SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
ON
FORM 10-K/A
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended September 30, 2002 Commission File Number 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 Identification No.)
incorporation or organization)
3101 McKelvey Road, St. Louis, Missouri 63044
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 291-5110
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X].
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-25 of the Act). Yes . No X .
--- ---
State the aggregate market value of the voting stock held by
non-affiliates of the registrant as of January 10, 2003: approximately
$21,681,000.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of January 10, 2003: 16,297,338 shares of Common
Stock, par value $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into the
indicated Part of this Report:
Document Part of Form 10-K
-------- -----------------
Proxy Statement for the 2003
Annual Meeting of Shareholders II and III
EXPLANATORY NOTE
----------------
This Amendment No. 1 on Form 10-K/A amends the Registrant's Annual
Report on Form 10-K for the fiscal year ended September 30, 2002 as originally
filed on January 14, 2003 (the "Original Filing"), and is being filed for the
purpose of amending portions of Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Item 8. "Financial Statements
and Supplementary Data" included in Part II, and Item 15. "Exhibits, Financial
Statement Schedule and Reports on Form 8-K" as set forth in the Original Filing.
The report of the Registrant's independent accountants on the Registrant's
consolidated financial statements as of September 30, 2002 and for the fiscal
year then ended filed herewith contains an unqualified opinion. The independent
accountants' report included in the Original Filing had contained a "going
concern" qualification.
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------ ---------------------------------------------------------------
Results of Operations
---------------------
OVERVIEW
The Company's mission is to commercialize the use of carbon fibers as
reinforcement in advanced composite materials. The Company believes it is the
lowest cost producer of carbon fibers. Its sales strategy is designed to attract
significant new applications for carbon fiber reinforced composites in
automotive, infrastructure, construction, marine and other industries. The
Company believes introduction of carbon fibers to potential end users has been
generally well received and the Company is participating in selected ongoing
development projects in these application categories.
As part of its strategy to establish availability of carbon fibers on a
scale sufficient to provide growth of large scale applications, the Company
completed a major carbon fiber production capacity expansion plan in fiscal
1999. The Company completed construction of seven continuous carbon fiber lines,
each with an annual rated capacity of one million pounds, at its Abilene, Texas
facility (five lines) and Zoltek Rt. facilities (two lines). In addition, the
Company completed construction of a secondary processing building at its
Abilene, Texas facility to perform intermediate and secondary carbon fiber
processing operations, such as chopping, milling and specialty packaging, and
completed construction and partial finish out of an additional building designed
to ultimately house up to 24 more continuous carbonization lines at its Abilene,
Texas facility. During fiscal 2000, the Company also completed construction of
an oxidization line at Zoltek Rt., with an annual rated capacity of two million
pounds. The Company is supplying European markets with oxidized fiber used in
friction and thermal applications from this line.
As the Company pursues its application and market development efforts,
the Company has found the existing composite materials value chain relatively
slow to change and is undertaking steps to accelerate the introduction and
development of carbon fiber composites across a broad range of mass market
applications. The Company is continuing to target emerging applications for
low-cost, high-performance carbons in automobile manufacturing, alternate energy
technologies, deep sea oil drilling applications, filament winding applications,
buoyancy and fire resistant applications.
The Company acquired a series of downstream businesses during fiscal
2000, with the objective of accelerating the introduction and development of
carbon fibers and carbon fiber composites in low-cost, high volume applications.
The Company's strategy includes providing direct input into the composites value
chain by supplying composite engineering and design technology, composite
processing technology and the ability to create integrated product solutions
utilizing composite materials.
In October 1999, Zoltek acquired Zoltek Materials Group, Inc. Zoltek
Materials Group, located in San Diego, California, is a manufacturer of carbon
fiber prepreg (pre-impregnated with resin) composite materials.
1
In November 1999, the Company acquired substantially all of the assets
of Engineering Technology Corporation ("Entec Composite Machines"). Entec,
located in Salt Lake City, Utah, designs and manufactures filament winding
equipment used in the production of composite parts. Also in November 1999, the
Company acquired Composite Machines Corporation ("CMC") and Ramal International,
Inc. (parent company of CMC). CMC, located in Salt Lake City, Utah, designed and
manufactured filament winding and pultrusion equipment used in the production of
composite parts. CMC and Ramal have been integrated into the Entec operation.
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.
In April 2000, the Company acquired a 45% preferred membership interest
in Hardcore Composites Operations LLC ("Hardcore"). Hardcore 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, which was completed in March 2002.
The Company's consolidated financial statements for fiscal 2002, 2001
and 2000 account for Hardcore 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. Carbon fiber sales for fiscal 2002 were $30.4
million compared to $37.3 million for fiscal 2001. The Company's strategy for
near-term sales increases was to rely primarily on what had been two
fast-growing commercial markets (conductive plastics used in electronic products
and sporting goods). In fiscal 2001, the growth in these two markets slowed
dramatically. In addition, sales of carbon fibers into commercial markets have
been slower to develop than expected due to long lead times in product
development for large-scale applications. For these reasons, the Company has
temporarily idled the plant in Abilene, Texas. The excess capacity costs related
to the carbon fiber business totaled $6.0 million in 2002. In fiscal 2003, these
excess capacity costs are forecasted to be approximately $5.0 million to $5.5
million.
COMPARISON OF RESULTS FOR FISCAL YEARS ENDED SEPTEMBER 30, 2002 AND 2001
The Company's sales decreased 10.5% ($8.1 million) to $68.4 million in
fiscal 2002 from $76.5 million in fiscal 2001. Carbon fiber sales decreased
18.3% ($6.9 million) to $30.4 million in fiscal 2002 from $37.3 million in
fiscal 2001. During fiscal 2002, carbon fiber sales decreased due to excess
carbon fiber capacity that resulted in distressed pricing across most existing
markets and by weakened economic conditions globally. In particular, sales
declined in the compounding, automotive and buoyancy markets due to price
competition, and in the sporting goods category which was impacted by lower
volume in the prepreg markets, modestly offset by increased growth in the
friction market. Sales of acrylic and other products produced at Zoltek Rt.
decreased $1.2 million, or 3.1%, to $38.0 million in fiscal 2002 from $39.2
million in fiscal 2001. Sales in this segment declined due to the decreased
demand for textile materials in response to weakened global economic conditions.
Gross profit increased $7.4 million to $9.5 million in fiscal 2002 from
$2.1 million in fiscal 2001. The results for fiscal 2001 included an inventory
value reduction of $8.6 million, to reflect a lower of cost or market
adjustment. The inventory valuation 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, gross profit would have been $10.7 million, or
14.0% of sales, in fiscal 2001 compared to $9.5 million, or 14.0% of sales, in
fiscal 2002. Gross margin from carbon fibers increased $9.4 million in fiscal
2002 to $6.3 million from a $3.2 million loss in fiscal 2001. The margin
percentage on carbon fiber increased to 20.5% of sales in fiscal 2002 from
(8.2)% of sales in fiscal 2001, primarily due to the inventory
2
valuation reduction. Without the inventory valuation reduction in fiscal 2001,
gross profit on carbon fibers would have been $5.5 million, or 14.9% of sales.
Gross profit from acrylic and other products sold by Zoltek Rt. was $3.3 million
in fiscal 2002 compared to $5.2 million in fiscal 2001. Gross margin on acrylic
fibers and other products decreased to 8.6% of sales for fiscal 2002 compared to
13.2% of sales for fiscal 2001 due primarily to price decreases and product mix.
During fiscal years 2002, 2001 and 2000, the Company was not operating
its continuous carbonization lines at the Abilene, Texas facility at full
capacity, resulting in available unused capacity charges of approximately $6.0
million, $6.8 million and $4.7 million, respectively. These costs included
depreciation and other overhead charges. The Company believes it is necessary to
maintain available capacity to encourage development of significant new
large-scale applications and anticipates costs associated with the available
capacity will continue into fiscal 2003. The Company does, however, anticipate
increases in carbon fiber sales from both the U.S. and Hungarian locations in
fiscal 2003.
Application and development costs were $3.7 million in fiscal 2002
compared to $3.5 million in fiscal 2001, representing a $0.2 million increase.
This increase was due to increased costs related to the carbon fiber operations
due to product and market development efforts for product trials, and for
additional sales and product development personnel and travel. Targeted emerging
applications include automobile manufacturing, alternate energy technologies,
deep sea oil drilling, filament winding and buoyancy.
Selling, general, and administrative expenses decreased $2.4 million,
or 19.5%, from $12.3 million in fiscal 2001 to $9.9 million in fiscal 2002. The
decrease in expense was from both business segments and the corporate
headquarters, due to cost cutting measures, including lower payroll and
administrative costs.
Interest expense was approximately $1.6 million for fiscal year 2002
compared to $2.1 million in fiscal 2001. The decrease in interest expense
resulted from lower borrowings related to the reduced level of capital
expenditures and improved working capital management. Interest income decreased
to a nominal amount for fiscal 2002 from $1.0 million for fiscal 2001 due to
lower balances invested. During fiscal 2002, capital expenditures totaled $2.0
million compared to $5.3 million during fiscal 2001.
In fiscal 2001, the Company recorded a valuation allowance against
substantially all of its deferred tax assets due to the uncertainty of
generating positive income in the near foreseeable future. During fiscal 2002,
the tax laws changed allowing the Company additional carryback of net operating
losses to prior years. As such, the Company reported an income tax benefit of
$2.9 million in fiscal 2002 compared to an income tax benefit of $0.5 million in
fiscal 2001. The Company received the income tax refund of $2.7 million in the
third quarter of fiscal 2002. The Company recognizes income taxes in the United
States and Hungary based on the income before income taxes. Included in the
provision for income taxes are gross receipts taxes charged by the Hungarian
local taxing authorities, as well as the statutory income taxes (18% Hungarian
rate), which were $0.1 million in fiscal 2002 compared to $0.3 million for
fiscal 2001.
Loss from continuing operations in fiscal 2002 included a $400,000
reversal of certain inventory reserves and a reversal of a $412,000 accrual for
credits to former customers; in both instances management believes that the
facts and circumstances that gave rise to the reversal of the above reserves
occurred in the fourth quarter of fiscal 2002. The inventory reserve release was
necessary as the Company sold certain products that previously were doubtful as
to salability at their carrying value.
The foregoing resulted in a net loss from continuing operations of $8.7
million for fiscal 2002 compared to a net loss of $21.3 million for fiscal 2001.
Similarly, the Company reported a net loss from continuing operations per share
of $0.53 and $1.29 on a basic and diluted basis for fiscal 2002 and fiscal 2001,
respectively. The weighted average common shares outstanding decreased to 16.3
million for fiscal 2002 compared to 16.5 million for fiscal year 2001.
3
The net gain from discontinued operations for fiscal 2002 included a
$1.0 million loss from the results of operations and a $1.9 million gain from
the disposition of Hardcore Composites. The net gain from discontinued
operations included $575,000 relating to the settlement of a promissory note
that was carried in the restructuring reserve; management believes that the
facts and circumstances that gave rise to the above item were not present until
the fourth quarter of fiscal 2002. The net loss from discontinued operations in
fiscal 2001 included a $8.5 million loss from the results of operations of
Hardcore Composites and a $1.8 million loss from the disposition of SP Systems.
The foregoing resulted in a net gain from discontinued operations of $0.9
million in fiscal 2002, or $0.05 per share on a basic and diluted basis, and a
net loss of $10.3 million in fiscal 2001, or $0.62 per share on a basic and
diluted basis.
The net loss for fiscal 2002 was $7.8 million, or $0.48 per share on a
basic and diluted basis compared to a net loss of $31.6 million, or $1.91 per
share in fiscal 2001.
