SEC Company Response from ZOLTEK COMPANIES INC (CIK 0000890923) — May 2, 2005
ZOLTEK COMPANIES INC (CIK 0000890923)
Date: May 2, 2005 · CIK: 0000890923 · Accession: 0001068800-05-000291
AI Filing Summary & Sentiment
File numbers found in text: 000-20600
Referenced dates: March 28, 2004
Letter
May 2, 2005 VIA UPS NEXT DAY AIR AND EDGAR Attention: Mr. Thomas E. Dyer, Staff Accountant
Re: Zoltek Companies, Inc. Form 10-K for the Fiscal Year Ended September 30, 2004 Form 10-Q for the Fiscal Quarter Ended December 31, 2004 File No. 000-20600
Dear Mr. Dyer:
We are in receipt of the Staff's comment letter, dated March 28, 2004, pursuant to which the Staff commented on the Annual Report on Form 10-K for the fiscal year ended September 30, 2004, and the Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2004, filed by Zoltek Companies, Inc. ("Zoltek"). We have set forth below each Staff comment in the comment letter followed by our response to each comment.
Form 10-K for the Fiscal Year ended September 30, 2004 ------------------------------------------------------
Item 8. Financial Statements and Supplementary Data - Page 25 --------------------------------------------------------------
Zoltek Companies, Inc. Report of Management - Page 25 -----------------------------------------------------
1. We note your statement that "[t]he Company maintains accounting and internal control systems that it believes are adequate...." Please note that we have not objected to this disclosure since you were not required to include management's assessment of the effectiveness of your internal control over financial reporting and the other disclosures required by Item 308(a) of Regulation S-K in this Form 10-K. Please also note, however, that you will be required to include a statement as to the effectiveness, rather than the adequacy, of your internal control over financial reporting in all future filings in which you are required to include the internal control over financial reporting disclosures called for under Item 308(a) of Regulation S-K. Please prepare your future filings accordingly.
ZOLTEK COMPANIES, INC. * 3101 MCKELVEY RD. * ST. LOUIS, MO 63044 (USA) 314/291-5110 * FAX: 314/291-9082
Mr. Thomas E. Dyer May 2, 2005 Page 2
Response: ---------
Zoltek has noted the Staff's comment regarding the required disclosure regarding the effectiveness of our internal controls over financial reporting, and will include such statement in all future filings in which Zoltek is required to include the internal control over financial reporting disclosures required under Item 308(a) of Regulation S-K.
2. In future filings, please revise your "Report of Management" to eliminate the last sentence of the fourth paragraph as management generally should refrain from including disclosures that attempt to interpret or otherwise explain the meaning of the statements included in the audit report.
Response: ---------
Zoltek has noted and understands the Staff's comment regarding elimination of the last sentence of the fourth paragraph of the "Report of Management" and will comply with the Staff's comment in future filings where applicable.
Note 1. Summary of Significant Accounting Policies - Page 31 -------------------------------------------------------------
Revenue Recognition - Page 31 -----------------------------
3. Your accounting policy for revenue recognition should address the criteria in SAB Topic 13.A and explain how the company applies the criteria to its specific situation. Your policy should also discuss how you account for revenue derived from each significant type of revenue. Also, please tell us and, if significant, disclose in future filings your accounting policies for rights of return, acceptance, installation and warranty provisions, if any. Please also address how you account for change orders, claims, revisions to estimates, and provisions for anticipated losses on contracts.
Response: ---------
Zoltek's business generates two significant types of revenues. The most significant type consists of the sale of manufactured products, primarily carbon fibers, oxidized acrylic fibers and carbon fibers pre-impregnated with resin. Sales transactions are initiated through customer purchase orders or sales agreements, which include fixed pricing for the material. Revenue from the sale of these products is recognized on the date title to the product sold transfers to the customer, which date is typically the shipping date. In addition, we sell product on consignment, in which case revenue is recognized on the date the product is consumed by the buyer.
