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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 1998
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.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
---- ----
As of May 8, 1998 there were 15,448,871 shares of the Registrant's common stock,
par value $0.01 per share, outstanding.
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ALDILA, INC.
TABLE OF CONTENTS
FORM 10-Q FOR THE QUARTERLY PERIOD
ENDED MARCH 31, 1998
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at
March 31, 1998 and December 31, 1997 3
Consolidated Statements of Income for the
three months ended March 31, 1998
and 1997 4
Consolidated Statements of Cash Flows for the
three months ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALDILA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,358 $ 3,046
Accounts receivable 9,756 4,640
Income taxes receivable - 14
Inventories 12,154 13,186
Deferred tax assets 2,902 2,902
Prepaid expenses and other current assets 646 734
------------ ------------
Total current assets 27,816 24,522
PROPERTY, PLANT AND EQUIPMENT 26,388 26,170
TRADEMARKS AND PATENTS 14,595 14,704
GOODWILL 47,268 47,625
DEFERRED FINANCING FEES 98 107
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TOTAL ASSETS $116,165 $113,128
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,309 $ 4,051
Accrued expenses 3,285 3,696
Income taxes payable 1,052 -
------------ ------------
Total current liabilities 9,646 7,747
LONG-TERM LIABILITIES:
Long-term debt 20,000 20,000
Deferred tax liabilities 7,412 7,487
Deferred rent liabilities 584 611
------------ ------------
Total liabilities 37,642 35,845
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized 5,000,000 shares;
no shares issued
Common stock, $.01 par value; authorized 30,000,000 shares;
issued and outstanding 15,448,871 and 15,428,871 shares 155 154
Additional paid-in capital 42,554 42,456
Retained earnings 35,814 34,673
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Total stockholders' equity 78,523 77,283
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $116,165 $113,128
------------ ------------
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</TABLE>
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ALDILA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1997
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<S> <C> <C>
NET SALES $19,117 $14,601
COST OF SALES 13,277 9,784
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Gross profit 5,840 4,817
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SELLING, GENERAL AND ADMINISTRATIVE 3,068 2,643
AMORTIZATION OF GOODWILL 357 357
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Operating income 2,415 1,817
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OTHER:
Interest expense 316 316
Other (income), net (47) (156)
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INCOME BEFORE INCOME TAXES 2,146 1,657
PROVISION FOR INCOME TAXES 1,005 724
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NET INCOME $ 1,141 $ 933
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NET INCOME PER COMMON SHARE $ 0.07 $ 0.06
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NET INCOME PER COMMON SHARE,
ASSUMING DILUTION $ 0.07 $ 0.06
----------- -----------
----------- -----------
</TABLE>
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ALDILA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,141 $ 933
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,353 1,390
Changes in assets and liabilities:
Accounts receivable (5,116) (4,609)
Inventories 1,032 (1,222)
Prepaid expenses and other current assets 88 (6)
Accounts payable 1,258 2,444
Accrued expenses (411) (486)
Income taxes payable/receivable 1,066 790
Deferred tax liabilities (75) (68)
Deferred rent liabilities (27) (38)
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Net cash provided by (used for) operating activities 309 (872)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (1,096) (3,190)
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Net cash used for investing activities (1,096) (3,190)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 93 0
Repurchase of common stock 0 (1,595)
Tax benefit from exercise of stock options 6 0
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Net cash provided by (used for) financing activities 99 (1,595)
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NET DECREASE IN CASH AND CASH EQUIVALENTS (688) (5,657)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,046 19,676
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CASH AND CASH EQUIVALENTS, END OF PERIOD $2,358 $14,019
--------- ---------
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 613 $ 613
Income taxes $9 $2
</TABLE>
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ALDILA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. BASIS OF PRESENTATION
The consolidated balance sheet as of March 31, 1998 and the consolidated
statements of income and of cash flows for the three month periods ended March
31, 1998 and 1997, are unaudited and reflect all adjustments of a normal
recurring nature which are, in the opinion of management, necessary for a fair
presentation of the financial position and results of operations for the interim
periods. The consolidated balance sheet as of December 31, 1997 was derived
from the Company's audited financial statements. Operating results for the
three month period ended March 31, 1998 are not necessarily indicative of
results to be expected for the fiscal year ending December 31, 1998. These
consolidated financial statements should be read in conjunction with the
Company's December 31, 1997 consolidated financial statements and notes thereto.
2. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Raw materials $ 8,957 $ 7,514
Work in process 841 2,108
Finished goods 2,356 3,564
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Inventories $12,154 $13,186
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</TABLE>
3. LONG-TERM DEBT
Line of Credit - In March of 1998 the Company established a $10.0 million
unsecured line of credit with a financial institution expiring June 30, 1999.
