-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BMSBQhdTBjN7Ej4/Wsj1WU+JyZ+BihEbYrgIpTuwVWi69eGterJaC391us9AYUOu Tm/mCEuywZswvVCd0uhr0g== 0001047469-98-012687.txt : 19980401 0001047469-98-012687.hdr.sgml : 19980401 ACCESSION NUMBER: 0001047469-98-012687 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALDILA INC CENTRAL INDEX KEY: 0000902272 STANDARD INDUSTRIAL CLASSIFICATION: [3949] IRS NUMBER: 133651060 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21872 FILM NUMBER: 98580337 BUSINESS ADDRESS: STREET 1: 15822 BERNARDO CNTR DR CITY: SAN DIEGO STATE: CA ZIP: 92127 BUSINESS PHONE: 6195920404 MAIL ADDRESS: STREET 2: 15822 BERNARDO CENTER DRIVE CITY: SAN DIEGO STATE: CA ZIP: 92127 10-K 1 FORM 10-K 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, 1997 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 0-21872 ALDILA, INC. (Exact name of registrant as specified in its charter) DELAWARE 13-3645590 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 15822 BERNARDO CENTER DRIVE, SAN DIEGO, CALIFORNIA 92127 (Address of principal executive offices) (619) 592-0404 (Registrant's Telephone No.) Securities Registered Pursuant to Section 12(b) of the Act: Title of each class Names of each exchange on which registered None None ---- ---- Securities registered pursuant to section 12(g) of the Act: Common Stock, par value $0.01 per share --------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. [ ] As of March 16,1998, 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 $78.1 million. As of March 16,1998, there were 15,443,871 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 1998 Annual Meeting of Stockholders to be filed with the Commission within 120 days after the close of the fiscal year. ALDILA, INC. TABLE OF CONTENTS FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
PAGE ---- PART I -------- Item 1. Business 1 Item 2. Properties 11 Item 3. Legal Proceedings 11 Item 4. Submission of Matters to a Vote of 11 Security Holders PART II -------- Item 5. Market for Registrant's Common Equity and 12 Related Stockholder Matters Item 6. Selected Financial Data 12 Item 7. Management's Discussion and Analysis of 14 Financial Condition and Results of Operations Item 8. Financial Statements and Supplementary Data 18 Item 9. Changes in and Disagreements with Accountants 18 on Accounting and Financial Disclosure PART III --------- Item 10. Directors and Executive Officers of the 18 Registrant Item 11. Executive Compensation 18 Item 12. Security Ownership of Certain Beneficial 18 Owners and Management Item 13. Certain Relationships and Related Transactions 18 PART IV -------- Item 14. Exhibits, Financial Statement Schedules, and 19 Reports on Form 8-K Signatures 34
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 Golf Company ("Callaway"), Karsten Manufacturing ("Ping") and Taylor Made. Aldila believes that it is one of the few independent shaft manufacturers with the technical and production expertise required to produce high-quality graphite shafts in quantities sufficient to meet rapidly growing demand. The Company's current product line consists of Aldila and G. Loomis branded products designed for custom club makers as well as hundreds of custom shafts developed in conjunction with its major customers, which are designed to improve the performance of any level of golfer, from novice to tour professional. During 1997, the Company invested in the design and construction of a 50,000 square foot carbon fiber manufacturing facility in Evanston, Wyoming. The Company expects to begin production of carbon fiber at this facility in the first quarter of 1998 and will use the output to satisfy a significant portion of its internal demand for carbon fiber in the manufacturing of graphite golf club shafts. The Company also anticipates that it will 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, in some cases in the form of graphite prepreg manufactured using its existing facility in San Diego, California, to manufacturers of other carbon fiber -based products. The Company expects that the additional vertical integration offered by its new facility will assist from the outset in maintaining its position as a low cost manufacturer of graphite golf club shafts at all price points. Management of the Company believes that the ability to manufacture carbon fiber will also ultimately enable the Company to diversify its sales and reduce its dependence on the overall golf club market, while continuing to leverage the Company's existing composite materials expertise. During 1998, however, the new facility will not be operating at full capacity, therefore the full benefit of this facility is not expected to be realized until at least 1999. -1- Most golf clubs currently being sold have shafts constructed from steel or graphite, although limited numbers are also manufactured from other materials. Graphite shafts were introduced in the early 1970's as the first major improvement in golf shaft technology since steel replaced wood in the 1930's. The first graphite shafts had significant torque (twisting force) and appealed primarily to weaker-swinging players desiring greater distance. Graphite shaft technology has subsequently improved so that shafts can now be designed for golfers at all skill levels. Unlike steel shafts, graphite shafts can be altered with respect to weight, flex, flex location and torque to produce greater distance, increased accuracy and reduced club vibration resulting in improved "feel" to the golfer. The improvement in the design and manufacture of graphite shafts and the growing recognition of their superior performance characteristics compared to steel have resulted in increased demand for graphite shafts by golfers of all skill levels. The initial acceptance of graphite shafts was primarily for use in woods. Subsequently, after achieving dominant acceptance and penetration in both the professional and consumer woods markets (with over 81% of new woods purchased including graphite shafts in 1997), 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 1997, approximately 42% of new irons purchased were graphite shafted. As the market for graphite shafts continues to grow, new graphite shafted wood and iron purchases by consumers are expected to surpass 90% and 50%, respectively, by the year 2000. Originally, virtually all graphite shafts were sold for use in premium clubs, while the value priced segment of the golf club market continued to be supplied with steel shafts. In the last several years, however, an increasing percentage of value priced clubs are being sold with graphite shafts, which is a trend that the Company expects will continue. As a result, the Company has taken steps to enable it to meet the needs of this segment of the shaft market, including the design of shafts that can be manufactured at prices acceptable to this market and continued efforts to reduce its overall manufacturing costs. The Company was originally founded in San Diego, California in 1972 and was an early leader in the design and production of graphite golf shafts. Since then, the Company has continually improved upon its shaft designs and the materials it uses in its shafts to meet the demands of a growing market. The Company believes it is well positioned to remain a leader in the market for graphite shafts due to its innovative and high quality products, strong customer relationships, design and composite materials expertise and significant manufacturing capabilities. In order to maintain its leadership position in the graphite shaft market through control of its raw material costs and ensuring its sources of supply, over the last several years the Company has taken steps to vertically integrate into the manufacture of its own raw materials. In 1994, the Company started production of its principal raw material, graphite prepreg, which consists of sheets of carbon fibers combined with epoxy resin. See "Manufacturing--Raw Materials." The Company now produces substantially all of its graphite prepreg requirements internally. In 1997, the Company constructed a new facility for the manufacture of carbon fiber. The Company intends to manufacture carbon fiber not only for its own consumption in the manufacture of golf shafts but also for sale or use in other recreational and industrial composite products. -2- 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 85% of net sales in the year ended December 31, 1997, are designed in partnership with its customers (principally golf club manufacturers) to accommodate specific golf club designs. The Company's standard models are typically sold to golf club manufacturers, distributors and golf pro and repair shops, and are used either to assemble a new custom club from selected components or to replace the steel shaft of an older club. The Company also helps develop cosmetic designs to give the customer's golf clubs a distinctive look, even when the customer does not require a shaft with customized performance characteristics. The prices of Aldila shafts typically range from $6 to $30. All of the Company's shafts are composite structures consisting principally of carbon fiber and epoxy resins. The Company's shafts may also include boron (added to increase shaft strength) or fiberglass. The Company regularly evaluates new composite materials for inclusion in the Company's shafts and new refinements on designs using current materials. During 1998 the Company anticipates that it will offer carbon fiber products for sale to third parties once the carbon fiber output from the new facility exceeds the internal demand for golf shaft manufacturing. These products are expected to be primarily large bundle carbon fiber, chopped fiber and graphite prepregs. See "Manufacturing - Raw Materials." 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. CUSTOMERS AND CUSTOMER RELATIONS For fiscal year 1997, the Company had approximately 300 customers, which included approximately 110 golf club manufacturers and more than 60 distributors, with the balance principally constituting custom club assemblers, pro shops and repair shops. However, the majority of the Company's sales have been and may continue to be concentrated among a relatively small number of customers. Sales to the Company's top five customers represented approximately 72%, 78% and 73% of net sales in 1997, 1996 and 1995 respectively. In 1997, Callaway accounted for 32% of the Company's net sales, as compared to 43% in 1996 and 50% in 1995. 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. Although Callaway has been the Company's largest customer for each of the last six years its percentage of the Company's net sales has varied substantially on a year-to-year basis. The Company's second largest customer was Taylor Made in 1997 and 1996, Ping in 1995, 1994 and 1993 and Wilson Sporting Goods in 1992. Because of the historic volatility of consumer demand for specific clubs, as well as continued competition from alternative shaft suppliers, sales to a given customer in a prior period may not necessarily be indicative of future sales. -3- 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, to enhance brand awareness among golfers and to increase overall market acceptance and use of graphite golf shafts. The Company utilizes a wide variety of marketing and promotional channels to increase Aldila's brand name recognition and reputation among consumers for offering consistently high quality products designed for a wide range of golfers and to explain the advantages of graphite shafts. Although the Company does not sell directly to the end users of its products, the Company believes that its brand name recognition contributes significantly to the marketability of its customers' products. Aldila's marketing and promotion expenditures were approximately $2.5 million, $2.5 million, and $4.2 million in 1997, 1996, and 1995, respectively. SALES AND DISTRIBUTION Within the golf club industry, most companies do not manufacture the three principal components of the golf club--the grip, the shaft and the clubhead--but, rather, source these components from independent suppliers that design and manufacture components to the club manufacturers' specifications. As a result, Aldila sells its graphite shafts primarily to golf club manufacturers and, to a lesser extent, distributors, custom club shops, pro shops and repair shops. Distributors typically resell the Company's products to custom club assemblers, pro and custom club shops, and individuals. The Company uses its internal sales force in the marketing and sale of its shafts to golf club manufacturers. Sales to golf club manufacturers accounted for approximately 85% of net sales for the year ended December 31, 1997. Beginning in 1998, the Company began setting up a sales organization to sell carbon fiber and related carbon fiber products. International sales represented less than 10% of net sales for the years ended December 31, 1997, 1996 and 1995. -4- 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's design with respect to weight, torque, flex point, tip and butt flexibility, swing weight and other critical shaft design criteria. In addition, the Company researches new and innovative shaft designs on an independent basis, which has enabled the Company to produce a variety of new standard shafts as well as generate design ideas for customized shafts. To improve and advance composites technology and shaft process manufacturing, the Company's engineers test new and existing materials, such as boron, kevlar, fiberglass, ceramic, thermo plastic and carbon fiber. The Company's design research also focuses