SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended December 31, 2001 Commission File No. 0-20600
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ZOLTEK COMPANIES, INC.
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(Exact name of registrant as specified in its charter)
Missouri 43-1311101
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3101 McKelvey Road, St. Louis, Missouri 63044
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(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 February 8, 2002,
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)
DECEMBER 31, SEPTEMBER 30,
ASSETS 2001 2001
- -----------------------------------------------------------------------------------------------------------------------
(Unaudited)
Current assets:
Cash and cash equivalents........................................................... $ 1,164 $ 667
Accounts receivable, less allowance for doubtful accounts of $820 and
$760, respectively................................................................ 11,025 13,518
Inventories......................................................................... 24,754 25,250
Other current assets................................................................ 945 666
Current assets of discontinued operations........................................... 1,082 1,307
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Total current assets........................................................... 38,970 41,408
Property and equipment, net.............................................................. 78,885 79,157
Intangible assets, net................................................................... 653 672
Other assets............................................................................. 809 255
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Total assets................................................................... $ 119,317 $ 121,492
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------
Current liabilities:
Current maturities of long-term debt................................................ $ 1,128 $ 1,073
Trade accounts payable.............................................................. 9,881 11,295
Accrued expenses and other liabilities.............................................. 3,485 3,342
Short-term debt to be extinguished with discontinued operations..................... 1,000 1,000
Current liabilities of discontinued operations...................................... 2,238 2,058
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Total current liabilities...................................................... 17,732 18,768
Other long-term liabilities.............................................................. 334 367
Long-term debt, less current maturities.................................................. 24,527 22,036
Long-term liabilities of discontinued operations......................................... 725 725
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Total liabilities.............................................................. 43,318 41,896
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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 shares issued and outstanding, respectively............................ 188 188
Additional paid-in capital.......................................................... 128,024 128,024
Accumulated deficit................................................................. (13,442) (9,071)
Treasury common stock at cost, 2,514,993 shares..................................... (19,181) (19,181)
Accumulated other comprehensive loss................................................ (19,590) (20,364)
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Total shareholders' equity..................................................... 75,999 79,596
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Total liabilities and shareholders' equity .................................... $ 119,317 $ 121,492
========= =========
The accompanying notes are an integral part of the consolidated financial statements.
2
ZOLTEK COMPANIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------
(Amounts in thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
2001 2000
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Net sales........................................................................................ $ 16,557 $ 21,831
Cost of sales.................................................................................... 14,569 19,124
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Gross profit............................................................................ 1,988 2,707
Available unused capacity costs.................................................................. 1,670 1,418
Application and development costs................................................................ 1,030 980
Selling, general and administrative expenses..................................................... 2,514 3,264
-------- --------
Operating loss from continuing operations............................................... (3,226) (2,955)
Other income (expense):
Interest expense........................................................................ (419) (760)
Interest income......................................................................... 7 334
Other, net.............................................................................. (40) 47
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Loss from continuing operations before income taxes.............................................. (3,678) (3,334)
Income tax expense (benefit)..................................................................... 45 (1,017)
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Net loss from continuing operations..................................................... (3,723) (2,317)
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Discontinued operations:
Operating loss, net of taxes............................................................ (648) (220)
Loss on disposal of discontinued operations, net of taxes............................... - (1,760)
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Total loss on discontinued operations, net of taxes................................ (648) (1,980)
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Net loss......................................................................................... $ (4,371) $ (4,297)
======== ========
Net loss per share:
Basic and diluted loss per share:
Continuing operations.............................................................. $ (0.23) $ (0.13)
Discontinued operations............................................................ (0.04) (0.11)
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Total.............................................................................. $ (0.27) $ (0.24)
======== ========
Weighted average common and common equivalent shares outstanding................................. 16,285 17,225
The accompanying notes are an integral part of the consolidated financial statements.
