**Exhibit99.1**

 

 

**INDEPENDENTAUDITORS’ REPORT**

 

Boardof Managers

CarbonFiber Technology, LLC

 

Wehave audited the accompanying balance sheets of Carbon Fiber Technology, LLC(the ”Company”) as of December 31, 2002 and 2001 and the relatedstatements of income, members’ equity and cash flows for the years thenended.  These financial statements arethe responsibility of the Company’s management.  Our responsibility is to express an opinion on these financialstatements based on our audits.

 

Weconducted our audits in accordance with auditing standards generally acceptedin the United States of America.  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe our auditsprovide a reasonable basis for our opinion.

 

In ouropinion, such financial statements present fairly, in all material respects,the financial position of the Company as of December 31, 2002 and 2001 and theresults of its operations and its cash flows for the years then ended inconformity with accounting principles generally accepted in the United Statesof America.

 

 
| /s/ DELOITTE & TOUCHE LLP |   |
|-------------------------------|--------|
| January 24, 2003              |

 

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**CARBON FIBER TECHNOLOGY, LLC**

 

**BALANCE SHEETS**

**DECEMBER 31, 2002 AND 2001**

 
|                                     |   | **2002**   |       | **2001**   |       |
|------------------------------------------|--------|------------|------------|------------|------------|
| **ASSETS**                               |   |       |       |       |       |
|                                     |   |       |       |       |       |
| CURRENT  ASSETS:                         |   |       |       |       |       |
| Cash                                     |   | $          | 1,654,244  |       | $          | 751,619 |   |
| Accounts  receivable                     |   | 910,058    |       | 1,109,189  |       |
| Inventories                              |   | 1,141,720  |       | 1,971,108  |       |
| Prepaid  expenses                        |   | 4,273      |       | 1,083      |       |
|                                     |   |       |       |       |       |
| Total  current assets                    |   | 3,710,295  |       | 3,832,999  |       |
|                                     |   |       |       |       |       |
| PROPERTY,  PLANT AND EQUIPMENT—Net  |   | 10,840,572 |       | 11,884,619 |       |
|                                     |   |       |       |       |       |
| TOTAL                                    |   | $          | 14,550,867 |       | $          | 15,717,618 |   |
|                                     |   |       |       |       |       |
| **LIABILITIES AND MEMBERS’ EQUITY** |   |       | ** ** |       | ** ** |
|                                     |   |       |       |       |       |
| CURRENT  LIABILITIES:                    |   |       |       |       |       |
| Accounts  payable                        |   | $          | 339,590    |       | $          | 240,408 |   |
| Accrued  expenses                        |   | 348,809    |       | 301,698    |       |
|                                     |   |       |       |       |       |
| Total  current liabilities               |   | 688,399    |       | 542,106    |       |
|                                     |   |       |       |       |       |
| MEMBERS’  EQUITY                    |   | 13,862,468 |       | 15,175,512 |       |
|                                     |   |       |       |       |       |
| TOTAL                                    |   | $          | 14,550,867 |       | $          | 15,717,618 |   |

 

Seenotes to financial statements.

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**CARBON FIBER TECHNOLOGY, LLC**

 

**STATEMENTS OF INCOME**

**YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000**

 
|                             |   | **2002**  |      | **2001**  |   | **2000**        |   |
|----------------------------------|--------|-----------|-----------|-----------|--------|-----------------|--------|
|                             |   |      |      |      |   | **(Unaudited)** |   |
| SALES                            |   | $         | 9,181,834 |      | $      | 8,782,902       |   | $ | 10,417,482 |   |
|                             |   |      |      |      |   |            |   |
| COST  OF SALES                   |   | 8,746,948 |      | 8,425,095 |   | 9,933,966       |   |
|                             |   |      |      |      |   |            |   |
| GROSS  PROFIT                    |   | 434,886   |      | 357,807   |   | 483,516         |   |
|                             |   |      |      |      |   |            |   |
| OTHER  INCOME (EXPENSE)—Net |   | 32,070    |      | (17,312   | )      | 42,685          |   |
|                             |   |      |      |      |   |            |   |
| NET  INCOME                      |   | $         | 466,956   |      | $      | 340,495         |   | $ | 526,201 |   |

 

See notes to financial statements.