on improvements in graphite shaft aesthetics since cosmetic appearance has become increasingly important to customers. Although the Company emphasizes these research and development activities, there can be no assurance that Aldila will continue to develop competitive products or that the Company will be able to utilize new composite material technology on a timely or competitive basis, or otherwise respond to emerging market trends. The Company has applied its carbon fiber technology to other products engaging in limited production of graphite tubing on a special-order basis. MANUFACTURING The Company believes that its manufacturing expertise and production capacity differentiate it from many of its competitors and enable Aldila to respond quickly to customers orders and provide sufficient quantities on a timely basis. The Company today operates five 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 26 years of operation, the Company has improved its manufacturing process and believes it has established a reputation as the industry's leading volume manufacturer of high-performance graphite shafts. SHAFT MANUFACTURING PROCESS. The process of manufacturing a graphite shaft has several distinct phases. Different designs of Aldila shafts require variations in both the manufacturing process and the materials used. In traditional shaft designs, treated graphite known as "prepreg" is rolled onto metal rods known as mandrels. The Company also manufactures filament wound shafts where continuous graphite fibers are mechanically wound around a mandrel. Under either process, the graphite is then baked at high temperatures to harden the material into a golf shaft. At the end of the manufacturing process, the shafts are painted and stylized using a variety of colors, patterns and designs, including logos and other custom identification. Through each phase of this process, the Company performs quality control reviews to ensure continuing high standards of quality and uniformity and to meet exacting customer specifications. -5- 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 manufactures graphite prepreg in its Poway, California facility. Through 1997, the Company purchased carbon fibers from outside vendors. Beginning in 1998, the Company will manufacture carbon fiber in its Evanston, Wyoming facility, although it will continue to be reliant on outside suppliers for a portion of its ongoing needs. 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 1997, the Company purchased most of its carbon fiber from Hexcel (formerly Hercules, Inc.) and Fortafil Fibers, Inc., and expects to purchase a significant volume of carbon fiber from Hexcel in 1998; however, the Company also purchases fibers from Toray Marketing & Sales (America), Inc., and Toho Carbon Fibers, Inc. The Company experienced increases in these raw material component costs in 1996 and 1997 and anticipates that these costs will continue to increase in the future, although it cannot predict the timing or extent of any future price changes. During 1997, the Company invested in the design and construction of a 50,000 square foot carbon fiber manufacturing facility in Evanston, Wyoming. In this facility, the Company will produce large bundle carbon fiber material from acrylic fiber through a continuous carbonization process. This material will be the primary raw material for the Company's prepreg manufacturing operation to support the manufacture of graphite golf shafts. At the present time, Courtaulds, a company based in the United Kingdom, is the only supplier of acrylic fiber, the principal raw material in carbon fiber, of the type and grade that the Company's carbon fiber operations will require. The Company has reached an understanding with Courtaulds that the Company believes should assure the Company with an adequate supply of such acrylic fiber. See "Business Risks--New Carbon Fiber Manufacturing Facility." ENVIRONMENTAL MATTERS The Company is subject to various federal, state, local and foreign environmental laws and regulations, including those governing the use, discharge and disposal of hazardous materials as the Company uses hazardous substances and generates hazardous waste in the ordinary course of its manufacturing 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. -6- 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. 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 believes that it is the largest supplier of graphite shafts in the United States, which results from its ability to establish a premium brand image and a reputation among golf club companies as a value-added supplier with competitive prices. 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. As the Company enters into the manufacture and sale of carbon fiber and prepreg products it will compete with other producers of carbon fibers, many of which have substantially greater research and development, managerial and financial resources than the Company and represent significant competition for the Company. INTELLECTUAL PROPERTY Aldila utilizes a number of trademarks and logos in connection with the sale and advertising of its products. The Company believes that the strength of its trademarks and logos are of considerable value to its business and intends to continue to protect them to the fullest extent practicable. The Company takes all reasonable measures to ensure that any product bearing an Aldila trademark reflects the consistency and quality associated with the Company's products. As of December 31, 1997 the Company had approximately 46 United States and foreign registered trademarks. The Company currently holds and protects the rights to two patents, although the Company does not view these patents as critical to the Company's business. EMPLOYEES As of December 31, 1997, Aldila employed 920 persons on a full-time basis, including 10 in sales and marketing, 26 in research and development and engineering, and 820 in production, and the balance are administrative and support staff. The number of full-time employees also includes 525 persons who are employed in the Company's Mexico facilities and 130 who are employed in the China facility. Because of seasonal demands, the Company hires a significant number of temporary employees. As of December 31, 1997, the Company also employed an additional 60 temporary employees on a full-time basis. Aldila considers its employee relations to be good. -7- SEASONALITY Because the Company's customers have historically built inventory in anticipation of purchases by golfers in the spring and summer, the principal selling season for golf equipment, the Company's operating results have been affected by seasonal demand for golf clubs, which has generally resulted in higher sales in the second and third quarters. The timing of customers' new products introductions has frequently mitigated the impact of seasonality in recent years. BACKLOG As of December 31, 1997, the Company had a backlog of approximately $14.1 million compared to approximately $8.0 million as of December 31, 1996. The Company believes that the dollar volume of its current backlog will be shipped over the next three months. Orders can typically be canceled without penalty up to 30 days prior to shipment. Historically, the Company's backlog generally has been highest in the first and second quarters, due in large part to seasonal factors. Due to the timing and receipt of customer orders, backlog is not necessarily indicative of future operating results. BUSINESS RISKS CUSTOMER CONCENTRATION. The Company's sales have been, and very likely will continue to be, concentrated among a small number of customers. In 1997, sales to the Company's top five customers represented approximately 72% of net sales. Aldila's principal customers have historically varied depending largely on the prevailing popularity of the various clubs that contain Aldila shafts. Customers representing more than 10% of net sales in the past three years have consisted of: Callaway Golf Company ("Callaway") (32%) and Taylor Made Golf Company ("Taylor Made") (22%) in 1997; Callaway (43%) and Taylor Made (16%) in 1996 and Callaway (50%) in 1995. The Company cannot predict the impact that general market trends in the golf industry, including the fluctuation in popularity of customers clubs, will have on its future business or operating results. While the Company has had long-established relationships with most of its customers, it is not the exclusive supplier of graphite shafts to most of them, and consistent with 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 50% of the Company's sales in 1997 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. SHAFT MANUFACTURING BY CLUB COMPANIES. Another factor that could have a negative impact in the future on the Company's sales to golf club manufacturers would be the decision by one of its customers to manufacture all or a portion of its graphite shaft requirements. While the Company has not to date experienced any material decline in its sales for this reason, should any of the Company's major customers decide to meet any significant portion of their shaft needs internally, it could have a material adverse impact on the Company and its financial results. -8- 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 currently in the start-up phase of production. Although the Company has hired individuals with substantial expertise in the manufacture of carbon fiber, the Company has only produced its initial production material for consumption by the golf shaft manufacturing operation and, therefore, there is a risk that the Company will be unable to manufacture carbon fiber of high enough quality in sufficient quantities at low enough costs to justify a decision to limit the use of outside suppliers. The Company expects to be able to use its carbon fiber manufacturing capacity to facilitate a transition away from being a single product producer, to become a diversified manufacturer of carbon fiber based products, either through supplying other manufacturers of sporting and industrial applications or by acquiring other such manufacturers. Although the Company would still be capitalizing on its existing expertise in composite materials manufacturing, any transition into new carbon fiber applications would require the Company to develop expertise with respect to different manufacturing and marketing issues related to such new applications. 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. Commencing in 1998, the Company expects to satisfy a portion of its needs for carbon fiber internally. Depending on market conditions prevailing at the time and the extent to which production at its planned facility meets expectations, the Company may face difficulties in obtaining adequate supplies of carbon fiber from external sources to provide for any carbon fiber needs not met internally. In particular, a substantial reduction in the Company's purchases in the market as a result of its internal capacity may make it more difficult to purchase carbon fiber from other suppliers if it remains in short supply. If it appears that the carbon fiber facility is not likely to satisfy a significant portion of the Company's needs or if it appears that there will not be adequate availability in the market, the Company may not have made arrangements in advance for the purchase of material amounts of carbon fiber from alternative sources. RAW MATERIAL COST/AVAILABILITY. The Company's gross profit margins are dependent on the price of carbon fiber, which is the most substantial component of total raw material costs. For several years, prices for carbon fiber, as well as for the graphite prepreg that is used in most graphite golf club shafts and that is manufactured out of carbon fiber, had been relatively low due to excess capacity in the carbon fiber industry. As a result of elimination of that excess capacity coupled with increasing demand for carbon fiber, including demand resulting from new applications, the Company experienced an increase in carbon fiber prices in 1996 and 1997. 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 most of 1998. However, given the current lack of excess capacity in the industry overall, the Company is engaging in discussions with its principal suppliers, and monitoring conditions in the market generally, to assure that it will have an adequate supply of carbon fiber for this period. If the Company's demand for carbon fiber during this period is not satisfied through its Evanston, Wyoming facility and its existing contracts because the supplier under these contracts fails to satisfy its contractual requirements, then a continuation of the current limited supply of carbon fiber could make it difficult for the Company to satisfy all of its customers' orders unless an appropriate substitute for the current type of carbon fiber can be found. In such event, the Company's net sales and profits would be adversely affected. Even if it is able to acquire sufficient additional carbon fiber outside the current contracts, it would likely be at a higher price than provided under its current contracts, with a resulting adverse impact on margins. -9- The Company anticipates that it will procure substantially all of its raw acrylic fibers for the carbon fiber operation from Courtaulds, which is currently the sole merchant supplier of such raw material in the world. Pursuant to a supply agreement with the Company, Courtaulds Fibres, Ltd. ("Courtaulds") has agreed to supply the Company with carbon fiber precurser. The Company believes Courtaulds is a reliable source of supply at the anticipated operating levels, however, any interruption of precursor supply from Courtaulds would have a material adverse effect on the Company's carbon fiber business and the Company's golf shaft business. RELIANCE ON OFF-SHORE MANUFACTURING FACILITIES. The Company operates manufacturing facilities in Tijuana, Mexico and in Zhuhai, People's Republic of China. The Company pays certain expenses of these facilities in Mexican pesos and Chinese renminbis, respectively, which are subject to fluctuations in currency value and exchange rates. The Company is also subject to other customary risks of doing business outside of the United States, including political instability, other import/export regulation, and cultural differences. UTILIZATION OF CERTAIN HAZARDOUS MATERIALS. In the ordinary course of its manufacturing process, the Company uses hazardous substances and generates hazardous waste. The Company has not to date incurred any material liabilities under environmental laws and regulations, and believes that it is in substantial compliance with applicable laws and regulations. Nevertheless, no assurance can be given that the Company will not encounter environmental problems or incur environmental liabilities in the future which could adversely affect its business. 