UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

 

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   ý    No   o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)

 

Yes    o    No    ý

 

As of May 13, 2003 there were 4,947,648 shares of the Registrant’s common stock, par value $0.01 per share, outstanding.

 

 

ALDILA, INC.

Table of Contents

Form 10-Q for the Quarterly Period

Ended March 31, 2003

 

PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets at March 31, 2003 and December 31, 2002
	Consolidated Statements of Operations for the three months ended March 31, 2003 and 2002
	Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2002
	Notes to Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures about Market Risk
Item 4.	Controls and Procedures
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings
Item 2.	Changes in Securities
Item 3.	Defaults Upon Senior Securities
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	Other Information
Item 6.	Exhibits and Reports on Form 8-K
	Signatures
	Officers’ Certification

 

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PART I - FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

ALDILA, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

		March 31, 2003			December 31, 2002
		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	3,663		$	3,286
Accounts receivable		5,130			4,393
Income taxes receivable		1,212			1,185
Inventories		7,772			8,538
Prepaid expenses and other current assets		313			497
Total current assets		18,090			17,899
PROPERTY, PLANT AND EQUIPMENT		5,747			6,167
INVESTMENT IN JOINT VENTURE		6,888			6,825
OTHER ASSETS		269			268
TOTAL ASSETS		$	30,994		$	31,159
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	3,332		$	2,912
Accrued expenses		1,435			1,825
Total current liabilities		4,767			4,737
LONG-TERM LIABILITIES:
Deferred rent and other long-term liabilities		43			69
Total liabilities		4,810			4,806
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par value; authorized 5,000,000 shares; no shares issued
Common stock, $.01 par value; authorized 30,000,000 shares; issued and outstanding 4,947,648 shares		49			49
Additional paid-in capital		41,983			41,983
Accumulated deficit		(15,848		)	(15,679		)
Total stockholders’ equity		26,184			26,353
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	30,994		$	31,159

 

See notes to consolidated financial statements.

 

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ALDILA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED

(In thousands, except per share data)

 

		Three months ended March 31,
		2003			2002
NET SALES		$	10,164		$	11,374
COST OF SALES		8,425			9,905
Gross profit		1,739			1,469
SELLING, GENERAL AND ADMINISTRATIVE		1,926			1,689
Operating loss		(187		)	(220		)
OTHER EXPENSE (INCOME):
Interest expense		8			36
Other, net		30			35
Equity in earnings of joint venture		(56		)	(61		)
LOSS BEFORE INCOME TAXES		(169		)	(230		)
BENEFIT FOR INCOME TAXES		—			(32		)
NET LOSS		$	(169	)	$	(198	)
NET LOSS PER COMMON SHARE		$	(0.03	)	$	(0.04	)
NET LOSS PER COMMON SHARE, ASSUMING DILUTION		$	(0.03	)	$	(0.04	)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING		4,948			4,948
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES		4,948			4,948

 

See notes to consolidated financial statements.

 

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ALDILA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

(In thousands)

 

		Three months ended March 31,
		2003			2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(169	)	$	(198	)
Adjustments to reconcile net loss to net cash provided by (used for) operating activities:
Depreciation and amortization		459			492
Loss (gain) on disposal of fixed assets		13			(4		)
Undistributed income of joint venture, net		(63		)	(54		)
Changes in assets and liabilities:
Accounts receivable		(737		)	(2,539		)
Income taxes receivable		(27		)	299
Inventories		766			1,599
Prepaid expenses and other assets		184			177
Accounts payable		420			162
Accrued expenses		(100		)	(152		)
Deferred tax liabilities		—			170
Deferred rent and other long-term liabilities		(26		)	(1		)
Net cash provided by (used for) operating activities		720			(49		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(354		)	(66		)
Proceeds from sales of property, plant and equipment		11			4
Distribution from joint venture		—			515
Net cash (used for) provided by investing activities		(343		)	453
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit		—			887
Payments under line of credit		—			(887		)
Net cash used for financing activities		—			—
NET INCREASE IN CASH AND CASH EQUIVALENTS		377			404
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		3,286			266
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	3,663		$	670
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest		$	8		$	13
Income taxes		$	30		$	49

 

See notes to consolidated financial statements.

