** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

##### **FORM 10-K**

 
|                                             | **(Mark  One)** |                                                                                      |
|--------------------------------------------------|-----------------|-------------------------------------------------------------------------------------------|
|                                             | **ý**      | **Annual Report Pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934** |   |
|                                             |            |                                                                                      |   |
| **For  the fiscal year ended December 31, 2002** |
|                                                  |                 |                                                                                           |  |  |  |

 

**OR**

 
|                                |   |                                                                                           |
|-------------------------------------|--------|------------------------------------------------------------------------------------------------|
|                                | **o**  | **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 registrantas specified in its charter)

 

| **Delaware**                                                     |   | **13-3645590**                           |
|------------------------------------------------------------------|--------|------------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification Number) |

 

**13450 STOWE DRIVE, POWAY, CALIFORNIA  92064**

(Address of principalexecutive offices)

 

**(858) 513-1801**

(Registrant’s TelephoneNo.)

www.aldila.com

 

Securities RegisteredPursuant to Section 12(b) of the Act:

 

| **Title of each class** |   | **Names of each exchange on which registered** |
|-------------------------|--------|------------------------------------------------|
| None                    |   | None                                           |

Securities registeredpursuant to section 12(g) of the Act:

**CommonStock, par value $0.01 per share**

(Title of Class)

 

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.    Yes     ý     No     o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 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 informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this form 10-K.  ý

 

Indicate by check mark whether the Registrant is an accelerated filer(as defined in Rule 12b-2 of the Act).  Yes     o     No     ý

 

The aggregate market value of the Company’svoting stock held by non-affiliates of the Company as of June 28, 2002 was $6.3million.

As of March 24, 2003,there were 4,947,648 shares of the Registrant’s common stock, par value $0.01per share, outstanding.

 

DOCUMENTS INCORPORATED BYREFERENCE

Portions of the followingdocuments are incorporated into this report by reference:

Part III, Items 10, 11,12 and 13.  The Registrant’s definitiveProxy Statement for the 2003 Annual Meeting of Stockholders to be filed withthe Commission within 120 days after the close of the fiscal year.

 

 

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**ALDILA, INC.**

 

**Report on Form 10-KFor the Fiscal Year Ended December 31, 2002**

 

**INDEX**

 
| Part I        |
|---------------|
|          |   |   |
|          | Item 1. | Business |
|          | Item 2. | Properties |
|          | Item 3. | Legal Proceedings |
|          | Item  4. | Submission  of Matters to a Vote of Security Holders |
|          |   |   |
| Part II       |
|          |   |   |
|          | Item  5. | Market  for Registrant’s Common Equity and Related Stockholder Matters |
|          | Item 6. | Selected Financial  Data |
|          | Item  7. | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|          | Item  7a. | Quantitative  and Qualitative Disclosures about Market Risk |
|          | Item  8. | Financial  Statements and Supplementary Data |
|          | Item  9. | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure |
|          |   |   |
| Part III      |
|          |   |   |
|          | Item  10. | Directors  and Executive Officers of the Registrant |
|          | Item 11. | Executive Compensation |
|          | Item  12. | Security  Ownership of Certain Beneficial Owners and Management |
|          | Item  13. | Certain  Relationships and Related Transactions |
|          | Item 14. | Controls and  Procedures |
|          |   |   |
| Part IV       |
|          |   |   |
|          | Item  15. | Exhibits,  Financial Statement Schedules, and Reports on Form 8-K |
|          |   |   |
| Signatures    |
| Exhibit Index |

 

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# **PART I**

 

*ThisForm 10-K contains forward-looking statements within the meaning of the federalsecurities laws.  These forward-lookingstatements are necessarily based on certain assumptions and are subject tosignificant risks and uncertainties. These forward-looking statements are based on management’s expectationsas of the date hereof, and the Company does not undertake any responsibility toupdate any of these statements in the future. Actual future performance and results could differ from that containedin or suggested by these forward-looking statements as a result of factors setforth in this Form 10-K (including those sections hereof incorporated byreference from other filings with the Securities and Exchange Commission), inparticular as set forth in “Business Risks” under Item 1 and set forth in the“Management’s Discussion and Analysis of Financial Condition and Results ofOperations” under Item 7.*

 

**Item1.  Business**

 

**General**

 

Aldila, Inc. (“Aldila” or the “Company”) is a leadingdesigner and manufacturer of high-quality innovative graphite (carbonfiber-based composite) golf shafts in the United States today and hasmaintained this position for over a decade. Aldila enjoys strong relationships with most major domestic and manyforeign golf club manufacturers including Callaway, TaylorMade-addidas Golf,Ping and Acushnet Company.  Aldilabelieves that it is one of the few independent shaft manufacturers with thetechnical and production expertise required to produce high-quality graphiteshafts in quantities sufficient to meet demand.  The Company’s current golf shaft product line consists of Aldilabranded products designed for custom club makers, as well as hundreds of customshafts developed in conjunction with its major customers. This product line isdesigned to improve the performance of any level of golfer from novice to tourprofessional.

 

In 1998, the Company established a manufacturingfacility in Evanston, Wyoming for the production of carbon fiber.  During 1998 and through the first ten monthsof 1999, the Company used the material from this facility to satisfy asignificant portion of its internal demand for carbon fiber in themanufacturing of golf club shafts. During 1999, the Company also produced and sold carbon fiber from thisfacility to other unrelated entities for the manufacture of other carbon-basedproducts.  On October 29, 1999, SGLCarbon Fibers and Composites, Inc. (“SGL”) purchased a 50% interest in theCompany’s carbon fiber manufacturing operation.  The Company and SGL entered into an agreement to operate thefacility through a limited liability company with equal ownership interestsbetween the joint venture partners.  TheCompany and SGL also entered into supply agreements with the new entity, CarbonFiber Technology LLC (“CFT”), for the purchase of carbon fiber at cost plus anagreed-upon mark-up.  Profits and lossesof CFT are shared equally by the partners. The Company anticipates that the carbon fiber from this facility willprimarily be consumed by the venture partners; however, any excess carbon fiberproduced at this facility could be marketed for sale to unrelated thirdparties.  In 1994, the Company startedproduction of its principal raw material for shafts, graphite prepreg, whichconsists of sheets of carbon fibers combined with epoxy resin.  See “Manufacturing—Raw Materials.”  The Company now produces substantially allof its graphite prepreg requirements internally.

 

**Graphite Golf Shafts**

 

The Company was founded in San Diego, California in1972 and was an early leader in the design and production of graphite golfshafts.  The Company believes it is wellpositioned to remain a leader in the market for graphite shafts due to itsinnovative and high quality products, strong customer relationships, design andcomposite expertise and significant manufacturing capabilities.

 

Most golf clubs being sold today have shaftsconstructed from steel or graphite, although limited numbers are alsomanufactured from other materials. Graphite shafts were introduced in the early 1970’s as the first majorimprovement in golf shaft technology since steel replaced wood in the1930’s.  The first graphite shafts hadsignificant torque (twisting force) and appealed primarily to weaker-swingingplayers desiring greater distance. Graphite shaft technology has subsequently improved so that shafts cannow be designed for golfers at all skill levels.  Unlike steel shafts, graphite shafts can be altered with respectto

 

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weight, flex, flex location and torque to produce greater distance,increased accuracy and reduced club vibration resulting in improved “feel” tothe golfer.  The improvements in thedesign and manufacture of graphite shafts and the growing recognition of theirsuperior performance characteristics for many golfers compared to steel haveresulted in increased demand for graphite shafts by golfers of all skilllevels. The initial acceptance of graphite shafts was primarily for use inwoods.  Graphite continues to dominate  the professional and consumer woods markets,with over 82% of new woods purchased in 2002 including graphite shafts.   The acceptance of graphite shafts in ironshas not achieved the same success as woods, and acceptance in irons hasdeclined somewhat in recent years.  In2002, approximately 22% of new irons purchased were graphite shafted.    Since many golfers consider professionalsto be “opinion leaders,” increased acceptance and use of graphite shafts inirons by professionals would help broaden the overall graphite market.

 

Initially, graphite shafts were primarily sold for usein premium clubs, while the value priced segment of the golf club marketcontinued to be supplied with steel shafts. Today, however, a large percentage of value priced clubs are being soldwith graphite shafts.  As the valuepriced segment of the golf club market converted from steel to graphite shafts,the Company took steps to enable it to meet the needs of this market segment,including the design of shafts that can be manufactured at prices acceptable tothis market and continued efforts to reduce its overall manufacturing costs.

 

**Products**

 

Aldila offers a broad range of innovative andhigh-quality graphite golf shafts designed to maximize the performance ofgolfers of every skill level.  TheCompany manufactures hundreds of unique graphite shafts featuring variouscombinations of performance characteristics such as weight, flex, flex pointand torque.  The Company’s customizedshafts, which constituted approximately 86% of net sales in the year endedDecember 31, 2002, are designed in partnership with its customers (principallygolf club manufacturers) to accommodate specific golf club designs.  The Company’s standard models are typicallysold to golf club manufacturers, distributors and golf pro and repair shops andare used either to assemble a new custom club from selected components or toreplace the steel shaft of an older club. The Company also helps develop cosmetic designs to give the customer’sgolf clubs a distinctive look, even when the customer does not require a shaftwith customized performance characteristics. The prices of Aldila shafts typically range from $3 to $30.

 

Recently, the Company introduced an innovativeproprietary design, the Aldila “One” shaft. The Company believes that this is the first shaft design to featuremultiple segments, each with separate design characteristics, which allows formore precise performance optimization than the traditional graphite shaftdesign, which embodies only one set of design characteristics over its entirelength.  The One shaft will be offeredthrough distribution to the custom club market and possibly directly toconsumers. It will also be included as a custom option by certain of its golfclub manufacturer customers.

 

All of the Company’s shafts are composite structuresconsisting 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 forinclusion in the Company’s shafts and new refinements on designs using currentmaterials.

 

The Company began the manufacture of composite hockeysticks in 2000, following several months of developmental work.  The manufacture of composite hockey sticksis similar to that of graphite golf shafts and uses similar raw materials.  Revenues from the sale of hockey sticks wereapproximately 2% of net sales in 2002 and are not expected to be significant tothe Company for several years.

 

Since 1994, the Company has manufactured prepreg materialfor its production of golf shafts.  In1998, the Company began selling prepreg manufactured in its Poway, Californiamanufacturing facility to third parties. Revenues from the sale of prepreg were approximately 3% of net sales in2002 and are not expected to be significant to the Company for severalyears.  Beginning in 1999, the Companyoffered for sale large bundle carbon fiber and chopped fiber from itsmanufacturing facility in Evanston, Wyoming. Sales of large bundle carbon fiber continued in 1999 through October 29,1999, the date that the Company sold a 50% interest in the carbon fibermanufacturing operation.  All subsequentoutside carbon fiber revenues, if any, will be attributed to the joint venture.  The Company does not anticipate outsidesales of carbon fiber to be significant in 2003.

 

Carbon fiber composite materials are suited for adiverse range of applications based on their distinctive combination ofphysical and chemical properties.  See“Manufacturing – Carbon Fiber Manufacturing Process.” Carbon fibers are used asreinforcements in composite materials that combine fibers with epoxy resins orother matrix materials to form a substance with high strength, low weight,stiffness, resistance to corrosion, resistance to fatigue and capacity todissipate heat and electrical

 

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conductivity.  Carbon fibermaterials produced by the Company or CFT are used in a variety of applicationssuch as molding compounds for the manufacture of electronic components, mastsand spars for the marine industry, hockey sticks, fishing rods, industrialproducts, as well as golf shafts.

 

**Customers and Customer Relations**

 

For fiscal year 2002, the Company hadapproximately 240 golf shaft customers, which included approximately 70 golfclub manufacturers and more than 40 distributors, with the balance principallyconsisting of custom club assemblers, pro shops and repair shops.  However, the majority of the Company’s saleshas been and may continue to be concentrated among a relatively small number ofcustomers.  Sales to the Company’s topfive customers represented approximately 75%, 73% and 69% of net sales in 2002,2001 and 2000, respectively.

 

Historically, Aldila’s principal customers have variedas a result of general market trends in the golf industry, in particular theprevailing popularity of the various clubs that contain Aldila’s shafts.  As a result, there typically are changes inthe composition of the list of the Company’s ten most significant customersfrom year to year.  Due to thesubstantial marketplace success of their clubs in recent periods, for the lastseveral years the Company’s largest customers have been Callaway,TaylorMade-addidas Golf, Acushnet and Ping. While the Company believes its relationship with each of these majorcustomers is sound, the Company is not the exclusive supplier to any ofthem.  The Company’s sales to itsprincipal customers have varied substantially from year to year.  Sales to Callaway Golf represented 22%, 22%and 21% of the Company’s net sales in 2002, 2001 and 2000, respectively.  Sales to TaylorMade-addidas Golf represented13%, 20% and 15% of the Company’s net sales in 2002, 2001 and 2000,respectively.  Sales to Acushnet Companyrepresented 21%, 10% and 9% of the Company’s net sales in 2002, 2001 and 2000,respectively.  Sales to Ping represented9%, 15% and 19% of the Company’s net sales in 2002, 2001 and 2000,respectively.  Because of the historicvolatility of consumer demand for specific clubs, as well as continuedcompetition from alternative shaft suppliers, sales to a given customer in aprior period may not necessarily be indicative of future sales and it is oftendifficult to project the Company’s sales to a given customer in advance.

 

The Company believes that its close customerrelationships and responsive service have been significant elements of itssuccess to date, establishing it as a premier graphite shaft company.  Aldila’s golf club manufacturer customersoften work together with the Company’s engineers when developing a new golfclub in order to design a club that maximizes the performance features of theprincipal component parts:  the grip,the clubhead and the Aldila shaft.  TheCompany’s partnership relationship with its customers continues after thedevelopment of clubs containing Aldila’s shafts.  Following the design process, the Company continues to providehigh levels of customer support and service in areas such as quality controland assurance, timely and responsive manufacturing, delivery schedules andeducation.  The Company believes thephysical proximity of its headquarter facilities to many of its customers hasfacilitated a high degree of customer interaction and responsiveness to customerneeds.  While the Company has had long-establishedrelationships with most of its customers, it is not the exclusive supplier ofgraphite shafts to most of them and generally does not have long-term supplyagreements with its customers.  Althoughthe Company believes that its relationships with its customers are good, theloss of a significant customer or a substantial decrease in sales to asignificant customer (whether as a result of diminished sales by that customeror a shaft sourced from other suppliers) could have a material adverse effecton the Company’s business or operating results.

 

**Marketing and Promotion**

 

The Company’s marketing strategy is designed toencourage golf club manufacturers to select and promote Aldila shafts and toincrease overall market acceptance and use of graphite golf shafts.  The Company utilizes a variety of marketingand promotional channels to increase sales of Aldila brand name shafts throughits network of distributors and to support Aldila’s brand name recognition and reputationamong consumers for offering consistently high quality products designed for awide range of golfers. Although the Company has very limited sales directly tothe end users of its products, the Company believes that its brand namerecognition contributes to the marketability of its customers’ products.  In addition,  Nick Price, Peter Kostis and Rich Beem serve on the Company’sadvisory staff and assist in its marketing efforts. Aldila’s marketing andpromotion expenditures were approximately $1.3 million, $1.1 million and $0.8million in 2002, 2001 and 2000, respectively. The Company does not currently incur significant marketing expenses forits products other than golf shafts.

 

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**Sales and Distribution**

 

Within the golf club industry, most companies do notmanufacture the three principal components of the golf club — the grip, theshaft and the clubhead — but, rather, source these components from independentsuppliers that design and manufacture components to the club manufacturers’ specifications.  As a result, Aldila sells its graphiteshafts primarily to golf club manufacturers and, to a lesser extent,distributors, custom club shops, pro shops and repair shops.  Distributors typically resell the Company’sproducts to custom club assemblers, pro and custom club shops, andindividuals.  The Company uses itsinternal sales force in the marketing and sale of its shafts to golf clubmanufacturers.  Sales to golf clubmanufacturers accounted for approximately 86% of net sales for the year endedDecember 31, 2002.

 

Prepreg sales and carbon fiber sales are madeprimarily to manufacturers of composite products.  The Company predominantly has utilized its internal sales forcein the marketing and sale of these products to its customers in the past andwill continue to utilize its internal sales force for the sales of prepreg inthe future.

 

International sales represented 14%, 12%, and 18% ofnet sales for the years ended December 31, 2002, 2001 and 2000, respectively.

 

**Product Design and Development**

 

Aldila is committed to maintaining its reputation as aleader in innovative shaft design and composite materials technology.  The Company believes that the enhancementand expansion of its existing product lines and the development of new productsare necessary for the Company’s growth and success.  However, while the Company believes that it has generallyachieved success in the introduction of its graphite golf shafts, no assurancecan be given that the Company will be able to continue to design and manufactureproducts that meet with market acceptance.

 

Graphite shaft designs and modifications arefrequently the direct result of the combined efforts and expertise of theCompany and its customers to develop an exclusive shaft for each customer’sclubs.  New golf shaft designs aredeveloped and tested using a CAD/CAE golf shaft analysis program, whichevaluates a new shaft design with respect to weight, torque, flex point, tipand butt flexibility, swing weight and other critical shaft design criteria.  In addition, the Company researches new andinnovative shaft designs on an independent basis, which has enabled the Companyto produce a variety of new standard shafts as well as generate design ideasfor customized shafts.  To improve andadvance product designs as they relate to composite technology and shaftprocess manufacturing, the Company’s engineers test new and existing materials,such as boron, kevlar, fiberglass, ceramic, thermoplastic and carbonfiber.  The Company’s design researchalso focuses on improvements in graphite shaft aesthetics since cosmeticappearance has become increasingly important to customers.  The Company’s research and developmentefforts have resulted in the Aldila “One” shaft, which the Company believes tobe the first shaft design featuring multiple segments, each with separatedesign characteristics, and which the Company recently started marketing.  Although the Company emphasizes theseresearch and development activities, there can be no assurance that Aldila willcontinue to develop competitive products or that the Company will be able toutilize new composite material technology on a timely or competitive basis, orotherwise respond to emerging market trends.