COMPARISON OF RESULTS FOR FISCAL YEARS ENDED SEPTEMBER 30, 2001 AND 2000
The Company's sales decreased 2.2% to $76.5 million in fiscal 2001 from
$78.2 million in fiscal 2000. Carbon fiber sales decreased 3.0% to $37.3 million
in fiscal 2001 from $38.4 million in fiscal 2000. During fiscal 2001, the
decrease in carbon fiber sales volumes was primarily the result of distressed
pricing due to significant overcapacity in the industry. Sales of acrylic and
other products produced at Zoltek Rt. were comparable year over year; $39.2
million in fiscal 2001 compared to $39.8 million in fiscal 2000.
Gross profit decreased 84.3% to $2.1 million in fiscal 2001 from $13.7
million in fiscal 2000. Gross profit from carbon fibers decreased to $(3.2)
million in fiscal 2001 from $6.9 million in fiscal 2000. An inventory valuation
reduction of $8.6 million recorded in fiscal 2001, to reflect a lower of cost or
market adjustment, was the primary component of the gross profit reduction. The
inventory valuation reduction was established due to the intensified
overcapacity occurring in the year, which caused distressed pricing across most
existing markets for carbon fibers. The margin percentage on carbon fiber
decreased to (8.7)% of sales in fiscal 2001 from 18.0% in fiscal 2000, primarily
due to the inventory valuation reduction. Without the inventory reduction, gross
profit would have been $5.4 million, a 22.2% ($1.5 million) reduction year over
year. Gross profit from acrylic and other products sold by Zoltek Rt., was $5.2
million in fiscal 2001 compared to $6.8 million in fiscal 2000. Gross margin on
acrylic fibers and other products decreased to 13.3% of sales for fiscal 2001
from 17.0% of sales for fiscal 2000 due to increases in raw material costs that
could not be passed along to customers.
During fiscal years 2001 and 2000, the Company was not operating its
new continuous carbonization lines at full capacity, resulting in available
unused capacity charges of approximately $6.8 and $4.7 million, respectively.
Application and development costs in fiscal 2001 were $3.5 million
versus $2.5 million in fiscal 2000. This increase was due to product and market
development efforts for product trials, additional sales/product development
personnel and travel, primarily in carbon fibers.
Selling, general and administrative expenses increased $0.4 million,
from $11.9 million in fiscal 2000 to $12.3 million in fiscal 2001, primarily due
to salaries and other personnel related costs.
Interest expense was approximately $2.1 million for fiscal 2001
compared to $1.3 million in fiscal 2000. The increase in interest expense
resulted from borrowings related to the use of funds for working capital and
capital expenditures. Interest income was $1.0 million for fiscal 2001 compared
to $0.6 million in fiscal 2000. Interest income increased due to higher balances
invested, including notes from sale of businesses. During fiscal 2001, capital
expenditures totaled $5.3 million.
During fiscal 2001, the Company reported an income tax benefit of $0.5
million compared to an income tax benefit of $2.3 million in fiscal 2000. The
Company recorded a valuation allowance against the deferred income tax asset in
fiscal 2001 that caused the Company to recognize a lower income tax benefit in
fiscal 2001
4
even though the Company had significantly greater net losses than in the prior
year. The Company recognizes income taxes in both 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, which were $0.4 in fiscal years 2001 and 2000, as well as the
statutory income taxes. The statutory income tax rate for the Zoltek Rt.
operation in Hungary is 18%.
The foregoing resulted in a net loss from continuing operations of
$21.3 million for fiscal 2001 compared to a net loss of $4.0 million for fiscal
2000. Similarly, the Company reported a net loss from continuing operations per
share of $1.29 and $0.22 on a basic and diluted basis for fiscal 2001 and fiscal
2000, respectively. The weighted average common shares outstanding decreased to
16.5 million for fiscal 2001 compared to 18.4 million for fiscal year 2000 due
to the repurchase 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, LLC, which it
acquired in April 2000. The net loss from discontinued operations for fiscal
2001 included a $3.4 million loss from the results of operations of Hardcore
Composites, a $5.1 million impairment charge to write-off the fixed assets and
intangibles of Hardcore, and a $1.8 million charge for the discontinued
operations of SP Systems occurring in fiscal 2000. The foregoing resulted in a
net loss from discontinued operations of $10.3 million, or $0.62 per share on a
basic and diluted basis in fiscal 2001, and $4.7 million, or $0.25 per share on
a basic and diluted basis, in fiscal 2000.
The net loss for fiscal 2001 was $31.6 million, or $1.91 per share on a
basic and diluted basis, compared to a net loss of $8.7 million, or $0.47 per
share in fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity historically have been cash
flow from operating activities and borrowings under credit facilities,
supplemented with the net proceeds from three previous equity offerings, and
long-term debt financing utilizing the equity in the Company's real estate
properties.
During much of fiscal 2002 and 2001, the carbon fiber market
experienced excess supply resulting from capacity increases by several other
carbon fiber manufacturers. As a result, the Company experienced substantial
reductions in selling prices and related gross profit across most existing
markets (partially offset by a favorable product mix in fiscal 2002). The
Company expects market conditions similar to fiscal 2002 to continue until the
market demand consumes the excess capacity. However, the Company plans to
continue to reduce its carbon fiber inventory, rationalize its work force to
reflect current and near-term demand and reduce operating expenses. Management's
objective is to operate the continuing business on a cash flow neutral basis by
the end of fiscal 2003.
On May 11, 2001, the Company entered into a two-year credit facility
with Southwest Bank of St. Louis in the amount of $14.0 million. The credit
facility is structured as a term loan in the amount of $4.0 million, and a
revolving credit loan in the amount of $10.0 million. The Company used the
proceeds of the new facility to repay existing borrowing of $9.0 million, plus
accrued interest, and terminated the old credit facility. Borrowings under the
new facility are based on a formula of eligible accounts receivable and
inventory of the Company's U.S. based subsidiaries. The outstanding loans under
the agreement bear interest at the prime interest rate. The loan agreement
contains financial covenants related to borrowings, working capital, debt
coverage, current ratio, inventory turn ratio, and capital expenditures. The
Company issued warrants to the bank to purchase 12,500 shares of common stock of
the Company at an exercise price of $5.00 per share, exercisable at any time
during a five-year period from the date of the loan.
In December 2001, the Company amended its credit agreement with
Southwest Bank (see Note 6) to waive the debt coverage ratio covenant for the
first two quarters of fiscal 2002, and modify the current ratio, the inventory
turn ratio and the debt coverage ratio covenants for quarters subsequent to the
second quarter of fiscal
5
2002. In June, 2002, the Company amended the credit agreement with Southwest
Bank to waive the debt coverage ratio and the inventory turn ratio covenants for
the remainder of fiscal 2002, modify the current ratio covenant for the third
and fourth quarters of fiscal 2002, and lower the maximum advance on inventory
covenant for quarters subsequent to the third quarter of fiscal 2002. In
consideration for these concessions by Southwest Bank, the Company paid fees of
$50,000 and the interest rate was adjusted to the prime rate plus 1.0% per
annum. As a result of these waivers and modifications, at September 30, 2002,
the Company was in compliance with all financial covenants requirements included
in the credit agreement as amended.
The Company was not in compliance with a certain financial covenant
under its credit agreement with Southwest Bank as of December 31, 2002. As a
result, under the terms of the credit agreement, Southwest Bank had the ability
to make all outstanding borrowings under the credit agreement due and
immediately payable. The credit agreement with Southwest Bank was due to expire
on May 11, 2003 and, assuming Southwest Bank had not requested repayment of the
debt by the Company prior to May 11, 2003 as a result of the financial covenant
non-compliance, any outstanding borrowings would have been due and immediately
payable on that date. Total borrowings under the credit agreement were $12.0
million at September 30, 2002.
The Company executed an amended credit facility agreement, dated as of
February 13, 2003, with Southwest Bank of St. Louis. The amended credit facility
agreement is structured as a term loan in the amount of $3.5 million (due
February 13, 2005) and a revolving credit loan in the amount of $5.0 million
(due January 31, 2004). Borrowings under the new facility are based on a formula
of eligible accounts receivable and inventory of the Company's U.S. based
subsidiaries. The outstanding loans under the agreement bear interest at the
prime interest rate plus 2%. The loan agreement contains financial covenants
related to borrowings, working capital, debt coverage, current ratio and capital
expenditures. The amended credit agreement waived the debt coverage ratio for
the first quarter of fiscal 2003. The Company believes compliance with all
financial covenants as required by the amended credit agreement will be
maintained in fiscal 2003.
The Company also entered into a debenture purchase agreement, dated as
of February 13, 2003, under which the Company agreed to issue and sell to 14
individuals, including Messrs. Bealke, Dill, McDonnell and Rumy, subordinated
convertible debentures in the aggregate principal amount of $8.0 million. The
subordinated convertible debentures mature in five years, bear interest at 7%
and are convertible into an aggregate of 2,285,714 shares of common stock of the
Company at a conversion price of $3.50 per share. The Company also agreed to
issue to the individual investors five-year warrants to purchase 400,000 shares
of common stock of the Company at an exercise price of $5.00 per share. Proceeds
from the issuance of these convertible debentures were used to repay existing
borrowings, plus accrued interest, as well as for working capital.
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 and a $2.0 working capital facility, both expiring in November 2003 and
a $4.0 million capital investment facility that expires in 2006. The factoring
facility and the working capital facility are one-year agreements renewable each
year. Borrowings against the Raiffeisen credit facility cannot be used in
Zoltek's U.S. operations.
The Company believes its financial position has been improved as a
result of recent operating cost reductions (including the rationalization of its
work force and the reduction of operating expenses), and the disposal of SP
Systems and Hardcore Composites. Management believes that the Company's
financial resources remain adequate to support the execution of its strategic
plans. However, failure to comply with its obligations under its amended credit
facilities, manage costs, and increase carbon fiber sales on a timely basis
would have a material adverse effect on the Company's results of operations and
financial condition. Management will seek to fund its continuing operations from
bank borrowings and to continue to closely manage the Company's working capital.
The Company's objective is to operate the continuing business on a cash-neutral
basis by the end of fiscal 2003. The Company does not believe that any
impairment exists relative to its capital investments as it is still forecasting
an improvement in the long-term carbon fibers markets within a reasonable
forecasting range of one to two years.
6
The Company reported working capital (excluding discontinued
operations) of $9.9 million at September 30, 2002 compared to working capital of
$24.4 million at September 30, 2001. The decrease in working capital from
September 30, 2001 to September 30, 2002 was primarily due to reclassifying its
debt with Southwest Bank to current from long-term, as the debt to Southwest
Bank matures in May 2003. The Company's continuing operations used $0.8 million
of cash during fiscal 2002 versus $6.2 million in fiscal 2001; $2.7 million of
the $5.4 million improvement was due to receipt of the federal tax refund. The
Company has taken steps to rationalize its work force to reflect current and
near-term demand, to significantly reduce other operating expenses and to
decrease carbon fiber inventories via an aggressive sales program. At September
30, 2002, the Company reported cash and cash equivalents of $0.7 million and had
available $2.1 million of unused borrowings under its credit facilities
($0.8 million from Southwest Bank and $1.3 million from Raiffeisen Bank Rt. for
its Hungarian subsidiary). As of December 31, 2002, the Company continues to
have $2.1 million of unused borrowings under its credit facilities ($0.8 million
from Southwest Bank and $1.3 million from Raiffeisen Bank Rt.).
