Page 23
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[ x ]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 1999
Commission file number 0-12611
AULT INCORPORATED
MINNESOTA 41-0842932
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identifiction No,)
7300 Boone Avenue North
Minneapolis, Minnesota 55428-1028
(Address of principal executive offices)
Registrant's telephone number: (612) 493-1900
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months, and (2) has
been subject to such filing requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock February 28, 1999
No par value 4,254,978 shares
Total pages 25
Exhibits Index on Page 20
Page 2
PART 1. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
AULT INCORPORATED & SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(in Thousands, Except Amounts Per Share)
<TABLE>
<CAPTION>
(Unaudited)
Third Quarter Ended Nine Months Ended
Feb. 28, March 1, Feb. 28, March 1,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net Sales $13,965 $10,294 $36,348 $30,671
Cost of Goods Sold 10,159 7,621 26,429 22,921
Gross Profits 3,806 2,673 9,919 7,750
Gross Profits Percentage 27.3 26.0 27.3 25.3
Operating Expenses:
Marketing 1,100 952 3,181 2,769
Design Engineering 549 478 1,545 1,309
General and Administrative
(Note 2) 1,269 861 3,132 2,434
2,918 2,291 7,858 6,512
Operating Income 888 382 2,061 1,238
Other Income (Expense):
Other 104 7 358 142
Interest Expense (50) (27) (103) (119)
Income Before Income Taxes 942 362 2,316 1,261
Income Taxes (Note 3) 336 79 772 382
Net Income $606 $283 $1,544 $879
Earnings Per Common and
Equivalent Shares
Outstanding (Note 4):
Basic $0.14 $0.07 $0.37 $0.21
Diluted $0.14 $0.07 $0.36 $0.21
Common and Equivalent
Shares Outstanding:
Basic 4,208,951 4,150,933 4,166,524 4,128,252
Diluted 4,454,681 4,265,129 4,329,388 4,277,376
</TABLE>
See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 3
PART 1. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
AULT INCORPORATED & SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in Thousands, Except Amounts Per Share)
<TABLE>
<CAPTION>
(Unaudited)
Third Quarter Ended Nine Months Ended
Feb. 28 March 1, Feb. 28 March 1,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net Income $606 $283 $1,544 $879
Other Comprehensive Income
Net of Tax:
Foreign Currency Translation
Adjustments (Note 13) 143 (829) 249 (1,263.00)
Comprehensive Income $749 ($546) $1,793 ($384)
</TABLE>
See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 4
AULT INCORPORATED & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in Thousands)
<TABLE>
<CAPTION>
(Unaudited)
February 28, May 31,
1999 1998
<S> <C> <C>
Assets:
Current Assets
Cash & Cash Equivalents (Note 5) $3,234 $5,935
Investment in Trading Securities 847 866
Trade Receivables, Less Allowance
for Doubtful Accounts of $48,000
at February 28, 1999, and $31,000
May 31, 1998 10,034 6,255
Inventories:
Finished Goods 4,976 3,744
Work in Process 498 278
Raw Material 3,623 2,594
Total Inventories 9,097 6,616
Prepaid and Other Expenses (Note 6) 894 618
Deferred Taxes 74 74
Total Current Assets 24,180 20,364
Other Assets:
Other Receivables, Less Allowance of
$65,000 at May 31, 1998, (Note 7) 199
Intangibles, Net of Amortization (Note 8) 1,593 142
Deferred Taxes 199 192
Other 213 41
2,005 574
Property, Equipment and Leasehold
Improvements at Cost:
Land 1,368 876
Building 814 813
Machinery and Equipment 6,569 5,969
Office Furniture 951 734
E.D.P. Equipment 1,520 1,493
Leasehold Improvements 975 978
12,197 10,863
Less Accumulated Depreciation 6,865 6,384
Net Equipment and Leasehold
Improvements 5,332 4,479
Total Assets $31,517 $25,417
</TABLE>
See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 5
AULT INCORPORATED & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in Thousands)
<TABLE>
<CAPTION>
(Unaudited)
February 28, May 31,
1999 1998
<S> <C> <C>
Liabilities and Stockholders' Equity
Current Liabilities:
Note Payable to Bank and Other $1,279 $236
Current Maturities of Long-Term
Debt (Note 9 ) 444 213
Account Payable 4,984 3,427
Accrued Expenses:
Compensation (Note 10) 436 392
Other (Note 11) 827 594
Income Taxes Payable 214 198
Total Current Liabilities 8,184 5,060
Long-Term Debt,
Less Current Maturities
Included Above (Note 9) 1,023 414
Deferred Rent Expense 28 70
Retirement and Severance
Benefits (Note 12) 338 245
Stockholders' Equity:
Preferred Stock, No Par Value, Authorized,
1,000,000 Shares; None Issued.