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 will produce in its new Wyoming facility. There can be no assurance, however, that these applications will develop to the extent anticipated by the Company. Although the Company believes that it has generally achieved success in the introduction of its graphite golf shafts, no assurance can be given that the Company will be able to continue to design and manufacture products that meet with market acceptance, either on the part of club manufacturers or golfers. The design of new graphite golf shafts is also influenced by rules and interpretations of the United States Golf Association ("USGA"). There can be no assurance that any new products will receive USGA approval or that existing USGA standards will not be altered in ways that adversely affect the sales of the Company's products. COMPETITION. Aldila operates in a highly competitive environment. The Company believes that it competes principally on the basis of its ability to provide a broad range of high quality, performance graphite shafts, its ability to deliver customized products in large quantities and on a timely basis; the acceptance of graphite shafts in general, and Aldila shafts in particular, by professional and other golfers, whose preferences are to some extent subjective; and finally, price. Aldila competes against both domestic and foreign shaft manufacturers. The Company also experiences indirect competition from golf club manufacturers that produce their own shafts internally. Some of the Company's current and potential competitors may have greater resources than Aldila. The Company also faces potential competition from those golf club manufacturers that currently purchase golf shaft components from outside suppliers but that may have, develop or acquire the ability to manufacture shafts internally. -10- As the Company enters into the manufacture and sale of carbon fiber and prepreg products it will compete with other producers of carbon fibers, 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. 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 leased facility in Rancho Bernardo, California. The Company's golf shafts are manufactured at five separate facilities, one located in the San Diego, California metropolitan area, three others located in Tijuana, Mexico and one in the Zhuhai economic development zone of the People's Republic of China. The Company leases 41,000 square feet of shaft manufacturing space (which was not being fully utilized as of December 31, 1997) and 20,000 square feet of office and research and development space 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 facility is also leased and comprises 31,000 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 1997. -11- PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS COMMON STOCK PERFORMANCE
1997 1996 - ------------------------------------------------------------------------------------------------------------- High Low High Low First Quarter $6 1/16 $4 9/16 $7 7/16 $4 3/8 Second Quarter $5 3/4 $4 1/8 $5 1/2 $3 15/16 Third Quarter $6 $4 7/8 $4 13/16 $3 7/8 Fourth Quarter $6 5/8 $4 1/4 $5 1/16 $3 5/8
On March 16, 1998, the closing common stock price was $5.50, and there were approximately 527 common stockholders of record. The Company believes a significant number of beneficial owners also own Aldila stock in "street name." ITEM 6. SELECTED FINANCIAL DATA The information required as to this Item is contained in the following table. - 12- ALDILA, INC. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OPERATING RESULTS (YEAR ENDED DECEMBER 31): 1997 1996 1995 1994 1993 ------- ------- ------- ------- ------- Net sales $55,636 $58,394 $56,545 $79,779 $62,646 Cost of sales 38,742 37,245 32,823 44,206 34,420 ------------------------------------------------------------------- Gross profit 16,894 21,149 23,722 35,573 28,226 ------------------------------------------------------------------- Selling, general and administrative 10,255 9,112 10,850 12,922 10,696 Amortization of goodwill 1,428 1,416 1,398 1,398 1,398 Plant consolidation 1,500 ------------------------------------------------------------------- Operating income 3,711 10,621 11,474 21,253 16,132 ------------------------------------------------------------------- Interest expense 1,040 1,266 1,291 1,313 3,013 Other (income), net (418) (727) (857) (297) (63) ------------------------------------------------------------------- Income before income taxes and extraordinary loss 3,089 10,082 11,040 20,237 13,182 Provision for income taxes 1,550 4,400 4,770 8,565 6,024 ------------------------------------------------------------------- Income before extraordinary loss 1,539 5,682 6,270 11,672 7,158 Extraordinary loss 786 ------------------------------------------------------------------- Net income $1,539 $5,682 $6,270 $11,672 $6,372 ------------------------------------------------------------------- ------------------------------------------------------------------- Earnings per common share(1): Income before extraordinary loss $0.10 $0.35 $0.38 $0.70 $0.51 Net income $0.10 $0.35 $0.38 $0.70 $0.45 Earnings per common share, assuming dilution: Income before extraordinary loss $0.10 $0.35 $0.37 $0.69 $0.50 Net income $0.10 $0.35 $0.37 $0.69 $0.44 SELECTED OPERATING RESULTS AS A PERCENTAGE OF NET SALES: Gross profit 30.4% 36.2% 42.0% 44.6% 45.0% Selling, general and administrative 18.4 15.6 19.2 16.2 17.1 Operating income 6.7 18.2 20.3 26.6 25.7 Net income 2.8 9.7 11.1 14.6 10.2 FINANCIAL POSITION (AT DECEMBER 31): Working capital $16,775 $28,274 $24,770 $19,080 $8,827 Total assets 113,128 111,935 111,853 109,557 95,127 Long-term debt, including current portion 20,000 20,000 20,000 20,000 20,000 Total stockholders' equity 77,283 78,826 75,481 69,777 57,228
(1) Earnings per common share have been adjusted to give retroactive effect to the recapitalization of the Company, including a one for 3.8 reverse stock split which occurred on June 15, 1993, and a 2-for-1 stock split which occurred on February 22, 1994. -13- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW - BUSINESS CONDITIONS Aldila, Inc. (the "Company") is principally in the business of designing, manufacturing and marketing graphite (carbon fiber based composite) golf club shafts, with approximately 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. Early in 1998, the Company expects to begin production of carbon fiber at its new facility in Evanston, Wyoming. The Company will use the output of this facility to satisfy a significant portion of its internal demand for carbon fiber in the manufacturing of golf club shafts. It also anticipates that it will produce at this new facility carbon fiber in excess of what it will be able to use in the manufacturing of golf club shafts. The Company intends to sell such excess, in some cases in the form of graphite prepreg manufactured using its existing facility in Poway, California, to other manufacturers of carbon fiber-based products. The Company is also exploring entering into the manufacture of new carbon fiber-based products in order to take advantage of this excess carbon fiber capacity and may make acquisitions of other companies in order to acquire such product lines. The Company expects that the additional vertical integration offered by its new facility will assist it from the outset in maintaining its position as a low cost manufacturer of graphite golf club shafts at all price points. Management of the Company believes that the ability to manufacture carbon fiber will also ultimately enable the Company to diversify its sales and reduce its dependence on the overall golf club market, while continuing to leverage the Company's existing composite materials expertise, which should provide opportunities for growth that are not currently present in the golf shaft business. This new facility will need to undergo a "shakedown" period and will not be operating at full capacity initially, therefore, the full benefit of this facility to the Company is not expected to be realized until at least 1999. Historically, graphite shafts have principally been offered by manufacturers of higher priced, premium golf clubs, and the Company's sales have been predominantly of premium graphite shafts. In addition, until recently, the United States market for graphite shafts was dominated by a relatively small number of United States-based shaft manufacturers. Both of these aspects of the graphite shaft market have been changing. As a high percentage of premium clubs are already sold with graphite shafts, as compared to a smaller percentage of value priced clubs, the Company anticipates that growth in graphite shaft usage in the future will be greater in the value priced segment of the market than in the premium segment. Management of the Company expects sales of shafts for the value priced club market to increase significantly over the next several years, although management also anticipates that sales of premium shafts will continue to represent a majority of the Company's sales measured in dollars for the foreseeable future. Over the last several years, the number of shaft manufacturers of graphite golf shafts serving the United States premium club market has increased, including affiliates of foreign manufacturers that had previously not had significant sales in the United States. These two overall trends in the graphite shaft marketplace have had the effect, and are expected by management to continue to have the effect for at least the next several years, of decreasing the average selling price of the Company's shafts. Although the Company's gross profit margin is being adversely affected by the reduction in average selling price and continuing increases in raw material costs, these adverse effects on gross margin should be mitigated to some extent by efforts being taken by the Company to control costs, including manufacturing its own graphite prepreg and, starting in 1998 its own carbon fiber, increased automation and increasing the percentage of its shafts being manufactured in countries with lower labor and overhead costs. -14- 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 1997, sales to Callaway Golf Company and Taylor Made Golf represented 32% and 22%, respectively, of the Company's total net sales. The Company expects Callaway and Taylor Made to continue to be the Company's largest customers at least through 1998. The Company believes that while it will often not be possible to predict, with any certainty, shifts in demand for particular clubs, the Company's broad range of club manufacturer customers should reduce in some cases the extent of the impact on the Company's financial results. RESULTS OF OPERATIONS The following table sets forth operating results expressed as a percentage of net sales for the years indicated:
----------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------- 1997 1996 1995 -------- -------- -------- Net sales . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% Cost of sales . . . . . . . . . . . . . . . . . . . 69.6 63.8 58.0 -------- -------- -------- Gross profit. . . . . . . . . . . . . . . . . . 30.4 36.2 42.0 -------- -------- -------- Selling, general and administrative . . . . . . . . 18.4 15.6 19.2 Amortization of goodwill. . . . . . . . . . . . . . 2.6 2.4 2.5 Plant consolidation . . . . . . . . . . . . . . . . 2.7 -------- -------- -------- Operating income . . . . . . . . . . . . . . . 6.7 18.2 20.3 -------- -------- -------- Other: Interest expense . . . . . . . . . . . . . . . 1.9 2.2 2.3 Other (income), net . . . . . . . . . . . . . . (0.8) (1.2) (1.5) -------- -------- -------- Income before income taxes. . . . . . . . . . . . . 5.6 17.2 19.5 Provision for income taxes. . . . . . . . . . . . . 2.8 7.5 8.4 -------- -------- -------- Net income. . . . . . . . . . . . . . . . . . . . . 2.8% 9.7% 11.1% -------- -------- -------- -------- -------- --------
