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 August 29, 1999
Commission file number 0-12611
AULT INCORPORATED
MINNESOTA 41-0842932
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7105 Northland Terrace
Minneapolis, Minnesota 55428-1534
(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 August 29, 1999
No par value 4,383,787 shares
Total pages 19
Exhibits Index on Page 18
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)
First Quarter
Ended
August August
29, 30,
1999 1998
<S> <C> <C>
Net Sales $13,535 $11,337
Cost of Goods Sold 9,959 8,275
Gross Profit 3,576 3,062
Operating Expenses
Marketing 1,200 1,035
Design Engineering 820 485
General & Administrative 1,242 907
3,262 2,427
Operating Income 314 635
Other Income (Expense)
Interest Expense (50) (29)
Other 30 112
Income Before Income Taxes (Note 2) 294 718
Income Taxes 82 243
Net Income $212 $475
Earnings Per Common and Equivalent
Share Outstanding (Note 3):
Basic EPS $0.05 $0.11
Diluted EPS $0.05 $0.11
Common and equivalent shares
outstanding:
Basic EPS 4,427,558 4,161,758
Diluted EPS 4,631,848 4,264,337
</TABLE>
See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 3
PART 1. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
AULT INCORPORATED & SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(in Thousands, Except Amounts Per Share)
<TABLE>
<CAPTION>
(Unaudited)
First Quarter
Ended
August 29, August 30,
1999 1998
<S> <C> <C>
Net Income $212 $475
Other Comprehensive Income Net of Tax:
Foreign Currency Translation
adjustments (Note 11) (22) 121
Comprehensive Income $190 $596
</TABLE>
See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 4
AULT INCORPORATED & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in Thousands)
<TABLE>
<CAPTION>
(Unaudited)
August 29, May 30,
1999 1999
<S> <C> <C>
Assets:
Current Assets
Cash & Cash Equivalents (Note 4) $2,853 $3,303
Investment in Trading Securities (Note 4) 847 850
Trade Receivables, Less Allowance
for doubtful Accounts of $47,000 at
August 29, 1999, and $30,000 at
May 30, 1999 11,104 10,467
Raw Material 5,492 4,959
Work in Process 157 216
Finished Goods 3,947 3,876
Prepaid and Other Expenses (Note 5) 639 854
Deferred Taxes 265 265
Total Current Assets 25,304 24,790
Other Assets:
Patents, (Note 6) 1,526 1,560
Deferred Taxes 105 105
Other 10 40
1,641 1,705
Property Equipment and Leasehold
Improvements at Cost:
Land 2,117 2,117
Building 1,109 816
Machinery and Equipment 7,008 6,423
Office Furniture 996 930
E.D.P. Equipment 1,474 1,465
Leasehold Improvements 686 975
Construction in Progress 1,535 815
14,925 13,541
Less Accumulated Depreciation 6,915 6,733
Net Equipment and Leasehold
Improvements 8,010 6,808
Total Assets $34,955 $33,303
</TABLE>
See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 5
AULT INCORPORATED & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in Thousands)
<TABLE>
<CAPTION>
(Unaudited)
August 29, May 30,
1999 1999
<S> <C> <C>
Liabilities and Stockholders' Equity:
Current Liabilities
Note Payable to Bank $2,785 $1,428
Current Maturities of Long-Term Debt
(Note 7) 408 402
Accounts Payable 5,535 5,557
Accrued Expenses:
Compensation (Note 8) 511 417
Other (Note 9) 806 622
Income Taxes Payable (112)
Total Current Liabilities 9,933 8,426
Long-Term Debt, Less Current Maturities
Included Above (Note 7) 1,113 1,187
Deferred Rent Expense 14
Retirement and Severance Benefits 277 234
(Note 10)
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:
August 29, 1999; and May 30, 1999;
4,383,787 shares 19,827 19,827
Less Note Receivable From Sale of
Common Stock (145) (145)
Retained Earnings 4,571 4,359
Accumulated Other Comprehensive
Income (Note 11) (621) (599)
TOTAL 23,632 23,442
Total Liabilities and
Stockholders' Equity $34,955 $33,303
</TABLE>
See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 6
AULT INCORPORATED & SUBSIDIARY
COMPUTATION OF CONSOLIDATED EARNINGS PER SHARE
(In Thousands)
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
August 29, August 30,
