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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2002 Commission File No. 0-20600
------------- -------
ZOLTEK COMPANIES, INC.
----------------------
(Exact name of registrant as specified in its charter)
Missouri 43-1311101
- -------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3101 McKelvey Road, St. Louis, Missouri 63044
- --------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 291-5110
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes x No
--- ---
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date: As of August 14,
2002, 16,291,338 shares of Common Stock, $.01 par value, were outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ZOLTEK COMPANIES, INC.
CONSOLIDATED BALANCE SHEET
--------------------------
(Amounts in thousands, except share and per share amounts)
JUNE 30, SEPTEMBER 30,
ASSETS 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Current assets:
Cash and cash equivalents................................................................ $ 1,259 $ 667
Accounts receivable, less allowance for doubtful accounts of $766 and
$760, respectively..................................................................... 13,622 13,518
Inventories.............................................................................. 26,275 25,250
Other current assets..................................................................... 940 666
Current assets of discontinued operations................................................ - 1,307
---------- ----------
Total current assets................................................................ 42,096 41,408
Property and equipment, net................................................................... 79,384 79,157
Intangible assets, net........................................................................ 612 672
Other assets.................................................................................. 935 141
---------- ----------
Total assets........................................................................ $ 123,027 $ 121,378
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Current maturities of long-term debt..................................................... $ 14,272 $ 2,073
Trade accounts payable................................................................... 12,063 10,873
Accrued expenses and other liabilities................................................... 4,984 4,264
Current liabilities of discontinued operations........................................... - 1,858
---------- ----------
Total current liabilities........................................................... 31,319 19,068
Other long-term liabilities................................................................... 706 678
Long-term debt, less current maturities....................................................... 13,868 22,036
---------- ----------
Total liabilities................................................................... 46,893 41,782
---------- ----------
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized,
no shares issued or outstanding........................................................ - -
Common stock, $.01 par value, 50,000,000 shares authorized,
16,291,338 and 16,285,338 shares issued and outstanding, respectively.................. 163 188
Additional paid-in capital............................................................... 108,889 128,024
Accumulated deficit...................................................................... (15,628) (9,071)
Treasury common stock at cost, 0 and 2,514,993 shares, respectively...................... - (19,181)
Accumulated other comprehensive loss..................................................... (16,290) (20,364)
---------- ----------
Total shareholders' equity.......................................................... 77,134 79,596
---------- ----------
Total liabilities and shareholders' equity ......................................... $ 123,027 $ 121,378
========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
2
ZOLTEK COMPANIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------
(Amounts in thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
--------------------------- --------------------------
2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------------
Net sales............................................................... $ 17,806 $ 17,156 $ 51,811 $ 59,320
Cost of sales........................................................... 15,447 14,963 45,039 59,530
----------- ----------- ----------- -----------
Gross profit (loss)................................................ 2,359 2,193 6,772 (210)
Available unused capacity costs......................................... 1,476 1,822 4,692 4,888
Application and development costs....................................... 767 920 2,761 2,796
Selling, general and administrative expenses............................ 2,578 2,776 7,608 9,444
----------- ----------- ----------- -----------
Operating loss from continuing operations.......................... (2,462) (3,325) (8,289) (17,338)
Other income (expense):
Interest expense................................................... (383) (426) (1,157) (1,581)
Interest income.................................................... 1 239 15 753
Other, net......................................................... (45) 22 (36) (145)
----------- ----------- ----------- -----------
Loss from continuing operations before income taxes..................... (2,889) (3,490) (9,467) (18,310)
Income tax expense (benefit)............................................ (2,694) 94 (2,622) (593)
----------- ----------- ----------- -----------
Net loss from continuing operations................................ (195) (3,584) (6,845) (17,717)
Discontinued operations:
Operating loss, net of taxes....................................... - (654) (1,030) (1,592)
Gain (loss) on disposal of discontinued operations, net of taxes... - - 1,319 (1,760)
----------- ----------- ----------- -----------
Net gain (loss) on discontinued operations, net of taxes......... - (654) 289 (3,352)
----------- ----------- ----------- -----------
Net loss................................................................ $ (195) $ (4,240) $ (6,556) $ (21,069)
=========== =========== =========== ===========
Net income (loss) per share:
Basic and diluted income (loss) per share:
Continuing operations.......................................... $ (0.01) $ (0.22) $ (0.42) $ (1.07)
Discontinued operations........................................ - (0.04) 0.02 (0.20)
----------- ----------- ----------- -----------
Total.......................................................... $ (0.01) $ (0.26) $ (0.40) $ (1.27)
=========== =========== =========== ===========
Weighted average common and common equivalent shares outstanding........ 16,289 16,284 16,287 16,592
The accompanying notes are an integral part of the consolidated financial statements.
