<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
--------------------
For the quarter ended December 31, 1998 Commission File No. 0-20600
----------------- -------
ZOLTEK COMPANIES, INC.
----------------------
(Exact name of registrant as specified in its charter)
Missouri 43-1311101
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3101 McKelvey Road, St. Louis, Missouri 63044
- --------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 291-5110
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes x No
----- -----
Indicate the number of shares outstanding of each of the registrant's classes
of common stock as of the latest practicable date: As of February 12, 1999,
16,216,338 shares of Common Stock, $.01 par value, were outstanding.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
ZOLTEK COMPANIES, INC.
CONSOLIDATED BALANCE SHEET
--------------------------
(Amounts in thousands, except share and per share amounts)
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1998
------------ -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,770 $ 8,004
Marketable securities 2,150 18,961
Accounts receivable, less allowance for doubtful accounts of $306 and
$314, respectively 12,278 14,964
Inventories 29,837 24,209
Prepaid expenses 668 173
Other receivables 1,635 2,403
Refundable income taxes 826 745
-------- --------
Total current assets 63,164 69,459
Property and equipment, net 82,731 76,861
Other assets 901 889
-------- --------
Total assets $146,796 $147,209
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term notes payable $ 391 $ -
Current maturities of long-term debt 688 817
Trade accounts payable 9,655 11,429
Accrued expenses and other liabilities 4,761 4,155
-------- --------
Total current liabilities 15,495 16,401
Other long-term liabilities 1,019 1,009
Long-term debt, less current maturities 5,851 5,898
Deferred income taxes 2,379 2,299
-------- --------
24,744 25,607
-------- --------
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized,
no shares issued or outstanding - -
Common stock, $.01 par value, 50,000,000 shares authorized,
16,216,338 shares issued and outstanding 162 162
Additional paid-in capital 99,954 99,954
Retained earnings 33,837 33,827
Accumulated other comprehensive income:
Foreign currency translation adjustment (11,901) (12,341)
-------- --------
122,052 121,602
-------- --------
Total liabilities and shareholders' equity $146,796 $147,209
======== ========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE> 3
<TABLE>
ZOLTEK COMPANIES, INC.
CONSOLIDATED STATEMENT OF INCOME
--------------------------------
(Amounts in thousands, except per share data)
(Unaudited)
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
Net sales $18,724 $22,224
Cost of sales - products sold 14,083 15,749
------- -------
Gross profit 4,641 6,475
Selling, general and administrative expenses 3,753 3,071
Available unused capacity costs 990 -
------- -------
Operating income (loss) (102) 3,404
Other income (expense):
Interest expense (118) (109)
Interest income 367 843
Other, net 1 (75)
------- -------
Income before income taxes 148 4,063
Provision for income taxes 138 802
------- -------
Net income $ 10 $ 3,261
======= =======
Net income per share:
Basic net income per share $ 0.00 $ 0.20
Diluted net income per share $ 0.00 $ 0.20
Weighted average common shares outstanding - basic 16,216 16,216
Weighted average common and common equivalent shares outstanding - diluted 16,346 16,552
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE> 4
<TABLE>
ZOLTEK COMPANIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
(Amounts in thousands)
(Unaudited)
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
------------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 10 $ 3,261
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and amortization 1,314 659
Unrealized foreign exchange (gain) loss 63 (41)
Other, net 10 16
Changes in assets and liabilities:
Decrease in accounts receivable 2,940 2,118
Decrease in other receivables 789 253
Increase in inventories (5,468) (4,122)
Increase in prepaid expenses (493) (275)
Decrease in trade accounts payable (1,992) (2,152)
Increase (decrease) in accrued expenses and other liabilities 474 (649)
Increase (decrease) in income taxes (12) 683
Increase in other long-term liabilities 3 45
------- --------
Total adjustments (2,372) (3,465)
------- --------
Net cash used by operating activities (2,362) (204)
------- --------
Cash flows from investing activities:
Payments for purchase of property and equipment (6,885) (6,653)
(Purchase) sale of marketable securities 16,811 (24,270)
------- --------
Net cash provided (used) by investing activities 9,926 (30,923)
------- --------
Cash flows from financing activities:
Proceeds from issuance of notes payable 388 -
