##### 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 December 31, 2009
 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 
incorporation or organization)
    
    (I.R.S. Employer
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  December 31, 2009 and September 30, 2009
    
    
    3Condensed Consolidated Statements of Operations  Three Months Ended December 31, 2009 and 2008
    
    
    4Condensed Consolidated Statement of Changes in Shareholders Equity  Three Months Ended December 31, 2009
    
    
    5Condensed Consolidated Statements of Cash Flows  Three Months Ended December 31, 2009 and 2008
    
    
    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
    
    
    26Item 4. Controls and Procedures
    
    
    27PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    28Item 5. Other Information
    
    
    28Item 6. Exhibits
    
    
    28SIGNATURES
    
    
    29EXHIBIT INDEX
    
    
    30Exhibit 10.1Exhibit 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
   December 31,
    
    
    September 30,2009
    
    
    2009AssetsCurrent assets:Cash and cash equivalents
    
    $
    21,229
    
    
    $
    20,943Accounts receivable, less allowance for doubtful accounts of $2,475
and $2,356, respectively
    
    
    23,778
    
    
    
    30,507Inventories, net
    
    
    47,095
    
    
    
    48,058Deferred tax assets
    
    
    6,047
    
    
    
    3,262Other current assets
    
    
    6,347
    
    
    
    6,838Total current assets
    
    
    104,496
    
    
    
    109,608Property and equipment, net
    
    
    250,239
    
    
    
    256,910Other assets
    
    
    249
    
    
    
    327Total assets
    
    $
    354,984
    
    
    $
    366,845Liabilities and Shareholders EquityCurrent liabilities:Borrowings under credit lines
    
    
    9,607
    
    
    
    12,277Current maturities of long-term debt
    
    
    1,613
    
    
    
    4,159Trade accounts payable
    
    
    8,575
    
    
    
    9,408Accrued expenses and other liabilities
    
    
    6,991
    
    
    
    6,845Construction payables
    
    
    659
    
    
    
    792Total current liabilities
    
    
    27,445
    
    
    
    33,481Long-term debt, less current maturities
    
    
    955
    
    
    
    981Hungarian grant, long-term
    
    
    9,732
    
    
    
    10,228Deferred tax liabilities
    
    
    7,178
    
    
    
    6,690Derivative liabilities
    
    
    2,203
    
    
    
    Total liabilities
    
    
    47,513
    
    
    
    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, 34,424,441 and
34,424,441 shares issued and outstanding at December 31, 2009 and
September 30, 2009
    
    
    344
    
    
    
    344Additional paid-in capital
    
    
    479,343
    
    
    
    494,311Accumulated other comprehensive loss
    
    
    (23,505
    )
    
    
    (18,405
    )Accumulated deficit
    
    
    (148,711
    )
    
    
    (160,785
    )Total shareholders equity
    
    
    307,471
    
    
    
    315,465Total liabilities and shareholders equity
    
    $
    354,984
    
    
    $
    366,845
   3




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ZOLTEK COMPANIES, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
   Three months ended December 31,2009
    
    
    2008Net sales
    
    $
    28,867
    
    
    $
    38,629Cost of sales, excluding available unused capacity costs
    
    
    22,149
    
    
    
    28,092Available unused capacity costs
    
    
    2,771
    
    
    
    273Gross profit
    
    
    3,947
    
    
    
    10,264Application and development costs
    
    
    1,983
    
    
    
    1,721Selling, general and administrative expenses
    
    
    4,713
    
    
    
    5,068Operating (loss) income
    
    
    (2,749
    )
    
    
    3,475Other income (expense):Interest income
    
    
    8
    
    
    
    219Gain on foreign currency transactions
    
    
    345
    
    
    
    178Other expense, net
    
    
    (412
    )
    
    
    (254
    )Gain on derivative liabilities
    
    
    858
    
    
    
    Interest expense, excluding amortization of financing fees and debt discount
    
    
    (134
    )
    
    
    (568
    )Amortization of financing fees and debt discount
    
    
    (197
    )
    
