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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, 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)
12140 COMMUNITY ROAD, POWAY, CALIFORNIA 92064
(Address of principal executive offices)
(619) 513-1801
(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
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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 22, 1999, 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 $23.9 million.
As of March 22, 1999, there were 15,462,204 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 1999 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.
REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
INDEX
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PAGE
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Part I
Item 1. Business 3
Item 2. Properties 14
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 15
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 7a. Quantitative and Qualitative Disclosures about Market
Risk 22
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 22
Part III
Item 10. Directors and Executive Officers of the Registrant 22
Item 11. Executive Compensation 22
Item 12. Security Ownership of Certain Beneficial Owners
and Management 22
Item 13. Certain Relationships and Related Transactions 22
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 23
Signatures 38
Exhibit Index 39
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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 OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"
UNDER ITEM 7.
ITEM 1. BUSINESS
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, Taylor Made, Ping and Titleist. 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 golf shaft
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.
In an effort to maintain its leadership position in the graphite shaft
market over the last several years the Company has taken steps to vertically
integrate into the manufacture of its own raw materials in order to control
its raw material costs and ensure its sources of supply. In 1994, the Company
started production of its principal raw material for shafts, 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 requirements internally. In 1997, the Company
constructed a 50,000 square foot carbon fiber manufacturing facility in
Evanston, Wyoming. The Company now produces carbon fiber at this facility to
satisfy a significant portion of its internal demand for carbon fiber in the
manufacturing of graphite prepreg for the production of graphite golf club
shafts. The Company also has the capability to produce carbon fiber at this
new facility in excess of what it will be able to use in the manufacture of
golf club shafts. The Company intends to sell such excess carbon fiber, in
the form of graphite prepreg manufactured using its existing facility in
Poway, California, as well as chopped carbon fiber to manufacturers of other
carbon fiber - based products. Management of the Company believes that the
ability to manufacture carbon fiber will 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. During 1998, however, the new facility did not operate
at full capacity and management does not expect to operate the plant at full
capacity in 1999 due to the weak demand for carbon fiber. The full benefit of
this facility to the Company is not expected to be realized until the demand
for the Company's carbon fiber increases which will allow the Company to
produce at increased volume levels resulting in lower production costs.
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Graphite Golf Shafts and Other Composite Products:
The Company was 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 used 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 expertise and significant
manufacturing capabilities.
Most golf clubs being sold today 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 improvements 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 78% of new woods purchased
including graphite shafts in 1998), graphite shafts have started to achieve
similar success in the irons market 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 1998,
approximately 39% of new irons purchased were graphite shafted.
Originally, graphite shafts were primarily 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 continued efforts to reduce its overall
manufacturing costs.
Carbon Fiber and Graphite Prepreg:
Carbon fiber is produced by processing acrylic fiber through a series of
stretching, stabilizing and carbonizing sequences converting it into
essentially a pure carbon chain fiber exhibiting stiffness and strength
characteristics similar to steel at significantly less weight. These carbon
fibers combined with various resins (prepregs) are then converted to
composite structures which have replaced metals in a number of weight
critical aerospace, sporting and industrial applications. Typically, the
composite structure will weigh 25 to 50 percent less than the metal structure
it has replaced. Carbon fiber composite structures also provide toughness,
resistance to corrosion, resistance to fatigue, capacity to dissipate heat
and electrical conductivity. Carbon fiber has grown from its inception in the
late 1950's into an industry producing approximately 27 million pounds of
carbon fiber per year.
Carbon fiber usage has grown primarily for consumption by the aerospace
industry and for sporting goods applications. Aerospace grade carbon fibers
continue to be utilized for production of commercial and military
aerostructures. The higher-cost, aerospace grade carbon fibers were first
used in sporting goods and industrial applications until a lower-cost, large
bundle carbon fiber was developed as an alternative for use in many sporting
goods and industrial applications. Aldila was a leader in utilizing large
bundle carbon fibers purchased from outside vendors for the manufacture of
graphite golf shafts. With the opening of its carbon fiber facility in
Evanston, Wyoming, Aldila now produces large bundle carbon fiber for its
prepreg operation and graphite golf shaft production. The carbon fiber
industry is represented by approximately ten companies that produce aerospace
and commercial carbon fibers. Aldila now competes in the carbon fiber market
as it offers for sale commercial carbon fibers and prepreg produced in its
facilities. At the same time, Aldila
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continues to purchase certain types of carbon fiber from these outside
vendors for the manufacture of golf shafts.
In addition to aerospace applications and graphite golf shafts,
applications for carbon fibers include thermoplastic injection molding
compounds for electronic components such as cellular telephones and
computers, drive shafts for trucks, natural gas vehicle fuel tanks,
reinforcement for infrastructure repair such as bridges, lightweight tubes
for off shore deep water oil well drilling, fishing rods, ski poles, bicycle
tubes and frames, tennis racquets, hockey sticks and sailboat masts.
Continuing growth in demand for carbon fibers in these applications and
others is dependent on continuing efforts to reduce the cost of the material
along with delivering adequate quantities of high quality carbon fiber to the
customer.
PRODUCTS
Aldila offers a broad range of innovative and high-quality graphite golf
shafts 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 approximately
85% of net sales in the year ended December 31, 1998, 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 $5 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.
During 1998, the Company sold graphite prepreg manufactured in its
Poway, California manufacturing facility to third parties and offered for
sale large bundle carbon fiber and chopped fiber from its manufacturing
facility in Evanston, Wyoming. Sale of these new carbon fiber products
commenced in the first quarter 1999.
Carbon fiber composite materials are suited for a diverse range of
applications based on their distinctive combination of physical and chemical
properties. Carbon fibers are used as reinforcements in composite materials
that combine fibers with epoxy resins or other matrix materials to form a
substance with high strength, low weight, stiffness, resistance to corrosion,
resistance to fatigue and capacity to dissipate heat and electrical
conductivity. Carbon fiber materials produced by the Company would be used in
a variety of applications such as molding compounds for the manufacture of
electronic components, masts and spars for the marine industry, hockey
sticks, fishing rods and other industrial products.
CUSTOMERS AND CUSTOMER RELATIONS
For fiscal year 1998, the Company had approximately 300 customers, which
included approximately 100 golf club manufacturers and more than 60
distributors, with the balance principally consisting of 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 61%, 72% and 78% of net sales in 1998,
1997 and 1996 respectively.
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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, and there
typically are changes in the composition of the list of the Company's five or
ten most significant customers from year to year as a result. Due to the
substantial marketplace success of their clubs in recent periods, however,
for the last several years, the Company's two largest customers have been
Callaway and Taylor Made. Callaway, which has been the Company's largest
customer for the last seven years but which has represented a decreasing
percentage of the Company's sales for each of the last four years, accounting
for 26%, 32% and 43% of the Company's net sales in 1998, 1997 and 1996
respectively, while Taylor Made, which has been the Company's second largest
customer for the last three years, accounted for 15%, 22% and 16% of the
Company's net sales in 1998, 1997 and 1996, respectively. As a result of
expected poor sales of golf clubs in 1999, particularly of premium clubs, as
well as the increased diversification of the Company's customer base due to
increasing penetration of graphite shafts into the value club segment of the
industry, the Company expects that the concentration of its sales to its five
largest customers will continue to decline in 1999. In addition, the Company
does not expect Callaway to continue to be its largest customer in 1999.
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
sales and it is often difficult to project the Company's sales to a given
customer in advance.
Aldila sells graphite prepreg primarily to manufacturers of composite
products such as hockey equipment, sail boat riggings and fishing rods and
sells chopped carbon fibers to companies which produce molding compounds
which include carbon fibers.
The Company believes that its close customer relationships and
responsive service have been significant elements of its success to date,
establishing it as a premier 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.
MARKETING AND PROMOTION
The Company's marketing strategy is designed to encourage golf club
manufacturers to select and promote Aldila shafts, and to increase overall
market acceptance and use of graphite golf shafts. The Company utilizes a
variety of marketing and promotional channels to increase sales of Aldila
brand name shafts through its network of distributors, and to support
Aldila's brand name recognition and reputation among consumers for offering
consistently high quality products designed for a wide range of golfers.
Although the Company does not sell directly to the end users of its products,
the Company believes that its brand name recognition contributes to the
marketability of its customers' products.
Aldila's marketing and promotion expenditures were approximately $1.0
million, $2.5 million and $2.5 million in 1998, 1997 and 1996, respectively.
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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 85% of net sales for the year ended
December 31, 1998.
Graphite prepreg sales and carbon fiber sales are made primarily to
manufacturers of composite products. The Company uses its internal sales
force in the marketing and sale of these products to its customers.
International sales represented less than 10% of net sales for the years
ended December 31, 1998, 1997 and 1996.
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.
The Company has been one of the leaders in developing the market for
lower cost large bundle carbon fiber by successfully converting to this fiber
type from a more expensive carbon fiber material for the manufacture of its
graphite golf shafts. The Company believes that it can also be a market
leader in providing large bundle carbon fiber to other manufacturing
applications outside of golf shafts.
