UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended September 30, 2007
Commission File Number 0-20600
ZOLTEK COMPANIES, INC.
(Exact name of registrant as specified in its charter)
| | | |
Missouri
(State or other jurisdiction of
incorporation or organization) | | 43-1311101
(I.R.S. Employer Identification No.) |
| | | |
3101 McKelvey Road, St. Louis, Missouri
(Address of principal executive offices) | | 63044
(Zip Code) |
Registrant’s telephone number, including area code: (314) 291-5110
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yeso. Noþ .
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yeso. Noþ .
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. Yesþ. Noo.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.þ.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one):
þ Large Accelerated Filero Accelerated Filero Non-Accelerated Filer.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso. Noþ.
State the aggregate market value of the voting stock held by non-affiliates of the registrant as of March 31, 2007: approximately $786,114,600.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of December 4, 2007: 33,813,271 shares of Common Stock, par value $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
The following document is incorporated by reference into the indicated Part of this Report:
| | | |
| Document | | Part of Form 10-K |
| | | |
| Proxy Statement for the 2007 | | |
| Annual Meeting of Shareholders | | III |
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-K/A amends the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2007, as originally filed on December 7, 2007 (the “Original Report”), and is being filed solely for the purpose of amending portions of Part II, Item 8 “Financial Statements and Supplemental Data” and Part IV, Item 15 “Exhibits, Financial Statement Schedules” to include certain information regarding developments that occurred since the Original Report was filed, as set forth below.
In April 2008, the Registrant’s management identified two payments by a subsidiary in the amounts of $175,000 and $75,000 in September 2007 and January 2008, respectively, that were not properly authorized or reported in the Registrant’s financial statements. The two payments were made by the Registrant’s Hungarian subsidiary at the direction of Kevin J. Schott, the former Chief Financial Officer of the Registrant. On May 2, 2008, Mr. Schott agreed to resign as Chief Financial Officer of the Registrant and paid the Registrant $250,000. The Audit Committee and management immediately initiated an investigation into the circumstances of the payments and to determine whether there were other transactions that were not properly authorized or recorded. On May 5, 2008, following a review by the Audit Committee, the Registrant filed a Current Report on Form 8-K reporting that it had determined that its previously issued financial statements as of September 30, 2007 and for the fiscal year then ended and as of December 31, 2007 and for the quarter then ended should no longer be relied upon pending completion of the Audit Committee’s investigation.
Zsolt Rumy, Chairman and Chief Executive Officer of the Registrant, is serving as Chief Financial Officer on an interim basis, and the Registrant is conducting a search for a permanent Chief Financial Officer. In connection with Mr. Schott’s resignation, the Registrant and Mr. Schott entered into a separation agreement under which Mr. Schott agreed to resign from the Registrant as of May 2, 2008, Mr. Schott paid the Registrant $250,000, and the Registrant agreed to pay him his salary and routine employee benefits through that date. The Registrant released Mr. Schott from claims arising out of the above-described payments that were not properly authorized or recorded and Mr. Schott released the Registrant from claims arising out of his employment and agreed to cooperate with the Registrant in connection with matters relating to his employment.
The Audit Committee has conducted its accounting investigation, including with respect to the circumstances of the two payments and whether there were additional payments that were not properly authorized or recorded in the Registrant’s financial statements. The Audit Committee’s investigation included specified forensic audit procedures conducted by the Registrant’s internal accounting staff and additional procedures developed and performed by forensic accounting experts of an independent accounting firm. The Audit Committee’s investigation has concluded and, based upon the forensic accounting procedures performed, did not detect the existence of other transactions that were not properly authorized or recorded.
The Audit Committee has discussed the results of its accounting investigation, including the report of the independent forensic accountants, with the Registrant’s independent registered public accounting firms. The Registrant has concluded that the Registrant’s previously issued financial statements as of September 30, 2007 and for the fiscal year then ended and as of December 31, 2007 and for the quarter then ended can be relied upon, and that no restatement of these financial statements is required. Management and the Audit Committee assessed the aggregate $250,000 amount under Staff Accounting Bulletin 99 and Staff Accounting Bulletin 108 and determined that the misstatement was not material to the results reflected in the consolidated financial statements. The $250,000 aggregate amount of the two unauthorized payments has been recorded below operating income as other expense in the Registrant’s consolidated statements of operations for the three and six months ended March 31, 2008. To reflect the receipt of the payment from Mr. Schott, the Registrant will record $250,000 below operating income as other income in the Registrant’s consolidated statements of operations for the three and nine months ended June 30, 2008. The Registrant is concurrently filing this amendment to its previously filed Annual Report on Form 10-K for the fiscal year ended September 30, 2007 and an amendment to its Quarterly Report on Form 10-Q for the quarter ended December 31, 2007 to reflect the above-described developments.
On May 13, 2008, the Registrant received a letter from the enforcement staff of the Securities and Exchange Commission indicating that the staff was conducting a non-public, fact finding investigation and requested that the Registrant retain certain records and produce information and documents related to matters disclosed in the Registrant’s Current Report on Form 8-K filed May 5, 2008. The Registrant has advised the staff that it will cooperate fully with its investigation.
This Form 10-K/A does not reflect all events occurring after the original filing of the Original Report or modify or update all the disclosures affected by subsequent events. Information not modified or updated herein reflects the disclosures made at the time of the filing of the Original Report on December 7, 2007. Accordingly, this Form 10-K/A should be read in conjunction with all of the Registrant’s periodic filings, including any Current Reports on Form 8-K and the Registrant’s Form 10-Q/A for the quarter ended December 31, 2007 and Form 10-Q for the quarter ended March 31, 2008, filed with the SEC subsequent to the filing date of the Original Report.
ZOLTEK COMPANIES, INC.
INDEX
2
Item 8. Financial Statements and Supplementary Data
ZOLTEK COMPANIES, INC.
REPORT OF MANAGEMENT
Management of Zoltek Companies, Inc. is responsible for the preparation and integrity of the Company’s financial statements. These statements have been prepared in accordance with generally accepted accounting principles and in the opinion of management fairly present the Company’s financial position, results of operations, and cash flow.
The Company maintains accounting and internal control systems to provide reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition and that the financial records are reliable for preparing financial statements. The selection and training of qualified personnel and the establishment and communication of accounting and administrative policies and procedures are important elements of these control systems. As set forth under “Item 9A. Controls and Procedures” of this Annual Report on Form 10-K, as amended, the Company’s Chief Executive Officer and Chief Financial Officer concluded that various material weaknesses existed as of September 30, 2007.
The Board of Directors, through its Audit Committee consisting solely of non-management directors, meets periodically with management and the Independent Registered Public Accounting Firm to discuss audit and financial reporting matters. To ensure independence, Grant Thornton LLP has direct access to the Audit Committee.
The Reports of Grant Thornton LLP and PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm, on their audits of the accompanying financial statements follows. This report states that their audits were performed in accordance with the Standards of the Public Company Accounting Oversight Board (United States). These standards include consideration of internal control over financial reporting controls for the purpose of determining the nature, timing, and extent of auditing procedures necessary for expressing their opinion on the financial statements.
| | | | | |
| | | |
| | /s/ Zsolt Rumy | |
| | Zsolt Rumy | |
| | Chief Executive Officer and Chief Financial Officer | |
| | June 26, 2008 | |
3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Zoltek Companies, Inc.
We have audited the accompanying consolidated balance sheet of Zoltek Companies, Inc. (a Missouri corporation) and its subsidiaries as of September 30, 2007, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Zoltek Companies, Inc. and its subsidiaries as of September 30, 2007, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying Schedule II is presented to comply with SEC reporting requirements and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Zoltek Companies, Inc.’s and subsidiaries internal control over financial reporting as of September 30, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated December 7, 2007 expressed an adverse opinion due to the identification and disclosure of material weaknesses.
| | | | | |
| | | |
| | /s/ GRANT THORNTON LLP | |
| |
| | Chicago, Illinois | |
| | December 7, 2007 (except for Note 13, as to which the date is June 26, 2008.) | |
4
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Zoltek Companies, Inc.
We have audited Zoltek Companies, Inc,’s (the “Company”) (a Missouri corporation) internal control over financial reporting as of September 30, 2007, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Zoltek Companies, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on Zoltek Companies, Inc.’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment:
| | | | |
| | • | | The Company did not maintain effective entity level controls and procedures to prevent certain accounting entries from being recorded prior to formal documentation of the arrangements being obtained. Specifically, the Company lacked effective policies and procedures for the review and recognition of revenue associated with certain sales contracts and the accurate recording of that revenue. Additionally, the Company lacked effective policies and procedures to insure use of an appropriate measurement date for the valuation of certain share-based payments. These deficiencies resulted in more than a remote likelihood that a material misstatement of the annual or interim financial statements would not be prevented or detected. |
| |
| | • | | The Company did not maintain effective policies and procedures related to the assessment of reserves for possible liability arising from certain litigation matters. These deficiencies resulted in more than a remote likelihood that a material misstatement of the annual or interim financial statements would not be prevented or detected. |
In our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, Zoltek Companies, Inc. has not maintained effective internal control over financial reporting as of September 30, 2007, based on criteria established inInternal Control—Integrated Frameworkissued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Zoltek Companies, Inc. and its subsidiaries as of September 30, 2007, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the year then ended. The material weaknesses identified above were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2007 financial statements, and this report does not affect our report dated December 7, 2007, which expressed and unqualified opinion on those financial statements.
We do not express an opinion on any other form of assurance on management’s discussion of the remediation of material weakness in internal control over financial reporting included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A.
| | | | | |
| | | |
| | /s/ GRANT THORNTON LLP | |
| |
| | Chicago, Illinois | |
| | December 7, 2007 | |
5
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Zoltek Companies, Inc.:
In our opinion, the consolidated balance sheet as of September 30, 2006 and the related consolidated statements of operations, shareholders’ equity and cash flows, for each of the two years in the period ended September 30, 2006 present fairly, in all material respects, the financial position of Zoltek Companies, Inc. and its subsidiaries at September 30, 2006, and the results of their operations and their cash flows for each of the two years in the period ended September 30, 2006, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule for each of the two years in the period ended September 30, 2006 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
| | | | | |
| | | |
| | /s/ PRICEWATERHOUSECOOPERS LLP | |
| |
| | St. Louis, Missouri | |
| | December 27, 2006 | |
6
ZOLTEK COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
| | | | | | | | | |
| | | September 30, | |
| | | 2007 | | | 2006 | |
Assets | | | | | | | | |
| Current assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 121,761 | | | $ | 10,802 | |
| Restricted cash | | | 13,815 | | | | 6,634 | |
| Accounts receivable, less allowance for doubtful accounts of $729 and $718, respectively | | | 37,495 | | | | 17,009 | |
| Inventories, net | | | 27,941 | | | | 21,721 | |
| Other current assets | | | 10,858 | | | | 6,915 | |
| | | | | | | |
| Total current assets | | | 211,870 | | | | 63,081 | |
| Property, plant and equipment, net | | | 188,801 | | | | 122,284 | |
| Other assets | | | 2,928 | | | | 2,319 | |
| | | | | | | |
| Total assets | | $ | 403,599 | | | $ | 187,684 | |
| | | | | | | |
| | | | | | | | | |
Liabilities and shareholders’ equity | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Current maturities of long-term debt | | $ | 13,813 | | | $ | 1,365 | |
| Trade accounts payable | | | 17,253 | | | | 11,935 | |
| Legal liabilities | | | 24,543 | | | | 23,725 | |
| Accrued expenses and other liabilities | | | 8,305 | | | | 6,014 | |
| | | | | | | |
| Total current liabilities | | | 63,914 | | | | 43,039 | |
| | | | | | | | | |
| Hungarian grant, long-term | | | 7,969 | | | | — | |
| Deferred Tax Liabilities | | | 4,046 | | | | — | |
| Value of warrants and beneficial conversion feature associated with convertible debt obligations | | | — | | | | 903 | |
| Other long-term liabilities | | | 52 | | | | 79 | |
| Long-term debt, less current maturities | | | 6,851 | | | | 32,002 | |
| | | | | | | |
| Total liabilities | | | 82,832 | | | | 76,023 | |
| | | | | | | |
| | | | | | | | | |
| Commitments and Contingencies (see Note 8) | | | — | | | | — | |
| | | | | | | | | |
| Shareholders’ equity: | | | | | | | | |
| Preferred stock, $.01 par value, 1,000,000 shares authorized, no shares issued and outstanding | | | — | | | | — | |
| Common stock, $.01 par value, 50,000,000 shares authorized, 33,653,735 and 25,652,982 shares issued and outstanding in 2007 and 2006, respectively | | | 337 | | | | 258 | |
| Additional paid-in capital | | | 476,205 | | | | 287,299 | |
| Accumulated other comprehensive income (loss) | | | 8,249 | | | | (14,389 | ) |
| Accumulated deficit | | | (164,024 | ) | | | (161,507 | ) |
| | | | | | | |
| | | | | | | | | |
| Total shareholders’ equity | | | 320,767 | | | | 111,661 | |
| | | | | | | |
| Total liabilities and shareholders’ equity | | $ | 403,599 | | | $ | 187,684 | |
| | | | | | | |
The accompanying notes are an integral part of the consolidated financial statements.
7
ZOLTEK COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
| | | | | | | | | | | | | |
| | | Fiscal Year Ended September 30, | |
| | | 2007 | | | 2006 | | | 2005 | |
| Net sales | | $ | 150,880 | | | $ | 92,357 | | | $ | 55,377 | |
| Cost of sales, excluding available unused capacity costs | | | 107,506 | | | | 69,994 | | | | 52,809 | |
| Available unused capacity costs | | | — | | | | — | | | | 2,347 | |
| Application and development costs | | | 7,230 | | | | 4,887 | | | | 3,324 | |
| Litigation charge (see Note 8) | | | 5,400 | | | | 22,795 | | | | — | |
| Selling, general and administrative expenses | | | 12,635 | | | | 10,356 | | | | 4,523 | |
| | | | | | | | | | |
| Operating income (loss) from continuing operations | | | 18,109 | | | | (15,675 | ) | | | (7,626 | ) |
| Other income (expense): | | | | | | | | | | | | |
| Interest expense, excluding amortization of financing fees, debt discount and beneficial conversion feature | | | (2,346 | ) | | | (2,645 | ) | | | (2,960 | ) |
| Warrant issue expense | | | (6,362 | ) | | | — | | | | — | |
| Amortization of financing fees and debt discount | | | (9,771 | ) | | | (16,532 | ) | | | (8,469 | ) |
| Loss on value of warrants and beneficial conversion feature | | | (314 | ) | | | (29,303 | ) | | | (16,574 | ) |
| Interest income | | | 1,829 | | | | 281 | | | | 2 | |
| Other, net | | | (1,131 | ) | | | (1,003 | ) | | | (1,876 | ) |
| | | | | | | | | | |
| Income (loss) from continuing operations before income taxes | | | 14 | | | | (64,877 | ) | | | (37,503 | ) |
| Income tax expense | | | 1,986 | | | | 888 | | | | 708 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Net loss from continuing operations | | | (1,972 | ) | | | (65,765 | ) | | | (38,211 | ) |
| | | | | | | | | | |
| Discontinued operations: | | | | | | | | | | | | |
| Operating loss, net of taxes | | | (545 | ) | | | (187 | ) | | | (2,182 | ) |
| Gain on disposal of discontinued operation, net of taxes | | | — | | | | 150 | | | | — | |
| | | | | | | | | | |
| Net loss on discontinued operations, net of taxes | | | (545 | ) | | | (37 | ) | | | (2,182 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Net loss | | $ | (2,517 | ) | | $ | (65,802 | ) | | $ | (40,393 | ) |
| | | | | | | | | | |
| Net loss per share: | | | | | | | | | | | | |
| Basic and diluted loss per share: | | | | | | | | | | | | |
| Continuing operations | | $ | ( 0.07 | ) | | $ | (2.91 | ) | | $ | (2.12 | ) |
| Discontinued operations | | | (0.02 | ) | | | (0.00 | ) | | | (0.12 | ) |
| | | | | | | | | | |
| Total | | $ | (0.09 | ) | | $ | (2.91 | ) | | $ | (2.24 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Weighted average common shares outstanding — basic and diluted | | | 28,539 | | | | 22,575 | | | | 18,050 | |
The accompanying notes are an integral part of the consolidated financial statements.
