Attached files
file | filename |
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EX-32.2 - EXHIBIT 32.2 - ZOLTEK COMPANIES INC | c00679exv32w2.htm |
EX-32.1 - EXHIBIT 32.1 - ZOLTEK COMPANIES INC | c00679exv32w1.htm |
EX-31.2 - EXHIBIT 31.2 - ZOLTEK COMPANIES INC | c00679exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - ZOLTEK COMPANIES INC | c00679exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark one)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the three months ended March 31, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to ___________ to ___________
Commission File No. 0-20600
ZOLTEK COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Missouri | 43-1311101 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
3101 McKelvey Road, St. Louis, Missouri | 63044 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (314) 291-5110
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 whether the Registrant is a large accelerated filer, an accelerated filer,
non-accelerated filer or a smaller reporting company. See the 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
Indicate the number of shares outstanding of each of the registrants classes of common stock as of
the latest practicable date: As of May 7, 2010, 34,408,608 shares of Common Stock, $.01 par value,
were outstanding.
ZOLTEK COMPANIES, INC.
INDEX
INDEX
3 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
5 | ||||||||
6 | ||||||||
7 | ||||||||
16 | ||||||||
27 | ||||||||
29 | ||||||||
30 | ||||||||
30 | ||||||||
31 | ||||||||
32 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
2
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ZOLTEK COMPANIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
(In thousands, except share amounts)
(Unaudited)
March 31, | September 30, | |||||||
2010 | 2009 | |||||||
Assets | ||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 22,616 | $ | 20,943 | ||||
Accounts receivable, less allowance for doubtful accounts of $1,809
and $2,356, respectively |
19,225 | 30,507 | ||||||
Inventories, net |
41,582 | 48,058 | ||||||
Other current assets |
7,935 | 10,100 | ||||||
Total current assets |
91,358 | 109,608 | ||||||
Property and equipment, net |
242,633 | 256,910 | ||||||
Other assets |
137 | 327 | ||||||
Total assets |
$ | 334,128 | $ | 366,845 | ||||
Liabilities and Shareholders Equity |
||||||||
Current liabilities: |
||||||||
Borrowings under credit lines |
7,803 | 12,277 | ||||||
Current maturities of long-term debt |
1,681 | 4,159 | ||||||
Trade accounts payable |
5,563 | 9,408 | ||||||
Accrued expenses and other liabilities |
6,627 | 6,845 | ||||||
Construction payables |
483 | 792 | ||||||
Total current liabilities |
22,157 | 33,481 | ||||||
Long-term debt, less current maturities |
| 981 | ||||||
Hungarian grant, long-term |
9,700 | 10,228 | ||||||
Deferred tax liabilities |
2,421 | 6,690 | ||||||
Derivative liabilities |
1,929 | | ||||||
Total liabilities |
36,207 | 51,380 | ||||||
Commitments and contingencies (see Note 8) |
||||||||
Shareholders equity: |
||||||||
Preferred stock, $.01 par value, 1,000,000 shares authorized,
no shares issued or outstanding |
| | ||||||
Common stock, $.01 par value, 50,000,000 shares authorized, 34,408,608 and
34,424,441 shares issued and outstanding at March 31, 2010 and
September 30, 2009, respectively |
344 | 344 | ||||||
Additional paid-in capital |
480,113 | 494,311 | ||||||
Accumulated other comprehensive loss |
(28,839 | ) | (18,405 | ) | ||||
Accumulated deficit |
(153,697 | ) | (160,785 | ) | ||||
Total shareholders equity |
297,921 | 315,465 | ||||||
Total liabilities and shareholders equity |
$ | 334,128 | $ | 366,845 | ||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
3
Table of Contents
ZOLTEK COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share and per share data)
(Unaudited)
(Amounts in thousands, except share and per share data)
(Unaudited)
Three months ended March 31, | Six months ended March 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net sales |
$ | 26,029 | $ | 36,006 | $ | 54,896 | $ | 74,635 | ||||||||
Cost of sales, excluding available unused capacity costs |
20,294 | 25,410 | 42,443 | 53,502 | ||||||||||||
Available unused capacity costs |
4,283 | 1,478 | 7,054 | 1,751 | ||||||||||||
Gross profit |
1,452 | 9,118 | 5,399 | 19,382 | ||||||||||||
Application and development costs |
1,965 | 1,726 | 3,949 | 3,448 | ||||||||||||
Selling, general and administrative expenses |
4,531 | 5,341 | 9,245 | 10,408 | ||||||||||||
Operating (loss) income |
(5,044 | ) | 2,051 | (7,795 | ) | 5,526 | ||||||||||
Other income (expense): |
||||||||||||||||
Interest income |
6 | 105 | 14 | 324 | ||||||||||||
(Loss) gain on foreign currency transactions |
(382 | ) | 1,073 | (36 | ) | 1,251 | ||||||||||
Other expense, net |
(217 | ) | (206 | ) | (629 | ) | (460 | ) | ||||||||
Gain on derivative liabilities |
274 | | 1,132 | | ||||||||||||
Interest expense, excluding amortization of financing fees and
debt discount |
(131 | ) | (377 | ) | (264 | ) | (945 | ) | ||||||||
Amortization of financing fees and debt discount |
(92 | ) | (1,593 | ) | (289 | ) | (3,557 | ) | ||||||||
(Loss) income before income taxes |
(5,586 | ) | 1,053 | (7,867 | ) | 2,139 | ||||||||||
Income tax benefit (expense) |
600 | (580 | ) | 2,398 | (1,130 | ) | ||||||||||
Net (loss) income |
$ | (4,986 | ) | $ | 473 | $ | (5,469 | ) | $ | 1,009 | ||||||
Basic and diluted (loss) income per share |
$ | (0.14 | ) | $ | 0.01 | $ | (0.16 | ) | $ | 0.03 | ||||||
Weighted average common shares outstanding basic |
34,417,071 | 34,405,692 | 34,420,796 | 34,405,156 | ||||||||||||
Weighted average common shares outstanding diluted |
34,417,071 | 34,482,098 | 34,420,796 | 34,486,450 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
4
Table of Contents
ZOLTEK COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
(Amounts in thousands)
(Unaudited)
(Amounts in thousands)
(Unaudited)
Total | Additional | Accumulated Other | ||||||||||||||||||
Shareholders | Common | Paid-In | Comprehensive | Accumulated | ||||||||||||||||
Equity | Stock | Capital | Loss | Deficit | ||||||||||||||||
Balance, September 30, 2009 |
$ | 315,465 | $ | 344 | $ | 494,311 | $ | (18,405 | ) | $ | (160,785 | ) | ||||||||
Stock option compensation expense |
1,563 | 1,563 | ||||||||||||||||||
Cumulative effect of change in accounting principle |
(3,061 | ) | (15,618 | ) | 12,557 | |||||||||||||||
Cash settlement of restricted shares |
(143 | ) | (143 | ) | ||||||||||||||||
Net loss |
(5,469 | ) | (5,469 | ) | ||||||||||||||||
Foreign currency translation adjustment |
(10,434 | ) | (10,434 | ) | ||||||||||||||||
Balance, March 31, 2010 |
$ | 297,921 | $ | 344 | $ | 480,113 | $ | (28,839 | ) | $ | (153,697 | ) | ||||||||
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Amounts in thousands)
(Unaudited)
(Amounts in thousands)
(Unaudited)
Three months ended March 31, | Six months ended March 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net (loss) income |
$ | (4,986 | ) | $ | 473 | $ | (5,469 | ) | $ | 1,009 | ||||||
Foreign currency translation adjustment |
(5,334 | ) | (32,364 | ) | (10,434 | ) | (59,824 | ) | ||||||||
Comprehensive loss |
$ | (10,320 | ) | $ | (31,891 | ) | $ | (15,903 | ) | $ | (58,815 | ) | ||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
5
Table of Contents
ZOLTEK COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
(Amounts in thousands)
(Unaudited)
Six months ended March 31, | ||||||||
2010 | 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net (loss) income |
$ | (5,469 | ) | $ | 1,009 | |||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: |
||||||||
Depreciation |
8,417 | 8,026 | ||||||
Amortization of financing fees and debt discount |
289 | 3,557 | ||||||
Deferred taxes |
(2,962 | ) | 590 | |||||
Gain on derivative liabilities |
(1,132 | ) | | |||||
Foreign currency transaction gains |
(306 | ) | (882 | ) | ||||
Stock option compensation expense |
1,563 | 1,599 | ||||||
Loss on disposal of assets |
154 | 321 | ||||||
Changes in assets and liabilities: |
||||||||
Decrease in accounts receivable |
10,280 | 3,195 | ||||||
Decrease (increase) in inventories |
4,490 | (10,489 | ) | |||||
Decrease in other current assets and other assets |
1,728 | 126 | ||||||
Decrease in trade accounts payable |
(3,523 | ) | (2,228 | ) | ||||
(Decrease) increase in accrued expenses and other liabilities |
(1,082 | ) | 2,581 | |||||
Decrease in legal liabilities |
| (5,399 | ) | |||||
Net cash provided by operating activities |
12,447 | 2,006 | ||||||
Cash flows from investing activities: |
||||||||
Purchases of property and equipment |
(2,105 | ) | (13,054 | ) | ||||
Proceeds received from sale of fixed assets |
83 | | ||||||
Proceeds received from Hungarian grant |
55 | | ||||||
Decrease in construction payables |
(309 | ) | (3,890 | ) | ||||
Net cash used for investing activities |
(2,276 | ) | (16,944 | ) | ||||
Cash flows from financing activities: |
||||||||
Repayment of convertible debentures |
(3,600 | ) | (5,150 | ) | ||||
Cash settlement of restricted shares |
(143 | ) | | |||||
(Repayment of) borrowings under notes payable and credit lines |
(4,524 | ) | 7,195 | |||||
Net cash (used for) provided by financing activities |
(8,267 | ) | 2,045 | |||||
Effect of exchange rate changes on cash and cash equivalents |
(231 | ) | 145 | |||||
Net increase (decrease) in cash and cash equivalents |
1,673 | (12,748 | ) | |||||
Cash and cash equivalents at beginning of period |
20,943 | 29,224 | ||||||
Cash and cash equivalents at end of period |
$ | 22,616 | $ | 16,476 | ||||
Supplemental disclosures of cash flow information: |
||||||||
Non-cash conversion of convertible debentures |
| 251 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
6
Table of Contents
ZOLTEK COMPANIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Zoltek Companies, Inc. is a holding company, which operates through wholly-owned subsidiaries,
Zoltek Corporation, Zoltek Zrt., Zoltek de Mexico SA de CV, Zoltek de Occidente SA de CV,
Engineering Technology Corporation (Entec Composite Machines), Zoltek Properties, Inc., and
Zoltek Automotive, LLC. 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 are Mexican subsidiaries that manufacture carbon
fiber and precursor raw material used in production of carbon fibers. Entec Composite Machines
manufactures and markets filament winding and pultrusion equipment used in the production of large
volume composite parts. Zoltek Properties, Inc. is a US subsidiary that owns property in the St.