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. -15- GROSS PROFIT. Gross profit decreased $4.3 million, or 20% 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 decreased 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%, 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. 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 in start-up costs recorded in the fourth quarter of 1997 related to the Company's new carbon fiber manufacturing facility. The Company anticipates that operating income will be further impacted by start-up costs in the first quarter of 1998 related to the 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-deductible amortization of goodwill in each year. 1996 COMPARED TO 1995 NET SALES. Net sales increased $1.8 million or 3.3%, to $58.4 million for 1996 from $56.5 million for the prior year. Unit sales increased 24% in 1996 as compared to 1995, which was offset by a 16.5% decrease in the average selling price of shafts sold, both as a result of a change in product mix and heightened competitive pressures. GROSS PROFIT. Gross profit decreased $2.6 million, or 10.8% to $21.1 million in 1996 from $23.7 million in 1995 principally as a result of the lower average selling prices for shafts sold. The gross profit margin was also negatively impacted by increases in raw material costs. The Company's gross profit margin decreased to 36.2% in 1996 from 42.0% in 1995 as a result of the factors noted above. OPERATING INCOME. Operating income decreased $0.9 million, or 7.4%, to $10.6 million in 1996 from $11.5 in 1995 and decreased as a percentage of net sales to 18.2% in 1996 compared to 20.3% in 1995 as a result of the decrease in gross profit offset in part by a decrease in selling, general and administrative expense, both in dollars and as a percentage of net sales. Selling, general and administrative expense decreased to $9.1 million (or 15.6% of net sales) in 1996 from $10.8 million (or 19.2% of net sales) in 1995 principally as a result of lower marketing and promotional expenses in 1996 as compared to 1995. INTEREST EXPENSE. Interest expense was $1.3 million in 1996 and 1995. The weighted average interest rate on borrowings was 6.13% in 1996 and 1995. -16- INCOME TAXES. The Company's effective tax rate in 1996 was 43.6% as compared to 43.2% in 1995. The increase resulted primarily from a decrease in tax credits in 1996 as compared to 1995. LIQUIDITY AND CAPITAL RESOURCES Since November 1993, the only indebtedness of the Company has been $20.0 million in 6.13% senior notes due 2001. The Company has not used borrowings to finance its operations or provide working capital for over five years but may require additional short-term financing to support its working capital needs. In March of 1998 the Company obtained a commitment from a financial institution for a $10.0 million unsecured line of credit through June of 1999. The line of credit requires the maintenance of certain financial ratios. Cash (including cash equivalents) provided by operating activities in 1997 was $1.2 million compared to $7.2 million in 1996. This decrease resulted principally from the decrease in net income and increase in inventory in 1997 as compared to 1996. The Company used $14.8 million for capital expenditures during 1997, primarily related to development and construction of a new facility for the manufacture of carbon fiber. The design, construction and start-up of the 50,000 square foot facility that was completed in the first quarter of 1998 will have a total cost of approximately $16.0 million. The Company has used existing cash and cash provided by operating activities to fund the project. The Company may from time to time consider the acquisition of businesses complementary to the Company's business. The Company could require additional debt financing if it were to engage in a material acquisition in the future. 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. The Company recognizes the need to ensure its operations will not be adversely impacted by the inability of the Company's information systems to process data having dates on or after January 1, 2000 (the "Year 2000" issues). Processing errors due to software failure arising from calculations using the Year 2000 date are a recognized risk. The Company is currently addressing the risk, with respect to the availability and integrity of its financial systems and the reliability of its operating systems, and is in the process of communicating with suppliers, customers, financial institutions and others with whom it conducts business transactions to assess whether they are Year 2000 compliant. The Company does not believe that it will incur a material financial impact from the risk, or from assessing the risk, arising from the Year 2000 issues. SEASONALITY Because the Company's customers have historically built inventory in anticipation of purchases by golfers in the spring and summer, the principal selling season for golf equipment, the Company's operating results have been affected by seasonal demand for golf clubs, which has generally resulted in higher sales in the second and third quarters. The timing of customers' new products introductions has frequently mitigated the impact of seasonality in recent years. -17- "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 With the exception of historical information (information relating to the Company's financial condition and results of operations at historical dates or for historical periods), the matters discussed in this Management's Discussion and Analysis of Financial Condition and Results of Operations are forward- looking statements that necessarily are based on certain assumptions and are subject to certain risks and uncertainties. These forward-looking statements are based on management's expectations as of the date hereof, and the Company does not undertake any responsibility to update any of these statements in the future. Actual future performance and results could differ from that contained in or suggested by these forward-looking statements as a result of the factors set forth in this Management's Discussion and Analysis of Financial Condition and Results of Operations, the Business Risks described in Item 1 of this Report on Form 10-K and elsewhere in the Company's filings with the Securities and Exchange Commission. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required as to this item is incorporated by reference from the consolidated financial statements and supplementary data listed in Item 14 of Part IV of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There is no information required to be submitted by the Company under this Item. PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required as to this Item is incorporated by reference from the section headed "Election of Directors" in the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders for the year ended December 31, 1997, which will be filed with the Commission within 120 days of the end of the fiscal year covered by this report ("1998 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 1998 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 1998 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS There is no information required to be submitted by the Company under this Item. -18- 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, 1997 and 1996; Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995; Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995; Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995; 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 35 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, 1997. -19- ALDILA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, DECEMBER 31, ASSETS 1997 1996 ----------- ----------- CURRENT ASSETS: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . $3,046 $19,676 Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . 4,640 2,460 Income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . 14 Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,186 7,809 Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . 2,902 2,301 Prepaid expenses and other current assets . . . . . . . . . . . . . . 734 468 ------- ------- Total current assets . . . . . . . . . . . . . . . . . . . . . . . 24,522 32,714 PROPERTY AND EQUIPMENT . . . . . . . . . . . . . . . . . . . . . . . . . 26,170 14,883 TRADEMARKS AND PATENTS, less accumulated amortization of $2,634 and $2,199. . . . . . . . . . . . . . . . . . . . . . . . . 14,704 15,139 GOODWILL, less accumulated amortization of $8,435 and $7,007 . . . . . . 47,625 49,053 DEFERRED FINANCING FEES, less accumulated amortization of $159 and $120 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 146 -------- -------- TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $113,128 $111,935 -------- -------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . $4,051 $2,062 Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,696 2,277 Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . 101 -------- -------- Total current liabilities 7,747 4,440 LONG-TERM LIABILITIES: Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000 20,000 Deferred tax liabilities. . . . . . . . . . . . . . . . . . . . . . . 7,487 7,906 Deferred rent liabilities . . . . . . . . . . . . . . . . . . . . . . 611 763 -------- -------- Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 35,845 33,109 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 15,428,871 and 16,011,152 shares . . . . . . 154 160 Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . 42,456 45,532 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . 34,673 33,134 -------- -------- Total stockholders' equity . . . . . . . . . . . . . . . . . . . . 77,283 78,826 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . $113,128 $111,935 -------- -------- -------- --------
See notes to consolidated financial statements. -20- ALDILA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ------------------------------------ 1997 1996 1995 -------- -------- -------- NET SALES . . . . . . . . . . . . . . . . . . . . . . $55,636 $58,394 $56,545 COST OF SALES . . . . . . . . . . . . . . . . . . . . 38,742 37,245 32,823 ------- ------ ------- Gross profit. . . . . . . . . . . . . . . . . . . . 16,894 21,149 23,722 ------- ------ ------- SELLING, GENERAL AND ADMINISTRATIVE . . . . . . . . . 10,255 9,112 10,850 AMORTIZATION OF GOODWILL. . . . . . . . . . . . . . . 1,428 1,416 1,398 PLANT CONSOLIDATION . . . . . . . . . . . . . . . . . 1,500 ------- ------ ------- Operating income 3,711 10,621 11,474 ------- ------ ------- OTHER: Interest expense . . . . . . . . . . . . . . . . . 1,040 1,266 1,291 Other (income), net . . . . . . . . . . . . . . . . (418) (727) (857) ------- ------ ------- INCOME BEFORE INCOME TAXES. . . . . . . . . . . . . . 3,089 10,082 11,040 PROVISION FOR INCOME TAXES. . . . . . . . . . . . . . 1,550 4,400 4,770 ------- ------ ------- NET INCOME. . . . . . . . . . . . . . . . . . . . . . $1,539 $5,682 $6,270 ------- ------ ------ ------- ------ ------ NET INCOME PER COMMON SHARE . . . . . . . . . . . . . $0.10 $0.35 $0.38 ------- ------ ------ ------- ------ ------ NET INCOME PER COMMON SHARE, ASSUMING DILUTION . . . . $0.10 $0.35 $0.37 ------- ------ ------ ------- ------ ------
See notes to consolidated financial statements. -21- ALDILA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
COMMON STOCK ADDITIONAL ------------------ PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS TOTAL ------ ------ ------- -------- -------- Balance at January 1, 1995 . . . . . . . . . . . . . . . 16,666 $ 166 $ 48,429 $ 21,182 $ 69,777 Repurchases of common stock. . . . . . . . . . . . . . . (206) (2) (955) (957) Common stock issued upon stock option exercises, including income tax benefits of $164. . . . . . . . . 114 2 389 391 Net income . . . . . . . . . . . . . . . . . . . . . . . 6,270 6,270 ------ ----- -------- -------- -------- Balance at December 31, 1995 . . . . . . . . . . . . . . 16,574 166 47,863 27,452 75,481 Repurchases of common stock. . . . . . . . . . . . . . . (563) (6) (2,331) (2,337) Net income . . . . . . . . . . . . . . . . . . . . . . . 5,682 5,682 ------ ----- -------- -------- -------- Balance at December 31, 1996 . . . . . . . . . . . . . . 16,011 160 45,532 33,134 78,826 Repurchases of common stock. . . . . . . . . . . . . . . (600) (6) (3,159) (3,165) Common stock issued upon 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 ------ ----- -------- -------- -------- ------ ----- -------- -------- --------
See notes to consolidated financial statements. -22- ALDILA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, -------------------------------------- 1997 1996 1995 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income. . . . . . . . . . . . . . . . . . . . . . $ 1,539 $ 5,682 $ 6,270 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization . . . . . . . . 5,373 4,931 3,972 Changes in assets and liabilities: Accounts receivable . . . . . . . . . . . . (2,180) 708 1,930 Inventories . . . . . . . . . . . . . . . . (5,377) (1,735) 361 Deferred tax assets . . . . . . . . . . . . (601) 507 623 Prepaid expenses and other current assets . (266) 274 97 Accounts payable. . . . . . . . . . . . . . 1,989 (2,168) (849) Accrued expenses. . . . . . . . . . . . . . 1,419 (948) (1,995) Income taxes payable/receivable . . . . . . (115) 189 (599) Deferred tax liabilities. . . . . . . . . . (419) (134) 2 Deferred rent liabilities . . . . . . . . . (152) (114) (55) -------- -------- -------- Net cash provided by operating activities. . . . 1,210 7,192 9,757 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment, net. . . . . . . (14,791) (4,407) (3,933) Other . . . . . . . . . . . . . . . . . . . . . . . . 33 (117) -------- -------- -------- Net cash used for investing activities. . . . . . . . (14,758) (4,524) (3,933) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock. . . . . . . . 71 227 Repurchases of common stock . . . . . . . . . . . . . (3,165) (2,337) (957) Tax benefit from exercise of stock options. . . . . . 12 164 -------- -------- -------- Net cash used for financing activities. . . . . . . . (3,082) (2,337) (566) -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . (16,630) 331 5,258 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR. . . . . . . 19,676 19,345 14,087 -------- -------- -------- CASH AND CASH EQUIVALENTS, END OF YEAR. . . . . . . . . . $ 3,046 $ 19,676 $ 19,345 -------- -------- -------- -------- -------- -------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest. . . . . . . . . . . . . . . . . . . . . $ 1,226 $ 1,226 $ 1,227 Income taxes. . . . . . . . . . . . . . . . . . . $ 2,674 $ 3,841 $ 4,595