 

The Company has been one of the leaders in developingthe market for lower cost large bundle carbon fiber by successfully convertingto this fiber type in some of its products from, until recently, a moreexpensive carbon fiber material for the manufacture of certain of its graphitegolf shafts.  The Company has hadlimited success in providing large bundle carbon fiber to other manufacturingapplications outside of golf shafts.

 

The Company has applied its composite materialsexpertise on a limited basis to other products in recent years, producinghockey sticks as well as graphite tubing and other molded parts on a specialorder basis.

 

**Manufacturing**

 

The Company believes that its manufacturing expertiseand production capacity differentiate it from many of its competitors andenable Aldila to respond quickly to its customers’ orders and providesufficient quantities on a timely basis. The Company today operates three golf shaft manufacturing facilities,one prepreg manufacturing facility (in conjunction with one of its shaftmanufacturing facilities) and through its 50% ownership interest in CFT, onecarbon fiber manufacturing facility. During its 31

 

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years of operation, the Company has improved its manufacturingprocesses and believes it has established a reputation as the industry’sleading volume manufacturer of high-performance graphite shafts.

 

*ShaftManufacturing Process*. The process of manufacturing a graphite shaft has several distinctphases.  Different designs of Aldilashafts require variations in both the manufacturing process and the materialsused.  In traditional shaft designs,treated graphite known as “prepreg” is rolled onto metal rods known asmandrels.   The graphite is then bakedat high temperatures to harden the material into a golf shaft.  At the end of the manufacturing process, theshafts are painted and stylized using a variety of colors, patterns anddesigns, including logos and other custom identification.  Through each phase of this process, theCompany performs quality control reviews to ensure continuing high standards ofquality and uniformity and to meet exacting customer specifications.  The Company’s shaft manufacturing facilitiesare located in Poway, California, Tijuana, Mexico, and Zhuhai, China, with anincreasing percentage of its shafts being manufactured in China, in recentyears.

 

*RawMaterials*.  Theprimary material currently used in all of the Company’s graphite shafts iscarbon fiber, which is combined with epoxy resin to produce sheets of graphiteprepreg.  Heating and stretching thegraphite fibers determines the tensile strength and modulus (stiffness) of thefiber.  The Company manufacturersgraphite prepreg at its Poway, California facility.

 

*PrepregManufacturing Process. *InOctober 1994, the Company initiated the internal production of prepreg in itsPoway, California facility.  The Companybelieves that by producing a major portion of its prepreg requirementsinternally, it may better control the supply of raw material for shafts and mayreduce the impact of potential future price increases.  The Company now produces substantially allof its prepreg requirements internally. The Company is, however, dependent upon certain domestic prepregsuppliers for types of prepreg that it does not produce and, therefore, the Companyexpects to continue to purchase some prepreg products from outside suppliers inthe future.  The Company is nowdependent on its own prepreg production operation to support its shaftmanufacturing requirements.  Althoughthe Company believes that there will continue to be alternative third partysuppliers of prepreg, there can be no assurance that unforeseen difficultieswhich could lead to an interruption in the Company’s internal prepregproduction will not occur which would result in production delays.

 

The Company’s prepreg operation is dependent oncertain suppliers for carbon fibers, which along with epoxy resins and paperconstitute the primary components in prepreg. Through 1997, the Company purchased all of its carbon fibers fromoutside vendors.  Beginning in 1998, theCompany manufactured carbon fiber at its Evanston, Wyoming facility forconsumption by its golf shaft production operation.  Because many different forms of carbon fiber are required forgolf shaft products, including some not manufactured at the CFT facility, theCompany will continue to depend on outside suppliers for a portion of itsongoing carbon fiber needs.  In 2002,the Company obtained a large portion of its carbon fiber from CFT but alsopurchased carbon fiber from other carbon fiber manufacturers.  The prices paid by the Company for carbonfiber decreased during 2002 due to  overcapacity in the carbon fiber industry. However, management anticipates that the prices for carbon fiber willincrease in the future, although it cannot predict the timing or extent of anyfuture price changes.

 

*CarbonFiber Manufacturing Process.* Carbon fiber is produced by processing acrylic fiber through aseries of stretching, stabilizing and carbonizing sequences converting it intoessentially a pure carbon chain fiber exhibiting stiffness and strengthcharacteristics when made into a composite part similar to steel atsignificantly less weight.  These carbonfibers combined with various resins are then converted to composite structures,which have replaced metals in a number of weight critical aerospace, sportingand industrial applications.  Typically,the composite structure will weigh 25 to 50 percent less than the metalstructure it has replaced.  Carbon fibercomposite structures also provide toughness, resistance to corrosion,resistance to fatigue, capacity to dissipate heat and electricalconductivity.  The carbon fiber industryhas grown from its inception in the late 1950’s into one, which producedapproximately 37 million pounds of carbon fiber in 2002.

 

Carbon fiber usage has grown primarily for consumptionby the aerospace industry and for sporting goods applications.  Aerospace grade carbon fibers continue to beutilized for production of commercial and military aerostructures.  The higher-cost, aerospace grade carbonfibers were first used in sporting goods and industrial applications until alower-cost, large bundle carbon fiber was developed as an alternative for usein many sporting goods and industrial applications.  Aldila was a leader in utilizing large bundle carbon fiberspurchased from outside vendors, initially for the manufacture of graphite golfshafts.

 

The Company completed construction of a 50,000 squarefoot carbon fiber manufacturing facility in Evanston, Wyoming during the firstquarter of 1998. The company sold a 50% interest in this facility to SGL onOctober 29, 1999. The facility produces large bundle carbon fiber material fromacrylic fiber through a series of stretching, stabilizing and carbonizing

 

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sequences in this facility. This material is now a signficant raw material for the Company’s prepregmanufacturing operation to support the manufacture of graphite golf shafts,although the Company still procures certain types of fibers from outsidevendors for the manufacture of golf shafts.

 

CFT purchased substantially all of its raw acrylicfibers for the carbon fiber operation from Toho Carbon Fibers, Inc. for theyears 2000 through 2002.  Previous to2000, Courtaulds Fibres, Ltd. was also used as a supplier of its raw acrylicfibers.  The Company believes these twovendors will be able to provide a reliable source of supply for raw materialsat the anticipated operating level of CFT. However, CFT will continue to pursue alternate sources of supply forthis material.

 

**Environmental Matters**

 

The Company is subject to various federal, state,local and foreign environmental laws and regulations, including those governingthe use, discharge and disposal of hazardous materials as the Company useshazardous substances and generates hazardous waste in the ordinary course ofits manufacturing of graphite golf shafts, other composites, graphite prepregand carbon fiber.  The Company believesit is in substantial compliance with applicable laws and regulations and hasnot to date incurred any material liabilities under environmental laws andregulations; however, there can be no assurance that environmental liabilitieswill not arise in the future which may affect the Company’s business.

 

**Competition**

 

Aldila operates in a highly competitive environment inboth the United States and international markets for the sale of its graphitegolf club shafts.  The Company believesthat it competes on the basis of its ability to provide a broad range of highquality, performance graphite shafts; its ability to deliver customizedproducts in large quantities and on a timely basis to its customers; theacceptance of graphite in general, and Aldila shafts in particular, by professionaland other golfers, whose preferences are to some extent subjective; and,finally, price.  Presently, there existssubstantial excess graphite shaft manufacturing capacity both in the UnitedStates and in other countries.  This hashad the effect of decreasing the selling prices of the Company’s shafts.  Management anticipates that this trend willcontinue; however it does appear that it is beginning to stabilize.  Until recently, the United States market forgraphite shafts was dominated by a relatively small number of United Statesbased shaft manufacturers which competed predominantly for the premium shaftbusiness. However, the Company now competes against United States andforeign-based shaft manufacturers for the premium shaft market and competes primarilyagainst the foreign-based shaft manufacturers for the value shaft market.  This competition has made it more difficultto retain existing customers, attract new customers and has placed increasingpressure on prices for the Company’s premium and value shafts.  The Company believes that it is the largestsupplier of graphite shafts in the United States, which results from itsability to establish a premium brand image and reputation among golf clubcompanies as a value-added supplier with competitive prices.

 

Aldila competes against other shaft manufacturers,both graphite and steel, and in the past also against golf club companies thatproduced their own shafts internally, some of which may have or had greaterresources than Aldila.  The Company alsofaces potential competition from those golf club manufacturers that currentlypurchase golf shaft components from outside suppliers but that may have,develop or acquire the ability to manufacture all or a portion of its graphiteshafts internally.  Should any of theCompany’s significant customers decide to meet any of its shaft needsinternally, it could have an adverse effect on the Company.  The Company also competes against companieswho manufacture one or more of three principal components of the golf club, thegrip, the shaft and the club head, and assemble completed golf clubs fordelivery to club companies.  Should anyof the Company’s significant customers decide to source their golf clubs inthis manner where an Aldila shaft is not included, it could have an adverseeffect on the Company.

 

The Company also competes for sales of prepreg fromits prepreg facility and carbon fiber through its 50% interest in CFT withother producers of prepreg and carbon fibers, many of which have substantiallygreater research and development, managerial and financial resources than theCompany.  Some producers have beenproducing prepreg and carbon fiber for substantially longer periods of timethan the Company has, and represent significant competition to the Company.  In addition, the Company’s ability tocompete in the sale of prepreg and carbon fiber is dependent to some extent onthe Company’s ability to cause manufacturers and consumers of carbonfiber-based products to utilize large bundle carbon fiber, which is the soletype of carbon fiber manufactured by CFT and a significant portion of thecarbon fiber used in Aldila’s graphite prepreg, rather than the small bundle,aerospace grade carbon fiber.

 

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**Intellectual Property**

 

Aldila utilizes a number of trademarks and logos inconnection with the sale and advertising of its products.  The Company takes all reasonable measures toensure that any product bearing an Aldila trademark reflects the consistencyand quality associated with the Company’s products and intends to continue toprotect them to the fullest extent practicable.  As of December 31, 2002 the Company had approximately 57 UnitedStates and foreign registered trademarks.

 

**Employees**

 

As of December 31, 2002, Aldila employed 1,081 personson a full-time basis, including eight in sales and marketing, 18 in researchand development and engineering and 929 in production. The balance isadministrative and support staff.  Thenumber of full-time employees includes 300 persons who are employed in theCompany’s Mexico facility and 643 who are employed in the Company’s Chinafacility.  Because of seasonal demands,the Company hires a significant number of temporary employees.  As of December 31, 2002, the Company alsoemployed an additional eight temporary employees on a full-time basis.  Aldila considers its employee relations tobe good.

 

**Seasonality**

 

Because the Company’s customers have historicallybuilt inventory in anticipation of purchases by golfers in the spring andsummer, the principal selling season for golf equipment, the Company’soperating results have been affected by seasonal demand for golf clubs, whichhas generally resulted in highest sales occurring in the second quarter.  The timing of customers’ new productintroductions has frequently mitigated the impact of seasonality in recentyears.

 

**Backlog**

 

As of December 31, 2002, the Company had a salesbacklog of approximately $6.8 million compared to approximately $9.1 million asof December 31, 2001.  The Companybelieves that the dollar volume of its current backlog will be shipped over thenext three months.  Orders can typicallybe cancelled without penalty up to 30 days prior to shipment.  Historically, the Company’s backloggenerally has been highest in the first and second quarters, due in large partto seasonal factors.  Due to the timingand receipt of customer orders, backlog is not necessarily indicative of futureoperating results.

 

**Business Risks**

 

*CustomerConcentration*.  TheCompany’s sales have been, and very likely will continue to be, concentratedamong a small number of customers.  In2002, sales to the Company’s top five customers represented approximately 75%of net sales.  Aldila’s principalcustomers have historically varied depending largely on the prevailingpopularity of the various clubs that contain Aldila shafts.  In 2002, Callaway Golf accounted for 22% ofnet sales, Acushnet Company accounted for 21% of net sales and TaylorMade-addidas Golf accounted for 13% of net sales.  The Company cannot predict the impact that general market trendsin the golf industry, including the fluctuation in popularity of specific clubsmanufactured by customers, will have on its future business or operatingresults.

 

While the Company has had long-establishedrelationships with most of its customers, it is not the exclusive supplier ofgraphite shafts to most of them, and consistent with the industry practice,generally does not have long-term contracts with its customers.  In this regard, Callaway Golf, AcushnetCompany and TaylorMade-addidas Golf, who collectively represent in excess of57% of the Company’s net sales in 2002, each purchased from at least two othergraphite shaft suppliers.  In the eventCallaway Golf, Acushnet Company, TaylorMade-addidas Golf or any othersignificant customer increases purchases from its other suppliers or addsadditional suppliers, the Company could be adversely affected.  Although the Company believes that itsrelationships with its customers are good, the loss of a significant customeror a substantial decrease in sales to a significant customer could have amaterial adverse effect on the Company’s business and operating results.  In addition, sales by the Company’s major customersare likely to vary dramatically from time to time due to fluctuating publicdemand for golf equipment generally and for their specific products.

 

*Competition*.  Aldila operates in a highly competitiveenvironment for golf equipment sales. The Company believes that it competes principally on the basis of itsability to provide a broad range of high quality, performance graphite shafts;its ability to 

 

9

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deliver customized products in large quantities and on a timely basis;the acceptance of graphite shafts in general, and Aldila shafts in particular,by professionals and other golfers, whose preferences are to some extentsubjective; and finally, price.

 

Aldila competes against both domestic and foreignshaft manufacturers.  Some of the Company’scurrent and potential competitors may have greater resources than Aldila.  The Company also faces potential competitionfrom those golf club manufacturers that currently purchase golf shaftcomponents from outside suppliers but that may have, develop or acquire, theability to manufacture shafts internally.

 

As the Company further enters into the manufacture andsale of prepreg products, it competes with other producers of prepregs, many ofwhich have substantially greater research and development, managerial andfinancial resources than the Company and represent significant competition forthe Company.

 

*PotentialCash Flow Shortages.* The Company has cash and cash equivalents totaling $3.3 million as ofDecember 31, 2002 and a revolving credit facility from a financial institution,which allows the Company to make advances against eligible accounts receivablesand inventory.  Management anticipatesthat these sources of funds when combined with cash flow generated fromoperations will be sufficient to finance its business operations at leastthrough 2003.

 

The Company experienced a decrease in net sales in2002 as a result of decreased average selling prices.  The Company expects net sales for 2003 to be comparable to 2002and anticipates that it will generate sufficient cash flows from operations tosupport the Company’s requirements in 2003. If the Company is not able to generate the expected cash flows fromoperations, the Company could be adversely affected.

 

*NewProduct Introduction*. The Company believes that the introduction of new, innovative golfshafts using graphite or other composite materials will be critical to itsfuture success.  While the Companyemphasizes research and development activities in connection with carbon fiberand other composite material technology, there can be no assurance that theCompany will continue to develop competitive products or that the Company willbe able to develop or utilize new composite material technology on a timely orcompetitive basis or otherwise respond to emerging market trends.

 

The Company is also seeking to develop newapplications for the type of carbon fiber that is produced by the CFTfacility.  The Company’s ability tocompete in the sale of graphite prepreg and sales of carbon fiber from CFT isdependent to some extent on the Company’s ability to cause manufacturers andconsumers of carbon fiber-based products to utilize large bundle carbon fiber,which is the sole type of carbon fiber manufactured by CFT.  There can be no assurance, however, thatthese applications will develop to the extent anticipated by the Company.

 

Although the Company believes that it has generallyachieved success in the introduction of its graphite golf shafts, no assurancecan be given that the Company will be able to continue to design andmanufacture products that meet with market acceptance, either on the part ofclub manufacturers or golfers.  Inparticular, the Company cannot provide any assurance that its new shaft introduction,the “One” shaft, will achieve commercial success. ** **The design of newgraphite golf shafts is also influenced by rules and interpretations of theUnited States Golf Association (“USGA”). There can be no assurance that any new products will receive USGAapproval or that existing USGA standards will not be altered in ways thatadversely affect the sales of the Company’s products.

 

*Relianceon Off-Shore Manufacturing Facilities*.  The Company operates manufacturingfacilities in Tijuana, Mexico and Zhuhai, People’s Republic of China.  The Company pays certain expenses of thesefacilities in Mexican pesos and Chinese renminbis, respectively, which aresubject to fluctuations in currency value and exchange rates.  The Company operates a shaft manufacturingfacility in Tijuana, Mexico pursuant to the “maquiladora” duty-free programestablished by the Mexican and United States governments.  Such program enables the Company to takeadvantage of generally lower costs in Mexico, without paying duty on inventoryshipped into or out of Mexico.  The Companyalso operates in the People’s Republic of China in a special economic zone,which affords special advantages to companies with regards to income taxes,import and export duties and value added taxes.  There can be no assurance that the governments of Mexico or thePeople’s Republic of China will continue the programs currently in place orthat the Company will continue to be able to benefit from these programs.  The loss of these benefits could have anadverse effect on the Company’s business. The Company is also subject to other customary risks of doing businessoutside the United States, including political instability, other import/exportregulations and cultural differences.

 

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*JointVenture Operating Carbon Fiber Facility. * The Companystarted producing carbon fiber at its Evanston, Wyoming facility in 1998.  Since October 1999, this facility has beenoperated by a joint venture, 50% owned by each of the Company and SGL.  As a result of the operation of thisfacility through the joint venture, the Company is subject to business andfinancial risks, such as the risks that SGL will be unable to meet itsobligations to the joint venture, that there will be operational difficultiesresulting from the split ownership, raw material supply problems, changes indemand for carbon fiber based products, or that there will be differences ofopinion between the joint venture partners as to future operations leading toan inability to make decisions when required or to the making of decisions notin the best interests of both joint venture partners.

 

*RawMaterial Cost/Availability*. The Company’s gross profit margins, in part, are dependent on the pricepaid for carbon fiber purchased from outside vendors, and more substantiallystarting in the latter part of 1998, the cost of production of carbon fiber atthe Evanston, Wyoming facility, including the price paid for the acrylic fiberused for the manufacture of carbon fiber and the other costs associated withthe operation of the carbon fiber plant.

