**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D. C. 20549**

 

**FORM 10-K/A**

**(Amendment No. 1 to Form 10-K)**

 
| **(Mark  One)** |
|-----------------|
| **ý**      | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934  [FEE  REQUIRED]** |

 

**FOR THE FISCAL YEAR ENDED MAY 30, 2004**

 

**Commission File Number 0-12611**

 

**AULT INCORPORATED**

(Exact name of registrant as specified in its charter)

 
| **MINNESOTA**                                                   | ** ** | **41-0842932**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (IRS Employer Identification Number) |
|                                                            |       |                                 |
| **7105 Northland Terrace, Brooklyn Park, MN  55428-1028**  |
| Address of principal executive offices                          |

 

Registrant’s telephonenumber, including area code: **(763) 592-1900**

Securities registeredpursuant to Section 12(b) of the Act: **None**

Securities registeredpursuant to Section 12(g) of the Act:

 

**Common Stock, No Par Value**

(Title of Class)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

YES  ý      NO o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendments to this Form 10-K.      o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

YES  o      NO ý

 

The aggregate marketvalue of the voting stock held by non-affiliates of the registrant wasapproximately $14,037,000 based upon the closing price of the Company’s commonstock on the NASDAQ National Market on August 2, 2004, multiplied by thenumber of outstanding shares of the Company held by persons other thanofficers, directors and 10% or more shareholders referred to in the “SecurityOwnership of Principal Shareholders and Management” table referred to underItem 12 herein.

 

On September 6,2005, there were outstanding 4,861,192 shares of the Registrant’s common stock.

 

The Form 10-K/Aconsists of 76 pages.  The Exhibit Indexis located on page 55.

 

Documents Incorporated byReference:  Portions of the definitiveProxy Statement to be delivered to shareholders for the Annual Meeting ofShareholders held September 28, 2004 were incorporated by reference into Part III.

 

 

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**AULT INCORPORATED**

 

**FORM 10-K/A**

**FOR THE FISCAL YEAR ENDED MAY 30, 2004**

 

#### **Restatement**

 

ThisAmendment No. 1 on Form 10-K/A (“Form 10-K/A”) to the Company’sAnnual Report on Form 10-K for the year ended May 30, 2004, initiallyfiled with the Securities and Exchange Commission (the “SEC”) on August 25,2004, (“Original Filing”) reflects a restatement of the consolidated financialstatements of Ault Incorporated (the “Company”) for the year ended May 30,2004, as discussed in Note 1 to the consolidated financial statements.  The determination to restate these financialstatements and other financial information was made as a result of management’sidentification, in connection with the preparation of the Company’s financialstatements for the year ended May 29, 2005, of accounting errors at theCompany’s China subsidiary related to inventory build-up and relief, andinadequate reconciliation of intercompany accounts.  The adjustments totaled $592,979 andincreased the Company’s net loss applicable to common shareholders to($5,545,646) from ($4,952,667) as originally reported.  Further information on the restatementadjustments can be found on Note 1 to the accompanying consolidated financialstatements.

 

ThisForm 10-K/A amends and restates Items 6, 7, 8 and 9A of Part II andItem 15 of Part IV of the Original Filing. In addition, pursuant to the rules of the SEC, Item 15 of Part IVof the Original Filing has been amended to contain an updated consent of theCompany’s independent registered public accounting firm and currently datedcertifications from the Company’s Chief Executive Officer and Chief FinancialOfficer, as required by Sections 302 and 906 of the Sarbanes-Oxley act of 2002.

 

**PART I**

 

#### **ITEM 1.**                                                     BUSINESS

 

(a)                **General Development of Business**

 

Ault Incorporated (hereinAult or the Company) was incorporated under the laws of the State of Minnesotain 1961.  The Company designs,manufactures, and markets power conversion products and is a leading domesticsupplier of such products to original equipment manufacturers (OEMs) of datacommunications equipment, telecommunications equipment, portable medicaldevices and equipment as well as scanning and printing equipment and industrialequipment.

 

On July 16, 2002,the Company purchased a portion of the operating assets of the Power Generaldivision of Nidec America Corporation. The Power General division developed, manufactured, and soldhigh-efficiency DC/DC converters and custom power supplies at various powerlevels up to 1200 watts under the Power General brand name.  Pursuant to the Purchase Agreement, theCompany paid the Seller $366,000 in cash and issued $2,074,000 face amount ofthe Company’s newly created Series B 7% Convertible Preferred Stock, nopar value (the Preferred Stock).  Furtherinformation regarding this acquisition is contained in Note 14 of the Notes toFinancial Statements under Item 8 herein. Since the acquisition of the Power General division significant time andresources have been expended integrating the Massachusetts engineering groupand internal power supply line into Ault’s existing processes and teamstructure.  As planned, production ofPower General’s open-frame AC-DC power supplies and the DC/DC converters wastransferred from Massachusetts to Ault’s existing facilities in Asia.  In addition, through training provided toAult’s field sales organization worldwide, Ault’s customers and prospects arefamiliar with the additional products and design engineering capabilitiesprovided by this acquisition.

 

On July 17, 2003,the Company announced the consolidation of its manufacturing operations.  The consolidation includes the closing of itsMinneapolis production operations, eliminating approximately 40 jobs inassembly, equipment maintenance, procurement and administrative support and theintegration of production into Ault’s other manufacturing plants.  Ault’s engineering, documentation, safetycertification/reliability, sales, marketing and administrative services willremain at the Minneapolis headquarters facility.  The consolidation was implemented to reduceexpenses, improve

 

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cash flow and return theCompany to profitability.  Ault’smanagement estimates that the consolidation will reduce expenses byapproximately $1.3 million annually.

 

The Company maintains awebsite at www.aultinc.com.  The annualreports on Form 10-K, quarterly reports on Form 10-Q and periodicreports on Form 8-K (and any amendments to these reports) are availablefree of charge on the website as soon as reasonably practical after the reportsare filed with the SEC.  To obtain copiesof these reports, go to www. http://www.aultinc.com.

 

(b)               **Financial Information About Industry Segments**

 

The Company operates inonly one industry segment - the manufacture and sale of power conversiondevices.

 

(c)                **Narrative Description of the Business**

 

Ault’s power conversionproducts are used to adapt alternating current (AC) to provide a source ofpower at various levels up to more than one kilowatt of continuous power for awide variety of electronic equipment.  Asignificant amount of the Company’s products are located outside the equipmentthey power as a wall plug-in or as in-line components.  Both of these styles are generally referredto as external power conversion products. A smaller percentage of the Company’s products are located inside theequipment they power and are generally known as internal power conversiondevices.  Each product configuration,external and internal, offers distinct advantages to the OEM buyer.  Internal power products are more generallyaccepted among design engineers across all segments of the electronic originalequipment market (EOEM).  Internal powerhas traditionally been the norm in product design and, in terms of range, itprovides greater latitude especially in applications beyond 100 watts.  External power still ranks as a high growtharea in the power supply industry due to the increasing emphasis on smaller andportable products that perform increasingly sophisticated functions.  Ault’s business strategy is to offer OEMs inthese markets an expanding line of high-quality power conversion products,diverse design engineering expertise and customized customer services.

 

(1)                **Products**

 

Ault’sproduct line includes internal AC/DC and DC/DC switching power supplies, DC/DCconverters, DC mobile adapters and four major categories of external powerconversion products:  switching powersupplies, linear power supplies, transformers and battery chargers.  The Company’s broad range of power conversionproducts --- ranging from 1 watt to more than 1 kilowatt --- are capable ofproviding power at most output levels that OEMs require.  The Company’s design and applicationengineers work closely with customers to ensure that these products arecustomized to meet each OEM customer’s unique power conversion needs.

 

Thefollowing table summarizes the proportion of sales of each of the Company’sfive major product categories for its last three fiscal years ended May 30,2004:

 

**Sale of Products by Category**

**as a Percentage of Total Sales**

 
| ** **               | ** ** | **Years Ended**        | ** ** |
|--------------------------|------------|------------------------|------------|
| **Product Type**         | ** ** | **May 30,  2004** | ** ** | **June 1,  2003** | ** ** | **June 2,  2002** | ** ** |
|                     |       |                   |       |   |   |   |   |
| Switching Power Supplies |       | 59                     | %          | 54 | % | 48 | % |
| Linear Power Supplies    |       | 25                     |       | 30 |   | 32 |   |
| Transformers             |       | 5                      |       | 6 |   | 11 |   |
| Battery Chargers         |       | 7                      |       | 7 |   | 9 |   |
| DC/DC Converters         |       | 4                      |       | 3 |   |   |   |
| Total                    |       | 100                    | %          | 100 | % | 100 | % |

 

***Power Supplies. ***TheCompany’s traditional power supplies provide all power conversion elements forelectronic equipment in power outputs ranging from 1 to 1200 watts.  The majority of the Company’s products containa

 

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componentlevel transformer, which reduces the voltage level, as well as other circuitryand components, which convert alternating current (AC) to direct current (DC)and, in most cases, maintain voltage within specific limits.

 

•                        ***Internal and External Switching PowerSupplies. ***The Companybelieves the market for switching power supplies in the 1-500 watt range isgenerally the fastest growing segment of the overall power supplyindustry.  For internals, switching powersupplies are efficient and easily modified to meet an OEM’s specific footprintand power requirements.  In externals,switching power supplies use switching transistors to convert power from AC toDC and are more energy efficient, smaller and lighter in weight than linearunits with comparable power outputs.  Theapplications in which these internal and external products are currently usedinclude telecommunications (wireless, wire line, cellular), data communications(networking, broadband modem, Power over Ethernet, routers, hubs, switches),computer and related peripherals, medical equipment, microprocessor controlledsystems, printing and scanning equipment, security systems, automatic tellerterminals, test equipment, multiplexers, digital cameras and point of saleequipment.

 

Mostof the Company’s internal and external switching power supplies incorporate auniversal input ranging from 90 to 265 volts AC.  This universal input means that the powersupplies can be used in virtually any country for applications such as localarea networks (LANs), printers and fiber optic links.  The Company has also designed medical gradeswitching power supplies with similar universal input ranges.

 

•                        ***Linear Power Supplies. ***Linear power supplies arelarger and generally less expensive than switching power supplies because theirdesign is based on technology employing steel laminations with windings ofcopper wire rather than switching transistors. Linear power supplies tend to be used when the wattage output requiredis relatively low.  Ault manufactureslinear power supplies that provide up to 12 watts of regulated power and 25watts of unregulated power.  The Company’slinear power supplies are used in a variety of applications including modems, telecommunicationsproducts, local area networks, microprocessor controlled systems, testequipment and multiplexers.

 

•                  ***Transformers. ***The Company manufactures a wide variety of wall plug-intransformers as part of its full range of power conversion products.  Transformers are used primarily inapplications where OEMs desire to remove heat, electromagnetic interference andweight from electronic equipment, while incorporating the rest of the powerconversion system within the product. These products reduce AC voltage from approximately 110 volts (230 voltsin some countries) down to lower voltages that range from 5 to 60 voltsAC.  The Company’s product line alsoincludes highly customized transformers that operate within stringent poweroutput tolerances, features that are not offered by most of the Company’scompetitors.  The Company’s transformersare utilized in a broad spectrum of applications including modems, telephonesets, multimedia products and scanners.

 

•                  ***Battery Chargers. ***Ault has been an innovator in battery charging technologysince the early 1980s.  Ault specializesin providing custom designed, advanced solutions for manufacturers of portableand battery powered equipment. Applications for the Company’s battery chargers include medical devices,mobile telecom devices, notebook computers, global positioning equipment andradio frequency communications products.

 

The Company’s products serve the entire range of widely used batterychemistries such as nickel cadmium, sealed lead acid, gel cell and nickel-metalhydride.  In addition, the Company hasdeveloped battery chargers for the particular requirements of newer batterychemistries such as zinc air, lithium ion and lithium polymer.  The Company is committed to supporting thesenew emerging chemistries and to developing battery charger products to beintroduced as these new battery chemistries become commercially accepted.

 

The Company sells primarily “smart” battery chargers as distinguishedfrom trickle chargers.  Smart chargerproducts use integrated circuits to control various charging characteristicswhile allowing for fast charge time and extended battery life.  Trickle charging is typically used for slow(8 to 10 hours) charging and/or standby battery maintenance.

 

The Company believes that the demand for high-quality battery chargerswill continue to increase to accommodate the growing sophistication of portableelectronic equipment.

 

•                  ***High-Efficiency and High-Density DC/DCConverters. ***The addition ofDC/DC converters to the Company’s product offering was in response to customerrequests for “on-the-board” power solutions and Ault’s strategy

 

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tofulfill the “total solution” approach as a preferred supplier to valued OEMcustomers.  In fiscal 2003, as part ofthe Power General product offering, Ault acquired a line of DC/DC convertersand seasoned engineers who have developed new, innovative high-densityquarter-brick and eighth-brick designs. These products provide Ault with a wide range of converter options tomeet the needs of OEMs using distributed power architecture in their nextgeneration and new electronic product designs. In fiscal 2002, Ault signed a private label agreement with a third partymanufacturer for distribution of high-efficiency DC/DC converters.  The terms of this agreement are subject to anannual review by each party.

 

•                  ***Mobile Products. ***In late 2002, the Company expanded its product offering to include aline of mobile products for powering laptop computers in a broad range of fieldand service applications.  The productfocus is on mobile adapters in a single and dual output with a primary salesfocus on laptop OEMs and value-added resellers (VARs).  The Company anticipates nearly 65% of themarket to be field and service applications in the business travel, insurance,trucking and delivery industries.  Theremainder of the applications is in emergency fire, police and medical services(20%); military and government (10%); and a small percentage in miscellaneoususes (5%).  The product family, known asTransport, was introduced in fiscal 2003. The TR75 (75watts) is a single output mobile adapter that has generatedapproximately $300,000 in revenue.  Thenext models in the product family are the TR100 (up to 100 watts) and the TR120(up to 120 watts) in a same footprint as the TR75.  These products will power the next generationof laptop computers that require 90, 100 or 120 watts.

 

(2)                **Markets and Customers**

 

The Company’s marketing efforts are directed primarily toward OEMsproducing non-consumer electronic equipment for broadband modems, wireless andwire line telecommunications product, networking, Power over Ethernet, as wellas industrial and retail data acquisition. These markets are characterized by trends toward smaller, portableproducts capable of performing increasingly sophisticated functions, as well asintense competitive pressure to rapidly introduce new products and productenhancements.  Based on its expertise totailor a broad range of products to meet customer requirements, the Companybelieves it is well positioned to serve the needs of its OEM customers as theyrespond to these trends and competitive factors.

 

Historically, the most significant market for the Company’s productshas been OEMs of telecommunications/data communications equipment (broadbandmodems, wireless and wire line); in fiscal 2004 sales in this marketrepresented approximately 40% of net sales. The Company’s products power cableand ADSL modems, network termination equipment (devices which interface betweentelephone network and the customer’s PBX or other telephone system), lineconditioning equipment (devices which prepare telephone lines for thetransmission of computer generated data), Wi-Fi and Power over Ethernet applicationsand various items of equipment ancillary to business telephones, includingspeaker phones, automatic dialers, caller identification units and alphanumeric displays, low to medium speed PC modems and multiplexers (equipmentwhich enables the simultaneous transmission of multiple channels of informationover the same telephone line).

 

In fiscal 2004, the telecommunications industry overall began torebound as OEMs began launching new projects/designs and had the need toreplenish existing product inventory that had been slow-moving over the pasttwo years.  A couple of telecommunicationsegments have been particularly strong: wireless and networking.  Thereare new applications such as broadband wireless routers and wireless Ethernetdevices that require cost-effective switching power supplies in the 12-32 wattrange.  The Company introduced a familyof single-port Power-over-Ethernet power supplies that combine power throughintegrated RJ45 jacks as well as data over a single CAT 5 Ethernet cable.  Two versions of the product are available:one that is 100% compliant to the Institute of Electrical and ElectronicsEngineers (IEEE) 802.3af standard that addresses Power over Ethernetrequirements.  A second version in thePW130 family is available to power OEM devices that are not compliant to thestandard.  Both versions can be sold as astandard product or be modified to suit specific requirements.

 

Approximately 26% of net sales in fiscal 2004 were to OEMs of portablemedical equipment such as infusion pumps, patient monitoring systems, apneamonitors, and portable terminals for patient history input diagnostics.

 

Infiscal 2004 approximately 19% of the Company’s net sales were to OEMs in theindustrial market segment that includes digital cameras, load survey equipment,industrial lighting, outdoor and specialty lighting as well as power tools,metal detectors and GPS equipment.  Theremaining 15% of the Company’s net sales were to OEMs of

 

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computersand computer peripherals such as digitizers, printers, plotters, portableterminals, point of sale scanners and optical character readers, LAN hardwareand multimedia speakers for computer applications.

 

The Company has worked diligently to support the growth of salesthrough our network of regional, national and international distributors.  In fiscal 2004, approximately 32% of theCompany’s net sales were to our distributors and their broad base ofcustomers.  While the specificpercentages per market segment are not available, the Company’s distributorstarget the same market segments as those outlined above. (i.e. the datacommunications/telecommunications segment ranks at the top of their market mixas well).

 

(3)**                Design Engineeringand Product Development**

 

Design engineering teams at the Company’s facilities in the UnitedStates, People Republic of China and South Korea are responsible for developingnew power conversion products and customizing existing products to meetcustomer needs.  The Company also utilizesthe significant engineering resources of its Asian subcontractors for thedevelopment of products targeted for subcontract manufacturing.  The Company’s product development activitiesare divided equally between developing products to satisfy customer needs andnew products based upon anticipated customer needs and market trends.  New product development opportunities areevaluated based upon criteria such as global market potential, return oninvestment and technological advantages. The Company believes that its collaborative efforts with customers,combined with its forward-looking concern for power technology and markettrends, have enabled it to gain a reputation as a leading innovator in thedevelopment of new power conversion products.

 

(4)**                Sales andDistribution**

 

The Company markets its products primarily in the U.S. and Canadathrough a network of 18 manufacturer representatives employing approximately125 salespersons, each of whom represents, in addition to Ault’s products,several different but complementary product lines of other manufacturers.  The Company also sells through four nationaldistributor organizations, which employ over 1,000 salespersons, and 14regional distributors, which employ over 100 salespersons.  The Company selects representatives basedupon their industry knowledge as well as account expertise with products thatare synergistic with the Company’s products. Individual salespersons are trained, mentored and technically assistedby the Company’s application engineers and other sales administrationstaff.  Any reduction in the efforts ofthese manufacturer representatives or distributors could adversely affect theCompany’s business and operating results.

 

The Company begins the sales process by identifying a potential customeror market; researching the target or potential customer’s total business,product and strategic needs; and then preparing a total solution proposal thatincludes engineering, product development, safety agency approvals, logisticsand project development processes, coordinating pilot runs and assisting OEMswith their product introductions.

 

The Company focuses its selling efforts primarily on OEMs in the U.S.and Canada.  However, many of the largerOEM customers of the Company manufacture and sell their products globally.  As a result, the Company has extended itspresence to markets throughout the world. The Company’s sales in the Pacific Rim are primarily to customers inSouth Korea and China.

 

The Company markets its products in Europe through a network ofdistributors who are managed through the Company’s customer team located inNorwood, Massachusetts.  In the PacificRim, the Company markets its products through direct sales teams located inSeoul, South Korea and Shanghai, People’s Republic of China.

 

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(5)                **Safety Agency Certification**

 

The power conversion system is potentially the most hazardous elementin most electronic equipment because the power supply modifies standard powerto a level appropriate for such equipment. Virtually all of the Company’s customers require that the powerconversion products supplied by the Company meet or exceed establishedinternational safety and quality standards, since many of the Company’sproducts are used in conjunction with equipment that is distributed through theworld.  In response to these customerrequirements, the vast majority of the Company’s products are designed andmanufactured in accordance with certification requirements of many safetyagencies, including Underwriters Laboratories Incorporated (UL) in the UnitedStates; the Canadian Standards Association (CSA) in Canada; TechnischerUberwachungs-Verein (TUV) in Germany; the British Approval Board forTelecommunication (BABT) in the United Kingdom; the InternationalElectrotechnical Committee (IEC), a European standards organization and (CE) astandard for the European Community.  Inaddition, some of the Company’s products have also received Japanese Ministryof International Trade and Industry (MITI) approval.  For certain safety applications, the Company’sproducts conform to FCC Class B requirements, which regulate the levels ofelectronic magnetic interference that may be emitted by electronicequipment.  Unlike most of itscompetitors, the Company is a certified test laboratory for UL, CSA and TUV andis able to conduct most certification tests at its Minneapolisheadquarters.  This procedure reduces thetime required to obtain safety certifications.