Current maturities of long-term debt at September 30, 2002 included
$12.0 million of the U.S. credit facility the stated term of which would have
matured in May 2003 had the credit facility not been amended and had the
convertible debt agreement not been completed, plus approximately $2.0 million
related to various mortgages.
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 fiscal 2002, the Company made capital expenditures of $2.0 million
for various projects compared to $5.3 million during fiscal 2001. Of these
expenditures in fiscal 2001, approximately $3.3 million was used for oxidation
lines and secondary processing equipment for carbon fibers and $1.7 million was
used at Zoltek Rt. for modernization and modifications to produce acrylic fiber
and other industrial products. Carbon fiber operations reported capital
expenditures of approximately $0.3 million for equipment additions and
modifications. These expenditures were financed principally with cash from the
sale of temporary investments and from borrowings. In fiscal 2003, the Company
expects purchases of property, plant and equipment to be less than $1 million,
unless near-term demand increases significantly. Application and development
costs are projected to be $4.3 million in fiscal 2003.
In fiscal 2001, the Company placed $27.7 million of assets in service
that were previously classified as construction in progress. These assets are
primarily located at the Abilene, Texas facility and consisted of $5.5 million
of buildings and $22.2 million of machinery and equipment. The Company began
recording depreciation on these assets from the date they were placed in
service. In the third quarter of fiscal 2001, the Company elected to temporarily
idle the continuous carbonization lines at the Abilene facility. These
carbonization lines had a carrying value of $19.5 million at September 30, 2002.
Management intends to return the lines to partial production in late fiscal 2003
and full production as market demand for carbon fiber products increases. In
light of the expected resumption of manufacturing at this time, the Company does
not believe that any impairment exists with respect to the carrying value of the
currently idled assets at the Abilene facility based on an analysis of expected
future net cash flow generated from this facility over the expected remaining
useful life.
As part of the Company's strategic plan for commercializing carbon
fibers and carbon fiber composites, the Company acquired Zoltek Materials Group
and Entec Composite Machines in November 1999 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 November 1999, the Company acquired all of the outstanding stock of
SP Systems for approximately $30.0 million in cash and 2.5 million shares of the
Company's common stock. The Company also borrowed $5.0 million to refinance
certain existing bank debt of SP Systems and fund working capital requirements.
During the fourth quarter of fiscal 2000, the Company formally adopted a plan to
sell SP Systems, which was completed in November 2000.
7
The Company entered into a six-year credit facility with a commercial
bank in an original aggregate amount of $71.0 million to finance the SP Systems
acquisition and refinance other indebtedness. The Company amended and restated
the credit agreement on May 31, 2000 to reduce the amount of borrowings
available to $53.0 million and to modify certain covenants. The facility, as
amended, contained financial covenants related to borrowings, future
acquisitions, working capital, net worth, cash flow, and fixed charge coverage.
The Company reduced the borrowings under the credit facility by $35.4 million in
November 2000 from the proceeds of the sale of SP Systems.
In April 2000, the Company acquired a 45% membership interest in
Hardcore for $1.4 million cash and guaranteed a note payable of $1.0 million.
The Company also provided additional funding for working capital. In the fourth
quarter of fiscal 2001, the Company formally adopted a plan to dispose of
Hardcore, and it completed the sale in March 2002 (see Note 2 of the
accompanying Notes to Consolidated Financial Statements).
Critical Accounting Policies
- ----------------------------
Outlined below are accounting policies that Zoltek believes are key
to a full understanding of the Company's operations and financial results. All
of the Company's accounting policies are in compliance with U.S. generally
accepted accounting principles (GAAP).
REVENUE RECOGNITION
The Company recognizes sales on the date title to the sold product
transfers to the customer, which generally approximates the shipping date.
Historically, the Company has experienced very low levels of product returns due
to damaged goods or products that do not meet customer specifications.
Additionally, the Company generally does not offer any volume or other
incentives to entice customer sales.
INVENTORIES
The Company evaluates its ending inventories for estimated excess
quantities and obsolescence. This evaluation includes analyses of sales levels
by product and projections of future demand within specific time horizons.
Inventories in excess of future demand, if any, are reserved. Remaining
inventory balances are adjusted to approximate the lower of cost on a first-in,
first-out basis or market value. Cost includes material, labor and overhead. If
future demand or market conditions are less favorable than the Company's
projections, additional inventory write-downs may be required and would be
reflected in cost of sales on the Company's statement of operations in the
period in which the revision is made.
In recent years, carbon fiber sales have been depressed by excess
capacity across the industry, distressed pricing across most existing markets
and weakening economic conditions globally. These factors combined with the high
level of inventories maintained by the Company have resulted in the Company
reducing the cost of certain carbon fiber inventories to their lower estimated
market values. If these industry conditions do not improve in a reasonable
period of time, or further deteriorate, it is possible that the market value of
certain of the Company's carbon fiber inventories may further decrease resulting
in additional charges to cost of sales.
APPLICATION AND DEVELOPMENT EXPENSES
The Company is actively pursuing the development of a number of
applications for the use of its carbon fiber and related products. The Company
is currently party to several developmental agreements with various prospective
users of these products for the purpose of accelerating the development of
various carbon fiber applications. Additionally, the Company is executing
several internal developmental strategies to further the use of carbon fiber and
consumer and industrial products made from carbon fiber. As a result, the
Company incurs certain costs for research, development and engineering of
products and manufacturing processes. These costs are expensed as incurred and
totaled approximately $3.8 million, $3.5 million and $2.5 million in fiscal
2002, 2001 and 2000, respectively. Application and development expenses are
presented as an operating item on the Company's
8
consolidated statement of operations. Given the Company's position and strategy
within the carbon fiber industry, it is expected that similar or greater levels
of application and development expenses will be incurred in future years.
UNUSED CAPACITY COSTS
The Company is currently not operating its continuous carbonization
lines located at the Abilene, Texas facility at full capacity. As a result, the
Company has elected to categorize certain costs related to these idle assets as
unused capacity costs. Such costs for the years ended September 30, 2002, 2001
and 2000 totaled $6.0 million, $6.8 million and $4.7 million, respectively, and
include depreciation and other overhead expenses associated with unused
capacity. The unused capacity costs are presented as an operating item on the
Company's consolidated statement of operations. As discussed above, management
intends to return the Abilene, Texas facility to service in fiscal 2003.
However, until the facility is operating at certain production levels, these
unused capacity costs will continue to be incurred.
VALUATION OF LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. If the sum of the expected future undiscounted cash flows is less
than the carrying amount of the asset, a loss is recognized for the difference
between the fair value and the carrying value of the asset. In determining
expected future undiscounted cash flows attributable to a long-lived asset or a
group of long-lived assets, the Company must make certain judgments and
estimations including the expected market conditions and demand for products
produced by the assets, expected product pricing assumptions, and assumptions
related to the expected costs to operate the assets. These judgments and
assumptions are particularly challenging as they relate to the Company's
long-lived assets due to the developmental stage and current market conditions
of the carbon fiber industry. It is possible that actual future cash flows
related to the Company's long-lived assets may materially differ from the
Company's determination of expected future undiscounted cash flows.
Additionally, if the Company's expected future undiscounted cash flows were less
than the carrying amount of the asset being analyzed, it would be necessary for
the Company to make significant judgments regarding the fair value of the asset
due to the specialized nature of much of the Company's carbon fiber production
equipment in order to determine the amount of the impairment charge.
Item 8. Financial Statements and Supplementary Data
- ------- -------------------------------------------
ZOLTEK COMPANIES, INC.
REPORT OF MANAGEMENT
Management of Zoltek Companies, Inc. is responsible for the preparation
and integrity of the Company's financial statements. These statements have been
prepared in accordance with generally accepted accounting principles and in the
opinion of management fairly present the Company's financial position, results
of operations, and cash flow.
The Company maintains accounting and internal control systems that it
believes are adequate to provide reasonable assurance that assets are
safeguarded against loss from unauthorized use or disposition and that the
financial records are reliable for preparing financial statements. The selection
and training of qualified personnel and the establishment and communication of
accounting and administrative policies and procedures are important elements of
these control systems.
The Board of Directors, through its Audit Committee consisting solely
of non-management directors, meets periodically with management and the
independent accountants to discuss audit and financial reporting matters. To
ensure independence, PricewaterhouseCoopers LLP has direct access to the Audit
Committee.
The report of PricewaterhouseCoopers LLP, independent accountants, on
their audits of the accompanying financial statements follows. This report
states that their audits were performed in accordance with generally accepted
auditing standards. These standards include an evaluation of internal control
for the purpose of establishing a basis for reliance thereon relative to the
scope of their audits of the financial statements.
9
ZOLTEK COMPANIES, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF ZOLTEK COMPANIES, INC.
- -------------------------------------------------------------------------------
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations, of changes in shareholders'
equity, and of cash flows present fairly, in all material respects, the
financial position of Zoltek Companies, Inc. and its subsidiaries at September
30, 2002 and 2001, and the results of their operations and their cash flows for
each of the three years in the period ended September 30, 2002 in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
- -------------------------------
PricewaterhouseCoopers LLP
St. Louis, Missouri
December 13, 2002, except for Note 6, which is as of February 18, 2003.
10
ZOLTEK COMPANIES, INC.
CONSOLIDATED BALANCE SHEET
ASSETS September 30,
- ---------------------------------------------------------------------------------------------------------------------------
2002 2001
--------- ---------
Current assets:
Cash and cash equivalents................................................................. $ 685 $ 667
Accounts receivable, less allowance for doubtful accounts of $742 and $760, respectively.. 11,749 13,518
Inventories............................................................................... 27,081 25,250
Other current assets...................................................................... 1,424 666
Current assets of discontinued operations................................................. - 1,307
--------- ---------
Total current assets................................................................. 40,939 41,408
Property and equipment, net.................................................................... 78,415 79,157
Other assets................................................................................... 2,068 927
--------- ---------
Total assets......................................................................... $ 121,422 $ 121,492
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Current maturities of long-term debt...................................................... $ 14,014 $ 2,073
Trade accounts payable.................................................................... 12,535 10,873
Accrued expenses and other liabilities.................................................... 4,518 4,264
Current liabilities of discontinued operations............................................ - 1,858
--------- ---------
Total current liabilities............................................................ 31,067 19,068
Other long-term liabilities.................................................................... 752 793
Long-term debt, less current maturities........................................................ 13,699 22,036
--------- ---------
Total liabilities.................................................................... 45,518 41,897
--------- ---------
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized, no shares
issued and outstanding................................................................. - -
Common stock, $.01 par value, 50,000,000 shares authorized,
16,297,338 and 16,285,338 shares issued and outstanding, respectively.................. 163 188
Additional paid-in capital................................................................ 108,897 128,024
Retained deficit ......................................................................... (16,903) (9,072)
Treasury common stock at cost (0 and 2,514,993 shares, respectively)...................... - (19,181)
Accumulated other comprehensive loss...................................................... (16,253) (20,364)
--------- ---------
Total shareholders' equity........................................................... 75,904 79,595
--------- ---------
Total liabilities and shareholders' equity........................................... $ 121,422 $ 121,492
========= =========
The accompanying notes are an integral part of the consolidated financial statements.