 

The Company experienced an increase in carbon fiberprices in 1996 and 1997 due to the growth experienced in the use of carbonfiber coupled with relatively little excess capacity.  The prices paid by the Company for carbon fiber leveled in 1998and decreased during 1999 through 2002, due to the current state ofexcess-capacity in the carbon fiber manufacturing industry.  Management is not able to predict the timingor extent of any future price changes for carbon fiber; however, the Companycould be negatively impacted if future increases in carbon fiber prices have anegative impact on the Company’s gross margins.

 

The Company also has relationships with other outsidevendors for its additional carbon fiber needs through 2003 and beyond.  Depending on market conditions prevailing atthe time and extent to which production at CFT meets expectations, the Companymay face difficulties in obtaining adequate supplies of carbon fiber fromexternal sources to provide for any carbon fiber needs not met internally.  If it appears that CFT is not likely tosatisfy a significant portion of the Company’s needs or if it appears thatthere will not be adequate availability in the market, the Company may not havemade arrangements in advance for the purchase of material amounts of carbonfiber from alternative sources.

 

In addition, the Company is dependent on its internalproduction of graphite prepreg to support its shaft manufacturing operationsand has not secured adequate additional sources of supply should its productionof prepreg be interrupted for any reason. The exposure to the Company resulting from its increasing reliance onits own internal production of the raw materials for its golf shaft business isenhanced because the Company currently operates only one prepreg facility andhas an interest in only one carbon fiber manufacturing facility.  Although there is currently excess-capacityin these industries, there have been significant market shortages of bothcarbon fiber and graphite prepreg in the past, and such shortages, although notexpected to recur in the near future, could have a negative impact on theCompany’s financial statements.

 

*Relianceon Carbon Fiber Manufacturing Facility. *During the period in which the Company or the jointventure has operated the Evanston, Wyoming facility, the market for carbonfiber products has been soft, which has limited the Company’s ability to takefull advantage of the opportunity offered by the vertical integration of itscarbon fiber raw material usage in graphite golf shafts.  In the current carbon fiber market there maynot be a market at attractive prices for any carbon fiber produced in excess ofthe needs of the Company and its venture partner.  If the facility does not produce high quality fiber at theanticipated volumes, either because of production shortfalls or limited demandfor the facility’s carbon fiber, the per pound cost of the fiber produced willlikely be higher due to the substantial fixed costs involved in operating acarbon fiber production facility.  Inaddition, if the facility is not capable of producing carbon fiber atsufficient volumes to satisfy the demands of both venture partners, the Companywould be required to purchase additional fiber from third party suppliers,which may not be available in sufficient quantities to satisfy its demands andcould result in higher marginal costs to the Company than fiber acquired fromthe joint venture.

 

*ShaftManufacturing by Club Companies*.  Another factor that could have a negative impact in the future onthe Company’s sales to golf club manufacturers would be a decision by one ofits customers to manufacture all or a portion of its graphite shaftrequirements.  While the Company has notto date experienced any material decline in its sales for this reason, shouldany of the Company’s major customers decide to meet any significant portion oftheir shaft needs internally, it could have a material adverse impact on theCompany and its financial results.

 

*Utilizationof Certain Hazardous Materials*.  In the ordinary course of its manufacturing processes, theCompany uses hazardous substances and generates hazardous waste.  The Company has not to date incurred anymaterial liabilities under environmental laws and regulations and believes thatit is in substantial compliance with applicable laws and regulations.  

 

11

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Nevertheless, no assurance can be given that the Company will notencounter environmental problems or incur environmental liabilities in thefuture, which could adversely affect its business.

 

*Dependenceon Discretionary Consumer Spending*.  Sales of golf equipment have historically been dependent ondiscretionary spending by consumers, which may be adversely affected by generaleconomic conditions.  The Companybelieves that golf equipment sales have remained flat in recent periods and maycontinue to be so in the future.  Adecrease in consumer spending on golf equipment or, in particular, a decreasein demand for golf clubs with graphite shafts could have an adverse effect onthe Company’s business and operating results.

 

*Relianceon Key Personnel*.  Thesuccess of the Company is dependent upon its senior management team, as well asits ability to attract and retain qualified personnel.  There is competition for qualified personnelin the golf shaft industry as well as the carbon fiber business.  There is no assurance that the Company willbe able to retain its existing senior management personnel or to attract additionalqualified personnel.

 

*JusticeDepartment Investigation*. During 1999 the Company received a subpoena for documents from theAntitrust Division of the U.S. Department of Justice in connection with theon-going investigation of an alleged price fixing conspiracy in the carbonfiber and graphite prepreg industries. The Department of Justice has informed the Company that it is notcurrently a target of the investigation, although it has indicated that it hasnot cleared the Company of any involvement in the alleged conspiracy.  The Company is cooperating with theDepartment of Justice’s investigation.

 

**Item 2.Properties**

 

The Company’s principal executive offices are locatedin Poway, California (in the San Diego metropolitan area).  The Company’s golf shafts are manufacturedat three separate facilities, one located in Poway, California, one located inTijuana, Mexico and one in the Zhuhai economic development zone of the People’sRepublic of China.  The Company leases a73,000 square foot facility in Poway, California for shaft manufacturingoperations, graphite prepreg production and for its executive offices.  The Mexico facility is also leased andcomprises approximately 31,000 square feet. The China facility is also leased and comprises approximately 88,000square feet.  The Company also may leasewarehousing space in Mexico and China when needed.  Currently, the Company leases warehousing space in China.  In addition, the Company’s 50% jointventure, CFT, owns 14 acres of land in Evanston, Wyoming on which it operates a50,000 square foot carbon fiber manufacturing plant.

 

The Company’s principal executive offices werepreviously located in a 33,000 square foot leased facility in Poway,California, with a lease term through October 31, 2005.  During March of 2003, the Companyconsolidated its principal executive offices into its manufacturing facility inPoway, California.  The Company hasnegotiated a sub-lease of its previous executive offices with a tenant throughOctober 31, 2005.

 

**Item3.  Legal Proceedings**

 

None.

 

**Item4.  Submission of Matters to a Vote ofSecurity Holders**

 

There were no matters submitted to a vote of securityholders during the fourth quarter of fiscal 2002.

 

 

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**PART II**

 

**Item5.  Market for Registrant’s CommonEquity and Related Stockholder Matters**

 

**COMMON STOCK PERFORMANCE**

 
|            |   | **2002** |   | **2001** |   |
|-----------------|--------|----------|--------|----------|--------|
|            |   | **High** |   | **Low**  |   | **High** |   | **Low** |   |
|            |   |     |   |     |   |   |   |   |   |
| First  Quarter  |   | $        | 3.60   |     | $      | 2.52 |   | $ | 6.00 |   | $ | 3.66 |   |
|            |   |     |   |     |   |   |   |   |   |
| Second  Quarter |   | $        | 3.24   |     | $      | 1.59 |   | $ | 5.25 |   | $ | 4.20 |   |
|            |   |     |   |     |   |   |   |   |   |
| Third  Quarter  |   | $        | 1.87   |     | $      | 1.32 |   | $ | 5.49 |   | $ | 3.48 |   |
|            |   |     |   |     |   |   |   |   |   |
| Fourth  Quarter |   | $        | 1.95   |     | $      | 1.10 |   | $ | 3.81 |   | $ | 3.00 |   |

 

All the prices above reflect the Company’sone-for-three reverse stock split, for shareholders of record at the close ofbusiness on June 3, 2002.  On March 24,2003, the closing common stock price was $1.55, and there were approximately400 common stockholders of record.  Thecompany believes a significant number of beneficial owners also own Aldilastock in “street name.”

 

Aldila, Inc. common stock is traded on the NASDAQnational market, symbol:  ALDA.

 

The Company intends to retain earnings for use inoperations and does not anticipate paying cash dividends on the common stock inthe foreseeable future.  Aldila, Inc. isa holding company whose ability to pay dividends depends on the receipt ofdividends or other payments from its two principal subsidiaries, Aldila GolfCorp. (“Aldila Golf”) and Aldila Materials Technology Corp.

 

**EQUITYCOMPENSATION PLAN INFORMATION**

 

The following table providesinformation regarding securities authorized for issuance under the Company’sequity compensation plans as of December 31, 2002 (all numbers of securitiesreflect the Company’s one-for-three reverse stock split on June 3, 2002):

 
| **Plan Category**                                           |   | **Number of  securities to be  issued upon exercise of  outstanding options** |   | **Weighted-average  exercise  price of outstanding  options** |   | **Number of  securities  remaining available for  future issuance under  equity compensation plans** |   |
|-------------------------------------------------------------|--------|-------------------------------------------------------------------------------|--------|---------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------|--------|
|                                                        |   |                                                                          |   |                                                          |   |                                                                                                 |   |
| Equity compensation plans approved by security  holders     |   |                                                                          |   |                                                          |   |                                                                                                 |   |
| 1994 Stock Incentive Plan                                   |   | 717,492                                                                       |   | $5.59                                                         |   | 633,618                                                                                              |   |
|                                                        |   |                                                                          |   |                                                          |   |                                                                                                 |   |
| Equity compensation plans not approved by security  holders |   |                                                                          |   |                                                          |   |                                                                                                 |   |
| 1992 Stock Option Plan(1)                                   |   | 11,697                                                                        |   | $18.00                                                        |   | 20,167                                                                                               |   |
| Stock Option Grant(2)                                       |   | 8,772                                                                         |   | $49.13                                                        |   | —                                                                                               |   |
| Stock Option Grant(3)                                       |   | 50,000                                                                        |   | $4.89                                                         |   | —                                                                                               |   |
| Total                                                       |   | 787,961                                                                       |   |                                                          |   | 653,785                                                                                              |   |

 

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(1) In 1992, the Company adopted the 1992 Stock Option Plan to provideequity incentives for the management and directors of the Company.  The Company has reserved 175,431 shares forissuance under this Plan.  The Companydoes not expect to issue additional options under the 1992 Plan.

(2) On October 5, 1993, the Company granted Marvin Giles options topurchase 8,772 shares of Common Stock with an exercise price of $49.13.  As of December 31, 2002, these optionsremain unexercised.  These options expireon October 5, 2003.

(3) On March 20, 2000, the Company and Nick Price Group entered into astock option agreement.  The optionagreement allows Nick Price to purchase 50,000 shares of Common Stock at apurchase price of $4.89.  The shares arenot currently registered under any of the Company’s stock option plans.  In return for the shares, the Company isreceiving the services of Nick Price at a guaranteed minimum value of $4.50 pershare, or a minimum aggregate consideration of $225,000.

 

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**Item 6.   Selected Financial Data**

 

The informationrequired as to this Item is contained in the following table.

 

**ALDILA, INC.**

**SELECTED FINANCIAL DATA**

**(In thousands, except per share amounts)**

 
|                                                           |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|----------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
| Operating  Results (Year ended December 31):                   |   |     |   |     |   |     |   |     |   |     |   |
|                                                           |   |     |   |     |   |     |   |     |   |     |   |
| Net  sales                                                     |   | $        | 37,462 |     | $      | 39,561   |   | $        | 55,859 |     | $      | 45,091 |   | $ | 62,487 |   |
| Cost  of sales                                                 |   | 32,828   |   | 33,304   |   | 42,257   |   | 37,241   |   | 44,689   |   |
| Gross  profit                                                  |   | 4,634    |   | 6,257    |   | 13,602   |   | 7,850    |   | 17,798   |   |
|                                                           |   |     |   |     |   |     |   |     |   |     |   |
| Selling,  general and administrative                           |   | 7,334    |   | 6,851    |   | 7,483    |   | 7,179    |   | 9,005    |   |
| Impairment  of goodwill                                        |   | —   |   | 41,932   |   | —   |   | —   |   | —   |   |
| Impairment  of trademarks & patents                        |   | —   |   | 12,963   |   | —   |   | —   |   | —   |   |
| Amortization  of goodwill                                      |   | —   |   | 1,410    |   | 1,428    |   | 1,428    |   | 1,427    |   |
| Plant  consolidation                                           |   | 300      |   | 593      |   | (566     | )      | 900      |   | 1,200    |   |
| Operating  income (loss)                                       |   | (3,000   | )      | (57,492  | )      | 5,257    |   | (1,657   | )      | 6,166    |   |
|                                                           |   |     |   |     |   |     |   |     |   |     |   |
| Interest  expense                                              |   | 94       |   | 375      |   | 900      |   | 1,315    |   | 1,285    |   |
| Other  expense (income), net                                   |   | 62       |   | 65       |   | (570     | )      | (379     | )      | (218     | )      |
| Equity  in earnings of joint venture                           |   | (269     | )      | (231     | )      | (220     | )      | (12      | )      | —   |   |
|                                                           |   |     |   |     |   |     |   |     |   |     |   |
| Income  (loss) before income taxes                             |   | (2,887   | )      | (57,701  | )      | 5,147    |   | (2,581   | )      | 5,099    |   |
| Provision  (benefit) for income taxes                          |   | (43      | )      | (6,282   | )      | 1,930    |   | (476     | )      | 2,300    |   |
|                                                           |   |     |   |     |   |     |   |     |   |     |   |
| Net  income (loss)                                             |   | $        | (2,844 | )        | $      | (51,419  | )      | $        | 3,217  |     | $      | (2,105 | ) | $ | 2,799 |   |
|                                                           |   |     |   |     |   |     |   |     |   |     |   |
| Net  income (loss) per common share-basic:                     |   | $        | (0.57  | )        | $      | (10.10   | )      | $        | 0.62   |     | $      | (0.42 | ) | $ | 0.54 |   |
|                                                           |   |     |   |     |   |     |   |     |   |     |   |
| Net  income (loss)  per common share,  assuming dilution: |   | $        | (0.57  | )        | $      | (10.10   | )      | $        | 0.62   |     | $      | (0.42 | ) | $ | 0.54 |   |
|                                                           |   |     |   |     |   |     |   |     |   |     |   |
| Selected Operating Results  As a Percentage of Net Sales:      |   |     |   |     |   |     |   |     |   |     |   |
|                                                           |   |     |   |     |   |     |   |     |   |     |   |
| Gross  profit                                                  |   | 12.4     | %      | 15.8     | %      | 24.4     | %      | 17.4     | %      | 28.5     | %      |
| Selling,  general and administrative                           |   | 19.6     | %      | 17.3     | %      | 13.4     | %      | 15.9     | %      | 14.4     | %      |
| Operating  income (loss)                                       |   | (8.0     | )%     | (145.3   | )%     | 9.4      | %      | (3.7     | )%     | 9.9      | %      |
| Net  income (loss)                                             |   | (7.6     | )%     | (130.0   | )%     | 5.8      | %      | (4.7     | )%     | 4.5      | %      |
|                                                           |   |     |   |     |   |     |   |     |   |     |   |
| Financial  Position (at December 31):                          |   |     |   |     |   |     |   |     |   |     |   |
|                                                           |   |     |   |     |   |     |   |     |   |     |   |
| Working  capital                                               |   | $        | 13,162 |     | $      | 13,851   |   | $        | 13,387 |     | $      | 15,356 |   | $ | 15,731 |   |
| Total  assets                                                  |   | 31,159   |   | 34,886   |   | 105,018  |   | 108,889  |   | 117,034  |   |
| Long-term  debt, including current portion                     |   | —   |   | —   |   | 8,000    |   | 16,000   |   | 20,000   |   |
| Total  stockholders’ equity                               |   | 26,353   |   | 29,197   |   | 81,366   |   | 78,149   |   | 80,254   |   |

 

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**Item7.    Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

**Critical Accounting Policies**

 

We prepare the consolidated financial statements ofthe Company in conformity with accounting principles generally accepted in theUnited States of America.  As such, weare required to make certain estimates, judgments and assumptions that webelieve are reasonable based upon the information available. These estimatesand assumptions affect the reported amounts of assets and liabilities at thedate of the financial statements and the reported amounts of revenues andexpenses during the periods presented. The significant accounting policieswhich we believe are the most critical to aid in fully understanding andevaluating our reported financial results include the following:

 

*Revenue Recognition*

 

The Company recognizes revenue from product sales atthe time of shipment and passage of title. We also offer certain of ourcustomers the right to return shafts for breakage within a limited time afterdelivery. We continuously monitor and track such shaft returns, and we record aprovision for the estimated amount of such future returns, based on historicalexperience and any notification we receive of pending returns at the time salesare made. While such returns have historically been within our expectations andthe provisions established, we cannot guarantee that we will continue toexperience the same return rates that we have in the past. Any significantincrease in product failure rates and the resulting returns could have amaterial adverse impact on our operating results for the period or periods inwhich such returns materialize.

 

*Accounts Receivable*

 

We perform ongoing credit evaluations of our customersand adjust credit limits based upon payment history and the customer’s currentcredit worthiness, as determined by our review of their current creditinformation. We continuously monitor collections and payments from ourcustomers and maintain a provision for estimated credit losses based upon ourhistorical experience and any specific customer collection issues that we haveidentified. While such credit losses have historically been within ourexpectations and the provisions established, we cannot guarantee that we willcontinue to experience the same credit loss rates that we have in the past.Since our accounts receivable are concentrated in a relatively few number ofcustomers, a significant change in the liquidity or financial position of anyone of these customers could have a material adverse impact on thecollectability of our accounts receivables and our future operating results.

 

*Inventories*

 

We value our inventory at the lower of the actual costto purchase and/or manufacture the inventory or the current estimated marketvalue of the inventory. We regularly review inventory quantities on hand andrecord a provision for excess and obsolete inventory based primarily on ourestimated forecast of product demand and production requirements for the nexttwelve months. A significant increase in the demand for our products couldresult in a short-term increase in the cost of inventory purchases while asignificant decrease in demand could result in an increase in the amount ofexcess inventory quantities on hand. In the future, if our inventory isdetermined to be overvalued, we would be required to recognize such costs inour cost of goods sold at the time of such determination. Likewise, if ourinventory is determined to be undervalued, we may have over-reported our costsof goods sold in previous periods and would be required to recognize suchadditional operating income at the time of sale. Therefore, although we makeevery effort to ensure that our forecasts of future product demands arereasonable, any significant unanticipated changes in demand could have asignificant impact on the value of our inventory and our reported operatingresults.