3
ZOLTEK COMPANIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
(Amounts in thousands)
(Unaudited)
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
2001 2000
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss................................................................................. $(4,371) $ (4,297)
Adjustments to reconcile net loss to net cash
used by operating activities:
Loss from discontinued operations................................................... 757 1,980
Depreciation and amortization....................................................... 1,590 1,552
Unrealized foreign exchange loss.................................................... 175 181
Other, net.......................................................................... - 21
Changes in assets and liabilities:
Decrease in accounts receivable............................................... 2,549 1,069
(Increase) decrease in inventories............................................ 812 (1,362)
Increase in other current assets.............................................. (978) (442)
(Increase) decrease in other assets........................................... 495 (1,122)
Increase (decrease) in trade accounts payable................................. (1,631) 3,006
Decrease in accrued expenses and other liabilities............................ (148) (783)
Decrease in other long-term liabilities....................................... (125) (18)
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Total adjustments........................................................ 3,496 4,082
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Net cash used by continuing operations................................................... (875) (215)
Net cash used by discontinued operations................................................. (352) (1,029)
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Net cash used by operating activities.......................................................... (1,227) (1,244)
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Cash flows from investing activities:
Payments for purchase of property and equipment...................................... (666) (1,519)
Other, net........................................................................... 28 13
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Net cash used by continuing operations................................................... (638) (1,506)
Net cash provided by discontinued operations............................................. - 37,714
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Net cash provided (used) by investing activities............................................... (638) 36,208
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Cash flows from financing activities:
Proceeds from exercise of common stock options....................................... - 72
Proceeds from issuance of notes payable.............................................. 2,420 135
Repayment of notes payable........................................................... (79) -
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Net cash provided by continuing operations............................................... 2,341 207
Net cash used by discontinued operations................................................. - (35,401)
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Net cash provided (used) by financing activities............................................... 2,341 (35,194)
Effect of exchange rate changes on cash........................................................ 21 26
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Net increase (decrease) in cash................................................................ 497 (204)
Cash and cash equivalents at beginning of period............................................... 667 2,222
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Cash and cash equivalents at end of period..................................................... $ 1,164 $ 2,018
======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Net cash paid during the period for:
Interest.................................................................................. $ 375 $ 1,236
Income taxes.............................................................................. $ 24 $ 103
Non-cash financing activities:
Return of common stock in acquisition and divestiture..................................... $ - $(19,063)
Note receivable received in divestiture................................................... $ - $ (5,000)
The accompanying notes are an integral part of the consolidated financial statements.
4
ZOLTEK COMPANIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
1. UNAUDITED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited consolidated
financial statements include all adjustments of a normal and recurring nature
necessary for a fair presentation of the financial position and results of
operations as of the dates and for the periods presented. These financial
statements should be read in conjunction with the Company's 2001 Annual
Report to Shareholders, which includes consolidated financial statements and
notes thereto for the fiscal year ended September 30, 2001. Certain
reclassifications have been made to conform prior year's data to the current
presentation. The results for the quarter ended December 31, 2001 are not
necessarily indicative of the results which may be expected for the fiscal
year ending September 30, 2002.
2. PRINCIPLES OF CONSOLIDATION
Zoltek Companies, Inc. (the "Company") is a holding company, which operates
through wholly owned subsidiaries, Zoltek Corporation, Zoltek Properties
Inc., Zoltek Rt., Zoltek Materials Group, Inc., and Engineering Technology
Corporation ("Entec Composites Machines"). The Company also owns a 45%
interest in Hardcore Composites Operations, LLC ("Hardcore Composites").
From November 1999 to November 2000, the Company owned Structural Polymer
(Holdings) Limited ("SP Systems").
The consolidated balance sheets of the Company's current and former
international subsidiaries, Zoltek Rt. and SP Systems, were translated from
Hungarian Forints and British Pounds, respectively, to U.S. Dollars at the
exchange rate in effect at the applicable balance sheet date, while their
consolidated statements of operations were translated using the average
exchange rates in effect during the periods presented. Adjustments resulting
from the translation of financial statements are reflected as other
comprehensive income (loss) within shareholders' equity. Gains and losses
from foreign currency transactions of Zoltek Rt. and SP Systems are included
in the results of operations. These financial statements have been prepared
in accordance with U.S. generally accepted accounting principles and on a
consistent basis with the consolidated financial statements as of and for the
year ended September 30, 2001. All significant intercompany transactions and
balances have been eliminated upon consolidation.
