Exhibit 99.1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Carbon Fiber Technology, LLC:
We have audited the accompanying balance sheet of Carbon Fiber Technology, LLC (the "Company") as of December 31, 2001, and the related statements of income, members' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements 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 the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2001, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
April 4, 2002
CARBON FIBER TECHNOLOGY, LLC
BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
| | 2001
| | 2000
|
|---|
| |
| | (Unaudited)
|
|---|
| ASSETS | | | | | | |
| CURRENT ASSETS: | | | | | | |
| | Cash and cash equivalents | | $ | 751,619 | | $ | 915,875 |
| | Accounts receivable | | | 1,109,189 | | | 856,465 |
| | Inventories | | | 1,971,108 | | | 1,154,891 |
| | Prepaid expenses | | | 1,083 | | | 1,042 |
| | |
| |
|
| | | Total current assets | | | 3,832,999 | | | 2,928,273 |
| PROPERTY, PLANT, AND EQUIPMENT, Net | | | 11,884,619 | | | 12,893,825 |
| | |
| |
|
| TOTAL | | $ | 15,717,618 | | $ | 15,822,098 |
| | |
| |
|
| LIABILITIES AND MEMBERS' EQUITY | | | | | | |
| CURRENT LIABILITIES: | | | | | | |
| | Accounts payable | | $ | 240,408 | | $ | 322,545 |
| | Accrued expenses | | | 301,698 | | | 283,604 |
| | |
| |
|
| | | Total current liabilities | | | 542,106 | | | 606,149 |
| MEMBERS' EQUITY | | | 15,175,512 | | | 15,215,949 |
| | |
| |
|
| TOTAL | | $ | 15,717,618 | | $ | 15,822,098 |
| | |
| |
|
See notes to financial statements.
2
CARBON FIBER TECHNOLOGY, LLC
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2001 AND 2000 AND THE PERIOD FROM
OCTOBER 29, 1999 (INCEPTION) TO DECEMBER 31, 1999
| | 2001
| | 2000
| | Period from
October 29, 1999
(Inception) to
December 31,
1999
|
|---|
| |
| | (Unaudited)
| | (Unaudited)
|
|---|
| SALES | | $ | 8,782,902 | | $ | 10,417,482 | | $ | 1,653,854 |
COST OF SALES |
|
|
8,425,095 |
|
|
9,933,966 |
|
|
1,578,686 |
| | |
| |
| |
|
GROSS PROFIT |
|
|
357,807 |
|
|
483,516 |
|
|
75,168 |
OTHER (EXPENSE) INCOME, Net |
|
|
(17,312 |
) |
|
42,685 |
|
|
4,708 |
| | |
| |
| |
|
NET INCOME |
|
$ |
340,495 |
|
$ |
526,201 |
|
$ |
79,876 |
| | |
| |
| |
|
See notes to financial statements.
3
CARBON FIBER TECHNOLOGY, LLC
STATEMENTS OF MEMBERS' EQUITY
YEARS ENDED DECEMBER 31, 2001 AND 2000 AND THE PERIOD FROM
OCTOBER 29, 1999 (INCEPTION) TO DECEMBER 31, 1999
| MEMBER CONTRIBUTIONS (Unaudited) | | $ | 14,609,872 | |
| |
Net income (Unaudited) |
|
|
79,876 |
|
| | |
| |
BALANCE, DECEMBER 31, 1999 (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 |
|
| | |
| |
See notes to financial statements.
