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EX-32.2 - EXHIBIT 32.2 - ZOLTEK COMPANIES INC | c93196exv32w2.htm |
EX-23.2 - EXHIBIT 23.2 - ZOLTEK COMPANIES INC | c93196exv23w2.htm |
EX-23.1 - EXHIBIT 23.1 - ZOLTEK COMPANIES INC | c93196exv23w1.htm |
EX-31.1 - EXHIBIT 31.1 - ZOLTEK COMPANIES INC | c93196exv31w1.htm |
EX-32.1 - EXHIBIT 32.1 - ZOLTEK COMPANIES INC | c93196exv32w1.htm |
EX-31.2 - EXHIBIT 31.2 - ZOLTEK COMPANIES INC | c93196exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
of the Securities Exchange Act of 1934
For the fiscal year ended September 30, 2009
Commission File Number 0-20600
ZOLTEK COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Missouri (State or other jurisdiction of incorporation or organization) |
43-1311101 (I.R.S. Employer Identification No.) |
|
3101 McKelvey Road, St. Louis, Missouri (Address of principal executive offices) |
63044 (Zip Code) |
Registrants telephone number, including area code: (314) 291-5110
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K þ.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer a
non-accelerated filer or a smaller reporting company. See definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (check one):
Large Accelerated Filer o | Accelerated Filer þ | Non-Accelerated Filer o | Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
State the aggregate market value of the voting stock held by non-affiliates of the registrant as of
March 31, 2009: approximately $187,570,000.
Indicate the number of shares outstanding of each of the registrants classes of common stock as of
November 25, 2009: 34,424,441 shares of Common Stock, par value $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
The following document is incorporated by reference into the indicated Part of this Report:
Document | Part of Form 10-K | |
Proxy Statement for the 2010 Annual Meeting of Shareholders |
III |
ZOLTEK COMPANIES, INC.
INDEX
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Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
2
Table of Contents
PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K for the fiscal year ended September 30, 2009 and the documents
incorporated by reference herein contain forward-looking statements, which are inherently subject
to risks and uncertainties. See Special Note Regarding Forward-Looking Statements.
Overview
We are an applied technology and advanced materials company. We are a leader in the
commercialization of carbon fiber through our development of a price-competitive, high-performance
reinforcement for composites used in a broad range of commercial products which we sell under the
Panex® trade name. In addition to manufacturing carbon fiber, we produce an intermediate product, a stabilized and oxidized acrylic fiber used in flame- and
heat-resistant applications which we sell under the Pyron® trade name.
We led the development of the carbon fiber commercialization concept and we believe we are the
largest manufacturer primarily focused on producing low-cost carbon fibers for commercial
applications. Our mission has been to introduce and lead the commercialization of carbon fibers as
a low-cost but high performance reinforcement of composites used as a primary building material in
everyday products. We have spent over 15 years developing and refining our proprietary technology
and manufacturing processes and capacity. Until fiscal 2004, the high cost of carbon fibers
precluded all but the most demanding applications, limiting carbon fiber use primarily to aerospace
and sporting goods applications. While the basic technology to manufacture commercial and aerospace
carbon fibers is the same and fiber-to-fiber properties are equivalent, demands for specific
fabrication methods, significantly higher capital requirements, level of quality documentation and
certification costs make the aerospace fibers significantly more costly to produce than carbon
fiber suitable for commercial applications.
For years prior to fiscal 2004, as additions of new capacity occasionally outpaced demand from
aerospace applications, manufacturers sold excess production at reduced prices into specialty
sporting goods and industrial applications. As a result, the distinctive characteristics of carbon
fiber and the techniques for fabricating carbon fiber composites became more broadly understood and
some new and diverse transitional applications developed. However, our financial results were
adversely affected by predatory pricing by the incumbent carbon fiber producers and by industry
oversupply conditions which inhibited adoption of carbon fibers for non-aerospace applications as
existing and potential customers were reluctant to commit to incorporate carbon fiber composites
into their products due to concerns about the availability of carbon fiber in large volumes at
predictable prices.
During 2005 and 2006, Airbus and Boeing initiated production of new generation aircraft
utilizing carbon fiber composites in critical airframe structures
(e.g., fuselage and wings). We
believe the demand for carbon fibers for these programs absorbed the substantial majority of
capacity of manufacturers for aerospace applications. At about the same time, the adoption of
carbon fibers in longer wind turbine blades created a new demand for commercial carbon fibers. This
triggered a significant divergence of demand for carbon fibers between aerospace and commercial
applications.
The divergence in the aerospace and commercial applications led in fiscal 2006 and 2007 to
strains in our ability to meet all the demand from our wind energy customers and we were unable to
take on new customers. When we were capacity-constrained, potential customers understandably would
not commit to new large-scale applications without demonstrated assurance of adequate future
supplies. In view of the supply shortages, we embarked on an expedited capacity expansion which now
has been largely completed. As a result we currently have sufficient capacity to meet demand from
current wind energy customers and produce carbon fibers for additional large-scale applications. At
the same time, manufacturers of carbon fibers for aerospace applications added substantial capacity
to meet demand for aircraft production.
During fiscal 2009, the commercial carbon fibers markets we serve have been negatively
impacted by the recessionary economic conditions in the United States and international economies,
including a sudden, but we believe only temporary, slowdown in the growth of wind turbine business.
At the same time, there were unexpected delays in the introduction of new jetliners utilizing aerospace
carbon fibers that resulted in a significant decrease in the
aerospace market demand. This factor, as well as substantial
increases in installed capacity for both aerospace and commercial
carbon fibers, led to an
increase in price and sales competition between aerospace and commercial carbon fiber
manufacturers, particularly in certain cross-over applications (e.g., sporting goods) for which
either aerospace or commercial carbon fibers may be utilized. While
this situation has negatively impacted our financial results, we plan to be ready to
respond to anticipated accelerating demand on a scale we experienced in the 2005 to 2006 time
period. We are also maintaining our available unused capacity in a ready mode to avoid the kind of
difficulties and delays in reacting to new orders that we experienced in 2005 and 2006.
We are aggressively marketing to obtain new business in existing applications and new
customers in new applications. New applications tend to require relatively long sales cycles due to
the new product development and manufacturing and engineering investments customers must make to
incorporate carbon fiber composites into their products. During 2009, we have added additional
sales personnel in Asia, focusing on markets in China, India and Korea and have begun to see some
success through new customers and sales in those regions. We expect our market development efforts
will be successful over the long run.
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Table of Contents
In addition to the adverse impact of the global economic downturn, four other key factors led
to declines in our revenues, operating earnings and margins. First, after years of growing at a
20-25% annual rate, worldwide growth in electricity generation from wind energy has slowed to an
estimated 10%. Second, price decreases caused approximately 25% of our revenue decline. Decreases
in raw material and energy costs were passed along to customers through prices reductions; however,
market pressure from lower customer demand forced price decreases to exceed the cost savings.
Third, currency fluctuations caused approximately 20% of our decline in revenue. Fourth, available
unused capacity, as discussed under Managements Discussion and Analysis of Financial Condition
and Results of Operations, was responsible for $7.4 million in unallocated costs (including
depreciation) during the fiscal year, without contributing to revenues or gross profit. While
Zoltek is confident that the additional capacity will be quickly absorbed as soon as the wind
energy business returns to a more robust growth rate and new customers and applications develop,
available unused capacity will continue to negatively impact gross margins and operating income. We
could take steps to significantly reduce these charges in the future, but we view this as an
investment in maintaining our facilities and core staff in a ready mode to minimize the cost and
time to restart facilities as the market conditions change.
In
order to manage our business, we track it in three separate business segments: carbon fiber
segment, technical fiber segment and corporate/other segment, which consists of ancillary activities not
directly related to the carbon fiber or technical fiber segments.
Business Strategy
Our business model focuses on low and sustainable pricing facilitated by low production
costs, rapidly scalable capacity and a product line that offers various value-added product and
process enhancements.
The principal elements of our business strategy include the following:
Sustainable Price Leadership. We market carbon fibers for use as a base reinforcement
material in composites at sustainable price levels resulting in predictable composite costs per
unit of strength and stiffness that compare favorably with alternative base construction materials.
We believe our proprietary process and equipment design technology enable us to produce carbon
fibers at costs substantially lower than those generally prevailing in the industry and to supply
carbon fibers for applications that are not economically viable for our higher-cost competitors. We
believe that, with our targeted cost structure, we can maintain sustainable pricing that makes it
attractive for customers to commit to high-volume applications.
Support New Commercial Markets and Applications Development. To further accelerate the
commercialization of carbon fibers and carbon fiber composites across a broad range of mass-market
applications, we have pursued various initiatives, including partnerships with potential users of
carbon fibers to act as catalysts in the development of new low-cost, high-volume products. We
believe that our supply relationships with customers for wind energy applications are the direct
result of these development efforts.
During September 2009, the Company announced that it entered into a one year technology and
marketing agreement with Global Blade Technology, which we expect to accelerate adoption of carbon
fibers as wind turbine blade lengths continue to increase. Zoltek and GBT are joining forces to
accelerate the design and manufacture of advanced wind turbine blades utilizing Zoltek carbon
fibers. GBT offers design, engineering, prototype development, testing and manufacturing assistance
for new and existing wind turbine and independent turbine blade manufacturers. We also believe that
research and development expenditures will be the primary means by which we can facilitate new
product applications.
Capacity Leadership to Keep Pace with Long-Term Demand Growth. We believe that our decision
to build and maintain significant available capacity will allow us the ability to enter into
additional long-term supply arrangements with high-volume customers. We have developed, and are
continually seeking to improve, proprietary continuous carbonization line designs in order to
increase efficiency and shorten lead time from the time of the decision to add lines to the time
when the lines become operational. In addition, we have continuously improved our ability to
produce acrylic fiber precursor at low costs and in sufficient quantities to support our growth in
carbon fiber capacity. The ability to increase capacity in response to the growth of the
commercial markets is essential to encouraging development of large-volume applications.
Develop Model for Long-Term Joint Ventures with Strategic Partners. Our industry currently has
no established means for supplying identified large scale applications for which carbon fiber
composites have been proven to offer transformational technology, such as structural use in mass
produced cars to increase fuel efficiency through reduced weight and improved safety due to
superior strength and stiffness. Accordingly, Zoltek is seeking to leverage its proprietary
expertise by developing a business model with the goal of proliferating carbon fiber technology to
new customers in capital intensive industries who would partner with us to invest in the plants
necessary to launch these high volume applications. Although we expect it will take some time and
our approach will evolve to address opportunities as they develop, we believe this strategy can
support a quantum leap in the commercial carbon fiber industry.
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Table of Contents
Emerging Applications
We have identified emerging applications for our products with high growth potential across a
variety of industries. Among them are:
| Wind Energy |
According to the Global Wind Energy Council (GWEC), the total market for wind turbines was
worth around 36.5 billion Euros ($51.5 billion U.S. dollars) in 2008. GWEC predicts that in 2013,
five years from now, global wind generating capacity will stand at 332 GW, up from 120 GW at the
end of 2008. GWEC also predicts that during 2013, 56.3 GW of new capacity will be added to the global total, more than
double the annual market in 2008. According to the GWEC, the annual growth rates during this period will average 22.4% in
terms of total installed capacity, and 15.8% for the annual market. These rates are modest
compared to past developments: in the past ten years, published
sources have reported an average increase of 28.2% for
total capacity and 28.3% for annual capacity.
Zoltek continues to be the leading supplier of the low-cost, high-performance carbon fibers
used in building the largest and most advanced wind turbines. As the blades on new wind turbines
get larger, the use of carbon fibers improves performance and reduces manufacturing costs. Zoltek
believes that at some point all major turbine manufacturers will require carbon fibers.
| Deep Sea Drilling |
As the price of oil on the world market continues to fluctuate, oil exploration companies are
striking out into deepwater, developing reserves beneath the ocean floor a mile or more below the
waters surface. As a result, demand for strong yet lightweight materials able to stand up to the
harsh subsea environment has spiked, with a corresponding peak of interest in composites. In a
successful demonstration project with a major producer of deep sea drilling platforms, composite
rods utilizing our carbon fibers in fabrication of umbilical products were found to deliver equal
or superior performance at affordable cost, compared to composite rods utilizing aero-space grade
carbon fibers. The composite rods are designed to demonstrate the ability to succeed where steel
cables begin to fail in counteracting the greater axial loads encountered in ultra deepwater,
meaning depths exceeding 8,000 feet. At these depths, steel is subject to deformation or
stretching. Additional test projects are being planned to demonstrate the effectiveness of carbon
fibers in other deep sea drilling applications.
| Aerospace Secondary Structures |
Zoltek is actively pursuing a new market with large-volume potential: sales of carbon fiber to
leading airplane makers for use in secondary structures such as floors, luggage bins and seats. We
believe airplane manufacturers are concerned about future availability and pricing of large
quantities of carbon fibers, as all newly designed commercial planes will incorporate extensive
utilization of carbon fiber composites. Zoltek can offer considerably lower cost structures than
the manufacturers of aerospace-grade carbon fibers and we also have the competitive advantage of
being able to deliver large volumes of carbon fibers on a timely basis. Airplane makers are looking
for every possible opportunity to reduce fuel burn by eliminating weight, but they are also
concerned about their competitive position. They have already turned to carbon fiber for making the
flight-worthy primary structures of their most advanced airplanes, and now they are searching for
ways to make other structures out of super-lightweight carbon fiber.
| Automotive |
Zoltek believes automotive applications are destined to become the largest user of carbon
fibers. For years there has been an upward trend in the use of carbon fiber reinforced composites
in the manufacture of small-volume and many times hand-made cars. Examples include the Tesla which
uses Zoltek fibers for the entire car and Corvette which use Zoltek carbon fibers for a few special
parts. While these applications have been growing steadily, the real explosion in demand will come
from expanded adaptation of carbon fiber composites into large scale series models produced on an
assembly line.
| Aircraft Brakes |
We believe our Technical Fibers segment is the largest supplier of oxidized and carbon fibers
to the leading manufacturers of aircraft brakes. A substantial majority of commercial and defense
aircraft has incorporated carbon-carbon brakes into their design due to their superior heat
resistance, friction properties and light weight. This business should continue to afford a steady
revenue stream with significant growth potential.
Customers
In the fiscal years 2009, 2008 and 2007, we reported net sales of $74.2 million, $75.1 million
and $49.9 million, respectively, to Vestas Wind Systems, a leading wind turbine manufacturer, which
represented 53.6%, 40.4% and 33.0% of our net sales, respectively, during such periods. The
related open accounts receivable balance at September 30, 2009
and 2008 were $21.1 million and $17.2
million, respectively. The Company reported net sales of $24.6 million and $25.1 million in fiscal
2008 and 2007, respectively, to Gamesa Group, another leading wind turbine manufacturer, which
represented 13.3% and 16.6% of our net sales, respectively, during such fiscal years. These were
the only customers that represented greater than 10% of consolidated net sales during these years.
Backlog
Sales of our products are generally made pursuant to customer purchase orders. In recent
years, our customers have increasingly demanded shorter order lead times and just-in-time
delivery performance. While we have many multi-year contracts with our major customers, most of
these contracts specify the customers requirements that will be supplied by us and the terms under
which the sales will occur, not the specific quantities to be procured. As a result, twelve-month
order backlog is not a meaningful indicator of future revenues for us.
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Table of Contents
Company Operations
We have manufacturing plants in Nyergesujfalu, Hungary, Guadalajara, Mexico, Abilene, Texas
and St. Charles, Missouri. Our plant in Hungary is our major carbon fiber manufacturing facility.
Our Hungarian plant also manufactures acrylic fiber precursor, the raw material that we use to make
carbon fibers and oxidized fibers. Our Texas plant houses carbon fiber manufacturing lines and
value-added processing capabilities. Our Missouri plant is primarily dedicated to the production of
technical fibers for aircraft brake and other friction applications and also produces limited
amounts of carbon fibers and houses a research and development
facility. In addition, we have facilities in Salt Lake City, Utah where we design and build composite manufacturing equipment and
can produce resin pre-impregnated carbon fibers, called prepregs.
Our facility in Guadalajara, Mexico was acquired in October 2007. We expect it will supply our
North American operations with low-cost precursor and will serve as an additional site for carbon
fiber production. The first phase of retrofitting the Mexican acrylic precursor plant and
installation of carbon fibers lines has been completed, but the plant has delayed
initiating production pending resumption of demand. The Mexico plant,
which we expect will eventually be our largest facility, will substantially increase
our capacity to produce low-cost carbon fibers on a timely and cost-effective basis, and further
extended our leadership in the growing commercial carbon fibers sector.
Acrylic fiber precursor comprises a significant part of the total cost of producing carbon
fibers. During 2000, we began to manufacture quantities of precursor at our Hungarian facility.
During 2004 and 2005, we converted all of our acrylic fiber capacity to precursor manufacturing and
currently all of our carbon fibers are produced from this precursor. With the addition of our
Mexico precursor facility, we expect to have ample supply of high quality, low cost precursor to
supply our foreseeable future requirements.
An element of our strategy is to offer customers value-added processing of the fibers that we
produce. Our longer-term focus is on creating integrated solutions for large potential end users by
working directly with carbon fiber customers in the primary market sectors that we target. We
perform certain downstream processing, such as weaving, knitting, blending with other fibers,
chopping and milling, and preparation of pre-form, pre-cut stacks of fabric. We also manufacture carbon fibers preimpregnated with bonding resin. In addition, our Salt Lake City-based
Entec Composite Machines subsidiary designs and builds composite manufacturing equipment and
markets the equipment along with manufacturing technology and materials.
We also provide composite design and engineering for development of applications for carbon
fiber reinforced composites. We reported research and development expenses of $7.6 million, $8.1
million and $7.2 million in fiscal 2009, fiscal 2008 and fiscal 2007, respectively. For historical
financial information regarding our various business segments, see Note 11 of the accompanying
Notes to Consolidated Financial Statements.
Competition
Our carbon fibers and technical fibers business segments compete with various other producers
of carbon fibers. We are the only publicly-held company that is a pure-play in carbon fibers,
while all the other six existing competitors carbon fiber operations are a small part of their
total business. Our existing six major competitors have substantially greater research and
development, marketing, financial and managerial resources than we do and represent significant
competition for us. We are aware of no single manufacturer of carbon fiber products that competes
across all of our product lines and applications. We believe our business model distinguishes us
from other carbon fiber manufacturers in supporting the long-term growth of the commercial carbon
fiber market.
To varying degrees, depending on market conditions and supply, we compete with aerospace
grade carbon fiber producers, such as Hexcel Corporation and Cytec Industries of the United States
and Toray Group, Toho Tenax and Mitsubishi Rayon of Japan. These carbon fiber producers tend to
market higher cost products than our products, with a principal focus on aerospace structural and
high price industrial applications. SGL Carbon is the most direct competitor which also uses a
textile-type precursor which they purchase from various suppliers.
The aerospace carbon fiber manufacturers have tended to enter into direct competition with us
primarily when they engage in significant discounting to protect their market share and to sell in
spot markets. SGL Carbon currently is our principal competitor in the oxidized fiber market.
The principal areas of competition for the carbon fibers and technical fibers business
segments are sustainable price, quality, development of new applications and ability to reliably
meet the customers volume requirements and qualifications for particular programs. Carbon fiber
production also requires substantial capital expenditures for manufacturing plants and specialized
equipment, know-how to economically manufacture carbon fibers to meet technical specifications and
the ability to qualify carbon fibers for acceptable performance in downstream applications.
International
The
Company conducts its carbon fiber products operations primarily in
North America and
Europe. The
Company sells its carbon fibers globally. There are unique risks attendant to the Companys
foreign operations, such as currency fluctuations. For additional information regarding our
international operations, see Note 11 of the accompanying Notes to Consolidated Financial
Statements and the information included under Item 1A-Risk Factors.
6
Table of Contents
Sources of Supply
As part of its growth strategy, the Company has developed its own precursor acrylic fibers,
which are used as the principal raw material for all of its carbon fibers. The primary source of
raw material for the precursor is ACN (acrylonitrile), which is a commodity product with multiple
sources.
Environmental
The Companys operations generate various hazardous wastes, including gaseous, liquid and
solid materials. The operations of the Companys Carbon Fibers and Technical Fibers business
segments utilize thermal oxidation of various by-product streams designed to comply with applicable
laws and regulations. The plants produce air emissions that are regulated and permitted by various
environmental authorities. The plants are required to verify by performance tests that certain
emission rates are not exceeded. The Company does not believe that compliance by its carbon fibers
and technical fibers operations with applicable environmental regulations will have a material
adverse effect upon the Companys future capital expenditure requirements, results of operations or
competitive position. There can be no assurance, however, as to the effect of interpretation of
current laws or future changes in federal, state or international environmental laws or regulations
on the business segments results of operations or financial condition.
Employees
As of September 30, 2009, we employed approximately 377 persons in our North American
operations and approximately 759 in our European operations.
Our U.S. employees are not represented by any collective bargaining organizations. By law,
most employees in Hungary are represented by at least one labor union. At Zoltek Zrt., our
Hungarian subsidiary, there are two active unions (some Zoltek Zrt. employees belong to both
unions). Management meets with union representatives on a regular basis and there have not been any
problems or major disagreements with either union in the past five years. We believe that overall
our employee relations are good. At our Mexican subsidiary employees are also represented by a
union which was selected by our subsidiary.
AVAILABLE INFORMATION
The Company regularly files periodic reports with the Securities and Exchange Commission
(SEC), including annual reports on Form 10-K and quarterly reports on Form 10-Q, as well as, from
time to time, current reports on Form 8-K and amendments to those reports. These filings are
available free of charge on the Companys website at www.zoltek.com, as soon as reasonably
practicable after their electronic filing with the SEC. All of the Companys filings may be read
or copied at the SECs Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information
on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.
The SEC maintains an Internet website (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding issuers that file electronically.
This Annual Report on Form 10-K for fiscal 2009 and the documents incorporated by reference
herein contain forward-looking statements, which are inherently subject to risks and uncertainties.
See Special Note Regarding Forward Looking Statements.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K and the information incorporated by reference in this Form 10-K contain certain
statements that constitute forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. The words expect, believe, goal, plan, intend, estimate, and similar
expressions and variations thereof are intended to specifically identify forward-looking
statements. Those statements appear in this Form 10-K, any accompanying Form 10-K supplement and
the documents incorporated herein by reference, particularly in the sections entitled Risk
Factors, Managements Discussion and Analysis of Financial Condition and Results of Operations
and Business, and include statements regarding the intent, belief or current expectations of us,
our directors and officers with respect to, among other things: (1) our financial prospects;
(2) our growth strategy and operating strategy, including our focus on facilitating acceleration of
the introduction and development of mass market applications for carbon fibers; (3) our current and
expected future revenue; and (4) our ability to complete financing arrangements that are adequate
to fund current operations and our long-term strategy.
This Form 10-K and the information incorporated by reference in the Form 10-K also contain
statements that are based on the current expectations of our company. You are cautioned that any
such forward-looking statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those projected in the
forward-looking statements as a result of various factors. The factors that might cause such
differences include, among others, our ability to: (1) successfully adapt to recessionary
conditions in the global economy; (2) penetrate existing, identified and emerging markets,
including entering into new supply agreements with large volume customers; (3) continue to improve
efficiency at our manufacturing facilities on a timely and cost-effective basis to meet current
order levels of carbon fibers; (4) successfully add new planned capacity for the production of
carbon fiber and precursor raw materials and meet our obligations under long-term supply
agreements; (5) maintain profitable operations; (6) increase or maintain our borrowing at
acceptable costs; (7) manage changes in customers forecasted requirements for our products; (8)
continue investing in application and market development in a range of industries; (9) manufacture
low-cost carbon fibers and profitably market them despite increases in raw material and energy
costs; (10) successfully operate our Mexican facility to produce acrylic fiber precursor and add
carbon fiber production lines; (11) resolve the pending non-public, fact-finding investigation
being conducted by the Securities and Exchange Commission; (12) successfully continue operations at
our Hungarian facility if natural gas supply disruptions occur; (13) successfully prosecute patent
litigation (14)
successfully implement and coordinate our new alliance with Global Blade Technology; and (15)
manage the risks identified under Risk Factors in our filings with the SEC.