3
ZOLTEK COMPANIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
(Amounts in thousands)
(Unaudited)
NINE MONTHS ENDED JUNE 30,
--------------------------
2002 2001
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss............................................................................... $ (6,556) $ (21,069)
Adjustments to reconcile net loss to net cash used by operating activities:
(Gain) loss from discontinued operations.......................................... (289) 3,352
Depreciation and amortization..................................................... 4,946 4,766
Unrealized foreign exchange gain.................................................. (699) (296)
Other, net........................................................................ (17) 1,028
Changes in assets and liabilities:
Decrease in accounts receivable............................................. 1,530 762
Decrease in inventories..................................................... 558 4,936
Decrease (increase) in other current assets................................. 276 (104)
Increase in other assets.................................................... (612) (552)
Increase in trade accounts payable.......................................... 69 2,517
Increase (decrease) in accrued expenses and other liabilities............... 255 (61)
Increase in other long-term liabilities..................................... 88 583
----------- -----------
Total adjustments...................................................... 6,105 16,931
----------- -----------
Net cash used by continuing operations................................................. (451) (4,138)
Net cash used by discontinued operations............................................... (262) (2,204)
----------- -----------
Net cash used by operating activities........................................................ (713) (6,342)
----------- -----------
Cash flows from investing activities:
Payments for purchase of property and equipment........................................ (1,624) (4,591)
Sale of marketable securities.......................................................... - 1,483
Other, net............................................................................. 69 79
----------- -----------
Net cash used by continuing operations............................................ (1,555) (3,029)
Net cash provided by discontinued operations...................................... - 37,565
----------- -----------
Net cash provided (used) by investing activities............................................. (1,555) 34,536
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of common stock options......................................... 21 287
Proceeds from issuance of notes payable........................................... 5,832 14,486
Repayment of notes payable and other................................................... (2,975) (9,312)
----------- -----------
Net cash provided by continuing operations........................................ 2,878 5,461
Net cash used by discontinued operations.......................................... - (35,401)
----------- -----------
Net cash provided (used) by financing activities............................................. 2,878 (29,940)
----------- -----------
Effect of exchange rate changes on cash...................................................... (18) (2)
----------- -----------
Net increase (decrease) in cash.............................................................. 592 (1,748)
Cash and cash equivalents at beginning of period............................................. 667 2,222
----------- -----------
Cash and cash equivalents at end of period................................................... $ 1,259 $ 474
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Net cash paid (received) during the period for:
Interest............................................................................... $ 1,103 $ 2,162
Income taxes........................................................................... $ (2,731) $ (1,037)
Non-cash financing activities:
Return of common stock in acquisition and divestiture.................................. $ - $ (19,062)
Note receivable received in divestiture................................................ $ - $ (5,000)
The accompanying notes are an integral part of the consolidated financial statements.
4
ZOLTEK COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. UNAUDITED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited consolidated
financial statements include all adjustments of a normal and recurring
nature necessary for a fair presentation of the financial position and
results of operations as of the dates and for the periods presented. These
financial statements should be read in conjunction with the Company's 2001
Annual Report to Shareholders, which includes consolidated financial
statements and notes thereto as of and for the fiscal year ended September
30, 2001. Certain reclassifications have been made to conform prior year's
data to the current presentation. The results for the quarter ended June 30,
2002 are not necessarily indicative of the results which may be expected for
the fiscal year ending September 30, 2002.
2. PRINCIPLES OF CONSOLIDATION
Zoltek Companies, Inc. (the "Company") is a holding company, which operates
through wholly owned subsidiaries, Zoltek Corporation, Zoltek Properties
Inc., Zoltek Rt., Zoltek Materials Group, Inc., and Engineering Technology
Corporation ("Entec Composites Machines"). From April 2000 to March 2002,
the Company owned a 45% interest in Hardcore Composites Operations, LLC
("Hardcore Composites"). From November 1999 to November 2000, the Company
owned Structural Polymer (Holdings) Limited ("SP Systems").
The consolidated balance sheets of the Company's current and former
international subsidiaries, Zoltek Rt. and SP Systems, were translated from
Hungarian Forints and British Pounds, respectively, to U.S. Dollars at the
exchange rate in effect at the applicable balance sheet date, while their
consolidated statements of operations were translated using the average
exchange rates in effect during the periods presented. Adjustments resulting
from the translation of financial statements are reflected as other
comprehensive income (loss) within shareholders' equity. Gains and losses
from foreign currency transactions of Zoltek Rt. and SP Systems are included
in the results of operations. These financial statements have been prepared
in accordance with U.S. generally accepted accounting principles and on a
consistent basis with the consolidated financial statements as of and for
the year ended September 30, 2001. All significant inter-company
transactions and balances have been eliminated upon consolidation.
3. DISCONTINUED OPERATIONS
In the fourth quarter of fiscal 2001, the Company formally adopted a plan to
dispose of its 45% interest in Hardcore Composites, which designs and
manufactures composite structures for the civil infrastructure market. The
Company acquired its interest in Hardcore Composites in the third quarter of
fiscal 2000. (For further discussion see Note 2 of the Notes to the
Consolidated Financial Statements included in the Company's 2001 Annual
Report.) From the date of acquisition until disposition, the financial
statements of Hardcore Composites were consolidated with the Company due to
the ability to directly control the operations. In the fourth quarter of
fiscal 2001, the Company recorded an impairment loss on discontinued
operations of $5.1 million to reduce the carrying value of Hardcore
Composites' long-lived assets to their estimated fair value less estimated
selling costs.
On March 1, 2002, the Company completed the sale of its interest in Hardcore
Composites to the 55% majority owner. At that date, Hardcore Composites had
net liabilities of approximately $1,319,000 which were 100% consolidated by
the Company. As part of the sale, Hardcore Composites assumed these net
liabilities, which resulted in the Company recognizing a $1,319,000 gain on
the sale of discontinued operations in the quarter ended March 31, 2002.
Additionally, in consideration for this sale, Hardcore Composites issued a
series of unsecured promissory notes to the Company. In light of the current
financial condition of Hardcore Composites, the Company recorded a full
valuation allowance against the promissory notes in its accounting for the
sale transaction.
In the third quarter and as a part of the sale of the Company's interest in
Hardcore Composites, Hardcore Composites and the Company also settled the
$1,000,000 note and certain other obligations payable to the former owner,
with the Company making a $500,000 payment and Hardcore Composites
contributing an additional amount. This note comprised part of the purchase
price of the acquisition in the third quarter of fiscal 2000 and was
guaranteed by the Company. However, the Company continues to guaranty
Hardcore Composite's lease obligations of approximately $30,000 per month to
the former owner. The obligation relates to a lease of the Hardcore
Composites manufacturing facility, which expires March 31, 2008. The Company
believes it has recorded sufficient reserves to cover for potential expenses
arising from this guarantee.