Louis, Missouri area. Zoltek Automotive, LLC is a recently organized subsidiary that develops
high-volume applications for lightweight carbon fibers within the automotive industry. The
Companys primary sales markets are in Europe and the United States, with an increasing presence in
Asia. 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.
Basis of Presentation
The accompanying condensed consolidated financial statements of the Company have been prepared
in accordance with accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete financial statements
and should be read in conjunction with the Companys Annual Report on Form 10-K for the fiscal year
ended September 30, 2009, which includes consolidated financial statements and notes thereto. In
the opinion of management, all normal recurring adjustments and estimates considered necessary have
been included. The results of operations of any interim period are not necessarily indicative of
the results that may be expected for a full fiscal year.
The unaudited interim condensed consolidated financial statements include the accounts and
transactions of the Company and its wholly-owned subsidiaries. Adjustments resulting from the
currency translation of financial statements of the Companys foreign subsidiaries are reflected as
Accumulated other comprehensive loss within shareholders equity. Gains and losses from foreign
currency transactions are included in the condensed consolidated statements of operations as Other
income (expense). All significant inter-company transactions and balances have been eliminated in
consolidation. Certain prior year amounts have been reclassified to conform to the current year
presentation.
Adoption of New Accounting Pronouncements
See Note 11 of the Notes to Condensed Consolidated Financial Statements.
2. INVENTORIES
Inventories, net of reserves, consist of the following (in thousands):
March 31, | September 30, | |||||||
2010 | 2009 | |||||||
Raw materials |
$ | 5,258 | $ | 7,349 | ||||
Work-in-process |
5,956 | 8,977 | ||||||
Finished goods |
25,504 | 26,758 | ||||||
Consigned inventory |
4,328 | 4,471 | ||||||
Supplies and other |
536 | 503 | ||||||
$ | 41,582 | $ | 48,058 | |||||
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 inventory valuation
reserves of $0.9 million as of March 31, 2010 and September 30, 2009 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.
7
Table of Contents
3. SEGMENT 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 segment production facilities 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 and costs associated with the Corporate headquarters.
Management evaluates the performance of its operating segments on the basis of operating
income (loss) contribution. The following tables present financial information on the Companys
operating segments as of March 31, 2010 and September 30, 2009 and for the three and six months
ended March 31, 2010 and 2009 (in thousands):
Three months ended March 31, 2010 | ||||||||||||||||
Carbon | Technical | Corporate/ | ||||||||||||||
Fibers | Fibers | Other | Total | |||||||||||||
Net sales |
$ | 19,654 | $ | 5,973 | $ | 402 | $ | 26,029 | ||||||||
Cost of sales, excluding available unused capacity costs |
15,494 | 4,486 | 314 | 20,294 | ||||||||||||
Available unused capacity costs |
3,733 | 550 | | 4,283 | ||||||||||||
Gross profit |
427 | 937 | 88 | 1,452 | ||||||||||||
Operating income (loss) |
(1,623 | ) | 731 | (4,152 | ) | (5,044 | ) | |||||||||
Depreciation |
3,274 | 434 | 393 | 4,101 | ||||||||||||
Capital expenditures |
970 | 288 | 197 | 1,455 |
Three months ended March 31, 2009 | ||||||||||||||||
Carbon | Technical | Corporate/ | ||||||||||||||
Fibers | Fibers | Other | Total | |||||||||||||
Net sales |
$ | 28,914 | $ | 6,490 | $ | 602 | $ | 36,006 | ||||||||
Cost of sales, excluding available unused capacity costs |
20,239 | 4,813 | 358 | 25,410 | ||||||||||||
Available unused capacity costs |
1,111 | 367 | | 1,478 | ||||||||||||
Gross profit |
7,564 | 1,310 | 244 | 9,118 | ||||||||||||
Operating income (loss) |
4,730 | 603 | (3,282 | ) | 2,051 | |||||||||||
Depreciation |
3,293 | 390 | 270 | 3,953 | ||||||||||||
Capital expenditures |
4,538 | 101 | 81 | 4,720 |
Six months ended March 31, 2010 | ||||||||||||||||
Carbon | Technical | Corporate/ | ||||||||||||||
Fibers | Fibers | Other | Total | |||||||||||||
Net sales |
$ | 43,596 | $ | 10,403 | $ | 897 | $ | 54,896 | ||||||||
Cost of sales, excluding available unused capacity costs |
33,379 | 8,282 | 782 | 42,443 | ||||||||||||
Available unused capacity costs |
6,160 | 894 | | 7,054 | ||||||||||||
Gross profit |
4,057 | 1,227 | 115 | 5,399 | ||||||||||||
Operating income (loss) |
(335 | ) | 792 | (8,252 | ) | (7,795 | ) | |||||||||
Depreciation |
6,713 | 892 | 812 | 8,417 | ||||||||||||
Capital expenditures |
1,209 | 512 | 384 | 2,105 |
Six months ended March 31, 2009 | ||||||||||||||||
Carbon | Technical | Corporate/ | ||||||||||||||
Fibers | Fibers | Other | Total | |||||||||||||
Net sales |
$ | 61,630 | $ | 11,755 | $ | 1,250 | $ | 74,635 | ||||||||
Cost of sales, excluding available unused capacity costs |
43,878 | 8,634 | 990 | 53,502 | ||||||||||||
Available unused capacity costs |
1,202 | 549 | | 1,751 | ||||||||||||
Gross profit |
16,550 | 2,572 | 260 | 19,382 | ||||||||||||
Operating income (loss) |
11,236 | 1,134 | (6,844 | ) | 5,526 | |||||||||||
Depreciation |
6,664 | 809 | 553 | 8,026 | ||||||||||||
Capital expenditures |
12,363 | 537 | 154 | 13,054 |
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Table of Contents
The following table presents financial information on the Companys operating segments as of
March 31, 2010 and September 30, 2009 (in thousands):
Total Assets | ||||||||||||||||
Carbon | Technical | Corporate/ | ||||||||||||||
Fibers | Fibers | Other | Total | |||||||||||||
March 31, 2010 |
$ | 265,172 | $ | 24,963 | $ | 43,993 | $ | 334,128 | ||||||||
September 30, 2009 |
293,200 | 27,614 | 46,031 | 366,845 |
4. FINANCING AND DEBT
Credit Facilities
US Operations The revolving credit facility has a total commitment of the lesser of $10.0
million or a borrowing base, which as of March 31, 2010 was $10.0 million. Total borrowings under
the facility were $7.8 million as of March 31, 2010. Effective as of February 2, 2010, the Company
extended its existing US line of credit until January 2011. There are no financial covenants
associated with this facility.
Hungarian Operations The Companys Hungarian subsidiary has a credit facility with a
Hungarian bank, which was renewed with the same terms in November 2009 and now expires on August
30, 2010. The revolving credit facility has a total commitment of the lesser of $9.1 million or a
borrowing base, which as of March 31, 2010 was $9.1 million. There were no borrowings under this
credit facility at March 31, 2010. There are no financial covenants associated with this facility.
Credit lines consist of the following (amounts in thousands):
March 31, | September 30, | |||||||
2010 | 2009 | |||||||
US facility (current interest rate of 2.98% variable with Libor) |
$ | 7,803 | $ | 8,343 | ||||
Facility with Hungarian bank (current interest rate of 2.7% to 7.3%, depending on currency) |
| 3,934 | ||||||
Total credit lines |
$ | 7,803 | $ | 12,277 | ||||
Hungarian Grant
The Hungarian government has pledged a grant of 2.9 billion Hungarian Forint (HUF)
(approximately $14.6 million as of March 31, 2010) to Zolteks Hungarian subsidiary. The grant is
intended to provide a portion of the capital resources to modernize the subsidiarys facility,
establish a research and development center, and support buildup of manufacturing capacity of
carbon fibers. Zolteks Hungarian subsidiary has received approximately HUF 2.6 billion in grant
funding as of March 31, 2010. These funds have been recorded as a liability on the Companys
consolidated balance sheet. The liability is being amortized over the life of the assets procured
by the grant funds, offsetting the depreciation expense from the assets 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 at least 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, as amended.
Convertible Debt and Warrants
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 March 31, 2010, Zoltek had $0.6 million of convertible debt outstanding, which the
Company repaid with cash on hand in April 2010. There were no conversions of convertible debt
during the first six months of fiscal 2010 or during the second quarter of fiscal 2009. During the
first quarter of fiscal 2009, convertible debt in the principal amount of $0.3 million was
converted into 16,264 shares of common stock.
9
Table of Contents
The following tables summarize the convertible debt outstanding as of March 31, 2010 and
September 30, 2009.
As of March 31, 2010 | As of September 30, 2009 | |||||||||||||||||||||||
Number | Number | |||||||||||||||||||||||
of shares | Conversion | Principal | of shares | Conversion | Principal | |||||||||||||||||||
issuable | price | outstanding | issuable | price | outstanding | |||||||||||||||||||
May 2006 |
| $ | 25.51 | $ | | 70,560 | $ | 25.51 | $ | 1,799,986 | ||||||||||||||
July 2006 |
| 25.51 | | 19,640 | 25.51 | 501,016 | ||||||||||||||||||
October 2006 |
25,460 | 25.51 | 649,485 | 76,381 | 25.51 | 1,948,479 | ||||||||||||||||||
25,460 | $ | 649,485 | 166,581 | $ | 4,249,481 | |||||||||||||||||||
The May, July and October 2006 issuances also provide that the investor may require the
Company to pay out the quarterly installment due in cash if the Volume-Weighted Average Price
(VWAP) of the Companys common stock is below $12.50 on the due date. During fiscal 2010, the
VWAP of the Companys common stock was below $12.50 on the due date of principal payments and,
accordingly, the Company paid out the quarterly installments of principal amortization in cash.