Common Shares, No Par Value, Authorized
10,000,000 Shares; Shares Outstanding:
February 28, 1999; 4,254,978 and
May 31, 1998; 4,172,258 Shares 18,882 18,359
Less Notes Receivable From
Sale of Common Stock (204) (204)
Retained Earnings 3,915 2,371
Accumulated Other Comprehensive
Income (Note 13) (649) (898)
21,944 19,628
Total Liabil. and Stockholders' Equity $31,517 $25,417
</TABLE>
See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 6
AULT INCORPORATED & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in Thousands)
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
February 28, March 1,
1999 1998
<S> <C> <C>
Cash Flows From Operating Activities
Net Income: $1,544 $879
Adjustments to Reconcile Net Income
to Net Cash
Provided by (Used in)
Operating Activities:
Depreciation 481 382
Amortization 35 27
Provision for Doubtful Accounts 17 35
Provision for Inventory Adjustments 50 45
Deferred Taxes (7) 90
Deferred Rent Expenses (42) (39)
Decrease in Market Value of Securities 19 1
Changes in Assets and Liabilities:
(Increase) Decrease In:
Trade Receivables (3,796) 1,775
Inventories (2,531) 410
Prepaid and Other Expenses (276) (19)
(Decrease) Increase in:
Accounts Payable 1,557 (451)
Accrued Expenses 370 (364)
Income Tax Payable 16 (124)
Net Cash Provided by (Used in)
Operating Activities (2,563) 2,647
Cash Flows From Investing Activities:
Purchase of Equipment and
Leasehold Improvements (1,334) (1,107)
Decrease (Increase) in Other Assets (1,459) 82
Net Cash Used in Investment
Activities (2,793) (1,025)
Cash Flows From Financing Activities:
Net Borrowings(Payments) on Revolving
Credit Agreements 1,008 (361)
Net Proceed From Issuance of Convertible
Note after conversion of $466,000 34
Proceeds from Long-Term Borrowings 998 300
Proceeds from Issuance of Common Stock 523 249
Principal Payments on Long-Term Borrowings
Including Capital Leases (157) (299)
Net Cash Provided by (Used in)
Financing Activities 2,406 (111)
Effect of Foreign Currency Exchange
Rate Changes on Cash 249 (1,101)
Cash and Cash Equivalents:
Increase (decrease) (2,701) 410
Beginning 5,935 3,677
Ending $3,234 $4,087
</TABLE>
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THIRD QUARTER ENDED FEBRUARY 28, 1999
Note 1, Principles of Consolidation
The Company's consolidated financial statements include the accounts
of Ault Incorporated, and its wholly owned subsidiaries, Ault Korea
and Ault Xianghe Co., Ltd. All significant intercompany
transactions have been eliminated. Foreign currencies representing
the investments of the Company in its subsidiaries were translated
into US dollars, in accordance with the provisions of FASB Statement
No. 52. The effect from the translation is represented in
Stockholders' Equity, Accumulated Other Comprehensive Income.
Note 2. General and Administrative
In December 1998, the Company acquired the power supply assets of
LZR Electronics, Inc., located in Gaithersburg, MD. To integrate
those assets into its operations, the Company paid bonuses to
certain employees of LZR in order to induce the continuation of
their services through May 31, 1999. Payments for these bonuses in
the third quarter totaled approximately $120,000. Similar payments
are anticipated in the fourth quarter of fiscal 1999.
Note 3, Income Taxes
The Company's tax provision includes taxes accrued on US and Korean
income calculated at an average rate of 33.3% of consolidated pre-
tax earnings for the nine months. The average calculated tax rate
is lower than the normal rate because Ault Xianghe Co. Ltd. Incurred
a loss for the period and Ault Korea Corporation utilized the
availability of certain business credits to offset portions of its
provisions for income taxes.
Note 4, Net Income Per Share
The Company has presented basic and diluted per share earnings in
accordance with FASB Statement No. 128. Basic per share earnings
are presented only for outstanding common stock. In addition to
outstanding common stock, presentation of diluted per share earnings
also assumes the conversion, exercise or issuance of all potential
common stock instruments that are not antidilutive, using average
common market values.
The Company also has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation. Accordingly, no compensation cost has
been recognized for the Company's stock option plan. Had
compensation cost been determined for the nine months of fiscal 1998
and fiscal 1999 based on the fair value of options at the grant
dates consistent with the provisions of SFAS No. 123, the Company's
net income and net income per share would have changed to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
Nine Months Ending
February 28, 1999 March 1, 1998
<S> <C> <C>
Net Income, as reported $1,544,000 $ 879,000
Net Income (loss) pro forma 1,307,552 560,946
Net Income, per share, as
reported, basic 0.37 0.21
Net income, per share, as
reported, diluted 0.36 0.21
Net Income, per share, basic,
basic, pro forma 0.30 0.13
Net Income, per share, diluted,
pro forma .029 0.09
</TABLE>
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THIRD QUARTER ENDED FEBRUARY 28, 1999
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants included in
fiscal 1999 and fiscal 1998 calculations:
<TABLE>
<CAPTION>
Nine Months Ending
Feb. 28, 1999 March 1, 1998
<S> <C> <C>
Expected dividend yield - -
Expected stock price volatility 63.14% 67.68%
Risk free interest rate 4.51-6.61% 5.47-6.61%
Expected life of options 1-5 1-5
</TABLE>
Note 5, Cash and Investments
For the purpose of reporting cash and cash flows, the Company
considers all highly liquid instruments purchased with a maturity of
three months or less to be cash equivalents. Investment in trading
securities is comprised of preferred stocks that pay dividends on
which the Company receives a tax benefit.
Note 6, Prepaid and Other Expenses
Prepaid and other expenses are principally customs duty and value-
added taxes, as well as certain deferred expenses that are related
to and are absorbed against revenue during the fiscal year and
receivables for cash advances made to foreign subcontractors of the
Company. The customs duty and value added taxes are paid by Ault
Korea Corporation to the Korean authority on products that are
manufactured for exportation. These payments are refundable when
the subsidiary submits to the Korean Government the appropriate
claim and proof of exportation. Advances to sub-contractors are
amortized against order deliveries.
