**Exhibit 99.1**

 

# **Carbon Fiber Technology, LLC**

# **Financial Statements**

 

December 31, 2003and 2002

 

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**Table of Contents**

 

 
| Independent Auditors’  Report                       |                               |
|----------------------------------------------------------|------------------------------------|
|                                                     |                               |
| Report  of Independent Registered Public Accounting Firm |                               |
|                                                     |                               |
| Financial Statements                                     |                               |
|                                                     |                               |
|                                                     | Balance Sheets                     |   |
|                                                     | Statements of Income               |   |
|                                                     | Statement of members’  equity |   |
|                                                     | Statements of cash flows           |   |
|                                                     | Notes to Financial  Statements     |   |

 

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**INDEPENDENT AUDITORS’ REPORT**

 

Boardof Managers

CarbonFiber Technology, LLC

 

Wehave audited the balance sheet of Carbon Fiber Technology, LLC (the “Company”)as of December 31, 2003 and therelated statements of income, members’ equity and cash flows for the year thenended. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audit.  The financialstatements of Carbon Fiber Technology, LLC as of December 31, 2002 and 2001, were audited by other auditors whosereport dated January 24, 2003, expressed an unqualified opinion on thosestatements.

 

Weconducted our audit in accordance with auditing standards generally accepted inthe United States of America. Those standards require that we plan and performthe audit to obtain reasonable assurance about whether the financial statementsare free of material misstatement. An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe our audit provides a reasonablebasis for our opinion.

 

Inour opinion, the 2003 financial statements referred to above present fairly, inall material respects, the financial position of the Company as of December 31, 2003 and the results ofits operations and its cash flows for the year then ended in conformity withaccounting principles generally accepted in the United States of America.

 

 
|   | /s/  Peterson & Co., LLP |   |
|--------|------------------------------|--------|
|   | Peterson & Co., LLP      |

 

SanDiego, California

January15, 2004

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

Board of Managers

Carbon Fiber Technology, LLC

 

We have audited theaccompanying balance sheet of Carbon Fiber Technology, LLC (the “Company”) asof December 31, 2002 and the related statements of income, members’ equity, andcash flows for each of the two years in the period ended December 31, 2002.These financial statements are the responsibility of the Company’s management.Our responsibility is to express an opinion on these financial statements basedon our audits.

 

We conducted our audits inaccordance with standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, such financialstatements present fairly, in all material respects, the financial position ofthe Company as of December 31, 2002 and the results of its operations and itscash flows for each of the two years in the period ended December 31, 2002 inconformity with accounting principles generally accepted in the United Statesof America.

 
| /s/ DELOITTE  & TOUCHE LLP |   |
|--------------------------------|--------|

 

San Diego, California

January 24, 2003

 

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**CARBON FIBER TECHNOLOGY, LLC**

**BALANCE SHEETS**

**December 31, 2003 and 2002**

 
| ** **                                 | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|--------------------------------------------|------------|------------|------------|------------|------------|
|                                       |       |       |       |       |       |
| ASSETS                                     |       |       |       |       |       |
|                                       |       |       |       |       |       |
| CURRENT ASSETS                             |       |       |       |       |       |
| Cash and cash equivalents                  |       | $          | 1,804,126  |       | $          | 1,654,244 |   |
| Accounts receivable                        |       | 84,777     |       | 910,058    |       |
| Inventories                                |       | 2,374,608  |       | 1,141,720  |       |
| Prepaid expenses                           |       | 6,893      |       | 4,273      |       |
|                                       |       |       |       |       |       |
| Total current assets                       |       | 4,270,404  |       | 3,710,295  |       |
|                                       |       |       |       |       |       |
| PROPERTY, PLANT AND EQUIPMENT, NET         |       | 9,727,587  |       | 10,840,572 |       |
|                                       |       |       |       |       |       |
| Total assets                               |       | $          | 13,997,991 |       | $          | 14,550,867 |   |
|                                       |       |       |       |       |       |
| LIABILITIES  AND MEMBERS’ EQUITY      |       |       |       |       |       |
|                                       |       |       |       |       |       |
| CURRENT LIABILITIES                        |       |       |       |       |       |
| Accounts payable                           |       | $          | 383,680    |       | $          | 339,590 |   |
| Accrued expenses                           |       | 221,590    |       | 348,809    |       |
| Deferred revenue                           |       | 206,196    |       | —     |       |
|                                       |       |       |       |       |       |
| Total current liabilities                  |       | 811,466    |       | 688,399    |       |
|                                       |       |       |       |       |       |
| MEMBERS’ EQUITY                       |       | 13,186,525 |       | 13,862,468 |       |
|                                       |       |       |       |       |       |
| Total liabilities and members’ equity |       | $          | 13,997,991 |       | $          | 14,550,867 |   |

