-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DXlKvGlIiB/JDx2f2WMRu0pbVY/DbJYlEiwBUPqTAFAnLKqr3Fb3Gb9L1FYco0nY dDeHrbwX9WOc2LBgmwZqag== 0001068800-00-000197.txt : 20000517 0001068800-00-000197.hdr.sgml : 20000517 ACCESSION NUMBER: 0001068800-00-000197 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ZOLTEK COMPANIES INC CENTRAL INDEX KEY: 0000890923 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRICAL INDUSTRIAL APPARATUS [3620] IRS NUMBER: 431311101 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20600 FILM NUMBER: 636654 BUSINESS ADDRESS: STREET 1: 3101 MCKELVEY RD CITY: ST LOUIS STATE: MO ZIP: 63044 BUSINESS PHONE: 3142915110 MAIL ADDRESS: STREET 1: 3101 MCKELVEY ROAD CITY: ST LOUIS STATE: MO ZIP: 63044 10-Q 1 ZOLTEK COMPANIES, INC. FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ---------------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ---------------------- For the quarter ended March 31, 2000 Commission File No. 0-20600 -------------- ------- ZOLTEK COMPANIES, INC. ---------------------- (Exact name of registrant as specified in its charter) Missouri 43-1311101 - -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3101 McKelvey Road, St. Louis, Missouri 63044 - ---------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (314) 291-5110 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No --- ---- Indicate the number of shares outstanding of each of the registrant's classes of common stock as of the latest practicable date: As of May 15, 2000, 18,701,338 shares of Common Stock, $.01 par value, were outstanding. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ZOLTEK COMPANIES, INC. CONSOLIDATED BALANCE SHEET -------------------------- (Amounts in thousands, except share and per share amounts)
MARCH 31, SEPTEMBER 30, ASSETS 2000 1999 - ------------------------------------------------------------------------------------------------ (Unaudited) Current assets: Cash and cash equivalents $ 2,471 $ 4,250 Marketable securities 1,950 7,117 Accounts receivable, less allowance for doubtful accounts of $1,052 and $774, respectively 23,481 13,138 Inventories 39,223 28,490 Prepaid expenses 890 212 Other receivables 1,694 436 Refundable income taxes 3,101 1,620 -------- -------- Total current assets 72,810 55,263 Property and equipment, net 92,881 77,422 Intangible assets (including goodwill), net 48,047 - Other assets 1,421 4,071 -------- -------- Total assets $215,159 $136,756 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------------------------------------------------------------------ Current liabilities: Short-term notes payable $ - $ 1,455 Current maturities of long-term debt 6,361 630 Trade accounts payable 19,367 6,650 Accrued expenses and other liabilities 4,180 2,582 Income taxes payable 1,315 - -------- -------- Total current liabilities 31,223 11,317 Other long-term liabilities 741 815 Long-term debt, less current maturities 43,436 5,423 Deferred income taxes 3,400 3,367 -------- -------- Total liabilities 78,800 20,922 -------- -------- Mandatorily redeemable common stock, 0 and 160,000 shares, respectively - 1,200 Shareholders' equity: Preferred stock, $.01 par value, 1,000,000 shares authorized, no shares issued or outstanding - - Common stock, $.01 par value, 50,000,000 shares authorized, 18,701,331 and 16,041,338 shares issued and outstanding, respectively 187 160 Additional paid-in capital 127,677 98,823 Retained earnings 28,878 31,185 Treasury common stock at cost (15,000 shares) (118) (118) Outstanding common stock put options (0 and 160,000 shares, respectively) - 181 Accumulated other comprehensive loss (20,265) (15,597) -------- -------- Total shareholders' equity 136,359 114,634 -------- -------- Total liabilities and shareholders' equity $215,159 $136,756 ======== ======== The accompanying notes are an integral part of the consolidated financial statements.
2 ZOLTEK COMPANIES, INC. CONSOLIDATED STATEMENT OF OPERATIONS ------------------------------------ (Amounts in thousands, except per share data) (Unaudited)
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31, ---------------------------- -------------------------- 2000 1999 2000 1999 - -------------------------------------------------------------------------------------------------------------- Net sales $35,218 $16,149 $58,151 $34,873 Cost of sales 26,236 12,876 43,973 26,959 ------- ------- ------- ------- Gross profit 8,982 3,273 14,178 7,914 Available unused capacity costs 1,099 906 2,088 1,896 Selling, general and administrative expenses 7,327 3,460 12,377 7,213 Goodwill amortization (815) - (1,189) - ------- ------- ------- ------- Income (loss) from operations (259) (1,093) (1,476) (1,195) Other income (expense): Interest expense (1,077) (118) (1,688) (236) Interest income 154 260 352 627 Other, net (154) (57) (247) (56) ------- ------- ------- ------- Loss from operations before income taxes (1,336) (1,008) (3,059) (860) Provision (benefit) for income taxes (227) (17) (752) 121 ------- ------- ------- ------- Net loss $(1,109) $ (991) $(2,307) $ (981) ======= ======= ======= ======= Net loss per share: Basic and diluted loss per share $ (0.06) $ (0.06) $ (0.13) $ (0.06) ======= ======= ======= ======= Weighted average common shares outstanding 18,701 16,205 18,018 16,211 The accompanying notes are an integral part of the consolidated financial statements.
3 ZOLTEK COMPANIES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS ------------------------------------ (Amounts in thousands) (Unaudited)
SIX MONTHS ENDED MARCH 31, -------------------------- 2000 1999 - ----------------------------------------------------------------------------------------------- Cash flows from operating activities: Net loss $ (2,307) $ (981) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 4,812 2,814 Unrealized foreign exchange gain (153) (40) Other, net 57 5 Changes in assets and liabilities: (Increase) decrease in accounts receivable (34) 1,768 (Increase) decrease in other receivables (204) 1,420 Increase in inventories (3,385) (4,774) Increase in prepaid expenses and other assets (1,486) (654) Increase (decrease) in trade accounts payable 3,097 (5,657) Increase (decrease) in accrued expenses and other liabilities (1,260) 41 (Increase) decrease in income taxes payable/refundable and deferred taxes (2,155) 722 Decrease in other long-term liabilities (62) (84) -------- ------- Total adjustments (773) (4,439) -------- ------- Net cash used by operating activities (3,080) (5,420) -------- ------- Cash flows from investing activities: Payments for purchase of Zoltek Intermediates businesses, net of cash acquired (34,317) - Payments for purchase of property and equipment (6,127) (8,968) Proceeds from sale of property, plant and equipment 31 5,036 Decrease in notes receivable 50 24 Sale of marketable securities 5,075 11,969 -------- ------- Net cash provided (used) by investing activities (35,288) 8,061 -------- ------- Cash flows from financing activities: Purchase of treasury stock - (118) Proceeds from sale of Zoltek stock options - 67 Proceeds from issuance of notes payable 43,000 1,259 Repayment of notes payable (6,399) (479) -------- ------- Net cash provided by financing activities 36,601 729 -------- ------- Effect of exchange rate changes on cash (12) (11) -------- ------- Net increase (decrease) in cash (1,779) 3,359 -------- ------- Cash and cash equivalents at beginning of period 4,250 8,004 -------- ------- Cash and cash equivalents at end of period $ 2,471 $11,363 ======== ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Net cash (refunded) paid during the year for: Interest $ 1,234 $ 207 Income taxes $ 2,052 $ (712) The accompanying notes are an integral part of the consolidated financial statements.