Note 7, Other Receivables
Other receivables for fiscal 1998 represented amounts that were owed
to the Company relating to trade receivable invoices from fiscal
1991. The customer had terminated its contract with the Company for
reasons that were external and unrelated to the Company and refused
to compensate the Company for its incurred costs. A suit by the
Company resulted in collection of the amount in the first quarter of
fiscal 1999.
Note 8. Intangibles
Intangibles are comprised of costs relating patent and goodwill.
The patent cost amounts to $115,000, net of amortized amounts of
$67,000. It represents the contract price of US Patent
#5,303,137,1, which was acquired from a source external to and
independent of the Company. The Company believes that products
using the power conversion technology it represents will generate
significant revenues into fiscal 2002. For amortization purposes,
it was assigned a life of four years.
Goodwill amounts to $1,478,000, net of amortization of $25,000. It
represents the excess of cost over book value of the assets acquired
by the Company in December, 1998, from LZR Electronics, Inc. located
in Gaithersburg MD, and is being amortized using the straight-line
method over fifteen years.
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THIRD QUARTER ENDED FEBRUARY 28, 1999
Note 9, Long-Term Debt
Long-term debt, including current maturities contains the following:
<TABLE>
<CAPTION>
February 28, May 31,
1999 1998
(000)
<S> <C> <C>
* US Bank
8.1% term loan due in monthly installments
of $7,340, including interest to February
2001, secured by equipment $162 $216
* Suwon City, Korea
6.5% note payable, due in quarterly installments
of approximately $28,019 including interest
Through April 2000 secured by equipment 102 144
* US Bank
7.9% term loan due in monthly installments
of $7,320, including interest to November
2001, secured by equipment 216 267
* Korea Government Agency
9.0% term loan due in 8 quarterly installments
of approximately $45,000 including interest,
Beginning in February 2000 through
November, 2001 323
* US Bank
6.8% term loan due in monthly installments
of $9,538, including interest to November
2002, secured by equipment 389
* Kamco, Korea Corporation
13.1% mortgage note first installment payment
principal and interest of approximately $31,000
due in May, 2000, and three payments each
of approximately $92,000 every six months
thereafter through November 2001 275
Total $1,467 $627
Less Current Maturities 444 213
Total $1,023 $414
</TABLE>
Note 10, Compensation
Compensation consists principally of amounts accrued for payment of
employees' salaries, vacation and sick pay.
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THIRD QUARTER ENDED FEBRUARY 28, 1999
Note 11, Accrued Expenses, Other
Accrued expenses, other, are mainly undue amounts for sales
representatives' commissions, fees to product certifying agencies
and provisions for future payment of current warranty commitments.
Note 12, Retirement & Severance Benefits
Retirement & Severance Benefits are a provision by Ault Korea
Corporation, in accordance with requirements of the Korea
Government, for the compensation of each current employee when
his/her employment with the subsidiary terminates. The National
Pension Scheme of Korea, does not require the Company to fund this
obligation, but requires the transfer of certain portions of the
liability to the Korean National Pension Fund. The liabilities
recorded by the Company are net of these transfers. To derive a tax
benefit from these deferred payments, the Company also has the
option to fund these future payments under a defined benefit plan
through an insurance company.
Note 13, Accumulated Other Comprehensive Income
Accumulated other comprehensive income is comprised of foreign
currency translation adjustments resulting from translation of the
financial statements of Ault Korea Corporation from its functional
currency, Korean Won, to US dollars. Adjustments that were recorded
during the nine months of each fiscal year are as follows:
<TABLE>
<CAPTION>
February 28, March 1,
1999 1998
(000)
<S> <C> <C>
Beginning cumulative exchange gain (loss) $(898) $31
Gain (loss) for the period from:
a. Long-term inter-company receivables 319 (1,71)
b. Other (70) (30)
Total $(649) $(1,070)
</TABLE>
The amounts attributed to long-term inter-company receivables for
the nine months ending February 28, 1999, reflect changes in the Won
rate from 1,400.0 Wons to $1.00 at June 1, 1998, to 1,224.0 Wons to
$1.00 at February 28, 1999. Amounts attributed to long-term inter-
company receivables for the nine months ending March 1, 1998,
reflect changes in the Won rate from 892.3 Wons to $1.00 at June 1,
1997, to 1,653.5 Wons to $1.00 at March 1, 1998. Amounts were
computed on outstanding receivables of $2,312,000 at February 28,
1999, and $2,327,000 at March 1, 1998.
ITEM 2 MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS ANDRESULTS 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.
RESULTS OF OPERATIONS
Net Sales: Net sales increased by 35.7% to $13,965,000 for the third
quarter of fiscal 1999 from $10,294,000 for the third quarter of
fiscal 1998. For the nine months of fiscal 1999, sales totaled
$36,348,000 up by 18.5% from sales of $30,671,000 for the nine
months fiscal 1998. The improvements in sales, principally during
the third quarter, resulted from continuing strong demand for
external power conversion products for applications in the
telecommunications/data communications, computer and medical markets
served by the Company. Significant among the applications 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.
