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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1996
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number 0-21872
ALDILA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3645590
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
15822 BERNARDO CENTER DRIVE, SAN DIEGO, CALIFORNIA 92127
(Address of principal executive offices)
(619) 592-0404
(Registrant's Telephone No.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
As of August 8, 1996 there were 16,457,952 shares of the Registrant's common
stock, par value $0.01 per share, outstanding.
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ALDILA, INC.
TABLE OF CONTENTS
FORM 10-Q FOR THE QUARTERLY PERIOD
ENDED JUNE 30, 1996
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at
June 30, 1996 and December 31, 1995 3
Consolidated Statements of Income for the
three months ended June 30, 1996
and 1995, and the six months ended
June 30, 1996 and 1995 4
Consolidated Statements of Cash Flows for
the six months ended June 30, 1996
and 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibit Index 18
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PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALDILA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - UNAUDITED
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
--------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 19,018 $ 19,345
Accounts receivable 4,560 3,168
Income taxes receivable 88
Inventories 6,159 6,074
Deferred tax assets 2,808 2,808
Prepaid expenses and other current assets 502 742
-------- --------
Total current assets 33,047 32,225
PROPERTY AND EQUIPMENT 14,556 13,545
TRADEMARKS AND PATENTS 15,359 15,579
GOODWILL 49,767 50,319
DEFERRED FINANCING FEES 166 185
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TOTAL ASSETS $112,895 $111,853
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-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $2,702 $4,230
Accrued expenses 2,748 3,225
Income taxes payable 1,059
-------- --------
Total current liabilities 6,509 7,455
LONG-TERM LIABILITIES:
Long-term debt 20,000 20,000
Deferred tax liabilities 7,912 8,040
Deferred rent liabilities 820 877
-------- --------
Total liabilities 35,241 36,372
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized
5,000,000 shares; no shares issued
Common stock, $.01 par value; authorized
30,000,000 shares; issued and outstanding
16,573,952 shares 166 166
Additional paid-in capital 47,863 47,863
Retained earnings 29,625 27,452
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Total stockholders' equity 77,654 75,481
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $112,895 $111,853
-------- --------
-------- --------
</TABLE>
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ALDILA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
June 30, June 30,
----------------------- -----------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $15,259 $17,498 $27,178 $36,314
COST OF SALES 9,776 9,685 17,584 20,101
------- ------- ------- -------
Gross profit 5,483 7,813 9,594 16,213
------- ------- ------- -------
SELLING, GENERAL AND ADMINISTRATIVE 2,536 3,008 4,702 6,361
AMORTIZATION OF GOODWILL 353 350 702 699
------- ------- ------- -------
Operating income 2,594 4,455 4,190 9,153
------- ------- ------- -------
OTHER:
Interest expense 316 329 632 658
Other (income), net (152) (229) (322) (403)
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 2,430 4,355 3,880 8,898
PROVISION FOR INCOME TAXES 1,069 1,873 1,707 3,826
------- ------- ------- -------
NET INCOME $ 1,361 $ 2,482 $ 2,173 $ 5,072
------- ------- ------- -------
------- ------- ------- -------
EARNINGS PER COMMON SHARE:
Net income $0.08 $0.15 $0.13 $0.30
------- ------- ------- -------
------- ------- ------- -------
Weighted average shares outstanding 16,596 16,804 16,600 16,790
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
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ALDILA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1996 1995
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,173 $ 5,072
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,254 1,957
Changes in assets and liabilities:
Accounts receivable (1,392) (31)
Inventories (85) 2,185
Prepaid expenses and other current assets 240 (14)
Accounts payable (1,528) (2,657)
Accrued expenses (477) (1,291)
Income taxes payable/receivable 1,147 909
Deferred tax liabilities (128) (110)
Deferred rent liabilities (57) (26)
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Net cash provided by operating activities 2,147 5,994
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,357) (938)
Other (117) 0
------- -------
Net cash used for investing activities (2,474) (938)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 217
Other 157
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Net cash provided by financing activities 374
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (327) 5,430
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 19,345 14,087
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $19,018 $19,517
------- -------
------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 613 $ 614
Income taxes $ 1,135 $ 2,869
</TABLE>
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ALDILA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. BASIS OF PRESENTATION
The consolidated balance sheet as of June 30, 1996 and the consolidated
statements of income and of cash flows for the three month and six month periods
ended June 30, 1996 and 1995, are unaudited and reflect all adjustments of a
normal recurring nature which are, in the opinion of management, necessary for a
fair presentation of the financial position and results of operations for the
interim periods. The consolidated balance sheet as of December 31, 1995 was
derived from the Company's audited financial statements. Operating results for
the three and six month periods ended June 30, 1996 are not necessarily
indicative of results to be expected for the fiscal year ending December 31,
1996. These consolidated financial statements should be read in conjunction
with the Company's December 31, 1995 consolidated financial statements and notes
thereto.
2. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---- ----
<S> <C> <C>
Raw materials $2,258 $3,828
Work in process 2,245 1,165
Finished goods 1,656 1,081
------- -------
Inventories $6,159 $6,074
------- -------
------- -------
</TABLE>
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW OF RECENT AND ANTICIPATED FUTURE TRENDS
Aldila, Inc. (the "Company") is principally in the business of designing,
manufacturing and marketing graphite golf club shafts, with approximately 85% of
its net sales resulting from sales to golf club manufacturers for inclusion in
their clubs. As a result, the Company's operating results are substantially
dependent not only on demand by its customers for the Company's shafts, but also
on demand by consumers for clubs including graphite shafts such as the
Company's.
Historically, graphite shafts have principally been offered by
manufacturers of higher priced, premium golf clubs, and the Company's sales have
been predominantly of premium graphite shafts. In addition, until recently, the
United States market for graphite shafts was dominated by a relatively small
number of United States-based shaft manufacturers. Both of these aspects of the
graphite shaft market have been changing. As a high percentage of premium clubs
are already sold with graphite shafts, as compared to a smaller percentage of
value priced clubs, the Company anticipates that growth in graphite shaft usage
in the future will be greater in the value priced segment of the market than in
the premium segment, depending on the availability in the marketplace of
graphite shafts at lower price points. Management of the Company expects sales
of shafts for the value priced club market to increase significantly over the
next several years, although management also anticipates that sales of premium
shafts will continue to represent a majority of the Company's sales measured in
dollars for the foreseeable future. In addition, the Company's net sales to its
premium shaft customers have been impacted by increasing competition from other
graphite shaft suppliers, which has made it more difficult to retain existing
customers and attract new customers. The competition has placed increasing
pressure on prices for the Company's premium shafts. While the Company does not
anticipate any lessening of competitive forces in the near future, the Company
believes that it remains the largest graphite shaft manufacturer for the United
States market.
These two overall trends in the graphite shaft marketplace have had the
effect, and are expected by management to continue to have
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the effect, of decreasing the average selling price of the Company's shafts.
The Company's gross profit margins are heavily dependent on the average
selling price for its shafts, and the recent decreases in average selling prices
have had the effect of decreasing the Company's overall gross profit margins.
The most significant other factor affecting gross profit margins is the price of
carbon fiber, which is the most substantial component of total raw material
costs. For several years, prices for carbon fiber, as well as for the graphite
prepreg that is used in most graphite golf club shafts and that is manufactured
out of carbon fiber, had been relatively low due to excess capacity in the
carbon fiber industry. As a result of elimination of that excess capacity
coupled with increasing demand for carbon fiber, including demand resulting from
new applications, the Company has experienced an increase in carbon fiber prices
in 1996, and expects further increases into 1997. To date, these price
increases have not been reflected in a decrease in gross profit margins as
compared to prior comparable periods, as they have been mitigated by the
beneficial effect of the Company's conversion from purchasing its graphite
prepreg from third parties to manufacturing graphite prepreg internally, which
conversion was underway during 1995 and substantially completed by the beginning
of 1996.
The Company has contracts providing for most of its currently anticipated
needs for carbon fiber through the end of 1997. However, given the current lack
of excess capacity in the industry overall, the Company is engaging in
discussions with its principal supplier, and monitoring conditions in the market
generally, to assure that it will have an adequate supply of carbon fiber for
this period. If the Company's demand for carbon fiber during this period is not
satisfied through its existing contracts because the supplier under these
contracts fails to satisfy its contractual requirements, then a continuation of
the current tight supply of carbon fiber could make it difficult for the Company
to satisfy all of its customers' orders unless an appropriate substitute for the
current type of carbon fiber can be found. In such event, the Company's net
sales and profits would be adversely affected. Even if it is able to acquire
sufficient additional carbon fiber outside the current contracts, it would
likely be at a higher price than provided under its current contracts, with a
resulting adverse impact on margins.
Although continuing decreases in average selling prices or continuing
increases in carbon fiber prices would lead to further decreases in
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gross profit margins, this result should be mitigated to some extent by the on-
going efforts of the Company to control costs, including increased automation
and increasing the percentage of shafts being manufactured in countries with
lower labor and overhead costs, as well as initiatives being undertaken by the
Company to reduce the risks associated with reduced capacity in the carbon fiber
industry, including the exploration of the possibility of manufacturing all or a
significant portion of the Company's carbon fiber needs internally and a
broadening of the types of carbon fiber that could be used to manufacture the
Company's shafts.
In recent years, the Company's results of operations have been materially
affected on several occasions by dramatic year-to-year changes in its sales to
an individual golf club manufacturer customer. Such changes can result either
from decisions by the customer to increase or decrease shaft purchases from an
alternative supplier or from the traditional volatility in consumer demand for
specific clubs. The Company believes that this volatility is likely to continue
in the future, particularly as club manufacturers seek to gain competitive
advantages through technological innovation in club design. The Company's
results will benefit whenever it has an opportunity to supply the latest "hot"
club and will be adversely affected whenever sales of clubs containing Aldila
shafts drop dramatically. The Company also believes that while it will often
not be possible to predict with any certainty such shifts in advance, the
Company's broad range of club manufacturer customers should reduce to some
extent the impact on the Company's financial results.