 

**Overview - Business Conditions**

 

The Company is principally engaged in the business ofdesigning, manufacturing and marketing graphite (carbon fiber based composite)golf club shafts, with approximately 86% of its net sales resulting from salesto golf club manufacturers for inclusion in their clubs.  As a result, the Company’s operating resultsare substantially dependent not only on demand by its customers for theCompany’s shafts, but also on demand by consumers for clubs including graphiteshafts such as the Company’s.

 

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Initially, graphite shafts were principally offered bymanufacturers of higher priced, premium golf clubs, and the Company’s sales hadbeen predominantly of premium graphite shafts. However, over the years the Company has realized substantial sales growthin the value priced segment of the graphite shaft market. The Company nowcompetes aggressively with both United States and foreign-based shaftmanufacturers for premium graphite shafts and also against primarilyforeign-based shaft manufacturers for lower priced value shaft sales. The Companycontinues to maintain a broad customer base in the premium shaft marketsegment.  While the Company’s marketshare in the value segment is not as great as the premium segment, the Companyhas advanced rapidly in securing new customers in this segment.  Generally, value shafts have significantlylower selling prices than premium shafts and, as a result, contribute less togross profit.

 

The Company’s sales have tended to be concentratedamong a limited number of major club companies, thus making the Company’sresults of operations dependent on those customers, their continued willingnessto purchase a significant portion of their shafts from the Company, and theirsuccess 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% ofthe Company’s net sales, respectively, and the Company anticipates that thesecompanies will continue, collectively, to represent the largest portion of itssales in 2003.  Although it is generallydifficult to predict in advance the success of any particular club or of anyparticular manufacturer, the Company believes that it is protected to someextent from normal periodic fluctuations in sales among the various golf clubcompanies 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 majorcompanies.  While the Company seeks tohave 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 does not include the Company’sshafts will not have a negative impact on the sales of those clubs thatdo.  The Company’s sales could alsosuffer a significant drop-off from period to period to the extent that they maybe dependent in any period on sales of one or more “hot” clubs, which then tailoff in subsequent periods when no other club offers a high level of new salesto replace the lost sales.

 

In 1994, the Company started manufacturing prepreg,the principal raw material in the manufacture of graphite golf shafts, at itsfacility in Poway, California.  Most ofits production of prepreg is used internally by the Company, with the remaindersold to other composite materials manufacturers.  The Company does not expect third party sales of prepreg to havea significant financial impact on the Company for at least the next severalyears.  In 1998, the Company establisheda manufacturing facility in Evanston, Wyoming for the production of carbon fiber.  During 1998 and through the first ten monthsof 1999, the Company used the material from this facility to satisfy asignificant portion of its internal demand for carbon fiber in themanufacturing of golf club shafts. During 1999, the Company also produced and sold carbon fiber from thisfacility to other unrelated entities for the manufacture of other carbon-basedproducts.  On October 29, 1999, SGLpurchased a 50% interest in the Company’s carbon fiber manufacturingoperation.  The Company and SGL enteredinto an agreement to operate the facility as a limited liability company withequal ownership interests between the venture partners.  The Company and SGL also entered into supplyagreements with the new entity, CFT, for the purchase of carbon fiber at costplus an agreed-upon mark-up.  TheCompany and SGL are each responsible to bear 50% of the fixed costs to operatethe facility as a term of this supply agreement.  Profits and losses of CFT are shared equally by thepartners.  The Company anticipates thatthe carbon fiber from this facility will primarily be consumed by the jointventure partners; however, any excess carbon fiber produced at this facilitycould be marketed for sale to unrelated third parties.  The Company continues to use its share ofthe output of this facility to satisfy a significant portion of its internaldemand for carbon fiber.

 

If the carbon fiber facility is not operated at highproduction levels, either because of production difficulties or because thereis not enough demand by the joint venture partners to justify that level ofproduction, the cost per unit of carbon fiber consumed by the Company (and thusthe cost of producing the Company’s golf shafts and other products) isincreased due to spreading the fixed costs of production over smallervolumes.  If demand is lower thanproduction capacity, CFT also runs the risk of building up excessinventory.  Given the relatively lowcosts at the present time in the market for carbon fiber and the highlycompetitive market for graphite golf shafts, the failure to operate at highlevels could adversely affect the Company’s gross margins or its ability tomaintain competitive prices for its products. Although third party sales of carbon fiber could help justify highproduction levels and thus help control unit production costs, the weakness ofthe carbon fiber market and the overall excess capacity in the industry meansthat third party sales at CFT are not likely to be significant at least untilthe overall market improves significantly. The Company does not expect third party sales at CFT to have asignificant effect on either its sales or profitability for several years.

 

17

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During the 1990’s, the graphite golf shaft industrybecame increasingly competitive, placing extraordinary pressure on the sellingprices of the Company’s golf shafts and adversely affecting its gross profitmargins and level of profitability.  TheCompany’s response has been to reduce its cost structure, principally byproducing its own prepreg and by shifting the largest portion of its shaftproduction to its offshore facilities, while maintaining high quality andsuperior customer service.  The costsaving benefits of its efforts to vertically integrate its operations,particularly through carbon fiber manufacturing, have been limited somewhat dueto historically low market prices for golf shaft raw materials in recent years,which, in some cases, have made carbon fiber available in the market atattractive prices when compared to the Company’s cost to purchase it fromCFT.  Although the Company’s grossmargins and profitability have continued to be adversely affected through thisperiod despite its efforts, management believes that these efforts have beensuccessful to date and is allowing the Company to maintain, or in some casesenhance, its competitive position with respect to the major United States golfclub companies that are its principal customers.  The Company continues to look for opportunities to cut costs andto increase its market share.  In aneffort to reduce costs, in 2002 the Company consolidated its executive officeswith its manufacturing facilities in Poway, California.

 

The pressure on selling prices of both premium andvalue shafts under current market conditions, and the increased percentage ofoverall sales represented by value shafts has resulted in a reduction ofapproximately 58% in the average selling price of the Company’s shafts over thelast seven years, although in some cases average selling prices may increaseslightly from period to period depending on the mix of products sold.  In addition, the percentage of overall golfclubs sold with graphite shafts appears to have leveled off after severaldecades of significant growth and most major club companies continue to seekmultiple sources of supply for their shafts and, thus, are unwilling to committo one principal graphite shaft supplier. These trends are not likely to reverse themselves under current marketconditions. As a result, management does not anticipate meaningful overallimprovement in the financial performance of the Company’s golf shaft operationsfor the foreseeable future.  There willcontinue to be fluctuations in performance on a periodic basis, drivenprincipally by the success of its key customers in selling clubs to consumers,but as selling prices continue to decrease, with increasing pressure on theCompany’s margins, increases in unit sales in the future, even to levelscomparable to those achieved in 2000, are not likely to generate operating cashflows and net income at the levels achieved in 2000 or in other, similarlysuccessful historical years.

 

Based on the results of 2001 and the general trendsand conditions of the golf industry over the last several years, the Companyaddressed the issue of impairment of its long-lived assets, specifically,goodwill, trademarks and patents during the fourth quarter of 2001.  In accordance with the Company’s policy,management assessed the recoverability of goodwill using undiscounted cash flowprojections based on the remaining amortization period of goodwill andtrademarks of thirty-one years.  TheCompany believed that the future projections represented management’s bestestimate of future undiscounted cash flows at that time.  Based on these projections, the Companyconcluded that impairment existed as of December 31, 2001.  In determining the amount of the impairmentcharge, the Company utilized an independent valuation, which resulted in awrite-off of all the goodwill and intangible assets of approximately $54.9million during the fourth quarter of 2001.

 

The Company is responding to the current prospects inits core golf shaft business in a variety of ways.  First, the Company introduced its new and innovative “One” shaftearly in 2002, which management intends to use to capture a portion of themarket for premium branded custom shafts, which tend to sell at higher pricesand gross margins than the standard shafts sold to club manufacturers.  In addition to the “One” shaft, the Companycontinues to develop other premium branded custom shafts.  The Company cannot now predict the successof these shafts in the market, although it anticipates that if it achievessignificant market acceptance, the financial benefits are not anticipated to bematerial until 2003.  In addition, theCompany has increased its marketing and advertising spending in recent years insupport of its premium branded custom offerings.  Second, the Company continues to look for opportunities to sell itsprepreg to other composite materials manufacturers and to manufacture othernon-golf composite materials products, such as hockey sticks.  Although the Company has achieved somesuccess in these areas, management continues to believe that the growth opportunitiesin these areas are limited and that sales of prepreg and of other compositematerials products will not be material to its results of operations for atleast several years.  Third, managementhas concluded that its ownership interest in the joint venture that operatesits carbon fiber plant does not offer significant value to the Company and isseeking 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 tothe joint venture could be redeployed more usefully for the Company and itsstockholders.  Finally, the Companycontinues to be receptive to other acquisition opportunities, in areas relatedto its core business and otherwise, in an effort to add the potential formeaningful growth in its overall profitability, although the Company is notactively seeking such opportunities at the present time.  Although management anticipates thatoperating cash flow levels are likely to be measurably lower for at least thenext several years than was typical until a few years ago, given the absence ofdebt currently on the Company’s balance sheet, the Company should be able togenerate cash from operations in excess of its needs during this period.  This excess operating cash could be used forresearch and development or marketing activities related to its current core

 

18

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business or to support expansion of its current businesses eitherinternally or through acquisitions.  Atpresent, the Company is unable to provide any assurances that it will identifyand be able to negotiate a sale of its interest in the joint venture or that itwill be able to successfully complete any potential acquisitions.

** **

**Resultsof Operations**

** **

                The followingtable sets forth operating results expressed as a percentage of net sales forthe years indicated:

 
|                                       |   | **Year Ended  December 31,** |   |
|--------------------------------------------|--------|------------------------------|--------|
|                                       |   | **2002**                     |   | **2001** |   | **2000** |   |
|                                       |   |                         |   |   |   |   |   |
| Net  sales                                 |   | 100.0                        | %      | 100.0 | % | 100.0 | % |
| Cost  of sales                             |   | 87.6                         |   | 84.2 |   | 75.6 |   |
| Gross  profit                              |   | 12.4                         |   | 15.8 |   | 24.4 |   |
| Selling,  general and administrative       |   | 19.6                         |   | 17.3 |   | 13.4 |   |
| Impairment  of goodwill                    |   | 0.0                          |   | 106.0 |   | 0.0 |   |
| Impairment  of trademarks & patents    |   | 0.0                          |   | 32.8 |   | 0.0 |   |
| Amortization  of goodwill                  |   | 0.0                          |   | 3.5 |   | 2.6 |   |
| Plant  consolidation                       |   | 0.8                          |   | 1.5 |   | (1.0 | ) |
| Operating  income (loss)                   |   | (8.0                         | )      | (145.3 | ) | 9.4 |   |
| Other:                                     |   |                         |   |   |   |   |   |
| Interest  expense                          |   | 0.3                          |   | 1.0 |   | 1.6 |   |
| Other  expense (income), net               |   | 0.1                          |   | 0.2 |   | (1.0 | ) |
| Equity  in earnings of joint venture       |   | (0.7                         | )      | (0.6 | ) | (0.4 | ) |
| Income  (loss) before income taxes    |   | (7.7                         | )      | (145.9 | ) | 9.2 |   |
| Provision  (benefit) for income taxes |   | (0.1                         | )      | (15.9 | ) | 3.4 |   |
| Net  income (loss)                         |   | (7.6                         | )%     | (130.0 | )% | 5.8 | % |

 

*2002Compared to 2001*

 

*NetSales. *Net salesdecreased $2.1 million, or 5.3%, to $37.5 million for 2002 from $39.6 millionfor the prior year.  The decrease in netsales was mainly attributed to a decrease in average selling prices, which weresomewhat offset by an increase in shaft unit sales.  Shaft unit sales increased 10.9% in 2002 compared to a decreaseof 30.1% in 2001 as a result of an increased demand for premium shafts, whilethe average selling price of shafts sold in 2002 decreased 15.0% compared to adecrease of 1.6% in 2001.

 

*GrossProfit.*  Gross profitdecreased $1.6 million, or 25.9%, to $4.6 million in 2002 from $6.3 million in2001. The Company’s gross profit margin decreased to 12.4% in 2002 from 15.8%in 2001, which was attributed to two factors, first, a decrease in net sales,which was a result of the decrease in average selling prices of units sold, andsecondly, an increase in variable costs from increased units produced andshipped, which was somewhat mitigated by the benefit achieved by transferring alarger percentage of our premium shaft production to China in 2002.  In addition, the Company’s gross profit wasnegatively affected by the increase in inventory related reserves ofapproximately $456,000 in 2002, which was less than the increase of $731,000 in2001.

 

19

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*OperatingIncome (Loss)*. Operating loss decreased $54.5 million to a loss of $3.0 million in 2002from a loss of $57.5 million in 2001. The majority of the decrease was attributed to a lack of a charge forthe impairment of goodwill, trademarks and patents, which the Company recordedduring the fourth quarter of 2001.  TheCompany wrote-off the remaining balance of its goodwill, trademarks and patentsin accordance with SFAS No. 121 “Accounting for the Impairment of Long-LivedAssets and for Long-Lived Assets to be Disposed Of.”  See — “Notes to Consolidated Financial Statements”, Note 5.  The total amount of impairment chargesrecorded in 2001 was approximately $54.9 million.

 

Selling, general and administrative (“SG&A”)expense increased approximately $483,000, which was mainly attributed toincreased advertising and promotion expenses. SG&A increased as a percentage of net sales to 19.6% in 2002, from17.3% in 2001.  The Company recorded acharge for plant consolidation during the fourth quarter of 2002 ofapproximately $300,000 related to the consolidation of the Company’s executiveoffices with the Company’s manufacturing facilities in Poway compared to$593,000 in 2001 related to the closure of two shaft manufacturing facilitiesin Mexico.  See — “Notes to ConsolidatedFinancial Statements”, Note 10.

 

*OtherExpense (Income)*. Interest expense decreased approximately $281,000 to $94,000 in 2002 ascompared to $375,000 in 2001.  Thedecrease is primarily attributed to the repayment of the Company’s long-termdebt in 2001.  The Company made itsfinal debt principal payment of $4.0 million on September 30, 2001.  The majority of the Company’s interestexpense in 2002 was attributed to interest and unused borrowing fees related tothe Company’s line of credit in place with a financial institution.

 

*IncomeTaxes.*  The Companyrecorded a benefit for income taxes in the amount of $43,000 in 2002.  The Company’s effective tax rate was 1.5% in2002.  At December 31, 2002, the Companyhad a net deferred tax asset of approximately $1.9 million.  This deferred tax asset represented netoperating loss carryforwards, tax credit carryforwards and other basisdifferences which give rise to future tax deductions in excess of bookdeductions.  Realization of these tax benefitsis dependent upon the generation of future taxable income.  During the fourth quarter of 2002,management determined that it was no longer more likely than not that the taxbenefits associated with these deferred tax assets would be realized.  Accordingly, the Company placed a fullvaluation allowance against its net deferred tax asset.  In connection with this determination,management also determined that its reserve of approximately $650,000 forcontingent tax liabilities was no longer appropriate.  As such, this reserve has been eliminated.

 

*2001Compared to 2000*

 

*NetSales. *Net salesdecreased $16.3 million, or 29.2%, to $39.6 million for 2001 from $55.9 millionfor the prior year.  The decrease in netsales was attributable to a decrease both in shaft unit sales and, to a lesserextent, in selling prices.  Shaft unitsales decreased 30.1 % in 2001 as compared to 2000 which was a result of lowerdemand for both premium and value shafts, and the average selling price ofshafts sold in 2001 decreased 1.6%.

 

*GrossProfit.*  Gross profitdecreased $7.3 million, or 54.0%, to $6.3 million in 2001 from $13.6 million in2000, principally as a result of the decrease in net sales.  The Company’s gross profit margin decreasedto 15.8% in 2001 from 24.4% in 2000, which was primarily attributed to a higherfixed cost per unit for shafts shipped in 2001 based on lower productionvolumes.  In addition, the Company’sgross profit was negatively affected by the increase in inventory relatedreserves of approximately $731,000 and approximately $485,000 related tostart-up costs and production inefficiencies resulting from the transfer ofadditional premium shaft volume to China, which decreased gross margin byapproximately 3.1%

 

*OperatingIncome (Loss)*. Operating income decreased $62.7 million to a loss of $57.5 million in2001 from  $5.3 million operating incomein 2000.  The majority of the decreasewas attributed to the impairment of goodwill, trademarks and patents.  The Company wrote-off the remaining balanceof its goodwill, trademarks and patents in accordance with SFAS No. 121“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assetsto be Disposed Of.”  See — “Notes toConsolidated Financial Statements”, Note 5. The total amount of impairment charges recorded in 2001 was approximately$54.9 million.

 

Selling, general and administrative (“SG&A”) expense decreasedapproximately $632,000, which was attributable to lower incentive charges ofapproximately $1.6 million in 2001, which was partially offset by increasedadvertising and promotion expenses. SG&A in 2000 benefited from a reduction in an environmental reserveof $400,000.

 

20

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The Company recorded plant consolidation charges in 2001 ofapproximately $593,000 related to the closure of two shaft manufacturingfacilities in Mexico.  The Company hasthree shaft manufacturing facilities. In 2000, the Company reflected a recovery of previously recorded plantconsolidation charges in 2000 of approximately $566,000 primarily in connectionwith the consolidation of its domestic golf shaft manufacturing operations inCalifornia.  See — “Notes toConsolidated Financial Statements”, Note 10.