3. DISCONTINUED OPERATIONS
In the fourth quarter of fiscal 2001, the Company formally adopted a plan
to dispose of Hardcore Composites, which designs and manufactures composite
structures for the civil infrastructure market. The Company acquired a 45%
interest in Hardcore Composites in the third quarter of fiscal 2000 for
$1.4 million in cash and guaranteed a note payable of $1.0 million. The
Company entered into an assignment and assumption agreement at the time of
the purchase of Hardcore Composites that requires the Company to guarantee
Hardcore Composites' post-closing obligations to the seller. The Company's
guarantees relate to obligations of approximately $4.8 million. The
obligations were payable as of April 28, 2001, however, these transactions
have not been completed, pending the outcome of negotiations with the seller
and the proposed disposition of the Company's interest in Hardcore
Composites. The financial statements of Hardcore Composites were
consolidated with the Company due to the ability to directly control the
operations. The original purchase price was allocated to the fair value of
assets acquired, with the excess of the amount paid for the business over
the fair value of the assets recognized as goodwill. The Company recorded an
impairment loss on discontinued operations of $5.1 million in the fourth
quarter of fiscal 2001 to reduce the carrying value of Hardcore Composites'
net assets to their estimated fair value less estimated selling costs. The
Company expects that the disposition of Hardcore Composites will be
completed by the end of fiscal 2002.
In the fourth quarter of fiscal 2000, the Company formally adopted a plan to
sell SP Systems. The Company acquired SP Systems in November 1999 and sold it
in November 2000. (For further discussion see Note 2 of the Notes to the
Consolidated Financial Statements of the Company's Annual Report.)
The Company reported the results of the operations of Hardcore Composites and
SP Systems as discontinued operations for the first quarter of fiscal 2002
and 2001 in the consolidated statement of operations. Assets and liabilities
associated with Hardcore have been reclassified as assets and liabilities of
discontinued operations on the consolidated balance sheet.
5
Certain information with respect to the discontinued operations of Hardcore
Composites and SP Systems for the quarters ended December 31, 2001 and 2000
is summarized as follows (amounts in thousands):
2001 2000
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Net sales.................................................................... $ 318 $ 701
Cost of sales................................................................ 621 952
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Gross profit................................................................. (303) (251)
Selling, general and administrative expenses................................. 334 428
Goodwill amortization........................................................ - 27
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Loss from operations......................................................... (637) (706)
Other expenses............................................................... (11) (65)
Income tax expense........................................................... - 127
Minority interest............................................................ - 424
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Net loss from operations..................................................... (648) (220)
Loss on disposal of discontinued operations.................................. - (1,760)
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Loss on discontinued operations, net of taxes................................ $ (648) $ (1,980)
========== =========
Certain information with respect to the assets and liabilities of
Hardcore Composites at December 31, 2001 and September 30, 2001 is
summarized as follows (amounts in thousands):
December 31, September 30,
2001 2001
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Cash and cash equivalents.................................................... $ 12 $ 10
Accounts receivable, net..................................................... 584 420
Inventories.................................................................. 379 811
Other assets................................................................. 107 66
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Assets of discontinued operations......................................... $ 1,082 $ 1,307
========== =========
Accounts payable............................................................. $ (1,268) $ (953)