As of September 30, 2009, we had $4.2 million in convertible debt outstanding related to the
May, July and October 2006 debt issuances. As of March 31, 2010, we had $0.6 million in
convertible debt outstanding related to the October 2006 debt issuance. The table below which sets
forth the significant terms and assumptions associated with valuing the conversion features:
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 | |||
Value per share of conversion features at issuance |
$18.80 | $19.21 | $19.57 | |||
Stock price on date of agreement |
$32.25 | $29.28 | $26.81 | |||
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 were considered to have beneficial conversion features. |
During the first quarter of fiscal 2006, the Company obtained the financing to post a bond in
connection with litigation. Part of the funds for this bond was provided by the proceeds from
the exercise of warrants to purchase 827,789 shares of common stock for $11.9 million by existing
institutional shareholders. In connection with the exercise of the warrants, the Company issued
investors additional warrants to purchase 827,789 shares of common stock with an exercise price of
$28.06 per share. The Company recorded the entire fair value of these new warrants, $6.4 million,
into expense during the first quarter of fiscal 2006.
Amortization of Financing Fees and Debt Discount
Convertible debt issued in May 2006, July 2006 and October 2006 was considered to have
beneficial conversion features 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 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.
At the time of issuance of convertible debt securities with warrants, the Company recorded the
fair value associated with the warrants using the Black-Scholes option-pricing model. This fair
value discount was recorded as a reduction in the carrying value of the convertible debt security
that was accreted to its face value over the life of the convertible security and expensed into the
Companys income statement. If the convertible security was converted prior to the redemption date,
the unamortized debt discount associated with the valuation of the warrants was recorded as a
reduction to additional paid-in capital at the time of conversion.
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The tables below show the impact of amortization of financing fees and debt discount on the
financial results for the three and six months ended March 31, 2010 and 2009 (in thousands).
Three months ended March 31, 2010 | Six months ended March 31, 2010 | |||||||||||||||||||||||
Conversion | Conversion | |||||||||||||||||||||||
Warrants | feature | Total | Warrants | feature | Total | |||||||||||||||||||
May 2006 issuance |
$ | | $ | | $ | | $ | 18 | $ | 26 | $ | 44 | ||||||||||||
July 2006 issuance |
| | | 15 | 17 | 32 | ||||||||||||||||||
October 2006 issuance |
18 | 21 | 39 | 54 | 62 | 116 | ||||||||||||||||||
$ | 18 | $ | 21 | 39 | $ | 87 | $ | 105 | 192 | |||||||||||||||
Deferred financing costs |
53 | 97 | ||||||||||||||||||||||
Total |
$ | 92 | $ | 289 | ||||||||||||||||||||
Three months ended March 31, 2009 | Six months ended March 31, 2009 | |||||||||||||||||||||||
Conversion | Conversion | |||||||||||||||||||||||
Warrants | feature | Total | Warrants | feature | Total | |||||||||||||||||||
May 2006 issuance |
$ | 450 | $ | 664 | $ | 1,114 | $ | 1,051 | $ | 1,551 | $ | 2,602 | ||||||||||||
July 2006 issuance |
89 | 108 | 197 | 158 | 193 | 351 | ||||||||||||||||||
October 2006 issuance |
87 | 100 | 187 | 193 | 222 | 415 | ||||||||||||||||||
$ | 626 | $ | 872 | 1,498 | $ | 1,402 | $ | 1,966 | 3,368 | |||||||||||||||
Deferred financing costs |
95 | 189 | ||||||||||||||||||||||
Total |
$ | 1,593 | $ | 3,557 | ||||||||||||||||||||
We have fully amortized the carrying values of unamortized debt discount and financing fees
as of March 31, 2010. The carrying values of unamortized debt discount and financing fees as of
September 30, 2009 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 | ||||||||||
Long-term Debt
The Companys long-term debt consists of the following (dollars in thousands):
March 31, | September 30, | |||||||
2010 | 2009 | |||||||
Note payable with interest currently at 4.12% (variable with Libor, payable in monthly
installments of interest to maturity in January 2011) |
$ | 1,032 | $ | 1,083 | ||||
Convertible debentures final payment due November 2009 (interest rate of 5.58% -
variable with Libor) |
| 1,800 | ||||||
Convertible debentures final payment due January 2010 (interest rate of 5.12% -
variable with Libor) |
| 501 | ||||||
Convertible debentures final payment due April 2010 (interest rate of 4.63% -
variable with Libor) |
649 | 1,948 | ||||||
Total long-term debt including current maturities |
1,681 | 5,332 | ||||||
Less: Debt discount associated with conversion features and warrants |
| (192 | ) | |||||
Less: Amounts payable within one year, net of discount of $0 and $192 |
(1,681 | ) | (4,159 | ) | ||||
Total long-term debt, less current maturities |
$ | | $ | 981 | ||||
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5. DERIVATIVE INSTRUMENTS AND FAIR VALUE MEASUREMENT
The Company adopted FASB ASC 815 (formerly referred to as EITF Issue No. 07-05, Determining
Whether an Instrument (or Embedded Feature) is Indexed to an Entitys Own Stock) on October 1,
2009. In connection with the adoption, the Company determined that our outstanding warrants as of
the adoption date, which include warrants issued in May 2006, July 2006, October 2006, and December
2006, are not indexed to the Companys own stock. Accordingly, these warrants should be treated
as a derivative financial liability, which requires separate accounting pursuant to ASC 815. The
fair value of the warrants was reclassified from equity to a derivative liability on October 1,
2009.
Zoltek adopted FASB ASC 820 (ASC 820) on October 1, 2008. ASC 820 defines fair value,
establishes a framework for measuring fair value, and expands disclosures about fair value
measurements. The fair value hierarchy for disclosure of fair value measurements under ASC 820 is
as follows:
Level 1 Valuations based on quoted prices for identical assets or liabilities in active
markets that the Company has the ability to access.
Level 2 Valuations based on quoted prices in markets that are not active or for which all
significant inputs are observable, either directly or indirectly.
Level 3 Valuations based on inputs that are unobservable and significant to the overall
fair value measurement.
We used a Black-Scholes pricing model to determine the fair value of the warrants. Fair
values under the Black-Scholes model are partially based on the expected remaining life of the
warrants, which is an unobservable input. Therefore, we have deemed the derivative liability
associated with the outstanding warrants to have Level 3 inputs. If the inputs used to measure the
financial assets and liabilities fall within more than one level described above, the
categorization is based on the lowest level input that is significant to the fair value measurement
of the instrument.
The fair value of the warrants is determined using the Black-Scholes option-pricing model with
the following weighted average assumptions as of March 31, 2010:
Outstanding Warrant Issuances
May 2006 | July 2006 | October 2006 | December 2006 | |||||
Warrants issued |
274,406 shares | 34,370 shares | 102,835 shares | 827,789 shares | ||||
Expiration of warrants |
May 2011 | July 2011 | October 2011 | December 2012 | ||||
Per share exercise price of warrants |
$28.06 | $28.06 | $28.06 | $28.06 | ||||
Expected remaining life of warrants |
1.1 years | 1.3 years | 1.6 years | 2.7 years | ||||
Risk-free interest rate |
0.41% | 0.41% | 1.02% | 1.60% | ||||
Stock volatility |
74.8% | 74.8% | 74.8% | 74.8% | ||||
Dividend yield |
0.0% | 0.0% | 0.0% | 0.0% |
A derivative liability of $3.1 million was established as of October 1, 2009. The adoption of
ASC 815 also resulted in a cumulative adjustment to accumulated deficit of $12.5 million and a
cumulative adjustment to additional paid-in capital of $15.6 million. The fair value of the
warrants are marked to market each period. If the warrants are not exercised, the derivative
liability will continue to be remeasured each quarter over the remaining contractual life of the
warrants.
At March 31, 2010, the Company remeasured the outstanding warrant liability and recorded a
fair value of $1.9 million. As a result of the remeasurement, the Company recorded a change in fair
value associated with these warrants as a gain totaling $0.3 million and $1.1 million for the three
months and six months ended March 31, 2010, respectively. The following is a summary of the change
in fair value of the Companys derivative financial instruments for the first six months of fiscal
2010.
Balance October 1, 2009 |
$ | 3,061 | ||
Change in fair value of derivative liability |
(1,132 | ) | ||
Balance March 31, 2010 |
$ | 1,929 | ||
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The fair value of warrants outstanding as of March 31, 2010 was as follows (dollars in thousands, except per share amounts):
Shares issuable | ||||||||||||
Fair value | upon exercise | Total fair | ||||||||||
Issuance Date | per warrant | of warrants | value | |||||||||
May 2006 |
$ | 0.51 | 274,406 | $ | 140 | |||||||
July 2006 |
0.64 | 34,370 | 22 | |||||||||
October 2006 |
0.93 | 102,835 | 96 | |||||||||
December 2006 |
2.02 | 827,789 | 1,671 | |||||||||
Total |
1,239,400 | $ | 1,929 | |||||||||
6. EARNINGS PER SHARE
In accordance with ASC 260, the Company has evaluated its diluted (loss) income per share
calculation.
The following is the diluted impact of the stock options on net (loss) income per share for
the three and six months ended March 31, 2010 and 2009, respectively (in thousands, except per
share amounts):
Three months ended | Six months ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Numerators: |
||||||||||||||||
Net (loss) income |
$ | (4,986 | ) | $ | 473 | $ | (5,469 | ) | $ | 1,009 | ||||||
Denominators: |
||||||||||||||||
Average shares outstanding basic |
34,417 | 34,406 | 34,421 | 34,405 | ||||||||||||
Impact of stock options |
| 76 | | 81 | ||||||||||||
Average shares outstanding diluted |
34,417 | 34,482 | 34,421 | 34,486 | ||||||||||||
Basic and diluted (loss) income per share |
$ | (0.14 | ) | $ | 0.01 | $ | (0.16 | ) | $ | 0.03 | ||||||
The Company has outstanding warrants, convertible debt, and stock options at March 31, 2010 and
2009 which are not included in the determination of diluted (loss) income per share for the three
and six months ended March 31, 2010 and 2009 because inclusion of the shares is anti-dilutive.