11
ZOLTEK COMPANIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Amounts in thousands, except per share data)
Year Ended September 30,
- ---------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
-------- -------- --------
Net sales................................................................... $ 68,436 $ 76,478 $ 78,204
Cost of sales............................................................... 58,920 74,333 64,520
-------- -------- --------
Gross profit........................................................... 9,516 2,145 13,684
Available unused capacity costs............................................. 6,039 6,803 4,658
Application and development costs........................................... 3,750 3,533 2,479
Selling, general and administrative expenses................................ 9,855 12,337 11,943
-------- -------- --------
Operating loss from continuing operations.............................. (10,128) (20,528) (5,396)
Other income (expense):
Interest expense........................................................ (1,632) (2,136) (1,314)
Interest income......................................................... 25 974 564
Other, net.............................................................. 180 (89) (163)
-------- -------- --------
Loss from continuing operations before income taxes..................... (11,555) (21,779) (6,309)
Benefit for income taxes..................................................... (2,860) (505) (2,305)
-------- -------- --------
Net loss from continuing operations..................................... (8,695) (21,274) (4,004)
-------- -------- --------
Discontinued operations:
Operating loss, net of taxes............................................ (1,030) (5,175) (1,981)
Gain (loss) on disposal of discontinued operations, net of taxes........ 1,894 (5,122) (2,700)
-------- -------- --------
Gain (loss) on discontinued operations, net of taxes............... 864 (10,297) (4,681)
-------- -------- --------
Net loss..................................................................... $ (7,831) $(31,571) $ (8,685)
======== ======== ========
Net loss per share:
Basic and diluted income (loss) per share:
Continuing operations.............................................. $ (0.53) $ (1.29) $ (0.22)
Discontinued operations............................................ 0.05 (0.62) (0.25)
-------- -------- --------
Total.............................................................. $ (0.48) $ (1.91) $ (0.47)
======== ======== ========
Weighted average common shares outstanding................................... 16,289 16,515 18,360
Weighted average common and common equivalent shares outstanding............. 16,289 16,515 18,360
The accompanying notes are an integral part of the consolidated financial statements.
12
ZOLTEK COMPANIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Amounts in thousands)
Total Share- Add'l Accumulated Other Retained
holders' Common Paid-In Comprehensive Treasury Earnings Comprehensive
Equity Stock Capital Income (Loss) Stock (Deficit) Income (Loss)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1999.......... $ 114,634 $ 160 $ 99,004 $ (15,597) $ (118) $ 31,185
Net loss............................. (8,685) - - - - (8,685) $ (8,685)
Foreign currency translation
adjustment......................... (11,765) - - (11,765) - - (11,765)
Unrealized losses on securities...... (86) - - (86) - - (86)
---------
Comprehensive loss.......... $ (20,536)
=========
Sales of put options on common stock:
Put options sold and expired
without redemption............ 1,200 2 1,198 - - -
Put options sold and repurchased
before expiration............. 13 - 13 - - -
Issuance of common stock for
purchase SP Systems................ 27,500 25 27,475 - - -
---------- ----- --------- --------- ------- --------
Balance, September 30, 2000.......... 122,811 187 127,690 (27,488) (118) 22,500
Net loss............................. (31,571) - - - - (31,571) $ (31,571)
Foreign currency translation
adjustment......................... 6,928 - - 6,928 - - 6,928
Unrealized losses on securities sold 156 - - 156 - - 156
---------
Comprehensive loss.......... $ (24,487)
=========
Treasury shares purchased............ (19,063) - - - (19,063)
Warrants issued with bank debt....... 48 - 48 - - -
Exercise of stock options............ 287 1 286 - - -
---------- ----- --------- --------- ------- --------
Balance, September 30, 2001.......... 79,595 188 128,024 (20,364) (19,181) (9,072)
Net loss............................. (7,831) - - - - (7,831) $ (7,831)
Foreign currency translation
adjustment......................... 4,111 - - 4,111 - - 4,111
---------
Comprehensive loss.......... $ (3,720)
=========
Treasury shares retired.............. - (25) (19,156) - 19,181 -
Exercise of stock options............ 29 - 29 - - -
---------- ----- --------- --------- ------- --------
Balance, September 30, 2002.......... $ 75,904 $ 163 $ 108,897 $ (16,253) $ - $(16,903)
========== ===== ========= ========= ======= ========
The accompanying notes are an integral part of the consolidated financial statements.
13
ZOLTEK COMPANIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in thousands)
Year Ended September 30,
- ---------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
---------- --------- ---------
Cash flows from operating activities:
Net loss.............................................................. $ (7,831) $ (31,571) $ (8,685)
Adjustments to reconcile net loss to net cash
used by operating activities:
(Gain) loss from discontinued operations......................... (864) 10,297 4,681
Depreciation and amortization.................................... 6,336 6,604 6,144
Unrealized foreign exchange gain................................. (240) (250) (72)
Other, net....................................................... (17) 136 (6)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable................... 2,587 128 (80)
(Increase) decrease in inventories........................... (133) 6,055 (3,744)
(Increase) decrease in prepaid expenses and other assets..... (1,137) 356 (760)
Increase in trade accounts payable........................... 504 2,317 1,636
Decrease in accrued expenses and other liabilities........... (195) (367) (1,461)
Increase (decrease) in other long-term liabilities........... 190 78 (509)
---------- --------- ---------
Total adjustments........................................ 7,031 25,354 5,829
---------- --------- ---------
Net cash used by continuing operations................................ (800) (6,217) (2,856)
Net cash used by discontinued operations.............................. (262) (2,973) (1,984)
---------- --------- ---------
Net cash used by operating activities...................................... (1,062) (9,190) (4,840)
---------- --------- ---------
Cash flows from investing activities:
Payments for purchase of Zoltek Intermediates companies, net of cash.. - - (4,599)
Payments for purchase of property and equipment....................... (1,981) (5,339) (6,135)
Proceeds from sale of property and equipment.......................... 59 772 33
Decrease in notes receivable.......................................... 15 5,066 74
Sale of marketable securities......................................... - 1,483 5,705
---------- --------- ---------
Net cash provided (used) by continuing operations....................... (1,907) 1,982 (4,922)
Net cash provided (used) by discontinued operations..................... - 37,823 (35,774)
---------- --------- ---------
Net cash provided (used) by investing activities........................... (1,907) 39,805 (40,696)
---------- --------- ---------
Cash flows from financing activities:
Proceeds from exercise of common stock options........................ 29 287 13
Proceeds from issuance of notes payable............................... 7,335 13,162 15,748
Repayment of notes payable............................................ (4,381) (9,853) (5,817)
---------- --------- ---------
Net cash provided by continuing operations.............................. 2,983 3,596 9,944
Net cash provided (used) by discontinued operations..................... - (35,375) 33,711
---------- --------- ---------
Net cash provided (used) by financing activities........................... 2,983 (31,779) 43,655
---------- --------- ---------
Effect of exchange rate changes on cash.................................... 5 (6) (532)
---------- --------- ---------
Net increase (decrease) in cash............................................ 18 (1,170) (2,413)
Cash and cash equivalents at beginning of period........................... 667 1,837 4,250
---------- --------- ---------
Cash and cash equivalents at end of period................................. $ 685 $ 667 $ 1,837
========== ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Net cash paid (refunded) during the year for:
Interest.............................................................. $ 2,425 $ 2,708 $ 3,573
Income taxes.......................................................... (2,844) (979) 747
The accompanying notes are an integral part of the consolidated financial statements.
14
ZOLTEK COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
- -------------------------------------------------------------------------------
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 Composite Machines"). Zoltek Corporation
("Zoltek") develops, manufactures and markets carbon fibers used in aircraft
brakes and other composite materials. Zoltek Materials Group, Inc. manufactures
"carbon fiber prepreg" (carbon fiber impregnated with resin) composite materials
used in the production of composite products requiring unidirectional strength
and stiffness, such as golf club shafts and other sporting goods. Entec
Composite Machines manufactures and sells filament winding and pultrusion
equipment used in the production of large volume composite parts. Zoltek Rt.
manufactures and markets acrylic and nylon fibers and yarns for the textile
industry, and carbon fiber. Other Zoltek Rt. products include nylon granules,
plastic grids and nets, and carboxymethyl cellulose. From April 2000 to March
2002, the Company owned a 45% interest in Hardcore Composites Operations, LLC
("Hardcore"), which designs and manufactures composite structures for the civil
infrastructure market including bridges, bridge decks, marine pilings, fender
panels, piers and stay-in-place form work. (See Note 2 for further discussion.)
From November 1999 to November 2000, the Company owned Structural Polymer
(Holdings) Limited ("SP Systems") which develops, markets and manufactures
prepreg (glass and carbon fiber pre-impregnated with resin) materials, special
bonding and laminating resins, reinforcement fabrics and consumable materials
for composite manufacturing and engineering of composite structures. (See Note 2
for further discussion.) These financial statements have been prepared in
accordance with U.S. generally accepted accounting principles. All significant
inter-company transactions and balances have been eliminated upon consolidation.
FOREIGN CURRENCY TRANSLATION
The consolidated balance sheet 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 for the periods presented. The related translation adjustments
are reported as other comprehensive income (loss) within shareholders' equity.
Gains and losses from foreign currency transactions of Zoltek Rt. and SP Systems
are included in the results of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires that management make estimates and
assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results may differ from those estimates and
assumptions.
REVENUE RECOGNITION
The Company recognizes sales on the date title to the sold product
transfers to the customer, which generally approximates the shipping date.
During 2002, 2001 and 2000, approximately $9.8 million, $10.3 million and $9.6
million, respectively, of sales was earned from one customer.
15
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
- -------------------------------------------------------------------------------
CONCENTRATION OF CREDIT RISK
Zoltek's carbon fiber products are primarily sold to customers in the
aerospace and composite industries. Zoltek Rt.'s acrylic products are mainly
sold to customers in the textile industry. Zoltek Materials Group products are
primarily sold to the sporting goods industry. Entec Composite Machine's
products are primarily sold in the composite industry. While the markets for the
Company's products are geographically unlimited, most of Zoltek's and Zoltek
Materials Group's business is with customers located in North America and most
of Zoltek Rt.'s sales are to customers in Europe and Asia, while Entec Composite
Machine's sales are worldwide. The Company performs ongoing credit evaluations
and generally requires collateral for significant export sales to new customers.
The Company maintains reserves for potential credit losses and such losses have
been within management's expectations. As of September 30, 2002, the Company had
no significant concentrations of credit risk.
CASH AND CASH EQUIVALENTS
All highly liquid investments purchased with a maturity of three months
or less are considered to be cash equivalents. Such investments amounted to $0
and $443,000 at September 30, 2002 and 2001, respectively.
MARKETABLE SECURITIES
Marketable securities consisted of preferred stock equities (classified
as available-for-sale) that were valued at fair market value. Unrealized gains
and losses were reflected as other comprehensive loss within shareholders'
equity until the marketable securities were sold in fiscal 2001.
INVENTORIES
Inventories are valued at the lower of cost, determined on the
first-in, first-out method, or market. Cost includes material, labor and
overhead.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Cost includes expenditures
necessary to make the property and equipment ready for its intended use.
Expenditures, which improve the asset or extend the useful life, are
capitalized, including interest on funds borrowed to finance the acquisition or
construction of major capital additions. No interest was capitalized for the
years ended September 30, 2002, 2001 and 2000. Maintenance and repairs are
expensed as incurred. When property is retired or otherwise disposed of, the
related cost and accumulated depreciation are removed from the accounts and any
profit or loss on disposition is credited or charged to income.
The Company provides for depreciation by charging amounts sufficient to
amortize the cost of properties placed in service over their estimated useful
lives using primarily straight-line methods. The range of estimated useful lives
used in computing depreciation is as follows:
Buildings and improvements..............................10 to 20 years
Automobiles.............................................3 to 5 years
Machinery and equipment.................................5 to 20 years
Furniture and fixtures..................................7 to 10 years
The Company primarily uses accelerated depreciation methods for income
tax purposes.
