<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended September 30, 1996 Commission File Number 0-20600
ZOLTEK COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Missouri 43-1311101
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3101 McKelvey Road, St. Louis, Missouri 63044
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 291-5110
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value $.01
(Title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
------ ------
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by non-
affiliates of the registrant: approximately $383,943,252 as of December 27,
1996.
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of the latest practicable date: As of
December 27, 1996, 16,210,338 shares of Common Stock, par value $.01, were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into the
indicated Part of this Report:
<TABLE>
<CAPTION>
Document Part of Form 10-K
-------- -----------------
<S> <C>
Annual Report to Shareholders
for the fiscal year ended September 30, 1996 I and II
Proxy Statement for the 1997
Annual Meeting of Shareholders III
</TABLE>
<PAGE> 2
PART I
Item 1. Business
- ------ --------
This Annual Report on Form 10-K for the year ended September 30, 1996
and the documents incorporated by reference herein contain forward-looking
statements which are inherently subject to risks and uncertainties.
Cautionary statements made herein should be read as being applicable to all
related forward-looking statements wherever they apprear herein or in the
documents incorporated by reference herein. The Company's actual results
could differ materially from those anticipated due to a number of factors,
including, without limitation, the following: the Company's ability to manage
rapid growth, increase its carbon fibers production capacity on a timely and
profitable basis, manufacture low-cost carbon fibers and profitably market
them at decreaseing price points, successfully operate and integrate Viscosa
and penetrate existing, identified and emerging future markets for carbon
fibers, as well as other factors discussed herein and the documents
incorporated by reference herein.
GENERAL
Zoltek Companies, Inc. (the "Company" or "Zoltek") is a leader in the
rapidly developing carbon fibers market, manufacturing products for a diverse
range of applications based upon carbon fibers' distinctive combination of
physical and chemical properties, principally high-strength, low-weight and
stiffness. Zoltek believes it produces carbon fibers at costs substantially
lower than those generally prevailing in the industry and, accordingly, can
supply carbon fibers for applications which are not economically viable for
most higher cost competitors. With the December 1995 acquisition of Magyar
Viscosa Rt. ("Viscosa"), a Hungarian manufacturer of acrylic fiber and nylon
products, the Company secured access to the technology underlying the
production of the acrylic fiber raw material utilized in the manufacture of
carbon fibers. The Company's strategy is to grow its business by continually
lowering its cost to manufacture carbon fibers, marketing its carbon fibers
at price points substantially lower than those generally prevailing in the
industry and working with current and prospective customers to develop new
carbon fiber applications. In order to alleviate its current capacity
constraints and to meet indicated and forecasted demand for carbon fiber
products, the Company is expanding its manufacturing capacity.
Carbon fiber composite materials are suited for a diverse range of
applications based on their distinctive combination of physical and chemical
properties. Carbon fibers are used as reinforcements in composite materials
that combine reinforcement fibers with resins or other matrix materials to
form a substance with high strength, light weight, conductivity or other
exceptional properties not found in either component alone. Carbon fibers
most often are manufactured from acrylic fiber raw material ("precursor"),
which is desirable due to the linear orientation of its molecular structure
and high carbon content (approximately 60%). While most other producers of
carbon fibers utilize internally produced custom-made acrylic raw material,
the Company utilizes less costly textile-type acrylic fiber.
The Company is a Missouri corporation founded in 1975. Until it entered
the carbon fibers business in 1987, the Company's business consisted of the
sale of various industrial equipment and the provision of related services.
The Company sold its equipment and services business unit toward the end of
fiscal 1995. In November 1992, the Company completed its initial public
offering. The Company completed follow-on common stock offerings in November
1995 and September 1996.
INDUSTRY OVERVIEW
Worldwide carbon fibers capacity (excluding the former Soviet Union and
China) was estimated to be approximately 27 million pounds per year in
calendar year 1994. Carbon fiber
- 2 -
<PAGE> 3
composites are an attractive material for a diverse range of applications, based
on their distinctive characteristics, including high strength, low weight,
stiffness, toughness, resistance to corrosion, resistance to fatigue, capacity
to dissipate heat and electrical conductivity. Until the early 1980s, the high
cost of carbon fibers precluded all but the most demanding applications,
limiting carbon fibers use primarily to the aerospace industry. During the past
decade, as additional capacity outpaced demand from aerospace applications,
manufacturers sold excess production at significantly reduced prices. As a
result, the distinctive characteristics of carbon fibers and the techniques for
fabricating carbon fiber composites became more broadly understood and a
number of diverse applications developed.
A number of specialty applications are commercially viable only at
carbon fiber prices lower than those prevailing for primary aerospace
applications. In sporting goods manufacturing, the strength-to-weight ratio,
stiffness, rapid damping and fatigue resistance characteristics of carbon
fibers have made them a desirable material for a wide range of products such
as golf club shafts, tennis racquets and bicycle frames. In current
industrial uses, carbon fibers' non-structural properties are often most
important. Chemical inertness is useful in corrosive applications for heat
exchanger tubing and pump cavities and in gas turbine blades; high
temperature resistance is useful in specialty metallurgical mold
applications; and combined rigidity and damping are useful in audio equipment
applications. New developing, commercial applications identified by the
Company include cargo shipping containers, vehicle drive shafts, compressed
natural gas (CNG) tanks, civil engineering uses, wood laminates, automotive
body and structural members, mass transit vehicle components, high strength
piping, marine uses and alternative energy systems. Currently served
specialty niche markets which the Company believes offer growth prospects
include aircraft brakes, conductive plastics, fire-retardant coatings and
specialty friction products.
The Company believes that the substantial majority of current worldwide
carbon fibers capacity remains dedicated to production of high-cost,
high-selling price material for primary aerospace applications. This market
segment differs in important respects from the commercial markets targeted by
Zoltek. Switching between market segments is relatively difficult and
capital intensive.
COMPANY STRATEGY
Zoltek's goal is to be the premier provider of low-cost carbon fibers.
Key elements of the Company's business strategy are as follows:
Low-Cost Producer -- The Company believes it currently manufactures
carbon fibers at costs substantially lower than those generally prevailing in
the industry. The Company intends to continue to reduce its total production
costs primarily by utilizing the acrylic fiber precursor manufactured by its
Viscosa operations after a conversion period estimated to continue through
December 1997. Longer term, the Company believes that the precursor
manufacturing technology acquired in the Viscosa acquisition will enhance its
ability to procure from third party sources precursor with specifications
which currently are not generally available from merchant suppliers. Acrylic
fiber precursor comprises more than 50% of the Company's total carbon fiber
product costs.
Currently, only one textile-type acrylic fiber manufacturer, Courtaulds
Fibres, Ltd. ("Courtaulds"), produces such fiber in a form suitable for
precursor use (i.e., without additives). While this textile-type acrylic
fiber is substantially less costly than internally produced custom-made
acrylic fiber precursor utilized by most of the Company's competitors,
Courtaulds takes advantage of its sole merchant supplier position to charge a
premium price for its fibers sold as precursor.
- 3 -
<PAGE> 4
Zoltek believes Viscosa's operations afford a strategic advantage by
providing access to the technology underlying the production of precursor.
Conversion of Viscosa's acrylic fiber capacity to produce precursor grade
material provides the opportunity to control a reliable source of precursor
on favorable terms and to optimize the carbon fibers production chain.
During early 1998, Viscosa is expected to be able to supply the Company's
carbon fiber operations with quantities of precursor which ultimately would
be sufficient to produce more than 30 million pounds annually of carbon fibers.
Price Leadership -- Zoltek has identified various price points lower
than those generally prevailing in the industry, at which it believes
customers will incorporate carbon fibers into their products to achieve
enhanced properties and performance. Targeted commercial market applications
include shipping containers, vehicle drive shafts, wrapping and reinforcement
for concrete structures, pressurized tanks, wood laminates, specialty piping
and a number of non-friction automotive uses. The Company believes that
these applications alone represent potential long-term market demand
requiring substantial increases in current carbon fibers industry capacity.
The ultimate goal of the Company's pricing strategy is to market carbon
fibers for use as a base reinforcement material in composites at price levels
resulting in composite costs per unit of strength which compete favorably
with alternative base construction materials such as steel and aluminum. The
Company believes that achievement of this pricing goal would result in
significant new product applications for carbon fibers.
New Commercial Market Applications Development -- The Company will
continue to identify, evaluate and develop new commercial market applications
for carbon fibers. Potential opportunities include: (i) applications for
which carbon fiber composites have been demonstrated to be well-suited, but
which only recently have begun to be commercialized (e.g., cargo shipping
containers, vehicle drive shafts and CNG tanks); (ii) applications which have
been established in principle or in small scale projects, but for which
additional engineering and fabrication developments are required (e.g.,
earthquake-proofing of bridge columns, aircraft seating and offshore
spoolable piping); and (iii) applications in which carbon fibers may permit
totally new technologies (e.g., flywheel-based alternative energy systems and
light trains).
As part of its efforts to expand its current range of market
applications, the Company engages in various strategic partnerships to study
the viability of the use of carbon fibers in new composite materials and
structural enhancement environments. These relationships are designed to
build on existing expertise and industry knowledge by exploring new potential
uses for carbon fibers. For example, studies performed by a research
consortium, including the Company, sponsored by the U.S. Advanced Research
Project Agency ("ARPA") demonstrated that columns wrapped with carbon fiber
composite materials made from the Company's carbon fibers significantly
improved the ability of bridges and other structures to withstand earthquakes.
Successful partnerships with commercial customers include long-term supply
relationships with BF Goodrich Aerospace ("BFG") and TRW Vehicle Safety Systems,
Inc. ("TRW"). More recently, the Company has established relationships with
American President Lines, Ltd. and Stoughton Composites, Inc. (shipping
containers), Compounding Technology, Inc. (computer printer components for
Hewlett-Packard Company products) and Thiokol Corp. (CNG tanks). Zoltek
believes that as new techniques are perfected and new composites are developed,
manufacturers will help develop new commercial applications for such composites,
thereby creating further demand for the Company's products.
The Company also plans to accelerate the development of new commercial
applications by enhancing its application engineering capability. The
Company's applications engineers will assist prospective users of carbon
fibers in properly evaluating the utility of carbon fibers for new
applications and will consult with customers regarding modifications of their
manufacturing processes to facilitate the full use of carbon fibers.
- 4 -
<PAGE> 5
CARBON FIBERS MANUFACTURING CAPACITY AND EXPANSION PLANS
The present rated capacity of the Company's carbon fiber manufacturing
operations is approximately 3.5 million pounds per year. The Company
currently is producing carbon fibers at its full operational capacity and
needs to expand its capacity to meet indicated and forecasted demand for
carbon fiber products. In order to increase its production capacity, the
Company plans to construct up to 16 additional continuous carbonization lines
by the end of fiscal 1998. In the United States, the Company plans to
initially construct a new line in the St. Louis, Missouri area, which is
expected to be operational by the third quarter of fiscal 1997, and is in the
process of selecting a site at which it intends initially to construct two
new lines planned to be operational by the end of fiscal 1997. In Hungary,
the Company is constructing a building at its Viscosa facility which
initially will house two lines which the Company expects to be operational by
the third quarter of fiscal 1997. The Company will use the net proceeds of
the secondary offering of its common stock completed in September 1996,
together with internally generated funds and borrowings under credit
facilities, to fund capital expenditures related to these continuous
carbonization lines. Each continuous carbonization line has a rated capacity
of approximately 1.0 million pounds of carbon fibers per year.
In the process of expanding capacity, the Company is developing a
standardized continuous carbonization line design in order to optimize
technical process capabilities, reduce equipment cost and shorten lead time
between the decision to add lines and the time when the lines become
operational.
CUSTOMERS AND BACKLOG
During the fiscal year ended September 30, 1996, the Company did not have
any customer to whom sales represented greater than 10% of the Company's total
consolidated revenues.
As of September 30, 1996 and 1995, the Company had backlogs of orders
believed to be firm aggregating more than $19.8 million and $15.9 million,
respectively (including estimated releases under long-term supply arrangements
during the succeeding 12 months.) Purchase orders from the Company's customers
are subject to amendment or cancellation.
CURRENT PRODUCT APPLICATIONS
The Company's current primary carbon fiber product applications are as
follows:
Aircraft Brakes
Carbon-carbon (carbon fibers fused in a carbon matrix) is used in
aircraft brakes because its utility is enhanced by heat. Where other
materials soften under rising temperatures, carbon-carbon grows stronger.
Developed originally as a lightweight heat shield for spacecraft, carbon-carbon
has become a key material in advanced braking systems used in fighter
aircraft, military aircraft, newer model commercial airliners and newer model
business aircraft.
There is a growing replacement market for composite brakes with the
retirement of older aircraft and their replacement by newer model aircraft
which utilize carbon-carbon brakes. Brake pads wear out and must be replaced
at regular intervals, typically at intervals of 750 to 2,000 landings
depending upon aircraft type, size and use. As the relative proportion of
newer aircraft to older aircraft increases, the demand for carbon-carbon
brakes increases proportionately. Zoltek's carbon fibers are
- 5 -
<PAGE> 6
approved as the single source, or one of only two approved fibers, for many high
production new models of commercial aircraft, and for selected civil and
military aircraft.
