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EX-31.1 - EXHIBIT 31.1 - ZOLTEK COMPANIES INC | c09033exv31w1.htm |
EX-23.1 - EXHIBIT 23.1 - ZOLTEK COMPANIES INC | c09033exv23w1.htm |
EX-31.2 - EXHIBIT 31.2 - ZOLTEK COMPANIES INC | c09033exv31w2.htm |
EX-32.2 - EXHIBIT 32.2 - ZOLTEK COMPANIES INC | c09033exv32w2.htm |
EX-23.2 - EXHIBIT 23.2 - ZOLTEK COMPANIES INC | c09033exv23w2.htm |
EX-32.1 - EXHIBIT 32.1 - ZOLTEK COMPANIES INC | c09033exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 30, 2010
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period From
to
Commission File Number 0-20600
ZOLTEK COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Missouri | 43-1311101 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
3101 McKelvey Road,
St. Louis, Missouri 63044
(Address of principal executive offices, including zip code)
St. Louis, Missouri 63044
(Address of principal executive offices, including zip code)
Registrants telephone number, including area code: (314) 291-5110
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class: | Name of Each Exchange on Which Registered: | |
Common Stock, $.01 Par Value Per Share | The NASDAQ Stock Market LLC | |
(NASDAQ Global Select Market) |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K þ.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (check one):
Large Accelerated Filer o | Accelerated Filer þ | Non-Accelerated Filer o | Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
State the aggregate market value of the voting stock held by non-affiliates of the registrant as of
March 31, 2010: approximately $265,714,000.
Indicate the number of shares outstanding of each of the registrants classes of common stock as of
November 26, 2010: 34,389,442 shares of Common Stock, par value $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
The following document is incorporated by reference into the indicated Part of this Report:
Document | Part of Form 10-K | |
Proxy Statement for the 2011 | ||
Annual Meeting of Shareholders | III |
ZOLTEK COMPANIES, INC.
INDEX
INDEX
PART I. |
||||||||
3 | ||||||||
9 | ||||||||
12 | ||||||||
13 | ||||||||
13 | ||||||||
13 | ||||||||
PART II. |
||||||||
14 | ||||||||
16 | ||||||||
17 | ||||||||
28 | ||||||||
30 | ||||||||
56 | ||||||||
56 | ||||||||
56 | ||||||||
PART III. |
||||||||
57 | ||||||||
57 | ||||||||
57 | ||||||||
57 | ||||||||
57 | ||||||||
PART IV. |
||||||||
58 | ||||||||
60 | ||||||||
61 | ||||||||
Exhibit 23.1 | ||||||||
Exhibit 23.2 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
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PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K for the fiscal year ended September 30, 2010 and the
information incorporated by reference herein contain forward-looking statements, which are
inherently subject to risks and uncertainties. See Special Note Regarding Forward-Looking
Statements.
General Development of Business
Zoltek Companies, Inc. is an applied technology and advanced materials company. Our mission is
to lead 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 were founded in 1988 and
incorporated in Missouri.
Overview
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.
From 2005 to 2007, there was a significant increase in demand for carbon fibers from the
aerospace and commercial manufacturing industries. Airbus and Boeing initiated production of new
generation aircraft utilizing carbon fiber composites in critical airframe structures (e.g.,
fuselage and wings). 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 on 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 completed. As a result we now have sufficient capacity to meet demand from current wind
energy customers and produce carbon fibers for additional large-scale applications. At the same
time, manufacturers of carbon fibers for aerospace applications added substantial capacity to meet
demand for aircraft production.
The
decline in revenue during our recently completed fiscal year was primarily due to pricing decreases effective
early in the fiscal year due to market pressures. During fiscal 2010, the commercial carbon fibers markets we serve
continued to be negatively impacted by the recessionary economic conditions in the United States
and international economies. These market conditions and over-supply of carbon fiber constrained
pricing levels during fiscal 2010. At the same time, our largest customer moved to a just-in-time
inventory program which caused a temporary reduction in sales volume. The cost of our principal raw
material increased substantially during fiscal 2010 as unscheduled shutdowns in production of
acrylonitrile (ACN) in Europe coupled with an increase in demand for ACN drove market prices up
more than 100% by the end of fiscal 2010. In addition, 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 well 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.
We are aggressively marketing to obtain new business in both existing and 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. Targeted application areas include automotive and aerospace
secondary structures. During 2010, we have added additional sales personnel in Asia, focusing on
markets in China, India and Korea and have begun to see some success through new customers and
sales in those regions. We expect our market development efforts will be successful over the long
run.
In addition to the adverse impact of the global economic downturn, three other key factors in
2009 and 2010 led to declines in our revenues, operating earnings and margins. First, after years
of growing at a 20-25% annual rate, worldwide growth in electricity generation from wind energy has
slowed. Second, market conditions and over-supply of carbon fiber depressed prices and caused a
decline in revenue. Third, available unused
capacity, as discussed under Managements Discussion and Analysis of Financial Condition and
Results of
Operations, was responsible for $12.8 million in unallocated costs (including depreciation)
during fiscal 2010, without contributing to revenues or gross profit. While Zoltek is confident
that the additional capacity will be quickly absorbed when 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 them as an investment in maintaining
our facilities and core staff in a ready mode to minimize the cost and time to restart facilities
as market conditions change.
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In order to manage our business, we focus on three separate business segments: carbon fiber
segment, technical fiber segment and corporate/other segment which consists of ancillary activities
not directly related to the carbon fiber or technical fiber segments.
Business Strategy
Our business model focuses on low and sustainable pricing facilitated by low production
costs, rapidly scalable capacity and a product line that offers various value-added product and
process enhancements.
The principal elements of our business strategy include the following:
Sustainable Price Leadership. We market carbon fibers for use as a base reinforcement
material in composites at sustainable price levels resulting in predictable composite costs per
unit of strength and stiffness that compare favorably with alternative base construction materials.
We believe our proprietary process and equipment design technology enable us to produce carbon
fibers at costs substantially lower than those generally prevailing in the industry and to supply
carbon fibers for applications that are not economically viable for our higher-cost competitors. We
believe that, with our targeted cost structure, we can maintain sustainable pricing that makes it
attractive for customers to commit to high-volume applications.
Support for New Commercial Markets and Applications Development. To further accelerate the
commercialization of carbon fibers and carbon fiber composites across a broad range of mass-market
applications, we have pursued various initiatives, including partnerships with potential users of
carbon fibers to act as catalysts in the development of new low-cost, high-volume products. We
believe that our supply relationships with customers for wind energy applications are the direct
result of these development efforts. These efforts were recognized as Zoltek was named 2009
Supplier of the Year by Vestas Blades A/S, the blade manufacturing division of Vestas Wind
Systems A/S.
Capacity Leadership to Keep Pace with Long-Term Demand Growth. We believe that our decision
to build and maintain significant available capacity will allow us the ability to enter into
additional long-term supply arrangements with high-volume customers. We have developed, and are
continually seeking to improve, proprietary continuous carbonization line designs in order to
increase efficiency and shorten lead time from the time of the decision to add lines to the time
when the lines become operational. In addition, we have continually improved our ability to produce
acrylic fiber precursor at low costs and in sufficient quantities to support our growth in carbon
fiber capacity. The ability to increase capacity in response to the growth of the commercial
markets is essential to encouraging development of large-volume applications.
Development of Model for Long-Term Joint Ventures with Strategic Partners. Our industry
currently has no established means for supplying identified large scale applications for which
carbon fiber composites have been proven to offer transformational technology, such as structural
use in mass produced cars to increase fuel efficiency through reduced weight and improved safety
due to superior strength and stiffness. Accordingly, Zoltek is seeking to leverage its proprietary
expertise by developing a business model with the goal of proliferating carbon fiber technology to
new customers in capital intensive industries who desire to partner with us to invest in the plants
necessary to launch these high volume applications. Although we expect it will take some time and
our approach will evolve to address opportunities as they develop, we believe this strategy can
support a quantum leap in the commercial carbon fiber industry.
Targeted Applications
We have identified targeted applications for our products with high growth potential across a
variety of industries. Among them are:
| Wind Energy |
According to the Global Wind Energy Council (GWEC), the total market for wind turbines was
approximately 45 billion Euros ($63 billion) in 2009. GWEC predicts that in 2013, global wind
generating capacity will stand at 332 GW, up from 120 GW at the end of 2008. We believe that Asia,
particularly China, will see tremendous growth in wind energy over the next ten years. Zoltek
believes that as the industry moves to supply off-shore wind turbines that are larger in size, they
will continue to incorporate more carbon fibers into their designs. This means that the underlying
carbon fiber demand for wind turbine applications should grow at a faster rate than the wind market itself.
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Zoltek believes it is the leading supplier of the low-cost, high-performance carbon fibers
used in building the largest and most advanced of these wind turbines.
| Deep Sea Drilling |
As the price of oil on the world market continues to fluctuate, oil exploration companies have
moved out into deepwater, developing reserves beneath the ocean floor a mile or more below the
waters surface. As a result, demand for strong yet lightweight materials able to stand up to the
harsh subsea environment has increased, with a corresponding peak of interest in composites. One
of those growth areas has been in buoyancy modules. In another
application, a major producer of deep sea drilling platforms has
tested composite rods
utilizing our carbon fibers in fabrication of umbilical products and
found them to deliver equal or
superior performance at affordable cost, compared to composite rods utilizing aerospace grade
carbon fibers. The composite rods are designed to demonstrate the ability to succeed where steel
cables begin to fail in counteracting the greater axial loads encountered in ultra deepwater,
meaning depths exceeding 8,000 feet. At these depths, steel is subject to deformation or
stretching. Additional test projects are being planned to demonstrate the effectiveness of carbon
fibers in other deep sea drilling applications.
| Aerospace Secondary Structures |
Zoltek is actively pursuing a new market with large-volume potential: sales of carbon fiber to
leading airplane makers for use in secondary structures such as floors, luggage bins and seats. We
believe airplane manufacturers are concerned about future availability and pricing of large
quantities of carbon fibers, as all newly designed commercial planes will incorporate extensive
utilization of carbon fiber composites. Zoltek can offer considerably lower cost structures than
the manufacturers of aerospace-grade carbon fibers and we also have the competitive advantage of
being able to deliver large volumes of carbon fibers on a timely basis. Airplane makers are looking
for every possible opportunity to reduce fuel burn by eliminating weight, but they are also
concerned about their competitive position. They have already turned to carbon fiber for making the
flight-worthy primary structures of their most advanced airplanes, and now they are interested in
ways to make other structures that use super-lightweight carbon fiber composites.
| Automotive |
Zoltek believes automotive applications are destined to become the largest user of carbon
fibers. For years there has been an upward trend in the use of carbon fiber reinforced composites
in the manufacture of small-volume and many times hand-made cars. Examples include the Tesla which
uses Zoltek fibers for the entire car and Corvette which use Zoltek carbon fibers for a few
specialized parts. While these applications have been growing steadily, the real explosion in
demand will come from expanded adaptation of carbon fiber composites into large scale series models
produced on an assembly line. Carbon fiber composites in automotive applications are suitable for
structural components such as front-end modules, leaf springs and many other chasis components.
In
fiscal 2010, Zoltek formed of a new subsidiary, Zoltek Automotive, LLC, to speed
development of volume automotive applications for large-tow carbon fiber. Our objective is to make
the adaptation of carbon fiber technology and processes easy and efficient for automotive companies
and their suppliers by developing new production methods that will enable customers to fabricate
cost-effective carbon fiber intermediate products. To this end,
Zoltek Automotive, LLC is working
directly with tier one automotive suppliers on advancing this technology and assisting them in the
utilization of carbon fiber with existing and new manufacturing machinery and processes.
| Aircraft Brakes |
We believe our technical fibers segment is the largest supplier of oxidized fibers to the
leading manufacturers of aircraft brakes. A substantial majority of commercial and defense
aircraft has incorporated carbon-carbon brakes into their design due to their superior heat
resistance, friction properties and light weight. This business should continue to afford a steady
revenue stream with significant growth potential.
Customers
In fiscal 2010, 2009 and 2008, we reported net sales of $49.5 million, $74.2 million and
$75.1 million, respectively, to Vestas Wind Systems, a leading wind turbine manufacturer, which
represented 38.6%, 53.6% and 40.4% of our net sales, respectively, during such periods. Zoltek has
also expanded its customer base to include additional wind energy and deep sea drilling customers
consistent with its objective of expanding into its targeted applications. The related open
accounts receivable balances at September 30, 2010 and 2009 were $11.0 million and $21.1 million,
respectively. The Company reported net sales of $24.6 million in fiscal 2008, to Gamesa Group,
another leading wind turbine manufacturer, which represented 13.3% of our net sales, during that
fiscal year. These were the only customers that represented greater than 10% of consolidated net
sales during these years.
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Table of Contents
Backlog
Sales of our products are generally made pursuant to customer purchase orders. In recent
years, our customers have increasingly demanded shorter order lead times and just-in-time
delivery performance. While we have multi-year contracts with certain major customers, most of
these contracts specify the customers indicated requirements that will be supplied by us and the
terms under which the sales will occur, not the specific quantities to be procured. As a result,
twelve-month order backlog is not a meaningful indicator of future revenues for us.
Company Operations
We have manufacturing plants in Nyergesujfalu, Hungary, Guadalajara, Mexico, Abilene, Texas
and St. Charles, Missouri. Our plant in Hungary is our major carbon fiber manufacturing facility.
Our Hungarian plant also manufactures acrylic fiber precursor, the raw material that we use to make
carbon fibers and oxidized fibers. Our Texas plant houses carbon fiber manufacturing lines and
value-added processing capabilities. Our Missouri plant is primarily dedicated to the production of
technical fibers for aircraft brake and other friction applications and also produces limited
amounts of carbon fibers and houses a research and development facility. In addition, we have
facilities in Salt Lake City, Utah where we design and build composite manufacturing equipment and
can produce resin pre-impregnated carbon fibers, called prepregs.
Our facility in Guadalajara, Mexico was acquired in October 2007. We expect it will supply our
North American operations with low-cost precursor and will serve as an additional site for carbon
fiber production. The first phase of retrofitting the Mexican acrylic precursor plant and
installation of carbon fibers lines has been completed. During the fourth quarter of fiscal 2010,
the plant began limited production of carbon fiber, but delayed precursor production and full
utilization of carbon fiber lines pending resumption of market demand. The Mexico plant, which we
expect will eventually be our largest facility, will substantially increase our capacity to produce
low-cost carbon fibers on a timely and cost-effective basis, and further extend our leadership in
the growing commercial carbon fibers sector.
Acrylic fiber precursor comprises a substantial portion of the total cost of producing carbon
fibers. With the addition of our Mexico precursor facility, we expect to have ample supply of high
quality, low-cost precursor to supply our foreseeable future requirements.
An element of our strategy is to offer customers value-added processing of the fibers that we
produce. Our longer-term focus is on creating integrated solutions for large potential end users by
working directly with carbon fiber customers in the primary applications that we target. We
perform certain downstream processing, such as weaving, knitting, blending with other fibers,
chopping and milling, and preparation of pre-form, pre-cut stacks of fabric. We also manufacture
carbon fibers preimpregnated with bonding resin, or prepregs. In addition, our Salt Lake City-based
Entec Composite Machines subsidiary designs and builds composite manufacturing equipment and
markets the equipment along with manufacturing technology and materials.
We also provide composite design and engineering for development of applications for carbon
fiber reinforced composites. We reported research and development expenses of $8.2 million, $7.6
million and $8.1 million in fiscal 2010, 2009 and 2008, respectively. For historical financial
information regarding our various business segments, see Note 11 of the Notes to Consolidated
Financial Statements.
Competition
Our carbon fibers and technical fibers business segments compete with various other producers
of carbon fibers. We are the only publicly-held company that is a pure-play in carbon fibers,
while all the other six principal competitors carbon fiber operations are a relatively small part
of their total business. Our existing six major competitors have substantially greater research and
development, marketing, financial and managerial resources than we do. We are aware of no single
manufacturer of carbon fiber products that competes across all of our product lines and
applications. We believe our business model distinguishes us from other carbon fiber manufacturers
in supporting the long-term growth of the commercial carbon fiber market.
To varying degrees, depending on market conditions and supply, we compete with aerospace
grade carbon fiber producers, such as Hexcel Corporation and Cytec Industries of the United States
and Toray Group, Toho Tenax and Mitsubishi Rayon of Japan. These carbon fiber producers tend to
market higher cost products than our products, with a principal focus on aerospace structural and
high price industrial applications. SGL Carbon is the most direct competitor which also uses a
textile-type precursor which they purchase from various suppliers.
The aerospace carbon fiber manufacturers have tended to enter into direct competition with us
primarily when they engage in significant discounting to protect their market share and to sell in
spot markets. SGL Carbon currently is our principal competitor in the oxidized fiber market.
The principal areas of competition for the carbon fibers and technical fibers business
segments are sustainable price, quality, development of new applications and ability to reliably
meet the customers volume requirements and qualifications for particular programs. Carbon fiber
production also requires substantial capital expenditures for manufacturing plants and specialized
equipment,
know-how to economically manufacture carbon fibers to meet technical specifications and the
ability to qualify carbon fibers for acceptable performance in downstream applications.
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Table of Contents
International
The Company conducts its carbon fiber products operations primarily in North America and
Europe. The Company sells its carbon fibers globally. There are unique risks attendant to the
Companys foreign operations, such as currency fluctuations. For additional information regarding
our international operations, see Note 11 of the Notes to Consolidated Financial Statements and the
information included under Item 1A. Risk Factors.
Sources of Supply
As part of its growth strategy, the Company has developed its own precursor acrylic fibers,
which are used as the principal raw material for all of its carbon fibers. The primary source of
raw material for the precursor is ACN (acrylonitrile), which is a commodity product with multiple
sources.
Environmental
The Companys operations generate various hazardous wastes, including gaseous, liquid and
solid materials. The operations of the Companys carbon fibers and technical fibers business
segments utilize thermal oxidation of various by-product streams designed to comply with applicable
laws and regulations. The plants produce air emissions that are regulated and permitted by various
environmental authorities. The plants are required to verify by performance tests that certain
emission rates are not exceeded. The Company does not believe that compliance by its carbon fibers
and technical fibers operations with applicable environmental regulations will have a material
adverse effect upon the Companys future capital expenditure requirements, results of operations or
competitive position. There can be no assurance, however, as to the effect of interpretation of
current laws or future changes in federal, state or international environmental laws or regulations
on the business segments results of operations or financial condition.
Employees
As of September 30, 2010, we employed approximately 362 persons in our North American
operations and approximately 733 in our European operations.
Our U.S. employees are not represented by any collective bargaining organizations. By law,
most employees in Hungary are represented by at least one labor union. At Zoltek Zrt., our
Hungarian subsidiary, there are two active unions (some Zoltek Zrt. employees belong to both
unions). Management meets with union representatives on a regular basis and there have not been any
problems or major disagreements with either union in the past five years. We believe that overall
our employee relations are good. At our Mexican subsidiary employees are also represented by a
union which was selected by our subsidiary.
AVAILABLE INFORMATION
The Company regularly files periodic reports with the Securities and Exchange Commission
(SEC), including annual reports on Form 10-K and quarterly reports on Form 10-Q, as well as, from
time to time, current reports on Form 8-K and amendments to those reports. These filings are
available free of charge on the Companys website at www.zoltek.com, as soon as reasonably
practicable after their electronic filing with the SEC. All of the Companys filings may be read
or copied at the SECs Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information
on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.
The SEC maintains an Internet website (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding issuers that file electronically.
This Annual Report on Form 10-K for fiscal 2010 and the documents incorporated by reference
herein contain forward-looking statements, which are inherently subject to risks and uncertainties.
See Special Note Regarding Forward Looking Statements.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K and the information incorporated by reference in this Form 10-K contain certain
statements that constitute forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. The words expect, believe, goal, plan, intend, estimate, and similar
expressions and variations thereof are intended to specifically identify forward-looking
statements. Those statements appear in this Form 10-K, any accompanying Form 10-K supplement and
the documents incorporated herein by reference, particularly in the sections entitled Risk
Factors, Managements Discussion and Analysis of Financial Condition and Results of Operations
and Business, and include statements regarding the intent, belief or current expectations of us,
our directors and officers with respect to, among other things: (1) our financial prospects;
(2) our growth strategy and operating strategy, including our focus on facilitating
acceleration of the introduction and development of mass market applications for carbon
fibers; and (3) our current and expected future revenue.