 

(6)**                Competition**

 

The Company competes primarily with various manufacturers of externalpower conversion products.  The industryis highly fragmented, with manufacturers generally focusing their marketing onspecific segments.  The Company hasexperienced strong competition from Taiwanese-based manufacturers principallyon price.  Many of these competitors havea smaller presence in the external conversion market than the Company, althoughseveral are engaged in more than one business and have significantly greaterfinancial resources.

 

No single company dominates the overall external power conversionproduct market, and the Company’s competitors vary depending upon theparticular power conversion product category. The companies with which Ault competes most directly in each of itsmajor product categories are: Leader Electronics, Inc. and Golden PacificElectronics, Inc. for transformers; Dee Van Enterprise Co., Ltd., Friwo,and EMC, Inc. for linear power supplies; GlobTek, Inc., Condor andPhihong Enterprise Co., Ltd. for switching power supplies; and Friwo, Phihongand Anam for battery chargers.

 

The Company competes on the basis of the quality and performance of itsproducts, the breadth of its product line, customer service, and dependabilityin meeting delivery schedules, design engineering services, and price.  The Company believes it is currently one of asmall number of companies that design, manufacture and obtain certifying agencyapprovals for the full range of internal and external power conversion devices,which OEMs consider in designing their electronic product.

 

The Company provides a total solution approach to the OEM’s entirepower conversion product needs (under 1 kilowatt) through its commitment toreliable partnerships and its delivery of high quality products supported bysolution-oriented design engineering. The manufacturing facilities in Korea and China, and arrangements withsubcontract manufacturers in China and Thailand enable the Company to competeeffectively when price is the primary consideration.

 

Internal power conversion products continue to be used for mostelectronic equipment, and as a result the Company experiences competition fromnumerous OEMs and independent suppliers offering internal products.  With the trend toward lower powerrequirements in portable electronic equipment and with the increasingavailability of smaller, competitively priced internal switching powersupplies, certain customers of the Company may choose to return to internalpower supplies in place of the external power conversion products they currentlypurchase.  In response to this issue, theCompany is now well positioned to service the power requirements of itscustomers, whether internal or external, as a result of the Power Generalacquisition.  This acquisition not onlyprovided the engineering expertise to design internal power supplies, but alsohas expanded the Company’s product offering significantly to include a line ofAC/DC and DC/DC switching power supplies and DC/DC converters.  The Company competes with a number ofmanufacturers of internal AC/DC power supplies, including Astec, Power-One,GlobTek, Condor and Delta Electronics.

 

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TheCompany competes with a broad range of manufacturers in the DC/DC convertermarket.  The industry is fragmented, withmanufacturers concentrating their sales and marketing on specific customerrequirements in specific markets.  TheCompany’s primary competitors are Synqor, Power-One, Ericsson, Artesyn, andGalaxy.  In the past 12 months, almostall of the key players in the DC/DC market have introduced models in theisolated, high-efficiency eighth-brick, quarter-brick, and half-brickmodels.  The largest single marketsegment for the sale of these high-efficiency models is telecommunications andsince this segment has suffered severely in the down economy, there has beenlimited demand for these products.  Todate, no single competitor dominates the DC/DC market in terms of market share.

 

Theestimated size of the mobile products market in North America is $55-$65million.  The major competitors, Targus,Lind and Mobility, specialize in this market segment.  These three companies dominate the marketwith combined revenues of approximately $47 million.  The rest of the market includes smallercompanies with limited sales to a handful of key customers.

 

(7)**                Manufacturing andSources of Supply**

 

The Company’s manufacturing operations consist of assembly andintegration of electronic components to meet product specifications and designrequirements for a variety of power conversion applications.  Manufacturing is currently conducted at theCompany’s facilities in Seoul, South Korea, and Xianghe, China, and bysubcontract manufacturers at four locations in China and Thailand.

 

As discussed above, the Company discontinued its Minneapolismanufacturing operations beginning in the first quarter of fiscal 2004, movingthis production to its other manufacturing plants, primarily China.  The consolidation included the closing of itsMinneapolis production operations, with the headquarters location continuing toprovide engineering, safety certification, reliability testing, sales,marketing and administrative services for its global customers.  Ault’s headquarters will continue to provideprototypes and engineering builds as part of its engineering support services.

 

Electronic components and raw materials used in the Company’s productsare generally available from a large number of suppliers, although from time totime shortages of particular items are experienced.

 

Quality and reliability are emphasized in both the design andmanufacture of the Company’s products. This emphasis is reflected in the ISO 9001 certification of the Company’sMinneapolis facility in 1991, its South Korea facility in 1996 and its Chinafacility in 1998.  The Company tests 100%of its finished products against its own and the customers’ specifications, andthen ships the products in custom-engineered protective packaging to minimizeany damage during shipment.

 

The Company has subcontract manufacturing arrangements with twobusiness partners in Thailand and two in China. The Company does not havelong-term commitments with its subcontractors and the subcontractors buildproduct for the Company pursuant to individual purchase orders.  The Company selects its subcontractmanufacturers based upon their ability to manufacture high-quality products,the sufficiency of their engineering capabilities to support products beingmanufactured; and their ability to meet required delivery times.

 

(8)                **Significant Customers: Backlog**

 

The Company sells its products to over 400 customers, and it is theCompany’s objective to maintain a diversified customer base to avoid, wherepracticable, dependence upon a single customer. In fiscal 2004, 2003, and 2002, no customers accounted for more than 10%of sales.

 

The Company’s order backlog at May 30, 2004 totaled $10,027,000compared to $13,850,000 at June 1, 2003. The order backlog represents sales for approximately 10 weeks.

 

The Company enters into buying commitments and other schedulingagreements with certain customers.  Forits larger customers, these agreements allow for order increases and decreaseswithin scheduled limits and include cancellation charges for completed and in-processproducts and procured materials.  Mostproducts are shipped within 4 to 10 weeks of an order.

 

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(9)                **Warranties**

 

The Company provides up to a three-year parts and labor warrantyagainst defects in materials or workmanship on all of its products. Servicingand repairs are conducted at the Company’s facilities in Minneapolis and SouthKorea. The Company’s warranty expenses have not been significant.

 

(10)          **Patents**

 

The Company holds no significant patents.

 

(11)**          Seasonality**

# ** **

In the past three years, sales of the Company have not reflectedseasonality.

 

(12)          **Employees**

# ** **

As of June 29, 2004, the Company employed approximately 685full-time employees at its facilities as follows:

 
| ** **                 | ** ** | **South  Korea** | ** ** | **China** | ** ** | **US** | ** ** | **Total** | ** ** |
|----------------------------|------------|------------------|------------|-----------|------------|--------|------------|-----------|------------|
|                       |       |             |       |      |       |   |       |      |       |
| Manufacturing              |       | 85               |       | 389       |       | 4      |       | 478       |       |
| Engineering                |       | 14               |       | 48        |       | 25     |       | 87        |       |
| Marketing                  |       | 9                |       | 8         |       | 13     |       | 30        |       |
| General and Administrative |       | 9                |       | 57        |       | 24     |       | 90        |       |
|                       |       |             |       |      |       |   |       |      |       |
| Total                      |       | 117              |       | 502       |       | 66     |       | 685       |       |

 

None of the Company’s employees are represented by a labororganization, and the Company has never experienced a work stoppage orinterruption due to a labor dispute. Management believes that its relations with its employees are good.

 

(13)          **Executive Officers of the Registrant**

# ** **

Certain information with respect to the executive officers of theCompany is set forth:

 
| **Name**           | ** ** | **Age** | ** ** | **Position**                                                                                                                                                                                                       | ** ** | **Officer Since** |
|--------------------|------------|---------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|
|               |       |    |       |                                                                                                                                                                                                               |       |              |
| Frederick M. Green |       | 61      |       | President  and Chief Executive Officer and Director                                                                                                                                                                |       | 1980              |
| Donald L. Henry    |       | 48      |       | Vice  President, Treasurer, Chief Financial Officer and Secretary                                                                                                                                                  |       | 1999              |
| Xiaodong Wang      |       | 46      |       | Vice  President – Asia Pacific (Previously 2 years with XD Company as CEO and  President and 7 years with Simplot Company most recently: General Manager of  China Operations, International Project Manager) |       | 2000              |
| Gregory L. Harris  |       | 51      |       | Vice  President – Business Development                                                                                                                                                                        |       | 1988              |

 

(14)**          Risk Factors**

 

The following risk factors are relevant to an understanding of theCompany’s business:

 

•                  ***The Company has experienced materialweaknesses in its internal controls***.  The Company has recently experienced materialweaknesses in its internal controls related to its Ault China subsidiaries, andrelated to its warehouse arrangements with third parties.  These weaknesses in controls resulted incertain adjustments to the

 

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Company’sfinancial statements.  The Company hasundertaken a remediation program to address these weaknesses, but there can beno assurance that the Company may not suffer additional material weaknesses andadjustments or restatements to its financial statements.

 

•                  ***The electronic equipment market is characterized byrapidly changing technology and shorter product life cycles.***  The Company’s future success will continue todepend upon its ability to enhance its current products and to develop newproducts that keep pace with technological developments and respond to changesin customer requirements.  Any failure bythe Company to respond adequately to technological changes and customerrequirements or any significant delay in new product introductions could have amaterial adverse effect on the Company’s business and results ofoperations.  In addition, there can be noassurance that new products to be developed by the Company will achieve marketacceptance.  See “Business-Design Engineeringand Product Development.”

 

•                  ***The Company’s financial results are influenced by anumber of factors.***  TheCompany’s financial results are subject to fluctuation due to various factors,including general business cycles in the Company’s markets, the mix of productssold, the stage of each product in its life cycle and the rate and cost ofdevelopment of new products.  Inaddition, component and material costs, the timing of orders from and shipmentsof products to customers and deferral or cancellation of orders from majorcustomers could adversely affect financial results.

 

•                  ***The Company’s reliance on outside contractorsreduces its control over quality and delivery schedules. ***  The Company currently depends on thirdparties located in foreign countries for a significant portion of themanufacture and assembly of certain of its products. While the Company takes anactive role in overseeing quality control with its third-party manufacturers,the failure by one or more of these subcontractors to deliver quality productsor to deliver products in a timely manner could have a material adverse effecton the Company’s operations.  Inaddition, the Company’s third-party manufacturing arrangements are short termin nature and could be terminated with little or no notice.  If this happened, the Company would becompelled to seek alternative sources to manufacture certain of itsproducts.  There can be no assurance thatany such attempts by the Company would result in suitable arrangements with newthird-party manufacturers.  See “Manufacturingand Sources of Supply.”

 

•                  ***The Company’s success depends in part upon thecontinued services of many of its highly skilled personnel involved inmanagement, engineering and sales, and upon its ability to attract and retainadditional highly qualified employees.***The loss of service of any of these keypersonnel could have a material adverse effect on the Company.  The Company does not have key-person lifeinsurance on any of its employees.  In addition,the Company’s future success will depend on the ability of its officers and keyemployees to successfully manage the Company for growth and profitability andto attract, retain, motivate and effectively utilize the team approach tomanage its employees.

 

•                  ***While the Company actively trains and technicallyassists the individual sales representatives representing its products, areduction in the sales efforts by the current manufacturer representatives anddistributors or termination of their relationships with Ault could adverselyaffect the sales and operations.*** The Company markets and sells products primarily through independentmanufacturer representatives and distributors that are not under its directcontrol.  The Company employs a limitednumber of internal sales personnel.

 

•                  ***To satisfy customer demand and toobtain greater purchasing discounts, the Company carries increased inventory******levels of certain items.***  The Company’s financial results may beadversely affected when inventory exceeds anticipated demand.  Gross margin can be adversely affected byincreases in costs of raw materials. There can be no assurance that raw material cost increases or the costof carrying increased finished goods inventory will not have a material adverseeffect on the financial results.

 

•                  ***A prolonged reduction in demand for the Company’sproducts will continue to impact the financial success.***  In fiscal year 2002, sales declined in largepart due to a substantial downturn in sales to the telecommunications and datacommunications markets.  Sales to thesemarkets stabilized in fiscal 2003 and fiscal 2004.  A decline of the telecommunications and datacommunications markets would adversely affect the Company’s results.

 

•                  ***The financing agreements containcovenants with which the Company may not be able to comply.***  The Company has entered into a financingagreement that contains financial covenants. These covenants require,

 

10

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thatthe Company, among other things, maintain a minimum working capital base, andalso impose certain limitations on additional capital expenditures and thepayment of dividends. The Company believes the covenants are achievable basedon the expected operating results.  Itsability to comply with financial covenants depends upon future operatingperformance. And, future operating performance depends, in part, on generalindustry conditions and other factors beyond the Company’s control.

 

•                  ***Civil unrest, labor disruptions, or acts ofaggression could impede the Company’s ability to operate in foreign locationsand would have a material adverse effect on future business and consequently,the operating results.*** Manufacturing is conducted at the Company’s facilities in South Koreaand China and through manufacturing relationships in the People’s Republic ofChina (China) and Thailand.  While thisPacific Rim manufacturing strategy enables the Company to compete worldwideagainst other suppliers of external power conversion products, it also involvesrisks.  While, its manufacturing operationsin South Korea, China and Thailand have not been affected by labor disruptions,civil unrest or political instability, the risk of civil unrest and politicalinstability is present in each of these countries.

 

# **(d)**               Financial Information About Foreign and DomesticOperations and Export Sales

# ** **

Export sales in fiscal year 2004 represented 12.6% ofthe Company’s gross sales, most of which were to OEMs in Europe andCanada.  For other financial informationabout foreign and domestic operations and export sales including the amount ofexport sales for the last 3 years, refer to “Note 13 - Segment Information andForeign Operations” under notes to consolidated financial statements.

 

## ***ITEM 2.***                                                     PROPERTIES

## *** ***

The Company owns and occupies its headquarters facilityin Brooklyn Park, a suburb of Minneapolis, Minnesota, which is approximately65,000 square feet in size.

 

The Company leases a 10,500-square-foot office inNorwood, Massachusetts.

 

Ault Korea Corporation owns and occupies a 54,000-square-footfacility in Suwon City in the province of Kyungki-Do, Korea.

 

Ault China Corporation owns and occupies a 40,000square foot facility in the Province of Xianghe in China.  The land use rights expire in 2050.

 

Ault Shanghai Corporation leases a 9,000-square-footfacility in Shanghai, China.

 

Management considers all of the Company’s propertiesto be well maintained, and together with subcontract arrangements in China andThailand, adequate for all Company functions, including manufacturingrequirements.

 

**ITEM 3.****                                                     LEGALPROCEEDINGS**

 

No material litigation or other claims are presentlypending against the Company.

 

**ITEM 4.****                                                     SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

Not applicable.

 

11

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**PART II.**

 

**ITEM 5.****                  MARKETFOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

 

(a)                MarketInformation

 

Ault common shares are traded on the NASDAQ marketunder the symbol AULT.  The followingtable presents the range of closing bid prices for the Company’s common stockon the NASDAQ Market for fiscal 2004 and 2003.

 
| ** **  | ** ** | **Fiscal 2004** | ** ** | **Fiscal 2003** | ** ** |
|-------------|------------|-----------------|------------|-----------------|------------|
| ** **  | ** ** | **$**           | ** ** | **$**           | ** ** | **$** | ** ** | **$** | ** ** |
| **Quarter** | ** ** | **High**        | ** ** | **Low**         | ** ** | **High** | ** ** | **Low** | ** ** |
|        |       |            |       |            |       |   |   |   |   |
| 1st         |       | 2.310           |       | 1.860           |       | 4.840 |   | 3.000 |   |
| 2nd         |       | 2.990           |       | 2.000           |       | 3.010 |   | 1.610 |   |
| 3rd         |       | 3.760           |       | 2.300           |       | 2.550 |   | 1.700 |   |
| 4th         |       | 3.770           |       | 2.800           |       | 2.080 |   | 1.660 |   |

 

(b)               Holders

 

As of August 2, 2004 there were 281 shareholdersof record for the Company’s common stock. This number of record stockholders does not include beneficial owners ofcommon stock whose shares are held of record by Depository Trust under the nameCEDE & Co.

 

(c)                Dividends

 

Ault has not paid cashdividends on its common shares, and the present policy of its Board ofDirectors is to retain any earnings for use in the business.  The Board of Directors does not anticipatepaying cash dividends on its common shares in the foreseeable future.  The Company is obligated to pay dividends onits outstanding 7% Convertible Preferred Stock. See Note 8 of the Notes to Financial Statements under Item 8 herein.

 

(d)               OtherInformation Regarding Equity Compensation Plans

 
| ** **                                               | ** ** | **(a)**                                                                                                          | ** ** | **(b)**                                                                               | ** ** | **(c)**                                                                                                                                             | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Plan Category**                                        | ** ** | **Number of shares of  common stock to be  issued upon exercise  of outstanding  options, warrants and  rights** | ** ** | **Weighted-  average exercise  price of  outstanding  options, warrants  and rights** | ** ** | **Number of shares of  common stock remaining  available for future  issuance under equity  compensation plans  (excluding shares in  column (a))** | ** ** |
|                                                     |       |                                                                                                             |       |                                                                                  |       |                                                                                                                                                |       |
| Equity  compensation plans approved by security holders: |       |                                                                                                             |       |                                                                                  |       |                                                                                                                                                |       |
| 1986 Stock Plan                                          |       | 146,500                                                                                                          |       | $                                                                                     | 4.922      |                                                                                                                                                | —     |   |
| 1996 Stock Plan                                          |       | 1,041,326                                                                                                        |       | 5.220                                                                                 |       | 5,575                                                                                                                                               |       |
| Employee Stock Purchase Plan                             |       | 25,875                                                                                                           |       | 1.700                                                                                 |       | 74,196                                                                                                                                              |       |
|                                                          |            |                                                                                                                  |            |                                                                                       |            |                                                                                                                                                     |            |  |

 

Equity compensation plans not approved by security holders:

None

 

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(1) The Company does not have individual compensationarrangements involving the granting of options warrants and rights.

 

(e)                Duringthe past three fiscal years, the Company has not sold its securities exceptpursuant to registration statements under the Securities Act of 1933.

