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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[ x ] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 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 Identification Number)
incorporation or organization)
15822 BERNARDO CENTER DRIVE, SAN DIEGO, CALIFORNIA 92127
(Address of principal executive offices)
(619) 592-0404
(Registrant's Telephone No.)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Names of each exchange on which registered
None None
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Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
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(Title of Class)
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 _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 24,1997, the aggregate market value of the voting stock held by
non-affiliates of the Registrant, based on market quotations as of that date,
was approximately $71.2 million.
As of March 24,1997, there were 15,711,152 shares of the Registrant's Common
Stock, par value $0.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated into this report by
reference:
Part III The Registrant's definitive Proxy Statement for the 1996 Annual
Meeting of Stockholders to be filed with the Commission within 120
days after the close of the fiscal year.
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ALDILA, INC.
TABLE OF CONTENTS
FORM 10-K FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1996
PAGE
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PART I
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Item 1. Business 1
Item 2. Properties 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of
Security Holders 11
PART II
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Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 11
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 17
PART III
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Item 10. Directors and Executive Officers of the Registrant 17
Item 11. Executive Compensation 17
Item 12. Security Ownership of Certain Beneficial
Owners and Management 17
Item 13. Certain Relationships and Related Transactions 17
PART IV
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Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 18
Signatures 32
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PART I
THIS FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
THE FEDERAL SECURITIES LAWS. THESE FORWARD-LOOKING STATEMENTS ARE
NECESSARILY BASED ON CERTAIN ASSUMPTIONS AND ARE SUBJECT TO SIGNIFICANT 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 FACTORS SET
FORTH IN THIS FORM 10-K (INCLUDING THOSE SECTIONS HEREOF INCORPORATED BY
REFERENCE FROM OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION), IN
PARTICULAR AS SET FORTH IN "BUSINESS RISKS" UNDER ITEM 1 AND SET FORTH IN THE
"MANAGEMENT'S DISCUSSION AND ANALYSIS" UNDER ITEM 7.
ITEM 1. BUSINESS
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GENERAL
Aldila, Inc. ("Aldila" or the "Company") is the leading designer and
manufacturer of high-quality innovative graphite (carbon fiber based
composite) golf shafts in the United States today and has maintained this
leading position for over a decade. Aldila enjoys strong relationships with
most major domestic, and many foreign, golf club manufacturers including
Callaway Golf Company ("Callaway"), Karsten Manufacturing ("Ping") and Taylor
Made. Aldila believes that it is one of the few independent shaft
manufacturers with the technical and production expertise required to produce
high-quality graphite shafts in quantities sufficient to meet rapidly growing
demand. The Company's current product line consists of Aldila and G. Loomis
branded products designed for custom club makers as well as hundreds of
custom shafts developed in conjunction with its major customers, which are
designed to improve the performance of any level of golfer, from novice to
tour professional.
Most golf clubs currently being sold have shafts constructed from steel or
graphite, although limited numbers are also manufactured from other
materials. Graphite shafts were introduced in the early 1970's as the first
major improvement in golf shaft technology since steel replaced wood in the
1930's. The first graphite shafts had significant torque (twisting force) and
appealed primarily to weaker-swinging players desiring greater distance.
Graphite shaft technology has subsequently improved so that shafts can now be
designed for golfers at all skill levels. Unlike steel shafts, graphite
shafts can be altered with respect to weight, flex, flex location and torque
to produce greater distance, increased accuracy and reduced club vibration
resulting in improved "feel" to the golfer. The improvement in the design
and manufacture of graphite shafts and the growing recognition of their
superior performance characteristics compared to steel have resulted in
increased demand for graphite shafts by golfers of all skill levels. The
initial acceptance of graphite shafts was primarily for use in woods.
Subsequently, after achieving dominant acceptance and penetration in both the
professional and consumer woods markets (with over 76% of new woods purchased
including graphite shafts in 1996), graphite shafts have started to achieve
similar success in the irons markets, including increasing acceptance among
tour professionals. Since many golfers consider professionals to be "opinion
leaders," their acceptance and growing use of graphite shafts in irons has
helped broaden the overall graphite market. As a result, in 1996,
approximately 38% of new irons purchased were graphite shafted. As the
market for graphite shafts continues to grow, new graphite shafted wood and
iron purchases by consumers are expected to surpass 90% and 75%,
respectively, by the year 2000.
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Originally, virtually all graphite shafts were sold for use in premium
clubs, while the value priced segment of the golf club market continued to be
supplied with steel shafts. In the last several years, however, an
increasing percentage of value priced clubs are being sold with graphite
shafts, which is a trend that the Company expects will continue. As a
result, the Company has taken steps to enable it to meet the needs of this
segment of the shaft market, including the design of shafts that can be
manufactured at prices acceptable to this market and continuing efforts to
reduce its overall manufacturing costs.
The Company was originally founded in San Diego, California in 1972 and
was an early leader in the design and production of graphite golf shafts.
Since then, the Company has continually improved upon its shaft designs and
the materials it uses in its shafts to meet the demands of a growing market.
The Company believes it is well positioned to remain a leader in the market
for graphite shafts due to its innovative and high quality products, strong
customer relationships, design and composite materials expertise and
significant manufacturing capabilities.
In order to maintain its leadership position in the graphite shaft market
through control of its raw material costs and ensuring its sources of supply,
over the last several years the Company has taken steps to vertically
integrate into the manufacture of its own raw materials. In 1994, the
Company started production of its principal raw material, graphite prepreg,
which consists of sheets of carbon fibers combined with epoxy resin. See
"Manufacturing--Raw Materials." The Company now produces substantially all
of its graphite prepreg internally. In late 1996, the Company decided to
construct a new facility for the manufacture of carbon fiber. The Company
intends to manufacture carbon fiber not only for its own consumption in the
manufacture of golf shafts but also for sale or use in other recreational and
industrial composite products. This facility should be operational in 1998.
See "Business Risks - New Carbon Fiber Manufacturing Facility."
PRODUCTS
Aldila offers a broad range of innovative and high-quality products
designed to maximize the performance of golfers of every skill level. The
Company manufactures hundreds of unique graphite shafts featuring various
combinations of performance characteristics such as weight, flex, flex point
and torque. The Company's customized shafts, which constituted 90% of net
sales in the year ended December 31, 1996, are designed in partnership with
its customers (principally golf club manufacturers) to accommodate specific
golf club designs. The Company's standard models are typically sold to golf
club manufacturers, distributors and golf pro and repair shops, and are used
either to assemble a new custom club from selected components or to replace
the steel shaft of an older club. The Company also helps develop cosmetic
designs to give the customer's golf clubs a distinctive look, even when the
customer does not require a shaft with customized performance
characteristics. The prices of Aldila shafts typically range from $6 to $30.
All of the Company's shafts are composite structures consisting
principally of carbon fiber and epoxy resins. The Company's shafts may also
include boron (added to increase shaft strength) or fiberglass. The Company
regularly evaluates new composite materials for inclusion in the Company's
shafts and new refinements on designs using current materials.
Based on units sold for the year ended December 31, 1996, approximately
64% of the Company's shafts are used in irons while approximately 36% are
used in woods. This iron shaft to wood shaft mix compares favorably to 1995
when 55% of shafts sold were for irons with 45% for woods. The iron mix
increased due to a change in product mix but also because graphite shafts
continue to penetrate the irons market. The Company expects that iron shafts
will represent an increasing percentage of units sold in the future since the
typical set of golf clubs contains approximately three times as many irons as
woods.
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CUSTOMERS AND CUSTOMER RELATIONS
For fiscal year 1996, the Company had approximately 420 customers, which
included approximately 115 golf club manufacturers and more than 60
distributors, with the balance principally constituting custom club
assemblers, pro shops and repair shops. However, the majority of the
Company's sales have been and may continue to be concentrated among a
relatively small number of customers. Sales to the Company's top five
customers represented approximately 80% and 75% of net sales in 1996 and
1995, respectively. In 1996, Callaway accounted for 43% of the Company's net
sales, as compared to 50% in 1995 and 66% in 1994. Callaway has been the
Company's largest customer for each of the last five years and has
represented a significant percentage of the Company's net sales each year
during that period, reflecting in large part the rapid growth of Callaway's
sales of its clubs. Historically, Aldila's principal customers have varied
as a result of general market trends in the golf industry, in particular the
prevailing popularity of the various clubs that contain Aldila's shafts.
(For example, the Company's second largest customer was Taylor Made in 1996,
Ping in 1995, 1994 and 1993 and Wilson Sporting Goods in 1992.) Because of
the historic volatility of consumer demand for specific clubs, as well as
continued competition from alternative shaft suppliers, sales to a given
customer in a prior period may not necessarily be indicative of future
results.
The Company believes that its close customer relationships and responsive
service have been significant elements of its success to date, establishing
it as a premium graphite shaft company. Aldila's golf club manufacturer
customers often work together with the Company's engineers when developing a
new golf club in order to design a club that maximizes the performance
features of the principal component parts: the grip, the clubhead and the
Aldila shaft. The Company's partnership relationship with its customers
continues after the development of clubs containing Aldila's shafts.