    
    (1,965
    )Income (loss) from continuing operations before income taxes
    
    
    (2,281
    )
    
    
    1,085Income tax (benefit) expense
    
    
    (1,798
    )
    
    
    550Net (loss) income
    
    $
    (483
    )
    
    $
    535Basic and diluted (loss) income per share
    
    $
    (0.01
    )
    
    $
    0.02Weighted average common shares outstanding  basic
    
    
    34,424,441
    
    
    
    34,404,631Weighted average common shares outstanding  diluted
    
    
    34,424,441
    
    
    
    34,476,681
   4




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##### Table of Contents



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
    
    
    650
    
    
    
    
    
    
    
    650Cumulative effect of change in accounting principle
    
    
    (3,061
    )
    
    
    
    
    
    
    (15,618
    )
    
    
    
    
    
    
    12,557Net loss
    
    
    (483
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (483
    )Foreign currency translation adjustment
    
    
    (5,100
    )
    
    
    
    
    
    
    
    
    
    
    (5,100
    )Balance, December 31, 2009
    
    $
    307,471
    
    
    $
    344
    
    
    $
    479,343
    
    
    $
    (23,505
    )
    
    $
    (148,711
    )
   5




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##### Table of Contents



ZOLTEK COMPANIES, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
   Three months endedDecember 31,2009
    
    
    2008Cash flows from operating activities:Net (loss) income
    
    $
    (483
    )
    
    $
    535Adjustments to reconcile net (loss) income to net cash from operating activities:Depreciation
    
    
    4,315
    
    
    
    4,073Amortization of financing fees and debt discount
    
    
    197
    
    
    
    1,965Deferred taxes
    
    
    (2,302
    )
    
    
    439Gain on derivative liabilities
    
    
    (858
    )
    
    
    Foreign currency transaction (gains) losses
    
    
    (796
    )
    
    
    721Stock option compensation expense
    
    
    650
    
    
    
    945Loss on disposal of assets
    
    
    134
    
    
    
    Changes in assets and liabilities:Decrease in accounts receivable
    
    
    6,468
    
    
    
    4,722Increase in inventories
    
    
    (171
    )
    
    
    (8,377
    )Decrease in other current assets and other assets
    
    
    850
    
    
    
    2,083Decrease in trade accounts payable
    
    
    (668
    )
    
    
    (2,551
    )Decrease in accrued expenses and other liabilities
    
    
    (790
    )
    
    
    (1,629
    )Decrease in legal liabilities
    
    
    
    
    
    
    (5,558
    )Net cash provided (used) by operating activities
    
    
    6,546
    
    
    
    (2,632
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (650
    )
    
    
    (8,334
    )Proceeds received from sale of fixed assets
    
    
    80
    
    
    
    Decrease in construction payables
    
    
    (134
    )
    
    
    (1,349
    )Net cash used for investing activities
    
    
    (704
    )
    
    
    (9,683
    )Cash flows from financing activities:Repayment of convertible debentures
    
    
    (2,700
    )
    
    
    (2,448
    )(Repayment of) borrowings under notes payable and credit lines
    
    
    (2,733
    )
    
    
    3,074Net cash (used) provided by financing activities
    
    
    (5,433
    )
    
    
    626Effect of exchange rate changes on cash and cash equivalents
    
    
    (123
    )
    
    
    (18
    )Net increase (decrease) in cash and cash equivalents
    
    
    286
    
    
    
    (11,707
    )Cash and cash equivalents at beginning of period
    
    
    20,943
    
    
    
    29,224Cash and cash equivalents at end of period
    
    $
    21,229
    
    
    $
    17,517Supplemental disclosures of cash flow information:Non-cash conversion of convertible debentures
    
    
    
    
    
    
    251
   6




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##### Table of Contents



ZOLTEK COMPANIES, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 1. ORGANIZATION AND BASIS OF PRESENTATION
   Basis of Presentation
   Adoption of New Accounting Standards
  2. INVENTORIES
  December 31,
    