Had these securities been dilutive, an additional 0.1 million and 0.5 million shares,
respectively, would have been included in the Companys diluted (loss) income per share
calculation for the three and six months ended March 31, 2010 and 2009.
7. STOCK OPTION 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 2010 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 six months ended March 31,
2010:
Wtd. avg. | ||||||||
Options | exercise price | |||||||
Balance, September 30, 2009 |
408,337 | $ | 23.60 | |||||
Granted |
37,500 | 8.52 | ||||||
Exercised |
| | ||||||
Cancelled |
(6,250 | ) | 29.70 | |||||
Balance, March 31, 2010 |
439,587 | $ | 22.23 | |||||
Exercisable, March 31, 2010 |
341,254 | $ | 20.96 | |||||
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The following table summarizes information for options currently outstanding and exercisable at March 31, 2010:
Options outstanding | Options exercisable | |||||||||||||||||||||
Range of | Wtd. avg. | Wtd. avg. | Wtd. avg. | |||||||||||||||||||
exercise prices | Number | remaining life | exercise price | Number | exercise price | |||||||||||||||||
$ | 2.07-5.47 | 39,500 | 4 years | $ | 5.30 | 39,500 | $ | 5.30 | ||||||||||||||
8.40-8.60 | 80,087 | 5 years | 8.53 | 80,087 | 8.53 | |||||||||||||||||
13.98-24.12 | 87,500 | 7 years | 19.71 | 47,917 | 17.76 | |||||||||||||||||
26.22-29.70 | 142,500 | 7 years | 29.09 | 83,750 | 28.66 | |||||||||||||||||
31.07-36.73 | 90,000 | 5 years | 33.43 | 90,000 | 33.43 | |||||||||||||||||
2.07-36.73 | 439,587 | 6 years | 22.23 | 341,254 | 20.96 | |||||||||||||||||
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 2010 | Fiscal 2009 | Fiscal 2008 | |||||||||
Expected life of option |
3.8 years | 3.8 & 4 years | 4 & 7.5 years | |||||||||
Risk-free interest rate |
0.4 | % | 0.5 | % | 1.8 | % | ||||||
Volatility of stock |
77 | % | 79 | % | 66 | % | ||||||
Forfeiture experience on employee options |
N/A | 25 | % | 30 | % |
As of March 31, 2010, the Company had $0.5 million of total unrecognized compensation expense
related to stock option plans that will be recognized over the fiscal years 2010 and 2011.
Restricted stock awards. Under the Companys equity incentive plans, employees and directors
may be granted restricted stock awards which are valued based upon the fair market value on the
date of the grant. Restricted shares granted in fiscal 2008 and the first nine months of fiscal
2009 vest 17% in the first year, 33% in the second year and 50% in the third year from date of
grant. Restricted shares granted in the fourth quarter of fiscal 2009 vest 50% in the second year
and 50% in the third year from date of grant. The balance of restricted stock shares outstanding
was 70,417 shares as of March 31, 2010. During the second quarter of fiscal 2010, 15,833
restricted shares were settled by payment of cash.
As of March 31, 2010, the remaining unamortized compensation cost related to employee
restricted stock awards was $0.7 million which is expected to be recognized over the remaining
vesting periods of two to three years.
The Company recorded into selling and general administrative expense for its corporate/other
products segment 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 718,
which was $0.9 million and $1.6 million for the three and six months ended March 31, 2010 and $0.7
million and $1.6 million for the three and six months ended March 31, 2009, respectively. There
were no recognized tax benefits during fiscal 2010 or 2009, as any benefit is offset by the
Companys full valuation allowance on its net deferred tax asset.
8. COMMITMENTS AND CONTINGENCIES
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.
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.
CONCENTRATION OF CREDIT RISK
Zolteks carbon fiber products are primarily sold to customers in the wind energy,
oil and gas, and composite industries and its technical fibers are primarily sold to customers in
the aerospace industry. The Company performs ongoing credit evaluations and generally requires
collateral on letters of credit for significant export sales to new customers. The Company
maintains reserves for potential credit losses and such losses have been within managements
expectations.
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In the three months ended March 31, 2010 and 2009, we reported aggregate sales of $6.0 million and
$17.1 million, to Vestas Wind Systems, a leading wind turbine manufacturer. In the six months
ended March 31, 2010 and 2009, we reported aggregate sales of $22.0 million and $34.9 million to
Vestas Wind Systems. In the three months ended March 31, 2010 and 2009, we reported aggregate
sales of $3.9 million and $3.9 million to Trelleborg Offshore. In the six months ended March 31,
2010 and 2009, we reported aggregate sales of $5.3 million and $7.4 million to Trelleborg Offshore.
Prior to the second quarter of fiscal 2010, sales to Trelleborg Offshore were less than 10% of
consolidated net sales.
These were the only customers that represented greater than 10% of consolidated net sales in
these periods.
ENVIRONMENTAL
The Companys operations generate various hazardous wastes, including gaseous, liquid and
solid materials. Zoltek believes that all of its facilities are in substantial compliance with
applicable environmental and safety regulations applicable to their respective operations. Zoltek
expects that compliance with current environmental regulations will not have a material adverse
effect on its business, results of operations or financial condition. There can be no assurance
that compliance with future national or local environmental laws, regulations and enforcement
policies will not have a material adverse effect on the business, results of operations or
financial condition of the Company.
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. Unscheduled
shutdowns in production in Europe coupled with an increase in demand for ACN drove prices up more
than 100% since the end of fiscal 2009.
9. INCOME TAXES
The Company currently has net operating loss carryforwards available to offset future tax
liabilities. The Company has recorded a full valuation allowance against its deferred tax asset in
the United States and Mexico because it is more likely than not that the value of the deferred tax
asset will not be realized. In the consolidated balance sheets, the Company classifies its
deferred tax assets and liabilities 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
loss carryforwards, is classified according to the expected reversal date of the temporary
differences as of the reporting date.
During the first six months of fiscal 2010, due to the favorable resolution of an uncertain
tax matter with the Hungarian Tax Authority the Company released a $2.3 million reserve on its
uncertain tax positions. As of March 31, 2010, we had uncertain tax positions for which it is
reasonably possible that amounts of unrecognized tax benefits could significantly change over the
next year. We expect that the amount of unrecognized tax benefits will continue to change in the
next twelve months as a result of ongoing tax deductions, the outcomes of audits and the passing of
the statute of limitations.
During the first six months of fiscal 2010, the HUF weakened against the US dollar by
approximately 6.8%. As of March 31, 2010, the Company has a long-term loan to its Zoltek Zrt.
subsidiary denominated in US dollars, which has incurred an unrealized loss during fiscal 2010 of
$2.9 million due to the weakening of the HUF. We intend to deduct the unrealized currency losses
on the 2010 Hungarian tax returns. This deduction further increases our tax net operating loss.
10. FOREIGN CURRENCY TRANSLATION
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 was
changed as of November 1, 2008, from the Mexican Peso to the US dollar.
The HUF weakened by 6.8% against the US dollar during the first six months of fiscal 2010.
This currency fluctuation caused increases in our accumulated other comprehensive loss of $5.3
million and $10.4 million for the three and six months ended March 31, 2010, respectively.
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11. NEW ACCOUNTING PRONOUNCEMENTS
In January 2010, the Financial Accounting Standards Board issued Accounting Standards Update
No. 2010-06, Improving Disclosures about Fair Value Measurements (ASU 2010-06). ASU 2010-06
requires new disclosures for significant transfers in and out of Level 1 and 2 of the fair value
hierarchy and the activity within Level 3 of the fair value hierarchy. The updated guidance also
clarifies existing disclosures regarding the level of disaggregation of assets or liabilities and
the valuation techniques and inputs used to measure fair value. The updated guidance is effective
for interim and annual reporting periods beginning after December 15, 2009, with the exception of
the new Level 3 activity disclosures, which are effective for interim and annual reporting periods
beginning after December 15, 2010. The Company adopted the applicable disclosure requirements
beginning in the second quarter of fiscal 2010. Zoltek does not believe that ASU 2010-06 will
have a material adverse effect on the Companys financial statements.
In February 2010, the FASB issued Accounting Standards Update No. 2010-09, Amendments to
Certain Recognition and Disclosure Requirements (ASU 2010-09), effective immediately. Under ASU
2010-09, SEC filers are no longer required to disclose the date through which subsequent events
have been evaluated in originally issued and revised financial statements. Zoltek adopted these
new requirements during the second quarter of fiscal 2010. The adoption of ASU 2010-09 did not
have an impact on the Companys financial statements.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
General
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. 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 (i.e., 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 wind energy customers and
other large-scale applications. Manufacturers of carbon fibers for aerospace applications also have
added substantial capacity to meet demand for aircraft production.
Over the past two years, the commercial carbon fibers markets we serve were negatively
impacted by the recessionary economic conditions in the US and international economies, including a
sudden, but we believe only temporary, slowdown in the growth of wind turbine business. The
slowdown continued through the second quarter of fiscal 2010. We have seen recent
strengthening in demand and expect order rates to begin to trend back to normal long-term
growth rates during the second half of the fiscal year. 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.
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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. Since the beginning of 2009, we added
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. In April 2010, we organized a new
subsidiary, Zoltek Automotive, LLC, to focus development resources on automotive application. We
expect our market development efforts will be successful over the long run.