Because forward-looking statements are inherently subject to risks and uncertainties, some of
which cannot be predicted or quantified, you should not rely upon forward-looking statements as
predictions of future events. The events and circumstances reflected in the forward-looking
statements may not be achieved or occur and actual results could differ materially from those
projected in the forward-looking statements.
7
Table of Contents
Item 1A. Risk Factors
The following are certain risk factors that could affect Zolteks business, financial results and
results of operations. These risk factors should be considered in connection with evaluating the
forward-looking statements contained in this Annual Report on Form 10-K because these factors could
cause the actual results and conditions to differ materially from those projected in
forward-looking statements. Before you buy the Companys securities, you should know that making
such an investment involves a high degree of risk, including the risks described below. The risks
that we have highlighted here are not the only ones that the Company faces. If any of the risks
actually occur, the Companys business, financial condition, results of operations or cash flows
could be negatively affected. In that case, the trading price of its securities could decline, and
you may lose all or part of your investment.
Our growth and profitability is dependent on growth in demand for carbon fibers and entering into
new supply agreements.
Historically, our business has been adversely affected during periods of oversupply and
capacity constraints. For years prior to fiscal 2004, our financial results were adversely
affected by industry oversupply conditions which inhibited adoption of carbon fibers for
non-aerospace applications as existing and potential customers were reluctant to commit to
incorporate carbon fiber composites into their products due to concerns about the availability of
carbon fiber in large volumes at predictable pricing. During 2006 and 2007, the divergence in the
aerospace and commercial applications and our new contracts with wind energy customers led to
strains on our ability to meet all the demand from our wind energy customers and we were unable to
take on new customers.
We currently have sufficient capacity to meet demand from current wind energy customers and
produce carbon fibers for additional large-scale applications. Our future profitability and growth
will depend upon our ability to enter into contracts with new customers for existing applications
utilizing our carbon fibers and the development of new markets for large-scale applications which
incorporate our carbon fiber products. Development of new customers for existing applications and
new markets for our carbon fiber products will require substantial technical, marketing and sales
efforts and the expenditure of significant funds. Development of new markets for carbon fibers may
not occur. Our business, operating results and financial condition could be materially and
adversely affected if new customers and markets for our carbon fibers products do not develop.
Increases in sales of our carbon fiber products are subject to long sales cycles of our customers.
Our future profitability and growth will depend primarily upon our ability to enter into
contracts with new customers for existing applications utilizing our carbon fibers and the
development of new markets for a broad range of large-scale applications which incorporate our
carbon fiber products. Our ability to increase sales of our carbon fiber products is subject to
relatively long sales cycles of our customers due to new product development, manufacturing and
engineering investments our customers must make to incorporate carbon fiber composites into their
products.
A limited number of customers generate a significant portion of our revenue and may terminate their
contracts with us in the event of certain changes in control or may require that we make penalty
payments in the event we fail to perform.
For fiscal 2009, our largest customer represented approximately 53.6% of our revenue and our
three next largest customers accounted for 24.0% of our revenue. We anticipate that significant
customer concentration will continue for the foreseeable future, although the composition of our
largest customers may change from period to period. A significant portion of our total sales in
fiscal 2009 were to customers in the wind energy market. Significant changes in demand for our
customers wind turbines, the shares of their requirements that are awarded to us or changes in the
design or materials used to construct their products could result in a significant loss of business
with these customers. Our contracts with certain customers allow them to terminate their agreements
with us or require us to make substantial penalty payments in the event we fail to perform our
obligations under our agreements with them. The loss of, or significant reduction in the purchases
by, these customers or any other significant customers could have a material adverse effect upon
our future revenues and business, results of operations, financial condition or cash flow.
We reported net losses from continuing operations for fiscal 2009, 2007 and each of the five fiscal
years preceding it.
Although we reported net income in fiscal 2008, we have reported losses from continuing
operations of $7.1 million, $12.3 million, $17.1 million, $38.2 million, $65.8 million $2.0
million, and $4.2 million in fiscal years 2002, 2003, 2004, 2005, 2006, and 2007, and 2009
respectively. Net losses from continuing operations for the fiscal years 2002, 2003, 2004 and 2005
were attributable primarily to the cost of development and preliminary execution of our carbon
fiber commercialization strategy.
Demand for our carbon fiber products may be adversely affected by the current economic and credit
environment.
The United States and international economies recently have experienced (and continue to
experience) a period of slow economic growth. A near-term economic recovery is uncertain. In
particular, the current credit and housing crisis, the increase in U.S. sub-prime mortgage
defaults, potential terrorist acts and similar events, continued turmoil in the Middle East and war
in general could contribute to a slowdown for products that require significant capital
expenditures, including demand for large-scale projects that incorporate our carbon fibers. If the
economic recovery slows down as a result of recent economic, political or social turmoil, we may
experience decreases in the demand for our carbon fiber products, which will harm our operating
results.
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Our operations and sales in foreign countries are subject to risks.
For fiscal 2009, approximately 77.3% of our revenues were supplied by our operations in
Hungary. Our operations in Hungary and Mexico and our sales in other foreign countries are subject
to risks associated with foreign operations and markets generally, including the fact that many
members of our senior management are resident in the United States, foreign currency fluctuations,
unexpected changes in regulatory, economic or political conditions, tariffs and other trade
barriers, longer payment cycles for accounts receivable, potentially adverse tax consequences,
restrictions on repatriation of earnings and the burdens of complying with a wide variety of
foreign laws. These factors could have a material adverse effect upon our future revenues and
business, results of operations, financial condition or cash flow.
Our ability to fund and manage our anticipated growth will affect our operating results.
The growth in our business has placed, and is expected to continue to place, a significant
strain on our management and operations. In order to effectively manage potential long-term growth
and to reach growth targets, we must add to our carbon fiber manufacturing capacity, have access to
adequate financial resources to fund significant capital expenditures and maintain gross profit
margins. We must also pursue a growth strategy and continue to strengthen our operations, including
our financial and management information systems, and expanding, training and managing our employee
workforce. There can be no assurance that we will be able to do so effectively or on a timely
basis. Failure to do so could have a material adverse effect upon our future revenues and business,
results of operations, financial condition or cash flow. Additionally, in the event that we need
to obtain debt financing in the future to fund our growth, recent uncertainty in the credit markets
could affect our ability to obtain debt financing on reasonable terms.
Our operations are dependent upon our senior management and technical personnel.
Our future operating results depend upon the continued service of our senior management our
technical personnel, and the management personnel in our domestic and foreign operations. Our
future success will depend upon our continuing ability to attract and retain highly qualified
managerial and technical personnel. Competition for such personnel is intense, and there can be no
assurance that we will retain our key managerial and technical employees or that we will be
successful in attracting, assimilating or retaining other highly qualified personnel in the future.
Our operating results may fluctuate.
Our quarterly results of operations may fluctuate as a result of a number of factors,
including the timing of purchase orders for and shipments of our products, our ability to
successfully operate our expanding production capacity and changes in production levels. Therefore,
quarter-to-quarter comparisons of results of operations have been and will be impacted by the
timing of such orders and shipments. In addition, our operating results could be adversely affected
by these factors, among others, such as variations in the mix of product sales, price changes in
response to competitive factors and interruptions in plant operations.
Developments by competitors may reduce demand for our products and technologies, which may
adversely affect our sales.
We compete with various other participants in the advanced materials and textile fibers
markets. All of our six principal competitors have substantially greater research and development,
manufacturing, marketing, financial and managerial resources than we do. In addition, existing
carbon fiber producers, including those that supply aerospace applications, may refocus their
activities to produce carbon fiber for commercial applications that compete more directly with us
and certain producers have announced plans to do so. Developments by existing or future competitors
may render our products or technologies less competitive. In addition, we may not be able to keep
pace with new technological developments.
The price volatility of many of our raw materials and energy costs may result in increased
production costs, which we may not be able to pass on to our customers.
A substantial portion of our raw materials are subject to price volatility and a significant
portion of our costs are energy costs. We may not always be able to promptly raise product prices
and, ultimately, pass on underlying cost increases to our customers. In addition, our competitors
may be able to obtain raw materials at a lower cost than we can. Additional raw material and energy
cost increases that we are not able to pass on to customers or the loss of a large number of
customers to competitors as a result of price increases could have a material adverse effect on our
future revenues and business, results of operations, financial condition or cash flow.
We could be adversely affected by environmental and safety requirements.
Our operations require the handling, use, storage and disposal of certain regulated
materials and wastes. As a result, we are subject to various laws and regulations pertaining to
pollution and protection of the environment, health and safety. These requirements govern, among
other things, emissions to air, discharge to waters and the generation, handling, storage,
treatment and disposal of waste and remediation of contaminated sites. We have made, and will
continue to make, capital and other expenditures in order to comply with these laws and
regulations. These laws and regulations are complex, change frequently and could become more
stringent in the future.
In addition, we may be required to comply with evolving environmental, health and safety laws,
regulations or requirements that may be adopted or imposed in the future or to address newly
discovered information or conditions that require a response. Although most of our properties have
been the subject of environmental site assessments, there can be no assurance that all potential
instances of soil and groundwater contamination have been identified, even at those sites where
assessments have been conducted. Accordingly, we may discover previously unknown environmental
conditions and the cost of remediating such conditions may be material.
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Our business depends upon the maintenance of our proprietary technology.
We depend upon our proprietary technology that is not subject to patent protection. We rely
principally upon trade secret and copyright laws to protect our proprietary technology. We
regularly enter into confidentiality agreements with our key employees, customers and potential
customers and limit access to and distribution of our trade secrets and other proprietary
information. These measures may not be adequate to prevent misappropriation of our technology or to
assure that our competitors will not independently develop technologies that are substantially
equivalent or superior to our technology. In addition, the laws of other countries in which we
operate may not protect our proprietary rights to the same extent as the laws of the United States.
We are also subject to the risk of adverse claims and litigation alleging infringement of
intellectual property rights.
Our existing credit facilities expire on January 1, 2010 and failure to extend or replace
these facilities could have a material adverse effect on us.
Our existing $10.0 million U.S. credit facility and our $9.7 million Hungarian credit facility
expire on January 1, 2010. Based on our existing relationships with our lenders and our current
financial condition, we believe that we will be able to extend these credit facilities beyond their
current expiration dates or, if necessary, replace these facilities. The failure to extend or
replace our credit facilities on favorable terms could have a material adverse effect on our
business, including our operating results and financial condition.
We have incurred and will continue to incur increased costs and demands upon our management as a
result of complying with the laws and regulations affecting public companies, which could affect
our operating results and make it more difficult to attract and retain qualified management.
As a public company, we have incurred and will continue to incur significant legal,
accounting and other expenses, including costs associated with public company reporting
requirements. We also have incurred and will incur costs associated with corporate governance
requirements, including requirements under the Sarbanes-Oxley Act of 2002, as well as rules
implemented by the SEC and the Nasdaq Global Select Market. The expenses incurred by public
companies generally for reporting and corporate governance purposes have increased. These rules and
regulations have increased our legal and financial compliance costs and have made some activities
more time-consuming and costly. It is possible that these new rules and regulations may make it
more difficult and more expensive for us to obtain director and officer liability insurance, and we
may be required to accept reduced policy limits and coverage or incur substantially higher costs to
obtain the same or similar coverage than used to be available. As a result, it may be more
difficult for us to attract and retain qualified individuals to serve on our board of directors or
as our executive officers.
Our stock price has been volatile and may continue to fluctuate.
Our stock price has fluctuated substantially over the past three years. Future announcements
concerning us or our competitors or customers, quarterly variations in operating results,
announcements of technological innovations, the introduction of new products or changes in product
pricing policies by us or our competitors, developments regarding proprietary rights, changes in
earnings estimates by analysts or reports regarding us or our industry in the financial press or
investment advisory publications, among other factors, could cause the market price of our common
stock to fluctuate substantially. In addition, stock prices for many emerging growth companies
fluctuate widely for reasons often unrelated to operating results. These fluctuations, as well as
general economic, political and market conditions, such as recessions, interest rates, world
events, military conflicts or market-sector declines, may materially and adversely affect the
market price of our common stock. Any information concerning us, including projections of future
operating results, appearing in investment advisory publications or on-line bulletin boards, or
otherwise emanating from a source other than from us, should not be relied upon as having been
supplied or endorsed by us.
A change of control of our company may be discouraged, delayed or prevented by our classified
board of directors, our ability to issue preferred stock, or the voting control of our principal
shareholder.
Our Articles of Incorporation divide the board of directors into three classes, with
three-year staggered terms. The classified board provision could increase the likelihood that, in
the event an outside party acquired a controlling block of our stock, incumbent directors
nevertheless would retain their positions for a substantial period, which may have the effect of
discouraging, delaying or preventing a change in control. The possible impact of such
discouragement, delay or prevention of takeover attempts could adversely affect the price of our
common stock.
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Our Articles of Incorporation also authorize the issuance of blank check preferred stock
with such designations, rights and preferences as may be determined from time to time by the board
of directors. Accordingly, the board of directors is empowered, without shareholder approval, to
issue preferred stock with dividend, liquidation, conversion, voting or other rights that could
adversely affect the voting power or other rights of the holders of common stock. Holders of common
stock will have no preemptive rights to subscribe for a pro rata portion of any preferred stock
that may be issued. If issued, the preferred stock could be utilized, under certain circumstances,
as a method of discouraging, delaying or preventing a change in control. The possible impact that
the issuance of preferred stock could have on a takeover attempt could adversely affect the price
of the common stock. Although we have no present intention to issue any shares of preferred stock,
we may do so in the future.
Zsolt Rumy, our founder and principal shareholder, owns approximately 17.7% of outstanding
shares of common stock. As a result, he has and will continue to have effective voting control over
our company, including the election of directors, and is able to effectively
prevent an affirmative vote which would be necessary for a merger, sale of assets or similar
transaction, irrespective of whether other shareholders believe such a transaction to be in their
best interests.
Future sales of common stock could affect the price of our common stock.
No prediction can be made as to the effect, if any, that future sales of shares or the
availability of shares for sale will have on the market price of our common stock prevailing from
time to time. Sales of substantial amounts of common stock, or the perception that such sales might
occur, could adversely affect prevailing market prices of our common stock.
We do not currently intend to pay dividends on our common stock.
We have never declared or paid any cash dividends on our common stock and do not currently
intend to do so for the foreseeable future. We currently intend to invest our future earnings, if
any, to fund our growth. Therefore, you are not likely to receive any dividends on your common
stock for the foreseeable future.
Item 1B. Unresolved Staff Comments
None.
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Item 2. Properties
The Companys facilities are listed below and are considered to be suitable and adequate for its
operations. Except as noted below, all the Companys properties are owned, subject to various
mortgage loans.
Approximate Area | ||||||||
Location | Use | (in square feet) | Status | |||||
St. Louis, Missouri |
Administrative, marketing and | 30,000 | Owned | |||||
central engineering offices | ||||||||
St. Charles, Missouri |
Carbon and Technical fiber | 107,000 | Owned | |||||
manufacturing and R&D facility | ||||||||
Abilene, Texas |
Carbon fiber manufacturing | 278,000 | Owned | |||||
Salt Lake City, Utah I |
Composite fabrication equipment | 65,000 | Owned/Mortgaged | |||||
design and manufacturing | ||||||||
Salt Lake City, Utah II |
Carbon fiber prepreg manufacturing | 35,000 | Leased | |||||
Nyergesujfalu, Hungary |
Carbon fiber, acrylic fiber precursor | 2,000,000 | Owned | |||||
Guadalajara, Mexico |
Carbon fiber, acrylic fiber precursor | 1,400,000 | Owned |
Item 3. Legal Proceedings
Legal contingencies have a high degree of uncertainty. When losses from contingencies become
estimatable and probable, reserves are established. The reserves reflect managements estimate of
the probable cost of ultimate resolution of the matters and are revised accordingly as facts and
circumstances change and, ultimately, when matters are brought to closure. If any litigation matter
is resolved unfavorably, the Company could incur obligations in excess of managements estimate of
the outcome, and such resolution could have a material adverse effect on the Companys consolidated
financial condition, results of operations or liquidity. In addition, we may incur additional legal
costs in connection with pursuing and defending such actions. As of September 30, 2009, the
Company does not have an accrual established for legal liabilities.
On May 13, 2008, the Company received a letter from the enforcement staff of the Securities
and Exchange Commission indicating that the staff was conducting a non-public, fact finding
investigation and requested that the Company retain certain records and produce information and
documents related to matters disclosed in the Companys Current Report on Form 8-K filed May 5,
2008 relating to payments directed by the Companys former Chief Financial Officer that were not
properly authorized or recorded. The Company has cooperated fully with its investigation. The
Company has submitted all information requested by the staff.
The Company is exposed to various claims and legal proceedings arising out of the normal
course of its business. Although there can be no assurance, in the opinion of management, the
ultimate outcome of these other claims and lawsuits should not have a material adverse effect on
the Companys consolidated financial condition, results of operations or liquidity.
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Item 4. Submission of Matters to a Vote of Security Holders
The Company did not submit any matters to a vote of its security holders during the quarter ended
September 30, 2009.
Item 4A. Executive Officers of the Registrant
The name, age, position and principal occupation of each of the executive officers of the Company
is set forth below:
Zsolt Rumy, age 66, is the founder of the Company and has served as its Chairman, Chief
Executive Officer and President and as a Director since 1975 and served as its interim Chief
Financial Officer from May 2008 to April 2009. Mr. Rumy received a B.S. degree in Chemical
Engineering from the University of Minnesota in 1966.
Karen M. Bomba, age 45, has served as the Chief Operating Officer of the Company since March
2008. From 2000 to 2008, Ms. Bomba served as Chairman and CEO of Messier-Bugatti USA, a subsidiary
of Messier-Bugatti, SAFRAN Group, a producer of aircraft carbon brakes and systems. Prior
positions included Business Line Manager and Focused Factory Manager of Hitco Carbon Composites
Aircraft Structures, Insulation Products and Carbon Businesses, and Manufacturing Engineering
Manager of the B2 Assembly and Systems Checkout. Ms. Bomba has a Mechanical Engineering BS from
Rensselaer Polytechnic Institute and was awarded a Northrop Fellowship for graduate work in
Manufacturing Engineering at UCLA.
Andrew W. Whipple, age 46, has served as the Chief Financial Officer since April 2009. Prior
to this, he served as Chief Accounting Officer of the Company from May 2008 to April 2009. Mr.
Whipple served as a Senior Manager in the St. Louis office of Deloitte & Touche, LLP where he
worked from 1993 to 1998, when he joined Digital Teleport, Inc. as its Controller and was later
promoted to Chief Financial Officer. After Digital Teleport was acquired by CenturyTel in June of
2003, he became Vice President of Operational Support at the telecommunications company and served
there for four years prior to joining E3 Biofuels as its Chief Financial Officer from 2007 to 2008.
Mr. Whipple is a CPA and received his degree in accounting from Virginia Tech in 1985.
George E. Husman, 64, has served as the Chief Technology Officer of the Company since January
2007. Mr. Husman holds a B.S. in aerospace engineering from the University of Cincinnati and a
M.S. in materials engineering from the University of Dayton. He spent 18 years at the Materials
Directorate at Wright-Patterson Air Force Base in research and management positions, including
Director of the Nonmetallic Materials Division. Upon leaving the Air Force in 1986, he joined BASF
Structural Materials, Inc., in Charlotte, North Carolina, as Vice President for Business
Development. At BASF, he also served as VP & General Manager of Thermoplastic Composites and Vice
President for Research and Development. In 1993, Mr. Husman joined Southern Research Institute in
Birmingham, Alabama, as Vice President of the
Engineering Division, and prior to joining Zoltek, he was the Associate Director for Research in
the School of Engineering at the University of Alabama at Birmingham.
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PART II
Item 5. Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases
of Equity Securities
The Companys common stock (symbol: ZOLT) is traded in the Nasdaq Global Select Market. The
number of beneficial holders of the Companys stock is approximately 34,000, including shareholders
whose shares are held in nominee or street names. As of September 30, 2009, there were 454
holders of record of the Companys common stock. The Company has not paid cash dividends on any
of its common stock and does not intend to pay cash dividends on common stock for the foreseeable
future.
Set forth below are the high and low bid quotations as reported by the Nasdaq Global Select
Market for the periods indicated. Such prices reflect interdealer closing prices, without retail
mark-up, markdown or commission:
Fiscal year ended | Fiscal year ended | |||||||||||||||
September 30, 2009 | September 30, 2008 | |||||||||||||||
High | Low | High | Low | |||||||||||||
First Quarter |
$ | 17.77 | $ | 4.28 | $ | 47.83 | $ | 34.10 | ||||||||
Second Quarter |
9.39 | 5.02 | 42.44 | 20.97 | ||||||||||||
Third Quarter |
12.60 | 6.50 | 32.25 | 22.79 | ||||||||||||
Fourth Quarter |
11.44 | 7.84 | 24.97 | 15.26 |
As
of November 27, 2009, the last reported sale price of the
Companys common stock was $9.05 per share.
The following table shows the total number of outstanding options and shares available for future
issuances of options under the Companys existing stock option plans as of September 30, 2009.
Number of securities | ||||||||||||
remaining available for | ||||||||||||
Number of securities | Weighted-average | future issuance under | ||||||||||
to be issued upon | exercise price | equity compensation | ||||||||||
exercise of outstanding | of outstanding | plans (excluding | ||||||||||
options, warrants | options, warrants | securities reflected in | ||||||||||
and rights | and rights | column (a)) | ||||||||||
Plan category | (a) | (b) | (c) | |||||||||
Equity compensation
plans approved by
security holders |
408,337 | $ | 23.60 | 2,163,501 | ||||||||
Equity compensation
plans not approved
by security holders |
| | | |||||||||
Total |
408,337 | $ | 23.60 | 2,163,501 | ||||||||
The Company currently has no equity compensation plans that are not approved by security holders.
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Performance Graph
The graph below shows the cumulative total return on common stock for the period from
September 30, 2004 through September 30, 2009, in comparison to the cumulative total return on
Russells 2000 Index and a NASDAQ peer group that we are most comparable to in terms of size and
nature of operations. The results shown assume that $100 was invested on September 30, 2004 and
that all dividends were reinvested. These indices are included for comparative purposes only and do
not reflect whether it is managements opinion that such indices are an appropriate measure of the
relative performance of the stock involved, nor are they intended to forecast or be indicative of
future performance of the common stock.