Borrowings under the line of credit bear interest, at the election of the
Company, at the bank reference rate or the LIBOR rate plus 1.5%. The line of
credit requires the maintenance of certain financial ratios. No borrowings have
been made against the line of credit.
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ITEM 2. 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 85% of its net sales resulting from sales to golf
club manufacturers for inclusion in their clubs. As a result, the Company's
operating results are substantially dependent not only on demand by its
customers for the Company's shafts, but also on demand by consumers for clubs
including graphite shafts such as the Company's.
In 1998, the Company began production of carbon fiber at its new facility
in Evanston, Wyoming. The Company will use the output of this facility to
satisfy a significant portion of its internal demand for carbon fiber in the
manufacturing of golf club shafts. It also anticipates that it will produce at
this new facility carbon fiber in excess of what it will be able to use in the
manufacturing of golf club shafts. The Company intends to sell such excess, in
some cases in the form of graphite prepreg manufactured using its existing
facility in Poway, California, to other manufacturers of carbon fiber-based
products. The Company is also exploring entering into the manufacture of new
carbon fiber-based products in order to take advantage of this excess carbon
fiber capacity and may make acquisitions of other companies in order to acquire
such product lines. The Company expects that the additional vertical
integration offered by its new facility will assist it from the outset in
maintaining its position as a low cost manufacturer of graphite golf club shafts
at all price points. Management of the Company believes that the ability to
manufacture carbon fiber will also ultimately enable the Company to diversify
its sales and reduce its dependence on the overall golf club market, while
continuing to leverage the Company's existing composite materials expertise,
which should provide opportunities for growth that are not currently present in
the golf shaft business. This new facility will need to undergo a "shakedown"
period and will not be operating at full capacity initially, therefore, the full
benefit of this facility to the Company is not expected to be realized until at
least 1999.
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. 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
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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
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 shafts for the latest "hot"
club and will be adversely affected whenever sales of clubs containing Aldila
shafts drop dramatically. In particular, in recent years, a significant
portion of the Company's sales has tended to be concentrated in one or two
customers, thereby making the Company's results of operations dependent to a
large extent on continued sales to those customers. In the first quarter of
1998, sales to Callaway Golf Company and Taylor Made Golf represented 25% and
18%, respectively, of the Company's total net sales. The Company expects
Callaway and Taylor Made to continue to be the Company's largest customers at
least through 1998. The Company believes that while it will often not be
possible to predict, with any certainty, shifts in demand for particular
clubs, 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.
RESULTS OF OPERATIONS
FIRST QUARTER 1998 COMPARED TO FIRST QUARTER 1997
NET SALES. Net sales increased $4.5 million, or 30.9%, to $19.1 million
for the first quarter ended March 31, 1998 (the "1998 Period") from $14.6
million for the first quarter ended in 1997 (the "1997 Period"). The increase
in net sales was attributable to increased unit sales to the Company's club
manufacturer customers. Unit sales increased 56% in the 1998 Period as compared
to the 1997 Period, which was offset by a 18% decrease in the average selling
price of shafts sold, both as a result of a change in product mix to lower
priced value shafts as well as continued pressure on shaft prices.
GROSS PROFIT. Gross profit increased $1.0 million, or 21.2%, to $5.8
million for the 1998 Period from $4.8 million for the 1997 Period principally as
a result of the increase in net sales. The Company's gross profit margin
decreased to 30.5% in the 1998 Period compared to 33.0% in the 1997 Period as a
result of a change in product mix as well as continued pressure on shaft prices.
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OPERATING INCOME. Operating income increased $0.6 million, or 32.9%, to
$2.4 million for the 1998 Period from $1.8 million for the 1997 Period, and
increased as a percentage of net sales to 12.6% in the 1998 Period compared to
12.4% in the 1997 Period. Selling, general and administrative expense decreased
as a percentage of net sales to 16.0% for the 1998 Period as compared to 18.1%
for the 1997 Period primarily as a result of lower advertising and other
administrative expenses incurred in the 1998 Period as compared to 1997.
Selling, general and administrative expenses included $0.7 million of start-up
costs in the 1998 Period related to the Company's new carbon fiber manufacturing
facility which was completed during this period.
Other income decreased to $47,000 for the 1998 Period as compared to
$156,000 for the 1997 Period as a result of decreased investment income on lower
average cash balances in the 1998 Period.
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. Generally, the Company has not required
borrowings to finance its operations or provide working capital but it may
require additional financing to support its working capital needs on a
short-term basis. In March of 1998, the Company established a $10.0 million
unsecured line of credit from a financial institution expiring June 30, 1999
which is available to support any short-term working capital requirements.
