##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the three months ended March 31, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from to ___________ to ___________
 Commission File No. 0-20600
 
 ZOLTEK COMPANIES, INC.
  Missouri
    
    43-1311101(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)3101 McKelvey Road, St. Louis, Missouri
    
    63044(Address of principal executive offices)
    
    (Zip Code)
  þ o
 Yes o No o
  Large Accelerated Filer o
    
    Accelerated Filer þ
    
    Non-accelerated Filer o
    
    Smaller Reporting Company o
 o þ




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##### 



ZOLTEK COMPANIES, INC.
INDEX
 PART I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)
    
    
    3Condensed Consolidated Balance Sheets  March 31, 2010 and September 30, 2009
    
    
    3Condensed Consolidated Statements of Operations  Three Months and Six Months Ended March 31,
2010 and 2009
    
    
    4Condensed Consolidated Statement of Changes in Shareholders Equity  Six Months
Ended March 31, 2010
    
    
    5Condensed Consolidated Statements of Comprehensive Loss  Three Months and Six Months
Ended March 31, 2010 and 2009
    
    
    5Condensed Consolidated Statements of Cash Flows  Six Months Ended March 31, 2010 and 2009
    
    
    6Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    27Item 4. Controls and Procedures
    
    
    29PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    30Item 6. Exhibits
    
    
    30SIGNATURES
    
    
    31EXHIBIT INDEX
    
    
    32Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 ZOLTEK COMPANIES, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 March 31,
    
    
    September 30,2010
    
    
    2009AssetsCurrent assets:Cash and cash equivalents
    
    $
    22,616
    
    
    $
    20,943Accounts receivable, less allowance for doubtful accounts of $1,809
and $2,356, respectively
    
    
    19,225
    
    
    
    30,507Inventories, net
    
    
    41,582
    
    
    
    48,058Other current assets
    
    
    7,935
    
    
    
    10,100Total current assets
    
    
    91,358
    
    
    
    109,608Property and equipment, net
    
    
    242,633
    
    
    
    256,910Other assets
    
    
    137
    
    
    
    327Total assets
    
    $
    334,128
    
    
    $
    366,845Liabilities and Shareholders EquityCurrent liabilities:Borrowings under credit lines
    
    
    7,803
    
    
    
    12,277Current maturities of long-term debt
    
    
    1,681
    
    
    
    4,159Trade accounts payable
    
    
    5,563
    
    
    
    9,408Accrued expenses and other liabilities
    
    
    6,627
    
    
    
    6,845Construction payables
    
    
    483
    
    
    
    792Total current liabilities
    
    
    22,157
    
    
    
    33,481Long-term debt, less current maturities
    
    
    
    
    
    
    981Hungarian grant, long-term
    
    
    9,700
    
    
    
    10,228Deferred tax liabilities
    
    
    2,421
    
    
    
    6,690Derivative liabilities
    
    
    1,929
    
    
    
    Total liabilities
    
    
    36,207
    
    
    
    51,380Commitments and contingencies (see Note 8)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, 34,408,608 and
34,424,441 shares issued and outstanding at March 31, 2010 and
September 30, 2009, respectively
    
    
    344
    
    
    
    344Additional paid-in capital
    
    
    480,113
    
    
    
    494,311Accumulated other comprehensive loss
    
    
    (28,839
    )
    
    
    (18,405
    )Accumulated deficit
    
    
    (153,697
    )
    
    
    (160,785
    )Total shareholders equity
    
    
    297,921
    
    
    
    315,465Total liabilities and shareholders equity
    
    $
    334,128
    
    
    $
    366,845
   3




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ZOLTEK COMPANIES, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three months ended March 31,
    
    
    Six months ended March 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Net sales
    
    $
    26,029
    
    
    $
    36,006
    
    
    $
    54,896
    
    
    $
    74,635Cost of sales, excluding available unused capacity costs
    
    
    20,294
    
    
    
    25,410
    
    
    
    42,443
    
    
    
    53,502Available unused capacity costs
    
    
    4,283
    
    
    
    1,478
    
    
    
    7,054
    
    
    
    1,751Gross profit
    
    
    1,452
    
    
    
    9,118
    
    
    
    5,399
    
    
    
    19,382Application and development costs
    
    
    1,965
    
    
    
    1,726
    
    
    
    3,949
    
    
    
    3,448Selling, general and administrative expenses
    
    
    4,531
    
    
    
    5,341
    
    
    
    9,245
    
    
    
    10,408Operating (loss) income
    
    
    (5,044
    )
    
    
    2,051
    
    
    
    (7,795
    )
    
    
    5,526Other income (expense):Interest income
    
    
    6
    
    
    
    105
    
    
    
    14
    
    
    
    324(Loss) gain on foreign currency transactions
    
    
    (382
    )
    
    
    1,073
    
    
    
    (36
    )
    
    
    1,251Other expense, net
    
    
    (217
    )
    
    
    (206
    )
    
    
    (629
    )
    
    
    (460
    )Gain on derivative liabilities
    
    
    274
    
    
    
