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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 December 31, 2002 Commission File No. 0-20600
----------------- -------
ZOLTEK COMPANIES, INC.
----------------------
(Exact name of registrant as specified in its charter)
Missouri 43-1311101
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(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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-25 of the Act). Yes No X
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Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date: As of February
10, 2003, 16,297,338 shares of Common Stock, $.01 par value, were
outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ZOLTEK COMPANIES, INC.
CONSOLIDATED BALANCE SHEET
--------------------------
(Amounts in thousands, except share and per share amounts)
DECEMBER 31, SEPTEMBER 30,
ASSETS 2002 2002
- ---------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Current assets:
Cash and cash equivalents................................................................$ 683 $ 685
Accounts receivable, less allowance for doubtful accounts of $790 and
$742, respectively..................................................................... 11,913 11,749
Inventories.............................................................................. 27,608 27,081
Other current assets..................................................................... 2,465 1,424
---------- ---------
Total current assets................................................................ 42,669 40,939
Property and equipment, net................................................................... 79,518 78,415
Other assets.................................................................................. 2,418 2,068
---------- ---------
Total assets........................................................................$ 124,605 $ 121,422
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Current maturities of long-term debt......................................................$ 13,968 $ 14,014
Trade accounts payable.................................................................... 15,667 12,535
Accrued expenses and other liabilities.................................................... 4,174 4,518
--------- ---------
Total current liabilities............................................................ 33,809 31,067
Other long-term liabilities.................................................................... 880 752
Long-term debt, less current maturities........................................................ 14,632 13,699
--------- ---------
Total liabilities.................................................................... 49,321 45,518
--------- ---------
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized,
no shares issued or outstanding......................................................... - -
Common stock, $.01 par value, 50,000,000 shares authorized,
16,297,338 shares issued and outstanding................................................ 163 163
Additional paid-in capital................................................................ 108,897 108,897
Retained deficit.......................................................................... (20,073) (16,903)
Accumulated other comprehensive loss...................................................... (13,703) (16,253)
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Total shareholders' equity........................................................... 75,284 75,904
--------- ---------
Total liabilities and shareholders' equity ..........................................$ 124,605 $ 121,422
========= =========
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 DECEMBER 31,
-------------------------------
2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
Net sales........................................................................................$ 16,959 $ 16,557
Cost of sales.................................................................................... 14,902 14,605
--------- ---------
Gross profit............................................................................ 2,057 1,952
Available unused capacity costs.................................................................. 1,326 1,754
Application and development costs................................................................ 895 985
Selling, general and administrative expenses..................................................... 2,664 2,439
--------- ---------
Operating loss from continuing operations............................................... (2,828) (3,226)
Other income (expense):
Interest expense........................................................................ (478) (419)
Interest income......................................................................... 20 7
Other, net.............................................................................. (19) (40)
--------- ---------
Loss from continuing operations before income taxes................................ (3,305) (3,678)
Income tax expense (benefit)..................................................................... (135) 45
--------- ---------
Net loss from continuing operations..................................................... (3,170) (3,723)
--------- ---------
Discontinued operations:
Operating loss, net of taxes............................................................ - (648)
--------- ---------
Total loss on discontinued operations, net of taxes................................ - (648)
--------- ---------
Net loss.........................................................................................$ (3,170) $ (4,371)
========= =========
Net loss per share:
Basic and diluted loss per share:
Continuing operations..............................................................$ (0.19) $ (0.23)
Discontinued operations............................................................ - (0.04)
---------- ---------
Total..............................................................................$ (0.19) $ (0.27)
========== ==========
Weighted average common and common equivalent shares outstanding................................. 16,297 16,285
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)
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
2002 2001