(Increase) decrease in notes receivable (12) 13
Repayment of notes payable (177) (204)
------- --------
Net cash provided (used) by financing activities 199 (191)
------- --------
Effect of exchange rate changes on cash 3 (63)
------- --------
Net increase (decrease) in cash and cash equivalents 7,766 (31,381)
Cash and cash equivalents at beginning of period 8,004 41,148
------- --------
Cash and cash equivalents at end of period $15,770 $ 9,767
======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 65 $ 42
Income taxes 151 119
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE> 5
ZOLTEK COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. UNAUDITED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited consolidated
financial statements include all adjustments of a normal and recurring nature
necessary for a fair presentation of the financial position and results of
operations as of the dates and for the periods presented. These financial
statements should be read in conjunction with the Company's 1998 Annual
Report which includes consolidated financial statements and notes thereto for
the fiscal year ended September 30, 1998. Certain reclassifications have
been made to conform prior years' data to the current presentation. The
results for the quarter ended December 31, 1998 are not necessarily
indicative of the results that may be expected for the fiscal year ending
September 30, 1999.
2. PRINCIPLES OF CONSOLIDATION
Zoltek Companies, Inc. (the "Company") is a holding company, which owns the
stock of the Company's operating subsidiaries, Zoltek Corporation ("Zoltek"),
Zoltek Intermediates Corporation, Zoltek Properties, Inc. and Zoltek Rt.
Zoltek is an applied technology and materials company primarily focused on
the low cost manufacturing and application of carbon fibers used as
reinforcement in composite materials. Zoltek Rt. manufactures and markets
acrylic and nylon products and fibers to the textile industry and supplies
limited quantities of acrylic fiber precursor to the Company's carbon fiber
manufacturing operations.
Zoltek Rt.'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. These financial
statements have been prepared in accordance with U.S. generally accepted
accounting principles. All significant intercompany transactions and
balances have been eliminated upon consolidation.
3. COMPREHENSIVE INCOME
Effective with the first quarter 1999, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income."
This Statement requires that the financial statements disclose a new category
entitled "Comprehensive Income" which is the combination of net income and
noncash changes to shareholder's equity. The adoption of the Statement had
no effect on the results of the Company's operations during the period.
Comprehensive income for the three-month period ended:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Net income $ 10 $ 3,261
Foreign currency translation adjustment 440 (1,028)
---- -------
Comprehensive income $450 $ 2,233
==== =======
</TABLE>
4. 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
$15.4 million and $7.2 million at December 31, 1998 and September 30, 1998,
respectively.
<PAGE> 6
5. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1998
------------ -------------
(Amounts in thousands)
<S> <C> <C>
Raw materials $ 8,303 $ 6,464
Work-in-process 1,660 1,837
Finished goods 19,511 15,509
Supplies, spares and other 363 399
-------- --------
$ 29,837 $ 24,209
======== ========
</TABLE>
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1998
------------ -------------
(Amounts in thousands)
<S> <C> <C>
Land $ 1,235 $ 1,146
Buildings and improvements 26,787 24,669
Machinery and equipment 64,123 59,200
Furniture and fixtures 3,831 3,751
-------- --------
95,976 88,766
Less: accumulated depreciation (13,245) (11,905)
-------- --------
$ 82,731 $ 76,861
======== ========
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
- -------
During the fourth quarter of fiscal 1997, the Company completed construction
and began operation of five continuous carbon fiber lines, each with an
annual rated capacity of 1.0 million pounds, at its Abilene, Texas facility
(three lines) and Zoltek Rt. facilities (two lines). The period of process
verification, product characterization and initial customer qualification
relative to the new carbon fiber capacity additions that began initial
operations at the end of fiscal 1997 was substantially completed by March 31,
1998.
During the first half of fiscal 1998, the Company completed construction of a
secondary processing building (40,000 square feet) at its Abilene, Texas
facility. The Company plans to utilize the facility to perform intermediate
and secondary processing operations such as specialty packaging, chopping and
milling.