4 ZOLTEK COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 1. UNAUDITED FINANCIAL STATEMENTS In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments of a normal and recurring nature necessary for a fair presentation of the financial position and results of operations as of the dates and for the periods presented. These financial statements should be read in conjunction with the Company's 1999 Annual Report which includes consolidated financial statements and notes thereto for the fiscal year ended September 30, 1999. Certain reclassifications have been made to conform prior year's data to the current presentation. The results for the quarter and six months ended March 31, 2000 are not necessarily indicative of the results which may be expected for the fiscal year ending September 30, 2000. 2. PRINCIPLES OF CONSOLIDATION Zoltek Companies, Inc. (the "Company") is a holding company, which owns the stock of the Company's operating subsidiaries, Zoltek Corporation ("Zoltek"), Structural Polymer (Holdings) Limited ("SP Systems"), Cape Composites Incorporated, Engineering Technology Corporation, Zoltek Intermediates Corporation, Zoltek Properties, Inc. and Zoltek Rt. The Company's Carbon Fiber business segment is primarily focused on the low cost manufacturing and application of carbon fibers used as reinforcement in composite materials. The Company's Composite Intermediates business segment manufactures and markets composite engineering and design technology, composite fabrication and processing technology and composite materials. The Company's Specialty Products business segment manufactures and markets acrylic and nylon products and fibers to the textile industry. The consolidated balance sheets of the Company's international subsidiaries, Structural Polymer (Holdings) Limited and Zoltek Rt., were translated from British Pounds and Hungarian Forints, respectively, to U.S. Dollars at the respective exchange rates in effect at the balance sheet date, while their consolidated statements of operations were translated using the average exchange rates in effect during the periods presented. Adjustments resulting from foreign currency transactions are recognized in income, whereas adjustments resulting from the translation of financial statements are reflected as a separate component of shareholders' equity. These financial statements have been prepared in accordance with U.S. generally accepted accounting principles. All significant intercompany transactions and balances have been eliminated upon consolidation. 3. ACQUISITIONS During the first quarter of fiscal 2000, the Company acquired a series of downstream businesses which now comprise its Composite Intermediates business segment. The businesses acquired were as follows: On October 1, 1999, Zoltek acquired all of the outstanding stock of Cape Composites for approximately $0.3 million in cash and assumed all outstanding liabilities. Cape Composites is a manufacturer of carbon fiber prepreg composite materials. On November 9, 1999, Engineering Technology Corporation ("EnTec"), a Missouri corporation which is a wholly-owned subsidiary of the Company, acquired substantially all of the assets of Engineering Technology, Inc., a Utah corporation, for $2.7 million in cash. Engineering Technology, Inc. designs, manufactures and sells filament winding equipment. On November 15, 1999, EnTec also acquired all of the outstanding stock of Composites Machine Corporation (CMC) and Ramal International, Inc. (parent company of CMC) for approximately $0.4 million in cash and assumed all outstanding debt of approximately $0.3 million. CMC designs and manufactures filament winding and pultrusion equipment used in the production of composite parts. Subsequent to the acquisitions of Cape Composites, EnTec and CMC, the Company provided working capital of approximately $2.1 million for the payment of accounts payable, accrued expenses and outstanding debt to certain banks. The Company anticipates making additional working capital available to these acquired companies during fiscal 2000. The sources of these funds has been and is expected to be available cash balances and borrowings under the Company's credit facilities. On November 19, 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 having a market value of approximately $27.5 million. The Company also borrowed $5.0 million to refinance certain existing bank debt of SP Systems and fund working capital 5 requirements. SP Systems designs and manufactures, among other things, composite materials used in large-scale structures such as wind turbine blades and marine structures. The foregoing acquisitions are reported under the purchase method of accounting and are included in the Company's consolidated financial statements from the date of acquisition. The purchase price allocation includes assets and liabilities acquired at their estimated fair values. The excess purchase price over the fair market value of the net assets acquired was allocated to goodwill. Set forth below is aggregate selected unaudited purchase price data of the acquired companies at the dates of acquisition.
(Unaudited) / (Amounts in thousands) SP SYSTEMS OTHER TOTAL ---------- ----- ----- Fair value of assets and liabilities acquired: Current assets $ 18,342 $ 2,310 $ 20,652 Long-term assets 9,093 6,567 15,660 Goodwill and intangibles 49,337 680 50,017 Liabilities (18,854) (6,158) (25,012) -------- ------- -------- Net purchase price $ 57,918 $ 3,399 $ 61,317 ======== ======= ========
Set forth below is selected unaudited pro forma combined results of operations data of the Company for the six months ended March 31, 2000 and 1999 as if the acquisitions had been completed as of October 1, 1999 and 1998, respectively. The pro forma combined financial information set forth below is not necessarily indicative of future results of operations or results of operations that would have been reported for the periods indicated. (amounts in thousands, except per share data).
(Unaudited) MARCH 31 2000 1999 ------- ------- Net sales $65,436 $67,002 Net loss $(3,033) $(1,377) Net loss per share - basic and diluted $ (0.16) $ (0.07)
On April 28, 2000, the Company acquired a 45% preferred membership interest in Hardcore Composites Operations LLC for $1.4 million cash and a note payable of $1.0 million. The Company anticipates providing additional funding of approximately $0.7 million for working capital during the remainder of fiscal 2000. The Company has the option to purchase the remaining interest in 2002 based upon a pre-determined formula. Hardcore Composites Operations LLC designs and manufactures composite structures for the civil infrastructure market. 4. COMPREHENSIVE INCOME Effective with the first quarter of fiscal 1999, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement requires that the financial statements disclose a new category entitled "Comprehensive Income" which is the combination of net income and noncash changes to shareholders' equity. The adoption of the Statement had no effect on the Company's results of operations during the periods presented. Comprehensive income (loss) includes cumulative translation adjustments and unrealized gains and losses on marketable equity securities. Comprehensive income (loss) was as follows for the six-month period ended:
MARCH 31, 2000 1999 ------- ------- (In thousands) Net loss $(2,307) $ (981) Accumulated other comprehensive loss (4,668) (2,662) ------- ------- Comprehensive loss $(6,975) $(3,643) ======= =======
6 5. CASH AND CASH EQUIVALENTS All highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents. Such investments amounted to $0.9 million and $3.8 million at March 31, 2000 and September 30, 1999, respectively. 6. INVENTORIES Inventories consist of the following:
MARCH 31, SEPTEMBER 30, 2000 1999 --------- ------------- (In thousands) Raw materials $ 9,136 $ 6,173 Work-in-process 1,314 935 Finished goods 28,670 21,059 Supplies, spares and other 103 323 ------- ------- $39,223 $28,490 ======= =======
7. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
MARCH 31, SEPTEMBER 30, 2000 1999 --------- ------------- (In thousands) Land $ 1,877 $ 1,151 Buildings and improvements 27,174 26,592 Machinery and equipment 80,067 62,819 Furniture and fixtures 7,540 3,720 -------- -------- 116,658 94,282 Less: accumulated depreciation (23,777) (16,860) -------- -------- $ 92,881 $ 77,422 ======== ========
8. INTANGIBLE ASSETS In connection with the acquisition of SP Systems, the Company recorded goodwill of $49.3 million. The goodwill is being amortized over 15 years. In addition, the Company identified certain filament winding industrial software at EnTec and CMC with an estimated value of $0.7 million. The filament winding industrial software is being amortized over 10 years. 