The Company believes that earlier infrastructure problems relating
to installation of transmission stations and wired systems that
hindered growth in demand for cable modems are being resolved and
that demand for cable modems, will continue to grow at a rate that
is faster than the rates of other applications. 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 alliance
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 and, as reported by Micro-Tech Consultants,
the fastest growing segment of the external power conversion
products market. Orders and sales for portable medical product
applications also grew during the nine months. These products
utilize the Company's switching power supplies and battery chargers
and are traditionally the Company's highest margin application
although they command only approximately 15.0% of the Company's
total sales. To strengthen its position in this market, in December
1998, the Company acquired the power supply division of LZR
Electronics, Inc., a small, closely held corporation located in
Gaithersburg, MD. LZR designs, manufactures and markets a full line
of power supplies from which it had revenues of $6.4 million in its
calendar year 1997 and estimated revenues of $6.5 million for its
calendar year 1998. In addition to complementing the Company's
sales for many high volume applications, most of LZR's products are
agency approved for medical product applications. The Company
believes that its greater sales channels and larger customer base
provide an advantage to enhance current levels of revenue attained
by LZR. LZR's domestic manufacturing is being moved to the Company's
headquarters facility in Minneapolis and a substantial portion of
its foreign sub-contract manufacturing will be moved to the
Company's Asian subsidiaries. Engineering, product development and
sales activities will continue to be based in Maryland.
Service to customers continues as a strong strategic focus of the
Company. To this end, the Company's engineering activities are
directed to various customer product applications, in addition to
cable modems and portable medical products, that are anticipated to
generate revenue in fiscal 1999 and later years. These applications
include uninterruptible power supplies, power supplies for
asymmetric digital subscriber line modems (a competing technology to
cable modems); hubs, routers and switchers for the networking
market. All of these factors are the basis for the Company's belief
that the improvements so far realized in its fiscal 1999 sales will
continue through the fourth quarter of fiscal 1999 and into its
fiscal year 2000.
Order Backlog: The Company's order backlog at February 28, 1999
totaled $15.4 million, which equals amounts that were available when
the quarter began, and as compared to $14.1 million at March 1,
1998. The order backlog at February 28, 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 customers. Because of the Company's shortening lead-times,
order backlog as an indicator of future shipments and raw material
requirements has also changed. These changes require the Company to
place greater reliability on its ability to forecast customer needs
and requirements for on-time shipment of products. The Company
believes that shorter customer lead-times will not detract from its
ability to deliver competitive customer services.
Gross Profit: Gross profit increased to $3,806,000 or 27.3% of net
sales for the third quarter of fiscal 1999, from $2,673,000 or 26.0%
of net sales for the third quarter of fiscal 1998. For the nine
months, gross profits totaled $9,919,000 or 27.3% of net sales in
fiscal 1999 and $7,750,000 which represented 25.3% of net sales for
fiscal 1998. The improvements are due principally to proportionately
greater sales 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 the nine months compared to
the nine months of fiscal 1998.
Operating Expenses: Operating expenses were $2,918,000 or 22.8% of
net sales in the third quarter of fiscal 1999, as compared to
$2,291,000 equaling 22.3% of net sales for the second quarter of
fiscal 1998. For the nine months, operating expenses amounted to
$7,858,000 or 21.6% of net sales in fiscal 1999 and $6,512,000,
which equaled 21.2% of net sales in fiscal 1998. Compared to fiscal
1998, operating expenses grew by $627,000 and $1,346,000 in the
third quarter and nine months, respectively, of fiscal 1999. The
increased expenditures were incurred principally in relation to
(1) sales commissions paid to sales representatives on the larger
sales in fiscal 1999, (2) assuring successful integration of LZR
into the Company, (see Note 2 to CONSOLIDATED FINANCIAL STATEMENTS);
and (3) continuing support of strategic initiatives to achieve the
following purposes:
1. Strengthening the Company's sales and marketing activities in
the US and Asia.
2. Enhancing Asian manufacturing supervision.
3. Providing and maintaining direct communication links between
Ault US and Ault Korea.
4. Installation and maintenance of programs for upgrading the
quality of management information services.
5. Certification of products for sale in broader foreign markets
and to facilitate a more prompt response to customer requirements.
6. Upgrading systems to improve materials forecasting technique
necessary to meet product delivery lead-times of customers and to
support US Customs matters necessitated by increased foreign
business activities.
It is anticipated that expenditures relating to most of these
matters will be incurred in future periods and that they will
contribute to the generation and support of future business. It is,
however, the Company's objective to reduce the proportion operating
expenses bear to future net sales where such action did not
jeopardize generation of future business.
Operating Income: Operating income for the third quarter totaled
$888,000 for fiscal 1999 and $382,000 for fiscal 1998 equaling,
respectively, 6.4% and 3.7% of net sales. For the nine months,
operating income totaled $2,061,000 or 5.7% of sales in fiscal 1999
and $1,238,000, which amounted to 4.0% of sales in fiscal 1998. 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.
Non-Operating Income: Other income of $358,000 for fiscal 1999 and
$142,000 for fiscal 1998 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
$103,000 in fiscal 1999 and $119,000 in fiscal 1998, which were paid
principally on bank credit facilities and long-term borrowings.
Income Tax: Income taxes for the nine months of fiscal 1999 were
$772,000, which equaled 33.3% of pretax income of $2,316,000. For
the nine months of fiscal 1998, income taxes were $382,000, which
amounted to 30.3% of pretax income of $1,261,000. The tax rates for
both periods 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 $606,000 for the
third quarter of fiscal 1999, compared to $283,000 for the third
quarter of fiscal 1998. Net income for the nine months totaled
$1,544,000 in fiscal 1999 and $879,000 in fiscal 1998.
