10-K/A 1 zolt20131218_10ka.htm FORM 10-K/A zolt20130930_10k.htm

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-K/A

(Amendment No. 1)

 

Annual Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

For the fiscal year ended September 30, 2013

 

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 incorporation or organization)

(I.R.S. Employer 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

 

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class:

 Name of Each Exchange on Which Registered:

Common Stock, $.01 Par Value per Share  The Nasdaq Stock Market LLC

 

(Nasdaq Global Select Market)

 

Securities registered pursuant to Section 12(g) of the Act: None

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes☐ No☑ .

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes☐ No☑ .

 

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☑ 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.☑.

 

Indicate by check mark whether the registrant is a large accelerated filer, an “accelerated filer a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):

 

Large Accelerated Filer☐

 

Accelerated Filer☑

 

Non-Accelerated Filer☐

 

Smaller reporting company☐

 

 

 
 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   ☐ No   ☑.

 

State the aggregate market value of the voting stock held by non-affiliates of the registrant as of March 31, 2013: approximately $324 million.

 

Indicate the number of shares outstanding of each of the registrant's classes of common stock as of November 25, 2013: 34,394,422 shares of Common Stock, par value $.01 per share.

  

 
 

 

 

 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, 2013, as originally filed (the “Original Report”), solely to correct typographical errors in the opinions of Ernst & Young LLP contained in Part II, Item 8 “Financial Statements and Supplementary Data” that were inadvertently included in the Original Report.

 

This Form 10-K/A does not reflect any events occurring after the original filing of the Original Report or modify or update any of the disclosures affected by subsequent events. Information not modified or updated herein reflects the disclosures made at the time of the filing of the Original Report. Accordingly, this Form 10-K/A should be read in conjunction with all of the Registrant’s other periodic filings filed with the Securities and Exchange Commission, including the Original Report.

 

 
 

 

 

Item 8. Financial Statements and Supplementary Data

 

ZOLTEK COMPANIES, INC.
REPORT OF MANAGEMENT

 

Management of Zoltek Companies, Inc. is responsible for the preparation and integrity of the Company's financial statements. These statements have been prepared in accordance with generally accepted accounting principles and in the opinion of management fairly present the Company's financial position, results of operations, and cash flow.

 

The Company maintains accounting and internal control systems to provide reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition and that the financial records are reliable for preparing financial statements. The selection and training of qualified personnel and the establishment and communication of accounting and administrative policies and procedures are important elements of these control systems. As set forth under “Item 9A. Controls and Procedures” of this Annual Report on Form 10-K, the Company's Chief Executive Officer and Chief Financial Officer concluded that no material weaknesses existed as of September 30, 2013.

 

The Board of Directors, through its Audit Committee consisting solely of non-management directors, meets periodically with management and the Independent Registered Public Accounting Firm to discuss audit and financial reporting matters. To ensure independence, Ernst & Young LLP has direct access to the Audit Committee.

 

The Report of Ernst & Young LLP, Independent Registered Public Accounting Firm, on its audit of the accompanying financial statements follows. This report states that their audit was performed in accordance with the Standards of the Public Company Accounting Oversight Board (United States). These standards include consideration of internal control over financial reporting controls for the purpose of determining the nature, timing, and extent of auditing procedures necessary for expressing their opinion on the financial statements.

 

 

 

/s/ Zsolt Rumy

 

Zsolt Rumy

 

Chief Executive Officer

 

December 16, 2013

 

 

 
 

 

  

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Shareholders of Zoltek Companies, Inc.

 

We have audited the accompanying consolidated balance sheets of Zoltek Companies, Inc. as of September 30, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended September 31, 2013. Our audits also include the financial statement schedules listed in the Index at Item 15(a)(1). These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Zoltek Companies, Inc. at September 30, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the financial information set forth herein.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Zoltek Companies, Inc.’s internal control over financial reporting as of September 30, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework), and our report dated December 16, 2013 expressed an unqualified opinion thereon.

 

/s/ ERNST & YOUNG LLP

 

St. Louis, Missouri

December 16, 2013

 

 
 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Shareholders of Zoltek Companies, Inc.

 

We have audited Zoltek Companies, Inc.’s internal control over financial reporting as of September 30, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework)(the COSO criteria). Zoltek Companies, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, Zoltek Companies, Inc. maintained, in all material respects, effective internal control over financial reporting as of September 30, 2013, based on the COSO criteria.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Zoltek Companies, Inc. as of September 30, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the three years ended September 30, 2013 of Zoltek Companies, Inc. and our report dated December 16, 2013 expressed an unqualified opinion thereon.

 

/s/ ERNST & YOUNG LLP

 

St. Louis, Missouri

December 16, 2013

  

 
 

 

 

ZOLTEK COMPANIES, INC.

CONSOLIDATED BALANCE SHEET

(Amounts in thousands, except share and per share data)

 

   

September 30,

 
   

2013

   

2012

 

Assets

               

Current assets:

               

Cash and cash equivalents

  $ 32,291     $ 29,935  

Accounts receivable, less allowance for doubtful accounts of $177 and $223

    31,722       35,918  

Inventories, net

    71,945       67,942  

VAT receivable

    3,527       6,190  

Other current assets

    3,336       2,617  

Total current assets

    142,821       142,602  

Property and equipment, gross

    371,988       360,905  

Less: accumulated depreciation

    (162,367 )     (145,255 )

Property and equipment, net

    209,621       215,650  

Other assets

    423       436  

Total assets

  $ 352,865     $ 358,688  
                 

Liabilities and shareholders' equity

               

Current liabilities:

               

Current maturities of long-term debt

  $ 4,330     $ 4,161  

Trade accounts payable

    6,270       12,473  

Accrued expenses and other liabilities

    8,133       8,687  

Construction payables

    850       1,784  

Total current liabilities

    19,583       27,105  

Long-term debt

    19,380       22,978  

Hungarian grant liability

    6,083       6,777  

Deferred tax liabilties

    481       473  

Liabilities carried at fair value

    122       384  

Total liabilities

    45,649       57,717  

Commitments and contingencies (See Note 9)

               

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, 34,390,922 and 34,355,192 shares issued and outstanding in 2013 and 2012, respectively

    344       344  

Additional paid-in capital

    482,425       481,743  

Accumulated other comprehensive loss

    (45,500 )     (45,827 )

Accumulated deficit

    (130,053 )     (135,289 )

Total shareholders' equity

    307,216       300,971  

Total liabilities and shareholders' equity

  $ 352,865     $ 358,688  

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 
 

 

 

ZOLTEK COMPANIES, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(Amounts in thousands, except share and per share data)

 

   

Fiscal Year Ended September 30,

 
   

2013

   

2012

   

2011

 
                         

Net sales

  $ 140,451     $ 186,337     $ 151,686  

Cost of sales

    110,621       140,693       133,985  

Gross profit

    29,830       45,644       17,701  

Application and development costs

    7,736       7,046       8,578  

Selling, general and administrative expenses

    13,997       12,957       13,852  

Operating income (loss)

    8,097       25,641       (4,729 )

Other (expense) income:

                       

Interest expense, net

    (589 )     (265 )     (119 )

Gain (loss) on foreign currency transactions

    127       (553 )     1,526  

Other expense, net

    (1,037 )     (883 )     (555 )

Gain on liabilities carried at fair value

    -       94       1,214  

(Loss) income from continuing operations before income taxes

    6,598       24,034       (2,663 )

Income tax expense

    1,362       1,182       911  
                         

Net income (loss)

    5,236       22,852       (3,574 )
                         

Basic earnings (loss) per share

  $ 0.15     $ 0.67     $ (0.10 )
                         

Diluted earnings (loss) per share

  $ 0.15     $ 0.66     $ (0.10 )
                         

Weighted average common shares outstanding – basic

    34,374,775       34,358,367       34,378,288  
                         

Weighted average common shares outstanding – diluted

    34,623,325       34,451,367       34,378,288  

The accompanying notes are an integral part of the consolidated financial statements. 