 

The accompanying notes are an integral part of these financialstatements

 

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**CARBON FIBER TECHNOLOGY, LLC**

**STATEMENTSOF INCOME**

**For the Years Ended December 31, 2003, 2002 and 2001**

 
| ** **             | ** ** | **2003**  | ** ** | **2002**  | ** ** | **2001**  | ** ** |
|------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
|                   |       |      |       |      |       |      |       |
| REVENUES, NET          |       | $         | 6,157,967  |      | $          | 9,181,834 |       | $ | 8,782,902 |   |
|                   |       |      |       |      |       |      |       |
| COST OF SALES          |       | 5,857,545 |       | 8,746,948 |       | 8,425,095 |       |
|                   |       |      |       |      |       |      |       |
| GROSS PROFIT           |       | 300,422   |       | 434,886   |       | 357,807   |       |
|                   |       |      |       |      |       |      |       |
| OTHER INCOME (EXPENSE) |       | 23,635    |       | 32,070    |       | (17,312   | )          |
|                   |       |      |       |      |       |      |       |
| NET INCOME             |       | $         | 324,057    |      | $          | 466,956   |       | $ | 340,495 |   |

 

The accompanying notes are an integral part of these financialstatements

 

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**CARBON FIBER TECHNOLOGY, LLC**

**STATEMENT OF MEMBERS’ EQUITY**

**For the Years Ended December 31, 2003, 2002 and 2001**

 
| BALANCE, December 31, 2000 (unaudited) |   | $          | 15,215,949 |   |
|----------------------------------------|--------|------------|------------|--------|
|                                   |   |       |       |
| Distributions to members               |   | (380,932   | )          |
|                                   |   |       |       |
| Net income                             |   | 340,495    |       |
|                                   |   |       |       |
| BALANCE, December 31, 2001             |   | 15,175,512 |       |
|                                   |   |       |       |
| Distributions to members               |   | (1,780,000 | )          |
|                                   |   |       |       |
| Net income                             |   | 466,956    |       |
|                                   |   |       |       |
| BALANCE, December 31, 2002             |   | 13,862,468 |       |
|                                   |   |       |       |
| Distribution to members                |   | (1,000,000 | )          |
|                                   |   |       |       |
| Net income                             |   | 324,057    |       |
|                                   |   |       |       |
| BALANCE, December 31, 2003             |   | $          | 13,186,525 |   |

 

The accompanying notes are an integral part of these financialstatements

 

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**CARBON FIBER TECHNOLOGY, LLC**

**STATEMENTS OF CASH FLOWS**

**For the Years Ended December 31, 2003, 2002 and 2001**

 
| ** **                                                                         | ** ** | **2003**   | ** ** | **2002**   | ** ** | **2001**  | ** ** |
|------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|-----------|------------|
|                                                                               |       |       |       |       |       |      |       |
| CASH FLOWS FROM OPERATING ACTIVITIES                                               |       |       |       |       |       |      |       |
| Net income                                                                         |       | $          | 324,057    |       | $          | 466,956   |       | $ | 340,495 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |       |       |       |       |      |       |
| Depreciation and amortization                                                      |       | 1,156,436  |       | 1,152,632  |       | 1,136,179 |       |
| (Gain) Loss on sale of equipment                                                   |       | —     |       | (2,551     | )          | 65,963    |       |
| Changes in operating assets and  liabilities:                                      |       |       |       |       |       |      |       |
| Accounts receivable                                                                |       | 825,281    |       | 199,131    |       | (252,724  | )          |
| Inventories                                                                        |       | (1,232,888 | )          | 829,388    |       | (816,217  | )          |
| Prepaid expenses                                                                   |       | (2,620     | )          | (3,190     | )          | (41       | )          |
| Accounts payable                                                                   |       | 44,090     |       | 99,182     |       | (82,137   | )          |
| Accrued expenses                                                                   |       | (127,219   | )          | 47,111     |       | 18,094    |       |
| Deferred revenue                                                                   |       | 206,196    |       | —     |       | —    |       |
|                                                                               |       |       |       |       |       |      |       |
| Net cash provided by operating activities                                          |       | 1,193,333  |       | 2,788,659  |       | 409,612   |       |
|                                                                               |       |       |       |       |       |      |       |
| CASH FLOWS FROM INVESTING ACTIVITIES                                               |       |       |       |       |       |      |       |
| Purchase of property, plant and equipment                                          |       | (43,451    | )          | (109,070   | )          | (192,936  | )          |
| Proceeds from disposal of property                                                 |       | —     |       | 3,036      |       |      |       |
|                                                                               |       |       |       |       |       |      |       |
| Net cash used in investing activities                                              |       | (43,451    | )          | (106,034   | )          | (192,936  | )          |
|                                                                               |       |       |       |       |       |      |       |
| CASH FLOWS FROM FINANCING ACTIVITIES                                               |       |       |       |       |       |      |       |
| Distributions to members                                                           |       | (1,000,000 | )          | (1,780,000 | )          | (380,932  | )          |
|                                                                               |       |       |       |       |       |      |       |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                              |       | 149,882    |       | 902,625    |       | (164,256  | )          |
|                                                                               |       |       |       |       |       |      |       |
| CASH AND CASH EQUIVALENTS, BEGINNING OF  YEAR                                      |       | 1,654,244  |       | 751,619    |       | 915,875   |       |
|                                                                               |       |       |       |       |       |      |       |
| CASH AND CASH EQUIVALENTS, END OF YEAR                                             |       | $          | 1,804,126  |       | $          | 1,654,244 |       | $ | 751,619 |   |