Per Share Earnings: Diluted per share earnings were $0.14 on
outstanding, weighted, average shares of 4,454,681 for the third
quarter of fiscal 1999 and $0.07 for the third quarter of fiscal
1998 computed on outstanding, weighted, average shares of 4,265,129.
Per share earnings for the nine months were $0.36 for fiscal 1999
and $0.21 for fiscal 1998 based on outstanding, weighted, average
shares of 4,329,388 and 4,277,376, respectively for each period.
LIQUIDITY AND CAPITAL RESOURCES
The following table describes the Company's working capital position
at February 28, 1999 and at March 1, 1998:
<TABLE>
<CAPTION>
February 28, March 1,
1999 1998
(000)
<S> <C> <C>
Working capital $15,996 14,577
Cash 3,234 4,087
Trading securities at market 847 847
Current Asset 24,180 19,629
Current Liabilities 8,184 5,052
Current Ratio 2.95 3.89
Unutilized bank credit facilities 4,221 3,105
Cash provided (used) by operations (2,563) 2,647
</TABLE>
Current Working Capital Position
At February 28, 1999, the Company had current assets of $24,180,000
and current liabilities of $8,184,000, which amounted to working
capital of $15,996,000 and represented the availability of resources
that are approximately three times its current liabilities. In
addition to cash and trading securities, the Company emphasizes
reliance, firstly, on cash flows from operations and, secondly, on
its credit facilities as sources of working capital to support
normal growth in revenue, capital expenditures and attainment of
profit goals.
Cash and Investments: At February 28, 1999, the Company had cash and
trading securities totaling $4,081,000, down from $4,934,000 at
March 1, 1998 principally because of cash payments made in acquiring
the power supply assets of LZR Electronics, Inc. Cost of the
acquisition to the Company amounted to $4,045,000, which included
price paid to the seller and the recognition of goodwill amounting
to $1,490,000, which included professional fees incurred by the
Company. The assets purchased had a total value of $2,105,000, and
included inventories valued at $1,863,000, manufacturing equipment
and tooling valued at $193,000, contracts, including sales
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, delivery
of a one year, 8.0% convertible promissory note for $500,000 and an
assumption by the Company of $450,000 of certain liabilities. The
note is convertible at the option of the holder into 78,865 shares
of the Company's common stock. Cash paid in the transaction was
derived from available Company cash.
Credit Facilities
The Company maintains two credit facilities; its primary credit
facility with US Bank and a smaller facility with Korea Exchange
Bank that supports the South Korean subsidiary.
The credit arrangement with US Bank includes:
(a) A revolving credit facility of $4.0 million at prime rate of
interest, secured by trade receivables and expiring on October 1,
1999. The Company has completed negotiations that are expected to
reduce the borrowing rate to .5% below the prime rate. At February
28, 1999, borrowings against it amounted to $650,000.
(b) One or more term loans, each up to an amount of $400,000. At
February 28, 1999, borrowings amounting to $767,000 were outstanding
on three term loans. See Note 9, under NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
The South Korean credit facility is approximately $1.5 million of
which borrowings at February 28, 1999 totaled $595,000.
Cash Flows for Fiscal 1999
Operations: Although the Company had net profits that totaled
$2,097,000, after adjustments, operations used $2,563,000 of cash
during the nine months due principally to the following activities:
(a) Increases in trade receivables, mainly due to the increased net
sales in the third quarter of fiscal 1999 used $3,796,000 of cash.
Further use of cash from increased net sales is anticipated for the
fourth quarter and in fiscal 2000.
(b) Increases in inventories used $2,531,000 of cash, including
approximately $1,900,000 was obtained in the asset purchase
transaction with LZR Electronics, Inc. The remaining 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
$1,927,000 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 over the remaining
fourth quarter and in fiscal year 2000.
Investing Activities: Investing activities used net cash of
$2,793,000 relating principally to (1) manufacturing and tooling
equipment obtained and goodwill, net of amortization, recognized
from the LZR Electronics, Inc. transaction, (2) purchase of
manufacturing and tooling equipment amounting to $696,000, normally
required to support the Company, and (3) purchase of land in South
Korea. Acquired at a cost of $445,000, the land is required to
relocate the Korean manufacturing facility soon to be purchased by
the Korean Government for public improvement purposes.
Financing Activities: Financing activities provided net cash of
$2,406,000, which were comprised principally of the following
transactions:
1. Borrowings under the revolving credit facilities provided
$1.008,000 of cash
2. Proceeds from long-term borrowings provided $998,000 of cash,
which included a US Bank equipment term loan of $400,000, a Korea
Government Agency working capital loan and a Kamco Korea Corporation
mortgage loan, each respectively, totaling $323,000 and $275,000.
See Note 9. Under NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 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.
3. Proceeds from the issuance of common stock provided $523,000,
of which $466,000 are in connection with conversion by LZR
Electronics, Inc. of portions of the Company's promissory note that
was issued as discussed under Cash and Investments.
4. Principal payments on long-term borrowings used $157,000 of
cash.
