-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PCepGl6ddEV2kbIybSEsgtmmegMHxgHwH3bXkxf6yNfv1Wb1zTip2R/76ZpWEvuC thrXX3Yd2xpBBU7Ws5eDzQ== 0000723639-99-000005.txt : 19990416 0000723639-99-000005.hdr.sgml : 19990416 ACCESSION NUMBER: 0000723639-99-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990228 FILED AS OF DATE: 19990415 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AULT INC CENTRAL INDEX KEY: 0000723639 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679] IRS NUMBER: 410842932 STATE OF INCORPORATION: MN FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-12611 FILM NUMBER: 99593999 BUSINESS ADDRESS: STREET 1: 7300 BOONE AVE N CITY: BROOKLYN PARK STATE: MN ZIP: 55428 BUSINESS PHONE: 6124931920 MAIL ADDRESS: STREET 1: 7300 BOONE AVENUE NORTH CITY: BROOKLYN PARK STATE: MN ZIP: 55428 10-Q 1 Page 23 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [ x ]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended February 28, 1999 Commission file number 0-12611 AULT INCORPORATED MINNESOTA 41-0842932 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identifiction No,) 7300 Boone Avenue North Minneapolis, Minnesota 55428-1028 (Address of principal executive offices) Registrant's telephone number: (612) 493-1900 Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at Class of Common Stock February 28, 1999 No par value 4,254,978 shares Total pages 25 Exhibits Index on Page 20 Page 2 PART 1. FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS AULT INCORPORATED & SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (in Thousands, Except Amounts Per Share)
(Unaudited) Third Quarter Ended Nine Months Ended Feb. 28, March 1, Feb. 28, March 1, 1999 1998 1999 1998 Net Sales $13,965 $10,294 $36,348 $30,671 Cost of Goods Sold 10,159 7,621 26,429 22,921 Gross Profits 3,806 2,673 9,919 7,750 Gross Profits Percentage 27.3 26.0 27.3 25.3 Operating Expenses: Marketing 1,100 952 3,181 2,769 Design Engineering 549 478 1,545 1,309 General and Administrative (Note 2) 1,269 861 3,132 2,434 2,918 2,291 7,858 6,512 Operating Income 888 382 2,061 1,238 Other Income (Expense): Other 104 7 358 142 Interest Expense (50) (27) (103) (119) Income Before Income Taxes 942 362 2,316 1,261 Income Taxes (Note 3) 336 79 772 382 Net Income $606 $283 $1,544 $879 Earnings Per Common and Equivalent Shares Outstanding (Note 4): Basic $0.14 $0.07 $0.37 $0.21 Diluted $0.14 $0.07 $0.36 $0.21 Common and Equivalent Shares Outstanding: Basic 4,208,951 4,150,933 4,166,524 4,128,252 Diluted 4,454,681 4,265,129 4,329,388 4,277,376
See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Page 3 PART 1. FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS AULT INCORPORATED & SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in Thousands, Except Amounts Per Share)
(Unaudited) Third Quarter Ended Nine Months Ended Feb. 28 March 1, Feb. 28 March 1, 1999 1998 1999 1998 Net Income $606 $283 $1,544 $879 Other Comprehensive Income Net of Tax: Foreign Currency Translation Adjustments (Note 13) 143 (829) 249 (1,263.00) Comprehensive Income $749 ($546) $1,793 ($384)
See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Page 4 AULT INCORPORATED & SUBSIDIARY CONSOLIDATED BALANCE SHEETS (in Thousands)
(Unaudited) February 28, May 31, 1999 1998 Assets: Current Assets Cash & Cash Equivalents (Note 5) $3,234 $5,935 Investment in Trading Securities 847 866 Trade Receivables, Less Allowance for Doubtful Accounts of $48,000 at February 28, 1999, and $31,000 May 31, 1998 10,034 6,255 Inventories: Finished Goods 4,976 3,744 Work in Process 498 278 Raw Material 3,623 2,594 Total Inventories 9,097 6,616 Prepaid and Other Expenses (Note 6) 894 618 Deferred Taxes 74 74 Total Current Assets 24,180 20,364 Other Assets: Other Receivables, Less Allowance of $65,000 at May 31, 1998, (Note 7) 199 Intangibles, Net of Amortization (Note 8) 1,593 142 Deferred Taxes 199 192 Other 213 41 2,005 574 Property, Equipment and Leasehold Improvements at Cost: Land 1,368 876 Building 814 813 Machinery and Equipment 6,569 5,969 Office Furniture 951 734 E.D.P. Equipment 1,520 1,493 Leasehold Improvements 975 978 12,197 10,863 Less Accumulated Depreciation 6,865 6,384 Net Equipment and Leasehold Improvements 5,332 4,479 Total Assets $31,517 $25,417
See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Page 5 AULT INCORPORATED & SUBSIDIARY CONSOLIDATED BALANCE SHEETS (in Thousands)
(Unaudited) February 28, May 31, 1999 1998 Liabilities and Stockholders' Equity Current Liabilities: Note Payable to Bank and Other $1,279 $236 Current Maturities of Long-Term Debt (Note 9 ) 444 213 Account Payable 4,984 3,427 Accrued Expenses: Compensation (Note 10) 436 392 Other (Note 11) 827 594 Income Taxes Payable 214 198 Total Current Liabilities 8,184 5,060 Long-Term Debt, Less Current Maturities Included Above (Note 9) 1,023 414 Deferred Rent Expense 28 70 Retirement and Severance Benefits (Note 12) 338 245 Stockholders' Equity: Preferred Stock, No Par Value, Authorized, 1,000,000 Shares; None Issued. Common Shares, No Par Value, Authorized 10,000,000 Shares; Shares Outstanding: February 28, 1999; 4,254,978 and May 31, 1998; 4,172,258 Shares 18,882 18,359 Less Notes Receivable From Sale of Common Stock (204) (204) Retained Earnings 3,915 2,371 Accumulated Other Comprehensive Income (Note 13) (649) (898) 21,944 19,628 Total Liabil. and Stockholders' Equity $31,517 $25,417
See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Page 6 AULT INCORPORATED & SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (in Thousands)
(Unaudited) Nine Months Ended February 28, March 1, 1999 1998 Cash Flows From Operating Activities Net Income: $1,544 $879 Adjustments to Reconcile Net Income to Net Cash Provided by (Used in) Operating Activities: Depreciation 481 382 Amortization 35 27 Provision for Doubtful Accounts 17 35 Provision for Inventory Adjustments 50 45 Deferred Taxes (7) 90 Deferred Rent Expenses (42) (39) Decrease in Market Value of Securities 19 1 Changes in Assets and Liabilities: (Increase) Decrease In: Trade Receivables (3,796) 1,775 Inventories (2,531) 410 Prepaid and Other Expenses (276) (19) (Decrease) Increase in: Accounts Payable 1,557 (451) Accrued Expenses 370 (364) Income Tax Payable 16 (124) Net Cash Provided by (Used in) Operating Activities (2,563) 2,647 Cash Flows From Investing Activities: Purchase of Equipment and Leasehold Improvements (1,334) (1,107) Decrease (Increase) in Other Assets (1,459) 82 Net Cash Used in Investment Activities (2,793) (1,025) Cash Flows From Financing Activities: Net Borrowings(Payments) on Revolving Credit Agreements 1,008 (361) Net Proceed From Issuance of Convertible Note after conversion of $466,000 34 Proceeds from Long-Term Borrowings 998 300 Proceeds from Issuance of Common Stock 523 249 Principal Payments on Long-Term Borrowings Including Capital Leases (157) (299) Net Cash Provided by (Used in) Financing Activities 2,406 (111) Effect of Foreign Currency Exchange Rate Changes on Cash 249 (1,101) Cash and Cash Equivalents: Increase (decrease) (2,701) 410 Beginning 5,935 3,677 Ending $3,234 $4,087