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. If the sum of the expected future undiscounted cash flows is less
than the carrying amount of the asset, a loss is recognized for the difference
between the fair value and the carrying value of the asset. Management believes
that no impaired assets exist at September 30, 2002.
16
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
- -------------------------------------------------------------------------------
COMPUTER SYSTEMS DEVELOPMENT COSTS
The Company capitalizes computer system development costs that meet
established criteria, and amortized those costs to expense on a straight-line
basis over 3 to 5 years. Systems development costs not meeting the proper
criteria for capitalization, including systems reengineering costs, are expensed
as incurred. No costs were capitalized in fiscal 2002 and fiscal 2001.
FINANCIAL INSTRUMENTS
The Company does not hold any financial instruments for trading
purposes. The carrying value of cash, accounts receivable and accounts payable
approximated their fair value at September 30, 2002 and 2001. Substantially all
of long-term debt bears current market rates of interest.
APPLICATION AND DEVELOPMENT EXPENSES
Expenditures for research, development and engineering of products and
manufacturing processes are expensed as incurred. Such costs were approximately
$3.8 million, $3.5 million and $2.5 million in fiscal 2002, 2001 and 2000,
respectively.
INCOME TAXES
The Company accounts for certain income and expense items differently
for financial reporting and income tax purposes. Deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax basis of assets and liabilities applying enacted statutory tax
rates in effect for the year in which the differences are expected to reverse. A
valuation allowance is provided against certain deferred tax assets when
realization of those assets are not considered to be more likely than not.
STOCK-BASED COMPENSATION
SFAS No. 123 "Accounting for Stock-Based Compensation," encourages, but
does not require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." APB No. 25 requires no recognition of compensation expense for the
stock-based compensation arrangements provided by the Company where the exercise
price is equal to the market price at the date of the grant.
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share includes no dilution and is
calculated by dividing net income (loss) by the weighted average number of
common shares outstanding for each period, while diluted net
income (loss) per share reflects the potential dilutive effects of stock
options. Because 2002 and 2001 results reflected a net loss, both basic and
diluted earnings per share were calculated based on the same weighted average
number of shares for the year.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board issued
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
("SFAS No. 144"). This statement addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. SFAS No. 144 was adopted
early by the Company, effective October 1, 2000. The Company's disposition of
Hardcore as discussed in Note 2 has been accounted for in accordance with SFAS
No. 144.
17
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
- -------------------------------------------------------------------------------
In June 2002, the Financial Accounting Standards Board issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS
146 provides guidance on the financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred rather than at the date of an entity's commitment to an
exit plan. Costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity.
Adoption of this standard is required for the Company beginning in the second
quarter of fiscal 2003. Based on a preliminary review of the provisions of SFAS
146, the Company believes that it will not have a significant impact on its
financial statements upon adoption.
FINANCIAL PRESENTATION CHANGES
Certain prior year amounts have been reclassified to conform to the
current year presentation.
2. DISCONTINUED OPERATIONS
- -------------------------------------------------------------------------------
In the fourth quarter of fiscal 2001, the Company formally adopted a
plan to dispose of its 45% interest in Hardcore Composites, which designs and
manufactures composite structures for the civil infrastructure market. The
Company acquired its interest in Hardcore Composites in the third quarter of
fiscal 2000. From the date of acquisition until disposition, the financial
statements of Hardcore Composites were consolidated with the Company due to the
ability to directly control the operations. In the fourth quarter of fiscal
2001, the Company recorded an impairment loss on discontinued operations of $5.1
million to reduce the carrying value of Hardcore Composites' long-lived assets
to their estimated fair value less estimated selling costs.
On March 1, 2002, the Company completed the sale of its interest in
Hardcore Composites to the 55% majority owner. At that date, Hardcore Composites
had net liabilities of approximately $1,319,000 which were 100% consolidated by
the Company. As part of the sale, Hardcore Composites assumed these net
liabilities, which resulted in the Company recognizing a $1,319,000 gain on the
sale of discontinued operations in the quarter ended March 31, 2002.
Additionally, in consideration for this sale, Hardcore Composites issued a
series of unsecured promissory notes to the Company. In light of then existing
financial condition of Hardcore Composites, the Company recorded a full
valuation allowance against the promissory notes in its accounting for the sale
transaction.
In fiscal 2002, as a part of the sale of the Company's interest in
Hardcore Composites, Hardcore Composites and the Company also settled the
$1,000,000 note and certain other obligations payable to the former owner, with
the Company making a $475,000 payment and Hardcore Composites contributing an
additional amount. This note comprised part of the purchase price of the
acquisition in the third quarter of fiscal 2000 and was guaranteed by the
Company. However, the Company continues to guaranty Hardcore Composite's lease
obligations of approximately $30,000 per month to the former owner. The
obligation relates to a lease of the Hardcore Composites manufacturing facility,
which expires March 31, 2008. In fiscal 2002, the Company reversed the $525,000
remaining accrual for the note payable to the former owner, as its obligation
has been satisfied. Also, the Company reduced accruals for disposal costs by
$50,000.
18
2. DISCONTINUED OPERATIONS (CONTINUED)
- -------------------------------------------------------------------------------
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 for
$30.0 million in 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. In November 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 $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. The Company also entered into
a 10-year carbon fiber supply agreement and certain technology license
agreements. The $5.0 million note was paid in September 2001.
The Company recorded an impairment loss on discontinued operations of
$2.7 million in the fourth quarter of fiscal 2000 to reduce the carrying value
of SP System's net assets to their estimated fair value less estimated selling
costs.
The Company has reported the results of operations of Hardcore and SP
Systems as discontinued operations for fiscal 2002, 2001 and 2000 in the
consolidated statement of operations. Additionally, assets and liabilities
associated with Hardcore and SP Systems have been reclassified as assets and
liabilities of discontinued operations on the consolidated balance sheet.
Certain information with respect to the discontinued operations of
Hardcore and SP Systems for the years ended September 30, 2002, 2001 and 2000 is
summarized as follows (amounts in thousands):
2002 2001 2000
---------- ---------- ----------
Net sales............................................ $ 408 $ 3,910 $ 56,768
Cost of sales........................................ 886 5,030 39,858
---------- ---------- ----------
Gross profit......................................... (478) (1,120) 16,910
Selling, general and administrative expenses......... 535 2,194 12,552
Goodwill amortization................................ - 103 2,748
---------- ---------- ----------
Income (loss) from operations........................ (1,013) (3,417) 1,610
Other expenses....................................... (17) (2,470) (3,014)
Income tax expense................................... - (117) (551)
Minority interest.................................... - 829 (26)
---------- ---------- ----------
Net loss from operations............................. (1,030) (5,175) (1,981)
Gain (loss) on disposal of disc. operations.......... 1,894 (5,122) (2,700)
---------- ---------- ----------
Gain (loss) on disc. operations, net of taxes........ $ 864 $ (10,297) $ (4,681)
========== ========== ==========
Certain information with respect to the assets and liabilities of
Hardcore and SP Systems at September 30, 2001 is summarized as follows (amounts
in thousands):
2001
----------
Cash and cash equivalents........................................... $ 10
Accounts receivable, net............................................ 420
Inventories......................................................... 811
Other assets........................................................ 66
----------
Assets of discontinued operations................................ $ 1,307
==========
Accounts payable.................................................... (953)
Accrued expenses and other liabilities.............................. (905)
----------
Liabilities of discontinued operations ........................... $ (1,858)
==========
19
3. INVENTORIES
- -------------------------------------------------------------------------------
Inventories consist of the following (amounts in thousands):
September 30,
2002 2001
--------- ---------
Raw materials........................... $ 4,893 $ 5,811
Work-in-process......................... 1,913 2,014
Finished goods.......................... 18,897 16,666
Supplies, spares and other.............. 1,378 759
--------- ---------
$ 27,081 $ 25,250
========= =========
The Company recorded an $8.6 million inventory valuation reserve during
the year ended September 30, 2001 to reduce the carrying value of the inventory
to a net realizable value. The reserve was established due to the intensified
overcapacity occurring during the year, which caused distressed pricing across
most existing markets for carbon fibers. At September 30, 2002 and 2001, the
inventory valuation reserve was $6,100,000 and $7,972,000, respectively.
4. PROPERTY AND EQUIPMENT
- -------------------------------------------------------------------------------
Property and equipment consists of the following (amounts in thousands):
September 30,
2002 2001
--------- ---------
Land............................................. $ 1,630 $ 1,544
Buildings and improvements....................... 28,562 27,536
Machinery and equipment.......................... 74,289 70,252
Furniture and fixtures........................... 5,181 4,735
Construction in progress......................... 3,189 2,185
--------- ---------
112,851 106,252
Less: accumulated depreciation.................. (34,436) (27,095)
--------- ---------
$ 78,415 $ 79,157
========= =========
In fiscal 2001, the Company placed $27.7 million of assets in service
that were previously classified as construction in progress. These assets are
primarily located at the Abilene, Texas facility and consisted of $ 5.5 million
of buildings and $22.2 million of machinery and equipment. The Company began
recording depreciation on these assets from the date they were placed in
service. In the third quarter of fiscal 2001, the Company elected to temporarily
idle the continuous carbonization lines at the Abilene facility. These
carbonization lines have a carrying value of $19.5 million at September 30,
2002. Management intends to return the lines to full production as market demand
for carbon fiber products
20
4. PROPERTY AND EQUIPMENT (CONTINUED)
- -------------------------------------------------------------------------------
increases, which is expected to occur in the latter part of fiscal 2003. During
the years ended September 30, 2002, 2001 and 2000, the Company was not operating
these continuous carbonization lines at full capacity, resulting in available
unused capacity charges of $6.0 million, $6.8 million and $4.7 million,
respectively. These costs include depreciation and other overhead expenses
associated with unused capacity.
5. INCOME TAXES
- -------------------------------------------------------------------------------
The components of the benefit for income taxes for the years ended
September 30, are as follows (amounts in thousands):
2002 2001 2000
-------- -------- --------
From continuing operations:
Current:
Federal..................................... $ (2,731) $ 622 $ (1,497)
State....................................... (113) - (59)
Non-U.S. local.............................. 358 394 448
--------- -------- --------
(2,486) 1,016 (1,108)
Deferred:
Federal..................................... 9 (1,551) (1,409)
State....................................... (9) 352 170
Non-U.S..................................... (374) (322) 42
--------- -------- --------
(374) (1,521) (1,197)
--------- -------- --------
Total continuing operations............ $ (2,860) $ (505) $ (2,305)
========= ======== ========
From discontinued operations:
Current:
Non-U.S..................................... $ - $ - $ 1,292
Deferred:
Federal..................................... - 108 (741)
State....................................... - 9 -
--------- -------- --------
Total discontinued operations.......... - 117 551
--------- -------- --------
Total .......................................... $ (2,860) $ (388) $ (1,754)
========= ======== ========
Deferred income taxes reflect the tax impact of carryforwards and
temporary differences between the amount of assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws and regulations.