 

12

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**ITEM 6.****                                                     SELECTEDFINANCIAL SUMMARY**

 

(Amounts in Thousands, Except Per Share Data)

 
| ** **                                           | ** ** | **YEARS ENDED**        | ** ** |
|------------------------------------------------------|------------|------------------------|------------|
| ** **                                           | ** ** | **May 30,  2004** | ** ** | **June 1,  2003** | ** ** | **June 2,  2002** | ** ** | **June 3,  2001** | ** ** | **May 28,  2000** | ** ** |
| ** **                                           | ** ** | **Restated**           | ** ** | **(2)** | ** ** | ** ** | ** ** | **(3)** | ** ** | **(4)** | ** ** |
| ** **                                           | ** ** | **(1)**                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                            |       | $                      | 45,109     |   | $ | 41,479 |   | $ | 41,032 |   | $ | 85,692 |   | $ | 67,913 |   |
| Gross profit                                         |       | 10,353                 |       | 8,419 |   | 7,944 |   | 18,657 |   | 16,236 |   |
| Operating expenses                                   |       | 15,116                 |       | 15,930 |   | 11,968 |   | 15,228 |   | 13,001 |   |
|                                                 |       |                   |       |   |   |   |   |   |   |   |   |
| Operating income (loss)                              |       | (4,763                 | )          | (7,511 | ) | (4,024 | ) | 3,429 |   | 3,235 |   |
|                                                 |       |                   |       |   |   |   |   |   |   |   |   |
| Nonoperating income (expense)                        |       | (591                   | )          | (393 | ) | (234 | ) | 172 |   | (311 | ) |
|                                                 |       |                   |       |   |   |   |   |   |   |   |   |
| Income (loss) before income taxes                    |       | (5,354                 | )          | (7,904 | ) | (4,258 | ) | 3,601 |   | 2,924 |   |
|                                                 |       |                   |       |   |   |   |   |   |   |   |   |
| Income tax  expense (benefit)                        |       | 47                     |       | (340 | ) | (694 | ) | 1,355 |   | 1,061 |   |
| Cumulative  effect of accounting change, net of tax  |       |                   |       |   |   |   |   | (50 | ) |   |   |
| Redeemable  convertible preferred stock dividends    |       | (145                   | )          | (128 | ) |   |   |   |   |   |   |
| Net income  (loss) applicable to common stockholders |       | $                      | (5,546     | ) | $ | (7,692 | ) | $ | (3,564 | ) | $ | 2,196 |   | $ | 1,863 |   |
| Net income (loss) per share:                         |       |                   |       |   |   |   |   |   |   |   |   |
| Basic                                                |       | $                      | (1.19      | ) | $ | (1.67 | ) | $ | (0.78 | ) | $ | 0.49 |   | $ | 0.42 |   |
| Diluted                                              |       | (1.19                  | )          | (1.67 | ) | (0.78 | ) | 0.47 |   | 0.40 |   |
|                                                 |       |                   |       |   |   |   |   |   |   |   |   |
| Total assets                                         |       | $                      | 29,835     |   | $ | 33,065 |   | $ | 36,697 |   | $ | 43,457 |   | $ | 46,256 |   |
| Property, plant and equipment, net                   |       | 10,673                 |       | 13,283 |   | 12,442 |   | 12,576 |   | 10,537 |   |
| Working capital                                      |       | 5,677                  |       | 8,431 |   | 14,084 |   | 17,840 |   | 17,708 |   |
| Long-term debt, less current maturities              |       | 2,313                  |       | 2,483 |   | 2,754 |   | 3,035 |   | 3,657 |   |
| Stockholders’ equity                            |       | 11,937                 |       | 17,319 |   | 24,753 |   | 28,129 |   | 25,805 |   |

 

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(1)          The 2004 results includeexit costs of $2,064; See Note 1 to financial statements for restatementinformation.

(2)          The 2003 results includea goodwill impairment charge of $1,153.

(3)          The 2001 results includea noncash, pretax cumulative effect of accounting change related to theadoption of Staff Accounting Bulletin No. 101 of $77 expense ($50 aftertax, or $0.01 per share).  The 2001results include 53 weeks of activity.

(4)          The 2000 results includea gain on the disposition of the Korean facility of $1,525

 

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**ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTSOF OPERATIONS**

 

Thisamended Annual Report on Form 10-K/A for the fiscal year ended May 30,2004, amends and restates financial statements and related financialinformation for the fiscal year ended May 30, 2004.  The determination to restate these financialstatements and other financial information was made as a result of the Company’sidentification, in connection with the preparation of the Company’s financialstatements for the fiscal year ended May 29, 2005, of accounting errors atthe Company’s China subsidiary related to inventory build-up and relief andinadequate reconciliation of intercompany accounts.  Further information on the restatement can befound in Note 1 to the accompanying consolidated financial statements.

 

**Critical Accounting Policies**

 

The discussion andanalysis of our financial condition and results of operations are based on ourconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States of America.  The preparation of these financial statementsrequires us to make estimates and judgments that affect the reported amounts ofassets and liabilities, revenues and expenses, and related disclosure ofcontingent assets and liabilities at the date of our financial statements.  Actual results may differ from theseestimates under different assumptions or conditions.

 

Critical accountingpolicies are defined as those that involve significant judgments anduncertainties and potentially result in materially different results underdifferent assumptions and conditions. Application of these policies is particularly important to the portrayalof our financial condition and results of operations.  We believe the accounting policies describedbelow meet these characteristics.  Oursignificant accounting policies are more fully described in the notes to theconsolidated financial statements included in this annual report on Form 10-K/A.

 

*Revenue Recognition*– The Company’s policy is to recognizerevenue for product sales when title transfers and risk of loss has passed tothe customer, which is generally upon acceptance of the product by the overseasfreight carrier. The Company’s policies comply with the guidance provided byStaff Accounting Bulletin No. 104, Revenue Recognition, issued by theSecurities and Exchange Commission. Judgments are required in evaluating thecredit worthiness of our customers. Credit is not extended to customers andrevenue is not recognized until the Company has determined that the risk ofuncollectibility is minimal.

 

*Inventory Valuation*–Inventory is written down for estimated surplus and discontinued inventoryitems. The amount of the write-down is determined by analyzing historical andprojected sales information, plans for discontinued products and other factors.Changes in sales volumes due to unexpected economic or competitive conditions areamong the factors that would result in materially different amounts for thisitem.

 

*Allowance for Doubtful Accounts*– An allowance is established for estimateduncollectible accounts receivable. The required allowance is determined byreviewing customer accounts and making estimates of amounts that may beuncollectible. Factors considered in determining the amount of the reserveinclude the age of the receivable, the financial condition of the customer,general business, economic and political conditions, and other relevant factsand circumstances. Unexpected changes in the aforementioned factors wouldresult in materially different amounts for this item.

 

*ProductWarranties*– TheCompany’s products are sold with warranty provisions that require it to remedydeficiencies in quality or performance over a specified period of time, 36months, at no cost to the Company’s customers. The Company’s policy is toestablish warranty reserves at levels that represent its estimate of the coststhat will be incurred to fulfill those warranty requirements at the time thatrevenue is recognized. The Company believes that its recorded liabilities areadequate to cover its future cost of materials, and overhead for the servicingof its products sold through that date. If there is an actual product failure,or material or service delivery costs differ from the Company’s estimates, itswarranty liability would need to be revised accordingly.

 

*Deferred Taxes*– Deferred tax assets and liabilities arerecognized using enacted tax rates for the effect of temporary differencesbetween the book and tax basis of recorded assets and liabilities.  Deferred tax assets are reduced by avaluation allowance if it is likely that some portion or the entire deferredtax asset will not be realized.  Basedupon prior taxable income and estimates of future taxable income, the Companyhas determined that it is likely that the net deferred

 

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tax asset will not berealized in the future.  Thus a full valuationallowance has been established.  Ifactual taxable income varies from these estimates, the Company may be requiredto change the valuation allowance against the deferred tax assets resulting ina change in income tax benefit, which will be recorded in the consolidatedstatement of operations.

 

# **LIQUIDITY AND CAPITAL RESOURCES**

 

The financial statementshave been prepared on a going-concern basis, which contemplates the realizationof assets and satisfaction of liabilities in the normal course of business.  The Company sustained net losses applicableto common stockholders of $5,545,646 (restated) in 2004 and $7,692,073 in 2003and at May 30, 2004 had an accumulated deficit of $8,321,044(restated).  The Company utilized$913,911 of cash for operating activities in 2004.  Future operations require the Company toborrow additional funds.  The Company hasa financing agreement, which includes a $7,000,000 line-of-credit agreementthrough December 4, 2006.  TheCompany took steps to reduce expenses, improve cash flow and return toprofitability, including the consolidation of its manufacturingoperations.  This consolidation includedthe closing of its Minneapolis production operations, eliminating approximately40 jobs in assembly, equipment maintenance, procurement and administrativesupport and the integration of production into Ault’s other manufacturingplants.  Ault’s engineering,documentation, safety certification/reliability, sales, marketing andadministrative services will remain at the Minneapolis headquarters facility.

 

Based on available funds,current plans and business conditions, management believes the Company’savailable cash, borrowings and amounts generated from operations, will besufficient to meet the Company’s cash requirements for the next 12 months.  The assumptions underlying this beliefinclude, among other things, that there will be no material adversedevelopments in the business or market in general.  There can be no assurances however that thoseassumed events will occur.  If management’splans are not achieved, there may be further negative effects on the results ofoperations and cash flows, which could have a material adverse effect on theCompany.

 

The following tablesummarizes the Company’s working capital position at May 30, 2004 and at June 1,2003:

 
| ** **                        | ** ** | **May 30,  2004** | ** ** | **June 1,  2003** | ** ** |
|-----------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                        | ** ** | **Restated**           | ** ** | **($000)**             | ** ** |
| ** **                        | ** ** | **($000)**             | ** ** | ** **             | ** ** |
| Working capital                   |       | 5,677                  |       | 8,431                  |       |
| Cash and cash equivalents         |       | 1,058                  |       | 1,100                  |       |
| Unutilized bank credit facilities |       | 5,720                  |       | 2,297                  |       |
| Cash used in operations           |       | (914                   | )          | (3,179                 | )          |

 

# **Current Working Capital Position**

 

At May 30, 2004, theCompany had current assets of $18,985,000 and current liabilities of$13,308,000 representing working capital of $5,677,000 and a current ratio of1.4.  This represents a decrease in workingcapital from $8,431,000 at June 1, 2003. The Company relies on its credit facilities as sources of workingcapital to support normal growth in revenue, capital expenditures andattainment of profit goals.  The Companyhas not committed to any material capital expenditures as of May 30, 2004.

 

**Cash andInvestments:** At May 30, 2004, the Company had cash andsecurities totaling $1,058,000, down from $1,100,000 at June 1, 2003.  This decrease in cash was principally due tothe net loss from operations.

 

#### **Credit Facilities:**The Company maintains credit facilities with WellsFargo Bank N.A. and with Korea Exchange Bank. See Note 4, under notes to consolidated financial statements.

#### ** **

The credit arrangementwith Wells Fargo is an asset-based credit facility of $7 million, secured bycompany assets.  At May 30, 2004there were borrowings of $1,965,000 compared to no borrowings at June 1,2003.  The financing agreement containsfinancial covenants. These covenants require the Company, among other things,to maintain a minimum capital base, and also impose certain limitations onadditional capital expenditures and the payment of dividends.   At the end of fiscal 2004, the Company’sactual net book worth and income before taxes did not meet the minimum of thecredit agreement.  The Company hasreceived a waiver and amendment for this covenant.  Following the

 

15

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July 21, 2004waiver, the Company believes the provisions imposed by this credit agreementare achievable based on the Company’s expected operating results for the nextyear.

 

The South Korean creditfacility is approximately $3.37 million of which borrowings at May 30,2004 totaled $2,685,003.

 

#### **CASH FLOWS FOR FISCAL 2004**

 

**Operations: **Operations used $914,000 ofcash during fiscal 2004 due principally to the following activities:

(a)          The lossnet of non-cash charges of depreciation of $1,191,000, and asset impairment of$1,742,000 used cash of $1,874,000.

(b)         Increases intrade receivables due to the increased net sales used $925,000.

(c)          Decreasesin inventories net of non-cash obsolescence write-downs provided $1,824,000.The decreases are due in part to the consolidation of the manufacturingfacilities.

(d)         Increases inaccrued expenses and accounts payable provided $805,000.

 

**InvestingActivities:**Investing activities used net cash of $322,000mainly relating to the purchase of tooling and test equipment.

 

**FinancingActivities:** Financing activities provided net cash of$1,189,000, is primarily comprised of:

(a)          Net bankborrowing provided $1,458,000 to fund operations.

(b)         Payments oflong-term debt used $270,000.

 

**Effect ofForeign Currency Exchange Rate Fluctuations:** The effect oftranslating the Korean financial statements, which were prepared in SouthKorean Won (Won), to U.S. Dollars, increased cash by approximately $6,000during the year.  The effect oftranslating the Chinese financial statements, which were prepared in ChineseYuan (Yuan) to U.S. Dollars, had minimal effect on cash for the year.

 

# **RESULTS OF OPERATIONS**

##### **Fiscal Year Ended May 30, 2004**

 
| ** **     | ** ** | **Fiscal**   | ** ** | **Fiscal** | ** ** | **Increase / (Decrease)** | ** ** |
|----------------|------------|--------------|------------|------------|------------|---------------------------|------------|
| **($000)**     | ** ** | **2004**     | ** ** | **2003**   | ** ** | **Amount**                | ** ** | **Percent** | ** ** |
| ** **     | ** ** | **Restated** | ** ** | ** ** | ** ** | ** **                | ** ** | ** ** | ** ** |
| Net Sales      |       | $            | 45,109     |       | $          | 41,479                    |       | $ | 3,630 |   | 9 | % |
| Operating Loss |       | (4,763       | )          | (7,511     | )          | 2,748                     |       | 37 | % |
|                |            |              |            |            |            |                           |            |  |  |  |  |  |

 

Net sales were $45,109,000for fiscal 2004, up 9% from $41,479,000 for fiscal 2003.  The increase is due to an increase in salesinto the Asia Pacific area of $2,255,000, and an increase in sales to NorthAmerica and Europe of $1,375,000.  Bothare a result of the continued economic expansion, with an increase in sales toexisting customers and new customers.

 

The gross margin forfiscal 2004 was 23.0%, compared to 20.3% for fiscal 2003. Current year marginincreased $797,000 from cost reductions related to the exiting of manufacturingin Minneapolis, $311,000 from increased volume in North America, and $292,000from an increase in sales in Korea, offset by $545,000 for inventory write-downdue to the exiting of manufacturing in Minneapolis and $487,000 inventorywrite-down for China operations, and prior year margin was adversely affectedby $740,000 from the acquisition of Power General.

 

Operating expenses decreased to $15,116,000 (restated) for fiscal 2004compared to $15,930,000 in fiscal 2003 primarily due to the followingfactors:  First, expenses of $1,626,000resulting from the April 2003 layoff did not repeat in 2004.  Second, impairment of $1,153,000 in goodwillrelated to the LZR acquisition did not repeat in fiscal year 2004.  Finally these non-recurring costs were offsetby the closing of the Minneapolis manufacturing plant in 2004 resulted inincreased costs of $2,064,000, related to severance for the employees and anasset impairment charge.

 

16

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The Company’s orderbacklog at May 30, 2004 totaled $10,027,000 compared to $13,850,000 at June 1,2003.  The backlog has decreased in theUS due to an increasing expectation by our customers to ordering on a just intime basis.

 

Net nonoperating expenseis $591,000 for fiscal 2004 compared to $393,000 in fiscal 2003.  The increase is primarily from higherinterest expense of $607,000 in fiscal 2004 compared with $435,000 in fiscal2003. The increase is due to the increased bank debt.

 

The effective tax ratewas an expense of 1.0% for fiscal year 2004 compared to a benefit of 4.3% forfiscal year 2003.  The expense in 2004 isthe result of state tax expenses in the U.S. and tax expenses in Korea.  The benefit in 2003 reflects the utilizationof the remaining U.S. loss carrybacks. No benefit has been recognized for the U.S. loss carryforwards from2003, or any foreign loss carryforwards generated in fiscal year 2003 or 2004,as a full valuation allowance has been established.  This reflects the determination that therealization of the deferred tax asset is not more likely than not as of May 30,2004.

 

**CASHFLOWS FOR FISCAL 2003**

 

**Operations: **Operations used $3,179,000of cash during fiscal 2003 due principally to the following activities:

(a)          The lossnet of depreciation of $1,029,000, goodwill impairment of $1,153,000, and baddebt reserve of $230,000, in total used cash of $5,152,000.

(b)         Decreases intrade receivables due to the decreased net sales provided $210,000.

(c)          Increasesin inventories net of obsolescence write-downs used $20,000. The increases aredue to the increased sales by our Asian subsidiaries.

(d)         Increases inaccrued expenses and accounts payable provided $1,443,000.

 

**InvestingActivities:**Investing activities used net cash of $639,000mainly relating to the acquisition of Power General of $366,000 and thepurchase of equipment of $273,000.

 

**FinancingActivities:** Financing activities used net cash of $123,000comprising:

(a)          Bankborrowing by our China subsidiary provided $290,000.

(b)         Proceedsfrom stock options exercised provided $60,000.

(c)          Payments oflong-term debt used $282,000.

 

**Effect ofForeign Currency Exchange Rate Fluctuations:** The effect oftranslating the Korean financial statements, which were prepared in Won, toU.S. Dollars, increased cash by approximately $20,000 during the year.  The effect of translating the Chinesefinancial statements, which were prepared in Yuan to U.S. Dollars, had minimaleffect on cash for the year.

 

##### **Fiscal Year Ended June 1, 2003**

 
| ** **              | ** ** | **Fiscal** | ** ** | **Fiscal** | ** ** | **Increase / (Decrease)** | ** ** |
|-------------------------|------------|------------|------------|------------|------------|---------------------------|------------|
| **($000)**              | ** ** | **2003**   | ** ** | **2002**   | ** ** | **Amount**                | ** ** | **Percent** | ** ** |
| Net Sales               |       | $          | 41,479     |       | $          | 41,032                    |       | $ | 447 |   | 1 | % |
| Operating Income (Loss) |       | (7,511     | )          | (4,024     | )          | (3,487                    | )          | (87 | ) |
|                         |            |            |            |            |            |                           |            |  |  |  |  |  |

 

Net sales were$41,479,000 for fiscal 2003, up 1% from $41,032,000 for fiscal 2002.  The increase is due to $2,360,000 in salesresulting from the acquisition of certain assets and certain liabilities ofPower General and an increase in sales into the Asia Pacific area of$4,249,000, offset by a decrease in sales to North America and Europe of$6,162,000.

 

The gross margin forfiscal 2003 was 20.3%, compared to 19.4% for fiscal 2002. Margins increasedprimarily due to a fiscal 2002 inventory write-down of $999,000 and offset bylower margin on the products sold from the acquisition of Power General of $500,000.

 

Operating expensesincreased to $15,930,000 for fiscal 2003 compared to $11,968,000 in fiscal 2002primarily due to the following factors: First, the July 2002 acquisition of certain assets and certainliabilities of Power General increased costs from fiscal 2002 by $2,654,000principally due to hiring engineering and sales staff formerly employed atPower General.  Second, transition costsof $404,000 for temporary operations in the current Power General location.  The transition for the manufacturing of theseproducts is complete and these costs will not continue.  Third, recognition of impairment of$1,153,000 in goodwill related to the LZR acquisition.  During the fourth quarter of fiscal 2003, theannual

 

17

----

 

goodwill impairment testwas performed and the fair value of the Company was assessed to determinewhether goodwill carried was impaired and the extent of such impairment.  After performing this evaluation it was evidentthat impairment of goodwill had occurred because of a decline in revenues forthe fourth quarter compared to forecasted revenues, as well as a significantincrease in the fourth quarter loss compared to forecast.  The Company did not perform an impairmenttest prior to the fourth quarter as there was not an event that had occurred orcircumstances had changed in such a manner to warrant an impairment test priorto the fourth quarter.  Fourth, theseitems were offset by a decrease in bad debt expense for fiscal 2003 whencompared to fiscal 2002.  In fiscal 2002the Company recognized $1,186,000 of additional bad debt expense for accountsthat were uncollectible.

 

The Company’s orderbacklog at June 1, 2003 totaled $13,850,000 compared to $9,310,000 at June 2,2002.  The backlog has increased in Asiaby $1,400,000 due to increased order activity, and domestic backlog hasincreased by $3,000,000 due to a purchase order from a customer covering aone-year period.

 

Nonoperating expense is$393,000 for fiscal 2003 compared to $234,000 in fiscal 2002.  The increase is primarily from (1) lowerinterest income in fiscal year 2003 compared to fiscal year 2002 of $68,000,and (2) currency exchange rate gains by the Korean subsidiary of $123,000less in fiscal 2003 as compared to fiscal 2002. The Company incurred interestexpense of $435,000 in fiscal 2003 and $495,000 in fiscal 2002. The decrease isdue to the decrease in bank debt in Korea.

 

The effective tax ratewas a benefit of 4.3% for fiscal year 2003 compared to a benefit of 16.3% for fiscalyear 2002, and expense of 37.6% for fiscal year 2001.  The benefit in 2003 reflects the utilizationof the remaining U.S. loss carrybacks but no benefit for the $3,600,000 U.S.loss carryforwards from 2003, or any foreign loss carryforwards generated infiscal year 2003, because a full valuation allowance has been set up for theloss carryforwards due to the determination that currently the realization ofthe deferred tax asset is not more likely than not.