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss.................................................................................$ (3,170) $ (4,371)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Loss from discontinued operations................................................... - 648
Depreciation and amortization....................................................... 1,571 1,590
Unrealized foreign exchange (gain) loss............................................. (188) 175
Other, net.......................................................................... (5) -
Changes in assets and liabilities:
Decrease in accounts receivable............................................... 570 2,549
Decrease in inventories....................................................... 539 812
Increase in prepaid expenses and other assets................................. (904) (483)
Increase (decrease) in trade accounts payable................................. 2,295 (1,631)
Decrease in accrued expenses and other liabilities............................ (309) (148)
Decrease in other long-term liabilities....................................... (179) (125)
--------- ---------
Total adjustments........................................................ 3,390 3,387
--------- ---------
Net cash provided (used) by continuing operations........................................ 220 (984)
Net cash used by discontinued operations................................................. - (243)
--------- ---------
Net cash provided (used) by operating activities............................................... 220 (1,227)
--------- ---------
Cash flows from investing activities:
Payments for purchase of property and equipment..................................... (345) (666)
Proceeds from sale of property and equipment........................................ 15 28
--------- ---------
Net cash used by continuing operations................................................... (330) (638)
Net cash provided (used) by discontinued operations...................................... - -
--------- ---------
Net cash used by investing activities.......................................................... (330) (638)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of notes payable............................................. 303 2,385
Repayment of notes payable.......................................................... (199) (44)
--------- ---------
Net cash provided by continuing operations............................................... 104 2,341
Net cash provided (used) by discontinued operations...................................... - -
--------- ---------
Net cash provided by financing activities...................................................... 104 2,341
Effect of exchange rate changes on cash........................................................ 4 21
--------- ---------
Net increase (decrease) in cash................................................................ (2) 497
Cash and cash equivalents at beginning of period............................................... 685 667
--------- ---------
Cash and cash equivalents at end of period.....................................................$ 683 $ 1,164
========= =========
Supplemental disclosures of cash flow information:
Net cash paid during the period for:
Interest.................................................................................. $ 473 $ 375
Income taxes.............................................................................. $ 94 $ 24
The accompanying notes are an integral part of the consolidated financial statements.
4
ZOLTEK COMPANIES, INC.
NOTES TO UNAUDITED 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 2002
Annual Report to Shareholders, which includes consolidated financial
statements and notes thereto for the fiscal year ended September 30, 2002.
Certain reclassifications have been made to conform prior year's data to the
current presentation. The results for the quarter ended December 31, 2002
are not necessarily indicative of the results which may be expected for the
fiscal year ending September 30, 2003.
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").
The consolidated balance sheets of the Company's current international
subsidiary, Zoltek Rt. were translated from Hungarian Forints 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. 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 fiscal year ended September 30, 2002. All significant inter-company
transactions and balances have been eliminated upon consolidation.
3. DISCONTINUED OPERATION
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. 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. On March 1, 2002, the
Company completed the sale of its interest in Hardcore Composites to the 55%
majority owner. (For further discussion see Notes to the Consolidated
Financial Statements of the Company's 2002 Annual Report.)
The Company has reported the results of operations of Hardcore as
discontinued operations for fiscal 2002 in the consolidated statement of
operations. Certain information with respect to the discontinued operations
of Hardcore Composites for the quarter ended December 31, 2001 is summarized
as follows (amounts in thousands):
2001
-----------
Net sales..................................................$ 318
Cost of sales.............................................. 621
-----------
Gross loss................................................. (303)
Selling, general and administrative expenses............... 334
-----------
Loss from operations....................................... (637)
Other expenses............................................. (11)
-----------
Net loss from operations................................... (648)
-----------
Loss on discontinued operations, net of taxes..............$ (648)
===========
5
4. COMPREHENSIVE LOSS
Comprehensive loss for the quarters ended December 31, 2002 and 2001 was as
follows (amounts in thousands):
2002 2001
----------- -----------
Net loss.................................................... $ (3,170) $ (4,371)
Foreign currency translation adjustment..................... 2,550 774
----------- -----------
Comprehensive loss.......................................... $ (620) $ (3,597)
=========== ===========
5. DEBT
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.