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This Form 10-K and the information incorporated by reference in this report also contain
statements that are based on the current expectations of our company. You are cautioned that any
such forward-looking statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those projected in the
forward-looking statements as a result of various factors. The factors that might cause such
differences include, among others, our ability to: (1) successfully adapt to recessionary
conditions in the global economy 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) operate
profitably; (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)
successfully continue operations at our Hungarian facility if natural gas supply disruptions occur;
(12) successfully prosecute patent litigation; (13) successfully facilitate adoption of our carbon
fibers by the auto industry for use in high-volume applications; and (14) manage the risks
identified under Risk Factors in our filings with the SEC.
Because forward-looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified, you should not rely upon forward-looking
statements as predictions of future events. The events and circumstances reflected in the
forward-looking statements may not be achieved or occur and actual results could differ materially
from those projected in the forward-looking statements.
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Table of Contents
Item 1A. Risk Factors
The following are certain risk factors that could affect Zolteks business, financial results and
results of operations. These risk factors should be considered in connection with evaluating the
forward-looking statements contained in this Annual Report on Form 10-K because these factors could
cause the actual results and conditions to differ materially from those projected in
forward-looking statements. Before you buy the Companys securities, you should know that making
such an investment involves a high degree of risk, including the risks described below. The risks
that we have highlighted here are not the only ones that the Company faces. If any of the risks
actually occur, the Companys business, financial condition, results of operations or cash flows
could be negatively affected. In that case, the trading price of its securities could decline, and
you may lose all or part of your investment.
Our growth and profitability will depend on increases in demand for carbon fibers and entering into
new supply relationships.
Historically, our business has been adversely affected during periods of oversupply and
capacity constraints. For years prior to fiscal 2004, our financial results were adversely
affected by industry oversupply conditions which inhibited adoption of carbon fibers for
non-aerospace applications as existing and potential customers were reluctant to commit to
incorporate carbon fiber composites into their products due to concerns about the availability of
carbon fiber in large volumes at predictable pricing. During 2006 and 2007, the divergence in the
aerospace and commercial applications and our new contracts with wind energy customers led to
strains on our ability to meet all the demand from our wind energy customers and we were unable to
take on new customers.
We currently have sufficient capacity to meet demand from current wind energy customers and
produce carbon fibers for additional large-scale applications. Our capacity expansion resulted in
excess capacity costs of $12.8 million in 2010. Our future profitability and growth will depend upon
our ability to enter into supply relationships with new customers for existing applications
utilizing our carbon fibers and the development of new markets for large-scale applications which
incorporate our carbon fiber products. Development of new customers for existing applications and
new markets for our carbon fiber products will require substantial technical, marketing and sales
efforts and the expenditure of significant funds. Development of new markets for carbon fibers may
not occur. Our business, operating results and financial condition could be materially and
adversely affected if new customers and markets for our carbon fibers products do not develop.
Increases in sales of our carbon fiber products are subject to long sales cycles of our customers.
Our future profitability and growth will depend primarily upon our ability to enter into
supply relationships with new customers for existing applications utilizing our carbon fibers and
the development of new markets for a broad range of large-scale applications which incorporate our
carbon fiber products. Our ability to increase sales of our carbon fiber products is subject to
relatively long sales cycles of our customers due to new product development, manufacturing and
engineering investments our customers must make to incorporate carbon fiber composites into their
products.
A limited number of customers generate a significant portion of our revenue and they may terminate
their contracts with us in the event of certain changes in control or may require that we make
penalty payments in the event we fail to perform.
For fiscal 2010, our largest customer represented approximately 38.6% of our revenue and our
three next largest customers accounted for 19.4% of our revenue. We anticipate that significant
customer concentration will continue for the foreseeable future, although the composition of our
largest customers may change from period to period. A significant portion of our total sales in
fiscal 2010 were to customers in the wind energy market. Significant changes in demand for our
customers wind turbines, the shares of their requirements that are awarded to us or changes in the
design or materials used to construct their products could result in a significant loss of business
with these customers. Our contracts with certain customers allow them to terminate their agreements
with us or require us to make substantial penalty payments in the event we fail to perform our
obligations under our agreements with them. The loss of, or significant reduction in the purchases
by, these customers or any other significant customers could have a material adverse effect upon
our future revenues and business, results of operations, financial condition or cash flow.
We reported net losses from continuing operations for fiscal 2010, 2009, 2007 and each of the five
fiscal years preceding it.
Although we reported net income in fiscal 2008, we have reported losses from continuing
operations of $7.1 million, $12.3 million, $17.1 million, $38.2 million, $65.8 million $2.0
million, $4.2 million, and $6.3 in fiscal years 2002, 2003, 2004, 2005, 2006, and 2007, 2009, and
2010 respectively. Net losses from continuing operations for the fiscal 2002, 2003, 2004 and 2005
were attributable primarily to the cost of development and preliminary execution of our carbon
fiber commercialization strategy.
Demand for our carbon fiber products may be adversely affected by the current economic and credit
environment.
The United States and international economies recently have experienced (and continue to
experience) a period of slow economic growth. A near-term economic recovery is uncertain. In
particular, the current credit and housing crisis, the increase in U.S. sub-prime mortgage
defaults, potential terrorist acts and similar events, continued turmoil in the Middle East and war
in general could contribute to a slowdown for products that require significant capital
expenditures, including demand for large-scale projects that
incorporate our carbon fibers. If the economic recovery slows down as a result of recent
economic, political or social turmoil, we may experience decreases in the demand for our carbon
fiber products, which will harm our operating results.
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Our operations and sales in foreign countries are subject to risks.
For fiscal 2010, approximately 58.6% of our revenues were derived from products supplied by
our operations in Hungary. Our operations in Hungary and Mexico and our sales in other foreign
countries are subject to risks associated with foreign operations and markets including the fact
that many members of our senior management are resident in the United States, foreign currency
fluctuations, unexpected changes in regulatory, economic or political conditions, tariffs and other
trade barriers, longer payment cycles for accounts receivable, potentially adverse tax
consequences, restrictions on repatriation of earnings and the burdens of complying with a wide
variety of foreign laws. These factors could have a material adverse effect upon our future
revenues and business, results of operations, financial condition or cash flow.
Our ability to fund and manage our anticipated growth will affect our operating results.
The growth in our business has placed, and is expected to continue to place, a significant
strain on our management and operations. In order to effectively manage potential long-term growth
and to reach growth targets, we will need to add to our carbon fiber manufacturing capacity, have
access to adequate financial resources to fund significant capital expenditures and maintain gross
profit margins. We must also pursue a growth strategy and continue to strengthen our operations,
including our financial and management information systems, and expanding, training and managing
our employee workforce. There can be no assurance that we will be able to do so effectively or on a
timely basis. Failure to do so could have a material adverse effect upon our future revenues and
business, results of operations, financial condition or cash flow. Additionally, in the event that
we need to obtain debt financing in the future to fund our growth, recent uncertainty in the credit
markets could affect our ability to obtain debt financing on reasonable terms.
Our operations are dependent upon our senior management and technical personnel.
Our future operating results depend upon the continued service of our senior management and
our technical personnel, and the management personnel in our domestic and international operations.
Our future success will depend upon our continuing ability to attract and retain highly qualified
managerial and technical personnel. Competition for such personnel is intense, and there can be no
assurance that we will retain our key managerial and technical employees or that we will be
successful in attracting, assimilating or retaining other highly qualified personnel in the future.
Our operating results may fluctuate.
Our quarterly results of operations may fluctuate as a result of a number of factors,
including the timing of purchase orders for and shipments of our products, our ability to
successfully operate our expanding production capacity and changes in production levels. Therefore,
quarter-to-quarter comparisons of results of operations have been and will be impacted by the
timing of such orders and shipments. In addition, our operating results could be adversely affected
by these factors, among others, such as variations in the mix of product sales, price changes in
response to competitive factors and interruptions in plant operations.
Developments by competitors may reduce demand for our products and technologies, which may
adversely affect our sales.
We compete with various other participants in the advanced materials and textile fibers
markets. All of our six principal competitors have substantially greater research and development,
manufacturing, marketing, financial and managerial resources than we do. In addition, existing
carbon fiber producers, including those that supply aerospace applications, may refocus their
activities to produce carbon fiber for commercial applications that compete more directly with us
and certain producers have announced plans to do so. Developments by existing or future competitors
may render our products or technologies less competitive. In addition, we may not be able to keep
pace with new technological developments.
The price volatility of many of our raw materials and energy costs may result in increased
production costs, which we may not be able to pass on to our customers.
A substantial portion of our raw materials are subject to price volatility and a significant
portion of our manufacturing costs are energy costs. The cost of our primary raw material, ACN,
increased by more than 100% after the end of fiscal 2009. We may not always be able to promptly
raise product prices and, ultimately, pass on underlying cost increases to our customers. In
addition, our competitors may be able to obtain raw materials at a lower cost than we can.
Additional raw material and energy cost increases that we are not able to pass on to customers or
the loss of a large number of customers to competitors as a result of price increases could have a
material adverse effect on our future revenues and business, results of operations, financial
condition or cash flow.
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We could be adversely affected by environmental and safety requirements.
Our operations require the handling, use, storage and disposal of certain regulated
materials and wastes. As a result, we are subject to various laws and regulations pertaining to
pollution and protection of the environment, health and safety. These requirements govern, among
other things, emissions to air, discharge to waters and the generation, handling, storage,
treatment and disposal of waste and remediation of contaminated sites. We have made, and will
continue to make, capital and other expenditures in order to comply with these laws and
regulations. These laws and regulations are complex, change frequently and could become more
stringent in the future.
In addition, we may be required to comply with evolving environmental, health and safety laws,
regulations or requirements that may be adopted or imposed in the future or to address newly
discovered information or conditions that require a response. Although most of our properties have
been the subject of environmental site assessments, there can be no assurance that all potential
instances of soil and groundwater contamination have been identified, even at those sites where
assessments have been conducted. Accordingly, we may discover previously unknown environmental
conditions and the cost of remediating such conditions may be material.
Our business depends upon the maintenance of our proprietary technology.
We depend upon our proprietary technology that is not subject to patent protection. We rely
principally upon trade secret and copyright laws to protect our proprietary technology. We
regularly enter into confidentiality agreements with our key employees, customers and potential
customers and limit access to and distribution of our trade secrets and other proprietary
information. These measures may not be adequate to prevent misappropriation of our technology or to
assure that our competitors will not independently develop technologies that are substantially
equivalent or superior to our technology. In addition, the laws of other countries in which we
operate may not protect our proprietary rights to the same extent as the laws of the United States.
We are also subject to the risk of adverse claims and litigation alleging infringement of
intellectual property rights.
Our existing lines of credit expire on January 1, 2011 and August 30, 2011 and failure to
extend or replace these facilities could have a material adverse effect on us.
Our existing $10.0 million U.S. line of credit and our $9.5 million Hungarian line of credit
expire on January 1, 2011 and August 30, 2011, respectively. Based on our existing relationships
with our lenders and our current financial condition, we believe that we will be able to extend
these credit facilities beyond their current expiration dates or, if necessary, replace them. The
failure to extend or replace our credit facilities on favorable terms could have a material adverse
effect on our business, operating results or financial condition.
We have incurred and will continue to incur increased costs and demands upon our management as a
result of complying with the laws and regulations affecting public companies, which could affect
our operating results and make it more difficult to attract and retain qualified management.
As a public company, we have incurred and will continue to incur significant legal,
accounting and other expenses, including costs associated with public company reporting
requirements. We also have incurred and will incur costs associated with corporate governance
requirements, including requirements under the Sarbanes-Oxley Act of 2002, as well as rules
implemented by the SEC and the NASDAQ Global Select Market. The expenses incurred by public
companies generally for reporting and corporate governance purposes have increased. These rules and
regulations have increased our legal and financial compliance costs and have made some activities
more time-consuming and costly. It is possible that these new rules and regulations may make it
more difficult and more expensive for us to obtain director and officer liability insurance, and we
may be required to accept reduced policy limits and coverage or incur substantially higher costs to
obtain the same or similar coverage than used to be available. As a result, it may be more
difficult for us to attract and retain qualified individuals to serve on our board of directors or
as our executive officers.
Our stock price has been volatile and may continue to fluctuate.
Our stock price has fluctuated substantially over the past several years. Future
announcements concerning us or our competitors or customers, quarterly variations in operating
results, announcements of technological innovations, the introduction of new products or changes in
product pricing policies by us or our competitors, developments regarding proprietary rights,
changes in earnings estimates by analysts or reports regarding us or our industry in the financial
press or investment advisory publications, among other factors, could cause the market price of our
common stock to fluctuate substantially. In addition, stock prices for many emerging growth
companies fluctuate widely for reasons often unrelated to operating results. These fluctuations, as
well as general economic, political and market conditions, such as recessions, interest rates,
world events, military conflicts or market-sector declines, may materially and adversely affect the
market price of our common stock. Any information concerning us, including projections of future
operating results, appearing in investment advisory publications or on-line bulletin boards, or
otherwise emanating from a source other than from us, should not be relied upon as having been
supplied or endorsed by us.
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A change of control of our company may be discouraged, delayed or prevented by our classified
board of directors, our ability to issue preferred stock, or the voting control of our principal
shareholder.
Our Articles of Incorporation divide the board of directors into three classes, with
three-year staggered terms. The classified board provision could increase the likelihood that, in
the event an outside party acquired a controlling block of our stock, incumbent directors
nevertheless would retain their positions for a substantial period, which may have the effect of
discouraging, delaying or preventing a change in control. The possible impact of such
discouragement, delay or prevention of takeover attempts could adversely affect the price of our
common stock.
Our Articles of Incorporation also authorize the issuance of blank check preferred stock
with such designations, rights and preferences as may be determined from time to time by the board
of directors. Accordingly, the board of directors is empowered, without shareholder approval, to
issue preferred stock with dividend, liquidation, conversion, voting or other rights that could
adversely affect the voting power or other rights of the holders of common stock. Holders of common
stock will have no preemptive rights to subscribe for a pro rata portion of any preferred stock
that may be issued. If issued, the preferred stock could be utilized, under certain circumstances,
as a method of discouraging, delaying or preventing a change in control. The possible impact that
the issuance of preferred stock could have on a takeover attempt could adversely affect the price
of the common stock. Although we have no present intention to issue any shares of preferred stock,
we may do so in the future.
Zsolt Rumy, our founder and principal shareholder, owns approximately 17.7% of outstanding
shares of common stock. As a result, he has and will continue to have significant voting control
over our company.
Future sales of common stock could affect the price of our common stock.
No prediction can be made as to the effect, if any, that future sales of shares or the
availability of shares for sale will have on the market price of our common stock prevailing from
time to time. Sales of substantial amounts of common stock, or the perception that such sales might
occur, could adversely affect prevailing market prices of our common stock.
We do not currently intend to pay dividends on our common stock.
We have never declared or paid any cash dividends on our common stock and do not currently
intend to do so for the foreseeable future. We currently intend to invest our future earnings, if
any, to fund our growth. Therefore, you are not likely to receive any dividends on your common
stock for the foreseeable future.
Item 1B. Unresolved Staff Comments
None.
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Item 2. Properties
The Companys facilities are listed below and are considered to be suitable and adequate for
its operations. Except as noted below, all the Companys properties are owned, subject to various
mortgage loans.
Approximate Area | ||||||||
Location | Use | (in square feet) | Status | |||||
St. Louis, Missouri |
Administrative, marketing and central engineering offices | 30,000 | Owned | |||||
St. Charles, Missouri |
Carbon and technical fiber manufacturing and R&D facility | 107,000 | Owned | |||||
Abilene, Texas |
Carbon fiber manufacturing and secondary processing | 278,000 | Owned | |||||
Salt Lake City, Utah I |
Composite fabrication equipment design and manufacturing | 65,000 | Owned/Mortgaged | |||||
Salt Lake City, Utah II |
Carbon fiber prepreg manufacturing | 35,000 | Leased | |||||
Nyergesujfalu, Hungary |
Carbon and technical fiber, and acrylic fiber precursor manufacturing | 2,000,000 | Owned | |||||
Guadalajara, Mexico |
Carbon fiber, and acrylic fiber precursor manufacturing | 1,400,000 | Owned |
Item 3. Legal Proceedings
Legal contingencies have a high degree of uncertainty. When losses from contingencies become
estimatable and probable, reserves are established. The reserves reflect managements estimate of
the probable cost of ultimate resolution of the matters and are revised accordingly as facts and
circumstances change and, ultimately, when matters are brought to closure. If any litigation matter
is resolved unfavorably, the Company could incur obligations in excess of managements estimate of
the outcome, and such resolution could have a material adverse effect on the Companys 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 financial condition, results of operations or liquidity.
Item 4A. Executive Officers of the Registrant
The name, age, position and principal occupation of each of the executive officers of the Company
is set forth below:
Zsolt Rumy, age 67, is the founder of the Company and has served as its Chairman, Chief
Executive Officer and President and as a Director since 1975 and served as its interim Chief
Financial Officer from May 2008 to April 2009. Mr. Rumy received a B.S. degree in Chemical
Engineering from the University of Minnesota in 1966.
Andrew W. Whipple, age 47, has served as the Chief Financial Officer since April 2009. Prior
to this, he served as Chief Accounting Officer of the Company from May 2008 to April 2009. Mr.
Whipple served as a Senior Manager in the St. Louis office of Deloitte & Touche, LLP where he
worked from 1993 to 1998, when he joined Digital Teleport, Inc. as its Controller and was later
promoted to Chief Financial Officer. After Digital Teleport was acquired by CenturyTel in June of
2003, he became Vice President of Operational Support at the telecommunications company and served
there for four years prior to joining E3 Biofuels as its Chief Financial Officer from 2007 to 2008.
Mr. Whipple is a CPA and received his degree in accounting from Virginia Tech in 1985.
George E. Husman, 65, has served as the Chief Technology Officer of the Company since January
2007. Mr. Husman holds a B.S. in aerospace engineering from the University of Cincinnati and a
M.S. in materials engineering from the University of Dayton. He spent 18 years at the Materials
Directorate at Wright-Patterson Air Force Base in research and management positions, including
Director of the Nonmetallic Materials Division. Upon leaving the Air Force in 1986, he joined BASF
Structural Materials, Inc., in Charlotte, North Carolina, as Vice President for Business
Development. At BASF, he also served as VP & General Manager of Thermoplastic Composites and Vice
President for Research and Development. In 1993, Mr. Husman joined Southern Research
Institute in Birmingham, Alabama, as Vice President of the Engineering Division, and prior to
joining Zoltek, he was the Associate Director for Research in the School of Engineering at the
University of Alabama at Birmingham.
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PART II
Item 5. Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
The Companys common stock (symbol: ZOLT) is traded in the NASDAQ Global Select Market. The
number of beneficial holders of the Companys stock is approximately 27,000, including shareholders
whose shares are held in nominee or street names. As of September 30, 2010, there were 437
holders of record of the Companys common stock. The Company has not paid cash dividends on any of
its common stock and does not intend to pay cash dividends on common stock for the foreseeable
future.
Set forth below are the high and low bid quotations as reported by the NASDAQ Global Select
Market for the periods indicated. Such prices reflect interdealer closing prices, without retail
mark-up, markdown or commission:
Fiscal year ended | Fiscal year ended | |||||||||||||||
September 30, 2010 | September 30, 2009 | |||||||||||||||
High | Low | High | Low | |||||||||||||
First Quarter |
$ | 11.24 | $ | 8.24 | $ | 17.77 | $ | 4.28 | ||||||||
Second Quarter |
10.74 | 7.00 | 9.39 | 5.02 | ||||||||||||
Third Quarter |
11.19 | 8.44 | 12.60 | 6.50 | ||||||||||||
Fourth Quarter |
10.84 | 8.05 | 11.44 | 7.84 |
As
of November 26, 2010 the last reported sale price of the
Companys common stock was $9.75 per
share.
The following table shows the total number of outstanding options and shares available for
future issuances of options under the Companys existing stock option plans as of September 30,
2010.
Number of securities | ||||||||||||
remaining available for | ||||||||||||
future issuance under | ||||||||||||
Number of securities to | Weighted-average | equity compensation | ||||||||||
be issued upon exercise | exercise price of | plans (excluding | ||||||||||
of outstanding options, | outstanding options, | securities reflected in | ||||||||||
warrants and rights | warrants and rights | column (a)) | ||||||||||
Plan category | (a) | (b) | (c) | |||||||||
Equity compensation plans approved by
security holders |
427,087 | $ | 22.21 | 2,173,500 | ||||||||
Equity compensation plans not approved
by security holders |
| | | |||||||||
Total |
427,087 | $ | 22.21 | 2,173,500 | ||||||||
The Company currently has no equity compensation plans that are not approved by security holders.
