SEC Company Response from ZOLTEK COMPANIES INC (CIK 0000890923) — Jun 21, 2005
ZOLTEK COMPANIES INC (CIK 0000890923)
Date: June 21, 2005 · CIK: 0000890923 · Accession: 0001068800-05-000422
AI Filing Summary & Sentiment
File numbers found in text: 000-20600
Referenced dates: March 28, 2005
Letter
June 21, 2005 VIA FACSIMILE 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, 2005, 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"). Zoltek filed its first response to the comment letter on May 2, 2005, subsequently, Zoltek rescinded its response related to comments four and five after it came to the Company's attention that the accounting treatment being applied related to the January, March, and October 2004 and February 2005 convertible debt issuances with warrants attached was incorrect. At this time, Zoltek is resubmitting its response to comments four and five and here by supplements its May 2nd response letter. We have set forth below each of such comments followed by our response.
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 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 calculated the discount and conversion feature. Historically, the Company had classified the value of
Zoltek Companies, Inc. 3101 McKelvey Rd. St. Louis, MO 63044 (USA) 314/291-5110 FAX: 314/291-9082
<PAGE> <PAGE>
Mr. Thomas E. Dyer June 21, 2005 Page 2
warrants to purchase common stock and the beneficial conversion feature, when applicable, as equity as the Company believed these instruments met the exceptions for recording these instruments as liabilities. After further review the Company has determined that the January, March and October 2004 and February 2005 instruments did not meet these exceptions and should have been classified as liabilities on its balance sheet at the fair value of each instrument. The Company concluded that its financial results for the fiscal year ended September 30, 2004 and interim periods ended March 31, June 30, September 30 and December 31, 2004 would be restated to reflect additional non-operating gains and losses related to the correction of its accounting for the conversion feature and related warrants to purchase the Company's common stock associated with convertible debt issued by the Company in January, March and October 2004 and the amortization expense associated with debt discount. The discount is 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 fair value of the conversion feature is also determined using the Black-Scholes model. The warrant discount and 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 the instrument was executed. We have provided the following disclosure in a footnote to our Form 10-Q for the fiscal quarter March 31, 2005 and will continue the disclosure in 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 ------------------------------------------------------------------------------------------------------------- Per Share Exercise price of Warrants $5.00 $5.40 $7.50 $13.00 $17.50 ------------------------------------------------------------------------------------------------------------- Fair Value of Warrant $.93 $2.27 $5.43 $6.02 $10.47 ------------------------------------------------------------------------------------------------------------- Value of Conversion Feature at Issuance $3.11 $1.78 $ 5.06 $4.31 $10.47 -------------------------------------------------------------------------------------------------------------
<PAGE> <PAGE>
Mr. Thomas E. Dyer June 21, 2005 Page 3
<CAPTION> ------------------------------------------------------------------------------------------------------------- February January March October February 2003 2004 2004 2004 2005 ------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Stock Price on Date of Agreement $1.58 $5.40 $9.53 $9.60 $16.68 ------------------------------------------------------------------------------------------------------------- Stock Volatility 100% 50% 61% 75% 84% ------------------------------------------------------------------------------------------------------------- Dividend Yield 0.0% 0.0% 0.0% 0.0% 0.0% ------------------------------------------------------------------------------------------------------------- Risk Free Interest Rate 3.0% 2.78% 2.44% 3.71% 3.46% ------------------------------------------------------------------------------------------------------------- </TABLE>
Our methodology for determining whether or not the convertible debt instruments contained any potential FAS 133 embedded derivative treatment is 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 as if it were a freestanding instrument. Paragraph 11(a) of FASB 133 states that if a freestanding instrument qualifies for classification in stockholders' equity and is indexed to a company's own stock, then derivative accounting under FASB 133 is not required.
We then utilized EITF 00-19 for the evaluation of whether the conversion features would qualify for classification as equity, as if they were a freestanding instruments. 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 and receiving the entire proceeds in a fixed number of shares or the equivalent amount of cash (at the discretion of the issuer).
Based on Zoltek's review of the January, March and October 2004 and February 2005 convertible debt agreements, it was determined that the agreements did not meet the requirements of a conventional convertible debt instrument, described in paragraph 4 of EITF 00-19 due to the following, and is subject to additional criteria to meet equity classification:
(1) Since accrued but unpaid interest at the date of conversion of the debt must be settled in shares of stock, the number of shares issued in the settlement is a variable amount; and
<PAGE> <PAGE>
Mr. Thomas E. Dyer June 21, 2005 Page 4
(2) Settlement of the accrued but unpaid interest is based upon the conversion price instead of the market price which may provide the holder value in excess of the calculated interest.