 

*OtherExpense (Income)*. Interest expense decreased approximately $525,000 to $375,000 in 2001 ascompared to $900,000 in 2000.  Thedecrease is primarily attributed to the scheduled payments on the Company’slong-term debt through 2001, which resulted in a lower debt balance for theyear.  The Company had a weightedaverage debt outstanding of $4.0 million in 2001 compared to a weighted averagedebt outstanding of $12.0 million in 2000. The Company made its final debt principal payment of $4.0 million onSeptember 30, 2001.  The weightedaverage interest rate on borrowings was 6.13% in 2001 and 2000.  Other, net decreased by approximately$635,000 to $65,000 in 2001, from ($570,000) in 2000.  The decrease is primarily attributed to a decrease in interestincome of approximately $408,000 and an increase in other expense items ofapproximately $227,000.

 

*IncomeTaxes.*  The Companyrecorded a benefit for income taxes in the amount of $6.3 million in 2001.  The Company’s effective tax rate was 10.9%in 2001.  The effective rate was reducedin 2001, as the Company’s goodwill amortization and impairment charge arenon-deductible for income tax purposes. Included in the $6.3 million benefit recorded in 2001 was the reductionof deferred tax liabilities of approximately $5.5 million related to thedeferred tax liability associated with the Company’s trademarks that werewritten off as noted above.

 

**Liquidity and Capital Resources**

 

The Company has in place a $12.0 million revolvingcredit facility from a financial institution, which is secured by substantiallyall the assets of Aldila Golf and guaranteed by the Company.  Borrowings under the line of credit bearinterest, at the election of the Company, at the bank reference rate or at theadjusted Eurodollar rate (as defined) plus 2.5%, subject to a minimum rate of7%. Availability for borrowings under the line of credit, based on eligibleaccounts receivable and inventories, was approximately $2.9 million at December31, 2002.  The line of credit wasrenewed for a one-year period effective July 9, 2002, and automatically renewseach July 9 for successive one-year periods, unless terminated as of thatdate.  Either party may terminate theline of credit agreement by giving the other party 90 days written notice priorto the renewal date.  There are notermination penalties for early termination during the renewal periods.

 

Cash (including cash equivalents) provided byoperating activities in 2002 was approximately $2.5 million, compared to$688,000 in 2001.  Cash provided byoperating activities mainly resulted from an approximate $2.5 million decreasein gross inventories, which was partially offset by an increase in accountsreceivable and income taxes receivable of $878,000.  Cash provided by operating activities was further affected bynon-cash charges from a deferred tax write down of approximately $3.1 million.  The Company used $362,000 for capitalexpenditures during 2002.  Managementanticipates capital expenditures to approximate $670,000 for 2003.  The Company received distributions from CFTtotaling $890,000 in 2002 compared to $190,000 in 2001.  Future distributions must be agreed upon byboth joint venture partners prior to any distribution being made.  The Company believes that it will haveadequate cash resources, including anticipated cash flow and borrowing availability,to meet its obligations at least through 2003.

 

The Company may from time to time consider theacquisition of businesses complementary to the Company’s business.  The Company could require additional debtfinancing if it were to engage in a material acquisition in the future.

 

**Seasonality**

 

Because the Company’s customers have historicallybuilt inventory in anticipation of purchases by golfers in the spring andsummer, the principal selling season for golf equipment, the Company’soperating results have been affected by seasonal demand for golf clubs, whichhas generally resulted in highest sales occurring in the second quarter.  The timing of customers’ new productintroductions has frequently mitigated the impact of seasonality in recentyears.

 

## **Recent AccountingPronouncements**

 

In June 2002, the FASB issued SFAS No. 146 “Accountingfor Costs Associated with Exit or Disposal Activities”, the provisions of whichare effective for any exit or disposal activities initiated by the Companyafter December 31, 2002.  SFAS No.

 

21

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146 provides guidance on the recognition and measurement of liabilitiesassociated with exit or disposal activities and requires that such liabilitiesbe recognized when incurred.  Theadoption of the provisions of SFAS No. 146 will impact the measurement andtiming of costs associated with any exit and disposal activities initiatedafter December 31, 2002.

 

**Item7a.  Quantitative and QualitativeDisclosures about Market Risk**

 

The Company has taken advances against the line ofcredit in 2002 to meet short-term working capital requirements, which are atvariable rates, however, the Company did not have any borrowings against theline of credit as of December 31, 2002 or 2001.  The Company believes that its exposure to market risk relating tointerest rate risk is not material.  TheCompany is exposed to foreign exchange risk to the extent of adversefluctuations in the Mexican peso and the Chinese renminbi.  Based on historical movements of thesecurrencies, the Company does not believe that reasonably possible near-termchanges in these currencies will have a material adverse effect on theCompany’s financial position or results of operations.  The Company believes that its business operationsare not exposed to market risk relating to commodity price risk or equity pricerisk.

 

**“Safe Harbor” Statement Under the Private SecuritiesLitigation Reform Act of 1995**

 

With the exception of historical information(information relating to the Company’s financial condition and results ofoperations at historical dates or for historical periods), the mattersdiscussed in this Management’s Discussion and Analysis of Financial Conditionand Results of Operations are forward-looking statements that necessarily arebased on certain assumptions and are subject to certain risks anduncertainties.  These forward-lookingstatements are based on management’s expectations as of the date hereof, thatnecessarily contain certain assumptions and are subject to certain risks anduncertainties.  The Company does notundertake any responsibility to update these statements in the future.  The Company’s actual future performance andresults could differ from that contained in or suggested by these forwardlooking statements as a result of the factors set forth in this Management’sDiscussion and Analysis of Financial Condition and Results of Operations, theBusiness Risks described in Item 1 of this Report on Form 10-K and elsewhere inthe Company’s filings with the Securities and Exchange Commission.

 

**Item8.  Financial Statements andSupplementary Data**

 

The information required as to this Item isincorporated by reference from the consolidated financial statements andsupplementary data listed in Item 15 of Part IV of this report.

 

**Item9.  Changes in and Disagreements withAccountants on Accounting and Financial Disclosure**

 

None.

 

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**PART III**

 

**Item10.  Directors and Executive Officers ofthe Registrant**

 

The information required as to this Item is incorporatedby reference from the section headed “Election of Directors” in the Company’sProxy Statement for the 2003 Annual Meeting of Stockholders for the year endedDecember 31, 2003, which will be filed with the Commission within 120 days ofthe end of the fiscal year covered by this report (“2003 Proxy Statement”).

 

**Item11.  Executive Compensation**

 

The information required as to this Item isincorporated herein by reference from the data under the caption “ExecutiveCompensation” in the 2003 Proxy Statement.

 

**Item12.  Security Ownership of CertainBeneficial Owners and Management**

 

The information required as to this Item isincorporated herein by reference from the data under the caption “SecurityOwnership of Certain Beneficial Owners and Management” in the 2003 ProxyStatement.

 

**Item13.  Certain Relationships and RelatedTransactions**

 

There is no information required to be submitted bythe Company under this Item.

 

**Item14.  Controls and Procedures**

 

(a)          *Evaluation of disclosure controls andprocedures. *Within the 90days prior to the filing of this annual report, Aldila management, includingthe Chief Executive Officer and Chief Financial Officer, conducted anevaluation of the effectiveness of our disclosure controls and procedurespursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and the ChiefFinancial Officer concluded that such disclosure controls and procedures areeffective in alerting them on a timely basis to material information relatingto Aldila required to be included in Aldila’s periodic filings under theExchange Act.

 

(b)         *Changes in internal control. *There have been no significantchanges in internal controls or in factors that could significantly affectinternal controls, including any corrective actions with regard to significantdeficiencies and material weaknesses, subsequent to the date the ChiefExecutive Officer and Chief Financial Officer completed their evaluation.

 

23

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**PART IV**

 

**Item15.  Exhibits, Financial StatementSchedules, and Reports on Form 8-K**

 

(a)           Documents included as part of thisreport:

 

1.                                       Theconsolidated financial statements for the Registrant are included in thisreport.

 

Consolidated Balance Sheetsat

December 31, 2002 and2001;

 

ConsolidatedStatements of Operations for

the years ended December31,

2002, 2001 and 2000;

 

ConsolidatedStatements of Stockholders’ Equity

for the yearsended December 31, 2002,

2001 and 2000;

 

ConsolidatedStatements of Cash Flows

for the years endedDecember 31,

2002, 2001 and 2000;

 

Notes toConsolidated Financial Statements

 

Independent Auditors’ Report.

 

2.                                       ScheduleIIC Valuation and Qualifying Accounts for the years ended December 31, 2002,2001 and 2000.

 

All other schedules areomitted because they are not applicable or the required information is shown inthe consolidated financial statements or the notes thereto.

 

3.                                       Seethe Index to Exhibits on page 45 of this Form 10-K.  Management contracts or compensatory plans or arrangementsrequired to be filed as exhibits to this report are identified on the Index toExhibits by an asterisk.

 

(b)           Reports on Form 8-K:

 

No reports on Form 8-K were filed during the quarterended December 31, 2002.

 

(c)           Exhibits required by Item 601 ofRegulation S-K.

 

See item (a)3 above.

 

(d)                                 Financialstatements required by Regulation S-X which are excluded from the annual reportto shareholders by Rule 14a-3, which include separate financial statements ofsubsidiaries not consolidated and fifty percent or less owned persons.

 

Financial statements forCarbon Fiber Technology, LLC for the years ended December 31, 2002, 2001 and2000, filed as Exhibit 99.1.

 

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**ALDILA, INC. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**(In thousands, except share data)**

** **
|                                                                                                  |   | **December 31,  2002** |   | **December 31,  2001** |   |
|-------------------------------------------------------------------------------------------------------|--------|------------------------|--------|------------------------|--------|
| **ASSETS**                                                                                            |   |                   |   |                   |   |
|                                                                                                  |   |                   |   |                   |   |
| CURRENT  ASSETS:                                                                                      |   |                   |   |                   |   |
| Cash  and cash equivalents                                                                            |   | $                      | 3,286  |                   | $      | 266 |   |
| Accounts  receivable                                                                                  |   | 4,393                  |   | 3,977                  |   |
| Income  taxes receivable                                                                              |   | 1,185                  |   | 723                    |   |
| Inventories                                                                                           |   | 8,538                  |   | 11,472                 |   |
| Deferred  tax assets                                                                                  |   | —                 |   | 2,366                  |   |
| Prepaid  expenses and other current assets                                                            |   | 497                    |   | 595                    |   |
| Total  current assets                                                                                 |   | 17,899                 |   | 19,399                 |   |
|                                                                                                  |   |                   |   |                   |   |
| PROPERTY,  PLANT AND EQUIPMENT                                                                        |   | 6,167                  |   | 7,634                  |   |
|                                                                                                  |   |                   |   |                   |   |
| INVESTMENT  IN JOINT VENTURE                                                                          |   | 6,825                  |   | 7,466                  |   |
|                                                                                                  |   |                   |   |                   |   |
| OTHER  ASSETS                                                                                         |   | 268                    |   | 387                    |   |
|                                                                                                  |   |                   |   |                   |   |
| TOTAL  ASSETS                                                                                         |   | $                      | 31,159 |                   | $      | 34,886 |   |
|                                                                                                  |   |                   |   |                   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                         |   |                   |   |                   |   |
|                                                                                                  |   |                   |   |                   |   |
| CURRENT  LIABILITIES:                                                                                 |   |                   |   |                   |   |
| Accounts  payable                                                                                     |   | $                      | 2,912  |                   | $      | 2,921 |   |
| Accrued  expenses                                                                                     |   | 1,825                  |   | 2,627                  |   |
| Total  current liabilities                                                                            |   | 4,737                  |   | 5,548                  |   |
|                                                                                                  |   |                   |   |                   |   |
| LONG-TERM  LIABILITIES:                                                                               |   |                   |   |                   |   |
| Deferred  rent                                                                                        |   | 69                     |   | 74                     |   |
| Deferred  tax liabilities                                                                             |   | —                 |   | 67                     |   |
| Total  liabilities                                                                                    |   | 4,806                  |   | 5,689                  |   |
|                                                                                                  |   |                   |   |                   |   |
| COMMITMENTS  AND CONTINGENCIES (Notes 12, 13 and 14)                                                  |   |                   |   |                   |   |
|                                                                                                  |   |                   |   |                   |   |
| 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                                                                                  |   | (15,679                | )      | (12,835                | )      |
| Total  stockholders’ equity                                                                      |   | 26,353                 |   | 29,197                 |   |
|                                                                                                  |   |                   |   |                   |   |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                      |   | $                      | 31,159 |                   | $      | 34,886 |   |

 

See notes to consolidatedfinancial statements.

 

25

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**ALDILA, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(In thousands, except per share data)**

** **
|                                                            |   | **Year ended  December 31,** |       |
|-----------------------------------------------------------------|--------|------------------------------|------------|
|                                                            |   | **2002**                     |       | **2001** |   | **2000** |   |
|                                                            |   |                         | ** ** |   | ** ** |   | ** ** |
| NET  SALES                                                      |   | $                            | 37,462     |   | $ | 39,561 |   | $ | 55,859 |   |
| COST  OF SALES                                                  |   | 32,828                       |       | 33,304 |   | 42,257 |   |
| Gross  profit                                                   |   | 4,634                        |       | 6,257 |   | 13,602 |   |
|                                                            |   |                         |       |   |   |   |   |
| SELLING,  GENERAL AND ADMINISTRATIVE                            |   | 7,334                        |       | 6,851 |   | 7,483 |   |
| IMPAIRMENT  OF GOODWILL                                         |   | —                       |       | 41,932 |   | — |   |
| IMPAIRMENT  OF TRADEMARKS & PATENTS                         |   | —                       |       | 12,963 |   | — |   |
| AMORTIZATION  OF GOODWILL                                       |   | —                       |       | 1,410 |   | 1,428 |   |
| PLANT  CONSOLIDATION                                            |   | 300                          |       | 593 |   | (566 | ) |
| Operating  income (loss)                                        |   | (3,000                       | )          | (57,492 | ) | 5,257 |   |
|                                                            |   |                         |       |   |   |   |   |
| OTHER  EXPENSE (INCOME):                                        |   |                         |       |   |   |   |   |
| Interest  expense                                               |   | 94                           |       | 375 |   | 900 |   |
| Other,  net                                                     |   | 62                           |       | 65 |   | (570 | ) |
| Equity  in earnings of joint venture                            |   | (269                         | )          | (231 | ) | (220 | ) |
|                                                            |   |                         |       |   |   |   |   |
| INCOME  (LOSS) BEFORE INCOME TAXES                              |   | (2,887                       | )          | (57,701 | ) | 5,147 |   |
| PROVISION  (BENEFIT) FOR INCOME TAXES                           |   | (43                          | )          | (6,282 | ) | 1,930 |   |
|                                                            |   |                         |       |   |   |   |   |
| NET  INCOME (LOSS)                                              |   | $                            | (2,844     | ) | $ | (51,419 | ) | $ | 3,217 |   |
|                                                            |   |                         |       |   |   |   |   |
| NET  INCOME (LOSS) PER COMMON SHARE-BASIC                       |   | $                            | (0.57      | ) | $ | (10.10 | ) | $ | 0.62 |   |
|                                                            |   |                         |       |   |   |   |   |
| NET  INCOME (LOSS) PER COMMON SHARE, ASSUMING DILUTION          |   | $                            | (0.57      | ) | $ | (10.10 | ) | $ | 0.62 |   |
|                                                            |   |                         |       |   |   |   |   |
| WEIGHTED  AVERAGE NUMBER OF COMMON SHARES OUTSTANDING           |   | 4,948                        |       | 5,090 |   | 5,154 |   |
|                                                            |   |                         |       |   |   |   |   |
| WEIGHTED  AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES |   | 4,948                        |       | 5,090 |   | 5,201 |   |

 

See notes to consolidatedfinancial statements.

 

26

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**ALDILA, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

**(In thousands)**

** **
|                           |   | **Common  Stock** |   | **Additional  Paid-in  Capital** |   | **Retained  Earnings  (Accumulated Deficit)** |   | **Total** |   |
|--------------------------------|--------|-------------------|--------|----------------------------------|--------|-----------------------------------------------|--------|-----------|--------|
| **Shares**                     |   | **Amount**        |
| Balance  at January 1, 2000    |   | 5,154             |   | $                                | 51     |                                          | $      | 42,731    |   | $ | 35,367 |   | $ | 78,149 |   |
|                           |   |              |   |                             |   |                                          |   |      |   |   |   |
| Net  Income                    |   |              |   |                             |   |                                          |   | 3,217     |   | 3,217 |   |
|                           |   |              |   |                             |   |                                          |   |      |   |   |   |
| Balance  at Deccember 31, 2000 |   | 5,154             |   | 51                               |   | 42,731                                        |   | 38,584    |   | 81,366 |   |
|                           |   |              |   |                             |   |                                          |   |      |   |   |   |
| Repurchases  of common stock   |   | (206              | )      | (2                               | )      |                                          | (748   | )         |   |   |   | (750 | ) |
|                           |   |              |   |                             |   |                                          |   |      |   |   |   |
| Net  loss                      |   |              |   |                             |   |                                          |   | (51,419   | )      | (51,419 | ) |
|                           |   |              |   |                             |   |                                          |   |      |   |   |   |
| Balance  at December 31, 2001  |   | 4,948             |   | 49                               |   | 41,983                                        |   | (12,835   | )      | 29,197 |   |
|                           |   |              |   |                             |   |                                          |   |      |   |   |   |
| Net  loss                      |   |              |   |                             |   |                                          |   | (2,844    | )      | (2,844 | ) |
|                           |   |              |   |                             |   |                                          |   |      |   |   |   |
| Balance  at December 31, 2002  |   | 4,948             |   | $                                | 49     |                                          | $      | 41,983    |   | $ | (15,679 | ) | $ | 26,353 |   |

 

See notes to consolidatedfinancial statements.

