SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
--------------------
For the quarter ended June 30, 2001 Commission File No. 0-20600
------------- -------
ZOLTEK COMPANIES, INC.
----------------------
(Exact name of registrant as specified in its charter)
Missouri 43-1311101
- -------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3101 McKelvey Road, St. Louis, Missouri 63044
- --------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 291-5110
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes x No
--- ---
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date: As of August 14,
2001, 16,285,338 shares of Common Stock, $.01 par value, were outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ZOLTEK COMPANIES, INC.
CONSOLIDATED BALANCE SHEET
--------------------------
(Amounts in thousands, except share and per share amounts)
JUNE 30, SEPTEMBER 30,
ASSETS 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Current assets:
Cash and cash equivalents............................................................... $ 550 $ 2,222
Marketable securities................................................................... - 1,327
Accounts receivable, less allowance for doubtful accounts of $606 and
$899, respectively.................................................................... 14,035 14,063
Inventories............................................................................. 27,553 31,876
Prepaid expenses........................................................................ 1,150 500
Other receivables....................................................................... 550 321
Refundable income taxes................................................................. 208 1,556
Net assets of discontinued operations held for sale..................................... - 57,360
---------- ----------
Total current assets............................................................... 44,046 109,225
Property and equipment, net.................................................................. 81,781 81,922
Intangible assets, net (including goodwill).................................................. 2,190 2,196
Other assets................................................................................. 5,578 1,548
---------- ----------
Total assets....................................................................... $ 133,595 $ 194,891
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Current maturities of long-term debt.................................................... $ 2,309 $ 10,751
Trade accounts payable.................................................................. 12,903 9,169
Accrued expenses and other liabilities.................................................. 4,789 4,451
Net current maturities of long-term debt for extinguishment with
discontinued operations............................................................... - 35,375
---------- ----------
Total current liabilities.......................................................... 20,001 59,746
Other long-term liabilities.................................................................. 467 379
Long-term debt, less current maturities...................................................... 23,525 9,697
Deferred income taxes........................................................................ 83 1,429
---------- ----------
Total liabilities.................................................................. 44,076 71,251
---------- ----------
Majority interest in consolidated partnership................................................ - 829
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized,
no shares issued or outstanding....................................................... - -
Common stock, $.01 par value, 50,000,000 shares authorized,
16,285,338 and 18,701,331 shares issued and outstanding, respectively................. 188 187
Additional paid-in capital.............................................................. 127,976 127,690
Retained earnings....................................................................... 1,431 22,500
Treasury common stock at cost (2,514,993 and 15,000 shares, respectively)............... (19,181) (118)
Accumulated other comprehensive loss.................................................... (20,895) (27,448)
---------- ----------
Total shareholders' equity......................................................... 89,519 122,811
---------- ----------
Total liabilities and shareholders' equity ........................................ $ 133,595 $ 194,891
========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
2
ZOLTEK COMPANIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------
(Amounts in thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
--------------------------- --------------------------
2001 2000 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
Net sales.............................................................. $ 18,710 $ 20,415 $ 62,262 $ 57,618
Cost of sales.......................................................... 15,274 16,386 61,828 45,484
----------- ----------- ----------- -----------
Gross profit...................................................... 3,436 4,029 434 12,134
Available unused capacity costs........................................ 1,821 1,310 4,888 3,398
Goodwill amortization.................................................. 27 5 80 5
Selling, general and administrative expenses........................... 5,467 4,251 14,972 12,171
----------- ----------- ----------- -----------
Operating loss from continuing operations......................... (3,879) (1,537) (19,506) (3,440)
Other income (expense):
Interest expense.................................................. (444) (321) (1,635) (918)
Interest income................................................... 155 90 547 442
Other, net........................................................ 22 73 (145) (66)
----------- ----------- ----------- -----------
Loss from continuing operations before income taxes.................... (4,146) (1,695) (20,739) (3,982)
Provision (benefit) for income taxes................................... 94 (585) (601) (1,456)
----------- ----------- ----------- -----------
Net loss from continuing operations before
majority interest in consolidated partnership................... (4,240) (1,110) (20,138) (2,526)
Majority interest in loss of consolidated partnership.................. - 145 829 145
----------- ----------- ----------- -----------
Net loss from continuing operations.................,............. (4,240) (965) (19,309) (2,381)
Discontinued operations:
Loss from discontinued operations, net of taxes................... - (404) - (1,295)
Loss on disposal of discontinued operations, net of taxes......... - - (1,760) -
----------- ----------- ----------- -----------
Loss on discontinued operations, net............................ - (404) (1,760) (1,295)
----------- ----------- ----------- -----------
Net loss............................................................... (4,240) (1,369) (21,069) (3,676)
=========== =========== =========== ===========
Net loss per share:
Basic and diluted loss per share:
Continuing operations......................................... $ (0.26) $ (0.05) $ (1.16) $ (0.13)
Discontinued operations....................................... - (0.02) (0.11) (0.07)
----------- ----------- ----------- -----------
Total......................................................... $ (0.26) $ (0.07) $ (1.27) $ (0.20)
=========== =========== =========== ===========
Weighted average common and common equivalent shares outstanding:
Basic............................................................. 16,284 18,701 16,592 18,245
Diluted........................................................... 16,305 18,778 16,613 18,348
The accompanying notes are an integral part of the consolidated financial statements.