Accrued expenses and other liabilities....................................... (970) (1,105)
Current maturities of long-term debt......................................... (1,000) (1,000)
Deferred income taxes payable................................................ (125) (125)
Other liabilities............................................................ (600) (600)
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Liabilities of discontinued operations .................................. $ (3,963) $ (3,783)
========== =========
4. COMPREHENSIVE INCOME
Comprehensive loss for the quarters ended December 31, 2001 and 2000 was as
follows (amounts in thousands):
2001 2000
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Net loss.................................................................. $ (4,371) $ (4,297)
Foreign currency translation adjustment................................... 774 208
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Comprehensive loss........................................................ $ (3,597) $ (4,089)
========== =========
5. DEBT
On May 11, 2001, the Company entered into two-year credit facility with
Southwest Bank of St. Louis (Southwest Bank) in the amount of $14.0 million,
structured as a term loan in the amount of $4.0 million and a revolving
credit loan in the amount of $10.0 million. Borrowings under the facility are
based on a formula of eligible accounts receivable and eligible inventory of
the Company and its U.S. based subsidiaries and bear interest at the prime
interest rate. The loan agreement contains financial covenants related to
borrowings, working capital, debt coverage, current ratio, inventory turn
ratio, and capital expenditures. In December 2001, the Company amended the
credit agreement with Southwest Bank to waive the debt coverage ratio for the
first two quarters of fiscal 2002, and modify the current ratio and inventory
turn ratio. In consideration for the waiver and modifications, the Company
paid a one-time fee of $25,000 and the interest rate was adjusted to the
prime rate plus 0.25%. At December 31, 2001, the Company was in compliance
with all financial covenants requirements, as amended.
6
6. SEGMENT INFORMATION
The Company's operations consist of three business segments: Carbon Fibers,
Composite Intermediates and Specialty Products.
The Carbon Fibers segment manufactures low-cost carbon fibers, facilitates
development of product and process applications to increase the demand for
carbon fibers and aggressively markets carbon fibers. The Carbon Fiber
segment is located geographically in the United States and Hungary.
The Composite Intermediates segment manufactures carbon fiber composite
products and filament winding equipment used in the composite industry and is
located in the United States. 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 segment manufactures and markets acrylic fibers, nylon
products and industrial materials primarily to the textile industry and is
located in Hungary.
Management evaluates the performance of its operating segments on the basis
of operating income (loss) contribution to the Company. The following table
presents financial information on the Company's operating segments as of
December 31, 2001 and September 30, 2001 and for the three-month periods
ended December 31, 2001 and 2000 (amounts in thousands):
THREE MONTHS ENDED DECEMBER 31, 2001
------------------------------------
CORPORATE
HEADQUARTERS
CARBON COMPOSITE SPECIALTY AND
FIBERS INTERMEDIATES PRODUCTS ELIMINATIONS TOTAL
----------- ------------- ----------- ------------ -----------
Net sales - external $ 5,748 $ 2,027 $ 8,782 $ - $ 16,557
Net sales - intersegment 98 - - (98)
----------- ----------- ----------- ----------- -----------
Total net sales 5,846 2,027 8,782 (98) 16,557
Available unused capacity expenses 1,670 - - - 1,670
Operating income (loss) (2,206) (491) 351 (880) (3,226)
Depreciation and amortization expense 1,171 208 191 20 1,590
Capital expenditures 411 - 255 - 666
THREE MONTHS ENDED DECEMBER 31, 2000
------------------------------------
CORPORATE
HEADQUARTERS
CARBON COMPOSITE SPECIALTY AND
FIBERS INTERMEDIATES PRODUCTS ELIMINATIONS TOTAL
----------- ------------- ----------- ------------ -----------
Net sales - external $ 7,357 $ 3,720 $ 10,754 $ - $ 21,831
Net sales - intersegment 370 - - (370) -
----------- ----------- ----------- ----------- -----------
Total net sales 7,727 3,720 10,754 (370) 21,831
Available unused capacity expenses 1,418 - - - 1,418
Operating loss (791) (815) (413) (936) (2,955)
Depreciation and amortization expense 1,119 207 205 21 1,552
