Zsolt Rumy, chief executive of Zoltek Cos. Inc., says the company is
confident there are no more accounting errors beyond those that led to
the forced resignation earlier this month of Kevin Schott as chief
financial officer.
In a second-quarter conference call May 13, Rumy said the audit
committee of Zoltek's board is continuing with its investigations, but
there's little likelihood that the probe will find anything new.
"We have virtually concluded our own internal management investigation,"
Rumy said. "We are confident there are no more hanging chads, so to
speak."
While answering an analyst's question, Rumy said he had never heard of
Arch Capital LLC until the accounting errors at Zoltek were discovered.
Arch Capital is a local company that a Zoltek subsidiary paid $175,000
last September -- one of two unauthorized or unre****ted payments
totaling $250,000 that triggered Schott's resignation.
Rumy said Zoltek had done business in the past with Victoriacap LLC, the
other company to receive an unauthorized and unre****ted payment. That
company received $75,000 in January.
Schott resigned May 2 to avoid dismissal by Zoltek's board, according to
an agreement that Zoltek filed with the Securities and Exchange
Commission in which Schott agreed to pay Zoltek $250,000 from his own
pocket.
Under the agreement, Zoltek agreed to waive any claims, lawsuits or
actions it may have had against Schott in relation to the payments made
to Victoriacap and Arch Capital.
In a statement May 5, Zoltek announced that its board's audit committee
had launched an investigation to determine whether any other
unauthorized activities had occurred at the company. Seven days later,
the company announced that it had hired Andrew Whipple, former chief
financial officer at Shawnee, Kan.-based E3 Biofuels, as vice president
and chief accounting officer.
Records at the Missouri secretary of state's office show Jay Nathanson,
an attorney at Greensfelder, Hemker & Gale PC, created Arch Capital as a
partner****p in 1997, while Sean O'Gorman, an attorney at O'Gorman &
Sandroni PC, created Victoriacap as a limited liability company in 2004.
O'Gorman said Victoriacap is a client of his law firm and a company that
has provided Zoltek with unspecified services on contract for many
years. He declined to disclose the names of Victoriacap's principals but
said Zoltek did not contact them on issues regarding Schott's
resignation.
"The whole thing is strange," O'Gorman said. "My clients provided Zoltek
with a service, and they were paid."
Nathanson declined to comment or disclose the identity of Arch Capital's
principals.
Zoltek is the world's largest producer of commercial-grade carbon fiber,
and its business has been booming over the last two years because of
high global demand for the material, which is used to make aircraft and
automobile parts and wind turbines, among other things.
On May 12, the company re****ted one of its best quarters, stating in
preliminary results that it posted profit of $4.3 million on revenue of
$49.6 million for the three-month period ended March 31. That compares
to a loss of $6 million on revenue of $36.7 million for the same period
in 2007.
For the first six months of its fiscal 2008, Zoltek posted net income of
$6.9 million on revenue of $89.7 million, compared to a loss of $5.7
million on revenue of $67 million for the same period the prior year.
The company posted profit of $2.6 million in its fiscal 2008 first
quarter, after posting losses for seven years in a row.
Following Schott's resignation, Zoltek's stock fell sharply, hitting a
52-week low price of $20.14 a share on May 5, the day of Zoltek's
announcement. It closed at $23.33 a share on May 14, nearly 55 percent
below its 52-week high price of $51.77 per share on Aug. 9, 2007.
Schott's resignation came about four years after he was hired as
Zoltek's chief financial officer. During his tenure, the company
re****ted that it had found material weaknesses in its accounting
processes, but Schott previously hadn't been connected to any financial
irregularities.
Stuart Bush, a Dallas-based analyst for RBC Capital Markets who covers
Zoltek, believes Schott's resignation and the accounting issues
surrounding the departure are casting a pall over Zoltek.
"We believe more accounting issues beyond those announced could develop,
with a full restatement possibly more substantial than the initial short
press release," Bush wrote in a re****t highlighting Schott's resignation
on May 5. "We believe (Zoltek's) shares will remain under pressure in
the near term as accounting uncertainties develop and remain an
overhang."
In a follow-up re****t May 13, Bush said he expected the pressure on
Zoltek's stock to persist because investor confidence in Zoltek's
"near-term fundamentals and management capability is reduced."
< Way overblown, ausound. >
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