8
ZOLTEK COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Amounts in thousands)
| | | | | | | | | | | | | | | | | | | | | |
| | | Total Share- | | | | | | | Additional | | | Accumulated Other | | | | |
| | | holders’ | | | Common | | | Paid-In | | | Comprehensive | | | Accumulated | |
| | | Equity | | | Stock | | | Capital | | | Income (Loss) | | | Deficit | |
| |
| Balance, September 30, 2004 | | $ | 44,230 | | | $ | 163 | | | $ | 109,524 | | | $ | (10,145 | ) | | $ | (55,312 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | (40,393 | ) | | | | | | | | | | | | | | | (40,393 | ) |
| Foreign currency translation adjustment | | | (2,676 | ) | | | | | | | | | | | (2,676 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Comprehensive loss | | | (43,069 | ) | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Value of warrants and conversion feature at time of conversion | | | 26,845 | | | | | | | | 26,845 | | | | | | | | | |
| Unamortized value of convertible debt discount at time of conversion | | | (5,463 | ) | | | | | | | (5,463 | ) | | | | | | | | |
| Warrants exercised | | | 2,525 | | | | 3 | | | | 2,522 | | | | | | | | | |
| Value of warrants and beneficial conversion feature issued with convertible debt | | | 2,303 | | | | | | | | 2,303 | | | | | | | | | |
| Convertible debt converted | | | 13,161 | | | | 22 | | | | 13,139 | | | | | | | | | |
| Interest paid in stock | | | 92 | | | | | | | | 92 | | | | | | | | | |
| Issuance cost related to convertible debt conversions | | | (401 | ) | | | | | | | (401 | ) | | | | | | | | |
| Exercise of stock options | | | 422 | | | | 1 | | | | 421 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| |
| Balance, September 30, 2005 | | | 40,645 | | | | 189 | | | | 148,982 | | | | (12,821 | ) | | | (95,705 | ) |
| |
| Net loss | | | (65,802 | ) | | | | | | | | | | | | | | | (65,802 | ) |
| |
| Foreign currency translation adjustment | | | (1,568 | ) | | | | | | | | | | | (1,568 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Comprehensive loss | | | (67,370 | ) | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Value of warrants and conversion feature at time of conversion | | | 57,451 | | | | | | | | 57,451 | | | | | | | | | |
| Unamortized value of convertible debt discount at time of conversion | | | (10,165 | ) | | | | | | | (10,165 | ) | | | | | | | | |
| Warrants exercised | | | 10,456 | | | | 17 | | | | 10,439 | | | | | | | | | |
| Value of warrants and beneficial conversion feature issued with convertible debt | | | 30,992 | | | | | | | | 30,992 | | | | | | | | | |
| Convertible debt converted | | | 47,308 | | | | 47 | | | | 47,261 | | | | | | | | | |
| Issuance cost related to convertible debt conversions | | | (1,403 | ) | | | | | | | (1,403 | ) | | | | | | | | |
| Stock option awards | | | 969 | | | | | | | | 969 | | | | | | | | | |
| Exercise of stock options | | | 2,778 | | | | 5 | | | | 2,773 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| |
| Balance, September 30, 2006 | | $ | 111,661 | | | | 258 | | | | 287,299 | | | | (14,389 | ) | | | (161,507 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | (2,517 | ) | | | | | | | | | | | | | | | (2,517 | ) |
| Foreign currency translation adjustment | | | 22,638 | | | | | | | | | | | | 22,638 | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Comprehensive income | | | 20,121 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Convertible debt converted | | | 34,497 | | | | 30 | | | | 34,467 | | | | | | | | | |
| Unamortized value of convertible debt discount at time of conversion | | | (2,785 | ) | | | | | | | (2,785 | ) | | | | | | | | |
| Warrants exercised | | | 12,405 | | | | 9 | | | | 12,396 | | | | | | | | | |
| Warrants issued in December 2006 | | | 6,362 | | | | | | | | 6,362 | | | | | | | | | |
| Value of warrants related to January 2004 issuance | | | 1,218 | | | | | | | | 1,218 | | | | | | | | | |
| Issuance cost related to convertible debt conversions | | | 2,796 | | | | | | | | 2,796 | | | | | | | | | |
| Interest paid in stock | | | 322 | | | | | | | | 322 | | | | | | | | | |
| Stock option awards | | | 1,253 | | | | | | | | 1,253 | | | | | | | | | |
| Exercise of stock options | | | 1,392 | | | | 1 | | | | 1,392 | | | | | | | | | |
| Secondary offering funds received, less issue costs of $760 | | | 131,525 | | | | 39 | | | | 131,486 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Balance, September 30, 2007 | | $ | 320,767 | | | $ | 337 | | | $ | 476,205 | | | $ | 8,249 | | | $ | (164,024 | ) |
| | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of the consolidated financial statements
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ZOLTEK COMPANIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in thousands)
| | | | | | | | | | | | | |
| | | Fiscal Year Ended September 30, | |
| | | 2007 | | | 2006 | | | 2005 | |
| Cash flows from operating activities: | | | | | | | | | | | | |
| Net loss | | $ | (2,517 | ) | | $ | (65,802 | ) | | $ | (40,393 | ) |
| Net loss from discontinued operations | | | 545 | | | | 37 | | | | 2,182 | |
| | | | | | | | | | |
| Net income (loss) from continuing operations | | | (1,972 | ) | | | (65,765 | ) | | | (38,211 | ) |
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | | | | | | | | | |
| Depreciation and amortization | | | 9,205 | | | | 5,853 | | | | 5,142 | |
| Warrant issue expense | | | 6,362 | | | | — | | | | — | |
| Amortization of financing fees, debt discount and beneficial conversion feature | | | 9,771 | | | | 16,532 | | | | 8,469 | |
| Loss on value of warrants and beneficial conversion feature | | | 314 | | | | 29,303 | | | | 16,574 | |
| Foreign currency transaction losses | | | 606 | | | | — | | | | — | |
| Deferred taxes | | | 828 | | | | — | | | | — | |
| Share based compensation expense | | | 1,253 | | | | 969 | | | | — | |
| Other, net | | | — | | | | — | | | | 117 | |
| Changes in assets and liabilities: | | | | | | | | | | | | |
| Increase in accounts receivable | | | (18,320 | ) | | | (6,772 | ) | | | (1,276 | ) |
| (Increase) decrease in inventories | | | (5,388 | ) | | | 2,318 | | | | (10 | ) |
| Increase in prepaid expenses and other assets | | | (725 | ) | | | (3,686 | ) | | | (793 | ) |
| Increase in trade accounts payable | | | 3,224 | | | | 658 | | | | 2,828 | |
| Decrease (increase) in accrued expenses and other liabilities | | | (278 | ) | | | 1,922 | | | | 207 | |
| Increase in legal liabilities | | | 818 | | | | 21,948 | | | | 138 | |
| Increase (decrease) in other long-term liabilities | | | 171 | | | | (25 | ) | | | (366 | ) |
| | | | | | | | | | |
| Net cash provided by (used in) continuing operations | | | 5,869 | | | | 3,255 | | | | (7,595 | ) |
| Net cash provided by (used in) discontinued operations | | | 1,010 | | | | (450 | ) | | | (1,505 | ) |
| | | | | | | | | | |
| Net cash provided by (used in) operating activities | | | 6,879 | | | | (2,805 | ) | | | (9,100 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | | | | | |
| Purchases of property, plant and equipment | | | (53,412 | ) | | | (40,795 | ) | | | (14,765 | ) |
| Change in cash restricted for letters of credit | | | (7,181 | ) | | | (6,634 | ) | | | — | |
| Proceeds from sale of property and equipment | | | — | | | | — | | | | 1 | |
| Proceeds from Hungarian Government grant | | | 9,435 | | | | — | | | | — | |
| | | | | | | | | | |
| Net cash used in continuing operations | | | (51,158 | ) | | | (47,429 | ) | | | (14,764 | ) |
| Net cash used in discontinued operations | | | — | | | | (11 | ) | | | (26 | ) |
| | | | | | | | | | |
| Net cash used in investing activities | | | (51,158 | ) | | | (47,440 | ) | | | (14,790 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | | | | | |
| Proceeds from exercise of stock options and warrants | | | 13,797 | | | | 13,234 | | | | 2,947 | |
| Payment of issue costs related to secondary stock offering | | | (760 | ) | | | — | | | | — | |
| Proceeds from secondary stock offering | | | 132,284 | | | | — | | | | — | |
| Proceeds from issuance of convertible debt | | | 7,495 | | | | 47,505 | | | | 45,000 | |
| Payment of financing fees | | | (900 | ) | | | (1,541 | ) | | | (1,693 | ) |
| Repayment of notes payable and long-term debt | | | 3,538 | | | | (3,744 | ) | | | (22,349 | ) |
| | | | | | | | | | |
| Net cash provided by financing activities | | | 155,454 | | | | 55,454 | | | | 23,905 | |
| | | | | | | | | | |
| |
| Effect of exchange rate changes on cash and cash equivalents | | | (216 | ) | | | (272 | ) | | | (26 | ) |
| | | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | | 110,959 | | | | 10,547 | | | | (12 | ) |
| Cash and cash equivalents at beginning of year | | | 10,802 | | | | 255 | | | | 267 | |
| | | | | | | | | | |
| Cash and cash equivalents at end of year | | $ | 121,761 | | | $ | 10,802 | | | $ | 255 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Supplemental disclosures of cash flow information: | | | | | | | | | | | | |
| Net cash paid during the year for: | | | | | | | | | | | | |
| Interest | | $ | 3,856 | | | $ | 3,793 | | | $ | 3,679 | |
| Income taxes | | | — | | | | 888 | | | | 708 | |
| Non-cash conversion of convertible securities | | | 34,497 | | | | 47,308 | | | | 13,161 | |
| |
The accompanying notes are an integral part of the consolidated financial statements. |
10
ZOLTEK COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
Zoltek Companies, Inc. (the “Company”) is a holding company, which operates through wholly-owned subsidiaries, Zoltek Corporation, Zoltek Properties, Inc., Zoltek Zrt., and Engineering Technology Corporation (“Entec Composite Machines”). Zoltek Corporation (“Zoltek”) develops, manufactures and markets carbon fibers and technical fibers in the United States. Carbon fibers are a low-cost but high performance reinforcement for composites used as the primary building material in everyday commercial products. Zoltek Zrt. is a Hungarian subsidiary that manufactures and markets carbon fibers and technical fibers and manufactures precursor raw material used in production of carbon fibers. Entec Composite Machines manufactures and sells filament winding and pultrusion equipment used in the production of large volume composite parts. The Company’s primary sales markets are in Europe and the United States.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that management make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates and assumptions.
REVENUE RECOGNITION
Sales transactions are initiated through customer purchase orders or sales agreements which may include fixed pricing terms. The Company recognizes sales for manufactured products on the date title to the product transfers to the customer, which is either the shipping date or the date consumed by the customer if sold on consignment. Revenues generated by Entec Composite Machines are recognized on a percentage of completion basis based on the percentage of total project cost incurred to date which include change orders, revisions to estimates and provisions for anticipated losses on contracts. Entec Composite Machines reported revenue of $3.9 million, $4.1 million and $3.9 million for fiscal 2007, 2006 and 2005. Revenues are reported net of any value-added tax or other such tax assessed by a governmental authority on our revenue-producing activities.
ACCOUNTS RECEIVABLE
The Company reviews its accounts receivable balance on a quarterly basis to identify any specific customers for collectibility issues. If the Company deems that an amount due from a customer is uncollectible, the amount is recorded as expense in the statement of operations. The Company evaluates the collectibility of our accounts receivable for each of our segments based on a combination of factors. We estimate reserves for bad debts based on the length of time receivables have been past due and our experience with collection. Our bad debt expense on accounts receivables was $0.4 million for 2007, $0.3 million for 2006 and $0.7 million for 2005.
CONCENTRATION OF CREDIT RISK
Zoltek’s carbon fiber products are primarily sold to customers in the composite industry and its technical fibers are primarily sold to customers in the aerospace industries. Entec Composite Machines’ products are primarily sold in the composite industry. The Company performs ongoing credit evaluations and generally requires collateral for significant export sales to new customers. The Company maintains reserves for potential credit losses and such losses have been within management’s expectations.
In the fiscal years ended September 30, 2007, 2006 and 2005, we reported sales of $49.9 million, $19.0 million and $9.0 million, respectively, and a related open account receivable balance of $13.9 million and $2.7 million as of September 30, 2007 and 2006, respectively, to a wind turbine manufacturer. The Company reported sales of $25.1 million, $11.7 million and $3.1 million to a European manufacturer of prepreg material as of September 30, 2007, 2006 and 2005, respectively. These were the only customers that represented greater than 10% of consolidated net sales.
CASH AND CASH EQUIVALENTS
Cash equivalents, include certificates of deposit and overnight repurchase agreements, all of which have initial maturities of three months or less. Cash equivalents are stated at cost plus accrued interest, which approximates market value. The Company places its temporary cash investments with high credit quality financial institutions, however, at times such investments may be in excess of the Federal Deposit Insurance Corporation (“FDIC”) insurance limit of $100,000 for U.S. banks. The Company has invested all unallocated funds received from its August equity offering into money market accounts. As of September 30, 2007, the Company had $117.7 million cash in these money market accounts.
INVENTORIES
Inventories are valued at the lower of cost or market and are removed from inventory under the first-in-first-out method (“FIFO”). Cost of inventory includes material, labor and overhead. The Company recorded inventory valuation reserves of $0.6 million and $1.3 million as of September 30, 2007 and 2006, respectively, to reduce the carrying value of inventories to a net realizable value. No material increases to the reserve were required in the current year. The reserves were established primarily due to industry overcapacity conditions for certain carbon fiber products in prior years.
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PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Cost includes expenditures necessary to make the property and equipment ready for its intended use. Expenditures to improve the asset or extend the useful life are capitalized, including interest on funds borrowed to finance the acquisition or construction of major capital additions. The Company capitalized interest of $5.3 million, $3.1 million and $1.2 million during fiscal 2007, 2006 and 2005, respectively. Maintenance and repairs are expensed as incurred. When property is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts and any profit or loss on disposition is credited or charged to income.
The Company provides for depreciation by charging amounts sufficient to amortize the cost of properties placed in service over their estimated useful lives using straight-line methods. The range of estimated useful lives used in computing depreciation is as follows:
| | | |
| Buildings and improvements | | 10 to 30 years |
| Machinery and equipment | | 3 to 20 years |
| Furniture and fixtures | | 7 to 10 years |
| Computer hardware and software | | 2 to 5 years |
Depreciation expense was $9.2 million, $5.9 million, and $5.1 million for fiscal years ended 2007, 2006 and 2005, respectively.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and the carrying value of the asset. No impairment charges for long-lived assets were recorded during fiscal 2007, 2006 and 2005.
FOREIGN CURRENCY TRANSLATION
The consolidated balance sheet of the Company’s international subsidiary, Zoltek Rt., was translated from Hungarian Forints to U.S. Dollars at the exchange rate in effect at the applicable balance sheet date, while its consolidated statements of operations were translated using the average exchange rates in effect for the periods presented. The related translation adjustments are reported as other comprehensive income (loss) within shareholders’ equity. Gains and losses from foreign currency transactions of Zoltek Rt. are included in the results of operations in other expenses. The Hungarian Forint strengthened by 18.3% against the US dollar during fiscal 2007. Hungarian non-intercompany assets net of non-intercompany liabilities were approximately $153 million as of September 30, 2007.
FINANCIAL INSTRUMENTS
The Company does not hold any financial instruments for trading purposes. The carrying value of cash, accounts receivable and accounts payable approximated their fair value at September 30, 2007 and 2006.
The Company has debt obligations that bear interest at a variable rate. The carrying value of debt with a variable rate approximated its fair value at September 30, 2007 and 2006.
In January, March and October of 2004 and February 2005, the Company issued convertible notes and warrants which would require the Company to register the resale of the shares of common stock upon conversion or exercise of these securities. The Company accounted for the fair value of these outstanding warrants to purchase common stock and conversion feature of its convertible notes in accordance with SFAS No. 133 “Accounting For Derivative Instruments And Hedging Activities” and EITF Issue No. 00-19 “Accounting For Derivative Financial Instruments Indexed To And Potentially Settled In A Company’s Own Stock” which require the Company to separately account for the conversion feature and warrants as embedded derivatives contained in the Company’s convertible notes. Pursuant to SFAS No. 133, the Company separates the fair value of the conversion feature from the convertible notes, since the conversion feature was determined to not be clearly and closely related to the debt host. In addition, since the effective registration of the securities underlying the conversion feature and warrants is an event outside of the control of the Company, pursuant to EITF Issue No. 00-19, the Company recorded the fair value of the conversion feature and warrants as long-term liabilities as it was assumed that the Company would be required to net-cash settle the underlying securities. The Company is required to carry these embedded derivatives on its balance sheet at fair value, which was zero and $0.9 million at September 30, 2007 and 2006, respectively.
APPLICATION AND DEVELOPMENT EXPENSES
The Company is actively pursuing the development of a number of applications for the use of its carbon fibers and related products. The Company is executing several internal developmental strategies to further the use of carbon fiber and consumer and industrial products made from carbon fiber. As a result, the Company incurs certain costs for research, development and engineering of products and manufacturing processes. These costs are expensed as incurred and totaled approximately $7.2 million, $4.9 million and $3.3 million for the years ended September 30, 2007, 2006 and 2005, 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.
12
INCOME TAXES
The Company accounts for certain income and expense items differently for financial reporting and income tax purposes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities applying enacted statutory tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is provided against certain deferred tax assets when realization of those assets are not considered to be more likely than not.
EARNINGS PER SHARE
In accordance with SFAS No. 128, “Earnings per Share,” the Company calculates diluted earnings per share including the impact of the Company’s potential stock equivalents. The Company has outstanding stock options, warrants and convertible debt at September 30, 2007 and 2006, which are not included in the determination of diluted earnings per share because the impact of these potential additional shares is anti-dilutive. Had these securities been dilutive, an additional 1.4 million shares for fiscal 2007, 4.3 million shares for fiscal 2006 and 6.6 million shares for fiscal 2005 would have been included in the Company’s diluted earnings per share calculation.