The Company is the exclusive supplier to BFG of carbon fibers for
aircraft brakes pursuant to a ten-year agreement (the "BFG Supply Agreement")
entered into in June 1994. The Company anticipates aggregate sales of more
than $80 million over the term of this agreement, increasing from
approximately $5 million of expected sales in the initial years to
approximately $15 million to $18 million per year during the later years of
the contract. The BFG Supply Agreement does not restrict the Company from
supplying carbon fibers to other aircraft brake manufacturers.
The BFG Supply Agreement provides that in the event the Company's Board
of Directors determines to seek a sale of, or significant investment in, the
Company, it first would negotiate such proposed transaction exclusively with
BFG for specified time periods. Mr. Rumy also has agreed, subject to certain
exceptions, to negotiate exclusively with BFG for a specified period if he
determines to sell a significant amount of shares of the Company's Common
Stock. The foregoing obligations are expressly subject to applicable
fiduciary duties of the Company's directors and Mr. Rumy, as principal
shareholder.
BFG's rights to exclusive negotiations with the Company or Mr. Rumy, as
the case may be, in the event of a proposed sale or investment terminate on
the first to occur of: (i) a material breach by BFG in performing its
obligations under the BFG Supply Agreement; (ii) such time as sales to BFG
account for less than 15% of carbon fibers sales in any trailing four
quarters; or (iii) termination of the BFG Supply Agreement.
Automotive Airbags
Sales of carbon fibers used in automotive airbags account for a
significant part of Zoltek's total sales of carbon fibers. Carbon fiber
material is used as an additive in the airbag propellant mix in the
pyrotechnic type of automotive airbag produced by TRW. The carbon fiber
material is used to improve performance in the inflation process.
Since 1994, Zoltek has been the exclusive supplier to TRW of carbon
fibers for use in producing its pyrotechnic type of airbags. The automotive
industry continues to conduct research and product development with respect
to airbag technology. Accordingly, the Company believes that the volume of
sales for this application will depend upon the relative utilization of the
pyrotechnic type of airbag in automobiles and trucks in future years.
Conductive Plastics
Growth in computers and electronics has resulted in rising demand for
carbon fibers used in conductive plastics to dissipate static electricity or
to act as a shield against electromagnetic interference. Used in making
plastic carrying trays for a manufacturing environment that cannot tolerate
contamination, Zoltek's carbon fibers help to safeguard the electrical
integrity of new and more powerful computer chips. In the past three years,
Zoltek has experienced increasing levels of sales of specialty carbon fiber
fillers for conductive plastic trays used in clean room environments. The
Company believes that this application offers significant potential for
future sales growth. Zoltek also supplies products used in carbon
fiber-impregnated injection-molded plastic boxes to offer effective shielding
from electromagnetic interference.
- 6 -
<PAGE> 7
Shipping Containers
Composite shipping containers utilizing carbon fibers, for rail, sea
and road transportation, offer the shipping industry significant weight
savings, reducing operating costs and increasing efficiency. The new
Refrigerated International ISO Container built by Stoughton Composites is one
of the first composite shipping containers being commercialized. Its design
is only made possible through the use of carbon fibers in the corner posts
and I-beams, where the majority of the loads are concentrated. This
container weighs approximately 5,000 pounds, compared to a typical steel
container which weighs approximately 8,600 pounds. Zoltek has partnered with
Stoughton Composites, Inc. and American President Lines, Ltd. to develop
composite shipping containers using low-cost carbon fibers.
Vehicle Drive Shafts
The use of carbon fibers allows a two-piece vehicle drive shaft to be
replaced with a one-piece design, reducing its average weight by
approximately 60%. The inherent damping characteristics of composites also
reduce the noise and vibration to the passenger compartment. New designs
with hybrid carbon fiber composites and alternative processing methods
continue to be developed to increase the cost-competitiveness of the
composite design. Zoltek has established relationships with the leaders in
the composite drive shaft field and is a current supplier for this
application.
Compressed Natural Gas Tanks
Due to the superior performance, both in terms of physical
characteristics and chemical/UV resistance, carbon fibers have emerged as a
desirable material for CNG tank reinforcement. Carbon fiber-reinforced CNG
tanks are primarily sold into the bus and other vehicle fleet market, as the
reduction of weight directly translates to increased payload capability. In
addition, the Company believes that governmental pressure to design and
manufacture a sedan with significantly improved fuel efficiency could
continue to cause automotive manufacturers to pursue CNG technologies.
Zoltek supplies carbon fibers to several customers for use in carbon
fiber-reinforced CNG tanks.
Fire-Retardant Coatings
Zoltek's carbon fibers are used in fire-retardant coatings to prevent
or control fire-related disasters in chemical plants, nuclear power plants,
refineries and off-shore drilling platforms. Used as an additive or
reinforcement, carbon fiber heightens the ability of the fire-retardant
coatings to withstand exceptionally high temperatures.
Specialty Friction Products
Specialty friction product applications are a natural extension of
existing aircraft brake applications. For instance, following the lead of
aircraft makers, virtually all grand prix racing cars now use carbon-carbon
brakes and clutches because of their superior performance and long life in
high-temperature and high-friction environments. Other friction products
utilizing carbon fibers are emerging as carbon fiber prices are reduced. As
the price of carbon fibers is lowered, the drive for better performance and
weight reduction makes possible their use in a range of automotive
applications. Zoltek is pursuing a number of initiatives in this area,
including pursuant to its joint product development agreement with BFG.
Other Company products include the following:
- 7 -
<PAGE> 8
Textile Fiber Products
Acrylic fibers currently represent Viscosa's primary product line
(approximately two-thirds of Viscosa's sales) and are used in producing a
variety of end products, including clothing and carpet. Viscosa's acrylic
fibers are sold in regional markets, principally to textile mills in Europe
and, to a limited extent, Taiwan and the United States. Viscosa's primary
markets for acrylic fibers are currently in Hungary and Poland.
The other principal fiber product line currently manufactured and
marketed by Viscosa consists of nylon-6 fibers and granules. Due to the
long-term decline in the domestic Hungarian market for nylon-6 fibers,
Viscosa has targeted export markets, the largest of which is Italy, and also
has sold significant amounts in the United Kingdom and Central and Eastern
Europe. Granular nylon-6 is used as a thermoplastic molding material and
combined in certain applications with glass or carbon fibers.
Other
Viscosa also currently manufactures: carboxyl-methyl cellulose which
is used as a film former, absorber or viscosity modifier for applications in
soap additives, drilling mud additives, paper manufacturing and adhesive
manufacturing; plastic netting and grids which are produced from continuously
extruded polyethylene and polypropylene net or screen with varying
specifications and used for soil stabilization and packaging; and filtration
membrane products for use in filtration media utilized in food and wine
processing and water purification. The Company is in the process of
evaluating the ultimate potential of these products and technologies.
INTERNATIONAL
To date, the Company's carbon fiber operations have focused primarily
on meeting the needs of U.S. customers. The Company has, however, shipped
limited amounts of carbon fiber products to customers in Europe and Asia,
primarily for use in conductive plastics applications. Most of these sales
have been made to foreign operations of domestic corporations, or to foreign
parent companies of domestic operating units.
Zoltek believes that significant opportunities exist to develop
international markets, particularly in Europe and Asia, as commercial market
applications of carbon fiber products develop. The Company expects to pursue
opportunities in Europe through the marketing organization currently in place
at Viscosa. This organization will seek to find customers for the carbon
fiber products currently manufactured at the Company's plant in St. Charles,
Missouri, as well as for those products produced at the carbon fibers
facilities which Zoltek is constructing at Viscosa and planning to construct
in the United States.
The Company has conducted preliminary discussions with prospective
strategic partners in Asia and expects that it will pursue opportunities in
that market either with a strategic partner or through a direct sales office
located in Asia.
SOURCES OF SUPPLY
The Company currently obtains all of its textile-type acrylic fibers to
supply its carbon fiber operations from Courtaulds, which is currently the
sole merchant supplier of such raw materials in the world. Courtaulds is also
the only supplier that currently produces precursor approved for use in
aircraft brake applications such as those supplied under the BFG Supply
Agreement. Pursuant to an
- 8 -
<PAGE> 9
agreement with the Company, Courtaulds has agreed to supply the Company with up
to 4.0 million pounds per year of precursor. This supply agreement may be
terminated by either party on June 30, 1999, or any anniversary thereof, by
providing two years' prior notice. The Company believes Courtaulds is a
reliable source of supply at the Company's current operating levels. However,
as part of its growth strategy, the Company is developing alternative sources of
precursor supply, including Viscosa, and expects that it ultimately will obtain
most of its precursor from Viscosa. In the near term, any interruption of
precursor supply from Courtaulds would have a material adverse effect on the
Company's carbon fibers business.
The major materials used in the Viscosa facility are acrylonitrile and
other basic commodity chemical products which are widely available from a
variety of sources.
INTELLECTUAL PROPERTY
The Company believes that it has developed and utilizes valuable
technology and innovations, including various aspects of its manufacturing
process, which are trade secrets in which it has a proprietary interest. The
Company seeks to protect its proprietary information by, among other things,
requiring key employees to execute non-disclosure agreements. The Company
holds no material patents.
COMPETITION
The Company competes with various other producers of carbon fibers,
acrylic fibers, and other textile fiber products, many of which have
substantially greater research and development, marketing, financial and
managerial resources than the Company and represent significant competition
for the Company.
The Company believes that no single manufacturer of carbon fiber
products competes across all of its applications. The Company's direct
carbon fibers competitors include Fortafil Fibers, Inc. in the United States
and R.K. Carbon in Europe, inasmuch as they use the same textile-type
precursor as the Company. To varying degrees, dependent on market conditions
and supply, the Company also competes with larger producers, such as Hexcel
Corporation and Amoco Corporation in the United States; and Toray Industries,
Inc., Toho Rayon and Mitsubishi Rayon Co., Ltd. in Japan. Large
international carbon fibers producers tend to market higher cost products
than the Company's products, with a principal focus on aerospace structural
applications. These large manufacturers tend to enter into direct
competition with the Company chiefly when they engage in significant
discounting due to excess capacity and product surpluses; however, such
competition historically has not had a material adverse effect on the
Company's business.
The Company believes that the principal areas of competition for its
carbon fibers operations are price, quality, skill in developing new
applications, ability to reliably meet the customer's volume requirements and
qualifications for particular programs.
Competitors in the textile fibers market include MonteFibre, Sp.A.,
A.G. Bayer and Courtaulds. However, Viscosa's historic ties with and
geographic proximity to customers in the former socialist countries provide
competitive advantages for Viscosa in these markets compared to the larger
manufacturers. Zoltek believes this advantage will decrease over time and,
accordingly, Viscosa is pursuing a strategy of seeking a product mix with
more favorable competitive characteristics, such as advanced materials (e.g.,
carbon fibers precursor).
- 9 -
<PAGE> 10
The non-textile market for Viscosa's products is sufficiently
fragmented that no significant single direct competitor exists. Viscosa's
sales of its industrial products are heavily concentrated in the Central and
Eastern European markets.
ENVIRONMENTAL
The carbon fibers operations at the Company's St. Charles, Missouri
plant utilize incineration and scrubbing of various exhaust streams, designed
to comply with applicable laws and regulations. The plant produces air
emissions which are regulated and permitted by the State of Missouri,
Department of Natural Resources. The plant is required by a condition of its
permit to verify by performance tests that certain emission rates are not
exceeded. Management believes that the plant is currently in compliance with
its permit and the conditions set forth therein. The Company does not
believe that compliance by its carbon fibers operations with applicable
environmental regulations will have a material effect upon the Company's
future capital expenditure requirements, results of operations or competitive
position. There can be no assurance, however, as to the effect of
implementation of current laws or future changes in federal or state
environmental laws or regulations on the Company's results of operations or
financial condition.
Viscosa's operations generate various hazardous wastes, including
gaseous, liquid and solid materials. From time to time, Viscosa has been
cited and fined for environmental violations by regulatory authorities. The
SPA commissioned an environmental audit by an independent consulting firm,
which in its June 1995 report recommended expenditures aggregating
approximately HUF 20.1 million (which then approximated $160,000) to correct
certain identified environmental deficiencies and Zoltek expects that
Viscosa's operations will require additional funds for enhancement of other
environmental compliance systems. Zoltek expects that compliance with
current environmental regulation will not have a material adverse effect on
Viscosa's business, results of operations or financial condition. There can
be no assurance, however, that the application of future national or local
environmental laws, regulations and enforcement policies will not have a
material adverse effect on Viscosa's business, results of operations or
financial condition.