5
The Company reported the results of the operations of Hardcore Composites
and SP Systems as discontinued operations for the third quarter and nine
months ended June 30, 2002 and 2001 in the consolidated statement of
operations. The Company acquired SP Systems in November 1999 and sold it in
November 2000. (For further discussion see Note 2 of the Notes to the
Consolidated Financial Statements of the Company's Annual Report.) Assets
and liabilities associated with Hardcore Composites have been reclassified
as assets and liabilities of discontinued operations on the consolidated
balance sheet at September 30, 2001.
Certain information with respect to the discontinued operations of Hardcore
Composites and SP Systems for the nine months ended June 30, 2002 and 2001
is summarized as follows (in thousands):
2002 2001
--------- ---------
Net sales.................................................................... $ 408 $ 2,942
Cost of sales................................................................ 886 3,478
---------- ---------
Gross loss................................................................... (478) (536)
Selling, general and administrative expenses................................. 534 1,552
Goodwill amortization........................................................ - 80
---------- ---------
Loss from operations......................................................... (1,013) (2,168)
Other expenses............................................................... (17) (261)
Income tax expense........................................................... - 8
Minority interest............................................................ - 829
---------- ---------
Net loss from operations..................................................... (1,030) (1,592)
Gain (loss) on disposal of discontinued operations........................... 1,319 (1,760)
---------- ---------
Gain (loss) on discontinued operations, net of taxes......................... $ 289 $ (3,352)
========== =========
Certain information with respect to the assets and liabilities of Hardcore
Composites at September 30, 2001 is summarized as follows (in thousands):
SEPTEMBER 30,
2001
-------------
Cash and cash equivalents.................................................... $ 10
Accounts receivable, net..................................................... 420
Inventories.................................................................. 811
Other assets................................................................. 66
-----------
Assets of discontinued operations......................................... $ 1,307
===========
Accounts payable............................................................. $ (953)
Accrued expenses and other liabilities....................................... (905)
-----------
Liabilities of discontinued operations .................................. $ (1,858)
===========
4. COMPREHENSIVE LOSS
Comprehensive loss for the nine months ended June 30, 2002 and 2001 was as
follows (in thousands):
2002 2001
----------- -----------
Net loss.......................................................................... $ (6,556) $ (21,069)
Foreign currency translation adjustment........................................... 4,074 1,405
----------- -----------
Comprehensive loss................................................................ $ (2,482) $ (19,664)
=========== ===========
5. DEBT
On May 11, 2001, the Company entered into a two-year credit facility with
Southwest Bank of St. Louis (Southwest Bank) in the amount of $14.0 million.
The loan agreement contains financial covenants related to borrowings,
working capital, debt coverage, current ratio, inventory turn ratio, and
capital expenditures. In December 2001, the Company amended the credit
agreement with Southwest Bank to waive the debt coverage ratio for the first
two quarters of fiscal 2002, and modify the current ratio, the inventory
turn ratio and the debt coverage ratio for quarters subsequent to the second
quarter of fiscal 2002. In June 2002, the Company amended the credit
agreement with Southwest Bank to waive the debt coverage ratio and the
inventory turn ratio for the remainder of fiscal 2002, modify the current
ratio for the third and fourth quarters of fiscal 2002, and lower the
maximum advance on inventory for quarters subsequent to the third quarter of
fiscal 2002. In consideration for the waivers and modifications, the Company
paid fees of
6
$50,000 and the interest rate was adjusted most recently to the prime rate
plus 1.0%. At June 30, 2002, the Company was in compliance with the
financial covenants requirements, as amended.
The Company's debt with Southwest Bank is due in May 2003, and accordingly,
it has been classified as a current liability as of June 30, 2002. The
Company currently anticipates that, as of December 31, 2002, it may not be
in compliance with certain financial covenants under its credit agreement
with Southwest Bank. The Company intends to replace its existing credit
facility with Southwest Bank in the near term with a combination of senior,
revolving, term and mortgage debt or, alternatively, if the facility cannot
be replaced or otherwise refinanced, seek appropriate waivers or amended
financial covenants with Southwest Bank. The Company has retained
experienced financial advisors to assist in seeking alternative sources for
its long-term capital structure.
6. SEGMENT INFORMATION
The Company's strategic business units are based on product lines and have
been grouped into two reportable segments: Carbon Fibers and Specialty
Products. The Company's former Composite Intermediates segment was combined
with the Carbon Fibers segment in the third quarter of fiscal 2002 to
reflect that its products and services are now strategically focused on the
Company's strategy of commercializing the use of carbon fibers as
reinforcement in advanced composite materials, including providing composite
design and engineering services for development of applications for carbon
fiber reinforced composites. Effective with the third quarter of fiscal
2002, Company management will review the performance of each of these two
segments, allocate resources between these segments and report on the
overall financial and operating performance of each to the chief executive
officer of the Company. Segment data for the comparable periods for fiscal
year 2001 has been restated to reflect this change.
The Carbon Fibers segment manufactures low-cost carbon fibers used as
reinforcement material in composites, oxidized acrylic fibers for heat/fire
barrier applications and aircraft brakes, carbon fiber composite products
and filament winding equipment used in the composite industry. It also
facilitates development of product and process applications to increase the
demand for carbon fibers and aggressively markets carbon fibers. The Carbon
Fiber segment is located geographically in the United States and Hungary.
The Specialty Products segment manufactures and markets acrylic fibers,
nylon products and industrial materials primarily to the textile industry.
