**Exhibit99.1**

 

**CARBONFIBER TECHNOLOGY, LLC****FINANCIALSTATEMENTS**

 

DECEMBER 31, 2004 AND 2003

 

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**TABLE OF CONTENTS**

 
| INDEPENDENT AUDITORS’  REPORT                       |     |     |
|----------------------------------------------------------|----------|----------|
|                                                     |     |     |
| REPORT  OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |     |     |
|                                                     |     |     |
| BALANCE  SHEETS                                          |     |     |
|                                                     |     |     |
| STATEMENTS  OF INCOME                                    |     |     |
|                                                     |     |     |
| STATEMENT OF  MEMBERS’ EQUITY                       | * * | * * |
|                                                     | * * | * * |
| STATEMENTS OF CASH FLOWS                                 | * * | * * |
|                                                     | * * | * * |
| NOTES TO FINANCIAL  STATEMENTS                           |     |     |

 

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**INDEPENDENTAUDITORS’ REPORT**

Board of Managers 

Carbon Fiber Technology, LLC

 

We have audited the accompanying balance sheets of Carbon FiberTechnology, LLC (the “Company”) as of December 31, 2004 and 2003, and therelated statements of operations, members’ equity and cash flows for the yearsthen ended.  These financial statementsare the responsibility of the Company’s management.  Our responsibility is to express an opinion onthese financial statements based on our audits.  The financial statements of Carbon FiberTechnology, LLC as of December 31, 2002, were audited by other auditorswhose report dated January 24, 2003, expressed an unqualified opinion onthose statements.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America.  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion. 

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the financial position of Carbon FiberTechnology, LLC as of December 31, 2004 and 2003, and the results of itsoperations and its cash flows for the years then ended in conformity withaccounting principles generally accepted in the United States of America.

 
|                  | /s/ PETERSON & Co., LLP |   |
|-----------------------|----------------------------------|--------|
|                  | PETERSON & Co., LLP     |
| San Diego, California |                             |
| January 14, 2005 |                             |

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING****FIRM**

 

Boardof Managers

CarbonFiber Technology, LLC

 

Wehave audited the accompanying statements of income, changes in members’ equity,and cash flows of Carbon Fiber Technology, LLC (the “Company”) for the yearended December 31, 2002.  Thesefinancial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion onthese financial statements based on our audit.

 

Weconducted our audit in accordance with standards of the Public CompanyAccounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audit provides areasonable basis for our opinion.

 

Inour opinion, such financial statements present fairly, in all material respects,the results of the Company’s operations and its cash flows for the year ended December 31,2002 in conformity with accounting principles generally accepted in the UnitedStates of America.

 

/s/ DELOITTE & TOUCHE LLP

 

San Diego, California

January 24, 2003

 

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**CARBONFIBER TECHNOLOGY, LLC**

**BALANCE SHEETS**

**December 31,2004 and 2003**

 
| ** **                                 | ** ** | **2004**   | ** **       | **2003**   | ** ** |
|--------------------------------------------|------------|------------|------------------|------------|------------|
| ASSETS                                     | ** ** | ** ** | ** **       | ** ** | ** ** |
| CURRENT ASSETS                             |       |       |             |       |       |
| Cash and cash equivalents                  |       | $          | 565,797          |       | $          | 1,804,126 | * * |
| Accounts receivable                        |       | 1,700,149  |             | 84,777     |       |
| Inventories                                |       | 953,388    |             | 2,374,608  |       |
| Prepaid expenses                           |       | 110,831    |             | 6,893      |       |
| Total current assets                       |       | 3,330,165  |             | 4,270,404  |       |
|                                       |       |       |             |       |       |
| PROPERTY, PLANT AND EQUIPMENT, NET         |       | 8,573,324  |             | 9,727,587  |       |
|                                       |       |       |             |       |       |
| Total assets                               |       | $          | 11,903,489       |       | $          | 13,997,991 |   |
| LIABILITIES  AND MEMBERS’ EQUITY      |       |       |             |       |       |
|                                       |       |       |             |       |       |
| CURRENT LIABILITIES                        |       |       |             |       |       |
| Accounts payable                           |       | $          | 946,449          |       | $          | 383,680 |   |
| Accrued expenses                           |       | 238,638    |             | 221,590    |       |
| Deferred revenue                           |       | —     |             | 206,196    |       |
| Total current liabilities                  |       | 1,185,087  |             | 811,466    |       |
|                                       |       |       |             |       |       |
| MEMBERS’ EQUITY                       |       | 10,718,402 |             | 13,186,525 |       |
|                                       |       |       |             |       |       |
| Total liabilities and members’ equity |       | $          |  11,903,489 |       | $          |  13,997,991 |   |