 

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ALDILA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

 

1.                    Basis of Presentation

 

The consolidated balance sheet as of March 31, 2003 and the consolidated statements of operations and of cash flows for the three-month periods ended March 31, 2003 and 2002, are unaudited and reflect all adjustments of a normal recurring nature which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the interim periods presented.  The consolidated balance sheet as of December 31, 2002 was derived from the Aldila, Inc. and subsidiaries’ (the “Company’s”) audited financial statements.  Operating results for the interim periods presented are not necessarily indicative of results to be expected for the fiscal year ending December 31, 2003.  These consolidated financial statements should be read in conjunction with the Company’s December 31, 2002 consolidated financial statements and notes thereto.

 

On May 15, 2002, the Company’s Board of Directors and stockholders approved a 1-for-3 reverse stock split of the Company’s Class A Common Stock, which became effective on June 3, 2002 for stockholders of record at that date.  Stockholders’ equity has been retroactively restated to reflect the reverse stock split for all periods presented by reclassifying the paid-in capital, which resulted from the reduction in shares due to the reverse split from common stock to additional paid-in capital.  All share and per share data in the accompanying consolidated financial statements and notes to the consolidated financial statements have been retroactively restated to reflect the stock split for all periods presented.

 

At March 31, 2003, the Company has two stock-based compensation plans. Statement of Financial Accounting Standards (“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 (See SFAS 148 below under Recently Issued Accounting Pronouncements).  The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (“APB”) 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.  Had compensation cost for the Company’s stock option awards been determined based upon the fair value at the grant date 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 loss and loss per share would have been increased to the pro forma amounts indicated below (in thousands, except for per share data):

 

 

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The pro forma compensation costs presented above were determined using the weighted average fair values of options granted under the Company’s stock option plans during 2002.  The fair value was estimated at $0.90 on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: 0% dividend yield, volatility of 50%, risk free rate of return of 3.3% 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.  There have not been any options granted in 2003.

 

2.                    Inventories

 

Inventories consist of the following (in thousands):

 

		March 31, 2003			December 31, 2002
Raw materials		$	3,581		$	3,226
Work in process		2,064			1,703
Finished goods		2,127			3,609
Inventories		$	7,772		$	8,538

 

3.               Accrued Expenses

 

		March 31, 2003			December 31, 2002
Warranty Reserve [1]		$	200		$	345
Plant Consolidation [2]		—			$	289

 

[1] Warranty Reserve
Beginning Balance		$	345		$	485
Settlement of Warranty		(33		)	(137		)
Adjustments to Warranty		(112		)	(3		)
Ending Balance		$	200		$	345

 

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[2] Plant Consolidation

 

Description		Reserve Balance as of December 31, 2002			Usage			Reserve Balance as of March 31, 2003
Leasehold Improvements		$	305		$	(305	)	$	—
Other (including credit for deferred rent		37			(37		)	—
Lease payments (net of sublease income		(53		)	53			—
Total		$	289		$	(289	)	$	—

 

4.                    Revolving Credit Agreement

 

On July 9, 1999, Aldila Golf Corp. (“Aldila Golf”), a wholly owned subsidiary of the Company, entered into a Loan and Security Agreement (the “Agreement”) with a financial institution which provides Aldila Golf with up to $12.0 million in secured financing.  The Agreement has a three-year term and is secured by substantially all of the assets of Aldila Golf and guaranteed by the Company.  Advances under the Agreement are made based on eligible accounts receivable and inventories of Aldila Golf and bear interest at the Adjusted Eurodollar rate (as defined) plus 2.5% or at the bank reference rate at the election of the Company, subject to a minimum interest rate of 7.0%.  As of March 31, 2003 and December 31, 2002, there were no outstanding borrowings.  The Agreement renewed automatically for a one-year period on July 9, 2002, and will terminate on July 9, 2003 if the Company or the lender provides written notification 90 days prior to July 9, 2003 requesting that the Agreement be terminated or at any time if either the Company or the financial institution provides written notification 90 days prior to the date they wish to terminate the Agreement.  The Company has notified the financial institution of its intent to terminate the Agreement effective July 9, 2003.  Availability for borrowings under the line of credit, based on eligible accounts receivable and inventories, was approximately $3.0 million at March 31, 2003 and $2.9 million at December 31, 2002.