    
    
    
    
    1,132
    
    
    
    Interest expense, excluding amortization of financing fees and
debt discount
    
    
    (131
    )
    
    
    (377
    )
    
    
    (264
    )
    
    
    (945
    )Amortization of financing fees and debt discount
    
    
    (92
    )
    
    
    (1,593
    )
    
    
    (289
    )
    
    
    (3,557
    )(Loss) income before income taxes
    
    
    (5,586
    )
    
    
    1,053
    
    
    
    (7,867
    )
    
    
    2,139Income tax benefit (expense)
    
    
    600
    
    
    
    (580
    )
    
    
    2,398
    
    
    
    (1,130
    )Net (loss) income
    
    $
    (4,986
    )
    
    $
    473
    
    
    $
    (5,469
    )
    
    $
    1,009Basic and diluted (loss) income per share
    
    $
    (0.14
    )
    
    $
    0.01
    
    
    $
    (0.16
    )
    
    $
    0.03Weighted average common shares outstanding  basic
    
    
    34,417,071
    
    
    
    34,405,692
    
    
    
    34,420,796
    
    
    
    34,405,156Weighted average common shares outstanding  diluted
    
    
    34,417,071
    
    
    
    34,482,098
    
    
    
    34,420,796
    
    
    
    34,486,450
   4




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ZOLTEK COMPANIES, INC.
 
 CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
 Total
    
    
    
    
    
    
    Additional
    
    
    Accumulated OtherShareholders
    
    
    Common
    
    
    Paid-In
    
    
    Comprehensive
    
    
    AccumulatedEquity
    
    
    Stock
    
    
    Capital
    
    
    Loss
    
    
    DeficitBalance, September 30, 2009
    
    $
    315,465
    
    
    $
    344
    
    
    $
    494,311
    
    
    $
    (18,405
    )
    
    $
    (160,785
    )Stock option compensation expense
    
    
    1,563
    
    
    
    
    
    
    
    1,563Cumulative effect of change in accounting principle
    
    
    (3,061
    )
    
    
    
    
    
    
    (15,618
    )
    
    
    
    
    
    
    12,557Cash settlement of restricted shares
    
    
    (143
    )
    
    
    
    
    
    
    (143
    )Net loss
    
    
    (5,469
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,469
    )Foreign currency translation adjustment
    
    
    (10,434
    )
    
    
    
    
    
    
    
    
    
    
    (10,434
    )Balance, March 31, 2010
    
    $
    297,921
    
    
    $
    344
    
    
    $
    480,113
    
    
    $
    (28,839
    )
    
    $
    (153,697
    )
 
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
 Three months ended March 31,
    
    
    Six months ended March 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Net (loss) income
    
    $
    (4,986
    )
    
    $
    473
    
    
    $
    (5,469
    )
    
    $
    1,009Foreign currency translation adjustment
    
    
    (5,334
    )
    
    
    (32,364
    )
    
    
    (10,434
    )
    
    
    (59,824
    )Comprehensive loss
    
    $
    (10,320
    )
    
    $
    (31,891
    )
    
    $
    (15,903
    )
    
    $
    (58,815
    )
   5




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ZOLTEK COMPANIES, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six months ended March 31,2010
    
    
    2009Cash flows from operating activities:Net (loss) income
    
    $
    (5,469
    )
    
    $
    1,009Adjustments to reconcile net (loss) income to net cash provided by operating activities:Depreciation
    
    
    8,417
    
    
    
    8,026Amortization of financing fees and debt discount
    
    
    289
    
    
    
    3,557Deferred taxes
    
    
    (2,962
    )
    
    
    590Gain on derivative liabilities
    
    
    (1,132
    )
    
    
    Foreign currency transaction gains
    
    
    (306
    )
    
    
    (882
    )Stock option compensation expense
    
    
    1,563
    
    
    
    1,599Loss on disposal of assets
    
    
    154
    
    
    
    321Changes in assets and liabilities:Decrease in accounts receivable
    
    
    10,280
    
    
    
    3,195Decrease (increase) in inventories
    
    
    4,490
    
    
    
    (10,489
    )Decrease in other current assets and other assets
    
    
    1,728
    
    
    
    126Decrease in trade accounts payable
    
    
    (3,523
    )
    
    
    (2,228
    )(Decrease) increase in accrued expenses and other liabilities
    
    
    (1,082
    )
    
    
    2,581Decrease in legal liabilities
    
    
    
    
    
    
    (5,399
    )Net cash provided by operating activities
    
    
    12,447
    
    
    
    2,006Cash flows from investing activities:Purchases of property and equipment
    
    
    (2,105
    )
    
    
    (13,054
    )Proceeds received from sale of fixed assets
    
    
    83
    
    
    
    Proceeds received from Hungarian grant
    
    
    55
    
    
    
    Decrease in construction payables
    
    
    (309
    )
    
    
    (3,890
    )Net cash used for investing activities
    
    
    (2,276
    )
    