The second type of revenue consists of the sale of engineered equipment used to produce composite materials. Sales transactions are initiated through customer purchase orders or
Mr. Thomas E. Dyer May 2, 2005 Page 3
sales agreements, which include fixed pricing for the equipment. Given the nature of this activity, which involves fabricating machinery on a project basis, revenue is recognized on the percentage of completion basis based on the percentage of estimated total project cost incurred to date. At each reported balance sheet date, we assess the projects being accounted for on a percentage of completion basis and take into consideration any issues related to change orders, revisions to estimates, provisions for anticipated losses on contracts and other relevant considerations in SAB Topic 13.A, and adjust the reported revenue and expense amounts accordingly.
Installation, warranty provisions, change orders, claims, revisions to estimates and provisions for anticipated losses on contracts as defined under SAB Topic 13.A historically have not been material to either type of revenue (less than $10,000 gross margin impact for fiscal 2004 and fiscal 2003.)
The customer accepts manufactured product prior to shipment and, accordingly, shipments are not subject to any acceptance criteria. Zoltek does record an allowance for returns of defective product and records a charge on the consolidated statement of operations when the customer notifies and returns defective product to us. We do not accrue an allowance at the time of sale for defective product because historically the amounts have been immaterial (e.g., gross margin impact of less than $40,000 in fiscal 2004 and 2003).
In future filings, we propose to modify our revenue recognition footnote as follows:
Sales transactions are initiated through customer purchase order or sales agreement which includes fixed pricing terms. The Company recognizes sales for manufactured products on the date title to the sold product transfer to the customer, which is the either the shipping date or the date consumed by the customer if sold on consignment. Revenues generated by its Entec Composite Machines subsidiary are recognized on a percentage of completion basis based on the percentage of total project cost incurred to date which include change orders, revisions to estimates and provisions for anticipated losses on contracts. Manufactured products are accepted prior to shipment and thus an allowance for allowance for returns is not accrued as historical returns have not been material. The Company reviews its accounts receivables on a monthly basis to identify any specific customers for collectibility issues. If the Company deems that an amount due from a customer as uncollectible the amount is recorded as expense in the statement of operations.
Note 2. Financing and Liquidity - Page 35 ------------------------------------------
4. For each issuance of convertible debt, including issuances subsequent to September 30, 2004, please tell us the significant terms of the conversion rights, including when the rights are exercisable, how you calculated the amount of the beneficial conversion feature and how you are accounting for that feature including the amortization of the associated
Mr. Thomas E. Dyer May 2, 2005 Page 4
discount. Include your analysis under SFAS 133 of whether the feature is a derivative. See EITF 98-5. Please provide similar disclosures in future filings.
Response: ---------
Each issuance of convertible debt is summarized in the table below which sets forth the significant terms of the debt, including conversion rights, and factors used to calculate the discount and beneficial conversion feature. The discount was determined to be the fair value of the warrants issued in connection with the convertible debt, which was calculated using the Black-Scholes model. The beneficial conversion feature was determined by comparing the fair value of the convertible per share to the stock price as of the date the agreement was executed. The warrant discount and beneficial conversion feature are being amortized over the life of the associated debt using the effective interest rate method. Both the convertible debt and warrants may be converted or exercised from and after the date agreement was executed. We will provide similar disclosure in a footnote to our financial statements in future filings.
<TABLE> <CAPTION> ------------------------------------------------------------------------------------------------------------- February January March October February 2003 2004 2004 2004 2005 ------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Amount of Debenture (millions) $8.1 $7.0 $5.75 $20.0 $20.0 ------------------------------------------------------------------------------------------------------------- Per share Conversion Price $3.25 $5.40 $7.25 $12.00 $20.00 ------------------------------------------------------------------------------------------------------------- Interest Rate 7.5% 6.0% 6.0% 7.0% 7.5% ------------------------------------------------------------------------------------------------------------- Term of Debenture 60 months 30 months 30 months 42 months 42 months ------------------------------------------------------------------------------------------------------------- Warrants Issued 405,000 323,995 230,000 500,000 457,142 ------------------------------------------------------------------------------------------------------------- Term