RECENT ACCOUNTING PRONOUNCEMENTS
FASB statement No. 160 “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” was issued December of 2007. This Statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance will become effective as of the beginning of a company’s fiscal year beginning after December 15, 2008. The Company believes that this new pronouncement will have an immaterial impact on the Company’s financial statements in future periods.
FASB statement No. 141 (R) “Business Combinations” was issued December of 2007. This Statement established principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The Statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will become effective as of the beginning of a company’s fiscal year beginning after December 15, 2008. The Company believes that this new pronouncement will have an immaterial impact on the Company’s financial statements in future periods.
FASB statement No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement 115”, was issued February of 2007. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The guidance will become effective as of the beginning of a company’s fiscal year beginning after November 15, 2007. The Company believes that this new pronouncement will have an immaterial impact on the Company’s financial statements in future periods.
In July 2006, the FASB released its final interpretation on uncertain tax positions, FIN 48, “Accounting for Uncertainty in Income Taxes.” FIN 48 addresses the recognition and measurement of uncertain income tax positions by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also introduces a number of new disclosure requirements. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company will adopt FIN 48 as of October 1, 2007, as required. The Company has performed preliminary calculations and continues to evaluate the potential impact of adoption to retained earnings.
In September 2006, the SEC issued Staff Accounting Bulletin 108, to address diversity in practice in quantifying financial statement misstatements. SAB 108 requires that the Company quantify misstatements based on their impact on each of its financial statements and related disclosures. SAB 108 is to become effective for fiscal years ending after November 15, 2006. The Company has adopted SAB 108 effective as of September 30, 2007. The adoption of this bulletin did not have a material impact on its financial position and results of operations.
FASB statement No. 157 “Fair Value Measurements” issued in September of 2006, defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company believes that this new pronouncement will have an immaterial impact on the Company’s financial statements in future periods.
2. FINANCING TRANSACTIONS
Fiscal 2007 Financing Activity
During the third quarter of fiscal 2007, the Company filed a shelf registration statement with the SEC for a periodic offering of securities with an aggregate public offering price of up to $350.0 million, of which up to $30.0 million may be offered by selling shareholders, in debt securities, common and preferred stock, warrants and/or units. The registration statement provides that the Company may sell securities in one or more separate offerings with the size, price and terms to be determined at the time of sale. In August 2007, the Company completed a public offering of 3,615,000 shares of Common Stock (excluding 385,000 shares sold by certain selling shareholders) and realized net proceeds of approximately $131.5 million.
Bond Related to SP Systems Case
On April 12, 2007, the Company reported the results of various post-trial motions in ongoing litigation against its Zoltek Corporation subsidiary brought by SP Systems (see Note 4). The Company posted a supersedeas bond in April 2007, collateralized by a $23.5 million letter of credit issued by the Company’s U.S. bank. As of September 30, 2007, the letter of credit is collateralized by certain U.S. real estate of the Company and $13.5 million of restricted cash. During the fourth quarter of fiscal 2007, the Company repaid a $10 million loan to its Chief Executive Officer which had previously been used to collateralize a letter of credit in connection with a litigation appeal bond. During the first quarter of fiscal 2008, the letter of credit was no longer collateralized by the U.S. real estate, but by $23.5 million of cash on hand
To increase available funding for the posting of the bond, in December 2006, the Company entered into an amendment of its previously announced convertible debt financing package with institutional investors under which the Company issued the investors warrants to purchase 827,789 shares of common stock with an exercise price of $28.06 per share. The Company recorded the entire fair value of these
13
new warrants, $6.4 million, as a non-cash charge during the first quarter of fiscal 2007. The fair value was calculated based on the warrants’ expected life of three years, the Company’s stock price of $20.20 at the date of issuance, a risk-free interest rate of 4.65% and a stock volatility of 67% at the date of issuance.
Revolving Credit Facility
In December 2006, the Company extended its existing line of credit until January 1, 2008. The renewal of this credit facility included an amendment which increased the amount available under the original revolving credit facility from $5.5 million to $6.7 million. The revolving credit facility has a total commitment of the lesser of (1) $6.7 million or (2) an amount equal to a percentage of eligible accounts receivable plus a percentage of eligible inventories, which as of September 30, 2007 totaled $7.3 million. The amendment also provides that the letter of credit previously collateralized by the Company’s cash and cash equivalents and presented as restricted cash in the Company’s consolidated balance sheet as of September 30, 2006 will be collateralized by the availability under the revolving credit facility thereby eliminating the cash restriction. Accordingly, as of September 30, 2007, there is no available borrowing base under the revolving credit facility. No financial covenants currently apply to the credit facility from the U.S. bank. The Company intends to extend its existing line of credit before its expiration on January 1, 2008. Based on the history of relationships with its bank and its current liquidity position, the Company does not expect any difficulty with extending its line of credit beyond the expiration date.
Hungarian Grant
The Hungarian government has pledged a grant of 2.9 billion HUF (approximately $16.4 million) to Zoltek’s Hungarian subsidiary that will partially provide the capital resources to modernize its facility, establish a research and development center, and support buildup of manufacturing capacity of carbon fibers. During fiscal 2007, Zoltek’s Hungarian subsidiary received approximately $9.4 million in grant funding. These funds have been recorded as a liability on the Company’s balance sheet. The liability will be amortized over the life of the assets procured by the grant funds, offsetting the assets’ depreciation expense.
The Company intends to present bank guarantees amounting to 120% of the amount of the grant as received. The Hungarian subsidiary may be required to pay back all or a portion of the grant if, among other things, the Hungarian subsidiary fails to achieve excess export revenues amounting to an average annual sum of 21.7 billion HUF (approximately $122.6 million); fails to employ an average annual staff of 1,200 employees; fails to utilize regional suppliers for at least 45% of its purchases; fails to obtain consent from the Hungarian government prior to selling assets created with grant funds; fails to use grant funds in accordance with the grant agreement; fails to provide appropriate security for the grant; makes or made an untrue statement or supplies or supplied false data in the grant agreement, grant application or during the time of the grant; defaults on its obligations by more than 30 days; withdraws any consents it gave in the grant agreement; or causes a partial or complete failure or hindrance of the project that is the subject of the grant. Currently, management anticipates the Company will comply with the requirements of the grant agreement.
Convertible Debt
Fiscal 2007 Activity
On August 14, 2007, the Company completed a public offering of 4,000,000 shares of common stock, par value $0.01 per share at $38.76 per share, less underwriting discounts. In the offering, 3,615,000 shares were sold by the Company and 385,000 shares were sold by the selling shareholders. The Company recorded the proceeds of $131.5 million, net of $0.8 million deal costs, as an increase to shareholders’ equity. The Company did not receive any of the proceeds from the sale of common stock by the selling shareholders.
During fiscal 2007, certain investors converted an aggregate of $6.5 million aggregate principal and interest on convertible debt privately placed in the May 2006 and February 2003 issuances into 920,391 shares of common stock at conversion prices of $25.51 and $3.50 per share, respectively, which was recorded into shareholders’ equity as of September 30, 2007. The Company recorded a non-cash charge of $2.8 million to amortization of financing fees and debt discount representing the remaining unamortized debt discount and deferred financing fees associated with the converted debt. Investors also converted during fiscal 2007 an aggregate of $28.3 million principal and interest on convertible debt privately placed in the September 2005, December 2005 and February 2006 issuances into 2.2 million shares of common stock at conversion prices of $12.50, $12.50 and $13.07 per share, respectively, which was recorded into shareholders’ equity. The Company recorded a non-cash charge of $3.3 million to amortization of financing fees and debt discount representing the remaining unamortized debt discount and deferred financing fees associated with the converted debt.
In October 2006, the Company issued convertible debentures in the aggregate principal amount of $7.5 million to institutional private equity investors. The convertible debentures have a stated maturity of 42 months and bear interest at a fixed rate of 7.5% per annum. However, after 18 months, the interest rate will be LIBOR plus 4% per annum. The convertible debentures are convertible into 293,767 shares of common stock at a conversion price of $25.51 per share. The Company also issued to the investors five-year warrants that give holders the right to purchase up to 102,835 shares of Zoltek common stock at an exercise price of $28.06 per share. The fair value of the debt discount associated with the warrants and conversion features at the time of issuance was $2.8 million and will be accreted to the debt’s face value over the life of the convertible debentures.
The terms of repayment for each convertible debt issuance in May 2006, July 2006 and October 2006 stipulate that the Company shall pay the principal balance in ten equal quarterly installments commencing on the date 15 months following the closing date and continues for each of the nine quarters thereafter. As of September 30, 2007, the stock price was above the conversion price for all issuances. Therefore, the Company does not anticipate that any of its lenders will demand cash repayment in the near future. Additionally, the May 2006, July 2006 and October 2006 issuances allow the Company to require conversion if the price of the Company’s stock stays above $42.50 per share for a period of 20 consecutive days beginning six months after the date of registration of the resale of the underlying shares.
14
Fiscal 2006 Financing Activity
During the fiscal year ended September 30, 2006, certain investors converted $47.3 million principal and interest amount of the convertible debt privately placed in the February 2003, October 2004, February 2005 and September 2005 issuances into 4,738,486 shares of common stock, which was recorded into equity. The Company also recorded into equity the fair market value of the conversion feature at the time of conversion of the debt issued in the October 2004 and February 2005 issuances, which was valued at $57.5 million and offset by a reduction to equity of $10.2 million for the unamortized portion of the debt discount. Also, at the time of conversion, the Company reclassified the unamortized deferred financing cost of $1.4 million related to these issuances into additional paid-in capital. The February 2005 issuance also had a beneficial conversion feature, of which $6.8 million was unamortized at the time of conversion and was recorded as an expense into amortization of financing fees and debt discount. Subsequent to these conversions, the October 2004 and February 2005 issuances have been fully converted into the Company’s common stock.
In September 2005, Zoltek entered into an agreement for a new financing; a convertible debenture package of up to $50 million in a private placement with a group of institutional investors. In April 2006, the Company amended the September 2005 financing package to provide for an additional $10.0 million funding. In order to match the cash needs to support the Company’s planned expansion, the financing arrangements provided for the funding to occur in six separate closings discussed in the following paragraphs. These financings are collateralized by the carbon fiber assets of the Company’s Hungarian subsidiary.
The closing on September 30, 2005 included a draw down of $5.0 million. The borrowing matures 42 months from the closing date and bears interest at a fixed rate of 7.5% annum. However, after 18 months, the interest rate will be LIBOR plus 4% per annum. The debentures are convertible into Zoltek common stock of 400,000 shares at a conversion price of $12.50 per share. The debentures were issued with five-year warrants that give holders the right to purchase up to 140,000 shares of Zoltek common stock at an exercise price of $14.50 per share. The fair value of the debt discount associated with the warrants and conversion features at the time of issuances was $1.0 million and will be accreted to the debt’s face value over the life of the convertible debentures.
In December 2005, the Company issued convertible debentures in the aggregate principal amount of $15.0 million to institutional private equity investors. The convertible debentures had a stated maturity of 42 months and bore interest at a fixed rate of 7.5% annum. However, after 18 months, the interest rate will be LIBOR plus 4% per annum. The convertible debentures are convertible into Zoltek 1,200,000 shares of common stock at a conversion price of $12.50 per share The Company also issued to the investors five-year warrants that give holders the right to purchase up to 420,000 shares of Zoltek common stock at an exercise price of $14.50 per share. The fair value of the debt discount associated with the warrants and conversion features at the time of issuances was $1.9 million and will be accreted to the debt’s face value over the life of the convertible debentures.
In February 2006, the Company issued convertible debentures in the aggregate principal amount of $10.0 million to institutional private equity investors. The convertible debentures had a stated maturity of 42 months and bore interest at a fixed rate of 7.5% annum. However, after 18 months, the interest rate will be LIBOR plus 4% per annum. The convertible debentures are convertible into 765,110 shares of Zoltek common stock at a conversion price of $15.16 per share. The Company also issued to the investors five-year warrants that give holders the right to purchase up to 267,789 shares of Zoltek common stock at an exercise price of $15.16 per share. The fair value of the debt discount associated with the warrants and conversion features at the time of issuances was $4.6 million and will be accreted to the debt’s face value over the life of the convertible debentures.
In May 2006, the Company issued convertible debentures in the aggregate principal amount of $20 million to institutional private equity investors. The convertible debentures had a stated maturity of 42 months and bore interest at a fixed rate of 7.5% annum. However, after 18 months, the interest rate will be LIBOR plus 4% per annum. The convertible debentures are convertible into 784,006 shares of Zoltek common stock at a conversion price of $25.51 per share. The Company also issued to the investors five-year warrants that give holders the right to purchase up to 274,406 shares of Zoltek common stock at an exercise price of $28.06 per share. The fair value of the debt discount associated with the warrants and conversion features at the time of issuances was $17.1 million and will be accreted to the debt’s face value over the life of the convertible debentures.
In July 2006, the Company issued convertible debentures in the aggregate principal amount of $2.5 million to institutional private equity investors. The convertible debentures had a stated maturity of 42 months and bore interest at a fixed rate of 7.5% annum. However, after 18 months, the interest rate will be LIBOR plus 4% per annum. The convertible debentures are convertible into 98,000 shares of Zoltek common stock at a conversion price of $25.51 per share. The Company also issued to the investors five-year warrants that give holders the right to purchase up to 34,370 shares of Zoltek common stock at an exercise price of $28.06 per share. The fair value of the debt discount associated with the warrants and conversion features at the time of issuances was $1.7 million and will be accreted to the debt’s face value over the life of the convertible debentures.
15
Fiscal 2005 Financing Activity
During the quarter ended March 31, 2005, certain investors converted $13.0 million of convertible debt issued in the January and March 2004 transaction into 2,230,011 shares of common stock which was recorded into equity. The Company also recorded into equity at the time of conversion the fair market value of the conversion feature at the time of conversion of the debt issued in the January and March 2004 issuances, which was valued at $24.5 million which was offset by a reduction to equity of $5.5 million for the unamortized portion of the debt discount. Also, at the time of conversion the Company wrote off the unamortized deferred financing cost of $0.4 million related to these issuances into additional paid-in capital.
In February 2005, the Company issued convertible debentures in the aggregate principal amount of $20.0 million to institutional private equity investors. The convertible debentures have a stated maturity of 42 months and bear interest at a variable rate of six-month LIBOR plus 4% which was 7.5% at March 2005, and are presently convertible into 1,000,000 shares of common stock at a conversion price of $20.00 per share. The Company also issued to the investors four-year warrants to purchase an aggregate of 457,142 shares of common stock of the Company at an exercise price of $17.50 per share. The fair value of the debt discount associated with the warrants and conversion feature of the debt at the time of issuance was $15.3 million and will be amortized over the life of the convertible debt. Proceeds from issuance of these convertible debentures were used to repay mortgage debt of $6.0 million and the balance to expand the capacity of carbon fiber operations to meet demand. The repayment of the $6.0 million mortgage note had a stated maturity of three years and bore interest at a rate of LIBOR plus 11% with a LIBOR floor of 2%. The Company paid a prepayment fee of $0.3 million, which was expensed to the Company’s statement of operations at the repayment date. The Company also wrote off the unamortized amount of the deferred financing cost related to the original issuances of the note of $0.4 million.
In October 2004, the Company issued convertible debentures in the aggregate principal amount of $20.0 million to institutional private equity investors. The convertible debentures have a stated maturity of 42 months and bear interest at 7.5% per annum and were initially convertible into 1,666,666 shares of common stock at a conversion price of $12.00 per share. In connection with the September 2005 issuance the conversion price was adjusted to $9.50 per share, resulting in the potential issuance of 2,105,263 shares upon conversion. The Company also issued to the investors six-year warrants to purchase an aggregate of 500,000 shares of common stock of the Company at an exercise price of $13.00 per share. The fair value of the debt discount associated with the warrants and conversion feature of the debt at the time of issuance was $10.2 million and will be amortized over the life of the convertible debt. Proceeds from issuance of these convertible debentures were used to reduce existing Hungarian bank debt by $12.0 million and the balance for working capital purposes which allowed the Company to refinance the remaining Hungarian bank debt to a three-year term loan for $3.0 million with no financial covenants going forward.
As part of the amended financing agreement, Zoltek reduced the conversion price on its outstanding convertible debt in the aggregate principal amount of $20.0 million issued in October 2004 from $12.00 to $9.50 per share, with the requirement that conversion take place within 30 days of the December closing. In connection with the April 2006 amendment, the investors converted the $20.0 million convertible notes previously issued in February 2005 into approximately 1,000,000 shares of common stock and exercised associated warrants for 1,052,000 shares related to October 2004 and February 2005 issuances. The Company also issued the investors up to 111,113 shares of common stock at an exercise price of $.01 per share. The fair value of the $0.01 per share warrants at the time of issuance was $3.3 million and was expensed in amortization of financing fees and debt discount during the third quarter of 2006.