Following the design process, the Company continues to provide high levels of
customer support and service in areas such as quality control and assurance,
timely and responsive manufacturing, delivery schedules and education. The
Company believes its physical proximity to many of its customers has
facilitated a high degree of customer interaction and responsiveness to
customer needs. While the Company has had long-established relationships
with most of its customers, it is not the exclusive supplier of graphite
shafts to most of them and generally does not have long-term supply
agreements with its customers. Although the Company believes that its
relationships with its customers are good, the loss of a significant customer
or a substantial decrease in sales to a significant customer could have a
material adverse effect on the Company's business or operating results. As
a result of the high percentage of the Company's net sales represented by
Callaway in recent periods, the Company's results of operations have been
dependent on sales to Callaway. Following the decrease in sales to Callaway
first announced in January 1995 and in part as a result of the success in the
marketplace of clubs manufactured by other customers of the Company, the
percentage of the Company's sales represented by sales to Callaway has
decreased and is expected to decrease again in 1997. The Company's
dependence on sales to Callaway has therefore lessened somewhat, although
Callaway continues to be the Company's largest single customer and the
Company believes that it continues to be Callaway's primary graphite shaft
supplier. Increasing sales to other customers, however, such as Taylor Made,
which represented 16% of sales in 1996, increases the Company's dependence on
those customers. If the Company's sales of shafts to Callaway or another
major customer were to decrease in the future, the Company would not
necessarily be able to replace those sales with sales of shafts to other golf
companies and, as a result, net sales for a given quarter or a longer period
of time might be materially adversely affected. See "Business Risks."
The Company's sales and marketing personnel devote substantial time and
energy to educating its customers, consumers and golf professionals about the
advantages of Aldila graphite shafts, and also concentrate on educating the
sales forces of golf club manufacturers so that they may more effectively
sell golf clubs incorporating Aldila graphite shafts.
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MARKETING AND PROMOTION
The Company's marketing strategy is designed to encourage golf club
manufacturers to select and promote Aldila shafts, to enhance brand awareness
among golfers and to increase overall market acceptance and use of graphite
golf shafts. The Company utilizes a wide variety of marketing and promotional
channels, including mass media advertising such as print and television,
sponsorship of golf-related events, product endorsements and product
demonstrations.
The Company uses mass media advertising to increase Aldila's brand name
recognition and reputation among consumers for offering consistently high
quality products designed for a wide range of golfers and to explain the
advantages of graphite shafts. Although the Company does not sell directly to
the end users of its products, the Company believes that its brand name
recognition contributes significantly to the marketability of its customers'
products. Aldila's name is also prominently displayed in its customers'
catalogues and product literature.
The Company believes that obtaining product endorsements from professional
golfers enhances its reputation for quality and performance while also
promoting the use of graphite shafts. The Company has secured product
endorsements from a number of PGA and Ladies PGA Tour players and well-known
teaching professionals. Recognizing the influence professionals' product
choices have on consumer preferences, the Company also engages in special
promotional efforts to encourage professional golfers to use clubs with
Aldila shafts. Similarly, the Company contributes graphite shafts to college
athletic programs and teaching professionals and sponsors college golf
tournaments in order to expose those who may influence future club purchases
by consumers to the advantages of graphite shafts.
Aldila's marketing and promotion expenditures were approximately $2.5
million, $4.2 million, and $6.0 million in 1996, 1995, and 1994,
respectively.
SALES AND DISTRIBUTION
Within the golf club industry, most companies do not manufacture the three
principal components of the golf club--the grip, the shaft and the
clubhead--but rather source these components from independent suppliers that
design and manufacture components to the club manufacturers' specifications.
As a result, Aldila sells its graphite shafts primarily to golf club
manufacturers and, to a lesser extent, distributors, custom club shops, pro
shops and repair shops. Distributors typically resell the Company's products
to custom club assemblers, pro and custom club shops, and individuals. The
Company uses its internal sales force in the marketing and sale of its shafts
to golf club manufacturers. Sales to golf club manufacturers accounted for
approximately 90% of net sales for the year ended December 31, 1996.
International sales represented less than 10% of net sales for the years
ended December 31, 1996, 1995 and 1994.
PRODUCT DESIGN AND DEVELOPMENT
Aldila is committed to maintaining its reputation as a leader in
innovative shaft design and composite materials technology. The Company
believes that the enhancement and expansion of its existing product lines and
the development of new products are necessary for the Company's continued
growth and success. However, while the Company believes that it has generally
achieved success in the introduction of its graphite golf shafts, no
assurance can be given that the Company will be able to continue to design
and manufacture products that meet with market acceptance.
Graphite shaft designs and modifications are frequently the direct result
of the Company's and its customers' combined efforts and expertise to develop
an exclusive shaft for that customer's clubs. New golf shaft designs are
developed and tested using a CAD/CAE golf shaft analysis program, which
evaluates a new shaft's design with respect to weight, torque, flex point,
tip and butt flexibility, swing weight and other critical shaft design
criteria. In addition, the Company
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researches new and innovative shaft designs on an independent basis, which
has enabled the Company to produce a variety of new standard shafts as well
as generate design ideas for customized shafts. To improve and advance
composites technology and shaft process manufacturing, the Company's
engineers test new and existing materials, such as boron, kevlar, fiberglass,
ceramic, thermo plastic and carbon fiber. The Company's design research also
focuses on improvements in graphite shaft aesthetics since cosmetic
appearance has become increasingly important to customers. Although the
Company emphasizes these research and development activities, there can be no
assurance that Aldila will continue to develop competitive products or that
the Company will be able to utilize new composite material technology on a
timely or competitive basis, or otherwise respond to emerging market trends.
The Company may consider from time to time applying carbon fiber
technology to other products, and has engaged in limited production of
graphite bicycle tubing on a special-order basis.
MANUFACTURING
The Company believes that its manufacturing expertise and production
capacity differentiate it from many of its competitors and enable Aldila to
respond quickly to customers' orders and provide sufficient quantities on a
timely basis. The Company today operates six manufacturing facilities.
During its 25 years of operation, the Company has improved its manufacturing
process and believes it has established a reputation as the industry's
leading volume manufacturer of high-performance graphite shafts.
SHAFT MANUFACTURING PROCESS. The process of manufacturing a graphite
shaft has several distinct phases. Different designs of Aldila shafts
require variations in both the manufacturing process and the materials used.
In traditional shaft designs, treated graphite known as "prepreg" are rolled
onto metal rods known as mandrels. The Company also manufactures filament
wound shafts where continuous graphite fibers are mechanically wound around a
mandrel. Under either process, the graphite is then baked at high
temperatures to harden the material into a golf shaft. At the end of the
manufacturing process, the shafts are painted and stylized using a variety of
colors, patterns and designs, including logos and other custom
identification. Through each phase of this process, the Company performs
quality control reviews to ensure continuing high standards of quality and
uniformity and to meet exacting customer specifications.
RAW MATERIALS. The primary material currently used in all of the
Company's graphite shafts is carbon fiber, which is combined with epoxy resin
to produce sheets of graphite prepreg. Heating and stretching the graphite
fibers determines the strength and tensile modulus (stiffness) of the fiber.
In October 1994, the Company initiated the internal production of graphite
prepreg in its Poway, California facility. The Company believes that by
producing a major portion of its graphite prepreg requirements internally it
may better control the supply of raw material for shafts and may reduce the
impact of potential future price increases. During 1995 and 1996 the Company
increased its monthly production levels and now produces substantially all of
its graphite prepreg requirements internally. In prior years the Company was
dependent upon certain domestic suppliers for graphite prepreg and the
Company expects to continue to purchase some prepreg products from outside
suppliers in the future. The Company is now dependent on its own prepreg
production operation to support its shaft manufacturing requirements.
Although the Company believes that there will continue to be alternative
third party suppliers of graphite prepreg, there can be no assurance that
unforeseen difficulties which could lead to an interruption in the Company's
internal prepreg production will not occur which would result in production
delays.
The Company's graphite prepreg operation is dependent on certain suppliers
for carbon fibers, which along with epoxy resins and paper constitute the
primary components in graphite prepreg. In 1995 and 1996, the Company
purchased most of its carbon fiber from Hexcel (formerly Hercules, Inc.) and
expects to purchase a significant portion of its carbon fiber from Hexcel in
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1997; however, the Company also purchases fibers from Toray Marketing & Sales
(America), Inc., Fortafil Fibers, Inc. and Toho Carbon Fibers, Inc. The
Company experienced increases in these raw material component costs in 1995
and 1996 and anticipates that these costs will continue to increase in the
future, although it cannot predict the timing or extent of any future price
changes.
The Company is in the process of developing a facility for the manufacture
of carbon fiber for use in the graphite prepreg that it makes for its own
consumption in the manufacture of golf shafts and also for sale or use in
other recreational and industrial composite products. The Company expects
this facility will be operational in 1998. At the present time, Courtaulds,
a company based in the United Kingdom, is the only supplier of acrylic fiber,
the principal raw material in carbon fiber, of the type and grade that the
Company's carbon fiber operations will require. The Company has reached an
understanding with Courtaulds that the Company believes should assure the
Company with an adequate supply of such acrylic fiber. See "Business
Risks--New Carbon Fiber Manufacturing Facility."
ENVIRONMENTAL MATTERS
The Company is subject to various federal, state, local and foreign
environmental laws and regulations, including those governing the use,
discharge and disposal of hazardous materials as the Company uses hazardous
substances and generates hazardous waste in the ordinary course of its
manufacturing process. Under the supervision of the County of San Diego Air
Pollution Control District (the "APCD"), the Company has constructed
additional pollution control equipment to control emissions of volatile
organic compounds ("VOCs") resulting from its golf shaft coating operations.
In 1993, the Company filed chemical use inventory forms with the United
States Environmental Protection Agency (the "EPA") covering the years 1987
through 1991. As a result of the information gathered in connection with
preparing this filing, the Company re-evaluated certain filings made with the
APCD and determined that submission of revised filings was appropriate. To
date, the Company has not been notified by the EPA that it may seek to assess
any penalties as a result of the untimely filing and does not know what
penalties, if any, would be assessed if the APCD were to determine that the
revised filings were required to be made. The Company does not believe that
any penalties that may be assessed by the EPA, the APCD or other interested
parties as a result of these matters would result in a material liability.