AULT INCORPORATED AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THIRD QUARTER ENDED FEBRUARY 28, 1999 Note 1, Principles of Consolidation The Company's consolidated financial statements include the accounts of Ault Incorporated, and its wholly owned subsidiaries, Ault Korea and Ault Xianghe Co., Ltd. All significant intercompany transactions have been eliminated. Foreign currencies representing the investments of the Company in its subsidiaries were translated into US dollars, in accordance with the provisions of FASB Statement No. 52. The effect from the translation is represented in Stockholders' Equity, Accumulated Other Comprehensive Income. Note 2. General and Administrative In December 1998, the Company acquired the power supply assets of LZR Electronics, Inc., located in Gaithersburg, MD. To integrate those assets into its operations, the Company paid bonuses to certain employees of LZR in order to induce the continuation of their services through May 31, 1999. Payments for these bonuses in the third quarter totaled approximately $120,000. Similar payments are anticipated in the fourth quarter of fiscal 1999. Note 3, Income Taxes The Company's tax provision includes taxes accrued on US and Korean income calculated at an average rate of 33.3% of consolidated pre- tax earnings for the nine months. The average calculated tax rate is lower than the normal rate because Ault Xianghe Co. Ltd. Incurred a loss for the period and Ault Korea Corporation utilized the availability of certain business credits to offset portions of its provisions for income taxes. Note 4, Net Income Per Share The Company has presented basic and diluted per share earnings in accordance with FASB Statement No. 128. Basic per share earnings are presented only for outstanding common stock. In addition to outstanding common stock, presentation of diluted per share earnings also assumes the conversion, exercise or issuance of all potential common stock instruments that are not antidilutive, using average common market values. The Company also has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation. Accordingly, no compensation cost has been recognized for the Company's stock option plan. Had compensation cost been determined for the nine months of fiscal 1998 and fiscal 1999 based on the fair value of options at the grant dates consistent with the provisions of SFAS No. 123, the Company's net income and net income per share would have changed to the pro forma amounts indicated below:
Nine Months Ending February 28, 1999 March 1, 1998 Net Income, as reported $1,544,000 $ 879,000 Net Income (loss) pro forma 1,307,552 560,946 Net Income, per share, as reported, basic 0.37 0.21 Net income, per share, as reported, diluted 0.36 0.21 Net Income, per share, basic, basic, pro forma 0.30 0.13 Net Income, per share, diluted, pro forma .029 0.09
AULT INCORPORATED AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THIRD QUARTER ENDED FEBRUARY 28, 1999 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants included in fiscal 1999 and fiscal 1998 calculations:
Nine Months Ending Feb. 28, 1999 March 1, 1998 Expected dividend yield - - Expected stock price volatility 63.14% 67.68% Risk free interest rate 4.51-6.61% 5.47-6.61% Expected life of options 1-5 1-5
Note 5, Cash and Investments For the purpose of reporting cash and cash flows, the Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents. Investment in trading securities is comprised of preferred stocks that pay dividends on which the Company receives a tax benefit. Note 6, Prepaid and Other Expenses Prepaid and other expenses are principally customs duty and value- added taxes, as well as certain deferred expenses that are related to and are absorbed against revenue during the fiscal year and receivables for cash advances made to foreign subcontractors of the Company. The customs duty and value added taxes are paid by Ault Korea Corporation to the Korean authority on products that are manufactured for exportation. These payments are refundable when the subsidiary submits to the Korean Government the appropriate claim and proof of exportation. Advances to sub-contractors are amortized against order deliveries. Note 7, Other Receivables Other receivables for fiscal 1998 represented amounts that were owed to the Company relating to trade receivable invoices from fiscal 1991. The customer had terminated its contract with the Company for reasons that were external and unrelated to the Company and refused to compensate the Company for its incurred costs. A suit by the Company resulted in collection of the amount in the first quarter of fiscal 1999. Note 8. Intangibles Intangibles are comprised of costs relating patent and goodwill. The patent cost amounts to $115,000, net of amortized amounts of $67,000. It represents the contract price of US Patent #5,303,137,1, which was acquired from a source external to and independent of the Company. The Company believes that products using the power conversion technology it represents will generate significant revenues into fiscal 2002. For amortization purposes, it was assigned a life of four years. Goodwill amounts to $1,478,000, net of amortization of $25,000. It represents the excess of cost over book value of the assets acquired by the Company in December, 1998, from LZR Electronics, Inc. located in Gaithersburg MD, and is being amortized using the straight-line method over fifteen years. AULT INCORPORATED AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THIRD QUARTER ENDED FEBRUARY 28, 1999 Note 9, Long-Term Debt Long-term debt, including current maturities contains the following:
February 28, May 31, 1999 1998 (000) * US Bank 8.1% term loan due in monthly installments of $7,340, including interest to February 2001, secured by equipment $162 $216 * Suwon City, Korea 6.5% note payable, due in quarterly installments of approximately $28,019 including interest Through April 2000 secured by equipment 102 144 * US Bank 7.9% term loan due in monthly installments of $7,320, including interest to November 2001, secured by equipment 216 267 * Korea Government Agency 9.0% term loan due in 8 quarterly installments of approximately $45,000 including interest, Beginning in February 2000 through November, 2001 323 * US Bank 6.8% term loan due in monthly installments of $9,538, including interest to November 2002, secured by equipment 389 * Kamco, Korea Corporation 13.1% mortgage note first installment payment principal and interest of approximately $31,000 due in May, 2000, and three payments each of approximately $92,000 every six months thereafter through November 2001 275 Total $1,467 $627 Less Current Maturities 444 213 Total $1,023 $414