Cash (including cash equivalents) provided by operating activities in the
1998 Period was $0.3 million compared to $0.9 million used by operating
activities in the 1997 Period. This increase resulted principally from the
increase in net income and decrease in cash used for working capital items in
1998 as compared to 1997. The Company used $1.1 million for capital
expenditures during the 1998 Period, primarily related to the completion of
construction of a new facility for the manufacture of carbon fiber. The design,
construction and start-up of the 50,000 square foot facility was completed in
the first quarter of 1998 and had a total cost of approximately $16.0 million.
The Company used 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 could require additional
debt financing if it were to engage in a material acquisition in the future.
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The Company recognizes the need to ensure its operations will not be
adversely impacted by the inability of the Company's information systems to
process data having dates on or after January 1, 2000 (the "Year 2000" issues).
Processing errors due to software failure arising from calculations using the
Year 2000 date are a recognized risk. The Company is currently addressing the
risk, with respect to the availability and integrity of its financial systems
and the reliability of its operating systems, and is in the process of
communicating with suppliers, customers, financial institutions and others with
whom it conducts business transactions to assess whether they are Year 2000
compliant. The Company does not believe that it will incur a material financial
impact from the risk, or from assessing the risk, arising from the Year 2000
issues.
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 timing of customers' new
products introductions has frequently mitigated the impact of seasonality in
recent years.
"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 the
Company's Report on Form 10-K and elsewhere in the Company's filings with the
Securities and Exchange Commission.
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PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable.
Item 2. CHANGES IN SECURITIES
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 10.1- Loan Agreement dated March 27, 1998 between
Aldila, Inc. and Union Bank of California,
N.A.
Exhibit 27.1 - Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Registrant
during the quarter ended March 31, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: ALDILA, INC.
May 8, 1998 \s\ Robert J. Cierzan
-----------------------------------
Robert J. Cierzan
Vice President, Finance
Signing both in his capacity as
Vice President and as Chief
Accounting Officer of the Registrant
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[LOGO]
LOAN AGREEMENT
THIS LOAN AGREEMENT ("Agreement") is made and entered into as of March 27,
1998 by and between ALDILA, INC., a Delaware corporation ("Borrower") and UNION
BANK OF CALIFORNIA, N.A. ("Bank").
SECTION 1. THE LOAN
1.1.1 THE REVOLVING LOAN. Bank will loan to Borrower an amount
not to exceed Ten Million Dollars ($10,000,000) outstanding in the aggregate at
any one time (the "Revolving Loan"). Borrower may borrow, repay and reborrow all
or part of the Revolving Loan in amounts of not less than One Hundred Thousand
Dollars ($100,000) in accordance with the terms of the revolving note. All
borrowings of the Revolving Loan must be made before June 30, 1999 at which time
all unpaid principal and interest of the Revolving Loan shall be due and
payable. The Revolving Loan shall be evidenced by a promissory note (the
"Revolving Note") on the standard form used by Bank for commercial loans. Bank
shall enter each amount borrowed and repaid in Bank's records and such entries
shall be deemed to be the amount of the Revolving Loan outstanding. Omission of
Bank to make any such entries shall not discharge Borrower of its obligation to
repay in full with interest all amounts borrowed.
1.2 TERMINOLOGY.
As used herein the word "Loan" shall mean, collectively, all
the credit facilities described above.
As used herein the word "Note" shall mean, collectively, all
the promissory notes described above.
As used herein, the words "Loan Documents" shall mean all
documents executed in connection with this Agreement.
1.3 PURPOSE OF LOAN. The proceeds of the Revolving Loan shall be
used for general working capital and general corporate purposes.
1.4 INTEREST. The unpaid principal balance of the Revolving Loan
shall bear interest at the rate or rates provided in the Revolving Note and
selected by Borrower. The Revolving Loan may be prepaid in full or in part only
in accordance with the terms of the Revolving Note and any such prepayment shall
be subject to the prepayment fee provided for therein.
1.5 UNUSED COMMITMENT FEE. On the last calendar day of the third
month following the execution of this Agreement and on the last calendar day of
each three-month period thereafter until June 30, 1999, or the earlier
termination of the Loan, Borrower shall pay to Bank a fee of one-quarter of one
percent (0.25%) per year on the average unused portion of the Loan for the
preceding quarter computed on the basis of actual days elapsed of a year of 360
days.
1.6 BALANCES. Borrower shall maintain its major depository accounts
with Bank until the Note and all sums payable pursuant to this Agreement have
been paid in full.