EMPLOYEES
As of September 30, 1996, the Company employed approximately 110
persons in its U.S. operations and approximately 1,544 in its Hungarian
operations. The Company's U.S. employees are not represented by any
collective bargaining organizations. By law, most employees in Hungary are
represented by at least one labor union and at Viscosa there are two active
unions, Union Viscosa with approximately 944 members, and Viscosa 1990 with
approximately 600 members. The Company believes that relations with both
unions are good. Management meets with union representatives on a bi-weekly
basis. There have not been any problems or major disagreements with either
union in the past five years. The Company believes that its employee
relations are good.
In June 1993, Viscosa entered into an agreement with the Labor Office
(the "Labor Office") of the county in which the plant is located, pursuant to
which the Labor Office made a HUF 285 million (approximately $1.8 million
translated at the exchange rate in effect at September 30, 1996) grant to
Viscosa to finance salary payments to Viscosa's employees during the period
April through December 1993. The grant is not repayable by Viscosa if
Viscosa and its subsidiaries maintain an employee level of at least 1,850
through 1997, subject to certain exceptions, such as reductions in force due
to normal retirement and terminations for cause. Presently, Viscosa's active
workforce is below the level specified by the grant and Zoltek intends to
effect reductions in staffing of operational activities as appropriate.
Viscosa believes, however, that if all employees (including non-active
employees, such as those on
- 10 -
<PAGE> 11
national service or maternity leave) and employees of non-core operations which
may be spun-off into independent companies are considered, Viscosa would not be
obligated to repay the grant. Viscosa is undertaking to clarify the application
of the calculation and to amend the agreement to confirm Viscosa's
understanding. Although there can be no assurance that a mutually acceptable
arrangement will be achieved, Zoltek believes that the ultimate resolution of
the grant will not have a material adverse effect on its consolidated financial
condition or results of operations.
Item 2. Properties
- ------ ----------
The Company's facilities are listed below and are considered to be
suitable and adequate for its operations. All the Company's properties are
owned or leased subject to various mortgage loans.
<TABLE>
<CAPTION>
APPROXIMATE AREA
LOCATION USE (IN SQUARE FEET)
-------- --- ----------------
<S> <C> <C>
St. Louis, Missouri Administrative offices, marketing
and engineering 40,000
St. Charles, Missouri<F1> Carbon fibers manufacturing 107,000
Nyergesujfalu, Hungary<F2> Acrylic fiber, nylon, other
manufacturing 1,600,000
- ----------------
<FN>
<F1> Subject to ground lease which expires in 2065, subject to a 24-year
renewal option thereafter.
<F2> Viscosa is located on a 150-acre site in the town of Nyergesujfalu,
approximately 30 miles from Budapest. The facility is located on a main
highway between Budapest and Vienna on the shore of the Danube River and
on a major rail line.
</TABLE>
Item 3. Legal Proceedings
- ------ -----------------
Except as set forth below, the Company is not a defendant in any
material legal proceedings other than ordinary routine litigation incidental
to its business.
The Company is engaged in litigation with Kenny Securities Corp.
("Kenny") in the Circuit Court of St. Louis County arising out of Kenny's
claim for compensation from the Company's November 1995 secondary Common
Stock offering. In August 1996, the Court granted the Company's motion to
compel arbitration of this matter under the rules of the National Association
of Securities Dealers, Inc. and such arbitration proceeding currently is at a
preliminary stage. The Company does not believe that the ultimate resolution
of these proceedings will have a material adverse effect on its financial
condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
The Company did not submit any matters to a vote of its security
holders during the quarter ended September 30, 1996.
- 11 -
<PAGE> 12
Item 4A. Executive Officers of the Registrant
- ------- ------------------------------------
The name, age and position with respect to each of the executive
officers of the Company are set forth below:
Zsolt Rumy, age 54, is the founder of the Company and has served
as its Chairman, President and Chief Executive Officer and as a Director
since 1975. Prior to founding the Company, Mr. Rumy served as Industrial
Marketing Manager and Process Engineer for Monsanto Company, Accounts Manager
for General Electric Company and Technical Sales Representative for W.R.
Grace Company. Since May 1996, Mr. Rumy has served as a director of
Southwest Bank of St. Louis, with which the Company maintains its primary
banking relationships. Mr. Rumy received a BS in Chemical Engineering from
the University of Minnesota in 1966. Mr. Rumy speaks fluent Hungarian.
Orel R. Kiphart, age 58, has served as President of Zoltek
Corporation and Vice President of the Company since June 1996. For more than
five years prior to joining the Company, he served as Director of Carbon
Products for BF Goodrich Aerospace, responsible for all that company's
high-temperature composite manufacturing, product development and sales and
marketing of carbon products to industrial markets. Mr. Kiphart received a
BS in Business and Engineering from California State Polytechnic University
in 1966 and an MS in Systems Management from Florida Institute of Technology
in 1969.
Daniel D. Greenwell, age 34, has served as Chief Financial
Officer and Secretary of the Company since December 1996. Prior to joining
the Company, from November 1992 to December 1996 Mr. Greenwell served as
Corporate Director of Financial Analysis and Reporting and as Controller of
Sigma-Aldrich Corporation (a publicly held specialty chemical manufacturer).
From August 1985 to November 1992, Mr. Greenwell was a certified public
accountant for KPMG Peat Marwick (an international accounting and auditing
firm) holding various positions, including Senior Manager. Mr. Greenwell
received a B.S. in Accounting from Truman State University in 1985.
Gyorgy Paszty, age 54, has served as President of the Company
since February 1996 and as Managing Director of Viscosa since 1990. Prior to
that time, he served in various technical and management positions in the
Hungarian chemical industry. Mr. Paszty received a BS in Chemical
Engineering from the Technical University, Budapest, Hungary, in 1966.
Mr. Paszty currently serves as President of the Hungarian Chemical
Association and as Executive Vice President of the Federation of Hungarian
Industrialists. Mr. Paszty speaks fluent English.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder
- ------ -------------------------------------------------------------
Matters
- -------
The information set forth under the caption "Price Range Per
Common Share" in the registrant's 1996 Annual Report to Shareholders is
incorporated herein by this reference.
Item 6. Selected Financial Data
- ------ -----------------------
The information set forth under the caption "Selected
Consolidated Financial Data" in the registrant's 1996 Annual Report to
Shareholders is incorporated herein by this reference.
Item 7. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations
- -------------------------
The information set forth under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
the registrant's 1996 Annual Report to Shareholders is incorporated herein by
this reference.
- 12 -
<PAGE> 13
Item 8. Financial Statements and Supplementary Data
- ------ -------------------------------------------
The following financial statements and supplementary data,
included in the registrant's 1996 Annual Report to Shareholders, are
incorporated herein by this reference.
Statement
- ---------
Consolidated Balance Sheet as of September 30, 1996
and 1995
Consolidated Statement of Operations for the years ended
September 30, 1996, 1995 and 1994
Consolidated Statement of Changes in Shareholders' Equity
for the years ended September 30, 1996, 1995 and 1994
Consolidated Statement of Cash Flows for the years ended
September 30, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Report of Independent Accountants
Item 9. Changes in and Disagreements with Accountants on Accounting
- ------ -----------------------------------------------------------
and Financial Disclosure
- ------------------------
Not Applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------- --------------------------------------------------
The information set forth under the caption "Election of Directors"
in the registrant's Proxy Statement for its 1997 Annual Meeting of Shareholders
is incorporated herein by this reference.
Item 11. Executive Compensation
- ------- ----------------------
The information set forth under the captions "Directors' Fees"
and "Compensation of Executive Officers" in the registrant's Proxy Statement
for its 1997 Annual Meeting of Shareholders is incorporated herein by this
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------- --------------------------------------------------------------
The information set forth under the captions "Voting Securities
and Principal Holder Thereof" and "Security Ownership By Management" in the
registrant's Proxy Statement for its 1997 Annual Meeting of Shareholders is
incorporated herein by this reference.
- 13 -
<PAGE> 14
Item 13. Certain Relationships and Related Transactions
- ------- ----------------------------------------------
The information set forth under the caption "Certain
Transactions" in the registrant's Proxy Statement for its 1997 Annual Meeting
of Shareholders is incorporated herein by this reference.
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
- ------- -----------------------------------------------------------------
(a)(1) Financial statements: Incorporated herein by
reference, are listed in Item 8 of this report.
(2) The following financial statement schedule and
auditors' report thereon are included in Part IV of this report:
Page(s)
-------
Report of Independent Public Accountants on
Financial Statement Schedule 19
12-09 Valuation and Qualifying Accounts and Reserves 20
Schedules other than those listed above have been omitted
because they are either not required or not applicable, or because the
information is presented in the consolidated financial statements or the
notes thereto.
(3) The following exhibits are filed herewith or incorporated
by reference herein, as indicated:
2.1 Form of Share Purchase Agreement, by and among Allami
Privatizacios Es Vagyonkezelo Reszvenytarsasag, Magyar Viscosa
Rt. and Zoltek Corporation, filed as Exhibit 2.1 to Registrant's
Registration Statement on Form S-1 (Reg. No. 33-97294) is
incorporated herein by this reference
2.2 Agreement on Sale of Lease Receivables, dated September 20, 1995,
by and between Zoltek Corporation and Central European
International Bank Ltd, filed as Exhibit 2.2 to Registrant's
Registration Statement on Form S-1 (Reg. No. 33-97294) is
incorporated herein by this reference
2.3 Agreement on Sale of Shares, dated September 20, 1995, with
respect to 14.132 pcs of preferred shares of Magyar Viscosa Rt.
by and between Zoltek Corporation and CIB Hungaria Bank Rt.,
filed as Exhibit 2.3 to Registrant's Registration Statement on
Form S-1 (Reg. No. 33-97294) is incorporated herein by this
reference
2.4 Agreement on Sale of Shares, dated September 20, 1995, with
respect to 14.934 pcs of ordinary shares and 29.534 pcs of
preferred shares of Magyar Viscosa Rt. by and between Zoltek
Corporation and CIB Hungaria Bank Rt., filed as Exhibit 2.4 to
Registrant's Registration Statement on Form S-1 (Reg. No.
33-97294) is incorporated herein by this reference
- 14 -
<PAGE> 15
2.5 Sales Agreement, dated September 22, 1995, by and between Zoltek
Corporation and Bank of Hungarian Savings Cooperatives, Ltd.,
filed as Exhibit 2.5 to Registrant's Registration Statement on
Form S-1 (Reg. No. 33-97294) is incorporated herein by this
reference
2.6 Agreement on Sale of Shares, dated September 12, 1995, by and
between Zoltek Corporation and Allami Fejlesztesi Intezet, filed
as Exhibit 2.6 to Registrant's Registration Statement on Form S-1
(Reg. No. 33-97294) is incorporated herein by this reference
2.7 Agreement on Sale of Shares Issued By Magyar Viscosa Rt., by and
between Zoltek Corporation and Inter-Europa Bank Rt., filed as
Exhibit 2.7 to Registrant's Registration Statement on Form S-1
(Reg. No. 33-97294) is incorporated herein by this reference
2.8 Agreement on Sale of Loan Receivables by and between Zoltek
Corporation and Bank of Inter-Europa Bank Rt., filed as Exhibit
2.8 to Registrant's Registration Statement on Form S-1 (Reg. No.
33-97294) is incorporated herein by this reference
2.9 Agreement on Sale of Loan Receivables and Shares, dated as of
September 12, 1995, by and between Zoltek Corporation and
Creditanstalt Rt., filed as Exhibit 2.9 to Registrant's
Registration Statement on Form S-1 (Reg. No. 33-97294) is
incorporated herein by this reference
2.10 Agreement for the Sale of Assets, dated as of August 17, 1995, by
and among Zoltek Corporation, Zoltek Properties, Inc., Pioneer
Pump and Packing, Inc., Pioneer Holdings, Inc. and Zsolt Rumy,
filed as Exhibit 2 to Registrant's Current Report on Form 8-K
dated August 31, 1995, is incorporated herein by this reference
3.1 Restated Articles of Incorporation of the Registrant, filed as
Exhibit 3.1 to Registrant's Registration Statement on Form S-1
(Reg. No. 33-51142) is incorporated herein by this reference
3.2 Restated By-Laws of the Registrant, as currently in effect, filed
as Exhibit 3.2 to Registrant's Registration Statement on Form S-1
(Reg. No. 33-51142) is incorporated herein by this reference
4.1 Form of certificate for Common Stock, filed as Exhibit 4.1 to
Registrant's Registration Statement on Form S-1 (Reg. No.
33-51142) is incorporated herein by this reference
10.1 Loan Agreement, dated December 29, 1989, by and between Zoltek
Corporation and Southwest Bank of St. Louis, as amended by
letter, dated August 13, 1992, filed as Exhibit 10.7 to
Registrant's Registration Statement on Form S-1 (Reg. No.
33-51142) is incorporated herein by this reference
10.2 Zoltek Companies, Inc. Long Term Incentive Plan, filed as Exhibit
10.15 to Registrant's Registration Statement on Form S-1 (Reg.