The credit facility is structured as a term loan in the amount of $4.0
million and a revolving credit loan in the amount of $10.0 million. In
conjunction therewith, the Company repaid borrowings of $9.0 million plus
accrued interest and terminated the old credit facility. Borrowings under
this revolving credit facility are based on a formula of eligible accounts
receivable and eligible inventory of the Company and its U.S. based
subsidiaries. The outstanding loans under the credit facility bear interest
at the prime interest rate. The loan agreement contains financial covenants
related to borrowings, working capital, debt coverage, current ratio,
inventory turn ratio and capital expenditures. The Company issued warrants
to Southwest Bank to purchase 12,500 shares of common stock of the Company
at an exercise price of $5.00 per share, exercisable at any time during a
five-year period from the date of the loan. The fair value of the warrants,
at the time of the grant, were estimated to be $48,000.
In December 2001, the Company amended its credit agreement with Southwest
Bank to waive the debt coverage ratio covenant for the first two quarters of
fiscal 2002, and modify the current ratio, the inventory turn ratio and the
debt coverage ratio covenants 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
covenants for the remainder of fiscal 2002, modify the current ratio
covenant for the third and fourth quarters of fiscal 2002, and lower the
maximum advance on inventory covenant for quarters subsequent to the third
quarter of fiscal 2002. In consideration for these concessions by Southwest
Bank, the Company paid fees of $50,000 and the interest rate was adjusted to
the prime rate plus 1.0% per annum. As a result of these waivers and
modifications, at September 30, 2002, the Company was in compliance with all
financial covenants requirements included in the credit agreement as
amended.
The Company was not in compliance with a certain financial covenant under
its credit agreement with Southwest Bank as of December 31, 2002. The credit
agreement with Southwest Bank was due to expire on May 11, 2003 and any
outstanding borrowings would have been due and immediately payable on that
date. Total borrowings under the credit agreement were $12.0 million at
December 31, 2002.
The Company executed an amended credit facility agreement dated as of
February 13, 2003, with Southwest Bank of St. Louis. The amended credit
facility agreement is structured as a term loan in the amount of $3.5
million (due February 13, 2005) and a revolving credit loan in the amount of
$5.0 million (due January 31, 2004). Borrowings under the new facility are
based on a formula of eligible accounts receivable and inventory of the
Company's U.S. based subsidiaries. The outstanding loans under the agreement
bear interest at the prime interest rate plus 2%. The loan agreement
contains financial covenants related to borrowings, working capital, debt
coverage, current ratio and capital expenditures. The amended credit
agreement waived the debt coverage ratio for the first quarter of fiscal
2003. The Company believes compliance with all financial covenants as
required by the amended credit agreement will be maintained in fiscal 2003.
The Company also entered into a debenture purchase agreement, dated as of
February 13, 2003, under which the Company agreed to issue and sell to 14
individuals, including Messrs. Bealke, Dill, McDonnell and Rumy,
subordinated convertible debentures in the aggregate principal amount of
$8.0 million. The subordinated convertible debentures mature in five years,
bear interest at 7% and are convertible into an aggregate of 2,285,714
shares of common stock of the Company at a conversion price of $3.50 per
share. The Company also agreed to issue to the individual investors
five-year warrants to purchase an aggregate of 400,000 shares of common
stock of the Company at an exercise price of $5.00 per share. Proceeds from
the issuance of these convertible debentures were used to repay existing
borrowings as well as for working capital.
In May 2001, the Company's Hungarian subsidiary entered into an expanded
credit facility (to $12.0 million from $6.0 million) with Raifeissen 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. Borrowings against the Raiffeisen credit facility
cannot be used in Zoltek's U.S. operations.