Cumulative carryforwards and temporary differences giving rise to the net
deferred income tax asset at September 30 are as follows (amounts in thousands):
2002 2001
--------- ---------
Tax effect of regular net operating losses........... $ (10,274) $ (11,335)
Valuation allowance on net operating losses.......... 6,796 7,229
Tax effect of capital loss........................... (582) (582)
Valuation allowance on capital loss.................. 582 582
Depreciation......................................... 3,512 4,125
Employee related costs............................... (87) (97)
Inventory reserve.................................... (38) (92)
Bad debt accrual..................................... (49) (76)
Deferred state income taxes.......................... (16) (16)
Other................................................ (63) (84)
Non-U.S. operations deferred tax, net................ (144) 232
--------- ---------
Total net deferred tax asset................ $ (363) $ (114)
========= =========
21
5. INCOME TAXES (CONTINUED)
- -------------------------------------------------------------------------------
The benefit for income taxes at September 30 differs from the amount
using the statutory federal income tax rate (34%) as follows (amounts in
thousands):
2002 2001 2000
-------- -------- --------
At statutory rate:
Income taxes on loss from continuing operations.......... $ (3,929) $ (7,405) $ (2,145)
Increases (decreases):
Lower effective tax rate on non-U.S. operations.......... 333 4 (361)
Change in valuation allowance on net operating loss...... (433) 5,216 -
Change in valuation allowance on capital loss............ - 582 -
Reduction of NOL due to 5 year carry back................ (1,871) - -
Refund related to 5 year carry back of NOL............... 2,731 - -
Local taxes, non-U.S..................................... 358 394 360
State taxes, net of federal benefit...................... (9) 352 (38)
Refund write-off......................................... - 622 -
Other.................................................... (40) (270) (121)
-------- -------- --------
$ (2,860) $ (505) $ (2,305)
======== ======== ========
The consolidated income (loss) from continuing operations before
income taxes by domestic and foreign sources for the years ended September
30, 2002, 2001 and 2000 was as follows (amounts in thousands):
2002 2001 2000
-------- -------- --------
Domestic ......................................................... $ (9,475) $(21,764) $ (7,751)
Foreign ......................................................... (2,080) (15) 1,442
-------- -------- --------
Loss from continuing operations before income taxes............... $(11,555) $(21,779) $ (6,309)
======== ======== ========
Undistributed earnings of Zoltek Rt. of $8,368,000 and $10,448,000
at September 30, 2002 and 2001, respectively, are considered to be
permanently reinvested and, accordingly, no provision for income taxes has
been recorded.
6. FINANCING
- -------------------------------------------------------------------------------
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 to the bank 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 $53.0 million) and modify certain
financial covenants. The facility, as amended, contained financial covenants
related to borrowings, future acquisitions, working capital, net worth, cash
flow and fixed charge coverage. The Company reduced the borrowings under the
credit facility by $35.4 million on November 6, 2000 from the proceeds of the
sale of SP Systems.
On May 11, 2001, the Company entered into a two-year credit
facility with Southwest Bank of St. Louis (Southwest Bank) in the amount of
$14.0 million. The 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 borrowings of $9.0
million plus accrued interest and terminated the old credit facility.
Borrowings under the new revolving credit facility are based on a formula of
eligible accounts receivable and eligible inventory of the Company and its
U.S. based subsidiaries. The outstanding loans under the credit facility
bear interest at the prime interest rate. The loan agreement contains
financial covenants related to borrowings, working capital, debt coverage,
current ratio, inventory turn ratio and capital expenditures. The Company
issued warrants to Southwest
22
6. FINANCING (CONTINUED)
- -------------------------------------------------------------------------------
Bank to purchase 12,500 shares of common stock of the Company at an exercise
price of $5.00 per share, exercisable at any time during a five-year period from
the date of the loan. The fair value of the warrants, at the time of the grant,
were estimated to be $48,000.
In December 2001, the Company amended its credit agreement with
Southwest Bank to waive the debt coverage ratio covenant for the first two
quarters of fiscal 2002, and modify the current ratio, the inventory turn ratio
and the debt coverage ratio covenants for quarters subsequent to the second
quarter of fiscal 2002. In June, 2002, the Company amended the credit agreement
with Southwest Bank to waive the debt coverage ratio and the inventory turn
ratio covenants for the remainder of fiscal 2002, modify the current ratio
covenant for the third and fourth quarters of fiscal 2002, and lower the maximum
advance on inventory covenant for quarters subsequent to the third quarter of
fiscal 2002. In consideration for these concessions by Southwest Bank, the
Company paid fees of $50,000 and the interest rate was adjusted to the prime
rate plus 1.0% per annum. As a result of these waivers and modifications, at
September 30, 2002, the Company was in compliance with all financial covenants
requirements included in the credit agreement as amended.
The Company was not in compliance with a certain financial covenant
under its credit agreement with Southwest Bank as of December 31, 2002. As a
result, under the terms of the credit agreement, Southwest Bank had the
ability to make all outstanding borrowings under the credit agreement due
and immediately payable. The credit agreement with Southwest Bank was due to
expire on May 11, 2003 and, assuming Southwest Bank had not requested
repayment of the debt by the Company prior to May 11, 2003 as a result of
the financial covenant non-compliance, any outstanding borrowings would have
been due and immediately payable on that date. Total borrowings under the
credit agreement were $12.0 million at September 30, 2002.
The Company executed an amended credit facility agreement dated as of
February 13, 2003, with Southwest Bank of St. Louis. The amended credit facility
agreement is structured as a term loan in the amount of $3.5 million (due
February 13, 2005) and a revolving credit loan in the amount of $5.0 million
(due January 31, 2004). Borrowings under the new facility are based on a formula
of eligible accounts receivable and inventory of the Company's U.S. based
subsidiaries. The outstanding loans under the agreement bear interest at the
prime interest rate plus 2%. The loan agreement contains financial covenants
related to borrowings, working capital, debt coverage, current ratio and capital
expenditures. The amended credit agreement waived the debt coverage ratio for
the first quarter of fiscal 2003. The Company believes compliance with all
financial covenants as required by the amended credit agreement will be
maintained in fiscal 2003.
The Company also entered into a debenture purchase agreement, dated as
of February 13, 2003, under which the Company agreed to issue and sell to 14
individuals, including Messrs. Bealke, Dill, McDonnell and Rumy, subordinated
convertible debentures in the aggregate principal amount of $8.0 million. The
subordinated convertible debentures mature in five years, bear interest at 7%
and are convertible into an aggregate of 2,285,714 shares of common stock of the
Company at a conversion price of $3.50 per share. The Company also agreed to
issue to the individual investors five-year warrants to purchase 400,000 shares
of common stock of the Company at an exercise price of $5.00 per share. Proceeds
from the issuance of these convertible debentures were used to repay existing
borrowings, plus accrued interest, as well as for working capital.
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
Raifeissen Bank Rt. The facility consists of a $6.0 million bank guarantee
and factoring facility, a $4.0 million capital investment facility and a
$2.0 million working capital facility. Borrowings against the Raiffeisen
credit facility cannot be used in Zoltek's U.S. operations.
23
6. FINANCING (CONTINUED)
- -------------------------------------------------------------------------------
In April 2000, the Company obtained secured financing in the amount of
$1,720,000 with Southwest Bank for the real estate and manufacturing facility in
Salt Lake City, Utah. The note bears interest at 9.0% and matures in May 2003.
In 1998, the City of Abilene, Texas provided secured long-term
financing as an incentive to locate facilities in Abilene. The original
financing of $3,099,287 is non-interest bearing and will be repaid from real
estate and personal property tax abatements.
Long-term debt consists of the following (amounts in thousands):
September 30,
----------------------
2002 2001
-------- -------
Note payable with interest at 9%, payable in monthly installments of
principal and interest of $17,579 to maturity in May 2003........................... $ 1,659 $ 1,778
Note payable with interest at 9.95%, payable in monthly installments of
principal and interest of $19,288 to maturity in September 2009..................... 1,164 1,272
Note payable with interest at 9.5%, payable in monthly installments of
principal and interest of $27,672 to maturity in December 2009 ..................... 1,730 1,887
Non-interest bearing note payable (discounted at 8%) to the City of Abilene, Texas
to be repaid from real estate and personal property tax abatements ................ 1,648 1,762
Non-interest bearing purchase money note to be repaid on or
before April 28, 2001 (see note 2).............................................. - 1,000
-------- -------
Revolving credit agreement, maturing in 2003, bearing interest at prime plus 1.0%
in fiscal 2002 (prime rate at September 30, 2002 was 4.75%) ..................... 8,508 4,678
Term loan, $0.5 million payable in 2002, balance payable in 2003, bearing interest
at prime plus 1.0% (prime rate at September 30, 2002 was 4.75%).................... 3,500 4,000
Factoring facility with a Hungarian bank (average interest rate of 5.5%)................ 5,631 4,443
Working capital facility with a Hungarian bank (average interest rate
of 10.6%).......................................................................... 2,393 1,565
Capital investment facility with a Hungarian bank (average interest
rate of 5.6%)....................................................................... 1,480 1,724
-------- -------
Total debt.......................................................................... 27,713 24,109
Less: amounts payable within one year............................................ (14,014) (2,073)
-------- -------
Total Long-term debt ................................................................... $ 13,699 $22,036
======== =======
24
6. FINANCING (CONTINUED)
- -------------------------------------------------------------------------------
Following is a schedule of required principal payments of long-term
debt, net of discontinued operations (amounts in thousands):
Year ending
September 30, Total
------------- --------
2003..................................... $ 14,014
2004..................................... 8,451
2005..................................... 434
2006..................................... 471
2007..................................... 1,989
Thereafter............................... 2,354
--------
$ 27,713
========
7. COMMITMENTS AND CONTINGENCIES
- -------------------------------------------------------------------------------
LEASES
Land at the carbon fibers manufacturing facility in Missouri is leased
under an operating lease that expires in December 2065, with a renewal option
for 24 years expiring in December 2089. The lease requires annual rental
payments of $57,991 through October 2010. Rental expense related to this lease
was $57,991 for the years ended September 30, 2002, 2001 and 2000.
The Company entered into a sale/leaseback arrangement with Southwest
Bank for a nitrogen plant located at the Abilene facility, in January 1999. The
Company received $5,000,000 in cash for the nitrogen plant and did not recognize
a gain or loss. The term of the lease is seven years and may be extended on a
month-to-month basis thereafter. At expiration of the lease, the Company may
repurchase the plant for market value. The lease is accounted for as an
operating lease and requires minimum annual rental payments of $962,000 per
year. Rental expense related to this lease was $962,000 for the years ended
September 30, 2002 and 2001.
LEGAL
The Company is a party to various claims and legal proceedings arising
out of the normal course of its business. In the opinion of management, the
ultimate outcome of these claims and lawsuits will not have a material adverse
effect upon the financial condition or results of operations of the Company and
its subsidiaries taken as a whole.
SOURCES OF SUPPLY
As part of its growth strategy, the Company has developed its own
precursor acrylic fibers and all of its carbon fibers, excluding the aircraft
brake products, are now manufactured from this precursor. The primary source of
raw material for the precursor is ACN (acrylonitrile), which is a commodity
product with multiple sources.
The Company currently obtains most of its acrylic fiber precursor to
supply its carbon fiber operations for the aircraft brake applications from a
single supplier which is the only supplier that currently produces precursor
approved for use in aircraft brake applications. The Company believes this
supplier is a reliable source of supply at the Company's current operating
levels. However, the Company
25
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
- -------------------------------------------------------------------------------
has initiated trials at an aircraft brake manufacturer with its own
precursor-based products, which might protect its business if there were an
interruption in supply from the supplier.
The major materials used by the Specialty Products Business Segment
include acrylonitrile and other basic commodity products, which are widely
available from a variety of sources.
8. PROFIT SHARING PLAN
- -------------------------------------------------------------------------------
The Company maintains a 401(k) Profit Sharing Plan for the benefit of
employees who have completed six months of service and attained 21 years of age.
No contributions were made by the Company for the years ended September 30,
2002, 2001, and 2000.