At the end of fiscal 1998, the Company substantially completed two additional
continuous carbonization lines at its Abilene, Texas facility. The Company
made the two additional lines ready for their intended use during the first
quarter of fiscal 1999. However, the Company does not plan to fully utilize
these two new lines until product demand increases.
At the end of fiscal 1998, the Company substantially completed construction
of an additional building (288,000 square feet) designed to house up to eight
continuous carbonization lines at its Abilene, Texas facility. Additionally,
the Company has placed orders for long-lead time equipment items for six
additional continuous carbonization lines, each with an annual capacity of
one million pounds. The Company plans to house the long-lead time equipment
items at its facility in Abilene, Texas. The Company does not currently
anticipate initializing construction of the six additional lines during
fiscal 1999 unless demand for carbon fiber increases. While the additional
operational capacity expands the Company's total capacity for production of
carbon fiber, the Company believes the market will require demonstration of
significant available capacity to initiate and develop large-scale composite
applications utilizing its carbon fiber products.
<PAGE> 7
The recent major additions to the Company's carbon fiber manufacturing
capacity (5.0 million pounds of rated capacity annually, completed in late
fiscal 1997 and 2.0 million pounds of rated capacity annually completed in
the first quarter of fiscal 1999) currently are having little impact on
sales. Carbon fiber sales for the first quarter of fiscal 1999 were $5.9
million compared to $5.1 million for fiscal 1998. The Company's strategy for
initial sales increases was to rely on what had been fast-growing markets in
conductive plastics and sporting goods applications. As a result of the
Asian economic crisis and its impact on the electronics sector, sales of
carbon fiber into that market fell significantly in fiscal 1998 and continued
to be depressed during the first quarter of fiscal 1999. Qualification for
the sporting goods applications and accompanying increases in sales has taken
longer than was originally expected due to the excess capacity in the market
resulting from capacity increases by several other carbon fiber
manufacturers.
At the end of fiscal 1998 and during the first quarter of fiscal 1999, the
Company was not operating its new continuous carbonization lines at full
capacity. The Company currently anticipates that it will not operate its
lines at full capacity during fiscal 1999. While the Company believes it is
necessary to maintain available capacity to develop significant new
applications, costs related to the unutilized capacity will adversely impact
earnings during fiscal 1999. The Company anticipates increases in sales for
the new carbon fiber lines at both the U.S. and Hungarian locations beginning
in the second half of fiscal 1999.
As part of its strategic plan, the Company is pursuing various initiatives to
facilitate development of product and process applications to increase demand
for low-cost carbon fiber, including possible acquisitions of selected
technology for the enhancement of its operations and to lead the
commercialization of selected large-scale carbon fiber composites.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THREE MONTHS ENDED
- -------------------------------------------------------------------
DECEMBER 31, 1997
- -----------------
The Company's sales decreased 15.7% to $18.7 million for the first three
months of fiscal 1999 from $22.2 million for the first three months of fiscal
1998. The sales of carbon fibers increased 16.3% to $5.9 million in the
first three months of fiscal 1999 from $5.1 million in the first quarter of
fiscal 1998. This increase was due to growth in the aircraft brake business
and the impact of the new capacity additions and related growth in sales to
the sporting goods market. However, this increase was less than had been
anticipated due to the continued decreased activities of Zoltek customers
that serve electronics markets in the Far East and to delays in the
development of new large scale applications utilizing significant quantities
of carbon fibers. The acrylic and other products, produced at Zoltek Rt.,
generated sales of $12.9 million for the first quarter of fiscal 1999
compared to $17.2 million for the first quarter of fiscal 1998, a decrease of
25.2% on comparable volumes. This decrease was principally due to selling
price reductions in the acrylic fiber markets. The acrylic fiber sales price
reductions resulted from a substantial reduction in acrylonitrile (ACN) raw
material pricing which the acrylic fiber manufacturers pass through to
customers. Zoltek Rt.'s sales of acrylic fibers and other products were to
the markets Zoltek Rt. had historically served prior to its acquisition by
the Company in December 1995.