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
6
engineering services for development of applications for carbon fiber
reinforced composites. Effective with the third quarter of fiscal 2002,
Company management has reviewed the performance of each of these two
segments, allocated resources between these segments and reported on the
overall financial and operating performance of each to the chief executive
officer of the Company. Segment data for the quarter then ended 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
December 31, 2002 and September 30, 2002 and for the three-month periods
ended December 31, 2002 and 2001 (in thousands):
THREE MONTHS ENDED DECEMBER 31, 2002
------------------------------------
(Unaudited)
Corporate
Headquarters
Carbon Specialty and
Fibers Products Eliminations Total
------------- ------------- ------------- -------------
Net sales..................................................... $ 7,164 $ 9,795 $ - $ 16,959
Available unused capacity expenses............................ 1,326 - - 1,326
Operating loss................................................ (1,638) (523) (667) (2,828)
Depreciation and amortization expense......................... 1,274 228 69 1,571
Capital expenditures.......................................... 263 82 - 345
THREE MONTHS ENDED DECEMBER 31, 2001
------------------------------------
(Unaudited)
Corporate
Headquarters
Carbon Specialty and
Fibers Products Eliminations Total
------------- ------------- -------------- -------------
Net sales..................................................... $ 7,775 $ 8,782 $ - $ 16,557
Available unused capacity expenses............................ 1,754 - - 1,754
Operating income (loss)....................................... (2,486) 80 (820) (3,226)
Depreciation and amortization expense......................... 1,379 191 20 1,590
Capital expenditures.......................................... 411 255 - 666
TOTAL ASSETS
------------
(Unaudited)
Corporate
Headquarters
Carbon Specialty and
Fibers Products Eliminations Total
------------- -------------- -------------- -------------
December 31, 2002............................................. $ 98,869 $ 29,327 $ (3,591) $ 124,605
September 30, 2002............................................ 99,511 25,024 (3,113) 121,422
7
GEOGRAPHIC INFORMATION (UNAUDITED) / (AMOUNTS IN THOUSANDS)
- -----------------------------------------------------------
REVENUES (1)
THREE MONTHS ENDED LONG-LIVED ASSETS (2)
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
2002 2001 2002 2002
----------- ----------- ---------- ----------
United States.....................................................$ 6,458 $ 4,777 $ 49,350 $ 50,366
Hungary........................................................... 10,501 11,780 30,758 28,660
----------- ----------- ---------- ----------
Total.............................................................$ 16,959 $ 16,557 $ 80,108 $ 79,026
=========== =========== ========== ==========
- ---------
(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 and equipment and intangibles, net of accumulated depreciation
and amortization, are based on country location of assets.
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 producer of carbon fibers. 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
selected 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 and is undertaking steps 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.
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,
which was completed in March 2002.
The Company's consolidated financial statements for the first quarter ended
December 31, 2001 account for Hardcore Composites as a discontinued
operation. Unless otherwise indicated, the following discussion relates to
the Company's continuing operations.
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
weakening 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, 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 has
temporarily idled a significant part of the plant in Abilene, Texas. The
excess capacity costs related to the carbon fiber business totaled $1.3
million in the fiscal quarter ended December 31, 2002 compared to $1.8
million for the fiscal quarter ended December 31, 2001.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED DECEMBER 31, 2002 COMPARED TO THREE MONTHS ENDED
- -------------------------------------------------------------------
DECEMBER 31, 2001
- -----------------
The Company's sales increased $0.4 million, or 2.4%, to $17.0 million in the
first quarter of fiscal 2003 from $16.6 million in the first quarter of
fiscal 2002. Carbon fiber sales decreased 7.9% ($0.6 million) to $7.2
million in the first quarter of fiscal 2003 from $7.8 million in the first
quarter of fiscal 2002. Carbon fiber sales decreased due to worldwide excess
carbon fiber capacity that resulted in distressed pricing across most
existing markets and by weakened economic conditions globally. Sales of
acrylic and other products
8
produced at Zoltek Rt. increased by $1.0 (11.5%) million to $9.8 million in
the first quarter of fiscal 2003 compared to $8.8 million in the first
quarter of fiscal 2002. Overall, demand in the textile markets remains
depressed due to continued weakened economic conditions globally and
particularly, in the primary European markets in which Zoltek Rt. competes.