 

The accompanying notes are anintegral part of these financial statements

 

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**CARBONFIBER TECHNOLOGY, LLC**

**STATEMENTS OF INCOME**

**For theYears Ended December 31, 2004, 2003 and 2002**

 
| ** **             |   | **2004**   |       | **2003**   |   | **2002**   | ** **   |
|------------------------|--------|------------|------------|------------|--------|------------|--------------|
| ** **             |   | ** ** |       | ** ** |   | ** ** | ** **   |
| REVENUES, NET          |   | $          | 11,970,500 |       | $      | 6,157,967  |         | $ | 9,181,834 | *** *** |
|                   |   |       |       |       |   |       | *** *** |
| COST OF SALES          |   | 11,367,128 |       | 5,857,545  |   | 8,746,948  | ** **   |
|                   |   |       |       |       |   |       | ** **   |
| GROSS PROFIT           |   | 603,372    |       | 300,422    |   | 434,886    | ** **   |
|                   |   |       |       |       |   |       | ** **   |
| OTHER INCOME (EXPENSE) |   | (71,495    | )          | 23,635     |   | 32,070     | ** **   |
|                   |   |       |       |       |   |       | ** **   |
| NET INCOME             |   | $          | 531,877    |       | $      | 324,057    |         | $ | 466,956 | ** ** |

 

The accompanying notes are an integral part of these financialstatements

 

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**CARBON FIBERTECHNOLOGY, LLC**

**STATEMENT OF CHANGES IN MEMBERS’ EQUITY**

**For theYears Ended December 31, 2004, 2003 and 2002**

 
| BALANCE, December 31, 2001 |   | $          | 15,175,512 | * * |
|---------------------------------|--------|------------|------------|----------|
|                            |   |       | * *   |
| Distributions to members        |   | (1,780,000 | )          |
|                            |   |       |       |
| Net income                      |   | 466,956    |       |
|                            |   |       |       |
| BALANCE, December 31, 2002 |   | 13,862,468 |       |
|                            |   |       |       |
| Distributions to members        |   | (1,000,000 | )          |
|                            |   |       |       |
| Net income                      |   | 324,057    | * *   |
|                            |   |       | * *   |
| BALANCE, December 31, 2003 |   | 13,186,525 |       |
|                            |   |       |       |
| Distribution to members         |   | (3,000,000 | )          |
|                            |   |       |       |
| Net income                      |   | 531,877    |       |
|                            |   |       |       |
| BALANCE, December 31, 2004 |   | $          | 10,718,402 |     |

 

The accompanying notes are an integral part of these financial statements

 

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**CARBONFIBER TECHNOLOGY, LLC**

