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 November 29, 1998
Commission file number 0-12611
AULT INCORPORATED
MINNESOTA 41-0842932
(State or other jurisdiction of (I.R.S.
Employer
incorporation or organization)
Identification No.)
7300 Boone Avenue North
Minneapolis, Minnesota 55428-1028
(Address of principal executive offices)
Registrant's telephone number: (612) 493-1900
Indicate by check mark whether registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months,
and (2) has been subject to such filing requirements for the past
90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock November 29, 1998
No par value 4,172,258 shares
Total pages 25
Exhibits Index on Page 18
PART 1. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
AULT INCORPORATED & SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(in Thousands, Except Amounts Per Share)
<TABLE>
<CAPTION>
(Unaudited)
Second Quarter Six months
Ended Ended
Nov. Nov. Nov. Nov.
29 30 29 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net Sales $11,046 $10,954 $22,383 $20,377
Cost of Goods Sold 7,995 8,086 16,270 15,300
Gross Profits $ 3,051 2,868 6,113 5,077
Gross Profits % 27.6 26.2 27.3 24.9
Operating Expenses
Marketing 1,046 930 2,081 1,817
Design 511 428 996 831
Engineering
General and 956 776 1,863 1,573
Administrative
2,513 2,134 4,940 4,221
Operating Income 538 734 1,173 856
Other Income
(Expense)
Other 142 69 254 135
Interest (24) (50) (53) (92)
Expense
Income Before 656 753 1,374 899
Income Taxes
Income Taxes 193 244 436 303
Net Income $463 $509 $938 $596
Earnings Per Common
and Equivalent
Shares
Outstanding
(Note 3)
Basic EPS $0.11 $0.12 $0.23 $0.14
Diluted EPS $0.11 $0.12 $0.22 $0.14
Common and
Equivalent Shares
Outstanding
Basic 4,166 4,082 4,166 4,116
,989 ,067 ,524 ,912
Diluted 4,401 4,308 4,329 4,298
,703 ,501 ,090 ,961
</TABLE>
See NOTES TO
CONSOLIDATED
FINANCIAL
STATEMENTS
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)
Second Quarter Six Months
Ended Ended
Nov. 29 Nov. 30 Nov. 29 Nov. 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net $463 $509 $938 $596
Income
Other
Comprehe
nsive
Income
Net of
Tax:
106 (434) 227 (463)
Foreign
Currency
Translat
ion
adjustme
nts
(Note
13)
Comprehe $569 $75 $1,165 $133
nsive
Income
</TABLE>
See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AULT INCORPORATED & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
( in Thousands)
<TABLE>
<CAPTION>
(Unaudited)
November May
29, 31,
1998 1998
<S> <C> <C>
Assets:
Current Assets
Cash & Cash $6,368 $5,935
Equivalents (Note 4)
Investment in Trading 847 866
Securities
Trade Receivables, Less
Allowance
for
Doubtful
Accounts of
$41,000 at
November 29, 1998, and $31,000
May 31, 7,606 6,255
1998
Inventories:
Finished 3,796 3,744
Goods
Work in 377 278
Process
Raw 3,263 2,594
Material
Total Inventories 7,436 6,616
Prepaid and 764 618
Other Expenses
(Note 5)
Deferred 74 74
Taxes
Total Current Assets 23,095 20,364
Other Assets:
Other
Receivables,
Less Allowance
of $65,000 0 199
at May 31,
1998, (Note 6)
Patents, 124 142
(Note 7)
Deferred 200 192
Taxes
Other 211 41
535 574
Property,
Equipment and
Leasehold
Improvements
at Cost:
Land 1,342 876
Building 813 813
Machinery 6,239 5,969
and Equipment
Office 960 734
Furniture
E.D.P. 1,495 1,493
Equipment
Leasehold 985 978
Improvements
11,834 10,863
Less 6,701 6,384
Accumulated
Depreciation
5,133 4,479
Total Assets $28,763 $25,417
</TABLE>
See NOTES TO
CONSOLIDATED
FINANCIAL
STATEMENTS
AULT INCORPORATED & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in Thousands)
<TABLE>
<CAPTION>
(Unaudited)
November May
29, 31,
1998 1998
<S> <C> <C>
Liabilities and
Stockholders'
Equity
Current
Liabilities:
Note Payable $400 $236
to Bank
Current 292 213
Maturities of
Long-Term Debt
(Note 8 )
Accounts 4,986 3,427
Payable
Accrued
Expenses:
465 392
Compensation
(Note 9)
Other (Note 743 594
10)
Income 25 198
Taxes Payable
Total Current 6,911 5,060
Liabilities
Long-Term Debt, 680 414
Less Current
Maturities
(Note 8)
Deferred Rent 42 70
Expense (Note
11)
Retirement and 309 245
Severance
Benefits (Note
12)
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:
November 29, 1998; 4,172,258 shares
and May 31, 1998; 4,161,758 shares 18,386 18,359
Less Note
Receivable From
Sale of
Common (204) (204)
Stock
Retained 3,310 2,371
Earnings
Accumulated
Other
Comprehensive
Income (671) (898)
(Note 13)
TOTAL 20,821 19,628
Total $28,76 $25,41
Liabilities and 3 7
Stockholders'
Equity
</TABLE>
See NOTES TO
CONSOLIDATED
FINANCIAL
STATEMENTS
AULT INCORPORATED & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
( in Thousands)
<TABLE>
<CAPTION>
(Unaudited)
Six Six
Months Months
Ended Ended
Nov. Nov.