 

 
 

 

 

ZOLTEK COMPANIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands) 

 

   

Fiscal year ended September 30

 
   

2013

   

2012

   

2011

 

Net income (loss)

  $ 5,236     $ 22,852     $ (3,574 )

Foreign currency translation adjustment

    65       (3,894 )     (8,168 )

Change in unrealized fair value of cash flow hedge, net of tax of $0

    262       (384 )     -  
                         

Comprehensive income (loss)

  $ 5,563     $ 18,574     $ (11,742 )

 

The accompanying notes are an integral part of the consolidated financial statements.  

 

 
 

 

 

 

ZOLTEK COMPANIES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Amounts in thousands)

 

   

Total

Shareholders’

Equity

   

Common

Stock

   

Additional

Paid-In

Capital

   

Accumulated

Other

Comprehensive

Loss

   

Accumulated

Deficit

 
                                         

Balance, September 30, 2010

  $ 292,698     $ 344     $ 480,302     $ (33,381 )   $ (154,567 )
                                         

Comprehensive loss

    (11,742 )                     (8,168 )     (3,574 )

Cash settlement of options

    (23 )     -       (23 )     -       -  

Stock option expense

    399       -       399       -       -  

Difference between compensation and change in liability for restricted stock awards

    215       -       215       -       -  
                                         

Balance, September 30, 2011

  $ 281,547     $ 344     $ 480,893     $ (41,549 )   $ (158,141 )
                                         

Comprehensive income (loss)

    18,574                       (4,278 )     22,852  

Cash proceeds from options

    4       -       4       -       -  

Stock option expense

    833       -       833       -       -  

Difference between compensation and change in liability for restricted stock awards

    13       -       13       -       -  
                                         

Balance, September 30, 2012

  $ 300,971     $ 344     $ 481,743     $ (45,827 )   $ (135,289 )
                                         

Comprehensive income (loss)

    5,563                       327       5,236  

Cash proceeds from options

    242       -       242       -       -  

Vesting of restricted stock

    79       -       79       -       -  

Stock option expense

    360       -       360       -       -  

Difference between compensation and change in liability for restricted stock awards

    1       -       1       -       -  
                                         

Balance, September 30, 2013

  $ 307,216     $ 344     $ 482,425     $ (45,500 )   $ (130,053 )

 

The accompanying notes are an integral part of the consolidated financial statements. 

 

 
 

 

 

ZOLTEK COMPANIES, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(Amounts in thousands)

 

   

Fiscal Year Ended September 30,

 
   

2013

   

2012

   

2011

 

Cash flows from operating activities:

                       

Net income (loss)

  $ 5,236     $ 22,852     $ (3,574 )

Adjustments to reconcile net income to net cash from operating activities:

                       

Depreciation

    18,130       17,842       17,795  

Amortization of financing fees and debt discount

    86       26       -  

Deferred taxes

    27       (77 )     65  

Gain on liabilities carried at fair value

    -       (94 )     (1,214 )

Foreign currency transaction losses (gains)

    323       860       (1,365 )

Stock compensation expense

    368       977       757  

Loss on disposal of assets

    -       635       262  

Changes in assets and liabilities:

                       

Decrease (increase) in accounts receivable

    4,201       (5,990 )     (8,667 )

Increase in inventories

    (3,988 )     (20,651 )     (10,344 )

Decrease (increase) in other current assets and other assets

    1,870       1,490       (3,338 )

(Decrease) increase in trade accounts payable

    (6,196 )     (1,056 )     6,449  

(Decrease) increase in accrued expenses and other liabilities

    (468 )     581       (43 )

Net cash provided (used) by operations

    19,589       17,395       (3,217 )
                         

Cash flows from investing activities:

                       

Purchases of property and equipment

    (13,017 )     (22,357 )     (8,177 )

(Decrease) increase in construction payables

    (934 )     757       121  

Proceeds received from sale of fixed assets

    -       -       24  

Proceeds received from Hungarian grant

    -       -       22  

Net cash used in investing activities

    (13,951 )     (21,600 )     (8,010 )
                         

Cash flows from financing activities:

                       

Payment of financing fees

    -       (258 )     -  

(Repayment) borrowings of credit lines

    -       (8,394 )     8,394  

Borrowings of notes payable

    -       26,499       -  

Repayment of notes payable

    (3,424 )     (333 )     (981 )

Cash settlement of restricted shares

    -       (114 )     (245 )

Cash proceeds from (settlement of) stock options

    242       4       (35 )

Net cash (used) provided in financing activities

    (3,182 )     17,404       7,133  
                         

Effect of exchange rate changes on cash and cash equivalents

    (100 )     (244 )     (460 )

Net increase (decrease) in cash and cash equivalents

    2,356       12,955       (4,554 )

Cash and cash equivalents at beginning of year

    29,935       16,980       21,534  

Cash and cash equivalents at end of year

  $ 32,291     $ 29,935     $ 16,980  
                         

Supplemental disclosures of cash flow information:

                       

Net cash paid during the year for:

                       

Interest

  $ 1,306     $ 447     $ 135  

Income taxes

    1,606       1,395       972  

 

The accompanying notes are an integral part of the consolidated financial statements. 

 

 
 

 

 

ZOLTEK COMPANIES, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. GENERAL

 

MERGER AGREEMENT WITH TORAY INDUSTRIES, INC. 

 

Merger Agreement and Plan

 

The agreement and plan of merger, dated as of September 27, 2013, by and among Zoltek, Toray and TZ Acquisition Corp., contemplates a merger under which Merger Sub, a wholly-owned subsidiary of Toray, will merge with and into Zoltek. Zoltek will survive the merger as a wholly-owned subsidiary of Toray.

  

At the effective time of the merger, the amended and restated articles of incorporation of Zoltek will be amended in the form agreed among Zoltek, Toray and Merger Sub, until subsequently amended in accordance with their terms or by applicable law. The by-laws of Merger Sub in effect immediately before the effective time of the merger will be the by-laws of the surviving corporation, until amended in accordance with their terms or by applicable law, except that they will be amended to change the name of the surviving corporation to “Zoltek Companies, Inc.”

