets at May 30, 1999, will be realized.
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Income Taxes (continued)
At May 30, 1999, the Company had research and development tax credit
carryforwards of approximately $49,000 available to reduce future
income taxes in Minnesota for income tax purposes. These credits
expire in varying amounts as follows:
<TABLE>
<C> <C>
2009 $9,000
2010 14,000
2011 1,000
2014 25,000
$49,000
</TABLE>
Note 5. Employee Benefit Plans
Profit sharing plan: The Company has a profit sharing plan covering
substantially all U.S. employees. The Company is required to match 25
percent of the employees' first 6 percent of contributions and may
make additional contributions to the plan to the extent authorized by
the Board of Directors. The contribution amounts charged to operating
expenses in the years ended May 30, 1999, May 31, 1998, and June 1,
1997, approximated $45,000, $39,000, and $37,000, 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 from the
commencement date of a phase. There were 11,766, 10,825, and 13,957
shares purchased under this plan during the years ended May 30, 1999,
May 31, 1998, and June 1, 1997, respectively.
Note 6. Stock Option Plan
The Company's 1986 and 1996 stock option plan has reserved 600,000 and
500,000 common shares, respectively, for issuance under qualified and
nonqualified stock options for its key employees and directors.
Option prices are the market value of the stock at the time the option
was granted. Options become exercisable as determined at the date of
grant by a committee of the Board of Directors. Options expire ten
years after the date of grant unless an earlier expiration date is set
at the time of grant.
The Company 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 stock option plan. Had compensation cost for the Company's
stock option plans been determined based on the fair value at the
grant date for awards in 1999, 1998, and 1997 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>
1999 1998 1997
<S> <C> <C> <C>
Net income, as reported $1,988,116 $1,317,718 $2,365,079
Net income, pro forma 1,305,841 700,698 1,969,063
Net income per share,
basic, as reported 0.47 0.32 0.79
Net income per share,
diluted, as reported 0.45 0.31 0.72
Net income per share,
basic, pro forma 0.31 0.17 0.65
Net income per share,
diluted, pro forma 0.29 0.17 0.60
</TABLE>
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Stock Option Plan (continued)
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 in 1999, 1998, and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Expected dividend yield $ - $ - $ -
Expected stock price volatility 71.51% 63.14% 67.68%
Risk-free interest rate 5.24% 6.04% 6.18%
Expected life of options 4 years 4 years 5 years
</TABLE>
The pro forma effect on net income in 1999, 1998, and 1997 is not
representative of the pro forma effect in future years because it does
not take into consideration pro forma compensation expense related to
grants made prior to 1996.
Additional information relating to all outstanding options as of May
30, 1999, May 31, 1998, and June 1, 1997, is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year 512,550 $5.86 426,750 $4.44 345,250 $2.37
Options exercised (120,400) 4.79 (75,200) 3.30 (102,000) 2.68
Options expired (18,000) 8.50 (2,500) 7.75 - -
Options granted 301,100 3.98 163,500 8.43 183,500 7.35
Options outstanding
at end of year 675,250 $5.14 512,550 $5.86 426,750 $4.44
Options exercisable
at end of year 352,300 $5.02 283,175 $4.65 204,750 $3.16
Weighted-average
fair value of options
granted during
the year $3.14 $4.66 $4.34
</TABLE>
The following table summarizes information about stock options
outstanding at May 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted-
Number Average Weighted- Number Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise at May 30, Contractual Exercise at May 30, Exercise
Prices 1999 Life (Years) Price 1999 Price
<C> <C> <C> <C> <C> <C>
$1.19-$1.63 29,000 5.0 $1.20 29,000 $1.20
2.13- 2.75 91,000 5.2 2.37 91,000 2.37
3.25- 3.875 270,250 8.8 3.77 60,925 3.72
5.06- 6.53 71,000 7.4 6.28 55,375 6.24
7.75- 8.625 214,000 7.6 8.20 116,000 8.14
$1.19-$8.625 675,250 7.7 $5.14 352,300 $5.02
</TABLE>
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 of
Incorporation provide that the preferred shares are senior to the
common shares with respect to dividends and liquidation. No preferred
shares have been issued.
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Stockholders' Equity (continued)
The Company has 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 $0.001 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. 100,000 shares of preferred stock are reserved for
the exercise of the rights. No rights were exercised during the years
ended May 30, 1999, May 31, 1998, and June 1, 1997.
The Company has notes receivable from certain officers of the Company
arising from the sale of common stock recorded as an offset to
stockholders' equity. The notes are due in September 2001.
In December 1996, the Company completed a secondary stock offering of
1,840,000 shares of common stock. In connection with this offering,
warrants to purchase 112,000 shares of common stock were issued.
These warrants are exercisable at $7.80 per share through December
2001.
Note 8. Commitments and Contingencies
Operating leases: The Company leases its United States plant under an
operating lease through August 1999. In addition, certain equipment
and motor vehicles are leased under operating leases with terms of
approximately 36 months.
Approximate minimum annual rental commitments at May 30, 1999, are as
follows:
<TABLE>
<C> <C>
2000 $225,000
2001 138,000
2002 126,000
2003 128,000
2004 84,000
$701,000
</TABLE>
Total rental expense for the years ended May 30, 1999, May 31, 1998,
and June 1, 1997, was approximately $511,000, $391,000, and $456,000,
respectively.
Long-term financing: In connection with the construction of the new
manufacturing/office facility, the Company obtained a short-term
advancing term note up to $3,200,000 through January 1, 2000. No
advances were outstanding on this term note as of May 30, 1999. Total
costs to construct this facility are estimated at $5,000,000. The
Company plans to obtain long-term financing for this facility during
fiscal 2000.
Note 9. Segment Information and Foreign Operations
The Financial Accounting Standards Board has issued Statement No. 131,
Disclosures About Segments of an Enterprise and Related Information.
This statement requires disclosure of certain information for each
reportable segment, including general information, profit and loss
information, segment assets, etc. The Company initially applied
Statement No. 131 for the year ended May 30, 1999.
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Segment Information and Foreign Operations (continued)
The Company conducts its business within one reportable segment: the
power conversion product industry. Foreign manufacturing is done by
the Korean subsidiary, including its wholly owned subsidiary located
in China, and certain nonaffiliated companies in China and Thailand.
All United States manufacturing is done by Ault Incorporated. A
summary of the Company's revenues, net income, and identifiable assets
by geographic area is presented below:
<TABLE>
<CAPTION>
May 30, May 31, June 1,
1999 1998 1997
<S> <C> <C> <C>
Revenues:
Domestic operations $49,366,148 $39,849,215 $39,022,322
Korean and Chinese
operations-customers 1,572,045 1,287,017 989,468
Korean and Chinese
operations-parent 8,310,867 9,056,631 7,965,817
Eliminations (8,310,867) (9,056,631) (7,965,817)
Consolidated $50,938,193 $41,136,232 $40,011,790
Net income (loss):
Domestic operations $1,879,164 $964,396 $2,473,815
Korean and Chinese
operations 44,812 419,261 (165,190)
Eliminations 64,140 (65,939) 56,454
Consolidated $1,988,116 $1,317,718 $2,365,079
Identifiable assets:
Domestic operations $31,287,114 $24,381,633 $24,231,186
Korean and Chinese
operations 8,770,190 7,108,449 7,435,977
Eliminations (6,754,021) (6,072,768) (5,572,702)
Consolidated $33,303,283 $25,417,314 $26,094,461
</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
14.3, 27.1, and 20.4 percent of total sales for the years ended May
30, 1999, May 31, 1998, and June 1, 1997, respectively.
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. Total purchases under these agreements were
approximately $20,525,000, $15,340,000, and $15,248,000 for the years
ended May 30, 1999, May 31, 1998, and June 1, 1997, respectively.
Note 10. Major Customer
The Company had a major customer during the years ended May 30, 1999,
May 31, 1998, and June 1, 1997, as follows:
<TABLE>
<CAPTION>
For the Years Ended
May 30, May 31, June 1,
1999 1998 1997
<S> <C> <C> <C>
Customer A:
Sales percentage 13.3% 2.3% 3.3%
Accounts receivable percentage 9.2% 8.3% 5.3%
</TABLE>
ITEM 8 (b) SUPPLEMENTAL FINANCIAL INFORMATION
QUARTERLY FINANCIAL DATA
(Unaudited)
(Amounts in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
FISCAL
QUARTERS
1ST 2ND 3RD 4TH
(Unaudited)
<S> <C> <C> <C> <C>
1999
Net Sales (Note 10) $11,337 $11,046 $13,965 $14,590
Gross Profit 3,062 3,051 3,806 4,099
Income Before Income Taxes 718 656 942 532
Net Income 475 463 606 444
Earnings Per Share (Note 1)
Basic $0.11 $0.11 $0.14 $0.10
Diluted 0.11 0.11 0.14 0.10
1998
Net Sales $9,423 $10,954 $10,294 $10,465
Gross Profit 2,208 2,868 2,673 3,010
Income Before Income Taxes 146 753 361 666
Net Income 87 509 282 439
Net Income Per Share:
Basic $0.02 $0.12 $0.07 $0.11
Diluted 0.02 0.12 0.07 0.10
</TABLE>
See NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not Applicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information called for by Item 405 under Registration S-K with respect
to the Company's executive officers is contained under Item 1,
Narrative Description of The Business -- Executive Officers of the
Registrant. The information required by this item with respect to
directors will be presented under the caption "Election of Directors"
in the Company's definitive proxy statement for its Annual Meeting to
be held on September 30, 1999 and is expressly incorporated herein by
reference. Such proxy statement will be filed with the Securities and
Exchange Commission not later than 120 days from the end of the
Company's 1999 fiscal year.
Information called for by item 405 under Regulation S-K with respect
to the information relating to compliance with 16(a) of the Exchange
Act is presented under the caption "Compliance with Section 16(a) of
the Securities Exchange Act 1934" in the Company's definitive proxy
statement for its Annual Meeting to be held on September 30, 1999 and
is expressly incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 403 under Regulation S-K, to the
extent applicable, will be set forth under the caption "Executive
Compensation and Other Information" under "General" in the Company's
definitive proxy materials for its September 30, 1999 Annual Meeting
to be filed within 120 days from the end of the Company's fiscal 1999
which information is expressly incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information called for by Item 403 under Regulation S-K, to the
extent applicable, will be set forth under the caption "Security
Ownership of Principal Shareholders and Management" in the Company's
definitive proxy statement for its September 30, 1999 Annual Meeting
to be filed within 120 days from the end of the Company's fiscal year
1999, which information is expressly incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not Applicable.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT, SCHEDULES AND REPORTS
(a)(1) The following financial statements are included in Part II, Item 8:
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditor's Report 19
Consolidated Financial Statements
--Balance Sheets, May 30, 1999 and May 31, 1998 20
--Consolidated Statements of Income for the Years
Ended May 30, 1999, May 31, 1998 and June 1, 1997 22
--Consolidated Statements of Stockholders' Equity
for the Years Ended May 30, 1999, May 31, 1998
and June 1, 1997 23
--Consolidated Statements of Cash Flows for the
Years Ended May 30, 1999, May 31, 1998 and
June 1, 1997 24
--Notes to Consolidated Financial Statements 26
(2) The following financial statements schedule for the years
ended May 30, 1999, May 31, 1998 and June 1, 1997 are
submitted herein following the signature page of this report.
--Independent Auditor's Report on the Supplementary
Information Schedule 41
--Schedule II - Valuation and Qualifying Accounts 42
</TABLE>
All other Schedules are omitted because they are not applicable or the
required information is shown in the financial statements of notes
thereto.
(3) Exhibits
The Exhibits required to be filed with this report or incorporated by
reference are listed in the Exhibit Index, which follows the Financial
Statements Schedules.
(b) Reports on Form 8-K during 3 months ended May 30, 1999 - None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Ault Incorporated has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AULT INCORPORATED
/s/ Frederick M. Green August 20, 1999
Frederick M. Green
President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant
in the capacities and on the dates indicated.