The Company believes it is in substantial compliance with applicable laws
and regulations and has not to date incurred any material liabilities under
environmental laws and regulations, however, there can be no assurance that
environmental liabilities will not arise in the future which may affect the
Company's business.
COMPETITION
Aldila operates in a highly competitive environment in both the United
States and international markets. The Company believes that it competes on
the basis of its ability to provide a broad range of high quality,
performance graphite shafts; its ability to deliver customized products in
large quantities and on a timely basis to its customers; the acceptance of
graphite in general, and Aldila shafts in particular, by professional and
other golfers, whose preferences are to some extent subjective; and, finally,
price. Until recently, the United States market for graphite shafts was
dominated by a relatively small number of United States based shaft
manufacturers. The Company currently competes against a number of well
established United States based shaft manufacturers for sales of premium
shafts which constitutes the majority of the Company's revenues. This
competition has made it more difficult to retain existing customers and
attract new customers. This competition had placed increasing pressure on
prices for the Company's premium shafts.
The Company believes that it is the largest supplier of graphite shafts in
the United States, which results from its ability to establish a premium
brand image and a reputation among golf club companies as a value-added
supplier with competitive prices.
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Aldila competes against other shaft manufacturers, both graphite and
steel, as well as against golf club companies that produce their own shafts
internally, some of which may have greater resources than Aldila. The
Company also faces potential competition from those golf club manufacturers
that currently purchase golf shaft components from outside suppliers but that
may have, develop or acquire the ability to manufacture all or a portion of
its graphite shafts internally. Should any of the Company's significant
customers decide to meet any of its shafts need internally, it could have an
adverse effect on the Company.
INTELLECTUAL PROPERTY
Aldila utilizes a number of trademarks and logos in connection with the
sale and advertising of its products. The Company believes that the strength
of its trademarks and logos are of considerable value to its business and
intends to continue to protect them to the fullest extent practicable. The
Company takes all reasonable measures to ensure that any product bearing an
Aldila trademark reflects the consistency and quality associated with the
Company's products. As of December 31, 1996 the Company had approximately 46
United States and foreign registered trademarks.
The Company currently holds and protects the rights to two patents,
although the Company does not view these patents as critical to the Company's
business.
EMPLOYEES
As of December 31, 1996, Aldila employed 1,260 persons on a full-time
basis, including 12 in sales and marketing, 22 in research and development
and engineering, and 1,180 in production, and the balance are administrative
and support staff. The Company employs no individuals on a part-time basis.
The number of full-time employees also includes 810 persons who are employed
in the Company's Mexican facility and 80 who are employed in the China
facility. Because of seasonal demands, the Company hires a significant
number of temporary employees. As of December 31, 1996, the Company also
employed an additional 25 temporary employees on a full-time basis. Aldila
considers its employee relations to be good.
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's, 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.
BACKLOG
As of December 31, 1996, the Company had a backlog of approximately $8.0
million compared to approximately $7.5 million as of December 31, 1995. The
Company believes that the dollar volume of its current backlog will be
shipped in the next three months. Orders can typically be canceled without
penalty up to 30 days prior to shipment. Historically, the Company's backlog
generally has been highest in the first and second quarters, due in large
part to seasonal factors. Due to the timing and receipt of customer orders,
backlog is not necessarily indicative of future operating results.
BUSINESS RISKS
CUSTOMER CONCENTRATION. The Company's sales have been, and very likely
will continue to be, concentrated among a small number of customers. In
1996, sales to the Company's top five customers represented approximately 80%
of net sales. Aldila's principal customers have historically varied
depending largely on the prevailing popularity of the various clubs that
contained
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Aldila shafts. Customers representing more than 10% of net sales in the past
three years have consisted of: Callaway Golf Company ("Callaway") (43%) and
Taylor Made Golf Company (16%) in 1996; Callaway (50%) in 1995; and Callaway
(66%) in 1994. The Company cannot predict the impact that general market
trends in the golf industry, including the fluctuation in popularity of
customers clubs, will have on its future business or operating results.
While the Company has had long-established relationships with most of its
customers, it is not the exclusive supplier of graphite shafts to most of
them, including Callaway, and consistent with industry practice, generally
does not have long-term contracts with its customers. In this regard,
Callaway, the Company's current largest customer, purchases from at least two
other graphite shaft suppliers. Although the Company believes it currently
supplies a substantial portion of Callaway's graphite shaft requirements,
there is no assurance that the Company will remain Callaway's primary
supplier and, in the event Callaway increases purchases from its other
suppliers or adds additional suppliers, the Company could be adversely
affected. Although the Company believes that its relationships with its
customers are good, the loss of a significant customer or a substantial
decrease in sales to a significant customer, could have a material adverse
effect on the Company's business in operating results.
Despite the fact that Callaway is likely to remain the Company's largest
customer and that the Company's net sales as a whole are likely to continue
to be concentrated among a small number of customers, the Company also
expects that Callaway will not continue to represent approximately 50% or
more of its net sales, as it has for several years, and that several other
companies, including Taylor Made, may represent significant percentages of
the Company's net sales over the next few years. As is the case with most
golf club manufacturers, these other companies tend to purchase graphite
shafts from more than one supplier, and their sales are likely to vary
dramatically from time to time due to fluctuating public acceptance of their
products. Although the Company will be less exposed to significant risks
resulting from variations in its sales to Callaway, the Company will be
exposed to those risks if sales to one or more of several other companies,
including Taylor Made, decrease to a material extent as a result either of
decreases in sales of golf clubs by the other company or of a decision to
purchase shafts from another supplier instead of from Aldila.
SHAFT MANUFACTURING BY CLUB COMPANIES. Another factor that could have a
negative impact in the future on the Company's 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. While the Company has
not to date experienced any material decline in its sales for this reason,
should any of the Company's major customers decide to meet any significant
portion of their shaft needs internally, it could have a material adverse
impact on the Company and its financial results. Based on Callaway's public
statements, the Company believes that Callaway has in the past considered
manufacturing at least a portion of the shafts for inclusion in the clubs it
sells, although the Company is unaware of any such activities at the present
time.
RAW MATERIAL COST/AVAILABILITY. The Company's gross profit margins are
dependent on 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
experienced an increase in carbon fiber prices in 1996 and into 1997.
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 suppliers, 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
-8-
<PAGE>
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.
NEW CARBON FIBER MANUFACTURING FACILITY. The Company has stated its
intention to construct a new facility for the manufacture of carbon fiber.
The Company has hired an individual and has retained consultants with
significant experience in carbon fiber manufacturing to design, develop and
start-up the planned 50,000 square foot facility. The Company currently
anticipates starting production of its own carbon fiber in the first half of
1998. The Company expects to incur approximately $16 million in capital
expenditures in 1997 in connection with the development of a carbon fiber
manufacturing facility. There can be no assurance that the Company will
ultimately go forward with its plans to start manufacturing its own carbon
fiber. Although the Company has preliminarily identified a location in
Evanston, Wyoming for this facility and is in purchase negotiations with
respect to this location, there can be no assurance that the Company will be
able to enter into a purchase agreement on acceptable terms or that it will
be able to develop it for use as a carbon fiber manufacturing facility on a
timely or cost effective basis. In addition, the Company has no experience
in the manufacturing of carbon fiber and, although it believes that the
individuals that it has retained to assist in this process have sufficient
expertise for its current needs, there is a risk that the Company will be
unable to manufacture carbon fiber of high enough quality in sufficient
quantities at low enough costs to justify a decision to limit the use of
outside suppliers.
The Company expects to be able to use its carbon fiber manufacturing
capacity to facilitate a transition away from being a single product
producer, to become a diversified manufacturer of carbon fiber based
products, either through supplying other manufacturers of sporting and
industrial applications or by acquiring other such manufacturers. Although
the Company would still be capitalizing on its existing expertise in
composite materials manufacturing, any transition into new carbon fiber
applications would require the Company to develop expertise with respect to
different manufacturing and marketing issues related to such new applications.
Commencing in 1998, the Company expects to satisfy a portion of its needs
for carbon fiber internally. Depending on market conditions prevailing at the
time and the extent to which production at its planned facility meets
expectations, the Company may face difficulties in obtaining adequate
supplies of carbon fiber from external sources to provide for any carbon
fiber needs not met internally. In particular, a substantial reduction in
the Company's purchases in the market as a result of its internal capacity
may make it more difficult to purchase carbon fiber from other suppliers if
it remains in short supply. If it appears that the carbon fiber facility is
not likely to satisfy a significant portion of the Company's needs or if it
appears that there will not be adequate availability in the market, the
Company may not have made arrangements in advance for the purchase of
material amounts of carbon fiber from alternative sources.
RELIANCE ON OFF-SHORE MANUFACTURING FACILITIES. The Company operates
manufacturing facilities in Tijuana, Mexico and in Zhuhai, People's Republic
of China. The Company pays certain expenses of these facilities in Mexican
pesos and Chinese renminbis, respectively, which are subject to fluctuations
in currency value and exchange rates. The Company is also subject to other
customary risks of doing business outside of the United States, including
political instability, currency and other import/export regulation, and
cultural differences.
UTILIZATION OF CERTAIN HAZARDOUS MATERIALS. In the ordinary course of its
manufacturing process, the Company uses hazardous substances and generates
hazardous waste. The Company has not to date incurred any material
liabilities under environmental laws and regulations, and believes that it is
in substantial compliance with applicable laws and regulations.
Nevertheless, no assurance can be given that the Company will not encounter
environmental problems or incur environmental liabilities in the future which
could adversely affect its business.