 

The directors of Merger Sub immediately before the effective time of the merger will, from and after the effective time of the merger, be the initial directors of the surviving corporation. Our officers immediately before the effective time of the merger will, from and after the effective time of the merger, be the initial officers of the surviving corporation.

 

Closing and Effective Time of the Merger

 

The merger will become effective upon the filing of articles of merger with the Secretary of State of the State of Missouri in accordance with the Missouri law or at such later time as Zoltek, Toray and Merger Sub agree and specify in the articles of merger. The closing of the merger will take place no later than the second business day following the satisfaction or waiver in accordance with the merger agreement of all of the conditions to closing of the merger (the Company expects the Merger to close in the first calendar quarter of 2014), other than conditions that by their terms are to be satisfied at the closing, but subject to the satisfaction or waiver of the conditions.

 

Conversion of Shares

 

Except for (1) any shares owned by Toray, Merger Sub or any other subsidiary of Toray, (2) shares owned by any shareholder who has properly exercised appraisal rights with respect to his, her or its shares in accordance with Section 351.455 of the Missouri law and (3) shares owned by Zoltek in treasury or by direct or indirect wholly-owned subsidiaries of Zoltek, all shares of Zoltek common stock outstanding immediately before the effective time of the merger will be converted into the right to receive $16.75 in cash, without interest and less any applicable withholding tax.

 

Each share of our common stock owned by Zoltek in treasury and any share of our common stock owned by Toray, Merger Sub or any other subsidiary of Toray will be canceled and no payment will be made with respect to such shares, subject to the right of record holders of dissenting shares to demand appraisal with respect to their dissenting shares. Each share of common stock of Merger Sub issued and outstanding immediately before the effective time of the merger will be converted into one validly issued, fully paid and nonassessable share of common stock of Zoltek as the surviving corporation in the merger.

 

ORGANIZATION AND PRINCIPLES OF CONSOLIDATION 

 

Zoltek Companies, Inc. is a holding company, which operates through wholly-owned subsidiaries, Zoltek Corporation, Zoltek Zrt., Zoltek de Mexico SA de CV, Zoltek de Occidente SA de CV, Engineering Technology Corporation (“Entec Composite Machines”), Zoltek Properties, Inc. and Zoltek Automotive, LLC. Zoltek Corporation (“Zoltek”) develops, manufactures and markets carbon fibers and technical fibers in the United States. Carbon fibers are a low-cost but high performance reinforcement for composites used as the primary building material in everyday commercial products. Technical fibers are an intermediate product used in heat-resistant applications such as aircraft brakes. Zoltek Zrt. is a Hungarian subsidiary that manufactures and markets carbon fibers and technical fibers and manufactures acrylic fiber precursor raw material used in production of carbon fibers and technical fibers. Zoltek de Mexico SA de CV and Zoltek de Occidente SA de CV are Mexican subsidiaries that manufacture carbon fiber and precursor raw material. Entec Composite Machines manufactures and markets filament winding and pultrusion equipment used in the production of large volume composite parts. The Company’s primary sales markets are in Europe and the United States; however, the Company has an increasing presence in Asia. Unless the context otherwise indicates, references to the “Company” are to Zoltek Companies, Inc. and its subsidiaries.

  

 
 

 

 

 

The Consolidated Financial Statements of the Company include the operations of its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current year presentation.

 

USE OF ESTIMATES

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that management make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates and assumptions.

 

REVENUE RECOGNITION

 

Sales transactions are initiated through customer purchase orders or sales agreements which are based on fixed pricing terms. The Company recognizes sales of manufactured products on the date risk of ownership to the product transfers to the customer. Revenues are reported net of any value-added tax or other such tax assessed by a governmental authority on our revenue-producing activities. Costs associated with shipping and handling are included in costs of sales. Revenues generated by Entec Composite Machines are recognized on a percentage of completion basis based on the percentage of total project cost incurred to date which include change orders, revisions to estimates and provisions for anticipated losses on contracts and represented 4% or less of consolidated revenues for all years presented. Revenue from sales of consigned inventory is recognized upon the use of the product by the consignee or according to terms of the contract.

 

ACCOUNTS RECEIVABLE

 

The Company reviews its accounts receivable balance on a quarterly basis to identify any specific customers for collectability issues. If the Company deems that an amount due from a customer is uncollectible, the amount is recorded as expense in the statement of operations. The Company evaluates the collectability of our accounts receivable for each of our segments based on a combination of factors. In circumstances where we are aware of a specific customer's inability to meet its financial obligations to us (e.g., bankruptcy filing or substantial downgrading of credit), we record a specific reserve for bad debts against the amounts due reducing the net recognized receivable to the amount we estimate will be collected. For all other customers, we estimate reserves for bad debts based on the length of time receivables have been past due and our experience with collection. We incurred bad debt expense on accounts receivable of less than $0.1 million for fiscal 2013, $0.2 million for fiscal 2012 and less than $0.1 million for fiscal 2011.

 

CONCENTRATION OF CREDIT RISK

 

Zoltek's carbon fiber products are primarily sold to customers in the composite industry and its technical fibers are primarily sold to customers in the aerospace industry. Entec Composite Machines' products are primarily sold in the composite industry. The Company performs ongoing credit evaluations and generally requires letters of credit for significant export sales to new customers. The Company maintains reserves for potential credit losses and such losses have been within management's expectations.

 

In fiscal 2013, 2012 and 2011, we reported net sales of $61.8 million, $86.6 million and $42.7 million, respectively, to Vestas Wind Systems, a leading wind turbine manufacturer, which represented 44.0%, 46.5% and 28.1% of our net sales, respectively, during these years. The related open accounts receivable balances at September 30, 2013 and 2012 were $17.6 million and $22.3 million, respectively. In fiscal 2011, we reported net sales of $15.8 million, which represented 10.4% of our total consolidated net sales to Saertex GMBH & Company, a manufacturer of fabrics for the composite industry, including materials for production of wind turbine blades. There was no material open accounts receivable balance from this customer at September 30, 2013 and 2012. These were the only customers that represented greater than 10% of consolidated net sales during these years.

 

CASH AND CASH EQUIVALENTS

 

Cash equivalents include certificates of deposit which have initial maturities of three months or less. Cash equivalents are stated at cost plus accrued interest, which approximates market value. The Company deposits its temporary cash investments with high credit quality financial institutions, however at times, such investments may be in excess of the Federal Deposit Insurance Corporation insurance limit for U.S. banks and the National Deposit Insurance Fund of Hungary limit for Hungarian Banks. As of September 30, 2013 and 2012 the Company had $31.5 million and $29.2 million of cash in these deposit accounts, respectively.

 

INVENTORIES

 

Inventories are valued at the lower of cost or market and are removed from inventory under the first-in-first-out method (“FIFO”). Cost of inventory includes material, labor and overhead. The Company recorded inventory valuation reserves of $0.8 million and $0.4 million as of September 30, 2013 and 2012, respectively, to reduce the carrying value of inventories to a net realizable value. This evaluation includes detailed analyses projected selling prices, sales levels by product and projections of future demand over specific time horizons that consider the potential for obsolescence of the product. The estimate of future demand is compared to work-in-process and finished goods inventory levels to determine the amount, if any, of obsolete or excess inventory. We consider the demand forecast in the management of our manufacturing schedules to facilitate consistency between inventory valuation and production decisions. Product-specific facts and circumstances reviewed in the inventory valuation process include a review of the customer base, customer acceptance of our products, as well as an assessment of the selling price in relation to the product cost. If our demand forecast for specific products is greater than actual demand and we fail to reduce manufacturing output accordingly, we could be required to write-off inventory, which would negatively impact our gross margin.