As outlined within paragraph 8 of EITF 00-19, equity recognition of freestanding contracts is applied when contracts give the company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement), assuming that all the criteria set forth in paragraphs 12-32 have been met.
The January, March and October 2004 and February 2005 convertible debt agreements do contain provisions that could require net-cash settlement.
The terms of the convertible debt permit Zoltek to deliver unregistered shares to the holders in settlement of its obligations thereunder (paragraphs 14-18). However Zoltek would incur liquidated damages (a 2% incremental interest charge per month) if the shares underlying the convertible debt are not registered and an effective registration statement is not maintained. This liquidated damage is not considered to be a discount on the issuance of unregistered shares as it is not conditioned upon the issuance of the shares but instead is based on the failure to register the shares. Therefore, the convertible debt instruments fail to meet the criteria in paragraphs 16 and 17 of EITF 00-19.
Based upon the foregoing, we then considered paragraph 8 of EITF 00-19 and concluded that liability classification for the conversion features associated with the January, March and October 2004 and February 2005 instruments is appropriate given the settlement rights discussed above. In subsequent periods the change in fair value of the instrument will result in an adjustment to this liability with the corresponding gain or loss being recorded in the statement of operations. At the date of its conversion of the instrument the corresponding liability will be reclassified to equity.
Based on Zoltek's review of the January 2003 convertible debt agreements, it was determined that the agreements met the requirements of a convertible debt instrument, described in paragraph 4 of EITF 00-19 due to the following:
(1) The debt may be converted at the election of the holders at any time prior to maturity based upon a fixed number of shares as outlined within the original debt agreement.
(2) The debt holder does not hold the authority within the agreement to force cash settlement of the outstanding obligations upon the maturity of the instruments.
<PAGE> <PAGE>
Mr. Thomas E. Dyer June 21, 2005 Page 5
Based upon the foregoing, Zoltek has determined that the requirements of paragraphs 12-32 in EITF 00-19 are not applicable to the January 2003 conversion feature in determining if it meets equity classification. We then considered paragraph 8 of EITF 00-19 and concluded that equity classification is appropriate given the settlement rights discussed above. Therefore, since the embedded conversion feature would received equity classification on a freestanding basis and the instrument is indexed to our own stock the
Show Raw Text
<DOCUMENT>
<TYPE>CORRESP
<SEQUENCE>1
<FILENAME>filename1.txt
<TEXT>
<PAGE>
[ZOLTEK logo]
June 21, 2005
VIA FACSIMILE 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, 2005,
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"). Zoltek filed its first response to the comment
letter on May 2, 2005, subsequently, Zoltek rescinded its response related
to comments four and five after it came to the Company's attention that the
accounting treatment being applied related to the January, March, and
October 2004 and February 2005 convertible debt issuances with warrants
attached was incorrect. At this time, Zoltek is resubmitting its response to
comments four and five and here by supplements its May 2nd response letter.
We have set forth below each of such comments followed by our response.
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 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 calculated the discount and
conversion feature. Historically, the Company had classified the
value of
Zoltek Companies, Inc. 3101 McKelvey Rd. St. Louis, MO 63044
(USA) 314/291-5110 FAX: 314/291-9082
<PAGE>
<PAGE>
Mr. Thomas E. Dyer
June 21, 2005
Page 2
warrants to purchase common stock and the beneficial conversion
feature, when applicable, as equity as the Company believed these
instruments met the exceptions for recording these instruments as
liabilities. After further review the Company has determined that
the January, March and October 2004 and February 2005 instruments
did not meet these exceptions and should have been classified as
liabilities on its balance sheet at the fair value of each
instrument. The Company concluded that its financial results for
the fiscal year ended September 30, 2004 and interim periods ended
March 31, June 30, September 30 and December 31, 2004 would be
restated to reflect additional non-operating gains and losses
related to the correction of its accounting for the conversion
feature and related warrants to purchase the Company's common stock
associated with convertible debt issued by the Company in January,
March and October 2004 and the amortization expense associated with
debt discount. The discount is 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 fair value of the
conversion feature is also determined using the Black-Scholes
model. The warrant discount and 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 the instrument was
executed. We have provided the following disclosure in a footnote
to our Form 10-Q for the fiscal quarter March 31, 2005 and will
continue the disclosure in 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
-------------------------------------------------------------------------------------------------------------
Per Share
Exercise price
of Warrants $5.00 $5.40 $7.50 $13.00 $17.50
-------------------------------------------------------------------------------------------------------------
Fair Value of
Warrant $.93 $2.27 $5.43 $6.02 $10.47
-------------------------------------------------------------------------------------------------------------
Value of
Conversion
Feature at
Issuance $3.11 $1.78 $ 5.06 $4.31 $10.47
-------------------------------------------------------------------------------------------------------------
<PAGE>
<PAGE>
Mr. Thomas E. Dyer
June 21, 2005
Page 3
<CAPTION>
-------------------------------------------------------------------------------------------------------------
February January March October February
2003 2004 2004 2004 2005
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Stock Price on
Date of
Agreement $1.58 $5.40 $9.53 $9.60 $16.68
-------------------------------------------------------------------------------------------------------------
Stock Volatility 100% 50% 61% 75% 84%
-------------------------------------------------------------------------------------------------------------
Dividend Yield 0.0% 0.0% 0.0% 0.0% 0.0%
-------------------------------------------------------------------------------------------------------------
Risk Free
Interest Rate 3.0% 2.78% 2.44% 3.71% 3.46%
-------------------------------------------------------------------------------------------------------------
</TABLE>
Our methodology for determining whether or not the convertible debt
instruments contained any potential FAS 133 embedded derivative
treatment is 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 as if it were a freestanding
instrument. Paragraph 11(a) of FASB 133 states that if a
freestanding instrument qualifies for classification in
stockholders' equity and is indexed to a company's own
stock, then derivative accounting under FASB 133 is not
required.