No. 33-51142) is incorporated herein by this reference
- 15 -
<PAGE> 16
10.3 Zoltek Companies, Inc. Directors Stock Option Plan, filed as
Appendix A to Registrant's definitive proxy statement for the
1995 Annual Meeting of Shareholders on Form S-1 (Reg. No.
33-51142) is incorporated herein by this reference
10.4 Promissory Note, dated September 29, 1994, by and between Zoltek
Properties, Inc. and Metlife Capital Corporation, filed as
Exhibit 10.8 to Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 1994, is incorporated herein by
this reference
10.5 Precursor Agreement, dated as of July 1, 1994, by and between
Zoltek Corporation and Courtaulds Fibres Limited, filed as
Exhibit 10.9 to Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 1994, is incorporated herein by
this reference. (An application for confidential treatment has
been made for a portion of Exhibit 10.9.)
10.6 Materials Supply Agreement, dated as of June 15, 1994, by and
between Zoltek Companies, Inc. and The B.F. Goodrich Company,
filed as Exhibit 10.10 to Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1994, is incorporated
herein by this reference. (An application for confidential
treatment has been made for a portion of Exhibit 10.10.)
10.7 Underwriting Agreement, dated November 17, 1995, by and between
the Registrant and First Albany Corporation and Stifel, Nicolaus
& Company, Incorporated, on behalf of the several underwriters,
filed as Exhibit 1.1 to Registrant's Registration Statement on
Form S-1 (Reg. No. 33-97294) is incorporated herein by this
reference
10.8 Loan Agreement, dated November 14, 1994, by and between Zoltek
Properties, Inc. and The Reliable Life Insurance Company, filed
as Exhibit 10.11 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1995, is incorporated herein
by this reference
10.9 Promissory Note, dated November 14, 1994, by and between Zoltek
Corporation and Southwest Bank of St. Louis, filed as Exhibit
10.2 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995, is incorporated herein by this
reference
10.10 Letter, dated March 6, 1995, from Southwest Bank of St. Louis to
the Registrant regarding amendment of certain loan covenants,
filed as Exhibit 10.13 to the Registrant's Quarterly Report of
Form 10-Q for the quarter ended March 31, 1995, is incorporated
herein by this reference
10.11 Purchase Agreement, dated September 18, 1996, by and between
Registrant and Merrill Lynch & Co. and Stifel, Nicolaus &
Company, Incorporated, on behalf of the several underwriters,
filed as Exhibit 1.1 to Registrant's Registration Statement on
Form S-3 (Reg. No. 333-07547) is incorporated herein by this
reference.
13 Registrant's 1996 Annual Report to Shareholders is filed herewith
- 16 -
<PAGE> 17
21 Subsidiaries of the Registrant, filed as Exhibit 21 to the
Registrant's Annual Report on Form 10-K for the year ended September
30, 1995, is incorporated herein by this reference.
23 Consent of Price Waterhouse LLP is filed herewith
- 17 -
<PAGE> 18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
ZOLTEK COMPANIES, INC.
(Registrant)
By /s/ Zsolt Rumy
----------------------------------
Zsolt Rumy, Chairman of the Board,
President and Chief Executive
Officer
Date: December 27, 1996
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<C> <S> <C>
/s/ Zsolt Rumy Chairman, Chief Executive Officer December 27, 1996
- ------------------------ and Director
Zsolt Rumy
/s/ Daniel D. Greenwell Chief Financial Officer December 27, 1996
- ------------------------ and Corporate Secretary
Daniel D. Greenwell
/s/ Linn Bealke Director December 27, 1996
- ------------------------
Linn Bealke
/s/ James W. Betts Director December 27, 1996
- ------------------------
James W. Betts
/s/ Charles A. Dill Director December 27, 1996
- ------------------------
Charles A. Dill
/s/ James Dorr Director December 27, 1996
- ------------------------
James Dorr
/s/ John L. Kardos Director December 27, 1996
- ------------------------
John L. Kardos
</TABLE>
- 18 -
<PAGE> 19
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Zoltek Companies, Inc.
Our audits of the consolidated financial statements referred to in our report
dated November 14, 1996, page 22 of the 1996 Annual Report to Shareholders of
Zoltek Companies, Inc. (which report and consolidated financial statements
are incorporated by reference in the Annual Report on Form 10-K) also
included an audit of the Financial Statement Schedule listed in Item 14 of
this Form 10-K. In our opinion, this Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read
in conjunction with the related consolidated financial statements.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
St. Louis, Missouri
November 14, 1996
- 19 -
<PAGE> 20
<TABLE>
FOR THE YEAR ENDED SEPTEMBER 30, 1996
Rule 12-09 Valuation and Qualifying Accounts and Reserves
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- --------------------------- -------- --------
Additions
---------------------------
Balance at Charged to Charged to Balance at
beginning costs and other accounts Deductions end
Description of period expenses describe describe of period
----------- ---------- ---------- -------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Reserve for doubtful accounts $28,038 $40,633 $121,436<F1> $118,328<F2> $71,779
======= ======= ======== ======== =======
- ----------
<FN>
<F1> Acquisition of Viscosa.
<F2> Write off of uncollectible receivable, net of recovery.
</TABLE>
-------------------------------------
<TABLE>
FOR THE YEAR ENDED SEPTEMBER 30, 1995
Rule 12-09 Valuation and Qualifying Accounts and Reserves
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- --------------------------- -------- --------
Additions
---------------------------
Balance at Charged to Charged to Balance at
beginning costs and other accounts Deductions end
Description of period expenses describe describe of period
----------- ---------- ---------- -------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Reserve for doubtful accounts $20,000 $12,000 $ $3,962<F1> $28,038
======= ======= ======== ====== =======
- ----------
<FN>
<F1> Write off of uncollectible receivable.
</TABLE>
-------------------------------------
<TABLE>
FOR THE YEAR ENDED SEPTEMBER 30, 1994
Rule 12-09 Valuation and Qualifying Accounts and Reserves
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- --------------------------- -------- --------
Additions
---------------------------
Balance at Charged to Charged to Balance at
beginning costs and other accounts Deductions end
Description of period expenses describe describe of period
----------- ---------- ---------- -------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Reserve for doubtful accounts $10,000 $10,000 $ $ $20,000
======= ======= ========== ========== =======
</TABLE>
- 20 -
<PAGE> 21
<TABLE>
EXHIBIT INDEX
-------------
<CAPTION>
Exhibit No. Description
- ----------- -----------
<C> <S>
2.1 Form of Share Purchase Agreement, by and among Allami
Privatizacios Es Vagyonkezelo Reszvenytarsasag, Magyar Viscosa
Rt. and Zoltek Corporation<F*>
2.2 Agreement on Sale of Lease Receivables, dated September 20, 1995,
by and between Zoltek Corporation and Central European
International Bank Ltd.<F*>
2.3 Agreement on Sale of Shares, dated September 20, 1995, with
respect to 14.132 pcs of preferred shares of Magyar Viscosa Rt.
by and between Zoltek Corporation and CIB Hungaria Bank Rt.<F*>
2.4 Agreement on Sale of Shares, dated September 20, 1995, with
respect to 14.934 pcs of ordinary shares and 29.534 pcs of
preferred shares of Magyar Viscosa Rt. by and between Zoltek
Corporation and CIB Hungaria Bank Rt.<F*>
2.5 Sales Agreement, dated September 22, 1995, by and between Zoltek
Corporation and Bank of Hungarian Savings Cooperatives, Ltd.<F*>
2.6 Agreement on Sale of Shares, dated September 12, 1995, by and
between Zoltek Corporation and Allami Fejlesztesi Intezet<F*>
2.7 Agreement on Sale of Shares Issued By Magyar Viscosa Rt., by and
between Zoltek Corporation and Inter-Europa Bank Rt.<F*>
2.8 Agreement on Sale of Loan Receivables by and between Zoltek
Corporation and Bank of Inter-Europa Bank Rt.<F*>
2.9 Agreement on Sale of Loan Receivables and Shares, dated as of
September 12, 1995, by and between Zoltek Corporation and
Creditanstalt Rt.<F*>
2.10 Agreement for the Sale of Assets, dated as of August 17, 1995, by
and among Zoltek Corporation, Zoltek Properties, Inc., Pioneer
Pump and Packing, Inc., Pioneer Holdings, Inc. and Zsolt Rumy<F*>
3.1 Restated Articles of Incorporation of the Registrant<F*>
3.2 Restated By-Laws of the Registrant, as currently in effect<F*>
4.1 Form of certificate for Common Stock<F*>
10.1 Loan Agreement, dated December 29, 1989, by and between Zoltek
Corporation and Southwest Bank of St. Louis, as amended by
letter, dated August 13, 1992<F*>
10.2 Zoltek Companies, Inc. Long Term Incentive Plan<F*>
10.3 Zoltek Companies, Inc. Directors Stock Option Plan<F*>
- -------------
<FN>
<F*> Incorporated herein by reference
- 21 -
<PAGE> 22
EXHIBIT INDEX
-------------
<CAPTION>
Exhibit No. Description
- ----------- ------------
<C> <S>
10.4 Promissory Note, dated September 29, 1994, by and between Zoltek
Properties, Inc. and Metlife Capital Corporation<F*>
10.5 Precursor Agreement, dated as of July 1, 1994, by and between
Zoltek Corporation and Courtaulds Fibres Limited.<F*> (An
application for confidential treatment has been made for a
portion of Exhibit 10.9.)
10.6 Materials Supply Agreement, dated as of June 15, 1994, by and
between Zoltek Companies, Inc. and The B.F. Goodrich Company.<F*>
(An application for confidential treatment has been made for a
portion of Exhibit 10.10.)
10.7 Underwriting Agreement, dated November 17, 1995, by and between
the Registrant and First Albany Corporation and Stifel,
Nicolaus & Company, Incorporated, on behalf of the several
underwriters<F*>
10.8 Loan Agreement, dated November 14, 1994, by and between Zoltek
Properties, Inc. and The Reliable Life Insurance Company<F*>
10.9 Promissory Note, dated November 14, 1994, by and between Zoltek
Corporation and Southwest Bank of St. Louis<F*>
10.10 Letter, dated March 6, 1995, from Southwest Bank of St. Louis to
the Registrant regarding amendment of certain loan covenants<F*>
10.11 Purchase Agreement, dated September 18, 1996, by and between
Registrant and Merrill Lynch & Co. and Stifel, Nicolaus &
Company, Incorporated, on behalf of the several underwriters,
filed as Exhibit 1.1 to Registrant's Registration Statement on
Form S-3 (Reg. No. 333-07547) is incorporated herein by this
reference.)<F*>
13 Registrant's 1995 Annual Report to Shareholders
21 Subsidiaries of the Registrant<F*>
23 Consent of Price Waterhouse LLP
- --------------
<FN>
<F*> Incorporated herein by reference
</TABLE>
- 22 -
<PAGE> 1
<TABLE>
ZOLTEK COMPANIES, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
<CAPTION>
Statement of Operations Data: Year Ended September 30,
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
======= ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Net sales $68,957 $12,698 $ 7,920 $5,141 $3,017
Cost of sales 49,772 7,716 4,502 2,942 1,691
Gross profit 19,185 4,982 3,418 2,199 1,326
Selling, general and administrative expenses 9,510 1,845 1,624 1,356 1,487
Operating income (loss) from continuing operations 9,675 3,137 1,794 843 (161)
Interest expense 1,012 740 617 579 781
Net income (loss) from continuing operations 6,172 1,577 799 136 (675)
Income from discontinued operations, net of income taxes 39 456 208 431 469
------- ------- ------- ------ ------
Net income (loss) $ 6,211 $ 2,033 $ 1,007 $ 567 $ (206)
======= ======= ======= ====== ======
Net income (loss) per common and common equivalent
share from continuing operations $ .45 $ .16 $ .09 $ .02 $ (.11)
Net income per common and common equivalent
share from discontinued operations .00 .05 .02 .04 .08
------- ------- ------- ------ ------
Net income (loss) per common and common equivalent share $ .45 $ .21 $ .11 $ .06 $ (.03)
======= ======= ======= ====== ======
Weighted average common and common equivalent shares
outstanding 13,737 9,583 9,314 9,025 6,000
<CAPTION>
Balance Sheet Data: September 30,
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
======== ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Working capital (deficit) $ 83,314 $ 6,322 $ 3,866 $ 467 $(2,411)
Total assets 134,660 18,390 17,373 15,371 13,680
Short-term debt 4,579 745 1,662 3,040 4,632
Long-term debt, less current maturities 5,207 6,191 6,562 4,394 4,998
Shareholders' equity 108,778 9,519 7,100 5,936 1,692
</TABLE>
ZOLTEK COMPANIES, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Zoltek Companies, Inc.
- --------------------------------------------------------------------------------
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of income, of changes in shareholders'
equity and of cash flows present fairly, in all material respects, the
financial position of Zoltek Companies, Inc., and its subsidiaries at
September 30, 1996 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended September 30,
1996, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As discussed in Note 1, effective October 1, 1993, the Company changed
its method of accounting for income taxes.
