Zoltek Companies (ZOLT) 10-Q 2009 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the three months ended December 31, 2008

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.

(Exact name of registrant as specified in its charter)

Missouri	43-1311101
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
3101 McKelvey Road, St. Louis, Missouri	63044
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (314) 291-5110

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one).

Large Accelerated Filerþ Accelerated Filero Non-accelerated Filero Smaller Reporting Companyo

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date: As of February 9, 2009, 34,405,692 shares of Common Stock, $.01 par value, were outstanding.

ZOLTEK COMPANIES, INC.
INDEX

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)	3
Condensed Consolidated Balance Sheet — December 31, 2008 and September 30, 2008	3
Condensed Consolidated Statement of Operations — Three Months Ended December 31, 2008 and 2007	4
Condensed Consolidated Statement of Changes in Shareholders’ Equity — December 31, 2008	5
Condensed Consolidated Statement of Cash Flows — Three Months Ended December 31, 2008 and 2007	6
Notes to Condensed Consolidated Financial Statements (Unaudited)	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3. Quantitative and Qualitative Disclosures About Market Risk	24
Item 4. Controls and Procedures	26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	27
Item 5. Other Information	27
Item 6. Exhibits	27
SIGNATURES	28
EXHIBIT INDEX	29
Exhibit 10.1
Exhibit 10.2
Exhibit 31.1
Exhibit 32.1

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ZOLTEK COMPANIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, except share amounts)
(Unaudited)

	December 31,			September 30,
	2008			2008
Assets
Current assets:
Cash and cash equivalents	$	17,517		$	29,224
Restricted cash		23,500			23,500
Accounts receivable, less allowance for doubtful accounts of $1,169 and $1,754, respectively		35,450			42,690
Inventories, net		53,217			45,659
Other current assets		6,948			9,432
Total current assets		136,632			150,505
Property and equipment, net		262,764			288,894
Other assets		619			765
Total assets	$	400,015		$	440,164
Liabilities and Shareholders’ Equity
Current liabilities:
Legal liabilities	$	23,340		$	29,083
Current maturities of long-term debt		16,153			12,601
Trade accounts payable		10,749			15,093
Accrued expenses and other liabilities		6,762			9,278
Construction payables		6,275			8,450
Total current liabilities		63,279			74,505
Long-term debt, less current maturities		2,247			3,562
Hungarian grant, long-term		9,412			10,882
Deferred tax liabilities		4,115			4,521
Other long-term liabilities		25			28
Total liabilities		79,078			93,498
Commitments 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, 34,405,642 and 34,389,428 shares issued and outstanding at December 31, 2008 and September 30, 2008, respectively		344			344
Additional paid-in capital		492,371			491,175
Accumulated other comprehensive (loss) income		(15,730	)		11,730
Accumulated deficit		(156,048	)		(156,583	)
Total shareholders’ equity		320,937			346,666
Total liabilities and shareholders’ equity	$	400,015		$	440,164

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

3

ZOLTEK COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share and per share data)
(Unaudited)

	Three months ended December 31,
	2008			2007
Net sales	$	38,629		$	40,072
Cost of sales		28,365			29,313
Gross profit		10,264			10,759
Application and development costs		1,721			1,896
Litigation charge (see Note 8)		238			—
Selling, general and administrative expenses		4,830			4,072
Operating income from continuing operations		3,475			4,791
Other income (expense):
Interest income		219			1,192
Gain (loss) on foreign currency transactions		178			(49	)
Other expense, net		(254	)		(93	)
Interest expense, excluding amortization of financing fees and debt discount		(568	)		(678	)
Amortization of financing fees and debt discount		(1,965	)		(1,554	)
Income from continuing operations before income taxes		1,085			3,609
Income tax expense		550			1,005
Net income	$	535		$	2,604
Basic and diluted income per share	$	0.02		$	0.08
Weighted average common shares outstanding — basic		34,404,631			33,756,205
Weighted average common shares outstanding — diluted		34,476,681			33,956,205

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

4

ZOLTEK COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(Amounts in thousands)
(Unaudited)

	Total					Additional		Accumulated Other
	Shareholders’			Common		Paid-In		Comprehensive			Accumulated
	Equity			Stock		Capital		(Loss) Income			Deficit
Balance, September 30, 2008	$	346,666		$	344	$	491,175	$	11,730		$	(156,583	)
Convertible debt converted		251					251
Stock option compensation expense		945					945
Net income		535										535
Foreign currency translation adjustment		(27,460	)						(27,460	)
Balance, December 31, 2008	$	320,937		$	344	$	492,371	$	(15,730	)	$	(156,048	)

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)

	Three months ended December 31,
	2008			2007
Net income	$	535		$	2,604
Foreign currency translation adjustments		(27,460	)		2,073
Comprehensive (loss) income	$	(26,925	)	$	4,677

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

5

ZOLTEK COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)

	Three months ended
	December 31,
	2008			2007
Cash flows from operating activities:
Net income	$	535		$	2,604
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation		4,073			3,360
Amortization of financing fees and debt discount		1,965			1,554
Deferred taxes		439			64
Foreign currency transaction losses		721			226
Stock option compensation expense		945			484
Changes in assets and liabilities:
Decrease in accounts receivable		4,722			5,667
Increase in inventories		(8,377	)		(7,007	)
Increase (decrease) in other current assets and other assets		2,083			(6,146	)
Decrease in trade accounts payable		(2,551	)		251
(Decrease) increase in accrued expenses and other liabilities		(1,629	)		856
Decrease in legal liabilities		(5,558	)		(159	)
Net cash used in operating activities		(2,632	)		1,754
Cash flows from investing activities:
Purchases of property and equipment		(8,334	)		(47,480	)
Decrease in construction payables		(1,349	)		(2,602	)
Proceeds received from Hungarian grant		—			779
Change in cash restricted for letters of credit		—			(9,685	)
Net cash used for investing activities		(9,683	)		(58,988	)
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants		—			720
Repayment of convertible debt		(2,448	)		—
Borrowings (repayment) of notes payable and long-term debt		3,074			(1,550	)
Net cash provided (used) by financing activities		626			(830	)
Effect of exchange rate changes on cash and cash equivalents		(18	)		(48	)
Net decrease in cash and cash equivalents		(11,707	)		(58,112	)
Cash and cash equivalents at beginning of period		29,224			121,761
Cash and cash equivalents at end of period	$	17,517		$	63,649
Supplemental disclosures of cash flow information:
Non-cash conversion of convertible debentures		251			2,853

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

6

ZOLTEK COMPANIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. ORGANIZATION AND BASIS OF PRESENTATION

Zoltek Companies, Inc. (the “Company”) is a holding company, which operates through wholly-owned subsidiaries, Zoltek Corporation, Zoltek Properties, Inc., Zoltek Zrt., Zoltek de Mexico SA de CV, Zoltek de Occidente SA de CV, and Engineering Technology Corporation (“Entec Composite Machines”). Zoltek Corporation (“Zoltek”) develops, manufactures and markets carbon fibers and technical fibers in the United States. Carbon fibers are a low-cost but high performance reinforcement for composites used as the primary building material in everyday commercial products. Zoltek Zrt. is a Hungarian subsidiary that manufactures and markets carbon fibers and technical fibers and manufactures precursor raw material used in production of carbon fibers. Zoltek de Mexico SA de CV and Zoltek de Occidente SA de CV were organized in October 2007 and are Mexican subsidiaries that manufacture carbon fiber and precursor raw material used in production of carbon fibers. Entec Composite Machines manufactures and sells filament winding and pultrusion equipment used in the production of large volume composite parts. The Company’s primary sales markets are in Europe and the United States.

Basis of Presentation

The accompanying condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and the rules and regulation of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2008, which includes consolidated financial statements and notes thereto. In the opinion of management, all normal recurring adjustments and estimates considered necessary have been included. The results of operations of any interim period are not necessarily indicative of the results that may be expected for a full fiscal year.

The unaudited interim condensed consolidated financial statements include the accounts and transactions of the Company and its wholly-owned subsidiaries. Adjustments resulting from the currency translation of financial statements of the Company’s foreign subsidiaries are reflected as other comprehensive income within shareholders’ equity. Gains and losses from foreign currency transactions are included in the condensed consolidated statement of operations as “Other income (expense).” All significant inter-company transactions and balances have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to current year presentation.