Capital expenditures 1,135 343 41 - 1,519
TOTAL ASSETS, NET OF DISCONTINUED OPERATIONS
--------------------------------------------
CORPORATE
HEADQUARTERS
CARBON COMPOSITE SPECIALTY AND
FIBERS INTERMEDIATES PRODUCTS ELIMINATIONS TOTAL
----------- ------------- ----------- ------------ -----------
December 31, 2001 $ 88,413 $ 9,242 $ 21,350 $ (770) $ 118,235
September 30, 2001 88,442 10,474 22,129 (860) 120,185
7
GEOGRAPHIC INFORMATION (AMOUNTS IN THOUSANDS)
- ---------------------------------------------
REVENUES (1)
THREE MONTHS ENDED LONG-LIVED ASSETS (2)
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
2001 2000 2001 2001
---------- ---------- ----------- -----------
United States........................................$ 4,777 $ 9,120 $ 52,887 $ 54,685
Hungary.............................................. 11,780 12,711 25,998 25,144
---------- ---------- ---------- ----------
Total................................................$ 16,557 $ 21,831 $ 78,885 $ 79,829
========== ========== ========== ==========
<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 net of accumulated depreciation and
goodwill and intangibles, net of discontinued operations, based on
country location of assets.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
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The Company's mission is to commercialize the use of carbon fibers as
reinforcement in advanced composite materials. The Company believes it is
the lowest cost producer of carbon fibers and its sales strategy is designed
to attract significant new applications for carbon fiber reinforced
composites in automotive, infrastructure, construction, marine and other
industries. The Company believes introduction of carbon fibers to potential
end users has been generally well received and the Company is participating
in a number of ongoing development projects in these application categories.
As the Company pursues its application and market development efforts, the
Company has found the existing composite materials value chain relatively
slow to change given the requirement for radical innovation in design,
engineering and building processes as well as the reluctance to shift from
the invested base in current building materials to one based on carbon fiber
composites. Therefore, the Company has sought to accelerate the introduction
and development of carbon fiber composites across a broad range of
mass-market applications. The Company is continuing to target emerging
applications for low-cost, high-performance carbons in automobile
manufacturing, alternate energy technologies, deep sea oil drilling
applications, filament winding applications, buoyancy and fire resistant
applications.
The Company acquired a series of downstream businesses during fiscal 2000,
with the objective of accelerating the introduction and development of carbon
fibers and carbon fiber composites in low-cost, high volume applications. The
Company's strategy includes providing direct input into the composites value
chain by supplying composite engineering and design technology, composite
processing technology and the ability to create integrated product solutions
utilizing composite materials. These acquisitions included Zoltek Materials
Group and Entec Composite Machines.
Additionally, in November 1999, the Company acquired Structural Polymer
(Holdings) Ltd. ("SP Systems"), which designs and manufactures composite
materials used in large scale structures such as wind turbine blades and
marine structures. While this acquisition was consistent with the Company's
business strategy, the financial performance of this business was
unsatisfactory. Therefore, in fiscal 2000, the Company formally adopted a
plan to sell this subsidiary. In November 2000, the Company sold SP Systems
and entered into agreements that provide for various continuing
relationships, including a ten-year carbon fiber supply agreement.
In April 2000, the Company acquired a 45% preferred membership interest in
Hardcore Composites Operations LLC ("Hardcore Composites"). Hardcore
Composites designs and manufactures composite structures for the civil
infrastructure market. In the fourth quarter of fiscal 2001, the Company
formally adopted a plan to dispose of its interests in Hardcore Composites.
The Company expects that the disposition of Hardcore Composites will be
completed by the end of fiscal 2002.
The Company's consolidated financial statements for the first quarter of
fiscal 2002 and 2001 account for Hardcore Composites and SP Systems as
discontinued operations. Unless otherwise indicated, the following discussion
relates to the Company's continuing operations.