 

5.                    Summarized Financial Information

 

Summarized financial information for Carbon Fiber Technology LLC (“CFT”), the Company’s 50% owned joint venture, for the periods ended March 31, 2003 and 2002 is as follows (in thousands):

 

		Three months ended March 31,
		2003			2002
Sales		$	2,407		$	1,987
Cost of sales		2,299			1,894
Gross profit		108			93
Net income		$	116		$	102

 

6.                    Recently Issued Accounting Pronouncements

 

In June 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities,” the provisions of which are effective for any exit or disposal activities initiated by the Company after December 31, 2002.  SFAS No. 146 provides guidance on the recognition and measurement of liabilities associated with exit or disposal activities and requires that such liabilities be recognized when incurred.

 

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The adoption of the provisions of SFAS No. 146 will impact the measurement and timing of costs associated with any exit and disposal activities initiated after December 31, 2002.

 

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock Based Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123.”  SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation.  In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.  As the Company still uses the guidance under APB Opinion 25 to account for stock based compensation, the adoption of SFAS 148 did not have a material effect on the Company’s financial statements.

 

Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The Company is principally engaged in the business of designing, manufacturing and marketing graphite (carbon fiber based composite) golf club shafts.  In reporting the Company’s results from its operations, the Company relies on several critical accounting policies.

 

Critical Accounting Policies

 

We prepare the consolidated financial statements of the Company in conformity with accounting principles generally accepted in the United States of America.  As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented.

 

We have several critical accounting policies, which were discussed in the 2002 Annual Report filed on Form 10-K, that are both important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments.  Typically, the circumstances that make these judgments complex and difficult have to do with making estimates about the effect of matters that are inherently uncertain.  During the three months ended March 31, 2003, we did not adopt any new accounting policies that are considered critical accounting policies nor were there any significant changes related to our critical accounting policies that would have a material impact on our consolidated financial position, results of operations, cash flows or our ability to conduct business.

 

Overview - Business Conditions

 

The Company is principally engaged in the business of designing, manufacturing and marketing graphite (carbon fiber based composite) golf club shafts, with approximately 86% 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.

 

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Initially, graphite shafts were principally offered by manufacturers of higher priced, premium golf clubs, and the Company’s sales had been predominantly of premium graphite shafts.  However, over the years the Company has realized substantial sales growth in the value priced segment of the graphite shaft market. The Company now competes aggressively with both United States and foreign-based shaft manufacturers for premium graphite shafts and also against primarily foreign-based shaft manufacturers for lower priced value shaft sales. The Company continues to maintain a broad customer base in the premium shaft market segment.  While the Company’s market share in the value segment is not as great as the premium segment, the Company has advanced rapidly in securing new customers in this segment.  Generally, value shafts have significantly lower selling prices than premium shafts and, as a result, contribute less to gross profit.

 

The Company’s sales have tended to be concentrated among a limited number of major club companies, thus making the Company’s results of operations dependent on those customers, their continued willingness to purchase a significant portion of their shafts from the Company, and their success in selling clubs containing the Company’s shafts to their customers.  In 2002, net sales to Callaway Golf, Acushnet Company and TaylorMade-addidas Golf represented 22%, 21% and 13% of the Company’s net sales, respectively, and the Company anticipates that these companies will continue, collectively, to represent the largest portion of its sales in 2003.  Although it is generally difficult to predict in advance the success of any particular club or of any particular manufacturer, the Company believes that it is protected to some extent from normal periodic fluctuations in sales among the various golf club companies by virtue of the broad range of its club manufacturer customers.