In recent years, the Company has benefited from strong sales of its shafts
to Callaway Golf Company ("Callaway") resulting from the popularity of
Callaway's clubs. During 1995, sales to Callaway were $28.0 million (or 50% of
the Company's net sales). Sales to Callaway were substantially lower in 1995
than in 1994, when they totaled $52.4 million (or 66% of the Company's net
sales). The Company's sales to Callaway were impacted beginning in the early
part of 1995 by Callaway's decision to increase its graphite shaft purchases
from other suppliers and by actions taken by Callaway to reduce finished goods
and component inventory levels. Beginning in the second half of 1995 and
continuing into 1996 the Company's sales to Callaway have also been impacted by
decreased prices that the Company has been able to charge Callaway as well as a
change in product mix to new lower priced shaft designs. Even following the
1995 decrease, the Company's results of operations continue to be dependent on
sales to Callaway (sales to Callaway were $13.0 million or 48% of net sales
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in the first six months of 1996), and, as a result, a further significant
decrease in sales to Callaway could have an adverse impact on the Company's
future net sales and earnings. Based in part, however, on Callaway's statements
to the Company that it will continue to be Callaway's primary supplier of
graphite golf club shafts, the Company expects that Callaway will continue to be
the Company's largest customer for the foreseeable future.
Another factor that could negatively impact the Company's future sales to
golf club manufacturers would be the decision by one of its customers to
manufacture all or a portion of its graphite shaft requirements. The Company is
aware, for example, that Callaway has in the past considered manufacturing
graphite shafts for its own use. Should Callaway or any other significant
customer of the Company decide in the future to meet any of its shaft
requirements internally, it could have an adverse effect on the Company.
RESULTS OF OPERATIONS
SECOND QUARTER 1996 COMPARED TO SECOND QUARTER 1995
NET SALES. Net sales decreased $2.2 million, or 12.8%, to $15.3 million
for the second quarter ended June 30, 1996 (the "1996 Period") from $17.5
million for the second quarter ended June 30, 1995 (the "1995 Period"). The
decrease in net sales was attributable to a significant decrease in the average
selling price of shafts sold due to a change in product mix. The average
selling price of shafts decreased 20% while total unit sales increased 10% in
the 1996 Period as compared to the 1995 Period.
Sales to Callaway were $7.9 million in the 1996 Period (or 52% of net
sales) compared to $7.8 million (or 44% of net sales) in the 1995 Period. See -
"Overview of Recent and Anticipated Future Trends."
GROSS PROFIT. Gross profit decreased $2.3 million, or 29.8%, to $5.5
million for the 1996 Period from $7.8 million for the 1995 Period partially as a
result of the decrease in the Company's net sales. The Company's gross profit
margin decreased to 35.9% in the 1996 Period compared to 44.7% in the 1995
Period primarily as a result of lower average selling prices for shafts sold.
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OPERATING INCOME. Operating income decreased $1.9 million, or 42%, to $2.6
million for the 1996 Period from $4.5 million for the 1995 Period and decreased
as a percentage of net sales to 17.0% in the 1996 Period compared to 25.5% in
the 1995 Period. Selling, general and administrative expense decreased as a
percentage of net sales to 16.6% for the 1996 Period as compared to 17.2% for
the 1995 Period as a result of a decrease in advertising and promotional
expenditures as a percentage of net sales in the 1996 Period.
INCOME TAXES. The Company's effective tax rate for the 1996 Period was
44.0% as compared to 43.0% for the 1995 Period. The increase resulted
principally from the decrease in profit before tax with constant non-deductible
amortization in each period.
SIX MONTH PERIOD IN 1996 COMPARED TO SIX MONTH PERIOD IN 1995
NET SALES. Net sales decreased $9.1 million, or 25.2%, to $27.2 million
for the six month period ended June 30, 1996 from $36.3 million for the six
month period ended June 30, 1995. The decrease in net sales was primarily
attributable to a significant decrease in the average selling price of shafts
sold due to a change in product mix. The average selling price of shafts
decreased 22% while total unit sales decreased 4% for the six month period ended
June 30, 1996 versus the comparable 1995 period.
Sales to Callaway were $13.0 million for the first six months of 1996 (or
48% of net sales) compared to $17.3 million (or 48% of net sales) for the first
six months of 1995. See - "Overview of Recent and Anticipated Future Trends."
GROSS PROFIT. Gross profit decreased $6.6 million, or 40.8%, to $9.6
million for the six month period ended June 30, 1996 from $16.2 million for the
six month period ended June 30, 1995 partially as a result of the decrease in
the Company's net sales. The Company's gross profit margin decreased to 35.3%
for the six month period ended June 30, 1996 from 44.6% for the six month period
ended June 30, 1995 primarily as a result of lower average selling prices for
shafts sold.