29, 30,
1998 1997
<S> <C> <C>
Cash Flows From
Operating
Activities
Net $938 $596
Income:
Adjustments to
Reconcile Net
Income to Net
Cash
Provided by
Operating
Activities:
317 263
Depreciation
18 25
Amortization
Provision 10 (21)
for Doubtful
Accounts
Provision 85
for Inventory
Adjustments
Deferred (8) 72
Taxes
Deferred (28) (25)
Rent Expenses
Decrease 19 1
(Increase) in
Market Value
of Securities
Changes in
Assets and
Liabilities:
(Increase)
Decrease In:
Trade (1,361) 749
Receivables
(905) (673)
Inventories
Prepaid (146) (389)
and Other
Expenses
(Decrease)
Increase in:
Accounts 1,559 301
Payable
Accrued 286 (177)
Expenses
Income Tax (173) (185)
Payable
Net Cash 611 537
Provided by
Operating
Activities
Cash Flows From
Investing
Activities:
Purchase of (971) (651)
Equipment and
Leasehold
Improvements
Decrease in 30 18
Other Assets
Net Cash Used (941) (633)
in Investment
Activities
Cash Flows From Financing Activities:
Net Borrowings
on Revolving
Credit
Agreements 164 188
Proceeds from 445 300
Long-Term
Borrowings
Proceeds from 27 248
Issuance of
Common Stock
Principal
Payments on
Long-Term
Borrowings
Including (100) (159)
Capital Leases
Net Cash 536 577
Provided by
Financing
Activities
Effect of Foreign Currency Exchange 227 (463)
Rate Changes on Cash
Increase 433 18
Cash and Cash
Equivalents:
Beginning 5,935 3,677
Ending $6,368 $3,695
</TABLE>
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SECOND QUARTER ENDED NOVEMBER 29, 1998
NOTE 1, Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of Ault Incorporated, its wholly-owned subsidiaries,
Ault Korea Corporation and Ault Xianghe Co. Ltd. All significant
intercompany transactions have been eliminated. The foreign
currency translation adjustment represents the translation into
United States dollars of the Company's investment in the net
assets of its foreign subsidiaries in accordance with the
provisions of FASB Statement No. 52.
NOTE 2, Income Taxes
The Company's tax provision includes taxes accrued on US and
Korean income calculated at an average rate of 32.0% of
consolidated pre-tax income. No taxes were accrued on profits of
Ault Xianghe Co. Ltd in view of the availability of net operating
loss carryforwards which were utilized to offset provisions for
income taxes.
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 six 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>
Six Months
Ending
Nov. 29, Nov. 30,
1998 1997
<S> <C> <C>
Net Income, as reported $938,000 $ 596,000
Net Income pro forma 775,292 384,467
Net Income, per share, as 0.23 0.14
reported, basic
Net income, per share, as 0.22 0.14
reported, diluted
Net Income, per share, 0.18 .09
basic, pro forma
Net Income, per share, 0.18 .09
diluted, pro forma
</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 1999 and fiscal 1998 calculations:
<TABLE>
<CAPTION>
Six Months
Ending
Nov. 29, Nov. 30,
1998 1997
<S> <C> <C>
Expected dividend yield - -
Expected stock price 63.14% 67.68%
volatility
Risk free interest rate 5.37-6.61% 5.47-
6.61%
Expected life of options 1-5 1-5
</TABLE>
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SECOND QUARTER ENDED NOVEMBER 29, 1998
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, 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 costs that were
incurred. A suit by the Company resulted in collection of the
amount in the first quarter of fiscal 1999.
NOTE 7, Patent
Patent cost, net of amortized amounts represents the contract
price of US Patent #5,303,137,1 which was acquired from a source
external to and independent of the Company. The Company believes
that products using the power conversion technology it represents
will generate significant revenues into fiscal 2002. For
amortization purposes, the patent was assigned a life of four
years.
NOTE 8, Long-term Debt
Long-term debt, including current maturities contain the
following:
<TABLE>
<CAPTION>
November May 31,
29,
1998 1998
(000)
<S> <C> <C>
US Bancorp
8.1% term loan due in
monthly installments
of $7,340, including
interest to February
2001, secured by equipment $187 $216
6.5% note payable, due in
quarterly installments
of $28,019 plus interest
through April 2000,
secured by equipment 101 144
13.1% mortgage note due in
six semiannual
installments of $74,167,
plus interest, thru
November, 2001 445
US Bancorp
7.9% term loan due in
monthly installments
of $7,320, including
interest to November
2001, secured by equipment 239
267
$972 $627
Less Current Maturities 292 213
Total $680 $414
</TABLE>
AULT INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SECOND QUARTER ENDED NOVEMBER 29, 1998
NOTE 9, Compensation
Compensation consists principally of amounts accrued for payment
of employees' salaries, vacation and sick pay.
NOTE 10, Accrued Expenses, Other
Accrued expenses, other, are mainly undue amounts for sales
representatives commissions, fees to product certifying agencies
and provisions for future payment of current warranty
commitments.
NOTE 11, Deferred Rent
The lease on the Company's Minneapolis plant and office
facilities includes scheduled base rent increases over the term
of the lease, which runs for ten years. The total amount of the
base rent payments is being charged to expenses on the straight-
line method over the term of the lease. The difference between
the payments expense is recorded as deferred rent.
NOTE 12, Retirement & Severance Benefits
Retirement and 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 through an
insurance company under a defined benefit plan.
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 quarter of each fiscal year are as
follows:
<TABLE>
<CAPTION>
November November
29, 30,
1998 1997
(000)
<S> <C> <C>
Beginning cumulative exchange gain $(898) $31
(loss)
Gain (loss) for the period from:
a. Long-term inter-company 281 (477)
receivables
b. Other (54) 14
Total $(671) $(432)
</TABLE>
The amounts attributed to long-term inter-company receivables for
the six months ending November 29, 1998, reflect changes in the
Won rate from 1,400.0 Wons to $1.00 at June 1, 1998, to 1,248.0
Wons to $1.00 at November 29, 1998. Amounts attributed to long-
term inter-company receivables for the six months ending November
30, 1997, reflect changes in the Won rate from 891.85 Wons to
$1.00 at June 2, 1997, to 1,122.0 Wons to $1.00 at November 30,
1997. Amounts were computed on outstanding receivables of
$2,312,000 at November 29, 1998 and $2,327,000 at November 30,
1997.