 

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**CARBON FIBER TECHNOLOGY, LLC**

 

**STATEMENTS OF MEMBERS’ EQUITY**

**YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000**

 
| BALANCE, JANUARY 1, 2000 (Unaudited)    |   | $          | 14,689,748 |   |
|-----------------------------------------|--------|------------|------------|--------|
|                                    |   |       |       |
| Net  income (Unaudited)                 |   | 526,201    |       |
|                                    |   |       |       |
| BALANCE,  DECEMBER 31, 2000 (Unaudited) |   | 15,215,949 |       |
|                                    |   |       |       |
| Distribution  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 |   |

 

See notes to financial statements.

 

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**CARBON FIBER TECHNOLOGY, LLC**

 

**STATEMENTS OF CASH FLOWS**

**YEARS ENDED DECEMBER 31, 2002, 2001 and 2000**

 
|                                                                               |   | **2002**   |      | **2001**  |   | **2000**        |   |
|------------------------------------------------------------------------------------|--------|------------|-----------|-----------|--------|-----------------|--------|
|                                                                               |   |       |      |      |   | **(Unaudited)** |   |
| CASH  FLOWS FROM OPERATING ACTIVITIES:                                             |   |       |      |      |   |            |   |
| Net  income                                                                        |   | $          | 466,956   |      | $      | 340,495         |   | $ | 526,201 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |   |       |      |      |   |            |   |
| Depreciation  and amortization                                                     |   | 1,152,632  |      | 1,136,179 |   | 1,107,316       |   |
| (Gain)  loss on disposal of fixed assets                                           |   | (2,551     | )         | 65,963    |   | 2,078           |   |
| Changes  in assets and liabilities:                                                |   |       |      |      |   |            |   |
| Accounts  receivable                                                               |   | 199,131    |      | (252,724  | )      | (386,875        | )      |
| Inventories                                                                        |   | 829,388    |      | (816,217  | )      | (450,662        | )      |
| Prepaid  expenses                                                                  |   | (3,190     | )         | (41       | )      | 27,560          |   |
| Deposits                                                                           |   |       |      |      |   | 50,000          |   |
| Accounts  payable                                                                  |   | 99,182     |      | (82,137   | )      | (129,825        | )      |
| Accrued  expenses                                                                  |   | 47,111     |      | 18,094    |   | 211,886         |   |
|                                                                               |   |       |      |      |   |            |   |
| Net  cash provided by operating activities                                         |   | 2,788,659  |      | 409,612   |   | 957,679         |   |
|                                                                               |   |       |      |      |   |            |   |
| CASH  FLOWS FROM INVESTING ACTIVITIES:                                             |   |       |      |      |   |            |   |
| Purchase  of property, plant and equipment                                         |   | (109,070   | )         | (192,936  | )      | (441,161        | )      |
| Proceeds  from property disposal                                                   |   | 3,036      |      |      |   |            |   |
|                                                                               |   |       |      |      |   |            |   |
| Net  cash used in investing activities                                             |   | (106,034   | )         | (192,936  | )      | (441,161        | )      |
|                                                                               |   |       |      |      |   |            |   |
| CASH  FLOWS FROM FINANCING ACTIVITIES                                              |   |       |      |      |   |            |   |
| Distributions  to members                                                          |   | (1,780,000 | )         | (380,932  | )      |            |   |
|                                                                               |   |       |      |      |   |            |   |
| NET  INCREASE (DECREASE) IN CASH                                                   |   | 902,625    |      | (164,256  | )      | 516,518         |   |
|                                                                               |   |       |      |      |   |            |   |
| CASH,  BEGINNING OF YEAR                                                           |   | 751,619    |      | 915,875   |   | 399,357         |   |
|                                                                               |   |       |      |      |   |            |   |
| CASH,  END OF YEAR                                                                 |   | $          | 1,654,244 |      | $      | 751,619         |   | $ | 915,875 |   |