  

 
 

 

 

We perform these analyses and projections based on current information from our key customers and through detailed discussions with our sales force with emphasis on inventory aging and developing market trends. 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 determination is made. Historically, variability of demand of products has not caused material write-downs or reserves for inventory balances.

 

PROPERTY AND EQUIPMENT

 

Property and equipment are stated at cost. Cost includes expenditures necessary to make the property and equipment ready for its intended use. Expenditures to improve the asset or extend the useful life are capitalized, including interest on funds borrowed to finance the acquisition or construction of major capital additions. The Company did not record any capitalized interest in fiscal 2013, 2012 or 2011. Maintenance and repairs are expensed as incurred. When property is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts and any profit or loss on disposition is credited or charged to income.

 

The Company provides for depreciation by charging amounts sufficient to amortize the cost of properties placed in service over their estimated useful lives using straight-line methods. The range of estimated useful lives used in computing depreciation is as follows:

 

 
   

Years

Buildings and improvements

  30 - 40

Machinery and equipment

  3 - 20

Furniture and fixtures

  7 - 10

Computer hardware and software

  2 - 5

 

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 long-lived assets, a loss is recognized for the difference between the fair value and the carrying value of the asset. No impairment charges for long-lived assets were recorded during fiscal 2013, 2012 and 2011.

 

EARNINGS PER SHARE

 

In accordance with ASC 260, the Company calculates diluted earnings per share including the impact of the Company's potential stock equivalents. The Company has outstanding stock options and warrants at September 30, 2013, 2012 and 2011, which are not included in the determination of diluted earnings per share because the impact of these potential additional shares is anti-dilutive.

 

FINANCIAL INSTRUMENTS

 

The Company does not hold any financial instruments for trading purposes. The carrying value of cash, accounts receivable, interest rate swaps and accounts payable approximated their fair value at September 30, 2013 and 2012. The fair value of the interest rate swap is determined using an internal valuation model which relies on the expected LIBOR yield curve as the most significant input. Additionally included in the model are estimates of counterparty and the Company’s non-performance risk. Model inputs are changed only when corroborated by market data.

 

The Company adopted the amended guidance of ASC Topic 815-40 (formerly referred to as EITF Issue No. 07-05, “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock,”) on October 1, 2009. In connection with the adoption, the Company determined that its outstanding warrants as of the adoption date, which include warrants issued in May 2006, July 2006, October 2006 and December 2006, are not indexed to the Company’s own stock. Accordingly, these warrants should be treated as a liability carried at fair value, which requires separate accounting pursuant to ASC 815. The fair value of the warrants was reclassified from equity to a liability carried at fair value on October 1, 2009.

 

APPLICATION AND DEVELOPMENT EXPENSES

 

The Company is actively pursuing the development of a number of applications for the use of its carbon fibers and related products. The Company is executing several internal and collaborative developmental strategies to further the use of carbon fiber and commercial and industrial products made from carbon fiber. As a result, the Company incurs certain costs for research, development and engineering of products and manufacturing processes. These costs are expensed as incurred and totaled approximately $7.7 million, $7.0 million and $8.6 million for fiscal 2013, 2012, and 2011, respectively. Application and development expenses are presented as an operating item on the Company's consolidated statement of operations.

  

 
 

 

 

FOREIGN CURRENCY TRANSLATION

 

The Company's Hungarian subsidiary, Zoltek Zrt., has a functional currency of the Hungarian Forint (HUF). As a result, the Company is exposed to foreign currency risks related to this investment. The consolidated balance sheet of Zoltek Zrt. was translated from HUF to US dollars, at the exchange rate in effect at the applicable balance sheet date, while its consolidated statements of operations were translated using the average exchange rates in effect for the periods presented. The related translation adjustments are reported as other comprehensive income (loss) within shareholders' equity. Gains and losses from foreign currency transactions of Zoltek Zrt. are included in the results of operations as other income (expense). Despite volatility throughout the year, the HUF retained the same valuation against the US dollar at the applicable balance sheet date in fiscal 2013 compared to fiscal 2012. Hungarian assets net of liabilities, excluding the long-term intercompany loan (see Part II. Item 7A. Quantitative and Qualitative Disclosures About Market Risk) were approximately $142 million as of September 30, 2013.

 

The functional currency of Zoltek de Mexico is the US dollar. Exchange rate gains and losses are recognized on transactions in currencies other than the US dollar and included in operations for the period in which the exchange rates changed.

 

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. The Company classifies income tax-related interest and penalties below operating income.

 

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

 

In July 2012, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) No. 2012-02, which permits an entity to make a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset, other than goodwill is impaired. If an entity concludes, based on an evaluation of all relevant qualitative factors, that it is not more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, it will not be required to perform the quantitative impairment for that asset. The ASU is effective for impairment tests performed for fiscal years beginning after September 15, 2012 (fiscal year 2013), with early adoption permitted. The adoption of ASU 2012-02 did not have an impact on the Company’s consolidated financial statements.

 

In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. Under this standard, entities are required to disclose additional information with respect to changes in accumulated other comprehensive income (“AOCI”) balances by component and significant items reclassified out of AOCI. Expanded disclosures for presentation of changes in AOCI involve disaggregating the total change of each component of other comprehensive income (loss) as well as presenting separately for each such component the portion of change in AOCI related to (1) amounts reclassified into income and (2) current-period other comprehensive income. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2012 (the Company’s current fiscal year ended September 30, 2013), with early adoption permitted. The Company will adopt this standard in the first quarter of fiscal year 2014. The Company does not expect that the new standard will have a material impact on the Company’s consolidated financial statements.

 

In July 2013, the FASB issued ASU No. 2013-10, Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes. The amendments in this update permit the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge accounting purposes in addition to U.S. Treasury (“UST”) and London Interbank Offered Rate (“LIBOR”). The amendments also remove the restriction on using different benchmark rates for similar hedges. The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The Company has not entered into any new hedging relationships since July 17, 2013.

 

In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This new standard requires the netting of unrecognized tax benefits against a deferred tax asset for a loss or other carryforward that would apply in settlement of the uncertain tax positions. Under the new standard, unrecognized tax benefits will be netted against all available same-jurisdiction loss or other tax carryforwards that would be utilized, rather than only against carryforwards that are created by the unrecognized tax benefits. The Company does not expect that the new standard will have a material impact on the Company’s consolidated financial statements.