The Company's carbon fiber manufacturing capacity continues to be
underutilized. Carbon fiber sales have been depressed by excess capacity
across the industry, distressed pricing across most existing markets and
weakening economic conditions globally. The Company's strategy for near-term
sales increases was to rely primarily on what had been two fast-growing
commercial markets (conductive plastics used in electronic products and
sporting goods). In fiscal 2001 and continuing into fiscal 2002, the growth
in these two markets slowed dramatically. In addition, sales of carbon fibers
into commercial markets have been slower to develop than expected due to long
lead times in product development for large-scale applications. For these
reasons, the Company idled its plant in Abilene, Texas in the latter part of
fiscal 2001. Although the Abilene, Texas facility is currently idle, the
Company believes that the continued growth of the aircraft brake
8
business, the potential use of oxidized fiber as a fire retardant and
insulating material in consumer and automotive applications and/or the
success of any one of the large-scale applications currently being pursued
(e. g., automotive, oil field, marine, etc.) could lead to the resumption of
manufacturing at the Abilene, Texas facility.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED DECEMBER 31, 2001 COMPARED TO THREE MONTHS
- -------------------------------------------------------------
ENDED DECEMBER 31, 2000
- -----------------------
The Company's sales decreased 24.2% to $16.6 million in the first quarter of
fiscal 2002 from $21.8 million in the first quarter of fiscal 2001. Carbon
fiber sales decreased 21.9% ($1.7 million) to $5.7 million in the first
quarter of fiscal 2002 from $7.4 million in the first quarter of fiscal 2001.
Carbon fiber sales decreased due to worldwide excess carbon fiber capacity
that resulted in distressed pricing across most existing markets. In
particular, sales declined in the compounding and buoyancy markets due to
price competition. Sales of the composite intermediates business segment
decreased by $1.7 million to $2.0 million in the first quarter of fiscal
2002 from $3.7 million in the first quarter of fiscal 2001. Composite
intermediates sales decreased due to increased price competition in the
prepreg market, particularly in the sporting goods category. Sales of acrylic
and other products produced at Zoltek Rt. decreased by $1.9 million to
$8.9 million in the first quarter of fiscal 2002 compared to $10.8 million
in the first quarter of fiscal 2001. Sales of acrylic and other products were
down as the demand in the textile market slowed in response to weakening
economic conditions.
Gross profit decreased to $2.0 million (12.0% of sales) in the first quarter
of fiscal 2002 from $2.7 million (12.4% of sales) in the first quarter of
fiscal 2001. Gross profit on carbon fibers decreased by $0.9 million to
$0.7 million (11.3% of sales) in the first quarter of fiscal 2002 compared to
$1.6 million (20.3% of sales) in the first quarter in fiscal 2001, due primarily
to lower volume, a decrease in selling prices and product mix changes. Gross
margin from composite intermediates products was breakeven in the first
quarter of fiscal 2002 and comparable to the first quarter of fiscal 2001.
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 increased to $1.3 million
(15.2% of sales) in the first quarter of fiscal 2002 from $1.1 million
(10.0% of sales) in the first quarter of fiscal 2001. Gross profit on acrylic
fiber and other products increased primarily due to price increases and
product mix.
The Company continued to incur costs related to the underutilized productive
capacity for carbon fibers at the idled Abilene, Texas facility. These costs
include depreciation and other overhead associated with the unused capacity.
These costs, which were separately identified on the income statement, were
approximately $1.7 million during the first quarter of fiscal 2002 and
$1.4 million in the first quarter of fiscal 2001. The Company believes it
is necessary to maintain available capacity to encourage development of
significant new large-scale applications. The Company forecasts these costs
to be between $5.5 and $6.0 million in fiscal 2002.
Application and development costs were $1.0 million in the first quarter of
fiscal 2002 and 2001. These costs include product and market development
efforts, product trials and sales and product development personnel and
related travel. The emerging applications targeted included automobile
manufacturing, alternate energy technologies, deep sea oil drilling, filament
winding and buoyancy.
Selling, general and administrative expenses decreased approximately 23.0%,
or $0.8 million, from $3.3 million in the first quarter of fiscal 2001 to
$2.5 million in the first quarter of fiscal 2002. The decrease in expense was
primarily from the composite intermediates and the specialty products
business segments due to cost cutting measures, including lower payroll and
administrative costs.