Price Waterhouse LLP
St. Louis, Missouri
November 14, 1996
<PAGE> 2
<TABLE>
ZOLTEK COMPANIES, INC.
CONSOLIDATED BALANCE SHEET
<CAPTION>
Assets September 30,
- ------------------------------------------------------------------------------------------------------------------------
1996 1995
============ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 75,446,930 $ 1,677,400
Accounts receivable, less allowance for doubtful accounts of $71,779 and
$28,038, respectively 11,225,528 3,066,427
Inventories 12,596,708 3,127,339
Prepaid expenses 350,129 27,144
Other receivables 2,700,259
Assets held for sale 581,472
------------ -----------
Total current assets 102,319,554 8,479,782
Property and equipment, net 31,440,578 9,355,773
Other assets 899,875 554,675
------------ -----------
Total assets $134,660,007 $18,390,230
============ ===========
<CAPTION>
Liabilities and shareholders' equity
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current liabilities:
Short-term notes payable $ 3,694,495 $
Current maturities of long-term debt 884,364 744,542
Trade accounts payable 8,620,515 861,578
Accrued expenses and other liabilities 2,278,999 290,060
Accrued liabilities for acquired operations 3,326,681
Income taxes payable 200,786 262,052
------------ -----------
Total current liabilities 19,005,840 2,158,232
Other long-term liabilities 973,738
Long-term debt, less current maturities 5,207,092 6,191,157
Deferred income taxes 695,721 522,000
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized, no shares
issued and outstanding
Common stock, $.01 par value, 20,000,000 and 8,000,000 shares authorized,
16,210,338 and 4,813,203 shares issued and outstanding, respectively 162,103 48,132
Additional paid-in capital 99,870,008 4,208,336
Cumulative translation adjustment (2,658,158)
Retained earnings 11,403,663 5,262,373
------------ -----------
108,777,616 9,518,841
------------ -----------
Total liabilities and shareholders' equity $134,660,007 $18,390,230
============ ===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE> 3
<TABLE>
ZOLTEK COMPANIES, INC.
CONSOLIDATED STATEMENT OF INCOME
<CAPTION>
Year Ended September 30,
- -------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
=========== ----------- ----------
<S> <C> <C> <C>
Net sales $68,956,758 $12,697,558 $7,920,651
Cost of sales 49,771,511 7,715,879 4,502,263
----------- ----------- ----------
Gross profit 19,185,247 4,981,679 3,418,388
Selling, general and administrative expenses 9,509,785 1,844,689 1,624,327
----------- ----------- ----------
Operating income from continuing operations 9,675,462 3,136,990 1,794,061
Other income (expense):
Interest expense (1,012,487) (739,506) (616,608)
Interest income 545,974 31,647
Other, net (497,312) 2,653 2,988
----------- ----------- ----------
Income from continuing operations before income taxes 8,711,637 2,431,784 1,180,441
Provision for income taxes 2,539,381 854,713 381,839
----------- ----------- ----------
Net income from continuing operations 6,172,256 1,577,071 798,602
Income from discontinued operations, net of income taxes 38,584 455,512 208,006
----------- ----------- ----------
Net income $ 6,210,840 $ 2,032,583 $1,006,608
=========== =========== ==========
Net income per common and common equivalent share:
Income from continuing operations $ .45 $ .16 $ .09
Discontinued operations .00 .05 .02
----------- ----------- ----------
Net income per common and common equivalent share $ .45 $ .21 $ .11
=========== =========== ==========
Weighted average common and common equivalent shares outstanding 13,736,911 9,582,936 9,313,590
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE> 4
<TABLE>
ZOLTEK COMPANIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<CAPTION>
Additional Cumulative
Preferred Common Paid-in Translation Retained
Stock Stock Capital Adjustment Earnings
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1993 $ 0 $ 31,000 $ 3,665,348 $ 0 $ 2,239,226
Exercise of stock options 285 113,994
Benefit of tax deduction for stock option compensation expense 44,000
Net income for the year ended September 30, 1994 1,006,608
--- -------- ----------- ----------- -----------
Balance, September 30, 1994 0 31,285 3,823,342 0 3,245,834
Exercise of stock options 803 278,994
Benefit of tax deduction for stock option compensation expense 106,000
Common stock split (3 for 2) in September 1995 16,044 (16,044)
Net income for the year ended September 30, 1995 2,032,583
--- -------- ----------- ----------- -----------
Balance, September 30, 1995 0 48,132 4,208,336 0 5,262,373
Secondary stock offering November 1995 20,850 26,270,471
Common stock split (2-for-1) in June 1996 69,550 (69,550)
Secondary stock offering September 1996 23,000 68,853,000
Exercise of stock options 571 78,201
Benefit of tax deduction for stock option compensation expense 460,000
Cumulative translation adjustment (2,658,158)
Net income for the year ended September 30, 1996 6,210,840
--- -------- ----------- ----------- -----------
Balance, September 30, 1996 $ 0 $162,103 $99,870,008 $(2,658,158) $11,403,663
=== ======== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE> 5
<TABLE>
ZOLTEK COMPANIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
Year Ended September 30,
- -------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
=========== ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 6,210,840 $ 2,032,583 $ 1,006,608
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 2,848,160 1,049,103 949,978
Gain on sale of Equipment and Service Business Unit ("ESBU") (387,887)
Other, net 12,281
Changes in assets and liabilities, net of effects from purchase of Viscosa:
Increase in accounts receivable (3,616,406) (131,545) (815,423)
Increase in other receivables (2,141,113)
Increase in inventories (3,650,900) (1,203,239) (701,393)
(Increase) decrease in prepaid expenses (341,244) (214) 22,770
(Increase) decrease in refundable income taxes 200,820 (145,509)
Decrease in inventories held for sale 452,529
Decrease in trade accounts payable (1,321,946) (244,081) (335,805)
Increase (decrease) in accrued expenses and other liabilities 524,496 (73,967) (6,013)
Increase (decrease) in income taxes payable (61,266) 188,591 73,461
Decrease in accrued liabilities for acquired operations (132,041)
Increase (decrease) in deferred income taxes 192,439 (58,000) 315,038
Decrease in other long-term liabilities (1,096,626)
----------- ----------- -----------
Total adjustments (8,331,637) (660,419) (642,896)
----------- ----------- -----------
Net cash provided (used) by operating activities (2,120,797) 1,372,164 363,712
----------- ----------- -----------
Cash flows from investing activities:
Payments for purchase of Viscosa, net of cash acquired (17,555,091)
Payments for purchase of property and equipment (5,133,657) (951,081) (1,135,155)
Proceeds from sale of ESBU 1,716,960
Proceeds from sale of fixed assets 155,559
----------- ----------- -----------
Net cash provided (used) by investing activities (22,533,189) 765,879 (1,135,155)
----------- ----------- -----------
Cash flows from financing activities:
Net decrease in line of credit borrowings (1,027,969) (1,359,567)
Net proceeds from sale of common stock 95,167,321
Net proceeds from exercise of stock options and warrants 538,771 385,797 158,279
Proceeds from issuance of notes payable 13,050,076 5,650,000 5,297,500
Increase in notes receivable (162,596)
Repayment of notes payable (10,215,580) (5,329,172) (3,147,614)
Increase in loan origination costs (9,539) (63,927)
(Increase) decrease in deferred costs 286,256 (286,256)
----------- ----------- -----------
Net cash provided (used) by financing activities 98,664,248 (617,139) 884,671
----------- ----------- -----------
Effect of exchange rate changes on cash (240,732)
----------- ----------- -----------
Net increase in cash 73,769,530 1,520,904 113,228
Cash and cash equivalents at beginning of period 1,677,400 156,496 43,268
----------- ----------- -----------
Cash and cash equivalents at end of period $75,446,930 $ 1,677,400 $ 156,496
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 996,089 $ 775,921 $ 585,021
Income taxes 1,954,000 817,589 276,010
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
The Company sold substantially all the assets of the ESBU in August 1995. Portions
of the payment received by the Company were noncash in nature, as follows:
Long-term note receivable from buyer of ESBU $ 200,000
Debt assumed by buyer of ESBU 581,277
-----------
$ 781,277
===========
The Company sold the remaining assets of the ESBU in June 1996. The payment
received by the Company was non-cash in nature, as follows:
Long-term note receivable from buyer of ESBU $ 206,000
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE> 6
ZOLTEK COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies
- --------------------------------------------------------------------------------
PRINCIPLES OF CONSOLIDATION
Zoltek Companies, Inc. (the "Company") is a holding company, having no
operations of its own. Zoltek Corporation ("Zoltek") develops, manufactures
and markets advanced material and industrial products for selected niche
markets. The Carbon Fibers Business Unit of Zoltek manufactures carbon
fibers used in aircraft brakes and other composite materials. In August
1995, the Company's Board of Directors authorized the disposition of the
Company's former Equipment and Services Business Unit ("ESBU"), which
supplied industrial process equipment, aftermarket components and repair
services. These operations have been classified as a discontinued operation
(Note 12). Zoltek Magyar Viscosa Rt ("Viscosa") manufactures and markets
acrylic and nylon fibers and yarns to the textile industry. Other Viscosa
products include nylon granules, plastic grids and nets, and carboxymethyl
cellulose. In addition, Viscosa provides public works services for plant
use and to the town of Nyergesujfalu, Hungary. 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.
FOREIGN CURRENCY TRANSLATION
Viscosa's consolidated balance sheet was translated from Hungarian
Forints to U.S. Dollars at the exchange rate in effect at the balance sheet
date, while its consolidated statement of operations was translated using
the average exchange rates in effect during the period. 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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires that management make estimates and
assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results may differ from those estimates and
assumptions.
REVENUE RECOGNITION
The Company recognizes sales on the date the products are shipped.
During 1996, approximately $5,688,000 and $5,247,000, respectively, of total
Carbon Fibers Business Unit's sales revenue was earned from two customers.
During 1995, approximately $3,780,000 and $4,658,000, respectively, of total
Carbon Fibers Business Unit's sales revenue was earned from the same two
customers.
CONCENTRATION OF CREDIT RISK
Products of the Carbon Fiber Business Unit are primarily sold to
customers in the aerospace and automotive industries; Viscosa's products are
mainly sold to customers in the textile industry. While the markets for the
Company's products are geographically unlimited, most of Zoltek's business
is with customers located in North America and most of Viscosa's sales are
to customers in Eastern Europe, the Commonwealth of Independent States,
Europe and Asia. The Company performs ongoing credit evaluations. Viscosa
generally requires collateral for significant export sales to new customers;
Zoltek generally does not require collateral. The Company maintains
reserves for potential credit losses and such losses have been within
management's expectations. As of September 30, 1996, the Company had no
significant concentrations of credit risk.
CASH AND CASH EQUIVALENTS
All highly liquid investments purchased with a maturity of three months
or less are considered to be cash equivalents. Such investments amounted to
$74,021,349 and $1,500,950 at September 30, 1996 and 1995, respectively. At
September 30, 1996, cash equivalents included $69,331,255 of U.S. Treasury
bills.
INVENTORIES
Inventories are valued at the lower of cost, determined on the first-in,
first-out method, or market. Cost includes material, labor and overhead.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures which improve
the asset or extend the useful life are capitalized, including interest on
funds borrowed to finance the acquisition or construction of major capital
additions. No interest was capitalized for the years ended September 30,
1996, 1995 and 1994. 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.
<PAGE> 7
ZOLTEK COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
The Company provides for depreciation by charging amounts sufficient to
amortize the cost of the properties over their estimated useful lives using
primarily straight line methods. The range of estimated useful lives used
in computing depreciation is as follows:
<TABLE>
<S> <C>
Buildings and improvements 10 to 31.5 years
Automobiles 3 to 5 years
Machinery and equipment 5 to 10 years
Furniture and fixtures 7 to 10 years
</TABLE>
The Company uses primarily accelerated depreciation methods for income
tax purposes.
FINANCIAL INSTRUMENTS
The Company does not hold any financial instruments for trading
purposes. The carrying value of cash and cash equivalents and debt
approximates fair value at September 30, 1996.
RESEARCH AND DEVELOPMENT EXPENSES
Expenditures for research, development and engineering of products and
manufacturing processes are expensed as incurred. Such costs were
approximately $643,000, $370,000, and $263,000 in 1996, 1995, and 1994,
respectively.
INCOME TAXES
Effective October 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes" which
did not have a material impact on the Company's financial statements. SFAS
109 is an asset and liability approach that requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences
of events that have been recognized in the Company's financial statements or
tax returns. Deferred tax expense (benefit) is the result of changes in the
liability for deferred taxes.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Net income per common and common equivalent share is calculated by
dividing net income by the sum of the weighted average number of shares of
common stock outstanding of 13,348,294 and common stock equivalents of
388,617 for the year ended September 30, 1996. Common stock equivalents are
excluded from the computation for the years ended September 30, 1995 and
1994 because their dilutive effect is not significant. All share and per
share data have been adjusted to give retroactive effect to the
recapitalizations and stock splits described in Note 9.