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 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 of $11,046,000 in the second quarter of
fiscal 1999 were up only slightly from sales of $10,954,000 in
the second quarter of fiscal 1998, which represented the
strongest quarterly sales for all of fiscal 1998. For the six
months, sales totaled $22,383,000 for fiscal 1999, up by 9.8%
from sales of $20,377,000 for fiscal 1998. The improvement in
fiscal 1999 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 portable medical products and cable modems.
Cable modems are designed to process data transmitted over cable
lines that also transmit television signals. Orders by the
Company's cable modem OEM customers improved during the quarter
resulting in greater revenues from sale of switching power
supplies that support those OEM products. The Company believes
that 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, and influence further growth
in the sale of power conversion products. 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.
Orders and sales for portable medical product applications also
grew during the six months. These products utilize the Company's
switching power supplies and battery chargers that traditionally
command high margins, and currently represent approximately 15.0%
of the Company total sales. To strengthen its position in the
medical market, the Company acquired the power supply division of
LZR Electronics, Inc., a small Maryland based corporation, in
December 1999. In addition to providing a structure for efficient
service to low volume customers, most of LZR's products are
agency approved for medical 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. 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, among others, uninterruptible
power supplies, power supplies for asymmetric digital subscriber
line modems (a competing technology to cable modem); hubs,
routers and switches for the networking market. Like the cable
modem market, these programs are anticipated to generate sales
for fiscal 1999 mainly in the latter quarters of the fiscal year.
All of these factors lead to management's belief that sales for
the remaining periods of fiscal 1999 will improve compared to
sales attained in the earlier periods.
Order Backlog: The Company's order backlog at November 29, 1998
totaled $14.1 million, which equals amounts when the quarter
began, as compared to $13.6 million at November 30, 1997. The
order backlog at November 29, 1998, represented sales for
approximately fourteen 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
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 it is effectively responding
to the needs of customers for delivery of competitive services at
required lead times.
Gross Profit: Gross profit increased to $3,051,000 or 27.6% of
net sales for the second quarter of fiscal 1999 from $2,868,000,
or 26.2% of net sales, for the second quarter of fiscal 1998.
For the six months, gross profits totaled $6,113,000, or 27.3% of
net sales, in fiscal 1999 and $5,077,000, which represented 24.9%
of net sales for fiscal 1998. The improvements are due
principally to the greater proportions in the sales mix of
battery chargers, as well as linear and switching power supplies
which have higher margins as compared to transformer products.
Revenue from shipments of transformers, traditionally a lower
margin product, decreased as a percentage of sales, during the
six months, compared to the six months of fiscal 1998.
Operating Expenses: Operating expenses were $2,513,000, or 22.8%
of net sales in the second quarter of fiscal 1999, as compared to
$2,134,000 equaling 19.5% of net sales for the second quarter of
fiscal 1998. For the six months, operating expenses amounted to
$4,940,000, or 22.1% of net sales, in fiscal 1999 and $4,221,000
which equaled 20.7% of net sales in fiscal 1998. Compared to
fiscal 1998, operating expenses grew by $379,000 and $719,000 in
the second quarter and six months, respectively, of fiscal 1999.
Increased expenditures for the six months were incurred
principally for sales commissions paid to sales representatives
on the larger sales in fiscal 1999 and for the continuing support
of strategic initiatives for the following purposes:
1. Strengthening the Company's sales and marketing competitive
position 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 programs for upgrading the
quality of management information services.
5. Certification of products for sale in broader foreign
markets and to afford a more expedient response to customer
requirements.
6. Upgrading logistic supports to provide the material
forecasting technique necessary to support changing product
delivery lead-times required by customers and to support US
Customs requirements necessitated by increased foreign business
activities.
The greater portions of these expenditures are anticipated to
assist in the generation and support of future business and are
expected to be incurred in future periods. The Company's
objective, however, is to reduce the proportion operating
expenses bear to net sales as sales continue to increase,
providing that such actions did not jeopardize the generation of
future business.
Operating Income: Operating income for the second quarter
totaled $538,000 for fiscal 1999 and $734,000 for fiscal 1998
equaling, respectively, 4.9% and 6.7% of net sales. The lower
proportion of operating income to sales for fiscal 1999 is due
principally to the operating expenses as stated previously. For
the six months, operating expenses totaled $1,173,000 or 5.2% of
sales in fiscal 1999 and $856,000, which amounted to 4.2% of
sales in fiscal 1998. The higher proportion of operating income
to sales for the six months of fiscal 1999 is principally due to
the greater sales for that period.
Non-Operating Income: Other income of $254,000 for fiscal 1999
and $135,000 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 $53,000 in fiscal 1999 and $92,000 in fiscal 1998
which were paid principally on bank credit facilities including
long-term borrowings.
Income Tax: For the second quarter, the Company had pre-tax
income of $656,000 in fiscal 1999 and $753,000 in fiscal 1998 on
which US and Korean income tax of $193,000 at net rate of 29.4%
and $244,000 at net rate of 32.4%, respectively, were incurred.
The lower rate for fiscal 1999 was due principally to profits of
the Company's China subsidiary on which no income taxes were
incurred because of losses incurred during its first quarter and
the availability of net operating loss carryforwards. Income
taxes for the six months were $436,000, which equaled 31.7% of
pretax income of $1,374,000 in fiscal 1999 and $303,000 which
amounted to 33.7% of pretax income of $899,000 in fiscal 1998.
Net Income: The Company reported net income of $463,000 for the
second quarter of fiscal 1999 and $509,000 for the second
quarter of fiscal 1998. Net income for the six months totaled
$936,000 in fiscal 1999 and $596,000 in fiscal 1998, equaling
respectively, 4.2% and 2.9% of net sales.
Diluted per share earnings were $0.11 on outstanding, weighted,
average shares of 4,401,703 for the second quarter of fiscal 1999
and $0.12 for the second quarter of fiscal 1998 computed on
outstanding, weighted, average shares of 4,308,501. Per share
earnings for the six months were $0.23 for fiscal 1999 and $0.14
for fiscal 1998 based on outstanding, weighted, average shares of
4,329,090 and 4,298,961, respectively for each period.