Gross profit decreased 28.3% to $4.6 million in the first three months of
fiscal 1999 from $6.5 million in the first three months of fiscal 1998.
Decreased gross profit resulted from a $1.9 million decrease, or 41.1%, in
gross profit from acrylic and other products sold by Zoltek Rt. for the first
quarter of fiscal 1999 offset by an increase in carbon fibers gross profit of
2.1%. Carbon fibers gross profit increased to $2.0 million in the first
three months of fiscal 1999 from $1.9 million in the first three months of
fiscal 1998. The gross profit from acrylic and other products decreased to
$2.7 million in the first three months of fiscal 1999 from $4.6 million in
the first three months of fiscal 1998 due primarily to the decreased selling
prices of acrylic fibers. The gross margin on carbon fibers decreased to
33.3% of sales in the first three months of fiscal 1999 from 38.0% in the
first three months of fiscal 1998 due to sales price decreases and product
mix changes. The gross margin of acrylic fibers and other products decreased
to 20.9% of sales for the first three months of fiscal 1999 compared to 26.5%
of sales for the first three months of fiscal 1998 due to reductions in the
selling prices. The gross margins contributed by the acrylic and other
products, which are produced at Zoltek Rt., have historically generated lower
gross margins than the Company's carbon fiber business.
The Company incurred costs related to the underutilized productive capacity
for carbon fibers at the Abilene, Texas and Hungarian facilities. These
costs include the depreciation and other overhead associated with the unused
capacity. These costs, which were separately identified on the income
statement, were approximately $1.0 million during the first three months of
fiscal 1999. The Company believes it is necessary to maintain available
capacity to develop significant new applications and anticipates costs
associated with the available capacity will continue during much of fiscal
1999.
Selling, general and administrative expenses increased $0.7 million, or
approximately 22.2%, from $3.1 million in the first three months of fiscal
1998 to $3.8 million in the first three months of fiscal 1999. This increase
was primarily attributable to increased costs related to product and market
development efforts for product trials, additional sales personnel and
travel. The proportions of selling, general and administrative expenses
represented by such component costs remained relatively constant.
<PAGE> 8
Interest expense was $0.1 million for the first three months of fiscal 1999
and 1998. Interest income was $0.4 million for the first three months of
fiscal 1999 compared to $0.8 million in the first three months of fiscal
1998. The decrease in interest income was due to the use of funds to finance
the capital expansions during fiscal 1999 and 1998. Capital expenditures
totaled $6.9 million in the first three months of fiscal 1999 and $31.2
million for fiscal year 1998.
During the first three months of fiscal 1999, the Company reported income tax
expense of $0.1 million compared to $0.8 million in the first three months of
fiscal 1998 due to the decreased profit levels. The Company recognizes
income taxes in both the United States and Hungary based on the income before
income taxes. During the first three months of fiscal 1999 the Company's
effective tax rate was approximately 93%. Included in the provision for
income taxes are gross receipts taxes charged by the Hungarian local taxing
authorities as well as the statutory income taxes. The statutory income tax
rate for the Zoltek Rt. operation in Hungary is 18%. During the first three
months of fiscal 1998, Zoltek Rt. was able to utilize 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 in 1998. However, due to the uncertainty of the
availability of these operating loss carryforwards to reduce Zoltek Rt.'s
future income tax liability, the Company recognized a full valuation
allowance against these net operating loss carryforwards at the date of
acquisition. During the first three months of fiscal 1998, Zoltek Rt.
utilized operating loss carryforwards to reduce the income tax liabilities by
$0.4 million. Additionally, valuation allowance adjustments of $0.4 million
for the first three months of 1998 were recognized as a reduction of income
tax expense.
The foregoing resulted in a decrease in net income to approximately a
break-even position for the first three months of fiscal 1999 compared to
$3.3 million for the first three months of fiscal 1998. Similarly, the
Company reported net income per share of $0.00 and $0.20 on a diluted basis
for the first three months of fiscal 1999 and fiscal 1998, respectively. The
weighted average common and common equivalent shares outstanding decreased to
16.3 million for the first three months of fiscal 1999 compared to16.5
million for the first three months of fiscal 1998 due to a reduction in
common stock equivalents.