    
    (16,944
    )Cash flows from financing activities:Repayment of convertible debentures
    
    
    (3,600
    )
    
    
    (5,150
    )Cash settlement of restricted shares
    
    
    (143
    )
    
    
    (Repayment of) borrowings under notes payable and credit lines
    
    
    (4,524
    )
    
    
    7,195Net cash (used for) provided by financing activities
    
    
    (8,267
    )
    
    
    2,045Effect of exchange rate changes on cash and cash equivalents
    
    
    (231
    )
    
    
    145Net increase (decrease) in cash and cash equivalents
    
    
    1,673
    
    
    
    (12,748
    )Cash and cash equivalents at beginning of period
    
    
    20,943
    
    
    
    29,224Cash and cash equivalents at end of period
    
    $
    22,616
    
    
    $
    16,476Supplemental disclosures of cash flow information:Non-cash conversion of convertible debentures
    
    
    
    
    
    
    251
   6




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ZOLTEK COMPANIES, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 1. ORGANIZATION AND BASIS OF PRESENTATION
   Basis of Presentation
   Adoption of New Accounting Pronouncements
  2. INVENTORIES
  March 31,
    
    
    September 30,2010
    
    
    2009Raw materials
    
    $
    5,258
    
    
    $
    7,349Work-in-process
    
    
    5,956
    
    
    
    8,977Finished goods
    
    
    25,504
    
    
    
    26,758Consigned inventory
    
    
    4,328
    
    
    
    4,471Supplies and other
    
    
    536
    
    
    
    503$
    41,582
    
    
    $
    48,058
   7




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3. SEGMENT INFORMATION
   Three months ended March 31, 2010Carbon
    
    
    Technical
    
    
    Corporate/Fibers
    
    
    Fibers
    
    
    Other
    
    
    TotalNet sales
    
    $
    19,654
    
    
    $
    5,973
    
    
    $
    402
    
    
    $
    26,029Cost of sales, excluding available unused capacity costs
    
    
    15,494
    
    
    
    4,486
    
    
    
    314
    
    
    
    20,294Available unused capacity costs
    
    
    3,733
    
    
    
    550
    
    
    
    
    
    
    
    4,283Gross profit
    
    
    427
    
    
    
    937
    
    
    
    88
    
    
    
    1,452Operating income (loss)
    
    
    (1,623
    )
    
    
    731
    
    
    
    (4,152
    )
    
    
    (5,044
    )Depreciation
    
    
    3,274
    
    
    
    434
    
    
    
    393
    
    
    
    4,101Capital expenditures
    
    
    970
    
    
    
    288
    
    
    
    197
    
    
    
    1,455
 Three months ended March 31, 2009Carbon
    
    
    Technical
    
    
    Corporate/Fibers
    
    
    Fibers
    
    
    Other
    
    
    TotalNet sales
    
    $
    28,914
    
    
    $
    6,490
    
    
    $
    602
    
    
    $
    36,006Cost of sales, excluding available unused capacity costs
    
    
    20,239
    
    
    
    4,813
    
    
    
    358
    
    
    
    25,410Available unused capacity costs
    
    
    1,111
    
    
    
    367
    
    
    
    
    
    
    
    1,478Gross profit
    
    
    7,564
    
    
    
    1,310
    
    
    
    244
    
    
    
    9,118Operating income (loss)
    
    
    4,730
    
    
    
    603
    
    
    
    (3,282
    )
    
    
    2,051Depreciation
    
    
    3,293
    
    
    
    390
    
    
    
    270
    
    
    
    3,953Capital expenditures
    
    
    4,538
    
    
    
    101
    
    
    
    81
    
    
    
    4,720
 Six months ended March 31, 2010Carbon
    
    
    Technical
    
    
    Corporate/Fibers
    
    
    Fibers
    
    
    Other
    
    
    TotalNet sales
    
    $
    43,596
    
    
    $
    10,403
    
    
    $
    897
    
    
    $
    54,896Cost of sales, excluding available unused capacity costs
    
    
    33,379
    
    
    
    8,282
    
    
    
    782
    
    
    
    42,443Available unused capacity costs
    
    
    6,160
    
    
    
    894
    
    
    
    
    
    
    
    7,054Gross profit
    
    
    4,057
    
    
    
    1,227
    
    
    
    115
    
    
    
    5,399Operating income (loss)
    
    
    (335
    )
    
    
    792
    
    
    
    (8,252
    )
    
    
    (7,795
    )Depreciation
    
    
    6,713
    
    
    
    892
    
    
    
    812
    
    
    
    8,417Capital expenditures
    
    
    1,209
    
    
    
    512
    
    
    
    384
    
    
    
    2,105
 Six months ended March 31, 2009Carbon
    
    
    Technical
    
    
    Corporate/Fibers
    
    
    Fibers
    
    
    Other
    
    
    TotalNet sales
    
    $
    61,630
    
    
    $
    11,755
    
    
    $
    1,250
    
    
    $
    74,635Cost of sales, excluding available unused capacity costs
    
    
    43,878
    
    
    