 

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**CARBON FIBER TECHNOLOGY, LLC**

 

**NOTES TO FINANCIAL STATEMENTS**

**YEARS ENDED DECEMBER 31,2002, 2001 AND 2000**

 

**1.**                      SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES

 

***Organization—***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 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 value of $13,275,877.  SGL purchased a 50% interest in AMTC’scarbon fiber manufacturing operations with a net book value of $6,637,939 for$6,971,934 in cash.  Accordingly, theexcess of consideration paid by SGL over the net book value of the assetsacquired of the carbon fiber manufacturing operations was recorded as a step-upin basis and is being depreciated over the average remaining useful life of themanufacturing equipment.  Based on theirrespective ownership interest of 50% in the joint venture, profit and loss areallocated equally to each member.  TheAmended and Restated LLC Agreement provides that the Company is to continueuntil December 31, 2099 unless it is dissolved earlier, its affairs are woundup, and final liquidating distributions are made pursuant to the Amended andRestated 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 recordedamounts of assets, liabilities, revenues, expenses, and related disclosures areaffected by such estimates and assumptions, and actual results could differfrom those estimates and assumptions.

 

***RevenueRecognition—***The Company recognizes revenue as of the datemerchandise is shipped to its customers. In accordance with the Amended and Restated LLC Agreement and subject tomodifications made by the members, the Company bills the members for fixedcosts incurred on a monthly basis and bills variable costs at an agreed-upontransfer price for the period as fiber is shipped.  The billings reflect an approximate 5% gross profit margin to theCompany.

 

***Cash Equivalents—***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***—The joint venture has been established to provide for the carbon fiber needsof the respective members.  Sales tothird parties are permitted only after the carbon fiber requirements of eachmember are met.  There have been nosignificant sales to third parties for the years ended December 31, 2002 and2001.  Therefore, a provision for baddebt has not been made.

 

***Fair Value ofFinancial Instruments*** —The carrying amount of cash and cashequivalents, trade accounts receivable and payable and certain accrued expensesin the financial statements approximates their fair value due to the shortmaturity of those investments.

 

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***Inventories—***Inventoriesare stated at the lower of first-in, first-out (FIFO) cost or marketvalue.  As significantly all operatingcosts of the Company are directly related to the manufacturing process, theyare included in determining inventory cost.

 

***Property, Plant andEquipment—***Property, plant, and equipment are stated atcost.  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 |   | 5-10      |   |

 

***Impairment orDisposal of Long-Lived Assets—***The Company evaluates itslong-lived assets for impairment whenever events or changes in circumstancesindicate that the carrying amount of such assets or intangibles may not berecoverable.  Recoverability of assetsto be held and used is measured by a comparison of the carrying amount of anasset to future undiscounted net cash flows expected to be generated by theasset.  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.  Assets to be disposed of are reported at thelower of the carrying amount or fair value less costs to sell.

 

***Income Taxes***—Asa limited liability company, the Company is not subject to federal and stateincome taxes.  The taxable income orloss of the Company is included in the income tax returns of its members.  Accordingly, the Company has made noprovision for income taxes.

 

***Recently IssuedAccounting Pronouncements***—In August 2001, the FinancialAccounting Standards Board issued Statement of Financial Accounting Standards(“SFAS”) No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets*, which was effectiveJanuary 1, 2002.  SFAS No. 144supercedes and clarifies the accounting in SFAS No. 121, *Accounting for the Impairment of Long-Lived Assetsand for Long-Lived Assets to be Disposed Of*.  The adoption of this pronouncement did nothave a material impact on the Company’s financial position or results ofoperations.