    
    September 30,2009
    
    
    2009Raw materials
    
    $
    6,546
    
    
    $
    7,349Work-in-process
    
    
    6,286
    
    
    
    8,977Finished goods
    
    
    29,782
    
    
    
    26,758Consigned inventory
    
    
    4,000
    
    
    
    4,471Supplies and other
    
    
    481
    
    
    
    503$
    47,095
    
    
    $
    48,058
   7




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##### Table of Contents



3. SEGMENT INFORMATION
   Three months ended December 31, 2009Carbon
    
    
    Technical
    
    
    Corporate/Fibers
    
    
    Fibers
    
    
    Other
    
    
    TotalNet sales
    
    $
    23,942
    
    
    $
    4,430
    
    
    $
    495
    
    
    $
    28,867Cost of sales, excluding available unused capacity costs
    
    
    17,884
    
    
    
    3,795
    
    
    
    470
    
    
    
    22,149Available unused capacity costs
    
    
    2,427
    
    
    
    344
    
    
    
    
    
    
    
    2,771Gross profit
    
    
    3,631
    
    
    
    291
    
    
    
    25
    
    
    
    3,947Operating income (loss)
    
    
    1,319
    
    
    
    73
    
    
    
    (4,141
    )
    
    
    (2,749
    )Depreciation
    
    
    3,437
    
    
    
    458
    
    
    
    420
    
    
    
    4,315Capital expenditures
    
    
    239
    
    
    
    224
    
    
    
    187
    
    
    
    650
 Three months ended December 31, 2008Carbon
    
    
    Technical
    
    
    Corporate/Fibers
    
    
    Fibers
    
    
    Other
    
    
    TotalNet sales
    
    $
    32,716
    
    
    $
    5,265
    
    
    $
    648
    
    
    $
    38,629Cost of sales, excluding available unused capacity costs
    
    
    23,639
    
    
    
    3,821
    
    
    
    632
    
    
    
    28,092Available unused capacity costs
    
    
    91
    
    
    
    182
    
    
    
    
    
    
    
    273Gross profit
    
    
    8,986
    
    
    
    1,262
    
    
    
    16
    
    
    
    10,264Operating income (loss)
    
    
    6,507
    
    
    
    530
    
    
    
    (3,562
    )
    
    
    3,475Depreciation
    
    
    3,371
    
    
    
    419
    
    
    
    283
    
    
    
    4,073Capital expenditures
    
    
    7,825
    
    
    
    436
    
    
    
    73
    
    
    
    8,334
  Total AssetsCarbon
    
    
    Technical
    
    
    Corporate/Fibers
    
    
    Fibers
    
    
    Other
    
    
    TotalDecember 31, 2009
    
    $
    282,912
    
    
    $
    24,984
    
    
    $
    47,088
    
    
    $
    354,984September 30, 2009
    
    
    293,200
    
    
    
    27,614
    
    
    
    46,031
    
    
    
    366,845
 4. FINANCING AND DEBT
 Credit Facilities
    8




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##### Table of Contents



December 31,
    
    
    September 30,2009
    
    
    2009U.S. facility (current interest rate of 2.98%  variable with Libor)
    
    $
    9,607
    
    
    $
    8,343Facility with Hungarian bank (interest rate of 2.7% to 8.1%, depending on currency)
    
    
    
    
    
    
    3,934Total credit lines
    
    $
    9,607
    
    
    $
    12,277
 Hungarian Grant
   Convertible Debt and Warrants
    As of December 31, 2009
    
    
    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
    
    
    9,916
    
    
    
    25.51
    
    
    
    252,957
    
    
    
    19,640
    
    
    
    25.51
    
    
    
    501,016October 2006
    
    
    50,830
    
    
    
    25.51
    
    
    
    1,296,673
    
    
    
    76,381
    
    
    
    25.51
    
    
    
    1,948,47960,746
    
    
    
    
    
    
    $
    1,549,630
    
    
    
    166,581
    
    
    
    
    
    
    $
    4,249,481
   9




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##### Table of Contents



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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##### Table of Contents