3
ZOLTEK COMPANIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
(Amounts in thousands)
(Unaudited)
NINE MONTHS ENDED JUNE 30,
--------------------------
2001 2000
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss.............................................................................. $ (21,069) $ (3,676)
Adjustments to reconcile net loss to net cash used by operating activities:
Loss from discontinued operations................................................ 1,760 1,295
Depreciation and amortization.................................................... 5,055 4,637
Other, net....................................................................... (97) 86
Changes in assets and liabilities:
Decrease in accounts receivable............................................ 453 110
(Increase) decrease in inventories......................................... 4,852 (4,513)
(Increase) in prepaid expenses and other assets............................ (623) (1,320)
Increase in trade accounts payable......................................... 3,394 1,811
Increase (decrease) in accrued expenses and other liabilities.............. (397) 1,501
Change in income taxes payable/refundable and deferred taxes............... 493 (602)
Other changes in assets and liabilities.................................... (88) (338)
----------- -----------
Total adjustments..................................................... 14,802 2,667
----------- -----------
Net cash used by continuing operations................................................ (6,267) (1,009)
Net cash used by discontinued operations.............................................. - (1,447)
----------- -----------
Net cash used by operating activities....................................................... (6,267) (2,456)
----------- -----------
Cash flows from investing activities:
Payments for purchase of Zoltek Intermediates companies, net of cash acquired......... - (5,189)
Payments for purchase of property and equipment....................................... (4,949) (5,185)
Sale of marketable securities......................................................... 1,483 5,705
Other investing activities, net....................................................... 79 104
----------- -----------
Net cash used by continuing operations........................................... (3,387) (4,565)
Net cash provided (used) by discontinued operations.............................. 37,924 (33,582)
----------- -----------
Net cash provided (used) by investing activities............................................ 34,537 (38,147)
----------- -----------
Cash flows from financing activities:
Proceeds (purchase) from exercise of stock options and warrants.................. 287 (181)
Proceeds from issuance of notes payable.......................................... 14,486 45,757
Repayment of notes payable....................................................... (44,713) (3,688)
----------- -----------
Net cash provided (used) by continuing operations..................................... (29,940) 41,888
Net cash used by discontinued operations.............................................. - (3,788)
----------- -----------
Net cash provided (used) by financing activities............................................ (29,940) 38,100
----------- -----------
Effect of exchange rate changes on cash..................................................... (2) (343)
----------- -----------
Net decrease in cash........................................................................ (1,672) (2,846)
Cash and cash equivalents at beginning of period............................................ 2,222 4,250
----------- -----------
Cash and cash equivalents at end of period.................................................. $ 550 $ 1,404
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Net cash paid (received) during the period for:
Interest, including discontinued operations........................................... $ 2,201 $ 2,316
Income taxes.......................................................................... $ (1,037) $ 451
Non-cash financing activities:
Issuance (return) of common stock from SP Systems acquisition......................... $ (19,062) $ 27,500
The accompanying notes are an integral part of the consolidated financial statements.
4
ZOLTEK COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. UNAUDITED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited consolidated
financial statements include all adjustments of a normal and recurring
nature necessary for a fair presentation of the financial position and
results of operations as of the dates and for the periods presented. These
financial statements should be read in conjunction with the Company's 2000
Annual Report, which includes consolidated financial statements, and notes
thereto for the fiscal year ended September 30, 2000. Certain
reclassifications have been made to conform prior year's data to the current
presentation. The results for the quarter ended June 30, 2001 are not
necessarily indicative of the results that may be expected for the fiscal
year ending September 30, 2001.
2. PRINCIPLES OF CONSOLIDATION
Zoltek Companies, Inc. (the "Company") is a holding company which operates
through wholly owned subsidiaries, Zoltek Corporation, Zoltek Properties
Inc., Zoltek Rt., Zoltek Materials Group, Inc. ("Zoltek Materials Group"),
Engineering Technology Corporation ("Entec Composite Machines"), and a
45%-membership interest in Hardcore Composites Operations, LLC ("Hardcore")
which is reported as a consolidated subsidiary due to the Company's
operational control. From November 1999 to November 2000, the Company also
owned Structural Polymer (Holdings) Limited ("SP Systems").
The consolidated balance sheets of the Company's current and former
international subsidiaries, Structural Polymer (Holdings) Limited and
Zoltek Rt., were translated from British Pounds and Hungarian Forints,
respectively, to U.S. Dollars at the exchange rate in effect at the
applicable balance sheet date, while their consolidated statements of
operations were translated using the average exchange rates in effect during
the periods presented. The related translation adjustments are reported as
other comprehensive income (loss) within shareholders' equity. Gains and
losses from foreign currency transactions of Zoltek Rt. and SP Systems are
included in the results of operations. These financial statements have been
prepared in accordance with U.S. generally accepted accounting principles
and on a consistent basis with the consolidated financial statements as of
and for the year ended September 30, 2000. All significant intercompany
transactions and balances have been eliminated upon consolidation.
3. DISCONTINUED OPERATIONS
In the fourth quarter of fiscal 2000, the Company decided to dispose of SP
Systems. Accordingly, the Company reported the results of the operations of
SP Systems as discontinued operations.
The Company acquired SP Systems on November 19, 1999 for $30.0 million cash
and 2.5 million shares of the Company's common stock valued at a price of
$11.00 per share, or $27.5 million, for a total purchase price of
approximately $57.5 million. The acquisition resulted in the recognition of
$49.3 million of goodwill. In connection with the acquisition, the Company
borrowed $30.0 million to finance the purchase.