In addition to the adverse impact of the global economic downturn, three other key factors led
to declines in our revenues, operating earnings and margins for the first six months of 2010 as
compared to the first six months of 2009. 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%. In
addition, our largest customer has been in the process of moving from producing according to
forecast to mainly producing to order (i.e., just-in-time inventory) which caused a temporary
decline in its order level during the first six months of fiscal 2010. The largest customer has
publicly projected that its demand will pick up during the second half of 2010 as evidenced by
Vestas Wind Systems April 2010 receipt of the largest single order in its history for up to 2,100
MW of generating capacity. The decrease in sales volume from wind industry customers accounted for
approximately 80% of the revenue decline for the first six months of 2010 compared to the first six months of
2009. Second, decreases realized during fiscal 2009 in raw material and energy costs were passed
along to customers through price reductions; however, market pressure from lower customer demand
forced price decreases to exceed the cost savings. These price decreases were offset by a
strengthening of the Euro. Price decreases, offset somewhat by a stronger Euro during the first six
months of 2010 as compared to the first six months of 2009, caused approximately 11.5% of our
revenue decline for the first six months of 2010 compared to the first six months of 2009. Third,
available unused capacity was responsible for $7.1 million in unallocated costs (including
depreciation) during the first six months of fiscal 2010, 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 products segment, which includes of ancillary
activities not directly related to the carbon fiber or technical fiber segments.
KEY PERFORMANCE INDICATORS
Our management monitors and analyzes several key performance indicators 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
positively affect demand for our products.
Gross profit. Our total gross profit for the second quarter of fiscal 2010 and 2009,
respectively, was 5.6% and 25.3%, respectively. Our total gross profit for the first six
months of fiscal 2010 and 2009, respectively, was 9.8% and 26.0%, 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. Available unused capacity costs of $4.3 million negatively affected gross
margin by 16.5% for the second quarter of fiscal 2010. Available unused capacity costs of
$7.1 million negatively affected gross margin by 12.9% for the first six months of fiscal
2010. 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.
Unscheduled shutdowns in production in Europe coupled with an increase in demand for ACN
drove prices up more than 100% since the end of fiscal 2009.
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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. Operating activities generated cash of $12.4
million during the first half of fiscal 2010 and generated cash of $2.0 million during the
first half of fiscal 2009. Management believes that operating cash flow is meaningful to
investors because it provides a view of Zoltek with respect to sustainability of our ongoing
operations and the extent to which we may or may not require external capital.
Liquidity and cash flows. Due to the variability in revenue, our cash position varies.
We closely monitor our expected cash levels, particularly as they relate 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. As of
March 31, 2010, we no longer have long-term debt, although we do maintain lines of credit.
BUSINESS TRENDS
At the end of fiscal 2008, we substantially 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. Since the beginning of fiscal 2009, we have seen a sudden, but we believe only
temporary, slowdown in the growth of wind turbine business. We experienced a continued slowdown
into the second quarter of fiscal 2010. We expect that the second half of the fiscal year will
begin to trend back to normal long-term growth levels. This slowdown 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, oil and gas, 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 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 through the formation of our new subsidiary, Zoltek Automotive, LLC in April 2010. The new subsidiary will define automotive application opportunities, develop approaches to successfully demonstrate these applications, and develop and implement them into high-volume production either by itself or by partnering with other like-minded companies. |
| Operating Cash Flows and Cash Management. Despite a 26.4% decrease in sales for the first six months of 2010 as compared to the first six months of 2009, we reported cash flows from operating activities of $12.4 million during the first six months of fiscal 2010, compared to operating cash flows of $2.0 million during the first six months of fiscal 2009. Reduced accounts receivable and inventories provided cash of $10.3 million and $4.5 million, respectively, during the first six months of fiscal 2010. We have established collection targets and payment targets for all customers and suppliers to improve control over our days sales outstanding and days payables outstanding. The Company paid down $3.6 million of its convertible debt and had $2.1 million of capital expenditures during the first six months of fiscal 2010. We paid down our remaining convertible debt with operating cash flows and our lines of credit during April 2010. |
Unscheduled shutdowns in production in Europe coupled with an increase in demand for acrylonitrile (ACN) drove market prices up more than 100% since the end of fiscal 2009. The Company is focused on increasing sales and managing inventory and production levels to better match current sales rates. |
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RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2010 COMPARED TO THREE MONTHS ENDED MARCH 31, 2009
The Companys sales decreased 27.7%, or $10.0 million, to $26.0 million in the second quarter
of fiscal 2010 from $36.0 million in the second quarter of fiscal 2009. The decline in revenue was
partly due to decreased sales volume, including the temporary reduction in sales volume from our
largest customer which is in the process of moving to just-in-time inventory. Our largest customer
publicly projected that its demand will pick up during the second half of 2010. During the second
quarter of fiscal 2010, the decrease in volume of product shipments compared to the
second quarter of 2009 accounted for approximately $7.9 million
or 78.8% of the revenue decrease.
Certain price reductions resulted from passing on temporary savings on raw material and energy
costs to customers, which caused a $1.3 million decrease in sales during the second quarter of
fiscal 2010 as compared to the second quarter of fiscal 2009. A large amount of our European sales
are denominated in Euros, which was stronger versus the US dollar during the second quarter of 2010
as compared to the second quarter of 2009, contributing an increase in sales of approximately $0.5
million, compared to the prior year quarter.
Carbon fiber sales decreased 32.0%, or $9.2 million, to $19.7 million in the second quarter of
fiscal 2010 from $28.9 million in the second quarter of fiscal 2009. Technical fiber sales
decreased 8.0%, or $0.5 million, to $6.0 million in the second quarter of fiscal 2010 from $6.5
million in the second quarter of fiscal 2009. Technical fiber sales decreased as shipments to its
primary aircraft brake customers declined. Other revenues decreased $0.2 million to $0.4 million
during the second quarter of fiscal 2010 from $0.6 million during the second quarter of fiscal
2009. Many of our customers are being impacted by the global economic downturn and difficult
capital market conditions. Management believes that these customers reactions of reducing
inventories and slowing orders is temporary and that Zoltek is best positioned to supply our
current customers and new customers with their commercial carbon fiber needs as opportunities arise
and economic conditions and capital markets improve.
The Companys cost of sales decreased by 8.6%, or $2.3 million, to $24.6 million in the second
quarter of fiscal 2010 from $26.9 million in the second quarter of fiscal 2009. Included in the
Companys cost of sales were available unused capacity costs of $4.3 million and $1.5 million for
the second quarter of fiscal 2010 and second quarter of fiscal 2009, respectively. During the
second quarter of fiscal 2010, these costs were comprised of fixed production costs allocated to
manufacturing lines which were producing below normal levels and amounted to $3.7 million for the
carbon fiber segment and $0.6 million for the technical fiber segment. During the second quarter
of fiscal 2009, these costs amounted to $1.1 million for the carbon fiber segment and $0.4 million
for the technical fiber segment. 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 near-term return to more robust market conditions.
Carbon fiber cost of sales decreased by 9.9%, or $2.2 million, to $19.2 million for the second
quarter of fiscal 2010 from $21.4 million for the second quarter of fiscal 2009. The decrease in
carbon fiber cost of sales reflected decreased sales of 32.0% discussed above offset by an increase
in our available unused capacity costs. Technical fiber cost of sales decreased $0.2 million, or
2.8%, to $5.0 million for the second quarter of fiscal 2010 from $5.2 million for the second
quarter of fiscal 2009. The cost of sales of the corporate/other products segment decreased for the
second quarter of fiscal 2010 to $0.3 million compared to $0.4 million for the second quarter of
fiscal 2009.
The Companys gross profit decreased by $7.6 million, to $1.5 million, or 5.6% of sales in the
second quarter of fiscal 2010 from $9.1 million, or 25.3% of sales in the second quarter of fiscal
2009. Carbon fiber gross profit margin decreased to 2.2% for the second quarter of fiscal 2010
compared to 26.2% for the second quarter of fiscal 2009. Carbon fiber gross profit decreased to
$0.4 million from $7.6 million during these respective periods. The decreases in carbon fiber
gross profit and gross profit margin resulted primarily from available unused capacity costs
expensed during the second quarter of fiscal 2010 compared to the second quarter of fiscal 2009.
Technical fiber gross profit decreased from $1.3 million, or 20.2% of sales, in the second quarter
of fiscal 2009 to $0.9 million, or 15.7% of sales, during the corresponding period of fiscal 2010.
The decrease in technical fiber gross profit resulted from unfavorable product sales mix. The
corporate/other products segment reported a gross profit of $0.1 million for the second quarter of
fiscal 2010 as compared to a gross profit of $0.2 million for the second quarter of 2009.
Application and market development costs were $2.0 million in the second quarter of fiscal
2010 and $1.7 million in the second quarter of fiscal 2009. These costs included product
development efforts, product trials and sales and product development personnel and related travel.
Targeted emerging applications include automobile components, fire/heat barrier and alternate
energy technologies.
Selling, general and administrative expenses for continuing operations were $4.5 million in
the second quarter of fiscal 2010 compared to $5.3 million in the second quarter of fiscal 2009.
The Company recorded $0.9 million for the cost of employee services received in exchange for equity
instruments under FASB ASC 718 during the second quarter of fiscal 2010, an increase of $0.2
million from the expense in the second quarter of fiscal 2009.
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Operating loss from the second quarter of fiscal 2010 was $5.0 million, a decrease of $7.1
million from the operating income of $2.1 million incurred during the second quarter of fiscal
2009. This decline resulted primarily from a decrease in gross profit of $7.6 million. Carbon
fiber operating income declined from $4.7 million of operating income in the second quarter of
fiscal 2009 to an operating loss of $1.6 million in the second quarter of fiscal 2010. The decline
resulted from lower sales as discussed above. Operating income from technical fibers increased
from $0.6 million in the second quarter of fiscal 2009 to $0.7 million in the second quarter of
fiscal 2010. The Company reclassified certain research and development personnel from technical
fiber to the other products segment during fiscal 2010. Other products/ headquarters operating
loss increased from a loss of $3.3 million in the second quarter of fiscal 2009 to a loss of $4.2
million in the second quarter of fiscal 2010 due to increases in application and development and
selling, general, and administrative costs as discussed.
Interest income was less than $0.1 million in the second quarter of fiscal 2010 compared to
$0.1 million in the second quarter of fiscal 2009.
(Loss) gain on foreign currency translations declined to a $0.4 million loss for the second
quarter of fiscal 2010, compared to $1.1 million gain for the second quarter of fiscal 2009.