See notes to consolidated financial statements. -23- ALDILA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES THE COMPANY -- Aldila, Inc. (a Delaware Corporation) (the "Company") designs, manufactures and markets graphite golf club shafts for sale principally in the United States. PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements of the Company include the accounts of the Company and its wholly-owned 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 ("AFSC"). All inter- company transactions and balances have been eliminated in consolidation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The recorded amounts of assets, liabilities, revenues and expenses are affected by such estimates and assumptions. REVENUE RECOGNITION -- The Company recognizes revenues as of the date merchandise is shipped to its customers. CASH EQUIVALENTS -- The Company's investment policy is to invest its excess cash in corporate debt, tax-exempt and government securities, bank related instruments and money market accounts. The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company has not historically experienced losses on such investments. ACCOUNTS RECEIVABLE -- The Company sells graphite golf club shafts primarily to golf club manufacturers on credit terms. Historically, credit losses have been minimal in relation to the credit extended. INVENTORIES -- Inventories are stated at the lower of first-in, first-out (FIFO) cost or market. PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost. Repairs and maintenance are charged to expense as incurred. The Company depreciates its property and equipment using the straight-line method over the estimated useful lives of the assets, as follows: YEARS ----- Building . . . . . . . . . . . . . . . . . . . . 39 Machinery and equipment. . . . . . . . . . . . . 5-10 Office furniture and equipment . . . . . . . . . 3-10 Leasehold improvements are amortized over the shorter of the asset life or the remaining term of the related lease. TRADEMARKS AND PATENTS -- Trademarks and patents are being amortized on a straight-line basis over 40 years and 17 years, respectively. Amortization expense was $435,000 in each of 1997, 1996 and 1995. 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. -24- EVALUATION OF TRADEMARKS, PATENTS AND GOODWILL -- The Company's policy is to evaluate, at each balance sheet date, the appropriateness of the carrying values of the unamortized balances of trademarks, patents and goodwill on the basis of estimated future cash flows and other factors. If 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. 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 and net income per common share assuming dilution ("EPS") amounts on the face of the income statement. Net income per common share 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 issuable shares. The EPS data for 1996 and 1995 have been restated to conform to the requirements of SFAS No. 128. Net income per common share, assuming dilution includes 113,000, 22,000 and 51,000 dilutive equivalent shares from outstanding stock options for 1997, 1996 and 1995, respectively, which are not included in the calculation of net income per common share. Options to purchase 724,000 shares of common stock at prices ranging from $5.06 to $16.38 per share were not included in the computation of diluted EPS at December 31,1997 because the effect of such options would be anti-dilutive. Such options expire at various dates through November of 2007. 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. The Company will be required to begin reporting under SFAS No. 131 commencing in its financial statements for the year ended December 31, 1998. 2. ACCOUNTS RECEIVABLE Accounts receivable at December 31 consists of the following (in thousands): 1997 1996 ------- ------- Trade accounts receivable . . . . . . . . . . . . . $ 5,769 $ 3,653 Less: allowance for doubtful accounts . . . . . . . (369) (378) Less: allowance for sales returns . . . . . . . . . (760) (815) ------- ------- Accounts Receivable . . . . . . . . . . . . . . . . $ 4,640 $ 2,460 ------- ------- ------- ------- -25- 3. INVENTORIES Inventories at December 31 consist of the following (in thousands):
1997 1996 -------- ------- Raw materials. . . . . . . . . . . . . . . . . . . $ 7,514 $ 3,868 Work-in-process. . . . . . . . . . . . . . . . . . 2,108 2,298 Finished goods . . . . . . . . . . . . . . . . . . 3,564 1,643 -------- ------- Inventories. . . . . . . . . . . . . . . . . . . . $ 13,186 $ 7,809 -------- ------- -------- -------
4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at December 31 consist of the following (in thousands):
1997 1996 -------- -------- Land. . . . . . . . . . . . . . . . . . . . . . . $ 140 Machinery and equipment . . . . . . . . . . . . . 14,524 $ 12,829 Office furniture and equipment. . . . . . . . . . 1,938 1,705 Leasehold improvements. . . . . . . . . . . . . . 7,359 6,596 Property and equipment not yet in service . . . . 13,088 1,401 Other . . . . . . . . . . . . . . . . . . . . . . 167 229 -------- -------- 37,216 22,760 Less accumulated depreciation and amortization. . (11,046) (7,877) -------- -------- Property, plant and equipment . . . . . . . . $ 26,170 $ 14,883 -------- -------- -------- --------
Depreciation and amortization expense was $3,471,000, $3,036,000 and $2,095,000 in 1997, 1996 and 1995, respectively. $225,000 of interest was capitalized in 1997. 5. ACCRUED EXPENSES Accrued expenses at December 31 consist of the following (in thousands):
1997 1996 ------- ------- Payroll and employee benefits . . . . . . . . . . $ 871 $ 1,289 Plant consolidation . . . . . . . . . . . . . . . 1,491 Interest payable. . . . . . . . . . . . . . . . . 306 306 Other . . . . . . . . . . . . . . . . . . . . . . 1,028 682 ------- ------- Accrued expenses. . . . . . . . . . . . . . . $ 3,696 $ 2,277 ------- ------- ------- -------
-26- 6. LONG-TERM DEBT SENIOR NOTES -- Long-term debt consists of $20.0 million in principal amount of senior notes placed with an institutional investor on November 30, 1993. The notes bear interest at 6.13%, payable semi-annually on March 31 and September 30. Semi-annual principal payments of $4.0 million will be due beginning September 30, 1999 through September 30, 2001. The senior notes contain certain restrictions, including limitations on additional borrowings, the payment of dividends and capital stock repurchases. Under the most restrictive provision of the note agreement, approximately $12.3 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, 1997, 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. LINE OF CREDIT -- In March of 1998 the Company established a $10.0 million unsecured line of credit with a financial institution expiring June 30, 1999. Borrowings under the line of credit bear interest, at the election of the Company, at the bank reference rate or at the LIBOR rate plus 1.5%. The line of credit requires the maintenance of certain financial ratios. 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 and approximately 206,000 shares at an average price of $4.66 per share in 1995. 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 reflects $900,000 of noncash 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. -27- 9. INCOME TAXES The components of the provision for income taxes are as follows (in thousands):
1997 1996 1995 ------- ------- ------- Current: Federal . . . . . . . . . . . . . . . . . . . . $ 2,014 $ 3,095 $ 3,306 State . . . . . . . . . . . . . . . . . . . . . 544 930 676 ------- ------- ------- Total. . . . . . . . . . . . . . . . . . . . 2,558 4,025 3,982 ------- ------- ------- Deferred: Federal . . . . . . . . . . . . . . . . . . . . (734) 287 306 State . . . . . . . . . . . . . . . . . . . . . (287) 88 318 ------- ------- ------- Total. . . . . . . . . . . . . . . . . . . . (1,021) 375 624 ------- ------- ------- Tax benefit credited directly to additional paid-in-capital . . . . . . . . . . . . . . . . . . 13 164 ------- ------- ------- Provision for income taxes. . . . . . . . . . . . . $ 1,550 $ 4,400 $ 4,770 ------- ------- ------- ------- ------- -------
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):
1997 1996 ------- ------- Inventories . . . . . . . . . . . . . . . . . . . . . $ 1,280 $ 1,186 Allowance for doubtful accounts and sales returns . . 484 528 Accrued expenses. . . . . . . . . . . . . . . . . . . 1,047 360 State income taxes. . . . . . . . . . . . . . . . . . 91 227 ------- ------- Deferred tax assets -- current. . . . . . . . . . . . $ 2,902 $ 2,301 ------- ------- ------- -------
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):
1997 1996 ------- ------- Trademarks and patents. . . . . . . . . . . . . . . . $ 6,454 $ 6,876 Property and equipment. . . . . . . . . . . . . . . . 728 827 Other . . . . . . . . . . . . . . . . . . . . . . . . 305 203 ------- ------- Deferred tax liabilities -- long-term . . . . . . . . $ 7,487 $ 7,906 ------- ------- ------- -------
Differences between the statutory federal income tax rate and the effective tax rate as a percentage of income taxes are summarized below.
1997 1996 1995 ------ ------ ------ Statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . 34.0% 35.0% 35.0% State income taxes, net of Federal tax benefit . . . . . . . . . . . 7.9 6.7 5.6 Non-deductible amortization -- purchase accounting adjustments . . . 15.9 5.0 4.6 Other items. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7.6) (3.1) (2.0) ---- ---- ---- Effective rate . . . . . . . . . . . . . . . . . . . . . . . . . . . 50.2% 43.6% 43.2% ---- ---- ---- ---- ---- ----
-28- 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 in 1995, and 1996 and 1997 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:
1997 1996 1995 ---- ---- ---- Net income - pro forma (in thousands) $ 864 $ 5,232 $ 6,130 Earnings per share, assuming dilution - pro forma $0.05 $ 0.32 $ 0.37
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 1997, 1996 and 1995 were estimated at $2.02, $1.91 and $2.33, respectively, on the date of grant using the Black-Scholes option- pricing model with the following weighted-average assumptions: 0% dividend yield, expected volatility of 34%, risk free rate of return of 6.3% 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. -29- A summary of the status of the Company's fixed stock option plans as of December 31, 1997, 1996 and 1995 and activity during the years then ended is presented below:
1997 1996 1995 ------------------------ --------------------------- ------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------------------------ --------------------------- ------------------------- Outstanding at January 1 1,193,064 $ 6.09 593,064 $ 7.55 432,240 $ 9.09 Granted 1,058,814 $ 4.85 610,000 $ 4.67 411,442 $ 5.69 Exercised (17,719) $ 4.00 - (113,826) $ 2.00 Terminated (230,167) $ 5.21 (10,000) $ 5.41 (57,850) $ 10.29 Cancelled - - (78,942) $ 12.31 --------- --------- ------- Outstanding at December 31 2,003,992 $ 5.56 1,193,064 $ 6.09 593,064 $ 7.55 --------- ------ --------- ------ ------- ------- --------- ------ --------- ------ ------- -------
The following table summarizes information about stock options outstanding and exercisable at December 31, 1997:
Options Outstanding Options Exercisable ------------------------- ------------------------------ Weighted Number Average Weighted Number Weighted Outstanding Remaining Average Exercisable Average Range of at December 31, Contractual Exercise at December 31, Exercise Exercise Prices 1997 Life (Yrs.) Price 1997 Price - -------------------------------------------------------------------- ------------------------------ $ 2.00 35,086 4.7 $ 2.00 35,086 $ 2.00 $ 4.44 - $ 6.00 1,816,756 8.8 $ 4.96 413,625 $ 5.28 $ 12.56 - $ 16.38 152,150 5.6 $ 13.47 152,150 $ 13.47 ----------------------------------------------- ------------------------------ $ 2.00 - $ 16.38 2,003,992 8.5 $ 5.56 600,861 $ 7.16 ----------------------------------------------- ------------------------------ ----------------------------------------------- ------------------------------
As of December 31, 1996 and 1995, 283,838 and 103,522 shares were exercisable under the Plans at a weighted average exercise price of $8.47 and $9.35 per share respectively. -30- As of December 31, 1997, an aggregate of 1,178,287 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 $61,000, $54,000 and $60,000 in 1997, 1996 and 1995, 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 $1,404,000 $1,270,000 and $1,301,000 for 1997, 1996 and 1995, respectively. As of December 31, 1997, future minimum lease payments for all operating leases are as follows (in thousands): 1998 . . . . . . . . . . . . . . . . . . . . $ 1,470 1999 . . . . . . . . . . . . . . . . . . . . 1,266 2000 . . . . . . . . . . . . . . . . . . . . 842 2001 . . . . . . . . . . . . . . . . . . . . 785 2002 . . . . . . . . . . . . . . . . . . . . 6 ------- $ 4,369 ------- ------- 13. SIGNIFICANT CUSTOMERS Sales to a major customer represented 32%, 43%, and 50% of net sales in 1997, 1996 and 1995, respectively. Sales to a second customer represented 22% and 16% of net sales in 1997 and 1996, respectively. -31- 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, 1997 (in thousands, except per share data):