 

The accompanying notes are an integral part of these financialstatements

 

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CARBON FIBER TECHNOLOGY, LLC

NOTESTO FINANCIAL STATEMENTS

 

**Note 1 – Organization and Summary ofSignificant Accounting Policies**

 

***Nature of Operations***

 

CarbonFiber Technology, LLC (a Delaware limited liability company) (the “Company”)manufactures carbon fiber for use in various applications, including aerospace,sporting goods, and other commercial applications. The Company, which waspreviously a wholly owned subsidiary of Aldila Materials Technology Corporation(“AMTC”), was formed on October 29, 1999 as a joint venture between AMTC andSGL Carbon Fibers and Composites, Inc. (“SGL”). AMTC contributed net assetswith a book value of $13,275,877. SGL purchased a 50% interest in AMTC’s carbonfiber manufacturing operations with a net book value of $6,637,939 for$6,971,934 in cash. Accordingly, the excess of consideration paid by SGL overthe net book value of the assets acquired of the carbon fiber manufacturingoperations was recorded as a step-up in basis and is being depreciated over theaverage remaining useful life of the manufacturing equipment. Based on theirrespective ownership interest of 50% in the joint venture, profit and loss areallocated equally to each member. The Amended and Restated LLC Agreementprovides that the Company is to continue until December 31, 2099 unless it isdissolved earlier, its affairs are wound up, and final liquidatingdistributions are made pursuant to the Amended and Restated LLC Agreement.

 

***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 recorded amounts of assets, liabilities,revenues, expenses, and related disclosures are affected by such estimates andassumptions, and actual results could differ from those estimates andassumptions.

 

***Cash and Cash Equivalents***

 

TheCompany considers all highly liquid investments purchased with an originalmaturity of three months or less to be cash equivalents. The Company has nothistorically experienced losses on such investments.

 

***Accounts Receivable***

 

Thejoint venture has been established to provide for the carbon fiber needs of therespective members of the Company. Sales to third parties are permitted onlyafter the carbon fiber requirements of each member are met. There have been nosignificant sales to third parties for the years ended December 31, 2003 and 2002. Therefore, an allowance for bad debthas not been made.

 

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***Inventories***

 

Inventoriesare stated at the lower of first-in, first-out (FIFO) cost or marketvalue.  Significantly all operating costsof the Company are directly related to the manufacturing process, and are includedin the cost of inventory.

 

***Property, Plant and Equipment***

 

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

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

 

***Impairment or Disposal 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 of assets to be held and used is measured bya comparison of the carrying amount of an asset to future undiscounted net cashflows expected to be generated by the asset. If such assets are considered tobe impaired, the impairment to be recognized is measured by the amount by whichthe carrying amount of the assets exceeds the fair value of the assets. Assetsto be disposed of are reported at the lower of the carrying amount or fairvalue less costs to sell.  No assets areconsidered to be impaired as of December31, 2003 and 2002.

 

***Revenue Recognition***

 

TheCompany recognizes revenue when product is shipped. In accordance with theAmended and Restated LLC Agreement and subject to modifications made by themembers, the Company bills the members for fixed costs incurred on a monthlybasis and bills variable costs at an agreed-upon transfer price for the periodas carbon fiber is shipped. The billings reflect an approximate 5% gross profitmargin to the Company.  Periodically, theCompany bills its customers for fixed costs associated with production prior tothe shipment of the product.  As the Companyhas not completed 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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***Supplier Concentrations***

 

For the year ended December31, 2003, 2002 and 2001, the Company had one major supplier representingapproximately one hundred percent (100%) of purchases of precursor.  At December 31, 2003, the amount due tothese suppliers included in accounts payable was $223,767.