 

27

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**ALDILA, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

 
|                                                                                      |   | **Year ended  December 31,** |   |
|-------------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                      |   | **2002**                     |   | **2001** |   | **2000** |   |
| CASH  FLOWS FROM OPERATING ACTIVITIES:                                                    |   |                         |   |   |   |   |   |
| Net  income (loss)                                                                        |   | $                            | (2,844 | ) | $ | (51,419 | ) | $ | 3,217 |   |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities: |   |                         |   |   |   |   |   |
| Depreciation  and amortization                                                            |   | 1,921                        |   | 3,840 |   | 4,066 |   |
| Loss  (gain) on disposal of fixed assets                                                  |   | (11                          | )      | 363 |   | 56 |   |
| Impairment  of goodwill                                                                   |   | —                       |   | 41,932 |   | — |   |
| Impairment  of trademarks & patents                                                   |   | —                       |   | 12,963 |   | — |   |
| Undistributed  income of joint venture, net                                               |   | (249                         | )      | (192 | ) | (283 | ) |
| Changes  in assets and liabilities:                                                       |   |                         |   |   |   |   |   |
| Accounts  receivable                                                                      |   | (416                         | )      | 3,407 |   | (1,867 | ) |
| Inventories                                                                               |   | 2,934                        |   | (471 | ) | 1,325 |   |
| Deferred  tax assets                                                                      |   | 2,366                        |   | 936 |   | 708 |   |
| Prepaid  expenses and other assets                                                        |   | 117                          |   | 15 |   | 177 |   |
| Accounts  payable                                                                         |   | (9                           | )      | (1,484 | ) | 1,147 |   |
| Accrued  expenses                                                                         |   | (802                         | )      | (1,717 | ) | (589 | ) |
| Income  taxes payable/receivable                                                          |   | (462                         | )      | (1,588 | ) | 1,751 |   |
| Deferred  tax liabilities                                                                 |   | (67                          | )      | (5,914 | ) | (357 | ) |
| Deferred  rent                                                                            |   | (5                           | )      | 17 |   | (341 | ) |
| Net  cash provided by operating activities                                                |   | 2,473                        |   | 688 |   | 9,010 |   |
|                                                                                      |   |                         |   |   |   |   |   |
| CASH  FLOWS FROM INVESTING ACTIVITIES:                                                    |   |                         |   |   |   |   |   |
| Purchases  of property, plant and equipment                                               |   | (362                         | )      | (835 | ) | (893 | ) |
| Proceeds  from sales of property, plant and equipment                                     |   | 19                           |   | 266 |   | — |   |
| Proceeds  from sales of marketable securities                                             |   | —                       |   | 3,104 |   | 4,513 |   |
| Purchases  of marketable securities                                                       |   | —                       |   | — |   | (3,104 | ) |
| Distributions  from joint venture                                                         |   | 890                          |   | 190 |   | — |   |
| Net  cash provided by investing activities                                                |   | 547                          |   | 2,725 |   | 516 |   |
|                                                                                      |   |                         |   |   |   |   |   |
| CASH  FLOWS FROM FINANCING ACTIVITIES:                                                    |   |                         |   |   |   |   |   |
| Borrowings  under line of credit                                                          |   | 887                          |   | 750 |   | — |   |
| Payments  under line of credit                                                            |   | (887                         | )      | (750 | ) | — |   |
| Principal  payments on long-term debt                                                     |   | —                       |   | (8,000 | ) | (8,000 | ) |
| Repurchases  of common stock                                                              |   | —                       |   | (750 | ) | — |   |
| Net  cash used for financing activities                                                   |   | —                       |   | (8,750 | ) | (8,000 | ) |
|                                                                                      |   |                         |   |   |   |   |   |
| NET  INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                     |   | 3,020                        |   | (5,337 | ) | 1,526 |   |
| CASH  AND CASH EQUIVALENTS, BEGINNING OF YEAR                                             |   | 266                          |   | 5,603 |   | 4,077 |   |
| CASH  AND CASH EQUIVALENTS, END OF YEAR                                                   |   | $                            | 3,286  |   | $ | 266 |   | $ | 5,603 |   |
|                                                                                      |   |                         |   |   |   |   |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION:                                       |   |                         |   |   |   |   |   |
| Cash  paid during the year for:                                                           |   |                         |   |   |   |   |   |
| Interest                                                                                  |   | $                            | 48     |   | $ | 408 |   | $ | 902 |   |
| Income  taxes                                                                             |   | $                            | 251    |   | $ | 618 |   | $ | 974 |   |

 

See notes toconsolidated financial statements.

 

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**ALDILA, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.             SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

*TheCompany**–***Aldila, Inc. (a Delaware Corporation) (the“Company”) designs, manufacturers and markets graphite golf club shafts forsale principally in the United States.

 

*Principlesof Consolidation****–*** The consolidated financial statements of the Companyinclude the accounts of the Company and its wholly owned subsidiaries, AldilaMaterials Technology Corporation (“AMTC”), Aldila Golf, and Aldila Golf’ssubsidiaries, Aldila de Mexico, Aldila Graphite Products (Zhuhai) Company Ltd.and Aldila Foreign Sales Corporation. All intercompany transactions andbalances have been eliminated in consolidation.  The Company accounts for its joint venture investment in CarbonFiber Technology (“CFT”) under the equity method of accounting.

 

*Useof Estimates****–*** The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that effect the reportedamounts of assets, liabilities, revenues and expenses, as well as thedisclosure of contingencies affected by such estimates and assumptions.  Actual results could differ from estimates.

 

*RevenueRecognition****–*** The Company recognizes revenues from product salesupon transfer of title to the customer at the time of shipment.  The Company also offers discounts to certaincustomers based on early payment.  Salesto these customers are recognized on a gross basis, and sales discounts arerecorded at the time the discount is taken by the customer.

 

*CashEquivalents****–*** The Company considers all highly liquid investmentspurchased with an original maturity of three months or less to be cashequivalents.  The Company has nothistorically experienced losses on such investments.

 

*MarketableSecurities****–*** Management determines the appropriate classificationof marketable debt and equity securities at the time of purchase.  The Company did not have any marketablesecurities at December 31, 2002 and 2001.

 

*FairValue of Financial Instruments -*The fair value of short-termmarketable securities, trade accounts receivable and payable and certainaccrued expenses approximate their carrying amounts in the financial statementsdue to the short maturity of such instruments. The fair value of investments is determined using quoted market pricesfor those securities.

 

*AccountsReceivable****–*** The Company sells graphite golf club shafts primarilyto golf club manufacturers and distributors on credit terms.  The Company also sells hockey sticks to onecustomer and composite prepregs to manufacturers of other composite basedproducts on credit terms.  Historically,credit losses have been minimal in relation to the credit extended.

 

*Inventories****–*** Inventories arestated at the lower of first-in, first-out (FIFO) cost or market value.

 

*Propertyand Equipment****–*** Property and equipment are stated at cost.  Repairs and maintenance are charged toexpense as incurred.  The Companydepreciates its property and equipment using the straight-line method over theestimated useful lives of the assets, as follows:

 

|                            |   | **Years** |   |
|---------------------------------|--------|-----------|--------|
| Machinery  and equipment        |   | 5-10      |   |
|                            |   |      |   |
| Office  furniture and equipment |   | 3-10      |   |

 

Leasehold improvements are amortized over the shorterof the asset life or the remaining term of the related lease.

 

*Trademarksand Patents **–***Trademarks and patents were amortized on astraight-line basis over 40 years and 17 years, respectively.  Amortization expense was $435,000 in each of2001 and 2000.  See *Evaluation of Long-Lived Assets*.

 

29

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*Goodwill****–*** Goodwill representsthe excess of cost over fair value of net assets acquired and was amortizedover 40 years on a straight-line basis. See *Evaluation of Long-Lived Assets*.

 

*Evaluationof Long-lived Assets*– The Company’s policy is to assesspotential impairments to its long-lived assets when there is evidence thatevents or changes in circumstances have made recovery of the assets carryingvalue unlikely and the carrying amount of the asset exceeds the estimatedundiscounted future cash flows.  If suchevaluation were to indicate a material impairment of these long-lived assets,such impairment would be recognized by a write down of the applicable asset toits estimated fair value under Statement of Financial Accounting Standards(“SFAS”) No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”.  See Note 5.

 

*DeferredFinancing Costs* – Costs associated with the issuance of debtare amortized over the life of the related debt using the straight-linemethod.  Such amortization is includedin interest expense.

 

*Warranty Reserve –*The Company provides awarranty to its customers for shaft breakage in the normal course ofbusiness.  The Company accrues for theestimated warranty based on historical experience at time of sale.  The estimated warranty is calculated basedupon a rolling four-year ratio of breakage returns to sales applied to currentyear sales.

 

*CommonStock and Earnings Per Share (EPS)* – Earnings per share -basic is calculated based upon the weighted average number of sharesoutstanding during the year, while diluted also gives effect to all potentialdilutive common shares outstanding during each year such as options, warrantsand contingently issuable shares. Earnings per share assuming dilution includes 47,000 dilutive equivalentshares from outstanding stock options for 2000, which are not included in thecalculation of earnings per share - basic. Options to purchase 737,961 and 1,038,095 shares of common stock as ofDecember 31, 2002 and December 31, 2001, respectively, at prices ranging from$1.61 to $18.66 per share were not included in the computation of diluted EPSbecause the effect of such options would be anti-dilutive. Such options expireat various dates through December of 2012.

 

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

 

*Income Taxes* - Income taxes are provided utilizing the liabilitymethod.  The liability method requires the recognition of deferred taxassets and liabilities for the expected future tax consequences of temporarydifferences between the carrying amounts and tax bases of assets andliabilities.  Valuation allowances are established when necessary toreduce deferred income tax assets to amounts more likely than not to berealized.

 

*Accountingfor Stock Based Compensation* – At December 31, 2002, theCompany has two stock-based compensation plans, which are described more fullyin Note 12.  SFAS No. 123, “Accountingfor Stock-Based Compensation,” encourages but does not require companies torecord compensation cost for stock-based employee compensation plans at fairvalue (See SFAS 148 below under *RecentlyIssued Accounting Pronouncements)*. The Company has chosen to continue to account for stock-based compensationusing the intrinsic value method prescribed in Accounting Principles Board(“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and relatedinterpretations.  Accordingly,compensation cost for stock options is measured as the excess, if any, of thequoted market price of the Company’s stock at the date of the grant over theamount an employee must pay to acquire the stock.  Had compensation cost for the Company’s stock option awards beendetermined based upon the fair value at the grant date for awards from 1995through 2002 and recognized on a straight-line basis over the related vestingperiod, in accordance with the provisions of SFAS No. 123, the Company’s netincome (loss) and earnings per share would have been reduced to the pro formaamounts indicated below:

 
|                                                                                                                                          |   | **2002** |   | **2001** |   | **2000** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Net  income (loss) as reported                                                                                                                |   | $        | (2,844 | )        | $      | (51,419  | )      | $ | 3,217 |   |
|                                                                                                                                          |   |     |   |     |   |     |   |
| Deduct: Total stock-based employee compensation  expense determined under fair value based method for all awards, net of related  tax effects |   | (380     | )      | (510     | )      | (865     | )      |
| Pro  forma net income (loss)                                                                                                                  |   | $        | (3,224 | )        | $      | (51,929  | )      | $ | 2,352 |   |
|                                                                                                                                          |   |     |   |     |   |     |   |
| Earnings  per share:                                                                                                                          |   |     |   |     |   |     |   |
| Basic  – as reported                                                                                                                     |   | $        | (0.57  | )        | $      | (10.10   | )      | $ | 0.62 |   |
| Basic  – pro forma                                                                                                                       |   | $        | (0.65  | )        | $      | (10.20   | )      | $ | 0.46 |   |
|                                                                                                                                          |   |     |   |     |   |     |   |
| Diluted  – as reported                                                                                                                   |   | $        | (0.57  | )        | $      | (10.10   | )      | $ | 0.62 |   |
| Diluted  – pro forma                                                                                                                     |   | $        | (0.65  | )        | $      | (10.20   | )      | $ | 0.45 |   |

 

30

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*RecentlyIssued Accounting Pronouncements*— In June 2001, theFinancial Accounting Standards Board (“FASB”) approved SFAS No. 141, “BusinessCombinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.”  SFAS No. 141 prospectively prohibits thepooling-of-interests method of accounting for business combinations initiatedafter June 30, 2001. SFAS No. 142 requires companies to cease amortizinggoodwill and intangible assets with indefinite useful lives that existed atJune 30, 2001, and any new goodwill resulting from acquisitions completed afterJune 30, 2001 will not be amortized.  SFASNo. 142 also establishes a new method of testing goodwill and intangible assetswith indefinite useful lives for impairment on an annual basis or on an interimbasis if an event occurs or circumstances change that would reduce the fairvalue of a reporting unit below its carrying value.  The Company’s adoption of SFAS No. 142 on January 1, 2002 did not have a material effect on theCompany’s financial statements as its goodwill and intangible assets werewritten off in accordance with SFAS 121 “Accounting for the Impairment ofLong-Lived Assets to be Disposed Of” in 2001. See Note 5.

 

In August 2001, the FASB approved SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets”.  SFAS No. 144 establishes a single accountingmodel, based on the framework of SFAS No. 121, “Accounting for the Impairmentof Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” forlong-lived assets to be disposed by sale, whether previously held and used ornewly acquired.  In addition, SFAS No. 144resolved significant implementation issues related to SFAS No. 121.  The adoption of SFAS 144 did not have amaterial effect on the Company’s financial statements.

 

In June 2002, the FASB issued SFAS No. 146 “Accountingfor Costs Associated with Exit or Disposal Activities,” the provisions of whichare effective for any exit or disposal activities initiated by the Companyafter December 31, 2002.  SFAS No. 146provides guidance on the recognition and measurement of liabilities associatedwith exit or disposal activities and requires that such liabilities berecognized when incurred.  The adoptionof the provisions of SFAS No. 146 will impact the measurement and timing ofcosts associated with any exit and disposal activities initiated after December31, 2002.

 

In November 2002, the FASB issued FASB InterpretationNo. 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others” (FIN 45), whichexpands previously issued accounting guidance and disclosure requirements forcertain guarantees.  The disclosurerequirements of FIN 45 are effective as of December 31, 2002 (See Note 7 foradditional disclosure).  The Companydoes not expect the adoption of the provisions of FIN 45 will have a materialeffect on the Company’s financial statements.

 

In December 2002, the FASB issued SFAS No. 148,“Accounting for Stock Based Compensation — Transition and Disclosure, andamendment of FASB Statement No. 123.” SFAS No. 148 amends SFAS No. 123 to provide alternative methods oftransition for a voluntary change to the fair value based method of accountingfor 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 financialstatements about the method of accounting for stock-based employee compensationand the effect of the method used on reported results.  As the Company still uses the guidance underAPB Opinion 25 to account for stock based compensation, the adoption of SFAS148 will not have a material effect on the Company’s financial statements.

 

*Reclassifications*– Certain reclassifications have been made to prior years’consolidated statement of cash flows to conform to current year classifications.

 

31

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**2.             ACCOUNTS RECEIVABLE**

 

Accounts receivable at December 31 consist of thefollowing (in thousands):

 

|                                        |   | **2002** |   | **2001** |   |
|---------------------------------------------|--------|----------|--------|----------|--------|
|                                        |   |     |   |     |   |
| Trade  accounts receivable                  |   | $        | 4,415  |     | $      | 4,128 |   |
| Less:  allowance for doubtful accounts |   | (22      | )      | (151     | )      |
| Accounts  receivable                        |   | $        | 4,393  |     | $      | 3,977 |   |

 

**3.             INVENTORIES**

 

Inventories at December 31 consist of the following(in thousands):

 

|            |   | **2002** |   | **2001** |   |
|-----------------|--------|----------|--------|----------|--------|
|            |   |     |   |     |   |
| Raw  materials  |   | $        | 3,226  |     | $      | 4,100 |   |
| Work-in-process |   | 1,703    |   | 3,757    |   |
| Finished  goods |   | 3,609    |   | 3,615    |   |
| Inventories     |   | $        | 8,538  |     | $      | 11,472 |   |

 

**4.             PROPERTY,PLANT AND EQUIPMENT**

 

Property, plant and equipment at December 31 consistsof the following (in thousands):

 

|                                             |   | **2002** |   | **2001** |   |
|--------------------------------------------------|--------|----------|--------|----------|--------|
|                                             |   |     |   |     |   |
| Machinery  and equipment                         |   | $        | 14,401 |     | $      | 14,257 |   |
| Office  furniture and equipment                  |   | 1,804    |   | 1,813    |   |
| Leasehold  improvements                          |   | 8,135    |   | 8,055    |   |
| Property  and equipment not yet in service       |   | 38       |   | 46       |   |
|                                             |   | 24,378   |   | 24,171   |   |
| Less:  accumulated depreciation and amortization |   | (18,211  | )      | (16,537  | )      |
|   Property, plant and equipment             |   | $        | 6,167  |     | $      | 7,634 |   |

 

Depreciation and amortization expense were $1.8million, $1.8 million and $2.1 million in 2002, 2001 and 2000, respectively.

 

**5.             GOODWILL, TRADEMARKS AND PATENTS**

 

During the fourth quarter of fiscal year 2001, theCompany identified certain conditions including a continued decrease in averageselling prices, declining margins, an increase in foreign competition andcontinued volatility in the golf industry as indicators of asset impairment.  These conditions led to operating resultsand forecasted future results that were substantially less favorable than hadbeen previously anticipated.  Inaccordance with the Company’s policy and SFAS No. 121, management assessed therecoverability of goodwill and other intangible assets using undiscounted cashflow projections based on the remaining amortization period of goodwill andtrademarks of thirty-one years.  Theseprojections represented the Company’s best estimate as of December 31, 2001 ofthe future undiscounted cash flows using the methodology described above.  Based on these projections, the Companyconcluded that impairment existed as of December 31, 2001.  In determining the amount of the

 

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impairment charge, the Companyutilized an independent valuation, which resulted in a write-off of allgoodwill and intangible assets of approximately $54.9 million as of December31, 2001.