 

**InformationAbout Revenue by Geography**

 

Revenue from the U.S.,from each foreign country that is the source of significant revenue, and fromall other foreign countries as a group are as follows:

 

18

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Fiscal Year Ended

 
| ** **    | ** ** | **May 30,  2004** | ** ** | **June 1,  2003** | ** ** |
|---------------|------------|------------------------|------------|------------------------|------------|
| ** **    | ** ** | **($000)**             | ** ** | **($000)**             | ** ** |
|          |       |                   |       |                   |       |
| U.S.          |       | $                      | 26,702     |                   | $          | 26,352 |   |
| Korea         |       | 9,748                  |       | 5,483                  |       |
| China         |       | 3,567                  |       | 5,302                  |       |
| Canada        |       | 1,182                  |       | 819                    |       |
| Ireland       |       | 983                    |       | 89                     |       |
| Belgium       |       | 22                     |       | 5                      |       |
| Other Foreign |       | 2,905                  |       | 3,429                  |       |
| Total         |       | $                      | 45,109     |                   | $          | 41,479 |   |
|               |            |                        |            |                        |            |  |  |  |

 

The Company considers a countryto be the geographic source of revenue if it has contractual obligations,including obligation to pay for trade receivable invoices.

 

**Impact ofForeign Operations and Currency Changes**

 

Products manufactured bythe Company’s Korean subsidiary comprised a large portion of total sales. TheCompany will experience normal valuation changes as the Korean and Chinesecurrencies fluctuate.  The effect oftranslating the Korean and Chinese financial statements resulted in a net assetvalue increase of $35,000 during the year, the majority relating to the Koreancurrency fluctuations.

 

**ForwardLooking Statements**

 

From time to time, inreports filed with the Securities and Exchange Commission (SEC), in pressreleases, and in other communications to shareholders or the investing public,the Company may make forward-looking statements concerning possible oranticipated future results of operations or business developments that aretypically preceded by the words “believes,” “expects,” “anticipates,” “intends”or similar expressions.  For suchforward-looking statements, the Company claims the protection of the safeharbor for forward-looking statements contained in the Private SecuritiesLitigation Reform Act of 1995. Shareholders and the investing public should understand that suchforward-looking statements are subject to risks and uncertainties which couldcause results or developments to differ significantly from those indicated inthe forward-looking statements.  Such risksand uncertainties include, but are not limited to, the overall level of salesby original equipment manufacturers (OEMs) in the telecommunications, datacommunications, medical and other markets; buying patterns of the Company’sexisting and prospective customers; the impact of new products introduced bycompetitors; delays in new product introductions; higher than expected expenserelated to sales and new marketing initiatives; availability of adequatesupplies of raw materials and components; dependence on outside contractors;  reliance on third-party distribution;  unanticipated expenses related to integrationof manufacturing and personnel from acquisitions, such as the acquisition ofthe Power General assets;  dependence onforeign manufacturing and other operations; and other risks affecting theCompany’s target markets generally.

 

**CONTRACTUAL OBLIGATIONS**

 

The following table summarizes the Company’scontractual obligations and commercial commitments as of May 30, 2004 (inthousands):

 

Payments due by Period

 
| ** **                     | ** ** | **Total** | ** ** | **Less than 1 year** | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **After 5 years** | ** ** |
|--------------------------------|------------|-----------|------------|----------------------|------------|---------------|------------|---------------|------------|-------------------|------------|
| Contractual Obligations:       |       |      |       |                 |       |          |       |          |       |              |       |
| Long-term debt                 |       | $         | 2,773      |                 | $          | 460           |       | $             | 344        |              | $          | 403 |   | $ | 1,566 |   |
| Operating leases               |       | 678       |       | 196                  |       | 378           |       | 104           |       |              |       |
| Total  contractual obligations |       | $         | 3,451      |                 | $          | 656           |       | $             | 722        |              | $          | 507 |   | $ | 1,566 |   |

 

19

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**AccountingPronouncements**

 

In June 2001, theFinancial Accounting Standards Board (FASB) approved for issuance SFAS No. 142,*Goodwill and Other Intangible Assets*.  SFAS No. 142 requires that upon adoption,amortization of goodwill will cease and instead, the carrying value of goodwillwill be evaluated for impairment on an annual basis. In fiscal 2002 theamortization expense was $100,000.  On June 3,2002, the Company adopted SFAS No. 142, and the initial impairment testwas performed and it was determined that there was no goodwill impairment on June 3,2002.  During the fourth quarter offiscal 2003, the annual goodwill impairment test was performed and the fairvalue of the Company was assessed to determine whether goodwill carried wasimpaired and the extent of such impairment. After performing this evaluation it was evident that impairment ofgoodwill had occurred because of a decline in revenues for the fourth quartercompared to forecasted revenues, as well as a significant increase in thefourth quarter loss compared to forecast. The Company did not perform an impairment test prior to the fourthquarter as there wasn’t an event that had occurred or circumstances had changedin such a manner to warrant an impairment test prior to the fourthquarter.  Accordingly, an impairmentcharge of $1,153,153 was recorded in the fourth quarter of fiscal 2003.

 

20

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**ITEM7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

The Company experiencesforeign currency gains and losses, which are reflected in the financialstatements, due to the strengthening and weakening of the U.S. Dollar againstcurrencies of the Company’s foreign subsidiaries. The Company anticipates thatit will continue to have exchange gains or losses in the future.  The Company realized an exchange loss of$30,000 for fiscal 2004, and an exchange loss $23,000 for fiscal 2003, and a$100,000 gain for fiscal 2002.

 

As of May 30, 2004, the Company had variable ratedebt outstanding. Thus, an interest rate increase would negatively impactinterest expense and cash flows.  Forevery $1,000,000 of bank debt, a rate increase of 1% would result in $10,000 ofadditional expense.

 

21

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**ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA**

 

(a) Financial Statements

Index toConsolidated Financial Statements

 
|   | *      | Report  of Independent Registered Public Accounting Firm – Grant Thornton LLP                                                         |   |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |   |                                                                                                                                       |   |
|   | *      | Report  of Independent Registered Public Accounting Firm – Deloitte Anjin LLC                                                         |   |
|   |   |                                                                                                                                       |   |
|   | *      | Report  of Independent Registered Public Accounting Firm – Deloitte & Touche  LLP                                            |   |
|   |   |                                                                                                                                       |   |
|   | *      | Consolidated  Balance Sheets, May 30, 2004 (restated) and June 1, 2003                                                           |   |
|   |   |                                                                                                                                       |   |
|   | *      | Consolidated  Statements of Operations, Years Ended May 30, 2004 (restated),  June 1, 2003, and June 2, 2002                |   |
|   |   |                                                                                                                                       |   |
|   | *      | Consolidated  Statements of Stockholders’ Equity, Years Ended May 30, 2004 (restated),  June 1, 2003, and June 2, 2002 |   |
|   |   |                                                                                                                                       |   |
|   | *      | Consolidated  Statements of Cash Flows, Years Ended May 30, 2004 (restated),  June 1, 2003, and June 2, 2002                |   |
|   |   |                                                                                                                                       |   |
|   | *      | Notes to  Consolidated Financial Statements                                                                                                |   |

 

(b) Supplemental Financial Information

 
|   | * | Quarterly  Financial Data |   |
|--------|---|---------------------------|--------|

 

22

----

 

# **REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

# ** **

Stockholders and Board ofDirectors

Ault Incorporated andSubsidiaries

 

We have audited theconsolidated balance sheet of Ault Incorporated and subsidiaries (a Minnesotacorporation) as of May 30, 2004, and the related consolidated statementsof operations, stockholders’ equity, and cash flows for the year then ended (asrestated, see Note 1).  These financial statements are the responsibilityof the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audit.  We did not audit the financial statements ofthe Ault Korea Corporation, a wholly-owned subsidiary, which statements reflecttotal assets and revenues constituting 37 percent and 22 percent, respectively,of the related consolidated totals as of and for the year ended May 30,2004.  Those statements were audited byother auditors whose report has been furnished to us, and our opinion, insofaras it relates to the amounts included for the Ault Korea Corporation is basedsolely on the report of the other auditors.

 

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe consolidated financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the consolidated financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall consolidated financial statementpresentation.  We believe our audit andthe report of other auditors provide a reasonable basis for our opinion.

 

In our opinion, based onour audit and the report of other auditors, the financial statements referredto above present fairly, in all material respects, the consolidated financialposition of Ault Incorporated and subsidiaries as of May 30, 2004, and theresults of their operations and their cash flows for the year then ended, inconformity with accounting principles generally accepted in the United Statesof America.

 

We have also audited Schedule IIfor the year ended May 30, 2004.  Inour opinion, based on our audit and the report of other auditors, thisschedule, when considered in relation to the basic financial statements takenas a whole, presents fairly, in all material respects, the information therein.

 

Grant Thornton LLP

 

Minneapolis, Minnesota

July 16, 2004 (except for Note 4, as to which thedate is July 21, 2004, and Note 1, as to which the date is August 8,2005)

 

23

----

 

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To theBoard of Directors and Shareholder of

AultKorea Corporation

 

We have audited the balance sheet of Ault Korea Corporation (the “Company”) as of April 30,2004, and the related statements of income, stockholder’s equity and cash flowsfor the year then ended (all expressed in Korean won, none of which arepresented herein).  These financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audit.

 

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financial statementsare free of material misstatement.  Anaudit includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audit provides a reasonable basis for our opinion.

 

In our opinion, such financial statementspresent fairly, in all material respects, the financial position of the Company as of April 30,2004, and the results of its operations, and its cash flows for the year thenended in conformity with accounting principles generally accepted in theUnited States of America.

 

Asdescribed in Note 6 to the financial statements, the Company sells a substantial portion ofits finished goods to and purchases raw materials from related parties.  For the year ended April 30, 2004, salesto related parties totaled W7,438 million and purchases from related partiestotaled W993 million.  As of April 302004, the related accounts receivable were W2,398 million and the relatedaccounts payable, including long-term accounts payable, were W5,215million.  In addition, as of April 30,2004, loans provided to related parties were W163 million.

 

 

**DeloitteAnjin LLC**

** **

 

Seoul,Republic of Korea

June 1,2004

 

24

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**REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

** **

To the Stockholders andBoard of Directors

Ault Incorporated andSubsidiaries

Minneapolis, Minnesota

 

We have audited theaccompanying consolidated balance sheet of Ault Incorporated and subsidiaries(the “Company”) as of June 1, 2003 and the related consolidated statementsof operations, stockholders’ equity, and cash flows for the fiscal years ended June 1,2003 and June 2, 2002. Our audits also included the information for thefiscal years ended June 1, 2003 and June 2, 2002 in the financialstatement schedule listed in the index as Item 15.(2). These consolidatedfinancial statements and the financial statement schedule are theresponsibility of the Company’s management. Our responsibility is to express anopinion on the consolidated financial statements and financial statement schedule basedon our audits.

 

We conducted our auditsin accordance with standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe our audits provide a reasonable basis forour opinion.

 

In our opinion, suchconsolidated financial statements present fairly, in all material respects, thefinancial position of Ault Incorporated and subsidiaries as of June 1,2003 and the results of their operations and their cash flows for the fiscalyears ended June 1, 2003 and June 2, 2002, in conformity withaccounting principles generally accepted in the United States of America. Also,in our opinion, such financial statement schedule, when considered in relationto the basic consolidated financial statements taken as a whole, presentsfairly in all material respects the information set forth therein for thefiscal years ended June 1, 2003 and June 2, 2002.

 

As discussed in Note 1 tothe consolidated financial statements, the Company changed its method ofaccounting for goodwill in fiscal 2003.

 

Deloitte &Touche LLP

 

Minneapolis, Minnesota

August 18, 2003 (August 29,2003 as to Note 4)

 

25

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## ***AULT INCORPORATED AND SUBSIDIARIES***

##### **CONSOLIDATEDBALANCE SHEETS**

**MAY 30,2004 AND JUNE 1, 2003**

 
| ** **                                                                                      | ** ** | **May 30,** | ** ** | **June 1,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                      | ** ** | **2004**         | ** ** | **2003**         | ** ** |
| ** **                                                                                      | ** ** | **Restated**     | ** ** | ** **       | ** ** |
|                                                                                            |       |             |       |             |       |
| **ASSETS**                                                                                      |       |             |       |             |       |
|                                                                                            |       |             |       |             |       |
| CURRENT ASSETS:                                                                                 |       |             |       |             |       |
| Cash and cash  equivalents                                                                      |       | $                | 1,058,166  |             | $          | 1,099,602 |   |
| Trade  receivables, less allowance for doubtful accounts of $476,000 in 2004;  $500,000 in 2003 |       | 8,399,375        |       | 7,417,098        |       |
| Inventories                                                                                     |       | 8,143,628        |       | 9,867,943        |       |
| Prepaid and  other expenses                                                                     |       | 1,383,815        |       | 1,064,065        |       |
| Total current  assets                                                                           |       | 18,984,984       |       | 19,448,708       |       |
|                                                                                            |       |             |       |             |       |
| OTHER ASSETS:                                                                                   |       | 177,765          |       | 332,902          |       |
|                                                                                            |       |             |       |             |       |
| PROPERTY, PLANT AND EQUIPMENT:                                                                  |       |             |       |             |       |
| Land                                                                                            |       | 1,734,674        |       | 1,734,674        |       |
| Building and  leasehold improvements                                                            |       | 6,710,619        |       | 7,845,238        |       |
| Machinery and  equipment                                                                        |       | 7,050,101        |       | 8,961,099        |       |
| Office furniture  and equipment                                                                 |       | 1,911,192        |       | 1,887,099        |       |
| Data processing  equipment                                                                      |       | 2,009,213        |       | 2,226,545        |       |
|                                                                                            |       | 19,415,799       |       | 22,654,655       |       |
|                                                                                            |       |             |       |             |       |
| Less accumulated  depreciation                                                                  |       | 8,743,257        |       | 9,371,348        |       |
|                                                                                            |       |             |       |             |       |
|                                                                                            |       | 10,672,542       |       | 13,283,307       |       |
|                                                                                            |       | $                | 29,835,291 |             | $          | 33,064,917 |   |

 

SEE NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS.

 

26

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| ** **                                                                                                                            | ** ** | **May 30,** | ** ** | **June 1,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                                                            | ** ** | **2004**         | ** ** | **2003**         | ** ** |
| ** **                                                                                                                            | ** ** | **Restated**     | ** ** | ** **       | ** ** |
|                                                                                                                                  |       |             |       |             |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                         |       |             |       |             |       |
|                                                                                                                                  |       |             |       |             |       |
| CURRENT LIABILITIES:                                                                                                                  |       |             |       |             |       |
| Notes payable to  bank                                                                                                                |       | $                | 4,650,467  |             | $          | 3,103,594 |   |
| Current  maturities of long-term debt                                                                                                 |       | 459,969          |       | 560,110          |       |
| Accounts payable                                                                                                                      |       | 6,265,042        |       | 5,695,507        |       |
| Accrued  compensation                                                                                                                 |       | 1,164,745        |       | 1,162,348        |       |
| Accrued  commissions                                                                                                                  |       | 280,794          |       | 300,203          |       |
| Other                                                                                                                                 |       | 486,981          |       | 195,537          |       |
| Total current  liabilities                                                                                                            |       | 13,307,998       |       | 11,017,299       |       |
|                                                                                                                                  |       |             |       |             |       |
| LONG-TERM DEBT, less current maturities                                                                                               |       | 2,312,892        |       | 2,483,254        |       |
| DEFERRED TAX LIABILITY                                                                                                                |       | —           |       | 23,242           |       |
| RETIREMENT AND SEVERANCE BENEFITS                                                                                                     |       | 203,465          |       | 147,808          |       |
|                                                                                                                                  |       |             |       |             |       |
| COMMITMENTS AND CONTINGENCIES                                                                                                         |       |             |       |             |       |
|                                                                                                                                  |       |             |       |             |       |
| REDEEMABLE CONVERTIBLE PREFERRED STOCK                                                                                                |       |             |       |             |       |
| No par value,  2,074 shares issued and outstanding                                                                                    |       | 2,074,000        |       | 2,074,000        |       |
|                                                                                                                                  |       |             |       |             |       |
| STOCKHOLDERS’ EQUITY:                                                                                                            |       |             |       |             |       |
| Preferred stock,  no par value; authorized 1,000,000 shares;  none issued                                                             |       | —           |       | —           |       |
| Common stock, no  par value; authorized 10,000,000 shares;  issued and outstanding 4,705,083 shares in 2004; 4,648,499 shares in 2003 |       | 21,172,717       |       | 21,026,162       |       |
| Notes receivable  arising from the sale of common stock                                                                               |       | (45,000          | )          | (45,000          | )          |
| Accumulated  other comprehensive loss                                                                                                 |       | (869,737         | )          | (886,450         | )          |
| Accumulated  deficit                                                                                                                  |       | (8,321,044       | )          | (2,775,398       | )          |
| Total  stockholders’ equity                                                                                                      |       | 11,936,936       |       | 17,319,314       |       |
|                                                                                                                                  |       | $                | 29,835,291 |             | $          | 33,064,917 |   |

 

SEE NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS.