 

***Income Taxes***

 

Asa limited liability company, the Company is not subject to federal and stateincome taxes. The taxable income or loss of the Company is included in theincome tax returns of its members. Accordingly, the Company has made noprovision for income taxes.

 

***Fair Value of Financial 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.

 

#### ***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– Accounts Receivable**

 

Thecomposition of accounts receivable is summarized as follows:

 
| ** **                   | ** ** | **December 31,** | ** ** |
|------------------------------|------------|------------------|------------|
| ** **                   | ** ** | **2003**         | ** ** | **2002** | ** ** |
|                         |       |             |       |   |   |
| Billed accounts receivable   |       | $                | 84,777     |   | $ | 655,620 |   |
| Unbilled accounts receivable |       | —           |       | 254,438 |   |
|                         |       |             |       |   |   |
| Accounts receivable          |       | $                | 84,777     |   | $ | 910,058 |   |

 

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**Note 3– Inventories**

 

Thecomposition of inventory is summarized as follows:

 
| ** **      | ** ** | **December 31,** | ** ** |
|-----------------|------------|------------------|------------|
| ** **      | ** ** | **2003**         | ** ** | **2002** | ** ** |
|            |       |             |       |   |   |
| Raw materials   |       | $                | 200,437    |   | $ | 180,401 |   |
| Work in process |       | 102,979          |       | 402,827 |   |
| Finished goods  |       | 2,071,192        |       | 558,492 |   |
|            |       |             |       |   |   |
| Inventories     |       | $                | 2,374,608  |   | $ | 1,141,720 |   |

 

**Note 4– Property, Plant andEquipment**

 

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

 
| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|------------------|------------|
| ** **                                      | ** ** | **2003**         | ** ** | **2002** | ** ** |
|                                            |       |             |       |   |   |
| Land                                            |       | $                | 140,142    |   | $ | 140,142 |   |
| Building                                        |       | 5,850,019        |       | 5,850,019 |   |
| Manufacturing equipment                         |       | 8,352,930        |       | 8,351,886 |   |
| Office furniture and equipment                  |       | 49,287           |       | 54,921 |   |
| Construction in progress                        |       | 42,409           |       | — |   |
|                                            |       |             |       |   |   |
|                                            |       | 14,434,787       |       | 14,396,968 |   |
| Less accumulated depreciation and  amortization |       | (4,707,200       | )          | (3,556,396 | ) |
|                                            |       |             |       |   |   |
| Property, plant and equipment                   |       | $                | 9,727,587  |   | $ | 10,840,572 |   |

 

Depreciationand amortization expense for the years ended December 31, 2003, 2002 and 2001 was $1,156,436, $1,152,632an $1,136,179, respectively.

 

10

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**Note 5– Accrued Expenses**

 

Thecomposition of accrued expenses is summarized as follows:

 
| ** **       | ** ** | **December 31,** | ** ** |
|------------------|------------|------------------|------------|
| ** **       | ** ** | **2003**         | ** ** | **2002** | ** ** |
|             |       |             |       |   |   |
| Salaries         |       | $                | 101,726    |   | $ | 115,819 |   |
| Accrued bonuses  |       | 97,810           |       | 205,170 |   |
| Other            |       | 22,054           |       | 27,820 |   |
|             |       |             |       |   |   |
| Accrued expenses |       | $                | 221,590    |   | $ | 348,809 |   |

 

# **Note6** - Concentration of Credit Risk

 

AtDecember 31, 2003, the Companyhas accounts in excess of federally insured limits with one financialinstitution.  The Company places cashwith a high-credit, quality financial institution and believes no significantcredit risk exists.

 

**Note 7– Related Party Transactions**

 

The joint venture has been established to providefor the carbon fiber needs of the respective members.  Substantially all sales for the years ended December 31, 2003 and 2002 were made to the members, SGL and AldilaGolf Corp., an affiliate of AMTC. Substantially all accounts receivable at December 31, 2003 and2002 are due from SGL and Aldila GolfCorp.  Administrative services charged byAldila Golf Corp. to the Company were $18,292, $18,000 and $30,000 for the years ended December 31, 2003, 2002 and 2001.

 

**Note 8– Employee Benefit Plan**

 

Effective January 1, 2000, the Company adopted the CarbonFiber Technology, LLC 401(k) Savings Plan (the “Plan”) for employees of theCompany.  This defined contribution planallows employees 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 vest ratably over four years.  The Company’s contributions amounted to $5,341,$6,458 and $7,000 for the yearsended December 31, 2003, 2002and 2001, respectively.

 

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