16
Each issuance of convertible debt is summarized in the table below which sets forth the significant term of the debt, warrants and assumptions associated with valuing the conversion feature and warrants:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| CONVERTIBLE DEBT ISSUANCES FISCAL 2003 THROUGH FISCAL 2007 |
| | | FEBRUARY | | JANUARY | | MARCH | | OCTOBER | | FEBRUARY | | SEPTEMBER |
| | | 2003 (1) | | 2004 | | 2004 | | 2004 | | 2005 | | 2005 (1) |
| Amount of debenture (millions) | | $ | 8.1 | | | $ | 7.0 | | | $ | 5.75 | | | $ | 20.0 | | | $ | 20.0 | | | $ | 5.0 | |
| Per share conversion price on debenture | | $ | 3.25 | | | $ | 5.40 | | | $ | 6.25 | | | $ | 12.00 | | | $ | 20.00 | | | $ | 12.50 | |
| Interest rate | | | 7.0 | % | | | 6.0 | % | | | 6.0 | % | | | 7.0 | % | | | 7.5 | % | | | 7.5 | % |
| Term of debenture | | 60 months | | 30 months | | 30 months | | 42 months | | 42 months | | 42 months |
| Warrants issued | | | 405,000 | | | | 323,995 | | | | 230,000 | | | | 500,000 | | | | 457,142 | | | | 140,000 | |
| Term of warrants | | 60 months | | 48 months | | 48 months | | 72 months | | 48 months | | 60 months |
| Per share exercise price of warrants | | $ | 5.00 | | | $ | 5.40 | | | $ | 7.50 | | | $ | 13.00 | | | $ | 17.50 | | | $ | 14.50 | |
| Fair value per warrant at issuance | | $ | 0.93 | | | $ | 2.27 | | | $ | 5.43 | | | $ | 6.02 | | | $ | 10.47 | | | $ | 9.34 | |
| Value per share conversion feature at issuance | | $ | 3.11 | | | $ | 1.78 | | | $ | 5.06 | | | $ | 4.31 | | | $ | 10.47 | | | $ | 9.91 | |
| Stock price on date of agreement | | $ | 1.58 | | | $ | 5.40 | | | $ | 9.53 | | | $ | 9.60 | | | $ | 16.68 | | | $ | 13.15 | |
| Stock volatility at issuance | | | 100 | % | | | 50 | % | | | 61 | % | | | 75 | % | | | 84 | % | | | 205 | % |
| Dividend yield | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % |
| Risk-free interest rate at issuance | | | 3.0 | % | | | 2.78 | % | | | 2.44 | % | | | 3.71 | % | | | 3.46 | % | | | 4.25 | % |
| Converted | | Yes | | Yes | | Yes | | Yes | | Yes | | Yes |
| Warrants exercised | | Yes | | Yes | | Yes | | Yes | | Yes | | Yes |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | DECEMBER | | FEBRUARY | | MAY | | JULY | | OCTOBER | | | | |
| | | 2005 (1) | | 2006 (1) | | 2006 (1) | | 2006 (1) | | 2006 (1) | | | | |
| Amount of debenture (millions) | | $ | 15.0 | | | $ | 10.0 | | | $ | 20.0 | | | $ | 2.5 | | | $ | 7.5 | |
| Per share conversion price on debenture | | $ | 12.5 | | | $ | 13.07 | | | $ | 25.51 | | | $ | 25.51 | | | $ | 25.51 | |
| Interest rate | | | 7.5 | % | | | 7.5 | % | | | 7.5 | % | | | 7.5 | % | | | 7.5 | % |
| Term of debenture | | 42 months | | 42 months | | 42 months | | 42 months | | 42 months |
| Warrants issued | | | 420,000 | | | | 267,789 | | | | 274,406 | | | | 34,370 | | | | 102,835 | |
| Term of warrants | | 60 months | | 60 months | | 60 months | | 60 months | | 60 months |
| Per share exercise price of warrants | | $ | 14.50 | | | $ | 15.16 | | | $ | 28.06 | | | $ | 28.06 | | | $ | 28.06 | |
| Fair value per warrant at issuance | | $ | 5.92 | | | $ | 10.56 | | | $ | 26.03 | | | $ | 23.89 | | | $ | 22.13 | |
| Value per share conversion feature at issuance | | $ | 10.72 | | | $ | 10.20 | | | $ | 18.80 | | | $ | 19.21 | | | $ | 19.57 | |
| Stock price on date of agreement | | $ | 8.80 | | �� | $ | 13.99 | | | $ | 32.25 | | | $ | 29.28 | | | $ | 26.81 | |
| Stock volatility at issuance | | | 96 | % | | | 99 | % | | | 106 | % | | | 111 | % | | | 117 | % |
| Dividend yield | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % |
| Risk-free interest rate at issuance | | | 4.28 | % | | | 4.28 | % | | | 4.88 | % | | | 4.88 | % | | | 4.65 | % |
| Converted | | Yes | | Yes | | Partial | | No | | No |
| Warrants exercised | | Yes | | Yes | | No | | No | | Partial |
| | |
| (1) | | The warrants issued in connection with the February 2003, September 2005, December 2005, February 2006, May 2006, July 2006 and October 2006 convertible issuances meet the criteria of EITF 00-19 for equity classification, as they do not contain similar registration rights obligations with respect to the underlying shares. Accordingly, the conversion features do not require derivative accounting. The September 2005, February 2006, May 2006, July 2006 and October 2006 issuances do have a beneficial conversion feature; however, the February 2003 and December 2005 issuances have no beneficial conversion feature. |
17
Warrant and Conversion Features
In January, March and October 2004 and February 2005, the Company issued convertible notes and warrants that required the Company to register the resale of the shares of common stock issuable upon conversion or exercise of these securities. The Company accounts for the fair value of these outstanding warrants to purchase common stock and conversion feature of its convertible notes in accordance with Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting For Derivative Instruments And Hedging Activities,” and Emerging Issues Task Force (EITF) Issue No. 00-19, “Accounting For Derivative Financial Instruments Indexed To And Potentially Settled In A Company’s Own Stock,” which require the Company to separately account for the conversion feature and warrants as embedded derivatives contained in the Company’s convertible notes. The Company recorded the fair value of the conversion feature and warrants as long-term liabilities. The Company is required to carry these embedded derivatives on its balance sheet at fair value and unrealized changes in the values of these embedded derivatives are reflected in the consolidated statement of operations as “Loss on value of warrants and conversion feature.”
As of September 30, 2007, all such convertible notes and warrants have been exercised. See table below for impact on the results for fiscal years ended September 30, 2007, 2006 and 2005 (amounts in thousands).
| | | | | | | | | | | | | |
| | | FISCAL YEAR ENDED SEPTEMBER 30, 2007 | |
| | | | | | | CONVERSION | | | | |
| | | WARRANTS | | | FEATURES | | | TOTAL | |
| January 2004 issuance — mark to market | | $ | ( 314 | ) | | $ | — | | | $ | (314 | ) |
| | | | | | | | | | |
| Loss on value of warrants and conversion feature | | $ | (314 | ) | | $ | — | | | $ | (314 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| | | FISCAL YEAR ENDED SEPTEMBER 30, 2006 | |
| | | | | | | CONVERSION | | | | |
| | | WARRANTS | | | FEATURES | | | TOTAL | |
| January 2004 issuance — mark to market | | $ | (1,413 | ) | | $ | — | | | $ | (1,413 | ) |
| March 2004 issuance — mark to market | | | (730 | ) | | | — | | | | (730 | ) |
| October 2004 issuance — mark to market | | | (2,902 | ) | | | (5,671 | ) | | | (8,573 | ) |
| February 2005 issuance — mark to market | | | (1,788 | ) | | | (16,799 | ) | | | (18,587 | ) |
| | | | | | | | | | |
| Loss on value of warrants and conversion feature | | $ | (6,833 | ) | | $ | (22,470 | ) | | $ | (29,303 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| | | FISCAL YEAR ENDED SEPTEMBER 30, 2005 | |
| | | | | | | CONVERSION | | | | |
| | | WARRANTS | | | FEATURES | | | TOTAL | |
| January 2004 issuance — mark to market | | $ | (1,083 | ) | | $ | (8,164 | ) | | $ | (9,247 | ) |
| February 2004 issuance — mark to market | | | (775 | ) | | | (5,684 | ) | | | (6,459 | ) |
| October 2004 issuance — mark to market | | | (2,025 | ) | | | (3,958 | ) | | | (5,983 | ) |
| February 2005 issuance — mark to market | | | 1,172 | | | | 3,943 | | | | 5,115 | |
| | | | | | | | | | |
| Loss on value of warrants and conversion feature | | $ | (2,711 | ) | | $ | (13,863 | ) | | $ | (16,574 | ) |
| | | | | | | | | | |
Amortization of Financing Fees and Debt Discount
At the time of issuance of convertible debt securities with warrants, the Company records the fair value associated with the warrants using the Black-Scholes option-pricing model. This fair value discount is recorded as a reduction in the carrying value of the convertible debt security that is accreted to its face value over the life of the convertible security and expensed into the Company’s income statement. If the convertible security is converted prior to the redemption date, the unamortized debt discount associated with the valuation of the warrants is recorded as a reduction to additional paid-in capital at the time of conversion.
As part of the April 2006 amendment to the September 2005 convertible debt issuance, the Company issued the investors five-year warrants to purchase 111,113 shares of common stock at an exercise price of $.01 per share as an inducement to the holders to convert the February 2005 issuance. The fair value of the warrants issued of $3.3 million was expensed during the quarter ended June 30, 2006 and is included in amortization of financing fees and debt discount in the statement of operations.
The February 2005, February 2006, May 2006, July 2006 and October 2006 issuances were considered to have a beneficial conversion feature because the adjusted conversion price after allocating a portion of the proceeds to the warrants, as discussed above, was less than the Company’s market price of common stock at date of issue. The beneficial conversion is recorded as a reduction in the carrying value of the convertible debt security and is accreted to its face value over the life of the convertible security and expensed into the Company’s income statement. If the convertible security is converted prior to the redemption date, the unamortized balance is recorded in expense at the time of
18
conversion. During the third quarter of fiscal 2006, the February 2005 issuance, which had a beneficial conversion feature, was converted and the Company recorded an expense $5.0 million for the unamortized portion on the beneficial conversion feature which is included in amortization of financing fees and debt discount in the statement of operations.
See the table below for impact of amortization of financing fees and debt discount on the financial results for the fiscal years 2007, 2006 and 2005 (amounts in thousands).
| | | | | | | | | | | | | |
| | | FISCAL YEAR ENDED SEPTEMBER 30, 2007 | |
| | | | | | | CONVERSION | | | | |
| | | WARRANTS | | | FEATURES | | | TOTAL | |
| September 2005 issuance | | $ | 158 | | | $ | — | | | $ | 158 | |
| December 2005 issuance | | | 285 | | | | — | | | | 285 | |
| February 2006 issuance | | | 1,830 | | | | 1,882 | | | | 3,712 | |
| May 2006 issuance | | | 1,560 | | | | 2,302 | | | | 3,862 | |
| July 2006 issuance | | | 113 | | | | 138 | | | | 251 | |
| October 2006 issuance | | | 235 | | | | 269 | | | | 504 | |
| | | | | | | | | | |
| | | $ | 4,181 | | | $ | 4,591 | | | $ | 8,772 | |
| | | | | | | | | | |
| Deferred financing costs | | | | | | | | | | | 999 | |
| | | | | | | | | | | | |
| Total | | | | | | | | | | $ | 9,771 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | FISCAL YEAR ENDED SEPTEMBER 30, 2006 | |
| | | | | | | CONVERSION | | | | |
| | | WARRANTS | | | FEATURES | | | TOTAL | |
| October 2004 issuance | | $ | 204 | | | $ | 400 | | | $ | 604 | |
| February 2005 issuance | | | 834 | | | | 7,830 | | | | 8,664 | |
| September 2005 issuance | | | 906 | | | | — | | | | 906 | |
| December 2005 issuance | | | 548 | | | | — | | | | 548 | |
| February 2006 issuance | | | 312 | | | | 694 | | | | 1,006 | |
| May 2006 issuance | | | 3,524 | | | | 332 | | | | 3,856 | |
| July 2006 issuance | | | 28 | | | | 34 | | | | 62 | |
| | | | | | | | | | |
| | | $ | 6,356 | | | $ | 9,290 | | | $ | 15,646 | |
| | | | | | | | | | |
| Deferred financing costs | | | | | | | | | | | 886 | |
| | | | | | | | | | | | |
| Total | | | | | | | | | | $ | 16,532 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | FISCAL YEAR ENDED SEPTEMBER 30, 2005 | |
| | | | | | | CONVERSION | | | | |
| | | WARRANTS | | | FEATURES | | | TOTAL | |
| January 2004 issuance | | $ | 458 | | | $ | — | | | $ | 458 | |
| March 2004 issuance | | | 863 | | | | — | | | | 863 | |
| October 2004 issuance | | | 973 | | | | 1,902 | | | | 2,875 | |
| February 2005 issuance | | | 850 | | | | 1,892 | | | | 2,742 | |
| | | | | | | | | | |
| | | $ | 3,144 | | | $ | 3,794 | | | $ | 6,938 | |
| | | | | | | | | | |
| Deferred financing costs | | | | | | | | | | | 1,531 | |
| | | | | | | | | | | | |
| Total | | | | | | | | | | $ | 8,469 | |
| | | | | | | | | | | | |
19
The carrying values of unamortized conversion features, debt discount and financing fees are as follows (amounts in thousands):
| | | | | | | | | | | | | |
| | | SEPTEMBER 30, 2007 | |
| | | | | | | CONVERSION | | | | |
| | | WARRANTS | | | FEATURES | | | TOTAL | |
| May 2006 issuance | | | 4,728 | | | | 6,981 | | | | 11,709 | |
| July 2006 issuance | | | 403 | | | | 485 | | | | 888 | |
| October 2006 issuance | | | 1,236 | | | | 1,422 | | | | 2,658 | |
| | | | | | | | | | |
| | | $ | 6,367 | | | $ | 8,888 | | | | 15,255 | |
| | | | | | | | | | |
| Debt acquisition cost and financing fees | | | | | | | | | | | 985 | |
| | | | | | | | | | | | |
| Total | | | | | | | | | | $ | 16,240 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | SEPTEMBER 30, 2006 | |
| | | | | | | CONVERSION | | | | |
| | | WARRANTS | | | FEATURES | | | TOTAL | |
| September 2005 issuance | | $ | 1,003 | | | $ | — | | | $ | 1,003 | |
| December 2005 issuance | | | 1,894 | | | | — | | | | 1,894 | |
| February 2006 issuance | | | 2,278 | | | | 2,343 | | | | 4,621 | |
| May 2006 issuance | | | 6,899 | | | | 10,187 | | | | 17,086 | |
| July 2006 issuance | | | 791 | | | | 952 | | | | 1,743 | |
| | | | | | | | | | |
| | | $ | 12,865 | | | $ | 13,482 | | | | 26,347 | |
| | | | | | | | | | |
| Debt acquisition cost and financing fees | | | | | | | | | | | 1,582 | |
| | | | | | | | | | | | |
| Total | | | | | | | | | | $ | 27,929 | |
| | | | | | | | | | | | |
20
3. DISCONTINUED OPERATIONS
During the fourth quarter of fiscal 2006, the Company formally adopted a plan to discontinue and exit certain of the assets of its continuously extruded netting division and to discontinue and exit another division that manufactured thermoplastic components. The discontinuation of the thermoplastic division was completed in October 2006. The Company incurred no significant exit costs for the selling or discontinuation of these businesses. These divisions were not part of the long-term strategy of the Company and were not expected to be profitable in the foreseeable future due to the continued pricing pressure from competitive manufacturers. The results from operations of these two divisions have been reclassified to discontinued operations. Previous to the Company’s 2006 Form 10-K filing, these businesses collectively comprised the Specialty Products segment and were disclosed as such. Certain information with respect to the discontinued operations for the fiscal years ended September 30, 2007, 2006 and 2005 is summarized as follows (amounts in thousands):
| | | | | | | | | | | | | |
| | | 2007 | | | 2006 | | | 2005 | |
| Net sales | | $ | 1,843 | | | $ | 4,964 | | | $ | 13,008 | |
| Cost of sales | | | 2,220 | | | | 4,369 | | | | 11,424 | |
| | | | | | | | | | |
| Gross profit | | | (377 | ) | | | 595 | | | | 1,584 | |
| Selling, general and administrative expenses | | | (144 | ) | | | (383 | ) | | | (3,735 | ) |
| | | | | | | | | | |
| Gain (loss) from operations | | | (521 | ) | | | 212 | | | | (2,151 | ) |
| Other loss | | | (24 | ) | | | (399 | ) | | | (31 | ) |
| | | | | | | | | | |
| Net loss from operations | | | (545 | ) | | | (187 | ) | | | (2,182 | ) |
| Gain (loss) on disposal of discontinued operations | | | — | | | | 150 | | | | — | |
| | | | | | | | | | |
| Loss on discontinued operations | | $ | (545 | ) | | $ | (37 | ) | | $ | (2,182 | ) |
| | | | | | | | | | |
4. INVENTORIES
Inventories consist of the following (amounts in thousands):
| | | | | | | | | |
| | | SEPTEMBER 30, | |
| | | 2007 | | | 2006 | |
| | | | | | | |
| Raw materials | | $ | 7,941 | | | $ | 5,737 | |
| Work-in-process | | | 11,832 | | | | 10,319 | |
| Finished goods | | | 7,632 | | | | 5,142 | |
| Supplies and other | | | 536 | | | | 523 | |
| | | | | | | |
| | | $ | 27,941 | | | | 21,721 | |
| | | | | | | |
Inventories are valued at the lower of cost, determined on the first-in, first-out method, or market. Cost includes material, labor and overhead. The Company recorded an inventory valuation reserve of $0.6 million and $1.3 million as of September 30, 2007 and 2006, respectively, to reduce the carrying value of inventories to net realizable value. The reserves were established primarily due to industry overcapacity for certain carbon fiber products in prior years.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (amounts in thousands):
| | | | | | | | | |
| | | SEPTEMBER 30, | |
| | | 2007 | | | 2006 | |
| Land | | $ | 2,265 | | | $ | 1,674 | |
| Buildings and improvements | | | 46,153 | | | | 50,887 | |
| Machinery and equipment | | | 166,021 | | | | 102,673 | |