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, supplemented with the net proceeds from
equity offerings and long-term debt financing utilizing the equity in the
Company's real estate properties.
The Company's financial position remains strong and sufficient to support the
execution of its strategic expansion plans. At December 31, 1998, the
Company reported working capital of $47.7 million compared to working capital
of $53.1 million at September 30, 1998. The decrease in working capital from
September 30, 1998 to December 31, 1998 was due primarily to the use of
proceeds from liquidation of temporary investments of $6.9 million to finance
capital expenditures for expansion of the carbon fiber production capacity.
Inventories increased from $24.2 million at September 30, 1998 to $29.8
million at December 31, 1998. Carbon fibers accounted for $2.4 million of
the increase while acrylic fibers and other products accounted for $3.2
million of the increase. Carbon fibers increase in inventories resulted from
the market constraints in the Far East and competitive conditions coupled
with the available capacity. The increase in the inventories of acrylic
fibers and other products was mainly attributable to the depressed acrylic
market conditions in both Western and Eastern Europe. The Company
anticipates that the rate of inventory growth will decrease during fiscal
1999 as a result of lower production rates and with additional product
demand.
Marketable securities at December 31, 1998 amounted to $2.2 million compared
to $19.0 million at September 30, 1998, a decrease of $16.8 million due to
maturing of the securities and conversion to cash equivalents. The
marketable securities primarily included U.S. Government Agency Notes with
maturities longer than three months but less than twelve months and preferred
stock.
Other receivables of $1.6 million at December 31, 1998 consisted primarily of
VAT and import duty refunds due Zoltek Rt. from the Hungarian taxing
authorities compared to $2.4 million at September 30, 1998. The decrease was
mainly due to the receipt of cash in transit at September 30, 1998 associated
with the long term financing by Abilene, Texas. Other long-term liabilities
are related to various supply agreements between Zoltek Rt. 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, and the expansion of the Company's carbon fibers production
capacity. In the first three months of fiscal 1999, the Company made capital
expenditures of $6.9 million compared to $6.7 million for the same period in
fiscal 1998. Capital expenditures for the fiscal year ended September 30,
1998 totaled $31.2 million. These expenditures were financed principally with
cash from the secondary offering in September 1996 and from cash generated
from operations.
The Company continues to believe that identified and forecasted customer
demand for carbon fibers products will require additional substantial
increases in capacity. In June 1997, the Company acquired a 100,000 square
foot newly constructed building and 11 acres in Abilene, Texas for its
planned capacity expansion. During fiscal 1998, the Company constructed a
40,000 square foot building
<PAGE> 9
and acquired an additional 42 acres at the Abilene facility. The Company
completed construction (in both the U.S. and Hungary) of seven continuous
carbonization lines during fiscal years 1997 and 1998. During the first
quarter of fiscal 1999, the Company made two continuous carbonization lines
ready for their intended use but does not plan to utilize these two lines
until product demand increases.
During late fiscal 1998 and during the first quarter of fiscal 1999, the
Company completed construction of a building (288,000 square feet) designed
to house up to eight continuous carbonization lines. Additionally, the
Company has placed orders for equipment items with long-lead times for six
additional continuous carbonization lines, each with an annual rated capacity
of one million pounds, which the Company plans to temporarily warehouse at
its Abilene, Texas facility. The Company does not currently anticipate
initiating construction of the six additional lines during fiscal 1999 unless
demand for carbon fibers increases. The Company's overall strategic plan
calls for total capital expenditures of approximately $10 to $15 million
during fiscal 1999 to obtain long-lead time equipment items and fund building
construction (of which $6.9 million was spent in the first quarter). The
Company does not anticipate further expenditures on continuous carbonization
lines in fiscal 1999 other than those long-lead time items, which it is
currently committed to acquire. These expenditures will be funded with cash
and cash equivalents, marketable securities on hand and internally generated
funds.