QUARTER ENDED ----------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, --------- -------- ------------- ------------ 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) Earnings (loss) per common share, assuming dilution . . . . . . . . . . . . . . . $ 0.06 $ 0.09 $ 0.05 $ (0.10) ----------------------------------------------------------------------------------------------------------------- 1996: Net sales. . . . . . . . . . . . . . . . . . . . . . $ 11,919 $ 15,259 $ 16,735 $ 14,481 Gross profit . . . . . . . . . . . . . . . . . . . . 4,111 5,483 6,301 5,254 Net income . . . . . . . . . . . . . . . . . . . . . 812 1,361 1,869 1,640 Earnings per common share, assuming dilution . . . . . . . . . . . . . . . 0.05 0.08 0.11 0.10
-32- 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, 1997 and 1996 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Deloitte & Touche LLP San Diego, California February 4, 1998 -33- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ALDILA, INC. By: /S/ GARY T. BARBERA --------------------------------- Gary T. Barbera Chairman of the Board, Chief Executive Officer
Signature Title Date ----------- -------- ------ /s/ Gary T. Barbera Chief Executive Officer March 16, 1998 - ------------------------- and Director (Principal Gary T. Barbera Executive Officer) /s/ Robert J. Cierzan Vice President, Finance (Principal March 16, 1998 - ------------------------- Financial Officer and Principal Robert J. Cierzan Accounting Officer) /s/ Vincent T. Gorguze Chairman Emeritus of the Board March 16, 1998 - ------------------------- and Director Vincent T. Gorguze /s/ Peter R. Mathewson Vice President and Director March 16, 1998 - ------------------------- Peter R. Mathewson /s/ Peter E. Bennett Director March 16, 1998 - ------------------------- Peter E. Bennett /s/ Marvin M. Giles, III Director March 16, 1998 - ------------------------- Marvin M. Giles, III /s/ John J. Henry Director March 16, 1998 - ------------------------- John J. Henry /s/ Donald C. Klosterman Director March 16, 1998 - ------------------------- Donald C. Klosterman /s/ Wm. Brian Little Director March 16, 1998 - ------------------------- Wm. Brian Little /s/ Chapin Nolen Director March 16, 1998 - ------------------------- Chapin Nolen /s/ Jon B. DeVault Vice President and Director March 16, 1998 - ------------------------- Jon B. DeVault /s/ Thomas A. Brand Director March 16, 1998 - ------------------------- Thomas A. Brand
-34- EXHIBIT INDEX Exhibit Number Exhibit Page - -------- ------- ---- 2.1 -- Agreement of Purchase and Sale, dated as of December 14, 1991, by and among Aldila Acquisition Corp., Aldila, Inc. and all of the Shareholders of Aldila, Inc., as amended by the First Amendment dated January 9, 1992 by and among Aldila Acquisition Corp., Aldila, Inc. and all of the Shareholders of Aldila, Inc. (Filed as Exhibit 2.1 to the Company's Registration Statement on Form S-1 (Registration No. 33-61560) and incorporated herein by reference). 3.1 -- Restated Certificate of Incorporation. (Filed as Exhibit 3.1 to the Company's Registration Statement on Form S-1 (Registration No. 33-70010) and incorporated herein by reference). 3.2 -- Restated By-Laws of the Company. (Filed as Exhibit 3.2 to the Company's Registration Statement on Form S-1 (Registration No. 33-61560) and incorporated herein by reference). 4.1 -- Specimen form of Company's Common Stock Certificate. (Filed as Exhibit 4.1 to the Company's Registration Statement on Form S-1 (Registration No. 33-61560) and incorporated herein by reference). 4.2 -- Note Purchase Agreement dated as of November 1, 1993, with respect to the Company's 6.13% Senior Notes due 2001. (Filed as Exhibit 4.2 to the Company's Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference). 4.3 -- Form of 6.13% Senior Note due 2001. (Filed as Exhibit 4.3 to the Company's Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference). *10.1 -- 1992 Stock Option Plan of the Company, as amended. (Filed as Exhibit 10.6 to the Company's Registration Statement on Form S-1 (Registration No. 33-61560) and incorporated herein by reference). *10.2 -- Form of Stock Option Agreement in connection with the Stock Option Plan. (Filed as Exhibit 10.7 to the Company's Registration Statement on Form S-1 (Registration No. 33-61560) and incorporated herein by reference). *10.3 -- Executive Bonus Plan of the Company. (Filed as Exhibit 10.2 to the Company's Report on Form 10-Q for the quarterly period ended September 30, 1994 and incorporated herein by reference). 10.4 -- Form of Indemnification Agreement between the Company and its directors and executive officers. (Filed as Exhibit 10.13 to the Company's Registration Statement on Form S-1 (Registration No. 33-61560) and incorporated herein by reference). -35- EXHIBIT INDEX Exhibit Number Exhibit Page - -------- ------- ---- 10.5 -- Business Park Net Lease dated as of May 29, 1987, between the Company and Kaiser Development Company as amended by the First Amendment to Lease dated as of January 12, 1992, between the Company and Bedford Development Company. (Filed as Exhibit 10.15 to the Company's Registration Statement on Form S-1 (Registration No. 33-61560) and incorporated herein by reference). 10.6 -- Lease Agreement dated as of October 15, 1990, between the Company and Baja del Mar, S.A. de C.V. (Filed as Exhibit 10.16 to the Company's Registration Statement on Form S-1 (Registration No. 33-61560) and incorporated herein by reference). 10.7 -- Lease Agreement dated as of August 30, 1993, between the Company and T.M. Cobb Company. (Filed as Exhibit 10.16 to the Company's Registration Statement on Form S-1 (Registration No. 33-70010) and incorporated herein by reference). 10.8 -- First Amendment to Lease Agreement dated as of August 30, 1993, between the Company and T.M. Cobb Company. (Filed as Exhibit 10.14 to the Company's Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference). 10.9 -- Lease Agreement dated as of November 30, 1993, between the Company and T.M. Cobb Company. (Filed as Exhibit 10.15 to the Company's Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference). *10.10 -- Form of Stock Option Agreement, dated October 5, 1993, between Marvin M. Giles, III and the Company. (Filed as Exhibit 10.18 to the Company's Registration Statement on Form S-1 (Registration No. 33-70010) and incorporated herein by reference). 10.11 -- 1994 Stock Incentive Plan of the Company as amended (filed as Exhibit A to the Company's 1996 Proxy Statement dated March 28, 1996 and incorporated herein by reference). 10.12 -- Form of Stock Option Agreement in connection with the 1994 Stock Incentive Plan (filed as Exhibit 10.1 to the Report on Form 10-Q for the quarterly period ended September 30, 1994 and incorporated herein by reference). 10.13 -- Lease Agreement dated May 15, 1995 between the Company and Desarrollo Industrial de Tijuana, S.A. de C.V. (Filed as Exhibit 10.1 to the Company's Report on Form 10-Q for the quarterly period ended June 30, 1995 and incorporated herein by reference). -36- EXHIBIT INDEX Exhibit Number Exhibit Page - -------- ------- ---- *10.14 -- Employment and Consulting Agreement dated as of October 2, 1995 between the Company and Gary T. Barbera (Filed as Exhibit 10.1 to the Report on Form 10-Q for the quarterly period ended September 30, 1995 and incorporated herein by reference). *10.15 -- Employment and Consulting Agreement dated as of October 4, 1995 between the Company and Robert J. Cierzan (Filed as Exhibit 10.2 to the Report on Form 10-Q for the quarterly period ended September 30, 1995 and incorporated herein by reference). *10.16 -- Employment and Consulting Agreement dated as of October 4, 1995 between the Company and Peter J. Piotrowski (Filed as Exhibit 10.3 to the Report on Form 10-Q for the quarterly period ended September 30, 1995 and incorporated herein by reference). *10.17 -- Employment and Consulting Agreement dated as of October 4, 1995 between the Company and Peter R. Mathewson (Filed as Exhibit 10.4 to the Report on Form 10-Q for the quarterly period ended September 30, 1995 and incorporated herein by reference). *10.18 -- Employment and Consulting Agreement dated as of January 18, 1996 between the Company and Edmond S. Abrain (Filed on Exhibit 10.21 to the Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference). *10.19 -- Services Agreement dated as of January 1, 1996 between Aldila, Inc. and Vincent T. Gorguze (Filed as Exhibit 10.1 to the report on Form 10-Q for the quarterly period ended June 30, 1996 and incorporated herein by reference) 10.20 -- Supply Agreement commencing January 1, 1998 between Courtaulds Fibres, Ltd. and Aldila Materials Technology Corp. 11.1 -- Statement re: Computation of Earnings per Common Share 38 21.1 -- Subsidiaries of the Company. 39 23.1 -- Independent Auditors' Consent 27.1 -- Financial Data Schedule 40 * Indicates management contracts or compensatory plans or arrangements required to be filed as exhibits to this report on Form 10-K. -37-
EX-10.20 2 EXHIBIT 10.20 SUPPLY AGREEMENT This Agreement, commencing 1st January 1998 by and between: Courtaulds Fibres Ltd, a company incorporated under the laws of England having its registered office at 50 George Street, London W1A 2BB, England, hereinafter referred to as "Seller" and Aldila Materials Technology Corp., 1375 Union Road, Evanston, Wy. 82930, USA hereinafter referred to as "Buyer". WITNESSETH THAT WHEREAS Seller is a supplier of various grades of carbon fibre precursor, (hereinafter described as "the Products"); WHEREAS Buyer uses the Product * for its manufacture of carbon fibre on a continuing basis and Seller is prepared to supply * or a mutually agreed equivalent on such a basis; WHEREAS Buyer and Seller wish to agree terms for the supply of the Products; NOW, THEREFORE THE PARTIES HAVE AGREED AS FOLLOWS: ARTICLE 1 - SALE AND PURCHASE With effect from 1st January 1998 ("the Commencement Date"), Seller agrees to sell to Buyer, *. * Material omitted and filed separately with the SEC pursuant to a request for confidential treatment. ARTICLE 2 - ORDERS, SHIPMENT 2.1 Prior to the beginning of each relevant calendar year, Buyer shall provide an estimate of the quantities of the Products it expects to require, by product, during the forthcoming year. Quantities will be confirmed by Buyer prior to each three month period, commencing with the period quarter 1, 1998. 2.2 Orders will be placed monthly or quarterly by Buyer, providing at least 14 days notice to quantities and schedule for the entire period. Each such order shall constitute a separate contract between the parties. 2.3 Save as provided herein, sales of the Products shall be governed solely by Seller's standard written conditions of contract as set out in Schedule 1. In the event of any conflict between any such conditions and any terms of this Agreement, the terms of this Agreement shall prevail (notwithstanding Section 1(a) of the said standard conditions). 2.4 Accordingly, Seller warrants that the Products will comply with the specifications mutually agreed upon by the parties from time to time (the present specification being set out in Schedule 2), but does not warrant that the Products are suitable for any particular purpose. 2.5 Each order shall be delivered by Seller to Buyer's factory at Evanston Wy - USA according to the agreed delivery schedule, *. * Material omitted and filed separately with the SEC pursuant to a request for confidential treatment. 2 ARTICLE 3 - PRICES, PAYMENT 3.1 The prices of the Products to be delivered pursuant to this Agreement shall be those determined in accordance with the provisions of this Article.* 3.2 * * Material omitted and filed separately with the SEC pursuant to a request for confidential treatment. 3 3.3 * 3.4 * 3.5 * * Material omitted and filed separately with the SEC pursuant to a request for confidential treatment. 4 3.6 * 3.7 * 3.8 * 3.9 * ARTICLE 4 - FORCE MAJEURE 4.1 Neither Seller nor Buyer shall be deemed to be in default hereunder if prevented from performing its obligations resulting from this Agreement by reason of any circumstance beyond its reasonable control, occurring after the commencement date including without limiting the generality of the foregoing: acts of God, fire, explosion, war or acts of any government or international or supranational authority having jurisdiction over the parties hereto. 4.2 The party prevented from performing its obligations by reasons referred to in the preceding clause shall inform the other party to that effect by telex or facsimile transmission immediately and shall confirm the same by registered letter. 4.3 It is agreed that during the period of any such circumstances the obligations of the parties shall be suspended. If, however, either Seller or Buyer is prevented or is reasonably to be expected to be prevented from the delivering or taking off quantities ordered hereunder, either party may cancel such deliveries by written notice to the other party. 