 

Golf club companies regularly introduce new clubs, frequently containing innovations in design.  Sometimes these new clubs achieve dramatic success in the marketplace, thus increasing the overall volatility of club sales among the major companies.  While the Company seeks to have its shafts represented on as many major product introductions as possible, it can provide no assurance that its shafts will be included in any particular “hot” club or that sales of a “hot” club that do not include the Company’s shafts will not have a negative impact on the sales of those clubs that do.  The Company’s sales could also suffer a significant drop-off from period to period to the extent that they may be dependent in any period on sales of one or more “hot” clubs, which then tail off in subsequent periods when no other club offers a high level of new sales to replace the lost sales.

 

In 1994, the Company started manufacturing prepreg, the principal raw material in the manufacture of graphite golf shafts, at its facility in Poway, California.  Most of its production of prepreg is used internally by the Company, with the remainder sold to other composite materials manufacturers.  The Company does not expect third party sales of prepreg to have a significant financial impact on the Company for at least the next several years.  In 1998, the Company established a manufacturing facility in Evanston, Wyoming for the production of carbon fiber.  During 1998 and through the first ten months of 1999, the Company used the material from this facility to satisfy a significant portion of its internal demand for carbon fiber in the manufacturing of golf club shafts.  During 1999, the Company also produced and sold carbon fiber from this facility to other unrelated entities for the manufacture of other carbon-based products.  On October 29, 1999, SGL Carbon Fibers and Composite, Inc. (“SGL”) purchased a 50% interest in the Company’s carbon fiber manufacturing operation.  The Company and SGL entered into an agreement to operate the facility as a limited liability company with equal ownership interests between the venture partners.  The Company and SGL also entered into supply agreements with

 

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the new entity, CFT, for the purchase of carbon fiber at cost plus an agreed-upon mark-up.  The Company and SGL are each responsible to bear 50% of the fixed costs to operate the facility as a term of this supply agreement.  Profits and losses of CFT are shared equally by the partners.  The Company anticipates that the carbon fiber from this facility will primarily be consumed by the joint venture partners; however, any excess carbon fiber produced at this facility could be marketed for sale to unrelated third parties.  The Company continues to use its share of the output of this facility to satisfy a significant portion of its internal demand for carbon fiber.

 

If the carbon fiber facility is not operated at high production levels, either because of production difficulties or because there is not enough demand by the joint venture partners to justify that level of production, the cost per unit of carbon fiber consumed by the Company (and thus the cost of producing the Company’s golf shafts and other products) is increased due to spreading the fixed costs of production over smaller volumes.  If demand is lower than production capacity, CFT also runs the risk of building up excess inventory.  Given the relatively low costs at the present time in the market for carbon fiber and the highly competitive market for graphite golf shafts, the failure to operate at high levels could adversely affect the Company’s gross margins or its ability to maintain competitive prices for its products.  Although third party sales of carbon fiber could help justify high production levels and thus help control unit production costs, the weakness of the carbon fiber market and the overall excess capacity in the industry means that third party sales at CFT are not likely to be significant at least until the overall market improves significantly.  The Company does not expect third party sales at CFT to have a significant effect on either its sales or profitability for several years.

 

During the 1990’s, the graphite golf shaft industry became increasingly competitive, placing extraordinary pressure on the selling prices of the Company’s golf shafts and adversely affecting its gross profit margins and level of profitability.  The Company’s response has been to reduce its cost structure, principally by producing its own prepreg and by shifting the largest portion of its shaft production to its offshore facilities, while maintaining high quality and superior customer service.  The cost saving benefits of its efforts to vertically integrate its operations, particularly through carbon fiber manufacturing, have been limited somewhat due to historically low market prices for golf shaft raw materials in recent years, which, in some cases, have made carbon fiber available in the market at attractive prices when compared to the Company’s cost to purchase it from CFT.  Although the Company’s gross margins and profitability have continued to be adversely affected through this period despite its efforts, management believes that these efforts have been successful to date and are allowing the Company to maintain, or in some cases enhance, its competitive position with respect to the major United States golf club companies that are its principal customers.  The Company continues to look for opportunities to cut costs and to increase its market share.  In an effort to reduce costs, in 2002 the Company decided to consolidate its executive offices with its manufacturing facilities in Poway, California.  The consolidation was completed during the first quarter ended March 31, 2003.