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Performance Graph
The graph below shows the cumulative total return on common stock for the period from
September 30, 2005 through September 30, 2010, in comparison to the cumulative total return on
Russells 2000 Index and a NASDAQ peer group that we are most comparable to in terms of size and
nature of operations. The results shown assume that $100 was invested on September 30, 2005 and
that all dividends were reinvested. These indices are included for comparative purposes only and do
not reflect whether it is managements opinion that such indices are an appropriate measure of the
relative performance of the stock involved, nor are they intended to forecast or be indicative of
future performance of the common stock.
ASSUMES $100 INVESTED ON SEPTEMBER 30, 2005 IN
ZOLTEK COMPANIES, INC. COMMON STOCK,
THE NASDAQ INDUSTRIAL INDEX AND
THE RUSSELL 2000 INDEX
ZOLTEK COMPANIES, INC. COMMON STOCK,
THE NASDAQ INDUSTRIAL INDEX AND
THE RUSSELL 2000 INDEX
9/30/2005 | 9/30/2006 | 9/30/2007 | 9/30/2008 | 9/30/2009 | 9/30/2010 | |||||||||||||||||||
Zoltek Companies, Inc. |
100.00 | 194.30 | 331.79 | 130.11 | 79.85 | 73.92 | ||||||||||||||||||
NASDAQ Industrial Index |
100.00 | 107.09 | 128.39 | 93.83 | 90.93 | 106.77 | ||||||||||||||||||
The Russell 2000 Index |
100.00 | 108.65 | 120.61 | 101.76 | 90.49 | 101.25 |
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Item 6. Selected Financial Data
ZOLTEK COMPANIES, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
Fiscal year ended September 30, | ||||||||||||||||||||
Statement of Operations Data: | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
Net sales |
$ | 128,464 | $ | 138,756 | $ | 185,616 | $ | 150,880 | $ | 92,357 | ||||||||||
Cost of sales, excluding available unused capacity costs |
102,350 | 100,744 | 134,393 | 107,506 | 69,994 | |||||||||||||||
Available unused capacity costs (1) |
12,822 | 7,352 | | | | |||||||||||||||
Gross profit |
13,292 | 30,660 | 51,223 | 43,374 | 22,363 | |||||||||||||||
Application and development costs |
8,207 | 7,589 | 8,093 | 7,230 | 4,887 | |||||||||||||||
Litigation charge (2) |
| 238 | 4,884 | 5,400 | 22,795 | |||||||||||||||
Selling, general and administrative expenses |
15,649 | 19,438 | 18,239 | 12,635 | 10,356 | |||||||||||||||
Operating (loss) income from continuing operations |
(10,564 | ) | 3,395 | 20,007 | 18,109 | (15,675 | ) | |||||||||||||
Other income (expense) |
2,384 | (5,492 | ) | (7,150 | ) | (18,095 | ) | (49,202 | ) | |||||||||||
Income tax benefit (expense) |
1,841 | (2,105 | ) | (5,416 | ) | (1,986 | ) | (888 | ) | |||||||||||
Net (loss) income from continuing operations |
(6,339 | ) | (4,202 | ) | 7,441 | (1,972 | ) | (65,765 | ) | |||||||||||
Discontinued operations: |
||||||||||||||||||||
Operating loss, net of taxes |
| | | (545 | ) | (187 | ) | |||||||||||||
Gain on disposal of discontinued operation, net of taxes |
| | | | 150 | |||||||||||||||
Net loss on discontinued operations, net of taxes |
| | | (545 | ) | (37 | ) | |||||||||||||
Net (loss) income |
$ | (6,339 | ) | $ | (4,202 | ) | $ | 7,441 | $ | (2,517 | ) | $ | (65,802 | ) | ||||||
Net (loss) income per share: |
||||||||||||||||||||
Basic and diluted (loss) income per share: |
||||||||||||||||||||
Continuing operations |
$ | (0.18 | ) | $ | (0.12 | ) | $ | 0.22 | $ | (0.07 | ) | $ | (2.91 | ) | ||||||
Discontinued operations |
| | | (0.02 | ) | | ||||||||||||||
Total |
$ | (0.18 | ) | $ | (0.12 | ) | $ | 0.22 | $ | (0.09 | ) | $ | (2.91 | ) | ||||||
Basic weighted average common shares outstanding |
34,411 | 34,402 | 34,042 | 28,539 | 22,575 | |||||||||||||||
Diluted weighted average common shares outstanding |
34,411 | 34,402 | 34,172 | 28,539 | 22,575 |
September 30, | ||||||||||||||||||||
Balance Sheet Data: | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
Working capital (3) |
$ | 71,972 | $ | 76,127 | $ | 76,000 | $ | 147,956 | $ | 20,042 | ||||||||||
Total assets (3) |
322,140 | 366,845 | 440,164 | 403,599 | 187,684 | |||||||||||||||
Current maturities of long-term debt and credit lines |
981 | 16,436 | 12,601 | 13,813 | 1,365 | |||||||||||||||
Long-term debt, less current maturities |
| 981 | 3,562 | 6,851 | 32,002 | |||||||||||||||
Shareholders equity (3) |
292,698 | 315,465 | 346,666 | 320,767 | 111,661 |
(1) | These costs include depreciation and other costs associated with the available unused capacity. The Company believes maintaining this available unused capacity has been necessary to encourage development of significant large-scale applications and maintain a level of readiness as we anticipate a return to more robust market conditions. | |
(2) | See Note 8 of the Notes to Consolidated Financial Statements. | |
(3) | The Company completed a public offering of shares in August 2007 and realized net proceeds of $131.5 million, recorded as increases to cash and equity. During fiscal 2008 a substantial portion of those proceeds were used to fund capacity expansion projects in Mexico. |
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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
The following Managements Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) is intended to help the reader understand Zoltek, our operations and our
business environment. MD&A is provided as a supplement to, and should be read in conjunction with,
our Consolidated Financial Statements and the accompanying notes elsewhere in this report. This
overview summarizes the MD&A, which includes the following sections:
Our Business a general description of the key drivers that affect our business, the
industry in which we operate and the strategic initiatives on which we focus.
Results of Operations an analysis of our overall results of operations and segment results
for the three fiscal years presented in our financial statements. We operate in two principal
segments: carbon fiber and technical fiber. Other miscellaneous and corporate are combined
into a third business segment called headquarters/other.
Liquidity and Capital Resources an analysis of cash flows, sources and uses of cash,
off-balance sheet arrangements, contractual obligations, the potential impact of currency
exchange and an overview of our financial position.
Critical Accounting Estimates a description of accounting estimates that require critical
judgments and estimates.
OUR BUSINESS
EXECUTIVE OVERVIEW
We are an applied technology and advanced materials company. Our mission is to lead in the
commercialization of carbon fiber through our development of a price-competitive, high-performance
reinforcement for composites used in a broad range of commercial products which we sell under the
Panex® trade name. In addition to manufacturing carbon fiber, we produce an intermediate product
that we refer to as technical fiber, a stabilized and oxidized acrylic fiber used in flame- and
heat-resistant applications which we sell under the Pyron® trade name. We have spent over 15 years
developing our proprietary technology and manufacturing processes. We believe that we are the
largest capacity manufacturer primarily focused on producing low-cost carbon fiber for commercial
applications.
KEY PERFORMANCE INDICATORS
Our management monitors and analyzes several key performance indicators within each of these
segments to manage our business and evaluate our financial and operating performance, including:
Revenue. In the short-term, management closely reviews the volume of product shipments and
indicated customer requirements in order to forecast revenue and cash receipts. In the
longer-term, management believes that revenue growth through sales to new customers in existing
applications and new product applications are the best indicator of whether we are achieving our
objective of commercializing carbon fiber. We expect that new applications, including those we are
attempting to facilitate, will continue to positively affect demand for our products.
Gross profit. Our total gross margin for fiscal 2010, 2009, and 2008 was 10.3%, 22.1% and
27.6%, respectively. Management focuses on maintaining and improving the gross profit over the
long-term while leading the commercialization of carbon fiber and controlling associated costs.
As such, the Company has maintained available unused capacity to remain poised to capture
opportunities in emerging markets. Gross margin was negatively impacted by 10.0% by available
unused capacity costs of $12.8 million in fiscal 2010. The primary cost components of our carbon
fiber and technical fiber segments are ACN, 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 and energy. Unscheduled shutdowns of ACN production in Europe coupled
with an increase in demand for ACN drove prices up more than 100% during fiscal 2010 which placed
additional pressure on our gross margins during the year.
Operating expenses. Our operating expenses are driven by headcount and related administrative
costs, marketing costs and research and development costs. We monitor headcount levels in specific
geographic and operational areas. We believe that research and development expenditures will be
the primary means by which we can facilitate new product applications.
Cash flow from operating activities. Cash flow from operating activities for fiscal 2010,
2009, and 2008 was $22.0 million, $15.2 million, and $20.2 million. 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. It also provides meaningful insight into the management of our working 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 aggressively
pursues any late receivables and actively manages its inventory levels in order to effectively use
it, working
capital. Management also monitors debt levels and the financing costs associated with debt. As of
September 30, 2010, we had no long-term borrowings, although we do maintain lines of credit.
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BUSINESS TRENDS
At the end of fiscal 2008, we completed our expansion plans and essentially doubled our
production capacity over the immediately preceding two fiscal years. Our capacity increase was
completed just as world trade dropped and the global economy began to experience deep recession.
During fiscal 2009 and fiscal 2010, we experienced a sudden, but we believe only temporary,
slowdown in the growth of the wind turbine business. This slowdown occurred at the same time as a
significant decrease in the aerospace market due to 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. | ||
| 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. | ||
| Operating Cash Flows and Cash Management. Despite a 7.4% decrease in sales, we had positive operating cash flows of $22.0 million in fiscal 2010 compared to $15.2 million in fiscal 2009. Reduced inventory levels provided cash of $8.8 million in fiscal 2010. The Company paid down the remaining outstanding balance of $4.2 million of its convertible debt and reported $4.4 million of capital expenditures during fiscal 2010. | ||
| High Raw Material Cost for Fiscal 2010. Unscheduled production shutdowns in Europe of our primary raw material, ACN, coupled with an increase in demand for ACN drove market prices up more than 100% and negatively impacted gross margins. |
RESULTS OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 2010 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 2009
The Companys sales decreased 7.4%, or $10.3 million, to $128.5 million in fiscal 2010 from
$138.8 million in fiscal 2009. Sales volume to our largest customer declined by $24.7 million as
demand for their wind turbines declined and they moved to just-in-time inventory. This reduction
was, however, offset partially by an increase in volume of sales to other wind energy customers
and other markets. Certain price reductions related to market
pressures caused a $9.1 million decrease in sales compared to
fiscal 2010. Carbon fiber sales decreased 10.4%, or $12.0 million, to $103.4 million during
fiscal 2010 from $115.3 million during fiscal 2009. Technical fiber sales increased 11.0%, or
$2.3 million, to $23.3 million during fiscal 2010 from $21.0 million during fiscal 2009.
Technical fiber sales increased in fiscal 2010 primarily due to increased shipments to aircraft
brake customers. Sales of other products and services consisting primarily of energy utility
services provided to the local community by our Hungarian subsidiary decreased $0.6 million to
$1.8 million during fiscal 2010 from $2.4 million during fiscal 2009.
The Companys cost of sales increased by 6.5% or $7.1 million, to $115.2 million during fiscal
2010 from $108.1 million during fiscal 2009. Our raw material costs increased substantially as
unscheduled shutdowns of ACN production in Europe coupled with an increase in demand for ACN drove
market prices up more than 100% by the end of fiscal 2010. Carbon fiber cost of sales increased by
7.0%, or $6.2 million, to $94.9 million during fiscal 2010 from $88.7 million for fiscal 2009 as a
result of the increase in raw material costs and unscheduled shutdowns described above. Technical
fiber cost of sales increased $1.7 million, or 9.8%, to $19.1 million for fiscal 2010 from $17.4
million for fiscal 2009 primarily as a result of the increased sales noted above. The cost of
sales of the corporate/other products segment decreased by 41.0%, or $0.8 million to $1.2 million
for fiscal 2010 as compared to $2.1 million for fiscal 2009.
Included in the Companys cost of sales were available unused capacity costs of $12.8
million. These costs are comprised of fixed production costs allocated to manufacturing lines
which were producing below normal levels and amounted to $11.9 million for the carbon fiber segment
and $0.9 million for the technical fiber segment during fiscal 2010. The Company believes
maintaining this available unused capacity has been necessary to encourage development of
significant large-scale applications and maintain a level of readiness as we anticipate a return to
more robust market conditions. The cost of sales of other products decreased for fiscal 2010 to
$1.2 million compared to fiscal 2009 of $2.1 million.
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The Companys gross profit decreased by 56.6%, or $17.4 million, to $13.3 million during
fiscal 2010 from $30.6 million in fiscal 2009. Carbon fiber gross profit percentage decreased to
8.2% for fiscal 2010 compared to 23.1% for fiscal 2009. Carbon fiber gross profit decreased from
$26.7 million to $8.5 million during these respective periods. The decreases in carbon fiber gross
profit and gross profit percentage resulted primarily from available unused capacity costs
expensed during the fiscal year and price reductions discussed above. Our raw material costs
increased substantially as unscheduled shutdowns of ACN production in Europe coupled with an
increase in demand for acrylonitrile (ACN) drove market prices up more than 100% by the end of
fiscal 2010. Additional decreases in carbon fiber gross profit and gross profit margin resulted
from available unused capacity costs expensed during the year compared to fiscal 2009. Technical
fiber gross profit increased from $3.6 million, or 17.3% of sales, for fiscal 2009 to $4.2 million,
or 18.2% of sales, during fiscal 2010. The increases in technical fiber gross profit and margin
resulted from favorable product sales mix. The gross profit of the other products increased for
fiscal 2010 to $0.6 million compared to a gross profit for fiscal 2009 of $0.4 million.
Application and market development costs were $8.2 million in fiscal 2010 and $7.6 million in
fiscal 2009. These costs included product and market development efforts, product trials and
product development personnel costs. Targeted emerging applications include automobile components,
offshore oil and gas drilling, fire/heat barrier and alternate energy technologies. The increase
from fiscal 2009 to fiscal 2010 is primarily due to increased focus on developing new production
methods that will enable potential automotive customers to fabricate cost-effective carbon fiber
intermediate products.
Selling, general and administrative expenses decreased by $3.8 million, to $15.6 million in
fiscal 2010 from $19.4 million in fiscal 2009. The Company recorded $2.0 million for the cost of
employee and director services received in exchange for equity instruments during fiscal 2010, a
decrease of $1.0 million from $3.0 million in fiscal 2009. Additionally, the decrease was due to a
decrease of $0.4 million in legal fees, $0.8 million decrease in bad debt expense and $0.2 million
decrease in audit and tax fees. During fiscal 2010, the Company realigned its organizational
structure, assigning some management personnel from administrative roles to better focus on
operations.
There were no litigation related charges in fiscal 2010 compared to $0.2 million in fiscal
2009. The 2009 charges related to the affirmance of the judgment in the supply agreement
litigation (see Note 8 of the Notes to Consolidated Financial Statements).
Operating loss was $10.6 million for fiscal 2010 compared to income of $3.4 million in fiscal
2009. Carbon fiber operations reported operating income of $0.3 million for fiscal 2010 compared to
income of $14.2 million in fiscal 2009. The decrease in operating income in the carbon fiber
operation in fiscal 2010 related to the decrease in production and sales, as well as the cost
factors mentioned above. Operating income from technical fibers increased $1.1 million, from $2.3
million for fiscal 2009 to $3.4 million for fiscal 2010. Corporate headquarters/other reported an
operating loss of $14.3 million for fiscal 2010 compared to a loss of $13.1 million during fiscal
2009 due to increases in application and development and selling, general, and administrative costs
as discussed.
Interest
expense, net, was $0.3 million for fiscal 2010, compared to $1.0 million in fiscal 2009.
The decrease in interest expense, net, resulted from the repayment of debt during fiscal 2010.
Amortization of financing fees, which are non-cash expenses, was approximately $0.3 million
during fiscal 2010 compared to $5.4 million during fiscal 2009. (See Liquidity and Capital
Resources Financing).
Gain (loss) on foreign currency transactions was a gain of $1.9 million for fiscal 2010
compared to a gain of $2.2 million for fiscal 2009. During fiscal 2010, the Euro and the U.S.
dollar gained in value against the HUF. As most of the Companys accounts receivables are
denominated in Euros, the strengthening value over fiscal 2010 resulted in a gain recognized in our
Hungarian subsidiary. This gain during fiscal 2010 was offset by currency losses incurred related
to US dollar-denominated intercompany payables; however, an overall gain was recognized. The
translation of the Hungarian subsidiarys financial statements from its functional currency (HUF)
to U.S. dollars is not included in determining net income for the period but is recorded in
accumulated other comprehensive loss in equity.
Other expense, net, was $0.7 million in fiscal 2010 compared to $1.2 million for 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 $1.8 million at the end of fiscal 2010 due to the adoption
of ASC 815 (see Liquidity and Capital Resources Derivative Instruments and Fair Value
Measurements).
Income tax benefit was $1.8 million for fiscal 2010 compared to expense of $2.1 million for
fiscal 2009. During fiscal 2010, income tax expense of $0.8 million was incurred related to the
local Hungarian municipality tax. This expense was offset by the release of the $2.2 million
reserve on the Companys uncertain tax positions due to a favorable resolution with the Hungarian
Tax
Authority. An additional income tax benefit of $0.7 million was recorded during fiscal 2010
related to the net operating loss for the Hungarian subsidiary. Local and federal alternative
minimum taxes in the U.S. and Mexico were $0.2 million.
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The foregoing resulted in a net loss of $6.3 million for fiscal 2010 compared to $4.2 million
for fiscal 2009. Similarly, the Company reported net loss per share of $0.18 and $0.12 on a basic
and diluted basis for fiscal 2010 and 2009, respectively. The weighted average basic common
shares outstanding were 34.4 million for both fiscal 2010 and 2009.
FISCAL YEAR ENDED SEPTEMBER 30, 2009 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 2008
The Companys sales decreased 25.2%, or $46.9 million, to $138.8 million in fiscal 2009 from
$185.6 million in fiscal 2008. The decline in revenue was primarily due to declined sales volume,
pricing declines resulting from significant cost reduction in raw materials and energy and
currency fluctuation, and the weakness of the Euro versus the U.S. dollar during fiscal 2009.
During fiscal 2009, there was approximately a 14.5% decrease in volume of product shipments as
compared to 2008, which accounted for approximately $20.9 million of the revenue decrease.
Certain price reductions resulted from passing on raw material cost savings to customers, which
caused an $11.6 million decrease in sales over fiscal 2009. The majority of our European sales are
denominated in Euros, which weakened significantly versus the U.S. dollar during most of the 2009
fiscal year, causing approximately $8.9 million of the decrease in sales. Carbon fiber sales
decreased 26.1%, or $40.7 million, to $115.3 million during fiscal 2009 from $156.0 million during
fiscal 2008. Technical fiber sales decreased 19.0%, or $4.9 million, to $21.0 million during
fiscal 2009 from $25.9 million during fiscal 2008. Technical fiber sales decreased in fiscal 2009
primarily due to lower shipments to aircraft brake customers. Sales of other products and
services consisting primarily of energy utility services provided to the local community by our
Hungarian subsidiary decreased $1.3 million to $2.4 million during fiscal 2009 from $3.7 million
during fiscal 2008.
The Companys cost of sales decreased by 19.6%, or $26.3 million, to $108.1 million during
fiscal 2009 from $134.4 million during fiscal 2008. Carbon fiber cost of sales decreased by 19.9%,
or $22.0 million, to $88.7 million during fiscal 2009 from $110.7 million for fiscal 2008. The
decrease in carbon fiber cost of sales reflected decreased sales of 26.2% discussed above.
Technical fiber cost of sales decreased $3.0 million, or 14.8%, to $17.4 million for fiscal 2009
from $20.4 million for fiscal 2008 primarily as a result of the decreased sales noted above.
Included in the Companys cost of sales were available unused capacity costs of $7.4 million.
These costs are comprised of fixed production costs allocated to manufacturing lines which were
producing below normal levels and amounted to $6.4 million for the carbon fiber segment and $1.0
million for the technical fiber segment during fiscal 2009. The Company believes maintaining this
available unused capacity has been necessary to encourage development of significant large-scale
applications and maintain a level of readiness as we anticipate a return to more robust market
conditions. The cost of sales of other products decreased for fiscal 2009 to $2.1 million
compared to fiscal 2008 of $3.3 million.