1999 1998
<S> <C> <C>
Cash Flows From Operating Activities
Net Income: $212 $475
Adjustments to Reconcile Net Income to
Net Cash (Used in) Operating Activities:
Depreciation/Amortization 215 160
Decrease (Increase) in Market Value of 3 (14)
Securities
Changes in Assets and Liabilities:
(Increase) Decrease In:
Trade Receivables (637) (1,779)
Inventories (545) 12
Prepaid and Other Expenses 230 (149)
(Decrease) Increase in:
Accounts Payable (20) 1,070
Accrued Expenses 278 202
Income Tax Payable (112) 45
Net Cash Provided by (Used in)
Operating Activities (376) 22
Cash Flows From Investing Activities:
Purchase of Equipment and Leasehold
Improvements (1,384) (234)
Decrease in Other Assets 121
Net Cash Used in Investment Activities (1,384) (113)
Cash Flows From Financing Activities:
Net Borrowings on Revolving Credit
Agreements 1,357 190
Proceeds from Issuance of Common Stock
Principal Payments on Long-Term
Borrowings Including Capital Leases (25) (45)
Net Cash Provided by Financing 1,332 145
Activities
Effect of Foreign Currency Exchange
Rate Changes on Cash (22) 121
Cash and Cash Equivalents:
Increase (450) 175
Beginning 3,303 5,935
Ending $2,853 $6,110
</TABLE>
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST QUARTER ENDING AUGUST 29,1999
NOTE 1, Principles of Consolidation
The accompanying consolidated financial statements include
the accounts of Ault Incorporated, its wholly-owned
subsidiaries, Ault Korea Corporation and Ault Xianghe Co.
Ltd. All significant intercompany transactions have been
eliminated. The foreign currency translation adjustment
represents the translation into United States dollars of the
Company's investment in the net assets of its foreign
subsidiaries in accordance with the provisions of FASB
Statement No. 52.
NOTE 2, Income Taxes
The Company's tax provision includes taxes accrued on US and
Korean income calculated at an average rate of 34.0% after
recognition of deferred tax assets.
NOTE 3, 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 three 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>
Quarter Ending
August August
29, 1999 30, 1998
<S> <C> <C>
Net Income, as reported $212,000 $475,000
Net Income (loss) pro forma 48,000 396,154
Net Income, per share, as reported, basic 0.05 0.11
Net income, per share, as reported, diluted 0.05 0.11
Net Income, per share, basic, pro forma 0.01 0.09
Net Income, per share, diluted, pro forma 0.01 0.09
</TABLE>
The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants
included in fiscal 2000 and fiscal 1999 calculations:
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST QUARTER ENDING AUGUST 29, 1999
<TABLE>
<CAPTION>
Quarter Ending
August 29, August 30,
1999 1998
<S> <C> <C>
Expected dividend yield - -
Expected stock price volatility 75.63% 63.14%
Risk free interest rate 4.76-5.85% 5.37-6.61%
Expected life of options 1-5 1-5
</TABLE>
NOTE 4, 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 5, Prepaid and Other Expenses
Prepaid and other expenses are principally customs duty and
value-added taxes, and certain deferred expenses that are
related to, and are absorbed against revenue during the
fiscal year, as well as receivables for cash advances made
to foreign subcontractors of the Company. The customs duty
and value added taxes are paid by Ault Korea Corporation to
the Korean authority on products that are manufactured for
exportation. These payments are refundable when the
subsidiary submits to the Korean Government the appropriate
claim and proof of exportation. Advances to sub-contractors
are amortized against order deliveries.
NOTE 6, Patent
Patent cost, net of amortized amounts represents the
contract price of US Patent #5,303,137,1 which was acquired
from a source external to and independent of the Company.
The Company believes that products using the power
conversion technology it represents will generate
significant revenues into fiscal 2002. For amortization
purposes, the patent had been assigned a life of four years.