 

**2.**                      ACCOUNTSRECEIVABLE

 

**Accounts receivable consist of the following atDecember 31:**

 
|                          |   | **2002** |    | **2001** |   |
|-------------------------------|--------|----------|---------|----------|--------|
|                          |   |     |    |     |   |
| Billed  accounts receivable   |   | $        | 655,620 |     | $      | 923,451 |   |
| Unbilled  accounts receivable |   | 254,438  |    | 185,738  |   |
|                          |   |     |    |     |   |
| Accounts  receivable          |   | $        | 910,058 |     | $      | 1,109,189 |   |

 

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**3.**                      INVENTORIES

 

Inventories consist of the following as of December31:

 
|             |   | **2002** |      | **2001**  |   |
|------------------|--------|----------|-----------|-----------|--------|
|             |   |     |      |      |   |
| Raw  materials   |   | $        | 180,401   |      | $      | 398,810 |   |
| Work  in process |   | 402,827  |      | 306,418   |   |
| Finished  goods  |   | 558,492  |      | 1,265,880 |   |
|             |   |     |      |      |   |
| Inventories      |   | $        | 1,141,720 |      | $      | 1,971,108 |   |

 

**4.**                      PROPERTY,PLANT AND EQUIPMENT

 

Property, plant and equipment consist of the followingas of December 31:

 
|                                            |   | **2002**   |       | **2001**   |   |
|-------------------------------------------------|--------|------------|------------|------------|--------|
|                                            |   |       |       |       |   |
| Land                                            |   | $          | 140,142    |       | $      | 140,142 |   |
| Building                                        |   | 5,850,019  |       | 5,810,860  |   |
| Manufacturing  equipment                        |   | 8,226,224  |       | 8,287,259  |   |
| Office  furniture and equipment                 |   | 54,921     |       | 52,298     |   |
|                                            |   |       |       |       |   |
|                                            |   | 14,271,306 |       | 14,290,559 |   |
| Less  accumulated depreciation and amortization |   | (3,430,734 | )          | (2,405,940 | )      |
|                                            |   |       |       |       |   |
| Property,  plant and equipment                  |   | $          | 10,804,572 |       | $      | 11,884,619 |   |

 

Depreciation and amortization expense was $1,152,632,$1,136,179 and $1,107,316 in 2002, 2001 and 2000 (unaudited), respectively.

 

**5.**                      ACCRUEDEXPENSES

 

Accrued expenses consist of the following as ofDecember 31:

 
|                |   | **2002** |    | **2001** |   |
|---------------------|--------|----------|---------|----------|--------|
|                |   |     |    |     |   |
| Salaries  and wages |   | $        | 115,819 |     | $      | 118,985 |   |
| Accrued  bonuses    |   | 205,170  |    | 141,075  |   |
| Other               |   | 27,820   |    | 41,638   |   |
|                |   |     |    |     |   |
| Accrued  expenses   |   | $        | 348,809 |     | $      | 301,698 |   |

 

**6.**                      RELATEDPARTY TRANSACTIONS

 

The joint venture has been established to provide forthe carbon fiber needs of the respective members.  Substantially all sales for the years ended December 31,2002 and 2001 were made to the members, SGL and Aldila Golf Corp., an affiliateof AMTC.  Substantially all accountsreceivable at December 31, 2002 and 2001 are due from SGL and Aldila GolfCorp.  Administrative services chargedby Aldila Golf Corp. to the Company were approximately $18,000, $30,000 and$43,000 for the years ended December 31, 2002, 2001 and 2000 (unaudited),respectively.

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**7.**                      EMPLOYEEBENEFIT PLAN

 

Effective January 1, 2000, the Company adopted theCarbon Fiber Technology, LLC 401(k) Savings Plan (the ”Plan”) foremployees of the Company.  This definedcontribution plan allows employees who satisfy the age and service requirementsof the Plan to contribute up to 20% of pre-tax wages, limited to the maximumamount permitted by federal law.  TheCompany matches 25% of the first 4% of employee contributions.  The Company’s matching contributions vestratably over four years.  The Company’scontributions amounted to approximately $7,000 for each of the years endedDecember 31, 2002 and 2001.

 

 

******

 

(25056)

 

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