Gross profit was flat at $2.0 million (12.1% of sales) in the first quarter
of fiscal 2003 and in the first quarter of fiscal 2002. Gross profit on
carbon fibers increased by $0.5 million to $1.4 million (19.2% of sales) in
the first quarter of fiscal 2003 compared to $0.9 million (11.5% of sales)
in the first quarter of fiscal 2002 due to improved product mix. Gross
profit on specialty products decreased to $0.7 million (7.0% of sales) in
the first quarter of fiscal 2003 from $1.1 million (12.1% of sales) in the
first quarter of fiscal 2002 primarily due to weak demand for acrylic
products and an unfavorable product mix.
The Company continued to incur costs related to the underutilized productive
capacity for carbon fibers at the idled Abilene, Texas facility. These costs
include depreciation and other overhead associated with the unused capacity.
These costs, which were separately identified on the income statement, were
approximately $1.3 million during the first quarter of fiscal 2003 and $1.8
million in the first quarter of fiscal 2002. The Company believes it is
necessary to maintain available capacity to encourage development of
significant new large-scale applications.
Application and development costs were $0.9 million in the first quarter of
fiscal 2003 and $1.0 million in the first quarter of fiscal 2002. These
costs include product and market development efforts, product trials and
sales and product development personnel and related travel. Targeted
emerging applications include automobile manufacturing, fire / heat barrier,
alternate energy technologies, deep sea oil drilling, filament winding and
buoyancy.
Selling, general and administrative expenses increased $0.2 million to $2.6
million, or 15.7% of sales, in the first quarter of fiscal 2003 from $2.4
million or 14.7% of sales, in the first quarter of fiscal 2002 primarily due
to the adverse effect of the exchange rate of the Hungarian currency.
Interest expense increased $0.1 million to $0.5 million for the first
quarter of fiscal 2003 from $0.4 million in the first quarter of fiscal year
2002, as a result of higher borrowings under the Company's credit facility.
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. As such, during
the first quarter of fiscal 2003 and fiscal 2002, the Company reported a
nominal income tax benefit / expense. The Company recognizes income taxes in
the United States and Hungary based on 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).
The foregoing resulted in a net loss from continuing operations of $3.2
million for the first quarter of fiscal 2003 compared to a net loss from
continuing operations of $3.7 million for the first quarter of fiscal 2002.
Similarly, the Company reported a net loss from continuing operations per
share of $0.19 and $0.23 on a basic and diluted basis for the first quarter
of fiscal 2003 and fiscal 2002, respectively. The weighted average common
shares outstanding were 16.3 million for the first quarter of fiscal 2003
and for the first quarter of fiscal year 2002.
In the first quarter of fiscal 2002, the Company disposed of its 45%
interest in Hardcore Composites. The net loss from discontinued operations
for first quarter of fiscal 2002 included a $0.6 million loss from the
results of operations of Hardcore Composites, or $0.04 per share on a basic
and diluted basis.
The net loss for the first quarter of fiscal 2003 was $3.2 million, or $0.19
per share on a basic and diluted basis, compared to a net loss of $4.4
million, or $0.27 per share in the first quarter of fiscal 2002.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary sources of liquidity historically have been cash flow
from operating activities and borrowings under credit facilities,
supplemented with the net proceeds from three previous equity offerings, and
long-term debt financing utilizing the equity in the Company's real estate
properties.
In May 2001, the Company entered into a two-year credit facility with
Southwest Bank of St. Louis in the amount of $14.0 million. The credit
facility is structured as a term loan in the amount of $4.0 million, and a
revolving credit loan in the amount of $10.0 million. The Company used the
proceeds of the new facility to repay existing borrowing of $9.0 million,
plus accrued interest, and terminated the old credit facility. Borrowings
under the new facility are based on a formula of eligible accounts
receivable and inventory of the Company's U.S. based subsidiaries. The
outstanding loans under the agreement bear interest at the prime interest
rate. The loan agreement contains financial covenants related to borrowings,
working capital, debt coverage, current ratio, inventory turn ratio, and
capital expenditures. The Company issued warrants to the bank to purchase
12,500 shares of common stock of the Company at an exercise price of $5.00
per share, exercisable at any time during a five-year period from the date
of the loan.