    8,634
    
    
    
    990
    
    
    
    53,502Available unused capacity costs
    
    
    1,202
    
    
    
    549
    
    
    
    
    
    
    
    1,751Gross profit
    
    
    16,550
    
    
    
    2,572
    
    
    
    260
    
    
    
    19,382Operating income (loss)
    
    
    11,236
    
    
    
    1,134
    
    
    
    (6,844
    )
    
    
    5,526Depreciation
    
    
    6,664
    
    
    
    809
    
    
    
    553
    
    
    
    8,026Capital expenditures
    
    
    12,363
    
    
    
    537
    
    
    
    154
    
    
    
    13,054
  8




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##### Table of Contents



Total AssetsCarbon
    
    
    Technical
    
    
    Corporate/Fibers
    
    
    Fibers
    
    
    Other
    
    
    TotalMarch 31, 2010
    
    $
    265,172
    
    
    $
    24,963
    
    
    $
    43,993
    
    
    $
    334,128September 30, 2009
    
    
    293,200
    
    
    
    27,614
    
    
    
    46,031
    
    
    
    366,845
 4. FINANCING AND DEBT
 Credit Facilities
    March 31,
    
    
    September 30,2010
    
    
    2009US facility (current interest rate of 2.98%  variable with Libor)
    
    $
    7,803
    
    
    $
    8,343Facility with Hungarian bank (current interest rate of 2.7% to 7.3%, depending on currency)
    
    
    
    
    
    
    3,934Total credit lines
    
    $
    7,803
    
    
    $
    12,277
 Hungarian Grant
   Convertible Debt and Warrants
    9




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##### Table of Contents



As of March 31, 2010
    
    
    As of September 30, 2009Number
    
    
    
    
    
    
    
    
    
    
    Numberof shares
    
    
    Conversion
    
    
    Principal
    
    
    of shares
    
    
    Conversion
    
    
    Principalissuable
    
    
    price
    
    
    outstanding
    
    
    issuable
    
    
    price
    
    
    outstandingMay 2006
    
    
    
    
    
    $
    25.51
    
    
    $
    
    
    
    
    70,560
    
    
    $
    25.51
    
    
    $
    1,799,986July 2006
    
    
    
    
    
    
    25.51
    
    
    
    
    
    
    
    19,640
    
    
    
    25.51
    
    
    
    501,016October 2006
    
    
    25,460
    
    
    
    25.51
    
    
    
    649,485
    
    
    
    76,381
    
    
    
    25.51
    
    
    
    1,948,47925,460
    
    
    
    
    
    
    $
    649,485
    
    
    
    166,581
    
    
    
    
    
    
    $
    4,249,481
   Outstanding Convertible Debt Issuances
 May 2006(1)
    
    July 2006(1)
    
    October 2006(1)Original principal amount of debentures
(millions)
    
    $20.0
    
    $2.5
    
    $7.5Per share conversion price on debenture
    
    $25.51
    
    $25.51
    
    $25.51Interest rate
    
    Libor plus 4%
    
    Libor plus 4%
    
    Libor plus 4%Term of debenture
    
    42 months
    
    42 months
    
    42 monthsWarrants issued
    
    274,406 shares
    
    34,370 shares
    
    102,835 sharesTerm of warrants
    
    60 months
    
    60 months
    
    60 monthsValue per share of conversion features at issuance
    
    $18.80
    
    $19.21
    
    $19.57Stock price on date of agreement
    
    $32.25
    
    $29.28
    
    $26.81Dividend yield
    
    0.0%
    
    0.0%
    
    0.0%Risk-free interest rate at issuance
    
    4.88%
    
    4.88%
    
    4.65%Principal shares converted
    
    Partial
    
    Partial
    
    PartialWarrants exercised
    
    No
    
    No
    
    Partial
 
 (1)
    
    The May 2006, July 2006 and October 2006 issuances were considered to have beneficial
conversion features.  Amortization of Financing Fees and Debt Discount
    10




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Three months ended March 31, 2010
    
    
    Six months ended March 31, 2010Conversion
    
    
    
    
    
    
    
    
    
    
    ConversionWarrants
    
    
    feature
    
    
    Total
    
    
    Warrants
    
    
    feature
    
    
    TotalMay 2006 issuance
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    18
    
    
    $
    26
    
    
    $
    44July 2006 issuance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15
    
    
    
    17
    
    
    
    32October 2006 issuance
    
    
    18
    
    
    
    21
    
    
    
    39
    
    
    
    54
    
    
    
    62
    
    
    
    116$
    18
    
    
    $
    21
    
    
    
    39
    
    
    $
    87
    
    
    $
    105
    
    
    
    192Deferred financing costs
    
    
    
    
    
    
    
    
    
    
    53
    
    
    
    
    
    
    
    
    
    
    
    97Total
    
    
    
    
    
    
    
    
    
    $
    92
    
    
    
    
    
    
    
    
    