LIQUIDITY AND CAPITAL RESOURCES
The following table describes the Company's working capital
position at November 29, 1998 and November 30, 1997:
<TABLE>
<CAPTION>
November 29, November 30,
1998 1997
(000)
<S> <C> <C>
Working capital $16,184 $15,384
Cash 6,368 3,695
Trading securities at market 847 848
Unutilized bank credit 4,100 2,556
facilities
Cash provided by operations 611 537
for the six months
</TABLE>
Current Working Capital Position
At November 29, 1998, the Company had current assets of
$23,095,000 and current liabilities of $6,911,000, which amounted
to working capital of $16,184,000 and current ratio of 3.34 to
1.00. This represents an improvement in its working capital
which was $15,384,000 at November 30, 1997, although its current
ratio declined slightly from the 3.39 to 1.00 at that time. In
addition to cash and trading securities, the Company relies on
its credit facilities and cash flows from operations as sources
of working capital to support normal growth in revenue, capital
expenditures and attainment of profit goals.
Cash and Investments: At November 29, 1998, the Company had cash
and trading securities totaling $7,215,000, up from $4,543,000 at
November 30, 1997, principally because of amounts provided from
net profit and successful cash management techniques during the
second half of fiscal 1998. Purchase of LZR Electronics, Inc. in
December, 1998, as earlier discussed, will use current cash of
approximately $2,630,000 which includes cash payments to Seller
and payments for professional services relating to due diligence
matters (See SUBSEQUENT EVENTS on Page 17).
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, on which negotiations were
completed on November 27, 1998, (see Exhibit 10) 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. It represents an increase of $2.0 million from the credit
facility that expired on October 1, 1998. At the end of the
quarter, there were no outstanding borrowings against it.
(b) One or more term loans, each up to an amount of $400,000.
At November 29, 1998, borrowings amounting to $426,000 were
outstanding on two term loans. See Note 8, under NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
The South Korean credit facility is approximately $1.5 million of
which borrowings at November 29, 1998, amounted to $400,000.
Cash Flows for Fiscal 1999
Operations: Operations contributed net cash of $611,000 during
the six months from activities that provided $3,050,000 and
activities that used $2,439,000 of cash. The activities that
provided cash were the following:
(a) Net profits, adjusted for non-cash items provided net cash
of $1,351,000 of which net profits totaled $938,000. Principal
items among the adjustments were depreciation and amortization
which contributed $335,000 of cash. Further contribution to
working capital from net profits is anticipated during the
remaining six months.
(b) Increases in accounts payable and accrued expenses provided
$1,699,000 of cash from growth in liabilities associated with
purchases of material to support customer orders and their
emergency stocking requirements. Further contribution to cash
from increased liabilities for these purposes is anticipated over
the remaining six months.
The activities that used $2,439.000 of cash were the following:
(a) Increase in trade receivable balances used $1,361,000 of
cash principally because of outstanding amounts on the higher
levels of revenue for the six months of fiscal 1999, compared to
fiscal 1998. Additional use of cash from increases in trade
receivables is anticipated for the remaining six months.
(b) Increases in inventories used $905,000 of cash. The
increase is due mainly to requirements of customers for
additional stockings of finished products to support their
emergency needs. No significant changes are anticipated over the
remaining six months for this purpose. However, inventories
obtained from the purchase of LZR Electronics, Inc. will use
approximately $1,900,000 of cash.
(c) Income tax payments used $173,000 of cash which were unpaid
amounts from fiscal 1998.
Investing Activities: Investing activities used net cash of
$941,000 of which $475,000 was for the purchase of manufacturing
and tooling equipment and $445,000 for the purchase of land to
relocate the Korean manufacturing facility soon to be purchased
by the Korean Government for public improvement purposes.
Purchase of additional amounts of manufacturing and tooling
equipment, including those of LZR are anticipated to use
approximately $700,000 of cash over the remaining six months.
Financing Activities: Financing activities provided net cash of
$536,000 the major portions of which related to mortgage on the
Korean real estate, previously discussed.
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, 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 $227,000 during the six months, which is
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 normal growth in revenue and profit beyond the current fiscal
year. Current cash position is also sound and enough to support
the acquisition of LZR Electronics, Inc and operations of the
Company for the remaining six months without any significant
utilization of the credit facilities.
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 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 offering 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>
SIX MONTHS ENDING
NOV. NOV.
29, 30,
1998 1997
($000) ($000)
<S> <C> <C>
US $17,388 $15,283
Canada 1,044 652
France 10 1,977
Ireland 1,535 1,182
All Other Foreign 2,406 1,283
Countries
Total $22,383 $20,377
</TABLE>
The Company considers a country to be the geographic source of
revenue if it had 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 it is
its objective 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 FISCAL FISCAL FISCAL
1999 1999 1998 1998
Revenue % Revenue %
(000) (000)
<S> <C> <C> <C> <C>
Customer "A" $2,833 12.7 509 2.5
Customer "B" 1,783 8.0 2,649 13.0
Customer "C" 1,535 6.9 1,118 5.4
</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 first half 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
quarter because a significant amount 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 the result of computer programs that were
written using two digits rather than four to define the
applicable year. Computer equipment, software, devices and
products with imbedded technology that are time-sensitive may
recognize a two digit date field using "00" as the year 1900
rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business
activities.
State of Readiness
The Company anticipates that most of its microchip-based date
referenced systems, including computer software and hardware will
be Year 2000 compliant by the end of its fiscal year ending May
31, 1999. All the Company's business systems have been tested
and verified as Year 2000 compliant. The Company's desktop
software have been evaluated for compliance and implementation
of necessary upgrades are also scheduled to occur at the end of
its fiscal year 1999. The Company's hardware have been assessed
for Year 2000 compliance and all necessary upgrades are scheduled
to occur at the end of its fiscal year 1999. There are therefore
no internal matters that are expected to affect the Company's
ability to process systems date-referenced information when year
2000 arrives. The Company does not yet know of the extent to
which the current preparedness of its external business
associates and external infrastructure would affect its business
transactions if they were tested today for year 2000 compliance.
