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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[ x ] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 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
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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
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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.
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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
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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).
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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-