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR FIRST QUARTER ENDING AUGUST 29, 1999
NOTE 7, Long-term Debt
Long-term debt, including current maturities contain the
following:
<TABLE>
<CAPTION>
AUGUST 29, MAY 30,
1999 1999 (00
(000)
<S> <C> <C>
* US Bancorp
7.2% term loan due in monthly installments
of $7,978, including interest to December
2003, secured by equipment $354 $371
* US Bancorp
8.1% term loan due in monthly installments
of $7,340, including interest to February
2001, secured by equipment 124 143
* US Bancorp
7.9% term loan due in monthly installments
of $7,320, including interest to November
2001, secured by equipment 180 198
8.0% 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 373 373
7.5% note payable, quarterly interest
payments until April 2000, thereafter due
in quarterly principal payments of
$52,464 plus interest, through April 2002,
secured by Korean government-funded agency 420 420
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 70 84
$1,521 $1,589
Less Current Maturities 408 402
Total $1,113 $1,187
</TABLE>
NOTE 8, 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
FOR FIRST QUARTER ENDING AUGUST 29, 1999
NOTE 9, 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 10, Retirement & Severance Benefits
Deferred compensation is 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.
NOTE 11, 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 quarter
of each fiscal year are as follows:
<TABLE>
<CAPTION>
AUGUST 29, AUGUST 30,
1999 1998
(000)
<S> <C> <C>
Beginning cumulative exchange gain (loss) $(599) $(898)
Gain (loss) for the period from:
a. Long-term inter-company receivables 18 131
b. Other (40) (10)
Total $(621) $(777)
</TABLE>
The amounts attributed to long-term inter-company
receivables for the quarter ending August 30, 1998, reflect
changes in the Won rate from 1,393.0 Wons to $1.00 at June
1, 1998, to 1,307.8 Wons to $1.00 at August 30, 1998.
Amounts attributed to long-term inter-company receivables
for the quarter ending August 29, 1999, reflect changes in
the Won rate from 1,191.3 Wons to $1.00 at May 31, 1999, to
1,182.0 Wons to $1.00 at August 29, 1999. Amounts were
computed on outstanding receivables of $2,327,000 at August
30, 1998 and $2,311,000 at August 29, 1999.
ITEM 2 - MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
From time to time, in reports filed with the Securities and
Exchange Commission, in press releases, and in other
communications to shareholders or the investing public, the
Company may 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 Original
Equipment Manufacturers (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 were $13,535,000 for the first quarter
of fiscal 2000 up 19% from $11,337,000 for the first quarter
of fiscal 1999. 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,
network routers, local area networks, wireless telephones,
scanners, electronic testing instruments and portable
medical 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. While one of
the Company's major cable modem customers is experiencing
production slowdowns, sales from other OEM's increased to
give the almost 20% first quarter sales increase. The
Company believes the market for cable modems remains strong
and is a supplier for several major manufacturers.
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 was 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 were agency approved for medical product
applications. The Company's greater sales channels and
larger customer base have enabled it to leverage the
products to greater revenue levels.
Order Backlog: The Company's order backlog at August 29,
1999 totaled $12,197,000 compared to $12,963,000 at May 30,
1999. The order backlog represents sales for approximately
twelve weeks and reflected the posture of many OEMs to limit
their contractual commitments to the best lead-times of
their suppliers. This requires 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 $3,576,000 or 26.4%
of net sales for the first quarter of fiscal 2000, compared
to $3,062,000 or 27.01% of net sales for the same period in
fiscal 1999. The change was due principally to the greater
proportions in the sales mix of medical applications, which
have higher margins as compared to other products. The
sales mix change is due to the timing of shipments and will
not affect total fiscal year 2000.
Operating Expenses: Operating expenses were $3,262,000 or
24.1% of net sales in first quarter of fiscal 2000, as
compared to $2,427,000 equaling 21.4% of net sales for the
first quarter of fiscal 1999. The increased expenditures
were incurred principally due to (1) sales commissions paid
to sales representatives on the larger sales in the first
quarter, (2) integration of LZR into the Company, and (3)
continued support of strategic initiatives such as new
product and sales development:
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 data convergence and portable medical
products, these applications include uninterruptible power
supplies, hubs, routers and switchers for the networking
market.
Sales Development: During the latter half of fiscal 1999,
the Company opened sales offices in Shanghai and in Europe
and strengthened the Korean Sales office.
These higher operating expenses will also affect
profitability in the second 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 $314,000 for the
first quarter of fiscal 2000 and $635,000 for the same
period in fiscal 1999 equaling, respectively, 2.3% and 5.6%
of net sales. The change in operating income for fiscal 2000
is due principally to the increased operating expenses,
partially offset by greater sales volume.