 

27

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**AULTINCORPORATED AND SUBSIDIARIES**

##### **CONSOLIDATEDSTATEMENTS OF OPERATIONS**

#### **YEARS ENDED MAY 30, 2004, JUNE 1, 2003, AND JUNE 2,2002**

 
| ** **                                        | ** ** | **May 30,  2004** | ** ** | **June 1,  2003** | ** ** | **June 2,  2002** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                        | ** ** | **Restated**           | ** ** | ** **             | ** ** | ** **             | ** ** |
|                                              |       |                   |       |                   |       |                   |       |
| NET SALES                                         |       | $                      | 45,109,077 |                   | $          | 41,479,010             |       | $ | 41,031,854 |   |
|                                              |       |                   |       |                   |       |                   |       |
| COST OF GOODS SOLD                                |       | 34,755,584             |       | 33,060,018             |       | 33,087,745             |       |
| Gross profit                                      |       | 10,353,493             |       | 8,418,992              |       | 7,944,109              |       |
|                                              |       |                   |       |                   |       |                   |       |
| OPERATING EXPENSES:                               |       |                   |       |                   |       |                   |       |
| Marketing                                         |       | 3,985,597              |       | 4,933,895              |       | 3,548,104              |       |
| Design  engineering                               |       | 3,661,850              |       | 4,225,627              |       | 2,393,899              |       |
| General and  administrative                       |       | 5,404,780              |       | 5,617,704              |       | 6,025,791              |       |
| Exit Costs                                        |       | 2,063,998              |       |                   |       |                   |       |
| Goodwill  impairment                              |       |                   |       | 1,153,153              |       |                   |       |
|                                              |       | 15,116,225             |       | 15,930,379             |       | 11,967,794             |       |
| OPERATING LOSS                                    |       | (4,762,732             | )          | (7,511,387             | )          | (4,023,685             | )          |
|                                              |       |                   |       |                   |       |                   |       |
| OTHER INCOME (EXPENSE):                           |       |                   |       |                   |       |                   |       |
| Interest expense                                  |       | (606,516               | )          | (434,714               | )          | (495,356               | )          |
| Interest income                                   |       |                   |       | 24,894                 |       | 93,482                 |       |
| Other                                             |       | 15,644                 |       | 17,176                 |       | 167,707                |       |
|                                              |       | (590,872               | )          | (392,644               | )          | (234,167               | )          |
| LOSS BEFORE INCOME TAXES                          |       | (5,353,604             | )          | (7,904,031             | )          | (4,257,852             | )          |
|                                              |       |                   |       |                   |       |                   |       |
| INCOME TAX EXPENSE (BENEFIT))                     |       | 46,862                 |       | (340,200               | )          | (694,126               | )          |
| NET LOSS                                          |       | (5,400,466             | )          | (7,563,831             | )          | (3,563,726             | )          |
|                                              |       |                   |       |                   |       |                   |       |
| REDEEMABLE CONVERTIBLE  PREFERRED STOCK DIVIDENDS |       | (145,180               | )          | (128,242               | )          |                   |       |
|                                              |       |                   |       |                   |       |                   |       |
| NET LOSS APPLICABLE TO COMMON  STOCKHOLDERS       |       | $                      | (5,545,646 | )                      | $          | (7,692,073             | )          | $ | (3,563,726 | ) |
|                                              |       |                   |       |                   |       |                   |       |
|   NET LOSS PER  SHARE:                  |       |                   |       |                   |       |                   |       |
| Basic                                             |       | $                      | (1.19      | )                      | $          | (1.67                  | )          | $ | (0.78 | ) |
| Diluted                                           |       | $                      | (1.19      | )                      | $          | (1.67                  | )          | $ | (0.78 | ) |
|                                              |       |                   |       |                   |       |                   |       |
| Weighted average common shares outstanding:       |       |                   |       |                   |       |                   |       |
| Basic                                             |       | 4,679,570              |       | 4,596,882              |       | 4,541,322              |       |
| Diluted                                           |       | 4,679,570              |       | 4,596,882              |       | 4,541,322              |       |

 

SEENOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

 

28

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## ***AULT INCORPORATED AND SUBSIDIARIES***

##### **CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

#### **YEARS ENDED MAY 30, 2004, JUNE 1, 2003, AND JUNE 2,2002**

 
| ** **                                                                                              | ** ** | **Common Stock** | ** ** | **Notes  Receivable  from Sale  of Common** | ** ** | **Retained  Earnings/  Accumulated** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | **Total  Stockholders’** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|------------------|------------|---------------------------------------------|------------|--------------------------------------|------------|-----------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                              | ** ** | **Shares**       | ** ** | **Amount**                                  | ** ** | **Stock**                            | ** ** | **Deficit**                                   | ** ** | **(Loss)**                    | ** ** | **Equity** | ** ** |
|                                                                                                    |       | ** **       | ** ** | ** **                                  | ** ** | ** **                           | ** ** | ** **                                    | ** ** | ** **                    | ** ** | ** ** | ** ** |
| BALANCE AT JUNE 3, 2001                                                                            |       | 4,528,522        |       | $                                           | 20,683,920 |                                 | $          | (100,000                                      | )          | $                             | 8,480,401  |   | $ | (935,260 | ) | $ | 28,129,061 |   |
|                                                                                                    |       |             |       |                                        |       |                                 |       |                                          |       |                          |       |   |   |
| Comprehensive  loss:                                                                                    |       |             |       |                                        |       |                                 |       |                                          |       |                          |       |   |   |
| Net loss                                                                                                |       |             |       |                                        |       |                                 |       | (3,563,726                                    | )          |                          |       | (3,563,726 | ) |
| Net change in foreign currency translation adjustment                                                   |       |             |       |                                        |       |                                 |       |                                          |       | 13,688                        |       | 13,688 |   |
| Total comprehensive loss                                                                                |       |             |       |                                        |       |                                 |       |                                          |       |                          |       | (3,550,038 | ) |
| Issuance of 35,088 shares of common stock in accordance  with stock purchase plan and stock option plan |       | 35,088           |       | 121,981                                     |       |                                 |       |                                          |       |                          |       | 121,981 |   |
| Income tax benefit from stock options exercised                                                         |       |             |       | 51,728                                      |       |                                 |       |                                          |       |                          |       | 51,728 |   |
|                                                                                                    |       |             |       |                                        |       |                                 |       |                                          |       |                          |       |   |   |
| BALANCE AT JUNE 2, 2002                                                                            |       | 4,563,610        |       | 20,857,629                                  |       | (100,000                             | )          | 4,916,675                                     |       | (921,572                      | )          | 24,752,732 |   |
|                                                                                                    |       |             |       |                                        |       |                                 |       |                                          |       |                          |       |   |   |
| Comprehensive  loss:                                                                                    |       |             |       |                                        |       |                                 |       |                                          |       |                          |       |   |   |
| Net loss                                                                                                |       |             |       |                                        |       |                                 |       | (7,692,073                                    | )          |                          |       | (7,692,073 | ) |
| Net change in foreign currency translation adjustment                                                   |       |             |       |                                        |       |                                 |       |                                          |       | 35,122                        |       | 35,122 |   |
| Total comprehensive loss                                                                                |       |             |       |                                        |       |                                 |       |                                          |       |                          |       | (7,656,951 | ) |
| Issuance of 33,712 shares of common stock in  accordance with stock purchase plan and stock option plan |       | 33,712           |       | 59,648                                      |       |                                 |       |                                          |       |                          |       | 59,648 |   |
| Write-off of stock receivable                                                                           |       |             |       |                                        |       | 55,000                               |       |                                          |       |                          |       | 55,000 |   |
|                                                                                                    |       |             |       |                                        |       |                                 |       |                                          |       |                          |       |   |   |
| Issuance of 51,177 shares of common stock in  accordance with redeemable preferred stock                |       | 51,177           |       | 108,885                                     |       |                                 |       |                                          |       |                          |       | 108,885 |   |
|                                                                                                    |       |             |       |                                        |       |                                 |       |                                          |       |                          |       |   |   |
| BALANCE AT JUNE 1, 2003                                                                            |       | 4,648,499        |       | 21,026,162                                  |       | (45,000                              | )          | (2,775,398                                    | )          | (886,450                      | )          | 17,319,314 |   |
|                                                                                                    |       |             |       |                                        |       |                                 |       |                                          |       |                          |       |   |   |
| Comprehensive  loss:                                                                                    |       |             |       |                                        |       |                                 |       |                                          |       |                          |       |   |   |
| Net loss (restated)                                                                                     |       |             |       |                                        |       |                                 |       | (5,400,466                                    | )          |                          |       | (5,400,466 | ) |
| Net change in foreign currency translation adjustment                                                   |       |             |       |                                        |       |                                 |       |                                          |       | 16,713                        |       | 16,713 |   |
| Total comprehensive loss (restated)                                                                     |       |             |       |                                        |       |                                 |       |                                          |       |                          |       | (5,383,753 | ) |
| Issuance of 1,000 shares of common stock in  accordance with stock purchase plan and stock option plan  |       | 1,000            |       | 1,375                                       |       |                                 |       |                                          |       |                          |       | 1,375 |   |
| Issuance of 55,584 shares of common stock in  accordance with redeemable preferred stock                |       | 55,584           |       | 145,180                                     |       |                                 |       | (145,180                                      | )          |                          |       | — |   |
|                                                                                                    |       |             |       |                                        |       |                                 |       |                                          |       |                          |       |   |   |
| BALANCE AT May 30, 2004 (restated)                                                                 |       | 4,705,083        |       | $                                           | 21,172,717 |                                 | $          | (45,000                                       | )          | $                             | (8,321,044 | ) | $ | (869,737 | ) | $ | 11,936,936 |   |

 

SEE NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS.

 

29

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**AULTINCORPORATED AND SUBSIDIARIES**

##### **CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

#### **YEARS ENDED MAY 30, 2004, JUNE 1, 2003, AND JUNE 2,2002**

 
| ** **                                                                                 | ** ** | **May 30,** | ** ** | **June 1,** | ** ** | **June 2,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                 | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
| ** **                                                                                 | ** ** | **Restated**     | ** ** | ** **       | ** ** | ** **       | ** ** |
|                                                                                       |       |             |       |             |       |             |       |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                      |       |             |       |             |       |             |       |
| Net loss                                                                                   |       | $                | (5,400,466 | )                | $          | (7,563,831       | )          | $ | (3,563,726 | ) |
| Adjustments to reconcile net  loss to net cash provided by (used in) operating activities: |       |             |       |             |       |             |       |
| Depreciation                                                                               |       | 1,190,657        |       | 1,029,287        |       | 972,230          |       |
| Asset impairment                                                                           |       | 1,742,470        |       |             |       |             |       |
| Amortization of goodwill                                                                   |       |             |       |             |       | 100,274          |       |
| Allowance for doubtful  accounts                                                           |       | 17,000           |       | 230,000          |       | 1,416,000        |       |
| Goodwill impairment                                                                        |       |             |       | 1,153,153        |       |             |       |
| Deferred taxes                                                                             |       |             |       | (1,242           | )          | 172,283          |       |
| Change in assets and  liabilities, net of effect of acquisition:                           |       |             |       |             |       |             |       |
| (Increase) decrease in:                                                                    |       |             |       |             |       |             |       |
| Trade receivables                                                                          |       | (925,023         | )          | 209,723          |       | 3,321,769        |       |
| Inventories                                                                                |       | 1,823,592        |       | (20,264          | )          | 4,226,425        |       |
| Prepaid and other expenses                                                                 |       | (167,400         | )          | (241,717         | )          | (1,061,044       | )          |
| Increase (decrease) in:                                                                    |       |             |       |             |       |             |       |
| Accounts payable                                                                           |       | 514,924          |       | 825,932          |       | (795,834         | )          |
| Accrued expenses                                                                           |       | 313,999          |       | 617,099          |       | (864,905         | )          |
| Income taxes                                                                               |       | (23,664          | )          | 582,450          |       | (364,895         | )          |
| Net cash provided by (used in)  operating activities                                       |       | (913,911         | )          | (3,179,410       | )          | 3,558,577        |       |
|                                                                                       |       |             |       |             |       |             |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                      |       |             |       |             |       |             |       |
| Purchase of property and  equipment                                                        |       | (322,362         | )          | (272,867         | )          | (838,703         | )          |
| Power General acquisition, net of cash acquired                                            |       |             |       | (366,000         | )          |             |       |
| Net cash used in investing  activities                                                     |       | (322,362         | )          | (638,867         | )          | (838,703         | )          |
|                                                                                       |       |             |       |             |       |             |       |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                      |       |             |       |             |       |             |       |
| Net borrowings (payments) on  revolving credit agreement                                   |       | 1,458,036        |       | 289,607          |       | (1,211,131       | )          |
| Write-off of notes receivable  arising from the sale of common stock                       |       |             |       | 55,000           |       |             |       |
| Proceeds from issuance of  common stock                                                    |       | 1,375            |       | 59,648           |       | 121,981          |       |
| Principal payments on  long-term borrowings                                                |       | (270,493         | )          | (281,507         | )          | (584,905         | )          |
| Net cash provided by (used in)  financing activities                                       |       | 1,188,918        |       | 122,748          |       | (1,674,055       | )          |
|                                                                                       |       |             |       |             |       |             |       |
| EFFECT OF FOREIGN CURRENCY  EXCHANGE RATE CHANGES ON CASH                                  |       | 5,919            |       | 19,941           |       | 5,990            |       |
|                                                                                       |       |             |       |             |       |             |       |
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                           |       | (41,436          | )          | (3,675,588       | )          | 1,051,809        |       |
|                                                                                       |       |             |       |             |       |             |       |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                             |       | 1,099,602        |       | 4,775,190        |       | 3,723,381        |       |
|                                                                                       |       |             |       |             |       |             |       |
| CASH AND CASH EQUIVALENTS AT END OF YEAR                                                   |       | $                | 1,058,166  |             | $          | 1,099,602        |       | $ | 4,775,190 |   |
|                                                                                       |       |             |       |             |       |             |       |
| NON-CASH TRANSACTION:                                                                      |       |             |       |             |       |             |       |
| Issuance of redeemable  convertible preferred stock to acquire Power General               |       | $                | —     |             | $          | 2,074,000        |       | $ | — |   |
| Issuance of common stock to  pay preferred stock dividends                                 |       | 145,180          |       | 108,885          |       |             |       |
| SUPPLEMENTAL DISCLOSURES OF  CASH FLOW INFORMATION                                         |       |             |       |             |       |             |       |
| Cash payments for:                                                                         |       |             |       |             |       |             |       |
| Interest                                                                                   |       | 606,516          |       | 434,714          |       | 495,356          |       |
| Taxes                                                                                      |       | 46,862           |       |             |       | 171,819          |       |

 

SEENOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

 

30

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## ***AULT INCORPORATED AND SUBSIDIARIES***

##### **NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

#### **YEARS ENDED MAY 30, 2004, JUNE 1, 2003, AND JUNE 2,2002**

#### ** **

1.                             NATUREOF BUSINESS, LIQUIDITY, AND SIGNIFICANT ACCOUNTING POLICIES

 

*Nature ofBusiness*- Ault Incorporated and Subsidiaries (Ault or theCompany) operate in one business segment which includes the design,manufacturing, and marketing of power conversion products, principally tooriginal equipment manufacturers of data communications equipment,microcomputers and related peripherals, telecommunications equipment, andportable medical equipment.  Sales are tocustomers worldwide, and credit is granted based upon the credit policies of theCompany.

 

*Restatement –* The consolidated financialstatements as of and for the fiscal year ended May 30, 2004 were restatedas a result of the Company’s identification, in connection with the preparationof the Company’s financial statements for the fiscal year ended May 29,2005, of accounting errors at the Company’s China subsidiary related toinventory build-up and relief and inadequate reconciliation of intercompanyaccounts.  The accounting errors resultedin a misstatement in inventories, current assets, total assets, accumulateddeficit, total shareholders’ equity, cost of goods sold, gross profit, generaland administrative expense, total operating expenses, operating loss, lossbefore taxes, net loss, net loss applicable to common stockholders, and netloss per share.  There were also relatedadjustments to the Company’s consolidated statement of cash flows andconsolidated statement of stockholders’ equity.

 

**Effects on Consolidated Balance Sheet as of May 30, 2004**

 
| ** **                       | ** ** | **As previously** | ** ** | ** **      | ** ** |
|----------------------------------|------------|-------------------|------------|-----------------|------------|
| ** **                       | ** ** | **reported**      | ** ** | **As restated** | ** ** |
| Inventories                      |       | $                 | 8,736,607  |            | $          | 8,143,628 |   |
| Total current  assets            |       | 19,577,963        |       | 18,984,984      |       |
| Total assets                     |       | 30,428,270        |       | 29,835,291      |       |
| Accumulated  deficit             |       | (7,728,065        | )          | (8,321,044      | )          |
| Total  stockholders’ equity |       | 12,529,915        |       | 11,936,936      |       |
|                                  |            |                   |            |                 |            |  |  |

 

**Effects on Consolidated Statement of Operations for fiscalyear-ended May 30, 2004**

 
| ** **                                  | ** ** | **As previously** | ** ** | ** **      | ** ** |
|---------------------------------------------|------------|-------------------|------------|-----------------|------------|
| ** **                                  | ** ** | **reported**      | ** ** | **As restated** | ** ** |
| Cost of goods  sold                         |       | $                 | 34,268,253 |            | $          | 34,755,584 |   |
| Gross profit                                |       | 10,840,824        |       | 10,353,493      |       |
| General and  administrative                 |       | 5,299,132         |       | 5,404,780       |       |
| Total operating  expenses                   |       | 15,010,225        |       | 15,116,225      |       |
| Operating loss                              |       | (4,169,753        | )          | (4,762,732      | )          |
| Loss before  income taxes                   |       | (4,760,625        | )          | (5,353,604      | )          |
| Net loss                                    |       | (4,807,487        | )          | (5,400,466      | )          |
| Net loss  applicable to common stockholders |       | (4,952,667        | )          | (5,545,646      | )          |
| Net loss per  share basic                   |       | (1.06             | )          | (1.19           | )          |
| Net loss per  share diluted                 |       | (1.06             | )          | (1.19           | )          |
|                                             |            |                   |            |                 |            |  |  |

 

31

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*Liquidity* – The financial statements havebeen prepared on a going-concern basis, which contemplates the realization ofassets and satisfaction of liabilities in the normal course of business.  The Company sustained net losses applicableto common stockholders of $5,545,646 in 2004 and $7,692,073 in 2003 and at May 30,2004 had an accumulated deficit of $8,321,044. The Company utilized $913,911 and $3,179,410 of cash for operatingactivities in 2004 and 2003.  Futureoperations require the Company to borrow additional funds.  On December 4, 2003, the Company enteredinto a new financing agreement, which includes a $7,000,000 line-of-credit agreementthrough December 2006.  Theavailability of the line is based on the outstanding receivables of theCompany; the amount available at May 30, 2004 was $3,394,000.  There was $1,965,464 outstanding on thisline-of-credit at May 30, 2004.  TheCompany took steps to reduce expenses, improve cash flow and return toprofitability, including the consolidation of its manufacturingoperations.  This consolidation includesthe closing of its Minneapolis production operations, eliminating approximately40 jobs in assembly, equipment maintenance, procurement and administrativesupport and the integration of production into Ault’s other manufacturingplants.  Ault’s engineering,documentation, safety certification/reliability, sales, marketing andadministrative services will remain at the Minneapolis headquarters facility.

 

Basedon available funds, current plans and business conditions management believesthat the Company’s available cash, borrowings and amounts generated fromoperations, will be sufficient to meet the Company’s cash requirements for thenext 12 months.  The assumptionsunderlying this belief include, among other things, that there will be nomaterial adverse developments in the business or market in general.  There can be no assurances however that thoseassumed events will occur.  If management’splans are not achieved, there may be further negative effects on the results ofoperations and cash flows, which could have a material adverse effect on theCompany.

 

Asummary of the Company’s significant accounting policies follows:

 

*Principlesof Consolidation* - The consolidated financial statementsinclude the accounts of Ault Incorporated and its wholly ownedsubsidiaries.  All intercompanytransactions have been eliminated.  Theforeign currency translation adjustment represents the translation into UnitedStates dollars of the Company’s investment in the net assets of its foreignsubsidiaries.

 

*Fiscal Year*****- TheCompany operates on a 52 to 53-week fiscal year.  The fiscal years for the financial statementspresented end on May 30, 2004, June 1, 2003, and June 2,2002.  All years presented contain 52weeks.  The Company’s foreignsubsidiaries have an April 30 fiscal year-end, and the Companyconsolidates the subsidiaries for financial reporting purposes on a one-monthlag basis to facilitate timely and accurate consolidation and in order to meetfinancial reporting deadlines of the Company.

 

*Cash and Cash Equivalents -*The Companymaintains its cash in bank deposit accounts which, at times, may exceedfederally insured limits.  The Companyhas not experienced any losses in such accounts.  The Company considers all highly liquidfinancial instruments purchased with an original maturity of three months orless to be cash equivalents.  Cashequivalents consist primarily of short-term commercial paper.  The Company maintained cash at variousfinancial institutions located in countries in the Far East totaling $775,146and $775,874 at May 30, 2004 and June 1, 2003.

 

32

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*AccountsReceivable* - The Company grants credit to customers in thenormal course of business, but generally does not require collateral or anyother security to support amounts due. Management performs on- going credit evaluations of customers based onfinancial position, past history, the customer’s current ability to pay itsobligation to the Company, and the condition of the general economy and theindustry as a whole.  The Companymaintains allowances for potential credit losses which, when realized, havegenerally been within management expectations. The Company writes-off accounts receivable when they becomeuncollectible, and payments subsequently received on such receivables arecredited to the allowance for doubtful accounts.

 

*Inventories* -Inventories are stated at the lower of cost (first-in, first-out) ormarket.  Inventories include material,labor, and manufacturing overhead.

 

*Goodwill–* The Company adopted Financial Accounting Standards (SFAS) No. 142,*Goodwill and Other Intangible Assets*on June 2, 2002.  SFAS No. 142requires that upon adoption, amortization of goodwill will cease and instead,the carrying value of goodwill will be evaluated for impairment on an annualbasis. In fiscal 2002 the amortization expense was $100,000.  On June 3, 2002, the initial impairmenttest was performed and it was determined that there was no goodwill impairmenton June 3, 2002.  During the fourthquarter of fiscal 2003, the annual goodwill impairment test was performed andthe fair value of the Company was assessed to determine whether goodwillcarried was impaired and the extent of such impairment.  After performing this evaluation it wasevident that impairment of goodwill had occurred because of a decline inrevenues for the fourth quarter compared to forecasted revenues, as well as asignificant increase in the fourth quarter loss compared to forecast.  The Company did not perform an impairmenttest prior to the fourth quarter as there was not an event that had occurred orcircumstances had changed in such a manner to warrant an impairment test priorto the fourth quarter.  Accordingly, animpairment charge of $1,153,153 was recorded in the fourth quarter of fiscal2003 to write off all remaining goodwill.