9. DEBT In November 1999, the Company financed the SP Systems acquisition through a new $71.0 million credit facility with Mercantile Bank National Association. The credit facility, structured as a $35.0 million, 6-year acquisition term loan, a $26.0 million, 6-year revolving credit facility, and a $10.0 million, 6-year future acquisition term loan is secured by a pledge of 65% of the outstanding stock of the Company's international subsidiaries (Structural Polymer (Holdings) Ltd. and Zoltek Rt.) in addition to substantially all of the assets of the Company's U.S. operations. Borrowings under the revolving credit facility are based on a formula of eligible accounts receivable and eligible inventory of the Company and certain subsidiaries. Interest rates are based on either Prime or LIBOR with a margin depending upon the Company's achievement of certain operating and financial benchmarks. The credit agreement contains financial covenants, including financial covenants related to borrowings, future acquisitions, working capital, net worth, cash flow and fixed charge coverage. In addition, the credit facility requires lender consent for the payment of cash dividends. There is no requirement to maintain compensating balances under the credit facility, however, the Company will be required to pay a fee of 0.50% per annum on the unused portion of the total facility plus certain other administrative costs. The Company paid $0.71 million as a nonrefundable fee to the bank for the arrangement of the credit facility. Proceeds of $8.0 million, drawn under the revolving credit facility, were also used to refinance certain existing bank debt of the Company and for working capital purposes. Borrowings of $42.1 million under the credit facilities are at an interest rate of 8.26% at March 31, 2000. At March 31, 2000, the Company had an interest rate swap agreement outstanding with a notional amount of $23.3 million under which the Company paid a fixed rate of interest and received a floating rate of interest over the term of the interest rate swap agreement 7 without the exchange of underlying notional amounts. The interest rate swap agreement in effect converted a portion of the acquisition term loan from a floating rate obligation to a fixed rate obligation. The fair value of $23.3 million swap agreement outstanding at March 31, 2000 was $0.3 million. The fair value of the interest rate swap agreement was not recognized in the consolidated financial statements at that time since the agreement was accounted for as a hedge. At March 31, 2000 the Company did not meet minimum EBITDA and the EBITDA to Funded Debt covenants of its credit agreement with Mercantile Bank National Association. A waiver of these violations was received on May 12, 2000. The Company has received a credit modification commitment from Mercantile Bank National Association and management expects that the modified agreement will be entered into by May 31, 2000. The proposed amended agreement, structured as a $34.1 million, 5.5-year acquisition term loan, and a $20.0 million, 5.5-year revolving credit facility will continue to be secured by a pledge of 65% of the outstanding stock of the Company's international subsidiaries (Structural Polymer (Holding) Ltd. and Zoltek Rt.) in addition to substantially all of the assets of the Company's U.S. operations. Pursuant to the commitment letter, borrowings under the modified revolving credit facility will be based on a formula of eligible accounts receivable and inventory of the Company and certain subsidiaries. Interest rates will be tied to either prime or LIBOR with a margin depending upon the Company's achievement of certain operating and financial benchmarks. The modified loan agreement contains financial covenants, including financial covenants related to borrowings, future acquisitions, working capital, net worth, cash flow and fixed charge coverage. In addition, the modified credit facility restricts fixed asset purchases and requires lender consent for the payment of cash dividends. There is no requirement to maintain compensating balances under the credit facility, however, the Company will be required to pay a fee of 0.50% per annum on the unused portion of the total credit facility plus certain other administrative costs. 10. NET INCOME (LOSS) PER SHARE The following table sets forth the computation of shares used in the computations of basis and diluted net income (loss) per share (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31, MARCH 31, 2000 1999 2000 1999 ------------------- ------------------- Weighted average common shares outstanding used in computation of basic and diluted net income (loss) per share 18,701 16,201 18,018 16,211
Because the Company reported a net loss for the three months ended March 31, 2000 and 1999 and the six months ended March 31, 2000 and 1999, the calculation of diluted earnings per share does not include common stock equivalents as it would result in a reduction of net loss per share. If the Company had reported net income for the three months ended March 31, 2000 and 1999 there would have been 123,600 and 88,300 additional shares, respectively, in the calculation of diluted earnings per share. If the Company had reported net income for the six months ended March 31, 2000 and 1999, there would have been 118,300 and 106,700 additional shares, respectively, in the calculation of diluted earnings per share. 8 The following options to purchase shares of common stock were not included in the computation of diluted net income (loss) per share because the options' exercise price was greater than the average market price of the Company's common stock for the periods stated and, therefore, are not common stock equivalents for purposes of this calculation (in thousands, except exercise price data):
THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31, MARCH 31, 2000 1999 2000 1999 ------------------- ------------------- Options excluded from computation of diluted net income (loss) per share 281 348 281 348 Exercise price ranges: High $39.00 $39.00 $39.00 $39.00 Low $10.00 $ 8.75 $10.00 $11.50
11. SEGMENT INFORMATION The Company's strategic business units are based on product lines and have been grouped into three reportable segments, Carbon Fibers, Composite Intermediates and Specialty Products. The Carbon Fibers segment is focused on the manufacturing of low cost carbon fibers, facilitating development of product and process applications to increase the demand for carbon fibers and aggressively marketing carbon fibers. The Carbon Fibers segment is located geographically in the United States and Hungary. The Composite Intermediates segment is focused on the development, manufacturing and marketing of large composite structures, carbon fiber and glass composites, specialty resins and prepreg materials. The Composite Intermediates segment is located geographically in the United States and the United Kingdom. The Specialty Products segment manufactures and markets acrylic and nylon products and fibers primarily to the textile industry and is located in Hungary. The Company markets all of its products globally. The corporate headquarters and unallocated assets incur no cost of sales expenses so they have no gross profit or loss to report. The corporate headquarters does have general and administrative expenses. Management evaluates the performance of its operating segments on the basis of operating income contribution to the Company. The Company's operating segments have responsibility for managing sales, costs of sales and the selling, general and administrative efforts of each of the segments. Therefore, these costs are considered by management in the evaluation of the individual segment's primary performance. The following table presents financial information on the Company's operating segments as of and for the three and six months periods ending March 31, 2000 and 1999 (amounts in thousands):
THREE MONTHS ENDED MARCH 31, 2000 --------------------------------- (Unaudited) Corporate Headquarters Carbon Composite Specialty and Fibers Intermediates Products Eliminations Total ------ ------------- --------- ------------ ------- Net sales - external $7,128 $18,190 $9,900 $ - $35,218 Net sales - intersegment 72 - - (72) - ------ ------- ------ ----- ------- Total net sales 7,200 18,190 9,900 (72) 35,218 Operating income (loss) (78) 399 264 (844) (259) Available unused capacity expenses 1,099 - - - 1,099 Depreciation and amortization expense 1,093 1,395 238 29 2,755 Capital expenditures 294 1,942 1,097 - 3,333 9 THREE MONTHS ENDED MARCH 31, 1999 --------------------------------- (Unaudited) Corporate Headquarters Carbon Composite Specialty and Fibers Intermediates Products Eliminations Total ------ ------------- --------- ------------ ------- Net sales - external $5,859 $ - $10,290 $ - $16,149 Operating income (loss) 549 - (932) (710) (1,093) Available unused capacity expenses 906 - - - 906 Depreciation and amortization expense 1,203 - 297 29 1,529 Capital expenditures 2,024 - 59 - 2,083 SIX MONTHS ENDED MARCH 31, 2000 ------------------------------- (Unaudited) Corporate Headquarters Carbon Composite Specialty and Fibers Intermediates Products Eliminations Total ------ ------------- --------- ------------ ------- Net sales - external $12,625 $25,165 $20,361 $ - $58,151 Net sales - intersegment 167 - - (167) - ------- ------- ------- ------- ------- Total net sales 12,792 25,165 20,361 (167) 58,151 Operating income (loss) (490) (370) 926 (1,542) (1,476) Available unused capacity expenses 2,088 - - - 2,088 Depreciation and amortization expense 2,205 2,073 477 57 4,812 Capital expenditures 1,262 2,518 2,347 - 6,127 SIX MONTHS ENDED MARCH 31, 1999 ------------------------------- (Unaudited) Corporate Headquarters Carbon Composite Specialty and Fibers Intermediates Products Eliminations Total ------ ------------- --------- ------------ ------- Net sales - external $11,731 $ - $23,142 $ - $34,873 Operating income (loss) 784 - (559) (1,420) (1,195) Available unused capacity expenses 1,896 - - - 1,896 Depreciation and amortization expense 2,147 - 610 57 2,814 Capital expenditures 8,566 - 402 - 8,968 TOTAL ASSETS ------------ (Unaudited) Corporate Headquarters Carbon Composite Specialty and Fibers Intermediates Products Eliminations Total ------ ------------- --------- ------------ -------- March 31, 2000 $97,097 $88,935 $25,967 $ 3,160 $215,159 September 30, 1999 85,796 - 35,935 15,025 136,756
10 GEOGRAPHIC INFORMATION (UNAUDITED) / (AMOUNTS IN THOUSANDS) - -----------------------------------------------------------
REVENUES THREE MONTHS ENDED LONG-LIVED ASSETS MARCH 31, MARCH 31, SEPTEMBER 30, 2000 1999 2000 1999 ------------------- ------------------- United States $14,602 $10,462 $60,916 $55,400 United Kingdom 20,949 $ - 10,727 - Hungary 22,600 24,411 21,238 22,022 ------- ------- ------- ------- Total $58,151 $34,873 $92,881 $77,422 ======= ======= ======= ======= Revenues are attributed to the entity recognizing the sale in the interim statements as it is not practical to accumulate every customer's country of domicile on an interim basis. Property, plant and equipment and goodwill and intangibles, net of accumulated depreciation and amortization based on country location.