  

 
 

 

  

2. INVENTORIES

 


 

Inventories consist of the following (amounts in thousands):

 
   

September 30,

 
   

2013

   

2012

 

Raw materials

  $ 5,414     $ 8,631  

Work-in-process

    13,135       15,192  

Finished goods

    49,430       40,787  

Consigned inventory

    3,227       2,896  

Supplies and other

    739       436  
    $ 71,945     $ 67,942  

 

3. PROPERTY, PLANT AND EQUIPMENT

 


 

Property, plant and equipment consist of the following (amounts in thousands):  

 
   

September 30,

 
   

2013

   

2012

 

Land

  $ 14,511     $ 14,435  

Buildings and improvements

    74,178       70,214  

Machinery and equipment

    270,641       256,977  

Furniture, fixtures & computer equipment

    8,333       7,753  

Spare parts

    1,098       1,160  

Construction-in-progress

    3,227       10,366  
    $ 371,988     $ 360,905  

Less: accumulated depreciation

    (162,367 )     (145,255 )
    $ 209,621     $ 215,650  

 

4. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION

 


 

The Company’s strategic business units are based on product lines and comprised of three reportable segments: carbon fibers, technical fibers and corporate/other products. The carbon fibers segment manufactures commercial carbon fibers used as reinforcement material in composites. The technical fibers segment manufactures oxidized acrylic fibers and specialty carbon fibers used to manufacture aircraft brake pads and for heat/fire barrier applications. These two segments also facilitate development of product and process applications to increase the demand for carbon fibers and technical fibers. The carbon fibers and technical fibers segments’ production facilities are located geographically in the United States, Hungary and Mexico. The remaining business represented in the corporate/other products segment relates to water treatment and electrical services provided by the Hungarian operations and costs associated with the corporate headquarters.  

 

 
 

 

 

 

Management evaluates the performance of its segments on the basis of operating income (loss) contribution. The following tables present financial information on the Company’s segments as of September 30, 2013 and 2012 and for the fiscal years ended September 30, 2013, 2012 and 2011 (amounts in thousands):

 
   

Fiscal year ended September 30, 2013

 
   

Carbon

Fibers

   

Technical

Fibers

   

Corporate/

Other

   

Total

 

Net sales

  $ 106,205     $ 32,498     $ 1,748     $ 140,451  

Cost of sales

    87,105       21,943       1,573       110,621  

Gross profit

    19,100       10,555       175       29,830  

Operating income (loss)

    12,442       10,036       (14,381 )     8,097  

Depreciation

    15,072       1,673       1,385       18,130  

Capital expenditures

    5,066       5,465       2,486       13,017  

 

   

Fiscal year ended September 30, 2012

 
   

Carbon

Fibers

   

Technical

Fibers

   

Corporate/

Other

   

Total

 

Net sales

  $ 151,494     $ 32,425     $ 2,418     $ 186,337  

Cost of sales

    117,431       20,853       2,409       140,693  

Gross profit

    34,063       11,572       9       45,644  

Operating income (loss)

    27,818       10,328       (12,505 )     25,641  

Depreciation

    15,986       1,351       505       17,842  

Capital expenditures

    17,434       1,208       3,715       22,357  

 

   

Fiscal year ended September 30, 2011

 
   

Carbon

Fibers

   

Technical

Fibers

   

Corporate/

Other

   

Total

 

Net sales

  $ 118,986     $ 30,483     $ 2,217     $ 151,686  

Cost of sales

    106,832       25,500       1,653       133,985  

Gross profit

    12,154       4,983       564       17,701  

Operating income (loss)

    2,918       3,673       (11,320 )     (4,729 )

Depreciation

    15,658       1,414       723       17,795  

Capital expenditures

    6,574       779       824       8,177  

 

   

Total Assets

 
   

Carbon

Fibers

   

Technical

Fibers

   

Corporate/

Other

   

Total

 

September 30. 2013

  $ 288,544     $ 44,946     $ 19,375     $ 352,865  

September 30. 2012

  $ 301,440     $ 31,597     $ 25,651     $ 358,688  

 

Sales, long-lived assets, and net assets by geographic area, consist of the following as of and for each of the fiscal years ended September 30, 2013, 2012 and 2011 (amounts in thousands):

 
   

2013

   

2012

   

2011

 
   

Net

Sales(a)

   

Net Long

Lived

Assets(b)

   

Net Assets

   

Net Sales(a)

   

Net Long

Lived

Assets(b)

   

Net Assets

   

Net Sales(a)

   

Net Long

Lived

Assets(b)

   

Net Assets

 

United States

  $ 61,195     $ 42,233     $ 71,227     $ 72,269     $ 47,645     $ 82,337     $ 66,342     $ 41,403     $ 74,232  

Hungary

    *       91,779       142,424       *       96,394       135,521       *       98,326       126,589  

Germany

    24,873       -               34,600       -       -       26,250       -       -  

Other Europe

    35,837       -               56,030       -       -       45,761       -       -  

Asia

    15,938       -               21,374       -       -       11,266       -       -  

Mexico

    *       75,609       93,565       *       71,611       83,113       *       75,354       80,726  

Other areas

    2,608       -               2,064       -       -       2,067       -       -  

Total

  $ 140,451     $ 209,621     $ 307,216     $ 186,337     $ 215,650     $ 300,971     $ 151,686     $ 215,083     $ 281,547  

 


(a)

Revenues are attributed to countries based on the delivery location of the customer.

(b)

Property and equipment net of accumulated depreciation based on country location of assets.

*

Net sales for this country were less than 10% of total sales. Such sales were aggregated into “Other Europe,” “Asia” or “Other areas.”

  

 
 

 

 

5.  SUMMARY OF QUARTERLY RESULTS (UNAUDITED)

 


 

(Amounts in thousands, except per share data) 

 

Fiscal year 2013

 

1st Quarter

   

2nd Quarter

   

3rd Quarter

   

4th Quarter

   

Total

 

Net sales

  $ 35,877     $ 33,306     $ 30,310     $ 40,958     $ 140,451  

Gross profit

    9,077       7,032       6,202       7,519       29,830  

Net income (loss)

    2,977       3,306       (897 )     (150 )     5,236  
                                         

Basic income (loss) per share

  $ 0.09     $ 0.09     $ (0.03 )   $ 0.00     $ 0.15  
                                         

Diluted income (loss) per share

  $ 0.09     $ 0.09     $ (0.03 )   $ 0.00     $ 0.15  

 

Fiscal year 2012

 

1st Quarter

   

2nd Quarter

   

3rd Quarter

   

4th Quarter

   

Total

 

Net sales

  $ 47,046     $ 47,014     $ 48,078     $ 44,199     $ 186,337  

Gross profit

    13,178       10,968       11,278       10,220       45,644  

Net income

    9,703       3,338       5,566       4,245       22,852  
                                         

Basic income per share

  $ 0.28     $ 0.10     $ 0.16     $ 0.13     $ 0.67  
                                         

Diluted income per share

  $ 0.28     $ 0.10     $ 0.16     $ 0.12     $ 0.66  

 

Fiscal year 2011

 

1st Quarter

   

2nd Quarter

   

3rd Quarter

   

4th Quarter

   

Total

 

Net sales

  $ 32,862     $ 37,099     $ 38,593     $ 43,132     $ 151,686  

Gross profit

    4,074       2,447       4,452       6,728       17,701  

Net (loss) income

    (1,561 )     (5,107 )     (1,461 )     4,555       (3,574 )
                                         

Basic and diluted (loss) income per share

  $ (0.05 )   $ (0.15 )   $ (0.04 )   $ 0.14     $ (0.10 )

 

 

 

6. Earnings Per Share

 


 

 In accordance with ASC 260, the Company has evaluated its diluted (loss) income per share calculation. The Company had outstanding options at September 30, 2013, 2012 and 2011 and outstanding warrants at September 30, 2012 and 2011, which were not included in the determination of diluted income (loss) per share for the fiscal 2013, 2012 and 2011 because the shares were anti-dilutive. Had these securities been dilutive, an additional 0.1 million, 1.8 million and 0.5 million, respectively, would have been included in the Company’s diluted income (loss) per share calculation for those years.