    
    $
    289
 Three months ended March 31, 2009
    
    
    Six months ended March 31, 2009Conversion
    
    
    
    
    
    
    
    
    
    
    ConversionWarrants
    
    
    feature
    
    
    Total
    
    
    Warrants
    
    
    feature
    
    
    TotalMay 2006 issuance
    
    $
    450
    
    
    $
    664
    
    
    $
    1,114
    
    
    $
    1,051
    
    
    $
    1,551
    
    
    $
    2,602July 2006 issuance
    
    
    89
    
    
    
    108
    
    
    
    197
    
    
    
    158
    
    
    
    193
    
    
    
    351October 2006 issuance
    
    
    87
    
    
    
    100
    
    
    
    187
    
    
    
    193
    
    
    
    222
    
    
    
    415$
    626
    
    
    $
    872
    
    
    
    1,498
    
    
    $
    1,402
    
    
    $
    1,966
    
    
    
    3,368Deferred financing costs
    
    
    
    
    
    
    
    
    
    
    95
    
    
    
    
    
    
    
    
    
    
    
    189Total
    
    
    
    
    
    
    
    
    
    $
    1,593
    
    
    
    
    
    
    
    
    
    
    $
    3,557
  September 30, 2009ConversionWarrants
    
    
    feature
    
    
    TotalMay 2006 issuance
    
    $
    18
    
    
    $
    26
    
    
    $
    44July 2006 issuance
    
    
    15
    
    
    
    17
    
    
    
    32October 2006 issuance
    
    
    54
    
    
    
    62
    
    
    
    116$
    87
    
    
    $
    105
    
    
    
    192Debt acquisition cost and financing fees
    
    
    
    
    
    
    
    
    
    
    97Total
    
    
    
    
    
    
    
    
    
    $
    289
 Long-term Debt
  March 31,
    
    
    September 30,2010
    
    
    2009Note payable with interest currently at 4.12% (variable with Libor, payable in monthly
installments of interest to maturity in January 2011)
    
    $
    1,032
    
    
    $
    1,083Convertible debentures final payment due November 2009 (interest rate of 5.58% -
variable with Libor)
    
    
    
    
    
    
    1,800Convertible debentures final payment due January 2010 (interest rate of 5.12% -
variable with Libor)
    
    
    
    
    
    
    501Convertible debentures final payment due April 2010 (interest rate of 4.63% -
variable with Libor)
    
    
    649
    
    
    
    1,948Total long-term debt including current maturities
    
    
    1,681
    
    
    
    5,332Less: Debt discount associated with conversion features and warrants
    
    
    
    
    
    
    (192
    )Less: Amounts payable within one year, net of discount of $0 and $192
    
    
    (1,681
    )
    
    
    (4,159
    )Total long-term debt, less current maturities
    
    $
    
    
    
    $
    981
  11




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##### Table of Contents



5. DERIVATIVE INSTRUMENTS AND FAIR VALUE MEASUREMENT
   Level 1 
 Level 2 
 Level 3 
   Outstanding Warrant Issuances
 May 2006
    
    July 2006
    
    October 2006
    
    December 2006Warrants issued
    
    274,406 shares
    
    34,370 shares
    
    102,835 shares
    
    827,789  sharesExpiration of warrants
    
    May 2011
    
    July 2011
    
    October 2011
    
    December 2012Per share exercise price of warrants
    
    $28.06
    
    $28.06
    
    $28.06
    
    $28.06Expected remaining life of warrants
    
    1.1 years
    
    1.3 years
    
    1.6 years
    
    2.7 yearsRisk-free interest rate
    
    0.41%
    
    0.41%
    
    1.02%
    
    1.60%Stock volatility
    
    74.8%
    
    74.8%
    
    74.8%
    
    74.8%Dividend yield
    
    0.0%
    
    0.0%
    
    0.0%
    
    0.0%
   Balance  October 1, 2009
    
    $
    3,061Change in fair value of derivative liability
    
    
    (1,132
    )Balance  March 31, 2010
    
    $
    1,929
  12




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##### Table of Contents



Shares issuableFair value
    
    
    upon exercise
    
    
    Total fairIssuance Date
    
    per warrant
    
    
    of warrants
    
    
    valueMay 2006
    
    $
    0.51
    
    
    
    274,406
    
    
    $
    140July 2006
    
    
    0.64
    
    
    
    34,370
    
    
    
    22October 2006
    
    
    0.93
    
    
    
    102,835
    
    
    
    96December 2006
    
    
    2.02
    
    
    
    827,789
    
    
    
    1,671Total
    
    
    
    
    
    
    1,239,400
    
    
    $
    1,929
 6. EARNINGS PER SHARE
   Three months ended
    
    
    Six months endedMarch 31,
    
    
    March 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Numerators:Net (loss) income
    
    $
    (4,986
    )
    
    $
    473
    
    
    $
    (5,469
    )
    
    $
    1,009Denominators:Average shares outstanding  basic
    
    
    34,417
    
    
    
    34,406
    
    
    
    34,421
    
    
    