**STATEMENTS OF CASH FLOWS**

**For theYears Ended December 31, 2004, 2003 and 2002**

 
| ** **                                                                         | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| CASH FLOWS FROM OPERATING ACTIVITIES                                               |       |       |       |       |       |       | ** ** |
| Net income                                                                         |       | $          | 531,877    |       | $          | 324,057    |       | $ | 466,956 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |       |       |       |       |       |       |
| Depreciation and amortization                                                      |       | 1,152,218  |       | 1,156,436  |       | 1,152,632  |       |
| (Gain) Loss on sale of equipment                                                   |       | 79,170     |       | —     |       | (2,551     | )          |
| Changes in operating assets and liabilities:                                       |       |       |       |       |       |       |       |
| Accounts receivable                                                                |       | (1,615,372 | )          | 825,281    |       | 199,131    |       |
| Inventories                                                                        |       | 1,421,220  |       | (1,232,888 | )          | 829,388    |       |
| Prepaid expenses                                                                   |       | (103,938   | )          | (2,620     | )          | (3,190     | )          |
| Accounts payable                                                                   |       | 562,769    |       | 44,090     |       | 99,182     |       |
| Accrued expenses                                                                   |       | 17,048     |       | (127,219   | )          | 47,111     |       |
| Deferred revenue                                                                   |       | (206,196   | )          | 206,196    |       | —     |       |
|                                                                               |       |       |       |       |       |       |       |
| Net cash provided by operating activities                                          |       | 1,838,796  |       | 1,193,333  |       | 2,788,659  |       |
|                                                                               |       |       |       |       |       |       |       |
| CASH FLOWS FROM INVESTING ACTIVITIES                                               |       |       |       |       |       |       |       |
| Purchase of property, plant and equipment                                          |       | (102,125   | )          | (43,451    | )          | (109,070   | )          |
| Proceeds from disposal of property                                                 |       | 25,000     |       | —     |       | 3,036      |       |
|                                                                               |       |       |       |       |       |       |       |
| Net cash used in investing activities                                              |       | (77,125    | )          | (43,451    | )          | (106,034   | )          |
|                                                                               |       |       |       |       |       |       |       |
| CASH FLOWS FROM FINANCING ACTIVITIES                                               |       |       |       |       |       |       |       |
| Distributions to members                                                           |       | (3,000,000 | )          | (1,000,000 | )          | (1,780,000 | )          |
|                                                                               |       |       |       |       |       |       |       |
| NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                               |       | (1,238,329 | )          | 149,882    |       | 902,625    |       |
|                                                                               |       |       |       |       |       |       |       |
| CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                       |       | 1,804,126  |       | 1,654,244  |       | 751,619    |       |
|                                                                               |       |       |       |       |       |       |       |
| CASH AND CASH EQUIVALENTS, END OF YEAR                                             |       | $          | 565,797    |       | $          | 1,804,126  |       | $ | 1,654,244 |   |

 

The accompanying notes are an integral part of these financialstatements

 

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**CARBON FIBER TECHNOLOGY, LLC**

**NOTES TO FINANCIALSTATEMENTS**

 

**NOTE 1 –****ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

***Nature of Operations***

 

CarbonFiber Technology, LLC (a Delaware limited liability company) (the “Company”) manufacturescarbon fiber for use in various applications, including aerospace, sportinggoods, and other commercial applications.  The Company, which was previously a whollyowned subsidiary of Aldila Materials Technology Corporation (“AMTC”), wasformed on October 29, 1999 as a joint venture between AMTC and SGL CarbonFibers and Composites, Inc. (“SGL”).  AMTC contributed net assets with a book valueof $13,275,877.  SGL purchased a 50%**interest in AMTC’s carbon fiber manufacturing operations with a net bookvalue of $6,637,939 for $6,971,934 in cash.  Accordingly, the excess of consideration paidby SGL over the net book value of the assets acquired of the carbon fibermanufacturing operations was recorded as a step-up in basis and is beingdepreciated over the average remaining useful life of the manufacturingequipment.  Based on their respectiveownership interest of 50% in the joint venture, profit and loss are allocatedequally to each member.  The Amended andRestated LLC Agreement provides that the Company is to continue until December 31,2099 unless it is dissolved earlier, its affairs are wound up, and finalliquidating distributions are made pursuant to the Amended and Restated LLCAgreement.

 

***Use of Estimates***

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions.  The recordedamounts of assets, liabilities, revenues, expenses, and related disclosures areaffected by such estimates and assumptions, and actual results could differfrom those estimates and assumptions.

 

***Cash and CashEquivalents***

 

TheCompany considers all highly liquid investments purchased with an originalmaturity of three months or less to be cash equivalents.  The Company has not historically experiencedlosses on such investments.