As of July 31, 1998, the Company's critical suppliers were mailed
certification notices and risk assessment audits. The Company is
still in the process of evaluating suppliers' responses to the
risk assessments audits. The Company is communicating with
external sources and its objective is to obtain their commitment,
with reasonable verification, that they, along with the Company
will be Year 2000 compliant by May 31, 1999. The Company began
exhibiting its progress, with continual updates, towards
compliance on its website, www.aultinc.com, during the fourth
quarter of its fiscal year 1998. Below is a table showing the
Company's progress to date:
Tasks Status
Suppliers
Critical suppliers sent certification notice regarding Y2K
compliance. 06/01/98 Completed
Sent critical suppliers Y2K risk assessment audit. 07/31/98
Completed
Evaluate risk assessment audit responses. 11/17/98 Completed
Selected site visits to supplier base to ensure Y2K compliance.
11/30/98 Completed
Restructure supplier base to insure Y2K compliance. 03/01/99
Estimated
Tasks Status
Desktop Software
Plan audit of desktop software. 10/01/97 Completed
Audit company wide desktop software. 02/01/98 Completed
Evaluate noncompliance issues.
04/01/98 Completed
Recommend necessary software upgrades to insure Y2K compliance
07/01/98 Completed
Implement necessary software upgrades.
03/01/99 Estimated
Business Systems
Requested Y2K Compliance information from suppliers.
01/15/98 Completed
Received compliance information from suppliers.
02/23/98 Completed
Tested and verified as Y2K compliant.
04/24/98 Completed
Hardware
Plan audit of network hardware.
10/01/97 Completed
Audit company wide network hardware.
02/01/97 Completed
Evaluate noncompliance issues.
04/01/98 Completed
Recommend necessary hardware upgrades to insure Y2K compliance
07/01/98 Completed
Implement necessary hardware upgrades.
01/28/99 Estimated
Global Test
Design simulation of customer order thru put.
01/31/99 Estimated
Simulation of customer order thru put.
02/15/99 Estimated
Quarterly Re-simulation. 02/15/99
Estimated
Quarterly Re-simulation. 06/15/99
Estimated
Quarterly Re-simulation. 09/01/99
Estimated
Quarterly Re-simulation. 12/01/99
Estimated
Costs to Address Year 2000 Issues
To date, the Company has not incurred any material expenditures
in connection with identifying or evaluating Year 2000 compliance
issues. The Company presently estimates the labor costs of its
Year 2000 compliance efforts to be approximately $60,000. With
respect to future costs, the Company estimates it will spend
approximately $50,000 for remediation and validation of products
and programs which the Company presently knows are not compliant
and another $25,000 for future staff time for such remediation.
In addition, the Company estimates that it may spend no more than
another $10,000 on remediation and validation of products and
programs which have not yet been assessed. The Company believes
that these estimates are reasonable and within its fiscal 1999
budget. Capital expenditures among these costs will be
capitalized in accordance with generally accepted 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. At this
time, the Company does not possess the information necessary to
estimate any potential financial impact of Year 2000 compliance
issues relating to its business. Any significant business
disruption could have a material adverse impact on the Company's
financial condition and results of operations.
Risks of Year 2000 Issues
Because the Company is still in the discovery and evaluation
phase of assessing its overall Year 2000 exposure, it cannot at
this time state with certainty that the Year 2000 issues will not
have a material adverse impact on its financial condition,
results of operations and liquidity. Although the Company
considers these events to be unlikely, the Company believes that
the following situations are comprised of worse case issues that
are most likely to result from any Year 2000 non-compliance:
1. Customer Litigation.
Although the Company believes that its efforts will ensure no
disruption 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 Supply Materials.
Several months ago, the Company began an ongoing process of
surveying its suppliers with regard to their Year 2000 readiness
and is now in the process of assessing and cataloging the first
responses to the survey. The Company received adequate responses
from critical vendors and many non-critical vendors. The Company
presently expects to work with suppliers that need assistance or
that provide inadequate responses, and in many cases expects that
survey results will be improved significantly by such work.
Where survey results necessitate it, the Company will arrange for
back-up vendors before the changeover date.
3. Disruption of the Company's Internal Computer Systems.
The Company has identified the hardware and software upgrades
believed to be necessary to insure the Year 2000 compliance of
the Company's internal computer systems. These upgrades will be
implemented at the end of fiscal 1999. Year 2000 testing will
occur as the upgrade process proceeds and, in addition, will
continue to occur prior to the changeover date. For these
reasons, the Company considers that disruption of its internal
computer systems is unlikely.
4. Disruption of the Company's Non-Computer Systems.
The Company is currently conducting a comprehensive assessment of
all non-computer systems, including utility, telecommunications,
delivery and other services. The Company intends to work with any
third party provider of such services to ensure that there will
be no disruption in the Company's operations. However, if
disruptions occur, the Company anticipates that they will be
dealt with promptly.
Contingency Plans
While the Company recognizes the need for contingency planning,
it has not yet developed any specific contingency plans for
potential disruptions. The Company believes that details of such
plans will depend on the Company's final assessment of the
problem as well as the evaluation and success of its remediation
efforts. Future disclosures will include contingency plans as
they become available.
SUBSEQUENT EVENTS
On December 10, 1998, the Company filed Form 8-K with the
Securities and Exchange Commission reporting the purchase of
certain operating assets of LZR Electronics, Inc., a closely held
firm located in Gaithersburg, MD. The purchase was finalized on
December 1, 1998. The assets purchased included inventory, fixed
assets, contracts and intellectual property rights and other
operating assets. The aggregate purchase price paid amounted to
$3,505,000, consisting of cash payment of $2,555,000, delivery of
a one year, 8.0%, convertible promissory note for $500,000 and an
assumption of $450,000 of certain liabilities. The convertible
promissory note may be converted 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. LZR
designs, manufactures and markets a full line of power supplies.