The Specialty Products segment is located in Hungary.
Management evaluates the performance of its operating segments on the basis
of operating income (loss) contribution to the Company. The following table
presents financial information on the Company's operating segments as of
June 30, 2002 and September 30, 2001 and for the three- and nine-month
periods ended June 30, 2002 and 2001 (in thousands):
THREE MONTHS ENDED JUNE 30, 2002
--------------------------------
(Unaudited)
Corporate
Headquarters
Carbon Specialty and
Fibers Products Eliminations Total
----------- ----------- ------------ ---------
Net sales $ 7,841 $ 9,965 $ - $ 17,806
Available unused capacity expenses 1,476 - - 1,476
Operating loss (1,224) (227) (1,011) (2,462)
Depreciation and amortization expense 1,274 436 77 1,787
Capital expenditures 226 251 28 505
THREE MONTHS ENDED JUNE 30, 2001
--------------------------------
(Unaudited)
Corporate
Headquarters
Carbon Specialty and
Fibers Products Eliminations Total
----------- ----------- ------------ ---------
Net sales $ 7,860 $ 9,296 $ - $ 17,156
Available unused capacity expenses 1,822 - - 1,822
Operating income (loss) (2,619) 614 (1,320) (3,325)
Depreciation and amortization expense 1,413 190 21 1,624
Capital expenditures 884 697 - 1,581
7
NINE MONTHS ENDED JUNE 30, 2002
-------------------------------
(Unaudited)
Corporate
Headquarters
Carbon Specialty and
Fibers Products Eliminations Total
----------- ----------- ------------ ---------
Net sales $ 23,613 $ 28,198 $ - $ 51,811
Available unused capacity expenses 4,692 - - 4,692
Operating loss (4,852) (579) (2,858) (8,289)
Depreciation and amortization expense 3,885 821 240 4,946
Capital expenditures 911 685 28 1,624
NINE MONTHS ENDED JUNE 30, 2001
-------------------------------
(Unaudited)
Corporate
Headquarters
Carbon Specialty and
Fibers Products Eliminations Total
----------- ----------- ------------ ---------
Net sales $ 29,344 $ 29,976 $ - $ 59,320
Available unused capacity expenses 4,888 - - 4,888
Operating income (loss) (14,253) 448 (3,532) (17,338)
Depreciation and amortization expense 4,095 609 62 4,766
Capital expenditures 3,460 1,131 - 4,591
TOTAL ASSETS, NET OF DISCONTINUED OPERATIONS
--------------------------------------------
(Unaudited)
Corporate
Headquarters
Carbon Specialty and
Fibers Products Eliminations Total
----------- ----------- ------------ ---------
June 30, 2002 $ 101,784 $ 24,193 $ (1,950) $ 124,027
September 30, 2001 98,916 22,129 (974) 120,071
GEOGRAPHIC INFORMATION (UNAUDITED) / (AMOUNTS IN THOUSANDS)
- -----------------------------------------------------------
REVENUES (1)
NINE MONTHS ENDED LONG-LIVED ASSETS (2)
----------------- ---------------------
JUNE 30, JUNE 30, JUNE 30, SEPTEMBER 30,
2002 2001 2002 2001
---- ---- ---- ----
United States........................................................... $ 18,469 $ 23,779 $ 51,393 $ 54,685
Hungary................................................................. 33,342 35,541 28,603 25,144
----------- ----------- ----------- -----------
Total................................................................... $ 51,811 $ 59,320 $ 79,996 $ 79,829
=========== =========== =========== ===========
- ------------------------
(1) Revenues are attributed to the entity recognizing the sale in the
interim statements, as it is not practical to accumulate every
customer's country of domicile on an interim basis.
(2) Property, plant and equipment and goodwill and intangibles, net of
accumulated depreciation and amortization, and net of discontinued
operations, are based on country location.
7. SHAREHOLDERS' EQUITY
In the third quarter of fiscal 2002, the Company retired and cancelled
2,514,993 of shares held in treasury. Since the excess of the purchase cost
over the par value was less than the pro rata amount originally charged to
additional paid-in capital, the excess was charged against additional
paid-in capital at the time of cancellation.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
- -------
The Company's mission is to commercialize the use of carbon fibers as
reinforcement in advanced composite materials. The Company believes it is
the lowest cost producers of carbon fibers and its sales strategy is
designed to attract significant new applications for carbon fiber reinforced
composites in automotive, infrastructure, construction, marine and other
industries. The Company believes introduction of carbon fibers to potential
end users has been generally well received and the Company is participating
in a number of ongoing development projects in these application categories.
As the Company pursues its application and market development efforts, the
Company has found the existing composite materials value chain relatively
slow to change given the requirement for radical innovation in design,
engineering and building processes as well as the reluctance to shift from
the invested base in current structural materials to one based on carbon
fiber composites. Therefore, the Company has sought to accelerate the
introduction and development of carbon fiber composites across a broad range
of mass-market applications. The Company is continuing to target emerging
applications for low-cost, high-performance carbons in automobile
manufacturing, alternate energy technologies, deep sea oil drilling
applications, filament winding applications, buoyancy and fire resistant
applications.
The Company acquired a series of downstream businesses during fiscal 2000,
with the objective of accelerating the introduction and development of
carbon fibers and carbon fiber composites in low-cost, high volume
applications. The Company's strategy includes providing direct input into
the composites value chain by supplying composite engineering and design
technology, composite processing technology and the ability to create
integrated product solutions utilizing composite materials. These
acquisitions included Zoltek Materials Group and Entec Composite Machines.