12. SUBSEQUENT EVENTS On April 28, 2000 the Company acquired a 45% preferred membership interest in Hardcore Composites Operations LLC for $1.4 million cash and a note payable of $1.0 million. The Company anticipates providing additional funding of approximately $0.7 million for working capital. The Company has the option to purchase the remaining interest in 2002 based upon a pre-determined formula. Hardcore Composites Operations LLC designs and manufactures composite structures for the civil infrastructure market. Products manufactured include bridges, bridge decks, marine pilings, fender panels, piers and stay-in-place form work. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL - ------- The Company's mission and its strategic objective is to commercialize the use of carbon fibers as reinforcement in composite materials. The Company believes it is the lowest cost producer and low selling price leader for carbon fibers. The Company believes its introduction of carbon fibers to potential end users has been well received, however, the Company found the existing composite materials value chain unresponsive and initiated steps to accelerate the introduction and development of carbon fiber composites across a broad range of mass market applications. During the first quarter of fiscal 2000, the Company acquired a series of downstream businesses, which now comprise its Composite Intermediates business segment, that position it to facilitate 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 fabrication and processing technology and the ability to create integrated product solutions utilizing composite materials. As part of its strategic plan, the Company is pursuing various initiatives to facilitate further development of product and process applications to increase demand for low-cost carbon fiber, including possible additional acquisitions of selected technology for the enhancement of its operations and to lead the commercialization of selected large-scale carbon fiber composites. The Company initiated a major carbon fiber production capacity expansion plan during fiscal 1997 that continued into fiscal 1999 to facilitate its strategic objective of commercializing the use of carbon fibers. The Company constructed 5.0 million pounds of new continuous carbonization capacity at its Abilene, Texas facility and 2.0 million pounds of continuous carbonization capacity at its facilities in Hungary. The Company also completed construction of a secondary processing building (40,000 square feet) at its Abilene, Texas facility. The Company is utilizing this facility to perform intermediate and secondary carbon fiber processing operations, such as chopping, milling and specialty packaging. In addition, the Company substantially completed construction and partial finish out of an additional building (288,000 square feet) designed to house up to eight continuous carbonization lines at its Abilene, Texas facility. The Company has obtained certain long-lead time equipment items for four additional continuous carbonization lines, each with an annual rated capacity of one million pounds. The Company is housing the long- lead time equipment items at its facility in Abilene, Texas. The Company does not currently anticipate initializing construction of the four additional lines during fiscal 2000 unless demand for carbon fiber increases. 11 While the additional operational capacity expands the Company's total capacity for production of carbon fiber, the Company believes the market will require demonstration of significant available capacity to initiate and develop large-scale composite applications utilizing its carbon fiber products. The recent major additions to the Company's carbon fiber manufacturing capacity currently are having little impact on sales. Carbon fiber sales for the first six months of fiscal 2000 were $12.6 million compared to $11.7 million for the first six months of fiscal 1999. Qualification for new applications and accompanying increases in sales have taken longer than was originally expected due to the excess supply in the market resulting from capacity increases by several other carbon fiber manufacturers. During all of fiscal 1999 and the first six months of fiscal 2000, the Company was not operating its new continuous carbonization lines at full capacity. During the first six months of fiscal 2000, available unused capacity charges were approximately $2.1 million. The Company currently anticipates that it will not operate its lines at full capacity during fiscal 2000. While the Company believes it is necessary to maintain available capacity to encourage development of significant new applications for carbon fibers, costs related to the unutilized capacity will adversely impact results of operations during fiscal 2000. The Company does, however, anticipate increases in sales from the new carbon fiber lines at both the U.S. and Hungarian locations in fiscal 2000. RESULTS OF OPERATIONS - --------------------- THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED - ---------------------------------------------------------------- MARCH 31, 1999 - -------------- The Company's sales increased 118% to $35.2 million in the second quarter of fiscal 2000 from $16.1 million in the second quarter of fiscal 1999. The acquisitions in the first quarter of fiscal 2000 accounted for $18.2 million of sales. Carbon fiber sales increased 21.5% ($1.2 million) to $7.1 million in the second quarter of fiscal 2000 from $5.9 million in the second quarter of fiscal 1999. The carbon fibers sales increase was due to increased sales volumes of product to the conductive plastics and aircraft brake markets. Sales of the Specialty Products business segment (acrylic and other products) produced at Zoltek Rt. decreased by 3.7% to $9.9 million in the second quarter of fiscal 2000 compared to $10.3 million in the second quarter of fiscal 1999. This decrease was principally due to volume reductions in the acrylic fiber markets. In addition, the Company converted its Mavilon acrylic fiber plant to carbon fiber precursor production during the last half of fiscal 1999, permanently removing the capacity from the acrylic textile fiber operation. Sales of the Mavilon acrylic fiber were approximately $1.9 million during the second quarter of fiscal 1999. The Mavilon acrylic fiber plant change did not result in an asset impairment charge. Gross profit increased 172% to $9.0 million in the second quarter of fiscal 2000 from $3.3 million in the same period of fiscal 1999. The Composite Intermediates business segment acquisitions in the second quarter of fiscal 2000 accounted for $5.4 million of the reported gross profit. Gross profit from the Carbon Fiber and Specialty Products business segments increased in the second quarter of fiscal 2000 compared to the same period in fiscal 1999. Gross profit from the Specialty Products business segment was $1.8 million or 21% more than that in fiscal 1999. The principal factor in the gross margin improvement was price increases in acrylic fibers. Overall volume in the second quarter of fiscal 2000 of acrylic fibers decreased compared to the same period of fiscal 1999. The principal factor for volume reductions related to the Mavilon acrylic fiber plant. Gross profit on carbon fibers decreased by $0.2 million in the second quarter of fiscal 2000 compared to the gross profit for the corresponding quarter in fiscal 1999. Gross margin on the Specialty Products business segment increased to 18.0% of sales for the second quarter of fiscal 2000 compared to 14.4% of sales for the second quarter of fiscal 1999 due primarily to increases in selling prices. Gross margin on carbon fibers decreased to 25.3% of sales for the second quarter of fiscal 2000 from 30.6% of sales for the second quarter of fiscal 1999, due primarily to decreases in the selling prices and product mix changes. The Company continued to incur costs related to the underutilized productive capacity for carbon fibers at the Abilene, Texas and Hungarian facilities. These costs included depreciation and other overhead associated with the unused capacity. These costs, which were separately identified on the income statement, were approximately $1.1 million during the second quarter of fiscal 2000 and $1.0 million for the corresponding quarter in fiscal 1999. 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 during fiscal 2000. Selling, general and administrative expenses increased approximately 108%, or $3.8 million, from $3.5 million in the second quarter of fiscal 1999 to $7.3 million in the second quarter of fiscal 2000. The acquisitions in the first quarter of fiscal 2000 accounted for $4.2 million of selling, general and administrative expenses. The decrease in expenses for the Carbon Fiber and Specialty Products business segments resulted from lower payroll, engineering and administrative costs. During the second quarter of fiscal 2000, the Company incurred expense of approximately $0.8 million related to the amortization of the goodwill and intangibles resulting from the acquisitions of SP Systems and EnTec. 