-9-
<PAGE>
NEW PRODUCT INTRODUCTION. The Company believes that the introduction of
new, innovative golf shafts using graphite or other composite materials will
be critical to its future success. While the Company emphasizes research and
development activities in connection with carbon fiber and other composite
material technology, there can be no assurance that the Company will continue
to develop competitive products or that the Company will be able to develop
or utilize new composite material technology on a timely or competitive basis
or otherwise respond to emerging market trends.
Although the Company believes that it has generally achieved success in
the introduction of its graphite golf shafts, no assurance can be given that
the Company will be able to continue to design and manufacture products that
meet with market acceptance, either on the part of club manufacturers or
golfers. The design of new graphite golf shafts is also influenced by rules
and interpretations of the United States Golf Association ("USGA"). There
can be no assurance that any new products will receive USGA approval or that
existing USGA standards will not be altered in ways that adversely affect the
sales of the Company's products.
COMPETITION. Aldila operates in a highly competitive environment. The
Company believes that it competes principally on the basis of its ability to
provide a broad range of high quality, performance graphite shafts, its
ability to deliver customized products in large quantities and on a timely
basis; the acceptance of graphite shafts in general, and Aldila shafts in
particular, by professional and other golfers, whose preferences are to some
extent subjective; and finally, price.
Aldila competes against both domestic and foreign shaft manufacturers.
The Company also experiences indirect competition from golf club
manufacturers that produce their own shafts internally. Some of the
Company's current and potential competitors may have greater resources than
Aldila. The company also faces potential competition from those golf club
manufacturers that currently purchase golf shaft components from outside
suppliers but that may have, develop or acquire the ability to manufacture
shafts internally.
DEPENDENCE ON DISCRETIONARY CONSUMER SPENDING. Sales of golf equipment
have historically been dependent on discretionary spending by consumers,
which may be adversely affected by general economic conditions. The Company
believes that golf equipment sales may have remained flat in recent periods
and may continue to be so in the future. A decrease in consumer spending on
golf equipment or, in particular, a decrease in demand for golf clubs with
graphite shafts could have an adverse effect on the Company's business and
operating results.
RELIANCE ON KEY PERSONNEL. The success of the Company is dependent upon
its senior management team, as well as its ability to attract and retain
qualified personnel. There is competition for qualified personnel in the
golf shaft industry. There is no assurance that the Company will be able to
retain its existing senior management personnel or to attract additional
qualified personnel.
ITEM 2. PROPERTIES
The Company's principal executive offices are located in a leased facility
in Rancho Bernardo, California. The Company's shafts are manufactured at six
separate facilities, one attached to the Company's executive office, one
located elsewhere in the San Diego, California metropolitan area, three
others located in Tijuana, Mexico and one in the Zhuhai economic development
zone of the People's Republic of China. The Company's main facility is
comprised of 41,000 square feet of shaft manufacturing space and 20,000
square feet of office and research and development space. The Company also
leases a 73,000 square foot facility in Poway, California for shaft
manufacturing operations and graphite prepreg production. The Tijuana, Mexico
production operations are conducted in leased facilities that aggregate
61,000 square feet. The China facility is also leased and comprises 31,000
square feet.
-10-
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
There is no information required to be submitted by the Company under this
Item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal 1996.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK PERFORMANCE
1996 1995
___________________________________________________________________________
High Low High Low
First Quarter $7 7/16 $4 3/8 $11 5/8 $4 1/2
Second Quarter $5 1/2 $3 15/16 $6 5/8 $4 7/8
Third Quarter $4 13/16 $3 7/8 $5 15/16 $4 11/16
Fourth Quarter $5 1/16 $3 5/8 $5 1/8 $3 3/4
On March 24, 1997, the closing Common Stock price was $4.88, and there were
approximately 532 common stockholders of record. The Company believes a
significant number of beneficial owners also own Aldila stock in "street
name."
ITEM 6. SELECTED FINANCIAL DATA
The information required as to this Item is contained in the following
table.
-11-
<PAGE>
ALDILA, INC.
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
OPERATING RESULTS (YEAR ENDED DECEMBER 31): 1996 1995 1994 1993 1992
---------- ---------- ---------- --------- ----------
---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Net sales $58,394 $56,545 $79,779 $62,646 $47,665
Cost of sales 37,245 32,823 44,206 34,420 26,433
---------- ---------- ---------- --------- ----------
Gross profit 21,149 23,722 35,573 28,226 21,232
---------- ---------- ---------- --------- ----------
Selling, general and administrative 9,112 10,850 12,922 10,696 8,394
Amortization of goodwill 1,416 1,398 1,398 1,398 1,398
---------- ---------- ---------- --------- ----------
Operating income 10,621 11,474 21,253 16,132 11,440
---------- ---------- ---------- --------- ----------
Interest expense 1,266 1,291 1,313 3,013 4,984
Other (income), net (727) (857) (297) (63) (42)
---------- ---------- ---------- --------- ----------
Income before income taxes
and extraordinary loss 10,082 11,040 20,237 13,182 6,498
Provision for income taxes 4,400 4,770 8,565 6,024 3,360
---------- ---------- ---------- --------- ----------
Income before extraordinary loss 5,682 6,270 11,672 7,158 3,138
Extraordinary loss 786
---------- ---------- ---------- --------- ----------
Net income $5,682 $6,270 $11,672 $6,372 $3,138
---------- ---------- ---------- --------- ----------
---------- ---------- ---------- --------- ----------
Earnings per common share(1):
Income before extraordinary loss $0.35 $0.37 $0.69 $0.50 $0.28
Net income $0.35 $0.37 $0.69 $0.44 $0.28
Weighted average shares outstanding 16,434 16,765 16,810 14,340 11,063
SELECTED OPERATING RESULTS AS
A PERCENTAGE OF NET SALES:
Gross profit 36.2% 42.0% 44.6% 45.0% 44.5%
Selling, general and administrative 15.6 19.2 16.2 17.1 17.6
Operating income 18.2 20.3 26.6 25.7 24.0
Net income 9.7 11.1 14.6 10.2 6.6
FINANCIAL POSITION (AT DECEMBER 31):
Working capital $28,274 $24,770 $19,080 $8,827 $1,700
Total assets 111,935 111,853 109,557 95,127 90,551
Long-term debt, including current portion 20,000 20,000 20,000 20,000 58,000
Total stockholders' equity 78,826 75,481 69,777 57,228 16,542
</TABLE>
(1) Earnings per common share and weighted average shares outstanding have
been adjusted to give retroactive effect to the recapitalization of the
Company, including a 1-for-3.8 reverse stock split which occurred on
June 15, 1993, and a 2-for-1 stock split which occurred on February 22,
1994.
-12-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW - BUSINESS CONDITIONS
Aldila, Inc. (the "Company") is principally in the business of designing,
manufacturing and marketing graphite (carbon fiber based composite) golf club
shafts, with approximately 90% 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. Over the last several years, the number of shaft
manufacturers of graphite golf shafts serving the United States premium club
market has increased, including affiliates of foreign manufacturers that had
previously not had significant sales in the United States. These two overall
trends in the graphite shaft marketplace have had the effect, and are
expected by management to continue to have the effect for at least the next
several years, of decreasing the average selling price of the Company's
shafts. Although the Company's gross profit margin is being adversely
affected by the reduction in average selling price and continuing increases
in raw material costs, these adverse effects on gross margin should be
mitigated to some extent by efforts being taken by the Company to control
costs, including manufacturing its own graphite prepreg and, starting in 1998
its own carbon fiber, increased automation and increasing the percentage of
its shafts being manufactured in countries with lower labor and overhead
costs.
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 an increased rate of 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 in some cases the extent
of 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 1996, 1995 and 1994 sales to Callaway comprised
43%, 50% and 66%, respectively, of the Company's total net sales. Although
sales to Callaway as a percentage of the Company's net sales has decreased
over the last several years and is expected to decrease again in 1997, the
Company's results of operations continue to be dependent on sales to
Callaway, and as a result, further significant
-13-
<PAGE>
decreases in sales to Callaway could have a significant adverse impact on the
Company's sales or 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.
The Company continues to serve a broad range of golf club manufacturers, and,
in part as a result of the success in the marketplace of clubs manufactured
by several of these other customers, sales to other customers in addition to
Callaway are likely to represent significant percentages of the Company's net
sales over the next several years.
RESULTS OF OPERATIONS
The following table sets forth operating results expressed as a percentage
of net sales for the years indicated:
------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
------------------------------------
Net sales................................. 100.0% 100.0% 100.0%
Cost of sales............................. 63.8 58.0 55.4
---------- ---------- ---------
Gross profit..................... 36.2 42.0 44.6
---------- ---------- ---------
Selling, general and administrative....... 15.6 19.2 16.2
Amortization of goodwill.................. 2.4 2.5 1.8
---------- ---------- ---------
Operating income................. 18.2 20.3 26.6
---------- ---------- ---------
Other:
Interest expense................. 2.2 2.3 1.7
Other (income), net.............. (1.2) (1.5) (0.4)
---------- ---------- ---------
Income before income taxes................ 17.2 19.5 25.3
Provision for income taxes................ 7.5 8.4 10.7
---------- ---------- ---------
Net income................................ 9.7% 11.1% 14.6%
---------- ---------- ---------
---------- ---------- ---------
1996 COMPARED TO 1995
NET SALES. Net sales increased $1.8 million, or 3.3%, to $58.4 million
for 1996 from $56.5 million for the prior year. Unit sales increased 24% in
1996 as compared to 1995, which was offset by a 16.5% decrease in the average
selling price of shafts sold, both as a result of a change in product mix and
heightened competitive pressures.