 

The following is the diluted impact of the options and warrants on net income (loss) per share for the fiscal years ended September 30, 2013, 2012 and 2011 respectively: 

 

 
   

Fiscal year ended September 30,

 
   

2013

   

2012

   

2011

 

Numerators:

                       

Net (loss) income

  $ 5,236     $ 22,852     $ (3,574 )
                         

Denominators:

                       

Average shares outstanding – basic

    34,375       34,358       34,378  

Impact of stock options

    248       93       -  

Average shares outstanding – diluted

    34,623       34,451       34,378  
                         

Basic earnings (loss) per share

  $ 0.15     $ 0.67     $ (0.10 )
                         

Diluted earnings (loss) per share

  $ 0.15     $ 0.66     $ (0.10 )

  

 
 

 

 

7. FINANCING TRANSACTIONS

 


 

Hungarian Grant

 

The Hungarian government has pledged a grant of 2.9 billion Hungarian Forint (“HUF”) to Zoltek’s Hungarian subsidiary, which translated at the September 30, 2013 exchange rate, is approximately $13.1 million. The grant is intended to provide a portion of the capital resources to modernize the subsidiary’s facility, establish a research and development center, and support buildup of manufacturing capacity of carbon fibers. Zoltek’s Hungarian subsidiary did not receive any grant funding during fiscal 2013 and 2012 and received approximately HUF 0.1 billion in grant funding during fiscal 2011. As of September 30, 2013, Zoltek Zrt. had received an aggregate of approximately HUF 2.6 billion ($11.7 million) in funding pursuant to the grant. These funds have been recorded as a liability on the Company’s consolidated balance sheet. The Company has presented bank guarantees amounting to 120% of the amount of the grant as received.

 

The Hungarian subsidiary may be required to repay all or a portion of the grant if, among other things, the Hungarian subsidiary: fails to obtain revenue targets; fails to employ an average annual staff of at least 1,200 employees (as of September 30, 2013 Zoltek Zrt. has fewer than 800 employees); fails to utilize regional suppliers for at least 45% of its purchases; fails to obtain consent from the Hungarian government prior to selling assets created with grant funds; fails to use grant funds in accordance with the grant agreement; fails to provide appropriate security for the grant; makes or made an untrue statement or supplies or supplied false data in the grant agreement, grant application or during the time of the grant; defaults on its obligations by more than 30 days; withdraws any consents it gave in the grant agreement; or causes a partial or complete failure or hindrance of the project that is the subject of the grant. These targets must be achieved during a five-year measurement period from October 2013 to October 2018. In November 2013, we petitioned the Hungarian government to amend the current grant requirements, specifically lower the required employment levels and separate each year into its own measurement period rather than a single five-year measurement period. Whether or not our petition is approved by the Hungarian government, we expect that Zoltek Zrt. will comply with the requirements of the grant agreement during the measurement period. If Zoltek Zrt. is unable to comply with the grant agreement, it would be required to pay back all or a portion of the grant funds with possible interest which as of September 30, 2013 could total up to $16.6 million.

 

Financing Activity

 

Hungarian Financing

 

On June 15, 2012, Zoltek Zrt. completed an amended credit facility with Raiffeisen Bank Zrt. (the “Lender”) pursuant to which Zoltek Zrt. and the Lender entered into a Credit Facility Agreement, dated as of June 1, 2012, and a Restated and Amended Uncommitted Credit Line Agreement, dated as of June 1, 2012.  Under the credit facility, the Lender agreed to provide Zoltek Zrt.: (1) a term facility in the maximum amount of 13.6 million EUR ($18.4 million at the September 30, 2013 exchange rate) (the “Term Facility”) and (2) a multicurrency overdraft facility in the amount of up to 1.12 billion HUF ($5.1 million at the September 30, 2013 exchange rate) (the “Revolving Facility”).

 

The Term Facility is a five-year term loan and bears interest at 4.17%.  Principal under the Term Facility is payable semi-annually in equal installments.  The Revolving Facility is a revolving credit facility that expires on March 29, 2013 and has a total commitment of 1.120 billion HUF subject to a borrowing base. In addition to the Term Facility and the Revolving Facility, Zoltek Zrt. has obtained from the lender a bank guaranty in the amount of HUF 3.48 billion ($15.7 million at the September 30, 2013 exchange rate) as required by the Hungarian government grant.  The obligations of Zoltek Zrt. under this credit facility are guaranteed by the Company.

 

This credit facility contains representations and warranties, and contains a requirement that Zoltek Zrt. maintain a minimum current asset ratio and minimum annual EBITDA, along with other covenants. The Company was in compliance with all covenants as of September 30, 2013. Zoltek Zrt. had previously maintained a credit facility with the Lender, which expired May 30, 2012 and the facility was replaced with the new facility. As of September 30, 2013, the Company had borrowed $14.7 million under this credit facility.

 

US Financing

 

On March 30, 2012, the Company entered into a $10 million term loan with Enterprise Bank & Trust (the “Enterprise Loan”) secured by the real property associated with its facilities in the St. Louis, Missouri area. The Enterprise Loan is a seven-year term loan maturing March 30, 2019. Principal of the Enterprise Loan is payable monthly with a balloon payment due at maturity. The Enterprise Loan bears interest at a one-month LIBOR rate, plus 3%. The Company contemporaneously entered into a swap agreement that fixes the interest rate on the Enterprise Loan at 4.75% per annum. The loan agreement contains representations and warranties, and contains a requirement that the Company, on a consolidated basis, maintain minimum fixed charge coverage and leverage ratios, along with other covenants. The Company was in compliance with all covenants as of September 30, 2013. As of September 30, 2013, the principal balance of this term loan was $9.1 million.

 

The Company primarily utilized the proceeds of the Enterprise Loan to repay all outstanding balances under the Company's former U.S. revolving credit facility with its former U.S. Bank; the original borrowings had financed purchase of our St. Peters, Missouri plant.

  

 
 

 

  

On April 27, 2012, the Company entered into a $15 million revolving credit agreement with JPMorgan Chase, N.A., with interest based on LIBOR plus 2.5%, adjusted monthly. The revolving credit facility is subject to a borrowing base and financial covenants and expires on April 27, 2015. The Company was in compliance with all covenants as of September 30, 2013. As of September 30, 2013, the Company had no borrowings under this revolving credit agreement.