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 each customer's clubs. New golf shaft designs
are developed and tested using a CAD/CAE golf shaft analysis program, which
evaluates a new shaft design with respect to weight, torque, flex point, tip
and butt flexibility, swing weight and other critical shaft design criteria.
In addition, the Company 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, thermoplastic 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 has applied its carbon fiber technology to other products in
recent years, engaging in limited production of graphite tubing and other
molded parts on a special order basis.
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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 golf shaft manufacturing
facilities, one prepreg manufacturing facility (in conjunction with one of
its shaft manufacturing facilities) and one carbon fiber manufacturing
facility. During its 27 years of operation, the Company has improved its
manufacturing processes and believes its 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" is rolled onto
metal rods known as mandrels. The Company also manufacturers 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 tensile strength and modulus (stiffness) of the fiber.
The Company manufacturers graphite prepreg in its Poway, California facility.
Through 1997, the Company purchased all of its carbon fibers from outside
vendors. Beginning in 1998, the Company manufactured carbon fiber in its
Evanston, Wyoming facility for consumption in its golf shaft production
operation. Because many different forms of carbon fiber are required for golf
shaft products, the Company will continue to be reliant on outside suppliers
for a portion of its ongoing carbon fiber needs.
GRAPHITE PREPREG MANUFACTURING PROCESS. 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. The Company now produces substantially all of its
graphite prepreg requirements internally. The Company is, however, dependent
upon certain domestic graphite prepreg suppliers for graphite prepreg which
it does not produce and, therefore, 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 1998, the Company
purchased most of its carbon fiber from Hexcel (formerly Hercules, Inc.) and
Fortafil Fibers; however, the Company also purchased carbon fiber from Toho
Carbon Fibers, Inc. The Company experienced increases in these raw material
component costs in 1996 and 1997 but due to a weakening in demand for carbon
fiber overall the costs for these raw materials stabilized in 1998, and
management anticipates that these costs will decrease in the future, although
it cannot predict the timing or extent of any future price changes.
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CARBON FIBER MANUFACTURING PROCESS. In the first quarter of 1998 the
Company completed construction of a 50,000 square foot carbon fiber
manufacturing facility in Evanston, Wyoming. In this facility the Company
produces large bundle carbon fiber material from acrylic fiber through a
series of stretching, stabilizing and carbonizing sequences. This material is
now the primary raw material for the Company's prepreg manufacturing
operation to support the manufacture of graphite golf shafts.
In 1998, the Company purchased substantially all of its raw acrylic
fibers for the carbon fiber operation from two outside vendors. Pursuant to a
supply agreement with the Company, Courtaulds Fibres, Ltd. ("Courtaulds") has
agreed to supply the Company with carbon fiber precursor. The Company
believes Courtaulds and its other vendor will provide a reliable source of
supply for raw materials at the anticipated 1999 operating levels. However,
the Company will continue to pursue alternate sources of supply for this
material. 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 of graphite golf shafts, graphite prepreg, and beginning in
1998, carbon fiber. 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 for the sale of its graphite golf club
shafts. 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. Recently, competition
based primarily on price has become increasingly prevalent. 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 constitute the majority
of the Company's revenues. This competition has made it more difficult to
retain existing customers, attract new customers and has placed increasing
pressure on prices for the Company's premium shafts. The Company now also
competes with foreign owned graphite shaft manufacturers for customers
desiring lower priced value shafts. The Company only recently entered into
this segment of the market, whereas the competing shaft manufacturers may be
well established in this segment of the market.
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 reputation among golf club companies as a value-added
supplier with competitive prices.
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 shaft needs internally, it could have an adverse
effect on the Company.
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The Company expects that in the future it may also compete against
companies who manufacture one or more of three principal components of the
golf club -- the grip, the shaft and the clubhead and assemble completed golf
clubs for delivery to club companies. Should any of the Company's significant
customers decide to source their golf clubs in this manner where an Aldila
shaft is not included, it could have an adverse effect on the Company.
The Company also competes for sales of graphite prepreg and carbon fiber
products with other producers of graphite prepreg and carbon fibers, many of
which have substantially greater research and development, managerial and
financial resources than the Company and have been producing graphite prepreg
and carbon fiber for substantially longer periods of time than the Company
has, and represent significant competition for the Company. In addition, the
Company's ability to compete in the sale of graphite prepreg and carbon fiber
is dependent to some extent on the Company's ability to cause manufacturers
and consumers of carbon fiber-based products to utilize large bundle carbon
fiber, which is the sole type of carbon fiber manufactured by the Company and
the principal type used in its graphite prepreg, rather than the small
bundle, aerospace grade carbon fiber, that predominated in the industry until
a few years ago.
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, 1998 the Company had approximately 48
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, 1998, Aldila employed approximately 1,000 persons on
a full-time basis, including nine in sales and marketing, 22 in research and
development and engineering, and 920 in production, and the balance are
administrative and support staff. The number of full-time employees also
includes 435 persons who are employed in the Company's Mexico facilities and
275 who are employed in the Company's China facility. 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
highest sales occurring in the second quarter.
The Company experienced a substantial shaft unit volume increase in 1998
over the previous year which followed a seasonal pattern where sales volume
peaked in the second quarter of the fiscal year. However, based on the
overall weak demand for golf clubs experienced in the fourth quarter of 1998
and forecast for at least the first half of 1999, the Company anticipates its
net sales could decline between 25% to 45% in the first half of 1999 versus
1998 and accordingly, does not anticipate normal seasonal sales trends in
1999.
10
<PAGE>
BACKLOG
As of December 31, 1998, the Company had a sales backlog of
approximately $8.1 million compared to approximately $14.1 million as of
December 31, 1997. The Company believes that the dollar volume of its current
backlog will be shipped over the next three months. Orders can typically be
cancelled 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
NEW CARBON FIBER MANUFACTURING FACILITY. The Company has constructed a
new facility for the manufacture of carbon fiber in Evanston, Wyoming. The
Company has made a substantial investment in this new operation and is now
operating at a normal rate of production after completing its start-up phase
in the first half of 1998. Although the Company has hired individuals with
substantial expertise in the manufacture of carbon fiber, the Company has
only produced carbon fibers for consumption by the golf shaft manufacturing
operation for a short-time and, therefore, there is a risk that the Company
will be unable to continue 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, the transition into new carbon fiber
applications will require the Company to develop expertise with respect to
different manufacturing and marketing issues related to such new
applications. The inability to develop new applications internally or to sell
carbon fiber or prepreg to other manufacturers to absorb carbon fiber
manufacturing capacity in excess of its golf shaft needs could have an
adverse effect on the Company.
MARKET PENETRATION - CARBON FIBER PRODUCTS. The Company established a
carbon fiber manufacturing facility in Evanston, Wyoming to support the
manufacture of graphite golf shafts but also to diversify its sales among
other products. In recent years, the worldwide demand for carbon fiber for
aerospace, sporting goods and industrial applications has grown rapidly as
new applications have been advanced for consumption of this material. The
Company's success in entering into this market with its internally produced
carbon fiber is dependent on continued increases in demand for carbon fiber
worldwide. However, at present there exists excess capacity for the
manufacture of carbon fiber worldwide which has had the effect of decreasing
the market prices for carbon fiber and products derived from carbon fiber, as
compared to shortages and increasing prices as prevailed during 1996 and
1997. The Company anticipates that the current state of overcapacity in the
industry will make it difficult for the Company to take advantage of the full
capacity of its carbon fiber plant to generate incremental profitable
revenues through sales of carbon fiber other than its golf shafts.
POTENTIAL CASH FLOW SHORTAGES. As a result of a significant drop-off in
sales of golf clubs generally, particularly the premium clubs that continue
to represent a substantial majority of the Company's sales, that started in
the fall of 1998 and is expected to continue at least through 1999, combined
with current overcapacity in the carbon fiber industry that is depressing
market prices for carbon fiber products, the Company has recently
experienced, and expects to continue to experience periodically throughout
1999, the need for borrowings under its line of credit facility in order to
finance its business operations. Since its initial public offering in 1993,
the Company had been able to finance its business operations out of
internally generated working capital without resort to any outside credit
facility. In addition, the first semi-annual $4,000,000 principal payment
under its outstanding senior notes is due in September 1999. The Company has
recently been required by the financial institution providing its line of
credit facility to secure its obligations under the facility through a pledge
of substantially all of its assets. The line of credit facility currently
expires
11
<PAGE>
in August 1999, although the Company is engaged in negotiations to extend or
replace this facility in order to provide working capital borrowing capacity
at least into 2000. In particular if the Company is not able to secure an
adequate working capital credit facility that extends past the expiration of
its current facility, there can be no assurance that the Company will
generate sufficient cash flow from operations to finance its business
operations for the remainder of 1999 and also meet its obligations under its
senior notes.