Note 10, Compensation Compensation consists principally of amounts accrued for payment of employees' salaries, vacation and sick pay. AULT INCORPORATED AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THIRD QUARTER ENDED FEBRUARY 28, 1999 Note 11, Accrued Expenses, Other Accrued expenses, other, are mainly undue amounts for sales representatives' commissions, fees to product certifying agencies and provisions for future payment of current warranty commitments. Note 12, Retirement & Severance Benefits Retirement & Severance Benefits are a provision by Ault Korea Corporation, in accordance with requirements of the Korea Government, for the compensation of each current employee when his/her employment with the subsidiary terminates. The National Pension Scheme of Korea, does not require the Company to fund this obligation, but requires the transfer of certain portions of the liability to the Korean National Pension Fund. The liabilities recorded by the Company are net of these transfers. To derive a tax benefit from these deferred payments, the Company also has the option to fund these future payments under a defined benefit plan through an insurance company. Note 13, Accumulated Other Comprehensive Income Accumulated other comprehensive income is comprised of foreign currency translation adjustments resulting from translation of the financial statements of Ault Korea Corporation from its functional currency, Korean Won, to US dollars. Adjustments that were recorded during the nine months of each fiscal year are as follows:
February 28, March 1, 1999 1998 (000) Beginning cumulative exchange gain (loss) $(898) $31 Gain (loss) for the period from: a. Long-term inter-company receivables 319 (1,71) b. Other (70) (30) Total $(649) $(1,070)
The amounts attributed to long-term inter-company receivables for the nine months ending February 28, 1999, reflect changes in the Won rate from 1,400.0 Wons to $1.00 at June 1, 1998, to 1,224.0 Wons to $1.00 at February 28, 1999. Amounts attributed to long-term inter- company receivables for the nine months ending March 1, 1998, reflect changes in the Won rate from 892.3 Wons to $1.00 at June 1, 1997, to 1,653.5 Wons to $1.00 at March 1, 1998. Amounts were computed on outstanding receivables of $2,312,000 at February 28, 1999, and $2,327,000 at March 1, 1998. ITEM 2 MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS ANDRESULTS OF OPERATIONS From time to time, in reports filed with the Securities and Exchange Commission, in press releases, and in other communications to shareholders or the investing public, the Company may make forward- looking statements concerning possible or anticipated future results of operations or business developments which are typically preceded by the words "believes", "expects", "anticipates", "intends" or similar expressions. For such forward-looking statements, the Company claims the protection of the safe harbor for forward looking statements contained in the Private Securities Litigation Reform Act of 1995. Shareholders and the investing public should understand that such forward-looking statements are subject to risks and uncertainties which could cause results or developments to differ significantly from those indicated in the forward-looking statements. Such risks and uncertainties include, but are not limited to, the overall level of sales by OEMs in the telecommunications, data communications, computer peripherals and the medical markets; buying patterns of the Company's existing and prospective customers; the impact of new products introduced by competitors; delays in new product introductions; higher than expected expense related to sales and new marketing initiatives; availability of adequate supplies of raw materials and components and other risks affecting the Company's target markets generally. RESULTS OF OPERATIONS Net Sales: Net sales increased by 35.7% to $13,965,000 for the third quarter of fiscal 1999 from $10,294,000 for the third quarter of fiscal 1998. For the nine months of fiscal 1999, sales totaled $36,348,000 up by 18.5% from sales of $30,671,000 for the nine months fiscal 1998. The improvements in sales, principally during the third quarter, resulted from continuing strong demand for external power conversion products for applications in the telecommunications/data communications, computer and medical markets served by the Company. Significant among the applications are cable and analog modems, wireless telephones, scanners, electronic testing instruments and portable medical products. Cable modems, fastest growing among these applications, are designed to process data transmitted over cable lines that also transmit television signals. The Company believes that earlier infrastructure problems relating to installation of transmission stations and wired systems that hindered growth in demand for cable modems are being resolved and that demand for cable modems, will continue to grow at a rate that is faster than the rates of other applications. Dataquest, a nationally known marketing research organization forecast cable modem shipments growing from 500,000 units in 1998 to 2.4 million units by 2002. The Company believes that, because of its alliance with several major manufacturers of cable modems, it is well positioned to benefit from growth in demand for these products. Many of these applications are designed to function with the Company's switching power supplies, one of the highest margin products of the Company and, as reported by Micro-Tech Consultants, the fastest growing segment of the external power conversion products market. Orders and sales for portable medical product applications also grew during the nine months. These products utilize the Company's switching power supplies and battery chargers and are traditionally the Company's highest margin application although they command only approximately 15.0% of the Company's total sales. To strengthen its position in this market, in December 1998, the Company acquired the power supply division of LZR Electronics, Inc., a small, closely held corporation located in Gaithersburg, MD. LZR designs, manufactures and markets a full line of power supplies from which it had revenues of $6.4 million in its calendar year 1997 and estimated revenues of $6.5 million for its calendar year 1998. In addition to complementing the Company's sales for many high volume applications, most of LZR's products are agency approved for medical product applications. The Company believes that its greater sales channels and larger customer base provide an advantage to enhance current levels of revenue attained by LZR. LZR's domestic manufacturing is being moved to the Company's headquarters facility in Minneapolis and a substantial portion of its foreign sub-contract manufacturing will be moved to the Company's Asian subsidiaries. Engineering, product development and sales activities will continue to be based in Maryland. Service to customers continues as a strong strategic focus of the Company. To this end, the Company's engineering activities are directed to various customer product applications, in addition to cable modems and portable medical products, that are anticipated to generate revenue in fiscal 1999 and later years. These applications include uninterruptible power supplies, power supplies for asymmetric digital subscriber line modems (a competing technology to cable modems); hubs, routers and switchers for the networking market. All of these factors are the basis for the Company's belief that the improvements so far realized in its fiscal 1999 sales will continue through the fourth quarter of fiscal 1999 and into its fiscal year 2000. Order Backlog: The Company's order backlog at February 28, 1999 totaled $15.4 