STOCK-BASED COMPENSATION
The Company currently accounts for its stock-based compensation plans
using the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25).
RECENT ACCOUNTING PRONOUNCEMENTS
The following recently issued accounting standards will be applicable to
the Company for its fiscal year ending September 30, 1997:
SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," effective for the Company for its fiscal
year ending September 30, 1997, establishes standards for the impairment of
long-lived assets, certain identifiable intangibles and goodwill related to
those assets to be held and used and those to be disposed of. SFAS 121 is
not expected to have a material impact on the Company's financial condition
or results of operations.
SFAS 123, "Accounting for Stock-based Compensation," defines the fair value
based method of accounting for stock option, purchase and award plans. SFAS
123 allows companies to use the fair value method defined therein or to
continue use of the intrinsic value method as outlined in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB 25). The Company anticipates utilizing APB 25 in accounting for stock
option plans and, as a result, SFAS 123 is not expected to have a material
impact on the Company's financial condition or results of operations.
FINANCIAL PRESENTATION CHANGES
Certain prior year amounts have been reclassified to conform to the
current year presentation.
<PAGE> 8
ZOLTEK COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
2. Acquisition
- --------------------------------------------------------------------------------
On December 8, 1995, the Company completed the acquisition of Viscosa.
Pursuant to agreements with the Hungarian State Property Agency and other
shareholders and lenders, the Company acquired approximately 95% of the
equity ownership and substantially all the debt of Viscosa for approximately
$18 million. Subsequently, the Company acquired an additional 4% of the
equity ownership for $250,000. During fiscal 1996, the Company made $5
million available to fund Viscosa's working capital requirements and an
additional $1 million available to fund capital expenditures associated with
new continuous carbonization lines which the Company plans to install at
Viscosa. The Viscosa acquisition is reported under the purchase method of
accounting and is 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 of the fair market value of the assets acquired over the purchase
price was allocated to reduce property and equipment.
The purchase price allocation reflects the recording at the acquisition
date of a liability of $3,950,000 related to the estimated cost for
reorganization of the acquired operations, including modification of
facilities layout and possible demolition of obsolete buildings, and product
rationalization, including employee severance and exit costs. The liability
also contains amounts necessary to correct certain identified environmental
deficiencies and enhancements of other environmental compliance systems.
Additionally, the liability contains an amount for a government grant received
by Viscosa to finance salary payments to Viscosa's employees during the period
April through December 1993. The grant is repayable by Viscosa if employment
levels decline below 1,850 through 1997, subject to certain exceptions.
Presently, Viscosa's active workforce is below the level specified by the
grant. Viscosa is undertaking to clarify the application of the calculation
and to amend the agreement to confirm Viscosa's understanding.
Set forth below are unaudited pro forma combined results of operations
of Zoltek and Viscosa for the twelve months ended September 30, 1996 as if
the Viscosa acquisition had been completed as of October 1, 1995 and for the
twelve months ended September 30, 1995 as if the Viscosa acquisition had
been completed as of October 1, 1994. The pro forma combined financial
information set forth below is not necessarily indicative of future results
of operations or results of operations that would have been reported for
the periods indicated had the acquisition of Viscosa been completed as of
October 1, 1995 or 1994.
<TABLE>
<CAPTION>
Twelve Months Ended
September 30,
-----------------------------
1996 1995<F*>
=========== -----------
<S> <C> <C>
Net sales $80,323,000 $63,483,000
Income (loss) before extraordinary items 6,034,000 (85,000)
Net income 5,996,000 10,542,000
Net income per share .43 .79
- ----------------
<FN>
<F*> The period ended September 30, 1995 includes extraordinary items related
to the sale of certain of Viscosa's assets and the forgiveness of certain
of its debt in December 1994 for a net gain of $10.6 million, relating to
the Viscosa operations.
</TABLE>
3. Inventories
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Inventories consist of the following: September 30,
- --------------------------------------------------------------------------------
1996 1995
=========== -----------
<S> <C> <C>
Raw materials $ 5,446,296 $ 1,091,113
Work-in-process 1,565,786 106,343
Finished goods 5,584,626 1,929,883
----------- -----------
$12,596,708 $ 3,127,339
=========== ===========
</TABLE>
4. Property and equipment
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Property and equipment consists of the following: September 30,
- --------------------------------------------------------------------------------
1996 1995
=========== -----------
<S> <C> <C>
Land $ 1,393,314 $ 314,009
Buildings and improvements 15,974,739 5,290,932
Machinery and equipment 18,905,550 7,272,943
Furniture and fixtures 2,134,226 718,687
----------- -----------
38,407,829 13,596,571
Less: accumulated depreciation (6,967,251) (4,240,798)
----------- -----------
$31,440,578 $ 9,355,773
=========== ===========
<PAGE> 9
ZOLTEK COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
5. Income taxes
- --------------------------------------------------------------------------------
The components of the provision for income taxes for the years ended
September 30, are as follows:
</TABLE>
<TABLE>
<CAPTION>
From continuing operations:
Current: 1996 1995 1994
========== ---------- --------
<S> <C> <C> <C>
Federal $1,566,000 $ 776,536 $(18,178)
State 98,573 74,177 40,979
Non-U.S. Local 401,000
---------- ---------- --------
2,065,573 850,713 22,801
Deferred:
Federal 154,000 4,000 341,000
State 7,000 18,038
Non-U.S. 312,808
---------- ---------- --------
473,808 4,000 359,038
---------- ---------- --------
Total continuing operations 2,539,381 854,713 381,839
---------- ---------- --------
From discontinued operations:
Current:
Federal 24,000 271,416 125,178
State 1,427 22,871 11,983
---------- ---------- --------
Total discontinued operations 25,427 294,287 137,161
---------- ---------- --------
$2,564,808 $1,149,000 $519,000
========== ========== ========
</TABLE>
Refundable income taxes at September 30, 1994 represent refunds
resulting from amended returns filed for prior years to expense research and
development costs and recognize tax credits. The benefit of these amended
returns is reflected as a reduction of the current tax provision for the
year ended September 30, 1994.
Deferred income taxes reflect the tax impact of temporary differences
between the amount of assets and liabilities for financial reporting
purposes and such amounts as measured by tax laws and regulations. Amounts
giving rise to the deferred income tax liability at September 30 are as
follows:
<TABLE>
<CAPTION>
1996 1995
========== ---------
<S> <C> <C>
Depreciation $ 863,235 $ 769,919
Inventories (18,385) (53,405)
Accrued vacation pay (35,627) (25,970)
Deferred state income taxes (20,740) (18,360)
Accrued health fund (3,677) (15,037)
Other 4,194 (29,147)
Non-U.S. operations deferred tax, net 276,721
---------- ---------
1,065,721 628,000
Less: tax benefit of stock options (370,000) (106,000)
---------- ---------
Total deferred tax liability $ 695,721 $ 522,000
========== =========
</TABLE>
At September 30, 1996 the Company has deferred tax assets of $2,238,779
related to net operating loss carryforwards and tax positions subject to
examination by Hungarian tax authorities. During 1996 the Company recorded
a reduction in the valuation allowance of $265,000 related to utilization of
net operating loss carryforwards in 1996. The Company has a valuation
allowance of $2,238,779 against these deferred tax assets at September 30,
1996.
The provision for income taxes at September 30 differs from the amount
using the statutory federal income tax rate (34%) as follows:
<TABLE>
<CAPTION>
1996 1995 1994
========== ---------- --------
<S> <C> <C> <C>
At statutory rate:
Income taxes on income from continuing operations $2,961,957 $ 827,000 $401,350
Income taxes on income from discontinued operations 21,800 255,000 117,356
Increases (decreases):
Lower effective tax rate on non-U.S. operations (593,000)
Valuation allowance change (265,000)
Local taxes, non-U.S. 401,000
State taxes, net of federal benefit 70,600 64,000 44,617
R & D tax credits, net of federal benefit (15,000) (52,441)
Other (32,549) 18,000 8,118
---------- ---------- --------
$2,564,808 $1,149,000 $519,000
========== ========== ========
</TABLE>
For the years ended September 30, 1996, 1995 and 1994, the consolidated
income from continuing operations before income taxes by domestic and
foreign sources was $5,005,586 and $3,706,051, $2,431,784 and $0 and
$1,180,441 and $0, respectively.
<PAGE> 10
ZOLTEK COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
6. Financing
- --------------------------------------------------------------------------------
SHORT-TERM DEBT AND CREDIT AGREEMENTS
The Company has short-term debt totaling $3,694,495 at September 30,
1996 of which $3,034,000 was represented by bank loans. The portion of
these bank loans secured by inventory is $2,000,000 while the remaining
amounts are unsecured. The interest rates on these loans is determined at
the time of borrowing based upon the London Interbank Offered Rates (LIBOR)
plus 1.5 percent. The remaining balance of the short-term debt represents
borrowings of $660,495 under a bank line of credit, secured by Viscosa real
estate, with the maximum credit line of $947,000 at September 30, 1996. The
interest rates for the line of credit are equal to the Hungarian National
Bank prime rate plus 1.5 percent or LIBOR plus 1.5 percent, depending on the
currency of repayment.
The Company has a revolving credit agreement which bears interest at
prime (prime rate at September 30, 1996 was 8.25%) with a maximum available
of $3,500,000. At September 30, 1996 the unused portion of the line of
credit amounted to $3,500,000. The Company also has a $1,000,000 unsecured
borrowing ability under a working capital credit facility. Additionally,
the Company has received a commitment for a $5,000,000 secured equipment
loan to finance planned U.S. capital expenditures. There were no borrowings
under the working capital credit or secured equipment loan facilities at
September 30, 1996.
LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt consists of the following: September 30,
- -----------------------------------------------------------------------------------------------------------------------
1996 1995
========== ----------
<S> <C> <C>
EQUIPMENT LOANS
Note payable with interest at 5%, payable in monthly installments of
$3,333 principal plus interest on the outstanding balance to maturity
in November 1996, at which time the remaining principal balance is due $ 106,369 $ 243,333
Note payable with interest at 9%, payable in monthly installments of
principal and interest of $62,458 to maturity in November 1999 1,810,808 2,366,779
REAL ESTATE LOANS
Note payable with interest at 9.95%, payable in monthly installments of
principal and interest of $19,288 to maturity in September 2009 1,684,431 1,744,950
Note payable with interest at 9.5%, payable in monthly installments of
principal and interest of $27,672 to maturity in December 2009 2,489,848 2,580,637
---------- ----------
6,091,456 6,935,699
Less: amounts payable within one year (884,364) (744,542)
---------- ----------
$5,207,092 $6,191,157
========== ==========
</TABLE>
Following is a schedule of required principal payments of long-term debt:
<TABLE>
<CAPTION>
YEAR ENDING
SEPTEMBER 30, TOTAL
<S> <C>
1997 $ 884,364
1998 852,211
1999 732,869
2000 222,555
2001 245,085
Thereafter 3,154,372
----------
$6,091,456
==========
</TABLE>
The revolving credit agreement and notes payable, aggregating $1,917,177
at September 30, 1996 are secured by accounts receivable, inventories,
machinery and equipment, and general intangibles. The remaining notes
payable are secured by real estate holdings.
Under the terms of the revolving credit agreement and certain long-term
debt, Zoltek is required to maintain a minimum level of tangible net worth
and there are restrictions on capital expenditures. The Company is in
compliance with the debt covenants at September 30, 1996.
<PAGE> 11
ZOLTEK COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
7. Commitments and contingencies
- --------------------------------------------------------------------------------
LEASE
Land at the carbon fibers manufacturing facility is leased under an
operating lease which provides for 100% real estate tax abatement and
expires in December 2065, with a renewal option for 24 years expiring in
December 2089. The lease required a prepayment of $50,000 for rental
through October 1993 and requires annual rental payments of $57,991 through
October 2010. Rental expense related to this lease was $57,991 for the
years ended September 30, 1996 and 1995 and $54,552 for 1994.
LEGAL
The Company is a party to various claims and legal proceedings arising
out of the normal course of its business. In the opinion of management, the
ultimate outcome of these claims and lawsuits will not have a material
adverse effect upon the financial condition or results of operations of the
Company.
8. Profit sharing plan
- --------------------------------------------------------------------------------
The Company maintains a 401(k) Profit Sharing Plan for the benefit of
employees who have completed six months of service and attained 21 years of
age. The Company's contribution to the plan is determined annually by the
Board of Directors. Contributions of $138,600, $75,000 and $55,000 were
made for the years ended September 30, 1996, 1995 and 1994, respectively.
9. Recapitalizations and stock splits
- --------------------------------------------------------------------------------
In August 1992, the Company's authorized capital structure was changed
to 8,000,000 shares of common stock, par value $.01 per share, and 1,000,000
shares of preferred stock, par value $.01 per share. In addition, pursuant
to a stock dividend, the Company split its shares of common stock at a rate
of 4,000 to 1, thereby increasing issued and outstanding shares from 1,500
to 6,000,000.