Power of Attorney
Each person whose signature appears below constitutes and appoints FREDERICK
M. GREEN and CARLOS S. MONTAGUE as his true and lawful attorneys-in-fact and
agents, each acting alone, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign
any or all amendments to this Annual Report on Form 10-K and to file the same,
with all exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, each acting alone, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all said attorneys-in-fact and agents,
each acting along, or his substitute or substitutes, may lawfully do or
cause to be done by virtue thereof.
<TABLE>
<CAPTION>
Signature Title Date
<C> <C> <C> <C> <C>
/s/Frederick M. Green President, Chief August 25, 1999
Frederick M. Green Executive Officer and
Director
/s/Carlos S. Montague Vice President, August 25, 1999
Treasurer, Chief
Financial Officer,
Assistant Secretary and
Controller*
/s/Matthew A. Sutton Director August 25, 1999
Matthew A. Sutton
/s/Frank L. Sims Director August 25, 1999
Frank L. Sims
/s/Delbert W. Johnson Director August 25, 1999
Delbert W. Johnson
/s/John G. Kassakian Director August 25, 1999
John G. Kassakian
/s/David P. Larkin Director August 25, 1999
David P. Larkin
/s/James M. Duddleston Director August 25, 1999
James M. Duddleston
</TABLE>
*Principal Financial Officer and Principal Accounting Officer
****************************************************************************
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF
AULT INCORPORATED
FOR
YEAR ENDED MAY 30, 1999
*****************************************************************************
FINANCIAL STATEMENT SCHEDULES
*****************************************************************************
INDEPENDENT AUDITOR'S REPORT
ON THE SUPPLEMENTARY INFORMATION
To the Board of Directors
Ault Incorporated and Subsidiary
Minneapolis, Minnesota
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The consolidated
supplemental schedule II is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not a part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in our audits of the basic consolidated
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic consolidated financial statements taken
as a whole.
McGladrey & Pullen, LLP
Minneapolis, Minnesota
July 9, 1999
AULT INCORPORATED AND SUBSIDIARY SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Years Ended May 30, 1999, May 31, 1998 and June 1, 1997
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Costs and End of
of Period Expenses Deductions Period
<S> <C> <C> <C> <C>
Year ended May 30, 1999:
Allowance for doubtful accounts $31,000 $47,000 $48,000 (a) $30,000
Reserve for warranties 83,000 32,000 41,000 74,000
Year ended May 31, 1998:
Allowance for doubtful accounts 120,000 95,000 184,000 (a) 31,000
Reserve for warranties 81,000 97,000 95,000 83,000
Year ended June 1, 1997:
Allowance for doubtful accounts 116,000 50,000 46,000 (a) 120,000
Reserve for warranties 77,000 72,000 68,000 81,000
<FN>
(a) Represents charge-off of accounts receivable, net of recoveries.
</TABLE>
*****************************************************************************
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
OF
AULT INCORPORATED
FOR
YEAR ENDED MAY 30, 1999
******************************************************************************
EXHIBITS
******************************************************************************
AULT INCORPORATED
EXHIBIT INDEX TO
FORM 10-K FOR THE YEAR ENDED
May 30, 1999
Required Registration S-K
Exhibit Items
SK Reference
<TABLE>
<CAPTION>
Title of Documents Location
<S> <C> <C>
3(a) Restated Articles of Filed as Exhibit 3(a) to Form 10-K for
Incorporation, as amended fiscal 1988 and incorporated herein by
reference
3(b) Bylaws, as amended Filed as Exhibit 3(b) to Registration
Statement No. 2-85224 and incorporated
herein by reference
3(c) Amendment to Articles Filed herewith as Exhibit 3(c)
of Incorporation
4.1 Rights Agreement Filed electronically on Form 8-K for
March 1996 and herein incorporated by
reference
10.1 Management Incentive Filed as Exhibit 10(b) to Registration
Compensation Plan Statement 2-85224 and incorporated
herein by reference
10.2 1986 Employee Stock Filed as Exhibit 10(c) to Form 10-K for
Option Plan fiscal 1987 and incorporated herein
by reference
10.3 Ten Year Building Lease Filed as Exhibit 10(c) to Form 10-L for
Contract fiscal 1987 and incorporated herein
by reference
10.4 Financing Agreement on Filed as Exhibit 10(f) to Form 10-K for
Credit Facility fiscal 1995 and incorporated herein
by reference
10.5 First and Second Filed electronically as Exhibit 10(g) to
Amendments to Financing Form 10-K for fiscal 1996 and herein
Agreement on Credit incorporated by reference
Facility
10.6 Employee Stock Purchase Filed electronically Commission File
Plan #333-4609 and herein incorporated by
reference
10.7 Amended and Restated Filed herewith as Exhibit 10(h)
Letter Loan Agreement
(Replaced former 10.7)
10.8 1986 Employee stock Filed electronically. Commission File
Option plan, Amended #333-4609 and herein incorporated by
reference
10.9 1996 Employee stock Filed electronically. Commission File
Option plan #333-4609 and herein incorporated by
reference
10.10 Cost Plus Construction Filed herewith as Exhibit 10(i)
Contract
11 Computation of Per Share Filed herewith at page 45
Earnings
21 Subsidiary of Registrant Filed as Exhibit 21 to Form 10-K for
fiscal 1997 and incorporated herein
by reference
23 Consent of Independent Filed herewith at page 87
Auditors
27 Financial Data Schedule Filed electronically
</TABLE>
Pursuant to provisions of Item 601(b)(A)(iii)(a) of Regulation S-K, copies of
instruments defining the rights of holders of long-term debt of the Company
are not being filed and in lieu thereof, Company agrees to furnish copies
thereof to the Securities and Exchange Commission upon request.
EXHIBIT 3(c)
MINNESOTA SECRETARY OF STATE
AMENDMENT OF ARTICLES OF INCORPORATION
READ INSTRUCTIONS LISTED BELOW, BEFORE COMPLETING THIS FORM.
1. Type or print in black ink.
2. There is a $35.00 fee payable to the Secretary of State for
filing this "Amendment of Articles of Incorporation".
3. Return Completed Amendment Form and Fee to the address
listed on the bottom of the form.
CORPORATE NAME: (List the name of the company prior to any
desired name change)
AULT INCORPORATED
This amendment is effective on the day it is filed with the
Secretary of State, unless you indicate another date, no later
than 30 days after filing with the Secretary of State.
The following amendment(s) to articles regulating the above
corporation were adopted: (Insert full test of newly amended
article(s) indicating which article(s) is (are) being amended or
added.) If the full text of the amendment will not fit in the
space provided, attach additional numbered pages. (Total number
of pages including this form 1.)
ARTICLE THREE
The first sentence of Section 1. Authorized Shares under Article
Three-Capital Stock of the Restated Articles of Incorporation of
Ault Incorporated has been amended to read as follows:
Section 1. Authorized Shares. The aggregate number of
shares of stock which this corporation shall have the authority
to issue is Eleven Million (11,000,000) shares divided into Ten
Million (10,000,000) common shares and One Million (1,000,000)
Preferred Shares."
This amendment has been approved pursuant to Minnesota Statues
chapter 302A or 317A. I certify that I am authorized to execute
this amendment and I further certify that I understand that by
signing this amendment, I am subject to the penalties of perjury
as set forth in section 609.48 as if I had signed this amendment
under oath.
/s/ Richard Primuth
Number and telephone number of contact person: Richard A.
Primuth (612) 371-3260
All of the information of this form is public and required in
order to process this filing. Failure to provide the requested
information will prevent the Office from approving or further
processing this filing.
If you have any questions please contact the Secretary of State's
office at (651) 296-2803.
RETURN TO: Secretary of State
180 State Office Bldg., 100 Constitution Ave.
St. Paul, MN 55155-1299, (651) 296-2803
EXHIBIT 10(h)
AMENDED AND RESTATED LETTER LOAN AGREEMENT
June 2, 1999
Ault Incorporated
7300 Boone Ave. N.
Minneapolis, MN 55428
Attn: Frederick M. Green
RE: $4,000,000 Line of Credit and $3,200,000 Advancing Term
Loan
Dear Mr. Green:
Reference is made to that certain Letter Loan Agreement
dated February 25, 1997 between Ault Incorporated, a Minnesota
corporation (the "Borrower") and U.S. Bank National Association
(the "Lender") as amended by a First Amendment to Letter Loan
Agreement, a Second Amendment to Letter Loan Agreement and a
Third Amendment to Letter Loan Agreement (said Agreement with all
amendments, collectively, the "Prior Agreement"). This Amended
and Restated Letter Loan Agreement (the "Agreement") is issued in
replacement and substitution of the Prior Agreement. All amounts
outstanding under the revolving line of credit, if any, under the
Prior Agreement as of the date hereof, shall be deemed Revolving
Advances (as defined below) under this Agreement. The Lender
agrees to make (i) revolving advances ("Revolving Advances") to
the Borrower, in an aggregate amount outstanding from time to
time of up to the lesser of $4,000,000 or the Borrowing Base
(defined below), from now until December 1, 1999 under a
promissory note dated the date of this Agreement (as the same may
hereafter be amended, restated, extended, renewed or otherwise
modified from time to time, the "Revolving Note"), and (ii) an
advancing term loan (the "Advancing Term Loan") available in
multiple term loan advances ("Term Loan Advances") from the date
hereof through January 1, 2000, in an aggregate amount
outstanding not to exceed the lesser of $3,200,000 or 80% of the
appraised value of the "Project" (defined below). The Advancing
Term Loan shall be evidenced by the Advancing Term Note dated the
date of this Agreement (as the same may hereafter be amended,
restated, extended, renewed or otherwise modified from time to
time, the "Advancing Term Note") (the Revolving Note and the
Advancing Term Note herein, with any other Note covered by this
Agreement, collectively called the "Notes"). Revolving Advances
and Term Loan Advances will be made upon the following terms and
conditions:
1. (a) The Term Loan Advances and Revolving Advances. The
Lender does not have to make any Revolving Advances or Term
Loan Advances until the conditions of paragraph 7 have been
satisfied. The proceeds of the Revolving Advances will be
the used by the Borrower for its general business purposes.
The proceeds of the Term Loan Advances will be used to
finance construction of a new building on the Borrower's
property located at the northeast corner of U.S. Highway 169
and Interstate 694, Northland Industrial Park, Brooklyn
Park, Minnesota (the "Project").
(b) Revolving Advances. The unpaid principal balance of
Revolving Advances outstanding at any time shall never
exceed the lesser of (a) $4,000,000, or (b) the Borrowing
Base (as defined below). The Lender does not have to make
any Revolving Advance if an Event of Default (as defined
below) has occurred, if the Lender has terminated its
commitment or such commitment has been automatically
terminated under this Agreement pursuant to paragraph 13
below or if any of the representations and warranties in
this Agreement would not be true if made on the date of that
Revolving Advance. The Borrower may prepay all or a portion
of the Revolving Note at any time, without premium or
penalty except as the Revolving Note may otherwise provide.
Amounts prepaid on the Revolving Note may be reborrowed,
within the limitations specified above.
(c) Nonuse fee. The Borrower will pay to the Lender a
nonuse fee equal to one quarter of one percent of the
amounts by which $4,000,000 exceeds the daily outstanding
principal balance of the Revolving Advances from the date
hereof until the maturity date of the Revolving Note. Such
nonuse fee shall be payable on a semi annual basis on June 1
and December 1 of each year and on the maturity date of the
Revolving Note.
(d) Interest. The outstanding principal balance of the
Revolving Note and the Advancing Term Note shall bear
interest at a variable annual rate equal to the Lender's
reference rate minus one-half of one percent per annum. The
reference rate is the rate publicly announced by the Lender
from time to time as its reference rate. The Lender may
lend to its customers at rates that are at, above or below
the reference rate. Any change in the interest rate shall
take effect as and when the reference rate changes.
Interest shall be determined on the basis of actual days
elapsed and a year of 360 days. Interest shall be due and
payable, in arrears, on the first day of each month and at
final maturity of the Note in question.