4
CARBON FIBER TECHNOLOGY, LLC
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001 AND 2000 AND THE PERIOD FROM
OCTOBER 29, 1999 (INCEPTION) TO DECEMBER 31, 1999
| | 2001
| | 2000
| | Period from
October 29, 1999
(Inception) to
December 31,
1999
| |
|---|
| |
| | (Unaudited)
| | (Unaudited)
| |
|---|
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | |
| | Net income | | $ | 340,495 | | $ | 526,201 | | $ | 79,876 | |
| | Adjustments to reconcile net income to net cash provided by (used for) operating activities: | | | | | | | | | | |
| | | Depreciation and amortization | | | 1,136,179 | | | 1,107,316 | | | 189,605 | |
| | | Loss on disposal of fixed assets | | | 65,963 | | | 2,078 | | | — | |
| | | Changes in assets and liabilities: | | | | | | | | | | |
| | | | Accounts receivable | | | (252,724 | ) | | (386,875 | ) | | (469,590 | ) |
| | | | Inventories | | | (816,217 | ) | | (450,662 | ) | | (157,129 | ) |
| | | | Prepaid expenses | | | (41 | ) | | 27,560 | | | (28,613 | ) |
| | | | Deposits | | | — | | | 50,000 | | | (50,000 | ) |
| | | | Accounts payable | | | (82,137 | ) | | (129,825 | ) | | 59,240 | |
| | | | Accrued expenses | | | 18,094 | | | 211,886 | | | (54,157 | ) |
| | |
| |
| |
| |
| | | | | Net cash provided by (used for) operating activities | | | 409,612 | | | 957,679 | | | (430,768 | ) |
| CASH FLOWS FROM INVESTING ACTIVITIES - | | | | | | | | | | |
| | Purchases of property, plant, and equipment | | | (192,936 | ) | | (441,161 | ) | | (169,875 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | |
| | Member contributions | | | — | | | — | | | 1,000,000 | |
| | Distribution to members | | | (380,932 | ) | | — | | | — | |
| | |
| |
| |
| |
| NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | | | (164,256 | ) | | 516,518 | | | 399,357 | |
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | | | 915,875 | | | 399,357 | | | — | |
| | |
| |
| |
| |
| CASH AND CASH EQUIVALENTS, END OF PERIOD | | $ | 751,619 | | $ | 915,875 | | $ | 399,357 | |
| | |
| |
| |
| |
| SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES - | | | | | | | | | | |
| | Net assets contributed | | | | | | | | $ | 13,609,872 | |
| | | | | | | | |
| |
See notes to financial statements.
5
CARBON FIBER TECHNOLOGY, LLC
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000 (Unaudited) AND THE PERIOD FROM
OCTOBER 29, 1999 (INCEPTION) TO DECEMBER 31, 1999 (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization—Carbon Fiber 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 wholly owned subsidiary of Aldila Materials Technology Corporation ("AMTC"), was formed on October 29, 1999 as a joint venture between AMTC and SGL Carbon Fibers and Composites, Inc. ("SGL"). AMTC, a wholly owned subsidiary of Aldila, Inc., contributed net assets with a book value of $13,275,877. SGL purchased a 50 percent interest in AMTC's carbon fiber 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 over the net book value of the assets acquired of the carbon fiber manufacturing operation was recorded as a step-up in basis of the fixed assets and is being depreciated over the average remaining useful life of the manufacturing equipment. Based on their respective ownership interest of 50 percent in the joint venture, profit and loss are allocated equally to each member. The Amended and Restated LLC Agreement provides that the Company is to continue until December 31, 2099 unless it is dissolved earlier, its affairs are wound up, and final liquidating distributions are made pursuant to the Amended and Restated LLC Agreement.
Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. The recorded amounts of assets, liabilities, revenues, expenses, and related disclosures are affected by such estimates and assumptions, and actual results could differ from those estimates and assumptions.
Revenue Recognition—The Company recognizes revenue as of the date merchandise is shipped to its customers. In accordance with the Amended and Restated LLC Agreement and subject to modifications made by the members, the Company bills the members for fixed costs incurred on a monthly basis and bills variable costs at an agreed-upon transfer price for the period as fiber is shipped. The billings reflect an approximate five percent gross profit margin to the Company.
Cash Equivalents—The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company has not historically experienced losses on such investments.
Accounts Receivable—The joint venture has been established to provide for the carbon fiber needs of the respective members. Sales to third parties are permitted only after the carbon fiber requirements of each member are met. There have been no significant sales to third parties for the years ended December 31, 2001 and 2000 (unaudited). Therefore, a provision for bad debt has not been made.
Fair Value of Financial Instruments—The carrying amount of cash and cash equivalents, trade accounts receivable and payable and certain accrued expenses in the financial statements approximates their fair value due to the short maturity of those instruments.
Inventories—Inventories are stated at the lower of first-in, first-out (FIFO) cost or market value. As significantly all operating costs of the Company are directly related to the manufacturing process, they are included in determining inventory cost with the exception of interest income and the loss on the sale of fixed assets.
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Property, Plant, and Equipment—Property, plant, and equipment are stated at cost. Depreciation is provided on a straight-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 of Long-Lived Assets and Long-Lived Assets to Be Disposed Of—The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets or intangibles may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Income Taxes—As a limited liability company, the Company is not subject to federal and state income taxes. The taxable income or loss of the Company is included in the income tax returns of its members. Accordingly, the Company has made no provision for income taxes.