million, which equals amounts that were available when the quarter began, and as compared to $14.1 million at March 1, 1998. The order backlog at February 28, 1999 represented sales for approximately thirteen weeks and reflected the posture of many OEMs to limit their contractual commitments to the best lead-times of their customers. Because of the Company's shortening lead-times, order backlog as an indicator of future shipments and raw material requirements has also changed. These changes require the Company to place greater reliability on its ability to forecast customer needs and requirements for on-time shipment of products. The Company believes that shorter customer lead-times will not detract from its ability to deliver competitive customer services. Gross Profit: Gross profit increased to $3,806,000 or 27.3% of net sales for the third quarter of fiscal 1999, from $2,673,000 or 26.0% of net sales for the third quarter of fiscal 1998. For the nine months, gross profits totaled $9,919,000 or 27.3% of net sales in fiscal 1999 and $7,750,000 which represented 25.3% of net sales for fiscal 1998. The improvements are due principally to proportionately greater sales of battery chargers, as well as linear and switching power supplies, which have higher margins as compared to transformer products. Revenue from shipments of transformers, traditionally a lower margin product, decreased during the nine months compared to the nine months of fiscal 1998. Operating Expenses: Operating expenses were $2,918,000 or 22.8% of net sales in the third quarter of fiscal 1999, as compared to $2,291,000 equaling 22.3% of net sales for the second quarter of fiscal 1998. For the nine months, operating expenses amounted to $7,858,000 or 21.6% of net sales in fiscal 1999 and $6,512,000, which equaled 21.2% of net sales in fiscal 1998. Compared to fiscal 1998, operating expenses grew by $627,000 and $1,346,000 in the third quarter and nine months, respectively, of fiscal 1999. The increased expenditures were incurred principally in relation to (1) sales commissions paid to sales representatives on the larger sales in fiscal 1999, (2) assuring successful integration of LZR into the Company, (see Note 2 to CONSOLIDATED FINANCIAL STATEMENTS); and (3) continuing support of strategic initiatives to achieve the following purposes: 1. Strengthening the Company's sales and marketing activities in the US and Asia. 2. Enhancing Asian manufacturing supervision. 3. Providing and maintaining direct communication links between Ault US and Ault Korea. 4. Installation and maintenance of programs for upgrading the quality of management information services. 5. Certification of products for sale in broader foreign markets and to facilitate a more prompt response to customer requirements. 6. Upgrading systems to improve materials forecasting technique necessary to meet product delivery lead-times of customers and to support US Customs matters necessitated by increased foreign business activities. It is anticipated that expenditures relating to most of these matters will be incurred in future periods and that they will contribute to the generation and support of future business. It is, however, the Company's objective to reduce the proportion operating expenses bear to future net sales where such action did not jeopardize generation of future business. Operating Income: Operating income for the third quarter totaled $888,000 for fiscal 1999 and $382,000 for fiscal 1998 equaling, respectively, 6.4% and 3.7% of net sales. For the nine months, operating income totaled $2,061,000 or 5.7% of sales in fiscal 1999 and $1,238,000, which amounted to 4.0% of sales in fiscal 1998. The improvements in operating income for fiscal 1999 are due principally to the greater sales and better gross margin on the mix of products, as previously discussed. Non-Operating Income: Other income of $358,000 for fiscal 1999 and $142,000 for fiscal 1998 represented principally interest income, currency exchange rate gains on foreign contracts by the Korean subsidiary and income derived from rented portions of the Korean manufacturing facility. The Company incurred interest expenses of $103,000 in fiscal 1999 and $119,000 in fiscal 1998, which were paid principally on bank credit facilities and long-term borrowings. Income Tax: Income taxes for the nine months of fiscal 1999 were $772,000, which equaled 33.3% of pretax income of $2,316,000. For the nine months of fiscal 1998, income taxes were $382,000, which amounted to 30.3% of pretax income of $1,261,000. The tax rates for both periods are below the normal rates because of the utilization of business credits and of net operating loss carry forwards by the foreign operations to offset portions of their accrued taxes. Net Income: The Company reported net income of $606,000 for the third quarter of fiscal 1999, compared to $283,000 for the third quarter of fiscal 1998. Net income for the nine months totaled $1,544,000 in fiscal 1999 and $879,000 in fiscal 1998. Per Share Earnings: Diluted per share earnings were $0.14 on outstanding, weighted, average shares of 4,454,681 for the third quarter of fiscal 1999 and $0.07 for the third quarter of fiscal 1998 computed on outstanding, weighted, average shares of 4,265,129. Per share earnings for the nine months were $0.36 for fiscal 1999 and $0.21 for fiscal 1998 based on outstanding, weighted, average shares of 4,329,388 and 4,277,376, respectively for each period. LIQUIDITY AND CAPITAL RESOURCES The following table describes the Company's working capital position at February 28, 1999 and at March 1, 1998:
February 28, March 1, 1999 1998 (000) Working capital $15,996 14,577 Cash 3,234 4,087 Trading securities at market 847 847 Current Asset 24,180 19,629 Current Liabilities 8,184 5,052 Current Ratio 2.95 3.89 Unutilized bank credit facilities 4,221 3,105 Cash provided (used) by operations (2,563) 2,647
Current Working Capital Position At February 28, 1999, the Company had current assets of $24,180,000 and current liabilities of $8,184,000, which amounted to working capital of $15,996,000 and represented the availability of resources that are approximately three times its current liabilities. In addition to cash and trading securities, the Company emphasizes reliance, firstly, on cash flows from operations and, secondly, on its credit facilities as sources of working capital to support normal growth in revenue, capital expenditures and attainment of profit goals. Cash and Investments: At February 28, 1999, the Company had cash and trading securities totaling $4,081,000, down from $4,934,000 at March 1, 1998 principally because of cash payments made in acquiring the power supply assets of LZR Electronics, Inc. Cost of the acquisition to the Company amounted to $4,045,000, which included price paid to the seller and the recognition of goodwill amounting to $1,490,000, which included professional fees incurred by the Company. The assets purchased had a total value of $2,105,000, and included inventories valued at $1,863,000, manufacturing equipment and tooling valued at $193,000, contracts, including sales contracts, intellectual property rights and other operating