12 Interest expense was approximately $1.1 million for the second quarter of fiscal 2000 compared to $0.1 million in the same period of fiscal year 1999. The increase in interest expense resulted from the debt incurred as a result of the acquisition of SP Systems. Interest income was $0.2 million for the second quarter of fiscal 2000 compared to $0.3 million in the second quarter of fiscal 1999. The decrease in interest income was due to the use of funds to finance the acquisitions in the second quarter of fiscal 2000, as well as capital expenditures during fiscal 1999. During the second quarter of fiscal 2000 capital expenditures totaled $3.3 million. In January 1999, the Company sold its nitrogen generation plant in Abilene, Texas for $5.0 million and leased it back under a seven-year operating lease. The Company did not realize a gain or loss on this sale. During the second quarter of fiscal 2000, the Company reported an income tax benefit of $0.2 million compared to no income tax expense in the second quarter of fiscal 1999 due to the reduced profit levels. The income tax benefit reflected the loss before income taxes reported for the period. The Company recognizes income taxes in the United States, United Kingdom and Hungary based on the income before income taxes. Included in the provision for income taxes were gross receipts taxes charged by the Hungarian local taxing authorities, which were $0.1 and $0.2 million in the second quarters of fiscal year 2000 and 1999, respectively, as well as the statutory income taxes. The statutory income tax rate for operations in Hungary is 9%. The statutory income tax rate for operations in the United Kingdom is 31%. The Company anticipates earnings from the operations in the United Kingdom will be repatriated to the United States and is recording deferred taxes for the differences in income tax rates. The foregoing resulted in a net loss of $1.1 million for the second quarter of fiscal 2000 compared to a net loss of $1.0 million for the same period in fiscal 1999. Similarly, the Company reported net loss per share of ($0.06) on a basic and diluted basis for the second quarter of fiscal 2000 and fiscal 1999. The weighted average common shares outstanding increased to 18.7 million for the second quarter of fiscal 2000 compared to 16.2 million for the same period in fiscal year 1999 due to the issuance of 2.5 million common shares in connection with the acquisition of SP Systems on November 19, 1999. SIX MONTHS ENDED MARCH 31, 2000 COMPARED TO SIX MONTHS ENDED - ------------------------------------------------------------ MARCH 31, 1999 - -------------- The Company's sales increased 67% to $58.2 million in the first half of fiscal 2000 from $34.9 million in the first half of fiscal 1999. The acquisitions in the first quarter of fiscal 2000 accounted for $25.2 million of sales. Carbon fiber sales increased 7.5% ($0.9 million) to $12.6 million in the first half of fiscal 2000 from $11.7 million in the first half of fiscal 1999. The carbon fibers sales increase was due to higher sales volumes of product to the conductive plastics and aircraft brake markets. Sales of the Specialty Products business segment (acrylic and other products) produced at Zoltek Rt. decreased by 12% to $20.4 million in the first half of fiscal 2000 compared to $23.1 million in the first half of fiscal 1999. This decrease was principally due to volume reductions in the acrylic fiber markets. In addition, the Company converted its Mavilon acrylic fiber plant to carbon fiber precursor production during the last half of fiscal 1999, permanently removing the capacity from the acrylic textile fiber operation. Sales of the Mavilon acrylic fiber were approximately $4.2 million during the first half of fiscal 1999. The Mavilon acrylic fiber plant change did not result in an asset impairment charge. Gross profit increased 79% to $14.2 million in the first half of fiscal 2000 from $7.9 million in the corresponding period of fiscal 1999. The Composite Intermediates business segment acquisitions in the first half of fiscal 2000 accounted for $6.8 million of the reported gross profit. Gross profit from the Carbon Fiber and Specialty Products business segments decreased in the first half of fiscal 2000 compared to the first six months of fiscal 1999. Gross profit from the Specialty Products business segment was $4.1 million or a decrease of 1.8% less compared to the first six months of fiscal 1999. The principal factor was volume reductions from the Mavilon acrylic fiber plant. Gross profit on carbon fibers decreased by $0.5 million in the first half of fiscal 2000 compared to the gross profit for the corresponding period in fiscal 1999. Gross margin on the Specialty Products business segment increased to 20.1% of sales for the first half of fiscal 2000 compared to 18.0% of sales for the same period of fiscal 1999 due primarily to increases in selling prices. Gross margin on carbon fibers decreased to 26.0% of sales for the first half of fiscal 2000 compared to 32.0% of sales for the corresponding period of fiscal 1999, due primarily to decreases in the selling prices and product mix changes. The Company continued to incur costs related to the underutilized productive capacity for carbon fibers at the Abilene, Texas and Hungarian facilities. These costs include depreciation and other overhead associated with the unused capacity. These costs, which were separately identified on the income statement, were approximately $2.1 million during the first half of fiscal 2000 and $1.9 million during the first half of fiscal 1999. 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 during fiscal 2000. 13 Selling, general and administrative expenses increased approximately 72%, or $5.2 million, from $7.2 million in the first half of fiscal 1999 to $12.4 million in the first half of fiscal 2000. The acquisitions in the first quarter of fiscal 2000 accounted for $6.0 million of selling, general and administrative expenses. The decrease in expenses for the Carbon Fiber and Specialty Products business segments resulted from lower payroll, engineering and administrative costs. During the first half of fiscal 2000, the Company incurred expense of approximately $1.2 million related to the amortization of the goodwill and intangibles resulting from the acquisitions of SP Systems and EnTec. Interest expense was approximately $1.7 million for the first half of fiscal 2000 compared to $0.2 million in the same period of fiscal year 1999. The increase in interest expense resulted from the debt incurred as a result of the acquisition of SP Systems. Interest income was $0.4 million for the first half of fiscal 2000 compared to $0.6 million in the first half of fiscal 1999. The decrease in interest income was due to the use of funds to finance the acquisitions in the first half of fiscal 2000, as well as capital expenditures during fiscal 1999 and 2000. During the first half of fiscal 2000 capital expenditures totaled $6.1 million. In January 1999, the Company sold its nitrogen generation plant in Abilene, Texas for $5.0 million and leased it back under a seven-year operating lease. The Company did not realize a gain or loss on this sale. During the first half of fiscal 2000, the Company reported an income tax benefit of $0.8 million compared to income tax expense of $0.1 million in the first half of fiscal 1999 due to the reduced profit levels. The income tax benefit reflects the loss before income taxes reported for the period. The Company recognizes income taxes in the United States, United Kingdom and Hungary based on the income before income taxes. Included in the provision for income taxes were gross receipts taxes charged by the Hungarian local taxing authorities, which were $0.2 and $0.3 million in the first half of fiscal year 2000 and 1999, respectively, as well as the statutory income taxes. The statutory income tax rate for operations in Hungary is 9%. The statutory income tax rate for operations in the United Kingdom is 31%. The Company anticipates earnings from the operations in the United Kingdom will be repatriated to the United States and is recording deferred taxes for the differences in income tax rates. The foregoing resulted in a net loss of $2.3 million for the first half of fiscal 2000 compared to net loss of $1.0 for the first half of fiscal 1999. Similarly, the Company reported net loss per share of ($0.13) and ($0.06) on a basic and diluted basis for the first half of fiscal 2000 and fiscal 1999, respectively. The weighted average common shares outstanding increased to 18.0 million for the first half of fiscal 2000 compared to 16.2 million for fiscal year 1999 due to the issuance of 2.5 million common shares in connection with the acquisition of SP Systems on November 19, 1999. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- As part of the Company's strategic plan for commercializing carbon fibers and carbon fiber composites, the Company acquired a series of downstream businesses during the first quarter of fiscal 2000. On October 1, 1999, Zoltek acquired all of the outstanding stock of Cape Composites for approximately $0.3 million in cash and assumed all outstanding liabilities. Cape Composites is a manufacturer of carbon fiber prepreg composite materials. On November 9, 1999, Engineering Technology Corporation ("EnTec"), a Missouri corporation which is a wholly-owned subsidiary of the Company, acquired substantially all of the assets of Engineering Technology, Inc., a Utah corporation, for $2.7 million in cash. Engineering Technology, Inc. designs, manufactures and sells filament winding equipment. On November 15, 1999, EnTec also acquired all of the outstanding stock of Composite Machines Corporation (CMC) and Ramal International, Inc. (parent company of CMC) for approximately $0.4 million in cash and assumed all outstanding debt of approximately $0.3 million. CMC designs and manufactures filament winding and pultrusion equipment used in the production of composite parts. Subsequent to the acquisitions of Cape Composites, EnTec and CMC, the Company provided working capital of approximately $2.1 million for the payment of accounts payable, accrued expenses and outstanding debt to certain banks. The Company anticipates making additional working capital available to these acquired companies during fiscal 2000. The sources of these funds has been and is expected to be available cash balances and borrowings under the Company's credit facilities. 14 On November 19, 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. SP Systems designs and manufactures composite materials used in large-scale structures such as wind turbine blades and marine structures. On April 28, 2000, the Company acquired a 45% preferred membership interest in Hardcore Composites Operations LLC for $1.4 million cash and a note payable of $1.0 million. The Company anticipates providing additional funding of approximately $0.7 million for working capital. The Company has the option to purchase the remaining interest in 2002 based upon a pre-determined formula. Hardcore Composites Operations LLC designs and manufactures composite structures for the civil infrastructure market. Products manufactured include bridges, bridge decks, marine pilings, fender panels, piers and stay-in-place form work. In November 1999, the Company financed the SP Systems acquisition through a new $71.0 million credit facility with Mercantile Bank National Association. The credit facility, structured as a $35.0 million, 6-year acquisition term loan, a $26.0 million, 6-year revolving credit facility, and a $10.0 million, 6-year future acquisition term loan is secured by a pledge of 65% of the outstanding stock of the Company's international subsidiaries (Structural Polymer (Holding) Ltd. and Zoltek Rt.) in addition to substantially all of the assets of the Company's U.S. operations. Borrowings under the revolving credit facility are based on a formula of eligible accounts receivable and inventory of the Company and certain subsidiaries. Interest rates are tied to either Prime or LIBOR with a margin depending upon the Company's achievement of certain operating and financial benchmarks. At March 31, 2000, the interest rate was 8.26%. The loan agreement contains financial covenants, including financial covenants related to borrowings, future acquisitions, working capital, net worth, cash flow and fixed charge coverage. In addition, the credit facility restricts fixed asset purchases and requires lender consent for the payment of cash dividends. There is no requirement to maintain compensating balances under the credit facility, however, the Company will be required to pay a fee of 0.50% per annum on the unused portion of the total credit facility plus certain other administrative costs. The Company paid $0.71 million as a nonrefundable fee to the bank for the arrangement of the credit facility. Proceeds of $5.0 million, drawn in November 1999 under the new revolving credit facility, were also used to refinance certain existing bank debt of the Company and for working capital purposes. As of May 15, 2000, the Company has total outstanding borrowings of $9.5 million under the revolving credit facility. At March 31, 2000, the Company had an interest rate swap agreement outstanding with a notional amount of $23.3 million under which the Company paid a fixed rate of interest and received a floating rate of interest over the term of the interest rate swap agreement without the exchange of underlying notional amounts. The interest rate swap agreement in effect converted a portion of the acquisition term loan from a floating rate obligation to a fixed rate obligation at 6.51%. The fair value of $23.3 million swap agreement outstanding at March 31, 2000 was $0.3 million. The fair value of the interest rate swap agreement was not recognized in the consolidated financial statements at that time since the agreement was accounted for as a hedge. At March 31, 2000 the Company did not meet minimum EBITDA and the EBITDA to Funded Debt covenants of its credit agreement with Mercantile Bank National Association due primarily to delays in anticipated sales growth of the Composite Intermediates business and the impact of integration of the acquired businesses. A waiver of these violations was received on May 12, 2000. The Company has received a credit modification commitment from Mercantile Bank National Association and management expects that the modified agreement will be entered into by May 31, 2000. The proposed modified agreement, structured as a $34.1 million, 5.5-year acquisition term loan, and a $20.0 million, 5.5-year revolving credit facility will be secured by a pledge of 65% of the outstanding stock of the Company's international subsidiaries (Structural Polymer (Holding) Ltd. and Zoltek Rt.) in addition to substantially all of the assets of the Company's U.S. operations. Pursuant to the commitment, borrowings under the modified revolving credit facility will be based on a formula of eligible accounts receivable and inventory of the Company and certain subsidiaries. Interest rates are tied to either Prime or LIBOR with a margin depending upon the Company's achievement of certain operating and financial benchmarks. The modified loan agreement will contain financial covenants, including financial covenants related to borrowings, future acquisitions, working capital, net worth, cash flow and fixed charge coverage. In addition, the modified credit facility restricts fixed asset purchases and requires lender consent for the payment of cash dividends. There is no requirement to maintain compensating balances under the credit facility, however, the Company will be required to pay a fee of 0.50% per annum on the unused portion of the total credit facility plus certain other administrative costs. During fiscal 1999 and prior years, the Company's primary sources of liquidity were cash flow from operating activities and available borrowing capacity under credit facilities, supplemented with the net proceeds from three equity offerings, and long-term debt financing utilizing the equity in the Company's real estate properties. 15 The Company believes that its financial position remains adequate, with the anticipated credit facilities, to support the execution of its strategic expansion plans. At March 31, 2000, the Company reported working capital of $41.6 million compared to working capital of $43.9 million at September 30, 1999. Working capital at March 31, 2000 resulting from the recent acquisitions was approximately $9.5 million. The decrease in working capital from September 30, 1999 to March 31, 2000 was due primarily to the use of proceeds from the sale of short-term investments to finance the acquisitions of Cape Composites, EnTec and CMC (aggregate purchase price of $3.4 million) and capital expenditures of $6.1 million. Inventories increased from $28.5 million at September 30, 1999 to $39.2 million at March 31, 2000. The recent acquisitions accounted for $6.2 million of the increase. Carbon Fibers inventory increased $0.7 million while Specialty Products accounted for $0.8 million of the increase. The increase in carbon fibers inventories resulted from soft market conditions coupled with the newly added production capacity. The increase in the inventories of acrylic fibers and other products was principally attributable to the depressed acrylic market conditions in Western and Eastern Europe. The Company anticipates that the rate of inventory growth will decrease during the remainder of fiscal 2000 as a result of lower production rates. Marketable securities at March 31, 2000 amounted to $1.9 million compared to $7.1 million at September 30, 1999. At September 30, 1999, marketable securities primarily included U.S. Government Agency Notes with maturities longer than three months but less than twelve months and preferred stock. At March 31, 2000, marketable securities consisted of preferred stock. Other receivables of $1.7 million at March 31, 2000 consisted primarily of VAT and import duty refunds due from the taxing authorities compared to $0.4 million at September 30, 1999. Other assets at March 31, 2000 were $1.4 million. At September 30, 1999 other assets totaled $4.1 million. The decrease