Three months ended December 31, 2009ConversionWarrants
    
    
    features
    
    
    TotalMay 2006 issuance
    
    $
    18
    
    
    $
    26
    
    
    $
    44July 2006 issuance
    
    
    15
    
    
    
    18
    
    
    
    33October 2006 issuance
    
    
    36
    
    
    
    41
    
    
    
    77$
    69
    
    
    $
    85
    
    
    
    154Deferred financing costs
    
    
    
    
    
    
    
    
    
    
    43Total
    
    
    
    
    
    
    
    
    
    $
    197
 Three months ended December 31, 2008ConversionWarrants
    
    
    features
    
    
    TotalMay 2006 issuance
    
    $
    601
    
    
    $
    887
    
    
    $
    1,488July 2006 issuance
    
    
    69
    
    
    
    85
    
    
    
    154October 2006 issuance
    
    
    106
    
    
    
    122
    
    
    
    228$
    776
    
    
    $
    1,094
    
    
    
    1,870Deferred financing costs
    
    
    
    
    
    
    
    
    
    
    95Total
    
    
    
    
    
    
    
    
    
    $
    1,965
  December 31, 2009ConversionWarrants
    
    
    features
    
    
    TotalOctober 2006 issuance
    
    $
    18
    
    
    $
    21
    
    
    $
    39Debt acquisition cost and financing fees
    
    
    
    
    
    
    
    
    
    
    55Total
    
    
    
    
    
    
    
    
    
    $
    94
 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
 Long-term Debt
  December 31,
    
    
    September 30,2009
    
    
    2009Note payable with interest currently at 4.12% (variable with Libor, payable in monthly
installments of interest to maturity in January 2011)
    
    $
    1,057
    
    
    $
    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)
    
    
    251
    
    
    
    501Convertible debentures final payment due April 2010 (interest rate of 4.63% 
variable with Libor)
    
    
    1,299
    
    
    
    1,948Total long-term debt including current maturities
    
    
    2,607
    
    
    
    5,332Less: Debt discount associated with conversion features and warrants
    
    
    (39
    )
    
    
    (192
    )Less: Amounts payable within one year, net of discount of $39 and $192
    
    
    (1,613
    )
    
    
    (4,159
    )Total long-term debt, less current maturities
    
    $
    955
    
    
    $
    981
  11




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##### Table of Contents



AnnualDecember 31,
    
    maturities2010
    
    
    1022011
    
    
    955Total
    
    $
    1,057
 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
    
    1.4 years
    
    
    1.5 years
    
    
    1.8 years
    
    
    3.0 yearsRisk-free interest rate
    
    
    0.47
    %
    
    
    1.14
    %
    
    
    1.14
    %
    
    
    1.70
    %Stock volatility
    
    
    75.7
    %
    
    
    75.7
    %
    
    
    75.7
    %
    
    
    75.7
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    12




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##### Table of Contents



Shares issuableFair value
    
    
    upon exercise
    
    
    Total fairIssuance Date
    
    per warrant
    
    
    of warrants
    
    
    valueMay 2006
    
    $
    0.73
    
    
    
    274,406
    
    
    $
    201July 2006
    
    
    0.88
    
    
    
    34,370
    
    
    
    30October 2006
    
    
    1.17
    
    
    
    102,835
    
    
    
    120December 2006
    
    
    2.24
    
    
    
    827,789
    
    
    
    1,852Total
    
    
    
    
    
    
    1,239,400
    
    
    $
    2,203
  Balance  October 1, 2009
    
    $
    3,061Change in Fair Value of Derivative Liability
    
    
    (858
    )Balance  December 31, 2009
    
    $
    2,203
 6. EARNINGS PER SHARE
   Three months endedDecember 31,2009
    
    
    2008Numerators:Net income (loss)
    
    $
    (483
    )
    
    $
    535Denominators:Average shares outstanding  basic
    
    
    34,424
    
    
    
    34,405Impact of stock options
    
    
    
    
    
    
    72Average shares outstanding  diluted
    
    
    34,424
    
    
    