    34,405Impact of stock options
    
    
    
    
    
    
    76
    
    
    
    
    
    
    
    81Average shares outstanding  diluted
    
    
    34,417
    
    
    
    34,482
    
    
    
    34,421
    
    
    
    34,486Basic and diluted (loss) income per share
    
    $
    (0.14
    )
    
    $
    0.01
    
    
    $
    (0.16
    )
    
    $
    0.03
  7. STOCK OPTION COMPENSATION EXPENSE
  Stock option awards
  Wtd. avg.Options
    
    
    exercise priceBalance, September 30, 2009
    
    
    408,337
    
    
    $
    23.60Granted
    
    
    37,500
    
    
    
    8.52Exercised
    
    
    
    
    
    
    Cancelled
    
    
    (6,250
    )
    
    
    29.70Balance, March 31, 2010
    
    
    439,587
    
    
    $
    22.23Exercisable, March 31, 2010
    
    
    341,254
    
    
    $
    20.96
  13




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##### Table of Contents



Options outstanding
    
    
    Options exercisableRange of
    
    
    
    
    
    
    Wtd. avg.
    
    
    Wtd. avg.
    
    
    
    
    
    
    Wtd. avg.exercise prices
    
    
    Number
    
    
    remaining life
    
    
    exercise price
    
    
    Number
    
    
    exercise price$
    2.07-5.47
    
    
    
    39,500
    
    
    4 years
    
    
    $
    5.30
    
    
    
    39,500
    
    
    $
    5.308.40-8.60
    
    
    
    80,087
    
    
    5 years
    
    
    
    8.53
    
    
    
    80,087
    
    
    
    8.5313.98-24.12
    
    
    
    87,500
    
    
    7 years
    
    
    
    19.71
    
    
    
    47,917
    
    
    
    17.7626.22-29.70
    
    
    
    142,500
    
    
    7 years
    
    
    
    29.09
    
    
    
    83,750
    
    
    
    28.6631.07-36.73
    
    
    
    90,000
    
    
    5 years
    
    
    
    33.43
    
    
    
    90,000
    
    
    
    33.432.07-36.73
    
    
    
    439,587
    
    
    6 years
    
    
    
    22.23
    
    
    
    341,254
    
    
    
    20.96
  Assumptions
    
    Fiscal 2010
    
    
    Fiscal 2009
    
    
    Fiscal 2008Expected life of option
    
    3.8 years
    
    
    3.8 & 4 years
    
    
    4 & 7.5 yearsRisk-free interest rate
    
    
    0.4
    %
    
    
    0.5
    %
    
    
    1.8
    %Volatility of stock
    
    
    77
    %
    
    
    79
    %
    
    
    66
    %Forfeiture experience on employee options
    
    
    N/A
    
    
    
    25
    %
    
    
    30
    %
  Restricted stock awards.
   8. COMMITMENTS AND CONTINGENCIES
 LEGAL
   CONCENTRATION OF CREDIT RISK
   14




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ENVIRONMENTAL
  SOURCES OF SUPPLY
  9. INCOME TAXES
    10. FOREIGN CURRENCY TRANSLATION
    15




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##### Table of Contents



11. NEW ACCOUNTING PRONOUNCEMENTS
   
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 General
 ® ®
       16




---



##### Table of Contents



KEY PERFORMANCE INDICATORS
  Revenue.
 Gross profit.
  17




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##### Table of Contents



Operating expenses.
 Cash flow from operating activities.
 Liquidity and cash flows.
 BUSINESS TRENDS
   
    
    Increased Sales Efforts in Selected International Markets.We have identified
international markets with high growth potential for our existing and emerging commercial
applications. Accordingly, we have added sales personnel and
increased our marketing efforts in India, China and Korea, which have shown growth for wind
energy, oil and gas, and other applications.
 
    
    Business Development in Emerging Applications. We have identified emerging applications
for our products with high growth potential across a variety of industries and regions. In
addition to producing carbon fibers for the existing prepreg technology used by our large
wind turbine customers, we have recently begun shipments of carbon fibers qualified for use
in the infusion process utilized by other wind turbine blade manufacturers. We also are
seeking to qualify our products for use in aerospace secondary structures such as floor,
luggage bins and seats, and anticipate increased sales in this market as the production of
new jetliners increases.
 Additionally, we are gearing up for the anticipated next phase of wider use of carbon fibers
in automotive applications through the formation of our new subsidiary, Zoltek Automotive,
LLC in April 2010. The new subsidiary will define automotive application opportunities,
develop approaches to successfully demonstrate these applications, and develop and implement
them into high-volume production either by itself or by partnering with other like-minded
companies.
 