GROSS PROFIT. Gross profit decreased $2.6 million, or 10.8% to $21.1
million in 1996 from $23.7 million in 1995 primarily as a result of the lower
average selling prices for shafts sold. The gross profit margin was also
negatively impacted by increases in raw material costs. The Company's gross
profit margin decreased to 36.2% in 1996 from 42.0% in 1995 as a result of
the factors noted above.
-14-
<PAGE>
OPERATING INCOME. Operating income decreased $0.9 million, or 7.4%, to
$10.6 million in 1996 from $11.5 in 1995 and decreased as a percentage of net
sales to 18.2% in 1996 compared to 20.3% in 1995 as a result of the decrease
in gross profit offset in part by a decrease in selling, general and
administrative expense, both in dollars and as a percentage of net sales.
Selling, general and administrative expense decreased to $9.1 million (or
15.6% of net sales) in 1996 from $10.8 million (or 19.2% of net sales) in
1995 principally as a result of lower marketing and promotional expenses in
1996 as compared to 1995.
INTEREST EXPENSE. Interest expense was $1.3 million in 1996 and 1995.
The weighted average interest rate on borrowings was 6.13% in 1996 and 1995.
INCOME TAXES. The Company's effective tax rate in 1996 was 43.6% as
compared to 43.2% in 1995. The increase resulted primarily from a decrease
in tax credits in 1996 as compared to 1995.
1995 COMPARED TO 1994
NET SALES. Net sales decreased $23.2 million or 29.1%, to $56.5 million
for 1995 from $79.8 million for the prior year. The decrease in net sales
was attributable to a $24.4 million decrease in sales to Callaway in 1995
compared to 1994. Callaway accounted for 50% of net sales in 1995 compared
to 66% in 1994. Net sales to customers other than Callaway increased 4% in
1995. Unit sales to these customers increased 16%. See - "Overview."
Total unit sales decreased 19% and the average selling price of shafts
sold decreased 13% in 1995 as compared to 1994.
GROSS PROFIT. Gross profit decreased $11.9 million, or 33.3% to $23.7
million in 1995 from $35.6 million in 1994 principally as a result of the
decrease in net sales. The Company's gross profit margin decreased to 42.0%
in 1995 from 44.6% in 1994 primarily as a result of lower average selling
prices for shafts and fixed costs being spread over reduced operating levels.
The Company's gross profit margins are impacted by the price it pays for
carbon fibers, the most substantial component of total raw material costs.
OPERATING INCOME. Operating income decreased $9.8 million, or 46%, to
$11.5 million in 1995 from $21.3 million in 1994 and decreased as a
percentage of net sales to 20.3% in 1995 compared to 26.6% in 1994. Selling,
general and administrative expense increased as a percentage of net sales to
19.2% in 1995 as compared to 16.2% in 1994 as a result of the fixed component
of selling, general and administrative costs being spread over lower net
sales in 1995. This percentage increase occurred despite decreases in
marketing and promotional expenses.
INTEREST EXPENSE. Interest expense was $1.3 million in 1995 and 1994.
The weighted average interest rate on borrowings was 6.13% in 1995 and 1994.
OTHER INCOME. Other income increased to $857,000 in 1995 as compared to
$297,000 in 1994 as a result of increased investment income on higher average
cash balances along with higher rates of return in 1995.
INCOME TAXES. The Company's effective tax rate in 1995 was 43.2% as
compared to 42.3% in 1994. The increase resulted primarily from the decrease
in profit before tax with constant non-deductible amortization of goodwill in
each year.
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<PAGE>
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'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 by operating activities in 1996
was $7.2 million compared to $9.8 million in 1995. This decrease resulted
partially from the increase in inventory in 1996 to support the higher sales
levels at the end of 1996. The Company used $4.4 million for capital
expenditures during 1996, primarily related to adding machinery and equipment
intended to improve manufacturing efficiencies in existing facilities, to add
other manufacturing technologies and to add additional manufacturing capacity
in order to meet the anticipated demand. The Company currently anticipates
committing to capital expenditures of approximately $18.5 million in 1997
primarily related to development and construction of a new facility for the
manufacture of carbon fiber. Management estimates that the design,
construction and start-up of the planned 50,000 square foot facility will
require approximately 15 months, and a capital expenditure of approximately
$16.0 million. The Company plans to use existing cash and cash provided by
operating activities to fund the project.
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. The Company could require additional debt financing,
however, if it were to engage in a material acquisition in the future.
On October 26, 1995 the Board of Directors of the Company authorized the
repurchase of up to 2.5 million shares of the Company's Common Stock. The
Company intends to repurchase shares from time to time in the market at then
prevailing prices, depending on market and general economic conditions. The
Company repurchased approximately 563,000 shares at an average price of $4.15
per share in 1996 and approximately 206,000 shares at an average price of
$4.66 per share in 1995.
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 quarters. The success of certain
customers' products, 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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<PAGE>
"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, the Business Risks
described in Item 1 of this Report on Form 10-K and elsewhere in the
Company's filings with the Securities and Exchange Commission.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required as to this item is incorporated by reference from
the consolidated financial statements and supplementary data listed in Item 14
of Part IV of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There is no information required to be submitted by the Company under this
Item.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required as to this Item is incorporated by reference from
the section headed "Election of Directors" in the Company's Proxy Statement
for the 1997 Annual Meeting of Stockholders for the year ended December 31,
1996, which will be filed with the Commission within 120 days of the end of
the fiscal year covered by this report ("1997 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required as to this Item is incorporated herein by
reference from the data under the caption "Executive Compensation" in the
1997 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required as to this Item is incorporated herein by
reference from the data under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the 1997 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is no information required to be submitted by the Company under this
Item.
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<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents included as part of this report:
1. The consolidated financial statements for the Registrant are included
in this report.
Consolidated Balance Sheets at
December 31, 1996 and 1995;
Consolidated Statements of Income for
the years ended December 31,
1996, 1995 and 1994;
Consolidated Statements of Stockholders'
Equity for the years ended
December 31, 1996, 1995 and 1994;
Consolidated Statements of Cash Flows
for the years ended December 31,
1996, 1995 and 1994;
Notes to Consolidated Financial Statements
Independent Auditors' Report.
2. All financial statement schedules have been omitted because they are
not required or the information required to be set forth therein is
included in the consolidated financial statements or the notes thereto.
3. See the Index to Exhibits on page 33 of this Form 10-K. Management
contracts or compensatory plans or arrangements required to be filed
as exhibits to this report are identified on the Index to Exhibits by
an asterisk.
(b) Reports on Form 8-K:
During the quarter, a report on Form 8-K dated November 25, 1996 was
filed by the Registrant. It was reported that the Company has approved a
plan to construct a new facility for the manufacture of carbon fiber.
-18-
<PAGE>
ALDILA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, DECEMBER 31,
1996 1995
------------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . $19,676 $19,345
Accounts receivable . . . . . . . . . . . . . . . 2,460 3,168
Income taxes receivable . . . . . . . . . . . . . 88
Inventories . . . . . . . . . . . . . . . . . . . 7,809 6,074
Deferred tax assets . . . . . . . . . . . . . . . 2,301 2,808
Prepaid expenses and other current assets . . . . 468 742
------------- ----------
Total current assets . . . . . . . . . . . . . . 32,714 32,225
PROPERTY AND EQUIPMENT . . . . . . . . . . . . . . 14,883 13,545
TRADEMARKS AND PATENTS, less accumulated
amortization of $2,199 and $1,759. . . . . . . . 15,139 15,579
GOODWILL, less accumulated amortization of
$7,007 and $5,592. . . . . . . . . . . . . . . . 49,053 50,319
DEFERRED FINANCING FEES, less accumulated
amortization of $120 and $81 . . . . . . . . . . 146 185
------------- ----------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . $111,935 $111,853
------------- ----------
------------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable. . . . . . . . . . . . . . . . . $2,062 $4,230
Accrued expenses. . . . . . . . . . . . . . . . . 2,277 3,225
Income taxes payable. . . . . . . . . . . . . . . 101
------------- ----------
Total current liabilities. . . . . . . . . . . . 4,440 7,455
LONG-TERM LIABILITIES:
Long-term debt. . . . . . . . . . . . . . . . . . 20,000 20,000
Deferred tax liabilities. . . . . . . . . . . . . 7,906 8,040
Deferred rent liabilities . . . . . . . . . . . . 763 877
------------- ----------
Total liabilities. . . . . . . . . . . . . . . . 33,109 36,372
------------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 9 and 11)
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
16,011,152 and 16,573,952 shares . . . . . . . . 160 166
Additional paid-in capital. . . . . . . . . . . . 45,532 47,863
Retained earnings . . . . . . . . . . . . . . . . 33,134 27,452
------------- ----------
Total stockholders' equity . . . . . . . . . . . 78,826 75,481
------------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . $111,935 $111,853
------------- ----------
------------- ----------
See notes to consolidated financial statements.
-19-
<PAGE>
ALDILA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED
DECEMBER 31,
--------------------------------
1996 1995 1994
---------- ---------- ---------
NET SALES $58,394 $56,545 $79,779
COST OF SALES 37,245 32,823 44,206
---------- ---------- ---------
Gross profit 21,149 23,722 35,573
---------- ---------- ---------
SELLING, GENERAL AND ADMINISTRATIVE 9,112 10,850 12,922
AMORTIZATION OF GOODWILL 1,416 1,398 1,398
---------- ---------- ---------
Operating income 10,621 11,474 21,253
---------- ---------- ---------
OTHER:
Interest expense 1,266 1,291 1,313
Other (income), net (727) (857) (297)
---------- ---------- ---------
INCOME BEFORE INCOME TAXES 10,082 11,040 20,237
PROVISION FOR INCOME TAXES 4,400 4,770 8,565
---------- ---------- ---------
NET INCOME $5,682 $6,270 $11,672
---------- ---------- ---------
---------- ---------- ---------
NET INCOME PER COMMON SHARE $0.35 $0.37 $0.69
---------- ---------- ---------
---------- ---------- ---------
WEIGHTED AVERAGE SHARES OUTSTANDING 16,434 16,765 16,810
---------- ---------- ---------
---------- ---------- ---------
See notes to consolidated financial statements.