Adoption of New Accounting Standards

See Note 9 of the Notes to the Condensed Consolidated Financial Statements.

2. INVENTORIES

Inventories consist of the following (amounts in thousands):

	December 31,		September 30,
	2008		2008
Raw materials	$	12,571	$	10,749
Work-in-process		12,181		14,962
Finished goods		27,615		18,844
Supplies and other		850		1,104
	$	53,217	$	45,659

Inventories are valued at the lower of cost, determined on the first-in, first-out method, or market. Cost includes material, labor and overhead. The Company recorded an inventory valuation reserve of $0.3 million and $0.5 million as of December 31, 2008 and September 30, 2008, respectively, to reduce the carrying value of inventories to net realizable value. The reserves were established primarily due to slow-moving inventories produced in prior years.

7

3. SEGMENT INFORMATION

The Company’s strategic business units are based on product lines and have been grouped into three reportable segments: Carbon Fibers, Technical Fibers and Corporate/Other Products. The Carbon Fibers segment manufactures low-cost carbon fibers used as reinforcement material in composites, carbon fiber composite products and filament winding equipment used in the composite industry. The Technical Fibers segment manufactures oxidized acrylic fibers used to manufacture aircraft brake pads and for heat/fire barrier applications. These two segments also facilitate development of product and process applications to increase the demand for carbon fibers and technical fibers and seek to aggressively market carbon fibers and technical fibers. The Carbon Fibers and Technical Fibers segments are located geographically in North America, Mexico and Hungary.

Management evaluates the performance of its operating segments on the basis of operating income (loss) contribution. The following table presents financial information on the Company’s operating segments as of and for the three months ended December 31, 2008 and 2007 (amounts in thousands):

	Three months ended December 31, 2008
	Carbon		Technical		Corporate/
	Fibers		Fibers		Other			Total
Net sales	$	32,716	$	5,265	$	648		$	38,629
Cost of sales		23,730		4,003		632			28,365
Gross profit		8,986		1,262		16			10,264
Operating income (loss)		6,507		530		(3,562	)		3,475
Depreciation		3,371		419		283			4,073
Capital expenditures		7,825		436		73			8,334

	Three months ended December 31, 2007
	Carbon		Technical		Corporate/
	Fibers		Fibers		Other			Total
Net sales	$	34,120	$	5,033	$	919		$	40,072
Cost of sales		24,958		3,713		642			29,313
Gross profit		9,162		1,320		277			10,759
Operating income (loss)		7,816		83		(3,108	)		4,791
Depreciation		2,593		542		225			3,360
Capital expenditures		12,062		316		102			12,480

	Total Assets
	Carbon		Technical		Corporate/
	Fibers		Fibers		Other		Total
December 31, 2008	$	309,713	$	30,730	$	59,572	$	400,015
September 30, 2008		344,974		32,705		62,485		440,164

4. FINANCING

Bond Related to SP Systems Case

In April 2007, the Company reported the results of various post-trial motions in ongoing litigation (see Note 7 of the Notes to the Condensed Consolidated Financial Statements). In April 2007 the Company posted a supersedeas bond, collateralized by a $23.5 million letter of credit issued by the Company’s U.S. bank. As of December 31, 2008, the letter of credit is collateralized by $23.5 million of restricted cash.

Revolving Credit Facility

As of December 31, 2008, there was a $2.5 million draw down of credit by the Company under the revolving credit facility. No financial covenants currently apply to the credit facility from the U.S. bank.

In February 2009, the Company extended its existing line of credit until January 1, 2010. The extension of this credit facility increases the amount available under the previously existing revolving credit facility from $6.7 million to $10.0 million. The revolving credit facility has a total commitment of the lesser of (1) $10.0 million or (2) an amount equal to a percentage of eligible accounts receivable plus a percentage of eligible inventories, which as of December 31, 2008 totaled $9.6 million.

8

Hungarian Grant

The Hungarian government has pledged a grant of 2.9 billion HUF (approximately $15.3 million) to Zoltek’s Hungarian subsidiary that will provide a portion of the capital resources to modernize its facility, establish a research and development center, and support buildup of manufacturing capacity of carbon fibers. Zoltek’s Hungarian subsidiary received approximately HUF 0.7 billion and HUF 1.6 billion in grant funding during fiscal 2008 and 2007, respectively. These funds have been recorded as a liability on the Company’s consolidated balance sheet. The liability will be amortized over the life of the assets procured by the grant funds, offsetting the assets’ depreciation expense into which the proceeds of the grant are invested.

The Company has presented bank guarantees amounting to 120% of the amount of the grant as received. The Hungarian subsidiary may be required to pay back all or a portion of the grant if, among other things, the Hungarian subsidiary fails to achieve certain revenue and employment targets. Currently, although management can offer no assurance, it anticipates the Company will comply with the requirements of the grant agreement.

Financing Activity

In August 2007, the Company completed a public offering of 3,615,000 shares of common stock, par value $0.01 per share, at $38.76 per share, less underwriting discounts. The Company recorded the proceeds of $131.5 million, net of $0.8 million financing costs, as an increase to shareholders’ equity.

Convertible Debt

The following tables summarize the activity regarding our convertible debt conversions during the first quarter of fiscal years 2009 and 2008.

	Three months ended December 31, 2008						Three months ended December 31, 2007
	Number						Number
	of shares		Price				of shares		Conversion
	converted		converted		Equity value		converted		price		Equity value
May 2006		—	$	—	$	—		62,719	$	25.51	$	1,599,962
July 2006		16,264		15.40		250,466		9,820		25.51		250,508
October 2006		—		—		—		39,200		25.51		999,992
		16,264			$	250,466		111,739			$	2,850,462

	As of December 31, 2008
	Number
	of shares		Conversion		Debt
	outstanding		price		outstanding
May 2006		282,242	$	25.51	$	7,200,000
July 2006		49,100		25.51		1,252,534
October 2006		152,762		25.51		3,896,947
		484,104			$	12,349,481

The terms of repayment for each convertible debt issuance in May, July and October 2006 stipulate that the Company shall pay the principal balance in ten equal quarterly installments commencing on the date 15 months following the closing date and continue for each of the nine quarters thereafter. Under certain circumstances, the Company may settle the principal and accrued unpaid interest in common stock. Additionally, the May, July and October 2006 issuances allow the Company to require conversion if the price of the Company’s common stock stays above $42.50 per share for a period of 20 consecutive days beginning six months after the date of registration of the resale of the underlying shares. At that time, the Company may require the investor to convert with at least 30 days’ notice. The May, July and October 2006 issuances also provide stipulation that the investor may require the Company to pay out the quarterly installment due in cash if the Company’s common stock Volume-Weighted Average Price (“VWAP”) average is below $12.50 on the due date.

During the first quarter of fiscal 2009, as the Company’s common stock VWAP average was below $12.50 on the date of conversion, the Company paid out the quarterly installment in cash for $1.8 million and $0.6 million related to the May 2006 and October 2006 issuances, respectively.

9

Each outstanding issuance of convertible debt is summarized in the table below which sets forth the significant terms of the debt, warrants and assumptions associated with valuing the conversion feature and warrants:

Outstanding Convertible Debt Issuances

	May 2006 (1)			July 2006 (1)			October 2006 (1)
Original principal amount of debentures (millions)	$	20.0		$	2.5		$	7.5
Per share conversion price on debenture	$	25.51		$	25.51		$	25.51
Interest rate		7.5	%		7.5	%		7.5	%
Term of debenture		42 months			42 months			42 months
Warrants issued		274,406 shares			34,370 shares			102,835 shares
Term of warrants		60 months			60 months			60 months
Per share exercise price of warrants	$	28.06		$	28.06		$	28.06
Fair value per warrant at issuance	$	26.03		$	23.89		$	22.13
Value per share of conversion feature at issuance	$	18.80		$	19.21		$	19.57
Stock price on date of agreement	$	32.25		$	29.28		$	26.81
Stock volatility at issuance		106	%		111	%		117	%
Dividend yield		0.0	%		0.0	%		0.0	%
Risk-free interest rate at issuance		4.88	%		4.88	%		4.65	%
Principal shares converted		Partial			Partial			Partial
Warrants exercised		No			No			Partial

(1) The May 2006, July 2006 and October 2006 issuances had a beneficial conversion feature.