OPERATING INCOME. Operating income decreased $5.0 million, or 54%, to $4.2
million for the six month period ended June 30, 1996 from $9.2 million for the
six month period ended June 30, 1995 and decreased as a percentage of net sales
to 15.4% from 25.2%,
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respectively. Selling, general and administrative expense remained relatively
constant as a percentage of net sales at 17.3% for the six month period ended
June 30, 1996 as compared to 17.5% for the six month period ended June 30, 1995.
INCOME TAXES. The Company's effective tax rate for the six months ended
June 30, 1996 was 44.0% as compared to 43.0% for the six months ended June 30,
1995. The increase resulted principally from the decrease in profit before tax
with constant non-deductible amortization in each period.
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LIQUIDITY AND CAPITAL RESOURCES
Since November 1993, the only indebtedness of the Company has been $20.0
million in 6.13% senior notes due 2001. The Company has not used borrowings to
finance its operations or provide working capital for over five years and does
not anticipate doing so for the foreseeable future. The Company could require
additional debt financing, however, if it were to engage in a material
acquisition in the future. The Company's belief that it will not otherwise need
to finance its operations with borrowings is based on assumptions that it will
continue to be profitable, with positive cash provided by operating activities,
and that changes in the pace of technological development in shaft design and
manufacturing processes will not result in substantially higher levels of
spending on capital expenditures and research and development than the Company
has recently incurred.
Cash (including cash equivalents) provided from operating activities for
the six month period in 1996 was $2.1 million compared to $6.0 million provided
from operating activities for the six month period in 1995. This decrease
resulted principally from the decrease in net income for the six month period
ended June 30, 1996 compared to the six month period ended June 30, 1995. The
Company used $2.4 million for capital expenditures during the six month period
ended June 30, 1996. The Company currently anticipates committing to capital
expenditures of approximately $4.5 million in 1996. The Company may from time
to time consider the acquisition of businesses complementary to the Company's
business. The Company anticipates that its cash requirements for maintaining
its current level of operations and those planned for the foreseeable future can
be satisfied by cash provided through operating activities.
SEASONALITY
Because the Company's customers have historically built inventory in
anticipation of purchases by golfers in the spring and summer, the principal
selling season for golf equipment, the Company's operating results have been
affected by seasonal demand for golf clubs, which has generally resulted in
higher sales in the second and third quarter. The success of certain customers'
products, in particular, Callaway, patterns of product introduction, and
customer acceptance thereof, coupled with a generally increasing overall demand
for graphite shafts, has tended to mitigate the impact of seasonality in recent
years.
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"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
With the exception of historical information (information relating to the
Company's financial condition and results of operations at historical dates or
for historical periods), the matters discussed in this Management's Discussion
and Analysis of Financial Condition and Results of Operations are forward-
looking statements that necessarily are based on certain assumptions and are
subject to certain risks and uncertainties. These forward-looking statements
are based on management's expectations as of the date hereof, and the Company
does not undertake any responsibility to update any of these statements in the
future. Actual future performance and results could differ from that contained
in or suggested by these forward-looking statements as a result of the factors
set forth in this Management's Discussion and Analysis of Financial Condition
and Results of Operations and elsewhere in the December 31, 1995 Annual Report
and related filings with the Securities and Exchange Commission.
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PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable.
Item 2. CHANGES IN SECURITIES
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on May 15,
1996. At the Annual Meeting, three items were submitted to a
vote of the stockholders of the Company and were approved:
1) The nine current directors of the company (listed below) were
nominated and elected to serve until the next annual meeting of
stockholders. Votes cast for each director as well as votes
withheld are as follows:
<TABLE>
<CAPTION>
WITHHELD
NAME FOR AUTHORITY
---- --- ---------
<S> <C> <C>
Edmond S. Abrain 15,055,400 215,056
Gary T. Barbera 15,061,570 208,886
Peter E. Bennett 15,065,170 205,286
Marvin M. Giles 15,067,300 203,156
Vincent T. Gorguze 15,046,320 224,136
John J. Henry 15,052,970 217,486
Donald C. Klosterman 14,791,053 479,403
Wm. Brian Little 15,064,470 205,986
Chapin Nolen 15,062,270 208,186
</TABLE>
2) The stockholders approved an amendment to the 1994 Stock
Incentive Plan. The 1994 Stock Incentive Plan provides for the
granting of options, stock appreciation rights, restricted stock
and performance shares to salaried employees and directors of the
Company and its
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subsidiaries and to consultants and advisors. 13,084,061 votes
were cast for approval of the amendments; 1,101,480 votes were
cast against approval of the amendments; there were 666,723
abstentions and 418,192 broker non-votes.