The Companys gross profit decreased by 40.1%, or $20.6 million, to $30.6 million during
fiscal 2009 from $51.2 million in fiscal 2008. Carbon fiber gross profit percentage decreased to
23.1% for fiscal 2009 compared to 29.1% for fiscal 2008. Carbon fiber gross profit decreased from
$45.3 million to $26.7 million during these respective periods. The decreases in carbon fiber
gross profit and gross profit percentage resulted primarily due to available unused capacity costs
expensed during the fiscal year. Technical fiber gross profit decreased from $5.5 million, or
21.4% of sales, for fiscal 2008 to $3.6 million, or 17.3% of sales, during fiscal 2009. The
decrease in technical fiber gross profit and gross profit percentage resulted primarily from
available unused capacity costs expensed during the fiscal year and decreased shipments to the
primary aircraft brake customers. The gross profit of the other products increased for fiscal 2009
to $0.4 million compared to a gross profit for fiscal 2008 of $0.3 million.
Application and market development costs were $7.6 million in fiscal 2009 and $8.1 million in
fiscal 2008. These costs included product and market development efforts, product trials and
product development personnel costs. Targeted emerging applications include automobile components,
offshore oil and gas drilling, fire/heat barrier and alternate energy technologies. These costs
include expenses associated with application development of the towpreg product at the Companys
prepreg facility in Utah.
A litigation charge of $0.2 million was recorded in fiscal 2009 related to the affirmance of
the judgment in the SP case compared to a charge of $4.9 million during fiscal 2008 (see Note 8 of
the Notes to Consolidated Financial Statements).
Selling, general and administrative expenses increased by $1.2 million, to $19.4 million in
fiscal 2009 from $18.2 million in fiscal 2008. The Company recorded $3.0 million for the cost of
employee and director services received in exchange for equity instruments under FASB ASC 715
(formerly referenced as Statement of Financial Accounting Standards (SFAS) 123-R Share-Based
Payments) during fiscal 2009 and $2.3 million in fiscal 2008. The increase was due to the true-up
of the employee forfeiture rate as the retention rate for top management improved significantly
from historical averages. Administrative costs in Mexico increased by approximately $1.0 million
as the plant built up staffing to prepare for operations. The Company spent $0.4 million in fiscal
2008 related to a previously disclosed accounting investigation. There was a $0.1 decrease in
expenses related to a supersedeas bond related to a judgment in litigation related to supply
agreement (see Note 8 to the Notes to Consolidated Financial Statements).
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Operating income was $3.4 million for fiscal 2009 compared to income of $20.0 million in
fiscal 2008. Carbon fiber operations reported operating income of $14.2 million for fiscal 2009
compared to income of $34.0 million in fiscal 2008. The decrease in operating income in the carbon
fiber operation in fiscal 2009 related to the decrease in production and sales, as well as the
other factors mentioned above. Operating income from technical fibers decreased $0.7 million,
from $3.0 million for fiscal 2008 to $2.3 million for fiscal 2009, as sales decreased $4.9 million
due to decreased orders from aircraft brake customers. Corporate headquarters/other reported an
operating loss of $13.1 million for fiscal 2009 compared to a loss of $17.0 million during fiscal
2008. The decrease in operating loss was due primarily to the decrease in legal and litigation
expenses due to the resolution of certain lawsuits during 2009.
Interest expense was $1.4 million for fiscal 2009, compared to $1.9 million in fiscal 2008.
The decrease in interest expense resulted from the repayment of $10.5 million and conversion of
$0.3 million of convertible debt to common stock during fiscal 2009.
Amortization of financing fees, which are non-cash expenses, was approximately $5.4 million
during fiscal 2009 compared to $6.7 million during fiscal 2008. (See Liquidity and Capital
Resources Financing Activity).
Interest income was $0.4 million for fiscal 2009 compared to $2.9 million for fiscal 2008.
The decrease was a result of lower cash balance on hand.
Gain on foreign currency transactions improved to $2.2 million for fiscal 2009 compared to a
loss of $0.4 million for fiscal 2008. During fiscal 2009, the Hungarian Forint (HUF) weakened in
value against the Euro and the U.S. dollar, causing a loss on the Companys accounts receivable,
but was offset by a gain on a large U.S. dollar denominated intercompany payable. The translation
of the Hungarian subsidiarys financial statements from its functional currency (HUF) to U.S.
dollars is not included in determining net income for the period but is recorded in accumulated
other comprehensive income (loss) in equity.
Other expense, net, was $1.2 million in fiscal 2009 compared to $1.1 million for fiscal 2008.
Other expense, net for fiscal 2009 consisted primarily of loss from the sale of miscellaneous
equipment and from miscellaneous penalties and fees in Hungary.
Income tax expense was $2.1 million for fiscal 2009 compared to $5.4 million for fiscal 2008
due primarily to decreased sales and taxable income generated in Hungary. An additional income tax
expense of $1.2 million was recorded for fiscal 2008 as the Company accrued for a special Hungarian
tax of 4% on pre-tax net income. In fiscal 2009, this special Hungarian tax did not apply to the
Company. The Company accrued approximately $0.2 million in alternative minimum and local income
taxes in the U.S. and Mexico.
The foregoing resulted in loss from continuing operations of $4.2 million for fiscal 2009
compared to a net income of $7.4 million for fiscal 2008. Similarly, the Company reported net loss
from continuing operations per share of $0.12 on a basic and diluted basis for fiscal 2009 and net
income from continuing operations per share of $0.22 on a basic and diluted basis for fiscal 2008.
The weighted average basic common shares outstanding were 34.4 million and 34.0 million for fiscal
2009 and 2008, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes its cash currently on hand, cash flow from operations and available
credit facilities should be sufficient to fund its identified liquidity needs over the next twelve
months.
CASH FLOWS
Cash Provided By Operating Activities
Operating activities provided $22.0 million of cash for fiscal 2010. Reduction of inventory
levels provided $8.8 million during fiscal 2010 due to lower production, coupled with sales of
existing inventory. Cash flows were positively affected by depreciation of $16.5 million in 2010,
which was included in the operating loss of $10.6 million. Cash flows were positively impacted by
$5.4 million as accounts receivables decreased due to decrease sales levels and collection
activities and $2.2 million as accrued expenses and other liabilities increased during fiscal 2010.
Operating activities provided $15.2 million of cash for fiscal 2009. Cash flows were
positively affected by operating income before depreciation of $19.7 million. Cash flows were
negatively affected during fiscal 2009 by the payment of $5.6 million, net of accrued interest, to
resolve litigation involving an investment banker (see Note 8 of the Notes to Consolidated
Financial Statements). In February 2009, the Company used $23.5 million of restricted cash to
resolve litigation involving a supply agreement. Restricted cash has been shown as a use of cash
in investing activities during fiscal 2008, 2007 and 2006, so its usage in 2009 had no impact on
unrestricted cash balances. Increased inventory levels used $4.3 million of cash in the current
fiscal year. Collections from accounts receivable resulted in a net increase in cash flow of $8.5
million.
Cash Used In and Provided By Investing Activities
Net cash used in investing activities for fiscal 2010 was $4.1 million, which consisted of
capital expenditures on existing production lines and new equipment. This included $0.1 million of
funds received from the Hungarian government as a conditional grant to reimburse capital
expenditures and related outlays (see Note 2 of the Notes to Consolidated Financial Statements).
Net cash used in investing activities for fiscal 2009 was $20.5 million, which consisted of
capital expenditures to expand production lines of the Companys precursor facilities and carbon
fiber operations to meet the anticipated long-term demand for
carbon fiber products. This included $1.6 million of funds received from the Hungarian government
as a conditional grant to reimburse capital expenditures and related outlays (see Note 2 of the
Notes to Consolidated Financial Statements).
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Cash Used and Provided In Financing Activities
Net cash used in financing activities was $16.8 million in fiscal 2010 consisting primarily of
the repayment of convertible debt and lines of credit.
Net cash used in financing activities was $3.0 million in fiscal 2009 as the Company repaid
convertible debt of $10.6 million, which was offset by increasing borrowings on our lines of credit
by $7.6 million.
HUNGARIAN GRANT
The Hungarian government has pledged a grant of 2.9 billion HUF to Zolteks Hungarian
subsidiary that will provide a portion of the capital resources to modernize its facility,
establish a research and development center, and support buildup of manufacturing capacity of
carbon fibers. Zolteks Hungarian subsidiary received approximately HUF 0.1 billion, HUF 0.3
billion, and HUF 0.7 billion in grant funding during fiscal 2010, 2009, and 2008, respectively.
These funds have been recorded as a liability on the Companys consolidated balance sheet. The
liability will be amortized over the life of the assets procured by the grant funds, offsetting the
depreciation expense of 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
2012 to October 2017. Although there can be no assurance, the Company anticipates it
will comply with the requirements of the grant agreement when the
measurement period begins.
FINANCING ACTIVITY
Revolving Credit Facility
In February 2010, the Company extended its existing U.S. line of credit until January 1, 2011.
The revolving credit facility has a total commitment of the lesser of (1) $10.0 million or (2) an
eligible borrowing base equal to a percentage of eligible accounts receivable plus a percentage of
eligible inventories, which as of September 30, 2010 equaled $10.0 million. There were no
borrowings under the facility as of September 30, 2010.
In August 2010, the Companys Hungarian subsidiary extended its existing line of credit until
August 30, 2011. The revolving credit facility has a total commitment of the lesser of 1.9 billion
HUF or a borrowing base, which as of September 30, 2010 was $9.5 million. There were no borrowings
under this credit facility at September 30, 2010. The credit facility is a term loan with quarterly
interest payments.
The Company intends to extend its existing lines of credit before expiration. Based on the
history of relationships with its banks and its current financial position, the Company expects it
will be able to successfully extend its lines of credit.
Bond Related to Litigation
In April 2007, the Company reported the results of various post-trial motions in ongoing
litigation (see Note 8 of the Notes to the Consolidated Financial Statements). In April 2007 the
Company posted a supersedeas bond, collateralized by a $23.5 million letter of credit issued by the
Companys U.S. bank. As of September 30, 2008, the letter of credit was collateralized by
$23.5 million of restricted cash.
On February 9, 2009, the Company paid the judgment using $23.5 million of restricted cash,
which terminated the letter of credit and related bond.
Convertible Debt
In September 2005, Zoltek entered into an agreement for new financing; a convertible debenture
package of up to $50 million in a private placement with a group of institutional investors.
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In April 2010, the Company repaid all remaining convertible debt with cash on hand. There
was no conversion of convertible debt during fiscal 2010. The following tables summarize the
activity regarding our convertible debt conversions during the fiscal years ended 2009.
Fiscal year ended September 30, 2009 | ||||||||||||
Number of shares | Conversion | |||||||||||
converted | price | Equity value | ||||||||||
February 2003 |
| $ | 3.50 | $ | | |||||||
December 2005 |
| 12.50 | | |||||||||
February 2006 |
| 13.07 | | |||||||||
May 2006 |
| 25.51 | | |||||||||
July 2006 |
16,264 | 15.40 | 250,466 | |||||||||
October 2006 |
| 25.51 | | |||||||||
16,264 | $ | 250,466 | ||||||||||
As of September 30, 2009 | ||||||||||||
Number of shares | Conversion | Principal | ||||||||||
outstanding | price | outstanding | ||||||||||
May 2006 |
70,560 | $ | 25.51 | $ | 1,799,986 | |||||||
July 2006 |
19,640 | 25.51 | 501,016 | |||||||||
October 2006 |
76,381 | 25.51 | 1,948,479 | |||||||||
166,581 | $ | 4,249,481 | ||||||||||
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 issued in connection with the convertible debt was less than the
market price of the Companys common stock at date of issue. The beneficial conversion was 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 was converted prior to the redemption date, the unamortized balance was
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 fiscal years ended September 30, 2010, 2009 and 2008 (in thousands).
Fiscal year ended September 30, 2010 | ||||||||||||
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 | ||||||||
Deferred financing costs |
97 | |||||||||||
Total |
$ | 289 | ||||||||||
Fiscal year ended September 30, 2009 | ||||||||||||
Conversion | ||||||||||||
Warrants | Features | Total | ||||||||||
May 2006 Issuance |
$ | 1,549 | $ | 2,285 | $ | 3,834 | ||||||
July 2006 Issuance |
242 | 296 | 538 | |||||||||
October 2006 Issuance |
317 | 364 | 681 | |||||||||
$ | 2,108 | $ | 2,945 | 5,053 | ||||||||
Deferred financing costs |
311 | |||||||||||
Total |
$ | 5,364 | ||||||||||
Fiscal year ended September 30, 2008 | ||||||||||||
Conversion | ||||||||||||
Warrants | Features | Total | ||||||||||
May 2006 Issuance |
$ | 1,943 | $ | 2,867 | $ | 4,810 | ||||||
July 2006 Issuance |
230 | 280 | 510 | |||||||||
October 2006 Issuance |
392 | 452 | 844 | |||||||||
$ | 2,565 | $ | 3,599 | 6,164 | ||||||||
Deferred financing costs |
518 | |||||||||||
Total |
$ | 6,682 | ||||||||||
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We have fully amortized the carrying values of unamortized debt discount and financing fees
as of September 30, 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 | 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 income per share
calculation. The Company does have outstanding warrants at September 30, 2010 and outstanding
warrants and convertible debt at September 30, 2009 and 2008 which are not included in the
determination of diluted loss per share for the fiscal years ended September 30, 2010, 2009 and
2008 because the shares are anti-dilutive. Had these securities been dilutive, an additional 0.1
million, 0.3 million and 0.7 million shares, respectively, would have been included in the
Companys diluted loss per share calculation.
The following is the diluted impact of the convertible debt and warrants on net income (loss)
per share for the fiscal years ended September 30, 2010, 2009 and 2008 respectively:
Fiscal year ended September 30, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Numerators: |
||||||||||||
Net (loss) income |
$ | (6,339 | ) | $ | (4,202 | ) | $ | 7,441 | ||||
Denominators: |
||||||||||||
Average shares outstanding basic |
34,411 | 34,402 | 34,042 | |||||||||
Impact of convertible debt, warrants and stock options |
| | 130 | |||||||||
Average shares outstanding diluted |
34,411 | 34,402 | 34,172 | |||||||||
Basic (loss) income per share |
$ | (0.18 | ) | $ | (0.12 | ) | $ | 0.22 | ||||
Diluted (loss) income per share |
$ | (0.18 | ) | $ | (0.12 | ) | $ | 0.22 | ||||
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FUTURE CONTRACTUAL OBLIGATIONS
In the table below, we set forth our enforceable and legally binding obligations as of
September 30, 2010. Some of the amounts included in this table (amounts in thousands) are based on
our estimates and assumptions about these obligations, including their durations, anticipated
actions by third parties and other factors. The enforceable and legally binding obligations we will
actually pay in future periods may vary from those reflected in the table because the estimates and
assumptions are subjective. See Note 7 of the Notes to Consolidated Financial Statements for
discussion of the Companys debt agreements.
Payments Due by Period | ||||||||||||||||||||
Less than | Over 5 | |||||||||||||||||||
Total | 1 Year | 1-3 Years | 3-5 Years | Years | ||||||||||||||||
Operating lease obligations (a) |
10,198 | 1,335 | 2,073 | 1,714 | 5,076 | |||||||||||||||
Capital leases obligations |
68 | 57 | 11 | | | |||||||||||||||
Total debt and leases |
10,266 | 1,392 | 2,084 | 1,714 | 5,076 | |||||||||||||||
Note payable |
981 | 981 | | | | |||||||||||||||
Contractual interest payments (b) |
15 | 15 | | | | |||||||||||||||
Purchase obligations (c) |
2,390 | 2,390 | | | | |||||||||||||||
Total contractual obligations |
$ | 13,652 | $ | 4,778 | $ | 2,084 | $ | 1,714 | $ | 5,076 | ||||||||||
(a) | Includes four-year contract for nitrogen gas facility and equipment at approximately $0.9 million per year. | |
(b) | Amounts represent the expected cash payment of interest on our debt. | |
(c) | Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable price provisions, and the approximate timing of the transactions. Purchase obligations exclude agreements that are cancelable at any time without penalty. |
SUPPLY CONTRACTS
We are party to long-term supply contracts with our wind energy customers Vestas Wind Systems
and Gamesa Group. Vestas was the only customer which represented greater than 10% of net sales for
fiscal 2010 and 2009. In fiscal year 2010 and 2009, we reported net sales of $49.5 million and
$74.2 million to Vestas Wind Systems, which represented 38.6%
and 53.6%, respectively, of our net sales. In fiscal
2008, we reported net sales of $75.1 million to Vestas Wind Systems, which represented 40.4% of our
net sales and $24.6 million to Gamesa Group, which represented 13.3% of our net sales. These were
the only customers that represented greater than 10% of consolidated net sales during any of these
three years.
Our current supply agreement with Vestas Wind Systems was executed in May 2007 and obligates
us to supply carbon fibers under a five-year delivery schedule, and a rolling three-year schedule
as long as the supply agreement is in place. Under the agreement, Vestas provides us with annual
forecasts of its supply requirements, and we receive binding orders for shipments on approximately
a monthly basis. We are not guaranteed specific levels of sales under the agreement, and we are
subject to liquidated damages if we are unable to perform our obligations under the agreement. In
general, the agreement may be terminated by: (1) mutual agreement of the parties, (2) by either
party with at least 36 months written notice, (3) by either party as a result of a material breach
of the agreement that is not remedied within 30 days of receipt of notice of such breach, and (4)
by either party in the event of the bankruptcy, insolvency, or change of control of the other
party.
Our current supply agreement with Gamesa Group was executed in July 2007 and is effective
through December 31, 2012, subject to automatic renewal for successive one-year terms upon at least
two years advance notice by Gamesa to Zoltek. The agreement obligates Zoltek to supply carbon
fibers during the term of the contract provides based upon annual anticipated base volumes amounts,
which are converted into binding orders for shipments on approximately a quarterly basis. We are
not guaranteed specific levels of sales under the agreement, and we are subject to liquidated
damages if we are unable to perform our obligations under the agreement. In general, the agreement
may be terminated (1) by mutual agreement of the parties, (2) by either party with at least 36
months written notice, (3) by either party as a result of a material breach of the agreement that
is not remedied within 45 days of receipt of notice of such breach or the bankruptcy, and (4) by either party in the event of the
bankruptcy, insolvency, or change of control of the other party.
In our supply agreements with Vestas and Gamesa, we do not have post-shipment obligations
other than that we warrant that our products are free from defects in design, materials, and
workmanship at the time of delivery and that the products are produced in accordance with standard
production and sales specifications stated in the agreements. The Vestas agreement states that the
warranty shall continue for a period of five years from the date of delivery of the products. The
Gamesa agreement states that all products shall, as of the moment of delivery, be warranted for
three years with regards to manufacture.
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LEGAL CONTINGENCIES
Legal contingencies have a high degree of uncertainty. When losses from contingencies become
estimatable and probable, reserves are established. The reserves reflect managements estimate of
the probable cost of ultimate resolution of the matters and are revised accordingly as facts and
circumstances change and, ultimately, when matters are brought to closure. If any litigation matter
is resolved unfavorably, the Company could incur obligations in excess of managements estimate of
the outcome, and such resolution could have a material adverse effect on the Companys consolidated
financial condition, results of operations or liquidity. We anticipate that we will incur
additional legal costs in connection with pursuing and defending such actions.
See Note 8 of the Notes to the Companys Consolidated Financial Statements for a description
of our significant legal matters.
CRITICAL ACCOUNTING ESTIMATES
Certain of our accounting policies require our management to make difficult, subjective or
complex judgments. All of the Companys accounting policies are in compliance with U.S. generally
accepted accounting principles (GAAP). The Company considers the following policies to be the
most critical in understanding the estimates, assumptions and judgments that are involved in
preparing our financial statements, and the uncertainties that could affect our results of
operations, financial condition and cash flows.
ACCOUNTS RECEIVABLE COLLECTIBILITY
The Company evaluates the collectability of our accounts receivable for each of our segments
based on a combination of factors. In circumstances where we are aware of a specific customers
inability to meet its financial obligations to us (e.g., bankruptcy filing or substantial
downgrading of credit), we record a specific reserve for bad debts against the amounts due reducing
the net recognized receivable to the amount we estimate will be collected. For all other customers,
we estimate reserves for bad debts based on the length of time receivables have been past due and
our experience with collection. Our bad debt expense on accounts receivable was $0.5 million for
fiscal 2010, $1.3 million for fiscal 2009 and $1.3 million for fiscal 2008.
INVENTORIES
The Company evaluates its ending inventories for estimated excess quantities and obsolescence.
This evaluation includes analyses of sales levels by product and projections of future demand
within specific time horizons. Inventories in excess of future demand, if any, are reserved.
Remaining inventory balances are adjusted to approximate the lower of cost on a first-in, first-out
basis or market value. Cost includes material, labor and overhead. If future demand or market
conditions are less favorable than the Companys projections, additional inventory write-downs may
be required and would be reflected in cost of sales on the Companys statement of operations in the
period in which the revision is made.