9/30/2004 | 9/30/2005 | 9/30/2006 | 9/30/2007 | 9/30/2008 | 9/30/2009 | |||||||||||||||||||
Zoltek Companies, Inc. |
100.00 | 146.44 | 284.52 | 485.86 | 190.53 | 116.93 | ||||||||||||||||||
NASDAQ Industrial Index |
100.00 | 112.55 | 120.53 | 144.51 | 105.61 | 102.35 | ||||||||||||||||||
The Russell 2000 Index |
100.00 | 116.47 | 126.64 | 140.58 | 118.61 | 105.47 |
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Item 6. Selected Financial Data
ZOLTEK COMPANIES, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
Fiscal Year Ended September 30, | ||||||||||||||||||||
Statement of Operations Data: |
2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
Net sales |
$ | 138,756 | $ | 185,616 | $ | 150,880 | $ | 92,357 | $ | 55,377 | ||||||||||
Cost of sales, excluding available unused capacity costs |
100,744 | 134,393 | 107,506 | 69,994 | 52,809 | |||||||||||||||
Available unused capacity costs (1) |
7,352 | | | | 2,347 | |||||||||||||||
Gross profit |
30,660 | 51,223 | 43,374 | 22,363 | 221 | |||||||||||||||
Application and development costs |
7,589 | 8,093 | 7,230 | 4,887 | 3,324 | |||||||||||||||
Litigation charge (2) |
238 | 4,884 | 5,400 | 22,795 | | |||||||||||||||
Selling, general and administrative expenses |
19,438 | 26,332 | 19,865 | 15,243 | 7,847 | |||||||||||||||
Operating income (loss) from continuing operations |
3,395 | 20,007 | 18,109 | (15,675 | ) | (7,626 | ) | |||||||||||||
Other (expense) income |
(5,492 | ) | (7,150 | ) | (18,095 | ) | (49,202 | ) | (29,877 | ) | ||||||||||
Income tax expense |
(2,105 | ) | (5,416 | ) | (1,986 | ) | (888 | ) | (708 | ) | ||||||||||
Net (loss) income from continuing operations |
(4,202 | ) | 7,441 | (1,972 | ) | (65,765 | ) | (38,211 | ) | |||||||||||
Discontinued operations: |
||||||||||||||||||||
Operating loss, net of taxes |
| | (545 | ) | (187 | ) | (2,182 | ) | ||||||||||||
Gain on disposal of discontinued operation,
net of taxes |
| | | 150 | | |||||||||||||||
Net loss on discontinued operations, net of taxes |
| | (545 | ) | (37 | ) | (2,182 | ) | ||||||||||||
Net income (loss) |
$ | (4,202 | ) | $ | 7,441 | $ | (2,517 | ) | $ | (65,802 | ) | $ | (40,393 | ) | ||||||
Net income (loss) per share: |
||||||||||||||||||||
Basic and diluted (loss) income per share: |
||||||||||||||||||||
Continuing operations |
$ | (0.12 | ) | $ | 0.22 | $ | (0.07 | ) | $ | (2.91 | ) | $ | (2.12 | ) | ||||||
Discontinued operations |
0.00 | 0.00 | (0.02 | ) | (0.00 | ) | (0.12 | ) | ||||||||||||
Total |
$ | (0.12 | ) | $ | 0.22 | $ | (0.09 | ) | $ | (2.91 | ) | $ | (2.24 | ) | ||||||
Basic weighted average common shares outstanding |
34,402 | 34,042 | 28,539 | 22,575 | 18,050 | |||||||||||||||
Diluted weighted average common shares outstanding |
34,402 | 34,172 | 28,539 | 22,575 | 18,050 |
September 30, | ||||||||||||||||||||
Balance Sheet Data: |
2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
Working capital (3) |
$ | 76,127 | $ | 76,000 | $ | 147,956 | $ | 20,042 | $ | 19,072 | ||||||||||
Total assets (3) |
366,845 | 440,164 | 403,599 | 187,684 | 130,429 | |||||||||||||||
Current maturities of long-term debt and credit lines |
16,436 | 12,601 | 13,813 | 1,365 | 374 | |||||||||||||||
Long-term debt, less current maturities |
981 | 3,562 | 6,851 | 32,002 | 40,421 | |||||||||||||||
Shareholders equity (3) |
315,465 | 346,666 | 320,767 | 111,661 | 40,645 |
(1) | These costs include depreciation and other costs associated with the available unused capacity. The Company believes maintaining this available unused capacity has been necessary to encourage development of significant large-scale applications and maintain a level of readiness as we anticipate a return to more robust market conditions. | |
(2) | Litigation expenses related to the Scott-Macon case in fiscal 2007 and the SP Systems case in fiscal 2009, 2008 and 2006, as discussed in Note 8 of the Notes to Consolidated Financial Statements. | |
(3) | The Company completed a public offering of shares in August 2007 and realized net proceeds of $131.5 million, recorded as increases to cash and equity. During fiscal 2008 a substantial portion of those proceeds were used to fund capital expenditure projects in Mexico. |
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Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations
OVERVIEW
The following Managements Discussion and Analysis of Financial Condition and Results of Operations
(MD&A) is intended to help the reader understand Zoltek, our operations and our business
environment. MD&A is provided as a supplement to, and should be read in conjunction with, our
consolidated financial statements and the accompanying notes. This overview summarizes the MD&A,
which includes the following sections:
Our Business a general description of the key drivers that affect our business, the industry in
which we operate and the strategic initiatives on which we focus.
Results of Operations an analysis of our overall results of operations and segment results for
the three years presented in our financial statements. We operate in two segments: Carbon Fiber and
Technical Fiber. Other miscellaneous and corporate are combined into a third business segment
called Headquarters/Other.
Liquidity and Capital Resources an analysis of cash flows, sources and uses of cash, off-balance
sheet arrangements, contractual obligations, the potential impact of currency exchange and an
overview of our financial position.
Critical Accounting Estimates a description of accounting estimates that require critical
judgments and estimates.
OUR BUSINESS
EXECUTIVE OVERVIEW
We are an applied technology and advanced materials company. We are a leader in the
commercialization of carbon fiber through our development of a price-competitive, high-performance
reinforcement for composites used in a broad range of commercial products which we sell under the
Panex ® trade name. In addition to manufacturing carbon fiber, we produce an intermediate product
that we refer to as technical fiber, a stabilized and oxidized acrylic fiber used in flame- and
heat-resistant applications which we sell under the Pyron ® trade name. We have spent over 15 years
developing our proprietary technology and manufacturing processes. We believe that we are the
largest capacity manufacturer primarily focused on producing low-cost carbon fiber for commercial
applications.
KEY PERFORMANCE INDICATORS
Our management monitors and analyzes several key performance indicators within each of these
segments to manage our business and evaluate our financial and operating performance, including:
Revenue. In the short-term, management closely reviews the volume of product shipments and
indicated customer requirements in order to forecast revenue and cash receipts. In the
longer-term, management believes that revenue growth through new product applications is the best
indicator of whether we are achieving our objective of commercializing carbon fiber. We expect that
new applications, including those we are attempting to facilitate, will continue to positively
affect demand for our products.
The following factors have affected the net sales of our Carbon Fiber segment in recent years:
(1) the growth in emerging applications using carbon fiber, such as wind turbines; (2) increases in
our manufacturing capacity; (3) foreign currency fluctuations; (4) selling prices; and (5) global
economic and capital market conditions affecting our customers. We expect that our net sales in
future periods will continue to be affected by all of these factors. During fiscal 2009, we
implemented selected price decreases primarily as a result of decreases in raw material costs. We
periodically change our prices based on changes in our costs, as well as to reflect overall market
conditions. The net sales of our Technical Fiber segment have been affected in the past, and we
expect will continue to be affected in the foreseeable future, by the demand and order patterns
resulting from aircraft brake manufacturers.
Gross profit. Our total gross profit for fiscal 2009, 2008, and 2007 was 22.1%, 27.6%, and
28.7%, respectively. Management focuses on maintaining and improving the gross profit over the
long-term while leading the commercialization of carbon fiber and controlling associated costs.
As such, the Company has maintained available unused capacity to remain poised to capture
opportunities in emerging markets. Gross margin was negatively impacted by 5.3% by available
unused capacity costs of $7.4 million in fiscal 2009. The primary cost components of our Carbon
Fiber and Technical Fiber segments are energy and acrylonitrile, which is a propylene-based product
and our primary raw material for the production of acrylic fiber precursor used in our carbon fiber
and technical fiber production.
Operating expenses. Our operating expenses are driven by headcount and related administrative
costs, marketing costs, and research and development costs. We monitor headcount levels in specific
geographic and operational areas. We believe that research and development expenditures will be
the primary means by which we can facilitate new product applications.
Cash flow from operating activities. Cash flow from operating activities for fiscal 2009,
2008, and 2007 was $15.2 million, $20.2 million, and $6.9 million. Management believes that
operating cash flow is meaningful to investors because it provides a view of Zoltek with respect to
ongoing operating results.
Liquidity and cash flows. Due to the variability in revenue, our cash position varies. We
closely monitor our expected cash levels, particularly as it relates to operating cash flow, days
sales outstanding, days payables outstanding and inventory turnover. Management also
monitors debt levels and the financing costs associated with debt. We expect to repay all our
outstanding long-term debt during fiscal 2010 and to continue to finance our working capital needs
with bank lines of credit.
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BUSINESS TRENDS
At the end of fiscal 2008, we completed our expansion plans and essentially doubled our
production capacity over the immediately preceding two fiscal years. Our capacity increase was
completed just as world trade dropped and the global economy began to experience deep recession.
During fiscal 2009, we have seen a sudden, but we believe only temporary, slowdown in the growth of
wind turbine business. This occurred at the same time as a significant decrease in the aerospace
market due unexpected delays in the introduction of new jetliners utilizing aerospace carbon
fibers. Inasmuch as producers of carbon fibers for commercial and aerospace applications had
greatly increased their installed capacity over the past few years, we have seen intensified
competition between aerospace and commercial carbon fiber manufacturers in cross-over applications
(e.g., sporting goods) for which either aerospace or commercial carbon fibers may be utilized.
In this business environment, management continued to focus its efforts on building on the
long-term vision of Zoltek as the leader in commercialization of carbon fibers as a low-cost but
high performance reinforcement for composites. Management primarily emphasized the following
areas:
| Increased Sales Efforts in Selected International Markets. We have identified international markets with high growth potential for our existing and emerging commercial applications. Accordingly, we have added sales personnel and increased our marketing efforts in India, China and Korea, which have shown growth for wind energy and other applications. |
| Business Development in Emerging Applications. We have identified emerging applications for our products with high growth potential across a variety of industries and regions. In addition to producing carbon fibers for the existing prepreg technology used by many of our large wind turbine customers, we have recently begun shipments of carbon fibers qualified for use in the infusion process utilized by other wind turbine blade manufacturers. We also are seeking to qualify our products for use in aerospace secondary structures such as floor, luggage bins and seats, and anticipate increased sales in this market as the production of new jetliners increases. Additionally, we are gearing up for the anticipated next phase of wider use of carbon fibers in automotive applications. |
| Operating Cash Flows and Cash Management. Despite a 25% decrease in sales, we had positive operating cash flows of $15.2 million in fiscal 2009, compared to $20.2 million during fiscal 2008. Increased inventory levels used $4.3 million in fiscal 2009. The Company seeks to reduce inventory levels going forward. In order to accomplish this goal the Company is focused on increasing sales and reducing production levels to better match current sales rates. During fiscal 2009, we established collection targets and payment schedules for all customers and suppliers to improve better control our days sales outstanding and days payables outstanding. The Company paid down $10.6 million of its convertible debt and $22.2 million of capital expenditures and construction payables related primarily to the expansion of precursor and carbon fiber lines in Mexico. Even with these cash outlays which are not expected to recur in fiscal 2010, the Companys cash balance only declined by $8.3 million. We feel that we are in a position to pay down our remaining debt with operating cash flows and revolving credit borrowings and increase our cash balance during fiscal 2010. |
RESULTS OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 2009 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 2008
The Companys sales decreased 25.2%, or $46.9 million, to $138.8 million in fiscal 2009 from
$185.6 million in fiscal 2008. The decline in revenue was primarily due to declined sales volume,
pricing declines resulting from significant cost reduction in raw materials and energy and
currency fluctuation, and the weakness of the Euro versus the U.S. dollar during fiscal 2009.
During fiscal 2009, there was approximately a 14.5% decrease in volume of product shipments as
compared to 2008, which accounted for approximately $20.9 million of the revenue decrease.
Certain price reductions resulted from passing on raw material cost savings to customers, which
caused a $11.6 million decrease in sales over fiscal 2009. The majority of our European sales are
denominated in Euros, which weakened significantly versus the U.S. dollar during most of the 2009
fiscal year, causing approximately $8.9 million of the decrease in sales. Carbon fiber sales
decreased 26.1%, or $40.7 million, to $115.3 million during fiscal 2009 from $156.0 million during
fiscal 2008. Technical fiber sales decreased 19.0%, or $4.9 million, to $21.0 million during
fiscal 2009 from $25.9 million during fiscal 2008. Technical fiber sales decreased in fiscal 2009
primarily due to lower shipments to aircraft brake customers. Sales of other products and
services consisting primarily of energy utility services provided to the local community by our
Hungarian subsidiary decreased $1.3 million to $2.4 million during fiscal 2009 from $3.7 million
during fiscal 2008.
The Companys cost of sales decreased by 19.6%, or $26.3 million, to $108.1 million during
fiscal 2009 from $134.4 million during fiscal 2008. Carbon fiber cost of sales decreased by 19.9%,
or $22.0 million, to $88.7 million during fiscal 2009 from $110.7 million for fiscal 2008. The
decrease in carbon fiber cost of sales reflected decreased sales of 26.2% discussed above.
Technical fiber cost of sales decreased $3.0 million, or 14.8%, to $17.4 million for fiscal 2009
from $20.4 million for fiscal 2008 primarily as a result of the decreased sales noted above.
Included in the Companys cost of sales was available unused capacity costs of $7.4 million. These
costs are comprised of fixed production costs allocated to manufacturing lines which were producing
below normal levels and amounted to $6.4 million for the carbon fiber segment and $1.0 million for
the technical fiber segment during fiscal 2009. The Company believes maintaining this available
unused capacity
has been necessary to encourage development of significant large-scale applications and
maintain a level of readiness as we anticipate a return to more robust market conditions. The
cost of sales of other products decreased for fiscal 2009 to $2.1 million compared to fiscal 2008
of $3.3 million.
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The Companys gross profit decreased by 40.1%, or $20.6 million, to $30.6 million during
fiscal 2009 from $51.2 million in fiscal 2008. Carbon fiber gross profit percentage decreased to
23.1% for fiscal 2009 compared to 29.1% for fiscal 2008. Carbon fiber gross profit decreased from
$45.3 million to $26.7 million during these respective periods. The decreases in carbon fiber
gross profit and gross profit percentage resulted primarily due to available unused capacity costs
expensed during the fiscal year. Technical fiber gross profit decreased from $5.5 million, or
21.4% of sales, for fiscal 2008 to $3.6 million, or 17.3% of sales, during fiscal 2009. The
decrease in technical fiber gross profit and gross profit percentage resulted primarily from
available unused capacity costs expensed during the fiscal year and decreased shipments to the
primary aircraft brake customers. The gross profit of the other products increased for fiscal 2009
to $0.4 million compared to a gross profit for fiscal 2008 of $0.3 million.
Application and market development costs were $7.6 million in fiscal 2009 and $8.1 million in
fiscal 2008. These costs included product and market development efforts, product trials and
product development personnel costs. Targeted emerging applications include automobile components,
offshore oil and gas drilling, fire/heat barrier and alternate energy technologies. These costs
include expenses associated with application development of the towpreg product at the Companys
prepreg facility in Utah.
A litigation charge of $0.2 million was recorded in fiscal 2009 related to the affirmance of
the judgment in the SP case compared to a charge of $4.9 million during fiscal 2008 (see Note 8 of
the Notes to Consolidated Financial Statements).
Selling, general and administrative increased by $1.2 million, to $19.4 million in fiscal 2009
from $18.2 million in fiscal 2008. The Company recorded $3.0 million for the cost of employee and
director services received in exchange for equity instruments under FASB ASC 715 (formerly
referenced as Statement of Financial Accounting Standards (SFAS) 123-R Share-Based Payments)
during fiscal 2009 and $2.3 million in fiscal 2008. The increase was due to the true up of the
employee forfeiture rate as the retention rate for top management improved significantly from
historical averages. Administrative costs in Mexico increased by approximately $1.0 million as the
plant built up staffing to prepare for operations. The Company spent $0.4 million in fiscal 2008
related to a previously disclosed accounting investigation. There was a $0.1 decrease in expenses
related to a supersedeas bond related to our SP case judgment (see Note 8).
Operating loss was $3.4 million for fiscal 2009 compared to income of $20.0 million in fiscal
2008. Carbon fiber operations reported operating income of $14.2 million for fiscal 2009 compared
to income of $34.0 million in fiscal 2008. The decrease in operating income in the carbon fiber
operation in fiscal 2009 related to the decrease in production and sales, as well as the other
factors mentioned above. Operating income from technical fibers decreased $0.7 million, from $3.0
million for fiscal 2008 to $2.3 million for fiscal 2009, as sales decreased $4.9 million due to
decreased orders from aircraft brake customers. Corporate headquarters/other reported an operating
loss of $13.1 million for fiscal 2009 compared to a loss of $17.0 million during fiscal 2008. The
decrease in operating loss was due primarily to the decrease in legal and litigation expenses due
to the resolution of the Scott-Macon and SP cases during 2009.
Interest expense was $1.4 million for fiscal 2009, compared to $1.9 million in fiscal 2008.
The decrease in interest expense resulted from the repayment of $10.5 million and conversion of
$0.3 million of convertible debt to during fiscal 2009.
Amortization of financing fees, which are non-cash expenses, was approximately $5.4 million
during fiscal 2009 compared to $6.7 million during fiscal 2008. (See Liquidity and Capital
ResourcesFinancing).
Interest income was $0.4 million for fiscal 2009 compared to $2.9 million for fiscal 2008.
The decrease was a result of lower cash balance on hand.
Gain on foreign currency transactions improved to $2.2 million for fiscal 2009 compared to a
loss of $0.4 million for fiscal 2008. During fiscal 2009, the Hungarian Forint (HUF) weakened in
value against the Euro and the U.S. dollar, causing a loss on the Companys accounts receivable,
but was offset by a gain on a large U.S. dollar denominated intercompany payable. The translation
of the Hungarian subsidiarys financial statements from its functional currency (HUF) to U.S.
dollars is not included in determining net income for the period but is recorded in accumulated
other comprehensive income (loss) in equity.
Other expense, net, was $1.2 million in fiscal 2009 compared to $1.1 million for fiscal 2008.
Other expense, net for fiscal 2009 consists primarily of loss from the sale of miscellaneous
equipment and from miscellaneous penalties and fees in Hungary.
Income tax expense was $2.1 million for fiscal 2009 compared to $5.4 million for fiscal 2008
due primarily to decreased sales and taxable income generated in Hungary. An additional income
tax expense of $1.2 million was recorded for fiscal 2008 as the Company accrued for a special
Hungarian tax of 4% on pre-tax net income. In fiscal 2009, this special Hungarian tax did not
apply to the Company. The Company accrued approximately
$0.2 million in alternative minimum and local income
taxes in the U.S. and Mexico.
The foregoing resulted in loss from continuing operations of $4.2 million for fiscal 2009
compared to a net income of $7.4 million for fiscal 2008. Similarly, the Company reported net loss
from continuing operations per share of $0.12 on a basic and diluted basis for fiscal 2009 and net
income from continuing operations per share of $0.22 on a basic and diluted basis for fiscal 2008.
The weighted average basic common shares outstanding were 34.4 million and 34.0 million for fiscal
2009 and 2008, respectively.
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FISCAL YEAR ENDED SEPTEMBER 30, 2008 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 2007
The Companys sales increased 23.0%, or $34.7 million, to $185.6 million in fiscal 2008 from
$150.9 million in fiscal 2007. Carbon fiber sales increased 34.1%, or $39.7 million, to $156.0
million during fiscal 2008 from $116.4 million during fiscal 2007 as production and sales of wind
energy orders continued to grow. The Companys sales further benefited from the newly added
capacity in Hungary of five carbon fiber lines, two of which were not completed until late March
2008. Technical fiber sales decreased 18.3%, or $5.8 million, to $25.9 million during fiscal 2008
from $31.7 million during fiscal 2007. Technical fiber sales decreased in fiscal 2008 as the
Companys two major aircraft brake customers reduced inventory which they had built up during
fiscal 2007 due to concerns that they had with their supply chain. Orders resumed to normal
levels with one of these customers during the second quarter of 2008. Sales of other products and
services consisting primarily of energy utility services provided to the local community by our
Hungarian subsidiary increased $0.9 million to $3.7 million during fiscal 2008 from $2.8 million
during fiscal 2007.
The Companys cost of sales increased by 25.0%, or $26.9 million, to $134.4 million during
fiscal 2008 from $107.5 million during fiscal 2007. Carbon fiber cost of sales increased by 34.6%,
or $28.5 million, to $110.7 million during fiscal 2008 from $82.2 million for fiscal 2007. The
increase in carbon fiber cost of sales resulted primarily from the increased sales of 34.1%
discussed above. Technical fiber cost of sales decreased $3.3 million, or 13.9%, to $20.4 million
for fiscal 2008 from $23.7 million for fiscal 2007 primarily as a result of the decreased sales
noted above. The cost of sales of other products increased for fiscal 2008 to $3.3 million
compared to fiscal 2007 of $1.6 million.
The Companys gross profit increased by 18.1%, or $7.8 million, to $51.2 million during fiscal
2008 from $43.4 million in fiscal 2007. Carbon fiber gross profit percentage decreased to 29.1% for
fiscal 2008 compared to 29.3% for fiscal 2007. Carbon fiber gross profit increased from $34.1
million to $45.3 million during these respective periods. The increase in carbon fiber gross
profit resulted from greater volumes and improved efficiencies of the installed carbon fiber lines.
Technical fiber gross profit decreased from $8.0 million, or 25.3% of sales, for fiscal 2007 to
$5.5 million, or 21.4% of sales, during fiscal 2008. The decrease in technical fiber gross profit
and gross profit percentage resulted from the limitation on the ability of the business unit to
absorb certain fixed costs due to decreased production of technical fiber products.
Application and market development costs were $8.1 million in fiscal 2008 and $7.2 million in
fiscal 2007. These costs included product and market development efforts, product trials and sales
and product development personnel and related travel. Targeted emerging applications include
automobile components, offshore oil and gas drilling, fire/heat barrier and alternate energy
technologies.
A litigation charge of $4.9 million was recorded in fiscal 2008 related to the affirmance of
the judgment in the SP case compared to a charge of $5.4 million during fiscal 2007 related to the
confirmation of judgment of the Scott-Macon case (see Note 8 of the Notes to Consolidated Financial
Statements).
Selling, general and administrative increased by $5.6 million, to $18.2 million in fiscal 2008
from $12.6 million in fiscal 2007. The Company recorded $2.3 million for the cost of employee
services received in exchange for equity instruments under FASB ASC 715 (formerly referenced as
Statement of Financial Accounting Standards (SFAS) 123-R Share-Based Payments) during fiscal
2008 and $1.3 million in fiscal 2007. The Company also increased headcount and administrative
services during fiscal 2008 by $2.8 million compared to fiscal 2007. The increase related to
staffing of management positions that have been filled to meet the demands of the growing sales and
production volume. The Company spent $0.4 million in fiscal 2008 related to a previously
disclosed accounting investigation. Bad debt expense increased by $0.9 million from fiscal 2007
to fiscal 2008.
Operating income was $20.0 million for fiscal 2008 compared to income of $18.1 million in
fiscal 2007. Carbon fiber operations reported operating income of $34.0 million for fiscal 2008
compared to income of $26.6 million in fiscal 2007. The improvement in operating income in the
carbon fiber operation in fiscal 2007 related to the increase in production and sales as the
Company added new capacity at its Hungarian facility. Operating income from technical fibers
decreased $4.4 million, from $7.4 million for fiscal 2007 to $3.0 million for fiscal 2008, as sales
decreased $5.8 million due to decreased orders from aircraft brake customers. Corporate
headquarters/other reported an operating loss of $17.0 million for fiscal 2008 compared to a loss
of $15.8 million during fiscal 2007. The increase in operating loss was due primarily to increases
in administrative headcount and salaries in at the corporate office and in Hungary to support the
production growth and an increase of $1.0 million for the cost of employee services received in
exchange for equity instruments under FASB ASC 715.
Interest expense was $1.9 million for fiscal 2008, compared to $2.3 million in fiscal 2007.
The decrease in interest expense resulted from the reduced debt balances due to conversion of
convertible debt to common stock during fiscal 2007 and 2008.
Amortization of financing fees, which are non-cash expenses, was approximately $6.7 million
during fiscal 2008 compared to $9.8 million during fiscal 2007. (See Liquidity and Capital
ResourcesFinancing).
Interest income was $2.9 million for fiscal 2008 compared to $1.8 million for fiscal 2007.
The increase was a result of interest earned on short-term investments of cash received from our
public offering in August 2007.
Warrant issuance expense was $6.4 million for fiscal 2007. In December 2006, the Company
expensed the fair value of warrants issued to induce holders to exercise previously held warrants.
The Company used the funds received in connection with posting the bond necessary in connection
with the continuing defense of the SP Systems case. The Company did not incur any warrant issuance
expense during fiscal 2008.
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Loss on value of warrants and conversion feature, which is a non-cash item, was a loss of $0.3
million for fiscal 2007 (see Liquidity and Capital ResourcesFinancing). The loss was
attributable to the increase in the market price of the Companys common stock. All of the
Companys convertible debt issuances which required derivative accounting were converted to equity
instruments as of September 30, 2007.
Loss on foreign currency transactions decreased to $0.4 million for fiscal 2008 compared to
$0.7 million for fiscal 2007. During fiscal 2008, both the U.S. dollar and the Euro declined in
value against the HUF. As most of the Companys accounts receivable are denominated in Euros, the
decline in value resulted in a significant loss recognized in the income statement of our Hungarian
subsidiary. The translation of the Hungarian subsidiarys financial statements from its functional
currency (HUF) to U.S. dollars is not included in determining net income for the period but is
recorded in accumulated other comprehensive income in equity. The loss in fiscal 2007 was primarily
the result the decline in value of the U.S. dollar.