| Furniture, fixtures and software | | | 6,042 | | | | 5,534 | |
| Construction in progress | | | 36,183 | | | | 17,297 | |
| | | | | | | |
| | | | 256,664 | | | | 178,065 | |
| Less: accumulated depreciation | | | (67,863 | ) | | | (55,781 | ) |
| | | | | | | |
| | | $ | 188,801 | | | $ | 122,284 | |
| | | | | | | |
6. INCOME TAXES
The components of income tax expense (benefit) for the fiscal years ended September 30, 2007, 2006 and 2005 are as follows (amounts in thousands):
21
| | | | | | | | | | | | | |
| | | 2007 | | | 2006 | | | 2005 | |
| From continuing operations: | | | | | | | | | | | | |
| Current: | | | | | | | | | | | | |
| Federal | | $ | — | | | $ | — | | | $ | — | |
| State | | | — | | | | — | | | | — | |
| Non-U.S. | | | 1,158 | | | | 888 | | | | 708 | |
| | | | | | | | | | |
| | | | 1,158 | | | | 888 | | | | 708 | |
| | | | | | | | | | |
| Deferred: | | | | | | | | | | | | |
| Federal | | | — | | | | — | | | | — | |
| State | | | (157 | ) | | | — | | | | — | |
| Non-U.S. | | | 985 | | | | — | | | | — | |
| | | | | | | | | | |
| | | | 828 | | | | — | | | | — | |
| | | | | | | | | | |
| Total Continuing Operations | | $ | 1,986 | | | $ | 888 | | | $ | 708 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| From discontinued operations: | | | | | | | | | | | | |
| Current: | | | | | | | | | | | | |
| Federal | | $ | — | | | $ | — | | | $ | — | |
| State | | | — | | | | — | | | | — | |
| Non-U.S. | | | 19 | | | | — | | | | — | |
| | | | | | | | | | |
| | | | 19 | | | | — | | | | — | |
| | | | | | | | | | |
| Deferred: | | | | | | | | | | | | |
| Federal | | | — | | | | — | | | | — | |
| State | | | — | | | | — | | | | — | |
| Non-U.S. | | | — | | | | — | | | | — | |
| | | | | | | | | | |
| Total Discontinued Operations | | | 19 | | | | — | | | | — | |
| | | | | | | | | | |
| Total | | $ | 2,005 | | | $ | 888 | | | $ | 708 | |
| | | | | | | | | | |
Deferred income taxes reflect the tax impact of carryforwards and temporary differences between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. Cumulative carryforwards and temporary differences giving rise to the net deferred income tax liability at September 30 are as follows (amounts in thousands):
| | | | | | | | | |
| | | SEPTEMBER 30, | |
| | | 2007 | | | 2006 | |
Deferred Tax Assets | | | | | | | | |
| Legal liabilities | | $ | 1,812 | | | $ | — | |
| Reserves | | | 117 | | | | 292 | |
| Other assets | | | 416 | | | | — | |
| Accrued employee compensation | | | 178 | | | | — | |
| Net operating loss and credit carryforwards | | | 37,493 | | | | 40,169 | |
| | | | | | | |
| | | | 40,016 | | | | 40,461 | |
| | | | | | | |
| | | | | | | | | |
Deferred Tax Liabilities | | | | | | | | |
| Property, plant and equipment | | | (9,943 | ) | | | (7,247 | ) |
| Employee compensation | | | (391 | ) | | | — | |
| Prepaid expenses | | | (185 | ) | | | (82 | ) |
| Other liabilities | | | (567 | ) | | | — | |
| | | | | | | |
| | | | (11,086 | ) | | | (7,329 | ) |
| | | | | | | |
| | | | | | | | | |
Total Deferred Taxes | | | 28,930 | | | | 33,132 | |
| Less: Valuation allowance | | | (29,758 | ) | | | (33,132 | ) |
| | | | | | | | | |
| | | | | | | |
Net Deferred Tax Liability | | $ | (828 | ) | | $ | — | |
| | | | | | | |
| | | | | | | | | |
Classification of Deferred Taxes: | | | | | | | | |
| Current Deferred Tax Asset (included in Other Current Assets) | | $ | 3,218 | | | $ | — | |
| Long-Term Deferred Tax Liability | | | (4,046 | ) | | | — | |
| | | | | | | |
| | | $ | (828 | ) | | $ | — | |
| | | | | | | |
In the consolidated balance sheets, these deferred tax assets and liabilities are classified as either current or non-current based on the classification of the related liability or asset for financial reporting. A deferred tax asset or liability that is not related to an asset or liability for financial reporting, including deferred taxes related to carryforwards, is classified according to the expected reversal date of the temporary differences as of the end of the year.
22
The provision for income taxes at September 30 differs from the amount using the statutory federal income tax rate (34%) as follows (amounts in thousands):
| | | | | | | | | | | | | |
| | | 2007 | | | 2006 | | | 2005 | |
| At statutory rate: | | | | | | | | | | | | |
| Income taxes on income (loss) from continuing operations | | $ | 5 | | | $ | (22,058 | ) | | $ | (12,751 | ) |
| Increases (decreases): | | | | | | | | | | | | |
| Lower effective tax rate on non-U.S. operations | | | (2,805 | ) | | | (985 | ) | | | 525 | |
| Change in valuation allowance on net operating loss | | | 1,428 | | | | 12,339 | | | | 4,125 | |
| Change in valuation allowance on capital loss | | | — | | | | (523 | ) | | | — | |
| State Taxes, net of federal benefit | | | (157 | ) | | | — | | | | — | |
| Local taxes, non-U.S. | | | 1,177 | | | | 888 | | | | 708 | |
| Amortization of warrant discount | | | 3,926 | | | | 5,659 | | | | 2,359 | |
| Fair market value of warrants | | | 107 | | | | 9,963 | | | | 5,635 | |
| Nonqualified stock option expense | | | (1,115 | ) | | | (3,617 | ) | | | — | |
| Other | | | (561 | ) | | | (778 | ) | | | 107 | |
| | | | | | | | | | |
| | | $ | 2,005 | | | $ | 888 | | | $ | 708 | |
| | | | | | | | | | |
The consolidated loss from continuing operations before income taxes by domestic and foreign sources for the years ended September 30, 2007, 2006 and 2005 was as follows (amounts in thousands):
| | | | | | | | | | | | | |
| | | 2007 | | | 2006 | | | 2005 | |
| Domestic | | $ | (16,093 | ) | | $ | (71,069 | ) | | $ | (35,936 | ) |
| Foreign | | | 16,107 | | | | 6,192 | | | | (1,567 | ) |
| | | | | | | | | | |
| Income (loss) from continuing operations before income taxes | | $ | 14 | | | $ | (64,877 | ) | | $ | (37,503 | ) |
| | | | | | | | | | |
Zrt’s retained earnings of $27,081,395 and accumulated deficit of $(5,317,328) at September 30, 2007 and September 30, 2006, respectively, are considered to be permanently reinvested and, accordingly, no provision for income taxes has been recorded.
23
The Company currently has domestic net operating loss carryforwards of approximately $115.5 million available to offset future tax liabilities, which expire between 2020 and 2027. Included in the net operating loss carry-forwards are stock option deductions of approximately $13.3 million. The benefits of these tax deductions, referred to as excess tax benefits, will be credited to additional paid-in capital upon being realized or recognized. The Company has recorded a full valuation allowance against its deferred tax asset because it is more likely than not that the value of the deferred tax asset will not be realized.
The Company currently has a foreign net operating loss carryforward of approximately $15.2 million, $6.6 million of which expires in 2009 and the remainder does not have time restrictions. During the years ended September 30, 2006 and 2007, the Company utilized approximately $1.4 million and $1.4 million, respectively, of its foreign deferred tax assets for which no benefit had been previously recorded. As of September 30, 2007, the Company released the remainder of the valuation allowance that resulted in the recognition of additional net deferred tax assets of approximately $1.1 million. The Company has determined that it is more likely than not that these assets will be utilized due to the recent history of cumulative foreign pre-tax income and jurisdictional forecasts of foreign taxable income.
The Company estimates its contingent income tax liabilities based on its assessment of probable income tax-related exposures and the anticipated settlement of those exposures translating into actual future liabilities. As of September 30, 2007, the Company’s accrual for these contingencies, included in long-term deferred tax liabilities in the accompanying consolidated balance sheet, was approximately $600,000. There was no reserve recorded as of September 30, 2006.
7. DEBT
Credit Facilities
US Operations — In December 2006, the Company extended its existing line of credit until January 1, 2008. The renewal of this credit facility included an amendment which increased the amount available under the original revolving credit facility from $5.5 million to $6.7 million. The revolving credit facility has a total commitment of the lesser of (1) $6.7 million or (2) an amount equal to a percentage of eligible accounts receivable plus a percentage of eligible inventories, which as of September 30, 2007 totaled $7.3 million. The amendment also provides that the letter of credit previously collateralized by the Company’s cash and cash equivalents and presented as restricted cash in the Company’s consolidated balance sheet as of September 30, 2006 will be collateralized by the availability under the revolving credit facility thereby eliminating the cash restriction. Accordingly, as of September 30, 2007, there is no available borrowing base under the revolving credit facility. No financial covenants currently apply to the credit facility from the U.S. bank. Hungarian Operations — The Company’s Hungarian subsidiary has a credit facility with a Hungarian bank. Total borrowings under this credit facility were $6.4 million at September 30, 2007. The credit facility is a term loan with quarterly interest payments and repayment of principal at the maturity date on December 31, 2007. The majority of the principal balance has been paid as of October 31, 2007.
The subordinated debt agreements of 2004 and 2005 (see Note 2) require that the Company maintain cash plus borrowing capacity under credit facilities of at least $0.5 million, which the Company was in compliance with as of September 30, 2007.
Long-term debt consists of the following (amounts in thousands):
| | | | | | | | | |
| | | SEPTEMBER 30, | |
| | | 2007 | | | 2006 | |
| Note payable with interest at 9%, payable in monthly installments of principal and interest of $15 to maturity in January 2008 | | $ | 1,272 | | | $ | 1,346 | |
| | | | | | | | | |
| Non-interest bearing note payable (discounted at 8%) to the City of Abilene, Texas to be repaid from real estate and personal property tax abatements | | | 2,030 | | | | 1,946 | |
| | | | | | | | | |
| Facilities with Hungarian banks (interest rate of 5.5% to 10.6%) | | | 6,417 | | | | 3,217 | |
| | | | | | | | | |
| Convertible debentures due February 2008 bearing interest at 7.0% | | | — | | | | 2,700 | |
| Convertible debentures due March 2009 bearing interest at 7.5% | | | — | | | | 3,000 | |
| Convertible debentures due May 2009 bearing interest at 7.5% | | | — | | | | 15,000 | |
| Convertible debentures due August 2009 bearing interest at 7.5% | | | — | | | | 10,000 | |
| Convertible debentures due November 2009 bearing interest at 7.5% | | | 16,200 | | | | 20,000 | |
| Convertible debentures due January 2010 bearing interest at 7.5% | | | 2,505 | | | | 2,505 | |
| Convertible debentures due April 2010 bearing interest at 7.5% | | | 7,495 | | | | — | |
| | | | | | | |
| | | | | | | | | |
| Total debt | | | 35,919 | | | | 59,714 | |
| Less: Beneficial conversion feature and debt discount associated with warrants | | | (15,255 | ) | | | (26,347 | ) |
| Less: amounts payable within one year | | | (13,813 | ) | | | (1,365 | ) |
| | | | | | | |
| Total long-term debt | | $ | 6,851 | | | | 32,002 | |
| | | | | | | |
8. COMMITMENTS AND CONTINGENCIES
LEASES
We rent office facilities and equipment under various operating leases. During fiscal 2007, we exercised an option to purchase the land and building at the manufacturing facility in Missouri that we previously occupied under an operating lease. Rent expense for all operating leases was $265,660, $57,991 and $57,991 for the fiscal years ended September 30, 2007, 2006, and 2005, respectively. There are no material future minimum payments under non-cancelable operating leases with initial or remaining terms in excess of one year at September 30, 2007.
24
During 2007, we began to lease forklifts and telecommunication equipment under various capital leases. Lease expense for all capital leases for the fiscal year ended September 30, 2007 was $102,368.
LEGAL
Legal contingencies have a high degree of uncertainty. When losses from contingencies become estimatable and probable, reserves are established. The reserves reflect management’s estimate of the probable cost of ultimate resolution of the matters and are revised accordingly as facts and circumstances change and, ultimately, when matters are brought to closure. If any litigation matter is resolved unfavorably, the Company could incur obligations in excess of management’s estimate of the outcome, and such resolution could have a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity. As of September 30, 2007, the Company has established an accrual for legal liabilities of $24.5 million.
In February 2005, SP Systems and its subsidiary Structural Polymer Systems, Limited filed an action against our Zoltek Corporation subsidiary in the U.S. District Court for the Eastern District of Missouri, Eastern Division alleging that we breached a Supply Agreement relating to our carbon fiber product known as Panex 33. The case was tried in November 2006 and on November 29, 2006, the jury in the case rendered verdicts against our Zoltek Corporation subsidiary in the amounts of $21.1 million and $14.9 million, respectively, which verdicts were subsequently entered as judgments against our Zoltek Corporation subsidiary. On April 12, 2007, the Court ruled on various post-trial motions, granting one of our motions to reduce the judgment from $36.0 million to $21.1 million, concluding that the jury’s award of damages on the two separate counts brought by the plaintiffs was duplicative. The Court issued an Order setting the amount of a supersedeas bond at $23.5 million in order to stay the execution of the amended judgment pending our appeal and denied our post-trial motions for a new trial and for a judgment in our favor as a matter of law. The bond was posted in April 2007. We accrued $21.8 million during the fourth quarter of fiscal 2006 in respect of the potential liability and related legal fees in this matter. We have filed an appeal and the plaintiffs have filed a cross appeal. On the basis of the plaintiffs’ settlement proposals and the reduction of the judgment in April 2007, the Company reduced the accrual to $18.9 million, which decreased litigation charges by $2.1 million for the quarter ended June 30, 2007. As of September 30, 2007, the Company’s accrual with respect to this matter has been reduced to $18.6 million due to litigation cost incurred during the fourth quarter. The ultimate resolution of this litigation may have a material adverse impact on our results of operations, financial condition or cash flow.
In September 2004, the Company was named a defendant in a civil action filed by an investment banker that was retained to obtain equity investors, alleging breach by the Company of the Company’s obligations under the agreement signed by the parties. A decision granting summary judgment against Zoltek was entered in April 2005. A trial on damages took place in December 2005, after which a judgment was filed in May 2006 against the Company in the amount of $4.1 million in cash and the Court ordered us to issue warrants to purchase 122,888 shares of Zoltek’s common stock at various prices. In October 2007, the United States Court of Appeals for the Second Circuit upheld the liability against Zoltek affirming $2.5 million in cash and approximately 92,000 warrants. The Court reversed the district court’s award of attorney’s fees stemming from indemnification of the plaintiff by Zoltek and remanded the determination of damages in respect to placements of securities not closed within the 18-month tail period back to the district court for reconsideration. The appeal process continues and attempts to settle this case have been made. To date, the Company has not made payments of any portion of this obligation or issued the warrants, although Zoltek posted an appeal bond in the amount of $6.6 million. On the basis of the appeals court ruling and the ongoing settlement discussions the Company charged $5.4 million to litigation charges during the fourth quarter of fiscal 2007 to increase the accrual to $5.9 million. This accrual is based on management’s best estimate of exposure for this matter, including a likely cash settlement of $2.5 million and a potential issuance of 92,000 warrants valued using the stock price on the date of the appeals court ruling net of the warrants’ exercise price. The Company expects to adjust the recorded liability for this potential warrant issuance as the Company’s stock price increases or decreases. These charges or income could be material. If negotiations for settlement of this case are unsuccessful, this matter could have a material adverse effect on our results of operations, financial condition or cash flow.