1.7 DISBURSEMENT. Upon execution hereof, Bank shall disburse the
proceeds of the Loan as provided in Bank's standard form Authorization executed
by Borrower.
1.8 CONTROLLING DOCUMENT. In the event of any inconsistency between
the terms of this Agreement and any Note or any of the other Loan Documents, the
terms of such Note or other Loan Documents will prevail over the terms of this
Agreement.
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SECTION 2. CONDITIONS PRECEDENT
Bank shall not be obligated to disburse all or any portion of the proceeds
of the Loan unless at or prior to the time for the making of such disbursement,
the following conditions have been fulfilled to Bank's satisfaction:
2.1 COMPLIANCE. Borrower shall have performed and complied with all
terms and conditions required by this Agreement to be performed or complied with
by it prior to or at the date of the making of such disbursement and shall have
executed and delivered to Bank the Note and other documents deemed necessary by
Bank.
2.2 BORROWING RESOLUTION. Borrower shall have provided Bank with
certified copies of resolutions duly adopted by the Board of Directors of
Borrower, authorizing this Agreement and the Loan Documents. Such resolutions
shall also designate the persons who are authorized to act on Borrower's behalf
in connection with this Agreement and to do the things required of Borrower
pursuant to this Agreement.
2.3 CONTINUING COMPLIANCE. At the time any disbursement is to be
made, there shall not exist any event, condition or act which constitutes an
event of default under Section 6 hereof or any event, condition or act which
with notice, lapse of time or both would constitute such event of default; nor
shall there be any such event, condition, or act immediately after the
disbursement were it to be made.
SECTION 3. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants that:
3.1 BUSINESS ACTIVITY. The principal business of Borrower is the
manufacture of graphite golf shafts, carbon fiber, other composite materials
and products which employ carbon fiber and composite materials.
3.2 AFFILIATES AND SUBSIDIARIES. Borrower's affiliates and
subsidiaries (those entities in which Borrower has either a controlling interest
or at least a 25% ownership interest) and their addresses, and the names of
Borrower's principal shareholders, are as provided on a schedule delivered to
Bank on or before the date of this Agreement.
3.3 AUTHORITY TO BORROW. The execution, delivery and performance of
this Agreement, the Note and all other agreements and instruments required by
Bank in connection with the Loan are not in contravention of any of the terms of
any indenture, agreement or undertaking to which Borrower is a party or by which
it or any of its property is bound or affected.
3.4 FINANCIAL STATEMENTS. The financial statements of Borrower,
including both a balance sheet at December 31, 1997, together with supporting
schedules, and an income statement for the twelve (12) months ended December
31, 1997, have heretofore been furnished to Bank, and are true and complete
and fairly represent the financial condition of Borrower during the period
covered thereby. Since December 31, 1997, there has been no material adverse
change in the financial condition or operations of Borrower.
3.5 TITLE. Except for assets which may have been disposed of in the
ordinary course of business, Borrower has good and marketable title to all of
the property reflected in its financial statements delivered to Bank and to all
property acquired by Borrower since the date of said financial statements, free
and clear of all liens, encumbrances, security interests and adverse claims
("Liens"), except for Permitted Liens, as defined in Section 5.1.
3.6 LITIGATION. There is no litigation or proceeding pending or
threatened against Borrower or any of its property which is reasonably likely to
affect the financial condition, property or business of Borrower in a materially
adverse manner or result in liability in excess of Borrower's insurance
coverage.
3.7 DEFAULT. Borrower is not now in default in the payment of any
of its material obligations, and there exists no event, condition or act which
constitutes an event of default under Section 6 hereof and no condition, event
or act which with notice or lapse of time, or both, would constitute an event of
default.
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3.8 ORGANIZATION. Borrower is duly organized, validly existing and
in good standing under the laws of the state of its organization, and has the
power and authority to carry on the business in which it is engaged and/or
proposes to engage.
3.9 POWER. Borrower has the power and authority to enter into this
Agreement and to execute and deliver the Note and all of the other Loan
Documents.
3.10 AUTHORIZATION. This Agreement and all things required by this
Agreement have been duly authorized by all requisite action of Borrower.
3.11 QUALIFICATION. Borrower is duly qualified and in good standing
as a foreign corporation in each jurisdiction where the failure to qualify would
have a material adverse effect on the operations or financial condition of
Borrower.
3.12 COMPLIANCE WITH LAWS. Borrower is not in violation with respect
to any applicable laws, rules, ordinances or regulations which violation
materially affects the operations or financial condition of Borrower.