On August 31, 1995, the Company announced a three-for-two stock split
implemented by a stock dividend of one share for each two shares
outstanding. The stock dividend was paid on September 29, 1995 to
shareholders of record on September 15, 1995.
In February 1996, the Company's authorized capital structure was changed
to 20,000,000 shares of common stock, par value $.01 per share, and
1,000,000 shares of preferred stock, par value $.01 per share.
On May 20, 1996, the Company announced a two-for-one stock split
implemented by a stock dividend of one share for each share outstanding.
The stock dividend was paid June 17, 1996 to shareholders of record on June
3, 1996.
All share and per share amounts in the accompanying financial statements
and notes have been adjusted to give retroactive effect to the stock split
for all periods presented except for on the Consolidated Statement of
Changes in Shareholders' Equity and Balance Sheet. In these statements,
shares issued and outstanding prior to June 17, 1996 are reported on a
pre-split basis.
10. Stock options and warrants
- --------------------------------------------------------------------------------
INITIAL PUBLIC OFFERING
In November 1992, the Company completed an initial public offering of
3,300,000 shares of common stock and received net proceeds of $3.7 million.
The Company applied $1.4 million of the net proceeds to reduce indebtedness
and $631,000 was used to reduce accounts payable. The remaining $1.7
million was utilized for capital expenditures. In conjunction with the
offering, the Company sold warrants to purchase 165,000 shares of the
Company's common stock at an exercise price per share equal to the initial
public offering price of $1.33 per share (increasing annually by 7% of the
initial public offering price) to the representatives of the underwriters,
for an aggregate price of $100.00. These warrants were exercised during
fiscal year 1995 at $1.43 per share.
<PAGE> 12
ZOLTEK COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
LONG-TERM INCENTIVE PLAN
In July 1992, the Company adopted a Long-term Incentive Plan that
authorizes the Compensation Committee of the Board of Directors (the
Committee) to grant key employees and officers of the Company incentive or
nonqualified stock options, stock appreciation rights, performance shares,
restricted shares and performance units. The Committee determines the
prices and terms at which awards may be granted along with the duration of
the restriction periods and performance targets. Currently, 900,000 shares
of common stock may be issued pursuant to awards under the plan.
Outstanding stock options expire 10 years from the date of grant or upon
termination of employment. Options granted in 1993 vested ratably from date
of grant over three years. Options granted in 1995 and 1996 vest 100% five
years from date of grant. The options were issued at an option price equal
to the market price on the date of grant. Information related to stock
options during the four years ended September 30, 1996 is as follows:
<TABLE>
<CAPTION>
Number of Option
Shares Price
--------- ------
<S> <C> <C>
Shares under option at September 30, 1993 400,500 $ 1.33
Granted - -
Exercised 85,710 1.33
Forfeited 61,290 1.33
-------
Shares under option at September 30, 1994 253,500 1.33
Granted 390,000 3.42-6.25
Exercised 80,490 1.33
Forfeited 69,510 1.33
-------
Shares under option at September 30, 1995 493,500 1.33-6.25
Granted 275,000 8.38-22.44
Exercised 83,020 1.33
Forfeited 80,480 1.33-3.42
-------
Shares under option at September 30, 1996 605,000 1.33-22.44
=======
</TABLE>
DIRECTORS STOCK OPTION PLAN
In July 1992, the Company adopted a Directors Stock Option Plan under
which options to purchase 3,000 shares of common stock at the then fair
market value will be issued to each non-employee director annually. In
addition, newly elected non-employee directors receive options to purchase
3,000 shares of common stock, at the then fair market value. The plan was
amended in February 1995 to increase the annual grants to 7,500 shares.
Pursuant to the plan, options to purchase 9,000 shares of common stock at an
exercise price of $1.33 per share, 9,000 shares of common stock at an
exercise price of $2.34 per share, 30,000 shares of common stock at an
exercise price of $4.34 per share and 37,500 shares of common stock at an
exercise price of $13.50 per share were outstanding as of September 30,
1996. The options expire in 2002, 2004, 2005 and 2006, respectively.
11. Secondary stock offerings
- --------------------------------------------------------------------------------
Pursuant to a secondary public offering in November 1995, the Company
sold 4,170,000 shares of common stock and received net proceeds of $26.3
million. The Company used approximately $18 million to fund the purchase of
Viscosa and the remaining proceeds for Viscosa's working capital needs, and
general corporate purposes, including capital expenditures.
On September 18, 1996, the Company completed a secondary offering of
2,300,000 shares of common stock and received net proceeds of $68.9 million.
The Company plans to utilize these funds to expand its production capacity
by constructing additional continuous carbonization lines by the end of
fiscal 1998 and for working capital needs and general corporate purposes.
12. Discontinued operations
- --------------------------------------------------------------------------------
In view of ESBU's operating performance, demands of the unit on the
Company's finite managerial resources and the perceived opportunities in the
carbon fibers operations, the Company's Board of Directors authorized in
August 1995 the disposition of the Company's equipment and services business
unit. Revenues from the equipment and services business unit were
$6,725,000, $5,848,000 and $760,000 in fiscal 1994, 1995 and 1996,
respectively.
On August 31, 1995, the Company sold the valves, pumps and repair and
fluid-sealing product lines for aggregate consideration of approximately
$2.5 million (consisting of $1.7 million cash, $581,000 of debt assumption
and a note receivable for $200,000). The sale resulted in an after-tax gain
of approximately $230,000 for financial statement reporting purposes which
was recorded in the fourth quarter of fiscal 1995. The Company sold the
unit's remaining product line, flexible graphite products, on June 30, 1996
in consideration of a note receivable for $206,000, which approximated the
net book value of such assets.
<PAGE> 13
ZOLTEK COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
13. Summary of quarterly results (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FISCAL YEAR 1996 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
========================================================================================================================
<S> <C> <C> <C> <C>
Net sales $9,351,709 $18,862,542 $18,999,243 $21,743,264
Gross profit 2,652,176 4,396,605 5,097,417 7,039,049
Net income from continuing operations 934,054 1,234,814 1,584,727 2,418,662
Net income from discontinued operations 17,235 5,192 16,157 0
Net income $ 951,289 $ 1,240,006 $ 1,600,884 $ 2,418,661
Net income per common and common equivalent share:
Net income from continuing operations $ .08 $ .09 $ .12 $ .16
Net income from discontinued operations .00 .00 .00 .00
---------- ----------- ----------- -----------
Net income $ .08 $ .09 $ .12 $ .16
========== =========== =========== ===========
<CAPTION>
FISCAL YEAR 1995 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
========================================================================================================================
<S> <C> <C> <C> <C>
Net sales $2,401,970 $3,302,401 $2,970,171 $4,023,016
Gross profit 1,079,000 1,245,957 1,231,653 1,425,069
Net income from continuing operations 321,635 352,034 375,536 527,866
Net income from discontinued operations 47,785 89,578 72,350 245,799
Net income $ 369,420 $ 441,612 $ 447,886 $ 773,665
Net income per common and common equivalent share:
Net income from continuing operations $ .03 $ .04 $ .04 $ .05
Net income from discontinued operations .01 .01 .01 .03
---------- ---------- ---------- ----------
Net income $ .04 $ .05 $ .05 $ .08
========== ========== ========== ==========
<FN>
Note: Quarterly earnings have been adjusted to reflect the presentation of
the Equipment and Services Business Unit as a discontinued operation (Note
12) and to reflect the 3 for 2 stock split effective September 29, 1995 and
the 2 for 1 stock split effective June 17, 1996 (Note 9).
- -------------------------
<F*> In the fourth quarter of 1995, income from discontinued operations
includes the gain on sale of a portion of the Equipment and Services
Business Unit of $230,000.
</TABLE>
<PAGE> 14
ZOLTEK COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
14. Segment information
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Twelve months ended September 30,
- --------------------------------------------------------------------------------
1996<F*> 1995<F**>
=========== -----------
<S> <C> <C>
Net sales
Zoltek Corporation $ 20,035,802 $12,697,558
Zoltek Magyar Viscosa Rt 48,920,956
------------ -----------
$ 68,956,758 $12,697,558
============ ===========
Income from operations
Zoltek Corporation $ 5,186,479 $ 3,136,990
Zoltek Magyar Viscosa Rt 4,488,983
------------ -----------
$ 9,675,462 $ 3,136,990
============ ===========
Total assets
Zoltek Corporation $ 18,692,171 $18,390,230
Zoltek Magyar Viscosa Rt 41,416,194
General corporate 74,551,642
------------ -----------
$134,660,007 $18,390,230
============ ===========
Capital expenditures
Zoltek Corporation $ 3,315,366 $ 539,166
Zoltek Magyar Viscosa Rt 1,818,291
------------ -----------
$ 5,133,657 $ 539,166
============ ===========
Depreciation and amortization expense
Zoltek Corporation $ 1,132,874 $ 794,254
Zoltek Magyar Viscosa 1,715,286
------------ -----------
$ 2,848,160 $ 794,254
============ ===========
<FN>
- -------------------
<F*> Information for Zoltek Magyar Viscosa Rt
is from the date of acquisition,
December 8, 1995, to September 30, 1996
<F**> Balances exclude ESBU
</TABLE>
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
- ----------------------------------------------------------------------------
The Company is a Missouri corporation founded in 1975. Until it
entered the carbon fibers business in fiscal 1988, the Company's business
consisted of engineering, sales and installation of various process
equipment, provision of in-house and field repair services, and distribution
of various industrial products manufactured by others.
The Company entered the carbon fiber business in fiscal 1988 through
the acquisition of a Lowell, Massachusetts company that produced a line of
carbon fiber products for niche and specialty markets. In fiscal 1991, the
Company closed its carbon fiber production facility in Lowell, and moved to
its new production facility in St. Charles, Missouri. This production
facility achieved full production capability in July 1992. In November 1992,
the Company completed its initial public offering to finance the new
facilities and to fund future growth and product development.
In 1994, the Company began producing low-cost, high-strength carbon
fiber products utilizing a proprietary continuous carbonization process to
complement its specialty carbon fibers product line. During the same year,
the Company negotiated two significant multi-year supply arrangements with
BFGoodrich Aerospace for fibers used in carbon/carbon aircraft brakes and
with TRW Vehicle Safety Systems for use in enhancing the performance of its
airbag propellant. These two supply relationships have provided a
substantial sales base to support Zoltek's expansion.
In order to focus its efforts on emerging opportunities in the carbon
fibers market, the Company sold all of the assets of its former equipment
and services business unit during fiscal 1995 and 1996. The results of the
unit's operations have been reclassified to identify them as discontinued
operations.
In November 1995, the Company completed a secondary public offering of
4.2 million shares of Common Stock and received net proceeds of $26.3
million. The Company used the proceeds of the offering primarily to acquire
substantially all of the shares of Magyar Viscosa Rt. for $17.8 million in
December 1995 and to provide working capital to enhance Viscosa's
operations. Viscosa manufactures textile-type acrylic fibers, which is the
raw material for manufacturing of carbon fibers, as well as nylon and
other industrial materials. This acquisition enabled the Company to secure
access to the technology underlying the production of the acrylic fiber raw
material. The Company also expects Viscosa will begin to supply acrylic
fiber used as carbon fiber precursor by the end of 1997. The Viscosa
acquisition is reported under the purchase method of accounting and is
included in the Company's consolidated financial statements from the date of
acquisition.
Zoltek has achieved substantial sales growth in its carbon fibers
business. From fiscal 1992 to fiscal 1996, net sales of carbon fibers grew
from $3.0 million to $20.0 million. Much of the sales increase came from
specialty applications, however, the Company believes that its greatest
opportunities are presented by the market for its low-cost carbon fibers used
in much broader applications. The Company is producing carbon fibers at its
full operational capacity and needs to expand its capacity to meet the
indicated and forecasted demand for carbon fiber products.
To support the Company's growth strategy, it completed a secondary
stock offering in September 1996. The Company sold 2.3 million shares of
<PAGE> 16
Common Stock and received net proceeds of $68.9 million. The Company is
utilizing the net proceeds, together with internally generated funds, to
expand its carbon fibers manufacturing capacity from its current capacity
of approximately 3.5 million pounds to approximately 35 million pounds in
the United States and Hungary over the next four to five years. In addition
to securing the raw material source, the Company has developed a standardized
continuous carbonization line design to optimize the technical process
capabilities, reduce equipment cost and shorten lead time for future
expansion between the decision to add capacity and when lines become
operational.
COMPARISON OF RESULTS FOR FISCAL YEARS ENDED SEPTEMBER 30, 1996 AND 1995
- ------------------------------------------------------------------------
The Company's net sales increased 443% to $69.0 million in 1996 from
$12.7 million in 1995. The increase resulted from an increase in Zoltek's
carbon fibers business and the inclusion of Viscosa's revenues since its
acquisition on December 8, 1995. Net sales from Zoltek's carbon fibers
business totaled $20.0 million in fiscal 1996, an increase of 57% compared
to fiscal 1995. Higher sales revenues were recorded across carbon fiber
product categories. Growth in carbon fiber sales was constrained by
production capacity. For the period from December 8, 1995 to September 30,
1996, Viscosa reported net sales of $49.0 million. All of the Viscosa sales
were from the markets Viscosa had historically served prior to the
acquisition.