3) The stockholders also ratified the appointment of Deloitte &
Touche LLP as the Company's independent accountants for the
fiscal year ending December 31, 1996. 15,088,720 votes were cast
for ratification of Deloitte & Touche LLP; 126,080 votes were
cast against; and there were 55,086 abstentions and 570 broker
non-votes.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No. 10.1:
Services Agreement dated as of January 1, 1996 between Aldila,
Inc. and Vincent T. Gorguze
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Registrant during the
quarter ended June 30, 1996.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: ALDILA, INC.
August 8, 1996 /s/ Robert J. Cierzan
--------------------------------------
Robert J. Cierzan
Vice President, Finance
Signing both in his capacity as
Vice President and as Chief
Accounting Officer of the Registrant
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EXHIBIT INDEX
Exhibit No.
- - -----------
10.1 Services Agreement dated as of January 1, 1996
between Aldila, Inc. and Vincent T. Gorguze
27 Financial Data Schedule
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SERVICES AGREEMENT
THIS SERVICES AGREEMENT is made and entered into as of this 1st day of
January, 1996, by and between ALDILA, INC., a Delaware corporation (the
"Company"), and Vincent T. Gorguze ("Gorguze").
W I T N E S S E T H:
WHEREAS, through December 31, 1995, Gorguze was employed as an executive
officer of the Company, most recently as Chairman of the Board; and
WHEREAS, Gorguze continues to serve as a member of the Board of Directors
of the Company (the "Board of Directors"); and
WHEREAS, the Board of Directors has appointed Gorguze Chairman Emeritus;
and
WHEREAS, the Company desires to retain the services of Gorguze in addition
to his services as a member of the Board of Directors and Gorguze desires to
provide services to the Company during the Term (as defined below), upon the
terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants contained herein, the parties hereto agree as follows:
1. TERM. The term of this Agreement shall commence as of the date hereof
and shall continue in full force and effect until the second anniversary of the
date hereof (the "Expiration Date"), unless earlier terminated as provided
herein or extended as provided herein (the "Term").
2. DUTIES.
(a) Except as otherwise provided in this Section 2, during the Term,
Gorguze shall serve as a member of the Board of Directors and as Chairman
Emeritus of the Company. Gorguze's duties, services and responsibilities, in
addition to those as a member of the Board of Directors, will be determined by
the Board of Directors and will be performed under the overall supervision of
and consistent with the policies of the Board of Directors. Gorguze's duties,
services and responsibilities shall reflect his status as a former senior
executive officer of the Company and shall not interfere unreasonably with his
other business activities, as permitted in Section 2(b) below.
(b) During the Term, Gorguze shall devote such time, attention,
skill, energy and efforts as may be necessary for the faithful performance of
his duties hereunder. The foregoing shall not be construed to prohibit Gorguze
from serving as full- or part-time employee,
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director, trustee or member of or participant in any organization or business so
long as such service does not constitute a "Competitive Activity" (as such term
is defined in Section 6(c) below). Not including service on the Board of
Directors, in no event shall Gorguze be required to provide more than 50 hours
of service (including travel time required in connection with the provision of
any such services under this Agreement) during any month of the Term.
(c) During the Term and subject to the provisions of Section 5(d)
hereof, Gorguze shall be entitled to arrange his schedule for the provision of
services hereunder, provided that such schedule allows Gorguze to be reasonably
available to provide the services required under this Agreement. Gorguze shall
not be required to spend more than eight full continuous days (including travel
time) in rendering any services required hereunder, except to the extent that
days in excess of eight are spent in service on the Board of Directors.
3. COMPENSATION.
(a) In consideration of the performance by Gorguze of Gorguze's
obligations hereunder during the Term (including his services as a member of the
Board of Directors or any committee thereof), the Company will during the Term
pay Gorguze a salary (the "Salary") at an annual rate of $150,000. Such Salary
shall be payable in accordance with the normal payroll practices of the Company
then in effect. The Salary, and any and all other forms of compensation paid to
Gorguze hereunder during the Term, shall be subject to all applicable taxes
required to be withheld by the Company pursuant to federal, state or local law.
Gorguze shall be solely responsible for income taxes imposed on Gorguze by
reasons of any cash or non-cash compensation and benefits provided hereunder.
(b) During the Term, Gorguze shall be reimbursed for reasonable
travel and other business-related expenses incurred in the furtherance of the
business of the Company, including expenses incurred by Gorguze in traveling at
the request of the Company between any residence of Gorguze and the Company's
headquarters facility, which shall be maintained in San Diego County,
California, but not including any other travel between any such residence and
the San Diego County, California, even if he performs services hereunder while
in San Diego County, California. Reimbursement of approved expenses shall be
made by the Company upon submission by Gorguze of a statement itemizing the
expenses incurred or such other verification as the Company may reasonably
request.