CUSTOMER CONCENTRATION. The Company's sales have been, and very likely
will continue to be, concentrated among a small number of customers. In 1998,
sales to the Company's top five customers represented approximately 61% of
net sales. Aldila's principal customers have historically varied depending
largely on the prevailing popularity of the various clubs that contain Aldila
shafts. In 1998, Callaway accounted for 26% of net sales and Taylor Made
accounted for 15% of net sales. The Company cannot predict the impact that
general market trends in the golf industry, including the fluctuation in
popularity of specific clubs manufactured by customers, 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, and consistent with the industry practice, generally does not have
long-term contracts with its customers. In this regard, Callaway and Taylor
Made, who collectively represent in excess of 40% of the Company's sales in
1998, each purchases from at least two other graphite shaft suppliers. In the
event Callaway, Taylor Made or any other significant customer 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 and operating results. In
addition, sales by the Company's major customers are likely to vary
dramatically from time to time due to fluctuating public acceptance of their
products. The Company anticipates that its sales to Callaway and Taylor Made
will decline significantly in 1999 as compared to 1998. If these sales are
not replaced with sales to other shaft customers then such decrease could
have an adverse effect on the Company's business and operating results.
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 a 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.
RAW MATERIAL COST/AVAILABILITY. The Company's gross profit margins, in
part, are dependent on the price paid for carbon fiber purchased from outside
vendors and more substantially in the latter part of 1998 and in 1999 the
price paid for the acrylic fiber used for the manufacture of carbon fiber in
Evanston, Wyoming and the other costs associated with the operation of the
carbon fiber plant.
The Company experienced an increase in carbon fiber prices in 1996 and
1997 due to the growth being experienced in the use of carbon fiber coupled
with relatively little excess capacity. However, the Company experienced
minimal increases in raw material costs in 1998 and expects that raw material
costs will decline in 1999 due to a moderation in demand for all forms of
carbon fiber coupled with higher levels of available capacity for the
production of carbon fiber and prepregs in the industry.
The Company expects to obtain the majority of its carbon fiber from its
new facility in Evanston, Wyoming, but has also secured contracts for most of
its additional carbon fiber needs from outside vendors through 1999.
Depending on market conditions prevailing at the time and 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. 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. In addition, the Company is dependent
12
<PAGE>
on its internal production of graphite prepreg to support its shaft
manufacturing operations and has not secured adequate additional sources of
supply should its production of prepreg be interrupted for any reason. The
exposure to the Company resulting from its increasing reliance on its own
internal production of the raw materials for its golf shaft business is
enhanced because the Company currently operates only one prepreg facility and
only one carbon fiber manufacturing facility. Although there is currently
overcapacity in these industries, there have been significant market
shortages of both carbon fiber and graphite prepreg in the recent past and
such shortages should be expected to recur in the future.
In 1998 the Company procured substantially all of its raw acrylic fibers
for the carbon fiber operation from two outside vendors. Pursuant to a supply
agreement with the Company, Courtaulds has agreed to supply the Company with
carbon fiber precursor. The Company believes Courtaulds and its other vendor
will provide a reliable source of supply of raw materials at the anticipated
operating levels, however, any interruption of precursor supply from one or
both of these suppliers would have a material adverse effect on the Company's
business.
RELIANCE ON OFF-SHORE MANUFACTURING FACILITIES. The Company operates
manufacturing facilities in Tijuana, Mexico and 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 operates a shaft manufacturing facility in Tijuana, Mexico
pursuant to the "maquiladora" duty-free program established by the Mexican
and United States governments. Such program enables the Company to take
advantage of generally lower costs in Mexico, without paying duty on
inventory shipped into or out of Mexico. The Company also operates in the
People's Republic of China in a special economic zone which affords special
advantages to companies with regards to income taxes, import and export
duties and value added taxes. There can be no assurance that the Mexican
government or the People's Republic of China will continue the programs
currently in place or that the Company will continue to be able to take
advantage of the benefits of the programs. The loss of these benefits could
have an adverse effect on the Company's business. The Company is also subject
to other customary risks of doing business outside of the United States,
including political instability, other import/export regulation, and cultural
differences.
UTILIZATION OF CERTAIN HAZARDOUS MATERIALS. In the ordinary course of
its manufacturing processes, 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.
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.
The Company is also seeking to develop new applications for the type of
carbon fiber that it produces in its new Wyoming facility. The Company's
ability to compete in the sale of graphite prepreg and carbon fiber is
dependent to some extent on the Company's ability to cause manufacturers and
consumers of carbon fiber-based products to utilize large bundle carbon
fiber, which is the sole type of carbon fiber manufactured by the Company.
There can be no assurance, however, that these applications will develop to
the extent anticipated by the Company.
13
<PAGE>
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 for
golf equipment sales. 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 professionals 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.
As the Company further enters into the manufacture and sale of carbon
fiber and prepreg products, it competes with other producers of carbon fibers
and prepregs, many of which have substantially greater research and
development, managerial and financial resources than the Company and
represent significant competition for the Company.
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 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.
YEAR 2000. The Company recognizes the need to ensure its operations will
not be adversely impacted by the inability of the Company's systems and the
information systems of its major customers and suppliers to process data
having dates on or after January 1, 2000. The Company has developed and
implemented a plan to identify and resolve all of the internal Year 2000
issues as well as evaluate its external Year 2000 exposures and risks. There
can be no assurance that the Company's efforts to achieve Year 2000
compliance will be successful or that third parties with whom the Company has
material relationships will be Year 2000 compliant by January 1, 2000. An
interruption of the company's ability to conduct its business due to a Year
2000 problem with a third party could have an adverse effect on the Company.
See also discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Year 2000" in this Form 10-K.
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 as well as the carbon fiber business. 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 33,000 square
foot leased facility in Poway, California (in the San Diego metropolitan
area). The Company's golf shafts are manufactured at six separate facilities,
one located in the Poway, California, three others located in Tijuana, Mexico
and two in the Zhuhai economic development zone of the People's Republic of
China. The Company leases 61,000 square feet of office
14
<PAGE>
and manufacturing space (which was not being utilized as of December 31,
1998) in Rancho Bernardo, California. 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
facilities are also leased and comprises 109,000 square feet.
In addition, the Company owns 14 acres of land in Evanston, Wyoming on
which the Company has constructed a 50,000 square foot carbon fiber
manufacturing plant.
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 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK PERFORMANCE
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HIGH LOW HIGH LOW
First Quarter $5 15/16 $4 3/8 $6 1/16 $4 9/16
Second Quarter $7 15/16 $5 7/8 $5 3/4 $4 1/8
Third Quarter $7 3/8 $ 3 1/2 $6 $4 7/8
Fourth Quarter $4 $2 1/8 $6 5/8 $4 1/4
</TABLE>
On March 22, 1999, the closing common stock price was $1.69, and there
were approximately 460 common stockholders of record. The company believes a
significant number of beneficial owners also own Aldila stock in "street
name."
Aldila, Inc. common stock is traded on the NASDAQ national market,
symbol: ALDA.
The Company intends to retain earnings for use in operations and does
not anticipate paying cash dividends on the common stock in the foreseeable
future. Aldila, Inc. is a holding company whose ability to pay dividends
depends on the receipt of dividends or other payments from its two principal
subsidiaries, Aldila Golf Corp. and Aldila Materials Technology Corp. The
Company's 6.13% senior notes restrict its ability to declare or pay cash
dividends unless certain financial criteria is satisfied.
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The information required as to this Item is contained in the following
table.
ALDILA, INC.
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
-----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Results (Year ended December 31):
Net sales $62,487 $55,636 $58,394 $56,545 $79,779
Cost of sales 44,689 38,742 37,245 32,823 44,206
-----------------------------------------------------------------------------------
Gross profit 17,798 16,894 21,149 23,722 35,573
-----------------------------------------------------------------------------------
Selling, general and administrative 9,005 10,255 9,112 10,850 12,922
Amortization of goodwill 1,427 1,428 1,416 1,398 1,398
Plant consolidation 1,200 1,500
-----------------------------------------------------------------------------------
Operating income 6,166 3,711 10,621 11,474 21,253
-----------------------------------------------------------------------------------
Interest expense 1,285 1,040 1,266 1,291 1,313
Other (income), net (218) (418) (727) (857) (297)
-----------------------------------------------------------------------------------
Income before income taxes 5,099 3,089 10,082 11,040 20,237
Provision for income taxes 2,300 1,550 4,400 4,770 8,565
-----------------------------------------------------------------------------------
Net income $2,799 $1,539 $5,682 $6,270 $11,672
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
Net income per common share-basic: $0.18 $0.10 $0.35 $0.38 $0.70
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
Net income per common share, assuming
dilution: $0.18 $0.10 $0.35 $0.37 $0.69
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
Selected Operating Results
As Percentage of Net Sales:
Gross profit 28.5% 30.4% 36.2% 42.0% 44.6%
Selling, general and administrative 14.4% 18.4% 15.6% 19.2% 16.2%
Operating income 9.9% 6.7% 18.2% 20.3% 26.6%
Net income 4.5% 2.8% 9.7% 11.1% 14.6%
Financial Position (at December 31):
Working capital $15,731 $16,775 $28,274 $24,770 $19,080
Total assets 117,034 113,128 111,935 111,853 109,557
Long-term debt, including current portion 20,000 20,000 20,000 20,000 20,000
Total stockholders' equity 80,254 77,283 78,826 75,481 69,777
</TABLE>
16
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW - BUSINESS CONDITIONS
Aldila, Inc. and subsidiaries (the "Company") is principally engaged 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 intends to 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 is producing 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, as well as chopped carbon fiber to
manufacturers of other carbon fiber-based products. The Company has not yet
realized significant revenues from the sale of carbon fiber or graphite
prepreg to third parties through the end of 1998. Management of the Company
believes that the ability to manufacture carbon fiber will 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. The new facility underwent a "shakedown"
period in 1998 and therefore did not operate at full capability during the
year. Management does not expect to operate the plant at full capacity in
1999 due to the weak demand for carbon fiber. The full benefit of this
facility to the Company is not expected to be realized until the demand for
the Company's carbon fiber increases which will allow the Company to produce
at increased volume levels resulting in lower production costs.