We then utilized EITF 00-19 for the evaluation of whether
the conversion features would qualify for classification
as equity, as if they were a freestanding instruments.
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 and receiving the entire proceeds
in a fixed number of shares or the equivalent amount of
cash (at the discretion of the issuer).
Based on Zoltek's review of the January, March and October
2004 and February 2005 convertible debt agreements, it was
determined that the agreements did not meet the
requirements of a conventional convertible debt
instrument, described in paragraph 4 of EITF 00-19 due to
the following, and is subject to additional criteria to
meet equity classification:
(1) Since accrued but unpaid interest at the date
of conversion of the debt must be settled in
shares of stock, the number of shares issued in
the settlement is a variable amount; and
<PAGE>
<PAGE>
Mr. Thomas E. Dyer
June 21, 2005
Page 4
(2) Settlement of the accrued but unpaid interest
is based upon the conversion price instead of the
market price which may provide the holder value
in excess of the calculated interest.
As outlined within paragraph 8 of EITF 00-19, equity
recognition of freestanding contracts is applied when
contracts give the company a choice of net-cash settlement
or settlement in its own shares (physical settlement or
net-share settlement), assuming that all the criteria set
forth in paragraphs 12-32 have been met.
The January, March and October 2004 and February 2005
convertible debt agreements do contain provisions that
could require net-cash settlement.
The terms of the convertible debt permit Zoltek to deliver
unregistered shares to the holders in settlement of its
obligations thereunder (paragraphs 14-18). However Zoltek
would incur liquidated damages (a 2% incremental interest
charge per month) if the shares underlying the convertible
debt are not registered and an effective registration
statement is not maintained. This liquidated damage is not
considered to be a discount on the issuance of
unregistered shares as it is not conditioned upon the
issuance of the shares but instead is based on the failure
to register the shares. Therefore, the convertible debt
instruments fail to meet the criteria in paragraphs 16 and
17 of EITF 00-19.
Based upon the foregoing, we then considered paragraph 8
of EITF 00-19 and concluded that liability classification
for the conversion features associated with the January,
March and October 2004 and February 2005 instruments is
appropriate given the settlement rights discussed above.
In subsequent periods the change in fair value of the
instrument will result in an adjustment to this liability
with the corresponding gain or loss being recorded in the
statement of operations. At the date of its conversion of
the instrument the corresponding liability will be
reclassified to equity.
Based on Zoltek's review of the January 2003 convertible
debt agreements, it was determined that the agreements met
the requirements of a convertible debt instrument,
described in paragraph 4 of EITF 00-19 due to the
following:
(1) The debt may be converted at the
election of the holders at any time prior to
maturity based upon a fixed number of shares as
outlined within the original debt agreement.
(2) The debt holder does not hold the
authority within the agreement to force cash
settlement of the outstanding obligations upon
the maturity of the instruments.
<PAGE>
<PAGE>
Mr. Thomas E. Dyer
June 21, 2005
Page 5
Based upon the foregoing, Zoltek has determined that the
requirements of paragraphs 12-32 in EITF 00-19 are not
applicable to the January 2003 conversion feature in
determining if it meets equity classification. We then
considered paragraph 8 of EITF 00-19 and concluded that
equity classification is appropriate given the settlement
rights discussed above. Therefore, since the embedded
conversion feature would received equity classification on
a freestanding basis and the instrument is indexed to our
own stock the