(c) If (i) Gorguze is not able to meet the schedule arranged
pursuant to Section 2(c) above for 135 business days in any twelve-month period
during the term of this Agreement by reason of illness or incapacity (whether
physical or otherwise) or (ii) the Company reasonably determines that Gorguze is
unable to perform his duties, services and responsibilities pursuant to
Section 2 hereof by reason of illness or incapacity (whether physical or
otherwise) for a total of 135 business days in any twelve-month period during
the term of this Agreement ("Disability"), the Company shall not be obligated to
pay Gorguze any compensation for any period of absence in excess of such 135
business days. Any payments of Salary accrued by Gorguze for business days on
which Gorguze was not able to meet his schedule or unable to
2
<PAGE>
perform his duties hereunder by reason of illness or incapacity (whether
physical or otherwise) shall be reduced by any amount Gorguze is entitled to
receive as a result of such disability under any plan provided through the
Company or under state or federal law.
(d) Except as otherwise provided herein, Gorguze shall not be
entitled to any benefits ordinarily accorded to employees, officers or directors
of the Company; PROVIDED, HOWEVER, that the Company agrees at its expense (i) to
grant annually to Gorguze options to purchase at least such of the shares of the
Company's common stock as are granted to the Company's "non-employee" directors
(ii) to provide Gorguze an automobile allowance and country club membership
comparable to that provided the Company's chief executive officer, and (iii) to
the extent permitted under the terms of the Company's group health and long-term
disability insurance plans covering its chief executive officer, to provide
Gorguze coverage under such plans.
4. RELATIONSHIP OF PARTIES. So long as Gorguze is providing services
under this Agreement, Gorguze shall not be deemed to be a "non-employee"
director of the Company.
5. TERMINATION.
(a) Except as otherwise provided in this Agreement herein, this
Agreement shall terminate upon the earliest to occur of the dates specified
below:
(i) the close of business on the Expiration Date;
(ii) the close of business on the date of Gorguze's death;
(iii) the close of business on the day on which the Company
delivers to Gorguze a written notice of the Company' election to terminate this
Agreement for "Cause" (as hereinafter defined);
(iv) the close of business on the day on which the Company shall
have delivered to Gorguze a written notice of the Company's election to
terminate this Agreement because of Disability;
(v) the close of business on the day on which Gorguze delivers
to the Company a written notice of Gorguze's election to terminate this
Agreement; and
(vi) the close of business on an early termination date mutually
agreed to in writing by the Company and Gorguze.
(b) Any purported termination by the Company or by Gorguze pursuant
to Section 5(a) hereof shall be communicated by written "Notice of Termination"
to the other. For purposes of this Agreement, a "Notice of Termination" shall
mean a written notice which indicates the specific termination provision in this
Agreement relied upon and which sets forth in
3
<PAGE>
reasonable detail the facts and circumstances claimed to provide a basis for
termination of this Agreement under the provision so indicated. For purposes of
this Agreement, no such purported termination shall be effective without
delivery of such Notice of Termination.
(c) For purposes of this Agreement, termination for "Cause" shall
mean termination based on (i) the intentional and continued failure of Gorguze
to substantially perform his duties pursuant to this Agreement after a written
demand by the Company identifying the manner in which it believes Gorguze has
not substantially performed his duties and providing a reasonable opportunity
for correction of such failure, (ii) a material breach of this Agreement by
Gorguze after a written demand by the Company identifying the breach and
providing a reasonable opportunity for correction thereof, (iii) conviction in a
criminal proceeding against Gorguze or commission of an act involving a felony
or moral turpitude, (iv) the commission of common law fraud, embezzlement, theft
or unethical business conduct against the Company or conduct involving a third
party which significantly impairs the reputation of, or harms, the Company, its
subsidiaries or affiliates, (v) the commission of intentional wrongful damage to
material property of the Company, (vi) a material breach of Gorguze's fiduciary
obligation to the Company or its subsidiaries, or (vii) a material breach of any
material policy or rule of the Company or any of its subsidiaries.
(d) In the event of termination of this Agreement, for whatever
reason, Gorguze agrees to cooperate with the Company and to be reasonably
available to the Company with respect to continuing and/or future matters
arising out of Gorguze's employment or any other relationship with the Company,
whether such matters are business-related, legal or otherwise. The Company
agrees to reimburse Gorguze for Gorguze's reasonable travel expenses incurred in
complying with the terms of this paragraph for such expenses. The provisions of
this paragraph shall survive termination of this Agreement.
(e) Prior to the end of the Term, the Company and Gorguze may extend
the Term of this Agreement to such date as is mutually agreed to in writing by
the Company and Gorguze.