3.13 ERISA. Any defined benefit pension plans as defined in the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), of
Borrower meet, as of the date hereof, the minimum funding standards of Section
302 of ERISA, and no Reportable Event or Prohibited Transaction as defined in
ERISA has occurred with respect to any such plan.
3.14 REGULATION U. No action has been taken or is currently planned
by Borrower, or any agent acting on its behalf, which would cause this Agreement
or the Note to violate Regulation U or any other regulation of the Board of
Governors of the Federal Reserve System or to violate the Securities and
Exchange Act of 1934, in each case as in effect now or as the same may hereafter
be in effect. Borrower is not engaged in the business of extending credit for
the purpose of purchasing or carrying margin stock as one of its important
activities and none of the proceeds of the Loan will be used directly or
indirectly for such purpose.
3.15 CONTINUING REPRESENTATIONS. These representations shall be
considered to have been made again at and as of the date of each disbursement of
the Loan and shall be true and correct as of such date or dates.
SECTION 4. AFFIRMATIVE COVENANTS
Until the Note and all sums payable pursuant to this Agreement or any other
of the Loan Documents have been paid in full, unless Bank waives compliance in
writing, Borrower agrees that:
4.1 USE OF PROCEEDS. Borrower will use the proceeds of the Loan
only as provided in subsection 1.3 above.
4.2 PAYMENT OF OBLIGATIONS. Borrower will pay and discharge
promptly all taxes, assessments and other governmental charges and claims levied
or imposed upon it or its property, or any part thereof, provided, however, that
Borrower shall have the right in good faith to contest any such taxes,
assessments, charges or claims and, pending the outcome of such contest, to
delay or refuse payment thereof provided that adequately funded reserves are
established by it to pay and discharge any such taxes, assessments, charges and
claims.
4.3 MAINTENANCE OF EXISTENCE. Borrower will maintain and preserve
its existence and assets and all rights, franchises, licenses and other
authority necessary for the conduct of its business and will maintain and
preserve its property, equipment and facilities in good order, condition and
repair, ordinary wear and tear excepted, and except for the disposition of
inventory, or of excess or obsolete equipment which is disposed of in an arm's
length transaction or has no tangible financial value, in the ordinary course of
business. Bank may, at reasonable times, visit and inspect any of the properties
of Borrower.
4.4 RECORDS. Borrower will keep and maintain full and accurate
accounts and records of its operations according to generally accepted
accounting principles and will permit Bank to have reasonable access thereto, to
make reasonable examination and photocopies thereof, and, upon reasonable
advance notice, to make audits during regular business hours. Costs for such
audits shall be paid by Borrower.
-3-
<PAGE>
4.5 INFORMATION FURNISHED. Borrower will furnish to Bank:
(a) Within forty five (45) days after the close of each fiscal
quarter, except for the final fiscal quarter of each fiscal year, its unaudited
balance sheet as of the close of such fiscal quarter, its unaudited income and
expense statement with supportive schedules and statement of retained earnings
for that fiscal quarter, prepared in accordance with generally accepted
accounting principles;
(b) Within ninety (90) days after the close of each fiscal year, a
copy of its statement of financial condition including at least its balance
sheet as of the close of such fiscal year, its income and expense statement and
retained earnings statement for such fiscal year, examined and prepared on an
audited basis by independent certified public accountants selected by Borrower
and reasonably satisfactory to Bank, in accordance with generally accepted
accounting principles applied on a basis consistent with that of the previous
year;
(c) As soon as available, copies of such financial statements and
reports as Borrower may file with any state or federal agency, including all
1O-Q, 10-K, and other reports as filed with the Securities and Exchange
Commission ("SEC");
(d) Such other financial statements and information as Bank may
reasonably request from time to time;
(e) In connection with each financial statement provided hereunder,
a certification of compliance with all covenants under this Agreement, executed
by Borrower's chief financial officer or other duly authorized officer of
Borrower, in form acceptable to Bank including Borrower's statement certifying
that no default has occurred and no event exists which with notice or the lapse
of time, or both, would result in a default hereunder;
(f) In connection with each fiscal year-end statement required
hereunder, any management letter of Borrower's certified public accountants;
(g) Prompt written notice to Bank of all events of default under
any of the terms or provisions of this Agreement or of any other agreement,
contract, document or instrument entered, or to be entered into with Bank; and
of any litigation which, if decided adversely to Borrower, would have a material
adverse effect on Borrower's financial condition; and of any other matter which
has resulted in, or is likely to result in, a material adverse change in its
financial condition or operations; and
(l) Prior written notice to Bank of any changes in Borrower's
officers and other senior management; Borrower's name; and location of
Borrower's assets, principal place of business or chief executive office.