In October 2003, the Company was named as a defendant in a civil action filed in the Court of Common Pleas for Cuyahoga County, Ohio by the former owner of Hardcore Composites Operations, LLC (Hardcore) alleging breach by Hardcore and the Company of their respective obligations under a sublease, the Company’s guaranty of the sublease, and prior settlement agreement among the parties. Zoltek and the former owners of Hardcore and their successors entered into a settlement agreement and release whereby Zoltek paid $2.5 million cash, which increased litigation charges by $1.2 million for the quarter ended June 30, 2007, and was completely released of all claims with prejudice.
The Company has received two notices of enforcement action, dated March 2, 2007 and June 8, 2007, respectively, from the Texas Natural Resource Conservation Commission concerning alleged air permit violations and excessive emissions at the Company’s Abilene, Texas manufacturing facility. The Company has submitted written responses, including a corrective action plan, to the Texas Natural Resource Conservation Commission and has substantially implemented the actions identified in the corrective action plan. The Company has received a notice from the Texas Natural Resource Conservation Commission dated August 21, 2007 for civil fines associated with the alleged violations in the amount of $21,590. The Company is currently appealing the assessed penalty.
The Company is a party to various other claims and legal proceedings arising out of the normal course of its business. Although there can be no assurance, in the opinion of management, the ultimate outcome of these other claims and lawsuits should not have a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity.
25
SOURCES OF SUPPLY
As part of its growth strategy, the Company has developed its own precursor acrylic fibers and all of its carbon fibers and technical fibers. The primary source of raw material for the precursor is ACN (acrylonitrile), which is a commodity product with multiple sources.
9. PROFIT SHARING PLAN
The Company maintains a 401(k) Profit Sharing Plan for the benefit of employees who have completed six months of service and attained 21 years of age. No contributions were made by the Company for the fiscal years ended September 30, 2007, 2006, and 2005.
10. STOCK COMPENSATION EXPENSE
The Company maintains a Long-term Incentive Plan that authorizes the Board of Directors or its Compensation Committee (the “Committee”) to grant key employees, officers and non-employee directors of the Company incentive or nonqualified stock options, stock appreciation rights, performance shares, restricted shares and performance units. The Committee determines the prices and terms at which awards may be granted along with the duration of the restriction periods and performance targets. All issuances are granted out of shares authorized, as the Company has no treasury stock. Outstanding stock options expire 10 years from the date of grant or upon termination of employment. Options granted to employees in 2007 vest 17% in the first year, 33% in the second year and 50% in the third year from date of grant. Options granted to employees in 2005 and 2006 vest two years from the date of grant. The fair value of all options are amortized on a straight-line basis over the vesting period. Annually options to purchase 7,500 shares of common stock are issued to each non-employee director. In addition, newly elected non-employee directors receive options to purchase 7,500 shares of common stock. All options granted to non-employee directors vest immediately at time at grant. All options are issued at a price equal to the market price on the date of grant. These options expire from 2008 through 2017.
Presented below is a summary of stock option plans activity for the fiscal years 2005 through 2007:
| | | | | | | | | | | | | | | | | |
| | | | | | | WTD. AVG. | | WTD. AVG. | | WTD. AVG. |
| | | OPTIONS | | EXERCISE PRICE | | EXERCISABLE | | EXERCISE PRICE |
| Balance, September 30, 2005 | | | 1,051,667 | | | | 8.37 | | | | 812,028 | | | | 8.85 | |
| Granted | | | 197,500 | | | | 10.06 | | | | | | | | | |
| Exercised | | | (537,833 | ) | | | 5.21 | | | | | | | | | |
| Cancelled | | | (158,500 | ) | | | 12.52 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Balance, September 30, 2006 | | | 552,834 | | | | 10.94 | | | | 343,495 | | | | 12.65 | |
| | | | | | | | | | | | | | | | | |
| Granted | | | 77,500 | | | | 29.51 | | | | | | | | | |
| Exercised | | | (220,524 | ) | | | 6.31 | | | | | | | | | |
| Cancelled | | | (40,000 | ) | | | 28.01 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Balance, September 30, 2007 | | | 369,810 | | | | 16.02 | | | | 264,800 | | | | 17.23 | |
| | | | | | | | | | | | | | | | | |
26
The following table summarizes information for options currently outstanding and exercisable at September 30, 2007:
| | | | | | | | | | | | | | | | | | | | | | | | |
| OPTIONS OUTSTANDING | | | OPTIONS EXERCISABLE |
| RANGE OF | | | | | | | WTD. AVG. | | WTD. AVG. | | | | | | WTD. AVG. |
| PRICES | | | NUMBER | | REMAINING LIFE | | EXERCISE PRICE | | NUMBER | | EXERCISE PRICE |
| $ | 1.33 - | 2.80 | | | | 17,000 | | | 5 years | | $ | 2.44 | | | | 17,000 | | | $ | 2.44 | |
| | 3.25 - | 5.67 | | | | 35,000 | | | 5 years | | | 5.49 | | | | 35,000 | | | | 5.49 | |
| | 6.25 - | 9.25 | | | | 117,800 | | | 7 years | | | 8.37 | | | | 50,300 | | | | 8.06 | |
| | 9.60 - | 15.99 | | | | 92,510 | | | 7 years | | | 13.47 | | | | 80,000 | | | | 14.03 | |
| | 24.50 - | 39.00 | | | | 107,500 | | | 7 years | | | 32.16 | | | | 82,500 | | | | 33.95 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 1.33 - | 39.00 | | | | 369,810 | | | 7 years | | | 16.02 | | | | 264,800 | | | $ | 17.23 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
The Company historically accounted for stock-based compensation in accordance with that prescribed by Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees” and its related interpretations, as permitted by SFAS No. 123, “Accounting for Stock-Based Compensation”. APB 25 required the use of the intrinsic value method, which measures compensation cost as the excess, if any, of the quoted market price of the stock over the amount the employee must pay for the stock. Compensation expense for substantially all of the Company’s equity based awards was measured under APB 25 on the date the shares were granted. Under APB 25, no compensation expense was recognized for stock options. The total intrinsic value of options outstanding at September 30, 2007 and 2006 was approximately $5,190,000 and $4,279,000, respectively.
On October 1, 2005, the Company adopted the provisions of SFAS No. 123-(R) “Share-Based Payment” using the modified prospective method. SFAS No. 123-(R) requires companies to recognize the cost of employee services received in exchange for awards of equity instruments based upon the grant date fair value of those awards. Under the modified prospective method of adopting SFAS No. 123-(R), the Company recognized compensation cost for all share-based payments granted after October 1, 2005, plus any awards granted to employees prior to October 1, 2005 that remain unvested at that time. Under this method of adoption, no restatement of prior periods is made.
For the fiscal years ended September 30, 2007 and 2006, the Company recorded into selling and general administrative expense and into its corporate/other segment $1.3 million and $1.0 million, respectively, for the cost of employee services received in exchange for equity instruments based on the grant-date fair value of those instruments in accordance with the provisions of SFAS No. 123-(R). There were no recognized tax benefits during the fiscal years 2007 or 2006, as any benefit is offset by the Company’s full valuation allowance on its net deferred tax asset. The Company has not recognized the windfall tax benefit as the resulting deduction has not been realized via a reduction of income taxes payable.
During fiscal 2005, had the cost of employee services received in exchange for equity instruments been recognized based on the grant-date fair value of those instruments in accordance with the provisions of SFAS No. 123-R, the Company’s net loss and loss per share would have been impacted as shown in the following table (amounts in thousands).
| | | | | |
| | | FISCAL YEAR ENDED SEPTEMBER 30, | |
| | | 2005 | |
| Reported net loss | | $ | (40,393 | ) |
| Total stock-based employee compensation expense determined under fair value based method for all awards | | | (294 | ) |
| | | | |
| Pro forma net loss | | $ | (40,687 | ) |
| | | | |
| Reported basic loss per share | | $ | (2.23 | ) |
| | | | |
| Pro forma basic loss per share | | $ | (2.25 | ) |
| | | | |
| Reported diluted loss per share | | $ | (2.23 | ) |
| | | | |
| Pro forma diluted loss per share | | $ | (2.25 | ) |
| | | | |
The historical pro forma impact of applying the fair value method prescribed by SFAS No. 123-R is not representative of the impact that may be expected in the future due to changes resulting from additional grants in future years and changes in assumptions such as volatility, interest rates and expected life used to estimate fair value of the grants in future years.
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
| | | | | | | | | | | | | |
| | | FISCAL YEAR ENDED SEPTEMBER 30 |
| ASSUMPTIONS | | 2007 | | 2006 | | 2005 |
| Expected life of option | | 3-7.5 years | | 3-8 years | | 4-8 years |
| Risk-free interest rate | | | 4.90 | % | | | 4.32 | % | | | 3.80 | % |
| Volatility of stock | | | 68 | % | | | 96 | % | | | 76 | % |
| Cancellation experience | | | 30 | % | | | 30 | % | | | 51 | % |
27
The Company uses historical volatility for a period of time that is comparable to the expected life of the option. However, the Company only calculates the volatility of the Company’s stock back to November 2003, the date the Company received its first large order for carbon fibers, as that is when the Company considers its business to have changed from a research and development company to an operational company. Management believes this is a better measurement of the Company’s stock volatility.
The fair value of the options granted during fiscal 2007, 2006 and 2005 was $1,377,648, $1,088,964 and $684,221, respectively. As of September 30, 2007, the Company had $0.5 million of total unrecognized compensation expense related to stock option plans that will be recognized over the fiscal years 2008, 2009 and 2010. Cash proceeds received from the exercise of stock options were $1.4 million, $2.8 million and $0.4 million for fiscal 2007, 2006 and 2005, respectively.
11. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company’s strategic business units are based on product lines and have been grouped into three reportable segments: Carbon Fibers, Technical Fibers and Corporate/Other Products. The Carbon Fibers segment manufactures low-cost carbon fibers used as reinforcement material in composites, carbon fiber composite products and filament winding equipment used in the composite industry. The Technical Fibers segment manufactures oxidized acrylic fibers used to manufacture aircraft brake pads for heat/fire barrier applications. These two segments also facilitate development of product and process applications to increase the demand for carbon fibers and technical fibers and seek to aggressively market carbon fibers and technical fibers. The Carbon Fibers and Technical Fibers segments are located geographically in the United States and Hungary.
During the fourth quarter of fiscal 2006, the Company formally adopted a plan to sell certain of the assets of its continuously extruded netting division and to discontinue and exit another division that manufactured thermoplastic components. Collectively, these businesses previously comprised the Specialty Products segment and were disclosed as such. The remaining business represented in the Corporate/Other Products segment relate to water treatment and electrical services provided by the Hungarian operations.
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 and for the fiscal years ended September 30, 2007, 2006 and 2005 (amounts in thousands):
| | | | | | | | | | | | | | | | | |
| | | FISCAL YEAR ENDED SEPTEMBER 30, 2007 |
| | | CARBON | | TECHNICAL | | CORPORATE/ | | |
| | | FIBERS | | FIBERS | | OTHER | | TOTAL |
| Net sales | | $ | 116,365 | | | $ | 31,697 | | | $ | 2,818 | | | $ | 150,880 | |
| Cost of sales | | | 82,223 | | | | 23,689 | | | | 1,594 | | | | 107,506 | |
| Operating income (loss) | | | 26,536 | | | | 7,435 | | | | (15,862 | ) | | | 18,109 | |
| Depreciation and amortization expense | | | 7,387 | | | | 1,333 | | | | 485 | | | | 9,205 | |
| Capital expenditures | | | 47,321 | | | | 2,148 | | | | 3,943 | | | | 53,412 | |
| | | | | | | | | | | | | | | | | |
| | | FISCAL YEAR ENDED SEPTEMBER 30, 2006 |
| | | CARBON | | TECHNICAL | | CORPORATE/ | | |
| | | FIBERS | | FIBERS | | OTHER | | TOTAL |
| Net sales | | $ | 65,677 | | | $ | 25,195 | | | $ | 1,485 | | | $ | 92,357 | |
| Cost of sales | | | 49,386 | | | | 19,211 | | | | 1,397 | | | | 69,994 | |
| Operating income (loss) | | | 10,383 | | | | 4,620 | | | | (30,678 | ) | | | (15,675 | ) |
| Depreciation and amortization expense | | | 4,601 | | | | 1,125 | | | | 127 | | | | 5,853 | |
| Capital expenditures | | | 31,742 | | | | 7,833 | | | | 1,220 | | | | 40,795 | |
| | | | | | | | | | | | | | | | | |
| | | FISCAL YEAR ENDED SEPTEMBER 30, 2005 |
| | | CARBON | | TECHNICAL | | CORPORATE/ | | |
| | | FIBERS | | FIBERS | | OTHER | | TOTAL |
| Net sales | | $ | 34,487 | | | $ | 19,693 | | | $ | 1,197 | | | $ | 55,377 | |
| Cost of sales, excluding available unused capacity expenses | | | 36,677 | | | | 15,361 | | | | 771 | | | | 52,809 | |
| Available unused capacity expenses | | | 2,347 | | | | — | | | | — | | | | 2,347 | |
| Operating income (loss) | | | (8,214 | ) | | | 2,658 | | | | (2,070 | ) | | | (7,626 | ) |
| Depreciation and amortization expense | | | 3,922 | | | | 877 | | | | 343 | | | | 5,142 | |
| Capital expenditures | | | 11,850 | | | | 2,611 | | | | 304 | | | | 14,765 | |
| | | | | | | | | | | | | | | | | |
| | | TOTAL ASSETS |
| | | CARBON | | TECHNICAL | | CORPORATE/ | | |
| | | FIBERS | | FIBERS | | OTHER | | TOTAL |
| September 30, 2007 | | $ | 217,662 | | | $ | 36,833 | | | $ | 149,104 | | | $ | 403,599 | |
| September 30, 2006 | | | 128,747 | | | | 25,199 | | | | 33,738 | | | | 187,684 | |
| September 30, 2005 | | | 93,386 | | | | 22,662 | | | | 14,381 | | | | 130,429 | |
28
Sales and long-lived assets, by geographic area, consist of the following as of and for each of the three fiscal years in the period ended September 30, 2006, 2005 and 2004 (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2007 | | | 2006 | | | 2005 | |
| | | | | | | NET | | | | | | | NET | | | | | | | NET | |
| | | | | | | LONG LIVED | | | | | | | LONG LIVED | | | | | | | LONG LIVED | |
| | | NET SALES (a) | | | ASSETS (b) | | | NET SALES (a) | | | ASSETS (b) | | | NET SALES (a) | | | ASSETS (b) | |
| United States | | $ | 38,506 | | | $ | 194,365 | | | $ | 36,359 | | | $ | 49,497 | | | $ | 21,533 | | | $ | 45,978 | |
| Western Europe | | | 101,641 | | | | — | | | | 38,108 | | | | — | | | | 22,764 | | | | — | |
| Eastern Europe | | | 5,056 | | | | 205,902 | | | | 9,621 | | | | 72,787 | | | | 6,058 | | | | 42,040 | |
| Asia | | | 4,983 | | | | — | | | | 698 | | | | — | | | | 4,879 | | | | — | |
| Other areas | | | 694 | | | | — | | | | 7,571 | | | | — | | | | 143 | | | | — | |
| | | | | | | | | | | | | | | | | | | |
| Total | | $ | 150,880 | | | $ | 400,267 | | | $ | 92,357 | | | $ | 122,284 | | | $ | 55,377 | | | $ | 88,018 | |
| | | | | | | | | | | | | | | | | | | |
| | |
| (a) | | Revenues are attributed to countries based on the location of the customer. |
| |
| (b) | | Property and equipment net of accumulated depreciation based on country location of assets. |
12. SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
| | | | | | | | | | | | | | | | | |
| (Amounts in thousands, except per share data) | | | | | | | | | | | | |
| |
| FISCAL YEAR 2007 | | 1ST QUARTER | | | 2ND QUARTER | | | 3RD QUARTER | | | 4TH QUARTER | |
| Net sales | | $ | 30,285 | | | $ | 36,742 | | | $ | 40,274 | | | $ | 43,579 | |
| Income (loss) from continuing operations | | | (5,595 | ) | | | (57 | ) | | | 5,020 | | | | (1,340 | ) |
| Income (loss) from discontinued operations | | | (68 | ) | | | 51 | | | | (24 | ) | | | (504 | ) |
| | | | | | | | | | | | | |
| Net income (loss) | | $ | (5,663 | ) | | $ | (6 | ) | | $ | 4,996 | | | $ | (1,844 | ) |
| | | | | | | | | | | | | |
| Basic and diluted loss per share: | | | | | | | | | | | | | | | | |
| Continuing operations — basic | | $ | (0.22 | ) | | $ | (0.00 | ) | | $ | 0.17 | | | $ | (0.04 | ) |
| Discontinued operations — basic | | | (0.00 | ) | | | 0.00 | | | | (0.00 | ) | | | (0.02 | ) |
| | | | | | | | | | | | | |
| Total basic | | $ | (0.22 | ) | | $ | (0.00 | ) | | $ | 0.17 | | | $ | (0.06 | ) |
| | | | | | | | | | | | | |
| Continuing operations — diluted | | $ | (0.23 | ) | | $ | (0.00 | ) | | $ | 0.17 | | | $ | (0.04 | ) |
| Discontinued operations — diluted | | | (0.00 | ) | | | 0.00 | | | | (0.00 | ) | | | (0.02 | ) |
| | | | | | | | | | | | | |
| Total diluted | | $ | (0.23 | ) | | $ | (0.00 | ) | | $ | 0.17 | | | $ | (0.06 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| FISCAL YEAR 2006 | | 1ST QUARTER | | | 2ND QUARTER | | | 3RD QUARTER | | | 4TH QUARTER | |
| Net sales | | $ | 15,557 | | | $ | 26,199 | | | $ | 26,787 | | | $ | 23,814 | |
| Income (loss) from continuing operations | | | 6,128 | | | | (27,784 | ) | | | (21,216 | ) | | | (22,893 | ) |
| Income (loss) from discontinued operations | | | 160 | | | | 41 | | | | (252 | ) | | | 14 | |
| | | | | | | | | | | | | |
| Net income (loss) | | $ | 6,288 | | | $ | (27,743 | ) | | $ | (21,468 | ) | | $ | (22,879 | ) |
| | | | | | | | | | | | | |
| Basic and diluted income (loss) per share: | | | | | | | | | | | | | | | | |
| Continuing operations — basic | | $ | 0.31 | | | $ | (1.31 | ) | | $ | (0.90 | ) | | $ | (0.89 | ) |
| Discontinued operations — basic | | | 0.01 | | | | 0.00 | | | | (0.01 | ) | | | (0.00 | ) |
| | | | | | | | | | | | | |
| Total basic | | $ | 0.32 | | | $ | (1.31 | ) | | $ | (0.91 | ) | | $ | (0.89 | ) |
| | | | | | | | | | | | | |
| Continuing operations — diluted | | $ | 0.27 | | | $ | (1.31 | ) | | $ | (0.90 | ) | | $ | (0.89 | ) |
| Discontinued operations — diluted | | | .01 | | | | 0.00 | | | | (0.01 | ) | | | (0.00 | ) |
| | | | | | | | | | | | | |
| Total diluted | | $ | 0.28 | | | $ | (1.31 | ) | | $ | (0.91 | ) | | $ | (0.89 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| FISCAL YEAR 2005 | | 1ST QUARTER | | | 2ND QUARTER | | | 3RD QUARTER | | | 4TH QUARTER | |
| Net sales | | $ | 11,194 | | | $ | 13,230 | | | $ | 16,073 | | | $ | 14,880 | |
| Income (loss) from continuing operations | | | (29,187 | ) | | | 2,621 | | | | (1,293 | ) | | | (10,352 | ) |
| Loss from discontinued operations | | | (742 | ) | | | (475 | ) | | | (175 | ) | | | (790 | ) |
| | | | | | | | | | | | | |
| Net income (loss) | | $ | (29,929 | ) | | $ | 2,146 | | | $ | (1,468 | ) | | $ | (11,142 | ) |
| | | | | | | | | | | | | |
| Basic and diluted income (loss) per share: | | | | | | | | | | | | | | | | |
| Continuing operations — basic | | $ | (1.62 | ) | | $ | 0.14 | | | $ | (0.07 | ) | | $ | (0.57 | ) |
| Discontinued operations — basic | | | (0.04 | ) | | | (0.02 | ) | | | (0.01 | ) | | | (0.04 | ) |
| | | | | | | | | | | | | |
| Total basic | | $ | (1.66 | ) | | $ | 0.12 | | | $ | (0.08 | ) | | $ | (0.61 | ) |
| | | | | | | | | | | | | |
| Continuing operations — diluted | | $ | (1.78 | ) | | $ | (0.21 | ) | | $ | (0.13 | ) | | $ | (0.52 | ) |
| Discontinued operations — diluted | | | (0.04 | ) | | | (0.02 | ) | | | (0.01 | ) | | | (0.03 | ) |
| | | | | | | | | | | | | |
| Total diluted | | $ | (1.82 | ) | | $ | (0.23 | ) | | $ | (0.14 | ) | | $ | (0.55 | ) |
| | | | | | | | | | | | | |
13. SUBSEQUENT EVENTS
In April 2008, the Company’s management identified two payments by a subsidiary in the amounts of $175,000 and $75,000 in September 2007 and January 2008, respectively, that were not properly authorized or recorded in the Company’s financial statements. The two payments were made by the Company’s Hungarian subsidiary at the direction of Kevin J. Schott, the former Chief Financial Officer of the Company. On May 2, 2008, Mr. Schott agreed to resign as Chief Financial Officer of the Company and paid the Company $250,000. Management promptly advised the Audit Committee of its Board of Directors and its independent registered public accounting firm of the two payments that were not properly authorized or recorded. The Audit Committee and management immediately initiated an investigation into the circumstances of the payments and to determine whether there were other transactions that were not properly authorized or recorded. On May 5, 2008, following a review by the Audit Committee, the Company filed a Current Report on Form 8-K reporting that it had determined that its previously issued financial statements as of September 30, 2007 and for the fiscal year then ended and as of December 31, 2007 and for the quarter then ended should no longer be relied upon pending completion of the Audit Committee’s investigation.