assets valued at $49,000. The aggregate payments to LZR amounted to $3,505,000, which consisted of cash payments of $2,555,000, delivery of a one year, 8.0% convertible promissory note for $500,000 and an assumption by the Company of $450,000 of certain liabilities. The note is convertible at the option of the holder into 78,865 shares of the Company's common stock. Cash paid in the transaction was derived from available Company cash. Credit Facilities The Company maintains two credit facilities; its primary credit facility with US Bank and a smaller facility with Korea Exchange Bank that supports the South Korean subsidiary. The credit arrangement with US Bank includes: (a) A revolving credit facility of $4.0 million at prime rate of interest, secured by trade receivables and expiring on October 1, 1999. The Company has completed negotiations that are expected to reduce the borrowing rate to .5% below the prime rate. At February 28, 1999, borrowings against it amounted to $650,000. (b) One or more term loans, each up to an amount of $400,000. At February 28, 1999, borrowings amounting to $767,000 were outstanding on three term loans. See Note 9, under NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. The South Korean credit facility is approximately $1.5 million of which borrowings at February 28, 1999 totaled $595,000. Cash Flows for Fiscal 1999 Operations: Although the Company had net profits that totaled $2,097,000, after adjustments, operations used $2,563,000 of cash during the nine months due principally to the following activities: (a) Increases in trade receivables, mainly due to the increased net sales in the third quarter of fiscal 1999 used $3,796,000 of cash. Further use of cash from increased net sales is anticipated for the fourth quarter and in fiscal 2000. (b) Increases in inventories used $2,531,000 of cash, including approximately $1,900,000 was obtained in the asset purchase transaction with LZR Electronics, Inc. The remaining increases are due principally to requirements of customers that the Company carries additional stockings of finished products to support their emergency needs. This is a normal business practice in the power supply market. No changes that are anticipated over the near term are expected to be of any significant impact on use of cash. (c) Increases in accounts payable and accrued expenses provided $1,927,000 of cash from liabilities associated with purchases of material to support customer orders and emergency stockings of finished products. Further contribution to cash from increased liabilities for these purposes is anticipated over the remaining fourth quarter and in fiscal year 2000. Investing Activities: Investing activities used net cash of $2,793,000 relating principally to (1) manufacturing and tooling equipment obtained and goodwill, net of amortization, recognized from the LZR Electronics, Inc. transaction, (2) purchase of manufacturing and tooling equipment amounting to $696,000, normally required to support the Company, and (3) purchase of land in South Korea. Acquired at a cost of $445,000, the land is required to relocate the Korean manufacturing facility soon to be purchased by the Korean Government for public improvement purposes. Financing Activities: Financing activities provided net cash of $2,406,000, which were comprised principally of the following transactions: 1. Borrowings under the revolving credit facilities provided $1.008,000 of cash 2. Proceeds from long-term borrowings provided $998,000 of cash, which included a US Bank equipment term loan of $400,000, a Korea Government Agency working capital loan and a Kamco Korea Corporation mortgage loan, each respectively, totaling $323,000 and $275,000. See Note 9. Under NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. The Kamco Korea Corporation mortgage loan was acquired on the South Korean property that is intended to be the site for the subsidiary's manufacturing facility when its current facility is acquired by the Korean Government, as discussed under Investing Activities. 3. Proceeds from the issuance of common stock provided $523,000, of which $466,000 are in connection with conversion by LZR Electronics, Inc. of portions of the Company's promissory note that was issued as discussed under Cash and Investments. 4. Principal payments on long-term borrowings used $157,000 of cash. Effect of Foreign Currency Exchange Rate Fluctuations. The economic crisis in South Korea, which in fiscal 1998 resulted in a dramatic devaluation of the Won, the country's currency, has improved, although, compared to its value during the past several years, it remains weak in relation to the value of the US dollar. The effect of translating the Korean financial statements, which were prepared in Won, to US dollars, resulted in a net asset value increase of $249,000 during the nine months, which related principally to long- term inter-company receivables. See Note 13, under NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. Summary: Although no significant contributions to cash from operations are anticipated for the remaining period of fiscal 1999, the Company's cash and working capital positions are sound and, together with its credit facilities are adequate for the support of the Company's strategies into fiscal year 2000. Impact of Recent Accounting Standard Changes: Statement No. 130: The FASB has issued Statement No. 130, Reporting Comprehensive Income, effective for fiscal years beginning after December 15, 1997. Statement No. 130 requires that items, such as unrealized gains and losses on certain investments in debt and equity securities and certain foreign currency items be treated as components of other comprehensive income in the statements of income and in the stockholder's equity segments of financial statements. As required, the Company has adopted Statement No. 130 as of August 30, 1998. See CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME and CONSOLIDATED BALANCE SHEETS, Stockholders' Equity. Statement No. 131: FASB has issued Statement No. 131, Disclosures About Segments of an Enterprise and Related Information, effective for fiscal years beginning after December 15, 1997. Statement No. 131 requires disclosure of certain information for each organizationally structured and performance assessed business segment of an enterprise, including, among other disclosures, profit and loss information, segment assets and information on major customers. The following information relates to adoption of Statement No. 131 by the Company for its fiscal year 1999: Information About Products and Services The Company's business operations are comprised of principally one activity - the design, manufacture and sale of equipment for converting electric power to a level used by OEMs principally in computer peripherals, data communications/telecommunications and medical markets to charge batteries, and /or power equipment. The Company supports these power requirements by making available to the OEM products that have various technical features. These products are managed as one product segment under the Company's internal organizational structure and the Company does not consider any financial distinctive measures, including net profitability and segmentation of assets to be meaningful to performance assessment. Information About Revenue by Geography Distribution of revenue from the US, from each foreign country that is the source of significant revenue and from all other foreign countries as a group are as follows:
NINE MONTHS ENDING FEB. 28, 1999 MAR. 1, 1998 ($000) ($000) US $29,667 $21,490 Canada 1,310 1,442 France 3,888 Ireland 2,474 1,095 All Other Foreign Countries 2,897 2,756 Total $36,348 $30,671
The Company considers a country to be the geographic source of revenue if it has all contractual obligations to the Company, including obligation to pay for trade receivable invoices. Information About Major Customers The Company sells its products to over 200 customers, and its objective is to maintain a diversified customer base and to avoid, where practicable, dependence for revenue on a single customer. For the fiscal 1999 and fiscal 1998 periods ending November 29, 1998 and November 30, 1997, respectively, revenues from customers that comprised 10.0% or more of total revenues were:
FISCAL 1999FISCAL 1999FISCAL 1998FISCAL 1998 Revenue % Revenue % (000) (000) Customer "A" $5,829 16.0 256 .8 Customer "B" 2,527 7.0 2,965 9.7 Customer "C" 2,474 6.8 973 3.2
Impact of Foreign Operations and Currency changes: South Korea had a significant fall in the value of its currency during the third quarter of fiscal 1998, but recovered portions of the early loss by the end of the fiscal year and showed relative stability through the third quarter of fiscal 1999. Although products that were manufactured by the Korean subsidiary contributed a large portion of total sales, the devalued Won had no significant impact on the Company's consolidated sales for the nine months because the predominant portions of the subsidiary's sales were made under inter-company contracts with the US operations. Sales by the subsidiary in its local market are not material in amounts in contrast to its inter-company sales. The Company's US operations have no significant exposure to currency risks because the predominant portions of its foreign contracts are made in US dollars. Microchip-Based Date-Referenced Systems and Year 2000 Compliance The year 2000 issue is principally the result of computer programs that were written and component embedded logics that were designed using two digits instead of four digits to define the year date field. No recognition was given for the change in date identification after calendar 1999 that would require a distinction between year 1900 and years after 1999. The Company's computer equipment, software and hardware with embedded logic technologies that are time sensitive may recognize a two digit date field using "00" as the year 1900 instead of 2000. This could result in a system failure or miscalculations causing disruptions in business, including among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. State of Readiness The Company is not engaged in the manufacturing of products that are year 2K sensitive, but it uses Y2K sensitive products of other manufacturers and relies on services of others such as equipment suppliers, software providers and suppliers with Y2K sensitive manufacturing environment. The data shown below describes the Company's activities and preparedness affecting its suppliers, freight services, desktop software, other manufacturing information software and hardware and electric power and telecommunication and other support: Suppliers Suppliers Partnering Under Inventory Forecast System: Many of these suppliers currently partnering under the forecast system, as opposed to MRP are already Y2K compliant. Guided by Ault's forecast system and monitored by the Company, each supplier has agreed to carry a minimum of four months of material enough to cover any potential interruptions during the critical times. Agreement to complete by 5-01-99 Currently Non-compliant Small to Mid-size Suppliers The Company is working with suppliers in this category to ensure delivery of materials without reliance on their current computerized systems. The alternative plan is a manual, paper driven system with a three month back up of material as determined by Ault's forecast. Agreement to complete by 5-01-99 Currently Non-compliant Large Suppliers Ault will negotiate a three month reserve of material with these suppliers as well as determine alternate sources among the smaller suppliers who show greater willingness to cooperate 5-01-99 Additionally, site visits will be made to certain large suppliers to evaluate their current system and to determine if allocation to a more reliable supplier is necessary 3-30-99 Asian Suppliers Many of our Asian suppliers have been less reliant on electronic systems, relying to a great extent on manual systems. Arrangements have been reached where these suppliers have committed to carry up to eight weeks of supplies through the critical period of Y2K. Freight Services All freight carriers surveyed or visited were reported as already Y2K compliant. Desk Top Software * Office 95 users will be upgraded to Office 97 and Excel spreadsheets compliance will be checked and corrected. 6-01-99 * Windows 95 users will be upgraded to NT 4.0. 6-01-99 * Symix business information software will be run in a test environment using a HP 9000 platform for compliance proof. 5-01-99 Other Manufacturing Information & Communication Software The following software reported by their manufacturers as compliant will be tested: * Automatic test equipment for product reliability 5-01-99 * EDI for customer/supplier communications 5-01-99 * Pro-Engineering documentation software 5-01-99 * Price quotation system 5-01-99 * Telecommunication fax 5-01-99 * Building security, including door card reader 5-01-99 * US Bank communication software The following systems were documentary certified compliant: * Lucent Technologies email system * AT&T telephone system Hardware * HP UNIX server reported compliant will be tested6-01-99 * About 50% of non-compliant workstations already replaced * Remaining workstations will be tested and those not compliant will be replaced by 6-01-99 Electric Power The Company does not anticipate any interruption to its US manufacturing due to any non-compliance from the local power company. Its China facility is already provided with backup generators and backup generators will be added at its Korea facility by October 1999. Cost to Address Year 2000 Issues To date, the Company has not incurred any significant expenditures in connection with identifying or evaluating Year 2000 compliance issues and has only used its internal resources in this effort. The Company presently estimates the labor costs used on compliance efforts to be approximately $60,000 and replacement of hardware to be about $50,000. With respect to future costs, the Company estimates it will spend approximately $50,000 for replacement of hardware and software which the Company presently knows are not compliant and another $25,000 for future staff time for compliance tasks. In addition, the Company estimates that it may spend no more than an additional $10,000 on remediation and validation of products and programs which have not yet been assessed. The Company believes that these estimates are reasonable and of minimal impact on operations. Capital expenditures among these costs will be handled in accordance with generally acceptable accounting principles. All other costs are expensed as period costs as they are incurred. The Company does not consider that these period costs will be of any material impact on its operations, and does not anticipate any potential negative financial impact of Year 2000 compliance issues relating to its business and its ability to function normally. Any significant business interruptions, however, could have a material, adverse impact on the Company's financial condition and results of operations. Risk of Year 2000 Issues The Company considers any adverse events to be unlikely and although remote, it recognizes the following situations as worse case issues that could result from any Year 2000 non-compliance: 1. Customer Litigation: Although the Company believes that its efforts will ensure that there are no disruptions in the business or operations of its customers, the possibility exists that some customers may experience problems that may motivate such customers to commence litigation against the Company for restitution and damages that may be related to such problems. 2. Disruption of Material Supply: The Company has surveyed its suppliers with regard to their Y2K readiness and has received adequate responses from many suppliers of whom the support of some is considered critical to the Company's Y2K compliance. The Company will provide assistance to suppliers who need it. Where survey results necessitate it, the Company will arrange for suppliers to maintain reserves of material through critical Y2K periods. 3. Disruption of the Company's Computer Information System: The Company has identified all of its hardware and software that will require compliance. Some have been tested and upgraded or replaced. Final testing and necessary upgrading are anticipated to complete by June 1999. The Company considers any disruption of its computer information system to be unlikely. 4. Disruption of the Company's Computer-based Manufacturing Supporting System: The company has inventoried all of its vendor provided computer- based systems, such as its testing and documentation systems. Although some vendors have provided documentary certification of compliance, the Company expects to compliance test this equipment and remedy any defects by June 1999. While no disruptions are anticipated, the Company believes that if disruptions occur, they will not be significant and will be dealt with promptly. 5. Disruption of Communication, Utilities and other Externally Provided Supports: The Company has surveyed its providers of electric power, telecommunication, banking and other services and does not anticipate that it will encounter any non-compliance matters that originate from these service providers. Contingency Plan The Company has established contingency plans for non-disruption of material supply as well as for the continuation of the supply of electric power to operate its Asian subsidiaries. The Company does not anticipate that any further contingency provision will be required. Subsequent Events: On April 12, 1999 the Company released to the public that it signed an agreement with Sumitomo Corporation of Japan to form a joint venture in South Korea that will manufacture and market smart battery packs for wireless telephones that use CDMA technologies. Named Ault Energy Systems, Inc. (AES), the venture will have equity capital of $2.0 million, which will be funded in two equal increments in May 1999 and in February 2000. It will be 60.0% owned by Ault and 40.0% owned by Sumitomo. Production is scheduled to commence in June 1999. ITEM 1-4 Not Applicable ITEM 5 OTHER INFORMATION Mr. Edward C. Lund resigned from the Board of Directors effective January 29, 1999, to devote greater attention to family matters. He had served the Board since 1974. The Board of Directors and Executive Management, on their own behalf and the behalf of shareholders express gratitude to Mr. Lund for his many years of dedicated service to the Company and wish him well in his new direction. Mr. Frank L. Sims was appointed to the Board of Directors at its meeting on January 29, 1999 to fill the position vacated by Mr. Lund. Mr. Sims is president of Cargill's North American Grain Division with responsibilities for grain operations in the United States, Canada and Mexico. He brings to the Board his expertise in general business management. ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits ReferenceTitle of Document Location Part 1 Exhibits 11 Computation of Per Share Earnings Filed herewith at page 22 27 Financial Data Schedule Filed Electronically 99-1 Public News Release on contract signed Filed herewith on page 24 with Sumitomo Corporation establishing a Joint Venture Operation in South Korea to build smart battery packs. (b) Reports on Form 8-K On December 10, 1998 the company filed its Form 8-K with the Securities and Exchange Commission Reporting the purchase of all of the power supply assets of LZR Electronics, Inc., a Maryland-based corporation. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AULT INCORPORATED (REGISTRANT) DATED: 4/15/99 /s/ Frederick M. Green Frederick M. Green, President Chief Executive Officer and Chairman DATED: 4/15/99 /s/ Carlos S. Montague Carlos S. Montague, Vice President Chief Financial Officer and Controller EX-11 2 Page 7 EXHIBIT 11 AULT INCORPORATED AND SUBSIDIARY COMPUTATION OF CONSOLIDATED EARNINGS PER SHARE (In Thousands of Dollars, Except Per Share Data)
(Unaudited) Nine Months Ended Ended February 28, March 1, 1999 1998 Basic Earnings Per Share Computation: Net Income to Common Stockholders $1,544 $879 Common Shares Outstanding: Beginning of Year 4,161,758 4,075,733 Common Shares, Daily Weighted, From: Exercise of Employee Stock Options First Quarter 52,519 Second Quarter 3,904 Third Quarter 3,070 Conversion of Notes, Third Quarter 10,667 Total Weighted Common Shares 4,179,399 4,128,252 Net Income Per Share $0.37 $0.21 Diluted Earnings Per Share Computation: Net Income to Common Stockholders $1,544 $879 Total Weighted Common Shares 4,179,399 4,128,252 Dilutive Potential Common Shares, Daily Weighted, from Assumed Conversion of Outstanding Dilutive: Convertible Notes 15,367 Employee Stock Options 487,307 257,564 Employee Stock Purchase Plan 11,605 502,674 269,169 Less Common Shares Purchasable from Proceeds: Convertible Notes 14,161 Employee Stock Options 320,087 109,638 Employee Stock Purchase Plan, Phase 2 10,407 334,248 120,045 Adjusted Weighted Average Shares * 4,347,825 4,277,376 Net Income Per Share $0.36 $0.21 *For the third quarter of fiscal 1999 and fiscal 1998, options totaling 143,871, and 329,000 respectively, were excluded from dilutive EPS calculations because of their higher exercise prices compared to the market values. Underwriters' common stock warrants totaling 112,000 shares were also excluded from the dilutive EPS calculations in these periods for similar reasons.