4.6 PROFITABILITY. Borrower will maintain its net income, after provision
for income taxes, calculated as the sum of the most recent fiscal quarter plus
the three (3) fiscal quarters ended immediately prior to such quarter, of not
less than:
i) $1,500,000 at December 31, 1997;
ii) $1,000,000 at March 31, 1998;
iii) $ 400,000 at June 30, 1998;
iv) $ 450,000 at September 30, 1998;
v) $3,100,000 at December 31, 1998;
vi) $3,100,000 at March 31, 1999;
vii) $3,500,000 at June 30, 1999.
4.7 CASH FLOW TO DEBT SERVICE RATIO. Borrower will maintain a
ratio of Cash Flow to Debt Service of not less than 1.25:1.0. "Cash Flow"
shall mean the sum of net income plus interest payments, tax payments,
depreciation, amortization and rents LESS income received from sub-leases,
unfinanced Normalized Capital Expenditures and dividends paid, all for the
most recent fiscal quarter plus the three (3) fiscal quarters ended
immediately prior to such quarter. "Debt Service" shall mean that portion of
rent, long-term liabilities and capital leases, net of income received from
sub-leases, coming due within twelve (12) months after the date of
calculation plus interest payments projected by Borrower for the same period,
but shall not include principal
-4-
<PAGE>
amounts outstanding under the Revolving Loan. "Normalized Capital Expenditures"
shall mean those capital expenditures made by Borrower except those related to
Borrower's single production line and associated facility located in Evanston,
Wyoming.
4.8 NET WORTH. Borrower will maintain net worth of not less than
Seventy Million Dollars ($70,000,000) as of December 31, 1997 and will at all
times thereafter maintain a minimum net worth that increases from said amount as
of each fiscal year end of Borrower by fifty percent (50%) of Borrower's net
income after taxes.
4.9 TOTAL LIABILITIES TO NET WORTH. Borrower will maintain a ratio
of total liabilities to net worth of not less than 0.60:1.0.
4.10 INSURANCE. Borrower will keep all of its insurable property,
real, personal or mixed, insured by good and responsible companies against fire
and such other risks as are customarily insured against by companies conducting
similar business with respect to like properties. Borrower will maintain
adequate worker's compensation insurance and adequate insurance against
liability for damages to persons and property.
4.11 ADDITIONAL REQUIREMENTS. Borrower will promptly, upon demand by
Bank, take such further action and execute all such additional documents and
instruments in connection with this Agreement as Bank in its reasonable
discretion deems necessary, and promptly supply Bank with such other information
concerning its affairs as Bank may reasonably request from time to time.
4.12 LITIGATION AND ATTORNEYS' FEES. Borrower will pay promptly to
Bank upon demand, reasonable attorneys' fees (including but not limited to the
reasonable estimate of the allocated costs and expenses of in-house legal
counsel and legal staff) and all costs and other expenses paid or incurred by
Bank in collecting, modifying or compromising the Loan or in enforcing or
exercising its rights or remedies created by, connected with or provided for in
this Agreement or any of the Loan Documents, whether or not an arbitration,
judicial action or other proceeding is commenced. If such proceeding is
commenced, only the prevailing party shall be entitled to attorneys' fees and
court costs.
4.13 BANK EXPENSES. Borrower will pay or reimburse Bank for all
costs, expenses and fees incurred by Bank in preparing and documenting this
Agreement and the Loan, and all amendments and modifications thereof, including
but not limited to all filing and recording fees, costs of appraisals, insurance
and attorneys' fees, including the reasonable estimate of the allocated costs
and expenses of in-house legal counsel and legal staff.
4.14 REPORTS UNDER PENSION PLANS. Borrower will furnish to Bank, as
soon as possible and in any event within 15 days after Borrower knows or has
reason to know that any event or condition with respect to any defined benefit
pension plans of Borrower described in Section 3 above has occurred, a statement
of an authorized officer of Borrower describing such event or condition and the
action, if any, which Borrower proposes to take with respect thereto.
SECTION 5. NEGATIVE COVENANTS
Until the Note and all other sums payable pursuant to this Agreement or any
other of the Loan Documents have been paid in full, unless Bank waives
compliance in writing, Borrower agrees that:
-5-
<PAGE>
5.1 ENCUMBRANCES AND LIENS.
(a) Borrower will not create any Lien on property of any
kind, whether real, personal or mixed, now owned or hereafter acquired, or
upon the income or profits thereof, except for (i) Liens specifically
referred to in the financial statements of Borrower as at December 31, 1997
or in a schedule delivered to Bank prior to the execution hereof, (ii) Liens
incidental to the conduct of Borrower's business or the ownership of
Borrower's assets which (a) do not secure indebtedness and (b) do not in the
aggregate materially detract from the value of Borrower's assets or
materially impair the use thereof in the operation of Borrower's business,
(iii) Liens incurred by Borrower in the ordinary course of business for items
not past due and payable, including mechanics' and materialmen's liens and
deposits and charges for workers' compensation and liens for taxes and
assessments not past due and payable, or where such items are being contested
in good faith provided provision is made to the reasonable satisfaction of
Bank for the eventual payment thereof if subsequently found payable by
Borrower, (iv) purchase money security interests encumbering only the
personal property acquired, (v) operating leases or licenses under which
Borrower uses or possesses any property, whether personal or real, and (vi)
the sublease of all or any portion of the real property currently leased by
Borrower at 15822 Bernardo Center Drive, San Diego, California (collectively,
"Permitted Liens").
(b) Borrower will not assume or suffer to exist any Lien on
property of any kind, whether real, personal or mixed, now owned or hereafter
acquired, or upon the income or profits thereof, except for Permitted Liens.
5.2 BORROWINGS. Borrower will not sell, discount or otherwise
transfer any account receivable or any note, draft or other evidence of
indebtedness, except to Bank or except to a financial institution at face
value for deposit or collection purposes only and without any fee other than
fees normally charged by the financial institution for deposit or collection
services. Borrower will not borrow any money, become contingently liable to
borrow money, nor enter any agreement to directly or indirectly obtain
borrowed money, except pursuant to agreements made with Bank.
5.3 SALE OF ASSETS, LIQUIDATION OR MERGER. Borrower will neither
liquidate nor dissolve nor enter into any consolidation, merger, partnership
or other combination, nor convey, nor sell, nor lease all or the greater part
of its assets or business, nor purchase or lease all or the greater part of
the assets or business of another, provided, however, Borrower may acquire,
by purchase of stock, purchase of assets or merger, all or any substantial
division or portion of the assets and business of another entity if (a) such
acquisition is uncontested by such entity, (b) the principal business of such
entity is the same as that of Borrower as defined in Section 3.1 hereof, (c)
Borrower is the surviving entity, (d) the consideration paid or to be paid by
Borrower in connection with such acquisition, whether in the form of shares
of Borrower's stock, cash, debt due to seller, or otherwise, when added to
the consideration paid or to be paid by Borrower in connection with all other
acquisitions made by Borrower at any time on or after the date of this
Agreement but on or prior to the date of such acquisition, does not exceed,
in the aggregate, the sum of (i) twenty percent (20%) of Borrower's net worth
as at Borrower's fiscal year-ended December 31, 1997, AND (ii) fifty percent
(50%) of Borrower's cumulative EBITDA, measured quarterly on a current fiscal
year-to-date basis, (e) the amount of consideration paid or to be paid in a
form other than shares of Borrower's stock in connection with such
acquisition, when added to the consideration paid or to be paid by Borrower
in a form other than shares of Borrower's stock in connection with all other
acquisitions made by Borrower at any time on or after the date of this
Agreement but on or prior to the date of such acquisition, does not exceed an
amount equal to sixty percent (60%) of the maximum amount permitted under
subparagraph (d) above; and (f) no Event of Default shall have occurred and
be continuing either immediately prior to or immediately after the making of
such acquisition, or shall be caused thereby. "EBITDA" shall mean earnings
before interest, taxes, depreciation and amortization.
5.4 LOANS, ADVANCES AND GUARANTIES. Borrower will not, except in
the ordinary course of business as currently conducted, make any loans or
advances, become a guarantor or surety, pledge its credit or properties in any
manner or extend credit.
5.5 INVESTMENTS. Borrower will not purchase the debt or equity of
another person or entity except for savings accounts and certificates of deposit
of Bank, direct U.S. Government obligations and commercial paper issued by
corporations with the top ratings of Moody's or Standard & Poor's, provided all
such permitted investments shall mature within one year of purchase.
-6-
<PAGE>
5.6 PAYMENT OF DIVIDENDS. Borrower will not declare or pay any
dividends, other than a dividend payable in its own common stock, or authorize
or make any other distribution with respect to any of its stock now or hereafter
outstanding.
SECTION 6. EVENTS OF DEFAULT
The occurrence of any of the following events ("Events of Default") shall
terminate any obligation on the part of Bank to make or continue the Loan and
automatically, unless otherwise provided under the Note, shall make all sums of
interest and principal and any other amounts owing under the Loan immediately
due and payable, without notice of default, presentment or demand for payment,
protest or notice of nonpayment or dishonor, or any other notices or demands:
6.1 Borrower shall default in the due and punctual payment of the
principal of or the interest on the Note or any of the other Loan Documents; or
6.2 Any default shall occur under the Note; or
6.3 Borrower shall default in the due performance or observance of
any covenant or condition of the Loan Documents.