Effect of Foreign Currency Exchange Rate Fluctuations. The economic
crisis in South Korea, which in fiscal 1998 resulted in a dramatic
devaluation of the Won, the country's currency, has improved,
although, compared to its value during the past several years, it
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
$249,000 during the nine months, which related principally to long-
term inter-company receivables. See Note 13, under NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
Summary:
Although no significant contributions to cash from operations are
anticipated for the remaining period of fiscal 1999, 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.
Impact of Recent Accounting Standard Changes:
Statement No. 130: The FASB has issued Statement No. 130, Reporting
Comprehensive Income, effective for fiscal years beginning after
December 15, 1997. Statement No. 130 requires that items, such as
unrealized gains and losses on certain investments in debt and
equity securities and certain foreign currency items be treated as
components of other comprehensive income in the statements of income
and in the stockholder's equity segments of financial statements.
As required, the Company has adopted Statement No. 130 as of August
30, 1998. See CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME and
CONSOLIDATED BALANCE SHEETS, Stockholders' Equity.
Statement No. 131: FASB has issued Statement No. 131, Disclosures
About Segments of an Enterprise and Related Information, effective
for fiscal years beginning after December 15, 1997. Statement No.
131 requires disclosure of certain information for each
organizationally structured and performance assessed business
segment of an enterprise, including, among other disclosures, profit
and loss information, segment assets and information on major
customers. The following information relates to adoption of
Statement No. 131 by the Company for its fiscal year 1999:
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>
NINE MONTHS ENDING
FEB. 28, 1999 MAR. 1, 1998
($000) ($000)
<S> <C> <C>
US $29,667 $21,490
Canada 1,310 1,442
France 3,888
Ireland 2,474 1,095
All Other Foreign Countries 2,897 2,756
Total $36,348 $30,671
</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.
Information About Major Customers
The Company sells its products to over 200 customers, and its
objective is to maintain a diversified customer base and to avoid,
where practicable, dependence for revenue on a single customer. For
the fiscal 1999 and fiscal 1998 periods ending November 29, 1998 and
November 30, 1997, respectively, revenues from customers that
comprised 10.0% or more of total revenues were:
<TABLE>
<CAPTION>
FISCAL 1999FISCAL 1999FISCAL 1998FISCAL 1998
Revenue % Revenue %
(000) (000)
<S> <C> <C> <C> <C>
Customer "A" $5,829 16.0 256 .8
Customer "B" 2,527 7.0 2,965 9.7
Customer "C" 2,474 6.8 973 3.2
</TABLE>
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 the third quarter of fiscal 1999. Although
products that were 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 nine months
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.
Microchip-Based Date-Referenced Systems and Year 2000 Compliance
The year 2000 issue is principally the result of computer programs
that were written and component embedded logics that were designed
using two digits instead of four digits to define the year 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
year 2K 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, desktop
software, other manufacturing information software and hardware and
electric power and telecommunication and other support:
Suppliers
Suppliers Partnering Under Inventory Forecast System:
Many of these suppliers currently partnering under the forecast
system, as opposed to MRP are already Y2K compliant. Guided by
Ault's forecast system and monitored by the Company, each supplier
has agreed to carry a minimum of four months of material enough to
cover any potential interruptions during the critical times.
Agreement to complete by 5-01-99
Currently Non-compliant Small to Mid-size Suppliers
The Company is working with suppliers in this category to ensure
delivery of materials without reliance on their current computerized
systems. The alternative plan is a manual, paper driven system with
a three month back up of material as determined by Ault's forecast.
Agreement to complete by 5-01-99
Currently Non-compliant Large Suppliers
Ault will negotiate a three month reserve of material with these
suppliers as well as determine alternate sources among the smaller
suppliers who show greater willingness to cooperate 5-01-99
Additionally, site visits will be made to certain large suppliers to
evaluate their current system and to determine if allocation to a
more reliable supplier is necessary 3-30-99
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 have 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 compliance will be checked and corrected.
6-01-99
* Windows 95 users will be upgraded to NT 4.0. 6-01-99
* Symix business information software will be run in a test
environment
using a HP 9000 platform for compliance proof. 5-01-99
Other Manufacturing Information & Communication Software
The following software reported by their manufacturers as compliant
will be tested:
* Automatic test equipment for product reliability 5-01-99
* EDI for customer/supplier communications 5-01-99
* Pro-Engineering documentation software 5-01-99
* Price quotation system 5-01-99
* Telecommunication fax 5-01-99
* Building security, including door card reader 5-01-99
* US Bank communication software
The following systems were documentary certified compliant:
* Lucent Technologies email system
* AT&T telephone system
Hardware
* HP UNIX server reported compliant will be tested6-01-99
* About 50% of non-compliant workstations already replaced
* Remaining workstations will be tested and those not
compliant
will be replaced by 6-01-99
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 at 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 replacement of
hardware and software which the Company presently knows are not
compliant and another $25,000 for future staff time for compliance
tasks. In addition, the Company estimates that it may spend no more
than an additional $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, and 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 interruptions, however, could have a material,
adverse impact on the Company's financial condition and results of
operations.
Risk 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 are no disruptions in the business or operations of its
customers, the possibility exists that some customers may experience
problems that may motivate such customers to commence litigation
against the Company for restitution and damages that 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 received adequate responses from many suppliers of
whom the support of some is considered critical to the Company's Y2K
compliance. The Company will provide assistance to suppliers who
need it. Where survey results necessitate it, the Company will
arrange for suppliers to maintain reserves of material through
critical Y2K periods.
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 June 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 this equipment
and remedy any defects by June 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.