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. However, in recent years
the Company has realized substantial sales growth in the value priced segment
of the graphite shaft market. The Company now competes aggressively with
primarily United States based shaft manufacturers for premium graphite shafts
and also against primarily foreign based shaft manufacturers for lower priced
value shaft sales. The Company continues to maintain a broad customer base in
the premium shaft market segment. While the Company's market share in the
value segment is not as great as the premium segment, the Company has
advanced rapidly in securing new customers in this segment in recent years.
Presently, there exists substantial excess graphite shaft manufacturing
capacity both in the United States and in other countries. This has had the
effect, and is expected by management to continue to have the effect for at
least the next several years, of decreasing the selling prices of the
Company's shafts. Although the Company's gross profit margin is being
adversely affected by the reduction in selling prices, the adverse effects on
gross margin should be mitigated to some extent by efforts being taken by the
Company to control costs, including obtaining lower prices for its raw
materials, manufacturing its own graphite prepreg and increasing the
percentage of its shafts being manufactured in countries with lower labor and
overhead costs. In order to increase its capacity to manufacture shafts in a
lower cost environment, the Company opened a second shaft manufacturing
facility in Zhuhai, China during the first quarter of 1999.
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 1998, sales to Callaway Golf
Company and Taylor Made Golf represented 26% and 15%, respectively, of the
Company's total net sales. The Company anticipates that its sales, both in
dollars and as a percentage of total sales to these two customers will
decline significantly in 1999 as compared to 1998. If these sales are not
replaced with sales to other shaft customers then such decrease could have an
adverse effect on the Company's business and operating results. The Company
believes that while it will often not be possible to predict, with any
17
<PAGE>
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
The following table sets forth operating results expressed as a
percentage of net sales for the years indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1998 1997 1996
--------------------------------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 71.5 69.6 63.8
------------- ------------- --------------
Gross profit 28.5 30.4 36.2
------------- ------------- --------------
Selling, general and administrative 14.4 18.4 15.6
Amortization of goodwill 2.3 2.6 2.4
Plant consolidation 1.9 2.7
------------- ------------- --------------
Operating income 9.9 6.7 18.2
------------- ------------- --------------
Other:
Interest expense 2.0 1.9 2.2
Other (income), net (0.3) (0.8) (1.2)
------------- ------------- --------------
Income before income taxes 8.2 5.6 17.2
Provision for income taxes 3.7 2.8 7.5
------------- ------------- --------------
Net income 4.5% 2.8% 9.7%
------------- ------------- --------------
------------- ------------- --------------
</TABLE>
1998 COMPARED TO 1997
NET SALES. Net sales increased $6.9 million, or 12.3%, to $62.5 million
for 1998 from $55.6 million for the prior year. The increase in net sales was
attributable to increased shaft unit sales to the Company's club manufacturer
customers as well as a $1.5 million increase in sales of other carbon fiber
products in 1998 as compared to 1997. Shaft unit sales increased 22% in 1998
as compared to 1997, which was offset by a 12% decrease in the average
selling price of shafts sold, as a result of a change in product mix to lower
priced value shafts.
Based on the overall weak demand for golf clubs experienced in the
fourth quarer of 1998 and forecast for at least the first half of 1999, the
Company anticipates its net sales could decline between 25% to 45% in the
first half of 1999 versus 1998.
18
<PAGE>
GROSS PROFIT. Gross profit increased $0.9 million, or 5.4%, to $17.8
million in 1998 from $16.9 million in 1997 principally as a result of the
increase in net sales. Gross profit was negatively impacted in 1998 by $1.6
million in charges against cost of sales related to production ramp-up in the
new facility in Evanston, Wyoming ($0.7 million) and inventory markdowns on
carbon fiber recorded in the fourth quarter of 1998 ($0.9 million). Including
these charges, the Company's gross profit margin decreased to 28.5% in 1998
compared to 30.4% in 1997. Before considering these charges, gross profit
margin in 1998 increased by 0.7% over the 1997 gross profit margin to 31.1%.
The Company anticipates its gross profit margin will be negatively
impacted in 1999 by the anticipated lower shaft sales volumes forecast for
the Company and also as the early production quantities of Evanston, Wyoming
produced carbon fiber is relieved from inventories to cost of sales in the
form of graphite shaft sales containing carbon fiber produced at relatively
higher production costs.
OPERATING INCOME. Operating income increased $2.5 million, or 66.2%, to
$6.2 million in 1998 from $3.7 million in 1997 and increased as a percentage
of net sales to 9.9% in 1998 compared to 6.7% in 1997. Selling, general and
administrative expense decreased as a percentage of net sales to 14.4% in
1998 as compared to 18.4% in 1997 primarily as a result of lower advertising,
promotional and other administrative expenses in 1998 compared to 1997.
The Company has reflected plant consolidation charges in 1998 ($1.2
million) and 1997 ($1.5 million) in connection with the consolidation of its
domestic golf shaft manufacturing operations in Rancho Bernardo, California
into its facility in Poway, California. See - "Notes to Consolidated
Financial Statements", Note 8.
INTEREST EXPENSE. Interest expense was $1.3 million in 1998 and $1.0
million in 1997. A total of $20.0 million in long term borrowings remained
outstanding during each period. In 1997, $0.2 million of interest was
capitalized during the construction period for the Company's new carbon fiber
manufacturing facility. The weighted average interest rate on borrowings was
6.13% in 1998 and 1997
INCOME TAXES. The Company's effective tax rate in 1998 was 45.1% as
compared to 50.2% in 1997. The decrease resulted primarily from the increase
in profit before tax with constant non-deductible amortization of goodwill in
each year.
1997 COMPARED TO 1996
NET SALES. Net sales decreased $2.8 million, or 4.7%, to $55.6 million
for 1997 from $58.4 million for the prior year. Unit sales increased 8% in
1997 as compared to 1996, which was offset by a 11.9% decrease in the average
selling price of shafts sold. The average selling price for shafts sold
decreased in 1997 as a result of a change in product mix to lower priced
value shafts as well as heightened competition for premium golf shafts.
GROSS PROFIT. Gross profit decreased $4.3 million, or 20.1% to $16.9
million in 1997 from $21.1 million in 1996 primarily as a result of the lower
average selling prices for shafts sold and increases in raw material costs.
The Company's gross profit margin deceased to 30.4% in 1997 from 36.2% in
1996 as a result of the factors noted above.
OPERATING INCOME. Operating income decreased $6.9 million, or 65.1%, to
$3.7 million in 1997 from $10.6 in 1996 and decreased as a percentage of net
sales to 6.7% in 1997 compared to 18.2% in 1996, primarily as a result of the
lower gross profit and a $1.5 million plant consolidation charge recorded in
the fourth quarter of 1997. The Company plans to consolidate its domestic
golf shaft manufacturing operations located in Rancho Bernardo, California
into its facility in Poway, California. The $1.5 million charge reflects
$900,000 for write-downs of plant and equipment, $450,000 for estimated
losses on the Rancho Bernardo facility lease, and $150,000 of other
associated consolidation costs. See - "Notes to Consolidated Financial
Statements", Note 8.
19
<PAGE>
Selling, general and administrative expense increased to $10.3 million
(or 18.4% of net sales) in 1997 from $9.1 million (or 15.6% of net sales) in
1996 primarily as a result of increased administrative expenses in 1997 as
compared to 1996 and as a result of approximately $0.6 million in start-up
costs recorded in the fourth quarter of 1997 related to the Company's new
carbon fiber manufacturing facility.
INTEREST EXPENSE. Interest expense was $1.0 million in 1997 and $1.3
million in 1996. A total of $20.0 million in long term borrowings remained
outstanding during each period, but in 1997 $0.2 million of interest was
capitalized during the construction period for the Company's new carbon fiber
manufacturing facility. The weighted average interest rate on borrowings was
6.13% in 1997 and 1996 .