On November 6, 2000, the Company sold SP Systems to a group consisting of
the original shareholders and a merchant banking firm. In connection with
the sale, the Company received $30.0 million in cash, an interest-bearing
note receivable of $5.0 million, the return of 2.5 million shares of the
Company's common stock valued at $7.625 per share ($19.1 million aggregate
value) and was repaid approximately $7.9 million consisting of intercompany
loans, accrued interest and closing expenses. Cash proceeds from the sale
and repayment of the intercompany balances were used to retire $35.4 million
of bank debt ($30.0 million initial financing and $5.4 million of working
capital) and pay interest of $0.8 million. In connection with the sale of SP
Systems, the Company recorded a loss of $1.8 million, net of tax in the
quarter ended December 31, 2000 related to costs incurred to dispose of SP
Systems and the early repayment of debt. The Company also entered into a
10-year carbon fiber supply agreement and certain technology license
agreements with SP Systems.
5
4. ACQUISITIONS
During the first and third quarters of fiscal 2000, the Company acquired a
series of downstream businesses which now comprise its Composite
Intermediates business segment. The businesses acquired included Zoltek
Materials Group, Entec Composite Machines and Hardcore.
The Company acquired Zoltek Materials Group and Entec Composite Machines in
the first quarter of fiscal 2000 for an aggregate purchase price of $4.0
million in cash. The Company also assumed certain liabilities at acquisition
and provided working capital and credit facilities for the acquired
companies.
In the third quarter of fiscal 2000, the Company acquired a 45%-preferred
membership interest in Hardcore, for $1.4 million in cash and guaranteed a
note payable of $1.0 million. The Company also provided additional funding
for working capital. The Company has the option to purchase the remaining
interest in 2002 based upon a pre-determined formula. The financial
statements of Hardcore are consolidated with the Company due to the ability
to directly control the operations. Due to losses incurred at Hardcore
subsequent to acquisition, majority interest in consolidated partnerships
was $0 at June 30, 2001 compared to $829,000 at September 30, 2000. As part
of the Hardcore acquisition agreement, the Company must absorb all losses
once Hardcore is in a deficit position. The Company will be repaid for this
absorption out of future Hardcore earnings; however, due to the inability to
predict future earnings at Hardcore, no asset is being recognized at this
time. Prospectively, all losses at Hardcore will be recognized by the
Company.
These acquisitions were accounted under the purchase method of accounting
and are included in the Company's consolidated financial statements from the
date of acquisition. The purchase prices were allocated to the fair value of
the assets acquired. The excess of the amount paid for the businesses over
the fair value of the assets acquired was recognized as goodwill and is
being amortized over 15 years.
Set forth below is aggregate selected unaudited purchase price data of the
acquired companies at the dates of acquisition.
TOTAL
----------
Fair value of assets and liabilities acquired:
Current assets............................................ $ 2,631
Long-term assets.......................................... 9,034
Goodwill and intangibles.................................. 1,898
Liabilities............................................... (8,704)
----------
Net purchase price................................... $ 4,859
==========
Set forth below is selected unaudited pro forma combined results of
operations data of the Company for the nine months ended June 30, 2000, as
if the acquisitions had been completed as of October 1, 1999. The pro forma
combined financial information set forth below is not necessarily indicative
of future results of operations or results of operations that would have
been reported for the periods indicated had the transactions actually
occurred on that date (amounts in thousands, except per share data).
(Unaudited)
NINE MONTHS ENDED
JUNE 30,
2000
-----------------
Net sales............................................ $ 58,391
Net loss from continuing operations.................. (2,397)
Net loss per share from continuing operations -
basic and diluted.................................. $ (.13)
6
5. COMPREHENSIVE LOSS
Comprehensive loss was as follows for the nine-month period ended (in
thousands):
JUNE 30,
2001 2000
----------- -----------
(Unaudited) (Unaudited)
Net loss............................................. $ (21,069) $ (3,676)
Other comprehensive income (loss).................... 1,405 (3,965)
----------- -----------
Comprehensive loss................................... $ (19,664) $ (7,641)
=========== ===========
6. INVENTORIES
Inventories consist of the following (in thousands):
JUNE 30, SEPTEMBER 30,
2001 2000
(Unaudited) (Unaudited)
----------- -------------
Raw materials.................................... $ 5,826 $ 7,930
Work-in-process.................................. 2,349 1,516
Finished goods................................... 18,668 20,893
Supplies, spares and other....................... 710 1,537
----------- -----------
$ 27,553 $ 31,876
=========== ===========
The Company recorded a $7.5 million inventory valuation reserve during the
quarter ended March 31, 2001 to reduce the carrying value of the inventory
to net realizable value of the inventory. This reserve was established due
to the intensified overcapacity occurring in the quarter, which caused
distressed pricing across most existing markets for carbon fibers.
7. DEBT
In November 1999, the Company entered into a six-year credit facility with a
commercial bank in an original aggregate amount of $71.0 million. The
Company paid $0.71 million as a nonrefundable fee for the arrangement of the
credit facility. The Company amended and restated the credit agreement on
May 31, 2000, to among other things, reduce the amount of borrowings
available (from $71.0 million to $54.0 million) and modify certain financial
covenants. The facility, as amended, contained financial covenants,
including financial covenants related to borrowings, future acquisitions,
working capital, net worth, cash flow and fixed charge coverage. The Company
repaid the term loan of $32.4 million and $3.0 million of the revolving
credit loan on November 6, 2000 from the proceeds of the sale of SP Systems.