Interest expense was approximately $0.4 million for the first quarter of
fiscal 2002 compared to $0.8 million in the first quarter of fiscal year
2001. The decrease in interest expense resulted from lower borrowings related
to the levels of capital expenditures and working capital. Interest income
decreased to a nominal amount from $0.3 million for the first quarter of
fiscal 2002 due to lower balances invested.
During the first quarter of fiscal 2002, the Company reported nominal income
tax expense compared to an income tax benefit of $1.0 million in the first
quarter of fiscal 2001. The Company recorded a valuation allowance against
substantially all deferred income tax assets in the fourth quarter of fiscal
2001 that caused the Company to recognize a lower income tax benefit. The
Company recognizes income taxes in the United States and Hungary based on the
income before income taxes. Included in the provision for income taxes are
gross receipts taxes charged by the Hungarian local taxing authorities,
as well as the statutory income taxes (9% Hungarian rate), which were
$0.1 million in each of the first quarters of fiscal year 2002 and 2001.
The foregoing resulted in a net loss from continuing operations of $3.7
million for the first quarter of fiscal 2002 compared to a net loss from
continuing operations of $2.3 million for the first quarter of fiscal 2001.
Similarly, the Company reported a net loss from continuing operations per
share of $0.23 and $0.13 on a basic and diluted basis for the first quarter
of fiscal 2002 and fiscal 2001, respectively. The weighted average common
shares outstanding decreased to 16.3 million for the first quarter of fiscal
2002 compared to 17.2 million for the first quarter of fiscal year 2001 due
to the reacquisition of approximately 2.5 million common shares as partial
consideration for the sale of SP Systems in November 2000.
In the fourth quarter of fiscal 2001, the Company formally adopted a plan
to dispose of its 45% interest in Hardcore Composites. The net loss from
discontinued operations for first quarter of fiscal 2002 included a
$0.6 million loss from the results of operations of Hardcore Composites.
The net loss from discontinued operations in the first quarter of fiscal
2001 included a $0.2 million loss from the results of
9
operations for Hardcore Composites and $1.8 million from SP Systems.
The foregoing resulted in a net loss from discontinued operations
of $0.6 million in the first quarter of fiscal 2002, or $0.04 per share
on a basic and diluted basis, and $2.0 million in the first quarter of
fiscal 2001, or $0.11 per share on a basic and diluted basis.
The net loss for the first quarter of fiscal 2002 was $4.4 million, or
$0.27 per share on a basic and diluted basis, compared to a net loss of
$4.3 million, or $0.24 per share in the first quarter of fiscal 2001.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company reported working capital (excluding discontinued operations) of
$23.4 million at December 31, 2001 compared to working capital of $24.4 million
at September 30, 2001. The decrease in working capital from September 30, 2001
to December 31, 2001 was primarily due to decreased accounts receivable, as
a result of lower sales volume, and a decrease in inventories. The Company's
continuing operations used $0.9 million of cash during the first quarter of
fiscal 2002 versus $0.2 million in the first quarter of fiscal 2001. The
Company has taken steps to decrease carbon fiber inventories, rationalize its
work force to reflect current and near-term demand and to significantly reduce
operating expenses during fiscal 2002. The Company also is actively taking
steps to reduce the level of operating losses incurred by the composite
intermediates business segment. At December 31, 2001, the Company reported
cash and cash equivalents of $1.1 million and had available $5.3 million of
unused borrowings under its credit facilities ($3.1 million available from
Southwest Bank for its U.S. based subsidiaries and $2.2 million available
from Raiffeisen Bank Rt. for its Hungarian subsidiary). For the balance of
fiscal 2002, the Company will seek to fund its continuing operations from
borrowings and managing its working capital.
Current maturities of long-term debt at December 31, 2001 included a
$0.5 million payment due on the term loan with Southwest Bank in May 2002
plus approximately $0.6 million related to various mortgages.