In September 2005, the Company entered into an agreement for new financing; a convertible debenture package of up to $50 million in a private placement with a group of institutional investors. In April 2006, the Company amended the September 2005 financing package to provide for an additional $10.0 million funding. In order to match the cash needs to support the Company’s planned expansion, the financing arrangements provided for the funding to occur in six separate closings. These financings are collateralized by the Hungarian subsidiary’s carbon fiber assets existing before September 2005.

Amortization of Financing Fees and Debt Discount

The May 2006, July 2006 and October 2006 issuances were considered to have a beneficial conversion feature because the adjusted conversion price after allocating a portion of the proceeds to the warrants, as discussed above, was less than the market price of the Company’s common stock at date of issue. The beneficial conversion is recorded as a reduction in the carrying value of the convertible debt security and is accreted to its face value over the life of the convertible security and expensed into the Company’s consolidated income statement. The Company records the fair value associated with the warrants using the Black-Scholes option-pricing model. See the table below for impact of amortization of financing fees and debt discount on the financial results for the three months ended December 31, 2008 and 2007 (amounts in thousands).

	Three months ended December 31, 2008
			Conversion
	Warrants		Features		Total
May 2006 issuance	$	601	$	887	$	1,488
July 2006 2005 issuance		69		85		154
October 2006 issuance		106		122		228
	$	776	$	1,094	$	1,870
Deferred financing costs						95
Total					$	1,965

10

	Three months ended December 31, 2007
			Conversion
	Warrants		Features		Total
May 2006 issuance	$	416	$	614	$	1,030
July 2006 2005 issuance		73		90		163
October 2006 issuance		117		133		250
	$	606	$	837	$	1,443
Deferred financing costs						111
Total					$	1,554

The carrying values of unamortized debt discount and financing fees are as follows (amounts in thousands):

	December 31, 2008
			Conversion
	Warrants		Feature		Total
May 2006 issuance	$	965	$	1,426	$	2,391
July 2006 issuance		189		228		417
October 2006 issuance		264		304		568
	$	1,418	$	1,958	$	3,376
Debt acquisition cost and financing fees						314
Total					$	3,690

	September 30, 2008
			Conversion
	Warrants		Feature		Total
May 2006 issuance	$	1,566	$	2,313	$	3,879
July 2006 issuance		259		311		570
October 2006 issuance		370		426		796
	$	2,195	$	3,050	$	5,245
Debt acquisition cost and financing fees						416
Total					$	5,661

Earnings Per Share

In accordance with SFAS No. 128, “Earnings per Share,” the Company has evaluated its diluted income per share calculation. The Company does have outstanding warrants and convertible debt at December 31, 2008 and 2007 which are not included in the determination of diluted loss per share for the three months ended December 31, 2008 and 2007 because the shares are anti-dilutive. Had these securities been dilutive, an additional 0.5 and 1.4 million shares, respectively, would have been included in the Company’s diluted loss per share calculation.

The following is the diluted impact of the convertible debt and warrants on net income per share for the three months ended December 31, 2008 and 2007, respectively:

	Three months ended
	December 31,
	2008		2007
Numerators:
Net income	$	535	$	2,604
Denominators:
Average shares outstanding — basic		34,405		33,756
Impact of convertible debt, warrants and stock options		72		200
Average shares outstanding — diluted		34,477		33,956
Basic income per share	$	0.02	$	0.08
Diluted income per share	$	0.02	$	0.08

11

5. DEBT

Credit Facilities

U.S. Operations — As of December 31, 2008, there was a $2.5 million draw down of credit by the Company under the revolving credit facility. No financial covenants currently apply to the credit facility from the U.S. bank.

In February 2009, the Company extended its existing line of credit until January 1, 2010. The extension of this credit facility increases the amount available under the previously existing revolving credit facility from $6.7 million to $10.0 million. The revolving credit facility has a total commitment of the lesser of (1) $10.0 million or (2) an amount equal to a percentage of eligible accounts receivable plus a percentage of eligible inventories, which as of December 31, 2008 totaled $9.6 million.

Hungarian Operations — The Company’s Hungarian subsidiary has a credit facility with a Hungarian bank. Total borrowings under this credit facility were $5.8 million at December 31, 2008. The credit facility is a term loan with quarterly interest payments.

The subordinated debt agreements of 2004 and 2005 (see Note 4) require that the Company maintain cash plus borrowing capacity under credit facilities of at least $0.5 million, which the Company was in compliance with as of December 31, 2008.

Long-term debt consists of the following (amounts in thousands):

	December 31,			September 30,
	2008			2008
Note payable with interest at 4.25% (variable with Libor, payable in monthly installments of interest to maturity in January 2011)	$	1,157		$	1,184
Line credit U.S. facility (interest rate of 3.6% — variable with Libor)		2,510			—
Facilities with Hungarian banks (interest rate of 5.5% to 7.0%)		5,759			5,175
Convertible debentures final payment due November 2009 bearing interest at 8.8%		7,200			9,000
Convertible debentures final payment due January 2010 bearing interest at 7.5%		1,252			1,500
Convertible debentures final payment due April 2010 bearing interest at 7.5%		3,897			4,549
Total long-term debt including current maturities		21,775			21,408
Less: Debt discount associated with conversion feature and warrants		(3,375	)		(5,245	)
Less: Amounts payable within one year, net of discount of $2,831 and $5,867		(16,153	)		(12,601	)
Total long-term debt, less current maturities	$	2,247		$	3,562

The aggregate annual maturities of long-term debt at December 31, 2008 are set forth below (amounts in thousands):

	Annual
December 31,	Maturities
2009	$	18,984
2010		2,358
2011		433
Total	$	21,775

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6. STOCK OPTION COMPENSATION EXPENSE

The Company maintains long-term incentive plans that authorize the Board of Directors or its Compensation Committee (the “Committee”) to grant key employees, officers and directors of the Company incentive or nonqualified stock options, stock appreciation rights, performance shares, restricted shares and performance units. The Committee determines the prices and terms at which awards may be granted along with the duration of the restriction periods and performance targets. All issuances are granted out of shares authorized, as the Company has no treasury stock. The Company has the option, in its sole discretion, to settle awards under its 2008 incentive plan in cash, in lieu of issuing shares.

Stock option awards. Outstanding stock options expire 10 years from the date of grant or upon termination of employment. Options granted to employees in 2007 and 2008 vest 17% in the first year, 33% in the second year and 50% in the third year from date of grant. The fair value of all options is amortized on a straight-line basis over the vesting period. Annually options to purchase 7,500 shares of common stock are issued to each director, other than the CEO. In addition, newly elected directors receive options to purchase 7,500 shares of common stock. All options granted to directors vest immediately at time at grant. These options expire from 2009 through 2018.

Presented below is a summary of stock option plans activity for the first quarter of fiscal 2009:

			Wtd. Avg.
	Options		Exercise Price
Balance, September 30, 2008		415,587	$	25.52
Granted		—		—
Exercised		—
Cancelled		—		—
Balance, December 31, 2008		415,587	$	25.52
Exercisable, December 31, 2008		233,087	$	23.65

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The following table summarizes information for options currently outstanding and exercisable at December 31, 2008:

Options Outstanding							Options Exercisable
Range of				Wtd. Avg.	Wtd. Avg.				Wtd. Avg.
Exercise Prices		Number		Remaining Life	Exercise Price		Number		Exercise Price
$	1.33-2.80		2,000	4 years	$	2.07		2,000	$	2.07
	6.25-9.25		35,087	6 years		8.58		35,087		8.58
	9.60-24.12		113,500	7 years		18.29		56,000		14.30
	26.22-29.70		175,000	9 years		29.20		50,000		27.96
	30.00-39.00		90,000	9 years		33.43		90,000		33.43
	1.33-39.00		415,587	8 years		25.52		233,087		23.50

The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

Assumptions	Fiscal 2008	Fiscal 2007	Fiscal 2006
Expected life of option	4 & 4.5 years	3 & 7.5 years	3 & 8 years
Risk-free interest rate	1.8%	4.9%	4.32%
Volatility of stock	66%	68%	96%

As of December 31, 2008, the Company had $2.3 million of total unrecognized compensation expense related to stock option plans that will be recognized over the fiscal years 2009, 2010 and 2011. There were no awards granted or exercised during the first three months of fiscal 2009.