    
    Operating Cash Flows and Cash Management.Despite a 26.4% decrease in sales for the
first six months of 2010 as compared to the first six months of 2009, we reported cash
flows from operating activities of $12.4 million during the first six months of fiscal
2010, compared to operating cash flows of $2.0 million during the first six months of
fiscal 2009. Reduced accounts receivable and inventories provided cash of $10.3 million
and $4.5 million, respectively, during the first six months of fiscal 2010. We have
established collection targets and payment targets for all customers and suppliers to
improve control over our days sales outstanding and days payables outstanding. The
Company paid down $3.6 million of its convertible debt and had $2.1 million of capital
expenditures during the first six months of fiscal 2010. We paid down our remaining
convertible debt with operating cash flows and our lines of credit during April 2010.
 Unscheduled shutdowns in production in Europe coupled with an increase in demand for
acrylonitrile (ACN) drove market prices up more than 100% since the end of fiscal 2009. The
Company is focused on increasing sales and managing inventory and production levels to better
match current sales rates.
  18




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RESULTS OF OPERATIONS
 THREE MONTHS ENDED MARCH 31, 2010 COMPARED TO THREE MONTHS ENDED MARCH 31, 2009
         19




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SIX MONTHS ENDED MARCH 31, 2010 COMPARED TO SIX MONTHS ENDED MARCH 31, 2009
   20




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21




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Liquidity and Capital Resources
  Cash Provided By Operating Activities
    22




---



##### Table of Contents



Cash Used In Investing Activities
    Cash (Used In) Provided By Financing Activities
  Credit Facilities
   Hungarian Grant
   Convertible Debt and Warrants
    23




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##### Table of Contents



As of March 31, 2010
    
    
    As of September 30, 2009Number
    
    
    
    
    
    
    
    
    
    
    Numberof shares
    
    
    Conversion
    
    
    Principal
    
    
    of shares
    
    
    Conversion
    
    
    Principalissuable
    
    
    price
    
    
    outstanding
    
    
    issuable
    
    
    price
    
    
    outstandingMay 2006
    
    
    
    
    
    $
    25.51
    
    
    $
    
    
    
    
    70,560
    
    
    $
    25.51
    
    
    $
    1,799,986July 2006
    
    
    
    
    
    
    25.51
    
    
    
    
    
    
    
    19,640
    
    
    
    25.51
    
    
    
    501,016October 2006
    
    
    25,460
    
    
    
    25.51
    
    
    
    649,485
    
    
    
    76,381
    
    
    
    25.51
    
    
    
    1,948,47925,460
    
    
    
    
    
    
    $
    649,485
    
    
    
    166,581
    
    
    
    
    
    
    $
    4,249,481
   May 2006(1)
    
    July 2006(1)
    
    October 2006(1)Original principal amount of debentures (millions)
    
    $20.0
    
    $2.5
    
    $7.5Per share conversion price on debenture
    
    $25.51
    
    $25.51
    
    $25.51Interest rate
    
    Libor plus 4%
    
    Libor plus 4%
    
    Libor plus 4%Term of debenture
    
    42 months
    
    42 months
    
    42 monthsWarrants issued
    
    274,406 shares
    
    34,370 shares
    
    102,835 sharesTerm of warrants
    
    60 months
    
    60 months
    
    60 monthsValue per share of conversion features at issuance
    
    $18.80
    
    $19.21
    
    $19.57Stock price on date of agreement
    
    $32.25
    
    $29.28
    
    $26.81Dividend yield
    
    0.0%
    
    0.0%
    
    0.0%Risk-free interest rate at issuance
    
    4.88%
    
    4.88%
    
    4.65%Principal shares converted
    
    Partial
    
    Partial
    
    PartialWarrants exercised
    
    No
    
    No
    
    Partial
 (1)
    
    The May 2006, July 2006 and October 2006 issuances were considered to have beneficial
conversion features.  Amortization of Financing Fees and Debt Discount
    24




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##### Table of Contents



Three months ended March 31, 2010
    
    
    Six months ended March 31, 2010Conversion
    
    
    
    
    
    
    
    
    
    
    ConversionWarrants
    
    
    feature
    
    
    Total
    
    
    Warrants
    
    
    feature
    
    
    TotalMay 2006 issuance
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    18
    
    
    $
    26
    
    
    $
    44July 2006 issuance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15
    
    
    
    17
    
    
    
    32October 2006 issuance
    
    
    18
    
    
    
    21
    
    
    
    39
    
    
    
    54
    
    
    
    62
    
    
    
    116$
    18
    
    
    $
    21
    
    
    
    39
    
    
    $
    87
    
    
    $
    105
    
    
    
    192Deferred financing costs
    
    
    
    
    
    
    
    
    
    
    53
    
    
    
    
    
    
    
    
    
    
    
    97Total
    
    
    
    
    
    
    
    
    
    $
    92
    
    
    
    
    
    
    
    
    
    
    $
    289
 Three months ended March 31, 2009
    
    
    Six months ended March 31, 2009Conversion
    
    
    
    
    
    
    
    
    
    
    ConversionWarrants
    
    
    feature
    
    
    Total
    
    
    Warrants
    
    
    feature
    
    
    TotalMay 2006 issuance
    
    $
    450
    
    
    $
    664
    
    
    $
    1,114
    
    
    $
    1,051
    
    
    $
    1,551
    
    
    $
    2,602July 2006 issuance
    
    
    89
    
    
    