    34,477Basic and diluted income (loss) per share
    
    $
    (0.01
    )
    
    $
    0.02
 7. STOCK OPTION COMPENSATION EXPENSE
  Stock option awards
  13




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##### Table of Contents



Wtd. avg.Options
    
    
    exercise priceBalance, September 30, 2009
    
    
    408,337
    
    
    $
    23.60Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Cancelled
    
    
    (6,250
    )
    
    
    29.70Balance, December 31, 2009
    
    
    402,087
    
    
    $
    23.50Exercisable, December 31, 2009
    
    
    295,420
    
    
    $
    22.49
  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
    
    
    
    42,587
    
    
    5 years
    
    
    8.53
    
    
    
    42,587
    
    
    
    8.5310.0024.12
    
    
    
    87,500
    
    
    7 years
    
    
    19.71
    
    
    
    39,583
    
    
    
    16.7326.22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
    
    
    
    402,087
    
    
        6 years
    
    
    23.50
    
    
    
    295,420
    
    
    
    22.49
  Assumptions
    
    Fiscal 2009
    
    
    Fiscal 2008
    
    
    Fiscal 2007Expected life of option
    
    3.8 & 4 years
    
    
    4 & 7.5 years
    
    
    3 & 7.5 yearsRisk-free interest rate
    
    
    0.5
    %
    
    
    1.8
    %
    
    
    4.9
    %Volatility of stock
    
    
    79
    %
    
    
    66
    %
    
    
    68
    %Forfeiture experience on employee options
    
    
    25
    %
    
    
    30
    %
    
    
    30
    %
  Restricted stock awards.
     14




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##### Table of Contents



8. COMMITMENTS AND CONTINGENCIES
 LEGAL
   CONCENTRATION OF CREDIT RISK
   ENVIRONMENTAL
  SOURCES OF SUPPLY
  9. INCOME TAXES
     15




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##### Table of Contents



10. FOREIGN CURRENCY TRANSLATION
   11. NEW ACCOUNTING PRONOUNCEMENTS
    
 Item 2.

    Managements Discussion and Analysis of Financial Condition and Results of Operations
 General
 ® ®
     16




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##### 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 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 many of 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.
 
    
    Operating Cash Flows and Cash Management.Despite a 25% decrease in sales, we reported
positive operating cash flows of $6.5 million during the first quarter of fiscal 2010,
compared to negative operating cash flows of $2.6 million during the first quarter of
fiscal 2009. Reduced accounts receivable provided cash of $6.5 million during the first
quarter 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 $2.7 million of its convertible debt and had
$0.7 million of capital expenditures during the first quarter of fiscal 2010. We feel that
we are in a position to pay down our remaining convertible debt with operating cash flows.
  18




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RESULTS OF OPERATIONS
 THREE MONTHS ENDED DECEMBER 31, 2009 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2008
         19




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##### Table of Contents



Liquidity and Capital Resources
  Cash Provided (Used) In Continuing Operating Activities
    20




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##### Table of Contents



Cash Used In Investing Activities
    Cash (Used) Provided By Financing Activities
  Credit Facilities
   Hungarian Grant
   Convertible Debt and Warrants
    21




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##### Table of Contents



As of December 31, 2009
    
    
    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
    
    
    9,916
    
    
    
    25.51
    
    
    
    252,957
    
    
    
    19,640
    
    
    
    25.51
    
    
    
    501,016October 2006
    
    
    50,830
    
    
    
    25.51
    
    
    
    1,296,673
    
    
    
    76,381
    
    
    
    25.51
    
    
    
    1,948,47960,746
    
    
    
    
    
    
    $
    1,549,630
    
    
    
    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.   22




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##### Table of Contents



Amortization of Financing Fees and Debt Discount
    Three months ended December 31, 2009ConversionWarrants
    
    
    features
    
    
    TotalMay 2006 issuance
    
    $
    18
    
    
    $
    26
    
    
    $
    44July 2006 issuance
    
    
    15
    
    
    
    18
    
    
    