(e) Default Interest. Upon the occurrence and during the
continuance of any Event of Default, the outstanding balance
of the Advancing Term Note and the Revolving Note, shall, at
the option of the Lender, bear interest at the rate
otherwise applicable thereto, plus 2% per annum. Default
interest shall be payable on demand.
2. Borrowing Base. The Borrowing Base shall be equal to 80% of
Eligible Receivables. "Eligible Receivables" means the book
value of the Borrower's accounts receivable, minus the sum
of (1) the book value of all receivables that remain unpaid
90 days or more after the date of the relevant invoice, plus
(2) the book value of all receivables due from officers,
directors, shareholders, partners, or affiliated
corporations, plus (3) the book value of all receivables
owed by debtors outside the United States, plus (4) the book
value of all receivables owed by debtors 10% or more of the
receivables from which are otherwise ineligible, and
excluding all other accounts receivables or types of
accounts receivable the Lender may deem ineligible. Any
limitations on advances or required prepayments relating to
the Borrowing Base shall be based on the latest borrowing
base certificate (described below) the Borrower shall have
delivered to the Lender.
3. Procedure for Advances. The Borrower may request any
Advance to its corporate account by telephone or in writing.
The Borrower agrees to repay each Advance, regardless of
whether the person requesting it was authorized to do so.
Each request for an Advance will be deemed a representation
by the Borrower that at the time of such Advance and after
giving effect thereto, all conditions to Advances will be
satisfied.
4. Other Loans. The provisions of this Agreement shall apply to
other loans the Lender may make to the Borrower from time to
time when the notes evidencing such loans make reference to
this Agreement. This Agreement shall apply to (i) that
certain promissory note from the Borrower to the Lender
dated as of February 3, 1997 in the original principal
amount of $300,000, (ii) that certain promissory note from
the Borrower to the Lender dated as of October 10, 1997 in
the original principal amount of $300,000, and (iii) that
certain promissory note from the Borrower to the Lender
dated as of December 10, 1998 in the original principal
amount of $400,000 (collectively, the "Existing Term
Notes").
5. Repayment. All amounts outstanding under the Revolving Note
shall be due and payable in full on the earlier of December
1, 1999 or the date the Lender terminates its commitment or
such commitment is automatically terminated under this
Agreement pursuant to paragraph 13 below. If the principal
balance of the Revolving Note at any time exceeds the
Borrowing Base, the Borrower shall immediately prepay the
Revolving Note by the amount of that excess. The Advancing
Term Note shall be due and payable in full on January 1,
2000, subject to acceleration as provided in this Agreement.
Each Existing Term Note shall be payable at the dates and in
the amounts specified in such Existing Term Note. Existing
Term Notes may be prepaid only to the extent and upon the
terms, if any, set forth in the Existing Term Notes. The
Revolving Note and the Advancing Term Note may be prepaid in
whole or in part at any time without premium or penalty.
6. Cleanup Period. For a Cleanup Period of 30 consecutive days
during each calendar year the Borrower shall pay in full the
entire principal balance of the Revolving Note and during
such period no Revolving Advances will be made.
7. Conditions. The Lender will not make a Term Loan Advance or
the first Revolving Advance until the following conditions
have been satisfied:
a) The Lender shall have received the Revolving Note
substantially in the form of Exhibit A hereto, and the
Advancing Term Note substantially in the form of
Exhibit B hereto, each duly executed by the Borrower.
b) The Lender shall have received the Security Agreement
substantially in the form of Exhibit C hereto, duly
executed by the Borrower. (The Security Agreement, this
Agreement and the Notes are the "Loan Documents").
c) The Lender shall have received any insurance
certificates, stock certificates, bonds, notes and
other documents required under any of the Loan
Documents, all in form satisfactory to the Lender.
d) The Lender shall have received the initial borrowing
base certificate completed as required (if a Revolving
Advance is requested).
e) The Lender shall have received the following:
A certificate of good standing for Borrower from
the jurisdiction of Borrower's incorporation.
An incumbency certificate for the Borrower's
officers.
A copy of the resolution of the Borrower's Board
of Directors authorizing those Loan Documents
executed by the Borrower and the transactions
contemplated hereby and thereby.
A certification of the Borrower's Secretary or
Assistant Secretary that the Borrower's Articles
of Incorporation and bylaws have not been amended
or modified since the same were last certified to
the Lender (or if amended, certifying a true,
complete and correct copy of such Articles, bylaws
and all amendments thereto).
Each document listed above shall be certified to the
satisfaction of the Lender.
f) The priority and perfection of the Lender's interest in
any collateral taken under the Loan Documents shall
have been established to the satisfaction of the
Lender.
g) There shall not exist any Event of Default or any event
which, with the passage of time or the giving of
notice, would become an Event of Default.
8) The Lender shall have received the opinion of counsel to the
Borrower covering such matters as the Lender may reasonably
require.
9) The Lender shall have received a commitment fee of $8,000
for the Advancing Term Loan.
8. Representations. The Borrower represents and warrants to
the Lender as follows:
a) The Borrower is a corporation duly organized, validly
existing and in good standing under the laws of the
State of Minnesota.
b) The Borrower's execution, delivery and performance of
this Agreement, the Notes and the other Loan Documents
have been properly authorized by all necessary
corporate action, do not require governmental approval
and do not conflict with any agreement binding on the
Borrower or its property.
c) The Loan Documents have been properly executed and
constitute the Borrower's legal, valid and binding
obligations, enforceable against the Borrower in
accordance with their terms.
d) The financial statements that the Borrower has
furnished to the Lender fairly represent the Borrower's
financial condition on the date of those statements and
the results of the Borrower's operations for the
periods referred to in those statements. Those
statements were prepared in accordance with generally
accepted accounting principles. There have been no
material adverse changes in the Borrower's properties
or financial condition since the date of the latest
statements.
e) Except as disclosed on Schedule 8.e) hereto, there are
no actions, suits or proceedings pending or threatened
against or affecting the Borrower or the Borrower's
properties before any court or governmental agency.
f) All federal, state and local tax returns of the
Borrower required to be filed have been filed and the
Borrower has paid or made provision for the payment of
all taxes due and payable pursuant to such returns and
pursuant to any assessments made against it or any of
its property.
g) The Borrower is in compliance with all applicable
requirements of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), and all rules and
regulations thereunder.
h) There are no security interests, mortgages,
encumbrances or other liens on any of the Borrower's
property except (i) as previously disclosed to the
Lender in writing, and (ii) in favor of the Lender.
i) The Borrower is not in default under or in violation of
any law, statute, rule or regulation, order, writ,
judgment, injunction, decree, determination or award or
any indenture, loan or credit agreement or other
agreement, lease or instrument in any case in which the
consequences of such default or violation could have a
material adverse effect on the business, operations,
properties, assets or condition (financial or
otherwise) of the Borrower.
10) The Borrower has reviewed and assessed its business
operations and computer systems and applications to address the
"year 2000 problem" (that is, that computer applications and
equipment used by Borrower may be unable to properly perform date-
sensitive functions before, during and after January 1, 2000).
Borrower reasonably believes that the year 2000 problem will not
result in a material adverse change in Borrower's business
condition (financial or otherwise), operations, properties or
prospects or ability to repay Lender. Borrower is in the process
of implementing a plan to remediate year 2000 problems and will
complete implementation of such plan with respect to any material
year 2000 problems and testing thereof, by September 30, 1999.
Borrower agrees that this representation will be true and correct
on and shall be deemed made by Borrower on each date Borrower
requests any Revolving Advance or Term Loan Advance under this
Agreement or delivers any information to Lender. Borrower will
promptly deliver to Lender such information relating to this
representation and covenant as Lender reasonably requests from
time to time.
9. Reporting. The Borrower will not change its fiscal year end
from May 31, and will provide to the Lender the following
reports in a form acceptable to the Lender:
a) The Borrower's annual consolidated financial statements
within 120 days after the end of each fiscal year,
audited by an independent certified public accountant
satisfactory to the Lender.
b) The Borrower's quarterly internally-prepared financial
statements within 45 days after the end of each fiscal
quarter, certified as accurate by an officer of the
Borrower.
c) A compliance certificate in the form attached hereto as
of the end of each month by the thirtieth day of the
following month.
d) Immediate notice of (i) any uninsured litigation
totaling over $50,000 or dealing with the Loan
Documents; (ii) any arbitration or government
investigation or development (including notification
of environmental or pollution law violations) pending
or threatened that does or would materially adversely
affect the Borrower or its ability to perform under
this Agreement; (iii) any Event of Default; or (iv) any
reportable event, prohibited transaction or impositions
of withdrawal liability under ERISA.
e) A borrowing base certificate in the form attached
hereto. Borrowing base certificates shall (i) be dated
as of the last day of each month during which there are
outstanding Revolving Advances and shall be delivered
to the Lender by the thirtieth day of the next month,
(ii) be dated as of the date the Lender requests such a
certificate and be delivered to the Lender within 10
days of the Lender's request therefor, and (iii) be
dated as of the last day of the most recent month when
requesting a Revolving Advance and no Revolving
Advances are currently outstanding. Each borrowing
base certificate shall state the amount of Eligible
Receivables and the Borrowing Base as of the end of the
previous month or the date of the Lender's request, as
appropriate.
11) On request of the Lender, an accounts receivable aging in
form and substance satisfactory to the Lender. Each aging shall
be with respect to accounts receivable as of the end of the
previous month.
g) From time to time, such other information regarding the
business, operation and financial condition of the
Borrower as the Lender may reasonably request,
including, without limitation, an accounts payable
aging, upon request.
The financial statements described in clauses (a) and (b)
above shall be prepared in accordance with generally
accepted accounting principles, consistently applied.
10. Other Affirmative Covenants. Unless the Lender shall
otherwise consent in writing, the Borrower will:
a) Pay the Borrower's taxes (including payroll and
withholding taxes) when due.
b) Keep adequate and proper financial records, and permit
the Lender to examine those records and inspect the
Borrower's inventory and other property, and discuss
the Borrower's affairs and finances with the Borrower's
officers, at any reasonable time. Without limiting the
generality of the foregoing sentence, the Borrower
shall pay the costs of annual collateral audits by the
Lender or its agents.
c) Keep the Borrower's business adequately insured in such
amounts and against such hazards as is customary in the
case of reputable organizations engaged in the same or
similar business and similarly situated, and maintain
the insurance required under any other Loan Document.
d) Maintain the Borrower's corporate existence in good
standing under the laws of the state of Minnesota.
e) Maintain the Borrower's properties in good condition,
repair and working order.
f) Comply in all material respects with all laws, rules
and regulations to which the Borrower may be subject.
11. Negative Covenants. Unless the Lender shall otherwise
consent in writing, the Borrower will not:
a) Grant any mortgage, security interest or any other lien
on any of the Borrower's assets (including capitalized
leases), or permit any such lien to exist or continue,
except for (i) liens in the Lender's favor, (ii)
deposits or pledges to secure payment of workers'
compensation, unemployment insurance, old age pensions
or other social security obligations and liens of
carriers, warehousemen, mechanics and materialmen for
sums not due, in each case arising in the ordinary
course of business of the Borrower, (iii) liens for
taxes, fees, assessments and governmental charges not
delinquent, (iv) liens incurred or deposits or pledges
made or given in connection with, or to secure payment
of, indemnity, performance or other similar bonds, (v)
encumbrances in the nature of zoning restrictions,
easements and rights or restrictions of record on the
use of real property and landlord's liens under leases
on the premises rented, which do not materially detract
from the value of such property or impair the use
thereof in the business of the Borrower, (vi)
capitalized leases provided that the aggregate annual
payments owed by the Borrower under such capitalized
leases do not exceed $200,000, (vii) purchase money
security interests, provided that, (A) the debt secured
thereby is otherwise permitted by this Agreement and
(B) such security interests are limited to the property
acquired and do not secure debt other than the purchase
price of such property, and (viii) a mortgage on the
Project to secure permanent financing of the Project
and to pay off the Advancing Term Loan.
b) Borrow any money, or sign any promissory note, except
for loans from the Lender and notes to the Lender, and
indebtedness secured by liens permitted under a) above.
c) Guarantee any obligations of unrelated parties, except
the endorsement of checks for collection.
d) Invest in any other person or entity or hold an
investment other than (i) as presently held in the
Borrower's affiliates, if any, and as planned for Ault
Energy Systems, Inc., (ii) investments in bank
accounts, bank certificates of deposit or bankers'
acceptances issued by any United States commercial bank
with a combined capital and surplus and credit rating
for unsecured indebtedness satisfactory to the Lender,
(iii) commercial paper with the highest rating by
Moody's Investors Services of Standard and Poor's or
readily marketable direct obligations of the United
States government (and repurchase agreements relating
to such securities), in each case with a maturity or
one year or less, and (iv) travel advances to the
Borrower's officers and employees in the ordinary
course.
e) Sell any of the Borrower's assets other than inventory
in the ordinary course of business.
f) Consolidate or merge with any other business, acquire
the assets of any other business or liquidate, wind up
or dissolve itself (or suffer any liquidation or
dissolution).
g) Engage in any line of business substantially different
from the Borrower's current business.
h) Permit the Borrower's net after tax earnings for any
fiscal year to be less than $500,000.
i) Permit the ratio of liabilities (including subordinated
indebtedness) to tangible net worth to be more than 1.0
to 1 at any time.
j) Pay any dividends or otherwise make any distributions
on, or redemptions of, any of its outstanding stock.