4.4 Nothing in the foregoing shall relieve either party of any obligation in relation to goods already shipped, under Article 2. ARTICLE 5 - ASSIGNMENT This Agreement shall not be assigned to a third party in whole or in part by either party without the written consent of the other party hereto, save that the Seller may, on giving notice to Buyer, assign all its rights and obligations hereunder to Courtaulds plc or any wholly owned subsidiary thereof, and Buyer on giving notice to Seller may assign all its rights and obligations hereunder to Aldila Inc., or any of its subsidiaries. * Material omitted and filed separately with the SEC pursuant to a request for confidential treatment. 5 ARTICLE 6 - TERM 6.1 This Agreement shall remain in force for a minimum period of five years from the Commencement Date, provided that either party may terminate this Agreement by 24 months written notice given at any time after the third anniversary of the Commencement Date. 6.2 Seller may terminate this agreement with immediate effect in the event that the Buyer is acquired by, or acquires an acrylic fibre manufacturing company. ARTICLE 7 - APPLICABLE LAW, COMPETENT COURT The present Agreement shall be governed by and construed in accordance with the English Law, and the parties agree to submit all other disputes to arbitration in London before the London Court of International Arbitration, whose findings shall be binding on the Parties, who shall waive any right of appeal. ARTICLE 8 - SELLERS WARRANTY 8.1 In addition to the specific warranties contained in the Sellers standard written conditions of sale, as set out in Schedule 1, the Seller will indemnify and hold the Buyer harmless against all damages and costs which may be be awarded against the Buyer by any court resulting from any claim that the Products in the form sold to the Buyer (but not any processing, conversion or use of the Products or any downstream product resulting therefrom) infringes any valid US patent which is published prior to the Commencement Date or which issues from any patent application published in the USA prior to the Commencement Date which designates the USA as a territory in which the application is seeking patent protection, provided that: 8.2 The Buyer promptly informs the Seller of all relevant patents and patent applications which come to its attention and of all claims and allegations made concerning infringement or potential infringement of any patents by the Products, to the extent that such patent, patent application, alleged infringement or alleged potential infringement relates to the claim regarding infringement of a third party patent for which indemnification is being sought hereunder. 8.3 The Buyer gives the Seller care and control of any litigation initiated against the Buyer for infringement of any patent by the Products and signs such documents and does such things as are necessary for the Seller to defend such litigation and counterclaim against the validity of the patent in issue, all at the Sellers expense, and 8.4 The Buyer gives the Seller all reasonable assistance in minimising any liability for patent infringement as aforesaid including, if requested, assistance in opposing grant of relevant patents, all at the Sellers expense. 6 ARTICLE 9 - MISCELLANEOUS 9.1 In the event that any provision of this Agreement is declared by any judicial or other competent authority to be void and unenforceable, the parties shall amend that provision in such reasonable manner as achieves the intention of the parties without illegality, and the remaining provisions of this Agreement shall remain in full force and effect, unless either party, in its discretion, decides that the effect of it is to defeat the original intention of the said party, in which event either party shall be entitled to terminate the Agreement forthwith. 9.2 This Agreement contains the entire agreement, between the parties in relation to supplies of the Products by Seller or Buyer and supersedes all previous Agreements on this and related subjects, which are hereby agreed to be cancelled. 9.3 No amendment hereto shall be binding unless in writing and signed by both parties. 9.4 No failure by either party to assert any right hereunder shall be deemed to constitute any waiver thereof. 9.5 Any notice or consent to be given or served hereunder shall be in writing and deemed duly served seven days after it has been placed prepaid in first class airmail post or immediately upon sending by telex or facsimile transmission to the address set out above, provided that the recipient's answer-back code shall have been received. 9.6 This Agreement may be terminated by either party should the other party be in default of any such of its obligations hereunder and have failed to rectify such default within 30 days after receipt of a notice of default by the defaulting party, or should the other party become insolvent or should any administration or receiver be appointed in respect of any of its assets, or should it make any composition with its creditors. IN WITNESS THEREOF, the parties have caused this Agreement to be executed by their duly authorised representatives: COURTAULDS FIBRES LTD. ALDILA INC. /s/ John Fagge /s/ Robert J. Cierzan - -------------------------- ------------------------ Date: 11/9/97 Date: 11/5/97 7 SCHEDULE l CONDITIONS OF CONTRACT SEE ATTACHED 8 CONDITIONS OF CONTRACT 1. General (a) These conditions supersede all prior representations or arrangements, and contain the entire agreement between the parties in connection with the products (unless otherwise stated on Seller's order confirmation). All other terms and conditions, express or implied, are excluded. None of Seller's employees or agents has authority to modify or supplement these conditions or to accept any order except on Seller's official sales forms. (b) Nothing in these conditions shall restrict the statutory rights of a buyer who deals as a consumer. (c) References to the products include their packaging. If Seller has not issued an order confirmation, "Seller's order confirmation" means any document issued by Seller indicating the terms on which the products are supplied. (d) Subject to the provisions of this contract, terms defined in the 1990 edition of Incoterms have the same meaning when used in these conditions. 2. Delivery (a) Delivery or despatch dates quoted or requested, or dates when goods will be ready for shipment, are given or accepted by Seller in good faith but are not guaranteed. (b) Delivery shall be made to the place(s) and by the method(s) specified on Seller's order confirmation (or if none, FCA Free carrier to the point specified on Seller's order confirmation). Buyer is responsible for un-loading. Buyer's or its carrier's receipt shall be conclusive evidence of delivery. (c) Returnable packaging will be charged to Buyer, but if returned empty, clean, securely closed and in good condition within 30 days after receipt by Buyer, Seller will credit Buyer with the amount charged. Any special packaging requirements will incur a non-refundable additional charge. (d) Unless otherwise specifically agreed on Seller's order confirmation Buyer shall accept manufacturing tolerances accepted in the trade, and weights or quantities varying by not more than 10% from the contract weight or quantity, and shall pay pro rata for the actual weight or quantity delivered. The weight or quantity stated on Seller's despatch note shall be conclusive evidence of the amount delivered except in cases of manifest error. (e) Save for the purposes of Clause 3(c), 6(b) and 7, each delivery shall be treated as a separate contract, and partial deliveries are permitted unless otherwise stated on Seller's order confirmation. Accordingly, failure to make any particular delivery, or any breach of contract by Seller relating thereto, shall not affect any remaining deliveries. (f) Buyer shall take delivery of the products by any date quoted by Seller or requested by Buyer or (if none) within a reasonable time. Seller may deliver early where reasonable. Buyer shall be responsible for all storage, insurance and other costs relating to Buyer's failure to comply with the contract. (g) Buyer shall promptly supply all information and assistance required for Seller to execute Buyer's order. (h) Where the products are supplied under any internationally recognised trading terms as specified in Incoterms 1990, the provision by Seller of the usual transport document(s) or other evidence of delivery by Seller. (i) If Seller or its carrier is unable for any reason to place the products on board ship upon their arrival at the port of delivery, a warehouse receipt for the products shall be treated as sufficient delivery. (j) Other than for sales ex-works Seller undertakes to obtain any UK licence(s) required for the export of the products from the UK by Seller. Buyer undertakes to comply with any such licence(s) and to obtain and comply with all other necessary licenses, permits and consents (including all other export/import licenses). 3. Price (a) Unless otherwise stated on Seller's order confirmation, prices are FCA and exclusive of VAT and all other duties, fees or taxes. All sums due to Seller shall be paid in the currency and to the address stated on Seller's order confirmation, or such other address as Seller may require. (b) Payment is due by the date and in accordance with the payment terms and instructions stated on the Seller's order confirmation but Seller may require security for payment before dispatch in the circumstances described in Clause 6(c). Where discount is granted under the said payment terms, such discount will only be allowed upon payment being made before the due date (or earlier date stated on Seller's order confirmation for the purpose of obtaining discount) and payment by such date is a condition precedent to the allowance of discount. (c) Where prices are quoted in currencies other than sterling, Buyer shall compensate Seller for any currency losses suffered by Seller as a result of Buyer's failure to pay for the products on the due date for payment. (d) Unless prices are stated to be fixed on Seller's order confirmation, Seller may increase prices in accordance with increases in Seller's costs and/or general price list increases occurring after the date of Seller's order confirmation but before delivery. Buyer shall pay for any increases in delivery costs after the date of Seller's order confirmation. (e) In the circumstances described in Clause 6(c), all unpaid balances owing to Seller from Buyer shall become a debt immediately due and payable to Seller, irrespective of whether property in the products has passed to Buyer. (f) Time of payment is of the essence of the contract. Seller may change interest at * above Barclays Bank plc's base rate per annum for the time being (to accrue from day to day) on any sum owed to Seller under the contract which is not paid to the Seller on the due date, after as well as before any judgment. Buyer may not withhold payment or make any set-off on any account. (g) Seller may appropriate sums received from Buyer against any debt due to Seller from Buyer (under this or any other contract), irrespective of any purported appropriation by Buyer. 4. Seller's Warranty (a) Seller warrants that upon delivery the products: (i) are sold with good title; and (ii) comply with Seller's current published product data sheets (or, where there are none, that they comply with any specification appearing on Seller's order confirmation and are made with sound materials and workmanship to normal standards accepted in the industry), in all material respects ("Seller's Warranty"). Seller does not warrant that the products are of satisfactory quality or fit for any particular purpose of or intended use by Buyer, and it is for Buyer to satisfy itself that the products are so fit. (b) Seller's Warranty is given on the condition that any instructions of Seller relating to the products are strictly complied with. (c) Buyer shall examine the products as soon as reasonably practicable after delivery. Buyer shall immediately notify Seller of any incomplete or failed delivery, loss or damage during carriage or if the products fail to comply with Seller's Warranty. Unless Buyer so notifies Seller within 30 days after the date when Buyer became or ought reasonably to have become aware of any of the above, and in any event before the earlier of (i) 6 months from the date of despatch by Seller; and (ii) 30 days after the products have been used or put into process Buyer shall (subject to Clauses 4(f) and 8(a)) be treated as having waived all claims connected with the matter which should have been notified. (d) Subject to notification within the period required by Clause 4(c), if it is shown to Seller's reasonable satisfaction that the products fail materially to comply with Seller's Warranty, Seller shall be given a reasonable opportunity to correct such failure, and, if Seller does not or is unable to do so, Seller will at Buyer's option either refund the contract price (or, if the products have depreciated for reasons other than Seller's default or have been used or put into process, a reasonable part of the contract price), or replace the products (if reasonably practicable) within a reasonable time, free of charge. Such correction, refund or replacement shall, subject to clause 4(f) and 8(a) below, be Seller's sole liability in relation to any such failure. Replacement products are covered by these conditions including Seller's Warranty. Products which are alleged not to comply with the contract shall as far as possible be preserved for inspection by Seller, and if replaced or if a refund is made shall be returned to Seller (at Seller's cost) if Seller reasonably so requests. (e) Clause 4(a)(ii) does not apply to seconds, remainder stock or samples or to goods sold as obsolete or sub-standard. (f) Seller does not exclude any liability which cannot be excluded as between Buyer and Seller under any United Kingdom legislation. * Material omitted and filed separately with the SEC pursuant to a request for confidential treatment. 