-20-
<PAGE>
ALDILA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------ PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
---------- ------ --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994.................. 16,521 $165 $47,553 $9,510 $57,228
Common Stock issued upon stock
option exercises, including income
tax benefits of $696....................... 145 1 982 983
Other, net.................................. (106) (106)
Net income.................................. 11,672 11,672
---------- ------ --------- --------- ---------
Balance at December 31, 1994................ 16,666 166 48,429 21,182 69,777
Repurchases of Common Stock................. (206) (2) (955) (957)
Common Stock issued upon stock option
exercises, including income tax benefits
of $164.................................... 114 2 389 391
Net income.................................. 6,270 6,270
---------- ------ --------- --------- ---------
Balance at December 31, 1995................ 16,574 166 47,863 27,452 75,481
Repurchases of Common Stock................. (563) (6) (2,331) (2,337)
Net income.................................. 5,682 5,682
---------- ------ --------- --------- ---------
Balance at December 31, 1996................ 16,011 $160 $45,532 $33,134 $78,826
---------- ------ --------- --------- ---------
---------- ------ --------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
-21-
<PAGE>
ALDILA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------------------
1996 1995 1994
----------- ------------ ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $5,682 $6,270 $11,672
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,931 3,972 3,359
Changes in assets and liabilities:
Accounts receivable 708 1,930 1,235
Inventories (1,735) 361 136
Deferred tax assets 507 623 (1,392)
Prepaid expenses and other current assets 274 97 (25)
Accounts payable (2,168) (849) 366
Accrued expenses (948) (1,995) 1,693
Income taxes payable/receivable 189 (599) (90)
Deferred tax liabilities (134) 2 (31)
Deferred rent liabilities (114) (55) (57)
----------- ------------ ---------
Net cash provided by operating activities 7,192 9,757 16,866
----------- ------------ ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (4,407) (3,933) (5,575)
Other (117)
----------- ------------ ---------
Net cash used for investing activities (4,524) (3,933) (5,575)
----------- ------------ ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock 227 287
Repurchases of Common Stock (2,337) (957)
Tax benefit from exercise of stock options 164 696
Other, net (98)
----------- ------------ ---------
Net cash provided by (used for) financing
activities (2,337) (566) 885
----------- ------------ ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 331 5,258 12,176
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 19,345 14,087 1,911
----------- ------------ ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $19,676 $19,345 $14,087
----------- ------------ ---------
----------- ------------ ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $1,226 $1,227 $1,025
Income taxes $3,841 $4,595 $9,410
</TABLE>
See notes to consolidated financial statements.
-22-
<PAGE>
ALDILA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY -- Aldila, Inc. (a Delaware Corporation) (the "Company")
designs, manufactures and markets graphite golf club shafts for sale
principally in the United States.
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements of
the Company include the accounts of the Company and its wholly-owned
subsidiary, Aldila Golf Corp., a Delaware corporation ("Aldila Golf") and
Aldila Golf's subsidiaries, Aldila de Mexico, Aldila Graphite Products
(Zhuhai) Company Ltd. and Aldila Foreign Sales Corporation ("AFSC"). All
intercompany transactions and balances have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. The recorded amounts of assets, liabilities, revenues and
expenses are affected by such estimates and assumptions.
REVENUE RECOGNITION -- The Company recognizes revenues as of the date
merchandise is shipped to its customers.
CASH EQUIVALENTS -- The Company's investment policy is to invest its
excess cash in corporate debt, tax-exempt and government securities, bank
related instruments and money market accounts. The Company considers all
highly liquid investments purchased with an original maturity of three months
or less to be cash equivalents. The Company has not historically experienced
losses on such investments.
ACCOUNTS RECEIVABLE -- The Company sells graphite golf club shafts
primarily to golf club manufacturers on credit terms. Historically, credit
losses have been minimal in relation to the credit extended.
INVENTORIES -- Inventories are stated at the lower of first-in, first-out
(FIFO) cost or market.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Repairs and maintenance are charged to expense as incurred. The Company
depreciates its property and equipment using the straight-line method over
the estimated useful lives of the assets, as follows:
YEARS
-----
Machinery and equipment..................................... 5-10
Office furniture and equipment.............................. 3-10
Leasehold improvements are amortized over the shorter of the asset life or
the remaining term of the related lease.
TRADEMARKS AND PATENTS -- Trademarks and patents are being amortized on a
straight-line basis over 40 years and 17 years, respectively. Amortization
expense was $435,000 in each of 1996, 1995 and 1994.
GOODWILL -- Goodwill represents the excess of cost over fair value of net
assets acquired and is being amortized over 40 years on a straight-line basis.
EVALUATION OF TRADEMARKS, PATENTS AND GOODWILL -- The Company's policy is
to evaluate, at each balance sheet date, the appropriateness of the carrying
values of the unamortized balances of trademarks, patents and goodwill on the
basis of estimated future cash flows and other factors. If
-23-
<PAGE>
such evaluation were to indicate a material impairment of these intangible
assets, such impairment would be recognized by a writedown of the applicable
asset.
DEFERRED FINANCING COSTS -- Costs associated with the issuance of debt are
amortized over the life of the related debt using the interest method. Such
amortization is included in interest expense.
EARNINGS PER COMMON SHARE -- Earnings per common share is computed based
on the weighted average number of common shares outstanding, including the
dilutive effect of common stock equivalents. Retroactive effect has been
given to the 2-for-1 stock split effective for shareholders of record on
February 22, 1994, described in Note 7.
ACCOUNTING FOR STOCK BASED COMPENSATION - Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation,"
encourages, but does not require companies to record compensation cost for
stock-based employee compensation plans at fair value. The Company has
chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and related Interpretations.
Accordingly, compensation cost for stock options is measured as the excess,
if any, of the quoted market price of the Company's stock at the date of the
grant over the amount an employee must pay to acquire the stock.
2. ACCOUNTS RECEIVABLE
Accounts Receivable at December 31 consists of the following (in
thousands):
1996 1995
---------- ---------
Trade accounts receivable......................... $3,653 $4,405
Less: allowance for doubtful accounts............. (378) (362)
Less: allowance for sales returns................. (815) (875)
---------- ---------
Accounts Receivable........................... $2,460 $3,168
---------- ---------
---------- ---------
3. INVENTORIES
Inventories at December 31 consist of the following (in thousands):
1996 1995
---------- ---------
Raw materials...................................... $3,868 $3,828
Work-in-process.................................... 2,298 1,165
Finished goods..................................... 1,643 1,081
---------- ---------
Inventories........................................ $7,809 $6,074
---------- ---------
---------- ---------
-24-
<PAGE>
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consist of the following (in
thousands):
1996 1995
---------- --------
Machinery and equipment........................... $12,829 $10,377
Office furniture and equipment.................... 1,705 1,328
Leasehold improvements............................ 6,596 5,403
Property and equipment not yet in service......... 1,401 1,447
Other............................................. 229 159
---------- --------
22,760 18,714
Less accumulated depreciation and amortization... (7,877) (5,169)
---------- --------
Property and equipment..................... $14,883 $13,545
---------- --------
---------- --------
Depreciation and amortization expense was $3,036,000, $2,095,000 and
$1,483,000 in 1996, 1995 and 1994, respectively.
5. ACCRUED EXPENSES
Accrued expenses at December 31 consist of the following (in thousands):
1996 1995
--------- --------
Payroll and employee benefits........ $1,289 $ 843
Advertising fees..................... 785
Interest payable..................... 306 307
Other................................ 682 1,290
--------- --------
Accrued expenses............... $2,277 $3,225
--------- --------
--------- --------
6. LONG-TERM DEBT
SENIOR NOTES -- Long-term debt consists of $20.0 million in principal
amount of senior notes placed with an institutional investor on November 30,
1993. The notes bear interest at 6.13%, payable semi-annually on March 31 and
September 30. Semi-annual principal payments of $4.0 million will be due
beginning September 30, 1999 through September 30, 2001. The senior notes
contain certain restrictions, including limitations on additional borrowings,
the payment of dividends and capital stock repurchases. Under the most
restrictive provision of the note agreement, approximately $14.7 million of
retained earnings is unrestricted and available for such borrowings and
expenditures. The senior notes also require the maintenance of certain
financial ratios. As of December 31, 1996, the Company was in compliance
with all covenants under the senior notes. None of the restrictions contained
in the senior notes are expected to have a significant effect on the ability
of the Company to operate.
-25-
<PAGE>
7. STOCKHOLDERS' EQUITY
The Board of Directors approved a 2-for-1 stock split of common shares for
shareholders of record on February 22, 1994. The consolidated financial
statements of the Company for all dates and periods presented give
retroactive effect to the stock split.
On October 26 1995, the Board of Directors of the Company authorized the
repurchase of up to 2.5 million shares of the Company's Common Stock. The
Company intends to repurchase shares from time to time in the market at then
prevailing prices, depending on market and general economic conditions. The
Company repurchased approximately 563,000 shares at an average price of $4.15
per share in 1996 and approximately 206,000 shares at an average price of
$4.66 per share in 1995.