Other expense, net, was $1.1 million in fiscal 2008 compared to $0.4 million for fiscal 2007.
During fiscal 2008, the Company disposed of some obsolete equipment items and incurred cost related
to the shutdown of a sales office in Europe. The expenses incurred during fiscal 2007 were
primarily fees incurred at our Hungarian subsidiary.
Income tax expense was $5.4 million for fiscal 2008 compared to $2.0 million for fiscal 2007.
During fiscal 2008, the Company amortized its deferred tax asset by $2.6 million, reducing the
existing net operating loss carryforward. An additional income tax expense of $1.2 million was
recorded for fiscal 2008 as the Company accrued for a special Hungarian tax of 4% on pre-tax net
income. The Company also incurred $1.4 million expense during fiscal 2008 related to the local
Hungarian municipality tax. The Company paid approximately $0.2 million in state and local income
taxes in the U.S. and Mexico.
The foregoing resulted in income from continuing operations of $7.4 million for fiscal 2008
compared to a net loss of $2.5 million for fiscal 2007. Similarly, the Company reported net income
from continuing operations per share of $0.22 on a basic and diluted basis for fiscal 2008 and net
loss from continuing operations per share of $0.07 on a basic and diluted basis for fiscal 2007.
The weighted average common shares outstanding were 34.0 million and 28.5 million for fiscal 2008
and 2007, respectively.
Net loss from discontinued operations was $0.5 for fiscal 2007. The Company reported net loss
from discontinued operations per share of $0.02 on a basic and diluted basis for fiscal 2007. The
Company did not report any discontinued operations for fiscal 2008.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes its cash currently on hand, cash flow from operations and available
credit facilities should be sufficient to fund its identified liquidity needs over the next twelve
months.
CASH FLOWS
Cash Provided By Operating Activities
Operating activities provided $15.2 million of cash for fiscal 2009. Cash flows were
positively affected by operating income before depreciation of $19.7 million. Cash flows were
negatively affected during fiscal 2009 by the payment of $5.6 million, net of accrued interest, to
resolve litigation involving an investment banker (see Note 7 of the Notes to Consolidated
Financial Statements). In February 2009, the Company used $23.5 million of restricted cash to
resolve litigation involving SP Systems. Restricted cash has been shown as a use of cash in
investing activity during fiscal 2008, 2007 and 2006, so its usage in 2009 had no impact on
unrestricted cash balances. Increased inventory levels used $4.3 million of cash in the current
fiscal year. The Company will seek to reduce inventory levels going forward. Collections from
accounts receivables resulting in a net increase in cash flow of $8.5 million.
Operating activities provided $20.2 million of cash for fiscal 2008. Cash flows were
positively affected by a $9.2 million improvement in operating income before depreciation for
fiscal 2008 of $36.5 million. The Companys sales benefited from the newly added capacity in
Hungary. Increased inventory levels and accounts receivable used of $17.4 million and $4.4
million, respectively, of cash during fiscal 2008 as the Company grew the inventory levels to
sustain current and anticipated increased revenue in the future.
Cash Used In and Provided By Investing Activities
Net cash used in investing activities for fiscal 2009 was $20.5 million, which consisted of
capital expenditures to expand production lines of the Companys precursor facilities and carbon
fiber operations to meet the anticipated long-term demand for carbon fiber products. This included
$1.6 million of funds received from the Hungarian government as a conditional grant to reimburse
capital expenditures and related outlays (see Note 2 of the Notes to Consolidated Financial
Statements).
Net cash used in investing activities for fiscal 2008 was $110.6 million which consisted of
capital expenditures of $107.7 million to acquire the Mexican facility expand and improve
production lines of the Companys Hungarian and Mexican precursor facility and carbon fiber
operations and the U.S. to meet the additional demand for carbon fiber products. This was offset
by $3.3 million of funds received from the Hungarian government as a conditional grant to reimburse
capital expenditures and related outlays (see Note 2 of the Notes to Consolidated Financial
Statements).
Cash Used and Provided By Financing Activities
Net cash used for financing activities was $3.0 million in fiscal 2009 as the Company repaid
convertible debt of $10.6 million, which was offset by increasing borrowings on our lines of credit
by $7.6 million.
Net cash used by financing activities was $2.3 million in fiscal 2008, as the Company repaid
$1.5 million of its Hungarian term loan, and repaid $2.3 million of its U.S. term loans, while the
exercise of stock options and warrants provided $1.5 million.
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HUNGARIAN GRANT
The Hungarian government has pledged a grant of 2.9 billion HUF (approximately $15.7
million as of September 30, 2009) to Zolteks Hungarian subsidiary that will provide a portion of
the capital resources to modernize its facility, establish a research and development center, and
support buildup of manufacturing capacity of carbon fibers. Zolteks Hungarian subsidiary received
approximately HUF 0.3 billion, HUF 0.7 billion and HUF 1.6 billion in grant funding during fiscal
2009, 2008 and 2007, respectively. These funds have been recorded as a liability on the Companys
consolidated balance sheet. The liability will be amortized over the life of the assets procured
by the grant funds, offsetting the assets depreciation expense into which the proceeds of the
grant are invested. The Company has presented bank guarantees amounting to 120% of the amount of
the grant as received.
The Hungarian subsidiary may be required to pay back all or a portion of the grant if, among
other things, the Hungarian subsidiary fails to obtain revenue targets ; fails to employ an average
annual staff of 1,200 employees; fails to utilize regional suppliers for at least 45% of its
purchases; fails to obtain consent from the Hungarian government prior to selling assets created
with grant funds; fails to use grant funds in accordance with the grant agreement; fails to provide
appropriate security for the grant; makes or made an untrue statement or supplies or supplied false
data in the grant agreement, grant application or during the time of the grant; defaults on its
obligations by more than 30 days; withdraws any consents it gave in the grant agreement; or causes
a partial or complete failure or hindrance of the project that is the subject of the grant. These
targets must be achieved during a five-year measurement period from October 2011 to October 2016.
Currently, although there can be no assurance, the Company anticipates it will comply with the
requirements of the grant agreement.
FINANCING ACTIVITY
Public offering
In fiscal 2007, the Company completed a public offering of 3,615,000 shares of common
stock, par value $0.01 per share, at $38.76 per share, less underwriting discounts. The Company
recorded the proceeds of $131.5 million, net of $0.8 million financing costs, as an increase to
shareholders equity.
Bond Related to SP Systems Case
In December 2006, the Company obtained the financing to post a bond of up to $40.0
million, which represented the potential bond necessary in connection with the continuing defense
of the SP Systems case. The Company raised the financing with a $10.0 million loan commitment from
its U.S. bank collateralized by certain real estate of the Company at an interest rate of 7.5%, a
$10.0 million loan commitment from the Companys Chief Executive Officer at 8% interest, the
proceeds from the exercise of 827,789 warrants for $11.9 million by existing institutional
investors and the remainder with the Companys cash on hand.
In April 2007, the Company reported the results of various post-trial motions in ongoing
litigation (see Note 8 of the Notes to the Consolidated Financial Statements). In April 2007 the
Company posted a supersedeas bond, collateralized by a $23.5 million letter of credit issued by the
Companys U.S. bank. As of September 30, 2008, the letter of credit is collateralized by
$23.5 million of restricted cash. The Company repaid the loan from the Chief Executive Officer and
terminated the $10.0 million loan commitment from its U.S. bank during the fourth quarter of fiscal
2007.
On February 9, 2009, the Company paid the judgment using $23.5 million of restricted cash,
which terminated the letter of credit and related bond.
Revolving Credit Facility
In February 2009, the Company extended its existing U.S. line of credit until January 1,
2010. The extension of this credit facility increases the amount available under the previously
existing revolving credit facility from $6.7 million to $10.0 million. The revolving credit
facility has a total commitment of the lesser of (1) $10.0 million or (2) an eligible borrowing
base equal to a percentage of eligible accounts receivable plus a percentage of eligible
inventories, which as of September 30, 2009 equaled $9.1 million. Total borrowings under the
facility were $8.3 million as of September 30, 2009.
In November 2009, the Companys Hungarian subsidiary increased its amount available under its
credit facility with a Hungarian bank from $5.0 million to $9.7 million, the term of which expires
December 31, 2009. Total borrowings under this credit facility were $3.9 million at September 30,
2009, with $5.8 million of remaining availability. The credit facility is a term loan with
quarterly interest payments.
The Company intends to extend its existing lines of credit before expiration on January 1,
2010. Based on the history of relationships with its banks and its current financial position, the
Company expects it will be able to successfully extend its lines of credit.
Convertible Debt
In September 2005, Zoltek entered into an agreement for new financing; a convertible debenture
package of up to $50 million in a private placement with a group of institutional investors. These
financings are collateralized by the carbon fiber assets of the Companys Hungarian subsidiary.
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As of September 30, 2009, Zoltek had $4.2 million of convertible debt outstanding, which the
Company anticipates repaying with cash on hand by April 2010. The following tables summarize the
activity regarding our convertible debt conversions during the fiscal years ended 2009, 2008 and
2007.
2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||
Number | Number | Number | ||||||||||||||||||||||||||||||||||
of shares | Conversion | of shares | Conversion | of shares | Conversion | |||||||||||||||||||||||||||||||
converted | price | Equity value | converted | price | Equity value | converted | price | Equity value | ||||||||||||||||||||||||||||
February 2003 |
| $ | 3.50 | $ | | | $ | 3.50 | $ | | 771,431 | $ | 3.50 | $ | 2,700,009 | |||||||||||||||||||||
December 2005 |
| 12.50 | | | 12.50 | | 1,444,489 | 12.50 | 18,056,112 | |||||||||||||||||||||||||||
February 2006 |
| 13.07 | | | 13.07 | | 760,622 | 13.07 | 9,941,330 | |||||||||||||||||||||||||||
May 2006 |
| 25.51 | | 203,679 | 25.51 | 5,195,856 | 141,120 | 25.51 | 3,599,971 | |||||||||||||||||||||||||||
July 2006 |
16,264 | 15.40 | 250,466 | 117,840 | 25.51 | 3,006,092 | | 25.51 | | |||||||||||||||||||||||||||
October 2006 |
| 25.51 | | 115,578 | 25.51 | 2,948,383 | | 25.51 | | |||||||||||||||||||||||||||
16,264 | $ | 250,466 | 437,097 | $ | 11,150,331 | 3,117,662 | $ | 34,297,422 | ||||||||||||||||||||||||||||
As of September 30, 2009 | As of September 30, 2008 | |||||||||||||||||||||||
Number | Number | |||||||||||||||||||||||
of shares | Conversion | Principal | of shares | Conversion | Principal | |||||||||||||||||||
outstanding | price | outstanding | outstanding | price | outstanding | |||||||||||||||||||
May 2006 |
70,560 | 25.51 | 1,799,986 | 352,803 | 25.51 | 9,000,005 | ||||||||||||||||||
July 2006 |
19,640 | 25.51 | 501,016 | 58,800 | 25.51 | 1,499,988 | ||||||||||||||||||
October 2006 |
76,381 | 25.51 | 1,948,479 | 178,342 | 25.51 | 4,549,504 | ||||||||||||||||||
166,581 | $ | 4,249,481 | 589,945 | $ | 15,049,497 | |||||||||||||||||||
The terms of repayment for each convertible debt issuance in May, July and October 2006
stipulate that the Company shall pay the principal balance in ten equal quarterly installments
commencing on the date 15 months following the closing date and continues for each of the nine
quarters thereafter. Under certain circumstances, the Company may settle the principal and accrued
unpaid interest in common stock. Additionally, the May, July and October 2006 issuances allow the
Company to require conversion if the price of the Companys common stock stays above $42.50 per
share for a period of 20 consecutive days beginning six months after the date of registration of
the resale of the underlying shares. At that time, the Company may require the investor to convert
with at least 30 days notice. The May, July and October 2006 issuances also provide stipulation
that the investor may require the Company to pay out the quarterly installment due in cash if the
Companys common stock Volume-Weighted Average Price average is below $12.50 on the date of
conversion.
Each outstanding issuance of convertible debt is summarized in the table below which sets
forth the significant terms of the debt, warrants and assumptions associated with valuing the
conversion feature and warrants:
Outstanding Convertible Debt Issuances
May 2006(1) | July 2006(1) | October 2006(1) | ||||||||||
Original principal amount of debentures (millions) |
$ | 20.0 | $ | 2.5 | $ | 7.5 | ||||||
Per share conversion price on debenture |
$ | 25.51 | $ | 25.51 | $ | 25.51 | ||||||
Interest rate |
Libor plus 4 | % | Libor plus 4 | % | Libor plus 4 | % | ||||||
Term of debenture |
42 months | 42 months | 42 months | |||||||||
Warrants issued |
274,406 shares | 34,370 shares | 102,835 shares | |||||||||
Term of warrants |
60 months | 60 months | 60 months | |||||||||
Per share exercise price of warrants |
$ | 28.06 | $ | 28.06 | $ | 28.06 | ||||||
Fair value per warrant at issuance |
$ | 26.03 | $ | 23.89 | $ | 22.13 | ||||||
Value per share of conversion feature at issuance |
$ | 18.80 | $ | 19.21 | $ | 19.57 | ||||||
Stock price on date of agreement |
$ | 32.25 | $ | 29.28 | $ | 26.81 | ||||||
Stock volatility at issuance |
106 | % | 111 | % | 117 | % | ||||||
Dividend yield |
0.0 | % | 0.0 | % | 0.0 | % | ||||||
Risk-free interest rate at issuance |
4.88 | % | 4.88 | % | 4.65 | % | ||||||
Principal shares converted |
Partial | Partial | Partial | |||||||||
Warrants exercised |
No | No | Partial |
(1) | The May 2006, July 2006 and October 2006 issuances had a beneficial conversion feature. |
Amortization of Financing Fees and Debt Discount
At the time of issuance of convertible debt securities with warrants, the Company records the
fair value associated with the warrants using the Black-Scholes option-pricing model. This fair
value discount is recorded as a reduction in the carrying value of the convertible debt security
that is accreted to its face value over the life of the convertible security and expensed into the
Companys income statement. If the
convertible security is converted prior to the redemption date, the unamortized debt discount
associated with the valuation of the warrants is recorded as a reduction to additional paid-in
capital at the time of conversion.
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The February 2005, February 2006, May 2006, July 2006 and October 2006 issuances were
considered to have a beneficial conversion feature because the adjusted conversion price after
allocating a portion of the proceeds to the warrants, as discussed above, was less than the
Companys market price of common stock at date of issue. The beneficial conversion is recorded as a
reduction in the carrying value of the convertible debt security and is accreted to its face value
over the life of the convertible security and expensed into the Companys income statement. If the
convertible security is converted prior to the redemption date, the unamortized balance is recorded
in expense at the time of conversion.
See the table below for impact of amortization of financing fees and debt discount on the
financial results for the fiscal years 2009, 2008 and 2007 (amounts in thousands).
Fiscal Year Ended September 30, 2009 | ||||||||||||
Conversion | ||||||||||||
Warrants | Features | Total | ||||||||||
May 2006 issuance |
$ | 1,549 | $ | 2,285 | $ | 3,834 | ||||||
July 2006 issuance |
242 | 296 | 538 | |||||||||
October 2006 issuance |
317 | 364 | 681 | |||||||||
$ | 2,108 | $ | 2,945 | 5,053 | ||||||||
Deferred financing costs |
311 | |||||||||||
Total |
$ | 5,364 | ||||||||||
Fiscal Year Ended September 30, 2008 | ||||||||||||
Conversion | ||||||||||||
Warrants | Features | Total | ||||||||||
May 2006 issuance |
$ | 1,943 | $ | 2,867 | $ | 4,810 | ||||||
July 2006 issuance |
230 | 280 | 510 | |||||||||
October 2006 issuance |
392 | 452 | 844 | |||||||||
$ | 2,565 | 3,599 | 6,164 | |||||||||
Deferred financing costs |
518 | |||||||||||
Total |
$ | 6,682 | ||||||||||
Fiscal Year Ended September 30, 2007 | ||||||||||||
Conversion | ||||||||||||
Warrants | Features | Total | ||||||||||
September 2005 issuance |
$ | 158 | $ | | $ | 158 | ||||||
December 2005 issuance |
285 | | 285 | |||||||||
February 2006 issuance |
1,830 | 1,882 | 3,712 | |||||||||
May 2006 issuance |
1,560 | 2,302 | 3,862 | |||||||||
July 2006 issuance |
113 | 138 | 251 | |||||||||
October 2006 issuance |
235 | 269 | 504 | |||||||||
$ | 4,181 | $ | 4,591 | 8,772 | ||||||||
Deferred financing costs |
999 | |||||||||||
Total |
$ | 9,771 | ||||||||||
The carrying values of unamortized conversion features, debt discount and financing fees are as follows (amounts in thousands):
September 30, 2009 | ||||||||||||
Conversion | ||||||||||||
Warrants | Feature | Total | ||||||||||
May 2006 issuance |
$ | 18 | 26 | $ | 44 | |||||||
July 2006 issuance |
15 | 17 | 32 | |||||||||
October 2006 issuance |
54 | 62 | 116 | |||||||||
$ | 87 | $ | 105 | 192 | ||||||||
Debt acquisition cost and financing fees |
97 | |||||||||||
Total |
$ | 289 | ||||||||||
September 30, 2008 | ||||||||||||
Conversion | ||||||||||||
Warrants | Feature | Total | ||||||||||
May 2006 issuance |
$ | 1,566 | 2,313 | $ | 3,879 | |||||||
July 2006 issuance |
259 | 311 | 570 | |||||||||
October 2006 issuance |
370 | 426 | 796 | |||||||||
$ | 2,195 | $ | 3,050 | 5,245 | ||||||||
Debt acquisition cost and financing fees |
416 | |||||||||||
Total |
$ | 5,661 | ||||||||||
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EARNINGS PER SHARE
In accordance with FASB ASC 260 (formerly referenced as SFAS No. 128, Earnings per Share),
the Company has evaluated its diluted income per share calculation. The Company does have
outstanding warrants and convertible debt at September 30, 2009, 2008 and 2007 which are not
included in the determination of diluted loss per share for the fiscal year ended September 30,
2009, 2008 and 2007 because the shares are anti-dilutive. Had these securities been dilutive, an
additional 0.3 million, 0.7 million and 1.4 million shares, respectively, would have been included
in the Companys diluted loss per share calculation.
The following is the diluted impact of the convertible debt and warrants on net income (loss)
per share for the fiscal years ended September 30, 2009, 2008 and 2007 respectively:
Fiscal Year Ended September 30, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Numerators: |
||||||||||||
Net income (loss) |
$ | (4,202 | ) | $ | 7,441 | $ | (2,517 | ) | ||||
Denominators: |
||||||||||||
Average shares outstanding basic |
34,402 | 34,042 | 28,539 | |||||||||
Impact of convertible debt, warrants and stock options |
| 130 | | |||||||||
Average shares outstanding diluted |
34,402 | 34,172 | 28,539 | |||||||||
Income (loss) per share basic: |
||||||||||||
Continuing operations |
$ | (0.12 | ) | $ | 0.22 | $ | (0.07 | ) | ||||
Discontinued operations |
0.00 | 0.00 | (0.02 | ) | ||||||||
Basic income (loss) per share |
$ | (0.12 | ) | $ | 0.22 | $ | (0.09 | ) | ||||
Income (loss) per share diluted: |
||||||||||||
Continuing operations |
$ | (0.12 | ) | $ | 0.22 | $ | (0.07 | ) | ||||
Discontinued operations |
0.00 | 0.00 | (0.02 | ) | ||||||||
Diluted income (loss) per share |
$ | (0.12 | ) | $ | 0.22 | $ | (0.09 | ) | ||||
FUTURE CONTRACTUAL OBLIGATIONS
In the table below, we set forth our enforceable and legally binding obligations as of
September 30, 2009. Some of the amounts included in this table (amounts in thousands) are based on
our estimates and assumptions about these obligations, including their durations, anticipated
actions by third parties and other factors. The enforceable and legally binding obligations we will
actually pay in future periods may vary from those reflected in the table because the estimates and
assumptions are subjective. See Note 7 of the Notes to Consolidated Financial Statements for
discussion of the Companys debt agreements.
Payments Due by Period | ||||||||||||||||||||
Less than | 3-5 | Over | ||||||||||||||||||
Total | 1 year | 1-3 years | years | 5 years | ||||||||||||||||
Convertible debentures (a) |
$ | 4,249 | $ | 4,249 | $ | | $ | | $ | | ||||||||||
Credit lines |
$ | 12,277 | 12,277 | | | | ||||||||||||||
Other debt |
1,083 | 102 | 981 | | | |||||||||||||||
Total obligations |
17,609 | 16,628 | 981 | | | |||||||||||||||
Operating lease obligations (b) |
2,812 | 1,076 | 1,681 | 55 | | |||||||||||||||
Capital leases obligations |
182 | 153 | 29 | | | |||||||||||||||
Total debt and leases |
20,603 | 17,857 | 2,691 | 55 | | |||||||||||||||
Contractual interest payments (c) |
114 | 94 | 20 | | | |||||||||||||||
Purchase obligations (d) |
2,089 | 2,089 | | | | |||||||||||||||
Total contractual obligations |
$ | 22,806 | $ | 20,040 | $ | 2,711 | $ | 55 | $ | | ||||||||||
(a) | Convertible debentures are presented on the balance sheet net of debt discount of $0.2 million. | |
(b) | Includes four-year contract for nitrogen gas facility and equipment at approximately $0.9 million per year. | |
(c) | Amounts represent the expected cash payment of interest on our debt. | |
(d) | Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable price provisions, and the approximate timing of the transactions. Purchase obligations exclude agreements that are cancelable at any time without penalty. |
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SUPPLY CONTRACTS
We are party to long-term supply contacts with our wind energy customers Vestas Wind Systems
and Gamesa Group. In the fiscal years 2009, we reported net sales of $74.2 million to Vestas Wind
Systems, and $13.8 million to Gamesa Group, which represent 53.6% and 9.9% of our net sales,
respectively, during such year.
Our supply agreement with Vestas Wind Systems was executed in May 2007 and obligates us to
supply carbon fibers under a five year delivery schedule, and a rolling three year schedule as
long as the supply agreement is in place. Under the agreement, Vestas provides us with annual
forecasts of its supply requirements, and we receive binding orders for shipments on approximately
a monthly basis. We are not guaranteed specific levels of sales under the agreement, and we are
subject to liquidated damages if we are unable to perform our obligations under the agreement. In
general, the agreement may be terminated (1) mutual agreement of the parties, (2) by either party
with at least 36 months written notice, (3) by either party as a result of a material breach of the
agreement that is not remedied within 30 days of receipt of notice of such breach, and (4) by either party in the event of the bankruptcy, insolvency, or change of
control of the other party .
Our
supply agreement with Gamesa Group was executed in July 2007 and is effective through
December 31, 2012, subject to automatic renewal for successive one-year terms upon at least two
years advance notice by Gamesa to Zoltek. The
agreement obligates Zoltek to supply carbon fibers during
the term of the contract provides based upon annual anticipated base volumes amounts, which are
converted into binding orders for shipments on approximately a quarterly basis. We are not
guaranteed specific levels of sales under the agreement, and we are subject to liquidated damages
if we are unable to perform our obligations under the agreement. In general, the agreement may be
terminated (1) mutual agreement of the parties, (2) by either party with at least 36 months
written notice, (3) by either party as a result of a material breach of the agreement that is not
remedied within 45 days of receipt of notice of such breach, and (4) by either
party in the event of the bankruptcy, insolvency, or change of control of the other party.
LEGAL CONTINGENCIES
Legal contingencies have a high degree of uncertainty. When losses from contingencies become
estimatable and probable, reserves are established. The reserves reflect managements estimate of
the probable cost of ultimate resolution of the matters and are revised accordingly as facts and
circumstances change and, ultimately, when matters are brought to closure. If any litigation matter
is resolved unfavorably, the Company could incur obligations in excess of managements estimate of
the outcome, and such resolution could have a material adverse effect on the Companys consolidated
financial condition, results of operations or liquidity. We anticipate that we will incur
additional legal costs in connection with pursuing and defending such actions.