On May 11, 2001, the Company entered into a new two-year credit facility
with Southwest Bank of St. Louis (Southwest Bank) in the amount of $14.0
million. The new credit facility is structured as a term loan in the amount
of $4.0 million and a revolving credit loan in the amount of $10.0 million.
In conjunction therewith, the Company repaid the prior bank the outstanding
revolving credit loan of $9.0 million plus accrued interest. Borrowings
under the new revolving credit facility will be based on a formula of
eligible accounts receivable and eligible inventory of the Company and its
U.S.-based subsidiaries. The outstanding loans under the credit facility
will bear interest at the prime interest rate. The loan agreement contains
financial covenants, including financial covenants related to borrowings,
working capital, debt coverage, current ratio, inventory turn ratio, and
capital expenditures. The Company paid $35,000 as a non-refundable fee to
Southwest Bank. In addition, the Company issued warrants to Southwest Bank
to purchase 12,500 shares of common stock of the Company at an exercise
price of $5.00 per share exercisable at any time during a five-year period
from the date of the loan.
On May 18, 2001, the Company's Hungarian subsidiary also entered into an
expanded credit facility (to $12.0 million from $6.0 million) with
Raiffeisen Bank Rt. The facility consists of a $6.0 million bank guarantee
and factoring facility, a $4.0 million capital investment facility and a
$2.0 million working capital facility.
7
8. COMMITMENTS AND CONTINGENCIES
The Company entered into an assignment and assumption agreement at the time
of the purchase of Hardcore that requires the Company to guarantee Hardcore's
post-closing obligations to the seller. The Company's guarantee relates to
obligations of approximately $4.8 million. Upon performance of the
obligations, Hardcore will acquire real estate and improvements with an
estimated value of approximately that amount. The obligations were payable as
of April 28, 2001, however, these transactions have not yet been completed
pending the negotiated modifications of those arrangements with the seller
and completion of the related real estate transaction.
9. SEGMENT INFORMATION
The Company's operations consist of three business segments: Carbon Fibers,
Composite Intermediate Materials and Specialty Products.
The Carbon Fibers business segment manufactures and markets carbon fibers
and develops applications for carbon fibers. At plants in Abilene, Texas,
Hungary and St. Charles, Missouri, the Company's rated annual carbon fibers
production capacity of 12.5 million pounds is the largest in the world. The
Carbon Fibers business segment also sells oxidized fiber and performs
certain downstream processing, such as chopping and milling. The Company's
primary focus is to create integrated solutions for large potential end
users by working directly with users in the primary market sectors
identified by the Company.
The Composite Intermediate Materials business segment develops, manufactures
and markets reinforcements, prepregs (glass or carbon fiber pre-impregnated
with resin), specialty resins and manufacturing equipment for the composite
manufacturing industry. In addition, this business segment supports the
Carbon Fibers business segment by providing composite design and engineering
for development of applications for carbon fiber reinforced composites.
The Specialty Products business segment, which is comprised of the Company's
Hungarian-based subsidiary, Zoltek Rt., manufactures and markets acrylic
fibers, nylon products and industrial materials. Acrylic and nylon fibers
currently represent the Specialty Products business segment's primary
product line and are used in producing a variety of end products, including
clothing and carpet. The segment's products are sold in regional markets,
principally in Europe.
The Carbon Fibers segment is located geographically in the United States and
Hungary. The Composite Intermediates segment is located in the United
States. The Specialty Products segment is located in Hungary. The Company
markets all of its products globally. The corporate and unallocated assets
incur no cost of sales expenses so they have no gross profit or loss to
report.
Management evaluates the performance of its operating segments on the basis
of operating profit (loss) contribution to the Company. The Company's
operating segments have the primary responsibility for managing sales, costs
of sales and the selling, general and administrative efforts of each of the
segments. Therefore, management, in the evaluation of the individual
segment's primary performance, considers these costs. The following table
presents financial information on the Company's operating segments as of and
for the three- and nine-month periods ending June 30, 2001 and 2000
(amounts in thousands):
THREE MONTHS ENDED JUNE 30, 2001
--------------------------------
(Unaudited)
Corporate
Headquarters
Carbon Composite Specialty and
Fibers Intermediates Products Eliminations Total
----------- ------------- ----------- ------------- -----------
Net sales - external $ 5,216 $ 4,198 $ 9,296 $ - $ 18,710
Net sales - intersegment 199 - - (199) -
----------- ----------- ----------- ------------ -----------
Total net sales 5,415 4,198 9,296 (199) 18,710
Operating income (loss) (1,720) (1,453) 614 (1,320) (3,879)
Available unused capacity expenses 1,821 - - - 1,821
Depreciation and amortization expense 1,205 305 190 21 1,721
Capital expenditures 893 35 697 - 1,625
8
THREE MONTHS ENDED JUNE 30, 2000
--------------------------------
(Unaudited)
Corporate
Headquarters
Carbon Composite Specialty and
Fibers Intermediates Products Eliminations Total
----------- ------------- ----------- ------------- -----------
Net sales - external $ 6,885 $ 3,911 $ 9,619 $ - $ 20,415
Net sales - intersegment 77 - - (77) -
----------- ----------- ----------- ----------- -----------
Total net sales 6,962 3,911 9,619 (77) 20,415
Operating income (loss) (534) (594) 12 (421) (1,537)
Available unused capacity expenses 1,310 - - - 1,310
Depreciation and amortization expense 1,066 214 263 19 1,562