The Company historically has not experienced material problems related to the pricing or
functionality of carbon fibers inventory. Our PanexÒ carbon fibers represent the majority of
our inventory balance and are available in continuous tow, fabric, prepreg, chopped, and milled
forms. Generally, technical obsolescence and spoilage have not historically been a concern because
nonqualifying produced items can be reclaimed for processing for sale in secondary markets.
Available unused capacity costs for fiscal 2010 were comprised of fixed production costs
allocated to manufacturing lines which were producing below normal levels during the year. The
Company reviews monthly production levels of all manufacturing lines for all products. Any lines
which produced at a rate below a historical range of normal capacity were identified and the fixed
costs associated with those lines were calculated. The unallocated costs were recognized as an
expense in the period in which they were incurred.
VALUATION OF LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. Zoltek management is responsible for
routinely assessing whether impairment indicators are present. The Company expects that the
components of each operating segment will exhibit similar financial performance over the long term
and, therefore, groups assets accordingly for analyzing whether impairment exists. If the sum of
the expected future undiscounted cash flows is less than the carrying amount of the asset group, a
loss is recognized for the difference between the fair value and the carrying value of the asset
group. In determining expected future undiscounted cash flows attributable to the group of
long-lived assets, the Company must make certain judgments and estimations including the expected
market conditions and demand for products produced by the assets, expected product pricing
assumptions, and assumptions related to the expected costs to operate the assets. It is possible
that actual future cash flows related to the Companys long-lived assets may materially differ from
the Companys determination of expected future undiscounted cash flows. Additionally, if the
Companys expected future undiscounted cash flows were less than the carrying amount of the asset
group being analyzed, it would be necessary for the Company to make significant judgments regarding
the fair value of the asset due to the specialized nature of much of the Companys carbon fiber
production equipment in order to determine the amount of the impairment charge.
27
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CONTINGENT LIABILITIES
The Company is subject to lawsuits, investigations, and other claims related to employment,
environmental, service providers, supply agreements, taxing authorities, and other matters, and is
required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as
potential ranges of probable losses. A determination of the amount of reserves and disclosures
required, if any, for these contingencies is made after considerable analysis of each individual
issue. We accrue for contingent liabilities when an assessment of the risk of loss is probable and
can be reasonably estimated.
Our contingent liabilities contain uncertainties because the eventual outcome will result from
future events, and determination of current reserves requires estimates and judgments related to
future changes in facts and circumstances, differing interpretations of the law and assessments of
the amount of damages, and the effectiveness of strategies or other factors beyond our control.
However, if actual results are not consistent with our estimates or assumptions, we may be exposed
to gains or losses that could be material.
INCOME TAXES
The Company accounts for certain income and expense items differently for financial reporting
and income tax purposes. Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax basis of assets and liabilities applying enacted statutory
tax rates in effect for the year in which the differences are expected to reverse. A valuation
allowance is provided against certain deferred tax assets when realization of those assets are not
considered to be more likely than not.
We are subject to the jurisdiction of numerous tax authorities. Our operations in these
different jurisdictions are generally taxed on income before taxes adjusted for various differences
between tax law and GAAP accounting. Determination of taxable income in any jurisdiction requires
the interpretation of the related tax laws and regulations and the use of estimates and assumptions
regarding significant future events such as the amount, timing and character of deductions,
permissible revenue recognition methods under the tax law and the sources and character of income
and tax credits. Changes in tax laws, regulations, agreements and treaties, foreign currency
exchange restrictions or our level of operations or profitability in each taxing jurisdiction could
have an impact on the amount of income taxes that we provide during any given year. Our tax filings
for various periods are subject to audit by the tax authorities in the jurisdictions in which we
conduct business.
STOCK-BASED COMPENSATION
On October 1, 2005, the Company adopted the provisions of ASC 718, using the modified
prospective method.ASC 718 requires companies to recognize the cost of employee services received
in exchange for awards of equity instruments based upon the grant date fair value of those awards.
Under the modified prospective method of adopting ASC 718 the Company recognized compensation cost
for all share-based payments granted after October 1, 2005, plus any awards granted to employees
prior to October 1, 2005 that remain unvested at that time. Under this method of adoption, no
restatement of prior periods was made. The Company uses historical volatility for a period of time
that is comparable to the expected life of the option. However, the Company only calculates the
volatility of the Companys stock back to November 2003, the date the Company received its first
large order for carbon fiber, as that is when the Company considers its business to have changed
from a research and development company to an operational company. Management believes this is a
better measurement of the Companys stock volatility.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 of the Notes to the Companys Consolidated Financial Statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Risk
The consolidated balance sheets of the Companys international subsidiaries, Zoltek Zrt. and
Zoltek de Mexico, were translated from Hungarian Forints and Mexican Pesos to U.S. dollars,
respectively, at the exchange rate in effect at the applicable balance sheet date, while its
consolidated statements of operations were translated using the average exchange rates in effect
for the periods presented. The related translation adjustments are reported as other comprehensive
income (loss) within shareholders equity. Gains and losses from foreign currency transactions of
Zoltek Zrt. are included in the results of operations in other expenses. The Company views as
long-term its investments in Zoltek Zrt. and Zoltek de Mexico. Zoltek Zrt. Has a functional
currency of the HUF. As a result, the Company is exposed to foreign currency risks related to this
investment. The functional currency of Zoltek de Mexico has changed as of November 1, 2008 from
the Mexican Peso to the U.S. dollar. The Company does not currently employ a foreign currency
hedging strategy related to the sales from Hungary or Mexico. Neither Hungary nor Mexico is
considered to be a highly inflationary or deflationary economy.
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As of September 30, 2010, the Company had a long-term loan to its Zoltek Zrt. subsidiary of
$108 million denominated in U.S. dollars. The potential loss in value of the Companys net foreign
currency investment in Zoltek Zrt. resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rate of the HUF against the U.S. dollar
at September 30, 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 September 30, 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 U.S. dollar at September 30, 2010 because Zoltek de Mexicos functional currency
is the U.S. dollar. The Company does not expect repayment of the loan in the foreseeable future.
As such, the Company considers this loan as a permanent investment.
Commodity Price Risk
We are exposed to commodity price risk arising from changes in the market price of certain raw
materials, such as ACN, and utilities. Due to competition and market conditions, volatile price
increases cannot always be passed on to our customers. Management assesses commodity price trends
on a regular basis and adjusts purchasing accordingly. The Company does not currently utilize
derivative instruments to hedge purchases of commodities.
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. As of September 30, 2010, the
Company had borrowings of $1.0 million. At variable rates and a two-percentage point change in the
average interest rate under these borrowings, it is estimated our interest expense for the twelve
months ended September 30, 2010 would have changed by approximately $0.02 million. In the event of
an adverse change in interest rates, we would seek to take actions to mitigate our exposure to
interest rate risk. Further, no consideration has been given to the effects of the change in the
level of overall economic activity that could exist in such an environment. The nature and amount
of the Companys debt may vary as a result of future business requirements, market conditions and
other factors. The extent of the Companys interest rate risk is not quantifiable or predictable
because of the variability of future interest rates and business financing requirements. The
Company does not believe such risk is material because of the
Companys relatively low debt and because a significant amount of the Companys
current debt is at fixed rates. At September 30, 2010, the Company did not have any interest rate
swap agreements outstanding.
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Item 8. Financial Statements and Supplementary Data
ZOLTEK COMPANIES, INC.
REPORT OF MANAGEMENT
REPORT OF MANAGEMENT
Management of Zoltek Companies, Inc. is responsible for the preparation and integrity of the
Companys financial statements. These statements have been prepared in accordance with generally
accepted accounting principles and in the opinion of management fairly present the Companys
financial position, results of operations, and cash flow.
The Company maintains accounting and internal control systems to provide reasonable assurance that
assets are safeguarded against loss from unauthorized use or disposition and that the financial
records are reliable for preparing financial statements. The selection and training of qualified
personnel and the establishment and communication of accounting and administrative policies and
procedures are important elements of these control systems. As set forth under Item 9A. Controls
and Procedures of this Annual Report on Form 10-K, as amended, the Companys Chief Executive
Officer and Chief Financial Officer concluded that no material weaknesses existed as of September
30, 2010.
The Board of Directors, through its Audit Committee consisting solely of non-management directors,
meets periodically with management and the Independent Registered Public Accounting Firm to discuss
audit and financial reporting matters. To ensure independence, Ernst & Young LLP has direct access
to the Audit Committee.
The Reports of Ernst & Young LLP and Grant Thornton LLP, Independent Registered Public Accounting
Firms, on their audits of the accompanying financial statements follows. This report states that
their audits were performed in accordance with the Standards of the Public Company Accounting
Oversight Board (United States). These standards include consideration of internal control over
financial reporting controls for the purpose of determining the nature, timing, and extent of
auditing procedures necessary for expressing their opinion on the financial statements.
/s/ Zsolt Rumy
|
||
Chief Executive Officer |
||
November 29, 2010 |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Zoltek Companies, Inc.
We have audited the accompanying consolidated balance sheets of Zoltek Companies, Inc. as of
September 30, 2010 and 2009, and the related consolidated statements of operations, shareholders
equity, and cash flows for the years then ended. These financial statements are the responsibility
of the Companys management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Zoltek Companies, Inc. at September 30, 2010 and
2009, and the consolidated results of its operations and its cash flows for the years then ended,
in conformity with U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of
accounting for outstanding warrants effective October 1, 2009.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Zoltek Companies Inc.s internal control over financial reporting as of
September 30, 2010, based on criteria established in Internal Control-Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
November 29, 2010 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP |
St. Louis, Missouri |
November 29, 2010 |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Zoltek Companies, Inc.
We have audited Zoltek Companies, Inc.s internal control over financial reporting as of
September 30, 2010, based on criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). Zoltek Companies, Inc.s management is responsible for maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying Managements Report on
Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the
companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting
was maintained in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists,
testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the companys assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Zoltek Companies, Inc. maintained, in all material respects, effective internal
control over financial reporting as of September 30, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of Zoltek Companies, Inc. as of
September 30, 2010 and 2009, and the related consolidated statements of operations,
shareholders equity, and cash flows for the years then ended of Zoltek Companies Inc. and our
report dated November 29, 2010 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP |
St. Louis, Missouri |
November 29, 2010 |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Zoltek Companies, Inc.
Zoltek Companies, Inc.
We have audited the accompanying consolidated statements of operations, shareholders equity, and
cash flows of Zoltek Companies, Inc. (a Missouri corporation) and its subsidiaries (the Company)
for the year ended September 30, 2008. Our audit of these financial statements included the
financial statement schedule listed in the Index appearing under item 15(a) for the year ended
September 30, 2008. These financial statements and financial statement schedule are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated operations and cash flows of Zoltek Companies, Inc. and its
subsidiaries for the year ended September 30, 2008, in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the financial
statement schedule for the year ended September 30, 2008, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material respects, the information
set forth therein.
/s/ GRANT THORNTON LLP |
Chicago, Illinois |
December 1, 2008 |
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ZOLTEK COMPANIES, INC.
CONSOLIDATED BALANCE SHEET
(Amounts in thousands, except share and per share data)
(Amounts in thousands, except share and per share data)
September 30, | ||||||||
2010 | 2009 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 21,534 | $ | 20,943 | ||||
Accounts receivable, less allowance for doubtful accounts of $178 and $2,356 |
22,816 | 30,507 | ||||||
Inventories, net |
38,002 | 48,058 | ||||||
VAT Receivable |
5,703 | 4,109 | ||||||
Other current assets |
2,251 | 5,991 | ||||||
Total current assets |
90,306 | 109,608 | ||||||
Property and equipment, net |
231,661 | 256,910 | ||||||
Other assets |
173 | 327 | ||||||
Total assets |
$ | 322,140 | $ | 366,845 | ||||
Liabilities and shareholders equity |
||||||||
Current liabilities: |
||||||||
Borrowings under credit lines |
$ | | $ | 12,277 | ||||
Current maturities of long-term debt |
981 | 4,159 | ||||||
Trade accounts payable |
8,865 | 9,408 | ||||||
Accrued expenses and other liabilities |
7,583 | 6,845 | ||||||
Construction payables |
905 | 792 | ||||||
Total current liabilities |
18,334 | 33,481 | ||||||
Long-term debt, less current maturities |
| 981 | ||||||
Hungarian grant, long-term |
9,020 | 10,228 | ||||||
Deferred tax liabilties |
792 | 6,690 | ||||||
Derivative liabilities |
1,296 | | ||||||
Total liabilities |
29,442 | 51,380 | ||||||
Commitments and contingencies (See Note 8) |
||||||||
Shareholders equity: |
||||||||
Preferred stock, $.01 par value, 1,000,000 shares authorized, no shares issued and
outstanding |
| | ||||||
Common stock, $.01 par value, 50,000,000 shares authorized, 34,389,442 and 34,424,441
shares issued and outstanding in 2010 and 2009, respectively |
344 | 344 | ||||||
Additional paid-in capital |
480,302 | 494,311 | ||||||
Accumulated other comprehensive loss |
(33,381 | ) | (18,405 | ) | ||||
Accumulated deficit |
(154,567 | ) | (160,785 | ) | ||||
Total shareholders equity |
292,698 | 315,465 | ||||||
Total liabilities and shareholders equity |
$ | 322,140 | $ | 366,845 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
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ZOLTEK COMPANIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Amounts in thousands, except share and per share data)
(Amounts in thousands, except share and per share data)
Fiscal Year Ended September 30, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Net sales |
$ | 128,464 | $ | 138,756 | $ | 185,616 | ||||||
Cost of sales, excluding available unused capacity costs |
102,350 | 100,744 | 134,393 | |||||||||
Available unused capacity costs |
12,822 | 7,352 | | |||||||||
Gross profit |
13,292 | 30,660 | 51,223 | |||||||||
Application and development costs |
8,207 | 7,589 | 8,093 | |||||||||
Litigation charge (see Note 8) |
| 238 | 4,884 | |||||||||
Selling, general and administrative expenses |
15,649 | 19,438 | 18,239 | |||||||||
Operating (loss) income |
(10,564 | ) | 3,395 | 20,007 | ||||||||
Other income (expense): |
||||||||||||
Interest income |
55 | 350 | 2,904 | |||||||||
Gain (loss) on foreign currency transactions |
1,938 | 2,161 | (385 | ) | ||||||||
Other expense, net |
(678 | ) | (1,228 | ) | (1,125 | ) | ||||||
Gain on derivative liabilities |
1,753 | | | |||||||||
Interest expense, excluding amortization of financing fees and
debt discount |
(395 | ) | (1,411 | ) | (1,862 | ) | ||||||
Amortization of financing fees and debt discount |
(289 | ) | (5,364 | ) | (6,682 | ) | ||||||
(Loss) income from continuing operations before income taxes |
(8,180 | ) | (2,097 | ) | 12,857 | |||||||
Income tax (benefit) expense |
(1,841 | ) | 2,105 | 5,416 | ||||||||
Net (loss) income |
(6,339 | ) | (4,202 | ) | 7,441 | |||||||
Basic and diluted (loss) income per share |
$ | (0.18 | ) | $ | (0.12 | ) | $ | 0.22 | ||||
Weighted average common shares outstanding basic |
34,410,608 | 34,402,046 | 34,042,792 | |||||||||
Weighted average common shares outstanding diluted |
34,410,608 | 34,402,046 | 34,171,629 |
The accompanying notes are an integral part of the consolidated financial statements.
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ZOLTEK COMPANIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
(Amounts in thousands)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
(Amounts in thousands)
Accumulated | ||||||||||||||||||||
Total | Additional | Other | ||||||||||||||||||
Shareholders | Common | Paid-In | Comprehensive | Accumulated | ||||||||||||||||
Equity | Stock | Capital | Income (Loss) | Deficit | ||||||||||||||||
Balance, September 30, 2007 |
$ | 320,767 | $ | 337 | $ | 476,205 | $ | 8,249 | $ | (164,024 | ) | |||||||||
Net income |
7,441 | | | | 7,441 | |||||||||||||||
Foreign currency translation adjustment |
3,481 | | | 3,481 | | |||||||||||||||
Comprehensive income |
$ | 10,922 | ||||||||||||||||||
Convertible debt converted |
11,151 | 6 | 11,145 | | | |||||||||||||||
Warrants exercised |
150 | | 150 | | | |||||||||||||||
Restricted stock expense |
329 | | 329 | | | |||||||||||||||
Stock option expense |
1,987 | 1 | 1,986 | | | |||||||||||||||
Exercise of stock options |
1,360 | | 1,360 | | | |||||||||||||||
Balance, September 30, 2008 |
$ | 346,666 | $ | 344 | $ | 491,175 | $ | 11,730 | $ | (156,583 | ) | |||||||||
Net loss |
(4,202 | ) | | | | (4,202 | ) | |||||||||||||
Foreign currency translation adjustment |
(30,135 | ) | | | (30,135 | ) | | |||||||||||||
Comprehensive loss |
$ | (34,337 | ) | |||||||||||||||||
Convertible debt converted |
251 | | 251 | | | |||||||||||||||
Cash settlement of restricted shares |
(75 | ) | | (75 | ) | | | |||||||||||||
Restricted stock expense |
521 | | 521 | | | |||||||||||||||
Stock option expense |
2,439 | | 2,439 | | | |||||||||||||||
Balance, September 30, 2009 |
$ | 315,465 | $ | 344 | $ | 494,311 | $ | (18,405 | ) | $ | (160,785 | ) | ||||||||
Net loss |
(6,339 | ) | | | | (6,339 | ) | |||||||||||||
Foreign currency translation adjustment |
(14,976 | ) | | | (14,976 | ) | | |||||||||||||
Comprehensive loss |
$ | (21,315 | ) | |||||||||||||||||
Cash settlement of restricted shares |
(144 | ) | | (144 | ) | | | |||||||||||||
Restricted stock liability reclass |
(240 | ) | | (240 | ) | | | |||||||||||||
Restricted stock expense |
349 | | 349 | | | |||||||||||||||
Stock option expense |
1,506 | | 1,506 | | | |||||||||||||||
Difference between compensation and
change in liability for restricted
stock awards |
138 | | 138 | | ||||||||||||||||
Cumulative effect of change in
accounting principle |
(3,061 | ) | | (15,618 | ) | | 12,557 | |||||||||||||
$ | 292,698 | $ | 344 | $ | 480,302 | $ | (33,381 | ) | $ | (154,567 | ) | |||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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ZOLTEK COMPANIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in thousands)
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in thousands)
Fiscal Year Ended September 30, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net (loss) income |
$ | (6,339 | ) | $ | (4,202 | ) | $ | 7,441 | ||||
Adjustments to reconcile net income to net cash from operating activities: |
||||||||||||
Depreciation |
16,461 | 16,351 | 16,476 | |||||||||
Amortization of financing fees and debt discount |
289 | 5,364 | 6,682 | |||||||||
Deferred taxes |
(3,274 | ) | 690 | 1,501 | ||||||||
Gain on value of warrants and conversion feature |
(1,753 | ) | | | ||||||||
Foreign currency transaction gains |
(96 | ) | (1,396 | ) | (431 | ) | ||||||
Stock compensation expense |
2,030 | 2,960 | 2,316 | |||||||||
Loss on disposal of assets |
342 | 707 | | |||||||||
Changes in assets and liabilities: |
||||||||||||
Decrease (increase) in accounts receivable |
5,361 | 8,528 | (4,381 | ) | ||||||||
Decrease (increase) in inventories |
8,826 | (4,327 | ) | (17,427 | ) | |||||||
Decrease (increase) in other current assets and other assets |
(1,291 | ) | 459 | (214 | ) | |||||||
(Decrease) increase in trade accounts payable |
(761 | ) | (3,764 | ) | 1,902 | |||||||
Increase (decrease) in accrued expenses and other liabilities |
2,187 | (553 | ) | 2,002 | ||||||||
(Decrease) increase in legal liabilities |
| (5,583 | ) | 4,328 | ||||||||
Net cash provided by operations |
21,982 | 15,234 | 20,195 | |||||||||
Cash flows from investing activities: |
||||||||||||
Purchases of property and equipment |
(4,410 | ) | (16,206 | ) | (107,715 | ) | ||||||
Increase (decrease) in construction payables |
114 | (6,016 | ) | 3,591 | ||||||||
Proceeds received from sale of fixed assets |
83 | 116 | | |||||||||
Proceeds received from Hungarian grant |
150 | 1,588 | 3,253 | |||||||||
Change in cash restricted for letters of credit |
| | (9,685 | ) | ||||||||
Net cash used in investing activities |
(4,063 | ) | (20,518 | ) | (110,556 | ) | ||||||
Cash flows from financing activities: |
||||||||||||
Proceeds from exercise of stock options and warrants |
| | 1,510 | |||||||||
Cash settlement of restricted shares |
(216 | ) | (75 | ) | | |||||||
Repayment of convertible debt |
(4,249 | ) | (10,550 | ) | | |||||||
Borrowings (repayment) of notes payable and credit lines |
(12,379 | ) | 7,594 | (3,786 | ) | |||||||
Net cash used in financing activities |
(16,844 | ) | (3,031 | ) | (2,276 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents |
(484 | ) | 34 | 100 | ||||||||
Net increase (decrease) in cash and cash equivalents |
591 | (8,281 | ) | (92,537 | ) | |||||||
Cash and cash equivalents at beginning of year |
20,943 | 29,224 | 121,761 | |||||||||
Cash and cash equivalents at end of year |
21,534 | 20,943 | 29,224 | |||||||||
Supplemental disclosures of cash flow information: |
||||||||||||
Net cash paid during the year for: |
||||||||||||
Interest |
$ | 330 | $ | 1,200 | $ | 1,491 | ||||||
Income taxes |
1,970 | 1,510 | 2,800 | |||||||||
Non-cash conversion of convertible debentures |
| 251 | 11,500 |
The accompanying notes are an integral part of the consolidated financial statements.