Restricted stock awards.Under the Company’s equity incentive plans, employees and directors may be granted restricted stock awards which are valued based upon the fair market value on the date of the grant. Restricted shares granted in fiscal 2008 vest 17% in the first year, 33% in the second year and 50% in the third year from date of grant. The fair value of all options is amortized on a straight-line basis over the vesting period. No restricted shares were granted, exercised, or converted during the first quarter of fiscal 2009. The balance of restricted stock shares was 67,500 as of December 31, 2008.

As of December 31, 2008, the remaining unamortized compensation cost related to restricted stock awards was $1.1 million which is expected to be recognized over the remaining vesting period of three years.

For the three months ended December 31, 2008 and 2007, the Company recorded into selling and general administrative expense and into its corporate/other segment $0.9 million and $0.5 million, respectively, for the cost of employee services received in exchange for equity instruments based on the grant-date fair value of those instruments in accordance with the provisions of SFAS No. 123 (R). There were no recognized tax benefits during the fiscal years 2008 or 2007, as any benefit is offset by the Company’s full valuation allowance on its net deferred tax asset.

The Company uses historical volatility for a period of time that is comparable to the expected life of the option. However, the Company only calculates the volatility of the Company’s stock back to November 2003, the date the Company received its first large order for carbon fibers, as that is when the Company considers its business to have changed from a research and development company to an operational company. Management believes this is a better measurement of the Company’s stock volatility.

7. COMMITMENTS AND CONTINGENCIES

LEGAL

Legal contingencies have a high degree of uncertainty. When losses from contingencies become estimatable and probable, reserves are established. The reserves reflect management’s estimate of the probable cost of ultimate resolution of the matters and are revised accordingly as facts and circumstances change and, ultimately, when matters are brought to closure. If any litigation matter is resolved unfavorably, the Company could incur obligations in excess of management’s estimate of the outcome, and such resolution could have a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity. As of December 31, 2008, the Company has established an accrual for legal liabilities of $23.3 million. In addition, we may incur additional legal costs in connection with pursuing and defending such actions.

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In February 2005, SP Systems and its subsidiary Structural Polymer Systems, Limited (“SP Systems”) filed an action against our Zoltek Corporation subsidiary in the U.S. District Court for the Eastern District of Missouri, Eastern Division alleging that we breached a Supply Agreement relating to our carbon fiber product known as Panex 33. The case was tried in November 2006 and the jury rendered verdicts against our Zoltek Corporation subsidiary. In April 2007, the Court issued an Order setting the amount of a supersedeas bond at $23.5 million in order to stay the execution of the amended judgment pending our appeal. On October 8, 2008, the United States Court of Appeals affirmed the district court’s earlier denial of Zoltek’s motion for a new trial and motion for judgment as a matter of law. The Court of Appeals also denied Structural Polymer Group’s cross appeal of the district court’s reduction of the jury’s damages award. Zoltek filed a motion for rehearing by the full Eighth Circuit Court of Appeals. As of December 31, 2008, the Company had recorded an accrual for legal liabilities of $23.3 million with respect to this matter. On February 2^nd, 2009, the district court granted Structural Polymer Group’s motion to collect $23,306,462 plus $3,160.74 daily interest since December 7, 2008, by payment on the bond. The Company expects that the ultimate resolution of the litigation will not have any additional material adverse effect on the Company’s future business, financial condition or liquidity.

Zoltek has filed a separate lawsuit alleging that SP Systems breached its supply agreement and committed fraud against Zoltek. Zoltek is claiming actual and punitive damages of in excess of $78 million in that suit, which it will continue to vigorously prosecute.

In September 2004, the Company was named a defendant in a civil action filed by an investment banker that was retained to obtain equity investors, alleging breach by the Company of the Company’s obligations under the agreement signed by the parties. In October 2008, the Company settled the case for $5.8 million and remitted the cash payment.

The Company is exposed to various claims and legal proceedings arising out of the normal course of its business. Although there can be no assurance, in the opinion of management, the ultimate outcome of these other claims and lawsuits should not have a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity.

CONCENTRATION OF CREDIT RISK

Zoltek’s carbon fiber products are primarily sold to customers in the composite industry and its technical fibers are primarily sold to customers in the aerospace industries. Entec’s products are primarily sold in the composite industry. The Company performs ongoing credit evaluations and generally requires collateral for significant export sales to new customers. The Company maintains reserves for potential credit losses and such losses have been within management’s expectations.

In the three months ended December 31, 2008 and 2007, we reported sales of $18.3 million and $21.8 million, respectively, and a related open account receivable balance of $17.8 million and $12.6 million, respectively, to Vestas Wind Systems. In the three months ended December 31, 2008 and 2007, the Company reported sales of $3.3 million and $3.7 million to Gamesa Group. These were the only customers that represented greater than 10% of consolidated net sales.

ENVIRONMENTAL

The Company’s operations generate various hazardous wastes, including gaseous, liquid and solid materials. Zoltek believes that all of its facilities are in substantial compliance with applicable environmental and safety regulations applicable to their respective operations. Zoltek expects that compliance with current environmental regulations will not have a material adverse effect on its business, results of operations or financial condition. There can be no assurance, that compliance with future national or local environmental laws, regulations and enforcement policies will not have a material adverse effect on the business, results of operations or financial condition of the Company.

SOURCES OF SUPPLY

As part of its growth strategy, the Company has developed its own precursor acrylic fibers and all of its carbon fibers and technical fibers. The primary source of raw material for the precursor is ACN (acrylonitrile), which is a commodity product with multiple sources.

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8. INCOME TAXES

In June 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes — and interpretation of FASB Statement No. 109, Accounting for Income Taxes. The Interpretation addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, companies may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. The Company adopted the provisions of FIN 48 on October 1, 2007. The Company recognized an increase in the liability for unrecognized benefits for the first quarter of fiscal 2009 of $0.3 million.

Zoltek and our U.S. subsidiaries join in the filing of a U.S. federal consolidated income tax return. The Internal Revenue Service “IRS” concluded its examination of our consolidated federal income tax returns for the fiscal year ended September 30, 2003. The U.S. federal statute of limitations remains open for the year 2003 and onward. Foreign and U.S. state jurisdictions have statutes of limitations generally ranging from 3 to 5 years. Years still open to examination by Hungarian foreign tax authorities include 2005 and onward.

As of December 31, 2008, we had uncertain tax positions for which it is reasonably possible that amounts of unrecognized tax benefits could significantly change over the next year. We expect that the amount of unrecognized tax benefits will continue to change in the next twelve months as a result of ongoing tax deductions, the outcomes of audits and the passing of the statute of limitations.

9. NEW ACCOUNTING PRONOUNCEMENTS

In September 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 157 “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This statement is effective for the Company’s fiscal year 2009 and . has not had a material impact on the Company’s financial statements.

FASB Statement No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement 115,” was issued February 2007. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. This statement is effective for the Company’s fiscal year 2009 and has not had a material impact on the Company’s financial statements.

In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133,” which requires companies to disclose their objectives and strategies for using derivative instruments, whether or not designated as hedging instruments under SFAS 133. The Company will adopt SFAS 161 effective October 1, 2009. Management is continuing to evaluate the impact that the adoption of SFAS 161 will have on the financial statements.

In May 2008, FASB Staff Position (“FSP”) No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement),” was issued. FSP No. APB 14-1 requires that issuers of convertible debt instruments that may be settled in cash upon conversion separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate as interest cost is recognized in subsequent periods. The Company will adopt FSP No. APB 14-1 effective October 1, 2009. The Company is continuing to evaluate the full impact that the adoption of FSP No. APB 14-1 will have on its financial statements

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”).SFAS 162 identifies the sources of accounting principles and the framework for selecting principles to be used in the preparation and presentation of financial statements in accordance with accounting principles generally accepted in the United States of America. SFAS 162 became effective November 15, 2008. Management has concluded that the adoption of SFAS 162 will not have a material impact on the financial statements.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

We are an applied technology and advanced materials company. We are a leader in the commercialization of carbon fiber through our development of a price-competitive, high-performance reinforcement for composites used in a broad range of commercial products which we sell under the Panex^®trade name. In addition to manufacturing carbon fiber, we produce an intermediate product that we refer to as technical fiber, a stabilized and oxidized acrylic fiber used in flame- and heat-resistant applications which we sell under the Pyron^®trade name. We have spent over 15 years developing our proprietary technology and manufacturing processes. We believe that we are the largest manufacturer primarily focused on producing low-cost carbon fiber for commercial applications. Our mission has been to introduce and facilitate the growth of the concept of commercial applications for carbon fibers across an expanding variety of uses.