See Note 8 of the Notes to the Companys Consolidated Financial Statements for a description
of our significant legal matters.
CRITICAL ACCOUNTING ESTIMATES
Certain of our accounting policies require our management to make difficult, subjective or
complex judgments. All of the Companys accounting policies are in compliance with U.S. generally
accepted accounting principles (GAAP). The Company considers the following policies to be the
most critical in understanding the estimates, assumptions and judgments that are involved in
preparing our financial statements, and the uncertainties that could affect our results of
operations, financial condition and cash flows.
ACCOUNTS RECEIVABLE COLLECTIBILITY
The Company evaluates the collectability of our accounts receivable for each of our segments
based on a combination of factors. In circumstances where we are aware of a specific customers
inability to meet its financial obligations to us (e.g., bankruptcy filing or substantial
downgrading of credit), we record a specific reserve for bad debts against the amounts due reducing
the net recognized receivable to the amount we estimate will be collected. For all other customers,
we estimate reserves for bad debts based on the length of time receivables have been past due and
our experience with collection. Our bad debt expense on accounts receivables was $1.3 million for
2009, $1.3 million for 2008 and $0.4 million for 2007.
INVENTORIES
The Company evaluates its ending inventories for estimated excess quantities and obsolescence.
This evaluation includes analyses of sales levels by product and projections of future demand
within specific time horizons. Inventories in excess of future demand, if any, are reserved.
Remaining inventory balances are adjusted to approximate the lower of cost on a first-in, first-out
basis or market value. Cost includes material, labor and overhead. If future demand or market
conditions are less favorable than the Companys projections, additional inventory write-downs may
be required and would be reflected in cost of sales on the Companys statement of operations in the
period in which the revision is made.
The Company historically has not experienced material problems related to the pricing or
functionality of carbon fibers inventory. Our Panex® carbon fibers represent the majority of
our inventory balance and are available in continuous tow, fabric, prepreg, chopped, and
milled forms. Generally, technical obsolescence and spoilage have not historically been a
concern because nonqualifying produced items can be reclaimed for processing for sale in secondary
markets.
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Available unused capacity costs for fiscal 2009 are comprised of fixed production cost
allocated to manufacturing lines which were producing below normal levels during the year. The
Company reviews monthly production levels of all manufacturing lines for all products. Any lines
which produced at a rate below a historical range of normal capacity were identified and the fixed
costs associated with those lines were calculated. The unallocated costs were recognized as an
expense in the period in which they were incurred.
VALUATION OF LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. Zoltek management is responsible for
routinely assessing whether impairment indicators are present. The Company expects that the
components of each operating segment will exhibit similar financial performance over the long-term
and, therefore, groups assets accordingly for analyzing whether an impairment exists. If the sum
of the expected future undiscounted cash flows is less than the carrying amount of the asset group,
a loss is recognized for the difference between the fair value and the carrying value of the asset
group. In determining expected future undiscounted cash flows attributable to the group of
long-lived assets, the Company must make certain judgments and estimations including the expected
market conditions and demand for products produced by the assets, expected product pricing
assumptions, and assumptions related to the expected costs to operate the assets. It is possible
that actual future cash flows related to the Companys long-lived assets may materially differ from
the Companys determination of expected future undiscounted cash flows. Additionally, if the
Companys expected future undiscounted cash flows were less than the carrying amount of the asset
group being analyzed, it would be necessary for the Company to make significant judgments regarding
the fair value of the asset due to the specialized nature of much of the Companys carbon fiber
production equipment in order to determine the amount of the impairment charge.
CONTINGENT LIABILITIES
The Company is subject to lawsuits, investigations and other claims related to employment,
environmental, service providers, supply agreements, taxing authorities and other matters, and is
required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as
potential ranges of probable losses. A determination of the amount of reserves and disclosures
required, if any, for these contingencies is made after considerable analysis of each individual
issue. We accrue for contingent liabilities when an assessment of the risk of loss is probable and
can be reasonably estimated.
Our contingent liabilities contain uncertainties because the eventual outcome will result from
future events, and determination of current reserves requires estimates and judgments related to
future changes in facts and circumstances, differing interpretations of the law and assessments of
the amount of damages, and the effectiveness of strategies or other factors beyond our control.
However, if actual results are not consistent with our estimates or assumptions, we may be exposed
to gains or losses that could be material.
INCOME TAXES
The Company accounts for certain income and expense items differently for financial reporting
and income tax purposes. Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax basis of assets and liabilities applying enacted statutory
tax rates in effect for the year in which the differences are expected to reverse. A valuation
allowance is provided against certain deferred tax assets when realization of those assets are not
considered to be more likely than not.
We are subject to the jurisdiction of numerous tax authorities. Our operations in these
different jurisdictions are generally taxed on income before taxes adjusted for various differences
between tax law and GAAP accounting. Determination of taxable income in any jurisdiction requires
the interpretation of the related tax laws and regulations and the use of estimates and assumptions
regarding significant future events such as the amount, timing and character of deductions,
permissible revenue recognition methods under the tax law and the sources and character of income
and tax credits. Changes in tax laws, regulations, agreements and treaties, foreign currency
exchange restrictions or our level of operations or profitability in each taxing jurisdiction could
have an impact on the amount of income taxes that we provide during any given year. Our tax filings
for various periods are subject to audit by the tax authorities in the jurisdictions in which we
conduct business.
STOCK-BASED COMPENSATION
On October 1, 2005, the Company adopted the provisions of FASB ASC 715 (formerly referenced as
FAS 123(R) Share-Based Payment), using the modified prospective method. FASB ASC 715 requires
companies to recognize the cost of employee services received in exchange for awards of equity
instruments based upon the grant date fair value of those awards. Under the modified prospective
method of adopting FASB ASC 715 the Company recognized compensation cost for all share-based
payments granted after October 1, 2005, plus any awards granted to employees prior to October 1,
2005 that remain unvested at that time. Under this method of adoption, no restatement of prior
periods was made. The Company uses historical volatility for a period of time that is comparable
to the expected life of the option. However, the Company only calculates the volatility of the
Companys stock back to November 2003, the date the Company received its first large order for
carbon fiber, as that is when the Company considers its business to have changed from a research
and development company to an operational company. Management believes this is a better measurement
of the Companys stock volatility.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 of the Notes to the Companys Consolidated Financial Statements.
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Table of Contents
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The Company is exposed to changes in interest rates primarily as a result of borrowing
activities under its credit facility and other variable rate debt. Assuming the current level of
borrowings of $16.4 million at variable rates and a two-percentage point change in the average
interest rate under these borrowings, it is estimated our interest expense for the twelve months
ended September 30, 2009 would have changed by approximately $0.3 million. In the event of an
adverse change in interest rates, we would seek to take actions to mitigate our exposure to
interest rate risk. Further, no consideration has been given to the effects of the change in the
level of overall economic activity that could exist in such an environment. The nature and amount
of the Companys debt may vary as a result of future business requirements, market conditions and
other factors. The extent of the Companys interest rate risk is not quantifiable or predictable
because of the variability of future interest rates and business financing requirements. The
Company does not believe such risk is material because a significant amount of the Companys
current debt is at fixed rates. At September 30, 2009, the Company did not have any interest rate
swap agreements outstanding.
Foreign Currency Risk
The consolidated balance sheet of the Companys international subsidiaries, Zoltek Zrt. and
Zoltek de Mexico, were translated from Hungarian Forints and Mexican Pesos to U.S. dollars,
respectively, at the exchange rate in effect at the applicable balance sheet date, while its
consolidated statements of operations were translated using the average exchange rates in effect
for the periods presented. The related translation adjustments are reported as other comprehensive
income (loss) within shareholders equity. Gains and losses from foreign currency transactions of
Zoltek Zrt. are included in the results of operations in other expenses. The Company views as
long-term its investments in Zoltek Zrt. and Zoltek de Mexico. Zoltek
Zrt. has a functional currency of the HUF. As a result, the Company is exposed to foreign currency risks related
to this investment. The functional currency of Zoltek de Mexico has changed as of November 1, 2008 from the Mexican Peso to the
U.S. dollar. The Company does not currently employ a foreign currency hedging strategy
related to the sales from Hungary or Mexico. Neither Hungary nor Mexico is considered to
be a highly inflationary or deflationary economy.
As of September 30, 2009, the Company had a long-term loan to its Zoltek Zrt. subsidiary of
$108.0 million denominated in U.S. dollars. The potential loss in value of the Companys net
foreign currency investment in Zoltek Zrt. resulting from a hypothetical 10% adverse change in
quoted foreign currency exchange rate of the Hungarian Forint against the U.S. dollar at September
30, 2009 and 2008 amounted to $10.8 million and $10.8 million, respectively. The Company does not
expect repayment of the loan in the foreseeable future. As such, the Company considers this loan as
a permanent investment. In addition, Zoltek Zrt. routinely sells its products to customers located
primarily throughout Europe in sales transactions that are denominated in foreign currencies other
than the Hungarian Forint. Also, Zoltek Zrt. has debt that is denominated in foreign currencies
other than the Hungarian Forint.
As of September 30, 2009, the Company had a long-term loan to its Zoltek de Mexico subsidiary.
There is no potential loss in value of the Companys net foreign currency investment in Zoltek de
Mexico million resulting from an adverse change in quoted foreign currency exchange rate of the
Mexican Peso against the U.S. dollar at September 30, 2009 because Zoltek de Mexicos functional
currency is the U.S. dollar. The Company does not expect repayment of the loan in the foreseeable
future. As such, the Company considers this loan as a permanent investment.
Commodity Price Risk
We are exposed to commodity price risk arising from changes in the market price of certain raw
materials, such as acrylonitrile, and utilities. Due to competition and market conditions,
volatile price increases cannot always be passed on to our customers. Management assesses
commodity price trends on a regular basis and adjusts purchasing accordingly. The Company does
not currently utilize derivative instruments to hedge purchases of commodities.
28
Table of Contents
Item 8. Financial Statements and Supplementary Data
ZOLTEK COMPANIES, INC.
REPORT OF MANAGEMENT
REPORT OF MANAGEMENT
Management of Zoltek Companies, Inc. is responsible for the preparation and integrity of the
Companys financial statements. These statements have been prepared in accordance with generally
accepted accounting principles and in the opinion of management fairly present the Companys
financial position, results of operations, and cash flow.
The Company maintains accounting and internal control systems to provide reasonable assurance that
assets are safeguarded against loss from unauthorized use or disposition and that the financial
records are reliable for preparing financial statements. The selection and training of qualified
personnel and the establishment and communication of accounting and administrative policies and
procedures are important elements of these control systems. As set forth under Item 9A. Controls
and Procedures of this Annual Report on Form 10-K, as amended, the Companys Chief Executive
Officer and Chief Financial Officer concluded that no material weaknesses existed as of September
30, 2009.
The Board of Directors, through its Audit Committee consisting solely of non-management directors,
meets periodically with management and the Independent Registered Public Accounting Firm to discuss
audit and financial reporting matters. To ensure independence, Ernst & Young LLP has direct access
to the Audit Committee.
The Reports of Ernst & Young LLP and Grant Thornton LLP, Independent Registered Public Accounting
Firm, on their audits of the accompanying financial statements follows. This report states that
their audits were performed in accordance with the Standards of the Public Company Accounting
Oversight Board (United States). These standards include consideration of internal control over
financial reporting controls for the purpose of determining the nature, timing, and extent of
auditing procedures necessary for expressing their opinion on the financial statements.
/s/ Zsolt Rumy
|
||
Chief Executive Officer |
||
November 30, 2009 |
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Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Zoltek Companies, Inc.
We have audited the accompanying consolidated balance sheet of Zoltek
Companies, Inc. as of September 30, 2009 and the related consolidated
statement of operations, shareholders equity, and cash flows for the
year ended September 30, 2009. These financial statements are the
responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Zoltek Companies, Inc. at
September 30, 2009 and the consolidated results of their operations and their cash
flows for the year in the period ended September 30, 2009, in conformity with U.S.
generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), Zoltek Companies Inc.s internal control
over financial reporting as of September 30, 2009, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated November 30, 2009
expressed an unqualified opinion.
/s/ ERNST & YOUNG LLP
St. Louis, Missouri
November 30, 2009
November 30, 2009
30
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Zoltek Companies, Inc.
We have audited Zoltek Companies, Inc.s internal control over financial reporting as of September 30, 2009, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Zolteks management is responsible for
maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the
accompanying Managements Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the companys internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that
our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of
the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, Zoltek Companies, Inc. maintained, in all material respects, effective internal control over financial reporting as of September 30, 2009, based on
the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Zoltek
Companies, Inc. as of September 30, 2009 and the related consolidated statements of operations, shareholders equity, and cash flows for the year ended September 30, 2009 of
Zoltek Companies Inc. and our report dated November 30, 2009 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
St. Louis, Missouri
November 30, 2009
November 30, 2009
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Zoltek Companies, Inc.
Zoltek Companies, Inc.
We have audited the accompanying consolidated balance sheet of Zoltek Companies, Inc. (a Missouri
corporation) and its subsidiaries (the Company) as of September 30, 2008, and the related
consolidated statements of operations, shareholders equity, and cash flows for each of the two
years in the period ended September 30, 2008. Our audits of the basic financial statements included
the financial statement schedule listed in the Index appearing under
item 15(a) for each of the two years in the period ended
September 30, 2008. These financial
statements and financial statement schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). 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 that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Zoltek Companies, Inc. and its subsidiaries as of
September 30, 2008, and the results of their operations and their cash flows for each of the two
years in the period ended September 30, 2008, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the related financial statement
schedule for each of the two years in the period ended September 30, 2008, when considered in relation to the
basic financial statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ GRANT THORNTON LLP
Chicago, Illinois
December 1, 2008
December 1, 2008
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ZOLTEK COMPANIES, INC.
CONSOLIDATED BALANCE SHEET
(Amounts in thousands, except share and per share data)
CONSOLIDATED BALANCE SHEET
(Amounts in thousands, except share and per share data)
September 30, | ||||||||
2009 | 2008 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 20,943 | $ | 29,224 | ||||
Restricted cash |
| 23,500 | ||||||
Accounts receivable, less allowance for doubtful accounts of $2,356 and $1,754, respectively |
30,507 | 42,690 | ||||||
Inventories, net |
48,058 | 45,659 | ||||||
Other current assets |
10,100 | 9,432 | ||||||
Total current assets |
109,608 | 150,505 | ||||||
Property and equipment, net |
256,910 | 288,894 | ||||||
Other assets |
327 | 765 | ||||||
Total assets |
$ | 366,845 | $ | 440,164 | ||||
Liabilities and shareholders equity |
||||||||
Current liabilities: |
||||||||
Legal liabilities |
$ | | $ | 29,083 | ||||
Credit lines |
12,277 | 5,175 | ||||||
Current maturities of long-term debt |
4,159 | 7,426 | ||||||
Trade accounts payable |
9,408 | 15,093 | ||||||
Accrued expenses and other liabilities |
6,845 | 9,278 | ||||||
Construction payables |
792 | 8,450 | ||||||
Total current liabilities |
33,481 | 74,505 | ||||||
Long-term debt, less current maturities |
981 | 3,562 | ||||||
Hungarian grant, long-term |
10,228 | 10,882 | ||||||
Deferred tax liabilities |
6,690 | 4,521 | ||||||
Other long-term liabilities |
| 28 | ||||||
Total liabilities |
51,380 | 93,498 | ||||||
Commitments and contingencies (see Note 8) |
| | ||||||
Shareholders equity: |
||||||||
Preferred stock, $.01 par value, 1,000,000 shares authorized, no shares issued and outstanding |
| | ||||||
Common stock, $.01 par value, 50,000,000 shares authorized,
34,424,441 and 34,389,428 shares issued and outstanding in 2009 and 2008, respectively |
344 | 344 | ||||||
Additional paid-in capital |
494,311 | 491,175 | ||||||
Accumulated other comprehensive (loss) income |
(18,405 | ) | 11,730 | |||||
Accumulated deficit |
(160,785 | ) | (156,583 | ) | ||||
Total shareholders equity |
315,465 | 346,666 | ||||||
Total liabilities and shareholders equity |
$ | 366,845 | $ | 440,164 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
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ZOLTEK COMPANIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Amounts in thousands, except share and per share data)
CONSOLIDATED STATEMENT OF OPERATIONS
(Amounts in thousands, except share and per share data)
Fiscal Year Ended September 30, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Net sales |
$ | 138,756 | $ | 185,616 | $ | 150,880 | ||||||
Cost of sales, excluding available unused capacity costs |
100,744 | 134,393 | 107,506 | |||||||||
Available unused capacity costs |
7,352 | | | |||||||||
Gross profit |
30,660 | 51,223 | 43,374 | |||||||||
Application and development costs |
7,589 | 8,093 | 7,230 | |||||||||
Litigation charge (see Note 8) |
238 | 4,884 | 5,400 | |||||||||
Selling, general and administrative expenses |
19,438 | 18,239 | 12,635 | |||||||||
Operating income |
3,395 | 20,007 | 18,109 | |||||||||
Other income (expense): |
||||||||||||
Interest income |
350 | 2,904 | 1,829 | |||||||||
Gain (loss) on foreign currency transactions |
2,161 | (385 | ) | (707 | ) | |||||||
Other, net |
(1,228 | ) | (1,125 | ) | (424 | ) | ||||||
Interest expense, excluding amortization of financing fees, debt discount and
beneficial conversion feature |
(1,411 | ) | (1,862 | ) | (2,346 | ) | ||||||
Warrant issue expense |
| | (6,362 | ) | ||||||||
Amortization of financing fees and debt discount |
(5,364 | ) | (6,682 | ) | (9,771 | ) | ||||||
Loss on value of warrants and beneficial conversion feature |
| | (314 | ) | ||||||||
Income (loss) from continuing operations before income taxes |
(2,097 | ) | 12,857 | 14 | ||||||||
Income tax expense |
2,105 | 5,416 | 1,986 | |||||||||
Net income (loss) |
(4,202 | ) | 7,441 | (1,972 | ) | |||||||
Discontinued operations: |
||||||||||||
Operating loss, net of taxes |
| | (545 | ) | ||||||||
Net income (loss) |
$ | (4,202 | ) | $ | 7,441 | $ | (2,517 | ) | ||||
Basic and diluted income (loss) per share |
$ | (0.12 | ) | $ | 0.22 | $ | (0.09 | ) | ||||
Weighted average common shares outstanding basic |
34,402,046 | 34,042,792 | 28,538,501 | |||||||||
Weighted average common shares outstanding diluted |
34,402,046 | 34,171,629 | 28,538,501 |
The accompanying notes are an integral part of the consolidated financial statements.
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ZOLTEK COMPANIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
(Amounts in thousands)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
(Amounts in thousands)
Total Share- | Additional | Accumulated Other | ||||||||||||||||||
holders | Common | Paid-In | Comprehensive | Accumulated | ||||||||||||||||
Equity | Stock | Capital | Income (Loss) | Deficit | ||||||||||||||||
Balance, September 30, 2006 |
$ | 111,661 | 258 | $ | 287,299 | $ | (14,389 | ) | $ | (161,507 | ) | |||||||||
Net loss |
(2,517 | ) | (2,517 | ) | ||||||||||||||||
Foreign currency translation adjustment |
22,638 | 22,638 | ||||||||||||||||||
Comprehensive income |
$ | 20,121 | ||||||||||||||||||
Convertible debt converted |
34,497 | 30 | 34,467 | |||||||||||||||||
Unamortized value of convertible debt
discount at time of conversion |
(2,785 | ) | (2,785 | ) | ||||||||||||||||
Warrants exercised |
12,405 | 9 | 12,396 | |||||||||||||||||
Warrants issued in December 2006 |
6,362 | 6,362 | ||||||||||||||||||
Value of warrants related to January
2004 issuance |
1,218 | 1,218 | ||||||||||||||||||
Issuance cost related to convertible
debt conversions |
2,796 | 2,796 | ||||||||||||||||||
Interest paid in stock |
322 | 322 | ||||||||||||||||||
Stock option awards |
1,253 | 1,253 | ||||||||||||||||||
Exercise of stock options |
1,392 | 1 | 1,392 | |||||||||||||||||
Secondary offering funds received, less
issue costs of $760 |
131,525 | 39 | 131,486 | |||||||||||||||||
Balance, September 30, 2007 |
$ | 320,767 | 337 | $ | 476,205 | $ | 8,249 | $ | (164,024 | ) | ||||||||||
Net income |
7,441 | 7,441 | ||||||||||||||||||
Foreign currency translation adjustment |
3,481 | 3,481 | ||||||||||||||||||
Comprehensive income |
$ | 10,922 | ||||||||||||||||||
Convertible debt converted |
11,151 | 6 | 11,145 | |||||||||||||||||
Warrants exercised |
150 | 150 | ||||||||||||||||||
Restricted stock expense |
329 | 329 | ||||||||||||||||||
Stock option awards |
1,987 | 1 | 1,986 | |||||||||||||||||
Exercise of stock options |
1,360 | | 1,360 | |||||||||||||||||
Balance, September 30, 2008 |
$ | 346,666 | 344 | $ | 491,175 | $ | 11,730 | $ | (156,583 | ) | ||||||||||
Net loss |
(4,202 | ) | (4,202 | ) | ||||||||||||||||
Foreign currency translation adjustment |
(30,135 | ) | (30,135 | ) | ||||||||||||||||
Comprehensive loss |
$ | (34,337 | ) | |||||||||||||||||
Convertible debt converted |
251 | 251 | ||||||||||||||||||
Cash settlement of restricted shares |
(75 | ) | (75 | ) | ||||||||||||||||
Restricted stock expense |
521 | 521 | ||||||||||||||||||
Stock option awards |
2,439 | | 2,439 | |||||||||||||||||
Balance, September 30, 2009 |
$ | 315,465 | $ | 344 | $ | 494,311 | $ | (18,405 | ) | $ | (160,785 | ) | ||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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ZOLTEK COMPANIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in thousands)
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in thousands)
Fiscal Year Ended September 30, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net income (loss) |
$ | (4,202 | ) | $ | 7,441 | $ | (2,517 | ) | ||||
Net loss from discontinued operations |
| | 545 | |||||||||
Net income (loss) from continuing operations |
(4,202 | ) | 7,441 | (1,972 | ) | |||||||
Adjustments to reconcile net income to net cash from operating activities: |
||||||||||||
Depreciation |
16,351 | 16,476 | 9,205 | |||||||||
Amortization of financing fees and debt discount |
5,364 | 6,682 | 9,771 | |||||||||
Deferred taxes |
690 | 1,501 | 828 | |||||||||
Warrant issue expense |
| | 6,362 | |||||||||
Loss on value of warrants and conversion feature |
| | 314 | |||||||||
Foreign currency transaction (gains) losses |
(1,396 | ) | (431 | ) | 606 | |||||||
Stock option compensation expense |
2,960 | 2,316 | 1,253 | |||||||||
Loss on disposal of assets |
707 | | | |||||||||
Changes in assets and liabilities: |
||||||||||||
Decrease (increase) in accounts receivable |
8,528 | (4,381 | ) | (18,320 | ) | |||||||
Increase in inventories |
(4,327 | ) | (17,427 | ) | (5,388 | ) | ||||||
Decrease (increase) in other current assets and other assets |
459 | (214 | ) | (725 | ) | |||||||
(Decrease) increase in trade accounts payable |
(3,764 | ) | 1,902 | 3,224 | ||||||||
(Decrease) increase in accrued expenses and other liabilities |
(553 | ) | 2,002 | (278 | ) | |||||||
(Decrease) increase in legal liabilities |
(5,583 | ) | 4,355 | 818 | ||||||||
(Decrease) increase in other long-term liabilities |
| (27 | ) | 171 | ||||||||
Net cash provided by continuing operations |
15,234 | 20,195 | 5,869 | |||||||||
Net cash provided by discontinued operations |
| | 1,010 | |||||||||
Net cash provided by operating activities |
15,234 | 20,195 | 6,879 | |||||||||
Cash flows from investing activities: |
||||||||||||
Purchases of property and equipment |
(16,206 | ) | (107,715 | ) | (53,412 | ) | ||||||
(Decrease) increase in construction payables |
(6,016 | ) | 3,591 | | ||||||||
Proceeds received from sale of fixed assets |
116 | | | |||||||||
Proceeds received from Hungarian grant |
1,588 | 3,253 | 9,435 | |||||||||
Change in cash restricted for letters of credit |
| (9,685 | ) | (7,181 | ) | |||||||
Net cash used in investing activities |
(20,518 | ) | (110,556 | ) | (51,158 | ) | ||||||
Cash flows from financing activities: |
||||||||||||
Proceeds from exercise of stock options and warrants |
| 1,510 | 13,797 | |||||||||
Payment of issue costs related to secondary stock offering |
| | (760 | ) | ||||||||
Proceeds from secondary stock offering |
| | 132,284 | |||||||||
Cash settlement of restricted shares |
(75 | ) | | | ||||||||
Proceeds (repayment) from issuance of convertible debt |
(10,550 | ) | | 7,495 | ||||||||
Payment of financing fees |
| | (900 | ) | ||||||||
Borrowings (repayment) of notes payable and credit lines |
7,594 | (3,786 | ) | 3,538 | ||||||||
Net cash (used) provided by financing activities |
(3,031 | ) | (2,276 | ) | 155,454 | |||||||
Effect of exchange rate changes on cash and cash equivalents |
34 | 100 | (216 | ) | ||||||||
Net (decrease) increase in cash and cash equivalents |
(8,281 | ) | (92,537 | ) | 110,959 | |||||||
Cash and cash equivalents at beginning of year |
29,224 | 121,761 | 10,802 | |||||||||
Cash and cash equivalents at end of year |
$ | 20,943 | $ | 29,224 | $ | 121,761 | ||||||
Supplemental disclosures of cash flow information: |
||||||||||||
Net cash paid during the year for: |
||||||||||||
Interest |
$ | 1,200 | $ | 1,491 | $ | 3,856 | ||||||
Income taxes |
1,510 | 2,800 | | |||||||||
Non-cash conversion of convertible debentures |
251 | 11,150 | 34,497 |
The accompanying notes are an integral part of the consolidated financial statements.