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ZOLTEK COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
Zoltek Companies, Inc. is a holding company, which operates through wholly-owned
subsidiaries, Zoltek Corporation, Zoltek 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. The Companys primary sales markets are in Europe and the United States,
however, the Company has 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. Certain prior year amounts have been reclassified to conform to the current year
presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires that management make estimates and assumptions
that affect amounts reported in the financial statements and accompanying notes. Actual results may
differ from those estimates and assumptions.
REVENUE RECOGNITION
Sales transactions are initiated through customer purchase orders or sales agreements which
are based on fixed pricing terms. The Company recognizes sales of manufactured products on the date
title to the product transfers to the customer, ordinarily upon shipping. Revenues are reported net
of any value-added tax or other such tax assessed by a governmental authority on our
revenue-producing
activities. Costs associated with shipping and handling are included in costs of
sales. Revenues generated by Entec Composite Machines are recognized on a percentage of
completion basis based on the percentage of total project cost incurred to date which include
change orders, revisions to estimates and provisions for anticipated losses on contracts and
represented 3% or less of consolidated revenues for all years presented. Revenue from sales of
consigned inventory is recognized upon the use of the product by the consignee or according to
terms of the contract.
ACCOUNTS RECEIVABLE
The Company reviews its accounts receivable balance on a quarterly basis to identify any
specific customers for collectability issues. If the Company deems that an amount due from a
customer is uncollectible, the amount is recorded as expense in the statement of operations. The
Company evaluates the collectability of our accounts receivable for each of our segments based on a
combination of factors. In circumstances where we are aware of a specific customers inability to
meet its financial obligations to us (e.g., bankruptcy filing or substantial downgrading of
credit), we record a specific reserve for bad debts against the amounts due reducing the net
recognized receivable to the amount we estimate will be collected. For all other customers, we
estimate reserves for bad debts based on the length of time receivables have been past due and our
experience with collection. We incurred bad debt expense on accounts receivable of $0.5 million
for 2010, $1.3 million for 2009 and $1.3 million for 2008.
CONCENTRATION OF CREDIT RISK
Zolteks carbon fiber products are primarily sold to customers in the composite industry and
its technical fibers are primarily sold to customers in the aerospace industry. Entec Composite
Machines products are primarily sold in the composite industry. The Company performs ongoing
credit evaluations and generally requires collateral for significant export sales to new customers.
The Company maintains reserves for potential credit losses and such losses have been within
managements expectations.
In fiscal 2010, 2009 and 2008, we reported net sales of carbon fiber of $49.5 million, $74.2
million and $75.1 million, respectively, to Vestas Wind Systems, a leading wind turbine
manufacturer, which represented 38.6%, 53.6% and 40.4% of our net sales, respectively, during these
years. The related open accounts receivable balances at September 30, 2010 and 2009 were $11.0
million and $21.1 million, respectively. Vestas was the only customer which represented greater
than 10% of consolidated open accounts receivable at September 30, 2010 and 2009. The Company
reported net sales of carbon fiber of $24.6 million during fiscal year 2008 to Gamesa Group,
another leading wind turbine manufacturer. These sales represented 13.3% of our net sales. These
were the only customers that represented greater than 10% of consolidated net sales during these
years.
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CASH AND CASH EQUIVALENTS
Cash equivalents include certificates of deposit and overnight repurchase agreements, all of
which have initial maturities of three months or less. Cash equivalents are stated at cost plus
accrued interest, which approximates market value. The Company places its temporary cash
investments with high credit quality financial institutions, however, at times such investments may
be in excess of the Federal Deposit Insurance Corporation (FDIC) insurance limit of $250,000 for
U.S. banks. As of September 30, 2010, the Company had $10.3 million cash in these money market
accounts.
INVENTORIES
Inventories are valued at the lower of cost or market and are removed from inventory under the
first-in-first-out method (FIFO). Cost of inventory includes material, labor and overhead. The
Company recorded inventory valuation reserves of $0.9 million and $0.7 million as of September 30,
2010 and 2009, respectively, to reduce the carrying value of inventories to a net realizable value.
This evaluation includes analyses of sales levels by product and projections of future demand
within specific time horizons. If future demand or market conditions are less favorable than the
Companys projections, additional inventory write-downs may be required and would be reflected in
cost of sales on the Companys statement of operations in the period in which the determination is
made.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Cost includes expenditures necessary to make the
property and equipment ready for its intended use. Expenditures to improve the asset or extend the
useful life are capitalized, including interest on funds borrowed to finance the acquisition or
construction of major capital additions. The Company did not record any capitalized interest in
fiscal 2010 or 2009 and capitalized interest of $4.5 million during fiscal 2008. Maintenance and
repairs are expensed as incurred. When property is retired or otherwise disposed of, the related
cost and accumulated depreciation are removed from the accounts and any profit or loss on
disposition is credited or charged to income.
The Company provides for depreciation by charging amounts sufficient to amortize the cost of
properties placed in service over their estimated useful lives using straight-line methods. The
range of estimated useful lives used in computing depreciation is as follows:
Years | ||||
Buildings and improvements |
30 - 40 | |||
Machinery and equipment |
3 - 20 | |||
Furniture and fixtures |
7 - 10 | |||
Computer hardware and software |
2 - 5 |
Depreciation expense, including the amortization of assets recorded under capital leases, was
$16.5 million, $16.4 million and $16.5 million for fiscal 2010, 2009 and 2008, respectively.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. If the sum of the expected future
undiscounted cash flows is less than the carrying amount of the asset, a loss is recognized for the
difference between the fair value and the carrying value of the asset. No impairment charges for
long-lived assets were recorded during fiscal 2010, 2009 and 2008.
FOREIGN CURRENCY TRANSLATION
The Companys Hungarian subsidiary, Zoltek Zrt., has a functional currency of the Hungarian
Forint, (HUF). As a result, the Company is exposed to foreign currency risks related to this
investment. The consolidated balance sheet of Zoltek Zrt. was translated from Hungarian Forints to
U.S. dollars, at the exchange rate in effect at the applicable balance sheet date, while its
consolidated statements of operations were translated using the average exchange rates in effect
for the periods presented. The related translation adjustments are reported as other comprehensive
income (loss) within shareholders equity. Gains and losses from foreign currency transactions of
Zoltek Zrt. are included in the results of operations as other income (expense). The Hungarian
Forint weakened by 9.9% against the U.S. dollar during fiscal 2010. Hungarian assets net of
liabilities, excluding the long-term intercompany loan were approximately $132.8 million as of
September 30, 2010.
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The functional currency of Zoltek de Mexico was changed as of November 1, 2008, from the
Mexican Peso to the U.S. dollar. Management made this determination based on its analysis that the
currency which the majority of Mexican assets, liabilities, and operations are denominated in is
U.S. dollars. The U.S. dollar-translated amounts of nonmonetary assets and liabilities at November
1, 2008 became the historical accounting basis for those assets and liabilities for all subsequent
periods. As a result of this change in functional currency, exchange rate gains and losses are
recognized on transactions in currencies other than the U.S. dollar and included in operations for
the period in which the exchange rates changed. The Mexican Peso weakened by 19% against the U.S.
dollar during the first month of fiscal 2009 before the functional currency of Zoltek de Mexico was
changed to the U.S. dollar.
During fiscal 2010, currency fluctuations caused a change of $15.0 million in our accumulated
other comprehensive loss.
FINANCIAL INSTRUMENTS
The Company does not hold any financial instruments for trading purposes. The carrying value
of cash, accounts receivable and accounts payable approximated their fair value at September 30,
2010 and 2009.
The Company has debt obligations that bear interest at a variable rate. The carrying value of
debt with a variable rate approximated its fair value at September 30 2009. There was $1.0 million
of outstanding debt obligations at September 30, 2010.
In January, March and October 2004 and February 2005, the Company issued convertible notes and
warrants which would require the Company to register the resale of the shares of common stock upon
conversion or exercise of these securities. The Company accounted for the fair value of these
outstanding warrants to purchase common stock and conversion feature of its convertible notes in
accordance with ASC 815, which require the Company to separately account for the conversion feature
and warrants as embedded derivatives contained in the Companys convertible notes. Pursuant to ASC
815, the Company separated the fair value of the conversion feature from the convertible notes,
since the conversion feature was determined to not be clearly and closely related to the debt host.
In addition, since the effective registration of the securities underlying the conversion feature
and warrants is an event outside of the control of the Company, pursuant to ASC 815, the Company
recorded the fair value of the conversion feature and warrants as long-term liabilities as it was
assumed that the Company would be required to net-cash settle the underlying securities.
The Company adopted the amended guidance of ASC Topic 815-40, (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 its
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 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.
APPLICATION AND DEVELOPMENT EXPENSES
The Company is actively pursuing the development of a number of applications for the use of
its carbon fibers and related products. The Company is executing several internal developmental
strategies to further the use of carbon fiber and commercial and industrial products made from
carbon fiber. As a result, the Company incurs certain costs for research, development and
engineering of products and manufacturing processes. These costs are expensed as incurred and
totaled approximately $8.2 million, $7.6 million and $8.1 million for fiscal years 2010, 2009 and
2008, respectively. Application and development expenses are presented as an operating item on the
Companys consolidated statement of operations. Given the Companys position and strategy within
the carbon fiber industry, it is expected that similar or greater levels of application and
development expenses will be incurred in future periods.
INCOME TAXES
The Company accounts for certain income and expense items differently for financial reporting
and income tax purposes. Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax basis of assets and liabilities applying enacted statutory
tax rates in effect for the year in which the differences are expected to reverse. A valuation
allowance is provided against certain deferred tax assets when realization of those assets are not
considered to be more likely than not. The Company classifies income tax-related interest and
penalties as other expense, net.
EARNINGS PER SHARE
In accordance with ASC 260, the Company calculates diluted earnings per share including the
impact of the Companys potential stock equivalents. The Company has outstanding stock options,
warrants and convertible debt at September 30, 2010 and 2009, which are not included in the
determination of diluted earnings per share because the impact of these potential additional shares
is anti-dilutive. Had these securities been dilutive, an additional 0.1 million shares for fiscal
2010, 0.3 million shares for fiscal 2009 and 0.7 million shares for fiscal 2008 would have been
included in the Companys diluted earnings per share calculation.
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RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
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 a
material impact on the Companys financial statements.
In January 2010, the FASB 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. Adoption of ASU 2010-06 did not have a material impact on the
Companys financial statements.
In August 2009, the FASB issued Accounting Standards Update No. 2009-05, Measuring
Liabilities at Fair Value (ASU 2009-05). This update provides amendments to ASC 820, Fair Value
Measurements and Disclosure, for the fair value measurement of liabilities when a quoted price in
an active market is not available. ASU 2009-05 is effective for reporting periods beginning after
August 28, 2009. This ASU was effective for Zoltek starting in fiscal 2010, and did not have a
material impact on the Companys financial statements.
The Company adopted the amended guidance in ASC 815-40 effective October 1, 2009, which,
provides revised guidance on whether a conversion option or warrant is indexed to a companys own
stock. Instruments with certain price reset features are not considered to be indexed to a
companys own stock, and consequently must be accounted for as derivatives and marked to market
each reporting period. See Note 5 for more information on the adoption of ASC 815-40.
2. FINANCING TRANSACTIONS
HUNGARIAN GRANT
The Hungarian government has pledged a grant of 2.9 billion HUF 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 0.1 billion, HUF 0.3 billion and HUF 0.7 billion in grant funding during fiscal 2010, 2009 and
2008, respectively. 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
2012 to October 2017. Although there can be no assurance, the Company anticipates it
will comply with the requirements of the grant agreement when the
measurement period begins.
FINANCING ACTIVITY
Revolving Credit Facility
In February 2010, the Company extended its existing U.S. line of credit until January 1, 2011.
The revolving credit facility has a total commitment of the lesser of (1) $10.0 million or (2) an
eligible borrowing base equal to a percentage of eligible accounts receivable plus a percentage of
eligible inventories, which as of September 30, 2010 equaled $10.0 million. There were no
borrowings under the facility as of September 30, 2010.
In August 2010, the Companys Hungarian subsidiary extended its existing line of credit until
August 30, 2011. The revolving credit facility has a total commitment of the lesser of 1.9 billion
HUF or a borrowing base, which as of September 30, 2010 was $9.5 million. There were no borrowings
under this credit facility at September 30, 2010. The credit facility includes a term loan with
quarterly interest payments.
The Company intends to extend its existing lines of credit before expiration. Based on the
history of relationships with its banks and its current financial position, the Company expects it
will be able to successfully extend its lines of credit.
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Bond Related to Litigation
In December 2006, the Company obtained the financing to post a bond of up to $40.0
million, which represented the potential bond necessary in connection with the continuing defense
of a lawsuit arising out of a dispute regarding a supply agreement.
In April 2007, the Company reported the results of various post-trial motions in ongoing
litigation (see Note 8.). As of September 30, 2008, the letter of credit was collateralized by
$23.5 million of restricted cash that collateralized a letter of credit posted to serve the bond.
On February 9, 2009, the Company paid the judgment using $23.5 million of restricted cash, which
terminated the letter of credit and related bond.
Convertible Debt
In September 2005, Zoltek entered into an agreement for new financing; a convertible debenture
package of up to $50 million in a private placement with a group of institutional investors. These
financings are collateralized by the carbon fiber assets of the Companys Hungarian subsidiary.
In April 2010, the Company repaid all remaining convertible debt with cash on hand. There was no
conversion of convertible debt during fiscal 2010. The following tables summarize the activity
regarding our convertible debt conversions during the fiscal years ended 2009.
Fiscal year ended September 30, 2009 | ||||||||||||
Number of shares | ||||||||||||
converted | Conversion price | Equity value | ||||||||||
February 2003 |
| $ | 3.50 | $ | | |||||||
December 2005 |
| 12.50 | | |||||||||
February 2006 |
| 13.07 | | |||||||||
May 2006 |
| 25.51 | | |||||||||
July 2006 |
16,264 | 15.40 | 250,466 | |||||||||
October 2006 |
| 25.51 | | |||||||||
16,264 | $ | 250,466 | ||||||||||
September 30, 2009 | ||||||||||||
Number of shares | Principal | |||||||||||
issuable | Conversion price | outstanding | ||||||||||
70,560 | $ | 25.51 | $ | 1,799,986 | ||||||||
May 2006 |
19,640 | 25.51 | 501,016 | |||||||||
July 2006 |
76,381 | 25.51 | 1,948,479 | |||||||||
October 2006 |
166,581 | $ | 4,249,481 | |||||||||
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 issued in connection with the convertible debt was less than the
market price of the Companys common stock at date of issue. The beneficial conversion was 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 was converted prior to the redemption date, the unamortized balance was
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 years ended September 30, 2010, 2009 and 2008 (in thousands).
Fiscal year ended September 30, 2010 | ||||||||||||
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 | ||||||||
Deferred financing costs |
97 | |||||||||||
Total |
$ | 289 | ||||||||||
Fiscal year ended September 30, 2009 | ||||||||||||
Conversion | ||||||||||||
Warrants | Features | Total | ||||||||||
May 2006 Issuance |
$ | 1,549 | $ | 2,285 | $ | 3,834 | ||||||
July 2006 Issuance |
242 | 296 | 538 | |||||||||
October 2006 Issuance |
317 | 364 | 681 | |||||||||
$ | 2,108 | $ | 2,945 | 5,053 | ||||||||
Deferred financing costs |
311 | |||||||||||
Total |
$ | 5,364 | ||||||||||
Fiscal year ended September 30, 2008 | ||||||||||||
Conversion | ||||||||||||
Warrants | Features | Total | ||||||||||
May 2006 Issuance |
$ | 1,943 | $ | 2,867 | $ | 4,810 | ||||||
July 2006 Issuance |
230 | 280 | 510 | |||||||||
October 2006 Issuance |
392 | 452 | 844 | |||||||||
$ | 2,565 | $ | 3,599 | 6,164 | ||||||||
Deferred financing costs |
518 | |||||||||||
Total |
$ | 6,682 | ||||||||||
We have fully amortized the carrying values of unamortized debt discount and financing fees
as of September 30, 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 | 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 | ||||||||||
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EARNINGS PER SHARE
In accordance with ASC 260, the Company has evaluated its diluted income per share
calculation. The Company does have outstanding warrants and convertible debt at September 30, 2010,
2009 and 2008 which are not included in the determination of diluted loss per share for the fiscal
year ended September 30, 2010, 2009 and 2008 because the shares are anti-dilutive. Had these
securities been dilutive, an additional 0.1 million, 0.3 million and 0.7 million, respectively,
would have been included in the Companys diluted loss per share calculation.
The following is the diluted impact of the convertible debt and warrants on net income (loss)
per share for the fiscal years ended September 30, 2010, 2009 and 2008 respectively:
Fiscal Year Ended September 30, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Numerators: |
||||||||||||
Net (loss) income |
$ | (6,339 | ) | $ | (4,202 | ) | $ | 7,441 | ||||
Denominators: |
||||||||||||
Average shares outstanding basic |
34,411 | 34,402 | 34,042 | |||||||||
Impact of convertible debt, warrants and stock options |
| | 130 | |||||||||
Average shares outstanding diluted |
34,411 | 34,402 | 34,172 | |||||||||
Basic (loss) income per share |
$ | (0.18 | ) | $ | (0.12 | ) | $ | 0.22 | ||||
Diluted (loss) income per share |
$ | (0.18 | ) | $ | (0.12 | ) | $ | 0.22 | ||||
3. INVENTORIES
Inventories consist of the following (amounts in thousands):
September 30, | ||||||||
2010 | 2009 | |||||||
Raw materials |
$ | 6,988 | $ | 7,349 | ||||
Work-in-process |
6,346 | 8,977 | ||||||
Finished goods |
20,976 | 26,758 | ||||||
Consigned inventory |
3,109 | 4,471 | ||||||
Supplies and other |
583 | 503 | ||||||
$ | 38,002 | $ | 48,058 | |||||
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4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (amounts in thousands):
September 30, | ||||||||
2010 | 2009 | |||||||
Land |
$ | 13,180 | $ | 13,275 | ||||
Buildings and improvements |
64,372 | 66,510 | ||||||
Machinery and equipment |
236,729 | 230,502 | ||||||
Furniture, fixtures and software |
7,161 | 6,759 | ||||||
Construction in progress |
24,098 | 41,029 | ||||||
$ | 345,540 | $ | 358,075 | |||||
Less: accumulated depreciation |
(113,879 | ) | (101,165 | ) | ||||
$ | 231,661 | $ | 256,910 | |||||
5. INCOME TAXES
The components of income tax expense (benefit) for the fiscal years ended September 30, 2010,
2009 and 2008 are as follows (amounts in thousands):
2010 | 2009 | 2008 | ||||||||||
From continuing operations: |
||||||||||||
Current: |
||||||||||||
Federal |
$ | 121 | $ | 130 | $ | | ||||||
State |
12 | | 107 | |||||||||
Non U.S. |
849 | 1,284 | 2,724 | |||||||||
982 | 1,414 | 2,831 | ||||||||||
Deferred: |
||||||||||||
Federal |
| | | |||||||||
State |
| (179 | ) | | ||||||||
Non U.S. |
(2,823 | ) | 869 | 2,585 | ||||||||
(2,823 | ) | 690 | 2,585 | |||||||||
Total continuing operations |
$ | (1,841 | ) | $ | 2,104 | $ | 5,416 | |||||
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Deferred income taxes reflect the tax impact of carryforwards and temporary differences
between the amount of assets and liabilities for financial reporting purposes and such amounts as
measured by tax laws and regulations. Cumulative carryforwards and temporary differences giving
rise to the net deferred income tax liability at September 30 are as follows (amounts in
thousands):
September 30, | ||||||||
2010 | 2009 | |||||||
Deferred tax assets: |
||||||||
Accrued employee compensation |
$ | 116 | $ | 106 | ||||
Reserves |
278 | 581 | ||||||
Other assets |
29 | | ||||||
Net operating loss and credit carryforwards |
33,910 | 30,635 | ||||||
34,333 | 31,322 | |||||||
Deferred tax liabilities: |
||||||||
Property, plant and equipment |
(12,365 | ) | (12,291 | ) | ||||
Prepaid expenses |
(106 | ) | (110 | ) | ||||
Unrealized currency losses on intercompany loan in Hungary |
(3,537 | ) | (1,496 | ) | ||||
Other liabilities |
| (715 | ) | |||||
(16,008 | ) | (14,612 | ) | |||||
Total deferred taxes |
18,325 | 16,710 | ||||||
Less: valuation allowance |
(18,516 | ) | (20,138 | ) | ||||
Net deferred tax liability |
$ | (191 | ) | $ | (3,428 | ) | ||
Classification of deferred taxes: |
||||||||
Current deferred tax asset (included in Other current assets) |
$ | 601 | $ | 3,262 | ||||
Long-term deferred tax liability |
(792 | ) | (6,690 | ) | ||||
$ | (191 | ) | $ | (3,428 | ) | |||
In the consolidated balance sheets, these deferred tax assets and liabilities are classified
as either current or non-current based on the classification of the related liability or asset for
financial reporting. A deferred tax asset or liability that is not related to an asset or liability
for financial reporting, including deferred taxes related to carryforwards, is classified according
to the expected reversal date of the temporary differences as of the end of the year.