8. INCOME TAXES
The components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
----------- ------------- -----------
<S> <C> <C> <C>
Current:
Federal................................................. $3,095 $3,306 $7,271
State................................................... 930 676 2,022
----------- ------------- -----------
Total................................................ 4,025 3,982 9,293
----------- ------------- -----------
Deferred:
Federal................................................. 287 306 (869)
State................................................... 88 318 (207)
----------- ------------- -----------
Total................................................ 375 624 (1,076)
----------- ------------- -----------
Investment tax credit - state............................... (348)
Tax benefit credited directly to additional paid-in-capital. 164 696
----------- ------------- -----------
Provision for income taxes.................................. $4,400 $4,770 $8,565
----------- ------------- -----------
----------- ------------- -----------
</TABLE>
Net deferred income taxes included in current assets in the balance sheet
at December 31 consist of the tax effects of temporary differences related to
the following (in thousands):
1996 1995
---------- -------------
Inventories................................ $1,186 $1,553
Allowance for doubtful accounts
and sales returns........................ 528 548
Accrued expenses........................... 360 499
State income taxes......................... 227 208
---------- -------------
Deferred tax assets -- current............. $2,301 $2,808
---------- -------------
---------- -------------
Net deferred income taxes included in long-term liabilities in the balance
sheet at December 31 consist of the tax effects of temporary differences
related to the following (in thousands):
1996 1995
---------- -------------
Trademarks and patents..................... $6,876 $7,033
Property and equipment..................... 827 752
Other...................................... 203 255
---------- -------------
Deferred tax liabilities -- long-term...... $7,906 $8,040
---------- -------------
---------- -------------
-26-
<PAGE>
Differences between the statutory Federal income tax rate and the
effective tax rate as a percentage of income before income taxes are
summarized below.
1996 1995 1994
-------- -------- -------
Statutory rate............................ 35.0% 35.0% 35.0%
State income taxes, net of Federal
tax benefit............................. 6.7 5.6 5.2
Non-deductible amortization -- purchase
accounting adjustments.................. 5.0 4.6 2.5
Other items............................... (3.1) (2.0) (.4)
-------- -------- --------
Effective rate............................ 43.6% 43.2% 42.3%
-------- -------- --------
-------- -------- --------
9. STOCK OPTION PLAN
In 1992, the Company adopted a Stock Option Plan for management. The
Company has reserved 526,292 shares for issuance under this Plan. Options are
granted at the fair market value of the shares at the date of grant,
generally become fully vested three years after grant, and expire ten years
from the date of grant.
In May of 1994, the stockholders adopted the 1994 Stock Incentive Plan for
employees, directors and consultants of the Company. The Company has reserved
1,600,000 shares for issuance under this Plan. Options are granted at the
fair market value of the shares at the date of grant, generally become fully
vested three years after grant, and expire ten years from the date of grant.
The Company has adopted the disclosure-only provisions of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation expense has been recognized for its stock option
plan. Had compensation cost for the Company's stock option awards been
determined based upon the fair value at the grant date for awards in 1995 and
1996 and recognized on a straight-line basis over the related vesting period,
in accordance with the provisions of SFAS No. 123, the Company's net
income and earnings per share would have been reduced to the pro forma
amounts indicated below:
1996 1995
----- ----
Net income - pro forma (in thousands) $5,232 $6,130
-----------------
Earnings per share - pro forma $ 0.32 $ 0.37
-----------------
The pro forma effect on net income for 1996 and 1995 is not representative
of the pro forma effect on net income in future years because it does not
take into consideration pro forma compensation expense related to grants made
prior to 1995. The weighted average fair value of options granted under the
Company's stock option plans during 1996 and 1995 were estimated at $1.91 and
$2.33, respectively, on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions: 0%
dividend yield, expected volatility of 34%, risk free rate of return of 6.3%,
assumed forfeiture rate of 10%, and expected lives of 5 years. The estimated
fair value of options granted is subject to the assumptions made and if the
assumptions changed, the estimated fair value amounts could be significantly
different.
-27-
<PAGE>
A summary of the status of the Company's fixed stock option plans as of
December 31, 1996, 1995 and 1994 and activity during the years then ended is
presented below:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------ ------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------------------ ------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
January 1 593,064 $7.55 432,240 $9.09 327,328 $3.32
Granted 610,000 $4.67 411,442 $5.69 248,942 $12.57
Exercised - (113,826) $2.00 (144,030) $2.00
Terminated (10,000) $5.41 (57,850) $10.29 -
Cancelled - (78,942) $12.31 -
------------- ---------- ----------
Outstanding at
December 31 1,193,064 $6.09 593,064 $7.55 432,240 $9.09
------------- -------- ---------- -------- ---------- -------
------------- -------- ---------- -------- ---------- -------
</TABLE>
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------- ---------------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Range of at December 31, Contractual Exercise at December 31, Exercise
Exercise Prices 1996 Life (Yrs.) Price 1996 Price
- -------------------------------------------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C>
$2.00 39,472 5.7 $ 2.00 39,472 $ 2.00
$4.44 - $6.00 991,442 9.0 $ 5.06 127,147 $ 5.68
$12.56 - $16.38 162,150 6.6 $13.41 117,219 $13.67
------------------------------------------------- ---------------------------------
$2.00 - $16.38 1,193,064 8.5 $ 6.09 283,838 $ 8.47
------------------------------------------------- ---------------------------------
------------------------------------------------- ---------------------------------
</TABLE>
As of December 31, 1995, 103,522 shares were exercisable under the Plans
at a weighted average exercise price of $9.35 per share.
-28-
<PAGE>
As of December 31, 1996, an aggregate of 506,934 shares remain available
for grant under the Plans. In addition, during each of 1994 and 1993,
options covering 26,314 shares were granted to two directors of the Company
apart from the Stock Option Plans. The options were granted at $14.13 and
$16.38 per share, respectively. The terms of these options are consistent
with those granted under the 1992 Stock Option Plan.
10. EMPLOYEE BENEFIT PLAN
In July of 1994, the Company adopted the Aldila, Inc. 401(k) Savings Plan
(the "Plan") for employees of the Company and its subsidiaries. The Plan
became effective on October 1, 1994. This defined contribution plan allows
employees who satisfy the age and service requirements of the Plan to
contribute up to 19% of pre-tax wages, limited to the maximum amount
permitted under federal law. The Company matches the first 4% of wages
contributed by employees at a rate of $0.25 for every $1.00. The Company's
matching contribution vests over four years based on years of service. The
Company's contributions amounted to $54,000, $60,000 and $14,000 in 1996,
1995 and 1994, respectively.
11. COMMITMENTS AND CONTINGENCIES
The Company leases building space and certain equipment under operating
leases. The Company's leases for office and manufacturing space contain
rental escalation clauses and renewal options. Rental expense for the Company
was $1,270,000, $1,301,000 and $1,210,000 for 1996, 1995 and 1994,
respectively.
As of December 31, 1996, future minimum lease payments for all operating
leases are as follows (in thousands):
1997........................... $1,509
1998........................... 1,274
1999........................... 1,230
2000........................... 817
2001........................... 770
-------
$5,600
-------
-------
12. SIGNIFICANT CUSTOMERS
Sales to a major customer represented 43%, 50% and 66% of net sales in
1996, 1995 and 1994, respectively. Sales to a second customer represented 16%
of net sales in 1996.
-29-
<PAGE>
13. QUARTERLY RESULTS OF OPERATIONS (Unaudited)
The following is a summary of the quarterly results of operations for the
two years in the period ended December 31, 1996 (in thousands, except per
share data):
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
------------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
1996:
Net sales....................... $ 11,919 $ 15,259 $16,735 $14,481
Gross profit.................... 4,111 5,483 6,301 5,254
Net income...................... 812 1,361 1,869 1,640
Earnings per common share ...... 0.05 0.08 0.11 0.10
----------------------------------------------------------------------------------------
1995:
Net sales....................... $ 18,816 $ 17,498 $ 9,546 $10,685
Gross profit.................... 8,400 7,813 3,662 3,847
Net income...................... 2,590 2,482 498 700
Earnings per common share ...... 0.15 0.15 0.03 0.04
</TABLE>
-30-
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Aldila, Inc.:
We have audited the consolidated balance sheets of Aldila, Inc. and its
subsidiaries (the "Company") as of December 31, 1996 and 1995 and the related
consolidated statements of income, stockholders' equity and cash flows for
each of the three years in the period ended December 31,1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31,
1996 and 1995 and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
San Diego, California
February 7, 1997
-31-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ALDILA, INC.
By: /S/ GARY T. BARBERA
--------------------------------------------
Gary T. Barbera
Chairman of the Board,
Chief Executive Officer
SIGNATURE TITLE DATE
--------- ----- ----
/S/ GARY T. BARBERA Chief Executive Officer March 24, 1997
- ------------------------- and Director (Principal
Gary T. Barbera Executive Officer)
/S/ ROBERT J. CIERZAN Vice President, Finance (Principal March 24, 1997
- ------------------------- Financial Officer and Principal
Robert J. Cierzan Accounting Officer)
/S/ VINCENT T. GORGUZE Chairman Emeritus of the March 24, 1997
- ------------------------- Board and Director
Vincent T. Gorguze
/S/ PETER R. MATHEWSON Vice President and March 24, 1997
- ------------------------- Director
Peter R. Mathewson
/S/ PETER E. BENNETT Director March 24, 1997
- -------------------------
Peter E. Bennett
/S/ MARVIN M. GILES, III Director March 24, 1997
- -------------------------
Marvin M. Giles, III
/S/ JOHN J. HENRY Director March 24, 1997
- -------------------------
John J. Henry
/S/ DONALD C. KLOSTERMAN Director March 24, 1997
- -------------------------
Donald C. Klosterman
/S/ WM. BRIAN LITTLE Director March 24, 1997
- -------------------------
Wm. Brian Little
/S/ CHAPIN NOLEN Director March 24, 1997
- -------------------------
Chapin Nolen
-32-
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT PAGE
- ------- ------- -----
2.1 -- Agreement of Purchase and Sale, dated as of December 14,
1991, by and among Aldila Acquisition Corp., Aldila,
Inc. and all of the Shareholders of Aldila, Inc., as
amended by the First Amendment dated January 9, 1992 by
and among Aldila Acquisition Corp., Aldila, Inc. and all
of the Shareholders of Aldila, Inc. (Filed as Exhibit 2.1
to the Company's Registration statement on Form S-1
(Registration No. 33-61560) and incorporated herein
by reference).