Subsequent Events:
On April 12, 1999 the Company released to the public that it signed
an agreement with Sumitomo Corporation of Japan to form a joint
venture in South Korea that will manufacture and market smart
battery packs for wireless telephones that use CDMA technologies.
Named Ault Energy Systems, Inc. (AES), the venture will have equity
capital of $2.0 million, which will be funded in two equal
increments in May 1999 and in February 2000. It will be 60.0% owned
by Ault and 40.0% owned by Sumitomo. Production is scheduled to
commence in June 1999.
ITEM 1-4 Not Applicable
ITEM 5 OTHER INFORMATION
Mr. Edward C. Lund resigned from the Board of Directors effective
January 29, 1999, to devote greater attention to family matters. He
had served the Board since 1974. The Board of Directors and
Executive Management, on their own behalf and the behalf of
shareholders express gratitude to Mr. Lund for his many years of
dedicated service to the Company and wish him well in his new
direction.
Mr. Frank L. Sims was appointed to the Board of Directors at its
meeting on January 29, 1999 to fill the position vacated by Mr.
Lund. Mr. Sims is president of Cargill's North American Grain
Division with responsibilities for grain operations in the United
States, Canada and Mexico. He brings to the Board his expertise in
general business management.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
ReferenceTitle of Document Location
Part 1 Exhibits
11 Computation of Per Share Earnings Filed herewith
at page 22
27 Financial Data Schedule Filed Electronically
99-1 Public News Release on contract signed Filed
herewith on page 24
with Sumitomo Corporation establishing
a Joint Venture Operation in South Korea
to build smart battery packs.
(b) Reports on Form 8-K
On December 10, 1998 the company filed its Form 8-K with the
Securities and Exchange Commission Reporting the purchase of all of
the power supply assets of LZR Electronics, Inc., a Maryland-based
corporation.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AULT INCORPORATED
(REGISTRANT)
DATED: 4/15/99 /s/ Frederick M. Green
Frederick M. Green, President
Chief Executive Officer and
Chairman
DATED: 4/15/99 /s/ Carlos S. Montague
Carlos S. Montague, Vice President
Chief Financial Officer and
Controller
Page 7
EXHIBIT 11
AULT INCORPORATED AND SUBSIDIARY
COMPUTATION OF CONSOLIDATED EARNINGS PER SHARE
(In Thousands of Dollars, Except Per Share Data)
<TABLE>
<CAPTION>
(Unaudited)
Nine Months
Ended Ended
February 28, March 1,
1999 1998
<S> <C> <C>
Basic Earnings Per Share Computation:
Net Income to Common Stockholders $1,544 $879
Common Shares Outstanding:
Beginning of Year 4,161,758 4,075,733
Common Shares, Daily Weighted, From:
Exercise of Employee Stock Options
First Quarter 52,519
Second Quarter 3,904
Third Quarter 3,070
Conversion of Notes, Third Quarter 10,667
Total Weighted Common Shares 4,179,399 4,128,252
Net Income Per Share $0.37 $0.21
Diluted Earnings Per Share
Computation:
Net Income to Common Stockholders $1,544 $879
Total Weighted Common Shares 4,179,399 4,128,252
Dilutive Potential Common Shares,
Daily Weighted, from Assumed
Conversion of
Outstanding Dilutive:
Convertible Notes 15,367
Employee Stock Options 487,307 257,564
Employee Stock Purchase Plan 11,605
502,674 269,169
Less Common Shares Purchasable
from Proceeds:
Convertible Notes 14,161
Employee Stock Options 320,087 109,638
Employee Stock Purchase
Plan, Phase 2 10,407
334,248 120,045
Adjusted Weighted Average Shares * 4,347,825 4,277,376
Net Income Per Share $0.36 $0.21
<FN>
*For the third quarter of fiscal 1999 and fiscal 1998,
options totaling 143,871, and 329,000 respectively, were
excluded from dilutive EPS calculations because of their
higher exercise prices compared to the market values.
Underwriters' common stock warrants totaling 112,000 shares
were also excluded from the dilutive EPS calculations in
these periods for similar reasons.