Capital expenditures 1,091 401 - - 1,492
NINE MONTHS ENDED JUNE 30, 2001
-------------------------------
(Unaudited)
Corporate
Headquarters
Carbon Composite Specialty and
Fibers Intermediates Products Eliminations Total
----------- ------------- ----------- ------------- -----------
Net sales - external $ 20,164 $ 12,122 $ 29,976 $ - $ 62,262
Net sales - intersegment 976 - - (976) -
----------- ----------- ----------- ------------ -----------
Total net sales 21,140 12,122 29,976 (976) 62,262
Operating income (loss) (11,761) (4,976) 448 (3,217) (19,506)
Available unused capacity expenses 4,888 - - - 4,888
Depreciation and amortization expense 3,472 912 609 62 5,055
Capital expenditures 3,107 711 1,131 - 4,949
NINE MONTHS ENDED JUNE 30, 2000
-------------------------------
(Unaudited)
Corporate
Headquarters
Carbon Composite Specialty and
Fibers Intermediates Products Eliminations Total
----------- ------------- ----------- ------------- -----------
Net sales - external $ 19,510 $ 8,128 $ 29,980 $ - $ 57,618
Net sales - intersegment 244 - - (244) -
----------- ----------- ----------- ----------- -----------
Total net sales 19,754 8,128 29,980 (244) 57,618
Operating income (loss) (1,024) (1,391) 938 (1,963) (3,440)
Available unused capacity expenses 3,398 - - - 3,398
Depreciation and amortization expense 3,271 550 740 76 4,637
Capital expenditures 2,353 514 2,318 - 5,185
TOTAL ASSETS, NET OF DISCONTINUED OPERATIONS
--------------------------------------------
(Unaudited)
Corporate
Headquarters
Carbon Composite Specialty and
Fibers Intermediates Products Eliminations Total
----------- ------------- ----------- ------------- -----------
June 30, 2001 $ 87,221 $ 17,897 $ 24,158 $ 4,318 $ 133,595
September 30, 2000 89,615 17,513 26,903 3,500 137,531
9
GEOGRAPHIC INFORMATION (UNAUDITED) / (AMOUNTS IN THOUSANDS)
REVENUES (1)
NINE MONTHS ENDED LONG-LIVED ASSETS (2)
JUNE 30, JUNE 30, JUNE 30, SEPTEMBER 30,
2001 2000 2001 2000
----------- ----------- ----------- -------------
United States.......................................................... $ 26,721 $ 23,192 $ 60,048 $ 64,767
Hungary................................................................ 35,541 34,426 23,923 19,351
----------- ----------- ----------- -----------
Total.................................................................. $ 62,262 $ 57,618 $ 83,971 $ 84,118
=========== =========== =========== ===========
<FN>
- ------------------------
(1) Revenues are attributed to the entity recognizing the sale in the
interim statements as it is not practical to accumulate every
customer's country of domicile on an interim basis.
(2) Property, plant and equipment and goodwill and intangibles, net of
accumulated depreciation and amortization are based on country
location.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
- -------
Zoltek is an applied technology and advanced materials company. The
manufacturing and marketing of carbon fibers is the Company's primary
objective. The most significant current application for carbon fibers
produced by the Company is for aircraft brake manufacturers who use the
Company's fibers as base materials for the carbon/carbon brake systems used
in most newly designed aircraft. While this market is stable, profitable and
growing, the Company believes a much more significant market potential is the
commercial use of carbon fibers as reinforcement for composites. Zoltek
believes it is a leader in developing commercial markets for carbon fibers
and carbon fiber reinforced composites for a diverse range of applications
based upon carbon fibers' distinctive combination of physical and chemical
properties, principally corrosion and fatigue resistance, high-strength,
low-weight and stiffness.
In developing new commercial applications for reinforcement carbon fibers,
the Company's business strategy requires it to reduce production costs,
maintain price leadership, assure adequate production capacity and support
new commercial markets and application development. To accelerate the
commercialization of carbon fibers and carbon fiber composites across a
broad range of mass-market applications, the Company has pursued various
initiatives to act as a catalyst in the development of new low-cost, high
volume applications. In fiscal 2000, the Company completed a series of
downstream acquisitions as part of its strategy to accelerate the
introduction and development of carbon fibers and carbon fiber composites.
These acquisitions included: Zoltek Materials Group, Entec Composite
Machines and Hardcore Composites.
In November 1999, the Company also acquired SP Systems, which designs
composite structures and manufactures composite intermediate materials, used
in manufacturing marine and wind energy composite products. SP Systems did
not meet its sales and profit forecasts and, as a result, was unable to
support the Company's carbon fiber commercialization objectives. Therefore,
in November 2000, the Company sold SP Systems to a group consisting of the
former Structural Polymer (Holdings) Limited shareholders and a merchant
banking firm. The cash proceeds from the sale of SP Systems were used to
repay bank debt. In connection with the sale of SP Systems, the Company
entered into agreements that provide for various continuing strategic
relationships with SP Systems. These agreements include a long-term carbon
fiber supply agreement, an agreement to utilize SP Systems' formulations for
prepreg and formulated products and a license agreement for the Company to
offer SP Systems' proprietary SPRINT composite process technology.
Accordingly, the Company's consolidated financial statements for the periods
ended June 30, 2000 and 2001 account for SP Systems as a discontinued
operation. Unless otherwise indicated, the following discussion relates to
the Company's continuing operations. Subsequent to the sale, SP System's
operations ceased to be part of the Company's operations and reported
results.
During all of fiscal 2000 and the first nine months of fiscal 2001, the
Company was not operating its carbon fiber production lines at full capacity.