 

The pressure on selling prices of both premium and value shafts under current market conditions, and the increased percentage of overall sales represented by value shafts has resulted in a reduction of approximately 58% in the average selling price of the Company’s shafts over the last seven years, although in some cases average selling prices may increase slightly from period to period depending on the mix of products sold.  In addition, the percentage of overall golf clubs sold with graphite shafts appears to have leveled off after several decades of significant growth and most major club companies continue to seek multiple sources of supply for their shafts and, thus, are unwilling to commit to one principal graphite shaft supplier.  These

 

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trends are not likely to reverse themselves under current market conditions. As a result, management does not anticipate meaningful overall improvement in the financial performance of the Company’s golf shaft operations for the foreseeable future.  There will continue to be fluctuations in performance on a periodic basis, driven principally by the success of its key customers in selling clubs to consumers, but as selling prices continue to decrease, with increasing pressure on the Company’s margins, increases in unit sales in the future, even to levels comparable to those achieved in 2000, are not likely to generate operating cash flows and net income at the levels achieved in 2000 or in other, similarly successful historical years.

 

The Company is responding to the current prospects in its core golf shaft business in a variety of ways.  First, the Company introduced its new and innovative “One” shaft early in 2002, which management intends to use to capture a portion of the market for premium branded custom shafts, which tend to sell at higher prices and gross margins than the standard shafts sold to club manufacturers.  In addition to the “One” shaft, the Company continues to develop other premium branded custom shafts.  The Company cannot now predict the success of these shafts in the market, although it anticipates that if it achieves significant market acceptance, the financial benefits are not anticipated to be material until late 2003, or later.  In addition, the Company has increased its marketing and advertising spending in recent years in support of its premium branded custom offerings.  Second, the Company continues to look for opportunities to sell its prepreg to other composite materials manufacturers and to manufacture other non-golf composite materials products, such as hockey sticks.  Although the Company has achieved some success in these areas, management continues to believe that the growth opportunities in these areas are limited and that sales of prepreg and of other composite materials products will not be material to its results of operations for at least several years.  Third, management has concluded that its ownership interest in the joint venture that operates its carbon fiber plant does not offer significant value to the Company and is seeking to sell its interest, either to its joint venture partner, SGL, or, with SGL’s consent, to a third party, so that the capital currently committed to the joint venture could be redeployed more usefully for the Company and its stockholders.  Finally, the Company continues to be receptive to other acquisition opportunities, in areas related to its core business and otherwise, in an effort to add the potential for meaningful growth in its overall profitability, although the Company is not actively seeking such opportunities at the present time.  Although management anticipates that operating cash flow levels are likely to be measurably lower for at least the next several years than was typical until a few years ago, given the absence of debt currently on the Company’s balance sheet, the Company should be able to generate cash from operations in excess of its needs during this period.  This excess operating cash could be used for research and development or marketing activities related to its current core business or to support expansion of its current businesses either internally or through acquisitions.  At present, the Company is unable to provide any assurances that it will identify and be able to negotiate a sale of its interest in the joint venture or that it will be able to successfully complete any potential acquisitions.

 

Results of Operations

 

First Quarter 2003 Compared to First Quarter 2002

 

Net Sales.  Net sales decreased $1.2 million, or 10.6%, to $10.2 million for the first quarter ended March 31, 2003 (the “2003 Period”) from $11.4 million for the first quarter ended 2002 (the “2002 Period”).  The decrease in net sales was primarily attributable to a decrease in golf shaft units sold, which decreased by 17.8% in the 2003 Period as compared to the 2002 Period.

 

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The average price of shafts sold increased approximately 10.3% in the 2003 Period as compared to the 2002 Period, although the average selling price for premium shafts declined 8.9% in the 2003 Period.  The increase in average selling price was attributed to a change in the product mix.