was primarily due to the elimination of notes receivable from Cape Composites of $2.6 million as a result of the acquisition on October 1, 1999. Other long-term liabilities are related to various supply agreements between the Company and its vendors as well as other deferred costs. Historically, cash used in investing activities has been expended for equipment additions and the expansion of the Company's carbon fibers production capacity. In the first six months of fiscal 2000, the Company made capital expenditures of $6.1 million compared to $9.0 million for the corresponding period in fiscal 1999. These expenditures were financed principally with cash from the secondary offering in September 1996 and from available credit facilities. In January 1999, the Company sold its nitrogen generation facility in Abilene, Texas to Southwest Bank for $5.0 million (actual construction cost) and leased it back under a seven-year operating lease. This sale and lease back did not result in a gain or loss. The Company used the funds for carbon fiber facility expansion and general corporate purposes. In February 1999, the Company's Board of Directors authorized a share repurchase program for up to 1,000,000 shares of the Company's common stock in the open market over an unspecified period of time as market conditions allow. The purpose of the repurchase plan is to meet the Company's obligations under its stock option plans, while minimizing dilution to shareholders. In connection with the approved repurchase, the Company purchased 15,000 shares of the Company's common stock in March 1999. The Company's credit facility requires the lender's consent for additional repurchases. The Company sold put options for 230,000 shares of the Company's common stock during the period beginning in February 1999 through September 1999. The put options allow the purchasers to exercise the options and sell the shares to the Company or let the options expire. All of these put options expired in calendar 1999 and January 2000 without being exercised. The Company had put options for 160,000 shares outstanding at September 30, 1999. The Company sold put options for 50,000 shares of the Company's common stock in December 1999, which expire on July 22, 2000. The Company repurchased these put options on March 1, 2000. There were no put options at March 31, 2000. IMPACT OF YEAR 2000 - ------------------- The Company has not currently experienced any material problems with its computer systems or trading partners associated with the Year 2000 compliance. There were no material expenditures during the second quarter of fiscal 2000 relating to Year 2000 compliance. The Company does not anticipate any material problems or expenditures relating to the Year 2000 compliance during fiscal 2000. OUTLOOK - ------- The recent downstream acquisitions will allow the Company to provide direct input into the composites value chain by supplying composite engineering and design technology, composite fabrication and processing technology and the ability to create integrated product solutions utilizing an entire range of composite materials and structures. 16 Indications from the marketplace are that long-term demand for carbon fibers and composite materials eventually will grow as forecasted by the Company. During the Company's multi-year growth program, from time to time demand may lag capacity growth, as new markets take time to develop. In the Company's view, this is neither unexpected nor undesirable during the development of significant new applications. The Company is working with several customers to develop major new applications that would require significant quantities of carbon fiber, not small incremental volume increases. Therefore, the Company believes it will be necessary to incur costs related to available capacity during the periods the new applications are being developed. The Company's carbon fiber and composite material sales expectations are based on a combination of the anticipated growth of existing customer demand and projected new applications development. During the first half of fiscal 2000 the Company's Composite Intermediates business segment experienced sales growth delays due to various customer production and product changeovers. The Company believes the production and technical difficulties have been resolved and anticipate continuation of growth trends from the wind energy markets during the second half of fiscal 2000. During the fourth quarter of fiscal 1999 the market prices of acrylonitrile (ACN) prices began to increase from their levels during the first three quarters of fiscal 1999. The Company experienced increased sales prices and related gross profit in the fourth quarter of fiscal 1999 and the first quarter of fiscal 2000. During the second quarter of fiscal 2000 ACN prices continued to increase from their levels during the first quarter of fiscal 2000. The Company was not able to pass sales price increases to the acrylic fiber markets and related gross profit declined. The Company expects market conditions to remain constrained for the second half of fiscal 2000. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to changes in interest rates primarily as a result of borrowing activities under its credit facility. The nature and amount of the Company's debt may vary as a result of future business requirements, market conditions and other factors. The extent of the Company's interest rate risk is not quantifiable or predictable because of the variability of future interest rates and business financing requirements, but the Company does not believe such risk is material. At March 31, 2000, the Company had an interest rate swap agreement outstanding with a notional amount of $23.3 million under which the Company paid a fixed rate of interest and received a floating rate of interest over the terms of the swap agreement without the exchange of underlying notional amounts. The interest rate swap agreement in effect converted a portion of the acquisition term loan from a floating rate obligation to a fixed rate obligation at 6.51%. The fair value of the swap agreement outstanding at March 31, 2000 was $0.3 million. The fair value of the interest rate swap agreement was not recognized in the consolidated financial statements at that time since the agreement was accounted for as a hedge. * * * The forward-looking statements contained in this report are inherently subject to risks and uncertainties. The Company's actual results could differ materially from those in the forward-looking statements. Potential risks and uncertainties consist of a number of factors, including the Company's ability to manage rapid growth and increase its carbon fibers markets on a timely and profitable basis. 17 ZOLTEK COMPANIES, INC. PART II. OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- The registrant's annual meeting of shareholders was held February 15, 2000. At such meeting, the shareholders considered and voted upon the following: 1. John L. Kardos, Linn Bealke and John F. McDonnell were reelected as directors of the registrant, with the results of the voting as follows:
Votes For Votes Withheld Abstain --------- -------------- ------- John L. Kardos 17,437,918 10,583 123,471 Linn Bealke 17,437,793 9,108 123,471 John F. McDonnell 17,437,138 12,233 123,471
The terms of the following directors of the registrant continued after the meeting: James W. Betts, Charles A. Dill and Zsolt Rumy. 2. The Amended and Restated Zoltek Companies, Inc. 1992 Long Term Incentive Plan was adopted with the results of the voting as follows:
Votes For Votes Withheld Abstain --------- -------------- ------- 17,172,069 354,608 54,350
Item 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (a) Exhibits: 10 Waiver To Credit Agreement 27 Financial Data Schedule (b) Reports on Form 8-K: No reports on Form 8-K were filed during the three months ended March 31, 2000. SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Zoltek Companies, Inc. (Registrant) Date: May 15, 2000 By: /s/ DANIEL D. GREENWELL ------------ ----------------------------------- Daniel D. Greenwell Chief Financial Officer 18 EX-10 2 WAIVER TO CREDIT AGREEMENT WAIVER TO CREDIT AGREEMENT This WAIVER TO CREDIT AGREEMENT dated as of May 12, 2000, (the "Waiver"), is entered into among ZOLTEK COMPANIES, INC., a ------ Missouri corporation ("Parent"), ZOLTEK CORPORATION, a Missouri ------ corporation, ZOLTEK INTERMEDIATES CORPORATION, a Missouri corporation, ZOLTEK PROPERTIES, INC., a Missouri corporation, CAPE COMPOSITES, INC., a California corporation, and ENGINEERING TECHNOLOGY CORPORATION, a Missouri corporation (each, individually a "Borrower" and, -------- collectively, the "Borrowers"), the LENDERS listed on the signature --------- pages hereof and MERCANTILE BANK NATIONAL ASSOCIATION, now known as Firstar Bank, in its capacity as Agent for the Lenders. WITNESSETH: WHEREAS, the Borrowers, the Lenders and the Agent are parties to that certain Credit Agreement dated as of November 19, 1999 (the "Agreement") pursuant to which the Lenders have made available --------- to Borrower a credit facility in the maximum aggregate principal amount of Seventy One Million Dollars ($71,000,000); and WHEREAS, Borrowers have requested the Lenders and the Agent to waive compliance with certain of the provisions of the Agreement; and WHEREAS, the Required Lenders and the Agent desire to waive compliance with certain provisions of the Agreement as requested by the Borrower; NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: Section 1. Definitions. Capitalized terms used and not ----------- otherwise defined in this Waiver are used as defined in the Agreement. Section 2. Waivers under the Agreement. --------------------------- 2.1 The Lenders and the Agent hereby waive the provisions of Section 7.1(i)(i) of the Agreement solely to the extent ----------------- necessary to waive the failure by Borrowers to attain, as of March 31, 2000, EBITDA (as calculated on a consolidated basis for Parent and its Consolidated Subsidiaries) of not less than $12,000,000. 