of Warrant 60 months 48 months 48 months 72 months 48 months ------------------------------------------------------------------------------------------------------------- Fair Value of Warrant $0.93 $3.53 $6.96 $5.71 $8.46 ------------------------------------------------------------------------------------------------------------- Intrinsic Value of Debt $3.11 $4.64 $5.98 $10.50 $16.76 ------------------------------------------------------------------------------------------------------------- Beneficial Conversion Feature No Yes Yes No No ------------------------------------------------------------------------------------------------------------- OTHER PARAMETERS USED TO CALCULATE FAIR VALUE OF WARRANTS AND DEBT ------------------------------------------------------------------------------------------------------------- Stock Price on Date of Agreement $1.58 $5.40 $9.53 $9.01 $16.68 ------------------------------------------------------------------------------------------------------------- Stock Volatility 100% 90.2% 97.73% 74% 64% ------------------------------------------------------------------------------------------------------------- Dividend Yield 0.0% 0.0% 0.0% 0.0% 0.0% ------------------------------------------------------------------------------------------------------------- Risk Free Interest Rate 3.0% 2.74% 2.52% 4.25% 4.25% ------------------------------------------------------------------------------------------------------------- </TABLE>
Mr. Thomas E. Dyer May 2, 2005 Page 5
Our methodology for determining whether or not the convertible debt instruments contained any potential FAS 133 beneficial conversion features is summarized as follows:
In accordance with paragraph 16 of EITF 98-5, we assessed whether the embedded conversion feature of the convertible debt meets the derivative criteria in paragraph 12 of FASB 133. Paragraph 12(c) of FASB 133 indicates that for an embedded derivative to apply derivative accounting it must meet the criteria of FASB 133 if it were a freestanding instrument. In evaluating the FASB 133 criteria in paragraph 6 through 11, we believe that the embedded derivative qualifies for the exception in Paragraph 11 (a) of FASB 133. Paragraph 11(a) of FASB 133 states that if a freestanding instrument qualifies for classification in stockholders' equity and is indexed to our own stock, then derivative accounting under FASB 133 is not required.
We then utilized EITF 00-19 for the evaluation of whether this would qualify for classification as equity, if it were a freestanding instrument. Paragraph 4 of EITF 00-19 indicates that for purposes of evaluating whether an embedded derivative indexed to a company's own stock would be classified in stockholders' equity if freestanding, the requirements of EITF 00-19 paragraphs 12-32 do not apply if the hybrid contract is a conventional convertible debt instrument in which the holder may only realize the value of the conversion option by exercising the option a
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<DOCUMENT>
<TYPE>CORRESP
<SEQUENCE>1
<FILENAME>filename1.txt
<TEXT>
<PAGE>
[ZOLTEK logo]
May 2, 2005
VIA UPS NEXT DAY AIR AND EDGAR
Attention: Mr. Thomas E. Dyer, Staff Accountant
Re: Zoltek Companies, Inc.
Form 10-K for the Fiscal Year Ended September 30, 2004
Form 10-Q for the Fiscal Quarter Ended December 31, 2004
File No. 000-20600
Dear Mr. Dyer:
We are in receipt of the Staff's comment letter, dated March 28, 2004,
pursuant to which the Staff commented on the Annual Report on Form 10-K for
the fiscal year ended September 30, 2004, and the Quarterly Report on Form
10-Q for the fiscal quarter ended December 31, 2004, filed by Zoltek
Companies, Inc. ("Zoltek"). We have set forth below each Staff comment in
the comment letter followed by our response to each comment.
Form 10-K for the Fiscal Year ended September 30, 2004
------------------------------------------------------
Item 8. Financial Statements and Supplementary Data - Page 25
--------------------------------------------------------------
Zoltek Companies, Inc. Report of Management - Page 25
-----------------------------------------------------
1. We note your statement that "[t]he Company maintains accounting and
internal control systems that it believes are adequate...." Please
note that we have not objected to this disclosure since you were
not required to include management's assessment of the
effectiveness of your internal control over financial reporting and
the other disclosures required by Item 308(a) of Regulation S-K in
this Form 10-K. Please also note, however, that you will be
required to include a statement as to the effectiveness, rather
than the adequacy, of your internal control over financial
reporting in all future filings in which you are required to
include the internal control over financial reporting disclosures
called for under Item 308(a) of Regulation S-K. Please prepare your
future filings accordingly.
ZOLTEK COMPANIES, INC. * 3101 MCKELVEY RD. * ST. LOUIS, MO 63044 (USA)
314/291-5110 * FAX: 314/291-9082
Mr. Thomas E. Dyer
May 2, 2005
Page 2
Response:
---------
Zoltek has noted the Staff's comment regarding the required
disclosure regarding the effectiveness of our internal controls
over financial reporting, and will include such statement in all
future filings in which Zoltek is required to include the internal
control over financial reporting disclosures required under Item
308(a) of Regulation S-K.