During the second quarter of fiscal 2010 and 2009, the Euro and the US dollar gained in value
against the HUF. As most of the Companys accounts receivables are denominated in Euros, the
weakening in value over the second quarter of fiscal 2010 resulted in a loss recognized in our
Hungarian subsidiary. The translation of the Hungarian subsidiarys financial statements from its
functional currency (HUF) to US dollars is not included in determining net income for the period
but is recorded in accumulated other comprehensive loss in equity.
Other expense, net, was $0.2 million in the second quarter of fiscal 2010 compared to $0.2
million for the second quarter of fiscal 2009. Other expense, net consists primarily of
loss from the disposal of miscellaneous equipment and from tax penalties in Hungary.
Gain on derivative liabilities was $0.3 million in the second quarter of fiscal 2010 due to
the adoption of ASC 815 (see Liquidity and Capital Resources Derivative
Instruments and Fair Value Measurements).
Interest expense was approximately $0.1 million in the second quarter of fiscal 2010 compared
to $0.4 million in the second quarter of fiscal 2009. As convertible debt was paid down by $0.9
million and the line of credit balance was lowered by $1.8 million, the Companys cost of interest
on the related debt is reduced.
Amortization of financing fees and debt discounts, which are non-cash expenses, were
approximately $0.1 million for the second quarter of fiscal 2010 compared to $1.6 million for the
second quarter of fiscal 2009 (see Liquidity and Capital Resources).
Income tax benefit was $0.6 million for the second quarter of fiscal 2010 compared to a $0.6
million expense for the second quarter of fiscal 2009. During the second quarter of fiscal 2010,
income tax expense of $0.1 million was incurred related to the local Hungarian municipality tax.
This expense was offset by a $0.3 million tax benefit related to the change in the Hungarian
effective tax rate from 16% to 19%. An additional income tax benefit was recorded during the
second quarter of fiscal 2010 related to the net operating loss for the Hungarian subsidiary.
During the second quarter of fiscal 2009, the Company amortized its deferred tax asset by $0.1
million, reducing the existing net operating loss carryforwards. An additional income tax expense
of $0.4 million compared to the prior year was incurred related to the local Hungarian municipality
tax for the second quarter of fiscal 2009. An income tax expense of $0.1 million was recorded for
the second quarter of fiscal 2009, as we established a deferred tax liability for book to tax
differences within the Hungarian operation.
The foregoing resulted in net loss of $5.0 million for second quarter of fiscal 2010 compared
to net income $0.5 million for the second quarter of fiscal 2009. Similarly, the Company reported
loss per share of $0.14 and income per share of $0.01 on a basic and diluted basis for the second
quarter of fiscal 2010 and 2009, respectively. The weighted average basic common shares outstanding
were 34.4 million for the second quarters of both fiscal 2010 and 2009.
SIX MONTHS ENDED MARCH 31, 2010 COMPARED TO SIX MONTHS ENDED MARCH 31, 2009
The Companys sales decreased 26.4%, or $19.7 million, to $54.9 million in the first six
months of fiscal 2010 from $74.6 million in the first six months of fiscal 2009. The decline in
revenue was partly due to decreased sales volume, including the reduction in sales volume from our
largest customer which is in the process of moving to just-in-time inventory, which we believe is
temporary. During the first six months of fiscal 2010, the decrease in volume of
product shipments compared to the first six months of 2009 accounted for approximately $14.9
million or 75.3% of the revenue decrease. The decline in revenue was also due to other factors, such as
pricing decreases as a result of temporary cost reductions in raw materials and energy, and
currency fluctuations. Certain price reductions resulted from passing on raw material cost savings
to customers, caused a $5.1 million decrease in sales during the first six months of fiscal 2010 as
compared to the corresponding period of fiscal 2009. A large amount of our European
sales are denominated in Euros, which was stronger versus the US dollar during the first six
months of 2010 as compared to the first six months of 2009, contributing an increase in sales of
approximately $2.9 million, compared to the prior year period.
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Carbon fiber sales decreased 29.3%, or $18.0 million, to $43.6 million in the first six months
of fiscal 2010 from $61.6 million in the first six months of fiscal 2009. Technical fiber sales
decreased 11.5%, or $1.4 million, to $10.4 million in the first six months of fiscal 2010 from
$11.8 million in the first six months of fiscal 2009. Technical fiber sales decreased as shipments
to primary aircraft brake customers declined. Other revenues decreased $0.4 million to $0.9
million during the first six months of fiscal 2010 from $1.3 million during the first six months of
fiscal 2009. Many of our customers are being impacted by the global economic downturn and
difficult capital market conditions. Management believes that these customers reactions of
reducing inventories and slowing orders is temporary and that Zoltek is best positioned to supply
our current customers and new customers with their commercial carbon fiber needs as opportunities
arise and economic conditions and capital markets improve.
The Companys cost of sales decreased by 10.4%, or $5.8 million, to $49.5 million in the first
six months of fiscal 2010 from $55.3 million in the first six months of fiscal 2009. Included in
the Companys cost of sales were available unused capacity costs of $7.1 million and $1.8 million
for the first six months of fiscal 2010 and 2009, respectively. During the first six months of
fiscal 2010, these costs are comprised of fixed production costs allocated to manufacturing lines
which were producing below normal levels and amounted to $6.2 million for the carbon fiber segment
and $0.9 million for the technical fiber segment. During the first six months of fiscal 2009,
these costs amounted to $1.2 million for the carbon fiber segment and $0.6 million for the
technical fiber segment. 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.
Carbon fiber cost of sales decreased by 12.3%, or $5.6 million, to $39.5 million for the first
six months of fiscal 2010 from $45.1 million for the first six months of fiscal 2009. The decrease
in carbon fiber cost of sales reflected decreased sales of 29.3% discussed above offset by an
increase in our available unused capacity costs. Technical fiber cost of sales remained flat at
$9.2 million for the first six months of fiscal 2010 as compared to $9.2 million for the first six
months of fiscal 2009. The cost of sales of the corporate/other products segment decreased for the
first six months of fiscal 2010 to $0.8 million compared to $1.0 million for the same period of
fiscal 2009.
The Companys gross profit decreased by $14.0 million, to $5.4 million, or 9.8% of sales in
the first six months of fiscal 2010 from $19.4 million, or 26.0% of sales in the first six months
of fiscal 2009. Carbon fiber gross profit margin decreased to 9.3% for the first six months of
fiscal 2010 compared to 26.9% for the first six months of fiscal 2009. Carbon fiber gross profit
decreased to $4.1 million from $16.6 million during these respective periods. The decreases in
carbon fiber gross profit and gross profit margin resulted primarily from increased available
unused capacity costs expensed during the first six months of fiscal 2010 compared to the
corresponding period of fiscal 2009. Technical fiber gross profit decreased from $2.6 million, or
21.9% of sales, in the first six months of fiscal 2009 to $1.2 million, or 11.8% of sales, during
the corresponding period of fiscal 2010. The decrease in technical fiber gross profit percentage
resulted from product sales mix. The corporate/other products segment reported a gross profit of
$0.1 million for the first six months of fiscal 2010 and $0.3 million for the first six months of
2009.
Application and market development costs were $3.9 million in the first six months of fiscal
2010 and $3.4 million in the first six months of fiscal 2009. These costs included product
development efforts, product trials and sales and product development personnel and related travel.
Targeted emerging applications include automobile components, fire/heat barrier and alternate
energy technologies.
Selling, general and administrative expenses for continuing operations were $9.2 million in
the first six months of fiscal 2010 compared to $10.4 million in the first six months of fiscal
2009. The Company recorded $1.6 million for the cost of employee services received in exchange for
equity instruments under FASB ASC 718 during the first six months of fiscal 2010 and the first six
months of fiscal 2009. A litigation charge of $0.2 million was recorded in the first six months of
fiscal 2009.
Operating loss from the first six months of fiscal 2010 was $7.8 million, a decrease of $13.3
million from the operating income of $5.5 million incurred during the first six months of fiscal
2009. This decline resulted primarily from a decrease in gross profit of $14.0 million. Carbon
fiber operating income declined from income of $11.2 million in the first six months of fiscal 2009
to a loss of $0.3 million in the first six months of fiscal 2010. The decline resulted from a
decrease in gross profit as discussed above. Operating income from technical fibers decreased from
$1.1 million in the first six months of fiscal 2009 to $0.8 million in the first six months of
fiscal 2010. The Company reclassified certain research and development personnel from technical
fiber to the other products segment during fiscal 2010. Other products/ headquarters operating
loss increased from a loss of $6.8 million in the first six months of fiscal 2009 to a loss of $8.3
million in the first six months of fiscal 2010 due to increases in application and development
costs.
Interest income was less than $0.1 million in the first six months of fiscal 2010 compared to
$0.3 million in the first six months of fiscal 2009.
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(Loss) gain on foreign currency translations declined to a loss of less than $0.1 million for
the first six months of fiscal 2010, compared to $1.3 million gain for the first six months of
fiscal 2009. During the first six months of fiscal 2010 and 2009, the Euro and the US dollar
gained in value against the HUF. As most of the Companys accounts receivables are denominated in
Euros, the weakening in value over the first six months of fiscal 2010 resulted in a loss
recognized in our Hungarian subsidiary. The translation of the Hungarian subsidiarys financial
statements from its functional currency (HUF) to US dollars is not included in determining net
income for the period but is recorded in accumulated other comprehensive loss in equity.
Other expense, net, was $0.6 million in the first six months of fiscal 2010 compared to $0.5
million for the first six months of fiscal 2009. Other expense, net consists primarily of
loss from the sale of miscellaneous equipment and from miscellaneous fees in Hungary.
Gain on derivative liabilities was $1.1 million in the first six months of fiscal 2010 due to
the adoption of ASC 815 (see Liquidity and Capital Resources Derivative
Instruments and Fair Value Measurements).
Interest expense was approximately $0.3 million in the first six months of fiscal 2010
compared to $0.9 million in the first six months of fiscal 2009. As the convertible debt has been
paid down, the Companys cost of interest on the related debt has been reduced.
Amortization of financing fees and debt discounts, which are non-cash expenses, were
approximately $0.3 million for the first six months of fiscal 2010 compared to $3.6 million for the
first six months of fiscal 2009 (see Liquidity and Capital Resources).