 

 

8. STOCK COMPENSATION EXPENSE

 


 

The Company maintains long-term incentive plans that authorize the Board of Directors or its Compensation Committee (the “Committee”) to grant key employees, officers and directors of the Company incentive or nonqualified stock options, stock appreciation rights, performance shares, restricted shares (“restricted stock awards”) and performance units. The Committee determines the prices and terms at which awards may be granted along with the duration of the restriction periods and performance targets. All issuances are granted out of shares authorized, as the Company has no treasury stock. The Company has the option, in its sole discretion, to settle awards under its 2008 incentive plans in cash, in lieu of issuing shares.

 

For fiscal 2013, 2012 and 2011, the Company recorded into selling and general administrative expenses and into its corporate/other segment $0.4 million, $1.0 million and $0.8 million, respectively, for the cost of employee and director services received in exchange for equity instruments based on the grant-date fair value of those instruments in accordance with the provisions of ASC 718. There were no recognized tax benefits during fiscal 2013, 2012 or 2011, as any benefit is offset by the Company's full valuation allowance on its net deferred tax asset. The Company has not recognized the windfall tax benefit as the resulting deduction has not been realized via a reduction of income taxes payable.

 

Stock option awards

 

During fiscal 2012 the Company awarded performance-based stock options with separate performance conditions for vesting in respect of the Company’s results and individual performances in fiscal 2012, 2013 and 2014, to named executive officers and other key employees. The Company recognizes compensation expense related to each separate service period during the applicable period. The maximum number of performance-based options available to vest subject to certain operating performance targets is 685,000 and subject to the performance measures in a given fiscal year.  During fiscal 2012, the Company granted 105,000 stock options with a vesting period through December 2012 to certain key employees. During fiscal 2013, the Company granted stock options to purchase a total of 45,000 shares of common stock with a vesting period of one to two years to certain key employees, some of which were classified as performance-based stock options similar to stock options awarded during fiscal 2012.

 

              Annually, options to purchase 7,500 shares of common stock are issued to each director, other than the CEO, with an exercise price equal to the fair market value of the shares. In addition, newly elected directors receive options to purchase 7,500 shares of common stock. All such options vest immediately at time of grant. Directors were issued options to purchase 37,500 shares of common stock during fiscal 2013.

 

The following tables summarize information for options currently outstanding and exercisable at September 30, 2013:

 

 
       

Options Outstanding

 

Range of

Exercise Prices

 

Number

   

Wtd. Avg.

Remaining

Life (Years)

   

Wtd. Avg.

Exercise

Price

   

Aggregate

Intrinsic

Value

 
$5.47 - 5.72     874,028       7     $ 5.71     $ 9,595,587  
 7.09 - 8.60     169,388       5       7.93       1,483,125  
11.94 -  24.12     90,000       3       13.55       282,825  
31.07     45,000       3       31.07       -  
 $5.47 - 31.07     1,178,416                     $ 11,361,537  

 

       

Options Exercisable

 

Range of

Exercise Prices

 

Number

   

Wtd. Avg.

Remaining

Life (Years)

   

Wtd. Avg.

Exercise

Price

   

Aggregate

Intrinsic

Value

 
$5.47 - 5.72     224,028       6     $ 5.69     $ 2,465,087  
7.09 -  8.60     101,888       3       7.97       888,400  
11.94 -  24.12     90,000       3       13.55       282,825  
31.07     45,000       3       31.07       -  
$5.47 - 31.07     460,916                     $ 3,636,312  

  

 
 

 

 

Presented below is a summary of stock option plans activity for fiscal 2012 and 2013: 

 
   

Options

   

Wtd. Avg.

Exercise Price

   

Aggregate

Intrinsic Value

 

Exercisable at September 30, 2011

    403,337     $ 21.43     $ 395,517  

Outstanding at September 30, 2011

    414,587     $ 21.41     $ 395,517  

Granted

    1,331,250       6.02          

Exercised

    (2,000 )     2.07       11,240  

Forfeited or expired

    (300,000 )     17.20          

Outstanding at September 30, 2012

    1,443,837     $ 8.12     $ 2,260,688  

Exercisable at September 30, 2012

    300,087     $ 17.06     $ 66,600  
                         

Outstanding at September 30, 2012

    1,443,837     $ 8.12     $ 2,260,688  

Granted

    82,500       7.48          

Exercised

    (40,603 )     5.95       435,948  

Forfeited or expired

    (307,318 )     10.26          

Outstanding at September 30, 2013

    1,178,416     $ 7.60     $ 11,361,537  

Exercisable at September 30, 2013

    460,916     $ 10.20     $ 3,636,312  

 

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

 

Fiscal 2013

 

Fiscal 2012

 

Fiscal 2011

 

Expected life of option (years)

  3 - 5    3 - 5     5  

Risk-free interest rate

  0.4% - 0.9%    0.4% - 0.8%     2.4 %

Volatility of stock

   59% - 75%    72% - 79%     73 %

Forfeiture rate

   0% - 16%    0% - 16%     0 %

 

The fair value of the options granted during fiscal 2013, 2012 and 2011 was $0.4 million, $4.4 million and $0.3 million, respectively. As of September 30, 2013, the Company had $2.3 million total unrecognized compensation expense, net of estimated forfeitures related to stock option plans which will be recognized as expense over a remaining weighted average period of 1 year. Cash proceeds received from the exercise of stock options were $0.2 million, $0.1 million and $0.1 million for fiscal 2013, 2012 and 2011, respectively. The Company uses historical volatility for a period of time that is comparable to the expected life of the option.

 

Restricted stock awards

 

Under the Company’s equity incentive plans, employees and directors may be granted restricted stock awards with participation rights which are valued based upon the fair market value on the date of the grant. The balance of restricted stock awards outstanding was 15,000 shares as of September 30, 2012. As of September 30, 2013, there were no restricted stock awards outstanding.

 

In accordance with ASC 718, the Company determined its practice of settling vested restricted stock awards in cash resulted in a modification from equity to liability accounting for the remaining unvested restricted shares. The fair value of the modified liability award is measured each reporting date through settlement and any adjustments to increase or decrease the liability are recorded either as compensation cost or a charge to equity.

 

During fiscal 2013, the Company continued to recognize compensation cost for the original value of the award as the fair value of the original award is greater than the period-end fair value of unvested restricted shares. The difference between the change in the fair value of the liability and stock compensation recognized during the year of less than $0.1 million was recorded to additional paid-in capital.

 

 

9. COMMITMENTS AND CONTINGENCIES

 


 

LEASES

 

We rent office facilities and equipment under various operating leases. Rent expense for all operating leases was $1.4 million, $1.3 million and $1.6 million for fiscal 2013, 2012 and 2011, respectively.

  

 
 

 

 

 

The following table sets forth the future minimum lease commitments under operating leases at September 30, 2013 (amounts in thousands):

 

September 30,

 

Future

Commitments for

Operating Leases

 
2014    $ 1,235  
2015      832  
2016      819  
2017      813  
2018      813  

Thereafter

    2,446  

Total

  $ 6,958  

 

We have rented forklifts and water treatment equipment under various capital leases in past years. We had no lease expense for capital leases for fiscal 2013 and 2012 and $0.1 million for the fiscal 2011.