2. In future filings, please revise your "Report of Management" to
eliminate the last sentence of the fourth paragraph as management
generally should refrain from including disclosures that attempt to
interpret or otherwise explain the meaning of the statements
included in the audit report.
Response:
---------
Zoltek has noted and understands the Staff's comment regarding
elimination of the last sentence of the fourth paragraph of the
"Report of Management" and will comply with the Staff's comment in
future filings where applicable.
Note 1. Summary of Significant Accounting Policies - Page 31
-------------------------------------------------------------
Revenue Recognition - Page 31
-----------------------------
3. Your accounting policy for revenue recognition should address the
criteria in SAB Topic 13.A and explain how the company applies the
criteria to its specific situation. Your policy should also discuss
how you account for revenue derived from each significant type of
revenue. Also, please tell us and, if significant, disclose in
future filings your accounting policies for rights of return,
acceptance, installation and warranty provisions, if any. Please
also address how you account for change orders, claims, revisions
to estimates, and provisions for anticipated losses on contracts.
Response:
---------
Zoltek's business generates two significant types of revenues. The
most significant type consists of the sale of manufactured
products, primarily carbon fibers, oxidized acrylic fibers and
carbon fibers pre-impregnated with resin. Sales transactions are
initiated through customer purchase orders or sales agreements,
which include fixed pricing for the material. Revenue from the sale
of these products is recognized on the date title to the product
sold transfers to the customer, which date is typically the
shipping date. In addition, we sell product on consignment, in
which case revenue is recognized on the date the product is
consumed by the buyer.
The second type of revenue consists of the sale of engineered
equipment used to produce composite materials. Sales transactions
are initiated through customer purchase orders or
Mr. Thomas E. Dyer
May 2, 2005
Page 3
sales agreements, which include fixed pricing for the equipment.
Given the nature of this activity, which involves fabricating
machinery on a project basis, revenue is recognized on the
percentage of completion basis based on the percentage of estimated
total project cost incurred to date. At each reported balance sheet
date, we assess the projects being accounted for on a percentage of
completion basis and take into consideration any issues related to
change orders, revisions to estimates, provisions for anticipated
losses on contracts and other relevant considerations in SAB Topic
13.A, and adjust the reported revenue and expense amounts
accordingly.
Installation, warranty provisions, change orders, claims, revisions
to estimates and provisions for anticipated losses on contracts as
defined under SAB Topic 13.A historically have not been material to
either type of revenue (less than $10,000 gross margin impact for
fiscal 2004 and fiscal 2003.)
The customer accepts manufactured product prior to shipment and,
accordingly, shipments are not subject to any acceptance criteria.
Zoltek does record an allowance for returns of defective product
and records a charge on the consolidated statement of operations
when the customer notifies and returns defective product to us. We
do not accrue an allowance at the time of sale for defective
product because historically the amounts have been immaterial
(e.g., gross margin impact of less than $40,000 in fiscal 2004 and
2003).
In future filings, we propose to modify our revenue recognition
footnote as follows:
Sales transactions are initiated through customer purchase order or
sales agreement which includes fixed pricing terms. The Company
recognizes sales for manufactured products on the date title to the
sold product transfer to the customer, which is the either the
shipping date or the date consumed by the customer if sold on
consignment. Revenues generated by its Entec Composite Machines
subsidiary are recognized on a percentage of completion basis based
on the percentage of total project cost incurred to date which
include change orders, revisions to estimates and provisions for
anticipated losses on contracts. Manufactured products are accepted
prior to shipment and thus an allowance for allowance for returns
is not accrued as historical returns have not been material. The
Company reviews its accounts receivables on a monthly basis to
identify any specific customers for collectibility issues. If the
Company deems that an amount due from a customer as uncollectible
the amount is recorded as expense in the statement of operations.
Note 2. Financing and Liquidity - Page 35
------------------------------------------
4. For each issuance of convertible debt, including issuances
subsequent to September 30, 2004, please tell us the significant
terms of the conversion rights, including when the rights are
exercisable, how you calculated the amount of the beneficial
conversion feature and how you are accounting for that feature
including the amortization of the associated
Mr. Thomas E. Dyer
May 2, 2005
Page 4
discount. Include your analysis under SFAS 133 of whether the
feature is a derivative. See EITF 98-5. Please provide similar
disclosures in future filings.