The Company continues to maintain an excellent relationship with its lead
bank, Southwest Bank of St. Louis. The Company maintains, several credit
commitments with the bank that would allow the Company to borrow
approximately $10 million. The Company is currently negotiating with several
U.S. and international banks to secure additional lines of credit, should the
need arise for additional borrowings.
In connection with the initial purchase of the Abilene, Texas facility in
fiscal 1997, the Company obtained a $1.8 million short-term non-interest
bearing loan through the City of Abilene. During fiscal 1998, the Company
purchased additional land and a building from the City of Abilene and
consolidated this purchase with its initial loan for a new $3.1 million
non-interest bearing loan maturing in January 2008, which was discounted.
The long-term loan with the City of Abilene will be repaid with future real
estate and personal property tax abatements granted by the City of Abilene.
Additionally, since the beginning of fiscal 1994, the Company has obtained
long-term financing utilizing its equity in its real estate properties. These
loans are non-recourse loans secured by mortgages on the Company's
headquarters and St. Charles manufacturing facility. Based on the interest
rates and the nature of the loans, the Company plans to repay these loans in
accordance with their stated long-term amortization schedules.
As part of its strategic plan, the Company is pursuing various initiatives to
facilitate development of product and process applications to increase demand
for low-cost carbon fiber, including possible acquisitions of selected
technology for the enhancement of its operations and to lead the
commercialization of selected large-scale carbon composites.
Zoltek Rt. had eliminated all debt and short-term financing during fiscal
1997. Due to the acrylic market conditions during fiscal 1998 and the first
three months of fiscal 1999, Zoltek Rt. obtained short-term financing
consisting of working capital and commercial letters of credit of which $0.4
million was outstanding at December 31, 1998.
In January 1999, the Company sold its nitrogen generation facility in
Abilene, Texas to Southwest Bank for $5.0 million (actual construction cost)
and leased it back under a seven-year operating lease. The Company plans to
utilize the funds for carbon fiber facility expansion and general corporate
purposes.
In February 1999, the Company's Board of Directors authorized a share
repurchase program for up to 1,000,000 shares of the Company's common stock
in the open market over an unspecified period of time as market conditions
allow. The purpose of the repurchase plan is to meet the Company's
obligations under its stock option plans, while minimizing dilution to
shareholders.
IMPACT OF YEAR 2000
- -------------------
The significance of the year 2000 is that computer programs, other business
systems and date sensitive devices were installed using two digits rather
than four to define the applicable year, thus they could read the year 2000
as 1900. This could cause disruptions of operations due to system failures
or miscalculations that could result in a temporary inability to process
normal transactions or engage in other business activities.
The Company has completed its review of the internal business systems and is
in the process of modifying or replacing any systems that are not Year 2000
compliant. The review of manufacturing processes and facility management
systems is underway and any identified systems will be corrected to be Year
2000 compliant. All modifications and changes in internal business,
manufacturing processes and facility management systems are anticipated to be
completed by June 1999. Information system maintenance and modifications are
expensed as incurred, while any new software and equipment is capitalized and
amortized over the asset's useful life. The Company purchased and installed
new business system programs in both the US and Hungarian operations at the
beginning of fiscal 1998 which were Year 2000 compliant at installation. The
Company has not separately identified the costs incurred to date
<PAGE> 10
for system and program modifications required specifically for Year 2000
compliance but they have not been material to operations or financial
position. The costs of any further changes currently anticipated are also not
expected to be material to either operations or financial position.
The Company is currently contacting its key unrelated trading partners
(suppliers and customers) to determine the extent to which the Company may be
vulnerable to their failure to correct their own Year 2000 issues.
Sufficient responses to its inquiries have not been received from these
trading partners to form an accurate assessment of their Year 2000 readiness.
The Company does not have control over these third parties and therefore
cannot currently determine the extent future operating results may be
adversely effected by their failure to correct their Year 2000 problems.
Based on the Company's accomplishments to date, no contingency plans are
expected to be needed and none have been developed. Since the Company
anticipates having all Year 2000 issues resolved by June 1999, it believes
that adequate time will be available to develop contingency plans and insure
that alternatives are developed and implemented. However, if such
alternatives are not developed and implemented on a timely basis, the
potential does exist, even though remotely, that the Year 2000 issues could
have a material impact on the results from operations.