Income tax benefit was $2.4 million for the first six months of fiscal 2010 compared to a $1.1
million expense for the first six months of fiscal 2009. During fiscal 2010, income tax expense of
$0.5 million was incurred related to the local Hungarian municipality tax and US state income
taxes. This expense was offset by the release of a $2.3 million reserve on the Companys uncertain
tax positions and a $0.3 million tax benefit related to the change in the Hungarian effective tax
rate from 16% to 19%. An additional income tax benefit was recorded during fiscal 2010 related to
the net operating loss for the Hungarian subsidiary. During the first six months of fiscal 2009,
the Company amortized its deferred tax asset by $0.5 million, reducing the existing net operating
loss carryforwards. An additional income tax expense of $0.6 million compared to the prior year
was incurred related to the local Hungarian municipality tax for the first six months of fiscal
2009. An income tax expense of $0.1 million was recorded for the first six months of fiscal 2009,
as we established a deferred tax liability for book to tax differences within the Hungarian
operation.
The foregoing resulted in a net loss of $5.5 million for the first six months of fiscal 2010
compared to net income $1.0 million for the first six months of fiscal 2009. Similarly, the Company
reported loss per share of $0.16 and income per share of $0.03 on a basic and diluted basis for the
first six months of fiscal 2010 and 2009, respectively. The weighted average basic common shares
outstanding were 34.4 million for the year-to-date periods of both fiscal 2010 and 2009.
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 during fiscal 2010.
Cash Provided By Operating Activities
Operating activities provided $12.4 million of cash for the first six months of fiscal 2010.
Inventory levels provided $4.5 million during the first six months of fiscal 2010 due to lower
production and sales of existing inventory. Cash flows were positively affected by depreciation of
$8.4 million for the first six months of fiscal 2010, which was included in the operating loss of
$8.0 million. Cash collections reduced accounts receivables by $10.3 million during the first six
months of fiscal 2010. Cash flows were negatively impacted by reductions in payables and accrued
expenses of $4.6 million during the first six months of fiscal 2010.
Operating activities provided $2.0 million of cash for the first six months of fiscal 2009.
Cash flows were negatively affected during fiscal 2009 by the payment of $5.8 million to resolve
litigation involving an investment banker (see Note 8 of the Notes to Condensed 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 $10.5 million of cash in the six month
period of fiscal 2009. Cash flows were positively affected by depreciation of $8.0 million for the
first six months of fiscal 2010, which was included in operating income of $5.5 million.
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Cash Used In Investing Activities
Net cash used in investing activities for the first six months of fiscal 2010 was $2.3
million, which consisted of capital expenditures on existing production lines and new equipment.
Property and equipment, net, decreased from $256.9 million at September 30, 2009 to $242.6 million
at March 31, 2010. Approximately $8.1 million of the decline in property and equipment, net was
caused by the decline in value of the HUF, which is the functional currency of our Hungarian
operations.
Net cash used in investing activities for the first six months of fiscal 2009 was $16.9
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.
Historically, cash used in investing activities has been expended for equipment additions and
the expansion of the Companys carbon fiber and technical fiber production capacity.
Cash (Used In) Provided By Financing Activities
Net cash used by financing activities was $8.3 million for the first six months of fiscal 2010
resulting primarily from repayment of convertible debt and lines of credit. Net cash provided in
financing activities was $2.0 million for the first six months of fiscal 2009 as the Company
increased its borrowings on our lines of credit and repaid convertible debt.
Credit Facilities
US Operations The revolving credit facility has a total commitment of the lesser of $10.0
million or a borrowing base, which as of March 31, 2010 was $10.0 million. Total borrowings under
the facility were $7.8 million as of March 31, 2010. On February 2, 2010, the Company extended its
existing US line of credit until January 2011. There are no financial covenants associated with
this facility.
Hungarian Operations The Companys Hungarian subsidiary has a credit facility with a
Hungarian bank, which was renewed with the same terms in November 2009 and now expires on August
30, 2010. The revolving credit facility has a total commitment of the lesser of $9.1 million or a
borrowing base, which as of March 31, 2010 was $9.1 million. There were no borrowings under this
credit facility at March 31, 2010. There are no financial covenants associated with this facility.
Hungarian Grant
The Hungarian government has pledged a grant of 2.9 billion Hungarian Forint (HUF)
(approximately $14.6 million as of March 31, 2010) to Zolteks Hungarian subsidiary. The grant is
intended to provide a portion of the capital resources to modernize the subsidiarys facility,
establish a research and development center, and support buildup of manufacturing capacity of
carbon fibers. Zolteks Hungarian subsidiary has received approximately HUF 2.6 billion in grant
funding as of March 31, 2010. These funds have been recorded as a liability on the Companys
consolidated balance sheet. The liability is being amortized over the life of the assets procured
by the grant funds, offsetting the depreciation expense from the assets 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.
Convertible Debt and Warrants
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 March 31, 2010, Zoltek had $0.6 million of convertible debt outstanding, which the
Company repaid with cash on hand in April 2010. There were no conversions of convertible debt
during the first six months of fiscal 2010 or during the second quarter of fiscal 2009. During the
first quarter of fiscal 2009, convertible debt in the principal amount of $0.3 million was
converted into 16,264 shares of common stock.
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The following tables summarize the convertible debt outstanding as of March 31, 2010 and
September 30, 2009.
As of March 31, 2010 | As of September 30, 2009 | |||||||||||||||||||||||
Number | Number | |||||||||||||||||||||||
of shares | Conversion | Principal | of shares | Conversion | Principal | |||||||||||||||||||
issuable | price | outstanding | issuable | price | outstanding | |||||||||||||||||||
May 2006 |
| $ | 25.51 | $ | | 70,560 | $ | 25.51 | $ | 1,799,986 | ||||||||||||||
July 2006 |
| 25.51 | | 19,640 | 25.51 | 501,016 | ||||||||||||||||||
October 2006 |
25,460 | 25.51 | 649,485 | 76,381 | 25.51 | 1,948,479 | ||||||||||||||||||
25,460 | $ | 649,485 | 166,581 | $ | 4,249,481 | |||||||||||||||||||
The May, July and October 2006 issuances also provide that the investor may require the
Company to pay out the quarterly installment due in cash if the Volume-Weighted Average Price
(VWAP) of the Companys common stock is below $12.50 on the due date. During fiscal 2010, the
VWAP of the Companys common stock was below $12.50 on the due date of principal payments and,
accordingly, the Company paid out the quarterly installments of principal amortization in cash.
As of September 30, 2009, we had $4.2 million in convertible debt outstanding related to the
May, July and October 2006 debt issuances. As of March 31, 2010, we had $0.6 million in
convertible debt outstanding related to the October 2006 debt issuance. The table below which sets
forth the significant terms and assumptions associated with valuing the conversion features:
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 | |||
Value per share of conversion features at issuance |
$18.80 | $19.21 | $19.57 | |||
Stock price on date of agreement |
$32.25 | $29.28 | $26.81 | |||
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 were considered to have beneficial conversion features. |
During the first quarter of fiscal 2006, the Company obtained the financing to post a bond in
connection with litigation. Part of the funds for this bond was provided by the proceeds from
the exercise of warrants to purchase 827,789 shares of common stock for $11.9 million by existing
institutional shareholders. In connection with the exercise of the warrants, the Company issued
investors additional warrants to purchase 827,789 shares of common stock with an exercise price of
$28.06 per share. The Company recorded the entire fair value of these new warrants, $6.4 million,
into expense during the first quarter of fiscal 2006.
Amortization of Financing Fees and Debt Discount
Convertible debt issued in May 2006, July 2006 and October 2006 was considered to have
beneficial conversion features 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 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.
At the time of issuance of convertible debt securities with warrants, the Company recorded the
fair value associated with the warrants using the Black-Scholes option-pricing model. This fair
value discount was recorded as a reduction in the carrying value of the convertible debt security
that was accreted to its face value over the life of the convertible security and expensed into the
Companys income statement. If the convertible security was converted prior to the redemption date,
the unamortized debt discount associated with the valuation of the warrants was recorded as a
reduction to additional paid-in capital at the time of conversion.
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The tables below show the impact of amortization of financing fees and debt discount on the
financial results for the three and six months ended March 31, 2010 and 2009 (in thousands).
Three months ended March 31, 2010 | Six months ended March 31, 2010 | |||||||||||||||||||||||
Conversion | Conversion | |||||||||||||||||||||||
Warrants | feature | Total | Warrants | feature | Total | |||||||||||||||||||
May 2006 issuance |
$ | | $ | | $ | | $ | 18 | $ | 26 | $ | 44 | ||||||||||||
July 2006 issuance |
| | | 15 | 17 | 32 | ||||||||||||||||||
October 2006 issuance |
18 | 21 | 39 | 54 | 62 | 116 | ||||||||||||||||||
$ | 18 | $ | 21 | 39 | $ | 87 | $ | 105 | 192 | |||||||||||||||
Deferred financing costs |
53 | 97 | ||||||||||||||||||||||
Total |
$ | 92 | $ | 289 | ||||||||||||||||||||
Three months ended March 31, 2009 | Six months ended March 31, 2009 | |||||||||||||||||||||||
Conversion | Conversion | |||||||||||||||||||||||
Warrants | feature | Total | Warrants | feature | Total | |||||||||||||||||||
May 2006 issuance |
$ | 450 | $ | 664 | $ | 1,114 | $ | 1,051 | $ | 1,551 | $ | 2,602 | ||||||||||||
July 2006 issuance |
89 | 108 | 197 | 158 | 193 | 351 | ||||||||||||||||||
October 2006 issuance |
87 | 100 | 187 | 193 | 222 | 415 | ||||||||||||||||||
$ | 626 | $ | 872 | 1,498 | $ | 1,402 | $ | 1,966 | 3,368 | |||||||||||||||
Deferred financing costs |
95 | 189 | ||||||||||||||||||||||
Total |
$ | 1,593 | $ | 3,557 | ||||||||||||||||||||
We have fully amortized the carrying values of unamortized debt discount and financing fees
as of March 31, 2010. The carrying values of unamortized debt discount and financing fees for
September 30, 2009 are as follows (amounts in thousands):
September 30, 2009 | ||||||||||||
Conversion | ||||||||||||
Warrants | features | 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 | ||||||||||
Earnings Per Share
In accordance with ASC 260, the Company has evaluated its diluted (loss) income per share
calculation.