Response:
---------
Each issuance of convertible debt is summarized in the table below
which sets forth the significant terms of the debt, including
conversion rights, and factors used to calculate the discount and
beneficial conversion feature. The discount was determined to be
the fair value of the warrants issued in connection with the
convertible debt, which was calculated using the Black-Scholes
model. The beneficial conversion feature was determined by
comparing the fair value of the convertible per share to the stock
price as of the date the agreement was executed. The warrant
discount and beneficial conversion feature are being amortized over
the life of the associated debt using the effective interest rate
method. Both the convertible debt and warrants may be converted or
exercised from and after the date agreement was executed. We will
provide similar disclosure in a footnote to our financial
statements in future filings.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
February January March October February
2003 2004 2004 2004 2005
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amount of
Debenture
(millions) $8.1 $7.0 $5.75 $20.0 $20.0
-------------------------------------------------------------------------------------------------------------
Per share
Conversion Price $3.25 $5.40 $7.25 $12.00 $20.00
-------------------------------------------------------------------------------------------------------------
Interest Rate 7.5% 6.0% 6.0% 7.0% 7.5%
-------------------------------------------------------------------------------------------------------------
Term of Debenture 60 months 30 months 30 months 42 months 42 months
-------------------------------------------------------------------------------------------------------------
Warrants Issued 405,000 323,995 230,000 500,000 457,142
-------------------------------------------------------------------------------------------------------------
Term of Warrant 60 months 48 months 48 months 72 months 48 months
-------------------------------------------------------------------------------------------------------------
Fair Value of
Warrant $0.93 $3.53 $6.96 $5.71 $8.46
-------------------------------------------------------------------------------------------------------------
Intrinsic Value
of Debt $3.11 $4.64 $5.98 $10.50 $16.76
-------------------------------------------------------------------------------------------------------------
Beneficial
Conversion Feature No Yes Yes No No
-------------------------------------------------------------------------------------------------------------
OTHER PARAMETERS USED TO CALCULATE FAIR VALUE OF WARRANTS AND DEBT
-------------------------------------------------------------------------------------------------------------
Stock Price on
Date of Agreement $1.58 $5.40 $9.53 $9.01 $16.68
-------------------------------------------------------------------------------------------------------------
Stock Volatility 100% 90.2% 97.73% 74% 64%
-------------------------------------------------------------------------------------------------------------
Dividend Yield 0.0% 0.0% 0.0% 0.0% 0.0%
-------------------------------------------------------------------------------------------------------------
Risk Free
Interest Rate 3.0% 2.74% 2.52% 4.25% 4.25%
-------------------------------------------------------------------------------------------------------------
</TABLE>
Mr. Thomas E. Dyer
May 2, 2005
Page 5
Our methodology for determining whether or not the convertible debt
instruments contained any potential FAS 133 beneficial conversion
features is summarized as follows:
In accordance with paragraph 16 of EITF 98-5, we assessed
whether the embedded conversion feature of the convertible
debt meets the derivative criteria in paragraph 12 of FASB
133. Paragraph 12(c) of FASB 133 indicates that for an
embedded derivative to apply derivative accounting it must
meet the criteria of FASB 133 if it were a freestanding
instrument. In evaluating the FASB 133 criteria in paragraph
6 through 11, we believe that the embedded derivative
qualifies for the exception in Paragraph 11 (a) of FASB 133.
Paragraph 11(a) of FASB 133 states that if a freestanding
instrument qualifies for classification in stockholders'
equity and is indexed to our own stock, then derivative
accounting under FASB 133 is not required.
We then utilized EITF 00-19 for the evaluation of whether
this would qualify for classification as equity, if it
were a freestanding instrument. Paragraph 4 of EITF 00-19
indicates that for purposes of evaluating whether an
embedded derivative indexed to a company's own stock would
be classified in stockholders' equity if freestanding, the
requirements of EITF 00-19 paragraphs 12-32 do not apply
if the hybrid contract is a conventional convertible debt
instrument in which the holder may only realize the value
of the conversion option by exercising the option a