Additionally, in November 1999, the Company acquired Structural Polymer
(Holdings) Ltd. ("SP Systems"), which designs and manufactures composite
materials used in large scale structures such as wind turbine blades and
marine structures. While this acquisition was consistent with the Company's
business strategy, the financial performance of this business was
unsatisfactory. Therefore, in fiscal 2000, the Company formally adopted a
plan to sell this subsidiary and, in November 2000, the Company sold SP
Systems.
In April 2000, the Company acquired a 45% preferred membership interest in
Hardcore Composites Operations LLC ("Hardcore Composites"). Hardcore
Composites designs and manufactures composite structures for the civil
infrastructure market. In the fourth quarter of fiscal 2001, the Company
formally adopted a plan to dispose of its interests in Hardcore Composites.
The Company completed the disposition of Hardcore Composites in the second
quarter of fiscal 2002.
The Company's consolidated financial statements for the third quarter and
nine months ended June 30, 2002 and 2001 account for Hardcore Composites and
SP Systems as discontinued operations. Unless otherwise indicated, the
following discussion relates to the Company's continuing operations.
In order to encourage new applications development for carbon fibers, the
Company believes it is necessary to maintain significant available capacity.
From fiscal 1997 through early fiscal 1999 the Company pursued an aggressive
capacity expansion program and currently has the largest rated capacity for
carbon fibers production in the world. The Company believes that its
significant available capacity will encourage potential high volume users to
commit to incorporating carbon fibers into their products. Zoltek has
developed a standardized continuous carbonization line design in order to
optimize technical process capabilities, reduce equipment cost and shorten
lead time from the decision to add lines to the time when the lines become
operational.
The Company's carbon fiber manufacturing capacity continues to be
underutilized. Carbon fiber sales have been depressed by excess capacity
across the industry, distressed pricing across most existing markets and
weakened economic conditions globally. The Company's strategy for near-term
sales increases was to rely primarily on what had been two fast-growing
commercial markets (conductive plastics used in electronic products and
sporting goods). In fiscal 2001 and continuing into fiscal 2002, the growth
in these two markets slowed dramatically. In addition, sales of carbon
fibers into commercial markets have been slower to develop than expected due
to long lead times in product development for large-scale applications. For
these reasons, the Company idled the continuous carbon producing lines at
its plant in Abilene, Texas in the latter part of fiscal 2001 while still
utilizing the facility to manufacture its short fiber products. Although the
continuous carbon lines at the Abilene, Texas facility are currently idle,
the Company believes that the continued growth of the aircraft brake
business, the potential use of oxidized fiber as a fire retardant and
insulating material in consumer and automotive applications and/or the
success of any one of the large-scale applications currently being pursued
(e. g., automotive, oil field, marine, etc.) could lead to the resumption of
manufacturing its continuous carbon products at the Abilene, Texas facility
during the latter part of 2003. In light of such possible resumption of
manufacturing at this time, the
9
Company does not believe that any impairment exists with respect to the
carrying value of the currently idled assets at the Abilene facility.
The Company announced two new products at the 2002 JEC Composite show, held
in Paris in April: Panex 35 carbon fibers and a line of fabrics made from
this new carbon fiber. Both of these products represent successful
development efforts and the Company believes they have great potential value
for gaining new business in the long term. While the Company believes that
these products evidence the validity of its strategic initiatives in
developing the commercialization of low cost carbon fibers, it cannot
presently predict the pace at which future demand will grow or the timeframe
during which the products will begin to contribute material revenues.
A significant component of the Company's carbon fiber commercialization
strategy is to price carbon fibers to attract new applications and to
replace lower cost materials that have lower performance properties. In
order to make its strategy and position the business to be financially
sustainable, it has been necessary to reduce raw material (precursor) cost.
For the past four years the Company devoted substantial efforts and
investment to developing a precursor from its own acrylic fiber
manufacturing facility. Panex 35 is the result of this effort. The
properties of this fiber are significantly better than the fibers the
Company has produced in the past and should give it an advantage in
performance-critical applications. Additionally, the expertise developed
within the Company should enable it to find and develop additional sources
of precursor as the markets for carbon fiber grow.
The fabric products the Company introduced were an extension of its joint
automotive development project. In order to manufacture large composite
structures with reasonable speed, the resin must be infused either by
pressure or vacuum in a die or mold where the carbon fiber fabric is placed.
The line of fabrics the Company introduced are designed to facilitate the
resin infusion process. As automotive structural applications grow over the
next several years and as other markets, such as wind energy, begin to use
carbon fibers, the Company expects that its fabric products will be
positioned to capture significant market share in these developing
applications.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
- -----------------------------------------------------------------------------
The Company's sales increased 3.8% to $17.8 million in the third quarter of
fiscal 2002 from $17.2 million in the third quarter of fiscal 2001. Carbon
fiber sales were unchanged at $7.8 million in the third quarter of fiscal
2002 compared to the third quarter of fiscal 2001. Carbon fiber sales
declined in the buoyancy, automotive and sporting goods markets, offset by
increased growth in the friction market. Sales of the specialty products
business segment increased 7.2% ($0.7 million) to $10.0 million in the third
quarter of fiscal 2002 from $9.3 million in the third quarter of fiscal
2001. Sales of acrylic and other products increased primarily as the demand
in the textile market improved slightly compared to the weakened global
economic conditions experienced over the past year.
Gross profit increased $0.2 million to $2.4 million, 13.2% of sales, in the
third quarter of fiscal 2002 from a gross profit of $2.2 million, 12.8% of
sales, in the third quarter of fiscal 2001. Gross profit from carbon fibers
increased $0.9 million in the third quarter of fiscal year 2002 to $1.5
million compared to $0.6 million for the same period of fiscal 2001. Gross
margin increased primarily due to an improved product mix. Gross profit on
specialty products decreased by $0.7 million to $0.9 million in the third
quarter of fiscal 2002 compared to a gross profit of $1.6 million for the
corresponding quarter in fiscal 2001. Gross margin on specialty products
decreased to 8.7% of sales for the third quarter of fiscal 2002 compared to
17.3% of sales for the third quarter of fiscal 2001 due primarily to
increases in raw material costs that could not be passed on to customers,
and product mix.