"Tangible net worth" means net worth computed in accordance
with generally accepted accounting principles less the book
value of all intangible items such as goodwill, trademarks,
trade names, service marks, copyrights, patents, licenses,
unamortized debt discount and expenses and the excess of the
purchase price of the assets of any business acquired by the
Borrower over the book value of such assets and less any
receivables due from officers, managers, directors,
shareholders, partners, members or affiliated corporations
or other entities, the cost or value of any leasehold
improvements, or any organizational costs. "Subordinated
indebtedness" shall be any indebtedness of the Borrower that
is subordinated to the Borrower's obligations to the Lender
on terms and conditions that have been reviewed by and are
satisfactory to the Lender. The other accounting terms used
above and elsewhere in this Agreement shall be computed or
interpreted in accordance with generally accepted accounting
principles consistently applied.
12. Right to Charge Checking Account. The Borrower authorizes
the Lender to charge the Borrower's checking account with
the Lender for any amounts due under the Notes.
13. Events of Default. Each of the following shall be an Event
of Default:
a) The Borrower shall fail to pay when due (whether by
acceleration or otherwise) any amount owing on any of
the Notes or any other indebtedness to the Lender that
the Borrower owes or has guaranteed and such failure
shall continue for more than the period of grace, if
any applicable thereto.
b) The Borrower shall breach any of the Borrower's other
obligations under this Agreement and such breach shall
continue for five days after the Lender gives the
Borrower notice thereof.
c) Any default shall occur under any security agreement,
mortgage or other document securing any of the Notes
and such default shall continue for more than the
period of grace, if any applicable thereto.
d) Any representation or warranty that the Borrower has
made under this Agreement or any other Loan Document
shall prove to have been untrue when made.
e) The Borrower shall (i) become insolvent or unable to
pay its debts generally as they mature; (ii) make a
general assignment for the benefit of creditors; (iii)
admit in writing its inability to pay its debts
generally as they mature; (iv) consent to the
appointment of a trustee or receiver for the Borrower
or for a substantial part of the property thereof; (v)
have an order, judgment or decree entered appointing,
without its consent, a trustee or receiver for the
Borrower or for a substantial part of the property
thereof; (vi) file a petition under the United States
Bankruptcy Code or any other state or federal law
relating to insolvency, reorganization, receivership or
relief of debtors; or (viii) take any action for the
purpose of effecting or consent to any of the
foregoing.
If (i) any Event of Default described in paragraph 13 e)
shall occur with respect to
the Borrower, the Lender's
commitment to make Revolving
Advances under this Agreement
and to make additional Term
Loan Advances shall
automatically terminate and
the Notes and all other
obligations of the Borrower to
the Lender under this
Agreement shall automatically
become immediately due and
payable, or (ii) upon
occurrence of any other Event
of Default, the Lender may,
without giving the Borrower
notice, declare the Lender's
commitment to make Revolving
Advances and additional Term
Loan Advances under this
Agreement terminated and/or
declare the principal balance
of the Notes and all accrued
interest to be immediately
due, and, upon the occurrence
of the events described in
either clause (i) or (ii) of
this sentence, the Lender may
exercise any other rights and
remedies available to the
Lender by law or agreement.
The Borrower hereby
irrevocably authorizes the
Lender to set off all sums
owing by the Borrower to the
Lender against all deposits
and credits the Borrower may
have with, and any claims the
Borrower may have against, the
Lender at any time after an
Event of Default occurs.
14. Fees and Expenses; Indemnity. The Borrower agrees to pay
all of the reasonable costs and expenses incurred by the
Lender in connection with the negotiation, preparation,
execution, perfection, administration, amendment, or
enforcement of this Agreement and the other Loan Documents,
including attorney's fees and expenses and internal time
charges reasonably determined by the Lender for lawyers
employed by the Lender. The Borrower agrees to indemnify
the Lender, its employees, agents and independent
contractors from all actions, losses, damages and expenses
(including attorneys' fees) arising out of or relating to
transactions under the Loan Documents except for actions,
losses, damages and expenses arising from the wrongful
intentional actions or gross negligence of the Lender, its
employees, agents and independent contractors, which
obligation survives the termination of this Agreement and
includes expenses and costs associated with environmental
and pollution laws of any kind.
15. Miscellaneous.
a) If the Lender does not exercise some right the Lender
has against the Borrower, or if the Lender delays in
exercising a right, that does not mean that the Lender
gives up that right.
b) No Loan Document can be changed unless the Lender signs
a written amendment.
c) If any part of the Loan Documents is unenforceable, the
rest of their provisions will still be enforceable.
d) The Lender may assign its rights or obligations under
the Loan Documents or grant participations therein at
any time and share information about the Borrower in
connection therewith, without the Borrower's consent.
e) Except when telephonic notice is expressly authorized
by this Agreement, any notice or other communication to
any party in connection with this Agreement shall be in
writing and shall be sent by manual delivery, telegram,
telex, facsimile transmission, overnight courier or
United States mail (postage prepaid) addressed to the
Borrower at the address above and to the Lender at the
address on the signature page hereof, or at such other
address as such party shall have specified to the other
party hereto in writing. All periods of notice shall
be measured from the date of delivery thereof if
manually delivered, from the date of sending thereof if
sent by telegram, telex or facsimile transmission, from
the first business day after the date of sending if
sent by overnight courier, or from four days after the
date of mailing if mailed; provided, however, that any
notice to the Lender regarding Advances or rates of
interest shall be deemed to have been given only when
received by the Lender.
f) This Agreement and the other Loan Documents constitute
the entire agreement between the Lender and the
Borrower with respect to the subject matter hereof and
thereof. This Agreement takes the place of any
conversations, oral agreements and commitment letters
or other letters between the Lender and the Borrower.
This Agreement amends, restates, supersedes and
replaces the Prior Agreement. The security agreement
between the Borrower and the Lender dated February 25,
1997 remains in full force and effect and secures all
amounts and obligations under this Agreement,
notwithstanding the execution and delivery of the
Security Agreement attached hereto as security for the
Advancing Term Note.
g) This Agreement shall be binding upon the Borrower, its
successors and assigns (except that the Borrower may
not assign its rights or delegate its obligations
hereunder or under the other Loan Documents without the
prior written consent of the Lender) and upon the
Lender and its successors and assigns and shall inure
to the benefit of, and be enforceable by, the Lender
and its successors, transferees and assigns and also by
any person or entity to whom all or any part may be
sold or transferred; provided, however, that in the
event such sale or transfer covers only part of the
Lender's interest, the Lender shall have the right to
enforce this Agreement as to the remainder retained and
owned by the Lender.
16. Governing Law and Construction. THE VALIDITY, CONSTRUCTION
AND ENFORCEABILITY OF THIS AGREEMENT AND THE NOTES SHALL BE
GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA,
WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES
THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS OF THE UNITED
STATES APPLICABLE TO NATIONAL BANKS.
17. Jurisdiction. AT THE OPTION OF THE LENDER, THIS AGREEMENT
AND THE OTHER LOAN DOCUMENTS MAY BE ENFORCED IN ANY FEDERAL
COURT OR MINNESOTA STATE COURT SITTING IN HENNEPIN OR RAMSEY
COUNTY, MINNESOTA; AND THE BORROWER CONSENTS TO THE
JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY
ARGUMENT THAT VENUE IN SUCH FORUMS IS NOT CONVENIENT. IN
THE EVENT THE BORROWER COMMENCES ANY ACTION IN ANOTHER
JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY
ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED
BY THIS AGREEMENT, THE LENDER AT ITS OPTION SHALL BE
ENTITLED TO HAVE THE CASE TRANSFERRED TO ONE OF THE
JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR IF SUCH
TRANSFER CANNOT BE ACCOMPLISHED UNDER APPLICABLE LAW, TO
HAVE SUCH CASE DISMISSED WITHOUT PREJUDICE.
18. Waiver of Jury Trial. EACH OF THE BORROWER AND THE LENDER
IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY
LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS
AGREEMENT AND THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS
CONTEMPLATED HEREBY OR THEREBY.
Please indicate the Borrower's acceptance of this Agreement
by signing the enclosed copy of this letter and returning it to
the undersigned.
Very truly yours,
U.S. BANK NATIONAL ASSOCIATION
By
Its _______________
Address:
332 Minnesota Street
St. Paul, MN 55101
Fax: (651) 244-5590
Accepted this ____ day of
______________ , 199 ____ .
BORROWER:
Ault Incorporated
By ____________________
Its
EXHIBIT 10 (i)
DESIGN/BUILD
COST PLUS CONSTRUCTION CONTRACT
for
AULT INCORPORATED
TABLE OF CONTENTS
DESIGN/BUILD
COST PLUS CONSTRUCTION CONTRACT
This Contract, made this 5th day of May, 1999, by and
between RYAN COMPANIES US, INC., a Minnesota corporation
(hereinafter called "Design/Builder"), and AULT INCORPORATED, a
Minnesota corporation (hereinafter called "Owner");
Witnesseth that, in consideration of the mutual covenants
and agreements contained herein, Design/Builder and Owner hereby
agree as follows:
Article 1 - Scope of the Project
Design/Builder shall furnish all of the labor, materials,
equipment and all of the services necessary for the design of the
site work and building shell and construction of the entire site
work, shell building and interior improvements comprising an
approximately 63,500 square foot office/manufacturing building
and related improvements in accordance with the preliminary
plans, outline specifications and any other materials described
on Exhibit A and the final plans and specifications prepared
therefrom (hereinafter referred to as the "Project" or the
"Work"). The parties acknowledge and agree that Pope Associates
("Interior Architect") will design the interior improvements to
the building which are not described in the materials set forth
on Exhibit A hereto (the "Interior Improvements").
Design/Builder agrees to (a) provide access to the site for
Interior Architect, (b) cooperate with Interior Architect in the
design and drawings for the Project, and (c) coordinate and
consult with Interior Architect during the construction of the
Interior Improvements, which construction shall be completed by
Design/Builder pursuant to this Contract. Both the design and
construction of the Project shall be undertaken with a standard
of care, skill and workmanship throughout, consistent with
applicable industry standards in the area in which the Project is
located. Within 30 days from the date hereof, Design/Builder
shall submit to Owner for its approval final plans and
specifications for the portion of the Work that it has design
responsibility for, setting forth in detail the requirements for
construction thereof. Such final plans and specifications shall
be in substantial accordance with the documents described on
Exhibit A and shall be prepared and certified by architects or
engineers in their respective disciplines, selected by
Design/Builder, who are licensed in the state where the Project
is located. Design/Builder warrants that such final plans and
specifications will comply with all applicable building codes,
laws, ordinances and regulations in effect and enforced as of the
date of this Contract, and with any and all encumbrances filed
against the property as of the date of this Contract and which
are anticipated to be filed in connection with the construction
of the Project, including without limitation restrictions and
covenants required by prior owners and/or the City of Brooklyn
Park. Design/Builder's costs and expenses incurred in all such
compliance shall be included in the Cost of the Work. Owner
shall furnish to Design/Builder, in a timely manner, any
necessary program or design information regarding Owner's needs
or requirements for the Project and for any work to be performed
by separate contractors working directly for Owner.