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ZOLTEK COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
Zoltek Companies, Inc. is a holding company, which operates through wholly-owned
subsidiaries, Zoltek Corporation, Zoltek Properties, Inc., Zoltek Zrt., Zoltek de Mexico SA de CV,
Zoltek de Occidente SA de CV, and Engineering Technology Corporation (Entec Composite Machines).
Zoltek Corporation (Zoltek) develops, manufactures and markets carbon fibers and technical fibers
in the United States. Carbon fibers are a low-cost but high performance reinforcement for
composites used as the primary building material in everyday commercial products. Zoltek Zrt. is a
Hungarian subsidiary that manufactures and markets carbon fibers and technical fibers and
manufactures precursor raw material used in production of carbon fibers. Zoltek de Mexico SA de CV
and Zoltek de Occidente SA de CV were acquired in October 2007 and are Mexican subsidiaries that
manufactures carbon fiber and precursor raw material used in production of carbon fibers. Entec
Composite Machines manufactures and sells filament winding and pultrusion equipment used in the
production of large volume composite parts. The Companys primary sales markets are in Europe and
the United States. Unless the context otherwise indicates, references to the Company are to
Zoltek Companies, Inc. and its subsidiaries.
The Consolidated Financial Statements of the Company include the operations of its
wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in
consolidation. Certain prior year amounts have been reclassified to conform to the current year
presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires that management make estimates and assumptions
that affect amounts reported in the financial statements and accompanying notes. Actual results may
differ from those estimates and assumptions.
REVENUE RECOGNITION
Sales transactions are initiated through customer purchase orders or sales agreements which
are based on fixed pricing terms. The Company recognizes sales for manufactured products on the
date title to the product transfers to the customer ordinarily upon shipping. Revenues are reported
net of any value-added tax or other such tax assessed by a governmental authority on our
revenue-producing activities. Costs associated with shipping and handling are included in costs of
sales. Revenues generated by Entec Composite Machines are recognized on a percentage of
completion basis based on the percentage of total project cost incurred to date which include
change orders, revisions to estimates and provisions for anticipated losses on contracts and
represented 3% or less of consolidated revenues for all years presented. Revenue from sales of
consigned inventory is recognized upon the use of the product by the consignee.
ACCOUNTS RECEIVABLE
The Company reviews its accounts receivable balance on a quarterly basis to identify any
specific customers for collectability issues. If the Company deems that an amount due from a
customer is uncollectible, the amount is recorded as expense in the statement of operations. The
Company evaluates the collectability of our accounts receivable for each of our segments based on a
combination of factors. In circumstances where we are aware of a specific customers inability to
meet its financial obligations to us (e.g., bankruptcy filing or substantial downgrading of
credit), we record a specific reserve for bad debts against the amounts due reducing the net
recognized receivable to the amount we estimate will be collected. For all other customers, we
estimate reserves for bad debts based on the length of time receivables have been past due and our
experience with collection. Our bad debt expense on accounts receivables was $1.3 million for
2009, $1.3 million for 2008 and $0.4 million for 2007.
CONCENTRATION OF CREDIT RISK
Zolteks carbon fiber products are primarily sold to customers in the composite industry and
its technical fibers are primarily sold to customers in the aerospace industry. Entec Composite
Machines products are primarily sold in the composite industry. The Company performs ongoing
credit evaluations and generally requires collateral for significant export sales to new customers.
The Company maintains reserves for potential credit losses and such losses have been within
managements expectations.
In fiscal 2009, 2008 and 2007, we reported net sales of $74.2 million, $75.1 million and $49.9
million, respectively, to our Vestas Wind Systems, a leading wind turbine manufacturer, which
represented 53.6%, 40.4% and 33.0% of our net sales, respectively, during such periods. The
Company reported net sales of $24.6 million, $25.1 million during fiscal years 2008 and 2007,
respectively, to Gamesa Group, another leading wind turbine manufacturer. These sales
represented 13.3% and 16.6% of our net sales. These were the only customers that represented
greater than 10% of consolidated net sales during these years.
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CASH AND CASH EQUIVALENTS
Cash equivalents include certificates of deposit and overnight repurchase agreements, all of
which have initial maturities of three months or less. Cash equivalents are stated at cost plus
accrued interest, which approximates market value. The Company places its temporary cash
investments with high credit quality financial institutions, however, at times such investments may
be in excess of the Federal Deposit Insurance Corporation (FDIC) insurance limit of $250,000 for
U.S. banks. The Company invested all unallocated funds received from its August 2007 equity
offering into money market accounts. As of September 30, 2009, the Company had $19.0 million cash
in these money market accounts.
INVENTORIES
Inventories are valued at the lower of cost or market and are removed from inventory under the
first-in-first-out method (FIFO). Cost of inventory includes material, labor and overhead. The
Company recorded inventory valuation reserves of $0.7 million and $0.5 million as of September 30,
2009 and 2008, respectively, to reduce the carrying value of inventories to a net realizable value.
This evaluation includes analyses of sales levels by product and projections of future demand
within specific time horizons. If future demand or market conditions are less favorable than the
Companys projections, additional inventory write-downs may be required and would be reflected in
cost of sales on the Companys statement of operations in the period in which the determination is
made.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Cost includes expenditures necessary to make the
property and equipment ready for its intended use. Expenditures to improve the asset or extend the
useful life are capitalized, including interest on funds borrowed to finance the acquisition or
construction of major capital additions. The Company did not record any capitalized interest in
fiscal 2009 and capitalized interest of $4.5 million and $5.3 million during fiscal 2008 and 2007,
respectively. Maintenance and repairs are expensed as incurred. When property is retired or
otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts
and any profit or loss on disposition is credited or charged to income.
The Company provides for depreciation by charging amounts sufficient to amortize the cost of
properties placed in service over their estimated useful lives using straight-line methods. The
range of estimated useful lives used in computing depreciation is as follows:
Buildings and improvements
|
30 to 40 years | |
Machinery and equipment
|
3 to 20 years | |
Furniture and fixtures
|
7 to 10 years | |
Computer hardware and software
|
2 to 5 years |
Depreciation expense, including the amortization of assets recorded under capital leases, was
$16.4 million, $16.5 million and $9.2 million for fiscal 2009, 2008 and 2007, respectively.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. If the sum of the expected future
undiscounted cash flows is less than the carrying amount of the asset, a loss is recognized for the
difference between the fair value and the carrying value of the asset. No impairment charges for
long-lived assets were recorded during fiscal 2009, 2008 and 2007.
FOREIGN CURRENCY TRANSLATION
The Companys Hungarian subsidiary, Zoltek Zrt., has a functional currency of the HUF. As a
result, the Company is exposed to foreign currency risks related to this investment. The
consolidated balance sheet of Zoltek Zrt. was translated from Hungarian Forints to U.S. dollars, at
the exchange rate in effect at the applicable balance sheet date, while its consolidated statements
of operations were translated using the average exchange rates in effect for the periods presented.
The related translation adjustments are reported as other comprehensive income (loss) within
shareholders equity. Gains and losses from foreign currency transactions of Zoltek Zrt. and Zoltek
de Mexico are included in the results of operations as other income (expense). The Hungarian
Forint strengthened by 10.0% against the U.S. dollar during fiscal 2009. Hungarian assets net of
liabilities, excluding the permanent intercompany loan were
approximately $159.4 million as of
September 30, 2009.
The functional currency of Zoltek de Mexico was changed as of November 1, 2008, from the
Mexican Peso to the U.S. dollar. Management made this determination based on a review of the
currency that the majority of Mexican assets, liabilities, and operations will be denominated in
U.S. dollars upon completion of the Mexican precursor facility. The U.S. dollar-translated amounts
of nonmonetary assets and liabilities at November 1, 2008 became the historical accounting basis
for those assets and liabilities for all subsequent periods. As a result of this change in
functional currency, exchange rate gains and losses are recognized on transactions in currencies
other than the U.S. dollar and included in operations for the period in which the exchange rates
changed. The Mexican Peso weakened by 19% against the U.S. dollar during the first month of fiscal
2009 before the functional currency of Zoltek de Mexico was changed to the U.S. dollar.
During fiscal 2009, currency fluctuations caused a change in our accumulated other
comprehensive loss of $30.1 million.
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FINANCIAL INSTRUMENTS
The Company does not hold any financial instruments for trading purposes. The carrying value
of cash, accounts receivable and accounts payable approximated their fair value at September 30,
2009 and 2008.
The Company has debt obligations that bear interest at a variable rate. The carrying value of
debt with a variable rate approximated its fair value at September 30, 2009 and 2008.
In January, March and October 2004 and February 2005, the Company issued convertible notes and
warrants which would require the Company to register the resale of the shares of common stock upon
conversion or exercise of these securities. The Company accounted for the fair value of these
outstanding warrants to purchase common stock and conversion feature of its convertible notes in
accordance with FASB ASC 815 (formerly referenced as Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting For Derivative Instruments And Hedging Activities, and EITF Issue No.
00-19 Accounting For Derivative Financial Instruments Indexed To And Potentially Settled In A
Companys Own Stock), which require the Company to separately account for the conversion feature
and warrants as embedded derivatives contained in the Companys convertible notes. Pursuant to SFAS
No. 133, the Company separated the fair value of the conversion feature from the convertible notes,
since the conversion feature was determined to not be clearly and closely related to the debt host.
In addition, since the effective registration of the securities underlying the conversion feature
and warrants is an event outside of the control of the Company, pursuant to FASB ASC 815, the
Company recorded the fair value of the conversion feature and warrants as long-term liabilities as
it was assumed that the Company would be required to net-cash settle the underlying securities.
APPLICATION AND DEVELOPMENT EXPENSES
The Company is actively pursuing the development of a number of applications for the use of
its carbon fibers and related products. The Company is executing several internal developmental
strategies to further the use of carbon fiber and consumer and industrial products made from carbon
fiber. As a result, the Company incurs certain costs for research, development and engineering of
products and manufacturing processes. These costs are expensed as incurred and totaled
approximately $7.6 million, $8.1 million and $7.2 million for fiscal years 2009, 2008 and 2007,
respectively. Application and development expenses are presented as an operating item on the
Companys consolidated statement of operations. Given the Companys position and strategy within
the carbon fiber industry, it is expected that similar or greater levels of application and
development expenses will be incurred in future periods.
INCOME TAXES
The Company accounts for certain income and expense items differently for financial reporting
and income tax purposes. Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax basis of assets and liabilities applying enacted statutory
tax rates in effect for the year in which the differences are expected to reverse. A valuation
allowance is provided against certain deferred tax assets when realization of those assets are not
considered to be more likely than not. The Company classifies income tax-related interest and
penalties as other expense, net.
EARNINGS PER SHARE
In accordance with FASB ASC 260 (formerly referenced as SFAS No. 128, Earnings per Share),
the Company calculates diluted earnings per share including the impact of the Companys potential
stock equivalents. The Company has outstanding stock options, warrants and convertible debt at
September 30, 2009 and 2008, which are not included in the determination of diluted earnings per
share because the impact of these potential additional shares is anti-dilutive. Had these
securities been dilutive, an additional 0.3 million shares for fiscal 2009, 0.7 million shares for
fiscal 2008 and 1.4 million shares for fiscal 2007 would have been included in the Companys
diluted earnings per share calculation.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2009, the FASB issued Accounting Standards Update No. 2009-12, Investments in
Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (ASU 2009-12).
This update provides amendments to ASC Topic 820, Fair Value Measurements and Disclosure
permitting companies to estimate the fair value of investments within ASC 820s scope using the net
asset value per share. ASU 2009-05 is effective for reporting periods ending after December 15,
2009. This ASU will be effective for Zoltek starting in fiscal 2010. Management has concluded that
the adoption of ASU 2009-12 will not have a material impact on the financial statements.
In August 2009, the FASB issued Accounting Standards Update No. 2009-05, Measuring
Liabilities at Fair Value (ASU
2009-05). This update provides amendments to Accounting Standards Codification (ASC) Topic 820,
Fair Value Measurements
and Disclosure for the fair value measurement of liabilities when a quoted price in an active
market is not available. ASU 2009-05 is
effective for reporting periods beginning after August 28, 2009. This ASU will be effective for
Zoltek starting in fiscal 2010.
Management has concluded that the adoption of ASU 2009-05 will not have a material impact on the
financial statements.
In June 2009, the FASB issued FASB ASC 105 (formerly referenced as Statement No. 168, The
FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting
Principlesa replacement of FASB Statement No. 162 (FAS 168)). The Codification will become the
source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities.
Rules and
interpretive releases of the SEC under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. On the effective date of FASB ASC 105, the Codification
will supersede all then-existing non-SEC accounting and reporting standards. All other
non-grandfathered non-SEC accounting literature not included in the Codification will become
non-authoritative. FASB ASC 105 is effective for financial statements issued for interim and annual
periods ending after September 15, 2009. Management has concluded that the adoption of FASB ASC 105
will not have a material impact on the financial statements.
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In May 2008, FASB ASC 470 (formerly referenced as FSP No. APB 14-1, Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement)) was issued. FASB ASC 470 requires that issuers of convertible debt instruments that
may be settled in cash upon conversion separately account for the liability and equity components
in a manner that will reflect the entitys nonconvertible debt borrowing rate as interest cost is
recognized in subsequent periods. The Company will adopt FASB ASC 470 effective October 1, 2009.
The Company is continuing to evaluate the full impact that the adoption of FASB ASC 470 will have
on its financial statements.
In June 2008, FASB ASC 815 (formerly referenced as EITF Issue No. 07-05, Determining Whether
an Instrument (or Embedded Feature)) is Indexed to an Entitys Own Stock was issued. FASB ASC
815 provides revised guidance on whether a conversion option or warrant is indexed to a companys
own stock. Instruments with certain price reset features are not considered to be indexed to a
companys own stock, and consequently must be accounted for as derivatives and marked to market
each reporting period. The Company will adopt FASB ASC 815 effective October 1, 2009. The
Company is continuing to evaluate the full impact that the adoption of FASB ASC 815 will have on
its financial statements.
2. FINANCING TRANSACTIONS
HUNGARIAN GRANT
The Hungarian government has pledged a grant of 2.9 billion HUF (approximately $15.7
million as of September 30, 2009) to Zolteks Hungarian subsidiary that will provide a portion of
the capital resources to modernize its facility, establish a research and development center, and
support buildup of manufacturing capacity of carbon fibers. Zolteks Hungarian subsidiary received
approximately HUF 0.3 billion, HUF 0.7 billion and HUF 1.6 billion in grant funding during fiscal
2009, 2008 and 2007, respectively. These funds have been recorded as a liability on the Companys
consolidated balance sheet. The liability will be amortized over the life of the assets procured
by the grant funds, offsetting the assets depreciation expense into which the proceeds of the
grant are invested. The Company has presented bank guarantees amounting to 120% of the amount of
the grant as received.
The Hungarian subsidiary may be required to pay back all or a portion of the grant if, among
other things, the Hungarian subsidiary fails to obtain revenue targets; fails to employ an average
annual staff of 1,200 employees; fails to utilize regional suppliers for at least 45% of its
purchases; fails to obtain consent from the Hungarian government prior to selling assets created
with grant funds; fails to use grant funds in accordance with the grant agreement; fails to provide
appropriate security for the grant; makes or made an untrue statement or supplies or supplied false
data in the grant agreement, grant application or during the time of the grant; defaults on its
obligations by more than 30 days; withdraws any consents it gave in the grant agreement; or causes
a partial or complete failure or hindrance of the project that is the subject of the grant. These
targets must be achieved during a five-year measurement period from October 2011 to October 2016.
Currently, although there can be no assurance, the Company anticipates it will comply with the
requirements of the grant agreement.
FINANCING ACTIVITY
Public offering
In fiscal 2007, the Company completed a public offering of 3,615,000 shares of common
stock, par value $0.01 per share, at $38.76 per share, less underwriting discounts. The Company
recorded the proceeds of $131.5 million, net of $0.8 million financing costs, as an increase to
shareholders equity.
Bond Related to SP Systems Case
In December 2006, the Company obtained the financing to post a bond of up to $40.0
million, which represented the potential bond necessary in connection with the continuing defense
of the SP Systems case. The Company raised the financing with a $10.0 million loan commitment from
its U.S. bank collateralized by certain real estate of the Company at an interest rate of 7.5%, a
$10.0 million loan commitment from the Companys Chief Executive Officer at 8% interest, the
proceeds from the exercise of 827,789 warrants for $11.9 million by existing institutional
investors and the remainder with the Companys cash on hand.
In April 2007, the Company reported the results of various post-trial motions in ongoing
litigation (see Note 8 of the Notes to the Consolidated Financial Statements). In April 2007 the
Company posted a supersedeas bond, collateralized by a $23.5 million letter of credit issued by the
Companys U.S. bank. As of September 30, 2008, the letter of credit is collateralized by
$23.5 million of restricted cash. The Company repaid the loan from the Chief Executive Officer and
terminated the $10.0 million loan commitment from its U.S. bank during the fourth quarter of fiscal
2007.
On February 9, 2009, the Company paid the judgment using $23.5 million of restricted cash,
which terminated the letter of credit and related bond.
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Revolving Credit Facility
In February 2009, the Company extended its existing U.S. line of credit until January 1, 2010.
The extension of this credit facility increases the amount available under the previously existing
revolving credit facility from $6.7 million to $10.0 million. The revolving credit facility has a
total commitment of the lesser of (1) $10.0 million or (2) an eligible borrowing base equal to a
percentage of eligible accounts receivable plus a percentage of eligible inventories, which as of
September 30, 2009 equaled $9.1 million. Total borrowings under the facility were $8.3 million as
of September 30, 2009.
In November 2009, the Companys Hungarian subsidiary increased its amount available under its
credit facility with a Hungarian bank from $5.0 million to $9.7 million, the term of which expires
December 31, 2009. Total borrowings under this credit facility were $3.9 million at September 30,
2009, with $5.8 million of remaining availability. The credit facility is a term loan with
quarterly interest payments.
The Company intends to extend its existing lines of credit before expiration on January 1,
2010. Based on the history of relationships with its banks and its current financial position, the
Company expects it will be able to successfully extend its lines of credit.
Convertible Debt
In September 2005, Zoltek entered into an agreement for new financing; a convertible debenture
package of up to $50 million in a private placement with a group of institutional investors. These
financings are collateralized by the carbon fiber assets of the Companys Hungarian subsidiary.
As of September 30, 2009, Zoltek had $4.2 million of convertible debt outstanding, which the
Company anticipates repaying with cash on hand by April 2010. The following tables summarize the
activity regarding our convertible debt conversions during the fiscal years ended 2009, 2008 and
2007.
2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||
Number | Number | Number | ||||||||||||||||||||||||||||||||||
of shares | Conversion | of shares | Conversion | of shares | Conversion | |||||||||||||||||||||||||||||||
converted | price | Equity value | converted | price | Equity value | converted | price | Equity value | ||||||||||||||||||||||||||||
February 2003 |
| $ | 3.50 | $ | | | $ | 3.50 | $ | | 771,431 | $ | 3.50 | $ | 2,700,009 | |||||||||||||||||||||
December 2005 |
| 12.50 | | | 12.50 | | 1,444,489 | 12.50 | 18,056,112 | |||||||||||||||||||||||||||
February 2006 |
| 13.07 | | | 13.07 | | 760,622 | 13.07 | 9,941,330 | |||||||||||||||||||||||||||
May 2006 |
| 25.51 | | 203,679 | 25.51 | 5,195,856 | 141,120 | 25.51 | 3,599,971 | |||||||||||||||||||||||||||
July 2006 |
16,264 | 15.40 | 250,466 | 117,840 | 25.51 | 3,006,092 | | 25.51 | | |||||||||||||||||||||||||||
October 2006 |
| 25.51 | | 115,578 | 25.51 | 2,948,383 | | 25.51 | | |||||||||||||||||||||||||||
16,264 | $ | 250,466 | 437,097 | $ | 11,150,331 | 3,117,662 | $ | 34,297,422 | ||||||||||||||||||||||||||||
As of September 30, 2009 | As of September 30, 2008 | |||||||||||||||||||||||
Number | Number | |||||||||||||||||||||||
of shares | Conversion | Principal | of shares | Conversion | Principal | |||||||||||||||||||
outstanding | price | outstanding | outstanding | price | outstanding | |||||||||||||||||||
May 2006 |
70,560 | 25.51 | 1,799,986 | 352,803 | 25.51 | 9,000,005 | ||||||||||||||||||
July 2006 |
19,640 | 25.51 | 501,016 | 58,800 | 25.51 | 1,499,988 | ||||||||||||||||||
October 2006 |
76,381 | 25.51 | 1,948,479 | 178,342 | 25.51 | 4,549,504 | ||||||||||||||||||
166,581 | $ | 4,249,481 | 589,945 | $ | 15,049,497 | |||||||||||||||||||
The terms of repayment for each convertible debt issuance in May, July and October 2006
stipulate that the Company shall pay the principal balance in ten equal quarterly installments
commencing on the date 15 months following the closing date and continues for each of the nine
quarters thereafter. Under certain circumstances, the Company may settle the principal and accrued
unpaid interest in common stock. Additionally, the May, July and October 2006 issuances allow the
Company to require conversion if the price of the Companys common stock stays above $42.50 per
share for a period of 20 consecutive days beginning six months after the date of registration of
the resale of the underlying shares. At that time, the Company may require the investor to convert
with at least 30 days notice. The May, July and October 2006 issuances also provide stipulation
that the investor may require the Company to pay out the quarterly installment due in cash if the
Companys common stock Volume-Weighted Average Price average is below $12.50 on the date of
conversion.