Revenues relating to its power supply business for its calendar
year 1997 were approximately $6.4 million and the estimated
revenues for its calendar year 1998 were $6.5 million.
LZR's domestic manufacturing will be moved to the Company's
headquarters facility in Minneapolis. Engineering and product
development will continue to be based in Maryland.
AULT INCORPORATED AND SUBSIDIARY
PART II OTHER INFORMATION
ITEMS 1 - 3 OTHER INFORMATION: Not Applicable
ITEM 4 RESULT OF VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on September
28, 1998. The shareholders voted to elect the directors named
below to hold office until the next Annual Meeting of
Shareholders or until their successors are elected and qualified.
The shareholders present in person or by proxy voted their
shares in connection with the election of directors as follows:
<TABLE>
<CAPTION>
Votes
Directors Votes Withhe
For ld
<S> <C> <C> <C>
James M 3,687,004 5,000
Duddleston
Frederick M. 3,688,004 4,000
Green
Delbert W. 3,687,996 4,008
Johnson
John G. Kassakian 3,691,996 8
Edward C. Lund 3,686,866 5,138
Eric G. Mitchell 3,692,004 0
Mathew A. Sutton 3,686,956 5,048
</TABLE>
No other matters were voted upon by shareholders.
ITEM 5 OTHER INFORMATION
Mr. Eric G. Mitchell resigned from the Board of Directors
effective November 24, 1998, to devote greater attention to
family and personal business matters. He had served the Board
since 1992. The Board of Directors and Executive Management on
their own behalf and the behalf of shareholders express gratitude
to Mr. Mitchell for his many years of dedicated service to the
Company and wish him well in his new direction.
Mr. David J. Larkin was appointed to the Board of Directors at
its meeting on November 24, 1998, to fill the position vacated by
Mr. Mitchell. A past Chairman, President and Chief Executive
Officer of Honeywell Limited, Toronto, Canada, Mr. Larkin is
presently Chief Operating Officer and Executive Vice President of
Jostens, a Minneapolis based provider of achievement and
affiliation products. Mr. Larkin brings to the Board his
expertise in general business management.
ITEM 6 EXHIBITS AND REPORT ON FORM 8-K
(a) Exhibits
Reference Title of Document Location
Part 1 Exhibits
10 Third amendment to
Letter Loan Agreement
dated November 27, 1998 Filed herewith at
page 19
11 Computation of Per Share Filed herewith at
Earnings page 23
27 Financial Data Schedule Filed Electronically
(b) Report on Form-8K
There were no reports on Form-8K filed for the quarter ended
November 29, 1998.
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: 1/13/99 /s/ Frederick M. Green
Frederick M. Green, President
Chief Executive Officer and
Chairman
EXHIBIT 10
THIRD AMENDMENT TO LETTER LOAN AGREEMENT
This THIRD AMENDMENT TO LETTER LOAN AGREEMENT (this
"Amendment"), made and entered into as of November 27, 1998, is
by and between Ault Incorporated, a corporation organized under
the laws of the State of Minnesota (the "Borrower"), and U.S.
Bank National Association, formerly known as First Bank National
Association, a national banking association (the "Lender").
RECITALS
1. The Lender and the Borrower entered into a Letter Loan
Agreement dated as of February 25, 1997, as amended by a First
Amendment to Letter Loan Agreement, and a Second Amendment to
Letter Loan Agreement (as amended, the "Credit Agreement"); and
2. The Borrower desires to amend certain provisions of the
Credit Agreement, and the Lender has agreed to make such
amendments, subject to the terms and conditions set forth in this
Amendment.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the
parties hereto hereby covenant and agree to be bound as follows:
Section 1. Capitalized Terms. Capitalized terms used
herein and not otherwise defined herein shall have the meanings
assigned to them in the Credit Agreement, unless the context
shall otherwise require.
Section 2. Amendments. The Credit Agreement is hereby
amended as follows:
2.1 Introductory paragraph: The introductory
paragraph of the Credit Agreement is amended to read in its
entirety as follows:
U.S. Bank National Association (the "Lender") agrees to
make (i) revolving advances ("Advances") to Ault
Incorporated (the "Borrower"), in an aggregate amount
outstanding from time to time of up to the lesser of
$4,000,000 or the Borrowing Base (defined below), from the
date of the Third Amendment to this Agreement (the "Third
Amendment") until October 1, 1999 under a promissory note
dated the date of the Third Amendment (as the same may
hereafter be amended, restated, extended, renewed or
otherwise modified from time to time, the "Revolving Note"),
(ii) two term loans of up to $300,000 each, (each an
"Existing Term Loan") (the Existing Term Loans were funded
prior to the date of the Third Amendment), and (iii) in its
sole and absolute discretion and without any commitment to
do so, one or more new term loans (each a "New Term Loan")
or up to $400,000 in the aggregate (the Existing Term Loans
and the New Term Loans, if any, are all "Term Loans" and
each is a Term Loan). Each Term Loan is or shall be
evidenced by a term note dated the date of such Term Loan
(as the same may hereafter be amended, restated, or
otherwise modified from time to time, each a "Term Note")
(the Revolving Note, each Term Note and all other notes from
the Borrower to the Lender are collectively the "Notes").
Advances and Term Loans will be made upon the following
terms and subject to the following conditions:
2.2 Nonuse fee. The following new paragraph 1(c) is
added to the Credit Agreement:
(c) Nonuse fee. The Borrower will pay to the Lender a
nonuse fee equal to one quarter of one percent of the amount
by which $4,000,000 exceeds the average daily outstanding
principal balance of the Advances from the date of the Third
Amendment until the maturity of the Revolving Note. Such
nonuse fee shall be payable on a semi-annual basis on June 1
and December 1 of each year, and on the maturity date of the
Revolving Note.
2.3 Discretionary Term Loans. The following two
sentences are added at the end of paragraph 7 of the Credit
Agreement, after paragraph 7 (b):
SATISFACTION OF THE CONDITIONS OF THIS PARAGRAPH 7 DOES NOT
IN ANY WAY ALTER THE DISCRETIONARY NATURE OF THE TERM LOANS.