Design/Builder shall be entitled to rely on the accuracy and
completeness of such information in the design of the Project.
Additional design services for space planning of moveable office
work stations, design of custom furniture, selection of
furnishings, artwork and accessories, and inventorying of
existing furniture and equipment are not within the scope of the
services to be provided by Design/Builder pursuant to this
Contract and must be separately contracted for in writing.
Design/Builder's rates for such additional design services
(performed by Design/Builder's personnel) are set forth in
Exhibit C. When said final plans and specifications have been
approved by Owner and Design/Builder, they shall be signed or
otherwise approved in writing by their appointed representatives
and shall supersede the preliminary plans, outline specifications
and any other materials described on Exhibit A. Owner agrees
that it will not unreasonably withhold its approval and will not
act in any arbitrary or capricious manner with respect to
approval of such final plans and specifications so long as the
same are in substantial accordance with the documents set forth
in Exhibit A. If final plans and specifications for the Project
have not been approved by Owner and Design/Builder within 10 days
after the first submittal thereof by Design/Builder, then either
party may terminate this Contract by giving written notice
thereof to the other party. In the event of such termination,
whether by Owner or Design/Builder, Owner shall within 10 days
thereafter pay to Design/Builder all costs (including
Design/Builder's personnel costs at the rates set forth in
Exhibit C and all out-of-pocket costs) which Design/Builder has
incurred for its time and expense in developing the preliminary
and proposed final plans and specifications. Such costs shall in
no event exceed $140,000. Upon receipt of such payment,
Design/Builder shall deliver to Owner uncertified copies of such
proposed final plans and specifications. In addition, Owner
shall pay Design/Builder for any other expenses incurred by
Design/Builder that Owner has given Design/Builder written
authorization to incur.
Not later than June 1, 1999, Owner shall furnish to
Design/Builder final plans and specifications for the Interior
Improvements. Such final plans and specifications shall be
prepared and certified by the Interior Architect and shall be
consistent with the final plans and specifications furnished by
Design/Builder.
Article 2 - Time of Completion
Design/Builder shall achieve Substantial Completion of the
Project not later than August 30, 1999. Design/Builder will
notify Owner by June 30, 1999 if it anticipates that Substantial
Completion of the Project will not be achieved by August 20,
1999. However, if Design/Builder is delayed at any time in the
progress of the Work by any act or neglect of Owner or of any
agent or employee of Owner or of any separate contractor employed
by Owner, failure to timely furnish the final plans and
specifications for the Interior Improvements, changes ordered in
the Work by Owner, labor disputes, fire or other casualty,
unusual delay in deliveries, shortages or unavailability of fuel
or materials, unusual weather, acts of God or public enemy,
governmental action or non-action, or by any other cause beyond
the control of Design/Builder, then the time by which Substantial
Completion is to be achieved shall be extended by a period equal
to such delay. Design/Builder shall not be entitled to a time
extension for delays that are the result of Design/Builder's
negligence. All claims for an extension of time shall be made in
writing to Owner within 20 days after the occurrence of the cause
of delay or shall be deemed waived, but in the case of a
continuing cause of delay, only one claim shall be necessary.
Substantial Completion shall be deemed to have been achieved when
construction is sufficiently complete so that Owner can utilize
the Project for the purpose for which it is intended and a
certificate of occupancy (temporary or permanent) has been issued
for the Project. Owner and Design/Builder shall execute a
Certificate of Substantial Completion certifying such date as the
Date of Substantial Completion. As of the Date of Substantial
Completion, Owner shall assume full responsibility for all
utilities, insurance, security, and all other operational aspects
of the Project.
Article 3 - Contract Sum
Owner shall pay Design/Builder for the performance of this
Contract, subject to additions and deductions as provided for
herein, in current funds, the Contract Sum consisting of the Cost
of the Work as defined in Article 8 plus the Design/Builder's Fee
to be determined as follows:
Design/Builder's Fee shall be $192,588.
Article 4 - Guaranteed Maximum Price
The sum of the Cost of the Work and the Design/Builder's Fee
is guaranteed by Design/Builder not to exceed Three Million Six
Hundred Eighty-four Thousand One Hundred and Forty-eight Dollars
($3,684,148), which includes a contingency in the amount of
$78,288 (the "Contingency"), subject to additions and deductions
by Change Order as provided in this Contract. Such maximum sum
is referred to in this Contract as the Guaranteed Maximum Price.
Such Guaranteed Maximum Price includes allowances for the Cost of
the Work relating to (a) the Interior Improvements of $447,840,
(b) electrical power and lighting of $214,732, and (c) exterior
signage of $7,500. Costs which would cause the Guaranteed
Maximum Price to be exceeded shall be paid by Design/Builder
without reimbursement by Owner. If the Cost of the Work plus the
Design/Builder's Fee is less than the Guaranteed Maximum Price,
the difference thereof (hereinafter referred to as the "Savings")
shall be divided between Owner and Design/Builder as described in
this Article 4. Provided that Design/Builder achieves
Substantial Completion by August 20, 1999, Design/Builder shall
receive, as additional Design/Builder's Fee, an amount equal to
fifty percent (50%) of any amount remaining in the Contingency.
All remaining Savings, including the other fifty percent (50%) of
any remaining Contingency, shall accrue to Owner.
Article 5 - Payment of Contract Sum
(a) Progress Payments. Owner shall make payments on
account of the Contract Sum as follows:
(i) Design/Builder shall submit to Owner, on or about
the first day of each month, an Application for Payment
for the value of the Work completed (including
materials suitably stored on the site and a
proportionate share of Design/Builder's Fee) based upon
the Schedule of Values set forth in Exhibit B. If no
Schedule of Values is attached hereto, Design/Builder
shall submit one to Owner prior to its first
Application for Payment.
(ii) Upon receipt of each Application for Payment,
Owner shall have the right to inspect the Project to
confirm that Design/Builder's Application reflects the
value of Work actually completed. If Owner discovers
that the Work actually completed differs from that
represented on the Application for Payment, or the Work
is defective or does not comply with the requirements
of this Contract, Owner may withhold such sums as it
reasonably deems necessary in light of the Work
actually completed until the Work is completed or the
defect is remedied.
(iii) Within 20 days after receipt of each
Application for Payment, Owner shall pay to
Design/Builder the entire amount thereof, subject to
possible withholding as provided above, except that a
retainage of 5% of the amount set forth in each
Application for Payment shall be withheld. No payment
to Design/Builder shall constitute an acceptance of any
Work not in accordance with the requirements of this
Contract.
(iv) Upon receipt of each payment from Owner,
Design/Builder shall deliver to Owner its lien waiver
in the amount of such payment. Prior to receipt of the
second and each succeeding payment, Design/Builder
shall deliver to Owner lien waivers from its
subcontractors and suppliers covered by the previous
payment received from Owner. Design/Builder guarantees
that title to all Work, materials and equipment covered
by an Application for Payment, whether incorporated
into the Project or not, will pass to Owner free and
clear of all liens, claims, security interests and
encumbrances upon the receipt of such payment by
Design/Builder. Design/Builder agrees to pay its
suppliers and subcontractors promptly after receipt of
payment from Owner. Design/Builder shall cooperate
with Owner's title insurance carrier, Old Republic
National Title Insurance Company ("Title"), which will
disburse all payments to Design/Builder pursuant to
this Contract, such that Design Builder will provide
any and all documentation reasonably and customarily
provided under the circumstances.
(b) Punchlist Work. Upon Substantial Completion of the
Project by Design/Builder, Design/Builder, Interior
Architect and Owner shall jointly inspect the Work. If
there remain "punch list" items to be completed,
Design/Builder and Owner shall list such items and
Design/Builder shall complete said items within 30 days
thereof, unless Design/Builder is unable to complete such
items due to weather conditions, unavailability of materials
or other conditions beyond the control of Design/Builder, in
which event Design/Builder shall diligently and
expeditiously complete construction of any punchlist items
as soon as possible and practicable under the circumstances.
(c) Final Payment. The amount of the final payment shall
be calculated as follows:
(i) Take the sum of the Cost of the Work
substantiated by the Design/Builder's final accounting
and the Design/Builder's Fee plus Design/Builder's
portion of the Savings; but not more than the
Guaranteed Maximum Price. Subtract the aggregate of
previous payments made by Owner. The remaining balance
shall be paid to Design/Builder as its final payment.
If the aggregate of previous payments made by Owner
exceeds the amount due Design/Builder, Design/Builder
shall pay the difference to Owner.
(ii) Owner's accountants or other Owner designated
representative will review and report in writing on
Design/Builder's final accounting (which shall include
all detail reasonably necessary for verification of the
Cost of the Work) within 15 days after delivery of the
final accounting to Owner by Design/Builder.
(iii) If Owner's accountants or other Owner
designated representative report the Cost of the Work
as substantiated by Design/Builder's final accounting
to be less than claimed by Design/Builder,
Design/Builder shall be entitled to demand arbitration
of the disputed amount. Such demand for arbitration
shall be made by Design/Builder within 30 days after
Design/Builder's receipt of notice from Owner. Failure
to demand arbitration within this 30-day period shall
result in the substantiated amount reported by Owner's
accountants becoming binding on Design/Builder.
Pending a final resolution by arbitration, Owner shall
pay Design/Builder the undisputed amount.
(iv) Subject to the provision of Clause 5(c)(iii)
hereof, the unpaid balance of the Contract Sum,
including all sums retained pursuant to Clause
5(a)(iii) hereof, shall be due and payable within 15
days after Design/Builder has submitted its final
accounting. Final payment shall be made simultaneously
with the furnishing of a lien waiver from
Design/Builder and lien waivers from its subcontractors
and suppliers for all sums paid to Design/Builder, as
required by Title Owner may withhold a sum equal to
150% of the estimated cost of completing any unfinished
Work. Thereafter, Owner shall pay to Design/Builder,
on a monthly basis, the amount withheld for unfinished
items as each item is completed. Acceptance of final
payment by Design/Builder shall constitute a waiver of
all claims against Owner. However, making final
payment shall not constitute a release of claims that
Owner may have against Design/Builder, except for
claims or disputes that have been previously resolved.
(d) Liens. Design/Builder shall, at all times, keep the
Project free of liens arising out of the Work of this
Contract for which Design/Builder has been paid. If any
such liens are filed, Design/Builder shall, within 14 days
after such filing, either,
(i) Satisfy such lien, or
(ii) Post a bond in an amount equal to 150% of the
amount of such lien.
(e) Late Payment. In the event that any payment by Owner
to Design/Builder is not paid when due, Owner shall pay
interest on said unpaid amount from the date due to and
including the date of payment at a variable rate equal to 2%
per annum in excess of the rate of interest from time to
time publicly announced by U.S. Bank National Association,
Minneapolis, Minnesota, as its reference rate, or such
lesser rate as may be the maximum rate permitted by law.
Owner shall pay to Design/Builder all costs reasonably
incurred by Design/Builder in the collection of amounts
payable by Owner hereunder, including reasonable attorneys'
fees.
Article 6 - Bond
Upon Owner's request at any time prior to commencement of
construction, Design/Builder shall furnish a surety bond for its
performance of this Contract and the payment of all obligations
to subcontractors arising hereunder. If such bond is requested,
the Guaranteed Maximum Price shall be increased by the full
amount of the premium therefor.