Non-Operating Income: Other income of $30,000 for the first
quarter of fiscal 2000 and $112,000 for the same period in
fiscal 1999 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 $50,000 in fiscal 2000 and $29,000 in
fiscal 1999, paid principally on bank credit facilities and
long-term borrowings.
Income Tax: The Company had pre-tax income of $294,000 for
the first quarter of fiscal 2000 on which it accrued US and
Korean income taxes totaling $82,000. For the first quarter
of fiscal 1999, the Company had pre-tax income of $718,000
on which US and Korean income taxes totaling $243,000 were
accrued.
Net Income: The Company reported diluted per share
earnings of $0.05 for the first quarter of fiscal 2000 based
on 4,632,000 outstanding weighted average shares, compared
to diluted per share earnings of $0.11 for the first quarter
of fiscal 1999, which were based on 4,264,000 outstanding
weighted average shares.
LIQUIDITY AND CAPITAL RESOURCES
The following table describes the Company's working capital
position at August 29, 1999, and at August 30, 1998:
<TABLE>
<CAPTION>
August 29, August 30,
1999 1998
(000)
<S> <C> <C>
Working capital $15,371 $15,879
Cash 2,853 $6,110
Trading Securities at market 847 880
Unutilized bank credit facilities 5,179 $2,491
Cash provided by (used in) operations (376) 22
</TABLE>
Current Working Capital Position
At August 29, 1999, the Company had current assets of
$25,304,000 and current liabilities of $9,933,000 which
amounted to working capital of $15,603,000 and current ratio
of 2.57 to 1.00. This represents a change from its working
capital of $15,879,000 at August 30, 1998. In addition to
cash and trading securities, the Company relies on its
credit facilities and cash flows from operations as sources
of working capital supporting normal growth in revenue,
capital expenditures and attainment of profit goals.
Cash and Investments: At August 29, 1999, the Company had
cash and trading securities totaling $3,700,000, down from
$6,990,000 at August 30, 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 7, 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 August
29, 1999, borrowings against it amounted to $729,000.
(b) One or more term loans, each up to $400,000. At August
29, 1999, borrowings totaling $658,000 were outstanding on
three term loans.
(c) One or more notes payable, secured by equipment, land,
and buildings. At August 29, 1999, borrowings totaling
$863,000 were outstanding.
The South Korean credit facility is approximately $1.5
million of which borrowings at August 29, 1999 totaled
$306,000.
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. At August 29, 1999 borrowings
against it totaled $1,535,000. The Company plans to obtain
long-term financing for the facility during fiscal 2000.
CASH FLOWS FOR 2000
Operations: Operations used $376,000 of cash during the
first quarter of fiscal 2000 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 the first quarter of fiscal 2000 used
$637,000 of cash. Further use of cash from increased net
sales is anticipated in fiscal 2000.
(b) Increases in inventories used $545,000 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 accrued expenses provided $278,000 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 year
2000.
Investing Activities: Investing activities used net cash of
$1,384,000 relating principally to the construction of the
new manufacturing/office facility in Minneapolis.
Financing Activities: Financing activities provided net cash
of $1,332,000, which were comprised principally of
borrowings under the short term advancing term note in
connection with the construction of the new
manufacturing/office facility in Minneapolis.
Effect of Foreign Currency Exchange Rate Fluctuations: The
effect of translating the Korean financial statements, which
were prepared in Won, to US dollars, resulted in a net asset
value decrease of $22,000 during the quarter, which related
principally to long-term inter-company receivables. See
Note 13, under NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Summary: The Company's cash and working capital positions
are sound and, together with its credit facilities, are
adequate for the support of the Company's strategies into
fiscal 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>
THREE MONTHS ENDING
AUGUST AUGUST
29, 1999 30,1998
($000) ($000)
<S> <C> <C>
US $11,788 $9,347
Canada 262 745
Ireland -- 577
Korea 599 253
Mexico 289 199
Other Foreign 597 216
Total $13,535 $11,337
</TABLE>
The Company considers a country to be the geographic source
of revenue if it has contractual obligations, including
obligation to pay for trade receivable invoices.
Impact of Foreign Operations and Currency changes:
Products manufactured by the Korean subsidiary contributed a
large portion of total sales. The value of the Won had no
significant impact on the Company's consolidated sales for
the quarter 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: 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 environments. 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 have been upgraded to Office 97 and
Excel spreadsheets have tested compliant.