 

**6.             INVESTMENTIN JOINT VENTURE**

 

The Company and SGL each own 50% of CFT in a jointventure to produce carbon fiber.  CFT,which was previously a wholly owned subsidiary of AMTC, was formed on October29, 1999.  AMTC contributed net assetswith a book value of approximately $13.3 million.  SGL purchased a 50% interest in AMTC’s carbon fiber manufacturingoperations for approximately $7.0 million in cash, which resulted in a gain ofapproximately $334,000.  Based on themember’s respective ownership interest in the joint venture, profits and lossesare allocated equally to each member. The Amended and Restated Limited Liability Company Agreement providesthat CFT is to continue until December 31, 2099 unless it is dissolved earlier,its affairs are wound up and final liquidating distributions are made pursuantto the Amended and Restated  LimitedLiability Company Agreement.  TheCompany’s equity in earnings from the joint venture for the years endedDecember 31, 2002, 2001 and 2000 were approximately $269,000, $231,000 and$220,000, respectively.  The Company’sinvestment includes the unamortized excess of the Company’s investment over itsequity in the joint venture net assets. The excess was approximately $104,000 and $124,000 at December 31, 2002and 2001, respectively, and is being amortized on a straight-line basis over aninitial estimated economic useful life of approximately 101 months.

 

**7.             ACCRUEDEXPENSES**

 

Accrued expenses at December 31 consist of thefollowing (in thousands):

 

|                               |   | **2002** |   | **2001** |   |
|------------------------------------|--------|----------|--------|----------|--------|
|                               |   |     |   |     |   |
| Payroll  and employee benefits     |   | $        | 749    |     | $      | 958 |   |
| Transfer  pricing reserve          |   | —   |   | 677      |   |
| Warranty  reserve [1]              |   | 345      |   | 485      |   |
| Plant  consolidation               |   | 289      |   | —   |   |
| Marketing  and promotional expense |   | 209      |   | 207      |   |
| Duty  reserve                      |   | —   |   | 126      |   |
| Legal  and professional fees       |   | 40       |   | 58       |   |
| Interest  payable                  |   | 3        |   | 3        |   |
| Other                              |   | 190      |   | 113      |   |
| Accrued  expenses                  |   | $        | 1,825  |     | $      | 2,627 |   |

 

 

| **[1]  Warranty Reserve** |   |   | **2002** |   | **2001** |   |
|---------------------------|--------|--------|----------|--------|----------|--------|
| Beginning  Balance        |   | $      | 485      |   | $        | 691    |   |
| Settlement  of Warranty   |   | (137   | )        | (148   | )        |
| Adjustments  to Warranty  |   | (3     | )        | (58    | )        |
| Ending  Balance           |   | $      | 345      |   | $        | 485    |   |

 

**8.             LONG-TERMDEBT**

 

*RevolvingCredit Agreement* – On July 9, 1999, Aldila Golf, a whollyowned subsidiary of the Company, entered into a Loan and Security Agreement(the “Agreement”) with a financial institution which provides Aldila Golf withup to $12.0 million in secured financing. The Agreement had an initial three-year term and is secured bysubstantially all of the assets of Aldila Golf and guaranteed by theCompany.  Advances under the Agreementare made based on eligible accounts receivable and inventories of Aldila Golf andbear interest at the Adjusted Eurodollar rate (as defined) plus 2.5% or at thebank reference rate at the election of the Company subject to a minimum rate of7%.  The Agreement requires the Companyto maintain a minimum level of tangible net worth (as defined).  As of December 31, 2002 and 2001 there wereno outstanding borrowings.  TheAgreement was renewed for a one-year period effective July 9, 2002 andautomatically renews each July 9, for successive one-year periods, unlessterminated by one of the parties to the Agreement.  Either party may terminate the Agreement by giving the otherparty 90 days prior written notice to the renewal date.

 

33

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*SeniorNotes* –The Company placed $20.0 million in principal amountof senior notes with an institutional investor on November 30, 1993.  The notes bore interest at 6.13%, payablesemi-annually on March 31 and September 30. The final semi-annual principal payments of $4.0 million were made onMarch 31 and September 30, 2001.

 

**9.             STOCKHOLDERS’EQUITY**

 

The Company announced on January 17, 2001 that itsboard of directors authorized the repurchase of up to 333,333 shares of theCompany’s common stock (or up to 6.5% of the 5,154,068 shares then issued andoutstanding).  The Company repurchased206,267 shares on the open market, at an approximate cost of $3.63 per shareduring 2001.  The Company announced onJanuary 22, 2002 an increase in the number of shares authorized for purchase inits current share buyback program from 333,333 to 666,667 shares of the Company’scommon stock.

 

**10.          PLANTCONSOLIDATION**

 

In November of 1997, the Company announced its plansto consolidate its United States graphite golf shaft manufacturing facilitiesby integrating its operations in Rancho Bernardo, California with its operationsin Poway, California

 

In the first quarter ended March 31, 2000, the Companycompleted a Lease Termination Agreement (“Termination Agreement”) with thelandlord of the Rancho Bernardo manufacturing facility.  The Termination Agreement allowed the Companyto buy itself out of the remaining years of the lease for a sum of$900,000.  The Termination Agreement wasfinalized and the payment was made on February 18, 2000.  As such, the Company reversed approximately$566,000 of previously accrued plant consolidation charges.

 

The Company was informed in April 2001 by one of itsmajor customers that they would like to have the majority of their shaftsmanufactured in China.  Based on thisrequest, and the Company’s general strategy of shifting the manufacture ofpremium product lines from North America and Mexico to China, the Companydecided to shut down two of its manufacturing facilities in Mexico, leaving theCompany with one remaining facility in Mexico. As a result of this decision, the Company laid-off 323 employees anddisposed of excess equipment from the two facilities.  The Company recorded a plant consolidation charge of $593,000during 2001.  The charge was comprised ofapproximately $305,000 in severance and related benefits, $159,000 in write-downsof excess equipment and $129,000 in other related costs which was all paid byDecember 31, 2001.

 

During the fourth quarter of 2002, managementdeveloped a plan to consolidate its executive offices with its U.S.manufacturing operations in an effort to reduce costs.  The Company successfully negotiated asub-lease of its executive offices, with the term of the sub-lease identical tothe term of the Company’s remaining lease obligation through October 31, 2005.  Accordingly, the Company recorded a plant consolidationcharge in the amount of approximately $300,000.  The majority of the charge is related to the Company’s leaseholdimprovements at its executive offices. There were no severance or related benefits included in the charge.  As of December 31, 2002, there wasapproximately $289,000 remaining in the reserve for future obligations.  The components of the reserve in fiscal 2002were as follows:

 
| **Description**                             |   | **Original  Reserve** |    | **Usage** |   | **Reserve  Balance as of  December 31, 2002** |   |
|---------------------------------------------|--------|-----------------------|---------|-----------|--------|-----------------------------------------------|--------|
| Leasehold  improvements                     |   | $                     | 305,203 |      | $      | —                                        |   | $ | 305,203 |   |
| Other  (including credit for deferred rent) |   | 48,654                |    | (11,560   | )      | 37,094                                        |   |
| Lease  payments (net of sublease income)    |   | (53,749               | )       | —    |   | (53,749                                       | )      |
| Total                                       |   | $                     | 300,108 |      | $      | (11,560                                       | )      | $ | 288,548 |   |

 

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**11.          INCOMETAXES**

 

The components of the provision (benefit) for incometaxes are as follows (in thousands):

 
|                                  |   | **2002** |   | **2001** |   | **2000** |   |
|---------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Current:                              |   |     |   |     |   |     |   |
| Federal                               |   | $        | (2,317 | )        | $      | (1,370   | )      | $ | 1,056 |   |
| State                                 |   | (17      | )      | (194     | )      | 267      |   |
| Foreign                               |   | (8       | )      | 260      |   | 256      |   |
| Total                                 |   | (2,342   | )      | (1,304   | )      | 1,579    |   |
| Deferred:                             |   |     |   |     |   |     |   |
| Federal                               |   | 1,698    |   | (3,889   | )      | 266      |   |
| State                                 |   | 601      |   | (1,089   | )      | 85       |   |
| Total                                 |   | 2,299    |   | (4,978   | )      | 351      |   |
| Provision  (benefit) for income taxes |   | $        | (43    | )        | $      | (6,282   | )      | $ | 1,930 |   |

 

Net deferred income taxes included in current assetsin the balance sheet at December 31, consist of the tax effects of temporarydifferences related to the following (in thousands):

 
|                                |   | **2002** |   | **2001** |   |
|-------------------------------------|--------|----------|--------|----------|--------|
| Inventories                         |   | $        | 1,476  |     | $      | 2,028 |   |
| Accrued  expenses                   |   | 504      |   | 431      |   |
| Allowance for doubtful accounts     |   | 9        |   | 65       |   |
| Deferred  expenses                  |   | 37       |   | 47       |   |
| Prepaid  expenses                   |   | (96      | )      | —   |   |
| State  income taxes                 |   | (173     | )      | (205     | )      |
| Deferred  tax assets – current |   | $        | 1,757  |     | $      | 2,366 |   |

 

Net deferred income taxesincluded in long-term liabilities in the balance sheet at December 31 consistof the tax effects of temporary differences related to the following (inthousands):

 
|                                               |   | **2002** |      | **2001** |   |
|----------------------------------------------------|--------|----------|-----------|----------|--------|
| Property  and equipment                            |   | $        | 499       |     | $      | 145 |   |
| Basis  in joint venture (CFT)                      |   | (591     | )         | (494     | )      |
| Other                                              |   | 246      |      | 282      |   |
| Deferred  tax assets(liabilities) – long term |   | $        |  154 |     | $      |  (67 | ) |

 
|                                                     |   | **2002** |         | **2001** |   |
|----------------------------------------------------------|--------|----------|--------------|----------|--------|
| Deferred  tax assets – current                      |   | $        | 1,757        |     | $      | 2,366 |   |
| Deferred  tax assets (liabilities) – long term      |   | 154      |         | (67      | )      |
| Total  net deferred tax asset before valuation allowance |   | 1,911    |         | 2,299    |   |
| Valuation  allowance                                     |   | (1,911   | )            | —   |   |
| Total  deferred tax asset                                |   | $        |  — |     | $      |  2,299 |   |

 

At December 31, 2002, the Company had California netoperating loss carryforwards of $1.5 million. The California net operating loss carryforwards will begin to expire in2013, unless previously utilized.  TheCompany also has federal and California research and development tax creditcarryforwards of approximately $23,000 and $70,000, respectively, which willbegin to expire in 2021 unless previously utilized.

 

A valuation allowance of $1.9 million has beenrecorded at December 31, 2002, to offset the net deferred tax assets.  Realization of these tax benefits isdependent upon the generation of future taxable income.  In accordance with FAS 109, management hasdetermined that it is no longer more likely than not that the tax benefitsassociated with the deferred tax assets

 

35

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will berealized.  Differences between thestatutory federal income tax rate and the effective tax rate as a percentage ofincome taxes are summarized below.

 
|                                            |   | **2002** |       | **2001** |       | **2000** |       |
|-------------------------------------------------|--------|----------|------------|----------|------------|----------|------------|
|                                            |   |     | ** ** |     | ** ** |     | ** ** |
| Statutory  rate                                 |   | (34.0    | )%         | (34.0    | )%         | 34.0     | %          |
| State  income taxes, net of Federal tax benefit |   | 1.7      |       | (1.5     | )          | 4.6      |       |
| Valuation  allowance                            |   | 66.2     |       | —   |       | —   |       |
| Goodwill  impairment                            |   | —   |       | 24.7     |       | —   |       |
| Non-deductible  amortization                    |   | —   |       | 0.8      |       | 9.4      |       |
| Revision  of prior years’ tax estimates    |   | (23.4    | )          | —   |       | (7.3     | )          |
| Foreign  earnings taxed at different rates      |   | (12.5    | )          | 0.5      |       | (2.9     | )          |
| Other  items                                    |   | 0.5      |       | (1.4     | )          | (0.3     | )          |
| Effective  rate                                 |   | (1.5     | )%         | (10.9    | )%         | 37.5     | %          |

 

The Company has adopted the position under APB 23 thatearnings of its foreign subsidiaries will be permanently reinvested outside ofthe United States.  As such, UnitedStates deferred taxes have not been provided for on these earnings.

 

**12.          STOCKOPTION PLAN**

 

In 1992, the Company adopted a Stock Option Plan formanagement.  The Company has reserved175,431 shares for issuance under this Plan. Options are granted at the fair market value of the shares at the dateof grant, generally become fully vested three years after grant, and expire tenyears from the date of grant.

 

In May of 1994, the stockholders adopted the 1994Stock Incentive Plan for employees, directors and consultants of theCompany.  The Company has reserved1,366,667 shares for issuance under this Plan. Options are granted at the fair market value of the shares at the dateof grant, generally become fully vested three years after grant, and expire tenyears from the date of grant.

 

The pro forma compensation costs presented in Note 1were determined using the weighted average fair values of options granted underthe Company’s stock option plans during 2002, 2001 and 2000 were estimatedat  $0.90, $2.25 and $2.55,respectively, on the date of grant using the Black-Scholes option-pricing modelwith the following weighted-average assumptions: 0% dividend yield, volatilityof 50% in 2002, 49% in 2001 and 47% in 2000, risk free rate of return of 3.3%in 2002, 5.0% in 2001 and 6.7% in 2000 and expected lives of five years.  The estimated fair value of options grantedis subject to the assumptions made and if the assumptions changed, theestimated fair value amounts could be significantly different.  A summary of the Company’s fixed stockoption plans as of December 31, 2002, 2001 and 2000 and activity during theyears then ended is presented below:

 
|                        |   | **2002**   |   | **2001**                                   |   | **2000**   |      |
|-----------------------------|--------|------------|--------|--------------------------------------------|--------|------------|-----------|
|                        |   | **Shares** |   | **Weighted****Average  Exercise****Price** |   | **Shares** |      | **Weighted****Average  Exercise****Price** |   | **Shares** |   | **Weighted****Average  Exercise****Price** |   |
| Outstanding  at January 1   |   | 1,029,323  |   | $                                          | 10.08  |       | 1,035,547 |   | $ | 12.27 |   | 1,009,886 |   | $ | 17.22 |   |
| Granted                     |   | 108,899    |   | $                                          | 1.92   |       | 226,271   |   | $ | 4.62 |   | 134,605 |   | $ | 5.13 |   |
| Terminated                  |   | (409,033   | )      | $                                          | 15.92  |       | (232,495  | ) | $ | 14.55 |   | (108,944 | ) | $ | 14.99 |   |
| Outstanding  at December 31 |   | 729,189    |   | $                                          | 5.79   |       | 1,029,323 |   | $ | 10.08 |   | 1,035,547 |   | $ | 12.27 |   |

 

36

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The following table summarizes information about stock optionsoutstanding and exercisable at December 31, 2002:

 
|                               |   |                                           |   | **Options  Outstanding**                                   |   | **Options  Exercisable**               |   |
|------------------------------------|--------|------------------------------------------------|--------|------------------------------------------------------------|--------|----------------------------------------|--------|
| **Range of****Exercise****Prices** |   | **Number  Outstanding  at December 31,  2002** |   | **Weighted  Average  Remaining  Contractual  Life (Yrs.)** |   | **Weighted  Average  Exercise  Price** |   | **Number****Exercisable****at  December 31,  2002** |   | **Weighted****Average****Exercise  Price** |   |
|                               |   |                                           |   |                                                       |   |                                   |   |   |   |   |   |
| $  1.61 - $2.58                    |   | 104,812                                        |   | 9.8                                                        |   | $                                      | 1.89   |   | — |   | — |   |
| $  4.14 - $7.08                    |   | 534,250                                        |   | 7.5                                                        |   | $                                      | 4.81   |   | 367,131 |   | $ | 4.85 |   |
| $  14.34 - $18.66                  |   | 90,127                                         |   | 3.1                                                        |   | $                                      | 16.09  |   | 90,127 |   | $ | 16.09 |   |
| $  1.61 - $18.66                   |   | 729,189                                        |   | 5.9                                                        |   | $                                      | 5.79   |   | 457,258 |   | $ | 7.06 |   |

 

As of December 31, 2002, 2001 and 2000, 457,258,666,662 and 700,388 shares were exercisable under the Plans at a weightedaverage exercise price of $7.06, $12.99 and $15.09 per share, respectively.

 

As of December 31, 2002, an aggregate of 653,785shares remain available for grant under the Plans.  In addition, during each of 1994 and 1993, options covering 8,772shares were granted to two directors of the Company apart from the Stock OptionPlans.  The options were granted at$42.38 and $49.13 per share, respectively. The terms of these options are consistent with those granted under the1992 Stock Option Plan.

 

On March 20, 2000, the Company and Nick Price Groupentered into a stock option agreement. The option agreement allows Nick Price to purchase 50,000 shares ofCommon Stock at a purchase price of $4.89 per share.  The shares are not currently registered under the Plans.  In return for the shares, the Company isreceiving the services of Nick Price at a guaranteed minimum value of $4.50 pershare, or a minimum aggregate consideration of $225,000.  The Company recognized compensation expenseand a liability of approximately $37,000, $66,000 and $103,000 in 2002, 2001and 2000, respectively.

 

**13.          EMPLOYEE BENEFIT PLAN**

 

In 1994, the Company adopted the Aldila, Inc. 401(k)Savings Plan (the “Plan”) for employees of the Company and itssubsidiaries.  This defined contributionplan allows employees who satisfy the age and service requirements of the Planto contribute up to 19% of pre-tax wages, limited to the maximum amountpermitted under federal law.  TheCompany matches the first 4% of wages contributed by employees at a rate of$0.25 for every $1.00.  The Company’smatching contributions vest over four years based on years of service.  The Company’s contributions amounted toapproximately $59,000, $62,000 and $48,000 in 2002, 2001 and 2000,respectively.

 

**14.          COMMITMENTSAND CONTINGENCIES**

 

The Company leases building space and certainequipment under operating leases.  TheCompany’s leases for office and manufacturing space contain rental escalationclauses and renewal options.  Rentalexpense for the Company was $1.1 million, $1.2 million and $1.3 million for2002, 2001 and 2000, respectively.  Asof December 31, 2002, future minimum lease payments for all operating leasesare as follows (in thousands):

 

| 2003       |   | $   | 1,099 |
|------------|--------|-----|-------|
| 2004       |   | 870 |
| 2005       |   | 350 |
| 2006       |   | 145 |
| 2007       |   | 145 |
| Thereafter |   | 834 |
|       |   | $   | 3,443 |

 

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Amounts receivable from future minimum rental payments due from asub-lessee for the years ending December 31, 2003, 2004 and 2005 are $179,000,$245,000 and $211,000, respectively.