INCOME TAXES. The Company's effective tax rate in 1997 was 50.2% as
compared to 43.6% in 1996. The increase resulted primarily from the decrease
in profit before tax with constant non-deductble amortization of goodwill in
each year.
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
in 1999 the Company will require additional borrowings to support its working
capital needs on a short-term basis. The Company's $20.0 million in 6.13%
senior notes require semi-annual principal payments of $4.0 million beginning
September 30,1999 through September 30, 2001. The Company has in place a $5.0
million line of credit facility from a financial institution which is secured
by substantially all the assets of the Company. This line of credit facility,
which was initially established in March of 1998, was amended in March of
1999 and has a maturity date of August 30, 1999. The Company did not take
advances against the line of credit in 1998, although it did so the first
quarter of 1999. Borrowings under the line of credit bear interest, at the
election of the Company, at the bank reference rate (7.75% at December 31,
1998) plus 0.5% or at the LIBOR rate plus 2.0%. The line of credit requires
the maintenance of certain financial ratios. As of December 31, 1998, the
Company was in compliance with all covenants under the amended line of credit
agreement.
Cash (including cash equivalents) provided by operating activities in
1998 was $4.6 million compared to $1.2 in 1997. 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 $5.9
million for capital expenditures during 1998, primarily related to the
completion of construction of a new facility for the manufacture of carbon
fiber and for the new shaft manufacturing facility in China. Other than
maintenance capital expenditures in the ordinary course of business (which
the Company does not expect to be significant), the only planned capital
expenditures over the next twelve months are in connection with the
completion of the new China shaft facility. Management anticipates capital
expenditures over the next 12 months to approximate $1.5 million.
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.
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
highest sales occurring in the second quarter.
20
<PAGE>
The Company experienced a substantial shaft unit volume increase in 1998
over the previous year which followed a seasonal pattern where sales volume
peaked in the second quarter of the fiscal year. However, based on the
overall weak demand for golf clubs experienced in the fourth quarter of 1998
and forecast for at least the first half of 1999, the Company anticipates its
net sales could decline between 25% to 45% in the first half of 1999 versus
1998 and accordingly, does not anticipate normal seasonal sales trends in
1999.
YEAR 2000. The Company recognizes the need to ensure its operations will
not be adversely impacted by the inability of the Company's information
systems and the information systems of its major customers and suppliers to
process data having dates on or after January 1, 2000 (the "Year 2000"
issues).
The Company has evaluated its information technology ("IT") and non-IT
systems, including but not limited to computer hardware and software, alarm
systems, manufacturing equipment and software, and all other mechanical
equipment, to determine areas of exposure to potential Year 2000 issues.
Based on this evaluation, a plan was developed and implemented to identify
and resolve all of the internal Year 2000 issues. The Company has tested its
critical systems and believes them to be Year 2000 compliant. However, the
Company has not completed the testing phase for its non critical systems. The
Company believes that it will complete its Year 2000 plan by the end of the
second quarter 1999.
Included in the Company's plan is the evaluation of its external Year
2000 exposure and risks. The Company is still in the process of contacting
its major external customers and suppliers to determine their Year 2000
readiness and evaluate risk factors associated with them. The possibility
exists that the Company's manufacturing operations could be affected by
external suppliers systems that are not year 2000 compliant. Key risk areas
identified by the Company include its energy suppliers to its facility in
Evanston, Wyoming as well as electrical providers to the Company in Tijuana,
Mexico and Zhuhai, China. If one of these providers is not able to provide
the necessary requirements to the Company, there likely would not be a
reasonable alternative available to the Company and as a result the Company's
business could be negatively impacted.
To date, the Company has not expended a significant amount in
identifying and fixing Year 2000 issues and estimates it will not incur a
significant amount for remediation of its remaining Year 2000 issues. Total
expenditures are not expected to exceed $100,000. In addition, based on its
efforts to date, the Company does not anticipate any significant risk of
failure leading to material financial impact resulting from the Year 2000
issue. Consequently, the Company does not intend to create a contingency plan.
There can be no assurance that the Company's efforts to achieve Year
2000 compliance will be successful or that third parties with whom the
Company has material relationships will be Year 2000 compliant by January 1,
2000. An interruption of the Company's ability to conduct its business due to
a Year 2000 problem with a third party, such as those noted above, could have
an adverse effect on the Company.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995
With the exception of historical information (information relating 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, that
necessarily contain certain assumptions and are subject to certain risks and
uncertainties. The Company does not undertake any responsibilities to update
these statements in the future. The Company's 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 of Form 10-K and elsewhere
in the Company's filings with the Securities and Exchange Commission.
21
<PAGE>
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's only indebtedness as of December 31, 1998 was related to
its fixed rate financing. The Company anticipates that it will require
advances against the line of credit in 1999 to meet short-term working
capital requirements, which are at variable rates. The Company believes that
its exposure to market risk relating to interest rate risk is not material.
The Company is exposed to foreign exchange risk to the extent of adverse
fluctuations in the Mexican peso and the Chinese renminbi. Based on
historical movements of these currencies, the Company does not believe that
reasonably possible near-term changes in these currencies will have a
material adverse effect on the Company's financial position or results of
operations. The Company believes that its business operations are not exposed
to market risk relating to commodity price risk or equity price risk.
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 1999 Annual Meeting of Stockholders for the year ended
December 31, 1998, which will be filed with the Commission within 120 days of
the end of the fiscal year covered by this report ("1999 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
1999 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 1999 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is no information required to be submitted by the Company under
this Item.
22
<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, 1998 and 1997;
Consolidated Statements of Income for
the years ended December 31,
1998, 1997 and 1996;
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1998,
1997 and 1996;
Consolidated Statements of Cash Flows
for the years ended December 31,
1998, 1997 and 1996;
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 39 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:
No reports on Form 8-K were filed during the quarter ended December 31,
1998.
23
<PAGE>
ALDILA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------------- -------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $1,972 $3,046
Accounts receivable 3,421 4,640
Income taxes receivable - 14
Inventories 17,326 13,186
Deferred tax assets 5,126 2,902
Prepaid expenses and other current assets 1,006 734
------------------- -------------------
Total current assets 28,851 24,522
PROPERTY, PLANT AND EQUIPMENT 27,649 26,170
TRADEMARKS AND PATENTS, less accumulated amortization
of $3,070 and $2,634 14,268 14,704
GOODWILL, less accumulated amortization of $9,862 and $8,435 46,198 47,625
DEFERRED FINANCING FEES, less accumulated amortization of
$198 and $159 68 107
------------------- -------------------
TOTAL ASSETS $117,034 $113,128
------------------- -------------------
------------------- -------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $3,658 $4,051
Accrued expenses 3,897 3,696
Income taxes payable 1,565 -
Long-term debt, current portion 4,000 -
------------------- -------------------
Total current liabilities 13,120 7,747
LONG-TERM LIABILITIES:
Long-term debt 16,000 20,000
Deferred tax liabilities 7,143 7,487
Deferred rent liabilities 517 611
------------------- -------------------
Total liabilities 36,780 35,845
------------------- -------------------
COMMITMENTS AND CONTINGENCIES ( Notes 10 and 12 )
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 15,462,204 and 15,428,871 shares 155 154
Additional paid-in capital 42,627 42,456
Retained earnings 37,472 34,673
------------------- -------------------
Total stockholders' equity 80,254 77,283
------------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $117,034 $113,128
------------------- -------------------
------------------- -------------------
</TABLE>
See notes to consolidated financial statements.
24
<PAGE>
ALDILA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------------------------
1998 1997 1996
------------- ------------- --------------
<S> <C> <C> <C>
NET SALES $62,487 $55,636 $58,394
COST OF SALES 44,689 38,742 37,245
------------- ------------- --------------
Gross profit 17,798 16,894 21,149
------------- ------------- --------------
SELLING, GENERAL AND ADMINISTRATIVE 9,005 10,255 9,112
AMORTIZATION OF GOODWILL 1,427 1,428 1,416
PLANT CONSOLIDATION 1,200 1,500 -
------------- ------------- --------------
Operating income 6,166 3,711 10,621
------------- ------------- --------------
OTHER:
Interest expense 1,285 1,040 1,266
Other (income), net (218) (418) (727)
------------- ------------- --------------
INCOME BEFORE INCOME TAXES 5,099 3,089 10,082
PROVISION FOR INCOME TAXES 2,300 1,550 4,400
------------- ------------- --------------
NET INCOME $2,799 $1,539 $5,682
------------- ------------- --------------
------------- ------------- --------------
NET INCOME PER COMMON SHARE-BASIC $0.18 $0.10 $0.35
------------- ------------- --------------
------------- ------------- --------------
NET INCOME PER COMMON SHARE,
ASSUMING DILUTION $0.18 $0.10 $0.35
------------- ------------- --------------
------------- ------------- --------------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 15,452 15,625 16,411
------------- ------------- --------------
------------- ------------- --------------
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES 15,519 15,738 16,434
------------- ------------- --------------
------------- ------------- --------------
</TABLE>
See notes to consolidated financial statements.