The Company continued to incur costs related to the underutilized productive
capacity for carbon fibers at the Abilene, Texas facilities. These costs
included depreciation and other overhead associated with the unused
capacity. These costs were approximately $1.5 million during the third
quarter of fiscal 2002 and $1.8 million in the third quarter of fiscal 2001.
The Company believes it is necessary to maintain available capacity to
encourage development of significant new large-scale applications. The
Company forecasts these costs to be between $5.5 and $6.0 million in fiscal
2002. Total capital invested in the Abilene facility as of June 30, 2002 was
$39.1 million.
Application and development costs were $0.8 million in the third quarter of
fiscal 2002 and $0.9 million in the third quarter of fiscal 2001. These
costs include product and market development efforts, product trials and
sales and product development personnel and related travel. The emerging
applications targeted included automotive, alternate energy technologies,
deep sea oil drilling, filament winding and buoyancy.
Selling, general and administrative expenses decreased approximately 7.1%,
or $0.2 million, from $2.8 million in the third quarter of fiscal 2001 to
$2.6 million in the third quarter of fiscal 2002. The decrease in expense
was primarily from the carbon fiber business segment and the corporate
headquarters, due to cost cutting measures, including lower payroll and
administrative costs.
10
Interest expense, at $0.4 million, was approximately the same for the third
quarter of fiscal 2002 and fiscal 2001. Interest income decreased to a
nominal amount from $0.2 million for the third quarter of fiscal 2002 due to
lower balances invested.
In fiscal 2001, the Company recorded a valuation allowance against
substantially all of its deferred tax assets due to the uncertainty of
generating positive income in the near foreseeable future. During fiscal
2002, the tax laws changed allowing the Company additional carryback of net
operating losses to prior years. As such, the Company reported a $2.7
million income tax benefit in the third quarter of fiscal 2002 compared to
an income tax expense of $0.1 million in the third quarter of fiscal 2001.
The Company received the income tax refund of $2.7 million in the third
quarter of fiscal 2002. The Company recognizes income taxes in the United
States and Hungary based on the income before income taxes. Included in the
provision for income taxes are gross receipts taxes charged by the Hungarian
local taxing authorities, as well as the statutory income taxes (18%
Hungarian rate), which were minimal in the third quarter of fiscal 2002
versus $0.3 million in the third quarter of fiscal 2001.
The foregoing resulted in a net loss from continuing operations of $0.2
million for the third quarter of fiscal 2002 compared to a net loss of $4.2
million for the third quarter of fiscal 2001. Similarly, the Company
reported a net loss from continuing operations per share of $0.01 and $0.22
on a basic and diluted basis for the third quarter of fiscal 2002 and fiscal
2001, respectively. The weighted average common shares outstanding were 16.3
million for the third quarter of fiscal 2002 and for the third quarter of
fiscal year 2001, respectively.
In the fourth quarter of fiscal 2001, the Company formally adopted a plan to
dispose of its 45% interest in Hardcore Composites and in the second quarter
of fiscal 2002, the Company completed the sale. The net loss from
discontinued operations in the third quarter of fiscal 2001 included a $0.7
million loss from the results of operations for Hardcore Composites, or
$0.04 per share on a basic and diluted basis.
The net loss for the third quarter of fiscal 2002 was $0.2 million, or $0.01
per share on a basic and diluted basis, compared to a net loss of $4.2
million, or $0.26 per share in the third quarter of fiscal 2001.
NINE MONTHS ENDED JUNE 30, 2002 COMPARED TO NINE MONTHS ENDED JUNE 30, 2001
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The Company's sales decreased 14.5% ($7.5 million) to $51.8 million in
fiscal year 2002 from $59.3 million in fiscal year 2001. Carbon fiber sales
decreased 19.4% ($5.7 million) to $23.6 million in fiscal 2002 from $29.3
million in fiscal 2001. The carbon fiber sales decrease was due to worldwide
excess carbon fiber capacity that resulted in distressed pricing across most
existing markets. In particular, sales declined in the compounding and
buoyancy markets due to price competition, and in the sporting goods
category impacted by lower volume in the prepreg markets, modestly offset by
increased growth in the friction market. Sales of the specialty products
business segment decreased by 5.9% ($1.8 million) to $28.2 million in fiscal
2002 compared to $30.0 million in fiscal 2001. Sales in this segment
declined due to the decreased demand for textile materials in response to
weakened global economic conditions.
Gross profit increased to $6.8 million in fiscal 2002 from a loss of $0.2
million in the corresponding period of fiscal 2001 as the results for fiscal
2001 included an inventory valuation reduction of $7.5 million to reflect a
lower of cost or market adjustment. This inventory value reduction was
established due to the intensified overcapacity occurring in the second
quarter of fiscal 2001, which caused distressed pricing across most existing
markets for carbon fibers. Without the inventory value reduction, gross
margin would have been $7.3 million, or 12.3% of sales, in the first nine
months of fiscal 2001 compared to $6.8 million, or 13.1% of sales, for the
first nine months of fiscal 2002. Gross profit from carbon fibers increased
$8.6 million in fiscal year 2002 to $4.3 million from a $4.3 million loss
for the fiscal year 2001. Gross margin on carbon fibers increased to 18.0%
of sales for fiscal 2002 compared to (14.8)% of sales for the same period of
fiscal 2001, due primarily to the inventory value reduction recorded in
fiscal 2001. Without the inventory valuation reduction, gross margin on
carbon fibers would have been $3.2 million, 10.8% of sales, in the first
nine months of fiscal 2001. Gross profit on specialty products decreased
38.7% or $1.6 million from $4.1 million in fiscal 2001 to $2.5 million in
fiscal 2002. Gross margin on specialty products decreased to 9.0% of sales
for fiscal 2002 compared to 13.7% of sales for fiscal 2001 due primarily to
price decreases and product mix.