In connection with Mr. Schott’s resignation, the Company and Mr. Schott entered into a separation agreement under which Mr. Schott agreed to resign from the Company as of May 2, 2008, Mr. Schott paid the Company $250,000, and the Company agreed to pay him his salary and routine employee benefits through that date. The Company released Mr. Schott from claims arising out of the above-described payments that were not properly authorized or recorded and Mr. Schott released the Company from claims arising out of his employment and agreed to cooperate with the Company in connection with matters relating to his employment.
The Audit Committee has conducted its accounting investigation, including with respect to the circumstances of the two payments and whether there were additional payments that were not properly authorized or recorded in the Company’s financial statements. The Audit Committee’s investigation included specified forensic audit procedures conducted by the Company’s internal accounting staff and additional procedures developed and performed by forensic accounting experts of an independent accounting firm. The Audit Committee’s investigation has concluded and, based upon the forensic accounting procedures performed, did not detect the existence of other transactions that were not properly authorized or recorded.
The Company has concluded that the Company’s previously issued financial statements as of September 30, 2007 and for the fiscal year then ended and as of December 31, 2007 and for the quarter then ended can be relied upon, and that no restatement of these financial statements is required.
Management and the Audit Committee assessed the aggregate $250,000 amount under Staff Accounting Bulletin 99 and Staff Accounting Bulletin 108 and determined that the misstatement was not material to the results reflected in the consolidated financial statements. The $250,000 aggregate amount of the two unauthorized payments has been recorded below operating income as other expense in the Company’s consolidated statements of operations for the three and six months ended March 31, 2008. To reflect the receipt of the payment from Mr. Schott, the Company will record $250,000 below operating income as other income in the Company’s consolidated statements of operations for the three and nine months ending June 30, 2008. The Company is concurrently filing amendments to its previously filed Annual Report on Form 10-K for the fiscal year ended September 30, 2007 and Quarterly Report on Form 10-Q for the quarter ended December 31, 2007 to reflect the above-described developments.
On May 13, 2008, the Company received a letter from the enforcement staff of the Securities and Exchange Commission indicating that the staff was conducting a non-public, fact finding investigation and requested that the Company retain certain records and produce information and documents related to matters disclosed in the Company’s Current Report on Form 8-K filed May 5, 2008. The Company has advised the staff that it will cooperate fully with its investigation.
On October 3, 2007, the Company purchased the Guadalajara, Mexico-based Crysel acrylic fiber manufacturing assets of Cydsa, a large publicly traded Mexican chemical and industrial company. The Company has begun retooling and modifying the newly acquired facility to supply Zoltek’s North American operations with low-cost precursor, the principal raw material used in manufacturing carbon fibers. The Company expects the facility will serve as a site for additional carbon fiber production lines supporting Zoltek’s strategic goal of achieving $500 million in annual sales of its high-performance commercial grade carbon fibers by fiscal year 2011.
Since the end of fiscal year 2007, the Company has spent approximately $39.1 million in cash for the acquisition of the new Mexico facility and capital expenditures for the Mexico facility. The Company estimates its total investment will be approximately $100 million to purchase the facility, to retool and modify the plant to produce acrylic precursor and to install the initial carbon fiber manufacturing facility. The Company is using a portion of the proceeds of its August 2007 secondary common stock offering, along with cash from operations, to fund the investments in the newly acquired plant. Zoltek expects that precursor production will begin by the end of fiscal 2008.
29
PART IV
Item 15. Exhibits and Financial Statement Schedule
(a) (1) Financial statements: The following financial statements and reports thereon are included in Item 8 of this report:
Report of Management
Report of Independent Registered Public Accounting Firm — Grant Thornton LLP
Report of Independent Registered Public Accounting Firm — Grant Thornton LLP
Report of Independent Registered Public Accounting Firm — PricewaterhouseCoopers LLP
Consolidated Balance Sheets as of September 30, 2007 and 2006
Consolidated Statements of Operations for the years ended September 30, 2007, 2006 and 2005
Consolidated Statements of Changes in Shareholders’ Equity for the years ended September 30, 2007, 2006 and 2005
Consolidated Statements of Cash Flows for the years ended September 30, 2007, 2006 and 2005
Notes to Consolidated Financial Statements
(2) The following financial statement schedule is included in Part IV of this report:
12-09 Valuation and Qualifying Accounts and Reserves
Schedules other than those listed above have been omitted because they are either not required or not applicable, or because the information is presented in the consolidated financial statements or the notes thereto.
RATIO OF EARNINGS AVAILABLE TO COVER FIXED CHARGES
The ratio of earnings to fixed charges and the ratio of earnings to combined fixed charges and preferred stock dividends for each of the periods indicated is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended September 30, |
| | | 2007 | | 2006 | | 2005 | | 2004 | | 2003 | | 2002 |
| Ratio of earnings available to cover fixed charges (i) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | |
| (i) | | Due to our losses in fiscal years 2002, 2003, 2004, 2005, 2006 and 2007, there was a deficiency of earnings to cover fixed charges in each such period. Additional earnings of $9.4 million, $11.9 million, $16.7 million, $37.5 million, $64.9 million and $2.0 million would have been required in each of such periods, respectively, for earnings to cover fixed charges. |
(3) The following exhibits are filed herewith or incorporated by reference herein, as indicated:
30
| | | |
| Exhibit | | |
| Number | | Description |
| |
| 3.1 | | Restated Articles of Incorporation of the Registrant dated October 7, 1992, filed as Exhibit 3.1 to Registrant’s Registration Statement on Form S-3 (Reg. No. 333-143996) and incorporated herein by reference. |
| |
| 3.2 | | Certificate of Amendment of Restated Articles of Incorporation of the Registrant dated February 15, 1996, filed as Exhibit 3.2 to Registrant’s Registration Statement on Form S-3 (Reg. No. 333-143996) and incorporated herein by reference. |
| |
| 3.3 | | Certificate of Amendment of Restated Articles of Incorporation of the Registrant dated February 7, 1997, filed as Exhibit 3.3 to Registrant’s Registration Statement on Form S-3 (Reg. No. 333-143996) and incorporated herein by reference. |
| |
| 3.4 | | Restated By-Laws of the Registrant dated September 22, 1992, filed as Exhibit 3.4 to Registrant’s Registration Statement on Form S-3 (Reg. No. 333-143996) and incorporated herein by reference. |
| |
| 4.10 | | Form of certificate for Common Stock, filed as Exhibit 4.1 to Registrant’s Registration Statement on Form S-1 (Reg. No. 33-51142) and incorporated herein by reference. |
| |
| 4.11 | | Form of Warrant, dated May 11, 2001, issued to Southwest Bank of St. Louis with respect to 12,500 shares of Registrant’s Common Stock, filed as Exhibit 4.2 to Registrant’s Annual Report on Form 10-K for the year ended September 30, 2001 and incorporated herein by reference. |
| |
| 4.12 | | Subordinated Convertible Debenture Purchase Agreement, dated as of February 13, 2003, by and among Zoltek Companies, Inc. and the investors named therein, filed as Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated February 18, 2003 and incorporated herein by reference. |
| |
| 4.13 | | Form of Subordinated Debenture, filed as Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated February 18, 2003 and incorporated herein by reference. |
| |
| 4.14 | | Form of Warrant, filed as Exhibit 4.3 to Registrant’s Current Report on Form 8-K dated February 18, 2003 and incorporated herein by reference. |
| |
| 4.15 | | Securities Purchase Agreement, dated as of December 19, 2003, by and among Zoltek Companies, Inc. and the investors named therein, filed as Exhibit 4.6 to Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2003 and incorporated herein by reference. |
| |
| 4.16 | | Form of 6% Convertible Debenture, filed as Exhibit 4.7 to Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2003 and incorporated herein by reference. |
| |
| 4.17 | | Form of Warrant, filed as Exhibit 4.8 to Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2003 and incorporated herein by reference. |
| |
| 4.18 | | Securities Purchase Agreement, dated as of March 11, 2004, by and among Zoltek Companies, Inc. and the investors named therein, filed as Exhibit 4.2 to Registrant’s Registration Statement on Form S-3 (Reg. No. 333-115043) and incorporated herein by reference. |
| |
| 4.19 | | Form of 6% Convertible Debenture, filed as Exhibit 4.3 to Registrant’s Registration Statement on Form S-3 (Reg. No. 333-115043) and incorporated herein by reference. |
| |
| 4.20 | | Form of Warrant, filed as Exhibit 4.4 to Registrant’s Registration Statement on Form S-3 (Reg. No. 333-115043) and incorporated herein by reference. |
| |
| 4.21 | | Loan and Warrant Agreement, dated as of October 14, 2004, filed as Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated October 19, 2004 and incorporated herein by reference. |
| |
| 4.22 | | Security Agreement, dated as of October 14, 2004, filed as Exhibit 4.3 to Registrant’s Current Report on Form 8-K dated October 19, 2004 and incorporated herein by reference. |
| |
| 4.23 | | Mortgage Agreement, dated as of October 14, 2004, filed as Exhibit 4.4 to Registrant’s Current Report on Form 8-K dated October 19, 2004 and incorporated herein by reference. |
| |
| 4.24 | | Form of Warrant, filed as Exhibit 4.5 to Registrant’s Current Report on Form 8-K dated October 19, 2004 and incorporated herein by reference. |
| |
| 4.25 | | Loan and Warrant Agreement, dated as of February 9, 2005, by and among the Registrant, the Lenders and the Agent, filed as Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2004 and incorporated herein by reference. |
| |
| 4.26 | | Form of Senior Convertible Note, dated as of February 9, 2005, filed as Exhibit 4.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2004 and incorporated herein by reference. |
| |
| 4.27 | | Form of Warrant, dated as of February 9, 2005, filed as Exhibit 4.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2004 and incorporated herein by reference. |
| |
| 4.28 | | Form of Registration Rights Agreement, dated as of February 9, 2005, filed as Exhibit 4.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2004 and incorporated herein by reference. |
| |
| 4.29 | | Loan and Warrant Agreement, dated as of September 29, 2005, among the Registrant, the Lenders and the Agent, filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated September 29, 2005 and incorporated herein by reference. |
| |
| 4.30 | | Form of Note, filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated September 29, 2005 and incorporated herein by reference. |
| |
| 4.31 | | Form of Warrant, filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K dated September 29, 2005 and incorporated herein by reference. |
| |
| 4.32 | | Registration Rights Agreement, dated as of September 30, 2005, by and among the Registrant and the Lenders parties thereto, filed as Exhibit 4.4 to the Registrant’s Current Report on Form 8-K dated September 29, 2005 and incorporated herein by reference. |
| |
| 4.33 | | Waiver and Consent, dated as of February 3, 2006, by and among the Registrant and the Lender parties thereto, filed as Exhibit 4.5 to the Registrant’s Current Report on Form 8-K dated February 6, 2006, and incorporated herein by reference. |
| |
| 4.34 | | Amendment No. 1 to Loan and Warrant Agreement and Registration Rights Agreement among the Registrant and the Lender parties thereto, filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated April 28, 2006 and incorporated herein by reference. |
| |
| 4.35 | | Form of Note, filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K dated April 28, 2006 and incorporated herein by reference. |
| |
| 4.36 | | Form of Warrant, filed as Exhibit 4.4 to the Registrant’s Current Report on Form 8-K dated April 28, 2006 and incorporated herein by reference. |
| |
| 4.37 | | Amendment No. 2 to Loan and Warrant Agreement and Registration Rights Agreement, dated as of December 14, 2006, among the Registrant and the Lenders, filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K dated December 14, 2006 and incorporated herein by reference. |
| |
| 4.38 | | Form of Warrant, filed as Exhibit 4.4 to the Registrant’s Current Report on Form 8-K dated December 14, 2006 and incorporated herein by reference. |
| |
|
| 10.1 | | Loan Agreement, dated December 29, 1989, by and between Zoltek Corporation and Southwest Bank of St. Louis, as amended by letter, dated August 13, 1992, filed as Exhibit 10.7 to Registrant’s Registration Statement on Form S-1 (Reg. No. 33-51142) is incorporated herein by this reference |
| |
| 10.2 | | Zoltek Companies, Inc. Long Term Incentive Plan, filed as Appendix B to Registrant’s definitive proxy statement for the 1997 Annual Meeting of Shareholders is incorporated herein by this reference* |
| |
| 10.3 | | Zoltek Companies, Inc. Amended and Restated Directors Stock Option Plan, filed as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q dated August 13, 1999, is incorporated herein by this reference* |
| |
| 10.4 | | Precursor Agreement, dated as of July 1, 1994, by and between Zoltek Corporation and Courtaulds Fibres Limited, filed as Exhibit 10.9 to Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 1994, is incorporated herein by this reference (An application for confidential treatment has been made for a portion of Exhibit 10.5.) |
| |
| 10.5 | | Materials Supply Agreement, dated as of June 15, 1994, by and between Zoltek Companies, Inc. and The B.F. Goodrich Company, filed as Exhibit 10.10 to Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 1994, is incorporated herein by this reference (An application for confidential treatment has been made for a portion of Exhibit 10.6.) |
| |
| 10.6 | | Promissory Note, dated November 14, 1994, by and between Zoltek Corporation and Southwest Bank of St. Louis, filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, is incorporated herein by this reference |
| |
| 10.7 | | Credit Agreement, dated May 11, 2001, between Southwest Bank of St. Louis and Zoltek Companies, Inc., Zoltek Corporation, Cape Composites, Inc., Engineering Technology Corporation, Zoltek Properties, Inc., and Hardcore Composites Operations, LLC, filed as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 is incorporated herein by reference |
| |
| 10.8 | | First Amendment to Credit Agreement, dated as of February 13, 2003, by and among Zoltek Companies, Inc., Zoltek Corporation, Cape Composites, Inc., Engineering Technology Corporation, Zoltek Properties, Inc. and Southwest Bank of St. Louis, filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated February 18, 2003 is incorporated herein by reference |
| |
| 10.9 | | Zoltek Companies, Inc. 2003 Long-Term Equity Incentive Plan, filed as Appendix A to Registrant’s definitive proxy statement for the 2002 Annual Meeting of Shareholders is incorporated herein by reference* |
| |
| 10.10 | | Promissory Note, dated January 13, 2004, by and between Zoltek Properties, Inc. and Beal Bank, S.S.B. filed as Exhibit 10.13 to Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2003, is incorporated herein by this reference, incorporated herein by reference. |
| |
| 10.11 | | Second Amendment to Credit Agreement, dated as of January 13, 2003, by and among Zoltek Companies, Inc., Zoltek Corporation, Cape Composites, Inc., Engineering Technology Corporation, Zoltek Properties, Inc. and Southwest Bank of St. Louis filed as Exhibit 10.14 to Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2003, is incorporated herein by this reference |
| |
| 21 | | Subsidiaries of the Registrant** |
| |
| 23.1 | | Consent of Grant Thornton LLP. |
| |
| 23.2 | | Consent of PricewaterhouseCoopers LLP. |
| |
| 31.1 | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended is filed herewith. |
| |
| 32.1 | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 is filed herewith. |
| | |
| * | | Management compensatory plan or arrangement |
| |
| ** | | Previously filed on December 7, 2007 with original filing of Form 10-K for fiscal year ended September 30, 2007 |
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Form 10-K/A (Amendment No. 1) to be signed on its behalf by the undersigned, thereunto duly authorized.