    108
    
    
    
    197
    
    
    
    158
    
    
    
    193
    
    
    
    351October 2006 issuance
    
    
    87
    
    
    
    100
    
    
    
    187
    
    
    
    193
    
    
    
    222
    
    
    
    415$
    626
    
    
    $
    872
    
    
    
    1,498
    
    
    $
    1,402
    
    
    $
    1,966
    
    
    
    3,368Deferred financing costs
    
    
    
    
    
    
    
    
    
    
    95
    
    
    
    
    
    
    
    
    
    
    
    189Total
    
    
    
    
    
    
    
    
    
    $
    1,593
    
    
    
    
    
    
    
    
    
    
    $
    3,557
  September 30, 2009ConversionWarrants
    
    
    features
    
    
    TotalMay 2006 issuance
    
    $
    18
    
    
    $
    26
    
    
    $
    44July 2006 issuance
    
    
    15
    
    
    
    17
    
    
    
    32October 2006 issuance
    
    
    54
    
    
    
    62
    
    
    
    116$
    87
    
    
    $
    105
    
    
    
    192Debt acquisition cost and financing fees
    
    
    
    
    
    
    
    
    
    
    97Total
    
    
    
    
    
    
    
    
    
    $
    289
 Earnings Per Share
   Three months ended
    
    
    Six months endedMarch 31,
    
    
    March 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Numerators:Net (loss) income
    
    $
    (4,986
    )
    
    $
    473
    
    
    $
    (5,469
    )
    
    $
    1,009Denominators:Average shares outstanding  basic
    
    
    34,417
    
    
    
    34,406
    
    
    
    34,421
    
    
    
    34,405Impact of stock options
    
    
    
    
    
    
    76
    
    
    
    
    
    
    
    81Average shares outstanding  diluted
    
    
    34,417
    
    
    
    34,482
    
    
    
    34,421
    
    
    
    34,486Basic and diluted (loss) income per share
    
    $
    (0.14
    )
    
    $
    0.01
    
    
    $
    (0.16
    )
    
    $
    0.03
   25




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##### Table of Contents



DERIVATIVE INSTRUMENTS AND FAIR VALUE MEASUREMENT
   Level 1 
 Level 2 
 Level 3 
   Outstanding Warrant Issuances
 May 2006
    
    July 2006
    
    October 2006
    
    December 2006Warrants issued
    
    274,406 shares
    
    34,370 shares
    
    102,835 shares
    
    827,789  sharesExpiration of warrants
    
    May 2011
    
    July 2011
    
    October 2011
    
    December 2012Per share exercise price of warrants
    
    $28.06
    
    $28.06
    
    $28.06
    
    $28.06Expected remaining life of warrants
    
    1.1 years
    
    1.3 years
    
    1.6 years
    
    2.7 yearsRisk-free interest rate
    
    0.41%
    
    0.41%
    
    1.02%
    
    1.60%Stock volatility
    
    74.8%
    
    74.8%
    
    74.8%
    
    74.8%Dividend yield
    
    0.0%
    
    0.0%
    
    0.0%
    
    0.0%
   Balance  October 1, 2009
    
    $
    3,061Change in fair value of derivative liability
    
    
    (1,132
    )Balance  March 31, 2010
    
    $
    1,929
  Shares issuableFair value
    
    
    upon exercise
    
    
    Total fairIssuance Date
    
    per warrant
    
    
    of warrants
    
    
    valueMay 2006
    
    $
    0.51
    
    
    
    274,406
    
    
    $
    140July 2006
    
    
    0.64
    
    
    
    34,370
    
    
    
    22October 2006
    
    
    0.93
    
    
    
    102,835
    
    
    
    96December 2006
    
    
    2.02
    
    
    
    827,789
    
    
    
    1,671Total
    
    
    
    
    
    
    1,239,400
    
    
    $
    1,929
  26




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##### Table of Contents



LEGAL
   CRITICAL ACCOUNTING ESTIMATES
  FAIR VALUE OF FINANCIAL INSTRUMENTS
  NEW ACCOUNTING PRONOUNCEMENTS
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Interest Rate Risk
  Foreign Currency Risk
   27




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##### Table of Contents



Commodity Price Risk
  * * *
 Special Note Regarding Forward-Looking Statements
   * * *
  28




---



##### Table of Contents



Item 4. Controls and Procedures
 Evaluation of Controls and Procedures
     29




---



##### Table of Contents



ZOLTEK COMPANIES, INC.
 
 PART II. OTHER INFORMATION
 
   
    30




---



##### Table of Contents



SIGNATURE
  Zoltek Companies, Inc.
(Registrant)Date:  May 10, 2010
    By:
    /s/ ZSOLT RUMYZsolt RumyChief Executive Officer  31




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##### Table of Contents



EXHIBIT INDEX
 Exhibit Number
    
    Description of Document31.1
    
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934, as amended.31.2
    
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934, as amended.32.1
    
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32