OUTLOOK
- -------
Indications from the market place are that long-term demand for carbon fibers
will grow as expected. During the Company's multi-year growth program, from
time to time demand may lag capacity growth, as new markets take time to
develop. In the Company's view, this is neither unexpected nor undesirable
during the development of significant new applications. Significant new
applications would increase demand in significant quantities, compared to
limited incremental volume increases. Therefore, the Company believes it
will be necessary to incur costs related to available capacity during the
periods which applications are being developed. The Company's carbon fiber
sales expectations are based on a combination of the anticipated growth of
existing customer demand and projected new applications development.
During the fourth quarter of fiscal 1998 and the first quarter of fiscal
1999, the acrylic fiber market experienced a sharp downturn in sales prices
and related gross profit, primarily as a result of substantial reductions in
the market prices of acrylonitrile raw material. The Company expects these
market conditions to continue during much of fiscal 1999.
NEW ACCOUNTING STANDARD
- -----------------------
The following accounting standards will be applicable to the Company for its
fiscal year ending September 30, 1999:
SFAS 131, "Disclosure About Segments of an Enterprise and Related
Information", establishes standards for the reporting by public enterprises
of information about operating segments. It also establishes standards for
disclosure about products and services, geographic areas, and major
customers. SFAS 131 is not expected to have a material impact on the
Company's consolidated financial condition, results of operations or cash
flows.
* * *
The forward-looking statements contained in this report are inherently
subject to risks and uncertainties. The Company's actual results could
differ materially from those in the forward-looking statements. Potential
risks and uncertainties consists of a number of factors, including the
Company's ability to manage rapid growth and increase its carbon fibers
production capacity and markets on a timely basis.
<PAGE> 11
<TABLE>
ZOLTEK COMPANIES, INC.
SEGMENT INFORMATION
(Amounts in thousands)
(Unaudited)
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
Net sales
Carbon fibers $ 5,872 $ 5,050
Acrylic fibers and other products 12,852 17,174
-------- --------
$ 18,724 $ 22,224
======== ========
Gross profit
Carbon fibers - product sales $ 1,958 $ 1,917
Acrylic fibers and other products 2,683 4,558
-------- --------
$ 4,641 $ 6,475
======== ========
Total assets
Carbon fibers $ 87,451 $ 50,253
Acrylic fibers and other products 40,232 38,222
General corporate 19,113 51,118
-------- --------
$146,796 $139,593
======== ========
Capital expenditures
Carbon fibers $ 6,542 $ 5,910
Acrylic fibers and other products 343 743
-------- --------
$ 6,885 $ 6,653
======== ========
Depreciation and amortization expense
Carbon fibers $ 1,001 $ 348
Acrylic fibers and other products 313 311
-------- --------
$ 1,314 $ 659
======== ========
</TABLE>
<PAGE> 12
ZOLTEK COMPANIES, INC.
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K: No reports on Form 8-K were
filed during the three months ended
December 31, 1998.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Zoltek Companies, Inc.
(Registrant)
Date: February 16, 1999 By: /s/ DANIEL D. GREENWELL
----------------- ------------------------------------
Daniel D. Greenwell
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 15,770
<SECURITIES> 2,150
<RECEIVABLES> 12,584
<ALLOWANCES> (306)
<INVENTORY> 29,837
<CURRENT-ASSETS> 63,164
<PP&E> 95,976
<DEPRECIATION> (13,245)
<TOTAL-ASSETS> 146,796
<CURRENT-LIABILITIES> 15,495
<BONDS> 5,851
<COMMON> 162
0
0
<OTHER-SE> 121,890
<TOTAL-LIABILITY-AND-EQUITY> 146,796
<SALES> 18,724
<TOTAL-REVENUES> 18,724
<CGS> 14,083
<TOTAL-COSTS> 14,083
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 118
<INCOME-PRETAX> 148
<INCOME-TAX> 138
<INCOME-CONTINUING> 10
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