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Table of Contents
Each outstanding issuance of convertible debt is summarized in the table below which sets
forth the significant terms of the debt, warrants and assumptions associated with valuing the
conversion feature and warrants:
Outstanding Convertible Debt Issuances
May 2006(1) | July 2006(1) | October 2006(1) | ||||||||||
Original principal amount of debentures (millions) |
$ | 20.0 | $ | 2.5 | $ | 7.5 | ||||||
Per share conversion price on debenture |
$ | 25.51 | $ | 25.51 | $ | 25.51 | ||||||
Interest rate |
Libor plus 4 | % | Libor plus 4 | % | Libor plus 4 | % | ||||||
Term of debenture |
42 months | 42 months | 42 months | |||||||||
Warrants issued |
274,406 shares | 34,370 shares | 102,835 shares | |||||||||
Term of warrants |
60 months | 60 months | 60 months | |||||||||
Per share exercise price of warrants |
$ | 28.06 | $ | 28.06 | $ | 28.06 | ||||||
Fair value per warrant at issuance |
$ | 26.03 | $ | 23.89 | $ | 22.13 | ||||||
Value per share of conversion feature at issuance |
$ | 18.80 | $ | 19.21 | $ | 19.57 | ||||||
Stock price on date of agreement |
$ | 32.25 | $ | 29.28 | $ | 26.81 | ||||||
Stock volatility at issuance |
106 | % | 111 | % | 117 | % | ||||||
Dividend yield |
0.0 | % | 0.0 | % | 0.0 | % | ||||||
Risk-free interest rate at issuance |
4.88 | % | 4.88 | % | 4.65 | % | ||||||
Principal shares converted |
Partial | Partial | Partial | |||||||||
Warrants exercised |
No | No | Partial |
(1) | The May 2006, July 2006 and October 2006 issuances had a beneficial conversion feature. |
Amortization of Financing Fees and Debt Discount
At the time of issuance of convertible debt securities with warrants, the Company records the
fair value associated with the warrants using the Black-Scholes option-pricing model. This fair
value discount is recorded as a reduction in the carrying value of the convertible debt security
that is accreted to its face value over the life of the convertible security and expensed into the
Companys income statement. If the convertible security is converted prior to the redemption date,
the unamortized debt discount associated with the valuation of the warrants is recorded as a
reduction to additional paid-in capital at the time of conversion.
The February 2005, February 2006, May 2006, July 2006 and October 2006 issuances were
considered to have a beneficial conversion feature because the adjusted conversion price after
allocating a portion of the proceeds to the warrants, as discussed above, was less than the
Companys market price of common stock at date of issue. The beneficial conversion is recorded as a
reduction in the carrying value of the convertible debt security and is accreted to its face value
over the life of the convertible security and expensed into the Companys income statement. If the
convertible security is converted prior to the redemption date, the unamortized balance is recorded
in expense at the time of conversion.
See the table below for impact of amortization of financing fees and debt discount on the
financial results for the fiscal years 2009, 2008 and 2007 (amounts in thousands).
Fiscal Year Ended September 30, 2009 | ||||||||||||
Conversion | ||||||||||||
Warrants | Features | Total | ||||||||||
May 2006 issuance |
$ | 1,549 | $ | 2,285 | $ | 3,834 | ||||||
July 2006 issuance |
242 | 296 | 538 | |||||||||
October 2006 issuance |
317 | 364 | 681 | |||||||||
$ | 2,108 | $ | 2,945 | 5,053 | ||||||||
Deferred financing costs |
311 | |||||||||||
Total |
$ | 5,364 | ||||||||||
Fiscal Year Ended September 30, 2008 | ||||||||||||
Conversion | ||||||||||||
Warrants | Features | Total | ||||||||||
May 2006 issuance |
$ | 1,943 | $ | 2,867 | $ | 4,810 | ||||||
July 2006 issuance |
230 | 280 | 510 | |||||||||
October 2006 issuance |
392 | 452 | 844 | |||||||||
$ | 2,565 | 3,599 | 6,164 | |||||||||
Deferred financing costs |
518 | |||||||||||
Total |
$ | 6,682 | ||||||||||
Fiscal Year Ended September 30, 2007 | ||||||||||||
Conversion | ||||||||||||
Warrants | Features | Total | ||||||||||
September 2005 issuance |
$ | 158 | $ | | $ | 158 | ||||||
December 2005 issuance |
285 | | 285 | |||||||||
February 2006 issuance |
1,830 | 1,882 | 3,712 | |||||||||
May 2006 issuance |
1,560 | 2,302 | 3,862 | |||||||||
July 2006 issuance |
113 | 138 | 251 | |||||||||
October 2006 issuance |
235 | 269 | 504 | |||||||||
$ | 4,181 | $ | 4,591 | 8,772 | ||||||||
Deferred financing costs |
999 | |||||||||||
Total |
$ | 9,771 | ||||||||||
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The carrying values of unamortized conversion features, debt discount and financing fees are as follows (amounts in thousands):
September 30, 2009 | ||||||||||||
Conversion | ||||||||||||
Warrants | Feature | Total | ||||||||||
May 2006 issuance |
$ | 18 | 26 | $ | 44 | |||||||
July 2006 issuance |
15 | 17 | 32 | |||||||||
October 2006 issuance |
54 | 62 | 116 | |||||||||
$ | 87 | $ | 105 | 192 | ||||||||
Debt acquisition cost and financing fees |
97 | |||||||||||
Total |
$ | 289 | ||||||||||
September 30, 2008 | ||||||||||||
Conversion | ||||||||||||
Warrants | Feature | Total | ||||||||||
May 2006 issuance |
$ | 1,566 | 2,313 | $ | 3,879 | |||||||
July 2006 issuance |
259 | 311 | 570 | |||||||||
October 2006 issuance |
370 | 426 | 796 | |||||||||
$ | 2,195 | $ | 3,050 | 5,245 | ||||||||
Debt acquisition cost and financing fees |
416 | |||||||||||
Total |
$ | 5,661 | ||||||||||
EARNINGS PER SHARE
In accordance with FASB ASC 260 (formerly referenced as SFAS No. 128, Earnings per Share),
the Company has evaluated its diluted income per share calculation. The Company does have
outstanding warrants and convertible debt at September 30, 2009, 2008 and 2007 which are not
included in the determination of diluted loss per share for the fiscal year ended September 30,
2009, 2008 and 2007 because the shares are anti-dilutive. Had these securities been dilutive, an
additional 0.3 million, 0.7 million and 1.4 million shares, respectively, would have been included
in the Companys diluted loss per share calculation.
The following is the diluted impact of the convertible debt and warrants on net income (loss)
per share for the fiscal years ended September 30, 2009, 2008 and 2007 respectively:
Fiscal Year Ended September 30, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Numerators: |
||||||||||||
Net income (loss) |
$ | (4,202 | ) | $ | 7,441 | $ | (2,517 | ) | ||||
Denominators: |
||||||||||||
Average shares outstanding basic |
34,402 | 34,042 | 28,539 | |||||||||
Impact of convertible debt, warrants and stock options |
| 130 | | |||||||||
Average shares outstanding diluted |
34,402 | 34,172 | 28,539 | |||||||||
Income (loss) per share basic: |
||||||||||||
Continuing operations |
$ | (0.12 | ) | $ | 0.22 | $ | (0.07 | ) | ||||
Discontinued operations |
0.00 | 0.00 | (0.02 | ) | ||||||||
Basic income (loss) per share |
$ | (0.12 | ) | $ | 0.22 | $ | (0.09 | ) | ||||
Income (loss) per share diluted: |
||||||||||||
Continuing operations |
$ | (0.12 | ) | $ | 0.22 | $ | (0.07 | ) | ||||
Discontinued operations |
0.00 | 0.00 | (0.02 | ) | ||||||||
Diluted income (loss) per share |
$ | (0.12 | ) | $ | 0.22 | $ | (0.09 | ) | ||||
3. DISCONTINUED OPERATIONS
During the fourth quarter of fiscal 2006, the Company formally adopted a plan to discontinue
operations and sell the assets of its continuously extruded netting and thermoplastic compounding
product lines. These operations have since been reported as discontinued operations. Beginning in
fiscal 2007, the remaining operations related these products are immaterial to the Companys
overall operations and therefore no longer segregated from continuing operations.
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The Company incurred no significant exit costs for the selling or discontinuation of these
businesses. These divisions were not part of the long-term strategy of the Company. The results of
operations of these two product lines have been reclassified to discontinued operations for fiscal
2007.
Net sales |
$ | 1,843 | ||
Cost of sales |
2,220 | |||
Gross profit (loss) |
(377 | ) | ||
Selling, general and administrative expenses |
(144 | ) | ||
Loss from operations |
(521 | ) | ||
Other loss |
(24 | ) | ||
Loss on discontinued operations |
$ | (545 | ) | |
4. INVENTORIES
Inventories consist of the following (amounts in thousands):
September 30, | ||||||||
2009 | 2008 | |||||||
Raw materials |
$ | 7,349 | $ | 10,749 | ||||
Work-in-process |
8,977 | 14,962 | ||||||
Finished goods |
26,758 | 16,334 | ||||||
Consigned inventory |
4,471 | 2,510 | ||||||
Supplies and other |
503 | 1,104 | ||||||
$ | 48,058 | $ | 45,659 | |||||
Inventories are valued at the lower of cost, determined on the first-in, first-out method, or
market. Cost includes material, labor and overhead. The Company recorded an inventory valuation
reserve of $0.7 million and $0.5 million as of September 30, 2009 and 2008, respectively, to reduce the
carrying value of inventories to net realizable value. The reserves were established primarily due
to slow-moving inventories produced in prior years.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (amounts in thousands):
September 30, | ||||||||
2009 | 2008 | |||||||
Land |
$ | 13,275 | $ | 15,450 | ||||
Buildings and improvements |
66,510 | 55,267 | ||||||
Machinery and equipment |
230,502 | 225,342 | ||||||
Furniture, fixtures and software |
6,759 | 6,788 | ||||||
Construction in progress |
41,029 | 72,214 | ||||||
358,075 | 375,061 | |||||||
Less: accumulated depreciation |
(101,165 | ) | (86,167 | ) | ||||
$ | 256,910 | $ | 288,894 | |||||
6. INCOME TAXES
The components of income tax expense (benefit) for the fiscal years ended September 30, 2009,
2008 and 2007 are as follows (amounts in thousands):
2009 | 2008 | 2007 | ||||||||||
From continuing operations: |
||||||||||||
Current: |
||||||||||||
Federal |
$ | 130 | $ | | $ | | ||||||
State |
| 107 | | |||||||||
Non U.S. |
1,284 | 2,724 | 1,158 | |||||||||
1,415 | 2,831 | 1,158 | ||||||||||
Deferred: |
||||||||||||
Federal |
| | ||||||||||
State |
(179 | ) | | (157 | ) | |||||||
Non U.S. |
869 | 2,585 | 985 | |||||||||
690 | 2,585 | 828 | ||||||||||
Total continuing operations |
$ | 2,105 | $ | 5,416 | $ | 1,986 | ||||||
From discontinued operations: |
||||||||||||
Current: |
||||||||||||
Federal |
$ | | $ | | $ | | ||||||
State |
| | | |||||||||
Non-U.S. |
| | 19 | |||||||||
| | 19 | ||||||||||
Deferred: |
||||||||||||
Federal |
| | | |||||||||
Non-U.S. |
| | | |||||||||
Total discontinued operations |
| | 19 | |||||||||
Total |
$ | 2,105 | $ | 5,416 | $ | 2,005 | ||||||
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Deferred income taxes reflect the tax impact of carryforwards and temporary differences
between the amount of assets and liabilities for financial reporting purposes and such amounts as
measured by tax laws and regulations. Cumulative carryforwards and temporary differences giving
rise to the net deferred income tax liability at September 30 are as follows (amounts in
thousands):
September 30, | ||||||||
2009 | 2008 | |||||||
Deferred tax assets: |
||||||||
Legal liabilities |
$ | | $ | 7,990 | ||||
Accrued employee compensation |
106 | 119 | ||||||
Reserves |
581 | 181 | ||||||
Net operating loss and credit carryforwards |
30,635 | 24,933 | ||||||
31,322 | 33,223 | |||||||
Deferred tax liabilities: |
||||||||
Property, plant and equipment |
(12,291 | ) | (10,841 | ) | ||||
Prepaid expenses |
(110 | ) | (118 | ) | ||||
Unrealized currency losses on intercompany loan in Hungary |
(1,496 | ) | | |||||
Other liabilities |
(715 | ) | (664 | ) | ||||
(14,612 | ) | (11,623 | ) | |||||
Total deferred taxes |
16,710 | 21,600 | ||||||
Less: valuation allowance |
(20,138 | ) | (25,188 | ) | ||||
Net deferred tax liability |
$ | (3,428 | ) | $ | (3,588 | ) | ||
Classification of deferred taxes: |
||||||||
Current deferred tax asset (included in Other current assets) |
$ | 3,262 | $ | 933 | ||||
Long-term deferred tax liability |
(6,690 | ) | (4,521 | ) | ||||
$ | (3,428 | ) | $ | (3,588 | ) | |||
In the consolidated balance sheets, these deferred tax assets and liabilities are classified
as either current or non-current based on the classification of the related liability or asset for
financial reporting. A deferred tax asset or liability that is not related to an asset or liability
for financial reporting, including deferred taxes related to carryforwards, is classified according
to the expected reversal date of the temporary differences as of the end of the year.
The provision for income taxes at September 30 differs from the amount using the statutory
federal income tax rate (34%) as follows (amounts in thousands):
2009 | 2008 | 2007 | ||||||||||
At statutory rate: |
||||||||||||
Income taxes on income (loss) from continuing operations |
$ | (713 | ) | $ | 4,507 | $ | 5 | |||||
Increases (decreases): |
||||||||||||
Lower effective tax rate on non-U.S. operations |
1,744 | (1,446 | ) | (2,805 | ) | |||||||
Change in valuation allowance on net operating loss |
(5,696 | ) | (3,416 | ) | 1,428 | |||||||
State taxes, net of federal benefit |
(545 | ) | 17 | (157 | ) | |||||||
Local taxes, non-U.S. |
1,101 | 2,724 | 1,177 | |||||||||
Change of uncertain tax positions |
2,440 | | 559 | |||||||||
Intercompany transfer pricing adjustment |
1,662 | | | |||||||||
Reflection of tax rate change non-U.S. |
370 | | | |||||||||
Amortization of warrant discount |
1,718 | 3,425 | 3,926 | |||||||||
Fair market value of warrants |
| | 107 | |||||||||
Non-qualified stock option expense |
| (567 | ) | (1,115 | ) | |||||||
Other |
24 | 172 | (1,120 | ) | ||||||||
$ | 2,105 | $ | 5,416 | $ | 2,005 | |||||||
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The consolidated income (loss) from continuing operations before income taxes by domestic and
foreign sources for the years ended September 30, 2009, 2008 and 2007 was as follows (amounts in
thousands):
2009 | 2008 | 2007 | ||||||||||
Domestic |
$ | 13,352 | $ | 6,831 | $ | (16,093 | ) | |||||
Foreign |
(15,449 | ) | 6,026 | 16,107 | ||||||||
Income (loss) from continuing operations before income taxes |
$ | (2,097 | ) | $ | 12,857 | $ | 14 | |||||
The Company currently has domestic net operating loss carryforwards of approximately $81.0
million available to offset future tax liabilities, which expire between 2020 and 2027. Included
in the net operating loss carry-forwards are stock option deductions of approximately $15.0
million. The benefits of these tax deductions, referred to as excess tax benefits, will be
credited to additional paid-in capital upon being realized or recognized. The Company has recorded
a full valuation allowance against its deferred tax asset because it is more likely than not that
the value of the deferred tax asset will not be realized.
The Company currently has a foreign net operating loss carryforward of approximately
$41.1 million which expires between 2010 and 2014. During the years ended September 30,
2008 and 2007, the Company utilized approximately $2.2 million and $1.4 million,
respectively, of its foreign deferred tax assets.
The Company estimates its contingent income tax liabilities based on its assessment of
probable income tax-related exposures and the anticipated settlement of those exposures
translating into actual future liabilities. As of September 30, 2009 and 2008, the Companys
accrual for these contingencies was approximately $3.0 million and $0.6 million,
respectively.
7. DEBT
Credit Facilities
U.S. Operations The Companys U.S. subsidiary has a credit facility with a U.S. bank, the
term of which expires January 1, 2010. Total borrowings under the facility were $8.3 million as of
September 30, 2009, with $0.8 million remaining availability. No financial covenants currently
apply to the credit facility from the U.S. bank.
Hungarian Operations In September 2009, the Companys Hungarian subsidiary increased its
amount available under the credit facility with a Hungarian bank from $5.0 million to $9.7 million,
the term of which expires December 31, 2009. Total borrowings under this credit facility were $3.9
million at September 30, 2009, with $5.8 million of remaining availability. The credit facility is
a term loan with quarterly interest payments. No financial covenants currently apply to the credit
facility from the Hungarian bank.
The Company intends to extend its existing lines of credit before expiration on January 1,
2010. Based on the history of relationships with its banks and its current financial position, the
Company expects it will be able to successfully extend its lines of credit.
Credit lines consist of the following (amounts in thousands):
September 30, | September 30, | |||||||
2009 | 2008 | |||||||
U.S. facility (current interest rate of 3.01% variable with Libor) |
8,343 | | ||||||
Facility with Hungarian bank (interest rate of 3.1% to 10.5%, depending on currency) |
3,934 | 5,175 | ||||||
Total credit lines |
$ | 12,277 | $ | 5,175 | ||||
The Companys long-term debt consists of the following (amounts in thousands):
September 30, | September 30, | |||||||
2009 | 2008 | |||||||
Note payable with interest currently at 4.15% (variable with Libor, payable in monthly
installments of interest and principle to maturity in January 2011) |
$ | 1,083 | $ | 1,184 | ||||
Convertible debentures final payment due November 2009 (interest rate of 5.58%
variable with Libor) |
1,800 | 9,000 | ||||||
Convertible debentures final payment due January 2010 (interest rate of 5.12%
variable with Libor) |
501 | 1,500 | ||||||
Convertible debentures final payment due April 2010 (interest rate of 4.63%
variable with Libor) |
1,948 | 4,549 | ||||||
Total long-term debt including current maturities |
5,332 | 16,233 | ||||||
Less: Debt discount associated with conversion feature and warrants |
(192 | ) | (5,245 | ) | ||||
Less: Amounts payable within one year, net of discount of $192 and $3,729 |
(4,159 | ) | (7,426 | ) | ||||
Total long-term debt, less current maturities |
$ | 981 | $ | 3,562 | ||||
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The aggregate annual maturities of long-term debt at September 30, 2009 are set forth below (amounts in thousands):
Annual | ||||
September 30, | Maturities | |||
2010 |
$ | 51 | ||
2011 |
930 | |||
Total |
$ | 981 | ||
8. COMMITMENTS AND CONTINGENCIES
LEASES
We rent office facilities and equipment under various operating leases. Rent expense for all
operating leases was $0.3 million, $0.3 million and $0.3 million for the fiscal years ended
September 30, 2009, 2008, and 2007, respectively.
The following table sets forth the future minimum lease commitments under operating leases at
September 30, 2009 (amounts in thousands):
Future | ||||
Commitments | ||||
for Operating | ||||
September 30, | Leases | |||
2010 |
$ | 1,076 | ||
2011 |
970 | |||
2012 |
711 | |||
2013 |
33 | |||
2014 |
22 | |||
Thereafter |
| |||
Total |
$ | 2,812 | ||
We rent forklifts and water treatment equipment under various capital leases. Lease expense
for all capital leases for the fiscal years ended September 30, 2009 and 2008 was $0.2 million and
$0.2 million, respectively.
The following table sets forth the future minimum lease commitments under capital leases and
the present value of net minimum lease payments at September 30, 2009 (amounts in thousands):
Future | ||||
Minimum | ||||
Lease | ||||
September 30, | Payments | |||
2010 |
$ | 153 | ||
2011 |
18 | |||
2012 |
11 | |||
Total capital lease obligation |
$ | 182 | ||
LEGAL
Legal contingencies have a high degree of uncertainty. When losses from contingencies become
estimatable and probable, reserves are established. The reserves reflect managements estimate of
the probable cost of ultimate resolution of the matters and are revised accordingly as facts and
circumstances change and, ultimately, when matters are brought to closure. If any litigation matter
is resolved unfavorably, the Company could incur obligations in excess of managements estimate of
the outcome, and such resolution could have a material adverse effect on the Companys consolidated
financial condition, results of operations or liquidity. In addition, we may incur additional legal
costs in connection with pursuing and defending such actions.
In February 2005, SP Systems and its subsidiary Structural Polymer Systems, Limited filed an action against our
Zoltek Corporation subsidiary in the U.S. District Court for the Eastern District of Missouri, Eastern Division
alleging that we breached a supply agreement relating to our carbon fiber product known as Panex 33. The case was tried
in November 2006 and the jury rendered verdicts against our Zoltek Corporation subsidiary, which verdicts we later
appealed. On February 9, 2009, the Company resolved the litigation by paying a judgment using $23.5 million of
restricted cash.
In September 2004, the Company was named a defendant in a civil action filed by an investment banker that was
retained to obtain equity investors, alleging breach by the Company of the Companys obligations under the agreement
signed by the parties. In October 2008, the Company settled the case for $5.8 million cash which had been fully
accrued as a litigation charge as of September 30, 2008.
In May 2008, the Company received a letter from the enforcement staff of the Securities and
Exchange Commission indicating that the staff was conducting a non-public, fact finding
investigation and requested that the Company retain certain records and produce information and
documents related to matters disclosed in the Companys Current Report on Form 8-K filed May 5,
2008 relating to payments directed by the Companys former Chief Financial Officer that were not
properly authorized or recorded. The Company has cooperated fully with its investigation. The
Company now has submitted all information requested by the staff.
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The Company is exposed to various claims and legal proceedings arising out of the normal
course of its business. Although there can be no assurance, in the opinion of management, the
ultimate outcome of these other claims and lawsuits should not have a material adverse effect on
the Companys consolidated financial condition, results of operations or liquidity.
SOURCES OF SUPPLY
As part of its growth strategy, the Company has developed its own precursor acrylic fibers and
all of its carbon fibers and technical fibers. The primary source of raw material for the precursor
is ACN (acrylonitrile), which is a commodity product with multiple sources.
9. PROFIT SHARING PLAN
The Company maintains a 401(k) Profit Sharing Plan for the benefit of employees who have
completed six months of service, worked 501 or more hours this year and attained 21 years of age.
No contributions were made by the Company for fiscal years 2009, 2008 and 2007.
10. STOCK COMPENSATION EXPENSE
The Company maintains long-term incentive plans that authorize the Board of Directors or its
Compensation Committee (the Committee) to grant key employees, officers and directors of the
Company incentive or nonqualified stock options, stock appreciation rights, performance shares,
restricted shares and performance units. The Committee determines the prices and terms at which
awards may be granted along with the duration of the restriction periods and performance targets.
All issuances are granted out of shares authorized, as the Company has no treasury stock. The
Company has the option, in its sole discretion, to settle awards under its 2008 incentive plans in
cash, in lieu of issuing shares.
Stock option awards. Outstanding employee stock options expire 10 years from the date of
grant or upon termination of employment. Options granted to employees in 2007 and 2008 vest 17% in
the first year, 33% in the second year and 50% in the third year from date of grant. The fair value
of all options is amortized on a straight-line basis over the vesting period. Annually options to
purchase 7,500 shares of common stock are issued to each director, other than the CEO. In addition,
newly elected directors receive options to purchase 7,500 shares of common stock. All options
granted to directors vest immediately at time of grant. These options expire from 2009 through
2018. Director options granted before 2008 expire 10 years from date of grant. Director options
granted in 2008 or thereafter have a five-year term.