 

The following tableadjusts net loss for goodwill amortization expense recognized for the yearended June 2, 2002:

 
| ** **                                    | ** ** | **Year Ended**   | ** ** |
|-----------------------------------------------|------------|------------------|------------|
| ** **                                    | ** ** | **May 30,** | ** ** | **June 1,** | ** ** | **June 2,** | ** ** |
| ** **                                    | ** ** | **2004**         | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                    | ** ** | **Restated**     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Reported loss                                 |       | $                | (5,546     | ) | $ | (7,692 | ) | $ | (3,564 | ) |
|                                          |       |             |       |   |   |   |   |
| Add back  goodwill amortization, net of tax   |       | —           |       | — |   | 100 |   |
| Pro forma  adjusted net loss                  |       | (5,546           | )          | (7,692 | ) | (3,464 | ) |
|                                          |       |             |       |   |   |   |   |
| Basic net loss  per share:                    |       |             |       |   |   |   |   |
| Reported net loss                             |       | $                | (1.19      | ) | $ | (1.67 | ) | $ | (0.78 | ) |
| Goodwill amortization, net of tax             |       | —           |       | — |   | 0.02 |   |
| Pro forma adjusted  basic net loss per share  |       | $                | (1.19      | ) | $ | (1.67 | ) | $ | (0.76 | ) |
|                                          |       |             |       |   |   |   |   |
| Diluted net loss  per share:                  |       |             |       |   |   |   |   |
| Reported net loss                             |       | $                | (1.19      | ) | $ | (1.67 | ) | $ | (0.78 | ) |
| Goodwill amortization, net of tax             |       | —           |       | — |   | 0.02 |   |
| Proforma  adjusted diluted net loss per share |       | $                | (1.19      | ) | $ | (1.67 | ) | $ | (0.76 | ) |
|                                          |       |             |       |   |   |   |   |
| Common and  equivalent shares outstanding:    |       |             |       |   |   |   |   |
| Basic                                         |       | 4,680            |       | 4,597 |   | 4,541 |   |
| Diluted                                       |       | 4,680            |       | 4,597 |   | 4,541 |   |

 

33

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The Company has nogoodwill as of May 30, 2004 and June 1, 2003.

 

*Depreciation-*Depreciation is based on the estimated useful lives of theindividual assets and is calculated on the straight-line method for financialreporting and accelerated methods for tax purposes.  The estimated useful lives are as follows:

 
| ** **                      | ** ** | **Years**  | ** ** |
|---------------------------------|------------|------------|------------|
|                            |       |       |       |
| Building                        |       | 36         |       |
| Machinery and  equipment        |       | 3-10       |       |
| Office furniture  and equipment |       | 5-15       |       |
| Data processing  equipment      |       | 3-5        |       |
| Leasehold  improvement          |       | Lease term |       |

 

*FinancialInstruments -* The fair value of the long-term debt isestimated based on the use of discounted cash flow analysis using interestrates for the same or similar debt offered to the Company having the same orsimilar remaining maturities and collateral requirements.  Management estimates the carrying value ofthe long-term debt approximates fair value. All other financial instruments approximate fair value because of theshort-term nature of these instruments.

 

*Retirementand Severance Benefits -*****Retirement andseverance benefits represents the accrual of compensation expense, net ofdeposits, for Korean employees payable upon termination of employment underprovisions of Korean law.

 

The Company does not fund the retirement andseverance benefits accrued, but rather provides for the estimated accruedliability under the plans as of the balance sheet date.  Under the National Pension Scheme of Korea,the Company is required to deposit a certain portion of the retirementallowances of employees to the National Pension Fund.  The deposits reduce the retirement andseverance benefit liability recorded in the consolidated financial statements.

 

*Revenue Recognition -*The Company recognizes revenue at the shipping point for sales tocustomers located within the Company’s or subsidiaries’ country ofdomicile.  For sales to customers outsideof the Company’s or subsidiaries’ country of domicile, the Company recognizesrevenue at the time risk of ownership passes. All of the Company’s product heldby distributors are stocked for OEM’s and the sales terms are noncancelable,and nonreturnable.  Payment terms fordistributors are no different than other customers, 0.5% 10 net 30.

 

*Freight*-Customer billings for freight are included in sales, and the freight costs areincluded in costs of sales.

 

*DesignEngineering -*Design engineering costs are those incurred forresearch, design, and development of new products and redesign of existingproducts.  These costs are expensed asincurred.

 

34

----

 

*Advertising Expense -* The Companyexpenses advertising costs as incurred. Advertising expenses of approximately $129,000, $76,000, and $45,000were charged to operations during the years ended May 30, 2004, June 1,2003, and June 2, 2002, respectively.

 

*Stock Compensation* - TheCompany’s 1986 and 1996 stock option plans have reserved 600,000 and 1,200,000common shares, for issuance under qualified and nonqualified stock options forits key employees and directors.  Optionprices are determined by the market value of the stock at the time the optionwas granted.  Options become exercisableas determined at the date of grant by a committee of the Board ofDirectors.  Options expire ten yearsafter the date of grant unless an earlier expiration date is set at the time ofgrant.

 

The intrinsic value method is used to value thestock option grants to employees and directors. No compensation cost has been recognized for the stock option plans, asall options have been issued with exercised prices at or above fair value.  Had compensation cost for the Company’s stockoption plans been determined based on the fair value at the grant date forawards in 2004, 2003, and 2002, the Company’s net loss and net loss per sharewould have changed to the pro forma amounts indicated below:

 
| ** **                                   | ** ** | **May 30,** | ** ** | **June 1,** | ** ** | **June 2,** | ** ** |
|----------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                   | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
| ** **                                   | ** ** | **Restated**     | ** ** | ** **       | ** ** | ** **       | ** ** |
| Net loss  applicable to common stockholders: |       |             |       |             |       |             |       |
| As reported                                  |       | $                | (5,545,646 | )                | $          | (7,692,073       | )          | $ | (3,563,726 | ) |
| Pro forma                                    |       | (5,806,664       | )          | (8,092,340       | )          | (4,237,331       | )          |
| Per share, basic, as reported                |       | (1.19            | )          | (1.67            | )          | (0.78            | )          |
| Per share, diluted, as reported              |       | (1.19            | )          | (1.67            | )          | (0.78            | )          |
| Per share, basic, pro forma                  |       | (1.24            | )          | (1.76            | )          | (0.93            | )          |
| Per share, diluted, pro forma                |       | (1.24            | )          | (1.76            | )          | (0.93            | )          |
|                                              |            |                  |            |                  |            |                  |            |  |  |  |

 

The fair value of each option grant is estimatedon the date of grant using the Black-Scholes option-pricing model with thefollowing weighted-average assumptions used for grants in 2004, 2003, and 2002:

 
| ** **                       | ** ** | **May 30,** | ** ** | **June 1,** | ** ** | **June 2,** | ** ** |
|----------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                       | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
|                             |       |             |       |             |       |             |       |
| Expected  dividend yields        |       | $                | —     |             | $          | —           |       | $ | — |   |
| Expected stock  price volatility |       | 71.01            | %          | 73.63            | %          | 59.38            | %          |
| Risk-free  interest rate         |       | 2.77             | %          | 2.01             | %          | 4.81             | %          |
| Expected life of  options        |       | 7.48 years       |       | 7.55 years       |       | 7.74 years       |       |
|                                  |            |                  |            |                  |            |                  |            |  |  |  |

 

35

----

 

*Long-LivedAssets*****- The Companyreviews its long-lived assets annually to determine potential impairment bycomparing the carrying value of the long-lived assets outstanding withestimated future undiscounted cash flows expected to result from the use of theassets, including cash flows from disposition. Should the sum of the expected future undiscounted cash flows be lessthan the carrying value, the Company would recognize an impairment loss.  An impairment loss would be measured bycomparing the amount by which the carrying value exceeds the fair value of thelong-lived assets and intangibles.  Todate, management has determined that no impairment of long-lived assets exists.

 

*Net Lossper Share -* Basic net loss per share is computed by dividingnet loss by the weighted-average number of common shares outstanding during theperiod.  Diluted loss per share iscomputed by dividing net loss by the weighted-average number of common sharesoutstanding during the period adjusted by common share equivalents related tostock options, warrants.  Options topurchase 1,187,826, 1,093,426, and 978,926 shares of common stock wereoutstanding at the fiscal years ended May 30, 2004, June 1, 2003, andJune 2, 2002, but were excluded from the computation of common stockequivalents because they were anti-dilutive.

 

Thefollowing table reflects the calculation of basic and diluted net loss pershare:

 
| ** **                                                  | ** ** | **May 30,** | ** ** | **June 1,** | ** ** | **June 2,** | ** ** |
|-------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                  | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
| ** **                                                  | ** ** | **Restated**     | ** ** | ** **       | ** ** | ** **       | ** ** |
| Numerator -                                                 |       |             |       |             |       |             |       |
| Net loss applicable to common stockholders                  |       | $                | (5,545,646 | )                | $          | (7,692,073       | )          | $ | (3,563,726 | ) |
| Denominator:                                                |       |             |       |             |       |             |       |
| Basic - weighted-average shares outstanding                 |       | 4,679,570        |       | 4,596,882        |       | 4,541,322        |       |
| Effect of dilutive shares:                                  |       |             |       |             |       |             |       |
| Stock options outstanding and employee stock  purchase plan |       |             |       |             |       |             |       |
| Diluted - weighted-average shares outstanding               |       | 4,679,570        |       | 4,596,882        |       | 4,541,322        |       |
|                                                        |       |             |       |             |       |             |       |
| Basic net loss  per share                                   |       | $                | (1.19      | )                | $          | (1.67            | )          | $ | (0.78 | ) |
|                                                        |       |             |       |             |       |             |       |
| Diluted net loss  per share                                 |       | $                | (1.19      | )                | $          | (1.67            | )          | $ | (0.78 | ) |

 

*Use of Estimates -* Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosures of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period.  Actualresults could differ from those estimates.

 

*ComprehensiveLoss -*The Company’s fiscal 2004 comprehensive loss consistsof net loss and foreign currency translation adjustments.

 

*ForeignCurrency Translation -*The Company’s internationalsubsidiaries have United States dollars as their functional currency.  Specific transactions that are denominated inthe foreign currency are translated at the current exchange rate.

 

36

----

 

2.                             INVENTORIES

 

The components of inventory are as follows:

 
| ** **      | ** ** | **May 30,** | ** ** | **June 1,** | ** ** |
|-----------------|------------|------------------|------------|------------------|------------|
| ** **      | ** ** | **2004**         | ** ** | **2003**         | ** ** |
| ** **      | ** ** | **Restated**     | ** ** | ** **       | ** ** |
|            |       |             |       |             |       |
| Raw materials   |       | $                | 4,601,140  |             | $          | 6,019,803 |   |
| Work-in-process |       | 1,407,037        |       | 1,163,304        |       |
| Finished goods  |       | 2,135,451        |       | 2,684,836        |       |
|            |       | $                | 8,143,628  |             | $          | 9,867,943 |   |

 

#### **3.**                             WARRANTY

 

TheCompany offers its customers a three-year warranty on products.  Warranty expense is estimated at the timerevenue is recognized and is determined by calculating the historicalrelationship between sales and warranty costs and applying the calculation tothe current period’s sales. Based on warranty repair costs and the rate ofreturn, the Company periodically reviews and adjusts its warranty accrual. TheCompany exercises judgment in determining its accrued warranty liability.  Actual repair costs are offset against thereserve.  The following table shows theactivity for the Company’s warranty accrual (in thousands):

 
| ** **                  | ** ** | **May 30,** | ** ** | **June 1,** | ** ** |
|-----------------------------|------------|------------------|------------|------------------|------------|
| ** **                  | ** ** | **2004**         | ** ** | **2003**         | ** ** |
| Beginning  Balance          |       | $                | 134        |             | $          | 113 |   |
|                        |       |             |       |             |       |
| Charges and  Costs Accrued  |       | 14               |       | 193              |       |
|                        |       |             |       |             |       |
| Less Repair  Costs Incurred |       | (23              | )          | (172             | )          |
|                        |       |             |       |             |       |
| Ending Balance              |       | $                | 125        |             | $          | 134 |   |

 

4.                             FINANCINGARRANGEMENT AND LONG-TERM DEBT

 

*FinancingArrangement*****-****The Company has a financing agreement, which includes a$7,000,000 revolving line-of-credit agreement through December 4,2006.  Interest on advances is at theprime rate plus 2.00% (prime plus 5% default rate) for fiscal year 2004 andprime plus 7.00% (default rate) for fiscal year 2003.  The rate at May 30, 2004 was 6.00% andon June 1, 2003 the rate was 11.00%. All advances are due on demand and are collateralized by all assets ofthe Company.  The availability of theline is based on the outstanding receivables of the Company; the amountavailable at May 30, 2004 was $3,394,000. There was $1,965,464 outstanding on this line-of-credit at May 30,2004.  The Company’s financing agreementcontains financial covenants. These covenants require the Company, among otherthings, to maintain a minimum capital base, and also impose certain limitationson additional capital expenditures and the payment of dividends. At the end offiscal 2003, the Company’s actual capital base did not meet the minimum capitalbase of the credit agreement.  TheCompany received a waiver on August 29, 2003 and amendment for thiscovenant.  At the end of fiscal 2004, theCompany’s actual net book worth and income before taxes did not meet theminimum of the credit agreement.  TheCompany received a waiver and amendment for these covenants.  Following the July 2004 waiver, theCompany believes the provisions imposed by this credit agreement are achievablebased on the Company’s expected operating results for the next year.  Also, the Company’s Korean subsidiarymaintains an unsecured $3,370,000 credit facility agreement to cover bankoverdrafts, short-term financing, and export financing at a rate of 8.15% on May 30,2004 and 6.25% on June 1, 2003. Advances outstanding relating to the Korean facility were $2,685,003 and$3,103,594 at May 30, 2004 and June 1, 2003, respectively.

 

37

----

 

*Long-TermDebt –*

 
| ** **                                                                                                                                                                     | ** ** | **May 30,** | ** ** | **June 1,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                                                                                                     | ** ** | **2004**         | ** ** | **2003**         | ** ** |
|                                                                                                                                                                           |       |             |       |             |       |
| 8.05% term loan, due in monthly installments of  $28,756, including interest to February 2015, collateralized by the  Company’s headquarters building in Minneapolis |       | $                | 2,465,062  |             | $          | 2,605,501 |   |
| 5.3%  uncollateralized term loan, due in January 2005                                                                                                                     |       | 289,607          |       | 289,617          |       |
| 7.94% term loan, due in monthly installments of  $6,144, including interest to September 2004, secured by furniture                                                       |       | 18,192           |       | 87,464           |       |
| 7.2% term loan,  paid in full in December 2003                                                                                                                            |       | —           |       | 60,782           |       |
| Total                                                                                                                                                                          |       | 2,772,861        |       | 3,043,364        |       |
|                                                                                                                                                                           |       |             |       |             |       |
| Less current  maturities                                                                                                                                                       |       | 459,969          |       | 560,110          |       |
|                                                                                                                                                                           |       | $                | 2,312,892  |             | $          | 2,483,254 |   |

 

Maturities of long-term debt for years subsequent to May 30, 2004are as follows:

 
| 2005       |   |   |   | $         | 459,969   |   |
|------------|--------|--------|--------|-----------|-----------|--------|
| 2006       |   |   |   | 164,882   |      |
| 2007       |   |   |   | 178,656   |      |
| 2008       |   |   |   | 193,581   |      |
| 2009       |   |   |   | 209,752   |      |
| Thereafter |   |   |   | 1,566,021 |      |
|       |   |   |   |      |      |
|       |   |   |   | $         | 2,772,861 |   |

 

#### **5.**                             PLANT CLOSING

 

On July 17,2003, the Company announced the consolidation of its manufacturingoperations.  The consolidation includedthe closing of its Minneapolis production operations, eliminating approximately40 jobs in assembly, equipment maintenance, procurement and administrativesupport and the integration of production into Ault’s other manufacturingplants.  Ault’s engineering,documentation, safety certification/reliability, sales, marketing andadministrative services will remain at the Minneapolis headquartersfacility.  The consolidation was completeat the end of February 2004.  Theconsolidation was implemented to reduce expenses, improve cash flow and helpreturn the Company to profitability. Ault’s management estimates that the consolidation will reduce expensesby approximately $1.3 million annually.

 

As aresult of these decisions, the Company recorded charges of $301,000, forseverance related to workforce reductions of approximately 40 employees,$1,743,000 for asset impairment write down, $545,000 for obsolete inventory,and $20,000 related to other costs associated with the consolidationrestructuring. Cash of $286,000 was used in connection with severance charges,which began to be paid in the second quarter and will be completely paid by theend of August 2004.

 

38

----

 

A summary of therestructuring activity during the year ending May 30, 2004 is as follows:

 
| ** **                  | ** ** | ** **            | ** ** | **Current Period** | ** ** | ** **   | ** ** | **Restructuring**     | ** ** |
|-----------------------------|------------|-----------------------|------------|--------------------|------------|--------------|------------|-----------------------|------------|
| ** **                  | ** ** | **Balance at**        | ** ** | **Restructuring**  | ** ** | **Paid/**    | ** ** | **Liabilities at**    | ** ** |
| ** **                  | ** ** | **June 2, 2003** | ** ** | **Charges**        | ** ** | **Expensed** | ** ** | **May 30, 2004** | ** ** |
| Employee  termination costs |       | $                     | —     |               | $          | 301,000      |       | $                     | 286,000    |   | $ | 15,000 |   |
| Obsolete  Inventory         |       | —                |       | 545,000            |       | 545,000      |       | —                |       |
| Asset impairment            |       | —                |       | 1,743,000          |       | 1,743,000    |       | —                |       |
| Miscellaneous  costs        |       | —                |       | 20,000             |       | 20,000       |       | —                |       |
| Total                       |       | $                     | —     |               | $          | 2,609,000    |       | $                     | 2,594,000  |   | $ | 15,000 |   |

 

The current periodrestructuring charges were recorded in the accompanying statement of operationsas follows:

 
| Cost of Goods  Sold              |   | $         | 545,000   |   |
|----------------------------------|--------|-----------|-----------|--------|
| Operating  Expenses - Exit Costs |   | 2,064,000 |      |
|                             |   | $         | 2,609,000 |   |

 

#### **6.**                             INCOME TAXES

 

Pretax income (loss) for domestic and foreignoperations was as follows:

 
| ** ** | ** ** | **May 30,** | ** ** | **June 1,** | ** ** | **June 2,** | ** ** |
|------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** ** | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
| ** ** | ** ** | **Restated**     | ** ** | ** **       | ** ** | ** **       | ** ** |
| Domestic   |       | $                | (4,607,298 | )                | $          | (6,549,516       | )          | $ | (2,654,385 | ) |
| Foreign    |       | (746,306         | )          | (1,354,515       | )          | (1,603,467       | )          |
| Total      |       | $                | (5,353,604 | )                | $          | (7,904,031       | )          | $ | (4,257,852 | ) |

 

The components of the provision (benefit) forincome taxes are as follows:

 
| ** ** | ** ** | **May 30,** | ** ** | **June 1,** | ** ** | **June 2,** | ** ** |
|------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** ** | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
| Current:   |       |             |       |             |       |             |       |
| Domestic   |       | $                | —     |             | $          | (340,200         | )          | $ | (952,026 | ) |
| Foreign    |       | (13,127          | )          | —           |       | 125,000          |       |
| State      |       | 59,989           |       | —           |       | (18,600          | )          |
| Deferred   |       | —           |       | —           |       | 151,500          |       |
|       |       | $                | 46,862     |             | $          | (340,200         | )          | $ | (694,126 | ) |

 

39

----

 