During the first nine months of fiscal 2001, available unused capacity
charges were approximately $4.9 million. While the Company believes it is
necessary to maintain available capacity to encourage development of
significant new applications for carbon fibers, costs related to the
unutilized capacity will continue to adversely impact results of operations
in fiscal 2002. The Company does, however, anticipate increases in sales from
the carbon fiber lines at both the U.S. and Hungarian locations in fiscal
2002.
A significant portion of the Company's expenses is attributable to customer-
driven application and process development projects. The Company regards
these development costs as critical investments to the future large-scale
commercialization of carbon fibers and carbon fiber composites. Current
customer-driven application and development projects are focused in the
automotive industry, the oilfield / marine industry, the materials handling
products industry and plastics industry among others.
10
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
- -----------------------------------------------------------------------------
The Company's sales decreased 8.4% to $18.7 million in the third quarter of
fiscal 2001 from $20.4 million in the third quarter of fiscal 2000. Carbon
fiber sales decreased 24.2% ($1.7 million) to $5.2 million in the third
quarter of fiscal 2001 from $6.9 million in the third quarter of fiscal
2000. The carbon fibers sales decrease was due to competition from continued
sales of excess aerospace-grade carbon fiber at below-cost pricing, changes
in product mix and by the deferral of orders from certain large customers.
Based on indicated demand, the Company anticipates the return to historical
levels of sales to large customers in future quarters. Sales of the
composite intermediates business segment increased by 7.3% ($.3 million) to
$4.2 million in the third quarter of fiscal 2001 from $3.9 million in the
third quarter of fiscal 2000. The increase resulted from higher volume in
the prepreg markets and the Hardcore acquisition in May 2000. Overall, this
segment is meeting its strategic objective of accelerating the introduction
of and demand for carbon fibers and carbon fiber composites in low-cost,
high volume applications. Sales of the specialty products business segment
decreased modestly (3.4% or $.3 million) to $9.3 million in the third
quarter of fiscal 2001 from $9.6 million in the third quarter of fiscal
2000.
Gross profit decreased to $3.4 million in the third quarter of fiscal 2001
from a profit of $4.0 million in the third quarter of fiscal 2000. Gross
profit from carbon fibers was $1.5 million in the third quarter of fiscal
year 2001 or a decrement of $0.4 million from the third quarter of fiscal
2000, due primarily to a decrease in selling prices, product mix changes,
and the deferral of orders from certain large customers. Gross profit from
composite intermediates products was $0.3 million in the third quarter of
fiscal 2001 compared to a profit of $0.6 million in the third quarter of
fiscal 2000. These downstream businesses continue to actively participate in
several development projects that generate little gross margin at current
volume levels; however, such projects are intended to develop applications
for carbon fibers. Gross profit on specialty products remained unchanged
between the third quarter of 2001 and 2000 at $1.6 million.
The Company continued to incur costs related to the underutilized productive
capacity for carbon fibers at the Abilene, Texas facility. These costs
include depreciation and other overhead associated with the unused capacity.
These costs were approximately $1.8 million during the third quarter of
fiscal 2001 and $1.3 million in the third quarter of fiscal 2000. The
Company believes it is necessary to maintain available capacity to encourage
development of significant new large-scale applications and anticipates
costs associated with the available capacity will continue into fiscal 2002.
Selling, general and administrative expenses increased approximately 28.6%,
or $1.2 million, from $4.3 million in the third quarter of fiscal 2000 to
$5.5 million in the third quarter of fiscal 2001. The increase was mainly
due to the inclusion of Hardcore for a full quarter in the third quarter of
2001 and to increased research and development costs, including associated
personnel costs for customer-driven applications and process development
projects.
During the third quarter of fiscal 2001, the Company reported an income tax
expense of $0.1 million compared to an income tax benefit of $0.6 million in
the third quarter of fiscal 2000. Included in the provision for income taxes
are gross receipts taxes charged by the Hungarian local taxing authorities
as well as statutory income taxes. The statutory income tax rate for
operations in Hungary is 9%.
The foregoing resulted in a net loss from continuing operations of $4.2
million for the third quarter of fiscal 2001 compared to a net loss of $1.0
million for the third quarter of fiscal 2000. Similarly, the Company
reported a net loss from continuing operations per share of $0.26 and $0.05
on a basic and diluted basis for the third quarter of fiscal 2001 and fiscal
2000, respectively. The weighted average common shares outstanding decreased
to 16.3 million for the third quarter of fiscal 2001 compared to 18.7
million for the third quarter of fiscal year 2000 due to the retirement (in
November 2000) of approximately 2.5 million common shares as partial
consideration for the purchase and sale of SP Systems.
The net loss from discontinued operations includes the results of operations
of SP Systems and interest costs related to borrowings used to finance the
acquisition. The Company did not report any loss on discontinued operations
during the third quarter of fiscal 2001 compared to a net operating loss on
discontinued operations of $0.4 million during the third quarter of fiscal
2000. The Company reported no loss per share from discontinued operations in
the third quarter of fiscal 2001 compared to loss of $0.02 per share on a
basic and diluted basis for the third quarter of fiscal 2000.
The net loss for the third quarter of fiscal 2001 was $4.2 million, or $0.26
per share on a basic and diluted basis, compared to a net loss of $1.4
million, or $0.07 per share in the third quarter of fiscal 2000.