25
<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, 1996 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 Deccember 31, 1996 16,011 160 45,532 33,134 78,826
Repurchases of common stock (600) (6) (3,159) (3,165)
Common stock issued upon stock option exercises,
including income tax benefits of $12 18 83 83
Net income 1,539 1,539
--------------- --------------- -------------- -------------- ---------------
Balance at December 31, 1997 15,429 154 42,456 34,673 77,283
Common stock issued upon stock option exercises,
including income tax benefits of $16 33 1 171 172
Net income 2,799 2,799
--------------- --------------- -------------- -------------- ---------------
Balance at December 31, 1998 15,462 $155 $42,627 $37,472 $80,254
--------------- --------------- -------------- -------------- ---------------
--------------- --------------- -------------- -------------- ---------------
</TABLE>
See notes to consolidated financial statements.
26
<PAGE>
ALDILA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------------------------------
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,799 $1,539 $5,682
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,996 5,373 4,931
Loss on disposal of fixed assets 258 - -
Changes in assets and liabilities:
Accounts receivable 1,219 (2,180) 708
Inventories (4,140) (5,377) (1,735)
Deferred tax assets (2,224) (601) 507
Prepaid expenses and other current assets (272) (266) 274
Accounts payable (393) 1,989 (2,168)
Accrued expenses 201 1,419 (948)
Income taxes payable/receivable 1,579 (115) 189
Deferred tax liabilities (344) (419) (134)
Deferred rent liabilities (94) (152) (114)
------------ ------------ -------------
Net cash provided by operating activities 4,585 1,210 7,192
------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (5,886) (14,791) (4,407)
Other 55 33 (117)
------------ ------------ -------------
Net cash used for investing activities (5,831) (14,758) (4,524)
------------ ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 156 71 -
Repurchase of common stock - (3,165) (2,337)
Tax benefit from exercise of stock options 16 12 -
------------ ------------ -------------
Net cash provided by (used for) financing activities 172 (3,082) (2,337)
------------ ------------ -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,074) (16,630) 331
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,046 19,676 19,345
------------ ------------ -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $1,972 $3,046 $19,676
------------ ------------ -------------
------------ ------------ -------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $1,246 $1,226 $1,226
Income taxes $3,273 $2,674 $3,841
</TABLE>
See notes to consolidated financial statements.
27
<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, manufacturers 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
subsidiaries, Aldila Materials Technology Corporation, Aldila Golf, and
Aldila Golf's subsidiaries, Aldila de Mexico, Aldila Graphite Products
(Zhuhai) Company Ltd. and Aldila Foreign Sales Corporation. All intercompany
transactions and balances have been eliminated in consolidation.
USE OF ESTIMATES - 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. Actual
results could differ from estimates.
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.
The fair value of short-term financial instruments, including cash and
cash equivalents, trade accounts receivable and payable and certain accrued
expenses approximate their carrying amounts in the financial statements due
to the short maturity of such instruments.
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:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Building 39
Machinery and equipment 5-10
Office furniture and equipment 3-10
</TABLE>
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 1998, 1997 and 1996.
28
<PAGE>
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 - SFAS 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed of" requires that impairment losses be recognized when the carrying
value of an asset exceeds its fair value. 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 such evaluation
were to indicate a material impairment of these intangible assets, such
impairment would be recognized by a write down of the applicable asset to its
estimated fair value.
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.
NET INCOME PER COMMON SHARE - In December 1997, the Company adopted the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 128
"Earnings Per Share", which requires the presentation of net income per
common share - basic and net income per common share assuming dilution
("EPS") amounts on the face of the income statement. Net income per common
share - basic is calculated based upon the weighted average number of shares
outstanding during the year, while diluted EPS also gives effect to all
potential dilutive common shares outstanding during each year such as
options, warrants and contingently issueable shares. The EPS data for 1996
has been restated to conform to the requirements of SFAS No. 128.
Net income per common share, assuming dilution includes 67,000, 113,000
and 22,000 dilutive equivalent shares from outstanding stock options for
1998, 1997 and 1996, respectively, which are not included in the calculation
of net income per common share - basic. Options to purchase 1,230,534 shares
of common stock at prices ranging from $4.94 to $16.38 per share were not
included in the computation of diluted EPS at December 31, 1998 because the
effect of such options would be anti-dilutive. Such options expire at various
dates through May of 2008.
ACCOUNTING FOR STOCK BASED COMPENSATION - SFAS 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.
SEGMENT DISCLOSURES - In June 1997, the Financial Accounting Standards
Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," which revises reporting requirements and definitions
for segments of business operations, based on management's approach to
segment reporting. It establishes requirements to report selected segment
information quarterly and to report entity-wide disclosures about products
and services, major customers, and the material countries in which the entity
holds assets and reports revenue. The Company adopted SFAS No. 131 as of
December 31, 1998. See Note 13.
29
<PAGE>
2. ACCOUNTS RECEIVABLE
Accounts receivable at December 31 consist of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Trade accounts receivable $ 4,821 $ 5,769
Less: allowance for doubtful accounts (640) (369)
Less: allowance for sales returns (760) (760)
------------ ------------
Accounts Receivable $ 3,421 $ 4,640
------------ ------------
------------ ------------
</TABLE>
3. INVENTORIES
Inventories at December 31 consist of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Raw materials $11,210 $7,514
Work-in-process 3,141 2,108
Finished goods 2,975 3,564
----------- -----------
Inventories $17,326 $13,186
----------- -----------
----------- -----------
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 consist of the following
(in thousands):
<TABLE>
<CAPTION>
1998 1997
------------- --------------
<S> <C> <C>
Land $140 $140
Machinery and equipment 22,683 14,524
Building 5,894
Office furniture and equipment 1,842 1,938
Leasehold improvements 8,830 7,359
Property and equipment not yet in service 2,518 13,088
Other 196 167
------------- --------------
42,103 37,216
Less accumulated depreciation and
amortization (14,454) (11,046)
------------- --------------
Property, plant and equipment $27,649 $26,170
------------- --------------
------------- --------------
</TABLE>
Depreciation and amortization expense was $4,094,000, $3,471,000 and
$3,036,000 in 1998, 1997 and 1996, respectively. $225,000 of interest was
capitalized in 1997.
30
<PAGE>
5. ACCRUED EXPENSES
Accrued expenses at December 31 consist of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997
------------ --------------
<S> <C> <C>
Payroll and employee benefits $832 $871
Plant consolidation 1,726 1,491
Interest payable 306 306
Other 1,033 1,028
------------ --------------
Accrued Expenses $3,897 $3,696
------------ --------------
------------ --------------
</TABLE>
6. LONG-TERM DEBT
SENIOR NOTES -The Company has $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-anually 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 $13.7 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, 1998, 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. The fair value of the fixed rate senior notes
approximates their carrying amount based on the estimated current incremental
borrowing rates for similar obligations with similar terms.
LINE OF CREDIT - The Company has in place a $5.0 million line of credit
facility from a financial institution which is secured by substantially all
of the assets of the Company. This line of credit facility, which was
initially established in March of 1998, was amended in March of 1999 and has
a maturity date of August 30, 1999. The Company did not take advances against
the line of credit in 1998. Borrowings under the line of credit bear
interest, at the election of the Company, at the bank reference rate (7.75%
at December 31, 1998) plus 0.5% or at the LIBOR rate plus 2.0%. The line of
credit requires the maintenance of certain financial ratios. As of December
31, 1998, the Company was in compliance with all covenants under the amended
line of credit agreement.
7. STOCKHOLDERS' EQUITY
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 600,000 shares at an average price of $5.28 per share in
1997 and approximately 563,000 shares at an average price of $4.15 per share
in 1996.
31
<PAGE>
8. PLANT CONSOLIDATION
In November of 1997, the Company announced its plans to consolidate its
United States graphite golf shaft manufacturing facilities by integrating its
operations in Rancho Bernardo, California with its operations in Poway,
California. In connection with this decision, a charge in the amount of
$1,500,000 (after tax $900,000 or $0.06 per share) was recorded in the fourth
quarter ended December 31, 1997. The charge reflected $900,000 of non-cash
write-downs for plant and equipment, $450,000 for the estimated future losses
on the Rancho Bernardo facility lease and $150,000 for other associated
consolidation costs.
In the fourth quarter ended December 31, 1998, the Company recorded an
additional plant consolidation charge in the amount of $1,200,000 (after tax
$720,000 or $0.05 per share) for estimated future losses on the Rancho
Bernardo facility lease in excess of the provision established in the fourth
quarter of 1997. The total plant consolidation charge of $2,700,000
represents management's best estimate of the costs to vacate and sublease
this facility. The Company remains obligated under an operating lease for
this property through December 31, 2001.