Article 7 - Changes in the Work
(a) Owner, without invalidating this Contract, may request
changes in the Work within the general scope of this
Contract, consisting of additions, deletions, alterations or
other modifications, with the Guaranteed Maximum Price and
the time for Substantial Completion to be adjusted
appropriately. All changes in the Work shall be made only
pursuant to a written Change Order signed by Owner and
Design/Builder setting forth any adjustment to the
Guaranteed Maximum Price and time for Substantial
Completion. If applicable, the adjustment to the Guaranteed
Maximum Price shall be determined by application of the unit
prices set forth in the specifications. Otherwise, the
adjustment shall be agreed upon by Design/Builder and Owner
before Design/Builder proceeds on any such changes,
additions or alterations. Design/Builder's Fee shall not be
increased until the total of all Change Orders exceeds ten
percent (10%) of the total of (a) the total amount of the
Cost of the Work as determined by Owner and Design/Builder
following the acceptance of all Bids (pursuant to Article 11
of this Contract), less any total excess costs for allowance
items, and (b) the Design/Builder's Fee in the amount
described in Article 3 of this Contract. Thereafter,
Design/Builder's Fee shall be increased by six percent (6%)
of the estimated Cost of the Work pertaining to the change.
(b) If, during the design process, Owner requests a
substantial change to the design of the Project that Owner
has previously approved or given Design/Builder direction to
perform, the Guaranteed Maximum Price and Design/Builder's
design fee set forth in Clause 8(g)(i) shall be increased by
the amount of Design/Builder's additional design costs to
perform such change. Design/Builder shall notify Owner of
such costs and a Change Order shall be entered into prior to
making such change.
(c) If, after the final plans and specifications have been
approved by Owner and Design/Builder, Owner requests
Design/Builder to submit a proposal for a change in the Work
and then elects not to proceed with the change, a Change
Order shall be issued to reimburse Design/Builder for any
costs incurred for design services for proposed revisions to
the final plans and specifications.
(d) The rates in Exhibit C shall apply to all changes that
involve Design/Builder's design personnel.
Article 8 - Costs to be Reimbursed
The term Cost of the Work shall mean costs necessarily
incurred by Design/Builder in the proper performance of the Work.
Such costs shall be at rates not higher than the standard paid at
the place of the Project except with prior consent of Owner. The
Cost of the Work shall include only the items set forth in this
Article 8.
(a) Design/Builder's Labor Costs. (Excluding Design
Costs)
(i) Wages of construction workers directly
employed by Design/Builder to perform the construction
of the Work at the site or at off-site workshops.
(ii) Wages or salaries of Design/Builder's
supervisory, safety and administrative personnel when
stationed at the Project site.
(iii) Wages and salaries of Design/Builder's
supervisory and administrative personnel stationed at
Design/Builder's principal office as follows:
None
(iv) Wages and salaries of Design/Builder's
supervisory or administrative personnel engaged, at
factories, workshops or on the road, in expediting the
production or transportation of materials or equipment
required for the Work, but only for that portion of
their time required for the Work.
(v) Costs paid or incurred by Design/Builder for
taxes, insurance, contributions, assessments and
benefits required by law or collective bargaining
agreements and, for personnel not covered by such
agreements, customary benefits such as sick leave,
transportation costs, medical and health benefits,
holidays, vacations and pensions, provided such costs
are based on wages and salaries included in the Cost of
the Work as provided above. The cost of
Design/Builder's contributions for F.I.C.A. taxes,
state unemployment taxes, federal unemployment taxes,
worker's compensation insurance and general liability
insurance shall be an amount equal to 39% the
employee's taxable wages. Such amount shall only apply
to Design/Builder's field labor force and does not
apply to its project management or design personnel.
(b) Subcontract Costs. Payments made by Design/Builder to
subcontractors in accordance with the requirements of the
subcontracts.
(c) Costs of Materials and Equipment Incorporated in
the Completed Construction.
(i) Costs, including transportation, of materials
and equipment incorporated in the completed
construction.
(ii) Costs of materials described in the preceding
Clause 8(c)(i) in excess of those actually installed
but required to provide reasonable allowance for waste
and for spoilage. Unused excess materials, if any,
shall be handed over to Owner at the completion of the
Work or, at Owner's option, shall be sold by
Design/Builder. Amounts realized, if any, from such
sales shall be credited to Owner as a deduction from
the Cost of the Work.
(d) Costs of Other Materials and Equipment, Temporary
Facilities and Related Items
(i) Costs, including transportation,
installation, maintenance, dismantling and removal of
materials, supplies, temporary facilities, machinery,
equipment, and hand tools not customarily owned by the
construction workers, which are provided by
Design/Builder at the site and fully consumed in the
performance of the Work; and cost less salvage value on
such items if not fully consumed, whether sold to
others or retained by Design/Builder. Cost for items
previously used by Design/Builder shall mean fair
market value. Traffic control costs.
(ii) Rental charges for temporary facilities,
machinery, equipment, and hand tools not customarily
owned by the construction workers, which are provided
by Design/Builder at the site, whether rented from
Design/Builder or others, and costs of transportation,
installation, minor repairs and replacements,
dismantling and removal thereof. The rates for such
equipment rented from Design/Builder shall not exceed
85% of current Associated Equipment Distributors
(A.E.D.) rental rates.
(iii) Costs of removal of debris from the site.
(iv) Costs of telegrams and long-distance
telephone calls, cellular phone charges, postage and
parcel delivery charges, telephone service at the site
and reasonable petty cash expenses of the site office.
(v) Costs of temporary utilities (such as
electricity, gas, sewer, water and other such items)
utilized to construct the Project.
(vi) That portion of the reasonable travel and
subsistence expenses of Design/Builder's personnel
incurred while traveling in discharge of duties
connected with the Work.
(e) Miscellaneous Costs
(i) That portion of premiums for insurance and
bonds directly and solely attributable to this Contract
that Design/Builder is required to provide.
(ii) Sales, use, gross receipts or similar taxes
imposed by a governmental authority which are related
to the Work and for which Design/Builder is liable.
(iii) Fees and assessments for the building
permit (including a park dedication fee of $13,560) and
for other permits, licenses and inspections for which
Design/Builder is required by this Contract to pay.
(iv) Fees of testing laboratories for tests and
inspections related to the Work.
(v) Royalties and license fees paid for the use
of a particular design, process or product required by
Owner; the cost of defending suits or claims for
infringement of patent rights arising from such
requirements; payments made in accordance with legal
judgments against Design/Builder resulting from such
suits or claims and payments of settlements made with
Owner's consent; provided, however, that such costs of
legal defenses, judgment and settlements shall not be
included in the calculation of the Design/Builder's Fee
or of the Guaranteed Maximum Price, and provided that
such royalties, fees and costs are not otherwise
excluded by this Contract.
(vi) Deposits lost for causes other than
Design/Builder's fault or negligence.
(vii) Any deductibles paid by Design/Builder
as a result of casualty losses.
(viii) Other costs incurred in the performance
of the Work if and to the extent approved in writing by
Owner.
(ix) Site preparation costs incurred prior to the date
of this Contract in the amount of $101,903.
(x) A fee to The Tegra Group, Inc. in the amount of
$144,000, which shall be paid upon Substantial
Completion.
(f) Emergencies. The Cost of the Work shall also include
costs which are incurred by Design/Builder in taking action
to prevent threatened damage, injury or loss in case of an
emergency affecting the safety of persons or property.
(g) Design, Engineering and Other Professional Services
(i) Design/Builder shall be paid a design fee of
$137,760 to provide architectural, structural
engineering, and civil engineering design services with
Design/Builder's personnel. Such design fee shall be a
reimbursable Cost of the Work and is not included in
the Design/Builder's Fee.
(ii) Costs paid to third parties by Design/Builder
to provide soil investigation, surveying, environmental
consulting and other professional services that are not
performed by Design/Builder's personnel. The cost of
the ALTA survey provided by Design/Builder in
connection with its sale of the site to Owner will not
be included in the Cost of the Work. Design/Builder
will provide an as-built survey of the site and the
Project upon completion of construction, and the cost
thereof and of surveying services during construction
will be included in the Cost of the Work.
(iii) Costs of travel of design professionals.
(iv) Costs of reproduction of any drawings,
specification, submittal or Contract document.
Article 9 - Costs Not To Be Reimbursed.
(a) The Cost of the Work shall not include:
(i) Salaries and other compensation of
Design/Builder's personnel stationed at
Design/Builder's principal office or offices other than
the site office, except as specifically provided in
Clause 8(a)(iii) and Paragraph 8(g).
(ii) Expenses of Design/Builder's principal office
and offices other than the site office, except for long
distance phone calls, reproduction costs, postage and
courier services.
(iii) Overhead and general expenses, except as
may be expressly included in
Article 8.
(iv) Design/Builder's capital expenses, including
interest on Design/Builder's capital employed for the
Work.
(v) Rental costs of machinery and equipment,
except as provided in Clause 8(d)(ii).
(vi) Any cost not specifically and expressly described
in Article 8.
(vii) Taxes levied and assessed against
Design/Builder for property, materials or equipment
belonging to Design/Builder.
(viii) Costs which would cause the Guaranteed
Maximum Price to be exceeded.
Article 10 - Discounts, Rebates and Refunds.
(a) Cash discounts obtained on payments made by
Design/Builder shall accrue to Owner if (1) before making the
payment, Design/Builder included them in an Application for
Payment and received payment therefor from Owner, or (2) Owner
has deposited funds with Design/Builder with which to make
payments; otherwise, cash discounts shall accrue to
Design/Builder. Design/Builder shall notify Owner of the
availability of such cash discounts. Trade discounts, rebates,
refunds and amounts received from sales of surplus materials and
equipment shall accrue to Owner, and Design/Builder shall make
provisions so that they can be secured.
(b) Amounts which accrue to Owner in accordance with the
provisions of Paragraph 10(a) shall be credited to Owner as a
deduction from the Cost of the Work.
Article 11 - Subcontracts and Other Agreements.
(a) Portions of the Work may be performed under
subcontracts or by other appropriate agreements with
Design/Builder. Unless Owner reasonably determines that three
(3) bids are not necessary, Design/Builder shall obtain three (3)
competitive bids (including bids from in-house trades) from
subcontractors and suppliers of materials or equipment
fabricated especially for the Project (the "Bids") and shall
review such Bids with Owner. Owner and Design/Builder will then
jointly determine which Bids will be accepted. Owner may
designate specific persons or entities from whom Design/Builder
shall obtain bids; however, if a Guaranteed Maximum Price has
been established, Owner may not prohibit Design/Builder from
obtaining bids from others. Design/Builder shall not be required
to contract with anyone to whom Design/Builder has reasonable
objection.
(b) If a Guaranteed Maximum Price has been established and
a specific bidder among those whose Bids are delivered by
Design/Builder to Owner (1) is recommended to Owner by
Design/Builder; (2) is qualified to perform that portion of the
Work; and (3) has submitted a Bid which conforms to the
requirements of this Contract without reservations or exceptions,
but Owner requires that another Bid be accepted; then
Design/Builder may require that a Change Order be issued to
adjust the Guaranteed Maximum Price by difference between the Bid
of the person or entity recommended to Owner by Design/Builder
and the amount of the subcontract or other agreement actually
signed with the person or entity designated by Owner.
Article 12 - Accounting Records.
Design/Builder shall keep full and detailed accounts and
exercise such controls as may be necessary for proper financial
management under this Contract; the accounting and control
systems shall be satisfactory to Owner. Owner and Owner's
accountants shall be afforded access to Design/Builder's records,
books, correspondence, instructions, drawings, receipts,
subcontracts, purchase orders, vouchers, memoranda and other data
relating to this Contract, and Design/Builder shall preserve
these for a period of three (3) years after Substantial
Completion of the Project, or for such longer period as may be
required by law.
Article 13 - Correction of the Work.
(a) Rejected work. Design/Builder shall promptly correct
Work rejected by Owner that does not conform to the requirements
of this Contract.
(b) Warranty Period. If, within one year after the Date of
Substantial Completion of the Project, or within such longer
period of time as may be prescribed by law or by the terms of any
applicable special warranty contained in the specifications, any
of the Work is found to be defective due to faulty workmanship or
materials or not in accordance with the requirements of this
Contract, and if, within such period Owner notifies
Design/Builder thereof in writing, then Design/Builder shall
promptly and expeditiously correct the same as soon as possible
and practicable under the circumstances after receipt of such
notice. Owner shall notify Design/Builder promptly after
discovery of the condition. Establishment of this one year
warranty period relates only to the specific obligation of
Design/Builder to correct the Work, and shall in no way affect
the time within which Design/Builder's obligation to comply with
the requirements of this Contract may sought to be enforced.