 

***Accounts Receivable***

 

TheCompany has been established to provide for the carbon fiber needs of therespective members.  Sales to thirdparties are permitted only after the carbon fiber requirements of each memberare met.  There have been no significantsales to third parties for the years ended December 31, 2004 and 2003.  Therefore, an allowance for bad debt has notbeen made.

 

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***Inventories***

 

Inventoriesare stated at the lower of first-in, first-out (FIFO) cost or market value.  Significantly all operating costs of theCompany are directly related to the manufacturing process, and are included inthe cost of inventory.

 

***Property, Plant and Equipment***

 

Property,plant, and equipment are stated at cost.  Depreciation is provided on a straight-linebasis over the estimated useful lives of the assets as follows:

 
| ** **                     | ** ** | **Years**  | ** ** |
|--------------------------------|------------|------------|------------|
| ** **                     | ** ** | ** ** | ** ** |
| Building                       |       | 39         |       |
| Manufacturing equipment        | ** ** | 5-10       |       |
| Office furniture and equipment | ** ** | 3-10       |       |

 

***Impairment orDisposal of Long-Lived Assets***

 

TheCompany evaluates its long-lived assets for impairment whenever events orchanges in circumstances indicate that the carrying amount of such assets maynot be recoverable.  Recoverability ofassets to be held and used is measured by a comparison of the carrying amountof an asset to future undiscounted net cash flows expected to be generated bythe asset.  If such assets are consideredto be impaired, the impairment to be recognized is measured by the amount bywhich the carrying amount of the assets exceeds the fair value of the assets.  Assets to be disposed of are reported at thelower of the carrying amount or fair value less costs to sell.  No assets are considered to be impaired as of December 31,2004 and 2003.

 

***Revenue Recognition***

 

TheCompany recognizes revenue when product is shipped.  In accordance with the Amended and RestatedLLC Agreement and subject to modifications made by the members, the Companybills the members for fixed costs incurred on a monthly basis and billsvariable costs at an agreed-upon transfer price for the period as carbon fiberis shipped.  The billings reflect anapproximate 5% gross profit margin to the Company.  Periodically, the Company bills its customersfor fixed costs associated with production prior to the shipment of theproduct.  As the Company has notcompleted the earning process, such amounts received for fixed cost billingspaid in advance of shipment of the carbon fiber are recorded as deferredrevenue.

 

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***SupplierConcentrations***

 

TheCompany has one major supplier representing approximately one hundred percent(100%) of purchases of precursor which is an essential raw material.  Purchases of precursor for the years ended December 31,2004, 2003 and 2002 amounted to $4,650,681, $2,940,652 and $3,593,044,respectively.

 

***Income******Taxes***

 

Asa limited liability company, the Company is not subject to federal and stateincome taxes.  The taxable income or lossof the Company is included in the income tax returns of its members.  Accordingly, the Company has made no provisionfor income taxes.

 

***Fair Value ofFinancial Instruments***

 

Thecarrying amount of cash and cash equivalents, trade accounts receivable andpayable and certain accrued expenses in the financial statements approximatestheir fair value due to the short maturity of those investments.

 

***Shipping andHandling Costs***

 

Shippingand handling costs are classified as cost of sales.

 

***Reclassifications***

 

Certainprior year amounts have been reclassified to conform to the current year’spresentation.  These changes had noimpact on previously reported results of operations or shareholders’ equity.

 

**NOTE 2 – INVENTORIES**

 

Thecomposition of inventory is summarized as follows:

 
| ** **      | ** ** | **December 31,** | ** ** |
|-----------------|------------|-----------------------|------------|
| ** **      | ** ** | **2004**              | ** ** | **2003** | ** ** |
| ** **      | ** ** | ** **            | ** ** | ** ** | ** ** |
| Raw materials   | ** ** | $                     | 749,649    |   | $ | 200,437 | ** ** |
| Work in process | ** ** | 35,452                |       | 102,979 | ** ** |
| Finished goods  | ** ** | 168,287               |       | 2,071,192 | ** ** |
|            | ** ** |                  |       |   | ** ** |
| Inventories     | ** ** | $                     | 953,388    |   | $ | 2,374,608 | ** ** |