The Company continued to incur costs related to the underutilized productive
capacity for carbon fibers at the Abilene, Texas facilities. These costs
included depreciation and other overhead associated with the unused
capacity. These costs, which were separately identified on the income
statement, were approximately $4.7 million during the first nine months of
fiscal 2002 and $4.9 million in the first nine months of fiscal 2001. The
Company believes it is necessary to maintain available capacity to encourage
development of significant new large-scale applications and anticipates
costs associated with the available capacity will continue into fiscal 2003.
Total capital invested in the Abilene facility as of June 30, 2002 is $39.1
million.
Application and development costs were $2.8 million in the first nine months
of fiscal 2002 and in same period of fiscal 2001. These costs include
product and market development efforts, product trials and sales and product
development personnel and related travel.
11
The emerging applications targeted included automotive, alternate energy
technologies, deep sea oil drilling, filament winding and buoyancy.
Selling, general and administrative expenses decreased approximately 19.4%,
or $1.8 million, from $9.4 million in the first nine months of fiscal 2001
to $7.6 million in first nine months of fiscal 2002. The decrease in expense
was from both business segments and the corporate headquarters, due to cost
cutting measures, including lower payroll and administrative costs.
Interest expense was approximately $1.2 million for fiscal 2002 compared to
$1.6 million in the corresponding period of fiscal year 2001. The decrease
in interest expense resulted from lower borrowings related to the reduced
levels of capital expenditures and improved working capital management.
Interest income decreased to a nominal amount for the first nine months of
fiscal 2002 from $0.8 million for the first nine months of fiscal 2001
due to lower balances invested.
In fiscal 2001, the Company recorded a valuation allowance against
substantially all of its deferred tax assets due to the uncertainty of
generating positive income in the near foreseeable future. During fiscal
2002, the tax laws changed allowing the Company additional carryback of net
operating losses to prior years. As such, the Company reported an income tax
benefit of $2.6 million compared to an income tax benefit of $0.6 million in
fiscal 2001. The Company received the income tax refund of $2.7 million in
the third quarter of fiscal 2002. The Company recognizes income taxes in the
United States and Hungary based on the income before income taxes. Included
in the provision for income taxes are gross receipts taxes charged by the
Hungarian local taxing authorities, as well as the statutory income taxes
(18% Hungarian rate), which were $0.1 million in the first nine months of
fiscal year 2002 compared to $0.3 million for the first nine months of
fiscal 2001.
The foregoing resulted in a net loss from continuing operations of $6.8
million for the first nine months of fiscal 2002 compared to a net loss of
$17.7 million for the corresponding period of fiscal 2001. Similarly, the
Company reported net loss from continuing operations per share of $0.42 and
$1.07 on a basic and diluted basis for the first nine months of fiscal 2002
and fiscal 2001, respectively. The weighted average common shares
outstanding decreased to 16.3 million for the first nine months of fiscal
year 2002 from 16.6 million for the first nine months of fiscal year 2001.
The net gain from discontinued operations for the first nine months of
fiscal 2002 included a $1.0 million loss from the results of operations and
a $1.3 million gain from the disposition of Hardcore Composites. The net
loss from discontinued operations in the first nine months of fiscal 2001
included a $1.6 million loss from the results of operations of Hardcore
Composites and a $1.8 million loss from the disposition of SP Systems. The
foregoing resulted in a net gain from discontinued operations of $0.3
million in the first nine months of fiscal 2002, or $0.02 per share on a
basic and diluted basis, and a net loss of $3.4 million in the first nine
months of fiscal 2001, or $0.20 per share on a basic and diluted basis.
The net loss for the first nine months of fiscal 2002 was $6.6 million, or
$0.40 per share on a basic and diluted basis, compared to a net loss of
$21.1 million, or $1.27 per share in the year to date period of fiscal 2001.
LIQUIDITY AND CAPITAL RESOURCES
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The Company reported working capital (excluding discontinued operations) of
$10.8 million at June 30, 2002 compared to working capital of $22.9 million
at September 30, 2001. The decrease in working capital from September 30,
2001 to June 30, 2002 was primarily due to reclassifying its debt with
Southwest Bank to current from long term, as the debt to Southwest Bank
matures in May, 2003. The Company's continuing operations used $0.5 million
of cash during fiscal 2002 versus $4.1 million in fiscal 2001; $2.7 million
of the $3.6 million improvement was due to receipt of the federal tax
refund. The Company has taken steps to rationalize its work force to reflect
current and near-term demand, to significantly reduce other operating
expenses during fiscal 2002 and to decrease carbon fiber inventories via an
aggressive sales program. At June 30, 2002, the Company reported cash and
cash equivalents of $1.3 million and had available $2.3 million of unused
borrowings under its credit facilities ($1.0 million from Southwest Bank and
$1.3 million from Raiffeisen Bank Rt. for its Hungarian subsidiary). As of
August 14, 2002, the Company continues to have $2.3 million of unused
borrowings under its credit facilities ($1.0 million from Southwest Bank and
$1.3 million from Raiffeisen Bank Rt.).