The provision for income taxes at September 30 differs from the amount using the statutory
federal income tax rate (34%) as follows (amounts in thousands):
2010 | 2009 | 2008 | ||||||||||
At statutory rate: |
||||||||||||
Income tax (benefit) expense on (loss) income from continuing operations |
$ | (2,781 | ) | $ | (713 | ) | $ | 4,507 | ||||
Increases (decreases): |
||||||||||||
Lower effective tax rate on non-U.S. operations |
1,253 | 1,744 | (1,446 | ) | ||||||||
Change in valuation allowance on net operating loss |
1,771 | (4,034 | ) | (3,416 | ) | |||||||
State taxes, net of federal benefit |
149 | (545 | ) | 17 | ||||||||
Local taxes, non-U.S. |
711 | 1,101 | 2,724 | |||||||||
Change of uncertain tax positions |
(2,173 | ) | 2,440 | | ||||||||
Reflection of tax rate change non-U.S. |
(340 | ) | 370 | | ||||||||
Amortization of warrant discount |
65 | 1,718 | 3,425 | |||||||||
Fair market value of warrants |
(596 | ) | | | ||||||||
Non-qualified stock option expense |
| (567 | ) | |||||||||
Other |
100 | 24 | 172 | |||||||||
$ | (1,841 | ) | $ | 2,105 | $ | 5,416 | ||||||
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The change in valuation allowance is impacted by both the unrealized excess tax
benefits on stock based compensation reflected in the net operating loss as well as changes in the
expected realization of net operating losses
The consolidated income (loss) from continuing operations before income taxes by domestic and
foreign sources for the years ended September 30, 2010, 2009 and 2008 was as follows (amounts in
thousands):
2010 | 2009 | 2008 | ||||||||||
Domestic |
$ | 5,760 | $ | 13,352 | $ | 6,831 | ||||||
Foreign |
(13,940 | ) | (15,449 | ) | 6,026 | |||||||
Income (loss) from continuing operations before income taxes |
$ | (8,180 | ) | $ | (2,097 | ) | $ | 12,857 | ||||
The Company currently has domestic net operating loss carryforwards of approximately $74.4
million available to offset future tax liabilities, which expire between 2020 and 2028. Included
in the net operating loss carry-forwards are stock option deductions
of approximately $19.9 million.
The benefits of these tax deductions, referred to as excess tax benefits, will be credited to
additional paid-in capital upon being realized or recognized. The Company has recorded a full
valuation allowance against its deferred tax asset because it is more likely than not that the
value of the deferred tax asset will not be realized.
The Company currently has a foreign net operating loss carryforward of approximately
$71.2 million. $21.9 million expires between 2012 and 2014 and $49.3 million has unlimited
carryforward.
The Company estimates its contingent income tax liabilities based on its assessment of
probable income tax-related exposures and the anticipated settlement of those exposures translating
into actual future liabilities. As of September 30, 2010 and 2009, the Companys accrual for these
contingencies was approximately $0.8 million and $3.0 million, respectively. During
fiscal 2010, income tax expense of $0.8 million was incurred related to the local Hungarian
municipality tax. This expense was offset by the release of the $2.2 million reserve on the
Companys uncertain tax positions due to favorable resolution with Hungarian tax authority. An
additional income tax benefit of $0.7 million was recorded during fiscal 2010 related to the net
operating loss for the Hungarian subsidiary. Local and federal alternative minimum taxes in the
U.S. and Mexico were $0.2 million.
6. DEBT
Credit Facilities
U.S. Operations The Companys U.S. subsidiary has a credit facility with a U.S. bank, the
term of which expires January 1, 2011. There were no borrowings as of September 30, 2010, with
$10.0 million of remaining availability. No financial covenants currently apply to the credit
facility from the U.S. bank.
Hungarian Operations The Companys Hungarian subsidiary has a credit facility with a
Hungarian bank, which was renewed with the same terms in August 2010 and now expires on August 30,
2011. The revolving credit facility has a total commitment of the lesser of 1.9 billion HUF or a
borrowing base, which as of September 30, 2010 was $9.5 million. There were no borrowings under
this credit facility at September 30, 2010. The credit facility includes a term loan with
quarterly interest payments. There are no financial covenants associated with this facility.
The Company intends to extend its existing lines of credit before expiration on January 1,
2011 and August 30, 2011. Based on the history of relationships with its banks and its current
financial position, the Company expects it will be able to successfully extend its lines of credit.
Credit lines consist of the following (amounts in thousands):
September 30, | September 30, | |||||||
2010 | 2009 | |||||||
U.S. facility (current interest rate of 3.1% variable with Libor) |
$ | | $ | 8,343 | ||||
Facility with Hungarian bank (interest rate of 2.9% to 6.9%, depending on currency) |
| 3,934 | ||||||
Total credit lines |
$ | | $ | 12,277 | ||||
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The Companys long-term debt consists of the following (amounts in thousands):
September 30, | September 30, | |||||||
2010 | 2009 | |||||||
Note payable with interest currently at 4.1% (variable with Libor, payable in monthly
installments of interest and principal to maturity in January 2011) |
$ | 981 | $ | 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) |
| 1,948 | ||||||
Total long-term debt including current maturities |
981 | 5,332 | ||||||
Less: Debt discount associated with conversion feature and warrants |
| (192 | ) | |||||
Less: Amounts payable within one year, net of discount of $0 and $192 |
(981 | ) | (4,159 | ) | ||||
Total long-term debt, less current maturities |
$ | | $ | 981 | ||||
The aggregate annual maturities of long-term debt at September 30, 2010 are set forth below
(amounts in thousands):
Annual | ||||
September 30, | Maturities | |||
2011 |
$ | 981 | ||
Total |
$ | 981 | ||
7. DERIVATIVE INSTRUMENTS AND FAIR VALUE MEASUREMENT
Zoltek adopted 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. |
The Company adopted ASC 815-40 on October 1, 2009. In connection with the adoption, the
Company determined that its 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 liability, which requires
separate accounting pursuant to ASC 815-40. The fair value of the warrants was reclassified from
equity to a derivative liability on October 1, 2009.
The Company 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.
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Table of Contents
The fair value of the warrants is determined using the Black-Scholes option-pricing model with
the following weighted average assumptions as of September 30, 2010:
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 |
0.62 | 0.76 | 1.07 | 2.22 | ||||||||||||
Risk-free interest rate |
0.24 | % | 0.23 | % | 0.24 | % | 0.42 | % | ||||||||
Stock volatility |
73.54 | % | 73.54 | % | 73.54 | % | 73.54 | % | ||||||||
Dividend yield |
0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % |
A derivative liability of $3.1 million was established related to the warrants as of
October 1, 2009. The adoption of ASC 815-40 also resulted in a cumulative adjustment to accumulated
deficit of $12.6 million and a cumulative adjustment to additional paid-in capital of
$15.6 million. The warrants are remeasured and adjusted to fair value at the end of each reporting
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 September 30, 2010, the Company remeasured the outstanding warrant liability and recorded a
fair value of $1.3 million. As a result of the remeasurement, the Company recorded a change in fair
value associated with these warrants as a gain totaling $1.8 million for the twelve months ended
September 30, 2010.
Beginning in the quarter ended June 30, 2010, the Company determined that liability
classification of its restricted shares is appropriate based on the recent trend of settling
restricted shares in cash. The unamortized fair value of the restricted shares was reclassified
from equity to a derivative liability on April 1, 2010. The fair value of the restricted shares is
determined using the current market price for the shares and an estimated forfeiture rate, an
unobservable input. Although the market price of the shares are based on quoted prices in an
active market, the forfeiture rate is considered to be a significant input and therefore we have
deemed the derivative liability associated with the restricted shares to be Level 3.
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Table of Contents
The fair value of warrants and restricted shares outstanding as of September 30, 2010 was as
follows (amounts in thousands, except per share amounts):
Fair Value Measurements at September 30, 2010 | ||||||||||||||||
Description | September 30, 2010 | Level 1 | Level 2 | Level 3 | ||||||||||||
Warrant Date of Issuance |
||||||||||||||||
May 2006 |
$ | 34 | $ | | $ | | $ | 34 | ||||||||
July 2006 |
7 | | | 7 | ||||||||||||
October 2006 |
46 | | | 46 | ||||||||||||
December 2006 |
1,222 | | | 1,222 | ||||||||||||
Restricted Shares |
206 | | 206 | |||||||||||||
Total |
$ | 1,515 | $ | | $ | | $ | 1,515 |
Fair Value Per | Shares Issuable | Total Fair Value of | ||||||||||
Share | Upon Exercise | Instrument | ||||||||||
Warrant Date of Issuance |
||||||||||||
May 2006 |
$ | 0.12 | 274,406 | $ | 34 | |||||||
July 2006 |
0.21 | 34,370 | 7 | |||||||||
October 2006 |
0.44 | 102,835 | 46 | |||||||||
December 2006 |
1.48 | 827,789 | 1,222 | |||||||||
Restricted Shares |
51,250 | 206 | ||||||||||
Total |
1,290,650 | $ | 1,515 | |||||||||
The following is a summary of the change in fair value of the Companys derivative financial
instruments for fiscal 2010.
Warrant balance October 1, 2009 |
$ | 3,061 | ||
Change in fair value of warrants |
(1,753 | ) | ||
Warrant balance September 30, 2010 |
$ | 1,308 | ||
Restricted share balance October 1, 2009 |
$ | | ||
Establishment of restricted share liability April 1, 2010 |
240 | |||
Settlements |
(71 | ) | ||
Change in fair value of restricted shares |
37 | |||
Restricted share balance September 30, 2010 |
$ | 206 | ||
8. COMMITMENTS AND CONTINGENCIES
LEASES
We rent office facilities and equipment under various operating leases. Rent expense for all
operating leases was $1.5 million, $0.3 million and $0.3 million for the fiscal years ended
September 30, 2010, 2009 and 2008, respectively.
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The following table sets forth the future minimum lease commitments under operating leases at
September 30, 2010 (amounts in thousands):
Future | ||||
Commitments for | ||||
September 30, | Operating Leases | |||
2011 |
$ | 1,335 | ||
2012 |
1,194 | |||
2013 |
879 | |||
2014 |
868 | |||
2015 |
846 | |||
Thereafter |
5,076 | |||
Total |
$ | 10,198 |
We rent forklifts and water treatment equipment under various capital leases. Lease expense for
all capital leases for the fiscal years ended September 30, 2010, 2009, and 2008 was $0.1 million
$0.2 million, and $0.2 million, respectively.
LEGAL
Legal contingencies have a high degree of uncertainty. When losses from contingencies become
estimable and probable, reserves are established. The reserves reflect managements estimate of the
probable cost of ultimate resolution of the matters and are revised accordingly as facts and
circumstances change and, ultimately, when matters are brought to closure. If any litigation matter
is resolved unfavorably, the Company could incur obligations in excess of managements estimate of
the outcome, and such resolution could have a material adverse effect on the Companys consolidated
financial condition, results of operations or liquidity. In addition, we may incur additional legal
costs in connection with pursuing and defending such actions.
In
February 2005, a customer filed an
action against our Zoltek Corporation subsidiary in the U.S. District Court for the Eastern
District of Missouri, Eastern Division alleging that we breached a supply agreement relating to our
carbon fiber product known as Panex 33. The case was tried in November 2006 and the jury rendered
verdicts against our Zoltek Corporation subsidiary, which verdicts we later appealed. On February
9, 2009, the Company resolved the litigation by paying a judgment using $23.5 million of restricted
cash.
In September 2004, the Company was named a defendant in a civil action filed by an investment
banker that was retained to obtain equity investors, alleging breach by the Company of the
Companys obligations under the agreement signed by the parties. In October 2008, the Company
settled the case for $5.8 million cash which had been fully accrued as a litigation charge as of
September 30, 2008.
The Company is exposed to various claims and legal proceedings arising out of the normal
course of its business. Although there can be no assurance, in the opinion of management, the
ultimate outcome of these other claims and lawsuits should not have a material adverse effect on
the Companys consolidated financial condition, results of operations or liquidity.
SOURCES OF SUPPLY
As part of its growth strategy, the Company has developed its own precursor acrylic fibers and
all of its carbon fibers and technical fibers. The primary source of raw material for the
precursor is ACN (acrylonitrile), which is a commodity product with multiple sources. Unscheduled
shutdowns in production in Europe coupled with an increase in demand for ACN drove prices up more
than 100% by the end of fiscal 2010.
9. PROFIT SHARING PLAN
The Company maintains a 401(k) Profit Sharing Plan for the benefit of employees who have
completed six months of service, worked 501 or more hours this year and attained 21 years of age.
No contributions were made by the Company for fiscal years 2010, 2009 and 2008.
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10. STOCK COMPENSATION EXPENSE
The Company maintains long-term incentive plans that authorize the Board of Directors or its
Compensation Committee (the Committee) to grant key employees, officers and directors of the
Company incentive or nonqualified stock options, stock appreciation rights, performance shares,
restricted shares and performance units. The Committee determines the prices and terms at which
awards may be granted along with the duration of the restriction periods and performance targets.
All issuances are granted out of shares authorized, as the Company has no treasury stock. The
Company has the option, in its sole discretion, to settle awards under its 2008 incentive plans in
cash, in lieu of issuing shares.
For fiscal 2010, 2009 and 2008, the Company recorded into selling and general administrative
expenses and into its corporate/other segment $2.0 million, $3.0 million, and $2.4 million,
respectively, for the cost of employee and director services received in exchange for equity
instruments based on the grant-date fair value of those instruments in accordance with the
provisions of ASC 718. There were no recognized tax benefits during fiscal 2010, 2009, or 2008, as
any benefit is offset by the Companys full valuation allowance on its net deferred tax asset. The
Company has not recognized the windfall tax benefit as the resulting deduction has not been
realized via a reduction of income taxes payable.
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 fiscal years 2009 through
2010:
Wtd. Avg. | Options | Wtd. Avg. | ||||||||||||||
Options | Exercise Price | Exercisable | Exercise Price | |||||||||||||
Balance, September 30, 2008 |
415,587 | $ | 25.52 | 220,587 | $ | 23.50 | ||||||||||
Granted |
52,500 | 6.31 | ||||||||||||||
Exercised |
| | ||||||||||||||
Forfeited or expired |
(59,750 | ) | 19.99 | |||||||||||||
Balance, September 30, 2009 |
408,337 | $ | 23.60 | 301,670 | $ | 22.64 | ||||||||||
Granted |
37,500 | 8.52 | ||||||||||||||
Exercised |
| | ||||||||||||||
Forfeited or expired |
(18,750 | ) | 25.03 | |||||||||||||
Balance, September 30, 2010 |
427,087 | 22.21 | 410,837 | 22.23 | ||||||||||||
The following table summarizes information for options currently outstanding and exercisable
at September 30, 2010:
Options Outstanding | Options Exercisable | |||||||||||||||||||||||
Wtd. Avg. | Wtd. Avg. | Wtd. Avg. | ||||||||||||||||||||||
Range of | Remaining | Exercise | Exercise | Intrinsic | ||||||||||||||||||||
Exercise Prices | Number | Life | Price | Number | Price | Value | ||||||||||||||||||
$2.07-5.47 |
39,500 | 3 years | $ | 5.30 | 39,500 | $ | 5.30 | $ | 161,403 | |||||||||||||||
8.40-8.60 |
80,087 | 5 years | 8.53 | 80,087 | 8.53 | 68,788 | ||||||||||||||||||
13.98-24.12 |
75,000 | 7 years | 19.21 | 58,750 | 18.50 | | ||||||||||||||||||
26.22-29.70 |
142,500 | 7 years | 29.09 | 142,500 | 29.09 | | ||||||||||||||||||
31.07-36.73 |
90,000 | 5 years | 33.43 | 90,000 | 33.43 | | ||||||||||||||||||
$2.07-36.73 |
427,087 | 410,837 | $ | 230,191 | ||||||||||||||||||||
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 rate |
0%-25 | % | 0%-25 | % | 0%-30 | % |
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The fair value of the options granted during fiscal 2010, 2009 and 2008 was $0.2 million, $0.2
million and $5.5 million, respectively. As of September 30, 2010, the Company had $0.1 million of
total unrecognized compensation expense related to stock option plans that will be recognized over
fiscal 2011. Cash proceeds received from the exercise of stock options were $0.0 million, $0.0
million and $1.4 million for fiscal 2010, 2009 and 2008, respectively.
Restricted stock awards. Under the Companys equity incentive plans, employees and directors
may be granted restricted stock awards with participation rights which are valued based upon the
fair market value on the date of the grant. Restricted shares granted to directors in fiscal 2008,
2009, and 2010 and restricted shares granted to employees in fiscal 2008 vest 17% in the first
year, 33% in the second year and 50% in the third year from date of grant. Restricted shares
granted to employees in fiscal 2009 vest 50% in the second year, 50% in the third year from date of
grant. The balance of restricted stock shares outstanding was 51,250 shares, 86,250 shares, and
67,500 shares as of September 30, 2010, 2009, and 2008, respectively. The Company has settled by
payment in cash, all prior vested restricted share grants, including 22,499 restricted shares which
vested during fiscal 2010.
In accordance with ASC 718, the Company determined its trend of settling vested
restricted shares in cash resulted in a modification from equity to liability accounting for the
remaining unvested restricted shares. The fair value of the modified liability award is measured
each reporting date through settlement and any adjustments to increase or decrease the liability
are recorded either as compensation cost or a charge to equity.
The minimum remaining compensation cost to be recognized over the remaining vesting period
is $0.3 million and is equal to the amount of unrecognized expense of the original award at grant date
fair value. To the extent the fair value of unvested restricted stock at the end of the period
exceeds the grant date fair value, any incremental expense is recognized during the period.
During the current year, the Company continued to recognize compensation cost for the original
value of the award as the fair value of the original award is greater than the period end fair
value of unvested restricted shares. The difference between the change in the fair value of the
liability and stock compensation recognized during the year of $0.1 million was recorded to
additional paid in capital.
The Company uses historical volatility for a period of time that is comparable to the expected
life of the option. However, the Company only calculates the volatility of the Companys stock back
to November 2003, the date the Company received its first large order for carbon fibers, as that is
when the Company considers its business to have changed from a research and development company to
an operational company. Management believes this is a better measurement of the Companys stock
volatility.
11. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Companys strategic business units are based on product lines and have been grouped into
three reportable segments: carbon fibers, technical fibers and corporate/other products. The carbon
fibers segment manufactures commercial carbon fibers used as reinforcement material in composites.
The technical fibers segment manufactures oxidized acrylic fibers and specialty carbon fibers used
to manufacture aircraft brake pads and for heat/fire barrier applications. These two segments also
facilitate development of product and process applications to increase the demand for carbon fibers
and technical fibers. The carbon fibers and technical fibers segments 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.