SECTION 7. MISCELLANEOUS PROVISIONS
7.1 ADDITIONAL REMEDIES. The rights, powers and remedies given to
Bank hereunder shall be cumulative and not alternative and shall be in addition
to all rights, powers and remedies given to Bank by law against Borrower or any
other person, including but not limited to Bank's rights of setoff or banker's
lien.
7.2 NONWAIVER. Any forbearance or failure or delay by Bank in
exercising any right, power or remedy hereunder shall not be deemed a waiver
thereof and any single or partial exercise of any right, power or remedy shall
not preclude the further exercise thereof. No waiver shall be effective unless
it is in writing and signed by an officer of Bank.
7.3 INUREMENT. The benefits of this Agreement shall inure to the
successors and assigns of Bank and the permitted successors and assignees of
Borrower, and any assignment by Borrower without Bank's consent shall be null
and void.
7.4 APPLICABLE LAW. This Agreement and all other agreements and
instruments required by Bank in connection therewith shall be governed by and
construed according to the laws of the State of California.
7.5 SEVERABILITY. Should any one or more provisions of this
Agreement be determined to be illegal or unenforceable, all other provisions
nevertheless shall be effective. In the event of any conflict between the
provisions of this Agreement and the provisions of any note or reimbursement
agreement evidencing any indebtedness hereunder, the provisions of such note or
reimbursement agreement shall prevail.
7.6 INTEGRATION CLAUSE. Except for documents and instruments
specifically referenced herein, this Agreement constitutes the entire agreement
between Bank and Borrower regarding the Loan and all prior communications verbal
or written between Borrower and Bank shall be of no further effect or
evidentiary value.
7.7 CONSTRUCTION. The section and subsection headings herein are
for convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
7.8 AMENDMENTS. This Agreement may be amended only in writing
signed by all parties hereto.
7.9 COUNTERPARTS. Borrower and Bank may execute one or more
counterparts to this Agreement, each of which shall be deemed an original, but
when together shall be one and the same instrument.
-7-
<PAGE>
SECTION 8. SERVICE OF NOTICES
8.1 Any notices or other communications provided for or allowed
hereunder shall be effective only when given by one of the following methods and
addressed to the respective party at its address given with the signatures at
the end of this Agreement and shall be considered to have been validly given:
(a) upon delivery, if delivered personally; (b) upon receipt, if mailed, first
class postage prepaid, with the United States Postal Service; (c) on the next
business day, if sent by overnight courier service of recognized standing; and
(d) upon telephoned confirmation of receipt, if telecopied.
8.2 The addresses to which notices or demands are to be given may
be changed from time to time by notice delivered as provided above.
THIS AGREEMENT is executed on behalf of the parties by duly authorized
officers as of the date first above written.
UNION BANK OF CALIFORNIA, N.A. ALDILA, INC.
By: /s/ Douglas Lambell By: /s/ Robert J. Cierzan
-------------------------------- -------------------------------
Title Vice President Title Vice President
----------------------------- -----------------------------
By: /s/ Steve Dunne By:
-------------------------------- -------------------------------
Title: Vice President Title:
----------------------------- -----------------------------
Address: 530 B Street, 4th Floor Address: 15822 Bernardo Center Drive
San Diego, California 92101 San Diego, California 92127
Attention: Steven N. Adkins, Attention: Robert J. Cierzan,
Vice President Vice President of Finance
Telecopier:(619) 230-3766 Telecopier:(619) 592-0403
Telephone: (619) 230-3750 Telephone: (619) 592-0404
-8-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,358
<SECURITIES> 0
<RECEIVABLES> 9,756
<ALLOWANCES> 0
<INVENTORY> 12,154
<CURRENT-ASSETS> 27,816
<PP&E> 26,388
<DEPRECIATION> 0
<TOTAL-ASSETS> 116,165
<CURRENT-LIABILITIES> 9,646
<BONDS> 20,000
0
0
<COMMON> 155
<OTHER-SE> 78,368
<TOTAL-LIABILITY-AND-EQUITY> 116,165
<SALES> 19,117
<TOTAL-REVENUES> 19,117
<CGS> 13,277
<TOTAL-COSTS> 16,345
<OTHER-EXPENSES> 357<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 316
<INCOME-PRETAX> 2,146
<INCOME-TAX> 1,005
<INCOME-CONTINUING> 1,141
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,141
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
<FN>
<F1>GOODWILL AMORTIZATION
</FN>
</TABLE>