    33October 2006 issuance
    
    
    36
    
    
    
    41
    
    
    
    77$
    69
    
    
    $
    85
    
    
    
    154Deferred financing costs
    
    
    
    
    
    
    
    
    
    
    43Total
    
    
    
    
    
    
    
    
    
    $
    197
 Three months ended December 31, 2008ConversionWarrants
    
    
    features
    
    
    TotalMay 2006 issuance
    
    $
    601
    
    
    $
    887
    
    
    $
    1,488July 2006 issuance
    
    
    69
    
    
    
    85
    
    
    
    154October 2006 issuance
    
    
    106
    
    
    
    122
    
    
    
    228$
    776
    
    
    $
    1,094
    
    
    
    1,870Deferred financing costs
    
    
    
    
    
    
    
    
    
    
    95Total
    
    
    
    
    
    
    
    
    
    $
    1,965
  December 31, 2009ConversionWarrants
    
    
    features
    
    
    TotalOctober 2006 issuance
    
    $
    18
    
    
    $
    21
    
    
    $
    39Debt acquisition cost and financing fees
    
    
    
    
    
    
    
    
    
    
    55Total
    
    
    
    
    
    
    
    
    
    $
    94
 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
   23




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##### Table of Contents



Three months endedDecember 31,2009
    
    
    2008Numerators:Net income (loss)
    
    $
    (483
    )
    
    $
    535Denominators:Average shares outstanding  basic
    
    
    34,424
    
    
    
    34,405Impact of stock options
    
    
    
    
    
    
    72Average shares outstanding  diluted
    
    
    34,424
    
    
    
    34,477Basic and diluted income (loss) per share
    
    $
    (0.01
    )
    
    $
    0.02
 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
    
    1.4 years
    
    
    1.5 years
    
    
    1.8 years
    
    
    3.0 yearsRisk-free interest rate
    
    
    0.47
    %
    
    
    1.14
    %
    
    
    1.14
    %
    
    
    1.70
    %Stock volatility
    
    
    75.7
    %
    
    
    75.7
    %
    
    
    75.7
    %
    
    
    75.7
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
  24




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Shares issuableFair value
    
    
    upon exercise
    
    
    Total fairIssuance Date
    
    per warrant
    
    
    of warrants
    
    
    valueMay 2006
    
    $
    0.73
    
    
    
    274,406
    
    
    $
    201July 2006
    
    
    0.88
    
    
    
    34,370
    
    
    
    30October 2006
    
    
    1.17
    
    
    
    102,835
    
    
    
    120December 2006
    
    
    2.24
    
    
    
    827,789
    
    
    
    1,852Total
    
    
    
    
    
    
    1,239,400
    
    
    $
    2,203
  Balance  October 1, 2009
    
    $
    3,061Change in Fair Value of Derivative Liability
    
    
    (858
    )Balance  December 31, 2009
    
    $
    2,203
 LEGAL
   CRITICAL ACCOUNTING ESTIMATES
  FAIR VALUE OF FINANCIAL INSTRUMENTS
   25




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NEW ACCOUNTING PRONOUNCEMENTS
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Interest Rate Risk
  Foreign Currency Risk
     Commodity Price Risk
  * * *
  26




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##### Table of Contents



Special Note Regarding Forward-Looking Statements
   * * *
 
 Item 4. Controls and Procedures
 Evaluation of Controls and Procedures
     27




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ZOLTEK COMPANIES, INC.
 
 PART II. OTHER INFORMATION
 
   
   
    28




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##### Table of Contents



SIGNATURE
  Zoltek Companies, Inc.
(Registrant)Date:  February 8, 2010
    By:
    /s/ ZSOLT RUMYZsolt RumyChief Executive Officer  29




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##### Table of Contents



EXHIBIT INDEX
 Exhibit Number
    
    Description of Document10.1
    
    

Revolving
Credit Note, dated as of February 2, 2010, by and among Zoltek Companies, Inc.,
Zoltek Corporation and Southwest Bank of St. Louis.31.1
    
    
    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.
  30