 

Gross Profit.  Gross profit increased $270,000, or 18.4%, to $1.7 million for the 2003 Period from $1.5 million for the 2002 Period.  Gross profit was negatively impacted in the 2002 Period by $389,000 for un-utilized carbon fiber capacity, which the Company did not incur during the 2003 Period, with the remaining gross profit improvement in the 2003 Period attributed to an increase in sales of premium branded shafts. The Company’s gross profit margin increased to 17.1% in the 2003 Period compared to 12.9% in the 2002 Period.  The un-utilized carbon fiber charge reduced the Company’s gross profit margin by 3.4% in the 2002 Period,

 

Operating Loss.  Operating loss decreased $33,000, or 15.0%, to a loss of $187,000 for the 2003 Period from an operating loss of $220,000 for the 2002 Period.  Operating loss decreased as a percentage of net sales to (1.8)% in the 2003 Period compared to (1.9)% in the 2002 Period.  Selling, general and administrative expense (“SG&A”) increased by $237,000, or 14.0%, to $1.9 million for the 2003 Period compared to $1.7 million for the 2002 Period.  The increase was primarily attributed to increased marketing and advertising spending in support of the Company’s branded product. SG&A increased as a percentage of net sales to 19.0% for the 2003 Period compared to 14.9% for the 2002 Period as a result of the increase in marketing and advertising spending along with the decrease in net sales.

 

Loss Before Income Taxes.  Loss before income taxes decreased $61,000 to a loss before income taxes of $169,000 for the 2003 Period from a loss before income taxes of $230,000 for the 2002 Period.  The majority of the decrease was attributed to the decrease in operating loss and a decrease in interest expense in the 2003 Period as compared to the 2002 Period.

 

Benefit For Income Taxes.  During the fourth quarter of 2002, management determined that it was no longer more likely than not that the tax benefits associated with its deferred tax assets would be realized.  Accordingly, the Company placed a full valuation allowance against its net deferred tax asset as of December 31, 2002.  As such, the Company has not recorded a benefit for income taxes for the 2003 Period.  The Company recorded a benefit for income taxes of $32,000 in the 2002 Period.  The effective tax rate was 13.9% for the 2002 period.

 

Liquidity and Capital Resources

 

The Company has in place a $12.0 million revolving credit facility from a financial institution, which is secured by substantially all the assets of Aldila Golf and guaranteed by the Company.  Borrowings under the line of credit bear interest, at the election of the Company, at the bank reference rate or at the adjusted Eurodollar rate plus 2.5%, with a minimum rate of 7%. Availability for borrowings under the line of credit, based on eligible accounts receivable and inventories, was approximately $3.0 million at March 31, 2003 and $2.9 million at December 31, 2002.  The line of credit renews effective July 9, 2003, unless terminated as of that date.  Either party may terminate the line of credit agreement by giving the other party 90 days written notice prior to the renewal date.  The Company notified the financial institution of its intent to terminate the line of credit as of July 9, 2003.  The Company does not anticipate incurring any termination penalties for the termination of the line of credit.

 

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Cash (including cash equivalents) provided by operating activities was $720,000 for the 2003 Period compared to cash used for operating activities of $49,000 in the 2002 Period. The increase in cash provided by operations was primarily attributed to the cash provided by working capital items in the 2003 Period, mainly cash provided by inventory of $766,000 in the 2003 Period. The Company used $354,000 for capital expenditures during the 2003 Period as compared to $66,000 for the 2002 Period.  The increase in capital expenditures is primarily attributed to the tenant improvements to the Company’s manufacturing facility, which enabled the Company to consolidate its executive offices into its manufacturing facility during the 2003 Period.  Management anticipates capital expenditures to approximate $670,000 for 2003.  The Company also has an obligation to support one half of CFT’s fixed annual cost.  The Company believes that it will have adequate cash resources, including anticipated cash flow to meet its obligations at least through 2003.

 

The Company may from time to time consider the acquisition of businesses.  The Company could require additional debt financing if it were to engage in a material acquisition in the future.

 

Seasonality

 

Because the Company’s customers have historically built inventory in anticipation of purchases by golfers in the spring and summer, the principal selling season for golf equipment, the Company’s operating results have been affected by seasonal demand for golf clubs, which has generally resulted in the highest sales occurring in the second quarter. The timing of customers’ new product introductions has frequently mitigated the impact of seasonality in recent years.