The following factors have affected the net sales of our Carbon Fiber segment in recent years: (1) the growth in emerging applications using carbon fiber, such as wind turbines; (2) increases in our manufacturing capacity; and (3) sellers prices. We would expect that our net sales in future periods will continue to be affected by the first and second of these factors. .

The primary cost components of our Carbon Fiber and Technical Fiber segments are energy and acrylonitrile, which is a propylene-based product and our primary raw material for the production of acrylic fiber precursor used in our carbon fiber and technical fiber production. We expect that new applications, including those we are attempting to facilitate, will continue to positively affect demand for our products.

Until a few years ago, the high cost of carbon fibers precluded all but the most demanding applications, limiting carbon fiber use primarily to aerospace and sporting goods applications. While the basic technology to manufacture commercial and aerospace carbon fibers is the same and fiber-to-fiber properties are equivalent, demands for specific fabrication methods, significantly higher capital requirements, level of quality documentation and certification costs make the aerospace fibers significantly more costly to produce than carbon fiber suitable for commercial applications.

For years prior to fiscal 2004, as additions of new capacity occasionally outpaced demand from aerospace applications, manufacturers sold excess production at reduced prices into specialty sporting goods and industrial applications. As a result, the distinctive characteristics of carbon fiber and the techniques for fabricating carbon fiber composites became more broadly understood and some new and diverse transitional applications developed. However, our financial results were adversely affected by predatory pricing by the incumbent carbon fiber producers and by industry oversupply conditions which inhibited adoption of carbon fibers for non-aerospace applications as existing and potential customers were reluctant to commit to incorporate carbon fiber composites into their products due to concerns about the availability of carbon fiber in large volumes at predictable prices.

During 2005 and 2006, the Airbus A-380 and Boeing 787 airplanes entered the production phase, utilizing carbon fibers for a substantial portion of their primary structural components and requiring substantial amounts of carbon fibers. We believe the demand for carbon fibers for these two programs has absorbed the substantial majority of capacity of manufacturers for aerospace applications. At about the same time, the adoption of carbon fibers in longer wind turbine blades created a significant demand for commercial carbon fibers. This triggered the permanent divergence of the aerospace and commercial demand for carbon fibers.

The divergence in the aerospace and commercial applications led in fiscal 2006 and 2007 to strains on our ability to meet all the demand from our wind energy customers and we were unable to take on new customers. In view of the supply shortages, we embarked on an expedited capacity expansion which now has been largely completed. As a result we currently have sufficient capacity to meet demand from current wind energy customers and produce carbon fibers for additional large-scale applications. Nonetheless, when we were capacity-constrained, potential customers understandably would not commit to new large-scale applications without demonstrated assurance of adequate future supplies. This has caused our recent sequential quarter growth rates to be uneven. We are aggressively marketing to obtain new business in existing applications and new customers in new applications. New applications tend to require relatively long sales cycles due to the new product development, manufacturing and engineering investments customers must make to incorporate carbon fiber composites into their products. We expect our market development efforts will be successful over the long run.

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RESULTS OF OPERATIONS

THREE MONTHS ENDED DECEMBER 31, 2008 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2007

The Company’s sales decreased 3.6%, or $1.5 million, to $38.6 million in the first quarter of fiscal 2009 from $40.1 million in the first quarter of fiscal 2008. Carbon fiber sales decreased 4.1%, or $1.4 million, to $32.7 million in the first quarter of fiscal 2009 from $34.1 million in the first quarter of fiscal 2008 primarily due to reaction by several smaller customers and Gamesa Group to weak global economic conditions in the current year quarter. These customers postponed or cancelled orders during the quarter which resulted in reduced sales going into calendar year end. The Company’s orders from other significant customers, such as Vestas Wind Systems, remained steady. Technical fiber sales increased 4.6%, or $0.3 million, to $5.3 million in the first quarter of fiscal 2009 from $5.0 million in the first quarter of fiscal 2008. Sales of other products and services decreased $0.3 million to $0.6 million during the first quarter of fiscal 2009 from $0.9 million during fiscal 2008 related to our Energy sales division.

The Company’s cost of sales decreased by 3.2%, or $0.9 million, to $28.4 million in the first quarter of fiscal 2009 from $29.3 million in the first quarter of fiscal 2008. Carbon fiber cost of sales decreased by 4.9%, or $1.3 million, to $23.7 million for the first quarter of fiscal 2009 from $25.0 million for the first quarter of fiscal 2008. The decrease in carbon fiber cost of sales reflected decreased sales of 4.1% discussed. Technical fiber cost of sales increased $0.3 million, or 7.8%, to $4.0 million for the first quarter of fiscal 2009 from $3.7 million for the first quarter of fiscal 2008. The increase in technical fiber cost of sales resulted from the increased sales of 4.6% discussed above. The cost of sales of the other products remained flat for the first quarter ended fiscal 2009 to $0.6 million compared to the first quarter ended fiscal 2008 of $0.6 million.

The Company’s gross profit decreased by $0.5 million, to $10.3 million, or 26.6% of sales in the first quarter of fiscal 2009 from $10.8 million, or 26.8% of sales in the first quarter of fiscal 2008. Carbon fiber gross profit percentage increased to 27.5% for the first quarter of fiscal 2009 compared to 26.9% for the first quarter of fiscal 2008. Carbon fiber gross profit decreased from $9.2 million to $9.0 million during these same respective periods. The increase in carbon fiber gross profit percentage resulted from improved production efficiencies from using Mexico precursor in U.S. production as well as a decline in the value of the Forint in which we pay a significant amount of expenses. Technical fiber gross profit remained flat from $1.3 million, or 26.2% of sales, in the first quarter of fiscal 2008 to $1.3 million, or 24.0% of sales, during the corresponding period of fiscal 2009. The decrease in technical fiber gross profit percentage resulted from lower quantities produced during the quarter. The gross profit of the other products decreased for the first quarter ended fiscal 2008 to $0.01 million compared to the first quarter ended fiscal 2007 of $0.3 million.

Application and market development costs were $1.7 million in the first quarter of fiscal 2009 and $1.9 million in the first quarter of fiscal 2008. These costs included product development efforts, product trials and sales and product development personnel and related travel. Targeted emerging applications include automobile components, fire/heat barrier and alternate energy technologies.

A litigation charge of $0.2 million was recorded in the first quarter of fiscal 2009 for interest related to the judgment of the SP case (see Note 7 of the Notes to Condensed Consolidated Financial Statements). No litigation charge was recorded during the first quarter of fiscal 2008.

Selling, general and administrative expenses for continuing operations were $4.8 million in the first quarter of fiscal 2009 compared to $4.1 million reported for the first quarter of fiscal 2008. Approximately $0.1 million of the increase related to staffing of management positions, particularly at our Corporate office. The Company also recorded $0.9 million for the cost of employee services received in exchange for equity instruments under SFAS 123 (R) during the first quarter of fiscal 2009, an increase of $0.4 million from first quarter fiscal 2008 expense. Accounting and audit fees increased by $0.1 million as the Company changed independent auditors during the first quarter of fiscal 2009.

Operating income from the first quarter of fiscal 2009 was $3.5 million, a decrease of $1.3 million from the operating income of $4.8 million incurred during the first quarter of fiscal 2008. This decline resulted primarily from a decrease in gross profit of $0.5 million. Carbon fiber operating income declined from $7.8 million in the first quarter of fiscal 2008 to $6.5 million in the first quarter of fiscal 2009. The decline resulted from lower sales as discussed above. Operating income from technical fibers increased from $0.1 million in the first quarter of fiscal 2008 to $0.5 million in the first quarter of fiscal 2009. Other products/ headquarters operating loss increased from a loss of $3.1 million in the first quarter of fiscal 2008 to a loss of $3.6 million in fiscal 2009 due to increases in staffing of management positions at headquarters and fiscal year-end audit expenses.