9
In December 2001, the Company amended its credit agreement with Southwest
Bank to waive the debt coverage ratio covenant for the first two quarters of
fiscal 2002, and modify the current ratio, the inventory turn ratio and the
debt coverage ratio covenants 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
covenants for the remainder of fiscal 2002, modify the current ratio
covenant for the third and fourth quarters of fiscal 2002, and lower the
maximum advance on inventory covenant for quarters subsequent to the third
quarter of fiscal 2002. In consideration for these concessions by Southwest
Bank, the Company paid fees of $50,000 and the interest rate was adjusted to
the prime rate plus 1.0% per annum. As a result of these waivers and
modifications, at September 30, 2002, the Company was in compliance with all
financial covenants requirements included in the credit agreement as
amended.
The Company was not in compliance with a certain financial covenant under
its credit agreement with Southwest Bank as of December 31, 2002. The credit
agreement with Southwest Bank was due to expire on May 11, 2003 and any
outstanding borrowings would have been due and immediately payable on that
date. Total borrowings under the credit agreement were $12.0 million at
December 31, 2002.
The Company executed an amended credit facility agreement, dated as of
February 13, 2003, with Southwest Bank of St. Louis. The amended credit
facility agreement is structured as a term loan in the amount of $3.5
million (due February 13, 2005) and a revolving credit loan in the amount of
$5.0 million (due January 31, 2004). Borrowings under the new facility are
based on a formula of eligible accounts receivable and inventory of the
Company's U.S. based subsidiaries. The outstanding loans under the agreement
bear interest at the prime interest rate plus 2%. The loan agreement
contains financial covenants related to borrowings, working capital, debt
coverage, current ratio and capital expenditures. The amended credit
agreement waived the debt coverage ratio for the first quarter of fiscal
2003. The Company believes compliance with all financial covenants as
required by the amended credit agreement will be maintained in fiscal 2003.
The Company also entered into a debenture purchase agreement, dated as of
February 13, 2003, under which the Company agreed to issue and sell to 14
individuals, including Messrs. Bealke, Dill, McDonnell and Rumy,
subordinated convertible debentures in the aggregate principal amount of
$8.0 million. The subordinated convertible debentures mature in five years,
bear interest at 7% and are convertible into an aggregate of 2,285,714
shares of common stock of the Company at a conversion price of $3.50 per
share. The Company also agreed to issue to the individual investors
five-year warrants to purchase 400,000 shares of common stock of the Company
at an exercise price of $5.00 per share. Proceeds from the issuance of these
convertible debentures were used to repay existing borrowings, plus accrued
interest, as well as for working capital.
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 and a $2.0 working capital facility, both expiring in November 2003
and a $4.0 million capital investment facility that expires in 2006. The
factoring facility and the working capital facility are one-year agreements
renewable each year. Borrowings against the Raiffeisen credit facility
cannot be used in Zoltek's U. S. operations.
The Company reported working capital of $8.9 million at December 31, 2002
compared to working capital of $9.9 million at September 30, 2002. The
decrease in working capital from September 30, 2002 to December 31, 2002 was
primarily due to an increase in the Company's accounts payable. The
Company's continuing operations provided $0.2 million of cash during the
first quarter of fiscal 2003 versus using $0.9 million in the first quarter
of fiscal 2002. The Company has taken steps to rationalize its work force to
reflect current and near-term demand, to reduce other operating expenses
until customer demand improves and to decrease carbon fiber inventories. At
December 31, 2002, the Company reported cash and cash equivalents of $0.7
million and had available $2.1 million of unused borrowings under its credit
facilities ($0.8 million available from Southwest Bank for its U. S. based
subsidiaries and $1.3 million available from Raiffeisen Bank Rt. for its
Hungarian subsidiary).
Current maturities of long-term debt at December 31, 2002 included $12.0
million of the U.S. credit facility the stated terms of which would have
matured in May 2003 had the credit facility not been amended and had the
convertible debt agreement not been completed, plus approximately $2.0
million related to various mortgages.