The following is the diluted impact of the stock options on net (loss) income per share for
the three and six months ended March 31, 2010 and 2009, respectively (in thousands, except per
share amounts):
Three months ended | Six months ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Numerators: |
||||||||||||||||
Net (loss) income |
$ | (4,986 | ) | $ | 473 | $ | (5,469 | ) | $ | 1,009 | ||||||
Denominators: |
||||||||||||||||
Average shares outstanding basic |
34,417 | 34,406 | 34,421 | 34,405 | ||||||||||||
Impact of stock options |
| 76 | | 81 | ||||||||||||
Average shares outstanding diluted |
34,417 | 34,482 | 34,421 | 34,486 | ||||||||||||
Basic and diluted (loss) income per share |
$ | (0.14 | ) | $ | 0.01 | $ | (0.16 | ) | $ | 0.03 | ||||||
The Company has outstanding warrants, convertible debt, and stock options at March 31, 2010 and
2009 which are not included in the determination of diluted (loss) income per share for the three
and six months ended March 31, 2010 and 2009 because inclusion of the shares is anti-dilutive.
Had these securities been dilutive, an additional 0.1 million and 0.5 million shares,
respectively, would have been included in the Companys diluted (loss) income per share
calculation for the three and six months ended March 31, 2010 and 2009.
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DERIVATIVE INSTRUMENTS AND FAIR VALUE MEASUREMENT
The Company adopted FASB ASC 815 (formerly referred to as EITF Issue No. 07-05, Determining
Whether an Instrument (or Embedded Feature) is Indexed to an Entitys Own Stock) on October 1,
2009. In connection with the adoption, the Company determined that our outstanding warrants as of
the adoption date, which include warrants issued in May 2006, July 2006, October 2006, and December
2006, are not indexed to the Companys own stock. Accordingly, these warrants should be treated
as a derivative financial liability, which requires separate accounting pursuant to ASC 815. The
fair value of the warrants was reclassified from equity to a derivative liability on October 1,
2009.
Zoltek adopted FASB ASC 820 (ASC 820) on October 1, 2008. ASC 820 defines fair value,
establishes a framework for measuring fair value, and expands disclosures about fair value
measurements. The fair value hierarchy for disclosure of fair value measurements under ASC 820 is
as follows:
Level 1 Valuations based on quoted prices for identical assets or liabilities in active
markets that the Company has the ability to access.
Level 2 Valuations based on quoted prices in markets that are not active or for which all
significant inputs are observable, either directly or indirectly.
Level 3 Valuations based on inputs that are unobservable and significant to the overall
fair value measurement.
We used a Black-Scholes pricing model to determine the fair value of the warrants. Fair
values under the Black-Scholes model are partially based on the expected remaining life of the
warrants, which is an unobservable input. Therefore, we have deemed the derivative liability
associated with the outstanding warrants to have Level 3 inputs. If the inputs used to measure the
financial assets and liabilities fall within more than one level described above, the
categorization is based on the lowest level input that is significant to the fair value measurement
of the instrument.
The fair value of the warrants is determined using the Black-Scholes option-pricing model with
the following weighted average assumptions as of March 31, 2010:
Outstanding Warrant Issuances
May 2006 | July 2006 | October 2006 | December 2006 | |||||
Warrants issued |
274,406 shares | 34,370 shares | 102,835 shares | 827,789 shares | ||||
Expiration of warrants |
May 2011 | July 2011 | October 2011 | December 2012 | ||||
Per share exercise price of warrants |
$28.06 | $28.06 | $28.06 | $28.06 | ||||
Expected remaining life of warrants |
1.1 years | 1.3 years | 1.6 years | 2.7 years | ||||
Risk-free interest rate |
0.41% | 0.41% | 1.02% | 1.60% | ||||
Stock volatility |
74.8% | 74.8% | 74.8% | 74.8% | ||||
Dividend yield |
0.0% | 0.0% | 0.0% | 0.0% |
A derivative liability of $3.1 million was established as of October 1, 2009. The adoption of
ASC 815 also resulted in a cumulative adjustment to accumulated deficit of $12.5 million and a
cumulative adjustment to additional paid-in capital of $15.6 million. The fair value of the
warrants are marked to market each period. If the warrants are not exercised, the derivative
liability will continue to be remeasured each quarter over the remaining contractual life of the
warrants.
At March 31, 2010, the Company remeasured the outstanding warrant liability and recorded a
fair value of $1.9 million. As a result of the remeasurement, the Company recorded a change in fair
value associated with these warrants as a gain totaling $0.3 million and $1.1 million for the three
months and six months ended March 31, 2010, respectively. The following is a summary of the change
in fair value of the Companys derivative financial instruments for the first six months of fiscal
2010.
Balance October 1, 2009 |
$ | 3,061 | ||
Change in fair value of derivative liability |
(1,132 | ) | ||
Balance March 31, 2010 |
$ | 1,929 | ||
The fair value of warrants outstanding as of March 31, 2010 was as follows (dollars in thousands, except per share amounts):
Shares issuable | ||||||||||||
Fair value | upon exercise | Total fair | ||||||||||
Issuance Date | per warrant | of warrants | value | |||||||||
May 2006 |
$ | 0.51 | 274,406 | $ | 140 | |||||||
July 2006 |
0.64 | 34,370 | 22 | |||||||||
October 2006 |
0.93 | 102,835 | 96 | |||||||||
December 2006 |
2.02 | 827,789 | 1,671 | |||||||||
Total |
1,239,400 | $ | 1,929 | |||||||||
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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.
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.
CRITICAL ACCOUNTING ESTIMATES
In Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations, included in our fiscal 2009 Form 10-K, the Company discusses those accounting estimates
that are considered to be critical in determining the results of operations and its financial
position. With the adoption of ASC 815 on October 1, 2009, Zoltek has adopted a new accounting
policy for Financial Instruments and considers the following new policy to be 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
ASC 815 requires companies to reclassify the fair value of the outstanding warrants as a
derivative liability and to mark the liability to market at each report date if certain criteria
are met. The fair value of the Companys derivative liabilities are determined using Level 3
inputs in a Black-Scholes pricing model. 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. The Company uses historical volatility for a period of time that is
comparable to the expected life of the financial instrument. 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.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 11 of the Notes to Condensed Consolidated Financial Statements.
Item 3. 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 level of borrowings
of $9.5 million as of March 31, 2010, 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 three
months ended March 31, 2010 would have changed by less than $0.1 million. In the event of an
adverse change in interest rates, we expect that 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 of our
relatively modest level of borrowings and anticipated cash needs. At March 31, 2010, the Company
did not have any interest rate swap agreements outstanding.
Foreign Currency Risk
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 changed as
of November 1, 2008 from the Mexican Peso to the US 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.
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The consolidated balance sheet of the Companys international subsidiary, Zoltek Zrt., was
translated from HUF to US 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 loss within shareholders equity. Gains and losses from foreign currency
transactions of Zoltek Zrt. are included in the results of operations in other expenses.
As of March 31, 2010, the Company had a long-term loan of $108.0 million to its Zoltek Zrt.
subsidiary denominated in US 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 HUF against the US dollar at March 31, 2010 and 2009 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 HUF. Also,
Zoltek Zrt. has debt that is denominated in foreign currencies other than the HUF.
As of March 31, 2010, 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 resulting from an adverse change in quoted foreign currency exchange rate of the Mexican
Peso against the US dollar at March 31, 2010 because Zoltek de Mexicos functional currency is the
US 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 seeks to adjust purchasing accordingly. The Company does not
currently utilize derivative instruments to hedge purchases of commodities. Unscheduled shutdowns
in production in Europe coupled with an increase in demand for acrylonitrile drove prices up more
than 100% since the end of fiscal 2009.
* * *
Special Note Regarding Forward-Looking Statements
This quarterly report includes forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended (the Securities Act) and Section 21E of the Securities
Exchange Act of 1934. 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.
The forward-looking statements contained in this report are inherently subject to risks and
uncertainties. The Companys actual results could differ materially from those in the
forward-looking statements. The factors that might cause such differences include, among others,
our ability to: (1) successfully adapt to recessionary conditions in the global economy and substantial volatility in order rates from our wind energy customers; (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 for a range of applications; (9) manufacture low-cost carbon
fibers and profitably market them despite fluctuations in raw material and energy costs; (10)
successfully operate our Mexican facility to produce acrylic fiber precursor and carbon fibers;
(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 alliance with Global Blade Technology; (15) successfully
facilitate adoption of our carbon fibers by the auto industry for use
in high-volume applications; and (16) manage the risks identified under Risk
Factors in our filings with the SEC.
* * *
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Item 4. Controls and Procedures
Evaluation of Controls and Procedures
As of the end of the period covered by this report, an evaluation was carried out by
management, under the supervision and with the participation of the Companys Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the Companys disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of
1934, as amended (the Exchange Act). The Companys disclosure controls and procedures are
designed to ensure that information required to be disclosed in reports it files or submits under
the Exchange Act is recorded, processed, summarized and reported within the time periods specified
in SEC rules and forms and that such information is accumulated and communicated to the Companys
management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to
allow timely decisions regarding required disclosures.
Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Companys disclosure controls and procedures as of March 31, 2010 were effective
to ensure that information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commissions rules and forms.
There has been no change in our internal control over financial reporting during the most
recent fiscal quarter that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
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ZOLTEK COMPANIES, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 8 of the Notes to Consolidated Financial Statements for a summary of the
Companys current legal proceedings, which is incorporated herein by reference.
Item 6. Exhibits.
See Exhibit Index
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SIGNATURE
Pursuant to the requirements 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) |
||||
Date: May 10, 2010 | By: | /s/ ZSOLT RUMY | ||
Zsolt Rumy | ||||
Chief Executive Officer |
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EXHIBIT INDEX
Exhibit Number | Description of Document | |||
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934, as amended. |
|||
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934, as amended. |
|||
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. |
|||
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. |
32