ZOLTEK COMPANIES, INC.
(Registrant)
| | | | | | | |
| | | By | | /s/ Zsolt Rumy | | |
| | | | | | | |
| | | | | Zsolt Rumy, Chairman of the Board, President and | | |
| | | | | Chief Executive Officer and Chief Financial Officer | | |
Date: June 26, 2008
32
| | | | | | | | | | | | | | | | | | | | | |
| FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2007 |
| |
| Rule 12-09 Valuation and Qualifying Accounts and Reserves |
| (Amounts in thousands) |
| | | | | | | | | | | | | | | | | | | | | |
| Column A | | Column B | | | Column C | | | Column D | | | Column E | |
| | | | | | | Additions | | | | | | | | |
| | | Balance at | | | Charged to | | | Charged to | | | | | | | Balance at | |
| | | beginning | | | costs and | | | other accounts | | | Deductions | | | end | |
| | | of period | | | expenses | | | describe | | | describe | | | of period | |
| RESERVE FOR DOUBTFUL ACCOUNTS | | $ | 729 | | | $ | 52 | | | $ | — | | | $ | — | | | $ | 781 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| RESERVE FOR INVENTORY VALUATION | | $ | 1,300 | | | $ | — | | | $ | — | | | $ | 655 | (2) | | $ | 645 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| DEFERRED TAX VALUATION | | $ | 34,217 | | | $ | — | | | $ | 628 | (5) | | $ | 5,087 | (3)(4)(6) | | $ | 29,758 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2006
| | | | | | | | | | | | | | | | | | | | | |
| Rule 12-09 Valuation and Qualifying Accounts and Reserves |
| (Amounts in thousands) |
| | | | | | | | | | | | | | | | | | | | | |
| Column A | | Column B | | | Column C | | | Column D | | | Column E | |
| | | | | | | Additions | | | | | | | | |
| | | Balance at | | | Charged to | | | Charged to | | | | | | | Balance at | |
| | | beginning | | | costs and | | | other accounts | | | Deductions | | | end | |
| | | of period | | | expenses | | | describe | | | describe | | | of period | |
| RESERVE FOR DOUBTFUL ACCOUNTS | | $ | 718 | | | $ | 306 | | | $ | — | | | $ | 295 | (1) | | $ | 729 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| RESERVE FOR INVENTORY VALUATION | | $ | 3,100 | | | $ | — | | | $ | — | | | $ | 1,800 | (2) | | $ | 1,300 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| DEFERRED TAX VALUATION | | $ | 22,401 | | | $ | 14,233 | | | $ | — | | | $ | 2,417 | (3) | | $ | 34,217 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2005 |
| |
| Rule 12-09 Valuation and Qualifying Accounts and Reserves |
| (Amounts in thousands) |
| | | | | | | | | | | | | | | | | | | | | |
| Column A | | Column B | | | Column C | | | Column D | | | Column E | |
| | | | | | | Additions | | | | | | | | |
| | | Balance at | | | Charged to | | | Charged to | | | | | | | Balance at | |
| | | beginning | | | costs and | | | other accounts | | | Deductions | | | end | |
| | | of period | | | expenses | | | describe | | | describe | | | of period | |
| RESERVE FOR DOUBTFUL ACCOUNTS | | $ | 981 | | | $ | 425 | | | $ | — | | | $ | 688 | (1) | | $ | 718 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| RESERVE FOR INVENTORY VALUATION | | $ | 5,187 | | | $ | — | | | $ | — | | | $ | 2,087 | (2) | | $ | 3,100 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| DEFERRED TAX VALUATION | | $ | 14,497 | | | $ | 7,904 | | | $ | — | | | $ | | | | $ | 22,401 | |
| | | | | | | | | | | | | | | | |
| | |
| (1) | | Write-off of uncollectible receivable, net of recovery. |
| (2) | | Reduction in inventory reserve for inventory items sold during fiscal 2005. |
| (3) | | Expiration of capital loss carryforward and utilization against current foreign income taxes payable. |
| (4) | | Removal of NOL’s related to non-qualified stock options and the related valuation allowance. |
| (5) | | Addition of a valuation allowance on the Texas tax credits that were created from prior years Texas NOL. The credits are created and calculated under the newly enacted Texas margin tax law. |
| (6) | | Prior Year true-ups. |
33
Exhibit Index
| | | |
Exhibit
Number | | Description |
| |
| 3.1 | | Restated Articles of Incorporation of the Registrant dated October 7, 1992, filed as Exhibit 3.1 to Registrant’s Registration Statement on Form S-3 (Reg. No.333-143996) and incorporated herein by reference. |
| |
| 3.2 | | Certificate of Amendment of Restated Articles of Incorporation of the Registrant dated February 15, 1996, filed as Exhibit 3.2 to Registrant’s Registration Statement on Form S-3 (Reg. No.333-143996) and incorporated herein by reference. |
| |
| 3.3 | | Certificate of Amendment of Restated Articles of Incorporation of the Registrant dated February 7, 1997, filed as Exhibit 3.3 to Registrant’s Registration Statement on Form S-3 (Reg. No.333-143996) and incorporated herein by reference. |
| |
| 3.4 | | Restated By-Laws of the Registrant dated September 22, 1992, filed as Exhibit 3.4 to Registrant’s Registration Statement on Form S-3 (Reg. No.333-143996) and incorporated herein by reference. |
| |
| 4.10 | | Form of certificate for Common Stock, filed as Exhibit 4.1 to Registrant’s Registration Statement on Form S-1 (Reg. No. 33-51142) and incorporated herein by reference. |
| |
| 4.11 | | Form of Warrant, dated May 11, 2001, issued to Southwest Bank of St. Louis with respect to 12,500 shares of Registrant’s Common Stock, filed as Exhibit 4.2 to Registrant’s Annual Report on Form 10-K for the year ended September 30, 2001 and incorporated herein by reference. |
| |
| 4.12 | | Subordinated Convertible Debenture Purchase Agreement, dated as of February 13, 2003, by and among Zoltek Companies, Inc. and the investors named therein, filed as Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated February 18, 2003 and incorporated herein by reference. |
| |
| 4.13 | | Form of Subordinated Debenture, filed as Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated February 18, 2003 and incorporated herein by reference. |
| |
| 4.14 | | Form of Warrant, filed as Exhibit 4.3 to Registrant’s Current Report on Form 8-K dated February 18, 2003 and incorporated herein by reference. |
| |
| 4.15 | | Securities Purchase Agreement, dated as of December 19, 2003, by and among Zoltek Companies, Inc. and the investors named therein, filed as Exhibit 4.6 to Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2003 and incorporated herein by reference. |
| |
| 4.16 | | Form of 6% Convertible Debenture, filed as Exhibit 4.7 to Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2003 and incorporated herein by reference. |
| |
| 4.17 | | Form of Warrant, filed as Exhibit 4.8 to Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2003 and incorporated herein by reference. |
| |
| 4.18 | | Securities Purchase Agreement, dated as of March 11, 2004, by and among Zoltek Companies, Inc. and the investors named therein, filed as Exhibit 4.2 to Registrant’s Registration Statement on Form S-3 (Reg. No. 333-115043) and incorporated herein by reference. |
| |
| 4.19 | | Form of 6% Convertible Debenture, filed as Exhibit 4.3 to Registrant’s Registration Statement on Form S-3 (Reg. No. 333-115043) and incorporated herein by reference. |
| |
| 4.20 | | Form of Warrant, filed as Exhibit 4.4 to Registrant’s Registration Statement on Form S-3 (Reg. No. 333-115043) and incorporated herein by reference. |
| |
| 4.21 | | Loan and Warrant Agreement, dated as of October 14, 2004, filed as Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated October 19, 2004 and incorporated herein by reference. |
| |
| 4.22 | | Security Agreement, dated as of October 14, 2004, filed as Exhibit 4.3 to Registrant’s Current Report on Form 8-K dated October 19, 2004 and incorporated herein by reference. |
| |
| 4.23 | | Mortgage Agreement, dated as of October 14, 2004, filed as Exhibit 4.4 to Registrant’s Current Report on Form 8-K dated October 19, 2004 and incorporated herein by reference. |
| |
| 4.24 | | Form of Warrant, filed as Exhibit 4.5 to Registrant’s Current Report on Form 8-K dated October 19, 2004 and incorporated herein by reference. |
| |
| 4.25 | | Loan and Warrant Agreement, dated as of February 9, 2005, by and among the Registrant, the Lenders and the Agent, filed as Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2004 and incorporated herein by reference. |
| |
| 4.26 | | Form of Senior Convertible Note, dated as of February 9, 2005, filed as Exhibit 4.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2004 and incorporated herein by reference. |
| |
| 4.27 | | Form of Warrant, dated as of February 9, 2005, filed as Exhibit 4.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2004 and incorporated herein by reference. |
| |
| 4.28 | | Form of Registration Rights Agreement, dated as of February 9, 2005, filed as Exhibit 4.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2004 and incorporated herein by reference. |
| |
| 4.29 | | Loan and Warrant Agreement, dated as of September 29, 2005, among the Registrant, the Lenders and the Agent, filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated September 29, 2005 and incorporated herein by reference. |
34
| | | |
Exhibit
Number | | Description |
| |
| 4.30 | | Form of Note, filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated September 29, 2005 and incorporated herein by reference. |
| |
| 4.31 | | Form of Warrant, filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K dated September 29, 2005 and incorporated herein by reference. |
| |
| 4.32 | | Registration Rights Agreement, dated as of September 30, 2005, by and among the Registrant and the Lenders parties thereto, filed as Exhibit 4.4 to the Registrant’s Current Report on Form 8-K dated September 29, 2005 and incorporated herein by reference. |
| |
| 4.33 | | Waiver and Consent, dated as of February 3, 2006, by and among the Registrant and the Lender parties thereto, filed as Exhibit 4.5 to the Registrant’s Current Report on Form 8-K dated February 6, 2006, and incorporated herein by reference. |
| |
| 4.34 | | Amendment No. 1 to Loan and Warrant Agreement and Registration Rights Agreement among the Registrant and the Lender parties thereto, filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated April 28, 2006 and incorporated herein by reference. |
| |
| 4.35 | | Form of Note, filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K dated April 28, 2006 and incorporated herein by reference. |
| |
| 4.36 | | Form of Warrant, filed as Exhibit 4.4 to the Registrant’s Current Report on Form 8-K dated April 28, 2006 and incorporated herein by reference. |
| |
| 4.37 | | Amendment No. 2 to Loan and Warrant Agreement and Registration Rights Agreement, dated as of December 14, 2006, among the Registrant and the Lenders, filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K dated December 14, 2006 and incorporated herein by reference. |
| |
| 4.38 | | Form of Warrant, filed as Exhibit 4.4 to the Registrant’s Current Report on Form 8-K dated December 14, 2006 and incorporated herein by reference. |
| |
|
| 10.1 | | Loan Agreement, dated December 29, 1989, by and between Zoltek Corporation and Southwest Bank of St. Louis, as amended by letter, dated August 13, 1992, filed as Exhibit 10.7 to Registrant’s Registration Statement on Form S-1 (Reg. No. 33-51142) is incorporated herein by this reference |
| |
| 10.2 | | Zoltek Companies, Inc. Long Term Incentive Plan, filed as Appendix B to Registrant’s definitive proxy statement for the 1997 Annual Meeting of Shareholders is incorporated herein by this reference* |
| |
| 10.3 | | Zoltek Companies, Inc. Amended and Restated Directors Stock Option Plan, filed as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q dated August 13, 1999, is incorporated herein by this reference* |
| |
| 10.4 | | Precursor Agreement, dated as of July 1, 1994, by and between Zoltek Corporation and Courtaulds Fibres Limited, filed as Exhibit 10.9 to Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 1994, is incorporated herein by this reference (An application for confidential treatment has been made for a portion of Exhibit 10.5.) |
| |
| 10.5 | | Materials Supply Agreement, dated as of June 15, 1994, by and between Zoltek Companies, Inc. and The B.F. Goodrich Company, filed as Exhibit 10.10 to Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 1994, is incorporated herein by this reference (An application for confidential treatment has been made for a portion of Exhibit 10.6.) |
| |
| 10.6 | | Promissory Note, dated November 14, 1994, by and between Zoltek Corporation and Southwest Bank of St. Louis, filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, is incorporated herein by this reference |
| |
| 10.7 | | Credit Agreement, dated May 11, 2001, between Southwest Bank of St. Louis and Zoltek Companies, Inc., Zoltek Corporation, Cape Composites, Inc., Engineering Technology Corporation, Zoltek Properties, Inc., and Hardcore Composites Operations, LLC, filed as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 is incorporated herein by reference |
| |
| 10.8 | | First Amendment to Credit Agreement, dated as of February 13, 2003, by and among Zoltek Companies, Inc., Zoltek Corporation, Cape Composites, Inc., Engineering Technology Corporation, Zoltek Properties, Inc. and Southwest Bank of St. Louis, filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated February 18, 2003 is incorporated herein by reference |
| |
| 10.9 | | Zoltek Companies, Inc. 2003 Long-Term Equity Incentive Plan, filed as Appendix A to Registrant’s definitive proxy statement for the 2002 Annual Meeting of Shareholders is incorporated herein by reference* |
| |
| 10.10 | | Promissory Note, dated January 13, 2004, by and between Zoltek Properties, Inc. and Beal Bank, S.S.B. filed as Exhibit 10.13 to Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2003, is incorporated herein by this reference, incorporated herein by reference. |
| |
| 10.11 | | Second Amendment to Credit Agreement, dated as of January 13, 2003, by and among Zoltek Companies, Inc., Zoltek Corporation, Cape Composites, Inc., Engineering Technology Corporation, Zoltek Properties, Inc. and Southwest Bank of St. Louis filed as Exhibit 10.14 to Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2003, is incorporated herein by this reference |
| |
| 21 | | Subsidiaries of the Registrant** |
| |
| 23.1 | | Consent of Grant Thornton LLP. |
| |
| 23.2 | | Consent of PricewaterhouseCoopers LLP. |
| |
| 31.1 | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended is filed herewith. |
| |
| 32.1 | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 is filed herewith. |
| | |
| * | | Management compensatory plan or arrangement |
| |
| ** | | Previously filed on December 7, 2007 with original filing of Form 10-K for fiscal year ended September 30, 2007 |
35