Interest expense was approximately $0.6 million in the first quarter of fiscal 2009 compared to $0.7 million in the corresponding period of fiscal 2008. As investors continue to convert their outstanding convertible debt into shares, the Company’s cost of interest on the related debt is reduced.

Amortization of financing fees and debt discounts, which are non-cash expenses, were approximately $2.0 million for the first quarter of fiscal 2009 compared to $1.6 million for the first quarter of fiscal 2008. The Company is no longer capitalizing any amortization as the current capital expansion projects are funded by equity funds, not debt. Amortization resulted from the expensing of the beneficial conversion feature related to a partial conversion of the May, July and October 2006 convertible debt issuances (see “— Liquidity and Capital Resources”).

Interest income was $0.2 million in the first quarter of fiscal 2009 compared to $1.2 million in fiscal 2008. The decrease was primarily a result of lower interest earned on short-term investment of cash received from our public offering in August 2007. The Company has used this cash balance to fund the purchase and refurbishing of the facility in Mexico.

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Gain/loss on foreign currency translations improved to a $0.2 million gain for fiscal 2009, compared to a $0.1 million loss for fiscal 2008. During the first three months of fiscal 2009, the both the Euro and the U.S. dollar gained in value against the Forint. As most of the Company’s accounts receivables are denominated in Euros, the strengthening in value resulted in a gain recognized in our Hungarian subsidiary. The translation of the Hungarian subsidiary’s financial statements from its functional currency (Forint) to U.S. dollars is not included in determining net income for the period but is recorded in accumulated other comprehensive income (loss) in equity. The loss in fiscal 2008 was primarily the result in the decline in value of the U.S. dollar.

Other expense, net, was of $0.3 million in the first quarter of fiscal 2009 compared to $0.1 million for fiscal 2008.

Income tax expense was $0.6 million for the first quarter of fiscal 2009 compared to $1.0 million for the corresponding period in the prior year. During the first quarter of fiscal 2009, the Company amortized its deferred tax asset by $0.4 million, reducing the existing net operating loss carryforward. An additional income tax expense of $0.2 million compared to the prior year was incurred related to the local Hungarian municipality tax for the first quarter of fiscal 2009. An income tax expense of $0.5 million was recorded for the first quarter of fiscal 2009, as we established a deferred tax liability for book to tax differences within the Hungarian operation.

The foregoing resulted in net income $0.5 million for first quarter of fiscal 2009 compared to net income $2.6 million for the first quarter of fiscal 2008. Similarly, the Company reported income from continuing operations per share of $0.02 and $0.08 on a basic and diluted basis for the first quarter of fiscal 2009 and 2008, respectively. The weighted average common shares outstanding were 34.4 million and 33.8 million for the first quarter of fiscal 2009 and 2008, respectively.

Liquidity and Capital Resources

The Company believes its cash currently on hand , cash flow from operations, and available credit facilities should be sufficient to fund its identified liquidity needs during fiscal 2009.

In August 2007, the Company completed a public offering of 3,615,000 shares of common stock at $38.76 per share, less underwriting discounts. The Company recorded the proceeds of $131.5 million, net of $0.8 million financing costs, as an increase to shareholders’ equity. Property and equipment, net, decreased from $288.9 million at September 30, 2008 to $262.8 million at December 31, 2008, due to the decline in value of the Forint, which is the functional currency of our Hungarian operations.

Cash Used In Continuing Operating Activities

Operating activities used $2.6 million of cash for the first quarter of fiscal 2009 compared to cash provided of $1.8 million in the first quarter of fiscal 2008. Inventory levels increased by $8.4 million and $7.0 million during the first quarter of fiscal 2009 and 2008, respectively, due to year-end inventory management by our customers as they brought down inventories to increase their cash positions. Cash flows were also negatively affected during the first quarter of fiscal 2009 by a $5.8 million settlement paid in October related to litigation involving an investment banker. Cash flows were positively affected by operating income before depreciation by $7.9 million and $8.2 million for the first quarter of fiscal 2009 and 2008, respectively. Cash flows were affected by cash collections which reduced accounts receivables by $4.7 million and $5.7 million during the first quarter of fiscal 2009 and 2008, respectively.

Cash Used In Investing Activities

Net cash used in investing activities for the first quarter of fiscal 2009 was $9.7 million which consisted of capital expenditures to expand production lines of the Company’s precursor facilities and carbon fiber operations to meet the anticipated long-term demand for carbon fiber products.

Net cash used in investing activities for the first quarter of fiscal 2008 was $59.0 million which consisted of capital expenditures primarily at the Hungarian subsidiary related to expansion of its precursor facility and its carbon fiber lines and a decrease in restricted cash. $35.0 million was used to acquire the Mexico facility for production capabilities. This was offset by $0.8 million of funds received from the Hungarian government as a conditional grant to reimburse capital expenditures and related outlays (see Note 4 of the Notes to the Condensed Consolidated Financial Statements).

Historically, cash used in investing activities has been expended for equipment additions and the expansion of the Company’s carbon fiber production capacity. The Company expects capital expenditures to continue in connection with the expansion of our Mexico facility.

Cash Provided (Used) By Financing Activities

Net cash provided in financing activities was $0.6 million for the first quarter of fiscal 2009 as the Company increased its borrowings on our lines of credit and repaid convertible debt. Net cash used by financing activities was $0.8 million for the first quarter of fiscal 2008. The Company repaid debt of $1.5 million, while the exercise of stock options and warrants provided $0.7 million.

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Future Contractual Obligations

In the table below, we set forth our enforceable and legally binding obligations as of December 31, 2008. Some of the amounts included in this table (amounts in thousands) are based on our estimates and assumptions about these obligations, including their durations, anticipated actions by third parties and other factors. The enforceable and legally binding obligations we will actually pay in future periods may vary from those reflected in the table because the estimates and assumptions are subjective. See Notes 3 and 4 of the Notes to Condensed Consolidated Financial Statements for discussion of the Company’s debt agreements.

	Payments Due by Period
			Less than				3-5		Over
	Total		1 year		1-3 years		years		5 years
Convertible debentures (a)	$	12,349	$	9,558	$	2,791		—		—
Other long-term debt, including current maturities (a)		9,426		9,426		—		—		—
Total long-term debt obligations		21,775		18,984		2,791		—		—
Operating lease obligations (b)		3,714		1,085		1,770		857		2
Capital leases obligations		323		202		121		—		—
Total debt and leases		25,812		20,271		4,682		857		2
Legal liabilities (c)		23,340		23,340		—		—		—
Contractual interest payments (c)		1,143		980		163		—		—
Purchase obligations (e)		2,545		2,545		—		—		—
Total contractual obligations	$	52,840	$	47,136	$	4,845	$	857		2

(a)	Convertible debentures and long-term debt are presented on the balance sheet net of debt discount of $3.4 million.
(b)	Includes four-year contract for nitrogen gas facility and equipment at approximately $840,000 per year.
(c)	Amount accrued for potential damages and litigation cost related to SP Systems case. See Note 7 of the Notes to Condensed Consolidated Financial Statements.
(d)	Amounts represent the expected cash payment of interest on our debt.
(e)	Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable price provisions, and the approximate timing of the transactions. Purchase obligations exclude agreements that are cancelable at any time without penalty.

The future contractual obligations and debt could be reduced by up to $12.3 million in exchange for up to 0.5 million shares of common stock. The following table sets forth our contractual obligations on a pro forma basis assuming all the convertible debt was converted as of December 31, 2008 (amounts in thousands):

	Conversion					Less than						3-5		Over
	price		Total			1 year			1-3 years			years		5 years
Total contractual obligations			$	52,840		$	47,136		$	4,845		$	857	$	2
May 2006 issuance	$	25.51		(7,200	)		(7,200	)		—			—		—
July and October 2006 issuance	$	25.51		(5,149	)		(2,358	)		(2,791	)		—		—
Interest payments				(1,143	)		(980	)		(163	)		—		—
Total contractual obligations assuming conversion on December 31, 2008			$	39,348		$	36,598		$	1,891		$	857	$	2

As of February 6, 2009 the last reported sale price of the Company’s common stock was $8.21 per share

Bond Related to SP Systems Case

In April 2007, the Company reported the results of various post-trial motions in ongoing litigation (see Note 7 of the Notes to the Condensed Consolidated Financial Statements). In April 2007 the Company posted a supersedeas bond, collateralized by a $23.5 million letter of credit issued by the Company’s U.S. bank. As of December 31, 2008, the letter of credit is collateralized by $23.5 million of restricted cash.