Prior to the expiration of this warranty period, representatives
of Owner and Design/Builder shall inspect the Project, jointly
determine if any Work does not conform to the requirements of
this Contract, and Design/Builder shall promptly correct such non-
conforming Work, provided that such non-conforming Work is not
the result of abuse, neglect or improper or inadequate care and
maintenance by Owner.
Article 14 - Insurance.
(a) Design/Builder's Liability Insurance. Design/Builder
shall purchase and maintain such insurance as will protect it
(and, where stated, Owner) from the claims set forth below which
may arise out of the performance of this Contract, whether such
performance be by Design/Builder or by any subcontractor of
Design/Builder or by anyone directly or indirectly employed by
any of them or by anyone for whose acts any of them may be
liable:
(i) Worker's Compensation and Employer's Liability
insurance for claims under workers' compensation, disability
benefit and other similar employee benefit acts, in the
amounts required by law and claims for damages arising out
of bodily injury, occupational sickness or disease, or death
of its employees, in the amounts specified below:
Insurance Limits
Worker's Compensation Statutory
Employer's Liability $1,000,000
(ii) Commercial General Liability insurance for claims for
damages arising out of bodily injury, sickness or disease,
personal injury, or death of any person other than its
employees, and for damages arising out of injury to or
destruction of tangible property (other than the Project),
in the amount of $5,000,000 (including umbrella coverage)
per occurrence. Owner shall be named as an additional
insured under such liability insurance policy to the extent
of any liability arising out of Design/Builder's Work. Such
insurance policy shall include premises operations
(including explosion, collapse and underground coverage),
elevators (if applicable), independent contractors,
completed operations (for not less than one year after the
Date of Substantial Completion) and broad form property
damage coverage.
(iii) Automobile Liability insurance for claims for
damages for bodily injury or death of a person or property
damage arising out of the ownership, maintenance or use of
all owned, hired and non-owned motor vehicles. The combined
single liability limit for bodily injury and property damage
shall be $5,000,000 (including umbrella coverage) per
occurrence.
Certificates of such insurance, showing such coverages to be in
force, shall be furnished to Owner prior to commencement of
construction.
(b) Casualty Insurance. Design/Builder shall purchase and
maintain, until the Date of Substantial Completion, "all-risk"
builder's risk insurance covering the Project in an amount not
less than $3,227,000, and with a deductible amount not to exceed
$10,000. Design/Builder shall be responsible to pay any such
deductibles, which shall be considered a Cost of the Work under
this Contract. Such insurance shall be provided on a
non-reporting, completed value basis. Owner and Design/Builder's
subcontractors and suppliers shall be named as additional
insureds under such policy. Any insured loss under such policy
shall be adjusted with Owner and Design/Builder and made payable
to both Owner and Design/Builder (subject to any applicable
mortgagee clause) as trustee for the insureds, as their interests
may appear. A certificate of insurance showing such coverage to
be in force shall be furnished to Owner prior to commencement of
construction.
(c) Waiver of Subrogation. Owner and Design/Builder waive
all rights against each other, and against their respective
agents, employees and subcontractors, for damages caused by
perils covered by the insurance to be maintained pursuant to
Paragraph 14(b) hereof, except such rights as they may have to
the proceeds of such insurance. If the policy of insurance to be
provided pursuant to Paragraph 14(b) hereof requires an
endorsement for continued coverage where there is a waiver of
subrogation, the party providing such insurance shall cause such
policy to be so endorsed.
(d) Notice of Cancellation. All insurance policies
provided by either party to this Contract shall contain a
provision requiring the insurer to give a minimum of 30 days
advance written notice to the other party of cancellation, non-
renewal or modification of the terms of the policy.
Article 15 - Termination of the Contract.
(a) Termination by Design/Builder. If construction on the
Project is stopped (through no fault of Design/Builder) for a
period of 30 days under order of any court or other public
authority having jurisdiction, or as a result of any governmental
act such as a declaration of national emergency making fuels or
materials unavailable, or if Owner wrongfully fails to make any
payment to Design/Builder within 20 days after Design/Builder
gives Owner written notice of such non-payment and Owner has
failed to cure such default (or to provide reasonable security
for such payment if such payment is disputed by Owner),
Design/Builder may stop construction and terminate this Contract
and recover from Owner payment for all Cost of the Work incurred
by Design/Builder, all of Design/Builder's Fee and such other
damages under subcontracts as Design/Builder may sustain by
reason thereof. If the termination is caused by anything other
than a default by Owner, Design/Builder may recover all of the
above except that Design/Builder shall only be entitled to
receive the proportionate share of its Fee based upon the Cost of
the Work incurred.
(b) Termination by Owner. If Design/Builder fails to
diligently proceed with the Work, materially breaches this
Contract, is adjudged a bankrupt, or if it makes a general
assignment for the benefit of its creditors, or if a receiver is
appointed on account of its insolvency, or if it persistently or
repeatedly refuses or fails, except in cases for which extension
of time is provided, to supply enough properly skilled workers or
proper materials, or if it fails to make prompt payment to
subcontractors or for materials or labor, or disregards laws,
ordinances, rules, regulations or orders of any public authority
having jurisdiction, Owner may, without prejudice to any right or
remedy and after giving Design/Builder and its surety, if any, 10
days' written notice (during which time the failure is not
cured), terminate this Contract and take possession of the site
and of all materials, equipment, tools, construction equipment
and machinery thereon owned by Design/Builder and may finish the
Project by whatever method it may deem expedient. In such case
Design/Builder shall not be entitled to receive any further
payment. If Owner's costs to complete the Project exceed the
difference between what Owner has paid to Design/Builder and the
Guaranteed Maximum Price, Design/Builder shall immediately upon
demand pay the difference to Owner. This obligation for payment
shall survive the termination of this Contract. If Owner so
terminates this Contract, Design/Builder shall, upon Owner's
request, immediately assign all design agreements, subcontracts
and purchase orders to Owner so that Owner may expeditiously
complete the Project. Design/Builder shall also immediately
provide to Owner all drawings, plans, specifications and
accountings to allow Owner to complete the Work.
(c) Termination for Convenience. Owner may, at any time
and in its sole discretion, terminate this Contract at its
convenience. Should Owner so terminate this Contract, Owner
shall pay to Design/Builder all amounts due pursuant to Paragraph
15(a) hereof, including Design/Builder's Fee and such other
damages under subcontracts as Design/Builder may sustain.
Article 16 - Miscellaneous Provisions.
(a) Owner and Design/Builder Representatives. Owner and
Design/Builder shall each appoint a representative with full
authority to act on behalf of each party. Owner's representative
shall be Carlos Montague and Design/Builder's representative
shall be Frank Zelley. Communication between the parties shall,
whenever possible, be accomplished by the above representatives.
(b) Ownership of Plans. The drawings, specifications and
other design documents prepared by Design/Builder or its design
consultants pursuant to this Contract are the property of
Design/Builder or its design consultants and Design/Builder or
its design consultants shall retain all common law, statutory and
other reserved rights including the copyright thereto, except as
specifically set forth in Article 15. However, Owner shall have
a royalty-free license to reproduce, distribute and otherwise use
such drawings, specifications and other design documents for
additions to or remodeling of the Project, provided that Owner
shall indemnify, defend and hold harmless Design/Builder and its
design consultants for any claims and liabilities arising from
such use thereof.
(c) Survey and Easements. Design/Builder has furnished a
current ALTA/ACSM land title survey of the Project site showing
the boundaries, dimensions and topography thereof and the
location of all utilities, easements and other restrictions.
Design/Builder has obtained all easements necessary for access to
the Project site, including easements for installation and
maintenance of utilities.
(d) Supervision and Construction Procedures.
Design/Builder shall supervise and direct the Project and shall
be solely responsible for all construction means, methods,
techniques, sequences and procedures, and for coordinating all
portions of the Work under this Contract. Design/Builder shall
employ a competent superintendent who shall be stationed at the
Project site during the progress of the Work. Design/Builder
shall be responsible to Owner for the acts and omissions of all
of its employees and all subcontractors of Design/Builder and
their agents and employees. Design/Builder shall at all times
enforce strict discipline and good order among its employees and
other persons carrying out the Work, and shall not employ on the
Project any unfit person or anyone not skilled in the assigned
task.
(e) Labor and Materials. Unless otherwise provided in this
Contract, all materials used in the Project shall be new.
Design/Builder shall provide and pay for all labor, services,
materials, equipment, tools, machinery, utilities, transportation
and other facilities and services necessary for the proper
execution and completion of the Work.
(f) Quality Assurance and Testing. Design/Builder shall
establish and implement a written quality assurance and testing
program that is appropriate for the Project. Owner shall have
the right to review such program and receive copies of any test
reports, if requested. Owner shall have the right, at Owner's
expense, to perform any additional testing or inspection that it
deems necessary. If such additional testing reveals the presence
of substandard, defective or non-conforming Work, Design/Builder
shall pay the cost of such testing.
(g) Taxes, Permits and Fees and Bonds. Design/Builder
shall pay all sales, consumer, gross receipts, use and other
similar taxes required by law and imposed, as of the date of this
Contract, upon the labor and materials provided by Design/Builder
or any of its subcontractors. Design/Builder shall be entitled
to an increase in the Guaranteed Maximum Price to the extent that
an increase in the aggregate of such taxes payable by
Design/Builder hereunder results from any change in the laws,
enacted after the date of this Contract, creating or modifying
such taxes. Design/Builder shall secure and pay for the building
permit and all other governmental permits (except zoning, land
use permits and fees, and acreage assessment charges), licenses
and inspections necessary for the proper execution and completion
of the Work, including utility availability and hook-up charges,
which are legally required as of the date of this Contract.
Design/Builder shall not be required to pay any special
assessment charges for public improvements and other municipal
charges for the payment of capital improvements. Owner shall be
responsible for all permits, licenses and fees relating to the
operation or use (as opposed to the construction) of the Project,
including (but not limited to) storm water discharge permits for
the operation of the facility, air emission permits and indirect
source permits. Owner shall provide any bonds, guarantees or
other forms of security required by local governmental units
having jurisdiction over the Project relating to on-site or off-
site improvements.
(h) Royalties and Patents. Design/Builder shall pay all
royalties and license fees, and shall defend all suits or claims
for infringement of any patent rights and save Owner harmless
from loss on account thereof.
(i) Concealed Conditions. Should there be discovered
unknown physical conditions below the surface of the ground or
concealed conditions in an existing structure, differing
materially from those ordinarily encountered in work of the
character provided for in this Contract or should the same be at
variance with the conditions indicated in the plans and
specifications for the Project, the time by which Substantial
Completion is to be achieved shall be extended by the period of
the delay resulting therefrom and the Guaranteed Maximum Price
shall be increased by the amount of all costs incurred by
Design/Builder by reason thereof, provided that a written claim
therefor is submitted to Owner within 20 days after the first
observance of the conditions by Design/Builder. Design/Builder
has reviewed the subsurface exploration report prepared by GME
Consultants, Inc., dated March 23, 1999 (the "Soils Report"),
and relied on this information in designing the Project,
establishing the Guaranteed Maximum Price and the time for
Substantial Completion. Actual subsurface conditions that
materially differ from those identified in the Soils Report, or
from those which are reasonably inferable therefrom, shall
constitute a concealed condition under this provision.
Design/Builder acknowledges that it has familiarized itself with
the Project site and taken what it believes to be a reasonable
number of soil borings.