On May 11, 2001, the Company entered into a two-year credit facility with
Southwest Bank of St. Louis (Southwest Bank) in the amount of $14.0 million,
structured as a term loan in the amount of $4.0 million and a revolving
credit loan in the amount of $10.0 million. Borrowings under the facility are
based on a formula of eligible accounts receivable and eligible inventory of
the Company and its U.S. based subsidiaries. The loan agreement contains
financial covenants related to borrowings, working capital, debt coverage,
current ratio, inventory turn ratio, and capital expenditures. In December
2001, the Company amended the credit agreement with Southwest Bank to waive
and modify certain financial covenants for fiscal 2002. In consideration for
the waiver and modifications, the Company paid a one-time fee of $25,000 and
the interest rate was adjusted to the prime rate plus 0.25%. At December 31,
2001, the Company was in compliance with all financial covenants requirements
included in the credit facility agreement as amended.
On May 18, 2001, the Company's Hungarian subsidiary entered into an expanded
credit facility (to $12.0 million from $6.0 million) with Raiffeisen Bank Rt.
The facility consists of a $6.0 million bank guarantee and factoring
facility, a $4.0 million capital investment facility and a $2.0 million
working capital facility.
The Company believes its financial position has been improved as a result of
recent operating cost reductions, the disposal of SP Systems, and the planned
disposition of Hardcore. Management believes that the Company's financial
resources remain adequate to support the execution of its strategic plans.
However, failure to comply with its obligations under its existing credit
facilities, manage costs, and increase carbon fiber sales on a timely basis
would have a material adverse effect on the Company's results of operations
and financial condition. Management's objective is to operate the continuing
business on a cash neutral basis by the end of fiscal 2002.
Historically, cash used in investing activities has been expended for
equipment additions and the expansion of the Company's carbon fibers
production capacity. In the first quarter of fiscal 2002, the Company made
capital expenditures of $0.7 million for various projects compared to
$1.6 million during the first quarter of fiscal 2001. These expenditures were
financed principally with cash from borrowings. The Company expects capital
expenditures to total $1.0 million in fiscal 2002.
Since the beginning of fiscal 1994, the Company has obtained long-term
financing utilizing its equity in its real estate properties. These loans are
non-recourse loans for the Company's headquarters, St. Charles manufacturing
facility and Salt Lake City facility. Based on the interest rates and the
nature of the loans, the Company plans to repay these loans in accordance
with their stated long-term amortization schedules.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in interest rates primarily as a result of
borrowing activities under its credit facility. The nature and amount of the
Company's debt may vary as a result of future business requirements, market
conditions and other factors. The extent of the Company's interest rate risk
is not quantifiable or predictable because of the variability of future
interest rates and business financing requirements, but the Company does not
believe such risk is material. At December 31, 2001, the Company did not have
any interest rate swap agreements outstanding. However, a one percent
increase in the weighted average interest rate of the Company's debt for
fiscal 2002 compared to fiscal 2001 would result in a $0.3 million increase
in interest expense based on the debt levels at December 31, 2001 excluding
discontinued operations.
* * *
The forward-looking statements contained in this report are inherently
subject to risks and uncertainties. The Company's actual results could differ
materially from those in the forward-looking statements. Potential risks and
uncertainties consist of a number of factors, including the Company's ability
to return to operating on a profitable basis, comply with its obligations
under its credit agreements, manage its excess carbon fiber production
capacity and inventory levels, continue investing in application and market
development, manufacture low-cost carbon fibers and profitably market them at
decreasing price points and penetrate existing, identified and emerging
markets, as well as other matters discussed herein.
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ZOLTEK COMPANIES, INC.
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits:
10.1 Amendment to Credit Agreement dated as of
December 28, 2001 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.
(b) Reports on Form 8-K: No reports on Form 8-K
were filed during the three months ended
December 31, 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: February 14, 2002 By: /s/ JAMES F. WHALEN
----------------- ----------------------------
James F. Whalen
Chief Financial Officer
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