6. COVENANTS.
(a) CONFIDENTIAL INFORMATION. Gorguze, during the Term and
thereafter, will not, directly or indirectly (without the Company's prior
written consent), use for himself, or use for or disclose to any party other
than the Company or any subsidiary or affiliate of the Company, any secret or
confidential information or data regarding the costs, uses, methods,
applications, customers (including their names and buying habits or practices),
trade accounts or suppliers (and pertinent information respecting transactions
and prospective transactions therewith) of products made, produced or sold by
the Company or any of its subsidiaries or affiliates, or regarding its marketing
methods and related data or any secret or confidential apparatus, process,
system, manufacturing or other method at any time used, developed or
investigated by or for the Company or any of its subsidiaries or affiliates,
whether or not invented, developed, acquired, discovered or investigated by
Gorguze. At the termination of this
4
<PAGE>
Agreement or at any other time the Company may request, Gorguze shall promptly
deliver to the Company all memoranda, notes, records, plats, sketches, plans or
other documents made, compiled by, delivered to, or otherwise acquired by,
Gorguze concerning costs, uses, methods, designs, applications, purchasers or
suppliers of products made or sold by the Company or any subsidiary or affiliate
of the Company or any secret or confidential product, apparatus or process
manufactured, used, developed, acquired or investigated by the Company or any
subsidiaries or affiliate of the Company.
(b) INVENTIONS. Gorguze agrees that any and all inventions,
discoveries, improvements, processes, methods, designs, patents, copyrights and
trademarks made, developed, discovered or acquired by him during the Term,
solely or jointly with others or otherwise and which relate to the business of
the Company and all knowledge possessed by Gorguze relating thereto
(collectively, the "Inventions") shall be fully and promptly disclosed to the
Board of Directors and to such person or persons as the Board of Directors shall
direct and shall be the sole and absolute property of the Company and the
Company will be the sole and absolute owner thereof. Gorguze agrees that he
will at all time keep all of the same secret from everyone except the Company
and such persons as the Board of Directors may from time to time direct.
Gorguze shall, as requested by the Company at any time and from time to time,
whether prior to or after the expiration of the Term, execute and deliver to the
Company any instruments deemed necessary by the Company to effect disclosure and
assignment of the Inventions to the Company or its designees and any patent
applications (United States or foreign) and renewals with respect thereto,
including any other instruments reasonably deemed necessary by the Company for
the prosecution of patent applications or the acquisition of letters patent.
Pursuant to Section 2872 of the California Labor Code, the Company hereby
notifies Gorguze that this Section 6(b) shall not apply to any invention which
qualifies fully under the provisions of Section 2870 of the California Labor
Code.
(c) NON-COMPETITION. By and in consideration of the Company's
entering into this Agreement and the Salary, and benefits to be provided by the
Company hereunder, and further in consideration of the Gorguze's exposure to the
proprietary information of the Company, Gorguze agrees that Gorguze will not,
during the Term and thereafter so long as Gorguze serves on the Board of
Directors in any capacity, engage in any Competitive Activity. The term
"Competitive Activity" means engaging in any of the following activities: (i)
serving as a director of any Competitor (as defined below), (ii) directly or
indirectly through one or more intermediaries, either (A) controlling any
Competitor or (B) owning any equity or debt interests in any Competitor (other
than equity or debt interests which are publicly traded and, at the time of any
acquisition, do not exceed 5% of the particular class of interests outstanding)
(it being understood that, if interests in any Competitor are owned by an
investment vehicle or other entity in which Gorguze individually or with his
"affiliates" and "associates" (as defined under Section 12 of the Securities
Exchange Act of 1934) owns a controlling equity interest (with ownership of
securities holding 25% of the total votes in the election of directors or
members of an equivalent governing body presumptively, but not exclusively,
being deemed to constitute control), a portion of the interests in such
Competitor owned by such entity shall be attributed to Gorguze, such portion
determined by applying the percentage of the equity interest in such entity
owned
5
<PAGE>
by Gorguze to the interests in such Competitor owned by such entity), (iii)
employment by (including serving as an officer or partner of), providing
consulting services to (including, without limitation, as an independent
contractor) or managing or operating the business or affairs of any Competitor
or (iv) otherwise participating in the ownership, management, operation or
control of any Competitor. The term "Competitor" as used herein means any
person (other than the Company or any affiliate thereof) that, anywhere in the
Restricted Area, (i) designs or manufactures golf club shafts (whether for sale
to or use by third parties or for its own use, and regardless of the material),
(ii) sells, markets or distributes golf club shafts (other than solely as a
component of completed shafts), (iii) manufactures, sells, markets or
distributes graphite prepreg, graphite filament or graphite fiber, (iv) has
announced an intention to enter into any of the foregoing activities or (v) is
an affiliate of any person covered by clauses (i) through (iv) (affiliate for
these purposes meaning any other person controlled by, under common control with
or controlling such person (with ownership of securities holding 25% of the
total votes in the election of directors or members of an equivalent governing
body presumptively, but not exclusively, being deemed to constitute control).
The term "Restricted Area" means any state or territory of the United States or
any state or similar subdivision of any foreign country in which the Company or
any affiliate thereof conducts business, including, without limitation, selling
any of its products, whether or not the Company or such affiliate maintains any
facilities or a permanent sales force or other employees or agents in such
jurisdiction.