The income tax provision (benefit) differs fromthe amount of income tax determined by applying the U.S. federal income taxrate to pretax income for the fiscal years ended May 30, 2004, June 1,2003, and June 2, 2002, due to the following:

 
| ** **                                          | ** ** | **May 30,** | ** ** | **June 1,** | ** ** | **June 2,** | ** ** |
|-----------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                          | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
| ** **                                          | ** ** | **Restated**     | ** ** | ** **       | ** ** | ** **       | ** ** |
| Computed  expected tax provision (benefit)          |       | $                | (1,870,000 | )                | $          | (2,687,000       | )          | $ | (1,405,060 | ) |
| Increase (decrease) in income taxes resulting from: |       |             |       |             |       |             |       |
| Nondeductible expenses                              |       | 5,000            |       | 4,888            |       | 10,087           |       |
| State income taxes, net of federal benefit          |       | (123,000         | )          | 59,000           |       | (31,360          | )          |
| Foreign taxes                                       |       | (20,000          | )          | —           |       | 125,000          |       |
| Current year R&D tax credits                    |       | —           |       | —           |       | 84,000           |       |
| Foreign losses not benefited                        |       | 292,382          |       | —           |       | —           |       |
| Change in valuation allowance                       |       | 1,363,088        |       | 2,282,912        |       | 502,207          |       |
| Change in foreign tax rate on deferreds             |       | 41,718           |       | —           |       | —           |       |
| Other                                               |       | 357,674          |       | —           |       | 21,000           |       |
|                                                |       | $                | 46,862     |             | $          | (340,200         | )          | $ | (694,126 | ) |

 

Net deferred taxesconsist of the following components:

 
| ** **                           | ** ** | ** ** | ** ** | **May 30,** | ** ** | **June 1,** | ** ** |
|--------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|
| ** **                           | ** ** | ** ** | ** ** | **2004**         | ** ** | **2003**         | ** ** |
| ** **                           | ** ** | ** ** | ** ** | **Restated**     | ** ** | ** **       | ** ** |
| Deferred tax assets  (liabilities):  | ** ** | ** ** |       |             |       |             |       |
| Current deferred taxes               |       |       |       |             |       |             |       |
| Allowance for doubtful accounts      |       |       |       | $                | 106,000    |             | $          | 163,000 |   |
| Inventory reserve                    |       |       |       | 144,000          |       | 206,000          |       |
| Accrued vacation                     |       |       |       | 61,000           |       | 90,000           |       |
| Accrued warranty                     |       |       |       | 45,000           |       | 46,000           |       |
| Inventory capitalization             |       |       |       | 2,000            |       | —           |       |
| Imputed interest                     |       |       |       | 77,000           |       | —           |       |
| Valuation allowance                  |       |       |       | (435,000         | )          | (505,000         | )          |
| Total current deferred taxes         |       |       |       | —           |       | —           |       |
|                                 |       |       |       |             |       |             |       |
| Long-term deferred taxes             |       |       |       |             |       |             |       |
| Goodwill deductible for tax          |       |       |       | 384,000          |       | 360,000          |       |
| Equipment and leasehold improvements |       |       |       | 396,000          |       | (261,000         | )          |
| Tax credit carryforwards and other   |       |       |       | —           |       | (8,298           | )          |
| Federal NOL carryforwards            |       |       |       | 2,592,000        |       | 1,229,000        |       |
| Foreign deferred tax asset           |       |       |       | 521,000          |       | 1,140,210        |       |
| Foreign deferred liability           |       |       |       | —           |       | (23,242          | )          |
| Valuation allowance                  |       |       |       | (3,893,000       | )          | (2,459,912       | )          |
| Total long-term deferred taxes       |       |       |       | $                | —     |             | $          | (23,242 | ) |

 

The Company has net operating loss carryforwards ofapproximately $7,101,000 as of May 30, 2004, with various expiration datesthrough 2023.  Based on prior taxableincome and estimates of future taxable income, the Company has determined thatit is likely that the net deferred tax asset will not be fully realized in thefuture.  Thus a full valuation allowancehas been established.

 

40

----

 

#### **7.**                             EMPLOYEE BENEFIT PLANS

#### ** **

*401(k) Employer Match Plan -*****The Company has a 401(k) plan covering substantially allU.S. employees.  The Company is requiredto match 25% of the employees’ first 6% of contributions and may make additionalcontributions to the plan to the extent authorized by the Board ofDirectors.  The contribution amountscharged to operating expenses in the fiscal years ended May 30, 2004, June 1,2003, and June 2, 2002 approximated $55,000, $58,000, and $72,000, respectively.

 

*StockPurchase Plan* - The Company maintains a stock purchase planin which up to 200,000 shares of common stock may be purchased byemployees.  The purchase price is equalto the lesser of 85% of the fair market value of the shares on the date thephase commences or 85% of the fair market value of the shares on thetermination date of the phase.  Eachphase is one year from the commencement date of a phase.  There were 23,212, and 13,588 sharespurchased under this plan during the fiscal year ended June 1, 2003, and June 2,2002, respectively.  No shares werepurchased under the plan during the year ended May 30, 2004 due to thephase ending on May 31, 2004.

 

#### **8.**                             REDEEMABLE CONVERTIBLE PREFERRED STOCK

#### ** **

In July 2002,in connection with the purchase of certain assets and liabilities of PowerGeneral, the Company issued 2,074 shares of redeemable 7% convertible preferredstock at $1,000 face value.  Thepreferred stock is convertible into common stock at the holders’ option at aconversion price of $4.25 principal amount of preferred stock for each shareand has a mandatory redemption of one-third of the outstanding shares ofunconverted preferred stock on July 16, 2006, one-half of the remainingoutstanding shares on July 16, 2007, and the remaining outstanding shareson July 16, 2008.  The dividends onthe preferred stock are cumulative and payable quarterly beginning October 15,2002, and can be paid in cash; however, during the first three years theCompany can pay dividends in shares of common stock in lieu of cash based onthe fair market value of the common stock at the time the dividends aredeclared.  In fiscal 2004 the Companydeclared dividends of $145,180, which have been paid with 55,584 shares of commonstock.  In fiscal 2003 the Companydeclared dividends of $128,242, of which $108,885 have been paid with 51,177shares of common stock.

 

9.                             STOCKOPTION PLAN

 

Information relating to all outstanding optionsas of May 30, 2004, June 1, 2003, and June 2, 2002 is asfollows:

 
| ** **                                                      | ** ** | **May 30,** | ** ** | **June 1,** | ** ** | **June 2,** | ** ** |
|-----------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                      | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
| ** **                                                      | ** ** | ** **       | ** ** | **Weighted-**    | ** ** | ** **       | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                                      | ** ** | ** **       | ** ** | **Average**      | ** ** | ** **       | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                                      | ** ** | ** **       | ** ** | **Exercise**     | ** ** | ** **       | ** ** | **Exercise** | ** ** | ** ** | ** ** | **Exercise** | ** ** |
| ** **                                                      | ** ** | **Shares**       | ** ** | **Price**        | ** ** | **Shares**       | ** ** | **Price** | ** ** | **Shares** | ** ** | **Price** | ** ** |
| ** **                                                      | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Options outstanding at beginning of year                        |       | 1,093,426        |       | $                | 5.43       |             | 978,926    |   | $ | 5.70 |   | 867,676 |   | $ | 5.71 |   |
| Options exercised                                               |       | (1,000           | )          | 1.38             |       | (10,500          | )          | 2.32 |   | (21,500 | ) | 3.23 |   |
| Options expired                                                 |       | (1,000           | )          | 1.38             |       | (13,000          | )          | 4.00 |   | (26,250 | ) | 7.15 |   |
| Options granted                                                 |       | 96,400           |       | 2.34             |       | 138,000          |       | 3.11 |   | 159,000 |   | 5.57 |   |
| Options outstanding at end of year                              |       | 1,187,826        |       | $                | 5.18       |             | 1,093,426  |   | $ | 5.43 |   | 978,926 |   | $ | 5.70 |   |
|                                                            |       |             |       |             |       |             |       |   |   |   |   |   |   |
| Options exercisable at end of year                              |       | 1,030,526        |       | $                | 5.46       |             | 905,176    |   | $ | 5.58 |   | 782,926 |   | $ | 5.60 |   |
|                                                            |       |             |       |             |       |             |       |   |   |   |   |   |   |
| Weighted-average fair value of options granted  during the year |       |             |       | $                | 1.72       |             |       |   | $ | 1.94 |   |   |   | $ | 3.81 |   |

 

41

----

 

The following table summarizes information aboutstock options outstanding at May 30, 2004:

 
| ** **                    | ** ** | ** **          | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|-------------------------------|------------|---------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                    | ** ** | ** **          | ** ** | **Weighted-**           | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **Number**          | ** ** | **Average**             | ** ** | **Weighted-**           | ** ** | **Number** | ** ** | **Weighted-** | ** ** |
| **Range of**                  | ** ** | **Outstanding**     | ** ** | **Remaining**           | ** ** | **Average**             | ** ** | **Exercisable** | ** ** | **Average** | ** ** |
| **Exercise**                  | ** ** | **at May 30,** | ** ** | **Contractual**         | ** ** | **Exercise**            | ** ** | **at May 30,** | ** ** | **Exercise** | ** ** |
| **Prices**                    | ** ** | **2004**            | ** ** | **Life (Years)**        | ** ** | **Price**               | ** ** | **2004** | ** ** | **Price** | ** ** |
| ** **                    | ** ** | ** **          | ** ** | ** **              | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| $ 1.19 - $ 1.72     |       | 22,000              |       | 0.1                     |       | $                       | 1.19       |   | 22,000 |   | $ | 1.19 |   |
| 1.73 -    2.58 |       | 143,400             |       | 3.6                     |       | 2.31                    |       | 81,600 |   | 2.32 |   |
| 2.59 -    3.45 |       | 135,000             |       | 3.7                     |       | 3.12                    |       | 74,500 |   | 3.09 |   |
| 3.46 -    4.31 |       | 218,124             |       | 4.5                     |       | 3.78                    |       | 218,124 |   | 3.78 |   |
| 4.32 -    5.17 |       | 10,000              |       | 4.3                     |       | 5.06                    |       | 10,000 |   | 5.06 |   |
| 5.18 -    6.03 |       | 278,800             |       | 6.1                     |       | 5.82                    |       | 243,800 |   | 5.83 |   |
| 6.04 -    6.90 |       | 62,918              |       | 2.9                     |       | 6.52                    |       | 62,918 |   | 6.52 |   |
| 6.91 -    7.76 |       | 197,000             |       | 4.7                     |       | 7.38                    |       | 197,000 |   | 7.38 |   |
| 7.77 -    8.63 |       | 120,584             |       | 3.5                     |       | 8.44                    |       | 120,584 |   | 8.44 |   |
| $ 1.19 - $ 8.63     |       | 1,187,826           |       | 4.4                     |       | $                       | 5.18       |   | 1,030,526 |   | $ | 5.46 |   |

 

10.                       STOCKHOLDERS’EQUITY

 

The Board of Directors is empowered to establishand to designate classes and series of preferred shares and to set the terms ofsuch shares, including terms with respect to redemption, dividends,liquidation, conversion, and voting rights. The Restated Articles of Incorporation provide that the preferred sharesare senior to the common shares with respect to dividends and liquidation.

 

The Company has a shareholders’ rights plan -under which, a Class A, Junior Participating Preferred Stock with no parvalue was created.  In addition, adividend of one right was declared for each share of common stock at anexercise price of $36 per right and a redemption price of $0.001 perright.  Each right is equal to a right topurchase one one-hundredth of a share of the Class A, Junior ParticipatingPreferred Stock. 100,000 shares of preferred stock are reserved for the exerciseof the rights.  No rights were exercisedduring the years ended May 30, 2004, June 1, 2003, and June 2,2002.

 

The Company has notes receivable from certainofficers of the Company arising from the sale of common stock recorded as anoffset to stockholders’ equity.  During2003, the Company wrote off $55,000 as compensation expense.

 

42

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11.                       COMMITMENTAND CONTINGENCIES

 

*Operating Leases -* The Companyleases certain facilities under operating leases through December 2008.  In addition, certain equipment and motorvehicles are leased under operating leases with terms of approximately 36months.

 

Approximate minimum annual rental commitments atMay 30, 2004 are as follows:

 
| 2005   |   | $       | 196,527 |   |
|--------|--------|---------|---------|--------|
| 2006   |   | 185,045 |    |
| 2007   |   | 173,677 |    |
| 2008   |   | 104,125 |    |
|   |   |    |    |
|   |   | $       | 659,374 |   |

 

Total rental expense for the fiscal years ended May 30,2004, June 1, 2003, and June 2, 2002 was approximately $227,000,$393,000, and $44,000, respectively.

 

12.                       SEGMENTINFORMATION AND FOREIGN OPERATIONS

 

The Company conducts its business within onereportable segment:  the power conversionproduct industry.  Manufacturing of theCompany’s products are performed at the Company’s Korean subsidiary, theChinese subsidiaries, and certain nonaffiliated companies in China andThailand.  A summary of the Company’srevenues, net income, and identifiable assets by geographic area is presentedbelow:

 
| ** **                                           | ** ** | **May 30,** | ** ** | **June 1,** | ** ** | **June 2,** | ** ** |
|------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                           | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
| ** **                                           | ** ** | **Restated**     | ** ** | ** **       | ** ** | ** **       | ** ** |
| Revenues:                                            |       |             |       |             |       |             |       |
| Domestic operations                                  |       | $                | 32,385,149 |             | $          | 31,009,020       |       | $ | 34,811,779 |   |
| Asian operations - customers                         |       | 12,723,928       |       | 10,469,990       |       | 6,220,075        |       |
| Asian operations - parent                            |       | 13,643,103       |       | 10,572,884       |       | 9,711,255        |       |
| Eliminations                                         |       | (13,643,103      | )          | (10,572,884      | )          | (9,711,255       | )          |
| Consolidated                                         |       | $                | 45,109,077 |             | $          | 41,479,010       |       | $ | 41,031,854 |   |
|                                                 |       |             |       |             |       |             |       |
| Net income  (loss) applicable to common stockholder: |       |             |       |             |       |             |       |
| Domestic operations                                  |       | $                | (4,812,467 | )                | $          | (6,337,558       | )          | $ | (1,835,369 | ) |
| Asian operations                                     |       | (735,379         | )          | (1,354,515       | )          | (1,729,515       | )          |
| Eliminations                                         |       | 2,200            |       |             |       | 1,158            |       |
| Consolidated                                         |       | $                | (5,545,646 | )                | $          | (7,692,073       | )          | $ | (3,563,726 | ) |
|                                                 |       |             |       |             |       |             |       |
| Identifiable  assets:                                |       |             |       |             |       |             |       |
| Domestic operations                                  |       | $                | 23,547,646 |             | $          | 27,823,792       |       | $ | 30,619,959 |   |
| Asian operations                                     |       | 23,005,284       |       | 21,218,530       |       | 17,549,919       |       |
| Eliminations                                         |       | (16,717,639      | )          | (15,977,405      | )          | (11,472,891      | )          |
| Consolidated                                         |       | $                | 29,835,291 |             | $          | 33,064,917       |       | $ | 36,696,987 |   |
|                                                      |            |                  |            |                  |            |                  |            |  |  |  |  |

 

43

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| ** **                     | ** ** | **May 30,** | ** ** | **June 1,** | ** ** | **June 2,** | ** ** |
|--------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                     | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
| Long-lived  assets:            |       |             |       |             |       |             |       |
| Domestic  operations           |       | $                | 4,176,751  |             | $          | 6,493,373        |       | $ | 5,904,130 |   |
| Korean and  Chinese operations |       | 6,495,791        |       | 6,789,934        |       | 6,538,116        |       |
| Consolidated                   |       | $                | 10,672,542 |             | $          | 13,283,307       |       | $ | 12,442,246 |   |
|                                |            |                  |            |                  |            |                  |            |  |  |  |  |

 

Sales from the subsidiary to the parent companyare based upon profit margins, which represent competitive pricing of similarproducts.

 

*Export Sales -*The Companyalso had foreign export sales amounting to 12.6%, 11.2%, and 17.3% of totalsales for the fiscal years ended May 30, 2004, June 1, 2003, and June 2,2002, respectively.

 

*Other Foreign Production -*In additionto the manufacturing done by the Asian subsidiaries, the Company hassubcontracting agreements for the purchase of finished assemblies from certainmanufacturers in China and Thailand. Total purchases under these agreements were approximately $5,243,000,$5,918,000, and $10,388,000 for the fiscal years ended May 30, 2004, June 1,2003, and June 2, 2002, respectively.

 

#### **13.**                       MAJORCUSTOMER

#### ** **

The Company had no customers with revenues or accounts receivable ofmore than 10% of the total during the fiscal years ended May 30, 2004 and June 1,2003.  During the fiscal year ended June 2,2002, the Company had a major customer with 2.8% of total sales and 10.1% oftotal accounts receivable.

 

#### **14.**                       ACQUISITION

#### ** **

On July 16,2002, the Company purchased a portion of the operating assets of the PowerGeneral division of Nidec America Corporation. The Power General divisiondeveloped, manufactured, and sold high-efficiency DC/DC converters and custompower supplies at various power levels up to 1200 watts under the Power Generalbrand name.  Pursuant to the PurchaseAgreement, the Company paid the seller $366,000 in cash and issued $2,074,000face amount of the Company’s newly created Series B 7% ConvertiblePreferred Stock, no par value (the Preferred Stock). The Preferred Stock issuedto seller is convertible into 488,000 shares of the Company’s commonstock.  The Company has filed aregistration statement covering the shares of common stock issuable uponconversion of the Preferred Stock with the Securities and Exchange Commission.Diluted EPS reflects the potential dilution that could occur if the PreferredStock was converted into common stock of the Company during reportedperiods.  The Preferred Stock wasexcluded from Diluted EPS in the current year as the effect of its inclusionwould be antidilutive.  The Company hasmaintained Power General’s engineering group in Massachusetts and has movedPower General’s manufacturing operations and related functions to The Company’sother facilities in Asia.