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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 and for the fiscal years ended September 30, 2010, 2009 and 2008 (amounts
in thousands):
Fiscal year ended September 30, 2010 | ||||||||||||||||
Carbon | Technical | Corporate/ | ||||||||||||||
Fibers | Fibers | Other | Total | |||||||||||||
Net sales |
$ | 103,390 | $ | 23,301 | $ | 1,773 | $ | 128,464 | ||||||||
Cost of sales, excluding available unused capacity costs |
83,021 | 18,113 | 1,216 | 102,350 | ||||||||||||
Available unused capacity costs |
11,874 | 948 | | 12,822 | ||||||||||||
Gross profit |
8,495 | 4,240 | 557 | 13,292 | ||||||||||||
Operating income (loss) |
312 | 3,403 | (14,279 | ) | (10,564 | ) | ||||||||||
Depreciation |
13,762 | 1,567 | 1,132 | 16,461 | ||||||||||||
Capital expenditures |
3,175 | 627 | 608 | 4,410 |
Fiscal year ended September 30, 2009 | ||||||||||||||||
Carbon | Technical | Corporate/ | ||||||||||||||
Fibers | Fibers | Other | Total | |||||||||||||
Net sales |
$ | 115,348 | $ | 20,996 | $ | 2,412 | $ | 138,756 | ||||||||
Cost of sales, excluding available unused capacity costs |
82,274 | 16,411 | 2,059 | 100,744 | ||||||||||||
Available unused capacity costs |
6,404 | 948 | | 7,352 | ||||||||||||
Gross profit |
26,670 | 3,637 | 353 | 30,660 | ||||||||||||
Operating income (loss) |
14,186 | 2,307 | (13,098 | ) | 3,395 | |||||||||||
Depreciation |
13,490 | 1,667 | 1,194 | 16,351 | ||||||||||||
Capital expenditures |
14,983 | 642 | 581 | 16,206 |
Fiscal year ended September 30, 2008 | ||||||||||||||||
Carbon | Technical | Corporate/ | ||||||||||||||
Fibers | Fibers | Other | Total | |||||||||||||
Net sales |
$ | 156,033 | $ | 25,910 | $ | 3,673 | $ | 185,616 | ||||||||
Cost of sales |
110,691 | 20,378 | 3,324 | 134,393 | ||||||||||||
Gross profit |
45,342 | 5,532 | 349 | 51,223 | ||||||||||||
Operating income (loss) |
33,961 | 3,019 | (16,973 | ) | 20,007 | |||||||||||
Depreciation |
13,353 | 2,030 | 1,093 | 16,476 | ||||||||||||
Capital expenditures |
101,628 | 2,568 | 3,519 | 107,715 |
Total Assets | ||||||||||||||||
Carbon | Technical | Corporate/ | ||||||||||||||
Fibers | Fibers | Other | Total | |||||||||||||
September 30. 2010 |
$ | 263,600 | $ | 22,655 | $ | 35,885 | $ | 322,140 | ||||||||
September 30. 2009 |
293,200 | 27,614 | 46,031 | 366,845 |
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Sales, long-lived assets, and net assets by geographic area, consist of the following as of
and for each of the three fiscal years in the period ended September 30, 2010, 2009 and 2008
(amounts in thousands):
2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||
Net Long | Net Long | Net Long | ||||||||||||||||||||||||||||||||||
Net | Lived | Net | Net | Lived | Net | Net | Lived | Net | ||||||||||||||||||||||||||||
Sales(a) | Assets(b) | Assets | Sales(a) | Assets(b) | Assets | Sales(a) | Assets(b) | Assets | ||||||||||||||||||||||||||||
United States |
$ | 43,762 | $ | 41,536 | $ | 79,892 | $ | 34,036 | $ | 44,539 | $ | 247,569 | $ | 42,205 | $ | 47,617 | $ | 340,285 | ||||||||||||||||||
Denmark |
* | | | 35,351 | | | 49,109 | | | |||||||||||||||||||||||||||
Hungary |
* | 112,034 | 132,827 | * | 132,880 | 53,668 | * | 158,694 | (14,641 | ) | ||||||||||||||||||||||||||
Germany |
21,336 | | | 19,809 | | | 42,552 | | | |||||||||||||||||||||||||||
Spain |
* | | | 15,178 | | | * | | | |||||||||||||||||||||||||||
Other Europe |
52,441 | | | 31,999 | | | 41,625 | | | |||||||||||||||||||||||||||
Asia |
9,989 | | | 2,205 | | | 10,106 | | | |||||||||||||||||||||||||||
Mexico |
* | 78,091 | 79,979 | * | 79,491 | 14,228 | * | 82,583 | 21,022 | |||||||||||||||||||||||||||
Other areas |
936 | | | 178 | | | 19 | | | |||||||||||||||||||||||||||
Total |
$ | 128,464 | $ | 231,661 | $ | 292,698 | $ | 138,756 | $ | 256,910 | $ | 315,465 | $ | 185,616 | $ | 288,894 | $ | 346,666 | ||||||||||||||||||
(a) | Revenues are attributed to countries based on the delivery location of the customer. | |
(b) | Property and equipment net of accumulated depreciation based on country location of assets. | |
* | Net sales for this country were less than 10% of total sales. Such sales were aggregated into Other Europe, Asia or Other areas. |
12. SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
(Amounts in thousands, except per share data)
Fiscal year 2010 | 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | ||||||||||||
Net sales |
$ | 28,867 | $ | 26,029 | $ | 42,448 | $ | 31,120 | ||||||||
Gross profit |
3,947 | 1,452 | 4,655 | 3,238 | ||||||||||||
Net loss |
(483 | ) | (4,986 | ) | (444 | ) | (426 | ) | ||||||||
Basic and diluted loss per share: |
||||||||||||||||
Basic loss per share |
$ | (0.01 | ) | $ | (0.15 | ) | $ | (0.01 | ) | $ | (0.01 | ) | ||||
Diluted loss per share |
$ | (0.01 | ) | $ | (0.15 | ) | $ | (0.01 | ) | $ | (0.01 | ) | ||||
Fiscal year 2009 | 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | ||||||||||||
Net sales |
$ | 38,629 | $ | 36,006 | $ | 30,306 | $ | 33,815 | ||||||||
Gross profit |
10,264 | 9,118 | 6,160 | 5,118 | ||||||||||||
Net (loss) income |
535 | 473 | (1,429 | ) | (3,781 | ) | ||||||||||
Basic and diluted (loss) income per share: |
||||||||||||||||
Basic (loss) income per share |
$ | 0.02 | $ | 0.01 | $ | (0.04 | ) | $ | (0.11 | ) | ||||||
Diluted (loss) income per share |
$ | 0.02 | $ | 0.01 | $ | (0.04 | ) | $ | (0.11 | ) | ||||||
Annual earnings per share may not equal the sum of the individual quarters due to differences
in the average number of shares outstanding during the respective periods.
55
Table of Contents
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures
None.
Item 9A. Controls and Procedures
Evaluation of Controls and Procedures
Under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of
the Companys disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of
the Securities and Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer has concluded that the Companys disclosure controls and procedures as of
September 30, 2010 were effective.
Managements Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Under
the supervision and with the participation of our management, including the Chief Executive Officer
and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal
control over financial reporting as of September 30, 2010. All internal control systems have
inherent limitations, including the possibility of circumvention and overriding the
control. Accordingly, even effective internal control can provide only reasonable assurance as to
the reliability of financial statement preparation and presentation. Further, because of changes
in conditions, the effectiveness of internal control may vary over time.
In making its evaluation, our management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework. Based upon this evaluation, our management has concluded that our internal control over
financial reporting as of September 30, 2010 was effective.
Attestation Report of Independent Registered Public Accounting Firm
Our independent registered public accounting firm, Ernst & Young LLP, has audited the
effectiveness of our internal control over financial reporting, as stated in its report which is
included herein.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during
the quarter ended September 30, 2010 that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information set forth under the captions Election of Directors, Other Matters and
Compliance with Section 16(a) of the Securities Exchange Act of 1934 in the registrants Proxy
Statement for its 2011 Annual Meeting of Shareholders is incorporated herein by this reference. See
also Item 4A of Part I of this report.
Item 11. Executive Compensation
The information set forth under the captions Directors Fees and Compensation of Executive
Officers in the registrants Proxy Statement for its 2011 Annual Meeting of Shareholders is
incorporated herein by this reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information set forth under the captions Voting Securities and Principal Holders Thereof
and Security Ownership By Management in the registrants Proxy Statement for its 2011 Annual
Meeting of Shareholders is incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information set forth under the captions Certain Transactions and Election of
Directors in the registrants Proxy Statement for its 2011 Annual Meeting of Shareholders is
incorporated herein by this reference.
Item 14. Principal Accounting Fees and Services
The information set forth under the caption Principal Accountant Fees and Services in the
registrants Proxy Statement for its 2011 Annual Meeting of Shareholders is incorporated herein by
this reference.
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Table of Contents
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) (1) Financial statements: The following financial statements and reports thereon are included
in Item 8 of this report:
Report of Management
Reports of Independent Registered Public Accounting Firm Ernst & Young LLP*
Report of Independent Registered Public Accounting Firm Grant Thornton LLP
Consolidated Balance Sheets as of September 30, 2010 and 2009
Consolidated Statements of Operations for the years ended September 30, 2010, 2009 and 2008
Consolidated Statements of Changes in Shareholders Equity for the years ended September 30, 2010,
2009 and 2008
Consolidated Statements of Cash Flows for the years ended September 30, 2010, 2009 and 2008
Notes to Consolidated Financial Statements
* | Report on financial statement schedule is included in Exhibit 23.1 hereto. |
(2) The following financial statement schedule is included in Part IV of this report:
Rule 12-09 Valuation and Qualifying Accounts and Reserves
58
Table of Contents
For the fiscal year ended September 30, 2010
Rule 12-09 Valuation and Qualifying Accounts and Reserves
(Amounts in thousands)
Rule 12-09 Valuation and Qualifying Accounts and Reserves
(Amounts in thousands)
Column A | Column B | Column C | Column D | Column E | ||||||||||||||||
Additions | ||||||||||||||||||||
Charged to | ||||||||||||||||||||
Balance at | Charged to | other | Balance at | |||||||||||||||||
beginning of | costs and | accounts | Deductions | end of | ||||||||||||||||
period | expenses | describe | describe | period | ||||||||||||||||
Reserve for doubtful accounts |
$ | 2,356 | $ | 497 | (1) | $ | | $ | 2,675 | (2) | $ | 178 | ||||||||
Reserve for inventory valuation |
$ | 665 | $ | 214 | (3) | $ | | $ | | $ | 879 | |||||||||
Deferred tax valuation |
$ | 20,138 | $ | | $ | | $ | 1,622 | (4)(5) | $ | 18,516 | |||||||||
For the fiscal year ended September 30, 2009
Rule 12-09 Valuation and Qualifying Accounts and Reserves
(Amounts in thousands)
Rule 12-09 Valuation and Qualifying Accounts and Reserves
(Amounts in thousands)
Column A | Column B | Column C | Column D | Column E | ||||||||||||||||
Additions | ||||||||||||||||||||
Charged to | ||||||||||||||||||||
Balance at | Charged to | other | Balance at | |||||||||||||||||
beginning of | costs and | accounts | Deductions | end of | ||||||||||||||||
period | expenses | describe | describe | period | ||||||||||||||||
Reserve for doubtful accounts |
$ | 1,754 | $ | 1,303 | (1) | $ | | $ | 701 | (2) | $ | 2,356 | ||||||||
Reserve for inventory valuation |
$ | 500 | $ | 165 | (3) | $ | | $ | | $ | 665 | |||||||||
Deferred tax valuation |
$ | 30,815 | $ | | $ | | $ | 10,677 | (4)(5) | $ | 20,138 | |||||||||
For the fiscal year ended September 30, 2008
Rule 12-09 Valuation and Qualifying Accounts and Reserves
(Amounts in thousands)
Rule 12-09 Valuation and Qualifying Accounts and Reserves
(Amounts in thousands)
Column A | Column B | Column C | Column D | Column E | ||||||||||||||||
Additions | ||||||||||||||||||||
Charged to | ||||||||||||||||||||
Balance at | Charged to | other | Balance at | |||||||||||||||||
beginning of | costs and | accounts | Deductions | end of | ||||||||||||||||
period | expenses | describe | describe | period | ||||||||||||||||
Reserve for doubtful accounts |
$ | 781 | $ | 1,300 | (1) | $ | | $ | 327 | (2) | $ | 1,754 | ||||||||
Reserve for inventory valuation |
$ | 645 | $ | | $ | | $ | 145 | (7) | $ | 500 | |||||||||
Deferred tax valuation |
$ | 29,758 | $ | 1,057 | $ | | $ | | $ | 30,815 | (6) | |||||||||
(1) | Write off of uncollectible receivable. | |
(2) | Recovery of receivables previously listed as doubtful. | |
(3) | Increase reserve for slow-moving product. | |
(4) | Reduction in required valuation allowance due to domestic NOL utilization. | |
(5) | Reduction in required valuation due to non-qualified stock options deduction for which no cash benefit has been realized. | |
(6) | Includes valuation allowance related to non-qualified stock options. | |
(7) | Company used and sold materials for which reserves were established primarily for slow-moving product. |
Schedules other than those listed above have been omitted because they are either not required
or not applicable, or because the information is presented in the consolidated financial statements
or the notes thereto.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
ZOLTEK COMPANIES, INC. (Registrant) |
||||
By: | /s/ ZSOLT RUMY | |||
Zsolt Rumy, Chairman of the Board, President and | ||||
Chief Executive Officer |
Date: November 29, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
Signature | Title | Date | ||
/s/ ZSOLT RUMY
|
Chairman, President, Chief Executive Officer and Director | November 29, 2010 | ||
/s/ ANDREW W. WHIPPLE
|
Chief Financial Officer | November 29, 2010 | ||
/s/ LINN H. BEALKE
|
Director | November 29, 2010 | ||
/s/ CHARLES A. DILL
|
Director | November 29, 2010 | ||
/s/ GEORGE E. HUSMAN
|
Director | November 29, 2010 | ||
/s/ MICHAEL D. LATTA
|
Director | November 29, 2010 | ||
/s/ PEDRO REYNOSO
|
Director | November 29, 2010 |
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Table of Contents
Exhibit Index
Exhibit | ||||
Number | Description | |||
3.1 | Restated Articles of Incorporation of the Registrant dated October 7, 1992, filed as Exhibit 3.1 to Registrants Registration Statement on Form S-3 (Reg. No.333-143996) and incorporated herein by reference. |
|||
3.2 | Certificate of Amendment of Restated Articles of Incorporation of the Registrant dated February 15, 1996, filed as Exhibit 3.2 to Registrants Registration Statement on Form S-3 (Reg. No.333-143996) and incorporated herein by reference. |
|||
3.3 | Certificate of Amendment of Restated Articles of Incorporation of the Registrant dated February 7, 1997, filed as Exhibit 3.3 to Registrants Registration Statement on Form S-3 (Reg. No.333-143996) and incorporated herein by reference. |
|||
3.4 | Restated By-Laws of the Registrant dated September 22, 1992, filed as Exhibit 3.4 to Registrants Registration Statement on Form S-3 (Reg. No.333-143996) and incorporated herein by reference. |
|||
4.1 | Form of certificate for Common Stock, filed as Exhibit 4.1 to Registrants Registration Statement on Form S-1 (Reg. No. 33-51142) and incorporated herein by reference. |
|||
4.2 | Form of Registration Rights Agreement, dated as of February 9, 2005, filed as Exhibit 4.4 to the Registrants Quarterly Report on Form 10-Q for the quarter ended December 31, 2004 and incorporated herein by reference. |
|||
4.3 | Registration Rights Agreement, dated as of September 30, 2005, by and among the Registrant and the Lenders parties thereto, filed as Exhibit 4.4 to the Registrants Current Report on Form 8-K dated September 29, 2005 and incorporated herein by reference. |
|||
4.4 | Waiver and Consent, dated as of February 3, 2006, by and among the Registrant and the Lender parties thereto, filed as Exhibit 4.5 to the Registrants Current Report on Form 8-K dated February 6, 2006, and incorporated herein by reference. |
|||
4.5 | Amendment No. 1 to Loan and Warrant Agreement and Registration Rights Agreement among the Registrant and the Lender parties thereto, filed as Exhibit 4.2 to the Registrants Current Report on Form 8-K dated April 28, 2006 and incorporated herein by reference. |
|||
4.6 | Form of Note, filed as Exhibit 4.3 to the Registrants Current Report on Form 8-K dated April 28, 2006 and incorporated herein by reference. |
|||
4.7 | Form of Warrant, filed as Exhibit 4.4 to the Registrants Current Report on Form 8-K dated April 28, 2006 and incorporated herein by reference. |
|||
4.8 | Amendment No. 2 to Loan and Warrant Agreement and Registration Rights Agreement, dated as of December 14, 2006, among the Registrant and the Lenders, filed as Exhibit 4.3 to the Registrants Current Report on Form 8-K dated December 14, 2006 and incorporated herein by reference. |
|||
4.9 | Form of Warrant, filed as Exhibit 4.4 to the Registrants Current Report on Form 8-K dated December 14, 2006 and incorporated herein by reference. |
|||
10.1 | Zoltek Companies, Inc. Amended and Restated Directors Stock Option Plan filed as Exhibit 10.1 to Registrants Quarterly Report on Form 10-Q dated August 13, 1999* |
|||
10.2 | Credit Agreement, dated as of May 11, 2001, between Southwest Bank of St. Louis and Zoltek Companies, Inc., Zoltek Corporation, Cape Composites, Inc., Engineering Technology Corporation, Zoltek Properties, Inc., and Hardcore Composites Operations, LLC, filed as Exhibit 10.1 to Registrants Quarterly Report on Form 10-Q for the quarter ended June 30, 2001, is incorporate herein by reference. |
|||
10.3 | First Amendment to Credit Agreement, dated as of February 13, 2003, by and among Zoltek Companies, Inc., Zoltek Corporation, Cape Composites, Inc., Engineering Technology Corporation, Zoltek Properties, Inc. and Southwest Bank of St. Louis, filed as Exhibit 10.1 to Registrants Current Report on Form 8-K dated February 18, 2003 is incorporated herein by reference. |
|||
10.4 | Zoltek Companies, Inc. 2003 Long-Term Equity Incentive Plan, filed as Appendix A to Registrants definitive proxy statement for the 2002 Annual Meeting of Shareholders* |
|||
10.5 | Second Amendment to Credit Agreement, dated as of January 13, 2003, by and among Zoltek Companies, Inc., Zoltek Corporation, Cape Composites, Inc., Engineering Technology Corporation, Zoltek Properties, Inc. and Southwest Bank of St. Louis filed as Exhibit 10.14 to Registrants Annual Report on Form 10-K for the fiscal year ended September 30, 2003, is incorporated herein by this reference |
|||
10.6 | Zoltek Companies, Inc. 2008 Director Incentive Plan, filed as Appendix A to the Registrants Proxy Statement on Schedule 14A filed on January 2, 2008 and incorporated herein by this reference.* |
61
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Exhibit | ||||
Number | Description | |||
10.7 | Zoltek Companies, Inc. 2008 Long Term Incentive Plan, filed as Appendix B to the Registrants Proxy Statement on Schedule 14A filed on January 2, 2008 and incorporated herein by this reference.* |
|||
10.8 | Employment Agreement, dated March 1, 2008, between the Registrant and Karen Bomba, filed as Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 and incorporated herein by reference. |
|||
10.9 | Employment Agreement, dated November 26, 2008, between the Registrant and Andrew W. Whipple, filed as Exhibit 10.10 to the Registrants Annual Report on Form 10-K for the fiscal year ended September 30, 2008, is incorporated herein by this reference. |
|||
10.10 | Second Trade Agreement dated as of May 29, 2007, between Vestas Wind Systems A/S and Zoltek Companies, Inc., filed as Exhibit 10.11 to the Registrants Annual Report on Form 10-K/A for the year ended September 30, 2008, and incorporated herein by this reference.** |
|||
21 | Subsidiaries of the Registrant filed as Exhibit 21 to the Registrants Annual Report on Form 10-K for the fiscal year ended September 30, 2007 and incorporated herein by reference. |
|||
23.1 | Consent of Ernst & Young LLP. |
|||
23.2 | Consent of Grant Thornton LLP. |
|||
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended is filed herewith |
|||
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended is filed herewith |
|||
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 is filed herewith |
|||
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 is filed herewith |
* | Management compensatory plan or arrangement | |
** | Confidential portions of this exhibit have been redacted and filed separately with the Securities and Exchange Commission pursuant to a confidential treatment request in accordance with Rule 24b-2 of the Securities Exchange Act of 1934, as amended. |
62