(d) NON-SOLICITATION. During the term of this Agreement and
thereafter so long as Gorguze serves on the Board of Directors in any capacity,
Gorguze shall not use any information obtained as a result of his employment
with the Company to interfere with the Company's relationship with, or endeavor
to entice away from the Company, any person who at any time during the Term was
an employee or customer of the Company or otherwise had a material business
relationship with the Company.
(e) REMEDIES. Gorguze agrees that any breach of the terms of this
Section 6 would result in irreparable injury and damage to the Company for which
the Company would have no adequate remedy at law; Gorguze therefore also agrees
that in the event of said breach or any threat of breach, the Company shall be
entitled to an immediate injunction and restraining order to prevent such breach
and/or threatened breach and/or continued breach by Gorguze and/or any and all
persons and/or entities acting for and/or with Gorguze, without having to prove
damages, in addition to any other remedies to which the Company may be entitled
at law or in equity; PROVIDED, HOWEVER, that the prevailing party in any such
action brought by the Company pursuant to this Section 6(e) will be entitled to
recover from the other party all costs and expenses, including reasonable
attorney's fees and costs, incurred by the prevailing party in connection with
such action. The terms of this paragraph shall not prevent the Company from
pursuing any other available remedies for any breach or threatened breach
hereof, including but not limited to the recovery of damages from Gorguze.
The provisions of this Section 6 shall survive any termination of this
Agreement, and the existence of any claim or cause of action by Gorguze against
the Company whether predicated on
6
<PAGE>
this Agreement or otherwise, shall not constitute a defense to the enforcement
by the Company of the covenants and agreements of this Section 6.
7. NOTICES. Any notice or other communication required or permitted
hereunder shall be in writing and shall be deemed to have been given (i) if
personally delivered, when so delivered, or (ii) if mailed, three (3) business
days after having been placed in the United States mail, registered or
certified, postage prepaid, addressed to the party to whom it is directed at the
address set forth below:
If to the Company:
Aldila, Inc.
15822 Bernardo Center Drive
San Diego, California 92127
Attention: Chairman
Telecopy: 619-592-0403
If to Gorguze:
Vincent T. Gorguze
11975 El Camino Real, Suite 302
San Diego, CA 92130
Telecopy: 619-793-4079
by registered or certified mail, postage prepaid, return receipt requested.
8. BINDING EFFECT/ASSIGNMENT. This Agreement shall inure to the benefit
of and be binding upon the parties hereto and their respective heirs, executors,
personal representatives, estates, successors (including, without limitation, by
way of merger) and assigns. Notwithstanding the provisions or the immediately
preceding sentence, neither the Company nor Gorguze shall not assign all or any
portion of this Agreement without the prior written consent of the other.
9. ENTIRE AGREEMENT. This Agreement sets forth the entire understanding
of the parties hereto with respect to the subject matter hereof and supersedes
all prior agreements, written or oral, between them as to such subject matter.
This Agreement may not be amended, nor may any provision hereof be modified or
waived, except by an instrument in writing duly signed by the party to be
charged.
10. SEVERABILITY. If any provision of this Agreement, or any application
thereof to any circumstances, is invalid, in whole or in part, such provision or
application shall to the extent be severable and shall not affect other
provisions or applications of this Agreement.
7
<PAGE>
11. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of California, without reference
to the principles of conflict of laws.
12. MODIFICATIONS AND WAIVERS. No provisions of this Agreement may be
modified, altered or amended except by an instrument in writing executed by the
parties hereto. No waiver by either party hereto of any breach by the other
party hereto of any provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions at the time
or at any prior or subsequent time.
13. HEADINGS. The headings contained herein are solely for the purposes
of reference, are not part of this Agreement and shall not in any way affect the
meaning or interpretation of this Agreement.
14. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
8
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by
authority of its Board of Directors, and Gorguze has hereunto set his hand, the
day and year first above written.
ALDILA, INC.
By: /s/ Gary T. Barbera
----------------------------------
Gary T. Barbera
Title: Chief Executive Officer
/s/ Vincent T. Gorguze
--------------------------------------
Vincent T. Gorguze
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE COMPANY'S REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 19,018
<SECURITIES> 0
<RECEIVABLES> 4,560
<ALLOWANCES> 0
<INVENTORY> 6,159
<CURRENT-ASSETS> 33,047
<PP&E> 14,556
<DEPRECIATION> 0
<TOTAL-ASSETS> 112,895
<CURRENT-LIABILITIES> 6,509
<BONDS> 20,000
0
0
<COMMON> 166
<OTHER-SE> 77,488
<TOTAL-LIABILITY-AND-EQUITY> 112,895
<SALES> 27,178
<TOTAL-REVENUES> 27,178
<CGS> 17,584
<TOTAL-COSTS> 22,286
<OTHER-EXPENSES> 702<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 632
<INCOME-PRETAX> 3,880
<INCOME-TAX> 1,707
<INCOME-CONTINUING> 2,173
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,173
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
<FN>
<F1>GOODWILL AMORTIZATION
</FN>
</TABLE>