THE LENDER IS UNDER NO OBLIGATION TO MAKE ANY TERM LOAN.
2.4 Revolving Note. The Revolving Note in the form of
Exhibit A hereto is substituted as the Revolving Note under
the Credit Agreement. Each reference to the Revolving Note
in the Credit Agreement shall be deemed a reference to the
Revolving Note in the form of Exhibit A attached hereto.
Section 3. Effectiveness of Amendments. The amendments
contained in this Amendment shall become effective upon delivery
by the Borrower of, and compliance by the Borrower with, the
following:
3.1 This Amendment and the Revolving Note in the form
of Exhibit A hereto (the "New Revolving Note"), each duly
executed by the Borrower.
3.2 A copy of the resolutions of the Board of
Directors of the Borrower authorizing the execution,
delivery and performance of this Amendment and the New
Revolving Note certified as true and accurate by its
Secretary or Assistant Secretary, along with a certification
by such Secretary or Assistant Secretary (i) certifying that
there has been no amendment to the Articles of Incorporation
or Bylaws of the Borrower since true and accurate copies of
the same were last delivered to the Lender, and (ii)
identifying each officer of the Borrower authorized to
execute this Amendment, the New Revolving Note and any other
instrument or agreement executed by the Borrower in
connection with this Amendment (collectively, the "Amendment
Documents"), and certifying as to specimens of such
officer's signature and such officer's incumbency in such
offices as such officer holds.
3.3 The Borrower shall have satisfied such other
conditions as specified by the Lender, including payment of
all unpaid legal fees and expenses incurred by the Lender
through the date of this Amendment in connection with the
Credit Agreement and the Amendment Documents.
Section 4. Representations, Warranties, Authority, No
Adverse Claim.
4.1 Reassertion of Representations and Warranties, No
Default. The Borrower hereby represents that on and as of the
date hereof and after giving effect to this Amendment (a) all of
the representations and warranties contained in the Credit
Agreement are true, correct and complete in all respects as of
the date hereof as though made on and as of such date, except for
changes permitted by the terms of the Credit Agreement, and (b)
there will exist no Event of Default under the Credit Agreement
as amended by this Amendment on such date which has not been
waived by the Lender.
4.2 Authority, No Conflict, No Consent Required. The
Borrower represents and warrants that the Borrower has the power
and legal right and authority to enter into the Amendment
Documents and has duly authorized as appropriate the execution
and delivery of the Amendment Documents and other agreements and
documents executed and delivered by the Borrower in connection
herewith or therewith by proper corporate, and none of the
Amendment Documents nor the agreements contained herein or
therein contravene or constitute a default under any agreement,
instrument or indenture to which the Borrower is a party or a
signatory or a provision of the Borrower's Articles of
Incorporation, Bylaws or any other agreement or requirement of
law, or result in the imposition of any lien on any of its
property under any agreement binding on or applicable to the
Borrower or any of its property except, if any, in favor of the
Lender. The Borrower represents and warrants that no consent,
approval or authorization of or registration or declaration with
any person, including but not limited to any governmental
authority, is required in connection with the execution and
delivery by the Borrower or the Amendment Documents or other
agreements and documents executed and delivered by the Borrower
in connection therewith or the performance of obligations of the
Borrower therein described, except for those which the Borrower
has obtained or provided and as to which the Borrower has
delivered certified copies of documents evidencing each such
action to the Lender.
4.3 No Adverse Claim. The Borrower warrants, acknowledges
and agrees that no events have been taken place and no
circumstances exist at the date hereof which would give the
Borrower a basis to assert a defense, offset or counterclaim to
any claim of the Lender with respect to the Borrower's
obligations under the Credit Agreement as amended by this
Amendment.
Section 5. Affirmation of Credit Agreement, Further
References, Affirmation of Security Interest. The Lender and the
Borrower each acknowledge and affirm that the Credit Agreement,
as hereby amended, is hereby ratified and confirmed in all
respects and all terms, conditions and provisions of the Credit
Agreement, except as amended by this Amendment, shall remain
unmodified and in full force and effect. All references in any
document or instrument to the Credit Agreement are hereby amended
and shall refer to the Credit Agreement as amended by this
Amendment. The Borrower confirms to the Lender that the
Borrower's obligations under the Credit Agreement, as amended by
this Amendment are and continue to be secured by the security
interest granted by the Borrower in favor of the Lender under
that certain security agreement dated as of February 25, 1997,
and made by the Borrower in favor of the Lender, and all of the
terms, conditions, provisions, agreements, requirements,
promises, obligations, duties, covenants and representations of
the Borrower under such documents and any and all other documents
and agreements entered into with respect to the obligations under
the Credit Agreement are incorporated herein by reference and are
hereby ratified and affirmed in all respects by the Borrower.
Section 6. Merger and Integration, Superseding Effect.
This Amendment, from and after the date hereof, embodies the
entire agreement and understanding between the parties hereto and
supersedes and has merged into this Amendment all prior oral and
written agreements on the same subjects by and between the
parties hereto with the effect that this Amendment, shall control
with respect to the specific subjects hereof and thereof.
Section 7. Severability. Whenever possible, each provision
of this Amendment and the other Amendment Documents and any other
statement, instrument or transaction contemplated hereby or
thereby or relating hereto or thereto shall be interpreted in
such manner as to be effective, valid and enforceable under the
applicable law of any jurisdiction, but, if any provision of this
Amendment, the other Amendment Documents or any other statement,
instrument or transaction contemplated hereby or thereby or
relating hereto or thereto shall be held to be prohibited,
invalid or unenforceable under the applicable law, such provision
shall be ineffective in such jurisdiction only to the extent of
such prohibition, invalidity or unenforceability, without
invalidating or rendering unenforceable the remainder of such
provision or the remaining provisions of this Amendment, the
other Amendment Documents or any other statement, instrument or
transaction, contemplated hereby or thereby or relating hereto or
thereto in such jurisdiction, or affecting the effectiveness,
validity or enforceability of such provision in any other
jurisdiction.