9. INCOME TAXES
The components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C>
Current:
Federal $4,088 $2,014 $3,095
State 764 544 930
------------ ------------ ------------
Total 4,852 2,558 4,025
------------ ------------ ------------
Deferred:
Federal (2,030) (734) 287
State (538) (287) 88
------------ ------------ ------------
Total (2,568) (1,021) 375
------------ ------------ ------------
Tax benefit credited directly to
additional paid-in-capital 16 13
Provision for income taxes $2,300 $1,550 $4,400
------------ ------------ ------------
------------ ------------ ------------
</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):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Inventories $2,712 $1,280
Accrued expenses 1,098 1,047
Allowance for doubtful accounts and
sales returns 600 484
Deferred expenses 520
State income taxes 196 91
------------ ------------
Deferred tax assets - current $5,126 $2,902
------------ ------------
------------ ------------
</TABLE>
32
<PAGE>
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):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Trademarks and patents $6,252 $6,454
Property and equipment 413 728
Other 478 305
------------ ------------
Deferred tax liability - long term $7,143 $7,487
------------ ------------
------------ ------------
</TABLE>
Differences between the statutory federal income tax rate and the
effective tax rate as a percentage of income taxes are summarized below.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory rate 34.0% 34.0% 35.0%
State income taxes, net of Federal tax benefit 2.9 7.9 6.7
Non-deductible amortization 9.7 15.9 5.0
Other items (1.5) (7.6) (3.1)
------- ------- ------
Effective rate 45.1% 50.2% 43.6%
------- ------- ------
------- ------- ------
</TABLE>
10. 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 3,100,000 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 from 1995,
through 1998 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:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net income - pro forma $1,616 $864 $5,232
(in thousands)
Net income per share, basic and $0.10 $0.05 $0.32
assuming dilution - pro forma
</TABLE>
33
<PAGE>
The pro forma effect on net income 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 1998, 1997 and 1996 were estimated at $3.18, $2.02
and $1.91 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 43% in 1998 and 34% in 1997 and 1996,
risk free rate of return of 5.7% in 1998 and 6.3% in 1997 and 1996 and
expected lives of five 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.
A summary of the Company's fixed stock option plans as of December 31,
1998, 1997 and 1996 and activity during the years then ended is presented
below:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------- ------------------------------ -----------------------------
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 2,003,992 $5.56 1,193,064 $6.09 593,064 $7.55
Granted 480,000 $6.94 1,058,814 $4.85 610,000 $4.67
Exercised (33,333) $4.70 (17,719) $4.00
Terminated (308,500) $6.05 (230,167) $5.21 (10,000) $5.41
---------- ---------- ---------- -----
Outstanding at
December 31 2,142,159 $5.81 2,003,992 $5.56 1,193,064 $6.09
---------- ----- ---------- ----- ---------- -----
---------- ----- ---------- ----- ---------- -----
</TABLE>
The following table summarizes information about stock options
outstanding and exercisable at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------- ---------------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise at December 31, Contractual Exercise at December 31, Exercise
Prices 1998 Life (Yrs.) Price 1998 Price
- ----------------------------------------------- ------------------- -------------- -------------------- -------------
<S> <C> <C> <C> <C> <C>
$2.00 35,086 3.7 $2.00 35,086 $2.00
$4.44 - $7.06 1,979,923 8.2 $5.37 849,601 $5.07
$12.56 - $16.38 127,150 4.6 $13.65 127,150 $13.65
------------------- ------------------- -------------- -------------------- -------------
$2.00 - $16.38 2,142,159 7.9 $5.81 1,011,837 $6.04
------------------- ------------------- -------------- -------------------- -------------
------------------- ------------------- -------------- -------------------- -------------
</TABLE>
As of December 31, 1997 and 1996, 600,861 and 283,838 shares were
exercisable under the Plans at a weighted average exercise price of $7.16 and
$8.47 per share respectively.
34
<PAGE>
As of December 31, 1998, an aggregate of 1,006,787 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.
11. 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 $53,000,
$61,000 and $54,000 in 1998, 1997 and 1996, respectively.
12. 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
$1,046,000, $1,404,000 and $1,270,000 for 1998, 1997 and 1996, respectively.
As of December 31, 1998, future minimum lease payments for all operating
leases are as follows (in thousands):
<TABLE>
<S> <C>
1999 $1,814
2000 1,213
2001 1,117
2002 347
2003 361
Thereafter 1,898
-----
$6,750
-----
-----
</TABLE>
13. SEGMENT INFORMATION
The Company designs and manufacturers graphite shafts for golf club
manufacturers. In doing so, the Company also manufactures carbon fiber and
prepreg materials which are utilized in the manufacture of graphite golf shafts.
In accordance with SFAS No. 131, the Company considers its business to consist
of one reportable operating segment.
Sales to a major customer represented 26%, 32%, and 43% of net sales in
1998, 1997, and 1996, respectively. Sales to a second customer represented 15%,
22%, and 16% of net sales in 1998, 1997, and 1996, respectively.
35
<PAGE>
14. 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, 1998 (in thousands, except per share
data):
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
------------------- ---------------- ------------------ ------------------
<S> <C> <C> <C> <C>
1998:
Net Sales $19,117 $21,153 $13,609 $8,608
Gross profit 5,840 5,976 4,111 1,871
Net income (loss) 1,141 1,564 755 (661)
Net income (loss) per common
share, assuming dilution $0.07 $0.10 $0.05 ($0.04)
- -------------------------------------------------------------------------------------------------------------------------
1997:
Net sales $14,601 $17,008 $12,772 $11,255
Gross profit 4,817 5,698 3,934 2,445
Net income (loss) 933 1,376 791 (1,561)
Net income (loss) per common
share, assuming dilution $0.06 $0.09 $0.05 ($0.10)
</TABLE>
36
<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, 1998 and 1997 and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1998. 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, 1998
and 1997 and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
San Diego, California
February 3, 1999 (March 22, 1999 as to the
effects of the amendment to the line of credit
described in Note 6)
37
<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
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- -----
<S> <C> <C>
/s/ Gary T. Barbera Chief Executive Officer March 22, 1999
------------------------------------ and Director (Principal
Gary T. Barbera Executive Officer)
/s/ Robert J. Cierzan Vice President, Finance March 22, 1999
------------------------------------ (Principal Financial Officer
Robert J. Cierzan and Principal Accounting Officer)
Chairman Emeritus of the Board March , 1999
------------------------------------ and Director
Vincent T. Gorguze
/s/ Peter R. Mathewson Vice President and Director March 22, 1999
------------------------------------
Peter R. Mathewson
/s/ Peter E. Bennett Director March 22, 1999
------------------------------------
Peter E. Bennett
/s/ Marvin M. Giles, III Director March 22, 1999
------------------------------------
Marvin M. Giles, III
/s/ John J. Henry Director March 22, 1999
------------------------------------
John J. Henry
Director March , 1999
------------------------------------
Donald C. Klosterman
/s/ Wm. Brian Little Director March 22, 1999
------------------------------------
Wm. Brian Little
/s/ Chapin Nolen Director March 22, 1999
------------------------------------
Chapin Nolen
/s/ Thomas A. Brand Director March 22, 1999
------------------------------------
Thomas A. Brand
</TABLE>
38
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT PAGE
------- ------- ----
<S> <C> <C>
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 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 in-
corporated 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 in-
corporated 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 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).
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT PAGE
------- ------- ----
<S> <C> <C>
*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).
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).
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT PAGE
------- ------- ----
<S> <C> <C>
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).
10.14 -- Supply Agreement commencing January 1, 1998 between
Courtaulds Fibres, Ltd. And Aldila Materials
Technology Corp. (Filed as Exhibit 10.20 to the
Company's Report on Form 10-K for the year ended
December 31, 1997 and incorporated herein by
reference).
10.15 -- Loan agreement dated March 27, 1998 between Aldila, Inc.
and Union Bank of California, N.A. (Field as Exhibit
10.1 to the Company's Report on Form 10-Q for the
quarterly period ended March 31, 1998 and
incorporated herein by reference).
10.16 -- First Amendment to Loan Agreement dated March 22, 1999
between Aldila, Inc. and Union Bank of California,
N.A.
11.1 -- Statement re: Computation of Net Income per Common
Share
21.1 -- Subsidiaries of the Company (Filed as Exhibit 21.1 to
the Company's Report on Form 10-K for the year ended
December 31, 1997 and incorporated herein by
reference.)
23.1 -- Independent Auditors' Consent
27.1 -- Financial Data Schedule
</TABLE>
*Indicates management contracts or compensatory plans or arrangements required
to be filed as exhibits to this Report on Form 10-K.
41
<PAGE>
EXHIBIT 10.16
[LOGO]
FIRST AMENDMENT
TO LOAN AGREEMENT
THIS FIRST AMENDMENT TO LOAN AGREEMENT ("First Amendment"), dated as of March
22, 1999 is made and entered into by and between ALDILA, INC., a Delaware
corporation ("Borrower"), and UNION BANK OF CALIFORNIA, N.A. ("Bank").
RECITALS:
A. Borrower and Bank are parties to that certain Loan Agreement, dated March
27, 1998 (the "Agreement"), pursuant to which Bank agreed to extend credit to
Borrower.