Recently Issued Accounting Pronouncements—In August 2001, the Financial Accounting Standards Board approved Statement of Financial Accounting Standards ("SFAS") No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 established a single accounting model, based on the framework of SFAS No. 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, for long-lived assets to be disposed by sale, whether previously held and used or newly acquired. In addition SFAS No. 144 resolved significant implementation issues related to SFAS No. 121. The Company is required to adopt SFAS No. 144 on January 1, 2002 and does not believe the adoption of this standard will have a material effect on the Company's financial statements.
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at December 31:
| | 2001
| | 2000
|
|---|
| |
| | (Unaudited)
|
|---|
| Billed accounts receivable | | $ | 923,451 | | $ | 567,949 |
| Unbilled accounts receivable | | | 185,738 | | | 288,516 |
| | |
| |
|
| Accounts receivable | | $ | 1,109,189 | | $ | 856,465 |
| | |
| |
|
3. INVENTORIES
Inventories consist of the following as of December 31:
| | 2001
| | 2000
|
|---|
| |
| | (Unaudited)
|
|---|
| Raw materials | | $ | 398,810 | | $ | 639,620 |
| Work in process | | | 306,418 | | | 291,682 |
| Finished goods | | | 1,265,880 | | | 223,589 |
| | |
| |
|
| Inventories | | $ | 1,971,108 | | $ | 1,154,891 |
| | |
| |
|
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4. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consist of the following as of December 31:
| | 2001
| | 2000
| |
|---|
| |
| | (Unaudited)
| |
|---|
| Land | | $ | 140,142 | | $ | 140,142 | |
| Building | | | 5,810,860 | | | 5,724,472 | |
| Manufacturing equipment | | | 8,287,259 | | | 7,943,145 | |
| Office furniture and equipment | | | 52,298 | | | 53,317 | |
| Construction-in-progress | | | — | | | 328,990 | |
| | |
| |
| |
| | | | 14,290,559 | | | 14,190,066 | |
| Less: accumulated depreciation and amortization | | | (2,405,940 | ) | | (1,296,241 | ) |
| | |
| |
| |
| Property, plant and equipment | | $ | 11,884,619 | | $ | 12,893,825 | |
| | |
| |
| |
Depreciation and amortization expense was $1,136,179, $1,107,316, and $189,605 in 2001, 2000 (unaudited) and the period from October 29, 1999 (inception) to December 31, 1999 (unaudited), respectively.
5. ACCRUED EXPENSES
Accrued expenses consist of the following as of December 31:
| | 2001
| | 2000
|
|---|
| |
| | (Unaudited)
|
|---|
| Salaries and wages | | $ | 118,985 | | $ | 115,712 |
| Accrued bonuses | | | 141,075 | | | 88,245 |
| Accrued material receipts | | | — | | | 44,754 |
| Other | | | 41,638 | | | 34,893 |
| | |
| |
|
| Accrued expenses | | $ | 301,698 | | $ | 283,604 |
| | |
| |
|
6. RELATED PARTY TRANSACTIONS
The joint venture has been established to provide for the carbon fiber needs of the respective members. Substantially all sales for the years ended December 31, 2001, and 2000 (unaudited) and the period October 29, 1999 (inception) to December 31, 1999 (unaudited) were made to the members, SGL and Aldila Golf Corp., an affiliate of AMTC. Substantially all accounts receivable at December 31, 2001 and 2000 (unaudited) are due from SGL and Aldila Golf Corp. Administrative services provided by Aldila Golf Corp. on behalf of the Company were approximately $30,000, $43,000 and $8,000 for the years ended December 31, 2001, 2000 (unaudited) and the period October 29, 1999 (inception) to December 31, 1999 (unaudited), respectively.
7. EMPLOYEE BENEFIT PLAN
Effective January 1, 2000, the Company adopted the Carbon Fiber Technology, LLC 401(k) Savings Plan (the "Plan") for employees of the Company. This defined contribution plan allows employees who satisfy the age and service requirements of the Plan to contribute up to 20 percent of pre-tax wages, limited to the maximum amount permitted by federal law. The Company matches 25 percent of the first 4 percent of employee contributions. The Company's matching contributions vest ratably over four years. The Company's contributions amounted to approximately $7,000 and $8,000 for the years ended December 31, 2001 and 2000 (unaudited), respectively.
8
8. SUBSEQUENT EVENTS
On February 28, 2002, the Board of Directors of the Company approved a distribution to both members determined as the amount of cash on-hand at the end of March 2002 in excess of $800,000. On March 29, 2002, $515,000 was distributed to each member.
9