9. STOCK OPTIONS
- -------------------------------------------------------------------------------
In 1992, the Company adopted a Long-term Incentive Plan that authorizes
the Compensation Committee of the Board of Directors (the "Committee") to grant
key employees and officers of the Company incentive or nonqualified stock
options, stock appreciation rights, performance shares, restricted shares and
performance units. The Committee determines the prices and terms at which awards
may be granted along with the duration of the restriction periods and
performance targets. Currently, 1,500,000 shares of common stock may be issued
pursuant to awards under the plan. Outstanding stock options expire 10 years
from the date of grant or upon termination of employment. Options granted in
1998 and prior vest 100% five years from date of grant. Options granted in 1999
and thereafter primarily vest 100% three years from date of grant. All options
were issued at an option price equal to the market price on the date of grant.
In 1992, the Company adopted a Directors Stock Option Plan under which
options to purchase 7,500 shares of common stock at the then fair market value
are currently issued to each non-employee director annually. In addition, newly
elected non-employee directors receive options to purchase 7,500 shares of
common stock, at the then fair market value. The options expire from 2002
through 2010, respectively.
The pro forma information required by SFAS 123 regarding net income and
earnings per share has been presented below as if the Company had accounted for
its stock option plans under the fair value method. The fair value of each
option grant is estimated on the date of the grant using the Black-Scholes
option pricing model with the following weighted average assumptions:
Assumptions: 2002 2001
----------- ------- -------
Expected life of options............. 6 years 6 years
Risk-free interest rate.............. 6.15% 7.15%
Volatility of stock.................. 98% 79%
Expected dividend yield.............. -- --
26
7. STOCK OPTIONS (CONTINUED)
- -------------------------------------------------------------------------------
The fair value of the options granted during 2002 and 2001 was $349,000
and $379,000, respectively. Had the fair value of the options been amortized to
expense over the options' vesting periods, the pro forma impact on earnings of
the stock-based compensation for the options would have been as follows (amounts
in thousands, except for earnings per share information):
2002 2001
-------- ---------
Net loss:
As reported......................... $ (7,831) $ (31,571)
Pro forma........................... (8,036) (32,027)
Diluted loss per share:
As reported......................... (0.48) (1.91)
Pro forma........................... (0.49) (1.94)
Presented below is a summary of stock option plans activity for the
years shown:
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Options Exercise Price Exercisable Exercise Price
--------- -------------- ----------- --------------
Balance, September 30, 1999 793,000 $ 13.32 199,500 $ 18.41
Granted............................. 237,500 8.58
Exercised........................... -- --
Cancelled........................... (58,000) 7.74
---------
Balance, September 30, 2000 972,500 12.50 672,500 13.71
Granted............................. 287,500 4.58
Exercised........................... (84,000) 3.42
Cancelled........................... (120,000) 16.27
---------
Balance, September 30, 2001 1,056,000 10.75 531,000 10.81
Granted............................. 451,000 2.10
Exercised........................... (12,000) 2.38
Cancelled........................... (408,000) 11.31
---------
Balance, September 30, 2002 1,087,000 $ 7.05 561,833 $ 10.35
The following table summarizes information for options currently
outstanding and exercisable at September 30, 2002:
Options Outstanding Options Exercisable
-------------------------------- ----------------------------
Range of Wtd. Avg. Wtd. Avg. Wtd. Avg.
Prices Number Remaining Life Exercise Price Number Exercise Price
------------ --------- -------------- -------------- ------ --------------
$ 1.33-2.47 412,000 10 years $ 2.10 43,500 $ 2.45
3.25-5.25 192,500 7 years 4.56 125,834 4.35
6.25-6.88 197,500 3 years 6.40 197,500 6.40
7.69-9.25 135,000 8 years 8.40 45,000 8.44
10.00-39.00 150,000 6 years 23.44 150,000 23.44
--------- -------
$ 1.33-39.00 1,087,000 7 years $ 7.05 561,834 $ 10.35
========= =======
10. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
- -------------------------------------------------------------------------------
The Company's strategic business units are based on product lines and
have been grouped into two reportable segments: Carbon Fibers and Specialty
Products. The Company's former Composite Intermediates segment was combined with
the Carbon Fibers segment in the third quarter of fiscal 2002 to reflect that
its products and services are now strategically focused on the Company's
strategy of
27
10. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
- -------------------------------------------------------------------------------
commercializing the use of carbon fibers as reinforcement in advanced composite
materials, including providing composite design and engineering services for
development of applications for carbon fiber reinforced composites. Effective
with the third quarter of fiscal 2002, Company management reviewed the
performance of each of these two segments, allocated resources between these
segments and reported on the overall financial and operating performance of each
to the chief executive officer of the Company. Segment data for the comparable
periods for fiscal year 2001 and 2002 has been restated to reflect this change.
The Carbon Fibers segment is the primary strategic segment and
manufactures low-cost carbon fibers used as reinforcement material in
composites, oxidized acrylic fibers for heat/fire barrier applications and
aircraft brakes, carbon fiber composite products and filament winding equipment
used in the composite industry. It also facilitates development of product and
process applications to increase the demand for carbon fibers and aggressively
markets carbon fibers. The Carbon Fiber segment is located geographically in the
United States and Hungary. The Specialty Products segment manufactures and
markets acrylic and nylon products and fibers primarily to the textile industry
and is located in Hungary. With the exception of the Carbon Fibers segment, none
of the segments are substantially dependent on sales from one customer nor a
small group of customers. Carbon Fibers has one customer which represented 14%,
13%, and 12% of the total sales of the Company in fiscal 2002, 2001 and 2000,
respectively.
Management evaluates the performance of its operating segments on the
basis of operating income (loss) contribution to the Company. The following
table presents financial information on the Company's operating segments as of
and for the fiscal years ended September 30, 2002, 2001 and 2000 (amounts in
thousands):
Fiscal Year Ended September 30, 2002
------------------------------------
Corporate
Specialty Headquarters
Carbon Fibers Products and Eliminations Total
------------- --------- ---------------- -----
Net sales - external................................... $30,448 $37,988 $ - $ 68,436
Net sales - intersegment............................... 4,419 - (4,419) -
------- ------- ------- --------
Total net sales..................................... 34,867 37,988 (4,419) 68,436
Gross profit (loss).................................... 6,826 3,251 (561) 9,516
Available unused capacity expenses..................... 6,039 - - 6,039
Operating (loss)....................................... (5,942) (1,142) (3,044) (10,128)
Depreciation and amortization expense.................. 5,160 862 314 6,336
Capital expenditures................................... 1,389 561 31 1,981
Total assets........................................... 99,511 25,024 (3,113) 121,422
Fiscal Year Ended September 30, 2001
------------------------------------
Corporate
Specialty Headquarters
Carbon Fibers Products and Eliminations Total
------------- --------- ---------------- -----
Net sales - external................................... $ 37,269 $39,209 $ - $ 76,478
Net sales - intersegment............................... 6,669 - (6,669) -
-------- ------- ------- --------
Total net sales..................................... 43,938 39,209 (6,669) 76,478
Gross profit (loss).................................... (3,235) 5,210 170 2,145
Available unused capacity expenses..................... 6,803 - - 6,803
Operating income (loss)................................ (17,023) 418 (3,923) (20,528)
Depreciation and amortization expense.................. 5,521 1,001 82 6,604
Capital expenditures................................... 3,651 1,688 - 5,339
Total assets........................................... 98,916 22,129 447 121,492
28
10. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
- -------------------------------------------------------------------------------
Fiscal Year Ended September 30, 2000
------------------------------------
Corporate
Specialty Headquarters
Carbon Fibers Products and Eliminations Total
------------- --------- ---------------- -----
Net sales - external................................... $ 38,420 $39,784 $ - $ 78,204
Net sales - intersegment............................... 2,420 - (2,240) -
-------- ------- ------- --------
Total net sales..................................... 40,840 39,784 (2,420) 78,204
Gross profit (loss).................................... 6,901 6,785 (2) 13,684
Available unused capacity expenses..................... 4,658 - - 4,658
Operating income (loss)................................ (3,600) 987 (2,783) (5,396)
Depreciation and amortization expense.................. 4,976 1,072 96 6,144
Capital expenditures................................... 3,387 2,748 - 6,135
Total assets........................................... 103,457 23,873 3,500 130,830
Sales and long-lived assets, by geographic area, consist of the
following as of and for each of the three fiscal years in the period ended
September 30, 2002, 2001 and 2000 (amounts in thousands):
2002 2001 2000
-------------------------- ----------------------------- ---------------------------
Net Net Net
Long Lived Long Lived Long Lived
Net Sales (a) Assets (b) Net Sales (a) Assets (b) Net Sales (a) Assets (b)
------------- ----------- ------------- ---------- ------------- ----------
United States........... $ 24,461 $ 50,366 $ 27,715 $ 54,685 $ 30,935 $ 60,756
Western Europe
Italy................ 6,810 6,362 7,544 -
France............... 2,253 3,606 4,163 -
Other................ 3,678 4,095 4,063 -
Eastern Europe
Hungary.............. 12,894 28,660 15,224 25,144 15,818 19,351
Poland............... 3,601 4,087 4,464 -
Other................ 10,088 9,936 7,300 -
Other Areas............. 4,651 5,453 - 3,917 -
-------- -------- -------- -------- -------- --------
Total................ $ 68,436 $ 79,026 $ 76,478 $ 79,829 $ 78,204 $ 80,107
======== ======== ======== ======== ======== ========
<FN>
(a) Revenues are attributed to countries based on the location of the customer.
(b) Property and equipment net of accumulated depreciation and intangibles, net
of discontinued operations, based on country location of assets.
29
11. SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
- -------------------------------------------------------------------------------
(Amounts in thousands, except per share data)
Fiscal year 2002 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- ---------------------------------------------------------------------------------------------------------------------
Net sales.......................................... $ 16,557 $ 17,448 $ 17,806 $ 16,625
Gross profit....................................... 1,954 2,459 2,359 2,744
Loss from continuing operations.................... (3,723) (2,927) (195) (1,850)
Gain (loss) from discontinued operations........... (648) 937 - 575
Net loss........................................... $ (4,371) $ (1,990) $ (195) $ (1,275)
Net loss per share:
Basic and diluted net loss per share
Continuing operations............................ $ (0.23) $ (0.18) $ (0.01) $ (0.11)
Discontinued operations.......................... (0.04) 0.06 - 0.03
----------- ----------- ----------- ----------
Total..................................... $ (0.27) $ (0.12) $ (0.01) $ (0.08)
=========== =========== ========== ==========
Fiscal year 2001 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- ---------------------------------------------------------------------------------------------------------------------
Net sales.......................................... $ 21,831 $ 20,334 $ 17,156 $ 17,157
Gross profit....................................... 2,707 (5,109) 2,193 2,354
Loss from continuing operations.................... (2,317) (11,816) (3,583) (3,558)
Loss from discontinued operations.................. (1,980) (718) (654) (6,945)
Net loss........................................... $ (4,297) $ (12,534) $ (4,237) $ (10,503)
Net loss per share:
Basic and diluted net loss per share
Continuing operations............................ $ (0.13) $ (0.73) $ (0.22) $ (0.21)
Discontinued operations.......................... (0.11) (0.04) (0.04) (0.43)
----------- ----------- ---------- ----------
Total..................................... $ (0.24) $ (0.77) $ (0.26) $ (0.64)
=========== =========== ========== ==========
30
PART IV
Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K
- ------- --------------------------------------------------------------
(a) (1) Financial statements: The following financial statements
are included in Item 8 of this report:
Report of Independent Accountants
Consolidated Balance Sheet as of September 30, 2002
and 2001
Consolidated Statement of Operations for the years ended
September 30, 2002, 2001 and 2000
Consolidated Statement of Changes in Shareholders' Equity for
the years ended September 30, 2002, 2001 and 2000
Consolidated Statement of Cash Flows for the years ended
September 30, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
(2) The following financial statement schedule and
independent accountant's report thereon are included in Part IV of this report:
Page
----
Report of Independent Public Accountants on
Financial Statement Schedule 37
12-09 Valuation and Qualifying Accounts and Reserves 38
Schedules other than those listed above have been
omitted because they are either not required or not applicable, or because the
information is presented in the consolidated financial statements or the notes
thereto.