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Revolving Credit Facility

As of December 31, 2008, there was a $2.5 million draw down of credit by the Company under the revolving credit facility. No financial covenants currently apply to the credit facility from the U.S. bank.

In February 2009, the Company extended its existing line of credit until January 1, 2010. The extension of this credit facility increases the amount available under the previously existing revolving credit facility from $6.7 million to $10.0 million. The revolving credit facility has a total commitment of the lesser of (1) $10.0 million or (2) an amount equal to a percentage of eligible accounts receivable plus a percentage of eligible inventories, which as of December 31, 2008 totaled $9.6 million.

Hungarian Grant

The Hungarian government has pledged a grant of 2.9 billion HUF (approximately $15.3 million) to Zoltek’s Hungarian subsidiary that will provide a portion of the capital resources to modernize its facility, establish a research and development center, and support buildup of manufacturing capacity of carbon fibers. Zoltek’s Hungarian subsidiary received approximately HUF 0.7 billion and HUF 1.6 billion in grant funding during fiscal 2008 and 2007, respectively. These funds have been recorded as a liability on the Company’s consolidated balance sheet. The liability will be amortized over the life of the assets procured by the grant funds, offsetting the assets’ depreciation expense into which the proceeds of the grant are invested.

The Company has presented bank guarantees amounting to 120% of the amount of the grant as received. The Hungarian subsidiary may be required to pay back all or a portion of the grant if, among other things, the Hungarian subsidiary fails to achieve certain revenue and employment targets. Currently, although management can offer no assurance, it anticipates the Company will comply with the requirements of the grant agreement.

Financing Activity

In August 2007, the Company completed a public offering of 3,615,000 shares of common stock, par value $0.01 per share, at $38.76 per share, less underwriting discounts. The Company recorded the proceeds of $131.5 million, net of $0.8 million financing costs, as an increase to shareholders’ equity.

Convertible Debt

The following tables summarize the activity regarding our convertible debt conversions during the first quarter of fiscal years 2009 and 2008.

	Three months ended December 31, 2008						Three months ended December 31, 2007
	Number						Number
	of shares		Price				of shares		Conversion
	converted		converted		Equity value		converted		price		Equity value
May 2006		—	$	—	$	—		62,719	$	25.51	$	1,599,962
July 2006		16,264		15.40		250,466		9,820		25.51		250,508
October 2006		—		—		—		39,200		25.51		999,992
		16,264			$	250,466		111,739			$	2,850,462

	As of December 31, 2008
	Number
	of shares		Conversion		Debt
	outstanding		price		outstanding
May 2006		282,242	$	25.51	$	7,200,000
July 2006		49,100		25.51		1,252,534
October 2006		152,762		25.51		3,896,947
		484,104			$	12,349,481

The terms of repayment for each convertible debt issuance in May, July and October 2006 stipulate that the Company shall pay the principal balance in ten equal quarterly installments commencing on the date 15 months following the closing date and continue for each of the nine quarters thereafter. Under certain circumstances, the Company may settle the principal and accrued unpaid interest in common stock. Additionally, the May, July and October 2006 issuances allow the Company to require conversion if the price of the Company’s common stock stays above $42.50 per share for a period of 20 consecutive days beginning six months after the date of registration of the resale of the underlying shares. At that time, the Company may require the investor to convert with at least 30 days’ notice. The May, July and October 2006 issuances also provide stipulation that the investor may require the Company to pay out the quarterly installment due in cash if the Company’s common stock Volume-Weighted Average Price (“VWAP”) average is below $12.50 on the due date.

During the first quarter of fiscal 2009, as the Company’s common stock VWAP average was below $12.50 on the date of conversion, the Company paid out the quarterly installment in cash for $1.8 million and $0.6 million related to the May 2006 and October 2006 issuances, respectively.

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Each outstanding issuance of convertible debt is summarized in the table below which sets forth the significant terms of the debt, warrants and assumptions associated with valuing the conversion feature and warrants:

Outstanding Convertible Debt Issuances

	May 2006 (1)			July 2006 (1)			October 2006 (1)
Original principal amount of debentures (millions)	$	20.0		$	2.5		$	7.5
Per share conversion price on debenture	$	25.51		$	25.51		$	25.51
Interest rate		7.5	%		7.5	%		7.5	%
Term of debenture		42 months			42 months			42 months
Warrants issued		274,406 shares			34,370 shares			102,835 shares
Term of warrants		60 months			60 months			60 months
Per share exercise price of warrants	$	28.06		$	28.06		$	28.06
Fair value per warrant at issuance	$	26.03		$	23.89		$	22.13
Value per share of conversion feature at issuance	$	18.80		$	19.21		$	19.57
Stock price on date of agreement	$	32.25		$	29.28		$	26.81
Stock volatility at issuance		106	%		111	%		117	%
Dividend yield		0.0	%		0.0	%		0.0	%
Risk-free interest rate at issuance		4.88	%		4.88	%		4.65	%
Principal shares converted		Partial			Partial			Partial
Warrants exercised		No			No			Partial

(1) The May 2006, July 2006 and October 2006 issuances had a beneficial conversion feature.

In September 2005, the Company entered into an agreement for new financing; a convertible debenture package of up to $50 million in a private placement with a group of institutional investors. In April 2006, the Company amended the September 2005 financing package to provide for an additional $10.0 million funding. In order to match the cash needs to support the Company’s planned expansion, the financing arrangements provided for the funding to occur in six separate closings. These financings are collateralized by the Hungarian subsidiary’s carbon fiber assets existing before September 2005.

Amortization of Financing Fees and Debt Discount

The May 2006, July 2006 and October 2006 issuances were considered to have a beneficial conversion feature because the adjusted conversion price after allocating a portion of the proceeds to the warrants, as discussed above, was less than the market price of the Company’s common stock at date of issue. The beneficial conversion is recorded as a reduction in the carrying value of the convertible debt security and is accreted to its face value over the life of the convertible security and expensed into the Company’s consolidated income statement. The Company records the fair value associated with the warrants using the Black-Scholes option-pricing model. See the table below for impact of amortization of financing fees and debt discount on the financial results for the three months ended December 31, 2008 and 2007 (amounts in thousands).

	Three months ended December 31, 2008
			Conversion
	Warrants		Features		Total
May 2006 issuance	$	601	$	887	$	1,488
July 2006 2005 issuance		69		85		154
October 2006 issuance		106		122		228
	$	776	$	1,094	$	1,870
Deferred financing costs						95
Total					$	1,965

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	Three months ended December 31, 2007
			Conversion
	Warrants		Features		Total
May 2006 issuance	$	416	$	614	$	1,030
July 2006 2005 issuance		73		90		163
October 2006 issuance		117		133		250
	$	606	$	837	$	1,443
Deferred financing costs						111
Total					$	1,554

The carrying values of unamortized debt discount and financing fees are as follows (amounts in thousands):

	December 31, 2008
			Conversion
	Warrants		Feature		Total
May 2006 issuance	$	965	$	1,426	$	2,391
July 2006 issuance		189		228		417
October 2006 issuance		264		304		568
	$	1,418	$	1,958	$	3,376
Debt acquisition cost and financing fees						314
Total					$	3,690

	September 30, 2008
			Conversion
	Warrants		Feature		Total
May 2006 issuance	$	1,566	$	2,313	$	3,879
July 2006 issuance		259		311		570
October 2006 issuance		370		426		796
	$	2,195	$	3,050	$	5,245
Debt acquisition cost and financing fees						416
Total					$	5,661

Earnings Per Share

In accordance with SFAS No. 128, “Earnings per Share,” the Company has evaluated its diluted income per share calculation. The Company does have outstanding warrants and convertible debt at December 31, 2008 and 2007 which are not included in the determination of diluted loss per share for the three months ended December 31, 2008 and 2007 because the shares are anti-dilutive. Had these securities been dilutive, an additional 0.5 and 1.4 million shares, respectively, would have been included in the Company’s diluted loss per share calculation.