3.1 -- Restated Certificate of Incorporation. (Filed
as Exhibit 3.1 to the Company's Registration Statement on
Form S-1 (Registration No. 33-70010) and incorporated
herein by reference).
3.2 -- Restated By-Laws of the Company. (Filed as
Exhibit 3.2 to the Company's Registration Statement on
Form S-1 (Registration No. 33-61560) and incorporated
herein by reference).
4.1 -- Specimen form of Company's Common Stock
Certificate. (Filed as Exhibit 4.1 to the Company's
Registration Statement on Form S-1 (Registration No.
33-61560) and incorporated herein by reference).
4.2 -- Note Purchase Agreement dated as of November
1, 1993, with respect to the Company's 6.13% Senior Notes
due 2001. (Filed as Exhibit 4.2 to the Company's Report
on Form 10-K for the year ended December 31, 1993 and
incorporated herein by reference).
4.3 -- Form of 6.13% Senior Note due 2001. (Filed as
Exhibit 4.3 to the Company's Report on Form 10-K for the
year ended December 31, 1993 and incorporated herein by
reference).
*10.1 -- 1992 Stock Option Plan of the Company, as
amended. (Filed as Exhibit 10.6 to the Company's
Registration Statement on Form S-1 (Registration No.
33-61560) and incorporated herein by reference).
*10.2 -- Form of Stock Option Agreement in connection
with the Stock Option Plan. (Filed as Exhibit 10.7 to the
Company's Registration Statement on Form S-1
(Registration No. 33-61560) and incorporated herein by
reference).
*10.3 -- Executive Bonus Plan of the Company. (Filed
as Exhibit 10.2 to the Company's Report on Form 10-Q for
the quarterly period ended September 30, 1994 and
incorporated herein by reference).
10.4 -- Form of Indemnification Agreement between the
Company and its directors and executive officers. (Filed
as Exhibit 10.13 to the Company's Registration Statement
on Form S-1 (Registration No. 33-61560) and incorporated
herein by reference).
-33-
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT PAGE
- ------- ------- -----
10.5 -- Business Park Net Lease dated as of May 29,
1987, between the Company and Kaiser Development Company
as amended by the First Amendment to Lease dated as of
January 12, 1992, between the Company and Bedford
Development Company. (Filed as Exhibit 10.15 to the
Company's Registration Statement on Form S-1
(Registration No. 33-61560) and incorporated herein by
reference).
10.6 -- Lease Agreement dated as of October 15, 1990,
between the Company and Baja del Mar, S.A. de C.V. (Filed
as Exhibit 10.16 to the Company's Registration Statement
on Form S-1 (Registration No. 33-61560) and incorporated
herein by reference).
10.7 -- Lease Agreement dated as of August 30, 1993,
between the Company and T.M. Cobb Company. (Filed as
Exhibit 10.16 to the Company's Registration Statement on
Form S-1 (Registration No. 33-70010) and incorporated
herein by reference).
10.8 -- First Amendment to Lease Agreement dated as of
August 30, 1993, between the Company and T.M. Cobb
Company. (Filed as Exhibit 10.14 to the Company's Report
on Form 10-K for the year ended December 31, 1993 and
incorporated herein by reference).
10.9 -- Lease Agreement dated as of November 30, 1993,
between the Company and T.M. Cobb Company. (Filed as
Exhibit 10.15 to the Company's Report on Form 10-K for
the year ended December 31, 1993 and incorporated herein
by reference).
*10.10 -- Form of Stock Option Agreement, dated
October 5, 1993, between Marvin M. Giles, III and the
Company. (Filed as Exhibit 10.18 to the Company's
Registration Statement on Form S-1 (Registration No.
33-70010) and incorporated herein by reference).
10.11 -- 1994 Stock Incentive Plan of the Company as
amended, (filed as Exhibit A to the Company's 1996 Proxy
Statement dated March 28, 1996 and incorporated herein by
reference).
10.12 -- Form of Stock Option Agreement in connection
with the 1994 Stock Incentive Plan (filed as Exhibit 10.1
to the Report on Form 10-Q for the quarterly period ended
September 30, 1994 and incorporated herein by reference).
10.13 -- Lease Agreement dated May 15, 1995 between the Company
and Desarrollo Industrial de Tijuana, S.A. de
C.V. (Filed as Exhibit 10.1 to the Company's Report on
Form 10-Q for the quarterly period ended June 30, 1995
and incorporated herein by reference).
-34-
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT PAGE
- ------- ------- -----
*10.14 -- Employment and Consulting Agreement dated as
of October 2, 1995 between the Company and Gary T.
Barbera (Filed as Exhibit 10.1 to the Report on Form 10-Q
for the quarterly period ended September 30, 1995 and
incorporated herein by reference).
*10.15 -- Employment and Consulting Agreement dated as
of October 4, 1995 between the Company and Robert J.
Cierzan (Filed as Exhibit 10.2 to the Report on Form 10-Q
for the quarterly period ended September 30, 1995 and
incorporated herein by reference).
*10.16 -- Employment and Consulting Agreement dated as
of October 4, 1995 between the Company and Peter J.
Piotrowski (Filed as Exhibit 10.3 to the Report on Form
10-Q for the quarterly period ended September 30, 1995
and incorporated herein by reference).
*10.17 -- Employment and Consulting Agreement dated as
of October 4, 1995 between the Company and Peter R.
Mathewson (Filed as Exhibit 10.4 to the Report on Form
10-Q for the quarterly period ended September 30, 1995
and incorporated herein by reference).
*10.18 -- Employment and Consulting Agreement dated as of
January 18, 1996 between the Company and Edmond S.
Abrain. (Filed on Exhibit 10.21 to the Report on Form
10-K for the year ended December 31, 1995 and
incorporated herein by reference).
*10.19 -- Services Agreement dated as of January 1, 1996
between Aldila, Inc. and Vincent T. Gorguze (Filed as
Exhibit 10.1 to the report on Form 10-Q for the quarterly
period ended June 30, 1996 and incorporated herein by
reference)
11.1 -- Statement re: Computation of Earnings per
Common Share 36
21.1 -- Subsidiaries of the Company. 37
23.1 -- Independent Auditors' Consent 38
* Indicates management contracts or compensatory plans or arrangements
required to be filed as exhibits to this report on Form 10-K.
-35-
<PAGE>
ALDILA, INC.
STATEMENT RE: COMPUTATION OF EARNINGS PER COMMON SHARE
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------------
1996 1995 1994
--------- ----------- ----------
<S> <C> <C> <C>
Net income............................................. $5,682 $6,270 $11,672
--------- ----------- ----------
--------- ----------- ----------
Weighted average shares of Common Stock outstanding.... 16,411 16,714 16,624
Net effect of Common Stock options..................... 23 51 186
--------- ----------- ----------
Weighted average shares outstanding (1)............ 16,434 16,765 16,810
--------- ----------- ----------
--------- ----------- ----------
Earnings per common share(1)........................... $0.35 $0.37 $0.69
--------- ----------- ----------
--------- ----------- ----------
</TABLE>
- ------------------
(1) Adjusted to give retroactive effect to the two-for-one stock split for
all stockholders of record on February 22, 1994.
NOTE: Fully diluted earnings per share are not presented as the amounts are
not more than 3% dilutive to primary earnings per share presented herein.
Exhibit 11.1
-36-
<PAGE>
SUBSIDIARIES
JURISDICTION
OF
SUBSIDIARY INCORPORATION
- ---------- --------------
Aldila Golf Corp. Delaware, U.S.
Aldila Foreign Sales Corp. U.S. Virgin Islands
Aldila de Mexico, S.A. de C.V. Mexico
Aldila Graphite Products (Zhuhai)
Company Limited People's Republic of China
Exhibit 21.1
-37-
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.'s
33-70050 and 33-80985 of Aldila, Inc. on Form S-8 of our report dated
February 7, 1997, incorporated by reference in this Annual Report on Form
10-K of Aldila, Inc. for the year ended December 31, 1996.
Deloitte & Touche LLP
March 26, 1997
San Diego, California
Exhibit 23.1
-38-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 19,676
<SECURITIES> 0
<RECEIVABLES> 2,460
<ALLOWANCES> 0
<INVENTORY> 7,809
<CURRENT-ASSETS> 32,714
<PP&E> 14,883
<DEPRECIATION> 0
<TOTAL-ASSETS> 111,935
<CURRENT-LIABILITIES> 4,440
<BONDS> 20,000
0
0
<COMMON> 160
<OTHER-SE> 78,666
<TOTAL-LIABILITY-AND-EQUITY> 111,935
<SALES> 58,394
<TOTAL-REVENUES> 58,394
<CGS> 37,245
<TOTAL-COSTS> 46,357
<OTHER-EXPENSES> 1,416<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,266
<INCOME-PRETAX> 10,082
<INCOME-TAX> 4,400
<INCOME-CONTINUING> 5,682
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,682
<EPS-PRIMARY> .35
<EPS-DILUTED> .35
<FN>
<F1> GOODWILL AMORTIZATION
</FN>
</TABLE>