</TABLE>
Page 8
AULT INCORPORATED AND SUBSIDIARY
COMPUTATION OF CONSOLIDATED EARNINGS PER SHARE
(In Thousands of Dollars, Except Per Share Data)
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
February 28, March 1,
1999, 1998
<S> <C> <C>
Basic Earnings Per Share Computation:
Net Income to Common Stockholders $606 $283
Common Shares:
Outstanding, Beginning of Year 4,161,758 4,075,733
Exercise of Employee Stock Options:
First Quarter 75,200
Second Quarter 10,500
Common Shares, Daily Weighted,
Third Quarter From:
Exercise of Employee Stock Options 4,691
Conversion of Notes 32,001
Total Weighted Common Shares 4,208,950 4,150,933
Net Income Per Share $0.14 $0.07
Diluted Earnings Per Share Computation:
Net Income to Common Stockholders $606 $283
Total Weighted Common Shares 4,208,950 4,150,933
Dilutive Potential Common Shares,
Daily Weighted, from:
Assumed Conversion of
Outstanding Dilutive:
Employee Stock Options 660,459 180,550
Employee Stock Purchase Plan 11,766 11,605
Convertible Note 46,052
718,277 192,155
Less Common Shares Purchasable
from Proceeds:
Employee Stock Options 418,342 68,309
Employee Stock Purchase Plan 8,722 9,650
Convertible Note 42,437
469,501 77,959
Adjusted Weighted Average Shares 4,457,726 4,265,129
Net Income Per Share $0.14 $0.07
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS OF THE
COMPANY'S FORM 10-Q FOR THE PERIOD ENDED FEBRUARY 28, 1999, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-30-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> FEB-28-1999
<CASH> 3234
<SECURITIES> 847
<RECEIVABLES> 10034
<ALLOWANCES> 0
<INVENTORY> 9097
<CURRENT-ASSETS> 24180
<PP&E> 12197
<DEPRECIATION> 6865
<TOTAL-ASSETS> 31517
<CURRENT-LIABILITIES> 8184
<BONDS> 0
0
0
<COMMON> 18882
<OTHER-SE> 3062
<TOTAL-LIABILITY-AND-EQUITY> 31517
<SALES> 36348
<TOTAL-REVENUES> 36348
<CGS> 26429
<TOTAL-COSTS> 26429
<OTHER-EXPENSES> 7500
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 103
<INCOME-PRETAX> 2316
<INCOME-TAX> 772
<INCOME-CONTINUING> 1544
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1544
<EPS-PRIMARY> .37
<EPS-DILUTED> .36
</TABLE>
Page 2
EXHIBIT 99-1
Ault Establishes Joint Venture With Sumitomo Corporation of Japan
To Manufacture and Market Battery Packs for Digital Wireless Phones
Joint Venture Revenues of Approximately $13 Million Expected in
Fiscal 2000
Rising to $28 Million in Fiscal 2001
April 12, 1999---Minneapolis, MN---Ault Incorporated (Nasdaq
National Market: AULT) today announced the formation of Ault Energy
Systems, Inc. (AES), a joint venture with Japanese trading company,
Sumitomo Corporation that will manufacture and market smart battery
packs for wireless digital telephones. AES will be 60%-owned by
Ault and 40%-owned by Sumitomo.
Battery pack production is scheduled to commence in June 1999, which
marks the beginning of Ault's fiscal 2000 year. AES sales are
expected to total approximately $13 million in fiscal 2000 and are
currently forecasted to increase significantly to approximately $28
million in fiscal 2001.
AES will manufacture smart battery packs on new production lines at
the Company's manufacturing facility in Korea. Snapped into the
back of a wireless phone, a smart battery includes a built-in
microchip and electronics that monitor the battery's charge status
and regulates battery recharging and other functions.
Sumitomo will be the sole agent for selling the completed battery
packs to Korean OEMs of digital wireless phones, which dominate the
wireless telephone market based on the CDMA technology standard.
CDMA-based digital phones account for approximately 50% of the U.S.
market, and the Peoples' Republic of China recently indicated it may
open its market to CDMA-standard wireless equipment.
Frederick M. Green, president and chief executive officer,
commented: "This joint venture represents the single greatest
growth opportunity in Ault's history, and we are extremely pleased
to be pursuing the wireless battery pack market with a partner of
Sumitomo's global stature. Since the worldwide battery pack market
is highly fragmented, we believe substantial opportunity exists for
a well-funded operation like AES that is backed by Ault's
demonstrated manufacturing expertise and Sumitomo's extensive
distribution capabilities. As a result, we believe AES can develop
a high degree of critical mass in the wireless battery pack market
within a relatively short period of time."
Industry sources estimate that the smart battery pack market
registered unit growth of nearly 50% in 1998. Demand for smart
wireless battery packs is expected to continue exceeding available
worldwide supply for the foreseeable future. The strong demand for
smart battery packs is based on the fact that smart batteries are
considered the best technology for increasing battery life and
product safety.
Green said that under terms of the joint venture, Ault is free to
pursue additional battery pack business outside the Korean market.
He said the Company intends to evaluate selected opportunities
involving such applications as digital cameras and camcorders.
Due to the impact of start-up costs, AES will post a loss during
Ault's fourth quarter ending May 31, 1999, but Ault's consolidated
earnings for this period are not expected to be significantly
affected by its 60% equity share of this loss. AES is forecast to
post progressively smaller losses during the first half of fiscal
2000 as battery pack production starts ramping up. It is
anticipated that these losses again will have only a minimal impact
on Ault's consolidated earnings. AES is expected to turn profitable
in the third quarter of fiscal 2000 and report net income for the
full year.
Initial equity funding for AES will amount to $2 million, of which
Ault will contribute 60% or approximately $1.2 million. Later in
fiscal 2000, the joint venture plans to borrow an additional
$2 million, which it expects to repay within one year.
Headquartered in Tokyo, Sumitomo Corporation is one of the world's
largest integrated trading companies, providing value-added
intermediary and distribution services between producers and
customers around the globe. Sumitomo Corporation had sales of
approximately $95 billion in 1998.
Ault is the largest independent manufacturer of external power
conversion products based in North America. The Company is a
leading supplier to original equipment manufacturers of
telecommunication, data communications and medical equipment.
# # #
For additional information, contact:
Frederick M. Green (CEO)
612/493-1900
Statements regarding Ault's anticipated performance are forward-
looking and therefore involve risks and uncertainties, including but
not limited to: market conditions in the global electronic industry,
the ability of the AES joint venture to attain profitability within
currently planned timetables, buying patterns of major customers
including OEMs of wireless telephones, competitive products and
technologies, and other factors set forth in the Company's filings
with the Securities and Exchange Commission.