11
NINE MONTHS ENDED JUNE 30, 2001 COMPARED TO NINE MONTHS ENDED JUNE 30, 2000
- ---------------------------------------------------------------------------
The Company's sales increased 8.1% to $62.3 million in fiscal year 2001 from
$57.6 million in year fiscal 2000. Carbon fiber sales increased 3.4% ($0.7
million) to $20.2 million in fiscal 2001 from $19.5 million in fiscal 2000.
The carbon fibers sales increase was due to significantly higher sales
volumes at lower average sales prices due to product mix changes, and
competition from continued sales of excess aerospace-grade carbon fiber at
below-cost pricing offset by the deferral of orders from certain large
customers during the third quarter. Sales of the composite intermediates
business segment increased by 49.1% ($4.0 million) to $12.1 million in fiscal
2001 from $8.1 million in fiscal 2000. The increase resulted from higher
volume in the prepreg markets and a full nine months of results in fiscal
2001 from the Entec Composite Machines acquisition that occurred in
mid-November 1999 and the Hardcore acquisition in May 2000. Sales of the
specialty products business segment remained flat at $30.0 million in fiscal
2001 and fiscal 2000.
Gross profit decreased to $0.4 million in fiscal 2001 from a profit of $12.1
million in the corresponding period of fiscal 2000. The inventory value
reduction of $7.5 million recorded in the second quarter of fiscal 2001 to
reflect a lower of cost or market adjustment was the primary component of
the gross profit reduction. This inventory value reduction was established
due to the intensified overcapacity occurring in the second quarter of
fiscal 2001, which caused distressed pricing across most existing markets
for carbon fibers. Without the inventory reduction, the gross profit would
have been $7.9 million or a 35% reduction year over year. Gross profit from
carbon fibers decreased $8.5 million from fiscal year 2000 to a loss of $3.3
million in fiscal year 2001, primarily due to the inventory value reduction.
Gross margin on carbon fibers before the inventory adjustment decreased to
19.7% of sales for fiscal 2001 compared to 26.2% of sales for the same
period of fiscal 2000, due primarily to intensified overcapacity which
caused decreases in the selling price as well as product mix changes. Gross
profit on composite intermediates was a loss of $0.4 million in the fiscal
2001 period compared to a profit of $1.3 million in the fiscal 2000 period.
The decrease was attributable to the above-described development projects.
Gross profit on specialty products decreased 27.0% or $1.5 million from $5.6
million in fiscal 2000 to $4.1 million in fiscal 2001. Gross margin on
specialty products decreased to 13.7% of sales for the fiscal 2001 compared
to 18.8% of sales for the fiscal 2000 due primarily to increases in raw
material costs that could not be passed on to customers.
The Company continued to incur costs related to the underutilized productive
capacity for carbon fibers at the Abilene, Texas facilities. These costs
include depreciation and other overhead associated with the unused capacity.
These costs were approximately $4.9 million during the first nine months of
fiscal 2001 and $3.4 million in the first nine months of fiscal 2000. The
Company believes it is necessary to maintain available capacity to encourage
development of significant new large-scale applications and anticipates
costs associated with the available capacity will continue into fiscal 2002.
Selling, general and administrative expenses increased approximately 23.0%,
or $2.8 million, from $12.2 million in the first nine months of fiscal 2000
to $15.0 million in first nine months of fiscal 2001. The mid-November 2000
acquisition of Entec Composite Machines and the May 2000 acquisition of
Hardcore accounted for $2.0 million of this increase with the balance
attributed to increased research and development costs.
During fiscal 2001, the Company reported an income tax benefit of $0.6
million compared to an income tax benefit of $1.5 million in fiscal 2000.
The Company recorded a valuation allowance against the deferred income tax
asset of $1.3 million in the second quarter of fiscal 2001 that caused the
Company to recognize a lower income tax benefit in the fiscal 2001 period
even though the Company has reported significantly greater net losses than
in the prior year. Included in the provision for income taxes are gross
receipts taxes charged by the Hungarian local taxing authorities as well as
the statutory income taxes. The statutory income tax rate for operations in
Hungary is 9%.
The foregoing resulted in a net loss from continuing operations of $19.3
million for fiscal 2001 compared to a net loss of $2.4 million for fiscal
2000. Similarly, the Company reported net loss from continuing operations
per share of $1.16 and $0.13 on a basic and diluted basis for fiscal 2001
and fiscal 2000, respectively. The weighted average common shares
outstanding decreased to 16.6 million for the first nine months of fiscal
year 2001 from 18.2 million for the first nine months of fiscal year 2000
due to the issuance and retirement of approximately 2.5 million common
shares as partial consideration for the purchase and sale of SP Systems.
The net loss from discontinued operations includes the results of operations
of SP Systems and interest costs related to borrowings used to finance the
acquisition. The net loss on discontinued operations in the first nine
months of fiscal 2001 was $1.8 million and consisted of costs associated
with the early repayment of debt and other costs incurred to dispose of SP
Systems. During the first nine months of fiscal 2000, the Company reported a
net loss from discontinued operations of $1.3 million. The foregoing
resulted in a net loss of $0.11 per share on a basic and diluted basis in
the fiscal 2001 period, and $0.07 per share on a basic and diluted basis in
the fiscal 2000 period.
The net loss for the first nine months of fiscal 2001 was $21.1 million, or
$1.27 per share on a basic and diluted basis, compared to a net loss of $3.7
million, or $0.20 per share in the year-to-date period of fiscal 2000.