Gross profit increased 285% to $19.2 million in fiscal 1996.
Increased gross profit resulted from a 61% increase in gross profit from
Zoltek's carbon fiber business and from the operation of Viscosa after its
acquisition by the Company. Excluding Viscosa, Zoltek's gross margin from
the carbon fibers business was 40% for fiscal 1996. The Company's overall
gross profit decreased to 28% for the year from 39% in the prior year due to
the acquisition of Viscosa which generates significantly lower gross margins
than the carbon fibers business. Although Viscosa's margins are generally
lower, its productivity and margins have significantly improved compared to
its operations prior to the acquisition.
Selling, general and administrative expenses were $9.5 million for
fiscal 1996 compared to $1.8 million during the prior year. Essentially all
of the increase resulted from consolidation of the Viscosa operation. To a
lesser extent, these expenses increased due to the addition of engineering,
development and administrative staff during the year ended September 30,
1996, as well as costs related to the increased sales level.
Interest expense was $1.0 million for fiscal 1996. Interest income for
the year was $546,000. Net interest expense declined 34% for fiscal 1996
compared to 1995 largely due to interest generated on increased cash and
short-term investment balances in the current year.
During fiscal 1996, the Company reported income tax expense of $2.6
million compared to $1.2 million in 1995. The effective tax rate remained
relatively constant between years, excluding the effects of the Viscosa
acquisition. The statutory rate for the Viscosa operation in Hungary is
18%. At present, Viscosa has net operating loss carryforwards arising from
losses incurred prior to the Company's acquisition. These net operating
loss carryforwards resulted in a reduced income tax liability. Due to the
substantial uncertainty of the availability of these operating loss
carryforwards to reduce Viscosa's future income tax liability, the Company
recognized a full valuation allowance against these net operating loss
carryforwards at the date of acquisition. During 1996, Viscosa utilized
net operating loss carryforwards to reduce the income tax liability by
$578,000. Additionally, a valuation allowance adjustment of $265,000 was
recognized as a reduction to income tax expense. At September 30, 1996, the
Company continues to recognize a valuation allowance against the available
net operating loss carryforwards.
<PAGE> 17
In connection with the Company's determination, in August 1995, to
dispose of its equipment and services business unit, the Company put the
unit's business and related assets up for sale. The valves, pumps, and
repair and fluid sealing product lines were sold in August 1995. The
Company sold the unit's remaining product line, flexible graphite products,
in June 1996 in consideration of a note receivable for $206,000, which
approximated the net book value of such assets.
As a result of the foregoing, net income increased 206% to $6.2
million for fiscal 1996 from $2.0 million in 1995. Similarly, the Company
reported net income per share of $0.45 for fiscal 1996 compared to net
income per share of $0.21 in 1995. Weighted average common shares increased
to 13.7 million from 9.6 million primarily due to the secondary offerings in
November 1995 and September 1996.
COMPARISON OF RESULTS FOR FISCAL YEARS ENDED SEPTEMBER 30, 1995 AND 1994
- ------------------------------------------------------------------------
Net sales increased by 60% to $12.7 million in 1995 from $7.9 million
in 1994. The improvement resulted principally from growth in sales of
carbon fibers for aircraft brake, automotive airbag and conductive plastics
applications.
Gross profit increased 46% to $5.0 million in 1995 from $3.4 million
in 1994. As a percentage of net sales, gross profit was 39% in 1995,
compared to 43% in 1994. The decrease was attributable primarily to
increases in raw material costs, variations in the mix of products sold and
the cost associated with quantities of carbon fibers provided to potential
customers for evaluation purposes, the effect of which was partially offset
by economies realized from the increase in the level of net sales.
Selling, general and administrative expenses were $1.8 million in 1995
compared to $1.6 million in 1994. Expenses associated with the expanded
level of net sales and a $106,000 increase in research and development
expense were offset by a decrease of $275,000 in training and start-up
expenses for manufacturing capacity added in 1994. As a percentage of net
sales, selling, general and administrative expenses were 14.5% in 1995
versus 20.5% in 1994, reflecting improved leveraging of fixed costs.
Interest expense increased to $740,000 from $617,000 in the prior year
due primarily to the increase in outstanding long-term debt related to the
refinancing of the Company's primary real estate properties, as well as an
increase in interest rates.
During 1995, the Company reported income tax expenses from its
continued operations of $855,000 compared to income tax expense of $382,000
in 1994, as a result of the increase in the reported level of income. The
total income tax provision was $1,149,000 during fiscal 1995 compared to
$519,000 during the prior year. The effective tax rate increased to 36.1%
from 34.0% in the prior year due to recognition in 1994 of refunds from
amending prior years returns to claim research and development tax credits.
In connection with the Company's determination in August 1995 to
dispose of its equipment and services business unit, the Company put the
unit's business and related assets up for sale. The results of the unit's
operations have been reclassified to separately identify them as
discontinued operations. The unit reported net sales of $5.8 million in 1995
and $6.7 million in 1994. The unit reported income from operations, net of
income taxes, of $456,000 (including an after-tax gain of approximately
$230,000) in 1995 versus $208,000 reported in 1994.
As a result of the foregoing, net income was $2.0 million in 1995
compared to net income of $1.0 million reported for 1994. Similarly, the
Company reported net income per share of $.21 in 1995 and net income per
share of $.11 in 1994.
<PAGE> 18
LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------------------------------------------------
The Company's primary sources of liquidity historically have been and
continue to be cash flow from operating activities and available borrowing
capacity under credit facilities. These funding sources have been
supplemented with the net proceeds from three equity offerings, long-term
debt financing utilizing the equity in the Company's real estate properties
and the sale of all of the assets of the Company's equipment and services
business unit.
The Company's financial position remains strong and sufficient for
execution of its strategic expansion plans. At September 30, 1996 the Company
reported working capital of $83.3 million compared to working capital of
$6.3 million at September 30, 1995. The increase in working capital was due
primarily to receipt of the net proceeds of $ 68.9 million from the
September 1996 secondary stock offering and receipt of the net proceeds from
the November 1995 secondary stock offering in excess of amounts used to
finance the acquisition of Viscosa, as well as increased inventory levels
associated with the acquisition and the repayment of long-term liabilities.
Other receivables of $2.7 million consisted primarily of VAT and import
refunds due Viscosa from the Hungarian taxing authorities. Other long-term
liabilities were related to various supply agreements between Viscosa and
its vendors.
Historically, cash used in investing activities has been expended for
equipment additions and to support research and development of carbon fibers
applications, the expansion of the Company's carbon fibers production
capacity and the acquisition of Viscosa. In fiscal 1996, the Company
incurred capital expenditures of $ 5.1 million for various projects. Of
these expenditures approximately $2.1 million was used to increase capacity
at the current facilities, $1 million was used for completion of the
engineering facility and computer network system and $2.0 million was used
for the new continuous carbonization line expansion. These expenditures
were financed principally with cash generated from operations. In fiscal
1995, the Company's capital expenditures were $1.0 million, including
installation of an enhanced research and development facility. During 1994,
the Company invested $1.1 million in manufacturing equipment, primarily for
two additional batch carbon fiber furnaces and completion of a continuous
carbonization line.
The Company believes that identified and forecasted customer demand
for carbon fiber products likely will require substantial increases in
capacity. The Company currently is producing carbon fibers at its full
operational capacity and needs to expand its capacity to meet the indicated
and forecasted demand. The Company is adding to its carbon fibers batch
process capacity at its St. Charles, Missouri plant. The Company expects to
fund the capital expenditures with available cash. In order to further
increase its production capacity, the Company plans to construct (in the
U.S. and Hungary) up to 16 additional continuous carbonization lines by the
end of fiscal 1998. The Company's current plans call for capital
expenditures of approximately $70 million through fiscal 1998 for this
expansion. The construction of these continuous carbonization line
facilities will be funded with the proceeds of the secondary offering,
together with internally generated funds and borrowings.
The Company maintains an excellent relationship with its lead bank,
Southwest Bank of St. Louis, and the bank maintains several credit
commitments that would allow the Company to borrow up to approximately $10
million. However, the Company has no current plans to borrow under these
commitments in the foreseeable future. The Company currently has
outstanding a term loan with a principal balance of $1.8 million which
matures in 1999. This loan will be repaid during fiscal 1997.
<PAGE> 19
Since the beginning of fiscal 1994, the Company has obtained long-term
financing utilizing its equity in its real estate properties. The
applicable loan agreements prohibit the payment of dividends without the
consent of the lenders. These loans are non-recourse loans for the Company's
headquarters and St. Charles manufacturing facility. Based on the interest
rates and the nature of the loans, the Company expects to leave these loans
in place.
Pursuant to a secondary stock offering in November 1995, the Company
sold 4.2 million shares of Common Stock and realized net proceeds of
approximately $26.3 million. The Company utilized approximately $17.8
million to fund the purchase of Viscosa. During 1996, the Company has made
available a total of $5 million to fund Viscosa's working capital
requirements and an additional $1 million to fund capital expenditures
associated with new continuous carbonization lines which the Company plans
to install at Viscosa. The remaining proceeds will be used for working
capital needs of Viscosa and general corporate purposes, including capital
expenditures. Beginning in the second quarter of fiscal 1996, Viscosa
obtained short-term financing consisting of working capital loans and
commercial letters of credit, of which $3.7 million was outstanding at
September 30, 1996. The Company plans to repay the Viscosa borrowings
during fiscal 1997.
In August 1995, the Company sold its valves, pumps and repair and
fluid-sealing product lines for an aggregate sale price of approximately
$2.5 million (consisting of $1.7 million cash, $581,000 of debt assumption
and a note receivable for $200,000). The Company sold the unit's remaining
product line, flexible graphite products, on June 30, 1996 in consideration
of a note receivable for $206,000.
Pursuant to a secondary stock offering in September 1996, the Company
sold 2.3 million shares of Common Stock and realized net proceeds of
approximately $68.9 million. The Company's strategic plan calls for capital
expenditures of approximately $70 million through fiscal 1998 to construct
substantial increases in production capacity of carbon fibers.
NEW ACCOUNTING STANDARDS
- ----------------------------------------------------------------------------
The following recently issued accounting standards will be applicable
to the Company for its fiscal year ending September 30, 1997:
SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of," effective for the Company for its
fiscal year ending September 30, 1997, establishes standards for the
impairment of long-lived assets, certain identifiable intangibles and
goodwill related to those assets to be held and used and those to be
disposed of. SFAS 121 is not expected to have a material impact on the
Company's financial condition or results of operations.
SFAS 123, "Accounting for Stock-based Compensation," defines the fair
value based method of accounting for stock option, purchase an award plans.
SFAS 123 allows companies to use the fair value method defined therein or to
continue use of the intrinsic value method as outlined in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB 25). SFAS 123 is not expected to have a material impact on the
Company's financial condition or results of operations.
<PAGE> 20
PRICE RANGE PER COMMON SHARE
The Company's Common Stock (symbol: "ZOLT") is traded in the NASDAQ National
Market System. The number of record holders of the Company's stock is
approximately 700.
Set forth below are the high and low bid quotations as reported by NASDAQ
for the periods indicated. Such prices reflect interdealer prices, without
retail mark-up, mark-down or commission and have been adjusted to reflect
the 2-for-1 stock split effective June 17, 1996:
<TABLE>
<CAPTION>
Fiscal year ended Fiscal year ended
September 30, 1996 September 30, 1995
------------------ ------------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter $ 8.50 $ 6.50 $ 4.42 $3.33
Second Quarter 23.63 7.88 5.17 3.42
Third Quarter 46.63 21.13 9.21 4.83
Fourth Quarter 39.00 21.00 12.92 6.33
</TABLE>
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-83160) pertaining to the Zoltek Companies, Inc.
Savings and Profit Sharing Plan, the Registration Statement (Form S-3 No.
33-84070) pertaining to 154,206 shares of common stock, the Registration
Statement (Form S-8 No. 33-83160) pertaining to Zoltek Companies, Inc. 1992
Long Term Incentive Plan and Zoltek Companies, Inc. 1992 Directors Stock
Option Plan and the Registration Statement (Form S-8 No. 33-06565) pertaining
to 34,896 shares of common stock of our report dated November 14, 1996, which
appears on page 22 of the 1996 Annual Report to Shareholders of Zoltek
Companies, Inc., which is incorporated by reference in Zoltek Companies, Inc.
Annual Report on Form 10-K for the year ended September 30, 1996. We also
consent to the incorporation by reference of our report on the Financial
Statement Schedule, which appears on page 19 of such Annual Report on
Form 10-K.
Price Waterhouse LLP
St. Louis, Missouri
December 30, 1996