Section 8. Successors. The Amendment Documents shall be
binding upon the Borrower and the Lender and their respective
successors and assigns, and shall inure to the benefit of the
Borrower and the Lender and the successors and assigns of the
Lender.
Section 9. Legal Expenses. The Borrower agrees to
reimburse the Lender, upon execution of this Amendment, for all
reasonable out-of-pocket expenses (including attorneys' fees and
legal expenses of Dorsey & Whitney LLP, counsel for the
Lender)incurred in connection with the Credit Agreement,
including in connection with the negotiation, preparation and
execution of the Amendment Documents and all other documents
negotiated, prepared and executed in connection with the
Amendment Documents, and in enforcing the obligations of the
Borrower under the Amendment Documents, and to pay and save the
Lender harmless from all liability for, any stamp or other taxes
which may be payable with respect to the execution or delivery of
the Amendment Documents, which obligations of the Borrower shall
survive any termination of the Credit Agreement.
Section 10. Headings. The headings of various sections of
this Amendment have been inserted for reference only and shall
not be deemed to be a part of this Amendment.
Section 11. Counterparts. The Amendment Documents may be
executed in several counterparts as deemed necessary or
convenient, each of which, when so executed, shall be deemed an
original, provided that all such counterparts shall be regarded
as one and the same document, and either party to the Amendment
Documents may execute any such agreement by executing a
counterpart of such agreement.
Section 12. Governing Law. THE AMENDMENT DOCUMENTS SHALL
BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA,
WITHOUT GIVING EFFECT TO CONFLICT OF LAW PRINCIPLES THEREOF, BUT
GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS, THEIR
HOLDING COMPANIES AND THEIR AFFILIATES.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed as of the date and year first above
written.
BORROWER: AULT INCORPORATED
By:
Title:
LENDER: U.S. BANK NATIONAL ASSOCIATION
By:
Title:
EXHIBIT 11
AULT INCORPORATED & SUBSIDIARY
COMPUTATION OF CONSOLIDATED EARNINGS PER
SHARE
(In Thousands of Dollars, Except Per Share
Data)
<TABLE>
<CAPTION>
(Unaudited)
Three Months Six Months
Ended Ended
November 29, November 29,
1998 1998
<S> <C> <C>
Basic EPS
Computation
Net Income $463 $938
to Common
Stockholders
Common
Shares
Outstanding:
Beginning of 4,161,758 4,161,758
Year
Common
Shares from
Exercise of
Employee
Stock
Options
Daily
Weighted:
Second 5,231 4,766
Quarter
Total 4,166,989 4,166,524
Weighted
Common
Shares
Net Income $0.11 $0.23
Diluted EPS
Computation
Net Income $463 $938
to Common
Stockholders
Total 4,166,989 4,166,524
Weighted
Common
Shares
Dilutive
Potential
Common
Shares,
Daily
Weighted,
From
Assumed
Conversion
of
Outstanding
Dilutive:
Employee Stock 489,447 541,197
Options
Employee Stock 16,273 16,273
Purchase Plan
505,720 557,470
Less
Common
Shares
Purchasable
from
Proceeds:
Employee Stock 259,388 383,290
Options
Employee Stock 13,412 13,407
Purchase Plan,
Phase 2
272,800 396,697
Adjusted 4,399,909 4,327,297
Weighted
Average
Shares *
Net Income $0.11 $0.22
<FN>
* For the second quarter of fiscal 1999 and
fiscal 1998, options totaling 313,203, and
632,600, 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 these
periods for similar reasons.
</TABLE>
AULT INCORPORATED & SUBSIDIARY
COMPUTATION OF CONSOLIDATED EARNINGS PER
SHARE
(In Thousands of Dollars, Except Per Share
Data)
<TABLE>
<CAPTION>
(Unaudited)
Three Months Six Months
Ended Ended
November 30, November 30,
1997 1997
<S> <C> <C>
Basic EPS
Computation
Net Income to $509 $596
Common
Stockholders
Common Shares
Outstanding:
Beginning 4,075,733 4,075,733
of Year
Common
Shares from
Exercise of
Employee
Stock
Options
Daily
Weighted:
First 75,200
Quarter
Second 41,179
Quarter
Total 4,150,933 4,116,912
Weighted
Common Shares
Net Income $0.12 $0.14
Diluted EPS
Computation
Net Income to $509 $596
Common
Stockholders
Total 4,150,933 4,116,912
Weighted
Common Shares
Dilutive
Potential
Common
Shares, Daily
Weighted,
from:
Assumed
Conversion of
Outstanding
Dilutive
Employee Stock 385,571
Options
Employee Stock 349,050 11,605
Purchase Plan
Warrants 11,605 112,000
360,655 509,176
Less
Common Shares
Purchasable
from
Proceeds:
Employee Stock 210,478 212,382
Options
Employee Stock 10,053 9,365
Purchase Plan
Warrants - 105,380
220,531 327,127
Adjusted 4,291,057 4,298,961
Weighted
Average
Shares
Net Income $0.12 $0.14
</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 NOVEMBER 29, 1998, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERRENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-30-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> NOV-29-1998
<CASH> 6368
<SECURITIES> 847
<RECEIVABLES> 7606
<ALLOWANCES> 0
<INVENTORY> 7436
<CURRENT-ASSETS> 23095
<PP&E> 11834
<DEPRECIATION> 6701
<TOTAL-ASSETS> 28763
<CURRENT-LIABILITIES> 6911
<BONDS> 0
0
0
<COMMON> 18386
<OTHER-SE> 2435
<TOTAL-LIABILITY-AND-EQUITY> 28763
<SALES> 22383
<TOTAL-REVENUES> 22383
<CGS> 16270
<TOTAL-COSTS> 16270
<OTHER-EXPENSES> 4686
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 53
<INCOME-PRETAX> 1374
<INCOME-TAX> 436
<INCOME-CONTINUING> 938
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 938
<EPS-PRIMARY> .23
<EPS-DILUTED> .22
</TABLE>