12
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company reported working capital of $24.0 million at June 30, 2001
compared to working capital of $49.5 million at September 30, 2000. The
decrease in working capital from September 30, 2000 to June 30, 2001 was
primarily due to the sale of SP Systems and the repayment of approximately
$35.4 million of bank debt. Inventories decreased from $31.9 million at
September 30, 2000 to $27.6 million at June 30, 2001 primarily due to the
lower of cost or market adjustment. The Company's continuing operations used
$6.3 million of cash during the first nine months of fiscal 2001 versus $1.0
million in the corresponding period of the prior fiscal year. The Company
will fund its continuing operations prospectively from a combination of
borrowing from its credit facilities, achieving cash neutrality at its
composite intermediates business segment and closely managing its working
capital. The Company's objective is to decrease carbon fiber inventories
during the balance of fiscal 2001 and into fiscal 2002 by pursuing an
aggressive sales effort in existing and new markets.
Marketable securities at September 30, 2000 amounted to $1.3 million and
were sold during the second quarter of fiscal 2001.
Income taxes receivable were $0.2 million at June 30, 2001 and $1.5 million
at September 30, 2000. A tax refund of $1.3 million for loss carry-backs was
received by the Company in the third quarter of fiscal 2001.
Other assets include a $5.0 million loan receivable, due November 6, 2002,
at a rate of 9.5% interest, from SP Systems which was received as part of
the sale consideration.
In the second quarter of fiscal 2001, the Company reclassified $27.7 million
of existing construction in progress projects that had been completed to
their related property, plant and equipment classifications. Depreciation on
these completed projects commenced in the current quarter.
In the first quarter of fiscal 2000, the Company acquired Zoltek Materials
Group and Entec Composite Machines for approximately $3.4 million cash and
the assumption of approximately $2.7 million in debt. In April 2000, the
Company acquired a 45% membership interest in Hardcore Composites Operations
LLC ("Hardcore") for $1.4 million cash and a note payable of $1.0 million.
The Company entered into an assignment and assumption agreement at the time
of the purchase of Hardcore that requires the Company to guarantee
Hardcore's post-closing obligations to the seller. The Company's guarantee
relates to obligations of approximately $4.8 million. Upon performance of
the obligations, Hardcore will acquire real estate and improvements with an
estimated value of approximately that amount. The obligations were payable
as of April 28, 2001, however, these transactions have not yet been
completed pending the outcome of negotiations regarding possible
modification of those arrangements with the seller and completion of related
financing.
On May 11, 2001, the Company entered into a new two-year credit facility
with Southwest Bank of St. Louis (Southwest Bank) in the amount of $14.0
million. The new credit facility is structured as a term loan in the amount
of $4.0 million and a revolving credit loan in the amount of $10.0 million.
In conjunction therewith, the Company repaid the prior lender the
outstanding revolving credit loan of $9.0 million plus accrued interest.
Borrowings under the new revolving credit facility will be based on a
formula of eligible accounts receivable and eligible inventory of the
Company and its U.S.-based subsidiaries. The outstanding loans under the
credit facility will bear interest at the prime interest rate. The loan
agreement contains financial covenants, including financial covenants
related to borrowings, working capital, debt coverage, current ratio,
inventory turn ratio, and capital expenditures. The Company paid $35,000 as
a non-refundable fee to Southwest Bank and, in addition, the Company issued
warrants to Southwest Bank to purchase 12,500 shares of common stock of the
Company at an exercise price of $5.00 per share exercisable at any time
during a five year period from the date of the loan.
On May 18, 2001, the Company's Hungarian subsidiary also entered into an
expanded credit facility (to $12.0 million from $6.0 million) with
Raiffeisen Bank Rt. The facility consists of a $6.0 million bank guarantee
and factoring facility, a $4.0 million capital investment facility and a
$2.0 million working capital facility.
Historically, cash used in investing activities has been expended for
equipment additions and to support research and development of carbon fibers
applications and the expansion of the Company's carbon fibers production
capacity. In the first nine months of fiscal year 2001, the Company made
capital expenditures of $4.9 million for various projects compared to $5.2
million during fiscal year 2000. These expenditures were financed
principally with cash from the sale of temporary investments and from cash
from borrowings.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in interest rates primarily as a result of
borrowing activities under its credit facility. The nature and amount of the
Company's debt may vary as a result of future business requirements, market
conditions and other factors. The extent of the Company's interest rate risk
is not quantifiable or predictable because of the variability of future
interest rates and business financing requirements, but the Company does not
believe such risk is material. At June 30, 2001, the Company did not have any
interest rate swap agreements outstanding.
* * *
The forward-looking statements contained in this report are inherently
subject to risks and uncertainties. The Company's actual results could
differ materially from those in the forward-looking statements. Potential
risks and uncertainties consist of a number of factors, including the
Company's ability to comply with its obligations under its existing credit
facility, manage growth and acquisitions and increase its carbon fibers
sales on a timely basis.
13
ZOLTEK COMPANIES, INC.
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits:
10.1 Credit Agreement between Southwest Bank of St.
Louis and Zoltek Companies, Inc., Zoltek Corporation,
Cape Composites, Inc., Engineering Technology
Corporation, Zoltek Properties, Inc., and Hardcore
Composite Operations, LLC, dated May 11, 2001
(b) Reports on Form 8-K: No reports on Form 8-K were filed
during the three months ended June 30, 2001.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Zoltek Companies, Inc.
(Registrant)
Date: August 14, 2001 By: /s/ JAMES F. WHALEN
--------------- ---------------------------------------------
James F. Whalen
Chief Financial Officer
14