(j) Cleaning Up. Design/Builder shall at all times keep
the Project site free from accumulation of waste materials or
rubbish caused by its operations. At Substantial Completion of
the Project, Design/Builder shall remove all of its surplus
materials, rubbish, tools, equipment and machinery from the
Project site, and shall clean all glass surfaces and leave the
Project in a "broom clean" condition. If Design/Builder fails to
clean up at the completion of the Project, and such failure
continues for 5 days after notice thereof to Design/Builder,
Owner may perform such clean up and the cost thereof shall be
deducted from the Guaranteed Maximum Price.
(k) Access. Owner and its representatives shall at all
times have access to the Project, and Design/Builder shall permit
and facilitate inspections of the Work by Owner and its
representatives.
(l) Work by Owner. Owner shall have the right to perform
work related to the Project with its own forces and to award
separate contracts therefor, provided such work does not
interfere with the Work of Design/Builder. Owner shall not award
contracts to any contractor who is not signatory to a collective
bargaining agreement with a local AFL-CIO Building Trades Union
without the written approval of Design/Builder. Owner will
provide for the coordination of such separate work with the Work
of the Design/Builder, who shall cooperate therewith. Owner
shall be responsible to provide all necessary insurance for the
work of such contractors. Owner agrees to cause its employees
and any such separate contractors to abide by all federal, state
and local safety laws and regulations and to comply with
Design/Builder's safety program for the Project.
(m) Indemnification. To the fullest extent permitted by
law, Design/Builder shall indemnify, defend and hold harmless
Owner, its officers, directors, employees and agents, from and
against all claims, suits, demands, damages, losses, liabilities
and expenses, including reasonable attorneys' fees, arising out
of or resulting from the performance of this Contract, provided
that any such claim, damage, loss or expenses (i) is attributable
to bodily injury, sickness, disease or death, or to injury to or
destruction of tangible property (other than the Project itself),
and (ii) is caused or alleged to be caused in whole or in part by
any negligent or willful act or omission of Design/Builder, any
subcontractor of Design/Builder, anyone directly or indirectly
employed by any of them, or anyone for whose acts any of them may
be liable. Owner shall notify Design/Builder of any claim under
this indemnity promptly after Owner becomes aware of same, so as
to avoid prejudice to Design/Builder; and Design/Builder shall
have the right to defend in any action with respect to such claim
with counsel reasonably acceptable to Owner.
(n) Notices. All notices permitted or required by this
Contract shall be in writing and shall be deemed to have been
given when personally delivered to the respective persons whose
name appears below or when deposited in the United States mails,
certified or registered mail, postage prepaid and addressed as
follows:
If to Design/Builder: Ryan Companies US, Inc.
700 International Centre
900 Second Avenue South
Minneapolis, Minnesota 55402
Attention: Timothy M. Gray
If to Owner: Ault Incorporated
7300 Boone Avenue North
Brooklyn Park, Minnesota 55428
Attention: Carlos Montague
Either party may change the address for mailing of notices to it
hereunder and/or the person to receive such notices by giving 10
days written notice thereof to the other party in the manner
above provided.
(o) Governing Law. This Contract shall be governed by and
construed in accordance with the laws of the state of Minnesota.
(p) Binding Effect and Assignment. This Contract shall be
binding upon and shall inure to the benefit of the parties hereto
and their respective successors and assigns. Neither party to
this Contract shall assign any interest in this Contract without
the written consent of the other party. No permitted assignment
by either party, however, shall release it from primary liability
for the performance of its obligations hereunder.
(q) Hazardous Substances, Buried Tanks and Wells. Should
any so-called "hazardous or toxic substances," buried tanks or
wells, as defined and/or regulated by federal, state or local
laws or regulations, be encountered in the performance of the
Work, Design/Builder shall immediately cease work and notify
Owner thereof. Owner shall promptly thereafter cause any such
substances, tanks or wells to be removed in accordance with all
applicable laws. Design/Builder shall not be required to resume
construction until such substances, tanks or wells have been so
removed; and Owner shall provide Design/Builder with written
evidence of compliance with applicable laws in the removal of
such substances, tanks or wells as Design/Builder may reasonably
request. If the remediation of the hazardous substances, buried
tanks or wells only affects a portion of the Project site,
Design/Builder agrees to continue working on portions of the
Project that are unaffected so long as such Work does not present
a safety hazard to workers on the Project. The time by which
Substantial Completion is to be achieved shall be extended by the
period of delay resulting therefrom and the Guaranteed Maximum
Price shall be increased by any additional costs reasonably
incurred by Design/Builder due to such cessation and delay,
except to the extent that Design/Builder knew of such conditions.
If such substances, tanks or wells have not been removed as
required herein within 30 days from the date of Design/Builder's
notice to Owner, then Design/Builder may terminate this Contract
by written notice to Owner and recover from Owner the amounts
provided in Paragraph 15(a), unless Design/Builder knew of such
conditions. Irrespective of whether or not this Contract shall
have been so terminated by Design/Builder, unless Design/Builder
knew of such conditions, Owner shall indemnify, defend and hold
harmless Design/Builder and all of its employees and
subcontractors from and against any and all liability, loss, cost
and expense arising by reason of the presence of such hazardous
substances, tanks or wells on the Project site, except such as
may result from the gross negligence of Design/Builder or its
subcontractors.
(r) Project Closeout. Prior to receiving final payment,
Design/Builder shall furnish Owner with the following:
(i) One operation and maintenance manual;
(ii) Three sets of record drawings (blue
prints) for the entire Project, with accompanying
CADD discs;
(iii) Any special warranties or guarantees
that Design/Builder secures;
(iv) A project directory listing all names,
addresses and phone numbers of Design/Builder's
subcontractors who worked on the Project.
(s) Entire Agreement. This Contract represents the entire
and integrated agreement between Owner and Design/Builder
pertaining to the Project, and supersedes all prior negotiations,
representations or agreements, whether written or oral. This
Contract may be amended only on a written instrument signed by
both Owner and Design/Builder.
(t) Allowances. Design/Builder shall include in the
Guaranteed Maximum Price all allowances stated in the plans and
specifications. Unless specified otherwise herein, each
allowance shall include all of Design/Builder's costs (labor,
installation costs, materials, equipment, subcontractor costs,
taxes, freight, etc.) for that portion of the Project (but no
Design/Builder Fee). Whenever the actual costs covered by the
allowance are more or less than the allowance, the Guaranteed
Maximum Price shall be adjusted accordingly by Change Order.
(u) Addendum. The terms and provisions contained in any
Addendum or Exhibit which is attached hereto are incorporated
herein by reference and made a part of this Contract.
Article 17 - Arbitration and Legal Costs.
(a) Arbitration. All claims or disputes between the
parties to this Contract arising out of or relating to this
Contract, or the breach thereof, shall be decided by arbitration
in accordance with the Construction Industry Arbitration Rules of
the American Arbitration Association then in effect, unless the
parties hereafter agree otherwise. This provision shall be
specifically enforceable in any court of competent jurisdiction.
Notice of demand for arbitration shall be filed in writing with
the other party to this Contract and with the American
Arbitration Association. The demand shall be made within a
reasonable time after the dispute has arisen or as otherwise
required by this Contract. In no event shall the demand for
arbitration be made after the date when the applicable statute of
limitations would bar institution of a legal or equitable
proceeding based on such claim, dispute or other matter in
question. All arbitration proceedings shall be conducted in
Minneapolis, Minnesota, and prehearing discovery in the time and
manner provided by the then effective Federal Rules of Civil
Procedure shall be permitted. The award rendered by the
arbitrator or arbitrators shall be final, and judgment may be
entered upon it in accordance with applicable law in any court
having jurisdiction. Unless otherwise agreed in writing,
Design/Builder shall carry on the Work and maintain its progress
during any arbitration proceedings, and Owner shall continue to
make payments to Design/Builder in accordance with the terms of
this Contract except for the specific items that are in dispute.
(b) Legal Costs. If either party hereto shall file for
arbitration or bring suit against the other party to enforce the
terms of this Contract, the losing party shall pay to the
prevailing party that percentage of the prevailing party's costs
and expenses incurred in such action, including reasonable
attorney's fees, in an amount equal to the percentage that the
value of the judgment or award received by the prevailing party
bears to the total value of the judgment or award claimed by such
party, but in no event more than one hundred percent (100%) of
such costs and expenses, provided that the prevailing party has
not rejected a bona fide written settlement offer from the other
party in an amount greater than the amount of the judgment or
award received, in which case the prevailing party shall be
entitled to no reimbursement for its costs and expenses.
IN WITNESS WHEREOF, Design/Builder and Owner have executed this
Contract as of the date first above written.
OWNER: DESIGN/BUILDER:
AULT INCORPORATED RYAN COMPANIES US, INC.
By: By:
(Signature) (Signature)
(Printed Name and Title) (Printed Name and
Title)
EXHIBIT 11
AULT INCORPORATED & SUBSIDIARY
COMPUTATION OF CONSOLIDATED EARNINGS PER SHARE
(In Thousands of Dollars, Except Per Share Data)
<TABLE>
<CAPTION>
(Unaudited)
Years Ended
May 30, May 31,
1999 1998
<S> <C> <C>
Basic EPS Computation
Net Income Available to Common
Stockholders $1,988 $1,318
Common Shares Outstanding:
Beginning of Year 4,161,758 4,075,733
Common Shares Daily Weighted From:
Conversion of Note 9,619 -
Exercise of Employee Stock Options 22,182 58,036
Exercise of Employee Stock
Purchase Plan 2,290 2,290
Total Weighted Common Shares 4,195,849 4,136,059
Basic Earnings Per Share $0.47 $0.32
Diluted EPS Computation
Net Income Available to Common
Stockholders $1,988 $1,318
Total Weighted Common Shares 4,195,849 4,136,059
Dilutive Potential Common Shares,
Daily Weighted, from:
Assumed Conversion of
Outstanding Dilutive
Copnvertible Note 5,647
Employee Stock Purchase Plan 9,277 -
Employee Stock Options * 472,008 254,147
Employee Stock Purchase Plan 2,490 11,977
489,422 266,124
Less Common Shares Purchasable
from Proceeds:
Convertible Note 5,475 -
Employee Stock Purchase Plan 7,234 -
Employee Stock Options 255,761 135,568
Employee Stock Purchase Plan 2,336 12,443
270,806 148,011
Adjusted Weighted Average Shares 4,414,465 4,254,172
Diluted Earnings Per Share $0.45 $0.31
<FN>
* In fiscal 1999, options and warrants totaling 227,413 and
112,000 shares, respectively were excluded from the dilutive EPS
calculations because of their higher exercise prices compared to the
average market values. In fiscal 1998, options and warrants totaling
217,435 and 112,000, respectively, were also excluded from the
dilutive EPS calculations for similar reason.
</TABLE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Company's Registration Statements on Form S-8 (Commission file
numbers 333-08992, 333-38455, 333-04609, 33-53988, 33-19662,
2-87376, 33-33566), and the related Prospectuses, of our report,
dated July 9, 1999, which appears in the Annual Report on Form 10-K
of Ault Incorporated and Subsidiary for the year ended May 30,
1999.
/s/ McGLADREY & PULLEN, LLP
Minneapolis, Minnesota
August 25, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME OF THE
COMPANY'S FORM 10-K FOR THE YEAR ENDED MAY 30, 1999, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-30-1999
<PERIOD-END> MAY-30-1999
<CASH> 3303277
<SECURITIES> 849914
<RECEIVABLES> 10466897
<ALLOWANCES> 0
<INVENTORY> 9050605
<CURRENT-ASSETS> 24789864
<PP&E> 13541248
<DEPRECIATION> 6733372
<TOTAL-ASSETS> 33303283
<CURRENT-LIABILITIES> 8425833
<BONDS> 0
0
0
<COMMON> 19827000
<OTHER-SE> 3614980
<TOTAL-LIABILITY-AND-EQUITY> 33303283
<SALES> 50938193
<TOTAL-REVENUES> 50938193
<CGS> 36919753
<TOTAL-COSTS> 36919753
<OTHER-EXPENSES> 11023308
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 146016
<INCOME-PRETAX> 2848116
<INCOME-TAX> 860000
<INCOME-CONTINUING> 1988116
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1988116
<EPS-BASIC> .47
<EPS-DILUTED> .45
</TABLE>