The Company believes its financial position has been improved as a result of
operating cost reductions, including the rationalization of its work force
and the reduction of operating expenses and the recent amendment to its bank
credit facility and convertible debenture financing. 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 amended credit facilities, 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 bank borrowings and to continue
to closely manage the Company's working capital. 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 quarter of fiscal 2003, the Company made
capital expenditures of $0.3 million for various projects compared to $0.7
million during the corresponding period of fiscal 2002. These expenditures
were financed principally with
10
borrowings. The Company expects capital expenditures to total less than $1.0
million in fiscal 2003 unless near term demand increases significantly.
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
manufacturing facility and the Salt Lake City 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.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
Outlined below are accounting policies that Zoltek believes are key to a
full understanding of the Company's operations and financial results. All of
the Company's accounting policies are in compliance with U. S. generally
accepted accounting principles (GAAP).
Revenue recognition
The Company recognizes sales on the date title to the sold product transfers
to the customer, which generally approximates the shipping date.
Historically, the Company has experienced very low levels of product returns
due to damaged goods or products that do not meet customer specifications.
Additionally, the Company generally does not offer any volume or other
incentives to entice customer sales.
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
Company's projections, additional inventory write-downs may be required and
would be reflected in cost of sales on the Company's statement of operations
in the period in which the revision is made.
In recent years, carbon fiber sales have been depressed by excess capacity
across the industry, distressed pricing across most existing markets and
weakening economic conditions globally. These factors combined with the high
level of inventories maintained by the Company have resulted in the Company
reducing the cost of certain carbon fiber inventories to their lower
estimated market values. If these industry conditions do not improve in a
reasonable period of time, or further deteriorate, it is possible that the
market value of certain of the Company's carbon fiber inventories may
further decrease resulting in additional charges to cost of sales.
Application and development expenses
The Company is actively pursuing the development of a number of applications
for the use of its carbon fiber and related products. The Company is
currently party to several developmental agreements with various prospective
users of these products for the purpose of accelerating the development of
various carbon fiber applications. Additionally, the Company is executing
several internal developmental strategies to further the use of carbon fiber
and consumer and industrial products made from carbon fiber. As a result,
the Company incurs certain costs for research, development and engineering
of products and manufacturing processes. These costs are expensed as
incurred and totaled approximately $0.8 million and $1.0 million in the
first quarter of fiscal 2003 and 2002, respectively. Application and
development expenses are presented as an operating item on the Company's
consolidated statement of operations. Given the Company's 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.
Unused capacity costs
The Company is currently not operating its continuous carbonization lines
located at the Abilene, Texas facility at full capacity. As a result, the
Company has elected to categorize certain costs related to these idle assets
as unused capacity costs. Such costs totaled $1.3 million and $1.8 million
for the quarters ended December 31, 2002 and 2001, respectively and include
depreciation and other overhead expenses associated with unused capacity.
The unused capacity costs are presented as an operating item on the
Company's consolidated statement of operations. As discussed above,
management intends to return the Abilene, Texas facility to service in
fiscal 2003. However, until the facility is operating at certain production
levels, these unused capacity costs will continue to be 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. 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. In determining
expected future undiscounted cash flows attributable to a long-lived asset
or a group of long-lived assets, the Company must make certain judgments and
estimations
11
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. These judgments and assumptions
are particularly challenging as they relate to the Company's long-lived
assets due to the developmental stage and current market conditions of the
carbon fiber industry. It is possible that actual future cash flows related
to the Company's long-lived assets may materially differ from the Company's
determination of expected future undiscounted cash flows. Additionally, if
the Company's expected future undiscounted cash flows were less than the
carrying amount of the asset 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 Company's carbon fiber
production equipment in order to determine the amount of the impairment
charge.
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 facilities. 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 December 31, 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
would result in a $0.3 million increase in interest expense based on the
debt levels at December 31, 2002.