 

44

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Thetotal cost of the acquisition was $2,559,278 and was accounted for under thepurchase method of accounting. Accordingly, the acquired assets and liabilities assumed have beenrecorded at their respective fair values as of the date of acquisition.  The results of operations of the acquiredbusiness is included in the financial statements since the date of theacquisition.  The following tablesummarizes the estimated fair values of the assets acquired and liabilitiesassumed from Nidec on the date of the acquisition:

 
| Inventories             |   | $         | 1,048,675 |   |
|-------------------------|--------|-----------|-----------|--------|
| Property and  equipment |   | 1,634,971 |      |
|                    |   |      |      |
| Total assets acquired   |   | 2,683,646 |      |
|                    |   |      |      |
| Current  liabilities    |   | 124,368   |      |
|                    |   |      |      |
| Net assets acquired     |   | $         | 2,559,278 |   |
|                         |        |           |           |        |  |

 

Pro-formaresults of the Company, assuming the acquisition had been made at the beginningof each period presented, are:

 

Amountsin thousands, except per share amounts

 
| ** **                                  | ** ** | **Year Ended**   | ** ** |
|---------------------------------------------|------------|------------------|------------|
| ** **                                  | ** ** | **June 1,** | ** ** | **June 2,** | ** ** |
| ** **                                  | ** ** | **2003**         | ** ** | **2002** | ** ** |
| Revenue                                     |       | $                | 41,848     |   | $ | 46,421 |   |
|                                        |       |             |       |   |   |
| Net (Loss)  Income                          |       | (7,899           | )          | (6,887 | ) |
|                                        |       |             |       |   |   |
| Preferred Stock  Dividends                  |       | 146              |       | 146 |   |
|                                        |       |             |       |   |   |
| Net Loss  Applicable to Common Stockholders |       | $                | (8,045     | ) | $ | (7,033 | ) |
|                                        |       |             |       |   |   |
| Basic (Loss)  Income Per Share              |       | $                | (1.75      | ) | $ | (1.55 | ) |
| Diluted (Loss)  Income Per Share            |       | $                | (1.75      | ) | $ | (1.55 | ) |
|                                        |       |             |       |   |   |
| Common and  equivalent shares outstanding:  |       |             |       |   |   |
| Basic                                       |       | 4,597            |       | 4,541 |   |
| Diluted                                     |       | 4,597            |       | 4,541 |   |

 

45

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#### **15.**                       QUARTERLYFINANCIAL INFORMATION

#### ** **

QUARTERLY FINANCIAL DATA(Unaudited)(Amounts in Thousands, Except Per Share Data)

 
| ** **                                  | ** ** | **FISCAL QUARTERS** | ** ** |
|---------------------------------------------|------------|---------------------|------------|
| ** **                                  | ** ** | **1ST**             | ** ** | **2ND** | ** ** | **3RD** | ** ** | **4TH** | ** ** |
| Fiscal Year 2004  (as restated):            |       |                |       |   |   |   |   |   |   |
| Net Sales                                   |       | $                   | 10,816     |   | $ | 11,134 |   | $ | 10,730 |   | $ | 12,429 |   |
|                                        |       |                |       |   |   |   |   |   |   |
| Gross Profit                                |       | 2,383               |       | 2,787 |   | 2,050 |   | 3,133 |   |
|                                        |       |                |       |   |   |   |   |   |   |
| Loss Before  Income Taxes                   |       | (1,108              | )          | (731 | ) | (3,196 | ) | (319 | ) |
|                                        |       |                |       |   |   |   |   |   |   |
| Net Loss Applicable to Common Stockholders  |       | (1,143              | )          | (766 | ) | (3,233 | ) | (404 | ) |
|                                        |       |                |       |   |   |   |   |   |   |
| Loss Per Share:                             |       |                |       |   |   |   |   |   |   |
| Basic                                       |       | (0.25               | )          | (0.16 | ) | (0.69 | ) | (0.09 | ) |
| Diluted                                     |       | (0.25               | )          | (0.16 | ) | (0.69 | ) | (0.09 | ) |
|                                        |       |                |       |   |   |   |   |   |   |
| Fiscal Year  2003:                          |       |                |       |   |   |   |   |   |   |
| Net Sales                                   |       | 10,848              |       | 10,523 |   | 9,940 |   | 10,168 |   |
|                                        |       |                |       |   |   |   |   |   |   |
| Gross Profit                                |       | 2,858               |       | 2,143 |   | 1,862 |   | 1,556 |   |
|                                        |       |                |       |   |   |   |   |   |   |
| Loss Before Income Taxes                    |       | (605                | )          | (1,628 | ) | (1,823 | ) | (3,848 | ) |
|                                        |       |                |       |   |   |   |   |   |   |
| Net Loss  Applicable to Common Stockholders |       | (521                | )          | (1,495 | ) | (1,829 | ) | (3,847 | ) |
|                                        |       |                |       |   |   |   |   |   |   |
| Loss Per Share:                             |       |                |       |   |   |   |   |   |   |
| Basic                                       |       | (0.11               | )          | (0.33 | ) | (0.40 | ) | (0.83 | ) |
| Diluted                                     |       | (0.11               | )          | (0.33 | ) | (0.40 | ) | (0.83 | ) |
|                                             |            |                     |            |  |  |  |  |  |  |  |  |  |  |

 

46

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**ITEM 8(b). SUPPLEMENTARY FINANCIAL INFORMATION**

 

Not Applicable.

 

**ITEM 9.  CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

On February 5, 2004,the Board of Directors of the Corporation, upon the recommendation of its AuditCommittee, dismissed Deloitte Touche LLP as the Corporation’s independentaccountants and engaged Grant Thornton LLP to serve as the Corporation’sindependent accountants. Information regarding the change in the Corporation’sprincipal accountants was provided in the Corporation’s Current Report on Form 8-K,filed February 5, 2004. The letter from Deloitte & Touche LLPstating the firm’s conclusions regarding the information provided in theCurrent Report on Form 8-K was filed as an exhibit thereto.

 

**ITEM 9A. CONTROLS AND PROCEDURES.**

 

(a)     Evaluation of Disclosure Controls and Procedures

 

Management, with the participation of the principal executive officer andprincipal financial officer, has evaluated the effectiveness of the design andoperation of the disclosure controls and procedures (as defined in rules 13a-15(e) and15d – 15(e) under the Securities Exchange Act of 1934, as amended) as ofthe end of the period covered by this annual report.  Subject to the matters discussed below,management has concluded that the Company’s disclosure controls and proceduresare not effective to ensure that information required to be disclosed in thereports that the Company files under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the rules andforms of the SEC and that the disclosure controls are also not effective toensure that information required to be disclosed in the Company’s Exchange Actreports is accumulated and communicated to management, including the chiefexecutive officer and chief financial officer to allow timely decisionsregarding required disclosure.

 

A material weakness is a control deficiency, or combination of controldeficiencies, that results in more than a remote likelihood that a materialmisstatement of the annual or interim financial statements will not beprevented or detected.  As of May 30,2004, the Company did not maintain effective controls relating to transactionsat its China subsidiary related to inventory build-up and relief andreconciliation of intercompany accounts.

 

In connection with its audit of the Company’s consolidated financialstatements for the year ended May 30, 2004, Grant Thornton LLP (“GrantThornton”), the Company’s independent accountants, advised the Audit Committeeand management of internal control matters with respect to certain inventorytransactions that they considered to be a material weakness as that term isdefined under standards established by the Public Company Accounting OversightBoard (PCAOB).  The Company consideredthese matters in connection with the year-end closing process and thepreparation of the May 30, 2004 consolidated financial statements includedin this Form 10-K.  In response tothe observations made by Grant Thornton, the Company will implement certainenhancements to its internal controls and procedures, which it believes addressthe matters raised by Grant Thornton.

 

*China Subsidiary*

 

The Company did not maintain effective controls over the preparation ofand independent review of accounts at the China subsidiary.  The Company has concluded that these controldeficiencies constitute material weaknesses.

 

*Remediation of Material Weaknesses Related to ChinaSubsidiary*

 

Management has taken, or is in the process of taking the following stepswith respect to the control deficiencies at its China subsidiary:

 

47

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**•**                  The transfer of a seasoned accountant withexperience in Asian operations who will be headquartered in Minneapolis, andwill be the primary liaison with our China accounting staff and operations.

 

**•**                  Commencement of a training program to upgradethe skill sets of our China accounting staff.

 

**•**                  The hiring or an experienced China-basedcontroller to coordinate all financial reporting, monthly fiscal inventorycounts and verification and also be a part of the weekly conference calls withall of our operations to improve communications.

 

Management believes that implementation of these actions will remediatethe material weaknesses described above.

 

*Warehouse Control Deficiencies*

 

In a cost-cutting effort in the third quarter of fiscal 2004, the Companyclosed down a manufacturing facility in Minneapolis and terminated a thirdparty warehouse facility in Ireland.  Aspart of the shutdown of the manufacturing in December 2003, certainpersonnel were terminated prior to the disposition of inventory at thelocation.  The Company’s haste in costelimination resulted in having insufficient staffing to control the dispositionof the inventory.  This was found to be aweakness of $25,569 in the counting of inventory that was discovered during thecourse of the audit by the Company’s external auditors.  This should have been recorded in the thirdquarter.

 

In addition to the manufacturing shut-down, the Company also closed athird party warehouse facility to cut costs in January 2004.  This too resulted in the terminations ofpersonnel whose responsibilities including monitoring third party warehousingof customer stock inventory. Approximately $57,581 of inventory was not adequately tracked.  This error was also discovered in the courseof the audit, and should have been recorded in the third quarter.  Taken together the manufacturing and third partywarehouse control deficiencies resulted in an adjustment of $83,150, whichshould have been recorded in the third quarter. This $83,150 adjustment was extrapolated over the Company’s entireinventory, which resulted in a total adjustment of $279,987.  The Company believes that this adjustment isnot material.

 

In connection with its audit of the Company’s consolidated financialstatements for the year ended May 30, 2004, Grant Thornton LLP (“GrantThornton”), the Company’s independent registered public accounting firm,advised the Company’s audit committee and management that the adjustmentsdescribed with respect to inventory constituted a material weakness as thatterm is defined under standards established by the Public Company AccountingOversight Board (PCAOB).  In response tothe observations made by Grant Thornton, the Company will implement certainenhancements to its internal controls and procedures that the Company believeswill address the matters raised by Grant Thornton.

 

Specifically, if the Company determines to enter into any future thirdparty warehouse agreement, the Company will make sure that is has devotedadequate resources for necessary preventative and detective controls.  The third party warehouse will have a weeklyreconciliation between the inventory in the warehouse and the Company’sinventory system.  The head of sales andthe head of finance will review this reconciliation.  On a quarterly basis, the Company willphysically count the inventory.

 

Similarly, before the Company closes another manufacturing location, theCompany will make sure there are adequate resources in place for necessarypreventative and detective controls.  Ifthe Company closes a manufacturing location, it will have the necessaryresources to maintain a cycle count system until the disposition of theinventory is complete.  Also there willbe a physical inventory of the inventory before the end of each quarter untilthe disposition of the inventory is complete.

 

**ITEM 9B. OTHER INFORMATION**

 

Not Applicable.

 

48

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**PART III.**

 

**ITEM 10.  DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

Information called for by Item 405 under RegulationS-K with respect to the Company’s executive officers is contained under Item 1,Narrative Description of The Business — Executive Officers of theRegistrant.  The information required bythis item with respect to directors will be presented under the caption “Electionof Directors” in the Company’s definitive proxy statement for its AnnualMeeting held on September 28, 2004 and is expressly incorporated herein byreference.

 

Information called for by item 405 under RegulationS-K with respect to the information relating to compliance with 16(a) ofthe Exchange Act is presented under the caption “General—Compliance with Section 16(a) ofthe Securities Exchange Act 1934” in the Company’s definitive proxy statementfor its Annual Meeting held on September 28, 2004 and is expresslyincorporated herein by reference.

 

**ITEM 11.  EXECUTIVECOMPENSATION**

 

The information called for by Item 402 underRegulation S-K, to the extent applicable, will be set forth under the caption “ExecutiveCompensation and Other Information” under “General” in the Company’s definitiveproxy materials for its September 28, 2004 Annual Meeting, whichinformation is expressly incorporated herein by reference.

 

**ITEM 12.  SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

The information called for by Item 201(d) andItem 403 under Regulation S-K, to the extent applicable, is set forth under thecaption “Security Ownership of Principal Shareholders and Management” in theCompany’s definitive proxy statement for its September 28, 2004 AnnualMeeting, which information is expressly incorporated herein by reference.

 

**ITEM 13.  CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

Not Applicable.

 

**ITEM 14.  PRINCIPALACCOUNTANT FEES AND SERVICES**

 

The information called for by Item 9(E) of schedule 14Aunder the Security Exchange Act of 1934, to the extent applicable, is set forthunder the caption “The Company’s Auditors” in the Company’s definitive proxystatement for its September 28, 2004 Annual Meeting, which information isexpressly incorporated herein by reference.

 

49

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**PART IV.**

 

**ITEM 15.  EXHIBITS,FINANCIAL STATEMENT, SCHEDULES AND REPORTS ON 8-K**

 

**(1)  The following financial statements areincluded in Part II, Item 8:**

 
| Report of  Independent Registered Public Accounting Firm – Grant Thornton LLP                                                            |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                          |   |
| Report of  Independent Registered Public Accounting Firm – Deloitte Anjin LLC                                                            |   |
|                                                                                                                                          |   |
| Report of  Independent Registered Public Accounting Firm – Deloitte & Touche  LLP                                               |   |
|                                                                                                                                          |   |
| Consolidated Financial Statements                                                                                                             |   |
|                                                                                                                                          |   |
| — Balance Sheets, May 30,  2004 and June 1, 2003.                                                                              |   |
|                                                                                                                                          |   |
| —  Consolidated Statements of Operations for the Years Ended May 30, 2004, June 1,  2003 and June 2, 2002.                |   |
|                                                                                                                                          |   |
| —  Consolidated Statements of Stockholders’ Equity for the Years Ended May 30,  2004, June 1, 2003 and June 2, 2002. |   |
|                                                                                                                                          |   |
| —  Consolidated Statements of Cash Flows for the Years Ended May 30, 2004, June 1,  2003 and June 2, 2002.                |   |
|                                                                                                                                          |   |
| —  Notes to Consolidated Financial Statements                                                                                            |   |

 

**(2)****               Thefollowing financial statement schedule for the years ended May 30,2004, June 1, 2003 and June 2, 2002 is submitted herein following thesignature page of this report.**

 
| — Schedule II -  Valuation and Qualifying Accounts |   |
|--------------------------------------------------------------|--------|

 

All otherSchedules are omitted because they are not applicable or the requiredinformation is shown in the financial statements or notes thereto.

 

**(3)****                                 Exhibits**

 
| (a)    |   | The Exhibits required pursuant to Item 601 of  Regulation S-K to be filed with this report or incorporated by reference are  listed in the Exhibit Index, which follows the Financial Statement  Schedules.   |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                               |
| (b)    |   | Reports on Form 8-K during three months ended May 30,  2004 – The Company filed Form 8-K on March 23, 2004 reporting under  Item 12 results for the quarter ended February 29, 2004. |

 

50

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, Ault Incorporated has duly causedAmendment No. 1 to be signed on its behalf by the undersigned, thereuntoduly authorized.

 

**AULT INCORPORATED**

 

 

Frederick M. Green

 

September 27, 2005

Frederick M. Green

President, Chief Executive Officer and Director

 

51

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*******************************************************************

 

 

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D. C.   20549

 

**FORM 10-K/A**

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

OF

 

**AULT INCORPORATED**

** **

**FOR**

 

**YEAR ENDED MAY 30, 2004**

 

 

*******************************************************************

 

 

**FINANCIAL STATEMENT SCHEDULES**

 

*******************************************************************

 

52

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##### **SCHEDULE II**

**AULTINCORPORATED AND SUBSIDIARIES**

**VALUATIONAND QUALIFYING ACCOUNTS**

 

**YearsEnded May 30, 2004, June 1, 2003, and June 2, 2002**

 
| ** **                      | ** ** | **Balance at** | ** ** | **Charged to** | ** ** | ** **     | ** ** | **Balance at** | ** ** |
|---------------------------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|
| ** **                      | ** ** | **Beginning**  | ** ** | **Costs and**  | ** ** | ** **     | ** ** | **End of**     | ** ** |
| ** **                      | ** ** | **of Period**  | ** ** | **Expenses**   | ** ** | **Deductions** | ** ** | **Period**     | ** ** |
| Year ended May 30,  2004:  |       |           |       |           |       |           |       |           |       |
| Allowance for doubtful accounts |       | $              | 500,000    |           | $          | 17,000         |       | $              | 41,000     | (a) | $ | 476,000 |   |
| Reserve for warranties          |       | 134,000        |       | 14,000         |       | 23,000         |       | 125,000        |       |
|                            |       |           |       |           |       |           |       |           |       |
| Year ended June 1,  2003:  |       |           |       |           |       |           |       |           |       |
| Allowance for doubtful accounts |       | 320,000        |       | 230,000        |       | 50,000         | (a)        | 500,000        |       |
| Reserve for warranties          |       | 113,000        |       | 193,000        |       | 172,000        |       | 134,000        |       |
|                            |       |           |       |           |       |           |       |           |       |
| Year ended June 2,  2002:  |       |           |       |           |       |           |       |           |       |
| Allowance for doubtful accounts |       | 676,000        |       | 1,416,000      |       | 1,772,000      | (a)        | 320,000        |       |
| Reserve for warranties          |       | 133,000        |       | 133,000        |       | 153,000        |       | 113,000        |       |
|                                 |            |                |            |                |            |                |            |                |            |  |  |  |  |

 

----

(a) Representscharge-off of accounts receivable, net of recoveries.

 

53

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*******************************************************************

 

 

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D. C.   20549

 

**FORM 10-K/A**

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

 

OF THE SECURITIES EXCHANGE ACT OF 1934

 

OF

 

**AULT INCORPORATED**

 

**FOR**

 

**YEAR ENDED MAY 30, 2004**

 

 

*******************************************************************

 

 

**EXHIBITS**

 

*******************************************************************

 

54

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**AULT INCORPORATED**

 

**EXHIBIT INDEX TO**

**FORM 10-K/A FOR THE YEARENDED**

**May 30, 2004**

 

Required Registration S-K

Exhibit Items

 
| **SK Item** | ** ** | **Title of Documents**                                                                                                                                             | ** ** | **Location**                                                                                                     |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                               |       |                                                                                                             |
| 3(a)        |       | Restated  Articles of Incorporation, as amended                                                                                                                    |       | Filed as Exhibit 3(a) to  Form 10-K for fiscal 1988 and incorporated herein by reference          |
|        |       |                                                                                                                                                               |       |                                                                                                             |
| 3(b)        |       | Bylaws, as  amended                                                                                                                                                |       | Filed as Exhibit 3(b) to  Registration Statement No. 2-85224 and incorporated herein by reference |
|        |       |                                                                                                                                                               |       |                                                                                                             |
| 3(c)        |       | Amendment to  Articles of Incorporation                                                                                                                            |       | Filed as Exhibit 3(c) to  Form 10-K for fiscal 1999 and incorporated herein by reference          |
|        |       |                                                                                                                                                               |       |                                                                                                             |
| 4.1         |       | Rights Agreement                                                                                                                                                   |       | Filed  electronically on Form 8-K for March 1996 and incorporated herein  by reference                 |
|        |       |                                                                                                                                                               |       |                                                                                                             |
| 10.1        |       | Management  Incentive Compensation Plan                                                                                                                            |       | Filed as Exhibit 10(b) to  Registration Statement 2-85224 and incorporated herein by reference         |
|        |       |                                                                                                                                                               |       |                                                                                                             |
| 10.2        |       | 1986 Employee  Stock Option Plan                                                                                                                                   |       | Filed as Exhibit 10(c) to  Form 10-K for fiscal 1987 and incorporated herein by reference         |
|        |       |                                                                                                                                                               |       |                                                                                                             |
| 10.3        |       | Employee Stock  Purchase Plan                                                                                                                                      |       | Filed  electronically. Commission File #333-4609 and herein incorporated by  reference                           |
|        |       |                                                                                                                                                               |       |                                                                                                             |
| 10.4        |       | 1986 Employee  Stock Option Plan, Amended                                                                                                                          |       | Filed electronically.  Commission File #333-4609 and herein incorporated by reference                            |
|        |       |                                                                                                                                                               |       |                                                                                                             |
| 10.5        |       | 1996 Employee  Stock Option Plan                                                                                                                                   |       | Filed  electronically. Commission File #333-4609 and herein incorporated by  reference                           |
|        |       |                                                                                                                                                               |       |                                                                                                             |
| 10.6        |       | 1998 Senior  Management Change in Control Severance Plan                                                                                                           |       | Filed as Exhibit 10.6  herewith                                                                             |
|        |       |                                                                                                                                                               |       |                                                                                                             |
| 21          |       | Subsidiary of  Registrant                                                                                                                                          |       | Filed as Exhibit 21  to Form 10-K for fiscal 1997 and incorporated herein by reference                 |
|        |       |                                                                                                                                                               |       |                                                                                                             |
| 23.1        |       | Consent of  Independent Auditors                                                                                                                                   |       | Filed herewith  at page 71                                                                                  |
|        |       |                                                                                                                                                               |       |                                                                                                             |
| 23.2        |       | Consent of  Independent Auditors                                                                                                                                   |       | Filed herewith  at page 72                                                                                  |
|        |       |                                                                                                                                                               |       |                                                                                                             |
| 23.3        |       | Consent of  Independent Auditors                                                                                                                                   |       | Filed herewith  at page 73                                                                                  |
|        |       |                                                                                                                                                               |       |                                                                                                             |
| 31.1        |       | Certification of  the Chief Executive Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange  Act). |       | Filed herewith  at page 74                                                                                  |
|        |       |                                                                                                                                                               |       |                                                                                                             |
| 31.2        |       | Certification of  the Chief Financial Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange  Act). |       | Filed herewith  at page 75                                                                                  |
|        |       |                                                                                                                                                               |       |                                                                                                             |
| 32          |       | Certifications  pursuant Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.  §1350).                                                               |       | Filed herewith  at page 76                                                                                  |

 

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Pursuant to provisions of Item 601(b)(A)(iii)(a) ofRegulation S-K, copies of instruments defining the rights of holders oflong-term debt of the Company are not being filed and in lieu thereof, Companyagrees to furnish copies thereof to the Securities and Exchange Commission uponrequest.

 

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