2.2 The Lenders and the Agent hereby waive the provisions of Section 7.1(i)(ii) of the Agreement solely to the extent necessary to waive the failure by Borrowers to maintain, as of March 31, 2000, a ratio of Total Funded Debt to EBITDA (as calculated on a consolidated basis for Parent and its Consolidated Subsidiaries) of not greater than 3.75:1. 2.3 The Lenders and the Agent hereby waive the provisions of Sections 7.2(d) and 7.2(h) of the Agreement solely to the extent necessary to permit the purchase by Parent of 45% of the membership interests of Hardcore Composites Operations, L.L.C. ("Hardcore Composites") in connection with the purchase by ------------------- Hardcore Composites from Master Builders Inc. and SKW-MBT Operations, Inc. of the assets of their former Hardcore Composites division for a purchase price of $2,319,889. Said purchase price was paid as follows: $1,319,889 in cash at closing (which closing occurred on April 28, 2000); and $1,000,000 in the form of an unsecured promissory note payable by Hardcore Composites to Master Builders Inc. and SKW-MBT Operations, Inc., which note bears interest at the prevailing prime rate of interest announced by Firstar Bank, N.A. from time to time and is due and payable on April 28, 2001 (the "Hardcore -------- Composites Note"). Notwithstanding the provisions of Section --------------- 7.2(d) and Section 7.2(h), from and after the date hereof, Borrowers may not make any Acquisition of any Person without the prior written consent of the Required Lenders. 2.4 The Lenders and the Agent hereby waive the provisions of Section 7.2(l) of the Agreement solely to the extent necessary to permit the incurrence by Parent of unsecured Indebtedness in the amount of $1,500,000 from Southwest Bank in connection with the purchase of Hardcore Composites, which Indebtedness bears interest at the prevailing prime rate of interest announced by Southwest Bank from time to time and is due and payable on May 28, 2000. Borrowers covenant and agree that no payment shall be made by or on behalf of Borrower in respect of such Indebtedness upon the occurrence and during the continuance of an Event of Default. 2.5 The Lenders and the Agent hereby waive the provisions of Section 7.2(l) of the Agreement solely to the extent necessary to permit the Guarantee by Parent of the obligations of Hardcore Composites to Master Builders Inc. and SKW-MBT Operations, Inc. in respect of the Hardcore Composites Note. Borrowers hereby acknowledge and agree that (i) a default in the payment of any principal of or interest on the Hardcore Composites Note beyond any applicable period of grace provided with respect thereto or (ii) a default by Parent in the performance of or compliance with any term, provision, condition or covenant contained in the guarantee of the Hardcore Composites Note, shall constitute an Event of Default under the Agreement. 2.6 The Lenders and the Agent hereby waive the provisions of Section 7.2(h) of the Agreement solely to the extent necessary to permit the making of a loan by Parent in the amount of $725,938.79 to Hardcore Composites, which loan is evidenced by a promissory note payable by Hardcore Composites dated April 28, 2000. Such loan bears interest at the rate of 8% per annum and is due and payable on September 30, 2002. Section 3. Further Compliance. The waivers set forth in ------------------ Section 2 hereof are effective only in this specific instance and - --------- shall not operate as a waiver of compliance with Sections 7.1(i)(i), ------------------- 7.1(i)(ii), 7.2(d), 7.2(h) or 7.2(l) of the Agreement by Borrowers - ------------------------------------ from and after the date hereof. Section 4. Effectiveness. The effectiveness of this ------------- Waiver is subject to the satisfaction and occurrence of the following conditions precedent: 4.1 The Agent's receipt of executed counterparts of this Waiver which, when taken together, bear the signatures of the Borrowers, the Agent and the Required Lenders. 2 4.2 The Agent shall have received: (i) a copy of the Hardcore Composites Note, certified as true, correct and complete by the Secretary of Parent; (ii) a copy of the loan documents in respect of the loan to Parent from Southwest Bank, certified as true, correct and complete by the Secretary of Parent; (iii) a copy of the purchase agreement in respect of the purchase of the membership interests of Hardcore Composites and all documents and instruments executed in connection therewith, together with a copy of the operating or members agreement for Hardcore Composites, all certified as true, correct and complete by the Secretary of Parent; (iv) a copy of the note payable by Hardcore Composites to Parent in respect of the loan permitted pursuant to Section 2.6 above, certified as true, correct and complete by the Secretary of Parent; (v) an acknowledgment from Southwest Bank with regard to the prohibition on payment set forth in Section 2.4 above. Upon the satisfaction of the foregoing conditions precedent, this Waiver shall be effective until May 31, 2000. From and after May 31, 2000, this Waiver shall be of no further force or effect. Section 5. Representations and Warranties. Each of the ------------------------------ Borrowers represents and warrants that: 5.1 The representations and warranties of the Borrowers contained in Section 6 of the Agreement are correct in all --------- material respects on and as of the date hereof as if such representations and warranties had been made on and as of the date hereof (except to the extent that any such representations and warranties specifically relate to an earlier date), provided that with respect to Section 6.4 of the Agreement, it is assumed ----------- that the fiscal quarter referred to is the fiscal quarter ending March 31, 2000; and 5.2 the Borrowers are in compliance with all the terms and provisions set forth in the Agreement and no Default or Event of Default has occurred and is continuing (other than as specifically waived herein) or would result from the execution, delivery and performance of this Waiver. Section 6. Full Force and Effect. Except as expressly --------------------- waived hereby, all of the terms and conditions of the Agreement shall remain in full force and effect, and the same are hereby ratified and confirmed. Section 7. Counterparts. This Waiver may be executed in ------------ any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Section 8. Headings. The various headings of this -------- Waiver are inserted for convenience of reference only and shall not affect the meaning or interpretation of this Waiver or any provisions hereof. 3 IN WITNESS WHEREOF, the parties hereto have caused this Waiver to be executed by their respective authorized officers as of the day and year first above written. ZOLTEK COMPANIES, INC. By: /s/ Daniel D. Greenwell -------------------------------------- Daniel D. Greenwell Chief Financial Officer ZOLTEK CORPORATION By: /s/ Daniel D. Greenwell -------------------------------------- Daniel D. Greenwell Chief Financial Officer ZOLTEK INTERMEDIATES CORPORATION By: /s/ Daniel D. Greenwell -------------------------------------- Daniel D. Greenwell Chief Financial Officer ZOLTEK PROPERTIES, INC. By: /s/ Daniel D. Greenwell -------------------------------------- Daniel D. Greenwell Chief Financial Officer CAPE COMPOSITES, INC. By: /s/ Daniel D. Greenwell -------------------------------------- Daniel D. Greenwell Chief Financial Officer 4 ENGINEERING TECHNOLOGY CORPORATION By: /s/ Daniel D. Greenwell -------------------------------------- Daniel D. Greenwell Chief Financial Officer MERCANTILE BANK NATIONAL ASSOCIATION, now known as Firstar Bank, as Agent, as Swingline Lender and as a Lender By: /s/ R. Gordon Myers -------------------------------------- R. Gordon Myers Senior Vice President 5 EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS SEP-30-2000 OCT-01-1999 MAR-31-2000 2,471 1,950 24,533 (1,052) 39,223 72,810 116,658 23,777 215,159 31,223 43,436 187 0 0 136,172 215,159 58,151 58,151 43,973 59,627 0 0 1,688 (3,059) (752) (2,307) 0 0 0 (2,307) (.13) (.13)
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