The Company views as long-term its investment in Zoltek Rt., which has a
functional currency other than the U.S. dollar. As a result, the Company
does not hedge this net investment. In terms of foreign currency translation
risk, the Company is exposed to Zoltek Rt.'s functional currency, which is
the Hungarian Forint. The Company's net foreign currency investment in
Zotlek Rt. translated into U.S. dollars using period-end exchange rates was
$19.5 million and $16.3 million at December 31, 2002 and December 31, 2001,
respectively. The potential loss in value of the Company's net foreign
currency investment in Zoltek Rt. resulting from a hypothetical 10% adverse
change in quoted foreign currency exchange rate of the Hungarian Forint at
December 31, 2002 and December 30, 2001 amounted to $2.9 million and $2.0
million, respectively. In addition, Zoltek Rt. routinely sells its products
to customers located primarily throughout Europe in sales transactions that
are denominated in foreign currencies other than the Hungarian Forint. As a
result, Zoltek Rt. is exposed to foreign currency risks related to these
transactions. The Company does not currently employ a foreign currency
hedging strategy related to the sales of Zoltek Rt. and does not believe
these risks will have a material adverse impact on the Company's results of
operations or financial position.
* * *
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.
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation as of December 31, 2002, the Company's Chief
Executive Officer and Chief Financial Officer have concluded that the
Company's disclosure controls and procedures (as defined in Rule 13a-14(c)
and 15d-14(c) under the Securities Exchange Act of 1934, as amended) are
effective. There have been no significant changes in internal controls or in
other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
12
ZOLTEK COMPANIES, INC.
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits: 99.1 Certification of Zsolt Rumy
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 of James F. Whalen
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 December 31,
2002.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Zoltek Companies, Inc.
(Registrant)
Date: February 18, 2003 By: /s/ JAMES F. WHALEN
----------------- ---------------------------------
James F. Whalen
Chief Financial Officer
13
I, Zsolt Rumy, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of
Zoltek Companies, Inc.;
(2) Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to
state a material fact necessary in order to make the
statements made, in light of the circumstances under which
such statements were made, not misleading with respect to
the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
(4) The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures
to ensure that material information relating to
the registrant, including its consolidated
subsidiaries, is made known to us by others
within those entities, particularly during the
period for which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls as of a date within 90 days
prior to the filing date of this quarterly report
(the "Evaluation Date"); and
(c) presented in this quarterly report our
conclusions about the effectiveness of the
disclosure controls and procedures based on our
evaluation as of the Effective Date;
(5) The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or
operation of internal controls which could
adversely affect the registrant's ability to
record, process, summarize and report financial
data and have identified for the registrant's
auditors any material weaknesses in internal
controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a
significant role in the registrant's internal
controls; and
(6) The registrant's other certifying officer and I have
indicated in this quarterly report whether or not there
were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation,
including any corrective actions with regard to
significant deficiencies and material weaknesses.
February 18, 2003 /s/ Zsolt Rumy
--------------------------------
Zsolt Rumy
Chief Executive Officer
14
I, James F. Whalen, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of
Zoltek Companies, Inc.;
(2) Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to
state a material fact necessary in order to make the
statements made, in light of the circumstances under which
such statements were made, not misleading with respect to
the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
(4) The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures
to ensure that material information relating to
the registrant, including its consolidated
subsidiaries, is made known to us by others
within those entities, particularly during the
period for which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls as of a date within 90 days
prior to the filing date of this quarterly report
(the "Evaluation Date"); and
(c) presented in this quarterly report our
conclusions about the effectiveness of the
disclosure controls and procedures based on our
evaluation as of the Effective Date;
(5) The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or
operation of internal controls which could
adversely affect the registrant's ability to
record, process, summarize and report financial
data and have identified for the registrant's
auditors any material weaknesses in internal
controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a
significant role in the registrant's internal
controls; and
(6) The registrant's other certifying officer and I have
indicated in this quarterly report whether or not there
were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation,
including any corrective actions with regard to
significant deficiencies and material weaknesses.
February 18, 2003 /s/ James F. Whalen
--------------------------------
James F. Whalen
Chief Financial Officer
15