Presented below is a summary of stock option plans activity for the fiscal years 2007 through
2009:
Wtd. Avg. | Options | Wtd. Avg. | ||||||||||||||
Options | Exercise Price | Exercisable | Exercise Price | |||||||||||||
Balance, September 30, 2007 |
$ | 369,810 | $ | 16.02 | 264,800 | $ | 17.23 | |||||||||
Granted |
245,000 | 27.92 | ||||||||||||||
Exercised |
(169,223 | ) | 8.03 | |||||||||||||
Forfeited or expired |
(30,000 | ) | 39.00 | |||||||||||||
Balance, September 30, 2008 |
415,587 | $ | 25.52 | 220,587 | $ | 23.50 | ||||||||||
Granted |
52,500 | 6.31 | ||||||||||||||
Exercised |
| | ||||||||||||||
Forfeited or expired |
(59,750 | ) | 19.99 | |||||||||||||
Balance, September 30, 2009 |
408,337 | $ | 23.60 | 301,670 | $ | 22.64 | ||||||||||
The following table summarizes information for options currently outstanding and exercisable at September 30, 2009:
Options Outstanding | Options Exercisable | |||||||||||||||||||||
Range of | Wtd. Avg. | Wtd. Avg. | Wtd. Avg. | |||||||||||||||||||
Exercise Prices | Number | Remaining Life | Exercise Price | Number | Exercise Price | |||||||||||||||||
$ | 1.335.67 | 39,500 | 4 years | $ | 5.30 | 39,500 | $ | 5.30 | ||||||||||||||
6.259.25 | 42,587 | 6 years | 8.53 | 42,587 | 8.53 | |||||||||||||||||
9.6024.12 | 87,500 | 8 years | 19.71 | 39,584 | 16.73 | |||||||||||||||||
26.2229.70 | 148,750 | 8 years | 29.12 | 90,000 | 28.73 | |||||||||||||||||
30.0039.00 | 90,000 | 6 years | 33.43 | 90,000 | 33.43 | |||||||||||||||||
1.3339.00 | 408,337 | 7 years | 23.60 | 301,671 | 22.64 |
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The fair value of each option grant is estimated on the date of the grant using the
Black-Scholes option-pricing model with the following weighted average assumptions:
Assumptions | Fiscal 2009 | Fiscal 2008 | Fiscal 2007 | |||||||||
Expected life of option |
3.8 & 4 years | 4 & 7.5 years | 3 & 7.5 years | |||||||||
Risk-free interest rate |
0.5 | % | 1.8 | % | 4.9 | % | ||||||
Volatility of stock |
79 | % | 66 | % | 68 | % | ||||||
Forfeiture experience on employee options |
25 | % | 30 | % | 30 | % |
The fair value of the options granted during fiscal 2009, 2008 and 2007 was $0.2 million, $5.5
million and $1.4 million, respectively. As of September 30, 2009, the Company had $1.3 million of
total unrecognized compensation expense related to stock option plans that will be recognized over
fiscal 2010 and 2011. Cash proceeds received from the exercise of stock options were $0.0 million,
$1.4 million and $1.4 million for fiscal 2009, 2008 and 2007, respectively.
Restricted stock awards. Under the Companys equity incentive plans, employees and directors
may be granted restricted stock awards with participation rights which are valued based upon the fair market value on the
date of the grant. Restricted shares granted to directors in fiscal 2008 and 2009 and restricted
shares granted to employees in fiscal 2008 vest 17% in the first year, 33% in the second year and
50% in the third year from date of grant. Restricted shares granted to employees in fiscal 2009
vest 50% in the second year, 50% in the third year from date of grant. The balance of restricted
stock shares outstanding was 67,500 shares as of September 30, 2008. The balance of restricted
stock shares outstanding was 86,250 shares as of September 30, 2009. The Company has settled by
payment in cash 11,250 restricted shares which vested during fiscal 2009.
As of September 30, 2009, the remaining unamortized compensation cost related to restricted
stock awards was $0.9 million which is expected to be recognized over the remaining vesting period
of two to three years.
For fiscal 2009, 2008 and 2007, the Company recorded into selling and general administrative
expense and into its corporate/other segment $3.0 million, $2.4 million and $1.3 million,
respectively, for the cost of employee services received in exchange for equity instruments based
on the grant-date fair value of those instruments in accordance with the provisions of FASB ASC 715
(formerly referenced as Statement of Financial Accounting Standards (SFAS) 123-R Share-Based
Payments). There were no recognized tax benefits during fiscal 2009, 2008 or 2007, as any benefit
is offset by the Companys full valuation allowance on its net deferred tax asset. The Company has
not recognized the windfall tax benefit as the resulting deduction has not been realized via a
reduction of income taxes payable.
The Company uses historical volatility for a period of time that is comparable to the expected
life of the option. However, the Company only calculates the volatility of the Companys stock back
to November 2003, the date the Company received its first large order for carbon fibers, as that is
when the Company considers its business to have changed from a research and development company to
an operational company. Management believes this is a better measurement of the Companys stock
volatility.
11. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Companys strategic business units are based on product lines and have been grouped into
three reportable segments: Carbon Fibers, Technical Fibers and Corporate/Other Products. The Carbon
Fibers segment manufactures commercial carbon fibers used as reinforcement material in composites.
The Technical Fibers segment manufactures oxidized acrylic fibers and specialty carbon fibers used
to manufacture aircraft brake pads and for heat/fire barrier applications. These two segments also
facilitate development of product and process applications to increase the demand for carbon fibers
and technical fibers. The Carbon Fibers and Technical Fibers segments are located geographically in
the United States, Hungary and Mexico. The remaining business represented in the Corporate/Other
Products segment relates to water treatment and electrical services provided by the Hungarian
operations.
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Table of Contents
Management evaluates the performance of its operating segments on the basis of operating
income (loss) contribution. The following table presents financial information on the Companys
operating segments as of and for the fiscal years ended September 30, 2009, 2008 and 2007 (amounts
in thousands):
Fiscal Year Ended September 30, 2009 | ||||||||||||||||
Carbon | Technical | Corporate/ | ||||||||||||||
Fibers | Fibers | Other | Total | |||||||||||||
Net sales |
$ | 115,348 | $ | 20,996 | $ | 2,412 | $ | 138,756 | ||||||||
Cost of sales, excluding available unused capacity costs |
82,274 | 16,411 | 2,059 | 100,744 | ||||||||||||
Available unused capacity costs |
6,404 | 948 | | 7,352 | ||||||||||||
Gross profit |
26,670 | 3,637 | 353 | 30,660 | ||||||||||||
Operating income (loss) |
14,186 | 2,307 | (13,098 | ) | 3,395 | |||||||||||
Depreciation |
13,490 | 1,667 | 1,194 | 16,351 | ||||||||||||
Capital expenditures |
14,983 | 642 | 581 | 16,206 |
Fiscal Year Ended September 30, 2008 | ||||||||||||||||
Carbon | Technical | Corporate/ | ||||||||||||||
Fibers | Fibers | Other | Total | |||||||||||||
Net sales |
$ | 156,033 | $ | 25,910 | $ | 3,673 | $ | 185,616 | ||||||||
Cost of sales |
110,691 | 20,378 | 3,324 | 134,393 | ||||||||||||
Gross profit |
45,342 | 5,532 | 349 | 51,223 | ||||||||||||
Operating income (loss) |
33,961 | 3,019 | (16,973 | ) | 20,007 | |||||||||||
Depreciation |
13,353 | 2,030 | 1,093 | 16,476 | ||||||||||||
Capital expenditures |
101,628 | 2,568 | 3,519 | 107,715 |
Fiscal Year Ended September 30, 2007 | ||||||||||||||||
Carbon | Technical | Corporate/ | ||||||||||||||
Fibers | Fibers | Other | Total | |||||||||||||
Net sales |
$ | 116,365 | $ | 31,697 | $ | 2,818 | $ | 150,880 | ||||||||
Cost of sales |
82,223 | 23,689 | 1,594 | 107,506 | ||||||||||||
Gross profit |
34,142 | 8,008 | 1,224 | 43,374 | ||||||||||||
Operating income (loss) |
26,536 | 7,435 | (15,862 | ) | 18,109 | |||||||||||
Depreciation |
7,387 | 1,333 | 485 | 9,205 | ||||||||||||
Capital expenditures |
47,321 | 2,148 | 3,943 | 53,412 |
Total Assets | ||||||||||||||||
Carbon | Technical | Corporate/ | ||||||||||||||
Fibers | Fibers | Other | Total | |||||||||||||
September 30, 2009 |
$ | 293,200 | $ | 27,614 | $ | 46,031 | $ | 366,845 | ||||||||
September 30, 2008 |
344,974 | 32,705 | 62,485 | 440,164 |
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Sales and long-lived assets, by geographic area, consist of the following as of and for each
of the three fiscal years in the period ended September 30, 2009, 2008 and 2007 (amounts in
thousands):
2009 | 2008 | 2007 | ||||||||||||||||||||||
Net | Net | Net | ||||||||||||||||||||||
Long Lived | Long Lived | Long Lived | ||||||||||||||||||||||
Net Sales(a) | Assets(b) | Net Sales(a) | Assets(b) | Net Sales(a) | Assets(b) | |||||||||||||||||||
United States |
$ | 34,036 | $ | 44,539 | $ | 42,205 | $ | 47,617 | $ | 38,505 | $ | 48,744 | ||||||||||||
Europe |
102,337 | 132,880 | 133,286 | 158,694 | 106,798 | 140,457 | ||||||||||||||||||
Asia |
2,205 | | 10,106 | | 4,983 | | ||||||||||||||||||
Mexico |
| 79,491 | | 82,583 | | | ||||||||||||||||||
Other areas |
178 | | 19 | | 594 | | ||||||||||||||||||
Total |
$ | 138.756 | $ | 256,910 | $ | 185,616 | $ | 288,894 | $ | 150,880 | $ | 188,801 | ||||||||||||
(a) | Revenues are attributed to countries based on the delivery location of the customer. |
|
(b) | Property and equipment net of accumulated depreciation based on country location of assets. |
12. SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
(Amounts in thousands, except per share data)
Fiscal year 2009 | 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | ||||||||||||
Net sales |
$ | 38,629 | $ | 36,006 | $ | 30,306 | $ | 33,815 | ||||||||
Gross profit |
10,264 | 9,118 | 6,160 | 5,118 | ||||||||||||
Net income (loss) from continuing operations |
535 | 473 | (1,429 | ) | (3,781 | ) | ||||||||||
Net income (loss) |
535 | 473 | (1,429 | ) | (3,781 | ) | ||||||||||
Basic and diluted income (loss) per share: |
||||||||||||||||
Continuing operations basic |
$ | 0.02 | $ | 0.01 | $ | (0.04 | ) | $ | (0.11 | ) | ||||||
Continuing operations diluted |
$ | 0.02 | $ | 0.01 | $ | (0.04 | ) | $ | (0.11 | ) | ||||||
Fiscal year 2008 | 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | ||||||||||||
Net sales |
$ | 40,072 | $ | 49,581 | $ | 44,950 | $ | 51,013 | ||||||||
Gross profit |
10,759 | 14,025 | 13,638 | 12,801 | ||||||||||||
Net income (loss) from continuing operations |
2,604 | 4,311 | 2,316 | (1,790 | ) | |||||||||||
Net income (loss) |
2,604 | 4,311 | 2,316 | (1,790 | ) | |||||||||||
Basic and diluted income (loss) per share: |
||||||||||||||||
Continuing operations basic |
$ | 0.08 | $ | 0.13 | $ | 0.07 | $ | (0.05 | ) | |||||||
Continuing operations diluted |
$ | 0.08 | $ | 0.13 | $ | 0.07 | $ | (0.05 | ) | |||||||
Annual earnings per share may not equal the sum of the individual quarters due to differences
in the average number of shares outstanding during the respective periods.
13. SUBSEQUENT EVENTS
Material subsequent events are evaluated and disclosed through the report issuance date, November
30, 2009.
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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosures
None.
Item 9A. Controls and Procedures
Evaluation of Controls and Procedures
Under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of
the Companys disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of
the Securities and Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer has concluded that the Companys disclosure controls and procedures as of
September 30, 2009 were effective to ensure that information required to be disclosed by the
Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in Securities and Exchange
Commissions rules and forms.
Managements Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Under
the supervision and with the participation of our management, including the Chief Executive Officer
and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal
control over financial reporting as of September 30, 2009. All internal control systems have
inherent limitations, including the possibility of circumvention and overriding the control.
Accordingly, even effective internal control can provide only reasonable assurance as to the
reliability of financial statement preparation and presentation. Further, because of changes in
conditions, the effectiveness of internal control may vary over time.
In making its evaluation, our management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework. Based upon this evaluation, our management has concluded that our internal control over
financial reporting as of September 30, 2009 is effective.
Attestation Report of Independent Registered Public Accounting Firm
Our independent registered public accounting firm, Ernst & Young LLP, has audited the
effectiveness of our internal control over financial reporting, as stated in its report which is
included herein.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during
the quarter ended September 30, 2009 that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information set forth under the captions Election of Directors, Other Matters and
Compliance with Section 16(a) of the Securities Exchange Act of 1934 in the registrants Proxy
Statement for its 2010 Annual Meeting of Shareholders is incorporated herein by this reference. See
also Item 4A of Part I of this report.
Item 11. Executive Compensation
The information set forth under the captions Directors Fees and Compensation of Executive
Officers in the registrants Proxy Statement for its 2010 Annual Meeting of Shareholders is
incorporated herein by this reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information set forth under the captions Voting Securities and Principal Holders Thereof
and Security Ownership By Management in the
registrants Proxy Statement for its 2010 Annual
Meeting of Shareholders is incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information set forth under the captions Certain Transactions and Election of
Directors in the registrants Proxy Statement for its 2010 Annual Meeting of Shareholders is
incorporated herein by this reference.
Item 14. Principal Accounting Fees and Services
The information set forth under the caption Principal Accountant Fees and Services in the
registrants Proxy Statement for its 2010 Annual Meeting of Shareholders is incorporated herein by
this reference.
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Table of Contents
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) (1) Financial statements: The following financial statements and reports thereon are included
in Item 8 of this report:
Report of Management
Reports of Independent Registered Public Accounting Firm Ernst & Young LLP*
Report of Independent Registered Public Accounting Firm Grant Thornton LLP
Consolidated Balance Sheets as of September 30, 2009 and 2008
Consolidated Statements of Operations for the years ended September 30, 2009, 2008 and 2007
Consolidated Statements of Changes in Shareholders Equity for the years ended September 30, 2009,
2008 and 2007
Consolidated Statements of Cash Flows for the years ended September 30, 2009, 2008 and 2007
Notes to Consolidated Financial Statements
* | Report on financial statement schedule is included in Exhibit 23.1 hereto. |
(2) The following financial statement schedule is included in Part IV of this report:
Rule 12-09 Valuation and Qualifying Accounts and Reserves
For the fiscal year ended September 30, 2009
Rule 12-09 Valuation and Qualifying Accounts and Reserves
(Amounts in thousands)
Column A | Column B | Column C | Column D | Column E | ||||||||||||||||
Additions | ||||||||||||||||||||
Balance at | Charged to | Charged to | Balance at | |||||||||||||||||
beginning | costs and | other accounts | Deductions | end | ||||||||||||||||
of period | expenses | describe | describe | of period | ||||||||||||||||
Reserve for doubtful accounts |
$ | 1,754 | $ | 1,303 | (1) | $ | | $ | 701 | (2) | $ | 2,356 | ||||||||
Reserve for inventory valuation |
$ | 500 | $ | 165 | (3) | $ | | $ | | $ | 665 | |||||||||
Deferred tax valuation |
$ | 30,815 | $ | | $ | | $ | 10,677 | (4)(5) | $ | 20,138 | |||||||||
For the fiscal year ended September 30, 2008
Rule 12-09 Valuation and Qualifying Accounts and Reserves
(Amounts in thousands)
Column A | Column B | Column C | Column D | Column E | ||||||||||||||||
Additions | ||||||||||||||||||||
Balance at | Charged to | Charged to | Balance at | |||||||||||||||||
beginning | costs and | other accounts | Deductions | end | ||||||||||||||||
of period | expenses | describe | describe | of period | ||||||||||||||||
Reserve for doubtful accounts |
$ | 781 | $ | 1,300 | (1) | $ | | $ | 327 | (2) | $ | 1,754 | ||||||||
Reserve for inventory valuation |
$ | 645 | $ | | $ | | $ | 145 | (7) | $ | 500 | |||||||||
Deferred tax valuation |
$ | 29,758 | $ | 1,057 | $ | | $ | | $ | 30,815 | (6) | |||||||||
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For the fiscal year ended September 30, 2007
Rule 12-09 Valuation and Qualifying Accounts and Reserves
(Amounts in thousands)
Column A | Column B | Column C | Column D | Column E | ||||||||||||||||
Additions | ||||||||||||||||||||
Balance at | Charged to | Charged to | Balance at | |||||||||||||||||
beginning | costs and | other accounts | Deductions | end | ||||||||||||||||
of period | expenses | describe | describe | of period | ||||||||||||||||
Reserve for doubtful accounts |
$ | 729 | $ | 52 | (8) | $ | | $ | | $ | 781 | |||||||||
Reserve for inventory valuation |
$ | 1,300 | $ | | $ | | $ | 655 | (7) | $ | 645 | |||||||||
Deferred tax valuation |
$ | 34,217 | $ | | $ | 628 | (9) | $ | 5,087 | (10)(11)(12) | $ | 29,758 | ||||||||
(1) | Write off of uncollectible receivable | |
(2) | Recovery of receivables previously listed as doubtful | |
(3) | Increase reserve for slow-moving product | |
(4) | Reduction in required valuation allowance due to domestic NOL utilization. | |
(5) | Reduction in required valuation allowance due to non-qualified stock option deduction for which no cash benefit has been realized. | |
(6) | Includes valuation allowance related to non-qualified stock options. | |
(7) | Company used and sold materials for which reserves were established primarily for slow-moving product. | |
(8) | Write-off of uncollectible receivable, net of recovery. | |
(9) | Addition of a valuation allowance on the Texas tax credits that were created from prior years Texas NOL. The credits are created and calculated under the newly enacted Texas margin tax law. | |
(10) | Expiration of capital loss carryforward and utilization against current foreign income taxes payable. | |
(11) | Removal of NOLs related to non-qualified stock options and the related valuation allowance. | |
(12) | Prior year true ups |
Schedules other than those listed above have been omitted because they are either not required or
not applicable, or because the information is presented in the consolidated financial statements or
the notes thereto.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
ZOLTEK COMPANIES, INC. (Registrant) |
||||
By: | /s/ ZSOLT RUMY | |||
Zsolt Rumy, Chairman of the Board, President and | ||||
Chief Executive Officer |
Date: November 30, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
Signature | Title | Date | ||
/s/ ZSOLT RUMY
|
Chairman, President, Chief Executive Officer and Director | November 30, 2009 | ||
/s/ ANDREW W. WHIPPLE
|
Chief Financial Officer | November 30, 2009 | ||
/s/ LINN H. BEALKE
|
Director | November 30, 2009 | ||
/s/ CHARLES A. DILL
|
Director | November 30, 2009 | ||
/s/ GEORGE E. HUSMAN
|
Director | November 30, 2009 | ||
/s/ MICHAEL D. LATTA
|
Director | November 30, 2009 | ||
/s/ PEDRO REYNOSO
|
Director | November 30, 2009 |
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Exhibit Index
Exhibit | ||||
Number | Description | |||
3.1 | Restated Articles of Incorporation of the Registrant dated October 7,
1992, filed as Exhibit 3.1 to Registrants Registration Statement on
Form S-3 (Reg. No. 333-143996) and incorporated herein by reference. |
|||
3.2 | Certificate of Amendment of Restated Articles of Incorporation of the
Registrant dated February 15, 1996, filed as Exhibit 3.2 to Registrants
Registration Statement on Form S-3 (Reg. No. 333-143996) and incorporated
herein by reference. |
|||
3.3 | Certificate of Amendment of Restated Articles of Incorporation of the
Registrant dated February 7, 1997, filed as Exhibit 3.3 to Registrants
Registration Statement on Form S-3 (Reg. No. 333-143996) and incorporated
herein by reference. |
|||
3.4 | Restated By-Laws of the Registrant dated September 22, 1992, filed as
Exhibit 3.4 to Registrants Registration Statement on Form S-3 (Reg.
No. 333-143996) and incorporated herein by reference. |
|||
4.1 | Form of certificate for Common Stock, filed as Exhibit 4.1 to
Registrants Registration Statement on Form S-1 (Reg. No. 33-51142) and
incorporated herein by reference. |
|||
4.2 | Form of Registration Rights Agreement, dated as of February 9, 2005, filed as Exhibit
4.4 to the Registrants Quarterly Report on Form 10-Q for the quarter ended December 31,
2004 and incorporated herein by reference. |
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Exhibit | ||||
Number | Description | |||
4.3 | Registration Rights Agreement, dated as of September 30,
2005, by and among the Registrant and the Lenders parties
thereto, filed as Exhibit 4.4 to the Registrants Current
Report on Form 8-K dated September 29, 2005 and
incorporated herein by reference. |
|||
4.4 | Waiver and Consent, dated as of February 3, 2006, by and
among the Registrant and the Lender parties thereto, filed
as Exhibit 4.5 to the Registrants Current Report on Form
8-K dated February 6, 2006, and incorporated herein by
reference. |
|||
4.5 | Amendment No. 1 to Loan and Warrant Agreement and
Registration Rights Agreement among the Registrant and the
Lender parties thereto, filed as Exhibit 4.2 to the
Registrants Current Report on Form 8-K dated April 28,
2006 and incorporated herein by reference. |
|||
4.6 | Form of Note, filed as Exhibit 4.3 to the Registrants
Current Report on Form 8-K dated April 28, 2006 and
incorporated herein by reference. |
|||
4.7 | Form of Warrant, filed as Exhibit 4.4 to the Registrants
Current Report on Form 8-K dated April 28, 2006 and
incorporated herein by reference. |
|||
4.8 | Amendment No. 2 to Loan and Warrant Agreement and
Registration Rights Agreement, dated as of December 14,
2006, among the Registrant and the Lenders, filed as
Exhibit 4.3 to the Registrants Current Report on Form 8-K
dated December 14, 2006 and incorporated herein by
reference. |
|||
4.9 | Form of Warrant, filed as Exhibit 4.4 to the Registrants
Current Report on Form 8-K dated December 14, 2006 and
incorporated herein by reference. |
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10.1 | Zoltek Companies, Inc. Amended and Restated Directors Stock
Option Plan filed as Exhibit 10.1 to Registrants Quarterly
Report on Form 10-Q dated August 13, 1999* |
|||
10.2 | Credit Agreement, dated as of May 11, 2001, between
Southwest Bank of St. Louis and Zoltek Companies, Inc.,
Zoltek Corporation, Cape Composites, Inc., Engineering
Technology Corporation, Zoltek Properties, Inc., and
Hardcore Composites Operations, LLC, filed as Exhibit 10.1
to Registrants Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001, is incorporate herein by
reference. |
|||
10.3 | First Amendment to Credit Agreement, dated as of February
13, 2003, by and among Zoltek Companies, Inc., Zoltek
Corporation, Cape Composites, Inc., Engineering Technology
Corporation, Zoltek Properties, Inc. and Southwest
Bank of St. Louis, filed as Exhibit 10.1 to Registrants
Current Report on Form 8-k dated February 18, 2003 is
incorporated herein by reference. |
|||
10.4 | Zoltek Companies, Inc. 2003 Long-Term Equity Incentive
Plan, filed as Appendix A to Registrants definitive proxy
statement for the 2002 Annual Meeting of Shareholders* |
|||
10.5 | Second Amendment to Credit Agreement, dated as of January
13, 2003, by and among Zoltek Companies, Inc., Zoltek
Corporation, Cape Composites, Inc., Engineering Technology
Corporation, Zoltek Properties, Inc. and
Southwest Bank of St. Louis filed as Exhibit 10.14 to
Registrants Annual Report on Form 10-K for the fiscal year
ended September 30, 2003, is incorporated herein by this
reference |
|||
10.6 | Zoltek Companies, Inc. 2008 Director Incentive Plan, filed
as Appendix A to the Registrants Proxy Statement on
Schedule 14A filed on January 2, 2008 and incorporated
herein by this reference.* |
|||
10.7 | Zoltek Companies, Inc. 2008 Long Term Incentive Plan, filed
as Appendix B to the Registrants Proxy Statement on
Schedule 14A filed on January 2, 2008 and incorporated
herein by this reference.* |
|||
10.8 | Employment Agreement, dated March 1, 2008, between the
Registrant and Karen Bomba, filed as Exhibit 10.1 to the
Registrants Quarterly Report on Form 10-Q for the quarter
ended March 31, 2008 and incorporated herein by reference. |
|||
10.9 | Employment Agreement, dated November 26, 2008, between the
Registrant and Andrew W. Whipple, filed as Exhibit 10.10 to
the Registrants Annual Report on Form 10-K for the fiscal
year ended September 30, 2008, is incorporated herein by
this reference |
|||
21 | Subsidiaries of the Registrant filed as Exhibit 21 to the
Registrants Annual Report on Form 10-K for the fiscal year
ended September 30, 2007 and incorporated herein by
reference. |
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23.1 | Consent of Ernst & Young LLP. |
|||
23.2 | Consent of Grant Thornton LLP. |
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31.1 | Certification of Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as
amended is filed herewith |
|||
31.2 | Certification of Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as
amended is filed herewith |
|||
32.1 | Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 is filed herewith |
|||
32.2 | Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 is filed herewith |
* | Management compensatory plan or arrangement |
58