* Windows 95 users have been upgraded to NT 4.0.
* Symix business information software reported as being
compliant, and has been run in a test environment using a HP
9000 for compliance proof.
Other Manufacturing Information & Communications Software:
The following software reported by their manufacturers as
compliant. The Company has conducted tests on systems:
* Automatic test equipment for product reliability
* EDI for customer/supplier communications
* Price quotation system: this system was determined not
Y2K compliant. The Company has designed a new system that
is compliant and ready.
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.
* All non-compliant workstations have been replaced.
* HP 10.2 Unix Operating System was reported by the
manufacturer to be of questionable Y2K compliance. The
Company has upgraded to HP version 11.0 and is testing for
compliance.
Electric Power: The Company does not anticipate any
interruption to its US manufacturing due to any non-
compliance from the local power company. The Company's China
facility is already provided with backup generators and
backup generators will be added its Korea facility during
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 $85,000 and
replacement of hardware to be about $100,000. 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 its
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 required compliance. All have been tested and
upgraded or replaced. Final testing and necessary upgrading
are complete. 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 provided documentary certification of
compliance, the Company has tested this equipment and
remedied defects. 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.
AULT INCORPORATED AND SUBSIDIARY
PART II. OTHER INFORMATION
ITEMS 1-5 OTHER INFORMATION: Not Applicable
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
Reference Title of Document Location
Part 1 Exhibits
11 Computation of Per Filed herewith at page
Share Earnings 7
27 Financial Data Filed Electronically
Scheduling
(a) None
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the quarter
ended August 29, 1999.
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: 10/11/99 /s/Frederick M. Green
Frederick M. Green, President
Chief Executive Officer and
Chairman
DATED: 10/11/99 /s/Donald L. Henry
Donald L. Henry
Chief Financial Officer
EXHIBIT 11
AULT INCORPORATED & SUBSIDIARY
COMPUTATION OF CONSOLIDATED EARNINGS PER SHARE
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
(Unaudited)
Three Three
Months Months
Ended Ended
August 29, August 30,
1999 1998
<S> <C> <C>
Basic EPS Computation
Net Income to Common Stockholders $212 $475
Common Shares Outstanding:
Beginning of Year 4,372,789 4,161,758
Common Shares from Exercise of
Warrants 54,769
Daily Weighted:
First Quarter
Total Weighted Common Shares 4,427,558 4,161,758
Basic Earnings Per Share $0.05 $0.11
Diluted EPS Computation
Net Income to Common Stockholders $212 $475
Total Weighted Common Shares 4,427,558 4,161,758
Dilutive Potential Common Shares, Daily
Weighted, from:
Assumed Conversion of Outstanding
Dilutive
Underwriters' Common Stock Warrants
Employee Stock Options 727,602 180,550
Employee Stock Purchase Plan, Phase 2 12,093 13,759
739,695 194,309
Less Common Shares Purchaseable from
Proceeds:
Employee Stock Options 524,164 82,516
Employee Stock Purchase Plan, Phase 2 11,241 9,514
535,405 92,030
Adjusted Weighted Average Shares * 4,631,848 4,264,037
Net Income $0.05 $0.11
<FN>
* For the first quarter of fiscal 2000 and fiscal 1999, options
totaling 214,000 and 599,600, 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 the fiscal 1999
first quarter for similar reasons.
</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 AUGUST 29, 1999, AND IS QUALIFIED IN
ITS ENTIRELY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-28-2000
<PERIOD-END> AUG-29-1999
<CASH> 2853
<SECURITIES> 847
<RECEIVABLES> 11104
<ALLOWANCES> 0
<INVENTORY> 9596
<CURRENT-ASSETS> 25304
<PP&E> 14925
<DEPRECIATION> 6915
<TOTAL-ASSETS> 34955
<CURRENT-LIABILITIES> 9933
<BONDS> 0
0
0
<COMMON> 19827
<OTHER-SE> 3805
<TOTAL-LIABILITY-AND-EQUITY> 34955
<SALES> 13535
<TOTAL-REVENUES> 13535
<CGS> 9959
<TOTAL-COSTS> 9959
<OTHER-EXPENSES> 3232
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50
<INCOME-PRETAX> 294
<INCOME-TAX> 82
<INCOME-CONTINUING> 212
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 212
<EPS-BASIC> .05
<EPS-DILUTED> .05
</TABLE>