B. Borrower and Bank desire to amend the Agreement subject to the terms and
conditions of this First Amendment.
AGREEMENT:
In consideration of the above recitals and of the mutual covenants and
conditions contained herein, Borrower and Bank agree as follows:
1. DEFINED TERMS. Initially capitalized terms used herein which are not
otherwise defined shall have the meanings assigned thereto in the Agreement.
2. AMENDMENTS TO THE AGREEMENT.
(a) Section 1.1.1 (The Revolving Line) of the Agreement is hereby amended
by substituting the amount of "Five Million Dollars ($5,000,000)" for the
amount of "Ten Million Dollars ($10,000,000)" and by substituting the
date of "August 30, 1999" for the date of "June 30, 1999."
(b) Section 1.5 (Unused Commitment Fee) of the Agreement is hereby
amended by substituting the figure of "three-eighths of one percent
(0.375%)" for the figure of "one-quarter of one percent (0.25%)."
(c) Section 1.9 of the Agreement is hereby added as follows:
"1.9 SECURITY. Borrower shall execute a security agreement, on Bank's
standard form, and a financing statement, suitable for filing in the office
of the Secretary of State of the State of California and any other state
designated by Bank, granting to Bank a first priority security interest in
such of Borrower's property as is described in said security agreement.
Exceptions to Bank's first priority, if any, are permitted only as
otherwise provided in this Agreement. At Bank's request, Borrower will also
use its best efforts to obtain executed landlord's and mortgagee's waivers
on Bank's form covering all of Borrower's property located on leased or
encumbered real property."
(d) Section 4.5 (i) (Information Furnished) of the Agreement is hereby
added as follows:
<PAGE>
"(i) Within fifteen (15) days after each calendar month end, a copy
of Borrower's monthly accounts receivable aging, accounts payable aging,
and within thirty (30) after each calendar month end, a copy of Borrowers'
inventory report, all in form and detail satisfactory to Bank."
(e) Section 4.6 (Profitability) of the Agreement is hereby amended by
deleting sections (v), (vi) and (vii) and substituting
the following:
"(v) $2,250,000 at December 31, 1998;
(vi) $1,000,000 at March 31, 1999;
(vii) $ -0- at June 30, 1999."
(f) Section 4.7 (Cash Flow to Debt Service Ratio) is hereby
deleted in its entirety.
(g) Section 4.8 (Net Worth) is hereby deleted in its
entirety.
(h) Section 4.9 (Total Liabilities to Net Worth) is hereby
amended by substituting the figure of "0.55 : 1.0" for the figure of
"0.60 : 1.0."
(i) Section 4.10 (Insurance) is hereby deleted in its
entirety and replaced by the following:
"4.10 INSURANCE. Borrower will keep all of its insurable property,
real, personal or mixed, insured by companies and in amounts approved by
Bank against fire and such other risks, and in such amounts, as is
customarily obtained by companies conducting similar business with respect
to like properties. Borrower will furnish to Bank statements of its
insurance coverage, will promptly furnish other or additional insurance
deemed necessary by and upon request of Bank to the extent that such
insurance may be available and hereby assigns to Bank, as security for
Borrower's obligations to Bank, the proceeds of any such insurance. In
conjunction with the First Amendment, Bank will be named loss payee on all
policies insuring collateral and such policies shall require at least ten
(10) days' written notice to Bank before any policy may be altered or
cancelled. Borrower will maintain adequate worker's compensation insurance
and adequate insurance against liability for damage to persons or
property."
(j) Section 4.15 is hereby added as follows:
"4.15 EBITDA. Borrower will maintain EBITDA for each fiscal
quarter, of not less than:
(viii) $500,000 at December 31, 1998;
(ix) $1,000,000 at March 31, 1999;
(x) $2,500,000 at June 30, 1999.
"EBITDA" shall mean earnings before interest, taxes,
depreciation and amortization.
(k) Section 4.16 is hereby added as follows:
"4.16 INVENTORY TURNDAYS. Borrower shall maintain at all times a
ratio of inventory multiplied by 360 days divided by the cost of goods
sold for the most recent three months multiplied by four of not more
than:
(i) 240 days;
(ii) 230 days;
(iii) 180 days."
(l) Section 5.1 (a) (Encumbrances and Liens) shall be amended by
inserting the following prior to "(collectively, "Permitted Liens"):
"and (vii) liens as required in accordance with Section 1.9
hereof"
(m) Section 5.3 is hereby deleted in its entirety and replaced as
follows:
-2-
<PAGE>
"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."
3. EFFECTIVENESS OF THE FIRST AMENDMENT. This First Amendment shall become
effective as of the date hereof when, and only when, Bank shall have received
all of the following, in form and substance satisfactory to Bank:
(a) A counterpart of this First Amendment, duly executed by Borrower;
(b) A replacement Revolving Loan Note, duly executed by Borrower;
(c) A security agreement and financing statement, duly executed by
Borrower;
(d) An insurance certificate (form 438 BFU) issued by Borrower's
insurance carrier naming Bank as loss payee; and
(e) Such other documents, instruments or agreements as Bank may
reasonably deem necessary.
4. RATIFICATION. Except as specifically amended hereinabove, the Agreement
shall remain in full force and effect and is hereby ratified and confirmed.
5. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants as
follows:
(a) Each of the representations and warranties contained in the Agreement,
as the same may be amended hereby, is hereby reaffirmed as of the date
hereof, each as if set forth herein;
(b) The execution, delivery and performance of this First Amendment and
any other instruments or documents in connection herewith are within
Borrower's power, have been duly authorized, are legal, valid and binding
obligations of Borrower, and are not in conflict with the terms of any
charter, bylaw, or other organization papers of Borrower or with any law,
indenture, agreement or undertaking to which Borrower is a party or by
which Borrower is bound or affected;
(c) No event has occurred and is continuing or would result from this First
Amendment which constitutes or would constitute an Event of Default under
the Agreement.
6. GOVERNING LAW. This First Amendment and all other instruments or documents
executed or to be executed in connection herewith shall be governed by and
construed according to the laws of the State of California.
7. COUNTERPARTS. This First Amendment may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
WITNESS the due execution hereof as of the date first above written.
ALDILA, INC. UNION BANK OF CALIFORNIA, N.A.
By: /s/ Robert J. Cierzan By: /s/ Douglas S. Lambell
---------------------------- ----------------------------
Robert J. Cierzan Douglas S. Lambell
Title: Vice President / CFO Title: Vice President / SCM
By: By:
---------------------------- ----------------------------
Title: Title:
-3-
<PAGE>
EXHIBIT 11.1
ALDILA, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Twelve months ended
December 31,
---------------------------------------------------
1998 1997 1996
--------------- --------------- --------------
<S> <C> <C> <C>
BASIC:
Net income $ 2,799 $ 1,539 $ 5,682
Weighted average number of common shares outstanding 15,452 15,625 16,411
--------------- --------------- --------------
Net income per common share $ 0.18 $ 0.10 $ 0.35
--------------- --------------- --------------
--------------- --------------- --------------
ASSUMING DILUTION:
Net income $ 2,799 $ 1,539 $ 5,682
Weighted average number of common shares outstanding 15,452 15,625 16,411
The number of shares resulting from the assumed exercise
of stock options reduced by the number of shares which
could have been purchased with the proceeds from such
exercise, using the average market price during the period 67 113 23
--------------- --------------- --------------
Weighted average number of common and
common equivalent shares 15,519 15,738 16,434
--------------- --------------- --------------
Net income per common share, assuming dilution $ 0.18 $ 0.10 $ 0.35
--------------- --------------- --------------
--------------- --------------- --------------
</TABLE>
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No's
33-70050, 33-80985 and 333-32237 of Aldila, Inc. on Form S-8 of our report
dated February 3, 1999 (March 22, 1999 as to the effects of the amendment to
the line of credit described in Note 6), appearing in this Annual Report on
Form 10-K of Aldila, Inc. for the year ended December 31, 1998.
Deloitte & Touche LLP
San Diego, California
March 22, 1999
<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, 1998 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-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,972
<SECURITIES> 0
<RECEIVABLES> 3,421
<ALLOWANCES> 0
<INVENTORY> 17,326
<CURRENT-ASSETS> 28,851
<PP&E> 27,649
<DEPRECIATION> 0
<TOTAL-ASSETS> 117,034
<CURRENT-LIABILITIES> 13,120
<BONDS> 16,000
0
0
<COMMON> 155
<OTHER-SE> 80,099
<TOTAL-LIABILITY-AND-EQUITY> 117,034
<SALES> 62,487
<TOTAL-REVENUES> 62,487
<CGS> 44,689
<TOTAL-COSTS> 53,694
<OTHER-EXPENSES> 2,627<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,285
<INCOME-PRETAX> 5,099
<INCOME-TAX> 2,300
<INCOME-CONTINUING> 2,799
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,799
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
<FN>
<F1>GOODWILL AMORTIZATION - 1,427, PLANT CONSOLIDATION 1,200
</FN>
</TABLE>