 

**15.          SEGMENTINFORMATION**

 

The Company designs and manufacturers graphite shaftsfor golf club manufacturers.  In doingso, the Company also manufactures carbon fiber and prepreg materials, which areutilized in the manufacture of graphite golf shafts.  In accordance with SFAS No. 131 “Disclosures about Segments of anEnterprise and Related Information”, the Company considers its business toconsist of one reportable operating segment.

 

The Company markets its products domestically andinternationally, with its principal international market being Europe.  The table below contains information aboutthe geographical areas in which the Company operates.  Revenues are attributed to countries based on location in which thesale is settled.  Long-lived assets arebased on the country of domicile.  Salesto a major customer represented 22%, 22%, and 21% of net sales in 2002, 2001,and 2000, respectively.  Sales to asecond customer represented 13%, 20%, and 15% of net sales in 2002, 2001, and2000, respectively. Sales to a third customer represented 21%, 10% and 9% ofnet sales in 2002, 2001 and 2000, respectively.  Sales to a fourth customer represented 9%, 15% and 19% of netsales in 2002, 2001 and 2000, respectively.

 

 
| **(in thousands)**       |   |      |   |                   |   |
|--------------------------|--------|-----------|--------|------------------------|--------|
| **2002**                 |   | **Sales** |   | **Long-Lived  Assets** |   |
| United  States           |   | $         | 32,207 |                   | $      | 10,587 |   |
| Scotland                 |   | 189       |   | —                 |   |
| England                  |   | 2,165     |   | —                 |   |
| China                    |   | 1,023     |   | 2,324                  |   |
| Mexico                   |   | —    |   | 349                    |   |
| Other  Foreign Countries |   | 1,878     |   | —                 |   |
| Total                    |   | $         | 37,462 |                   | $      | 13,260 |   |

 
| **2001**                 |   | **Sales** |   | **Long-Lived Assets** |   |
|--------------------------|--------|-----------|--------|-----------------------|--------|
| United  States           |   | $         | 34,746 |                  | $      | 12,520 |   |
| Scotland                 |   | 167       |   | —                |   |
| England                  |   | 1,792     |   | —                |   |
| China                    |   | 648       |   | 2,607                 |   |
| Mexico                   |   | 74        |   | 360                   |   |
| Other  Foreign Countries |   | 2,134     |   | —                |   |
| Total                    |   | $         | 39,561 |                  | $      | 15,487 |   |

 
| **2000**                 |   | **Sales** |         | **Long-Lived Assets** |   |
|--------------------------|--------|-----------|--------------|-----------------------|--------|
| United  States           |   | $         | 45,634       |                  | $      | 71,140 |   |
| Scotland                 |   | 887       |         | —                |   |
| England                  |   | 3,529     |         | —                |   |
| China                    |   | 2,080     |         | 2,772                 |   |
| Mexico                   |   | —    |         | 105                   |   |
| Other  Foreign Countries |   | 3,729     |         | —                |   |
| Total                    |   | $         |  55,859 |                  | $      |  74,017 |   |

 

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**16.          QUARTERLYRESULTS OF OPERATIONS (Unaudited)**

 

The following is a summary of the quarterly results ofoperations for the two years in the period ended December 31, 2002 (inthousands, except per share data):

 
|                                        |   | **Quarter  Ended** |   |
|---------------------------------------------|--------|--------------------|--------|
|                                        |   | **March 31,**      |   | **June 30,** |   | **September  30,** |   | **December  31,** |   |
| **2002:**                                   |   |               |   |   |   |   |   |   |   |
|                                        |   |               |   |   |   |   |   |   |   |
| Net  sales                                  |   | $                  | 11,374 |   | $ | 10,551 |   | $ | 6,450 |   | $ | 9,087 |   |
| Gross  profit                               |   | 1,469              |   | 1,830 |   | 482 |   | 853 |   |
| Net  loss                                   |   | (198               | )      | (170 | ) | (699 | ) | (1,777 | ) |
| Net  loss per common share-basic            |   | $                  | (0.04  | ) | $ | (0.03 | ) | $ | (0.14 | ) | $ | (0.36 | ) |
| Net  loss per common share-diluted          |   | $                  | (0.04  | ) | $ | (0.03 | ) | $ | (0.14 | ) | $ | (0.36 | ) |
|                                        |   |               |   |   |   |   |   |   |   |
| **2001:**                                   |   |               |   |   |   |   |   |   |   |
| Net  sales                                  |   | $                  | 14,582 |   | $ | 9,812 |   | $ | 6,845 |   | $ | 8,322 |   |
| Gross  profit (loss)                        |   | 4,152              |   | 2,371 |   | 712 |   | (978 | ) |
| Net  income (loss)                          |   | 988                |   | (464 | ) | (515 | ) | (51,428 | ) |
| Net  income (loss) per common share-basic   |   | $                  | 0.19   |   | $ | (0.09 | ) | $ | (0.10 | ) | $ | (10.15 | ) |
| Net  income (loss) per common share-diluted |   | $                  | 0.19   |   | $ | (0.09 | ) | $ | (0.10 | ) | $ | (10.15 | ) |

 

Earnings (loss) per share are computed independentlyfor each of the quarters presented and therefore may not sum to the annualamount for the year.

 

**17. RELATED PARTY TRANSACTIONS**

 

During 1999, the Company entered into a joint venturefor the production of carbon fiber with SGL (see Note 6).  The amount owed to CFT as of December 31, 2002and 2001 was approximately $205,000 and $206,000, respectively.

 

39

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**ALDILAINC. AND SUBSIDIARIES**

 

**SCHEDULEIIC VALUATION AND QUALIFYING ACCOUNTS**

 

**Forthe years ended December 31, 2002, 2001 and 2000**

 
|                                  |   | **Balance at  beginning  of year** |    | **Charged to  costs and  expenses** |   | **Deductions** |   | **Balance at  end  of year** |     |
|---------------------------------------|--------|------------------------------------|---------|-------------------------------------|--------|----------------|--------|------------------------------|----------|
| Year ended  December 31, 2000         |   |                               |    |                                |   |           |   |                         |     |
| Allowance for  uncollectible accounts |   | $                                  | 253,614 |                                | $      | 260,000        |   | $                            | (303,979 | ) | $ | 209,635 |   |
| Warranty reserve                      |   | $                                  | 710,000 |                                | $      | 198,000        |   | $                            | (217,000 | ) | $ | 691,000 |   |
| Year ended  December 31, 2001         |   |                               |    |                                |   |           |   |                         |     |
| Allowance for  uncollectible accounts |   | $                                  | 209,635 |                                | $      | 156,000        |   | $                            | (214,360 | ) | $ | 151,275 |   |
| Warranty reserve                      |   | $                                  | 691,000 |                                | $      | (58,000        | )      | $                            | (148,000 | ) | $ | 485,000 |   |
| Year ended December  31, 2002         |   |                               |    |                                |   |           |   |                         |     |
| Allowance for  uncollectible accounts |   | $                                  | 151,275 |                                | $      | (21,899        | )      | $                            | (107,040 | ) | $ | 22,336 |   |
| Warranty reserve                      |   | $                                  | 485,000 |                                | $      | (3,000         | )      | $                            | (137,000 | ) | $ | 345,000 |   |

 

40

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**INDEPENDENTAUDITORS’ REPORT**

 

Board of Directors and Stockholders 

Aldila, Inc.

 

We have audited the accompanying consolidated balance sheets of Aldila,Inc. and its subsidiaries (the “Company”) as of December 31, 2002 and 2001, andthe related consolidated statements of operations, stockholders’ equity andcash flows for each of the three years in the period ended December 31,2002.  Our audits also included the financial statement schedule listed onpage 40.  These financial statements and financial statement schedule arethe responsibility of the Company’s management.  Our responsibility is toexpress an opinion on these financial statements and financial statementschedule based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America.  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.  We believe thatour 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 as of December31, 2002 and 2001 and the results of its operations and its cash flows for eachof the three years in the period ended December 31, 2002 in conformity withaccounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered inrelation to the basic consolidated financial statements taken as a whole,presents fairly in all material respects the information set forth therein.

 
| /s/ DELOITTE & TOUCHE LLP |   |
|-------------------------------|--------|
|                          |
| San Diego, California         |
| February 12, 2003             |

 

41

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|   |   | ALDILA, INC. |                                             |                    |
|--------|--------|--------------|--------------------------------------------------|-------------------------|
|   |   |         |                                             |                    |
|   |   | By:          |                                             | /s/ Peter R.  Mathewson |   |
|   |   |         | Peter R.  Mathewson                              |                    |
|   |   |         | Chairman of the  Board,  Chief Executive Officer |                    |
|        |        |              |                                                  |                         |  |

 
| **Signature**            |   | **Title**                                                       |   | **Date**       |
|--------------------------|--------|-----------------------------------------------------------------|--------|----------------|
|                     |   |                                                            |   |           |
| /s/ Peter R.  Mathewson  |   | Chief Executive Officer                                         |   | March 24, 2003 |
| Peter R.  Mathewson      |   | and Director (Principal  Executive Officer)                     |   |           |
|                     |   |                                                            |   |           |
| /s/ Robert J.  Cierzan   |   | Vice President, Finance                                         |   | March 24, 2003 |
| Robert J. Cierzan        |   | (Principal  Financial Officer and Principal Accounting Officer) |   |           |
|                     |   |                                                            |   |           |
| /s/ Peter E.  Bennett    |   | Director                                                        |   | March 24, 2003 |
| Peter E. Bennett         |   |                                                            |   |           |
|                     |   |                                                            |   |           |
| /s/ Lloyd I  Miller, III |   | Director                                                        |   | March 24, 2003 |
| Lloyd I. Miller,  III    |   |                                                            |   |           |
|                     |   |                                                            |   |           |
| /s/ John J.  Henry       |   | Director                                                        |   | March 24, 2003 |
| John J. Henry            |   |                                                            |   |           |
|                     |   |                                                            |   |           |
| /s/ Chapin Nolen         |   | Director                                                        |   | March 24, 2003 |
| Chapin Nolen             |   |                                                            |   |           |
|                     |   |                                                            |   |           |
| /s/ Thomas A.  Brand     |   | Director                                                        |   | March 24, 2003 |
| Thomas A. Brand          |   |                                                            |   |           |

 

42

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**Certification Pursuantto Rules 13a-14 and 15d-14of the 1934 Securities Exchange Act**

 

I certify that:

 

1.  I have reviewed this annual report onForm 10-K of Aldila, Inc. (the registrant);

 

2.  Based on my knowledge, this annualreport does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this annual report;

 

3.  Based on my knowledge, the financialstatements, and other financial information included in this annual report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this annual report;

 

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

 

a) designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this annual report isbeing prepared;

 

b) evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 days priorto the filing date of this annual report (the “Evaluation Date”); and

 

c) presented in this annual report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

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

 

a) all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

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

 

6.  The registrant’s other certifyingofficer and I have indicated in this annual report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
| Date: March 24, 2003 | /s/  Peter R. Mathewson |   |
|----------------------|------------------------------|--------|
|                 | Peter R. Mathewson           |
|                 | Chief Executive Officer      |

 

43

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**Certification Pursuantto Rules 13a-14 and 15d-14of the 1934 Securities Exchange Act**

 

I certify that:

 

1.  I have reviewed this annual report onForm 10-K of Aldila, Inc. (the registrant);

 

2.  Based on my knowledge, this annualreport does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this annual report;

 

3.  Based on my knowledge, the financialstatements, and other financial information included in this annual report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this annual report;

 

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

 

a) designed such disclosure controls andprocedures to ensure that material information relating to the registrant, includingits consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this annual report is beingprepared;

 

b) evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this annual report (the “Evaluation Date”); and

 

c) presented in this annual report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

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

 

a) all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

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

 

6.  The registrant’s other certifyingofficer and I have indicated in this annual report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
| Date: March 24, 2003 | /s/  Robert J. Cierzan |   |
|----------------------|-----------------------------|--------|
|                 | Robert J. Cierzan           |
|                 | Chief Financial Officer     |

 

44

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**EXHIBITINDEX**

 
| **Exhibit  Number** |   | **Exhibit**                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|---------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 2.1                 |   | Agreement of Purchase  and Sale, dated as of December 14, 1991, by and among Aldila Acquisition  Corp., Aldila, Inc. and all of the Shareholders of Aldila, Inc., as amended  by the First Amendment dated January 9, 1992 by and among Aldila Acquisition  Corp., Aldila, Inc. and all the Shareholders of Aldila, Inc. (Filed as  Exhibit 2.1 to the Company’s Registration Statement on Form S-1 (Registration  No. 33-61560) and 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).                                                                                                                                                                                                                                                               |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *10.1               |   | 1992 Stock Option Plan  of the Company, as amended.  (Filed as  Exhibit 10.6 to the Company’s Registration Statement on Form S-1  (Registration No. 33-61560) and incorporated herein by reference).                                                                                                                                                                                                                                                               |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *10.2               |   | Form of Stock Option  Agreement in connection with Stock Option Plan.  (Filed as Exhibit 10.7 to the Company’s Registration Statement  on Form S-1 (Registration No. 33-61560) and incorporated herein by  reference).                                                                                                                                                                                                                                             |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *10.3               |   | Executive Bonus Plan of  the Company.  (Filed as Exhibit 10.2  to the Company’s Report on Form 10-Q for the quarterly period ended September  30, 1994 and incorporated herein by reference).                                                                                                                                                                                                                                                                      |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.4                |   | Form of Indemnification  Agreement between the Company and its directors and executive officers.  (Filed as Exhibit 10.13 to the Company’s  Registration Statement on Form S-1 (Registration No. 33-61560) and  incorporated herein by reference).                                                                                                                                                                                                                 |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.5                |   | Business Park Net Lease  dated as of May 29, 1987,                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

45

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|   |   | 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 1997  Proxy Statement dated March 26, 1997 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                                                                                                                        |

 

46

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|   |   | June 30, 1995 and  incorporated herein by reference).                                                                                                                                                                                                                                                                                       |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                        |
| 10.14  |   | Supply Agreement  commencing January 1, 1998 between Courtaulds Fibres, Ltd. And Aldila  Materials  Technology Corp.  (Filed as Exhibit 10.20 to the Company’s  Report on Form 10-K for the year ended December 31, 1997 and incorporated herein  by reference).                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                        |
| 10.15  |   | Loan Agreement dated  March 27, 1998 between Aldila, Inc. and Union Bank of California, N.A. (Filed  as Exhibit 10.1 to the Company’s Report on Form 10-Q for the quarterly period  ended March 31, 1998 and incorporated herein by reference).                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                        |
| 10.16  |   | First Amendment to Loan  Agreement dated March 22, 1999   between the Company and Union Bank of California, N.A. (Filed as  Exhibit 10.16 to the Company’s Report on Form 10-K for the year ended  December 31, 1998 and incorporated herein by reference).                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                        |
| 10.17  |   | Member Interest  Purchase Agreement dated as of October 20, 1999 among SGL Carbon Fibers and  Composites, Inc., SGL Technik GmbH, Aldila Materials Technology Corp. and the  Company.  (Filed as Exhibit 10.17 to  the Company’s Report on Form 10-K for the year ended December 31, 1999 and  incorporated herein by reference). |
|   |   |                                                                                                                                                                                                                                                                                                                                        |
| *10.18 |   | Loan and Security  Agreement by and between Aldila Golf Corp. and Foothill Capital Corporation  dated July 9, 1999. (Filed as Exhibit 10.1 to the Company’s Report on Form  10-Q for thequarterly period ended June 30, 1999 and incorporated herein by  reference).                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                        |
| *10.19 |   | Severance Protection  Agreement dated March 11, 1999 between the Company and Gary T. Barbera.  (Filed as Exhibit 10.2 to the Company’s Report on Form 10-Q for the quarterly  period ended June 30, 1999 and incorporated herein by reference).                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                        |
| *10.20 |   | Severance Protection  Agreement dated March 11, 1999 between the Company and Peter R. Mathewson.  (Filed as Exhibit 10.3 to the Company’s Report on Form 10-Q for the quarterly  period ended June 30, 1999 and incorporated herein by reference).                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                        |
| *10.21 |   | Severance Protection  Agreement dated March 11, 1999 between the Company and Robert J. Cierzan.  (Filed as Exhibit 10.4 to the Company’s Report on Form 10-Q for the quarterly  period ended June 30, 1999 and incorporated herein by reference).                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                        |
| *10.22 |   | Severance Protection  Agreement dated March 11, 1999 between the Company and Michael J. Rossi.  (Filed as Exhibit 10.5 to the Company’s Report on Form 10-Q for the quarterly  period ended June 30, 1999 and incorporated herein by reference).                                                                                       |

 

47

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| 10.23  |   | 1994 Stock Option Plan  of the Company, as amended.  (Filed as  attachment A-1 in the Company’s 2000 Proxy Statement and registered on the  Company’s Form S-8 (Registration No. 333-57754) and incorporated herein by  reference). |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                               |
| 10.24  |   | Aldila, Inc. Audit  Committee Charter included as Exhibit A in the Company’s 2001 Proxy dated  April 4, 2001 and incorporated herein by reference.                                                                                            |
|   |   |                                                                                                                                                                                                                                               |
| 11.1   |   | Statement re:  Computation of Net Income (Loss) per  Common Share.                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                               |
| 21.1   |   | Subsidiaries of the  Company.                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                               |
| 23.1   |   | Independent Auditors’  Consent.                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                               |
| 99.1   |   | Carbon Fiber  Technology, LLC financial statements as of and for the years ended December  31, 2002 and 2001.                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                               |
| 99.2   |   | Certification of  Principal Executive Officer and Principal Financial Officer pursuantto 18  U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002.                                                           |

 

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* Indicates management contracts or compensatory plans or arrangementsrequired to be filed as exhibits to this Report on Form 10-K.

 

48

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