 

“Safe Harbor” Statement Under the Private Securities Litigation Reform Act of 1995

 

With the exception of historical information (information relating to the Company’s financial condition and results of operations at historical dates or for historical periods), the matters discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations may contain forward-looking statements that necessarily are based on certain assumptions and are subject to certain risks and uncertainties.  These forward-looking statements are based on management’s expectations as of the date hereof, that necessarily contain certain assumptions and are subject to certain risks and uncertainties.  The Company does not undertake any responsibility to update these statements in the future.  The Company’s actual future performance and results could differ from that contained in or suggested by these forward-looking statements as a result of a variety of factors.

 

The Company’s Report on Form 10-K for the year ended December 31, 2002 (the “Form 10-K”) presents a more detailed discussion of these and other risks related to the forward-looking statements in this 10-Q, in particular under “Business Risks” in Part I, Item 1 of the Form 10-K and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 7 of the Form 10-K.  The forward-looking statements in this 10-Q are particularly subject to the risks that:

 

•                  we will not maintain or increase our market share with our principal customers;

•                  demand for clubs manufactured by our principal customers will decline, thereby affecting their demand for our shafts;

 

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•                  our principal customers will be unwilling to satisfy a significant portion of their demand with shafts manufactured in China in place of either the United States or Mexico;

•                  new product offerings, including those outside the golf industry, will not achieve success with consumers or OEM customers;

•                  we will not achieve success marketing shafts to club assemblers based in China;

•                  our international operations will be adversely affected by political instability, currency fluctuation, export/import regulation and other risks typical of multi-national operations, particularly those operating in less developed countries;

•                  CFT will be unsuccessful as a result, for example, of internal operational problems, raw material supply problems, changes in demand for carbon fiber based products, or difficulties in operating a joint venture.

•                  attractive strategic alternatives will not be available to us on desirable terms, and

•                  a general decrease in stock market prices would affect the price of our stock.

 

 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

 

There have been no significant changes from the information that was disclosed in the Company’s Annual Report for the period ended December 31, 2002 filed on Form 10-K.

 

Item 4.  Controls and Procedures

 

(a)   Within the 90 days prior to the date of filing this Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chairman and Chief Executive Officer along with the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Company’s Chief Executive Officer along with the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.

 

(b)   There have been no significant changes in the Company’s internal controls or in other factors, which could significantly affect internal controls subsequent to the date the Company carried out its evaluation.

 

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PART II - OTHER INFORMATION

 

Item 1.		Legal Proceedings
		Not applicable.
Item 2.		Changes in Securities
		Not applicable.
Item 3.		Defaults Upon Senior Securities
		Not applicable.
Item 4.		Submission of Matters to a Vote of Security Holders
		Not applicable.
Item 5.		Other Information
		Not applicable.
Item 6.		Exhibits and Reports on Form 8-K
			(a)	Exhibits
				11.1	Statement re:  Computation of Net Income (Loss) per Common Share
				99.1	Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
			(b)	Reports on Form 8-K during Quarter ended March 31, 2003
				No reports on Form 8-K were filed during the fiscal quarter for which this report is filed.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

Dated:	ALDILA, INC.
May 13, 2003	/s/ Robert J. Cierzan
	Robert J. Cierzan
	Vice President, Finance
	Signing both in his capacity as
	Vice President and as Chief
	Accounting Officer of the Registrant

 

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Certification Pursuant to Rules 13a-14 and 15d-14
of the 1934 Securities Exchange Act

 

I, Peter R. Mathewson, certify that:

 

1.  I have reviewed this quarterly report on Form 10-Q of Aldila, Inc.;

 

2.  Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.  Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.  The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.  The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of Aldila’s board of directors:

 

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.  The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

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Date: May 13, 2003	/s/ Peter R. Mathewson
	Peter R. Mathewson
	Chief Executive Officer

 

I , Robert J. Cierzan, certify that:

 

1.  I have reviewed this quarterly report on Form 10-Q of Aldila, Inc.;

 

2.  Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.  Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.  The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

b) evaluated the effectiveness of the registrant’s disclosure controls and  procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.  The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of Aldila’s board of directors:

 

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

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6.  The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

 

Date: May 13, 2003	/s/ Robert J. Cierzan
	Robert J. Cierzan
	Chief Financial Officer

 

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