The following is the diluted impact of the convertible debt and warrants on net income per share for the three months ended December 31, 2008 and 2007, respectively:

	Three months ended
	December 31,
	2008		2007
Numerators:
Net income	$	535	$	2,604
Denominators:
Average shares outstanding — basic		34,405		33,756
Impact of convertible debt, warrants and stock options		72		200
Average shares outstanding — diluted		34,477		33,956
Basic income per share	$	0.02	$	0.08
Diluted income per share	$	0.02	$	0.08

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LEGAL

Legal contingencies have a high degree of uncertainty. When losses from contingencies become estimatable and probable, reserves are established. The reserves reflect management’s estimate of the probable cost of ultimate resolution of the matters and are revised accordingly as facts and circumstances change and, ultimately, when matters are brought to closure. If any litigation matter is resolved unfavorably, the Company could incur obligations in excess of management’s estimate of the outcome, and such resolution could have a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity. As of December 31, 2008, the Company has established an accrual for legal liabilities of $23.3 million. In addition, we may incur additional legal costs in connection with pursuing and defending such actions.

In February 2005, SP Systems and its subsidiary Structural Polymer Systems, Limited (“SP Systems”) filed an action against our Zoltek Corporation subsidiary in the U.S. District Court for the Eastern District of Missouri, Eastern Division alleging that we breached a Supply Agreement relating to our carbon fiber product known as Panex 33. The case was tried in November 2006 and the jury rendered verdicts against our Zoltek Corporation subsidiary. In April 2007, the Court issued an Order setting the amount of a supersedeas bond at $23.5 million in order to stay the execution of the amended judgment pending our appeal. On October 8, 2008, the United States Court of Appeals affirmed the district court’s earlier denial of Zoltek’s motion for a new trial and motion for judgment as a matter of law. The Court of Appeals also denied Structural Polymer Group’s cross appeal of the district court’s reduction of the jury’s damages award. Zoltek filed a motion for rehearing by the full Eighth Circuit Court of Appeals. As of December 31, 2008, the Company had recorded an accrual for legal liabilities of $23.3 million with respect to this matter. On February 2, 2009, the district court granted Structural Polymer Group’s motion to collect $23,306,462 plus $3,160.74 daily interest since December 7, 2008 by payment on the bond, The Company expects that the ultimate resolution of the litigation will not have any additional material adverse effect on the Company’s future business, financial condition or liquidity.

Zoltek has filed a separate lawsuit alleging that SP Systems breached its supply agreement and committed fraud against Zoltek. Zoltek is claiming actual and punitive damages of in excess of $78 million in that suit, which it will continue to vigorously prosecute.

In September 2004, the Company was named a defendant in a civil action filed by an investment banker that was retained to obtain equity investors, alleging breach by the Company of the Company’s obligations under the agreement signed by the parties. In October 2008, the Company settled the case for $5.8 million and remitted the cash payment.

The Company is exposed to various claims and legal proceedings arising out of the normal course of its business. Although there can be no assurance, in the opinion of management, the ultimate outcome of these other claims and lawsuits should not have a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity.

NEW ACCOUNTING PRONOUNCEMENTS

See Note 9 of the Notes to the Condensed Consolidated Financial Statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to changes in interest rates primarily as a result of borrowing activities under its credit facility. The nature and amount of the Company’s debt may vary as a result of future business requirements, market conditions and other factors. The extent of the Company’s interest rate risk is not quantifiable or predictable because of the variability of future interest rates and business financing requirements. The Company does not believe such risk is material because a significant amount of the Company’s current debt is at fixed rates.

The Company views as long-term its investment in Zoltek Zrt. and Zoltek de Mexico. Zoltek Zrt. has a functional currency of the Hungarian Forint. As a result, Zoltek Zrt. is exposed to foreign currency risks related to this investment. The functional currency of of Zoltek de Mexico has changed as of November 1, 2008, from the Mexican Peso to the U.S. dollar. Zoltek de Mexico is nearing completion of its capital expansion phase and has begun to manufacture and ship product to its U.S. parent company, Zoltek Corporation.

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The Company does not currently employ a foreign currency hedging strategy related to the sales of Zoltek Zrt or Zoltek de Mexico. Hungary and Mexico are not considered to be a highly inflationary or deflationary economy. As of December 31, 2008, the Company has a long-term loan with its Zoltek Zrt. subsidiary of $119.4 million and a long-term loan with its Zoltek de Mexico subsidiary of $40.5 million. The Company does not expect the loan to be repaid in the near future. In fact the Company expects the loan to increase as the Company continues to finalize its initial investment in its installation of its precursor and carbon fiber operations at its Mexican facility. In addition, Zoltek Zrt. routinely sells its products to customers located primarily throughout Europe in sales transactions that are denominated in foreign currencies other than the Hungarian Forint. Also, Zoltek Zrt. has debt that is denominated in foreign currencies other than the Hungarian Forint.

* * *

Special Note Regarding Forward-Looking Statements

The forward-looking statements contained in this report are inherently subject to risks and uncertainties. The Company’s actual results could differ materially from those in the forward-looking statements. The factors that might cause such differences include, among others, our ability to: (1) successfully adapt to recessionary conditions in the global economy; (2) penetrate existing, identified and emerging markets, including entering into new supply agreements with large volume customers; (3) continue to improve efficiency at our manufacturing facilities on a timely and cost-effective basis to meet current order levels of carbon fibers; (4) successfully add new planned capacity for the production of carbon fiber and precursor raw materials and meet our obligations under long-term supply agreements; (5) maintain profitable operations; (6) increase our borrowing at acceptable costs; (7) manage changes in customers’ forecasted requirements for our products; (8) continue investing in application and market development in a range of industries; (9) manufacture low-cost carbon fibers and profitably market them despite increases in raw material and energy costs; (10) successfully operate our Mexican facility to produce acrylic fiber precursor and add carbon fiber production lines; (11) resolve the pending non-public, fact-finding investigation being conducted by the Securities and Exchange Commission; (12) successfully continue operations at our Hungarian facility if natural gas supply disruptions persist; (13) successfully prosecute patent litigation; and (14) manage the risks identified under “Risk Factors” below and in our filings with the SEC.

This quarterly report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements.

* * *

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Item 4. Controls and Procedures

Evaluation of Controls and Procedures

As of the end of the period covered by this report, an evaluation was carried out by management, under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed in reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer, and Chief Accounting Officer, as appropriate to allow timely decisions regarding required disclosures.

Based on that evaluation, the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer has concluded that the Company’s disclosure controls and procedures as of September 30, 2008 were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission’s rules and forms.

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ZOLTEK COMPANIES, INC.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

See Note 7 of the Notes to Consolidated Financial Statements for a summary of the Company’s current legal proceedings, which is incorporated herein by reference.

Item 5. Other Information

On February 6, 2009, the Company extended its existing line of credit until January 1, 2010. The extension of this credit facility increases the amount available under the previously existing revolving credit facility from $6.7 million to $10.0 million. The revolving credit facility has a total commitment of the lesser of (1) $10.0 million or (2) an amount equal to a percentage of eligible accounts receivable plus a percentage of eligible inventories. The Company has also executed a letter agreement with its lender waiving compliance with any financial covenants contained in its credit agreement for the period January 8, 2008 through December 31, 2008 and removing specified financial covenants effective January 1, 2009. A copy of the new promissory note and letter agreement are filed as Exhibit 10.1 and Exhibit 10.2, respectively, hereto and incorporated by reference herein.

Item 6. Exhibits

See Exhibit Index

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Zoltek Companies, Inc. (Registrant)
Date: February 9, 2009	By:	/s/ ZSOLT RUMY
		Zsolt Rumy
		Chief Executive Officer and Chief Financial Officer

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EXHIBIT INDEX

Exhibit Number		Description of Document
	10.1	Revolving Credit Note, dated as of January 1, 2009, by and among Zoltek Companies, Inc., Zoltek Corporation and Southwest Bank of St. Louis.
	10.2	Letter Agreement, dated as of February 6, 2009, by and among Zoltek Companies, Inc. and Southwest Bank of St. Louis.
	31.1	Certification of Chief Executive Officer and 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 and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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