For the balance of fiscal 2002, the Company will seek to fund its continuing
operations from borrowings, including seeking additional sources of
liquidity, and managing its working capital. As previously announced, the
Company has retained Pharus Advisors LLC, of New York, to assist the Company
in arranging financing to strengthen its long-term capital structure.
Current maturities of long-term debt at June 30, 2002 included $12.3 million
of the U. S. credit facility coming due in May 2003, plus approximately $1.9
million related to various mortgages.
In May 2001, the Company entered into a two-year credit facility with
Southwest Bank of St. Louis (Southwest Bank) in the amount of $14.0 million,
structured as a term loan in the amount of $4.0 million and a revolving
credit loan in the amount of $10.0 million.
12
Borrowings under the facility are based on a formula of eligible accounts
receivable and eligible inventory of the Company and its U.S. based
subsidiaries. The loan agreement contains financial covenants related to
borrowings, working capital, debt coverage, current ratio, inventory turn
ratio, and capital expenditures. In December 2001, the Company amended the
credit agreement with Southwest Bank to waive the debt coverage ratio for
the first two quarters of fiscal 2002, and modify the current ratio, the
inventory turn ratio and the debt coverage ratio for quarters subsequent to
the second quarter of fiscal 2002. In June, 2002, the Company amended the
credit agreement with Southwest Bank to waive the debt coverage ratio and
the inventory turn ratio for the remainder of fiscal 2002, modify the
current ratio for the third and fourth quarters of fiscal 2002, and lower
the maximum advance on inventory for quarters subsequent to the third
quarter of fiscal 2002. In consideration for the waiver and modifications,
the Company paid fees of $50,000 and the interest rate was adjusted to the
prime rate plus 1.0%. At June 30, 2002, the Company was in compliance with
all financial covenants requirements included in the credit facility
agreement as amended.
The Company currently anticipates that, as of December 31, 2002, it may not
be in compliance with certain financial covenants under its credit agreement
with Southwest Bank. The Company intends to replace its existing credit
facility with Southwest Bank in the near term with a combination of senior,
revolving, term and mortgage debt or, alternatively, if the facility cannot
be replaced or otherwise refinanced, seek appropriate waivers or amended
financial covenants.
In May 2001, the Company's Hungarian subsidiary entered into an expanded
credit facility (to $12.0 million from $6.0 million) with Raiffeisen Bank
Rt. The facility consists of a $6.0 million bank guarantee and factoring
facility, a $4.0 million capital investment facility and a $2.0 million
working capital facility.
The Company believes its financial position has been improved as a result of
recent operating cost reductions (including the rationalization of its work
force and the reduction of operating expenses), and the disposal of SP
Systems and Hardcore Composites. Management believes that the Company's
financial resources remain adequate to support the execution of its
strategic plans. However, failure to comply with its obligations under its
existing credit facilities, or obtain new financing when its existing US
bank credit facility matures, manage costs, and increase carbon fiber sales
on a timely basis would have a material adverse effect on the Company's
results of operations and financial condition. Management will seek to fund
its continuing operations from borrowings (including seeking additional
sources of liquidity) and to continue to closely manage the Company's
working capital. The Company's objective is to operate the continuing
business on a cash-neutral basis by the end of fiscal 2002. The Company does
not believe that any impairment exists relative to its capital investments
as it is still forecasting an improvement in the long-term carbon fibers
markets within a reasonable forecasting range of one to two years.
Historically, cash used in investing activities has been expended for
equipment additions and the expansion of the Company's carbon fibers
production capacity. In the first nine months of fiscal 2002, the Company
made capital expenditures of $1.6 million for various projects compared to
$4.6 million during the corresponding period of fiscal 2001. These
expenditures were financed principally with cash from borrowings. The
Company expects capital expenditures to total less than $2.0 million in
fiscal 2002.
Since the beginning of fiscal 1994, the Company has obtained long-term
financing utilizing its equity in its real estate properties. These loans
are non-recourse loans for the Company's headquarters, the St. Charles,
Missouri manufacturing facility and the Salt Lake City, Utah facility. Based
on the interest rates and the nature of the loans, the Company plans to
repay these loans in accordance with their stated long-term amortization
schedules.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in interest rates primarily as a result of
borrowing activities under its credit facility. The nature and amount of the
Company's debt may vary as a result of future business requirements, market
conditions and other factors. The extent of the Company's interest rate risk
is not quantifiable or predictable because of the variability of future
interest rates and business financing requirements, but the Company does not
believe such risk is material. At June 30, 2002, the Company did not have
any interest rate swap agreements outstanding. However, a one percent
increase in the weighted average interest rate of the Company's debt for
fiscal 2002 compared to fiscal 2001 would result in a $0.3 million increase
in interest expense based on the debt levels at June 30, 2002, excluding
discontinued operations.
* * *
The forward-looking statements contained in this report are inherently
subject to risks and uncertainties. The Company's actual results could
differ materially from those in the forward-looking statements. Potential
risks and uncertainties consist of a number of factors, including the
Company's ability to return to operating on a profitable basis, comply with
its obligations under its credit agreements, refinance those agreements at
their maturity dates, manage its excess carbon fiber production capacity and
inventory levels, continue investing in application and market development,
manufacture low-cost carbon fibers and profitably market them at decreasing
price points and penetrate existing, identified and emerging markets, as
well as other matters discussed herein.
14
ZOLTEK COMPANIES, INC.
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits: 99.1 Certification pursuant to 18 U. S. C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibits: 99.2 Certification pursuant to 18 U. S. C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K: No reports on Form 8-K were filed
during the three months ended June 30, 2002.
SIGNATURE
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Zoltek Companies, Inc.
(Registrant)
Date: August 14, 2002 By: /s/ James F. Whalen
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James F. Whalen
Chief Financial Officer
15