 

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**NOTE 3 – PROPERTY, PLANT****AND****EQUIPMENT**

 

Thecomposition of property, plant and equipment is summarized as follows:

 
| ** **                                     | ** ** | **December 31,** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **2004**              | ** ** | **2003** | ** ** |
| ** **                                     | ** ** | ** **            | ** ** | ** ** | ** ** |
| Land                                           |       | $                     | 140,142    |   | $ | 140,142 |   |
| Building                                       |       | 5,875,818             |       | 5,850,019 | * * |
| Manufacturing equipment                        |       | 8,245,372             |       | 8,352,930 |   |
| Office furniture and equipment                 | * *   | 54,249                |       | 49,287 |   |
| Construction in progress                       |       | 58,986                |       | 42,409 |   |
| * *                                       | * *   | 14,374,567            |       | 14,434,787 |   |
| Less accumulated depreciation and amortization |       | (5,801,243            | )          | (4,707,200 | ) |
|                                           |       |                  |       |   |   |
| Property, plant and equipment                  |       | $                     | 8,573,324  |   | $ | 9,727,587 |   |

 

Depreciationand amortization expense for the years ended December 31, 2004, 2003 and2002 was $1,152,218, $1,156,436 and $1,152,632,**respectively.

 

**NOTE 4 – ACCRUED EXPENSES**

 

The composition of accrued expenses is summarized as follows: 
| ** **       | ** ** | **December 31,** |    |
|------------------|------------|-----------------------|---------|
| ** **       | ** ** | **2004**              |    | **2003** |   |
| ** **       | ** ** | ** **            |    | ** ** |   |
| Salaries         |       | $                     | 111,543 |   | $ | 101,726 |   |
| Accrued bonuses  |       | 106,918               |    | 97,810 |   |
| Other            |       | 20,177                |    | 22,054 |   |
|             |       |                  |    |   |   |
| Accrued expenses |       | $                     | 238,638 |   | $ | 221,590 |   |

 

**NOTE 5 – CONCENTRATION OF CREDIT****RISK**

 

TheCompany maintains some of its cash in bank deposit accounts, which may beuninsured or exceed the federally insured limits.  No losses have been experienced related tosuch accounts.  The Company believes itplaces its cash with quality financial institutions and is not exposed to anysignificant concentration of credit risk on cash.

 

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**NOTE 6 – RELATED****PARTY TRANSACTIONS**

 

TheCompany has been established to provide for the carbon fiber needs of therespective members.  Sales to themembers, SGL and Aldila Golf Corp., an affiliate of AMTC for the year ended December 31,2003 were $2,929,031 and $3,204,064, respectively.  Sales to SGL and Aldila Golf Corp. for theyear ended December 31, 2004 were $7,002,143 and $4,726,319, respectively. Accounts receivable due from SGL andAldila Golf Corp. at December 31, 2003 are $54,272 and $0, respectively.  Accounts receivable due from SGL and AldilaGolf Corp. at December 31, 2004 are $1,082,612 and $413,837, respectively.

 

Administrativeservices charged by Aldila Golf Corp. to the Company were $18,292 for each ofthe years ended December 31, 2004, 2003 and 2002.

 

Duringthe year the Company incurred a loss on the sale of machinery to SGL of $79,170.

 

**NOTE****7 – EMPLOYEE BENEFIT PLAN**

 

EffectiveJanuary 1, 2000, the Company adopted the Carbon Fiber Technology, LLC401(k) Savings Plan (the “Plan”) for employees of the Company.  This defined contribution plan allowsemployees who satisfy the age and service requirements of the Plan tocontribute up to 20% of pre-tax wages, limited to the maximum amount permittedby federal law.  The Company matches 25%of the first 4% of employee contributions.  The Company’s matching contributions vestimmediately for employees with four or more years of service.  For employees with less than four years ofservice, the Company’s matching contributions vest 25% per year.  The Company’s contributions amounted to $5,254, $5,341 and $6,458 for the years ended December 31,2004, 2003 and 2002, respectively.

 

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