Page 8 AULT INCORPORATED AND SUBSIDIARY COMPUTATION OF CONSOLIDATED EARNINGS PER SHARE (In Thousands of Dollars, Except Per Share Data)
(Unaudited) Three Months Ended February 28, March 1, 1999, 1998 Basic Earnings Per Share Computation: Net Income to Common Stockholders $606 $283 Common Shares: Outstanding, Beginning of Year 4,161,758 4,075,733 Exercise of Employee Stock Options: First Quarter 75,200 Second Quarter 10,500 Common Shares, Daily Weighted, Third Quarter From: Exercise of Employee Stock Options 4,691 Conversion of Notes 32,001 Total Weighted Common Shares 4,208,950 4,150,933 Net Income Per Share $0.14 $0.07 Diluted Earnings Per Share Computation: Net Income to Common Stockholders $606 $283 Total Weighted Common Shares 4,208,950 4,150,933 Dilutive Potential Common Shares, Daily Weighted, from: Assumed Conversion of Outstanding Dilutive: Employee Stock Options 660,459 180,550 Employee Stock Purchase Plan 11,766 11,605 Convertible Note 46,052 718,277 192,155 Less Common Shares Purchasable from Proceeds: Employee Stock Options 418,342 68,309 Employee Stock Purchase Plan 8,722 9,650 Convertible Note 42,437 469,501 77,959 Adjusted Weighted Average Shares 4,457,726 4,265,129 Net Income Per Share $0.14 $0.07
EX-27 3
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS OF THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDED FEBRUARY 28, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS MAY-30-1999 JUN-01-1998 FEB-28-1999 3234 847 10034 0 9097 24180 12197 6865 31517 8184 0 0 0 18882 3062 31517 36348 36348 26429 26429 7500 0 103 2316 772 1544 0 0 0 1544 .37 .36
EX-99 4 Page 2 EXHIBIT 99-1 Ault Establishes Joint Venture With Sumitomo Corporation of Japan To Manufacture and Market Battery Packs for Digital Wireless Phones Joint Venture Revenues of Approximately $13 Million Expected in Fiscal 2000 Rising to $28 Million in Fiscal 2001 April 12, 1999---Minneapolis, MN---Ault Incorporated (Nasdaq National Market: AULT) today announced the formation of Ault Energy Systems, Inc. (AES), a joint venture with Japanese trading company, Sumitomo Corporation that will manufacture and market smart battery packs for wireless digital telephones. AES will be 60%-owned by Ault and 40%-owned by Sumitomo. Battery pack production is scheduled to commence in June 1999, which marks the beginning of Ault's fiscal 2000 year. AES sales are expected to total approximately $13 million in fiscal 2000 and are currently forecasted to increase significantly to approximately $28 million in fiscal 2001. AES will manufacture smart battery packs on new production lines at the Company's manufacturing facility in Korea. Snapped into the back of a wireless phone, a smart battery includes a built-in microchip and electronics that monitor the battery's charge status and regulates battery recharging and other functions. Sumitomo will be the sole agent for selling the completed battery packs to Korean OEMs of digital wireless phones, which dominate the wireless telephone market based on the CDMA technology standard. CDMA-based digital phones account for approximately 50% of the U.S. market, and the Peoples' Republic of China recently indicated it may open its market to CDMA-standard wireless equipment. Frederick M. Green, president and chief executive officer, commented: "This joint venture represents the single greatest growth opportunity in Ault's history, and we are extremely pleased to be pursuing the wireless battery pack market with a partner of Sumitomo's global stature. Since the worldwide battery pack market is highly fragmented, we believe substantial opportunity exists for a well-funded operation like AES that is backed by Ault's demonstrated manufacturing expertise and Sumitomo's extensive distribution capabilities. As a result, we believe AES can develop a high degree of critical mass in the wireless battery pack market within a relatively short period of time." Industry sources estimate that the smart battery pack market registered unit growth of nearly 50% in 1998. Demand for smart wireless battery packs is expected to continue exceeding available worldwide supply for the foreseeable future. The strong demand for smart battery packs is based on the fact that smart batteries are considered the best technology for increasing battery life and product safety. Green said that under terms of the joint venture, Ault is free to pursue additional battery pack business outside the Korean market. He said the Company intends to evaluate selected opportunities involving such applications as digital cameras and camcorders. Due to the impact of start-up costs, AES will post a loss during Ault's fourth quarter ending May 31, 1999, but Ault's consolidated earnings for this period are not expected to be significantly affected by its 60% equity share of this loss. AES is forecast to post progressively smaller losses during the first half of fiscal 2000 as battery pack production starts ramping up. It is anticipated that these losses again will have only a minimal impact on Ault's consolidated earnings. AES is expected to turn profitable in the third quarter of fiscal 2000 and report net income for the full year. Initial equity funding for AES will amount to $2 million, of which Ault will contribute 60% or approximately $1.2 million. Later in fiscal 2000, the joint venture plans to borrow an additional $2 million, which it expects to repay within one year. Headquartered in Tokyo, Sumitomo Corporation is one of the world's largest integrated trading companies, providing value-added intermediary and distribution services between producers and customers around the globe. Sumitomo Corporation had sales of approximately $95 billion in 1998. Ault is the largest independent manufacturer of external power conversion products based in North America. The Company is a leading supplier to original equipment manufacturers of telecommunication, data communications and medical equipment. # # # For additional information, contact: Frederick M. Green (CEO) 612/493-1900 Statements regarding Ault's anticipated performance are forward- looking and therefore involve risks and uncertainties, including but not limited to: market conditions in the global electronic industry, the ability of the AES joint venture to attain profitability within currently planned timetables, buying patterns of major customers including OEMs of wireless telephones, competitive products and technologies, and other factors set forth in the Company's filings with the Securities and Exchange Commission. -----END PRIVACY-ENHANCED MESSAGE-----