(3) The following exhibits are filed herewith or
incorporated by reference herein, as indicated:
3.1 Restated Articles of Incorporation of the Registrant,
filed as Exhibit 3.1 to Registrant's Registration Statement
on Form S-1 (Reg. No. 33-51142) is incorporated herein by
this reference
3.2 Restated By-Laws of the Registrant, as currently in
effect, filed as Exhibit 3.2 to Registrant's Registration
Statement on Form S-1 (Reg. No. 33-51142) is incorporated
herein by this reference
4.1 Form of certificate for Common Stock, filed as Exhibit
4.1 to Registrant's Registration Statement on Form S-1 (Reg.
No. 33-51142) is incorporated herein by this reference
31
4.2 Form of Warrant, dated May 11, 2001, issued to Southwest
Bank of St. Louis with respect to 12,500 shares of
Registrant's Common Stock is filed herewith
10.1 Loan Agreement, dated December 29, 1989, by and between
Zoltek Corporation and Southwest Bank of St. Louis, as
amended by letter, dated August 13, 1992, filed as
Exhibit 10.7 to Registrant's Registration Statement on Form
S-1 (Reg. No. 33-51142) is incorporated herein by this
reference
10.2 Zoltek Companies, Inc. Long Term Incentive Plan, filed
as Appendix B to Registrant's definitive proxy statement for
the 1997 Annual Meeting of Shareholders is incorporated
herein by this reference
10.3 Zoltek Companies, Inc. Amended and Restated Directors
Stock Option Plan, filed as Exhibit 10.1 to Registrant's
Quarterly Report on Form 10-Q dated August 13, 1999, is
incorporated herein by this reference
10.4 Promissory Note, dated September 29, 1994, by and between
Zoltek Properties, Inc. and Metlife Capital Corporation, filed
as Exhibit 10.8 to Registrant's Annual Report on Form 10-K for
the fiscal year ended September 30, 1994, is incorporated
herein by this reference
10.5 Precursor Agreement, dated as of July 1, 1994, by and between
Zoltek Corporation and Courtaulds Fibres Limited, filed as
Exhibit 10.9 to Registrant's Annual Report on Form 10-K for
the fiscal year ended September 30, 1994, is incorporated
herein by this reference (An application for confidential
treatment has been made for a portion of Exhibit 10.5.)
10.6 Materials Supply Agreement, dated as of June 15, 1994, by and
between Zoltek Companies, Inc. and The B.F. Goodrich Company,
filed as Exhibit 10.10 to Registrant's Annual Report on Form
10-K for the fiscal year ended September 30, 1994, is
incorporated herein by this reference (An application for
confidential treatment has been made for a portion of Exhibit
10.6.)
10.7 Loan Agreement, dated November 14, 1994, by and between Zoltek
Properties, Inc. and The Reliable Life Insurance Company,
filed as Exhibit 10.11 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1995, is
incorporated herein by this reference
10.8 Promissory Note, dated November 14, 1994, by and between
Zoltek Corporation and Southwest Bank of St. Louis, filed as
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1995, is incorporated herein
by this reference
10.9 Stock Purchase Agreement, dated November 19, 1999, by and
among Zoltek Companies, Inc. and each of the holders of the
outstanding share capital of Structural Polymer (Holdings)
Limited, filed as Exhibit 2.1 to Registrant's Current Report
on Form 8-K dated November 19, 1999 is incorporated herein by
this reference
10.10 Credit Agreement, dated May 11, 2001, between Southwest Bank
of St. Louis and Zoltek Companies, Inc., Zoltek Corporation,
Cape Composites, Inc., Engineering Technology Corporation,
Zoltek Properties, Inc., and Hardcore Composites Operations,
LLC, filed as
32
Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2001 is incorporated herein
by reference
21 Subsidiaries of the Registrant filed as Exhibit 21 to
Registrant's Annual Report on Form 10-K for the fiscal year
ended September 30, 2000 is incorporated herein by this
reference
23 Consent of PricewaterhouseCoopers LLP is filed herewith
99.1 Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ZOLTEK COMPANIES, INC.
(Registrant)
Date: February 18, 2003 By /s/ Zsolt Rumy
----------------------------------------------
Zsolt Rumy, Chairman of the Board, President
and Chief Executive Officer
By /s/ James F. Whalen
----------------------------------------------
James F. Whalen, Chief Financial Officer and
Corporate Secretary
34
I, Zsolt Rumy, certify that:
(1) I have reviewed this annual report on Form 10-K of Zoltek
Companies, Inc.;
(2) Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by
this annual report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
(4) The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period for which this annual
report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls as of a date within 90 days prior
to the filing date of this annual report (the
"Evaluation Date"); and
(c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Effective Date;
(5) The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
(6) The registrant's other certifying officer and I have indicated
in this annual report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
February 18, 2003 /s/ Zsolt Rumy
--------------------------------
Zsolt Rumy
Chief Executive Officer
35
I, James F. Whalen, certify that:
(1) I have reviewed this annual report on Form 10-K of Zoltek
Companies, Inc.;
(2) Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by
this annual report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
(4) The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period for which this annual
report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls as of a date within 90 days prior
to the filing date of this annual report (the
"Evaluation Date"); and
(c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Effective Date;
(5) The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
(6) The registrant's other certifying officer and I have indicated
in this annual report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
February 18, 2003 /s/ James F. Whalen
--------------------------------
James F. Whalen
Chief Financial Officer
36
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Zoltek Companies, Inc.
Our audits of the consolidated financial statements referred to in our report
dated December 13, 2002, except for Note 6, which is as of February 18, 2003,
appearing in the 2002 Annual Report to Shareholders of Zoltek Companies, Inc.
(which report and consolidated financial statements are included in this Annual
Report on Form 10-K) also included an audit of the Financial Statement Schedule
listed in Item 14(a)(2) of this Form 10-K. In our opinion, this Financial
Statement Schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
/s/PricewaterhouseCoopers LLP
- -------------------------------
PricewaterhouseCoopers LLP
St. Louis, Missouri
December 13, 2002
37
FOR THE YEAR ENDED SEPTEMBER 30, 2002
Rule 12-09 Valuation and Qualifying Accounts and Reserves
(Amounts in thousands)
Column A Column B Column C Column D Column E
-------- -------- ------------------------------------ -------- --------
Additions
------------------------------------
Balance at Charged to Charged to Balance at
beginning costs and other accounts Deductions end
of period expenses describe describe of period
--------- -------- -------- -------- ---------
RESERVE FOR DOUBTFUL ACCOUNTS $ 760 $ 392 $ $ 410(1) $ 742
======= ======== ======== ======= =======
RESERVE FOR INVENTORY VALUATION $ 7,972 $ $ $ 1,872(2) $ 6,100
======= ======== ======== ======= =======
---------------------------------
FOR THE YEAR ENDED SEPTEMBER 30, 2001
Rule 12-09 Valuation and Qualifying Accounts and Reserves
(Amounts in thousands)
Column A Column B Column C Column D Column E
-------- -------- ------------------------------------ -------- --------
Additions
------------------------------------
Balance at Charged to Charged to Balance at
beginning costs and other accounts Deductions end
of period expenses describe describe of period
--------- -------- -------- -------- ---------
RESERVE FOR DOUBTFUL ACCOUNTS $ 899 $ 836 $ -- $ 975(1) $ 760
======= ======== ======== ======= =======
RESERVE FOR INVENTORY VALUATION $ 3,340 $ 8,644 $ 417 $ 4,429(2) $ 7,972
======= ======== ======== ======= =======
---------------------------------
FOR THE YEAR ENDED SEPTEMBER 30, 2000
Rule 12-09 Valuation and Qualifying Accounts and Reserves
(Amounts in thousands)
Column A Column B Column C Column D Column E
-------- -------- ------------------------------------ -------- --------
Additions
------------------------------------
Balance at Charged to Charged to Balance at
beginning costs and other accounts Deductions end
of period expenses describe describe of period
--------- -------- -------- -------- ---------
RESERVE FOR DOUBTFUL ACCOUNTS $ 774 $ 81 $ 190(3) $ 146(1) $ 899
======= ======= ======= ======= =======
RESERVE FOR INVENTORY VALUATION $ 2,191 $ 1,609 $ -- $ 460(2) $ 3,340
======= ======= ======= ======= =======
<FN>
- -----------------
(1) Write-off of uncollectible receivable, net of recovery.
(2) Reduction in inventory reserve for specific inventory items.
(3) Acquisition of subsidiaries.
38
EXHIBIT INDEX
-------------
Exhibit No. Description
----------- -----------
3.1 Restated Articles of Incorporation of the Registrant*
3.2 Restated By-Laws of the Registrant, as currently in effect*
4.1 Form of certificate for Common Stock*
4.2 Form of Warrant, dated May 11, 2001, issued to Southwest Bank
of St. Louis with respect to 12,500 shares of Registrant's
Common Stock*
10.1 Loan Agreement, dated December 29, 1989, by and between Zoltek
Corporation and Southwest Bank of St. Louis, as amended by
letter, dated August 13, 1992*
10.2 Zoltek Companies, Inc. Long Term Incentive Plan*
10.3 Zoltek Companies, Inc. Amended and Restated Directors Stock
Option Plan filed as Exhibit 10.1 to Registrant's Quarterly
Report on Form 10-Q dated August 13, 1999*
10.4 Promissory Note, dated September 29, 1994, by and between
Zoltek Properties, Inc. and Metlife Capital Corporation*
10.5 Precursor Agreement, dated as of July 1, 1994, by and between
Zoltek Corporation and Courtaulds Fibres Limited* (An
application for confidential treatment has been made for a
portion of Exhibit 10.5.)
10.6 Materials Supply Agreement, dated as of June 15, 1994, by and
between Zoltek Companies, Inc. and The B.F. Goodrich Company*
(An application for confidential treatment has been made for a
portion of Exhibit 10.6.)
10.7 Loan Agreement, dated November 14, 1994, by and between
Zoltek Properties, Inc. and The Reliable Life Insurance
Company*
10.8 Promissory Note, dated November 14, 1994, by and between
Zoltek Corporation and Southwest Bank of St. Louis*
<FN>
- --------------
* Incorporated herein by reference
39
EXHIBIT INDEX
-------------
Exhibit No. Description
----------- -----------
10.9 Stock Purchase Agreement, dated as of November 6, 2000, by
and among Structural Polymer Group Limited, Zoltek Companies,
Inc. and certain Shareholders of Zoltek Companies, Inc.*
10.10 Credit Agreement, dated as of May 11, 2001, between Southwest
Bank of St. Louis and Zoltek Companies, Inc., Zoltek
Corporation, Cape Composites, Inc., Engineering Technology
Corporation, Zoltek Properties, Inc., and Hardcore Composites
Operations, LLC*
21 Subsidiaries of the Registrant*
23 Consent of PricewaterhouseCoopers LLP
99.1 Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
<FN>
- ------------------
* Incorporated herein by reference
40