5. Force Majeure (a) Seller shall not be liable for any failure to comply with the contract related to any circumstances whatever (whether or not involving Seller's negligence) which are beyond Seller's reasonable control and which prevent or restrict Seller from complying with the contract (including but not limited to a failure of a government or relevant authority to grant or to delay in the grant of, any licence(s) required for the export of the products from the UK). (b) Seller may where reasonable in all the circumstances (whether or not involving Seller's negligence) without liability suspend or terminate (in whole or in part) its obligations under the contract, if Seller's ability to manufacture, supply, deliver or acquire materials for the production of the products by Seller's normal means is materially impaired. 6. Termination and Suspension (a) Except where Buyer has caused or contributed to any delay, Buyer may (as Buyer's sole remedy, without affecting the balance of the contract quantity) terminate the contract by notice to Seller in respect of any installment of products which is not despatched within 60 days after any date quoted on Seller's order confirmation (unless the goods have been specially manufactured or adapted for Buyer). (b) Seller may (without prejudice to its other rights or remedies) terminate or suspend Seller's performance of the whole or any outstanding part of the contract in the circumstances described in Clause 6(c). Seller may also suspend deliveries while investigating any claim relating to prior shipments (under any contract) of products. (c) The relevant circumstances are if: (i) Buyer fails to take delivery of the Products by the date required under Clause 2(f) or fails to pay for the Products by the due date or breaches any other term of the contract: or (ii) Buyer becomes bankrupt or insolvent or if a receiver or encumbrancer takes possession of any material part of Buyer's assets, or Buyers suffers any foreign equivalent of the foregoing; or (iii) Seller has reasonable grounds for suspecting that an event in Clause 6(c)(ii) has occurred or will occur, or that Buyer will not pay for the products on the due date, and so notifies Buyer. (d) In addition, Seller shall have the right, by notifying Buyer, to suspend deliveries under this and/or any other contract Seller may have with Buyer (even though Buyer is not in arrears with any payment) if Seller considers that the amount outstanding in the account of Buyer (whether actually due for payment or not) has reached the limit to which the Seller is prepared to allow credit to Buyer, whether or not such limit has been notified to Buyer. (c) If Buyer provides Seller with security for the contract price, reasonably acceptable to Seller, within 3 working days after a notice has been given under Clause 6(c)(iii) or 6(d), Seller shall withdraw the notice. 7. Risk and Title (a) Risk in the products shall pass to Buyer upon delivery. (b) However, Seller shall retain ownership of the products until (i) Seller has received payment in full for the products or (ii) Subject to Clause 7(c) Buyer mixes or processes the products so that they lose their identity or are irrecoverably incorporated in or mixed with other goods, or (iii) Buyer sells them at arm's length in good faith to an unrelated third party. (c) As a separate and independent condition, Buyer agrees that in the circumstances described in Clause 7(b)(ii), the resulting product ("the Downstream Product") shall be Seller's property until the conditions in Clause 7(b)(i) or (iii) have been met, unless the value of the other goods (as measured by the price charged to the Buyer or, if none, the direct factory cost to the Buyer of their manufacture) exceeds the invoice value for the products. (d) Until ownership of the products or Downstream Products passes to Buyer, Buyer shall insure them against all usual risks to full replacement value, shall sell, use or part with possession of them only in the ordinary course of trading and shall where reasonably possible keep each delivery separate and clearly identified as Seller's property. In the circumstances described in Clause 6(c), Buyer's right to sell, use or part with possession of the products or Downstream Products shall terminate and Seller may recover and/or sell the products or Downstream Products and may enter Buyer's premises for that purpose, without prejudice to Seller's other remedies. If Seller recovers and/or sells the Downstream Products, any excess of the value of the Downstream Products (as reasonably estimated by Seller) over any amounts due to Seller under the contract plus Seller's costs of recovery and disposal shall be paid to Buyer. This obligation shall survive termination of the contract. 8. Intellectual Property; and Third Party Claims (a) Seller will defend Buyer against any third party claim made against Buyer in the United Kingdom alleging that the products as such, in the original state sold by Seller, infringe any patent, registered design, trademark, tradename or copyright effective in the United Kingdom, and Seller will pay any damages and costs finally awarded against Buyer in the United Kingdom in respect of such a claim. Seller may modify the products so that they cease to infringe so long as Buyer is not substantially prejudiced by the modification. (b) Clause 8(a) shall not apply to the extent that the products are manufactured to Buyer's specification (or as provided in Clause (d)(i), or in respect of any use of the products not contemplated by Seller at the date of Seller's order confirmation. (c) Buyer shall not use any trademarks or tradenames applied to or used by Seller in relation to the products in any manner not approved by Seller. (d) Buyer shall indemnify Seller against any liability incurred by Seller. (i) As a result of incorporating property of Buyer in the products or applying any trademark, tradename or design to the products, on Buyer's instructions, or complying with any other instructions of Buyer relating to the products; and (ii) In relation to any third party claims arising from the use made of or dealings by Buyer in the products (irrespective of whether they involve the negligence of Seller, its agents or employees). Except as provided in clause 8(a) or if arising from Seller's wilful default. (c) The indemnified party shall promptly notify the other of any relevant claim, shall comply with the other's reasonable requirements to minimise liability and/or avoid further liability, and shall allow the other conduct of any action and/or settlement negotiations, on reasonable terms. 9. ADVICE AND ASSISTANCE Seller shall not be liable in contract, tort or otherwise, and irrespective of the negligence of Seller, its agents or employees for any representations, advice or assistance given (under this contract or otherwise, and whether before or after the date of the contract) by or on behalf of Seller in connection with the products or the contract, unless and then only to the extent that Seller has made such representation, and/or agreed to provide such advice or assistance for a fee under a separate written contract with Buyer. 10. LIMITATION OF LIABILITY (a) Without prejudice to any other limitation of Seller's liability (whether effective or not): (i) In no circumstances whatever shall Seller be liable (in contract, tort or otherwise, and irrespective of any negligence or other act, default or omission of Seller or its employees or agents) for any indirect or consequential losses (including loss of goodwill, business or anticipated savings), loss of profits or use, or (subject to clause 8(a)) any third party claims, in connection with the products or the contract. (ii) Except as provided under clause 8(a) Seller's total aggregate liability in connection with the products or the contract (in contract, tort or otherwise and whether or not related to any negligence or other act, default or omission of Seller or its employees or agents), is limited to the contract price, ex-works and ex-VAT. (b) Without prejudice to Seller's warranty, Buyer's sole remedy shall be in damages. (c) Seller's warranty and Buyer's remedies under clause 8(a) are in substitution for any other warranties, obligations, representations, liabilities, terms or conditions (whether they are expressed or implied, or arise in contract, tort, or otherwise, and irrespective of the negligence of Seller, its employees or agents) in connection with the products (including without limitation, any relating to satisfactory quality, fitness for purpose, conformity with description or sample, care and skill or compliance with representations, but excluding implied statutory warranties relating to title), and all such warranties, obligations, representations, liabilities, terms of conditions are hereby expressly excluded. (d) Without prejudice to clause 4(c), no action may be brought against Seller in connection with the Products or the contract unless proceedings are issued against Seller within two years after Buyer became or ought to have become aware of the circumstances giving rise thereto. (e) This clause 10 applies notwithstanding any fundamental breach or breach of a fundamental term of the contract by Seller. 11. Health and Safety At Work (a) Buyer shall ensure that all products are safely and lawfully received, stored, maintained, used or applied by Buyer, and that Buyer obtains relevant information in Seller's possession relating thereto. (b) Buyer shall ensure that all appropriate safety information (whether supplied by Seller, Buyer or others) is distributed and drawn to the attention of customers and all others (including Buyer's employees) who require if for the safe handling or use of the products. 12. Miscellaneous (a) The contract may not be assigned by Buyer without Seller's prior written consent. (b) Notices must be in writing to Seller's or Buyer's address and are deemed delivered on the first working day after sending by hand or (subject to confirmation of transmission) by telex or facsimile, or, within the UK, on the third working day after being placed prepaid in the first class post to Buyer's or Seller's UK address. Qualified acceptances by Buyer on delivery notes shall not constitute notice of any claim or acceptance by Seller of any such qualification. (c) No failure by Seller to enforce any provision of this contract shall be construed as a release of its rights relating thereto or to sanction any further breach. (d) If any provision of the contract is found to be invalid or unenforceable it shall have effect to the maximum extent permitted by law, or, if not so permitted, shall be deemed deleted. 13. Law This contract shall be governed by and construed in accordance with the law of England. Buyer hereby agrees, for Seller's exclusive benefit, that the English courts shall have sole jurisdiction to hear all claims or proceedings connected with the products or the contract. Seller may nevertheless bring claims in any other courts of competent jurisdiction. SCHEDULE 2 CARBON FIBRE PRECURSOR PRODUCT SPECIFICATIONS See attached: ALDILA INC., * * Material omitted and filed separately with the SEC pursuant to a request for confidential treatment. This page: Material omitted and filed separately with the SEC pursuant to a request for confidential treatment. Schedule 3 PRICE DIFFERENTIALS: This page: Material omitted and filed separately with the SEC pursuant to a request for confidential treatment. EX-11.1 3 EXHIBIT 11.1 ALDILA, INC. STATEMENT RE: COMPUTATION OF EARNINGS PER COMMON SHARE (in thousands, except per share amounts)
YEAR ENDED DECEMBER 31, ---------------------------------- 1997 1996 1995 -------- -------- -------- Net income............................................ $1,539 $5,682 $6,270 ------ ------ ------ ------ ------ ------ Weighted average shares of common stock outstanding... 15,625 16,411 16,714 Net effect of common stock options.................... 113 23 51 ------ ------ ------ Weighted average shares outstanding................... 15,738 16,434 16,765 ------ ------ ------ ------ ------ ------ Earnings per common share............................. $ 0.10 $ 0.35 $ 0.38 ------ ------ ------ ------ ------ ------ Earnings per common share, assuming dilution.......... $ 0.10 $ 0.35 $ 0.37 ------ ------ ------ ------ ------ ------
Exhibit 11.1 -38-
EX-21.1 4 EXHIBIT 21.1 SUBSIDIARIES
JURISDICTION OF SUBSIDIARY INCORPORATION - ----------- ------------------ Aldila Golf Corp. Delaware, U.S. Aldila Materials Technology Corp. Delaware, U.S. Aldila Wyoming Building Corp. Delaware, U.S. Aldila Foreign Sales Corp. U.S. Virgin Islands Aldila de Mexico, S.A. de C.V. Mexico Aldila Graphite Products (Zhuhai) Company Limited People's Republic of China
Exhibit 21.1 -39-
EX-23.1 5 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No.'s 33-70050 and 33-80985 of Aldila, Inc. on Form S-8 of our report dated February 4, 1998, incorporated by reference in this Annual Report on Form 10-K of Aldila, Inc. for the year ended December 31, 1997. Deloitte & Touche LLP March 25, 1998 San Diego, California Exhibit 23.1 -40- EX-27.1 6 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1997 DEC-31-1997 3,046 0 4,640 0 13,186 24,522 26,170 0 113,128 7,747 20,000 0 0 154 77,129 113,128 55,636 55,636 38,742 48,997 2,928 0 1,040 3,089 1,550 1,539 0 0 0 1,539 0.10 0.10 GOODWILL AMORTIZATION - 1,428, PLANT CONSOLIDATION - 1,500.
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