 

LEGAL

 

Legal contingencies have a high degree of uncertainty. We record reserves when losses from contingencies can be reasonably estimated and become probable. The reserves would reflect management’s estimate of the probable cost of ultimate resolution of the matters and are revised accordingly as facts and circumstances change and, ultimately, when matters are brought to closure. If any litigation matter is resolved unfavorably, the Company could incur obligations in excess of management’s estimate of the outcome, and such resolution could have a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity. In addition, we may incur additional legal costs in connection with pursuing and defending such actions. 

 

In September and October 2013, a total of 13 purported class actions arising out of the execution of the Merger Agreement were filed against Zoltek and Zoltek’s directors in the Circuit Court of St. Louis County, Missouri by purported shareholders of Zoltek. All but one of the lawsuits also named Toray and/or Merger Sub as defendants. The lawsuits allege, among other things, that (1) each of Zoltek’s directors breached his fiduciary duties to Zoltek’s shareholders in connection with approval of the transactions contemplated by the Merger Agreement, and (2) that Zoltek, Parent and Merger Sub aided and abetted Zoltek’s directors in such breaches of their fiduciary duties. The lawsuits seek, among other things, injunctive relief preventing the parties from completing the merger and directing the Zoltek directors to account to Zoltek and the purported class for all damages suffered as a result of the breaches of fiduciary duties and awards of attorneys’ fees and expenses for the plaintiffs.

 

Zoltek has filed various motions to dismiss the actions against Zoltek and the individual directors of Zoltek, which motions are pending. The Circuit Court of St. Louis County, Missouri consolidated each of the actions described above under the caption In Re: Zoltek Companies, Inc. Shareholder Litigation on November 26, 2013. On November 27, 2013, the Court entered an order denying a motion filed by certain of the plaintiffs for expedited discovery. Cross Motions filed by the plaintiffs to designate lead plaintiffs and lead counsel are pending before the Court. On December 4, 2013, the Court entered an order appointing co-lead plaintiffs in the action, and in the same order, the Court appointed Goldenberg Heller Antognoli & Rowland, P.C. and Holloran White Schwartz & Gaertner LLP as interim co-lead counsel and appointed Wolf Haldenstein Adler Freeman & Herz LLP and Robbins Geller Rudman & Dowd LLP to the Plaintiffs’ Executive Committee.

 

We believe that the lawsuits are without merit and intend to defend against them vigorously. There can be no assurance, however, with regard to the outcome of this litigation.

 

The Company is exposed to various claims and legal proceedings arising out of the normal course of its business. Although there can be no assurance, in the opinion of management, the ultimate outcome of such claims and lawsuits when and if they arise should not have a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity. As of September 30, 2013, Zoltek has no recorded material legal reserves.

 

SOURCES OF SUPPLY

 

As part of its growth strategy, the Company has developed and manufactures its own precursor acrylic fibers and all of its carbon fibers and technical fibers. The primary source of raw material for the precursor is ACN (acrylonitrile), which is a commodity product with multiple sources.

 

 
 

 

 

10. INCOME TAXES

 


 

The components of income tax expense (benefit) for fiscal 2013, 2012 and 2011 are as follows (amounts in thousands):

 
   

2013

   

2012

   

2011

 

From continuing operations:

                       

Current:

                       

Federal

  $ -     $ 52     $ 128  

State

    12       (14 )     3  

Foreign

    1,251       1,215       611  
      1,263       1,253       742  

Deferred:

                       

Federal

    -       -       -  

State

    -       -       -  

Non - U.S.

    99       (71 )     169  
      99       (71 )     169  

Total operations

  $ 1,362     $ 1,182     $ 911  

 

Deferred income taxes reflect the tax impact of carryforwards and temporary differences between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. Cumulative carryforwards and temporary differences giving rise to the net deferred income tax liability at September 30 are as follows (amounts in thousands):

 
   

September 30,

 
   

2013

   

2012

 

Deferred tax assets:

               

Accrued employee compensation

  $ 115     $ 107  

Reserves

    270       273  

Other assets

    17       17  

Non-Qualified Stock Compensation

    1,236       1,236  

Net operating loss and credit carryforwards

    38,824       32,628  
      40,462       34,261  
                 

Deferred tax liabilities:

               

Property, plant and equipment

    (14,024 )     (12,255 )

Prepaid expenses

    (124 )     (162 )
      (14,148 )     (12,417 )

Total deferred taxes

    26,314       21,844  

Less: valuation allowance

    (26,634 )     (22,137 )

Net deferred tax liability

  $ (320 )   $ (293 )
                 

Classification of deferred taxes:

               

Current deferred tax asset (included in other current assets)

  $ 168     $ 180  

Long-term deferred tax liability

    (488 )     (473 )
    $ (320 )   $ (293 )

 

 

In the consolidated balance sheets, these deferred tax assets and liabilities are classified as either current or non-current based on the classification of the related liability or asset for financial reporting. A deferred tax asset or liability that is not related to an asset or liability for financial reporting, including deferred taxes related to carryforwards, is classified according to the expected reversal date of the temporary differences as of the end of the year.

  

 
 

 

 

The provision for income taxes differs from the amount using the statutory federal income tax rate (34%) as follows (amounts in thousands):

 
   

2013

   

2012

   

2011

 

At statutory rate:

                       

Income tax (benefit) expense on income (loss) from operations

  $ 2,243     $ 8,172     $ (905 )

Increases (decreases):

                       

Effect of lower foreign statutory rates

    (3,425 )     (4,540 )     (175 )

Change in valuation allowance on net operating loss

    4,294       (1,782 )     (395 )

State taxes, net of federal benefit

    (43 )     (22 )     33  

Local taxes, non-U.S.

    1,045       1,018       611  

Change of uncertain tax positions

    16       (71 )     (46 )

Reflection of tax rate change – non-U.S.

    (641 )     (2,506 )     1,748  

Fair market value of warrants

    -       (32 )     (422 )

R&D credits

    (67 )     (33 )     (186 )

Mexico inflationary adjustment

    (772 )     921       560  

True up for Mexico inflationary adjustment

    (1,397 )     -       -  

Other

    109       57       88  
    $ 1,362     $ 1,182     $ 911  

  

 

The change in valuation allowance is impacted by the expected realization of deferred assets related to tax carryforwards and temporary differences. In fiscal 2013, the Company recorded a true-up to our provision to reflect tax deductions related to inflation adjustments which were recorded on our tax returns, but not reflected in the provision. The true-up relates to an annual inflation adjustment deduction allowed by Mexico, which consists of determining the monetary gain or loss, derived from the effect of the inflation on debits and credits, including assets related to net operating loss carryforwards. The incremental deferred tax assets related to these losses are offset by a full valuation allowance.

 

The consolidated income (loss) from continuing operations before income taxes by domestic and foreign sources for the years ended September 30, 2013, 2012 and 2011 was as follows (amounts in thousands):

 

 

   

2013

   

2012

   

2011